COMMERCIAL LAW

Marian Austriaco Obog

Subject Chair

Moira Lou J. Clemente

Elijah Christiane M. Fajardo
Electronic Data Processing

ADVISERS

Atty. Timoteo B. Aquino

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D. Diplomatic and Consular Law 214

E. Treaties ............... 219
F. Nationality and Statelessness.................................... 223
G. Jurisdiction of States ......... 226
H. Treatment of Aliens.. 231
International Human Rights Law 234
J. International Humanitarian Law ........................................... 236

COMMERCIAL AND TAXATION LAW .. 242

I.
CORPORATION LA............................................................ 242
General Principles..........
A. .................................................... 242
B. Kinds of Corporation 249
C. Incorporation and Organization.............................. 256
D.
Directors, Trustees, and
Powers of Corporations Of cers ........................................ 267
.............................................................. 280
E.
F. Stockholders and Members ..........................----.-......-......C.... 287
G Mergers, Consolidations, and Acquisitions.............................. 303
H. allon............................................
Corporate Dissolution and Liquidation 306
l. Foreign Corporations .......... 310

Il. PARTNERSHIP..................................................................................... 317

A. General Provisions ............................................................. 317
B. Obligations of Partners Among Themselves ................................... 325
C. Property Rights of Partners .......................................... 330
D. 331
Obligations of Partnership/Partners to Third Persons ................ 333
E.
F. Dissolution and ............
Limited Partnership Winding Up ...................................
.................................................... 337
Ill. INSURANCE LAW .................................................................................... 341
A. Concept of Insurance ......... 341
B. Insurable Interest ......... .. ...................m....um.....m...em... 344
C. Concealment ...e...e.................................................... 347
D Representation 348
E Policy ..................... 350
F. Warranties 355
G. Premium ....................................................................................... 356
H. Loss ................... ... ... . . . . . . . . . . . . . . . . ..... 359
Double Insurance............... 360
J. 361
Reinsurance................. • . . . ........................................................ . ...
K. 362
Classes of Insurance .................................................
IV. TRANSPORTATION LAW .................................................................... 368
A. General Principles of Common Carriers ........................................ 368
B. The Montreal Convention................................................................... 381

V. BANKING LAWS 387

A. The New Central Bank Act (R.A. No. 7653. as amended by R.A.
No. 11211)...................... ................... 387
B. Secrecy of Bank Deposits (R.A. No. 1405 and R.A. No. 6426, as
amendea)............................... 395
General Banking Law(R.A. No. 8791)......................................... 398
C.
D. Anti-Money Laundering Act (R.A. No. 9160, as amended).............. 402
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VI. INTELLECTUAL PROPERTY CODE OF THE PHILIPPINES

(R.A. No. 8293) . 411
A. Patents ......................................................................................... 412
B. Trademarks.............. .................................................................. 428
C. Copyrights ................ 438

VII. DATA PRIVACY ACT OF 2000 (R.A. No. 10173) .................................. 454
A. Personal vs. Sensitive Personal Information ................................... 454
B. Scope 455
C. Processing of Personal and Sensitive Personal Information ........... 456
D. General Data Privacy pr.is. s.............................................458
459
E. Rights of Data Subject ..............................................................
VIII. SECURITIES REGULATION CODE (R.A. No. 8799) ............................ 462
auny............................. 462
A. Framework for Regulating of Securities Trading
B. Concept of Securities; Howey Test ........... 462
C. Registration of Securities. 464

IX. ELECTRONIC COMMERCE ACT (R.A. No. 8792).......................... 466

A. Legal Recognition of Electronic Data Messages, Documents, and
Signatures.....................
.................................................... 467
B. Obligation of Con dentiality ........................................................... 470

X. ACCESS DEVICES REGISTRATION ACT (R.A. No. 8484) .................. 470

A. Access Devices 471
B. Prohibited Acts...................................................................... 471
C. Frustrated and Attempted Access Device Fraud.......................... 474

XI. PHILIPPINE COMPETITION ACT (R.A. No. 10667) .............................. 475

A. AntiCompetitive Agreements .......................................................... 477
B. Abuse of Dominant Position.............................................................. 480
C. Mergers and Acquisitions.......................................... 482

XII. PUBLIC SERVICE ACT (C.A. No. 146, as amended by R.A. No.
11659) ....................... 485
A. Public Service as Public Utility ....................... 486
B. Critical Infrastructure 491
C. Powers of the President.. 491
D. Reciprocity......................... 491

XIII. TAXATION LAW (R.A. No. 8424, as amended by R.A. No. 10963: R.A.
No. 11534) ........................ .......................................... 494
A. De nition, Characteristics, and Purpose 494
B. Distinguished from Police Power and Eminent Domain l......D... 497
C. Inherent and Constitutional Limitations .......................................... 499
D. Requisites of a Valid Tax ................ maa..................................... 512
E. Distinguished from Other Forms of Exactions ................................ 513
F. Doctrines in Taxation .......................................................... 517
G. Income Taxation ............................................................................... 531
H. Withholding Taxes 589
Transfer Taxes................ .................................................... 593
J. Value-Added Tax (VAT) (R.A. No. 8424, as amended;
611
R.R. No. 16-2005, as amended) ................................. . .
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K. Tax Remedies.
Local Taxation (R.A. No. 7160, Book Il,......................................
Title I) ............................... 634
677
M. Real Property Taxation (R.A. No. 7160, Book II. Title II)................ 710
N. Judicial Remedies .... 728

LABOR LAW AND SOCIAL LEGISLATION 1....... ..,tor a sho: sERI 744 ..
I. FUNDAMENTAL PRINCIPLES............................................ 744
A. Sources of Labor Laws . 744
B. State Policies ................................................................................ 747

Il. RECRUITMENT AND PLACEMENT OF WORKERS ............................. 750

A. Recruitment and Placement of Local and Migrant Workers............. 750
B. Employment of NonResident Aliens............................................... 765

IlI. EMPLOYER-EMPLOYEE RELATIONSHIP ..,........... 769

A. Employer-Employee Relationship ..................................................... 769
B. Legitimate Contracting vs. Labor-Only Contracting ......................... 779

IV. LABOR STANDARDS ............................................................................... 782

A. Conditions of Employment ........................................................ 782
B. Wages ............................ .................e 795
C. 809
Leaves
D. Special ............
Groups of Employees ................................................ 816
E. Sexual Harassment in the Work Environment (R.A. No. 7877);
Safe Spaces Act (R.A. No. 11313, Article IV)............................... 843
F. Discriminatory Practices ................................... 846

V. SOCIAL WELFARE BENEFITS................................................................... 850

A. SSS Law (R.A. No. 8282, as amended by R.A. No. 11199)............ 850
B. GSIS Law (R.A. No. 8291).... 858
C. Limited Portability Law (R.A. No. 7699) ......................................... 864
D. Disability and Death Bene ts .......................................................... 865
E.
Claims of Seafarers ................................................................... 866
VI. MANAGEMENT PREROGATIVE ..................................................... 871
A. Occupational Quali cations................................................. 872
B. Productivity Standards 873
C. Change of Working Hours............. 873
D. Transfer of Employees ............................................................... 873
E. Discipline of Employees ..................................................................... 874
F. Grant of Bonuses and Other. 875
G. Clearance Process ........... .....................c...ame.m................ 875
H. Post-Employment Restrictions ................................................... 875

VII. POST-EMPLOYMENT 877

A. Termination of Employment by Employer...................................... 877
B. Termination of Employment by Employee.................................... 886
C. Preventive Suspension. ............................................................ 888
D. Reliefs from Illegal Dismissal ............................. ...... . . . . . . ... . ... . . . ...... 889
E. Retirement ...................... 893
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COMMERCIAL LAW
CORPORATION LAW

A: GENERAL PRINCIPLES
NATURE AND ATTRIBUTES

Q: What is a corporation?
ANS: A corporation is an arti cial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law or
incidental to its existence (R.A. No. 11232, otherwise known as the "Revised Corporation
Code of the Philippines", Sec. 2 [hereinafter RCC]).

Q: What are the attributes of a corporation? (ALSP)

ANS: The attributes of a corporation arei
1. It is an Arti cial being with separate and juridical personality;
2. It is created by operation of Law;
3. It has the right of Succession, and
4. t has the Powers, attributes, and properties expressly authorized by law or
incident to its existence (RCC, Sec. 2).

NATIONALITY OF CORPORATIONS
COSTA TA
Q: What is a Domestic Corporation.?.
ANS: A Domestic Corporation is one formed, organized or existing under Philippine laws
(R.A. No. 7042, otherwise, known as the "Foreign Investments Act of 1991", Sec. 3
[hereinafter FIA]).

Q: What is a Foreign Corporation?.

ANS: A Foreign Corporation is-one formed, organized or existing under laws other than
those of the Philippines' and whose laws allow Filipino citizens and corporations to do
business in its own country or State (RCC, Sec. 140).

Q: What are the principal tests in determining the nationality of a corporation?

ANS: The tests in determining the corporate nationality of a corporation are the following:
1. Place of Incorporation test (RCC, Sec. 140); and
2. Control test (Narra Nickel Mining & Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, April 21, 2014).

Q: What is the place of incorporation test?

ANS: Under the place of incorporation test, the nationality of a corporation is determined
by under whose laws has been organized and registered, regardless of the nationality
of majority of its stockholders (RCC, Sec. 140).

Q: What is the control test?

ANS: The nationality of a private corporation is determined by the character or citizenship
of its controlling stockholders (Narra Nickel Mining & Development Corp. V. Redmont
Consolidated Mines Corp., G.R. No. 195580).
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Q: What is the primary test in determining the nationality of a corporation?

ANS: The place of incorporation test is the primary and general test used in determining
the nationality of a corporation (RCC, Sec. 140). However, the control test may be used:
1. In times of war (Filipinas Compania De Seguros v. Christern, G.R. No. L-2294,
May 25, 1951);
2. In determining compliance with constitutional and statutory foreign equity
restrictions (Narra Nickel Mining & Development Corp. V. Redmont
Consolidated Mines Corp., G.R. No. 195580, April 21, 2014); or
3 For corporations organized for the purpose of exploiting natural resources,
owning, and operating public utilities, mass media, advertising, and other
corporations subject to foreign equity restrictions under Sec. 11 of Article XII
and Sec. 11 of Article XVI of the Constitution (Roy Ill v. Herbosa, G.R. No.
207246, November 22, 2016).

Q: Under the Foreign Investments Act, when is a corporation considered as a

Philippine National?
ANS: The term "Philippine National" shall mean 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 shall be considered a Philippine
National. COMMERCIAL LAW

A corporation organized abroad and registered as doing business in the Philippines under
the Corporation Code of which 100% of the capital stock outstanding and entitled to vote
S wholly owned by Filipinos is a Philippine National (FIA, Sec13).

Q: As a general rule, what test is used to determine the nationality of a corporation

engaged in nationalized or partly-nationalized areas of activities?
ANS: In determining the nationality of a corporation engaged in nationalized or partly-
nationalized areas of activities, as a general rule, the Control Test shall be used. Under
the Control Test, a corporation shall be considered a Filipino corporation if the Filipino
ownership of its capital is at least 60% and where the 60-40 Filipino-alien shareholdings
Is not in doubt (Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines
Corp., G.R. No. 195580. April 21, 2014).

Q: What is the Grandfather Rule?

ANS: The Grandfather Rule by is the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other nationalization laws, is computed, in cases
where corporate shareholders are present, by attributing the nationality of the second or
even subsequent tier of ownership to determine the nationality of the corporate
shareholder.

It involves further investigation as to the nationality of the personalities with the bene cial
ownership and control of the corporate shareholders in both the investing and investee in
corporations (Narra Nickel Mining & Development Corp. V. Redmont Consolidated Mines
Corp, G.R. No. 195580, January 28, 2015).

The Strict Rule or the Grandfather Rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt. is there is no doubt, the Grandfather Rule will not apply (ld.).

Note: It is only when the Control Test is rst complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject corporation's Filipino equity falls below
the threshold 60%, the corporation is immediately considered foreign-owned, in which
case, the need to resort to the Grandfather Rule disappears (ld.).
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Q: What is the meaning of "doubt" for purposes of applying the Grandfather Rule?
(FTMP)
ANS: "Doubt" refers to various indicia that the "bene cial ownership" and "control" of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
Indicators of doubt include:
1. That the foreign investors provide practically all the Funds for the joint
investment undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the Technological
support for the joint venture;
3. That the foreign investors, while being minority stockholders, Manage the
company and Prepare all economic viability studies (ld.).

Q: What is the basis of computing for the 60-40 percentage requirement?

ANS: The Supreme Court held that what the Constitution requires is that full and legal
bene cial ownership of 60% of the outstanding capital stock (OCS), coupled with 60% of
the voting rights, must rest in the hands of Filipino nationals.

Thus, for purposes of determining compliance with constitutional or statutory ownership

requirements,
1. the required percentage of Filipino ownership shall be applied to both:
The total number of outstanding shares of stock entitled to vote in the election In
directors; and O
2. The total number of outstanding shares of stock, whether or not entitled to vote
(Roy Ill v. Herbosa, G.R. No, 207246, Resolution of April 18, 2017).
OD
Both the Voting Controt Test and the Bene cial Ownership Test must be applied to
determine whether a corporation is a "Philippine national" (Id.) 1
laporewered
SURICAZZ

Q: What is the bene cial ownership test?

ANS: Under the beneficial ownership, test, mere legal title is insufficient to meet the
required Filipino equity, he should also have full bene cial ownership of the share. If the
voting right of a share held in the name of a Filipino citizen or national is assigned or
transferred to an alien, that share is not to be counted in the determination of the required
Filipino equity. In the same vein, if the dividends and other fruits and accessions of the
share do not accrue tO Filipino citizen or national, then that share is also to be excluded tO
or not counted (Id.).

Q: What is the nationality of a corporation sole?

ANS: A corporation sole has no nationality as the framers of the Constitution did not have
in mind the religious corporations sole or any corporation sole, for that matter when
they provided the 60% requirement (Roman Catholic Apostolic Administration of Davao,
Inc.. V. Land Registration Commission, G.R. No. L-8451, December 20, 1957).

DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

Q: What is the Doctrine of Separate Juridical Personality?

ANS: A corporation is a distinct legal entity to be considered as separate and apart from
the individual stockholders or members who compose it, and is not affected by the
personal rights, obligations and transactions of its stockholders or members (Sulo ng
Bayan, Inc., v. Araneta, Inc., G.R. No. L-31061, August 17, 1976).

Q: What is the principle of limited liability?

ANS: The principle of limited liability provides that a corporate of cer or a stockholder, as
a general rule, is not personally held liable for corporate debts. Since a corporation has a
separate and distinct personality, it may incur its own liabilities and is responsible for the
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payment of its debts. The liability of the stockholder is limited to the unpaid subscription
(Zomer Development Co., Inc., v. Special Twentieth Division of the CA, Cebu City, G.R.
No. 194461, January 7, 2020; Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011).

Q: What are the implications of a corporation's separate personality? (PCC-ToRe)

ANS: The following are the implications of a corporation's separate personality:
1. Property of the Corporation - The property of the corporation is its property and
not that of the stockholders, as owners, although they have equities in it (Sulo
ng Bayan, Inc., v. Araneta, Inc., G.R. No. L-31061, August 17, 1976);
2. Corporate Liability - The obligations of a corporation, acting through its directors,
of cers, and employees, are its own sole liabilities (Bank of commerce v. Nite,
G.R. No. 211535, July 22, 2015);
3. Criminal Liability A corporation may incur criminal liability if penal statute
designates an act of a corporation as a crime a and prescribes a punishment
therefor. A corporation may be charged and prosecuted for a crime if the a
imposable penalty is ne. Even if the statute prescribes both ne and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be ned. However, if a statute de nes a crime that may be committed by a
corporation but prescribes the penalty therefor to be suffered by the of cers, MUTTVIHEWWOS

directors, or employees of such corporation or other persons responsible for the

offense, only such individuals will suffer such penalty (Ching V. Secretary of
Justice, G.R. No. 164317, February 6, 2006) jo
4. Tort Liability A corporation 46 liable for torts whenever a tortious act is
committed by an of cer or agent under the express direction or authority of the
stockholders or members acting as body, or, generally, from the directors as
the governing body (PAB V. CA, G R. No. L-27155, May 18, 1978); and
5. Right to Recover Moral Damages Generally, a corporation cannot be awarded
with moral damages because it us an arti cial being existing only in legal
contemplation. Thus, it has no feelings, no emotions, and no senses rooted from
physical suffering and mental anguish (San Fernando Regala Trading v. Cargill
Philippines, G. R. No. 178042, October 9, 2013).

However, in cases of libel, slander, or any other form of defamation, a corporation may
recover moral damages as Art. 2216 (7) of the Civil Code does not qualify whether the
plaintiff should be natural or juridical person (Filipinas Broadcasting V. Ago Medical
Center-Bicol, G.R. No. 141994 January 17, 2005). Furthermore, when the corporation
has a good reputation that is debased, resulting in its humiliation in the business realm
(Coastal Paci c Trading, Inc., v. Southern Rolling Mills Co., Inc., G.R. No. 118692, July
28, 2006).

Q: Why is a corporation generally not liable for the commission of a crime?

ANS: Since corporation is person of a mere legal ction, cannot be proceeded
against criminally because it cannot commit it crime in which personal violence or
malicious intent is required. Criminal action is limited to the corporate agents guilty of an
act amounting to a crime and a never against the corporation itself (West Coast Life
Insurance Co. v. Hurd, G.R. No. 8527, March 30, 1914). However, corporation can now
be made criminally liable for violation of the penal provisions of the Revised Penal Code
(Sec. 171, RCC).

A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment (Ching v. Secretary of Justice, G.R. No. 164317, February
6, 2006).
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DOCTRINE OF PIERCING THE CORPORATE VEIL

Q: What is the Doctrine of Piercing the Corporate Veil?

ANS: The doctrine of separate juridical personality, a corporation has a legal personality
separate and distinct from those individuals acting for and, in its behalf, and, in general,
from those comprising it. This legal ction may only be disregarded if it is used as means
to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues (The Linden Suites, Inc. v.
Meridien Far East Properties, Inc., G.R. No. 211969, October 4, 2021). Though the
corporation has separate and distinct personality from its stockholders, such personality
may be disregarded, or veil of corporate ction may be pierced, attaching personal liability
to the responsible person, if the corporate personality iS used to defeat public
convenience, justify wrong, protect fraud or defend crime, or use to defeat the labor laws.
Hence, the separate and distinct juridical personality of a corporation is disregarded or
pierced (Dutch Movers, Inc., V. Edilberto Lequin, G.R. No. 210032, April 25, 2017).

Q: What are the kinds of piercing cases?

ANS: The following are the kinds of piercing cases
1. Traditional Veil-Piercing Action where a court disregard the existence of the
corporate entity so a Claimant can reach the assets of a corporate insider; and
2. Reverse Piercing Action has two (2) types: outsider reverse piercing and
insider reverse piercing. one E
a. Outsider reverse piercing occurs when a party with a claim against an
individual or corporation attempts to be, repaid with assets of a
corporation owned or substantially controlled by the defendant. In
contrast;
b. Insider reverse piercing the controlling members will attempt to ignore
the corporate ction in order to take advantage of a bene t available to
the corporation, such as an interest in a lawsuit or protection of personal
assets. (International Academy of Management Économics v. Litton and
Company, G.R. No: 191525, December 13, 2017).
Somal
Q: In what cases is the doctrine of piercing the corporate veil applied? (DFA)
ANS: The doctrine of piercing the corporate veil applies only 3 basic areas, namely:
1. Defeat of public convenience - as when the corporate ction is used as a vehicle
for the evasion of an existing obligation;
2. Fraud cases - 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 S
and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation (Montealegre
V. Spouses De Vera, G.R. No. 208920, July 10, 2019).

Note: It has also been suggested that there is another group of cases where the doctrine
of piercing the veil of corporate ction can be applied known as Equity Cases. However,
even "Fraud Cases" and "Alter Ego Cases" are oftentimes explained on the basis of equity
and not on the basis of strict application of the rule on complete separation of legal
personality. "Fraud Cases" and "Alter Ego cases" are oftentimes Equity Cases (AQUINO
& AQUINO, The Revised Corporation Code of the Philippines (2024), p. 78, [hereinafter
AQUINO & AQUINO, Revised Corporation Code]).
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Q: What are the tests to determine the application of the Alter Ego Theory which
would warrant the piercing of the corporate veil? (CFC)
ANS: A Three-Pronged Test is used to determine the application of the alter of ego theory,
which is also known as the Instrumentality Theory, namely the:
1. Instrumentality or Control test - Control, not mere majority or complete stock
control, but complete domination, not only of nances 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. Fraud test - Such control must have been used by the defendant to commit
fraud or wrong in contravention of plaintiff's legal rights; and
3. Harm/Causal Connection test The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.

The absence of any of these three elements prevents the piercing of the corporate veil
(Maricalum Mining Corp. v. Florentino, G.R. Nos. 221813 & 222723, July 23, 2018).

Q: What is the rule on a subsidiary's separate existence?

ANS: The general rule is still to the effect that if used for legitimate functions, a
subsidiary's separate existence shall be respected, and the liability of the parent
corporation as well as the subsidiary will be con ned to those arising in their respective
MUTTVISHENWOD

business (PNB v. Ritratto Group Inc., G.R. No 142616, July 31, 2001).

O: Does the corporation have to be impleaded in the case when invoking the
doctrine of piercing the veil of corporate ction?
ANS: Yes. Compliance with the modes of acquiring jurisdiction over the person of the
defendant or respondent cannot be dispensed with in applying the doctrine of piercing the
veil of corporate ction. A corporation not impleaded in a suit cannot be subject to the
court's process of piercing the veil of its corporate ction (Parayday v. Shogun Shipping
Co., Inc., G.R. No. 204555; July 6, 2020).

in However, in labor cases, "the veil of corporate ction can be pierced, and responsible
corporate directors and of cers or even a separate but related corporation, may be
impleaded and held answerable solidarily in a labor case, even after nal judgment and
on execution, so long as it is established that such persons have deliberately used the
to corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud,
or bad faith or malice in doing so. When the shield of a separate corporate identity is used
tO commit wrongdoing and opprobriously elude responsibility, the courts and the legal
authorities in a labor case have not hesitated to step in and shatter the said shield and
deny the usual protections to the offending party, even after nal judgment. The key
element is the presence of fraud, malice or bad faith" (Guillermo v Uson, G.R. No. 19896,
March 7, 2016).

Q: What are the probative factors considered in alter ego cases that will justify the
application of the doctrine of piercing the corporate veil? (BIMB)
ANS: The probative factors considered are:
1. Stock ownership by one or common ownership of Both corporations;
2. Identity of directors and of cers;
3. Methods of conducting the business; and
4. Manner of keeping corporate Books and records (Concept Builders, Inc., V.
NLRC, G.R. No. 108734, May 29, 1996).
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Q: What are the indicia that a subsidiary company is merely an alter ego of its
parent corporation? (OCF-SIPNo-DUIF)
ANS: A combination of two or more of the following circumstances, taken together, may
be indicia a that a subsidiary corporation is but mere instrumentality or alter ego of its
parent corporation:
1 . The parent corporation Owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have Common directors or of cers.
3. The parent corporation Finances the subsidiary;
4. The parent corporation Subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;
5. The subsidiary has grossly Inadequate capital;
6. The parent corporation Pays the salaries and other expenses or losses of the
subsidiary;
7. The subsidiary has substantially No business except with the parent corporation
or no assets except those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its of cers, the
subsidiary is described as a Department or division of the parent corporation, or
its business or nancial responsibitity is referred to as the parent corporation's
own;
9. The parent corporation Uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the
Interest of the subsidiary, but take their orders from the parent corporation; and
11. The Formal legal requirements of the subsidiary, are not observed (PNB V.
Ritratto Group Inc., G.R. No. 142616, July 31, 2001).

Q: What are the consequences of piercing the corporate veil?

ANS: The court may pierce the corporate veil:
1. By disregarding the separate personality of the subject corporation and by
holding the corporate of cer liable for the corporate obligation (Francisco V.
Mejia, G.R. No. 141617, August 14, 2001) or
2. By regarding the corporation as an association of persons or of in case of two
corporations, by merging them into one and holding them liable as such
(Development Bank of the Philippines .. CA; G.R. No. 126200, August 16,
2001).
01 MANY
TRUST FUND DOCTRINE

Q: What is the Trust Fund Doctrine?

ANS: The Trust Fund Doctrine provides that the capital stock, property, and other assets
of a corporation are regarded as equity in trust for the payment of corporate creditors. The
subscriptions to the capital of a corporation constitute a to fund to which creditors have a
right to look for satisfaction of their claims (Turner v. Lorenzo Shipping Corp., G.R. No.
157479, November 24, 2010; Halley Printwell, Inc., G.R. No. 157549, May 30, 2011).

Q: What is covered by the Trust Fund Doctrine?

ANS: The Trust Fund Doctrine is not limited to reaching the stockholder's unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses
not only the capital stock, but also other property and assets generally regarded in equity
as a trust fund for the payment of corporate debts (Halley v. Printwell, G.R. No. 157549,
May 30, 2011).

Additional Paid-in Capital is considered a contribution of a stockholder over and above a

the par value of shares and falls under the of concept of corporate Trust Fund upon its
recording in the books of the corporation (SEC Opinion dated June 11, 2004).
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Q: In what instances would the Trust Fund Doctrine be violated? (CDR-Traln)

ANS: The Trust Fund Doctrine is violated in the following instances:
1. Where the corporation has distributed its Capital among the stockholders
without providing for the payment of creditors;
2. When there is payment of Dividends without unrestricted retained earnings;
3. Where it has Released the subscribers to the capital stock from their
subscriptions;
4. Where has Transferred the corporate property in fraud of its creditors; and
5. Where the corporation is Insolvent (Steinberg v. Velasco, G.R. No. L-30460,
March 12, 1929).

ITIB. KINDS OF CORPORATION

Q: What are the Classes of Corporations?
ANS:
As to number of components:
1. Aggregate corporation - a corporation consisting of more than one member.
It has been de ned as an arti cial body of men, composed of diverse individuals,
the ligaments of which body, the franchises and liberties bestowed upon it, bind
and all unite, all into one, and consists the whole frame and essence of the
COMMERCIAL LAW

corporation.
2. Corporation sole - a corporation consisting of only one person or member
(RCC, Sec. 108).
3. One Person Corporation - a corporation with a single stockholder (RCC, Sec.
116).

As to functions:
1.

2.
and welfare. d
Public Corporation - a corporation organized for the government of a portion
of ; State (like cities and municipalities) for the purpose of serving general good

Private Corporation - a corporation formed for some private purpose, bene t,

aim or end.

As to the manner of creation:

1. Corporation created by special law a corporation directly created by
Congress through a special law. Such corporation must be government-
owned or controlled corporation.
2. Corporation created under a general law - a corporation created under the
Revised Corporation Code, the Corporation Code of the Philippines or the old
Corporation Law.
3. Corporations by Prescription - a corporation that was not formally
organized as such but has been duly recognized by immemorial usage as a
corporation with rights and duties enforceable under the law.

As to legal status:
1. De jure corporation -a corporation organized in accordance with
requirements of the law.
2. De facto corporation - a corporation that is formed where there exists a aw
in its incorporation but there is colorable compliance with the requirements of
law.

3. Corporation by estoppel - group of persons which holds out itself as a

corporation and enters into a contract with a third person on the strength of
such appearance. It cannot be permitted to deny its existence in an action
under said contract (RCC, Sec. 20).
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As to existence of stocks:
1. Stock corporation a corporation with capital stock that is divided into
shares and is authorized to distribute to holders of such shares, dividends or
allotments of the surplus pro ts on the basis of the shares held (RCC, Sec.
3).
2. Non-stock corporation - a corporation that has no capital stock, does not
issue stocks, and does not distribute dividends to its members (RCC, Sec.
87).

As to laws of incorporation:
1. Domestic corporation - a corporation formed, a organized or existing under
Philippine laws (RCC, Sec. 140).
2. Foreign corporation - a corporation formed, organized or existing under
laws other than those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or State (RCC, Sec. 140).

STOCK CORPORATION

Q: What is a stock corporation?A

ANS: Stock corporations are those which have capital stock divided into shares and are
authorized of to distribute to the holders of such shares, dividends, or allotments of the
surplus pro ts on the basis of the shares held (ROC, Sec...3).
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NON-STOCK CORPORATION

Q: What is a non-stock corporation?

ANS: For purposes of the RCC and subject to its provisions on dissolution, non-stock
corporation is one where no part of its income is distributable as dividends to its members,
trustees, or of cers (RCC, Sec. 86)
O
Q: What are the purposes for which non-stock corporations may be formed?
ANS: Non-stock corporations may be formed or organized for charitable, religious,
educational, professional, cultural, fraternat, literary, scienti c, social, civic service, or
similar purposes, like trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions governing particular classes of non-stock
corporations (RCC, Sec. 87).

Q: What is the rule regarding pro ts generated by non-stock corporation?

ANS: Any pro t which a non-stock corporation may obtain incidental to its operations
shall, whenever necessary or proper, may be used for the furtherance of the purpose or
purposes for which the corporation was organized (RCC, Sec. 86).

Note: The only limitation on a non-stock corporation is that any pro t derived by it from
any authorized activity cannot be distributed as dividends to its members (RCC, Sec. 86).

CLOSE CORPORATION

Q: What is a close corporation?

ANS: A close corporation is one whose articles of incorporation provides that:
All the corporation's issued stock of all classes exclusive of treasury shares,
shall be held of record by not more than a speci ed number of persons, not
exceeding 20;
2. All the issued stock of all classes shall be subject to one or more speci ed
restrictions on transfer permitted by this title; and
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3. The corporation shall not list in any stock exchange or make any public offering
of its stocks of any class (RCC, Sec. 95).

Q: What are the distinguishing characteristics of a close corporation? (ALGI-KPDA)

ANS: The following are the distinguishing characteristics of a close corporation
1. Stockholders may Act as directors without the need for Election and therefore
are liable as directors;
2. Stockholders who are involved in the management of the corporation are Liable
in the same manner as directors are;
3. Quorum may be Greater than mere majority when provided in the AOI;
4. Transfers of stocks to others, which would increase the number of stockholders
to more than the maximum are Invalid;
5. Corporate Acts may be binding even without a formal board meeting, the
stockholder had Knowledge or rati ed the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board may be settled by the SEC, on the written petition by any
stockholder; and
8. Stockholder may withdraw and avail of his right of Appraisal (RCC, Secs. 95-
104). LAW IVISHENWOD

Q: What are the provisions that may be included in the Articles of Incorporation of
a close corporation? (SDQB)
ANS: The following are the permissive provisions in the Articles of Incorporation of a close
corporation:
1. Classi cations of Shares or rights and the quali cations for owning or holding
the same and restrictions on their transfers as may be stated therein;
2. Classi cation of Directors into one or more classes, each of whom may be voted
for and elected solely by : particular class of stock;
3. A greater Quorum or voting requirement in meetings of stockholders or directors
than those provided in the Code; and
4. The Business of the corporation to be Managed by the stockholders of the
corporation rather than by a board of directors (RCC, Sec. 96).

Q: What are the consequences when the close corporation is managed by the
stockholders?
ANS: When a close corporation provides in its article of incorporation that the business
of the corporation shall be managed by the stockholders of the corporation rather than by
a board of directors, the consequences are:
1. No meeting of stockholders need be called to elect directors; and
2. The stockholders shall be deemed to be directors and shall be subject to all
liabilities of directors (RCC, Sec. 96).

Q: What corporations may not be incorporated as a close corporation?

ANS: The following corporations cannot be a close corporation:
1. When at least 2/3 of its voting stocks or voting rights is owned or controlled
by another corporation which is not a close corporation; and
2. (MOSBI-PEV) Mining or Oil companies, Stock exchanges, Banks, Insurance
companies, Public utilities, Educational institutions, and corporations
declared to be Vested with public interest (RCC, Sec. 95).

Q: When are restrictions on the transfer of shares considered valid?

ANS: Restrictions on the transfer of shares shall be valid provided:
1. The restrictions must appear in the articles of incorporation, bylaws, and
certi cate of stock, otherwise the same shall not be binding on any purchaser
in good faith; and
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2. Right of rst refusal - the restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to purchase
the shares of the transferring stockholder with such reasonable terms,
conditions or period stated (RCC, Sec. 97).

Q: When may a stockholder sell his shares to a third person?

ANS: If the existing stockholders or the corporation fails to exercise the option O
purchase, the transferring stockholder may sell their shares to any third person (RCC,
Sec. 97).

Q: When may the close corporation refuse to register the transfer in the name of
the transferee? (INV)
ANS: The corporation may, at its option, refuse to register the transfer in the name of the
transferee if the latter has or is conclusively presumed under Sec. 98 to have notice of:
1. The person's Ineligibility to be : stockholder of the corporation;
2. That the transfer of stock would cause the stock of the corporation to be held by
more than the Number of persons permitted under its articles of incorporation;
or
3. That the transfer Violates a restriction on transfer of stock (RCC, Sec. 98).

Note: The corporation may, at its option, refuse to register the transfer of stock in the
name of transferee (Id.). 3
Exceptions:
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1. If stockholders consent to the transfer, or
2. If the close corporation has amended its articles of incorporation (ld.).

Q: What is the scope of pré-emptive right in close corporations?

ANS: The preemptive right of stockholders in close corporations shall extend to all stock
to be issued, including reissuance of treasury shares, whether for money, property or
personal services, or in payment of corporate debts, unless the articles of incorporation
provide otherwise (RCC, Sec. 101) JOna
Q: What is the difference between pre-emptive right in close corporations and that
in ordinary corporations?
ANS: The difference is that pre-emptive right in close corporations is not subject to any
exceptions other than that provided in the articles of incorporation, while pre-emptive right
in ordinary corporations is also subject to other exceptions provided in Section 38 (RCC,
Sec. 38 & 101).

Note: The pre-emptive right under Section 38 cannot be exercised in the following
instances: (DCG)
1. When Denied in the Articles of Incorporation;
2. When shares are issued in Compliance with laws requiring stock offerings or
minimum stock ownership by the public; and
3. When shares are issued in Good faith with the approval of shareholders
representing 2/3 of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of previously contracted debt
(RCC, Sec. 38).

Q: What are the requirements for amendment of articles of incorporation of a close

corporation?
ANS: Any amendment which seeks to delete or remove any provision required for close
corporations or to reduce a quorum or voting requirement stated In said articles of
incorporation shall require the af rmative vote of at least 2/3 of the outstanding capital
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stock, whether with or without voting rights, or of such greater proportion of shares of as
may be speci cally provided in the articles of incorporation for amending, deleting or
removing any of the aforesaid provisions, at a meeting duly called for the purpose (RCC,
Sec. 102).

EDUCATIONAL CORPORATION
Q: What is an educational corporation?
ANS: Educational corporations are those organized for educational purposes, particularly
the establishment and maintenance of a school, college or university (DIVINA, Questions
and Answers on the Revised Corporation Code, p. 511 [hereinafter DIVINA, Q&A on the
RCC]).

Q: What is the number and term of trustees for educational corporations?

ANS: The number of trustees in educational institutions organized as non-stock
corporations shall not be less than ve (5) nor more than fteen (15): Provided, That the
number of trustees shall be in multiples of ve (5) (RCC, Sec. 106).

The board of trustees of incorporated schools, colleges, or other institutions of learning

shall so classify themselves that the term of of ce of one- fth (1/5) of their number of shall COMMERCIAL LAW

expire every year unless otherwise provided In the articles of incorporation or by-laws.
Trustees thereafter elected to ll vacancies, occurring before the expiration of a particular
term, shall hold of ce only for the unexpired period. Frustees elected thereafter to ll
vacancies caused by expiration of term shall hold of ce for ve (5) years (RCC, Sec. 106).

RELIGIOUS CORPORATION
Q: What are the classes of religious corporations?

corporations may be classi ed into:

1. Corporation Sole
A
ANS: Religious corporations may be incorporated by one or more persons. Such

A corporation sole is one which is formed by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding older of a religious denomination, sect, or
church for the purpose of administering and managing, as trustee, the affairs,
property, and temporalities of such religious denomination, sect or church (RCC,
Sec. 108).
2. Religious Societies
Unless forbidden by competent authority, the Constitution, pertinent rules,
regulations, or discipline of the religious denomination, sect or church of which
it is a part, any religious society, religious order, diocese or synod, or district
organization of any religious denomination, sect or church, may, upon written
consent and/ or by an af rmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the administration of its
temporalities or for the management of its affairs, properties, and estate by ling
with the SEC, articles of incorporation veri ed by the af davit of the presiding
elder, or secretary, or clerk or other member of such religious society or religious
order, or diocese, synod, or district organization of the religious denomination,
sect or church (RCC, Sec. 114).

ONE PERSON CORPORATION (OPC)

Q: What is a One Person Corporation (OPC)?
ANS: A One Person Corporation is a corporation with a single stockholder (RCC, Sec.
116).
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Q: Who may form an OPC?

ANS: Only a natural person, trust, or an estate may form an OPC (RCC, Sec. 116).

Q: What entities are prohibited from becoming an OPC?

ANS: The following may not incorporate as an OPC:
1. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed
companies, and non-chartered government-owned and controlled corporations;
and
2. A natural person who is licensed to exercise a profession may to not organize an
OPC for the purpose of exercising such profession except as otherwise provided
under special laws (RCC, Sec. 116).

Q: What is the minimum capital stock required for an OPC?

ANS: A One Person Corporation shall not a be required to have a minimum authorized
capital stock except as otherwise provided by special law (RCC, Sec. 117).

Q: What must comprise the Articles of Incorporation of an OPC?

ANS: The articles of incorporation shall be in accordance with the requirements under
Section 14 of the RCC. It shall likewise substantially contain the following:
1. If the single stockhotder is a trust on an estate, the name, nationality, and
residence of the trustee, administrator, executor, guardian, conservator,
custodian, or other person exercising duciary duties together with the proof of
such authority to act on behalf of the trust or estate, and
2. Name, nationality, residence of the nominee and alternate nominee, and the
extent, coverage and limitation of the authority (RCC, Sec. 118).
ore

U IN
Q: What is the rule regarding the bylaws of an OPC?
ANS: The OPC is not required to submit and le corporate bylaws (RCC, Sec. 119).
LOON
Q: What must be included in the corporate name of an OPC?
ANS: A One Person Corporation shall indicate the letters "OP|" either below or at the
end of its corporate name (RCG, Sec 120)
Q: What is the position of the single stockholder of the OPC?
ANS: The single stockholder shall be the sole director and president of the One Person
Corporation (RCC, Sec. 121).

Q: What are the rules regarding the of cers of the OPC?

ANS: The rules are as follows:
1. Within 15 days from the issuance of its certi cate of incorporation, the OPC shall
appoint a treasurer, corporate secretary, and other of cers as it may deem
necessary;
2. The OPC shall notify the SEC thereof within 5 days from appointment of the
of cers;
3. The single stockholder may not be appointed as the corporate secretary; and
4. A single stockholder who is likewise the self-appointed treasurer of the
corporation shall:
a. Give a bond to the SEC in such a sum as may be required;
b. Undertake in writing to faithfully administer the OPC's funds to be
received as treasurer, and to disburse and invest the same according to
the AOI as approved by the SEC;
C. Renew the bond every 2 years or as often as may be required (RCC,
Sec. 122).
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Q: Who are nominees and alternate nominees?

ANS: Nominees and alternate nominees are those designated by the single stockholder
who shall, in the event of the single stockholder's death or incapacity, take the place of
the single stockholder as director and shall manage the corporation's affairs (RCC, Sec.
124).

Q: What are the requirements on designation of nominees and alternate nominees?

ANS: The requirements are:
1. The articles of incorporation shall state the names, residence addresses and
contact details of the nominee and alternate nominee, as well as the extent and
limitations of their authority in managing the affairs of the One Person
Corporation; and
2 The written consent of the nominee and alternate nominee shall be attached to
the application for incorporation (RCC, Sec. 124).

Q: How is consent of the nominee or alternate nominee withdrawn?

ANS: Such consent may be withdrawn in writing any time before the death or incapacity
of the single stockholder (RCC, Sec. 124)

Q: What is the term of of ce of a nominee and alternate nominee? MUTIVISHENWOS

ANS: The nominee/alternate nominee shall sit as director according to the following rules:
1. When the incapacity of the single stockholder is femporary, the nominee shall
sit as director and manage the affairs of the ORC until the stockholder, by self-
determination, regains the capacity to assume such duties;
2. In case of death or permanent incapacity of the single stockholder, the nominee
shall sit as director and manage the affairs of the ÖPC until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have
designated one of them or have agreed that the estate shall be the single
stockholder of the OPC; and
3 The alternate nominee shall sit as director and manage the OPC in case of the
nominee's inability, incapacity, death, or refusal to discharge the functions as
director and manager of the corporation, and only for the same term and under
the same conditions applicable to the nominee (RCC, Sec. 125).

Q: How may a nominee and alternate nominee be changed by the stockholder?

ANS: The single stockholder may, at any time, change its nominee and alternate nominee
by submitting to the SEC the names of the new nominees and their corresponding written
consent. For this purpose, the articles of incorporation need not be amended (RCC, Sec.
126).

Q: What shall be the contents of the minutes book of an OPC?

ANS: The minutes book shall contain all actions, decisions, and resolutions taken by the
OPC (RCC, Sec. 127).

Q: How may the OPC take action on any matter?

is ANS: When action is needed on any matter, it shall be suf cient to prepare a written
resolution, signed and dated by the single stockholder, and recorded in the minutes book
of the OPC. The date of recording in the minutes book shall be deemed to be the date of
the meeting for all purposes under this Code (RCC, Sec. 128).

Q: What is the obligation of a single shareholder claiming limited liability?

ANS: A sole shareholder claiming limited liability has the burden of af rmatively showing
that the corporation was adequately nanced (RCC, Sec. 130).
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Q: When is a single stockholder solidarily liable with the OPC?

ANS: Where the single stockholder cannot prove that the property of the OPC is
independent of the stockholder's personal property, the stockholder shall be jointly and
severally liable for the debts and other liabilities of the OPC. The principle of piercing the
corporate veil applies with equal force to an OPC (RCC, Sec. 130).

Q: In what instance may an ordinary corporation be converted into an OPC?

ANS: When a single stockholder acquires all the stocks of an ordinary stock corporation,
the latter may apply for conversion into an OPC, subject to the submission of such
documents as the SEC may require (RCC, Sec. 131).

Q: What is the effect of conversion of an ordinary corporation to an OPC?

ANS: The OPC converted from an ordinary stock corporation shall succeed the latter and
be legally responsible for all the latter' outstanding liabilities as of the date of conversion
(RCC, Sec. 131).

Q: In what instances may an OPC be converted into an ordinary corporation?

ANS: An OPC may be converted into an ordinary stock corporation after due notice to the
SEC of such fact and of the circumstances leading to the conversion, and after
compliance with all other requirements for stock corporations under this Code and
applicable rules.

In case of death of the single stockholder, the legal heirs, within 60 days from the transfer
01 shares by the nominee or alternate nominee, shall notify the SEC of their decision to
either wind up and dissolve the OPC-or-convert
08173 it into an ordinary stock corporation (RCC,
Sec. 132). 300
CEMET
Q: What is the effect of conversion from an OP.C to an ordinary corporation?
ANS: The ordinary stock corporation converted from an OP€ shall succeed the latter and
be legally responsible for all the latter's outstanding liabilities as of the date of conversion
(RCC, Sec. 132).

HOLDING/PARENT AND SUBSIDIARY CORPORATION

Q: What is a Holding Corporation (Parent Corporation)?
ANS: It is one which controls another as a subsidiary by the power to elect majority of the
latter's board members. It is one that holds stocks in other companies for purposes of
control rather than mere investment (2 VILLANUEVA-CASTRO, Commercial Law Recap
(2020), p. 10, [hereinafter 2 VILLANUEVA-CASTRO, Commercial Law Recap]).

Q: What is a Subsidiary Corporation

ANS: It is one which is so related to another corporation that the majority of its directors
can be elected either directly or indirectly by such other corporation (Id.).

C. INCORPORATION AND ORGANIZATION

NUMBER AND QUALIFICATIONS OF INCORPORATORS
Q: What is the required number of incorporators in forming a corporation?
ANS: Any person, partnership, association or corporation, singly or jointly with others but
not more than fteen (15) in number may organize a corporation (RCC, Sec. 10).

Q: Who can be incorporators?

ANS: Natural persons, partnerships, association, or corporations can be incorporators
(ld).
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Q: What are the basic quali cations in order to be an incorporator? (15-NOL)

ANS: In order to become an incorporator, the following quali cations must be present:
1. The incorporator must be Natural or juridical entity;
2. There must not be more than 15 incorporators;
3. a If the incorporator is a natural person, he or she must be of Legal age; and
4. Each incorporator of a stock corporation must own or be a subscriber to at least
One share of the capital stock

CORPORATE NAME
Q: May a corporation use a name that belong to another?
ANS: No. A corporation cannot use a name that belongs to another even as a trade name.
As a rule, no corporate name shall be allowed if it is not distinguishable from that already
reserved or registered for the use of another corporation, or if such name is already
protected by existing law, rules and regulations (RCC, Sec. 17).

Q: What must be proved by a person seeking to prevent another corporation from

using its name? (PDP)
ANS: The person must prove that:
1. The corporation has acquired a Prior right of over the use of such corporate name; COMMERCIAL LAW

and
2.
It is any of the cases mentioned under See. 17 of the RCC, namely:
a. Name is not Distinguishable from that already reserved or registered for
the use of another corporation; or
b. iS Such name is already Protected by existing law, rules and regulations

Q: May the original party to the case continue to litigate an action despite the
change in corporate name?
ANS: Yes. The original party to the case, may eed continue to litigate the present
action despite any transfer of interest. In any event, It seems that there was no actual
transfer of interest but a mere change of name (Asian Construction & Development
Corporation v. Mero Securities, Inc., G.R. No: 221147, September 29, 2021).

Q: Who enforces the protection of name accorded under Sec. 17 of the Revised
Corporation Code?
ANS: The Securities and Exchange Commission (SEC) has the power to enforce the
protection of corporate names. Its jurisdiction is not merely con ned to the adjudicative
functions. By express mandate, it has the absolute jurisdiction, supervision, and control
over all corporations (Indian Chamber of Commerce PHL., Inc. V. Filipino Indian Chamber
of Commerce in the PHL, Inc., G.R. No. 184008, August 3, 2016).

CAPITALIZATION
Q: What is the required minimum capital stock in a stock corporation?
ANS: None. There is no required minimum capital stock in a stock corporation (RCC, Sec.
12).

Q: Are there corporations with required minimum capital stocks?

ANS: Yes. Corporations governed by special laws which impose initial capitalization
requirements are required to have a minimum amount of capital stocks.

CORPORATE TERM
Q: How long does a corporation exist?
A ANS: A corporation shall have perpetual existence unless its articles of incorporation
provides otherwise (RCC, Sec. 11).
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Q: When does corporate term commence?

ANS: A corporate term commences upon issuance of the certi cate of incorporation by
the SEC (RCC, Sec. 19).

Q: Is a Certi cate of Incorporation relevant?

ANS: Yes. A certi cate of incorporation is an indispensable requirement before a
corporate life can ensue. It is only then that the incorporators/stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in
the articles of incorporation for a period of time mentioned therein (Ibid).

Q: Is a Certi cate of Incorporation necessary if the corporation is created through

a special law?
ANS: No. A certi cate of incorporation is not necessary if the corporation is created by a
special law. Its corporate existence commences as soon as the law takes effect and is
expressly or impliedly accepted.

Q: How may a corporate term for a speci c period be extended or shortened?

ANS: A corporate term for a speci c period may be extended or shortened by amending
the

A
articles of incorporation (ROC, Sec. 11), N
Q: How is the power to extend or shorten corporate term exercised?
ANS: A private corporation may extend
10) or shorten
V? its term as stated in the articles of
incorporation:
1. When approved by a majority vote of the board of directors or trustees, and
2. Rati ed at a meeting by the stockholders or members representing at least 2/3
of the outstanding capital stock or of its members (RCC, Sec. 36).
pwww.w.
SANCERN
Note: In case of extension of corporate term, a dissenting stockholder may exercise the
right of appraisal under the conditions provided in this Code (RCC) Sec. 36).

Q: When may a corporation extend its corporate term?

ANS: No extension may be made earlier than 3 years prior to the original or subsequent
expiry date(s) unless there are justi able reasons for an earlier extension as may be

determined by the SEC (ROC, S80 115 MANLY

Q: When may a corporation apply for revival of its corporate existence?
ANS: A corporation whose term has expired may, at any time, apply for a revival of its
corporate existence, together with all the rights and privileges under its certi cate of
incorporation and subject to all of its duties, debts and liabilities existing prior to revival.
Upon approval by the SEC, the corporation shall be deemed revived and a certi cate of
revival of corporate existence shall be issued, giving it perpetual existence, unless t its
application for revival provides otherwise (RCC, Sec. 11).

CLASSIFICATION OF SHARES
Q: What are "shares?"
ANS: Unit into which the proprietary interests in a corporation are divided. It is the
intangible interest or right which an owner has in the management, pro t and assets of
the corporation.

Q: What are the different kinds of shares? (CVP-TRF)

ANS: Shares may be classi ed into:
1. Common or Preferred Shares Common shares or stocks represent the
residual ownership interest in the corporation. It is a basic class of stock ordinaily
and usually issued without extraordinary rights or privileges and entitles the
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shareholder to a pro rata division of pro ts. Preferred stocks are those that
entitle the shareholder to some priority on dividends and/or asset distribution.
(AQUINO & AQUINO, Revised Corporation Code, supra at 161; RCC, Sec.6).

Note: The most common forms of preferred shares may be classi ed into two;
1. Preferred Shares as to Assets gives the holder thereof preference in the
distribution of the assets of the corporation in case of liquidation;
2. Preferred Shares as to Dividends - a share the holder of which S entitled to
receive dividences on said share to the extent agreed upon before any dividends
at all are paid to the holders of common stock. It may be;
a. Cumulative - if a dividend is omitted in any year, it must be made up in
a later year before any dividend may be paid on the most common
[shares] in the later year;
b. Non Cumulative - there is no need to make up for undeclared dividends.
No right survives as EO the undeclared dividends and the directors do not
even have discretion to declare those past dividends subsequently; and
Participating or Non Participating entitled to participate with the
common shares in excess distribution (AQUINO & AQUINO, Revised
Corporation Code supra at 164-166
3. Voting or Non-voting Shares, Shares may be voting or non-voting. In the MUTTVIOHEWWOD

absence of a provision in the Articles of Incorporation, and consistent with the

Doctrine of Equality of Shares, the shares in a stock corporation are considered
voting shares (AQUINO & AQUINO, Revised Corporation Code, supra at 169).
4. Par value or No par value Shares Par value shares are those with xed value
stated in the Articles of Incorporation and the share certi cate. No-par value
shares refer to shares without such arbitrary amount (AQUINO & AQUINO,
Revised Corporation Code, supra at 166; RCC, Sec 6).
5. Treasury Shares, Treasury shares are shares of stock that have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by
purchase, redemption, and donation or through same other lawful means
(AQUINO & AQUINO, Revised Corporation Code, supra at 180; RCC, Sec. 9).
6. Redeemable Shares - Redeemable shares are shares of stocks issued by a
corporation which said corporation can purchase or take up from their holders
as expressly provide for in the articles of incorporation and certi cates of stock
representing said shares (AQUINO & AQUINO, Revised Corporation Code,
supra at 175).
7. Founder's Shares - Founders' shares are shares that are given to those who
helped organize the corporation. This may be a form of reward to the "founders"
(AQUINO & AQUINO, Revised Corporation Code, supra at 174).

Q: What shares may be deprived of voting shares?

ANS: No share may be deprived of voting rights except those classi ed and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code (RCC, Sec. in
6).

ARTICLES OF INCORPORATION

Q: What are the contents of the Articles of Incorporation? (P2INT-15-DACO)

ANS: The contents of the Articles of Incorporation are:
1. The Name of the corporation;
2. The speci c Purpose or purposes for which the corporation is being formed.
Where a corporation has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
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3. The place where the Principal of ce of the corporation is to be located, which

must be within the Philippines;
4. The is Term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
5. The names, nationalities, and residence addresses of the Incorporators;
6. The number of directors, which shall not be more than fteen (15) or the number
of trustees which may be more than fteen (15);
7. The names, nationalities, and residence addresses of persons who shall act as
Directors or trustees until the rst regular directors or trustees are duly elected
and quali ed in accordance with this Code;
8. If it be a stock corporation, the amount of its Authorized capital stock, number
of shares into which it is divided, the par value of each, names, nationalities,
and residence addresses of the original subscribers, amount subscribed and
paid by each on the subscription, and a statement that some or all of the shares
are without par value, if applicable;
9. If it be a nonstock corporation, the amount of its capital, the names, nationalities,
and residence addresses of the Contributors, and amount contributed by each;
and
10. Such Other matters consistent with law and which the incorporators may deem
necessary and convenient (RCc. Sec. 43).

Q: What is the voting requirement for the Articles of Incorporation to be amended?

ANS: Unless otherwise prescribed by this Code or by special law, and for legitimate
purposes, any provision or matter stated in the articles of incorporation may be amended
by;
ape see worldl

Stock Corporation Non-Stock Corporation

Majority vote of the board of directors or By the vote or written assent of majority of
trustees and the vote or written assent the trustees and at least two-thirds (2/3)
of the stockholders representing at least of the members.
two-thirds (2/3) of the outstanding
capital stock.

Note: This is without prejudice to the

appraisal right of dissenting
stockholders
(RCC, Sec. 15)

Q: When shall the amended Articles of Incorporation take effect?

ANS: The amendments shall take effect upon their approval by the Commission or from
the date of ling with the said Commission if not acted upon within six (6) months from
the date of ling for a cause not attributable to the corporation (Ibid.).

Q: What are the grounds in which an amendment of the Articles of Incorporation

may be disapproved? (Not-CUP)
ANS: The grounds for disapproval are:
1. The articles of incorporation or any amendment thereto is Not substantially in
accordance with the form prescribed herein;
2. The purpose or purposes of the corporation are patently Unconstitutional, illegal,
immoral or contrary to government rules and regulations;
3. The Certi cation concerning the amount of capital stock subscribed and/or paid
is false; and
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4 The required Percentage of Filipino ownership of the capital stock under existing
laws or the Constitution has not been complied with (RCC, Sec. 16)

Q: What is the Accomplished Fact Rule?

ANS: There are provisions of the Articles of Incorporation that cannot be amended
because they are accomplished facts. For example, the names of the incorporators
cannot be changed and their number cannot be increased because the names and
number of the original incorporators are accomplished facts. Similarly, there can be no
change in the names of the original directors for the same reason (AQUINO & AQUINO,
Revised Corporation Code, supra at 245).

BY-LAWS
Q: What is the purpose of the By-Laws of a corporation?
ANS: The By-Laws of a corporation are the rules and regulations or private laws enacted
by the corporation to regulate, govern, and control its own actions, affairs and concerns
and of its stockholders or members and directors and of cers in relation thereto and
among themselves in relation to the corporation (Loyola Grand Villas Homeowners
(South) Association, Inc. V. CA, G.R. No. 117188, August 7, 1997).
COMMERCIAL LAW

Q: What is the voting requirement for the adoption of by-laws of a corporation?

ANS: For the adoption of bylaws by the corporation, the af rmative vote of the
stockholders representing at least a majority of the outstanding capital stock, or of at least
a majority of the members in case of nonstock corporations, shall be necessary (RCC,
Sec. 45).

Note: The bylaws shall be signed by the stockholders or members voting for them and
shall be kept in the principal of ce of the corporation, subject to the inspection of the
stockholders or members during of ce hours A copy thereof, duly certi ed by a majority
of the directors or trustees and countersigned by the secretary of the corporation, shall
be led with the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, bylaws may be adopted and
led prior to incorporation; in such case, such bylaws shall be approved and signed oy all
the incorporators and submitted to the Commission, together with the articles of
incorporation (Id.).

Q: What are the contents of the By-Laws? (DiSQ-MPro-QAM-PIOA)

ANS: The contents of By-Laws are the following:
1. The time, place and manner of calling and conducting regular or special
meetings of the Directors or trustees;
2. The time and manner of calling and conducting regular or special meetings and
mode of notifying the Stockholders or members thereof;
3. The required Quorum in meetings of stockholders or members and the manner
of voting therein;
4. The Modes by which a stockholder, member, director, or trustee may attend
meetings and cast their votes;
5. The form for Proxies of stockholders and members and the manner of voting of
them;
6. The directors' or trustees' Quali cations, duties and responsibilities, the
guidelines for setting the compensation of directors or trustees and of cers, and
the maximum number of other board representations that an independent
director or trustee may have which shall, in no case, be more than the number
prescribed by the Commission;
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7. The time for holding the Annual election of directors or trustees and the mode
or manner of giving notice thereof;
8. The Manner of election or appointment and the term of of ce of all of cers other
than directors or trustees;
9. The Penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of Issuing stock certi cates;
11. Such Other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good governance and
anti-graft and corruption measures; and
12. An Arbitration agreement may be provided in the bylaws pursuant to Section
181 of the Revised Corporation Code (RCC, Sec. 46).

Q: To whom are by-laws of a corporation binding?

ANS: The provisions of the Bylaws are binding, not only upon the corporation, but also
on its stockholders, members and those having direction, management and control of its
affairs (AQUINO & SUNDIANG, Reviewer on Commercial Law (2022), p. 293 [hereinafter
AQUINO & SUNDIANG, Reviewer on Commercial Law).

Q: Are By-Laws binding to third persons?

ANS: No. By-Laws are not binding to third persons unless there is actual knowledge.
Third persons are not even bound to investigate the contents of the By-Laws (PMI
Colleges v. NLRC, G.R. No,. 121466) 8
ARo 1) V
Q: What are the ways to amend the By-Laws of a corporation? (OB)
ANS: The ways are:
1. Amendment by the approval of the majority of the Board of Directors and at least
a majority of the Outstanding capital stock or at least a majority of the members
of a non-stock-corporation, and 1.80
2. By the Board) alone it there is prior delegatiónof such powers by the
stockholders/members done through votes of the 2/3 of the outstanding capital
stock or 2/3 members in a non stock corporation (RCÇ, Sec. 47).
SOme
Q: Is the approval of the SEC required when amending the By-Laws?
ANS: Yes. The amended or new by laws shall only be effective upon the issuance by the
Commission of certi cation that the same is in accordance with the code and other
relevant laws (Ibid).

CORPORATE OFFICERS
Q: Who are the corporate of cers and what are their quali cations?
ANS: Immediately after their election, the directors of a corporation must formally
organize and elect:

Of cer Requirement
President Director
Treasurer Resident of the Philippines
Citizen and a Resident of the
Secretary
Philippines

Note: If the corporation is vested with public interest, the board shall also elect a
compliance of cer (RCC, Sec. 24).
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Q: May an of cer hold concurrently two or more positions?

ANS: The same person may hold two (2) or more positions concurrently, except that no
one shall act as president and secretary or as president and treasurer at the same time,
unless otherwise allowed in the RCC (Ibid.).

Q: What is a Promoter?
ANS: Promoters are persons who, acting alone or with others, take initiative in founding
and organizing a business or enterprise (SRC, Sec. 3.1)

Q: What is the liability of a Promoter

ANS: Contracts entered into by the promoter may, in certain cases, bind a corporation. a
The general rule, however, is that the acts of the promoter are not binding on the
corporation that will be organized. Nevertheless, any bene t derived by a promoter for the
corporation should be given to the corporation. In a sense, promoters sustain a duciary
relationship to the subscribers, the corporation, and the stockholders and cannot deal
unfairly with them or retain any secret pro t (AQUINO & AQUINO, Revised Corporation
Code, supra at 278-279).

Q: What is the liability of the Corporation for Promoter acts? MUTTVIOHENNO?

ANS: The general rule is that the acts of the Promoter is not binding on the corporation
that will be organized. An exception lies when the corporation rati es the acts of the
Promoter (Cagayan Fishing Development co. Inc. Y. Sandiko, G.R. No. L-43350.
December 13, 1937).

Q: What is a Subscription Contract?®

ANS: Any contract for the acquisition of unissued stock in an existing corporation or a
to corporation still to be formed (RCG, Sec. 59)

Q: How is a Subscription Contract perfected?

ANS: A subscription contract is perfected as soon as the offer to take shares made by a
person to a corporation is accepted by the corporation, or as soon as the person to whom
the offer is made accepts an offer of shares by a corporation.

Q: Who are the parties to a subscription contract?

ANS: The parties are the subscriber and the corporation itself.

Q: How can a person become a stockholder in a corporation?

ANS: A person can be a stockholder by voluntarily acquiring a share. This may be done
through: (1) Purchase; or (2) Subscription.

Q: What are the differences between the two modes of becoming a stockholder?
ANS: The differences are:

PURCHASE FROM A SHAREHOLDER Vs. SUBSCRIPTION

Purchase Subscription

As to time when Made only after incorporation Can be made before or after
they are entered incorporation
into
As to time of Purchaser must fully pay the Subscriber need not to pay unless
payment if there purchase price at the time the there is a call
is no agreement shares are transferred
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Purchase Subscription

The stockholder who sells his Subscriber cannot be released

As to shares can condone the from his obligation to pay the
obligation to pay obligation of the purchaser to subscription price
pay

As to the Applies if the price is not less Does not apply to subscription
applicability of
than P500.00 contracts
Statute of Frauds

Q: What is a Pre-Incorporation Subscription?

ANS: Pre-Incorporation Subscription of shares refers to the subscription of shares in a
corporation still to be formed (RCC, Sec. 60).

Q: May a Pre-Incorporation Subscription be revoked?

ANS: No. Pre-Incorporation Subscription of shares shall be irrevocable for a period of at
least six (6) months from the date of subscription (Ibid).

Q: In what instances, may a Pre-Incorporation Subscription be revoked?

ANS: A Pre-Incorporation Subscription may be revoked when:
1. All the other subscribers consent to the revocation, or
2. Corporation fails to indorporate within the same period or within a longer period
stipulated in the contract of subscription unless the Articles of Incorporation is
already submitted to the SEC. (Ibid)

Q: What are the considerations that the law allows to be exchanged for shares in
subscription agreements? (CUPIL-RAG)
ANS: The considerations arè;
1. Actual Cash paid to the corporation, b
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred Indebtedness of the corporation;
5. Amounts transferred from Unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of Reclassi cation or
conversion;
7. Shares of stock in Another corporation; and
8. Other Generally accepted form of consideration (RCC, Sec. 61)

Q: What are the conditions imposed in order for a consideration to be exchanged

for shares of stock? (LPV)
ANS: The conditions are:
1. Stocks shall not be issued for a consideration Less than the par or issued price
thereof;
2. Shares of stock shall not be issued in exchange for Promissory notes or future
services; and
3. Where the consideration is property, whether tangible or intangible, such as
patents or copyrights, the Valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval by the SEC (Ibid).
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Q: What are the requirements in order that a tangible or intangible property may be
accepted as consideration? (VRAND)
ANS: The requirements are:
1. The property is actually Received by the corporation;
2. The property is Necessary or convenient for its use and lawful purposes;
3. It must be subject to a fair Valuation equal to the par or issued value of the stock
issued;
4. The valuation thereof shall initially be Determined by the stockholders or the
board of directors; and
5. The valuation is subject to Approval by the SEC (Ibid).

Q: What is the effect of the non-use of the Corporate Charter? (RD)

ANS: The effect of non-use are:
1. If failed to organize or commence business within ve years from incorporation:
The certi cate of incorporation shall be Revoked as of the day following the end
of the 5-year period
2 If commenced business but becomes inoperative for a period of at least 5
consecutive years: The commission may, after due notice and hearing, place
the corporation under Delinquent status (RCC, Sec. 21). MUTTVIDHEWWOD

Q: What is the period within which a delinquent corporation is required to resume

operations and comply with all the requirements in order to lift its delinquent
status?
ANS: Two (2) years within which to resume operations and comply with the requirements
of the Commission. Upon its compliance, the Commission shall issue an order lifting its
delinquent status (Ibid).

Q: What will happen if the delinquent corporation did not comply with the
requirements?
ANS: The Commission shall revoke the corporation's certificate of incorporation (Ibid).

DE FACTO CORPORATION
Q: What is a de facto corporation? (LAC)
ANS: A de facto corporation is an association of persons existing with:
1. A valid Law under which the corporation is organized;
2. A bona de Attempt in good faith to incorporate; and
3. An assumption of Corporate Powers (Seventh Day Adventist Conference
Church of Southern Philippines, Inc., v. Northeastern Mindanao Mission of
Seventh Day Adventists, Inc., G.R. No. 150416, July 21, 2006).

is Q: When is there a bona de attempt in good faith to incorporate?

ANS: The issuance of the Certi cate of Incorporation is essential to the claim of good
faith. An association of persons claiming to exercise the powers of a corporation knowing
that no Certi cate of Incorporation had yet been issued cannot claim to be exercising such
powers in good faith (Hall v. Piccio, G.R. No. L-2598, June 29, 1950).

Note: The ling of articles of incorporation (AOI) and the issuance of the certi cate of
incorporation are essential for the existence of a de facto corporation (Missionary Sisters
of Our Lady of Fatima v. Aizona, G.R. No. 224307, August 6, 2018).
Q: What is the consequence of a de facto status?
a ANS: For all intents and purposes, a de facto corporation has the same rights, powers,
obligations, and liabilities as a de jure corporation. The only difference is that the due
incorporation of a de facto corporation may be directly inquired into by the Solicitor
General in a quo warranto proceeding (RCC, Sec. 19).
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Q: When is there a corporation by estoppel?

ANS: There is a corporation by estoppel when a group of persons assumes to act as a
corporation knowing it to be without authority to do SO, and enters into a transaction with
a third person on the strength of such appearance. It cannot be permitted to deny its
existence in an action under said transaction (RCC, Sec. 20).

CORPORATION BY ESTOPPEL

Q: What is the consequence as to the liability incurred by a corporation by

estoppel?
ANS: When any such ostensible corporation is sued on any transaction entered by it as
a corporation or on any tort committed by it as such, it shall not be allowed to use its lack
of corporate personality as a defense. Anyone who assumes an obligation to an
ostensible corporation as such cannot resist performance thereof on the ground that there
was in fact no corporation (Ibid).

Q: To whom is estoppel an available defense against the ostensible corporation?

ANS: Estoppel, as defense, is only ayailable to third persons; otherwise, there is no
corporation by estoppel as the con ict arises only among those assuming the form of
corporation (Lozano v. De Los Santos, G..R. No. 125221, June 19, 1997).

D a de facto corporation and a corporation by

Q: What are the differences, betweer
estoppel? ArO
ANS: The following are the differences between a de facto corporation and a corporation
by estoppel:
4709
DE FACTO CORPORATION VS. CORPORATION BY ESTOPPEL

De facto Corporation Corporation by Estoppel

As to Who Can The State or any third person

Question Its The State who relied in good faith on its
Corporate Existence representation

As to the presence of
It has a juridical personality There is no juridical personality
juridical personality
As to Being Subject to
a Direct and Collateral
Subject to direct attack Subject to both direct and
only collateral attack
Attack
Has not complied with all
Absence of conditions
As to requirements but there has
precedent needed for a de facto
Creation been colorable
corporation
compliance

As to Liabilities to Liable only to the extent of All who have knowledge of its
of Of cers their subscription unless lack of authority to act as such
and Directors acted in bad faith are liable as general partners

Cannot sue or be sued except

As to Capacity to Sue
Can sue and be sued by a third party who relied on its
or Be Sued
representations in good faith

(AQUINO & AQUINO, Revised Corporation Code supra at 281-290).

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D. DIRECTORS, TRUSTEES AND OFFICERS

QUALIFICATIONS AND DISQUALIFICATIONS
Q: What are the quali cations of directors or trustees?
ANS: In order for one to become a director or trustee, he/she must possess the following
quali cations:
1. He must be of legal age;
2. In stock corporations, directors must own at least 1 share of stock. In non-stock at
corporations, trustees must be a member;
3. He must not possess any of the disquali cations provided Sec. 26 of the RCC;
and
4. He must possess such other quali cations as may be prescribed by law and in
the bylaws (RCC, Sec 22).

Note: There is no citizenship requirement for directors. However, the members of the
board must comply with the same proportion of maximum equity participation under
nationalization laws. Also, there is no more residence requirement. The requirement that
the majority of the directors or trustees must be residents of the Philippines under Sec.
23 of the Corporation Code has been deleted (AQUINO & SUNDIANG. Reviewer on MUTTVISEWWOO

Commercial Law supra at 315).

Q: What are the grounds for disquali cation of directors or trustees?

ANS: A person shall be disquali ed from being a directon trustee or of cer of any
corporation if, within 5 years prior to the election or appointment as such, the person
was:
1. Convicted by nal judgment:
a. Of an offense punishable by imprisonment, for period exceeding 6
years;
b. For violating the RCC; and
C. For violating R.A. No. 8799, otherwise known as "The Securities
Regulation Code;"
2. Found administratively liable for any offense involving fraudulent acts; and
3. By foreign court or equivalent foreign regulatory authority for similar acts,
violations or misconduct (RCC, Sec. 26).

The foregoing is without prejudice to other disquali cations, which the SEC, the primary
regulatory agency, or the Philippine Competition Commission may impose (RCC, Sec.
26).

Q: What is the number of directors or trustees allowed by law?

ANS: The number of directors or trustees allowed by law are as follows:
1. Stock Corporation - shall not be more than 15 (RCC, Sec. 10);
2. Ordinary Non-Stock Corporation - may be more than 15 (RCC, Sec. 91);
3. Educational corporations and Religious Society - not less than 5 nor more
than 15 (RCC, Sec. 106, 114); and
4. Corporation Sole none (RCC, Sec. 108).

ELECTIONS
Q: How many number of directors are allowed to be elected in a stock corporation?
ANS: The number of directors to be elected shall not exceed 15 (RCC, Sec. 13(f)).

Q: How many number of trustees are allowed to be elected in a non-stock

corporation?
ANS: The number of trustees to be elected may be more than 15 (RCC, Sec. 91).
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Q: When are elections of directors or trustees held?

ANS: Elections must be held once a year. The Revised Corporation Code authorizes
corporation to provide in the by-laws the time for holding the annual election of directors
or trustees and the mode or manner of giving notice thereof (RCC, Sec. 46).

Q: What are the modes of voting directors and trustees? (CRAP)

ANS: Stockholders or members may vote in the following ways:
1. In Person
2. Through a Representative authorized to act by written proxy; or
3. Through remote Communication or in Absentia, provided that:
a. It is so authorized in the by-laws; or
b. By a majority of the board of directors (RCC, Sec. 23).

Q: What is the quorum for purposes of election?

ANS: At all elections of directors or trustees, there must be present, either in person or
through a representative authorized to act to by written proxy, the owners of majority of the
outstanding capital sto or if there be no capital stock, majority of the members entitled
to vote (RCC, Sec. 23).

Q: Are stockholders or members who participated through remote communication

or in absentia deemed present for purposes of quórum?
ANS: Yes. A stockholder or member who participates through remote communication or
in absentia, shall be deemed present for purposes of quorum.›

Q: What are the methods of voting in -stock corporations? (SOD)

ANS: The methods of voting are:
1. Straight Voting A stockholder may vote such number of shares for as many
votes as the number of directors to be elected
2. Cumulative Voting for One Candidate - A stockholder may cumulate said
shares and give one (1) candidate as many votes as the number of directors to
be elected multiplied by the number of shares owned.
3. Cumulative Voting by Distribution - A stockholder may distribute them on the
same principle among as many candidates as may be seen t (RCC, Sec. 23)

Q: What is the method of voting in non stock corporations?

ANS: The general rule for the election of trustees of a non-stock corporation is that
members may cast as many votes as there are trustees to be elected but may cast only
one vote per candidate. By way of exception, a non-stock corporation may adopt other
modes of casting votes, including, but not limited to, cumulative voting, if the same is
authorized in its articles of incorporation or by-laws (SEC-OGC Opinion No. 14-10).

Q: What is the term of of ce of directors or trustees?

ANS: Directors shall be elected for a term of one (1) year from among the holders of
stocks registered in the corporation's books, while trustees shall be elected for a term not
exceeding three (3) years from among the members of the corporation. Each director and
trustee shall hold of ce until the successor is elected and quali ed (RCC, Sec. 22).

Q: What is required to be submitted to the Commission after the election?

ANS: Within thirty (30) days after the election of the directors, trustees and of cers of the
corporation, the secretary, or any other of cer of the corporation, shall submit to the
Commission the names, nationalities, shareholdings, and residence addresses of the
directors, trustees and of cers elected.
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Should a director, trustee or of cer die, resign or or n any manner cease to hold of ce, the
secretary, or the director, trustee or of cer of the corporation, shall, within seven (7) days
from knowledge thereof, report in writing such fact to the Commission (RCC, Sec. 25).

Q: What is the procedure to be undertaken if there was no election even if there is

quorum or the meeting did not proceed because there is no S quorum? (R2INS)
ANS: When there is no election even if there is a quorum or if the meeting did not proceed
because there is no quorum, the following procedures should be undertaken:
1. The non-holding of elections and the reasons therefor shall be Reported to the
Commission within thirty (30) days from the date of the scheduled election;
2. The report shall specify a New date for the election, which shall not be later than
sixty (60) days from the scheduled date;
3. If no new date has been designated, or if the rescheduled election is likewise
not held, the Commission may, upon the application a of a stockholder, member,
director, or trustee, and after veri cation of the unjusti ed non-holding of the
election, Summarily order that an election be held;
4 The commission shall have the power to Issue such orders as may be
appropriate, including orders directing the issuance of a notice stating the time
and place of election, designated presiding of cer, and the record date or dates
for the determination of stockholders or members entitled to vote; and MUTTVISHENWOS

5. Notwithstanding any provision to the articles of incorporation or bylaws to the

contrary, the shares of stock or membership Represented as such meeting and
entitled to vote shall ( nstitute a quorum for purposes of conducting an election
under this section (RCC, Sec. 25)
A
d
Q: n case of a non -holding of elections, what is the rule on quorum for purposes
of conducting an election?
ANS: Notwithstanding any provision in the articles of incorporation or bylaws to the
contrary, the shares of stock or membership represented at such meeting and entitled to
vote shall constitute a quorum for purposes of conducting an election, if the following
requisites are present. n
1. There is no new date* for election that has been designated following non-
holding of an election, or the rescheduled election is likewise not held;
2. There is an application made by a stockholder, member, director or trustee;
3. There is a veri cation of the unjusti ed non-holding of the election and
4. The Commission summarily orders that an election be held (RCC, Sec. 25).

INDEPENDENT DIRECTORS
Q: Who is an independent director?
ANS: An independent director is a person who, apart from shareholdings and fees
received from the corporation, is independent of management and free from any business
or other relationship which could, or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying but the responsibilities as a director
(RCC, Sec. 22).

Q: What corporations are required by law to have an independent director?

ANS: The board of the following corporations vested with public interest shall have
independent directors constituting at least 20% of such board:
1. Corporations covered by Section 17.2 of the Securities Regulation Code
namely:
a. Those whose securities are registered with the SEC,
b. Corporations listed with an exchange or with assets of at least
or P50,000,000 and having 200 or more holders of shares, each holding at
least 100 shares of a class of its equity shares;
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2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money

service business, pre-need, trust and insurance companies, and other nancial
intermediaries; and
3. Other corporations engaged in business vested with public interest similar to
the above, as may be determined by the SEC, after taking into account relevant
factors which are germane to the objective and purpose of requiring the election
of an independent director (RCC, Sec 22).

Q: What are the quali cations of an independent director? (1-CIPA)

ANS: An independent director shall have the following quali cations:
1. at He shall have at least 1 share of stock of the corporation;

2. He shall be at least a College graduate or he shall have been engaged or

exposed to the business of the corporation for at least 5 years;
3. He shall possess Integrity/Probity; and
4. He shall be Assiduous (SEC Memorandum Circular No. 16, Series of 2012).

TERM, HOLDOVER, AND REMOVAL"

Q: What is the term of of ce of directors or trustees?

ANS: The following are the terms of office of directors or trustees:
1. Directors shall be elected for a term of 1 year from among the holders of stocks
registered in the corporation's book; and

g
2. Trustees shall be elected for a term not exceeding 3 years from among the
members of the corporation (RCC, Sec 22)
coco sedi

Q: What is the holdover principle? a ma

ANS: The Holdover Principle states that upon failure of a quorum at any annual meeting,
the directorate naturally holds over and continues to function until another directorate is
chosen and quali ed, Unless the law or the charter of a corporation expressly provides
that an of ce shall become vacant at the expiration of the term of of ce for which the
of cer was elected, the general rule is to allow the of cer to holdover until his successor

0 MANY
is duly quali ed (Government the Philippine Islands . El Hogar Filipino, G.R. No. L-
26649, July 13, 1927).

Note: Holdover is a situation that arises when no successor is elected due to a valid and to
justi able reason (e.g. pending election protest on the outcome of the annual election), in
which case, the incumbent holds over and continues to function until another of cer is
chosen and quali ed (SEC Opinion No. 06-18, March 20, 2006).

Q: What is the procedure for the removal of directors or trustees? (MS2NVoF)

ANS: The procedure for a valid removal is as follows:
1. Call for regular or special Meeting;
2. Said meeting is called by the
a. Secretary on order of the president; or
b. Secretary upon the written demand of the stockholders representing or
holding at least a majority of the of outstanding capital stock or a majority
of the members entitled to vote;
3. Prior Notice to stockholders or members of the corporation of the time and place
of such meeting as well as of the intention to propose removal at the meeting;
4. There must be a Vote of the stockholders representing 2/3 of the outstanding
capital stock or members entitled to vote; and
5. Should the secretary Fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the call for
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the meeting may be addressed directly to the stockholders or members by any

stockholder or member of the corporation signing the demand (RCC, Sec. 27).

Note: The SEC shall, motu proprio or upon veri ed complaint, and after due notice and
hearing, order the removal of a director or trustee elected despite the disquali cation, or
whose disquali cation arose or is discovered subsequent to an election. The removal of
a disquali ed director shall be without prejudice to other sanctions that the SEC may
impose on the board of directors or trustees who, with knowledge of the disquali cation,
failed to remove such director or trustee (RCC, Sec. 27).

COMPENSATION

Q: Are directors and trustees entitled to compensation?

ANS: In the absence of any provision in the bylaws xing their compensation, the directors
or trustees shall not received any compensation in their capacity as such, except for
reasonable per diems (RCC, Sec. 29).

Q: Who can grant the directors and trustees compensation?

ANS: The stockholders representing at least a majority of the outstanding capital stock COMMERCIAL LAW

or majority of the members may grant directors or trustees with compensation and
approve the amount thereof at a regular or special meeting (RCC, Sec. 29).

Note: Directors or trustees shall not participate in the determination of their own in per diems
or compensation (RCC, Sec 29).

Q: What is the limitation for the compensation of directors and trustees?

ANS: In no case shall the total yearly compensation of directors exceed ten percent (10%)
of the net income before income tax of the corporation during the preceding year (RCC,
Sec. 29).

Q: What is the additional requirement for the compensation of directors and

trustees if the corporation is vested with public interest?
ANS: Corporations vested with public interest shall submit to their shareholders and the
Commission, an annual report of the total compensation of each of their directors or
trustees (RCC, Sec. 29).

VACANCY

Q: How are the vacancies in the board lled?

ANS: Any vacancy occurring in the board of directors or trustees other than by removal
or by expiration of term may be lled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum (RCC, Sec 28).

Note: the election must be held no later than forty- ve (45) days from the time the vacancy
arose. A director or trustee elected to ll a vacancy shall be referred to as replacement
director or trustee and shall serve only for the unexpired term of the predecessor in of ce
(Id.).

Q: When is there an emergency board?

ANS: When the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be temporarily lled from among the of cers
of the corporation by unanimous vote of the remaining directors of or trustees (RCC, Sec.
28).
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Note: The corporation must notify the Commission within three (3) days from the creation
of the emergency board, stating therein the reason for its creation (Id.).

Q: What are the scope of powers of the emergency board constituted?

ANS: The action by the designated director or trustee shall be limited to the emergency
action necessary, and the term shall cease within a reasonable time from the termination
of the emergency or upon election of the replacement director or trustee, whichever
comes earlier (Id.).

Q: How are vacancies lled on the grounds of removal or term expiration OR when
the remaining members of the board do not constitute a quorum?
ANS: In such cases, vacancies must be lled by the stockholders or members in a regular
or special meeting called for that purpose (RCC, Sec. 28).

Note: Any directorship or trusteeship to be lled by reason of an increase in the number

of directors or trustees shall be lled only by an election at a regular or at a special meeting
of stockholders or members duly called for the purpose (ld.).

VOTING REQUIREMENTS*
Q: What are the voting requirements in terms of election, vacancies and removal of
directors, trustees and of cers? 32
ANS: The voting/quorum requirement in terms of election, vacancies and removal are as
follows:
un
Board of Outstanding Capital
Corporate Act Directors/Trustees Stock / Members®

Presence of quorum
(Majority of
OCS/Members)
Sec. 23 - Election of N/A
Directors or Trustees The candidates "receiving
the highest number of
votes shall be declared
elected. (Sec. 23, RCCP)"

Sec. 27 Removal of
2/3 of OCS
N/A
Directors or Trustees

Sec. 28 - Filling Vacancy

in the Board, if the ground Majority of the remaining
is not expiration of term, directors (if still N/A
removal, increase in constitutes a quorum)
number of directors
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Board of Outstanding Capital

Corporate Act Directors/Trustees Stock Members

The candidates receiving

Sec. 28 - Filling Vacancy
in the Board due to any (
the highest number of
votes shall be declared
the following grounds;
elected. (Secs. 23 and 28,
1. Expiration of term
RCCP)
2. Removal
3. Increase in Number of
N/A The quorum can just be
Directors
majority of the
4. Not among the OCS/Members except if
grounds mentioned, the replacement will be
but remaining directors
do not constitute a elected in the meeting
when the director was
quorum
removed.

MV1 TVISHENWOO

Sec. 28 - Filling Vacancy

for Emergency Board;
a. If the vacancy
prevents the
remaining directors
Unanimous vote of the
from constituting
quorum; and
remaining N/A
directors/trustees
0. Emergency Action is
required to prevent
grave, substantial,
and irreparable loss
or damage to the
corporation.

Sec. 29 Grant of
Compensation to
Directors or Trustees N/A Majority of OCS / Members
other than per diem
allowance

DUTIES AND LIABILITIES

Q: What are the "three-fold duties" of director, trustee or of cer?

ANS: The members of the board of directors;
1. Duty of Obedience - The members of the board of Directors shall direct the
affairs of the corporation only in accordance with the purposes for which it was
organized (Strategic Alliance Development Corporation v. Radstock Securities
Limited, G.R. No. 178158, December 4, 2009);

Note: The of cers shall manage the corporation and perform such duties as may be
provided in the bylaws and/or as resolved by the board of directors (RCC, Sec. 25).
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2. Duty of Diligence- Provides that the director, trustee or of cer shall not:
a. willfully and knowingly vote for or assent to patently unlawful acts of the
corporation; or
b. act In bad faith or with gross negligence in directing the affairs of the of
corporation (Strategic Alliance Development Corporation v. Radstock
Securities Limited, G.R. No. 178158, December 4, 2009);

Note: The rst ground applies exclusively to the members of Board of Directors, while the
second ground could reasonably include and apply to members of the Management
(VILLANUEVA & VILLANUEVA-TIANSAY, Philippine Corporate Law, p.448, [hereinafter
VILLANUEVA & VILLANUEVA-TIANSAY, Philippine Corporate Law]; Benguet Electric
Cooperative, Inc. v. NLRC, G.R. No. 89070, May 18, 1992)

3. Duty of Loyalty - shall not acquire any personal or pecuniary interest in con ict
with their duty as such directors or trustees (Strategic Alliance Development
Corporation v. Radstock Securities Limited, G.R. No. 178158, December 4,
2009).

Note: In the discharge of his responsibilities and management of property, assets, and
business enterprise of the corporation, a directory trustee or of cer should put the interest
of the corporation and the shareholders or members above his personal interest and in
the event of con ict-of-interest, it would be a breach of his duty of loyalty to prefer his
personal interest to that of his principal -the corporation, and of his bene ciaries-the
shareholders or members (VILLANUEVA & VILLANUEVA-TIANSAY, Philippine
Corporate Law, supra at 455).
F - POl
Q: When is there disloyalty on the part of a director, trustee or of cer?
ANS: There is disloyalty when a director, trustee, or ofticer attempts to acquire or acquires
any interest adverse to the corporation in respect of any matter which has been reposed
in him in con dence, and upon which, equity imposes a disability upon himself to deal in
his own behalf (RCC, Sec. 30).

A director who, by virtue of such of ce, acquires a business opportunity which should
belong to the corporation, thereby obtaining pro ts to the prejudice of such corporation,
is also guilty of disloyalty (RCC, Sec. 33). MAS
Q: What is the effect of such disloyalty?
ANS: The director, trustee, or of cer who commits an act of disloyalty shall be liable as a
trustee for the corporation and must account for the pro ts which otherwise would have
accrued to the corporation (RCC, Sec. 30).

A disloyal director under Sec. 33 of the RCC must account for and refund to the
corporation all pro ts obtained to the prejudice of the latter, unless the act has been
rati ed by a vote of the stockholders owning or representing at 2/3 of the outstanding
capital stock (RCC, Sec. 33).

Q: What is the doctrine of corporate opportunity?

ANS: Where a director, by virtue of such of ce, acquires a business opportunity which
should belong to the corporation, thereby obtaining pro ts to the prejudice of such
corporation, the director must account for and refund to the latter all such pro ts, unless
the act has been rati ed by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked one's own funds in the venture (RCC,
Sec. 33).
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Note: The doctrine of corporate opportunity rests fundamentally on the unfairness in

particular circumstances, of an of cer or director taking advantage of an opportunity for
his own personal pro t when the interest of the corporation justly calls for protection
(Gokongwei, Jr. SEC, G.R. No. L-45911, April 11, 1979).

Q: When does the corporate opportunity exist?

ANS: Corporate opportunity exists when a proposed activity is reasonably an incident to
the corporation's present or prospective business and is one in which the corporation has
the capacity to engage (Total Of ce Products and Services (TOROS) v. Chang, G.R.
Nos. 200070-21, December 7, 2021).

Q: What is the relation of Doctrine of Corporate Opportunity to the duty of loyalty?

ANS: the doctrine of corporate opportunity governs the legal responsibility of directors,
of cers and controlling shareholders in a corporation, under the duty of loyalty, not to take
such opportunities for themselves, without rst disclosing the opportunity to the board of
directors of the corporation and giving the board the option to decline the opportunity on
behalf of the corporation. If the procedure is violated and a corporate duciary takes the
corporate opportunity anyway, the duciary violates its duty of loyalty and the corporation
will be entitled to a constructive trust of all pro ts obtained from the wrongful transaction
(ld.). COMMERCIAL LAW

Q: What are the parameters to determine whether a claim of damages is indeed

premised on the of cer or director's breach of his duty of loyalty? (FWI2)
ANS: A claim of damages under Section 33 of the RCC arises when a corporate of cer
or director takes business opportunity for his own, provided that it is suf ciently shown
by the claimant that:
1. The corporation is Financially able to exploit the opportunity;
2. The opportunity is Within the corporation's line of business the involved
corporations must be shown to be in competition with one another. They must
be engaged in related areas of businesses, producing the same products with
overlapping markets;

Note: the test müst be whether the business does in fact compete

3. The corporation has an Interest or expectancy in the opportunity; and

4. By taking the opportunity for his own, the corporate duciary (i.e., corporate
director, trustee or of cer) will thereby be placed in a position Inimicable to his
duties to the corporation (Id).

Q: When are the board of directors or trustees solidarily liable for damages?
ANS: The board of directors or trustees shall be solidarily liable for damages when they
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in con ict with in their duty as such directors or
trustees (RCC, Sec. 30).

Q: In what instances are the board of directors, trustees, or of cers personally or

solidarily liable? (SAWGAV)
ANS: Directors, trustees, or of cers may be held personally or solidarily liable in the
following instances:
1. By virtue of a Speci c provision of law;
2. Agreement or stipulation in a contract to hold himself personally liable with the
corporation (Crisologo v. People, G.R. No. 199481, December 3, 2012);
3. Consent to the issuance of Watered stocks, or, having knowledge thereof, fails
to le objections with the corporate secretary (RCC, Sec. 64);
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Those found guilty of Gross negligence or bad faith in directing the affairs of the
corporation (RCC, Sec. 30);
5. Acquire any personal or pecuniary interest in con ict with their duty (RCC, Sec.
30); and
6. Willfully and knowingly Vote for and assent to patently unlawful acts of the
corporation (RCC, Sec. 30).

Note: Only the "responsible of cer," i.e., the person directly responsible for and who
"acted in bad faith" is held solidarily liable. It is the person "actively engaged" in the
management of the corporation who is held liable (Guillermo v. Uson, G.R. No. 198967
March 7, 2016). a Thus, a director is not liable for misconduct of co-directors or other
of cers unless:
1. He connives or participates in it; or
2. He is negligent in not discovering or acting to prevent it (LADIA, The Corporation
Code of the Philippines annotated with the Securities Regulation Code and
Presidential Decree No. 902-A (2011), p. 166).

Q: What are the conditions for a director or of cer to be personally liable for the
obligations of the corporation? (PGB¢)
ANS: Settled is the rule that a director or of cer shall only be personally liable for the
obligations of the corporation, if the following conditions concur:
1. The complainant alleged in the complaint that; 0
a. the director of of cer assented to Patently, unlawful acts of the
corporation, or
b. that the of cer was guilty of Gross negligence or Bad faith; and
2. The complainant Clearly and convincingly proved such unlawful acts,
negligence or bad faith (Atienza v. Golden Ram Engineering Supplies &
Equipment Corp, G. R. No. 205405, June 28, 2021).
loD a po
Q: When are the directors or trustees responsible for a crime? a
ANS: If a statute de nes a crime that may be committed by a corporation but prescribes
the penalty therefor to. be suffered by the of cers, directors, or employees of such
corporation or other persons responsible for the offense only such individuals will suffer
such penalty (Ching v. Secretary of Justice, G.R.No, 164317, February 6, 2006);

Q: What is the status of a contract of self-dealing directors, trustees and of cers?

ANS: A contract between the corporation and one or more of its directors, trustee, or
of cers or their spouses and relatives within the fourth civil degree of consanguinity or
af nity is voidable, at the option of such corporation, unless all the following conditions
are present:
1. The presence of such director or trustee in the board n meeting in which the
contract was approved was not necessary to constitute a quorum for such a
meeting;
2. The vote of such director or trustee was not necessary for the approval of the of
contract;
3 The contract is fair and reasonable under the circumstances;
4. n case of corporations vested with public interest, material contracts are
approved by at least 2/3 of the entire membership of the board, with at least a
majority of the independent directors voting to approve the material contract;
and
5. In case of an of cer, the contract has been previously authorized by the board
of directors (RCC, Sec. 31).
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Q: What are the requisites for rati cation of contracts of self-dealing directors or
trustees?
ANS: Where any of the rst three conditions is absent, the contract of self-dealing
directors or trustees may be rati ed provided the following requisites are complied with:
1. Vote of the stockholders representing at least 2/3 of the outstanding capital
stock or members in a meeting called for the purpose;
2. There is full disclosure of the adverse interest of the directors or trustees
involved; and
3. The contract is fair and reasonable under the circumstances (RCC, Sec. 31).

Q: When is there Interlocking Directorship?

ANS: There is interlocking directorship when the two corporations share one or more
directors (RCC, Sec. 32; Forest Hills Golf and Country Club, Inc., v. Fil-Estate Properties,
Inc., G.R. No. 206649, July 20, 2016).

Q: What is the status of contracts between corporations with interlocking

directors?
ANS: A contract between two or more corporations having interlocking directors shall not
be invalidated on that ground alone except in cases of fraud or when the contract is not
MUTTVIOUEWWO:

fair and reasonable under the circumstances (RCC, Sec. 32).

Note: Sec. 32 applies if the contract results in prejudice to one of the corporations. This
rule does not apply the prejudiced party is a third party (Development Bank of the of
Philippines v. CA, G.R. No. 126200, August 16, 2001). Only the parties to a voidable
contract may seek to annul the contract (CIVIL CODE, Art. 1397).

Q: When should a contract with interlocking directors comply with Section 31 of

the RCC?
ANS: If the interest of the interlocking director in one corporation is substantial and the
interest in the other corporation's is merely nominal, the contract shall be subject to the
provisions of Section 31 of the RCC insofar as the latter corporation/s is concerned (RCC,
Sec. 32).

Q: When is interest in another corporation "substantial??

ANS: Stockholdings exceeding 20% of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors (RCC, Sec. 32).

Q: What are watered stocks?

ANS: Watered stocks are stocks of a corporation issued for:
1. Less than their par or issued value in cash; or
2. Non-cash considerations which is valued in excess of its fair value (RCC, Sec.
64).

Q: Who are liable for watered stocks?

ANS: A director or of cer of a corporation is liable for the issuance of watered stock when
he:
1. Consents to the issuance of stocks for a consideration less than its par or issued
value;
2. Consents to the issuance of stocks for a consideration other than cash, valued
in excess of its fair value; or
3. Having knowledge of the insuf cient consideration, does not le a written
objection with the corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the difference between
the value received at the time of issuance of the stock and the par or issued
value of the same (RCC, Sec. 64).
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Note: Because the subscriber takes the stock for less than its par value, he has by fraud
acquired property belonging to the corporation's capital. Thus, he is liable to the
corporation and its creditors for a constructive trust over the difference between the
amount he paid and the par value of the stock (CIVIL CODE, Art. 1456).

is Q: What is the nature and extent of such liability?

ANS: The liability of a director or of cer is solidary with the stockholder concerned for the
difference between the value received at the time of issuance of the stock and the par or
issued value of the same (RCC, Sec. 64).

Q: What is the basis for such liability?

ANS: Liability is incurred when v ratered stocks are issued, because the trust fund doctrine
provides that the capital of a corporation constitutes a fund upon which its creditors have
a right to rely for the payment of their claims, and that if the corporation, by knowingly
issuing stock as fully paid when it is not, represents its capital to be greater than it really
is, its action is a fraud upon its creditors (Rhode v. Dock-Hop Co., 184 Cal. 367, 377
(Cal. 1920)).

DOCTRINE OF CENTRALIZED MANAGEMENT

Q: What is the Doctrine of Centralized Management?

ANS: Under the Doctrine of Centralized Management, the board of directors or trustees or
shall exercise the corporate powers, conduct all business, and control all properties of the
corporation (RCC, Sec. 22).
¡OD'
Q: What are the instances when the powers of the corporation are not exercised
directly by the Board of Directors/Trustees? i
ANS:1.The powers are not exercised directly by the Board when:
There is a management contract; and
2. The powers of the board are delegated by a majority vote (of the Board) to an
executive committee (AQUINO & SUNDIANG, Reviewer on Commercial Law,
supra at 298, RCC, Sec. 34) CAN

Q: Can corporate of cers bind the corporation? / ration 1 A

ANS: In some cases, corporäte of cers Nike the President can bind the Corporation
(AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 298 to 299). The
authority of such individuals to bind the corporation is generally derived from:
1. Law;
2. Corporate By-laws; or
3. Authorization from the Board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business (Inter-Asia Investments
Industries CA, G.R. No. 125778, June 10, 2003).

Q: When is the Doctrine of Centralized Management not applicable?

ANS: In case of close corporations, the stockholders may directly manage the business
of the corporation instead, if the AOI so provides (RCC, Sec. 96).

BUSINESS JUDGMENT RULE

Q: What is the Business Judgment Rule?

ANS: The Business Judgment Rule provides that questions of policy or of management
are left solely to the honest decisions of of cers and directors of a corporation, and sO
long as they act in good faith, their orders are not reviewable by the courts (Saber v. CA,
G.R. No. 132981, August 31, 2004).
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Q: What are the two branches of the Business Judgment Rule?

ANS: The two branches of the Business Judgment Rule are:
1. Immunity for Decisions Made in Good Faith - There is a presumption that in
making business decisions not involving direct self-interest or self-dealing,
corporate directors act on an informed basis, in good faith, and in honest belief
that their actions are in the corporation's best interest (Grobow V. Perot, 539
A.2d 180 (1988)); and

Note: The rule shields directors and of cers from liability for unpro table or harmful
corporate transactions if the transactions were made in good faith, with due care, and
within the directors' or of cer's authority.

2. Beyond Judicial Review - Courts cannot undertake to control the discretion of

the board of directors about administrative matters as to which they have
legitimate power of, action and contracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere unless
such contracts are unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority (Gamboa V. Victoriano, G.R. No. L-
40620, May 5, 1979). LAW TYISHENWOO

DOCTRINE OF APPARENT AUTHORITY

Q: What is the doctrine of apparent authority?

ANS: Apparent authority is determined by the acts of the principal and not by the acts of
the agent. As applied to corporations, the doctrine of apparent authority provides that a
corporation is estopped from denying the of cer's authority if it knowingly permits such
of cer 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 (Agro Food and Processing Corp. V. Vitarich
Corp., G.R. No. 217454, January 11, 2021)

Q: How do we determine if the doctrine of apparent authority is applicable?

ANS: The doctrine of "apparent authority," with special reference to banks, has long been
recognized in this jurisdiction. 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 of cer or agent as having the power to act, or in other words, the apparent
In 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 (Allied Banking Corporation v. Sps. Macam, G.R. No.
200635, February 1, 2021).

Q: What are the other terms for Doctrine of Apparent Authority?

ANS: Apparent authority or what is sometimes referred to as the "holding out theory" or
doctrine of ostensible agency (2 VILLANUEVA-CASTRO, Commercial Law Recap, supra
at 87).

DOCTRINE OF RATIFICATION OR ESTOPPEL

Q: What is the doctrine of rati cation or estoppel?

ANS: A corporation may be held in estoppel from denying as against innocent third
persons the authority of its of cers or agents who have been clothed by it with ostensible
or apparent authority (Megan Sugar Corporation v. RTC of Ilo-ilo, G.R. No. 170352, June
1, 2011.
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E. POWERS OF CORPORATIONS; INCIDENTAL POWERS ULTRA VIRES

DOCTRINE
Q: What are the kinds of corporate powers? (El2)
ANS: Corporate powers are of the following kinds:
1. Express - those expressly authorized by the Corporation Code, applicable
special laws, administrative regulations, and the articles of incorporation;
2. Implied - those essential and necessary to carry out its purpose/s as stated in
the articles of incorporation (Magallanes Watercraft Association, Inc., v. Auguis,
G.R. No. 211485, May 30, 2016); and
3. Incidental - those which a corporation can exercise by the mere fact of its being
a corporation or powers which are necessary to its corporate existence
(AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 236).

Q: How does the board exercise its grant of corporate power?

ANS: Directors must act as a body in meeting called pursuant to the law or the
corporation's bylaws, otherwise, any action taken therein may be questioned by any
objecting director or shareholder (Lopez Realty; Inc., v. Fontecha, G.R. No. 76801,
August 11, 1995).

Q: How are corporate powers exercised by the shareholders?

ANS: The shareholders participate in controlling the affairs of the corporation by
exercising their right to vote. They can elect the directors who will actually govern the
corporation and they can also vote on important matters that are reserved to them by the
Revised Corporation Codé (RCC, Sec. 6 8 22)" weeded endl

Q: How are corporate powers exercised by the of cers?

ANS: Corporate powers are exercised by the of cers by managing the corporation and
performing such duties as may be provided in the bylaws and/or as resolved by the board
of directors (RCC, Sec. 24)

Q: What is the Test of Implied Powers?

ANS: The Test of Implied Powers provides that the act in question is part of implied
a powers of a corporation if it is in direct and immediate furtherance of the corporation's
business, fairly incident to the express powers and reasonably necessary to their exercise
(Montelibano v. Bacolod-Murcia Milling Co.," Inc., G.R. No. L-15092, May 18, 1962).

Q: What are the general powers of a corporation? (SESAB-PEDPO)

ANS: The following are the general powers of a corporation:
1. To Sue and be sued in its corporate name;
2. To have perpetual Existence unless the certi cate of incorporation provide
otherwise;
3. To adopt and use a corporate Seal;
4. To amend its Articles of Incorporation;
5. To adopt Bylaws, amend or repeal the same;
6. For stock corporations: Issue and sell stocks to subscribers and treasury stocks;
for non-stock corporations, admit members;
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and deal with real and personal property, securities and bonds;
8. To Enter into a partnership, joint venture, merger, consolidation or any other
commercial agreements;
9. To make reasonable Donations for public welfare, hospital, charitable, cultural,
scienti c, civic or similar purposes, provided that no foreign corporation shall
give donations in aid of any political party/candidate or for partisan political
activity;
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10. To establish Pension, retirement and other plans for the bene t of its directors,
trustees, of cers and employees; and2
11. To exercise such Other powers essential or necessary to carry out its purpose
as stated in the Articles of Incorporation (RCC, Sec. 35).

Q: What is the Theory of General Capacity?

ANS: The Theory of General Capacity provides that a corporation can perform such acts
as long as it is not prohibited by general law and not contrary to morals and public policy
(RCC, Sec. 2 & 44).

A corporation is empowered to exercise any act which is in direct and immediate

furtherance of its business, fairly incident to the express powers, and reasonably
necessary to their exercise, even if said power is not expressly granted in the Corporation
Code (Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092, May 18, 1962).

Q: What are the speci c powers of a corporation? (EID-SAC-DE)

ANS: The speci c powers of a corporation are the following:
1. Extend or shorten corporate term (RCC; Sec. 36);
2. Increase or decrease capital stock and incur, create or increase bonded
indebtedness RCC, Sec 37): MUTIVISJENWOO

3. Deny pre-emptive right (RCC, Sec, 38);

4. Sell or dispose its assets RCO, Sec. 30) teane
5. Acquire own shares (RCC, Sec. 40);
6. Invest Corporate funds in another corporation or business or for any other
purpose (RCC, Sec. 41);
7. Declare dividends (RCC. Sec. 42); and
8. Enter into management contract (RCC, Sec. 43).

Q: What corporate powers may a corporation possess or exercise?

ANS: Under the theory of speci c capacity, no corporation shall possess or exercise
corporate powers other than those conferred by the RCC or by its AOI and except as
necessary or incidental to the exercise of the powers conferred (RCC, Sec. 44).

Q: What is bonded indebtedness?

ANS: Bonded indebtedness is a secured indebtedness or indebtedness secured by real
or personal property that are covered by certi cates. They refer to negotiable corporate
bonds secured by mortgage on property (AQUINO & AQUINO, Revised Corporation
Code, supra at 498).

Q: What are the requirements for the increase or decrease of authorized capital
stock or create, incur or increase bonded indebtedness? (MOW-MACDI)
ANS: The requirements for the increase or decrease of authorized capital stock are as
follows:
1. Majority vote of the Board of Directors;
2. Vote of stockholders representing at least 2/3 of the Outstanding capital stock:
3. Written notice of the purpose, time and place of the meeting;
4. Meeting of stockholders duly called for such purpose;
5. Certi cate signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders meeting;
6. Approval of the SEC, and where appropriate, of the Philippine Competition
Commission;
7. In case of Decrease in capital stock, the same must not prejudice the right of
the creditors; and
8. In case of Increase in capital stock, treasurer's sworn statement showing that at
least 25% of the increase in capital has been subscribed and that at least 25%
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of the amount subscribed has been paid either in actual cash or property, the
valuation of which is equal to 25% of the subscription (RCC, Sec. 37).

Q: Can the SEC interfere in the decision to decrease capital stock?

ANS: No. Decreasing a corporation's authorized capital stock, which is an amendment of
the corporation's Articles of Incorporation, is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. For third
persons or parties outside the corporation like the SEC to interfere to the decrease of the
capital stock without reasonable ground is a violation of the "business judgment rule"
(Metroplex Berhad v. Sinophil Corporation, G.R. No. 208281, June 28, 2021)

Q: When is the authorized capital stock/bonded indebtedness considered as

increased/incurred/decreased? (Al)
ANS: The authorized capital stock/bonded indebtedness shall be considered
increased/decreased/incurred upon:
Approval by SEC; and
2. Issuance by the SEC of its certi cate of ling (RCC, Sec. 37).

Q: What is the right of rst refusal?

ANS: The right of first refusal is the option granted to the corporation and/or its
stockholders to purchase the shares of a transferring stockholder upon reasonable terms
and conditions. The corporation and its stockholders have no right of rst refusal unless
such restriction on transfer is embodied in the articles of incorporation, bylaws of the
corporation, and stock certi cates of the corporation (I1 DIVINA, Divina on Commercial
Law: A Comprehensive Guide (2023), p: 814, [hereinafter IN DIVINA, Commercial Law).

Q: How is the right of rst refusal distinguished from preemptive right?

ANS: The following are-the differences between the tight of rst refusal and pre-emptive
right: GON E ne
1. Pre-emptive right is a common law right and may be exercised by shareholders
even when no provision is granted in the law. The right of rst refusal arises only
by virtue of contractual stipulations and may also be provided for in speci ed
statutory provisions (e.g. Section 97), and if pat provided for by law or in the
MAD
articles of incorporation, the right of rst refusal is essentially creatures of
contract law;
2. Preemptive right pertains to unissued shares that are offered for subscription as
well as treasury shares being disposed of. It is a right claimed against the
corporation. A right of rst refusal pertains to issued shares. It is a right
exercisable against another shareholder (VILLANUEVA-TIANSAY, Philippine
Corporate Law supra at 552); and
3. Preemptive right may be exercised by mere trustee or conservator (Republic V.
Sandiganbayan, G.R. Nos. 107789 & 147214, April 30, 2003). A right of rst
refusal can only be exercised by the owner and not mere trustee or conservator
as it iS an act of ownership (Republic v. Sandiganbayan, G.R. No. 128606,
December 4, 2000).

Q: What are the requirements in order for a corporation to sell or dispose its
corporate assets? (M-MOM-T)
ANS: The following are the requirements to sell or dispose the corporate assets:
1. As a general rule, the Majority vote of the board shall only be required if the sale
or disposition does not cover all or substantially all of the assets;
2. However, if it involves all or substantially all of the corporate assets including its
goodwill, the following shall be required:
a. Majority vote of the Board;
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b. Assent of stockholders representing at least 2/3 of the Outstanding

capital stock or 2/3 of members in a non-stock corporation; and
C. Meeting duly called for the purpose; and
3. In case of non-stock corporations where there are no members with voting
rights, the vote of the majority of the Trustees in of ce will be suf cient
authorization for the corporation to enter into any transaction authorized by
Section 39 (RCC, Sec. 39, par. 1-3).

Q: When is the authorization of the stockholders not required even if there is sale
or disposal of all or substantially all of its assets?
ANS: The authorization by the stockholders or members is not required to sell, lease,
exchange, mortgage, pledge, or otherwise dispose of any of its property and assets in the
following cases:
1. If the transaction is necessary in the usual and regular course of business; or
2. If the proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of the remaining business (RCC, Sec. 39, par. 7).

Q: Under what circumstance does a sale or disposition qualify as a sale a of "all or

substantially all of the corporation's properties and assets"? MUTIVISHEWWOD

ANS: A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets the corporation would be rendered incapable of continuing the
business or accomplishing the purpose tor which It was incorporated (RCC, Sec. 39, par.
4).

Q: What does the Nell Doctrine provide?

ANS: Under the Nell Doctrine, the säle or transfer of the assets of one corporation to
another does not ipso facto include the debts and liabilities of the transferor (Y-/ Leisure
Philippines v. Yu, G.R. No, 207161, September 8, 2015)

Q: What are the exceptions to the Nell Doctrine? (AMC0F)

ANS: The following are the instances where the Nell Doctrine does not apply:
1. Where the purchaser expressly or impliedly Agrees to assume such debts of
the transferee (Ya Leisure Philippines v. Yun G.R. No. 207161, September 8,
2015);
2. Where the transaction amounts to a consolidation or Merger of the corporations
(RCC, Sec. 79 (c));
3. Where the purchasing corporation is merely a Continuation of the selling
corporation (Y-| Leisure Philippines v. Yu, G.R. No. 207161, September 8,
2015); and
4. Where the transaction is entered into Fraudulently in order to escape liability for
such debts (Y-/ Leisure Philippines v. Yu, G.R. No. 207161, September 8, 2015).

Q: When may a corporation abandon a sale or disposition?

ANS: The board of directors or trustees may, in its discretion, abandon the sale, lease,
exchange, mortgage, pledge, or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without further action or approval
by the stockholders or members (RCC, Sec. 39).

Q: What are the conditions before a corporation can acquire its own shares?
ANS: A corporation can acquire its own shares provided:
1. The acquisition must be for a legitimate a purpose or purposes, such as the
following:
a. To eliminate fractional shares arising out of stock dividends;
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b. To collect or compromise an indebtedness to the corporation, arising out

of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during the said sale;
C. TO pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code (RCC, Sec. 40);
d. To acquire treasury shares (RCC, Sec. 9);
e. To effect a decrease in capital stock (RCC, Sec. 37);
f. To purchase or take up redeemable shares (RCC, Sec. 8); and
g. When the SEC orders close corporation to purchase the shares of
stockholders in case of deadlock in its management (RCC, Sec. 103).
2. The corporation must have unrestricted retained earnings to cover the purchase
of the shares except if the purpose for Sec. 8 or Sec. 8 103 (Republic Planters
Bank v. Agana, Sr., G.R. No. 51765, March 3, 1997).

Q: What are the instances when the corporation can acquire its own shares even
when there are no available unrestricted retained earnings?
ANS: The Corporation can acquire its own shares even when there are no available
unrestricted retained earnings in the following cases:
1. Redemption of redeemable shares (RCC, Sec. 8; Republic Planters Bank V.
Agana Sr., G.R. No. 51765, March 3, 1997); and
2. When the shares are, reacquired by a close corporation in case of a deadlock
(RCC, Sec. 103).
Q: What are funds?
Re X
ANS: The term "funds" includes any corporate property to be used in furtherance of
business. The term "funds" may also include donations received by a corporation. Thus,
a non-stock, non-pro t corporation may invest its funds or subscribe to shares of another
domestic corporation (SEC Opinion No..54,
003 November 3, 2003).
ODN
Q: When may a private corporation invest its corporate funds in another
corporation or business? ex
ANS: Subject to the provisions of the ROC, corporate funds
Vase of a private corporation may
be invested:
1. When reasonably nécessary to accomplish its primary purpose; and
2. For any other purpose other than the primary purpose for which it was organized
(RCC, Sec. 41).

Q: In investing corporate funds, what is considered "other purposes"?

ANS: The "other purposes" for which the funds may be invested must be among those
secondary purposes enumerated in the AOI on the ground that use of corporate assets
for purposes not stated in the AOI is ultra vires and therefore voidable (Pirovana Et AI. v.
The De La Rama Steamship Co., G.R. No. L-5377, December 29, 1954).

Q: What are the requirements when a corporation invests its funds for a primary
purpose?
ANS: If the investment is for primary purpose or is reasonably necessary to accomplish
a primary purpose, only the majority vote of the board of directors/trustees shall be
required (RCC, Sec. 41).

Q: What are the requirements when I corporation invests its funds for a secondary
purpose?
ANS: If investment is for a secondary purpose, the following are the requisites:
1. Majority vote of the board;
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2 Rati cation of stockholders representing at least 2/3 of the outstanding capital

stock in a stock corporation or by at least 2/3 of the members in case of non-
stock corporation;
3. Notice of the proposed investment, time and place of the meeting shall be
addressed to each stockholder or member at the place of residence as shown
in the books of corporation; and
4. Meeting duly called for the purpose (Ibid).

Q: What are dividends?

ANS: Dividends are corporate pro ts allocated, lawfully declared and ordered by the
directors to be paid to the stockholders on demand or at a xed time (SEC Memorandum
Circular 11-09, Sec. 2).

Q: Who has the power to declare dividends?

ANS: The board of directors of stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, property, or in stock to all
of stockholders on the basis of outstanding stock held by them (RCC, Sec. 42).

Q: What are the requirements before dividends may be declared? (URA)

ANS: The following requirements must be met before dividends may be declared by the COMMERCIAL LAW

corporation:
1. Unrestricted retained earnings,
2. Resolution of the board, and
3. In the case of declaration of stock dividends, the Approval of stockholders
representing at least 2/3 of the outstanding capital stock at a regular or special
meeting duly called for the purpose (RCC, Sec. 42).

Q: What are the rutes on retention of surplus pro ts by a corporation? (SLEx)

ANS: The general rule is that stock corporations are prohibited from retaining surplus
pro ts in excess of 100% of their paid-in capital stock, except:
1. When it can be clearly shown that such retention iS necessary under Special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingenciesi
2. When the corporation is prohibited under any Loan agreement with nancial
institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or
3. When justi ed by de nite corporate Expansion projects or programs approved
by the board of directors (RCC, Sec. 42).

Q: What is unrestricted retained earnings? (CAR)

AN: Unrestricted retained earnings is the amount of accumulated pro ts and gains
realized out of normal operations of the company after deducting therefrom distributions
to stockholders and transfers to capital stock or other accounts, and which is:
1. Not Covered by a restriction under a loan agreement;
2. Not Appropriated by the Board for corporate expansion; and
3. Not Required to be retained under special circumstances (SEC Memorandum
Circular 11-09, Sec. 2).

Q: What corporate acts require the existence of unrestricted retained earnings?

(ADA)
ANS: The following corporate acts require the existence of unrestricted retained earnings:
1. Power to Acquire own shares (RCC, Sec. 40);
2. Power to Declare dividends (RCC, Sec. 42); and
3. Payment of stocks to dissenting stockholder in exercise of his Appraisal right
(RCC, Sec. 81).
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Q: What is a management contract?

ANS: It is a contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise (RCC, Sec. 43).

Note: Management contracts may be necessary to assure not only technical competence
but also continuity in management policy in the running of the corporation (AQUINO &
AQUINO, Revised Corporation Code, supra at 554).

0: What is the period of validity of : management contract?

ANS: A management contract must not be longer than years for any 1 term except
those contracts which relate to the exploration, development, exploitation or utilization of
natural resources that may be entered into for such periods as may be provided by
pertinent laws or regulations (RCC, Sec. 43).

Q: What are the requirements in order for a management contract to be valid?

ANS: The requirements, as general rule, are as follows:
1. Approval by a majority of the board of directors;
2 Rati cation by the majority of the stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members in case
of non-stock corporation of both the managing corporation and managed
corporation; and
3. Meeting duly catted for the purpose (RCC, Sec. 43))

Q: In entering into management contracts, under what circumstances shall the vote
of at least 2/3 of the outstanding capital stock or 2/3 of the members be required?
ANS: It is required in the presence of either: .
1 . Interlocking' stockhalders…-where.a.stockholder's representing the same
interest of both the managing and the managed corporations own or control
N
more than 1/3 of. the total outstanding capital stock entitled to vote of the
managing corporation; or
2 Interlocking directors - where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the members
of the board of directors of the managed corporation (RCC, Sec. 43).
MP
Q: What is the Principle of Indivisibility of Subscription?
ANS: Section 63 implicitly sets forth the doctrine that a subscription a is one, entire and
indivisible whole contract. It cannot be divided into portions, so that the stockholder shall
not be entitled [O certi cate of stock until he has remitted the full payment of his
subscription together with any interests and expenses, if any is due. All partial payments
on one subscription shall be deemed applied proportionately among the number of shares
(AQUINO & AQUINO, Revised Corporation Code, supra at 643).
Q: What is the ultra vires doctrine?
ANS: Under the ultra vires doctrine, no corporation shall possess or exercise corporate
powers other than those conferred by this Code or by its articles of incorporation and
except as are necessary or incidental to the exercise of the powers so conferred (RCC,
Sec. 44).

Q: When is an act ultra vires?

ANS: An act is ultra vires when it is committed outside the object for which a corporation
is created as de ned by the law of its organization and therefore beyond the powers
conferred upon it by law (Atrium Mgt. Co. v. CA, G.R. No. 109491, February 28, 2001).
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Q: What are the types of ultra vires acts? (BIN)

ANS: They are as follows:
1. Acts done Beyond the powers of the corporation as provided in the law or its
articles of incorporation;
2. Acts or contracts, which are per se Illegal as being contrary to law; and
3. Acts or contracts entered into in behalf of corporation by persons who have
No corporate authority (Rural Bank of Milaor V. Ocfemia, G.R. No. 137686,
February 8, 2000).

Q: What are the effects of an ultra vires act with respect to contracts?
ANS: The effects depend on the executory stage of the contract:
1. Executed contract - courts will not set aside or interfere with such contracts;
2. Executory contracts no enforcement even at the suit of either party
(unenforceable);
3. Partly executed and partly executory - principle prohibiting unjust enrichment
at the expense of another shall apply; and
4. Executory contracts apparently authorized but ultra vires- the principle of
estoppel shall apply (Pirovano V. De la Rama, G.R. No. L-5377, December 29,
1954). MUTIVISEWWOO

Q: What is the effect of unauthorized acts performed or contracts entered into by

an of cer in behalf of the corporation?
ANS: Acts of an of cer that are not authorized by the board of directors/trustees do not
bind the corporation unless the corporation rati es the acts or holds the of cer out as a
person with authority to transact on its behalf. Contracts entered into by persons without
authority from the corporation shall generally be considered ultra vires and unenforceable
against the corporation (University of Mindanao, Inc., v. Bangko Sentral ng Pilipinas, G.R.
Nos. 194964-65, January 11, 2016).

F. STOCKHOLDERS AND MEMBERS

DOCTRINE OF EQUALITY OF SHARES
Q: What is Doctrine of Equality of Shares?
ANS: Under this doctrine, all stocks issued by the corporation are presumed to be equal
with the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences (AQUINO & AQUINO, Revised Corporation Code, supra at 160).

Q: What is the presumption on the value of each share with respect to others
shares?
ANS: Under the Doctrine of Equality of Shares, each share shall be equal in all respects
to every other share, except as otherwise provided in the articles of incorporation and In
the certi cate of stocks (RCC, Sec. 6).

PARTICIPATION IN THE MANAGEMENT; VOTING REQUIREMENTS

Q: What are the basic rights of shareholders?
ANS: The following are the basic rights of a shareholder:
1. Direct or Indirect participation in management;
2. Voting rights (RCC, Sec. 6 & 57);
3. Right to remove directors (RCC, Sec. 27);
4. Proprietary rights:
a. Right to dividends;
b. Appraisal right (RCC, Sec. 80);
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C. Right to issuance of stock certi cates for fully paid shares (RCC, Sec.
63);
d. Proportionate participation in the distribution of assets in liquidation
(RCC, Sec. 139);
e. Right to transfer of stocks in corporate books (RCC, Sec. 62);
f. Pre-emptive right (RCC, Sec. 38);
5. Right to inspect books and records (RCC, Sec. 73);
6. Right to be furnished with the most recent nancial statement/ nancial report
(RCC, Sec. 74);
7. Right to recover stocks unlawfully sold for delinquent payment of subscription;
8. Right to the issuance of new certi cates in lieu of lost, stolen, or destroyed
certi cates (RCC, Sec. 71); and
9. Right to le individual suit, representative suit, and derivative suits (AQUINO &
SUNDIANG, Reviewer on Commercial Law, supra at p. 352).

Q: What are the obligations of a stockholder?

ANS: The following are the obligations of a stockholder:
1. Liability to the corporation for unpaid subscription (RCC, Sec. 65 to 69);
2. Liability to the corporation for interest on. unpaid subscription if so required

3.
(RCC, Sec. 65 & 66) m /
Liability to the creditors of the corporation for unpaid subscription subject to the
Limited Liability Rüle;
4. Liability for watered stocks (RCC, Sec. 64);
5. Liability for dividends unlawfully paid (RCC, Sec. 42) and
Administrative, civil, and criminal liability of a stockholder responsible for violation of the
RCC or for acts indispensable to the violation of the RCC (RCC, Sec. 171).

Q: What shares are deprived of voting rights under the RCC?

ANS: The following shares are deprived of their voting rights.
1. Where the right to vote in the election of directors is reserved for founders'
shares (RCQ, Sec. 7);
2. Treasury shares which remain in the Treasury (RCC,/Sec. 56); and
3. Delinquent stocks until and unless payment is made for the amount due on the
subscription with accrued interest, and, the costs and expenses of
advertisement, if any (RCC, Sec 70A D

Q: What are the instances wherein non-voting shares are entitled to vote?
(A2SI?MID)
ANS: Holders of non-voting shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation (RCC, Sec. 6).
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Q: What is proxy?
ANS: Proxy is a written authorization given by one person to another so that the second
person can act for the rst such as that given by the shareholder to someone else to
represent him and vote his shares at a shareholder's meeting (2 VILLANUEVA-CASTRO,
Commercial Law Recap, supra at 144).

Note: For non-stock corporations, unless otherwise provided in the articles of

incorporation or the bylaws, a member may vote by proxy, in accordance with the
provisions of this Code (RCC, Sec. 88). Therefore, unlike in the case of stock corporations
where proxy representation cannot be legally denied, it may be denied entirely in a
nonstock corporation when done through appropriate provisions in the AOI or bylaws
(SEC Opinion, September 20, 1994).

Q: What are the requisites for a valid proxy? (F5-SWV)

ANS: The following are the requisites of proxy:
1. It shall be Filed before the scheduled meeting with the corporate secretary;
2. No proxy shall be valid and effective for a period longer than 5 years at any one
time;
3. It shall be Signed by the stockholder or member concerned;
4. Proxies shall be in Writing, and COMMERCIAL LAW

5. Unless otherwise provided in the proxy form, it shall be Valid only for the meeting
which it was intended (RCC, Sec. 57)

Q: Are proxies revocable?

ANS: Proxies, even those with irrevocable terms, have always been considered as
revocable, unless coupled with an interest (SEC Memorandum No. 4, Series of 2004).
Revocation may be made through.-
1. Formal Notice;
2. Verbal Communication; or
3. Conduct l.e., when the stockholdor votes or attends the meeting personally
notwithstanding his appointment of a proxy. In such case, the proxy is deemed
revoked (SEC Opinion, October 28 1991).

Q: What is a voting trust agreement (VT A) ?

ANS: A voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or her shares to a trustee in order to
vest in the latter voting or other rights pertaining to shares for a period of not exceeding 5
years and upon such other terms and conditions speci ed in the agreement (Lee v. CA, V.
G.R. No. 93695, February 4, 1992).

Q: What are the statutory limitations on VTAs: (5-FW-CEA)

ANS: The statutory limitations are:
1. The agreement cannot be entered into for a period exceeding 5 years at any
one time, except when it is a condition in a loan agreement, in which case, said
contract shall automatically expire upon full payment of the loan;
2. The agreement must not be used for purposes of Fraud;
3. It must be in Writing and notarized and specify the terms and conditions thereof;
4. A Certi ed copy of the agreement must be led with the corporation and with
the SEC or it will be ineffective and unenforceable;
5. The agreement shall be subject to Examination by any stockholder of the
corporation; and
6. Unless expressly renewed, all rights granted in the agreement shall
Automatically expire at the end of the agreed period (RCC, Sec. 58).
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Q: What are the powers and rights of the voting trustees?

ANS: The following are the powers and rights of the of voting trustees:
1. They shall possess the right to vote and other rights pertaining to the shares so
transferred and registered in his or their names subject to the terms and
conditions of and for the period speci ed in the agreement;
2. May vote in person or by proxy unless the agreement provides otherwise;
3. The trustee may exercise the rights of inspection of all corporate books and
records (RCC, Sec. 58); and
4 The trustee is the legal title holder or owner of the shares so transferred under
the agreement. He is therefore quali ed is to be a director (Lee v. CA, G.R. No.
93695, February 4, 1992).

Q: What is the effect o1 the VTA on the status of a stockholder who is a party to its a
execution?
ANS: The effect of a voting trust agreement on the status of a stockholder who is a party
iS to its execution is that from being the legal titleholder or owner of the shares subject of
the voting trust agreement, he becomes the equitable or bene cial owner. The legal
ownership of the stock is transferred to the trustee, and he becomes the stockholder of
dV
record vacated (Lee v. CA, G.R: No. 93695, February 4, 1992).

Q: What is the effect of a VTA on the quali cation of a director or trustee?

ANS: Because a VTA results in the parting of legal title from the trustor to the trustee, a
shareholder or member who assigns his membership or all of his shares in a VTA ceases
to become shareholder of member of the corporation. Thus, he/she is disquali ed from
being elected as director/or trustee. If he/she is an incumbent, he/she is immediately
disquali ed and the position is vacated
we (Lee v. CA, G.R. No. 93695, February 4, 1992).

Q: What are the instances when the concurrence or rati cation of majority of the
(t
outstanding capital stock or members is necessary for the exercise of corporate
powers?
ANS: The concurrence or rati cation of majority of thé outstanding capital stock or
members is necessary for the following.
1. To enter into a management contract under circumstances not covered by either
of the two exceptional instances™ provided in Sec. 43. The vote requirement
applies to both the managing and managed corporation (RCC, Sec. 43);
2. To adopt, amend, or repeal the now bylaws (RCC, Sec. 45 & 47); and
3. Voluntary dissolution where no creditors are affected (RCC, Sec. 134).

Q: What are the instances when the concurrence of at least 2/3 of the outstanding
capital stock or 2/3 of the members is necessary for the exercise of corporate
powers?
ANS: The concurrence or rati cation of stockholders representing at least 2/3 of the
outstanding capital stock, or 2/3 of the members is necessary in the following:
1. To amend the articles of incorporation (RCC, Sec. 15);
2. To extend or shorten the corporate term (RCC, Sec. 36);
3. To increase/decrease capital stock (RCC, Sec. 37);
4. To incur, create, or increase bonded indebtedness (RCC, Sec. 37);
5. To deny pre-emptive right after incorporation (RCC, Sec. 38);
6. To sell, dispose, lease, encumber all or substantially all of the corporate assets
(RCC, Sec. 39);
7. To invest in another corporation, business other than the primary purpose like
the secondary purpose (RCC, Sec. 41);
8 To declare stock dividends (RCC, Sec. 42);
9. To enter into a management contract where:
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a. a stockholder or stockholders representing the same interest of both the

managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or
b.a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of
directors of the managed corporation (RCC, Sec. 43);
10. To approve plan of merger or consolidation (RCC, Sec. 76);
11. To adopt a plan providing for the distribution of assets by a nonstock corporation
(RCC, Sec. 94); and
12. Voluntary dissolution where creditors are affected (RCC, Sec. 135).

Q: What matters may be acted upon by the stockholders/members without

requiring the prior approval of the Board, and what is the vote required for each?
ANS: The following does not require prior approval of the board:
1. The delegation to the Board of the power to amend the bylaws - 2/3 of the -
outstanding capital stock or of the members (RCC, Sec. 47);
2. The revocation of the power of the Board to amend the bylaws, which was
previously delegated - ajority of the outstanding capital stock or the members
(RCC, Sec. 47); and COMMERCIAL LAW

3. To x the issued value of no par value shares - majority of the outstanding

capital stock or the members (RCC, Sec 61)

Q: What are the manner of voting of stockholders or members?

ANS: Stockholders or members may vote:
1. Directly, in person (RCC, Sec. 49), or
2. Indirectly
a. By means of a proxy (RCO Sec. 49);
b. Through remote communication or in absentia (ROC, Sec. 49);
C. By a trustee under a voting trust agreement (RGC, Sec. 58); or
d. By executors, administrators, receivers, or other legal representatives
duly appointed by the court (RCC. Sec. 54).

Q: What are the rules on cumulative voting in stock and non-stock corporations?
ANS: In stock corporations, the stockholder is allowed to concentrate his aggregate voting
power and allocate such number of aggregate votes in any manner as he wishes provided
that the number of votes cast for all directors shall not exceed his total aggregate voting
power (RCC, Sec. 23).

In non-stock corporations, the member may cast as many votes as there are trustees to
be elected but may cast not more than 1 vote for candidate. Cumulative voting is not
available unless allowed and provided for by the AOI or bylaws (Ibid).

Q: How do stockholders exercise their right to vote in a special or regular meeting?

ANS: Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members.
When so authorized in the bylaws a or by a majority of the board of directors, the
stockholders or members of corporations may also vote through remote communication
or in absentia provided that the votes are received before the corporation nishes the tally
of votes (RCC, Sec. 49 & 57).

Note: At all elections of directors or trustees, the right to vote through remote
communication or in absentia may be exercised in corporations vested with public
interest, notwithstanding the absence of a provision in the bylaws of such corporations
(Ibid).
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Q: What are the instances when voting right is not available? (DAFTS)
ANS: The following are the instances when voting right is not available:
1. Delinquent stocks (RCC, Sec. 70);
2. When provided for in the AOI (RCC, Sec. 6);
3. Fractional shares - Cannot be voted as they do not constitute at least one full
share (2 VILLANUEVA-CASTRO, Commercial Law Recap, supra at 136); and
4. Treasury shares (RCC, Sec. 56); and
5. Sequestered or escrowed shares satisfying the two-tiered test or the public
character test (Republic V. Sandiganbayan, G.R. No. 107789, April 30, 2003;
Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001).

Q: What are the tests to determine whether the PCGG (government) is authorized
to vote the sequestered shares registered in the name of private persons?
ANS: PCGG (government) is uthorized to vote the sequestered shares registered in the
names of private persons if it is able to satisfy either:
1. Two-Tiered Test
When sequestered shares registered in the names of private individuals or
entities are alleged to have been acquired with ill-gotten wealth, then the two-
tiered test is applied. The issue of whether PCGG may vote the sequestered
shares necessitates a determination of at least two factual matters:
a. There is prima facie evidence showing that the said shares are ill-gotten
and thus belong to the state; and one
b There is an immediate danger of dissipation [of assets] thus
necessitating the continued sequestration and voting by the PCGG while
the main issue is pending with the Sandiganbayan (Republic V.
Sandiganbayan, G.RvNo. 107789, April 30, 2003); or
2. Public Character Test Poe Saars
The two clear: public character exceptions under which the government is
granted the authority to vote the shares: pond
a. Where government shares are taken over by private persons or entities
who/which registered them in their own names; and
b. Where the capitalization or shares that were acquired with public funds
somehow landed in private hands (Republic v. COCOFED, G.R. Nos.

PROPRIETARY RIGHTS
VIAG
147062-64, December 14, 2001.10

Q: What are the proprietary rights of stockholders?

ANS: Proprietary rights pertain to certain economic bene ts that accrue to his shares,
such as right to receive dividends and right to participate in the assets of the corporation
upon dissolution and liquidation (I DIVINA, Commercial Law, supra at 621).

Right to Dividends

Q: When does the right to dividends accrue?

ANS: The accrual of right to dividends depends on the type of dividend declared:
1. Cash dividends as soon as cash dividends are publicly declared, the
stockholders have the right to their pro rata shares; or
2. Stock dividends a stock dividend, aside from board approval, requires
approval of stockholders representing at least 2/3 of the outstanding capital
stock (RCC, Sec. 42).
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Q: How does delinquency of a stockholder affect his/her right to dividends?

ANS: The delinquent stockholder is still entitled to dividends, subject to the following
conditions:
1 . Cash dividends due on delinquent stock shall rst be applied to the unpaid
balance on the subscription plus costs and expenses; and
2 Stock dividends shall be withheld until their unpaid subscription is fully paid
(Ibid).

Right to Inspection
Q: What are the contents of the stock and transfer book?
ANS: A stock and transfer book contains the following:
1. A record of all in stocks in the names of the stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks for which subscription has been
made, and the date of payment of any installment;
3. A statement of every alienation sale or transfer of stock made, the date thereof,
by and to whom made; and
4 Such other entries as the bylaws may prescribe (RCC, Sec. 73).

Q: Who may make valid entries on the stock and transfer book? COMMERCIAL LAW

ANS: Only the corporate secretary is duly authorized to make entries on the stock and
transfer book. Hence, entries made by the Chairman or President are invalid (Torres, Jr.
v. CA, G.R. No. 120138, September 5, 1997)

Q: Who is a stock transfer agent?

ANS: A stock transfer agent is one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation (RCC, Sec. 73)

Note: The SEC may require stock corporations which transfer and/or trade stocks in
secondary markets to have an independent transfer agent (RCC. Sec. 73).

Q: What is the basis of the right of the stockholders to inspect corporate books and
records?
ANS: 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 (Gokongwei v. Securities and Exchange
Commission, G.R. No. L-45911 April 11, 1979).

Q: What are the conditions for the exercise of the right to inspect corporate books
and records? (RIG-ConComp)
ANS: The following conditions must be complied with:
1. The right must be exercised at Reasonable hours on business days;
2. The director, trustee, stockholder, or member has not Improperly used any
information he secured through any previous examination;
3. Demand is made in Good faith or for a legitimate purpose;
4. The inspecting or reproducing party must respect and is bound by
Con dentiality rules under prevailing laws; and
5. The inspecting or reproduci party is not a competitor, director, of cer,
controlling stockholder or otherwise represents the interest of a Competitor
(RCC, Sec. 73).

Note: Right to inspect subsists even after dissolution of the corporation during the three-
year liquidation period (Roque v. People of the Philippines, G.R. No. 211108, June 7,
2017).
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Q: What are the requisites to give rise to an action for Denial of the Right to inspect?
ANS: The following are the requisites to give rise tO an action for Denial of the Right to
inspect:
1. A director, trustee, stockholder, or member has made a proper demand for
exercise of his/her right to inspect; and
2. Any of cer or agent of the concerned corporation, by himself, or by voting to do
SO in a board resolution, shall refuse to allow the said director, trustee,
stockholder, or member to examine and copy said excerpts (RCC, Sec. 73).

Q: What are the remedies if a valid demand for Inspection is denied?

ANS: The following are the remedies if a valid demand for Inspection is denied:
1. Mandamus (RULES OF COURT, Rule 65);
2. Damages;
3. Civil liability and criminal liability under Sec. 73 in relation to Sec. 161 of the
RCC;
4. Report to SEC to request for Summary Investigation under SEC Memorandum
Circular No. 25 Series of 2020 (AQUINO & AQUINO, Revised Corporation
Code, supra at 725); and
5. File a complaint under Rule 7 the Interim Rule for Intra-Corporate
Controversies (ld.)
Note: While such judicial remedy still remains effective, the SEC remedy may be more
expeditious (ld.).
Ro pAX
Q: What are the acts which shall constitute a violation ofwow.eright to inspect to and/or
reproduce corporate records?
ANS: The following shal constitute a violation of the right to inspect and/or reproduce
res
A
corporate records; 40 CENT O DIZZZ

1. Outright refusal to allow director, trustee, stockholder, or member of the

representative; O
corporation to inspect any of the corporate records in person, or by a

2. Failure to take, within reasonable amount of time, the necessary steps that
would allow the director, trustee, stockholder, or member of the corporation to
of inspect any of the corporate records in person, ot by a representative;
3. Failure to give the director trustee, stockholder or member a reasonable amount
of time to inspect any of the corporate records in person, or by a representative;
4. Outright refusal to allow the director, trustee, stockholder, or member of the
corporation to reproduce any of the corporate records in person, or by a
representative at his/her own expense;
5. Failure to take, within reasonable amount of time, the necessary steps that
would allow the director, trustee, stockholder, or member of the corporation to
reproduce any of the corporate records in person, or by a representative at
his/her own expense; or
6. Failure to give the director, trustee, stockholder or member a reasonable
amount of time to reproduce any of the corporate records in person, or by a
representative at his/her own expense (Section 2, SEC Memorandum Circular
No. 25 Series of 2020). of

Q: Why is a corporation not allowed to deny outright access to inspect corporate

books and records?
ANS: Access to the information is mandatory. The presumption is that is the corporation
should provide access. If it has basis for denial, then the corporation shoulders the risk of
being sued and of successfully raising the proper defenses (Philippine Associated
Smelting and Re ning Corporation v. Lim, G.R. No. 172948, October 5, 2016).
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Q: What af rmative defenses may the corporation raise when an action is instituted
against it?
ANS: It shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes:
1. Has improperly used any information secured through any prior examination of
the records or minutes of such corporation;
2. Was not acting in good faith;
3. Was not acting for a legitimate purpose in making demand to examine or
reproduce corporate records; or
4. Is a competitor, director, of cer, controlling stockholder or otherwise represents
the interests of a competitor (RCC, Sec. 73, par. 4).

Q: What are the liabilities incurred when the right to inspection is denied?
ANS: Any of cer or agent of the corporation who shall refuse to allow the inspection
and/or reproduction of records shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an offense, which shall be
punishable under Section 161 of the RCC (RCC, Sec. 73, par. 4).

Note: If such refusal is made pursuant to a resolution or order of the board or of directors or COMMERCIAL LAW

trustees, the liability shall be imposed upon the directors or trustees who voted for such
refusal (RCC, Sec. 73, par. 4).

Pre-Emptive Right

t
Q: What is pre-emptive right?
ANS: Pre-emptive right is the preferential right of shareholders to subscribe to all issues
or disposition of shares of any class; in proportion to their respective shareholdings (RCC,
Sec. 38).

Q: When can a stockholder exercise his pre-emptive right?

ANS: The following are the instances when pre-emptive right is available:
1. Original issuance of unissued shares forming part of the original authorized
capital stock;
2. Original issuance of new shares resulting from increase of authorized capital
stock (Dee v. CA, G.R. No. L-60502, July 16, 1991); and
3. Disposition of Treasury Shares (SEC Opinion, January 14, 1993).

Q: When is pre-emptive right not available? (PREP-DeWN)

ANS: The following are the instances when pre-emptive right is not available:
1. Shares to be issued to comply with laws requiring stock offering or minimum
stock ownership by the Public;
2. It does not apply to shares that are being Reoffered by the corporation after they
were initially offered together with all the shares;
3. Shares issued in good faith, with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in Exchange for property
needed for corporate purposes;
4. Shares issued, with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in Payment of previously contracted debts;
5. In case the right is Denied in the AOI or an amendment thereto;
6. Waiver of the right by the stockholder; and
7. In the case of Non-stock corporations, where the assignors have previously
exercised their pre-emptive rights to subscribe to new shares. Otherwise, the
pre-emptive right attached to the original stock would be exercised twice (SEC
Opinion, November 28, 1990).
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Appraisal Right
Q: What is appraisal right?
ANS: Appraisal right is the right of a stockholder to demand payment of the fair value of
the shares after dissenting from certain corporate acts involving fundamental changes In
corporate structure (RCC, Sec. 80)

Q: When may a right of appraisal be exercised? (AD-MIC)

ANS: Any stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of the shares in the following instances:
1. In case an Amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares,
or
b. Of authorizing preferences in any respect superior to those of
outstanding shares of any class, or
C. Of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other Disposition
of all or substantially all of the corporate property and assets;
3. In case of Merger or consolidation; and
4. In case of Investment of corporate funds for any purpose other than the primary
purpose of the corporation (RCC, Sec. 80)
5. In a Close corporation a* stockholder may for any reason, compel the
corporation to purchase his shares when the corporation has suf cient assets
its books to cover its debts and liabilities exclusive of capital stock (RCC, Sec.
104).
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Q: What are the conditions for exercise of the appraisal right? (AIDS-FUT)
ANS: The conditions are the following
Dissenting stockholder must have voted Against the proposed action;
1.
2. Any of the Instances set forth by law must be present;
3. Demand for payment must be made within 30 days from the date vote is taken s
thereon;
4. Submission by withdrawing stockholder of hits shares to the corporation for
notation of being dissenting stockholder within 1.0 days from written demand;
5. Price must be based on Fair value as of the day prior to date on which vote was
taken;
6. Payment must be made only when the corporation has Unrestricted retained
earnings in its books; and
7. Stockholder must Transfer his shares to the corporation upon payment by the
corporation (RCC, Secs. 81, 82 and 85).

Q: What are the rules regarding withdrawal of demand for payment? (CDAN)
ANS: As general rule, a dissenting stockholder who demands payment of his shares is
no longer allowed to withdraw from his decision except in the following instances:
1. The corporation Consents to the withdrawal;
2. The proposed corporate action is Disapproved by the SEC where its approval
is necessary;
3. The proposed corporate action is Abandoned or rescinded by the corporation;
or
4. The Commission determines that such stockholder is Not entitled to appraisal to
right (RCC, Sec. 83).
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Q: How s the right to vote exercised in case a stockholder grants security interest
in his or her shares?
ANS: In case a stockholder a grants security interest in his or her shares in stock
corporations, the stockholder-grantor shall have the right to attend and vote in meetings
of stockholders, unless the secured creditor is expressly given by the stockholder-grantor
such right in writing which is recorded in the appropriate corporate books (RCC, Sec. 54).

Q: What is the rule on voting rights in non-stock corporations?

ANS: The right of the members of any class or classes to vote may be limited, broadened,
or denied to the extent speci ed in the articles of incorporation or the by-laws. Unless so
limited, broadened, or denied, each member, regardless of class, shall be entitled to
vote (RCC, Sec. 88).

Q: What actions can a shareholder le to protect his or the corporation's interests?

ANS: A shareholder has the right to le three types of suits:
1. Individual Suits;
2. Representative Suits; or
3. Derivative Suits (Cua, Jr. v. Tan, @.R. No. 181455-56, December 4, 2009).

Q: What is an Individual suit? COMMERCIAL LAW

ANS: An individual suit may be instituted by stockholder against another stockholder

for wrongs committed against him personally, and to determine their Individual rights. An
individual suit may also be instituted against a corporation, the same having a separate
juridical personality, which by its own may be sued (Guy v. Guy, G.R. Nos. 189486 and
182008, December 4, 2009)

Note: Individual suits are led when the cause of action belongs to the individual
stockholder personally, and not to the stockholders as a group or to the corporation, e.g.,
denial of right to inspection and denial of dividends to a stockholder (Villamor, Jr., V.
Umale, G.R. No. 172843, September 24, 2014).

Q: Why is an individual suit involving corporate property not allowed?

ANS: A stockholder in a corporation has no title legal or equitable to the corporate
property; that both of these are in the corporation Itself for the bene t of the stockholders.
To allow shareholders to sue separately would con ict with the separate corporate entity
principle (Villamor, Jr., v. Umale, G.R. No. 172843, September 24, 2014).

Note: Shareholders cannot intervene in a suit involving corporate assets, because they
are in no legal sense the owners of corporate property, which is owned by the corporation
as distinct legal person. While a share of stock represents a proportionate or aliquot
interest in the property of the corporation, it does not vest the owner thereof with any legal
right or title to any of the property, his interest in the corporate property being equitable
or bene cial in nature (Magsaysay-Labrador v. CA, G.R. No. G.R. No. 58168 December
19, 1989).

Q: What is a Representative suit?

ANS: A representative suit is an action brought by the stockholder in behalf of himself
and all other stockholders similarly situated when a wrong is committed against a group
of stockholders (Cua, Jr. v. Tan, G.R. No. 181455-56, December 4, 2009).
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DERIVATIVE SUIT
Q: What is a Derivative Suit?
ANS: A derivative suit is an iS action led by stockholders to enforce a corporate action. It
is an exception to the general rule that the corporation's power to sue is exercised only
by the board of directors or trustees (Villamor, Jr., v. Umale, G.R. No. 172843, September
24, 2014).

Q: When may stockholders or members le a derivative suit?

ANS: Individual stockholders may be allowed to sue on behalf of the corporation
whenever the directors or of cers of the corporation refuse to sue to vindicate the rights
of the corporation or are the ones to be sued and are in control of the corporation. It is
allowed when the directors of cers are guilty of breach of trust, and not of mere error
of judgment (Villamor, Jr., V. Umale, G.R. No. 172843, September 24, 2014).

Q: What requisites must be met in order for a derivative suit to prosper? (SRAN2)
ANS: A stockholder or member may bring an action in the name of a corporation or
association, provided, that;
1. He was a Stockholder or member at the time the acts or transactions subject of
the action occurred and at the time the action was led;
2 He exerted all Reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust al remedies available under the articles of incorporation,
bylaws, laws oprules governing the corporation or partnership to obtain the relief
he desires (Exhaustion of Intra-Corporate Remedies)
3. No Appraisal rights are available, or does no one mino
4. The suit is not a Nuisance or harassment suit (A.M." No. 01-2-04-SC, Interim
Rules of Procedure for Intra-Corporate Controversies, Rule 8, Sec. 1); and
5 The action must be brought in the Name of the corporation. It is sine qua non
that the corporation is impleaded or made a party to a case (Chua v. CA, G.R
No. 150793, November 18, 2004):

Q: Who is the real party-in-interest in derivative suits?

ANS: In derivative suits, the real party in interest is the corporation, and the suing
stockholder is a mere nominal party. Hence, the corporation is an indispensable party
which must be impleaded in the derivative action (Villamor, Jr., v. Umale, G.R.
No. 172843, September 24, 2014).

Q: Where is the is regular or special meeting of stockholders or members held?

ANS: The meeting of stockholders or members, whether regular or special, shall be held
in the principal of ce of the corporation as set forth in the articles of incorporation, or, if
not practicable, in the city or municipality where the principal of ce of the corporation is
located.

Any city or municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan
areas shall, for purposes of this section, be considered a city or municipality (RCC, Sec.
50)

Note: The bylaws may provide that the members of a nonstock corporation may hold their
regular or special meetings at any place even outside the place where the principal of ce
of the corporation is located; Provided:
1. That proper notice is sent to all members indicating the date, time and place of
the meeting; and
2. That the place of meeting shall be within Philippine territory (RCC, Sec. 92).
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Q: When is a regular meeting of stockholders or members held?

ANS: Regular meetings of stockholders or members shall be held annually on a date
xed in the by-laws, or if not so xed. on any date after April 15 of every year as
determined by the board of directors or trustees (RCC, Sec. 49).

Q: When is a special meeting of stockholders or members held?

ANS: Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws (RCC, Sec. 49).

Q: Who calls a special meeting of stockholders? (OB-SP)

ANS: A special meeting of stockholder is called by:
1. The Of cer designated in the articles of incorporation or by-laws;
2. The Board of director if nobody is designated to call in the articles or by-laws
(SEC Opinion, February 6, 2006);
3. The SEC, upon petition of a stockholder or member on a showing of good cause
therefor, may issue an order directing the petitioning stockholder or member to
call a meeting of the corporation (RCC; Sec. 49);
4. In removal of directors, the secretary on order of the President, or upon written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or majority of the members entitled to vote. MV1 TVISEWWOD

Q: When is prior notice served in regular and special meeting of stockholders or

members?
ANS: For regular meetings, written notice shall be sent to all stockholders or members of
record at least 21 days prior to the meeting, unless a different period is required in the by-
laws, law or regulation.

For special meetings, at least 1 week written notice shall be sent to all stockholders or
members, unless a different period is provided in the by laws,law or regulation (RCC,
Sec. 49).

Q: What are the rules on waiver of notice?

ANS: The rules on the waiver of notice are as follows
1. Notice of any meeting may be walved, expressly or impliedly;
2. General waivers of notice in the articles of incorporation or the bylaws shall not
be allowed; and
3. Attendance at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened (RCC. Sec. 49).

Q: What is the is effect if the meeting is improperly held or called?

ANS: All proceedings and any business transacted at a meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the
meeting is improperly held or called: Provided, That all the stockholders or members of
the corporation are present or duly represented at the meeting and not one of them
expressly states at the beginning of the meeting that the purpose of their attendance is to
object to the transaction of any business because the meeting is not lawfully called or
convened (RCC, Sec. 50).

Q: What constitutes a quorum?

ANS: Unless otherwise provided for in the RCC or in the bylaws, a quorum shall consist
of the stockholders representing a majority of the outstanding capital stock or majority of
the members in case of nonstock corporations (RCC, Sec. 51).
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Q: At a regular meeting of stockholders or members, what matters/affairs shall the

board endeavor to present? (MLA-FED-RAR-SdP)
ANS: At each regular meeting of stockholders or members, the board of directors or
trustees shall endeavor to present to stockholders or members the following:
The Minutes of the most recent regular meeting which shall include among
others, six matters, including items that the Commission may require in the
interest of good corporate governance and the protection of minority
stockholders;
2. A members' List for non-stock corporations and, for stock corporations, material
information on the current stockholders, and their voting rights;
3. An Assessment of the corporation's performance;
4. A Financial report for the preceding year;
5. An Explanation of the dividend policy and the fact of payment of dividends or
the reasons for non-payment thereof;
6. Director or trustee pro les;

'
7. A director or trustee attendance Report;
8. Appraisals and performance reports for the board and the criteria and procedure
for assessment;
9. A director or trustee compensation Report,
10. Director disclosures on Self-dealings and related party transactions; and/or
11. The Pro les of directors nominated or seeking election or re-election (RCC, Sec.
49).
CoT I X

I
Q: Who shall preside at meetings?
ANS: The chairman Or, in his absence, the president shall preside at all meetings of the
directors or trustees as well as of the stockholders or members, unless the bylaws provide
otherwise (RCC, Sec, 53). AUTOPIZ
dorsesoscondo

The petitioning stockholder/member, directed by the SEC to call the meeting, shall
preside at the meeting until at least a majority of the stockholders or members present
have chosen from among themselves, a presiding of cer (RCC, Sec. 49).

DELINQUENCY
190;
Q: When are unpaid subscriptions due and payable?
ANS: Subject to the provisions of the subscription contract, the board of directors may, at
any time, declare due and payable to the corporation unpaid subscriptions and may
collect the same or such percentage thereof, in either case, with accrued interest, if any,
it as it may deem necessary (RCC, Sec. 66).

Q: When shall payment of the unpaid subscriptions be made?

ANS: Payment of unpaid subscription or any percentage thereof, together with any
interest accrued, shall be made on the date speci ed in the subscription contract or on
the date stated in the call made by the board (RCC, Sec. 66).

Q: What is the liability of stockholder if he fails tO render the entire balance of the
subscription on such date?
ANS: Failure to pay on the date speci ed in the subscription contract or on the date stated
in the call shall render the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different interest rate is
provided in the subscription contract (RCC, Sec. 66).

Note: The notice is regarded as a condition precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain an action for the call (Baltazar v. Lingayen
Gulf Electric Power Co., Inc., G.R. No. L-16236, June 30, 1965).
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Q: When are shares declared delinquent?

ANS: If the stockholder does not pay within 30 days from the date speci ed n the contract
of subscription or in the call, all the stocks covered by the subscription shall be declared
delinquent and shall be subject to the sale under Section 67, unless the board of directors
orders otherwise (RCC, Sec. 66).

Q: What is the effect of delinquency of shares?

ANS: No delinquent stock shall be voted for, be entitled to vote, or be represented at any
stockholders' meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of the RCC. It
is only upon payment of the amount due on the subscription with accrued interest, and
costs and expenses of advertisement, if any, that the stockholder will be stored to his full
rights (RCC, Sec. 70).

Q: What is the procedure for the sale of delinquent stocks?

ANS: The procedure for the sale of delinquent stocks is as follows:
1. Resolution The board of directors may, by resolution. order the sale of
delinquent stock on date which shall not be less than 30 days nor more than
60 days from the date the stocks become delinquent;
2. Notice - Notice of the sale, with a copy of the resolution, shall be sent to every MV1 IVISEWWOD

delinquent stockholder either personally, by registered mail, or through other

means provided in the bylaws,
3. Publication The notice shall be published once a week for 2 consecutive
weeks in newspaper of general circulation in the province or city where the
principal of ce of the corporation is located;
4. Auction sale - The delinquent stock shall be sold at public auction to such
bidder who shall offer to pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a share (RCC, Sec. 67).

Q: When may the board of directors not proceed with auction sale?
ANS: The delinquent stock shall not be sold at a public auction if the delinquent
stockholder pays to the corporation, on or before the date speci ed for the sale of the
delinquent stock, the balance due plus accrued interest, costs of advertisement and
expenses of sale, or when the board of directors otherwise orders (RCC, Sec. 67).

Q: What is the effect of the sale of the delinquent stock?

ANS: The stock so purchased shall be transferred to such purchaser in the books at the
corporation and a certi cate for such stock shall be issued in the purchaser's favor. The
remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certi cate of stock covering such shares (RCC,
Sec. 67).

Note: If there is no quali ed bidder, the corporation may, subject to the provisions of the
RCC, bid for the same, and the total amount due shall be credited as fully paid in the
books of the corporation, as treasury shares (RCC, Sec. 67).

Q: What does "call" by the board of directors refer to?

ANS: A call is the resolution or formal declaration of the board that the unpaid
subscriptions are due and payable. The unpaid subscription is not due and payable
without the call (Lingayen Gulf Electric Power Company v. Baltazar, G.R. No. L-4824.
June 30, 1953).
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Q: When is a call by the board of directors for the payment of the balance of
subscription not necessary?
ANS: A call is not necessary in the following instances:
1. When the date of payment is speci ed in the subscription agreement (RCC,
Sec. 66); and
2. When the corporation becomes insolvent (Velasco v. Poizat, G.R. No. L-11528,
March 15, 1918).

Q: When are restrictions on transfer of stocks considered valid and enforceable?

ANS: In order to be valid and enforceable, any restriction on the right to transfer shares
must be explicitly provided for in the articles of incorporation (RCC, Sec. 6, par. 1).

Q: What are the requirements for a valid transfer of stocks? (DER)

ANS: If represented by a certi cate, the following must be complied with:
1. There must be Delivery of the certi cate;
2. It must be Endorsed by the owner or his agent;

Note: It is delivery of the certi cate, coupled with the endorsement by the owner or his
duly authorized representative that is the operative act of transfer of shares from the
original owner to the transferee (AQUINO & AQUINO, Revised Corporation Code, supra
at 624).

3. To be valid against the corporation and third parties, the transfer must be
Recorded in the books of the corporation. Otherwise, the transfer shall be
binding only as between the parties (RCC, Sec. 62) *
Day series ede

Note: No shares of stock against which the corporation holds any unpaid claim shall be
LODI
transferable in the books of the corporation (RCC., Sec. 62)

CERTIFICATE OF STOCK 3
Q: What is the nature of a certi cate of stock?
ANS: A certi cate of stock is not necessary to render one a stockholder in a corporation.
Nevertheless, a certi cate of stock is the paper representative or tangible evidence of the
stock itself and of the various interests therein The certi cate 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 (Tan v. SEC, G.R. No. 95696. March 3, 1992).

It is the paper representative or tangible evidence of the stock itself and of the various
interests therein. It expresses the contract between the corporation and the stockholder
(Makati Sports Club, Inc., v. Cheng, G.R. No. 178523, June 16, 2010).

Shares of stock so issued are personal property and may be transferred by delivery of the
certi cate or certi cates indorsed by the owner, his attorney-in fact, or any other person
legally authorized to make the transfer (RCC, Sec. 62).

Q: What are uncerti cated shares?

ANS: Uncerti cated shares are securities evidenced by electronic or similar records (R.A.
No. 8799, otherwise known as "The Securities Regulation Code". Sec. 3.14 [hereinafter
SRC]).
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Q: What are the rules on uncerti cated shares?

ANS: Notwithstanding Section 63 (now Section 62) of the Corporation Code, a
corporation whose shares of stock are registered pursuant to the Code or listed on a stock
exchange may:
1 . If so resolved by its Board of Directors and agreed by a shareholder, investor or
securities intermediary, issue shares to, or record the transfer of some or all of
its shares into the name of said shareholders, investors or, securities
intermediary in the form of uncerti cated securities;
2. The use of uncerti cated securities shall be without prejudice to the rights of the
securities intermediary subsequently to require the corporation to issue a
certi cate in respect of any shares recorded in its name; and
3. If so provided in its articles of incorporation and bylaws, issue all of the shares
of particular class in the form of uncerti cated securities and subject to a
condition that investors may not require the corporation to issue a certi cate in
respect of any shares recorded in their name (SRC, Sec. 43.1).

Q: Why is stock certi cate regarded as quasi-negotiable instrument and not a

negotiable one?
ANS: A certi cate of stock is regarded as quasi negotiable in the sense that it may be
transferred by endorsement, coupled with delivery, but is not negotiable because the
MVTTVIOHEWWO?

holder thereof takes it without prejudice to such rights or defenses as the registered
owners or transferor's creditor may have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the principles governing estoppel
(Republic v. Sandiganbayan, G.R. Nos. 107789 & 147214 (Resolution), April 30, 2003).

Q: When may a certi cate of stock be issued?

ANS: No certi cate of stock shall be a issued to a subscriber until the full amount of the
subscription together with the interest and expenses (in case of delinquent shares), if any
is due, has been paid (RCC, Sec. 63)

of Note: Doctrine of Indivisibility of Subscription Section 63 implicitly sets forth the doctrine
that a subscription is one, entire and indivisible whole contract. It cannot be divided into
portions, so that the stockholder shall not be entitled to a certi cate of stock until he has
remitted the full payment of his subscription together with any interests and expenses, if
any is due. All partial payments on one subscription shall be deemed applied
proportionately among the number of shares (SEC-DGC No. 10-15 dated April 23. 2010,
SEC Opinion dated November 12, 1993).
Q: What is the situs of shares of stock?
ANS: to The situs of shares of stock is deemed to be the State where the corporation has
its domicile which is ordinarily the State under whose laws it was created (Wells Fargo
Bank & Union Trust Co. v. Collector of Internal Revenue, G.R. No. 46720, June 28, 1940).

G. MERGERS, CONSOLIDATIONS, AND ACQUISITIONS

Q: What is merger?
ANS: A merger is a consolidation of two or more corporations, which results in one or
more corporations being absorbed into one surviving corporation. The separate existence
of the absorbed corporation ceases (Philippine Geothermal, Inc., Employees Union v.
Unocal Philippines, Inc., G.R. No. 190187, September 28, 2016).

Q: What is consolidation?
ANS: Consolidation is one where two or more existing corporations are combined to form
a new corporation called the consolidated corporation (RCC, Sec. 75).
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Q: Distinguish constituent corporations from a consolidated corporation.

ANS: Constituent corporations are the parties to the merger or consolidation, while a
consolidated corporation is the new corporation formed by virtue of a valid consolidation
(RCC, Sec. 75).

Note: The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation (RCC, Sec. 80).

Q: What is the procedure for merger and consolidation?

ANS: The procedure for merger and consolidation may be summarized in this wise:
1. The board of directors or trustees of each corporation shall approve a plan of
merger or consolidation;
2. The plan of merger or consolidation shall be approved by majority vote of each
of the of the concerned corporations at separate meetings;
3. The plan of merger or consolidation shall be approved by 2/3 of the outstanding
capital stock or members for non-stock corporations;
4. An articles of merger or consolidation shall be executed by each of the
constituent corporations, signed by the president or vice-president and certi ed
by the secretary or assistant secretary of each corporation;
5. The articles of merger or consolidation shall be submitted to the SEC for
approval. A favorable recommendation from the appropriate government
agency in certain cases shall rst be obtained; A
6. If the SEC is satis ed that the merger or consolidation is consistent with the
RCC and existing laws, it shall issue a certi cate approving the articles and plan
of merger or consolidation; and
7. If, upon investigation, the SEC has reason to believe that the proposed merger
or consolidation is contrary to or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard (RCC, Sec, 75-78)

Q: What are the contents of a plan of merger or consolidation? (NTCO)

ANS:1.A plan of merger or consolidation shalt set forth the following:

MAN
The Names of the corporations proposing to merge or consolidate;
2. The Terms of the merger or consolidation and the mode of carrying the same
into effect;
3. A statement of the Changes, any in the articles of incorporation of the
surviving corporation in case of merger; and, in case of consolidation, all the
statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such Other provisions as are deemed necessary or desirable (RCC, Sec 75).

Q: What are the contents of the articles of merger or consolidation?

ANS: The articles of merger or consolidation shall set forth:
1. The plan of the merger or consolidation;
2. As to stock corporations, of the number of shares outstanding, or in the case of
non-stock corporations, the number of members;
3. As to each corporation, the number of shares or members voting for or against
such plan, respectively;
4. The carrying amounts and fair values of the assets and liabilities of the
respective companies as of the agreed cut-off date;
5. The method to be used in the merger or consolidation of accounts of the
companies;
6. The provisional or pro forma values, as merged or consolidated, using the
accounting method; and
7. Such other information as may be prescribed by the SEC (RCC, Sec. 77).
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Q: When is merger or consolidation deemed effective?

ANS: The merger or consolidation shall only be effective upon issuance by the SEC of a
certi cate approving the articles and plan of merger or consolidation (RCC, Sec. 78).

Note: If, upon investigation, the SEC has reason to believe that the proposed merger or
consolidation is contrary to or inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations concerned the opportunity to be heard
(RCC, Sec. 78).

Q: What are the effects of merger or consolidation?

ANS: The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation;
2. The separate existence of the constituent corporations shall cease, except that
of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities, and powers and shall be subject to all the duties and
liabilities of a corporation organized under the RCC;
4. All real or personal property, all receivables due on whatever account and every
other interest of, belonging to, or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving or consolidated corporation COMMERCIAL LAW

without further act or deed;

5. The surviving or consolidated corporation shalt be responsible for all the
liabilities and obligations of each constituent corporation; and
6. Any pending claim, action or proceeding brought by or against any constituent
corporation may be prosecuted by or against the surviving or consolidated
corporation (RCC, Sec. 79).

ASSET ONLY TRANSFER

Q: What is "Asset-Only Transfers"?

ANS: In asset-only transfers, the transferee is not bound to retain the employees of the
transferor since the former does not really step into the shoes of the latter. In addition, the
transferee is not liable for any of the claims against the transferor, even if the sale of the
business assets of the transferor should result in the shutting down of the transferor's
operations and the laying-off of the transferor's employees (VILLANUEVA &
VILLANUEVA-TIANSAY, Philippine Corporate Law, supra at 792]).

BUSINESS ENTERPRISE TRANSFER

Q: What is "Business Enterprise Transfer"?

ANS: In such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the atter's business enterprise, including its
goodwill.

The transferee is liable for the debts and liabilities of his transferor arising from the
business enterprise conveyed. The transferee corporation assumes the debts and
liabilities of the transferor corporation because it is merely a continuation of the latter's
business (Y-/ Leisure Philippines v. Yu, G.R. No. 207161, September 8, 2015).

Q: What is the purpose of Business Enterprise Transfer?

ANS: The purpose of the business-enterprise transfer is to protect the creditors of the
business by allowing them a remedy against the new owner of the assets and business
enterprise. Otherwise, creditors would be left "holding the bag," because they may not be
able to recover from the transferor who has "disappeared with the loot," or against the
transferee who can claim that he is a purchaser in good faith and for value. Based on the
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foregoing, as the exception of the Nell doctrine relates to the protection of the creditors of
the transferor corporation, and does not depend on any deceit committed by the
transferee corporation, then fraud is certainly not an element of the business enterprise
doctrine (Id).

Note: (Please refer to the discussion of Nell Doctrine under the Powers of Corporation).

H. CORPORATE DISSOLUTION AND LIQUIDATION

Q: What is dissolution?
ANS: Dissolution is the termination of the life of a juridical entity (Republic v. Tancinco,
G.R. No. 139256, December 27, 2002). It is the extinguishment of the corporate franchise
and the termination of corporate existence AQUINO & AQUINO, Revised Corporation
Code, supra at 867-868).

As distinguished from the actual business enterprise operations, dissolution legally affects
the nature and capacity of the "juridical person" of the corporate being. The mere fact that
the corporation has ceased to do business does not necessarily constitute a dissolution
or diminution of the legal power and capacity of the corporation (VILLANUEVA &
VILLANUEVA-TIANSAY, Philippine Corporate. Law, supra at 808).

Q: What are the modes of corporate dissolution?

ANS: A corporation formed or organized under the provisions of this Code may be
dissolved voluntarily or involuntarily (R€C, Sec. 133).
op1
Q: What are the methods of voluntary corporate dissolution? (EV-JAS)
ANS: The methods of voluntary corporate dissolution are: Pol
1. Expiration of the original term (RCC, Sec. 11, par. 2);
2. Vote of the board of directors or trustees and the stockholders or members
where NO Creditors are affected (RCC, Sec: 134);
3. Judgment of the SEC after hearing of petition for voluntary dissolution where
creditors are affected (RCC, Sec. 135)
4. Amending the AQI to shorten the corporate, term (RCC, Sec 136); or
5. In the case of a corporation Sole, by submitting to the SEC a veri ed declaration
of dissolution for approval (RCC, Sec: 143) *

Q: How may a voluntary dissolution be effected where no creditors are affected?

ANS: If dissolution of a corporation does not prejudice the rights of any creditor having a
claim against it, the dissolution may be effected by:
1. A majority vote of the board of directors or trustees to dissolve and call for a
stockholders' or members' meeting to adopt a resolution for dissolution;
2. At least 20 days prior to the meeting, notices shall be given to each shareholder
or member of record and shall state the purpose of the meeting is to vote on the
dissolution of the corporation;
3. The notice of meeting shall be published once prior to the date of the meeting
in a newspaper published in the place where the principal of ce of the
corporation is located;
4. The resolution to dissolve must be adopted by the af rmative vote of the
stockholders owning at least majority of the outstanding capital stock or majority
of the members of a meeting called by the directors or trustees;
5. The corporation shall le and submit the following to the SEC:
a. A veri ed request for dissolution;
b. A copy of the resolution authorizing the dissolution, certi ed by a majority
of the board of directors or trustees and countersigned by the secretary
of the corporation;
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c. Proof of publication; and

d Favorable recommendation from the appropriate regulatory agency,
when necessary;
6 Within 15 days from receipt of the veri ed request for dissolution, and in the
absence of any withdrawal, the SEC shall approve the request and issue the
certi cate of dissolution (RCC, Sec. 134).

Q: How may a voluntary dissolution be effected where creditors are affected?

ANS: Where the dissolution of a corporation may prejudice the rights of any creditor, the
dissolution may be effected by:
1. Filing with the SEC veri ed petition for dissolution signed by a majority of the
corporation's board of directors or trustees, and veri ed by its president or
secretary;
2. The petition shall set forth:
a. All claims and demands against it;
b. That its dissolution was resolved upon by the af rmative vote of the
stockholders representing at least 2/3 of the outstanding capital stock or
at least 2/3 of the members at a meeting of its stockholders or members
called for that purpose;
C. The reason for the dissolution; COMMERCIAL LAW

d. Formalities of the given notices; and

e. The manner in which the vote was made;
3. The corporation shall submit the following to the SEC:
a. A copy of the resolution authorizing the dissolution, certi ed by a majority
of the board of directors or trustees and countersigned by the secretary
of the corporation, and
b. A list of all its creditors;
c. If the SEC nds the petition suf cient in form and substance, it shall by
an order, x a deadline for ling objections to the petition which date shall
not be less than 30 days nor more than 60 days after the entry of such
order,
d. A copy of the order shall be published at least once a week for 3
consecutive weeks in a newspaper of general circulation published in the
place where the principal of ce of the corporation is situated;
e. Upon 5 days' notice following the date on which the right to le objections
has expired, the SEC shall hear the petition and render judgment
dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and
pay the debts of the corporation;
f. The SEC shall issue a certi cate of dissolution (RCC, Sec. 135).

Q: When does voluntary dissolution take effect?

ANS: In both cases where creditors are affected or not, voluntary dissolution shall take
effect only of upon issuance by the SEC of the certi cate of dissolution (RCC, Sec. 134 &
135).

Q: How is a corporation dissolved by shortening the corporate term?

ANS: The dissolution may be effected by amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of the RCC (RCC, Sec. 136).

Q: When is the corporation deemed dissolved when the corporate term is

shortened?
ANS: The corporation shall be deemed dissolved without any further proceedings, subject
to provisions on liquidation, upon the expiration of the shortened term as stated in the
approved amended articles of incorporation. In the case of expiration of corporate term,
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dissolution shall automatically take effect on the day following the last day of the corporate
term stated in the articles of incorporation, without need for the issuance by the SEC of a
certi cate of dissolution (RCC, Sec. 136).

Q: How is withdrawal of request for dissolution made where no creditors of the

corporation are affected?
ANS: A withdrawal of the request for dissolution shall be:
1. Made in writing;
2. Duly veri ed by any incorporator, director, trustee, shareholder or member;
3. Signed by the same number of incorporators, directors, trustees, shareholders,
or members necessary to request for dissolution; and
4. Submitted no later than 15 days from receipt by the SEC of the request for
dissolution (RCC, Sec. 137, par. 1).

Q: How is the withdrawal of petition for dissolution made where creditors of the
corporation are affected?
ANS: A withdrawal of the petition for dissolution shall be in the form of a motion and similar
in substance to a withdrawal of request for dissolution but shall be veri ed and led prior
EO the publication of the order setting the deadline for ing objections to the petition (RCC,

Sec. 137, par. 2).

Q: How is a corporation dissolved involuntarily?

ANS: A corporation may be dissolved involuntarily by the SEC motu proprio or upon ling
a veri ed complaint by any interested party (RCC, Sec. 138),
ID
Q: What are the grounds for involuntary dissolution? (NI-OFF)
ANS: The following may be grounds for dissolution of a corporation:
1. Non-use of corporate charter..
2. Continuous Inoperation of a corporation; /
3. Upon receipt of a lawful court Order dissolving the corporation;
4. Upon nding by nal judgment that the corporation procured its incorporation
through Fraud; and SOr
5. Upon nding by Final judgment that the corporation.
a. Was created for the purpose of committing, concealing or aiding the
commission of securities/violation, smuggling, tax evasion, money
laundering, or graft and corrupt practices;
b. Committed or aided in the commission of such acts, and its stockholders
knew of the same;
C. Repeatedly and knowingly tolerated the commission of graft and corrupt
practices or other fraudulent or illegal acts by its directors, trustees,
of cers, or employees (RCC, Sec. 138).

Q: What is liquidation?
ANS: Liquidation involves the winding up of the affairs of the corporation, which means
the collection of all assets, the payment of all its creditors, and the distribution of the
remaining assets, if any, among the stockholders thereof (Majority Stockholders of Ruby
Industrial Corp. v. Lim, G.R. No. 165887, June 06, 2011).

It is the process by which all the assets of the corporation are converted into liquid assets
(cash) in order tO facilitate the payment of obligations to creditors, and the remaining
balance, if any, is to be distributed to the stockholders or members (AQUINO & AQUINO,
Revised Corporation Code, supra at 880).
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Q: What are the methods of corporate liquidation? (BoT-MaRe)

ANS: Corporate liquidation may be done through the following means:
1. By the corporation itself through its Board of directors or trustees (RCC, Sec.
139, par. 1);
2. Through a Trustee to whom the corporate assets have been conveyed (RCC,
Sec. 139, par. 2); and
3. By Management committee or rehabilitation Receiver appointed by the SEC
(RCC, Sec. 135, par. 3).

Q: When may the corporation effect its liquidation?

ANS: A corporation shall remain as a body corporate for 3 years after the effective date
of dissolution and may effect liquidation within such period through its board of directors
or trustees (RCC, Sec. 139).

Q: For what purpose may the corporation effect its liquidation?

ANS: The corporation, through its board, may effect liquidation:
1. To prosecute and defend suits by or against it;
2. To settle and close its affairs;
3. To dispose of and convey its property; and
4. To distribute its assets. MV1 TvID::WWoD

Note: However, the corporation cannot continue the business for which it was established
(Ibid).

Q: How is liquidation made through trustees?

s
ANS: At any time during said 3 years after dissolution, the corporation is authorized and
empowered to convey all of its property to trustees for the bene t of stockholders,
members, creditors, and other persons In interest (RCC, Sec. 139, par. 2).

Q: What happens after the corporation conveys its property to a trustee?

ANS: After any such conveyance, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the bene cial interest in the
stockholders, members, creditors or other persons in-interest (RCC, Sec. 139, par. 2).

Q: When may a receiver be appointed to facilitate the liquidation of a corporation?

ANS: In case of voluntary dissolution where creditors are affected, the SEC may, in its
discretion, appoint a receiver to collect the assets of the corporation and pay the debts of
the corporation (Sec. 135, par. 3).

A receiver may be appointed whenever necessary in order In to preserve the rights of the
parties-litigants and/or protect the interest of the investing public and creditors. The SEC
may also appoint a rehabilitation receiver in appropriate cases (P.D. No. 902-A as
amended by P.D. No. 1799 otherwise known as "SEC Reorganization Act", Sec. 6(c)
[hereinafter SRA]).

Q: When may a management committee be appointed to facilitate the liquidation of

a corporation?
ANS: A management committee may be created and appointed upon petition or motu
propio to undertake the management of corporations, partnerships or other associations
not supervised or regulated by other government agencies in appropriate cases when
there is imminent danger of dissipation, loss, wastage or destruction of assets or other
properties of paralyzation of business operations of such corporations or entities which
may be prejudicial to the interest of minority stockholders, parties-litigants or the general
public (SRA, Sec. 6(d)).
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Q: What is the consequence of the appointment of a management committee or

rehabilitation receiver?
ANS: Upon appointment of a management committee, rehabilitation receiver, board or
body, pursuant to this Decree, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board
or body shall be suspended accordingly (SRA, Sec. 6(c)).

Q: What is the power of the management committee or rehabilitation receiver?

ANS: The management committee or rehabilitation receiver, board or body shall have the
power to take custody of, and control over, all the existing assets and property of such
entities under management.

The SEC may, on the basis of the ndings and recommendation of the management
committee, or rehabilitation receiver, or on its Own ndings, determine that the
continuance in business of such corporation or entity would not be feasible or pro table
nor work to the best interest of the stockholders, parties-litigants, creditors, or the general
public, order the dissolution of such corporation entity and its remaining assets liquidated
accordingly (SRA, Sec. 6(d)).

Q: In what instance may liquidation be effected even after the three-year period?
ANS: If a trustee has been designated, the trustee may continue to prosecute case
commenced by the corporation within 3 years from its dissolution until rendition of the nal
judgment, even if such judgment is rendered beyond the 3-year period allowed by Section

cannot initiate a suit after the lapseEN a

122 (now Sec. 139) of the Corporation Code. However, an already defunct corporation
of the said three-year period.

If the corporation had already pending actions at the time that its corporate existence was
terminated (as compared to actions commenced within the 3-year period), the board of
directors or trustees (in the absence of a trustee designated) may be permitted to so
continue as "trustees" by legal implication to complete the corporate liquidation even after
the lapse of the three year period (Alabang Development Corp, v. Alabang Hills Village
Association, G.R. No. 187456, June 2, 2014)
praye
is There is no time limit within which the trustees must complete a liquidation placed in their
hands. It is provided only that the conveyance to the trustees must be made within the
three-year period (Clemente v. CA, G:R. No. 82407, March 27, 1995).

Q: What happens when the person to whom an asset is distributable is unknown or

cannot be found?
ANS: Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member who is unknown or cannot be found shall be escheated in favor
of the national government (RCC, Sec. 139, par. 3).

_I. FOREIGN CORPORATIONS

Q: What is a foreign corporation?
ANS: A foreign corporation is one formed, organized or existing under laws other than
the Philippines' and whose laws allow Filipino citizens and corporations to do business in
its own country or State (RCC, Sec. 140).

Q: What are the bases of authority over foreign corporations?

ANS: The bases of authority over foreign corporations are:
1. Consent (RCC, Sec. 140); and
2. Doctrine of doing business (RCC, Sec. 146).
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PERSONALITY TO SUE AND SUABILITY

Q: What are the principles on the personality of a foreign corporation to sue?

ANS: The principles regarding the right of a foreign corporation to bring suit in Philippine in
courts are:
1. If a foreign corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts;
2. 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;
3. If a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation's corporate personality in a
suit brought before Philippine courts; and
4 If a foreign corporation does business n the Philippines with the required
license, it can sue before Philippine courts on any transaction (Agilent
Technologies Singapore v. Integrated Silicon Technology Phil. Corp., G.R. No.
154618, April 14, 2004).
MYT TYISJEWWOS

Q: When may a foreign corporation be sued in the Philippines?

ANS: A foreign corporation transacting business in the Philippines, whether or not with a
license, may be sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine laws (RCC, Sec. 146
& 150).

Q: When may an unlicensed foreign corporation be allowed to sue?

ANS: A foreign corporation needs no license to sue before Philippine courts on an isolated
transaction.

The phrase "isolated transaction" refers to a transaction or series of transactions set apart
from the common business of a foreign enterprise in the sense that there is no intention
to engage in a progressive pursuit of the purpose and object of the business organization
(Lorenzo Shipping Corp. v. Chubb and Sons, Inc., G. Ra No. 147724, 8, June 8, 2004).

Q: What are the instances when unlicensed foreign corporations may be allowed to
sue?
ANS: The following are the instances when an unlicensed foreign corporation may be
in allowed to sue in the Philippines courts.
1. To seek redress for an isolated business transaction;
2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction;
4. When the parties have contractually stipulated that the Philippines is the venue
of actions; and
5. When the party sued is barred by the principle of estoppel and/or principle of
unjust enrichment from questioning the capacity of the foreign corporation (2
VILLANUEVA-CASTRO, Commercial Law Recap, supra at 242).

Q: What is an isolated transaction?

ANS: The Court has not construed the term "isolated transaction" to literally mean "one"
or a mere single act. The phrase "isolated transaction" has a de nite and xed 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 intention to engage in progressive pursuit of the
purpose and object of the business organization (Lorenzo Shipping Corp. v. Chubb and
Sons, Inc., G.R. No. 147724, June 8, 2004).
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FOREIGN INVESTMENTS ACT - R.A. NO. 7042, as amended by R.A. No.

11647

Q: What are the laws applicable to a foreign corporation lawfully doing business in
the Philippines?
ANS: A foreign corporation lawfully doing business in the Philippines shall be bound by
all laws, rules and regulations applicable to domestic corporations of the same class
(RCC, Sec. 140).

Note: This rule shall not apply with respect to the creation, formation, organization or
dissolution of corporations or to those which x the relations, liabilities, responsibilities, or
duties of stockholders, members, or of cers of corporations to each other or to the
corporation (RCC, Sec. 140).

Doing Business in the Philippines

Q: What acts of a foreign corporation are included in the phrase "doing business"
in the Philippines?
ANS: The phrase "doing business" shall include:
1. Soliciting orders, service contracts, opening of ces, whether called "liaison"
of ces or branches;

D
2. Appointing representatives or distributors domiciled .in the Philippines or who in
any calendar year stay in the country for a period or periods totaling 180 days
or more;
3. Participating in the management;" "supervision or control of any domestic
business, rm, entity or corporation in the Philippines; and
4 Any other actor 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

A
organization (R.A. No. 7042 also known as Foreign Investments Act as
amended, Sec, 3(d), [hereinafter FIA])N O
Q: What are the test on whether foreign corporatión is doing business in the
Philippines?
ANS: The tests to determine on whether a corporation is doing business in the Philippines
are:
1. Substance test - Whether the foreign corporation is maintaining or continuing or
in the Philippines the body or substance of the business for which it was
organized or whether it has substantially retired from it and turned t over
another; and
2. Continuity test Whether there is continuity of commercial dealings and
arrangements, contemplating to some extent the performance of acts or works
or the exercise of some functions normally incident to and In progressive
prosecution of, the purpose and object of its organization (Agilent Technologies
Singapore v. Integrated Silicon Technology Phil. Corp., G.R. No. 154618, April
14, 2004).

Q: What acts of a foreign corporation do not constitute as "doing business" in the

Philippines?
ANS: The Implementing Rules and Regulations (IRR) of the FIA recognizes the following
acts as NOT constituting "doing business" in the Philippines:
1. Mere investment as a shareholder in a domestic corporation and/or the exercise
of rights as such investor;
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2. Appointing a representative a or distributor domiciled in the Philippines which

transacts business in its own name and for its own account;
3. Publication of a general advertisement through any print or broadcast media;
4. Maintaining a Stock of goods in the Philippines solely for the purpose of having
the same processed by another entity in the Philippines;
5. Having a nominee Director or of cer to represent its interest in such corporation;
6. Consignment by the foreign corporation of equipment with local company to
be used in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which are
not on a continuing basis (IRR of FIA, Sec. 1).

The mere ownership by a foreign corporation of a property in certain state,

unaccompanied by its active use in furtherance of the business for which it was formed,
is insuf cient in itself to constitute 'doing business" (MR Holdings Ltd. v. Bajar, G.R. No. V.
138104, April 11, 2002).

Q: When is the consent to transact business in the Philippines obtained by a foreign

corporation?
ANS: A foreign corporation shall have the right to transact business in the Philippines
MUTTVIO¿3WWOD

after obtaining a license for that purpose in accordance with the RCC and a certi cate of
authority from the appropriate government agency (RCC, Sec, 140).

Q: What are the requisites for issuance of a license? (LAOS-SA)

ANS: The requisites for issuance of a license are:
1. An application for License under oath;
2. A copy of its AO1 and by-laws, certi ed in accordance with law, and their
translation to an of cial language of the Philippines, if necessary;
3. Attached to the application for license shall be a duly executed Certi cate under
oath by the authorized of cial, attesting to the fact that the laws of the country
allow Filipino citizens and corporations to do business therein;
4. The application shall be accompanied. by a Statement under oath of the
President of the corporation, showing that applicant is solvent and in sound
nancial condition, and stating its assets and liabilities as of the date not
exceeding year immediately prior to the ling of the application;
5. Corporations governed by Special laws (such as banks and insurance
companies) shall also submit a previously issued authority from the appropriate
government agency as may be required by law for corporations in its line of
business (RCC, Sec. 142); and
6. Appointment of a Resident Agent (RCC, Sec. 145).

Q: What are the reasons why a license is necessary?

ANS: The following are the reasons:
1. To place them under the jurisdiction of the courts;
2. To place them in the same footing as domestic corporations;
3. For the protection of the public in dealing with said corporations (2
VILLANUEVA-CASTRO, Commercial Law Recap, supra at 240).

Note: 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 it for the regulation
of its activities in this country (Eriks PTE. Ltd. VS. Court of Appeals, G.R. No. 118843,
February 6, 1997).
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Q: When should a foreign corporation obtain an amended license?

ANS: A foreign corporation authorized to transact business in the Philippines shall obtain
an amended license in the event it changes its corporate name, or desires to pursue other
in or additional purposes in the Philippines (RCC, Sec. 148).

Q: What is a resident agent?

ANS: A resident agent is a resident of the Philippines designated by the corporation, on
whom summons and other legal processes may be served in all actions or other egal
proceedings against such corporation, and consenting that service upon such resident
agent shall be admitted and held as valid as if served upon the duly authorized of cers of
the foreign corporation at its home of ce (RCC, Sec. 145).

Q: Who could be a resident agent?

ANS: The following could be a resident agent
1. An individual, who must be of good moral character and of sound nancial
standing, residing in the Philippines; or
2. A domestic corporation lawfully transacting business in the Philippines
designated in a written power of attorney by a foreign corporation authorized to
do business in the Philippines (ROC, Sec. 144).

Q: What are the grounds for revocation of the license to transact business in the
Philippines? (AR-CAMOLO)
ANS: The grounds for revocation of license are
1. Failure to le its Annual report of pay any fees as required by the Code;
2. Failure to appoint and maintain a Resident agent in the Philippines;
3. Failure, after Change of its resident agent or address, to submit to the SEC a
statement of such change; Tot raZz 88
4. Failure to submit to the SEC an authenticated copy of any Amendment to its
articles of incorporation or bylaws or of any articles of merger or consolidation
within the time prescribed; G
5. A Misrepresentation of any material matter in any application, report, af davit or
other document submitted by such corporation;
6. Failure to Pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines Outside of the purpose or purposes for
which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting on behalf of any
foreign corporation or entity not duly Licensed to do business in the Philippines;
or
9. Any other ground as would render it Un t to transact business in the Philippines
(RCC, Sec. 151).

Q: How does the doctrine of estoppel apply to of foreign corporations?

ANS: The doctrine of estoppel states that the other contracting party may no longer
challenge the foreign corporation's personality after acknowledging the same by entering
into a contract with it. This principle is applied in order to "prevent a person (or another
corporation) contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chie y in cases where such person has received the
bene ts of the contract" (Magna Ready Mix Concrete v. Andersen Bjornstad Kane
Jacobs, Inc., G.R. No. 196158, January 20, 2021).
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Registration Requirement -R.A. No. 7042 as amended

Q: What is the Registration Requirement for Investments of Non-Philippine
Nationals?
ANS: Without need of prior approval, a non-Philippine national, and not otherwise
disquali ed by law may, upon registration with the Securities and Exchange Commission
(SEC), or the DTI in the case of single proprietorships, do business as de ned in Section
3(d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its
capital, unless participation of non-Philippine nationals in the enterprise is prohibited or
limited to a smaller percentage by existing law and/or under the provisions of this Act (FIA,
Sec. 5. as amended).

Nationalized Activities and the Negative List

Q: What is Foreign Investments Negative List?
ANS: The "Foreign Investments Negative List" or "Negative List" refers to the to list of areas
of economic activity whose foreign ownership is limited to a maximum of 40% of the equity
capital of the enterprises engaged therein (I| DIVINA, Divina on Commercial Law: A
Comprehensive Guide, supra at 453),
COMMERCIAL LAW

Q: What are the component lists of the 12 Foreign Investment Negative List?
ANS: The Foreign Investment Negative List is divided into two (2) component lists:
1. List A- which enumerates the areas of activities reserved to Philippine nationals
by mandate of the Constitution and speci c laws; and
2. List B- which contains the areas of activities and enterprises regulated pursuant
to law for reasons of security. defense, risk to health and morals, and protection
tO small and medium-scale enterprises (FIA, Sec. 8, as amended)

List A
Foreign Ownership is limited by mandate of the Constitution and Speci c
Laws

1. Mass media, except recording and internet business;

2. Practice of professions, including radiologic and x-ray
technology, criminology; law, and marine deck of cers and
marine engine of cers, subject to the Annex on Professions
indicating the professions where (a) foreigners are allowed to
practice in the Philippines subject to reciprocity; and (b) where
corporate practice is allowed. Foreigners may teach at higher
education levels, provided the subject being taught is not a
100% professional subject (i.e., included in a government board or
Filipino; No bar examination);
Foreign 3. Retail trade enterprises with paid-up capital of less than
Equity Php25 million.
4. Cooperatives unless investments of former natural born
citizens of the Philippines;
5. Organization and operation of private detective, watchmen or
security guards agencies;
6. Small-scale mining;
7. Utilization of marine resources in archipelagic waters,
territorial sea and exclusive economic zone;
8. Ownership, operation, and management of cockpits;
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List A
Foreign Ownership is limited by mandate of the Constitution and Speci c
Laws

9. Manufacture, repair, stockpiling, and distribution of nuclear

weapons;
10. Manufacture, repair, stockpiling, and/or distribution of
biological, chemical, and radiological weapons, and anti-
personnel mines; and
11. Manufacture of recrackers and other pyrotechnic devices.

Up to 25% 1. Private recruitment, whether for local or overseas employment;

Foreign and
Equity 2. Contracts for the construction of defense-related structures.

Up to 30%
Foreign Advertising
Equity

1. Procurement of infrastructure and development of natural

resources;
2. Exploration, development, and utilization of natural
resources;
3. Ownership of private lands, except for natural-born citizens
who have lost their Philippine citizenship and who have the
legal capacity to enter into a contract under Philippine laws;
4. Operation of public utilities;
5. Educational institutions other than those established by
religious groups and mission boards, foreign diplomatic
Up to 40%
personnel and their dependents, and other foreign temporary
Foreign residents or for short-term high-level skills development that
Equity do not form part of the formal education system;
6. Culture, production, milling, processing, trading except
retailing, of rice and corn and acquiring, by barter, purchase
or otherwise, rice and corn and the byproducts thereof;
7. Contracts for the supply of materials, goods and commodities
to government-owned or controlled corporation, company,
agency or municipal corporation;
8. Operation of deep-sea commercial shing vessels;
9. Ownership of condominium units; and
10. Private radio communications network.

List B
Foreign Ownership is Limited by Reasons of Security, Defense, Risk to
Health and Morals and Protection of Small and Medium Scale Enterprise

Manufacture, repair, storage, and/or distribution of products

and/or ingredients requiring Philippine National Police
clearance;
2 Manufacture and distribution of dangerous drugs;
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List A
Foreign Ownership is limited by mandate of the Constitution and Speci c
Laws

3. Sauna and steam bathhouses, massage clinics and other

like activities regulated by law because of risks posed to
public health and morals, except wellness centers;
4. All forms of gambling except those covered by investment
agreements with the state-run Philippine Amusement and
Up to 40% Gaming Corp.;
Foreign 5 Micro and small domestic market enterprises with paid-in
Equity equity capital of less than the equivalent of USD200,000.
6. Micro and small domestic market enterprises:
a. That involve advanced technology; or
b. Are endorsed as startup or startup enablers by state
agencies; or
C. Those whose majority of direct employees were
Filipinos provided that their employees should not be MVTIVISEWWO?

less than fteen (15), and with a paid-up equity capital

of less than the equivalent of USD 100,000.

(Executive Order No. 175, Series of 2022, The Twelfth Regular Foreign Investment
Negative List)

PARTNERSHIP

A. GENERAL PROVISION
DEFINITION

Q: What is a "partnership"?
ANS: By a contract of partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the pro ts
among themselves (C/VIL CODE, Art. 1767).

Q: What are the elements of partnership?

ANS: The following are the elements of partnership;
1. An agreement to contribute money, property or industry to a common fund; and a
2. Intent to divide the pro ts among the contracting parties (Jarantilla, Jr. v.
Jarantilla, G.R. No. 154486, December 1, 2010).

Q: What are the characteristics of a partnership? (P3C3BON)

ANS: The characteristics of a partnership are as follows:
1. Principal does not depend for its existence on other contracts:
2. Preparatory - entered as means to an end;
3. Pro t-oriented - purpose is for pro t and not just common enjoyment;
4. Commutative - undertaking of each one is considered equal with the others;
5. Consensual - perfected by mere consent;
6. Capable of suit endowed with legal personality unless it is an unlawful
partnership. It can sue and be sued;
7. Bilateral - entered by two or more persons and the rights and obligations arising
therefrom are always reciprocal;
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B. Onerous - certain contributions have to be made; and

9. Nominate has a special designation in law (DE LEON & DE LEON JR.,
Comments and Cases on Partnership, Agency, and Trusts (2019), p. 11-12
[hereinafter, DE LEON & DE LEON JR., Partnership, Agency & Trusts];
PINEDA, Partnership, Agency, & Trust (2006) p. 8-9 [hereinafter PINEDA,
Partnership Agency & Trusts|).

Q: What are the essential features of partnership?

ANS: The following are the essential features of a partnership contract:
1. There must be a valid contract;
2. The parties (two or more persons) must have legal capacity to enter into the
contract;
3. There must be a mutual contribution of money, property, or industry to a
common fund;
4. Object must be lawful (CIVIL CODE, Art. 1770);
5. Primary purpose must be to obtain pro ts and to divide the same among the
parties (DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 13-
14).
N
Q: Enumerate the parties who cannot give consent to contract of partnership.
(MIDCIP)
ANS: The following CANNOT give their consent to a contract of partnership:
1. Unemancipated Minors; 10)
Insane or demented persons;
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3. Deaf-mutes who do not-know how to write ,;™ o
4. Persons who are suffering from Civil interdiction;
5. Incompetents who are under guardianship (DE LEON & DE LEON JR.,
Partnership, Agency & Trusts, supra.at.17), and
6. Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership (CIVIL CODE, Art. 1782).

Q: Who are the persons prohibited from giving donation to each other and from
engaging in universal partnership? (MaCoPa-CP)
ANS: These persons are:
1. Legally Married spouses (FAMILY CODE, Art. 87);
2. Common-law spouses (FAMILY CODE, Art. 87);
3. Parties guilty of adultery or concubinage at the time of donation (CIVIL CODE,
Art. 739, par. 1);
4. Between persons found guilty of the same Criminal offense, in consideration
thereof (CIVIL CODE, Art. 739, par. 2); and
5. Person and a public of cer, or his wife, descendants, and ascendants, by reason
of his of ce (CIVIL CODE, Art. 739, par. 3). .

Q: What are the different kinds of partners?

ANS: The following are the different kinds of partners:
1. As to Membership:
a. Real partner - one who is really a contributing member of an existing
legal partnership like a general, limited, or industrial partner; or
b. Partner by estoppel or quasi-partner - one who iS not really partner
but represents himself as one.
2. As to Liability:
a. General Partner - his liability to third persons extends to his separate
property when assets had been exhausted; or
b. Limited Partner - liable to third persons only to the extent of his
contribution.
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3 As to the Nature of Contribution:

a. Capitalist Partner - contributes capital (money or property); or
b. Industrial Partner - contributes industry or labor.
4. As to Exposure to Public Perception:
a. Ostensible Partner - one who takes active part and known to the public
as a partner in the business, whether or not he has actual interest in the
rm;
b. Silent Partner - participates in the pro ts and losses of the rm but does
not take any active part in the partnership although may be known as
partner;
C. Secret Partner - participates in the pro ts and losses of the rm but is
not publicly known as a partner; or
d. Dormant Partner - does NOT take an active part in the business of the
rm and NOT publicly known as a partner (PINEDA, Partnership Agency
& Trusts).

RULES TO DETERMINE EXISTENCE

Q: What are the rules in determining the existence of a partnership? (NCR-S) MYTIVIOHENWOO

ANS: The rules in determining the existence of a partnership are as follows:

1. General Rule: Persons who are Not partners as to each other are not partners
as to third persons (C/VIL CODE, Ad. 1769, par. Up

Exception: Partnership by estoppel (CIVIL CODE, Art. 1825)

2. Co-ownership or co-possession of a property does not of itself establish a

partnership, whether such co-ownership or co-possessors do or do not share
any pro ts made by the use of the property (CIVIL CODE, Art. 1769, par. 2);
3. The sharing of gross Returns alone does not of Itsolt establish a partnership, a
whether or not the persons sharing them have a joint or common right or interest
in any property from which the returns are derived (C/VIL CODE, Art. 1769, par.
3); and
4. The receipt by a person of Share of the pro ts of a business is prima facie
evidence that he is a partner in the business (CIVIL CODE, Art. 1769, par. 4).

Q: What is the rule in determining the existence of a partnership when a person a

receives a share of the pro ts in a business? (DIWAC)
ANS: The receipt by a person of a share of the pro ts of a business is prima facie evidence
that he is partner in the business, but no such inference shall be drawn if such pro ts
were received in payment:
1. As a Debt by installments or otherwise;
2. As Interest on a loan, though the amount of payment varies with the pro ts of
the business;
3. As Wages of an employee or rent to a landlord;
4. As an Annuity to a widow or representative of a deceased partner; and
5. As the Consideration for the sale of a goodwill of a business or other property
by installments or otherwise (CIVIL CODE, Art. 1769).
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Q: Colet started working as in caretaker in Bini Beach, which is operated by Sheena.

Colet cleaned, watched, and secured the beach area, cottages, rest house, store,
and other properties in the resort, as well as entertained guests and occupants of
the cottages from a.m. to 9 p.m. every day (inclusive of holidays and weekends)
for an allowance of one thousand pesos (Php. 1,000.00) per week. Later on, Maloi,
the sister of Colet, was employed to manage the store in 2007 for P1,000.00 a week
and entitled to 15% commission on the rentals collected from the cottages and rest
house. Few years later on, Sheena noti ed Colet and Maloi that she will be leasing
Bini Beach because the business was not pro table, thus their services are no
longer needed. Due to this Colet and Maloi, no longer reported for work and
subsequently led a complaint asserting that they were illegally dismissed and
deprived of procedural due process. Sheena denied employment relationship with
Colet and Maloi and asserted that they were her industrial partners alleging that the
complainants receive their share on the pro ts of the Beach. Is Sheena correct?
ANS: No, it is beyond dispute that receipt by a person of share in the pro ts of a business
does not by itself establish the existence of a partnership, if the amounts are received as
wages of an employee. Neither does the sharing of gross returns establish partnership,
most especially, in light of the absence of the any other evidence to establish the
existence of the partnership. The existence of a partnership is established when it is
shown that: (1) two or more persons bind themselves to contribute money, property, or
industry to a common fund; and (2) they intend to divide the pro ts among themselves,
however, as in this case, there is no clear indication that the parties agreed to contribute

n
money, property or industry to engage in particular business (Dusol v. Lazo, G.R. No.
200555, July 20, 2021; Lopez Case).

SEPARATE PERSONALITY
E
Q: Is the Doctrine of Separate Juridical Personality applicable to partnership?
ANS: Yes, the partnership has a Juridical personality separate and distinct from that of
each of partners, even in case of failure to comply with the requirements of Article 1772,
rst paragraph (C/VIL CODE, Art. 1768):

PARTNERSHIP BY ESTOPPEL
G: What is a "partnership by estopper2/1 ANY/
ANS: A partnership by estoppel arises when a person, by words spoken or by conduct,
represents himself, or consents to another representing him to anyone, as a partner in an
existing partnership or with one or more persons not actual partners, he is liable to any
such persons to whom such representation has been made, who has, on the faith of such
representation given credit to the actual or apparent partnership (CIVIL CODE, Art. 1825).

Q: What are the requisites to make a person liable as a partner by estoppel? (RTC)
In ANS: In order to make a person liable as a partner by estoppel, the following requisites
must be present:
1. The person must Represent himself, or consent to another representing him to
anyone, as a partner in an existing partnership or with one or more persons not
actual partners;
2. The representation has been made to a Third person; and
3. On the faith of such representation, the third person has given Credit to the
actual or apparent partnership (CIVIL CODE, Art. 1825).

Note: No real partnership is created by estoppel. Article 1825 does not create or establish
a real partnership as between the alleged partners (DE LEON & DE LEON JR.,
Partnership, Agency & Trusts, supra at 198).
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Note: This is a case of partnership by estoppel composed of the alleged partner and the
partnership itself (PINEDA, Partnership Agency & Trusts supra at 143).

Q: What are the rules in determining the liability of consenting partners in different
scenarios of partnerships by estoppel?
ANS: The following are the rules in determining the liability of consenting partners in
different scenarios of partnership by estoppel:

RULES IN DETERMINING THE LIABILITY OF CONSENTING PARTNERS

Scenario Rule

An existing partnership exists

and all partners consented to A partnership by estoppel is created and the rules
the representation on partnership apply.

An existing partnership exists

and some of the partners The liability are as follows:
consented to the 1. Person who represented himself to be a
representation partner is liable; and MUTTVIOdEWWOO

2. All those who consented to the representation

No existing partnership but all shall be liable with the person who
the partners consented to the represented himself as partner pro rata.
representation
No existing partnership but Separate liability is created against those who
some of the partners consented.
consented

No existing partnership and

The liability arises only for the person who
represented himself as a partner. (DE LEON & DE &
none of the partners
LEON JR., Partnership, Agency & Trusts, supra at
consented 199)

KINDS OF PARTNERSHIP

Q: What are the kinds of partnership according to its object?

ANS: The following are the kinds of partnership according to its object:
1. Universal partnership - may refer to all the present property or to all the pro ts
(CIVIL CODE, Art. 1777); and
2. Particular partnership - has for its object determinate things, their use or fruits,
or a speci c undertaking, or the exercise of a or profession or vocation (CIVIL
CODE, Art. 1783).

Q: What is a "universal partnership of all present property"?

ANS: A universal partnership of all present property is that in which the partners contribute
all the property which actually belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the pro ts which they may acquire
therewith (CIVIL CODE, Art. 1778).

Q: What is a "universal partnership of pro ts"?

It ANS: It comprises all that the partners may acquire by their industry or work during the
existence of the partnership. The movable or immovable property which each of the
partners may possess at the time of the celebration of the contract shall continue to pertain
exclusively to each, only the usufruct passing to the partnership (CIVIL CODE, Art. 1780).
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Q: What comprises a partner's contribution in a contract of partnership?

ANS: A partner's contribution can be money, property, or industry, or any combination
thereof.

Note: In a partnership, it is necessary to prove that there was a contribution of money,

property, or industry to a common fund made by two or more persons with the intention
of dividing the pro ts obtained therefrom among themselves (CIVIL CODE, Art. 1767).

Q: May the delivery of checks, drafts, or promissory notes payable to order be

considered as contributions of money?
ANS: No. They are only representatives of money and produce the effect of payment only
when they have been cashed. Accordingly, there is no contribution of money until they
have been cashed (CIVIL CODE, Art. 1249 par. 2).

Q: What are the effects of an unlawful partnership formed for an unlawful purpose?
(VD-PIC)
ANS: The effects of an unlawful partnership formed for an unlawful purpose are the
following:
1. The contract is Void ab initio;
2. Neither partner has the right to require Division of the pro ts, if any;
3. The Pro ts shall'be con scated in favor of the government;
4. The Instruments or tools and proceeds of the crime shall be forfeited in favor of
the government; and
5. The Contributions of the partners shall not be con scated unless they fall under
No. 3 (DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 59).

Q: What are the rules on the formalities required in constituting a partnership?

ANS: Generally, a partnership may be constituted in any form (CIVIL CODE, Art. 1771).
However, under the following instances, the law requires a proper form in order for there
to be a partnership:
1. In case of a limited partnership, it is required that the contracting parties execute
a certi cate of limited partnership which must be recorded in the Of ce of the
Securities and Exchange Commission (CIVIL CODE, Art. 1844). The said
formality should be complied with; otherwise, there is no limited partnership but
only a general one;
2. In cases where immovable property or real rights are contributed, regardless of
value: (WIR)
a. It must be in Writing in a public instrument (CIVIL CODE, Art. 1771).
b. An Inventory of said property should be made, signed by the parties, and
attached to the public instrument, otherwise the contract of partnership
is void; and
C. It must be Recorded with the Register of Deeds where the immovable is
located to bind third persons; and
3 In cases where personal property is contributed:
a. If capital is less than P3,000, no special form is required for its validity or
existence (CIVIL CODE, Art. 1772); or
b. Where the contract of partnership has a capital of P3,000 or more, in
money or property, the same shall appear in a public instrument and
must be recorded in the Of ce of the Securities and Exchange
Commission. However, a partnership has a juridical personality separate
and distinct from each of the partners, even in case of failure to comply
with this requirement (CIVIL CODE, Arts. 1772 and 1768). Article 1358
applies only for the purpose of convenience and not for validity and
enforceability (V-Part I PARAS, Civil Code Annotated: Special Contracts,
(2021), p. 618-619, [hereinafter V-Part | PARAS, Special Contracts|).
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Q: What is a "partnership at will"?

ANS: A partnership that does not x its term is a partnership at will. The birth and life of a
partnership at will is predicated on the mutual desire and consent of the partners. Verily,
any one of the partners may, at his sole pleasure, dictate dissolution of the partnership
at will. He must, however, act in good faith, not that the attendance of bad faith can prevent
it dissolution of the partnership but that it can result in a liability for damages (Ortega v. CA,
G.R. No. 109248, July 3, 1995).

a Q: What is a "joint venture"?

ANS: A joint venture is an association of persons or company jointly undertaking some
commercial enterprise. Venturers generally contribute assets and share risks. t requires
a community of interest in the performance of the subject matter, to right to direct and
govern the policy in connection therewith, and a duty which may be altered to share both
in pro ts and losses (Kilosbayan v. Guingona, G.R. No. 113375, May 5, 1994).

Q: What are the requisites of a "joint venture"? (CRiSP)

ANS: The requisites of a joint venture are the following:
1. A Community of interest in the performance of the subject matter;
2. A Right to direct and govern the policy in connection therewith; and
3. Duty to Share Pro ts and losses (Kilosbayan, Inc., V. Guingona, Jr., G.R. No.
MUTIVISEWWO

113375, May 5, 1994).

Q: Distinguish partnership and joint venture.

ANS: The following are the distinctions:

PARTNERSHIP VS. JOINT VENTURE

Partnership Joint Venture

The partnership has a juridical An American concept similar to our
personality separate and joint account which is sort of an
distinct from that of each of the informal partnership, with no rm
As to Existence partners, even in case of name and no legal personality.
of Legal failure to comply with the
Personality requirements of Art. 1772, rst In a joint account, the participating
paragraph (CIVIL CODE, Art. merchants can transact business
1768). under their own name, and can be
individually liable therefore.

Generally, relates to a Usually, but not necessarily, it is

continuing business of various limited to a single transaction,
transactions of a certain kind. although the business of pursuing
As to the to a successful termination may
Transactions continue for a number of years
(Heirs of Tan Eng Kee v. Court of
Appeals, G.R. No. 126881,
October 3, 2000).

Q: De ne "general professional partnership".

ANS: A general professional partnership is a partnership for the exercise of a profession
(CIVIL CODE, Art. 1767). / "profession" has been de ned as "a group of men pursuing a
learned art as a common calling in the spirit of public service" (DE LEON & DE LEON JR.,
Partnership, Agency & Trusts, supra at 9).
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Note: In a professional partnership, it is the individual partners who are deemed engaged
in the practice of profession and not the partnership. Thus, they are responsible for their
own acts (DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 10).

Q: What are the rules on the management of partnership?

ANS: The following are the rules on management of partnership:
1. When the manner of management has been provided for in the partnership
agreement:
a. When a partner has been appointed manager in the articles of
partnership, he may execute all acts of administration despite the
opposition of his partners, unless he should act in bad faith (CIVIL
CODE, Art. 1800); and
b. When a partner has been appointed as manager after the constitution of
the partnership, power to act may be revoked at any time for any cause
whatsoever (CIVIL CODE, Art. 1800).

2. When two or more managing partners have been entrusted with the
management:
a. Without speci cation of their respective duties and without stipulation
that one of them shall not act without the consent of all the others, each
one may execute all acts of administration.

EXCÉRTIONS; If any such partner should oppose: (i) decision of the

majority (per head) of the managing partners shàll prevail; or (ii) in case
of a tie, decision of the partners haying the controlling interest (holds
more than 50% of capital investment) shall prevail, provided that they
aré also managers (C/VIL CODE, Art. 1801; Y Part / PARAS, Special
Contracts, supra at 649-650) and 9
b.
TOD B L
In case it should, have been stipulated that none of the managing
partners shall act without the consent of the others, the concurrence of
all shall be necessary for the validity of the acts and absence or disability
of any managing partner cannot be alleged /C/VIL CODE, Art. 1802).

EXCEPTION: When there is imminent danger of grave or irreparable

injury to the partnership (CIVIL CODE, Art. 1802).

3. When manner of management has not been agreed upon:

a. All partners shall be considered agents and whatever any one of them
may do alone binds the partnership, without prejudice to the provisions
of Art. 1801 (C/VIL CODE, Art. 1803, Par. 1);
b. None of the partners may, without the consent of others, make any
important alteration in the immovable property of the partnership, even if
it may be useful to the partnership (C/VIL CODE, Art. 1803, Par. 2); and
C. But if the refusal of consent by the other partners is manifestly prejudicial
to the interest of the partnership, the court's intervention may be sought
(CIVIL CODE, Art. 18023, Par. 2).

Q: When does a partnership begin?

ANS: A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated (C/VIL CODE, Art. 1784).
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Q: How long is the duration of a partnership?

ANS: When a partnership for xed term or particular undertaking is continued after the
termination of such term or particular undertaking without any express agreement, the
rights and duties of the partners remain the same as they were at such termination, so far
as is consistent with a partnership at will. A continuation of the business by the partners
or such of them as habitually acted therein during the term, without any settlement or
liquidation of the partnership affairs, is prima facie evidence of a continuation of the
partnership (CIVIL CODE, Art. 1785).

Q: to What happens to the rights and duties of the partners when the partnership is
continued beyond its xed term?
or ANS: When a partnership for a xed term or particular undertaking is continued after the
termination of such term or particular undertaking without any express agreement, the
rights and duties of the partners remain the same as they were at such termination, so far
as is consistent with a partnership at will (C/VIL CODE, Art. 1785, par 1).

B. OBLIGATIONS OF PARTNERS AMONG THEMSELVES

Q: What are the relations created by a contract of partnership? (APTS) MVTIVIDEWWOD

ANS: The relations created by a contract of partnership are as follows:

1. Relations Among the Partners Themselves;
2. Relations of the Partners with the Partnershipi
3. Relations of the Partnership with Third Persons with Whom It Contracts; and
4. Relations of the Partners with Such Third Persons (DE LEON & DE LEON JR.,
Partnership, Agency Trusts, supra at 85).

Q: What are the obligations of the partners? (ConConCo-ADam-CS)

ANS: The obligations of the partners are:
1. To give his Contribution (GIVIL CODE, Arts. 1786, 178810
2. Not to Convert rm money or property for his own use (CIVIL CODE, Art. 1788);
3. Not to engage in unfair Competitian with his own rm (CIVIL CODE, Art. 1808);
4. To Account for and hold as trustee, unauthorized personal pro ts (CIVIL CODE,
Art. 1807);
5. Pay for Damages caused by his own fault /C/VIL CODE, Art. 1794);
6. Duty to Credit to the rm the payment made by a debtor who owes him and the
rm (CIVIL CODE, Art. 1792); and
7. To Share with the other partners the share of the partnership credit which he
has received from an insolvent rm debtor (CIVIL CODE, Art. 1793).

Q: What are the rights of the partners? (PRA3ID)

ANS: The rights of the partners are as follows:
1. Property Rights of a Partner (C/VIL CODE, Art. 1810);
2. Right to Reimbursement for amounts advanced to the partnership and to
indemni cation for in risks in consequence of management (CIVIL CODE, Art.
1796);
3. Right to Associate with another person in his share (C/VIL CODE, Art. 1804);
4. Right of Access and inspection of partnership books (CIVIL CODE, Art. 1805);
5. Right to a formal Account of partnership affairs under certain circumstances
(CIVIL CODE, Art. 1809);
6. Right to demand true and full Information of all things affecting the partnership
(CIVIL CODE, Art. 1806);
7. Right to ask for the Dissolution of the rm at the proper time (CIVIL CODE, Arts.
1830-1831).
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Q: What are the three important duties of every partner with regard to the
contribution of property? (CDE)
ANS: The important duties are:
1. Duty to Contribute what had been promised;
2. Duty to Deliver the fruits of what should have been delivered: and
3. Duty to be bound for warranty in case of Eviction (CIVIL CODE, Art. 1786).

Q: What are the obligations of partners with respect to contribution of money and
money converted to personal use? (CRIP)
ANS: The obligations of the partners as to contribution of money and money converted to
personal use are the following:
1. To Contribute on the date due the amount promised to be given (C/VIL CODE,
Art. 1786);
2. To Reimburse any amount he may have taken from the partnership coffers and
converted to his own personal use (C/VIL CODE, Art. 1788);
3. To Indemnify the partnership for the damages caused to it by the delay in the in
contribution (CIVIL CODE, Art. 1788); and
4. To Pay the agreed or legal interest if he fails to pay in due time (CIVIL CODE.
Art. 1788).

Q: What are the liabilities of an industrial partner?%

ANS: An industrial partner is exempted from losses, (CIVIL CODE, Art. 1797). However,
such exemption is limited only as between or among the partners, Neither on principle nor
on authority can the industrial partner be relieved from liability to third persons for the
debts of the partnership (La Compania Maritima tr. Muñoz, G.R. No. L-3704, December
12, 1907).

Q: Distinguish an industrial partner and a capitalist partner as to their obligation

not to engage in other business for himself;
ANS: The obligation not to engage in other business for himself for Industrial Partner and
Capitalist Partner differ as follows:

INDUSTRIAL PARTNER VS. CAPITALIST PARTNE

Industrial Partner Capitalist Partner

Cannot engage in any business for Cannot engage for their own account in
himself, unless the partnership expressly any operation which is of the kind of
permits him to do so; and if he should do business in which the partnership is
so, the capitalist partners may either engaged, unless there is a stipulation to the
exclude him from the rm, or avail contrary (C/VIL CODE, Art. 1808)
themselves of the bene ts which he may
have obtained in violation of this provision,
with a right to damages in either case
(CIVIL CODE, Art. 1789)

Q: What are the rules when an industrial partner engages in business for himself?
ANS: An industrial partner cannot engage in business for himself, unless the partnership P
expressly permits him to do so; and if he should do so, the capitalist partners may either:
1. Exclude him from the rm; or
2. Avail themselves of the bene ts which he may have obtained.

Note: The partners have a right to damages in either case (CIVIL CODE. Art. 1789).
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Q: What is the remedy when a capitalist partner engages in the same business in
which the partnership is engaged without being authorized by stipulation?
ANS: Any capitalist partner violating this prohibition shall bring to the common funds to any
pro ts accruing to him from his transactions, and shall personally bear all the losses
(CIVIL CODE, Art. 1808).

Q: What is the effect of failure to contribute additional capital in case of imminent

loss of the business of the partnership?
ANS: If there is no agreement to the contrary, in case of an imminent loss of the business
of the partnership, any partner who refuses to contribute an additional share to the capital,
except an industrial partner, to save the venture, shall be obliged to sell his interest to the
other partners (CIVIL CODE, Art. 1791).

Q: What are the rules on the risk of loss of the things contributed?
ANS: The rules on the risk of loss of things contributed are:
1. The risk of speci c and determinate things which are not fungible and
contributed to the partnership so that only their use and fruits may be for the
common bene t, shall be borne by the partner who owns them;
2. If the things contributed are fungible or cannot be kept without deteriorating, the
risk shall be borne by the partnership; COMMERCIAL LAW

3. If the thing contributed is to be sold the risk shall be borne by the partnership;
and
4. If the thing is brought and appraised in the inventory the risk shall be borne by
the partnership (CIVIL CODE, Art. 1795).

Q: How are pro ts and losses distributed among the partners?

ANS: Pro ts and losses of the partnership are distributed as follows:
1. Pro ts are distributed according to agreement; if none, according to amount of
contribution; m
2. Losses are distributed according to agreement;
3. If there is no agreement as to losses, but pro t sharing has been agreed upon,
losses shall be distributed according to the same proportion;
4. If there is no agreement, then losses shall be distributed proportionately
to according to amount contribution; A A le
5. Industrial partner's pro t is such share as may be just and equitable under the
circumstances; and
6. While an industrial partner may be held liable by third persons, he can recover
whatever he has paid from the partners; for he is exempted from losses with or
without stipulation to this effect (CIVIL CODE, Art. 1797; V-Part PARAS,
Special Contracts, supra at 644).

Q: What is the status of a stipulation excluding a partner from pro ts or losses?

ANS: A stipulation which excludes one or more partners from any share in the pro ts or
losses is void (CIVIL CODE, Art. 1799).

Exception: In case of industrial partners whom the law itself excludes from losses (CIVIL
CODE, Art. 1797).

Q: May a partner associate another person with him in his share?

ANS: Yes. Every partner may associate another person with him in his share, but the
associate shall not be admitted in the partnership without the consent of all the other
partners (CIVIL CODE, Art. 1804).
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Q: What is meant by the principle of "delectus personae" in partnership relations?

ANS: The principle refers to the rule which is inherent in every partnership that no one
can become a member of the partnership association without the consent of all the
partners. Consequently, even if a partner will associate another person in his share in the
partnership, the associate shall not be admitted into the partnership without the consent
of all the partners, even if the partner having an associate should be a manager. The
phrase may be literally translated to choice of the person (CIVIL CODE, Art. 1804;
JURADO, Civil Law Reviewer, (2009) p. 1050, [hereinafter JURADO, Civil Law
Reviewer]); DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 15).

Q: TO whom does the partner have the duty to render true and full information of all
things affecting the partnership?
ANS: Partners shall render on demand true and full information of all things affecting the
partnership to any partner or to the legal representative of any deceased partner or of any
partner under legal disability (CIVIL CODE, Art. 1806).

Q: What is the obligation of a partner who derives pro ts from any transaction
connected with the formation, conduct or liquidation of the partnership without the
consent of the other partners?
ANS: Every partner must account to the partnership for any bene t, and hold as trustee
for it any pro ts derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or from
any use by him of its property (CIVIL CODE, Art.
MaN 1807).

Q: What is the obligation of a managing partner who collects debt?

ANS: As a general rule, where a person is separately indebted to the partnership and to
the managing partner at the same time, any sum received by the latter shall be applied to
the two credits in proportion to their amounts even though he may have given receipt for
his own credit only. An exception to the rule is when the partner received it entirely for the
account of the partnership, in which case the whole sum shall be applied to the partnership
credit (C/VIL CODE, Art. 1792).
Q: What is the obligation of the partner who receives his share in partnership
credit? dOpe
ANS: A partner who has received, in whole for in part, his share of a partnership credit,
when the other partners have not collected theirs, shall be obliged, if the debtor should
thereafter become insolvent, to bring to the partnership capital what he received even
though he may have given receipt for his share only (CIVIL CODE, Art. 1793).

Q: What are the distinctions between Art. 1792 and Art. 1793?
ANS: The following are the distinctions:

ART. 1792 vs. ART. 1793

Art. 1792 Art. 1793
Two distinct credits - one in Only one credit - in favor of the
As to Number of favor of the partnership and partnership
Credits another in favor of the
managing partner

As to Applies if the partner is a Applies whether the partner is

Applicability managing partner authorized to manage or not
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Q: What is the obligation of the partner for damages to the partnership?

ANS: Every partner is responsible to the partnership for damages suffered by it through
his fault and he cannot compensate them with the pro ts and bene ts which he may have
earned for the partnership by his industry (CIVIL CODE, Art. 1794).

Q: Who shall manage the partnership?

ANS: The management of the partnership may be vested by agreement in one, or some,
or all of the partners, or even in a third person, either in the articles of partnership or after
the partnership had already been constituted (C/VIL CODE, Arts. 1800, 1801, 1802). If
there is no agreement, it is vested in all of the partners (CIVIL CODE, Art. 1803; JURADO,
Civil Law Reviewer, supra at 1049).

Q: What are the two modes of appointing a manager?

ANS: The two modes of appointing a manager pursuant to Article 1800 are:
1. Appointment in the articles of partnership; and
2. Appointment made in an instrument, other than the articles of partnership or
made orally (V-Part I PARAS, Special Contracts, supra at 645).

Q: What is the effect if a partner has been appointed as manager in the articles of
partnership? A MUTTVISHENWOO

ANS: The partner who has been appointed managed in the articles of partnership may
execute all acts of administration despite the opustion of his partners, unless he should
in act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for such revocation of
power (CIVIL CODE, Art. 1800).

Q: How is a managing partner appointed in the articles of partnership removed?

ANS: The power of the manager is irrevocable without just and lawful cause. Therefore:
1. To remove him for just cause, the vote of the partners representing the

2.
1800 par. 1); or -
controlling interest is necessary for such revocation of power (CIVIL CODE, Art.

To remove him without cause, or for an unjust cause, there must be unanimity
(including his own vote) (5 PARAS, Special Contracts, supra at 645).

Q: What is the effect if a partner has been appointed as manager only after the
partnership has been constituted?
ANS: A power granted after the partnership has been constituted may be revoked at any
time (C/VIL CODE, Art. 1800).

Q: What are the rules when two or more managing partners are entrusted with the
management of the partnership?
ANS: When two or more managing partners are entrusted with the management of the
partnership, the rules are:
1. When the appointment is without speci cation of their respective duties and
without stipulation that one of them shall not act without the consent of all the
others, each one may execute all acts of administration, except that any
partner should oppose:
a. Decision of the majority of the managing partners shall prevail; and
b. In case of a tie, decision of the partners having the controlling interest
shall prevail (CIVIL CODE, Art. 1801);
2. If with stipulation requiring unanimity of action, unanimous consent of all the
managing partners shall be necessary for the validity of the acts and, absence
or disability of any managing partner cannot be alleged, except when there is
an imminent danger of grave or irreparable injury to the partnership (CIVIL
CODE, Art. 1802); or
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3. of When manner of management has not been agreed upon, all partners shall be
considered as managers and agents and unanimous consent is required for
important alteration of immovable property (CIVIL CODE, Art. 1803).

O: What is the obligation to account for any bene t and hold as trustee
unauthorized personal pro ts?
ANS: Every partner must account to the partnership for any bene t, and hold as trustee
it for it any pro ts derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or from
any use by him of its property (C/VIL CODE, Art. 1807).

. PROPERTY RIGHTS OF PARTNERS

Q: What are the property rights of a partner? (SIM)
ANS: The property rights of a partner are the following:
1. His rights in Speci c partnership property;
2. His Interest in the partnership; and
3. His right to participate in the Management (CIVIL CODE, Art. 1810).

Q: What is the nature of a partner's right in speci c partnership property?

e
ANS: A partner does not actually own any part of partnership property or property owned
by the partnership as a separate business entity although he has equal rights with his
partners to possess speci c partnership property (C/VIL CODE, Art. 1811).

Q: What are the Incidents of-co-ownership for speci c partnership property?

(PAAL)
ANS: The rights of a partner in speci c partnership property: Proo
1. Include the right to Possess for partnership purposes. For other purposes, the
8a
possession must be with the consent of the other partners;

is Note: This right is subject to Title IX (Partnership) of the Civil Code and to any agreement
between the partners.
SCENDS V
2. Are not Assignable except in connection with the assignment of rights of all the
partners in the same property; MA
3. Are not subject to Attachment or execution, except on a claim against the
partnership; and
4. Are not subject to Legal support under Art. 291 (now Art. 195 of the Family
Code) (CIVIL CODE, Art. 1811).

Q: What are the obligations of the parties with respect to the contribution of
property? (CoW-DADI)
ANS: The obligations of partners with respect to contribution of property are as follows:
1. To Contribute what had been promised (CIVIL CODE, Art. 1786);
2. To Warrant speci c and determinate property contributed to the partnership in
case of eviction (C/VIL CODE, Art. 1786);
3. To Deliver the fruits of the property from the time they should have been
delivered without the need of any demand (CIVIL CODE, Art. 1786);
4. When contribution is in goods, the amount thereof must be determined by proper
Appraisal of the value thereof at the time of contribution (C/VIL CODE, Art.
1787);
5. To preserve the property with Diligence of a good father a of a family pending
delivery to the partnership (CIVIL CODE, Art. 1163); and
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6. To Indemnify for any interest and damages caused by the retention of the
property or by delay in its obligation to contribute a sum of money (CIVIL CODE,
Arts. 1788 and 1170).

D. OBLIGATION OF PARTNERSHIP/PARTNERS TO THIRD PERSONS:

Q: What is the requirement under the law for a partnership's rm name?
ANS: Every partnership shall operate under a rm name, which may or may not include
the name of one or more of the partners. Those who, not being members of the
partnership, include their names in the rm name, shall be subject to the liability of a
partner (C/VIL CODE, Art. 1815).

Q: What are the rules regarding the liability of partners for partnership obligations?
ANS: The rules as to liability of the partners for partnership obligations are:
1. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the
partnership. However, any partner may enter into a separate obligation to COMMERCIAL LAW

perform a partnership contract (CIVIL CODE, Art. 1816);

Note: The term pro rata must be understood to mean equally or jointly, and not

I
proportionately, because the pro-rating s based on the number of partners and not on the
amount of their contributions (DE LEON & DE LEON JR., Partnership, Agency & Trusts,
supra at 175).

2. A stipulation which excludes one or more partners from any share in the pro ts
or losses is void (CIVIL CODE, Art. 1799). The exception is in case of industrial
partners whom the law itself excludes from losses (CIVIL CODE, Art. 1797);
3. All partners are ljable solidarily with the partnership for everything chargeable to
the partnership under Articles 1822 (wrongful acts or omission of any partner
acting in the ordinary course of business) and 1823 (to make good the loss)
(CIVIL CODE, Art. 1824);
4. A newly admitted partner into an existing partnership is liable for all the
obligations of the partnership arising before his admission but out of partnership
property shares (CIVIL CODE, Art. 1826); and
5. Upon dissolution of the partnership, the partners shall contribute the amounts
necessary to satisfy the partnership liabilities (C/VIL CODE, Art. 1839 (4), (7)).

Q: What are the rules regarding the liability of the partnership for the acts of the
partners?
ANS: The liabilities of the partnership are subject to the following rules: to

LIABILITY OF THE PARTNERSHIP FOR THE ACTS OF PARTNERS

Acts Liability
Apparently Carrying on iS Every partner is an agent and may execute such acts with
in the Usual Way of binding effect even if he has no authority unless the third
Business of the person has knowledge of such lack of authority.
Partnership
Acts Not in the Do not bind the partnership unless authorized by other
Ordinary Course of partners
Business
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Acts Liability
Strict Dominion or Partnership is not bound, unless authorized by all the other
Ownership partners or unless they have abandoned the business

Partnership is not liable to third persons having actual or

In Contravention of a
presumptive knowledge of the restrictions, whether or not
Restriction on
Authority for carrying on in the usual way of business of the
partnership.
(DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 177-179; C/VIL
CODE, Art. 1818)

Q: What are the liabilities of partners to third persons?

ANS: The obligations of the partners are the following:
1. Liability for contractual obligations (CIVIL CODE, Art. 1816);
2. Liability of partnership for acts of partners (CIVIL CODE, Art. 1818).

Q: What is the nature of a partner's obligation for partnership liabilities?

ANS: A partner's obligation for partnership liabilities is subsidiary in nature. They shall
only be liable with their property after all partnership assets have been exhausted. The
subsidiary nature of the partners liability with the partnership is one of the valid defenses
against a premature execution of judgment directed to a partner. As to third persons,
Article 1816 provides that the partners' obligation to third persons with respect to the
partnership liability is pro rata or joint (Guy V. Gacott, G,R. No.: 206147, January 13, 2016).

Q: What is the effect of stipulation against liability?

ANS: Any stipulation against the liability under Art. 1816 of the Civil Code shall be void
except as among the partners (CIVIL CODE, Art. 1817)

Q: What is the effect of an act of partner to the partnership?

ANS: Every partner is an agent of the partnership for the purpose of its business, and the
act of every partner, including the execution in the partnership name of any instrument,
for apparently carrying on in the usual way the business of the partnership of which he is
a member binds the partnership, unless the partner so acting has in fact no authority to
act for the partnership in the particular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority (CIVIL CODE, Art. 1818).

Q: What are the instances where an act of a partner is not binding upon the
partnership?
ANS: An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the other
partners (CIVIL CODE, Art. 1818, par. 2).

is Q: What is the extent of the authority of a partner to act? (ADIC-EAR)

ANS: Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
Assign the partnership property in trust for creditors or on the assignee's
promise to pay the debts of the partnership;
2. Dispose of the good-will of the business;
3. Do any other act which would make it Impossible to carry on the ordinary
business of a partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability;
6. Submit a partnership claim or liability to Arbitration; and
7. Renounce a claim of the partnership.
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Note: No act of a partner in contravention of a restriction on authority shall bind the

partnership to persons having knowledge of the restriction (CIVIL CODE, Art. 1819).

Q: What are the conditions for a an admission of a partner to be considered as an

admission against the partnership?
ANS: An admission by partner is an admission against the partnership under the
following conditions:
1. The admission must concern partnership affairs;
2. Within the scope of his authority (CIVIL CODE, Art. 1820); and
3. Admission was done during the existence of the partnership. (REVISED RULES
ON EVIDENCE. Rule 130, Section 30)

Q: What is the liability of the partnership with regard to the partner's tort or breach
of trust?
ANS: The rules on liability are as follows:
1. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partnership, or
any penalty is incurred, the partnership is liable therefore to the same extent as
the partner so acting or omitting to act (CIVIL CODE, Art. 1822); COMMERCIAL LAW

2. The partnership is bound to make good the loss:

a. Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and
b. Where the partnership in the course of its Business receives money or
property of a third, person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership
(CIVIL CODE, Art. 1823); and
3 All partners are liable solidarily with the partnership for everything chargeable to
the partnership under Articles 1822 and 1823 (CIVIL CODE, Art. 1824).

Q: What is the liability of an incoming partner?

ANS: A person admitted as a partner into tan existing partnership is liable for all the
obligations of the partnership arising before his admission as though he had been a
partner when such obligations were incurred, except that this liability shall be satis ed
only out of partnership property, unless there is a stipulation to the contrary. (CIVIL CODE,
Art. 1826)

Q: What is a Charging Order?

ANS: A "charging order" subjects the interest of the debtor partner in the partnership with
the payment of the unsatis ed amount of judgment secured in favor of separate
creditor. By virtue of such, any amount or portion thereof which the partnership would
otherwise pay to the debtor partner should instead be given to the judgment creditor (DE
LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 166).

Note: This remedy is, however, without prejudice to the preferred rights of partnership
creditors under Article 1827. Thus, the claims of partnership creditors must be satis ed
rst before the separate creditors of the partners can be paid out of the interest charged
(ld. At 166)

E DISSOLUTION AND WINDING UP

Q: De ne "dissolution of a partnership".
ANS: Dissolution is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on, as distinguished from the winding up, of the
business (CIVIL CODE, Art. 1828).
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Q: Does the partnership terminate upon dissolution?

ANS: No. On dissolution, the partnership is not terminated, but continues until the winding
up of partnership affairs is completed (C/VIL CODE, Art. 1829).

Q: De ne the concepts of dissolution, winding up and termination of a partnership.

ANS: The de nitions are as follows:

DISSOLUTION VS WINDING UP vs. TERMINATION

Dissolution Winding Up Termination

The change in the relation The process of settling The point in time after all the
of the partners caused by business affairs after partnership affairs have
any partner ceasing to be dissolution. been wound up (V-Part
associated in the carrying of PARAS, Special Contracts,
the business (CIVIL CODE, supra at 702-703).
Art. 1828); l IS that point of
time when the partners
cease to carry on the
business together.

accounting of the partnership business start to run? 0

Q: When does the 4-year prescriptive period of the right of a partner to demand an

ANS: As long as the partnership exists, any of the partners may demand an accounting
of the partnership business. The prescription of the said right starts to run only upon the
3
dissolution of the partnership when the nal accounting is done (Emnace v. CA, G.R. No.
126334, November 23, 2001)

Q: What are the kinds of dissolution?,

ANS: There are two kinds of dissolution:
1. Extrajudicial (CIVIL CODE, Art. 1830), and
2. Judicial dissolution (CIVIL CODE, Art. 1831),

Q: Enumerate the causes for extrajudicial dissolution. (WovCET-DICiDe)

ANS: The causes for extrajudicial dissolution are:
1. Without violation of the agreement between the partners: (TE3)
a. By the Termination of the de nite term or particular undertaking speci ed
in the agreement;
b. By the Express will of any partner, who must act in good faith, when no
de nite term or particular undertaking is speci ed;
C. By the Express will of all the partners who have not assigned their
interests or suffered them to be charged for their separate debts, either
before or after the termination of any speci ed term or particular
undertaking; or
d. By the Expulsion of any partner from the business bona de in
accordance with such a power conferred by the agreement between the
partners;
2. In Contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision of this
Article, by the express will of any partner at any time;
3. By any Event which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership;
4. When a speci c Thing which a partner had promised to contribute to the
partnership, perishes before the delivery; in any case by the loss of the thing,
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when the partner who contributed it having reserved the ownership thereof, has
only transferred to the partnership the use or enjoyment of the same; but the
partnership shall not be dissolved by the loss of the thing when it occurs after
the partnership has acquired the ownership thereof;
5. By the Death of any partner;
6. By the Insolvency of any partner or of the partnership;
7. By the Civil interdiction of any partner (C/VIL CODE, Art. 1830); and
8. By Decree of court under Article 1831 (CIVIL CODE, Art. 1830).

Q: What are the grounds for judicial dissolution? (12G-BLOP)

ANS: On application by or for a partner, the court shall decree a dissolution whenever:
1. A partner has been declared Insane in any judicial proceeding or is shown to be
of unsound mind;
2. A partner becomes in any other way Incapable of performing his part of the
partnership contract;
3. A partner has been Guilty of such conduct as tends to affect prejudicially the
carrying on of the business;
4. A partner wilfully or persistently commits a Breach of the partnership agreement,
or otherwise so conducts himself in matters relating to the partnership business
that it is not reasonably practicable to carry on the business in partnership with
him;
COMMERCIAL LAW

5. The business of the partnership can only be carried on at a Loss;

6. Other circumstances render a dissolution equitable; and
7. On the application of the Purchaser of a partner's Interest under Articles 1813
or 1814; (1) after the termination of the speci ed term or particular undertaking
or; (2) at any time if the partnership was a partnership at will when the interest
was assigned or when the charging order was issued (CIVIL CODE, Art. 1831).

Q: What are the rules regarding the effects of a dissolution of a partnership to a

partner's authority to act?
ANS: Every partner is considered the agent of the partnership unless stipulated, and upon
dissolution, the partners cannot carry on normal affairs and may only wind up the business
or complete transactions begun but un nished in this manner:
1. Insofar as the partners themselves are concerned, it depends on whether or not
the dissolution was by their act, insolvency, or death
a. No Authority is to carry on normal affairs is immediately terminated
(CIVIL CODE, Art. 1832).
b. Yes It again depends on whether or not the acting partner had
knowledge of the dissolution, death, or insolvency
I. Yes Authority of the partner who had knowledge is terminated
(CIVIL CODE, Art. 1832).
ii. No Authority of the acting partners who might continue to act
not knowing of the dissolution, death, or insolvency is continued
(CIVIL CODE, Art. 1834, par. 1(2)).
2. With respect to third persons as provided in Art 1834.

Q: What is the rule on the acting partner's liability to his co-partners when the
dissolution is due to the act, insolvency, or death of a partner?
ANS: When dissolution is by act, death or insolvency of a partner, each partner is liable
to his co-partners for his share of any liability created by any partner acting for the
partnership as if the partnership has not been dissolved. This rule is subject to the
following exceptions, i.e., the partner has no authority to act for the partnership when:
1. The cause of dissolution is the act of a partner and the acting partner had
knowledge of such dissolution; and
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2. The cause of dissolution is the death or insolvency of a partner and the acting
partner had knowledge or notice of such dissolution (CIVIL CODE, Art. 1833).
Q: What are the rules on the authority of the acting partner to bind the partnership to
with respect to third persons during dissolution?
ANS: With respect to third persons, the following are the rules:
1. When partnership is bound to third persons after dissolution: (WCuN)
a. Act appropriate for Winding up partnership affairs;
b. Act for Completing un nished transactions; and
c. Completely New transaction which would bind the partnership f
dissolution had not taken place provided the other party is in good faith,
meaning:
Previous creditor (had previously extended credit) and he had no
knowledge or notice of the dissolution; or
ii. a Not a previous creditor and the fact of dissolution had not been
published in a newspaper of general circulation (CIVIL CODE,
Art. 1834).
2. When partnership is not bound to third persons after dissolution:
(UI-UNN)
a. Where partnership was dissolved because it was Unlawful to carry on
the business, except when the act is for winding up;
b. Where the acting partner in the transaction has become Insolvent;
C. Where the partner is Unauthorized to wind up, except if the transaction
S with third personspin good faith, (same circumstances as de ned
above);
d. * 2winding up or for completing un nished
Where act is Not appropriate for
transactions; and
e. Completely New transaction which would bind the partnership if
dissolution had not taken place with third persons in bad faith (C/VIL
CODE, Art. 1834) A
Q: What is the effect of dissolution on the existing liability of : partner?
ANS: Dissolution does not of itself discharge the existing liability of any partner (C/VIL
CODE, Art. 1835, par. 1

Q: What is the exception to the general rule that dissolution does not discharge the
existing liability of any partner?
ANS: A partner may be discharged from all existing liabilities upon dissolution ONLY by
an agreement between himself, the partnership creditor and the persons or partnership
continuing the business; and such agreement may be inferred from knowledge of the
dissolution and the person or partnership continuing the business (CIVIL CODE, Art.
1835, par 2).

Q: What are the liabilities of a c leceased partner?

ANS: The individual property of a deceased partner shall be liable for all obligations of
the partnership incurred while he was a partner but subject to the prior payment of his
separate debts (CIVIL CODE, Art 1835, par 3).

Q: What are the kinds of winding-up?

ANS: Winding up may be done extra-judicially or judicially:
1. Extrajudicial winding-up:
a. By the partners who have not wrongfully dissolved the partnership; or
b. By the legal representative of the last surviving partner (when all the
partners are already dead), provided the last survivor was not insolvent;
and
2. Judicial winding-up - under the control and direction of the court, upon proper
to cause that is shown to the court (CIVIL CODE, Art. 1836).
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Q: What are the powers of a liquidating partner?

ANS: The liquidating partner can:
1. Make new contracts for the purpose of winding up
2. Raise money to pay partnership debts and dispose of property for that purpose
3. Incur obligations to
a. Complete existing contract
b. Preserve partnership assets
4. Incur expenses necessary in the conduct of litigation (DE LEON & DE LEON
JR., Partnership, Agency & Trusts, supra at 248)
Q: Can a partnership continue to use its partnership name even upon dissolution?
ANS: Yes. As a general rule, upon the a dissolution of a commercial partnership, the
succeeding partners or parties have the right to carry on the business under the old name,
provided that there is no stipulation forbidding it. This is because the name of a
commercial partnership is a partnership asset inseparable from the goodwill of the rm
(Id at 274).

Q: What is the order of the application of partnership assets for the satisfaction of MYT7VISHENWO?

liabilities?
ANS: The following -
1. Partnership creditors
2. Those owing to partners other than for capital and pro ts
3. Return of capital contributed by the partners
4. Pro ts to the partners in the proportion in which pro ts are to be shared (C/VIL
CODE, Art. 1839).

Q: What are the rights of a partner who retires of dies, when the business is
continued?
ANS: In the event that the business continues its existence and operations, the rights of
the retiring partner or the estate of the deceased partner are:
1. To have the value of the interest of the retiring or deceased partner ascertained
as of the date of dissolution; and
2. To receive, as an ordinary creditor, an amount equal to the value of his interest
in the dissolved partnership, with interest, or at his option, in lieu of interest, the
pro ts attributable to the use of his right in the property of the dissolved
partnership (C/VIL CODE, Art. 1841).

Q: Who are the persons liable to render an account?

ANS: The persons liable to render an account are:
1. The winding-up partners;
2. The surviving partners; and
3. The person or partnership continuing the business (CIVIL CODE, Art. 1842).

F. LIMITED PARTNERSHIP PIURS

Q: What is a "limited partnership"?
ANS: A limited partnership is one formed by two or more persons under the provisions of
Article 1844 of the Civil Code, having as members one or more general partners and one
or more limited partners. The limited partners as such shall not be bound by the
obligations of the partnership (CIVIL CODE, Art. 1843).

Q: How is a limited partner different to a general partner in terms of contribution?

ANS: The contribution of a limited partner in a limited partnership may be cash or other
property, but not services (CIVIL CODE, Art. 1845).
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Q: When may the name of a limited partner appear in the partnership name?
ANS: As a rule, the surname of a limited partner shall not appear in the partnership name
unless:
1. It is also the surname of a general partner; or
2. Prior to the to time when the limited partner became such, the business had been
carried on under a name in which his surname appeared.

Note: A limited partner whose surname appears in the partnership name contrary to the
provisions of the rst paragraph is liable as general partner to partnership creditors who
extend credit to the partnership without actual knowledge that he is not a general partner
(CIVIL CODE, Art. 1846).

Q: When may a limited partner be held liable as a general partner?

ANS: A limited partner shall not become liable as a general partner unless, in addition to
the exercise of his rights and powers as a limited partner, he takes part in the control of
the business (CIVIL CODE, Art. 1848}:*

Q: How can additional limited partners be admitted to the partnership?

ANS: After the formation of a limite partnership, additional limited partners may be
admitted upon:
1. Filing an amendment to the original certi cate,
2. The signing and/swearing to by all® the partners (including the new limited
partners) (CIVIL CODE, Art-4849), and
3. Filing in the Securities and Exchange Commission™ where the certi cate is
recorded (CIVIL CODE, Art. 1865 7
Q: What are the rights of a limited partner? (KIP-RAID)
ANS: The rights of a limited partner are the following,
1. To require that the partnership books be Kept at the principal place of business
of the partnership (CIVIL CODE Art: 1851);
2. (CIVIL
To CODE,
Inspect Art: 185t);
and copy y
at a reasonable hour partnership books or any of them of

3. To receive a share of the Pro ts or other compensation by way of income (CIVIL

CODE, Art. 1856);
4. To receive the Return of his contribution provided the partnership assets are in
excess of all its liabilities (CIVIL CODE, Art. 1857);
5. To demand a formal Account of partnership affairs whenever circumstances
render it just and reasonable (C/VIL CODE, Art. 1851);
6. To demand true and full Information of all things affecting the partnership (C/VIL
CODE, Art. 1851); and
7. To ask for Dissolution and winding up by decree of court (CIVIL CODE, Art.
1851).

Q: In what instance may a person be a general and limited partner at the same time?
ANS: A person may be a general and limited partner at the same time, provided the same
is stated in the certi cate signed, sworn to, and recorded in the of ce of the Securities
and Exchange Commission. His rights are those of a general partner. However, regarding
his contribution, he would be considered a limited partner, with the rights of a limited
partner insofar as the other partners are concerned (V-Part/

Q: What are the liabilities of a limited partner?

ANS: The liabilities of a limited partner to the partnership are the following:
1. The difference between his contribution as actually made and that stated in the
certi cate as having been made;
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2. Any unpaid contribution which he agreed in the certificate to make, in the future
at the time and on the conditions stated in the certi cate; (CIVIL CODE, Art
1858, par 1)
3. Liable as a trustee for the partnership for:
a. Speci c property stated in the certi cate as contributed by him but which
he had not contributed;
b. Speci c property of the partnership which had been wrongfully returned
to him;
C. Money wrongfully paid or conveyed to him on account of his contribution;
and
d. Other property wrongfully paid or conveyed to him on account of his LAW

contribution. (C/VIL CODE, Art. 1858, par 2)

4. to Liable to the partnership for the return of contribution lawfully received by him
(CIVIL CODE, Art 1857, par. 3 (2)).

Q: What are the obligations of a limited partner?

ANS: The following are the obligations of a limited partner:

Obligations of a Limited Partner VISHEWWOD

Since limited partners are not principals in the transaction of a

partnership, their liability as a rule, is to the partnership, not to the
To the creditors of the partnership.
Partnership
Note: The general partners cannot, however, waive any liability of
the limited partners to the prejudice of such creditors.

limited partner is liable for partnership obligations in the following In

instances:
When he contributed services instead of only money or property to
the partnership (CIVIL CODE, Art. 1845);
When he allows his surname to appear in the rm name (CIVIL
CODE, Art. 1846 (2));
When he fails to have a false statement in the certi cate corrected,
To the knowing it to be false (C/VIL CODE, Art. 1847(2)).
Partnership When he takes part in the control of the business (CIVIL CODE. Art.
Creditors and 1848);
Other When he receives partnership property as collateral security, or
Partners receives from a general partner or the partnership any payment,
conveyance, or release from liability when partnership assets are
not suf cient to discharge partnership liabilities, in fraud of
partnership creditors (C/VIL CODE, Art. 1854); and
When there is failure to substantially comply with the legal
requirements governing the formation of limited partnerships (CIVIL
CODE. Art. 1844 par. 2).
As in a general partnership, the creditor of a limited partner may, in
To Separate addition to other remedies allowed under existing laws, apply to the
Creditors proper court for a charging order subjecting the interest in the
partnership of the debtor partner for the payment of his obligation
(CIVIL CODE, Art. 1862).

(DE LEON & DE LEON JR., Partnership, Agency & Trusts, supra at 309).
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Q: What is the effect of death, retirement, insolvency, civil interdiction of a general

partner of partnership?
ANS: As a rule, the partnership is dissolved, unless the remaining general partners
continue the business:
1. Under a right to do so as stated in the certi cate, or
2. With the consent of all members (CIVIL CODE. Art. 1860).

Q: When can the limited partner have the partnership dissolved and wound up?
ANS: A limited partner may have the partnership dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands the return of his contribution; or
2. The other liabilities of the partnership have not been paid, or the partnership
property is insuf cient for their payment as required by the rst paragraph, No.
1 of Article 1857, and the limited partner would otherwise be entitled to the return
of his contribution (CIVIL CODE, Art. 1857).

Q: Who is a "substituted limited partner"?

ANS: He is a person admitted to all the rights of tO a limited partner who has died or has
assigned his interest in the partnership (C/VIL CODE, Art. 1859).

i
Q: What is the rule concerning the assignment of a limited partner of his interest to
a substituted limited partner?
ANS: If a limited partner (LP) assigned his interest to substituted limited partner (SLP),
SLP is considered as have acquired the right to become a substituted limited partner if
1. All the members consented to the assignee becoming a substituted limited
partner or the assignee was given the right by a limited partner to become an
SLP; 709
2. The Certi cate was amended o
3. The Certi cate as amended was registered in the Securities and Exchange
R 1859 par. 3-4).
Commission. (CIVIL CODE, Art.
Q: What is the order of priority in settling accounts after dissolution?
ANS: In settling accounts after dissolution, the liabilities of the partnership shall be entitled
to payment in the following order: a Pange
1. Those to creditors, in the order of priority as provided by law, except those to
limited partners on acoount of their contributions, and to general partners;
2. Those to limited partners in respect to their share of the pro ts and other
compensation by way of income on their contributions;
3. Those to limited partners in respect to the capital of their contributions;
4. Those to general partners other than for capital and pro ts;
5. Those to general partners in respect to pro ts;
6. Those to general partners in respect to capital. to

Note: Subject to any statement in the certi cate or to subsequent agreement, limited
partners share in the partnership assets in respect to their claims for capital, and in
respect to their claims for pro ts or for compensation by way of income on their
contribution respectively, in proportion to the respective amount of such claims (CIVIL
CODE, Art. 1863).

Q: What are the instances when a Certi cate of Limited Partnership may be
amended? (NSA2-RCET2D)
ANS: The following are instances when such certi cate may be amended:
1. There is a change in the Name of the partnership or in the amount or character
of the contribution of any limited partner;
2. A person is Substituted as a limited partner;
3. An Additional limited partner is admitted;
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4. A person is Admitted as a general partner;

5. A general partner Retires, dies, becomes insolvent or insane, or is sentenced to
civil interdiction and the business is continued under Article 1860;
6. There is change in the Character of the business of the partnership;
7. There is a false or Erroneous statement in the certi cate;
8. There is a change in the Time as stated in the certi cate for dissolution of the
partnership or for the return of a contribution;
9. A Time is xed for the dissolution of the partnership, or the return of a
contribution, no time having been speci ed in the certi cate; or
10. The members Desire to make a change in any other statement in the certi cate
in order that it shall accurately represent the agreement among them (CIVIL
CODE, Art. 1864).

INSURANCE LAW
A. CONCEPT OF INSURANCE
Q: What is : contract of insurance?
ANS: A contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an COMMERCIAL LAW

unknown or contingent event (R.A. No. 10607, otherwise known as "The Insurance Code",
Sec. 2(a) [hereinafter INSURANCE CODE) J

Q: What is the main function of a contraot of insurance?

ANS: Risk bearing is the primary function of insurance contracts. The nancial losses of
the few are equitably distributed over the many out of a fund (premium) contributed by all.
(DE LEON & DE LEON, Jr., The Insurance Code of the Philippines Annotated (2019), p.
62-63 [hereinafter DE LEON & DE LEON JR., Insurance Code]).

The insured contributes premiums under the risk of receiving nothing in return in case the
contingency does not happen. The insurer undertakes to pay the entire sum agreed upon
n case the contingency happens (Gaisano W. Development Insurance and Surety Corp.,
G.R. No. 190702, February 27, 2017).

Q: What are the distinguishing elements of a contract of insurance? (InS-PAR)

ANS: The following are the elements of contract of insurance:
1. The insured has an Insurable interest;
2. The insurable interest is Subject to a risk of loss by the happening of the
designated peril;
3. The insurer's promise is in consideration of the Payment of a premium;
4. The insurer Assumes the risk; and
5. Such assumption of risk is part of a Risk-distribution scheme (Loyola Life Plans
Inc. v. ATR Professional Life Assurance Corp., G.R. No. 228402, August 26,
2020).

Q: What is the principal object and purpose test?

ANS: The principal object and purpose test have been applied to determine whether the
assumption of risk and indemni cation 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 (Philippine Health Care Providers, Inc., v. CIR, G.R. No.
167330, September 18, 2009).
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Note: Even if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance (ld.)

Q: What are the characteristics of an insurance contract? (RAPA-CUCU-IE)

ANS: The following are the characteristics of an insurance contract:
1. Risk-Distributing Device - all members of a group are exposed to a particular
risk contribute premiums to an insurer, and from these contributory funds are
paid whatever losses occur due to the exposure to the peril insured against
(Gaisano v. Development Insurance and Surety Corp., G.R. No. 190702,
February 27, 2017).
2. Aleatory - the contract is effective upon its perfection although the occurrence
of a condition or event may later dictate the demandability of certain obligations
thereunder (Sps. Tibay, et al, v. CA, et al., V. G.R. No. 119655, May 24, 1996).
3. Personal - each party in an insurance contract had in view the character, credit,
and conduct of the other (DE LEON & DE LEON JR., Insurance Code, supra at
22).
4. Contract of Adhesion or Fine Print Rule - most of the terms of the contracts
do not result from mutual negotiations between the parties as they are
prescribed in printed form to which the insured may adhere if he chooses to but
which he cannot change (Norton Resources and Development Corp. v. All Asia
Bank Corp., G.R No: 162523, November-25, 2009%
5. Consensual - the contract is perfected by mere consent without the need of
delivery or any other formality (Perez v. CA, G:.R. No. 112329, January 28,

6.
2000). o
Uberrimae Fidel Contract - both parties must not only perform their obligations
in good faith but must avoid material concealment or misrepresentations as
contracts of insurance are one of utmost good faith (Verendia v. CA, G.R. No.
75605, January 22, 1993). LLO
7. Conditional the right of the insured to claim the proceeds is dependent upon
the happening of the event which constitutes the obligation of the insurer to pay
the principal of which is the happening of the event periled against, and other
conditions which the parties stipulated must beDoome
complied with (CIVIL CODE, Art.
1181).
8. Unilateral - it is a conträct which Imposes Vegat duty only to the insurer who
promises to indemnify in case of loss. The payment of premium is not an
obligation but an event that gives the contract an obligatory force. Upon
payment, it is only the insurer who has an obligation to pay in case of loss (DE
LEON & DE LEON JR., Insurance Code, supra at 22).
9 Contract of Indemnity - except for life and accident insurance, the measure of
an insurable interest in property is the extent to which the insured might be
damni ed by loss or injury thereof 'INSURANCE CODE, Sec. 17).
10. Executory - it is executed as to the insured after the payment of the premium
and executory on the part of the insurer in the sense that it is not executed until
the payment of the loss; executory upon the insurer subject to the condition of
the happening of the event (DE LEON & DE LEON JR., Insurance Code, supra
at 22).

Q: Can there be insurance for or against chance?

ANS: An insurance for or against the drawing of any lottery, of or for or against any chance
or ticket in a lottery drawing a prize is not allowed (INSURANCE CODE, Sec. 4). Every
policy executed by way of gaming or wagering is void (INSURANCE CODE, Sec. 25).
While it is based on a contingency, it is not a contract of chance and S not used for pro t.
The very purpose of insurance is the reimbursement of the holder of insurance for actual
loss suffered from speci ed risks (DE LEON & DE LEON JR., Insurance Code, supra at
72).
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Q: Who are the parties to the contract of insurance?

ANS: The parties to the contract of insurance are:
1. Essential Parties:
a. Insurer; and
b. Insured.
2. Incidental Party:
a. Bene ciary
Q: Who is the insurer?
ANS: The insurer is the party who assumes or accepts the risk of loss and undertakes for
a consideration to indemnify the insured or to pay him a certain sum on the happening of
speci ed contingency or event (DE LEON & DE LEON JR., Insurance Code, supra at
75).

Q: Who may be considered as an insurer?

ANS: An insurer may be a foreign or domestic insurance company or corporation, or a or
partnership or an association (INSURANCE CODE, Sec. 6).

The term "insurer" no longer includes "individuals" under the Insurance Code. Hence, an
individual natural person is no longer allowed to be an insurer (AQUINO & SUNDIANG, MV1 TVISHENWOO

Reviewer on Commercial Law, supra at 30).

Q: Who is an insured?
a
ANS: The insured or the second party to the contract is the person in whose favor the
contract is operative and who is indemni ed against; or is to receive a certain sum upon
the happening of a speci ed contingency on event. He is the person whose loss is the is
occasion for the payment of the insurance proceeds by the insurer (DE LEON & DE LEON

W
JR., Insurance Code, supra at 75).

The insured must have the capacity to contract and must have an insurable interest in the
of & life or property of the insured (AQUINO & SUNDIANG, Reviewer on Commercial Law,
supra at 32).

Q: What is the capacity of an insured? (GIP)

ANS: An insured must have the following:
1. He must be Competent to make a contract (C/VIL CODE, Art. 1327-1329);
2. He must possess an Insurable interest in the subject of the insurance (DE
LEON, Insurance Code, supra at 78); and
3. He must not be a Public enemy (INSURANCE CODE, Sec. 7).

Q: In life insurance policy, who is a Cestui Que Vie?

ANS: He is the person whose life is the subject of a life insurance policy. It is the person
whose life is used to measure the duration of a trust, gift or insurance contract (DE LEON
& DE LEON JR., Insurance Code, supra at 455).

Q: What is the effect of death of the policy owner in a life insurance?

ANS: Upon the death of the policy owner all his rights, title, and interest in the policy of
insurance on the life or health of the cestui que vie shall automatically vest in the latter,
unless otherwise provided for in the policy (INSURANCE CODE, Sec. 3, par. 3).

Q: Who is a bene ciary?

ANS: A bene ciary is one in whose name or for whose bene t the insurance proceeds
shall be applied exclusively unless otherwise speci ed in the policy (INSURANCE CODE,
Sec. 53).
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Q: Who are disquali ed from being bene ciaries of a life insurance policy?
ANS: Any person who is forbidden from receiving any donation under Article 739 of the
Civil Code cannot be named bene ciary of a life insurance policy by the person who
cannot make any donation to him, according to said article (CIVIL CODE, Art. 2012). The
following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at
the time of the donation;
2. Those made between persons found guilty of the same criminal offense, in
consideration thereof; or
3. Those made to a public of cer or his wife, descendants and ascendants, by
reason of his of ce (CIVIL CODE, Art. 739).

Q: Is appointment of bene ciary revocable?

ANS: As a general rule, the insured shall have the right to change the bene ciary he
designated in the policy (INSURANCE CODE, Sec. 11).

The exceptions where the appointment of a bene ciary is irrevocable are the following:
1. Upon the insured's death provided the insured does not change the designation
during his lifetime; and
2. If the right to change the bene ciary/ is, expressly waived in the policy
(INSURANCE CODE, Sec. 11).

Q: What happens when the bene ciary dies before the life insured?
ANS: Unless otherwise stipulated in the policy, the bene ciary, even if irrevocable, who
predeceases the life insured transmits nothing to his heirs (CIVIL CODE, Art. 856).
P
B. INSURABLE INTEREST
Q: What is an insurable interest?
ANS: Every interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might directly damnify
the insured (INSURANCE CODE, Sec. 13 m b
O
Q: What is the legal effect of the èxistence of an insurable interest?
ANS: Insurable interest is a matter that will affect the contract's enforceability and the
bene ciary's suitability to be constituted as such. (Manankil etc. vs. COA, G.R. No.
217342, October 13, 2020)

Q: What can be the subject matter of insurable interest?

ANS: The following can be the subject matter of insurable interest:
1. The life and health of:
a. Himself, his spouse, and his children;
b. Any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest in;
C. Any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or
prevent the performance; and
d. Any person upon whose life any estate or interest vested in him depends
(INSURANCE CODE, Sec.10).
2. Property Whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify
the insured (INSURANCE CODE, Sec.13). It may consist in:
a. An existing interest;
b. An inchoate interest founded on an existing interest; or
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C. An expectancy coupled with an existing interest in that out of which the

expectancy arises (INSURANCE CODE, Sec. 14).

Q: When must insurable interest exist?

ANS: The insurable interest must exist in the:
1. Life or health of a person insured - when the insurance takes effect, but need
not exist thereafter or when the loss occurs; or
2. Property insured when the insurance takes effect, and when the loss occurs,
but need not exist in the meantime (INSURANCE CODE, Sec. 19).

Q: Is the bene ciary required to have an insurable interest?

ANS: As a general rule, the bene ciary of a life insurance policy need not have insurable
interest, except in the following cases:
1. If the insured takes out an insurance on the life of another designating himself
or herself as bene ciary, the insurable interest on the part of the insured is
necessary;
2. If one takes out an insurance on the life of another and designates a third person
as the bene ciary, it is necessary for the bene ciary to have insurable interest
(AQUINO, Essentials of Insurance Law (2022), p. 131 [hereinafter AQUINO,
Insurance Lawl); and MUTTVISdEWWOS

3. In property insurance, the bene ciary therein must have insurable interest over
the property insured (AQUINO & SUNDIANG, Reviewer on Commercial Law,
supra at 33-34).

Q: What is the effect of a change in interest in any part of a thing insured

unaccompanied by a corresponding change of interest in the insurance?
ANS: A change of interest in any part of the thing insured unaccompanied by a
corresponding change of interest in the insurance suspends the insurance to an
equivalent extent until the interest in the thing and the interest in the insurance are vested
in the1.same person (INSURANCE CODE, Sec. 20), except in the following cases:
In life, health, and accident insurance (INSURANCE CODE, Sec. 20);
2 A change of interest in the thing insured after the occurrence of an injury which
results in a loss (INSURANCE CODE, Sec. 21);
3. A change of interest in one or more several distinct things, separately insured
by one policy, does not avoid the insurance as to the others (INSURANCE
CODE, Sec. 22);
4. A change of interest, by will or succession, on the death of the insured
(INSURANCE CODE, Sec. 23);
5. A transfer of interest by one of several partners, joint owners, or owners in
common, who are jointly insured, to the others (INSURANCE CODE, Sec. 24;
6. A policy so framed that it will inure to the bene t of whomsoever, during the
continuance of the risk, may become the owner of the interest insured
(INSURANCE CODE, Sec. 57); and
7. When there is an express prohibition against alienation in the policy, alienation
will not only suspend the contract but avoid it altogether (CIVIL CODE, ART.
1306).

Q: What is the legal effect of the change in insurable interest after the loss?
ANS: A change of interest in a thing insured, after the occurrence of an injury which results
in a loss, does not affect the right of the insured to indemnity for the loss (INSURANCE
CODE, Sec. 21).
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Q: What is the extent of a common carrier's or depositary's insurable interest in the

thing held by him as such?
ANS: A common carrier or depositary of any kind has an insurable interest in the thing
held by him as such, to the extent of his liability but not exceeding the value thereof
(INSURANCE CODE, Sec. 15).

Q: What kind of interest is not insurable?

ANS: A mere contingent or expectant interest in anything not founded on an actual right
to the thing, nor upon any valid contract for it, is not insurable (INSURANCE CODE, Sec.
16).

Q: What is the extent of one's insurable interest over a property?

ANS: The measure of an insurable interest in property is the extent to which the insured
might be damni ed by loss or injury thereof (INSURANCE CODE, Sec. 17).

Q: What is the rule on the insurable interest on a mortgaged property?

ANS: As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both-interests may be one policy, or each may
take out a separate policy covering his interest, either at the same or at separate times
(Geagonia v. CA, G.R. No. 414427 February 6, 1995)

Q: What is the extent of the mortgagor's interest in the mortgaged property?

ANS: The extent of the mortgagor's insurable Interest in the mortgaged property is, as
owner of such property, to the extent of its entire value regardless of the amount of the
mortgaged debt (Ibic)}!.o
7 or
Note: Insurable interest of the owner of the ship hypothecated by bottomry is only the
excess of its value NODI 2 U
over the amount secured by bottorry (INSURANCE CODE, Sec. 103).

Q: What is the extent of the mortgagee's interest in the mortgaged property?

ANS: 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. His insurable interest is prima facie the value mortgaged and
extends only to the amount of the debt, not exceeding the value of the mortgaged property
V. (Geagonia v. CA, G.R. No. 114427 February 6, 1995)

Q: What are the methods in insuring the interest of both the mortgagor and
mortgagee in a single policy?
ANS: The methods in insuring the interest of both the mortgagor and mortgagee in a in
single policy are as follows:
1. "As their interest may appear" clause;
2. Loss payable clause - it is a clause under which acts of the mortgagor affect
the mortgagee, the reason being that the mortgagor does not cease to be a
party to the contract (INSURANCE CODE, Sec. 8);
3. Standard mortgage clause - it is a clause under which subsequent acts of the
mortgagor cannot affect the rights of the assignee, the reason being that it is as
if the insurer made a new and independent contract with the mortgagee
(INSURANCE CODE, Sec. 9);
4. A separate assignment of the policy;
5. An assignment in pledge; or
6. Establishment of an equitable lien on the proceeds of the insurance (AQUINO
& SUNDIANG, Reviewer on Commercial Law, supra at 116).
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Q: What are the effects of loss payable clause? (IPARA)

ANS: The following are the effects of loss payable clause:
1. The contract is deemed to be upon the Interest of the mortgagor, who does not
cease to be a party to the contract;
2. In case of loss, the mortgagee is entitled is to the Proceeds to the extent of his
credit;
3. Any act of the mortgagor prior to the loss, which would otherwise avoid the
insurance Affects the mortgagee even if the property is in the hands of the
mortgagee;
4. Upon Recovery by the mortgagee to the extent of his credit, the debt is
extinguished; and
5. Any Act, which under the contract of insurance is to be performed by the
mortgagor, may be performed by the mortgagee with the same effect
(INSURANCE CODE, Sec. 8).

Q: What is a mortgage redemption insurance?

ANS: Mortgage redemption insurance is a device for the protection of both the mortgagee
and the mortgagor. On the part of the mortgagee, it has to enter into such form of contract
so that in the event of the death of the mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be applied to the payment of the mortgage MUTTVIOEWWOO

debt. As for the mortgagor, in the event of death, the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness
(Great Paci c Life Assurance Corp., v. CA, G.R. No. 113899, October 13, 1999).

C. CONCEALMENT
Q: What are the grounds for the rescission of an insurance contract? (COM-WaP)
ANS: The insurer has the right to rescind the policy under the following grounds:
1. Intentional or unintentional Concealment (INSURANCE CODE, Sec. 27);
2. Intentional or fraudulent Omission, on the part of one insured, to communicate
information of matters proving or fending to prove the falsity of warranty
(INSURANCE CODE, Sec. 29);
3. Misrepresentation -it is when representation is false on material point whether
af rmative or promissory (INSURANCE CODE, Sec. 45);
4. Violation of material Warranty or other material provisions of the policy
(INSURANCE CODE, Sec. 74); and
5. Violation of a Provision wherein the policy declares that violation of which would
avoid the policy (INSURANCE CODE, Sec. 75).

Q: What is concealment?
ANS: Concealment is the neglect to communicate that which a party knows and ought to
communicate (INSURANCE CODE, Sec. 26).

Q: What are the requisites of concealment? (KD-MNO)

ANS: The requisites of concealment are:
1. A party Knows a fact which he neglects to communicate or disclose to the other;
2. Such party concealing is Duty bound to disclose such fact to the other;
3. The fact concealed is Material to the contract;
4. Such party concealing makes No warranty of the fact concealed; and
5. The Other party has not the means of ascertaining the fact concealed
(INSURANCE CODE, Sec. 28).

Note: Proof of fraudulent intent is unnecessary for the rescission of an insurance contract
on account of concealment (The Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R.
Nos. 207526 & 210156, October 3, 2018).
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Q: What is the Test of Materiality?

ANS: Materiality is determined not by the event, but solely by the probable and reasonable
in uence of the facts upon the party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract, or in making his inquiries
(INSURANCE CODE, Sec. 31).

Q: What are the matters that need not be disclosed except upon inquiry? (KnOW-
PRiNa)
ANS: Neither party to a contract of insurance is bound to communicate information of the
matters following, except in answer to the inquiries of the other:
1. Those which the other Knows;
2. Those which, in the exercise of ordinary care, the other Ought to know, and of
which the former has no reason to suppose him ignorant;
3. Those of which the other Waives the communication;
4. Those which Prove or tend to prove the existence a of a risk excluded by a
warranty, and which are not otherwise material;
5. Those which relate to a Risk excepted from the policy and which are not
otherwise material (INSURANCE CODE, Sec. 30); and
6. Information of the Nature or amount of the interest of one insured except if he is
not the absolute owner of the property insured (INSURANCE CODE, Sec. 34 &
51(e)).

Q: What are the matters that need not be disclosed even in answer to inquiries?
(JuG)
ANS: The following are matters that need not be disclosed even in answer to an inquiry:
1. Information of his own Judgment (INSURANCE CODE, Sec. 35); and
2. General causes which are open to his inquiry, equally with the other, and all
general usages of trade (INSURANCE CODE, Sec 32).
Q: May the right to material information may be waived?
ANS: The right to material information may be waived, either by terms of insurance or by
neglect to make inquiry as to such facts, where they are distinctly implied other facts of
which information is communicated (INSURANCE CODE, Sec. 33).
VOm
Q: Is there a distinction between intentional and unintentional concealment?
ANS: There iS none. A concealment whether intentional or unintentional entitles the
injured party to rescind a contract of insurance. (INSURANCE CODE, Sec. 27)

Q: When must the insurer exercise the right to rescind the contract on the ground
of concealment or misrepresentation?
ANS: The insurer must exercise the right to rescind the contract before the
commencement of an action on the contract. After a policy of life insurance made payable
of on the death of the insured shall have been in force during the lifetime of the insured for
a period of 2 years from the date of its issue or of its last reinstatement, the insurer cannot
prove that the policy S void ab initio or is rescindable by reason of the fraudulent
concealment or misrepresentation of the insured or his agent (INSURANCE CODE, Sec.
48).

D. REPRESENTATION
Q: What is representation?
ANS: A representation is:
1. An oral or written statement;
2. Af rmative or promissory;
3. Made at the time of or prior to the issuance of the policy; and
to tO 4. Related to the risk to be insured (INSURANCE CODE, Secs. 36, 37, & 39).
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Q: When is there misrepresentation?

ANS: A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations (INSURANCE CODE, Sec. 44). Representation can be a ground
for cancellation only there is fraud or in bad faith (The Insular Insurance Co. V. Heirs of
Alvarez, G.R. No. 207526, October 3, 2018).

Q: What is the effect of a misrepresentation?

ANS: If a representation is false in a material point, whether af rmative or promissory, the
injured party is entitled to rescind the contract from the time when the representation
becomes false (INSURANCE CODE, Sec. 45).

Q: What is the effect if the representation of an expectation or belief turns out to be

false?
ANS: Although false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance or at a lower rate of premium. This is likewise the
rule although the statement is material to. the f risk, if the statement is obviously of the
foregoing character, since in such case, the insurer is not justi ed in relying upon such
statement, but is obligated to make further inquiry (Philamcare Health Systems, Inc., V.
CA, G.R. No. 125678, March 18, 2002). COMMERCIAL LAW

Q: What is the effect if the information is obtained from third persons?

ANS: When a person insured has no personal knowledge of a fact, he may nevertheless
repeat information which he has upon the subject, and which he believes to be true, with
the explanation that he does so on the information of others; or he may submit the
information, in its whole extent, to the insurer, and in neither case is he responsible for its
truth, unless it proceeds from anwagent of the insured, whose duty it is to give the
information (INSURANCE CODE, Sec. 43).

Q: When is rescission not available it there is misrepresentation? (WICE)

ANS: The injured party cannot rescind the policy on the ground of false representation in
the following situations:
1. When there is Estoppel as in he case where the insurer accepted premium
payments despite knowledge of the ground for rescission;
2.
When there is Waiver;
3. When an action has already been Commenced on the contract; and
4. When the Incontestable clause applies. (INSURANCE CODE, Sec. 45 and 48)

CONCEALMENT vs. REPRESENTATION

POINT OF
DISTINCTION CONCEALMENT MATERIAL REPRESENTATION

iS positive assertion or
As to Nature Involves an Omission
af rmation
It cannot refer to future
As to Acts acts
Can refer to future acts

Determined not .by the event, but solely, by the probable and
reasonable in uence of the facts upon the party to whom the
As to Test of communication is due, n forming his estimate of the
Materiality advantages of the proposed contract, or in making his inquiries
(INSURANCE CODE, Sec. 31 & 46).
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As to Remedy Recission (INSURANCE CODE, Sec. 47 & 45)

Insurance Code Rescission under Sec. 45

dispenses with proof of remains subject to the basic
fraudulent intent in case precept of fraud having to be
of rescission due to proven by clear and convincing
concealment (The Insular evidence.
Assurance Co., Ltd. V. The fraudulent intent on the part
The Heirs of Alvarez, of the insured must be
G.R. No. 210516. established to entitle the insurer
October 3, 2018) to rescind the contract (The
As to Intent Insular Assurance Co., Ltd. V.
RATIONALE: In The Heirs of Alvarez, G.R. No.
insurance contracts, 210516, October 3, 2018).
concealing material facts
IS inherently fraudulent
(Id.)

Q: What is the "incontestability clause"?™

ANS: The incontestability clause provides that after a policy of life insurance made
payable on the death of the insured shall have been in force during the lifetime of the
insured for a period of 2 years from the date of its issue or of its last reinstatement. the
insurer cannot prove that the policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured OF His agent (INSURANCE
CODE. Sec. 48, par. 2). does
NOTOZZ
Q: What Defenses are not Barred by the Incontestability Clause? (FAB-P2C2)
ANS: The insurer may still contest the policy by way of defense to a suit brought upon the
policy1.or by action to rescind the same, on any of the following grounds:
That the Fraud is of a particular vicious type;
2. That the Action was not brought within the time speci ed;
3. That the Bene ciary failed to furnish proof of death or comply with any
conditions imposed by the policy after the loss has happened;
4. That the Person taking the insurance lacked insurable interest as required by
law;
5. That the Premiums have not been paid;
6. That the Cause of death of the insured is an excepted risk; and
7. That the Conditions of the policy relating to military or naval service have been
violated (DE LEON & DE LEON JR., Insurance Code, p. 176).

E POLICY
Q: How are insurance contracts perfected?
ANS: Insurance contracts, being consensual contracts, are perfected by mere consent of
the parties (CIVIL CODE, Art. 1315).

A contract of insurance, like all other contracts, must be assented to by both parties, either
in person or through their agents and so long as an application for insurance has not been
either accepted or rejected, it is merely a proposal or an offer to make a contract (Perez
V. CA, G.R. No. 112329, January 28, 2000).

Note: The in written instrument in which a contract of insurance is set forth, is called a
policy of insurance (INSURANCE CODE, Sec. 49).
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Q: What should be contained in an insurance policy?

ANS: A policy of insurance must specify:
1. The parties between whom the contract is made;
2. The amount to be insured except in the cases of open or running policies;
3. The premium, or if the insurance is of a character where the exact premium is
only determinable upon the termination of the contract, a statement of the basis
and rates upon which the nal premium is to be determined;
4. The property or life insured;
5. The interest of the insured in property insured, if he is not the absolute owner
thereof;
6. The risks insured against; and
7. The period during which the insurance is to continue (INSURANCE CODE, Sec.
51).

Q: What are the prohibited stipulations in an insurance policy?

ANS: The following are the prohibited stipulations in an insurance policy:
1. Stipulation for the payment of loss whether the person insured has or has no
interest in the subject matter of the insurance (INSURANCE CODE, Sec. 25);
2. Stipulation that the policy shall be received as a proof of insurable interest (Id.);
and COMMERCIAL LAW

3. A condition, stipulation or agreement in any policy of insurance, limiting the time

for commencing an action thereunder to a period of less than one (1) year from
the time when the cause of action accrues (INSURANCE CODE, Sec. 63).

Q: What is the effect of transfer of thing insured?

ANS: The mere transfer of a thing insured does not transfer the property insurance policy,
but suspends it until the same person becomes the owner of both the policy and the thing
insured (INSURANGE CODE, Sec. 58)

Q: What are the kinds of insurance policy?

ANS: Insurance policy may be
1. Open Policy which the value of the property insured shall be ascertained at
the time of the loss and the amount of insurance merely represents the insurer's
maximum liability (INSURANCE CODE, Sec 60)
2. Valued Policy which expresses on its face agreement that the thing insured
shall be valued at a speci ed sum (INSURANCE CODE, Sec. 61).
3. Running Policy Which contemplates successive insurances and which
provides that the object of the policy may be from time to time de ned especially
as to the subjects of insurance, by additional statements or endorsements
(INSURANCE CODE, Sec. 62)

Q: What theory is followed regarding insurance contracts through

correspondence?
ANS: The cognition theory, which states that an acceptance made by letter shall not
bind the person making the offer except from the time it came to his knowledge (Enriquez
v. Sun Life Assurance Company of Canada, G.R. No. L-15895, November 29, 1920).

Q: What is the effect of delay in accepting the application for insurance?

ANS: Mere delay by the insurer, although unreasonable, in acting upon the application
raises no implication of acceptance nor does it estop the insurer to deny the existence of
the contract (Perez v. CA, G.R. No. 112329, January 28, 2000).

Q: Is delivery of the policy required for the perfection of a contract of insurance?

ANS: Since the contract of insurance is consensual, the delivery of the policy is not
necessary for the perfection of the contract (AQUINO, Insurance Law, supra at 33). The
contract may be completed prior to delivery of the policy or even without the delivery of
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the policy depending on the intention of the parties. The policy may contain a provision
that states that the insurance is not effective until the delivery of the policy (DE LEON &
DE LEON JR., Partnership, Agency & Trusts, Insurance Code, supra at 190).

Q: What is the importance of delivery of the policy to the insured?

ANS: The importance of delivery of policy is:
1. It is evidence of the contract and of its terms; and
2. It is conclusive evidence of communication of the insurer's acceptance of the
insured's offer (DE LEON & DE LEON JR., Partnership, Agency & Trusts,
Insurance Code, supra at 189).

Q: What is cancellation of policy?

ANS: Cancellation is the termination or rescission, by either the insurer or the insured. of
a policy of insurance before its expiration (DE LEON & DE LEON JR., Insurance Code,
supra at 226). The insurer has the right to cancel a policy of insurance other than life
(INSURANCE CODE, Secs. 64-65).

Q: What are the requisites of cancellation of policy? (WANG)

ANS: The requisites of cancellation of policy are:
1. Notice must be in Writing, mailed, or delivered to the insured at the address
shown in the policy or to his broker, provided the broker is authorized in writing
by the policy owner to receiveD the V cancellation of his behalf (INSURANCE
CODE, Sec/ 655
2. Notice must be Based on the occurrence After the effective date of the policy of
one or more of the grounds mentioned (INSURANCE CODE, Sec. 64);
3. Prior Notice of cancellation to the insured (Id); and
4. Notice must state the Grounds relied upon and upon request of the insured to
furnish facts on which cancellation is made (INSURANCE CODE, Sec. 65).
OO
Q: What are the grounds for cancellation of policy? (Non-Con-FrAPOV)
ANS: The grounds are:
1. Non-payment of premiums
Note: The premium referred to must be a premium subsequent to the rst
installment because it speaks of non-payment "after the effective date of the
policy" (DE LEON & DE LÉON JR. Insurance Code, supra at 227).
2. Conviction of crime out of acts increasing the hazard insured against;
3. Discovery of Fraud or material misrepresentation;
4. Willful or reckless Acts or omissions increasing the risk insured against;
5. Physical changes in the property insured making it uninsurable;
6. Discovery of Other insurance coverage that makes the total insurance in excess
of the value of the property insured; or
7. Determination by the Insurance Commissioner that the policy would Violate the
Insurance Code (INSURANCE CODE, Sec. 64).

Q: What is a claim?
ANS: A claim is a demand for the satisfaction of a loss suffered within the purview of an
insured's policy. It may be made by the party insured, the insurer with the right of
subrogation, or a non-party but with a right against the insured (DE LEON & DE LEON
JR., Insurance Code, supra at 289).

Q: What constitutes unfair claim settlement practices? (FaCISS)

ANS: Any of the following acts by an insurance company, if committed without just cause
and performed with such frequency as to indicate a general business practice, shall
constitute unfair claim settlement practices:
1. Knowingly misrepresenting to claimants pertinent Facts or policy provisions
relating to coverage at issue;
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2. Failing to acknowledge with reasonable promptness pertinent Communications

with respect to claims arising under its policies;
3. Failing to adopt and implement reasonable standards for the prompt
Investigation of claims arising under its policies;
4. Not attempting in good faith to effectuate prompt, fair and equitable Settlement
of claims submitted in which liability has become reasonably clear; or
5. Compelling policyholders to institute Suits to recover amounts due under its
policies by offering without justi able reason substantially less than the amounts
ultimately recovered in suits brought by them (INSURANCE CODE, Sec.
247(a)).

Q: What are the sanctions for the commission of unfair claim settlement practices?
ANS: If it is found, after notice and an opportunity to be heard, that an insurance company
has committed any of the unfair claim settlement practices, each instance may be treated
as a separate violation and shall be considered suf cient cause for the suspension or
revocation of the company's certi cate of authority (INSURANCE CODE, Sec. 247(c)).

Q: When must the proceeds of an insurance policy be paid?

ANS: The proceeds of an insurance policy must be paid in the following periods:
For Life insurance policy:
MV1 IVIDHEWWOS

1.
a. Immediately upon maturity
b. As installments or annuities become due, in case proceeds are made
payable by installments or as annuities under the policy; and
C. Within 60 days after presentation of the claim and ling of the proof of
death of the insured in case the policy matures upon the death of the
insured (INSURANCE CODE, Sec. 248).

2. For policy other than life insurance policy:

a. Thirty (30) days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration; and
b. Ninety (90) days after receipt of the proof of loss if no such ascertainment
of loss is made within 60 days after the receipt of such proof
(INSURANCE CODE, Sec. 249). i
Note: There is prima facie is presumption of unreasonable delay if the insurer fails to pay
any such claim within the time prescribed (INSURANCE CODE, Sec. 250).

Q: What is the penalty for delay in claims settlement? (IAAE)

ANS: In case there is an unreasonable delay/denial in the payment of the insured's claim
by the insurer, the insured can recover:
1. Interest at double the legal interest rate xed by the monetary board;
2. Attorney's fees;
3. Amount of the claim; and
4. Expenses incurred by reason of the unreasonable withholding (Zenith Insurance
Corp. v. CA, G.R. No. 85296, May 14, 1990).

Q: When is delay reasonable?

ANS: When the refusal or failure to pay is based on the ground that the claim is fraudulent
(INSURANCE CODE, Sec. 249).

Q: What is the criminal liability for fraudulent claims of the insured?

ANS: It is unlawful for an insured to:
1. Present or cause to be presented any fraudulent claim for the payment of a loss
under a contract of insurance; and
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2. Fraudulently prepare, make or subscribe any writing with intent to present or

use the same, or to allow it to be presented in support of any such claim (Id).

Note: Any person who violates shall be punished by a ne not exceeding twice the
amount claimed or imprisonment of 2 years, or both at the discretion of the court
(INSURANCE CODE, Sec. 251).

Q: What are the rules on prescription of action to claim on an insurance policy?

ANS: The rules are the following:
1. A condition, stipulation, or agreement in any policy of insurance, limiting the time
for commencing an action thereunder to a period of less than 1 year from the
time when the cause of action accrues, is void (INSURANCE CODE, Sec. 63);
2. In case the claim was denied by the insurer but the insured led a petition for
reconsideration, the prescriptive period should be counted from the date the
claim was denied at the rst instance and not from the denial of the
reconsideration (Sun Life Of ce, Ltd. v. CA, G.R. No. 89741, March 13, 1991);
and
3. If the absence of stipulation or if the stipulation is void, the insured may bring an
action within 10 years, in case the contract Is written (CIVIL CODE, Art. 1144).

Q: M Company insured all of its properties against "all risks of physical loss,
destruction of, or damage, including re" for the period March 31, 2009, to March
31, 2010. The insurance policy provides,
X
"If a claim be made and rejected and an action or suit be
not commenced either in the Insurance Commission or any Court
of competent jurisdiction within twelve (12) months from receipt of
notice of such rejection, or in case of arbitration taking place as
provided herein within twelve (12) months after due notice of the
award made by the arbitrator or arbitrators or umpire, then the
claim shall for all purposes be deemed to have been abandoned
CIENTIO hereunder.
and shall not thereafter be recoverable
On May 24, 2009, re broke out at Integrated M Company's building causing
damage to its production equipment and machineries, prompting the M Company
to le a claim for indemnity on the following day, which the respondent B Insurance
Company rejected on February 24, 2010, on the ground that the cause of the loss
was an excluded peril. M Company led a motion a for reconsideration which
respondent rejected in a letter dated April 12, 2010, which the petitioner received
on April 15, 2010. Subsequently a year after, on April 11, 2011, M Company led a
complaint for speci c performance and damages against Standard Insurance
before the RTC. B Insurance Company contends that petitioner's cause of action
had prescribed because it led the complaint beyond the 12-month period from the
rejection of the claim. Is M Company's cause of action prescribed?
ANS: Yes, the insurance policy is explicit that if a claim is made and rejected, an action
or suit should be commenced within a period of 12 months. The accrual of the cause of
action for ling an insurance claim shall commence when there is a nal rejection by the
insurance company to avoid unnecessary suit which refers to the rejection by the
insurance company. the rejection referred to should be construed as the rejection, in the
rst instance, for if what is being referred to is a reiterated rejection conveyed in a
resolution of a petition for reconsideration, such should have been expressly stipulated
(Integrated Micro Electronics Inc., V. Standard Insurance Co., Inc., G.R. No. 210302,
August 7, 2020; Lopez Case).
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Q: What is subrogation?
ANS: Subrogation is the substitution of one person in place of another with reference to
lawful claim or right, SO that he who is substituted succeeds to the rights of the other In
relation to a debt or claim, including its remedies or securities (Lorenzo Shipping
Corporation v. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004).

Q: What is the basis for the right of subrogation in a contract of insurance?

ANS: If the plaintiff's property has been insured, and he has received ndemnity from the
insurance company for the Injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the persor who has violated the contract (CIVIL CODE, Art.
2207).

Q: What are the requisites of subrogation? (PARC)

ANS: The requisites of subrogation are:
1. The insurance involved is Property Insurance;
2. There is a loss Arising from the risk insured against;
3. The insured Received indemnity from the insurer for the loss; and
4. The indemnity is Covered by the face value of the policy (AQUINO, Insurance
Law, supra at 266). MUTTVINEWWOD

Q: What is the extent of subrogation?

ANS: The insurer is subrogated only to the extent of the amount paid. If the amount paid
by the insurance company does not fully cover the injury or loss, the aggrieved party shall
be entitled to recover the de ciency from the person causing the loss or injury (CIVIL
CODE, Art. 2207).

Q: In what instances will subrogation not be available? OPENL)

ANS: Subrogation will not be g vailable when
1. 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;
2. The insurer Pays the assured the value of the lost goods without notifying the of
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;
3. 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 v.
CA, G.R. No. 81026, April 3,1990);
4. Life Insurance is involved (CIVIL CODE, Art. 2207); and
5. Recovery of loss is in Excess of the insurance coverage (CIVIL CODE, Art.
2207).
Q: What is the prescriptive period for the subrogee-insurer to le a claim against
the wrongdoer based on a quasi-delict?
ANS: The prescriptive period i 4 years from the time the tort is committed against the
insured by the wrongdoer (Henson, Jr. v. UCPB General Insurance Co., Inc., G.R. No.
223134, August 14, 2019).

F. WARRANTIES
Q: What is a warranty?
ANS: A warranty is a statement or promise set forth in the policy, or by reference
incorporated therein, the untruthfulness or non-ful llment of which in any respect, and
without reference to whether the insurer was in fact prejudiced by such untruth or
nonful llment, renders the policy voidable by the insurer (Prudential Guarantee and
Assurance, Inc., v. Trans-Asia Shipping Lines, G.R. No. 151890, June 20, 2006).
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Note: Warranty is either expressed or implied (INSURANCE CODE, Sec. 67).

Q: What are the types of warranty?

ANS: Warranties may be;
1. Express - An agreement expressed in a policy whereby the insured stipulates
that the certain facts relating to the risk are or shall be true, or certain acts
relating to the same subject have been or shall be done (DE LEON & DE LEON
Jr., Insurance Code, supra at 230).
2. Implied is a warranty which from the very nature of the contract or from the
general tenor of the words, although no express warranty is mentioned, is
necessarily embodied in the policy as a part thereof and which binds the insured
as though expressed in the contract (DE LEON & DE LEON Jr., Insurance Code,
supra at 230 to 231).
3. Af rmative - is one which asserts the existence of a fact or condition at the
time it is made. The warranty is continuing if it is is one that must be satis ed
during the entire coverage period of insurance.
4. Promissory is one which where the insured stipulates that certain facts or
conditions pertaining to the risk-shalk exist or that certain things with reference
thereto shall be done or omitted.

Q: What are the formalities required for express warranty?

ANS: Without prejudice to Sec 51 of the Insurance Code, every express warranty, made
at or before the execution of a policy must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy making a part of it
(INSURANCE CODE, Sec. 70).

Q: What is the effects of breach of Material Warranty?

ANS: Violation of material warranty or of a material provision of a policy will entitle the
other party to rescind the contract, In order that the insurer may be entitled to rescind a
contract of insurance on the ground of a breach of warranty, fraud is not essential, but is
this merely exonerates an insurer from the time that it occurs, or where it is broken in its
CEN to the risk /INSURANCE CODE, Secs. 74 &
inception, prevents the policy from attaching
76).

Q: When does a breach of a warranty relating to the future NOT avoid the policy?
ANS: The omission to ful ll the warranty does not avoid the policy when, before the time
arrives for the performance of a warranty relating to the future:
1. A loss insured against happens; or
2. The performance becomes unlawful at the place of the contract or impossible
(INSURANCE CODE, Sec. 73).

Q: When may an immaterial warranty becomes material?

ANS: A policy may declare that a violation of speci ed provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy (INSURANCE
CODE, Sec. 75).

G. PREMIUM
Q: What is an insurance premium?
ANS: It is the agreed price for assuming and carrying the risk, i.e., the consideration paid
to an insurer for undertaking to indemnify the insured against a speci ed peril (DE LEON,
Insurance Code, supra at 248).

Q: When is the insurer entitled to the payment of premiums?

ANS: An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against (INSURANCE CODE, Sec. 77).
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CASH AND CARRY RULE

Q: What is the Cash and Carry Rule?
ANS: The Cash and Carry Rule provides that, notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid (INSURANCE CODE, Sec.
77).

EXCEPTIONS
LAW
Q: What are the exceptions to the Cash and Carry Rule? (GrACIE)
ANS: The following are the exceptions to the Cash and Carry Rule:
1. In case of life or industrial life policy, whenever the Grace period provision
applies (INSURANCE CODE, Sec. 77);
2. Where the insurer Acknowledged in the policy or contract of insurance itself the
receipt of premium, even premium has not been actually paid (INSURANCE
CODE, Sec. 79);
3. Where the insurer granted the insured a Credit term for the payment of the
premium, and loss occurs before the expiration of the term; LOdENWoD

4. Where the parties agreed that premium payment shall be in Installments and
partial payment has been made at the time of loss; and
5. Where the insurer is in Estoppel as when it has consistently granted a 60 to 90-
day credit term for the payment of premiums- (Gaisano v. Development
Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017).

Q: What
ANS: Theare the requisites
requisites forcredit
for a valid a valid credit extension?
extension are as follows;
1. The credit extension must be provided for under the broker and agency
agreements with duly licensed intermediaries; and
2. The credit extension to a duly licensed intermediary should not exceed 90 days
from the date of issuance of the policy (INSURANCE CODE, Sec. 77).

Q: What is the effect of an acknowledgement of receipt of premium?

ANS: An acknowledgement 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 (INSURANCE CODE, Sec. 79).

Q: Is payment by installment allowed in insurance contracts?

ANS: While the import of Section 77 is that prepayment of premiums is strictly required
as a condition to the validity of the contract, we are not prepared to rule that the request
to make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the initial
premium or rst installment. An understanding to allow insured to pay premiums in
installments is not so proscribed. At the very least, both parties should be deemed in
estoppel to question the arrangement they have voluntarily accepted (Makati Tuscany
Condominium Corp. V. CA, G.R. No. 95546, November 6, 1992).

Q: What are the effects of the non-payment of premiums?

ANS: The effects of the non-payment of premiums are as follows:
1. Non-payment of First Installment - it prevents the contract from becoming
binding notwithstanding the acceptance of the application or the issuance of
policy unless waived (INSURANCE CODE, Sec. 77); and
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2. Non-payment of Subsequent Installments - non-payment of the balance of

the premium due does not produce the cancellation of the contract unless, by
express stipulation, it is provided that the policy shall in that event be suspended
or shall lapse (Philippine Phoenix Surety and Insurance, Co., Inc., V.
Woodworks, Inc., G.R. No. L-22684, August 31, 1967).

Q: What devices can be used to prevent forfeiture of premium paid in a life

insurance in case of failure to pay subsequent installments?
ANS: The following devices can be used to prevent forfeiture of premium paid in a in life
insurance in case of failure to pay subsequent installments:
1. Cash Surrender Value - a fractional amount of insurance bene t the insurer
agrees to pay the insured in exchange for surrendering the policy in the event
of inability or unwillingness to pay the outstanding premium (INSURANCE
CODE, Sec. 233 ());
2. Automatic Loan Clause - if at the end of the grace period the premium due
has not been paid, a policy loan will automatically be made from the policy's
cash value to pay the premium. The primary purpose is to prevent unintentional
lapse of the policy (AQUINO, Insurance Law, supra at 125);
3. Grace Period - the period after the date of the premium is due during which the
premium can be paid with no interest charged and policy remaining in force (ld.
at 116); and
4. Reinstatement provision that the holder of the policy shall be entitled to
reinstatement of the contract at any time within three years from the date of
default in the payment of premium on due proceedings, (INSURANCE CODE,
Sec. 233 ())
seas rise di

Q: When may the insured be entitled to a return of the whole premium?

ANS: A person insured- is entitled to a return of the whale premium
1. If no part of his interest in the thing insured be exposed to any of the perils
insured against (INSURANCE CODE, Sec 80 (a)); and
2. When the contract is voidable, and subsequently annulled under the provisions
of the Civil Code; or on account of the fraud or misrepresentation of the insurer,
or of his agent, or on account of facts, or the existence of which the insured was
ignorant of without his fault; or when by any default of the insured other than
actual fraud, the Insurer never incurred any liability under the policy
(INSURANCE CODE, Sec. 82).

Note: A person insured is not entitled to return of premium if the policy is annulled,
rescinded or if a claim is denied by reason of fraud (INSURANCE CODE, Sec. 82).

Q: When may the insured be entitled to a proportionate return of the premium?

ANS: A person insured is entitled to a proportionate return of the premium in the following
cases:
1. Where the insurance is made for a de nite period of time and the insured
surrenders his policy - in this case, the insured s entitled to such portion of
the premium as corresponds with the unexpired time, at a pro rata rate, unless
a short period rate has been agreed upon and appears on the face of the policy,
after deducting from the whole premium any claim for loss or damage under the
policy which has previously accrued: Provided, no holder of life insurance
policy may avail himself of such privileges without suf cient cause as otherwise
provided by law (INSURANCE CODE, Sec 80(b)); and
2. Where there is an over insurance by several insurers other than life - the
insured herein is entitled to ratable return of the premium, proportioned to the
amount by which the aggregate sum insured in all the policies exceeds the
insurable value of the thing at risk (INSURANCE CODE, Sec. 83).
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H. LOSS
Q: What is loss?
ANS: Loss is the injury or damage sustained by the insured in consequence of the
happening of one or more of the accidents or misfortune against which the insurer, in
consideration of the premium, has undertaken to indemnify the insured (Bonifacio Bros.,
Inc v. Mora, G.R. No. L-20853, May 29, 1967).

Q: When is the insurer liable for loss? (PREIN)

ANS: The insurer is liable for loss in the following instances:
1. Loss, the Proximate cause of which, is the peril insured against (INSURANCE
CODE, Sec. 86);
2. Loss, due to a peril not insured against, where the thing insured is Rescued from
a peril insured against that would otherwise have caused a loss, if in the course
of rescue, it permanently deprives the insured of its possession, in whole or in
part (INSURANCE CODE, Sec. 87);
3. Loss caused by Efforts to Rescue the thing insured from a peril insured against
(INSURANCE CODE, Sec. 87) 9
4. Loss, the Immediate cause of which, is the peril insured against except where
the proximate cause S an excepted peril (INSURANCE CODE, Sec. 88); and COMMERCIAL LAW

5. Loss through the Negligence of the insured, or of the insurance agents or others
(INSURANCE CODE, Sec. 89).
Q: What is proximate cause?
ANS: The proximate legal cause S that acting rst and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and continuous
chain of events, each having a close causal connection with Its immediate predecessor,
the nal event in the chain immediately effecting the injury as a natural and probable result
of the cause which rst acted, under such circumstances that the person responsible for
the rst event should, as an ordinarily prudent and intelligent person, have reasonable
ground to expect at the moment of his act or default that an injury to some person might
probably result therefrom (Vda. de Bataclan v. Medina, G.R. No. L-10126. October 22,
1957).
Q: What is an immediate cause?
ANS: The immediate cause suggests proximity n time to the loss. What is usually
contemplated is situation where at least two causes are involved; one cause occurs
after the other (AQUINO, Insurance Law, supra at 293).

Q: What is a remote cause?

ANS: The remote case is that cause which some independent force merely took
advantage of to accomplish something which is not the natural effect thereof (Id. at 292).

Q: What kind of negligence may allow for the right to recover under the insurance
contract?
ANS: Distinction must be made between ordinary negligence and gross negligence. The
negligence must not be of such gross character as to amount to misconduct or wrongful
acts; otherwise, such negligence shall release the insurer from liability under the
insurance contract (AQUINO, Insurance Law, 165, supra at 293).

NOTICE AND PROOF OF LOSS

Q: When should notice of loss be given?
ANS: In case of loss upon an insurance against re, notice thereof should be without
unnecessary delay. For other non-life insurance, the Insurance Commissioner may
specify the period for the submission of the notice of loss (INSURANCE CODE, Sec. 90).
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Q: What is the effect of notice to the agent of the insurer?

ANS: The notice to the agent of the insurer binds the insurer. Under the doctrine of
representation, notice to the agent is notice to the principal (AQUINO, Insurance Law,
supra at 245; Bank of Philippine Islands v. Laingo, G.R. V. No. 205206, March 16, 2016).

Q: When is delay in the presentation of notice or proof of loss deemed waived?

ANS: Delay is deemed waived:
1. If delay is caused by any act of the insurer; and
2. By failure to take objection promptly and speci cally upon that ground
(INSURANCE CODE, Sec. 93).

Q: What kind of proof of loss is the insured required to give?

ANS: When a preliminary proof of loss is required by a policy, the insured is not bound to
give such proof as would be necessary in a court of justice; but it is suf cient for him to
give the best evidence which he has in his power at the time (INSURANCE CODE. Sec.
91).

If the policy requires, by way of preliminary proof of loss, the certi cate or testimony of a
person other than the insured, it is suf cient for the Insured to use reasonable diligence
to procure it, and in case of the refusal of such person to give it, then to furnish reasonable
evidence to the insurer that such refusal was not induced by any just grounds of disbelief
in the facts necessary to be certi ed or 10testi ed (INSURANCE CODE, Sec. 94).

I DOUBLE INSURANCE; OVERINSURANCE

Q: What is double insurance?
ANS: Double insurance exists where the same person is insured by several insurers
separately in respectODA
to the same subject and interest (INSURANCE CODE, Sec. 95).

Q: What are the requisites of double insurance? (TIRIS)

ANS: The requisites in order for double insurance to arise are as follows:
1 . Two or more Insurers insuring separately;
2. Same Insured person
3. Same Risk
4. or insured;
Same Interest perl rasured
and against AN 1/
5. Same Subject matter (Malayan Insurance Co., Inc., v. Philippine First Insurance
Co., Inc., G.R. No. 184300, July 11, 2012).

Q: What is over-insurance?
ANS: There is Over-insurance when the insured takes out an insurance over the property
in insured in an amount which is in excess of the value of his insurable interest (AQUINO,
Insurance Law, supra at 359). at

Q: When is there an over-insurance by double insurance?

ANS: It exists when there are two or more policies on the same adventure and interest or
any part of it, and the sums insured exceed the insurable interest value in the case n of an
unvalued policy or the value xed by the policy in the case of valued policy (DIZON, The
Insurance Code of the Philippines (2009), p.525).

Q: What are the rules on payment when the insured, in a policy other than life, is a
over insured by double insurance?
ANS: When the insured in a policy other than life is over insured by double insurance:
1. The insured, unless the policy otherwise provides, may claim payment from the
insurers in such order as he may select, up to the amount for which the insurers
are severally liable under their respective contracts;
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2. Where the policy under which the insured claims is valued policy, any sum
received by him under any other policy shall be deducted from the value of the
policy without regard to the actual value of the subject matter insured;
3. Where the policy under which the insured claims is an unvalued policy, any sum
received by him under any policy shall be deducted against the full insurable
value, for any sum received by him under any policy;
4. Where the insured receives any sum in of excess of the valuation in the case of
valued policies, or of the insurable value in the case of unvalued policies, he
must hold such sum in trust for the insurers, according to their right of
contribution among themselves; and
5. Each insurer is bound, as between himself and the other insurers, to contribute
ratably to the loss in proportion to the amount iS for which he is liable under his
contract (INSURANCE CODE, Sec. 96).

Q: What is the nature of the liability of the several insurers in double insurance?
ANS: Under the Principle of Contribution or Contribution Clause, each insurer is bound,
as between himself and other insurers, to contribute ratably to the loss in proportion to
the amount for which he is liable under his contract (INSURANCE CODE, Sec. 96 (e)).

Q: What is "Other Insurance" or "Additional Insurance" clause? MVTIVIaHEWWOD

ANS: Where the insurance policy speci es as a condition the disclosure of existing CO-
insurers, non-disclosure thereof is a violation that entitles the insurer to avoid the policy.
This condition is common in re insurance policies and is known as the "other insurance
clause (Multi-Ware Manufacturing Corp. v. Cibeles Insurance Corp., G.R. Nos. 230528;
February 1, 2021).

Q: When is there a violation of the "other insurance" clause?

ANS: The other insurance must be upon he same subject matter, the same interest
therein, and the same risk. Thus, even though the multipte insurance policies involved
were all issued in the name of the same assured, over the same subject matter and
covering the same risk, it was ruled that there was no violation of the "other insurance
clause" since there was no double insurance (Malayan Insurance V. Co., Inc v. Philippine
First Insurance Co., G.R. No. 184300, July 11, 2012) m

J. REINSURANCE
Q: What is reinsurance?
ANS: A contract of reinsurance is one by which an insurer procures a third person to
insure him against loss or liability by reason of such original insurance (INSURANCE
CODE. SEC. 97).

Reinsurance is therefore the insurance of an insurance (AQUINO, Insurance Law, supra

at 366)

Q: Who are the parties to a reinsurance contract?

ANS: The parties to a reinsurance contract are the reinsured and the reinsurer (AQUINO,
Insurance Law, supra at 366).

The Reinsurer agrees to indemnify Reinsured, either in whole or in part, against loss or
liability which the latter may sustain or incur under a separata and original contract of
a insurance with a third party, the original insured (DE LEON & DE LEON JR., Insurance
Code, supra at 320).

Note: The original insured has no interest in a contract of reinsurance (INSURANCE

CODE, Sec. 100).
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Sec. 100 of the Insurance Code makes it clear that "the original insured has no interest in
contract of reinsurance." Thus, the original insured cannot le an action to recover from
the reinsurer even if he has dif culty in recovering from the original insurer. There is no S
privity between the original insured and the reinsurer. (AQUINO, Insurance Law, supra at
366)

Q: What is the duty of reinsured to disclose facts?

ANS: Where an insurer obtains reinsurance, except under reinsurance treaties, he must
communicate all the representation of the original insured, and also, all the knowledge
and information he possesses, whether previously or subsequently acquired, which are
material to the risk (INSURANCE CODE, Sec. 98).

Q: What is the nature of Reinsurance Contracts?

ANS: A reinsurance contract is presumed to be a contract of indemnity against liability,
and not merely against damage (INSURANCE CODE. Sec. 99).

DOUBLE INSURANCE vS. REINSURANCE

POINT OF DISTINCTION DOUBLE INSURANCE REINSURANCE

Involves Different
As to Interest Involves same interest
Interests

As to Subject Property Original Insurer's Risk

Insurer becomes the
Insurer Remains in such
Insurer insured in relation to
capacity the reinsurer

Insured is the party In Original Insured has

As to Insured interest in the tWO no interest in the
insurance contracts reinsurance contract.
Insured has to give his Insured's consent is
As to Insured's Consent
consent not necessary
(DE LEON & DE LEON JR., Insurance Code, supra.at 321)

K. CLASSES OF INSURANCE
FIRE INSURANCE

Q: What is the coverage of Fire Insurance?

ANS: it shall include insurance against loss by re, lightning, windstorm, tornado, or
earthquake, and other allied risks when such risks are covered by extension to re
insurance policies or under separate policies (INSURANCE CODE, Sec. 169).

Note: Such risks must be expressly covered by an extension to re insurance policies or

under separate policies to allow the insured to recover loss arising therefrom (Id).

Q: When will an alteration of the insured object prevent recovery on the policy?
ANS: Alteration will prevent recovery on the policy only if the if following requisites are
present:
1. The alteration is made without the consent of the insurer;
2. The use or condition is beyond that expressly allowed by the Limitation in the
policy;
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3. The alteration increases the risk; and

4. The alteration is made by means within the control of the insured (INSURANCE
CODE, Sec. 170).

Q: What are the effects of alteration of the object insured to the contract of re
insurance?
ANS:
1. An alteration in the use or condition of a thing insured from that to which it is
limited by the policy, which does not increase the risk, does not affect a contract
of re insurance (INSURANCE CODE, Sec. 171).
2. A contract of re insurance is not affected by any act of the insured subsequent
to the execution of the policy, which does not violate its provisions, even though
it increases the risk and is the cause of the loss (INSURANCE CODE, Sec. 172).

Q: How is the indemnity measured under Fire Insurance?

ANS: Indemnity in an insurance against re may be measured as follows:
1. Open Policy - Only the expense necessary to replace the thing lost or injured
in the condition it was at the time of the injury (INSURANCE CODE, Sec. 173);
or COMMERCIAL LAW

2. Valued Policy -The effect shall be the same as in a policy of marine insurance
(ld.).

Q: What is Option to Rebuild Clause?

ANS: The parties may stipulate on the repairing, rebuilding oi replacing of buildings or
structures wholly or partially damaged or destroyed in lieu of payments for the value of
the loss (INSURANCE CODE Sec. 174).

Q: What is Non Alienation Clause?

ANS: No policy of re insurance shall be pledged hypothecated, or transferred to any
person, rm, or company who acts as agent for or otherwise represents the issuing
company, and any such pledge, hypothecation, or transfer hereafter made shall be void
and of no effect insofar as it may affect other creditors of the insured (INSURANCE CODE
Sec. 175).

CASUALTY
Q: What is Casualty Insurance?
ANS: Casualty Insurance is an insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss falling under other types of insurance such as re
or marine (INSURANCE CODE, Sec. 176);

Q: What are the risks that may be covered by Casualty Insurance?

ANS: The following may be covered by casualty insurance:
1 . Theft, Robbery and Burglary Insurance

Except: Persons in the insured's service and employment.

2. Compulsory Motor Vehicle Liability Insurance

3. Plate Glass Insurance
4. Personal Accident Insurance and Health Insurance
5. Employer's Liability and Workmen's Insurance
6. Other substantially similar kinds.
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SURETYSHIP

Q: What is Suretyship?
ANS: It is an agreement whereby a surety quarantees the performance by the principal
or obligor of an obligation or undertaking in favor of a third party called the obligee
(INSURANCE CODE, Sec. 177);

Note: It is considered an insurance contract if it is executed by the surety as a vocation,

and not incidentally (INSURANCE CODE, Sec. 2).

Q: What is the nature of liability of surety/sureties?

ANS: The liability of the surety or sureties shall be joint and several with the obligor and
shall be limited to the amount of the bond. It is determined strictly by the terms of the
contract of suretyship in relation to the principal contract between the obligor and the
obligee (INSURANCE CODE, Art. 178).

NOTE: The surety has no right to intervene in the principal contract because the surety
possesses no direct or personal interest over the obligations (Stronghold Insurance
Company, Inc. v Tokyu Construction Company, Ltd., G.R Nos. 158820-21; June 5, 2009).

Q: What are the rules on payment of premiums in Surety?

ANS: The rules on payment of premiums in surety are as follows:
1. The premium becomes a debt as soon as the contract of suretyship or bond is

2.
perfected and delivered to the obliger; O
The contract of suretyship or bond shall not be valid and binding unless and until
the premium therefor has been paid (id.);
3. Where the obligee has accepted the bond,.it shallbe valid and enforceable
notwithstanding the non-payment of premiums;
4, If the contract of suretyship or bond is not accepted by of led with the obligee,
the surety shall collect only a reasonable amount, not exceeding 50% of
premium due thereon as service fee, and
5. if the non-acceptance of the bond be due to the fault or negligence of the surety,
no service fee, stamps, or taxes imposed shall be collected by the surety

(INSURANCE CODE, 500;179, ANY

Note: Pertinent provisions of the Civit Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the provisions of a contract of
suretyship (INSURANCE CODE, Sec. 180).

LIFE INSURANCE

Q: What is Life Insurance?

ANS: it is an insurance on human lives and insurance appertaining thereto or connected or
therewith (INSURANCE CODE, Sec. 181).

Q: What are the kinds of life insurance?

ANS: Life Insurance could be a/an: (OLET-IRe)
1. Ordinary Life Policy - One under the terms of which the insured is required to
pay a certain xed premium annually or at more frequent intervals throughout
his entire lifetime and the bene ciary is entitled to receive xed payment under
the policy only after the death of the insured. This type of policy is also known
as the whole life or regular life, or straight life or cash-value insurance (DE LEON
& DE LEON JR., Insurance Code, supra at 461-462);
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2. Limited Payment Life Policy One under the terms of which the premiums
are payable only during a limited period of years, usually 10, 15, or 20. When
the speci ed number of premium payments has been made, the insurance is
paid up and fully effective during the insured's life. This kind of policy is also
called limited premium insurance policy (Id. at 462);
3. Endowment Policy - One providing for xed premium payments for a de nite
term, under the terms of which the insurer binds himself to pay a xed sum to
the insured if he survives for a speci ed period, or , if he dies within such period,
to some other person indicated (Id. at 462-463); and
4. Term Insurance Policy - One also providing for xed premium payments for a
speci ed term. It provides coverage only if the insured dies during the limited
period. It is an insurance for a xed or a speci c term, such as 2, 5, or 10 years.
If the insured dies within the period speci ed, the policy is paid to the bene ciary.
If he survives the period, the contract terminates at the end of the time period.
This kind of insurance is also known as temporary insurance (Id. at 463-464);
5. Industrial Life - That form of life insurance under which the premiums are
payable either monthly or oftener jf the face amount of insurance provided in
any policy is not more than ve hundred times that of the current statutory
minimum daily wage in the City of Manila, and if the words industrial policy are MUTTVISdEWWO?

printed upon the policy as part of the descriptive matter (INSURANCE CODE,
Sec. 235); and
6. Retirement Pension Trusts contract or undertaking for the payment of
annuities including contracts for the payment of lump sums under a retirement
program where a life insurance company manages or acts as a trustee for such
retirement program (INSURANCE CODE, Sec.181)

Q: In what cases is the insurer liable even it the insured commits suicide?
ANS:1The
. insurer in a life insurance contract shall be liable in case of suicide only:
When it is committed after the policy has been in force for a period of 2 years
from the date of its issue or of its last reinstatement, unless the policy provides

A
a shorter period; or
2. When it is committed in the state of insanity regardless of the date of
commission (INSURANCE CODE, Sec. 183)

Q: May a life insurance policy be an object of transfer?

ANS: The policy of life insurance may be the object of voluntary and involuntary transfer.
Insurable interest on the part of the transferee is not necessary. Notice to the insurer IS
also not necessary (INSURANCE CODE, Secs. 184-185).

A policy of insurance upon life or health may pass by transfer, will or succession to any
person, whether he has an insurable interest or not, and such person may recover upon
t whatever the insured might have recovered (INSURANCE CODE, Secs.184).

Q: What is the measure of indemnity in Life Insurance?

ANS: Unless the interest of person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or health is
the sum xed in the policy (INSURANCE CODE, 186).

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Q: What is Compulsory Motor Vehicle Liability Insurance (CMLVI)?

ANS: It is a special type of casualty insurance against passenger and third-party liability
for death or bodily injuries and damage to property arising from motor vehicle accidents
(INSURANCE CODE, Sec. 386(f);
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Note: The limit of liability with regard to the items listed in the Schedule of Indemnities is
the amount provided therein, while the limit of liability with regard to other kinds of
damages not listed in the same Schedule of Indemnities is the total amount of insurance
coverage. It then follows that the amounts in excess of the limits of liability in the schedule
for items listed therein are not covered by the total coverage and such excess S already
for the personal account of the insured or an excess coverage provider (Malayan
Insurance Co., Inc. V. Stronghold Insurance Co., Inc., G.R. No. 203060; June 28, 2021).

Q: Who are the persons subject to the CMLVI?

ANS: CMLVI is mandatory among the following:
1. Motor Vehicle Owner - One who is the actual legal owner of a motor vehicle in
whose name such vehicle is registered with the Land Transportation Of ce
(INSURANCE CODE, Sec. 386(d)); and
2. Land Transportation Operator • S One who is the owner of a motor vehicle or
vehicle being used for conveying passengers for compensation including school
buses (INSURANCE CODE, Sec. 386(e)).

Note: The land transportation operator or a motor vehicle owner cannot operate his
vehicle in public highways if there is no policy insurance or guaranty in cash or surety
bond in force to indemnify the death or injury and/or damage to property of the third party
or passenger (INSURANCE CODE; Sec. 387).

Q: Who pays for the premiums in CMLVI? "W

ANS: Premiums are paid by the operätor or owner of the vehicle, It shall be unlawful to

7
require their driver premployees to contribute in the payment of premium (INSURANCE
CODE, Sec. 399).

Q: What is the "No Fault Clause"..

CAROLIZ
W
ANS: The no fault clause provides that any claim for death or bodily injuries sustained by
passenger or third party under a CMVLI policy shall be paid without the necessity of
proving fault or negligence of any kind provided the total indemnity in respect of any
person shall be P15,000 and proofs of loss are, submitted under oath (INSURANCE
CODE, Sec. 391).

Q: What are the limitations of "No-Fault Claim??

ANS: These are the limitations of No-Fault-Claim
The total indemnity in respect of any person shall not be more than P15,000.00;
2. The following proof of loss, when submitted under oath, shall be suf cient
evidence to substantiate the claim:
a. Police report of accident; and
b. Proof of injury or death
i. Death certi cate and evidence suf cient to establish the proper
payee; or
li. Medical report and evidence of medical or hospital disbursement
in respect of which refund is claimed; and
3. No double recovery - claim may be made against one motor vehicle only in case
two or more vehicles are involved:
a. If claimant i: the occupant of a vehicle, the claim iS to be made on the
insurer of the vehicle in which he was an occupant; or
b. In any other case, claim shall lie against the insurer of the directly
offending vehicle (INSURANCE CODE, Sec. 391).

Note: The "No Fault Indemnity" is without prejudice to the proper determination of the
proper party at fault from whom liability for damages may be demanded (P.D. No. 1455,
Sec. 26).
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Q: Does the "No-Fault Claim" apply to property damage?

ANS: The no-fault claim does not apply to property damage. An insured may choose to
avail of an insurance policy which may cover damage to property of a third-party or
passenger, as the case may be, if it is offered by an insurer subject to the payment of the
computed premiums as may be approved by the Insurance Commission (Insurance
Circular Letter No. 2014-52, December 15, 2014).

MARINE INSURANCE
Q: What is the scope of Marine Insurance?
ANS:
1. Insurance against loss of or damage to:
a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise,
effects, disbursements, pro ts, moneys, securities, choses in action,
instruments of debts, valuable papers, bottomry, and respondentia
interests and all other kinds of property and interests therein;
o. Person or property in connection with or appertaining to marine, inland
marine, transit or transportation insurance, including liability for loss of or
damage arising out of or in connection with the construction, repair,
operation, maintenance or use of the subject matter of such insurance; COMMERCIAL LAW

c. Precious stones, jewels, jewelry, precious metals, whether in course of

transportation or otherwise; and
d. Bridges, tunnels and other instrumentalities of transportation and
communication (excluding buildings, their furniture and furnishings, xed
contents and supplies held in storage); piers, wharves, docks and slips,
and other aids to navigation and transportation, including dry docks and
marine railways, dams and appurtenant facilities for the control of
waterways (INSURANCE CODE, Sec. 101 (a)).
2. Marine protection and indemnity insurance a it is an insurance against legal
liability of-the insured for loss, damage, or expense incident to ownership,
operation, chartering, maintenance, use, repair, or construction of any vessel,
craft, or instrumentality in use of ocean or inland waterways, including liability of
the insured for personal injury, illness, or death; or for loss of or damage to the
property of another person (INSURANCE CODE, Sec. 101 (b)).

Q: What are the implied warranties in Marine Insurance? (SPAIN)

ANS: The following are the implied warranties in marine insurance;
1. Ship is Seaworthy (INSURANCE CODE, Sec. 115)
2. Presence of insurable interest (INSURANCE CODE, Sec. 102)
3. Against Improper deviation (INSURANCE Secs. 126, 127 & 128)
4. Against Illegal ventures (AQUINO & SUNDIANG, Reviewer on Commercial
Law, supra at 152)
5. Neutrality

Q: What is "Seaworthiness"
ANS: Whether or not the ship is reasonably t to perform the service and to encounter
the ordinary perils of the voyage (INSURANCE CODE, Sec. 116).

Note: A ship which is seaworthy for the purpose of an insurance upon the ship may,
nevertheless, by reason of being un tted to receive the cargo, be unseaworthy for the
purpose of insurance upon the cargo (INSURANCE CODE, Sec. 121).

Q: When should a ship be seaworthy?

ANS: As general rule, the warranty of seaworthiness is complied with if the if ship be
seaworthy at the time of the commencement of the risk (INSURANCE CODE, Sec. 117).
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Except:
1. Time Policy - The ship must be seaworthy at the commencement of every
voyage that it may undertake during the period of the coverage;
2. Cargo Policy - Each vessel upon which the cargo is shipped or transshipped
must be seaworthy at the commencement of each particular voyage;
3. Voyage Policy contemplating a voyage in different stages -The ship must
be seaworthy at the commencement of each stage of the voyage; and
4. Port Policy - The ship must be seaworthy at the time the vessel is exposed iS to
nay risk at the port (AQUINO, Insurance Law, supra at 329).

Note: Where different portions of the voyage contemplated by a policy differ in respect to
the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is
complied with if, at the commencement of each portion, the ship is seaworthy with
reference to that portion (INSURANCE CODE, Sec. 119).

Q: What is the coverage of the Warranty of Seaworthiness?

ANS: The warranty of seaworthiness covers: (CPC-SRO)
1. Condition of the structure of the ship posie
2. It must be Properly laden,
3. Provided with a Competent Master
4. Suf cient Number of Competent Of cers and seamen;
5. Requisite appurtenances and equipment; and
6. Other necessary or proper stores and implements for the voyage (INSURANCE
CODE, Seé. 118)
UD
Note: When the ship becomes unseaworthy during the voyage to which an insurance
relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or
ODliability from any loss arising therefrom (INSURANCE CODE,
shipowner's interest from
120).

TRANSPORTATION LAW

A. GENERAL PRINCIPLES OF COMMON CARRIERS

COMMON CARRIER vs. PRIVATE CARRIER™
Q: What are common carriers?
ANS: Common carriers are persons, corporations, rms, or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, offering their services to the public (CIVIL CODE, Art. 1732).

Q: What are the tests to determine whether a party is a common carrier of goods?
ANS:
1. Two-Pronged test
Part of General Business Test
b. Public Representation Test
2. Four-Fold Test

Q: What is the Four-Fold Test?

ANS: The test for determining whether party is a common carrier of goods is;
1. He must be engaged in the business of carrying goods for others as public
employment, and must hold himself out as ready to engage in the transportation
of goods for person generally as a business and not as casual occupation;
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2. He must undertake to carry goods of the kind to which his business is con ned;
3. He must undertake to carry by the method by which his business is conducted
and over his established roads; and
4. The transportation must be for hire (First Philippine Industrial Corporation v. CA,
G.R. No. 125948, December 29, 1998).

Note: The true test for a common carrier is not the quantity or extent of the business
actually transacted, or the number and character of the conveyances used in the activity,
but whether the undertaking is a part of the activity engaged in by the carrier that he has
held out to the general public as his business or occupation (Sps. Pereña v. Sps. Nicolas,
G.R. No. 157917, August 29, 2012).

COMMON CARRIER vs. PRIVATE CARRIER

Common Carrier Private Carrier

As to De nition

Common carriers are persons, A private carrier is one who, without COMMERCIAL LAW

corporations, rms, or associations making the activity a vocation, or without

engaged in the business of carrying or holding himself/itself out to the public as
transporting passengers or goods or ready to act for all who may desire his or
both, by land, water, or air, for its services, undertakes, by special
compensation, offering their services to agreement in a particular instances only,
the public to transport goods or persons from one
place to another either gratuitously or for
hire.

As to Governing Law
Provisions on common carriers of the Provisions on ordinary contracts of the
Civil Code, Public Service Act and other Civil Code.
Special Laws relating to transportation

As to State Regulation
Subject to extensive State Regulation Limited State Regulation

As to Availability

Holds himself out for all people Contracts with particular individuals or
indiscriminately groups only

As to Diligence

Extraordinary Diligence Diligence of a good father of a family

As to Presumption of Negligence
There iS always a presumption of No presumption of negligence
negligence or fault unless roved that
they exercised extraordinary diligence
under Article 1733 of the Civil Code.
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As Exemption for Employees' Negligence

Cannot stipulate that it is exempt from May validly enter into such stipulation
liability for the negligence of its agents or
employees.
Note: It is against public policy.

As to Obligation to Carry
A common carrier is bound to carry for all A private carrier is not bound to carry for
who offer such goods as it is accustomed any person, unless it enters a special
to carry and tender reasonable agreement to do so.
compensation for carrying them.

As to Stipulation Limiting Liability

Parties may not agree on limiting the Parties may limit the carrier's liability
carrier's liability except when provided by provided it is not contrary to law, morals,
law. It cannot stipulate that it is exempt or good customs. It can stipulate that it
from liability for the negligence of its s exempt from liability for the negligence
employees or agents, being contrary to of its employees or agents.
public policy.
(ld.)

DILIGENCE REQUIRED OF COMMON CARRIERS

Q: What is the diligence required of common carriers over the goods and
passengers transported by them ?.
ANS: Common carters, 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

N
safety of the passengers transported by them, according to all the circumstances of each
case (CIVIL CODE, Art: 1733). CEND
Q: What degree of diligence must be observed by common carriers with respect to
baggage of the passenger?
ANS: The law requires the common carrier to observe the same diligence as the hotel
keepers in case the baggage remains with the passenger; otherwise, extraordinary
diligence must be exercised (Sulpicio Lines, Inc., v. Sesante, G.R. No. 172682, July 27,
2016).

Q: What is the diligence required to third persons?

ANS: The extraordinary diligence is in effect owed also to third persons. In the exercise
of the standard extraordinary diligence, the common carriers cannot help but
simultaneously bene t pedestrians and the owners and passengers of other vehicles who
are equally entitled to safe and convenient use of roads and highways (Kapalaran Bus
Line v. Coronado, G.R. No. 85331, August 25, 1989).

Q: What is the economics theory?

ANS: Common carriers are obligated to exercise extraordinary diligence over the goods
entrusted to their care. This is due to the nature of their business, with the public policy
behind it geared toward achieving allocative ef ciency and minimizing the inherently
inequitable dynamics between the parties to the transaction. Allocative ef ciency is an
economic term that describes an optimal market where customers are willing to pay for
the goods produced. Thus, both consumers and producers bene t and stability is
achieved (Tan v. Great Harvest Enterprises, Inc., G.R. No. 220400, March 20, 2019).
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Q: What are the exceptions to extraordinary diligence? (OR)

ANS: The following are the exceptions to extraordinary diligence:
1. A common carrier is responsible for injuries suffered by a passenger on account
of the willful acts or negligence of Other passengers or of strangers, if the
common carrier's employees through the exercise of the diligence of a good
father of family could have prevented or stopped the act or omission (C/VIL
CODE, Art. 1763); and
2. Extraordinary diligence need not be exercised over the goods that are unloaded
temporarily if the shipper or owner has made use of the Right of stoppage in
transitu (CIVIL CODE, Art. 1737).

Q: What does extraordinary diligence in the vigilance over the goods require?
ANS: The extraordinary diligence in the vigilance over the goods tendered for shipment
requires common carriers to render service with the greatest skill and foresight and use
all reasonable means to ascertain the nature and characteristic of goods tendered for
shipment, and to exercise due care in the handling and stowage, including such methods
as their nature requires (Calvo v. UCPB, G.R. No. 148496, March 19, 2002).

Liabilities of Common Carriers

COMMERCIAL LAW

Q: What is the difference between the liability of a common carrier between Article
1759 and Article 1756?
ANS: Article 1759 of the Civil Code does not establish a presumption of negligence
because i explicitly makes the common carrier liable in the event of death or injury to
passengers due to the negligence or fault of the common carrier's employees. On the
other hand, Article 1756 of the Civil Code lays down the presumption of negligence
against the common carrier in the event of death or injury of its passenger (Sulpicio Lines,
Inc., v. Sesante, G.R. No. 172682, July 27, 2016).

Q: What is the basis of a cause of action of a passenger against the common

carrier?
ANS: The basis of a cause of action of a passenger against the common carrier is either
culpa contractual or culpa aquilana because although the relation of passenger and
carrier is contractual both in origin and nature, nevertheless, the act that breaks the
contract may also be a tort. Passengers do not contract merely for transportation. They
have right to be treated by the carrier's employees with kindness, respect, courtesy and
due consideration (Air France v. Carrascoso, G.R. No. L-21438, September 28, 1966).

Q: When are common carriers presumed to be liable with respect to goods?

ANS: If the goods are lost, destroyed or deteriorated, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as required in Article 1733 (C/VIL CODE, Art. 1735).

Q: What constitutes as a prima facie case of fault or negligence against the

common carrier with respect to the carriage of goods?
ANS: 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 (Eastern
Shipping Lines, Inc., v. BPI/MS Insurance Corp., G.R. No. 182864, January 12, 2015).

Q: What is the rule on a carrier's liability for delay?

ANS: In the absence of a special contract, a carrier s 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
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 372 BEDANVolume
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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 speci ed time, it is bound
to ful ll its contract and is liable for any delay, no matter from what cause it may have
arisen (Saludo Jr. v CA, G.R. No. 95536, March 23, 1992).

Q: What are the effects of excusable delay in delivering goods?

ANS: The following are the effects of excusable delay in delivering goods:
Excusable delay in carriage merely suspends, and generally does not terminate,
the contract of carriage. When the cause is removed, the master must proceed
with the voyage and make delivery (AQUINO & HERNANDO, Essentials of
Transportation and Public Utilities Law, (2020), 0. 80 [hereinafter AQUINO &
HERNANDO, Transportation Law]); and
2. During the detention or delay, the vessel continues to be liable as a common
carrier, not as a warehouseman, and remains duty bound to exercise
extraordinary diligence (ld.).

Q: What are the effects of inexcusable delay in delivering goods? (ALDEN)

ANS: The following are the effects of inexcusable delay in delivering goods:
1. The consignee may exercise his right to Abandon (CODE OF COMMERCE, Art.
371);
2. If delay is without just cause, the contract Limiting the common carrier's liability
cannot be availed of in case of loss or deteridration of the goods (CIVIL CODE,
Art. 1747); A)m TD
3. The carrier is liable for the Damages caused by the delay (CODE OF
COMMERCE, Aft. 35&, Saludo, Jr. v. CA, GIR. No. 95536, March 23, 1992);
4. The carrier remains duty bound to Exercise extraordinary diligence (AQUINO &
HERNANDO, Transportation Law, supra at 103); and
5. UD shall not free the carrier from responsibility (C/VIL CODE, Art.
A Natural disaster
1740).

Q: When is common carrier liable for an injury resulting from a defect in an

equipment purchased from a manufacturer?
ANS: A carrier is liable to its passengers caused by mechanical defects of the
conveyance. The carrier, while it is hot an insurer of the safety of the passengers, should
nevertheless be held to answer for the aws of its equipment if such aws were at all
discoverable. In this connection, the manufacturer will not relieve the carrier from liability
(Necesito v. Paras, G.R. No. L-10605, June 30, 1958).

Note: The rule on mechanical defects applies to "tire blow-outs" (Lasam v. Smith, G.R.
No. 19495, February 2, 1924).

Q: Mr. A was invited to be a keynote speaker by UN-WHO in Kazakhstan. Mr. A had

to take two connecting ights on board ABC Airlines. On the rst leg of his two-
day ight, Mr. A checked in his suitcase containing the materials for his speech
and his personal items. Upon checking, his suitcase did not arrive with him, he
then informed ABC Airlines which reassured him that his suitcase will arrive with
him in the next leg. His suitcase did not arrive, and he had to conduct the speech
without his materials. Mr. A wrote a demand letter to ABC Airlines. ABC Airlines
insisted that it performed extraordinary diligence in transporting Mr. A's suitcase
and that liability should be with the rst or last carrier. Is ABC Airlines' argument
correct?
ANS: No, ABC Airlines' argument is incorrect. Considering that a contract of carriage is
vested with public interest, a common carrier is presumed to have been at fault or to have
acted negligently in case of lost or damaged goods unless they prove that they observed
extraordinary diligence. Hence, in an action based on a breach of contract of carriage, the
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aggrieved party does not need to prove that the common carrier was at fault or was
negligent. He or she is only required to prove the existence of the contract and ts non-
performance by the carrier. Since the existence of the contract is proved by the tickets is
purchased by Mr. A from ABC Airlines, and ABC Airlines failed to overcome the
presumption of negligence, ABC Airlines is liable. (KLM Royal Dutch Airlines v. Tiongo, V.
G.R. No. 212136, October 4, 2021, Lopez Case).

VIGILANCE OVER GOODS

Q: What are the causes which exempt a common carrier from responsibility for the
loss, destruction, or deterioration of goods? (FASCOE)
ANS: Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
1. Flood, storm, earthquake, lightning, or other natural disaster or calamity; or
2. Act of the public enemy in war, whether international or civil;
3. Act or omission of the Shipper or owner of the goods;
4. The Character of the goods or defects in the packing or in the containers;
5. Order or act of competent public authority (CIVIL CODE, Art. 1734); and
6. Exercise of Extraordinary Diligence (CIVIL CODE, Art. 1735).
COMMERCIAL LAW

Note: No other defense may be raised by the common carrier in the carriage of goods.
The above enumeration which exempts the common carrier for the loss or damage to the
cargo is a closed list. If not one of those enumerated ts-present, the carrier is liable
(AQUINO & HERNANDO, Transportation Law supra at 220; Philippine Charter Insurance
Corp. V. Unknown Owner of the Vessel M/V. G.R. No. 161833, July 8, 2005).

Q: What are the requisites of a fortuitous event? (Im-INA)

ANS: The requisites of a fortuitous event are
1. 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, a
2. The cause of the unforeseen and unexpected occurrence, or of the failure of the
debtor to comply with his obligation must be Independent of the human will;
3. The occurrence must be such as to render it impossible for the debtor to ful ll
his obligation in a Normal manner, and -M o
4. The obligor (debtor) must be free from any participation in or the Aggravation of
the injury resulting to the creditor (Servando v. Philippine Steam Navigation,
G.R. No. L-36481-82, October 23, 1983). S
Q: When is a common carrier exempt from responsibility in case of loss,
destruction, or deterioration of goods due to a natural disaster? (PODD)
ANS: In order that the common carrier may be exempted from responsibility:
1. The natural disaster must have been the Proximate and Only cause of the loss;
2. The common carrier must exercise Due diligence to prevent or minimize loss
before, during and after the occurrence of ood, storm or other natural disaster
(CIVIL CODE. Art. 1739); and
3. The common carrier does not incur in Delay in the transportation of goods (CIVIL
CODE Art. 1740).

Q: What events do NOT fall within the ambit of a natural disaster or calamity?
(FMTH-WH)
ANS: The following events do not fall within the ambit of a natural disaster or calamity:
1. Fire (Cokaliong Shipping Lines V. UCPB General Insurance Co., G.R. No.
146018, 25 June 2003);
2. Mechanical defects of the conveyance (Necessito v. Paras, G.R. No. L-10605,
June 30, 1958);
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374 BEDAN RED BOOK
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3. Tire blow-out (Yobido v. CA, G.R. No. 113003, October 17, 1997);
4. Heavy Rains (Eastern Shipping Lines Inc., v. Intermediate Appellate Court, G.
R. No. 69044, May 29, 1987);
5. Strong Wind (AQUINO & HERNANDO, Transportation Law, supra at 230); and
6. Hijacking (De Guzman v. CA, G.R. No. L-47822, December 22, 1988).

Q: How may a common carrier be absolved from liability in case of a force majeure?
ANS: 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 (Sulpicio Lines, Inc., v. Sesante, G.R. No. 172682, July 27, 2016).

Q: When does actual or constructive liability commence?

ANS: The duty starts from the time the goods are unconditionally placed in the possession
of, and received by the carrier for transportation, until the same are delivered actually or
constructively by the carrier to the consignee or to the person who has the right to receive
them (C/VIL CODE, Art. 1736).

Q: When does the liability of a common carrier in the delivery of goods begin?
ANS: The liability of the carrier as common carrier, and its duty of extraordinary diligence
begins with the actual delivery of the goods, and not when
The common carrier received the goods not for transportation but only for
safekeeping; or) p V
. 2. When a receipt or bill of lading is executed, since the issuance of a bill of lading
is not necessary to complete delivery and acceptance (Compania Maritima
Insurance Coy G. R. No. L-18965, Oct. 30, 1964).
STOlZZ
Q: What does actual delivery mean.?.
ANS: There is actual delivery in contracts for the transport of goods when:
1 . Possession has been turned over to the consignee or to his duly authorized
agent; and
2. A reasonable time is given to him to remove the gaods (Nedlloyd Linen B.V.
Rotterdam v. Glow Laks Enterprises, Ltd., GoR. No. 156330, November 19,
2014).
MANY
Q: What is the liability of the common carrier in case of temporary unloading or
storage?
ANS: The common carrier's duty to observe extraordinary diligence over the goods
remains in full force and effect even when they are temporarily unloaded or stored in
transit, unless the shipper or owner has made use of the right of stoppage in transitu
(CIVIL CODE, Art. 1737).

Note: The extraordinary liability of the common carrier continues to be operative even
during the time the goods are stored in warehouse of the carrier at the place of
destination, until the consignee has been advised of the arrival of the goods and has had
reasonable opportunity thereafter to remove them or otherwise dispose of them (C/VIL
CODE, Art. 1738).

Q: What is the effect of the shipper's contributory negligence as to the common

carrier's liability?
ANS: If the shipper or owner merely contributed to the loss, destruction or deterioration
of the goods, the proximate cause thereof being the negligence of the common carrier,
the latter shall be in liable in damages, which however, shall be equitably reduced (CIVIL
CODE, Art. 1741).
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Q: When is there presumption of negligence?

ANS: In case of loss, destruction or deterioration of cargo or death or injuries to
passengers, the common carrier is presumed to be at fault or to have acted negligently
unless he had observed extraordinary diligence in the vigilance thereof (C/VIL CODE,
Arts. 1735 and 1756).

Note: Even when there is an agreement limiting the liability of the common carrier in the
vigilance over the goods, the common carrier is disputably presumed to have been
negligent in case of their loss, destruction or deterioration (CIVIL CODE, Arts. 1752).

Q: Should the common carrier still exercise due diligence to prevent or lessen loss
even if the loss of the goods is caused is by the character of the goods?
ANS: Yes, the common carrier must exercise due diligence to at least forestall or lessen
the loss even if such loss, destruction, or deterioration is caused by the character of the
goods or the faulty nature of the packing or of the containers (CIVIL CODE, Art. 1742).

Q: Is the common carrier responsible for the damages incurred by a goods seized
or destroyed by a public authority?
If ANS: If through the order of public authority the goods are seized or destroyed, the COMMERCIAL LAW

common carrier is not responsible, provided said public authority had power to issue the
order (CIVIL CODE, Art. 1743).

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

Q: What are the void stipulations in a contract of carriage of goods? (OLD-FETUs)?

ANS: The following stipulations are unreasonable, unjust, and contrary to public policy:
1. That the goods are transported at the risk of the Owner or shipper;
2. That the common carrier will not be Liable for any loss, destruction, or
deterioration of the goods;
3. That the common carrier need not observe any Diligence in the custody of
goods;
4. The exercise of diligence less than that of a good a Father of a family over the
movables transported;
5. That the common carrier shall not be responsible for the acts or omissions of its
Employees;
6 That the common carrier's liability for acts committed by Thieves, or of robbers
who do not act with grave or irresistible threat, violence or force is dispensed
with or diminished; and
7. That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car, vehicle,
ship, airplane, or other equipment Used in the contract of carriage (C/VIL CODE,
Art. 1745).

Q: Who may annul the agreement limiting the common carrier's liability?
ANS: An agreement limiting the common carrier's liability may be annulled by the shipper
or owner if the common carrier refused to carry the goods unless the former agreed to
such stipulation (C/VIL CODE, Art. 1746).
 376 BEDAN RED BOOK
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Q: Is: a stipulation that limits the common carrier's liability to the value 01 the goods
appearing in the bill of lading binding?
ANS: A stipulation that the common carrier's liability is limited to the value of the goods
in appearing in the bill of lading, unless the shipper or owner declares a greater value, is
binding (C/VIL CODE, Art. 1749).

Note: If the goods are to be shipped from a foreign port to the Philippines, the liability of
the carrier is US$500 per package in the absence of a shipper's declaration of a higher
value in the bill of lading (COGSA, Sec. 4 (5))

Q: When is a contract xing the sum that may be recovered by the owner or shipper
for the loss, destruction, or deterioration of the goods be valid?
ANS: A contract xing the sum that may be recovered by the owner or shipper for the
loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under
the circumstances, and has been fairly and freely agreed upon (CIVIL CODE, Art. 1750).

Note: The fact that the common carrier has no competitor along the line or route, or a part
thereof, to which the contract refers shall betaken into consideration on the question of
whether or not a stipulation limiting the common carrier's liability is reasonable, just and
in consonance with public policy (C/VIL CODE, Art 1751)

Q: What provisions of law shall apply to checked-in baggage?

ANS: The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage
which is not in his personal custody or in that of his employee (C/VIL CODE, Art. 1754).

Q: What provisions of the law shall apply to baggage in the possession of

passengers?
ANS: As to baggage in the personal custody of the passenger, Articles 1998 and 2000 to
2003 concerning the responsibility of hotel-keepers
De shall be applicable (CIVIL CODE, Art.
1754).

Note: The keepers of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees, of the effects brought by
the guests and that, on the part of the latter, they take the precautions which said hotel-
keepers or their substitutes advised relative to the care and vigilance of their effects (CIVIL
CODE, Art. 1998).

A depositary's responsibility, with regard to the safekeeping and the loss of the thing, shall
be exercised with ordinary diligence unless the stipulation of the parties requires another
standard of care (CIVIL CODE, Art. 1972).

Q: What will constitute suf cient noti cation to the common carrier of hand-carried
baggage brought by a passenger into its premises, so as to hold the former for the
loss thereof?
ANS: So long as the belongings were brought inside the premises of the vessel, the
common carrier is thereby effectively noti ed and consequently duty-bound to observe
the required diligence in ensuring the safety of the belongings during the voyage. Hence,
actual noti cation is not required before the common carrier becomes liable for lost
belongings that remained in the custody of the passenger (Sulpicio Lines, Inc., v. Sesante,
G.R. No. 172682, July 27, 2016).
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Q: When is a common carrier not liable for the loss and a injury to a passenger's
hand-carried baggage? (FAT)
ANS: A common carrier is not liable for loss caused by any of the following:
1. Those which may proceed from any Force majeure (CIVIL CODE, Art. 2000);
2. Act of passenger or his agents or if the loss arises from the character of the of
things (C/VIL CODE, Art. 2002);
3. Acts of Thief or robber done with the use of arms or through an irresistible force or
(CIVIL CODE, Art. 2001).

SAFETY OF PASSENGERS
Q: What does extraordinary diligence for the safety of passengers require?
ANS: A common carrier is bound to carry the passengers safely as far as human care
and foresight can provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances (C/VIL CODE, Art. 1755).

Q: When are common carriers presumed to be liable with respect to their

passengers?
ANS: In case of death of or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed MV1 IVINEWWOO

extraordinary diligence as prescribed in Articles 1733 and 1755 (C/VIL CODE, Art. 1756).

Q: When will the presumption of negligence apply against the common carrier in
case of death of or injuries to its passengers?
ANS: The presumption of negligence applies so long as there is evidence showing that:
1 . A contract exists between the passenger and the common carrier; and
2. The injury or death took place during the existence of such contract.

In such event, the burden shifts to the common carrier to prove its observance of
extraordinary diligence, and that an unforeseen event or force majeure had caused the
injury (Sulpicio Lines, Inc. Sesante, G.R. No. 172682, July 27, 2016).

Q: What are the rules when it comes to the limitation of liability of the common
carrier in a contract of carriage of passengers?
ANS: Generally, the responsibility of a common carrier for the safety of passengers
cannot be dispensed with "or lessened by stipulation by the posting of notices, by
statement on tickets, or otherwise (CIVIL CODE, Art. 1757).

However, when a passenger is carried gratuitously, a stipulation limiting the common

carrier's liability for negligence is valid; such a stipulation limiting the common carrier's
liability for willful acts or gross negligence is invalid (CIVIL CODE, Art. 1758).

Q: When are common carriers liable for the acts of their employees?
ANS: Common carriers are liable for the death of or injuries to passengers through the
negligence or willful acts of the former's employees, although such employees may have
acted beyond the scope of their authority or in violation of the orders of the common
carriers (C/VIL CODE, Art. 1759 (1)).

Exceptions: (FA-NL)
1. The liability of the carrier for the personal violence of its employees or agents
upon its passengers extends only to those acts which that the carrier could
Foresee or Avoid through the exercise of the degree of diligence required; and
2. The carrier is not liable for acts of the employee Not on duty or in the Line of
duty. However, the rule on strangers apply to them (AQUINO & SUNDIANG, &
Reviewer on Commercial Law, supra at 137 to 138).
378 BEDAN RED BOOK
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Q: What is the effect on the liability of the common carriers upon proof of diligence
in the selection and supervision of employees?
ANS: The liability of the common carriers does not cease upon proof that they exercised
all the a diligence of a good father of a family in the selection and supervision of their
employees (CIVIL CODE, Art. 1759).

Note: If the source of obligation is under Art. 2176 of the Civil Code or a cause of action
based on quasi-delict, the exercise of due carê and diligence in the selection and
supervision of their employees is available as a defense (Del Prado v. Manila Electric Co.,
G. R. No. 29462, March 7, 1929).

Q: What is the basis of the carrier's liability for assaults on passengers committed
by its drivers?
ANS: It is based on the following:
1. The doctrine of respondeat superior; or
2. The principle that it is the carrier's implied duty to transport the passenger safely
(Maranan v. Perez, G.R. No. L-22272, June 26, 1967).

Q: What stipulations eliminating or limiting the liability of a common carrier for the
carriage of passengers are deemed void? (WA-DI)
ANS: The following are void stipulations that eliminate or limit the liability of a common
carrier1.for the carriage of passengers...
A stipulation limiting the common carrier's liability for its Wilful Acts or gross
negligence, when a passenger is carried gratuitously (CIVIL CODE, Art. 1758
par. 1); and
2. A stipulation limiting the common carrier's liability for the Death of/or Injuries to
passengers through the negligence or willful acts of the former's employees
OD
(CIVIL CODE, Art. 1760)...
E
Q: What diligence must a passenger observe?
ANS: The passenger must observe the diligence of a good father of a family to avoid
injury to himself (CIVIL CODE, Art. 1767) m
Q: What is contributory negligence? CO
ANS: Contributory negligence is conduct on the part of the injured party, contributing as
legal cause to the harm he has suffered, which falls below the standard to which he is
required to conform for his own protection (Sealoader Shipping Corporation v. Grand
Cement Manufacturing Corp., et al., G.R. Nos. 167363 and 177466, December 15, 2010).

Q: Does passenger's contributory negligence bar recovery of damages for his

death or injuries?
ANS: The contributory negligence of a passenger does not bar recovery of damages for
his death or injuries if the proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably reduced (CIVIL CODE, Art. 1762).

Q: When iS a common carrier liable to its passenger for the acts of other
passengers or strangers?
ANS: A common carrier is responsible for injuries suffered by a passenger on account of
the willful acts or negligence of other passengers or of strangers, if the common carrier's
employees through the exercise of the diligence of a good father of a family could have
prevented or stopped the act or omission (CIVIL CODE, Art. 1763).
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Q: When is a common carrier bound to start the exercise of utmost diligence with
respect to passengers?
ANS: Such duty of a common carrier to provide safety to its passengers so obligates it
not only during the course of the trip but for so long as the passengers are within its
premises and where they ought to be in pursuance to the contract of carriage (Light Rail
Transit Authority v. Navidad, G.R. No. 145804, February 6, 2003).

Q: What is the Continuing Offer Rule?

ANS: 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 (Dangwa Transportation Co., Inc., v. CA, G.R. No. 95582,
October 7, 1991).

l
Q: When is a common carrier no longer bound to exercise utmost diligence with
respect to passengers?
ANS: A common carrier is no longer bound to exercise utmost diligence with respect to
passengers when the carrier-passenger relationship is terminated. Once created, the
relationship will not ordinarily terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's conveyance or had a reasonable opportunity MUTIVIDUEWWOO

to leave the carrier's premises (Aboitiz Shipping v. CA, G.R. No. 84458, November 6,
1989).

Note: All persons who remain on the premises for a reasonable time after leaving the a
conveyance are Eo be deemed passengers (Aboitiz Shipping v. CA, G.R. No. 84458,
November 6, 1989).

SOURCES OF LIABILITY
v
0: What is the basis of cause of action of a passenger and shipper against a
common carrier?
ANS: Passengers and shippers who suffered damages because of the breach of the
contractual obligation of the carrier may sue the latter for damages. The source of
obligation is culpa-contractual (AQUINO & HERNANDO, Transportation Law supra at
350).

Q: What are concurrent causes of action of a passenger or shipper?

ANS: The same act that breaches the contract may also be tort. Hence, a negligent act
that breaches the contract may give rise to a liability based on contract as well as quasi-
delict under Article 2176 of the Civil Code.

Note: With respect to employee of carrier, civil liability may be based on quasi-delict as
well as on criminal liability under Article 100 of the Revised Penal Code (AQUINO &
HERNANDO, Transportation Law, supra at 351).
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CONCURRENCE OF CAUSES OF ACTION

CONCURRENCE OF CAUSES OF ACTION

Against Common Carrier - culpa contractual

Against the Driver culpa aquiliana; the driver of the
Common Carrier and carrier, not being an agent but an employee, has himself
Driver no contractual relationship with the passenger.

Note: Same act or omission may give rise to both causes

of action. Tort may be a mode of breach.

1. Where the passenger was injured because the carrier

collided with another vehicle:
Against the Driver and/or His Employer quasi-
delict
Against Third Person - may be held criminally and
Common Carrier and civilly liable based on delict.
Third Person
2. Where it is a non-passenger who was injured by the
common carrier - third person may hold the common
carrier liable based on quasi-delict.

of Note: In case of negligence of the carrier's driver and of

third person concur, the liability of the parties carrier and
his driver, third person-is joint and several
(AQUINO & HERNANDO, Transportation Law, supra at 143 to. 144).

Q: is What is the extent of liability for damages?

ANS: Generally, the carrier in good faith is liable only to pay for the damages that are
natural and probable consequences of the breach of the obligation, and which the parties
have foreseen or could havé (reasonably… foreseen at the time the obligation was
constituted (AQUINO & HERNANDO, Transportation Law, supra at 355-356).

in However, if the carrier is in bad faith or was guilty of gross negligence, the said carrier is
liable for all damages, whether the same can be foreseen or not (ld.).

Q: What are the different kinds of recoverable damages? (MENTAL)

ANS: The following are the kinds of recoverable damages:
1. Moral Damages
a. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury. Though incapable of pecuniary
computation, moral damages may be recovered if they are the proximate
result of the defendant's wrongful act or omission (CIVIL CODE, Art.
2217).
2. Exemplary Damages
a. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate,
liquidated, or compensatory damages (CIVIL CODE, Art. 2229).
3. Nominal Damages
a. Nominal damages are adjudicated in order that a right of a the plaintiff,
which has been violated or invaded by the defendant, may be vindicated
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or recognized, and not for the purpose of indemnifying the plaintiff for
any loss suffered by him (C/VIL CODE, Art. 2221).
4. Temperate or Moderate Damages
a. Temperate or moderate damages, which are more than nominal but less
than compensatory damages, may be recovered when the court nds
that some pecuniary loss has been suffered but its amount cannot, from
the nature of the case, be provided with certainty (CIVIL CODE, Art.
2224).
5. Actual or Compensatory Damages
a. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by nim as he has
duly proved. Such compensation iS referred to as actual. or
compensatory damages (C/VIL CODE, Art. 2199).
6. Liquidated Damages
a. Liquidated damages are those agreed upon by the parties to a contract,
to be paid in case of breach thereof (C/VIL CODE, Art. 2226).

O: What is the right of recourse by the carrier?

ANS: The carrier who may be compelled to pay damages for the loss or damage to the MVTIVIOHEWWOO

goods or passengers has the right of recourse against the employee who committed the
negligent, intentional or fraudulent act (Sarkies Tours Philippines, Inc., v. Intermediate
Appellate Court. G.R. No. 63723, September 2, 1983) rem

B. THE MONTREAL CONVENTION OF 1999

APPLICABILITY
Q: What is the scope of application of the Montreal Convention?
ANS: The Montreal Convention applies to all International carriage of persons, baggage,
or cargo performed by aircraft for reward. It applies equally to gratuitous carriage by

e
aircraft performed by an air transport undertaking (MONTREAL CONVENTION, Art. 1 (1),
[hereinafter MC99]).

Q: What is international carriage?

ANS: Any carriage in which, according to the agreement between the parties, the place
of departure and the place of destination, whether or not there be a break in the carriage
or a transhipment, are situated either within the territories of two State Parties, or within
the territory IS of a single State Party if there is an agreed stopping place within the territory
of another State, even if that State is not a State Party (MC99, ART. 1 (2))
EXTENT OF LIABILITY OF AIR CARRIER

Q: What is a Special Drawing Right?

ANS: The sums mentioned in terms of Special Drawing Right in this Convention shall be
deemed to refer to the Special Drawing Right as de ned by the International Monetary
Fund (MC99, Art. 23 (1)).

Passenger

Q: When is a carrier liable for death or injury to passenger?

ANS: The carrier is liable for damage sustained in case of death or bodily injury of a
passenger when the following concur:
1. There is international carriage by air;
2. The passenger died or suffered bodily injury;
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3. Death or Bodily injury was cause by an accident; and

4. The death or Injury took place:
a. On board the aircraft; or
b. In the course of any of the Operations of embarking or disembarking
(MC99, Art. 17(1); AQUINO & SUNDIANG, Reviewer on Commercial
Law, supra at 177)

Baggage

Q: When is a carrier liable for loss or damage to passenger's baggage?

ANS: The carrier is liable as follows:

Type of Baggage Requisites

......up.m...oceeseecoso.b..co....

There is international carriage by air;

The baggage is a checked baggage;
The passenger sustained damage in case of destruction or
loss of, or of damage to, checked baggage; and
Checked Baggage The destruction, loss or damage took place on board the
aircraft or during any period within which the checked
baggage was in the charge of the carrier (AQUINO &
SUNDIANG, Reviewer on Commercial Law, supra at 178).

Damage resulted from ts fault or that of its servants or agents

Unchecked (MC99, Art. 17(2))
Baggage
Note: This includes personal items

f the carrier admits the loss of the checked baggage, or if

the checked baggage has not arrived at the expiration of 21
Lost Baggage days after the date on it which it ought to have arrived, the
passenger is entitled to enforce against the carrier the rights
which ow from the contract of carriage (MC99, Art. 17(3)).

Q: When is a carrier liable for lamages sustained in the event of destruction or loss
of or damage to cargo?
ANS: The carrier is liable for damages sustained in the event of destruction or loss of or
damage to cargo if the following requirements are present;
1. There is international carriage by air;
2. The cargo was lost, destroyed or damaged; and
3. The event which caused the damaged so sustained took place during the
carriage by air or the period during which the cargo is in charge of the carrier
(MC99, Art. 18(1) and Art. 18(3); AQUINO & SUNDIANG, Reviewer on
Commercial Law, supra at 180).

Note: Period of the carriage by air DOES NOT EXTEND to:

1. Any carriage by land, by sea or by inland waterway performed outside an airport;
or
2. The period when goods are transported through alternative modes of transport
(MC99, Art. 18(4)). If a carrier, without the consent of the consignor, substitutes
carriage by another mode of transport for the whole or part of a carriage
intended by the agreement between the parties to be carriage by air, such
carriage by another mode of transport is deemed to be within the period of
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carriage by air. (Ibid). If, however, such carriage takes place in the performance
of a contract for carriage by air, for the purposes of loading, delivery or
transhipment, any damage is presumed, subject to proof to the contrary, to have
been the result of an event which took place during the carriage by air (Id).

Q: What is Multi-Modal Transportation?

ANS: This is transportation through different means of transportation. The parties may agree
that other segments of the voyage will be through other means of transportation. In which n
case, only the segment where there is international air transportation will be covered by the
Montreal Convention. If a carrier, without the consent of the consignor, substitutes carriage
by another mode of transport for the whole or part of a carriage intended by the agreement
between the parties to be carriage by air, such carriage by another mode of transport is
deemed to be within the period of carriage by air (ld.).

Limitations to Liability

Type of Limitation of
Carriage
Ground
Liability
Except / Defenses
COMMERCIAL LAW

Defenses: If the damage is

Death 128, 821 SDRs more than the limit
prescribed, the carrier can
per passenger interpose the following
(MC99,
defenses:
Art.21(1))

Note: f the
1. Such damage was not
due to the negligence or
damage does
other wrongful act or
not exceed the omission of the carrier
limitation, the
liability is in form
or its servants or
Bodily Injury agents; or
of strict liability 2. Such damage was
hence, It the
solely due tO the
carrier cannot
raise any of the
negligence or other
Carriage of wrongful act or omission
defenses.
Passenger of a third party (MC99,
Art. 21(2), as amended).

Defenses: Carrier is not

liable if;

1. It proves that it and its

5,346 for each servants or agents took
Damage all measures that could
occasioned passenger
(MC99, reasonably be required
by Delay
Art. 22(1) as
to avoid the damage;
OR
amended)
2. It was impossible for it or
them to take such
measures (MC99, Art.
19).
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Type of Limitation of
Ground Except / Defenses
Carriage Liability

Limit does not apply: The

consignor/shipper is entitled
to an amount exceeding the
limit of liability in any of the
following cases:

1. When the consignor

declares a higher
amount provided the
following concur;
a. The consignor
made a special
declaration of the
cargo;
b. The special
declaration was
made at the time the
cargo was handed
over the carrier; and
C. The consignor paid
a supplementary
if sum if the case so
requires (MC99, Art.
22 SDRs per 22(2)).
Destruction, kilogram
Carriage of
Loss, (MC99, Art. Note: Despite the
Cargo Damage or 22(3) as declaration, the carrier
amended) will not be liable for the
declared sum if the carrier
proves that the declared
sum is greater than the
passenger's actual
interest in delivery at
destination.

2. Intentional
Act/Omission
Exception:
a. Damage resulted
from;
b. an act or omission
of the carrier, its
servants or agents
acting within the
scope of its
employment;
C. done with intent to
cause damage or
recklessly; and
d. with knowledge that
damage would
 COMMERCIAL AND TAXATION LAWS 385
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Type of Limitation of
Ground Except / Defenses
Carriage Liability
probably result
(MCC, Art. 22(5).

Defenses: Carrier is not

liable to the cargo and to the
extent if it proves that the
is cause is one or more of the
following:

1. Inherent defect, quality

vice of the cargo
2. Defective packaging of
the cargo performed by
the person other than
the carrier or its servants
or agents;
3. An act of war or an MUTIVIDEWWOD

armed con ict; or

4. An act of Public
Authority carried out in
connection with the
entry, exit or transit of
cargo
Note: These defenses may
either totally bar recovery or
mitigate liability (to the
extent that it is the cause)
depending on the
circumstances (AQUINO &
SUNDIANG. Reviewer on
Commercial Law, supra at
181).

Carrier is not liable if:

1. It proves that it and its
servants or agents took
all measures that could
reasonably be required
Delay to avoid the damage;
OR
2. t was impossible for it
or them to take such
measures (MC99, Art.
19).

1,288 SDRs for Limit does not apply

Passenger's
Destruction, each passenger when:
Loss, or (MC99, Art. 1. The passenger declares
Baggage Damage 22(2) as a higher amount,
amended) provided that the
following concur;
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386 BEDANVolume
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Type of Limitation of
Carriage
Ground Liability
Except / Defenses
a. Passenger made a
special declaration
of the value of the
baggage;
b. The special
declaration was
made at the time
when the checked
baggage was
handed over Eo the
carrier; and
C. The passenger paid
a supplementary
sum if the case sO
requires (MC99, Art.
22(2)); or
2. Intentional
Act/Omission
Exception:
a. Damage resulted
from;
b. An act or omission
of the carrier, its
servants or agents
acting within the
scope of its
employment;
C. Done with intent to
cause damage or
recklessly; and
d. With knowledge that
damage would
probably result
(MCC, Art. 22(5)).
Defenses: The carrier is not
liable if and to the extent that
the damage resulted from:
1. Inherent defect of the
baggage;
2. Quality of the
Baggage;
3. Vice of the Baggage
(MC99, Art. 17(2)).

Carrier is not liable if:

1. proves that it and its
servants or agents
Delay took all measures that
could reasonably be
required to avoid the
damage; OR
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Type of Limitation of
Carriage
Ground Liability
Except / Defenses

2. It was impossible for it

or them to take such
measures (MC99, Art.
19).

Q: Is the carrier allowed to stipulate on limits of liability?

ANS: Yes. A carrier may stipulate that the contract of carriage shall be subject to higher
limits of liability than those provided for in this Convention or to no limits of liability
whatsoever (MC99, Art. 25).

Note: Any provision tending to relieve the carrier of liability or to x a lower limit than that
is which is laid down in this vention shall be null and void, but the nullity of any such
provision does not involve the nullity of the whole contract, which shall remain subject to
the provisions of this Convention (MC99, Art: 26).

LIABILITY FOR DELAY COMMERCIAL LAW

Q: When is a carrier liable for delay?

ANS: The carrier is liable for damage occasioned by delay in the carriage by air of
passengers, baggage or cargo (MC99, Art. 19)

Q: When is a carrier NOT liable for delay?

ANS: The carrier shall not be liable for damage occasioned by delay if it proves that;
a. t and its servants and agents took all measures that could reasonably be
required to avoid the damage; or
b. that was impossible for tor them to take such measures (ld.).

BANKING LAW

A. NEW CENTRAL BANK ACT (R.A. No. 7653, as amended by R.A. No. 11211)
Q: What is the State Policy of the New Central Bank Act?
ANS: The state shall maintain central monetary authority that functions and operates
as an independent and accountable body corporate in the discharge of its mandated
responsibilities concerning money, banking, and credit.

The central monetary authority shall enjoy scal and administrative autonomy (R.A. 7653,
otherwise known as "The New Central Bank Act" [hereinafter "NCBA"), as amended by
R.A. No. 11211, Sec 1).

Q: What is the role of Bangko Sentral ng Pilipinas (BSP)?

ANS: It is the state's central monetary authority charged with the responsibility of
administering the monetary, banking, and credit system of the country. It is also granted
the power to supervise and examine over bank and non-bank nancial institutions
performing quasi banking functions which includes savings and loan association
(Busuego v. CA, G.R. No. 95326, 1999).

Note: The BSP is a constitutionally mandated authority (1987 Constitution, Article XII,
Sec. 20).
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Q: What are the primary objectives of BSP?

ANS: The primary objectives of BSP is to maintain price stability conducive to a balanced
and sustainable growth of the economy and employment.

It shall also promote and maintain monetary stability and the convertibility of the peso
(R.A. No. 7653 as amended, Sec. 3, par. 2).

Q: What are the administrative responsibilities of BSP? (PSR)

ANS: The Bangko Sentral shall:
1. Provide Policy directions in the areas of money, banking, and credit;
2. Have Supervision over the operations of banks; and
3. Exercise Regulatory and examination powers over:
a. The quasi-banking operations of non-bank nancial institutions;
b. Over money service businesses, credit granting businesses, and
payment system operations, as may be determined by the MB (NCBA
as amended, Sec. 3, par. 1).

Q: What are the other responsibilities of BSP2 (POP)

ANS: The other responsibilities of BSP are:
1. Promote nancial stability and closely work with the National Government,

Exchange Commission, the D

Insurance Corporation;
Insurance A
including, but not limited to, the Department of Finance, Securities and
V Commission, and the Philippine Deposit
2. Oversee the payment and settlement systems in the Philippines. This includes
critical nancial market infrastructures, to promote sound and prudent practices
which are consistent with the maintenance of nancial stability; and
3. Promote broad and convenient access to high quality nancial services and
o LPpublic (NCBA, Sec. 3).
consider the interest of the general
LaD
Q: Who shall exercise the powers and functions of the BSP?
ANS: The powers and functions of the Bangko Sentral shall be exercised by the Bangko
Sentral Monetary Board (hereinafter, MB). Its members shall serve a term of 6 years, and
no member shall be appointed more than once (NOBA, Sec, 6).
07
Q: What is the composition of the MB? (CCPP)
ANS: There shall be 7 members appointed-by the President of the Philippines for a term
of 6 years, with no member reappointed more than once. The members consist of:
1. A Chairman who is the BSP Governor;
2. A Cabinet member to be designated by the President of the Philippines; and
3. Members who shall come from the Private sector, all shall serve full time
(NCBA, Sec. 6 and 26).

NOTE: In absence of the Governor, a Deputy Governor shall act as chief executive of the
BSP and shall exercise the powers and duties of the Governor and whenever the governor
is unable to attend meeting, a deputy governor shall be vested with the author to
participate and exercise the right to vote in such meeting (NCBA, Sec. 26).

Q: What are the powers and functions of the MB? (IDEA-IA)

ANS: The scope of authority of the MB are to:
1. Issue rules and regulations;
2. Direct the management, operations, and administration of the BSP;
3. Establish a human resource management system;
4. Adopt its annual budget and authorize expenditures
5. Indemnify its members and other of cials of the BSP against all costs and
expenses which were reasonably incurred by reason of the performance of their
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functions in accordance with the free and harmless indemni cation clause (Sec.
15 and 16); and
6. Authorize entities or persons to engage in money service businesses (R.A. 7653
as amended, Sec. 3).

Q: What regulations may the MB issue? (CR)

ANS: The MB may issue such regulations as it may deem advisable in order to:
1. Prevent Circulation of foreign currency or of currency substitutes; and
2. Prevent the Reproduction of facsimiles of BSP notes (NCBA, Sec. 50).

Q: What is the effect of the Order of Closure issued by the MB?

ANS: After the order of closure issued by the MB:
1. The PDIC shall be designated as receiver and it shall proceed with the
takeover and liquidation of the closed bank. Banks closed by the Monetary
Board shall no longer be rehabilitated (R.A. 3591 as amended, Sec. 12);
2. Quasi banking institutions closed and placed under receivership may be
rehabilitated or liquidate (BSP Circular No. 719, s. 2011).

BANKS IN DISTRESS MYT TVIOHEWWOO

Q: What is Liquidity?
ANS: The ability of an asset to be converted into cash quickly and without any price
discount. (DIZON & DIZON, Banking Laws and Jurisprudence (2009), p. 226 [hereinafter,
DIZON & DIZON, Banking Laws]).

Q: What is Solvency?
ANS: The condition that exists when liabilities amount 0 less than total assets, thus
providing the ability to pay. debts. The test of insolvency is measured by determining
whether the realizable assets of bank are less than its liabilities....

Note: Hence, a bank is solvent if the fair cash value of all its assets, realizable within a
reasonable time by a reasonable prudent person, would equal or exceed its total liabilities
exclusive of stock liability; but if such cash value so realizable is not suf cient to pay such
liabilities within a reasonable time, the bank is insolvent (Id).

Q: What are the two tests for insolvency?

ANS: There are two tests for insolvency:
1. Technical or Balance Sheet Test
When the actual market value of assets is insuf cient to pay one's total liabilities
(Banco Filipino Savings and Mortgage Bank v. Monetary Board, G.R. No. 70054
December 11, 1991).
2. Cash Flow Insolvency (Lack of Liquidity)
Although realizable assets are considered suf cient as a whole, where such
assets are immediately available to pay liabilities within a reasonable time, after
they fall due (NCBA, Sec. 30(b)).

Q: What are the remedies/processes by which the BSP handles banks in distress?
ANS: Whenever a bank is in distress, whether seriously or otherwise, as in the case
where it is having liquidity problems, the BSP may perform any of the following:
1. Grant emergency Loans to the Bank
2. Appoint a Conservator; and
3. Appoint a Receiver and order the liquidation of the bank (AQUINO & AQUINO,
Fundamentals of Banking Law (2019), p. 411 [hereinafter AQUINO & AQUNO,
Banking Law]).
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Q: When may the BSP grant an emergency loan?

ANS: The BSP, upon the approval of at least ve of (5) members of the MB, may also grant
emergency loans or advances in the amount not exceeding 50% of its total deposits and
deposit substitutes. The loans shall be released in two tranches (AQUINO & AQUINO,
Banking Law supra at 412; NCBA Sec. 84).

Note: BSP may grant emergency loans or advances to banking institutions, even during
normal periods, for the purpose of assisting a bank in a precarious nancial condition or
under serious nancial pressures brought by unforeseen events, or events which, though
foreseeable, could not be prevented by the bank concerned: Provided, however, That the
MB has ascertained that the bank is not insolvent and has the assets de ned hereunder
to secure the advances (NCBA as amended, Sec.84)

Q: What are the requisites in placing an institution under conservatorship? (RFDN)

ANS: The following are required:
1 Report to the head of the supervising or examining department involving the
bank;
2. Finding of the MB of the existence of any of the grounds for conservatorship
or receivership;
3. Decision of the MB.1o:
a. Place institution under conservatorship; or
b. Summarily and without need for prior hearing forbid the institution from
doing business and place institution under receivership
4. Notice in writing to the Board of Directors informing the institution of the order of
the MB directing conservatorship or receivership (NOBA, Sec. 29 and 30).

Conservatorship
Q: What are the powers and duties of a conservator? (CORRECt)
ANS: The conservator shall have the power to
1. To Report tò the MB
2. To take Charge of the Assets, liabilities, and the management of the institution;
3. To Recognize the management
4. To collecT all monies and debts due said institution;
5. To Overdue or revoke the actions of the previous management and board of
directors of the bank or quast-bank; and™
6. To Exercise all powers necessary to restore the institution's viability (NCBA, as
amended Sec. 29).

Q: Scope of Powers of Conservator

ANS: The exercise of conservatory powers must be related to:
1. Preservation of the assets;
2. Reorganization of management; and
3. To restoration of viability

Note: Such power to revoke cannot extend to post-facto repudiation of perfected

transactions; otherwise, they would infringe the non-impairment clause of the Constitution
(Producers Bank of the Philippines v. NLRC, G.R. No. 119069, November 16, 1998).

Q: May the conservator unilaterally revoke all previous dealings?

ANS: The conservator's power is not unilateral and he cannot simply repudiate valid
obligations of the bank. His authority would be to only bring court actions to assail such tO
contracts. To rule otherwise would enable a failing bank to become solvent, at the
expense of third parties by simply getting the conservator. to unilaterally revoke all
previous dealings which come to be considered unfavorable to the bank, yielding nothing
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to perfected contractual rights nor vested interests of third parties who. had dealt with the
bank (First Philippine International Bank v. CA, G.R. No. 115849, January 24, 1996).

Q: How is the conservatorship terminated?

ANS: The conservatorship may be terminated through:
1. Expiry of the one-year term;

Note: The conservatorship cannot exceed one year.

2. When MB nds that the institution can continue to operate on its own and the
conservatorship is no longer necessary; and
3. When the continuance in business of the bank would involve probable loss to
its depositors or creditors, in which case receivership and liquidation shall be
pursued (NCBA, Sec. 29).

Receivership
Q: What is a receiver? (C-GPA-CL-DWA)
a ANS: It is a commission, person or ather agency. charged by the law with the following
duties: MUTIVISEWWO?

1. To take Charge of the assets and liabilities of a bank which has been forbidden
from doing business in the Philippines,
2. To Gather, Preserve and Administer such assets and liabilities for the bene t of
the depositors and creditors or salt bank;
3. To Continue into Liquidation wherever authorized under the PDIC Act or other
laws; and P
4. To Dispose of assets and to Wind up the Affairs of such closed bank (R.A.3591,
as amended, Sec. 4(c) [hereinafter PDIC Law)

Q: What is receivership?
ANS: It is a proceeding wherein the Monetary Board may summarily and without need for
prior hearing forbid a bank or quasi - bank from doing business in the Philippines and
designate a receiver.
Such authority may also be exercised over non- stock saving and loan association
(NSSLAs) (R.A. 7653 as amended, Sec. 30).

This is referred to as the close as the "Close now, Hear Later" scheme (Vivas v. The
Monetary Board of the Bango Sentral ng Pilipinas Deposit Insurance Corporation, G.R.
No. 191424, August 7, 2013).

Q: When may an institution be placed under receivership? (U60-PI-CoWi-HU)

ANS: The Monetary Board may appoint a receiver when it nds that a bank of quasi-
bank:
1. Has noti ed the BSP or publicly announced a Unilateral closure; or
2. Has been dormant for at least 60 days or in any manner has suspended the
payment of its deposit/ deposit substitute liabilities; or
3. Is unable to Pay its liabilities as they become due in the ordinary course of
business;
4. Has Insuf cient reliable assets, as determined by the Bangko Sentral to meet
its liabilities; or
5. Cannot Continue in business without involving probable losses to its
depositors or creditors; or
6. Has Willfully violated a cease-and-desist order under Section 37 of this Act
that has become nal, involving acts or transactions which amount to fraud or
a dissipation of the assets of the institution (NCBA as amended, Sec. 30);
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7. Bank noti es the Bangko Sentral or publicly announces a bank Holiday, or in

any manner suspends the payment of its deposit liabilities continuously for
more than 30 days (R.A. No. 8971. otherwise known as "General Banking
Law of 2000") [hereinafter, GBL.], Sec. 53); or
8. Has persisted in conducting its business in an in Unsafe or unsound manner
(GBL, Sec. 56).

Q: What are the consequences of receivership? (SCILP)

ANS: The consequences of receivership are as follows:
1. Business operations are Suspended.
2. Assets shall be deemed Custodia legis in the hands of the receiver and shall
not be exempt from garnishment, levy, attachment or execution.
3. The bank is not liable to pay Interest on deposits during the period of suspension
of operation.
4 Banks under liquidation retain their Legal personality.
5. There will be no Preference even if the claimant-depositor obtained a writ of
preliminary attachment (1 VILLANUEVA-CASTRO, Commercial Law Recap
(2020), p. 236, [hereinafter * aN VILLANUEVA-CASTRO, Commercial Law
Recap]).

Q: What are the differences between conservator and receiver?

ANS: The differences between conservator and receiver are as follows:

Conservator
Receiver (Sec. 30)
(Sec. 29)

1. Has willfully violated a cease and desist

order for fraud or dissipation of assets
(NCBA, Sec. 30(d));
2. Has persisted in conducting its
When the MB business in an unsafe or unsound
manner (General Banking Law, Sec.
nds, based on
56)
appropriate
3. Can only continue business at a loss
report that the
(NCBA, Sec. 30(c));
institution is in a
state of
4. Has announced a continuous bank
holiday even if 30 days has not yet
continuing lapsed because of suspension of
Grounds for inability or
payment of deposits which follows that
Appointment
inability or
there is a bank holiday (NCBA Sec.
unwillingness
30(a)); GBL., Sec.53)
to maintain 5. Has, in any other manner, suspended
condition of
withdrawal of accounts (NCBA, Sec.
liquidity deemed
30(a); GBL, Sec. 53);
adequate to
protect the
6. Dormancy of at least sixty (60) days
(NCBA, Sec. 30(a));
interest of 7. Has commenced unilateral closure
depositors and
(ld.).
creditors
8 Cash ow insolvency (NCA, Sec.
30(b)); or
9. Technical Insolvency except when
caused by bank run (NCBA, Sec.
30(a)).
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Conservator
Receiver (Sec. 30)
(Sec. 29)

General: To restore the bank or quasi-

bank's liquidity and solvency or to
recommend the liquidation of the bank.

Speci c:
To restore the 1. To receive collectibles;
Purpose of bank or quasi- 2. To preserve the bank's assets in
Appointment bank's liquidity substitution of its former
adequate to management; and
protect 3. To prevent the dissipation of its
stakeholders. assets to the detriment of the
creditors of the bank Banco Filipino
Savings and Mortgage Bank v. MB,
Central Bank of the Philippines,
G.R. No. 70054, December 11,
1991) MVTIVIDHENWOO

Any person who For banks: the PDIC (PDIC Act as

iS competent amended, Sec. 12)
Quali cation of and
Appointee knowledgeable For quasi-bank: any person of recognized
in the bank competence in the banking or nance
operations and (NCBA, Sec. 30, par.2)
management
(NCBA, Sec. 29,
par. 2)
As long as necessary to rehabilitate a
business.
One (1) year Provided that the receiver determines,
Duration of within 90 days from appointment, whether
(NCBA, Sec.29
Appointment the institution may be allowed to continue
par. 2)
business be rehabilitated, or be liquidated
(NCBA, Sec. 30, par 3)

Liquidation
Q: What is liquidation?
ANS: The acquisition of assets and their conversion into cash for distribution to all
creditors in compliance with the concurrency and priority criteria for claims. PDIC is the
receiver and liquidator (AM No. 19-12-02-SC, Sec. 1 (m), Rule 2).

Q: What are the two modes of liquidation by PDIC?

ANS: The modes of liquidation by PDIC are:
1. Purchase of Assets and/or Assumption of Liabilities (PDIC Law, Sec. 15); or
2. Conventional liquidation (PIC LAW, Sec. 16).

Q: What is "voluntary liquidation"?

ANS: Liquidation is voluntary when it is commenced by written notice to the MB. MB shall
have the right to intervene and take such steps as may be necessary to protect the interest
of creditors (GBL, Sec. 68).
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Q: What is "involuntary liquidation"?

ANS: Liquidation is involuntary when any of the grounds in Sec. 30 of the NCBA is present
and the institution is ordered closed by the MB (GBL, Sec. 69).

Q: What is the effect of the placement of a bank under liquidation on its corporate
franchise or existence?
ANS: Upon placement by the Monetary Board of a bank under liquidation, it shall continue
as a body corporate unit until the termination of the winding up period. Such continuation
as body corporate shall only be for the purpose of liquidating, settling and closing of its of
affairs and for the disposal, conveyance or distribution of its assets.

Note: In no case shall the bank be reopened and permitted to resume banking business
after being placed under liquidation (PDIC Law, Sec. 13).

Q: What is the effect of the placement of a bank under liquidation on its a assets?
ANS: Upon service of notice of closure. all the assets of the closed bank shall be deemed
in custodia legis In the hands of the receiver, and as such, these assets may not be
subject to attachment, garnishment execution levy or any other court processes (PDIC
Law, Sec. 13).

REMEDY OF CLOSED BANKS

Q: What is a closed bank? S ^
ANS: A closed bank refers to bank placed ünder liquidation by the Monetary Board
(AQUINO & AQUINO, Banking Law, "supra at 415)

Q: What is the "Close now, Hear later" scheme?

In ANS: In cases of existence of the grounds for receivership and liquidation, the MB may
summarily and without need for prior hearing forbid the institution from doing business in
the Philippines and designâte the person or entity authorized by law to act as receiver of
a banking institution (NCBA, Sec. 30(d); Alfeo Vivas v. MB, G.R. No. 191424, August 7,
2013).
RENDE
Q: Is prior notice and hearing-neèded?
CRONY
ANS: Prior notice and hearing is NOT required before a bank may be directed to stop
operations and placed under receivership When the law provided for the ling of a case
within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable
that the closure should precede the ling of the case (Central Bank v. CA, G.R. No. 76118,
March 30, 1993).

Q: What is the remedy from Order of Closure?

ANS: Closure Actions of the MB taken under Sec. 29 .or 30 shall be nal and executory
and may not be restrained or set aside (NCBA, Sec. 29 and 30). Only remedy is Petition
for Certiorari under Rule 65 on the ground that the action of the MB taken was in excess
of jurisdiction, or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction (NCBA, Sec. 29 and 30).

Only stockholders of record representing the majority of the capital stock have the
personality to le a petition for certiorari to be led within ten (10) days from receipt by the
board of directors of the institution of the order directing receivership, liquidation or
conservatorship (NCBA, Sec. 30).

Note: The pendency of the case does NOT diminish the authority of the liquidator to
administer and continue the bank's transactions. He is allowed to continue receiving
collectibles and receivables or paying off creditor's claims and other transactions
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pertaining to normal operations of a bank such as the prosecution of suits against debtors
for collection and for foreclosure of mortgages. The bank was allowed to collect interest
on its loans while under liquidation, provided that the interests were legal (Banco Filipino
Savings and Mortgage Bank v. Ybanez, G.R. No. 148163, December 6, 2004).

B. SECRECY OF BANK DEPOSITS (R.A. No. 1405, as amended, and R.A, No

6426, as amended)
Q: What are the purposes of R.A No. 1405?
ANS: The purposes of R.A. No. 1405 are to:
1. To encourage people to deposit their money in banking institutions; and
2. To discourage private hoarding so that the same may be properly utilized by
banks in authorized loans to assist in the economic development of the country
(R.A. No. 1405, also known as Secrecy of Bank Deposits, Sec. 1, [hereinafter
R.A. No. 1405]).

PROHIBITED ACTS

Q: What are the prohibited acts under R.A No. 1405?

MV1 TVISHEWWOD

ANS: The following acts are prohibited by RA No. 1405:

1. Examination and inquiry or looking Into all deposits, of whatever nature, with the
banks IN THE PHILIPPINES including investments in bonds issued by the
Government, its political subdivisions and instrumentalities (R.A. No. 1405, as
amended, Sec. 2) and
2. Any disclosure by any of cial or employee of any banking institution to any
unauthorized person of any information concerning the said deposits (R.A. No.
1405, as amended by P.D No. 1792, Sec. 3).
3. Disclosure of an Independent Auditor hired by a bank to conduct its regular audit
to any person apart from the bank director, of cial or employee authorized by
the bank, of any information concerning said deposits (Id.).

Note: Trust Accounts are covered by the term deposits". The use of the term 'deposits'
is to be understood broadly and not limited only to accounts which give rise to creditor-
debtor relationship between the depositor and the bank (Ejercito v. Sandiganbayan, G.R.
No. 157294-95, November 30% 2006).

Q: Is outsourcing of internal audit for areas covered by the deposit secrecy law?
ANS: Yes, banks may outsource, in accordance with existing Bangko Sentral regulations
on outsourcing, internal audit activities except for areas covered under existing
statutes on deposit secrecy (2018 MORB, Sec. 163; BSP Circular Nos. 969 dated
August 22, 2017 and 871 dated March 5, 2015).

Q: What are deposits covered by R.A No. 1405?

ANS: It covers all deposits of whatever nature with banks or banking institutions in the or
Philippines including investments in bonds issued by the Government of the Philippines,
its political subdivisions and its instrumentalities (R.A. No. 1405 as amended, Sec 2).

The phrase "of whatever nature" in Sec. 2 of R A No. 1405 proscribes any restrictive
interpretation of deposits. R.A. No. 1405 applies not only to money which is deposited but
also to those which are invested such as in those placed under a trust agreement. To hold
a that a trust account is not protected by R.A. No. 1405 would encourage private hoarding
of funds that could otherwise be invested by banks in other ventures, contrary to the policy
behind the law (Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006).
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Note: Foreign currency deposits are not covered, because they are governed by the
Foreign Currency Deposit Act (R.A. No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, as amended, Sec. 8).

Q: Is there an absolute con dentiality in R.A. No. 6426?

ANS: Yes, deposits covered by law are considered as absolutely con dential in nature
and may not be examined, inquired or looked into by any person, governmental of cial,
bureau, or of ce (R.A. No. 1405, Sec. 2).

EXCEPTIONS FROM COVERAGE

Q: What are the exceptions to the law on secrecy of bank of deposits under R.A. No.
1405? (MAPIB-L)
ANS: Under R.A. No. 1405, deposits may be examined, inquired, or looked into:
1. When it is made in the course of a special or general examination of a bank
and is speci cally authorized by the Monetary Board;
2. When it is made by an independent Auditor hired by the bank to conduct its
regular audit for audit purposes only for the exclusive use of the bank;
3. Upon written Permission of the depositor,
4. In cases of Impeachment; On oleo
5. Upon order of a competent court in cases
a. Of Bribery or dereliction of duty of-public of cials; and
b. Where the money deposited or invested"is the subject matter of the
Litigation (R.A, No. 1405 as amended, Séc 2). The money deposited
should be the very thing in dispute (Mellon Bank, N.A. v. Magsino, G.R.
No. 74479, October 18, 1990).
Badl

Q: When may the monetary board authorize the examination of deposits?

ANS: The Monetary Board may authorize the examination after being satis ed that there
is reasonable ground to believe that a bank fraud or serious irregularity has been or is
being committed and that it is necessary to look into the deposit to establish such fraud
or irregularity (R.A. No. 1405 as amended, Sec 2)?

MAC
Q: What are the exceptions to the law on secrecy of bank deposits under other
laws?
ANS: Deposits may be examined, inquired or looked into:
1. Upon order of the competent or tribunal n cases involving unexplained wealth
(R.A. No. 3019, otherwise known as under the Anti-Graft and Corrupt Practices
Act, Sec. 8);
2. By the Court of Appeals, designated as a special court, in issuing an order
authorizing law enforcement of cers to examine and gather information on the
deposits, placements, trust accounts, assets and records in a bank or nancial
institution in connection with anti-terrorism case (R.A. No. 9372, otherwise
known as the "Human Security Act of 2007", Sec. 27);
3. Upon inquiry by the Commissioner of Internal Revenue for the purpose of
determining the gross estate of the decedent, or considering an application for
compromise of tax liability by reason of nancial incapacity (R.A. No. 8424,
otherwise known as the "National Internal Revenue Code", as amended by R.A.
No. 10963, Sec. 6(F));
4. By the Commission on Audit which is authorized to examine and audit
government deposits pertaining to the revenue and receipts of. and
expenditures or uses of funds and properties, owned or held in trust by, or
pertaining to, the Government or any of its subdivisions, agencies or
instrumentalities, including government-owned and controlled corporations with
original charters (1987 Constitution, Art. IX-D and P.D. No. 1445);
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5 of Upon order of any competent court when it has been established that probable
cause exists that the deposits or investments involved, including related
accounts, are in any way related O an unlawful activity or a money laundering
offense, or in proper cases by the Anti-Money Laundering Council (AMLC)
is wherein court order is not required (R.A. No. 9160 as amended R.A. No. 9194,
otherwise known as the Anti-Money Laundering Act, Sec.11);
6. Upon waiver of the secrecy of deposits by any director, of cer or stockholder as
required by the New Central Bank Act (R.A. No. 7653 as amended, Sec. 26);
7. By the Bangko Sentral to:
a. inquire into or examine bank deposits or investments in the course of a
periodic or special examination to ensure compliance with The Anti-
Money Laundering Law, in accordance with the rule of examination of
the Bangko Sentral (R.A. No. 9160, as amended, Sec. 11); and
b. conduct annual testing which is limited to the determination of the
existence and true identity of the owners of numbered accounts (R.A.
No. 9160, as amended, Sec. 9);
8 By the PDIC and/or the Bangko Sentral in case there is a nding of unsafe or
unsound banking practice (R.A, No. 3591, as amended, Sec. 9);
9. By the PDIC when there is a failure of prompt corrective action by a bank as
declared by the Monetary Board due to capital de ciency (R.A. No. 3591 as
COMMERCIAL LAW

amended, Sec. 11);

10. Upon the disclosure to the Treasurer of the Philippines of dormant deposits for
at least 10 years (Act. No. 3936, as amended by P.D 679, Sec 2);
11. By the AMLC without court order in relation to violations of R.A. No. 11479 (R.A.
No. 11479, otherwise known as "The AntiTerrorism Act of 2020, Sec. 35);
12. By the Ombudsman, who has the power to issue subpoena and subpoena
duces tecum, take testimony in any investigation or inquiry, as well as examine
and access bank accounts and records (R.A, No. 6770, otherwise known as
"The Ombudsman Act of 1989", Sec 15(8))r and
13. By the PCGG, in the conduct of its investigations to recover ill-gotten wealth
accumulated by former Pres. Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, which may issue subpoenas
requiring the attendance and testimony of witnesses and/or the production of
books, papers, contracts, records, statement of accounts and other documents
(E.0. No. 1, Sec. 3).

Q: When is court order not required for examination? (KiD-HiDeS-T)

ANS: No court order shall be required in cases of money laundering offense involving the
following unlawful activities:
1. Kidnapping for ransom under Art. 267 the Revised Penal Code;
2. Violations of the Comprehensive Dangerous Drugs Act ot 2002 (R.A. No. 9165,
Secs. 4, 5, 6, 8, 9, 5, 10, 12, 13, 14, 15, and 16);
3. Hijacking and other violations under R.A. No. 6235;
4. Destructive arson and murder under RPC, including those perpetrated by
terrorists against non-combatant persons and similar targets;
5. Felonies or offenses of a nature similar to those mentioned above. Similar which
are punishable under the penal laws of other countries; and
6. Terrorism and conspiracy to commit terrorism as de ned and penalized under
R.A. No. 9372 (R.A. No. 9160, as amended by R.A. 10167, Sec. 11).

NOTE: A bank deposit may be inquired into in cases of Report of Banks to the Anti-Money
Laundering Council of covered and/or suspicious transactions (R.A. No. 9160, Sec. 9).
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GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

Q: Why can deposit accounts be garnished without violating R.A. No. 1405?
ANS: The prohibition against examination of or inquiry into a bank deposit does not
preclude its being garnished to insure satisfaction of a judgment.

There is no real inquiry in such case, and if the case, and if the existence of the deposit
is disclosed, the disclosure purely incidental to the execution process (China Banking
Corporation v. Ortega, G.R. No. L-34964, January 31, 1973).

Q: What is the rule on the garnishment of foreign currency deposits?

ANS: Foreign currency deposits shall be exempt from attachment, garnishment, or any
other order or process of any court, legislative body, government agency or any
administrative body whatsoever (R.A. 6426 as amended, Sec 8).

Q: When may the garnishment of foreign currency deposits be allowed?

ANS: Foreign currency deposit of a foreign transient may be garnished whenever injustice
a would result, especially to a citizen aggrieved by a foreign guest. Otherwise, this would
negate Art. 10 of the New Civil Code which provides that "in case of doubt in the
interpretation or application of laws, itis presumed that the lawmaking body intended right
and justice to prevail (Salvacion v. Central Bank of the Philippines, G.R. No. 94723,
August 21, 1997).
ROY p
Q: What are the exceptions to the absolute con dentiality nature of foreign
deposits? (POA)
ANS: Foreign currency -deposits may be examined, inquired or looked into:
1. Upon written Permission of the depositor (R.A. No. 6426 as amended, Sec 8);
2. Upon the Order of a competent court or in proper cases by the AMLC where
B
there is probable cause of money laundering (R.A No. 9160 as amended, Sec
11);
3. By the AML without court order in relation to violations of R.A. No. 11749 (R.A.
No. 11479, otherwise known as "The Anti- Terrorism
they Act of 2020, Sec. 35).

Q: What are penalties for violation under R.A No, 14057

ANS: Any violation of this law will subject offender upon conviction, to an imprisonment
5 of not more than 5 years or a ne of not more than P20,000 or both, in the discretion of
the court (R.A. No. 1405 as amended, Sec 5).

C. GENERAL BANKING LAW OF 2000 (R.A, No. 8791)

Q: What are banks?
ANS: Banks shall refer to entities engaged in the lending of funds obtained in the form of
deposits (R.A. No. 8791 also known as "General Banking Law", Sec. 3, [hereinafter
GBL])).

Q: What are the classi cation of banks? (UCTRCIO)

ANS: Banks shall be classi ed into:
1. Universal banks;
2. Commercial banks;
3. Thrift banks;
4. Rural banks, as de ned in R.A. No. 7353;
5. Cooperative banks, as de ned in R.A. No. 6938;
6. Islamic banks as de ned in R.A. No. 6848; and
7. Other classi cations of banks as determined by the MB of the BSP (GBL, Sec
3.2).
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Q: What are quasi-banks?

ANS: Quasi-Bank shall refer to a nonbank nancial institution authorized by the BSP to
engage in quasi-banking functions and to borrow funds from more than 19 lenders
through the issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes (as de ned in Section 95 of the NCBA as amended) for purposes of relending
or purchasing of receivables and other obligations (R.A. No. 9474, otherwise known as
'Lending Company Regulation Act of 2007", Sec. 3(c)).

Q: What is trust entity?

ANS: A trust entity shall refer to a:
1 . Bank or Non-Bank Financial Institution (NBFI), through its speci cally designate
business to unit to perform trust functions; and
2 Trust Corporation, authorized by the BSP to engage in trust or other duciary
business under Section 79 of the GBL of or to perform investment management
services under section 53 of GBL (2020 MORB, Sec. 403(a)).

Note: Only a stock corporation or person duly authorized by the Monetary Board to
engage in trust business shall act as a trustee or administer any trust or hold property in
trust or on deposit for the use, bene t, or behoof of others (GBL, Sec. 79).
MV1 TVID¿3WWOD

NATURE OF BANK FUNDS AND BANK DEPOSITS

Q: What is the nature of bank deposits? of
ANS: Bank deposits are in the nature of irregular deposits. They are really loans because
they earn interest. All kinds of bank deposits, whether xed, savings, or current are to be
treated as loans and are to be covered by the law on loans (Serrano v. Central Bank of
the Philippines, G.R. No. L-30511, February 14, 1980).

Q: What is the relationship between the bank and the depositor with respect to bank
deposits?
ANS: There is a debtor-creditor relationship between the bank and its depositor. The bank
Is the debtor and the depositor Is the creditor. The depositor lends the bank money and
the bank agrees to pay the depositor on demand (Consolidated Bank and Trust Corp. v.
Court of Appeals, G.R. No. 138569, September 14, 2003)

Q: What are the kinds of Bank Deposits?

ANS: The basic type of deposits are:
1. Demand Deposits - all those liabilities of banks which are denominated in the
Philippine Currency and are subject to payment in legal tender upon demand by
presentation of checks subject to the following rules;
a. Generally, only a universal bank or commercial bank can accept or
create demand deposits;
b. A bank, other than universal bank or commercial bank cannot accept
demand deposits except upon prior approval of the Monetary Board.
c. Temporary overdrawing against current accounts shall not be allowed
unless cause by normal bank charges and other fees incidental to
handling accounts,
d. Drawings against uncollected deposits (i.e. uncleared checks) are
generally prohibited
2. Savings Accounts Most common type of deposit and is usually evidenced
by a passbook.
a. Banks are prohibited from issuing/accepting withdrawal slips or any other
similar instruments designed to effect withdrawals of savings deposits
without requiring the depositors concerned to present their passbooks
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and accomplishing necessary withdrawal slips, except for bank

authorized by the BSP to adopt the no passbook withdrawal system.
b. The requirement of presentation of passbook is usually included in the
terms and conditions printed in the passbooks. A bank is negligent it
allows the withdrawal without requiring the presentation of a passbook.
3. Negotiable Order of Withdrawal (NOW) Accounts - interest-bearing deposit
accounts that combine the payable on demand feature of checks and
investment feature of savings accounts.
4. Time Deposits • An account with xed term; the interest is higher than the
interest in savings account.

Note: The abovementioned type of deposits shall not be subject to interest ceilings
(AQUINO & AQUINO, Banking Law, supra at 471 to 473).

REQUIRED DILIGENCE OF BANKS; LIABILITY AS DRAWEE BANK

Q: What is required by the duciary nature of banking?

ANS: The duciary nature of banking that requires high standards of integrity and
performance (GBL, Sec. 2).

Q: What is the standard of diligence required of a bank with respect to deposit

accounts?
ANS: The diligence required of banks is more than that of a good father of a family. Banks
are required to exercise the highest degree of diligende in its banking transactions (Bank
Zoi199562, January 16, 2019).
of the Philippine Islands Vi Sps. Quiaoit, G. R. No:

But the same higher degree of diligence is not expected to be exerted by banks in
commercial transactions that do. not involve their duciary relationship with their
depositors (Spouses Reyes v. Court of Appeals, G.R. No. 118492, August 15, 2001).

PROHIBITED TRANSACTIONS BY BANK DIRECTORS AND OFFICERS

Q: What are the restrictions on transactions of a bank with its directors, of cers,
stockholders and their related interests (DOSRI)?
ANS: No, director or of cer of any bank shall, directly or indirectly, for himself or as the
representative or agent of others
1. Borrow from such bank;
2. Become a guarantor, indorse or surety for loans from such bank to others; or to
3. In any manner to be an obligor or incur any contractual liability to the bank (GBL,
Sec. 36).

Note: Related interest is de ned under Section 131(m) of the 2020 MORB.

Q: When are such restricted transactions of a bank with its DOSRI allowed?
ANS: The restricted transactions of a bank with its DOSRI is allowed with the written
approval of the majority of all the directors of the bank, excluding the director
concerned (GBL, Sec. 36).

Q: When is such written approval not required?

ANS: Such written approval shall not be required for loans, other credit accommodations
and advances granted to of cers under a fringe bene t plan approved by the Bangko
Sentral of the Philippines (GBL, Sec. 36).
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Q: What are the limitations on approved DOSRI transactions?

ANS: Transactions with DOSRI are limited by the following:
1 Arm's Length Rule;
2. Aggregate Ceiling; and
3. Individual Ceiling (GBL, Sec. 36).
Q: What is the "Arm's Length Rule"?
ANS: The "Arm's Length Rule" provides that dealings of a bank with any of its DOSRI
shall be upon the terms not less favorable to the bank than those offered to others (GBL,
Sec. 36).

Q: What is the aggregate ceiling?

ANS: The Monetary Board may regulate the amount of loans, credit accommodations
and guarantees that may be extended, directly or indirectly, by a bank to its directors,
of cers, stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said DOSRI (GBL, Sec. 36).

Note: Such shall not exceed 15% of the total loan portfolio of the bank or 100% of net
worth whichever is lower (2020 MORB, Sec 345).
COMMERCIAL LAW

Q: What is the individual ceiling?

ANS: The individual ceiling provides that the outstanding loans, credit accommodations
and guarantees which a bank may extend to each of its stockholders, directors, or of cers
and their related interests, shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital contribution in the bank
(GBL, Sec. 36).

Q: What are excluded from the individual ceiling?

ANS: The following are excluded from the individual ceiling:
1. Loans, credit accommodations and guarantees secured by assets considered
as non-risk by the Monetary Board,
2. Loans, credit accommodations and advances to in of cers in the form of fringe
bene ts granted in accordance with rules as may be prescribed by the Monetary
Board;
3. Loans, credit accommodations and guarantees extended by a cooperative bank
to its cooperative shareholders (GBL, Sec. 36).

Q: What are the prohibited acts of borrowers? (OFDO)

ANS: No borrow of a bank shall:
1. Fraudulently Overvalue property offered as security for a loan or other credit
accommodation from the bank;
2. Furnish False or make misrepresentation or suppression of material facts for
the purpose of obtaining, renewing, or increasing a loan or other credit
accommodation or ending the period thereof;
3. Attempt to Defraud the said bank in the event of a court action to recover a loan
or other credit accommodation; or
4. Offer any director, of cer, employee or agent of a bank any gift, fee,
commission, or any other form of compensation in order to in uence such
persons into approving a loan or other credit accommodation application (GBL,
Sec. 55.2).
Q: What are the penalties for violation of the General Banking Law?
ANS: Unless otherwise herein provided, the violation of any of the provisions of this Act
shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender
is a director or of cer of a bank, quasi-bank or trust entity, the Monetary Board may also
suspend or remove such director or of cer. the violation is committed by a corporation,
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such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor
General (GB.L, Sec. 66).

Q: L Company obtained a loan from F Bank in the amount of P3M subject to a 17%
interest per annum. The said loan is a secured by a Real Estate Mortgage over l
Company's two condominium. F Bank subsequently merged with BPI Bank, the
latter being the surviving bank. When L Company failed to pay its indebtedness
including interests and penalties, the BPI applied for extrajudicial foreclosure of
the real estate mortgage. BPI being the highest bidder, obtained : title in its favor.
L Company led an action for the annulment of the title in the exercise of its right
of redemption. In determination of the redemption price, the RTC applied 6%
interest rate per annum and excluded the real estate taxes that BPI paid. Is the RTC
correct?
ANS: No, the applicable interest rate is 17% as provided for in the mortgage contract, and
not the legal interest of 6%. Section 78 of R.A. No. 337 or the 'General Banking Act," as
amended, (now Section 47 of RA No. 8791 or the "General Banking Law of 2000") shall
govern in cases where the mortgagee is a bank, and not the Rules of Court in relation to
Section 6 of Act No. 3135. The RTC erred in applying the legal interest of 6% per annum
given that the stipulated interest is neither excessive nor unconscionable. As part of the
redemption price, Section 78 of RA No. 337 as further amended, is explicit that the
principal obligation shall earn interest at the rate speci ed in the mortgage contract. Thus,
the interest rate of 17% per annum which the parties speci ed in the contract of loan and
the mortgage deed should be imposed and the real estate taxes should be included as
part of the redemptión price (BP/I v. LCL Capital Inc. G.R, No. 243396, September 14,
2021; Lopez Case)

D. ANTI-MONEY LAUNDERING ACT

POLICY

Q: What is the declared state policy of the Anti-Money Laundering Act? (PEE)
ANS: It is hereby declared the policy of the State;
1. To Protect and preserve the Integrity and con dentiality of bank accounts;
2. To Ensure that the Philippines shall not be used as a money laundering site for
of the proceeds of any unlawful activity, and
3. To Extend cooperation in:
a. Transnational investigations and prosecutions of persons involved in
money laundering activities wherever committed; and
b. the implementation of targeted nancial sanctions related to the
nancing of the proliferation of weapons of mass destruction, terrorism,
and nancing of terrorism, pursuant to the resolution of the United
Nations Security Council (R.A. No. 9160, as amended by R.A. No. 9194,
10167, 10365, 10927, and 11521 otherwise known as the "Anti-Money
Laundering Act", Sec 2 [hereinafter AMLA]).

COVERED INSTITUTIONS AND THEIR OBLIGATIONS

Q: Who are the covered persons under the AMLA? (BIS-D)
ANS: The covered entities or persons, natural or juridical, who are obligated to report
covered and suspicious transactions refer to the following:
1. Financial Institutions:
a. Persons supervised and/or regulated by BSP, including their
subsidiaries and af liates, which are also covered persons, supervised
and/or regulated by the BSP, such as:
Banks;
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ii. Quasi-banks;
iii. Trust entities;
iv. Pawnshops;
V. Non-stock savings and loan associations;
vi. Other non-bank nancial institutions which under special laws are
subject to BS supervision and/or regulation;
vi. Electronic money issuers; and
vili. Foreign exchange dealers, money changers, and remittance and
transfer companies.
b. Persons supervised or regulated by the Insurance Commission (IC),
such as:
i. Insurance Companies
ii. Insurance Companies;
iii. Pre-need Companies;
iv. Insurance Agents;
V. Insurance Brokers;
vi. Professional Reinsurers;
vii. Reinsurance Brokers;
vili. Holding Company Systems; MUTTVISJEWWOD

ix. Mutual Bene t Associations; and

X. All other persons and their subsidiaries and af liates supervised
or regulated by the 10
c. Persons supervised or regulated by the SEE, such as:
i. Securities dealers, brokers, salesmen, investment houses and
other similar persons managing securittes or rendering services
as investment agents, advisors, on consultants;
Mutual funds or open-end investment companies, close-end
investment companies or issuers, and other similar entities; and
Other entities administering or otherwise dealing in commodities
or nancial derivatives based thereon, valuable objects, cash
substitutes, and other similar monetary instruments or properties,
supervised or regulated by the SEC.
2. Designated Non-Financial Businesses and Professions, such as:
a. Jewelry dealers;
b. Dealers in precious metals, and dealers in precious stones; and
C. Company service providers, which, as a business, provide any of the
following services to third parties:
i. Acting as a formation agent of juridical persons;
ii. Acting as (or arranging for another person to act as) a director or
corporate secretary of a company, partner of a partnership, or
similar position in relation to other juridical persons;
ili. Providing a registered of ce, business address or
accommodation, correspondence or administrative address for a
company, a partnership or any other juridical person or legal
arrangement; and
iv. Acting as (or arranging for another person to act as) a nominee
shareholder for another person.
d. Persons, including lawyers, accountants, and other professionals, who
provide any of the following services:
i. Managing of client money, securities or other assets:
ii. Management of bank, savings, securities or other assets;
Hii. Organization of contributions for the creation, operation or
management of companies; and
iv. Creation, operation or management of juridical persons or
arrangements, and buying and selling business entities.
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e. Casinos, including internet-based casinos and ship-based casinos, with

respect to their casino cash transactions related to their gaming
operations (2018 Implementing Rules and Regulations of the AMLA
[hereinafter 2018 IRR of AMLA], Rule 4, Sec. 1);
f. Real estate developers and brokers; and
g. Offshore gaming operation, as well as their service providers,
supervised, accredited or regulated by the Philippine Amusement and
Gaming Corporation (PAGCOR) or any government agency (AMLA, Sec
3(a)).

Note: All covered persons shall register with the Anti-Money Laundering Council (AMLC)
(2018 IRR of AMLA, Rule 4, Sec. 3).

Q: Who are excluded from the term "covered persons"?

ANS: The term "covered persons" shall exclude lawyers and accountants acting as
independent legal professionals in relation to information concerning their clients or where
disclosure of information would compromise client con dences or the attorney-client
relationship (AMLA, Sec 3(a)).

i
Q: What are the primary duties of covered persons?
ANS: The following are the primary duties of covered persons:
1. They shall comply with all the requirements under the AMLA, its IRR, and other

*
AMLC issuances, They shall have the duty to cooperate with the AMLC in the
discharge of the latter's mandate and execution of its lawful orders and
issuances to protect their businesses or professions from being used in money-
laundering activities; and
2. Their board of directors, partners, or sole proprietors shall be ultimately
responsible for the covered persons' compliance with the AMLA, its IRR, and
m of AMLA, Rule 4, Sec, 2).
other AML issuances (2018 IRR

Q: What are the obligations of covered persons for the prevention of money
laundering? (CR2) Sc
ANS:1.Covered persons shall have the following obligations:
Customer Identi cation Covered institutions, shall establish and record the true
identity of their clients based on of ciat documents. They shall maintain a
system of verifying the true identity of their clients and, in case of corporate
clients, require a system of verifying their legal existence and organizational
structure, as well as the authority and identi cation of all persons purporting to
act on their behalf;
2. Record Keeping - All records of all transactions of covered institutions shall be
maintained and safely stored for 5 years from the date of transactions. With
respect to closed accounts, the records on customer identi cation, account les
and business correspondence, shall be preserved and safety stored for at least
years from the dates when they were closed; and
3. Reporting of Covered and Suspicious Transactions - Covered persons shall
report to the AMLC all covered transactions and suspicious transactions within
5 working days from occurrence thereof, unless the AML prescribes a different
period not exceeding 15 working days (AMLA, Sec. 9).

COVERED TRANSACTIONS AND SUSPICIOUS TRANSACTIONS

Q: What are the covered transactions of the AMLA? (CDC)

ANS: "Covered Transaction" refers to:
1. A transaction in Cash or other equivalent monetary instrument in excess of
P500,000 within 1 banking day;
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2 For Casinos, including internet-based casinos and ship-based casinos, with

respect to their casino cash transactions related to their gaming operations, a
single casino cash transaction involving an amount in excess of P5,000,000 or
its equivalent in any other currency.
3. For Real estate developers and brokers, a single cash transaction involving an
amount in excess of P7,500,000 or its equivalent in any other currency (AMLA,
Sec. 3(b)).

SUSPICIOUS TRANSACTIONS
Q: What are the suspicious transactions covered by AMLA? (No-CASt-DUS)
ANS: "Suspicious Transactions" are transactions with covered institutions, regardless of
the amounts involved, where any of the following circumstances exist:
1 There is No underlying legal or trade obligation, purpose, or economic
justi cation;
2. The Client is not properly identi ed;
3. The Amount involved is not commensurate with the business or nancial
capacity of the client;
4. Taking into account all known circumstances, it may be perceived that the
client's transaction is Structured in order to avoid being the subject of reporting COMMERCIAL MYT

requirements under the AMLA,

5. Any circumstance relating to the transaction which is observed to Deviate from
the pro le of the client and/or the client's past transactions with the covered
person;
6. The transaction in any way related to an Unlawful activity or any money
laundering activity or offense that is about tq be, is being, or has been
committed; or
7. Any transaction that is Similar or analogous to any of the foregoing (AMLA, Sec.
3(b-1)).

Q: What are the prohibited acts during reporting of covered or suspicious

transactions? (CP)
ANS: When reporting covered or suspicious transactions to the AMLC, covered persons
and their of cers and employees are prohibited from uma
1 . Communicating, directly or indirectly, in any manner or oy any means, o any
person or entity, the media, the fact that a covered or suspicious transaction has
been reported or is about to be reported, the contents of the report, or any other
information in relation thereto; and
2. Publishing or airing the reporting in any manner or form by the mass media,
electronic mail, or other similar devices (AMLA, Sec. 9(c)).

SAFE HARBOR PROVISION

Q: What is the safe harbor provision?
ANS: The safe harbor provision provides that no administrative, criminal or civil
proceedings shall lie against any person for having made a covered transaction report in
the regular performance of his duties and in good faith, whether or not such reporting
results any criminal prosecution under the AMLA or any other Philippine law (AMLA,
Sec. 9(c)).

MONEY LAUNDERING
Q: What is money laundering?
ANS: Money laundering is crime whereby the proceeds of an unlawful activity are
transacted thereby making them appear to have originated from legitimate sources
(AMLA, Sec. 4),
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Q: How is money laundering committed? (T-C3AP)

ANS: Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any unlawful
activity:
1. Transacts said monetary instrument or property;
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said
monetary instrument or property;
3. Conceals or disguises the true nature, source, location, disposition, movement
or ownership of or rights with respect to said monetary instrument or property;
4. Attempts or Conspires to commit money laundering offenses referred to in
numbers (1) (2) and (3);
5. Aids, abets, assists in or counsels the commission of the money laundering
offenses referred to in numbers (1), (2) or (3) above; and
6. Performs or fails to perform any act as a result of which he facilitates the offense
of money to laundering referred to in numbers (1), (2) or (3) above (AMLA, Sec.
4).

Note: Money laundering is also committed by any covered person who, knowing that a
covered or suspicious transaction is required under the AMLA to be reported to the AMLC,
fails to do so (AMLA, Sec.

Q: What are the three basic steps in money laundering? (PLI)

ANS: The following are m 10
1. Placement - At this stage, the launderer inserts the dirty money into a legitimate
nancial institution usually in the form of cash bank deposits;
2. Layering -Involves sending money through various nancial transactions to
change its form and make it more dif cult to follow It may consist of bank-to-
bank transfers, changing currency, or purchasing high value items. This is the
most complex step; and A 09
3. Integration The money re-enters mainstream economy in legitimate-looking
form, appearing to have come from some legitimate transaction.

Note: It may involve a nal bank transfer into the account of a local business in which the
launderer is "investing" in exchange for a cut of the pro ts or the sale of high value items
bought during the layering stage (DIZON & DIZON, Banking Laws, supra at 431-432).

Q: What are the unlawful activities or predicate crimes subject to AMLA?

ANS: Unlawful activity refers to any act or omission or series or combination thereof
involving or having direct relation to the following:
1. Kidnapping for Ransom under Art. 267 of Act No. 15 (RPC), as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of the Comprehensive
Dangerous Drugs Act of 2002 (R.A. No. 9165);
3. Section : paragraphs B, C, E, G, H and of the Anti-Graft and Corrupt
Practices Act (R.A. No. 3019);
4. Plunder (R.A. No. 7080 as amended);
5. Robbery and Extortion under Arts. 294, 295, 296, 299. 300, 301 and 302 of
the RPC, as amended;
6. Jueteng and Masiao punished as illegal gambling (P.D. No. 1602);
Piracy on the High Seas under the RPC and P.D. No. 532;
' c Quali ed Theft under Art. 310 of the RPC, as amended;
9. Swindling under Art. 315 and Other Forms of Swindling under Art. 316 of the
RPC, as amended;
10. Smuggling punished under the Tariff and Customs Code (R.A. No. 455, and
R.A. No. 1937, as amended);
11. Violations of the Electronic Commerce Act of 2000 (R.A. No. 8792);
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12. Hijacking and other violations under the Anti-Hijacking Law (R.A. No. 6235);
Destructive Arson and Murder, as de ned under the RPC, as amended;
13. Terrorism and Conspiracy to Commit Terrorism as de ned and penalized
under Sections 3 and 4 of R.A. No. 9372;
14. Financing of Terrorism under Section 4, and offenses punishable under
Sections 5, 6, 7 and 8 of the Terrorism Financing Prevention and Suppression
Act of 2012 (R.A. No. 10168);
15. Bribery under Arts. 210, 211 and 211-A of the RPC, as amended, and
Corruption of Public Of cers under Art. 212 of the RPC, as amended;
16. Frauds and Illegal Exactions and Transactions under Arts. 213, 214, 215
and 216 of the RPC, as amended;
17. Malversation of Public Funds and Property under Arts. 217 and 222 of the
RPC, as amended;
18. Forgeries and Counterfeiting under Arts. 163, 166, 167, 168, 169 and 176 of
the RPC, as amended;
19. Violations of Sections 4 to 6 of the Anti-Traf cking in Persons Act of 2003
(R.A. No. 9208);
20. Violations of Sections 78 to 79 of Chapter IV, of the Revised Forestry Code of
the Philippines, as amended (P.D, No. 705);
21. Violations of Sections 86 to 106 of Chapter VI, of the Philippine Fisheries Code COMMERCIAL LAW

of 1998 (R.A. No. 8550);

22. Violations of Sections 101 to 107, and 110 of the Philippine Mining Act of 1995
(R.A. No. 7942);
23. Violations of Section 27(c), (e), (f), (g) and (i), of the Wildlife Resources
Conservation and Protection Act (R.A. No. 9147)
24. Violation of Section 7(b) of the National Caves and Cave Resources
Management Protection Act (R.A, No. 9072);
25. Violation of the Anti-Carnapping Act of 2002, as amended (R.A. No. 6539);
26. Violations of Sections 1, 3 and 5 of the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture, Dealing in, Acquisition or
Disposition of Firearms, Ammunition or Explosives (P.D. No. 1866 as
amended);
27. Violation of the Anti-Fencing Law (P.D No. 1612);
28. Violation of Section 6 of the Migrant Workers and Overseas Filipinos Act of
1995 (R.A. No. 8042 as amended by R.A. No. 10022);
29. Violation of the Intellectual Property Code of the Philippines (R.A. No. 8293);
30. Violation of Section 4 of the Anti-Photo and Video Voyeurism Act of 2009
(R.A. No. 9995);
31. Violation of Section 4 of the Anti-Child Pornography Act of 2009 (R.A. No.
9775);
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of the Special
Protection of Children Against Abuse, Exploitation and Discrimination
(R.A. No. 7610);
33. Fraudulent practice and other violations under The Securities Regulation
Code of 2000 (R.A. No. 8799);
34. Violation of Section 9 (a)(3) 9 of Strategic Trade Management Act (R.A. No.
10697), in relation to the proliferation of weapons of mass destruction and its
nancing pursuant to United Nations Security Council Resolution Numbers 1718
of 2006 and 2231 of 2015;
35. Violation of Section 254 of Chapter II, Title X of the National Internal Revenue
Code of 1997, as amended, where the de ciency basic tax due in the nal
assessment is in excess of P25,000,000 per taxable year, for each tax type
covered and there has been nding of probable cause by the competent
authority: Provided, further, That there must be a nding of fraud, willful
misrepresenting or malicious intent on the part of the taxpayer: Provided, nally,
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That in no case shall the AMLC institute forfeiture proceedings tO recover

monetary instruments, property or proceeds representing, involving, or relating
to tax crime, if the same has already or been recovered or collected by the BIR
in a separate proceeding; and
36. Felonies and offenses of a similar nature that are punishable under the penal
laws of other countries (AMLA, Sec. 3 (i)).

Note: In determining whether or not a felony or offense punishable under the penal laws
of other countries is "of similar nature" so as to constitute an unlawful activity under the
AMLA, it is suf cient that both the Philippines and the other jurisdiction criminalize the
conduct or activity underlying the offense, regardless of whether both countries place the
offense within the same category, or denominate the offense under the same
nomenclature (2018 IRR of AMLA, Rule 3, Sec. 2).

AUTHORITY TO INQUIRE; FREEZING AND FORFEITURE

Q: When can the AMLC inquire into bank deposits?

ANS: As a general rule, the AMLÇ may inquire into or examine any particular deposit or
investment, including related counts, with any banking institution or non-bank nancial
institution upon order of any competent court based on an ex parte application in cases
of violations of this Act, when it has been established that there is probable cause that
the deposits or investments, including related accounts involved, are related to an
unlawful activity as de ned in Section 3(i) or a money laundering offense under Section
4 (AMLA, Sec. 10).
O0
By authority of the AMLO, the AML: Secretariat shall le before the Court of Appeals,
through the OSG, an ex parte, application for the Issuance of Bank Inquiry Order to
examine or inquire into any particular deposit or investment account that is related an
unlawful activity or money laundering offense (2018IRR of AMLA Rule 11, Sec. 1, 1.1).
A court order ex parte must be obtained before the AML can inquire into the related
accounts (2018 IRR of AMLA, Rule 11, Sec, 1, 1.2)
SCE
Note: No prior criminal charge, pendency of a case, or conviction for an unlawful activity
or money laundering offense is necessary for the filing or the resolution of an application
for issuance of bank inquiry order (2018 IRR of AMLA, Rule 11, Sec. 1, 1.3).

Q: When may the AMLC issue an ex parte Bank Inquiry Order? (KD-HATTS)
ANS: No court order or the AMLC shall issue an ex parte order authorizing the AMLC
Secretariat to inquire into or examine any particular deposit or investment account,
including related accounts, with any banking institution or non-bank nancial institution
and their subsidiaries and af liates when it has been established that probable cause
exists that the deposits or investments involved, including related accounts, are in any
way related to any of the following unlawful activities:
1. Kidnapping for ransom as de ned under the RPC;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of the Comprehensive
Dangerous Drugs Act of 2002 (R.A. No. 9165);
3. Hijacking and other violations under the Anti-Hijacking Law;
4. Destructive Arson and murder, as de ned under the RPC;
5. Financing of Terrorism under Section 4, and offenses punishable under Secs.
5, 6, 7, and of the Terrorism Financing Prevention and Suppression Act of
2012
6. Terrorism and conspiracy to commit terrorism as de ned and penalized under
R.A. No. 9372; and
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7. Felonies or offenses of a nature Similar to those mentioned in Section 3(i) (1),

(2), and (12) of the AMLA which are punishable under the penal laws of other
countries (2018 IRR of AMLA, Rule 11, Sec. 2, 2.1).

Q: What is a freeze order?

ANS: "Freeze Order" refers to provisional remedy aimed at blocking or restraining
monetary instruments or properties in any way related to an unlawful activity, as herein
de ned, from being transacted, withdrawn, deposited, transferred, removed, converted,
concealed, or otherwise moved or disposed without affecting the ownership thereof (2018
IRR of AMLA, Rule 2, Sec. 1(mm)). 2,

A freeze order is an extraordinary and interim relief issued by the Court of Appeals to
prevent the dissipation, removal, or disposal of properties that are suspected to be the
proceeds of, or related to, unlawful activities as de ned in Section 3 (i) of the AMLA (Ligot
v. Republic, G.R. No. 176944, March 6, 2013).
Q: Who has the power to freeze accounts?
ANS: The Court of Appeals may issue a freeze order which shall be effective immediately,
for a period of 20 days upon a veri ed ex parte petition by the AMLC and after
determination that probable cause exists that any monetary instrument or property is in MYTIVISHENWO?

any way related to an unlawful activity as de ned in Section 3(i) (AMLA, Sec. 10).
Note: The court should act on the petition to freeze within 24 hours from ling of the
petition. If the application is led a day before a nonworking day, the computation of the
24-hour period shall exclude the nonworking days (AMLA, Set 10).

Q: When can the AMLC issue a freeze order ex parte?

ANS: For purposes of implementing targeted nancial sanctions in relation to proliferation
of weapons of mass destruction and its nancing, the AML% shall have the power to issue,
ex parte, an order to freeze without delay.

The freeze order shall be effective until the basis for its issuance shall have been lifted.
During the effectivity of the freeze order, the aggrieved party may, within twenty 20 days
from issuance, le with the Court of Appeals a petition to determine the basis of the freeze
order according to the principle of effective judjoial protection: Provided, That the person
whose property or funds have been frozen may withdraw such sums as the AMLC
determines to be reasonably needed for monthly family needs and sustenance including
the services of counsel and the family medical needs of such person (AMLA, Sec. of 10).

Note: The AMLC, if circumstance warrant, may initiate civil forfeiture proceedings to
preserve the assets and to protect it from dissipation (AMLA, Sec. 10).

Q: What are the requirements for the issuance of freeze orders? (CAT)
ANS: The following are the requirements for the issuance of a freeze order:
1. No prior Criminal a charge, pendency of a case, or conviction for an unlawful
activity or ML offense necessary for the commencement or the resolution of
a petition for freeze order;
2. No Asset shall be frozen to the prejudice of a candidate for an electoral of ce
during an election period; and
3. No court shall issue a Temporary restraining order or a writ of injunction against
any freeze order, except the Supreme Court (2018 IRR of AMLA, Rule 10, Sec.
1).

Q: What is the limitation as to the period of a freeze order?

ANS: The total period of the freeze order issued by the Court of Appeals shall not exceed
6 months (AMLA, Sec. 10).
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Note: This is without prejudice to an asset preservation order that the Regional Trial Court
having jurisdiction over the appropriate anti-money laundering case or civil forfeiture case
may issue on the same account depending upon the circumstances of the case, where
the Court of Appeals will remand the case and its records (AMLA, Sec. 10).

Q: When is the freeze order deemed ipso facto lifted?

ANS: If there is no case led against a person whose account has been frozen within the
period determined by the Court of Appeals, not exceeding 6 months, the freeze 6 order
shall be deemed ipso facto lifted (AMLA, Sec. 10).

Q: What is the coverage of a freeze order?

ANS: The freeze order or asset preservation order issued shall be limited only to the
amount of cash or monetary instrument or value of property that court nds there is
probable cause to be considered as proceeds of a predicate offense, and the freeze order
or asset preservation order shall not apply to amounts in the same account in excess of
the amount or value of the proceeds of the predicate offense (AMLA, Sec. 10).

Q: Who can le a motion to lift the freeze order?

ANS: A person whose monetary instrument or property has been frozen may le a motion
to lift the freeze order. The court must resolve the motion before the expiration of the
freeze order (AMLA, Sec. 10).

Q: Who can issue a temporary restraining order or a writ of injunction against any
freeze order?
ANS: No court shall issue a temporary restraining order or a writ of injunction against any
freeze order, except the Supreme Court (AMLA, Sec. ¡10).
SON ONE D
Q: What is a civil forfeiture? JE
ANS: Civil Forfeiture refers to the non-conviction-based proceedings aimed at forfeiting,
in favor of the government, monetary instruments or properties/ related to an unlawful
activity or money laundering (ML) offense (2018 RR of AMLA, Rule 2, Sec. 1(r)).

Q: When may the AML¢ le a petition for civil forfeiture?

ANS: Upon determination that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity or ML offense, the AMLC shall le
with the RTC, through the OSG, a veri ed petition for civil forfeiture (2018 IRR of AMLA,
Rule 12, Sec. 1, 1.1).

Q: When is asset forfeiture proper?

ANS: Where there is conviction for money laundering, the court shall issue a judgment of
forfeiture in favor of the Government of the Philippines with respect to the monetary
instrument or property found to be proceeds of an unlawful activity (2018 IRR of AMLA,
Rule 12, Sec. 2).

Q: How can a person make a claim on the forfeited assets?

ANS: Where the court has issued an order of forfeiture of the monetary instrument or
property in a criminal prosecution for any ML offense, the offender or any other person
claiming an interest therein may apply, by veri ed petition, for a declaration that the same
legitimately belongs to him and for segregation or exclusion of the monetary instrument
or property corresponding thereto (AMLA, Section 12(b)).

Q: When may the court enforce payment in lieu of forfeiture? (LoS-CO-CP)

ANS: When the order of forfeiture cannot be enforced because any particular monetary
instrument or property:
1. Cannot, with due diligence, be Located;
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2. Has been Substantially altered, destroyed, diminished in value or otherwise

rendered worthless by any act or omission, directly or indirectly, attributable to
the offender;
3 Has been Concealed, removed, converted or otherwise transferred to prevent
the same from being found or to avoid forfeiture thereof;
4. Is located Outside the Philippines or has been placed or brought outside the
jurisdiction of the court;
5. Has been Commingled with other monetary instruments or property belonging
O either the offender himself or a third person or entity, thereby rendering the
same dif cult to identify or be segregated for purposes of forfeiture; or
6 The court may, instead of enforcing the order of forfeiture of the monetary
or instrument or property or part thereof or interest therein, accordingly, order the
convicted offender to Pay an amount equal to the value of said monetary
instrument or property (AMLA, Sec. 12(c)).

INTELLECTUAL PROPERTY CODE (R.A. No. 8293)

Q: What is Intellectual Property?
ANS: Intellectual Property is basically a creation of the mind, and the resultant product is MV1 TVIPHEWWO?

just the manifestation of one's creative thinking process. It is considered an intangible n

character (GEPTY, Intellectual Property Law Compendium (2019), p. 13 [hereinafter
GEPTY, Intellectual Property Lawl).

Q: What comprises Intellectual Property Right?

ANS: The term "intellectual property" consists of:
1. Copyright or Related Neighboring Rights (R.A. No. 8293, also known as
Intellectual Property Code, Sec, 4.1 (a), [hereinafter PC));
2. Trademark and Service Marks (IPO. Sec. 4.1(5) ) isol
3. Geographic Indications (IPC, Sec. 41(c));
4. Industrial designs (IP Sec. 4.1 (d)):
5. Patents (IPC, Sec: 4(e));
6. Layout Designs (Topographies) of Integrated Circuits (IPC, Sec 4.1(f)); and
7. Protection of Undisclosed Information (IP, Sea 4.1(g)).

Q: What are the differences between copyright, trademark and patents?

ANS: Copyright, Trademark and Patents are distinguished as follows:

Patent Copyright Trademark

As to Nature

Granted to provide rights Con ned to literary and Any visible sign capable
and protection to the artistic works which are of distinguishing an
inventor after an original intellectual enterprise (R.A. No.
invention is disclosed to 8293, also known as
creations in the literary and
the public (E.I. Duport De artistic domain protected Intellectual Property
Nemours and Co. V. from the moment of their Code as amended, Sec.
Francisco, G.R. No. creation (Ching V. Salinas 121.1 [hereinafter IPC])
174379, August 31, Sr., G.R. No. 161295)
2016)
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Patent Copyright Trademark

As to term of Protection

Copyright in works under

Sections 172 and 173 of
20 years the IPC shall be protected 10 years
(IPC, Sec. 145) during life of the author and (IPC, Sec. 145)
for fty (50) years after his
death.

As to what may be registered and Protected

Any technical solution of 1. Original Works (IPC Sec. Marks may be registered
a problem in any eld of 172); and as long as it is non-
human activity which is 2. Derivative Works (IPC registrable mark (IPC,
new, involves an Sec. 173) Sec. 123).
inventive step and is
industrially applicable
shall be patentable. It
may be, or may relate to
a product, or process, or
an improvement of any of
the foregoing (IPC Sec.
21)

A. PATENTS
Q: What is a patent?
ANS: It is an exclusive right granted for product, process or an improvement of a product
or process which is new, inventive and useful. This exclusive right gives the inventor the
right to exclude others from making, using, or selling the product of his invention during
the life of the patent (FUNA, Intellectual Property Law (2012), p. 23 [hereinafter FUNA,
Intellectual Property Law]).

Q: What is an invention?
ANS: "Invention" refers to the conception and not the physical embodiment of the idea.
The Intellectual Property Code does not require that the invention must rst be reduced
to practice before can be led for a patent (FUNA, Intellectual Property Law, supra at
66).

Q: What is the Three-Fold Purpose of Patent? (FP-En)

ANS:
1. The patent law seeks to Foster and Reward invention;
2. t Promotes disclosures of inventions to stimulate further innovation and to
permit the public to practice the invention once the patent expires; and
3. It seeks to Ensure that ideas in the public domain remain there for the free use
of the public (Pear & Dean (Phil.), Inc. v. Shoemart, G.R. No. 148222, August
15, 2003).
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PATENTABLE vs. NON-PATENTABLE INVENTIONS

Q: What are patentable inventions?
ANS: Patentable inventions refer to any technical solution of a problem in any eld of
human activity which is new, involves an inventive step and is industrially applicable shall
be patentable. It may be, or may relate to, a product, or process, or an improvement of
any of the foregoing (IPC Sec. 21).

Q: What are the requisites of a patentable invention? (TINIP)

ANS: The following are the requisites of a patentable invention:
1. Technical solution of a problem in any eld of human activity (IPC, Sec. 21);
2. Inventive Step An invention involves an inventive step if, having regard to
prior art, it is not obvious to a person skilled in the art at the time of the ling
date or priority date of the application claiming the invention (IPC, Sec. 26);
3. Novelty - An invention shall not be considered new if it forms part of a prior of art
(IPC, Sec. 23);

Note: For the patentee to be entitled to protection, the invention must be new to the world.
The element of novelty is an essential requisite of the patentability of an invention or
discovery. If a device or process has been known or used by others prior to its invention COMMERCIAL LAW

or discovery by the applicant, an application for a patent therefor should be denied; and if
the application has been granted, the court, in a judicial proceeding in which the validity
of the patent is drawn in question, will hold it void and Ineffective (Manzano v. CA, G.R.
No. 113388, September 1997).

4. Industrial Applicability - An invention that can be produced and used in any

industry (IPG; Sec. 27), and

Note: This requirement demonstrates the practical nature of patent jaw, which requires

a
that the invention should be mething which can be made Industrially or relate tO an
industrial process. The invention has to be something that can be worked industrially, and
to some extent this requirement distinguishes patents from other forms of intellectual
property (FUNA, Intellectual Property Law, supra at 65).

5. Patentable Subject Matter - is not otherwise listed as non-patentable (IPC,

Sec. 22).

Q: What is the Non-Obviousness Rule?

ANS: The rule provides that even if the subject matter sought to be patented is not exactly
shown by the prior art, and involves one or more differences over the most nearly similar
thing already known, a patent may still be refused if the differences would be obvious.
The subject matter sought to be patented must be suf ciently different from what has
been used or described before that it may be said to be non-obvious to a person having
ordinary skill in the area of technology related to the invention (FUNA, Intellectual Property
Law, supra at 62).

Q: What are non-patentable inventions? (DMe-SAM-PAA)

ANS: The following shall be excluded from patent protection:
1. Discoveries, scienti c theories. and mathematical methods, a law of nature, a
scienti c truth, or knowledge as such;
2. of In the case of drugs and Medicines, the mere discovery of a new form or new
property of a known substance which does not result in the enhancement of the
known ef cacy of that substance, or the mere discovery of any new property or
new use for a known substance, or the mere use of a known process, unless
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such known process results in a new product that employs at least one new
reactant;
3. Schemes, rules, and methods of performing mental acts and playing games, or
doing business, and programs for computers;
4. Abstract ideas or theories, fundamental concepts apart from the means or
processes for carrying the concept to produce a technical effect;
5. Methods for treatment of the human or animal body by surgery or therapy and
diagnostic methods practiced on the human or animal body;
6. Plant varieties or animal breeds or essentially biological processes for the
production of plants or animals;.
7. Aesthetic creations; and
8. Anything which is contrary to public order or morality (Revised Implementing
Rules and Regulations for Patents, Utility Models and Industrial Designs, Rule
202).

OWNERSHIP OF A PATENT

Q: Who owns the right to patent?

ANS: The right to a patent belongs to the inventor, his heirs, or assigns. When two or
more persons have jointly made an invention the right to a patent shall belong to them
jointly (IPC, Sec. 28).

Q: What is the First.to- le Rule?

ANS: Under the First-to-Filé Rule:
p X
1. If two or more persons have made the invention separately and independently
of each other, the right to the patent shall belong to the person who led an
application for such invention; or
2. Where two or more applications are led for the same invention, the right to the
patent shall belong to the applicant who has the earliest ling date, or the earliest
priority date (IPC, Sec. 29).

Q: Who owns an invention created pursuant to a commissioned work or

employment?
ANS: If the invention is created
1. Pursuant to a commission - The person who commissions the work shall own
the patent, unless otherwise provided in the contract (IPC, Sec. 30.1); or
2. In the course of his employment:
a. The invention belongs to the employee if the inventive activity is not a
part of his regular duties even if the employee uses the time, facilities
and materials of the employer; or
b. The invention belongs to the employer if the invention is the result of the
performance of his regularly-assigned duties, unless there is an
agreement, express or implied, to the contrary (IPC, Sec. 30.2).

Q: What is the right of priority?

ANS: An application for patent led by any person who has previously applied for the
same invention in another country which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as led as of the date of ling the foreign
application, provided that:
1. The local application expressly claims priority;
2. It is led within 12 months from the date the earliest foreign application was led;
and
3. A certi ed copy of the foreign application together with an English translation is
led within 6 months from the date of ling in the Philippines (IPC, Sec. 31).
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Q: When is the right of priority applicable/relevant?

ANS: The right of priority given to a patent applicant is only relevant when there are two
or more con icting patent applications on the same invention. Because a right of priority
does not automatically grant letters patent to an applicant, possession of a right of priority
does not confer any property rights on the applicant in the absence of an actual patent
(E.I. Dupont De Nemours and Co. v. Francisco, G.R. No. 174379, August 31, 2016).

RIGHTS AND LIMITATIONS OF PATENT OWNER

Rights Conferred by a Patent
Q: What are the rights conferred by a patent?
ANS: A patent shall confer on its owner the following exclusive rights:
1. To restrain, prohibit and prevent any unauthorized person or entity from:
a. Making, using, offering for sale, selling or importing that product, where
the subject matter is a product;
b. Using the process, and from manufacturing, dealing in, using, selling or
offering for sale, or importing any product obtained directly or indirectly
from such process, where the subject matter is a process (IPC, Sec. MUTIVISHENWOO

71.1); and
2 To assign, or transfer by succession the patent, and to conclude licensing
contracts for the same (IP€, Sec, 71,2)

to Note: It seeks to restrain and prevent unauthorized persons from unjustly pro ting from
protected invention (E./ Dupont De Nemaurs and Co. v. Francisco, G.R. No. 174379,
August 31, 2016).

Q: What is the presumption created by the issuance of a patent?

ANS: The issuance of such patent creates a presumption which yields only to clear and
cogent evidence that the patentee was the original and rst inventor. The burden of
proving want of novelty is on him who avers it and the burden is a heavy one which is met
only by clear and satisfactory proof which overcomes every reasonable doubt (Manzano
V. CA, G.R. No. 113388, September 5, 1997).

Q: What are included in the patent certi cate issued by the IPO?
ANS: A patent certi cate issued under the IP Code is registered, together with;
1. Description - contains the disclosure of the invention in a manner suf ciently
clear and complete for it to be carried out by a person skilled in the art;
2. Claims - succinctly state the essence of the invention or the elements which
distinguish it from the prior art; and
3. Drawings show every feature of the invention covered by the claims (Phillips
Seafood Philippines Corp., v. Tuna Processors, Inc., G.R. No. 214148, February
6. 2023).

Q: What are the functions of Claims?

ANS: Claims perform two functions, namely:
1. De nitional - the claims de ne the scope of protection granted to a patented
product or process. It particularly points out and distinctly claims the part,
improvement, or combination of the invention; and
2 Public Notice - claims inform the public and the courts of the extent of
protection conferred by the patent. Therefore, the claims should be clear,
concise, and supported by the description (ld.)
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Q: What are the kinds of claims?

ANS: The claims are classi ed as follows:
1. Basic Kinds
a. Process Claim Claim of an activity or process covers all kinds of
activities where the use of some material product is implied to carry out
the process
b. Product Claim product claim may include substances, compositions,
objects, articles, apparatus, machines, or systems of co-operating
apparatus
2. As to Form
a. Dependent refers back to and limits another claim in the application.
Basically, dependent claims include all the features of another claim.
b. Independent - on its own, de nes the technical features of the invention
protected by the patent. It contains the essential features of the invention
(ld).

Q: What is the importance of claims in determining patentee's rights?

ANS: When the language of its claims is clear and distinct, the patentee is bound thereby
and may not claim anything beyond them. And so are the courts bound which may not
add to or detract from the claims matters not expressed or necessarily implied, nor may
they enlarge the patent beyond the scope of that which the inventor claimed and the
patent of ce allowed, even if the patentee may have been entitled to something more
than the words it has chosen would include (Smith Kline Beckman Corporation v. CA,
G.R. No. 126627, August 14, 2003).
a0
Q: What is the remedy of a true and actual inventor deprived of the patent?
ANS: If a person who was deprived of the patent without his consent or through fraud is
declared by nal court order or decision to be the true and actual inventor, the court shall
order for his substitution as patentee, or at the option of the true inventor, cancel the
patent, and award actual and other damages in his favor if warranted by the
circumstances (IPC, Sec. 68)

Note: The action must be led within one (1) year from that date of publication (IPC, Sec.
70).

Limitations of Patent Rights 07 MANY

Q: What are the limitations of patent rights? (TPG)
ANS: The following are the limitations of patent rights:
1. Unauthorized use by a Third party that cannot be prevented by the owner of the
patent (IPC, Sec. 72);
2. Use by Prior user (PC, Sec. 73); and
3. Use by the Government (IPC, Sec. 74).

Q: What acts may be performed by third parties without the authorization of a

patent owner?
ANS: The owner of a patent has no right to prevent third parties from performing, without
his authorization, the acts conferred by a patent, in the following circumstances:
1. Using a patented product which has been put on the market in the Philippines
by the owner of the product, or with his express consent, insofar as such use iS
performed after that product has been so put on the said market (IPC, Sec.
72.1);
2. Where the act is done privately and on a non-commercial scale or for a non-
commercial purpose: Provided, that it does not signi cantly prejudice the
economic interests of the owner of the patent (IPC, Sec. 72.2);
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3. Where the act consists of making or using exclusively for experimental use of
the invention for scienti c purposes or educational purposes and such other
activities directly related to such scienti c or educational experimental use (IPC,
Sec. 72.3);
4. In the case of drugs and medicines, where the act includes testing, using,
making or selling the invention including any data related thereto, solely for
purposes reasonably related to the development and submission of information
and issuance of approvals by government regulatory agencies required under
any Philippines or foreign law (IPC, Sec. 72.4);
5. Where the act consists of the preparation for individual cases, in a pharmacy or
by a medical professional, of a medicine in accordance with a medical
prescription or acts concerning the medicine so prepared (IPC, Sec. 72.5); and
6. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any
other country entering the territory of the Philippines temporarily or accidentally
(IPC, Sec. 72.6).

Q: What is the right of a prior user?

ANS: Any prior user, who, in good faith was using the invention or has undertaken serious
preparations to use the invention in his enterprise or business, before the ling date or
priority date of the application on which a patent is granted, shall have the right to continue
COMMERCIAL LAW

the use thereof as envisaged in such preparation within the territory where the patent
produces its effect (IPC, Sec. 73.1).

Note: The right of prior use is only available to one who prior to the asserted patent's ling
or priority date "commercially used" or made "effective and serous preparation" to use
the patented invention (FUNA, Intellectual Property Law, supra at 142; IPC, Sec. 73.2).

Q: What are the limitations on the use of invention by the Government?

ANS: A Government agency or third person authorized by the Government may exploit
the invention even without agreement of the patent owner where.
1. The public interest, in particular, national security, nutrition, health or the
development of other sectors, as determined by the appropriate agency of the
government, so requires;
2. A judicial or administrative body has determined that the manner of exploitation,
by the owner of the patent or his licensee is anti-competitive;
3. In the case of drugs and medicines, there is a national emergency or other
circumstance of extreme urgency requiring the use of the invention;
4. In the case of drugs and medicines, there is public non-commercial use of the
patent by the patentee, without satisfactory reason; or
5. In the case of drugs and medicines, the demand for the patented article in the
Philippines is not being met to an adequate extent and on reasonable terms, as
determined by the Secretary of the Department of Health (IPC, Sec. 74.1).

Note: Unless otherwise provided herein, the use by the Government, or third person
authorized by the Government shall be subject, where applicable, to the following
provisions:
In situations of national emergency or other circumstances of extreme urgency
as provided under Section 74.1 (c), the right holder shall be noti ed as soon as
reasonably practicable;
2. In the case of public non-commercial use of the patent by the patentee, without
satisfactory reason, as provided under Section 74.1 (d), the right holder shall be
informed promptly: Provided, That, the Government or third person authorized
by the Government, without making a patent search, knows or has
demonstrable ground to know that a valid patent is or will be used by or for the
Government;
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3. If the demand for the patented article in the Philippines is not being met to an
adequate extent and on reasonable terms as provided under Section 74.1 (e),
the right holder shall be informed promptly;
4. The scope and duration of such use shall be limited to the purpose for which it
was authorized;
5. Such use shall be non-exclusive.
6. The right holder shall be paid adequate remuneration in the circumstances of
each case, taking into account the economic value of the authorization; and
7. The existence of a national emergency or other circumstances of extreme
urgency, referred to under Section 74.1 (c), shall be subject to the determination
of the President of the Philippines for the purpose of determining the need for
such use or other exploitation, which shall be immediately executory (IPC, Sec.
74.2).

Assignment and Transmission of Rights

Q: How are the rights, title or interest in and to patents and invention assigned?
ANS: Inventions and any right, title or interest in and to patents and inventions covered
thereby, may be assigned or transmitted by inheritance or bequest or may be the subject
of a license contract (IPC, Sec. 103).

PATENT INFRINGEMENT
AO T X
Q: What constitutes patent infringement?
ANS: The making, using, offering for sale, selling, or importing a patented product or a
product obtained directly or indirectly from a patented process, or the use of a patented
process without the authorization of the patentee constitutes patent infringement (IPC,
Sec. 76.1, as amended by R.A, No 9502).
on
Note: That, this shall not apply to instances covered by:
1. Limitations of Patent Rights (Sect. 72.1 and 72,4)
2. Use of Invention by Government (Sec. 74)
3. Compulsory Licensing (Sec. 93.6);
4. Procedures on issuance of a Special Compulsory License under the Trade-
Related Aspects of Intellectual Property Rights TRIPS Agreement (Sec. 93-A)

Q: What is the Doctrine of Patent Exhaustion?

ANS: The exclusive right of the patent owner is exhausted after the rst authorized sale,
meaning, the purchaser may thereafter use, repair and resell the product. However, the
purchaser may not reconstruct the product from the parts of products that were already
used (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 688).

Q: What are the tests to determine patent infringement?

ANS: There are two primary tests to determine patent infringement:
1. Literal infringement test; and
2. Doctrine of equivalents (Godines v. CA, G.R. No. 97343, September 13, 1993).

Q: When is there literal infringement?

ANS: There is infringement of patent under this test if one makes, uses, or sells an item
that contains all the elements of the patent claim. This test is satis ed S in either of the
following:
1. Exactness Rule: The item that is being sold, made or used conforms exactly
to the patent claim of another;
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2. Addition Rule: One makes, uses, or sells an item that has all the elements of
the patent claim of another plus other elements (AQUINO & SUNDIANG,
Reviewer on Commercial Law, supra at 691).

Q: What is the doctrine of equivalents?

ANS: The doctrine of equivalents provides that an infringement also takes place when a
device appropriates a prior invention by incorporating its innovative concept and, although
with some modi cation and change, performs substantially the same function in
substantially the same way to achieve substantially the same result (Smith Kline Beckman
Corporation V. CA, G.R. No. 126627, August 14, 2003).

Q: What are the tests of equivalency that would warrant the nding of patent
infringement under the doctrine of equivalents?
ANS: Our laws and jurisprudence recognize the following tests:
1. Insubstantial Difference Test - Under the insubstantial difference test, there is
patent infringement when the infringer appropriates the patent but adopts
insubstantial changes. The change is insubstantial if a person skilled in the art
Is aware that the change is a mere substitute for the replaced element;
2. Triple Identity Test / Function-Means-and-Result Test Under the triple
identity test, there is patent infringement if the allegedly-infringing device or COMMERCIAL LAW

process performs substantially the same function and accomplishes

substantially the same result by using substantially the same means; and
3. All elements Test - Under this test, courts consider the individual elements in
a patent claim to de ne the scope of the patented invention, rather than
considering the invention as a whole.

Note: Each element contained in a patent claim is deemed material to de ning the scope
of the patented invention, and thus the doctrine of equivalents, must be applied to
individual elements of the claim, not to the invention as a whole (Phillips Seafood
Philippines Corp., v. Tuna Processors, Inc., G.R. No. 214148, February 6. 2023).

Q: TPI is the patentee of *Method for curing Fish and Meat by Extra Low
Temperature Smoking", which includes, as its independent claim, the process of
curing tuna meat by exposing it to a ltered smoke cooled in a cooling unit to
between 0° and 5°C while etaining ingredients exerting highly preservative and
sterilizing effects. On the other hand, PSP Corp.'s process uses ltered smoke at
ambient temperature. TP led an administrative complaint for patent infringement
against PSP Corp., alleging that the claims of its patent could be read literally from
PSP Corp.'s process, as well as the steps in its patent claims are equivalent to
respondent's process. Is there a patent infringement?
ANS: No. Using literal infringement test, a comparison between the elements of TPI's
claim and PSP Corp.'s process shows that the inventive step of using ltered smoke
cooled to between 0° and 5°C is absent from the latter. Neither is there an infringement
under the doctrine of equivalents, TPI failed to establish that the simultaneous cooling of
the ltered smoke and tuna meat will cure tuna meat in substantially the same way as the
pre-cooled ltered smoke. The eventual cooling of the ltered smoke in PSP Corp.'s
process does not ipso facto indicate similarities in the effect of the smoke on tuna meat.
(Phillips Seafood Philippines Corp., v. Tuna Processors, Inc., G.R. No. 214148, February
6. 2023; Lopez Case).

Q: Who is a contributory infringer?

ANS: A contributory infringer is anyone who:
1. Actively induces the infringement of a patent; or
2. Provides the infringer with a component of a patented product or of a product
produced because of a patented process knowing it to be especially adopted for
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infringing the patented invention and not suitable for substantial non-infringing
use (IPC, Sec. 76.6).

Note: The contributory infringer shall be jointly and severally liable with the infringer (ld).

Q: What are the defenses in an action for infringement?

ANS: In an action for infringement, the defendant may show the invalidity of the patent,
or any claim thereof, on any of the grounds on which a petition of cancellation can be
brought (IPC, Sec. 81).

REMEDIES FOR INFRINGEMENT

Q: What are the remedies against patent infringement? (CIDC)

ANS: The remedies against patent infringement are the following:
1. Civil action for damages plus attorney's fees and other expenses for litigation
(IPC, Sec. 76.2);
2. Injunction (IPC, Sec. 76.2);
3. Disposal or destruction of the infringing-materials (IPC, Sec. 76.5); and
4. Criminal action for repetition of infringement TIPC, Sec. 84).

Q: Who may le an action for patent infringement?

ANS: Any patentee, or anyone possession any right, title or interest in and to the patented
invention, whose rights have been infringed, may bring a civil action (IPC, Sec. 76.2). It
is only the patentee, or his successors-in-interest that may le an action for infringement
(FUNA, Intellectual Property Law, supra at 145). we secondle

Note: A person or entity who has not been granted letters of patent over an invention and
has not acquired any right or title thereto either as assignee or as licensee, has no cause
of action for infringement because the right to maintain infringement suit depends on the
existence of the patent (Creser Precision Systems, Inc. v. CA, G.R. No. 118708, February
2, 1998).

Q: May Foreign National le an Infringement Action?

ANS: Any foreign national or juridical entity® who meets the requirements of Section 3 and
not engaged in business In in the Philippines, to which a patent has been granted or
assigned under this Act, may bring an action for infringement of patent, whether or not it
to is licensed to do business in the Philippines under existing law (IPC, Sec. 77)

Q: What are the limitations in an action to recover damages?

ANS: The following are the limitations on recovery of damages:
1. Recoverable damages are limited to acts of infringement committed within 4
years before institution of action (IPC, Sec. 79);
2. Damages cannot be recovered if the infringer did not know, or had no
reasonable grounds to know, about the patent (IPC, Sec. 80);

Note: It is presumed that the infringer had known of the patent if on the patented product,
or on the container or package in which the article is supplied to the public, or on the
advertising material relating to the patented product or process, are placed the words
"Philippine Patent" with the number of the patent (IPC, Sec. 80).

3 If the damages are inadequate or cannot be readily ascertained with reasonable

certainty, the court may award by way of damages a sum equivalent to
reasonable royalty (IPC, Sec. 76.3); and
4. The court may, according to the circumstances of the case, award damages in
a sum above the amount found as actual damages sustained, provided, that the
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award does not exceed three times the amount of such actual damages (IPC,
Sec. 76.4).

Q: When is a criminal action for infringement warranted?

ANS: If infringement is repeated by the infringer or by anyone in connivance with him
after nality of judgment of the court, the offenders shall, without prejudice to the institution
of a civil action for damages, be criminally liable therefore. Upon conviction [the infringer]
shall suffer imprisonment for 6 months to 3 years and/or a ne of P100,000 to P300,000,
at the discretion of the of court (IPC, Sec. 84). The action shall prescribe in 3 years from
date of the commission of the crime (IPC, Sec. 84).

CANCELLATION
Q: What are the grounds for cancellation of patents? (NDC)
ANS: Any interested person may, upon payment of the required fee, petition to cancel the to
patent or any claim thereof, or parts of the claim, on any of the following grounds:
1 . That what is claimed as the invention is not New or patentable;
2. That the patent does not Disclose the invention in a manner suf ciently clear
and complete for it to be carried out by any person skilled in the art; or
3. That the patent is Contrary to public order or morality (PC, Sec. 61.1). COMMERCIAL LAW

Note: Where the grounds for cancellation relate to some of the claims or parts of the
claim, cancellation may be effected to such extent only (IPC, Sec. 61.2).

Q: What are the requirements of the Petition for Cancellation of a Patent?

ANS: The petition for cancellation shall be; (WV-GSF)
1. In Writing;
2. Specify
Veri ed the Grounds
by the upon
petitioner which
or by anyitperson
is based;
in his behalf who knows the facts;
3.
4. Include a Statement of the facts to be relied upon, and
5. Filed with the Of ce.

Note: Copies of printed publications or of patents of other countries, and other supporting
documents mentioned in the petition shall be attached thereto, together with the
translation thereof in English, if not in the English language (IPC, Sec. 62).

Q: To whom the notice of hearing shall be given?

ANS: Upon ling of a petition for cancellation, the Director of Legal Affairs shall forthwith
serve notice of the ling thereof upon the patentee and all persons having grants or
licenses, or any other right, title or interest in and to the patent and the invention covered
thereby, as appears of record in the Of ce, and of notice of the date of hearing thereon
on such persons and the petitioner.

Note: Notice of the ling of the petition shall be published in the IPO Gazette (IPC, Sec.
63).

Q: When may a petition be heard by a Committee?

ANS: In cases involving highly technical issues, on motion of any party, the Director of
Legal Affairs may order that the petition be heard and decided by a committee composed
of the Director of Legal Affairs as chairman and two (2) members who have the experience
or expertise in the eld of technology to which the patent sought to be cancelled relates.
The decision of the committee shall be appealable to the Director General (IPC, Sec. 64).
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Q: What is the effect of the cancellation of patent or claim?

ANS: The rights conferred by the patent or or any speci ed claim or claims cancelled shall
terminate. Unless restrained by the Director General, the decision or order to cancel by
Director of Legal Affairs shall be immediately executory even pending appeal (IPC, Sec.
66).

Q: What are the kinds of licensing agreements?

ANS: There are two kinds of licensing agreements:
1. Voluntary Licensing IPC, Sec. 85); and
2. Compulsory Licensing (IPC, Sec. 93).

COMPULSORY LICENSING

Q: What is compulsory licensing?

ANS: Compulsory licensing is when the government allows another person to produce
the patented product or process without the consent of the patent owner or plans to use
the patented invention (Il DIVINA, Commercial Law, supra at 256).

Q: What are the grounds for compulsory licensing and their respective period?
ANS: The Director General of the Intellectual Property Of ce may a grant a license tO
exploit a patented invention, even without the agreement of the patent owner, in favor of
any person who has shown his capability to exploit the invention, under any of the
following circumstances P K
Ground Period to File to

If the patented invention is not being Within four (4) years from the date of
worked in the Philippines on a ling of the application OR three (3)
commercial scale, although capable of years from the date of the patent
being worked, without satisfactory whichever period expires last (IPC, Sec.
reason (IPC, Sec. 93.5); 94.1).
National emergency other
circumstances of extreme urgency (IPC,
Sec. 93.1)

Where the public interest, in particular,

national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government,
so requires (IPC, Sec. 93.2); At ANY TIME after the grant of the
patent
Where a judicial or administrative body
has determined that the manner of
exploitation by the owner of the patent or
his licensee is anti-competitive (IPC,
Sec. 93.3);
In case of public non-commercial use of
the patent by the patentee, without
satisfactory reason (IPC, Sec. 93.4);
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Ground Period to File

Where the demand for patented drugs
and medicines is not being met ¡O an
adequate extent and on reasonable
terms, as determined by the Secretary of
the Department of Health (IPC, Sec.
93.6).

Compulsory License based on

Interdependence of Patents (IPC, Sec.
97).

is Q: What is the procedure on Issuance of Special Compulsory License under the

TRIPS Agreement?
ANS: The Director General of the Intellectual Property Of ce, upon the written
recommendation of the Secretary of the Department of Health, shall, upon ling of a
petition, grant a special compulsory license for the importation of patented drugs and
medicines.
MYT COMMERCIAL

The special compulsory license for the importation herein shall be an additional special
alternative procedure to ensure access to quality affordable medicines and shall be
primarily for domestic consumption: Provided, that adequate remuneration shall be paid
to the patent owner either by the exporting or importing country. The compulsory license
shall also contain a provision directing the grantee the license to exercise reasonable
measures to prevent the re-exportation of the products imported under this provision.

Note: The grant of a special compulsory license under this provision shall be an exception
to Sections 100.4 and 100.6 of Republic Act No. 8293 and shall be immediately executory
(IPC, Sec. 93-A-1)

Q: What court has jurisdiction to issue Temporary Restraining Order or Preliminary

Injunction or other Provisional Remedies against a grant of Special Compulsory
License?
ANS: No court, except the Supreme Court of the Philippines, shall issue any temporary
restraining order or preliminary injunction or such other provisional remedies that will
prevent the grant of the special compulsory license (ld.).

Q: When may a compulsory license be granted for a manufacturer and exporter of

drugs and medicines?
ANS: A compulsory license shall also be available for the manufacture and export of
drugs and medicines to any country having insuf cient or no manufacturing capacity in
the pharmaceutical sector to address public health problems: Provided, That, a
compulsory license has been granted by such country or such country has, by noti cation
or otherwise, allowed importation into its jurisdiction of the patented drugs and medicines
from the Philippines in compliance with the TRIPS Agreement (PC, Sec. 93-A-2).

Note: The right to grant a special compulsory license under this section shall not limit or
prejudice the rights, obligations and exibilities provided under the TRIPS Agreement and
under Philippine laws, particularly Section 72.1 and Section 74 of the Intellectual Property
Code, as amended under this Act. It is also without prejudice to the extent to which drugs
and medicines produced under a compulsory license can be exported as allowed in the
TRIPS Agreement and applicable laws (IPC, Sec. 93-A-3)
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Q: What are the requirements to obtain a License on Reasonable Commercial

Terms?
ANS: The license will only be granted after the petitioner has made efforts to obtain
authorization from the patent owner on reasonable commercial terms and conditions but
such efforts have not been successful within a reasonable period of time (IPC, Sec. 95.1).

This shall not apply in the following cases:

1. Where the petition for compulsory license seeks to remedy a practice
determined after judicial or administrative process to be anti-competitive;
2. n situations of national emergency or other circumstances of extreme urgency;

Note: In these situations, the right holder shall be noti ed as soon as reasonably
practicable (IPC, Sec.95.3).

3. In cases of public non-commercial use.

Note: where the government or contractor, without making a patent search, knows or has
demonstrable grounds to know that a valid patent is or will be used by or for the
government, the right holder shall be informed promptly (IPC, Sec. 95.4)

Q: When may a Compulsory Licensing of Patents be granted to semi-conductor

technology?
ANS: In the case of compulsory licensing of patents involving semi-conductor technology,
the license may only be granted in case of public non -commercial use or to remedy :
practice determined after judicial or administrative process to be anti-competitive (IPC,
Sec. 96).

Q: What is Compulsory License based on Interdependence of Patents?

ANS: If the invention protected by a patent, hereafter referred to as the "second patent,"
within the country cannot be worked without infringing another patent, hereafter referred
to as the " rst patent," granted on a prior application or bene ting from an earlier priority,
a compulsory license may be granted to the owner of the second patent to the extent
necessary for the working of his invention, subject to the following conditions:
1. The invention claimed in the second patent involves an important technical
advance of considerable economic signi cance in relation to the rst patent;
2. The owner of the rst patent shall be entitled to a cross license on reasonable a
terms to use the invention claimed in the second patent;
3. The use authorized in respect of the rst patent shall be non-assignable except
with the assignment of the second patent; and
4. The terms and conditions of Sections 95, 96 and 98 to 100 of this Act (IPC, Sec.
97.1 to 97.4).

Q: What should be the form and contents of a petition for compulsory licensing?
ANS: The petition for compulsory licensing must be: (WVP)
1. In Writing
2. Veri ed by the Petitioner
3. Accompanied by Payment of the required ling fee.

It shall contain: (NA2NI-Paln-SURe)

1. Name and Address of the Petitioner;
2. Name and Address of the Respondent
3. Number and date of Issue of the patent in connection with which compulsory
license is sought;
4.
Name of the Patentee;
5. Title of his Invention;
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6. The Statutory grounds upon which compulsory license is sought;

7. The Ultimate facts constituting the petitioner's cause of action; and
8. Relief prayed for (IPC, Sec. 98).

of Q: To whom the notice of hearing for compulsory licensing shall be given?

ANS: Upon ling of a petition, the Director of Legal Affairs shall forthwith serve notice of
the ling and notice of the date of hearing thereof upon:
1. The patent owner; and
2. All persons having grants or licenses, or any other right, title or interest in and
to the patent and invention covered thereby as appears of record in the Of ce.

Note: The resident agent or representative appointed in accordance with the Section 33
of the IPC, shall be bound to accept service of notice of the ling of the petition within the
meaning of Section 99.1.

Q: Is the notice of hearing for compulsory licensing required to be published?

ANS: Yes, in every case, the notice shall be published by the said Of ce in a newspaper
of general circulation, once a week for three (3) consecutive weeks and once in the IPO
Gazette at applicant's expense (IPC, Sec. 99,2).
COMMERCIAL LAW

Q: What are the terms and conditions of Compulsory License?

ANS: The basic terms and conditions including the rate of royalties of a compulsory
license shall be xed by the Director of Legal Affairs subject to the following conditions:
1. The scope and duration of such license shall be limited to the purpose for which
it was authorized;
2. The license shall be non exclusiven
3. The license shall be non assignable, except with that part of the enterprise or
business with which the invention is being exploited;
4. Use of the subject matter of the license shall be devoted predominantly for the
supply of the Philippine market: Provided, That his limitation shall not apply
where the grant of the license is based on the ground that the patentee's manner
of exploiting the patent is determined by judicial or administrative process, to be
anti-competitive.
5. The license may be terminated upon proper showing that circumstances which
led to its grant have ceased to exist and are unlikely to recur: Provided, That
adequate protection shall be afforded to the legitimate interest of the licensee;
and
6. The patentee shall be paid adequate remuneration taking into account the
economic value of the grant or authorization, except that in cases where the
license was granted to remedy a practice which was determined after judicial or
administrative process, to be anti-competitive, the need to correct the anti-
competitive practice may be taken into account in xing the amount of
remuneration (PC, Sec. 100.1 to 100.6)

Q: May the decision granting the compulsory license be amended?

ANS: Yes, Upon the request of the patentee or the licensee, the Director of Legal Affairs
may amend the decision granting the compulsory license, upon proper showing of new
facts or circumstances justifying such amendment (IPC, Sec. 101.1).

Q: May a compulsory license be cancelled?

ANS: Yes, Upon the request of the patentee, the said Director may cancel the compulsory
license:
1. If the ground for the grant of the compulsory license no longer exists and is
unlikely to recur;
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2. If the licensee has neither begun to supply the domestic market nor made
serious preparation therefor;
3. If the licensee has not complied with the prescribed terms of the license (IPC,
Sec. 101.2)

Q: How may a compulsory license be surrendered?

ANS: The licensee may surrender the license by a written declaration submitted to the
Of ce (IPC, Sec. 101.3).

Note: The said Director shall cause the amendment, surrender, or cancellation in the
Register, notify the patentee, and/or the licensee, and cause notice thereof to be
published in the IPO Gazette (IPC, Sec. 101.4).
Q: When may a licensee be exempted from liability?
ANS: Any person a who works a patented product, substance and/or process under a
license granted under this Chapter, shall be free from any liability for infringement:
Provided, however, that in the case of voluntary licensing, no collusion with the licensor
Is proven. This is without prejudice to the right of the rightful owner of the patent to recover
from the licensor whatever he may have received as royalties under the license (IPC,
Sec. 102).

VOLUNTARY LICENSING
Q: What is voluntary license? DA V
ANS: A voluntary license is an authorization given by the patent holder to another person
allowing him to produce the patented article. The license usually xes the amount of
royalties, sets quality requirements and de nes the markets in which the licensee can sell
the product (II DIVINA, supra at 253) .
To encourage the transfer and dissemination of technology, prevent or control practices
and conditions that may in particular cases constitute an abuse of intellectual property
rights having an adverse effect on competition and trade, all technology transfer
arrangements shall comply With the provisions of this Chapter (IPC, Sec. 85).
SOmE
Q: Who has jurisdiction over disputes on royalties?
ANS: The Director of the Documentation, Information and Technology Transfer Bureau
shall exercise quasi-judicial jurisdiction in the settlement of disputes between parties to a
technology transfer arrangement arising from technology transfer payments, including the
xing of appropriate amount or rate of royalty (IPC, Sec. 86).

Q: What are the prohibited clauses in Voluntary License Contracts?

ANS: The following provisions shall be deemed prima facie to have an adverse effect on
competition and trade;
1, Those which impose upon the licensee the obligation to acquire from a speci c
source capital goods, intermediate products, raw materials, and other
technologies, or of permanently employing personnel indicated by the licensor;
2. Those pursuant to which the licensor reserves the right to x the sale or resale
prices of the products manufactured on the basis of the license;
3. Those that contain restrictions regarding the volume and structure of production;
4. Those that prohibit the use of competitive technologies in a nonexclusive
technology transfer agreement;
5. Those that establish a full or partial purchase option in favor of the licensor;
6. Those that obligate the licensee to transfer for free to the licensor the inventions
or improvements that may be obtained through the use of the licensed
technology;
7. Those that require payment of royalties to the owners of patents for patents
which are not used;
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8. Those that prohibit the licensee to export the licensed product unless justi ed
for the protection of the legitimate interest of the licensor such as exports to
countries where exclusive licenses to manufacture and/or distribute the licensed
products) have already been granted;
9. Those which restrict the use of the technology supplied after the expiration of
the technology transfer arrangement, except in cases of early termination of the
technology transfer arrangement due to reason(s) attributable to the licensee;
10. Those which require payments for patents and other industrial property rights
after their expiration, termination arrangement;
11. Those which require that the technology recipient shall not contest the validity
of any of the patents of the technology supplier;
12. Those which restrict the research and development activities of the licensee
designed to absorb and adapt the transferred technology to local conditions or
to initiate research and development programs in connection with new products,
processes or equipment;
13. Those which prevent the licensee from adapting the imported technology to
local conditions, or introducing innovation to it, as long as it does not impair the
quality standards prescribe by the licensor;
14. Those which exempt the licensor for liability for nonful llment of his MV1 TVIOENWOO

responsibilities under the technology transfer arrangement and/or liability arising

from third party suits brought about by the use of the licensed product or the
licensed technology; and
15. Other clauses with equivalent effects (IPC, Sec, 87),

Q: What are the mandatory Provisions in a Voluntary License Contracts?

ANS: The following provisions shall'be included in voluntary license contracts:
1. That the laws of the Philippines shall govern the interpretation of the same and
in the event of litigation, the venue shall be the proper court in the place where
the licensee has its principal of ce
2. Continued access to improvements in techniques and processes related to the
technology shall be made available during the period of the technology transfer
arrangement;
3. In the event the technology transfer arrangement shall provide for arbitration,
the Procedure of Arbitration of the Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be
the Philippines or any neutral country; and
4. The Philippine taxes on all payments relating to the technology transfer
arrangement shall be borne by the licensor (IPC, Sec. 88).

Q: What are the rights of Licensor and Licensee?

ANS: The rights of a licensor and licensee are as follows:

Licensor Licensee
In the absence of any provision to the The licensee shall be entitled to exploit
contrary in the technology transfer the subject matter of the technology
arrangement, the grant of a license shall transfer arrangement during the whole
not prevent the licensor from granting term of the technology transfer
further licenses to third person nor from arrangement (IPC, Sec. 90).
exploiting the subject matter of the
technology transfer arrangement himself
(IPC, Sec. 89).
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Note: Exemption from any of the above requirements may be allowed by the
Documentation, Information and Technology Transfer Bureau after evaluation thereof on
a case-by-case basis, under any of the exceptional or meritorious cases where substantial
bene ts will accrue to the economy, such as;
1. High technology content
2. Increase in foreign exchange earnings
3. Employment generation
4. Regional dispersal of industries and/or substitution with or use of local raw
materials
5. In the case of board of investments, registered companies with pioneer status,
(IPC, Sec. 91).

Q: What is the effect of Non-Registration with the Documentation, Information and

Technology Transfer Bureau of Technology Transfer Arrangements?
ANS: Technology transfer arrangements that conform with the provisions of Sections 86
and 87 •need not be registered with the Documentation, Information and Technology
Transfer Bureau. Non-conformance with any of the provisions of Sections 87 and 88,
however, shall automatically render the technology transfer arrangement unenforceable,
unless said technology transfer arrangement is approved and registered with the
Documentation, Information and Technology Transfer Bureau under the provisions of
Section 91 on exceptional cases (IPC, Sec. 92).

B. TRADEMARKS
MARKS VS. COLLECTIVE MARKS VS. TRADE NAMES

Q: What are the differences among mark, collective mark and trade name?
U2
ANS: Mark, Collective Marks and Trade Names are distinguished as follows:

MARK COLLECTIVE MARKS TRADE NAMES

Mark means any visible Collective mark means any Trade name means the
sign capable of visible sign designated as name or designation
distinguishing the goods such in the application for identifying or
(trademark) or services registration and capable of distinguishing an
(service mark) of an distinguishing the origin or enterprise (IPC, Sec.
enterprise and shall any other common 121.3).
include a stamped or characteristic, including the
marked container of quality of goods or services
goods (IPC, Sec. 121.1). of different enterprises which
use the sign under the
control of the registered
owner of the collective mark
(IPC, Sec. 121.2).

Q: When is a mark considered well-known?

ANS: A mark is well-known when it is considered it by the competent authority of the
Philippines to be well-known internationally and in the Philippines, whether or not it is
registered here, as being already the mark of a person other than the applicant for
registration, and used for identical or similar goods or services (IPC, Sec. 123.1).

Q: What factors are considered in determining whether a mark is well-known?

ANS: In determining whether a mark is well-known, account shall be taken of the
knowledge of the relevant sector of the public, rather than of the public at large, including
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knowledge in the Philippines which has been obtained as of a result of the promotion of the
mark (IPC, Sec. 123).

Note: It is not required that the well-known mark be used in commerce in the Philippines
but only that it be well-known in the Philippines (Fredco Manufacturing Corporation v.
President and Fellows of Harvard College, G.R. No. 185917, June 1, 2011).

Q: What are the rules on the registrability of the mark which is identical, or
confusingly similar to, or constitutes a translation of a well-known mark?
ANS: The mark cannot be registered:
1. Whether or not registered in the Philippines - when it is used for identical or
similar goods or services (IPC, Sec. 123.1(e)); or
2. If registered in the Philippines - with respect to goods or services which are or
NOT similar to those with respect to which the registration S applied for,
provided that the use of the mark in relation to those goods or services would
indicate a connection between those goods or services, and the owner of the
registered mark; and the interests of the owner of the registered mark are likely
to be damaged by such use (IPO, Sec. 123.1(f)).
COMMERCIAL LAW

NON-REGISTRABLE MARKS

Q: What are non-registrable marks? (IFNI3-MG CD-SC2)

ANS: A mark cannot be registered if it:
1 . Consists of Immoral and deceptive matter, or matter which may disparage or
falsely suggest a connection with persons, living of dead, institutions, beliefs or
national symbols, or bring them into contempt or disrepute (IPC, Sec. 123.1.a);
2. Consists of the Flag or coat of arms or other insignia of the Philippines or any of
its political subdivisions, or of any foreign nation or any simulation thereof (IPC,
Sec. 123,1.6); ea
3. Consists of a Name, portrait or signature identifying a living person, except by
his written consent, or the name, portrait or signature of a deceased President
of the Philippines during the life of his widow, if any, except by written consent
of the widow (IPC, Sec. 123.1.c);
4. Is Identical with a registered mark belonging to a different proprietor or a mark
with an earlier ling priority date, in respect of:
a. Same goods or service;
b. Closely-related goods or services; or
C. If it nearly resembles such mark as to be likely to deceive or cause
confusion (IPC, Sec. 123.1.d)
5. Is Identical with, or confusingly similar to, or constitutes a translation of a mark
which is considered by the competent authority of the Philippines to be of well-
known internationally and in the Philippines, whether or not it is registered here,
as being already the mark of a person other than the applicant for registration,
and used for identical or similar goods or services. Provided, that in determining
whether a mark is well-known, account shall be taken of the knowledge of the
relevant sector of the public, rather than of the public at large, including
knowledge in the Philippines which has been obtained as a result of the
promotion of the mark (IPC, Sec. 123.1.e);
6. s Identical with, or confusingly similar to, or constitutes a translation of a mark
considered well-known in accordance with the preceding paragraph, which is
registered in the ilippines with respect to goods or services which are not
similar to those with respect to which registration is applied for. Provided, that
use of the mark in relation to those goods or services would indicate a
connection between those goods or services, and the owner of the registered
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mark. Provided further, that the interests of the owner of the registered mark are
likely to be damaged by such use (IPC, Sec. 123.1.f);
7. Is likely to Mislead the public, particularly as to the nature, quality, characteristics
or geographical origin of the goods or services (IPC, Sec. 123.1.g);
8. Consists exclusively of signs Generic for the goods or services (IPC, Sec.
123.1.h);
9. Consists exclusively of signs or of indications that have become Customary or
usual to designate goods or services in everyday language or bona de and
established trade practices (IPC, Sec. 123.1.i);
10. Consists exclusively of signs or of indications that may serve in trade to
Designate the quality, quantity, intended purpose, value, geographical origin,
time or production of goods or rendering of the services, or other characteristics
of goods (IPC, Sec. 123.1.j);
11. Consists of Shapes that may be necessitated by technical factors or by the
nature of the goods themselves or factors that affect their intrinsic value (IPC,
Sec. 123.1.k);
12. Consists of Color alone, unless de ned by a given form (IPC, Sec. 123.1.l); and
13. Is Contrary to public order or morality (IPC, Sec. 123.1.m).

Q: What is the Doctrine of Secondary Meaning?

ANS: Acquiring secondary meaning is 'a when "a mark that is initially nondistinctive and
thus not protectible may acquire distinctiveness and become a trademark through use

*3
(FUNA, Intellectual Property Law, supra at 278) Speci c requirements have to be met in
order to conclude that a mark has acquired secondary meaning, to wit:
1. The secondary meaning must have arisen as a result of substantial commercial
use of a mark in the Philippines;
2. Such use must result in the distinctiveness of the mark insofar as the goods or
the products are concerned; and
3. Proof of substantially exclusive and continuous commercial use in the
Philippines for ve (5) years before the date on which the claim of distinctiveness
Is made (Shang Properties Realty Co. and Shang Properties, Inc. v. St. Francis
Dev't Co., G.R. No. 190706, July 21, 20.14). oler

Q: What prohibited marks may acquire secondary meaning?

ANS: While generic, indicative, or descriptive marks (paragraphs (i), (k), and (I) of Sec.
123. 1) are generally non-registrable, nothing shall prevent the registration of any such
sign or device which has become distinctive in relation to the goods for which registration
is requested as a result of the use that have been made of it in commerce in the
Philippines (IPC, Sec. 123.2).

Acquisition of Ownership of Mark

Q: How are the rights in a trademark acquired?
ANS: The rights in a mark shall be acquired through registration made validly in
accordance with the provisions of this law (SALAO, Essentials of Intellectual Property Law
(2019), p. 135).

Note: It must be emphasized that registration of a trademark, by is itself, is not a mode of

acquiring ownership. If the applicant is not the owner of the trademark, he has no right to
apply for its registration. 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 user thereof. Such presumption, just like the presumptive regularity
in the performance of of cial functions, is rebuttable and must give way to evidence to the
contrary (SALAO, Essentials of Intellectual Property Law (2019), p. 135).
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Q: Why is prior use of the mark no longer required for the ling of a trademark
registration?
ANS: The requirement of prior use of the mark before ling of trademark registration has
been dispensed with. Hence, it is no longer a condition for ownership (IPC, Sec. 122).
The present law now requires that the applicant or registrant shall le regularly
declaration of actual use of the mark within:
1. Three (3) years from the ling date of the application (IPC, Sec. 124.2); and
2. One (1) year from the fth anniversary of the date of the registration of the mark
(IPC, Sec. 145).

Note: Prior use no longer determines the acquisition of ownership of a mark in light of the
adoption of the rule that ownership of a mark is acquired through registration made validly
in accordance with the provisions of the IPC (Zuneca Pharmaceutical v. Natrapharm, Inc.,
G.R. No. 211850, September 8, 2020).

OWNERSHIP AND REGISTRATION

Q: How are the rights in a trade name acquired?
ANS: Trade Names are acquired by adoption and use and belong to the one who rst
uses them and gives them value (FUNA, Intellectual Property Law (2012, supra at 489). COMMERCIAL LAW

Note: Trade names shall be protected, even prior to or without registration, against any
unlawful act committed by third parties (IPO, Sec. 165.2.a.

Q: Is actual use necessary before one can register or own a trademark?

T
ANS: Prior use in the Philippines is not required before registration. However, there must
be an actual use after registration (AQUINO & SUNDIANG, Reviewer on Commercial
Law, supra at 644)

Q: On what periods is a Declaration of Actual Use (DAU) led and what are the
consequences for non ling?
ANS: All applicants or registrants shall le a Declaration of Actual Use (DAU) of the mark
with evidence to that effect and upon payment of the prescribed fee on the following
periods:
1. Within 3 years from the ling date of the application;
2. Within 1 year from the lth anniversary of the registration;
3. Within 1 year from date of renewal; and
4. Within year from the fth anniversary of each renewal.

Otherwise, the application shall be refused registration or the registered mark shall be
removed from the Register by the Director (Trademark Regulations, Rule 204).

Q: Who is entitled to register a trademark?

ANS: Only the owner of the trademark, trade name or service mark is entitled to register
the same. A local importer, however, may make application for the registration of a foreign
trademark, trade name or other mark of ownership (Unno Commercial Enterprises, Inc.,
v. General Milling Corp., G.R. No. L-28554, February 28, 1983).

Q: What is the effect of registration of a mark?

ANS: A certi cate of registration of a mark shall be prima facie evidence of the: of
1. Validity of the registration;
2. Registrant's ownership of the trademark; and
3. The exclusive right to the use thereof in connection with the goods or services
and those that are related thereto speci ed in the certi cate (IPC, Sec. 138).
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is Q: Until when is the registration of a trademark effective?

ANS: A certi cate of registration (of a trademark) shall remain in force for 10 years (IPC,
Sec. 145). A certi cate of registration may be renewed for periods of 10 years at its
expiration upon payment of the prescribed fee and upon ling of a request (IPC, Sec.
146.1).

Q: When is the trademark registration considered void?

ANS: The registration is void:
1. When the mark in was registered in bad faith--one can have a registration in bad in
faith only if he applied for the registration of the mark despite knowing that
someone else has created, used, or registered that mark;
2 When an unregistrable mark which was mistakenly allowed to be registered was
already inherently unregistrable even prior to its registration (Zuneca
Pharmaceutical, et al. v. Natrapharm, Inc., G.R. No. 211850, September 8,
2020).
RIGHTS AND LIMITATIONS OF TRADEMARK OWNER

Q: What are the rights conferred to the owner of a registered mark?

ANS: The owner of a registered mark shall have the exclusive right to prevent all 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 similar to those in respect of which
the trademark is registered where such would result in a likelihood of confusion. In case
of the use of an identical sign for identical goods or services, likelihood of confusion shall
be presumed (IPC, Sec 147.1)
weirdos ode

Note: The exclusive right of the owner of a well-known mark which is registered in the in
Philippines, shall extend to goods and services which are not similar to those in respect
of which the mark is registered. Provided, that the use of that mark in relation to those
goods or services would indicate a connection between those goods or services and the
owner of the registered mark. Provided further, that the interests of the owner of the
registered mark are likely to be damaged by such use (iPC, Sec. 147.2).

Q: What right is not conferred by the registration of a mark with respect to the use
of third parties of a similar mark? MAO
ANS: Registration of the mark shalt not confer on the registered owner the right to
preclude third parties from using bona de their names, addresses, pseudonyms, a
geographical name, or exact indications concerning the kind, quality, quantity, destination,
value, place of origin, or time of production or of supply, of their goods or services,
provided that such use is con ned to the purposes of mere identi cation or information
and cannot mislead the public as to the source of the goods or services. (IPC, Sec. 148).

A registered mark shall have no effect against any person who, in good faith, before the
ling date or the priority date, was using the mark for the purposes of his business or
enterprise. This right may only be transferred or assigned together with his enterprise or
business or with that part of his enterprise or business in which the mark is used (IPC,
Sec. 159.1).

Q: What are the instances when the registered owner does not have the exclusive
right to prevent a third party from using identical or similar signs?
ANS: In cases of importation of drugs and medicines allowed under Sec. 72.1 of the IPC
and of off-patent drugs and medicines. Provided that said drugs or medicines bear the
registered marks that have not been tampered, unlawfully modi ed, or infringed upon
(IPC, Sec. 147.1).
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TRADEMARK INFRINGEMENT
Q: What is trademark infringement?
ANS: Trademark infringement refers to the unauthorized use of a trademark. It is the a It
colorable imitation of a registered mark or a dominant feature thereof. It is an invasion of
the property rights of another and is committed against the registered mark (IPC, Sec.
155.1 & 155.2; ABS-CBN Publishing, Inc., v. Director of the V. Bureau of Trademarks, G.R.
No. 217916, June 20, 2018).

Q: Who are persons liable for trademark infringement?

ANS: Any person who shall commit the following acts without the consent of the owner
shall be liable in a civil action for infringement:
1. Use in commerce of any reproduction or colorable imitation of a registered mark
or a dominant feature thereof, in connection with: (SODA)
a. Sale;
b. Offering for sale;
c. Distribution; or
d. Advertising of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services, on or in MVTTVISEWWO?

connection, with which such üse is likely to cause confusion, or to cause

mistake, or to deceive, and
2. Reproduction, counterfeit, copy or colorable imitation of a registered mark or
dominant feature thereof and application of the same to labels, signs, prints
packages, wrappers, receptacles, or advertisements intended to be used in
commerce upon or in connection with the: (SODA!
a. Sale;
b. Offering for sale,
c. Distribution; or
d. Advertising of any goods or services on or in connection with which such
use is likely to cause confusion, or to cause mistake, or to deceive (IPC,
Sec. 155)

Q: What are the elements of trademark or trade name infringement? (RI-ULW)

ANS: The following are the elements of trademark of trade name infringement:
1. Trademark is Registered in the IPO; however, in infringement of trade name,
the same need not be registered;
2. Trademark or trade name is reproduced, counterfeited, copied, or colorably
Imitated;
3. The infringing mark or trade name is Used in connection with the sale, offering
for sale, or advertising of any goods, business or services; or the infringing mark
or trade name iS applied to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used upon or in connection with
such goods, business or services;
4 The use or application of the infringing mark or trade name is Likely to cause
confusion or mistake or to deceive purchasers or others as to the goods or
services themselves or as to the source or origin of such goods or services or
the identity of such business; and
5. •It is Without the consent of the trademark or trade name owner or the assignee
thereof (Societe Des Produits Nestle, S.A. v. Dy, Jr., G.R. No. 172276, August
8, 2010).

Q: What element is the gravamen of trademark infringement?

ANS: It is the likelihood of confusion that is the gravamen of infringement (Coffee
Partners, Inc., v. San Francisco Coffee & Roastery, Inc., G.R. No. 169504, March 3,
2010).
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Q: What are the types of confusion as to marks and trade names?

ANS: The two types of confusion are:
1. Confusion of Goods (Product Confusion) - Where the ordinarily prudent
purchaser would be induced to purchase one product in the belief that he was
purchasing the other; and
2. Confusion of Business (Source or Origin Confusion) - Where, although the
goods of the parties are different, the product, the mark of which registration is
applied for by one is party, is such as might reasonably be assumed to originate
with the registrant of an earlier product, and the public would then be deceived
either into that belief or into the belief that there is some connection between
the two parties, though inexistent (Skechers, USA, Inc., v. Inter Paci c Industrial
Trading Corp., et al., G.R. No. 164321, March 28, 2011).

Q: What is the test to determine confusing similarity between marks?

ANS: The test to determine whether a mark IS to be considered as "identical" or
confusingly similar with that of another is the Dominancy Test.

Note: In trademark cases, particularly™" in ascertaining whether one trademark is

confusingly similar to another, no set rules can be deduced because each case must be
decided on its merits (Societe Produits Nestle, S.A. vi Dy, Jr., G.R. No. 172276, August
9, 2010). Jurisprudence has developed two tests® the Dominancy Test and the Holistic
or Totality Test. In light of the adoption of the Dominancy Test and the abandonment of
the Holistic Test, as con rmed by the provisions of the IP Code and the legislative
deliberations, the Court hereby makes it crystal clear that the use of Holistic Test in
determining resemblance of marks has been abandoned (Kolin Electronics Co., Inc., V.
Kolin Philippines International, Inc., G.R. No. 228165, February 9, 2021).
pow.w.onor.

Q: What is the Dominancy Test?

CAST OZZ
O
ANS: 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. Duplication or imitation is not/necessary; neither S it
required that the mark sought to be registered suggests an effort to imitate (Skechers,
USA, Inc., V. Inter Paci c Industrial Trading Corp., et ah, G.R. No. 164321, March 28,
2011).
17
MAN
The test of dominancy is now explicitly incorporated into law in Section 155.1 of
the IPC which de nes infringement as the 'colorable imitation of a registered mark or
dominant feature thereof (ABS-CBN Publishing, Inc., v. Director of the Bureau of
Trademarks, G.R. No. 217916, June 20, 2018).

Q: What is the idem sonans rule?

ANS: Under the idem sonans rule, the aural effects of the words and letters contained in
the marks are taken into account in determining the issue of confusing similarity.

The idem sonans rules is applicable to the dominancy test since it relies not only on the
visual but also on the aural and connotative comparisons and overall impressions
between the two trademarks (Societe Produits Nestle, S.A, v. Dy, Jr., G.R. No. 172276,
August 9, 2010).

Q: Who can le a case for trademark infringement?

ANS: Only a registrant of a mark can le case for infringement. Upon the nality of an
order of cancellation of mark, the right of a registrant to le a case for infringement
terminates as well (Superior Commercial Ent., Inc., V. Kunnan Ent. Ltd., G.R. No. 169974,
April 20, 2010).
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Note: Intent to deceive is not required in trademark infringement. Complete imitation is

not required for infringement (Del Monte Corp. v. CA, G.R. No. L78325, January 25,
1990).

Q: What are the remedies of the owner of a registered mark in a case of trademark
infringement?
ANS: Regardless of whether there is actual sale of goods or services using the infringing
material, the registrant may le a civil action for:
1. Damages (IPC, Sec. 156.1);
2. The impound during the pendency of an action of the sales invoice and other
documents evidencing sales (IPC, Sec. 156.2);
3. Injunction (IPC, Sec. 156.4); or
4. Destruction of infringing material without compensation (IPC, Sec. 157.1).

Note: Independent of the civil and administrative sanctions imposed by law, the following
criminal penalty shall be imposed on any person who is found guilty of Infringement, Unfair
Competition, and False Designation:
Imprisonment of 2 years to 5 vears, and
2. Fine of P50,000 to P200,000 (/PO, Sec. 170).
COMMERCIAL LAW

Q: What is the measure of damages in an infringement case?

ANS: The measure of damages is
1. The reasonable pro t which the complaining party would have made, had the
defendant not infringed his rights; or
2. The pro t which the defendant actually made out of the infringement (IPC, Sec.
156.1).

Note: In cases where actual intent to mislead the public or to defraud the complainant is
in shown, in the discretion of the court, the damages may be doubled (/PC, Sec. 156.3).

Q: What acts may be sued upon in an action for damages?

ANS: As a general rule, only those acts of infringement committed from registration
onwards may be sued upon (Prosource International, Inc., v. Horphag Research
Management SA, G.R. No, 180073, November 25, 2009). The exception is, in case of
infringement of a well-known mark (IPC, Sec. 123.1 (e)).

Q: What is the effect of notice of registration?

ANS: In any suit for infringement, knowledge that an imitation is likely to cause confusion,
or to cause mistake, or to deceive is presumed if the registrant gives notice that his mark
is registered by displaying with the mark the words "Registered Mark" or the letter R within
a circle or if the defendant had otherwise actual notice of the registration (IPC, Sec. 158).

Note: The owner of the registered mark shall not be entitled to recover pro ts or damages or
unless the acts have been committed with knowledge that such imitation is likely to cause
confusion, or to cause mistake, or to deceive (IPC, Sec. 158).

Q: What are speci c limitations provided in the Code concerning an action for
infringement?
ANS: The remedies given to the owner of a right infringed under this Act shall be limited
as follows:
1 . Right of Prior User Registered mark shall be without effect against any
person who, in good faith, before the ling or priority date, was using the mark
for purposes of his business (IPC, Sec. 159.1);
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2. Relief against Printer • Injunction against future printing against an innocent

infringer who is engaged solely in the business of printing the mark (IPC,
Sec.159.2); and
3. Relief against Newspaper - Injunction against the presentation of advertising
matter in future issues of the newspaper, magazine or in electronic
communications in case the infringement complained of is contained in or is part
of paid advertisement in such materials (IPC, Sec. 159.3).

UNFAIR COMPETITION
Q: What is unfair competition?
ANS: There is unfair competition when any person employs 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 (IPC, Sec. 168.2).

Q: Who may be liable for unfair competition?

ANS: A seller or a manufacturer of imitation goods may be liable for unfair competition
(Alexander v. Sy Bok, G.R. No.* L-6708, May 31 7955, citing Sec. 29 of R.A. No. 166).
/
Q: What are the elements of an action for unfair competition?
ANS: 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 (Asia Paci c Resources
International Holdings, Ltd. v. Paperone, Incl, G.R; Nos. 213365-66, December
10, 2018)

Q: When is a person is deemed guilty of unfair competition?

ANS: A person is deemed guilty of
1 . Unfair competition in goods when: C
a. The offender sells his goods and gives them the general appearance of
the goods of another manufacturer or dealer, either as to the goods
themselves, their packaging and devises or words thereon, or in any
other feature of their appearance; and
b. The acts described would be likely to in uence purchasers to believe that
the goods offered are those of another manufacturer or dealer, or
deceive the public and defraud another of his legitimate trade, or any
subsequent vendor of such goods.
2. Unfair competition in services when he by any arti ce, or device, or employs any
other means calculated to induce the false belief that such person is offering the
services of another who has identi ed such services in the mind of the public;
or
3 Unfair competition by disparaging another's product or service when he makes
any false statement in the course of trade or commits any other act contrary to
good faith of a nature calculated to discredit the goods, business or services of
another (IPC, Sec. 168.3).
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Q: What are the distinctions between trademark infringement and unfair

competition?
ANS: They are distinguished as follows:

TRADEMARK INFRINGEMENT S. UNFAIR COMPETITION

Trademark Unfair
Infringement Competition
Unauthorized use of a trademark Passing off (or palming off) of
As to De nition one's goods as those of
another.

Trademark infringement is a form Unfair competition s broader

of unfair competition. Trademark than trademark infringement
infringement constitutes unfair and includes passing off goods
competition when there iS not with or without trademark
merely likelihood of confusion, but | infringement (McDonald's
As to Scope also actual or probable deception Corporation v. L.C. Big Mak
on the public because of the Burger, G.R. No. 143993, MUTIVISHENWOO

general appearance of the goods August 18, 2004).

(McDonald's Corporation v. L.C.
Big Mak Burger, G.R. No. 143993,
August 18, 2004).

As to the
Necessity of
Fraudulent intent is not necessary, Fraudulent intent is essential.
Fraudulent
Intent

As to the Prior registration of the trademark Registration is not necessary to

Requirement IS prerequisite to the action. bring an action for unfair
competition.
for Registration

(Del Monte Corporation v. CA., G.R. No. L-78325, January 25, 1990).

CANCELLATION
Q: When may a petition to cancel a registration of a mark be led?
ANS: A petition to cancel a registration of a mark may be led by any person who believes
that he is or will be damaged by the registration of a mark either:
1. Within 5 years from the date of registration of the mark; or
2. At any time, if: (GAMOF)
a. The registered mark becomes a Generic name for the goods or services
or a portion thereof, for which it is registered is (IPC, Sec. 151.1(b));

Note: If the registered trademark becomes the generic name for less than all of the goods
or services for which is it is registered, petition to cancel the registration for only those
goods pr services may be led. (IPC, Sec. 151.1(b)

A registered mark shall not be deemed to be the generic name of goods or services solely
because such mark is also of used as a name of or to identify a unique product or service.
(IPC, Sec. 151.1(b)
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b. The registered mark has been Abandoned (IPC, Sec. 151.1(b));

C. The registered mark is being used by, or with the permission of, the
registrant so as to Misrepresent the source of the goods or services on
or in connection with which the mark is used (IPC, Sec. 151.1(b)); and
d. The registration was Obtained fraudulently or contrary to the provisions
of the IPC (PC, Sec. 151.1(b));
e. If the registered owner of the mark without legitimate reason Fails to use
the mark within the Philippines, or to cause it to be used in the Philippines
by virtue of a license during an uninterrupted period of 3 years or longer
(IPC, Sec. 151.1 (c).

Q: When is non-use of trademark excused? (IFCA)

ANS: Non-use of trademark is excused in the following instances:
1. If caused by circumstances arising Independently of the will of the owner. (IPC,
Sec. 152.1)

Note: Lack of funds shall not excuse non-use of a mark (IPC, Sec. 152.1);

2. The use of a mark in 3-Eorm different from the form in which it was registered
which does not alter its distinctive character (IPÇ, Sec. 152.2);
3.

4.
152.3); and s
The use of a mark in connection with one or more of the goods or services
belonging to the Class In respect of which the mark is registered (PC, Sec.

The use of a mark by a company related with the registrant or Applicant shall
inure to the latter's bene t, provided that such mark is not used in such manner

P
as to deceive the public (PC, Sec. 152.4). do succesodl

Q: Is the use of mark in a form different from that which it is registered a ground
for cancellation?
ANS: The use of the mark in form different from the form which it is registered, which
does not alter its distinctive character, shall not be ground for cancellation or removal of
SCENTE
the mark and shall not diminish the protection granted to the mark (IPC, Sec. 152.2).

Q: What is the effect of cancellation of registration?

ANS: When the order or judgment of the cancellation of the registration becomes nal,
any right conferred by such registration upon the registrant or any person in interest of
record shall terminate. (IPC, Sec. 154).

c. COPYRIGHTS
Q: What a is a copyright?
ANS: It is the right over literary and artistic works which are original intellectual creations
in the literary and artistic domain protected from the moment of creation (Kho v. CA, G.R.
No. 115758, March 19, 2002).

Q: What is the scope of a copyright?

ANS: Protection extends only to the expression of the idea, not to the idea itself or to any
procedure, system, method or operation, concepts, principle, discovery, or mere data
(IPC, Sec. 175). [An] idea, no matter how original, cannot be protected by copyright. It is
the form in which they are clothed which is protected (FUNA, Intellectual Property Law,
supra at 577).

Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute confers. It may t be obtained and enjoyed
only with respect to the subjects and by the persons, and on terms and conditions
speci ed in the statute. Accordingly, it can cover only the works falling within the statutory
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enumeration or description (Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., G.R. No. 148222,
August 15, 2003).

Note: The copyright is distinct from the property in the material object subject to it.
Consequently, the transfer, assignment or licensing of the copyright shall not itself
constitute a transfer of the material object. Nor shall a transfer or assignment of the sole
copy or of one or several copies of the work imply transfer, assignment, or licensing of
the copyright. (IPC, Sec. 181)

Q: What are the requisites for the creation of a copyrightable work?

ANS: The following are the requisites for the creation of a copyrightable work:
1. Originality does not mean novelty or ingenuity; neither uniqueness nor
creativity. It simply means that the work "owes its origin to the author" (Thomas
Dawson, The Law of the Press, P.S. King & Son, Ltd., 1927); and
2. Expression - To be " xed", a work must be embodied in a medium suf ciently
permanent it or stable to permit it to be perceived, reproduced, or otherwise
communicated for a period of more than transitory duration (Managing
Intellectual Property in the Book Publishing Industry, A business-oriented
information Booklet, WIPO, Booklet No. 1, p. 14).
COMMERCIAL LAW

Note: Works are protected by the sole act of their creation, irrespective of their mode or
form of expression, as well as of their content. quality, and purpose (IPC, Sec. 172.2).

COPYRIGHTABLE WORKS
Q: What are the types of copyrightable works?
ANS: The types of copyrightable works are
1. Original Works (IPC, Sec. 172); and
2. Derivative Works (PG, Sec. 173).

Q: What are original works? (BPL2-DMW OID-PAPCO)

ANS: Original works are the literary and artistic works, which are original intellectual
creations in the literary and artistic domain:
1. Books, pamphlets, articles and other writings., .....
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery;
4. Letters;
5. Dramatic or dramatico-musical compositions; choreographic works or
entertainment in dumb shows;
6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture, engraving, lithography or
other works of art; models or designs for works of art;
8. Original ornamental designs or models for articles of manufacture, and other
works of applied art;
9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative
to geography, topography, architecture or science;
10. Drawings or plastic works of a scienti c or technical character;
11. Photographic works including works produced by a process analogous to
photography; lantern slides;
12. Audiovisual works and cinematographic works and works produced by a
to process analogous to cinematography or any process for making audio-visual
recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scienti c and artistic works (IPC, Sec 172.1).
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Note: There is no copyright protection for works of applied art or industrial design which
have aesthetic or artistic features that cannot be identi ed separately from the utilitarian
aspects of the article (Ching v. Salinas, G.R. No. 161295, June 29, 2005).

Q: What is a work of applied art?

ANS: An artistic creation with utilitarian functions or incorporated in a useful article, a
whether made by hand or produce on an industrial scale (IPC, Sec, 171.10).

Q: What is the doctrine of conceptual separability?

ANS: The court must decide whether the artistic element of the article is separable from
its utilitarian application. While the applied art aspect can be given copyright protection,
the utilitarian part may not (FUNA, Intellectual Property Law, supra at 563).

Q: What is the Denicola test?

ANS: It is one of the tests used to apply the Doctrine of Conceptual Separability. It inquires
into which aspects of the work are dictated by the functional constraints of the article, and
which aspects re ect unconstrained perspective of the artist (FUNA, Intellectual Property
Law, supra at 563).

Q: What are the derivative works? UNT

ANS: Derivative works are works based upon one or more pre-existing works (17 US
Code, Sec. 101). The following are derivative works that are also protected by copyright:
1. Dramatizations) translations, adaptations, abridgments, arrangements, and
other alterations of literary of artistic works; and
2. Collections of literary, scholarly or artistic works, and compilations of data and
other materials which are original by reason of the selection or coordination or
arrangement of their contents (IPC, Sec. 173.1).

Q: What is the protection given to derivative works?

U
ANS: Derivative works shall be protected as new works: Provided, however, that such
new work shall not affect the force of any subsisting copyright upon the original works
employed or any part thereof or be construed to imply any right to such use of the original
works, or to secure or extend copyright in such original works (IPC, Sec. 173.2).

NON-COPYRIGHTABLE WORKS MANY

Q: What are works not protected by copyright? (INOW)
ANS: The following are not protected by copyright:
1. Any Idea, procedure, system, method or operation, concept, principle, discovery
or mere data as such, even if they are expressed, explained, illustrated or
embodied in a work (IPC, Sec. 175);
2. News of the day and other miscellaneous facts having the character of mere
items of press information (IPC, Sec. 175);
3. Any Of cial text of a legislative, administrative or legal nature, as well as any
of cial translation thereof (IPC, Sec. 175); and
4. Any Work of the Government of the Philippines (PC, Sec. 176.1).

Note: Copyright protection cannot be granted to libelous, seditious, immoral, or obscene

works on the ground of public policy (FUNA, Intellectual Property Law, supra at 578).

Q: What is work of the Government of the Philippines?

ANS: A work of the Government of the Philippines is a work created by an of cer or
employee of the Philippine Government or any of its subdivisions and instrumentalities,
including GOCCs as part of his regularly prescribed of cial duties. (IPC, Sec. 171.11)
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Q: What two elements must be present in order to be deemed as work of the

Government of the Philippines?
ANS: The following are the element:
1. The creator must be an of cer or employee of the government; and
2. The work was done as part of his regularly prescribed of cial duties. (SALAO,
Essentials of Intellectual Property Law (2019), p.349)

RIGHTS CONFERRED BY COPYRIGHT

Q: What are the rights granted to a copyright owner? (EMD)

ANS: The following rights are granted to the copyright owner:
1. Copyright or Economic rights (IPC, Sec. 177);
2. Moral rights (IPC, Sec. 193); and
3. Right to participate in the gross proceeds of the sale or lease of the original work
or Droit de suite (IPC, Sec. 200).

Copyright subsists from the moment of creation. The intellectual creator's exercise and
enjoyment of copyright for his work and the protection given by law to him is not contingent
or dependent on any formality of registration. (Unilever Phils, Inc. vs CA, G.R. No. 119280,
August 10, 2006) MUTTVISEWWOD

Q: What are the economic rights conferred to copyright owners? (RDD-RD-PO)

ANS: Economic rights allow the owner to derive nancial reward from the use of his works
by others (WIPO, Copyright and Related Rights, p. 9). Copyright or economic rights shall
consist of the exclusive right to carry out, authorize or prevent the following acts:
1. Reproduction of the work or substantial portion of the work;
2. Dramatization, translation, adaptation, abridgment, arrangement or other
transformation of the work;
3. The rst public Distribution of the original and each copy of the work by sale or
other forms of transfer of ownership;
4. Rental of the original or a copy of an audiovisual or cinematographic work, a
work embodied in a sound recording, a computer program, a compilation of data
and other materials or a musical work in graphic form, irrespective of the
ownership of the original or the copy which is the subject of the rental;
5. Public Display of the original or a copy of the work;
6. Public Performance of the work; and
7. Other communication to the public of the work (IPC, Sec. 177).

Q: What is the right to Public Performance of a Copyright Owner?

ANS: Public Performance is de ned as follows:
1. For work other than an audiovisual work, public performance is the recitation,
playing, dancing, acting or otherwise performing the work, either directly or by
means of any device or process;
2. For audiovisual work, the showing of its images in sequence and the making
of the sounds accompanying it audible; and
3. For sound recording, making the recorded sounds audible at a place or at
places where persons outside the normal circle of a family and that family's
closest social acquaintances are or can be present, irrespective of whether they
are or can be present at the same place and at the same time, or at different
places and/or at different times, and where the performance can be perceived
without the need for communication within the meaning of Subsection 171.3
(IPC, Sec. 171.6).
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Q: Is radio reception a public performance?

ANS: A radio reception creates a performance separate from the broadcast. This is
otherwise known as the doctrine of multiple performances which provides that a radio (or
television) transmission or broadcast can create multiple performances at once. It is
immaterial if the broadcasting station has been licensed by the copyright owner because
the reception becomes a new public performance requiring separate protection (Filipino
Society of Composers, Authors and Publishers, Inc. V. Anrey, Inc., G.R. No. 233918,
August 9, 2022).

Q: What is Communication to the Public Right of a Copyright Owner?

ANS: "Communication to the public" or "communicate to the public" means any
communication to the public, including broadcasting, rebroadcasting, retransmitting by
cable, broadcasting and retransmitting by satellite, and includes the making of a work
available to the public by wire or wireless means in such a way that members of the public
may access these works from a place and time individually chosen by them (IPC, Sec.
171.3, as amended).

In relation to performances and sound recordings, "Communication to the public of a

performance or a sound recording" means the transmission to the public, oy any medium,
otherwise than by broadcasting, of sounds of a performance or the representations of
sounds xed in a sound recording It includes making the sounds or representations of
sounds xed in a sound recording audible to the public (1PC, Sec. 209).
O m V
Q: When is there a communication to the Public?
ANS: For purposes of determining whether there is-a "communication to the public," it
would be necessary to establish that the protected work was transmitted to a "new public,"
or a public which was not taken Into account by the authors of the protected works when
they authorized use through communication to the "original public" (Filipino Society of
Composers, Authors and Publishers, 02
Inc. vs Anrey, Inc., G.R No. 233918, August 9,
2022).
Note: "Communication" must be construed as. referring to any transmission of the
protected works, irrespective of the means used (ld).

Q: Is the transmission of a musical composition ( xed in an audiovisual derivative

work) by a cable television operator over a channel they control constitutes
communication to the public?
ANS: When a cable television system operator transmits a musical composition xed in
an audiovisual derivative work over a channel they control and operate, the operator is
making that work accessible to members of the public from a place or time individually
chosen by them. This is the essence of the "communication tO the public" right in the
Intellectual Property Code.

a Playing a musical composition, xed in an audiovisual derivative work, over cable

television to paying subscribers is making that work accessible to members of the public
from a place or time individually chosen by them. This is the essence of the
"communication to the public" right (Philippine Home Cable Holdings, Inc. V. FILSCAP,
G.R. No. 188933, February 21, 2023).

Q: What is the First Sale Doctrine?

ANS: After the rst sale of the lawfully made copy of the copyrighted work, anyone who
S the owner of that copy can sell or dispose of that copy in any way without any liability
for copyright infringement. The rst sale of an authorized copy of the work exhausts the
author's right to control distribution of copies (IPC, Sec. 177.3).
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Q: What are the moral rights granted to the author of a work protected by
copyright? (A2ON)
ANS: The following are the moral rights of the copyright owner:
1. Right of Paternity - To require that the Authorship of the works be attributed to
him, in particular, the right that his name, as far as practicable, be indicated in a
prominent way on the copies, and in connection with the public use of his work;
2 To make any Alterations of his work prior to or to withhold it from publication;
3. Right of Integrity - To Object to any distortion, mutilation or other modi cation
of, or other derogatory action in relation to, his work which would be prejudicial
to his honor or reputation; and
4. To restrain the use of his Name with respect to any work not of his own creation
or in a distorted version of his work (IPC, Sec. 193).

Note: An author cannot be compelled to perform his contract to create a work or for the
publication of his work already in existence. However, he may be held liable for damages
for breach of such contract (IPC, Sec. 194).

Q: What is the term or duration of the author's moral rights?

ANS: The right of an author under Section 193.1 shall last during the lifetime of the author MUTTVIDEWWOO

in and in perpetuity after his death while the rights under Section 193.2, 193.3, and 193.4,
shall be coterminous with the economic rights (IPC, Sec. 198.1, as amended by R.A. No.
10372).

Q: Are the moral rights assignable?

ANS: Moral rights shall not be assignable or subject to license (PC, Sec. 198).

Note: These rights are distinct from economic rights and remain with the author even after
he has transferred or assigned to another 'other rights of copyright" (WIPO, Copyright
and Related Rights, p. 14)

Q: Are the moral rights waivable?

ANS: As a general rule, moral rights may be waived by a written instrument. The
exception is where its effects is to permit anothera
1. To use the name of the author, or the title of his work, or otherwise to make use
of his reputation with respect to any version or adaptation of his work which,
because of alterations therein, would substantially tend to injure the literary or
artistic reputation of another author (IPC, Sec. 195.1); or
2. To use the name of the author with respect to a work he did not create (IPC,
Sec. 195.2).

Q: When is the iS right of an author to have his contributions in a collective work be

attributed to him deemed waived?
ANS: When an author contributes to a collective work, his right to have his contribution
attributed to him is deemed waived unless he expressly reserves it (IPC, Sec. 196).

Q: What are the rights of an author in terms of editing, arranging and adaptation of
his work?
ANS: In the absence of a contrary stipulation at the time an author licenses or permits
another to use his work, the necessary editing, arranging or adaptation of such work, for
publication, broadcast, use In motion picture, dramatization, or mechanical or electrical
reproduction in accordance with the reasonable and customary standards or
requirements of the medium in which the work is to be used, shall not be deemed to
contravene the author's rights secured by this chapter. Nor shall complete destruction of
a work unconditionally transferred by the author be deemed to violate such rights (IPC,
Sec. 197).
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Q: What is Droit de Suite?

ANS: Droit de Suite means "art proceeds right". That in every sale or lease of an original
work of painting or sculpture or of the original manuscript of a writer or composer,
subsequent to the rst disposition thereof by the author, the author or his heirs shall have
an inalienable right to participate in the gross proceeds of the sale or lease to the extent
of 5%. This right shall exist during the lifetime of the author and for 50 years after his
death (IPC, Sec. 200).

Q: What are the works that are not covered by Droit de Suite? (PE2W2)
ANS: The works not covered by droit de suite are: Prints, Etchings, Engravings, Works
of applied art or Works of similar kind wherein the author primarily derives gain from the
proceeds of reproductions (IPC, Sec. 201).

Q: What are the economic rights of performers under the Law on Copyright?
(BF-RDRA)
ANS: Performers shall enjoy the right of authorizing the:
1. As regards their performances:
a. Broadcasting and * her communication to the public of their

2.
b. performance;
Fixation of their and AL
un xed performance (PC, Sec. 203.1); and
As to their performances xed in sound recordings or audiovisual works or
xations:
a. Direct or indirect Reproductionr
b. First public Distribution of the original and copies through sale or rental
or other forms of transfer of ownership;

O
C. Commercial Rental to the public of the original and copies, even after
distribution of them by, or pursuant to the authorization by the performer;
and
d. Making Available to the public of their performances xed in sound
recordings, by wire or wireless means, in such a way that members of
the public may access them from a place and time individually chosen
by them (IPC, Sec. 203;2 to 203.5).
e
Q: What are the moral rights of performers under the Law on Copyright?
ANS: As regards his live aural performances or performances xed in sound recordings
or in audiovisual works or xations:
1. The right to be identi ed as the performer of his performances, except, where
the omission is dictated by the use of the performance; and
2. The right to object to any distortion, mutilation or other modi cation of his
performance that will be prejudicial to his reputation (IPC, Sec. 204.1).

Q: When may the rights granted to a performer under Section 203.1 be exercised?
ANS: The rights granted to a performer in accordance with Subsection 203.1 shall be
maintained and exercised 50 years after his death, by his heirs, and in default of heirs,
the government, where protection is claimed (IPC, Sec. 204.2).

Q: What are the rights of producers of sound recordings? (RDCP)

ANS: Producers of sound recordings shall enjoy, as to their sound recordings, the right
to authorize the:
1. Direct or indirect Reproduction; the placing of these reproductions in the market
and the right of rental or lending;
2 First public Distribution of the original and copies through sale or rental or other
forms of transferring ownership; and
3. Commercial rental to the public of the original and copies even after distribution
by them or pursuant to authorization by the producer; and
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4. Making available to the Public in such a way that a members of the public may
access the sound recording from a place and at a time individually chosen or
selected by them, as well as other transmissions of a sound recording with like
effect (IPC, Sec. 208).

Q: What are the rights of broadcasting organizations?

ANS: Broadcasting organizations shall enjoy the exclusive right to carry out, authorize or
prevent any of the following acts:
1. The rebroadcasting of their broadcasts;
2. The recording in any manner, including the making of lms or the use of video of or of
tape, of their broadcasts for the purpose of communication to the public of
television broadcasts of the same; and
3. The use of such records for fresh transmissions or for fresh recording (IPC, Sec.
211).

Q: What is the remedy of an author of a work if any of his moral rights are violated?
ANS: Violation of any of the moral rights of an author shall entitle those charged with their
enforcement to the same rights and remedies available to a copyright owner. In addition,
damages which may be availed of under the Civil Code may also be recovered. Any MVTTVISHEWWOD

damage recovered after the creators death shall be held in trust for and remitted to his
heirs, and in default of the heirs, shall belong to the government (IPC, Sec. 199).

OWNERSHIP OF A COPYRIGHT
Q: Who is presumed to be the author or maker of a work?
ANS: In the absence of proof to the contrary
1. The natural person whose name is indicated on a work in the usual manner as
the author shall be presumed to be the author of the work, even if the name is
a pseudonym; where the pseudonym leaves no doubt as to the identity of the
author (IPC, Sec. 219.1).
2. The person or body corporate whose name appears on an audiovisual work in
the usual manner shall be presumed to be the maker of said work (IPC, 219.2).

Q: What are the rules on determining copyright ownership?

ANS: The following are the rules on determining copyright ownership:

RULES IN DETERMINING COPYRIGHT OWNERSHIP

Authorship To Whom it Belongs

Sole Copyright shall belong to the author of the work, his heirs, or assigns
authorship (IPC, Sec. 178.1).

n the absence of agreement, the rights of the co-authors shall be

governed by the rules on co-ownership. If work consists of parts that
Joint can be used separately and the author of each can be identified, the
authorship author of each part shall be the original owner of the copyright in the
part that he has created (IPC, Sec. 178.2).

Copyright belongs to the person under whose name it is It is disclosed

Collective (IPC, Sec. 171.2).
Works Contributor is deemed to have waived his right, unless he expressly
reserves it (IPC, Sec. 196).
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Authorship To Whom it Belongs

The copyright shall belong to:
Work created 1. The employee if the creation of the object of copyright is not
by the author part of his regular duties even if the employee uses the
during and in time, facilities and materials of the employer; or
the course of 2. The employer if the work is the result of the performance of
his employment his regularly-assigned duties, unless there is an agreement,
express or implied, to the contrary (IPC, Sec. 178.3).

Ownership of the work itself

The person, other than the employer of the author, who
Commissioned commissioned such work (IPC, Sec. 178.4).
work Ownership of the copyright
The creator of the commissioned work, unless there s a written
stipulation to the contrary (IPC, Sec. 178.4).

The copyright shall belong to the: (PACFA)

1. Producer;
2. Author of the scenario;
3. Composer of the music;
4. Film director; and
Audiovisual 5. Author of the work so adapted.
work
The producer shall exercise the copyright to an extent required for
the exhibition of the work in any manner, except for the right to
collect performing license fees for the performance of musical
compositions which are incorporated into the work (IPC, Sec.
178.5).

The copyright shall belong to the writer subject to the provisions of

Article 723 of the Civil Code (IPC, Sec. 178.6).

Letters and other private communications in writing are owned by

Letters
the person to whom they are addressed and delivered, but they
cannot be published or disseminated without the consent of the
writer or his heirs. However, the court may authorize their
publication or dissemination if the public good or the interest of
justice so requires (C/VIL CODE, Art. 723).

Publishers are deemed representatives of the author, unless:

Anonymous
The contrary appears; or
and
Pseudonyms or adopted name leaves no doubt as to the
Pseudonymous 2. author's identity; or author discloses his identity (IPC, Sec.
Works
179).

Q: May a copyright be transferred, assigned, or licensed?

ANS: Yes. The copyright may be assigned or licensed in whole or in part. Within the
scope of the assignment or license, the assignee or licensee is entitled to all the rights
and remedies which the assignor or licensor had with respect to the copyright. (IPC, Sec.
180)
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Note: The copyright is distinct from the property in the material object subject to it.
Consequently, the transfer, assignment or licensing of the copyright shall not itself
constitute a transfer of the material object. Nor shall a transfer or assignment of the sole
copy or of one or several copies of the work imply transfer, assignment, or licensing of
the copyright. (IPC, Sec. 181)

LIMITATIONS ON COPYRIGHT
Q: What are the limitations on copyright protection?
ANS: The following are the limitations on copyright protection:
1. General limitations (IPC, Sec. 184.1);
2. Fair use (PC, Sec. 185); and
3. Other limitations on copyright (IPC, Sec. 186, 187,188,189, & 190).

Q: What are the general limitations on copyright? (R4EG-CDJB-QI)

ANS: The following are the general limitations on copyright under the law, and as such,
shall NOT constitute infringement of copyright:
1. The Recitation or performance of a work, once it has been lawfully made
accessible to the public, if done privately and free of charge or if made strictly
for a charitable or religious institution or society; MUTTVISHENWO?

2. The Reproduction or communication to the public by mass media of articles on

current political, social, economic, scienti c or religious topic, lectures,
addresses and other works of the same nature, which are delivered in public if
such use is for information purposes and has not been expressly reserved,
provided that the source is clearly Indicated;
3. The Reproduction and communication to the public of literary, scienti c or
artistic works as part of reports of current events by means of photography,
cinematography or broadcasting to the extent necessary for the purpose;
4. The Recording made in schools, universities, or educational institutions of a
work included in a broadcast for their use, provided, that such recording must
be deleted within a reasonable period after they were rst broadcast: Provided,
further, that such recording may not be made from audiovisual works which are
part of the general cinema repertoire of feature lms except for brief excerpts of
the work;
5. The making of Ephemeral recordings by a broadcasting organization by means
of its own facilities and for use in its own broadcast;
6. The use made of a work by or under the direction or control of the Government,
by the National Library or by educational, scienti c or professional institutions
where such use is in the public interest and is compatible with fair use;
7. The public performance or the communication to the public of a work, in a place
where no admission fee is charged in respect of such public performance or
communication, by a club or institution for Charitable or educational purpose
only, whose aim is not is pro t making;
8. Public Display of the original or a copy of the work not made by means of a lm,
slide, television image or otherwise on screen or by means of any other device
or process: Provided, that either the work has been published, or, that the
original or the copy displayed has been sold, given away or otherwise
transferred to another person by the author or his successor in title;
9. Any use made of a work for the a purpose of any Judicial proceedings or for the
giving of professional advice by a legal practitioner;
10. The reproduction or distribution, on a non-pro t basis, of published articles or
materials in a specialized format exclusively for the use of the Blind, visually-
and reading-impaired person, provided that the copyright owner and the date of
the original publication shall be indicated. Provided that the source and the
name of the author, if appearing in the work are mentioned;
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11. The making of Quotations from a published work if they are compatible with fair
use and only to the extent justi ed for the purpose, including quotations from
newspaper articles and periodicals in the form of press summaries; and
12. The Inclusion of a work in a publication, broadcast, or other communication to
the public, sound recording or lm, if such inclusion is made by way of illustration
for teaching purposes and is compatible with fair use (IPC, Sec. 184.1).

Note: Private reproduction of a a published work in a single copy, where the reproduction
is made by a natural person exclusively for research and private study, shall be permitted,
without the authorization of the owner of copyright in the work (IPC, Sec. 187.1).

Q: What are the requisites that must be satis ed in order for the use of a
copyrighted material to be considered exempt under Sec. 184.1(i)?
ANS: The following requisites must be satis ed:
1. The place where the performance is made does not charge any admission fee
in respect of such performance or communication;
2. The performance is made by a club or institution: (a) for charitable or educational
purpose only; and (b) whose aim is not pro t making; and
3. Such other requirements that may be prescribed under the implementing rules
and regulations promulgated by the Director General of the [IPO] (COSAC, nc.,
V. Filipino Society of Composers, Authors and Publishers, Inc., G.R. No.
222537, February 28, 20.23) *me
AD
Q: Does charging an admission fee automatically remove the playing of
copyrighted music from the exemption under Sec. 184.107*
ANS: No, charging an admission fee does not automatically remove the playing of
copyrighted music from this exemption But if the admission fee is charged in respect of
such performance" then it would not be covered by the exemption. Otherwise stated,
charging an admission fee for some other purpose not in connection with the playing of
the work could still be exempt under this provision (ld:).

Q: Are all private reproduction of a published work by a natural person in

accordance with Sec. 187.1 permitted?
ANS: The permission granted ünder Subsection 187.1 shall not extend to the
reproduction of:
1. of A work of architecture in form of building or other construction;
2. An entire book, or a substantial part thereof, or of a musical work in which
graphics form by reprographic means;
3. A compilation of data and other materials;
4. A computer program except as provided in Sec. 189; and
5. Any work in cases in where reproduction would unreasonably con ict with a
normal exploitation of the work or would otherwise unreasonably prejudice the
legitimate interests of the author (IPC, Sec. 187.2).

Q: What is the extent of the copyright in a work of architecture?

ANS: Copyright in a work of architecture shall include the right to control the erection of
any building which reproduces the whole or a substantial part of the work either in its
original form or in any form recognizably derived from the original: Provided. That the
copyright in any such work shall not include the right to control the reconstruction or
rehabilitation i the same style as the original of a building to which that copyright relates
(IPC, Sec. 186).
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Q: Is reprographic reproduction absolutely prohibited under the Copyright Law?

ANS: Any library or archive whose activities are not for pro t may, without the
authorization of the author of copyright owner, make a single copy of the work by
reprographic reproduction where:
1. The work by reason of its fragile character or rarity cannot be lent to user in its
original form;
2. The works are isolated articles contained in composite works or brief portions of
other published works, where their reproduction is considered expedient to
persons requesting their loan for purposes of research or study; or
3. The making of such limited copies is in order to preserve and, if necessary in
the event that it is lost, destroyed or rendered unusable, replace a copy and
copies are not available with the publisher (IPC, Sec. 188.1).

Q: Is reproduction of a computer program absolutely prohibited under the

Copyright Law?
ANS: Reproduction in one back-up copy or adaptation of a computer program is allowed
provided that such is necessary for:
1. The use of the computer program in conjunction with a computer for the
purpose, and to the extent, for which the computer program has been obtained;
and
Archival purposes, and, for the replacement of the lawfully owned copy of the
COMMERCIAL LAW

2.
computer program in the event that the lawfully obtained copy of the computer
program is lost, destroyed or rendered unusable (IPC, Sec. 189.1).

Q: What is fair use?

ANS: Fair use has been de ned as a privilege to use the copyrighted material in a
reasonable manner without the consent of the copyright owner or as copying the theme
or ideas rather than their expression (AB$-CBN Corp. v. Gozon, G.R. No. 195956, March
11, 2015).

Q: When is the fair use of a copyrighted work not considered an infringement?

ANS: Use of a copyrighted work is not considered an infringement when:
1. The fair use of a copyrighted work for criticism, comment, news reporting,
teaching including multiple copies for classroom use, scholarship, research, and
similar purposes is not an infringement of copyright (IPC, Sec. 185).
2. Decompilation or the reproduction of the code and translation of the forms of a
computer program to achieve the interoperability of an independently created
computer program with other programs may also constitute fair use done for the
purpose of obtaining the information necessary to achieve such interoperability
(IPC, Sec. 185.1).

Q: What are the factors to be considered in determining if there is fair use of a

copyrighted work? (P-NAE)
ANS: In determining whether the use made of a work in any particular case is fair use,
the factors to be considered shall include :
1. The Purpose and character of the use, including whether such use is of a
commercial nature or is for non-pro t educational purposes;
2. The Nature of the copyrighted work;
3. The Amount and substantiality of the portion used in relation to the copyrighted
work as a whole; and
4. The Effect of the use upon the potential market for or value of the copyrighted
work (PC, Sec. 185.1; ABS-CBN Corporation v. Gozon, G.R. No. 195956,
March 11, 2015).

Note: The fact that the work is unpublished shall not itself bar a nding of fair use (IPC,
Sec. 185.2).
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Q: What is the test used in reviewing the purpose and character of the usage of
copyrighted work?
ANS: The "transformative test" is generally used in reviewing the purpose and
character of the usage of the copyrighted work. This court must look into whether the copy
of the work adds new expression, meaning or message' to transform it into something
else. 'Meta-use' can also occur without necessarily transforming the copyrighted work
used (ABS-CBN Corporation v. Gozon, G.R. No. 195956, March 11, 2015).

Q: What must be the purpose and character of the use to be considered fair use of
copyrighted work?
ANS: Whether the purpose or character of the use is for commercial or nonpro t
educational purposes, should be determined. Thus:
1. If the new work clearly has transformative use and value, a nding of fair use iS
more likely even if the user stands to pro t from his or her new work.
2. Conversely, if the new work merely supplants the object of the original work, i.e.,
it has no transformative value, and is commercial in nature, the rst factor will
most likely be weighed against a nding of fair use.
3. Needless to state, if the new work has transformative use and value, and was
created for a noncommercial purpose or, use, the scale will highly likely be
swayed in favor of fair use (COSAC, VinC., v. Filipino Society of Composers,
Authors and Publishers, Inc., G.R. No. 222537, February 28, 2023).

Q: What is considered under the factor "nature of copyrighted work"?

ANS: In this factor, such "calls for recognition that some works are closer to the core of
intended copyright protection than others, with the consequence that fair use is more is
dif cult to establish when the former works are copied." Hence, "the closer the work is to
the core of copyright protection i.e. the more creative, imaginative, or original the
is, copied work is, the more likely will fair use be rejected as a defense against infringement"
(ld.). Un GENE

Q: What is considered under the "Amount and Substantiality of the Portion Used"
test"
ANS: This factor relates to the reasonableness of the amount and substantiality of the
portion used concerning the copyrighted material as a whole. Additionally, focus must be
directed on whether the amount of copying leads. to a valid and transformative purpose,
to which is related to the rst factor (the purpose and character of use), even if the entire
is work is copied but is hinged on a different function compared to the original (ld.).

Q: What does the fourth factor (Effect of the use upon the potential market for or
value of the copyrighted work) in determining fair use requires?
ANS: the last factor requires the courts to consider not only the extent of market harm
caused by the particular actions of the alleged infringer, but also whether unrestricted and
widespread conduct of the sort engaged in by the defendant would result in substantially
adverse impact on the potential market for the original and derivative works.

Thus, "[where the pro t generated by the alleged infringement substitutes for what the
owner or creator could make, this bars the concept of fair use. But where the bene ts are
complementary or incidental, then fair use may be properly considered (ld.).

COPYRIGHT INFRINGEMENT

Q: What is copyright infringement?

ANS: 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
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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 of the owner of the copyright (Habana v. Robles, G.R.
No. 131522. July 19, 1999).

Q: When is a person considered to have committed copyright infringement?

ANS: A person infringes a right protected under the Intellectual Property Code when one:
1. Directly commits an infringement;
2. Bene ts from the infringing activity of another person who commits an
infringement if the person bene ting has been given notice of the infringing
activity and has the right and ability to control the activities of the other person;
or
3. With knowledge of infringing activity, induces, causes or materially contributes
to the infringing conduct of another (PC, Sec. 216).

Note: Damage is not an element in an infringement suit (FUNA, Intellectual Property Law,
supra at 673).

Q: What are the elements of copyright infringement?

ANS: Before copyright holders may claim for infringement, two elements must be proven: MV7 IVISHENWOD

1. They must show ownership of a valid copyright; and

2. They must demonstrate that the alleged infringers violate at least one economic
right granted to copyright holders 27 under Sec. 177 of the IPC (Filipino Society
of Composers, Authors and Publishers v. Anrey, Inc G.R. No. 233918, August
9, 2022).

Note: For the second element, it must further be shown that the exercise of the economic
right was inconsistent with "any of the limitations on copyright 79 and permissible
unauthorized reproductions and importations. Alternatively, the defendant or respondent
may prove that its exercise of the economic right falls within fair use (Philippine Home
Cable Holdings, Inc. v. FILSCAP, G..R. No. 188933, February 21,2023).

Q: Is the grant of copyright protection to a derivative work renders the use of the
original work, or any part of it lawful?
ANS: To emphasize, copyright over an original work is unaffected even when that work
IS used in a derivative work And the grant of copyright protection to the derivative work
does not by itself make the use of the original work, or any part of it, lawful absent the
copyright holder's consent (Id).

Q: What is the Doctrine of Multiple Performances?

ANS: The doctrine of multiple performances provides that a radio (or television)
transmission or broadcast can create multiple performances at once. The reproduction of
the radio waves into audible sound waves is also a performance, hence it is immaterial if
the broadcasting station has been licensed by the copyright owner because the reception
becomes a new public performance requiring separate protection (Filipino Society of
Composers, Authors and Publishers v. Anrey, Inc., G.R. No. 233918, August 9, 2022).

Q: Is the act of playing radio broadcasts containing sound recordings using

loudspeakers amounts to copyright infringement?
ANS: the act of playing radio broadcasts containing sound recordings through the use
of loudspeakers amounts to an unauthorized communication of such copyrighted music
to the public, thus, violates the public performance rights of a copyright owner.

Typically, radio stations already secured from the copyright owner (or his/her assignee)
the license to broadcast the sound recording. And by the nature of broadcasting, it is
necessarily implied that its reception by the public has been consented to by the copyright
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owners. But the author normally thinks of the license to broadcast as to "cover only the
direct audience receiving the signal within the family circle." Any further communication
of the reception creates, by legal ction, a 'new public" which the author never
contemplated when they authorized its use in the initial communication to the public (ld.).

Q: When Is a person liable for the infringement of another? What are the kinds of
infringement?
ANS:
"A person can be held liable for copyright infringement based on the acts of another
if one bene ts from the infringing act; if a person contributes to the infringement by
inducing direct infringing acts; or infringes vicariously by pro ting from direct
infringement while declining to exercise a right to stop/limit it.
US case law also provides for sub-classi cations of secondary liability, as follows: (a)
inducement theory; (b) contributory infringement; and (c) vicarious infringement.
Under the inducement theory, when a person induces the commission of an infringing
act by another party, or persuades another to commit infringement, he/she shall be
liable. Next, contributory infringement happens when a person, aware of the infringing
activity, induces, causes or materially contributes to the infringing act of another.
Finally, vicarious infringement has two. (2) elements: (1) a defendant possesses the right
and ability to supervise the infringing act; and (2) the defendant must have "an obvious
and direct nancial interest in the exploitation of copyrighted material." In this mode,
knowledge or lack thereof of the infringement is immaterial in the determination of
vicarious liability (Cosac, Inc. v. Filipino Society of Composers, Authors and Publishers,
Inc., G.R. No. 222537, February 28, 2023).
C EXxX.//0/07/
ISA
For example, an owner of a restaurant who is liable as secondary infringer for vicarious
infringement when he allowed the commission of infringing acts when he permitted
musical artists or bands to perform copyrighted music. The restaurant owner is liable as
primary infringer when he played sound recordings as background music without rst
procuring a license from the copyright owners (or assignees) of the songs and paying the
fee (Id).
07 WANLY
Q: What is the subconscious copying doctrine? e
ANS: It contemplates infringement or plagiarism by copying from another work but
committed subconsciously from memory rather than conscious use by deliberately
copying (FUNA, Intellectual Property Law, supra at 674).

Note: A pirated copy is an infringement of the original and it is no defense that the pirate,
in such cases, did not know whether or not he was infringing any copyright; he at least
knew that what he was copying was not his and he copied at his peril (Habana v. Robles,
G.R. No. 131522, July 19, 1999; Columbia Pictures v. CA, G.R. No. 131522, July 19,
1999).

Q: What are the kinds of infringement?

ANS: The kinds of infringement are:
1. Direct Infringement - It is an infringement by a person who, without the consent
of the owner of the copyright, does anything the sole right to do which is by law
conferred on the owner of the copyright (FUNA, Intellectual Property Law, supra
at 676); and
2. Indirect Infringement Dealings with works of direct infringements (FUNA,
Intellectual Property, supra at 677).
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Q: What is the De Minims Principle?

ANS: De minims means minimal things, small and trivial. Certain acts would be
considered too minimal to be considered acts of infringement (FUNA, Intellectual Property
Law, supra at 684).

Q: What are the remedies available in case of copyright infringement? (IDIDOS)

ANS: Any person infringing a right protected under this law shall be liable to:
1. An Injunction restraining such infringement;
2. Pay to the copyright proprietor or his assigns or heirs such actual Damages,
including legal costs and other expenses, as well as the pro ts the infringer may
have made due to such infringement,
3. Deliver under oath, for Impounding during the pendency of the action, upon such
terms and conditions as the court may prescribe, sales invoices and other
documents evidencing sales, all articles and their packaging alleged to infringe
a copyright and implements for making them.
4. Deliver under oath for Destruction without any compensation all infringing
copies or devices, as well as all plates, molds, or other means for making such
infringing copies as the court may order;
5. Such Other terms and conditions, including the payment of moral and exemplary COMMERCIAL LAW

damages, which the court may deem proper, wise and equitable and the
destruction of infringing copies of the work even in the event of acquittal in a
criminal case (IPC, Sec. 216.1); and
6. The order of the court for Seizure and impounding of any article which may serve
as evidence in the court proceedings (IPC, Sec. 216.2).

Q: When does an action for recovery of damages by reason of infringement

prescribe?
ANS: No damages may be recovered under this Act after the lapse of 4 years from the
time the cause of action arose (IPC, Sec. 226).

Q: Who are the persons criminally liable for copyright infringement?

ANS: The following are criminally liable:
1. Any person infringing any right of the copyright owner or aiding or abetting such
infringement (IPC, Sec. 217 1)F of
2. Any person who at the time when copyright subsists in a work has in his
possession an article which he knows, or ought to know, to be an infringing copy
of the work for the purpose of:
a. Selling, letting for hire, or by way of trade offering or exposing for sale,
or hire, the article;
b. Distributing the article for purpose of trade, or for any other purpose to
an extent that will prejudice the rights of the copyright owner in the work;
or
C. Trade exhibit of the article in public (IPC, Sec. 217.3).

Q: What are the administrative remedies available to an aggrieved party?

ANS: The following are administrative remedies available to an aggrieved party:
1. Administrative action;
2. Cease and desist order;
w Forfeiture of paraphernalia used in committing the offense: and
4. Administrative nes (Rules and Regulations on Administrative Complaints for
Violation of Laws Involving Intellectual Property Rights, Rule 12).
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DATA PRIVACY ACT OF 2012 (R.A. No. 10173

Q: What is the declared state policy of the Data Privacy Act of 2012? (PR-VI)
ANS: It is the policy of the State to:
1. Protect the fundamental human right of privacy of communication while ensuring
free ow of information to promote innovation and growth.
2. Recognizes;
a. Vital role of information and communications technology in nation-
building; and
b. its Inherent obligation to ensure that personal information in information
and communications systems in the government and in the private sector
are secured and protected. (R.A. No. 10173, also known as the 'Data
Privacy Act of 2012" [hereinafter DPA]).

Q: Which government agency shall administer and implement the provisions of

the DPA?
ANS: National Privacy Commission (NPC) is an independent body created to administer
and implement the provisions of this Act, and to monitor and ensure compliance of the
country with the international standards set for data protection (DPA, Sec. 7).

A. PERSONAL VS. SENSITIVE PERSONAL INFORMATION

NOON
Q: What is the difference between Personal information and Sensitive personal
Information?
ANS: Personal Information and Sensitive Personal Information is distinguished as
follows:
O

Personal Information (PI) Sensitive Personal Information (SPI)

Broader Speci c
Any information whether recorded in a 1. About an individual's race, ethnic
material form or not from which the origin, marital status, age, color, and
identity of an individual is apparent or religious, philosophical or political
can be reasonably and directly af liations:
ascertained by the entity holding the 2. About an individual's health,
information, or when put together with education, genetic or sexual life of a
other information would directly and person, or to any proceeding for any
certainly identify an individual (DPA, offense committed or alleged to have
Sec. 3(g)). been committed by such person, the
disposal of such proceedings, or the
sentence of any court in such
proceedings;
3. Issued by government agencies
peculiar to an individual which
includes, but not limited to. social
security numbers, previous or current
health records, licenses or its denials,
suspension or revocation, and tax
returns; and
4. Speci cally established by an
executive order or an act of Congress
to be kept classi ed (DPA, Sec. 3(1)).
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Q: What is privileged information?

ANS: It refers to any, and all forms of data which under the Rules of Court and other
pertinent laws constitute privileged communication (DPA, Sec. 3(k)).

Q: What are the examples of privileged information?

ANS: The examples of such privileged information are:
1. Communication between husband and wife;
2. Communication between attorney and client;
3. Communication between physician and patient;
4. Communication between priest and penitent;
5. Public Of cers and Public Interest;
6. Editors may not be compelled to disclose the source of published news;
7. Voters may not be compelled to disclose for whom they voted;
8. Trade secrets;
9. Information contained in tax census returns;
10. Bank deposits; and
11. Information and statements made at conciliation proceedings (VITUG,
Commercial Laws and Jurisprudence Volume I/ (2022) p. 877, hereinafter
[VITUG Commercial Law]). LAW TVISHEWWOO

B. SCOPE
Q: What is the extent of DPA's application?
ANS: DPA applies to the processing of all types of personal information and to any natural
and juridical person involved in personal information processing including those personal
information controllers and processors who although not found or established in the
Philippines, use equipment that are located in the Philippines, or those who maintain an
of ce, branch or agency in the Philippines subject to the immediately expressly excluded
by the law: Provided, That the requirements for the protection afforded to journalists and
their sources under Section 5 are complied with (DPA, Sec. 4)

Note: Nothing in this Act shall be construed as to have amended or repealed the
provisions of Republic Act No. 53, which affords the publishers, editors or duly accredited
reporters of any newspaper, magazine or periodical of general circulation protection from
being compelled to reveal the source of any news report or information appearing in said
publication which was related in any con dence to such publisher, editor, or reporter
(DPA, Sec. 5).

Q: What are excluded from the application of DPA? (OCD-JFBF)

ANS: This Act does not apply to the following:
1. Information about any individual who is or was an Of cer or employee of a
government institution that relates to the position or functions of the individual,
including:
a. The fact that the individual iS or was an of cer or employee of the
government institution;
b. The title, business address and of ce telephone number of the individual;
C. The classi cation, salary range and responsibilities of the position held
by the individual; and
d. The name of the individual on a document prepared by the individual in
the course of employment with the government.
2. Information about an individual who is or was performing service under Contract
for a government institution that relates to the services performed, including the
terms of the contract, and the name of the individual given in the course of the
performance of those services;
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3. Information relating to any Discretionary bene t of a nancial nature such as the

granting a of a license or permit given by the government to an individual,
including the name of the individual and the exact nature of the bene t;
4. Personal information processed for Journalistic, artistic, literary or research
purposes;
5. Information necessary in order to carry out the Functions of public of authority
which includes the processing of personal data for the performance by the
independent central monetary authority and law enforcement and regulatory
agencies of their constitutionally and statutorily mandated functions. Nothing in
this Act shall be construed as to have amended or repealed Republic Act No.
1405, otherwise known as the Secrecy of Bank Deposits Act; Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act; and Republic Act
No. 9510, otherwise known as the Credit Information System Act (CISA);
6. Information necessary for Banks and other nancial institutions under the
jurisdiction of the independent central monetary authority or Bangko Sentral ng
Pilipinas to comply with Republic Act No. 9510, and Republic Act No. 9160, as
amended, otherwise known as the Anti-Money Laundering Act and other
applicable laws; and
7. Personal information originally collected from residents of Foreign jurisdictions
in accordance with "the laws. of. those foreign jurisdictions, including any
applicable data privacy laws, which is being processed in the Philippines. (DPA,
Sec. 4)
TRY I Vo
Q: Under what circumstances does the Data Privacy Act have extraterritorial
application?
ANS: DPA applies to an act done or practice engaged in and outside of the Philippines
by an entity if:
a. The act, practice or processing relates to personal information about a
Philippine citizen or a resident, u
b. The entity has a link with the Philippines, and the entity is processing personal
information in the Philippines or even it the processing is outside the Philippines
as long as it is about Philippine citizens or residents such as, but not limited to,
the following:
1. A contract is entered in the Philippines;
2. A juridical entity unincorporated in the Philippines but has central
management and controFin the country; and
3. An entity that has a branch, agency, of ce or subsidiary in the Philippines
and the parent or af liate of the Philippine entity has access to personal
information; and
C. The in entity has other links in the Philippines such as, but not limited to:
1. The entity carries on business in the Philippines; and
2. The personal information was collected or held by an entity in the
Philippines DPA, Sec. 6).

C. PROCESSING OF PERSONAL AND SENSITIVE PERSONAL

INFORMATION; LAWFUL BASIS
Q: What is processing?
ANS: Processing refers to any operation or any set of operations performed upon
personal information including, but not limited to, the collection, recording, organization,
storage, updating or modi cation, retrieval, consultation, use, consolidation, blocking,
erasure or destruction of data (DPA, Sec. 3(j)).
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Q: What is Personal Information Processor?

ANS: It is any natural or juridical person quali ed to act as such under this Act to whom
a personal information controller may outsource the processing of personal data
pertaining to a data subject (DPA, Sec. 3(i)).

Q: What is Personal Information Controller?

ANS: It refers to a person or organization who controls the collection, holding, processing
or use of personal information, including a person or organization who instructs another
person or organization to collect, hold, process, use, transfer or disclose personal
information on his or her behalf (DPA, Sec.3(h)).

Q: Who are not to be considered as a Personal Information Controller?

ANS: The terms Personal Information Controller excludes:
1. A person or organization who performs such functions as instructed by another
person or organization; and
2. An individual who collects, holds, processes or uses personal information in
connection with the individual's personal, family or household affairs (Ibid).

Q: What are the differences on processing of personal information? MUTTVISJEWWOD

ANS: The difference on processing between personal information and sensitive personal
information is:

PI SPI & Privileged Information

Processing is ALLOWED PROHIBITED except in speci c
unless prohibited 6g law, cases allowed by law (DPA Sec. 13).
As tO
Processing
AND at least one the
criteria for lawful processing
exists (DPA, Secs. 11 &12).

Q: What are the criteria for lawful processing?

ANS: The processing of personal information shall be permitted only if not otherwise
prohibited by law, and when at least one of the following conditions exists: (CFLPNL)
1. The data subject has given his or her Consent,
2. The processing of personal information is necessary and is related to the
Ful llment of a contract with the data subject or in order to take steps at the
request of the data subject prior to entering into a contract;
3. The processing is necessary for compliance with a Legal obligation to which the
personal information controller is subject;
IS 4. The processing is necessary to Protect vitally important interests of the data
subject, including life and health;
5. The processing is necessary in order to respond to National emergency, to
comply with the requirements of public order and safety, or to ful ll functions of
public authority which necessarily includes the processing of personal data for
the ful llment of its mandate; or
6. The processing is necessary for the purposes of the Legitimate interests
pursued by the personal information controller or by a third party or parties to
whom the data is disclosed, except where such interests are overridden by
fundamental rights and freedoms of the data subject which require protection
under the Philippine Constitution (DPA, Sec. 12).
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Q: What are the exceptional cases when Processing of SPI is permitted?

(CEPA-ML)
ANS: The processing of sensitive personal information and privileged information shall
be prohibited, except in the following cases:
1. The data subject has given his or her Consent, speci c to the purpose prior to
the processing, or in the case of privileged information, all parties to the
exchange have given their consent prior to processing;
2. The processing of the same is provided for by Existing laws and regulations:
Provided. that such regulatory enactments guarantee the protection of the
sensitive personal information and the privileged information: Provided, further,
That the consent of the data subjects are not required by law or regulation
permitting the processing of the sensitive personal information or the privileged
information;
3. iS The processing is necessary to Protect the life and health of the data subject or
another person, and the data subject is not legally or physically able to express to
his or her consent prior to the processing;
4. The processing is necessary to Achieve the lawful and noncommercial
objectives of public organizations and their associations: Provided;
a. Such processing is only con ned and related to the bona de-members
of these organizations or their associations:
b. The sensitive personal information are not transferred to third parties:
and
C. That consent of the data subject was obtained prior to processing;
5. The processing is necessary for purposes of Medical treatment, is carried out
by a medical practitioner or a medical treatment institution, and an adequate
level of protection of personal information is ensured; of
6. The processing concerns such personal information as is necessary for the
protection of Lawful rights and interests of natural or legal persons in court
proceedings, or the establishment, exercise or defense, of legal claims, or when
provided to government or public authority (DPA,/Sec. 13).

D. GENERAL DATA PRIVACY PRINCIPLES

Q: What are the General Data Privacy Principles?
ANS: The processing of personal information shall be allowed, subject to:
1. Compliance with the requirements of this Act and other laws allowing disclosure
of information to the public; AND
2. Adherence to the principles of:
a. Transparency
b. Legitimate Purpose; and
C. Proportionality (DPA, Sec. 11).

Q: What is the Transparency Principle in Data Privacy?

ANS: The data subject must be aware of the nature, purpose, and extent of the processing
of his or her personal data, including the risks and safeguards involved, the identity of
personal information controller, his or her rights as a data subject, a and how these can be
exercised. Any information and communication relating to the processing of personal data
should be easy to access and understand, using clear and plain language (Implementing
Rules and Regulations (IRR) of DPA, Rule /V, Sec. 18(a)).

Q: What is the principle of Legitimate Purpose in Data Privacy?

ANS: The processing of information shall be compatible with a declared and speci ed
purpose which must not be contrary to law, morals, or public policy (IRR of DPA, Rule IV,
Sec. 18(6)).
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Q: What is Proportionality Principle in Data Privacy?

ANS: The processing of information shall be adequate, relevant, suitable, necessary, and
not excessive in relation to a declared and speci ed purpose. Personal data shall be
processed only if the purpose of the processing could not reasonably be ful lled by other
means (IRR of DPA, Sec. 18(c)).

E. RIGHTS OF DATA SUBJECT

Q: Who is a Data Subject?
ANS: Data subject refers to an individual whose personal information is processed (DPA,
Sec.3(c)).

Q: What are the rights of Data Subject?

ANS: The data subject is entitled to:

Right of Data
Subject Coverage

Data subject has a right to be informed whether personal data MUTIVINEWWOD

Right to be pertaining to him or her shall be, are being, or have been
Informed processed, including the existence of automated decision-making
and pro ling (DPA, Sec. 16(a)).

Furnished the information of the following before the entry of his

or her personal information into the processing system of the
personal information controller, or at the next practical
opportunity: (DPSR-MIPE)

1. escription of the personal information to be entered into

the system;
2. Purposes for which they are being or are to be processed;
3. Scope and method of the personal information processing;
4. The Recipients or classes of recipients to whom they are or
may be disclosed;
5. Methods utilized for automated access, if the same IS
allowed by the data subject, and the extent to which such
Right to be access is authorized;
Furnished 6. The Identity and contact details of the personal information
Information controller or its representative;
7. The Period for which the information will be stored; and
8. The Existence of their rights, i.e., to access, correction, as
well as the right to lodge a complaint before the
Commission.
Note: Noti cation under Sec. 16(b) of DPA shall not apply:
1. Should the personal information be needed pursuant to a
subpoena; or
2. When the collection and processing are for obvious
purposes, including when it is necessary for the
performance of or in relation to a contract or service or
when necessary or desirable in the context of an
employer-employee relationship, between the collector
and the data subject; or
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Right of Data
Coverage
Subject
3. When the information iS being collected and processed as
a result of legal obligation (DPA, Sec. 16(b)).

a Data subject has a right to reasonable access to, to upon demand,

the following:
1. Contents of his or her personal information that were
processed;
2 Sources from which personal information were obtained;
3. Names and addresses of recipients of the personal
information
4. Manner by which such data were processed;
5. Reasons for the disclosure of the personal information to
Right to
recipients;
Access Data
6. Information on automated processes where the data will or
likely to be made as the sole basis for any decision
signi cantly affecting or will affect the data subject;
7. Date when his or her personal information concerning the
data subject were last accessed and modi ed; and

The designation, or name or identity and address of the personal

information controller (DPA, Sec. 16(c)).

Right to dispute the inaccuracy or error in the personal data and

have the personal information controller correct it immediately and
accordingly, unless the request is vexatious or otherwise
unreasonable.

Right to Note: If the personal data has been corrected, the personal
Recti cation information controller shall:
1. Ensure the accessibility of both the new and the retracted
information; and
2 The simultaneous receipt of the new and the retracted
information by the intended recipients thereof:

Provided, that recipients or third parties who have previously

received such processed personal data shall be informed of its
inaccuracy and its recti cation, upon reasonable request of the
data subject (DPA, Sec. 16(d)).
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Right of Data
Coverage
Subject

Data subject shall have the right to object to the processing of his
or her personal data, including processing for direct marketing,
automated processing or pro ling.

The data subject shall also be noti ed and given an opportunity to

withhold consent to the processing in case of changes or any
amendment to the information supplied or declared to the data
subject in the preceding paragraph. the personal information
controller shall no longer process the personal data, unless:
Right to Object 1 . The personal data is needed pursuant to a subpoena;
2. The collection and processing are for obvious purposes,
including, when it is necessary for the performance of or in
relation to a to a contract or service to which the data subject is
a party, or when necessary or desirable in the context of an
employer-employee relationship between the collector and
the data subject; or
COMMERCIAL MYT

3. The information is being collected and processed as a result

of a legal obligation (IRR of DPA, Rule VIll. Sec. 34(6)).

The data subject shall have the right to suspend, withdraw or order or
the blocking, removal or destruction of his or her personal data from
the personal information controller's ling system.
1. May be exercised upon discovery and substantial proof of
any of the following:
a. Personal Data is incomplete, outdated, false or
unlawfully obtained;
Right to 0. The personal data is being used for purpose not
Erasure or authorized by the data subject;
Blocking C. The personal data iS no longer necessary for the
purposes for which they were collected;
d. The data subject withdraws consent or objects to the
processing, and there is no other legal ground or
overriding legitimate interest for the processing;
e. The personal data concerns private information that
s prejudicial to data subject, unless justi ed by
freedom of speech, of expression, or of the press or
otherwise authorized;
f. The processing is unlawful;
g. The personal information controller or personal
information processor violated the rights of the data
subject
2. Personal information controller may notify third parties who
have previously received such processed personal
information (IRR of DPA, Rule VIlI, Sec. 34 (e)).

The data subject shall be indemni ed for any damages sustained

Right to due to such inaccurate, incomplete, outdated, false, unlawfully
Damages obtained or unauthorized use of personal data, taking into account
any violation of his or her rights and freedoms as data subject (IRR
of DPA, Rule VIII, Sec. 34(e)).
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Right of Data
Subject
Coverage

Where his or her is personal data is processed by electronic means

and in a structured and commonly used format, the data subject
Right to Data shall have the right to obtain from the personal information
Portability controller a copy of such data in an electronic or structured format
that is commonly used and allows for further use by the data subject
(IRR of DPA, Rule VIII, Sec. 36).

SECURITIES REGULATIONS CODE (R.A. No. 8799)

Q: What is the declared policy of the Securities and Regulation Code?
ANS: The State shall;
1. Establish a socially conscious, free market that regulates itself
2. Encourage the widest participator of ownership in enterprises
3. Enhance the democratization of wealth 7
4. Promote the development of the capital market
5. Protect investorsA
6. Ensure full and fair disclosure about securities
5 CO N Minimize it not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free market
(R.A. No. 8799, álso known as Securities Regulation Code, Sec. 2, [hereinafter
SRC])

A. FRAMEWORK FOR REGULATING OF SECURITIES TRADING

TODA LO
Q: What is the primary purpose of regulating Securities in the Philippines?
ANS: The principal purpose of laws and regulations governing securities in the Philippines
is to protect the public against nefarious practices of unscrupulous brokers and salesmen
in selling securities and the imposition of worthless ventures and the sale of securities
which have no basis at all. Hence, securities law provides for a system of registration of
securities, registration of brokers® and dealers of securities, prohibitions against
manipulations and practices detrimentat to the investing public and measures for the
protection of investors (I| DIVINA, Commercial Law, supra at 1).

B. CONCEPT OF SECURITIES; HOWEY TEST

Q: What is "securities"?
ANS: "Securities" are shares, participation or interests in a corporation or in a commercial
enterprise or pro t-making venture and evidenced by a certi cate, contract, instrument,
whether written or electronic in aracter. It includes:
1. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-
backed securities;
2. Investment contracts, certi cates of interest or participation in a pro t sharing
agreement, certi cates of deposit for a future subscription;
3.
4. Fractional
Derivativesundivided interests
like options in oil, gas
and warrants; or other mineral rights;
DHE
5. Certi cates of assignments, certi cates of participation, trust certi cates, voting
trust certi cates or similar instruments;
6. Proprietary or nonproprietary membership certi cates in corporations; and
7. Other instruments as may in the future be determined by the Commission (SRC,
Sec. 3).
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Q: What are the kinds of securities?

ANS: The following are the kinds of securities;

Non-Exempt Exempt Securities Securities sold on exempt

Securities Transactions
These are securities Exempt securities may Exempt transactions are those
that cannot be sold or be sold or distributed that do not require registration
distributed within the within the Philippines, either because the law itself
Philippines unless not subject [o the exempts them therefrom or the
registered with the foregoing requirement. SEC nds that the
SEC. enforcement of the registration
requirement is not necessa1-y
in the public interest and for the
protection of investors by
reason of the amount involved
or the limited character of the
public offering.
(Il DIVINA, Commercial Law, supra at 13) LAW IVISHENWOO

Q: What is an investment contract a security?

ANS: An investment contract is a contract, transaction, or scheme where a person
invests his money in common enterprise and is led to expect pro ts primarily from the
efforts of others. The SR treats investment contracts as securities" that have to be
registered with the SEC before they can be distributed and sold (SEC v. Prosperity. Com
Inc., G.R. No. 164197, January 25, 2012).

Q: What is the "Howey Test"? (CTS-MCE)

ANS: For an investment contract to exist, the following elements referred to as Howey
Test must concur:
1. A Contract, Transaction, or Scheme;
2. An investment of Money;
1
3. Investment is made in Common enterprise;
4. Expectation of pro ts; and
5, Pro ts arising primarily from the Efforts of others (Id.).

Q: Kasaganahan.Com Inc (KCI) sold computer software and hosted websites

without providing internet service. To make a pro t, KCI devised a scheme in
which, for the price of Php 2,500 a buyer could acquire from it an internet website
of a 15-Mega Byte (MB) capacity. At the same time, by referring to KCI his own
down-line buyers, a rst-time buyer could earn commissions, interest in real estate
in the Philippines and in the United States, and insurance coverage worth
P50,000.00. To bene t from this scheme, a KCI buyer must enlist and sponsor at
least two other buyers as his own down-lines. These second tier of buyers could in
turn build up their own down-lines. For each pair of down-lines, the buyer-sponsor
received Php 5,000.00 commission. Apparently, the KCI patterned its scheme

E
from Gaya-gaya Ventures which stopped its operations after it received a cease-
and-desist order from the SEC. Disgruntled elements of GVI led a complaint with
the SEC agalnst PCI, alleging that the latter had taken over VI's operations. SEC
ruled that PCI's scheme constitutes an investment contract and should have rst
registered such contract or securities with the SEC. Is the SEC correct?
ANS: No. KCl's clients do not make such investments. They buy a product of some value
to them: an Internet website of a 15-MB capacity. The client can use this website to enable
people to have internet access to what he has to offer to them, say, some skin cream.
The buyers of the website do not invest money in KCI that it could use for running some
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business that would generate pro ts for the investors. The price of Php 2,500 is what the
buyer pays for the use of the website, a tangible asset that KCI creates, using its computer
facilities and technical skills. (ld.).

C. REGISTRATION OF SECURITIES
Q: What is the Registration Requirement under the SRC?
ANS: Securities shall not be sold or offered for sale or distribution within the Philippines,
without a registration statement duly led with and approved by the Commission. Prior to
such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser (SRC,
Sec. 8.1).

EXEMPT SECURITIES
Q: What securities are exempted from registration requirement?
ANS: The requirement of registration shall not as a general rule apply to any a of the
following classes of securities:
1. Any security issued or guaranteed by the Government of the Philippines, or by
any political subdivision or agency theréof, or by any person controlled or
supervised by, and acting as an instrumentality of said Government.
2. Any security issued or guaranteed by the government of any country with which
the Philippines maintains diplomatic relations, of by any state, province or
political subdivisión thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and content of disclosures
the Commission may prescribe.
3 NO
Certi cates issued by a receiver or by a trustee in bankruptcy duly approved by
the proper adjudicatory body,. .de
4. Any security on its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Of ce of the Insurance Commission, Housing
and Land Use Regulatory Board, or the Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock (SRC, Sec. 9.1).

EXEMPT TRANSACTIONS
MANLY
Q: What transactions are exempted from the registration requirement?
ANS: The requirement of registration shall not apply to the sale of any security in any of
the following transactions:
1. At any judicial sale, or sale by an executor, administrator, guardian or receiver
or trustee in insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any other similar lien
holder selling or offering for sale or delivery in the ordinary course of business
and not for the purpose of avoiding the provisions of this Code, to liquidate a
bona de debt, a security pledged in good faith as security for such debt.
3. An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the
owner's account, such sale or offer for sale, subscription or delivery not being
made in the course of repeated and successive transactions of a like character
by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security.
4. The distribution by a corporation, actively engaged in the business authorized
by Its articles of incorporation, of securities to its stockholders or other security
holders as a stock dividend or other distribution out of surplus.
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5. The sale of capital stock of a corporation to its own stockholders exclusively,

where no commission or other remuneration is paid or given directly or indirectly
in connection with the sale of such capital stock.
6. The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, where the entire mortgage together with all the
bonds or notes secured thereby are sold to a single purchaser at a single sale.
7. The issue and delivery of any security in of exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security
so surrendered has been registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of such conversion
fall within the class of securities entitled to registration under this Code. Upon
such conversion the par value of the security surrendered in such exchange
shall be deemed the price at which the securities issued and delivered in such
exchange are sold.
8. Broker's transactions, executed upon customer's orders, on any registered
Exchange or other trading market.
9. Subscriptions for shares of the capital stock of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital
MY TVISJEWWOD

stock under the Corporation Code, when no expense is incurred, or no

commission, compensation or remuneration is paid or given in connection with
the sale or disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital stock of a
q 50853880
corporation which should be subscribed before It dan be registered and duly
incorporated, or its authorized capital increased/
10. The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.
11. The sale of securities by an issuer to fewer than twenty (20) persons in the in
Philippines during any twelve-month period.
12. The sale of securities to any number of the following quali ed buyers:
a. Bank;
b. Registered investment house;
C. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or managed by a bank or
other persons authorized by the Bangko Sentral to engage in trust
functions;
e. Investment company; or
f. Such other person as the Commission may by rule determine as
quali ed buyers, on the basis of such factors as nancial sophistication,
net worth, knowledge, and experience in nancial and business matters,
or amount of assets under management (SRC, Sec. 10.1).

Q: How may a transaction be exempted from registration requirement?

ANS: Any person applying for an exemption under this Section, shall le with the
Commission a notice identifying the exemption relied upon on such form and at such time
as the Commission by rule may prescribe and with such notice shall pay to the
Commission a fee a equivalent to one-tenth (1/10) of one percent (1%) of the maximum
aggregate price or issued value of the securities (SRC, Sec. 10.3).
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ELECTRONIC COMMERCE ACT (R.A. No. 8729)

Q: What is the declared state policy of the Electronic Commerce Act (E-Commerce
Act)? (VIPDFEN)
ANS: It is hereby declared the policy of the State to recognize:
1. The of Vital role of information and communications technology (ICT) in nation-
building;
2. The need to create an Information-friendly environment which supports and
ensures the availability, diversity and affordability of ICT products and services;
3. The primary responsibility of the Private sector in contributing investments and
services in ICT;
4. The need to Develop, with appropriate training programs and institutional policy
changes, human resources for the information age, a labor force skilled in the
use of ICT and a population capable of operating and utilizing electronic
appliances and computers;
5. Its obligation to Facilitate the transfer and promotion of technology;
6. To Ensure network security, connectivity and neutrality of technology for the
national bene t; and
7. The Need to marshal, organize and deploy national information infrastructures,
comprising in both communications network and strategic information services,
including their interconnection to the global information networks, with the
necessary and approprjate legal, nancial, diplomatic and technical framework,
systems and facilities (R.AlP No. 8792, otherwise known as the "Electronic
Commerce Act", Sec. 2 [hereinafter ECA]).
cON
Note: In enacting the E-Commerce Act, Congress intended virtual or paperless writings
to be the functional equivalent and to have the same legal function as paper-based
documents (MCC Industrial Sales Corp. v. Ssangyong Corp, G.R No. 170633, October
17, 2007). CI
Q: What is the objective of the E-Commerce Act?
ANS: The E-Commerce Act aims to facilitate domestic and international dealings,
transactions, arrangements, agreements, contracts and exchanges and storage of
information through the utilization of electronio, optical and similar medium, mode,
instrumentality and technology to recognize the authenticity and reliability of electronic
data messages or electronic documents related to such activities and to promote the
universal use of electronic transactions in the government and by the general public (ECA,
Sec. 3).

Q: What is the sphere of application of the E-Commerce Act?

ANS: The E-Commerce Act shall apply to any kind of electronic data message and
electronic document used in the context of commercial and non-commercial activities to
include domestic and international dealings, transactions, arrangements, agreements,
contracts and exchanges and storage of information (ECA, Sec. 4).

Q: Who is charged with the promotion and development of E-Commerce in the

country?
ANS: The Department of Trade and Industry (DTI) along with relevant government
agencies shall direct and supervise the promotion and development of electronic
commerce in the country in (ECA, Sec. 29).
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LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES.

DOCUMENTS, AND SIGNATURES
Q: What is an Electronic Data Message?
ANS: An Electronic Data Message refers to information generated, sent, received or
stored by electronic, optical or similar means (ECA, Sec. 5 (c)).

Note: Text messages have been classi ed as "ephemeral electronic communication"

under Section 1(k), Rule 2 of the Rules on Electronic Evidence (Nuez v. Cruz-Apao, A.M.
No. CA-05-18-P [Formerly OCA I.P.I. No. 05-80-CA-P], April 12, 2005).

Q: What is the legal effect of Electronic Data Messages?

ANS: Information shall not be denied validity or enforceability solely on the ground that it
is in the form of an electronic data message purporting to give rise to such legal effect, or
that it is merely incorporated by reference in that electronic data message (ECA, Sec. 6).

Q: What is an Electronic Document?

ANS: An Electronic Document refers to information or the representation of information,
data, gures, symbols or other modes of written expression, described or however
represented, by which a right is established or an obligation extinguished, or by which a
COMMERCIAL LAW

fact may be proved and af rmed, which is received, recorded, transmitted, stored,
processed, retrieved or produced electronically (ECA, Sec. 5 (f).

Note: Under the Rules on Electronic Evidence, the term "electronic document" may be
used interchangeably with "electronic data message" (A.M. No. 01-7-01-SC, also known
as Rules on Electronic Evidence, Rule 2, Section 1(h), [hereinafter REE]).

Q: Is facsimile considered an electronic data message or an electronic document?

ANS: A facsimile transmission is not an electronic data message" or an "electronic
document." In an ordinary facsimile transmission, there exists an original paper-based
information or data that is scanned, sent through a phone line, and re-printed at the
receiving end. Ineluctably, the law's de nition of "electronic data message," which is
interchangeable with "electronic document" could not have included facsimile
transmissions, which have an original paper-based copy as sent and a oaper-based
facsimile copy as received (MCG Industrial Sales Corp. v. Ssangyong Corp., G.R. No.
170633, October 17, 2007).

Note: While Congress anticipated future developments in communications and computer

technology when it drafted the law, it excluded the early forms of technology, like
telegraph, telex and telecopy (except computer-generated faxes, which is a newer
development as compared to the ordinary fax machine to fax machine transmission),
when it de ned the term 'electronic data message" (Id.).

Q: What is the legal effect of Electronic Documents?

ANS: Electronic documents shall have the legal effect, validity or enforceability as any
other document or legal writing, and:
1. Agreement required to be in writing. Where the law requires a document to be
in writing, that requirement is met by an electronic document if the said
electronic document maintains its integrity and reliability and can be
authenticated so as tO be usable for subsequent reference, in that:
a. The electronic document has remained complete and unaltered, apart
from the addition of any endorsement and any authorized change, or any
change which arises in the normal course of communication, storage and
display; and
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b. The electronic document is reliable in the light of the purpose for which
it was generated and in the light of all relevant circumstances;
C. Electronic document meets the requirement that the document s in
writing under the immediately preceding rule whether the requirement
therein is in the form of an obligation or whether the law simply provides
consequences for the document not being presented or retained in its
original form; and
2. When Original is required. Where the law requires that a document be presented
or retained in its original form (Example: Original Document Rule), that
requirement is met by an electronic document if :
a. There exist a reliable assurance as to the integrity of the document from
the time when it was rst generated in its nal form; and
b. That document is capable of being displayed to the person to whom it is
to be presented: Provided, that no provision of this Act shall apply to vary
any and all requirements of existing laws on formalities required in the
execution of documents for their validity (ECA, Sec. 7).

Note: The E-Commerce Act does not vary the requirements of any existing laws on the
formalities required in the execution of documents for their validity. But, for evidentiary
purposes, an electronic dooument shall be the functional equivalent of a written document
under existing laws. The E-Commerce act also does not modify any statutory rule relating
to the admissibility of electronic data messages or electronic documents, except the rules
relating to authentication and best evidence (ld)

Q: What is an Electronic Signature?

ANS: An Electronic Signature refers to any distinctive mark, characteristic and/or sound
in electronic form, representing the identity. of a person and attached to or logically
associated with the electronic data message or electronic document or any methodology
or procedures employed or adopted by a person and executed or adopted by such person
with the intention of authenticating or approving an electronic data message or electronic
document (ECA, Sec. 5 (e)).

Q: What is the legal effect of Electronic Signature? (MRNA)

ANS: An electronic signature on the electronic document shall be equivalent O the
signature of a person on a written document if the signature is an electronic signature and
proved by showing that a prescribed procedure, not alterable by the parties interested in
the electronic document, existed under which:
1 . A Method is used to identify the party sought to be bound and to indicate said
party's access to the electronic document necessary for his consent or approval
through the electronic signature;
2. Said method is Reliable and appropriate for the purpose for which the electronic
document was generated or communicated, in the light of all circumstances,
including any relevant agreement;
3. It is Necessary for the party sought to be bound, in order to proceed further with
the transaction, to have executed or provided the electronic signature; and
4. The other party is Authorized and enabled to verify the electronic signature and
to make the decision to proceed with the transaction authenticated by the same
(ECA, Sec. 8).

Q: What are the presumptions relating to Electronic Signatures?

ANS: In any proceedings involving an electronic signature, it shall be presumed that:
1. The electronic signature is the signature of the person to whom it correlates;
and
2. The electronic signature was af xed by that person with the intention of signing
or approving the electronic document unless:
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a. The person relying on the electronically signed electronic document

knows or has notice of defects in or unreliability of the signature; or
b. The reliance on the electronic signature is not reasonable under the
circumstances (ECA, Sec. 9).

Q: What are the requisites to determine if the information is "original" for legal
purposes?
ANS: Where the law requires information to be presented or retained in its original form,
that requirement is met by an electronic data message or electronic document if:
1. the integrity of the information from the time when it was rst generated in its nal
form, as an electronic data message or electronic document is shown by evidence
aliunde or otherwise; and
2. where it is required that information be presented, that the information is capable
of being displayed to the person to whom it is to be presented.

Note: These Applies whether the requirement therein is in the form of an obligation or
whether the law simply provides consequences for the information not being presented
or retained in its original form (ECA, Sec. 10).

Q: How is the integrity of an electranic document presented as original alleged to

MYT IVISdEWWOD

be retained in its original form assessed?

ANS: The criteria for assessing integrity shall be;
1. whether the information has remained complete and unaltered, apart from the
addition of any endorsement and any change which arises in the normal course
of communication, storage and display; and
2. the standard of reliability required shall be assessed in the light of the purpose
for which the information was generated and ín the light of all the relevant
circumstances (Id ) e

Q: How are Electronic Data Messages and Electronic Documents authenticated?

ANS: Electronic documents, electronic data messages and electronic signatures, shall be
authenticated by demonstrating, substantiating and validating a claimed identity of a user,
device, or another entity in an information or communication system (ECA, Sec. 11).

The Supreme Court provided that before any private electronic document offered as
authentic is received in evidence, its authenticity must be proved by any of the following
means:
1. By evidence that it had been digitally signed by the person purported to have
signed the same;
2. By evidence that other appropriate security procedures or devices as may be
authorized by the Supreme Court or by law for authentication of electronic
documents were applied to the document; or
3. By other evidence showing its integrity and reliability to the satisfaction of the
Judge (REE, Rule 5, Sec. 2).

Note: The person seeking to introduce an electronic document in any legal proceeding
has the burden of proving its authenticity (ECA, Sec. 11 and REE, Rule 5, Sec. 1).

Q: How is the integrity of the Information and Communication System established?

ANS: In the absence of evidence to the contrary, the integrity of the information and
communication system in which an electronic data message or electronic document is
recorded or stored may be established in any legal proceeding-
1. By evidence that at all material times the information and communication system
or other similar device was operating in a manner that did not affect the integrity
of the electronic data message or electronic document, and there are no other
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reasonable grounds to doubt the integrity of the information and communication

system;
2. By showing that the electronic data message or electronic document was recorded
or stored by a party to the proceedings who is adverse in interest to the party using
it: or
3. By showing that the electronic data message or electronic document was recorded
or stored in the usual and ordinary course of business by a person who is not a
party to the proceedings and who did not act under the control of the party using
the record (ECA, Sec. 11).

Q: What are the rules on the Admissibility and Evidential Weight of Electronic Data
Messages or Electronic Documents?
ANS: In any legal proceedings, nothing in the application of the rules on evidence shall
deny the admissibility of an electronic data message or electronic document in evidence: in
1. On the sole ground that it is in electronic form; or
2. On the ground that it is not in the standard written form, and the electronic data
message or electronic document meeting, and complying with the requirements
under Sections 6 or hereof shalt be the best evidence of the agreement and
transaction contained-therein.

Note: In assessing the evidential weight of an electronic data message or electronic

document, the reliability of the manner in which t was generated, stored or
communicated, the reliability of the manner in which its originator was identi ed, and other
relevant factor shall be given due regard (E-COMMERCE ACT, Sec. 12).

B. OBLIGATION OF CONFIDENTIALITY
A NETtITZZ:
Q: What is the obligation of con dentiality?... USO
ANS: Except for the purposes authorized under the E; Commerce Act, any person who
obtained access to any electronic key, electronic data message or electronic document,
book, register, correspondence, Information, or other material pursuant to any powers
conferred under this Act, shall not convey to r r share the same with any other person (E-
COMMERCE ACT, Sec. 32).

ACCESS DEVICES REGISTRATION ACT

(R. A. No 8484 AS AMENDED BY R.A. No 11449)
Q: What is the declared State policy of the Access Devices Registration Act?
ANS: The State recognizes the recent advances in technology and the widespread use
of access devices in commercial transactions. Toward this end, the State shall protect the
rights and de ne the liabilities of parties in such commercial transactions by regulating
the issuance and use of access devices.

The State likewise acknowledges that the advances in information technology on access
devices have been exploited by criminals and criminal syndicates in perpetrating
fraudulent activities that ultimately undermine the trust of the public in the banking
industry. Due to this deleterious effect on the economy, the State declares that the
commission of a crime using a access devices is a form of economic sabotage and a
heinous crime and shall be punishable to the maximum level allowed by law (R.A. 8484
also known as Access Devices Registration Act of 1998, Sec. 2, as amended by R.A. No. 2,
11449, [hereinafter Registration Act of 1998]).
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A ACCESS DEVICES
Q: What is Access Devices under the Registration Act of 1998?
ANS: Access Devices means any card, plate, code, account number, electronic serial
number, personal identi cation number, or other telecommunications service, equipment,
or instrumental identi er, or other means of account access that can be used to obtain
money, good, services, or any other thing of value or to initiate a transfer of funds (other
than: transfer originated solely by paper instrument) (Registration Act of 1998, Sec. 3(a)
as amended).

B. PROHIBITED ACTS
Q: What acts constitutes Access Device Fraud and are unlawful?
ANS: The following acts shall constitute access device fraud and are hereby declared to
be unlawful:
1. Producing, using, traf cking in one or more counterfeit access devices;

Note: "Counterfeit Access Device" means any access device that is counterfeit,
ctitious, altered, or forged, or an identi able component of an access device or COMMERCIAL LAW

counterfeit access device or any fraudulent copy or reproduction of a valid access device
(Regulations Act of 1998, Sec. 3(c) as amended) s

2. Trafficking in one or more unauthorized access devices or access devices

fraudulently applied for;

Note: "Traf cking" means transferring, or otherwise disposing of, to another, or

obtaining control of, with intent to transfer or dispose of (Regulations Act of 1998, Sec.
3(1). N
3. Using, with intent to defraud, an unauthorized access device,
4. Using an access device fraudulently applied for, . .

Note: "Access Device Fraudulently Applied For" means any access device that was
applied for or issued on account of the use of falsi ed document, false information,
ctitious identities and addresses, or any form of false pretense or misrepresentation
(Regulations Act of 1998, Sec. 3(d);

5. Possessing one or more counterfeit access devices or access devices

fraudulently applied for;

Note: "Counterfeit Access Device" means any access device that is counterfeit,
ctitious, altered, or forged, or an identi able component of an access device or
counterfeit access device (Regulations Act of 1998, Sec 3(b)).

6. Producing, traf cking in, having control or custody of, or possessing device-
making or altering equipment without being in the business or employment,
which lawfully deals with the manufacture, issuance, or distribution of such
equipment;

Note: "Device Making or Altering Equipment" means any equipment, mechanism or

impression designed or primarily used for making or altering or reencoding an access
device or a counterfeit access device (Registration Act of 1998, Sec. 3(g)).
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7. Inducing, enticing, permitting or in any manner allowing another, for

consideration or otherwise to produce, use, traf c in counterfeit access devices,
unauthorized access devices or access devices fraudulently applied for;
8. Multiple imprinting on more than one transaction record, sales slip or similar
document, thereby making it appear that the device holder has entered into a
transaction other than those which said device holder had lawfully contracted
for, or submitting, without being an af liated merchant, an order to collect from
the issuer of the access device, such extra sales slip through an af liated
merchant who connives therewith, or, under false pretenses of being an
af liated merchant, present for collection such sales slips, and similar
documents;
9. Disclosing any information imprinted on the access device, such as, but not
limited to, the account number or name or address of the device holder, without
the latter's authority or permission;
10. Obtaining money or anything of value through the use of an access device, with
intent to defraud or with intent to gain and eeing thereafter;
11. Having in one's possession, without authority from the owner of the access
device or the access device company; an access device, or any material, such
as slips, carbon paper, or any other medium, on which the access device is
written, printed, embossed; or otherwise indicated
12. Writing or causing to be written on sales slips, approval numbers from the issuer
of the access device of the fact of approval, where in fact no such approval was
given, or where, given, what is written, is deliberately different from the
approval actually given;
13. Making any alteration, without the access device holder's authority, of any
amount of other information written on the sales slip,
14. Effecting transaction, with one or more access devices issued to another person
or persons, to receive payment or any other thing of value;
15. Without the authorization of the issuer of the access device, soliciting a person
for the purpose of In
a. offering an access device;
b. selling information regarding or an application to obtain an access
device; or Do age

16. Without the authorization of the credit card system member or its agent, causing
or arranging for another person tor present to the member or its agent, for
payment, one or more evidence or records of transactions made by credit card;

Note: "Credit Card" means any card, plate, coupon book, or other credit device existing
for the purpose of obtaining money, goods, property, labor or services or anything of value
on credit (Regulation Act of 1998, Sec. 3(f)).

17. Skimming, copying or counterfeiting any credit card, payment card or debit card,
and obtaining any information therein with the intent of accessing the account
and or operating the same whether or not cash is withdrawn or monetary injury is
caused by a perpetrator against the account holder or the depositary bank;
18. Production or possession of any software component such as programs,
application, or malware, or any hardware component such as skimming device
or any electronic gadget or equipment that is used to perpetrate any of the
foregoing acts;
19. Accessing, with or without authority, any application, online banking account,
credit card account, atm account, debit card account, in a fraudulent manner,
regardless of whether or not it will result in monetary loss to the account holder;
and
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Note: "Online Banking" refers to the use of the internet by bank customers in order to
manage their bank accounts and perform account transactions (Regulations Act, Sec. 3,
as amended).

20. Hacking refers to the unauthorized access into or interference in a computer

system/server, or formation and communication system, or any access in
order to corrupt, alter, steal, or destroy using a computer or other similar
information and communication devices without the knowledge and consent of
the owner of the computer or information and communication system, including
the introduction of computer viruses and the like resulting in the corruption,
destruction, alteration, theft, or loss of electronic data messages or electronic
documents (Regulation Act of 1998, Sec. 9 as amended).

Q: Y alleged that he saw X ehaved suspiciously as the latter kept looking around
while transacting with an ATM as if he was being watched. Shortly, X removed the
card reader and the Personal Identi cation Number (PIN) pad cover, with an
attached camera (skimming device) from the ATM and exited the booth. Y further
narrated that as X stepped out of the booth, he saw the latter carrying the skimming
device and on the act of putting the PIN pad cover inside his bag. Y approached
and restrained X and place him under citizen's arrest for violation of RA 8484 for MUTTVISHENWOO

allegedly having in his possession a Device Making or Altering Equipment. RTC

found X guilty on the ground that the Access Device Fraud under R.A. No. 8484 is
mala prohibita crime hence, lack of criminal intent and good faith are not exempting
circumstances. Is the RTC correct in convicting X?
ANS: No, even if a violation of Sec. 9 (f) of R.A. No. 8484 is mala prohibita, it must be
established that X had the volition or intent to commit the prohibited act, which is the
possession of the device-making or altering equipment. Before the presumption of intent
to defraud arises under R.A. No. 8484, it must rst be established by the prosecution that
the offender had possession, control, or custody of the illicit device under the law. Hence,
even when criminal intent is not required in a mala prohibita crime, an offender under Sec.
9 (f) of R.A. No. 8484 must, at the very least, have the animus possidendi of the device-
making or altering equipment. Indeed, while If is not necessary that the prosecution prove
that the accused has an underlying evil intent to violate the law, it must be proved that the
accused had the consciousness, willingness, or desire in possessing the prohibited
equipment. It is not enough that the offender had physical possession of the said
equipment, there must be intent on the part of the offender to possess the same (Torres to
v. People, G.R. No. 255262, January 18, 2023).

Q: X was found in possession of CB Credit Card which bears the name "Juan Dela
Cruz" which he used to purchase branded shoes at F Mall. Later on, it was proven
that the credit card was a counterfeit. Is he liable under R.A. No. 8484?
ANS: Yes, under Section 9(a) and (e) of Republic Act No. 8484, the possession and use
of an access device is not illegal. Rather, what is prohibited is the possession and use of
counterfeit access device. Therefore, the corpus delicti of the crime is not merely the
access device, but also any vidence that proves that it is counterfeit. Herein, the access
device used by X was a proven to be a counterfeit (Cruz v. a People, G.R. No. 210266,
June 7, 2017).
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Q: Alice B. fraudulently obtained from Lisa H. various documents which re ects

latter's identity. Later on, Alice applied for credit card under Lisa's name and
personal circumstances. When the credit card was delivered by a messenger, Alice
presented her two identi cation cards bearing her photo with the Lisa' name and
signature forged therein. She then signed the acknowledgement receipt as
evidence that the envelope containing the credit card referred therein was
delivered. The messenger then introduced himself as an NBI agent and
apprehended Alice and was later on charged with violation of Section 9(e), R.A. No.
8484 for "possessing a counterfeit access device or access device fraudulently
applied for." Alice contends that she was never in possession of the subject cr
card because she was arrested immediately after signing the acknowledgement
receipt. Thus, she did not yet know the contents of the envelope delivered and had
no control over the subject credit card. Is Alice correct?
ANS: No, Alice materially held the envelope containing the credit card with the intent to
possess. Contrary to Alice contention that the credit card never came into her possession
because it was only delivered to her, the above narration shows that she, in fact, did an
active part in acquiring possession by presenting the identi cation cards purportedly
showing her identity as Lisa H. Certainly, she had the intention to possess the same.

Note: R.A. 8484 does not de ne the word "possession", thus the Supreme Court use the

i
de nition under Article 523 of the Civil Code that is, is, "possession is the holding of a
thing or the enjoyment of a‹right." The acquisition of possession involves two elements:
the corpus or the matérial holding of the thing, and the animus possidendi or the intent to
possess it. Animus possidendi is a state of mind, the presence or determination of which
is largely dependent on attendant events in each case. It may be inferred from the prior

if ‡8363 Un ⅔8 LO
r contemporaneous acts of the accused, as well as the surrounding circumstances
(Soledad v. People, G.R. No. 184274, February 23, 2011). pose cond

C. FRUSTRATED AND ATTEMPTED ACCESS DEIVCE FRAUD

Q: How is conspiracy to commit Access Device Fraud committed?
ANS: If two (2) or more persons conspire to commit any of the offenses listed in Section
9 and one or more of such persons does any act to effect the object of the conspiracy,
each of the parties to such conspiracy shall be punished as in the case of the doing of the
act. the accomplishment of which is the object of such conspiracy (Registration Act of
1998, Sec. 11).

Q: How is frustrated and Attempted Access Devices Fraud committed?

ANS: Frustrated and attempted access devices fraud are committed as follows:

Frustrated Access Device Attempted Access Device

Fraud Fraud
a. Any Person; a. Any Person;
b. who Performs all the acts b. who Commences the
of execution which would commission of any of the
produce any of the unlawful acts directly by
unlawful acts; overt acts; and
Elements but which nevertheless C. does Not perform all the acts
does Not produce it; of execution which would
d. by reason of causes produce the said acts;
Independent of the will of d. by reason of some Cause or
said person (PPNI). accident other than said
person's own spontaneous
desistance (PCNC).
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Punished with two-thirds (2/3) Punished with one half (1/2) of

of the ne and imprisonment the ne and imprisonment
provided for the consummated provided for the consummated
Penalty offenses listed in said section. offenses listed in the said
section.
(Registration Act of 1998, Sec. 12)

PHILIPPINE COMPETITION ACT (R.A. No. 10667)

Q: What are the declared policies of Philippine Competition Act?
ANS: The state recognizes:
1. That the past measures undertaken to liberalize key sectors in the economy
need to be reinforced by measures that safeguard competitive conditions:
2. That the provision of equal opportunities to all:
a. Promotes entrepreneurial spirit;
b. Encourages private investments;
C. Facilitates technology development; and
d. Transfer and enhances resource productivity.
MUTTVIDEWWOD

Pursuant to the Constitutional mandate that the state shall regulate or prohibit monopolies
when public interest so requires and that no combinations in restraint of trade or unfair
competition shall be allowed; the State shall (EPEPP)
1. Enhance economic ef ciency and Promote free and fair competition in trade,
industry and all commercial economic activities, as well as Establish a National
Competition Policy to be implemented by the Government of the Republic of the
Philippines and all of its political agencies as a whole;
2. Prevent economic concentration which will control the production, distribution,
trade, or Industry that will unduly sti e competition, lessen, manipulate or
constrict the discipline of free markets; and
3. Penalize all forms of anti-competitive agreements, abuse of dominant position
and anti-competitive mergers and acquisitions, with the objective of protecting
consumer welfare and advancing domestic and international trade and
economic development (R.A. No. 10667, also known as Philippine Competition
Act Sec. 2 [hereinafter PCA],).

Q: What is the constitutional basis of the PCA?

ANS: Section 19 of Article XII of the 1987 Constitution provides: "The State shall regulate
or prohibit monopolies when the public interest so requires. No combinations in restraint
of trade or unfair competition shall be allowed." (CONST. Article XII, Section 19)

Q: What is the scope and application of PCA?

ANS: PCA shall be enforceable against:

Local Trade International Trade

Any person or entity engaged in any Having direct, substantial and
trade, industry and commerce in the reasonably foreseeable effects in trade,
Republic of the Philippines. industry, or commerce in the Republic of
the Philippines, including those that
result from acts done outside the
Republic of the Philippines.
(PCA, Sec. 3).
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Q: What is an entity?
ANS: Entity refers to any person, natural or juridical, sole proprietorship, partnership,
combination or association in any form, whether incorporated or not, domestic or foreign,
including those owned or controlled by the government, engaged directly or indirectly in
any economic activity (PCA, Sec.4(a)).

Q: What activities are excluded from the application of PCA?

ANS: This Act shall not apply to the combinations or activities of workers or employees
nor to agreements or arrangements with their employers when such combinations,
activities, agreements, or arrangements are designed solely to facilitate collective
bargaining in respect of conditions of employment (Id.).

Q: What is the role of Philippine Competition Commission?

ANS: The Philippine Competition Commission (PCC) is an independent quasi-judicial
body created to implement the national competition policy and attain the objectives and
purposes of PCC (PCA, Sec. 5).

PC institutes a regulatory environment for market competition to:

1. Protect Consumer welfare by giving consumer access to a wider choice over
goods and services at lower prices; and
2. Promote competitive business and encourage market players to be more
ef cient and innovative. Competition also bene ts small and medium business
(IL DIVINA, Commercial Law supra at 605)
oka
Q: What is the Relévant Market?... (D
ANS: Relevant Market refers to the market in -which a particular good or service S sold
and which is a combination of the relevant product market and the relevant geographic
market, de ned as follows:

Relevant Product Market Relevant Geographic Market

Comprises all those goods and/or Comprises the area in which the entity
services are regarded as concerned is involved in the supply and
interchangeable or substitutable by demand of goods and services, in which
the consumer or the customer, by reason the conditions of competition are
of the goods and/or services' suf ciently homogenous and which can
characteristics, their prices and their be distinguished from neighboring areas
intended use; (PCA, Section 4(k)(1)) because the conditions of competition
are different in those areas (PCA,
Section 4(k)(2))

Q: What are the factors that the PCC shall consider in determining relevant market?
ANS: The following factors, among others, affecting the substitutability among goods or
services constituting such market and the geographic area delineating the boundaries of
the market shall be considered:
1. The possibilities of substituting the goods or services in question, with others of
domestic or foreign origin, considering the technological possibilities, extent to
which substitutes are available to consumers and time required for such
substitution;
2. The cost of distribution of the good or service, its raw materials, its supplements
and substitutes from other areas and abroad, considering freight, insurance,
import duties and non-tariff restrictions; the restrictions imposed by economic
agents or by their associations; and the time required to supply the market from
those areas;
3. The cost and probability of users or consumers seeking other markets; and
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4. National. local or international restrictions which limit access by users or

consumers to alternate sources of supply or the access of suppliers to alternate
consumers (PCA, Sec. 24).

Q: What are the prohibited acts under the PCA?

ANS: The following are expressly prohibited under the PCA:
Anti-Competitive Agreements (Sec. 14)
2. Abuse of Dominant Position (Sec. 15)
3. Prohibited Mergers and Acquisition (Sec. 16).

A, ANTI-COMPETITIVE AGREEMENTS
Q: What is an "agreement" under the PCA?
ANS: refers to any type or form of contract, arrangement, understanding, collective
recommendation, or concerted action, whether formal or informal, explicit or tacit, written
or oral (PCA, Sec. 4(b)).

Q: What are the anti-competitive agreements?

ANS: Anti-Competitive Agreements are agreements between and among competitors COMMERCIAL LAW

that substantially prevent, restrict or lessen competition which can be categorized as

follows:

Not Considered
Violations Per
Se
Violations Catch All Provision
Per Se
Provision Section 14(a) Section 14(b) Section 14(c)
Inherently Prohibited only if Agreements other than
illegal and no its object or effect those speci ed in (a) and
further inquiry to is to substantially (b) of this section which
their actual preventing, have the object or effect of
effect on the restricting or substantially preventing,
market or the lessening restricting or lessening
intentions of the competition. competition shall also be
parties who prohibited
Meaning engaged in the
illegal act or Note: Agreements which
agreement is contribute to improving the
necessary production or distribution of
goods and services or to
promoting technical or
economic progress, while
allowing consumers a fair
share of the resulting
bene ts, may not
necessarily be deemed a
violation
Examples Price Fixing, Bid Market Sharing,
Rigging, Cover
Output Limitation,
N/A
Bidding and Bid Market Allocation
Rotation and Cartel.
(PCA, Section 14; AQUINO & SUNDIANG, , Reviewer on Commercial Law, supra at 442-
443)
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Q: What is the Single Economic Unit Rule?

ANS: When the agreement is between related companies, it is not considered anti-
competitive agreement (1 VILLANUEVA-CASTRO, Commercial Law Recap, supra at
262).

An entity that controls, is controlled by, or is under common control with another entity or
entities, have common economic interests, and are not otherwise able to decide or act
independently of each other, shall not be considered competitors for purposes of this
section (PCA, Sec. 14).

Q: What is control under PCA?

ANS: Control refers to the ability to substantially in uence or direct the actions or
decisions of an entity, whether by contract, agency or otherwise (PCA, Sec. 4(f)).

Q: When is control presumed to exists?

ANS: Control is presumed to exist when:
1. When the parent owns directly or indirectly, through subsidiaries, more than one
half (1/2) of the voting power of arr entity, unless in exceptional circumstances,
it can clearly be demonstrated that such ownership does not constitute control;

2.
and
A
When an entity owns one half (1/2) or less of the voting power of another entity
when:
a. There & power over more than one half (1/2) of the voting rights by virtue
of an agreement with investors,
b. There is power to direct or govern the nancial and operating policies of
the entity under a statute or agreement;
C. There is power to appoint or remove the majority of the members of the
board of directors or equivalent governing body
d. There is power to cast the majority votes at meetings of the board of
directors or equivalent governing body;
e. There exists ownership over or the right to use all or a signi cant part of
the assets of the entity a N
f. There exist rights or contracts which confer decisive in uence on the
decisions of the entity (PCA, Sec. 25)
Q: What are the anti-competitive agreements which are considered violations per
se?
ANS: The following agreements, between or among competitors, are per se prohibited:

1. Restricting competition as to price, or components thereof, or other terms of

trade:
2. Fixing price at an auction or in any form of bidding including cover bidding, bid
suppression, bid rotation and market allocation and other analogous practices
of bid manipulation (PCA, Sec. 14(a))

Agreement Meaning
Cover Bidding Act of tendering an arti cially high price for a contract, on
Courtesy Bidding the assumption that the tender will not be accepted.
Bid Rotation Occurs when bidders take turns at being the winning bidder
Occurs when one (or more) bidders) deliberately stay out
Bid Suppression
of a bidding process so a bidder is guaranteed to win.
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Note: The foregoing scenarios create the false impression that a bidding for the
procurement of goods or services occurred when in fact, this was merely arti cial. The
objective of bidding, which is to elicit the best price, was therefore not achieved (1
VILLANUEVA-CASTRO, Commerci Law Recap (2020), p. 260-261 [hereinafter, 1
VILLANUEVA-CASTRO, Commercial Law Recap).

Q: What agreements are not considered violations per se?

ANS: The following agreements, between or among competitors which have the object
or effect of substantially preventing, restricting or lessening competition shall be
prohibited:
1. Setting, limiting, or controlling production, markets, technical development, or
investment (Supply Restriction);
2. Dividing or sharing the market, whether by volume of sales or purchases,
territory, type of goods or services, buyers or sellers or any other means (Market
Sharing).

Q: What is Supply Restriction or Output Limitation?

ANS: This is an agreement by two or more competing business to set or limit production
levels and create an arti cial supply shortage, thereby raising prices. Similar form of anti-
competitive agreements include restrictions in markets, technical development and MUTIVIOHEWWOO

investments (I| DIVINA supra at 611)

Example: When competitors agree to limit the production or volume or type of particular
goods, like medicine needed to minimize the risk of contagious illness, the arrangement
would be anti-competitive (1 VILLANUEVA-CASTRO, Commercial Law Recap, supra at
261).

Q: What is Market Sharing or Market Allocation?

ANS: This is a collusive agreement by two or more competing businesses to divide or
allocate the market. Market sharing not only include territories, but also customers,
volume of sales, or purchases, and type of goods or services, among other considerations
(I DIVINA supra at 611)

Example: This happens when competitors A and B agree to divide Barangay PCA market
to and to stay out of each other so as to eliminate competition (1 VILLANUEVA CASTRO.
Commercial Law Recap, supra at 261).

Q: What is a cartel?
ANS: A cartel involves business in the same industry colluding with one another to
substantially prevent, restrict, or lessen competition by entering into agreements to x
prices, rig bids, restrict output and allocate markets, among others (Il DIVINA,
Commercial Law supra at 611).

Q: How does the PCC assess whether anti-competitive agreements or conduct

have taken place?
ANS: In determining whether anti-competitive agreement or conduct has been committed,
the Commission shall:
1. De ne the relevant market allegedly affected by the anticompetitive agreement
or conduct, following the principles of Relevant Market;
2. if Determine if there is actual or potential adverse impact on competition in the
relevant market caused by the alleged agreement or conduct, and if such impact
is substantial and outweighs the actual or potential ef ciency gains that result
from the agreement or conduct;
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3. Adopt a broad and forward-looking perspective, recognizing future market

developments, any overriding need to make the goods or services available to
consumers, the requirements of large investments in infrastructure, the
requirements of law, and the need of our economy to respond to international
competition, but also taking account of past behavior of the parties involved and
prevailing market conditions;
4. Balance the need to ensure that competition is not prevented or substantially
restricted and the risk that competition ef ciency, productivity, innovation, or
development of priority areas or industries in the general interest of the country
may be deterred by overzealous or undue intervention; and
5. Assess the totality of evidence on whether it is more likely than not that the entity
has engaged in anti-competitive agreement or conduct including whether the
entity's conduct was done with a reasonable commercial purpose such as but
not limited to phasing out of a product or closure of a business, or as a
reasonable commercial response to the market entry or conduct of a competitor.

Q: What is Nolo Contendere?

ANS: An entity charged in a criminal proceeding of anti-competitive agreement per se or
not per se of the PCA may enter a plea of Nolo Contendere, in which he does not accept
nor deny responsibility for the charges but agrees to accept punishment as if he had
pleaded guilty. The plea cannot be used against the defendant entity to prove liability in
a civil suit arising fromAm
the criminal action V another cause of action
10 nor in

Note: Plea of Nolo Contendere may be entered only up to arraignment and subsequently,
only with the permission of the court -which shall accept it only after weighing its effect on
the parties, the public and the administration of justice (PCA, Sec, 36).

B. ABUSE OF DOMINANT POSITION

NOON
Q: What is dominant position® PCA?
ANS: It refers to a position of economic strength that an entity or entities hold which
makes it capable of controlling the relevant market independently from any or
combination of the following: competitors, customers, suppliers, or consumers (PCA, Sec.
4(g)).
MANY
Q: Is having dominant position by Itself a violation?
ANS: No, dominant position by itself is not a violation; an entity that is big and dominant
does not violate the law. It is abuse of dominant position that is prohibited (AQUINO &
SUNDIANG, Reviewer on Commercial Law, supra at 443).

Q: When is having dominant position in the market not illegal?

ANS: The acquisition, maintenance and increase of market does not violate the PCA if:
1. It is acquired through legitimate means, such as having superior skills, rendering
superior service, producing or distributing better quality products, having
business acumen, and using and enjoying intellectual property rights; and
2. It does not substantially prevent, restrict, or lessen competition in the market
(PCC Guidelines on Business 2021, (02052021)).

Q: What are the criteria the PCC should consider in determining whether an entity
has market dominant position for the purposes of PCA?
ANS: In determining whether an entity has market dominant position for purposes of this
Act, the Commission shall consider the following:
1. The share of the entity in the relevant market and whether it is able to x prices
unilaterally or to restrict in supply in the relevant market;
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2. The existence of barriers to entry and the elements which could foreseeably
alter both said barriers and the supply from competitors;
3. The existence and power of its competitors;
4. The possibility of access by its competitors or other entities to its sources of
inputs;
5. The power of its customers to switch to other goods or services;
6. Its recent conducts; and
7. Other criteria established by the regulations of this Act (PCA, Sec. 27).

Q: When there is rebuttable presumption that there exists a dominant position in

the market?
ANS: There shall be a rebuttable presumption of market dominant position if the market
share of an entity in the relevant market is at least fty percent (50%), unless a new market
share threshold is determined by the Commission for that particular sector (Id).

Q: What is conduct?
ANS: Conduct refers to any type or form of undertaking, collective recommendation,
independent or concerted action or practice whether formal or informal (PCA, Sec. 4(c)).

Q: What are the instances that is considered abuse of dominant position?

MUTTVIDEWWOS

ANS: It shall be prohibited for one or more entities to abuse their dominant position by
engaging in conduct that would substantially prevent, restrict or lessen competition:
1. Predatory Pricing Selling goods or services below cost with the object of
driving competition out of the relevant market;
2. Tying Agreement - Imposing barriers to entry or committing acts that prevent
competitors from growing within the market in an anticompetitive manner except
those that develop in the market as a result of or arising from a superior product
or process, business acumen, or legal rights op laws,
3. Making a transaction subject to, acceptance by the other parties of other
obligations which. by their nature or according to commercial usage, have no
connection wwth the ansaction;
4. Setting prices or other terms or conditions that discriminate unreasonably
between customers or sellers of the same goods or services, where such
customers or sellers are contemporaneously trading on similar terms and
conditions, where the effect may be to lessen competition substantially

Provided, that the following shall 'be considered price differentials:

a. Socialized pricing for less fortunate sector of the economy;
b. Price differential which reasonably or approximately re ect differences
in the cost of manufacture, sale, or delivery resulting from differing
methods, technical conditions, or quantities in which the goods or
services are sold or delivered to the buyers or sellers;
C. Price differential or terms of sale offered in response to the competitive
price of payments, services or changes in the facilities furnished by a
competitor; and
d. Price changes in response to changing market conditions, marketability
of goods or services, or volume;

5. Imposing restrictions on the lease or contract for sale or trade of goods or

services concerning where, to whom, or in what forms goods or services may
or be sold or traded, such as xing prices, giving preferential discounts or rebate
upon such price, or imposing conditions not to deal with competing entities,
where the object or effect of the restrictions is to prevent, restrict or lessen
competition substantially:
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Provided, that nothing contained in this Act shall prohibit or render unlawful:
a. Permissible franchising, licensing, exclusive merchandising or
exclusive distributorship agreements such as those which give each
party the right to unilaterally terminate the agreement; or
b. Agreements protecting intellectual property rights, con dential
information, or trade secrets;
6. Making supply of particular goods or services dependent upon the purchase of
other goods or services from the supplier which have no direct connection with
the main goods or services to be supplied
7. Monopsony - Directly or indirectly imposing unfairly low purchase prices for the
goods or services of, among others, marginalized agricultural producers,
sherfolk, micro-, small-, medium-scale enterprises, and other marginalized
service providers and producers
8. Directly or indirectly imposing unfair purchase or selling price on their
competitors, customers, suppliers or consumers, provided that prices that
develop in the market as a result of or due to a superior product or process,
business acumen or legal rights or laws shall not be considered unfair prices;
and
9. Limiting production, markets or technical development to the prejudice of
consumers, provided that limitations that develop in the market as a result of or
due to a superior product or process, business acumen or legal rights or laws
shall not be a violation of this Act (PCA, Sec. 15):
TARDI
C. MERGERS AND ACQUISITIONS
Q: What is merger and acquisition (M&A)?*
ANS: Merger and Acquisition is de ned m

Merger Acquisition
Refers to the joining of two (2) or more Refers to the purchase of securities or
entities into an existing entity or to form assets, through contract or other means,
a new entity (PCA, Sec. 4 (j)). for the purpose of obtaining control by:
1. One (1) entity of the whole or part of
another:
2 Two (2) or more entities over
another; or
3. One (1) or more entities over one (1)
or more entities (PCA Sec. 4(a)).

Q: What is the prohibited M&A?

ANS: Merger or acquisition agreements that substantially prevent, restrict or lessen
competition in the relevant market or in the market for goods or services as may be
determined by the Commission shall be prohibited (PCA, Sec. 20).

Q: What is the power of the PCC in terms of M&A?

ANS: The Commission shall have the power to review mergers and acquisitions based
on factors deemed relevant by the Commission (PCA, Sec. 16).

Q: What is Compulsory Noti cation?

ANS: Parties to the merger or acquisition agreement referred to in the preceding section
wherein the value of the transaction exceeds one billion pesos (P1,000,000,000.00) are
prohibited from consummating their agreement until thirty (30) days after providing
noti cation to the Commission in the form and containing the information speci ed in the
regulations issued by the Commission (PCA, Sec. 17).
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to Note: Pursuant to PCC Resolution No. 01-2024, beginning on March 1, 2024, the new
thresholds for mandatory or compulsory noti cation of mergers and acquisition ("M&A")
transactions with PCC is at P7.8 Billion for SOP and P3.2 Billion for SOT, but for the
purpose of 2024 bar examinations, the amounts re ected in the succeeding discussions
are pursuant to PCC's Commission Resolution No. 04-2023 which was effective from
March 1, 2023 to February 29, 2024.

Q: What is the task of the PCC in relation to Mandatory Noti cation?

ANS: The Commission shall, from time to time, adopt and publish regulations stipulating:
1. The transaction value threshold and such other criteria subject to the noti cation
requirement of Section 17 of PCA;
2. Prohibit the implementation of the agreement unless and until it is modi ed by
changes speci ed by the Commission;
3. Exceptions or exemptions from the noti cation requirement; and
4. Other rules relating to the noti cation procedures (PCA, Sec. 19).

Q: What are the current thresholds for compulsory noti cation?

ANS: The parties to a merger or acquisition shall be required to provide noti cation in
compliance with Section 17 of the PGA when: LAW TVIJHEWWOD

1. The Size of the Party (SOP) exceeds Seven Billion Pesos (P7B); AND
2. The Size of Transaction (SOT) exceeds Two Billion Nine-Hundred Thousand
Pesos (P2.9B) (Commission Resolution No. 04-2023).

Q: What are the tests to determine if the M&A shall be covered by the compulsory
noti cation to PCC?
ANS: Noti cation of M&A agreement to POC shall be compulsory provided BOTH the
"Size of Person Test" and "Size of Transaction Test" concur:
1. Size of Person/Party Test
a. Aggregate annual gross revenue in, into or from the Philippines ("PH"),
exceeds P7B; or
b. Value of the assets in the PI of the Ultimate Parent Entity ("UPE' of at
least the acquiring or acquired entities, including that of all entities that
the UPE controls, directly or indirectly, exceeds P7B.
Size of Transaction Test Value of the transaction exceeds P2.9B, as
determined by the following:

Transaction Value of Transaction

Involved
Merger or (i) aggregate value of the assets in the Philippines being
Acquisition of acquired in the proposed transaction; OR
Assets within the (ii) the gross revenues generated in the Philippines by
Philippines assets acquired in the Philippines
() aggregate value of the assets in the Philippines of the
Merger outside the acquiring entity; AND
Philippines (ii) the gross revenues generated in or into the Philippines
by those assets acquired outside the Philippines
†) the aggregate value of the assets in the Philippines of
Merger inside AND the acquiring entity; AND
outside the (ii) the aggregate gross revenues generated in or into the
Philippines ilippines by assets acquired in the Philippines and any
assets acquired outside the Philippines collectively
(i) the aggregate value of the assets in the Philippines that
are owned by the corporation or non-corporate entity or by
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Transaction Value of Transaction

Involved
Acquisition of (i) entities it controls, other than assets that are shares of any
Voting Shares of of those corporations; OR
Corporation or of (ii) (ii) gross revenues from sales in, into, or from the
An Interest in a non- Philippines of the corporation or non-corporate entity or by
corporate entity entities it controls, other than assets that are shares of any
of those corporations
AND
1. IF A CORPORATION - acquisition of outstanding voting
shares to 35% or it will increase to 50% if the entity or
entities already own 35% prior to the acquisition; OR
2. IF NOT A CORPORATION - it acquires interest in pro ts
or assets upon liquidation up to 35% or it will increase to
50% if the entity or entities already own 35% prior to the
acquisition.
(i) the aggregate value of assets that will be combined in
the Philippines or contributed into the proposed joint
Joint Venture venture; OR
* (i) the gross revenues generated in the Philippines by
assets to be combined in the Philippines or contributed into
the proposed Joint Venture

1
(AQUINO & SUNDIANG, Reviewer on Commercial Law, supra at 450 to 453, discussing
Rule /V, Sec. 4 of the Implementing Rules and Regulations of PÇA [hereinafter IRR of
PCA; PCC Resolution No. 04-2023 re SORTIZZA
ected herein)
Q
Q: What is the status of an M&A consummated in violation of the mandatory
noti cation requirement?
ANS: An agreement consummated in violation. of this requirement to notify the
Commission shall be considered void and subject the parties to an administrative ne of
one percent (1%) to ve percent (5%) of the value of the transaction (PCA, Sec. 17).
Or
Q: When may the PCC request further information for the review of M&A?
ANS: Should the Commission deem it necessary, it may request further information that
are reasonably necessary and directly relevant to the prohibition under Section 20 hereof
from the parties to the agreement before the expiration of the thirty (30)-day period
referred. The issuance of such a request has the effect of extending the period within
which the agreement may not be consummated for an additional sixty (60) days,
beginning on the day after the request for information is received by the parties.
Note: That, in no case shall the total period for review by the Commission of the subject
agreement exceed ninety (90) days from initial noti cation by the parties (Id).

Q: What is the effect when the period of the PCC to decide has expired and no
decision has been promulgated?
ANS: When the above periods have expired and no decision has been promulgated for
whatever reason, the merger or acquisition shall be deemed approved and the parties
may proceed to implement or consummate it. All notices, documents and information
provided to or emanating from the Commission under this section shall be subject to
con dentiality rule under Section 34 of this Act except when the release of information
contained therein is with the consent of the notifying entity or is mandatorily required to
be disclosed by law or by a valid order of a court of competent jurisdiction, or of a
government or regulatory agency, including an exchange (ld).
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Q: What are the exemptions from prohibited M&A?

ANS: Mergers or acquisition agreements prohibited under the ›CA may, nonetheless, be
exempt from the prohibition by the PCC when the parties establish either of the following:
1. The concentration has brought about or is likely to bring about gains in the
ef ciencies that are greater than the effects of any limitation on competition that
result or likely to result from the merger or acquisition agreement; or
2. A party to the merger or acquisition agreement is faced with actual or imminent
nancial failure, and the agreement represents the least anti-competitive
arrangement among the known alternative uses for the failing entity's assets
(PCA, Sec. 21)

Q: Who has the burden of proof to establish that the M&A falls within the
exemptions?
ANS: The burden of proof under Section 21 lies with the parties seeking the exemption.
A party seeking to rely on the exemption speci ed in Section 21 (a) must demonstrate
that if the agreement were not implemented, signi cant ef ciency gains would not be
realized (PCA, Sec. 22).

Q: What are the elements of violation of Compulsory Noti cation? LAW IVIOHEWWOD

ANS: A non-noti cation violation under Section 17 of the PCA has four (4) essential
elements:
1. There is merger or Acquisition (transaction) e
2. The transaction breached the noti cation thresholds,
3. The parties to the merger or acquisition did not notify the Commission of the
Transaction; and
4. The Merger or Acquisition was consummated (I DIVINA, supra 618 to 619).
*
Q: What are the actions that the PCC may take if it determines that the M&A is
prohibited and does not qualify for exemption?
ANS: If within the relevant periods stipulated under Section 17 of the PCA, the PCC
determines that such agreement is prohibited and not exempted, the PCC may:
1. Prohibit the implementation of the agreement;
2. Prohibit the implementation of the agreement unless and until it is modi ed by
changes speci ed by the Commission,
3. Prohibit the implementation of the agreement unless and until the pertinent party
or parties enter into legally enforceable agreements speci ed by the
Commission (PCA, Sec. 18).

PUBLIC SERVICE ACT (COMMONWEALTH NO. (CA) 146, AS

AMENDED BY R.A. No. 11659)
Q: Which government agency shall have jurisdiction and supervision over all
public services?
ANS: The Public Service Commission shall have jurisdiction and supervision over all
public services, including public utilities, and their franchises, equipment, and other
properties, and in the exercise of its authority, it shall have the necessary powers and the
aid of public force (C.A. No. 146, as amended by R.A. No. 11659, otherwise known as
the "Public Service Act, as Amended", Sec. 13(a) [hereinafter PSA, as amended by R.A.
No. 11659]).
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Q: Is there a difference in the regulation of public services owned or operated by

government entities or government-owned or controlled corporations from
privately-owned public services?
ANS: Public services, including public utilities, owned or operated by government entities
or government-owned or -controlled corporations shall be regulated by the Commission
in the same way as privately-owned public services (Id.).

Q: What are the government agencies that replaced the Public Service
Commission?
ANS: All references to the to Public Service Commission shall pertain to any Administrative to
Agency to which the powers and duties of the Public Service Commission were
transferred by subsequent laws, such as but not limited to:
1. Civil Aeronautics Board (CAB);
2. Civil Aviation Authority of the Philippines (CAAP);
3. Department of Energy (DOE);
4. Department of Environment and Natural Resources (DENR);
5. Department of Information and Communications Technology (DICT);
6. Department of Transportation (DOTT)
7. Energy Regulatory Commission (ERQ);
8. Land Transportation Franchising and Regulatory Board (LTFRB);
9. Land Transportation Of ce (LTO);
10. Local Water Utilities Administration (LWUA),
11. Maritime Industry Authority (MARINA)
12. Metropolitan Waterworks and Sewerage System (MWSS);
13. National Telecommunications Commission (NTC)
14. National Water Resources Board (NWRB); Descendershe

15. Philippine National Railways (PNR),

16. Philippine Ports Authority (P.PA), and
17. Toll Regulatory Board (TRB) (PSA, as amended by R$A. No. 11659, Sec. 3).

A. PUBLIC SERVICE AS PUBLIC UTILITY

Q: What is public service?
CRANI C
ANS: Public service includes every person that may own, operate, manage, or control in
the Philippines, for hire or compensation, with general or limited clientele, whether
permanent, occasional or accidental, and done for general use business purposes, any
common carrier, railroad, street railway, traction railway, sub-way motor vehicle, either for
freight or passenger, or both with without xed route and whatever may be its
classi cation, freight or carrier service of any class, express service, steamboat, or
steamship line, pontines, ferries, and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine railway, marine repair shop, wharf or dock,
ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power, petroleum, sewerage system, wire or wireless
communications system, wire or wireless broadcasting stations and other similar public
services (C.A. No. 146, as amended by R.A. No. 2677, otherwise known as the 'Public
Service Act". Sec. 13(b), [hereinafter PSA]).

Q: What is a public utility? (ETPeWSU)

ANS: Public utility refers to a public service that operates, manages or controls for public
use any of the following:
1. Distribution of Electricity;
2. Transmission of Electricity;
3. Petroleum and Petroleum Products Pipeline Transmission Systems;
4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems,
including sewerage pipeline systems;
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5 Seaports; and
6. Public Utility Vehicles (PSA, as amended by R.A. No. 11659, Sec. 13(d)).

Note: All concessionaires, joint ventures and other similar entities that wholly operate,
manage or control for public use the sectors above are public utilities (ld.).

Q: Are all public services public utilities?

ANS: Not all public services are public utilities (AQUINO & SUNDIANG, Reviewer on
Commercial Law, supra at 196). No other person shall be deemed a public utility unless
otherwise subsequently provided by law (PSA, as amended by R.A. No. 11659, Sec.
13(d)).

A public service which is not classi ed as public utility under R.A. No. 11659 shall be
considered a business affected with public interest for purposes of Sections 17 and 18 of
Article XIlI of the Constitution (Id., Sec. 13(e)).

Q: What are public utilities and are therefore subject to the requirement that at least
60% of their capital stock must be owned by Filipinos?
ANS: The following are public utilities and are therefore subject to the requirement that at MUTTVISHENWO?

least 60% of their capital stock must be owned by Filipinos:

1. Distribution of Electricity refers to the conveyance of electric power by a
distribution utility though its distribution system as de ned by Sec. 4(n) of R.A.
No. 9136, otherwise known as the "Electronic Power Industry Reform Act of
2001," as amended (PSA, as amended by R.A. No. 11659, Sec. 2(f));
2. Transmission of Electricity refers to the conveyance of electricity through the
high voltage backbone system, as de ned by Sec. 4(cc) of R.A. No. 9136, as
amended (PSA, as amended by R.A. No. 11659, Sec. 2(n));
3. Petroleum and Petroleum Products Pipeline Transmission System refer to
the operation and maintenance of pipeline transmission systems to ensure an
uninterrupted and adequate supply and transmission of petroleum and
petroleum products to the public, and excludes petroleum pipeline systems
operated exclusively for private use, or incidental to the operations of : distinct
business (PSA, as amended by R.A. No. 11659, Sec. 2(i));
4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems
refer to the operation and maintenance of water pipeline distribution systems to
ensure an uninterrupted and adequate supply and distribution of potable water
for domestic and other purposes and the operation and maintenance of
wastewater pipeline systems, except desludging companies and septic tanks,
to ensure public health and safety, by as regulated by R.A. No. 6234, entitled "An
Act Creating the Metropolitan Waterworks and Sewerage System and
Dissolving the National Waterworks and Sewerage Authority; and for Other
Purposes", as amended, and P.D. No. 198, otherwise known as the 'Provincial
Water Utilities Act of 1973", as amended (PSA, as amended by R.A. No. 11659,
Sec. 2(0));
5. Sewerage Pipeline Systems refer to the operation and sewerage pipeline
systems to ensure public health and safety, as regulated by R.A. No. 6234, as
amended, and P.D. No. 198, as amended (PSA, as amended by R.A. No.
11659. Sec. 2(p));
6. Public Utility Vehicles (PUVs) refer to internal combustion engine vehicles that
carry passengers and/or domestic cargo for a fee, offering services to the public,
namely trucks-for-hire, UV express service, public utility buses (PUBs), public
utility jeepneys (PUs), tricycles, lcabs, and taxis: Provided, that transportation
vehicles accredited with and operating through transport network corporations
shall not be considered as public utility vehicles (AQUINO & SUNDIANG,
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Reviewer on Commercial Law, pp. 194-196 citing PSA, as amended by R.A.

No. 11659, Sec. 2(k)).

Q: What is a seaport?
ANS: Seaport refers to a place where ships may anchor or tie up for the purpose of
shelter, repair, loading or discharge of passengers or cargo, or for other such activities
connected with water-borne commerce, and including all the land and water areas and
the structures, equipment and facilities related to these functions, as de ned by charters
of relevant authorities or agencies, such as the Philippine Ports Authority, Subic Bay
Metropolitan Authority, PHIVIDEC Industrial Estate Authority, Cebu Port Authority, local
government units, and other similar agencies or government bodies (PSA, as amended
by R.A. No. 11659, Sec. (I)).

Q: What are the criteria for public service to be classi ed as a public utility? (SMMA)
ANS: Upon recommendation of the NEDA, the President may recommend to Congress
the classi cation of a public service as a public utility on the basis of the following criteria:
1. The person or juridical entity regularly Supplies and transmits and distributes to
the public through a network a commodity or service of public consequence;
2. The commodity or service is a natural Monopoly that needs to be regulated
when the common good so requires. For this purpose, natural monopoly exists
when the market demand for a commodity oriservice.can be supplied by a single
entity at a lower cost than by two or more entities;
3. The commodity or services necessary for the Maintenance of life and
occupation of the public; and
4. The commodity or service is obligated -to provide Adequate service to the public

o
on demand: (PSA, as amended by R. A. No. 11659, Sec 13(d))
S
Q: What are the factors to be considered by NDA in reviewing reclassi cations of
Public Services? (IN-ENDM-LU)N I DON
ANS: NEDA shall consider the following factors in the review of the reclassi cation of
public services: Are
1. The commodity or service can only be regularly supplied, transmitted, and
distributed to the public though an Infrastructure network, composed of nodes
and links, speci cally built to facilitate the delivery of the commodity or service;
2. The commodity or service is a Natural monopoly based on, but not limited to,
the following: (EHDM)
a. Economies of scale characterized by declining average cost relative to
output;
b. High xed cost;
c. Industry or market Demand is insuf cient to support two or more rms;
and
d. Monopoly power is not solely due to regulatory or legal restrictions.
3. The commodity or service is necessary for the maintenance of Life, livelihood
or employment if the general public; and
4. An Uninterrupted market supply of the commodity or service is required to meet
market demand, whether such market demand is actual or potential
(Implementing Rules and Regulations of R.A. No. 11659, Sec. 13 [hereinafter
referred to as IRR of R.A. No. 11659]).

Q: What are the requirements in granting a Certi cate of Public Convenience (and
Necessity) for public service as public utility? (OFP)
ANS: The following conditions must concur in the grant of certi cate of public
convenience (and necessity) for public services which is a public utility:
1. The grantee must be a corporation or entity 60% of which is Owned by Filipino
citizens if the public service is a public utility;
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2. The grantee must have suf cient Financial capability to undertake the service;
3. The service will Promote public interest and convenience in a proper and
suitable manner (AQUINO & SUNDIANG, Reviewer on Commercial Law, supra
at 197).

Q: What is the effect if a public service is not classi ed as a public utility?

ANS: Public services that are not public utilities must still secure the certi cate or
franchise to operate from the Commission. However, it follows that public service that
is not a public utility is not subject to the constitutional provision requiring Filipino
ownership of 60% of its outstanding capital stock (AQUINO & SUNDIANG, supra at 196-
197). Notwithstanding any law to the contrary, nationality requirements shall not be
imposed by the relevant Administrative Agencies on any public service not classi ed as
a public utility (PSA, as amended by R.A. No. 11659, Sec. 13).

Q: What are the reasons for regulation of public service?

ANS: The regulation of public utilities is founded upon the police power of the State and
statutes prescribing rules for the control and regulation of public utilities are considered
valid exercise thereof. When private property is used for a public purpose and is affected
with public interest, it ceases to be juris private only and becomes subject to regulation.
The regulation is to promote the common good. Submission to regulation may be MUTIVIDHENWO?

withdrawn by the owner by discontinuing use; but as long. as use of the property is
continued, the same is subject to public regulation (Republic vs, Manila Electric Company,
G.R. No. 141314, November 15, 2002).

Q: What are the Constitutional limitations imposed on public utilities under Art. XII
of the Constitution? (CE50-APFO-ETMC)
ANS: The limitations imposed on public utilities under Sections 1, 6, 11, 17, 18, 19, and
22, Art. XII of the Constitution are as follows
1. No franchise, certi cate, or any other form of authorization for the operation of
a public utility shall be granted except to Citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least
60% of whose capital is owned by such citizens;
2. No franchise, certi cate, or authorization shall be Exclusive in character;
3. No franchise, certi cate, or authorization shall be for longer period than 50
years;
4. A franchise or right shall be granted only under the condition that it shall be
subject to Amendment, alteration, or repeal by the Congress when the common
good so requires;
5. The State shall encourage equity Participation in public utilities by the general
public;
6. The participation of Foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital;
7. All the executive and managing Of cers of the public utility that is a corporation
or association must be citizens of the Philippines;
8. In times of national Emergency, when the public interest so requires, the State
may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately-owed public utility
or business affected with public interest;
9. The State may, in the interest of national welfare or defense, upon payment of
just compensation, Transfer to public ownership utilities and other private
enterprises to be operated by the Government;
10. The State shall regulate or prohibit Monopolies when the public interest sO
requires; and
11. Combinations in restraint of trade or unfair competition are not allowed
(AQUINO & SUNDIANG, supra at 209-210).
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Q: Can any person operate a public service business without a certi cate of public
convenience?
ANS: It shall be unlawful for any individual, partnership, association, corporation or joint-
stock company, their lessees, trustees, or receivers appointed by any court, or any
municipality, province, or other department of the Government of the Philippines, to
engage in any public service business without having rst secured from the Commission
certi cate of public convenience or certi cate of public convenience and necessity
(PSA, as amended by R.A. No. 11659, Sec. 18).

Q: Who can operate public service business without having been granted a
certi cate of public convenience?
ANS: The following can operate public service a business without a certi cate of public
convenience:
1. Grantees of legislative franchises expressly exempting such grantee from the
requirement of securing a certi cate from the Commission, and
2. Concerns at present existing expressly exempted from the jurisdiction of the of
Commission, either totally or in part, by the provisions of Section 13 of this Act
(Id.).

Q: What are the unlawful acts for public service? (UDMU)

ANS: The following are unlawful acts of any public service
1. To provide or maintain any service that -is Unsafe, improper, or inadequate, or
withhold or refuse any service which can reasonably be demanded and
furnished, as found and determined by the Commission in a nal order which
shall be conclusive and shall take effect in accordance with C.A. No. 146, upon
appeal or otherwise (PSA, Sec. 19[a7);
2. To make or give, directly or indirectly, by itself or through its agents attorneys or
brokers, or any of them, Discounts or rebates on authorized rates, or grant credit
for the payment of freight charges, or any undue or unreasonable preference or
advantage to any person or corporation or to any locality or to any particular
description of traf c or service, or subject any particular person or corporation
or locality or any particular description of traf c to any prejudice or disadvantage
in any respect whatsoever, to adopt, maintain, or enforce any regulation,
practice or measurement which shall be found or determined by the
Commission to be unjust, unreasonable, unduly preferential or unjustly
discriminatory, in a nal order which shall be conclusive and shall take effect in
accordance with the provisions of C.A. No. 146, upon appeal or otherwise (Ibid.,
Sec. 19[6]);
3. To refuse or neglect, when requested by the Postmaster General or his
authorized representative, to carry public Mail on the regular trips of any public
land transportation service, upon such terms and conditions and for a
consideration in such amount as may be:
a. Agreed upon between the Postmaster General and the public service
carrier or
b. Fixed by the Commission in the absence of an agreement between the
Postmaster General and the carrier (PSA, as amended by R.A. No.
11659, Sec. 19[c]); and
4. To refuse or neglect, when requested by the Administrative Agency to urgently
Use, deliver or render the public service for the purpose of avoiding further loss
on human, material, nomic, or environment during a state of calamity (PSA,
as amended by R.A. No. 11659, Sec. 19[d]).
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Q: What process should be followed if the Postmaster General and the public
service carrier are unable to agree on the compensation?
ANS: In case the Postmaster General and the public service carrier are unable to agree
on the amount of the compensation to be paid for the carriage of the mail, the Postmaster
General shall request the Commission to x a just and reasonable compensation for such
carriage and the same shall be xed by the Commission in accordance with Section 16
of the Public Service Act, as amended (PSA, as amended by R.A. No. 11659, Sec. 19[c]).

B. CRITICAL INFRASTRUCTURE
Q: What is critical infrastructure?
ANS: Critical infrastructure refers to any public service which owns, uses, or operates
systems and assets, whether physical or virtual, so vital to the Republic of the Philippines
that the incapacity or destruction of such systems or assets would have a detrimental
impact on national security, including telecommunications and other such vital services
as may be declared by the President of the Philippines (PSA, as amended by R.A. No.
11659, Sec. 2[e]).

C. POWERS OF THE PRESIDENT MYTTVIOENWOD

Q: When can the President exercise his or her power to suspend or prohibit
transactions or investment in a public service?.
ANS: In the interest of national security, the President, after review, evaluation and
recommendation of the relevant government department or Administrative Agency, may,
within 60 days from receipt of such recommendation, suspend or prohibit any proposed
merger or acquisition transaction, or any investment in a public service that effectively
results in the grant of control, whether direct or indirect, to a foreigner or a foreign
corporation (PSA, as amended by R.A. No. 11659, Sec. 23).

D. RECIPROCITY
Q: Up to what extent can foreign nationals own the capital of entities engaged in
the operation and management of the critical infrastructure?
ANS: Foreign nationals shall not be allowed to own more than 50% of the capital of
entities engaged in the operation and management of critical infrastructure unless the
country of such foreign nationals accords reciprocity to Philippine Nationals as may be
provided by foreign law, treaty, or international agreement (PSA, as amended by R.A. No.
11659, Sec. 25)

Q: How is reciprocity satis ed?

ANS: Reciprocity may be satis ed by according to rights of similar value in other
economic sectors. The NEDA shall promulgate rules and regulations for this purpose.
(ld.)
Q: When can a public service employ the services of a foreign national?
ANS: A public service shall employ a foreign national only after the determination of non-
availability of a Philippine National who is competent, able, and willing to perform the
services for which the foreign national is desired. (PSA, as amended by R.A. No. 11659,
par. 2, Sec. 25)

Q: What is the exception to the rule regarding employment of a foreign national for
public service?
ANS: Unless it is otherwise provided by law, or by any international agreement. (ld.)
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Q: What other requirement must be complied with for a foreign national to be

employed for public service?
ANS: The following must obtain an employment permit pursuant to P.D. No. 442,
otherwise known as the Labor Code of the Philippines:
1. Any foreign national seeking admission to the Philippines for employment
purposes, and
2. Any public service to which desires to engage a foreign national for employment
in the Philippines. (PSA, as amended by R.A. No. 11659, par. 3, Sec. 25)

Q: What is the duty of public services employing foreign nationals?

ANS: Public services employing foreign nationals issued employment permits shall
implement an understudy/skills development program to ensure the transfer of
technology/skills to Filipinos, whether next-in-rank or otherwise, with the potential of
succeeding the foreign national in the same establishment or its subsidiary, within a
speci ed period as may be determined by the DOLE, upon consultation with relevant
government agencies and industry experts (PSA, as amended by R.A. No. 11659, par. 4,
Sec. 25).

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