1

Title. I. - OBLIGATIONS If the thing is indeterminate or generic, he may ask that

CHAPTER 1 the obligation be complied with at the expense of the
debtor.
Art. 1156. An obligation is a juridical necessity to give,
to do or not to do. If the obligor delays, or has promised to deliver the
same thing to two or more persons who do not have the
Art. 1157. Obligations arise from: same interest, he shall be responsible for any fortuitous
event until he has effected the delivery. 1096)
1) Law;
2) Contracts; Art. 1166. The obligation to give a determinate thing
3) Quasi-contracts; includes that of delivering all its accessions and
4) Acts or omissions punished by law; and accessories, even though they may not have been
5) Quasi-delicts. 1089a) mentioned. 1097a)

Art. 1158. Obligations derived from law are not Art. 1167. If a person obliged to do something fails to do
presumed. Only those expressly determined in this Code it, the same shall be executed at his cost.
or in special laws are demandable, and shall be
regulated by the precepts of the law which establishes This same rule shall be observed if he does it in
them; and as to what has not been foreseen, by the contravention of the tenor of the obligation.
provisions of this Book. 1090) Furthermore, it may be decreed that what has been
poorly done be undone. 1098)
Art. 1159. Obligations arising from contracts have the
force of law between the contracting parties and should Art. 1168. When the obligation consists in not doing,
be complied with in good faith. 1091a) and the obligor does what has been forbidden him, it
shall also be undone at his expense. 1099a)
Art. 1160. Obligations derived from quasi-contracts
shall be subject to the provisions of Chapter 1, Title Art. 1169. Those obliged to deliver or to do something
XVII, of this Book. incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of
Art. 1161. Civil obligations arising from criminal their obligation.
offenses shall be governed by the penal laws, subject to
the provisions of Article 2177, and of the pertinent However, the demand by the creditor shall not be
provisions of Chapter 2, Preliminary Title, on Human necessary in order that delay may exist:
Relations, and of Title XVIII of this Book, regulating
damages. 1092a)
1) When the obligation or the law expressly so
declare; or
Art. 1162. Obligations derived from quasi-delicts shall 2) When from the nature and the
be governed by the provisions of Chapter 2, Title XVII of circumstances of the obligation it appears that
this Book, and by special laws. 1093a) the designation of the time when the thing is
to be delivered or the service is to be rendered
CHAPTER 2 was a controlling motive for the establishment
NATURE AND EFFECT OF OBLIGATIONS of the contract; or
3) When demand would be useless, as when
Art. 1163. Every person obliged to give something is the obligor has rendered it beyond his power
also obliged to take care of it with the proper diligence to perform.
of a good father of a family, unless the law or the
stipulation of the parties requires another standard of In reciprocal obligations, neither party incurs in delay if
care. 1094a) the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From
Art. 1164. The creditor has a right to the fruits of the the moment one of the parties fulfills his obligation,
thing from the time the obligation to deliver it arises. delay by the other begins. 1100a)
However, he shall acquire no real right over it until the
same has been delivered to him. 1095) Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and
Art. 1165. When what is to be delivered is a determinate those who in any manner contravene the tenor thereof,
thing, the creditor, in addition to the right granted him are liable for damages.
by Article 1170, may compel the debtor to make the
delivery.
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Art. 1171. Responsibility arising from fraud is depend upon a future or uncertain event, or upon a past
demandable in all obligations. Any waiver of an action event unknown to the parties, is demandable at once.
for future fraud is void.
Every obligation which contains a resolutory condition
Art. 1172. Responsibility arising from negligence in the shall also be demandable, without prejudice to the
performance of every kind of obligation is also effects of the happening of the event. 1113)
demandable, but such liability may be regulated by the
courts, according to the circumstances. 1103) Art. 1180. When the debtor binds himself to pay when
his means permit him to do so, the obligation shall be
Art. 1173. The fault or negligence of the obligor consists deemed to be one with a period, subject to the
in the omission of that diligence which is required by provisions of Article 1197.
the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the Art. 1181. In conditional obligations, the acquisition of
place. When negligence shows bad faith, the provisions rights, as well as the extinguishment or loss of those
of Articles 1171 and 2201, paragraph 2, shall apply. already acquired, shall depend upon the happening of
the event which constitutes the condition. 1114)
If the law or contract does not state the diligence which
is to be observed in the performance, that which is Art. 1182. When the fulfillment of the condition
expected of a good father of a family shall be required. depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or
Art. 1174. Except in cases expressly specified by the law, upon the will of a third person, the obligation shall take
or when it is otherwise declared by stipulation, or when effect in conformity with the provisions of this Code.
the nature of the obligation requires the assumption of 1115)
risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen, Art. 1183. Impossible conditions, those contrary to good
were inevitable. customs or public policy and those prohibited by law
shall annul the obligation which depends upon them. If
Art. 1175. Usurious transactions shall be governed by the obligation is divisible, that part thereof which is not
special laws. affected by the impossible or unlawful condition shall
be valid.
Art. 1176. The receipt of the principal by the creditor
without reservation with respect to the interest, shall The condition not to do an impossible thing shall be
give rise to the presumption that said interest has been considered as not having been agreed upon. 1116a)
paid.
Art. 1184. The condition that some event happen at a
The receipt of a later installment of a debt without determinate time shall extinguish the obligation as soon
reservation as to prior installments, shall likewise raise as the time expires or if it has become indubitable that
the presumption that such installments have been paid. the event will not take place. 1117)
1110a)
Art. 1185. The condition that some event will not
Art. 1177. The creditors, after having pursued the happen at a determinate time shall render the
property in possession of the debtor to satisfy their obligation effective from the moment the time indicated
claims, may exercise all the rights and bring all the has elapsed, or if it has become evident that the event
actions of the latter for the same purpose, save those cannot occur.
which are inherent in his person; they may also impugn
the acts which the debtor may have done to defraud If no time has been fixed, the condition shall be deemed
them. 1111) fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the
Art. 1178. Subject to the laws, all rights acquired in obligation. 1118)
virtue of an obligation are transmissible, if there has
been no stipulation to the contrary. 1112) Art. 1186. The condition shall be deemed fulfilled when
the obligor voluntarily prevents its fulfillment. 1119)
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS Art. 1187. The effects of a conditional obligation to give,
SECTION 1. - Pure and Conditional Obligations once the condition has been fulfilled, shall retroact to
the day of the constitution of the obligation.
Art. 1179. Every obligation whose performance does not Nevertheless, when the obligation imposes reciprocal
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prestations upon the parties, the fruits and interests As for the obligations to do and not to do, the provisions
during the pendency of the condition shall be deemed to of the second paragraph of Article 1187 shall be
have been mutually compensated. If the obligation is observed as regards the effect of the extinguishment of
unilateral, the debtor shall appropriate the fruits and the obligation. 1123)
interests received, unless from the nature and
circumstances of the obligation it should be inferred Art. 1191. The power to rescind obligations is implied in
that the intention of the person constituting the same reciprocal ones, in case one of the obligors should not
was different. comply with what is incumbent upon him.

In obligations to do and not to do, the courts shall The injured party may choose between the fulfillment
determine, in each case, the retroactive effect of the and the rescission of the obligation, with the payment of
condition that has been complied with. 1120) damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
Art. 1188. The creditor may, before the fulfillment of the become impossible.
condition, bring the appropriate actions for the
preservation of his right. The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
The debtor may recover what during the same time he
has paid by mistake in case of a suspensive condition. This is understood to be without prejudice to the rights
1121a) of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the
Art. 1189. When the conditions have been imposed with Mortgage Law. 1124)
the intention of suspending the efficacy of an obligation
to give, the following rules shall be observed in case of Art. 1192. In case both parties have committed a breach
the improvement, loss or deterioration of the thing of the obligation, the liability of the first infractor shall
during the pendency of the condition: be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the
1) If the thing is lost without the fault of the contract, the same shall be deemed extinguished, and
debtor, the obligation shall be extinguished; each shall bear his own damages.
2) If the thing is lost through the fault of the
debtor, he shall be obliged to pay damages; it is SECTION 2. - Obligations with a Period
understood that the thing is lost when it
perishes, or goes out of commerce, or Art. 1193. Obligations for whose fulfillment a day
disappears in such a way that its existence is certain has been fixed, shall be demandable only when
unknown or it cannot be recovered; that day comes.
3) When the thing deteriorates without the
fault of the debtor, the impairment is to be
borne by the creditor; Obligations with a resolutory period take effect at once,
4) If it deteriorates through the fault of the but terminate upon arrival of the day certain.
debtor, the creditor may choose between the
rescission of the obligation and its fulfillment, A day certain is understood to be that which must
with indemnity for damages in either case; necessarily come, although it may not be known when.
5) If the thing is improved by its nature, or by
time, the improvement shall inure to the If the uncertainty consists in whether the day will come
benefit of the creditor; or not, the obligation is conditional, and it shall be
6) If it is improved at the expense of the regulated by the rules of the preceding Section. 1125a)
debtor, he shall have no other right than that
granted to the usufructuary. 1122)
Art. 1194. In case of loss, deterioration or improvement
of the thing before the arrival of the day certain, the
Art. 1190. When the conditions have for their purpose rules in Article 1189 shall be observed.
the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to
each other what they have received. Art. 1195. Anything paid or delivered before the arrival
of the period, the obligor being unaware of the period or
believing that the obligation has become due and
In case of the loss, deterioration or improvement of the demandable, may be recovered, with the fruits and
thing, the provisions which, with respect to the debtor, interests. 1126a)
are laid down in the preceding article shall be applied to
the party who is bound to return.
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Art. 1196. Whenever in an obligation a period is Art. 1201. The choice shall produce no effect except
designated, it is presumed to have been established for from the time it has been communicated. 1133)
the benefit of both the creditor and the debtor, unless
from the tenor of the same or other circumstances it Art. 1202. The debtor shall lose the right of choice when
should appear that the period has been established in among the prestations whereby he is alternatively
favor of one or of the other. 1127) bound, only one is practicable. 1134)

Art. 1197. If the obligation does not fix a period, but Art. 1203. If through the creditor's acts the debtor
from its nature and the circumstances it can be inferred cannot make a choice according to the terms of the
that a period was intended, the courts may fix the obligation, the latter may rescind the contract with
duration thereof. damages.

The courts shall also fix the duration of the period when Art. 1204. The creditor shall have a right to indemnity
it depends upon the will of the debtor. for damages when, through the fault of the debtor, all
the things which are alternatively the object of the
In every case, the courts shall determine such period as obligation have been lost, or the compliance of the
may under the circumstances have been probably obligation has become impossible.
contemplated by the parties. Once fixed by the courts,
the period cannot be changed by them. 1128a) The indemnity shall be fixed taking as a basis the value
of the last thing which disappeared, or that of the
Art. 1198. The debtor shall lose every right to make use service which last became impossible.
of the period:
Damages other than the value of the last thing or service
1) When after the obligation has been contracted, he may also be awarded. 1135a)
becomes insolvent, unless he gives a guaranty or
security for the debt; Art. 1205. When the choice has been expressly given to
the creditor, the obligation shall cease to be alternative
2) When he does not furnish to the creditor the from the day when the selection has been
guaranties or securities which he has promised; communicated to the debtor.

3) When by his own acts he has impaired said Until then the responsibility of the debtor shall be
guaranties or securities after their establishment, and governed by the following rules:
when through a fortuitous event they disappear, unless
he immediately gives new ones equally satisfactory; 1) If one of the things is lost through a
fortuitous event, he shall perform the
4) When the debtor violates any undertaking, in obligation by delivering that which the
consideration of which the creditor agreed to the creditor should choose from among the
period; remainder, or that which remains if only one
subsists;
5) When the debtor attempts to abscond. 1129a) 2) If the loss of one of the things occurs
through the fault of the debtor, the creditor
may claim any of those subsisting, or the price
SECTION 3. - Alternative Obligations of that which, through the fault of the former,
has disappeared, with a right to damages;
Art. 1199. A person alternatively bound by different 3) If all the things are lost through the fault of
prestations shall completely perform one of them. the debtor, the choice by the creditor shall fall
upon the price of any one of them, also with
The creditor cannot be compelled to receive part of one indemnity for damages.
and part of the other undertaking. 1131)
The same rules shall be applied to obligations to do or
Art. 1200. The right of choice belongs to the debtor, not to do in case one, some or all of the prestations
unless it has been expressly granted to the creditor. should become impossible. 1136a)

The debtor shall have no right to choose those Art. 1206. When only one prestation has been agreed
prestations which are impossible, unlawful or which upon, but the obligor may render another in
could not have been the object of the obligation. 1132) substitution, the obligation is called facultative.
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The loss or deterioration of the thing intended as a The creditor who may have executed any of these acts,
substitute, through the negligence of the obligor, does as well as he who collects the debt, shall be liable to the
not render him liable. But once the substitution has others for the share in the obligation corresponding to
been made, the obligor is liable for the loss of the them. 1143)
substitute on account of his delay, negligence or fraud.
Art. 1216. The creditor may proceed against any one of
SECTION 4. - Joint and Solidary Obligations the solidary debtors or some or all of them
simultaneously. The demand made against one of them
Art. 1207. The concurrence of two or more creditors or shall not be an obstacle to those which may
of two or more debtors in one and the same obligation subsequently be directed against the others, so long as
does not imply that each one of the former has a right to the debt has not been fully collected. 1144a)
demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a Art. 1217. Payment made by one of the solidary debtors
solidary liability only when the obligation expressly so extinguishes the obligation. If two or more solidary
states, or when the law or the nature of the obligation debtors offer to pay, the creditor may choose which
requires solidarity. 1137a) offer to accept.

Art. 1208. If from the law, or the nature or the wording He who made the payment may claim from his co-
of the obligations to which the preceding article refers debtors only the share which corresponds to each, with
the contrary does not appear, the credit or debt shall be the interest for the payment already made. If the
presumed to be divided into as many shares as there are payment is made before the debt is due, no interest for
creditors or debtors, the credits or debts being the intervening period may be demanded.
considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.
1138a) When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-
Art. 1209. If the division is impossible, the right of the debtors, in proportion to the debt of each. 1145a)
creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding against
all the debtors. If one of the latter should be insolvent, Art. 1218. Payment by a solidary debtor shall not entitle
the others shall not be liable for his share. him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or
become illegal.
Art. 1210. The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of
itself imply indivisibility. Art. 1219. The remission made by the creditor of the
share which affects one of the solidary debtors does not
release the latter from his responsibility towards the co-
Art. 1211. Solidarity may exist although the creditors debtors, in case the debt had been totally paid by
and the debtors may not be bound in the same manner anyone of them before the remission was effected.
and by the same periods and conditions. 1140)
Art. 1220. The remission of the whole obligation,
Art. 1212. Each one of the solidary creditors may do obtained by one of the solidary debtors, does not entitle
whatever may be useful to the others, but not anything him to reimbursement from his co-debtors.
which may be prejudicial to the latter. 1141a)
Art. 1221. If the thing has been lost or if the prestation
Art. 1213. A solidary creditor cannot assign his rights has become impossible without the fault of the solidary
without the consent of the others. debtors, the obligation shall be extinguished.

Art. 1214. The debtor may pay any one of the solidary If there was fault on the part of any one of them, all shall
creditors; but if any demand, judicial or extrajudicial, be responsible to the creditor, for the price and the
has been made by one of them, payment should be payment of damages and interest, without prejudice to
made to him. 1142a) their action against the guilty or negligent debtor.

Art. 1215. Novation, compensation, confusion or If through a fortuitous event, the thing is lost or the
remission of the debt, made by any of the solidary performance has become impossible after one of the
creditors or with any of the solidary debtors, shall solidary debtors has incurred in delay through the
extinguish the obligation, without prejudice to the judicial or extrajudicial demand upon him by the
provisions of Article 1219. creditor, the provisions of the preceding paragraph shall
apply.
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Art. 1222. A solidary debtor may, in actions filed by the save in the case where this right has been expressly
creditor, avail himself of all defenses which are derived reserved for him. Neither can the creditor demand the
from the nature of the obligation and of those which are fulfillment of the obligation and the satisfaction of the
personal to him, or pertain to his own share. With penalty at the same time, unless this right has been
respect to those which personally belong to the others, clearly granted him. However, if after the creditor has
he may avail himself thereof only as regards that part of decided to require the fulfillment of the obligation, the
the debt for which the latter are responsible. 1148a) performance thereof should become impossible without
his fault, the penalty may be enforced. 1153a)
SECTION 5. - Divisible and Indivisible Obligations
Art. 1228. Proof of actual damages suffered by the
Art. 1223. The divisibility or indivisibility of the things creditor is not necessary in order that the penalty may
that are the object of obligations in which there is only be demanded.
one debtor and only one creditor does not alter or
modify the provisions of Chapter 2 of this Title. 1149) Art. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or
Art. 1224. A joint indivisible obligation gives rise to irregularly complied with by the debtor. Even if there
indemnity for damages from the time anyone of the has been no performance, the penalty may also be
debtors does not comply with his undertaking. The reduced by the courts if it is iniquitous or
debtors who may have been ready to fulfill their unconscionable.
promises shall not contribute to the indemnity beyond
the corresponding portion of the price of the thing or of Art. 1230. The nullity of the penal clause does not carry
the value of the service in which the obligation consists. with it that of the principal obligation.
1150)
The nullity of the principal obligation carries with it that
Art. 1225. For the purposes of the preceding articles, of the penal clause. 1155)
obligations to give definite things and those which are
not susceptible of partial performance shall be deemed
to be indivisible. CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
When the obligation has for its object the execution of a
certain number of days of work, the accomplishment of Art. 1231. Obligations are extinguished:
work by metrical units, or analogous things which by
their nature are susceptible of partial performance, it
shall be divisible. 1) By payment or performance:
2) By the loss of the thing due:
3) By the condonation or remission of the
However, even though the object or service may be debt;
physically divisible, an obligation is indivisible if so 4) By the confusion or merger of the rights of
provided by law or intended by the parties. creditor and debtor;
5) By compensation;
In obligations not to do, divisibility or indivisibility shall 6) By novation.
be determined by the character of the prestation in each
particular case. 1151a) Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory
SECTION 6. - Obligations with a Penal Clause condition, and prescription, are governed elsewhere in
this Code. 1156a)
Art. 1226. In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the SECTION 1. - Payment or Performance
payment of interests in case of noncompliance, if there
is no stipulation to the contrary. Nevertheless, damages Art. 1232. Payment means not only the delivery of
shall be paid if the obligor refuses to pay the penalty or money but also the performance, in any other manner,
is guilty of fraud in the fulfillment of the obligation. of an obligation.

The penalty may be enforced only when it is Art. 1233. A debt shall not be understood to have been
demandable in accordance with the provisions of this paid unless the thing or service in which the obligation
Code. 1152a) consists has been completely delivered or rendered, as
the case may be. 1157)
Art. 1227. The debtor cannot exempt himself from the
performance of the obligation by paying the penalty,
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Art. 1234. If the obligation has been substantially 2) If the creditor ratifies the payment to the
performed in good faith, the obligor may recover as third person;
though there had been a strict and complete fulfillment,
less damages suffered by the obligee. 3) If by the creditor's conduct, the debtor has
been led to believe that the third person had
Art. 1235. When the obligee accepts the performance, authority to receive the payment. 1163a)
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is Art. 1242. Payment made in good faith to any person in
deemed fully complied with. possession of the credit shall release the debtor. 1164)

Art. 1236. The creditor is not bound to accept payment Art. 1243. Payment made to the creditor by the debtor
or performance by a third person who has no interest in after the latter has been judicially ordered to retain the
the fulfillment of the obligation, unless there is a debt shall not be valid.
stipulation to the contrary.
. The debtor of a thing cannot compel the creditor to
Whoever pays for another may demand from the debtor receive a different one, although the latter may be of the
what he has paid, except that if he paid without the same value as, or more valuable than that which is due.
knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial
to the debtor. 1158a) In obligations to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligee's will.
Art. 1237. Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such Art. 1245. Dation in payment, whereby property is
as those arising from a mortgage, guaranty, or penalty. alienated to the creditor in satisfaction of a debt in
1159a) money, shall be governed by the law of sales.

Art. 1238. Payment made by a third person who does Art. 1246. When the obligation consists in the delivery
not intend to be reimbursed by the debtor is deemed to of an indeterminate or generic thing, whose quality and
be a donation, which requires the debtor's consent. But circumstances have not been stated, the creditor cannot
the payment is in any case valid as to the creditor who demand a thing of superior quality. Neither can the
has accepted it. debtor deliver a thing of inferior quality. The purpose of
the obligation and other circumstances shall be taken
into consideration.
Art. 1239. In obligations to give, payment made by one
who does not have the free disposal of the thing due and
capacity to alienate it shall not be valid, without Art. 1247. Unless it is otherwise stipulated, the
prejudice to the provisions of Article 1427 under the extrajudicial expenses required by the payment shall be
Title on "Natural Obligations." 1160a) for the account of the debtor. With regard to judicial
costs, the Rules of Court shall govern. 1168a)
Art. 1240. Payment shall be made to the person in
whose favor the obligation has been constituted, or his Art. 1248. Unless there is an express stipulation to that
successor in interest, or any person authorized to effect, the creditor cannot be compelled partially to
receive it. 1162a) receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial
payments.
Art. 1241. Payment to a person who is incapacitated to
administer his property shall be valid if he has kept the
thing delivered, or insofar as the payment has been However, when the debt is in part liquidated and in part
beneficial to him. unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting
for the liquidation of the latter. 1169a)
Payment made to a third person shall also be valid
insofar as it has redounded to the benefit of the creditor.
Such benefit to the creditor need not be proved in the Art. 1249. The payment of debts in money shall be made
following cases: in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is
legal tender in the Philippines.
1) If after the payment, the third person
acquires the creditor's rights;
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
8

produce the effect of payment only when they have been If the debts due are of the same nature and burden, the
cashed, or when through the fault of the creditor they payment shall be applied to all of them proportionately.
have been impaired.
SUBSECTION 2. - Payment by Cession
In the meantime, the action derived from the original
obligation shall be held in the abeyance. 1170) Art. 1255. The debtor may cede or assign his property
to his creditors in payment of his debts. This cession,
Art. 1250. In case an extraordinary inflation or deflation unless there is stipulation to the contrary, shall only
of the currency stipulated should supervene, the value release the debtor from responsibility for the net
of the currency at the time of the establishment of the proceeds of the thing assigned. The agreements which,
obligation shall be the basis of payment, unless there is on the effect of the cession, are made between the
an agreement to the contrary. debtor and his creditors shall be governed by special
laws. 1175a)
Art. 1251. Payment shall be made in the place SUBSECTION 3. - Tender of Payment and Consignation
designated in the obligation.
Art. 1256. If the creditor to whom tender of payment
There being no express stipulation and if the has been made refuses without just cause to accept it,
undertaking is to deliver a determinate thing, the the debtor shall be released from responsibility by the
payment shall be made wherever the thing might be at consignation of the thing or sum due.
the moment the obligation was constituted.
Consignation alone shall produce the same effect in the
In any other case the place of payment shall be the following cases:
domicile of the debtor.
1) When the creditor is absent or unknown, or
If the debtor changes his domicile in bad faith or after does not appear at the place of payment;
he has incurred in delay, the additional expenses shall
be borne by him. 2) When he is incapacitated to receive the
payment at the time it is due;
These provisions are without prejudice to venue under
the Rules of Court. 1171a) 3) When, without just cause, he refuses to give
a receipt;
SUBSECTION 1. - Application of Payments
4) When two or more persons claim the same
Art. 1252. He who has various debts of the same kind in right to collect;
favor of one and the same creditor, may declare at the
time of making the payment, to which of them the same
must be applied. Unless the parties so stipulate, or when 5) When the title of the obligation has been
the application of payment is made by the party for lost. 1176a)
whose benefit the term has been constituted,
application shall not be made as to debts which are not Art. 1257. In order that the consignation of the thing
yet due. due may release the obligor, it must first be announced
to the persons interested in the fulfillment of the
If the debtor accepts from the creditor a receipt in obligation.
which an application of the payment is made, the former
cannot complain of the same, unless there is a cause for The consignation shall be ineffectual if it is not made
invalidating the contract. 1172a) strictly in consonance with the provisions which
regulate payment. 1177)
Art. 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until Art. 1258. Consignation shall be made by depositing the
the interests have been covered. 1173) things due at the disposal of judicial authority, before
whom the tender of payment shall be proved, in a
Art. 1254. When the payment cannot be applied in proper case, and the announcement of the consignation
accordance with the preceding rules, or if application in other cases.
can not be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due, The consignation having been made, the interested
shall be deemed to have been satisfied. parties shall also be notified thereof. 1178)
9

Art. 1259. The expenses of consignation, when properly Art. 1268. When the debt of a thing certain and
made, shall be charged against the creditor. 1178) determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its
Art. 1260. Once the consignation has been duly made, price, whatever may be the cause for the loss, unless the
the debtor may ask the judge to order the cancellation thing having been offered by him to the person who
of the obligation. should receive it, the latter refused without justification
to accept it. 1185)
Before the creditor has accepted the consignation, or
before a judicial declaration that the consignation has Art. 1269. The obligation having been extinguished by
been properly made, the debtor may withdraw the thing the loss of the thing, the creditor shall have all the rights
or the sum deposited, allowing the obligation to remain of action which the debtor may have against third
in force. 1180) persons by reason of the loss. 1186)

Art. 1261. If, the consignation having been made, the SECTION 3. - Condonation or Remission of the Debt
creditor should authorize the debtor to withdraw the
same, he shall lose every preference which he may have Art. 1270. Condonation or remission is essentially
over the thing. The co-debtors, guarantors and sureties gratuitous, and requires the acceptance by the obligor. It
shall be released. 1181a) may be made expressly or impliedly.

SECTION 2. - Loss of the Thing Due One and the other kind shall be subject to the rules
which govern inofficious donations. Express
Art. 1262. An obligation which consists in the delivery condonation shall, furthermore, comply with the forms
of a determinate thing shall be extinguished if it should of donation. 1187)
be lost or destroyed without the fault of the debtor, and
before he has incurred in delay. Art. 1271. The delivery of a private document
evidencing a credit, made voluntarily by the creditor to
When by law or stipulation, the obligor is liable even for the debtor, implies the renunciation of the action which
fortuitous events, the loss of the thing does not the former had against the latter.
extinguish the obligation, and he shall be responsible for
damages. The same rule applies when the nature of the If in order to nullify this waiver it should be claimed to
obligation requires the assumption of risk. 1182a) be inofficious, the debtor and his heirs may uphold it by
proving that the delivery of the document was made in
Art. 1263. In an obligation to deliver a generic thing, the virtue of payment of the debt. 1188)
loss or destruction of anything of the same kind does
not extinguish the obligation. Art. 1272. Whenever the private document in which the
debt appears is found in the possession of the debtor, it
Art. 1264. The courts shall determine whether, under shall be presumed that the creditor delivered it
the circumstances, the partial loss of the object of the voluntarily, unless the contrary is proved. 1189)
obligation is so important as to extinguish the
obligation. Art. 1273. The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver of
Art. 1265. Whenever the thing is lost in the possession the latter shall leave the former in force. 1190)
of the debtor, it shall be presumed that the loss was due
to his fault, unless there is proof to the contrary, and Art. 1274. It is presumed that the accessory obligation
without prejudice to the provisions of article 1165. This of pledge has been remitted when the thing pledged,
presumption does not apply in case of earthquake, after its delivery to the creditor, is found in the
flood, storm, or other natural calamity. 1183a) possession of the debtor, or of a third person who owns
the thing. 1191a)
Art. 1266. The debtor in obligations to do shall also be
released when the prestation becomes legally or SECTION 4. - Confusion or Merger of Rights
physically impossible without the fault of the obligor.
1184a) Art. 1275. The obligation is extinguished from the time
the characters of creditor and debtor are merged in the
Art. 1267. When the service has become so difficult as same person. 1192a)
to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in Art. 1276. Merger which takes place in the person of the
whole or in part. principal debtor or creditor benefits the guarantors.
10

Confusion which takes place in the person of any of the Art. 1285. The debtor who has consented to the
latter does not extinguish the obligation. 1193) assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the
Art. 1277. Confusion does not extinguish a joint compensation which would pertain to him against the
obligation except as regards the share corresponding to assignor, unless the assignor was notified by the debtor
the creditor or debtor in whom the two characters at the time he gave his consent, that he reserved his
concur. 1194) right to the compensation.

SECTION 5. - Compensation If the creditor communicated the cession to him but the
debtor did not consent thereto, the latter may set up the
Art. 1278. Compensation shall take place when two compensation of debts previous to the cession, but not
persons, in their own right, are creditors and debtors of of subsequent ones.
each other. 1195)
If the assignment is made without the knowledge of the
Art. 1279. In order that compensation may be proper, it debtor, he may set up the compensation of all credits
is necessary: prior to the same and also later ones until he had
knowledge of the assignment.
1) That each one of the obligors be bound
principally, and that he be at the same time a Art. 1286. Compensation takes place by operation of
principal creditor of the other; law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment.
2) That both debts consist in a sum of money, 1199a)
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated; Art. 1287. Compensation shall not be proper when one
of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in
3) That the two debts be due; commodatum.

4) That they be liquidated and demandable; Neither can compensation be set up against a creditor
who has a claim for support due by gratuitous title,
5) That over neither of them there be any without prejudice to the provisions of paragraph 2 of
retention or controversy, commenced by third Article 301. 1200a)
persons and communicated in due time to the
debtor. 1196) Art. 1288. Neither shall there be compensation if one of
the debts consists in civil liability arising from a penal
Art. 1280. Notwithstanding the provisions of the offense.
preceding article, the guarantor may set up
compensation as regards what the creditor may owe the Art. 1289. If a person should have against him several
principal debtor. 1197) debts which are susceptible of compensation, the rules
on the application of payments shall apply to the order
Art. 1281. Compensation may be total or partial. When of the compensation. 1201)
the two debts are of the same amount, there is a total
compensation. Art. 1290. When all the requisites mentioned in Article
1279 are present, compensation takes effect by
Art. 1282. The parties may agree upon the operation of law, and extinguishes both debts to the
compensation of debts which are not yet due. concurrent amount, even though the creditors and
debtors are not aware of the compensation. 1202a)
Art. 1283. If one of the parties to a suit over an
obligation has a claim for damages against the other, the SECTION 6. - Novation
former may set it off by proving his right to said
damages and the amount thereof. Art. 1291. Obligations may be modified by:

Art. 1284. When one or both debts are rescissible or 1) Changing their object or principal
voidable, they may be compensated against each other conditions;
before they are judicially rescinded or avoided.
2) Substituting the person of the debtor;
11

3) Subrogating a third person in the rights of Art. 1302. It is presumed that there is legal subrogation:
the creditor. 1203)
1) When a creditor pays another creditor who
Art. 1292. In order that an obligation may be is preferred, even without the debtor's
extinguished by another which substitute the same, it is knowledge;
imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every 2) When a third person, not interested in the
point incompatible with each other. 1204) obligation, pays with the express or tacit
approval of the debtor;
Art. 1293. Novation which consists in substituting a new
debtor in the place of the original one, may be made 3) When, even without the knowledge of the
even without the knowledge or against the will of the debtor, a person interested in the fulfillment of
latter, but not without the consent of the creditor. the obligation pays, without prejudice to the
Payment by the new debtor gives him the rights effects of confusion as to the latter's share.
mentioned in Articles 1236 and 1237. 1205a) 1210a)

Art. 1294. If the substitution is without the knowledge Art. 1303. Subrogation transfers to the persons
or against the will of the debtor, the new debtor's subrogated the credit with all the rights thereto
insolvency or non-fulfillment of the obligations shall not appertaining, either against the debtor or against third
give rise to any liability on the part of the original person, be they guarantors or possessors of mortgages,
debtor. subject to stipulation in a conventional subrogation.
1212a)
Art. 1295. The insolvency of the new debtor, who has
been proposed by the original debtor and accepted by Art. 1304. A creditor, to whom partial payment has been
the creditor, shall not revive the action of the latter made, may exercise his right for the remainder, and he
against the original obligor, except when said insolvency shall be preferred to the person who has been
was already existing and of public knowledge, or known subrogated in his place in virtue of the partial payment
to the debtor, when the delegated his debt. 1206a) of the same credit. 1213)

Art. 1296. When the principal obligation is extinguished

in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons
who did not give their consent. 1207)

Art. 1297. If the new obligation is void, the original one

shall subsist, unless the parties intended that the former
relation should be extinguished in any event.

Art. 1298. The novation is void if the original obligation

was void, except when annulment may be claimed only
by the debtor or when ratification validates acts which
are voidable. 1208a)

Art. 1299. If the original obligation was subject to a

suspensive or resolutory condition, the new obligation
shall be under the same condition, unless it is otherwise
stipulated.

Art. 1300. Subrogation of a third person in the rights of

the creditor is either legal or conventional. The former
is not presumed, except in cases expressly mentioned in
this Code; the latter must be clearly established in order
that it may take effect. 1209a)

Art. 1301. Conventional subrogation of a third person

requires the consent of the original parties and of the
third person.
12

Title II. - CONTRACTS Art. 1314. Any third person who induces another to
CHAPTER 1 violate his contract shall be liable for damages to the
GENERAL PROVISIONS other contracting party.

Art. 1305. A contract is a meeting of minds between two Art. 1315. Contracts are perfected by mere consent, and
persons whereby one binds himself, with respect to the from that moment the parties are bound not only to the
other, to give something or to render some service. fulfillment of what has been expressly stipulated but
1254a) also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and
Art. 1306. The contracting parties may establish such law. 1258)
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, Art. 1316. Real contracts, such as deposit, pledge and
morals, good customs, public order, or public policy. Commodatum, are not perfected until the delivery of the
1255a) object of the obligation.

Art. 1307. Innominate contracts shall be regulated by Art. 1317. No one may contract in the name of another
the stipulations of the parties, by the provisions of Titles without being authorized by the latter, or unless he has
I and II of this Book, by the rules governing the most by law a right to represent him.
analogous nominate contracts, and by the customs of
the place.
A contract entered into in the name of another by one
who has no authority or legal representation, or who
Art. 1308. The contract must bind both contracting has acted beyond his powers, shall be unenforceable,
parties; its validity or compliance cannot be left to the unless it is ratified, expressly or impliedly, by the person
will of one of them. 1256a) on whose behalf it has been executed, before it is
revoked by the other contracting party. 1259a)
Art. 1309. The determination of the performance may
be left to a third person, whose decision shall not be
binding until it has been made known to both CHAPTER 2
contracting parties. ESSENTIAL REQUISITES OF CONTRACTS
GENERAL PROVISIONS
Art. 1310. The determination shall not be obligatory if it
is evidently inequitable. In such case, the courts shall Art. 1318. There is no contract unless the following
decide what is equitable under the circumstances. requisites concur:

Art. 1311. Contracts take effect only between the 1) Consent of the contracting parties;
parties, their assigns and heirs, except in case where the 2) Object certain which is the subject matter of
rights and obligations arising from the contract are not the contract;
transmissible by their nature, or by stipulation or by 3) Cause of the obligation which is established.
provision of law. The heir is not liable beyond the value
of the property he received from the decedent. SECTION 1. - Consent

If a contract should contain some stipulation in favor of Art. 1319. Consent is manifested by the meeting of the
a third person, he may demand its fulfillment provided offer and the acceptance upon the thing and the cause
he communicated his acceptance to the obligor before which are to constitute the contract. The offer must be
its revocation. A mere incidental benefit or interest of a certain and the acceptance absolute. A qualified
person is not sufficient. The contracting parties must acceptance constitutes a counter-offer.
have clearly and deliberately conferred a favor upon a
third person. 1257a) Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his
Art. 1312. In contracts creating real rights, third persons knowledge. The contract, in such a case, is presumed to
who come into possession of the object of the contract have been entered into in the place where the offer was
are bound thereby, subject to the provisions of the made. 1262a)
Mortgage Law and the Land Registration Laws.
Art. 1320. An acceptance may be express or implied.
Art. 1313. Creditors are protected in cases of contracts
intended to defraud them. Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be
complied with.
13

Art. 1322. An offer made through an agent is accepted Art. 1332. When one of the parties is unable to read, or
from the time acceptance is communicated to him. if the contract is in a language not understood by him,
and mistake or fraud is alleged, the person enforcing the
Art. 1323. An offer becomes ineffective upon the death, contract must show that the terms thereof have been
civil interdiction, insanity, or insolvency of either party fully explained to the former.
before acceptance is conveyed.
Art. 1333. There is no mistake if the party alleging it
Art. 1324. When the offerer has allowed the offeree a knew the doubt, contingency or risk affecting the object
certain period to accept, the offer may be withdrawn at of the contract.
any time before acceptance by communicating such
withdrawal, except when the option is founded upon a Art. 1334. Mutual error as to the legal effect of an
consideration, as something paid or promised. agreement when the real purpose of the parties is
frustrated, may vitiate consent.
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, Art. 1335. There is violence when in order to wrest
but mere invitations to make an offer. consent, serious or irresistible force is employed.

Art. 1326. Advertisements for bidders are simply There is intimidation when one of the contracting
invitations to make proposals, and the advertiser is not parties is compelled by a reasonable and well-grounded
bound to accept the highest or lowest bidder, unless the fear of an imminent and grave evil upon his person or
contrary appears. property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
Art. 1327. The following cannot give consent to a
contract: To determine the degree of intimidation, the age, sex
and condition of the person shall be borne in mind.
1) Unemancipated minors;
2) Insane or demented persons, and deaf- A threat to enforce one's claim through competent
mutes who do not know how to write. 1263a) authority, if the claim is just or legal, does not vitiate
consent. 1267a)
Art. 1328. Contracts entered into during a lucid interval
are valid. Contracts agreed to in a state of drunkenness Art. 1336. Violence or intimidation shall annul the
or during a hypnotic spell are voidable. obligation, although it may have been employed by a
third person who did not take part in the contract.
Art. 1329. The incapacity declared in Article 1327 is 1268)
subject to the modifications determined by law, and is
understood to be without prejudice to special Art. 1337. There is undue influence when a person takes
disqualifications established in the laws. 1264) improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of
Art. 1330. A contract where consent is given through choice. The following circumstances shall be
mistake, violence, intimidation, undue influence, or considered: the confidential, family, spiritual and other
fraud is voidable. relations between the parties, or the fact that the person
alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial
Art. 1331. In order that mistake may invalidate consent, distress.
it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have
principally moved one or both parties to enter into the Art. 1338. There is fraud when, through insidious words
contract. or machinations of one of the contracting parties, the
other is induced to enter into a contract which, without
them, he would not have agreed to. 1269)
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the Art. 1339. Failure to disclose facts, when there is a duty
contract. to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
A simple mistake of account shall give rise to its
correction. Art. 1340. The usual exaggerations in trade, when the
other party had an opportunity to know the facts, are
not in themselves fraudulent.
14

Art. 1341. A mere expression of an opinion does not to be, for each contracting party, the prestation or
signify fraud, unless made by an expert and the other promise of a thing or service by the other; in
party has relied on the former's special knowledge. remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the
Art. 1342. Misrepresentation by a third person does not mere liberality of the benefactor. 1274)
vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual. Art. 1351. The particular motives of the parties in
entering into a contract are different from the cause
Art. 1343. Misrepresentation made in good faith is not thereof.
fraudulent but may constitute error.
Art. 1352. Contracts without cause, or with unlawful
Art. 1344. In order that fraud may make a contract cause, produce no effect whatever. The cause is unlawful
voidable, it should be serious and should not have been if it is contrary to law, morals, good customs, public
employed by both contracting parties. order or public policy. 1275a)

Incidental fraud only obliges the person employing it to Art. 1353. The statement of a false cause in contracts
pay damages. 1270) shall render them void, if it should not be proved that
they were founded upon another cause which is true
and lawful. 1276)
Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties Art. 1354. Although the cause is not stated in the
conceal their true agreement. contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary. 1277)
Art. 1346. An absolutely simulated or fictitious contract
is void. A relative simulation, when it does not prejudice Art. 1355. Except in cases specified by law, lesion or
a third person and is not intended for any purpose inadequacy of cause shall not invalidate a contract,
contrary to law, morals, good customs, public order or unless there has been fraud, mistake or undue influence.
public policy binds the parties to their real agreement.
CHAPTER 3
FORM OF CONTRACTS
SECTION 2. - Object of Contracts
Art. 1356. Contracts shall be obligatory, in whatever
Art. 1347. All things which are not outside the form they may have been entered into, provided all the
commerce of men, including future things, may be the essential requisites for their validity are present.
object of a contract. All rights which are not However, when the law requires that a contract be in
intransmissible may also be the object of contracts. some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such
No contract may be entered into upon future cases, the right of the parties stated in the following
inheritance except in cases expressly authorized by law. article cannot be exercised. 1278a)

All services which are not contrary to law, morals, good Art. 1357. If the law requires a document or other
customs, public order or public policy may likewise be special form, as in the acts and contracts enumerated in
the object of a contract. 1271a) the following article, the contracting parties may compel
each other to observe that form, once the contract has
Art. 1348. Impossible things or services cannot be the been perfected. This right may be exercised
object of contracts. 1272) simultaneously with the action upon the contract.

Art. 1349. The object of every contract must be Art. 1358. The following must appear in a public
determinate as to its kind. The fact that the quantity is document:
not determinate shall not be an obstacle to the existence
of the contract, provided it is possible to determine the 1) Acts and contracts which have for their
same, without the need of a new contract between the object the creation, transmission, modification
parties. 1273) or extinguishment of real rights over
immovable property; sales of real property or
SECTION 3. - Cause of Contracts of an interest therein a governed by Articles
1403, No. 2, and 1405;
Art. 1350. In onerous contracts the cause is understood
15

2) The cession, repudiation or renunciation of parties, the courts may order that the instrument be
hereditary rights or of those of the conjugal reformed.
partnership of gains;
Art. 1365. If two parties agree upon the mortgage or
3) The power to administer property, or any pledge of real or personal property, but the instrument
other power which has for its object an act states that the property is sold absolutely or with a right
appearing or which should appear in a public of repurchase, reformation of the instrument is proper.
document, or should prejudice a third person;
Art. 1366. There shall be no reformation in the
4) The cession of actions or rights proceeding following cases:
from an act appearing in a public document.
1) Simple donations inter vivos wherein no
All other contracts where the amount involved exceeds condition is imposed;
five hundred pesos must appear in writing, even a 2) Wills;
private one. But sales of goods, chattels or things in 3) When the real agreement is void.
action are governed by Articles, 1403, No. 2 and 1405.
1280a) Art. 1367. When one of the parties has brought an
action to enforce the instrument, he cannot
CHAPTER 4 subsequently ask for its reformation.
REFORMATION OF INSTRUMENTS

Art. 1359. When, there having been a meeting of the Art. 1368. Reformation may be ordered at the instance
minds of the parties to a contract, their true intention is of either party or his successors in interest, if the
not expressed in the instrument purporting to embody mistake was mutual; otherwise, upon petition of the
the agreement, by reason of mistake, fraud, inequitable injured party, or his heirs and assigns.
conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true Art. 1369. The procedure for the reformation of
intention may be expressed. instrument shall be governed by rules of court to be
promulgated by the Supreme Court.
If mistake, fraud, inequitable conduct, or accident has
prevented a meeting of the minds of the parties, the CHAPTER 5
proper remedy is not reformation of the instrument but INTERPRETATION OF CONTRACTS
annulment of the contract.
Art. 1370. If the terms of a contract are clear and leave
Art. 1360. The principles of the general law on the no doubt upon the intention of the contracting parties,
reformation of instruments are hereby adopted insofar the literal meaning of its stipulations shall control.
as they are not in conflict with the provisions of this
Code. If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
Art. 1361. When a mutual mistake of the parties causes former. 1281)
the failure of the instrument to disclose their real
agreement, said instrument may be reformed. Art. 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
Art. 1362. If one party was mistaken and the other acted subsequent acts shall be principally considered. 1282)
fraudulently or inequitably in such a way that the
instrument does not show their true intention, the Art. 1372. However general the terms of a contract may
former may ask for the reformation of the instrument. be, they shall not be understood to comprehend things
that are distinct and cases that are different from those
Art. 1363. When one party was mistaken and the other upon which the parties intended to agree. 1283)
knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former, Art. 1373. If some stipulation of any contract should
the instrument may be reformed. admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it
Art. 1364. When through the ignorance, lack of skill, effectual. 1284)
negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the Art. 1374. The various stipulations of a contract shall be
instrument does not express the true intention of the interpreted together, attributing to the doubtful ones
16

that sense which may result from all of them taken 4) Those which refer to things under litigation
jointly. 1285) if they have been entered into by the
defendant without the knowledge and
Art. 1375. Words which may have different approval of the litigants or of competent
significations shall be understood in that which is most judicial authority;
in keeping with the nature and object of the contract.
1286) 5) All other contracts specially declared by law
to be subject to rescission. 1291a)
Art. 1376. The usage or custom of the place shall be
borne in mind in the interpretation of the ambiguities of Art. 1382. Payments made in a state of insolvency for
a contract, and shall fill the omission of stipulations obligations to whose fulfillment the debtor could not be
which are ordinarily established. 1287) compelled at the time they were effected, are also
rescissible.
Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who Art. 1383. The action for rescission is subsidiary; it
caused the obscurity. 1288) cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation
Art. 1378. When it is absolutely impossible to settle for the same. 1294)
doubts by the rules established in the preceding articles,
and the doubts refer to incidental circumstances of a Art. 1384. Rescission shall be only to the extent
gratuitous contract, the least transmission of rights and necessary to cover the damages caused.
interests shall prevail. If the contract is onerous, the
doubt shall be settled in favor of the greatest reciprocity Art. 1385. Rescission creates the obligation to return the
of interests. things which were the object of the contract, together
with their fruits, and the price with its interest;
If the doubts are cast upon the principal object of the consequently, it can be carried out only when he who
contract in such a way that it cannot be known what demands rescission can return whatever he may be
may have been the intention or will of the parties, the obliged to restore.
contract shall be null and void. 1289)
Neither shall rescission take place when the things
Art. 1379. The principles of interpretation stated in Rule which are the object of the contract are legally in the
123 of the Rules of Court shall likewise be observed in possession of third persons who did not act in bad faith.
the construction of contracts.
In this case, indemnity for damages may be demanded
CHAPTER 6 from the person causing the loss. 1295)
RESCISSIBLE CONTRACTS
Art. 1386. Rescission referred to in Nos. 1 and 2 of
Art. 1380. Contracts validly agreed upon may be Article 1381 shall not take place with respect to
rescinded in the cases established by law. 1290) contracts approved by the courts. 1296a)

Art. 1381. The following contracts are rescissible: Art. 1387. All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to
1) Those which are entered into by guardians have been entered into in fraud of creditors, when the
whenever the wards whom they represent donor did not reserve sufficient property to pay all
suffer lesion by more than one-fourth of the debts contracted before the donation.
value of the things which are the object
thereof; Alienations by onerous title are also presumed
fraudulent when made by persons against whom some
2) Those agreed upon in representation of judgment has been issued. The decision or attachment
absentees, if the latter suffer the lesion stated need not refer to the property alienated, and need not
in the preceding number; have been obtained by the party seeking the rescission.

3) Those undertaken in fraud of creditors In addition to these presumptions, the design to defraud
when the latter cannot in any other manner creditors may be proved in any other manner
collect the claims due them; recognized by the law of evidence. 1297a)
17

Art. 1388. Whoever acquires in bad faith the things with knowledge of the reason which renders the
alienated in fraud of creditors, shall indemnify the latter contract voidable and such reason having ceased, the
for damages suffered by them on account of the person who has a right to invoke it should execute an
alienation, whenever, due to any cause, it should be act which necessarily implies an intention to waive his
impossible for him to return them. right. 1311a)

If there are two or more alienations, the first acquirer Art. 1394. Ratification may be effected by the guardian
shall be liable first, and so on successively. 1298a) of the incapacitated person.

Art. 1389. The action to claim rescission must be Art. 1395. Ratification does not require the conformity
commenced within four years. of the contracting party who has no right to bring the
action for annulment. 1312)
For persons under guardianship and for absentees, the
period of four years shall not begin until the termination Art. 1396. Ratification cleanses the contract from all its
of the former's incapacity, or until the domicile of the defects from the moment it was constituted. 1313)
latter is known.
Art. 1397. The action for the annulment of contracts
CHAPTER 7 may be instituted by all who are thereby obliged
VOIDABLE CONTRACTS principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with whom
Art. 1390. The following contracts are voidable or they contracted; nor can those who exerted
annullable, even though there may have been no intimidation, violence, or undue influence, or employed
damage to the contracting parties: fraud, or caused mistake base their action upon these
flaws of the contract. 1302a)
1) Those where one of the parties is incapable
of giving consent to a contract; Art. 1398. An obligation having been annulled, the
contracting parties shall restore to each other the things
2) Those where the consent is vitiated by which have been the subject matter of the contract, with
mistake, violence, intimidation, undue their fruits, and the price with its interest, except in
influence or fraud. cases provided by law.

These contracts are binding, unless they are annulled by In obligations to render service, the value thereof shall
a proper action in court. They are susceptible of be the basis for damages. 1303a)
ratification.
Art. 1399. When the defect of the contract consists in
Art. 1391. The action for annulment shall be brought the incapacity of one of the parties, the incapacitated
within four years. person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price
received by him. 1304)
This period shall begin:
Art. 1400. Whenever the person obliged by the decree
In cases of intimidation, violence or undue of annulment to return the thing can not do so because
influence, from the time the defect of the it has been lost through his fault, he shall return the
consent ceases. fruits received and the value of the thing at the time of
the loss, with interest from the same date. 1307a)
In case of mistake or fraud, from the time of
the discovery of the same. Art. 1401. The action for annulment of contracts shall be
extinguished when the thing which is the object thereof
And when the action refers to contracts entered into by is lost through the fraud or fault of the person who has a
minors or other incapacitated persons, from the time right to institute the proceedings.
the guardianship ceases. 1301a)
If the right of action is based upon the incapacity of any
Art. 1392. Ratification extinguishes the action to annul a one of the contracting parties, the loss of the thing shall
voidable contract. 1309a) not be an obstacle to the success of the action, unless
said loss took place through the fraud or fault of the
Art. 1393. Ratification may be effected expressly or plaintiff. 1314a)
tacitly. It is understood that there is a tacit ratification if,
18

Art. 1402. As long as one of the contracting parties does e) An agreement of the leasing for a
not restore what in virtue of the decree of annulment he longer period than one year, or for
is bound to return, the other cannot be compelled to the sale of real property or of an
comply with what is incumbent upon him. 1308) interest therein;

f) A representation as to the credit of

CHAPTER 8 a third person.
UNENFORCEABLE CONTRACTS
3) Those where both parties are incapable of
Art. 1403. The following contracts are unenforceable, giving consent to a contract.
unless they are ratified:
Art. 1404. Unauthorized contracts are governed by
1) Those entered into in the name of another Article 1317 and the principles of agency in Title X of
person by one who has been given no this Book.
authority or legal representation, or who has
acted beyond his powers;
Art. 1405. Contracts infringing the Statute of Frauds,
referred to in No. 2 of Article 1403, are ratified by the
2) Those that do not comply with the Statute failure to object to the presentation of oral evidence to
of Frauds as set forth in this number. In the prove the same, or by the acceptance of benefit under
following cases an agreement hereafter made them.
shall be unenforceable by action, unless the
same, or some note or memorandum, thereof,
be in writing, and subscribed by the party Art. 1406. When a contract is enforceable under the
charged, or by his agent; evidence, therefore, Statute of Frauds, and a public document is necessary
of the agreement cannot be received without for its registration in the Registry of Deeds, the parties
the writing, or a secondary evidence of its may avail themselves of the right under Article 1357.
contents:
Art. 1407. In a contract where both parties are
a) An agreement that by its terms is incapable of giving consent, express or implied
not to be performed within a year ratification by the parent, or guardian, as the case may
from the making thereof; be, of one of the contracting parties shall give the
contract the same effect as if only one of them were
incapacitated.
b) A special promise to answer for
the debt, default, or miscarriage of
another; If ratification is made by the parents or guardians, as the
case may be, of both contracting parties, the contract
shall be validated from the inception.
c) An agreement made in
consideration of marriage, other than
a mutual promise to marry; Art. 1408. Unenforceable contracts cannot be assailed
by third persons.
d) An agreement for the sale of
goods, chattels or things in action, at CHAPTER 9
a price not less than five hundred VOID AND INEXISTENT CONTRACTS
pesos, unless the buyer accept and
receive part of such goods and Art. 1409. The following contracts are inexistent and
chattels, or the evidences, or some of void from the beginning:
them, of such things in action or pay
at the time some part of the purchase 1) Those whose cause, object or purpose is
money; but when a sale is made by contrary to law, morals, good customs, public
auction and entry is made by the order or public policy;
auctioneer in his sales book, at the
time of the sale, of the amount and 2) Those which are absolutely simulated or
kind of property sold, terms of sale, fictitious;
price, names of the purchasers and
person on whose account the sale is
made, it is a sufficient memorandum; 3) Those whose cause or object did not exist at
the time of the transaction;
19

4) Those whose object is outside the one of the parties before the purpose has been
commerce of men; accomplished, or before any damage has been caused to
a third person. In such case, the courts may, if the public
5) Those which contemplate an impossible interest will thus be subserved, allow the party
service; repudiating the contract to recover the money or
property.
6) Those where the intention of the parties
relative to the principal object of the contract Art. 1415. Where one of the parties to an illegal contract
cannot be ascertained; is incapable of giving consent, the courts may, if the
interest of justice so demands allow recovery of money
or property delivered by the incapacitated person.
7) Those expressly prohibited or declared void
by law.
Art. 1416. When the agreement is not illegal per se but
is merely prohibited, and the prohibition by the law is
These contracts cannot be ratified. Neither can the right designated for the protection of the plaintiff, he may, if
to set up the defense of illegality be waived. public policy is thereby enhanced, recover what he has
paid or delivered.
Art. 1410. The action or defense for the declaration of
the inexistence of a contract does not prescribe. Art. 1417. When the price of any article or commodity is
determined by statute, or by authority of law, any
Art. 1411. When the nullity proceeds from the illegality person paying any amount in excess of the maximum
of the cause or object of the contract, and the act price allowed may recover such excess.
constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and Art. 1418. When the law fixes, or authorizes the fixing of
both shall be prosecuted. Moreover, the provisions of the maximum number of hours of labor, and a contract
the Penal Code relative to the disposal of effects or is entered into whereby a laborer undertakes to work
instruments of a crime shall be applicable to the things longer than the maximum thus fixed, he may demand
or the price of the contract. additional compensation for service rendered beyond
the time limit.
This rule shall be applicable when only one of the
parties is guilty; but the innocent one may claim what Art. 1419. When the law sets, or authorizes the setting
he has given, and shall not be bound to comply with his of a minimum wage for laborers, and a contract is
promise. 1305) agreed upon by which a laborer accepts a lower wage,
he shall be entitled to recover the deficiency.
Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, Art. 1420. In case of a divisible contract, if the illegal
the following rules shall be observed: terms can be separated from the legal ones, the latter
may be enforced.
1) When the fault is on the part of both
contracting parties, neither may recover what Art. 1421. The defense of illegality of contract is not
he has given by virtue of the contract, or available to third persons whose interests are not
demand the performance of the other's directly affected.
undertaking;
Art. 1422. A contract which is the direct result of a
2) When only one of the contracting parties is previous illegal contract, is also void and inexistent.
at fault, he cannot recover what he has given
by reason of the contract, or ask for the
fulfillment of what has been promised him. Title III. - NATURAL OBLIGATIONS
The other, who is not at fault, may demand the
return of what he has given without any Art. 1423. Obligations are civil or natural. Civil
obligation to comply his promise. 1306) obligations give a right of action to compel their
performance. Natural obligations, not being based on
positive law but on equity and natural law, do not grant
Art. 1413. Interest paid in excess of the interest allowed a right of action to enforce their performance, but after
by the usury laws may be recovered by the debtor, with voluntary fulfillment by the obligor, they authorize the
interest thereon from the date of the payment. retention of what has been delivered or rendered by
reason thereof. Some natural obligations are set forth in
Art. 1414. When money is paid or property delivered for the following articles.
an illegal purpose, the contract may be repudiated by
20

Art. 1424. When a right to sue upon a civil obligation this Code, the Code of Commerce, the Rules of Court and
has lapsed by extinctive prescription, the obligor who special laws.
voluntarily performs the contract cannot recover what
he has delivered or the value of the service he has Art. 1433. Estoppel may be in pais or by deed.
rendered.
Art. 1434. When a person who is not the owner of a
Art. 1425. When without the knowledge or against the thing sells or alienates and delivers it, and later the
will of the debtor, a third person pays a debt which the seller or grantor acquires title thereto, such title passes
obligor is not legally bound to pay because the action by operation of law to the buyer or grantee.
thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover
what he has paid. Art. 1435. If a person in representation of another sells
or alienates a thing, the former cannot subsequently set
up his own title as against the buyer or grantee.
Art. 1426. When a minor between eighteen and twenty-
one years of age who has entered into a contract
without the consent of the parent or guardian, after the Art. 1436. A lessee or a bailee is estopped from
annulment of the contract voluntarily returns the whole asserting title to the thing leased or received, as against
thing or price received, notwithstanding the fact the he the lessor or bailor.
has not been benefited thereby, there is no right to
demand the thing or price thus returned. Art. 1437. When in a contract between third persons
concerning immovable property, one of them is misled
Art. 1427. When a minor between eighteen and twenty- by a person with respect to the ownership or real right
one years of age, who has entered into a contract over the real estate, the latter is precluded from
without the consent of the parent or guardian, asserting his legal title or interest therein, provided all
voluntarily pays a sum of money or delivers a fungible these requisites are present:
thing in fulfillment of the obligation, there shall be no
right to recover the same from the obligee who has 1) There must be fraudulent representation or
spent or consumed it in good faith. 1160A) wrongful concealment of facts known to the
party estopped;
Art. 1428. When, after an action to enforce a civil
obligation has failed the defendant voluntarily performs 2) The party precluded must intend that the
the obligation, he cannot demand the return of what he other should act upon the facts as
has delivered or the payment of the value of the service misrepresented;
he has rendered.
3) The party misled must have been unaware
Art. 1429. When a testate or intestate heir voluntarily of the true facts; and
pays a debt of the decedent exceeding the value of the
property which he received by will or by the law of 4) The party defrauded must have acted in
intestacy from the estate of the deceased, the payment accordance with the misrepresentation.
is valid and cannot be rescinded by the payer.
Art. 1438. One who has allowed another to assume
Art. 1430. When a will is declared void because it has apparent ownership of personal property for the
not been executed in accordance with the formalities purpose of making any transfer of it, cannot, if he
required by law, but one of the intestate heirs, after the received the sum for which a pledge has been
settlement of the debts of the deceased, pays a legacy in constituted, set up his own title to defeat the pledge of
compliance with a clause in the defective will, the the property, made by the other to a pledgee who
payment is effective and irrevocable. received the same in good faith and for value.

Title IV. - ESTOPPEL Art. 1439. Estoppel is effective only as between the
parties thereto or their successors in interest.
Art. 1431. Through estoppel an admission or
representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against
the person relying thereon.

Art. 1432. The principles of estoppel are hereby adopted

insofar as they are not in conflict with the provisions of
21

Title VI. - SALES contains less than the number, weight or measure
CHAPTER 1 bought, the buyer becomes the owner of the whole mass
NATURE AND FORM OF THE CONTRACT and the seller is bound to make good the deficiency
from goods of the same kind and quality, unless a
Art. 1458. By the contract of sale one of the contracting contrary intent appears.
parties obligates himself to transfer the ownership and
to deliver a determinate thing, and the other to pay Art. 1465. Things subject to a resolutory condition may
therefor a price certain in money or its equivalent. be the object of the contract of sale.

A contract of sale may be absolute or conditional. Art. 1466. In construing a contract containing
1445a) provisions characteristic of both the contract of sale and
of the contract of agency to sell, the essential clauses of
Art. 1459. The thing must be licit and the vendor must the whole instrument shall be considered.
have a right to transfer the ownership thereof at the
time it is delivered. Art. 1467. A contract for the delivery at a certain price of
an article which the vendor in the ordinary course of his
Art. 1460. A thing is determinate when it is particularly business manufactures or procures for the general
designated or physical segregated from all other of the market, whether the same is on hand at the time or not,
same class. is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his
The requisite that a thing be determinate is satisfied if special order, and not for the general market, it is a
at the time the contract is entered into, the thing is contract for a piece of work.
capable of being made determinate without the
necessity of a new or further agreement between the Art. 1468. If the consideration of the contract consists
parties. partly in money, and partly in another thing, the
transaction shall be characterized by the manifest
Art. 1461. Things having a potential existence may be intention of the parties. If such intention does not
the object of the contract of sale. clearly appear, it shall be considered a barter if the value
of the thing given as a part of the consideration exceeds
the amount of the money or its equivalent; otherwise, it
The efficacy of the sale of a mere hope or expectancy is is a sale. 1446a)
deemed subject to the condition that the thing will come
into existence.
Art. 1469. In order that the price may be considered
certain, it shall be sufficient that it be so with reference
The sale of a vain hope or expectancy is void. to another thing certain, or that the determination
thereof be left to the judgment of a special person or
Art. 1462. The goods which form the subject of a persons.
contract of sale may be either existing goods, owned or
possessed by the seller, or goods to be manufactured, Should such person or persons be unable or unwilling
raised, or acquired by the seller after the perfection of to fix it, the contract shall be inefficacious, unless the
the contract of sale, in this Title called "future goods." parties subsequently agree upon the price.

There may be a contract of sale of goods, whose If the third person or persons acted in bad faith or by
acquisition by the seller depends upon a contingency mistake, the courts may fix the price.
which may or may not happen.
Where such third person or persons are prevented from
Art. 1463. The sole owner of a thing may sell an fixing the price or terms by fault of the seller or the
undivided interest therein. buyer, the party not in fault may have such remedies
against the party in fault as are allowed the seller or the
Art. 1464. In the case of fungible goods, there may be a buyer, as the case may be. 1447a)
sale of an undivided share of a specific mass, though the
seller purports to sell and the buyer to buy a definite Art. 1470. Gross inadequacy of price does not affect a
number, weight or measure of the goods in the mass, contract of sale, except as it may indicate a defect in the
and though the number, weight or measure of the goods consent, or that the parties really intended a donation
in the mass is undetermined. By such a sale the buyer or some other act or contract.
becomes owner in common of such a share of the mass
as the number, weight or measure bought bears to the
number, weight or measure of the mass. If the mass
22

Art. 1471. If the price is simulated, the sale is void, but the auctioneer, to employ or induce any person
the act may be shown to have been in reality a donation, to bid at such sale on behalf of the seller or
or some other act or contract. knowingly to take any bid from the seller or
any person employed by him. Any sale
Art. 1472. The price of securities, grain, liquids, and contravening this rule may be treated as
other things shall also be considered certain, when the fraudulent by the buyer.
price fixed is that which the thing sold would have on a
definite day, or in a particular exchange or market, or Art. 1477. The ownership of the thing sold shall be
when an amount is fixed above or below the price on transferred to the vendee upon the actual or
such day, or in such exchange or market, provided said constructive delivery thereof.
amount be certain. 1448)
Art. 1478. The parties may stipulate that ownership in
Art. 1473. The fixing of the price can never be left to the the thing shall not pass to the purchaser until he has
discretion of one of the contracting parties. However, if fully paid the price.
the price fixed by one of the parties is accepted by the
other, the sale is perfected. 1449a) Art. 1479. A promise to buy and sell a determinate thing
for a price certain is reciprocally demandable.
Art. 1474. Where the price cannot be determined in
accordance with the preceding articles, or in any other An accepted unilateral promise to buy or to sell a
manner, the contract is inefficacious. However, if the determinate thing for a price certain is binding upon the
thing or any part thereof has been delivered to and promissor if the promise is supported by a
appropriated by the buyer he must pay a reasonable consideration distinct from the price. 1451a)
price therefor. What is a reasonable price is a question
of fact dependent on the circumstances of each
particular case. Art. 1480. Any injury to or benefit from the thing sold,
after the contract has been perfected, from the moment
of the perfection of the contract to the time of delivery,
Art. 1475. The contract of sale is perfected at the shall be governed by Articles 1163 to 1165, and 1262.
moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
This rule shall apply to the sale of fungible things, made
independently and for a single price, or without
From that moment, the parties may reciprocally consideration of their weight, number, or measure.
demand performance, subject to the provisions of the
law governing the form of contracts. 1450a)
Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk shall
Art. 1476. In the case of a sale by auction: not be imputed to the vendee until they have been
weighed, counted, or measured and delivered, unless
1) Where goods are put up for sale by auction the latter has incurred in delay. 1452a)
in lots, each lot is the subject of a separate
contract of sale. Art. 1481. In the contract of sale of goods by description
or by sample, the contract may be rescinded if the bulk
2) A sale by auction is perfected when the of the goods delivered do not correspond with the
auctioneer announces its perfection by the fall description or the sample, and if the contract be by
of the hammer, or in other customary manner. sample as well as description, it is not sufficient that the
Until such announcement is made, any bidder bulk of goods correspond with the sample if they do not
may retract his bid; and the auctioneer may also correspond with the description.
withdraw the goods from the sale unless the
auction has been announced to be without The buyer shall have a reasonable opportunity of
reserve. comparing the bulk with the description or the sample.

3) A right to bid may be reserved expressly by Art. 1482. Whenever earnest money is given in a
or on behalf of the seller, unless otherwise contract of sale, it shall be considered as part of the
provided by law or by stipulation. price and as proof of the perfection of the contract.
1454a)
4) Where notice has not been given that a sale
by auction is subject to a right to bid on behalf Art. 1483. Subject to the provisions of the Statute of
of the seller, it shall not be lawful for the seller Frauds and of any other applicable statute, a contract of
to bid himself or to employ or induce any sale may be made in writing, or by word of mouth, or
person to bid at such sale on his behalf or for
23

partly in writing and partly by word of mouth, or may 1) When a separation of property was agreed
be inferred from the conduct of the parties. upon in the marriage settlements; or

Art. 1484. In a contract of sale of personal property the 2) When there has been a judicial separation
price of which is payable in installments, the vendor or property under Article 191. 1458a)
may exercise any of the following remedies:
Art. 1491. The following persons cannot acquire by
1) Exact fulfillment of the obligation, should purchase, even at a public or judicial auction, either in
the vendee fail to pay; person or through the mediation of another:

2) Cancel the sale, should the vendee's failure 1) The guardian, the property of the person or
to pay cover two or more installments; persons who may be under his guardianship;

3) Foreclose the chattel mortgage on the thing 2) Agents, the property whose administration
sold, if one has been constituted, should the or sale may have been entrusted to them,
vendee's failure to pay cover two or more unless the consent of the principal has been
installments. In this case, he shall have no given;
further action against the purchaser to recover
any unpaid balance of the price. Any 3) Executors and administrators, the property
agreement to the contrary shall be void. 1454- of the estate under administration;
A-a)
4) Public officers and employees, the property
Art. 1485. The preceding article shall be applied to of the State or of any subdivision thereof, or of
contracts purporting to be leases of personal property any government-owned or controlled
with option to buy, when the lessor has deprived the corporation, or institution, the administration
lessee of the possession or enjoyment of the thing. of which has been intrusted to them; this
1454-A-a) provision shall apply to judges and
government experts who, in any manner
Art. 1486. In the case referred to in two preceding whatsoever, take part in the sale;
articles, a stipulation that the installments or rents paid
shall not be returned to the vendee or lessee shall be 5) Justices, judges, prosecuting attorneys,
valid insofar as the same may not be unconscionable clerks of superior and inferior courts, and
under the circumstances. other officers and employees connected with
the administration of justice, the property and
Art. 1487. The expenses for the execution and rights in litigation or levied upon an execution
registration of the sale shall be borne by the vendor, before the court within whose jurisdiction or
unless there is a stipulation to the contrary. 1455a) territory they exercise their respective
functions; this prohibition includes the act of
Art. 1488. The expropriation of property for public use acquiring by assignment and shall apply to
is governed by special laws. 1456) lawyers, with respect to the property and
rights which may be the object of any litigation
in which they may take part by virtue of their
CHAPTER 2 profession.
CAPACITY TO BUY OR SELL

Art. 1489. All persons who are authorized in this Code 6) Any others specially disqualified by law.
to obligate themselves, may enter into a contract of sale, 1459a)
saving the modifications contained in the following
articles. Art. 1492. The prohibitions in the two preceding articles
are applicable to sales in legal redemption,
Where necessaries are those sold and delivered to a compromises and renunciations.
minor or other person without capacity to act, he must
pay a reasonable price therefor. Necessaries are those CHAPTER 3
referred to in Article 290. EFFECTS OF THE CONTRACT
WHEN THE THINGSOLD HAS BEEN LOST
Art. 1490. The husband and the wife cannot sell Art. 1493. If at the time the contract of sale is perfected,
property to each other, except: the thing which is the object of the contract has been
entirely lost, the contract shall be without any effect.
24

But if the thing should have been lost in part only, the Art. 1500. There may also be tradition constitutum
vendee may choose between withdrawing from the possessorium.
contract and demanding the remaining part, paying its
price in proportion to the total sum agreed upon. Art. 1501. With respect to incorporeal property, the
1460a) provisions of the first paragraph of article 1498 shall
govern. In any other case wherein said provisions are
Art. 1494. Where the parties purport a sale of specific not applicable, the placing of the titles of ownership in
goods, and the goods without the knowledge of the the possession of the vendee or the use by the vendee of
seller have perished in part or have wholly or in a his rights, with the vendor's consent, shall be
material part so deteriorated in quality as to be understood as a delivery. 1464)
substantially changed in character, the buyer may at his
option treat the sale: Art. 1502. When goods are delivered to the buyer "on
sale or return" to give the buyer an option to return the
1) As avoided; or goods instead of paying the price, the ownership passes
2) As valid in all of the existing goods or in so to the buyer of delivery, but he may revest the
much thereof as have not deteriorated, and as ownership in the seller by returning or tendering the
binding the buyer to pay the agreed price for goods within the time fixed in the contract, or, if no time
the goods in which the ownership will pass, if has been fixed, within a reasonable time.
the sale was divisible.
When goods are delivered to the buyer on approval or
CHAPTER 4 on trial or on satisfaction, or other similar terms, the
OBLIGATIONS OF THE VENDOR ownership therein passes to the buyer:
SECTION 1. - General Provisions
1) When he signifies his approval or
Art. 1495. The vendor is bound to transfer the acceptance to the seller or does any other act
ownership of and deliver, as well as warrant the thing adopting the transaction;
which is the object of the sale. 1461a)
2) If he does not signify his approval or
Art. 1496. The ownership of the thing sold is acquired acceptance to the seller, but retains the goods
by the vendee from the moment it is delivered to him in without giving notice of rejection, then if a
any of the ways specified in Articles 1497 to 1501, or in time has been fixed for the return of the goods,
any other manner signifying an agreement that the on the expiration of such time, and, if no time
possession is transferred from the vendor to the vendee. has been fixed, on the expiration of a
reasonable time. What is a reasonable time is a
SECTION 2. - Delivery of the Thing Sold question of fact.

Art. 1497. The thing sold shall be understood as Art. 1503. When there is a contract of sale of specific
delivered, when it is placed in the control and goods, the seller may, by the terms of the contract,
possession of the vendee. reserve the right of possession or ownership in the
goods until certain conditions have been fulfilled. The
Art. 1498. When the sale is made through a public right of possession or ownership may be thus reserved
instrument, the execution thereof shall be equivalent to notwithstanding the delivery of the goods to the buyer
the delivery of the thing which is the object of the or to a carrier or other bailee for the purpose of
contract, if from the deed the contrary does not appear transmission to the buyer.
or cannot clearly be inferred.
Where goods are shipped, and by the bill of lading the
With regard to movable property, its delivery may also goods are deliverable to the seller or his agent, or to the
be made by the delivery of the keys of the place or order of the seller or of his agent, the seller thereby
depository where it is stored or kept. 1463a) reserves the ownership in the goods. But, if except for
the form of the bill of lading, the ownership would have
Art. 1499. The delivery of movable property may passed to the buyer on shipment of the goods, the
likewise be made by the mere consent or agreement of seller's property in the goods shall be deemed to be only
the contracting parties, if the thing sold cannot be for the purpose of securing performance by the buyer of
transferred to the possession of the vendee at the time his obligations under the contract.
of the sale, or if the latter already had it in his
possession for any other reason. 1463a) Where goods are shipped, and by the bill of lading the
goods are deliverable to order of the buyer or of his
agent, but possession of the bill of lading is retained by
25

the seller or his agent, the seller thereby reserves a right 2) The validity of any contract of sale under
to the possession of the goods as against the buyer. statutory power of sale or under the order of a
court of competent jurisdiction;
Where the seller of goods draws on the buyer for the
price and transmits the bill of exchange and bill of 3) Purchases made in a merchant's store, or in
lading together to the buyer to secure acceptance or fairs, or markets, in accordance with the Code
payment of the bill of exchange, the buyer is bound to of Commerce and special laws.
return the bill of lading if he does not honor the bill of
exchange, and if he wrongfully retains the bill of lading Art. 1506. Where the seller of goods has a voidable title
he acquires no added right thereby. If, however, the bill thereto, but his title has not been avoided at the time of
of lading provides that the goods are deliverable to the the sale, the buyer acquires a good title to the goods,
buyer or to the order of the buyer, or is indorsed in provided he buys them in good faith, for value, and
blank, or to the buyer by the consignee named therein, without notice of the seller's defect of title.
one who purchases in good faith, for value, the bill of
lading, or goods from the buyer will obtain the
ownership in the goods, although the bill of exchange Art. 1507. A document of title in which it is stated that
has not been honored, provided that such purchaser has the goods referred to therein will be delivered to the
received delivery of the bill of lading indorsed by the bearer, or to the order of any person named in such
consignee named therein, or of the goods, without document is a negotiable document of title.
notice of the facts making the transfer wrongful.
Art. 1508. A negotiable document of title may be
Art. 1504. Unless otherwise agreed, the goods remain at negotiated by delivery:
the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership 1) Where by the terms of the document the
therein is transferred to the buyer the goods are at the carrier, warehouseman or other bailee issuing
buyer's risk whether actual delivery has been made or the same undertakes to deliver the goods to
not, except that: the bearer; or

1) Where delivery of the goods has been made 2) Where by the terms of the document the
to the buyer or to a bailee for the buyer, in carrier, warehouseman or other bailee issuing
pursuance of the contract and the ownership the same undertakes to deliver the goods to
in the goods has been retained by the seller the order of a specified person, and such
merely to secure performance by the buyer of person or a subsequent endorsee of the
his obligations under the contract, the goods document has indorsed it in blank or to the
are at the buyer's risk from the time of such bearer.
delivery;
Where by the terms of a negotiable document of title the
2) Where actual delivery has been delayed goods are deliverable to bearer or where a negotiable
through the fault of either the buyer or seller document of title has been indorsed in blank or to
the goods are at the risk of the party in fault. bearer, any holder may indorse the same to himself or to
any specified person, and in such case the document
Art. 1505. Subject to the provisions of this Title, where shall thereafter be negotiated only by the endorsement
goods are sold by a person who is not the owner of such endorsee.
thereof, and who does not sell them under authority or
with the consent of the owner, the buyer acquires no Art. 1509. A negotiable document of title may be
better title to the goods than the seller had, unless the negotiated by the endorsement of the person to whose
owner of the goods is by his conduct precluded from order the goods are by the terms of the document
denying the seller's authority to sell. deliverable. Such endorsement may be in blank, to
bearer or to a specified person. If indorsed to a specified
Nothing in this Title, however, shall affect: person, it may be again negotiated by the endorsement
of such person in blank, to bearer or to another
specified person. Subsequent negotiations may be made
1) The provisions of any factors' act, recording in like manner.
laws, or any other provision of law enabling
the apparent owner of goods to dispose of
them as if he were the true owner thereof; Art. 1510. If a document of title which contains an
undertaking by a carrier, warehouseman or other bailee
to deliver the goods to bearer, to a specified person or
order of a specified person or which contains words of
like import, has placed upon it the words "not
26

negotiable," "non-negotiable" or the like, such document the goods for him according to the terms of the
may nevertheless be negotiated by the holder and is a document.
negotiable document of title within the meaning of this
Title. But nothing in this Title contained shall be Prior to the notification to such bailee by the transferor
construed as limiting or defining the effect upon the or transferee of a non-negotiable document of title, the
obligations of the carrier, warehouseman, or other title of the transferee to the goods and the right to
bailee issuing a document of title or placing thereon the acquire the obligation of such bailee may be defeated by
words "not negotiable," "non-negotiable," or the like. the levy of an attachment of execution upon the goods
by a creditor of the transferor, or by a notification to
Art. 1511. A document of title which is not in such form such bailee by the transferor or a subsequent purchaser
that it can be negotiated by delivery may be transferred from the transfer of a subsequent sale of the goods by
by the holder by delivery to a purchaser or donee. A the transferor.
non-negotiable document cannot be negotiated and the
endorsement of such a document gives the transferee Art. 1515. Where a negotiable document of title is
no additional right. transferred for value by delivery, and the endorsement
of the transferor is essential for negotiation, the
Art. 1512. A negotiable document of title may be transferee acquires a right against the transferor to
negotiated: compel him to endorse the document unless a contrary
intention appears. The negotiation shall take effect as of
1) By the owner therefor; or the time when the endorsement is actually made.

2) By any person to whom the possession or Art. 1516. A person who for value negotiates or
custody of the document has been entrusted transfers a document of title by endorsement or
by the owner, if, by the terms of the document delivery, including one who assigns for value a claim
the bailee issuing the document undertakes to secured by a document of title unless a contrary
deliver the goods to the order of the person to intention appears, warrants:
whom the possession or custody of the
document has been entrusted, or if at the time 1) That the document is genuine;
of such entrusting the document is in such
form that it may be negotiated by delivery. 2) That he has a legal right to negotiate or
transfer it;
Art. 1513. A person to whom a negotiable document of
title has been duly negotiated acquires thereby: 3) That he has knowledge of no fact which
would impair the validity or worth of the
1) Such title to the goods as the person document; and
negotiating the document to him had or had
ability to convey to a purchaser in good faith 4) That he has a right to transfer the title to the
for value and also such title to the goods as the goods and that the goods are merchantable or
person to whose order the goods were to be fit for a particular purpose, whenever such
delivered by the terms of the document had or warranties would have been implied if the
had ability to convey to a purchaser in good contract of the parties had been to transfer
faith for value; and without a document of title the goods
represented thereby.
2) The direct obligation of the bailee issuing
the document to hold possession of the goods Art. 1517. The endorsement of a document of title shall
for him according to the terms of the not make the endorser liable for any failure on the part
document as fully as if such bailee had of the bailee who issued the document or previous
contracted directly with him. endorsers thereof to fulfill their respective obligations.

Art. 1514. A person to whom a document of title has Art. 1518. The validity of the negotiation of a negotiable
been transferred, but not negotiated, acquires thereby, document of title is not impaired by the fact that the
as against the transferor, the title to the goods, subject to negotiation was a breach of duty on the part of the
the terms of any agreement with the transferor. person making the negotiation, or by the fact that the
owner of the document was deprived of the possession
If the document is non-negotiable, such person also of the same by loss, theft, fraud, accident, mistake,
acquires the right to notify the bailee who issued the duress, or conversion, if the person to whom the
document of the transfer thereof, and thereby to acquire document was negotiated or a person to whom the
the direct obligation of such bailee to hold possession of document was subsequently negotiated paid value
27

therefor in good faith without notice of the breach of Art. 1522. Where the seller delivers to the buyer a
duty, or loss, theft, fraud, accident, mistake, duress or quantity of goods less than he contracted to sell, the
conversion. buyer may reject them, but if the buyer accepts or
retains the goods so delivered, knowing that the seller is
Art. 1519. If goods are delivered to a bailee by the not going to perform the contract in full, he must pay for
owner or by a person whose act in conveying the title to them at the contract rate. If, however, the buyer has
them to a purchaser in good faith for value would bind used or disposed of the goods delivered before he
the owner and a negotiable document of title is issued knows that the seller is not going to perform his
for them they cannot thereafter, while in possession of contract in full, the buyer shall not be liable for more
such bailee, be attached by garnishment or otherwise or than the fair value to him of the goods so received.
be levied under an execution unless the document be
first surrendered to the bailee or its negotiation Where the seller delivers to the buyer a quantity of
enjoined. The bailee shall in no case be compelled to goods larger than he contracted to sell, the buyer may
deliver up the actual possession of the goods until the accept the goods included in the contract and reject the
document is surrendered to him or impounded by the rest. If the buyer accepts the whole of the goods so
court. delivered he must pay for them at the contract rate.

Art. 1520. A creditor whose debtor is the owner of a Where the seller delivers to the buyer the goods he
negotiable document of title shall be entitled to such aid contracted to sell mixed with goods of a different
from courts of appropriate jurisdiction by injunction description not included in the contract, the buyer may
and otherwise in attaching such document or in accept the goods which are in accordance with the
satisfying the claim by means thereof as is allowed at contract and reject the rest.
law or in equity in regard to property which cannot
readily be attached or levied upon by ordinary legal In the preceding two paragraphs, if the subject matter is
process. indivisible, the buyer may reject the whole of the goods.

Art. 1521. Whether it is for the buyer to take possession The provisions of this article are subject to any usage of
of the goods or of the seller to send them to the buyer is trade, special agreement, or course of dealing between
a question depending in each case on the contract, the parties.
express or implied, between the parties. Apart from any
such contract, express or implied, or usage of trade to
the contrary, the place of delivery is the seller's place of Art. 1523. Where, in pursuance of a contract of sale, the
business if he has one, and if not his residence; but in seller is authorized or required to send the goods to the
case of a contract of sale of specific goods, which to the buyer, delivery of the goods to a carrier, whether named
knowledge of the parties when the contract or the sale by the buyer or not, for the purpose of transmission to
was made were in some other place, then that place is the buyer is deemed to be a delivery of the goods to the
the place of delivery. buyer, except in the case provided for in Article 1503,
first, second and third paragraphs, or unless a contrary
intent appears.
Where by a contract of sale the seller is bound to send
the goods to the buyer, but no time for sending them is
fixed, the seller is bound to send them within a Unless otherwise authorized by the buyer, the seller
reasonable time. must make such contract with the carrier on behalf of
the buyer as may be reasonable, having regard to the
nature of the goods and the other circumstances of the
Where the goods at the time of sale are in the case. If the seller omit so to do, and the goods are lost or
possession of a third person, the seller has not fulfilled damaged in course of transit, the buyer may decline to
his obligation to deliver to the buyer unless and until treat the delivery to the carrier as a delivery to himself,
such third person acknowledges to the buyer that he or may hold the seller responsible in damages.
holds the goods on the buyer's behalf.
Unless otherwise agreed, where goods are sent by the
Demand or tender of delivery may be treated as seller to the buyer under circumstances in which the
ineffectual unless made at a reasonable hour. What is a seller knows or ought to know that it is usual to insure,
reasonable hour is a question of fact. the seller must give such notice to the buyer as may
enable him to insure them during their transit, and, if
Unless otherwise agreed, the expenses of and incidental the seller fails to do so, the goods shall be deemed to be
to putting the goods into a deliverable state must be at his risk during such transit.
borne by the seller.
Art. 1524. The vendor shall not be bound to deliver the
thing sold, if the vendee has not paid him the price, or if
28

no period for the payment has been fixed in the 3) Where the buyer becomes insolvent.
contract. 1466)
The seller may exercise his right of lien notwithstanding
Art. 1525. The seller of goods is deemed to be an unpaid that he is in possession of the goods as agent or bailee
seller within the meaning of this Title: for the buyer.

1) When the whole of the price has not been Art. 1528. Where an unpaid seller has made part
paid or tendered; delivery of the goods, he may exercise his right of lien on
the remainder, unless such part delivery has been made
2) When a bill of exchange or other negotiable under such circumstances as to show an intent to waive
instrument has been received as conditional the lien or right of retention.
payment, and the condition on which it was
received has been broken by reason of the Art. 1529. The unpaid seller of goods loses his lien
dishonor of the instrument, the insolvency of thereon:
the buyer, or otherwise.
1) When he delivers the goods to a carrier or
In Articles 1525 to 1535 the term "seller" includes an other bailee for the purpose of transmission to
agent of the seller to whom the bill of lading has been the buyer without reserving the ownership in
indorsed, or a consignor or agent who has himself paid, the goods or the right to the possession
or is directly responsible for the price, or any other thereof;
person who is in the position of a seller.
2) When the buyer or his agent lawfully
Art. 1526. Subject to the provisions of this Title, obtains possession of the goods;
notwithstanding that the ownership in the goods may
have passed to the buyer, the unpaid seller of goods, as 3) By waiver thereof.
such, has:
The unpaid seller of goods, having a lien thereon, does
1) A lien on the goods or right to retain them not lose his lien by reason only that he has obtained
for the price while he is in possession of them; judgment or decree for the price of the goods.

2) In case of the insolvency of the buyer, a right Art. 1530. Subject to the provisions of this Title, when
of stopping the goods in transitu after he has the buyer of goods is or becomes insolvent, the unpaid
parted with the possession of them; seller who has parted with the possession of the goods
has the right of stopping them in transitu, that is to say,
3) A right of resale as limited by this Title; he may resume possession of the goods at any time
while they are in transit, and he will then become
4) A right to rescind the sale as likewise entitled to the same rights in regard to the goods as he
limited by this Title. would have had if he had never parted with the
possession.
Where the ownership in the goods has not passed to the
buyer, the unpaid seller has, in addition to his other Art. 1531. Goods are in transit within the meaning of the
remedies a right of withholding delivery similar to and preceding article:
coextensive with his rights of lien and stoppage in
transitu where the ownership has passed to the buyer. 1) From the time when they are delivered to a
carrier by land, water, or air, or other bailee for
Art. 1527. Subject to the provisions of this Title, the the purpose of transmission to the buyer, until
unpaid seller of goods who is in possession of them is the buyer, or his agent in that behalf, takes
entitled to retain possession of them until payment or delivery of them from such carrier or other
tender of the price in the following cases, namely: bailee;

1) Where the goods have been sold without 2) If the goods are rejected by the buyer, and
any stipulation as to credit; the carrier or other bailee continues in
possession of them, even if the seller has
refused to receive them back.
2) Where the goods have been sold on credit,
but the term of credit has expired;
Goods are no longer in transit within the meaning of the
preceding article:
29

1) If the buyer, or his agent in that behalf, original buyer upon the contract of sale or for any profit
obtains delivery of the goods before their made by such resale, but may recover from the buyer
arrival at the appointed destination; damages for any loss occasioned by the breach of the
contract of sale.
2) If, after the arrival of the goods at the
appointed destination, the carrier or other Where a resale is made, as authorized in this article, the
bailee acknowledges to the buyer or his agent buyer acquires a good title as against the original buyer.
that he holds the goods on his behalf and
continues in possession of them as bailee for It is not essential to the validity of resale that notice of
the buyer or his agent; and it is immaterial that an intention to resell the goods be given by the seller to
further destination for the goods may have the original buyer. But where the right to resell is not
been indicated by the buyer; based on the perishable nature of the goods or upon an
express provision of the contract of sale, the giving or
3) If the carrier or other bailee wrongfully failure to give such notice shall be relevant in any issue
refuses to deliver the goods to the buyer or his involving the question whether the buyer had been in
agent in that behalf. default for an unreasonable time before the resale was
made.
If the goods are delivered to a ship, freight train, truck,
or airplane chartered by the buyer, it is a question It is not essential to the validity of a resale that notice of
depending on the circumstances of the particular case, the time and place of such resale should be given by the
whether they are in the possession of the carrier as such seller to the original buyer.
or as agent of the buyer.
The seller is bound to exercise reasonable care and
If part delivery of the goods has been made to the buyer, judgment in making a resale, and subject to this
or his agent in that behalf, the remainder of the goods requirement may make a resale either by public or
may be stopped in transitu, unless such part delivery private sale. He cannot, however, directly or indirectly
has been under such circumstances as to show an buy the goods.
agreement with the buyer to give up possession of the
whole of the goods. Art. 1534. An unpaid seller having the right of lien or
having stopped the goods in transitu, may rescind the
Art. 1532. The unpaid seller may exercise his right of transfer of title and resume the ownership in the goods,
stoppage in transitu either by obtaining actual where he expressly reserved the right to do so in case
possession of the goods or by giving notice of his claim the buyer should make default, or where the buyer has
to the carrier or other bailee in whose possession the been in default in the payment of the price for an
goods are. Such notice may be given either to the person unreasonable time. The seller shall not thereafter be
in actual possession of the goods or to his principal. In liable to the buyer upon the contract of sale, but may
the latter case the notice, to be effectual, must be given recover from the buyer damages for any loss occasioned
at such time and under such circumstances that the by the breach of the contract.
principal, by the exercise of reasonable diligence, may
prevent a delivery to the buyer. The transfer of title shall not be held to have been
rescinded by an unpaid seller until he has manifested by
When notice of stoppage in transitu is given by the notice to the buyer or by some other overt act an
seller to the carrier, or other bailee in possession of the intention to rescind. It is not necessary that such overt
goods, he must redeliver the goods to, or according to act should be communicated to the buyer, but the giving
the directions of, the seller. The expenses of such or failure to give notice to the buyer of the intention to
delivery must be borne by the seller. If, however, a rescind shall be relevant in any issue involving the
negotiable document of title representing the goods has question whether the buyer had been in default for an
been issued by the carrier or other bailee, he shall not unreasonable time before the right of rescission was
obliged to deliver or justified in delivering the goods to asserted.
the seller unless such document is first surrendered for
cancellation. Art. 1535. Subject to the provisions of this Title, the
unpaid seller's right of lien or stoppage in transitu is not
Art. 1533. Where the goods are of perishable nature, or affected by any sale, or other disposition of the goods
where the seller expressly reserves the right of resale in which the buyer may have made, unless the seller has
case the buyer should make default, or where the buyer assented thereto.
has been in default in the payment of the price for an
unreasonable time, an unpaid seller having a right of If, however, a negotiable document of title has been
lien or having stopped the goods in transitu may resell issued for goods, no seller's lien or right of stoppage in
the goods. He shall not thereafter be liable to the
30

transitu shall defeat the right of any purchaser for value Art. 1541. The provisions of the two preceding articles
in good faith to whom such document has been shall apply to judicial sales.
negotiated, whether such negotiation be prior or
subsequent to the notification to the carrier, or other Art. 1542. In the sale of real estate, made for a lump sum
bailee who issued such document, of the seller's claim and not at the rate of a certain sum for a unit of measure
to a lien or right of stoppage in transitu. or number, there shall be no increase or decrease of the
price, although there be a greater or less area or
Art. 1536. The vendor is not bound to deliver the thing number than that stated in the contract.
sold in case the vendee should lose the right to make
use of the terms as provided in Article 1198. 1467a) The same rule shall be applied when two or more
immovables as sold for a single price; but if, besides
Art. 1537. The vendor is bound to deliver the thing sold mentioning the boundaries, which is indispensable in
and its accessions and accessories in the condition in every conveyance of real estate, its area or number
which they were upon the perfection of the contract. should be designated in the contract, the vendor shall be
bound to deliver all that is included within said
All the fruits shall pertain to the vendee from the day on boundaries, even when it exceeds the area or number
which the contract was perfected. 1468a) specified in the contract; and, should he not be able to
do so, he shall suffer a reduction in the price, in
proportion to what is lacking in the area or number,
Art. 1538. In case of loss, deterioration or improvement unless the contract is rescinded because the vendee
of the thing before its delivery, the rules in Article 1189 does not accede to the failure to deliver what has been
shall be observed, the vendor being considered the stipulated. 1471)
debtor.
Art. 1543. The actions arising from Articles 1539 and
Art. 1539. The obligation to deliver the thing sold 1542 shall prescribe in six months, counted from the
includes that of placing in the control of the vendee all day of delivery.
that is mentioned in the contract, in conformity with the
following rules:
Art. 1544. If the same thing should have been sold to
different vendees, the ownership shall be transferred to
If the sale of real estate should be made with a the person who may have first taken possession thereof
statement of its area, at the rate of a certain price for a in good faith, if it should be movable property.
unit of measure or number, the vendor shall be obliged
to deliver to the vendee, if the latter should demand it,
all that may have been stated in the contract; but, Should it be immovable property, the ownership shall
should this be not possible, the vendee may choose belong to the person acquiring it who in good faith first
between a proportional reduction of the price and the recorded it in the Registry of Property.
rescission of the contract, provided that, in the latter
case, the lack in the area be not less than one-tenth of Should there be no inscription, the ownership shall
that stated. pertain to the person who in good faith was first in the
possession; and, in the absence thereof, to the person
The same shall be done, even when the area is the same, who presents the oldest title, provided there is good
if any part of the immovable is not of the quality faith. 1473)
specified in the contract.
SECTION 3. - Conditions and Warranties
The rescission, in this case, shall only take place at the
will of the vendee, when the inferior value of the thing Art. 1545. Where the obligation of either party to a
sold exceeds one-tenth of the price agreed upon. contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the
contract or he may waive performance of the condition.
Nevertheless, if the vendee would not have bought the If the other party has promised that the condition
immovable had he known of its smaller area of inferior should happen or be performed, such first mentioned
quality, he may rescind the sale. 1469a) party may also treat the nonperformance of the
condition as a breach of warranty.
Art. 1540. If, in the case of the preceding article, there is
a greater area or number in the immovable than that Where the ownership in the thing has not passed, the
stated in the contract, the vendee may accept the area buyer may treat the fulfillment by the seller of his
included in the contract and reject the rest. If he accepts obligation to deliver the same as described and as
the whole area, he must pay for the same at the contract warranted expressly or by implication in the contract of
rate. 1470a)
31

sale as a condition of the obligation of the buyer to Art. 1551. If the property is sold for nonpayment of
perform his promise to accept and pay for the thing. taxes due and not made known to the vendee before the
sale, the vendor is liable for eviction.
Art. 1546. Any affirmation of fact or any promise by the
seller relating to the thing is an express warranty if the Art. 1552. The judgment debtor is also responsible for
natural tendency of such affirmation or promise is to eviction in judicial sales, unless it is otherwise decreed
induce the buyer to purchase the same, and if the buyer in the judgment.
purchase the thing relying thereon. No affirmation of
the value of the thing, nor any statement purporting to Art. 1553. Any stipulation exempting the vendor from
be a statement of the seller's opinion only, shall be the obligation to answer for eviction shall be void, if he
construed as a warranty, unless the seller made such acted in bad faith. 1476)
affirmation or statement as an expert and it was relied
upon by the buyer.
Art. 1554. If the vendee has renounced the right to
warranty in case of eviction, and eviction should take
Art. 1547. In a contract of sale, unless a contrary place, the vendor shall only pay the value which the
intention appears, there is: thing sold had at the time of the eviction. Should the
vendee have made the waiver with knowledge of the
1) An implied warranty on the part of the risks of eviction and assumed its consequences, the
seller that he has a right to sell the thing at the vendor shall not be liable. 1477)
time when the ownership is to pass, and that
the buyer shall from that time have and enjoy Art. 1555. When the warranty has been agreed upon or
the legal and peaceful possession of the thing; nothing has been stipulated on this point, in case
eviction occurs, the vendee shall have the right to
2) An implied warranty that the thing shall be demand of the vendor:
free from any hidden faults or defects, or any
charge or encumbrance not declared or known 1) The return of the value which the thing sold
to the buyer. had at the time of the eviction, be it greater or
less than the price of the sale;
This Article shall not, however, be held to render liable a
sheriff, auctioneer, mortgagee, pledgee, or other person 2) The income or fruits, if he has been ordered
professing to sell by virtue of authority in fact or law, for to deliver them to the party who won the suit
the sale of a thing in which a third person has a legal or against him;
equitable interest.

SUBSECTION 1. - Warranty in Case of Eviction 3) The costs of the suit which caused the
eviction, and, in a proper case, those of the suit
Art. 1548. Eviction shall take place whenever by a final brought against the vendor for the warranty;
judgment based on a right prior to the sale or an act
imputable to the vendor, the vendee is deprived of the 4) The expenses of the contract, if the vendee
whole or of a part of the thing purchased. has paid them;

The vendor shall answer for the eviction even though 5) The damages and interests, and ornamental
nothing has been said in the contract on the subject. expenses, if the sale was made in bad faith.
1478)
The contracting parties, however, may increase,
diminish, or suppress this legal obligation of the vendor. Art. 1556. Should the vendee lose, by reason of the
1475a) eviction, a part of the thing sold of such importance, in
relation to the whole, that he would not have bought it
Art. 1549. The vendee need not appeal from the without said part, he may demand the rescission of the
decision in order that the vendor may become liable for contract; but with the obligation to return the thing
eviction. without other encumbrances that those which it had
when he acquired it.
Art. 1550. When adverse possession had been
commenced before the sale but the prescriptive period He may exercise this right of action, instead of enforcing
is completed after the transfer, the vendor shall not be the vendor's liability for eviction.
liable for eviction.
The same rule shall be observed when two or more
things have been jointly sold for a lump sum, or for a
32

separate price for each of them, if it should clearly 1) Where the buyer, expressly or by
appear that the vendee would not have purchased one implication, makes known to the seller the
without the other. 1479a) particular purpose for which the goods are
acquired, and it appears that the buyer relies
Art. 1557. The warranty cannot be enforced until a final on the seller's skill or judgment whether he be
judgment has been rendered, whereby the vendee loses the grower or manufacturer or not), there is an
the thing acquired or a part thereof. 1480) implied warranty that the goods shall be
reasonably fit for such purpose;
Art. 1558. The vendor shall not be obliged to make good
the proper warranty, unless he is summoned in the suit 2) Where the goods are brought by description
for eviction at the instance of the vendee. 1481a) from a seller who deals in goods of that
description whether he be the grower or
manufacturer or not), there is an implied
Art. 1559. The defendant vendee shall ask, within the warranty that the goods shall be of
time fixed in the Rules of Court for answering the merchantable quality.
complaint, that the vendor be made a co-defendant.
1482a)
Art. 1563. In the case of contract of sale of a specified
article under its patent or other trade name, there is no
Art. 1560. If the immovable sold should be encumbered warranty as to its fitness for any particular purpose,
with any non-apparent burden or servitude, not unless there is a stipulation to the contrary.
mentioned in the agreement, of such a nature that it
must be presumed that the vendee would not have
acquired it had he been aware thereof, he may ask for Art. 1564. An implied warranty or condition as to the
the rescission of the contract, unless he should prefer quality or fitness for a particular purpose may be
the appropriate indemnity. Neither right can be annexed by the usage of trade.
exercised if the non-apparent burden or servitude is
recorded in the Registry of Property, unless there is an Art. 1565. In the case of a contract of sale by sample, if
express warranty that the thing is free from all burdens the seller is a dealer in goods of that kind, there is an
and encumbrances. implied warranty that the goods shall be free from any
defect rendering them unmerchantable which would
Within one year, to be computed from the execution of not be apparent on reasonable examination of the
the deed, the vendee may bring the action for rescission, sample.
or sue for damages.
Art. 1566. The vendor is responsible to the vendee for
One year having elapsed, he may only bring an action any hidden faults or defects in the thing sold, even
for damages within an equal period, to be counted from though he was not aware thereof.
the date on which he discovered the burden or
servitude. 1483a) This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the hidden
SUBSECTION 2. - Warranty Against Hidden Defects faults or defects in the thing sold. 1485)
of or Encumbrances Upon the Thing Sold
Art. 1567. In the cases of Articles 1561, 1562, 1564,
Art. 1561. The vendor shall be responsible for warranty 1565 and 1566, the vendee may elect between
against the hidden defects which the thing sold may withdrawing from the contract and demanding a
have, should they render it unfit for the use for which it proportionate reduction of the price, with damages in
is intended, or should they diminish its fitness for such either case. 1486a)
use to such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have Art. 1568. If the thing sold should be lost in
given a lower price for it; but said vendor shall not be consequence of the hidden faults, and the vendor was
answerable for patent defects or those which may be aware of them, he shall bear the loss, and shall be
visible, or for those which are not visible if the vendee is obliged to return the price and refund the expenses of
an expert who, by reason of his trade or profession, the contract, with damages. If he was not aware of them,
should have known them. 1484a) he shall only return the price and interest thereon, and
reimburse the expenses of the contract which the
Art. 1562. In a sale of goods, there is an implied vendee might have paid. 1487a)
warranty or condition as to the quality or fitness of the
goods, as follows: Art. 1569. If the thing sold had any hidden fault at the
time of the sale, and should thereafter be lost by a
fortuitous event or through the fault of the vendee, the
33

latter may demand of the vendor the price which he This action can only be exercised with respect to faults
paid, less the value which the thing had when it was lost. and defects which are determined by law or by local
customs.
If the vendor acted in bad faith, he shall pay damages to
the vendee. 1488a) Art. 1578. If the animal should die within three days
after its purchase, the vendor shall be liable if the
Art. 1570. The preceding articles of this Subsection shall disease which cause the death existed at the time of the
be applicable to judicial sales, except that the judgment contract. 1497a)
debtor shall not be liable for damages. 1489a)
Art. 1579. If the sale be rescinded, the animal shall be
Art. 1571. Actions arising from the provisions of the returned in the condition in which it was sold and
preceding ten articles shall be barred after six months, delivered, the vendee being answerable for any injury
from the delivery of the thing sold. 1490) due to his negligence, and not arising from the
redhibitory fault or defect. 1498)
Art. 1572. If two or more animals are sold together,
whether for a lump sum or for a separate price for each Art. 1580. In the sale of animals with redhibitory
of them, the redhibitory defect of one shall only give rise defects, the vendee shall also enjoy the right mentioned
to its redhibition, and not that of the others; unless it in article 1567; but he must make use thereof within the
should appear that the vendee would not have same period which has been fixed for the exercise of the
purchased the sound animal or animals without the redhibitory action. 1499)
defective one.
Art. 1581. The form of sale of large cattle shall be
The latter case shall be presumed when a team, yoke governed by special laws.
pair, or set is bought, even if a separate price has been
fixed for each one of the animals composing the same. CHAPTER 5
1491) OBLIGATIONS OF THE VENDEE

Art. 1573. The provisions of the preceding article with Art. 1582. The vendee is bound to accept delivery and to
respect to the sale of animals shall in like manner be pay the price of the thing sold at the time and place
applicable to the sale of other things. 1492) stipulated in the contract.

Art. 1574. There is no warranty against hidden defects If the time and place should not have been stipulated,
of animals sold at fairs or at public auctions, or of live the payment must be made at the time and place of the
stock sold as condemned. 1493a) delivery of the thing sold. 1500a)

Art. 1575. The sale of animals suffering from contagious Art. 1583. Unless otherwise agreed, the buyer of goods
diseases shall be void. is not bound to accept delivery thereof by installments.

A contract of sale of animals shall also be void if the use Where there is a contract of sale of goods to be
or service for which they are acquired has been stated delivered by stated installments, which are to be
in the contract, and they are found to be unfit therefor. separately paid for, and the seller makes defective
1494a) deliveries in respect of one or more instalments, or the
buyer neglects or refuses without just cause to take
delivery of or pay for one more instalments, it depends
Art. 1576. If the hidden defect of animals, even in case a in each case on the terms of the contract and the
professional inspection has been made, should be of circumstances of the case, whether the breach of
such a nature that expert knowledge is not sufficient to contract is so material as to justify the injured party in
discover it, the defect shall be considered as redhibitory. refusing to proceed further and suing for damages for
breach of the entire contract, or whether the breach is
But if the veterinarian, through ignorance or bad faith severable, giving rise to a claim for compensation but
should fail to discover or disclose it, he shall be liable for not to a right to treat the whole contract as broken.
damages.
Art. 1584. Where goods are delivered to the buyer,
Art. 1577. The redhibitory action, based on the faults or which he has not previously examined, he is not deemed
defects of animals, must be brought within forty days to have accepted them unless and until he has had a
from the date of their delivery to the vendee. reasonable opportunity of examining them for the
purpose of ascertaining whether they are in conformity
34

with the contract if there is no stipulation to the 1) Should it have been so stipulated;
contrary.
2) Should the thing sold and delivered produce
Unless otherwise agreed, when the seller tenders fruits or income;
delivery of goods to the buyer, he is bound, on request,
to afford the buyer a reasonable opportunity of 3) Should he be in default, from the time of
examining the goods for the purpose of ascertaining judicial or extrajudicial demand for the
whether they are in conformity with the contract. payment of the price. 1501a)

Where goods are delivered to a carrier by the seller, in Art. 1590. Should the vendee be disturbed in the
accordance with an order from or agreement with the possession or ownership of the thing acquired, or
buyer, upon the terms that the goods shall not be should he have reasonable grounds to fear such
delivered by the carrier to the buyer until he has paid disturbance, by a vindicatory action or a foreclosure of
the price, whether such terms are indicated by marking mortgage, he may suspend the payment of the price
the goods with the words "collect on delivery," or until the vendor has caused the disturbance or danger
otherwise, the buyer is not entitled to examine the to cease, unless the latter gives security for the return of
goods before the payment of the price, in the absence of the price in a proper case, or it has been stipulated that,
agreement or usage of trade permitting such notwithstanding any such contingency, the vendee shall
examination. be bound to make the payment. A mere act of trespass
shall not authorize the suspension of the payment of the
Art. 1585. The buyer is deemed to have accepted the price. 1502a)
goods when he intimates to the seller that he has
accepted them, or when the goods have been delivered Art. 1591. Should the vendor have reasonable grounds
to him, and he does any act in relation to them which is to fear the loss of immovable property sold and its price,
inconsistent with the ownership of the seller, or when, he may immediately sue for the rescission of the sale.
after the lapse of a reasonable time, he retains the goods
without intimating to the seller that he has rejected
them. Should such ground not exist, the provisions of Article
1191 shall be observed. 1503)
Art. 1586. In the absence of express or implied
agreement of the parties, acceptance of the goods by the Art. 1592. In the sale of immovable property, even
buyer shall not discharge the seller from liability in though it may have been stipulated that upon failure to
damages or other legal remedy for breach of any pay the price at the time agreed upon the rescission of
promise or warranty in the contract of sale. But, if, after the contract shall of right take place, the vendee may
acceptance of the goods, the buyer fails to give notice to pay, even after the expiration of the period, as long as no
the seller of the breach in any promise of warranty demand for rescission of the contract has been made
within a reasonable time after the buyer knows, or upon him either judicially or by a notarial act. After the
ought to know of such breach, the seller shall not be demand, the court may not grant him a new term.
liable therefor. 1504a)

Art. 1587. Unless otherwise agreed, where goods are Art. 1593. With respect to movable property, the
delivered to the buyer, and he refuses to accept them, rescission of the sale shall of right take place in the
having the right so to do, he is not bound to return them interest of the vendor, if the vendee, upon the expiration
to the seller, but it is sufficient if he notifies the seller of the period fixed for the delivery of the thing, should
that he refuses to accept them. If he voluntarily not have appeared to receive it, or, having appeared, he
constitutes himself a depositary thereof, he shall be should not have tendered the price at the same time,
liable as such. unless a longer period has been stipulated for its
payment. 1505)
Art. 1588. If there is no stipulation as specified in the
first paragraph of article 1523, when the buyer's refusal CHAPTER 6
to accept the goods is without just cause, the title ACTIONS FOR BREACH OF CONTRACT OF SALE OF
thereto passes to him from the moment they are placed GOODS
at his disposal.
Art. 1594. Actions for breach of the contract of sale of
goods shall be governed particularly by the provisions
Art. 1589. The vendee shall owe interest for the period of this Chapter, and as to matters not specifically
between the delivery of the thing and the payment of provided for herein, by other applicable provisions of
the price, in the following three cases: this Title.
35

Art. 1595. Where, under a contract of sale, the obligations thereunder, or has committed a breach
ownership of the goods has passed to the buyer and he thereof, the seller may totally rescind the contract of
wrongfully neglects or refuses to pay for the goods sale by giving notice of his election so to do to the buyer.
according to the terms of the contract of sale, the seller
may maintain an action against him for the price of the Art. 1598. Where the seller has broken a contract to
goods. deliver specific or ascertained goods, a court may, on the
application of the buyer, direct that the contract shall be
Where, under a contract of sale, the price is payable on a performed specifically, without giving the seller the
certain day, irrespective of delivery or of transfer of title option of retaining the goods on payment of damages.
and the buyer wrongfully neglects or refuses to pay such The judgment or decree may be unconditional, or upon
price, the seller may maintain an action for the price such terms and conditions as to damages, payment of
although the ownership in the goods has not passed. the price and otherwise, as the court may deem just.
But it shall be a defense to such an action that the seller
at any time before the judgment in such action has Art. 1599. Where there is a breach of warranty by the
manifested an inability to perform the contract of sale seller, the buyer may, at his election:
on his part or an intention not to perform it.
1) Accept or keep the goods and set up against
Although the ownership in the goods has not passed, if the seller, the breach of warranty by way of
they cannot readily be resold for a reasonable price, and recoupment in diminution or extinction of the
if the provisions of article 1596, fourth paragraph, are price;
not applicable, the seller may offer to deliver the goods
to the buyer, and, if the buyer refuses to receive them,
may notify the buyer that the goods are thereafter held 2) Accept or keep the goods and maintain an
by the seller as bailee for the buyer. Thereafter the seller action against the seller for damages for the
may treat the goods as the buyer's and may maintain an breach of warranty;
action for the price.
3) Refuse to accept the goods, and maintain an
Art. 1596. Where the buyer wrongfully neglects or action against the seller for damages for the
refuses to accept and pay for the goods, the seller may breach of warranty;
maintain an action against him for damages for
nonacceptance. 4) Rescind the contract of sale and refuse to
receive the goods or if the goods have already
The measure of damages is the estimated loss directly been received, return them or offer to return
and naturally resulting in the ordinary course of events them to the seller and recover the price or any
from the buyer's breach of contract. part thereof which has been paid.

When the buyer has claimed and been granted

Where there is an available market for the goods in a remedy in anyone of these ways, no other
question, the measure of damages is, in the absence of remedy can thereafter be granted, without
special circumstances showing proximate damage of a prejudice to the provisions of the second
different amount, the difference between the contract paragraph of Article 1191.
price and the market or current price at the time or
times when the goods ought to have been accepted, or, if
no time was fixed for acceptance, then at the time of the Where the goods have been delivered to the
refusal to accept. buyer, he cannot rescind the sale if he knew of
the breach of warranty when he accepted the
goods without protest, or if he fails to notify
If, while labor or expense of material amount is the seller within a reasonable time of the
necessary on the part of the seller to enable him to fulfill election to rescind, or if he fails to return or to
his obligations under the contract of sale, the buyer offer to return the goods to the seller in
repudiates the contract or notifies the seller to proceed substantially as good condition as they were in
no further therewith, the buyer shall be liable to the at the time the ownership was transferred to
seller for labor performed or expenses made before the buyer. But if deterioration or injury of the
receiving notice of the buyer's repudiation or goods is due to the breach or warranty, such
countermand. The profit the seller would have made if deterioration or injury shall not prevent the
the contract or the sale had been fully performed shall buyer from returning or offering to return the
be considered in awarding the damages. goods to the seller and rescinding the sale.

Art. 1597. Where the goods have not been delivered to Where the buyer is entitled to rescind the sale
the buyer, and the buyer has repudiated the contract of and elects to do so, he shall cease to be liable
sale, or has manifested his inability to perform his
36

for the price upon returning or offering to 4) When the purchaser retains for himself a
return the goods. If the price or any part part of the purchase price;
thereof has already been paid, the seller shall
be liable to repay so much thereof as has been 5) When the vendor binds himself to pay the
paid, concurrently with the return of the taxes on the thing sold;
goods, or immediately after an offer to return
the goods in exchange for repayment of the
price. 6) In any other case where it may be fairly
inferred that the real intention of the parties is
that the transaction shall secure the payment
Where the buyer is entitled to rescind the sale of a debt or the performance of any other
and elects to do so, if the seller refuses to obligation.
accept an offer of the buyer to return the
goods, the buyer shall thereafter be deemed to
hold the goods as bailee for the seller, but In any of the foregoing cases, any money, fruits, or other
subject to a lien to secure payment of any benefit to be received by the vendee as rent or
portion of the price which has been paid, and otherwise shall be considered as interest which shall be
with the remedies for the enforcement of such subject to the usury laws.
lien allowed to an unpaid seller by Article
1526. Art. 1603. In case of doubt, a contract purporting to be a
sale with right to repurchase shall be construed as an
5) In the case of breach of warranty of quality, equitable mortgage.
such loss, in the absence of special
circumstances showing proximate damage of a Art. 1604. The provisions of Article 1602 shall also
greater amount, is the difference between the apply to a contract purporting to be an absolute sale.
value of the goods at the time of delivery to the
buyer and the value they would have had if Art. 1605. In the cases referred to in Articles 1602 and
they had answered to the warranty. 1604, the apparent vendor may ask for the reformation
of the instrument.
CHAPTER 7
EXTINGUISHMENT OF SALE Art. 1606. The right referred to in Article 1601, in the
absence of an express agreement, shall last four years
Art. 1600. Sales are extinguished by the same causes as from the date of the contract.
all other obligations, by those stated in the preceding
articles of this Title, and by conventional or legal
redemption. 1506) Should there be an agreement, the period cannot exceed
ten years.
SECTION 1. - Conventional Redemption
However, the vendor may still exercise the right to
Art. 1601. Conventional redemption shall take place repurchase within thirty days from the time final
when the vendor reserves the right to repurchase the judgment was rendered in a civil action on the basis that
thing sold, with the obligation to comply with the the contract was a true sale with right to repurchase.
provisions of Article 1616 and other stipulations which 1508a)
may have been agreed upon. 1507)
Art. 1607. In case of real property, the consolidation of
Art. 1602. The contract shall be presumed to be an ownership in the vendee by virtue of the failure of the
equitable mortgage, in any of the following cases: vendor to comply with the provisions of article 1616
shall not be recorded in the Registry of Property
1) When the price of a sale with right to without a judicial order, after the vendor has been duly
repurchase is unusually inadequate; heard.

2) When the vendor remains in possession as Art. 1608. The vendor may bring his action against
lessee or otherwise; every possessor whose right is derived from the vendee,
even if in the second contract no mention should have
been made of the right to repurchase, without prejudice
3) When upon or after the expiration of the to the provisions of the Mortgage Law and the Land
right to repurchase another instrument Registration Law with respect to third persons. 1510)
extending the period of redemption or
granting a new period is executed;
Art. 1609. The vendee is subrogated to the vendor's
rights and actions. 1511)
37

Art. 1610. The creditors of the vendor cannot make use shall be no reimbursement for or prorating of those
of the right of redemption against the vendee, until after existing at the time of redemption, if no indemnity was
they have exhausted the property of the vendor. 1512) paid by the purchaser when the sale was executed.

Art. 1611. In a sale with a right to repurchase, the Should there have been no fruits at the time of the sale
vendee of a part of an undivided immovable who and some exist at the time of redemption, they shall be
acquires the whole thereof in the case of article 498, prorated between the redemptioner and the vendee,
may compel the vendor to redeem the whole property, if giving the latter the part corresponding to the time he
the latter wishes to make use of the right of redemption. possessed the land in the last year, counted from the
1513) anniversary of the date of the sale. 1519a)

Art. 1612. If several persons, jointly and in the same Art. 1618. The vendor who recovers the thing sold shall
contract, should sell an undivided immovable with a receive it free from all charges or mortgages constituted
right of repurchase, none of them may exercise this right by the vendee, but he shall respect the leases which the
for more than his respective share. latter may have executed in good faith, and in
accordance with the custom of the place where the land
The same rule shall apply if the person who sold an is situated. 1520)
immovable alone has left several heirs, in which case
each of the latter may only redeem the part which he SECTION 2. - Legal Redemption
may have acquired. 1514)
Art. 1619. Legal redemption is the right to be
Art. 1613. In the case of the preceding article, the subrogated, upon the same terms and conditions
vendee may demand of all the vendors or co-heirs that stipulated in the contract, in the place of one who
they come to an agreement upon the purchase of the acquires a thing by purchase or dation in payment, or by
whole thing sold; and should they fail to do so, the any other transaction whereby ownership is
vendee cannot be compelled to consent to a partial transmitted by onerous title. 1521a)
redemption. 1515)
Art. 1620. A co-owner of a thing may exercise the right
Art. 1614. Each one of the co-owners of an undivided of redemption in case the shares of all the other co-
immovable who may have sold his share separately, may owners or of any of them, are sold to a third person. If
independently exercise the right of repurchase as the price of the alienation is grossly excessive, the
regards his own share, and the vendee cannot compel redemptioner shall pay only a reasonable one.
him to redeem the whole property. 1516)
Should two or more co-owners desire to exercise the
Art. 1615. If the vendee should leave several heirs, the right of redemption, they may only do so in proportion
action for redemption cannot be brought against each of to the share they may respectively have in the thing
them except for his own share, whether the thing be owned in common. 1522a)
undivided, or it has been partitioned among them.
Art. 1621. The owners of adjoining lands shall also have
But if the inheritance has been divided, and the thing the right of redemption when a piece of rural land, the
sold has been awarded to one of the heirs, the action for area of which does not exceed one hectare, is alienated,
redemption may be instituted against him for the whole. unless the grantee does not own any rural land.
1517)
This right is not applicable to adjacent lands which are
Art. 1616. The vendor cannot avail himself of the right separated by brooks, drains, ravines, roads and other
of repurchase without returning to the vendee the price apparent servitudes for the benefit of other estates.
of the sale, and in addition:
If two or more adjoining owners desire to exercise the
1) The expenses of the contract, and any other right of redemption at the same time, the owner of the
legitimate payments made by reason of the adjoining land of smaller area shall be preferred; and
sale; should both lands have the same area, the one who first
requested the redemption. 1523a)
2) The necessary and useful expenses made on
the thing sold. 1518) Art. 1622. Whenever a piece of urban land which is so
small and so situated that a major portion thereof
cannot be used for any practical purpose within a
Art. 1617. If at the time of the execution of the sale there reasonable time, having been bought merely for
should be on the land, visible or growing fruits, there speculation, is about to be re-sold, the owner of any
38

adjoining land has a right of pre-emption at a Even in these cases he shall only be liable for the price
reasonable price. received and for the expenses specified in No. 1 of
Article 1616.
If the re-sale has been perfected, the owner of the
adjoining land shall have a right of redemption, also at a The vendor in bad faith shall always be answerable for
reasonable price. the payment of all expenses, and for damages. 1529)

When two or more owners of adjoining lands wish to Art. 1629. In case the assignor in good faith should have
exercise the right of made himself responsible for the solvency of the debtor,
and the contracting parties should not have agreed
pre-emption or redemption, the owner whose intended upon the duration of the liability, it shall last for one
use of the land in question appears best justified shall year only, from the time of the assignment if the period
be preferred. had already expired.

Art. 1623. The right of legal pre-emption or redemption If the credit should be payable within a term or period
shall not be exercised except within thirty days from the which has not yet expired, the liability shall cease one
notice in writing by the prospective vendor, or by the year after the maturity. 1530a)
vendor, as the case may be. The deed of sale shall not be
recorded in the Registry of Property, unless Art. 1630. One who sells an inheritance without
accompanied by an affidavit of the vendor that he has enumerating the things of which it is composed, shall
given written notice thereof to all possible only be answerable for his character as an heir. 1531)
redemptioners.
Art. 1631. One who sells for a lump sum the whole of
The right of redemption of co-owners excludes that of certain rights, rents, or products, shall comply by
adjoining owners. 1524a) answering for the legitimacy of the whole in general;
but he shall not be obliged to warrant each of the
CHAPTER 8 various parts of which it may be composed, except in
ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL the case of eviction from the whole or the part of greater
RIGHTS value. 1532a)

Art. 1624. An assignment of creditors and other Art. 1632. Should the vendor have profited by some of
incorporeal rights shall be perfected in accordance with the fruits or received anything from the inheritance
the provisions of Article 1475. sold, he shall pay the vendee thereof, if the contrary has
not been stipulated.
Art. 1625. An assignment of a credit, right or action shall
produce no effect as against third person, unless it Art. 1633. The vendee shall, on his part, reimburse the
appears in a public instrument, or the instrument is vendor for all that the latter may have paid for the debts
recorded in the Registry of Property in case the of and charges on the estate and satisfy the credits he
assignment involves real property. 1526) may have against the same, unless there is an agreement
to the contrary.
Art. 1626. The debtor who, before having knowledge of
the assignment, pays his creditor shall be released from Art. 1634. When a credit or other incorporeal right in
the obligation. 1527) litigation is sold, the debtor shall have a right to
extinguish it by reimbursing the assignee for the price
Art. 1627. The assignment of a credit includes all the the latter paid therefor, the judicial costs incurred by
accessory rights, such as a guaranty, mortgage, pledge him, and the interest on the price from the day on which
or preference. 1528) the same was paid.

Art. 1628. The vendor in good faith shall be responsible A credit or other incorporeal right shall be considered in
for the existence and legality of the credit at the time of litigation from the time the complaint concerning the
the sale, unless it should have been sold as doubtful; but same is answered.
not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior The debtor may exercise his right within thirty days
to the sale and of common knowledge. from the date the assignee demands payment from him.
1535)
39

Art. 1635. From the provisions of the preceding article 3) Goods are in a "deliverable state" within the
shall be excepted the assignments or sales made: meaning of this Title when they are in such a
state that the buyer would, under the contract,
1) To a co-heir or co-owner of the right be bound to take delivery of them.
assigned;
Art. 1637. The provisions of this Title are subject to the
2) To a creditor in payment of his credit; rules laid down by the Mortgage Law and the Land
Registration Law with regard to immovable property.
1537a)
3) To the possessor of a tenement or piece of
land which is subject to the right in litigation Title XI. - LOAN
assigned.
GENERAL PROVISIONS
CHAPTER 9
GENERAL PROVISIONS Art. 1933. By the contract of loan, one of the parties
delivers to another, either something not consumable so
Art. 1636. In the preceding articles in this Title that the latter may use the same for a certain time and
governing the sale of goods, unless the context or return it, in which case the contract is called a
subject matter otherwise requires: commodatum; or money or other consumable thing,
upon the condition that the same amount of the same
1) "Document of title to goods" includes any bill kind and quality shall be paid, in which case the
of lading, dock warrant, "quedan," or contract is simply called a loan or mutuum.
warehouse receipt or order for the delivery of
goods, or any other document used in the Commodatum is essentially gratuitous.
ordinary course of business in the sale or
transfer of goods, as proof of the possession or Simple loan may be gratuitous or with a stipulation to
control of the goods, or authorizing or pay interest.
purporting to authorize the possessor of the
document to transfer or receive, either by
endorsement or by delivery, goods In commodatum the bailor retains the ownership of the
represented by such document. thing loaned, while in simple loan, ownership passes to
the borrower. 1740a)
"Goods" includes all chattels personal but not
things in action or money of legal tender in the Art. 1934. An accepted promise to deliver something by
Philippines. The term includes growing fruits way of commodatum or simple loan is binding upon
or crops. parties, but the commodatum or simple loan itself shall
not be perfected until the delivery of the object of the
contract.
"Order" relating to documents of title means
an order by endorsement on the documents.
CHAPTER 1
COMMODATUM
"Quality of goods" includes their state or SECTION 1 - Nature of Commodatum
condition.
Art. 1935. The bailee in commodatum acquires the used
"Specific goods" means goods identified and of the thing loaned but not its fruits; if any
agreed upon at the time a contract of sale is compensation is to be paid by him who acquires the use,
made. the contract ceases to be a commodatum. 1941a)

An antecedent or pre-existing claim, whether Art. 1936. Consumable goods may be the subject
for money or not, constitutes "value" where of commodatum if the purpose of the contract is not the
goods or documents of title are taken either in consumption of the object, as when it is merely for
satisfaction thereof or as security therefor. exhibition.

2) A person is insolvent within the meaning of Art. 1937. Movable or immovable property may be the
this Title who either has ceased to pay his object of commodatum.
debts in the ordinary course of business or
cannot pay his debts as they become due, Art. 1938. The bailor in commodatum need not be the
whether insolvency proceedings have been owner of the thing loaned.
commenced or not.
40

Art. 1939. Commodatum is purely personal in character. Art. 1945. When there are two or more bailees to whom
Consequently: a thing is loaned in the same contract, they are liable
solidarily.
1) The death of either the bailor or the bailee
extinguishes the contract; SECTION 3. - Obligations of the Bailor

2) The bailee can neither lend nor lease the Art. 1946. The bailor cannot demand the return of the
object of the contract to a third person. thing loaned till after the expiration of the period
However, the members of the bailee's stipulated, or after the accomplishment of the use for
household may make use of the thing loaned, which the commodatum has been constituted. However,
unless there is a stipulation to the contrary, or if in the meantime, he should have urgent need of the
unless the nature of the thing forbids such use. thing, he may demand its return or temporary use.

Art. 1940. A stipulation that the bailee may make use of In case of temporary use by the bailor, the contract
the fruits of the thing loaned is valid. of commodatum is suspended while the thing is in the
possession of the bailor. 1749a)
SECTION 2. - Obligations of the Bailee
Art. 1947. The bailor may demand the thing at will, and
Art. 1941. The bailee is obliged to pay for the ordinary the contractual relation is called a precarium, in the
expenses for the use and preservation of the thing following cases:
loaned. 1743a)
1) If neither the duration of the contract nor
Art. 1942. The bailee is liable for the loss of the thing, the use to which the thing loaned should be
even if it should be through a fortuitous event: devoted, has been stipulated; or

1) If he devotes the thing to any purpose 2) If the use of the thing is merely tolerated by
different from that for which it has been the owner. 1750a)
loaned;
Art. 1948. The bailor may demand the immediate return
2) If he keeps it longer than the period of the thing if the bailee commits any act of ingratitude
stipulated, or after the accomplishment of the specified in Article 765.
use for which the commodatum has been
constituted; Art. 1949. The bailor shall refund the extraordinary
expenses during the contract for the preservation of the
3) If the thing loaned has been delivered with thing loaned, provided the bailee brings the same to the
appraisal of its value, unless there is a knowledge of the bailor before incurring them, except
stipulation exemption the bailee from when they are so urgent that the reply to the
responsibility in case of a fortuitous event; notification cannot be awaited without danger.

4) If he lends or leases the thing to a third If the extraordinary expenses arise on the occasion of
person, who is not a member of his household; the actual use of the thing by the bailee, even though he
acted without fault, they shall be borne equally by both
5) If, being able to save either the thing the bailor and the bailee, unless there is a stipulation to
borrowed or his own thing, he chose to save the contrary. 1751a)
the latter. 1744a and 1745)
Art. 1950. If, for the purpose of making use of the thing,
Art. 1943. The bailee does not answer for the the bailee incurs expenses other than those referred to
deterioration of the thing loaned due only to the use in Articles 1941 and 1949, he is not entitled to
thereof and without his fault. 1746) reimbursement.

Art. 1944. The bailee cannot retain the thing loaned on Art. 1951. The bailor who, knowing the flaws of the
the ground that the bailor owes him something, even thing loaned, does not advise the bailee of the same,
though it may be by reason of expenses. However, the shall be liable to the latter for the damages which he
bailee has a right of retention for damages mentioned in may suffer by reason thereof. 1752)
Article 1951. 1747a)
41

Art. 1952. The bailor cannot exempt himself from the Title XII. - DEPOSIT
payment of expenses or damages by abandoning the
thing to the bailee. CHAPTER 1
DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
CHAPTER 2
SIMPLE LOAN OR MUTUUM Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
Art. 1953. A person who receives a loan of money or any obligation of safely keeping it and of returning the same.
other fungible thing acquires the ownership thereof, If the safekeeping of the thing delivered is not the
and is bound to pay to the creditor an equal amount of principal purpose of the contract, there is no deposit but
the same kind and quality. 1753a) some other contract. 1758a)

Art. 1954. A contract whereby one person transfers the Art. 1963. An agreement to constitute a deposit is
ownership of non-fungible things to another with the binding, but the deposit itself is not perfected until the
obligation on the part of the latter to give things of the delivery of the thing.
same kind, quantity, and quality shall be considered a
barter. Art. 1964. A deposit may be constituted judicially or
extrajudicially. 1759)
Art. 1955. The obligation of a person who borrows
money shall be governed by the provisions of Articles Art. 1965. A deposit is a gratuitous contract, except
1249 and 1250 of this Code. when there is an agreement to the contrary, or unless
the depositary is engaged in the business of storing
If what was loaned is a fungible thing other than money, goods. 1760a)
the debtor owes another thing of the same kind,
quantity and quality, even if it should change in value. In Art. 1966. Only movable things may be the object of a
case it is impossible to deliver the same kind, its value at deposit.
the time of the perfection of the loan shall be paid.
1754a) Art. 1967. An extrajudicial deposit is either voluntary or
necessary. 1762)
Art. 1956. No interest shall be due unless it has been
expressly stipulated in writing. 1755a) CHAPTER 2
VOLUNTARY DEPOSIT
Art. 1957. Contracts and stipulations, under any cloak SECTION 1. - General Provisions
or device whatever, intended to circumvent the laws
against usury shall be void. The borrower may recover Art. 1968. A voluntary deposit is that wherein the
in accordance with the laws on usury. delivery is made by the will of the depositor. A deposit
may also be made by two or more persons each of
Art. 1958. In the determination of the interest, if it is whom believes himself entitled to the thing deposited
payable in kind, its value shall be appraised at the with a third person, who shall deliver it in a proper case
current price of the products or goods at the time and to the one to whom it belongs. 1763)
place of payment.
Art. 1969. A contract of deposit may be entered into
Art. 1959. Without prejudice to the provisions of Article orally or in writing.
2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation Art. 1970. If a person having capacity to contract
capitalize the interest due and unpaid, which as added accepts a deposit made by one who is incapacitated, the
principal, shall earn new interest. former shall be subject to all the obligations of a
depositary, and may be compelled to return the thing by
Art. 1960. If the borrower pays interest when there has the guardian, or administrator, of the person who made
been no stipulation therefor, the provisions of this Code the deposit, or by the latter himself if he should acquire
concerning solutio indebiti, or natural obligations, shall capacity. 1764)
be applied, as the case may be.
Art. 1971. If the deposit has been made by a capacitated
Art. 1961. Usurious contracts shall be governed by the person with another who is not, the depositor shall only
Usury Law and other special laws, so far as they are not have an action to recover the thing deposited while it is
inconsistent with this Code. still in the possession of the depositary, or to compel the
latter to pay him the amount by which he may have
enriched or benefited himself with the thing or its price.
42

However, if a third person who acquired the thing acted However, when the preservation of the thing deposited
in bad faith, the depositor may bring an action against requires its use, it must be used but only for that
him for its recovery. 1765a) purpose.

SECTION 2. - Obligations of the Depositary Art. 1978. When the depositary has permission to use
the thing deposited, the contract loses the concept of a
Art. 1972. The depositary is obliged to keep the thing deposit and becomes a loan or commodatum, except
safely and to return it, when required, to the depositor, where safekeeping is still the principal purpose of the
or to his heirs and successors, or to the person who may contract.
have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, The permission shall not be presumed, and its existence
shall be governed by the provisions of Title I of this must be proved. 1768a)
Book.
Art. 1979. The depositary is liable for the loss of the
If the deposit is gratuitous, this fact shall be taken into thing through a fortuitous event:
account in determining the degree of care that the
depositary must observe. 1766a)
1) If it is so stipulated;
Art. 1973. Unless there is a stipulation to the contrary,
the depositary cannot deposit the thing with a third 2) If he uses the thing without the depositor's
person. If deposit with a third person is allowed, the permission;
depositary is liable for the loss if he deposited the thing
with a person who is manifestly careless or unfit. The 3) If he delays its return;
depositary is responsible for the negligence of his
employees. 4) If he allows others to use it, even though he
himself may have been authorized to use the
Art. 1974. The depositary may change the way of the same.
deposit if under the circumstances he may reasonably
presume that the depositor would consent to the change Art. 1980. Fixed, savings, and current deposits of money
if he knew of the facts of the situation. However, before in banks and similar institutions shall be governed by
the depositary may make such change, he shall notify the provisions concerning simple loan.
the depositor thereof and wait for his decision, unless
delay would cause danger.
Art. 1981. When the thing deposited is delivered closed
and sealed, the depositary must return it in the same
Art. 1975. The depositary holding certificates, bonds, condition, and he shall be liable for damages should the
securities or instruments which earn interest shall be seal or lock be broken through his fault.
bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the
securities may preserve their value and the rights Fault on the part of the depositary is presumed, unless
corresponding to them according to law. there is proof to the contrary.

The above provision shall not apply to contracts for the As regards the value of the thing deposited, the
rent of safety deposit boxes. statement of the depositor shall be accepted, when the
forcible opening is imputable to the depositary, should
there be no proof to the contrary. However, the courts
Art. 1976. Unless there is a stipulation to the contrary, may pass upon the credibility of the depositor with
the depositary may commingle grain or other articles of respect to the value claimed by him.
the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in
the mass. When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the
deposit.
Art. 1977. The depositary cannot make use of the thing
deposited without the express permission of the
depositor. Art. 1982. When it becomes necessary to open a locked
box or receptacle, the depositary is presumed
authorized to do so, if the key has been delivered to him;
Otherwise, he shall be liable for damages. or when the instructions of the depositor as regards the
deposit cannot be executed without opening the box or
receptacle.
43

Art. 1983. The thing deposited shall be returned with all or should he have been notified of the opposition of a
its products, accessories and accessions. third person to the return or the removal of the thing
deposited. In these cases, the depositary must
Should the deposit consist of money, the provisions immediately inform the depositor of the attachment or
relative to agents in article 1896 shall be applied to the opposition. 1775)
depositary.
Art. 1989. Unless the deposit is for a valuable
Art. 1984. The depositary cannot demand that the consideration, the depositary who may have justifiable
depositor prove his ownership of the thing deposited. reasons for not keeping the thing deposited may, even
before the time designated, return it to the depositor;
and if the latter should refuse to receive it, the
Nevertheless, should he discover that the thing has been depositary may secure its consignation from the court.
stolen and who its true owner is, he must advise the 1776a)
latter of the deposit.
Art. 1990. If the depositary by force majeure or
If the owner, in spite of such information, does not claim government order loses the thing and receives money or
it within the period of one month, the depositary shall another thing in its place, he shall deliver the sum or
be relieved of all responsibility by returning the thing other thing to the depositor. 1777a)
deposited to the depositor.
Art. 1991. The depositor's heir who in good faith may
If the depositary has reasonable grounds to believe that have sold the thing which he did not know was
the thing has not been lawfully acquired by the deposited, shall only be bound to return the price he
depositor, the former may return the same. 1771a) may have received or to assign his right of action against
the buyer in case the price has not been paid him.
Art. 1985. When there are two or more depositors, if 1778)
they are not solidary, and the thing admits of division,
each one cannot demand more than his share. SECTION 3. - Obligations of the Depositor

When there is solidarity or the thing does not admit of Art. 1992. If the deposit is gratuitous, the depositor is
division, the provisions of Articles 1212 and 1214 shall obliged to reimburse the depositary for the expenses he
govern. However, if there is a stipulation that the thing may have incurred for the preservation of the thing
should be returned to one of the depositors, the deposited. 1779a)
depositary shall return it only to the person designated.
1772a) Art. 1993. The depositor shall reimburse the depositary
for any loss arising from the character of the thing
Art. 1986. If the depositor should lose his capacity to deposited, unless at the time of the constitution of the
contract after having made the deposit, the thing cannot deposit the former was not aware of, or was not
be returned except to the persons who may have the expected to know the dangerous character of the thing,
administration of his property and rights. 1773) or unless he notified the depositary of the same, or the
latter was aware of it without advice from the depositor.
Art. 1987. If at the time the deposit was made a place
was designated for the return of the thing, the Art. 1994. The depositary may retain the thing in pledge
depositary must take the thing deposited to such place; until the full payment of what may be due him by reason
but the expenses for transportation shall be borne by of the deposit. 1780)
the depositor.
Art. 1995. A deposit its extinguished:
If no place has been designated for the return, it shall be
made where the thing deposited may be, even if it 1) Upon the loss or destruction of the thing
should not be the same place where the deposit was deposited;
made, provided that there was no malice on the part of
the depositary. 1774)
2) In case of a gratuitous deposit, upon the
death of either the depositor or the depositary.
Art. 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period
or time for such return may have been fixed. CHAPTER 3
NECESSARY DEPOSIT
This provision shall not apply when the thing is Art. 1996. A deposit is necessary:
judicially attached while in the depositary's possession,
44

1) When it is made in compliance with a legal Art. 2004. The hotel-keeper has a right to retain the
obligation; things brought into the hotel by the guest, as a security
for credits on account of lodging, and supplies usually
2) When it takes place on the occasion of any furnished to hotel guests.
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. 1781a) CHAPTER 4
SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 1997. The deposit referred to in No. 1 of the
preceding article shall be governed by the provisions of Art. 2005. A judicial deposit or sequestration takes
the law establishing it, and in case of its deficiency, by place when an attachment or seizure of property in
the rules on voluntary deposit. litigation is ordered. 1785)

The deposit mentioned in No. 2 of the preceding article Art. 2006. Movable as well as immovable property may
shall be regulated by the provisions concerning be the object of sequestration. 1786)
voluntary deposit and by Article 2168. 1782)
Art. 2007. The depositary of property or objects
Art. 1998. The deposit of effects made by the travellers sequestrated cannot be relieved of his responsibility
in hotels or inns shall also be regarded as necessary. The until the controversy which gave rise thereto has come
keepers of hotels or inns shall be responsible for them to an end, unless the court so orders. 1787a)
as depositaries, provided that notice was given to them,
or to their employees, of the effects brought by the Art. 2008. The depositary of property sequestrated is
guests and that, on the part of the latter, they take the bound to comply, with respect to the same, with all the
precautions which said hotel-keepers or their obligations of a good father of a family. 1788)
substitutes advised relative to the care and vigilance of
their effects. 1783) Art. 2009. As to matters not provided for in this Code,
judicial sequestration shall be governed by the Rules of
Art. 1999. The hotel-keeper is liable for the vehicles, Court. 1789)
animals and articles which have been introduced or
placed in the annexes of the hotel. CHAPTER 2
EFFECTS OF GUARANTY
Art. 2000. The responsibility referred to in the two SECTION 1. - Effects of Guaranty
preceding articles shall include the loss of, or injury to Between the Guarantor and the Creditor
the personal property of the guests caused by the
servants or employees of the keepers of hotels or inns Art. 2058. The guarantor cannot be compelled to pay
as well as strangers; but not that which may proceed the creditor unless the latter has exhausted all the
from any force majeure. The fact that travellers are property of the debtor, and has resorted to all the legal
constrained to rely on the vigilance of the keeper of the remedies against the debtor. 1830a)
hotels or inns shall be considered in determining the
degree of care required of him. 1784a) Art. 2059. The excussion shall not take place:

Art. 2001. The act of a thief or robber, who has entered 1) If the guarantor has expressly renounced it;
the hotel is not deemed force majeure, unless it is done
with the use of arms or through an irresistible force.
2) If he has bound himself solidarily with the
debtor;
Art. 2002. The hotel-keeper is not liable for
compensation if the loss is due to the acts of the guest,
his family, servants or visitors, or if the loss arises from 3) In case of insolvency of the debtor;
the character of the things brought into the hotel.
4) When he has absconded, or cannot be sued
Art. 2003. The hotel-keeper cannot free himself from within the Philippines unless he has left a
responsibility by posting notices to the effect that he is manager or representative;
not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest 5) If it may be presumed that an execution on
whereby the responsibility of the former as set forth in the property of the principal debtor would not
articles 1998 to 2001 is suppressed or diminished shall result in the satisfaction of the obligation.
be void. 1831a)
45

Art. 2060. In order that the guarantor may make use of even though it did not earn interest for the
the benefit of exclusion, he must set it up against the creditor;
creditor upon the latter's demand for payment from
him, and point out to the creditor available property of 3) The expenses incurred by the guarantor
the debtor within Philippine territory, sufficient to cover after having notified the debtor that payment
the amount of the debt. 1832) had been demanded of him;

Art. 2061. The guarantor having fulfilled all the 4) Damages, if they are due. 1838a)
conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out
shall suffer the loss, to the extent of said property, for Art. 2067. The guarantor who pays is subrogated by
the insolvency of the debtor resulting from such virtue thereof to all the rights which the creditor had
negligence. 1833a) against the debtor.

Art. 2062. In every action by the creditor, which must be If the guarantor has compromised with the creditor, he
against the principal debtor alone, except in the cases cannot demand of the debtor more than what he has
mentioned in Article 2059, the former shall ask the really paid. 1839)
court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire, set Art. 2068. If the guarantor should pay without notifying
up such defenses as are granted him by law. The benefit the debtor, the latter may enforce against him all the
of excussion mentioned in Article 2058 shall always be defenses which he could have set up against the creditor
unimpaired, even if judgment should be rendered at the time the payment was made. 1840)
against the principal debtor and the guarantor in case of
appearance by the latter. 1834a) Art. 2069. If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
Art. 2063. A compromise between the creditor and the reimbursement of the debtor until the expiration of the
principal debtor benefits the guarantor but does not period unless the payment has been ratified by the
prejudice him. That which is entered into between the debtor. 1841a)
guarantor and the creditor benefits but does not
prejudice the principal debtor. 1835a) Art. 2070. If the guarantor has paid without notifying
the debtor, and the latter not being aware of the
Art. 2064. The guarantor of a guarantor shall enjoy the payment, repeats the payment, the former has no
benefit of excussion, both with respect to the guarantor remedy whatever against the debtor, but only against
and to the principal debtor. 1836) the creditor. Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous
Art. 2065. Should there be several guarantors of only event from advising the debtor of the payment, and the
one debtor and for the same debt, the obligation to creditor becomes insolvent, the debtor shall reimburse
answer for the same is divided among all. The creditor the guarantor for the amount paid. 1842a)
cannot claim from the guarantors except the shares
which they are respectively bound to pay, unless Art. 2071. The guarantor, even before having paid, may
solidarity has been expressly stipulated. proceed against the principal debtor:

The benefit of division against the co-guarantors ceases 1) When he is sued for the payment;
in the same cases and for the same reasons as the
benefit of excussion against the principal debtor. 1837) 2) In case of insolvency of the principal debtor;

SECTION 2. - Effects of Guaranty 3) When the debtor has bound himself to

Between the Debtor and the Guarantor relieve him from the guaranty within a
specified period, and this period has expired;
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
4) When the debt has become demandable, by
reason of the expiration of the period for
The indemnity comprises: payment;

1) The total amount of the debt; 5) After the lapse of ten years, when the
principal obligation has no fixed period for its
2) The legal interests thereon from the time maturity, unless it be of such nature that it
the payment was made known to the debtor,
46

cannot be extinguished except within a period Art. 2077. If the creditor voluntarily accepts immovable
longer than ten years; or other property in payment of the debt, even if he
should afterwards lose the same through eviction, the
6) If there are reasonable grounds to fear that guarantor is released. 1849)
the principal debtor intends to abscond;
Art. 2078. A release made by the creditor in favor of one
7) If the principal debtor is in imminent of the guarantors, without the consent of the others,
danger of becoming insolvent. benefits all to the extent of the share of the guarantor to
whom it has been granted. 1850)
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that Art. 2079. An extension granted to the debtor by the
shall protect him from any proceedings by the creditor creditor without the consent of the guarantor
and from the danger of insolvency of the debtor. 1834a) extinguishes the guaranty. The mere failure on the part
of the creditor to demand payment after the debt has
become due does not of itself constitute any extention of
Art. 2072. If one, at the request of another, becomes a time referred to herein. 1851a)
guarantor for the debt of a third person who is not
present, the guarantor who satisfies the debt may sue
either the person so requesting or the debtor for Art. 2080. The guarantors, even though they be solidary,
reimbursement. are released from their obligation whenever by some act
of the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter. 1852)
SECTION 3. - Effects of Guaranty as Between Co-
Guarantors Art. 2081. The guarantor may set up against the creditor
all the defenses which pertain to the principal debtor
Art. 2073. When there are two or more guarantors of and are inherent in the debt; but not those that are
the same debtor and for the same debt, the one among personal to the debtor. 1853)
them who has paid may demand of each of the others
the share which is proportionally owing from him. Title XVI. - PLEDGE, MORTGAGE AND ANTICHRESIS

If any of the guarantors should be insolvent, his share CHAPTER 1

shall be borne by the others, including the payer, in the PROVISIONS COMMON TO PLEDGE AND MORTGAGE
same proportion.
Art. 2085. The following requisites are essential to the
contracts of pledge and mortgage:
The provisions of this article shall not be applicable,
unless the payment has been made by virtue of a
judicial demand or unless the principal debtor is 1) That they be constituted to secure the
insolvent. 1844a) fulfillment of a principal obligation;

Art. 2074. In the case of the preceding article, the co- 2) That the pledgor or mortgagor be the
guarantors may set up against the one who paid, the absolute owner of the thing pledged or
same defenses which would have pertained to the mortgaged;
principal debtor against the creditor, and which are not
purely personal to the debtor. 1845) 3) That the persons constituting the pledge or
mortgage have the free disposal of their
Art. 2075. A sub-guarantor, in case of the insolvency of property, and in the absence thereof, that they
the guarantor for whom he bound himself, is be legally authorized for the purpose.
responsible to the co-guarantors in the same terms as
the guarantor. 1846) Third persons who are not parties to the principal
obligation may secure the latter by pledging or
CHAPTER 3 mortgaging their own property. 1857)
EXTINGUISHMENT OF GUARANTY
Art. 2086. The provisions of Article 2052 are applicable
Art. 2076. The obligation of the guarantor is to a pledge or mortgage.
extinguished at the same time as that of the debtor, and
for the same causes as all other obligations. 1847) Art. 2087. It is also of the essence of these contracts that
when the principal obligation becomes due, the things
47

in which the pledge or mortgage consists may be Art. 2094. All movables which are within commerce may
alienated for the payment to the creditor. 1858) be pledged, provided they are susceptible of possession.
1864)
Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them. Art. 2095. Incorporeal rights, evidenced by negotiable
Any stipulation to the contrary is null and void. 1859a) instruments, bills of lading, shares of stock, bonds,
warehouse receipts and similar documents may also be
Art. 2089. A pledge or mortgage is indivisible, even pledged. The instrument proving the right pledged shall
though the debt may be divided among the successors be delivered to the creditor, and if negotiable, must be
in interest of the debtor or of the creditor. indorsed.

Therefore, the debtor's heir who has paid a part of the Art. 2096. A pledge shall not take effect against third
debt cannot ask for the proportionate extinguishment of persons if a description of the thing pledged and the
the pledge or mortgage as long as the debt is not date of the pledge do not appear in a public instrument.
completely satisfied. 1865a)

Neither can the creditor's heir who received his share of Art. 2097. With the consent of the pledgee, the thing
the debt return the pledge or cancel the mortgage, to pledged may be alienated by the pledgor or owner,
the prejudice of the other heirs who have not been paid. subject to the pledge. The ownership of the thing
pledged is transmitted to the vendee or transferee as
soon as the pledgee consents to the alienation, but the
From these provisions is expected the case in which, latter shall continue in possession.
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate portion
of the credit. Art. 2098. The contract of pledge gives a right to the
creditor to retain the thing in his possession or in that of
a third person to whom it has been delivered, until the
The debtor, in this case, shall have a right to the debt is paid. 1866a)
extinguishment of the pledge or mortgage as the portion
of the debt for which each thing is specially answerable
is satisfied. Art. 2099. The creditor shall take care of the thing
pledged with the diligence of a good father of a family;
he has a right to the reimbursement of the expenses
Art. 2090. The indivisibility of a pledge or mortgage is made for its preservation, and is liable for its loss or
not affected by the fact that the debtors are not deterioration, in conformity with the provisions of this
solidarily liable. Code. 1867)

Art. 2091. The contract of pledge or mortgage may Art. 2100. The pledgee cannot deposit the thing pledged
secure all kinds of obligations, be they pure or subject to with a third person, unless there is a stipulation
a suspensive or resolutory condition. 1861) authorizing him to do so.

Art. 2092. A promise to constitute a pledge or mortgage The pledgee is responsible for the acts of his agents or
gives rise only to a personal action between the employees with respect to the thing pledged.
contracting parties, without prejudice to the criminal
responsibility incurred by him who defrauds another, by
offering in pledge or mortgage as unencumbered, things Art. 2101. The pledgor has the same responsibility as a
which he knew were subject to some burden, or by bailor in commodatum in the case under Article 1951.
misrepresenting himself to be the owner of the same.
1862) Art. 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate
CHAPTER 2 what he receives with those which are owing him; but if
PLEDGE none are owing him, or insofar as the amount may
exceed that which is due, he shall apply it to the
Art. 2093. In addition to the requisites prescribed in principal. Unless there is a stipulation to the contrary,
Article 2085, it is necessary, in order to constitute the the pledge shall extend to the interest and earnings of
contract of pledge, that the thing pledged be placed in the right pledged.
the possession of the creditor, or of a third person by
common agreement. In case of a pledge of animals, their offspring shall
pertain to the pledgor or owner of animals pledged, but
shall be subject to the pledge, if there is no stipulation to
the contrary. 1868a)
48

Art. 2103. Unless the thing pledged is expropriated, the returned by the pledgee. This same presumption exists
debtor continues to be the owner thereof. if the thing pledged is in the possession of a third
person who has received it from the pledgor or owner
Nevertheless, the creditor may bring the actions which after the constitution of the pledge.
pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person. Art. 2111. A statement in writing by the pledgee that he
1869) renounces or abandons the pledge is sufficient to
extinguish the pledge. For this purpose, neither the
Art. 2104. The creditor cannot use the thing pledged, acceptance by the pledgor or owner, nor the return of
without the authority of the owner, and if he should do the thing pledged is necessary, the pledgee becoming a
so, or should misuse the thing in any other way, the depositary.
owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged Art. 2112. The creditor to whom the credit has not been
requires its use, it must be used by the creditor but only satisfied in due time, may proceed before a Notary
for that purpose. 1870a) Public to the sale of the thing pledged. This sale shall be
made at a public auction, and with notification to the
Art. 2105. The debtor cannot ask for the return of the debtor and the owner of the thing pledged in a proper
thing pledged against the will of the creditor, unless and case, stating the amount for which the public sale is to
until he has paid the debt and its interest, with expenses be held. If at the first auction the thing is not sold, a
in a proper case. 1871) second one with the same formalities shall be held; and
if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case
Art. 2106. If through the negligence or wilful act of the he shall be obliged to give an acquittance for his entire
pledgee, the thing pledged is in danger of being lost or claim. 1872a)
impaired, the pledgor may require that it be deposited
with a third person.
Art. 2113. At the public auction, the pledgor or owner
may bid. He shall, moreover, have a better right if he
Art. 2107. If there are reasonable grounds to fear the should offer the same terms as the highest bidder.
destruction or impairment of the thing pledged, without
the fault of the pledgee, the pledgor may demand the
return of the thing, upon offering another thing in The pledgee may also bid, but his offer shall not be valid
pledge, provided the latter is of the same kind as the if he is the only bidder.
former and not of inferior quality, and without prejudice
to the right of the pledgee under the provisions of the Art. 2114. All bids at the public auction shall offer to pay
following article. the purchase price at once. If any other bid is accepted,
the pledgee is deemed to have been received the
The pledgee is bound to advise the pledgor, without purchase price, as far as the pledgor or owner is
delay, of any danger to the thing pledged. concerned.

Art. 2108. If, without the fault of the pledgee, there is Art. 2115. The sale of the thing pledged shall extinguish
danger of destruction, impairment, or diminution in the principal obligation, whether or not the proceeds of
value of the thing pledged, he may cause the same to be the sale are equal to the amount of the principal
sold at a public sale. The proceeds of the auction shall obligation, interest and expenses in a proper case. If the
be a security for the principal obligation in the same price of the sale is more than said amount, the debtor
manner as the thing originally pledged. shall not be entitled to the excess, unless it is otherwise
agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency,
Art. 2109. If the creditor is deceived on the substance or notwithstanding any stipulation to the contrary.
quality of the thing pledged, he may either claim
another thing in its stead, or demand immediate
payment of the principal obligation. Art. 2116. After the public auction, the pledgee shall
promptly advise the pledgor or owner of the result
thereof.
Art. 2110. If the thing pledged is returned by the
pledgee to the pledgor or owner, the pledge is
extinguished. Any stipulation to the contrary shall be Art. 2117. Any third person who has any right in or to
void. the thing pledged may satisfy the principal obligation as
soon as the latter becomes due and demandable.
If subsequent to the perfection of the pledge, the thing is
in the possession of the pledgor or owner, there is a Art. 2118. If a credit which has been pledged becomes
prima facie presumption that the same has been due before it is redeemed, the pledgee may collect and
49

receive the amount due. He shall apply the same to the instrument is not recorded, the mortgage is
payment of his claim, and deliver the surplus, should nevertheless binding between the parties.
there be any, to the pledgor.
The persons in whose favor the law establishes a
Art. 2119. If two or more things are pledged, the mortgage have no other right than to demand the
pledgee may choose which he will cause to be sold, execution and the recording of the document in which
unless there is a stipulation to the contrary. He may the mortgage is formalized. 1875a)
demand the sale of only as many of the things as are
necessary for the payment of the debt. Art. 2126. The mortgage directly and immediately
subjects the property upon which it is imposed,
Art. 2120. If a third party secures an obligation by whoever the possessor may be, to the fulfillment of the
pledging his own movable property under the obligation for whose security it was constituted. 1876)
provisions of Article 2085 he shall have the same rights
as a guarantor under Articles 2066 to 2070, and Articles Art. 2127. The mortgage extends to the natural
2077 to 2081. He is not prejudiced by any waiver of accessions, to the improvements, growing fruits, and the
defense by the principal obligor. rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity
Art. 2121. Pledges created by operation of law, such as granted or owing to the proprietor from the insurers of
those referred to in Articles 546, 1731, and 1994, are the property mortgaged, or in virtue of expropriation
governed by the foregoing articles on the possession, for public use, with the declarations, amplifications and
care and sale of the thing as well as on the termination limitations established by law, whether the estate
of the pledge. However, after payment of the debt and remains in the possession of the mortgagor, or it passes
expenses, the remainder of the price of the sale shall be into the hands of a third person. 1877)
delivered to the obligor.
Art. 2128. The mortgage credit may be alienated or
Art. 2122. A thing under a pledge by operation of law assigned to a third person, in whole or in part, with the
may be sold only after demand of the amount for which formalities required by law. 1878)
the thing is retained. The public auction shall take place
within one month after such demand. If, without just Art. 2129. The creditor may claim from a third person in
grounds, the creditor does not cause the public sale to possession of the mortgaged property, the payment of
be held within such period, the debtor may require the the part of the credit secured by the property which said
return of the thing. third person possesses, in the terms and with the
formalities which the law establishes. 1879)
Art. 2123. With regard to pawnshops and other
establishments, which are engaged in making loans Art. 2130. A stipulation forbidding the owner from
secured by pledges, the special laws and regulations alienating the immovable mortgaged shall be void.
concerning them shall be observed, and subsidiarily, the
provisions of this Title.
Art. 2131. The form, extent and consequences of a
mortgage, both as to its constitution, modification and
CHAPTER 3 extinguishment, and as to other matters not included in
MORTGAGE this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law. 1880a)
Art. 2124. Only the following property may be the object
of a contract of mortgage:
CHAPTER 4
1) Immovables; ANTICHRESIS

2) Alienable real rights in accordance with the Art. 2132. By the contract of antichresis the creditor
laws, imposed upon immovables. acquires the right to receive the fruits of an immovable
of his debtor, with the obligation to apply them to the
Nevertheless, movables may be the object of a chattel payment of the interest, if owing, and thereafter to the
mortgage. 1874a) principal of his credit. 1881)

Art. 2125. In addition to the requisites stated in Article Art. 2133. The actual market value of the fruits at the
2085, it is indispensable, in order that a mortgage may time of the application thereof to the interest and
be validly constituted, that the document in which it principal shall be the measure of such application.
appears be recorded in the Registry of Property. If the
50

Art. 2134. The amount of the principal and of the Art. 2141. The provisions of this Code on pledge, insofar
interest shall be specified in writing; otherwise, the as they are not in conflict with the Chattel Mortgage Law
contract of antichresis shall be void. shall be applicable to chattel mortgages.

Art. 2135. The creditor, unless there is a stipulation to

the contrary, is obliged to pay the taxes and charges
upon the estate.

He is also bound to bear the expenses necessary for its

preservation and repair.

The sums spent for the purposes stated in this article

shall be deducted from the fruits. 1882)

Art. 2136. The debtor cannot reacquire the enjoyment

of the immovable without first having totally paid what
he owes the creditor.

But the latter, in order to exempt himself from the

obligations imposed upon him by the preceding article,
may always compel the debtor to enter again upon the
enjoyment of the property, except when there is a
stipulation to the contrary. 1883)

Art. 2137. The creditor does not acquire the ownership

of the real estate for non-payment of the debt within the
period agreed upon.

Every stipulation to the contrary shall be void. But the

creditor may petition the court for the payment of the
debt or the sale of the real property. In this case, the
Rules of Court on the foreclosure of mortgages shall
apply. 1884a)

Art. 2138. The contracting parties may stipulate that the

interest upon the debt be compensated with the fruits of
the property which is the object of the antichresis,
provided that if the value of the fruits should exceed the
amount of interest allowed by the laws against usury,
the excess shall be applied to the principal. 1885a)

Art. 2139. The last paragraph of Article 2085, and

Articles 2089 to 2091 are applicable to this contract.
1886a)

CHAPTER 5
CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is

recorded in the Chattel Mortgage Register as a security
for the performance of an obligation. If the movable,
instead of being recorded, is delivered to the creditor or
a third person, the contract is a pledge and not a chattel
mortgage.
51

Title IX. - PARTNERSHIP property by installments or

CHAPTER 1 otherwise.
GENERAL PROVISIONS
Art. 1770. A partnership must have a lawful object or
Art. 1767. By the contract of partnership two or more purpose, and must be established for the common
persons bind themselves to contribute money, property, benefit or interest of the partners.
or industry to a common fund, with the intention of
dividing the profits among themselves.
When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the
Two or more persons may also form a partnership for State, without prejudice to the provisions of the Penal
the exercise of a profession. 1665a) Code governing the confiscation of the instruments and
effects of a crime. 1666a)
Art. 1768. The partnership has a judicial personality
separate and distinct from that of each of the partners, Art. 1771. A partnership may be constituted in any
even in case of failure to comply with the requirements form, except where immovable property or real rights
of Article 1772, first paragraph. are contributed thereto, in which case a public
instrument shall be necessary. 1667a)
Art. 1769. In determining whether a partnership exists,
these rules shall apply: Art. 1772. Every contract of partnership having a capital
of three thousand pesos or more, in money or property,
1) Except as provided by Article 1825, persons shall appear in a public instrument, which must be
who are not partners as to each other are not recorded in the Office of the Securities and Exchange
partners as to third persons; Commission.

2) Co-ownership or co-possession does not of Failure to comply with the requirements of the
itself establish a partnership, whether such- preceding paragraph shall not affect the liability of the
co-owners or co-possessors do or do not share partnership and the members thereof to third persons.
any profits made by the use of the property;
Art. 1773. A contract of partnership is void, whenever
3) The sharing of gross returns does not of immovable property is contributed thereto, if an
itself establish a partnership, whether or not inventory of said property is not made, signed by the
the persons sharing them have a joint or parties, and attached to the public instrument. 1668a)
common right or interest in any property from
which the returns are derived; Art. 1774. Any immovable property or an interest
therein may be acquired in the partnership name. Title
4) The receipt by a person of a share of the so acquired can be conveyed only in the partnership
profits of a business is prima facie evidence name.
that he is a partner in the business, but no
such inference shall be drawn if such profits Art. 1775. Associations and societies, whose articles are
were received in payment: kept secret among the members, and wherein any one
of the members may contract in his own name with
a) As a debt by installments or third persons, shall have no juridical personality, and
otherwise; shall be governed by the provisions relating to co-
ownership. 1669)
b) As wages of an employee or rent to
a landlord; Art. 1776. As to its object, a partnership is either
universal or particular.As regards the liability of the
c) As an annuity to a widow or partners, a partnership may be general or limited.
representative of a deceased partner; 1671a)

d) As interest on a loan, though the Art. 1777. A universal partnership may refer to all the
amount of payment vary with the present property or to all the profits. 1672)
profits of the business;
Art. 1778. A partnership of all present property is that
e) As the consideration for the sale of in which the partners contribute all the property which
a goodwill of a business or other actually belongs to them to a common fund, with the
intention of dividing the same among themselves, as
52

well as all the profits which they may acquire therewith. A continuation of the business by the partners or such
1673) of them as habitually acted therein during the term,
without any settlement or liquidation of the partnership
Art. 1779. In a universal partnership of all present affairs, is prima facie evidence of a continuation of the
property, the property which belongs to each of the partnership.
partners at the time of the constitution of the
partnership, becomes the common property of all the Art. 1786. Every partner is a debtor of the partnership
partners, as well as all the profits which they may for whatever he may have promised to contribute
acquire therewith. thereto.

A stipulation for the common enjoyment of any other He shall also be bound for warranty in case of eviction
profits may also be made; but the property which the with regard to specific and determinate things which he
partners may acquire subsequently by inheritance, may have contributed to the partnership, in the same
legacy, or donation cannot be included in such cases and in the same manner as the vendor is bound
stipulation, except the fruits thereof. 1674a) with respect to the vendee. He shall also be liable for the
fruits thereof from the time they should have been
Art. 1780. A universal partnership of profits comprises delivered, without the need of any demand. 1681a)
all that the partners may acquire by their industry or
work during the existence of the partnership. Art. 1787. When the capital or a part thereof which a
partner is bound to contribute consists of goods, their
Movable or immovable property which each of the appraisal must be made in the manner prescribed in the
partners may possess at the time of the celebration of contract of partnership, and in the absence of
the contract shall continue to pertain exclusively to stipulation, it shall be made by experts chosen by the
each, only the usufruct passing to the partnership. partners, and according to current prices, the
1675) subsequent changes thereof being for account of the
partnership.
Art. 1781. Articles of universal partnership, entered into
without specification of its nature, only constitute a Art. 1788. A partner who has undertaken to contribute a
universal partnership of profits. 1676) sum of money and fails to do so becomes a debtor for
the interest and damages from the time he should have
complied with his obligation.
Art. 1782. Persons who are prohibited from giving each
other any donation or advantage cannot enter into
universal partnership. 1677) The same rule applies to any amount he may have taken
from the partnership coffers, and his liability shall begin
from the time he converted the amount to his own use.
Art. 1783. A particular partnership has for its object 1682)
determinate things, their use or fruits, or specific
undertaking, or the exercise of a profession or vocation.
1678) Art. 1789. An industrial partner cannot engage in
business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the
capitalist partners may either exclude him from the firm
CHAPTER 2 or avail themselves of the benefits which he may have
OBLIGATIONS OF THE PARTNERS obtained in violation of this provision, with a right to
damages in either case.
SECTION 1. - Obligations of the PartnersAmong
Themselves Art. 1790. Unless there is a stipulation to the contrary,
the partners shall contribute equal shares to the capital
Art. 1784. A partnership begins from the moment of the of the partnership.
execution of the contract, unless it is otherwise
stipulated. 1679)
Art. 1791. If there is no agreement to the contrary, in
case of an imminent loss of the business of the
Art. 1785. When a partnership for a fixed term or partnership, any partner who refuses to contribute an
particular undertaking is continued after the additional share to the capital, except an industrial
termination of such term or particular undertaking partner, to save the venture, shall he obliged to sell his
without any express agreement, the rights and duties of interest to the other partners.
the partners remain the same as they were at such
termination, so far as is consistent with a partnership at
will. Art. 1792. If a partner authorized to manage collects a
demandable sum which was owed to him in his own
53

name, from a person who owed the partnership another he may have contributed, but the industrial partner
sum also demandable, the sum thus collected shall be shall not be liable for the losses. As for the profits, the
applied to the two credits in proportion to their industrial partner shall receive such share as may be
amounts, even though he may have given a receipt for just and equitable under the circumstances. If besides
his own credit only; but should he have given it for the his services he has contributed capital, he shall also
account of the partnership credit, the amount shall be receive a share in the profits in proportion to his capital.
fully applied to the latter. 1689a)

The provisions of this article are understood to be Art. 1798. If the partners have agreed to intrust to a
without prejudice to the right granted to the other third person the designation of the share of each one in
debtor by Article 1252, but only if the personal credit of the profits and losses, such designation may be
the partner should be more onerous to him. 1684) impugned only when it is manifestly inequitable. In no
case may a partner who has begun to execute the
Art. 1793. A partner who has received, in whole or in decision of the third person, or who has not impugned
part, his share of a partnership credit, when the other the same within a period of three months from the time
partners have not collected theirs, shall be obliged, if the he had knowledge thereof, complain of such decision.
debtor should thereafter become insolvent, to bring to
the partnership capital what he received even though he The designation of losses and profits cannot be
may have given receipt for his share only. 1685a) intrusted to one of the partners. 1690)

Art. 1794. Every partner is responsible to the Art. 1799. A stipulation which excludes one or more
partnership for damages suffered by it through his fault, partners from any share in the profits or losses is void.
and he cannot compensate them with the profits and 1691)
benefits which he may have earned for the partnership
by his industry. However, the courts may equitably Art. 1800. The partner who has been appointed
lessen this responsibility if through the partner's manager in the articles of partnership may execute all
extraordinary efforts in other activities of the acts of administration despite the opposition of his
partnership, unusual profits have been realized. 1686a) partners, unless he should act in bad faith; and his
power is irrevocable without just or lawful cause. The
Art. 1795. The risk of specific and determinate things, vote of the partners representing the controlling
which are not fungible, contributed to the partnership interest shall be necessary for such revocation of power.
so that only their use and fruits may be for the common
benefit, shall be borne by the partner who owns them. A power granted after the partnership has been
constituted may be revoked at any time. 1692a)
If the things contribute are fungible, or cannot be kept
without deteriorating, or if they were contributed to be Art. 1801. If two or more partners have been intrusted
sold, the risk shall be borne by the partnership. In the with the management of the partnership without
absence of stipulation, the risk of the things brought and specification of their respective duties, or without a
appraised in the inventory, shall also be borne by the stipulation that one of them shall not act without the
partnership, and in such case the claim shall be limited consent of all the others, each one may separately
to the value at which they were appraised. 1687) execute all acts of administration, but if any of them
should oppose the acts of the others, the decision of the
Art. 1796. The partnership shall be responsible to every majority shall prevail. In case of a tie, the matter shall be
partner for the amounts he may have disbursed on decided by the partners owning the controlling interest.
behalf of the partnership and for the corresponding
interest, from the time the expense are made; it shall Art. 1802. In case it should have been stipulated that
also answer to each partner for the obligations he may none of the managing partners shall act without the
have contracted in good faith in the interest of the consent of the others, the concurrence of all shall be
partnership business, and for risks in consequence of its necessary for the validity of the acts, and the absence or
management. 1688a) disability of any one of them cannot be alleged, unless
there is imminent danger of grave or irreparable injury
Art. 1797. The losses and profits shall be distributed in to the partnership. 1694)
conformity with the agreement. If only the share of each
partner in the profits has been agreed upon, the share of Art. 1803. When the manner of management has not
each in the losses shall be in the same proportion. been agreed upon, the following rules shall be observed:

In the absence of stipulation, the share of each partner 1) All the partners shall be considered agents
in the profits and losses shall be in proportion to what and whatever any one of them may do alone
54

shall bind the partnership, without prejudice 4) Whenever other circumstances render it
to the provisions of Article 1801. just and reasonable.

2) None of the partners may, without the SECTION 2. - Property Rights of a Partner
consent of the others, make any important
alteration in the immovable property of the Art. 1810. The property rights of a partner are:
partnership, even if it may be useful to the
partnership. But if the refusal of consent by 1) His rights in specific partnership property;
the other partners is manifestly prejudicial to
the interest of the partnership, the court's
intervention may be sought. 1695a) 2) His interest in the partnership; and

Art. 1804. Every partner may associate another person 3) His right to participate in the management.
with him in his share, but the associate shall not be
admitted into the partnership without the consent of all Art. 1811. A partner is co-owner with his partners of
the other partners, even if the partner having an specific partnership property.
associate should be a manager. 1696)
The incidents of this co-ownership are such that:
Art. 1805. The partnership books shall be kept, subject
to any agreement between the partners, at the principal 1) A partner, subject to the provisions of this
place of business of the partnership, and every partner Title and to any agreement between the
shall at any reasonable hour have access to and may partners, has an equal right with his partners
inspect and copy any of them. to possess specific partnership property for
partnership purposes; but he has no right to
Art. 1806. Partners shall render on demand true and full possess such property for any other purpose
information of all things affecting the partnership to any without the consent of his partners;
partner or the legal representative of any deceased
partner or of any partner under legal disability. 2) A partner's right in specific partnership
property is not assignable except in
Art. 1807. Every partner must account to the connection with the assignment of rights of all
partnership for any benefit, and hold as trustee for it the partners in the same property;
any profits derived by him without the consent of the
other partners from any transaction connected with the 3) A partner's right in specific partnership
formation, conduct, or liquidation of the partnership or property is not subject to attachment or
from any use by him of its property. execution, except on a claim against the
partnership. When partnership property is
Art. 1808. The capitalist partners cannot engage for attached for a partnership debt the partners,
their own account in any operation which is of the kind or any of them, or the representatives of a
of business in which the partnership is engaged, unless deceased partner, cannot claim any right
there is a stipulation to the contrary. under the homestead or exemption laws;

Any capitalist partner violating this prohibition shall 4) A partner's right in specific partnership
bring to the common funds any profits accruing to him property is not subject to legal support under
from his transactions, and shall personally bear all the Article 291.
losses.
Art. 1812. A partner's interest in the partnership is his
Art. 1809. Any partner shall have the right to a formal share of the profits and surplus.
account as to partnership affairs:
Art. 1813. A conveyance by a partner of his whole
1) If he is wrongfully excluded from the interest in the partnership does not of itself dissolve the
partnership business or possession of its partnership, or, as against the other partners in the
property by his co-partners; absence of agreement, entitle the assignee, during the
continuance of the partnership, to interfere in the
2) If the right exists under the terms of any management or administration of the partnership
agreement; business or affairs, or to require any information or
account of partnership transactions, or to inspect the
partnership books; but it merely entitles the assignee to
3) As provided by article 1807; receive in accordance with his contract the profits to
55

which the assigning partner would otherwise be However, any partner may enter into a separate
entitled. However, in case of fraud in the management of obligation to perform a partnership contract.
the partnership, the assignee may avail himself of the
usual remedies. Art. 1817. Any stipulation against the liability laid down
in the preceding article shall be void, except as among
In case of a dissolution of the partnership, the assignee the partners.
is entitled to receive his assignor's interest and may
require an account from the date only of the last account Art. 1818. Every partner is an agent of the partnership
agreed to by all the partners. for the purpose of its business, and the act of every
partner, including the execution in the partnership
Art. 1814. Without prejudice to the preferred rights of name of any instrument, for apparently carrying on in
partnership creditors under Article 1827, on due the usual way the business of the partnership of which
application to a competent court by any judgment he is a member binds the partnership, unless the
creditor of a partner, the court which entered the partner so acting has in fact no authority to act for the
judgment, or any other court, may charge the interest of partnership in the particular matter, and the person
the debtor partner with payment of the unsatisfied with whom he is dealing has knowledge of the fact that
amount of such judgment debt with interest thereon; he has no such authority.
and may then or later appoint a receiver of his share of
the profits, and of any other money due or to fall due to An act of a partner which is not apparently for the
him in respect of the partnership, and make all other carrying on of business of the partnership in the usual
orders, directions, accounts and inquiries which the way does not bind the partnership unless authorized by
debtor partner might have made, or which the the other partners.
circumstances of the case may require.
Except when authorized by the other partners or unless
The interest charged may be redeemed at any time they have abandoned the business, one or more but less
before foreclosure, or in case of a sale being directed by than all the partners have no authority to:
the court, may be purchased without thereby causing a
dissolution:
1) Assign the partnership property in trust for
creditors or on the assignee's promise to pay
1) With separate property, by any one or more the debts of the partnership;
of the partners; or
2) Dispose of the good-will of the business;
2) With partnership property, by any one or
more of the partners with the consent of all
the partners whose interests are not so 3) Do any other act which would make it
charged or sold. impossible to carry on the ordinary business
of a partnership;
Nothing in this Title shall be held to deprive a partner of
his right, if any, under the exemption laws, as regards 4) Confess a judgment;
his interest in the partnership.
5) Enter into a compromise concerning a
SECTION 3. - Obligations of the Partners partnership claim or liability;
WithRegard to Third Persons
6) Submit a partnership claim or liability to
Art. 1815. Every partnership shall operate under a firm arbitration;
name, which may or may not include the name of one or
more of the partners.
7) Renounce a claim of the partnership.
Those who, not being members of the partnership,
include their names in the firm name, shall be subject to No act of a partner in contravention of a restriction on
the liability of a partner. authority shall bind the partnership to persons having
knowledge of the restriction.
Art. 1816. All partners, including industrial ones, shall
be liable pro rata with all their property and after all the Art. 1819. Where title to real property is in the
partnership assets have been exhausted, for the partnership name, any partner may convey title to such
contracts which may be entered into in the name and property by a conveyance executed in the partnership
for the account of the partnership, under its signature name; but the partnership may recover such property
and by a person authorized to act for the partnership. unless the partner's act binds the partnership under the
provisions of the first paragraph of article 1818, or
56

unless such property has been conveyed by the grantee Art. 1823. The partnership is bound to make good the
or a person claiming through such grantee to a holder loss:
for value without knowledge that the partner, in making
the conveyance, has exceeded his authority. 1) Where one partner acting within the scope
of his apparent authority receives money or
Where title to real property is in the name of the property of a third person and misapplies it;
partnership, a conveyance executed by a partner, in his and
own name, passes the equitable interest of the
partnership, provided the act is one within the authority 2) Where the partnership in the course of its
of the partner under the provisions of the first business receives money or property of a third
paragraph of Article 1818. person and the money or property so received
is misapplied by any partner while it is in the
Where title to real property is in the name of one or custody of the partnership.
more but not all the partners, and the record does not
disclose the right of the partnership, the partners in Art. 1824. All partners are liable solidarily with the
whose name the title stands may convey title to such partnership for everything chargeable to the
property, but the partnership may recover such partnership under Articles 1822 and 1823.
property if the partners' act does not bind the
partnership under the provisions of the first paragraph
of Article 1818, unless the purchaser or his assignee, is a Art. 1825. When a person, by words spoken or written
holder for value, without knowledge. or by conduct, represents himself, or consents to
another representing him to anyone, as a partner in an
existing partnership or with one or more persons not
Where the title to real property is in the name of one or actual partners, he is liable to any such persons to
more or all the partners, or in a third person in trust for whom such representation has been made, who has, on
the partnership, a conveyance executed by a partner in the faith of such representation, given credit to the
the partnership name, or in his own name, passes the actual or apparent partnership, and if he has made such
equitable interest of the partnership, provided the act is representation or consented to its being made in a
one within the authority of the partner under the public manner he is liable to such person, whether the
provisions of the first paragraph of Article 1818. representation has or has not been made or
communicated to such person so giving credit by or
Where the title to real property is in the name of all the with the knowledge of the apparent partner making the
partners a conveyance executed by all the partners representation or consenting to its being made:
passes all their rights in such property.
1) When a partnership liability results, he is
Art. 1820. An admission or representation made by any liable as though he were an actual member of
partner concerning partnership affairs within the scope the partnership;
of his authority in accordance with this Title is evidence
against the partnership. 2) When no partnership liability results, he is
liable pro rata with the other persons, if any, so
Art. 1821. Notice to any partner of any matter relating consenting to the contract or representation as
to partnership affairs, and the knowledge of the partner to incur liability, otherwise separately.
acting in the particular matter, acquired while a partner
or then present to his mind, and the knowledge of any When a person has been thus represented to be a
other partner who reasonably could and should have partner in an existing partnership, or with one or more
communicated it to the acting partner, operate as notice persons not actual partners, he is an agent of the
to or knowledge of the partnership, except in the case of persons consenting to such representation to bind them
fraud on the partnership, committed by or with the to the same extent and in the same manner as though he
consent of that partner. were a partner in fact, with respect to persons who rely
upon the representation. When all the members of the
Art. 1822. Where, by any wrongful act or omission of existing partnership consent to the representation, a
any partner acting in the ordinary course of the partnership act or obligation results; but in all other
business of the partnership or with the authority of co- cases it is the joint act or obligation of the person acting
partners, loss or injury is caused to any person, not and the persons consenting to the representation.
being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same Art. 1826. A person admitted as a partner into an
extent as the partner so acting or omitting to act. existing partnership is liable for all the obligations of
the partnership arising before his admission as though
he had been a partner when such obligations were
57

incurred, except that this liability shall be satisfied only 3) By any event which makes it unlawful for
out of partnership property, unless there is a stipulation the business of the partnership to be carried
to the contrary. on or for the members to carry it on in
partnership;
Art. 1827. The creditors of the partnership shall be
preferred to those of each partner as regards the 4) When a specific thing which a partner had
partnership property. Without prejudice to this right, promised to contribute to the partnership,
the private creditors of each partner may ask the perishes before the delivery; in any case by the
attachment and public sale of the share of the latter in loss of the thing, when the partner who
the partnership assets. contributed it having reserved the ownership
thereof, has only transferred to the
CHAPTER 3 partnership the use or enjoyment of the same;
DISSOLUTION AND WINDING UP but the partnership shall not be dissolved by
the loss of the thing when it occurs after the
Art. 1828. The dissolution of a partnership is the change partnership has acquired the ownership
in the relation of the partners caused by any partner thereof;
ceasing to be associated in the carrying on as
distinguished from the winding up of the business. 5) By the death of any partner;

Art. 1829. On dissolution the partnership is not 6) By the insolvency of any partner or of the
terminated, but continues until the winding up of partnership;
partnership affairs is completed.
7) By the civil interdiction of any partner;
Art. 1830. Dissolution is caused:
8) By decree of court under the following
1) Without violation of the agreement between article. 1700a and 1701a)
the partners:
Art. 1831. On application by or for a partner the court
a) By the termination of the definite shall decree a dissolution whenever:
term or particular undertaking
specified in the agreement; 1) A partner has been declared insane in any
judicial proceeding or is shown to be of
b) By the express will of any partner, unsound mind;
who must act in good faith, when no
definite term or particular is 2) A partner becomes in any other way
specified; incapable of performing his part of the
partnership contract;
c) By the express will of all the
partners who have not assigned their 3) A partner has been guilty of such conduct as
interests or suffered them to be tends to affect prejudicially the carrying on of
charged for their separate debts, the business;
either before or after the termination
of any specified term or particular
undertaking; 4) A partner wilfully or persistently commits a
breach of the partnership agreement, or
otherwise so conducts himself in matters
d) By the expulsion of any partner relating to the partnership business that it is
from the business bona fide in not reasonably practicable to carry on the
accordance with such a power business in partnership with him;
conferred by the agreement between
the partners;
5) The business of the partnership can only be
carried on at a loss;
2) In contravention of the agreement between
the partners, where the circumstances do not
permit a dissolution under any other provision 6) Other circumstances render a dissolution
of this article, by the express will of any equitable.
partner at any time;
On the application of the purchaser of a partner's
interest under Article 1813 or 1814:
58

1) After the termination of the specified term had no knowledge or notice of the
or particular undertaking; dissolution; or

2) At any time if the partnership was a b) Though he had not so extended

partnership at will when the interest was credit, had nevertheless known of the
assigned or when the charging order was partnership prior to dissolution, and,
issued. having no knowledge or notice of
dissolution, the fact of dissolution
Art. 1832. Except so far as may be necessary to wind up had not been advertised in a
partnership affairs or to complete transactions begun newspaper of general circulation in
but not then finished, dissolution terminates all the place or in each place if more
authority of any partner to act for the partnership: than one) at which the partnership
business was regularly carried on.
1) With respect to the partners:
The liability of a partner under the first paragraph, No.
2, shall be satisfied out of partnership assets alone
a) When the dissolution is not by the when such partner had been prior to dissolution:
act, insolvency or death of a partner;
or
1) Unknown as a partner to the person with
whom the contract is made; and
b) When the dissolution is by such
act, insolvency or death of a partner,
in cases where article 1833 so 2) So far unknown and inactive in partnership
requires; affairs that the business reputation of the
partnership could not be said to have been in
any degree due to his connection with it.
2) With respect to persons not partners, as
declared in article 1834.
The partnership is in no case bound by any act of a
partner after dissolution:
Art. 1833. Where the dissolution is caused by the act,
death or insolvency of a partner, each partner is liable to
his co-partners for his share of any liability created by 1) Where the partnership is dissolved because
any partner acting for the partnership as if the it is unlawful to carry on the business, unless
partnership had not been dissolved unless: the act is appropriate for winding up
partnership affairs; or
1) The dissolution being by act of any partner,
the partner acting for the partnership had 2) Where the partner has become insolvent; or
knowledge of the dissolution; or
3) Where the partner has no authority to wind
2) The dissolution being by the death or up partnership affairs; except by a transaction
insolvency of a partner, the partner acting for with one who:
the partnership had knowledge or notice of
the death or insolvency. a) Had extended credit to the
partnership prior to dissolution and
Art. 1834. After dissolution, a partner can bind the had no knowledge or notice of his
partnership, except as provided in the third paragraph want of authority; or
of this article:
b) Had not extended credit to the
1) By any act appropriate for winding up partnership prior to dissolution, and,
partnership affairs or completing transactions having no knowledge or notice of his
unfinished at dissolution; want of authority, the fact of his want
of authority has not been advertised
in the manner provided for
2) By any transaction which would bind the advertising the fact of dissolution in
partnership if dissolution had not taken place, the first paragraph, No. 2
provided the other party to the transaction:
Nothing in this article shall affect the liability under
a) Had extended credit to the Article 1825 of any person who, after dissolution,
partnership prior to dissolution and represents himself or consents to another representing
59

him as a partner in a partnership engaged in carrying 2) The partners who have not caused the
business. dissolution wrongfully, if they all desire to
continue the business in the same name either
Art. 1835. The dissolution of the partnership does not of by themselves or jointly with others, may do
itself discharge the existing liability of any partner. so, during the agreed term for the partnership
and for that purpose may possess the
partnership property, provided they secure the
A partner is discharged from any existing liability upon payment by bond approved by the court, or
dissolution of the partnership by an agreement to that pay any partner who has caused the
effect between himself, the partnership creditor and the dissolution wrongfully, the value of his interest
person or partnership continuing the business; and in the partnership at the dissolution, less any
such agreement may be inferred from the course of damages recoverable under the second
dealing between the creditor having knowledge of the paragraph, No. 1 b) of this article, and in like
dissolution and the person or partnership continuing manner indemnify him against all present or
the business. future partnership liabilities.

The individual property of a deceased partner shall be 3) A partner who has caused the dissolution
liable for all obligations of the partnership incurred wrongfully shall have:
while he was a partner, but subject to the prior payment
of his separate debts.
a) If the business is not continued
Art. 1836. Unless otherwise agreed, the partners who under the provisions of the second
have not wrongfully dissolved the partnership or the paragraph, No. 2, all the rights of a
legal representative of the last surviving partner, not partner under the first paragraph,
insolvent, has the right to wind up the partnership subject to liability for damages in the
affairs, provided, however, that any partner, his legal second paragraph, No. 1 b), of this
representative or his assignee, upon cause shown, may article.
obtain winding up by the court.
b) If the business is continued under
Art. 1837. When dissolution is caused in any way, except the second paragraph, No. 2, of this
in contravention of the partnership agreement, each article, the right as against his co-
partner, as against his co-partners and all persons partners and all claiming through
claiming through them in respect of their interests in them in respect of their interests in
the partnership, unless otherwise agreed, may have the the partnership, to have the value of
partnership property applied to discharge its liabilities, his interest in the partnership, less
and the surplus applied to pay in cash the net amount any damage caused to his co-
owing to the respective partners. But if dissolution is partners by the dissolution,
caused by expulsion of a partner, bona fide under the ascertained and paid to him in cash,
partnership agreement and if the expelled partner is or the payment secured by a bond
discharged from all partnership liabilities, either by approved by the court, and to be
payment or agreement under the second paragraph of released from all existing liabilities of
Article 1835, he shall receive in cash only the net the partnership; but in ascertaining
amount due him from the partnership. the value of the partner's interest the
value of the good-will of the business
When dissolution is caused in contravention of the shall not be considered.
partnership agreement the rights of the partners shall
be as follows: Art. 1838. Where a partnership contract is rescinded on
the ground of the fraud or misrepresentation of one of
1) Each partner who has not caused the parties thereto, the party entitled to rescind is,
dissolution wrongfully shall have: without prejudice to any other right, entitled:

1) To a lien on, or right of retention of, the

a) All the rights specified in the first surplus of the partnership property after
paragraph of this article, and satisfying the partnership liabilities to third
persons for any sum of money paid by him for
b) The right, as against each partner the purchase of an interest in the partnership
who has caused the dissolution and for any capital or advances contributed by
wrongfully, to damages breach of the him;
agreement.
60

2) To stand, after all liabilities to third persons 7) The individual property of a deceased
have been satisfied, in the place of the partner shall be liable for the contributions
creditors of the partnership for any payments specified in No. 4.
made by him in respect of the partnership
liabilities; and 8) When partnership property and the
individual properties of the partners are in
3) To be indemnified by the person guilty of possession of a court for distribution,
the fraud or making the representation against partnership creditors shall have priority on
all debts and liabilities of the partnership. partnership property and separate creditors
on individual property, saving the rights of lien
Art. 1839. In settling accounts between the partners or secured creditors.
after dissolution, the following rules shall be observed,
subject to any agreement to the contrary: 9) Where a partner has become insolvent or
his estate is insolvent, the claims against his
1) The assets of the partnership are: separate property shall rank in the following
order:

a) The partnership property,

a) Those owing to separate creditors;
b) The contributions of the partners
necessary for the payment of all the b) Those owing to partnership
liabilities specified in No. 2. creditors;

2) The liabilities of the partnership shall rank c) Those owing to partners by way of
in order of payment, as follows: contribution.

a) Those owing to creditors other Art. 1840. In the following cases creditors of the
than partners, dissolved partnership are also creditors of the person or
partnership continuing the business:
b) Those owing to partners other
than for capital and profits, 1) When any new partner is admitted into an
existing partnership, or when any partner
c) Those owing to partners in respect retires and assigns or the representative of the
of capital, deceased partner assigns) his rights in
partnership property to two or more of the
partners, or to one or more of the partners and
d) Those owing to partners in one or more third persons, if the business is
respect of profits. continued without liquidation of the
partnership affairs;
3) The assets shall be applied in the order of
their declaration in No. 1 of this article to the 2) When all but one partner retire and assign
satisfaction of the liabilities. or the representative of a deceased partner
assigns) their rights in partnership property to
4) The partners shall contribute, as provided the remaining partner, who continues the
by article 1797, the amount necessary to business without liquidation of partnership
satisfy the liabilities. affairs, either alone or with others;

5) An assignee for the benefit of creditors or 3) When any partner retires or dies and the
any person appointed by the court shall have business of the dissolved partnership is
the right to enforce the contributions specified continued as set forth in Nos. 1 and 2 of this
in the preceding number. article, with the consent of the retired partners
or the representative of the deceased partner,
6) Any partner or his legal representative shall but without any assignment of his right in
have the right to enforce the contributions partnership property;
specified in No. 4, to the extent of the amount
which he has paid in excess of his share of the 4) When all the partners or their
liability. representatives assign their rights in
partnership property to one or more third
61

persons who promise to pay the debts and dissolved partnership; provided that the creditors of the
who continue the business of the dissolved dissolved partnership as against the separate creditors,
partnership; or the representative of the retired or deceased partner,
shall have priority on any claim arising under this
5) When any partner wrongfully causes a article, as provided Article 1840, third paragraph.
dissolution and the remaining partners
continue the business under the provisions of Art. 1842. The right to an account of his interest shall
article 1837, second paragraph, No. 2, either accrue to any partner, or his legal representative as
alone or with others, and without liquidation against the winding up partners or the surviving
of the partnership affairs; partners or the person or partnership continuing the
business, at the date of dissolution, in the absence of any
6) When a partner is expelled and the agreement to the contrary.
remaining partners continue the business
either alone or with others without liquidation
of the partnership affairs. CHAPTER 4
LIMITED PARTNERSHIP
The liability of a third person becoming a partner in the
partnership continuing the business, under this article, Art. 1843. A limited partnership is one formed by two or
to the creditors of the dissolved partnership shall be more persons under the provisions of the following
satisfied out of the partnership property only, unless article, having as members one or more general
there is a stipulation to the contrary. partners and one or more limited partners. The limited
partners as such shall not be bound by the obligations of
the partnership.
When the business of a partnership after dissolution is
continued under any conditions set forth in this article
the creditors of the dissolved partnership, as against the Art. 1844. Two or more persons desiring to form a
separate creditors of the retiring or deceased partner or limited partnership shall:
the representative of the deceased partner, have a prior
right to any claim of the retired partner or the 1) Sign and swear to a certificate, which shall
representative of the deceased partner against the state -
person or partnership continuing the business, on
account of the retired or deceased partner's interest in a) The name of the partnership,
the dissolved partnership or on account of any adding thereto the word "Limited";
consideration promised for such interest or for his right
in partnership property.
b) The character of the business;
Nothing in this article shall be held to modify any right
of creditors to set aside any assignment on the ground c) The location of the principal place
of fraud. of business;

The use by the person or partnership continuing the d) The name and place of residence
business of the partnership name, or the name of a of each member, general and limited
deceased partner as part thereof, shall not of itself make partners being respectively
the individual property of the deceased partner liable designated;
for any debts contracted by such person or partnership.
e) The term for which the
Art. 1841. When any partner retires or dies, and the partnership is to exist;
business is continued under any of the conditions set
forth in the preceding article, or in Article 1837, second f) The amount of cash and a
paragraph, No. 2, without any settlement of accounts as description of and the agreed value
between him or his estate and the person or of the other property contributed by
partnership continuing the business, unless otherwise each limited partner;
agreed, he or his legal representative as against such
person or partnership may have the value of his interest g) The additional contributions, if
at the date of dissolution ascertained, and shall receive any, to be made by each limited
as an ordinary creditor an amount equal to the value of partner and the times at which or
his interest in the dissolved partnership with interest, events on the happening of which
or, at his option or at the option of his legal they shall be made;
representative, in lieu of interest, the profits
attributable to the use of his right in the property of the
62

h) The time, if agreed upon, when the A limited partner whose surname appears in a
contribution of each limited partner partnership name contrary to the provisions of the first
is to be returned; paragraph is liable as a general partner to partnership
creditors who extend credit to the partnership without
i) The share of the profits or the actual knowledge that he is not a general partner.
other compensation by way of
income which each limited partner Art. 1847. If the certificate contains a false statement,
shall receive by reason of his one who suffers loss by reliance on such statement may
contribution; hold liable any party to the certificate who knew the
statement to be false:
j) The right, if given, of a limited
partner to substitute an assignee as 1) At the time he signed the certificate, or
contributor in his place, and the
terms and conditions of the 2) Subsequently, but within a sufficient time
substitution; before the statement was relied upon to enable
him to cancel or amend the certificate, or to
k) The right, if given, of the partners file a petition for its cancellation or
to admit additional limited partners; amendment as provided in Article 1865.

l) The right, if given, of one or more Art. 1848. A limited partner shall not become liable as a
of the limited partners to priority general partner unless, in addition to the exercise of his
over other limited partners, as to rights and powers as a limited partner, he takes part in
contributions or as to compensation the control of the business.
by way of income, and the nature of
such priority; Art. 1849. After the formation of a lifted partnership,
additional limited partners may be admitted upon filing
m) The right, if given, of the an amendment to the original certificate in accordance
remaining general partner or with the requirements of Article 1865.
partners to continue the business on
the death, retirement, civil Art. 1850. A general partner shall have all the rights and
interdiction, insanity or insolvency of powers and be subject to all the restrictions and
a general partner; and liabilities of a partner in a partnership without limited
partners. However, without the written consent or
The right, if given, of a limited ratification of the specific act by all the limited partners,
partner to demand and receive a general partner or all of the general partners have no
property other than cash in return authority to:
for his contribution.
1) Do any act in contravention of the
2) File for record the certificate in the Office of certificate;
the Securities and Exchange Commission.
A limited partnership is formed if there has been 2) Do any act which would make it impossible
substantial compliance in good faith with the foregoing to carry on the ordinary business of the
requirements. partnership;

Art. 1845. The contributions of a limited partner may be 3) Confess a judgment against the partnership;
cash or property, but not services.
4) Possess partnership property, or assign
Art. 1846. The surname of a limited partner shall not their rights in specific partnership property,
appear in the partnership name unless: for other than a partnership purpose;

1) It is also the surname of a general partner, 5) Admit a person as a general partner;

or
6) Admit a person as a limited partner, unless
2) Prior to the time when the limited partner the right so to do is given in the certificate;
became such, the business has been carried on
under a name in which his surname appeared.
7) Continue the business with partnership
property on the death, retirement, insanity,
63

civil interdiction or insolvency of a general 1) Receive or hold as collateral security and

partner, unless the right so to do is given in the partnership property, or
certificate.
2) Receive from a general partner or the
Art. 1851. A limited partner shall have the same rights partnership any payment, conveyance, or
as a general partner to: release from liability if at the time the assets of
the partnership are not sufficient to discharge
1) Have the partnership books kept at the partnership liabilities to persons not claiming
principal place of business of the partnership, as general or limited partners.
and at a reasonable hour to inspect and copy
any of them; The receiving of collateral security, or payment,
conveyance, or release in violation of the foregoing
2) Have on demand true and full information provisions is a fraud on the creditors of the partnership.
of all things affecting the partnership, and a
formal account of partnership affairs Art. 1855. Where there are several limited partners the
whenever circumstances render it just and members may agree that one or more of the limited
reasonable; and partners shall have a priority over other limited
partners as to the return of their contributions, as to
3) Have dissolution and winding up by decree their compensation by way of income, or as to any other
of court. matter. If such an agreement is made it shall be stated in
the certificate, and in the absence of such a statement all
the limited partners shall stand upon equal footing.
A limited partner shall have the right to receive a share
of the profits or other compensation by way of income,
and to the return of his contribution as provided in Art. 1856. A limited partner may receive from the
Articles 1856 and 1857. partnership the share of the profits or the compensation
by way of income stipulated for in the certificate;
provided that after such payment is made, whether
Art. 1852. Without prejudice to the provisions of Article from property of the partnership or that of a general
1848, a person who has contributed to the capital of a partner, the partnership assets are in excess of all
business conducted by a person or partnership liabilities of the partnership except liabilities to limited
erroneously believing that he has become a limited partners on account of their contributions and to
partner in a limited partnership, is not, by reason of his general partners.
exercise of the rights of a limited partner, a general
partner with the person or in the partnership carrying
on the business, or bound by the obligations of such Art. 1857. A limited partner shall not receive from a
person or partnership, provided that on ascertaining general partner or out of partnership property any part
the mistake he promptly renounces his interest in the of his contributions until:
profits of the business, or other compensation by way of
income. 1) All liabilities of the partnership, except
liabilities to general partners and to limited
Art. 1853. A person may be a general partner and a partners on account of their contributions,
limited partner in the same partnership at the same have been paid or there remains property of
time, provided that this fact shall be stated in the the partnership sufficient to pay them;
certificate provided for in Article 1844.
2) The consent of all members is had, unless
A person who is a general, and also at the same time a the return of the contribution may be
limited partner, shall have all the rights and powers and rightfully demanded under the provisions of
be subject to all the restrictions of a general partner; the second paragraph; and
except that, in respect to his contribution, he shall have
the rights against the other members which he would 3) The certificate is cancelled or so amended
have had if he were not also a general partner. as to set forth the withdrawal or reduction.

Art. 1854. A limited partner also may loan money to and Subject to the provisions of the first paragraph, a limited
transact other business with the partnership, and, partner may rightfully demand the return of his
unless he is also a general partner, receive on account of contribution:
resulting claims against the partnership, with general
creditors, a pro rata share of the assets. No limited 1) On the dissolution of a partnership; or
partner shall in respect to any such claim:
64

2) When the date specified in the certificate When a contributor has rightfully received the return in
for its return has arrived, or whole or in part of the capital of his contribution, he is
nevertheless liable to the partnership for any sum, not
3) After he has six months' notice in writing to in excess of such return with interest, necessary to
all other members, if no time is specified in the discharge its liabilities to all creditors who extended
certificate, either for the return of the credit or whose claims arose before such return.
contribution or for the dissolution of the
partnership. Art. 1859. A limited partner's interest is assignable.

In the absence of any statement in the certificate to the A substituted limited partner is a person admitted to all
contrary or the consent of all members, a limited the rights of a limited partner who has died or has
partner, irrespective of the nature of his contribution, assigned his interest in a partnership.
has only the right to demand and receive cash in return
for his contribution. An assignee, who does not become a substituted limited
partner, has no right to require any information or
A limited partner may have the partnership dissolved account of the partnership transactions or to inspect the
and its affairs wound up when: partnership books; he is only entitled to receive the
share of the profits or other compensation by way of
1) He rightfully but unsuccessfully demands income, or the return of his contribution, to which his
the return of his contribution, or assignor would otherwise be entitled.

2) The other liabilities of the partnership have An assignee shall have the right to become a substituted
not been paid, or the partnership property is limited partner if all the members consent thereto or if
insufficient for their payment as required by the assignor, being thereunto empowered by the
the first paragraph, No. 1, and the limited certificate, gives the assignee that right.
partner would otherwise be entitled to the
return of his contribution. An assignee becomes a substituted limited partner
when the certificate is appropriately amended in
Art. 1858. A limited partner is liable to the partnership: accordance with Article 1865.

1) For the difference between his contribution The substituted limited partner has all the rights and
as actually made and that stated in the powers, and is subject to all the restrictions and
certificate as having been made; and liabilities of his assignor, except those liabilities of which
he was ignorant at the time he became a limited partner
and which could not be ascertained from the certificate.
2) For any unpaid contribution which he
agreed in the certificate to make in the future
at the time and on the conditions stated in the The substitution of the assignee as a limited partner
certificate. does not release the assignor from liability to the
partnership under Articles 1847 and 1848.
A limited partner holds as trustee for the partnership:
Art. 1860. The retirement, death, insolvency, insanity or
civil interdiction of a general partner dissolves the
1) Specific property stated in the certificate as partnership, unless the business is continued by the
contributed by him, but which was not remaining general partners:
contributed or which has been wrongfully
returned, and
1) Under a right so to do stated in the
certificate, or
2) Money or other property wrongfully paid or 2) With the consent of all members.
conveyed to him on account of his
contribution.
Art. 1861. On the death of a limited partner his executor
or administrator shall have all the rights of a limited
The liabilities of a limited partner as set forth in this partner for the purpose of setting his estate, and such
article can be waived or compromised only by the power as the deceased had to constitute his assignee a
consent of all members; but a waiver or compromise substituted limited partner.
shall not affect the right of a creditor of a partnership
who extended credit or whose claim arose after the
filing and before a cancellation or amendment of the The estate of a deceased limited partner shall be liable
certificate, to enforce such liabilities. for all his liabilities as a limited partner.
65

Art. 1862. On due application to a court of competent 1) There is a change in the name of the
jurisdiction by any creditor of a limited partner, the partnership or in the amount or character of
court may charge the interest of the indebted limited the contribution of any limited partner;
partner with payment of the unsatisfied amount of such
claim, and may appoint a receiver, and make all other 2) A person is substituted as a limited partner;
orders, directions and inquiries which the
circumstances of the case may require.
3) An additional limited partner is admitted;
The interest may be redeemed with the separate
property of any general partner, but may not be 4) A person is admitted as a general partner;
redeemed with partnership property.
5) A general partner retires, dies, becomes
The remedies conferred by the first paragraph shall not insolvent or insane, or is sentenced to civil
be deemed exclusive of others which may exist. interdiction and the business is continued
under Article 1860;
Nothing in this Chapter shall be held to deprive a limited
partner of his statutory exemption. 6) There is a change in the character of the
business of the partnership;
Art. 1863. In setting accounts after dissolution the
liabilities of the partnership shall be entitled to payment 7) There is a false or erroneous statement in
in the following order: the certificate;

1) Those to creditors, in the order of priority 8) There is a change in the time as stated in
as provided by law, except those to limited the certificate for the dissolution of the
partners on account of their contributions, and partnership or for the return of a contribution;
to general partners;
9) A time is fixed for the dissolution of the
2) Those to limited partners in respect to their partnership, or the return of a contribution, no
share of the profits and other compensation by time having been specified in the certificate, or
way of income on their contributions;
10) The members desire to make a change in
3) Those to limited partners in respect to the any other statement in the certificate in order
capital of their contributions; that it shall accurately represent the
agreement among them.
4) Those to general partners other than for
capital and profits; Art. 1865. The writing to amend a certificate shall:

5) Those to general partners in respect to 1) Conform to the requirements of Article

profits; 1844 as far as necessary to set forth clearly the
change in the certificate which it is desired to
make; and
6) Those to general partners in respect to
capital.
2) Be signed and sworn to by all members, and
an amendment substituting a limited partner
Subject to any statement in the certificate or to or adding a limited or general partner shall be
subsequent agreement, limited partners share in the signed also by the member to be substituted or
partnership assets in respect to their claims for capital, added, and when a limited partner is to be
and in respect to their claims for profits or for substituted, the amendment shall also be
compensation by way of income on their contribution signed by the assigning limited partner.
respectively, in proportion to the respective amounts of
such claims.
The writing to cancel a certificate shall be signed by all
members.
Art. 1864. The certificate shall be cancelled when the
partnership is dissolved or all limited partners cease to
be such. A person desiring the cancellation or amendment of a
certificate, if any person designated in the first and
second paragraphs as a person who must execute the
A certificate shall be amended when:
66

writing refuses to do so, may petition the court to order

a cancellation or amendment thereof.

If the court finds that the petitioner has a right to have

the writing executed by a person who refuses to do so, it
shall order the Office of the Securities and Exchange
Commission where the certificate is recorded, to record
the cancellation or amendment of the certificate; and
when the certificate is to be amended, the court shall
also cause to be filed for record in said office a certified
copy of its decree setting forth the amendment.

A certificate is amended or cancelled when there is filed

for record in the Office of the Securities and Exchange
Commission, where the certificate is recorded:

1) A writing in accordance with the provisions

of the first or second paragraph, or

2) A certified copy of the order of the court in

accordance with the provisions of the fourth
paragraph;

3) After the certificate is duly amended in

accordance with this article, the amended
certified shall thereafter be for all purposes
the certificate provided for in this Chapter.

Art. 1866. A contributor, unless he is a general partner,

is not a proper party to proceedings by or against a
partnership, except where the object is to enforce a
limited partner's right against or liability to the
partnership.

Art. 1867. A limited partnership formed under the law

prior to the effectivity of this Code, may become a
limited partnership under this Chapter by complying
with the provisions of Article 1844, provided the
certificate sets forth:

1) The amount of the original contribution of

each limited partner, and the time when the
contribution was made; and

2) That the property of the partnership

exceeds the amount sufficient to discharge its
liabilities to persons not claiming as general or
limited partners by an amount greater than
the sum of the contributions of its limited
partners.

A limited partnership formed under the law prior to the

effectivity of this Code, until or unless it becomes a
limited partnership under this Chapter, shall continue to
be governed by the provisions of the old law.
Title X. - AGENCY
67

CHAPTER 1 Art. 1876. An agency is either general or special.

NATURE, FORM AND KINDS OF AGENCY
The former comprises all the business of the principal.
Art. 1868. By the contract of agency a person binds The latter, one or more specific transactions. 1712)
himself to render some service or to do something in
representation or on behalf of another, with the consent
or authority of the latter. 1709a) Art. 1877. An agency couched in general terms
comprises only acts of administration, even if the
principal should state that he withholds no power or
Art. 1869. Agency may be express, or implied from the that the agent may execute such acts as he may consider
acts of the principal, from his silence or lack of action, or appropriate, or even though the agency should
his failure to repudiate the agency, knowing that authorize a general and unlimited management.
another person is acting on his behalf without authority.
Art. 1878. Special powers of attorney are necessary in
Agency may be oral, unless the law requires a specific the following cases:
form.
1) To make such payments as are not usually
Art. 1870. Acceptance by the agent may also be express, considered as acts of administration;
or implied from his acts which carry out the agency, or
from his silence or inaction according to the
circumstances. 2) To effect novations which put an end to
obligations already in existence at the time the
agency was constituted;
Art. 1871. Between persons who are present, the
acceptance of the agency may also be implied if the
principal delivers his power of attorney to the agent and 3) To compromise, to submit questions to
the latter receives it without any objection. arbitration, to renounce the right to appeal
from a judgment, to waive objections to the
venue of an action or to abandon a
Art. 1872. Between persons who are absent, the prescription already acquired;
acceptance of the agency cannot be implied from the
silence of the agent, except:
4) To waive any obligation gratuitously;
1) When the principal transmits his power of
attorney to the agent, who receives it without 5) To enter into any contract by which the
any objection; ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
2) When the principal entrusts to him by letter
or telegram a power of attorney with respect
to the business in which he is habitually 6) To make gifts, except customary ones for
engaged as an agent, and he did not reply to charity or those made to employees in the
the letter or telegram. business managed by the agent;

Art. 1873. If a person specially informs another or states 7) To loan or borrow money, unless the latter
by public advertisement that he has given a power of act be urgent and indispensable for the
attorney to a third person, the latter thereby becomes a preservation of the things which are under
duly authorized agent, in the former case with respect administration;
to the person who received the special information, and
in the latter case with regard to any person. 8) To lease any real property to another
person for more than one year;
The power shall continue to be in full force until the
notice is rescinded in the same manner in which it was 9) To bind the principal to render some service
given. without compensation;

Art. 1874. When a sale of a piece of land or any interest 10) To bind the principal in a contract of
therein is through an agent, the authority of the latter partnership;
shall be in writing; otherwise, the sale shall be void.
11) To obligate the principal as a guarantor or
Art. 1875. Agency is presumed to be for a compensation, surety;
unless there is proof to the contrary.
68

12) To create or convey real rights over Art. 1886. Should there be a stipulation that the agent
immovable property; shall advance the necessary funds, he shall be bound to
do so except when the principal is insolvent.
13) To accept or repudiate an inheritance;
Art. 1887. In the execution of the agency, the agent shall
14) To ratify or recognize obligations act in accordance with the instructions of the principal.
contracted before the agency;
In default thereof, he shall do all that a good father of a
15) Any other act of strict dominion. family would do, as required by the nature of the
business. 1719)
Art. 1879. A special power to sell excludes the power to
mortgage; and a special power to mortgage does not Art. 1888. An agent shall not carry out an agency if its
include the power to sell. execution would manifestly result in loss or damage to
the principal.
Art. 1880. A special power to compromise does not
authorize submission to arbitration. 1713a) Art. 1889. The agent shall be liable for damages if, there
being a conflict between his interests and those of the
principal, he should prefer his own.
Art. 1881. The agent must act within the scope of his
authority. He may do such acts as may be conducive to
the accomplishment of the purpose of the agency. Art. 1890. If the agent has been empowered to borrow
1714a) money, he may himself be the lender at the current rate
of interest. If he has been authorized to lend money at
interest, he cannot borrow it without the consent of the
Art. 1882. The limits of the agent's authority shall not be principal.
considered exceeded should it have been performed in a
manner more advantageous to the principal than that
specified by him. 1715) Art. 1891. Every agent is bound to render an account of
his transactions and to deliver to the principal whatever
he may have received by virtue of the agency, even
Art. 1883. If an agent acts in his own name, the principal though it may not be owing to the principal.
has no right of action against the persons with whom
the agent has contracted; neither have such persons
against the principal. Every stipulation exempting the agent from the
obligation to render an account shall be void. 1720a)
In such case the agent is the one directly bound in favor
of the person with whom he has contracted, as if the Art. 1892. The agent may appoint a substitute if the
transaction were his own, except when the contract principal has not prohibited him from doing so; but he
involves things belonging to the principal. shall be responsible for the acts of the substitute:

The provisions of this article shall be understood to be 1) When he was not given the power to
without prejudice to the actions between the principal appoint one;
and agent.
2) When he was given such power, but without
CHAPTER 2 designating the person, and the person
OBLIGATIONS OF THE AGENT appointed was notoriously incompetent or
insolvent.
Art. 1884. The agent is bound by his acceptance to carry
out the agency, and is liable for the damages which, All acts of the substitute appointed against the
through his non-performance, the principal may suffer. prohibition of the principal shall be void. 1721)

He must also finish the business already begun on the Art. 1893. In the cases mentioned in Nos. 1 and 2 of the
death of the principal, should delay entail any danger. preceding article, the principal may furthermore bring
1718) an action against the substitute with respect to the
obligations which the latter has contracted under the
Art. 1885. In case a person declines an agency, he is substitution. 1722a)
bound to observe the diligence of a good father of a
family in the custody and preservation of the goods Art. 1894. The responsibility of two or more agents,
forwarded to him by the owner until the latter should even though they have been appointed simultaneously,
appoint an agent or take charge of the goods.
69

is not solidary, if solidarity has not been expressly statement of the damage and deterioration suffered by
stipulated. 1723) the same.

Art. 1895. If solidarity has been agreed upon, each of the Art. 1904. The commission agent who handles goods of
agents is responsible for the non-fulfillment of agency, the same kind and mark, which belong to different
and for the fault or negligence of his fellows agents, owners, shall distinguish them by countermarks, and
except in the latter case when the fellow agents acted designate the merchandise respectively belonging to
beyond the scope of their authority. each principal.

Art. 1896. The agent owes interest on the sums he has Art. 1905. The commission agent cannot, without the
applied to his own use from the day on which he did so, express or implied consent of the principal, sell on
and on those which he still owes after the credit. Should he do so, the principal may demand from
extinguishment of the agency. 1724a) him payment in cash, but the commission agent shall be
entitled to any interest or benefit, which may result
Art. 1897. The agent who acts as such is not personally from such sale.
liable to the party with whom he contracts, unless he
expressly binds himself or exceeds the limits of his Art. 1906. Should the commission agent, with authority
authority without giving such party sufficient notice of of the principal, sell on credit, he shall so inform the
his powers. 1725) principal, with a statement of the names of the buyers.
Should he fail to do so, the sale shall be deemed to have
Art. 1898. If the agent contracts in the name of the been made for cash insofar as the principal is
principal, exceeding the scope of his authority, and the concerned.
principal does not ratify the contract, it shall be void if
the party with whom the agent contracted is aware of Art. 1907. Should the commission agent receive on a
the limits of the powers granted by the principal. In this sale, in addition to the ordinary commission, another
case, however, the agent is liable if he undertook to called a guarantee commission, he shall bear the risk of
secure the principal's ratification. collection and shall pay the principal the proceeds of the
sale on the same terms agreed upon with the purchaser.
Art. 1899. If a duly authorized agent acts in accordance
with the orders of the principal, the latter cannot set up Art. 1908. The commission agent who does not collect
the ignorance of the agent as to circumstances whereof the credits of his principal at the time when they
he himself was, or ought to have been, aware. become due and demandable shall be liable for
damages, unless he proves that he exercised due
Art. 1900. So far as third persons are concerned, an act diligence for that purpose.
is deemed to have been performed within the scope of
the agent's authority, if such act is within the terms of Art. 1909. The agent is responsible not only for fraud,
the power of attorney, as written, even if the agent has but also for negligence, which shall be judged with more
in fact exceeded the limits of his authority according to or less rigor by the courts, according to whether the
an understanding between the principal and the agent. agency was or was not for a compensation. 1726)

Art. 1901. A third person cannot set up the fact that the CHAPTER 3
agent has exceeded his powers, if the principal has OBLIGATIONS OF THE PRINCIPAL
ratified, or has signified his willingness to ratify the
agent's acts. Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within
Art. 1902. A third person with whom the agent wishes the scope of his authority.
to contract on behalf of the principal may require the
presentation of the power of attorney, or the As for any obligation wherein the agent has exceeded
instructions as regards the agency. Private or secret his power, the principal is not bound except when he
orders and instructions of the principal do not prejudice ratifies it expressly or tacitly. 1727)
third persons who have relied upon the power of
attorney or instructions shown them. Art. 1911. Even when the agent has exceeded his
authority, the principal is solidarily liable with the agent
Art. 1903. The commission agent shall be responsible if the former allowed the latter to act as though he had
for the goods received by him in the terms and full powers.
conditions and as described in the consignment, unless
upon receiving them he should make a written
70

Art. 1912. The principal must advance to the agent, 4) When it was stipulated that the expenses
should the latter so request, the sums necessary for the would be borne by the agent, or that the latter
execution of the agency. would be allowed only a certain sum.

Should the agent have advanced them, the principal CHAPTER 4

must reimburse him therefor, even if the business or MODES OF EXTINGUISHMENT OF AGENCY
undertaking was not successful, provided the agent is
free from all fault. Art. 1919. Agency is extinguished:

The reimbursement shall include interest on the sums 1) By its revocation;

advanced, from the day on which the advance was made.
1728) 2) By the withdrawal of the agent;

Art. 1913. The principal must also indemnify the agent 3) By the death, civil interdiction, insanity or
for all the damages which the execution of the agency insolvency of the principal or of the agent;
may have caused the latter, without fault or negligence
on his part. 1729)
4) By the dissolution of the firm or corporation
which entrusted or accepted the agency;
Art. 1914. The agent may retain in pledge the things
which are the object of the agency until the principal
effects the reimbursement and pays the indemnity set 5) By the accomplishment of the object or
forth in the two preceding articles. 1730) purpose of the agency;

Art. 1915. If two or more persons have appointed an 6) By the expiration of the period for which
agent for a common transaction or undertaking, they the agency was constituted. 1732a)
shall be solidarily liable to the agent for all the
consequences of the agency. 1731) Art. 1920. The principal may revoke the agency at will,
and compel the agent to return the document
Art. 1916. When two persons contract with regard to evidencing the agency. Such revocation may be express
the same thing, one of them with the agent and the or implied. 1733a)
other with the principal, and the two contracts are
incompatible with each other, that of prior date shall be Art. 1921. If the agency has been entrusted for the
preferred, without prejudice to the provisions of Article purpose of contracting with specified persons, its
1544. revocation shall not prejudice the latter if they were not
given notice thereof. 1734)
Art. 1917. In the case referred to in the preceding
article, if the agent has acted in good faith, the principal Art. 1922. If the agent had general powers, revocation of
shall be liable in damages to the third person whose the agency does not prejudice third persons who acted
contract must be rejected. If the agent acted in bad faith, in good faith and without knowledge of the revocation.
he alone shall be responsible. Notice of the revocation in a newspaper of general
circulation is a sufficient warning to third persons.
Art. 1918. The principal is not liable for the expenses
incurred by the agent in the following cases: Art. 1923. The appointment of a new agent for the same
business or transaction revokes the previous agency
1) If the agent acted in contravention of the from the day on which notice thereof was given to the
principal's instructions, unless the latter former agent, without prejudice to the provisions of the
should wish to avail himself of the benefits two preceding articles. 1735a)
derived from the contract;
Art. 1924. The agency is revoked if the principal directly
2) When the expenses were due to the fault of manages the business entrusted to the agent, dealing
the agent; directly with third persons.

3) When the agent incurred them with Art. 1925. When two or more principals have granted a
knowledge that an unfavorable result would power of attorney for a common transaction, any one of
ensue, if the principal was not aware thereof; them may revoke the same without the consent of the
others.
71

Art. 1926. A general power of attorney is revoked by a distribute to the holders of such shares, dividends, or
special one granted to another agent, as regards the allotments of the surplus profits on the basis of the
special matter involved in the latter. shares held. All other corporations are nonstock
corporations.
Art. 1927. An agency cannot be revoked if a bilateral
contract depends upon it, or if it is the means of SEC. 4. Corporations Created by Special Laws or
fulfilling an obligation already contracted, or if a partner Charters. – Corporations created by special laws or
is appointed manager of a partnership in the contract of charters shall be governed primarily by the provisions
partnership and his removal from the management is of the special law or charter creating them or applicable
unjustifiable. to them, supplemented by the provisions of this Code,
insofar as they are applicable.
Art. 1928. The agent may withdraw from the agency by
giving due notice to the principal. If the latter should SEC. 5. Corporators and Incorporators, Stockholders
suffer any damage by reason of the withdrawal, the and Members. – Corporators are those who compose a
agent must indemnify him therefor, unless the agent corporation, whether as stockholders or shareholders in
should base his withdrawal upon the impossibility of a stock corporation or as members in a nonstock
continuing the performance of the agency without grave corporation. Incorporators are those stockholders or
detriment to himself. 1736a) members mentioned in the articles of incorporation as
originally forming and composing the corporation and
Art. 1929. The agent, even if he should withdraw from who are signatories thereof.
the agency for a valid reason, must continue to act until
the principal has had reasonable opportunity to take the SEC. 6. Classification of Shares. – The classification of
necessary steps to meet the situation. 1737a) shares, their corresponding rights, privileges, or
restrictions, and their stated par value, if any, must be
Art. 1930. The agency shall remain in full force and indicated in the articles of incorporation. Each share
effect even after the death of the principal, if it has been shall be equal in all respects to every other share, except
constituted in the common interest of the latter and of as otherwise provided in the articles of incorporation
the agent, or in the interest of a third person who has and in the certificate of stock.
accepted the stipulation in his favor.
The shares in stock corporations may be divided into
Art. 1931. Anything done by the agent, without classes or series of shares, or both. No share may be
knowledge of the death of the principal or of any other deprived of voting rights except those classified and
cause which extinguishes the agency, is valid and shall issued as “preferred” or “redeemable” shares, unless
be fully effective with respect to third persons who may otherwise provided in this Code: Provided, That there
have contracted with him in good faith. 1738) shall always be a class or series of shares with complete
voting rights.
Art. 1932. If the agent dies, his heirs must notify the
principal thereof, and in the meantime adopt such Holders of nonvoting shares shall nevertheless be
measures as the circumstances may demand in the entitled to vote on the following matters:
interest of the latter. 1739)
a) Amendment of the articles of incorporation;
CORPCODE GENERAL PROVISIONS DEFINITIONS AND
CLASSIFICATIONS b) Adoption and amendment of bylaws;

SECTION. 1. Title of the Code. – This Code shall be c) Sale, lease, exchange, mortgage, pledge, or other
known as the “Revised Corporation Code of the disposition of all or substantially all of the corporate
Philippines”. property;

SEC. 2. Corporation Defined. – A corporation is an d) Incurring, creating, or increasing bonded

artificial being created by operation of law, having the indebtedness;
right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to e) Increase or decrease of authorized capital stock;
its existence.
f) Merger or consolidation of the corporation with
SEC. 3. Classes of Corporations. – Corporations formed another corporation or other corporations;
or organized under this Code may be stock or nonstock
corporations. Stock corporations are those which have
capital stock divided into shares and are authorized to
72

g) Investment of corporate funds in another corporation SEC. 8. Redeemable Shares. – Redeemable shares may
or business in accordance with this Code; and be issued by the corporation when expressly provided
in the articles of incorporation. They are shares which
h) Dissolution of the corporation. may be purchased by the corporation from the holders
of such shares upon the expiration of a fixed period,
regardless of the existence of unrestricted retained
Except as provided in the immediately preceding earnings in the books of the corporation, and upon such
paragraph, the vote required under this Code to approve other terms and conditions stated in the articles of
a particular corporate act shall be deemed to refer only incorporation and the certificate of stock representing
to stocks with voting rights. the shares, subject to rules and regulations issued by the
Commission.
The shares or series of shares may or may not have a
par value: Provided, That banks, trust, insurance, and SEC. 9. Treasury shares. – Treasury shares are shares of
preneed companies, public utilities, building and loan stock which have been issued and fully paid for, but
associations, and other corporations authorized to subsequently reacquired by the issuing corporation
obtain or access funds from the public, whether publicly through purchase, redemption, donation, or some other
listed or not, shall not be permitted to issue no-par lawful means. Such shares may again be disposed of for
value shares of stock. a reasonable price fixed by the board of directors.

Preferred shares of stock issued by a corporation may TITLE II INCORPORATION AND ORGANIZATION OF
be given preference in the distribution of dividends and PRIVATE CORPORATIONS
in the distribution of corporate assets in case of
liquidation, or such other preferences: Provided, That
preferred shares of stock may be issued only with a SEC. 10. Number and Qualifications of Incorporators. –
stated par value. The board of directors, where Any person, partnership, association or corporation,
authorized in the articles of incorporation, may fix the singly or jointly with others but not more than fifteen
terms and conditions of preferred shares of stock or any 15) in number, may organize a corporation for any
series thereof: Provided, further, That such terms and lawful purpose or purposes: Provided, That natural
conditions shall be effective upon filing of a certificate persons who are licensed to practice a profession, and
thereof with the Securities and Exchange Commission, partnerships or associations organized for the purpose
hereinafter referred to as the “Commission”. of practicing a profession, shall not be allowed to
organize as a corporation unless otherwise provided
under special laws. Incorporators who are natural
Shares of capital stock issued without par value shall be persons must be of legal age.
deemed fully paid and nonassessable and the holder of
such shares shall not be liable to the corporation or to
its creditors in respect thereto: Provided, That no-par Each incorporator of a stock corporation must own or
value shares must be issued for a consideration of at be a subscriber to at least one 1) share of the capital
least Five pesos P5.00) per share: Provided, further, stock.
That the entire consideration received by the
corporation for its no-par value shares shall be treated A corporation with a single stockholder is considered a
as capital and shall not be available for distribution as One Person Corporation as described in Title XIII,
dividends. Chapter III of this Code.

A corporation may further classify its shares for the SEC. 11. Corporate Term. – A corporation shall have
purpose of ensuring compliance with constitutional or perpetual existence unless its articles of incorporation
legal requirements. provides otherwise.

SEC. 7. Founders’ Shares. – Founders’ shares may be Corporations with certificates of incorporation issued
given certain rights and privileges not enjoyed by the prior to the effectivity of this Code, and which continue
owners of other stocks. Where the exclusive right to to exist, shall have perpetual existence, unless the
vote and be voted for in the election of directors is corporation, upon a vote of its stockholders
granted, it must be for a limited period not to exceed representing a majority of its outstanding capital stock,
five 5) years from the date of incorporation: Provided, notifies the Commission that it elects to retain its
That such exclusive right shall not be allowed if its specific corporate term pursuant to its articles of
exercise will violate Commonwealth Act No. 108, incorporation: Provided, That any change in the
otherwise known as the “Anti-Dummy Law”; Republic corporate term under this section is without prejudice
Act No. 7042, otherwise known as the “Foreign to the appraisal right of dissenting stockholders in
Investments Act of 1991”; and other pertinent laws. accordance with the provisions of this Code.
73

A corporate term for a specific period may be extended e) The names, nationalities, and residence addresses of
or shortened by amending the articles of incorporation: the incorporators;
Provided, That no extension may be made earlier than
three 3) years prior to the original or subsequent expiry f) The number of directors, which shall not be more
dates) unless there are justifiable reasons for an earlier than fifteen 15) or the number of trustees which may be
extension as may be determined by the Commission: more than fifteen 15);
Provided, further, That such extension of the corporate
term shall take effect only on the day following the
original or subsequent expiry dates). g) The names, nationalities, and residence addresses of
persons who shall act as directors or trustees until the
first regular directors or trustees are duly elected and
A corporation whose term has expired may apply for a qualified in accordance with this Code;
revival of its corporate existence, together with all the
rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and h) If it be a stock corporation, the amount of its
liabilities existing prior to its revival. Upon approval by authorized capital stock, number of shares into which it
the Commission, the corporation shall be deemed is divided, the par value of each, names, nationalities,
revived and a certificate of revival of corporate existence and residence addresses of the original subscribers,
shall be issued, giving it perpetual existence, unless its amount subscribed and paid by each on the
application for revival provides otherwise. subscription, and a statement that some or all of the
shares are without par value, if applicable;
No application for revival of certificate of incorporation
of banks, banking and quasi- banking institutions, i) If it be a nonstock corporation, the amount of its
preneed, insurance and trust companies, non-stock capital, the names, nationalities, and residence
savings and loan associations NSSLAs), pawnshops, addresses of the contributors, and amount contributed
corporations engaged in money service business, and by each; and
other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable j)Such other matters consistent with law and which the
recommendation of the appropriate government agency. incorporators may deem necessary and convenient.

SEC. 12. Minimum Capital Stock Not Required of Stock An arbitration agreement may be provided in the
Corporations. – Stock corporations shall not be required articles of incorporation pursuant to Section 181 of this
to have a minimum capital stock, except as otherwise Code.
specifically provided by special law.
The articles of incorporation and applications for
SEC. 13. Contents of the Articles of Incorporation. – All amendments thereto may be filed with the Commission
corporations shall file with the Commission articles of in the form of an electronic document, in accordance
incorporation in any of the official languages, duly with the Commission’s rules and regulations on
signed and acknowledged or authenticated, in such electronic filing.
form and manner as may be allowed by the Commission,
containing substantially the following matters, except as SEC. 14. Form of Articles of Incorporation. – Unless
otherwise prescribed by this Code or by special law: otherwise prescribed by special law, the articles of
incorporation of all domestic corporations shall comply
a) The name of the corporation; substantially with the following form:

b) The specific purpose or purposes for which the Articles of Incorporation of ______________________ Name of
corporation is being formed. Where a corporation has Corporation)
more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and The undersigned incorporators, all of legal age, have
the secondary purpose or purposes: Provided, That a voluntarily agreed to form a stock) nonstock)
nonstock corporation may not include a purpose which corporation under the laws of the Republic of the
would change or contradict its nature as such; Philippines and certify the following:

c) The place where the principal office of the First: That the name of said corporation shall be
corporation is to be located, which must be within the “_______________, Inc., Corporation or OPC”;
Philippines;
Second: That the purpose or purposes for which such
d) The term for which the corporation is to exist, if the corporation is incorporated are: If there is more than
corporation has not elected perpetual existence;
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one purpose, indicate primary and secondary Modify

purposes); No. 8 if shares are with no-par value. In case the
corporation is nonstock, Nos. 7 and 8 of the above
Third: That the principal office of the corporation is articles may be modified accordingly, and it is sufficient
located in the City/Municipality of ______________________, if the articles state the amount of capital or money
Province of _______________________, Philippines; contributed or donated by specified persons, stating the
names, nationalities, and residence addresses of the
contributors or donors and the respective amount given
Fourth: That the corporation shall have perpetual by each.)
existence or a term of ______________ years from the date
of issuance of the certificate of incorporation;
Ninth: That _____________________ has been elected by the
subscribers as Treasurer of the Corporation to act as
Fifth: That the names, nationalities, and residence such until after the successor is duly elected and
addresses of the incorporators of the corporation are as qualified in accordance with the bylaws, that as
follows: Treasurer, authority has been given to receive in the
name and for the benefit of the corporation, all
Name Nationality Residence subscriptions, contributions or donations paid or given
by the subscribers or members, who certifies the
Sixth: That the number of directors or trustees of the information set forth in the seventh and eighth clauses
corporation shall be _________________; and the names, above, and that the paid-up portion of the subscription
nationalities, and residence addresses of the first in cash and/or property for the benefit and credit of the
directors or trustees of the corporation are as follows: corporation has been duly received.

Page 6 of 73 Tenth: That the incorporators undertake to change the

name of the corporation immediately upon receipt of
notice from the Commission that another corporation,
Name Nationality Residence partnership or person has acquired a prior right to the
use of such name, that the name has been declared not
Seventh: That the authorized capital stock of the distinguishable
corporation is ______________ PESOS P________), divided
into _____ shares with the par value of ____________ PESOS Page 7 of 73
P_______________) per share. In case all the shares are
without par value): That the capital stock of the
corporation is __________________________ shares without from a name already registered or reserved for the use
par value. of another corporation, or that it is contrary to law,
public morals, good customs or public policy.
In case some shares have par value and some are
without par value): That the capital stock of said Eleventh: Corporations which will engage in any
corporation consists of __________________________ shares, of business or activity reserved for Filipino citizens shall
which _______________________ shares have a par value of provide the following):
_________________ PESOS P____________) each, and of which
_______________________ shares are without par value. “No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
Eighth: That the number of shares of the authorized percentage of capital stock as provided by existing laws
capital stock above-stated has been subscribed as shall be allowed or permitted to be recorded in the
follows: proper books of the corporation, and this restriction
shall be indicated in all stock certificates issued by the
corporation.”
Name of Subscriber
IN WITNESS WHEREOF, we have hereunto signed these
Nationality Articles of Incorporation, this _______ day of _____________,
20_____ in the City/Municipality of ______________________,
No. of Shares Subscribed Province of _______________________, Republic of the
Philippines.
Amount Subscribed
Names and signatures of the incorporators)
Amount Paid _______________________________________

Name and signature of Treasurer)

75

SEC. 15. Amendment of Articles of Incorporation. – No articles of incorporation or amendment to articles of

Unless otherwise prescribed by this Code or by special incorporation of banks, banking and quasi-banking
law, and for legitimate purposes, any provision or institutions, preneed, insurance and trust companies,
matter stated in the articles of incorporation may be NSSLAS, pawnshops, and other financial intermediaries
amended by a majority vote of the board of directors or shall be approved by the Commission unless
trustees and the vote or written assent of the accompanied by a favorable recommendation of the
stockholders representing at least two-thirds 2/3) of appropriate government agency to the effect that such
the outstanding capital stock, without prejudice to the articles or amendment is in accordance with law.
appraisal right of dissenting stockholders in accordance
with the provisions of this Code. The articles of SEC. 17. Corporate Name. – No corporate name shall be
incorporation of a nonstock corporation may be allowed by the Commission if it is not distinguishable
amended by the vote or written assent of majority of the from that already reserved or registered for the use of
trustees and at least two-thirds 2/3) of the members. another corporation, or if such name is already
protected by law, or when its use is contrary to existing
The original and amended articles together shall law, rules and regulations.
contain all provisions required by law to be set out in
the articles of incorporation. Amendments to the A name is not distinguishable even if it contains one or
articles shall be indicated by underscoring the change more of the following:
or changes made, and a copy thereof duly certified
under oath by the corporate secretary and a majority of
the directors or trustees, with a statement that the a) The word “corporation”, “company”, “incorporated”,
amendments have been duly approved by the required “limited”, “limited liability”, or an abbreviation of one of
vote of the stockholders or members, shall be submitted such words; and
to the Commission.
b) Punctuations, articles, conjunctions, contractions,
The amendments shall take effect upon their approval prepositions, abbreviations, different tenses, spacing, or
by the Commission or from the date of filing with the number of the same word or phrase.
said Commission if not acted upon within six 6) months
from the date of filing for a cause not attributable to the The Commission, upon determination that the
corporation. corporate name is: 1) not distinguishable from a name
already reserved or registered for the use of another
SEC. 16. Grounds When Articles of Incorporation or corporation; 2) already protected by law; or 3) contrary
Amendment May be Disapproved. – The Commission to law, rules and regulations, may summarily order the
may disapprove the articles of incorporation or any corporation to immediately cease and desist from using
amendment thereto if the same is not compliant with such name and require the corporation to register a
the requirements of this Code: Provided, That the new one. The Commission shall also cause the removal
Commission shall give the incorporators, directors, of all visible signages, marks, advertisements, labels,
trustees, or officers a reasonable time from receipt of prints and other effects bearing such corporate name.
the disapproval within which to modify the Upon the approval of the new corporate name, the
objectionable portions of the articles or amendment. Commission shall issue a certificate of incorporation
The following are grounds for such disapproval: under the amended name.

a) The articles of incorporation or any amendment Page 9 of 73

thereto is not substantially in accordance with the form
prescribed herein; If the corporation fails to comply with the Commission’s
order, the Commission may hold the corporation and its
b)The purpose or purposes of the corporation are responsible directors or officers in contempt and/or
patently unconstitutional, illegal, immoral or contrary to hold them administratively, civilly and/or criminally
government rules and regulations; liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
c)The certification concerning the amount of capital
stock subscribed and/or paid is false; and SEC. 18. Registration, Incorporation and
Commencement of Corporate Existence. – A person or
group of persons desiring to incorporate shall submit
d)The required percentage of Filipino ownership of the the intended corporate name to the Commission for
capital stock under existing laws or the Constitution has verification. If the Commission finds that the name is
not been complied with. distinguishable from a name already reserved or
registered for the use of another corporation, not
protected by law and is not contrary to law, rules and
76

regulations, the name shall be reserved in favor of the shall issue an order lifting the delinquent status. Failure
incorporators. The incorporators shall then submit their to comply with the requirements and resume
articles of incorporation and bylaws to the Commission. operations within the period given by the Commission
shall cause the revocation of the corporation’s
If the Commission finds that the submitted documents certificate of incorporation.
and information are fully compliant with the
requirements of this Code, other relevant laws, rules The Commission shall give reasonable notice to, and
and regulations, the Commission shall issue the coordinate with the appropriate regulatory agency prior
certificate of incorporation. to the suspension or revocation of the certificate of
incorporation of companies under their special
A private corporation organized under this Code regulatory jurisdiction.
commences its corporate existence and juridical
personality from the date the Commission issues the TITLE III BOARD OF DIRECTORS/TRUSTEES AND
certificate of incorporation under its official seal and OFFICERS
thereupon the incorporators, stockholders/members
and their successors shall constitute a body corporate SEC. 22. The Board of Directors or Trustees of a
under the name stated in the articles of incorporation Corporation; Qualification and Term. – Unless otherwise
for the period of time mentioned therein, unless said provided in this Code, the board of directors or trustees
period is extended or the corporation is sooner shall exercise the corporate powers, conduct all
dissolved in accordance with law. business, and control all properties of the corporation.

SEC. 19. De facto Corporations. – The due incorporation Directors shall be elected for a term of one 1) year from
of any corporation claiming in good faith to be a among the holders of stocks registered in the
corporation under this Code, and its right to exercise corporation’s books, while trustees shall be elected for a
corporate powers, shall not be inquired into collaterally term not exceeding three 3) years from among the
in any private suit to which such corporation may be a members of the corporation. Each director and trustee
party. Such inquiry may be made by the Solicitor shall hold office until the successor is elected and
General in a quo warranto proceeding. qualified. A director who ceases to own at least one 1)
share of stock or a trustee who ceases to be a member of
SEC. 20. Corporation by Estoppel. – All persons who the corporation shall cease to be such.
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for The board of the following corporations vested with
all debts, liabilities and damages incurred or arising as a public interest shall have independent directors
result thereof: Provided, however, That when any such constituting at least twenty percent 20%) of such board:
ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed
by it as such, it shall not be allowed to use its lack of a) Corporations covered by Section 17.2 of Republic Act
corporate personality as a defense. Anyone who No. 8799, otherwise known as “The Securities
assumes an obligation to an ostensible corporation as Regulation Code”, namely those whose securities are
such cannot resist performance thereof on the ground registered with the Commission, corporations listed
that there was in fact no corporation. with an exchange or with assets of at least Fifty million
pesos P50,000,000.00) and having two hundred 200) or
more holders of shares, each holding at least one
SEC. 21. Effects of Non-Use of Corporate Charter and hundred 100) shares of a class of its equity shares;
Continuous Inoperation. – If a corporation does not
formally organize and commence its business within
five 5) years from the date of its incorporation, its b) Banks and quasi-banks, NSSLAs, pawnshops,
certificate of incorporation shall be deemed revoked as corporations engaged in money service business, pre-
of the day following the end of the five 5)-year period. need, trust and insurance companies, and other
financial intermediaries; and
However, if a corporation has commenced its business
but subsequently becomes inoperative for a period of at c) Other corporations engaged in business vested with
least five 5) consecutive years, the Commission may, public interest similar to the above, as may be
after due notice and hearing, place the corporation determined by the Commission, after taking into
under delinquent status. account relevant factors which are germane to the
objective and purpose of requiring the election of an
independent director, such as the extent of minority
A delinquent corporation shall have a period of two 2) ownership, type of financial products or securities
years to resume operations and comply with all issued or offered to investors, public interest involved in
requirements that the Commission shall prescribe.
Upon compliance by the corporation, the Commission
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the nature of business operations, and other analogous cumulate said shares and give one 1) candidate as many
factors. votes as the number of directors to be elected multiplied
by the number of the shares owned; or c) distribute
An independent director is a person who, apart from them on the same principle among as many candidates
shareholdings and fees received from the corporation, is as may be seen fit: Provided, That the total number of
independent of management and free from any business votes cast shall not exceed the number of shares owned
or other relationship by the stockholders as shown in the books of the
corporation multiplied by the whole number of
directors to be elected: Provided, however, That no
which could, or could reasonably be perceived to delinquent stock shall be voted. Unless otherwise
materially interfere with the exercise of independent provided in the articles of incorporation or in the
judgment in carrying out the responsibilities as a bylaws, members of nonstock corporations may cast as
director. many votes as there are trustees to be elected but may
not cast more than one 1) vote for one 1) candidate.
Independent directors must be elected by the Nominees for directors or trustees receiving the highest
shareholders present or entitled to vote in absentia number of votes shall be declared elected.
during the election of directors. Independent directors
shall be subject to rules and regulations governing their If no election is held, or the owners of majority of the
qualifications, disqualifications, voting requirements, outstanding capital stock or majority of the members
duration of term and term limit, maximum number of entitled to vote are not present in person, by proxy, or
board memberships and other requirements that the through remote communication or not voting in
Commission will prescribe to strengthen their absentia at the meeting, such meeting may be adjourned
independence and align with international best and the corporation shall proceed in accordance with
practices. Section 25 of this Code.

SEC. 23. Election of Directors or Trustees. – Except when Page 12 of 73

the exclusive right is reserved for holders of founders’
shares under Section 7 of this Code, each stockholder or
member shall have the right to nominate any director or The directors or trustees elected shall perform their
trustee who possesses all of the qualifications and none duties as prescribed by law, rules of good corporate
of the disqualifications set forth in this Code. governance, and bylaws of the corporation.

At all elections of directors or trustees, there must be SEC. 24. Corporate Officers. – Immediately after their
present, either in person or through a representative election, the directors of a corporation must formally
authorized to act by written proxy, the owners of organize and elect: a) a president, who must be a
majority of the outstanding capital stock, or if there be director; b) a treasurer, who must be a resident; c) a
no capital stock, a majority of the members entitled to secretary, who must be a citizen and resident of the
vote. When so authorized in the bylaws or by a majority Philippines; and d) such other officers as may be
of the board of directors, the stockholders or members provided in the bylaws. If the corporation is vested with
may also vote through remote communication or in public interest, the board shall also elect a compliance
absentia: Provided, That the right to vote through such officer. The same person may hold two 2) or more
modes may be exercised in corporations vested with positions concurrently, except that no one shall act as
public interest, notwithstanding the absence of a president and secretary or as president and treasurer at
provision in the bylaws of such corporations. the same time, unless otherwise allowed in this Code.

A stockholder or member who participates through The officers shall manage the corporation and perform
remote communication or in absentia, shall be deemed such duties as may be provided in the bylaws and/or as
present for purposes of quorum. resolved by the board of directors.

The election must be by ballot if requested by any SEC. 25. Report of Election of Directors, Trustees and
voting stockholder or member. Officers, Non-holding of Election and Cessation from
Office. – Within thirty 30) days after the election of the
directors, trustees and officers of the corporation, the
In stock corporations, stockholders entitled to vote shall secretary, or any other officer of the corporation, shall
have the right to vote the number of shares of stock submit to the Commission, the names, nationalities,
standing in their own names in the stock books of the shareholdings, and residence addresses of the directors,
corporation at the time fixed in the bylaws or where the trustees, and officers elected.
bylaws are silent, at the time of the election. The said
stockholder may: a) vote such number of shares for as
many persons as there are directors to be elected; b) The non-holding of elections and the reasons therefor
shall be reported to the Commission within thirty 30)
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days from the date of the scheduled election. The report of good corporate governance or as a sanction in its
shall specify a new date for the election, which shall not administrative proceedings.
be later than sixty 60) days from the scheduled date.
SEC. 27. Removal of Directors or Trustees. – Any
If no new date has been designated, or if the director or trustee of a corporation may be removed
rescheduled election is likewise not held, the from office by a vote of the stockholders holding or
Commission may, upon the application of a stockholder, representing at least two-thirds 2/3) of the outstanding
member, director or trustee, and after verification of the capital stock, or in a nonstock corporation, by a vote of
unjustified non-holding of the election, summarily order at least two-thirds 2/3) of the members entitled to vote:
that an election be held. The Commission shall have the Provided, That such removal shall take place either at a
power to issue such orders as may be appropriate, regular meeting of the corporation or at a special
including orders directing the issuance of a notice meeting called for the purpose, and in either case, after
stating the time and place of the election, designated previous notice to stockholders or members of the
presiding officer, and the record date or dates for the corporation of the intention to propose such removal at
determination of stockholders or members entitled to the meeting. A special meeting of the stockholders or
vote. members for the purpose of removing any director or
trustee must be called by the secretary on order of the
Notwithstanding any provision of the articles of president, or upon written demand of the stockholders
incorporation or bylaws to the contrary, the shares of representing or holding at least a majority of the
stock or membership represented at such meeting and outstanding capital stock, or a majority of the members
entitled to vote shall constitute a quorum for purposes entitled to vote. If there is no secretary, or if the
of conducting an election under this section. secretary, despite demand, fails or refuses to call the
special meeting or to give notice thereof, the
stockholder or member of the corporation signing the
Should a director, trustee or officer die, resign or in any demand may call for the meeting by directly addressing
manner cease to hold office, the secretary, or the the stockholders or members. Notice of the time and
director, trustee or officer of the corporation, shall, place of such meeting, as well as of the intention to
within seven 7) days from knowledge thereof, report in propose such removal, must be given by publication or
writing such fact to the Commission. by written notice prescribed in this Code. Removal may
be with or without cause: Provided, That removal
SEC. 26. Disqualification of Directors, Trustees or without cause may not be used to deprive minority
Officers. – A person shall be disqualified from being a stockholders or members of the right of representation
director, trustee or officer of any corporation if, within to which they may be entitled under Section 23 of this
five 5) years prior to the election or appointment as Code.
such, the person was:
The Commission shall, motu proprio or upon verified
a) Convicted by final judgment: complaint, and after due notice and hearing, order the
removal of a director or trustee elected despite the
1) Of an offense punishable by imprisonment disqualification, or whose disqualification arose or is
for a period exceeding six 6) years; discovered subsequent to an election. The removal of a
disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the
2) For violating this Code; and board of directors or trustees who, with knowledge of
the disqualification, failed to remove such director or
3) For violating Republic Act No. 8799, trustee.
otherwise known as “The Securities
Regulation Code”; SEC. 28. Vacancies in the Office of Director or Trustee;
Emergency Board. – Any vacancy occurring in the board
b) Found administratively liable for any offense of directors or trustees other than by removal or by
involving fraudulent acts; and expiration of term may be filled by the vote of at least a
majority of the remaining directors or trustees, if still
c) By a foreign court or equivalent foreign regulatory constituting a quorum; otherwise, said vacancies must
authority for acts, violations or misconduct similar to be filled by the stockholders or members in a regular or
those enumerated in paragraphs a) and b) above. special meeting called for that purpose.

The foregoing is without prejudice to qualifications or When the vacancy is due to term expiration, the election
other disqualifications, which the Commission, the shall be held no later than the day of such expiration at a
primary regulatory agency, or the Philippine meeting called for that purpose. When the vacancy
Competition Commission may impose in its promotion arises as a result of removal by the stockholders or
members, the election may be held on the same day of
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the meeting authorizing the removal and this fact must report of the total compensation of each of their
be so stated in the agenda and notice of said meeting. In directors or trustees.
all other cases, the election must be held no later than
forty-five 45) days from the time the vacancy arose. A SEC. 30. Liability of Directors, Trustees or Officers. –
director or trustee elected to fill a vacancy shall be Directors or trustees who willfully and knowingly vote
referred to as replacement director or trustee and shall for or assent to patently unlawful acts of the corporation
serve only for the unexpired term of the predecessor in or who are guilty of gross negligence or bad faith in
office. directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty
However, when the vacancy prevents the remaining as such directors or trustees shall be liable jointly and
directors from constituting a quorum and emergency severally for all damages resulting therefrom suffered
action is required to prevent grave, substantial, and by the corporation, its stockholders or members and
irreparable loss or damage to the corporation, the other persons.
vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the A director, trustee, or officer shall not attempt to
remaining directors or trustees. The action by the acquire, or acquire any interest adverse to the
designated director or trustee shall be limited to the corporation in respect of any matter which has been
emergency action necessary, and the term shall cease reposed in them in confidence, and upon which, equity
within a reasonable time from the termination of the imposes a disability upon themselves to deal in their
emergency or upon election of the replacement director own behalf; otherwise the said director, trustee, or
or trustee, whichever comes earlier. The corporation officer shall be liable as a trustee for the corporation
must notify the Commission within three 3) days from and must account for the profits which otherwise would
the creation of the emergency board, stating therein the have accrued to the corporation.
reason for its creation.
SEC. 31. Dealings of Directors, Trustees or Officers with
Any directorship or trusteeship to be filled by reason of the Corporation. – A contract of the corporation with 1)
an increase in the number of directors or trustees shall one or more of its directors, trustees, officers or their
be filled only by an election at a regular or at a special spouses and relatives within the fourth civil degree of
meeting of stockholders or members duly called for the consanguinity or affinity is voidable, at the option of
purpose, or in the same meeting authorizing the such corporation, unless all the following conditions are
increase of directors or trustees if so stated in the notice present:
of the meeting.
a) The presence of such director or trustee in the board
In all elections to fill vacancies under this section, the meeting in which the contract was approved was not
procedure set forth in Sections 23 and 25 of this Code necessary to constitute a quorum for such meeting;
shall apply.
b) The vote of such director or trustee was not
SEC. 29. Compensation of Directors or Trustees. – In the necessary for the approval of the contract; c) The
absence of any provision in the bylaws fixing their contract is fair and reasonable under the circumstances;
compensation, the directors or trustees shall not receive
any compensation in their capacity as such, except for
reasonable per diems: Provided however, That the d) In case of corporations vested with public interest,
stockholders representing at least a majority of the material contracts are approved by at least two-thirds
outstanding capital stock or majority of the members 2/3) of the entire membership of the board, with at
may grant directors or trustees with compensation and least a majority of the independent directors voting to
approve the amount thereof at a regular or special approve the material contract; and
meeting.
e) In case of an officer, the contract has been previously
In no case shall the total yearly compensation of authorized by the board of directors.
directors exceed ten 10%) percent of the net income
before income tax of the corporation during the Where any of the first three 3) conditions set forth in
preceding year. the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be
Directors or trustees shall not participate in the ratified by the vote of the stockholders representing at
determination of their own per diems or compensation. least two-thirds 2/3) of the outstanding capital stock or
of at least two-thirds 2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of
Corporations vested with public interest shall submit to the adverse interest of the directors or trustees involved
their shareholders and the Commission, an annual
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is made at such meeting and the contract is fair and b) To have perpetual existence unless the certificate of
reasonable under the circumstances. incorporation provides otherwise;

SEC. 32. Contracts Between Corporations with c) To adopt and use a corporate seal;
Interlocking Directors. – Except in cases of fraud, and
provided the contract is fair and reasonable under the d) To amend its articles of incorporation in accordance
circumstances, a contract between two 2) or more with the provisions of this Code;
corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one 1) e) To adopt bylaws, not contrary to law, morals or public
corporation is substantial and the interest in the other policy, and to amend or repeal the same in accordance
corporation or corporations is merely nominal, the with this Code;
contract shall be subject to the provisions of the
preceding section insofar as the latter corporation or f) In case of stock corporations, to issue or sell stocks to
corporations are concerned. subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members
Stockholdings exceeding twenty percent 20%) of the to the corporation if it be a nonstock corporation;
outstanding capital stock shall be considered
substantial for purposes of interlocking directors. g) To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage, and otherwise deal with such
SEC. 33. Disloyalty of a Director. – Where a director, by real and personal property, including securities and
virtue of such office, acquires a business opportunity bonds of other
which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation, corporations, as the transaction of the lawful business
the director must account for and refund to the latter all of the corporation may reasonably and necessarily
such profits, unless the act has been ratified by a vote of require, subject to the limitations prescribed by law and
the stockholders owning or representing at least two- the Constitution;
thirds 2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact h) To enter into a partnership, joint venture, merger,
that the director risked one’s own funds in the venture. consolidation, or any other commercial agreement with
natural and juridical persons;
SEC. 34. Executive, Management, and Other Special
Committees. – If the bylaws so provide, the board may i) To make reasonable donations, including those for the
create an executive committee composed of at least public welfare or for hospital, charitable, cultural,
three 3) directors. Said committee may act, by majority scientific, civic, or similar purposes: Provided, That no
vote of all its members, on such specific matters within foreign corporation shall give donations in aid of any
the competence of the board, as may be delegated to it political party or candidate or for purposes of partisan
in the bylaws or by majority vote of the board, except political activity;
with respect to the: a) approval of any action for which
shareholders’ approval is also required; b) filling of
vacancies in the board; c) amendment or repeal of j) To establish pension, retirement, and other plans for
bylaws or the adoption of new bylaws; d) amendment the benefit of its directors, trustees, officers, and
or repeal of any resolution of the board which by its employees; and
express terms is not amendable or repealable; and e)
distribution of cash dividends to the shareholders. k) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
The board of directors may create special committees of in the articles of incorporation.
temporary or permanent nature and determine the
members’ term, composition, compensation, powers, SEC. 36. Power to Extend or Shorten Corporate Term. –
and responsibilities. A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by
TITLE IV POWERS OF CORPORATIONS a majority vote of the board of directors or trustees, and
ratified at a meeting by the stockholders or members
representing at least two-thirds 2/3) of the outstanding
SEC. 35. Corporate Powers and Capacity. – Every capital stock or of its members. Written notice of the
corporation incorporated under this Code has the proposed action and the time and place of the meeting
power and capacity: shall be sent to stockholders or members at their
respective place of residence as shown in the books of
a) To sue and be sued in its corporate name; the corporation, and must either be deposited to the
81

addressee in the post office with postage prepaid, the date of approval of the board of directors and
served personally, or when allowed in the bylaws or stockholders, which period may be extended for
done with the consent of the stockholder, sent justifiable reasons.
electronically in accordance with the rules and
regulations of the Commission on the use of electronic Copies of the certificate shall be kept on file in the office
data messages. In case of extension of corporate term, a of the corporation and filed with the Commission and
dissenting stockholder may exercise the right of attached to the original articles of incorporation. After
appraisal under the conditions provided in this Code. approval by the Commission and the issuance by the
Commission of its certificate of filing, the capital stock
SEC. 37. Power to Increase or Decrease Capital Stock; shall be deemed increased or decreased and the
Incur, Create or Increase Bonded Indebtedness. – No incurring, creating or increasing of any bonded
corporation shall increase or decrease its capital stock indebtedness authorized, as the certificate of filing may
or incur, create or increase any bonded indebtedness declare: Provided, That the Commission shall not accept
unless approved by a majority vote of the board of for filing any certificate of increase of capital stock
directors and by two-thirds 2/3) of the outstanding unless accompanied by a sworn statement of the
capital stock at a stockholders’ meeting duly called for treasurer of the corporation lawfully holding office at
the purpose. Written notice of the time and place of the the time of the filing of the certificate, showing that at
stockholders’ meeting and the purpose for said meeting least twenty-five percent 25%) of the increase in capital
must be sent to the stockholders at their places of stock has been subscribed and that at least twenty-five
residence as shown in the books of the corporation and percent 25%) of the amount subscribed has been paid
served on the stockholders personally, or through in actual cash to the corporation or that property, the
electronic means recognized in the corporation’s bylaws valuation of which is equal to twenty-five percent 25%)
and/or the Commission’s rules as a valid mode for of the subscription, has been transferred to the
service of notices. corporation: Provided, further, That no decrease in
capital stock shall be approved by the Commission if its
A certificate must be signed by a majority of the effect shall prejudice the rights of corporate creditors.
directors of the corporation and countersigned by the
chairperson and secretary of the stockholders’ meeting, Nonstock corporations may incur, create or increase
setting forth: bonded indebtedness when approved by a majority of
the board of trustees and of at least two-thirds 2/3) of
a) That the requirements of this section have been the members in a meeting duly called for the purpose.
complied with; b) The amount of the increase or
decrease of the capital stock;c) In case of an increase of Bonds issued by a corporation shall be registered with
the capital stock, the amount of capital stock or number the Commission, which shall have the authority to
of shares of no-par stock thereof actually subscribed, determine the sufficiency of the terms thereof.
the names, nationalities and addresses of the persons
subscribing, the amount of capital stock or number of SEC. 38. Power to Deny Preemptive Right. – All
no-par stock subscribed by each, and the amount paid stockholders of a stock corporation shall enjoy
by each on the subscription in cash or property, or the preemptive right to subscribe to all issues or disposition
amount of capital stock or number of shares of no-par of shares of any class, in proportion to their respective
stock allotted to each stockholder if such increase is for shareholdings, unless such right is denied by the articles
the purpose of making effective stock dividend therefor of incorporation or an amendment thereto: Provided,
authorized; That such preemptive right shall not extend to shares
issued in compliance with laws requiring stock offerings
d) Any bonded indebtedness to be incurred, created or or minimum stock ownership by the public; or to shares
increased; issued in good faith with the approval of the
stockholders representing two-thirds 2/3) of the
e) The amount of stock represented at the meeting; and outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
f) The vote authorizing the increase or decrease of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness. SEC. 39. Sale or Other Disposition of Assets. – Subject to
the provisions of Republic Act No. 10667, otherwise
known as “Philippine Competition Act”, and other
Any increase or decrease in the capital stock or the related laws, a corporation may, by a majority vote of its
incurring, creating or increasing of any bonded board of directors or trustees, sell, lease, exchange,
indebtedness shall require prior approval of the mortgage, pledge, or otherwise dispose of its property
Commission, and where appropriate, of the Philippine and assets, upon such terms and conditions and for such
Competition Commission. The application with the consideration, which may be money, stocks, bonds, or
Commission shall be made within six 6) months from
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other instruments for the payment of money or other SEC. 40. Power to Acquire Own Shares. – Provided that
property or consideration, as its board of directors or the corporation has unrestricted retained earnings in its
trustees may deem expedient. books to cover the shares to be purchased or acquired, a
stock corporation shall have the power to purchase or
A sale of all or substantially all of the corporation’s acquire its own shares for a legitimate corporate
properties and assets, including its goodwill, must be purpose or purposes, including the following cases:
authorized by the vote of the stockholders representing
at least two-thirds 2/3) of the outstanding capital stock, a) To eliminate fractional shares arising out of stock
or at least two-thirds 2/3) of the members, in a dividends;
stockholders’ or members’ meeting duly called for the
purpose. b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
In nonstock corporations where there are no members delinquency sale, and to purchase delinquent shares
with voting rights, the vote of at least a majority of the sold during said sale; and
trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by c) To pay dissenting or withdrawing stockholders
this section. entitled to payment for their shares under the
provisions of this Code.
The determination of whether or not the sale involves
all or substantially all of the corporation’s properties SEC. 41. Power to Invest Corporate Funds in Another
and assets must be computed based on its net asset Corporation or Business or for Any Other Purpose. –
value, as shown in its latest financial statements. A sale Subject to the provisions of this Code, a private
or other disposition shall be deemed to cover corporation may invest its funds in any other
substantially all the corporate property and assets if corporation, business, or for any purpose other than the
thereby the corporation would be rendered incapable of primary purpose for which it was organized, when
continuing the business or accomplishing the purpose approved by a majority of the board of directors or
for which it was incorporated. trustees and ratified by the stockholders representing at
least two-thirds 2/3) of the outstanding capital stock, or
Written notice of the proposed action and of the time by at least two thirds 2/3) of the members in the case of
and place for the meeting shall be addressed to nonstock corporations, at a meeting duly called for the
stockholders or members at their places of residence as purpose. Notice of the proposed investment and the
shown in the books of the corporation and deposited to time and place of the meeting shall be addressed to each
the addressee in the post office with postage prepaid, stockholder or member at the place of residence as
served personally, or when allowed by the bylaws or shown in the books of the corporation and deposited to
done with the consent of the stockholder, sent the addressee in the post office with postage prepaid,
electronically: Provided, That any dissenting served personally, or sent electronically in accordance
stockholder may exercise the right of appraisal under with the rules and regulations of the Commission on the
the conditions provided in this Code. use of electronic data message, when allowed by the
bylaws or done with the consent of the stockholders:
After such authorization or approval by the Provided, That any dissenting stockholder shall have
stockholders or members, the board of directors or appraisal right as provided in this Code: Provided,
trustees may, nevertheless, in its discretion, abandon however, That where the investment by the corporation
such sale, lease, exchange, mortgage, pledge, or other is reasonably necessary to accomplish its primary
disposition of property and assets, subject to the rights purpose as stated in the articles of incorporation, the
of third parties under any contract relating thereto, approval of the stockholders or members shall not be
without further action or approval by the stockholders necessary.
or members.
SEC. 42. Power to Declare Dividends. – The board of
Nothing in this section is intended to restrict the power directors of a stock corporation may declare dividends
of any corporation, without the authorization by the out of the unrestricted retained earnings which shall be
stockholders or members, to sell, lease, exchange, payable in cash, property, or in stock to all stockholders
mortgage, pledge, or otherwise dispose of any of its on the basis of outstanding stock held by them:
property and assets if the same is necessary in the usual Provided, That any cash dividends due on delinquent
and regular course of business of the corporation or if stock shall first be applied to the unpaid balance on the
the proceeds of the sale or other disposition of such subscription plus costs and expenses, while stock
property and assets shall be appropriated for the dividends shall be withheld from the delinquent
conduct of its remaining business. stockholders until their unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders
83

representing at least two-thirds 2/3) of the outstanding of incorporation and except as necessary or incidental
capital stock at a regular or special meeting duly called to the exercise of the powers conferred.
for the purpose.
TITLE V BYLAWS
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred percent 100%) SEC. 45. Adoption of Bylaws. – For the adoption of
of their paid-in capital stock, except: a) when justified bylaws by the corporation, the affirmative vote of the
by definite corporate expansion projects or programs stockholders representing at least a majority of the
approved by the board of directors; or b) when the outstanding capital stock, or of at least a majority of the
corporation is prohibited under any loan agreement members in case of nonstock corporations, shall be
with financial institutions or creditors, whether local or necessary. The bylaws shall be signed by the
foreign, from declaring dividends without their consent, stockholders or members voting for them and shall be
and such consent has not yet been secured; or c) when it kept in the principal office of the corporation, subject to
can be clearly shown that such retention is necessary the inspection of the stockholders or members during
under special circumstances obtaining in the office hours. A copy thereof, duly certified by a majority
corporation, such as when there is need for special of the directors or trustees and countersigned by the
reserve for probable contingencies. secretary of the corporation, shall be filed with the
Commission and attached to the original articles of
SEC. 43. Power to Enter into Management Contract. – No incorporation.
corporation shall conclude a management contract with
another corporation unless such contract is approved by Notwithstanding the provisions of the preceding
the board of directors and by stockholders owning at paragraph, bylaws may be adopted and filed prior to
least the majority of the outstanding capital stock, or by incorporation; in such case, such bylaws shall be
at least a majority of the members in the case of a approved and signed by all the incorporators and
nonstock corporation, of both the managing and the submitted to the Commission, together with the articles
managed corporation, at a meeting duly called for the of incorporation.
purpose: Provided, That a) where a stockholder or
stockholders representing the same interest of both the
managing and the managed corporations own or control Page 22 of 73
more than one-third 1/3) of the total outstanding
capital stock entitled to vote of the managing In all cases, bylaws shall be effective only upon the
corporation; or b) where a majority of the members of issuance by the Commission of a certification that the
the board of directors of the managing corporation also bylaws are in accordance with this Code.
constitute a majority of the members of the board of
directors of the managed corporation, then the The Commission shall not accept for filing the bylaws or
management contract must be approved by the any amendment thereto of any bank, banking
stockholders of the managed corporation owning at institution, building and loan association, trust
least two-thirds 2/3) of the total outstanding capital company, insurance company, public utility, educational
stock entitled to vote, or by at least two-thirds 2/3) of institution, or other special corporations governed by
the members in the case of a nonstock corporation. special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such
These shall apply to any contract whereby a corporation bylaws or amendments are in accordance with law.
undertakes to manage or operate all or substantially all
of the business of another corporation, whether such SEC. 46. Contents of Bylaws. – A private corporation
contracts are called service contracts, operating may provide the following in its bylaws:
agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate
to the exploration, development, exploitation or a) The time, place and manner of calling and conducting
utilization of natural resources may be entered into for regular or special meetings of the directors or trustees;
such periods as may be provided by the pertinent laws
or regulations. b) The time and manner of calling and conducting
regular or special meetings and mode of notifying the
No management contract shall be entered into for a stockholders or members thereof;
period longer than five 5) years for any one 1) term.
c) The required quorum in meetings of stockholders or
SEC. 44. Ultra Vires Acts of Corporations. – No members and the manner of voting therein;
corporation shall possess or exercise corporate powers
other than those conferred by this Code or by its articles d) The modes by which a stockholder, member, director,
or trustee may attend meetings and cast their votes;
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e) The form for proxies of stockholders and members The amended or new bylaws shall only be effective upon
and the manner of voting them; the issuance by the Commission of a certification that
the same is in accordance with this Code and other
f) The directors’ or trustees’ qualifications, duties and relevant laws.
responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and TITLE VI MEETINGS
the maximum number of other board representations
that an independent director or trustee may have which SEC. 48. Kinds of Meetings. – Meetings of directors,
shall, in no case, be more than the number prescribed trustees, stockholders, or members may be regular or
by the Commission; special.

g) The time for holding the annual election of directors SEC. 49. Regular and Special Meetings of Stockholders
or trustees and the mode or manner of giving notice or Members. – Regular meetings of stockholders or
thereof; members shall be held annually on a date fixed in the
bylaws, or if not so fixed, on any date after April 15 of
h) The manner of election or appointment and the term every year as determined by the board of directors or
of office of all officers other than directors or trustees; trustees: Provided, That written notice of regular
meetings shall be sent to all stockholders or members of
i) The penalties for violation of the bylaws; record at least twenty-one 21) days prior to the
meeting, unless a different period is required in the
bylaws, law, or regulation: Provided, further, That
j) In the case of stock corporations, the manner of written notice of regular meetings may be sent to all
issuing stock certificates; and stockholders or members of record through electronic
mail or such other manner as the Commission shall
k) Such other matters as may be necessary for the allow under its guidelines.
proper or convenient transaction of its corporate affairs
for the promotion of good governance and anti-graft At each regular meeting of stockholders or members,
and corruption measures. the board of directors or trustees shall endeavor to
present to stockholders or members the following:
An arbitration agreement may be provided in the
bylaws pursuant to Section 181 of this Code. a) The minutes of the most recent regular meeting
which shall include, among others:
SEC. 47. Amendment to Bylaws. – A majority of the
board of directors or trustees, and the owners of at least 1) A description of the voting and vote tabulation
a majority of the outstanding capital stock, or at least a procedures used in the previous meeting;
majority of the members of a nonstock corporation, at a
regular or special meeting duly called for the purpose,
may amend or repeal the bylaws or adopt new bylaws. 2) A description of the opportunity given to
The owners of two-thirds 2/3) of the outstanding stockholders or members to ask questions and a record
capital stock or two-thirds 2/3) of the members in a of the questions asked and answers given;
nonstock corporation may delegate to the board of
directors or trustees the power to amend or repeal the 3) The matters discussed and resolutions reached;
bylaws or adopt new bylaws: Provided, That any power
delegated to the board of directors or trustees to amend 4) A record of the voting results for each agenda item;
or repeal the bylaws or adopt new bylaws shall be
considered as revoked whenever stockholders owning
or representing a majority of the outstanding capital 5) A list of the directors or trustees, officers and
stock or majority of the members shall so vote at a stockholders or members who attended the meeting;
regular or special meeting. and

Whenever the bylaws are amended or new bylaws are 6) Such other items that the Commission may require in
adopted, the corporation shall file with the Commission the interest of good corporate governance and the
such amended or new bylaws and, if applicable, the protection of minority stockholders.
stockholders’ or members’ resolution authorizing the
delegation of the power to amend and/or adopt new b) A members’ list for nonstock corporations and, for
bylaws, duly certified under oath by the corporate stock corporations, material information on the current
secretary and a majority of the directors or trustees. stockholders, and their voting rights;
85

c) A detailed, descriptive, balanced and comprehensible Provided, further, That attendance at a meeting shall
assessment of the corporation’s performance, which constitute a waiver of notice of such meeting, except
shall include information on any material change in the when the person attends a meeting for the express
corporation’s business, strategy, and other affairs; purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened.
d) A financial report for the preceding year, which shall
include financial statements duly signed and certified in Whenever for any cause, there is no person authorized
accordance with this Code and the rules the or the person authorized unjustly refuses to call a
Commission may prescribe, a statement on the meeting, the Commission, upon petition of a
adequacy of the corporation’s internal controls or risk stockholder or member on a showing of good cause
management systems, and a statement of all external therefor, may issue an order directing the petitioning
audit and non-audit fees; stockholder or member to call a meeting of the
corporation by giving proper notice required by this
e) An explanation of the dividend policy and the fact of Code or the bylaws. The petitioning stockholder or
payment of dividends or the reasons for nonpayment member shall preside thereat until at least a majority of
thereof; the stockholders or members present have chosen from
among themselves, a presiding officer.
f) Director or trustee profiles which shall include,
among others, their qualifications and relevant Unless the bylaws provide for a longer period, the stock
experience, length of service in the corporation, and transfer book or membership book shall be closed
trainings and continuing education attended, and their at least twenty 20) days for regular meetings and seven
board representations in other corporations; 7) days for special meetings before the scheduled date
of the meeting.
g) A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the In case of postponement of stockholders’ or members’
meetings of the board and its committees and in regular regular meetings, written notice thereof and the reason
or special stockholder meetings; therefor shall be sent to all stockholders or members of
record at least two 2) weeks prior to the date of the
meeting, unless a different period is required under the
h) Appraisals and performance reports for the board bylaws, law or regulation.
and the criteria and procedure for assessment;
The right to vote of stockholders or members may be
i) A director or trustee compensation report prepared in exercised in person, through a proxy, or when so
accordance with this Code and the rules the authorized in the bylaws, through remote
Commission may prescribe; communication or in absentia. The Commission shall
issue the rules and regulations governing participation
j) Director disclosures on self-dealings and related party and voting through remote communication or in
transactions; and/or k) The profiles of directors absentia, taking into account the company’s scale,
nominated or seeking election or reelection. number of shareholders or members, structure, and
other factors consistent with the protection and
A director, trustee, stockholder, or member may propose promotion of shareholders’ or member’s meetings.
any other matter for inclusion in the agenda at any
regular meeting of stockholders or members. SEC. 50. Place and Time of Meetings of Stockholders or
Members. – Stockholders’ or members’ meetings,
Special meetings of stockholders or members shall be whether regular or special, shall be held in the principal
held at any time deemed necessary or as provided in the office of the corporation as set forth in the articles of
bylaws: Provided, however, That at least one 1) week incorporation, or, if not practicable, in the city or
written notice shall be sent to all stockholders or municipality where the principal office of the
members, unless a different period is provided in the corporation is located: Provided, That any city or
bylaws, law or regulation. municipality in Metro Manila, Metro Cebu, Metro Davao,
and other Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
A stockholder or member may propose the holding of a
special meeting and items to be included in the agenda.
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice
Notice of any meeting may be waived, expressly or shall state the time, place and purpose of the meetings.
impliedly, by any stockholder or member: Provided,
That general waivers of notice in the articles of
incorporation or the bylaws shall not be allowed: Each notice of meeting shall further be accompanied by
the following:
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a) The agenda for the meeting; Page 27 of 73

b) A proxy form which shall be submitted to the prior to the scheduled meeting, unless a longer time is
corporate secretary within a reasonable time prior to provided in the bylaws. A director or trustee may waive
the meeting; this requirement, either expressly or impliedly.

c) When attendance, participation, and voting are Directors or trustees who cannot physically attend or
allowed by remote communication or in absentia, the vote at board meetings can participate and vote through
requirements and procedures to be followed when a remote communication such as videoconferencing,
stockholder or member elects either option; and teleconferencing, or other alternative modes of
communication that allow them reasonable
d) When the meeting is for the election of directors or opportunities to participate. Directors or trustees
trustees, the requirements and procedure for cannot attend or vote by proxy at board meetings.
nomination and election.
A director or trustee who has a potential interest in any
All proceedings and any business transacted at a related party transaction must recuse from voting on
meeting of the stockholders or members, if within the the approval of the related party transaction without
powers or authority of the corporation, shall be valid prejudice to compliance with the requirements of
even if the meeting is improperly held or called: Section 31 of this Code.
Provided, That all the stockholders or members of the
corporation are present or duly represented at the SEC. 53. Who Shall Preside at Meetings. – The chairman
meeting and not one of them expressly states at the or, in his absence, the president shall preside at all
beginning of the meeting that the purpose of their meetings of the directors or trustees as well as of the
attendance is to object to the transaction of any stockholders or members, unless the bylaws provide
business because the meeting is not lawfully called or otherwise.
convened.
SEC. 54. Right to Vote of Secured Creditors and
SEC. 51. Quorum in Meetings. – Unless otherwise Administrators. – In case a stockholder grants security
provided in this Code or in the bylaws, a quorum shall interest in his or her shares in stock corporations, the
consist of the stockholders representing a majority of stockholder-grantor shall have the right to attend and
the outstanding capital stock or a majority of the vote at meetings of stockholders, unless the secured
members in the case of nonstock corporations. creditor is expressly given by the stockholder-grantor
such right in writing which is recorded in the
SEC. 52. Regular and Special Meetings of Directors or appropriate corporate books.
Trustees; Quorum. – Unless the articles of incorporation
or the bylaws provides for a greater majority, a majority Executors, administrators, receivers, and other legal
of the directors or trustees as stated in the articles of representatives duly appointed by the court may attend
incorporation shall constitute a quorum to transact and vote in behalf of the stockholders or members
corporate business, and every decision reached by at without need of any written proxy.
least a majority of the directors or trustees constituting
a quorum, except for the election of officers which shall SEC. 55. Voting in Case of Joint Ownership of Stock. –
require the vote of a majority of all the members of the The consent of all the co-owners shall be necessary in
board, shall be valid as a corporate act. voting shares of stock owned jointly by two 2) or more
persons, unless there is a written proxy, signed by all
Regular meetings of the board of directors or trustees of the co-owners, authorizing one 1) or some of them or
every corporation shall be held monthly, unless the any other person to vote such share or shares: Provided,
bylaws provide otherwise. That when the shares are owned in an “and/or” capacity
by the holders thereof, any one of the joint owners can
Special meetings of the board of directors or trustees vote said shares or appoint a proxy therefor.
may be held at any time upon the call of the president or
as provided in the bylaws. SEC. 56. Voting Right for Treasury Shares. – Treasury
shares shall have no voting right as long as such shares
Meetings of directors or trustees of corporations may be remain in the Treasury.
held anywhere in or outside of the Philippines, unless
the bylaws provide otherwise. Notice of regular or SEC. 57. Manner of Voting; Proxies. – Stockholders and
special meetings stating the date, time and place of the members may vote in person or by proxy in all meetings
meeting must be sent to every director or trustee at of stockholders or members.
least two 2) days
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When so authorized in the bylaws or by a majority of corporate book or record: Provided, That both the
the board of directors, the stockholders or members of trustor and the trustee or trustees may exercise the
corporations may also vote through remote right of inspection of all corporate books and records in
communication or in absentia: Provided, That the votes accordance with the provisions of this Code.
are received before the corporation finishes the tally of
votes. Any other stockholder may transfer the shares to the
same trustee or trustees upon the terms and conditions
A stockholder or member who participates through stated in the voting trust agreement, and thereupon
remote communication or in absentia, shall be deemed shall be bound by all the provisions of said agreement.
present for purposes of quorum.
No voting trust agreement shall be entered into for
Page 28 of 73 purposes of circumventing the laws against anti-
competitive agreements, abuse of dominant position,
The corporation shall establish the appropriate anti-competitive mergers and acquisitions, violation of
requirements and procedures for voting through remote nationality and capital requirements, or for the
communication and in absentia, taking into account the perpetuation of fraud.
company’s scale, number of shareholders or members,
structure and other factors consistent with the basic Unless expressly renewed, all rights granted in a voting
right of corporate suffrage. trust agreement shall automatically expire at the end of
the agreed period. The voting trust certificates as well
Proxies shall be in writing, signed and filed, by the as the certificates of stock in the name of the trustee or
stockholder or member, in any form authorized in the trustees shall thereby be deemed cancelled and new
bylaws and received by the corporate secretary within a certificates of stock shall be reissued in the name of the
reasonable time before the scheduled meeting. Unless trustors.
otherwise provided in the proxy form, it shall be valid
only for the meeting for which it is intended. No proxy The voting trustee or trustees may vote by proxy or in
shall be valid and effective for a period longer than five any manner authorized under the bylaws unless the
5) years at any one time. agreement provides otherwise.

SEC. 58. Voting Trusts. – One or more stockholders of a TITLE VII STOCKS AND STOCKHOLDERS
stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the SEC. 59. Subscription Contract. – Any contract for the
right to vote and other rights pertaining to the shares acquisition of unissued stock in an existing corporation
for a period not exceeding five 5) years at any time: or a corporation still to be formed shall be deemed a
Provided, That in the case of a voting trust specifically subscription within the meaning of this Title,
required as a condition in a loan agreement, said voting notwithstanding the fact that the parties refer to it as a
trust may be for a period exceeding five 5) years but purchase or some other contract.
shall automatically expire upon full payment of the loan.
A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions SEC. 60. Pre-incorporation Subscription. – A
thereof. A certified copy of such agreement shall be filed subscription of shares in a corporation still to be formed
with the corporation and with the Commission; shall be irrevocable for a period of at least six 6) months
otherwise, the agreement is ineffective and from the date of subscription, unless all of the other
unenforceable. The certificate or certificates of stock subscribers consent to the revocation, or the
covered by the voting trust agreement shall be cancelled corporation fails to incorporate within the same period
and new ones shall be issued in the name of the trustee or within a longer period stipulated in the contract of
or trustees, stating that they are issued pursuant to said subscription. No pre-incorporation subscription may be
agreement. The books of the corporation shall state that revoked after the articles of incorporation is submitted
the transfer in the name of the trustee or trustees is to the Commission.
made pursuant to the voting trust agreement.
SEC. 61. Consideration for Stocks. – Stocks shall not be
The trustee or trustees shall execute and deliver to the issued for a consideration less than the par or issued
transferors, voting trust certificates, which shall be price thereof. Consideration for the issuance of stock
transferable in the same manner and with the same may be:
effect as certificates of stock.
a) Actual cash paid to the corporation;
The voting trust agreement filed with the corporation
shall be subject to examination by any stockholder of b) Property, tangible or intangible, actually received by
the corporation in the same manner as any other the corporation and necessary or convenient for its use
88

and lawful purposes at a fair valuation equal to the par No shares of stock against which the corporation holds
or issued value of the stock issued; any unpaid claim shall be transferable in the books of
the corporation.
c) Labor performed for or services actually rendered to
the corporation; SEC. 63. Issuance of Stock Certificates. – No certificate of
stock shall be issued to a subscriber until the full
d) Previously incurred indebtedness of the corporation; amount of the subscription together with interest and
expenses in case of delinquent shares), if any is due, has
been paid.
e) Amounts transferred from unrestricted retained
earnings to stated capital;
SEC. 64. Liability of Directors for Watered Stocks. – A
director or officer of a corporation who: a) consents to
f) Outstanding shares exchanged for stocks in the event the issuance of stocks for a consideration less than its
of reclassification or conversion; g) Shares of stock in par or issued value; b) consents to the issuance of stocks
another corporation; and/or for a consideration other than cash, valued in excess of
its fair value; or c) having knowledge of the insufficient
h) Other generally accepted form of consideration. consideration, does not file a written objection with the
corporate secretary, shall be liable to the corporation or
Where the consideration is other than actual cash, or its creditors, solidarily with the stockholder concerned
consists of intangible property such as patents or for the difference between the value received at the time
copyrights, the valuation thereof shall initially be of issuance of the stock and the par or issued value of
determined by the stockholders or the board of the same.
directors, subject to the approval of the Commission.
SEC. 65. Interest on Unpaid Subscriptions. – Subscribers
Shares of stock shall not be issued in exchange for to stocks shall be liable to the corporation for interest
promissory notes or future service. The same on all unpaid subscriptions from the date of
considerations provided in this section, insofar as subscription, if so required by and at the rate of interest
applicable, may be used for the issuance of bonds by the fixed in the subscription contract. If no rate of interest is
corporation. fixed in the subscription contract, the prevailing legal
rate shall apply.
The issued price of no-par value shares may be fixed in
the articles of incorporation or by the board of directors SEC. 66. Payment of Balance of Subscription. – Subject to
pursuant to authority conferred by the articles of the provisions of the subscription contract, the board of
incorporation or the bylaws, or if not so fixed, by the directors may, at any time, declare due and payable to
stockholders representing at least a majority of the the corporation unpaid subscriptions and may collect
outstanding capital stock at a meeting duly called for the the same or such percentage thereof, in either case, with
purpose. accrued interest, if any, as it may deem necessary.

SEC. 62. Certificate of Stock and Transfer of Shares. – Payment of unpaid subscription or any percentage
The capital stock of corporations shall be divided into thereof, together with any interest accrued shall be
shares for which certificates signed by the president or made on the date specified in the subscription contract
vice president, countersigned by the secretary or or on the date stated in the call made by the board.
assistant secretary, and sealed with the seal of the Failure to pay on such date shall render the entire
corporation shall be issued in accordance with the balance due and payable and shall make the stockholder
bylaws. Shares of stock so issued are personal property liable for interest at the legal rate on such balance,
and may be transferred by delivery of the certificate or unless a different interest rate is provided in the
certificates indorsed by the owner, his attorney- in-fact, subscription contract. The interest shall be computed
or any other person legally authorized to make the from the date specified, until full payment of the
transfer. No transfer, however, shall be valid, except as subscription. If no payment is made within thirty 30)
between the parties, until the transfer is recorded in the days from the said date, all stocks covered by the
books of the corporation showing the names of the subscription shall thereupon become delinquent and
parties to the transaction, the date of the transfer, the shall be subject to sale as hereinafter provided, unless
number of the certificate or certificates, and the number the board of directors orders otherwise.
of shares transferred. The Commission may require
corporations whose securities are traded in trading SEC. 67. Delinquency Sale. – The board of directors may,
markets and which can reasonably demonstrate their by resolution, order the sale of delinquent stock and
capability to do so to issue their securities or shares of shall specifically state the amount due on each
stocks in uncertificated or scripless form in accordance subscription plus all accrued interest, and the date, time
with the rules of the Commission. and place of the sale which shall not be less than thirty
89

30) days nor more than sixty 60) days from the date the SEC. 70. Effect of Delinquency. – No delinquent stock
stocks become delinquent. shall be voted for, be entitled to vote, or be represented
at any stockholder’s meeting, nor shall the holder
Notice of the sale, with a copy of the resolution, shall be thereof be entitled to any of the rights of a stockholder
sent to every delinquent stockholder either personally, except the right to dividends in accordance with the
by registered mail, or through other means provided in provisions of this Code, until and unless payment is
the bylaws. The same shall be published once a week for made by the holder of such delinquent stock for the
two 2) consecutive weeks in a newspaper of general amount due on the subscription with accrued interest,
circulation in the province or city where the principal and the costs and expenses of advertisement, if any.
office of the corporation is located.
SEC. 71. Rights of Unpaid Shares, Nondelinquent. –
Unless the delinquent stockholder pays to the Holders of subscribed shares not fully paid which are
corporation, on or before the date specified for the sale not delinquent shall have all the rights of a stockholder.
of the delinquent stock, the balance due on the former’s
subscription, plus accrued interest, costs of SEC. 72. Lost or Destroyed Certificates. – The following
advertisement and expenses of sale, or unless the board procedure shall be followed by a corporation in issuing
of directors otherwise orders, said delinquent stock new certificates of stock in lieu of those which have
shall be sold at a public auction to such bidder who shall been lost, stolen or destroyed:
offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of a) The registered owner of a certificate of stock in a
advertisement and expenses of sale, for the smallest corporation or such person’s legal representative shall
number of shares or fraction of a share. The stock so file with the corporation an affidavit in triplicate setting
purchased shall be transferred to such purchaser in the forth, if possible, the circumstances as to how the
books of the corporation and a certificate for such stock certificate was lost, stolen or destroyed, the number of
shall be issued in the purchaser’s favor. The remaining shares represented by such certificate, the serial
shares, if any, shall be credited in favor of the delinquent number of the certificate and the name of the
stockholder who shall likewise be entitled to the corporation which issued the same. The owner of such
issuance of a certificate of stock covering such shares. certificate of stock shall also submit such other
information and evidence as may be deemed necessary;
Should there be no bidder at the public auction who and
offers to pay the full amount of the balance on the
subscription together with accrued interest, costs of b) After verifying the affidavit and other information
advertisement, and expenses of sale, for the smallest and evidence with the books of the corporation, the
number of shares or fraction of a share, the corporation corporation shall publish a notice in a newspaper of
may, subject to the provisions of this Code, bid for the general circulation in the place where the corporation
same, and the total amount due shall be credited as fully has its principal office, once a week for three 3)
paid in the books of the corporation. Title to all the consecutive weeks at the expense of the registered
shares of stock covered by the subscription shall be owner of the certificate of stock which has been lost,
vested in the corporation as treasury shares and may be stolen or destroyed. The notice shall state the name of
disposed of by said corporation in accordance with the the corporation, the name of the registered owner, the
provisions of this Code. serial number of the certificate, the number of shares
represented by such certificate, and shall state that after
SEC. 68. When Sale May be Questioned. – No action to the expiration of one 1) year from the date of the last
recover delinquent stock sold can be sustained upon the publication, if no contest has been presented to the
ground of irregularity or defect in the notice of sale, or corporation regarding the certificate of stock, the right
in the sale itself of the delinquent stock, unless the party to make such contest shall be barred and the
seeking to maintain such action first pays or tenders to corporation shall cancel the lost, destroyed or stolen
the party holding the stock the sum for which the same certificate of stock in its books. In lieu thereof, the
was sold, with interest from the date of sale at the legal corporation shall issue a new certificate of stock, unless
rate. No such action shall be maintained unless a the registered owner files a bond or other security as
complaint is filed within six 6) months from the date of may be required, effective for a period of one 1) year, for
sale. such amount and in such form and with such sureties as
may be satisfactory to the board of directors, in which
SEC. 69. Court Action to Recover Unpaid Subscription. – case a new certificate may be issued even before the
Nothing in this Code shall prevent the corporation from expiration of the one 1) year period provided herein. If a
collecting through court action, the amount due on any contest has been presented to the corporation or if an
unpaid subscription, with accrued interest, costs and action is pending in court regarding the ownership of
expenses. the certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the court renders a
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final decision regarding the ownership of the certificate person or by a representative at reasonable hours on
of stock which has been lost, stolen or destroyed. business days, and a demand in writing may be made by
such director, trustee or stockholder at their expense,
Except in case of fraud, bad faith, or negligence on the for copies of such records or excerpts from said records.
part of the corporation and its officers, no action may be The inspecting or reproducing party shall remain bound
brought against any corporation which shall have issued by confidentiality rules under prevailing laws, such as
certificate of stock in lieu of those lost, stolen or the rules on trade secrets or processes under Republic
destroyed pursuant to the procedure above-described. Act No. 8293, otherwise known as the “Intellectual
Property Code of the Philippines”, as amended, Republic
Act No. 10173, otherwise known as the “Data Privacy
Page 33 of 73 Act of 2012”, Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”, and the Rules of
TITLE VIII CORPORATE BOOKS AND RECORDS Court.

SEC. 73. Books to be Kept; Stock Transfer Agent. – Every A requesting party who is not a stockholder or member
corporation shall keep and carefully preserve at its of record, or is a competitor, director, officer, controlling
principal office all information relating to the stockholder or otherwise represents the interests of a
corporation including, but not limited to: competitor shall have no right to inspect or demand
reproduction of corporate records.
a) The articles of incorporation and bylaws of the
corporation and all their amendments; Any stockholder who shall abuse the rights granted
under this section shall be penalized under Section 158
b) The current ownership structure and voting rights of of this Code, without prejudice to the provisions of
the corporation, including lists of stockholders or Republic Act No. 8293, otherwise known as the
members, group structures, intra-group relations, “Intellectual Property Code of the Philippines”, as
ownership data, and beneficial ownership; amended, and Republic Act No. 10173, otherwise
known as the “Data Privacy Act of 2012”.
c) The names and addresses of all the members of the
board of directors or trustees and the executive officers; Any officer or agent of the corporation who shall refuse
to allow the inspection and/or reproduction of records
in accordance with the provisions of this Code shall be
d) A record of all business transactions; liable to such director, trustee, stockholder or member
for damages, and in addition, shall be guilty of an
e) A record of the resolutions of the board of directors offense which shall be punishable under Section 161 of
or trustees and of the stockholders or members; this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of
f) Copies of the latest reportorial requirements directors or trustees, the liability under this section for
submitted to the Commission; and such action shall be imposed upon the directors or
trustees who voted for such refusal: Provided, further,
That it shall be a defense to any action under this
g) The minutes of all meetings of stockholders or section that the person demanding to examine and copy
members, or of the board of directors or trustees. Such excerpts from the corporation’s records and minutes
minutes shall set forth in detail, among others: the time has improperly used any information secured through
and place of the meeting held, how it was authorized, any prior examination of the records or minutes of such
the notice given, the agenda therefor, whether the corporation or of any other corporation, or was not
meeting was regular or special, its object if special, acting in good faith or for a legitimate purpose in
those present and absent, and every act done or ordered making the demand to examine or reproduce corporate
done at the meeting. Upon the demand of a director, records, or is a competitor, director, officer, controlling
trustee, stockholder or member, the time when any stockholder or otherwise represents the interests of a
director, trustee, stockholder or member entered or left competitor.
the meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken on any
motion or proposition, and a record thereof carefully If the corporation denies or does not act on a demand
made. The protest of a director, trustee, stockholder or for inspection and/or reproduction, the aggrieved party
member on any action or proposed action must be may report such to the Commission. Within five 5) days
recorded in full upon their demand. from receipt of such report, the Commission shall
conduct a summary investigation and issue an order
directing the inspection or reproduction of the
Corporate records, regardless of the form in which they requested records.
are stored, shall be open to inspection by any director,
trustee, stockholder or member of the corporation in
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Stock corporations must also keep a stock and transfer The board of directors or trustees of each corporation,
book, which shall contain a record of all stocks in the party to the merger or consolidation, shall approve a
names of the stockholders alphabetically arranged; the plan of merger or consolidation setting forth the
installments paid and unpaid on all stocks for which following:
subscription has been made, and the date of payment of
any installment; a statement of every alienation, sale or a) The names of the corporations proposing to merge or
transfer of stock made, the date thereof, by and to whom consolidate, hereinafter referred to as the constituent
made; and such other entries as the bylaws may corporations;
prescribe. The stock and transfer book shall be kept in
the principal office of the corporation or in the office of
its stock transfer agent and shall be open for inspection b) The terms of the merger or consolidation and the
by any director or stockholder of the corporation at mode of carrying the same into effect;
reasonable hours on business days.
c) A statement of the changes, if any, in the articles of
A stock transfer agent or one engaged principally in the incorporation of the surviving corporation in case of
business of registering transfers of stocks in behalf of a merger; and, in case of consolidation, all the statements
stock corporation shall be allowed to operate in the required to be set forth in the articles of incorporation
Philippines upon securing a license from the for corporations organized under this Code; and
Commission and the payment of a fee to be fixed by the
Commission, which shall be renewable annually: d) Such other provisions with respect to the proposed
Provided, That a stock corporation is not precluded merger or consolidation as are deemed necessary or
from performing or making transfers of its own stocks, desirable.
in which case all the rules and regulations imposed on
stock transfer agents, except the payment of a license SEC. 76. Stockholders’ or Members’ Approval. – Upon
fee herein provided, shall be applicable: Provided, approval by a majority vote of each of the board of
further, That the Commission may require stock directors or trustees of the constituent corporations of
corporations which transfer and/or trade stocks in the plan of merger or consolidation, the same shall be
secondary markets to have an independent transfer submitted for approval by the stockholders or members
agent. of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such
SEC. 74. Right to Financial Statements. – A corporation meetings shall be given to all stockholders or members
shall furnish a stockholder or member, within ten 10) of the respective corporations in the same manner as
days from receipt of their written request, its most giving notice of regular or special meetings under
recent financial statement, in the form and substance of Section 49 of this Code. The notice shall state the
the financial reporting required by the Commission. purpose of the meeting and include a copy or a
summary of the plan of merger or consolidation.
At the regular meeting of stockholders or members, the
board of directors or trustees shall present to such The affirmative vote of stockholders representing at
stockholders or members a financial report of the least two-thirds 2/3) of the outstanding capital stock of
operations of the corporation for the preceding year, each corporation in the case of stock corporations or at
which shall include financial statements, duly signed least two-thirds 2/3) of the members in the case of
and certified in accordance with this Code, and the rules nonstock corporations shall be necessary for the
the Commission may prescribe. approval of such plan. Any dissenting stockholder may
exercise the right of appraisal in accordance with this
However, if the total assets or total liabilities of the Code: Provided, That if after the approval by the
corporation is less than Six hundred thousand pesos stockholders of such plan, the board of directors decides
P600,000.00), or such other amount as may be to abandon the plan, the right of appraisal shall be
determined appropriate by the Department of Finance, extinguished.
the financial statements may be certified under oath by
the treasurer and the president. Any amendment to the plan of merger or consolidation
may be made: Provided, That such amendment is
TITLE IX MERGER AND CONSOLIDATION approved by a majority vote of the respective boards of
directors or trustees of all the constituent corporations
and ratified by the affirmative vote of stockholders
SEC. 75. Plan of Merger or Consolidation. – Two 2) or representing at least two-thirds 2/3) of the outstanding
more corporations may merge into a single corporation capital stock or of two-thirds 2/3) of the members of
which shall be one of the constituent corporations or each of the constituent corporations. Such plan,
may consolidate into a new single corporation which together with any amendment, shall be considered as
shall be the consolidated corporation. the agreement of merger or consolidation.
92

SEC. 77. Articles of Merger or Consolidation. – After the SEC. 79. Effects of Merger or Consolidation. – The
approval by the stockholders or members as required merger or consolidation shall have the following effects:
by the preceding section, articles of merger or articles of
consolidation shall be executed by each of the a) The constituent corporations shall become a single
constituent corporations, to be signed by the president corporation which, in case of merger, shall be the
or vice president and certified by the secretary or surviving corporation designated in the plan of merger;
assistant secretary of each corporation setting forth: and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
a) The plan of the merger or the plan of consolidation;
b) The separate existence of the constituent
b) As to stock corporations, the number of shares corporations shall cease, except that of the surviving or
outstanding, or in the case of nonstock corporations, the the consolidated corporation;
number of members;
c) The surviving or the consolidated corporation shall
c) As to each corporation, the number of shares or possess all the rights, privileges, immunities, and
members voting for or against such plan, respectively; powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
d) The carrying amounts and fair values of the assets
and liabilities of the respective companies as of the d) The surviving or the consolidated corporation shall
agreed cut-off date; possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real
e) The method to be used in the merger or consolidation or personal property, all receivables due on whatever
of accounts of the companies; account, including subscriptions to shares and other
choses in action, and every other interest of, belonging
to, or due to each constituent corporation, shall be
f) The provisional or pro forma values, as merged or deemed transferred to and vested in such surviving or
consolidated, using the accounting method; and consolidated corporation without further act or deed;
and
g) Such other information as may be prescribed by the
Commission. e) The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of each
SEC. 78. Effectivity of Merger or Consolidation. – The constituent corporation as though such surviving or
articles of merger or of consolidation, signed and consolidated corporation had itself incurred such
certified as required by this Code, shall be submitted to liabilities or obligations; and any pending claim, action
the Commission for its approval: Provided, That in the or proceeding brought by or against any constituent
case of merger or consolidation of banks or banking corporation may be prosecuted by or against the
institutions, loan associations, trust companies, surviving or consolidated corporation. The rights of
insurance companies, public utilities, educational creditors or liens upon the property of such constituent
institutions, and other special corporations governed by corporations shall not be impaired by the merger or
special laws, the favorable recommendation of the consolidation.
appropriate government agency shall first be obtained.
If the Commission is satisfied that the merger or TITLE X APPRAISAL RIGHT
consolidation of the corporations concerned is
consistent with the provisions of this Code and existing
laws, it shall issue a certificate approving the articles SEC. 80. When the Right of Appraisal May Be Exercised.
and plan of merger or of consolidation, at which time – Any stockholder of a corporation shall have the right
the merger or consolidation shall be effective. to dissent and demand payment of the fair value of the
shares in the following instances:
If, upon investigation, the Commission has reason to
believe that the proposed merger or consolidation is a) In case an amendment to the articles of incorporation
contrary to or inconsistent with the provisions of this has the effect of changing or restricting the rights of any
Code or existing laws, it shall set a hearing to give the stockholder or class of shares, or of authorizing
corporations concerned the opportunity to be heard. preferences in any respect superior to those of
Written notice of the date, time, and place of hearing outstanding shares of any class, or of extending or
shall be given to each constituent corporation at least shortening the term of corporate existence;
two 2) weeks before said hearing. The Commission shall
thereafter proceed as provided in this Code. b) In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
93

the corporate property and assets as provided in this the corporation, or if the proposed corporate action is
Code; abandoned or rescinded by the corporation or
disapproved by the Commission where such approval is
c) In case of merger or consolidation; and necessary, or if the Commission determines that such
stockholder is not entitled to the appraisal right, then
the right of the stockholder to be paid the fair value of
d) In case of investment of corporate funds for any the shares shall cease, the status as the stockholder
purpose other than the primary purpose of the shall be restored, and all dividend distributions which
corporation. would have accrued on the shares shall be paid to the
stockholder.
SEC. 81. How Right is Exercised. – The dissenting
stockholder who votes against a proposed corporate SEC. 84. Who Bears Costs of Appraisal. – The costs and
action may exercise the right of appraisal by making a expenses of appraisal shall be borne by the corporation,
written demand on the corporation for the payment of unless the fair value ascertained by the appraisers is
the fair value of shares held within thirty 30) days from approximately the same as the price which the
the date on which the vote was taken: Provided, That corporation may have offered to pay the stockholder, in
failure to make the demand within such period shall be which case they shall be borne by the latter. In the case
deemed a waiver of the appraisal right. If the proposed of an action to recover such fair value, all costs and
corporate action is implemented, the corporation shall expenses shall be assessed against the corporation,
pay the stockholder, upon surrender of the certificate or unless the refusal of the stockholder to receive payment
certificates of stock representing the stockholder’s was unjustified.
shares, the fair value thereof as of the day before the
vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action. SEC. 85. Notation on Certificates; Rights of Transferee. –
Within ten 10) days after demanding payment for
shares held, a dissenting stockholder shall submit the
If, within sixty 60) days from the approval of the certificates of stock representing the shares to the
corporate action by the stockholders, the withdrawing corporation for notation that such shares are dissenting
stockholder and the corporation cannot agree on the shares. Failure to do so shall, at the option of the
fair value of the shares, it shall be determined and corporation, terminate the rights under this Title. If
appraised by three 3) disinterested persons, one of shares represented by the certificates bearing such
whom shall be named by the stockholder, another by the notation are transferred, and the certificates
corporation, and the third by the two 2) thus chosen. consequently cancelled, the rights of the transferor as a
The findings of the majority of the appraisers shall be dissenting stockholder under this Title shall cease and
final, and their award shall be paid by the corporation the transferee shall have all the rights of a regular
within thirty 30) days after such award is made: stockholder; and all dividend distributions which would
Provided, That no payment shall be made to any have accrued on such shares shall be paid to the
dissenting stockholder unless the corporation has transferee.
unrestricted retained earnings in its books to cover such
payment: Provided, further, That upon payment by the
corporation of the agreed or awarded price, the TITLE XI NONSTOCK CORPORATION
stockholder shall forthwith transfer the shares to the
corporation. SEC. 86. Definition. – For purposes of this Code and
subject to its provisions on dissolution, a nonstock
SEC. 82. Effect of Demand and Termination of Right. – corporation is one where no part of its income is
From the time of demand for payment of the fair value distributable as dividends to its members, trustees, or
of a stockholder’s shares until either the abandonment officers: Provided, That any profit which a nonstock
of the corporate action involved or the purchase of the corporation may obtain incidental to its operations
said shares by the corporation, all rights accruing to shall, whenever necessary or proper, be used for the
such shares, including voting and dividend rights, shall furtherance of the purpose or purposes for which the
be suspended in accordance with the provisions of this corporation was organized, subject to the provisions of
Code, except the right of such stockholder to receive this Title.
payment of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of the said The provisions governing stock corporations, when
shares within thirty 30) days after the award, the voting pertinent, shall be applicable to nonstock corporations,
and dividend rights shall immediately be restored. except as may be covered by specific provisions of this
Title.
SEC. 83. When Right to Payment Ceases. – No demand
for payment under this Title may be withdrawn unless SEC. 87. Purposes. – Nonstock corporations may be
the corporation consents thereto. If, however, such formed or organized for charitable, religious,
demand for payment is withdrawn with the consent of educational, professional, cultural, fraternal, literary,
94

scientific, social, civic service, or similar purposes, like SEC. 92. List of Members and Proxies, Place of Meetings.
trade, industry, agricultural and like chambers, or any – The corporation shall, at all times, keep a list of its
combination thereof, subject to the special provisions of members and their proxies in the form the Commission
this Title governing particular classes of nonstock may require. The list shall be updated to reflect the
corporations. members and proxies of record twenty 20) days prior to
any scheduled election. The bylaws may provide that
CHAPTER I MEMBERS the members of a nonstock corporation may hold their
regular or special meetings at any place even outside
the place where the principal office of the corporation is
SEC. 88. Right to Vote. – The right of the members of any located: Provided, That proper notice is sent to all
class or classes to vote may be limited, broadened, or members indicating the date, time and place of the
denied to the extent specified in the articles of meeting: Provided, further, That the place of meeting
incorporation or the bylaws. Unless so limited, shall be within Philippine territory.
broadened, or denied, each member, regardless of class,
shall be entitled to one 1) vote.
CHAPTER III
Page 40 of 73
DISTRIBUTION OF ASSETS IN NONSTOCK
CORPORATIONS
Unless otherwise provided in the articles of
incorporation or the bylaws, a member may vote by
proxy, in accordance with the provisions of this Code. SEC. 93. Rules of Distribution. – The assets of a nonstock
The bylaws may likewise authorize voting through corporation undergoing the process of dissolution for
remote communication and/or in absentia. reasons other than those set forth in Section 139 of this
Code, shall be applied and distributed as follows:
SEC. 89. Nontransferability of Membership. –
Membership in a nonstock corporation and all rights a) All liabilities and obligations of the corporation shall
arising therefrom are personal and non-transferable, be paid, satisfied and discharged, or adequate provision
unless the articles of incorporation or the bylaws shall be made therefor;
otherwise provide.
b) Assets held by the corporation upon a condition
SEC. 90. Termination of Membership. – Membership requiring return, transfer or conveyance, and which
shall be terminated in the manner and for the causes condition occurs by reason of the dissolution, shall be
provided in the articles of incorporation or the bylaws. returned, transferred or conveyed in accordance with
Termination of membership shall extinguish all rights of such requirements;
a member in the corporation or in its property, unless
otherwise provided in the articles of incorporation or c) Assets received and held by the corporation subject
the bylaws. to limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
CHAPTER II TRUSTEES AND OFFICERS but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one 1) or more corporations,
SEC. 91. Election and Term of Trustees. – The number of societies or organizations engaged in activities in the
trustees shall be fixed in the articles of incorporation or Philippines substantially similar to those of the
bylaws which may or may not be more than fifteen 15). dissolving corporation according to a plan of
They shall hold office for not more than three 3) years distribution adopted pursuant to this Chapter;
until their successors are elected and qualified. Trustees
elected to fill vacancies occurring before the expiration
of a particular term shall hold office only for the d) Assets other than those mentioned in the preceding
unexpired period. paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or
the bylaws, to the extent that the articles of
Except with respect to independent trustees of nonstock incorporation or the bylaws determine the distributive
corporations vested with public interest, only a member rights of members, or any class or classes of members,
of the corporation shall be elected as trustee. or provide for distribution; and

Unless otherwise provided in the articles of e) In any other case, assets may be distributed to such
incorporation or the bylaws, the members may directly persons, societies, organizations or corporations,
elect officers of a nonstock corporation. whether or not organized for profit, as may be specified
in a plan of distribution adopted pursuant to this
Chapter.
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SEC. 94. Plan of Distribution of Assets. – A plan a) A classification of shares or rights, the qualifications
providing for the distribution of assets, consistent with for owning or holding the same, and restrictions on
the provisions of this Title, may be adopted by a their transfers, subject to the provisions of the following
nonstock corporation in the process of dissolution in section;
the following manner:
b) A classification of directors into one 1) or more
a) The board of trustees shall, by majority vote, adopt a classes, each of whom may be voted for and elected
resolution recommending a plan of distribution and solely by a particular class of stock; and
directing the submission thereof to a vote at a regular or
special meeting of members having voting rights; c) Greater quorum or voting requirements in meetings
of stockholders or directors than those provided in this
b) Each member entitled to vote shall be given a written Code.
notice setting forth the proposed plan of distribution or
a summary thereof and the date, time and place of such The articles of incorporation of a close corporation may
meeting within the time and in the manner provided in provide that the business of the corporation shall be
this Code for the giving of notice of meetings; and managed by the stockholders of the corporation rather
than by a board of directors. So long as this provision
c) Such plan of distribution shall be adopted upon continues in effect, no meeting of stockholders need be
approval of at least two-thirds 2/3) of the members called to elect directors: Provided, That the stockholders
having voting rights present or represented by proxy at of the corporation shall be deemed to be directors for
such meeting. the purpose of applying the provisions of this Code,
unless the context clearly requires otherwise: Provided,
Page 42 of 73 further, That the stockholders of the corporation shall
be subject to all liabilities of directors.
TITLE XII CLOSE CORPORATIONS
The articles of incorporation may likewise provide that
all officers or employees or that specified officers or
SEC. 95. Definition and Applicability of Title. – A close employees shall be elected or appointed by the
corporation, within the meaning of this Code, is one stockholders, instead of by the board of directors.
whose articles of incorporation provides that: a) all the
corporation’s issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more SEC. 97. Validity of Restrictions on Transfer of Shares. –
than a specified number of persons, not exceeding Restrictions on the right to transfer shares must appear
twenty 20); b) all the issued stock of all classes shall be in the articles of incorporation, in the bylaws, as well as
subject to one or more specified restrictions on transfer in the certificate of stock; otherwise, the same shall not
permitted by this Title; and c) the corporation shall not be binding on any purchaser in good faith. Said
list in any stock exchange or make any public offering of restrictions shall not be more onerous than granting the
its stocks of any class. Notwithstanding the foregoing, a existing stockholders or the corporation the option to
corporation shall not be deemed a close corporation purchase the shares of the transferring stockholder with
when at least two-thirds 2/3) of its voting stock or such reasonable terms, conditions or period stated. If,
voting rights is owned or controlled by another upon the expiration of said period, the existing
corporation which is not a close corporation within the stockholders or the corporation fails to exercise the
meaning of this Code. option to purchase, the transferring stockholder may
sell their shares to any third person.
Any corporation may be incorporated as a close
corporation, except mining or oil companies, stock SEC. 98. Effects of Issuance or Transfer of Stock in
exchanges, banks, insurance companies, public utilities, Breach of Qualifying Conditions. –
educational institutions and corporations declared to be
vested with public interest in accordance with the a) If a stock of a close corporation is issued or
provisions of this Code. transferred to any person who is not eligible to be a
holder thereof under any provision of the articles of
The provisions of this Title shall primarily govern close incorporation, and if the certificate for such stock
corporations: Provided, That other Titles in this Code conspicuously shows the qualifications of the persons
shall apply suppletorily, except as otherwise provided entitled to be holders of record thereof, such person is
under this Title. conclusively presumed to have notice of the fact of the
ineligibility to be a stockholder.
SEC. 96. Articles of Incorporation. – The articles of
incorporation of a close corporation may provide for: b) If the articles of incorporation of a close corporation
states the number of persons, not exceeding twenty 20),
96

who are entitled to be stockholders of record, and if the or as agreed, or in accordance with a procedure agreed
certificate for such stock conspicuously states such upon by them.
number, and the issuance or transfer of stock to any
person would cause the stock to be held by more than c) No provision in a written agreement signed by the
such number of persons, the person to whom such stock stockholders, relating to any phase of corporate affairs,
is issued or transferred is conclusively presumed to shall be invalidated between the parties on the ground
have notice of this fact. that its effect is to make them partners among
themselves.
c) If a stock certificate of a close corporation
conspicuously shows a restriction on transfer of the d) A written agreement among some or all of the
corporation’s stock and the transferee acquires the stockholders in a close corporation shall not be
stock in violation of such restriction, the transferee is invalidated on the ground that it relates to the conduct
conclusively presumed to have notice of the fact that the of the business and affairs of the corporation as to
stock was acquired in violation of the restriction. restrict or interfere with the discretion or powers of the
board of directors: Provided, That such agreement shall
d) Whenever a person to whom stock of a close impose on the stockholders who are parties thereto the
corporation has been issued or transferred has or is liabilities for managerial acts imposed on directors by
conclusively presumed under this section to have notice this Code.
of: 1) the person’s ineligibility to be a stockholder of the
corporation; or 2) that the transfer of stock would cause e) Stockholders actively engaged in the management or
the stock of the corporation to be held by more than the operation of the business and affairs of a close
number of persons permitted under its articles of corporation shall be held to strict fiduciary duties to
incorporation; or 3) that the transfer violates a each other and among themselves. The stockholders
restriction on transfer of stock, and the corporation shall be personally liable for corporate torts unless the
may, at its option, refuse to register the transfer in the corporation has obtained reasonably adequate liability
name of the transferee. insurance.

e) The provisions of subsection d) shall not be SEC. 100. When a Board Meeting is Unnecessary or
applicable if the transfer of stock, though contrary to Improperly Held. – Unless the bylaws provide
subsections a), b) or c), has been consented to by all the otherwise, any action taken by the directors of a close
stockholders of the close corporation, or if the close corporation without a meeting called properly and with
corporation has amended its articles of incorporation in due notice shall nevertheless be deemed valid if:
accordance with this Title.
a) Before or after such action is taken, a written consent
f) The term “transfer”, as used in this section, is not thereto is signed by all the directors; or
limited to a transfer for value.
b) All the stockholders have actual or implied
g) The provisions of this section shall not impair any knowledge of the action and make no prompt objection
right which the transferee may have to either rescind in writing; or
the transfer or recover the stock under any express or
implied warranty.
c) The directors are accustomed to take informal action
with the express or implied acquiescence of all the
SEC. 99. Agreements by Stockholders. – stockholders; or

a) Agreements duly signed and executed by and among d) All the directors have express or implied knowledge
all stockholders before the formation and organization of the action in question and none of them makes a
of a close corporation shall survive the incorporation prompt objection in writing.
and shall continue to be valid and binding between such
stockholders, if such be their intent, to the extent that
such agreements are consistent with the articles of An action within the corporate powers taken at a
incorporation, irrespective of where the provisions of meeting held without proper call or notice, is deemed
such agreements are contained, except those required ratified by a director who failed to attend, unless after
by this Title to be embodied in said articles of having knowledge thereof, the director promptly files
incorporation. his written objection with the secretary of the
corporation.
b) A written agreement signed by two 2) or more
stockholders may provide that in exercising any voting SEC. 101. Preemptive Right in Close Corporations. – The
right, the shares held by them shall be voted as provided preemptive right of stockholders in close corporations
shall extend to all stock to be issued, including
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reissuance of treasury shares, whether for money, which may fix the compensation absent an agreement
property or personal services, or in payment of or in the event of disagreement between the provisional
corporate debts, unless the articles of incorporation director and the corporation.
provide otherwise.
SEC. 104. Withdrawal of Stockholder or Dissolution of
SEC. 102. Amendment of Articles of Incorporation. – Corporation. – In addition and without prejudice to
Any amendment to the articles of incorporation which other rights and remedies available under this Title, any
seeks to delete or remove any provision required by this stockholder of a close corporation may, for any reason,
Title or to reduce a quorum or voting requirement compel the corporation to purchase shares held at fair
stated in said articles of incorporation shall require the value, which shall not be less than the par or issued
affirmative vote of at least two-thirds 2/3) of the value, when the corporation has sufficient assets in its
outstanding capital stock, whether with or without books to cover its debts and liabilities exclusive of
voting rights, or of such greater proportion of shares as capital stock: Provided, That any stockholder of a close
may be specifically provided in the articles of corporation may, by written petition to the Commission,
incorporation for amending, deleting or removing any of compel the dissolution of such corporation whenever
the aforesaid provisions, at a meeting duly called for the any of acts of the directors, officers, or those in control
purpose. of the corporation is illegal, fraudulent, dishonest,
oppressive or unfairly prejudicial to the corporation or
SEC. 103. Deadlocks. – Notwithstanding any contrary any stockholder, or whenever corporate assets are being
provision in the close corporation’s articles of misapplied or wasted.
incorporation, bylaws, or stockholders’ agreement, if
the directors or stockholders are so divided on the TITLE XIII SPECIAL CORPORATIONS CHAPTER I
management of the corporation’s business and affairs EDUCATIONAL CORPORATIONS
that the votes required for a corporate action cannot be
obtained, with the consequence that the business and SEC. 105. Incorporation. – Educational corporations
affairs of the corporation can no longer be conducted to shall be governed by special laws and by the general
the advantage of the stockholders generally, the provisions of this Code.
Commission, upon written petition by any stockholder,
shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have SEC. 106. Board of Trustees. –Trustees of educational
authority to make appropriate orders, such as: a) institutions organized as nonstock corporations shall
cancelling or altering any provision contained in the not be less than five 5) nor more than fifteen 15):
articles of incorporation, bylaws, or any stockholder’s Provided, That the number of trustees shall be in
agreement; b) cancelling, altering or enjoining a multiples of five 5).
resolution or act of the corporation or its board of
directors, stockholders, or officers; c) directing or Unless otherwise provided in the articles of
prohibiting any act of the corporation or its board of incorporation or bylaws, the board of trustees of
directors, stockholders, officers, or other persons party incorporated schools, colleges, or other institutions of
to the action; d) requiring the purchase at their fair learning shall, as soon as organized, so classify
value of shares of any stockholder, either by the themselves that the term of office of one-fifth 1/5) of
corporation regardless of the availability of unrestricted their number shall expire every year. Trustees
retained earnings in its books, or by the other thereafter elected to fill vacancies, occurring before the
stockholders; e) appointing a provisional director; f) expiration of a particular term, shall hold office only for
dissolving the corporation; or g) granting such other the unexpired period. Trustees elected thereafter to fill
relief as the circumstances may warrant. vacancies caused by expiration of term shall hold office
for five 5) years. A majority of the trustees shall
A provisional director shall be an impartial person who constitute a quorum for the transaction of business. The
is neither a stockholder nor a creditor of the powers and authority of trustees shall be defined in the
corporation or any of its subsidiaries or affiliates, and bylaws.
whose further qualifications, if any, may be determined
by the Commission. A provisional director is not a For institutions organized as stock corporations, the
receiver of the corporation and does not have the title number and term of directors shall be governed by the
and powers of a custodian or receiver. A provisional provisions on stock corporations.
director shall have all the rights and powers of a duly
elected director, including the right to be notified of and CHAPTER II RELIGIOUS CORPORATIONS
to vote at meetings of directors until removed by order
of the Commission or by all the stockholders. The
compensation of the provisional director shall be SEC. 107. Classes of Religious Corporations. – Religious
determined by agreement between such director and corporations may be incorporated by one or more
the corporation, subject to approval of the Commission,
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persons. Such corporations may be classified into certificate of election or letter of appointment of such
corporations sole and religious societies. chief archbishop, bishop, priest, minister, rabbi, or
presiding elder, duly certified to be correct by any
Religious corporations shall be governed by this notary public.
Chapter and by the general provisions on nonstock
corporations insofar as applicable. From and after filing with the Commission of the said
articles of incorporation, verified by affidavit or
SEC. 108. Corporation sole. – For the purpose of affirmation, and accompanied by the documents
administering and managing, as trustee, the affairs, mentioned in the preceding paragraph, such chief
property and temporalities of any religious archbishop, bishop, priest, minister, rabbi, or presiding
denomination, sect or church, a corporation sole may be elder shall become a corporation sole and all
formed by the chief archbishop, bishop, priest, minister, temporalities, estate and properties of the religious
rabbi, or other presiding elder of such religious denomination, sect or church theretofore administered
denomination, sect, or church. or managed as such chief archbishop, bishop, priest,
minister, rabbi, or presiding elder shall be personally
held in trust as a corporation sole, for the use, purpose,
SEC. 109. Articles of incorporation. – In order to become
a corporation sole, the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religious Page 48 of 73
denomination, sect or church must file with the
Commission articles of incorporation setting forth the exclusive benefit and on behalf of the religious
following: denomination, sect or church, including hospitals,
schools, colleges, orphan asylums, parsonages, and
a) That the applicant chief archbishop, bishop, priest, cemeteries thereof.
minister, rabbi, or presiding elder represents the
religious denomination, sect, or church which desires to SEC. 111. Acquisition and Alienation of Property. – A
become a corporation sole; corporation sole may purchase and hold real estate and
personal property for its church, charitable, benevolent,
b) That the rules, regulations and discipline of the or educational purposes, and may receive bequests or
religious denomination, sect or church are consistent gifts for such purposes. Such corporation may sell or
with becoming a corporation sole and do not forbid it; mortgage real property held by it by obtaining an order
for that purpose from the Regional Trial Court of the
province where the property is situated upon proof that
c) That such chief archbishop, bishop, priest, minister, the notice of the application for leave to sell or mortgage
rabbi, or presiding elder is charged with the has been made through publication or as directed by the
administration of the temporalities and the Court, and that it is in the interest of the corporation
management of the affairs, estate and properties of the that leave to sell or mortgage be granted. The
religious denomination, sect or church within the application for leave to sell or mortgage must be made
territorial jurisdiction, so described succinctly in the by petition, duly verified, by the chief archbishop,
articles of incorporation; bishop, priest, minister, rabbi, or presiding elder acting
as corporation sole, and may be opposed by any
d) The manner by which any vacancy occurring in the member of the religious denomination, sect or church
office of chief archbishop, bishop, priest, minister, rabbi, represented by the corporation sole: Provided, That in
or presiding elder is required to be filled, according to cases where the rules, regulations, and discipline of the
the rules, regulations or discipline of the religious religious denomination, sect or church, religious society,
denomination, sect or church; and or order concerned represented by such corporation
sole regulate the method of acquiring, holding, selling,
e) The place where the principal office of the and mortgaging real estate and personal property, such
corporation sole is to be established and located, which rules, regulations and discipline shall govern, and the
place must be within the territory of the Philippines. intervention of the courts shall not be necessary.

The articles of incorporation may include any other SEC. 112. Filling of Vacancies. – The successors in office
provision not contrary to law for the regulation of the of any chief archbishop, bishop, priest, minister, rabbi,
affairs of the corporation. or presiding elder in a corporation sole shall become
the corporation sole on their accession to office and
shall be permitted to transact business as such upon
SEC. 110. Submission of the Articles of Incorporation. – filing a copy of their commission, certificate of election,
The articles of incorporation must be verified, by or letters of appointment, duly certified by any notary
affidavit or affirmation of the chief archbishop, bishop, public with the Commission.
priest, minister, rabbi, or presiding elder, as the case
may be, and accompanied by a copy of the commission,
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During any vacancy in the office of chief archbishop, b) That at least two-thirds 2/3) of its membership has
bishop, priest, minister, rabbi, or presiding elder of any given written consent or has voted to incorporate, at a
religious denomination, sect or church incorporated as duly convened meeting of the body;
a corporation sole, the person or persons authorized by
the rules, regulations or discipline of the religious c) That the incorporation of the religious society or
denomination, sect or church represented by the religious order, or diocese, synod, or district
corporation sole to administer the temporalities and organization is not forbidden by competent authority or
manage the affairs, estate, and properties of the by the Constitution, rules, regulations or discipline of
corporation sole shall exercise all the powers and the religious denomination, sect or church of which it
authority of the corporation sole during such vacancy. forms part;

SEC. 113. Dissolution. – A corporation sole may be d) That the religious society or religious order, or
dissolved and its affairs settled voluntarily by diocese, synod, or district organization desires to
submitting to the Commission a verified declaration of incorporate for the administration of its affairs,
dissolution, setting forth: properties and estate;

a) The name of the corporation; e) The place within the Philippines where the principal
office of the corporation is to be established and
b) The reason for dissolution and winding up; located; and

c) The authorization for the dissolution of the f) The names, nationalities, and residence addresses of
corporation by the particular religious denomination, the trustees, not less than five 5) nor more than fifteen
sect or church; and 15), elected by the religious society or religious order, or
the diocese, synod, or district organization to serve for
d) The names and addresses of the persons who are to the first year or such other period as may be prescribed
supervise the winding up of the affairs of the by the laws of the religious society or religious order, or
corporation. of the diocese, synod, or district organization.

Upon approval of such declaration of dissolution by the CHAPTER III ONE PERSON CORPORATIONS
Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its SEC. 115. Applicability of Provisions to One Person
affairs. Corporations. – The provisions of this Title shall
primarily apply to One Person Corporations. Other
SEC. 114. Religious Societies. – Unless forbidden by provisions of this Code apply suppletorily, except as
competent authority, the Constitution, pertinent rules, otherwise provided in this Title.
regulations, or discipline of the religious denomination,
sect or church of which it is a part, any religious society, Page 50 of 73
religious order, diocese, synod, or district organization
of any religious denomination, sect or church, may, upon SEC. 116. One Person Corporation. – A One Person
written consent and/or by an affirmative vote at a Corporation is a corporation with a single stockholder:
meeting called for the purpose of at least two-thirds Provided, That only a natural person, trust, or an estate
2/3) of its membership, incorporate for the may form a One Person Corporation.
administration of its temporalities or for the
management of its affairs, properties, and estate by
filing with the Commission, articles of incorporation Banks and quasi-banks, pre-need, trust, insurance,
verified by the affidavit of the presiding elder, secretary, public and publicly-listed companies, and non-chartered
or clerk or other member of such religious society or government-owned and -controlled corporations may
religious order, or diocese, synod, or district not incorporate as One Person Corporations: Provided,
organization of the religious denomination, sect or further, That a natural person who is licensed to
church, setting forth the following: exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under special
a) That the religious society or religious order, or laws.
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or
church; SEC. 117. Minimum Capital Stock Required for One
Person Corporation. – A One Person Corporation shall
not be required to have a minimum authorized capital
stock except as otherwise provided by special law.
100

SEC. 118. Articles of Incorporation. – A One Person a) Be responsible for maintaining the minutes book
Corporation shall file articles of incorporation in and/or records of the corporation;
accordance with the requirements under Section 14 of
this Code. It shall likewise substantially contain the b) Notify the nominee or alternate nominee of the death
following: or incapacity of the single stockholder, which notice
shall be given no later than five 5) days from such
a) If the single stockholder is a trust or an estate, the occurrence;
name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, c) Notify the Commission of the death of the single
custodian, or other person exercising fiduciary duties stockholder within five 5) days from such occurrence
together with the proof of such authority to act on and stating in such notice the names, residence
behalf of the trust or estate; and addresses, and contact details of all known legal heirs;
and
b) Name, nationality, residence of the nominee and
alternate nominee, and the extent, coverage and d) Call the nominee or alternate nominee and the
limitation of the authority. known legal heirs to a meeting and advise the legal heirs
with regard to, among others, the election of a new
SEC. 119. Bylaws. – The One Person Corporation is not director, amendment of the articles of incorporation,
required to submit and file corporate bylaws. and other ancillary and/or consequential matters.

SEC. 120. Display of Corporate Name. – A One Person SEC. 124. Nominee and Alternate Nominee. – The single
Corporation shall indicate the letters “OPC” either below stockholder shall designate a nominee and an alternate
or at the end of its corporate name. nominee who shall, in the event of the single
stockholder’s death or incapacity, take the place of the
SEC. 121. Single Stockholder as Director, President. – single stockholder as director and shall manage the
The single stockholder shall be the sole director and corporation’s affairs.
president of the One Person Corporation.
The articles of incorporation shall state the names,
SEC. 122. Treasurer, Corporate Secretary, and Other residence addresses and contact details of the nominee
Officers. – Within fifteen 15) days from the issuance of and alternate nominee, as well as the extent and
its certificate of incorporation, the One Person limitations of their authority in managing the affairs of
Corporation shall appoint a treasurer, corporate the One Person Corporation.
secretary, and other officers as it may deem necessary,
and notify the The written consent of the nominee and alternate
nominee shall be attached to the application for
Commission thereof within five 5) days from incorporation. Such consent may be withdrawn in
appointment. writing any time before the death or incapacity of the
single stockholder.
The single stockholder may not be appointed as the
corporate secretary. SEC. 125. Term of Nominee and Alternate Nominee. –
When the incapacity of the single stockholder is
temporary, the nominee shall sit as director and manage
A single stockholder who is likewise the self-appointed the affairs of the One Person Corporation until the
treasurer of the corporation shall give a bond to the stockholder, by self determination, regains the capacity
Commission in such a sum as may be required: to assume such duties.
Provided, That the said stockholder/treasurer shall
undertake in writing to faithfully administer the One
Person Corporation’s funds to be received as treasurer, In case of death or permanent incapacity of the single
and to disburse and invest the same according to the stockholder, the nominee shall sit as
articles of incorporation as approved by the
Commission. The bond shall be renewed every two 2) director and manage the affairs of the One Person
years or as often as may be required. Corporation until the legal heirs of the single
stockholder have been lawfully determined, and the
SEC. 123. Special Functions of the Corporate Secretary. – heirs have designated one of them or have agreed that
In addition to the functions designated by the One the estate shall be the single stockholder of the One
Person Corporation, the corporate secretary shall: Person Corporation.

The alternate nominee shall sit as director and manage

the One Person Corporation in case of the nominee’s
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inability, incapacity, death, or refusal to discharge the SEC. 130. Liability of Single Shareholder. – A sole
functions as director and manager of the corporation, shareholder claiming limited liability
and only for the same term and under the same
conditions applicable to the nominee. has the burden of affirmatively showing that the
corporation was adequately financed.
SEC. 126. Change of Nominee or Alternate Nominee. –
The single stockholder may, at any time, change its Where the single stockholder cannot prove that the
nominee and alternate nominee by submitting to the property of the One Person Corporation is independent
Commission the names of the new nominees and their of the stockholder’s personal property, the stockholder
corresponding written consent. For this purpose, the shall be jointly and severally liable for the debts and
articles of incorporation need not be amended. other liabilities of the One Person Corporation.

SEC. 127. Minutes Book. – A One Person Corporation The principles of piercing the corporate veil applies
shall maintain a minutes book which shall contain all with equal force to One Person Corporations as with
actions, decisions, and resolutions taken by the One other corporations.
Person Corporation.
SEC. 131. Conversion from an Ordinary Corporation to a
SEC. 128. Records in Lieu of Meetings. – When action is One Person Corporation. – When a single stockholder
needed on any matter, it shall be sufficient to prepare a acquires all the stocks of an ordinary stock corporation,
written resolution, signed and dated by the single the latter may apply for conversion into a One Person
stockholder, and recorded in the minutes book of the Corporation, subject to the submission of such
One Person Corporation. The date of recording in the documents as the Commission may require. If the
minutes book shall be deemed to be the date of the application for conversion is approved, the Commission
meeting for all purposes under this Code. shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion. The One Person
SEC. 129. Reportorial Requirements. – The One Person Corporation converted from an ordinary stock
Corporation shall submit the following within such corporation shall succeed the latter and be legally
period as the Commission may prescribe: responsible for all the latter’s outstanding liabilities as
of the date of conversion.
a) Annual financial statements audited by an
independent certified public accountant: Provided, That SEC. 132. Conversion from a One Person Corporation to
if the total assets or total liabilities of the corporation an Ordinary Stock Corporation. – A One Person
are less than Six Hundred Thousand Pesos Corporation may be converted into an ordinary stock
P600,000.00), the financial statements shall be certified corporation after due notice to the Commission of such
under oath by the corporation’s treasurer and fact and of the circumstances leading to the conversion,
president. and after compliance with all other requirements for
stock corporations under this Code and
b) A report containing explanations or comments by the
president on every qualification, reservation, or adverse applicable rules. Such notice shall be filed with the
remark or disclaimer made by the auditor in the latter’s Commission within sixty 60) days from the occurrence
report; of the circumstances leading to the conversion into an
ordinary stock corporation. If all requirements have
c) A disclosure of all self-dealings and related party been complied with, the Commission shall issue a
transactions entered into between the One Person certificate of filing of amended articles of incorporation
Corporation and the single stockholder; and reflecting the conversion.

d) Other reports as the Commission may require. In case of death of the single stockholder, the nominee
or alternate nominee shall transfer the shares to the
duly designated legal heir or estate within seven 7) days
For purposes of this provision, the fiscal year of a One from receipt of either an affidavit of heirship or self-
Person Corporation shall be that set forth in its articles adjudication executed by a sole heir, or any other legal
of incorporation or, in the absence thereof, the calendar document declaring the legal heirs of the single
year. stockholder and notify the Commission of the transfer.
Within sixty 60) days from the transfer of the shares,
The Commission may place the corporation under the legal heirs shall notify the Commission of their
delinquent status should the corporation fail to submit decision to either wind up and dissolve the One Person
the reportorial requirements three 3) times, Corporation or convert it into an ordinary stock
consecutively or intermittently, within a period of five 5) corporation.
years.
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The ordinary stock corporation converted from a One approve the request and issue the certificate of
Person Corporation shall succeed the latter and be dissolution. The dissolution shall take effect only upon
legally responsible for all the latter’s outstanding the issuance by the Commission of a certificate of
liabilities as of the date of conversion. dissolution.

TITLE XIV DISSOLUTION No application for dissolution of banks, banking and

quasi-banking institutions, preneed, insurance and trust
SEC. 133. Methods of Dissolution. – A corporation companies, NSSLAs, pawnshops, and other financial
formed or organized under the provisions of this Code intermediaries shall be approved by the Commission
may be dissolved voluntarily or involuntarily. unless accompanied by a favorable recommendation of
the appropriate government agency.
SEC. 134. Voluntary Dissolution Where No Creditors are
Affected. – If dissolution of a corporation does not SEC. 135. Voluntary Dissolution Where Creditors are
prejudice the rights of any creditor having a claim Affected; Procedure and Contents of Petition. – Where
against it, the dissolution may be effected by majority the dissolution of a corporation may prejudice the rights
vote of the board of directors or trustees, and by a of any creditor, a verified petition for dissolution shall
resolution adopted by the affirmative vote of the be filed with the Commission. The petition shall be
stockholders owning at least majority of the signed by a majority of the corporation’s board of
outstanding capital stock or majority of the members of directors or trustees, verified by its president or
a meeting to be held upon the call of the directors or secretary or one of its directors or trustees, and shall set
trustees. forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of
the stockholders representing at least two-thirds 2/3)
At least twenty 20) days prior to the meeting, notice of the outstanding capital stock or at least two-thirds
shall be given to each shareholder or member of record 2/3) of the members at a meeting of its stockholders or
personally, by registered mail, or by any means members called for that purpose. The petition shall
authorized under its bylaws likewise state: a) the reason for the dissolution; b) the
form, manner, and time when the notices were given;
Page 54 of 73 and c) the date, place, and time of the meeting in which
the vote was made. The corporation shall submit to the
whether or not entitled to vote at the meeting, in the Commission the following: 1) a copy of the resolution
manner provided in Section 50 of this Code and shall authorizing the dissolution, certified by a majority of the
state that the purpose of the meeting is to vote on the board of directors or trustees and countersigned by the
dissolution of the corporation. Notice of the time, place, secretary of the corporation; and 2) a list of all its
and object of the meeting shall be published once prior creditors.
to the date of the meeting in a newspaper published in
the place where the principal office of said corporation If the petition is sufficient in form and substance, the
is located, or if no newspaper is published in such place, Commission shall, by an order reciting the purpose of
in a newspaper of general circulation in the Philippines. the petition, fix a deadline for filing objections to the
petition which date shall not be less than thirty 30) days
A verified request for dissolution shall be filed with the nor more than sixty 60) days after the entry of the order.
Commission stating: a) the reason for the dissolution; b) Before such date, a copy of the order shall be published
the form, manner, and time when the notices were at least once a week for three 3) consecutive weeks in a
given; c) names of the stockholders and directors or newspaper of general circulation published in the
members and trustees who approved the dissolution; d) municipality or city
the date, place, and time of the meeting in which the
vote was made; and e) details of publication. where the principal office of the corporation is situated,
or if there be no such newspaper, then in a newspaper
The corporation shall submit the following to the of general circulation in the Philippines, and a similar
Commission: 1) a copy of the resolution authorizing the copy shall be posted for three 3) consecutive weeks in
dissolution, certified by a majority of the board of three 3) public places in such municipality or city.
directors or trustees and countersigned by the secretary
of the corporation; 2) proof of publication; and 3) Upon five 5) days’ notice, given after the date on which
favorable recommendation from the appropriate the right to file objections as fixed in the order has
regulatory agency, when necessary. expired, the Commission shall proceed to hear the
petition and try any issue raised in the objections filed;
Within fifteen 15) days from receipt of the verified and if no such objection is sufficient, and the material
request for dissolution, and in the absence of any allegations of the petition are true, it shall render
withdrawal within said period, the Commission shall judgment dissolving the corporation and directing such
103

disposition of its assets as justice requires, and may a) Non-use of corporate charter as provided under
appoint a receiver to collect such assets and pay the Section 21 of this Code;
debts of the corporation.
b) Continuous inoperation of a corporation as provided
The dissolution shall take effect only upon the issuance under Section 21 of this Code;
by the Commission of a certificate of dissolution.
c) Upon receipt of a lawful court order dissolving the
SEC. 136. Dissolution by Shortening Corporate Term. – A corporation;
voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term d) Upon finding by final judgment that the corporation
pursuant to the provisions of this Code. A copy of the procured its incorporation through fraud;
amended articles of incorporation shall be submitted to
the Commission in accordance with this Code.
e) Upon finding by final judgment that the corporation:
Upon the expiration of the shortened term, as stated in
the approved amended articles of incorporation, the 1) Was created for the purpose of committing,
corporation shall be deemed dissolved without any concealing or aiding the commission of securities
further proceedings, subject to the provisions of this violations, smuggling, tax evasion, money laundering, or
Code on liquidation. graft and corrupt practices;

In the case of expiration of corporate term, dissolution 2) Committed or aided in the commission of securities
shall automatically take effect on the day following the violations, smuggling, tax evasion, money laundering, or
last day of the corporate term stated in the articles of graft and corrupt practices, and its stockholders knew;
incorporation, without the need for the issuance by the and
Commission of a certificate of dissolution.
3) Repeatedly and knowingly tolerated the commission
SEC. 137. Withdrawal of Request and Petition for of graft and corrupt practices or other fraudulent or
Dissolution. – A withdrawal of the request for illegal acts by its directors, trustees, officers, or
dissolution shall be made in writing, duly verified by employees.
any incorporator, director, trustee, shareholder, or
member and signed by the same number of If the corporation is ordered dissolved by final judgment
incorporators, directors, trustees, shareholders, or pursuant to the grounds set forth in subparagraph e)
members necessary to request for dissolution as set hereof, its assets, after payment of its liabilities, shall,
forth in the foregoing sections. The withdrawal shall be upon petition of the Commission with the appropriate
submitted no later than fifteen 15) days from receipt by court, be forfeited in favor of the national government.
the Commission of the request for dissolution. Upon Such forfeiture shall be without prejudice to the rights
receipt of a withdrawal of request for dissolution, the of innocent stockholders and employees for services
Commission shall withhold action on the request for rendered, and to the application of other penalty or
dissolution and shall, after investigation: a) make a sanction under this Code or other laws.
pronouncement that the request for dissolution is
deemed withdrawn; b) direct a joint meeting of the The Commission shall give reasonable notice to, and
board of directors or trustees and the stockholders or coordinate with, the appropriate regulatory agency
members for the purpose of ascertaining whether to prior to the involuntary dissolution of companies under
proceed with dissolution; or c) issue such other orders their special regulatory jurisdiction.
as it may deem appropriate.
SEC. 139. Corporate Liquidation. – Except for banks,
A withdrawal of the petition for dissolution shall be in which shall be covered by the applicable provisions of
the form of a motion and similar in substance to a Republic Act No. 7653, otherwise known as the “New
withdrawal of request for dissolution but shall be Central Bank Act”, as amended, and Republic Act No.
verified and filed prior to publication of the order 3591, otherwise known as the Philippine Deposit
setting the deadline for filing objections to the petition. Insurance Corporation Charter, as amended, every
corporation whose charter expires pursuant to its
SEC. 138. Involuntary Dissolution. – A corporation may articles of incorporation, is annulled by forfeiture, or
be dissolved by the Commission motu proprio or upon whose corporate existence is terminated in any other
filing of a verified complaint by any interested party. manner, shall nevertheless remain as a body corporate
The following may be grounds for dissolution of the for three 3) years after the effective date of dissolution,
corporation: for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs,
dispose of and convey its property, and distribute its
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assets, but not for the purpose of continuing the a) The date and term of incorporation;
business for which it was established.
b) The address, including the street number, of the
At any time during said three 3) years, the corporation principal office of the corporation in the country or
is authorized and empowered to convey all of its State of incorporation;
property to trustees for the benefit of stockholders,
members, creditors and other persons in interest. After c) The name and address of its resident agent
any such conveyance by the corporation of its property authorized to accept summons and process in all legal
in trust for the benefit of its stockholders, members, proceedings and all notices affecting the corporation,
creditors and others in interest, all interest which the pending the establishment of a local office;
corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial
d) The place in the Philippines where the corporation
intends to operate;
interest in the stockholders, members, creditors or
other persons-in-interest.
e) The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
Except as otherwise provided for in Sections 93 and 94 business in the Philippines: Provided, That said purpose
of this Code, upon the winding up of corporate affairs, or purposes are those specifically stated in the
any asset distributable to any creditor or stockholder or certificate of authority issued by the appropriate
member who is unknown or cannot be found shall be government agency;
escheated in favor of the national government.
f) The names and addresses of the present directors and
Except by decrease of capital stock and as otherwise officers of the corporation;
allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities. g) A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by class, par value of shares,
TITLE XV FOREIGN CORPORATIONS shares without par value, and series, if any;

SEC. 140. Definition and Rights of Foreign Corporations. h) A statement of its outstanding capital stock and the
– For purposes of this Code, a foreign corporation is one aggregate number of shares which the corporation has
formed, organized or existing under laws other than issued, itemized by class, par value of shares, shares
those of the Philippines’ and whose laws allow Filipino without par value, and series, if any;
citizens and corporations to do business in its own
country or State. It shall have the right to transact
business in the Philippines after obtaining a license for i) A statement of the amount actually paid in; and
that purpose in accordance with this Code and a
certificate of authority from the appropriate j) Such additional information as may be necessary or
government agency. appropriate in order to enable the Commission to
determine whether such corporation is entitled to a
SEC. 141. Application to Existing Foreign Corporations. license to transact business in the Philippines, and to
– Every foreign corporation which, on the date of the determine and assess the fees payable.
effectivity of this Code, is authorized to do business in
the Philippines under a license issued to it shall Attached to the application for license shall be a
continue to have such authority under the terms and certificate under oath duly executed by the authorized
conditions of its license, subject to the provisions of this official or officials of the jurisdiction of its
Code and other special laws. incorporation, attesting to the fact that the laws of the
country or State of the applicant allow Filipino citizens
SEC. 142. Application for a License. – A foreign and corporations to do business therein, and that the
corporation applying for a license to transact business applicant is an existing corporation in good standing. If
in the Philippines shall submit to the Commission a the certificate is in a foreign language, a translation
copy of its articles of incorporation and bylaws, certified thereof in English under oath of the translator shall be
in accordance with law, and their translation to an attached to the application.
official language of the Philippines, if necessary. The
application shall be under oath and, unless already The application for a license to transact business in the
stated in its articles of incorporation, shall specifically Philippines shall likewise be accompanied by a
set forth the following: statement under oath of the president or any other
person authorized by the corporation, showing to the
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satisfaction of the Commission and when appropriate, they were deposited. The Commission may, at its
other governmental agencies that the applicant is discretion, release part of the additional deposit if the
solvent and in sound financial condition, setting forth gross income of the licensee has decreased, or if the
the assets and liabilities of the corporation as of the date actual market value of the total deposit has increased,
not exceeding one 1) year immediately prior to the filing by more than ten percent 10%) of their actual market
of the application. value at the time they were deposited. The Commission
may, from time to time, allow the licensee to make
Foreign banking, financial, and insurance corporations substitute deposits for those already on deposit as long
shall, in addition to the above requirements, comply as the licensee is solvent. Such licensee shall be entitled
with the provisions of existing laws applicable to them. to collect the interest or dividends on such deposits. In
In the case of all other foreign corporations, no the event the licensee ceases to do business in the
application for license to transact business in the Philippines, its deposits shall be returned, upon the
Philippines shall be accepted by the Commission licensee’s application and upon proof to the satisfaction
without previous authority from the appropriate of the Commission that the licensee has no liability to
government agency, whenever required by law. Philippine residents, including the Government of the
Republic of the Philippines. For purposes of computing
the securities deposit, the composition of gross income
SEC. 143. Issuance of a License. – If the Commission is and allowable deductions therefrom shall be in
satisfied that the applicant has complied with all the accordance with the rules of the Commission.
requirements of this Code and other special laws, rules
and regulations, the Commission shall issue a license to
transact business in the Philippines to the applicant for SEC. 144. Who May be a Resident Agent. – A resident
the purpose or purposes specified in such license. Upon agent may be either an individual residing in the
issuance of the license, such foreign corporation may Philippines or a domestic corporation lawfully
commence to transact business in the Philippines and transacting business in the Philippines: Provided, That
continue to do so for as long as it retains its authority to an individual resident agent must be of good moral
act as a corporation under the laws of the country or character and of sound financial standing: Provided,
State of its Incorporation, unless such license is sooner further, That in case of a domestic corporation who will
surrendered, revoked, suspended, or annulled in act as a resident agent, it must likewise be of sound
accordance with this Code or other special laws. Within financial standing and must show proof that it is in good
sixty 60) days after the issuance of the license to standing as certified by the Commission.
transact business in the Philippines, the licensee, except
foreign banking or insurance corporations, shall deposit SEC. 145. Resident Agent; Service of Process. – As a
with the Commission for the benefit of present and condition to the issuance of the license for a foreign
future creditors of the licensee in the Philippines, corporation to transact business in the Philippines, such
securities satisfactory to the Commission, consisting of corporation shall file with the Commission a written
bonds or other evidence of indebtedness of the power of attorney designating a person who must be a
Government of the Philippines, its political subdivisions resident of the Philippines, on whom summons and
and instrumentalities, or of government-owned or other legal processes may be served in all actions or
-controlled corporations and entities, shares of stock or other legal proceedings against such corporation, and
debt securities that are registered under Republic Act consenting that service upon such resident agent shall
No. 8799, otherwise known as “The Securities be admitted and held as valid as if served upon the duly
Regulation Code”, shares of stock in domestic authorized officers of the foreign corporation at its
corporations listed in the stock exchange, shares of home office. Such foreign corporation shall likewise
stock in domestic insurance companies and banks, any execute and file with the Commission an agreement or
financial instrument determined suitable by the stipulation, executed by the proper authorities of said
Commission, or any combination thereof with an actual corporation, in form and substance as follows:
market value of at least Five hundred thousand pesos
P500,000.00) or such other amount that may be set by “The name of foreign corporation) hereby stipulates and
the Commission: Provided, however, That within six 6) agrees, in consideration of being granted a license to
months after each fiscal year of the licensee, the transact business in the Philippines, that if the
Commission shall require the licensee to deposit corporation shall cease to transact business in the
additional securities or financial instruments equivalent Philippines, or shall be without any resident agent in the
in actual market value to two percent 2%) of the Philippines on whom any summons or other legal
amount by which the licensee’s gross income for that processes may be served, then service of any summons
fiscal year exceeds Ten million pesos P10,000,000.00). or other legal process may be made upon the
The Commission shall also require the deposit of Commission in any action or proceeding arising out of
additional securities or financial instruments if the any business or transaction which occurred in the
actual market value of the deposited securities or Philippines and such service shall have the same force
financial instruments has decreased by at least ten and effect as if made upon the duly authorized officers
percent 10%) of their actual market value at the time of the corporation at its home office.”
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Whenever such service of summons or other process is Whenever a foreign corporation authorized to transact
made upon the Commission, the Commission shall, business in the Philippines shall be a party to a merger
within ten 10) days thereafter, transmit by mail a copy or consolidation in its home country or State as
of such summons or other legal process to the permitted by the law authorizing its incorporation, such
corporation at its home or principal office. The sending foreign corporation shall, within sixty 60) days after the
of such copy by the Commission shall be a necessary effectivity of such merger or consolidation, file with the
part of and shall complete such service. All expenses Commission, and in proper cases, with the appropriate
incurred by the Commission for such service shall be government agency, a copy of the articles of merger or
paid in advance by the party at whose instance the consolidation duly authenticated by the proper official
service is made. or officials of the country or State under whose laws the
merger or consolidation was effected: Provided,
It shall be the duty of the resident agent to immediately however, That if the absorbed corporation is the foreign
notify the Commission in writing of any change in the corporation doing business in the Philippines, the latter
resident agent’s address. shall at the same time file a petition for withdrawal of its
license in accordance with this Title.
SEC. 146. Law Applicable. – A foreign corporation
lawfully doing business in the Philippines shall be SEC. 150. Doing Business Without a License. – No
bound by all laws, rules and regulations applicable to foreign corporation transacting business in the
domestic corporations of the same class, except those Philippines without a license, or its successors or
which provide for the creation, formation, organization assigns, shall be permitted to maintain or intervene in
or dissolution of corporations or those which fix the any action, suit or proceeding in any court or
relations, liabilities, responsibilities, or duties of administrative agency of the Philippines; but such
stockholders, members, or officers of corporations to corporation may be sued or proceeded against before
each other or to the corporation. Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
SEC. 147. Amendments to Articles of Incorporation or
Bylaws of Foreign Corporations. – Whenever the articles SEC. 151. Revocation of License. – Without prejudice to
of incorporation or bylaws of a foreign corporation other grounds provided under special laws, the license
authorized to transact business in the Philippines are of a foreign corporation to transact business in the
amended, such foreign corporation shall, within sixty Philippines may be revoked or suspended by the
60) days after the amendment becomes effective, file Commission upon any of the following grounds:
with the Commission, and in the proper cases, with the
appropriate government agency, a duly authenticated a) Failure to file its annual report or pay any fees as
copy of the amended articles of incorporation or bylaws, required by this Code;
indicating clearly in capital letters or underscoring the
change or changes made, duly certified by the b) Failure to appoint and maintain a resident agent in
authorized official or officials of the country or State of the Philippines as required by this Title;
incorporation. Such filing shall not in itself enlarge or
alter the purpose or purposes for which such
corporation is authorized to transact business in the c) Failure, after change of its resident agent or address,
Philippines. to submit to the Commission a statement of such change
as required by this Title;
SEC. 148. Amended License. – A foreign corporation
authorized to transact business in the Philippines shall d) Failure to submit to the Commission an authenticated
obtain an amended license in the event it changes its copy of any amendment to its articles of incorporation
corporate name, or desires to pursue other or additional or bylaws or of any articles of merger or consolidation
purposes in the Philippines, by submitting an within the time prescribed by this Title;
application with the Commission, favorably endorsed by
the appropriate government agency in the proper cases. e) A misrepresentation of any material matter in any
application, report, affidavit or other document
SEC. 149. Merger or Consolidation Involving a Foreign submitted by such corporation pursuant to this Title;
Corporation Licensed in the Philippines. – One or more
foreign corporations authorized to transact business in f) Failure to pay any and all taxes, imposts, assessments
the Philippines may merge or consolidate with any or penalties, if any, lawfully due to the Philippine
domestic corporation or corporations if permitted Government or any of its agencies or political
under Philippine laws and by the law of its subdivisions;
incorporation: Provided, That the requirements on
merger or consolidation as provided in this Code are
followed.
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g) Transacting business in the Philippines outside of the to any such publication involving companies under their
purpose or purposes for which such corporation is special regulatory jurisdiction.
authorized under its license;
SEC. 155. Administration of Oaths, Subpoena of
h) Transacting business in the Philippines as agent of or Witnesses and Documents. – The Commission, through
acting on behalf of any foreign corporation or entity not its designated officer, may administer oaths and
duly licensed to do business in the Philippines; or affirmations, issue subpoena and subpoena duces
tecum, take testimony in any inquiry or investigation,
i) Any other ground as would render it unfit to transact and may perform other acts necessary to the
business in the Philippines. proceedings or to the investigation.

SEC. 152. Issuance of Certificate of Revocation. – Upon SEC. 156. Cease and Desist Orders. – Whenever the
the revocation of the license to transact business in the Commission has reasonable basis to believe that a
Philippines, the Commission shall issue a corresponding person has violated, or is about to violate this Code, a
certificate of revocation, furnishing a copy thereof to the rule, regulation, or order of the Commission, it may
appropriate government agency in the proper cases. direct such person to desist from committing the act
constituting the violation.
The Commission shall also mail the notice and copy of
the certificate of revocation to the corporation, at its The Commission may issue a cease and desist order ex
registered office in the Philippines. parte to enjoin an act or practice which is fraudulent or
can be reasonably expected to cause significant,
imminent, and irreparable danger or injury to public
SEC. 153. Withdrawal of Foreign Corporations. – Subject safety or welfare. The ex parte order shall be valid for a
to existing laws and regulations, a foreign corporation maximum period of twenty 20) days, without prejudice
licensed to transact business in the Philippines may be to the order being made permanent after due notice and
allowed to withdraw from the Philippines by filing a hearing.
petition for withdrawal of license. No certificate of
withdrawal shall be issued by the Commission unless all
the following requirements are met: Thereafter, the Commission may proceed
administratively against such person in accordance with
Section 158 of this Code, and/or transmit evidence to
a) All claims which have accrued in the Philippines have the Department of Justice for preliminary investigation
been paid, compromised or settled; or criminal prosecution and/or initiate criminal
prosecution for any violation of this Code, rule, or
b) All taxes, imposts, assessments, and penalties, if any, regulation.
lawfully due to the Philippine Government or any of its
agencies or political subdivisions, have been paid; and SEC. 157. Contempt. – Any person who, without
justifiable cause, fails or refuses to comply with any
c) The petition for withdrawal of license has been lawful order, decision, or subpoena issued by the
published once a week for three 3) consecutive weeks in Commission shall, after due notice and hearing, be held
a newspaper of general circulation in the Philippines. in contempt and fined in an amount not exceeding
Thirty thousand pesos P30,000.00). When the refusal
TITLE XVI INVESTIGATIONS, OFFENSES, AND amounts to clear and open defiance of the Commission’s
PENALTIES order, decision, or subpoena, the Commission may
impose a daily fine of One thousand pesos P1,000.00)
until the order, decision, or subpoena is complied with.
SEC. 154. Investigation and Prosecution of Offenses. –
The Commission may investigate an alleged violation of
this Code, or of rule, regulation, or order of the SEC. 158. Administrative Sanctions. – If, after due notice
Commission. and hearing, the Commission finds that any provision of
this Code, rules or regulations, or any of the
Commission’s orders has been violated, the Commission
The Commission may publish its findings, orders, may impose any or all of the following sanctions, taking
opinions, advisories, or information concerning any into consideration the extent of participation, nature,
such violation, as may be relevant to the general public effects, frequency and seriousness of the violation:
or to the parties concerned, subject to the provisions of
Republic Act No. 10173, otherwise known as the “Data
Privacy Act of 2012”, and other pertinent laws. a) Imposition of a fine ranging from Five thousand pesos
P5,000.00) to Two million pesos P2,000,000.00), and
not more than One thousand pesos P1,000.00) for each
The Commission shall give reasonable notice to and day of continuing violation but in no case to exceed Two
coordinate with the appropriate regulatory agency prior million pesos P2,000,000.00);
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b) Issuance of a permanent cease and desist order; or statements, shall be punished with a fine ranging
from Twenty thousand pesos P20,000.00) to Two
C) Suspension or revocation of the certificate of hundred thousand pesos P200,000.00). When the
incorporation; and wrongful certification is injurious or detrimental to the
public, the auditor or the responsible person may also
be punished with a fine ranging from Forty thousand
d) Dissolution of the corporation and forfeiture of its pesos P40,000.00) to Four hundred thousand pesos
assets under the conditions in Title XIV of this Code. P400,000.00).

SEC. 159. Unauthorized Use of Corporate Name; SEC. 163. Independent Auditor Collusion; Penalties. –
Penalties. – The unauthorized use of a corporate name An independent auditor who, in collusion with the
shall be punished with a fine ranging from Ten thousand corporation’s directors or representatives, certifies the
pesos P10,000.00) to Two hundred thousand pesos corporation’s financial statements despite its
P200,000.00). incompleteness or inaccuracy, its failure to give a fair
and accurate presentation of the corporation’s
SEC. 160. Violation of Disqualification Provision; condition, or despite containing false or misleading
Penalties. – When, despite the knowledge of the statements, shall be punished with a fine ranging from
existence of a ground for disqualification as provided in Eighty thousand pesos P80,000.00) to Five hundred
Section 26 of this Code, a director, trustee or officer thousand pesos P500,000.00). When the statement or
willfully holds office, or willfully conceals such report certified is fraudulent, or has the effect of causing
disqualification, such director, trustee or officer shall be injury to the general public, the auditor or responsible
punished with a fine ranging from Ten thousand pesos officer may be punished with a fine ranging from One
P10,000.00) to Two hundred thousand pesos hundred thousand pesos P100,000.00) to Six hundred
P200,000.00) at the discretion of the court, and shall be thousand pesos P600,000.00).
permanently disqualified from being a director, trustee
or officer of any corporation. When SEC. 164. Obtaining Corporate Registration Through
Fraud; Penalties. – Those responsible for the formation
Page 64 of 73 of a corporation through fraud, or who assisted directly
or indirectly therein, shall be punished with a fine
the violation of this provision is injurious or detrimental ranging from Two hundred thousand pesos
to the public, the penalty shall be a fine ranging from P200,000.00) to Two million pesos P2,000,000.00).
Twenty thousand pesos P20,000.00) to Four hundred When the violation of this provision is injurious or
thousand pesos P400,000.00). detrimental to the public, the penalty is a fine ranging
from Four hundred thousand pesos P400,000.00) to
Five million pesos P5,000,000.00).
SEC. 161. Violation of Duty to Maintain Records, to
Allow their Inspection or Reproduction; Penalties. – The
unjustified failure or refusal by the corporation, or by SEC. 165. Fraudulent Conduct of Business; Penalties. – A
those responsible for keeping and maintaining corporation that conducts its business through fraud
corporate records, to comply with Sections 45, 73, 92, shall be punished with a fine ranging from Two hundred
128, 177 and other pertinent rules and provisions of thousand pesos P200,000.00) to Two million pesos
this Code on inspection and reproduction of records P2,000,000.00). When the violation of this provision is
shall be punished with a fine ranging from Ten thousand
pesos P10,000.00) to Two hundred thousand pesos injurious or detrimental to the public, the penalty is a
P200,000.00), at the discretion of the court, taking into fine ranging from Four hundred thousand pesos
consideration the seriousness of the violation and its P400,000.00) to Five million pesos P5,000,000.00).
implications. When the violation of this provision is
injurious or detrimental to the public, the penalty is a SEC. 166. Acting as Intermediaries for Graft and Corrupt
fine ranging from Twenty thousand pesos P20,000.00) Practices; Penalties. – A corporation used for fraud, or
to Four hundred thousand pesos P400,000.00). for committing or concealing graft and corrupt practices
as defined under pertinent statutes, shall be liable for a
The penalties imposed under this section shall be fine ranging from One hundred thousand pesos
without prejudice to the Commission’s exercise of its P100,000.00) to Five million pesos P5,000,000.00).
contempt powers under Section 157 hereof.
When there is a finding that any of its directors, officers,
SEC. 162. Willful Certification of Incomplete, Inaccurate, employees, agents, or representatives are engaged in
False, or Misleading Statements or Reports; Penalties. – graft and corrupt practices, the corporation’s failure to
Any person who willfully certifies a report required install: a) safeguards for the transparent and lawful
under this Code, knowing that the same contains delivery of services; and b) policies, code of ethics, and
incomplete, inaccurate, false, or misleading information
109

procedures against graft and corruption shall be prima responsible for the violation or indispensable to its
facie evidence of corporate liability under this section. commission.

SEC. 167. Engaging Intermediaries for Graft and Corrupt SEC. 172. Liability of Aiders and Abettors and Other
Practices; Penalties. – A corporation that appoints an Secondary Liability. – Anyone who shall aid, abet,
intermediary who engages in graft and corrupt counsel, command, induce, or cause any violation of this
practices for the corporation’s benefit or interest shall Code, or any rule, regulation, or order of the
be punished with a fine ranging from One hundred Commission shall be punished with a fine not exceeding
thousand pesos P100,000.00) to One million pesos that imposed on the principal offenders, at the
P1,000,000.00). discretion of the court, after taking into account their
participation in the offense.
SEC. 168. Tolerating Graft and Corrupt Practices;
Penalties. – A director, trustee, or officer who knowingly TITLE XVII MISCELLANEOUS PROVISIONS
fails to sanction, report, or file the appropriate action
with proper agencies, allows or tolerates the graft and SEC. 173. Outstanding Capital Stock Defined. – The term
corrupt practices or fraudulent acts committed by a “outstanding capital stock”, as used in this Code, shall
corporation’s directors, trustees, officers, or employees mean the total shares of stock issued under binding
shall be punished with a fine ranging from Five hundred subscription contracts to subscribers or stockholders,
thousand pesos P500,000.00) to One million pesos whether fully or partially paid, except treasury shares.
P1,000,000.00).
SEC. 174. Designation of Governing Boards. – The
SEC. 169. Retaliation Against Whistleblowers. – A provisions of specific provisions of this Code to the
whistleblower refers to any person who provides contrary notwithstanding, nonstock or special
truthful information relating to the commission or corporations may, through their articles of
possible commission of any offense or violation under incorporation or their bylaws, designate their governing
this Code. Any person who, knowingly and with intent boards by any name other than as board of trustees.
to retaliate, commits acts detrimental to a
whistleblower such as interfering with the lawful
employment or livelihood of the whistleblower, shall, at SEC. 175. Collection and Use of Registration,
the discretion of the court, be punished with a fine Incorporation and Other Fees. – For a more effective
ranging from One hundred thousand pesos implementation of this Code, the Commission is hereby
P100,000.00) to One million pesos P1,000,000.00). authorized to collect, retain, and use fees, fines, and
other charges pursuant to this Code and its rules and
regulations. The amount collected shall be deposited
SEC. 170. Other Violations of the Code; Separate and maintained in a separate account which shall form a
Liability. – Violations of any of the other provisions of fund for its modernization and to augment its
this Code or its amendments not otherwise specifically operational expenses such as, but not limited to, capital
penalized therein shall be punished by a fine of not less outlay, increase in compensation and benefits
than Ten thousand pesos P10,000.00) but not more than comparable with prevailing rates in the private sector,
One million pesos P1,000,000.00). If the violation is reasonable employee allowance, employee health care
committed by a corporation, the same may, after notice services, and other insurance, employee career
and hearing, be dissolved in appropriate proceedings advancement and professionalization, legal assistance,
before the Commission: Provided, That such dissolution seminars, and other professional fees.
shall not preclude the institution of appropriate action
against the director, trustee, or officer of the corporation
responsible for said violation: Provided, further, That SEC. 176. Stock Ownership in Corporations. – Pursuant
nothing in this section shall be construed to repeal the to the duties specified by Article XIV of the Constitution,
other causes for dissolution of a corporation provided in the National Economic and Development Authority
this Code. NEDA) shall, from time to time, determine if the
corporate vehicle has been used by any corporation,
business, or industry to frustrate the provisions of this
Liability for any of the foregoing offenses shall be Code or applicable laws, and shall submit to Congress,
separate from any other administrative, civil, or criminal whenever deemed necessary, a report of its findings,
liability under this Code and other laws. including recommendations for their prevention or
correction.
SEC. 171. Liability of Directors, Trustees, Officers, or
Other Employees. – If the offender is a corporation, the The Congress of the Philippines may set maximum
penalty may, at the discretion of the court, be imposed limits for stock ownership of individuals or groups of
upon such corporation and/or upon its directors, individuals related to each other by consanguinity,
trustees, stockholders, members, officers, or employees affinity, or by close business interests, in corporations
declared to be vested with public interest pursuant to
110

the provisions of this section, or whenever necessary to Any person required to file a report with the
prevent anti-competitive practices as provided in Commission may redact confidential information from
Republic such required report: Provided, That such confidential
information shall be filed in a supplemental report
Act No. 10667, otherwise known as the “Philippine prominently labelled “confidential”, together with a
Competition Act”, or to implement national economic request for confidential treatment of the report and the
policies designed to promote general welfare and specific grounds for the grant thereof.
economic development, as declared in laws, rules, and
regulations. SEC. 178. Visitorial Power and Confidential Nature of
Examination Results. – The Commission shall exercise
In recommending to the Congress which corporations, visitorial powers over all corporations, which powers
businesses and industries will be declared as vested shall include the examination and inspection of records,
with public interest, and in formulating proposals for regulation and supervision of activities, enforcement of
limitations on stock ownership, the NEDA shall consider compliance, and imposition of sanctions in accordance
the type and nature of the industry, size of the with this Code.
enterprise, economies of scale, geographic location,
extent of Filipino ownership, labor intensity of the Should the corporation, without justifiable cause, refuse
activity, export potential, as well as other factors which or obstruct the Commission’s exercise of its visitorial
are germane to the realization and promotion of powers, the Commission may revoke its certificate of
business and industry. incorporation, without prejudice to the imposition of
other penalties and sanctions under this Code.
SEC. 177. Reportorial Requirements of Corporations. –
Except as otherwise provided in this Code or in the All interrogatories propounded by the Commission and
rules issued by the Commission, every corporation, the answers thereto, as well as the results of any
domestic or foreign, doing business in the Philippines examination made by the Commission or by any other
shall submit to the Commission: official authorized by law to make an examination of the
operations, books, and records of any corporation, shall
a) Annual financial statements audited by an be kept strictly confidential, except when the law
independent certified public accountant: Provided, That requires the same to be made public, when necessary
if the total assets or total liabilities of the corporation for the Commission to take action to protect the public
are less than Six hundred thousand pesos P600,000.00), or to issue orders in the exercise of its powers under
the financial statements shall be certified under oath by this Code, or where such interrogatories, answers or
the corporation’s treasurer or chief financial officer; and results are necessary to be presented as evidence before
any court.
b) A general information sheet.
SEC. 179. Powers, Functions, and Jurisdiction of the
Commission. – The Commission shall have the power
Corporations vested with public interest must also and authority to:
submit the following:
a) Exercise supervision and jurisdiction over all
1) A director or trustee compensation report; and corporations and persons acting on their behalf, except
as otherwise provided under this Code;
2) A director or trustee appraisal or performance report
and the standards or criteria used to assess each b) Pursuant to Presidential Decree No. 902-A, retain
director or trustee. jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution. The
The reportorial requirements shall be submitted Commission shall retain jurisdiction over pending
annually and within such period as may be prescribed suspension of payment/rehabilitation cases filed as of
by the Commission. 30 June 2000 until finally disposed;

The Commission may place the corporation under c) Impose sanctions for the violation of this Code, its
delinquent status in case of failure to submit the implementing rules and orders of the Commission;
reportorial requirements three 3) times, consecutively
or intermittently, within a period of five 5) years. The d) Promote corporate governance and the protection of
Commission shall give reasonable notice to and minority investors, through, among others, the issuance
coordinate with the appropriate regulatory agency prior of rules and regulations consistent with international
to placing under delinquent status companies under best practices;
their special regulatory jurisdiction.
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e) Issue opinions to clarify the application of laws, rules, No court below the Court of Appeals shall have
and regulations; jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any
f) Issue cease and desist orders ex parte to prevent case, dispute, or controversy that directly or indirectly
imminent fraud or injury to the public; interferes with the exercise of the powers, duties and
responsibilities of the Commission that falls exclusively
within its jurisdiction.
g) Hold corporations in direct and indirect contempt;
SEC. 180. Development and Implementation of
h) Issue subpoena duces tecum and summon witnesses Electronic Filing and Monitoring System. – The
to appear in proceedings before the Commission; Commission shall develop and implement an electronic
filing and monitoring system. The Commission shall
i) In appropriate cases, order the examination, search promulgate rules to facilitate and expedite, among
and seizure of documents, papers, files and records, and others, corporate name reservation and registration,
books of accounts of any entity or person under incorporation, submission of reports, notices, and
investigation as may be necessary for the proper documents required under this Code, and sharing of
disposition of the cases, subject to the provisions of pertinent information with other government agencies.
existing laws;
SEC. 181. Arbitration for Corporations. – An arbitration
j) Suspend or revoke the certificate of incorporation agreement may be provided in the articles of
after proper notice and hearing; incorporation or bylaws of an unlisted corporation.
When such an agreement is in place, disputes between
k) Dissolve or impose sanctions on corporations, upon the corporation, its stockholders or members, which
final court order, for committing, aiding in the arise from the implementation of the articles of
commission of, or in any manner furthering securities incorporation or bylaws, or from intra-corporate
violations, smuggling, tax evasion, money laundering, relations, shall be referred to arbitration. A dispute shall
graft and corrupt practices, or other fraudulent or illegal be nonarbitrable when it involves criminal offenses and
acts; interests of third parties.

l) Issue writs of execution and attachment to enforce The arbitration agreement shall be binding on the
payment of fees, administrative fines, and other dues corporation, its directors, trustees, officers, and
collectible under this Code; executives or managers.

m) Prescribe the number of independent directors and To be enforceable, the arbitration agreement should
the minimum criteria in determining the independence indicate the number of arbitrators and the procedure
of a director; for their appointment. The power to appoint the
arbitrators forming the arbitral tribunal shall be granted
to a designated independent third party. Should the
Impose or recommend new modes by which a third party fail to appoint the arbitrators in the manner
stockholder, member, director, or trustee may attend and within the period specified in the arbitration
meetings or cast their votes, as technology may allow, agreement, the parties may request the Commission to
taking into account the company’s scale, number of appoint the arbitrators. In any case, arbitrators must be
shareholders or members, structure, and other factors accredited or must belong to organizations accredited
consistent with the basic right of corporate suffrage; for the purpose of arbitration.

o) Formulate and enforce standards, guidelines, policies, The arbitral tribunal shall have the power to rule on its
rules and regulations to carry out the provisions of this own jurisdiction and on questions relating to the
Code; and validity of the arbitration agreement. When an intra-
corporate dispute is filed with a Regional Trial Court,
p) Exercise such other powers provided by law or those the court shall dismiss the case before the termination
which may be necessary or incidental to carrying out of the pretrial conference, if it determines that an
the powers expressly granted to the Commission. arbitration agreement is written in the corporation’s
articles of incorporation, bylaws, or in a separate
In imposing penalties and additional monitoring and agreement.
supervision requirements, the Commission shall take
into consideration the size, nature of the business, and The arbitral tribunal shall have the power to grant
capacity of the corporation. interim measures necessary to ensure enforcement of
the award, prevent a miscarriage of justice, or otherwise
protect the rights of the parties.
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A final arbitral award under this section shall be provisions hereof which are not affected thereby shall
executory after the lapse of fifteen 15) days from receipt continue to be in full force and effect.
thereof by the parties and shall be stayed only by the
filing of a bond or the issuance by the appellate court of SEC. 187. Repealing clause. – Batas Pambansa Blg. 68,
an injunctive writ. otherwise known as “The Corporation Code of the
Philippines”, is hereby repealed. Any law, presidential
The Commission shall formulate the rules and decree or issuance, executive order, letter of instruction,
regulations, which shall govern arbitration under this administrative order, rule or regulation contrary to or
section, subject to existing laws on arbitration. inconsistent with any provision of this Act is hereby
repealed or modified accordingly.
SEC. 182. Jurisdiction Over Party-List Organizations. –
The powers, authorities, and responsibilities of the SEC. 188. Effectivity. – This Act shall take effect upon
Commission involving party-list organizations are completion of its publication in the Official Gazette or in
transferred to the Commission on Elections COMELEC). at least two 2) newspapers of general circulation.

Within six 6) months after the effectivity of this Act, the

monitoring, supervision, and regulation of such
corporations shall be deemed automatically transferred
to the COMELEC.

For this purpose, the COMELEC, in coordination with

the Commission, shall promulgate the corresponding
implementing rules for the transfer of jurisdiction over
the abovementioned corporations.

SEC. 183. Applicability of the Code. – Nothing in this law

shall be construed as amending existing provisions of
special laws governing the registration, regulation,
monitoring and supervision of special corporations such
as banks, nonbank financial institutions and insurance
companies.

Notwithstanding any provision to the contrary,

regulators such as the Bangko Sentral ng Pilipinas and
the Insurance Commission shall exercise primary
authority over special corporations such as banks,
nonbank financial institutions, and insurance
companies under their supervision and regulation.

SEC. 184. Effect of Amendment or Repeal of This Code,

or the Dissolution of a Corporation. – No right or
remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers,
nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.

SEC. 185. Applicability to Existing Corporation. – A

corporation lawfully existing and doing business in the
Philippines affected by the new requirements of this
Code shall be given a period of not more than two 2)
years from the effectivity of this Act within which to
comply.

SEC. 186. Separability Clause. – If any provision of this

Act is declared invalid or unconstitutional, other