University of Santo Tomas Faculty of Civil Law
MERCANTILE LAW Pre-week Notes 2017 ACADEMICS COMMITTEE SECRETARY GENERAL: CAMILLE ANGELICA B. GONZALES EXECUTIVE COMMITTEE: EMNIE VALERIE B. DURAN, IRVIN L. PALANCA, MARIELLA A. MARASIGAN , LARA NICOLE T. GONZALES
MERCANTILE L AW COMMITTEE COMMITTEE HEAD: JOSEPH NELSON A. HERNANDEZ SUBJECT HEADS: FLORRENCE FAYE S. FRANCO, KELLY ANN RUBIN, MAICA A. PRUDENTE, JANINE AIRA A. ARENAS, JACKIELYN KRYSTYL C. BANA MEMBERS : NEREN O. NIEVA, GERALD L. NACPIL, CAMILLE ANNE P. DE ASIS, STEFFI NICOLE P. FLORES, CLAIRE MARGARETTE M. BONA, ZARA JANELLA M. CACHA, DIVINE CARLOS, JARENA RIA ZOLINA
ATTY . M ARY GRACE L. J AVIER ADVISER
UST LAW PRE-WEEK LAW PRE-WEEK NOTES 2017 LETTERS OF CREDIT It is any arrangement, however named or described, whereby the issuing bank acting at the request and on the instructions of a customer (applicant) or on its own behalf, binds itself to: ( PAN) PAN)
Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or 2. Authorize another bank to pay or to accept and pay such drafts, or 3. Authorizes another bank to Negotiate, against stipulated documents 1.
2.
Three (3) distinct but intertwined contracts in a Letter of Credit transaction (2002, 2008 BAR) 1.
3.
Between the applicant/buyer/importer/account party and the beneficiary/seller/exporter – The applicant is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title while the
KINDS OF BANK Notifying/ Advising Bank
Confirming bank
Negotiating bank
ROLE
beneficiary is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods. The relationship between them is governed by the law on sales if it is a commercial L/C but if it is a standby letter of credit it is governed by the law on obligations and contract. Between the issuing bank and the beneficiary/ seller/exporter – The issuing bank is the one that issues the letter of credit and undertakes to pay the beneficiary upon strict compliance of the latter to the requirements set forth in the letter of credit. On the other hand, the beneficiary surrenders document of title to the bank in compliance with the terms of the L/C. Their relationship is governed by the terms of the L/C. Between the issuing bank and the applicant/ buyer/importer – The applicant obliges himself to reimburse the issuing bank upon receipt of the documents of title. Their relationship is governed by the terms of the application and agreement for the issuance of the L/C by the bank.
LIABILITY
Serves as an agent of the issuing bank;
Does not incur any obligation more than just notifying the seller/beneficiary of the opening of the L/C after it has Warrants the apparent authenticity of determined its apparent authority. It does not guarantee the the L/C (Bank of America NT & SA v. CA, genuineness or due execution of execution of the L/C. It is not liable for G.R. No. 105395, December December 10, 1993). damages even if the L/C turns out to be spurious provided the spurious character is not apparent on the face of the instrument. Lends credence to the L/C issued by a Direct obligation, as if it is the one which issued the L/C. lesser-known bank. Its obligation is similar to the issuing banks. Thus, The confirming bank collects fees for beneficiary may tender documents to the confirming bank such engagement and obtains and collect payment. reimbursement from the issuing bank. Buys the seller’s draft and later on sells Depends on the stage of negotiation, thus: the draft to the issuing bank. 1. Before negotiation – No liability with respect to the seller. Merely suggests its willingness to negotiate. 2. After negotiation – A contractual relationship will then arise, making the bank liable. As holder, it has the right to payment from the bank primarily liable on the draft (either the issuing or confirming bank). If the party primarily liable on the L/C refuses to honor the draft, the negotiating bank has the right to proceed against the drawer thereof.
Paying bank
May either be the issuing bank or any other bank in the place of the issuing bank to facilitate payment to the beneficiary.
Doctrine of Independence/ Independence Principle Fraud Exception Principle: Principle: It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment.
The relationship of the buyer and the bank is is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the L/C has been fulfilled or not because in transactions involving L/C, banks deal only with documents and not goods (BPI ( BPI v. De Reny Fabric Industries, Inc., L-2481, October 16, 1970). In effect, the buyer has no course of action against the issuing bank.
Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of credit if the beneficiary committed fraud by substituting fraudulent documents even if on their face the documents complied with the requirements.
Exception to the Independence Principle (2010 BAR)
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UST LAW PRE-WEEK LAW PRE-WEEK NOTES 2017 LETTERS OF CREDIT It is any arrangement, however named or described, whereby the issuing bank acting at the request and on the instructions of a customer (applicant) or on its own behalf, binds itself to: ( PAN) PAN)
Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or 2. Authorize another bank to pay or to accept and pay such drafts, or 3. Authorizes another bank to Negotiate, against stipulated documents 1.
2.
Three (3) distinct but intertwined contracts in a Letter of Credit transaction (2002, 2008 BAR) 1.
3.
Between the applicant/buyer/importer/account party and the beneficiary/seller/exporter – The applicant is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title while the
KINDS OF BANK Notifying/ Advising Bank
Confirming bank
Negotiating bank
ROLE
beneficiary is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods. The relationship between them is governed by the law on sales if it is a commercial L/C but if it is a standby letter of credit it is governed by the law on obligations and contract. Between the issuing bank and the beneficiary/ seller/exporter – The issuing bank is the one that issues the letter of credit and undertakes to pay the beneficiary upon strict compliance of the latter to the requirements set forth in the letter of credit. On the other hand, the beneficiary surrenders document of title to the bank in compliance with the terms of the L/C. Their relationship is governed by the terms of the L/C. Between the issuing bank and the applicant/ buyer/importer – The applicant obliges himself to reimburse the issuing bank upon receipt of the documents of title. Their relationship is governed by the terms of the application and agreement for the issuance of the L/C by the bank.
LIABILITY
Serves as an agent of the issuing bank;
Does not incur any obligation more than just notifying the seller/beneficiary of the opening of the L/C after it has Warrants the apparent authenticity of determined its apparent authority. It does not guarantee the the L/C (Bank of America NT & SA v. CA, genuineness or due execution of execution of the L/C. It is not liable for G.R. No. 105395, December December 10, 1993). damages even if the L/C turns out to be spurious provided the spurious character is not apparent on the face of the instrument. Lends credence to the L/C issued by a Direct obligation, as if it is the one which issued the L/C. lesser-known bank. Its obligation is similar to the issuing banks. Thus, The confirming bank collects fees for beneficiary may tender documents to the confirming bank such engagement and obtains and collect payment. reimbursement from the issuing bank. Buys the seller’s draft and later on sells Depends on the stage of negotiation, thus: the draft to the issuing bank. 1. Before negotiation – No liability with respect to the seller. Merely suggests its willingness to negotiate. 2. After negotiation – A contractual relationship will then arise, making the bank liable. As holder, it has the right to payment from the bank primarily liable on the draft (either the issuing or confirming bank). If the party primarily liable on the L/C refuses to honor the draft, the negotiating bank has the right to proceed against the drawer thereof.
Paying bank
May either be the issuing bank or any other bank in the place of the issuing bank to facilitate payment to the beneficiary.
Doctrine of Independence/ Independence Principle Fraud Exception Principle: Principle: It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment.
The relationship of the buyer and the bank is is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the L/C has been fulfilled or not because in transactions involving L/C, banks deal only with documents and not goods (BPI ( BPI v. De Reny Fabric Industries, Inc., L-2481, October 16, 1970). In effect, the buyer has no course of action against the issuing bank.
Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of credit if the beneficiary committed fraud by substituting fraudulent documents even if on their face the documents complied with the requirements.
Exception to the Independence Principle (2010 BAR)
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MERCANTILE LAW This principle refers to fraud in relation with the independent purpose or character of the L/C and not only fraud in the performance of the obligation or contract supporting the letter of credit (Transfield vs. Luzon Hydro Corp., supra). supra).
(Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232, June 29, 2005).
Real owner of the articles subject of the Trust Receipt transaction: The real owner of the articles subject of the TR is the entrustee who binds himself to hold the designated GDI. The entruster merely holds a security interest.
The documents tendered by the seller/beneficiary must strictly conform conform to the terms of the L/C. The tender of documents must include all documents required by the letter. It is not a question of whether or not it is fair or equitable to require submission of documents but whether or not the documents were agreed upon. Thus, a correspondent bank which departs from what has been stipulated under the L/C acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary (Feati Bank and Trust Company v. CA)
Entrustee cannot mortgage the goods because one of the requisites of a valid mortgage is that the mortgagor must be the absolute owner of the property mortgaged or must have free disposal thereof. The entrustee is not responsible as principal or vendor under any sale or contract to sell made by the entrustee.
Entrustee shall bear the loss of the goods, documents, or instruments which are the subject of a Trust Receipt
Explain the Independence Principle under a le tter of credit transaction.
Res perit domino in trust receipt : not a valid defense against an Entrustee in cases of loss or destruction of the goods, documents, or instruments secured by a Trust Receipt. For the principle of res perit domino to apply the entrustee must be the owner of the goods at the time of the loss. A TR is a security agreement, pursuant to which a bank acquires a ‘security interest’ in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. If under a trust receipt transaction, the entruster is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wa nts. Thus, the ownership of the goods remaining with the entrustee, he cannot be relieved of the obligation to pay his/her loan in case of loss or destruction (Rosario Textile Mills vs. Home Bankers Association, supra).
In determining compliance with the letter of credit, the bank is obliged to examine only the shipping documents presented by the seller. It is precluded from determining whether the main contract of sale (between buyer and seller) has been strictly complied with. Banks deal only with documents and not with goods or obligations to which they relate. The seller is assured of prompt payment independent of any breach in the main contract. Thus, the bank has no duty to verify whether the goods described in the letter of credit or in the shipping documents actually tallies with what was loaded aboard the ship. This may be invoked by both the seller and the issuing bank. (Dimaampao, 2017)
Defenses available to negate CRIMINAL liability of the Entrustee (CoCo CaCo No LP)
TRUST RECEIPT LAWS Trust Receipt (TR) transaction
1.
It is any transaction between the entruster and entrustee: 1.
2.
2. 3.
Whereby the entruster who owns or holds title or security interests over certain specified goods, documents or instrument (GDI), releases releases the same to the possession of entrustee upon the latter’s execution of a TR agreement . Wherein the entrustee binds entrustee binds himself to hold the the GDI in trust for the entruster and, in case of defaul t, a. to sell or otherwise dispose such GDI with with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to it or b. to turn over the GDI itself if not sold or otherwise disposed of in accordance with the terms and conditions specified in the TR.
Compliance with the terms of the TR either by payment, return of the proceeds or return of the goods (P.D. 115, Sec. 13). Consignment. Cancellation of the TR agreement and taking into possession of the goods by the entruster. NOTE: Repossession of the goods will extinguish only the criminal liability.
4.
5.
before filing of information Compromise by parties before filing in court. Compromise of estafa case arising from TR transaction, after the case has been filed in court does not amount amount to novation and novation and does not erase erase the criminal liability of the accused (Ong ( Ong vs. CA, G.R. No. L-58476, September 2, 1983). 1983 ). Non-receipt of the goods by the entrustee or where proof of delivery of goods to the accused is insufficient. (Ramos (Ramos vs. CA, supra). supra ). Loss of goods without fault of the entrustee.
Two features of a Trust Receipt transaction
6.
Loan feature – is brought about by the fact that the entruster financed the importation or purchase of the goods under TR (Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987). 2. Security feature – property interest in the GDI to secure performance of some obligation of the entrustee or of some third persons to the entruster
Where the debtor received the goods subject of the trust receipt before the trust receipt was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the
1.
2
UST LAW PRE-WEEK LAW PRE-WEEK NOTES 2017 importer in trust after the loan is granted. (Colinares ( Colinares vs. CA, G.R. No. 90828, September 5, 2000) 4. 5. 6. 7.
Correlate the letter of credit transaction with the trust receipt arrangement. The bank extends a loan covered by the letter of credit with the trust receipt as security for the loan. The transaction involves a loan feautere represented by the letter of credit, and a security feature covered by the trust receipt. (Dimaampao, 2017)
8.
Upon failure to return the goods released under the trust receipt transaction, the bank instituted against the borrower who insisted that he could not be imprisoned for non-paymnet of debt. Is he correct? NO. Violation of Trust Receipts Law is an act malum prohibitum. Hence, he may be prosecuted criminally. Estafa results because of failure (1) to return the goods unsold; or (2) to turn over the proceeds of the sale. (Dimaampao, 2017)
CONSERVATORSHIP One appointed if the bank is in the state of illiquidity or the bank fails or refuses to maintain a state of liquidity adequate to protect its depositors and creditors. The bank still has more assets than its liabilities but its assets are not liquid or not in cash thus it cannot pay its obligation when it falls due. The bank, not the BSP, pays for fees.
C contracted with D to renovate his commercial building. D ordered construction materials from E and received delivery thereof. The following day, C went to F bank to apply for a loan to pay the construction materials. As security for the loan, C was made to execute a trust receipt. One year later, after C failed to pay the balance on the loan, F bank charged him with violation of the Trust Receipts Law. Will the case prosper? Reason briefly.
Powers of a conservator do not extend to the revocation of valid and perfected contracts. The law merely gives the conservator power to revoke contracts that are deemed to be defective – void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of the bank’s board.
NO. It is not covered by the Trust Receipts Law. Where the debtor received the goods before the trust receipt itself was entered into, the transaction in question must be considered a simple loan. The Trust Receipts Law does not seek to enforce payment of a loan, rather it punishes dishonesty and abuse of confidence in handling money or goods to the prejudice of another regardless of whether the latter is the owner. (Dimaampao, 2017)
The officers of X Bank entered into a contract with Y Corporation. Later, the bank was placed under conservatorship. The conservator took charge of and managed the assets and liabilities of the bank. It likewise revoked the contract of X Bank with Y Corporation. Was the revocation proper? NO. The powers of a conservator relates only to the preservation of the assets of the bank, management thereof, and restoration to viability. The conservator may not revoke a contract already perfected and enforceable at the time he was appointed. The only remaining remedy available to the conservator is to file a case to revoke or nullify the contract. (Dimaampao, 2017)
BANKING LAWS THE NEW CENTRAL BANK ACT (NCBA, R.A. 7653) BANKO CENTRAL NG PILIPINAS Responsibilities (1992, 1998 BAR) 1. 2. 3.
guarantee foreign loans but with the prior concurrence of the Monetary Board. Government agent (NCBA, Secs. 117-122) Source of credit (NCBA, Secs. 61-63, 81-89, 109) Issuer of Currency (NCBA, Sec. 49-60) Clearing channel or House; especially where the PCHC does not operate (NCBA, Sec. 102) Supervisor of the Banking system (NCBA, Sec. 25) – shall include the power to: a. Examine, which power extends to enterprises wholly or majority-owned or controlled by the bank (GBL, Sec. 7); 7) ; this power may not be restrained by a writ of injunction unless there is convincing proof that the action of the BSP is plainly arbitrary (NCBA, Sec. 25) b. Place a bank under receivership or liquidation (NCBA, Sec. 30)
When is conservatorship terminated?
To provide policy directions in the areas of money, banking, and credit To supervise bank operations To regulate the operations of finance companies and non-bank financial institutions performing quasi-banking functions, and similar institutions (NCBA, Sec. 3).
When the MB is satisfied that the bank can continue to operate on its own, conservatorship shall be terminated. Otherwise, the bank shall be placed in receivership. (Dimaampao, 2017)
Powers of a conservator (CARe BEAr) 1. 2.
Functions 1. B anker anker of the government – the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings (NCBA, Secs. 110- 116). 116) . 2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103) 3. Financial Advisor Advisor of the government (NCBA, Secs. 123-124) – Under Article VII, Sec. 20 of the 1987 Constitution, the President may contract or
3. 4. 5.
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Collect all monies and debts due to the said bank To take charge of the Assets, liabilities, and the management thereof REorganize, the management thereof And such other powers as the monetary Board deems necessary Exercise all powers necessary to restore its viability, with the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank
MERCANTILE LAW 6.
To bring court actions to Assail or Repudiate contracts entered into by the bank. (First Philippine International Bank v. CA, G.R. No. 115849, Jan. 24, 1996).
1.
2.
Conservatorship shall not exceed 1 year. 3.
Grounds for closure of a bank or a quasi-bank 4. 1.
2.
3.
4.
5. 6. 7.
Cash Flow test – Inability to pay liabilities as they become due in the ordinary course of business (NCBA, Sec. 30 [a], 1997 Bar). Balance sheet test – Insufficiency of realizable assets to meet its liabilities (NCBA, Sec 30 [b], 1997 Bar). Inability to continue business without involving probable losses to its depositors and creditors (NCBA, Sec 30 [c], 1997 Bar). Willful violation of a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets (NCBA, Sec 30 [d], 1997 Bar). Notification to the BSP or public announcement of a bank holiday (GBL, Sec 53). Suspension of payment of its deposit liabilities continuously for more than 30 days (GBL, Sec 53). Persisting in conducting its business in an unsafe or unsound manner (GBL, Sec 56).
It is unable to pay its l iabilities as they fall due in the ordinary course of business, excluding financial panic in the banking community; It has insufficient realizable assets to meet its liabilities; It cannot continue in business without involving probable losses to its depositors or creditors; or It has violated a final cease and desist order that has become final involving acts or transactions amounting to fraud or dissipation of assets. (Dimaampao, 2017)
For how long may a bank be placed under receivership? The bank may be placed under receivership for a maximum period of 90 days from take over. (Dimaampao, 2017)
RECEIVER One appointed if the bank is already insolvent which means that its liabilities are greater than its assets. The Court has no authority to appoint a receiver for a bank if the latter will function as such under BSP law. The power to appoint belongs to BSP.
NOTE: For banks, the receiver would be the Philippine Deposit Insurance Corporation; for quasi-banks, it could be any person of recognized competence in banking or finance (NCBA, Sec. 30). 30).
The Monetary Board may preventively suspend any director or officer of a bank or quasi-bank pending investigation up to 120 days but any delay due to the fault of the director or offcer shall not be counter in computing the period of suspension.
A receiver can only perform acts of administration and not acts of dominion. The receiver cannot approve an option to purchase real property. He has only the authority to administer the same for the benefit of its creditors (Abacus Real Estate Development Center, Inc. v. Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005). 2005) .
Close now-hear later doctrine It is to prevent unwarranted dissipation of the bank’s assets and as a valid exercise of police power to protect the depositors, creditors, stockholders and the general public. No prior hearing is necessary in appointing a receiver and in closing the bank. It is enough that subsequent judicial review is provided for.
Designation of conservator is not a precondition to the designation or receiver. (Sec. 31) LIQUIDATION
Injunction does not lie against BSP in the exercise of the power and function. A contrary rule may lead to dissipation of assets and trigger bank run. Judicial review comes only after action of the Monetary Board if the same was attended with bad faith and grave abuse of discretion (Bangko Sentral ng Pilipinas v. Valenzuela, G.R. No. 184778, October 2, 2009). 2009) .
Acts of liquidation are those which constitute the conversion of the assets of the banking institution to money or the sale, assignment or disposition of the same to creditors and other parties for the purpose of paying debts of such institution (Banco Filipino v. Central Bank, G.R. No. 70054, December 11, 1991) .
However, the closure and liquidation of a bank, which is considered an exercise of police power may be the subject of judicial inquiry. The order of closure (receivership or conservatorship) may be assailed: a) by the stockholders representing at least majority of the outstanding capital stock; b) within ten days from receipt by the board of directors of the order; c) thru a petition for certiorari on the ground that the action taken by the BSP was in excess of jurisdiction or with grave abuse of discretion as to amount to lack of jurisdiction.
If the receiver determines that the institution can no longer be rehabilitated, the Monetary Board shall notify the board of directors and direct the receiver to proceed with its liquidation.
Liquidator of a distressed bank can prosecute and defend suits against the bank Prosecution of suits, collection and the foreclosure of mortgages against debtors of the bank by the liquidator are among the usual and ordinary transactions pertaining to the administration of a bank (Banco Filipino v. Central Bank, ibid) .
RECEVIERSHIP Enumerate the grounds for placement under receivership.
Filing of the claims against the insolvent bank GR: All claims against the insolvent bank should be filed in the liquidation proceeding. It is not necessary that a claim be initially disputed in a court or agency before it
A bank may be placed under receivership once the MB finds that:
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UST LAW PRE-WEEK NOTES 2017 is filed with the liquidation court (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).
Rationale for the stay order : The reason behind the indiscriminate suspension or stay order in relation to the creditors’ claim is to expedite the rehabilitation of the distressed corporation by enabling the m anagement committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company. It also recognizes the assets of a corporation under rehabilitation held under trust for the equal benefit of all creditors under the doctrine equality is equity, whereby all the creditors ought to stand on equal footing, and not one of them should be paid ahead of others. (2006 BAR)
XPN: Where it is the bank that files a claim against another person or legal entity, the claim should be filed in the regular courts. STAY ORDER After the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the assets of the insolvent bank are held in trust for the equal benefit of all creditors. One cannot obtain an advantage or preference over another by attachment, execution or otherwise. The final judgment against the bank should be stayed as to execute the judgment would unduly deplete the assets of the banks to the obvious prejudice of other depositors and creditors (Lipana v. Development Bank of Rizal, G.R. No. L-73884, Sept. 24, 1987).
Grounds
CONSERVATORSHIP 1. Continuing inability 2. Unwillingness to maintain condition of liquidity
1. 2. 3. 4. 5. 6.
Effects
1. Juridical personality is retained. 2. Perfected transactions cannot be repudiated
1. 2. 3.
Appointment of receiver operates to suspend the authority of the bank and its officers over its properties and effects.
RECEIVERSHIP Inability to pay liabilities as they fall due e.g: bank run, rumors, etc. Assets are less than its liabilities Cannot continue business without causing damage; Violation of a cease and desist order “Bank holiday” for more than 30 days (NCBA, Sec. 30). Juridical personality is retained Suspension of operation /stoppage of business Assets deemed in custodia legis (Domingo v. NLRC, G.R. 156761, October 17, 2006).
How BSP handles crisis
1.
To protect the international reserves of the Bangko Sentral in the imminence of, or during an exchange crisis, or in time of national emergency and to give the Monetary Board and the Government time in which to take constructive measures to forestall, combat, or overcome such a crisis or emergency, the Monetary Board, with the concurrence of at least five (5) of its members and with the approval of the President of the Philippines, may: 1. 2. 3.
2. 3.
LIQUIDATION 1. Insolvency 2. Bank cannot be rehabilitated
Same with conservatorship
Granting emergency loans in an amount not exceeding 50% of its total deposits and deposit substitutes; Appointing a conservator; Appointing a receiver and order liquidation of the bank. (Dimaampao, 2017)
The relationship between a bank and its depositor is that of creditor and debtor. For this reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor’s indebtedness (Equitable PCI Bank v. Ng Sheung Ngor, et al., 171545, December 19, 2007).
temporarily suspend or restrict sales of exchange by the Bangko Sentral, and may subject all transactions in gold and foreign exchange to license by the Bangko Sentral, and may require that any foreign exchange thereafter obtained by any person residing or entity operating in the Philippines be delivered to the Bangko Sentral or to any bank or agent designated by the Bangko Sentral for the purpose, at the effective exchange rate or rates:
Loan to Banks Bangko Sentral may buy and sell credit instruments with maturities of not more than 180 days from their acquisition. [Sec. 82(a)] It may also buy and sell credit instruments with maturities of not more than 360 days from their acquisition, if they are related to the production and processing of agricultural, animal, mineral or industrial products. [Sec. 82(b)]
Provided , however, that foreign currency deposits made under Republic Act No. 6426 shall be exempt from these requirements. (NCBA, Sec. 72)
Bangko Sentral may extend loands to banks for not more than 7 days without any collateral to provide liquidity (Sec. 83)
How does the BSP extend help to banks in distress or banks with liquidity problems?
LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405, AS AMENDED)
The BSP may help banks having liquidity problems by:
PROHIBITED ACTS
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MERCANTILE LAW 1.
2.
Examination/inquiry/looking into all deposits of whatever nature with banks or banking institutions in the Philippines (including investment in bonds issued by the government) by any person, government official or office (RA 1405, Sec. 2). Disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning said deposit (RA 1405, Sec. 3).
material to its investigation (Opinion of the Secretary of Justice, February 27, 1987) 8. The Anti-Money Laundering Council (AMLC) may inquire into any deposit with any bank in case of violation of the RA 9160 or the AMLA if there is probable cause that it is related to an unlawful activity (RA 9160, as amended, Sec. 11) 9. The PDIC and the BSP may examine deposit accounts and all information related to them in case of a finding of unsafe or unsound banking practices (RA 3591, as amended, Sec. 8) 10. With court order: a. In cases of unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt P ractices Act (PNB v . Gancayco, L-18343, September 30, 1965) 11. Without court order: If the AMLC determines that a particular deposit or investment with any banking institution is related to the following (HK-MADS): a. Hijacking, b. K idnapping, c. Murder, d. Destructive Arson, and e. Violation of the Dangerous Drugs Act. f. Acts of Terrorism or in violation of Human Security Act.
However, non-bank official or employee is not covered by the prohibition. Neither is disclosure by a bank official or employee of information about bank deposit in favor of a co-employee in the course of the performance of his duties covered by the prohibition.
Confidentiality granted by RA 1405 does NOT extend to Letters of Credit and Trust Receipts DEPOSITS COVERED 1. 2.
3.
All deposits of whatever nature with banks or banking institutions found in the Philippines; or Investments in bonds issued by the Philippine government, its branches, and institutions. (R.A. 1405, Sec. 2) Trust accounts are included in the scope of the law.
Improper cases: 1. The examination of bank account to which the money paid by an insurance company for treasury bills it purchased was deposited is improper, even if the insurance company sued the seller for failure to deliver treasury bills. The money paid is not subject matter of litigation. (Onate v. Abrogar) 2. A collecting bank which sued the drawee bank to recover the deficiency for the payment of a check for failure of the drawee bank to notify the collecting bank that it had erroneously undercoded the amount of the check presented for clearing is not entitled to examination because the money in the account of the drawee is not the subject matter of the case. The subject matter is the deficiency of payment. (Union Bank of the Philippines v. Court of Appeals) 3. Ombudsman cannot inspect an account as there is yet no pending litigation before any court of competent authority. Mere investigation of Ombudsman is not enough, inspection during an investigation merely amounts to a fishing expedition. (Marquez vs. Desierto)
Instances where examination or disclosure of information about deposits can be allowed 1.
Upon written consent of the depositor (RA 1405, Sec. 2) 2. In cases of impeachment (ibid) 3. Upon order of competent court in cases of bribery or dereliction of duty of public officials (ibid) 4. In cases where the money deposited or invested is the subject matter of the litigation (ibid) a. In an action filed by the bank to recover the money transmitted by mistake, necessarily, an inquiry into the whereabouts of the amount extends to whatever is concealed by being held or recorded in the name of the persons other than the one responsible for the illegal acquisition. (1992 Bar) b. In a case of plunder, it necessarily involves an inquiry into the whereabouts of the amount purportedly acquired illegally. (Ejercito vs. Sandiganbayan, G.R. No. 157294, Nov. 30, 2006) c. In a special proceeding to settle the estate of deceased depositor, his bank deposits may be inquired into, since his bank deposits are subject matter of the case, because all of his assets are supposed to be collated. (Sy v RTC Judge of Iloilo) 5.
6.
7.
FOREIGN CURRENCY DEPOSIT (R.A. 6426, AS AMENDED) GR: Foreign currency deposits cannot be inquired or looked into. All foreign currency deposits are absolutely confidential (RA 6426, Sec. 8).
Upon order of the Commissioner of Internal Revenue: a. A decedent to determine his estate; and b. Any taxpayer who has filed for an application for compromise of his tax liability c. A specific taxpayer upon request for tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a party. (NIRC, Sec. 6 [f]) In case of dormant accounts/deposits for at least 10 years under the Unclaimed Balances Act ( Act No. 3936, Sec. 2) Presidential Commission on Good Government (PCGG) may require the production of b ank records
The surety which issued a bond to secure the obligation of the principal debtor cannot inquire into the foreign currency deposits of the debtor even if its purpose is to determine whether or not the loan proceeds were used for the purpose specified in the surety agreement. The foreign currency deposits cannot be examined without the consent of the depositor. The subpoena issued by the bank should be quashed because foreign currency deposits are not subject to court order except for violation of the anti-money laundering law (GSIS v. Court of Appeals, G.R. No. 189206, June 8, 2011).
XPNs: Based on law
6
UST LAW PRE-WEEK NOTES 2017 1. 2.
3.
4.
5.
The depositor has given his written permission (ibid.) The Commissioner of Internal Revenue is authorized to inquire into bank deposits of the following: a. A decedent to determine his estate; and b. Any taxpayer who has filed for an application for compromise of his tax liability c. A specific taxpayer upon request for tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a party. (NIRC, Sec. 6 [f]) AMLC may inquire into any deposit with a bank or financial institution in case of violation of RA 9160 if there is probable cause that it is related to an unlawful activity (RA 9160, Sec. 11). AMLC can investigate (a) any property of funds related to financing terrorism; (b) property or funds of any person if there is probable cause to believe he is committing or attempting or conspiring to commit terrorism or financing terrorism (RA 10168, Sec. 10). Upon ex parte application by a law enforcer authorized by the Anti-Terrorism Council, the justices of the CA designated as special court to handle anti-terrorism cases may authorize the examination of deposits in a financial institution upon finding probable cause of the commission of terrorism or conspiracy to commit terrorism (RA 9372, Sec. 27-28). PDIC and BSP may examine deposit accounts and all information related to them in case of a finding of unsafe or unsound banking practices (RA 3591, as amended, Sec. 8).
case yet filed before the court since it is still in the preliminary investigation stage.
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS The prohibition against examination or inquiry does not preclude its being garnished for satisfaction of judgment. The disclosure is purely incidental to the execution process and it was not the intention of the legislature to place bank deposits beyond the reach of judgment creditor (PCIB v. CA, G.R. No. 84526, January 28, 1991). With respect to foreign deposits, they shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever (RA 6426, Sec 8).
XPN: The garnishment of a foreign currency deposit should be allowed to prevent injustice and for e quitable grounds GENERAL BANKING LAW OF 2000 (RA 8791) Banks and their ownership Banks refer to entities engaged in the lending of funds obtained in the form of deposits. Quasi-bank are entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or purchasing of receivables and other obligations (GBL, Sec 4). Unlike banks, quasi-banks do not accept deposits. Neither are funds obtained insured with the PDIC.
Based on jurisprudence 1. Where the funds deposited in a joint foreign currency savings account belonged exclusively to one of the depositors and were held in trust for him by the other depositor and the other depositor unilaterally closed the joint account and transferred the funds to her personal account, the latter cannot invoke the exemption from court processes under RA 6426 because she is not the owner of the deposit in the account. (Van Twest v. Court of Appeals, G.R. No. 106235, February 10, 1994). 2. A father who sued his daughter for illegally withdrawing funds from his foreign currency deposit and transferring to another bank in the name of her sister, can inquire into the deposit of the sister, because the money deposited belongs to him (China Banking Corp. v. CA, G.R. No. 140687, December 18, 2006). 3. The exemption from court process of foreign currency deposits under RA 6426 cannot be invoked by a foreign transient who raped a minor, escaped and was held liable for damages to the victim. The garnishment of his foreign currency deposit should be allowed to prevent an injustice and for equitable grounds. The law was enacted to encourage foreign currency deposit and not to benefit a wrongdoer (Salvacion v. Central Bank of the Philippines, G.R. No. 94723, August 21, 1997).
Ownership of a bank Individuals and non-bank corporations, whether foreign or Filipino, ay own or control up to 40% of the voting stock of a domestic bank. i. The percentage of foreign-owned stocks shall be determined by the citizenship of the individual stockholder. ii. The citizenship of the non-bank corporation shall follow the citizenship of its controlling stockholders.
FIT AND PROPER RULE: The Monetary Board shall take into consideration the capability in terms of financial resources and technical expertise and intergrity of banks before they may be allowed to operate. Explain money market placement. Money market placement is a simple loan or mutuum. It is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. ( Allied Bank v. Lim Sio Wan, 549 SCRA 504, March 27, 2008)
During a preliminary investigation for estafa, the investigating fiscal issued subpoena for production of bank account. Is this proper? NO. The investigating fiscal may not issue a subpoena to inquire into the bank deposit. It is only a court of competent jurisdiction which may do so. There is no
Classifications of banks (2002, 2010 BAR)
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MERCANTILE LAW 1.
2.
3.
4.
5.
6.
7.
Universal banks – Primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization. Commercial banks – Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and can neither exercise the powers of an investment house nor invest in non-allied enterprises. Thrift banks – These are a) Savings and mortgage banks; b) Stock savings and loan associations; and c) Private development banks, which are primarily governed by the Thrift Banks Act (RA 7906). Rural banks – These are mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353). Cooperative banks – Banks whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. They are governed primarily by the Cooperative Code (RA 6938). Islamic banks – Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’ a, such as th e Al Amanah Islamic Investment Bank of the Philippines which was created by RA 6848. Other classification of banks as determined by the Monetary Board of the BSP.
3.
4.
5.
Directors 1. 2. 3. 4.
Composition: 5 to 15 At least 2 directors shall be independent Foreigners may become directors to the extent of foreign participation in the equity of the bank In case of bank merger or consolidation. Directors shall not exceed 21.
by an additional 10% of the net worth of such bank provided that additional liabilities are adequately secured by trust receipt, shipping documents, warehouse receipts and other similar documents which must be fully covered by an insurance (GBL, Sec. 35.2). Loans and other credit accommodations secured by REM shall not exceed 75% of the appraised value of the real estate security plus 60% of the appraised value of the insured improvements (GBL, Sec. 37) CM/intangible property such as patents, trademarks, etc. shall not exceed 75% of the appraised value of the security (GBL, Sec. 38). Loans being contractual, the period of payment may be subject to stipulation by the parties. In the case of amortization, the amortization schedule has no fixed period as it depends on the project to be financed such that if it was capable of raising revenues, it should be at least once a year with a grace period of 3 years if the project to be financed is not that profitable which could be deferred up to 5 years if the project was not capable of raising revenues (GBL, Sec. 44). Loans granted to DOSRI: a. Director b. Officer c. Stockholder, having at least 1% ownership over the bank d. Related Interests, such as DOS’s spouses, their relatives within the first degree whether by consanguinity or affinity, partnership whereby DOS is a partner or a corporation where DOS owns at least 20%.
RESTRICTIONS ON BANK EXPOSURE TO DOSRI (DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR RELATED INTERESTS) Requirements that must be complied with in case of DOSRI accounts (2002 BAR)
ACQUISITION OF REAL ESTATE APPROVAL REQUIREMENT: Loan must be approved by the majority of all the directors not including the director concerned.
For its own use : Total investment in real estate and improvements, including equipment, for the own use of the bank shall not exceed 50% of combined capital account
REPORTORIAL REQUIREMENTS: a. Loan must be entered in the books of the corporation (GBL, Sec. 36) b. CB must be informed of the prior to the transaction.
For satisfaction of debt : Real property acquired by bank because of a mortgage, conveyance in satisfaction of debt, or under judgement shall be dispoed within 5 years. (Sec. 52)
CEILING REQUIREMENT: The amount of the loan shall not exceed the book valued of the paid-in contribution and the amount of the unencumbered deposits. (Go v. Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23, 2009)
SINGLE BORROWER’S LIMIT
Limitations imposed upon banks with respect to its loan function 1.
ARMS-LENGTH RULE: It provides that any dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the bank than those offered to others (GBL, Sec. 36 [2]).
GR: Single borrower’s limit – The total amount of loans, credit accommodations and guarantees that the bank could grant should at no time exceed 25% of the bank’s net worth (GBL, Sec 35.1, 2002, 2015 BAR).
Effect of non-compliance with the foregoing requirement: Violation of DOSRI is a crime and carries with it penal sanction. It does not make the transaction void but only renders the responsible officers and directors criminally liable. (Republic v. Sandiganbayan, G.R. No. 166859, 169203, 180702, April 12, 2011).
XPN: a. As the Monetary Board may otherwise prescribe for reasons of national interest b. Deposits of rural banks with GOCC financial institutions like LBP, DBP, and PNB. 2.
A bank officer violates the DOSRI law when he acquires bank funds for his personal benefit, even if such acquisition was facilitated by a fraudulent loan
The total amount of loans, credit accommodations and guarantees prescribed in (a) may be increased
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UST LAW PRE-WEEK NOTES 2017 application. Directors, officers, stockholders, and their related interests cannot be allowed to interpose the fraudulent nature of the loan as a defense to escape culapability or their circumvention of the law. The prohibition under the law covers loan by a bank director or officer which are made directly, indirectly, for himself or as the representative or agent of others. At the same time, he is liable for estafa through falsification of commercial documents. The bank money which came to his possession as a result of the fraudulent loan application was not his. He remained bank’s fiduciary with respect to that money, which makes it capable of misappropriation or conversion in his hands (Soriano v. People of the Philippines, et al., G.R. No. 162336, February 1, 2010)
5.
6.
SPECIAL LAWS ANTI-MONEY LAUNDERING ACT OF 2001 (R.A. 9160, AS AMENDED BY RA 9194, 10167, 10365)
7.
Money laundering is committed by any person who, knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity: a. b.
c.
d. e.
f.
FREEZING OF MONEY INSTRUMENT OR PROPERTY Upon a verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order which shall be effective immediately, and which shall not exceed six (6) months depending upon the circumstances of the case: Provided, That if there is no case filed against a person whose account has been frozen within the period determined by the court, the freeze order shall be deemed ipso facto lifted: Provided, further, That this new rule shall not apply to pending cases in the courts. In any case, the court should act on the petition to freeze within twenty-four (24) hours from filing of the petition. If t he application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall exclude the nonworking days.
transacts said monetary instrument or property; converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property; conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary instrument or property; attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c); aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above; and performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraphs (a), (b) or (c) above.
“Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.” (Sec. 4, RA 10365, amending Sec. 4, RA 9160).
COVERED 'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of Five hundred thousand pesos (PhP 500,000.00) within one (1) banking day. (RA 9160, Sec. 3 [b]).
client's transaction is structured in order to avoid being the subject of reporting requirements under the Act; Any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution; The transactions are in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or Any transactions that is similar or analogous to any of the foregoing." (RA 9160, Sec. 3[b-1]).
A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the expiration of the freeze order. No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court. (Sec. 8, RA 10365, amending RA 9160.)
SUSPICIOUS 'Suspicious transaction' 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 justification; 2. The client is not properly identified; 3. The amount involved is not commensurate with the business or financial capacity of the client; 4. Taking into account all known circumstances, it may be perceived that the
Safe Harbor Provision No administrative, criminal or civil proceedings, shall lie against any person for having made a COVERED transaction report or a SUSPICIOUS transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law.
FINANCIAL REHABILITATION AND INSOLVENCY ACT (R.A. 10142) Rehabilitation Rehabilitation refers to the restoration of the debtor to a condition of successful operation and solvency, if it is
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MERCANTILE LAW shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if its immediately liquidated. (Dimaampao, 2017)
to another (Pre-Week Reviewer in Commercial Law, Dimaampao & Dumlao-Escalante, 2014).
What are the requisites of negotiability? (WUPOA) 1.
Can a distressed corporation file a petition for corporate rehabilitation after the dismissal of its earlier petition for liquidation? Explain.
2. 3.
YES. The dismissal of a petition for liquidation does not preclude the distressed corporation from filing a petition for corporate rehabilitation. The dismissal of the petition for liquidation implies that corporation may still be restored to successful operation and solvency. (Dimaampao, 2017)
4. 5.
It must be in Writing and signed by the maker or drawer; Must contain an Unconditional promise or order to pay a sum certain in money; Must be Payable on demand, or at a fixed or determinable future time; Must be payable to Order or to bearer; and Where the instrument is Addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty (NIL, Sec.1).
When is an instrument payable to order? Can the corporation file a petition for rehabilitation first, and after it is dismissed, file a petition for liquidation?
The instrument is payable to order where it is drawn payable to the order of a specified person or to him or to his order. It may be drawn payable to the order of:
YES. The dismissal of a petition for rehabilitation connotes that the corporation can no l onger be restored. Ergo, it can file a petition for liquidation. (Dimaampao, 2017)
1. 2. 3. 4. 5. 6.
Explain the phrase “equality is equity” in corporate rehabilitation proceedings. “Equality is Equity” means that once the corporation is taken over by a receiver, all the creditors stand on equal footing and no one may be paid ahead of the others. This is consistent with the “pari passu” principle in that all assets of a corporation under rehabilitation receivership are held in trust for the benefit of all creditors, precluding one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise. (Dimaampao, 2017)
A Payee who is not a maker, drawer, or drawee; The Drawer or maker; or The Drawee; or Two or more payees Jointly; or One or some of Several payees; or The Holder of an office for the time being (Sec. 8, NIL).
An order instrument is negotiated by indorsement completed by delivery (Sec. 30, NIL). If an order instrument is not indorsed, the negotiation is incomplete and the instrument is in effect, merely assigned. The transferee acquires the right to have the indorsement of the transferor. It is only at the time of indorsement that negotiation takes effect and the transferee acquires all the rights of a holder. (Dimaampao & Dumlao-Escalante, 2014).
Liquidation. When is an instrument payable to bearer? (ENaF PaLa)
In a broad sense, it is equivalent to winding up, that is, the comprehensive process of settling accounts, ascertaining and adjusting debts, collecting assets and paying off claims. It is a declaration by the trial court of the corporation’s insolvency so that its creditors may be able to file their claims in the settlement of corporation’s debts and obligations. (Pacific Banking Corporation Employees Oraganization v. CA, 312 Phil. 578, 592-593)
1. 2. 3.
NEGOTIABLE INSTRUMENTS LAW 4.
What is Negotiable Instrument?
5.
It is a written contract for the payment of money which is intended as a substitute for money and passes from one person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free from defenses available to prior parties (Sundiang Sr. & Aquino, 2011).
When it is Expressed to be so payable; (e.g. I promise to pay to bearer P10,000.00) When it is payable to a person Named therein or bearer; (e.g. Pay to P or bearer P10,000.00) When it is payable to the order of a Fictitious person or non-existing person, and such fact was known to the person making it so payable; (e.g. Pay to John Doe or order) When the name of the Payee does not purport to be the name of any person; (Pay to cash) When the only or the Last indorsement is an indorsement in blank (NIL, Sec 9).
What is Fictitious-Payee rule? The fictitious-payee rule contemplates that the payee is fictitious or not intended to be true recipient of the proceeds. The check is considered a bearer instrument negotiable by delivery alone. The underlying theory is that the maker of the check knew that the fictitious payee cannot indorse the instrument so that he must have intended for it to be negotiated by mere delivery. (PNB v. Rodriguez, G.R. No. 170325, September 26, 2008)
What are the characteristics or features of a negotiable instrument? Negotiability – the negotiable instrument passes from hand to hand as money so as to give the holder in due course the right to hold the instrument and collect the sum for himself. 2. Accumulation of secondary contracts– contracts are created as the instrument passes from one person 1.
GR: In case of controversy, the drawer is liable and the drawee bank is absolved from liability. XPN: When there is commercial bad faith, whereby the
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UST LAW PRE-WEEK NOTES 2017 drawee bank acts dishonestly and is a party to the fraudulent scheme. The check is deemed payable to order, and consequently, the drawee bank bears the loss (Ibid).
What are the kinds of negotiable instruments? 1.
2.
3.
c.
Promissory notes (PN) – An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer (NIL, Sec. 184). Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (NIL, Sec. 126). Check – A bill of exchange drawn on a bank payable on demand (NIL, Sec. 185).
d.
e.
PARTIES TO A NEGOTIABLE INSTRUMENT
f.
Who are the parties to a negotiable instrument? What are their liabilities? In a promissory note there are two parties.
The maker who makes the promise and signs the instrument and is primarily liable for the payment of the obligation;
g.
The payee to whom payment is originally payable.
In a bill of exchange there are four parties.
The drawer who issues and draws the bill and whose liability to pay is only secondary, except when drawee refused to accept; can limit his liability by putting “without recourse”; The drawee upon whom the bill is drawn may not be held liable until he becomes acceptor; The payee to whom payment is originally payable; and The acceptor who is the drawee who accepts the bill.
COMPLETION AND DELIVERY INCOMPLETE BUT DELIVERED (Sec. 14) Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. (NIL, Sec. 14).
PROMISSORY NOTE v . BILL OF EXCHANGE When can you treat a bill of exchange as a promissory note? (2015 BAR) 1. 2. 3. 4.
In order that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within reasonable time. If such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within reasonable time (Ibid).
Where in a bill the drawer and the drawee are the same person (NIL, Sec. 130) The drawee is a fictitious person (NIL, Sec. 130) The drawee does not have the capacity to contract (NIL, Sec. 130) Whether the instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it either at his election (NIL, Sec. 17[e])
NEGOTIABILITY OF OTHER DOCUMENTS
INCOMPLETE AND UNDELIVERED (Sec. 15)
Determine the negotiability of the following documents. a.
b.
promise to repay the same to the depositor or bearer thereof at a specific time (Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and Trust Company, G.R. No. 97753, August 10, 1992). A letter of credit is not negotiable because it is generally conditional and has limited negotiability because it is issued in favor of a specific person. But the Supreme Court held in Lee vs. Court of Appeals, that the drafts issued in connection with the letters of credit are negotiable instruments. A warehouse receipt is not a negotiable instrument because the obligation of a warehouseman is not to pay but to d eliver the goods under the warehouse receipt which fails to comply with the requirements set forth under Sec. 1 of the NIL. A treasury warrant require appropriations from the national government which means that the particular fund may or may not exists which renders it conditional, thereby non-negotiable. A certificate of indebtedness is not negotiable. It merely acknowledges to pay a sum of money to a specified persons or entity. Since a certificate of indebtedness which is not payable to order or bearer but is payable to a specific person is not negotiable, the assignee takes it subject to the defect in the title of the assignor. The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of exchange (Hongkong & Shanghai Banking Corporation v. CIR, G.R. Nos. 166018 & 167728, 04 June 2014).
Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the ha nds of any holder, as against any person whose signature was placed thereon before delivery (NIL, Sec. 15).
Postal money order is not a negotiable instrument . It is governed by postal rules and regulation and it may only be negotiated once. The certificate of time deposit is a negotiable instrument because it is an acknowledgement in writing by the bank of the amount of deposit with a
Q: PN makes a promissory note for P5, 000.00, but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He
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MERCANTILE LAW mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. It turned up later when X presented it to PN for payment. Before X, T who turned out to have filched the note from PN’s office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery. But X said he had no participation in, or knowledge about the pilferage and alteration of the note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law. Who is correct and why?
2.
What is Cut-off Principle? In order instruments, parties prior to forgery are relieved or cut-off of liability. They cannot be held liable by any holder, including a holder in due course.
What are the legal consequences when a bank honors a forged check? If the drawer's signature is forged, then the drawee bank is liable because the bank is bound to know the signature of its customers and if it pays a forged check, it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. It is also in a superior position to detect the forgery because it has a specimen of the signature of the maker. Lastly, by accepting the instrument, it becomes an acceptor who admits the gen uineness of the drawer’s signature.
A: Since the negotiable instrument is still incomplete and has not yet been delivered, PN is correct in dishonoring the said instrument. Sec. 15 of Act 2031 provides that where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Thus, under this section, it is a real defense that can even be interposed against a holder in due course.
If the payee’s signature is forged, then drawee bank is liable because it owes to the drawer-depositor an absolute and contractual duty to pay the check only to the person to whom it is made payable. Drawee bank, in such case, should credit back and restore to drawer’s account the value of the check wrongfully encashed.
COMPLETE BUT DELIVERED (Sec. 16) It is incomplete and revocable until delivery of the instrument for the purpose of giving it effect (NIL, Sec. 16). Delivery is essential to the validity of any negotiable instrument (Sundiang Sr. & Aquino, 2009).
If the indorser’s signature is forged Drawee bank bears the loss as it is under strict liability to pay the check to the order of the payee. Payment under forged indorsement is not to the drawer’s order. Ensuingly, if the drawee bank pays a check bearing forged signature of indorser, it does so at its own peril.
Q: Jun was to leave for a business trip. As his usual practice, he signed several blank checks. He instructed Ruth, his secretary, to fill them as payment for his obligations. Ruth filled one check with her name as payee, placed P30, 000 thereon, endorsed and delivered it to Marie. She accepted the check in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did and apologized to Jun. immediately, he directed the drawee bank to dishonor the check. When Marie encashed the check, it was dishonored. Is Jun liable to Marie? (2006 BAR)
However, the drawee bank may pass the liability to the collecting bank who cannot interpose the defense of forgery. The collecting bank is an indorser who warrants that the instrument is genuine and in all respect what it purports to be (NIL, Sec. 16). The collecting bank had no right to be paid by the drawee bank since the forged indorsement is inoperative. The collecting bank my ultimately recover from the forger.
A: YES. Considering that Marie accepted the check in good faith and for value, she is a holder in due course, who has the right to enforce payment of the check for the full amount thereof against Jun. That the blank check was filled-up not in accordance with the authority given is only a personal defense that cannot be used against a holder in due course.
Who are the persons precluded from setting up the defense of forgery? (2010 BAR) 1.
FORGERY
2.
What is the effect of forgery in a negotiable instrument?
3.
GR: It does not avoid the instrument but only the forged signature. The signature is wholly inoperative. In other words, rights may still exist and be enforced by virtue of such instrument as to those signatures thereto are found to be genuine.
Those who admit/warrant the genuineness of the signature such as indorsers, persons negotiating by delivery and acceptor; (NIL, Sec 56). Those who by their acts, silence, or negligence, are estopped from claiming forgery; A holder of a bearer instrument who subsequently negotiates such instrument with a prior forged indorsement (forged indorsement is not necessary to his title it being a bearer instrument).
ACCOMODATION PARTY Who is an accommodation party?
XPNs: 1.
Where the forged signature is not necessary to the holder’s title, in which case, the forgery may be disregarded (NIL, Sec. 48).
An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person (NIL, Sec. 29).
If the party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority (NIL, Sec. 23).
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UST LAW PRE-WEEK NOTES 2017 What are the requisites to be an accommodation party? 1. 2. 3.
Under the "shelter principle," the HIDC, by negotiating the instrument, to a party not an HIDC, transfers all his rights as such holder to the latter and acquires the right to enforce the instrument as if he was an HIDC. The principle applies to a "sheltered" holder who is not a party to any fraud or illegality impairing the validity of the instrument.
Accommodation party must sign as maker, drawer, acceptor or indorser; No value is received by the accommodation party from the accommodated party; and The purpose is to lend the name.
Q: A drawer issued a check for the payment of a car, which check was delivered to the agent of the owner of the car for safekeeping. The check was then used by the agent to pay the medical bills of his wife in a clinic. The projected purchase did not materialize. Is the clinic considered a holder in due course?
The accommodation party, as surety, is deemed an original promisor and debtor from the beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable. Although a contract of suretyship is in essence accessory or collateral to a valid principal obligation, the surety’s liability to the creditor is immediate, primary and absolute; he is directly and equally bound with the principal. As an equivalent of a regular party to the undertaking, a surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations nor does he receive any benefit therefrom.
A: NO, the rule that a possessor of the instrument is prima facie a HIDC does not apply to the clinic because it cannot be said to have acquired the negotiable instrument in good faith for there was a defect in the title of the holder (agent), since the instrument was not payable “to the agent or to bearer;” also the drawer had no account with the clinic, the agent did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own account.
Can a corporation act as an accommodation party? As the holder’s title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder’s title, the presumption that the clinic is a HIDC does not exist (De Ocampo & Co. v. Gatchalian, G.R. No. L-15126, November 30, 1961).
NO. A corporation cannot act as an accommodation party. The issue or endorsement of negotiable instrument by a corporation without consideration and for accommodation of another is ultra vires. In such case, the corporation incurs no liability. The officer who signed shall be personally liable. (Dimaampao & Dumlao-Escalante, 2014)
What are the defenses against a Holder?
An accommodation party cannot set up lack of consideration against any holder, even as to one who is not a holder in due course.
1.
HOLDER IN DUE COURSE (HIDC)
2.
GR: Every holder is deemed prima facie to be an HIDC. XPN: When it is shown that the title of any person who has negotiated the instrument was defective. But this is only as regards a party who became such after the acquisition of the defective title (NIL, Sec.59).
Real or Absolute Defenses – those that are attached to the instrument itself and are available against all parties, both immediate and remote, including holders in due course. Personal or Equitable Defenses – defenses which are only available against a holder not in due course. Those which grow out of the agreement or conduct of a particular person which renders it inequitable for him, though holding the legal title, to enforce it against the party sought to be made liable.
What are the Real or Absolute Defenses available against the Holder?
What constitutes a Holder in Due Course? 1.
A holder in due course is a holder who has taken the instrument under the following conditions:
2.
That is Complete and regular upon its face; Became the holder before it was Overdue, and without notice that it has been previously dishonored, if such was the fact; Took it in good Faith and for value; At the time it was negotiated to him, he had no notice of any Infirmity in the instrument or defect in the title of the person negotiating it. (NIL, Sec. 52)
4.
1. 2.
3. 4.
3.
5. 6. 7. 8. 9. 10.
11.
A holder in due course holds the instrument free from any defect of title of prior parties and from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof.
12.
Discuss the Shelter principle or Holder in Due Course by Subrogration.
1.
13.
Incomplete and undelivered instrument Minority (available only to the minor) Incapacity as far as incapacitated persons are concerned Ultra–vires acts of a corporation Want of Authority, apparent and real Fraudulent alteration Forgery Duress amounting to Forgery Prescription Other infirmities appearing on the face of the instrument Discharge in insolvency Illegal Contract Fraud in Factum or Esse Contractus
What are the Personal or Equitable Defenses available against the Holder?
2.
3.
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Innocent alteration or spoliation Discharge of party Secondarily liable by discharge of prior party. Set-off between immediate parties
MERCANTILE LAW 4.
5.
6.
7. 8. 9. 10.
Filling up of blanks not in accordance with the Authority given Acquisition of instrument by Duress or force and fear; unlawful means or for an illegal consideration Discharge by payment or renunciation or release before maturity Failure or absence of consideration. Undelivered complete instrument Insertion of a wrong date Fraud in inducement or simple fraud
a. b. c. d.
Instrument is genuine; He has good title to it; Capacity to contract of all prior parties; and; No knowledge of any fact which would impair the validity of the instrument. (NIL, Sec.65)
NOTE: He is liable to all parties who derive their title through his indorsement. A person negotiating by delivery has the same warranties as a qualified indorser. But unlike a qualified indorser, a person negotiating by mere delivery is liable only to his immediate transferee. (NIL, par. 2, Sec. 65)
LIABILITIES OF PARTIES A party primarily liable is unconditionally bound and absolutely required to pay the instrument upon maturity. While a party secondarily liable is conditionally bound to pay only after the ff. conditions have been fulfilled:
NOTE: Person negotiating by mere delivery and a qualified indorser’s secondary li ability is limited, namely, to their warranties. How are negotiable instruments discharged?
1. 2. 3.
Due presentment for payment or acceptance to primary party (NIL, Sec. 143); Dishonor by such party (NIL, Sec.70); Taking of proceedings required by law (NIL, Sec.152)
a. b.
Negotiable instrument should be presented for payment to the party primarily liable (NIL, Sec. 72[d]):
c. d.
What are the warranties and liabilities of parties who are secondarily liable?
e.
By payment in due course by or on behalf of the principal debtor; By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation By the intentional cancellation thereof by the holder By any other act which will discharge a simple contract for the payment of money When the principal debtor becomes the holder of the instrument at or after maturity in his own right (Sec. 119, NIL).
Absolute Liability What are the requisites of payment in due course? A drawer of a Bill of Exchange warrants: a. The existence of payee and his then capacity to indorse; b. That the instrument will be accepted or paid upon due presentment by the party primarily liable according to its tenor; and c. That if dishonored, he will pay the party entitled to be paid. (NIL, Sec. 61.)
1. 2. 3.
It is made at or after the date of Maturity; To the Holder thereof; In Good faith and without notice that holder’s title is defective (NIL, Sec. 88).
The term “in good faith” refers to the maker or acceptor and not to the holder.
A general indorser warrants that: i. Instrument is genuine ii. He had good title to it iii. All prior parties had capacity to contract iv. Instrument, at the time of indorsement, was valid and subsisting; v. On due presentment, it shall be accepted or paid, or both according to its tenor
What is reasonable time as applied to presentment?
If the instrument is dishonored and the necessary proceedings on dishonor be duly taken, he will pay the holder. (NIL, Sec. 66.)
NOTICE OF DISHONOR
Reasonable time is relative. Regard is to be had to the facts of each case, usage of business and trade, and the nature of the instrument. With respect to checks, current banking practice dictates that the check becomes stale if it is not presented for payment within 6 months (180 days) from issuance.
What is a notice of dishonor?
An irregular indorser is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes one because of his signature in the instrument. a. In an order instrument, liable to the payee and all subsequent parties b. If bearer instrument or payable to order of maker or drawer, liable to all parties subsequent to the maker or drawer
It is a notice given by the holder to the parties secondarily liable, drawer and each indorser, that the instrument was dishonored by non-payment or nonacceptance by the drawee/maker. Persons primarily liable need not be given notice of dishonor because they are the ones who dishonored the instrument.
What are the instances when notice of dishonor is NOT necessary?
If he signs for accommodation of the payee, liable to all parties subsequent to payee. (NIL, Sec. 64.)
1. 2. 3.
Limited Liability A qualified indorser warrants that the:
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Waiver of notice (NIL, Sec. 109) Waiver of protest (NIL, Sec. 111) When notice is dispensed with when after exercise of reasonable diligence, notice cannot be given or
UST LAW PRE-WEEK NOTES 2017
4. 5. 6.
does not reach the parties sought to be charged (NIL, Sec. 112) Drawer in cases under Sec. 114 , NIL. Indorser in cases under Sec. 115 , NIL.; and Where due notice of dishonor by non-acceptance has been given (notice of dishonor by non-payment not necessary). (NIL, Sec. 116.)
3.
Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee (NIL, Sec. 143, par. 1).
The holder must either present it for acceptance or negotiate it within a reasonable time, otherwise, the drawer and all indorsers are discharged (NIL, Sec. 144).
ACCEPTANCE
What is constructive acceptance?
What is an acceptance of a bill?
The drawee is deemed to have accepted the instrument if he destroys the same, refuses within 24 hours after delivery or within such other period as the holder may allow, to return the bill accepted or not accepted to the holder. (Sec. 137)
It is a signification by the drawee of his assent to the order of the drawer (NIL, Sec. 132) .
What are the requisites of acceptance? PROMISSORY NOTES 1.
2. 3. 4.
In writing, except constructive acceptance and to a foreign bill payable in another state ( unless the other state requires for written acceptance); Signed by the drawee (without it, he is not liable); Must express a promise to pay money (not goods); Delivered to the holder (before delivery or notification, acceptor may revoke or cancel his acceptance).
What is a promissory note? An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer (NIL, Sec. 184).
What is a check?
Upon acceptance, the bill, in effect becomes a note. The drawee who thereby becomes an acceptor assumes the liability of the maker (who has primary liability) and the drawer, that of the first indorser.
It is a bill of exchange drawn on a bank and payable on demand (NIL, Sec. 185). A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.
Is acceptance necessary to make any party to the bill liable? GR: Acceptance is not necessary to render any party to the bill liable (NIL, Sec. 143, par. 2).
What are the essential characteristics of checks? 1. 2.
XPNs: 1. Where bill is payable after sight, or when it is necessary in order to fix the maturity of the instrument; 2. When bill expressly stipulates that it shall be presented for acceptance; or BASIS Drawee Payability Function Presentment for Payment Discharge of Liability
Effect of the Death of the Drawer Presentment for Acceptance
They are drawn on a bank; and Payable instantly on demand.
What is the distinction between a check and a bill of exchange?
CHECKS Always drawn on a bank or banker against a previous deposit of funds Always payable on demand Ordinarily intended for immediate payment Must be presented for payment within a reasonable time after its issue(NIL, Sec.186) When a check is accepted or certified, the drawer & indorsers are discharged from liability thereon (NIL, Sec. 188) Death of the drawer of a check with the knowledge of the bank revokes the authority of the bank to pay. Need not be presented for acceptance (NIL, Sec. 185)
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BOE May or may not be drawn on a bank and need not be drawn against a deposit Either payable on demand or at a fixed or determinable future time (NIL, Sec.4) Intended for circulation as instrument of credit Must be presented for payment within a reasonable time after its last negotiation (NIL, Sec. 171) They remain liable despite a cceptance (NIL, Sec. 84)
Death of the drawer of an o rdinary bill does not revoke the authority of the drawee to pay. Must be presented for acceptance in certain cases (NIL, Sec. 143)
MERCANTILE LAW What is the effect of erasure or alteration on checks?
b. That the check may be negotiated only once - to one who has an account with a bank; c. That the act of crossing the check serves as a warning to the holder that the check has been issued for definite purpose so that he must inquire if he has received the check pursuant to the purpose. Otherwise, he is not an HIDC (State Investment House v. IAC, G.R. No. 72764, July 13, 1989).
Pursuant to Philippine Clearing House Corporation Memorandum Circular No. 15-460A effective January 4, 2016, the following shall no longer be eligible or acceptable for clearing: a.
b.
Any check that shows or indicates on its face erasure or alteration regardless of any signature or initials that appear to indicate authorization of the alteration or erasure; or Does not indicate the date, payee, amount payable in figures, amount payable in words, or signature of the drawer
NOTE: Manager’s and cashier’s checks are still the subject of clearing to ensure that the same have not been materially altered or otherwise completely counterfeited. However, manager’s and cashier’s checks are preaccepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of the check (Metrobank and Trust Company vs Chiok, GR No. 172652, November 26, 2014).
Material alteration on checks When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to charge its client’s account only for bona fide disbursements he had made. If the drawee did not pay according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity. The drawee, however, still has recourse to recover its loss. The collecting banks are ultimately liable for the amount of the materially altered check (Areza vs. Express Savings Bank, Inc., G.R. No. 176697, September 10, 2014).
Q: Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel:
Is a manager’s check as good as cash? Why or why not? (2015 BAR)
a.
YES, the Supreme Court held in various decisions that a manager’s check is good as cash. A manager’s check is a check drawn by the bank against itself. It is deemed preaccepted by the bank from the moment of issuance. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay. By issuing it, the bank in effect commits its total resources, integrity and honor behind the check. (Tan v. Court of Appeals, 239 SCRA 310; International Corporate Bank vs Gueco, 351 SCRA 516; Metrobank and Trust Company vs Chiok, GR No. 172652, November 26, 2014).
b.
Whether as second indorser and holder of the crossed check, is it a holder in due course? Whether Po’s defense of lack of consideration as against Jose is also available as against Excel? (1994, 1995, 2005 BAR)
A: a.
What is a cross check? Done by writing 2 parallel lines on the left top portion of the check. The marking signifies that the bank should pay only with the intervention of the company only.
b.
What is the effect of crosschecking? a. That the check may not be encashed but only deposited in the bank;
Excel Inc. is not a holder in due course. The act of crossing the check imposes upon the holder thereof the duty to ascertain the indorser’s, title to th e check or the nature of his possession or the purpose for which it was issued. Excel is guilty of gross negligence amounting to legal absence of good faith for its failure to inquire from Jose the purpose for which the three checks were crossed despite the warning of the crossing, hence, it is not deemed a holder in due course. YES, the defense of lack of consideration as against Jose is also available as against Excel. For not being a holder in due course, Excel is subject to personal defenses as if the check were non-negotiable, such as lack of consideration between Po Press and Jose. In this ca se, Jose’s failure to deliver the newsprint resulted in the absence of consideration for the
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UST LAW PRE-WEEK NOTES 2017 issuance of the check. Consequently, Po Press cannot be made liable to pay the face value of the check.
What is the meaning of the notation “Account Payee Only” in a crossed check? A crossed check with the notation account payee can
against all risk or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in the Asian region. Does BD have an insurable interest within the meaning the Insurance Code of the Philippines? (2000 BAR)
UST LAW PRE-WEEK NOTES 2017 against all risk or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in the Asian region. Does BD have an insurable interest within the meaning the Insurance Code of the Philippines? (2000 BAR)
issuance of the check. Consequently, Po Press cannot be made liable to pay the face value of the check.
What is the meaning of the notation “Account Payee Only” in a crossed check? A crossed check with the notation account payee can only be deposited in the named payees account. It is gross negligence for a bank to ignore this rule solely on the basis of a third partys’ oral representations of having a good title thereto (Equitable Banking Corporation v. Special Steel Products, G.R. No. 175350, June 13, 2012, in Divina, 2014).
A: YES. BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess of the limit covered by the PDIC Act, BD will be damnified. He will suffer pecuniary loss of P400, 000, that is, his bank deposit of half a million pesos minus P100, 000 which is the maximum amount recoverable from the PDIC.
Distinguish clearly crossed checks from cancelled checks (2004 BAR)
Q: In return for the 20 years of faithful servic e of X as a house helper to Y, the latter promised to pay P100, 000 to X’s heirs if he (X) dies in an accident by fire. X agreed. Is this an insurance contract? (2011 BAR)
A crossed check is one with two parallel lines drawn diagonally on the left portion of the check. On the other hand, a cancelled check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof.
a. Yes, since all the elements of an insurance contract are present. b. Yes, since X’s services may be regarded as the consideration. c. No, since Y actually made a conditional donation in X’s favor. d. No, since it is in fact an innominate contract between X and Y.
Stale check: A check which has not been presented for payment within a reasonable time after its issue. It is valueless and thus, should not be paid. A check becomes stale 6 months from date of issue. INSURANCE LAW
A: b) No, since Y actually made a conditional donation in X’s favor.
CONCEPT OF INSURANCE Q: What is a Contract of Insurance?
Elements of an Insurance Contract
A: It is an agreement whereby one undertakes for a consideration to indemnify another against the loss, damage or liability arising from an unknown or contingent event (IC, Sec. 2[a]).
1.
2.
Q: May a member of the MILF or its breakaway group, the Abu Sayyaf, be insured with a company licensed to do business under the Insurance Code of the Philippines? Explain.
3.
A: YES. A member of the MILF or the Abu Sayyaf may be insured with a company licensed to do business under the Insurance Code of the Philippines. What is prohibited to be insured is a public enemy. A public enemy is a citizen or national of a country with which the Philippines is at war. Such member of the MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines.
4. 5.
Scheme to distribute losses – Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing a similar risk. Payment of premium – As consideration for the insurer’s promise, the insured makes a ratable contribution called “premium,” to a general insurance fund. Existence of insurable interest – The insured possesses an interest of some kind susceptible of pecuniary estimation, known as “insurable interest.” Assumption of Risk – The insurer assumes that risk of loss for a consideration. Risk of loss – The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated peril.
Parties to an Insurance Contract
Q: BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the PDIC is only 1/10 of BD’s deposit, he would like some protection for the excess by taking out an insurance
1.
Insurer – party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured on the happening of a
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MERCANTILE LAW
2.
specified contingency or event. The term “insurer” no longer includes “individuals” under RA 10607 Insured – person in whose favor the contract is operative and is indemnified. The insured is not always the person to whom the proceeds are paid.
determine who should be entitled to the proceeds of the policy. If you were the judge, how would you decide the said interpleader action? Explain. (1985 BAR) A: If I were the judge, I would decide that the legal wife, Clara, be entitled to the proceeds of insurance taken by
MERCANTILE LAW
2.
determine who should be entitled to the proceeds of the policy.
specified contingency or event. The term “insurer” no longer includes “individuals” under RA 10607 Insured – person in whose favor the contract is operative and is indemnified.
If you were the judge, how would you decide the said interpleader action? Explain. (1985 BAR)
The insured is not always the person to whom the proceeds are paid.
A: If I were the judge, I would decide that the legal wife, Clara, be entitled to the proceeds of insurance taken by Eduardo Fernandez who named his common-law wife, Diana, as his revocable beneficiary, at the time they were guilty of concubinage. In that case, the designation of Diana is void, being prohibited by the New Civil Code (Art. 739 and 2012). The guilt of Eduardo and Diana for concubinage may be proved by mere preponderance of evidence in the same action and there is no need for a criminal conviction for concubinage.
3. Assured/Beneficiary – a person designated by the terms of the policy to receive the proceeds of the insurance. He may be the insured or a third party in the contract for whose benefit the policy is issued and to whom the loss is payable.
Q: On July 1, 1979, Crispulo, married to Laura with whom he has two legitimate children, was issued Policy No. 8008 of the Midland Life Insurance Co. on a whole-life plan for P10, 000. He designated Angie, his common-law wife as the recoverable beneficiary. He referred to her, in his application and policy, as his wife. Two years later, Crispulo died. Angie filed her claim for the proceeds of the policy as the designated beneficiary therein. The widow, Laura, also filed her claim as legal wife.
Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2005 BAR) A: The irrevocable beneficiary has a vested interest in the policy, including its incident such as the policy loan and cash surrender value.
If you were the Legal Counsel for the Insurance Company, to whom would you adjudicate the proceeds of the insurance policy? Reason out your answer briefly. (1981 BAR)
MARINE INSURANCE Risk insured against in marine insurance GR: In the usual form of a marine policy, the risks insured against are only “ perils of the sea” .
A: I would adjudicate the proceeds of the insurance policy to Laura, the legal wife. In the appointment of beneficiary, the New Civil Code imposed certain limitations; one of them being that the insured may not appoint, as his beneficiary, one with whom he is guilty of concubinage, at the time of designation. Since Crispulo was married to Laura at the time when he designate as his beneficiary his concubine Angie, with whom he was guilty of concubinage at the time of designation, Laura may have said designation of Angie nullified, by mere preponderance of evidence in the same action for nullification. There is even no need of the criminal conviction for concubinage. (Arts. 739 and 2012, N.C.C.; Insular Life assn. Co., Ltd. v. Ebrado, Oct. 28, 1977; 80 SCRA 181)
XPN: When the insurance is an “all risk policy” and thus covers even “ perils of the ship” . XPN to XPN: When the risks are expressly excepted by the “all risk policy”. Q: What warranties are insurance? (2000 BAR)
implied
in
marine
A: The following warranties are implied in marine insurance: 1.
Q: Eduardo Fernandez applied for and was issued Policy No. 0777 by Atlas Life Insurance Corporation on a whole-life plan for P200, 000. Although he was married to Clara, with whom he had 5 legitimate children, he designated his common-law wife, Diana Cruz, as his revocable beneficiary in the policy, and referred to Diana in his application and policy, as his wife. 5 years thereafter, he died. Diana immediately filed her claim for the proceeds of the policy as the designated beneficiary. Clara also filed her claim as legal wife. The insurance company filed a petition for Interpleader before the RTC of Rizal to
2. 3.
4.
That the ship is seaworthy to make the voyage and/or to take in certain cargoes; That the ship shall not deviate from the voyage insured; That the ship shall carry the necessary documents to show nationality or neutrality and that it will not carry document which will cast reasonable suspicion thereon; That the ship shall not carry contraband, especially if it is making voyage through belligerent waters.
Q: Paolo, the owner of an ocean-going vessel, offered to transport the logs of Constantino from Manila to Nagoya. Constantino accepted the offer, not knowing
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UST LAW PRE-WEEK NOTES 2017 that the vessel was manned by an irresponsible crew with deep-seated resentments against Paolo, their employer.
b.
YES, the heirs of the 3 crew members perished can recover from CSC for negligence which constitutes a quasi-delict in this case.
Constantino insured the cargo of logs against both perils of the sea and barratry. The logs were improperly loaded on one side, thereby causing the vessel to tilt on one side. On the way to Nagoya, the
Perils of the Sea and Perils of the Ship The rusting of steel pipes in the course of a voyage is a “peril of the sea” in view of the toll on the cargo of wind,
UST LAW PRE-WEEK NOTES 2017 that the vessel was manned by an irresponsible crew with deep-seated resentments against Paolo, their employer.
b.
Constantino insured the cargo of logs against both perils of the sea and barratry. The logs were improperly loaded on one side, thereby causing the vessel to tilt on one side. On the way to Nagoya, the crew unbolted the sea valve of the vessel causing water to flood the ship hold. The vessel sank.
Perils of the Sea and Perils of the Ship The rusting of steel pipes in the course of a voyage is a “peril of the sea” in view of the toll on the cargo of wind, water, and salt conditions. Moreover, it is a cardinal rule in the interpretation of contracts that any ambiguity therein should be construed against the maker/issuer/drafter thereof, namely, the insurer. Besides the precise purpose of insuring cargo during a voyage would be rendered fruitless. (Cathay Insurance Co., v. CA, et. al., G.R. No. L-76145, June 30, 1987)
Constantino tried to collect from the insurance company which denied liability, given the unworthiness of both the vessel and its crew. Constantino countered that he was not the owner of the vessel and he could therefore not be responsible for conditions about which he was innocent. Is the insurance company liable? (2010 BAR)
Q: A marine insurance policy on a cargo states that “the insurer shall be liable for losses incident to perils of the sea”. During the voyage, seawater entered the compartment where the cargo was stored due to the defective drainpipe of the ship. The insured filed an action on the policy for recovery of the damages caused to the cargo. May the insured recover damages? (1998 BAR)
A: NO. The insurance company is not liable because there is an implied warranty in every marine insurance that the ship is seaworthy whoever is insuring the cargo, whether it be the shipowner or not. There was a breach of warranty, because the logs were improperly loaded and the crew was irresponsible. It is the obligation of the owner of the cargo to look fo r a reliable common carrier which keeps its vessel in sea worthy condition.
A: NO . the proximate cause of the damage to the cargo insured was the defective drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect in the drainpipe was the result of the ordinary use of the ship. To recover under a marine insurance policy, the proximate cause of the loss or damage must be peril of the sea.
Q: On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to Debenhams Company. After it indemnified Denbenhams, Empire as subrogee filed an action for damages against CSC.
Q: Perils of the ship, under marine insurance law, refer to loss which in the ordinary course of events results from (2011 BAR)
a) Assume the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will your answer be the same? Explain. b) Assume the facts in question (a). Can the heirs of the 3 crew members who perished recover from CSC? Explain fully. (2008 BAR)
a. Natural and inevitable actions of the sea. b. Natural and ordinary actions of the sea. c. Unnatural and inevitable actions of the sea. d. Unnatural and ordinary actions of the sea. A: a. Natural and inevitable actions of the sea.
A: a.
YES, the heirs of the 3 crew members perished can recover from CSC for negligence which constitutes a quasi-delict in this case.
Q: T Shipping, Co. insured all of its vessels with R insurance, Co. The insurance policies stated that the insurer shall answer for all damages due to perils of the sea. One of the insured’s ship, the MV Don Priscilla, ran aground in the Panama Canal when its engine pipes leaked and the oil seeped into the cargo compartment. The leakage was caused by the extensive mileage that the ship had accumulated. May the insurer be made to answer for the damage to the cargo and the ship? (2011 BAR)
NO, my answer will be different. Allowing the vessel to depart on a voyage when it is not seaworthy is a violation of the implied warranty of seaworthiness, and thus constitutes negligence on the part of owner of the ship and the ship captain. The hypothecary principle in maritime commerce —limiting the ship owner’s liability to the amount of insurance proceeds—is not applicable when the unseaworthiness of the vessel is due to the owner’s fault or negligence.
a. Yes, because the insurance policy covered any or all damage arising from perils of the sea.
19
MERCANTILE LAW b. Yes, since there appears to have been no fault on the part of the shipowner and ship captain. c. No, since the proximate cause of the damage was the breach of warranty of seaworthiness of the ship. d. No, since the proximate cause of the damage was due to ordinary usage of the ship, and thus not due to perils of the sea.
SURETYSHIP It is an agreement whereby a party called the “surety” guarantees the performance by another party called the “principal or obligor ” of an obligation or undertaking in favor of a third party called the “obligee”. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue and
MERCANTILE LAW b. Yes, since there appears to have been no fault on the part of the shipowner and ship captain. c. No, since the proximate cause of the damage was the breach of warranty of seaworthiness of the ship. d. No, since the proximate cause of the damage was due to ordinary usage of the ship, and thus not due to perils of the sea.
SURETYSHIP It is an agreement whereby a party called the “surety” guarantees the performance by another party called the “principal or obligor ” of an obligation or undertaking in favor of a third party called the “obligee”. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue and under the provisions of Act No. 536, as amended by Act No. 2206 (IC, Sec. 177).
A: d. No, since the proximate cause of the damage was due to ordinary usage of the ship, and thus not due to perils of the sea.
Nature of liability of surety CASUALTY INSURANCE 1. 2.
Third party liability insurance The insurer assumes the obligation by paying the injured third party to whom the insured is liable. Prior payment by the insured to the injured third person is not necessary in order that the obligation of the insurer may arise. The moment the insured becomes liable to third persons, the insured acquires an interest in the insurance contract which may be garnished like any other credit (Perla Compania de Seguros, Inc. vs. Ramolete, G.R. No. L-60887, November 13, 1991).
3.
LIFE INSURANCE Kinds of life insurance policies 1.
Source of liability: The direct liability of the insurer under indemnity contract against third party liability does not mean that the insurer can be held solidarily liable with the insured. The insurer ’s liability is based on contract; that of the insured is based on tort. (1996, 2000 BAR)
2.
3.
Liability of the insurer v. Liability of the insured INSURER The liability is direct but the insurer cannot be held solidarily liable with the insured and other parties at fault. The third-party liability is only up to the extent of the insurance policy and that required by law
Solidary – Joint and several with the obligor and Limited or fixed – Limited to the amount of the bond (It cannot be extended by implication). Contractual – It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee (IC, Sec. 178).
INSURED Liability is direct and can be held liable with all the parties at fault.
4.
5.
The liability extends to the amount of actual and other damages. (Heirs Poe v. Malayan Insurance, G.R. No. 156302, April 7, 2009)
Ordinary life, general life or old line policy – Insured pays a premium every year until he dies. Cash surrender value after 3 years. Limited payment – Insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything. Endowment – insured pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit. Term insurance – insured pays premium only once, and he is insured for a specified period. If he dies within the period, his beneficiaries benefit. If he outlives the period, no person benefits from the insurance. Industrial life – entitles the insured to pay premiums weekly, or where premiums are payable monthly or oftener (Sundiang Sr. & Aquino, 2014).
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
Indemnity against third party liability : The third persons to whom the insured is liable, can sue directly the insurer upon the occurrence of the injury or event upon which the liability depends.The purpose is to protect the injured person against the insolvency of the insured who causes such injury and to give him a certain beneficial interest in the proceeds of the policy. I t is as if the injured person were especially named in the policy (Shafer vs. RTC Judge, G.R. No. 78848, November 14, 1988; 1996 BAR ).
No fault indemnity clause (1994 BAR) It is a clause where the insurer is required to pay a third party injured or killed in an accident without the necessity of proving fault or negligence on the part of the insured. There is a stipulated maximum amount to be recovered.
Rules under the “no fault indemnity clause”
20
UST LAW PRE-WEEK NOTES 2017 1.
The total indemnity in respect of any one person shall not exceed P15, 000 for all motor vehicles (Ins. Memo. Circ. No. 4-2006).
with the law, and is not disqualified (Villacorta v. Insurance Commissioner, G.R. No. 54171, October 28, 1980).
2.
Proof of loss: a. Police report of accident b. Death certificate and evidence sufficient to establish proper payee
The main purpose of this clause is to require a person other than the insured, who drives the car on the insured’s order or with his permission, to be duly licensed drivers and have no disqualification to
UST LAW PRE-WEEK NOTES 2017 1.
The total indemnity in respect of any one person shall not exceed P15, 000 for all motor vehicles (Ins. Memo. Circ. No. 4-2006).
with the law, and is not disqualified (Villacorta v. Insurance Commissioner, G.R. No. 54171, October 28, 1980).
2.
Proof of loss: a. Police report of accident b. Death certificate and evidence sufficient to establish proper payee c. Medical report and evidence of medical or hospital disbursement (IC, Sec. 391 [3]). Claim may be made against one motor vehicle only (Sec. 391 [c], ibid). In case injury of an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from (ibid). In any other case (not an occupant), claim shall lie against the insurer of the d irectly offending vehicle In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained
The main purpose of this clause is to require a person other than the insured, who drives the car on the insured’s order or with his permission, to be duly licensed drivers and have no disqualification to drive a motor vehicle.
3. 4.
5. 6.
Theft clause There is theft if the vehicle is taken with intent to gain without the consent of the insured-owner. Thus, there is theft even if: 1. 2.
3.
Authorized driver clause
The vehicle is returned; The vehicle was stolen by the driver of the insured ( Alpha Insurance and Surety Company v. Castor, G.R. 198174, September 2, 2013); (2014 BAR) The vehicle was taken to the owner of a repair shop for the purpose of repair and in order to attach accessories (Paramount Insurance v. Spouses Remondeulaz, G.R. No. 173773, November 28, 2012)
It indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to: 1.
The insured himself; or
The insured need not prove that he has a driver’s license at the time of the accident if he was the driver (Sundiang Sr. & Aquino, 2014). 2.
Any person who drives on his order or with his permission; provided, that the person driving is permitted to drive the motor vehicle in accordance
INSURABLE INTEREST BASIS
LIFE GR: Every person has an unlimited insurable interest in his own life
As to extent
XPN: Where life insurance is taken out by a creditor on the life of the debtor, insurable interest is limited to the amount of debt
When must insurable interest exist
Must exist at the time the policy takes effect and need not exist thereafter (IC, Sec. 19).
PROPERTY Limited to the actual value of the property
GR: Must exist both at the time the policy takes effect and the time of loss, but need not exist in the period in between (Sec. 19, ibid). XPN: Secs. 21-24; 25, ibid .
21
MERCANTILE LAW
As to the beneficiary’ s interest
The beneficiary need not have insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured.
The beneficiary must have insurable interest over the thing insured.
MERCANTILE LAW
As to the beneficiary’ s interest
The beneficiary need not have insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured.
INSURABLE INTEREST IN LIFE 1.
2.
Irrevocable designation of the beneficiary to the assignment of the policy: The insured cannot assign the policy if the designation of the beneficiary is irrevocable. The irrevocable beneficiary has a vested right (Sundiang Sr. & Aquino, 2014).
Insurance upon one’s life – are those taken out by the insured upon his own life (IC, Section 10[a]) for the benefit of himself, or of his estate, in case it matures only at his death, for the benefit of third person who may be designated as ben eficiary. Insurance upon life of another – are those taken out by the insured upon the life of another. Where a person names himself beneficiary in a policy he takes on the life of another, he must have insurable interest in the life of the latter (De Leon, 2010). This class includes the following: a. b.
c.
d.
Effects of Irrevocable Designation of a Beneficiary: a.
b.
His spouse and of his children. Any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest. Of 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. Of any person upon whose life any estate or interest vested in him depends (IC, Sec. 10).
c.
d.
2. 3.
The beneficiary designated in a life insurance contract cannot be changed without the consent of the beneficiary. (Gercio v. Sun Life Assurance of Canada, 48 Phil. 53, 28 September 1925) A new beneficiary cannot be added to the irrevocably designated beneficiary for this would in effect reduce the latter’s vested rights. (Go v. Redfern, 72 Phil. 71, 25 April 1941) The irrevocably designated beneficiary may obtain a policy loan to the extent stated in the schedule of values attached to the policy. The insured cannot take the cash surrender value assign or even borrow on said policy without the consent of the beneficiary.
Q: Blanco took out a P1 M life insurance policy naming his friend and creditor, Montenegro, as his beneficiary. When Blanco died, his outstanding loan obligation to Montenegro was only P50, 000. Blanco’s executor contended that only P50, 000 out of the insurance proceeds should be paid to Montenegro and the balance of P950, 000 should be paid to Blanco’s estate.
Persons prohibited from being designated as beneficiaries (1998 BAR) 1.
The beneficiary must have insurable interest over the thing insured.
Those made between persons who were guilty of adultery or concubinage at the time of donation. Finding of guilt in a civil case is sufficient. Those made between persons found guilty of the same criminal offense, in consideration thereof. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
Is the executor’s contention correct? Reason out your answer. (1987 BAR)
A: The contention of the executor is incorrect because it was Blanco himself who took out the life insurance policy on his own life, naming only Montenegro as the beneficiary. It would have been different if it was Montenegro, as creditor, who took out a life insurance policy on the life of Blanco, as a debtor. In that case, Montenegro’s insurable interest in the life of Blanco would be only to the extent of P50, 000, which is the amount of his credit.
If the designation beneficiaries are disqualified by law to receive the proceeds, the policy remains valid and binding but the proceeds will be given to the estate of the insured.
CHANGE IN BENEFICIARY GR: The insured shall have the right to change the beneficiary he designated in the policy XPN: If the insured expressly waived this right in the said policy. In the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable (IC, Sec. 11).
22
UST LAW PRE-WEEK NOTES 2017 Q: On July 14, 1985, X, a homosexual, took an insurance policy on the life of his boyfriend, Y. In the insurance application, X misrepresented that Y was in perfect health although he knew all the time that Y was afflicted with AIDS. On October 18, 1987, Y died in a motor accident. Shortly thereafter, X filed his insurance claim. Should the insurer pay? Reasons. (1987 BAR)
A: a. A partner in a firm on its future profits. Mortgagor-mortgagee Each has an insurable interest in the property mortgaged and this interest is separate and distinct from the other. Therefore, insurance taken by one in his name only and in his favor alone does not inure to the
UST LAW PRE-WEEK NOTES 2017 Q: On July 14, 1985, X, a homosexual, took an insurance policy on the life of his boyfriend, Y. In the insurance application, X misrepresented that Y was in perfect health although he knew all the time that Y was afflicted with AIDS. On October 18, 1987, Y died in a motor accident. Shortly thereafter, X filed his insurance claim. Should the insurer pay? Reasons. (1987 BAR)
A: a. A partner in a firm on its future profits. Mortgagor-mortgagee Each has an insurable interest in the property mortgaged and this interest is separate and distinct from the other. Therefore, insurance taken by one in his name only and in his favor alone does not inure to the benefit of the other. The same is not open to objection that there is double insurance (RCBC vs. CA, 289 G.R. Nos. 128833-34, 128866, April 20, 1998; IC, Sec. 8).
A: The insurer is not obliged to pay. Friendship alone is not the insurable interest contemplated in life insurance. Insurable interest in the life of others (other than one’s own life, spouses or children) is merely to the extent of the pecuniary interest in that life.
1.
Assuming that such pecuniary interest exists, an insurer would be liable despite concealment or misrepresentation if the insurance had been in effect for more than 2 years (incontestability clause).
2.
Mortgagor – The mortgagor of property, as owner, has an insurable interest to the extent of its value even though the mortgage debt equals such value. Mortgagee – The mortgagee as such has an insurable interest in the mortgaged property to the extent of the debt secured; such interest continues until the mortgage debt is extinguished (Sundiang Sr. & Aquino, 2014).
INSURABLE INTEREST IN PROPERTY Q: X borrowed from CCC Bank. She mortgaged her house and lot in favor of the bank. X insured her house. The bank also got the house insured.
Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that contemplated peril might directly damnify the insured, is insurable interest (IC, Sec. 13).
a. b. c.
Insurable interest must exist both at the time the insurance contract takes effect and at the time of loss.
Is this double insurance? Explain your answer. Is this legally valid? Explain your answer. In case of damage, can X and CCC bank separately claim for the insurance proceeds? (2012 BAR)
Change of interest A: A change of interest in any part of a 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 the same person. (Sec. 20)
a.
b.
XPNS: 1.
2.
3.
4.
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. (IC, Sec. 21) A change of interest in one or more of several distinct things, separately insured by one policy, does not avoid the insurance as to the others. (IC, Sec. 22) A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured. (IC, Sec. 23) A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance. (IC, Sec. 24)
c.
NO, there is no double insurance. Double insurance exists where the same person is insured by several insurers separately with respect to the same subject and interest. YES, X and CCC Bank can both insure the house as they have different insurable interests therein. X, the borrower-mortgagor, has an insurable interest in the house being the owner thereof while CCC Bank, the lender, also has an insurable interest in the house as mortgagee thereof. YES. If X obtained an open policy then she could claim an amount corresponding to the extent of the damage based on the value of the house determined as of the date the damaged occurred, but not to exceed the face value of the insurance policy; however, if she obtained a valued policy then she could claim an amount corresponding to the extent of the damage based on the agreed upon valuation of the house.
As for CCC Bank, it could claim an am ount corresponding to the extent of the damage but not to exceed the amount of the loan it extended to X or so much thereof as may remain unpaid.
DOUBLE INSURANCE AND OVERINSURANCE Q: A person is said to have an insurable interest in the subject matter insured where he has a relation or connection with, or concern in it that he will derive pecuniary benefit or advantage from its preservation. Which among the following subject matters is not considered insurable? (2014 BAR) a. b. c. d.
Double insurance: Double insurance exists where the same person is insured by several insurers separately, in respect to the same subject and interest (Sec. 95, ibid). It is not contrary to law and hence, in case of double insurance, the insurers may still be made liable up to the extent of the value of the thing insured but not to exceed the amount of the policies issued
A partner in a firm on its future profits. A general creditor on the debtor’s property A judgment creditor on debtor’s property A mortgage creditor on debtor’s mortgaged property.
In double insurance, the insurers are considered as coinsurers. Each one is bound to contribute ratably to the loss in proportion to the amount for which he is liable
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MERCANTILE LAW Reinsurance is where the insurer procures a third party, called the reinsurer, to insure him against liability by reason of such original insurance. Basically, reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured.
under his contract. This is known as the “principle of contribution” or “contribution clause”
Overinsurance: There is overinsurance whenever the insured obtains a policy in an amount exceeding the value of his insurable interest
PERFECTION OF THE INSURANCE CONTRACT
The insurer may insert an “other insurance clause” which will prohibit double insurance. The rationale is to prevent the danger that the insured will over insure his property and thus avert the possibility of perpetration of fraud (ibid). It is lawful and specifically allowed under Sec. 75 of the Insurance Code which provides that “a policy may declare that a violation or a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it. ”
The contract of insurance is perfected when the assent or consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Mere offer or proposal is not contemplated (De Lim v. Sun Life Assurance Co., G.R. No. L-15774, November 29, 1920).
Cognition Theory: acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge.
Q: Terrazas de Pation Verde, a condominium building, has a value of P50 M. The owner insured the building against fire with 3 insurance compa nies for the following amounts:
Delivery of Policy
Northern Insurance Corp. —P20 M Southern Insurance Corp.—P30 M Eastern Insurance Corp.—P50 M a. b.
Q: On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a face value of P5 M from RN Insurance Company (RN), with his wife Tina Marcial (Tina) as sole beneficiary. On the same day, Danny issued an undated check to RN for the full amount of the premium. On October 1, 2013, RN issued the policy covering Danny’s life insurance. On October 5, 2013, Danny met a tragic accident and died. Tina claimed the insurance benefit, but RN was quick to deny the claim because at the time of Danny’s death, the check was not yet encashed and therefore the premium remained unpaid. Is RN correct? Will your answer be the same if the chec k is dated October 15, 2013? (2014 BAR)
Is the owner’s taking of insurance for the building with 3 insurers valid? Discuss. The building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50M, will the claim prosper? Explain. (BAR 2008)
A: a.
The taking of insurance from the 3 insurers is valid. It is a case of “double insurance”. The Insurance Code provides that a double insurance exist where the same person is insured by several insurers separately in respect to the same subject and interest.
A: NO. RN is not correct. After the issuance of the check by Danny for the full amount of the premium, the unconditional delivery of an insurance policy of RN to Danny corresponding to the terms of the application ordinarily consummates the contract, and the policy as delivered becomes the final contract between the parties. Where the parties, so intend, the insurance becomes effective at the time of the delivery of the policy notwithstanding the fact that the check was not yet encashed. My answer will still be the same even if the check is dated October 15, 2013 since an acknowledgment in a policy of the receipt of premium is conclusive evidence of its payment for the purpose of making the policy binding.
Double insurance is valid. What is prohibited is for the insured to recover more than his interest or value of the property pursuant to the “principle of indemnity”. b.
YES, the owner may legally claim the entire P50 M from Eastern Insurance, Corp. The Insurance Code provides that where the insured is overinsured by double insurance, 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. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract.
Transfer of Policy Q: The policy of insurance upon his life, with a face value of P100, 000, was assigned by Jose, a married man with 2 legitimate children, to his nephew Y, as security for a loan of P50, 000. He did not give the insurer any written notice of such assignment despite the explicit provision to that effect in the policy. Jose died. Upon the claim on the policy by the assignee, the insurer refused to pay on the ground that it was not notified of the assignment. Upon the other hand, the heirs of Jose contended that Y is not entitled to any amount under the policy because the assignment without due notice to the insurer was void. Resolve the issues. (1991 BAR)
Q: Distinguish co-insurance from re-insurance. (1994 BAR) A: Co-insurance is the percentage in the value of the insured property which the insured himself assumes or undertakes to act as insurer to the extent of the deficiency in the insurance of the insured property. In case of loss or damage, the insurer will be liable only for such proportion of the loss or damage as the amount of insurance bears to the designated percentage of the full value of the property insured.
A: A life insurance is assignable. A provision, however, in the policy stating that written notice of such an assignment should be given to the insurer is valid. The
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UST LAW PRE-WEEK NOTES 2017 failure of the notice of assignment would thus preclude the assignee from claiming rights under the policy. The failure of notice did not, however, avoid the policy; hence, upon the death of Jose, the proceeds would, in the absence of a designated beneficiary, go to the estate of the insured. The estate, in turn, would be liable for the loan of P50, 000 owing in favor of Y.
express stipulation, it is provided that the policy shall in that event be suspended or shall lapse (De Leon, 2010).
Payment by post-dated check A postdated check bearing a date prior to the loss, assuming availability of the funds thereof, would be sufficient even if it remains unencashed at the time of the loss, constitutes valid payment of premium. The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor. (2007 BAR)
PREMIUM PAYMENT “Cash and carry” rule
GR: No policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. Any agreement to the contrary is void.
The payment of a promissory note or postdated check at a stated maturity subsequent to the loss, is insufficient to put the insurance into effect. (Vitug, Commercial Laws and Jurisprudence, 2006, Vol. I, p. 250)
XPN: A policy is valid and binding even when there is non-payment of premium:
Payments in addition to regular premium
1.
In case of life or industrial life policy whenever the grace period provision applies, or whenever under the broker and agency agreements with duly licensed intermediaries, a ninety (90)-day credit extension is given. No credit extension to a duly licensed intermediary should exceed ninety (90) days from date of issuance of the policy ( IC, Sec. 77 ). 2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to be conclusive evidence of payment, even if there is stipulation therein that it shall not be binding until the premium is actually paid. This is without prejudice however to right of insurer to collect corresponding premium (Sec. 77, ibid).
An insurer may contract and accept payments, in addition to regular premium, for the purpose of paying future premiums on the policy or to increase the benefits thereof (IC, Sec. 84)
REFUND OF PREMIUM Insured entitled to recover premiums already paid or a portion thereof 1. 2.
Section 77 of the Insurance Code in effect allows waiver by the insurer of the condition prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. (Makati Tuscany Condominium Corp. vs. Court of Appeals G.R. No. 95546, November 6, 1992)
3.
4.
5.
When no part of the thing insured has been exposed to any of the perils insured against (IC, Sec. 80). When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent (IC, Sec. 82). When the insurance is voidable because of the existence of facts of which the insured was ignorant without his fault (IC, Sec. 82). When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud (IC, Sec. 82). When rescission is granted due to insurer’s breach of contract (IC, Sec. 74).
Insured is not entitled to return of premiums paid
3.
When there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of loss (Makati Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992) 4. When there is an agreement to grant the insured credit extension for the payment of the premium. (Art. 1306, NCC), and loss occurs before the expiration of the credit term ( UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, Apr. 4, 20012006, 2007 Bar). 5. When estoppel bars the insurer to invoke nonrecovery on the policy. 6. When the public interest so requires, as determined by the Insurance Commissioner
1.
2. 3. 4.
If the peril insured against has existed, and the insurer has been liable for any period, the peril being entire and indivisible (IC, Sec. 81); In life insurance policies (IC, Sec. 80 [b]); If the policy is annulled, rescinded or if a claim is denied by reason of fraud (IC, Sec. 82); If contract is illegal and the parties are in pari delicto.
COVER NOTE Persons who wish to be insured may get protection before the perfection of the insurance contract by securing a cover note. 1. The cover note shall be issued or renewed only upon prior approval of the Insurance Commission; 2. The cover note shall be valid and binding for not more than sixty (60) days from the date of its issuance; 3. No separate premium (separate from the policy or main contract) is required for the cover note; 4. The cover note may be canceled by either party upon prior notice to the other of at least seven (7) days;
Non-payment of premium Non-payment of the first premium prevents the contract from becoming binding notwithstanding the acceptance of the application or the issuance of the policy, unless waived. But nonpayment of the balance of the premium due does not produce the cancellation of the contract. With respect to subsequent premiums, non-payment does not affect the validity of the contracts unless, by
25
MERCANTILE LAW 5. 6. 7.
The policy should be issued within sixty (60) days after the issuance of the cover note; The sixty (60)-day period may be extended upon written approval of the Insurance Commission; and The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice-president or general manager of the insurer that the risk involved, the values of such risks and premium therefor, have not as yet been determined or established and the extension or renewal is not contrary to or is not for the purpose of violating the Insurance Code or any rule.
Matters relating to the health of the insured are material and relevant to the approval of the issuance of the life insurance policy as these definitely affect the insurer’s action to the application. It is well-settled that the insured need not die of the disease he had failed to disclose to the insurer, as it is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries (Sunlife Assurance Company of Canada v. CA, G.R. No. 105135, June 22, 1995). (2001 BAR) If there is concealment, the remedy of the insurer is rescission since concealment vitiates the contract of insurance. Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the injured party to rescind the contract of insurance (IC, Sec. 27).
BINDING RECEIPT In a life insurance, a binding slip does not insure by itself. It is merely an acknowledgment on behalf of th e insurer, that the latter’s branch office had received from the application the premium and had accepted the application subject for processing; and that the latter will either approve or reject the same.
Requisites of misrepresentation: 1. 2.
RESCISSION OF INSURANCE CONTRACTS Instances wherein a contract of insurance may be cancelled by the insurer 1. 2. 3. 4. 5. 6.
7.
3.
Nonpayment of premium; Conviction of a crime arising out of acts increasing the hazard insured against; Discovery of fraud or material misrepresentation; Discovery of willful or reckless acts or omissions increasing the hazard insured against; Physical changes in the property insured which result in the property becoming uninsurable; Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of the Insurance Code (IC, Sec. 64).
The insured stated a fact which is untrue; Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead; Such fact in either case is material to the risk.
INCONTESTABILITY CLAUSE After the 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 two (2) years from the date of its issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent (IC, Sec. 48).
The “Incontestability Clause” regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious enterprise (Manila Bankers Life Insurance Corporation vs. Cresencia-Aban, G.R. No. 175666, July 29, 2013).
No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the abovementioned instances (Sec. 64, ibid ).
Requisites of concealment:
The contract may be rescinded even beyond the incontestability period based on the following grounds: 1. Non-payment of premiums. 2. Violation of condition (IC, Secs. 233 [b], 234 [b]). 3. No insurable interest 4. Cause of death was excepted or not covered 5. Fraud of a vicious type 6. Proof of death was not given (IC, Sec. 248). 7. That the conditions of the policy relating to military or naval service (IC, Secs. 233 [b], 234 [b]). 8. That the action was not brought within the time specified (IC, Sec. 63).
1.
Defenses not barred by incontestability clause
CONCEALMENT AND MISREPRESENTATION Concealment is a neglect to communicate that which a party knows and ought to communicate. Misrepresentation is an oral or written statement of a fact or condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to assume the risk.
2. 3. 4. 5.
A party knows a fact which he neglects to communicate or disclose to the other party Such party concealing is duty bound to disclose such fact to the other Such party concealing makes no warranty as to the fact concealed The other party has no means of ascertaining the fact concealed The fact must be material
1.
That the person taking the insurance lacked insurable interest as required by law; 2. That the cause of the death of the insured is an excepted risk; 3. That the premiums have not been paid (IC, Secs. 77, 233[b], 236[b]);
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UST LAW PRE-WEEK NOTES 2017 4.
That the conditions of the po licy relating to military or naval service have been violated (IC, Secs. 233[b], 234[b]); 5. That the fraud is of a particularly vicious type; 6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or 7. That the action was not brought within the time specified (Sundiang Sr. & Aquino, 2014).
not malevolent (Rizal Commercial Bank Corporation v. Court of Appeals, supra).
PRESCRIPTION OF ACTIONS If there is no stipulation or the stipulation is void, the insured may bring the action within 10 years in case the contract is written. Parties may validly agree that an action on the policy should be brought within a limited period of time, provided such period is not less than 1 year from the time the cause of action accrues. If the period agreed upon is less than 1 year from the time the cause of action accrues, such agreement is void (IC, Sec. 63).
WARRANTIES Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment render the policy voidable by the insurer.
a.
CLAIMS SETTLEMENT AND SUBROGATION
b.
NOTICE AND PROOF OF LOSS The injury, damage or liability sustained by the insured in consequence of the happening of one or more of the perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. It may be total, partial, or constructive in marine insurance.
SUBROGATION If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract (NCC, Art. 2207). The insurer, upon happening of the risk insured against and after payment to the insured is subrogated to the rights and cause of action of the latter. (Eastern Shipping Lines vs. Prudential Guarantee and Assurance, Inc., G.R. No. 174116, September 1, 2009).
Conditions before the insured may recover on the policy after the loss 1.
2.
The stipulated prescriptive period shall begin to run from the date of the insurer’s rejection of the claim filed by the insured or beneficiary and not from the time of loss. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration (Sun Life Office, Ltd. vs. CA, supra).
The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give written notice to the insurer (IC, Sec. 90); When required by the policy, insured must present a preliminary proof loss which is the best evidence he has in his power at the time (IC, Sec. 91).
Effect of failure to give notice of loss Instances when subrogation does not apply FIRE INSURANCE Failure to give notice defeats the right of the insured to recover.
OTHER TYPES OF INSURANCE Failure to give notice will not exonerate the insurer, unless there is a stipulation in the policy requiring the insured to do so.
1.
if the assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability 2. where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation 3. where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting ‘voluntary payment,’ (Loadstar Shipping Co., v. Malayan Insurance, G.R. No. 185565, November 26, 2014)
Refusal or failure to pay the claim within the time prescribed The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board on the proceeds of the insurance from the date following the time prescribed under the Insurance Code, until the claim is fully satisfied (Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No. 151890, June 20, 2006).
Q: Will the subrogee be bound by the arbitration clause between the insurer and insured?
NOTE: Refusal or failure to pay the loss or damage will entitle the assured to collect interest UNLESS such refusal or failure to pay is based on the ground that the claim is fraudulent.
A: In Pan Malayan Insurance Corporation v. CA, April 3, 1990, SC held that that the right of insurance company as subrogee was not based on the charter party or any other contract; rather, it accrued upon the payment of the insurance claim by private respondent to the insured. However, in California and Hawaiian Sugar Co., v. Pioneer Insurance G.R. No. 139273, November 28, 2000 , the Court clarified that there was nothing in Pan Malayan that prohibited the applicability of the arbitration clause to the subrogee. That case merely
Where the mortgagor and the mortgagee were both claiming the proceeds of a fire insurance policy and the creditors of the mortgagor also attached the proceeds, the insurance company cannot be held liable for damages for withholding payment since the delay was
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MERCANTILE LAW discussed the accrual of the right of subrogation and the legal basis therefor.
basis; and between a carrier offering its services to the general public and one who offers services or solicits business only from a narrow segment of the general population (Pedro de Guzman v. CA, G.R. No. L-47822 December 27, 1988)
COLLATERAL SOURCE RULE If an injured person receives compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the damages which he would otherwise collect from the tortfeasor. It finds no application to cases involving nofault insurances under which the insured is indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the losses. Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance providers of said dependents. (Mitsubishi Motors Philippines Salaried Employees Union vs. Mitsubishi Motors Corporation Gholder.R. No. 175773, June 17, 2013).
Q: Spouses Dante and Leona Cruz lodged a Complaint against Sun Holidays, Inc. with the RTC for damages arising from the death of their son who perished with his wife while on board the boat M/B Coco Beach III that capsized en route to Batangas from Puerto Galera, Oriental Mindoro where the couple had stayed at Coco Beach Island Resort owned by Sun Holidays. Spouses contended that as a common carrier, it was guilty of negligence in allowing M/B Coco Beach to sail notwithstanding storm warning bulletins issued by PAGASA. Sun Holidays denied being a common carrier, alleging that its boats are not available to the general public as they only ferry resort guests and crew members.
TRANSPORTATION LAW
Is Sun Holidays liable as a common carrier?
COMMON CARRIERS
A: YES. Sun Holiday’s ferry services are so intertwined with its main business as to be properly considered ancillary thereto. The constancy of respondent’s ferry services in its resort operations is underscored by its having its own Coco Beach boats. And the tour packages it offers, which include the ferry services, may be availed of by anyone who can afford to pay the same. These services are thus available to the public (Spouses Dante Cruz v. Sun Holidays, G.R. No. 18312, June 29, 2010).
Define common carrier. A common carrier is a person engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, off ering services to the public. ( Art. 1732 of the NCC )
Enumerate the requisites for an entity to be classified as a common carrier (1996, 1997, 2000, 2002 BAR)
What is a private carrier?
(PBL-FP) 1. Must be a Person, corporation, firm or association 2. Engaged in the Business of carrying or transporting passengers or goods or both; 3. The carriage or transport must either be by Land, water or air; 4. The service is for a Fee; 5. The service is offered to the Public (Art. 1732, NCC).
A private carrier is one who, without making the activity a vocation, or without holding himself or itself o ut to the public as ready to act for all who may desire his or its services, undertakes, by special agreement in a particular instance only, to transport goods or persons from one place to another either gratuitously or for hire (Spouses Pereña v. Spouses Zarate, G.R. No. 157917, August 29, 2012).
Q: AM Trucking, a small company, operates two trucks for hire on a selective basis. It caters only to a few customers, and its trucks do not make regular or scheduled trips. It does not have a certificate of public convenience.
VIGILANCE OVER GOODS What is the presumption on the loss, destruction, or deterioration of goods GR: The common carrier is presumed to have been at fault or to have acted negligently when the goods transported are lost, destroyed, or deteriorated (Art. 1735, NCC).
On one occasion, Reynaldo contracted AM to transport, for a fee, 100 sacks of rice from Manil a to Tarlac. However, AM failed to deliver the cargo because its truck was hijacked when the driver stopped in Bulacan to visit his girlfriend.
XPNs: When the same is due to any of the following causes only: (FA2 – C O)
May Reynaldo hold AM liable as a common carrier?
1.
A: YES. The fact that AM Trucking operates only two trucks for hire on a selective basis, caters only to a few customers, does not make regular or scheduled trips, and does not have a certificate of public convenience are of no moment. The law does not distinguish between one whose principal business activity is the carrying of persons or goods or both and anyone who does such carrying only as an ancillary activity; between a person or enterprise offering transportation service on a regular or scheduled basis and one on an occasional, episodic or unscheduled
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Fortuitous events (flood, storm, earthquake, lightning, or other natural disaster or calamity). Provided, the following conditions are present: a. Natural disaster was the proximate and only cause; b. Carrier exercised due diligence to prevent or minimize loss before, during, and after the occurrence of the natural disaster; and c. The common carrier has not negligently incurred delay in transporting the goods (Art. 1739-1740, NCC).
UST LAW PRE-WEEK NOTES 2017 2. Act of the public enemy in war, whether international or civil, provided: a. Act was the proximate and only cause; and b. Carrier exercised due diligence to prevent or minimize loss before, during, and after the act (Art. 1739-1740, NCC).
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 liable for damages, which however, shall be equitably reduced (NCC, Art. 1741). Contributory negligence on the part of the passenger does NOT justify the common carrier’s exempt ion from liability (Martin, 1989). It will only mitigate the liability of the common carrier (J. Dimaampao)
3. Act or omission of the shipper or owner of the goods, provided: a. If proximate and only cause – exempting b. If contributory negligence – mitigating
Explain the stipulations for limitation of liability. 4.
The Character of the goods or defects in the packing or in the containers; provided, carrier exercised due diligence to forestall or prevent loss (Art 1742, NCC).
Even if there is an agreement limiting the l iability of the common carrier in the vigilance over the goods, the common carrier is still disputably presumed to have been negligent in case of its loss, destruction or deterioration (NCC, Art. 1752).
If the fact of improper packing is known to the carrier or its servants, or apparent upon ordinary observation, but it accepts the goods notwithstanding such condition, it is not relieved from responsibility for loss or injury resulting therefrom (Southern Lines Inc., v. CA, GR No. L -16629, January 31, 1962). 5.
A contract fixing a sum that may be recovered for the loss, destruction, and deterioration is binding provided it is: a. b.
Order or act of competent authority; provided, the authority is with power to issue the order (Art. 1743, NCC). If the officer acts without legal process, the common carrier will be held liable (Ganzon v. CA, GR No. L-48757, May 30, 1988).
GR: The liability of the common carrier shall not exceed the stipulation in a contract of carriage even if the loss or damage results from the carrier's negligence (Eastern and Australian Shipping Co. vs. Great American Insurance Co., GR No. L-37604, October 23, 1981).
In all cases other than those enumerated above, there is presumption of negligence even if there is an agreement limiting the liability of the common carrier in the vigilance over the goods.
XPN: Common carrier’s liability may be extended beyond the specified amount mentioned if:
ABSENCE OF DELAY
a.
What are the rules regarding the time of delivery of goods and delay?
b.
1.
2.
Just and reasonable under the circumstances Has been fairly and freely agreed upon.
the shipper or owner of the goods declares a greater value and; pays corresponding freight (NCC, Art. 1749).
The liability of an airline company for lost baggage is limited to the amount stated in the ticket unless the passenger declared a higher valuation and paid additional fare (Pan American World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 70462, August 11, 1988).
If there is an agreement as to time of delivery – delivery must be within the time stipulated in the contract or bill of lading. If there is no agreement – delivery must be within a reasonable time (Saludo, Jr. v. CA, G.R. No. 95536, March 23, 1992).
SAFETY OF PASSENGERS What is the consequence of delay in the delivery of goods?
What is the diligence required of a passenger?
The carrier shall be liable for damages immediately and proximately resulting from such neglect of duty (Ibid; Art. 1170, NCC).
The passenger must observe the diligence of a good father of a family or ordinary diligence to avoid injury to himself (NCC, Art. 1761). This means that if the proximate cause of the passenger’s injury is his negligence, the common carrier is not liable.
In the absence of a special contract, a carrier is not an insurer against delay in the transportation of goods. The effects of delay are the following:
Passengers must take such risks incident to the mode of travel. Carriers are NOT insurers of any and all risks to passengers and goods. It merely undertakes to perform certain duties to the public as the law im poses, and holds itself liable for any breach thereof (Pilapil v. CA, G.R. No. 52159, Dec. 22, 1989).
a.
Excusable delay in carriage merely suspends and generally does not terminate the contract of carriage. b. The carrier shall be made liable when vessel or vehicle is unreasonably delayed. c. Carrier remains duty bound to exercise extraordinary diligence. d. Natural disaster shall not free the carrier from responsibility. (Dimaampao & Dumlao-Escalante, 2014)
DURATION OF LIABILITY What are the duties of a common carrier? It is the duty of common carriers of passengers, including common carriers by railroad train, streetcar, or motorbus, to stop their conveyances a reasonable length of time in order to afford passengers an
What is contributory negligence?
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MERCANTILE LAW opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so. (Dangwa vs. CA, G.R. No. 95582, October 7, 1991).
In case of death of a passenger, the common carrier is liable to pay P50, 000 as indemnity for the life of a passenger (Victory Liner vs. Gammad, G.R. No. 159636, November 25, 2004). Carrier is NOT liable for exemplary damages where there is no proof that it acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
All persons who remain on the premises a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and includes a reasonable time to see after his baggage and prepare for his departure (La Mallorca v. CA, G.R. No. L-21486, May 14, 1966).
Moral damages GR: Moral damages are NOT recoverable for breach of contract of carriage in view of Articles 2219-20 of the Civil Code. XPNs:
Carrier-passenger relationship continues until the passenger has been landed at the port of destination and has left the vessel-owner’s premises. The victim’s presence in a vessel after 1 hour from his disembarkation is not enough in order to absolve the carrier from liability in his death. (Aboitiz Shipping Corporation v. CA, GR No. 84458, November 6, 1989).
a. b.
Where the mishap results in the death of the passenger; and Where it is proved that the common carrier was guilty of fraud or bad faith, even if death does not result.
Defenses available in culpa contractual ( FEC) LIABILITIES OF THE COMMON CARRIER 1. 2. 3.
What are the liabilities of the common carrier? Acts of its employees – 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 o f the orders of the common carriers. The liability of the common carriers does NOT cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees (NCC, Art. 1759).
Exercise of extraordinary due diligence Fortuitous event C ontributory negligence of passengers – it does NOT bar recovery of damages for death or injury if the proximate cause is the negligence of the common carrier but the amount of damages shall be equitably reduced (NCC, Art. 1762). BILL OF LADING
What is a bill of lading? It is a written acknowledgment of receipt of goods and agreement to transport them to a specific place and to a named person or to his order (Unsworth Transport International [Phils] vs. CA, G.R. No. 166520, 26 July 2010; 1992, 1998 Bar).
Acts of co-passengers or strangers – 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 carrier’s employees through the exercise of th e diligence of a good father of a family would have prevented or stopped the act or omission (NCC, Art. 1763).
Explain the three-fold character of a bill of lading. 1.
Hijacking is not considered as force majeure where only one of the two hijackers was armed with a bladed weapon. The hijackers did not act with grave or irresistible threat, violence, or force.
As a receipt , it recites the date and place of shipment, describes the goods as to quantity, weight, dimensions, identification marks and condition, quality, and value. 2. As a contract , it names the contracting parties, which include the consignee, fixes the route, destination, and freight rate or charges, and stipulates the rights and obligations assumed by the parties (Phoenix Assurance Co., Ltd. vs. United States Lines, G.R. No. L-24033, Feb. 22, 1968). 3. As a document of title, it regulates the relations between a carrier and a holder of the same.
EXTENT OF LIABILITY FOR DAMAGES
PERIOD FOR FILING CLAIMS
Acts of criminals – A common carrier is NOT absolved from liability committed by thieves or robbers. XPN: Where such thieves or robbers acted with grave or irrestible threat, violence, or force.
Enumerate the kinds of damages that may be recovered in case of death of a passenger.
What are the periods for filing claims? 1.
1. 2. 3. 4. 5. 6. 7.
An indemnity for the Death of the victim An indemnity for loss of Earning capacity of the deceased; Moral damages; Exemplary damages; Attorney's fees and expenses of litigation; Interest in proper cases (Briñas v. People, G.R. No. L30309, Nov. 25, 1983). Hospital and funeral expenses
2.
If the damage is apparent – Immediately after delivery; or If the damage is not apparent – within 24 hours from delivery (Code of Commerce, Art. 366)
The filing of claim is a condition precedent for recovery of damages. Requisites:
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UST LAW PRE-WEEK NOTES 2017 1.
Consignment of goods through a common carrier, by a consignor in one place to a consignee in another place; and 2. The delivery of the merchandise by the carrier to the consignee at the place of destination (New Zealand Ins. Co., Ltd. vs. Choa Joy, G.R. No. L-7311, Sept. 30, 1955).
consideration of the payment of freight (Caltex vs. Sulpicio Lines, G.R. No. 131166, September. 30, 1999).
State the persons involved in maritime commerce 1. 2. 3. 4.
Explain the Doctrine of combined or connecting services
Ship-owners and ship agents Captains and masters of the vessel Officers and Crews of the vessel Supercargoes (Sundiang, Sr. & Aquino, 2011)
What are the classes of charter party? The carrier which delivered the goods to the consignee shall assume the obligations, rights and actions of those who preceded him in the conveyance of the goods.
1. Bareboat or demise - The ship owner gives possession of the entire vessel to the charterer. In turn, the charterer supplies, equips, and mans the vessel. The charterer is the owner pro hac vice.
The shipper or consignee should proceed against the one who executed the contract or against the others who received the goods without reservation. But even if there is reservation, they are not exempted from liabilities that they may have incurred by reason of their own acts (CC, Art. 373).
The charterer assumes the rights and liabilities of the owner to third parties who deal with the vessel, it is the charterer and its agent who are liable for the wages of seamen hired by the master of the vessel, as the master of the vessel is acting in behalf of the charterer (Litonjua Shipping Co., Inc. vs. National Seamen Board, G.R. No. L51910, August 10, 1989).
Remedy: The carrier may then file a third-party complaint against the one who is really responsible. The carrier is an indispensable party. But the shipper or consignee may sue all of them as alternative defendants. A claim against the arrastre operator must be filed within fifteen (15) days from the delivery of goods (International Container Terminal Services, Inc. vs. Prudential Guarantee and Assurance Company, Inc. G.R. No. L-134514, December 8, 1999).
2. Contract of affreightment - owner of the vessel leases a part or all of its space to haul goods for others. It can either be: Time charter – Vessel is chartered for a particular time or duration. While the ship owner still retains possession and control of the vessel, the charterer has the right to use all vessel’s facilities and designate vessel’s destination. b. Voyage charter – Vessel is chartered for a carriage of goods from one or more ports of loading to on e or more ports of unloading. An owner who retains possession of the ship remains liable as carrier and must answer for loss or non-delivery of the goods received for transportation (Cebu Salvage Corp. vs. Philippine Home Assurance Corp., G.R. No. 150403, Jan. 25, 2007). a.
Commencement of action if delivery was made to arrastre operator: Commencement of action should be computed from the time of delivery to the arrastre operator. To use as basis for computing the one year period, the delivery to the consignee would be unrealistic and might generate confusion between the loss or damage sustained by the goods while in the carrier’s custody and those occurring while in the arrastre operator’s possession (Martin, 1989). The 1 year period of prescription is NOT applicable to misdelivery or conversion of goods.
BAREBOAT/DEMISE CHARTER CONTRACT
PERIOD FOR FILING ACTIONS
Negligence of the charterer gives rise to its liability to others.
What are the periods for filing actions? 1.
2.
For coastwise or carriage within the Philippines within 6 years if no bill of lading has been issued or within 10 years if a bill of has been issued. For international carriage from foreign port to the Philippines - within 1 year from delivery of goods or the date when the goods have been delivered.
Charterer is regarded as owner pro hac vice. Ship owner temporarily relinquishes possession and ownership of the vessel.
The compliance with a requirement in the bill of lading that the consignee must file a claim for loss or damage to the goods shipped within thirty days from delivery is a condition precedent to the accrual of a right of action against the carrier (Philippine American General Insurance Co. v. Sweet Lines, Inc., G.R. No. 87434, August 5, 1992).
CONTRACT OF AFFREIGHTMENT Ship owner remains liable and carrier must answer for any breach of duty. Charterer is not regarded as owner. Ship owner retains ownership over the vessel.
What is the liability of ship owners and shipping agents? Ship owner/agent is NOT liable for the obligations contracted by the captain if the latter exceeds his powers and privileges inherent in his position of those which may have been conferred upon him by the former. However, if the amount claimed were used for the benefit of the vessel, the ship owner or ship agent is liable.
MARITIME COMMERCE What is a charter party contract?
The shipping agent is civilly liable for damages in favor of third persons due to the conduct of the carrier's captain, and the shipping agent can exempt himself therefrom only by abandoning the vessel with all his
A charter party is a contract by which an entire ship, or some principal part thereof, is let by the owner to another person for a specified time or use in
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MERCANTILE LAW equipment and the freight he may have earned during the voyage. On the other hand, assuming there is bareboat charter, the stipulation in the charter party exempting the owner from liability is not against public policy because the public at large is not involved (Home Insurance Co. vs. American Steamship Agencies, Inc., G.R. No. L-25599, April 4, 1968).
subject to the same danger There is a deliberate sacrifice of part of the vessel, cargo, or both Damage or expenses incurred to the vessel, its cargo, or both, redounded to the benefit of the respective owners. All those who have benefited shall satisfy the average.
The captain shall NOT be liable for the loss or injury to persons or cargo if the loss or the injury is based on the following causes: 1. 2.
Force majeure Obligations contracted for the vessel’s benefit, except when the captain expressly agrees to be liable.
1. 2. 3. 4.
In collision of vessel, where fault is established but it cannot be determined which of the two vessels were at fault, both shall be deemed to have been at fault.
Discuss the Doctrine of Limited Liability It is also called the “no vessel, no liability doctrine” , it provides that liability of ship owner is limited to ship owner’s interest ov er the vessel. In case of loss, the ship owner’s liability is also extinguished. Limited liability likewise extends to ship’s appurtenances, equipment, freightage, and insurance proceeds. This can be availed only by the shipowner and the shipping agent.
3. 4. 5. 6.
Only the owner of the goods benefiting from the damage shall bear the expense of average.
Common danger present; Deliberate sacrifice of part of the vessel or cargo; Successful saving of vessel and/or cargo; and Proper procedure and legal steps. a. Assembly to be called by captain of all the cargo owners and other officers of the vessel b. Deliberation c. Resolution of the captain d. Entry of resolution in the logbook e. Delivery of the minutes of the meeting to the maritime judicial authority of the first port of arrival within 24 hours from arrival; f. Ratification by captain under oath. (Dimaampao & Dumlao-Escalante, 2014)
Who are the persons liable for the amount of loss?
What are the instances where Doctrine of Limited Liability shall NOT apply?
2.
Did not inure to common benefit and profit of all persons interested in the vessel and her cargo.
What are the requisites of general average (CD-PS)
Discuss the Doctrine of Inscrutable Fault.
1.
both the vessel and the cargo Expenses and damages are not deliberately made
In general average: All persons having an interest in the vessel and cargo therein at the time o f the occurrence of the average shall contribute (Art. 812, CC).
Repairs and provisioning of the vessel before the loss of the vessel; (CC, Art. 586) Insurance proceeds. If the vessel is insured, the proceeds will go to the persons entitled to claim from the shipowner; (Vasquez vs. CA, G.R. No. L42926, Sept. 13, 1985) Claims of the crew under the Workmen’s Compensation Act; When the shipowner is guilty of fault or n egligence; When the vessel is not abandoned; and When vessel is not seaworthy.
In particular average: The owner of the things which gave rise to the expenses or suffered the damage shall bear the simple or particular averages (Art. 810, CC).
Enumerate the rules on collision of vessels. a.
b.
ACCIDENTS AND DAMAGES IN MARITIME COMMERCE
c.
What are the accidents in maritime commerce ? (CASA)
Collision refers to the contact of two moving vessels. If one vessel is moving while the other is stationary, this is known as allision. The vessel at fault shall indemnify the damages sustained or losses incurred. ( Art. 826, Code of Commerce) If both vessels are at fault, each shall be solidarily liable for losses or damages to the cargoes. ( Arts. 827 – 828, Code of Commerce) In this situation, the common carrier operating the vessel is precluded from interposing the defense of due diligence in the selection and supervision of its employees in an action against it by a shipper of the other colliding vessel.
1. Collision 2. Averages 3. Shipwreck 4. Arrival under stress
Differentiate General average from Particular average GENERAL AVERAGE Damages or expenses deliberately caused in order to save the vessel, its cargo or both from real and known risk. Both the ship and cargo are
Q: Two vessels figured in a collision resulting in considerable loss of cargo. The damaged vessels were safely conducted to a port. Kim, a passenger and Ruby, a shipper who suffered damage to his cargo, did not file maritime protest. Can Kim and Ruby successfully maintain an action to recover losses and damages arising from the collision? (2007 BAR)
PARTICULAR AVERAGE Damages or expenses caused to the vessel or cargo that did not inure to the common benefit, and borne by respective owners. No common danger to
32
UST LAW PRE-WEEK NOTES 2017 A: Ruby, the shipper can successfully maintain an action to recover losses and damages arising from the collision notwithstanding his failure to file a maritime protest since the filing thereof is required only on the part of Kim, who, being a passenger of the vessel at the time of the collision, was expected to know the circumstances of the collision. Kim's failure to file a maritime protest will therefore prevent him from successfully maintaining an action to recover his losses and damages (CC, Art 836) .
2. 3. 4.
If damage resulted from Dangerous nature of shipment loaded without consent of carrier If Unseaworthiness not due to negligence If Deviation was to save life or property at sea.
Explain the procedure and prescriptive period for filing maritime claims in coastwise carriage and international carriage Coastwise (within the Philippines)
CARRIAGE OF GOODS BY SEA ACT (COGSA) When does COGSA apply?
NOTICE of DAMAGE
COGSA applies only in terms of loss or damage of goods transported to and from Philippine ports in foreign trade and to domestic trade when there is a paramount clause in the contract.
Condition precedent before filing case in court
COGSA applies only in case of non-delivery or damage, and not to misdelivery or conversion of goods (Ang v. American Steamship Agencies, Inc., G.R. No. L-22491, Jan. 27, 1967).
When damage to goods is apparent, the shipper must immediately file his claim with the carrier
Q: The goods imported from the United States were unloaded by the carrier in Manila. While in the custody of the arrastre operator, part of the shipment worth P1, 000 was lost. Does the case involve admiralty and maritime commerce so that the action for short delivery has to be files in the Court of First Instance regardless of the amount? Reasons. (2013 BAR)
The liability limit is set at $500 per package or customary freight unless the nature and value of such goods is declared by the shipper. Shipper and carrier may agree on another maximum amount, but not more than amount of damage actually sustained.
Q: On December 1, 2010, Korea Corporation shipped from South Korea to LT Corporation in Manila some 300, 000 sheets of high-grade special steel. The shipment was insured against all risk by NA Insurance (NA). The carrying vessel arrived at the Port of Manila on January 10, 2011. When the shipment was discharged, it was noted that 25, 000 sheets were damaged and in bad order. The entire shipment was turned over to the custody of ATI, the arrastre operator, on January 21, 2011 for storage and safekeeping, pending its withdrawal by the consignee’s authorized customs broker, RVM. On January 26 and 29, 2011, the subject shipment was withdrawn by RVM from the custody of ATI.
Delivery of the goods, in case of damage; or The date when the goods should have been delivered, in case of loss.
The one-year period is computed from the delivery of goods to the operator and not to the consignee. The parties may agree to extend the one-year p eriod to file a case under the Carriage of Goods by Sea (Universal Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. No. 74125, July 31, 1990).
On January 29, 2011, prior to the withdrawal of the last batch of the shipment, a joint inspection of the cargo was conducted per the Request for bad Order Survey (RBO) dated January 28, 2011. The examination report showed that 30, 000 sheets of steel were damaged and in bad order. NA Insurance paid LT Corporation the amount of P30 M for the 30,000 sheets that were damaged, as shown in the Subrogation Receipt dated January 13, 2013. Thereafter, NA Insurance demanded reparation against ATI for the goods damaged in its custody, in the amount of P5M. ATI alleged that the COGSA applies in this case since the goods were shipped from a foreign port to the Philippines.
The prescriptive period for an action against a broker is ten (10) years and not one year under the COGSA, since the broker is not a carrier, charterer or holder of the bill of lading (Reyma Brokerage Inc. vs. Philippine Home Assurance Corporation, G.R. No. 93464, October 7, 1991).
What are the instances where there is NO liability under COGSA? (FDUD) 1.
When damage is not apparent clam should be filed within 3 days from delivery
Shipper has 1 year form date of delivery (delivered but damaged goods), or the date when the vessel left Within 10 years, if a port, or from the date of bill of lading has been delivery to the arrastre issued (non-delivery or loss) within to file his case in court. (Table form J. Dimaampao , supra, p. 158)
The suit for loss or damage should be brought within one year from: 1. 2.
When the damage is apparent, the claim should be filed immediately upon discharge of the goods
Within 6 years if no bill of lading has been issued; or
Amount of the carrier’s liability under the COGSA
2.
NOT a condition precedent before filing
If not apparent, the shipper must file his claim withn 24 hours from delivery FILING of CASE in COURT
A: NO. The matter does not involve admiralty or maritime commerce which relate only to incidents occurring during the sea voyage.
1.
International (foreign port to Philippines)
If the nature or value of goods knowingly and f raudulently misstated by shipper
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MERCANTILE LAW NA Insurance claims that the COGSA does not apply, since ATI is not a shipper or carrier. Who is correct? (2014 BAR)
The act of the carrier in guessing which luggage contained the firearm constitutes willful misconduct.The guessing of which luggage contained the firearms amounted to willful misconduct under Section 25(1) of the Warsaw Convention (Northwest Airlines v. CA, GR No. 120334, January 20, 1998).
A: NA Insurance is correct. ATI should be ordered to pay NA Insurance notwithstanding the lapse of the one year prescriptive period for filing a suit under the COGSA. The term “carriage of goods” under Section 1 in COGSA, covers the period from the time when the goods are loaded to the time when they are discharged from the ship infer that the period of time when the goods have been discharged from the ship and given to the custody of the arrastre operator is not covered by the COGSA. The COGSA does not mention that an arrastre operator may invoke the prescriptive period of one year; hence, it does not cover the arrastre operator.
The allegation of willful misconduct resulting in a tort is insufficient to exclude the case from the realm of Warsaw Convention. A cause of action based on tort did not bring the case outside the sphere of the Warsaw Convention (Lhuiller v. British Airways, GR No. 171092, March 15, 2010)
THE CORPORATION CODE (BP BLG. 68)
WARSAW CONVENTION
Define corporation.
How do you apply Warsaw Convention?
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2, CC)
The WC applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking (WC, Art. 1[1]).
Distinguish the following classes of corporation. As to existence of stocks STOCK CORPORATION
What are the limitations to the liability of air carriers? 1.
2.
3.
Organized under the Corporation Code It has capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotment of the surplus profits on basis of the share held. (CC, Sec. 3)
Carriage of persons – 250,000 francs/$100, 000 for each passenger. Nevertheless, by special contract, the carrier and the passenger may agree to a higher limit of liability. Carriage of registered baggage and of cargo –250 francs per kilogram/ $1,000, unless the passenger or consignor has made, at the time when the package was handed over to the carrier, a special declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires. Objects which the passenger takes charge himself – 5,000 francs/ $1,000 per passenger.
NON-STOCK CORPORATION All others are non-stock corporation
As to how it is created and its function PRIVATE PUBLIC CORPORATION CORPORATION Formed for some private Formed for the purpose, benefit or end government of a portion of the State for the general good or welfare If NOT created for If the corporation is political or public created for political or purpose although whole public purpose or substantially the connected with the whole interest in the administration of corporation belongs to government the State
NOTE: The amendatory Guatemala Protocol has not yet been ratified, so either of the two currencies is still correct. Carrier is NOT entitled to the foregoing limit if the damage is caused by willful misconduct or default on its part (WC, Art. 25). Where the loss of the baggage of a passenger was due to the fault or recklessness of an airline company, the limitation on the liability of airline companies under the Warsaw Convention is not applicable (Alitalia v. IAC, G.R. No. 71929, December 4, 1990).
As to legal status DE JURE CORPORATION Organized in accordance with the requirements of the law.
GR: Claim for damages must be brought within 2 years reckoned from the date of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped, otherwise, right to damages shall be extinguished.
NOTE: If there is substantial compliance, a de jure corporation results. (Dimaampao and Escalante, 2017 )
XPN: Where delaying tactics were employed by airline itself to deny the passenger time to file his complaint (United Airlines vs. Uy, G.R. No. 127768, Nov. 19, 1999). Carrier is NOT entitled to the limitation of liability if the damage is caused by willful misconduct or default on its part (WC, Art. 25).
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DE FACTO CORPORATION A Corporation where there exists a flaw in its incorporation. Requisites: 1. Organized under a valid Law. 2. Attempt in good faith to form a corporation according to the requirements of the
UST LAW PRE-WEEK NOTES 2017 law (Colorable Compliance)
the form of a corporation who know that the corporation has not been registered, there is NO corporation by estoppel. (Lozano v. Judge Delos Santos, G. R. No. 125221, June 19, 1997)
NOTE: Issuance of Certificate of Incorporation by SEC is a minimum requirement for the formation of the corporation in good faith. (Sundiang Sr. & Aquino, 2009)
NATIONALITY OF CORPORATIONS How is the nationality of a corporation determined?
3.
Use of corporate Powers The corporation must have performed the acts which are peculiar to a corporation like entering into a subscription agreement, adopting by-laws, and electing directors (Actual User)
In Philippine jurisdiction, the nationality of a corporation is primarily governed by the Place of Incorporation Test . This means that a corporation is considered a national of the country where it is incorporated regardless of the nationality of the controlling stockholders. (Sec. 123, CC) In certain instances, however, the nationality of the corporation is determined by the Control Test . a) War – the nationality of the corporation is determined by the nationality of the controlling stockholders; b) Exploitation of Natural Resources – only a Filipino corporation, that is, 60% of its capital stock are owned by Filipinos, may exploit natural resources (Sec. 2, Art. XII of the 1987 Constitution); c) Public utilities – only a Filipino corporation, 60% of its capital stock are owned by Filipinos, may be granted franchise or certificate to operate public utilities (Sec. 11, Art. XII of the 1987 Constitution); d) Investment purposes – a Philippine national or corporation is one whereby 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. (Foreign Investment Act of 1991)
As to Laws of Incorporation DOMESTIC FOREIGN CORPORATION CORPORATION Formed, organized or Formed, organized or existing under Philippine existing under laws other law than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state (Sec. 123, CC)
“Capital” should be interpreted to mean shares which are entitled to vote. Non-voting shares must be excluded. (Gamboa v. Teves, 652 SCRA 690, June 28, 2011; as upheld in the Heirs of Wilson P. Gamboa v. Teves, Resolution, 682 SCRA 397, October 9, 2012)
Corporation by Estoppel vs. Corporation Sole CORPORATION BY CORPORATION SOLE ESTOPPEL 1. All persons who assume to act as a One established for the corporation purpose of administering knowing it to be and managing, as trustee, without authority to the affairs, property and do so shall be liable temporalities of any as general partners religious denomination, for all debts, sect or church. It may be liabilities and formed by the chief damages incurred archbishop, bishop, priest, or arising as a result. minister, rabbi or other 2. One who assumes an presiding elder of such obligation to an religious denomination, ostensible sect or church. corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation (CC, Sec. 21)
Finally, under the Grandfather Rule, 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 in the situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. If the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., “grandfathered”) to determine the total percentage of Filipino ownership. (SEC Opinion, 27 October 2011); (Dimaampao and Escalante, 2017)
Where there is no third person involved and the conflict arises only among those assuming
Redmont Consolidated Mines Corp. (Redmont) took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the DENR,
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MERCANTILE LAW it learned that the areas where it wanted to undertake exploration and mining activities were already covered by Mineral Production Sharing Agreement (MPSA) applications of Narra Corp., Tesoro Inc., and McArthur Inc., which were all domestic corporations.
What is the interpretation of the below provision in the Constitution? Section 11, Article XII of the Constitution: No franchise, certificate, 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 sixty per centum of whose capital is owned by such citizens.
Redmont, however, questioned these applications for MPSA arguing that at least 60% of the capital stock of these three corporations were owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation, which was disqualified from engaging in mining activities reserved only for Filipino citizens. Are Narra, Tesoro corporations?
and
McArthur
The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is "full [and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights must rest in the hands of Filipino nationals." And, precisely that is what SEC-MC No. 8 provides, viz.: "For purposes of determining compliance [with the constitutional or statutory ownership], the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote."
Filipino
NO. A grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:
In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign Investments Act of 1991 (FIA-IRR) provides: For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
“Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.”
In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and Regulations of the Securities Regulation Code (SRC-IRR) as:
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power (which includes the power to vote or direct the voting of such security) and/or investment returns or power (which includes the power to dispose of, or direct the disposition of such security). Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial ownership of each "specific stock" of the public utility company whose stocks are under review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or direct another to vote for him, or the Filipino has the investment power over the "specific stock", i.e., he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he can vote and dispose of that "specific stock" or direct another to vote or dispose it for him, then such Filipino is the "beneficial owner" of that "specific stock." Being considered Filipino, that "specific stock" is then to be counted as part of the 60% Filipino ownership requirement under the Constitution. The right to the dividends, jus fruendi - a right emanating from ownership of that "specific stock" necessarily accrues to its Filipino "beneficial owner."
Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership. Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation. (Narra Nickel Mining and Development Corporation v. Redmont Consolidated Mines, 722 SCRA 382, in Dimaampao and Escalante, 2017)
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UST LAW PRE-WEEK NOTES 2017 (Roy III v. Herbosa, G.R. No. 207246, April 18, 2017, EN BANC)
2.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY May a corporation own property and incur obligation in its own name?
When the corporation has a reputation that is debased, resulting in its humiliation in the business realm. (Manila Electric Company v. T.E.A.M. Electronics Corporation, et. al., G.R. No. 131723, December 13, 2007)
DOCTRINE OF PIERCING THE CORPORATE VEIL
YES. Stockholders merely have inchoate right over the properties of the corporation. Likewise, the properties of directors, officers and stockholders are not the properties of the corporation.
What is the Doctrine of Piercing the Veil of Corporate Entity? The Doctrine of Piercing the Corporate Veil is the doctrine that allows the State to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the persons composing it.
Parenthetically, as a consequence of its status as a distinct legal entity, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation , the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the Principle of Limited Liability . (Philippine National Bank v. Hydro Resources Contractors Corporation, 693 SCRA 294, March 13, 2013, in Dimaampao and Escalante, 2017)
NOTE: Any piercing of the corporate veil has to be done with caution, albeit courts will not hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives. (Sarona v. National Labor Relations Commission, 663 SCRA 394, January 18, 2012)
May a corporation be held liable for tort? For crime?
What are the tests in determining the applicability of the Doctrine of Piercing the Corporate Veil?
As to tort. It may be held accountable for tort when the act was committed by the officer or agent under the express direction or authority from the stockholders or members acting as a body or generally from the directors as the governing body.
(ECAO) 1. When the corporation is used to defeat public convenience as when the corporate fiction is us ed as a vehicle for the evasion of an existing obligation; (Equity Cases) 2. In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; (Control Test ) 3. In Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. (Timoteo H. Sarona v. National Labor Relations Commission, Royale Security Agency, et al., G.R. No. 185280, January 18, 2012) 4. The Objective test where the end result in piercing the veil of corporate fiction is to make the stockholders liable for debts and obligations of the Corporation not to make the Corporation liable for the debts and obligations of the stockholders. (Umali v CA, G.R. No. 89561, September 13, 1990)
As to crime. A corporation is an artificial being incapable of intent, and as such, it cannot commit felonies punishable under the Revised Penal Code. It cannot also be held liable for crimes punishable under special laws because these crimes are personal in nature requiring personal performance of overt acts. A corporation cannot be meted with the penalty of imprisonment because it exists by mere fiction of law. Exception: By express provision of the Anti-Money Laundering Act, a corporation may be held criminally liable for violation thereof. In such case, responsible officers would be criminally liable. (Dimaampao and Escalante, 2017)
RECOVERY OF MORAL DAMAGES May a corporation seek for and be awarded moral damages?
Explain the Alter Ego Theory/Instrumentality Theory.
A juridical person is, as a general rule, not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock
This theory espouses that the corporate entity is a mere farce as it is the alter ego, business conduit or instrumentality of a person or another entity. This contemplates of:
However, there are exceptions: 1. 1.
Article 2219 paragraph 7 of the Civil Code expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. This provision does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as the corporation can validly complain for libel or any other form of defamation and claim for moral damages. (Filipinas Broadcasting Network, Inc. v. AMEC-BCCM, G.R. No. 141994, January 17, 2005)
2.
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Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own (Instrumentality or Control test ); Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty,
MERCANTILE LAW or dishonest and unjust act in contravention of plaintiff’s legal right; (Fraud test ) and 3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of (Harm test ). (Philippine National v. Hydro Resources Contractors Corporation, 693 SCRA 294, March 133, 2013)
Priority of adoption determines the right to the exclusive use of a corporate name with freedom from infringement. Further, to determine whether a given corporate name is “identical” or “confusingly or deceptively similar” with another entity’s corporate name, the corporate names must be evaluated in their entirety. (Lyceum of the Philippines v. CA , G.R. No. 101897, March 5, 1993)
Kukan, Inc. conducted a bidding for the supply and installation of signages in a building. Morales tendered the winning bid and was awarded contract. Despite his compliance with his contractual undertakings, Morales was only paid half of the contract, which Kukan, Inc. refused to pay despite demands. Morales filed a Complaint with the RTC against Kukan, Inc. for a sum of money which was later on granted. Morales secured a writ of execution against Kukan, Inc. The sheriff then levied upon various personal properties found at what was supposed to be Kukan, Inc.’s office. Alleging that it owned the properties thus levied and that it was a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim. Morales filed an Omnibus Motion praying to apply the principle of piercing the veil of corporate entity. Rule on the motion.
Explain the Doctrine of Secondary Meaning. It is the doctrine which states that a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. (Philippine Nut Industry, Inc. v. Standard Brands. Inc. G.R. No.L-23035, July 31, 1975)
BY-LAWS What are the requisites for valid by-laws? (CoMorO-RAG) 1. Must be consistent with the COrporation Code, other pertinent laws and regulations; 2. Must not be contrary to MORals and public policy; 3. Must not impair Obligations and contracts or property rights of stockholders; 4. Must be Reasonable; 5. Must be consistent with the charter or AOI; 6. Must be of General application and not directed against a particular individual.
The motion should be denied. A corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and, hence, any p roceedings taken against that corporation and its property would infringe on its right to due process. The doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court has already acquired jurisdiction over the corporation. Before this doctrine can be applied:
What are the binding effects of by-laws? As to board of directors and officers, stockholders and members. They are bound by the terms thereof, but subordinate employees without actual knowledge are not bound.
a.
the court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and b. the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such service. (Kukan International Corporation v. Hon. Amor Reyes, G.R. No. 182729 September 29, 2010)
As to third persons. By-laws are not binding on them, unless they have actual knowledge. (Dimaampao and Escalante, 2017) What is the effect of non-filing of the by-laws within the required period?
CORPORATE NAME
Failure to submit the by-laws within 30 days from incorporation does not automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and hearing, under Section 6(I) of PD 902-A. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked. (Sawadjaan v. CA, G.R. No. 142284, June 8, 2005)
State the rules on adoption of a corporate name. The SEC shall not approve the proposed corporate name if: 1. there is already a prior right over the use of such corporate name; and 2. the proposed name is either: a) identical, or b) deceptively or confusingly similar to that of any existing corporation or to any other nam e already protected by law; or c) patently deceptive, confusing or contrary to existing law. (Industrial Refractories Corporation of the Philippines v. CA, et al., G.R. No. 122174, October 3, 2002)
CORPORATE POWERS Enumerate the express or general powers of a corporation (Theory of General Capacity). A corporation has no power except those expressly conferred upon it by the Corporation Code and those that are implied or incidental to its existence. Every corporation has the following general powers: (SuSuCo-ABS-PEDRO)
What is the Principle of Priority of Adoption?
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UST LAW PRE-WEEK NOTES 2017 To SUe and be sued; Of Succession; To adopt and use of Corporate seal; To amend its Articles of Incorporation; To adopt its By-laws; 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 merger or consolidation; 9. To make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any: a. Political party, b. Candidate and c. Partisan political activity. 10. To establish pension, Retirement, and other plans for the benefit of its directors, trustees, officers and employees – basis of which is the Labor code; 11. To exercise Other powers essential or necessary to carry out its purposes. (CC, Sec. 36)
If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.
Enumerate the specific powers of a corporation (Theory of Specific Capacity).
TRUST FUND DOCTRINE
1. 2. 3. 4. 5. 6.
Apparent authority is derived not merely from practice. Its existence may be ascertained through: 1.
2.
The general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or The acquiescence in his acts of a particular nature, with actual or constructive notice thereof, within o r beyond the scope of his ordinary powers.
It is not the quantity of similar acts which establishes apparent authority but the vesting of a corporate officer with the power to bind the corporation. (Advance Paper Corporation v. Arma Traders Corporation, GR No. 176897, December 11, 2013)
Explain the Trust Fund Doctrine. The specific powers of a corporation are the following: 1. extend or shorten corporate term (Sec. 37, CC); 2. increase or decrease capital stock (Sec. 38, CC); 3. incur, create or increase bonded indebtedness (Sec. 38, CC); and 4. deny pre-emptive rights (Sec. 39, CC); 5. Sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property, assets, and goodwill (Sec. 40); 6. purchase or acquire own shares (Sec. 41, CC); 7. invest in another corporation or business or for any purpose other than the primary purpose (Sec. 42, CC); 8. declare dividends (Sec. 43,CC); 9. enter into management contract (Sec. 44, CC); 10. amend the Articles of Incorporation (Sec. 16, CC).
The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.
Exceptions to the trust fund doctrine The Code allows distribution of corporate capital only in these instances: 1. 2.
Explain ultra vires act. 3. An ultra vires act refers to an act outside or beyond express, implied and incidental corporate powers. The concept also includes those acts that may ostensibly be within such powers but are, by general or special laws, either proscribed or declared illegal. (Rural Bank of Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000)
4.
Acts which are clearly beyond the scope of the corporation’s authority are null and void and cannot be given any effect. (Gancayco v. City Government of Quezon City, 658 SCRA 853, October 11, 2011)
5. 6. 7.
Amendment of the AOI to reduce authorized capital stock; Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings; Dissolution and eventual liquidation of the corporation; Dividends from investments in wasting asset corporation (one solely or principally engaged in the exploitation of “wasting assets,” distributing net proceeds from exploitation of their holdings, such as mines, oil wells, without allowance or d eduction for depletion); In close corporation, where there is a deadlock (Sec. 104, CC) Purchase own shares of stock Payment for the fair value of the shares of dissenting stockholders. (Dimaampao and Escalante, 2017)
May an ultra vires act be ratified? BUSINESS JUDGMENT RULE YES. For valid ratification, all the stockholders must give their consent to such ratification; the rights of the State are not involved; the creditors are not prejudiced; and the act or contracts must be wholly executed. (Dimaampao and Escalante, 2017)
GR: Contracts intra vires entered into by the board of directors are binding upon the corporation beyond the interference of courts. The courts are barred from intruding into business judgments of corporations, when the same are made in good faith. (Ong v Tiu, G.R. No. 144476. April 8, 2003)
Explain the Doctrine of Apparent Authority. (2015 BAR)
XPNs: The director/trustee or officer is personally and solidary liable if he:
39
MERCANTILE LAW 1.
2. 3.
4.
5.
6.
7.
Willfully and knowingly votes for or assent to patently unlawful acts of the corporation (Sec. 31, CC); Is guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec. 31, CC); Acquires any personal or pecuniary interest in conflict with his duty as such director or trustee (Sec. 31,CC); Acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation (Sec. 34,CC); Consents to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; Contractually agrees or stipulates to hold himself personally and solidarily liable with the Corporation; Is made, by specific provision of law, personally liable for his corporate action. (MAM Realty Development Corp. v. NLRC, 244 SCRA 797, June 2, 1995 in Dimaampao and Escalante, 2017)
case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. Based on the above discussion, when Section 23[9], CC declares that the board of directors shall hold office for 1 year until their successors are elected and qualified, we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period that time from the lapse of one year from a member’s election to the Board and until his successor ’s election and qualification is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term.
BOARD OF DIRECTORS/TRUSTEES/OFFICERS In the November 2010 stockholders’ meeting of Greenville Corporation, 8 directors were elected to the board. The directors assumed their posts in January 2011. Since no stockholders' meeting was held in November 2011, the 8 directors served in a holdover capacity and thus continued discharging their powers.
With the expiration of the terms of office, a vacancy resulted which, by the terms of Section 29 of the CC, must be filled by the stockholders in a regular or special meeting called for the purpose. To assume that the vacancy is caused by the resignation of Directors A and B in 2012, not by the expiration of their terms in 2011, is both illogical and unreasonable. Their resignation as holdover directors did not change the nature of the vacancy; the vacancy due to the expiratio n of A and B’s term had been created long before their resignation. (Valle Verde Country Club, Inc. v. Victor Africa, G.R. No. 151969, 11 August 2008)
In June 2012, 2 of Greenville Corporation's directors – Director A and Director B – resigned from the board. Relying on Section 29 of the Corporation Code, the remaining 6 directors elected 2 new directors to fill in the vacancy caused by the resignation of Directors A and B. Stockholder X questioned the election of the new directors, initially, through a letter-complaint addressed to the board, and later (when his lettercomplaint went unheeded), through a derivative suit filed with the court. He claimed that the vaca ncy in the board should be filled up by the vote of the stockholders of Greenville Corporation. Greenville Corporation's directors defended the legality of their action, claiming as well that Stockholder X's derivative suit was improper.
However, since the right to fill in a vacancy in the BOD belongs to the stockholders, the derivative suit to enforce such right is improper. (Reyes v. RTC of Makati, 561, SCRA 593, 11 August 2008, in Dimaampao and Escalante, 2017)
Ricardo Coros was dismissed by Matling Industrial and Commercial Corporation (Matling) as its Vice President for Finance and Administration. Coros filed a complaint for illegal suspension and illegal dismissal against Matling and some of its corporate officers with the NLRC. Matling, et al., moved to dismiss the complaint, raising the ground, among others, that the complaint pertained to the jurisdiction of the SEC due to the controversy being intra-corporate inasmuch as Coros was a member of Matling’s Board of Directors aside from being its Vice-President for Finance and Administration prior to his termination. It further argues that the power to create corporate offices and to appoint the individuals to assume the offices was delegated by Matling’s Board of Directors to its President through its By-Laws; and that any office the President created, like the position of the Coros, was as valid and effective a creation as that made by the Board of Directors, making the office a corporate office. Is Coros a corporate officer of Matling?
Rule on the issues raised. (2013 BAR) The election of the new directors should be by voting of the stockholders, and not merely by the remaining directors. Term is the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s tenure represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in
40
UST LAW PRE-WEEK NOTES 2017 NO. Pursuant to Section 25 of the Corporation Code, whoever are the corporate officers enumerated in the by-laws are the exclusive officers of the corporation and the Board has no power to create other offices without amending first the corporate By-laws. However, the Board may create appointive positions other than the positions of corporate officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Sec. 25 of the Corporation Code and are not empowered to exercise the functions of the corporate officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees. Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Sec. 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers is a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents. The office of Vice President for Finance and Administration created by Matling’s P resident pursuant to the By-Law was an ordinary, not a corporate, office. (Matling Industrial and Commercial Corporation, et al., v. Ricardo R. Coros, G.R. No. 157802, October 10, 2010, J. Bersamin)
At the meeting of the Board of Directors of KWIK to approve the contract, Chito would have to make sure that: a) There is no fraud involved; and b) The contract is fair and reasonable under the circumstances. 2.
Explain the contracts between corporations with interlocking directors. A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Provided that: 1. 2. 3.
CONTRACTS Briefly discuss the doctrine opportunity. (2005 BAR)
of
corporate
Corporate powers are exercised only by the board, except when delegated to an executive committee. What are the corporate powers that may not be delegated?
However, if such act is ratified by a vote of the stockholders representing at least 2/3 of the outstanding capital stock, the director is excused from remitting the profit realized. (ibid)
The executive committee by a vote of majority may exercise such powers as may be delegated to it. However, the following cannot be delegated:
Chito Santos is a director of both Platinum Corporation (PLATINUM) and KWIK Silver Corporation (KWIK). He owns 1% of the outstanding capital stock of PLATINUM and 40% of KWIK. PLATINUM plans to enter into a contract with KWIK that will make both companies earn very substantial profits. The contract is presented at the respective board meetings of PLATINUM and KWIK.
2.
1.
Contract is not fraudulent; Contract is fair and reasonable under the circumstances; and If the interest of the interlocking director in one corporation or corporations is merely nominal (not exceeding 20% of the outstanding capital stock), he shall be subject to the provisions of Sec. 32 insofar as the latter corporation or corporations are concerned. (CC, Sec. 33)
EXECUTIVE COMMITTEE
Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation. (CC, Sec. 34)
1.
If the conditions relating to quorum and required number of votes are not met, the contract must be ratified by the vote of stockholders representing at least 2/3 of the outstanding capital stock in a meeting called for the purpose. Furthermore, the adverse interest of Chito in the contract must be disclosed and the contract is fair and reasonable.
a) approval of any action for which shareholders’ approval is also required; b) filling of vacancies in the board; c) adopt, amend or repeal by-laws; d) amend or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and e) distribution of cash dividends to the shareholders. (Sec. 35, CC)
In order that the contract will not be voidable, what conditions will have to be complied with? Explain. If these conditions are not met, how may this contract be ratified? Explain. (1995 BAR)
STOCKHOLDERS AND MEMBERS What are the rights of a stockholder and member? (1996 BAR)
At the meeting of the Board of Directors of PLATINUM to approve the contract, Chito Santos would have to make sure that:
1.
a) His presence as director at the meeting is not necessary to constitute a quorum for such meeting; b) His vote is not necessary for the approval of the contract; and c) The contract is fair and reasonable under the circumstances.
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Management Right: a. To attend and vote in person or by proxy at a stockholders’ meetings (Secs. 50, 58); b. To elect and remove directors (Secs. 24, 28); c. To approve certain corporate acts (Sec. 58); d. To adopt and amend or repeal the by-laws or adopt new by-laws (Secs. 46, 48); e. To compel the calling of the meetings (Sec. 50); f. To enter into a voting trust agreement (Sec. 59); g. To have the corporation voluntarily dissolved (Secs. 118, 119).
MERCANTILE LAW 2.
3.
Proprietary rights a. To transfer stock in the corporate book ( Sec. 63); b. To receive dividends when declared (Sec. 43); c. To the issuance of certificate of stock or other evidence of stock ownership ( Sec. 64); d. To participate in the distribution of corporate assets upon dissolution (Sec. 118, 119); e. To pre-emption in the issue of shares (Sec. 39).
PRE-EMPTIVE RIGHT Explain the pre-emptive right of the stockholders. It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings. (CC, Sec. 39) Its purpose is to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.
Remedial rights a. To inspect corporate books (Sec. 74); b. To recover stock unlawfully sold for delinquent payment of subscription (Sec. 69); c. To be furnished with most recent financial statements or reports of the corporation’s operation (Sec. 74, 75); d. To bring suits (derivative suit, individual suit, and representative suit); e. To demand payment in the exercise of appraisal right (Secs. 41, 81).
Suppose that “X” Corporation has already used the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase “X’s” authorized capital stock. After complying with the requirements of the law on increase of capital stock, “X” issued an additional 1000 shares of the same value.
a. Assume that the stockholder “A” presently holds 200 out of the 1000 original shares, would “A” have a preemptive right to 200 of the new issue of 1000 shares? Why? b. When should stockholder “A” exercise the preemptive right? (2001 BAR)
VOTING TRUST What is a voting trust agreement (VTA)? A VTA is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other specific rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, to the trust agreement.
a.
Its principal purpose is to acquire control of the corporation.
b.
It is the trustee of the shares who acquires legal title to the shares under the voting trust agreement and thus entitled to the right to vote and the right to be elected in the board of directors while the trustor -stockholder has the beneficial title which includes the right to receive dividends. (Lee v. CA, G.R. No. 93695, February 4, 1992)
YES, “A” would have a preemptive right to 200 of the new issue of 1000 shares. “A” is a stockholder of record holding 200 shares in “X” Corporation. According to the Corporation Code, each stockholder has the preemptive right to all issues of shares made by the corporation in proportion to the number of share he holds on record in the corporation. Preemptive right must be exercised in accordance with the Articles of Incorporation or the By-Law. When the Articles of Incorporation and By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right. REMEDIAL RIGHTS
What are the actions that the stockholders or members can bring?
RIGHT OF APPRAISAL What is the meaning of stockholder’s appraisal right? (2007 BAR)
1.
It refers to the right of the stockholder to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the charter or articles of incorporation in the cases provided by law. (De Leon, 2010)
2.
The corporation need not pay the value of the shares of a dissenting stockholder if at the time of the demand, th e corporation has no unrestricted retained earnings. No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. The fact that the Corporation subsequent to the demand for payment and during the pendency of the collection case posted surplus profit did not cure the prematurity of the cause of action. (Philip Turner, et al., v. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010)
3.
Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation. Individual suit – an action brought by a stockholder against the corporation for direct violation of his contractual rights as such individual stockholder, such as the right to vote and be voted for, the right to share in the declared dividends, the right to inspect corporate books and records, and others. Representative suit – one brought by a person in his own behalf and on behalf of all similarly situated.
State the requisites for the existence of a derivative suit. (C-SENA) 1. Corporate cause of action: the cause of action must devolve upon the corporation itself; the wrongdoing or harm having been caused to the corporation and not to the particular stockholder brining the suit
42
UST LAW PRE-WEEK NOTES 2017 How is the voluntary dissolution of a corporation effected?
(Reyes v. Hon. RTC of Makati Br. 142, G.R. No. 165744, August 11, 2008); 2. Stockholder: the party bringing the suit must be a stockholder a. At the time the acts or transactions subject of the action occurred and b. at the time the action was filed
a) By the vote of the BOD/ BOT and the stockholders/ members where no creditors are affected (CC, Sec. 118); b) By the judgment of the SEC after hearing of petition for voluntary dissolution, where creditors are affected (CC, Sec. 119); c) By amending the AOI to shorten the corporate term (CC, Sec. 120); d) In case of a corporation sole, by submitting to the SEC a verified declaration of the dissolution for approval (CC, Sec. 115); e) Merger or consolidation
NOTE: if the cause of action is continuing in nature, the only requisite is that the party is a stockholder at the time the action was filed. (Dean Divina’s Lecture, April 29, 2015) Exhaustion of all intra-corporate remedies available under the AOI, By-Laws, laws or rules governing the corporation or partnership to obtain the relief he desires; 4. Not a Nuisance or Harassment suit; 5. Appraisal right is not available (Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, cited in Anthony S. Yu, et al., v. Joseph S. Yukayguan, et al., G.R. No. 177549, June 18, 2009) 3.
How is the involuntary dissolution of a corporation effected? a) By expiration of corporate term provided for in the AOI (CC, Sec. 11); b) By legislative enactment c) By failure to formally organize and commence the transaction of its business within 2 years from the date of incorporation (CC, Sec. 22); d) By order of the SEC on grounds under existing laws (CC, Sec. 121); e) Judicial decree on Quo Warranto Proceeding (CC, Sec. 20).
NOTE: A derivative suit is an intra-corporate controversy hence under the jurisdiction of the RTC acting as a special commercial court. WATERED STOCK What is a watered stock?
Define liquidation. A watered stock is a stock issued in exchange for cash, property, share, stock dividends, or services lesser than its par value or issued value. (CC, Sec. 65)
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. (Sundiang Sr. & Aquino, 2014)
Watered stocks can either be par or no par value shares. The watered stocks refer only to original issue of stocks but not to a subsequent transfer of such stocks by the corporation, for then it would no longer be an “issue” but a sale thereof (De Leon, 2010, citing Rochelle Roofing Co. v. Burley, 115 NE 478). Treasury shares are not subject to the prohibition on the issuance of watered stocks.
What are the methods of liquidation? 1. 2.
DISSOLUTION AND LIQUIDATION
By the corporation itself or its board of directors or trustees (CC , Sec. 122 [1]); By a trustee to whom the assets of the corporation had been conveyed. (CC, Sec. 122[2]) (Board of Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14, 1967); By a management committee or rehabilitation receiver appointed by SEC. (CC, Sec. 119)
Define dissolution.
3.
It is the extinguishment of the franchise of a corporation and the termination of its corporate existence. (Sundiang Sr. & Aquino, 2009)
Does corporate life cease to exist immediately upon dissolution?
What are the two legal steps in corporate dissolution? 1.
2.
NO. It shall continue as a body corporate for 3 years from the time of dissolution, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. (Dimaampao and Escalante, 2017)
The termination of the corporate existence at least as far as the right to go on doing ordinary business is concerned; The winding up of its affairs, the payment of its debts, and the distribution of its assets among the shareholders or members and other persons interested. After winding up, the existence of the corporation is terminated for all purposes.
The corporation, once dissolved, thereafter continues to be a body corporate for 3 years for purposes of prosecuting and defending suits by and against it and of enabling it to settle and close its affairs, culminating in the final disposition and distribution of its remaining assets. If the 3-year extended life expires without a trustee or receiver being designated by the corporation within that period and by that time (expiry of the 3-year extended term), the corporate liquidation is not yet
How are corporatations dissolved? a) b) c) d)
voluntarily; involuntarily; by shortening corporate term; and expiration of the term. (Dimaampao and Escalante, 2017)
43
MERCANTILE LAW over, how, if at all, can a final settlement of the corporate affairs be made? (1997 BAR)
This provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater longterm benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery. (BPI v. Sarabia Manor Hotel, G.R. no. 175844, July 29, 2013)
The liquidation can continue with the winding up. The members of the Board of Directors can continue with the winding of the corporate affairs until final liquidation. They can act as trustees or receivers for this purpose.
The SEC approved the amendment of the articles of incorporation of GHQ Corporation shortening its corporate life to only 25 years in accordance with Section 120 of the Corporation Code. As shortened, the corporation continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date, there were a num ber of pending civil actions, of varying nature but mostly money claims filed by creditors, none of which was expected to be completed or resolved within 5 ye ars from May 30, 1997. If the creditors had sought your professional help at that time about whether or not their cases could be pursued beyond May 30, 1997, what would have been your advice? (2000 BAR)
CLOSE CORPORATION What is a close corporation? A close corporation is one which AOI provides that: a.
b.
The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence of GHQ Corporation. The Corporation is not actually dissolved upon the expiration of its corporate term. There is still the period for liquidation or winding up. GHQ Corporation may still continue to defend suits filed against it until it could settle and close its affairs.
c.
d.
CORPORATE REHABILITATION Define Rehabilitation
All of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the provisions on close corporations; and The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed NOT a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
A close corporation is essentially an incorporated partnership in which the stockholders consider each other as partners but which the law treats as a corporation. Thus, stockholders in a close corporation are very much like members in a partnership. They owe to one another the same duty of utmost good faith and diligence that partners owe one another. This strict duty applies particularly to controlling stockholders. (De Leon, 2010)
It refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated [Sec. 4(gg), FRIA].
What is the nature of rehabilitation proceedings?
What are the corporations which may not qualify as a close corporation?
Rehabilitation proceedings are summary and nonadversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings.
Any corporation may be incorporated as a close corporation, EXCEPT: (MOSBI-PEP) 1. Mining or Oil companies, 2. Stock exchanges, 3. Banks, 4. Insurance companies, 5. Public utilities, 6. Educational institutions and 7. Corporations declared to be vested with Public interest in accordance with the provisions of the Corporation Code. (CC, Sec. 96)
The jurisdiction of the rehabilitation court is over claims against the debtor that is under rehabilitation, not over claims by the debtor against its own debtors or against third parties. The corporation under rehabilitation must file a separate action against its debtors/insurers to recover whatever claim it may have against them. (Steel Corporation v. Mapfre Insular Insurance Corporation, G.R. No. 201199, October 16, 2013, in Divina, 2014)
NON-STOCK CORPORATION Explain the Cram-down clause. Define non-stock corporation. Section 23. Approval of the Rehabilitation Plan. – The court may approve a rehabilitation plan over the opposition of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. (Sec. 23, Rule 4, Interim Rules of Procedure on Corporate Rehabilitation)
It is one where no part of its income is distributable as dividends to its members, trustees or officers. Any profit which it may obtain as an incident to its operations shall whenever necessary or proper, be used in furtherance of the purpose or purposes for which it was organized. (CC, Sec. 87) Non-stock corporations may be formed or organized for: (CREP-CFLSS-CS)
44
UST LAW PRE-WEEK NOTES 2017 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Charitable, Religious, Educational, Professional, Cultural, Fraternal, Literary, Scientific, Social, Civic service, or Similar purposes, like trade, industry, agriculture and like chambers, or any combination thereof. (CC, Sec. 88)
A foreign corporation not doing business, but merely transacts in an isolated transaction or on a cause of action entirely independent of its business transaction, need not obtain a license and m ay sue and be sued in our courts. 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. (Agilent Technologies Singapore [Pte.] Ltd. V. Integrated Silicon Technology Philippines Corporation, G.R. No. 154618, 14 April 2004, in Dimaampao and Escalante, 2017)
What are the characteristics of a non-stock corporation?
DOCTRINE OF DOING BUSINESS 1. 2.
3.
4. 5.
6.
7.
8.
It does not have capital stock divided into shares; No part of its income during its existence is distributable as dividends to its members, trustees, or officers; As a general rule, it is not empowered to engage in business with the object of m aking income or profits directly or indirectly. However, it is not prohibited to make income or profits as an incident to its operation (CC, Sec. 87); There is non-transferability of membership (CC, Sec. 90); The right to vote of members may be limited, broadened, or even denied in the AOI or the by-laws (CC, Sec. 89); Non-stock corporations may, through their articles of incorporation or their by-laws designate their governing boards by any name other than as BOT (CC, Sec. 138); By-laws may provide that the members may hold their meetings at any place even outside the place where the principal office of the corporation is located, provided that such place is within the Philippines (CC, Sec. 93). A non-stock corporation is not allowed to distribute any of its assets or any incidental income or profit made by the corporation during its existence; Non-availability of conversion into stock corporation. (SEC Opinion, February 24, 1989)
What does doing business in the Philippines under the Foreign Investment Act of 1991 (FIA) mean? (2016 BAR) The phrase "doing business in the Philippines" under the FIA include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; provided that passive equity investment shall not be construed as doing business.
What are the jurisdictional tests of “doing or transacting business” in the Philippines for foreign corporations? 1.
FOREIGN CORPORATIONS Define a foreign corporation. A foreign corporation is one, formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. (CC, Sec. 123)
Discuss the underlying reason in requiring foreign corporation to obtain license to do business in the Philippines.
2.
The purpose of the law is to subject the foreign corporation doing business in the Philippines to the jurisdiction of the courts.
Twin Characterization Test a. Continuity Test – Doing business implies a continuity of commercial dealings and arrangements, and contemplates 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. b. Subsequent Test – a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized (Sundiang Sr. & Aquino, 2009 Contract Test - Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines.
NOTE: Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus require the foreign corporation t o secure a Philippine business license. (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 147905, May 28, 2007)
A foreign corporation doing business in the Philippines with a license may sue and can be sued in the Philippines. If it is doing business without a license, it cannot sue but may be sued in the Philippines. (Sec. 133, CC )
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MERCANTILE LAW What is the legal test for determining if an unlicensed foreign corporation is doing business in the Philippines? (2002 BAR)
present, then the transferee corporation shall assume the liabilities of the transferor. The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the purchasing corporation is merely a continuation of the selling corporation, is challenging to determine. Dean Cesar Villanueva explained that this exception contemplates the “business-enterprise transfer.” In such transfer, the transferee corporation ’s interest goes beyond the assets of the transferor’s assets and its desires to acquire the latter’s business enterprise, including its goodwill.
The test is whether or not the unlicensed foreign corporation has performed an act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the fu nctions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business corporation.
A foreign corporation which is not licensed to do business in the Philippines is not absolutely incapacitated from filing a suit in local courts
Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine because the purchasing or transferee corporation necessarily continued the business of the selling or transferor corporation. Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former. Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. The sale under this provision does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose.
Only when that foreign corporation is “transacting” or “doing business” in the country will a license be necessary before it can institute suits. It may, however, bring suits on isolated business transactions, which is not prohibited under Philippine law. Thus, a foreign insurance company may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country. It is the act of engaging in business without the prescribed license which bars a foreign corporation from access to our courts. (Aboitiz Shipping Corp. v. Insurance Co. of North America, G.R. No. 168402, August 6, 2008, in Divina, 2010)
The purpose of the business-enterprise transfer is to protect the creditors of the business by all owing 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 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. Indeed, the transferee corporation may inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the latter’s business. (Y-I Leisure Philippines, Inc. v. Yu, G.R. No. 207161, September 18, 2015)
Any foreign corporation not doing business in the Philippines may maintain an action in our courts upon any cause of action, provided that the subject matter and the defendant are within the jurisdiction of the court. It is not the absence of the prescribed license but "doing business" in the Philippines without such license which debars the foreign corporation from access to our courts. In other words, although a foreign corporation is without license to transact business in the Philippines, it does not follow that it has no capacity to bring an action. Such license is not necessary if it is not engaged in business in the Philippines. (Columbia Pictures v. CA, G.R. No. 110318, August 28, 1996)
MERGERS AND CONSOLIDATIONS Where one corporation sells or otherwise transfers all of its assets to another corporation, is the latter liable for the debts and liabilities of the transferor?
What is meant by a de facto merger ? Discuss (2016 BAR) De facto merger means that a corporation called the acquiring corporation acquired the assets and lia bilities of another corporation in exchange for equivalent val ue of shares of stock of the acquiring corporation.
GR: No. XPNs: 1. Where the purchaser expressly or impliedly agrees to assume such debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation; and 4. Where the transaction is entered into fraudulently to escape liability for such debts. (Edward J. Nell Co. v. Pacific Farms, Inc., G.R. No. L-20850, November 29, 1965)
SECURITIES REGULATION CODE The SRC is the law that regulates securities (its issuance, distribution and sale) and the person who deals with such securities. It is enacted to protect the public from unscrupulous promoters, who stake business or venture claims which have really no basis, and sell shares or interests therein to investors. The SRC also serves to protect investors, promote investor confidence, and stabilize the financial markets.
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are
SECURITIES REQUIRED TO BE REGISTERED What are securities? (1996 BAR)
46
UST LAW PRE-WEEK NOTES 2017 Securities are shares, participation or interests in a corporation or in a commercial enterprise or profitmaking venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: (DO DIET) 1. 2. 3. 4.
5.
6.
Debt instruments – bonds, debentures, notes, evidence of indebtedness, asset-backed securities Other instruments as may in the future be determined by the SEC. Derivatives– options and warrants I nvestments instruments – Investment contracts, fractional undivided interests in oil, gas, or other mineral rights E quity instruments – Shares of stock, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription, proprietary or non-proprietary membership certificates in corporations. T rust instruments – Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments. (SRC, Sec. 3)
2.
Test on determining whether or not it is a security: Does it represent a share, participation, or interest in a commercial enterprise or any profit making venture? If yes, then, it is a security. If it is a security, then, it cannot be sold, or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC. (Divina, 2014) What is the requirement before securities are sold or offered for sale or distribution within the Philippines? They are required to be registered with and approved by the SEC. Registration also includes the disclosure to SEC of all material and relevant information about the issuer of the security. Prior to the sale, the information on the securities, in such form and with such substance as the SEC may prescribe, shall be made available to each prospective purchaser. (SRC, Sec. 8)
In Securities Law, what is a shortswing transaction? A shortswing is a transaction where a person buys securities and sells or disposes of the same within a period of six months.
PROHIBITIONS ON FRAUD, MANIPULATIONS AND INSIDER TRADING Explain the manipulation of security prices. (2001 BAR) The price of securities should be dictated by market forces. It cannot be pegged or stabilized. The following acts are considered as manipulation of security prices and are therefore prohibited: 1.
3.
Transactions intended to create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market: a. Wash Sale – is a transaction in which there is no genuine change in the beneficial (or actual) ownership of a security; b. Matched Sale – is a change of ownership in the securities by entering an order for the purchase or sale of a security with the knowledge that a
4.
47
simultaneous order of substantially the same size, time, and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; c. Similar transactions where there is no change of beneficial ownership. Effecting a series of transactions that will raise or depress the price of securities to induce the purchase or sale of securities respectively, or creating active trading to induce transactions through manipulative devices: a. Marking the close – buying and selling of securities at the close of the market in an effort to alter the closing price of these securities. b. Painting the tape – engaging in a series of transactions effected by brokers in securities that are reported publicly to give the impression or illusion of activity or price movement in a security, which may trick investors into trading in these securities because of the alleged trading volume or indications of interest. c. Squeezing the float – refers to taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way to create artificial prices. This prevents the actual market from determining the price of these securities. d. Hype and dump – engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices. e. Boiler room operations – refers to activities that involve the use of high pressure sale tactics such as direct mail offers or telephone followups to investors to promote purchase and sale of securities wherein there is misrepresentation in these securities. This is a fraudulent transaction that tricks investors into trading in a fake market. f. Daisy chain – refers to a series of purchase and sales of the same issue at successively higher prices by the same group of people with the purpose of manipulating prices are drawing unsuspecting investors into the market leaving them defrauded of their money and securities. g. Front-Running – is the prohibited practice of a broker-dealer executing its proprietary order before the customer’s order for the same security. This violates the fiduciary responsibility by the broker-dealer to its customer accounts as well as placing the customer’s order first. h. Churning – involves the excessive trading of securities by a broker- dealer in a customer’s discretionary account in order to generate commissions, without regard to the customer’s investment objective. Circulating or disseminating information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of that security for the purpose of inducing the purchase or sale of such security. To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange.
MERCANTILE LAW 5.
To effect, either alone or with others, any series of transactions for the purchase and/or sale of any security traded in an exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by the Code or by rules of the Commission.
equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all shareholders of such class.
NOTE: In the event that the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of such tender offer shall be proportionately distributed across both selling shareholder with whom the acquirer may have been in private negotiations and the minority shareholders.
What is insider trading? A purchase or sale made by an insider, or such insider’s spouse or his relative by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to be effected while in possession of material non-public information if transacted after such information came into existence but prior to the public dissemination of such information, and lapse of reasonable time for the market to absorb such information. (Bar 2015)
2.
What is material non-public information? (1995 BAR) 1.
2.
3.
Information about the issuer or the security has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. (SRC, Sec. 27.2)
4.
In insider trading, what is a fact of special significance? (1991 BAR) It is, in addition to being material, such fact as would likely, on being made generally available, to affect the market price of a security to a significant extent, or which a reasonable person would consider as especially important under the circumstances in determining his course of action in the light of such factors a s the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability. (RSA, Sec. 30 [c])
5.
What is a tender offer? (2016, 2010, 2002 BAR) Tender offer means a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. It is also an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Tender offer is in place to protect their minority shareholders against any scheme that dilutes the share value of any investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them opportunity to sell their shares at the same price as those of the majority shareholders. (CEMCO HOLDINGS, INC. v. National Life Insurance Company, Inc. G.R. No. 171815, August 7, 2007)
Coverage of the application of tender offer The mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may be effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. (Cemco Holdings v. National Life Insurance Company, G.R. No. 171815, August 7, 2007)
In what instances is a tender offer required to be made? (2002 BAR) Tender offer is required to be made in the following instances: 1.
Any person or group of persons acting in concert who intends to acquire 35% or more of any class of equity shares of a public company (corporation with assets of at least P 50,000,000.00 and having 200 or more stockholders with at least 100 shares for each stockholder) pursuant to an agreement made between or among the person or group of persons and one or more sellers. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares of a public company in one or more transactions within a period of 12 months shall be required to make a tender offer to all holders of such class for the number of shares so acquired within the same period. If any acquisition of even less than 35% would result in ownership of over 51% of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such tender offer shall be required to accept any and all securities thus tendered. In any transaction covered by this Rule, the sale of shares pursuant to the private transaction shall not be completed prior to the closing and completion of the tender offer. Transactions with any of the seller/s of significant block of shares with whom the acquirers may have been in private negotiation shall close at the same time and upon the same terms as the tender offer made to the public under this Rule. For paragraph (2)(B), the last sale meeting the threshold shall not be consummated until the closing and completion of the tender offer.
Any person or group of persons acting in concert who intends to acquire 35% or more of any class of
48
UST LAW PRE-WEEK NOTES 2017 CIVIL LIABILITY
INTELECTUAL PROPERTY LAW
What are the grounds for civil liability to arise
Coverage of intellectual property rights
1. 2.
1. 2. 3. 4. 5. 6.
3. 4. 5.
False Registration Statement (SRC, Sec. 56) Fraud in connection with prospectus, communications and reports (SRC, Sec. 57) Fraud in connection with security transactions (SRC, Sec. 58) Manipulation of security prices (SRC , Sec. 60) Insider trading (SRC, Sec. 61)
7.
Prescriptive period for filing of action: Two years after the discovery of the facts constituting the cause of action and within five years after such cause of action accrued
Copyright and Related Rights; Trademarks and Service Marks; Geographic indications; Industrial designs; Patents; Layout designs (Topographies) of Integrated Circuits; Protection of Undisclosed Information (TRIPS).
Distinctions copyright
among
trademark,
INTELLECTUAL PROPERTIES
Jurisdiction over civil liabilities: The court which has jurisdiction over cases involving civil liabilities is the Regional Trial Court. Civil suits are under the exclusive original jurisdiction of the RTC and hence, need not be first filed before the SEC unlike criminal cases, wherein the latter body exercises primary jurisdiction. (Pua v. Citibank, G.R. No. 180064, Sept. 16, 2013)
Trademarks and Service Marks
INTRA-CORPORATE CONTROVERSIES An intra-corporate controversy is one which arises between a stockholder and the co rporation and pertains to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. (Real v. Sangu Philippines Inc., G.R. No. 168757, January 19, 2011)
Patents
Copyright and Related Rights
The venue for actions involving intra-corporate controversies is now under the jurisdiction of the RTC acting as a special commercial court. (Sec. 5, A.M. NO. 01-2-04-SC)
patent,
and
DEFINITION any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. exists over original and derivative intellectual creations in the literary and artistic domain protected from the moment of their creation.
PATENTS Any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable. It may be, or may relate to, a product , or process, or an improvement of any of the foregoing (IPC, Sec. 21).
It is the RTC and not the Sandiganbayan which has jurisdiction over cases which do not involve a sequestration-related incident but an intra-corporate controversy. Issues regarding the propriety of the election of a party as a Director and his authority to act in that capacity should be determined only by the RTC pursuant to the pertinent law on jurisdiction because they do not concern the recovery of ill-gotten w ealth.
Improvement – enhancement or modification of any of the foregoing subject to patentability criteria. Criteria for Patentability:
TESTS TO DETERMINE INTRA-CORPORATE CONTROVERSY
1. 2.
1.
Relationship Test – No doubt exists that the parties were members of the same association, but this conclusion must still be supplemented by the controversy test before it may be considered as an intra-corporate dispute. 2. Controversy Test – The dispute must be rooted in the existence of an intra-corporate relationship, and must refer to the enforcement of the parties’ correlative rights and obligations under the Corporation Code, as well as the internal and intracorporate regulatory rules of the corporation, in order to be an intra-corporate dispute (Gulfo v. Ancheta, G.R. No. 175301, August 15, 2012).
3.
Novelty – An invention shall not be considered new if it forms part of a prior art (Sec. 23, IPC ). Inventive Step –if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. Industrially Applicable – An invention that can be produced and used in any industry (IPC, Sec. 27 ).
Coverage of patents: 1.
2.
3.
49
Invention – any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable . It may be, or may relate to, a product , or process, or an improvement of any of the foregoing (Sec. 21, IPC ). Utility Model – An invention qualifies for registration as a utility model if it is new and industrially applicable (Sec. 109, IPC ). Industrial Design – any composition of lines or colors or any three-dimensional form, whether or
MERCANTILE LAW not associated with lines or colors, provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. It must be new or ornamental (Sec. 112, 113 IPC ).
they are part of a process (e.g. business process with a step involving the use of a computer program).
OWNERSHIP OF PATENT 1. Inventor , his heirs, or assigns (IPC, Sec 28); 2. Joint invention – Jointly by the inventors (IPC, Sec. 28); 3. Two or more persons invented separately and independently of each other – To the person who filed an application; 4. Two or more applications are filed – the applicant who has the earliest filing date or, the earliest priority date. (First-to-file rule) (IPC, Sec. 29). 5. If made pursuant to a commission – person who commissions the work shall own the patent, unless otherwise provided in the contract. 6. If made pursuant to an employment – In case the employee made the invention in the course of his employment contract, the patent shall belong to: a. 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; b. The employer, if the inventive activity is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary (IPC, Sec. 30).
An industrial design is not considered new if it differs from prior designs only in minor respects that can be mistaken as such prior designs by an ordinary observer. (World Intellectual Property Organization, 2004).
Rights conferred by a patent: 1.
In case of Product – Right to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing the product. 2. In case of Process – Right to restrain prohibit and prevent any unauthorized person or entity from manufacturing, dealing in, using, offering for sale, selling or importing any product obtained directly or indirectly from such process (IPC, Sec. 71). 3. Right to assign the patent, to transfer by succession, and to conclude licensing contracts (IPC, Sec. 71.2). The rights conferred by a patent application take effect after publication in the Official Gazette (IPC, Sec 46).
Doctrine of exhaustion (Also known as the doctrine of first sale): it provides that the patent holder has control of the first sale of his invention. He has the opportunity to receive the full consideration for his invention from his sale. Hence, he exhausts his rights in the future control of his invention. It espouses that the patentee who has already sold his invention and has received all the royalty and consideration for the same will be deemed to have released the invention from his monopoly. The invention thus becomes open to the use of the purchaser without further restriction (Adams v. Burke, 84 U.S. 17, 1873).
RIGHT TO A PATENT
GR: Patent rights are exhausted by first sale in the Philippines (Domestic exhaustion).
2.
The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. (IPC, Sec. 28)
FIRST-TO-FILE RULE 1.
If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applicants are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. (IPC, Sec. 29)
XPN: On drugs and medicines: first sale in any jurisdiction exhausts the rights of the owner thereof (International exhaustion) (R.A. 9502).
INVENTIONS CREATED PURSUANT TO A COMMISION
NON-PATENTABLE INVENTIONS
Pursuant to a commission: The person who commissions the work shall own the patent, unless otherwise provided in the contract.
1.
2. 3. 4.
5. 6. 7.
8.
Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to microorganisms and non-biological and microbiological processes Aesthetic creations Discoveries, scientific theories and mathematical methods Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers Anything which is contrary to public order or morality (IPC as amended by R.A. 9502, Sec. 22). Methods for treatment of the human or animal body In the case of drugs and medicines, mere discovery of a new form or new property of a known substance which does not result in the enhancement of the efficacy of that substance Computer programs are not patentable but are copyrightable. However, they can be patentable if
Pursuant to employment: In case the employee made the invention in the course of his employment contract, the patent shall belong to: c.
d.
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; The employer, if the inventive activity 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).
RIGHT OF PRIORITY An application for patent filed 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
50
UST LAW PRE-WEEK NOTES 2017 as filed as of the date of filing the foreign application (IPC, Sec. 31). Conditions in availing of priority date: 1. 2. 3.
The local application expressly claims priority; It is filed within 12 months from the date the earliest foreign application was filed; and A certified copy of the foreign application together with an English translation is filed within 6 months from the date of filing in the Philippines (Sec. 31, IPC).
2.
GROUNDS FOR CANCELLATION OF A PATENT
3.
1. 2.
4.
3. 4. 5.
The invention is not new or patentable; The patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or Contrary to public order or morality (IPC, Sec. 61.1). Patent is found invalid in an action for infringement (IPC, Sec. 82); The patent includes matters outside the scope of the disclosure contained in the application (IPC, Sec 21, Regulations on Inter Partes Proceeding, Sec.1).
5.
been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention. Prior user - Person other than the applicant, who in good faith, started using the invention in the Philippines, or undertaken serious preparations to use the same, before the filing date or priority date of the application shall have the right to continue the use thereof, but this right shall only be transferred or assigned further with his enterprise or business. Where the act is done privately and on a noncommercial scale or for a non-commercial purpose (IPC, Sec. 72.2). Exclusively for experimental use of the invention for scientific purposes or educational purposes. (IPC, Sec. 72.3). Use by Government – a Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: a.
REMEDIES AVAILABLE 1.
Persons with a right to a patent - If a person other than the applicant is declared by final court order or decision as having the right to a patent, he may within 3 months after such decision has become final: a. Prosecute the application as his own b. File a new patent application c. Request the application to be refused; or d. Seek cancellation of the patent (IPC, Sec. 67.1).
b.
c.
d. 2.
True and actual inventor - If a person, who was deprived of the patent without his consent or through fraud is declared by final 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 damages in his favor if warranted by the circumstances (IPC, Sec. 68).
e.
These actions must be filed within one (1) year from the date of publication. (IPC, Sec. 70).
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; or A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti- competitive; or In the case of drugs and medicines, there is a national emergency or other circumstance of extreme urgency requiring the use of the invention; or In the case of drugs and medicines, there is a public non-commercial use of the patent by the patentee, without satisfactory reason; or 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.
The use by the Government, or third person authorized by the Government, shall be subject, where applicable, to the following provisions:
RIGHTS CONFERRED BY A PATENT 1. In case of Product – Right to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling o r importing the product. 2. In case of Process – Right to restrain, prohibit and prevent any unauthorized person or entity from manufacturing, dealing in, using, offering for sale, selling or importing any product obtained directly or indirectly from such process. (IPC, Sec. 71) 3. Right to assign the patent, to transfer by succession, and to conclude licensing contracts. (IPC, Sec. 71.2) 1.
2.
3.
4.
The rights conferred by a patent application take effect after publication in the Official Gazette. (IPC, Sec 46)
5. 6.
LIMITATIONS OF PATENT RIGHTS 1.
Parallel imporation – In case of drugs and medicine, the owner of a patent has NO RIGHT to prevent third parties from making, using, offering for sale, importing a patented product, when it has
7.
51
In situations of national emergency or other circumstances of extreme urgency , the right holder shall be notified as soon as reasonably practicable; In the case of public non-commercial use of the patent by the patentee , without satisfactory reason, the right holder shall be informed promptly; If 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 Health, the right holder shall be informed promptly; The scope and duration of such use shall be limited to the purpose for which it was authorized; Such use shall be non-exclusive; The right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; and The existence of a national emergency or other circumstances of extreme urgency, in the case of drugs and medicines shall be subject to the determination of the President of the Philippines for
MERCANTILE LAW the purpose of determining the need for such use or other exploitation, which shall be immediately executory.
not more than three (3) years and/or a fine not less than P100, 000.00 but not more than P300, 000.00. Prescriptive period: three (3) years from the commission of the crime. 3. Administrative remedy – Where the amount of damages claimed is not less than P200, 000.00, the patentee may choose to file a n administrative action against the infringer with the Bureau of Legal Affairs (BLA). The BLA can issue injunctions, order direct infringer to pay patentee damages, but unlike regular courts, the BLA may not issue search and seizure warrants or warrants of arrest. 4. Destruction of Infringing material – The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce of destroyed, without compensation (IPC, Sec.76.5 ).
PATENT INFRINGEMENT Tests in Patent Infringement: Literal Infringement - Resort must be had, in the first instance, to the words of the claim. If accused matter clearly falls within the claim, infringement is made out and that is the end of it. To determine whether the particular item falls within the literal meaning of the patent claims, the Court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exactly identity of all material elements (Godines v. The Honorable Court of Appeals, G.R. No. 97343, September 13, 1993 ).
Persons who can file an action for infringement: Doctrine of Equivalents – There is infringement when a device appropriates a prior invention by incorporating its innovative concept and, despite some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. (Ibid.).
1.
2.
The doctrine of equivalents thus requires satisfaction of the function-means-and-result test, the patentee having the burden to show that all three components of such equivalency test are met (Smithkline Beckman Corporation v. CA, G.R. No. 126627, August 14, 2003).
The patentee or his successors-in-interest may file an action for infringement (Creser Precision Systems, Inc. v. CA, G.R. No. 118708, Feb. 2, 1998). Any foreign national or juridical entity who meets the requirements of Sec. 3 and not engaged in business in the Philippines, to which a patent has been granted or assigned, whether or not it is licensed to do business in the Philippines (IPC, Sec. 77).
A licensee may NOT maintain a suit for infringement. Only the patentees, his heirs, assignee, grantee or personal representatives may bring an action for infringement. XPN: If the licensing agreement provides that the licensee may bring an action f or infringement or if he was authorized to do so by the patentee through a special power of attorney.
Meaning of “equivalent device”: It is such as a mechanic of ordinary skill in construction of similar machinery, having the forms, specifications and machine before him, could substitute in the place of the mechanism described without the exercise of the inventive faculty.
DEFENSES IN ACTION FOR INFRINGMENT Doctrine of file wrapper estoppel: It balances the doctrine of equivalents. Patentee is precluded from claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions that he was compelled to add by patent office regulations.
1. 2.
Contributory Infringement Anyone who actively induces the infringement of a patent or 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 fo r infringing the patented invention and not suitable for substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and severally liable with the infringer (Sec. 76.6, IPC).
3.
Invalidity of the patent (IPC, Sec. 81); Any of the grounds for cancellation of patents: a. That what is claimed as the invention is not new or patentable b. That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or c. That the patent is contrary to public order or morality (IPC, Sec. 61). Prescription
MODES OF OBTAINING LICENSING TO EXPLOINT PATENT RIGHTS A. VOLUNTARY – The grant by the patent owner to a third person of the right to exploit a patented invention.
Remedies of the owner of the patent against infringers
Rights of a licensor in voluntary licensing 1.
2.
Civil action for infringement – damages sustained by the owner, plus attorney’s fees and other litigation expenses, and to secure an injunction for the protection of his rights ( IPC, Sec 76.2). Prescriptive period: four (4) years from the filing of the action for infringement Criminal action for infringement – If the infringement is repeated , the infringer shall be criminally liable and upon conviction, shall suffer imprisonment of not less than six (6) months but
In the absence of any provision to the contrary in the technology transfer arrangement, the grant of a license shall not prevent the licensor from granting further licenses to third person nor from exploiting the subject matter of the technology transfer arrangement himself (IPC, Sec. 89).
B. COMPULSORY –
52
UST LAW PRE-WEEK NOTES 2017 Jurisdiction 1.
2.
in and to the patent and the invention covered thereby, or of an undivided share of the entire patent and invention, in which event the parties become joint owners thereof. An assignment may be limited to a specified territory (IPC, Sec. 104).
The Director of Legal Affairs may 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 (IPC, Sec. 93). R.A. No. 9502 (Universally Accessible Cheaper and Quality Medicines Act of 2008) however amended Sec. 93 so that it is the Director General of the IPO who may grant a license to exploit patented invention under the grounds enumerated therein.
Form of Assignment The assignment must be in writing, acknowledged before a notary public or other officer authorized to administer oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer (Sec. 105, IPC ).
The Director General of the Intellectual Property Office may grant a license to exploit a patented invention, even without the agreenment of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances: 1. 2.
3.
4. 5.
6.
Manner of effecting transfer of rights 1. 2.
Effect of an assignment of a patent
National emergency or other circumstances of extreme urgency; 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; or Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anticompetitive; or In case of public non-commercial use of the patent by the patentee, without satisfactory reason; If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason: Provided , that the importation of the patented article shall constitute working or using the patent; and Where the demand for patented drugs and medicines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health (IPC, Sec. 93, as amended by RA 9502).
The assignment works as an estoppel by deed, preventing the assignor from denying the novelty and utility of the patented invention when sued by the assignee for infringement.
Effect if the assignment was not recorded in the IPO A deed of assignment affecting title shall be void as against any subsequent purchaser or mortgagee for valuable consideration and without notice unless, it is so recorded in the Office, within three (3) m onths from the date of said instrument, or prior to the subsequent purchase or mortgage. However, even without recording, the instruments are binding upon the parties.
TRADEMARK Mark means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. Collective mark means any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark.
Cancellation of compulsory license Upon the request of the patentee, the Director may cancel the compulsory license: a. b.
c.
By inheritance or bequest License contract
If the ground for the grant of the compulsory license no longer exists and is unlikely to recur; If the licensee has neither begun to supply the domestic market nor made serious preparation therefor; If the licensee has not complied with the prescribed terms of the license (IPC, Sec. 101.2).
Trade name means the name or designation identifying or distinguishing an enterprise (IPC, Sec. 121.1, 121.2, 121.3). ACQUISITION OF OWNERSHIP OF A MARK The rights in a mark shall be acquired through registration made validly in accordance with the provisions of the IP Code. Actual prior use in commerce in the Philippines has been abolished as a condition for the registration of trademark.
ASSIGNMENT AND TRANSMISSION OF RIGHTS Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code.
Only the owner of the trademark, trade name or service mark used to distinguish his goods, business or service from the goods, business or service of others is entitled to register the same. An exclusive distributor does not acquire any proprietary interest in the principal's trademark and cannot register it in his own name unless it is has been validly assigned to him (Superior Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R. No. 169974, April 20, 2010).
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)
Assignment of Inventions An assignment may be of the entire right, title or interest
53
MERCANTILE LAW ACQUISITION OF TRADE NAME
12. Consists of color alone, unless defined by a given form; or 13. Is contrary to public order or morality (IPC, Sec. 123).
Ownership of a mark or trade name may be acquired not necessarily by registration but by adoption and use in trade or commerce. As between actual use of a mark without registration, and registration of the mark without actual use thereof, the former prevails over the latter. (Shangri-la Hotel Management Ltd. v. Developers Group of companies, March 31, 2006 G.R. No. 159938 ). A trade name need not be registered with the IPO before an infringement suit may be filed by its owner against the owner of an infringing trademark. All that is required is that the trade name is previously used in trade or commerce in the Philippines. (Coffee Partners, Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No. 169504, March 3, 2010).
Well-known marks A mark cannot be registered if it 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 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;
NON-REGISTRABLE MARKS 1.
2.
3.
4.
Consists of immoral , deceptive or scandalous matter or falsely suggest a connection with persons, institutions, beliefs, or national symbols; 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; Consists of a name, portrait or signature identifying a particular living individual except by his written consent , or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow except by written consent of the widow; Identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: a. The same goods or services, or b. Closely related goods or services, or c. If it nearly resembles such a mark as to be likely to deceive or cause confusion;
A mark cannot be registered if it is 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 Philippines with respect to goods or services which are NOT similar to those with respect to which registration is applied for : Provided , 1.
2.
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 mark : and That the interests of the owner of the registered mark are likely to be damaged by such use (Sec. 123.IPC ).
REGISTRATION OF A MARK A certificate of registration of a mark shall be prima facie evidence of the validity of the registration, the registrant’s ownership of the mark, and of the registrant’s exclusive right to u se the same in connection with the goods or services and those that are related thereto specified in the certificate (IPC, Sec. 138).
The law does not prohibit or enjoin every similarity. The similarity must be such that the ordinary purchaser will be deceived into the belief that the goods are those of another 5.
Is identical with an internationally well-known mark, whether or not it is registered here, used for identical or similar goods or services; 6. Is identical with an internationally well-known mark which is registered in the Philippines with respect to non-similar goods or services. Provided , that the interests of the owner of the registered mark are likely to be damaged by such use; 7. Is likely to mislead the public as to the nature, quality, characteristics or geographical origin of the goods or services; 8. Consists exclusively of signs that are generic for the goods or services that they seek to identify; 9. Consists exclusively of signs that have become customary or usual to designate the goods or services in everyday language and established trade practice; 10. Consists exclusively that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; 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;
A certificate of registration shall remain in force for ten (10) years, provided that the registrant shall file a declaration of actual use and evidence to that effect, or shall show valid reasons based on the existence of obstacles to such use, as prescribed by the Regulations, within one (1) year from the fifth anniversary of the date of the registration of the mark. Otherwise, the mark shall be removed from the Register by the Office (IPC, Sec. 145).
TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS DOMINANCY TEST – it focuses on the similarity of the prevalent features of the competing marks. If the competing trademark contains the main or essential or dominant features of another, and confusion and deception are likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. The question is whether the use of marks involved is likely to cause of confusion or mistake in the mind of the public or deceive purchasers. (2012 BAR)
54
UST LAW PRE-WEEK NOTES 2017 HOLISTIC TEST – Confusing similarity is to be determined on the basis of visual, aural, connotative comparisons and overall impressions engendered by the marks in controversy as they are encountered in the marketplace. The trademarks in their entirety as they appear in their respective labels are considered in relation to the goods to which they are attached.
Remedies of the owner of the trademark against infringers Civil — filed with the Regional Trial Courts. The owner of the registered mark may ask the court to issue a preliminary injunction to quickly prevent infringer from causing damage to his business. Furthermore, the court will require infringer to pay damages to the owner of the mark provided defendant is shown to have had notice of the registration of the mark (which is presumed if a letter R within a circle is appended) and stop him permanently from using the mark. 2. Criminal — the owner of the trademark may ask the court to issue a search warrant and in appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offense. 3. Administrative — same as in patent infringement cases. If the amount of damages claimed is not less than P200, 000.00, the registrant may choose to seek redress against the infringer by filing an administrative action against the infringer with the Bureau of Legal Affairs. 1.
The dominancy test only relies on visual comparisons between two trademarks whereas the totality or holistic test relies not only on the visual but also on the aural and connotative comparisons and overall impressions between the two trademarks (Societe Des Produits Nestl, S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
TRADEMARK INFRINGEMENT AND REMEDIES Use without consent of the trademark owner of any reproduction, counterfeit, copy or colorable limitation of any registered mark or trade name. Such use is likely to cause confusion or mistake or to deceive purchasers or others as to the source or origin of such goods or services, or identity of such business
Elements of trademark infringement: a.
b.
c.
d.
The trademark or trade name is reproduced, counterfeited, copied, or colorably imitated by the infringer; 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; 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 It is without the consent of the trademark or trade name owner or the assignee thereof
Jurisdiction over violations of intellectual property rights: It is properly lodged with the Regional Trial Court even if the penalty therefore is imprisonment of less than six years, or from 2 to 5 years and a fine ranging from P50, 000 to P200, 000. COPYRIGHT A right over literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of creation (IPC, Sec. 171.1).
Principle of automatic protection: Works are protected by the sole fact of their creation irrespective of their content, quality or purpose. Such rights are conferred from the moment of creation. (IPC, Sec. 172.2) Elements of copyrightability
Infringement of trademark v. Unfair competition 1.
INFRINGEMENT OF TRADEMARK Unauthorized use of a trademark. Fraudulent intent is unnecessary. GR: Prior registration of the trademark is a prerequisite to the action. XPN: Well-known marks
UNFAIR COMPETITION The passing off of one’s goods as those of another. Fraudulent intent is essential.
2.
Originality – Must have been created by the author’s own skill, labor, and judgment without directly copying or evasively imitating the work of another Expression – Must be embodied in a medium sufficiently permanent or stable to permit it to be perceived, reproduced or communicated for a period more than a transitory duration.
COPYRIGHTABLE WORKS
Registration is not necessary (Del Monte Corp. v. CA, G.R. No. 78325, January 23, 1990).
1.
Literary and Artistic Works a. b.
SIMILARITY BETWEEN THE TWO: The similarity lies in both their ability to disrupt fair competition amongst business enterprises and other businesses. They can also create confusion, mistake, and deception as to the minds of the consumers with regard to the source or identity of their products or services due to its similarity in appearance or packaging.
c. d. e. f. g. h. i.
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Books, pamphlets, articles and other writings Lectures, sermons, addresses, dissertations prepared for Oral delivery, whether or not reduced in writing or other material form Letters Dramatic, choreographic works Musical compositions Works of Art Periodicals and Newspapers Works relative to Geography, topography, architecture or science Works of Applied art
MERCANTILE LAW j. k. l. m. n. o.
2.
Works of a Scientific or technical character Photographic works Audiovisual works and cinematographic works Pictorial illustrations and advertisements Computer programs; and Other literary, scholarly, scientific and artistic works (IPC, Sec. 172.1).
b. c.
d.
Derivative Works a.
b.
To make any alterations of his work prior to, or to withhold it from publication To preserve integrity of work , object to any distortion, mutilation or other modification which would be prejudicial to his honor or reputation; and 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).
NATURE AND TERM OF MORAL RIGHTS: These are personal rights independent from the economic rights. Being a personal right, it can only be given to a natural person. Hence, even if he has licensed or assigned his economic rights, he continues to enjoy the abovementioned moral rights (Amador, 2007). The rights of an author shall last during the lifetime of the author and IN PERPETUITY after his death.
Dramatizations, translations, adaptations, abridgements, arrangements, and other alterations of literary or artistic works; 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).
Derivative works shall be protected as new works, provided that such new work shall not affect the fo rce 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).
3.
Droit de suite or “art proceeds right” is the artist’s resale right , which requires that a percentage of the resale price of an artistic work is paid to the author. The right is exercisable even after the author’s death, provided the work is still in copyright ( David Bainbridge, Intellectual Property, 3 rd Ed., p. 220 1996, also cited in Copyright Law of the Philippines by D. Funa).
NON-COPYRIGHTABLE WORKS 1. 2. 3.
4. 5.
6. 7. 8. 9.
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 first 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 five percent (5%) (Sec. 200, IPC ).
Idea, procedure, system, method or operation, concept, principle, discovery or mere data as such News of the day and other items of press information Any official text of a legislative, administrative or legal nature, as well as any official translation thereof Pleadings Decisions of courts and tribunals – this refers to original decisions and not to annotated decisions such as the SCRA or SCAD as these already fall under the classification of derivative works, hence copyrightable Any work of the government of the Philippines TV programs, format of TV programs (Joaquin v. Drilon, G.R. No. 108946, Jan. 28, 1999) Systems of bookkeeping; and Statutes.
Must carry rule It is limitation on copyright which obligates operators to carry the signals of local channels within their respective systems. This is to give the people wider access to more sources of news, information, education, sports event and entertainment programs other than those provided for by mass media and afforded television programs to attain a well informed, wellversed and culturally refined citizenry and enhance their socio-economic growth (ABS-CBN Broadcasting Corporation v. Philippine Multimedia System, G.R. No. 175769-70, Jan. 19, 2009).
RIGHTS OF COPYRIGHT OWNER 1.
2.
Economic rights – The right to carry out, authorize or prevent the following acts: a. Reproduction of the work or substantial portion thereof b. Carry-out derivative work (dramatization, translation, adaptation, abridgement, arrangement or other transformation of the work) c. First distribution of the original and each copy of the work by sale or other forms of transfer of ownership d. Rental right e. Public display f. Public performance g. Other communications to the public.
The rule mandates that the local television (TV) broadcast signals of an authorized TV broadcast station, such as the GMA Network, Inc., should be carried in full by the cable antenna television (CATV) operator, without alteration or deletion. In this case, the Central CATV, Inc. was found not to have violated the must-carry rule when it solicited and showed advertisements in its cable television system. Such solicitation and showing of advertisements did not constitute an infringement of the “television and broadcast markets” under Section 2 of E.O. No. 205 (GMA Network, Inc. v. Central CATV, Inc., G.R No. 176694, July 18, 2014).
OWNERSHIP OF COPYRIGHT 1. Original and literary artistic works – author 2. Joint authorship – co-authors, but if work of joint authorship consists of parts that can be used separately, then the author of each part shall be the original owner of the copyright in the part that he has created (IPC, Sec. 178.2).
Moral rights – For reasons of professionalism and propriety, the author has the right: a. To require that the authorship of the works be attributed to him (attribution right)
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UST LAW PRE-WEEK NOTES 2017 A: NO. In copyright infringement, intent is irrelevant. A person may consciously or unconsciously copy or infringe a copyrighted material and still be held liable for such act.
3. Audiovisual work – Producer, the author of the scenario, the composer of the music, the film director, and the author of the work so adapted 4. Anonymous and Pseudonymous works – publishers shall be deemed to represent the a uthors of articles and other writings published without the names of the authors or under pseudonyms, unless the contrary appears, or the pseudonyms or adopted name leaves no doubt as to the author's identity, or if the author of the anonymous works discloses his identity (IPC, Sec. 179). 5. Commissioned work – The person who commissioned the work shall own the work but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary (IPC, Sec. 178.4). 6. Collective works – 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). 7. In the course of employment – a. The employee, if not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. b. The employer, if the work is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary. (IPC, Sec. 178.3). 8. Letters – the writer subject to the provisions of Article 723 of the Civil Code. (IPC, Sec. 178.6).
A person infringes a right protected under this Act when one: a. b.
c.
Directly commits an infringement; Benefits from the infringing activity of another person who commits an infringement if the person benefiting has been given notice of the infringing activity and has the right and ability to control the activities of the other person; With knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another (IPC, Sec. 216, as amended by R.A. No. 10372).
Remedies in case of copyright infringement 1. 2.
Injunction Damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement.
Double damages – The amount of damages to be awarded shall be doubled against any person who: a. Circumvents effective technological measures; or b. Having reasonable grounds to know that it will induce, enable, facilitate or conceal the infringement, remove or alter any electronic rights management information from a copy of a work, sound recording, or fixation of a performance, or distribute, import for distribution, broadcast, or communicate to the public works or copies of works without authority, knowing that electronic rights management information has been removed or altered without authority (IPC, as amended by R.A. No. 10372, Sec. 216.1).
LIMITATIONS ON COPYRIGHT DOCTRINE OF FAIR USE “Fair use” permits a secondary use that “serves the copyright objective of stimulating productive thought and public instruction without excessively diminishing the incentives for creativity”. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including limited number of copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright.
NOTE: The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of several factors (IPC, Sec. 182.2). If you copy to the extent that you reduce the marketability of the book, it is no longer fair use.
3.
Impounding during the pendency of the action sales invoices and other documents evidencing sales 4. Destruction without any compensation all infringing copies 5. Moral and Exemplary damages (IPC, Sec. 216.1); or 6. Seizure and impounding of any article, which may serve as evidence in the court proceedings. (IPC, Sec. 216.2)
Substantial reproduction: It is not necessarily required that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work is appropriated. It is no defense that the pirate 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. In cases of infringement, copying alone is not what is prohibited. The copying must produce an “injurious effect” (Habana v. Robles, G.R. No. 131522, July 19, 1999).
RULES OF PROCEDURE FOR INTELLECTUAL PROPERTY RIGHTS CASES (A.M. NO. 10-3-10-SC) TRO/Preliminary Injunctions A.M. No. 10-3-10-SC does not provide a provision on provisional remedies. However, under Rule 1, Section 33 of the same Rules, it explicitly states that, where applicable, the Rules of Court shall apply suppletorily to proceedings under A.M. No. 10-3-10-SC. Thus, the existing provisions on TRO/Preliminary Injunctions and other remedies under the Rules of Court shall be applied in intellectual property cases.
COPYRIGHT INFRIGEMENT Q: In an action for damages on account of an infringement of a copyright, the defendant (the alleged pirate) raised the defense that he was unaware that what he had copied was a copyright material. Would this defense be valid? (1997 BAR)
Applicability of Rules on the Issuance of the Search and Seizure Order in Civil Actions for Infringement
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