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UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011

Commercial law
Prepared by:

ATTY. RENATO S. RONDEZ


NEGOTIABLE INSTRUMENTS
LAW
(Act No. 2031, June 2, 1911)

future time a sum certain in money to order


or bearer.
When the note is drawn to
makers own order, it is not complete until
indorse by him. (Sec. 184 NIL)

Written contracts for the payment of


money; by its form, intended as a substitute for
money and intended to pass from hand to hand,
to give the holder in due course the right to hold
the same and collect the sum due.

Parties:
a. Maker one who makes a promise and
sign the instrument
b. Payee one to whom the promise is
made or
the instrument is payable.

Negotiable instruments produce the


effect of payment only when they have been
encashed or through the fault of the creditor
have been impaired. (Article 1249, NCC)
Principal Features and Characteristics
a. negotiability - right of transferee to hold
the instrument and collect the sum due
b. accumulation of secondary contracts instrument is negotiated from person to
person
Requisites of Negotiability
An instrument to be negotiable must conform to
the following requirements:
a. It must be in writing and signed by maker
or drawer;
b. Must contain an unconditional promise or
order to pay a sum certain in money;
c. Must be payable on demand, or at a fixed
or determinable future time;
d. Must be payable to the order or to bearer;
and
e. Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
*For a Promissory Note to be negotiable,
requisites a,b,c and, d must be met.
*For a bill of exchange to be negotiable, all the
above requisites must be met.
Purpose of Negotiability. To allow bills and notes
the effect which money, in the form of
government bills or notes, supplies in the
commercial world.
The validity and negotiable character of a
negotiable instrument are NOT affected by
the fact that:
1. It is not dated;
2. It does not specify the place where it is
drawn or where it is payable;
3. It bears a seal;
4. It designates a particular kind of current
money in which payment is to be made (Sec. 6)
Kinds of Negotiable Instruments:
A. PROMISSORY NOTE - unconditional promise to
pay in writing made by one person to
another, signed by the maker, engaging to
pay on demand or a fixed determinable

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FORMS OF PROMISSORY NOTE


1. Due bill, an instrument whereby one
person acknowledges his indebtedness to
another and promises to pay a sum certain
in money.
2. Bonds, which are in the nature of PN.
3. Certificate of Deposit issued by banks
payable to depositor or his order, or to
bearer
B.

BILL OF EXCHANGE - unconditional order in


writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer. (Sec. 126 NIL)
Parties:
a. Drawer one who gives the
order to pay money to third party.
b. Payee one to whom the bill is
drawn or is payable
c. Drawee/ acceptor person to whom
the bill is addressed and who is ordered
to pay.
Forms of bill of exchange:
1. Trade Acceptance, A BOE drawn by
seller on the buyer for the purchase price of
goods.
2. Clean Bill of Exchange, A BOE wherein
no document is attached upon presentment
for acceptance or payment.
3. Documentary Bill of Exchange, A BOE
wherein documents are attached upon
presentment for acceptance or payment.
4. Bank Acceptance- A draft drawn and
accepted by a bank.
5. Drafts, which are BOE drawn by one bank
upon another.

C. CHECK - bill of exchange drawn on a bank


and payable on demand. (Sec. 185 NIL)
FORMS OF CHECK
1. Ordinary Check
2. Cashiers Check, A Check payable to
third person which is drawn by the bank
upon itself. (2003 BEQ)
3. Certified check , A personal check with
guaranteed funds to cover the payment
of the check.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
4. Voucher Check
5. Travelers Check
6. Managers Check , A check drawn by
the manager of the bank. (2003 BEQ)
7. Crossed Check ( 2004, 2005 BEQ)
8. Memorandum Check.

may
have
rights
better than transferor
Subject is money
Instrument itself
property of value

Other forms of negotiable instruments:


a. Certificate of deposit issued by banks,
payable to the depositor or his order, or to
bearer (CALTEX v. CA, 212 SCRA 471)
b. Trade Acceptance;
c. Bonds, which are in the nature of a
promissory notes;
d. Drafts which are bills of exchange drawn by
one bank upon another;
All of these comply with Sec. 1 NIL.
Letters of Credit are not negotiable.
DISTINCTIONS:
(2005 BEQ)
Negotiable
Instruments
Contains
all
the
requisites of Sec. 1 of
the NIL
Transferred
by
negotiation
Holder in due course
may
have
better
rights than transferor
Prior parties warrant
payment
Transferee has right
of recourse against
intermediate parties

Negotiable
Instruments
Have requisites
Sec. 1 of the NIL

of

Have right of recourse


against intermediate
parties
who
are
secondarily liable
Holder in due course

Check
Non-negotiable
- Always drawn
Instruments
upon a bank or
Doesbanker
not contain all
- Always payable
the requisites
of Sec.
1 of the
NIL
on demand
Transferred
by
assignment
- Not necessary
Transferee
acquires
be
rightsthatonly it of his
presented
for
transferor
acceptance
Prior - parties
Drawn merely
on a
warrant
legality of
deposit
title - The death of a
Transferee has no
drawer
of
a
right of recourse
check,
with
knowledge
by
the
banks,
revokes
Negotiable the
Documents
authorityofofTitle
the
Doesbanker
not pay
contain
requisites
of Sec. 1 be
of
Must
NIL
presented
for
No secondary liability
payment
within
of
intermediate
a
reasonable
parties
time after its
Transferee
merely
issue (6 months)

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is

Promissory Note
Unconditional
promise
Involves 2 parties
Maker primarily liable
Only 1 presentment for payment

steps into the shoes


of the transferor
Subject is goods
Instrument is merely
evidence
of
title;
thing of value are the
goods mentioned in
the document
Bill of Exchange
Unconditional order
Involves 3 parties
Drawer
only
secondarily liable
Generally
2
presentments - for
acceptance and for
payment

BOE
PN be drawn
CHECK
- May or may not
- There are two (2) - There are three (3)
against a bank
parties, the maker parties, the drawer,
and
the payee
- May be
payable
on demand the drawee bank and
or at a fixed or determinable the payee
- May be drawn Always
drawn
future time
against any person, against a bank
- Necessary that it be
not
necessarily
a
presented for acceptance
bank
- May be payable on -Always payable on
demand or at a fixed demand
- Not drawn on a deposit
or
determinable
future
time
- The death of the drawer of
- A promise to pay
- An order to pay
the ordinary bill of exchange
*Note: PN, BOE and
does not
Checkdefinitions
(2002 BEQ)

- May be presented for


payment within a reasonable
time after its last negotiation.

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However,
these
instruments
are
non-negotiable:
1. Treasury warrant
are
non-negotiable
because there is an
indication of the fund
as the source of

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
payment of the disbursement.(Metrobank v. CA,
194 SCRA 169)
2. Since a postal money order is subject to
restrictions and limitations under postal laws
and issued by the Government which is not
engaged in commercial transactions, it is not
governed by NIL. (Phil. Educ. Co., Inc. vs.
Soriano, 39 SCRA 587)
3. Letters of credit
4. Warehouse receipts - Non-Negotiable for
the same as Bill of lading it merely represents
goods, not money.
Factors that affect the determination of
negotiability of instruments:
a. Whole instrument;
b. What appears on the face of the
instrument;
c. Requisites enumerated in Sec.1 of NIL;
and
d. Should contain words or terms of
negotiability.
(Gopenco, Commercial law Bar Reviewer, cited
in Aquino p. 23)

In determining the negotiability of an


instrument, the instrument in its entirety
and what appears on its face must be
considered. It must comply with the
requirements of Sec.1 of NIL. ( Caltex
Phils. V. CA, 212 SCRA 448)
The acceptance of a bill of exchange is
not important in the determination of its
negotiability. The nature of acceptance
is important only on the determination
of the kind of liabilities of the parties
involved. (PBCOM v. Aruego, 102 SCRA
530)
Notes on Section 1:
In order to be negotiable, there must be
a writing of some kind, else there would
be nothing to be negotiated or passed
from hand to hand. The writing may be
in ink, print or pencil. It may be upon
parchment, cloth, leather or any other
substitute of paper.
It must be signed by the maker or
drawer. It may consist of mere initials or
even numbers, but the holder must
prove that what is written is intended as

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a signature of the person sought to be


charged.
The Bill must contain an order,
something more than the mere asking of
a favor.
Sum payable must be in money only. It
cannot be made payable in goods,
wares, or merchandise or in property.
A drawees name may be filled in under
Section 14 of the NIL.

MEANING OF PARTICULAR REQUISITES:


a. UNCONDITIONAL PROMISE OR ORDER
- Where the promise or order is made to
depend on a contingent event, it is conditional,
and makes the instrument non-negotiable.
The conditional nature of the promise or
order is not effected by:
a.
An indication of a particular
fund from which the acceptor reimburses
himself after paying the holder;
b.
A
statement
of
the
transaction which gives rise to the
instrument.
b. CERTAINTY OF SUM
- The sum is certain if the amount fixed.
- The certainty is HOWEVER NOT affected
although to be paid:
1. with interests;
2. by stated installments;
3. by stated installments with acceleration
clause;
4. with exchange;
5. with cost of collection or attorneys fees.
Escalation Clause an agreement pertaining
to a loan or increased in the event that the
applicable maximum rate of interest is
increased by law or by the Monetary Board.
De-escalation Clause an agreement
pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of
interest agreed upon may be reduced in the
event that the applicable maximum rate of
interest is decreased by law or by the Monetary
Board.
The presence of an escalation clause or
a de-escalation clause or both in the instrument

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
does not affect the negotiable character of the
instrument.

c.

When payable to the order of a fictitious


or non-existing person, and such fact
was known to the drawer or maker;
d. When the name of the payee is not the
name of a person;
e. When the only and last indorsement is
an indorsement in blank.

Acceleration clause - it is a provision that


upon default in payment of any installment or of
interest, the whole shall become due.
c. PAYABLE IN MONEY
General Rule: If some other act besides
payment of money is promised or ordered,
the instrument becomes non-negotiable.
Exceptions:
a. Authorizes
the sale of collateral
securities on default;
b. Authorizes confession of judgment on
default;
c. Waives the benefit of law intended to
protect the debtor;
d. Allows the creditor the option to require
something to be done in lieu of money.
d. PAYABLE ON DEMAND
An instrument is payable on demand:
a. Where it is expressed to be payable on
demand, at sight or on presentation;
b. Where no period of payment is stated;
c. Where the instrument has been issued,
accepted or indorsed after maturity.
e. DETERMINABLE FUTURE TIME
- Future time is determinable in the following
cases:
a. At a fixed period after date or sight;
b. On or before a specified fixed or
determinable future time;
c. On or at a fixed period after the
occurrence of a specified event, certain
to happen, although the exact date is
not certain.
f. PAYABLE TO ORDER
- The instrument is payable to order where
drawn payable to the order of a specified
person, or to him or his order.
- The payee must be named or otherwise
indicated therein with reasonable certainty.
g. PAYABLE TO BEARER
a. Where it is expressed to be so payable;
b. When payable to a person named
therein or bearer;

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An original bearer instrument remains to be


a bearer instrument even if indorsed
specially and thus can be negotiated by
mere delivery.
When the payee is vaguely designated, the
loss will be borne by the party who caused
it the drawer. (Equitable Bank v. IAC,
161 SCRA 518).

RULES AS TO DATES
There are several important principles as to
dates in negotiable instruments. These are:
1. Where the instrument, its acceptance, or
indorsement is dated, such date is
presumed to be the corresponding true
date; Date is important 2. Where the instrument is payable within a
specified period after date, or after
acceptance, in which case the date of the
instrument and the date of maturity of the
instrument; in these cases, the holder may
insert the true date;
a. when the instrument is payable on
demand, the date is necessary to
determine whether the instrument
was presented within a reasonable
time from issue in the case of notes
or from last negotiation in the case
of bills, as these factors will show
whether the last holder is a holder in
due course or not; and
b. when the instrument is an interestbearing one, to determine when the
interest starts to run.
3. Antedating or postdating an instrument
does not affect validity or negotiability,
unless done for an illegal or fraudulent
purpose.
REAL DEFENSES Those that attach to the
instrument itself and are available against all
holders, whether in due course or not.
(WAD FIMMU WIFE)
1. Want of delivery of incomplete
instrument;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2. Alteration;
3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse
contractus;
5. Insanity where the insane person
has a guardian appointed by the
court;
6. Minority;
7. Marriage in the case of a wife;
8. Ultra vires acts of a corporation;
where the corporation is absolutely
prohibited by its charter or statute
from issuing any commercial paper
under any circumstances;
9. Want of authority of agent;
10. Illegality of contract where it is the
contract or instrument itself which is
expressly made illegal by statute;
11. Forgery;
12. Execution of instrument between
public enemies
PERSONAL
DEFENSES/
EQUITABLE
DEFENSES Those which are available only
against a person not a holder in due course or a
subsequent holder who stands in privity with
him. (W2A4F2I4N2MU)
1. Want of delivery of complete
instrument;
2. Want of authority of agent where he
has apparent authority.
3. Absence or failure of consideration,
partial or total;
4. Acquisition of the instrument by
force, duress or fear;
5. Acquisition of the instrument by
unlawful means;
6. Acquisition of the instrument for an
illegal consideration;
7. Filling up of blank contrary to
authority given or not within
reasonable
time,
where
the
instrument is delivered;
8. Fraud in inducement;
9. Insertion of wrong date in an
instrument, where it is payable at a
fixed period after date and it is
issued undated or where it is
payable at a fixed period after sight
and the acceptance is undated;
10. Intoxication;
11. Insanity where there is no notice of
insanity on the part of the one
contracting with the insane person;

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12. Illegality of contract where the form


or consideration is illegal;
13. Negotiation in breach of faith;
14. Negotiation under circumstances
that amount to fraud;
15. Mistake;
16. Ultra vires acts of corporations
where the corporation has the power
to issue negotiable paper but the
issuance was not authorized for the
particular purpose for which it was
issued.

INSERTION OF DATE (Sec.13)


Rule: If there is a date and it is changed, apply
Sec.124 on ALTERATION OF AN INSTRUMENT.
The date may be inserted in an instrument
when:
a. An instrument expressed to be payable
at a fixed period after date is issued
undated
b. Where acceptance of an instrument
payable at a fixed period after sight is
undated (Sec. 13 NIL)
Effects:
Any holder may insert the true date of
issuance or acceptance
The insertion of a wrong date does not
avoid the instrument in the hands of a
subsequent holder in due course
As to the holder in due course, the date
inserted (even if it be the wrong date) is
regarded as the true date.
As to a holder in due course- the date inserted
is the true date.
Subsequent Holder in Due Course not
affected by the following deficiencies:
a. Incomplete but delivered instrument
(Sec. 14)
b. Complete but undelivered (Sec. 16)
c. Complete and delivered issued without
consideration
or
a
consideration
consisting of a promise which was not
fulfilled (Sec 28)
Holder in Due Course Affected by
Abnormality/Deficiency:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a. Incomplete and undelivered instrument
(Sec. 15)
b. Maker/drawers signature forged (Sec. 23)
Incomplete but Delivered
(Sec.14)
(2004 & 2005 Bar Exam)

There are two steps in the execution of a NI:


1. The act of writing the instrument comion
of giving
effect
pletely
and
in
accordance with Sec. 1 of NIL; and
2. The delivery of the instrument with the
intention of giving effect thereto
If Completed and negotiated without
authority, not a valid contract against a
person who has signed before delivery
of the contract against a person who has
signed before delivery of the contract
even in the hands of a HDC but
subsequent indorsers are liable.

Instrument:

1. Where an instrument is wanting in any


material particular:
a. Holder has prima facie authority to fill up
the blanks therein.
b. It must be filled up strictly in accordance
with the authority given and within a
reasonable time.
c. If negotiated to a holder in due course, it
is valid and effectual for all purpose as
though it was filled up strictly in
accordance with the authority given and
within reasonable time. (Sec. 14 NIL)

REASON: The law does not make any distinction


between a HDC and one who is not a HDC.

2. Where only a signature on a blank paper


was delivered:
a. It was delivered by the person making it
in order that it may be converted into a
negotiable instrument
b. The holder has prima facie authority to
fill it up as such for any amount. (Sec.
14 NIL)
Notes on Section 14
Rule: Sec. 14 applies if there is a signature on
the instrument for the purpose of giving effect
thereto.
Rule: If no signature, refer to Sec. 15 or 23.
Rule: Sec. 14 is merely a PERSONAL DEFENSE.
If the instrument is wanting in material
particular,
mere
possession
of
the
instrument is enough to presume prima
facie authority to fill it up.
Material particular may be an omission which
will render the instrument non-negotiable
(e.g. name of payee), an omission which will
not render the instrument non-negotiable
(e.g. date)
In the case of the signature in blank, delivery
with intent to convert it into a negotiable
instrument is required. Mere possession is
not enough.

Complete but Undelivered: (Sec.16)


General Rule: Every contract on a negotiable
instrument is incomplete and revocable
until delivery for the purpose of giving
effect thereto. .
a. If between immediate parties and remote
parties not holder in due course, to be
effectual there must be authorized delivery
by the party making, drawing, accepting or
indorsing. Delivery may be shown to be
conditional or for a special purpose only
b. If the holder is a holder in due course, all
prior deliveries conclusively presumed valid
c. If instrument not in hands of drawer/maker,
valid and intentional delivery is presumed
until the contrary is proven (Sec. 16 NIL)
Rules on delivery of negotiable
instruments:
1) Delivery is essential to the validity of any
negotiable instrument

Incomplete and Undelivered Instrument:


(Sec.15)

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Notes on Section 15
It is a real defense. It can be interposed
against a holder in due course.
Where
an
INCOMLETE
and
UNDELIVERED instrument is in the
hands of a HDC, there is PRIMA FACIE
PRESUMPTION of delivery.
Defense of the maker is to prove non-delivery
of the incomplete instrument.

Page 6

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2) As between immediate parties or those is
like cases, delivery must be with intention of
passing title
3) An instrument signed but not completed by
the drawer or maker and retained by him is
invalid as to him for want of delivery even in
the hands of a holder in due course
4) But there is prima facie presumption of
delivery of an instrument signed but not
completed by the drawer or maker and
retained by him if it is in the hands of a
holder in due course. This may be rebutted
by proof of non-delivery.
5) An instrument entrusted to another who
wrongfully completes it and negotiates it to
a holder in due course, delivery to the agent
or custodian is sufficient delivery to bind the
maker or drawer.
6) If an instrument is completed and is found
in the possession of another, there is prima
facie evidence of delivery and if it be a
holder in due course, there is conclusive
presumption of delivery.
7) Delivery may be conditional or for a special
purpose but such do not affect the rights of
a holder in due course.

Rules
on
Instruments:

Interpretation

of

1. Discrepancy between the Amount in


Figures and that in Words
- the words prevail, but if the words are
ambiguous, reference will be made to
the figures to fix the amount.
2. Instrument NOT dated
- considered dated on the date of issue
3. Conflict between Written and Printed
Provisions
- written provisions prevail
4. Interest provided for, but No starting
Date was specified
starting date is the date of the
instrument, in the absence of said date,
from date of issue
5. Instrument Ambiguous
- if the instrument is ambiguous such
that there is doubt whether it is a bill or
note, the holder may treat it as a note or
a bill at his option.

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6. Signature on Instrument does not


Indicate Capacity in Which Made
- Where it cannot be determined in what
capacity a person affixed his signature
to a negotiable instrument, he is
deemed to have signed as an indorser.
As indorser, his liability under the
instrument is secondary, meaning that if
the party primarily liable cannot pay,
the indorser can be made to pay by the
holder of the instrument.
7.
Where
Promissory
Note
worded
Promise to Pay is signed by two (2)
makers
- Under Section 17 (g) of the NIL and
Article 1216 of the Civil Code, where the
promissory note was executed jointly
and severally by two or more persons,
the payee of the promissory note had
the right to hold any one of the two (2)
signers
of
the
promissory
note
responsible for the payment of the
whole amount of the note. (Philippine
National
Bank
vs.
Concepcion
Milling Co., 5 SCRA 745).

RULE ON SIGNATURES
General Rule: A person whose signature does
not appear on the instrument in not
liable.
Exception:
a. One who signs in a trade or assumed
name (Sec. 18)
b. A duly authorized agent (Sec. 19)
c. A forger (Sec. 23)
LIABILITY of a person SIGNING AS AGENT:
An agent is exempt from personal liability,
provided he:
1. Acts within the scope of his authority;
2. Discloses the name of his principal; and
3. Discloses that he is acting in a representative
capacity (Sec. 20)
Notes on Section 20
General rule: An agent is not liable on the
instrument if he were duly authorized to
sign for or on behalf of a principal.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

If an agent does not disclose his principal,


the agent is personally liable on the
instrument.

Per Procuration - operates as notice that the


agent has a limited authority to sign.
Effects:
The principal in only bound if the agent
acted within the limits of the authority
given
The person who takes the instrument is
bound to inquire into the extent and
nature of the authority given. (Sec. 21
NIL)
General rule: Infants and corporations incur
no liability by their indorsement or
assignment of an instrument. (Sec. 22
NIL)
Effects:
No liability attached to the infant or the
corporation
The instrument is still valid and the
indorsee acquires title
FORGERY
A. Makers Signature
(1989 BEQ)
B. Drawers Signature
(2004,2006&2009 BEQ)
C. Payees Signature
( 2008 BEQ)
D. Indorsers Signature
(2008 BEQ)

Section 23 is not limited to counterfeit


signatures since it also applies to genuine ones.
* A person whose signature is forged as maker,
drawer, payee or indorsee of a note or check
was never a party to the instrument. Since his
signature does not appear in the instrument, he
cannot be held liable thereon by anyone.
(Gempsaw v. CA 218 SCRA 682)
CUT-OFF RULE:
General Rule: Parties prior to the forged
signature are cut-off from the parties after the
forgery in the sense that prior parties cannot be
held liable and can raise the defense of forgery.
The holder can only enforce the instrument
against parties who became such after forgery.
Exception: When the prior parties are
precluded from setting up the defense of
forgery either because of their warranties,
representation or negligence. (Gempsaw v. CA)
Persons PRECLUDED from setting up the
defense of forgery:
1. Those who admit/warrant the genuineness of
the signature in question: indorsers, persons
negotiating by delivery and acceptors;
2. Those who by their acts, silence, or
negligence, are estopped from claiming forgery;
3. Holder of a bearer instrument
Forged
signature
is
not
necessary to the title of the holder.

General rule: A signature, which is forged or


made without authority is wholly
inoperative. (Sec. 23)
Effects:
a. No right to retain
b. No right to give a discharge
c. No right to enforce payment can be
acquired.

Exception:
The party against whom it is sought to
be enforced is precluded from setting up
the forgery or want of authority. (Sec.23)

Forgery refers to both a signature which has


been forged or made without authority. Thus,

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Notes on Section 23
Section 23 applies only to forged signatures
or signatures made without authority
Alterations such as to amounts or like fall
under section 124
Forms of forgery are a) fraud in factum b)
duress amounting to fraud c) fraudulent
impersonation
Only the signature forged or made without
authority is inoperative, the instrument or
other signatures which are genuine are
affected
The instrument can be enforced by holders
to whose title the forged signature is not
necessary
drawee bank is conclusively presumed to
know the signature of its drawer
if endorsers signature is forged, loss will be
borne by the forger and parties subsequent
thereto

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

drawee bank is not conclusively presumed


to know the signature of the indorser. The
responsibility falls on the bank which last
guaranteed the indorsement and not the
drawee bank.
Where the payees signature is forged,
payments made by the drawee bank to
collecting bank is ineffective.
No
debtor/creditor relationship is created. An
agency to collect is created between the
person depositing and the collecting bank.
Drawee bank may recover from collecting
bank who may in turn recover from the
person depositing.

Rules on liabilities of parties on a forged


instrument:
In a PN
A party whose indorsement is forged on
a note payable to order and all parties
prior to him including the maker cannot
be held liable by any holder
A party whose indorsement is forged on
a note originally payable to bearer and
all parties prior to him including the
maker may be held liable by a holder in
due course provided that it was
mechanically complete before the
forgery
A maker whose signature was forged
cannot be held liable by any holder
In a BOE
The drawers account cannot be charged
by the drawee where the drawee paid
The drawer has no right to recover from
the collecting bank
The drawee bank can recover from the
collecting bank
The payee can recover from the drawer
The payee can recover from the
recipient of the payment, such as the
collecting bank
The payee cannot collect from the
drawee bank
The collecting bank bears the loss but
can recover from the person to whom it
paid
If payable to bearer, the rules are the
same as in PN.
If the drawee has accepted the bill, the
drawee bears the loss and his remedy is
to go after the forger

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If the drawee has not accepted the bill


but has paid it, the drawee cannot
recover from the drawer or the recipient
of the proceeds, absence any act of
negligence on their part.

Every negotiable instrument is deemed prima


facie to have been issued for a valuable
consideration. (Sec. 24)
Effects:
Every person whose signature appears
thereon is a party for value
Presumption is disputable
Where value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time. (Sec. 26)

Absence of Consideration:
(1995 and 1996 Bar Exam)
Effect of want of consideration:
a. Personal defense to the prejudice of a
party and available against any person
not holder in due course.
b. Partial failure of consideration is a
defense pro tanto, whether the failure is
an asceratained and liquidated amount
otherwise. (Sec 29)

Notes on Section 28
Absence of consideration is where no
consideration was intended to pass.
Failure of consideration implies that
consideration was intended by that it failed
to pass
The defense of want of consideration is
ineffective against a holder in due course
A drawee who accepts the bill cannot allege
want of consideration against the drawer

Accommodation
Legal arrangement under which a person called
the accommodation party lends his name and
credit to another called the accommodated
party, without consideration.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Effect: A person to whom the instrument thus
executed is subsequently negotiated, has a
right of recourse against the accommodation
party inspite of the formers knowledge that no
consideration
passed
between
the
accommodation and accommodated parties.
Requisites of Accommodation:
1. The accommodation party must sign as
maker, drawer, acceptor or indorser;
2. No
value
is
received
by
the
accommodation
party
from
the
accommodation party; and
3. The purpose is to lend the name.
(Crisologo-Jose v. CA, 177 SCRA 594).

defense
by
the
accommodation
(Prudencio v. CA, 143 SCRA 6).

party.

*The liability of an accommodation party


does not extend to corporate accommodation
because the act of the corporate officers is ultra
vires. However, these officers are personally
liable. (Crisologo-Jose v. CA, 177 SCRA 594).
*A
promissory
note,
with
an
accommodation co-maker, used to settle an
estafa case, has an illegality of cause, and does
not make the accommodation co-maker liable.
(United General Industries v. Paler, 112 SCRA
404)

Accommodation Party Is one who has


signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value
therefore, and for the purpose of lending his
name to another person. (2003 and 2005 BEQ)

*A
promissory
note
with
an
accommodation maker, utilized to settle an
estafa case, has an illegal consideration, and
does not make the co-maker liable. (United
Industries v. Paler, 112 SCRA 404)

RIGHTS OF AN ACCOMMODATION PARTY


1. Against the Accommodated Party
- the accommodation party, if obliged to pay
to
a
holder
of
value,
can
seek
reimbursement from the accommodated
party.
2. Against the Co-accommodation Party
to the use of some other persons
- where a solidary accommodation maker
paid to the bank the balance due on a
promissory note, he may seek contribution
from the other solidary accommodation
maker, in the absence of a contrary
agreement between them. This rights
springs from an implied promise between
the accommodation makers to share equally
the burdens resulting from their execution
of the note. They are joint guarantors of the
principal debtor. (Sadaya v. Sevilla).

A
corporation
cannot
act
as
an
accommodation party. Such is an ultra vires
act. (Crisologo-Jose v CA, 117SCRA594)

Liability of the Accommodation Party:


- The accommodation party is liable on
the instrument to a holder for value
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. It is a valid defense that
the accommodation party did not receive any
valuable consideration when he executed the
instrument. He is liable to a holder for value by
virtue of his being an accommodation party.
*An
accommodation
party
to
a
negotiable instrument, inspite of the lack of
consideration
between
him
and
the
accommodated party, is liable to any other
holder NOT to the accommodated party.
(Travel-On, Inc. v. CA, et al, 210 SCRA 351).
*An accommodation partys liability as a
solidarily party is unconditional party is
unconditional and is not affected by an
extension of payment granted by the creditor to
the debtor. HOWEVER, where the holder allowed
payments by the drawer direct to the contractor
without availing of the deed of assignment in its
favor, said holder is a bad faith holder, NOT a
holder in due course against whom an
extension to pay granted by the drawer is a

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A solidary accommodation maker may:


a. demand
from
the
principal
debtor
reimbursement of the amount which he
paid on the promissory note and
b.
c. demand
contribution
from
his
coaccommodation
maker,
without
first
directing his action against the principal
debtor, PROVIDED that:
b.1. he made the payment by virtue of
a judicial demand, or
b.2. the principal debtor is insolvent.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

NEGOTIATION

An instrument is negotiated when:


a. It is transferred from one person to another
b. That the transfer must be in a manner as to
constitute the transferee a holder
Modes of Negotiation:
1. If payable to bearer, it is negotiated by
delivery.
Negotiation of negotiable instrument
may be effected by the delivery alone of
the instrument to the transferee in those
negotiable instruments which are:
-originally payable to bearer, or
-originally payable to order
instruments where the last
indorsement is an indorsement
in blank.
2. If payable to order, it negotiated by the
indorsement of the holder completed by
delivery.
A negotiable instrument payable
to the order of a specified person, or to
him or his order, may be negotiated by
the payee by indorsement followed by
delivery of the instrument to the
indorsee. Subsequent negotiation may
be made in this manner if the holder
who indorses acquired the instrument
under a special indorsement.
The payee of the negotiable instrument
acquires no interest with respect thereto
until its delivery to him. (Development
Bank of Rizal v. Sima Wei)
3. Another method of transfer is by assignment
which generally refers to ordinary contracts,
and by operation of law, where title to a note or
bill passes upon the death of the holder to his
personal representative.
Indorsement to be valid must be:
a. Written
b. On the instrument itself or upon a piece
of paper attached (Sec. 31 NIL)

Notes on Section 31
The paper attached with the indorsement is
an allonge
An allonge must be attached so that it
becomes a part of the instrument, it cannot
be simply pinned or clipped to it.

Kinds of Indorsements:
a.
b.
c.
d.
e.

Special (Sec. 34)


Blank (Sec. 35)
Restrictive (Sec. 36)
Qualified (Sec. 38)
Conditional (Sec. 39)

A. SPECIAL- specifies the person to whom


or to whose order, the instrument is to
be payable. (Sec. 34)
B. BLANK- Specifies no person to whom or
to whose order the instrument is to be
payable.
1. Instrument becomes payable to
bearer and may be negotiated by
delivery (Sec. 34)
2. May be converted to a special
indorsement by writing over the
signature of the indorser in blank
any
contract
consistent
with
character of indorsement. (Sec. 35)
C. ABSOLUTE- One by which indorser
binds himself to pay:
a. Upon No order condition than failure
of prior parties to do so; and
b. Upon due notice to him of such
failure.
D. CONDITIONAL- right of the indorsee is
made to depend on the happening of a
contingent event. Party required to pay
may disregard the conditions. (Sec. 39)
E. RESTRICTIVEAn
indorsement
is
restrictive, when it either:
a. Prohibits further negotiation of
the instrument; or
b. Constitutes the indorsee the
agent of the indorser; or
c. Vests the title in the indorsee in
trust for or to the use of some
other persons.
But mere absence of words implying
power to negotiate does not make
an indorsement restrictive. (Sec. 36)
EFFECT of Restrictive indorsement:
Confers upon the indorsee the right-

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GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a. Receive payment of the instrument;
b. Bring any action thereon that the
indorser could bring;
c. To transfer his rights as such indorsee,
when the form of the instrument
authorizes him to do so.
F. QUALIFIED- Constitutes the indorser a
mere assignor of the title to the
instrument. ( Sec38)
It is made by adding to the
indorsers signature words like sans
recourse,
without
recourse,
indorser not holder, at the
indorsers own risk, other terms of
similar import.

Notes on Section 40
Section 40 applies only to instruments
originally payable to bearer
It cannot apply where the instrument is
payable to bearer because the only or last
indorsement is in blank

* Hence, it has been held that oral testimony is


not admissible to establish that an unqualified
indorsement is in fact qualified. ( Velasco v. Tan
Liuan & Co., March 17,1922)

Effects of a transfer without endorsement:


The transferee acquires such title as the
transferor had
The transferee acquires the right to have
the indorsement of the transferor
Negotiation takes effect as of the time the
indorsement is actually made (Sec. 49)

1.
2.
3.
4.

A Qualified indorser has limited


liability, i. e. he is liable for breach of
warranty if the instrument is
dishonored by non-acceptance or
non- payment due to:
Forgery; or
Lack of good title on the part of the
indorser; or
Lack of capacity to indorse on the
part of the prior parties; or
The fact that at the time of the
endorsement, the instrument was
valueless or nit valid, and he knew
of the fact.
A Qualified indorsement does not
impair the negotiable character of
the instrument.

As mentioned earlier, Negotiation is the


transfer of a negotiable instrument from one
person to another as to constitute the
transferee the holder thereof.
To be valid, negotiation must involve the entire
instrument.
Effects of indorsing an instrument originally
payable to bearer:
It may further be negotiated by delivery
The person indorsing is liable as
indorser to such persons as to make title
through his indorsement (Sec. 40)

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A holder may strike out any indorsement which


is not necessary to his title. (Sec. 48)
Effects:
An indorser whose indorsement is struck
out is discharged
All indorsers subsequent to such indorser
who has been discharged are likewise
relieved

WHO IS
COURSE?

HOLDER

IN

DUE

Every holder is deemed prima facie to


be a holder in due course; but when it is shown
that the title of any person who has negotiated
the instrument was defective, the burden is on
the holder to prove that he or some person
under whom he claims acquired the title as
holder in due course. But the last-mentioned
rule does not apply in favor of a party who
became bound on the instrument prior to the
acquisition of such defective title. (Sec. 59)
RIGHTS OF A HOLDER
-

A holder may sue in his own name


A holder may receive payment.
Effects: (Sec. 51 NIL)
If in due course
instrument

it

discharges

the

*Note: Holder in due Course (Secs. 52,57&59)


Personal and Real Defenses
( 2000 & 2009 BEQ)
Requisites for a Holder in Due Course (HDC):

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a. Receives the instrument complete and
regular on its face
b. Became a holder before it was overdue
and had no notice that it had been
previously dishonored if such was the
fact
c. Takes the instrument for value and in
good faith
d. At time he took the instrument, no
notice of infirmity in instrument or
defect in the title of the person
negotiating it (Sec. 52 NIL)
*Note: Under the "SHELTER PRINCIPLE," the
holder-in-due course, by negotiating the
instrument, to a party not a holder-in-due
course, transfers all his rights as such holder to
the latter, who thus acquires the right to
enforce the instrument as if he was a holder-indue course. However, this principle presupposes
that the "sheltered" holder is not a party to any
fraud or illegality impairing the validity of
the instrument. (2008 BEQ)
Notes on Section 52
Every holder is presumed to be a HDC (Sec.
59)
If one of the requisites are lacking, the holder
is not a HDC
An instrument is considered complete and
regular on its face if a) the omission is
immaterial b) the alteration on the instrument
was not apparent on its face
An instrument is overdue after the date of
maturity.
On the date of maturity, the instrument is not
overdue and the holder is a HDC
Acquisition of the transferee or indorsee must
be in good faith
Good faith means lack of knowledge or notice
of defect or infirmity

A holder is not a HDC where an instrument


payable on demand is negotiated at an
unreasonable length of time after its issue (Sec.
53 NIL)
Rights of a Holder in Due Course:
-

Holds the instrument free from any defect of


title of prior parties
Free from defenses available to prior parties
among themselves (personal/ equitable
defenses)

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May enforce payment of the instrument for


the full amount against all parties
liable(Sec. 57 NIL)
Notes on Section 57
Personal or equitable defenses are those
which grow out of the agreement or conduct
of a particular person in regard to the
instrument which renders it inequitable for
him through legal title to enforce it. Can be
set up against holders not HDC

Legal or real defenses are those which attach


to the instrument itself and can be set up
against the whole world, including a HDC.

An instrument not in the hands of a HDC is


subject to the same defenses as if it were
non-negotiable.
Exception:
A holder, who derives his title through a
HDC and is not a party to any fraud or
illegality affecting the instrument, has
all the rights of such HDC in respect to
all parties prior. (Sec. 58 NIL)
Rights of a holder not a HDC
May sue in his own name
May receive payment and if it is in due
course, the instrument is discharged
Holds the instrument subject to the
same defenses as if it were nonnegotiable
If he derives his title through a HDC and
is not a party to any fraud or illegality
thereto, has all the rights of such HDC
General rule: Every holder is deemed prima
facie to be a holder in due course.
Exception:
Where it is shown that the title of any
person
who
has
negotiated
the
instrument is defective, the burden is on
the holder to prove that he is a HDC or
that a person under whom he claims is a
HDC (Sec. 59 NIL)
DEFENSES OF PRIOR PARTIES AGAINST
THE HOLDER
Classes of Defenses:
1. Real or Absolute Defenses
- a real or absolute defense is a defense
which attaches to the instrument

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
irrespective of the parties and is
predicated on the principle that the
right sought to be enforced has never
existed or has ceased to exist.

under circumstances
amounting to fraud
11. Mistake
12. Intoxication
13. Ultra vires acts
of corporations
14. Want of authority
of the agent where
he has apparent
authority
15. Illegality of
contract where form
or consideration is
illegal
16. Insanity where
there is no notice of
insanity

- A real defense is available against ALL


HOLDERS, whether in due course or not.
2. Personal or Equitable Defenses
- a personal or equitable is a defense
growing out of an agreement or conduct
of a particular person in regard to an
instrument which renders it inequitable
for him although owner of it, to enforce
it against the defendant.
Personal Defenses
1. Absence or failure
of consideration
2. Want of delivery
of complete
instrument
3. Insertion of wrong
date where payable
at a fixed period after
date and issued
undated; or at a fixed
period after sight and
acceptance is
undated
4. Filling up the
blanks contrary to
authority given or not
within reasonable
time
5. Fraud in
inducement
6. Acquisition of the
instrument by force,
duress or fear
7. Acquisition of the
instrument by
unlawful means
8. Acquisition of the
instrument for an
illegal consideration
9. Negotiation in
breach of faith
10. Negotiation

Real Defenses

instrument between
public enemies
Illegality of contract
made by statue
Forgery

Alteration
Want of delivery of
incomplete
instrument

LIABILITIES OF PARTIES:
1. A maker is primarily liable:
Effects of making the instrument, the
maker:
a. Engages to pay according to tenor of
instrument
b. Admits existence of payee and his
capacity to indorse (Sec. 60 NIL)

Duress amounting to
forgery

Fraud in factum or in
esse contractus

Minority
Marriage in case of a
wife
Insanity where the
insane person has a
guardian appointed
by the court
Ultra vires acts of a
corporation where its
charter or by statue,
it is prohibited from
issuing commercial
paper
Want of authority of
agent
Execution of

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Notes on Section 60
A
makers
liability
is
primarily
and
unconditional
One who has signed as such is presumed to
have acted with care and to have signed with
full knowledge of its contents, unless fraud is
proved
The payees interest is only to see to it that
the note is paid according to its terms
When two or more makers sign jointly, each is
individually liable for the full amount even if
one did not receive the value given
The maker is precluded from setting up the
defense of:
a) The payee is fictional,
b) That the payee was insane, a minor or a
corporation acting ultra vires
2. A drawer is secondarily liable
Effects of drawing the instrument,
drawer:
a. Admits the existence of the payee,

the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
b. The capacity of such payee to indorse
c. Engages that on due presentment, the
instrument will be accepted or paid or
both according to its tenor.

Indorser warrants that the instrument is


genuine, that he has a good title to it, that all
prior parties had capacity to contract; that the
instrument at the time of the indorsement is
valid and subsisting; and that on due
presentment, the instrument will be accepted or
paid or both accepted and paid according to its
tenor, and that if it is dishonored, he will pay if
the necessary proceedings for dishonor are
made.

If the instrument is dishonored, and the


necessary proceedings on dishonor duly
taken
a. The drawer will pay the amount thereof
to the holder
b. Will pay to any subsequent indorser who
may be compelled to pay it. (Sec. 61
NIL)

5. Warranties where negotiating by delivery or


qualified endorsement:
a. The instrument is genuine and in all
respect what it purports to be
b. The indorser has good title to it
c. All prior parties had the capacity to
contract
d. Indorser has no knowledge of any fact
that would impair the validity or the
value of the instrument.

Notes on Section 61
A drawer may insert an express stipulation to
negative or limit his liability
3. An acceptor is primarily liable
By accepting the instrument, an acceptor:
Engages that he will pay according to
the tenor of his acceptance
Admits the existence of the drawer, the
genuineness of his signature and his
capacity and authority to draw the
instrument
The existence of the payee and his then
capacity indorse
IRREGULAR INDORSER
- a person not
otherwise a party to an instrument places
his signature in blank before delivery is
liable as an indorser in the following
manner:
a. If payable to order of a third person
liable to the payee and to all subsequent
parties
b. If payable to order of the maker or
drawer liable to all parties subsequent
to the maker or drawer
c. If payable to bearer liable to all parties
subsequent to the maker or drawer
d. If signs for an accommodation party
liable to all parties subsequent to the
payee (Sec. 64)
*Note: Irregular Indorser v. General Indorser
(2005 BEQ)
Irregular Indorser, is not a party to the
instrument but he places his signature in blank
before delivery. He is not a party but he
becomes one because of his signature in the
instrument. Because his signature he is
considered an indorser and he is liable to the
parties in the instrument. While, a General

Limitations of warranties:
- If by delivery extends only to immediate
transferee
- Warranty of capacity to contract does not
apply to persons negotiating
public or corporate securities
(Sec. 65 NIL)

4.

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Notes on Section 65
A qualified indorser is one who indorses
without recourse or sans recourse
Recourse - resort to a person secondarily
liable after default of person primarily liable
A qualified indorser cannot raise the defense
of a) forgery b) defect of his title or that it is
void c) the incapacity of the maker, drawer or
previous indorsers.
A qualified Indorsement makes the indorser
mere assignor of title of instrument, relieves
him of general obligation to pay if instrument
is dishonored, but he is still liable for the
warranties arising from instrument only up to
warranties of general indorser
The warranty is to the capacity of prior parties
at the time the instrument was negotiated.
Subsequent incapacity does not breach the
warranty.
lack of knowledge of the indorser as to any
fact that would impair the validity or the value
of the instrument must be subsisting all
throughout

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

A person Negotiating by Delivery warrants


same as those of qualified indorser and
extends to immediate transferees only
Warranties of a general indorser:
a. The instrument is genuine and in all
respect what it purports to be
b. The he has good title to it
c. All prior parties had the capacity to
contract
d. That the instrument at the time of his
indorsement was valid and subsisting
(Sec. 66)
In addition:
Engages that the instrument will be
accepted or paid or both according to its
tenor on due presentment
Engages to pay the amount thereof if it
be dishonored and the necessary
proceedings on dishonor are taken

Notes on Section 66
The indorser under Section 66 warrants the
solvency of a prior party
The indorser warrants that the instrument is
valid and subsisting regardless of whether he
is ignorant of that fact or not.
Warranties extend in favor of a) a HDC b)
persons who derive their title from HDC c)
immediate transferees even if not HDC
The
indorser
does
not
warrant
the
genuineness of the drawers signature
General indorser is only secondarily liable

Consists of
a) a personal demand for
payment at a proper place b) the bill or note
must be ready to be exhibited if required and
surrendered upon payment.

Parties primarily liable persons by the terms


of the instrument are absolutely required to
pay the same. E.g maker and acceptors.
They can be sued directly.

If payable at the special place, and the person


liable is willing to pay there at maturity, such
willingness and ability is equivalent to tender
of payment.

Acts needed to charge persons secondarily


liable:
a) Presentment for payment/acceptance
b) Dishonor
by
non-payment/nonacceptance
c) Notice of dishonor to secondary parties

Acts needed to charge persons secondarily


liable in other cases:
a) Protest for non-payment by the drawee
b) Protest for non-payment by the acceptor
for honor
Proper presentment:
a. By the holder or an authorized person
b. At a reasonable hour on a business day
c. At a proper place
d. To the person primarily liable or if
absent to any person found at the place
where presentment is made (sec. 72
NIL)

PRESENTMENT FOR PAYMENT


General rule: Presentment for payment is not
necessary to charge persons primarily
liable on the instrument. Presentment
for payment is necessary to charge the
drawer and indorsers. (Sec 70 NIL)
Presentment is necessary to charge
persons secondarily liable otherwise
they are discharged

Presentment for payment is made to the


maker, or acceptor. Not to the person
secondarily liable.

Notes on Section 70
Presentation for payment production of a
BOE to the drawee for his acceptance, or to a
drawee or acceptor for payment.
Also
presentment of a PN to the party liable for
payment of the same.

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Notes on Section 72
Only the holder or one authorized by him has
the right to make presentment for payment
Presentment cannot be made on a Sunday or
holiday
If the instrument is payable on demand a) if
it is a note presentment must be made
within reasonable time after issue b) if it is a
bill - presentment must be made within
reasonable time after last negotiation.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
General rule: Presentment for payment is
necessary to charge persons secondarily
liable otherwise they are discharged:
Exception:

the holder and presentment for payment is


necessary
Summary of rules as to presentment for
payment:
a. Presentment not necessary to charge
persons primarily liable
b. Necessary to charge persons secondarily
liable except:
The drawer under Sec. 79
The indorser under Sec. 80
When excused under Sec. 82
When
the
instrument
has
been
dishonored by non-acceptance under
Sec. 83

1. Presentment not required to charge the


drawer:
a. He has no right to expect
b. He has no right to require that the
drawee or acceptor will pay (Sec 79)
2. Presentment not required to charge the
indorser where:
a. The instrument was made or
accepted for his accommodation
b. He has no reason to expect that the
instrument will be paid if presented
(Sec. 80)

When instrument dishonored by nonpayment


The instrument is dishonored by non-payment
when:

Notes on Section 79 and 80


Only the drawer or indorser are not
discharged. All other parties secondarily
liable are discharged.

a. it is duly presented for payment and


payment is refused or cannot be
obtained; or
b. presentment is excused and the
instrument is overdue and unpaid.

Presentment for payment is dispensed


with if:
a. After due diligence, presentment cannot
be made
b. Presentment is waived
c. The drawee is a fictitious person (Sec
82)

Notes on Section 82
What is excused is the failure to make
presentment. There is no need to make any
presentment versus under section 81 (delay
in presentment) presentment for payment is
still required after the cause of delay has
ceased.
Other instances where presentment for
payment is not required:
1. in order to charge the drawer, where he
has no right to expect or require that the
drawee or acceptor will pay the instrument;
2. in order to charge an indorser, where the
instrument was made or accepted for his
accommodation and he has no right to
expect that the instrument will be paid if
presented; and
3. when a bill is dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to

BAR OPERATIONS 2011

Page 17

Effects of dishonor by non-payment:


An immediate right of recourse to all
parties secondarily liable accrues to the
holder (Sec. 84)
An immediate right of recourse means
that the holder, after the instrument is
dishonored by non-payment and notice of
dishonor given to the persons secondarily
liable, may sue any of the latter without
suing first the persons primarily liable.

Notes on Section 84
Parties cease to be secondarily liable and
become principal debtors.
Liability becomes the same as that of the
original obligors.

NOTICE OF DISHONOR
When a negotiable instrument has been
dishonored by non-acceptance non-payment,
notice of dishonor must be given to the drawer
and to each indorsers.
Any drawer or indorser to whom such notice is
not given is discharged.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Exceptions:
a. Waiver (Sec. 109)
b. Notice is dispensed (Sec. 112)
c. Not necessary to Drawer (Sec. 114)
d. Not necessary to Indorser (Sec. 115)

Notice of dishonor is dispensed with


when, after the exercise of reasonable
diligence, it cannot be given to or does not
reach the parties sought to be charged.
Effects of failure to give notice:
An omission to give notice of dishonor
by non-acceptance does not preclude the rights
of a holder in due course subsequent to the
omission.

- If notice is delayed, delay may be excused


(Sec. 113)
Notice of Dishonor may be given:

Instances when Notice Not Required to


Indorser
a. Drawee was a fictitious/incapacitated
person and the indorser was aware of
such at the time of indorsement
b. Indorser is the person to whom
instrument was presented for payment
c. Instrument
made/accepted
for
his
accommodation

a. By or on behalf or the holder


b. By or on behalf of any party who:
- Is a party to the instrument and might
be compelled to pay the instrument.
To a holder who having taken it up would
have a right of reimbursement from the party to
whom notice is given. (Sec. 90)

Notes on Section 111


Where notice is waived, presentment is not
waived
Where presentment is waived, notice is also
waived
Where protest is waived, notice and
presentment is waived

Discharge of the Instrument


A negotiable instrument is discharged:
a. By payment in due course by or on
behalf of the principal debtor;
b. Payment by in due course by party
accommodated, where the instrument
is
made
or
accepted
for
accommodation;
c. Intentional cancellation by holder of
instrument;
d. Any other act discharging a simple
contract for the payment of money;
e. When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.

Effects of notice:
a. Where notice is given by or on behalf
of the holder, it inures for the benefit of all
subsequent holders and all prior parties who
have a right of recourse against the party to
whom it is given.
b. Where notice is given by or on behalf
of a party entitled to give notice, it inures for
the benefit of the holder and all parties
subsequent to the party to whom it is given.
Forms of notice:
a. May be written or oral
b. Written notice need not be signed or
may be supplemented by verbal
communication
c. May be by personal delivery or by mail
Notice may be waived either expressly or
implied:
a. Before the time of giving notice has
arrived
b. After the omission to give due notice
Dispensation with Notice:

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Page 18

NOTES ON SECTION 119


Discharge of the instrument discharges all the
parties thereto
Payment must be in due course, and by the
principal debtor or on his behalf
If payment is not made by the principal
debtor, payment only cancels the liability of
the payor and those obligated after him but
does not discharge the instrument.
Payment by an accommodation party does
not discharge the instrument.
Discharge of Secondary Parties:
a. Any act discharging the instrument

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
b. Cancellation of indorsers signature by
indorsers
c. Discharge of prior party
d. Tender of payment by prior party
e. Release of principal debtor
f. Extension
of
payment
by
the
holder/postponement of right to enforce
without assent of secondary parties and
without reservation of right of recourse
against secondary parties (Sec 120 NIL)

General rule:
When materially altered,
without the consent of all parties liable,
the instrument is avoided except as
against:
a. The party who has made the alteration
b. The party who authorized or assented to
the alteration.
c. Subsequent indorsers
Exception:
If in the hands of a HDC, may be
enforced according to its original tenor

RIGHT OF PARTY WHO DISCHARGES


INSTRUMENT (Sec. 121)
A party secondarily liable who pays the
instrument does not discharge it , but instead
acquires certain rights ;
1.Collect from prior parties ; or
2. Negotiate the instrument to new parties- but
not to subsequent parties.
However , Under the exceptions provided in
Sec.121, the instrument is considered
discharged when ;
1.The BOE is payable to the order of a third
person and paid by the drawer himself, or
2. Where it was made or accepted for
accommodation , and has been paid by the
party accommodated.
RENUNCIATION BY HOLDER. (Sec 122)
Renunciation- The act of giving up or
abandoning a right without transferring the
right to another.
As a Rule ,the holder may expressly renounce
his rights against any party to the instrument
before , or after its maturity. An absolute and
unconditional renunciation of his rights against
the principal debtor at or after maturity of the
instrument discharges the instrument.
However , A renunciation does not affect the
rights of a holder in due course without notice
of the renunciation.

Notes on Section 122


if renounced in favor of a party secondarily
liable, only he is exonerated from liability and
all parties subsequent to him
discharge by novation is allowed

MATERIAL ALTERATION
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Page 19

MATERIAL ALTERATION
- Any change in the instrument which affects
or changes the liability of the parties in any
way.

There is no distinction between fraudulent


and innocent alteration
The EFFECTS of material alteration:
1. Alteration by a PARTY
Material alteration by the holder discharged the
instrument and all prior parties thereto who did
not give their consent to such alteration.
Whether the alteration made is favorable or
unfavorable to the party making the alteration,
no distinction as to the effect is made. The
intent of the law is to preserve the integrity
of the negotiable instrument.
2.
Alteration
by
a
STRANGER
( SPOLIATION )
If subsequently negotiated to a non-Holder in
Due CourseA material alteration avoids the
instrument as against any prior party who has
not assented to the alteration.
If subsequently negotiated to a Holder in Due
CourseHe may enforce payment thereof
according to its original tenor regardless of
whether the alteration was innocent or
fraudulent.
CHANGES
that
constitute
MATERIAL
ALTERATIONS
1. The date;
2. The sum payable, either for principal or
interest;
3. The time or place of payment;
4. The number or the relations of the parties;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
5. The medium or currency in which payment is
to be made;
6. Or which adds a place of payment where no
place of payment is specified; or
7. Any other change or addition which alters the
effect of the instrument in any respect. (Sec.
125)

A serial number is an item which is


not an essential requisite for
negotiability under Sec. 1 of NIL, and
which does not affect the right of the
parties, hence its alteration is not
material. (PNB v. CA, 256 SCRA 491)
(199 BEQ)

Instances where a BOE may be treated as


a PN:
a. Where the drawer and the drawee are
one and the same
b. Where the drawee is a fictitious person
c. Where the drawee has no capacity to
contract (Sec. 130)
The holder has the option to treat it as a BOE or
a PN

ACCEPTANCE
The signification by the drawee of his assent to
the order of the drawer. It is an act by which a
person on whom the Bill of Exchange is drawn
assents to the request of the drawer to pay it.
As a general rule, acceptance, in order to be
valid must be:
1. Written;
2. Signed by the drawee; and
3. Must contain an express or implied to pay
in money.

Kind of acceptance:
A. Constructive Acceptance:
a. Where the drawee to whom the bill has
been delivered destroys it
b. The drawee refuses within 24 hrs after
such delivery or within such time as is
given, to return the bill accepted or not
Notes on Section 137
Drawee becomes primarily liable as
acceptor.
Mere retention is equivalent to acceptance

B. General Acceptance:
An acceptance to pay at a particular
place is a general acceptance unless it is
expressly states that the bill is to be paid there
only and not elsewhere.
C. Qualified Acceptance if in express terms
varies the effect of the bill as drawn.
Kinds of Qualified Acceptance:
a. Conditional one which makes
payment
by
the
acceptor
dependent on the fulfillment of a
condition therein stated;
b. Partial an acceptance to pay
part only of the amount for
which the bill is drawn;
c. Local an acceptance to pay
only at a particular place;
d. Qualified as to time
e. The acceptance of some or
more drawees but NOT ALL.
-

The holder of the bill has the


right to require GENERAL
ACCEPTANCE thus he may
REFUSE
to
take
qualified
acceptance and if he DOES NOT
obtain an unqualified acceptance
he may treat the bill as
DISHONORED
BY
NONACCEPTANCE accordingly the
holder must give notice of
dishonor.

Effect of taking
acceptance:

Where a qualified acceptance is


taken THE DRAWER and

A holder of a bill has the right:


a. Require that acceptance be written on the
bill and if refused, treat it as if dishonored
(Sec. 133)
b. Refuse to accept a qualified acceptance
and may treat it as dishonored
Acceptance may be:
a. Actual
b. Constructive
c. General (Sec. 140)
d. Qualified (Sec. 141)

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Page 20

an

qualified

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
INDORSERS are discharged from
liability on the bill unless they
have expressly or impliedly
authorized the holder to take
qualified
acceptance
or
subsequently assents thereto.

PRESENTMENT FOR ACCEPTANCE


When presentment for acceptance is
necessary:
a. If necessary to fix the maturity of the bill
b. If it is expressly stipulated that it shall
be presented for acceptance
c. If the bill is drawn payable elsewhere
than the residence or place of business
of the drawee (Sec. 143 NIL)

* When the drawer or indorser


receives
notice
of
qualified
acceptance he must within a
REASONABLE TIME express his
dissent to the holder or he will be
deemed to have assented thereto.
Time for acceptance:
The drawee is allowed twenty-four hours
after presentment in which to decide whether or
not he will accept the bill; the acceptance, if
given, dates as of the day of presentation.
Rules governing acceptance:
When an acceptance is written on a
paper other than a bill itself, it does not bind
the acceptor except in favor of a person to
whom it is shown and who, on the faith thereof,
receive the bill for value.
An unconditional promise in writing to
accept a bill before it is drawn is deemed an
actual acceptance in favor of every person who,
upon the faith thereof, receives the bill for
value.
Where a drawee to whom a bill is
delivered for acceptance destroys the same, or
refuses within twenty-four hours after such
delivery, or within such other period as the
holder may allow, to return the bill accepted or
non-accepted to the holder, he will be deemed
to have accepted the same.
A bill may be accepted before it has
been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after is has
been dishonored by a previous refusal to
accept, or by non-payment. But when a bill
payable after sight is dishonored by nonacceptance and the drawee subsequently
accepts it, the holder, in the absence of any
different agreement, is entitled to have the bill
accepted as of the date of the first
presentment.

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Page 21

Notes on Section 143

PRESENTMENT is the production of a bill of


exchange to the drawee for his acceptance.

PRESENTMENT
For Acceptance (Sec. 143)
For Payment ( Sec. 70)
( 2000 & 2003 BEQ)
PURPOSE: To get acceptance of the drawer
for purpose of making him primarily liable as
an acceptor. Presentment is also prerequisite
to the accrual of secondary liability against
the drawer and the indorsers.
On what days presentment must be made:
A bill may be presented for acceptance
on any day on which negotiable instruments
may be presented for payment. When Saturday
is not otherwise a holiday, presentment for
acceptance may be made before twelve oclock
noon, on that day.
Presentment
made:

for

acceptance

must

be

1. Where the bill is payable after sight; or


in any other case, where presentment for
acceptance is necessary in order to fix the
maturity of the instrument.
2. Where the bill expressly stipulates that
it shall be presented for acceptance.
3. Where the bill is drawn payable
elsewhere than the residence or place of
business of the drawee.
Presentment, How made:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Presentment for acceptance must be
made by or on behalf of the holder at a
reasonable hour, on a business day and before
the bill is overdue, to the drawee or some
person authorized to accept or refuse
acceptance on his behalf; and
(a.) Where a bill is addressed to two or
more
drawees
who
are
not
partners,
presentment must be made to them all, unless
one has authority to accept or refuse
acceptance for all, in which case presentment
may be made to him alone;
(b.) Where the drawee has been dead,
presentment may be made to his personal
representatives;
(c.) Where the drawee has been adjudged a
bankrupt or an insolvent, or has made an
instrument for the benefit of creditors,
presentment may be made to him or to his
trustee or assignee.
WHERE PRESENTMENT IS EXCUSED. (Sec.
148.)
Presentment for acceptance is excused ,
and a bill may be treated as dishonored by non
acceptance , in either of the following cases:
1. Where the drawee is dead , or has
absconded , or is a fictitious person or a person
not having capacity to contract.
2. Where, after the exercise of reasonable
diligence , presentment cannot be made.
3. Where, although presentment has been
irregular , acceptance has been refused on
some other ground.
When bill is dishonored by non-acceptance
A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and
such an acceptance as is refused or cannot be
obtained;
b. When presentment for acceptance is
excused, and the bill is not accepted.
Duty of the holder where bill is not
accepted.
Where a bill is duly presented for
acceptance and is not accepted within the
prescribed time, the person presenting it must
treat the bill as dishonored by non-acceptance
or he loses the right of recourse against the
drawer and indorsers.

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Page 22

HOW? By giving NOTICE OF DISHONOR or by


making a PROTEST when required.
Rights of holder where bill is NOT
accepted:
An immediate right of recourse against the
drawer and indorsers accrues to the holder and
NO PRESENTMENT for payment is necessary.

PROMISSORY NOTES AND CHECKS


Promissory Note is an unconditional promise
in writing made by one person to another,
signed by the maker, engaging to pay on
demand, or at a fixed or determinable future
time, a sum certain in money to order or bearer.
NOTE: Where a note is drawn to the makers
own order, it is NOT complete until indorsed by
him.
Special types of promissory notes:
1. Certificate of deposit
is a written acknowledgment by
a bank of the receipt of money
on deposit which the bank
promises to pay to the depositor,
bearer, or to some other person
or order.
It is NOT ipso facto negotiable
it must first comply with the
requirements provided under
Section 1, NIL.
2. Bonds
- A promise, under seal, to pay money.
- The bond certifies that the issuing
company is indebted to the bondholder
for the amount specified on the face of
the bond, and contains an agreement of
the company to pay the sum at a
specified time in the future, and
meanwhile to pay a specified interest on
the
principal
amount
at
regular
intervals, generally six months apart.
They are negotiable if it the requisites in
Section 1, NIL are complied with.
Classes of Bonds:
1. Mortgage bonds;
2. Equipment Bonds;
3. Collateral trust bonds;
4. Guaranteed bonds;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
5.
6.
7.
8.
9.

Debentures; and
Income bonds;
Convertible bonds;
Redeemable Bonds;
Registered Bonds; and
- Coupon Bonds those which are
attached
a
sheet
of
dated,
numbered and similarly printed
coupons which the bondholder may
cut off when due or thereafter. Such
coupons may be served and
deposited in a bank, negotiated
before the maturity of the interest
they represent, and transferred just
like any commercial paper. They are
negotiable if it the requisites in
Section 1, NIL are complied with.

10. Bank Notes


- Are promissory notes of the issuing
bank payable to bearer on demand
and intended to circulate as money.
They are regarded as cash and pass
from hand to hand without any
evidence of titled in the holder than
that which arises form possession.
However, they are not money.
11. Due Bills
- is an instrument whereby one
person
acknowledges
his
indebtedness to another.
CHECKS - a bill of exchange drawn on a bank
payable on demand. (Sec. 185)
CONCEPTS:
Certification of Checks- An agreement
whereby the bank against whom a check is
drawn, undertakes to pay at any future time
when presented for payment.
EFFECTS:
a. Equivalent to acceptance (Sec 187)
and is the operative act that makes
the bank liable.
b. Assignment of the funds of the
drawer in the hands of the drawee
(Sec 189)
c. If obtained by the holder, discharges
the
persons
secondarily
liable
thereon ( Sec 188)

A check must be presented for payment within


reasonable time after its issue or the drawer will
be discharged from liability thereon to the
extent of the loss caused by the delay. (Sec.
186)
Reasonable Time: (Sec. 193)
a. Nature of the instrument
b. Usage of business or trade
c. The facts of the particular case
CROSSED CHECK: (2004 & 2005 BEQ)
- A check which in addition to the usual
contents of an ordinary check contains also the
name of a certain banker or business entity
through whom it must be presented for
payment.
- A Crossed Check under accepted banking
practice, crossing a check is done by writing
two parallel lines diagonally on the left top
portion of the checks. The crossing is special
where the name of the bank or a business
institution is written between the two parallel
lines, which mean that the drawee should pay
only with the intervention of that company.
EFFECTS:
a. That the check may not be encashed; it
may only be deposited with the bank;
b. That the check may be negotiated only
once to a person who has an account
with the bank; and
c. That it serves as a warning to the holder
that the check has been issued for a
definite purpose. (Bataan Cigar v. CA
280 SCRA 643)
*Note: Crossed Checks vs. Cancelled Checks
(2004 BEQ)
A crossed check is one with two parallel lines
drawn diagonally across its face or across a
corner thereof. On the other hand, a cancelled
check is one marked or stamped "paid" and/or
"cancelled" by or on behalf of a drawee bank to
indicate payment thereof.
*State Investment House v IAC (GR 72764
13Jul1989), the SC considered a crossed check
as subjecting a subsequent holder thereof to
the contractual covenants of the payor and the
payee.
2 KINDS:

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Page 23

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1. CROSSSED SPECIALLY- The same
name of a particular bank or company is
written or appears between thev. Tan
parallel lines in which case the draweebank must pay the check only upon
presentment by such bank or company
(Chan Wan v. tan Kim 109 Phil 706) on
penalty of being made to pay agin by
the rightful owner should the first
payment prove to have been erroneous.
2. CROSSED GENERALLY- only the words
and Co. are written between the
parallel lines or when none at all is
written at all between said lines.
* This Court has taken judicial cognizance of the
practice that a check with 2 parallel lines in the
upper left hand corner means that it could

CORPORATION LAW

only be deposited and not converted into


cash.

(Batas Pambansa Bilang 68)

IRON
CLAD
RULE

prohibits
the
countermanding of payment of certified
checks. (Rep. v. PNB, Dec. 1, 1961)

A. CORPORATION, DEFINED
An artificial being created by operation of law
having the right of succession, and the
powers, attributes and properties expressly
authorized by law and incident to its
existence. (Sec. 2). It has a separate and
distinct personality from its incorporators.
(2000 Bar Examination)

*Note: The holder must be a holder in due


course before the stop payment order may
not be successfully invoked against him.
(Mesina v. IAC, 146 SCRA 497, 505)
TYPES OF CHECKS (Cesar Villanueva,
Commercial Law Review, 2004 ed.)
a Cashiers Check- One drawn by the
cashier of a bank, in the name of the
bank against the bank itself payable
to a third person. It is a primary
obligation of the issuing bank and
accepted in advance upon issuance.
(Tan v. CA 239 SCRA 310)
b Managers Check- A check drawn by
the manager of a bank in the name of
the bank itself payable to a third
person. It is similar to the cashiers
check as to the effect and use.
c Memorandum Check- A check given
by a borrower to a lender for the
amount of a short loan, with the
understanding that it is not to be
presented at the bank, but will be
redeemed by the maker himself when
the loan falls due and which
understanding is evidenced by writing

BAR OPERATIONS 2011

the word memorandum, memo or


mem on the check.
Certified Check- An agreement
whereby the bank against whom a
check is drawn undertakes to pay it at
any future time when presented for
payment. (Sec. 187)
Travelers Check- It is one upon the
holders signature must appear twice;
one to be affixed by him at the time it
is issued and the second, for countersignature, to be affixed by him in the
presence of the payee before it is
paid, otherwise it is incomplete.

Attributes of a Corporation
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and
properties expressly authorized by law or
incident to its existence.
1.

2.

Page 24

Theories on Formation of a Corporation:


Concession Theory a corporation is an
artificial creature without any existence until
it has received the imprimatur of the state
acting according to law, through the SEC.
(Tayag vs. Benguet Consolidated, Inc., 26
SCRA 242)
Theory of corporate enterprise or
economic unit the corporation is not merely
an artificial being, but more of an
aggregation of persons doing business, or an
underlying
business
unit.
(Philippine
Corporate Law, Cesar Villanueva, 2001 ed.)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
B. CLASSIFICATION:
1. AS TO ORGANIZERS
a. public by State only; and
b. private by private persons alone or
with the State.
2. AS TO FUNCTIONS
a. public government of a portion of
the territory; and
b. private usually for profit-making
3. AS TO GOVERNING LAW
a. public Special Laws; and
b. private Law on Private Corporations
4. AS TO LEGAL STATUS
a. De jure corporation organized in
accordance with the requirements of
law.
b. De facto corporation organized with
a colorable compliance with the
requirements of a valid law. Its
existence
cannot
be
inquired
collaterally. Such inquiry may be
made by the Solicitor General in a
quo warranto proceeding. (Sec. 20)
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. A bona fide attempt in good faith
to incorporate under such law;
3. Actual use or exercise in good faith
of corporate powers; and
4. Issuance of a certificate of
incorporation by the SEC as a
minimum
requirement
of
continued good faith.
The only difference between a de facto
corporation and a de jure corporation
is that a de jure corporation can
successfully resist a suit by a state
brought to challenge its existence; a
de facto corporation cannot sustain its
right to exist.
c. Corporation by estoppel group of
persons that assumes to act as a
corporation knowing it to be without
authority to do so, and enters into a
transaction with a third person on the
strength of such appearance. It cannot

BAR OPERATIONS 2011

Page 25

be permitted to deny its existence in


an action under said transaction. (Sec.
21) It is neither de jure nor de facto.
d. Corporation by prescription one
which has exercised corporate powers
for an indefinite period without
interference on the part of the
sovereign power, e.g. Roman Catholic
Church.
5. AS TO EXISTENCE OF SHARES OF STOCK
a. Stock corporation a corporation (1)
whose capital stock is divided into
shares and (2) which is authorized to
distribute to shareholders dividends
or allotments of the surplus profits on
the basis of the shares held. (Sec. 3)
b. Non-stock corporation does not issue
stocks nor distribute dividends to their
members.
6. AS TO RELATIONSHIP OF CONTROL AND
MANAGEMENT
a. Holding Corporation - it is one which
controls another as a subsidiary by
the power to elect management. It is
one that holds stocks in other
companies for purposes of control
rather than for mere investment.
b. Subsidiary Corporation - one which is
so related to another corporation that
the majority of its directors can be
elected directly or indirectly by such
other corporation. (The Corporation
Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
c. Affiliates - company which is subject to
common control of a mother holding
company and operated as part of the
system.
d. Parent and Subsidiary Corporation separate entities with power to
contract with each other. The board of
directors of the parent company
determines its representatives to
attend and vote in the stockholders
meeting
of
its
subsidiary.
The
stockholders of the parent company
demand representation in the board
meetings of its subsidiary.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
7. AS TO PLACE OF INCORPORATION
a. Domestic corporation- a corporation
formed, organized, or existing under
Philippine laws.
b. Foreign corporation a corporation
formed, organized, or existing under
any laws other than those of the
Philippines. (Sec. 123)
C. NATIONALITY OF CORPORATION
Test
to
Determine
Nationality
of
Corporations
1. INCORPORATION TEST determined
by
the
state
of
incorporation,
regardless of the nationality of the
stockholders.
2. DOMICILE TEST determined by the
state where it is domiciled. The
domicile of a corporation is the place
fixed by the law creating or
recognizing it; in the absence thereof,
it shall be understood to be the place
where its legal representation is
established or where it exercise its
principal functions. (Art. 51, NCC)
3. CONTROL TEST determined by the
nationality
of
the
controlling
stockholders or members. This test is
applied in times of war. Also known as
the WARTIME TEST.
D. CORPORATE JURIDICAL PERSONALITY
I.

3. Right to acquire and possess property


property conveyed to or acquired by
the corporation is in law the property
of the corporation itself as a distinct
legal entity and not that of the
stockholders or members. (Art. 44(3),
Civil Code)
4. Acquisition of court of jurisdiction
service of summons may be made on
the president, general manager,
corporate secretary, treasurer or inhouse counsel. (Sec. 11, Rule 14,
Rules of Court).
5. Changes in individual membership
remains unchanged and unaffected in
its identity by changes in its individual
membership. (The Corporation Code
of the Philippines Annotated, Hector
de Leon, 2002 ed.)
6. Entitlement
to
constitutional
guaranties:
a. Due process (Albert vs. University
Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith,
Bell & Co. vs. Natividad, 40 Phil.
136)
c. Protection against unreasonable
searches and seizures. (Stonehill
vs. Diokno, 20 SCRA 383)
A corporation is not entitled to invoke
the right against self-incrimination.
(Bataan Shipyard vs. PCGG)
7.

Doctrine of Separate Personality


A corporation has a juridical personality
separate and distinct from that of its
stockholders or members.
Used for purposes of convenience and to
subserve the ends of justice.
Consequences/significance:
1. Liability for acts or contracts
obligations incurred by a corporation,
acting through its authorized agents
are its sole liabilities. (Creese vs. CA,
93 SCRA 483)
2. Right to bring actions may bring civil
and criminal actions in its own name
in the same manner as natural
persons. (Art. 46, Civil Code)

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Liability for torts a corporation


is
liable whenever a tortuous act is
committed by an officer or agent
under the express direction or
authority of the stockholders or
members acting as a body, or,
generally, from the directors as the
governing body. (PNB vs. CA, 83 SCRA
237)

8. A corporation is not entitled to moral


damages because it has no feelings,
no emotions, no senses. (ABS-CBN vs.
Court of Appeals)
9.

Liability for Crimes since a


corporation is a mere legal fiction, it
cannot be held liable for a crime
committed by its officers, since it does
not have the essential element of

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
malice; in such case the responsible
officers would be criminally liable.
(People vs. Tan Boon Kong, 54
Phil.607)
II. Doctrine of Piercing the Corporate Veil
1. Doctrine of Piercing the Corporate Veil
(2006 Bar Examination)
Under the doctrine of piercing the veil
of corporate entity, the legal fiction
that a corporation is an entity with a
juridical personality separate and
distinct
from
its
members
or
stockholders may be disregarded and
the corporation will be considered as a
mere associations of persons, such that
liability will attach directly to the
officers and the stockholders (Umali vs.
Court of Appeals, 189 SCRA 529, 542
[1990]). It is an equitable doctrine
developed to address situations where
the separate corporate personality of a
corporation is abused or used for
wrongful purposes.
Grounds for Application of the
Doctrine (2006 Bar Examination)
The doctrine of piercing the veil of
corporate entity will apply when the
corporations
separate
juridical
personality is used:
1. to defeat public convenience;
2. to justify wrong, protect fraud, or
defend crime;
3. as a shield to confuse the
legitimate issue;
4. where the corporation is the mere
alter ego or business conduit of a
person; or
5. where the corporation is so
organized and controlled and its
affairs are so conducted as to make
it
merely
an
instrumentality,
agency, conduit or adjunct of
another corporation (Umali vs.
Court of Appeals, 189 SCRA 529,
542 [1990]).
Test in Determining Whether to Pierce
the Veil of Corporate Personality

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1. Control, not mere majority or


complete stock control, but complete
domination, not only of the finances,
but of policy and business practice in
respect to the transaction attacked
so that the corporate entity as to this
transaction had at the time no
separate mind, will or existence of its
own;
2. Such control must have been used by
the defendant to commit fraud or
wrong, to perpetuate the violation of
a statutory or other positive legal
duty, or dishonest and unjust act in
contravention of plaintiffs legal right;
3. The aforesaid control and breach of
duty
must
proximately
prevent
piercing the corporate veil;
4. The wrong doing must be clearly and
convincingly established. It cannot be
presumed. (Lim vs. Court of Appeals,
et al., G.R. No. 124715, January 24,
2000
E. CAPITAL STRUCTURE
1. Number
and
qualifications
of
incorporators
i.
Number of Incorporators (2006 Bar
Examination)

ii.

iii.

Incorporators are required to be not


less than five (5) but not more than
fifteen (15).
Residency requirement (2006 Bar
Examination)
Majority of the incorporators are
required to be residents of the
Philippines.
Qualifications
All incorporators:
a. must be natural persons
b. must be of legal age

2. Minimum
Capital
Stock
subscription requirement
i.
Subscription requirement

and

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

ii.

All incorporators must subscribe to


at least one (1) share of stock of
the corporation being organized.
Capital
Stock,
minimum
subscription
The law requires that the total
capital stock to be subscribed at
the time of incorporation should at
least be twenty five percent (25%)
of the authorized capital stock of
the corporation being organized.
3. Corporate Term
Fifty (50) years from the date of
incorporation
unless
sooner
dissolved or unless said period is
extended (Sec. 11).

4. Classification of Shares
COMMON SHARES are the basic
class of stock ordinarily and
usually
issued
without
extraordinary rights and privileges.
The owners thereof are entitle to a
pro rata share in the profits of the
corporation and in its assets upon
dissolution and, likewise, in the
management of its affairs without
preference
or
advantage
whatsoever.
ii.
PREFERRED SHARES are those
issued with par value, and
preferences either with respect to:
a. assets
after
dissolution
(PREFERRED SHARES AS TO
ASSETS)
b. distribution
of
dividends
(PREFERRED SHARES AS TO
DIVIDENDS)
c. or both, and other preferences.
i.

Kinds of Preferred Shares as to


Dividends
1. Cumulative preferred shares a
share which entitles the holder
thereof not only the payment of
current dividends but also of
dividends in arrears.

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2. Non cumulative preferred shares


a share which allows the holder
thereof to the payment of current
dividends only without regards to
dividends in arrears.
3. Participating preferred shares a
share which gives the holder the
right to participate with the holders
of the common share in the
remaining profits pro rata, aside
from the right to receive the
stipulated dividends at a preferred
rate.
4. Non participating preferred shares
a share which allows the holder to
receive the stipulated dividends at a
preferred rate only. The holder shall
not
share
in
the
dividends
distributed to common shares.
REDEEMABLE SHARES are those which
permit the issuing corporation to redeem or
purchase its own shares.

i.

ii.

iii.

iv.

Limitations:
Redeemable shares may be
issued only when expressly
provided for in the articles of
incorporation;
Terms and conditions affecting
said shares must be stated
both
in
the
articles
of
incorporation
and
in
the
certificates
of
stock
representing such shares;
Redeemable shares may be
deprived of voting rights in the
articles of incorporation, unless
otherwise provided in the
Code.
Redeemable shares may be
redeemed, regardless of the
existence
of
unrestricted
retained earnings (Sec. 8), and
provided further that the
corporation has, after such
redemption, sufficient assets in
its books to absorb corporate
debts and liabilities.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
TREASURY SHARES are shares that
have been earlier issued as fully paid
and have thereafter been acquired by
the corporation by purchase, donation,
redemption or through some lawful
means (Sec. 9). When treasury shares
are sold below its par or issued value,
there can be no watering of stock
because watering of stock contemplates
an original issuance of shares.
PAR VALUE SHARES are shares with a
value fixed in the certificates of stock
and the articles of incorporation.
NO PAR VALUE SHARES are shares
having no par value but have an issued
value stated in the certificate or articles
of incorporation.
Limitations:
i.
No par value shares can have
an issue price of less than Php
5.00;
ii.
The entire consideration for its
issuance constitutes capital so
that no part of it should be
distributed as dividends;
iii.
They cannot be issued as
preferred stocks;
iv.
They cannot be issued by
banks,
trust
companies,
insurance companies, public
utilities and building and loan
association;
v.
The articles of incorporation
must state the fact that it
issued no par value shares as
well as the number of said
shares;
vi.
Once issued, they are deemed
fully paid and non assessable
(Sec. 6).

F. INCORPORATION
ORGANIZATION
1. Promoter
2. Subscription Contract

AND

Ways to become a Stockholder


of a Corporation:

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a. Subscription contract with the


corporation;
b. Purchase or acquisition of
shares
from
existing
stockholders; and
c. Purchase of treasury shares
from the corporation

SUBSCRIPTION
Refers to unissued
shares
Corporation still to
be form or already in
existence
The subscriber can
exercise all his right
as
a
stockholder
even
before
full
payment
of
the
subscription
Corporate creditors
may proceed against
the subscriber for his
unpaid subscription
in case the corporate
asset
are
not
sufficient to satisfy
their claims
Subscriber may not
be legally released
from the payment of
his
unpaid
subscription unless
no creditors would
be prejudiced and all
the
stockholders
agree thereto
Subscription may be
in any form, not
covered
by
the
statute of frauds.

PURCHASE OF
SHARES
Refers to issued
shares
The corporation
is
already
in
existence
The
purchaser
can only exercise
his right upon full
payment of the
purchase price
Corporate
creditor cannot
proceed against
the purchaser for
the balance of
the
purchase
price because of
the lack of privity
of
contract
between them
The corporation
can rescind or
cancel
the
contract in case
of
non

fulfillment by the
buyer.
Purchase
of
shares is covered
by the statute of
frauds in case of
purchases
amounting
to
more than Php
500.00

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Consequently, the subscribers are not real
parties in interest in a case for rescission
of the subscription contract of another
subscriber because they are not parties
thereto. (Ong Yung vs. Tiu, April 06, 2003)
Kinds of Subscription Contract
a. Pre incorporation subscription
b. Post incorporation Subscription
c. Conditional Subscription
d. Absolute Subscription
e. Subscription with a special term
3. Pre

incorporation
Agreements

Subscription

One entered into before incorporation.


Pre

incorporation
subscription
constitutes a binding contract among
the subscribers.
NOTE: It shall be irrevocable for a
period of at least six (6) years from
the date of subscription unless:
a. All of the other subscribers
consent to the revocation, or
b. The incorporation fails to
materialize
It shall likewise be irrevocable after
the submission of the articles of
incorporation to the SEC.
UNDERWRITING
AGREEMENT
between a corporation and a third
person, termed the underwriter is
an agreement by which the latter
agrees, for a certain compensation, to
purchase a stipulated amount of
stocks or bonds, specified in the
underwriting agreement, if such
securities are not purchased by those
to whom they are first offered.
4. Consideration of Stocks
Valid considerations in subscription
agreement:
a. Cash actually received;
b. Property, tangible or intangible
necessary or convenient for its use
and lawful purpose;
c. Labor or services actually rendered
to the corporation;

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d. Previously
incurred
corporate
indebtedness
(Note:
the
indebtedness involved must be
one that is acknowledged by the
board);
e. Amounts
transferred
from
unrestricted retained earnings to
stated capital;
f. Outstanding shares in exchange
for stocks in the event of
reclassification or conversion.
5. Articles of Incorporation
i.
Definition:
Basic
document
defining the charter of the
corporation
ii.
Significance: Condition precedent
in the acquisition of corporate
existence
iii.
Contractual
significance:
A
contract between 3 parties: (1) the
State and the corporation, (2) the
stockholders and the State, and
(3) the corporation and its
stockholders.
iv.
Effects as to Outsiders: Bind a
third person dealing with the
corporation
v.
Requisites for Validity
a. Filed and registered with the
SEC
b. Banks,
public
utilities,
insurance companies: needs
favorable
recommendation
from appropriate agency that
articles are in accordance with
law
c. SEC shall examine AOI upon
filing and upon satisfaction of
all legal requirements, issue
certificate of incorporation and
only then shall Corporation
have a personality separate
and
distinct
from
its
stockholders or members
d. Sworn
Statement
of
the
Treasurer
regarding
subscription requirement
vi.
Basic Content (Sec. 14)
a. The name of the corporation;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

vii.

b. The
specific
purpose
or
purposes
for
which
the
corporation
is
being
incorporated;
c. The place where the principal
office of the corporation is to
be located, which must be
within the Philippines;
d. The term for which the
corporation is to exist;
e. The number of directors or
trustees, which shall not be
less than 5 nor more than 15;
f. The names, nationalities and
residences of persons who
shall act as director or trustees
until the first regular directors
or trustees are duly elected
and qualified in accordance
with the Code;
g. If it be a stock corporation, the
amount
of
its
authorized
capital stock in lawful money of
the Philippines, the number of
shares into which it is divided,
and in case the share are par
value shares, the par value of
each, the names, nationalities
and residences of the original
subscribers, and the amount
subscribed and paid by each
on his subscription, and if some
or all of the shares are without
par value, such fact must be
stated;
h. If it be a non stock
corporation, the amount of its
capital,
the
names,
nationalities and residences of
the
contributors
and
the
amount contributed by each;
and
i. Such other matters as are not
inconsistent with law and
which the incorporators may
deem
necessary
and
convenient.
Adoption and Form: File with the
Securities and Exchange Commission
articles of incorporation in any of the
official languages duly signed and
acknowledged by all of the incorporators.

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viii.

Amendment
a. Majority vote of BOD / trustees and
vote or written assent of 2/3
outstanding capital stock, without
prejudice to the appraisal right of
dissenting stockholders.
b. Amendments take effect upon
approval by SEC or from the date of
filing with SEC if not acted upon
within 6 months from date of filing
for a cause not attributable to the
corporation.
ix. Grounds for Rejection or Disapproval (Sec.
17)
a. That the articles of incorporation
or any amendment thereto is not
substantially in accordance with
the from prescribed herein;
b. That the purpose or purposes of
the
corporation
are
patently
unconstitutional, illegal, immoral
or contrary to government rules
and regulations;
c. That the Treasurers Affidavit
concerning the amount of capital
stock subscribed and / or paid is
false;
d. That the percentage of ownership
of the capital stock to be owned by
citizens of the Philippines has not
been complied with as required by
existing laws or the Constitution.
6. Corporate Name
The name of the corporation must not
be
identical
or
deceptively
or
confusingly similar to any existing
corporation.
7. Registration
and
issuance
Certificate of Incorporation

of

8. Election of directors or trustees


9. Adoption of By Laws
i.
Definition: Meant to be an intramural
document to govern the relationship
between and among the members of
a corporate family

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
ii.

Effect as to Outsiders: Does not bind


outsiders
iii.
Requisites for Validity
a. By law provisions cannot
contravene law
b. By law provisions cannot
contravene the charter
c. By laws must be reasonable and
cannot discriminate.
iv.
Basic Content (Sec. 47)
a. The time, place and manner of
calling and conducting regular or
special meetings of the directors
or trustees;
b. The time and manner of calling
and conducting regular or special
meetings of the stockholders or
members;
c. The required quorum in meetings
of stockholders or members and
the manner of voting therein;
d. The
form
for
proxies
of
stockholders and members and
the manner of voting them;
e. The qualifications, duties and
compensation of directors or
trustees, officers and employees;
f. The time for holding the annual
election of directors or trustees
and the mode or manner of giving
notice thereof;
g. The
manner
of
election
or
appointment and the term of office
of all officers other than directors
or trustees;
h. The penalties for violation of the
by laws;
i. In the case of stock corporations,
the manner of issuing stock
certificates; and
j. Such other matters as may be
necessary for the proper or
convenient transaction of its
corporate business and affairs.
v.
Amendment
a. Majority vote of BOD / Trustees
and majority vote of outstanding
capital stock / members at a
regular or special meeting duly
called for the purpose of
amending or repealing any by
laws or adopting new by laws

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b. By delegation of 2/3 outstanding


capital stock or members

G. CORPORATE POWERS
1. GENERAL
POWERS,
THEORY
OF
GENERAL CAPACITY (Sec. 36)
a. To sue and be sued;
b. Of succession;
c. To adopt and use of corporate seal;
d. To amend its Articles of Incorporation;
e. To adopt its by-laws;
f. For stock corporations: issue and sell
stocks to subscribers and treasury
stocks; for non-stock corporations:
admit members;
g. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and deal with real and
personal property, securities and bonds
h. To enter into merger or consolidation;
i. To make reasonable donations for
public welfare, hospital, charitable,
cultural, scientific, civic or similar
purposes, provided that no donation is
given to any (i) political party, (ii)
candidate and (iii) partisan political
activity.
j. To establish pension, retirement, and
other plans for the benefit of its
directors,
trustees,
officers
and
employees.
k. To exercise other powers essential or
necessary to carry out its purposes.
2. SPECIFIC
POWERS,
THEORY
OF
SEPECIFIC CAPACITY (Sec. 37 44)
a. Power to extend or shorten corporate
term (2000 Bar Examination)
Majority of BOD, 2/3 of capital stock
Extension Sec. 37: right of
appraisal for dissenting stockholders
Shortening Sec. 81 allows for right
of appraisal, but technically there
shouldnt be because investors are
also in it for the short term (there
is no novation)
b. Increase or decrease corporate stock
Majority of BOD, 2/3 of capital stock
Needs SEC approval

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
i.

Increase there must be


certification of subscription to
at least 25% of increased
stock, and at least 25% of that
amount paid up
ii. Decrease wont approve if it
prejudices corporate creditors.
Since this is not an inherent power,
there must be strict compliance with
requirements in Sec. 38 and
Amendment provisions in Sec. 16
NO right of appraisal
i. Increase would defeat very
purpose of raising capital
ii. Decrease there already is
return of part of investments
ALSO, investing into a corporation
comes with expectations of possible
increase / decrease of shares

Ways of Increasing (Decreasing)


Capital Stock
1.
By
increasing
(decreasing) the no. of shares
authorized to be issued without
increasing (decreasing) the par
value thereof
2.
By
increasing
(decreasing) the par value of each
share
without
increasing
(decreasing) the no. thereof
3.
By
increasing
(decreasing) both the no. of shares
authorized to be issued and the
par value thereof (The Corporation
Code of the Phil. Annotated by
Hector de Leon, 2006 ed)
Methods to Replenish Capital
1. Additional subscription to shares of
stock of the corporation by
stockholders or by investors;
2. Advances by the stockholders to
the corporation; or
3. Payment of unpaid subscription
by the stockholders.
c. Incur, create, or increase bonded
indebtedness
CORPORATE BOND: an obligation to
pay a definite sum of money at a future
time at a fixed rate of interest

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SEC Opinion (1987): only covers


indebtedness of corporation secured
by real / personal property
Majority of BOD, 2/3 of capital stock
Needs SEC approval
Corporation must have minimum net
worth of P 25M and must have been
operating for at least 3 years
Unlike normal indebtedness, which
does not require 2/3 approval:
i.
Usually
very
large
amount
ii.
Usually with first lien on
important assets
iii.
Usually long period of
time
NO right of appraisal
i. Would drain financial resources
ii. Regardless,
corporations
creditors always have priority over
assets
d. Sell, dispose, lease, encumber all or
substantially all of corporate assets
Majority of BOD, 2/3 capital stock
Enterprise

level
transaction:
Although there is no effect in
relationship between State and
Corporation, its just as if there is
resetting to starting point of
business life
Compare:
i.
Usual
and
regular
course of business (Business
Judgment Doctrine)
ii.
Proceeds of sale for
conduct of remaining business
The test: It just has to be ordinary
so the sale of all business of a
corporation
in
light
of
using
proceeds to set up anew still needs
RATIFICATION
When no ratificatory vote from the
stockholders / members needed:
i. If it is necessary in the usual and
regular course of business
ii. If the proceeds of the sale or
other
disposition
of
such
property
and
assets
be
appropriated for the conduct of
the remaining business.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

There is right of appraisal because


unlike shortening of corporate life,
where there is automatic dissolution,
here there is none so stockholders
may be stuck in a non performing
venture
e. Purchase or acquire own shares
provided:
i.
there
is
an
unrestricted retained earnings to
purchase the same and its
capital is not thereby impaired;
and
ii.
it is for a legitimate
and proper corporate purpose.
Instances when Power may be
Exercised
1.
To
eliminate
fractional shares
2.
To
collect
/
compromise an indebtedness to the
corporation arising from unpaid
subscription, in a delinquency sale,
and to purchase the shares sold
during said sale
3.
To pay dissenting
/ withdrawing stockholders entitled
to payment for their shares when
exercising appraisal right
4.
To decrease cost
of doing business by decreasing
amount of dividends to be paid in
the future
5.
Other
similar
situations since this is non exclusive
f.
Invest corporate funds in another
corporation or business for other
purpose other than primary purpose
May invest in corporation / business
organized for any purpose apart
from the primary purpose from
which the investing business was
organized
Majority of BOD + 2/3 vote of
stockholders
Sec. 42: When investment is
reasonably necessary to accomplish
primary
purpose:
approval
of
stockholders not necessary

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i.

Lies under business judgment


doctrine
ii.
THUS whatever the primary
purpose of a corporation, it has a
choice of placing funds in deposit
accounts,
money
market,
treasury bills, or even stocks of
other
corporations
(fit
into
power, discretion and purpose to
obtain best returns for the
corporation)
So in Sec. 42, investment requiring
ratificatory vote: when there is
management involved of the other
company and not just investment
per se.
g. Power to declare dividends out of
unrestricted retained earnings
DIVIDENDS: corporate profits set aside,
declared and ordered to be paid by the
directors
for
distribution
among
shareholders at a fixed time.
FORMS:
1.
2.
3.

Cash
Property
Stock

REQUISITES:
1. Existence of unrestricted retained
earnings out of which the dividends
may be declared and paid (2005
Bar Examination)
2. A corporate resolution of the board
of directors declaring the payment
of a portion or all such earnings to
the stockholders (The Corporation
Code of the Phil. Annotated by
Hector de Leon, 2006 ed)
GENERAL RULE: Stock corporation
cannot retain surplus profits in excess
of 100% of paid up capital stock
except: (2001 Bar Examination)
1. Justified by definite corporate
expansion
projects
/
programs
approved
by
BOD
2. Loan agreement, where creditor
has to first consent before corporation
can declare dividends
3. Special circumstances
h. Enter into management contract with
another corporation (not with an

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
individual or a partnership-within
general
powers)
whereby
one
corporation undertakes to manage all
or substantially all of the business of
the other corporation for a period not
longer than 5 years for any one term.
MANAGEMENT CONTRACT: is an
agreement whereby a corporation
undertakes to manage or operate all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise
(Sec. 44)
GENERAL RULE: There shall be no
management contract with another
corporation unless:
Majority of BOD
Stockholders owning majority shares
in BOTH managing and managed
corporation EXCEPT where 2/3 votes
needed :if a stockholder/s in both
managing and managed corporation
owns more than 1/3 of outstanding
voting capital stock of managing
corporation OR majority of BOD in
managing
corporation
is
also
majority of BOD in managed
corporation
The management contract must not
be longer than 5 years
i.

ULTRA VIRES ACTS are acts which


are beyond the conferred powers of a
corporation or the purposes or objects
for which it is created as defined by the
law of its organization. (Republic vs.
Acoje Mining Co., Inc. 7 SCRAS 361)
An act done by a corporation outside of
the express and implied powers vested
in it by its charter and by the law. (Bar
Review Materials in Commercial Law,
Jorge Miravite, 2002 ed.)

Types:
(Philippine Corporate Law, Cesar
Villanueva, 2001 ed.)
1. Acts done beyond the powers of the
corporation as provided in the law or
its articles of incorporation;

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2. Acts or contracts entered into in


behalf of a corporation by persons
who have no corporate authority
(Note: This is technically ultra vires
acts of officers and not of the
corporation); and
3. Acts or contracts, which are per se
illegal as being contrary to law.

An ultra vires act may be that of:


a. The corporation;
b. The Board of Directors; and
c. The corporate officers.

Effects of ultra vires act on:


a. Executed contract courts will not set
aside or interfere with such contracts;
b. Executory contracts no enforcement
even at the suit of either party (void and
unenforceable);
c. Part executed and part executory
principle of no unjust enrichment at
expense of another shall apply; and
d.
Executory
contracts
apparently
authorized but ultra vires the principle
of estoppel shall apply.

ULTRA VIRES ACTS AND ILLEGAL ACTS


Ultra vires (beyond powers) refers only to
an act outside or beyond corporate powers,
including those that may ostensibly be within
such powers but are, by general or special
laws, either prohibited or declared illegal. It is
in this context that the Code has used the
term.
ULTRA VIRES
ACTS
Not
necessarily
unlawful,
but
outside the powers
of the corporation
Can be ratified
Can
bind
the
parties if wholly or
partly executed

ILLEGAL ACTS
Unlawful;
against
law, morals, public
policy, and public
order
Cannot be ratified
Cannot
bind
the
parties

TEST whether or not a corporation may


perform an act: consider the logical and
necessary
relation
between
the
act

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
questioned and the corporate purpose
expressed by law or in the charter. If the act
is lawful in itself and not prohibited, and is
done for the purpose of serving corporate
ends, and reasonably contributes to the
promotion of those ends in a substantial and
not in a remote and fanciful sense.
(Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., 5 SCRA 36)

1. Where the corporation has distributed


its capital among the stockholders
without providing for the payment of
creditors;
2. Where it had released the subscribers
to the capital stock from their
subscriptions;
3. Where it has transferred the corporate
property in fraud of its creditors; and
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD
extends to the capital stock represented by
the corporations legal capital.
2. If the corporation is insolvent, the TFD
extends to the capital stock of the
corporation as well as all of its property and
assets.

REMEDIES IN CASE OF ULTRA VIRES


ACTS
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit

Exceptions to the TFD:

3. Creditors
a. Nullification of contract in fraud of
creditors
j.

DOCTRINE OF
SUBSCRIPTION

INDIVIDUALITY

1. Redemption of redeemable shares (Sec. 8)


2. In close corporation, when there should be
a deadlock and the SEC orders the payment
of the appraised value of the stockholders
share. (Sec. 104)

OF

The subscription in shares of stock is one,


entire, indivisible, and whole contract, which
cannot be divided into portions. (SEC
Opinion)

H. STOCKHOLDERS AND MEMBERS


RIGHTS OF STOCKHOLDERS (Pandect of
Commercial Law and Jurisprudence, Justice
Jose Vitug, 1997 ed.)

k. DOCTRINE OF EQUALITY OF SHARES


Where the articles of incorporation do not
provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same
rights and privileges and are also subject to
the same liabilities. (Sec. 6)
l. TRUST FUND DOCTRINE (TFD)
The subscribed capital stock of the
corporation is a trust fund for the payment of
debts of the corporation which the creditors
have the right to look up to satisfy their
credits, and which the corporation may not
dissipate. The creditors may sue the
stockholders directly for the latters unpaid
subscription.

1. RIGHTS OF A STOCKHOLDER
a. Managerial Rights
b. Proprietary Rights
c. Pre emptive Rights
d. Remedial Rights
e. Appraisal Rights
f. Inspection Rights
2.
MANAGERIAL RIGHTS
a. Voting rights; and
b. Right to remove directors

Application of the TFD:

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LIMITATIONS on the stockholders RIGHT TO


VOTE
a. Where the articles of incorporation
provides for classification of shares
pursuant to Sec. 6, non voting shares
are not entitled to vote except as

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
provided for in the last paragraph of
Sec. 6;
b. Preferred or redeemable shares may be
deprived of the right to vote unless
otherwise provided in the Code;
c Fractional shares of stock cannot be
voted;
d. Treasury shares have no voting rights
as long as they remain in the treasury;
e. Holders of stock declared delinquent by
the BOD for unpaid subscription are not
entitled to vote or to a representation
at any stockholders meeting; and
f. A transferee of stock cannot vote if his
transfer is not registered in the stock
and transfer book of the coporation.
3. PROPRIETARY RIGHTS
a. Right to dividends;
b. Right to issuance of stock certificate
for fully paid shares;
c. Proportionate participation in the
distribution of assets in liquidation;
d. Corporate
Books
and
Records
inspection rights
Limitations:
i.
The right must be exercised
during
reasonable
hours
on
business days;
ii.
The person demanding the
right has not improperly used nay
information obtained through any
previous examination of the books
and records of the corporation; and
iii.
The demand is made in good
faith or for a legitimate purpose.
(Sec. 74)
The right extends, in consonance with equity,
good faith, and fair dealing, to a foreign
subsidiary wholly-owned by the corporation.
Books required to be kept by the corporation:
1. Book of Minutes
a. minutes of stockholder or
members meetings; and
b. minutes of board meetings.
2. Book of all business transactions;
3. Stock and transfer book, in case of
stock corporations.
Corporate records required by the SEC to be
kept and/or registered:

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1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.
e.

Appraisal
right
(2007
Bar
Examination) is the right of a
stockholder who dissents from a
fundamental or extraordinary corporate
action to demand payment of the fair
value of his shares. The corporate acts
involves fundamental changes in the
corporate structure namely:
1.
An amendment
to the articles of incorporation that
has the effect of
2.
Sale,
encumbrance or other dispositions of
all or substantially all of the corporate
property or assets
3.
Merger
or
consolidation
4.
Investment of
corporate funds in another corporation
or in a purpose other than the primary
purpose (Sec. 42)
GENERAL RULE: A dissenting stockholder who
demands payment of his shares is no longer
allowed to withdraw from his decision EXCEPT
when:
1. The corporation consents to the
withdrawal
2. The proposed corporate action is
abandoned or rescinded by the
corporation
3. The proposed corporate action is
disapproved by the SEC where its
approval is necessary
4. The Commission determines that
such stockholder is not entitled to
appraisal right.
f.

Right to recover stocks unlawfully sold


for delinquent payment of subscription
g.
Preemptive
right
is
the
shareholders
preferential
right
to
subscribe to all issues or dispositions of
shares of any class in proportion to their
present stockholdings.
Purpose: to enable the shareholder to
retain his proportionate control in the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
corporation and to retain his equity in
the surplus.
Extends to treasury shares in case of their
reissuance.
If the shares preferentially offered to a
stockholder are not subscribed or purchased
by him, it does not follow that said shares
shall again be re-offered on a pro rata basis
to stockholders who already exercised their
preemptive rights. There is no preemptive
right with respect to the share to be reoffered.

In case additional issues of originally


authorized shares:

GENERAL RULE: There is no preemptive right.


This is on the theory that when a corporation
at its inception offers its first shares, it is
presumed to have offered all of those which it
is authorized to issue.
EXCEPTION: When a corporation at its
inception offers only a specified portion of its
authorized capital stock for subscription. If
subsequently, it offers the remaining
unsubscribed portion, there would be
preemptive right as to the remaining portion
thus offered for subscription.

When pre-emptive right not available:


a. When denied by the article of
incorporation
b. Shares requiring stock offering or
minimum stock ownership by the
public
c. Shares to be issued in good faith with
the approval of the stockholders
representing 2/3 of the outstanding
capital stock, in exchange for property
needed for corporate purposes or in
payment of a previously contracted
debt

PRE-EMPTIVE RIGHT vis a - vis RIGHT


OF FIRST REFUSAL (Philippine Corporate
Law, Cesar Villanueva, 2001 ed.)
PRE-EMPTIVE

RIGHT OF FIRST

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RIGHT
May be exercised
even when there is
no
express
provision of law

Pertains
to
unsubscribed
portion
of
the
authorized capital
stock. A right that
may be claimed
against
the
corporation

REFUSAL
Arises
only
by
virtue
of
contractual
stipulations but is
also granted under
the provisions on
Close Corporation
Exercisable against
another stockholder
of the corporation
of his shares of
stock

4. REMEDIAL RIGHTS
a. Individual suit a suit instituted by a
shareholder for his own behalf against
the corporation;
b. Representative suit a suit filed by a
shareholder in his behalf and in behalf
likewise of other stockholders similarly
situated and with a common cause
against the corporation; and
c. Derivative suit (2009, 2006, 2005,
2004 Bar Examination) a suit filed
in behalf of the corporation by its
shareholders (not creditors whose
remedies are merely subsidiary such
as accion subrogatoria and accion
pauliana) upon a cause of action
belonging to the corporation, but not
duly pursued by it, against any person
or against the directors, officers
and/or controlling shareholders of the
corporation.
Requisites:
i.
An existing cause of
action
in
favor
of
the
corporation
ii.
The
stockholder/member must first
make a demand upon the
corporation
or
the
management to sue unless
such a demand would be futile
iii.
The
stockholder/member must be
such at the time of the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
objectionable
acts
or
transactions
unless
the
transactions are continuously
injurious
iv.
The action must be
brought in the name of the
corporation
The number of shares of the stockholder
is immaterial since he is not suing in his
own behalf
Note:
The mere trustee of shares
registered in his name cannot file a
derivative suit for he is not a stockholder
in his own right. (Bitong vs. CA, 292 SCRA
304)
5.

6.

LIABILITIES OF STOCKHOLDERS
a. Liability to the corporation for unpaid
subscription
b. Liability to the corporation for interest
on unpaid subscription
c. Liability to creditors of the corporation
on the unpaid subscription
d. Liability for watered stock
e. Liability for dividends unlawfully paid
f. Liability for failure to create corporation
STOCKHOLDERS
MEETING

OR

MEMBERS

WHEN:
1. REGULAR - held on the date fixed in the
by-laws or if not fixed on any date in
April; and
2. SPECIAL - held at any time deemed
necessary or as so provided in the bylaws.
WHERE:
WHERE: In the city or municipality where the
principal office of the corporation is located,
and if practicable, in the principal office of
the corporation.

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However,
in
the
case
of
non-stock
corporations, the by-laws may provide that
meetings may be held at any place even
outside the principal place of the corporation.
(Sec. 93)

I.

BOARD OF DIRECTORS / TRUSTEES


1. BOARD
OF
DIRECTORS
TRUSTEES
AS
REPOSITORY
CORPORATE POWERS

OR
OF

GENERAL RULE: The corporate powers of


the corporation shall be exercised, all
business conducted and all property of
such corporation controlled and held by
the board of directors or trustees. (Sec.
23)
EXCEPTIONS:
1.
In case of an
Executive Committee duly authorized
in the by-laws;
2.
In case of a
contracted manager which may be an
individual, a partnership, or another
corporation. Note: In case the
contracted manager is another
corporation, the special rule in Sec.
44 applies.
3. In case of close corporations, the
stockholders
may
manage
the
business of the corporation instead by
a board of directors, if the articles of
incorporation so provide.
The power to purchase real property is vested
in the board of directors or trustees. While a
corporation may appoint agents to negotiate
for the purchase of real property needed by
the corporation, the final say will have to be
with the board, whose approval will finalize
the transaction. A corporation can only
exercise its powers and transact its business
through its board of directors and through its
officers and agents when authorized by a
board resolution or by its by-laws. (Spouses
Constantine Firme vs. Bukal Enterprises and
Development Corporation, G.R. No. 146608,
October, 23, 2003)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
LIMITATIONS ON POWERS OF BOARD OR
DIRECTORS/TRUSTEES
1. Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws.
2. Cannot perform constituent or those
involving fundamental changes in the
corporation requiring the approval of
stockholders or members.
3.
Cannot
exercise
powers
not
possessed by the corporation. (The
Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
NATURE OF POWERS OF BOARD OF
DIRECTORS/TRUSTEES (The Corporation
Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
a. Under the Theory of Original Power, the
powers of the board of directors or
trustees
are
ORIGINAL
and
UNDELEGATED. The stockholders or
members do not confer, nor can they
revoke those powers.
b. They are DERIVATIVE only in the sense
of being received from the State in the
act of incorporation.
2.

TENURE, QUALIFICATIONS
AND
DISQUALIFICATIONS
OF
DIRECTORS

Qualifications:
1. For a stock corporation, ownership of at
least 1 share capital stock of the
corporation in his own name, and if he
ceases to own at least one share in his
own name, he automatically ceases to
be a director. (Sec. 23) For a non-stock
corporation, only members of the
corporation can be elected to seat in
the Board of Trustees.
In order to be eligible as a director,
what is material is the legal title to, not
beneficial ownership of the stocks
appearing on the books of the
corporation

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2. A majority of the directors/trustees


must be residents of the Philippines.
(Sec. 23)
3. He must not have been convicted by
final judgment of an offense punishable
by
imprisonment
for
a
period
exceeding 6 years or a violation of the
Corporation Code, committed within
five years from the date of his election.
(Sec. 27)
4. Only natural persons can be elected
directors/trustees.
In case of corporate stockholders or
members, their representation in the
board can be achieved by making their
individual representatives trustees of
the shares or membership to make
them stockholders/members of record.
5. Other qualifications as may
prescribed in the by-laws of
corporation.

be
the

6. Must be of legal age

Disqualifications
of
Trustees or Officers

Directors,

1.

Conviction by
final judgment of offenses punishable by
imprisonment for excess of 6 years, or

2.

Violation
of
code committed within 5 years prior to
date of his election or appointment.

Terms of Directors
For 1 year or until their successors are
elected and qualified (Hold over Principle)
3.

ELECTION OF DIRECTORS
OR TRUSTEES
a. Quorum in Meeting for Election
Majority of the outstanding capital
stock or member entitled to vote
Present either in person or by
representative by WRITTEN PROXY
b. How
Viva Voce, or
By ballot if requested by any
voting stockholder or member

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
c. Stock Corporations
Methods of Voting on the Election of
Directors
g. STRAIGHT
VOTING

Every
stockholder through this method,
may vote such number of shares for
as many persons as there are
directors.
h. CUMULATIVE VOTING
i.
Every stockholder is
entitled to such number of votes
that
his
number
of
shares
multiplied by the total number of
directors to be elected will bring.
He may give all such votes to one
candidate (CUMULATIVE VOTING
FOR ONE CANDIDATE) or he may
distribute them among as many
candidates
as
he
sees
fit
(CUMULATIVE
VOTING
BY
DISTRIBUTION). (Sec. 24)
ii.
A minority director
elected through cumulative voting
cannot be removed without cause.
(Sec. 28)
iii.
A PROXY is a written
instrument,
signed
by
the
stockholder
or
member
(as
principal) and filed before the
scheduled
meeting
with
the
corporate secretary, and given to
another
person
(as
agent)
authorizing
such
person
to
exercise the voting rights of the
former.
What is the period of validity of proxy?
Unless otherwise provided in the proxy, it
should be valid only for the meeting for
which it is intended. No proxy shall be valid
and effective for a longer period than five
years at any one time. (Sec. 58)
Instances whereby Right to vote by
Proxy may be exercised:
1.
Election of the
board of directors or trustees;
2.
Voting in case
of joint ownership of stock;
3.
Voting
by
trustee under voting trust agreement;

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4.
5.

mortgage of shares;
in its by laws.

Pledge

or

As provided for

Stockholders or members may attend and


vote in their meeting by proxy (Sec. 58); but
directors cannot do so. Directors must always
act in person. (Sec. 25)
A VOTING TRUST is an agreement whereby
one or more stockholders transfer their
shares of stocks to a trustee, who thereby
acquires for a period of time the voting rights
(and/ or any other rights) over such shares;
and in return, trust certificates are given to
the stockholder/s, which are transferrable like
stock certificates, subject however, to the
trust agreement.
d.

e.

Non Stock Corporations


Members may cast as many votes as
there are trustees to be elected
(seats)
But may not cast more than one
vote for a single candidate
EXCEPT: when the AOI or by laws
provide otherwise
Adjournment of Meeting for Elections
May adjourn from day to day or from
time to time
But NOT sine die or indefinitely if
quorum is not met (majority of
stockholders or members are not
present).

NOTE: Proposed amendment to by laws


stipulating permanent director even without
election is contrary to law. (Grace Christian
High School vs. CA)
4.

REMOVAL OF DIRECTORS
OR TRUSTEES
a. How may be removed
i. 2/3 vote of stockholders or
members entitled to vote
ii. During a regular meeting or a
special meeting called by the
secretary upon:
Order of the President

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

Written demand from majority


of stockholders or members
entitled to vote
iii. Upon
previous
notice
to
stockholders or members
Of the intention to propose
such removal at the meeting
Of the time and place of
meeting
Must be given by publication
or
by
written
notice
prescribed in the Code.
b. If secretary refuses/ fails to call for the
special meeting or give the notice, or
there is no secretary, call may be
directly addressed to stockholders or
members by demanding stockholder or
member.
c. Causes for Removal
1. May be with or without cause
Cause is usually related to the 3
duties of an officer or director
a. loyalty
b. obedience
c. diligence
2. Provided that removal without cause
may not be used to deprive minority
stockholders or members of their
right of representation under Sec. 24.
NOTE: Removal of Board of Director or
Trustee is different from removal of a
corporate officer. Stockholders approval is
necessary only for the removal of the
members of the Board. For the removal of a
corporate officer or employee, the vote of the
Board of Directors is sufficient for the
purpose. (2001 Bar Examination)
5.

FILLING OV VACANCIES IN
THE OFFICE OF DIRECTOR OR
TRUSTEE
a. Ground for Removal
1. Removal by the stockholder or
members or upon expiration of
term
Vacancy shall be filled by the
stockholder in a regular or special
meeting called for that purpose.

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2. Other causes other than expiration


or removal by stockholders /
members.
If remaining directors constitute
Quorum may be filled by the
MAJORITY vote of the remaining
directors.
If no quorum filled by the
stockholders in a regular or special
meeting called for that purpose.
3. Proposed amendment of Articles of
Incorporation resulting in increase
in number of directors / trustees
Vacancy shall be filled by the
stockholders in a regular or
special meeting called for
that purpose
Or in the same meeting
authorizing
increase
of
directors or trustees if so
stated in notice of the
meeting
b. Director or trustee so elected shall
serve only the unexpired portion of
the term.
6.
COMPENSATION
Directors are not entitled to compensation as
such directors except that they are allowed
reasonable per diems. However, directors
may be given compensation when:
a. There is a provision in the by laws
authorizing payment of compensation;
or
b. By a vote of the Stockholders
representing at least majority of the
outstanding capital stock at a regular
or special meeting.
LIMIT: In either case, the total yearly
compensation of the directors shall not
exceed 10% of the net income before income
tax of the corporation during the preceding
year.
7.

DUTY OF LOYALTY
To Act according to the corporations best
interest
DOCTRINE OF
CORPORATE

DISLOYALTY OF
A DIRECTOR

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
OPPORTUNITY
Cover same subject
which is business
opportunity
Applicable
to
directors, trustees
and officers
Does
not
cover
ratification. Even if
99%
of
the
stockholders affirm
the
transactions,
the
remaining
stockholders
can
still oppose such a
self

dealing
transaction and file
a derivative suit
Applies
to
both
stock and non
stock corporations

Cover
same
subject which is
business
opportunity
Only applicable to
DIRECTORS
and
not to officers
Allows
RATIFICATION of a
transaction by a
self

dealing
director by the
vote
of
stockholders
representing 2/3 of
the
outstanding
capital stock.

10.

LIABILITY FOR WATERED


STOCK
Under Sec. 65 on Liability of Directors for
Watered Stocks, if director of officer:
Consents to issuance of stocks for a
consideration less than its par or
issued value;
Consents to payment in consideration
other than cash, which is valued in
excess of its fair market value;
Having knowledge hereof does not
object in writing and file the same
with the corporate secretary.
Such director or officer shall be
SOLIDARILY LIABLE with the stockholder
concerned (buyer) and its creditors for
the DIFFERENCE between the fair value
received at time of issuance of the stock
and its par or issued value.

11.

CONTRACTS
a. By self dealing directors with the
corporation
Contracts between the corporation and
one or more of its directors or trustees or
officers are VOIDABLE at the option of
the corporation but VALID if the following
are present:
i.
Presence of director /
trustee in the board meeting which

Applies only to
stock corporations

8.

BUSINESS
JUDGMENT
RULE
Business judgment rule exists to protect
and promote the full and free exercise of
managerial power granted to directors.
The rule is a a presumption that in
making a business decision, the directors
of a corporation acted on an informed
basis, in good faith and in the honest
belief that the action taken was in the
best interest of the company. (Smith vs.
Van Gorkam)

9.

DUTY OF DILIGENCE
a. Violations of Duty of Diligence
i. Willfully and knowingly vote for or
assent to patently unlawful acts of
the corporation
ii. Guilty of gross negligence or bad
faith in directing the affairs of the
corporation
iii. Acquire any personal or pecuniary
interest in conflict with their duty
as director or trustee
iv. He consents to the issuance of
watered stocks or who, having
knowledge thereof, does not
forthwith file with the corporate

BAR OPERATIONS 2011

secretary his written objection


thereto; (Tramat Mercantile Inc. vs
CA)
v. He
agrees
to
hold
himself
personally and solidarily liable
with the corporation; or (Tramat
Mercantile Inc. vs. CA)
vi. He is made, by specific provision
of law, to personally answer for his
corporate
action
(Tramat
Mercantile Inc. vs. CA)
b. Liability for Violation of Duty of
Diligence shall be liable jointly and
severally for all damages resulting
therefrom
suffered
by
the
corporation, its stockholders or
members and other persons.

Page 43

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
approved
contract
was
not
necessary to constitute a quorum.
ii.
Vote of director or
trustee not necessary for approval of
contract
iii.
Contract is fair and
reasonable under the circumstances
iv.
In case of an officer,
contract
has
been
previously
authorized by board of directors.
NOTE: If directors presence was required
to meet the quorum (1st requisite) and I
his vote was necessary for approval of
the contract (2nd requisite), the contract
may still be valid if it is RATIFIED by 2/3
of stockholders or members in a meeting
called for that purpose.
b. Between corporation with interlocking
directors
Contract between two or more
corporations with a common
director/s may be valid
However, to be valid, it must be
fair and reasonable
A
contract
between
the
corporations with interlocking
directors is VOID if there is fraud
If the interest of the interlocking
director in one corporation is
SUBSTANTIAL
(meaning
stockholdings exceed 20% of the
outstanding capital stock) and his
interest is merely NOMINAL,
contract shall be treated as under
the provisions of Self Dealings
(voidable but may be ratified),
insofar as the corporation where
he has a nominal interest is
concerned.
NOTE: Corporate officers are not permitted
to use their position of trust and confidence
to further their private interests.
The
doctrine of CORPORATE OPPORTUNITY is
precisely recognition by the courts that the
fiduciary standards could not be upheld
where the fiduciary was acting for two
entities with competing interest. (Gokongwei
Jr. vs. SEC)

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12.

EXECUTIVE COMMITTEE
a. Creation
A body created by the by-laws
and composed of some members of
the board which, subject to the
statutory limitations, has all the
authority of the board to the extent
provided in the board resolution or
by-laws. (The Corporation Code of
the Philippines Annotated, Hector de
Leon, 2002 ed.)
Must be provided for in the by-laws and
composed of not less than 3 members of
the board appointed by the board.
May act by a majority vote of all of its
members
b. Limitations on its powers
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of bylaws;
4. Amendment
or
repeal
of
any
resolution of the Board which by its
express terms is not amendable or
repealable; and
5. Cash dividend declaration.

13.

MEETINGS

BOARD MEETING (Sec. 53)


WHEN:
1. REGULAR - held monthly, unless
otherwise provided in the by-laws; and
2. SPECIAL - held at any time upon the
call of the president.
WHERE:
May be held anywhere in or outside of the
Philippines.
CORPORATE OFFICERS, QUORUM
a. Corporate Officers
President must be a director

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

b.
c.
d.

e.

f.

Treasurer may or may not be a


director
Secretary shall be a resident and a
citizen of the Philippines
Other officers provided in the by
laws
Any 2 or more positions may
be held concurrently except president
and secretary or president and treasurer
When elected: Immediately
after election of directors
Duties to be performed by
officers
Enjoined on them by law
Enjoined by corporate by laws
Quorum board must act as a
body
For
transaction
of
corporate
business majority of number of
directors or trustees as fixed in the
AOI
For corporate act to be valid, there
must be a quorum and the act must
be approved by majority of directors
or trustees PRESENT
For election of officers majority of
ALL members of the board of
directors or board of trustees,
whether all members are present or
not.
Director or Trustees cannot
ATTEND or VOTE by proxy at board
meetings.

POWERS OF CORPORATE OFFICERS


a. Rule on Corporate Officers power to
bind the corporation
An officers power as an agent of the
corporation must be sought from the
statute, charter, by laws or in a
delegation of authority from such
officer, from the acts of the board of
directors formally expressed or
implied from a habit or custom of
doing business
b. When Corporation bound by the act of
its President.
In the absence of a charter or by law
provision to the contrary, the president

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is presumed to have the authority to act


within the domain of the general
objectives of its business and within the
scope of his or her usual duties. A party
dealing with the President of a
corporation is entitled to assume that
he has the authority to enter, on behalf
of the corporation, into contract that are
within the scope of the powers of said
corporation and that do not violate any
statute or rule on public policy.
Distinctions between a Corporate
Officer and Corporate Employee
CORPORATE
OFFICER
Position is provided
for in the by laws
or
under
the
Corporation Code
RTC has jurisdiction
in case of LABOR
DISPUTE
J.

CORPORATE
EMPLOYEE
Employed by the
action
of
the
managing officer of
the corporation
NLRC
has
jurisdiction in case
of labor dispute

CAPITAL AFFAIRS

2.

CERTIFICATE
OF STOCKS
The document evidencing the ownership of
shares of stocks by a stockholder and the full
payment of its issue or subscription price.
a. Nature of the certificate
It is not essential to the ownership
and/or existence of the share of stock.
Where the certificate of stock reflects a
greater volume of shares than the
actual number of shares issued or to be
issued, the following rules may be
considered:
1. To the extent that there is an over
issue, the excess issuance (over the
authorized capital stock or the stated
capital) shall be void as being ultra
vires.
2.
If there is no over issue, but no
payment has been made to cover the
par or stated value of the excess

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

3.

shares, the latter would constitute


watered stocks.
If there is no over issue and watering
of stocks, the corporation may be
bound to honor the certificate (if duly
signed and released by its authorized
officers) in the hands of a holder in
good faith, reserving a right of
recourse that an aggrieved party may
pursue against the culpable or
unjustly enriched party.
SHARES OF
STOCK

CAPITAL STOCK
Amount paid in or
secured to be paid in
by the stockholders
upon
which
the
corporation
is
to
conduct
its
operation. It is the
property
of
the
corporation
itself
(monetary value).

SHARES OF STOCK
Unit of interest in a
corporation

Incorporeal
or
intangible property
May be issued by
the corporation even
if the subscription is
not fully paid.

Interest or right
which
the
stockholder has in
the management of
the
corporation,
and
its
surplus
profits, and upon a
dissolution, in all of
its assets remaining
after payment of
corporate debts.
CERTIFICATE OF
STOCK
Evidence of the
holders ownership
of the stock and of
his
right
as
a
shareholder
Concrete
and
tangible
May be issued only
if the subscription is
fully paid.

b. Negotiability
REQUIREMENTS FOR
TRANSFER OF
STOCK
a. In case of shares covered by a
certificate, the indorsement of the

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owner or his agent coupled with


delivery is essential
b. Where no certificate has been issued
or for some reason it is not in the
possession of the stockholder, it may
be transferred by means of a deed of
assignment duly recorded in the books
of the corporation
c.
To be valid against the corporation
and third persons, the transfer must
be recorded in the stock and transfer
book
d. The transferee must present the
indorsed certificate to the corporate
secretary who shall effect the transfer
in the corporate books, issue a new
stock certificate in favor of the
transferee and cancel the former
certificate.
Only
absolute
transfers
need
be
registered. The pledge or mortgage itself
need not be recorded in the stock and
transfer book, but a chattel mortgage must
comply with the Chattel Mortgage Law, and a
pledge would require the shares to be placed
in the possession of the creditor/pledgee. The
agreement must appear in a public
instrument to take effect against third
persons. (Chemphil vs. CA, 251 SCRA 257)
EFFECTS OF UNREGISTERED TRANSFER
OF SHARES
a. It is valid and binding as between the
transferor and the transferee
b. It is invalid as to the corporation except
when notice is given to the corporation
for purposes of registration
c. It is invalid as against corporate creditors
and the transferor is still liable to the
corporation
d. It is invalid as to the attaching or
executing creditors of the transferor, as
well as subsequent purchasers in good
faith without notice of the transfer.
c. ISSUANCE OF CERTIFICATE OF STOCK
No certificate of stock shall be issued until
the full amount of the subscription is paid.
Basis:
Doctrine
of
Individuality
of
Subscription

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
D. PROCEDURE FOR ISSUANCE OF NEW
CERTIFICATE OF STOCK IN LIEU OF LOST,
STOLEN OR DESTROYED ONES (Sec. 73)
1. Filing with the corporation an affidavit in
triplicate by the registered owner setting
forth the circumstances as to how the
certificate was lost, stolen or destroyed, the
number of shares, serial number of the
certificate and the name of the corporation
that issued the same.
2. Publication of notice of loss by the
corporation in a newspaper of general
circulation in the place of the principal office,
once a week for 3 consecutive weeks.
3. After the lapse of 1 year from the date of
the last publication, if no contest has been
presented, the corporation shall cancel in its
books the certificate of stock, which has been
lost, stolen or destroyed, and issue in lieu
thereof a new certificate of stock.
However, if the registered owner files a bond
or other securities as may be necessary to
the board, the new certificate of stock may
be issued even before the expiration of one
(1) year period.
The prescribed procedure does not apply to a
case where the certificates are in the
companys possession when mislaid which
thereby obligates the corporation, not the
stockholder, to suffer the consequences. (SEC
Opinion)
3.

WATERED
STOCKS
Watered stock is stock issued not in
exchange for its equivalent in cash,
property, shares, stock dividends or
services. It includes stock that is issued
(a) without consideration (b) issued as
fully paid when the corporation receives
a sum less than par or issued value (c)
issued for a consideration other than
cash, the fair valuation of which is less
than par or issued value (d) stock
dividend without sufficient retained
earnings or surplus.

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3.

COLLECTION
OF
UNPAID
SUBSCRIPTION
1. Voluntary payment
a. Upon the date specified in the
subscription contract
b. Upon call by the Board of Directors
2. Involuntary payment
a. Extra-judicial
i. Delinquency sale
ii. Application of dividends
b. Judicial action
Note: The prescriptive period in case of
subscription of shares begins to run only from
the time the board of directors declares that
the balance are due and payable. It does not
begin to run from the date of the
subscription. (Garcia vs. Suarez, 67 Phil. 441)
4. SALE OF DELINQUENT SHARES
1. If the subscription contract fixes the date
for payment, failure to pay on such date
shall render the entire balance due and
payable with interest. Thirty days
therefrom, if still unpaid, the shares
become delinquent, as of the due date,
and subject to sale, unless the board
declares otherwise.
2. If no date is fixed in the subscription
contract, the board of directors can make
the call for payment, and specify the due
date. The notice of call is mandatory. The
failure to pay on such date shall render
the entire balance due and payable with
interest. Thirty days therefrom, if still
unpaid, the shares become delinquent, as
of the date of call, and subject to sale,
unless the board declares otherwise. (Sec.
67)
A. Effect of Delinquency:
A. Upon the stockholder
1. Accelerates the entire amount of the
unpaid subscription;
2. Subjects the shares to interest,
expenses and costs;
3. Disenfranchises the shares from any
right that inheres to a shareholder,
except the right to dividends (but
which shall be applied to any amount
due on said shares or, in the case of

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
stock dividends, to be withheld by the
corporation until full payment of the
delinquent shares. (Sec. 43)
B. Upon the director owning delinquent
shares
1. He can continue serving in that capacity
unless and until said shares are totally bidded
away, he continues to be the owner thereof
and in the interim he is not disqualified.
2. A delinquent stockholder seeking to be
elected as director may not be a candidate
for, nor be duly elected to, the board.
No delinquency stock shall be voted for or be
entitled to vote or representation at any
stockholders meeting, nor shall the holder be
entitled to any of the rights of a stockholder
except the right to dividends in accordance
with the provisions of this Code until and
unless he pays the amount due on his
subscription with accrued interest, and the
cost and expenses of advertisement, if any.
(Sec. 71)
PROCEDURE
FOR
THE
SALE
OF
DELINQUENT STOCKS (Sec. 68)
Call by resolution demanding payment of the
balance. However, if the contract of
subscription prescribes the date of
payment, no call is necessary.
Notice of the board resolution given to the
stockholders by the corporate secretary,
either personally or by registered mail.
Publication of notice of call is not
required.
Failure of the stockholder to pay within a
grace period of 30 days from the date
specified in the contract of subscription or
in the call, the stocks shall be declared
delinquent and shall be subject to sale.
Notice of delinquency served on the
subscribers either personally or registered
mail and publication in a newspaper of
general circulation in the province or the
city where principal office is located for
once a week for 2 consecutive weeks.
Notice shall state the amount due on each
subscription plus accrued interest, and
the date, time and place of the sale which
shall not be less than 30 days nor more
than 60 days from the date the stocks
become delinquent.

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Sale of the delinquent shares at public


auction.
HIGHEST BIDDER IN A DELINQUENCY
SALE
a. The person participating in the delinquency
sale who offers to pay the full amount of the
balance of the subscription together with the
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of
shares. In other words, the amount of the bid
does not vary but only the number of shares
to be bought changes and determines the
highest bidder.
b. If there is no bidder as mentioned above,
the corporation may bid for the same, and
the total amount due shall be credited as
paid in full in the books of the corporation.
Such shares shall be considered as treasury
shares.
K. DISSOLUTION
AND
(LIQUIDATION)

WINDING

UP

1. DISSOLUTION
When the corporation ceases to be a
juridical person
METHODS: (Sec 117)
1. Voluntary
2. Involuntary
A corporation may be dissolved by the
SEC upon filing of a verified complaint
and after proper notice and hearing on
the grounds provided by existing laws,
rules and regulations (Sec. 121)
The 3 Methods by which a Stock
Corporation may be voluntarily Dissolve
are: (2002 Bar Examination)
1.

Volun
tary dissolution where no creditors
are affected. This is done by a majority
vote of the directors and resolution vote
of at least 2/3 vote of the stockholders,
submitted to the SEC.
2.
Volun
tary dissolution where creditors are
affected. This is done by a petition for
dissolution which must be filed with the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
SEC, signed by a majority of the
members of the board of directors,
verified by the president or the
secretary, and upon affirmative vote of
stockholders representing 2/3 of the
outstanding capital stock
3.
Dissol
ution
by
shortening
of
the
corporate term. This is done by
amendment
of
the
articles
of
incorporation.
When
Corporation
is
Deemed
Dissolved:
WHEN DEEMED
METHOD
DISSOLVED
Sec. 118, when Upon issuance of
no creditors are certificate of SEC
affected
Sec. 119, where When judgment is
creditors
are rendered dissolving
affected
the corporation
Sec.
120, Upon approval of the
dissolution
by amended articles of
shortening
incorporation or the
corporate term
expiration of the
shortened term, as
the case may be.
INVOLUNTARY DISSOLUTION
Grounds:
1. If the corporation does not formally
organize and commence the transaction
of its business or the construction of its
works within 2 years from the date of its
incorporation, its corporate power ceases
and the corporation shall be deemed
dissolved.
2. If the corporation has commenced the
transaction
of
its
business;
but
subsequently
becomes
continuously
inoperative for a period of at least 5
years, the same shall be a ground for
suspension or revocation of its corporate
franchise or certificate of incorporation.
3. When the corporation fails to adopt and
file a code of by laws in the manner
provided for by the law.

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4. When the corporation has offended


against a provision of law for its creation
or renewal.
5. When it has committed or omitted an act
which amounts to a surrender of its
corporate rights, privileges, or franchises.
6. When it has misused a right, privilege, or
franchise conferred upon it by law, or
when it has exercised a right, privilege or
franchise in contravention of law, such as
commission by the corporation of ultra
vires or illegal acts.
7. When on the basis of findings and
recommendations of a duly appointed
management committee or rehabilitation
receiver, or based on the SECs own
findings, the continuance of the business
of the corporation would not be feasible
or profitable nor work to the best interest
of the stockholders, parties litigants,
creditors or the general public.
8. When the corporation is guilty of fraud in
procuring its certificate of registration.
9. When the corporation is guilty of serious
misrepresentation
as to what the
corporation can do or is doing to the great
prejudice of or damage to the general
public.
10. Refusal of the corporation to comply or
defiance of any lawful order of the SEC
restraining commission of acts which
would amount to a grave violation of its
franchise and
11. Failure of the corporation to file required
reports
in
appropriate
forms
as
determined by the SEC within the
prescribed period.
EFFECTS OF DISSOLUTION
a. Transfer of legal title to corporate property
to the stockholders who become co-owners
thereof
b. Corporation ceases as a body politic to
continue the business for which it was
organized
c. It cannot be revived
d. Dissolution does not by itself imply the
diminution or extinguishment of rights
e. The corporation continues as a body
corporate for 3 years for purposes of winding
up

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
f. Cessation of corporate existence for all
purposes upon the expiration of the winding
up period of 3 years. (The Corporation Code
of the Philippines Annotated, Hector de Leon,
2002 ed.
LIQUIDATION
The process by which all the assets of the
corporation are converted into liquid assets
(cash) in order to facilitate the payment of
obligations to creditors, and the remaining
balance, if any, is to be distributed to the
stockholders or members.
Methods:
1. By the corporation itself through its board of
directors/trustees;
2. By a trustee to whom the corporate assets
have been conveyed; and
3. By
a
management
committee
or
rehabilitation receiver appointed by the SEC.
Note: The 3-year period of liquidation does
not apply to Methods 2 and 3 as long as the
trustee or the receiver is appointed within the
said period.
The termination of the life of a juridical entity
does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity nor those of its owners and creditors
alike (Sec. 145).
The word trustee as sued in the corporation
statute must be understood in its general
concept which could include the counsel to
whom was entrusted the prosecution of the
suit filed by the corporation. (Spouses Gelano
vs. CA)
LIQUIDATION
Connotes
a
winding
up
or
settling
with
creditors
and
debtors
Winding up process
so that assets may
be distributed to
those entitled

REHABILITATION
Connotes
a
reopening
or
reorganization
Contemplates
a
continuance
of
corporate life in an
effort to restore the
corporation to its
former
successful
operation

OTHER COPORATIONS
1. CLOSE CORPORATION
A special kind of stock corporation:
1. whose articles of incorporation should
provide that:
a. the number of stockholders shall not
exceed 20;
b. issued stocks are subject to transfer
restrictions, with a right of preemption
in favor of the stockholders or the
corporation; and
c. the corporation shall not be listed in
the stock exchange or its stocks
should not be publicly offered; AND
2. Whose at least 2/3 of the voting stocks
or voting rights should not be owned or
controlled by another corporation which is
not a close corporation. (Sec. 96)
Characteristics:
1. Stockholders may act as directors
without need of election and therefore
are liable as directors;
2. Stockholders who are involved in the
management of the corporation are
liable in the same manner as directors
are.
3. Quorum may be greater than mere
majority;
4. Transfers of stocks to others, which
would increase the number of
stockholders to more than the
maximum are invalid;
5. Corporate actuations may be binding
even without a formal board meeting,
if the stockholder had knowledge or
ratified the informal action of the
others;
6. Preemptive right extends to all stock
issues;
7. Deadlocks in board are settled by the
SEC, on the written petition by any
stockholder; and
8. Stockholder may withdraw and avail
of his right of appraisal.
Note: Special rules are provided for close
corporations because it is essentially an
incorporated partnership. (The Corporation
Code of the Philippines Annotated, Hector de
Leon, 2002 ed.)
The following cannot be a close corporation:

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GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a.
b.
c.
d.
e.
f.
g.
h.

mining companies;
oil companies;
stock exchanges;
banks;
insurance companies;
public utilities;
education institutions;
other corporations declared to be
vested with public interest. (Sec. 96)

ORDINARY
STOCK
CORPORATION
Its
articles
of
incorporation
need only contain
the
general
matters
enumerated
in
Sec. 14 of the
Code.
Its status as an
ordinary
stock
corporation is not
affected by the
ownership of its
voting stock or
voting rights.
Its articles cannot
classify
its
directors.
Business of the
corporation
is
managed by the
board of directors.

The
corporate
officers
and
employees
are
elected
by
a

CLOSE
CORPORATION
Its
articles
must
contain the special
matters prescribed
by Sec. 97, aside
from the general
matters in Sec. 14.
Failure to do so
precludes a de jure
close
corporation
status.
2/3 of its voting
stock
or
voting
rights must not be
owned or controlled
by
another
corporation which is
not
a
close
corporation.
Its
articles
may
classify its directors.
Business
of
the
corporation may be
managed by the
stockholders if the
articles so provide,
but they are liable
as directors.
Its
articles
may
provide that any or
all of the corporate
officers
or

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majority vote of
all the members
of the board of
directors.

employees may be
elected or appointed
by the stockholders.

The pre-emptive
right is subject to
the
exceptions
found in Sec. 39.

The
pre-emptive
right is subject to no
exceptions
unless
denied
in
the
articles
The appraisal right
may be exercised
and
compelled
against
the
corporation by a
stockholder for any
reason.

The
appraisal
right
may
be
exercised by a
stockholder only
in
the
cases
provided in Secs.
81 and 42 of the
Code.
Except as regards
redeemable
shares,
the
purchase by the
corporation of its
own stock must
always be made
from
the
unrestricted
retained earnings.

Arbitration
of
intra-corporate
deadlock by the
SEC is not a
remedy in case
the directors or
stockholders are
so
divided
respecting
the
management
of
the corporation.

In
case
of
an
arbitration
of
an
intra-corporate
deadlock
by
the
SEC, the corporation
may be ordered to
purchase its own
shares
from
the
stockholders
regardless of the
availability
of
unrestricted
retained earnings.
Arbitration of intracorporate deadlock
by the SEC is an
available remedy in
case the directors or
stockholders are so
divided
respecting
the management of
the corporation.

POWERS OF THE SEC IN CASE OF


DEADLOCK IN CLOSE CORPORATIONS
1. Cancel or alter any provision in the
articles of incorporation or bylaws
2. Cancel, alter or enjoin any resolution of
the corporation
3. Direct or prohibit any act of the
corporation

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
4. Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation
regardless
of
the
availability
of
unrestricted retained earnings.
5. Appoint a provisional director
6. Dissolve the corporation
7. Granting such other relief as the
circumstances may warrant.
2. NON STOCK CORPORATIONS
A corporation organized for an eleemosynary
purpose, and no part of whose income is,
during
its
existence,
distributable
as
dividends to its members, trustees, or
officers, subject to the provisions of the
Corporation Code on dissolution. (Sec. 87)
Any profit which it may obtain as an incident
to its operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which it was
organized.
Eleemosynary
purposes:
charitable,
religious, educational, professional, cultural,
recreational, fraternal, literary, scientific,
social, civic service, or similar purposes, like
trade, industry, agricultural. (Sec. 88)
They are governed by the same rules
established for stock corporations, whenever
pertinent, subject, however, to a number of
special features.
RULES ON CONVERSION (SEC Opinion)
1. Stock to non-stock corporation
Conversion may be made by mere
amendment of the articles of incorporation.
2. Non-stock to stock corporation
The corporation must first be dissolved; mere
amendment of the articles of incorporation
would not suffice because the conversion
would change the corporate nature from nonprofit to monetary gain.
The conversion without dissolving it first
would be tantamount to distribution of its
assets or income to its members inasmuch as
after its conversion, the asset of the nonstock corporation would now be treated as
payment to the subscriptions of the members

who will now become stockholders of the


corporation.
RIGHTS OF MEMBERS
1. To be entitled to 1 vote unless
otherwise provided in the articles or
by-laws
2. To vote by proxy unless otherwise
provided in the articles or by-laws
3. To transfer membership if allowed by
the articles or by-laws
4. To be elected as trustee
STOCK
Has capital stock
divided into shares
and with authority
to
distribute
dividends to its
stockholders
Stockholders may
transfer
their
shares
Cumulative voting
is available in the
election
of
directors
Directors
cannot
exceed
15
in
number
The term of a
director is 1 year

Stockholders may
vote by proxy

Officers
are
elected by the
Board of Directors

Stockholders

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and

NON-STOCK
Does
not
have
shares and may
not
distribute
profits
to
its
members
Members
cannot
transfer
their
membership unless
allowed
by
the
articles or by-laws
Cumulative voting
not
available
unless
otherwise
provided in the
articles or by-laws
Trustees
may
exceed
15
in
number
The term of a
trustee is 3 years;
1/3 of the Board
shall be elected
annually
Members may be
deprived of the
right to vote by
proxy
in
the
articles or by-laws
Officers may be
directly elected by
the
members
unless
otherwise
provided in the
articles or by-laws
Members may be

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
directors must act
in
a
meeting,
except where a
mere
written
assent is sufficient
or
a
formal
meeting
unnecessary

A stock or non-stock corporation organized to


provide facilities for teaching or instruction.

allowed by the bylaws to vote by


mail
or
other
similar means

It is primarily governed by special laws and


suppletorily by the provisions of the Code.

RULES FOR DISTRIBUTION OF ASSETS IN


CASE OF DISSOLUTION (SEC. 94)
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged or adequate provision shall be
made therefor
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of dissolution, shall be returned,
transferred or conveyed in accordance with
such requirements
3. Assets received and held by the
corporation subject to limitations permitting
their use only for charitable, religious,
benevolent, educational or similar purposes
but not held upon a condition requiring
return, transfer or conveyance by reason of
dissolution, shall be transferred or conveyed
to one or more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those of
the dissolving corporation pursuant to a plan
of distribution
4. Other assets, if any, shall be distributed in
accordance with the provisions of the articles
of incorporation or the by-laws
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a
plan of distribution.
The plan of distribution shall be approved
by a majority vote of the board of trustees
and by 2/3 of the members having voting
rights at a meeting

SPECIAL CORPORATIONS

A favorable recommendation of the DECS is


essential for the approval of its articles and
by-laws.

NON-STOCK
EDUCATIONAL
CORPORATION
A
non-stock
corporation
Governed by the
provisions on nonstock corporations
and suppletorily by
the provisions on
stock corporations
The
number
of
board of trustees
may be more than
15
The term of office
of the board of
trustees shall be 3
years

A special corporation
which may a stock
or non-stock
Governed by special
laws and by the
general provisions of
the
Corporation
Code
The number of the
board of trustees
should not be less
than 5 but not more
than 15.
The term of office of
the board of trustees
shall be 5 years

2. RELIGIOUS CORPORATION
A corporation composed entirely of spiritual
persons and which is organized for the
furtherance of a religion or for perpetuating
the rights of the church or for the
administration of church or religious work or
property. It is different from an ordinary nonstock corporation organized for religious
purposes.
Kinds:
A) CORPORATION SOLE
- A special form of corporation, usually
associated with the clergy, consisting of
one person only and his successors, who is
incorporated by law to give some legal
capacities and advantages; and
B) RELIGIOUS SOCIETIES

1. EDUCATIONAL CORPORATION

BAR OPERATIONS 2011

EDUCATIONAL
CORPORATION

Page 53

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
- A non-stock corporation governed by
a board but with religious purposes. It is
incorporated by an aggregate of persons, e.g.
religious order, diocese, synod, sect, etc.
4. FOREIGN CORPORATION
A corporation formed, organized or existing
under any law other than those of the
Philippines, and whose laws allow Filipino
citizens and corporations to do business in its
own country or state. (Sec. 123)
The definition espouses the incorporation
test and the reciprocity rule and is significant
for licensing purposes.
It is not permitted to transact or do business
in the Philippines until it has secured a
license for that purpose from the SEC and a
certificate of authority from the appropriate
government agency.
RESIDENT AGENT
An individual, who must be of good moral
character and of sound financial standing,
residing in the Philippines, or a domestic
corporation lawfully transacting business in
the Philippines, designated in a written power
of attorney by a foreign corporation
authorized to do business in the Philippines,
on whom any summons and other legal
processes may be served in all actions or
other legal proceedings against the foreign
corporation. (Sec. 127-128)

whether such corporation is entitled to


license

1.
2.
3.
4.
5.
6.
7.
8.
9.

CONTENTS
FOR
APPLICATION
OF
LICENSE
1. Date and term of incorporation
2. The address of the principal office in the
country of incorporation
3. The name and address of resident agent
4.
The place in the Philippines where it
intends to operate
5. The specific purpose or purposes
6. The names and addresses of the present
directors and officers of the corporation
1.
A statement of its authorized capital
stock
2. A statement of its outstanding capital
stock
3. A statement of the amount actually paid
in
4. Such additional information as may be
necessary to enable the SEC to determine

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GROUNDS FOR REVOCATION OF LICENSE


Failure to file annual reports required by
the Code;
Failure to appoint and maintain a resident
agent;
Failure to inform the SEC of the change of
residence of the resident agent;
Failure to submit copy of amended
articles or by-laws or articles of merger or
consolidation;
A misrepresentation in material matters in
reports;
Failure to pay taxes, imposts and
assessments;
Engage in business unauthorized by SEC;
Acting as dummy of a foreign corporation;
and
Not licensed to do business in the
Philippines. (Sec. 134)
TEST OF DOING OR TRANSACTING
BUSINESS IN THE PHILIPPINES:
The Corporation Code does not define the
phrase doing or transacting business.
A. Jurisprudential Test (Philippine Corporate
Law, Cesar Villanueva, 2001 ed.)
1. Twin characterization test
a) Whether the foreign corporation is
maintaining
or
continuing
in
the
Philippines the body or substance of the
business for which it was organized or
whether it has substantially retired from it
and turned it over another (Substance
Test); and
b) Whether there is continuity of
commercial dealings and arrangements,
contemplating to some extent the
performance of acts or works or the
exercise of some functions normally
incident to and in progressive prosecution
of, the purpose and object of its
organization (Continuity Test).
2. Contract Test
Whether the contracts entered into by the
foreign corporation, or by an agent acting

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
under the control and direction of the
foreign corporation, are consummated in
the Philippines.

c.
The
articles
of
merger
or
consolidation shall be executed by each
of the constituent corporations
d. Submission to the SEC for approval

M. MERGER AND CONSOLIDATION

e. The SEC may or may not conduct a


hearing
MERGER

CONSOLIDATION

One or more existing


corporations
are
absorbed by another
corporation
which
survives (A + B = A
or B)

Union of 2 or more
corporations to form
a new corporation
called
a
consolidated
corporation (A + B
= C)
Same

Parties
called
constituent
corporations
Absorbed corporation
dissolved
without
liquidation of assets

Absorbing
corporation acquires
all
assets
and
assumes liabilities of
the
absorbed
corporation
regardless
WON
creditors consented
Stockholders
of
absorbed corporation
becomes
stockholders
of
absorbing
corporation

All
constituent
corporation
are
dissolved
without
liquidation of assets;
consolidated
corporation survives
Consolidated
corporation acquires
all
assets
and
assumes liabilities f
constituent
corporations
regardless of WON
creditors consented
Stockholders
of
constituent
corporations
becomes
stockholders
of
consolidated
corporation

PROCEDURE:
a. The board of directors or trustees of
each corporation shall approve a plan of
merger or consolidation
b. The plan shall be submitted for
approval
by
the
stockholders
or
members of each of such corporation at
separate corporate meetings duly called
for the purpose

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f. Issuance of certificate of merger or


consolidation by the SEC
EFFECTS
OF
MERGER
CONSOLIDATION (Sec. 80)

OR

1. The constituent corporations shall become


a single corporation which, in case of merger
shall be the surviving corporation and, in the
case
of
consolidation,
shall
be
the
consolidated corporation;
2. The separate existence of the constituent
corporation shall cease, except that of the
surviving corporation;
3. The surviving or consolidated corporation
shall possess all rights, privileges, immunities
and powers and subject to all the duties and
liabilities of a corporation;
4. The surviving or consolidated corporation
shall thereafter possess all the rights,
privileges, immunities and franchises of each
of the constituent corporations;
5. All property, real or personal, and all
receivables due to, and all other interest of
each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation without
further act or deed;
6. The surviving or consolidated corporation
shall be responsible for all the liabilities and
obligations of each of the constituent
corporations;
7. Any claim, action or proceeding pending
by or against any of the constituent
corporations may be prosecuted by or
against the surviving or consolidated
corporations; and
8. The rights of the creditors or lien upon the
property of any of each constituent
corporation shall not be impaired by such
merger or consolidation.
GENERAL RULE: When one corporation buys
all the shares of another corporation, this will

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
not operate to dissolve the other corporation
and as the two corporations still maintaining
their separate corporate entities, one will not
answer for the debts of the other.

1.
2.
3.
4.

EXCEPTIONS AS TO NON-ASSUMPTION OF
LIABILITIES:
If there is an express assumption of liabilities;
If there is a consolidation or merger;
If the purchase was in fraud of creditors; and
If the purchaser is merely a continuation of
the seller.
DE FACTO MERGER
One corporation acquiring all or
substantially all of the properties of another
corporation in exchange for shares of stock of
the acquiring corporation. The acquiring
corporation would end-up with the business
enterprise of the selling corporation whereas
the latter would end up with basically its
remaining assets being the shares of stock of
the acquiring corporation and may then
distribute it as liquidating dividend to its
stockholders. (Philippine Corporate Law,
Cesar Villanueva, 2001 ed.)
MERGER and
CONSOLIDATION
Sale of assets
always involved

is

There is automatic
assumption
of
liabilities

There is continuance
of the enterprise and
of the stockholders

Title to the assets


are transferred by
operation of law
The
constituent
corporations
are
automatically

BAR OPERATIONS 2011

SALE OF
ASSETS
Merger/consolidat
ion is not always
involved
Purchasing
corporation is not
generally
liable
for the debts and
liabilities of the
selling
corporation
The
selling
corporation
ordinarily
contemplates
a
liquidation of the
enterprise
Transfer of title is
by
virtue
of
contract
The
selling
corporation is not
dissolved by the

Page 56

dissolved

mere transfer of
all its property

TYPES
OF
ACQUISITIONS
(Philippine
Corporate Law, Cesar Villanueva, 2001 ed.)
a. ASSETS-ONLY LEVEL
The purchaser is interested only in the raw
assets and properties of the business. He is
not interested in the entity of the corporate
owner of the assets nor of the goodwill and
other factors relating to the business itself.
The transferee would not be liable for the
debts and liabilities of his transferor since
there is no privity of contract over debt
obligations between the transferee and the
transferors creditors
b. BUSINESS-ENTERPRISE LEVEL
The transferee merely continues the same
business of the transferor since he obtains
the earning capability of the venture
The transferee is liable for the debts and
liabilities of the transferor
c. EQUITY LEVEL
The purchaser takes control and ownership of
the business by purchasing the shareholdings
of the corporate owner. What the purchaser
actually purchased is the ability to elect the
members of the board of the corporation who
run the business

INSURANCE
CONTRACT OF INSURANCE
Agreement whereby one undertakes
for a consideration to indemnify
another against loss, damage, or
liability arising from an unknown or
contingent event. (Sec. 2, par. 2)
A contract of suretyship shall also
be deemed an insurance contract if
made by a surety who or which is
doing an insurance business.
NATURE AND CHARACTERISTICS OF A
CONTRACT OF INSURANCE:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

ALEATORY
depends upon some
contingent event.
Contract of INDEMNITY for Non-Life
recovery is commensurate to the loss. It
is an investment in life insurance
secured by the insured as a measure of
economic security for him during his
lifetime and for his beneficiary upon his
death except one secured by the creditor
on the life of the debtor.
PERSONAL contract - insurer contracts with
reference to the character of the insured and vice
versa.
EXECUTORY & CONDITIONAL on part
of the insurer.
It is one of PERFECT GOOD FAITH
Contract of ADHESION insurance
companies manage to impose upon the
insured prepared contracts, which the
insured cannot change. Consequently,
they are to construed as follows:
(a)
In case there is no doubt as to the
terms of the insurance contract, it is
to be construed in its plain,
ordinary, and popular sense.
(b)
If doubtful, ambiguous, certain,
it is to be construed strictly against
the insurer and liberally in favor of
the insured because the latter has
no voice in the selection of the
words used, and the language used
is selected by the lawyers of the
Insurer (Qua Chee Gan vs. Law
Union Rock Ins. Co. Ltd. 52 OG
1982).

ELEMENTS OF AN INSURANCE CONTRACT


1. The insured should possess an interest
of
some
kind,
susceptible
of
pecuniary estimation known as
insurable interest. Generally a
person has insurable interest in the
subject matter insured when:
- He has such a relation or
connection with or concern
in, such subject matter that he
will derive pecuniary benefit
or
advantage
from
its
preservation or will suffer
pecuniary loss or damage
from
its
destruction,

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termination or injury by the


happening of the event insured
against.
It is necessary because its
absence renders the contract
void.

IN WHAT DOES A PERSON HAVE


INSURABLE INTEREST IN (LIFE)
1. Himself, his spouse and of his
children.
2. Any person on whom he depends
wholly or in fact for education or
support or in whom he has pecuniary
interest.
3. Any person under legal obligation to
him for the payment of money,
respecting property or services of
which death or illness might delay or
prevent performance.
4. Any person upon whose life, any
estate or interest vested in him
depends.
WHEN MUST INSURABLE INTEREST IN
LIFE EXIST
- Insurable interest in life must exist at
the time of the effectivity of the
policy and need not exist at the time
of the death of the insured as life
insurance is not a contract of
indemnity. It is meant to give
financial security to the insured
or his beneficiaries (Sec. 19).
However, insurable interest of a
creditor on the life of the debtor must
exist only at the time of effectivity but
also at the time of the death of the
debtor as in this instance it is a
contract of indemnity. His interest is
capable
of
exact
pecuniary
measurement.
IS THE CONSENT OF THE INSURED
REQUIRED WHEN INSURANCE IS TAKEN
-

The law does not require the consent


of the person insured and such has
been considered as not essential to
the validity of the contract as long as

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
there is insurable interest at the
beginning;
WHEN DOES A PERSON HAVE INSURABLE
INTEREST IN PROPERTY
A person has insurable interest in property as
every interest in property, whether real
or personal, or any relation thereto, or
liability in respect thereof, of such
nature that a contemplated peril might
directly damnify the insured is an
insurable interest (Sec. 13). It may consist
of:
(a)
(b)
(c)

An existing interest
An inchoate interest founded on
an existing interest
An expectancy coupled with an
existing interest in that out of
which the expectancy arises;

Note:
- Expectancy must be founded on an
actual right to the thing or a valid
contract for it;
- A carrier or depository of any kind has
insurable interest in the thing held by
him such to the extent of his liability
but not to exceed the value thereof
(Sec. 13, 14, and 15).
-

But,
a
mere
contingent
or
expectant interest in anything, not
founded on contract or actual right
to the thing is not insurable as
there is no insurable interest (Sec.
16).

INCHOATE RIGHT The right to lay claim on


the fun is dependent on the solvency of the
insurer and is subject to all other obligations
of the company arising from its insurance
contracts. Thus, the respondents interest is
merely inchoate. Being a mere expectancy, it
has no attribute of property. At this time, it is
nonexistent and may never exist. Hence, it
would be premature to make the security
deposit answerable for CISCOs present
obligation to Del Monte Motors. (Republic of
the Philippines v. Del Monte Motors, Inc.,
Oct.9, 2006 G.R. No. 156956)

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INSURABLE
INTEREST
DEPOSITS
BAR EXAM; 2000 (VIII - b)

IN

BANK

Q: BD has bank deposit of half a million


pesos.Since the limit of trhe insurance
coverage of the Philippine Deposit
Insurance Corp Act ( 3591) is only one
tenth of BDs deposit, he would like
some protection for the excess by
taking out an insurance against all risks
or contingencies of loss arising from any
unsound or unsafe banking practices
including unforeseen adverse effects of
the continuing crisis involving the
banking and financial sector in Asia.
Does BD have insurable interest within
the meaning of the Insurance Code?
A: Yes, BD has insurable interest in his bank
deposit. In case of loss of said deposit, more
particularly to the extent of the amount in
excess of the limit covered by the Philippine
Deposit Insurance Corporation Act, BD will be
damnified. He will suffer pecuniary loss of
P400,000.00, that is, his bank deposit of half
a million pesos minus P100,000.00 which is
the maximum amount recoverable from the
PDIC.
MUST THE BENEFICIARY IN PROPERTY
HAVE INSURABLE INTEREST ON THE
PROPERTY INSURED?
- YES, as no contract or policy of
insurance on property shall be
enforceable. Except for the benefit of
some
person
having
insurable
interest in the property insured.
COMPARE WITH INSURABLE INTEREST IN
LIFE: 2002 BAR EXAM (N0.XVII)
INSURABLE
INTEREST IN
LIFE
Must exist only at
the time the
policy takes
effect and need
not exist at the

INSURABLE
INTEREST IN
PROPERTY
Must exist at the
time the policy
takes effect and
when the loss
occurs

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
time of loss
Unlimited except
in life insurance
effected
by
creditor on life of
debtor.
The expectation
of benefit to be
derived from the
continued
existence of life
need not have
any legal basis
whatever.
A
reasonable
probability
is
sufficient without
more.
The
beneficiary
need not have an
insurable interest
over the life of
the insured if the
insured
himself
secured
the
policy. However,
if
the
life
insurance
was
obtained by the
beneficiary, the
latter must have
insurable interest
over the life of
the insured.

change of interest by will or succession; and


4) transfer of interest by a partner, joint
owner, or common owner, to another partner,
joint owner or common owner.

Limited to actual
value of interest
in
property
insured.

Bar Exam (1980):


Q: A insures his house for P 10, 000
commencing January 1, 1952.
On
February 15, 1952, A sells the house to
B for P15,000 without endorsing or
transferring the fire policy to B.
On
April 20, 1952, the house is completely
destroyed on account of the accidental
fire. Can A or B collect the proceeds of
the policy from the insurer? Explain and
give reasons for your answer. (1952,
1959, 1980 Bar)

An expectation of
a benefit to be
derived from the
continued
existence of the
property insured
must have a legal
basis.

The
beneficiary
must
have
insurable interest
over the thing
insured.

A: Neither A, the seller, nor B, the buyer, can


collect under the policy. A transfer of interest
in property without any transfer of interest in
the insurance suspends the latter until the
interest in the property and in the insurance
is vested in the same person.
A has
transferred his interest in the object of the
insurance (the house) to B without a transfer
of his interest in the insurance to B. As the
interests in the object and in the insurance
are in different persons at the time of the
loss, none can recover under the policy.
WHAT CHANGE IS CONTEMPLATED
An absolute transfer of the property
not life, a lease/mortgage.

CHANGE OF INTEREST IN PROPERTY


INSURED (Transfer or Sale of Insured
Property) (1994 & 2000 Bar Exams)
A change of interest in any part of a
thing
insured
unaccompanied
by
a
corresponding change of interest in the
insurance suspends the insurance to an
equivalent extent, until the interests in the
thing and the interest in the insurance are
vested in the same person. (Sec. 20)
Exceptions: 1) change of interest
after the loss; 2) change of interest in one or
more of several things separately insured; 3)

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Page 59

EXCEPTIONS TO THE REQUIREMENTS OF


INSURABLE INTEREST:
(1)

(2)

(3)

Life, health or accident insurance


because they are not contracts of
indemnity and insurable interest is not
required at the time of loss;
A change of interest after occurrence
of an injury and results in loss does
not affect the right of the insured to
indemnity;
- After a loss, the liability of the insurer
is fixed;
A change of interest in one or more
several distinct things, separately
insured by one policy, does not avoid
as to the others; (Sec. 22)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(4)

(5)

(6)
(7)

A change of interest in one or more


several distinct things, separately
insured by one policy, does not avoid
the insurance as to the insured; (Sec.
23)
A transfer of interest by one or several
partners, joint owners, or owners in
common, who are jointly insured to
the others, does not avoid insurance
even though it has been agreed that
the insurance shall lease upon an
allocation of the thing insured;
When notwithstanding a prohibition,
the consent of the insurer is obtained;
and
When the policy is so framed that it
will
insure
to
the
benefit
of
whomsoever may become the owner
during the continuance of the risk.

CONTINUATION OF ELEMENTS:
1. Insurable interest;
2. The insured is subject to risk of loss
through the destruction or impairment
of that interest by the happening of
the designated risk;
3. The insurer assumes the risk of loss;
4. Such assertion is part of a general
scheme to distribute actual loss
among a large group of persons
bearing somewhat similar risk;
5. As a consideration for the insurers
promise, the insured makes a ratable
contribution called a premium to the
general insurance fund;
WHAT MAY BE INSURED AGAINST
Any unknown or contingent event,
whether past or future, which may damnify a
person having insurable interest or create a
liability against him, may be insured against
(Sec. 3).
NOTE: IN RELATION TO THE INSURANCE
SO SECURE
1. The consent of the husband is not
necessary for the validity of an insurance
policy taken by a married woman on her
life and that of her children. Under Art.
145 of the Family Code, she can also

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Page 60

insure her separate property without the


consent of the husband.
2. A minor may take out a contract for life,
health and accident insurance with any
company authorized to do business in the
Philippines, provided it be taken out on
his own life and the beneficiary named is
his estate, father, mother, husband, wife,
child, brother or sister. In so doing, the
married woman/minor may exercise all
the rights or privileges under the policy.
But What is the effect of the death of the
original owner of a policy, which covers the
life of a minor, ahead of the minor? all
rights, title and interest in the policy shall
automatically vest in the minor unless
otherwise provided in the policy;
WHAT CANNOT BE INSURED
An insurance for or against the
drawing of any lottery or for or against any
chance or ticket in a lottery drawing or prize.
Because gambling results in profit and
insurance only seeks to indemnify the
insured against loss (Sec. 4).
PARTIES TO A CONTRACT OF
INSURANCE:
1. INSURER every person, partnership,
association or corporation duly authorized
to transact insurance business as
provided in the code may be an insurer. It
is the party who agrees to indemnify
another upon the happening of specified
contingency.
2. INSURED party to be indemnified in
case of loss (Sec. 6). Anyone except a
public enemy (a nation at war with
Philippines and every citizen subject of
such nation.
BAR EXAM; 2000 (VIII - a)
Q: May a member of the Moro Islamic
Liberation Front (
MILF ) or its
breakaway group, the Abu Sayaff, be
insured with a company licensed to do
business under the Insurance Code of
the Philippines? Explain.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
A: A member of the MILF or the Abu Sayyaf
may be insured with a company licensed to
do business under the Insurance Code of the
Philippines. What is prohibited to be insured
is a public enemy. A public enemy is a citizen
or national of a country with which the
Philippines is at war. Such member if the
MILF or the Abu Sayyaf is not a citizen or
national of another country, but of the
Philippines.
WHO MAY INSURE A MORTGAGED
PROPERTY
Both
the
mortgagor
and
the
mortgagee may take out separate policies
with the same or different companies. The
mortgagor to the extent of his property,
the mortgagee to the extent of his credit;
(Sec. 8)
INSURANCE INTEREST ON MORTGAGED
PROPERTY (2005 BAR EXAM (N0. X - 2a)
Armando Geagonia v. CA 241 SCRA 154
SC:

Condition 3 is what is known as


other insurance clause which is a valid
provision allowed by the insurance code in
order to prevent in an increase in the moral
hazard and to serve as a warranty that no
other insurance exists. Its incorporation in fire
policies prevents over insurance and adverts
the perpetration of fraud. Its violation will
thus avoid the policy. However, in order to
constitute a violation, the other insurance
must be upon the same subject matter, the
same interest therein, and the same risk.
Double insurance exists where the
same person is insured by several insurers
separately in respect of the same subject and
interest.
The court ruled that since the stocks
in trade insured with PFIC were mortgaged
property, separate insurances covering
different insurable interests may be obtained
by the mortgagor and mortgagee. The
insurable interests of a mortgagor and
mortgagee are separate and distinct, thus no

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Page 61

double insurance exists since the policies of


PFIC do not cover the same interest as that
covered under the policy of Country Bankers
Insurance Corp. The non-disclosure of the
policies with PFIC was not fatal to Armandos
right to recover on his policy with Country
Bankers Insurance Corp.
WHAT ARE THE CONSEQUENCES WHERE
THE
MORTGAGOR
INSURES
THE
PROPERTY MORTGAGED IN HIS OWN
NAME BUT MAY THE LOSS PAYABLE TO
THE MORTGAGEE OR ASSIGNS THE
POLICY TO HIM:
a. The insurance is still deemed to be upon
the interest of the mortgagor who does
not cease to be a party to the original
contract. Hence, if the policy is
cancelled, notice must be given to the
mortgagor.
b. Any act of the mortgagor, prior to loss,
which would otherwise avoid the policy
or insurance, will have the same effect
although the property is in the hands of
the mortgagee. Hence, if there is a
violation of the policy by the mortgagor,
the mortgagee cannot recover.
c. Any act required to be done by the
mortgagor may be performed by the
mortgagee with the same effect if it has
been performed by the mortgagor.
d. Upon the occurrence of the loss, the
mortgagee is entitled to recover to the
extent of his credit and the balance if
any to be paid to the mortgagor, since
such is for both their benefits;
e. Upon recovery by the mortgagee, his
credit is extinguished;
Note: Union Mortgage Clause creates
the relation of insured and insurer between
mortgagee and the insurer independent of
the contract of the mortgagor. In such case,
any act of the mortgagor can no longer affect
the rights of the mortgagee the insurance
contract is now independent of that with the
mortgagor;
WHAT IS THE EFFECT OF INSURANCE
PROCURED
BY
THE
MORTGAGEE

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
WITHOUT REFERENCE TO THE RIGHT OF
THE MORTGAGOR

participation of Gemma Rivera in the


killing of Antonio Rivera? Discuss with
reasons.

a. The mortgagee may collect from the


insurer upon the occurrence of the loss to
the extent of his credit.
b. Unless otherwise stated, the mortgagor
cannot collect the balance of the
proceeds after the mortgagee is paid.
c. The insurer, after payment to the
mortgagee, becomes subrogated to the
rights of the mortgagee against the
mortgagor and may collect the debt to
the extent paid to the mortgagee.
d. The mortgagee after payment cannot
collect anymore from the mortgagor but if
he is unable to collect in full from insurer,
he can recover from the mortgagor.
e. The mortgagor is not released from the
debt because the insurer is subrogated in
place of the mortgagee.

A: Sec. 12: The interest of a beneficiary in a


life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice,
or accessory in willfully bringing about the
death of the insured; in which event, the
nearest relative of the insured shall receive
the proceeds of said insurance if not
otherwise disqualified. Thus, the insurance
company must still pay out the proceeds of
the life insurance policy to the nearest
qualified relative of the insured.
Those made to a public officer or his wife,
descendants/ascendants by reasons of his
office.
-

3. BENEFICIARY the person who receives


the benefits of an insurance policy upon
maturity.
BENEFICIARIES IN LIFE INSURANCE
Anyone, except who are prohibited by
law to receive donations from the
insured. Note Art. 739 of the Civil
Code, hence the following cannot be
designated as beneficiaries.
Those made between persons guilty of
adultery or concubinage at the time of
the designation.
Those guilty of the same criminal
offense in consideration thereof.
BAR EXAM (2008)
Q: On January 1, 2000, Antonio Rivera
secured a life insurance from SOS
Insurance Corp. for P1 Million with
Gemma Rivera, his adopted daughter, as
the beneficiary. Antonio Rivera died on
March 4, 2005 and in the police
investigation, it was ascertained that
Gemma Rivera participated as an
accessory in the killing of Antonio
Rivera. Can SOS Insurance Corp. avoid
liability by setting up as a defense the

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Page 62

A
prior
conviction
for
adultery/concubinage
is
not
required, it can be proven by
preponderance of evidence in the
same
action
nullifying
the
designation. Note the cases of Insular
Life vs. Ebrado, 80 SCRA 181, where a
common law wife of the insured who
is married could not be named as a
beneficiary and SSS vs. Davac, 17
SCRA
863,
where
the
insured
designated his second wife as a
beneficiary was upheld as the latter
was not aware of the first marriage.

Beneficiary
in
life
and
insurance (BAR EXAMS; 2005)

property

Philippine American Life Insurance


Company v. Pineda (175 SCRA 416)
SC:

Under the law, the beneficiary


designated in a life insurance contract cannot
be changed without his or her consent
because of the beneficiarys vested interest
in the policy. In this regard, it is worth nothing
that the beneficiary designation indorsement
which forms part of the policy in the name of
Rodolfo Dimayuga states that the designation
of the beneficiaries is irrevocable and no right
or privilege under the policy may be

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
exercised, or agreement made with the
insurance company to any change in or
amendment to the policy without the consent
of the said beneficiary. Accordingly, based on
the provisions of the contract and the law
applicable, it is only with the consent of all
the beneficiaries that any change or
amendment to the policy concerning the
irrevocability of beneficiaries may be legally
and validly effected.
Insurable interest on property
(BAR EXAMS, 2009)
Spouses Nilo Cha v. CA Aug. 18, 1997
SC:
1. The lessor cannot validly be a beneficiary
of the fire insurance policy taken by the
spouses Cha. It has no insurable interest
on the merchandize insured because it
remains with the spouses.
2. The automatic assignment of the policy to
the lessor is void for being contrary to law
and public policy. The proceeds of the fire
insurance policy rightfully belong to the
Sps. Cha.
3. The insurer cannot be compelled to pay
the proceeds of the policy to the lessor
who has no insurable interest on the
property insured.
CAN THE BENEFICIARY BE CHANGED
- The insured shall have the right to
change the beneficiary he designated
unless he has expressly waived the
right in the policy (Sec. 11);
- If he has waived the right, the effect
is to make the designation as
irrevocable. Note that the designation
of the guilty spouse as irrevocable
beneficiary is revocable as the
instance of the innocent spouse in
cases of termination of:
(1)
a subsequent marriage;
(2)
nullification of marriage;
(3)
annulment of marriage; and
(4)
legal separation (Art. 34, (4)
Family Code

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WHAT IS THE EXTENT OF THE INTEREST


OF THE IRREVOCABLE BENEFICIARY IN A
LIFE INSURANCE CONTRACT
The beneficiary has a vested right that
cannot be taken away without his consent. In
fact should the insured discontinue payment
of the premium, the beneficiary may continue
paying. Neither can the insured get a loan or
obtain the cash surrender value of the policy
without his consent (Nario vs. Philamlife,
20 SCRA 434).
Note: Where the wife and minor children
were named irrevocable beneficiaries, wife
dies, the husband seeks to change the
beneficiaries with the consent of the children.
The consent is not valid due to minority.
(Philamlife vs. Pineda, 170 SCRA 416)
BAR EXAM; 2005 (NO. IX -1)
Q: What are the effects of an irrevocable
designation of a beneficiary under the
Insurance Code? Explain.
A: The irrevocable beneficiary has a vested
interest in the policy, including its incident
such as the policy loan and cash surrender
value. (Grogorio v. Sun Life Assurance
Company of Canada, 48 Phil. 53 [1925])
2005 BAR EXAM (NO. IX- 2)
Q: Jacob obtained a life insurance policy
for P1 Million designating irrevocably
Diwata, a friend, as his beneficiary.
Jacob, however, changed his mind and
wants Yob and Jojo, his other friends, to
be included as beneficiaries considering
that the proceeds of the policy are
sufficient for the three friends.Can Jacob
still
add
Yob
and
Jojo
as
his
beneficiaries? Explain.
A: The insured cannot add other beneficiaries
as this would diminish the interest of Diwata
who is the irrevocably designated beneficiary.
The insured can only do so with the consent
of Diwata.
WHAT IS THE INTEREST OF AN
IRREVOCABLE BENEFICIARY IN AN
ENDOWMENT POLICY

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
His interest is contingent as benefits
are to be paid only if the assured dies before
the specified period. If the insured outlives
the period, the benefits are paid to the
insured.
WHAT IS THE EFFECT OF FAILURE TO
DESIGNATE
OR
BENEFICIARY
IS
DISQUALIFIED
The benefits of the policy shall accrue
to the estate of the insured.
WHO
RECOVERS
IF
BENEFICIARY
PREDECEASES THE INSURED

If designation is irrevocable, the legal


representatives of the beneficiary may
recover unless it was stipulated that the
benefits are payable only if living.
If revocable, and no change is made,
the benefits passes to the estate of the
insured. The rule holds also if benefits
were payable only if living or if
surviving and the beneficiary dies
before the insured.

CONCEALMENT

WHO MUST PROVE KNOWLEDGE OF THE


FACT CONCEALED?
The party claiming existence of
concealment must prove that there was
knowledge on the part of the party charged
with concealment.
AS OF WHAT TIME MUST THE PARTY
CHARGED WITH CONCEALMENT HAVE
KNOWLEDGE OF THE FACT CONCEALED
-

Neglect to communicate that which a


party
knows
and
ought
to
communicate (Sec. 26).
EFFECT OF CONCEALMENT
Whether intentional or not, it entitles
the injured party to rescind the contract of
insurance (Sec. 27).
2001 BAR EXAM (N0.XVI)
Q: A applied for a non-medical life
insurance. The insured did not inform
the insurer that one week prior to his
application for insurance, he was
examined and confined at St. Lukes
hospital where he was diagnosed for
lung cancer. The insured soon thereafter
died in a plane crash. Is the insurer
liable
considering
that
the
fact
concealed had no bearing with the
cause of death of the insured? Why?

BAR OPERATIONS 2011

A: No. The concealed fact is material to the


approval and issuance of the insurance policy.
It is well settled that the insured need not die
of the disease he failed to disclose to the
insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimate of
the risks of the proposed insurance policy or
in making inquiries.

Page 64

Generally, at the time of the


effectivity of the policy. Note that
even if a party did not know of the
existence at the crime of application
but before its effectivity, there is
concealment.
Information acquired after
effectivity is not concealment
and does not constitute ground
to rescind the policy, as after the
policy
is
issued,
information
subsequently acquired is no longer
material as it will not affect or
influence the party to enter into
contract. However, in case of the
reinstatement of a lapsed policy,
facts known after effectivity but
before
reinstatement
must
be
disclosed.

HOW IS THE
CONCEALMENT
DETERMINED?

MATERIALITY OF THE
OR
REPRESENTATION

Determined not by the event, but


solely by the probable and reasonable
influence of the facts upon the party to whom
the communication is due, in forming his
estimate of the disadvantages of the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
proposed contract or in making his inquiries.
(Sec. 31)
MUST THERE BE A CAUSAL CONNECTION
BETWEEN THE FACT CONCERNED AND
THE CAUSE OF THE LOSS?
Not necessary. It is sufficient that the nonrevelation has misled the insurer in
forming its estimate of disadvantage of
fixing the premium.
WHAT FACTS MUST BE COMMUNICATED?
(a)

Such fact within his knowledge


as concealment requires knowledge of
the fact concealed by the party
charged with concealment.
(b)
Fact/s material to the contract it
must be of such nature that had the
insurer known of it, it would not have
accepted the risk or demanded a
higher premium.
(c)
That the other party had no
means
of
ascertaining
such
fact/s.
(d) That the party with a duty to
communicate makes no warranty
(Sec. 28) as the existence of a warranty
make the requirement to disclose
superfluous
but

an
intentional
fraudulent omission on the part of the
one insured to communicate information
on a matter proving or tending to prove
falsity of a warranty entitles the insurer to
rescind. (Sec. 29)
1996, 1997, and 2001 BAR EXAMS
Sun Life Assurance Co. of Canada vs.
CA, June 22, 1995

The SC reversed the ruling and held


that the information which the insured failed
to disclose was material and relevant to the
approval and issuance of the policy. The
facts concealed would have affected the
insurers action on the application either by
charging a higher rate of premium or
rejecting the same. The insured need not die
of the disease he concealed. It is sufficient
that his non-disclosure misled the insurer in
forming his estimate of the risk involved or
in making inquiries. The contract of
insurance can be rescinded by reason of
concealment and this has to be exercised
within the two year contestability period.
REPRESENTATION
Oral or written statement of a fact or a
condition affecting the risk made by the
insured to the insurance company,
tending to induce the insurer to take the
risk. (Sec. 36)
WHEN MAY REPRESENTATION BE MADE
Since it is an inducement to entering a
contract it must ordinarily be made at the
same time as or before the insurance of the
policy (Sec. 37). Note that it can also be
made after the issuance of the policy when
the purpose thereof is to induce the insurer to
modify an existing insurance contract as
the provisions also apply to a modification
(Same with concealment)
FORMS AND KINDS OF REPRESENTATION
It may be Oral or Written and can either be:

Robert Bacani was issued life insurance nonmedical policy for P100,000.00 with his
mother as beneficiary. In his application, he
concealed his confinement at the Lung
Center of the Philippines for certain illness.
He died of a plane crash. The insurance
company refused to pay for breach of the
insurance contract.RTC and CA granted the
claim of the beneficiary because the
concealed facts were not material or
irrelevant to the cause of death.

BAR OPERATIONS 2011

SC:

Page 65

(a)
(b)

Affirmative an affirmation of a
fact existing when the contract
begins.
Promissory statement by the
insured concerning what is to
happen during the term of the
insurance.

IS A REPRESENTATION PART OF THE


CONTRACT
No, it cannot qualify as an express
provision in a contract (it is a collateral

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
inducement to the contract but it may qualify
an implied warranty. (Sec. 40)

was held to apply only when there is a


contract to rescind.

CAN
A
REPRESENTATION
WITHDRAWN OR ALTERED

It
is
also
qualified
by
2nd
paragraph of Section 48 which provides
that after a policy of life insurance payable on
the death of the insured shall have been in
force during the lifetime of the insured for a
period of 2 years from the date of issue or its
last reinstatement, the insurer cannot prove
that the policy is void ab initio or is subject to
rescission by reason of a fraudulent
concealment or misrepresentation of the
insured or his agent (known as the
incontestability clause).

BE

Yes, as long as the insurance has not


yet been effected and the insurer has not yet
been induced to issue the policy. If withdrawn
or altered afterwards, the contract can be
rescinded as the insurer has already been led
to issue the policy. (Sec. 41)
TO
WHAT
DATE
REPRESENTATION REFER

DOES

It must be presumed to refer to the date


on which the contract goes into effect. (Sec.
42)
Note: There is no false representation if it is
true at the time the contract takes effect
although false at the time it is made.

WHAT IS THE THEORY AND OBJECT


BEHIND THE INCONTESTABILITY CLAUSE
(a)

WHEN IS THE INSURED REQUIRED TO


DISCLOSE INFORMATION FROM A 3RD
PERSON
When the information material to the
transaction was acquired by an agent of the
insured, as knowledge of the agent is also
knowledge of the principal.

(b)

WHAT
IS
THE
EFFECT
OF
MISREPRESENTATION ON A MATERIAL
POINT?
If it is false on material point, whether
affirmative or promissory the injured party
is entitled to rescind the contract from the
time the representation becomes false.
However, the right to rescind is considered
waived by the acceptance of premium
payments despite knowledge of the ground
to rescind. (Sec. 45)
WHEN IS THE RIGHT TO
SUPPOSED TO BE EXERCISED

BAR OPERATIONS 2011

REQUISITES
CLAUSE
(1)
(2)
(3)

RESCIND

It is exercised previous to the


commencement of an action on the contract
(Sec. 48). Note the case of Tan Chay Hing
vs. West Coast Life Insurance Co., 51
Phil 80, where an insurer interposed the
defense in an action to claim the proceeds
that the contract is null and void. Section 48

Page 66

On the part of the insurer an


insurer
has/should
have
a
reasonable
opportunity
to
investigate the statements which
are made by the applicant an that
after a definite period, it should no
longer be permitted to question its
validity.
On part of the insured its
object is to give the greatest
possible
assurance
that
the
beneficiaries
would
receive
payment of the proceeds without
question as to validity or the
policy.
OF

INCONTESTABILITY

It is a life insurance policy;


It is payable on the death of the
insured;
It has been in force during the
lifetime of the insured for at least
two years from date of issue/or
last reinstatement.

WHAT DEFENSES ARE NOT BARRED BY


INCONTESTABILITY EVEN AFTER THE
LAPSE OF 2 YEARS?
(1)
(2)

non-payment of premiums;
lack of insurable interest;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(3)
(4)

(5)
(6)
(7)

that the cause of death was


excepted or not covered by the
terms of the policy;
that the fraud was of a particular
vicious type such as:
a. policy was taken in furtherance
of a scheme to murder the
insured;
b. where the insured substituted
another
for
the
medical
examination;
c. where
the
beneficiary
feloniously killed the insured;
violation of a condition in the
policy relating to military or naval
service in time of war;
the necessary notice or proof of
death was not given;
action is not brought within time
specified in the policy, which in no
case should be less than 1 year as
per Sec. 63.

CONCEALMENT
COMPARED

AND

REPRESENTATION

1. In concealment the insured


withholds information of material
facts, while in representation the
insured makes erroneous statements;
2. In
concealment
and
misrepresentation both give the
insurer the right to rescind the
contract of insurance;
3. The materiality of concealment and
representation are determined by the
same rules;
4. Whether
the
concealment
or
representation is intentional or not,
the injured party can rescind;
5. Since insurance contracts are of
utmost good faith the insurer is also
covered by the rules.
POLICY
It is the written instrument in which a
contract of insurance is set forth.
(Sec. 49)

(1)
(2)
(3)

(4)
(5)
(6)
(7)

COVER NOTES
It is a written memorandum of the
most important terms of a preliminary
contract of insurance intended to give
protection pending investigation by
the insurer of the risk or until the
insurance of the formal policy (Sec.
52). It is also known as binding slip
or receipt or binder.
EFFECTIVITY OF A COVER NOTE
The effectivity of a cover note is 60
days as within such period, a policy shall be
issued including in its terms the identical
assurance found under the cover rate and the
premium therefore. It may however, be
extended beyond 60 days and with the
written
approval
of
the
Insurance
Commissioner if he determines that it does
not violate the Insurance Code.
NOTE THE FOLLOWING RULES HAVE
BEEN PROMULGATED BY THE INSURANCE
COMMISSIONER:
(1)

WHAT MUST A POLICY SPECIFY?


A policy must specify:

BAR OPERATIONS 2011

(2)

Page 67

The parties whom the contract is


made;
The amount to be insured except
in open or running policies;
The premium, or if the premium is
to
be
determined
at
the
termination of the contract, a
statement of the basis and rates
upon which the final premium is to
be determined;
The property or life insured;
The interest of the insured in the
property insured, if not the
absolute owner;
The risks insured against;
The period during which the
insurance is to continue. (Sec. 51)

A cover note is valid for 60 days


whether or not a premium is paid
but may be cancelled by either
party upon at least 7-day notice to
the other party.
If the other note is not cancelled,
a regular policy must be issued

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

(3)

(4)

within 60 days from the date of


issue of the cover note including
within its terms the identical
insurance.
It may be extended with the
written
approval
of
the
commissioner
but
may
be
dispensed with by a certification
of the President, Vice-President or
General Manager of the insurer
that the risks involved and the
extension do not violate the code.
Insurance companies may impose
a deposit premium equivalent to
at least 25% of the estimated
premium but in no case less than
Php500.00.

IS PAYMENT OF A PREMIUM PAYMENT


FOR THE COVER NOTE NECESSARY TO BE
PROTECTED AGAINST RISK INSURED
AGAINST?
Cover note held to be binding despite
the absence of a premium payment for its
issuance. No separate premiums are intended
or required to be paid on a cover note
because they do not contain particulars
of the property insured that would serve
as the basis for the computation of
premiums such being the case no
premium can be fixed. The cover notes
should not be treated as a separate policy
but should be integrated in the regular policy
subsequently issued so that premiums on the
regular policy should include that for the
cover note (Pacific Timber vs. CA, 112
SCRA 199);
BAR EXAM; 2009 (IV)
Q: Antarctica Life Assurance Corporation
(ALAC) publicly offered a specially
designed insurance policy covering
persons between the ages of 50 to 75
who may be afflicted with serious and
debilitating illnesses. Quirico applied for
insurance coverage, stating that he was
already 80 years old. Nonetheless, ALAC
approved his application.Quirico then
requested ALAC for the issuance of a
cover note while he was trying to raise
funds to pay the insurance premium.

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Page 68

ALAC granted the request. Ten days


after he received the cover note, Quirico
had a heart seizure and had to be
hospitalized. He then filed a claim on
the policy.
a. Can ALAC validly deny the claim
on the ground that the insurance
coverage, as publicly offered, was
available only to persons 50 to 75 years
of age? Why or why not? (2%)
b. Did ALACs issuance of a cover
note result in the perfection of an
insurance contract between Quirico and
ALAC? Explain.
A: a. No. There was no concealment on the
part of Quirico as to his age.
b. Yes, one of the exception of the cash and
carry rule is in life insurance when the grace
period applies. in the case at bar, the
issuance of the cover note shows that the
insurer granted a grace period.
WHOSE INTEREST IS INSURED
(1)

The insurance proceeds shall be


applied exclusively to the proper
interest of the person in whose name
or for whose benefit it is made unless
otherwise specified in the policy (Sec.
53).

MAY A 3RD PERSON SUE THE INSURER


No, in general rule unless there is stipulation.
Unless otherwise specified in the policy, a 3 RD
person may sue if:
(a)

(b)

The insurance contract contain


stipulation in favor of a 3RD
person, the latter though not a party
may sue to enforce before the contract
is revoked by the parties;
The insurance contract provides
for indemnity against liability to
3RD persons.
The
test
to
determine
whether a 3rd person may directly
sue the insurer of the wrongdoer
is: if the contract provides indemnity

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
against liability to 3RD persons, then the
latter to whom the insured is liable
may directly sue the insurer, on the
other hand, if the insurance if for the
indemnity against actual loss or
payment then the 3rd person cannot
sue the insurer recourse is against
the insured alone.
(2)

(3)

(4)

(5)

(6)

If the contract is executed with an


agent or trustee as the insured, the
fact that his principal or beneficiary is
the real party in interest may be
indicated by describing the insured as
the agent/trustee or by general words
in the policy (Sec. 54). If not
indicated, it is as if the insurance is
the taken out by the agent/trustee
alone, consequently the principal has
no right against the insurer;
If a partner or part owner effects
insurance, it is necessary that the
terms of the policy should be such as
are applicable to the joint or common
interest so that it may be applicable
to
the
interest
of
his
copartners/owners
(Sec.
55).
Consequently, the policy must state
that the interest of all is insured, if
not, it is only the interest of the one
getting the policy that is insured;
When the description of the insured in
the policy is so general that it may
comprehend any person or any class
of persons, only he who can show that
it was intended to include him can
claim the benefit of the policy (Sec.
56).
When a policy is so framed that it will
inure to the benefit of whomsoever,
during the continuance of the risk may
become the owner of the interest
insured (Sec. 57). The proceeds
become payable to who may be the
owner at the time the loss or injury
occurs. This is an exception to Sec. 20.
The mere transfer of a thing insured
does not transfer the policy but

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suspends it until the same person


becomes the owner of both the policy
and the thing insured (Sec. 58). Note
the exceptions to this rule as found in
Sec. 20-24 and 57.
KINDS OF INSURANCE POLICIES:

Open Policy - value of the thing


insured is not agreed upon, but is
left to be ascertained in case of
loss (Sec. 60). What is mentioned,
as the amount is not the value of
the property but merely the
maximum limit of the insurers
liability. In case of loss, the insurer
only pays the actual cash value at
the time of loss.

Valued Policy - expresses on its


face that the thing insured shall be
valued at a specified sum (Sec. 61).
The valuation of the property
insured is conclusive between the
parties. In the absence of fraud or
mistake, such value will be paid in
case of a total loss.

Running Policy (Floating Policy)


-contemplates
successive
insurances and which provides that
the object of the policy may be
from
time
to
time
defined
especially as to the subjects of
insurance,
by
additional
statements or indorsements (Sec.
62). This is also known as a
Floating Policy usually issued to
provide indemnity for property,
which cannot be covered by
specific insurance because of a
frequent change in location and
quantity.

VALUED POLICY vs. OPEN POLICY


VALUED POLICY

OPEN POLICY

Proof of value of the


thing after the loss
is not necessary.

Insured must prove


the value of the
thing insured.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Parties
have
conclusively
stipulated that the
property insured is
valued
at
a
specified sum.

Value is not agreed


but
left
to
be
ascertained
upon
loss.

(1)
(2)

CAN THERE BE AGREEMENTS AS TO


PRESCRIPTION OF AN ACTION OR
LIMITATIONS ON THE PERIOD OF TIME
TO BRING AN ACTION
Yes, provided the period agreed upon
should not be less than one year (Section
63). If less than one year, the agreement is
void. The period so agreed shall be
considered as having commenced from the
time the cause of action accrues. Usually, the
cause of action accrues from the date of
the insurers rejection of the claim of the
beneficiary or of the insured since before
rejection there is no necessity to bring suit.
When no period is stipulated or if the
stipulation is void, the period is within 10
years under article 1144, New Civil Code, it
being a written contract (Eagle Star vs. Chia
Yu 96 Phil 696, ACCFA vs. Alpha Insurance, 24
SCRA 151).

(3)
(4)
(5)
(6)

The action may be filed in the


following:
(1)
(2)

Courts;
Insurance Commissioner, who has
concurrent jurisdiction with courts
for
claims
not
exceeding
Php100,000.00;
(3)
POEA/DOLE have the power to
compel a surety to make good on
a solidary undertaking in the same
proceeding where the liability of
the
principal
obligor
is
determined.
Note that the claim becomes action upon
filing with the court.
CANCELLATION OF THE POLICY
If policy other than life shall be cancelled by
the insurer except upon prior notice

Page 70

Non payment of premium;


Conviction of a crime arising out
of acts increasing the hazard
insured against
Discovery
of
material
representation;
Discovery of willful or reckless
acts or omissions increasing the
hazard insured against;
Physical changes in the property
insured which the result in the
property being uninsurable;
Determination by the insurance
commissioner that continuation of
the policy would place the insurer
in violation of the code:

FORM OF NOTICE OF CANCELLATION


It must be in writing, mailed or
delivered to the name insured at the address
shown in the policy which shall state:
(1)
(2)

WHERE IS THE ACTION FILED

BAR OPERATIONS 2011

thereof to the insured. No notice of


cancellation shall be effective if not
based on the occurrence, after effective
date of one or more grounds: (Section
64)

The grounds relied upon as per


Section 64, and;
That upon written request of the
named insured, the insurer will
furnish the facts on which
cancellation is based (Sec. 65).

WARRANTIES
It is a statement or promise stated in the
policy or incorporated therein by
reference, whereby the insured
expressly or impliedly (Section 67)
contracts as to the past, present or future
(Section 68) existence of certain facts,
conditions or circumstances the literal
truth of which is essential to the validity
of the contract.
KINDS OF WARRANTIES

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(1)

(2)

(3)

Affirmative those that relate to


matters that exist at or before
the issuance of the policy;
Promissory those where the
insured promises or undertakes
that certain matters shall exist or
will be done or will be omitted
after the policy takes effect. It is a
statement in the policy, which
imparts that it is intended to do or
not to do a thing which materially
affects the risk, is a warranty that
such act or omission shall take
place (Section 72);
Express a statement in a policy
of a matter relating to the person
or thing insured or to the risk as a
fact (Section 71) and where the
assertion or promise is clearly set
forth in the policy or incorporated
therein by reference. They can be
affirmative
or
promissory
warranties;

EFFECT OF VIOLATION OF A WARRANTY

The violation of a material warranty, or


other material provision of the policy,
on the part of either party thereto,
entitles the other to rescind (Sec. 74).
Note that the insured can exercise the
right also when the insurer violates a
warranty, like when it refuses to grant a
loan on the policy.
Note that a causal connection
between the violation of the warranty is
not necessary So, even if the violation
did act contribute in the loss the other
party may still rescind.

THE
NON
PERFORMANCE
OF
A
PROMISSORY WARRANTY DOES NOT
AVOID THE POLICY WHEN BEFORE THE
ARRIVAL
OF
THE
TIME
FOR
PERFORMANCE (Sec. 73)
(1)
(2)
(3)

An express warranty made at


or before the execution of the
policy should be contained (a)
in the policy itself (b) in another
instrument signed by the insured
and referred to in the policy as
making a part of it (Section 70).
This includes a rider it is a part
of the policy, it need not be signed
unless the rider was issued after
the original policy took effect;
(4)

Implied where the assertion or


promise is not expressly set forth
in the policy but because of the
general tenor of the terms of the
policy or from the very nature of
the insurance contract, a warranty
is
necessarily
inferred
or
understood. Note that the law only
provides for implied warranties in
contracts of marine insurance.
See Sec. 113 (seaworthiness) and
126 (deviation).

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The loss insured against happens;


The
performance
becomes
unlawful at the place of the
contract;
The
performance
becomes
impossible.

WARRANTY VS. REPRESENTATIONS


WARRANTY

REPRESENTATION

Part of the contract

Merely a collateral
inducement thereto

Expressly set forth


in the policy or
incorporated
therein
by
reference
Strictly and literally
performed

May be oral or
written in another
statement

Presumed material

Must be shown to
be so

Breach of warranty
is a breach of the
contract itself

Misrepresentation is
a ground to rescind
the contract

PREMIUM

Must be
substantially true

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
The agreed price for assuming and
carrying the risk.

1.

WHEN IS THE INSURER ENTITLED TO A


PREMIUM?
The insurer is entitled to the payment
of a premium as soon as the thing insured is
exposed to the peril insured against.
Notwithstanding any agreement to the
contrary, no policy or contract of insurance
issued by an insurance company is valid and
binding unless and until the premium is paid
except in:
(1)

(2)

(3)

In case of life or industrial life (life


insurance
policy
where
the
premium is payable monthly or
oftener) whenever the grace
period applies (Sec. 77);
When the insurer makes a written
acknowledgement of the receipt of
premium, such is conclusive
evidence of the payment of the
premium to make it binding
notwithstanding any stipulation
therein that it shall not be binding
until the premium is paid (Sec. 78)
HENCE, the effect of an
acknowledgement in a policy or
contract of insurance of the
receipt of the premium is that it
is conclusive evidence of payment
so far as to make the policy
binding. However, it is conclusive
only to make the policy binding
and not for the purpose of
collecting premium, and;
Where the obligee has accepted
the bond or suretyship contract in
which
case
such
bond
or
suretyship contract becomes valid
and enforceable irrespective of
whether or not the premium has
been paid by the obligor to the
surety (Sec. 177).

EXCEPTIONS TO SECTION 77:


UCPB
General
Insurance
Inc.
vs .Masagana Telemart, Inc. (G.R. No.
137172 April 4, 2001)

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When the grace periods applies; (Sec.


77)
2. When the insurer makes a written
acknowledgment of the receipt premium;
(Sec. 78)
3. Section 77 may not apply if the parties
have agreed to the payment of the
premium in installments and partial
payment has been made at the time of
the loss; (Makati Tuscany Condominium
Corp. v. CA, 215 SCRA 462)
4. If the insurer granted the insured a credit
term for the payment of the premium
and loss occurs before the expiration of
the term, recovery should be allowed
even the premium is paid after the loss
but within the credit term;
5. Where the parties are barred by
estoppel.
WHAT IS THE EFFECT OF PARTIAL
PAYMENT?
Ordinarily, the obligation to pay
premium when due is considered an
indivisible obligation. Hence, forfeiture is
not prevented by a part payment unless,
payment by installment has been agreed
upon or is the established practice the
basic principles of equity and fairness
would not allow the insurer to collect and
accept installments and later deny liability as
premiums were not paid in full.
PAYMENT TO INSURANCE AGENT OR
BROKER --payment to the insurance
company.
WHEN IS THE INSURED ENTITLED TO A
RETURN OF THE PREMIUMS PAID? 2000
BAR EXAM (IX a)
The insured is entitled to a return
when:
(1)

To the whole premium, when no


part of the interest in the thing
insured is exposed to any of the
perils insured against (Sec. 79 A);

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(2)

(3)

(4)

(5)

(6)

Where the insurance is made for a


definite period of time and the
insured surrenders his policy
before the expiration of the
period, here the insured only
recovers a portion of the policy
premiums corresponding with the
unexpired time but it does not
apply if:
(a)
the policy is not so definite;
(b)
a
short
period
rate
(insurance is for a period of
less than a year and a rate
has been agreed to if the
policy
is
surrendered;
Example: If the policy is in
force for a month the
insurer retains 20% of the
premium) has been agreed
upon;
(c)
the
policy
is
a
life
insurance policy it is
indivisible but he has a
cash surrender value;
When the contract is voidable on
account
of
fraud
or
misrepresentation of the insurer or
the agent (Sec. 81);
Where the contract is voidable on
account of facts, the existence of
which the insured was ignorant
without his fault (Sec. 81);
When by any default of the
insured other than actual fraud,
the insurer never incurred any
liability under the policy (Sec. 81);
In case of over insurance. Here
the insurance is in excess of the
amount of the insurable interest of
the insured and it is insured by
several insurers, the insured is
entitled to a RATABLE RETURN
OF PREMIUM, proportional to the
amount by which the aggregate
sum insured in all the policies
exceeds the insurable value;

WHEN ARE THEY NOT RECOVERABLE


Premiums cannot be recovered:

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(1)

(2)
(3)

LOSS

If the peril insured against has


existed, and the insurer has been
liable for any period, the period
being entire and indivisible (Sec.
80).
In life insurance (Sec. 79-b) cash
surrender value.
When the insured is guilty of fraud
or misrepresentation (Sec. 81).
AND

NOTICE

OF

LOSS

WHAT ARE THE RULES TO DETERMINE


WHETHER THE INSURER IS LIABLE FOR
THE LOSS OF THE THING INSURED?
1. Loss of which a peril insured is the
proximate cause.
2. Loss caused by efforts to rescue the
thing insured from a peril insured
against that would otherwise have
caused a loss, if in the course if such
rescue, the thing is exposed to peril
not
insured
against,
which
permanently deprives the insured of
its possession in whole or in part, or
where a loss is caused by efforts to
rescue the thing insured from a peril
insured against (Sec. 85). Here the
principle of proximate cause is
extended to loss incurred while saving
the thing insured.
3. Where a peril is especially excepted in
a contract of insurance a loss, which
would not have occurred but for such
peril, is thereby excepted although the
immediate cause of the loss was a
peril which was not excepted (Sec.
86). The immediate cause is the
CAUSE OR CONDITION NEAREST THE
TIME AND PLACE OF THE INJURY. Here,
the insurer will be liable if both the
immediate cause and the proximate

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
cause are not excepted. If the
proximate cause is excepted and the
immediate cause is not, the insurer is
not liable.
4. An insurer is not liable for loss caused
by the willful act or through the
convenience of the insured; but he is
not exonerated by the negligence of
the insured, or of the insureds agent
or others (Sec. 87).
2007 BAR EXAM (IV)
Q: Alfredo took out a policy to insure
his commercial building against fire. The
broker for the insurance company
agreed to give a 15-day credit within
which to pay the insurance premium.
Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28,
2006, a fire broke out and destroyed the
building
owned
by
Alfredo.Reason
briefly
in
(a),
(b)
and
(c).
a. May Alfredo recover on the insurance
policy?
A: Yes, Alfredo can recover on the insurance
policy. Although Section 77 of the Insurance
Code provides that in fire insurance, payment
of premium is necessary for validity of the
policy (also known as cash and carry
provision), nonetheless, the rule has been
modified by the decisions of the Supreme
Court after the promulgation of the Insurance
Code. Thus, in UCPB General Insurance v.
Masagana Telemart, G.R. No. 137172, April 4,
2001, it was held that the insured should be
allowed to recover on losses sustained even
when premium was paid after the fact of loss,
provided payment was received by the
insurer during the credit period given to the
insured. (See also South Sea Surety v.
Court of Appeals, G.R. No. 102253, June
2, 1995; American Home Assurance v.
Chua, G.R. No. 130421, June 28, 1999)
where the Supreme Court ruled that is the
check payment for premium was received by

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Page 74

the insurer prior to the loss or within the


credit period, the insured was allowed to
recover.
b. Would your answer in (a) be the same
if it was found that the proximate cause
of the fire was an explosion and that fire
was but the immediate cause of loss and
there is no excepted peril under the
policy?
Yes, recovering under an insurance
contract is allowed if the cause of the loss
was either the proximate or the immediate
cause as long as an expected peril was not
the proximate cause of the loss. (Section 86,
Insurance Code of the Philippines.) The fire
being the immediate cause for the loss of
the commercial building, would warrant
recovery
under
the
policy.
c. If the fire was found to have been
caused by Alfredo's own negligence, can
he
still
recover
on
the
policy?
Yes, he can still recover. The doctrine of
contributory negligence does not in any way
apply to rights under a contract of insurance,
unless it is a case of willful act. (Section 87,
Insurance Code of the Philippines)
RECOGNIZING
THAT
THERE
ARE
PROBLEMS IN DETERMINING PROXIMATE
CAUSE NOTE THE FOLLOWING RULES:
(a)
(b)

(c)

(d)

If there is a single cause which is an


insured peril, clearly it is the
proximate cause and there is liability;
If there are concurrent causes (those
happening together) with no excluded
perils, there if liability if one of the
causes is an insured peril, the others
may be ignored;
If there are concurrent causes with an
excepted peril (insured peril operate
together to produce the loss) the
claim will be outside the scope of the
policy;
But if the results of the operation of
the insured peril can be clearly
separated from the effects of the
excepted peril, the insurer is liable;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(e)

Where a number of causes operate


one from the other, the original cause
happens to be a peril, the insurer is
liable.

TRANSFER OF CLAIMS
An agreement not to transfer the
claim of the insured after the loss happens
is VOID if MADE BEFORE THE LOSS except as
otherwise provided in case of life insurance
(Sec. 33).
This means that the insured has an
absolute right to transfer his claim against
the insurer AFTER THE LOSS occurs, what is
prohibited is a transfer prior to the loss.
This is so because such stipulation
after the loss occurs shall hinder the
transmission of property. Neither does it
affect the insurer as its liability is already
fixed and what is actually assigned is the
money claim, not the contract itself.
The exception in Sec. 173 that
provides that the transfer of a fire insurance
policy to any person or company who acts as
an agent for or otherwise represents the
issuing company is prohibited and is void
insofar as it affects other creditors of the
insured.
NOTICE AND PROOF OF LOSS
Notice of loss must be given without
unnecessary delay by the insured or some
person entitled to the benefit of the
insurance. IF NOT THEN, the insurer is
exonerated (Sec. 88).

COURT OF JUSTICE WHAT IS SUFFICIENT is the


BEST EVIDENCE which he has in his power at
that time (Sec. 89).
WHEN ARE DEFECTS IN THE NOTICE OR
PROOF LOSS DEEMED WAIVED BY THE
INSURER

When the insurer fails to specify to


the insured any defect which the
insured can remedy without delay.

When the insurer denies liability on a


ground other than that defect in the
notice or proof of loss.

WHEN IS DELAY IN THE GIVING OF


NOTICE WAIVED
1. If it is caused by any act of the insurer.
2. If the insurer omits to make an
objection promptly and specifically on
that ground. despite delay, the
insurer does not object (Sec. 91).
WHAT HAPPENS AFTER PAYMENT BY THE
INSURER SUBSEQUENT TO GIVING OF
NOTICE OF LOSS
In property insurance, after the
insured has received payment from the
insurer of the loss covered by the policy, the
insurance company is SUBROGATED to the
rights of the insured against the wrongdoer or
the person who has violated the contract. The
right of subrogation accrues upon payment of
the insurance claim.

WITHOUT UNNECESSARY DELAY is


within a reasonable time, depending on
circumstances of a peculiar case, although
courts have construed the requirement
liberally in favor of the insured.

NOTE: Subrogation takes effect by operation


of law and does not require the consent of
the wrong doer (Firemans Fire Insurance vs.
Jamilla & Company, 70 SCRA 323).

PROOF OF LOSS
If the policy requires Preliminary Proof
of Loss (evidence given the insurer of the
occurrence of the loss, its particulars, and
data necessary to enable it to determine
liability and the amount thereof) IT IS NOT
NECESSARY that the insured give such proof
AS MAY OR WOULD BE NECESSARY IN A

(a)

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THERE IS NO SUBROGATION IN:

(b)
(c)

Life insurance as it is not a contract of


indemnity
When proximate cause of the loss is
the insured himself
When the insurer pays to the insured
a loss not covered by the policy;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
DOUBLE INSURANCE
Where the same person is insured by
several insurers separately in respect to the
same subject or interest (Sec. 91).
2005 BAR EXAM (N0. X 2 -b)
Q: What is the nature of the liability of
the
several
insurers
in
double
insurance? Explain.
A: In double insurance, the insurers
considered as co-insurers. Each one is bound
to contribute ratably to the loss in proportion
to the amount for which he is liable under his
contract. (Section 94(e), Insurance Code.
REQUISITES
1.
2.
3.
4.
5.

OF DOUBLE INSURANCE:
Same person is insured;
There are several insurers;
Subject insured is the same;
Interest insured is the same;
Risk of peril insured against is
the same;
There is prohibition TO PREVENT
OVER-INSURANCE, thus preventing
fraud.

2008 BAR EXAM:


Q:
Terrazas
de
Patio
Verde,
a
condominium building, has a value of
P50 Million. The owner insured the
building against fire with three (3)
insurance companies for the following
amounts: Northern Insurance Corp.
20M,Sounthern
Insurance
Corp.30M,
Eastern Insurance Corp.50M.
a. Is the owner's taking of insurance
for the building with three (3)
insurers valid? Discuss.
b. The building was totally razed by
fire. If the owner decides to claim
from Eastern Insurance Corp. only
P50 Million, will the claim prosper?
Explain.
A: (a). Taking out insurance covering the
same property, same insurable interest and
same risk with three insurance companies is
double insurance recognized under sec 93

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Page 76

of ICP. However, in American Home


Assurance Corp vs. Chua June 28, 1999, the
court referred to the common inclusion of the
other insurance clause in the fire insurance
policies requiring disclosure of co-insurance
of the same property with other insurers.
(b) Insured can recover from Eastern
Inssurance Corp up to the extent of his loss.
However, Eastern may refuse to pay if the
policy contains an other insurance clause
stipulating that non-disclosure of double
insurance
will
avoid
the
policy.
(Geagonia
v.
Country
Bankers
Insurance, 2/6/95). As there is no indication
of a contractual prohibition on double or
other insurance, all insurance contracts over
the
building
are
deemed
valid
and
enforceable.
The law prohibits double or overrecovery, not double insurance. Since eastern
insured the property up 50% the total
coverage, it is liable for only 50% of the total
actual loss. Eastern Insurance Corp, is liable
to the extent of its coverage but may recover
one half of the total indemnity from the coinsurers in the proportion of 60% (Southern
Insurance)- 40 % ( Northern Insurance)
EFFECTS
OF
OVER-INSURANCE
BY
DOUBLE INSURANCE
1. Insured, unless the policy otherwise
provide, may claim payment from the
insurers in such order as he may
select up to the amount for which the
insurers are severally liable under
their respective contracts.
2. Where the policy under which the
insured claims is a valued policy, the
insured must give credit as against
the valuation for any sum received by
him under any policy without regard
to the actual value of the subject
matter insured.
3.
Where the policy under which the
insured claims is an unvalued policy,
he must give credit, as against the full
insurable value, for any sum received
by him under the policy.
4. Where the insured receives any sum
in excess of the valuation in case of a
valued policy or the insurable value in

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
case of an unvalued policy, he must
hold such sum in trust for the insurers,
according to their right of contribution
among them;
5. In relation paragraph (4) Each
insurer is bound, as between himself
and the other insurers to contribute
ratably to the loss in proportion to the
amount for which it is liable under his
contract. ALSO REFERRED TO AS THE
PRINCIPLE OF CONTRIBUTION
WHICH
HAS
ALREADY
BEEN
INCOPORATED
IN
ALMOST
ALL
POLICIES that should there be other
insurances
covering
the
same
property, the liability of the company
would be limited to its ratable
proportion of the loss or damage (Also
known as CONTRIBUTION CLAUSE).
TEST TO DETERMINE EXISTENCE OF
DOUBLE INSURANCE
Whether the insured, in case of happening of
the risk, can directly benefited by recovering
on both policies? If yes there is double
insurance.
IS DOUBLE INSURANCE VALID?
- It depends, if there is prohibition in the
policy then it is not valid, but if there is
no prohibition, it is valid provided it
must follow the provisions of the law.
DOUBLE
OVER
INSURANCE
INSURANCE
There must be two One
insurer
is
or more insurers.
sufficient.
The total amount of
the policies need not
exceed the value of
the
insurable
interest.

The
value
must
always be in excess
of
the
insurable
interest;

REINSURANCE
Occurs when an insurer procures a 3RD
person to insure him against loss or liability
by reason of such original insurance (Sec.
95).

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WHEN IS REINSURANCE COMPULSORY?


1. When a non-life insurer insured in any
one risk or hazard an amount
exceeding 20% of its net worth, the
insurer needs reinsurance of the
excess over such limit (Sec. 215 (1)).
2. When a foreign insurance company
withdraws from the Philippines, it
should cause its primary liabilities
under policies insuring residents of the
Philippines to be reinsured by another
company authorized to transact an
insurance business in the Philippines.
DOUBLE INSURANCE VS.
REINSURANCE
DOUBLE INSURANCE
REINSURANCE
Insurer remains an Insurer becomes the
insurer
insured
Subject
matter
is Subject matter is
property
the insurers risk or
liability
Same interest and risk Different
interest
is insured with another and risk are insured
WHAT KIND OF CONTRACT IS
REINSURANCE?

It is presumed to be a contract of
indemnity against liability, and
merely against damage (Sec. 97).
As a RULE, the reinsurer is not liable
to the reinsured for a loss under an
original policy if the reinsured is not
liable to the original policyholder.
EXTENT OF LIABILITY OF THE
REINSURER?
The liability of the reinsurer is measured by
the liability of the reinsured to the original
policy holder PROVIDED, it does not exceed
the amount of reinsurance.

CLASSES OF INSURANCE
MARINE

INSURANCE

Insurance against loss or damage to:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(a)

(b)

Vessels, craft, aircraft, vehicles, goods


freight, cargoes, merchandise effects,
disbursements,
profits,
moneys,
securities, loses in action, evidences of
debt, valuable papers, bottomry or
respondentia interest and all other kind
of property and interests therein, in
respect to, appertaining to or in
connection with any and all risks or
perils
of
navigation,
transit
or
transportation
or
while
being
assembled, packed, crated, baled,
compressed, or similarly prepared for
shipment or while awaiting shipment or
during
any
delays,
storage,
transshipment or reshipment incident
thereto;
Person or property in connection with
or appertaining to marine, island
marine,
transit
or
transportation
insurance, including liability for loss or
in connection with the construction,
repair, operation, maintenance, use of
the subject matter of the insurance.
(But not including life insurance, or
surety bonds nor insurance against
loss by reason of bodily injury to any
person arising out of the ownership,
maintenance, use of automobiles);

(c)

Precious
stones,
jewels,
jewelry,
precious metals whether in the course
of transportation or otherwise;

(d)

Bridges,
tunnels
or
other
instrumentalities of transportation and
communications (excluding buildings,
their furniture and furnishings, fixed
contents, and supplies held in storage),
piers, wharves, docks, slips, and other
aids to navigation and transportation
including dry docks, marine railways,
dams and appurtenant facilities for the
control of waterways.
AND Marine Protection and
Indemnity Insurance meaning
insurance against, or against legal
liability of the insured for loss,
damage or expense incident to

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ownership,
operation,
chartering,
maintenance,
use,
repair,
or
construction of any vessel, craft or
instrumentality in use in ocean or
island waterways, including liability of
the insured for personal injury, illness
or death or for loss or damage to the
property of another person (Sec. 99).
WHAT RISKS ARE INSURED AGAINST?
-

The basic risk insured against is


commonly known as PERILS OF
THE SEA.

WHAT ARE NOT COVERED?


(a)
(b)
(c)

natural and inevitable action of


the sea;
ordinary wear and tear of the
ship;
negligent failure of the ship
owner to provide the vessel
with the proper equipment to
convey
the
cargo
under
ordinary conditions.

2008 BAR EXAM (IX b)


Q: On October 30, 2007, M/V Pacific, a
Philippine registered vessel owned by
Cebu Shipping Company (CSC), sank on
her voyage from Hong Kong to Manila.
Empire Assurance Company (Empire) is
the insurer of the lost cargoes loaded on
board the vessel which were consigned
to Debenhams Company.
After it
indemnified Debenhams, Empire as
subrogee filed an action for damages
against CSC.
b) Assume that the vessel was not
seaworthy as in fact its hull had leaked,
causing flooding in the vessel. Will your
answer be the same? Explain.
A: When the vessel is not seaworthy, it
is an exception to the hypothecary
principle in maritime commerce. To limit its
liability to the amount of the insurance
proceeds, the carrier has the burden of
proving that the unseaworthiness of its vessel
was not due to its fault or negligence. The
failure to discharge such a heavy burden

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
precludes application of the limited liability
rule and the carrier is liable to the full extent
of the claims of the cargo owners (Aboitiz
Shipping
v.
New
India
Assurance
Company, G.R. No. 156978, 02 May
2006).
2008 EXAM (IX c)
Q:c)
Assume the facts in question
(b). Can the heirs of the three (3) crew
members who perished recover from
CSC? Explain fully.
A: Yes, because the crew members died while
performing their assigned duties, aggravated
by the failure of the ship owner to ensure that
the vessel is seaworthy.
Workmens
compensation has been classified by
jurisprudence as an exception to the
hypothecary nature of maritime commerce,
[Abueg v.San Diego, 77 Phil. 730
(1948)], especially in this case where the
vessel was not seaworthy at the time it sank.
WHAT PERILS ARE INSURED IN AN ALL
RISK POLICY
It is to be construed as creating a
special insurance and extending to all risk
than are usually contemplated and will cover
all losses except such that may arise from
intentional fraud, intentional misconduct, or
that otherwise excluded. It may include all
losses whether arising from a marine peril or
not to include pilferage during a war (Filipino
Merchant Insurance Co. vs. CA, 179 SCRA
638).
NOTE:
Inchamaree Clause one that
covers any loss other than a willful and
fraudulent act of the insured and avoids
putting upon the insured the burden of
establishing that a loss was due to a peril
within the policys coverage, whether arising
from a marine peril or not provided the risk
is not excluded;
WHAT CONSTITUTES INSURABLE
INTEREST IN OCEAN MARINE
INSURANCE?

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1. The owner of a vessel has insurable


interest in the vessel such shall
continue even if the vessel has been
chartered by one who covenants to
pay the owner the value of the vessel
upon loss but in case of loss, the
owner is liable only for the part of the
loss which the insured cannot recover
from the charterer. (Sec. 100)
2. The insurable interest of the owner of
a ship hypothecated by bottomry is
only the excess of its value over the
amount secured by bottomry. (Sec.
101)
3. The owner of a vessel also has
insurable
interest
in
expected
freightage, which according to the
ordinary course of things he would
have earned but for the intervention
of a peril insured against or other peril
incident to the voyage. (Sec. 102)
ARE THERE PERSONS/PARTIES OTHER
THAN THE OWNER WHO HAS INSURABLE
INTEREST? YES;
1.

2.

One who has an interest in the thing


from which profits are expected to
proceed, has insurable interest on the
profits (Sec. 105).
The charterer of a ship has insurable
interest to the extent that he is liable
to be damnified by its loss (Sec. 106).

CONCEALMENT IN MARINE INSURANCE


-

A party is bound to communicate, in


addition to what is required by section
28 (facts within his knowledge,
material to the contract, other party
has not the means of ascertaining, as
to which party with a duty to
communicate makes no warranty)
information that he possesses, that
are material to the risk AND, to state
the EXACT and WHOLE TRUTH in
relation to all matters that he
represents, or upon inquiry discloses
or assumes to disclose EXCEPT those
that the insurer knows or those in the
exercise of ordinary care, the other
ought to know, and which the former

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
has no reason to suppose him to be
ignorant under Section 30 (Section
107);
NOTE: That the rules on concealment in
marine insurance are stricter as it is
sufficient that the insured is in
POSSESSION OF THE MATERIAL FACT,
ALTHOUGH HE IS UNAWARE OF IT.
A party is also bound to communicate, the
information belief or expectation of a 3rd
person, in reference to a material fact,
is material. Note: under section 35 such
is not required to be communicated in
ordinary insurance (Sec. 108).
PRESUMPTION OF A PRIOR LOSS
Insured in marine insurance is presumed to
have knowledge, at the time of insuring, or
prior, if information might possibly reached
him in the usual mode of transportation and
the usual rate of communication (Sec. 109).
EFFECT OF CONCEALMENT
It exonerates the insurer from a loss
resulting from the risks concealed as related
to:
(a)
the national character of the
insured;
(b)
the liability of the thing insured
to capture and detention;
(c)
the liability to seizure from
breach of laws of foreign laws
of trade;
(d)
the
want
of
necessary
documents ;
(e)
the use of false/simulated
documents
ORDINARY CONCEALMENT vs. MARINE
INSURANCE
ORDINARY
INSURANCE

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MARINE
INSURANCE

Page 80

Opinion or belief of a
3RD person or own
judgment
of
the
insured
is
not
material and need
not
be
communicated (Sec.
35)
A causal connection
between the fact
concealed and cause
of
loss
is
not
necessary for the
insurer to rescind;

Belief or expectation
of 3RD person in
reference
to
a
material
fact
is
material and has to
be communicated;
The concealment of
any of the matters
stated in section 110
merely
exonerates
the insurer from loss,
if the results from the
fact concealed;

REPRESENTATION IN MARINE
INSURANCE:
If
the
representation
is
intentionally false in any material
respect, or, in respect of any fact
on which the character and
nature of the risk depends, the
insurer may rescind (Section 111).
But the eventual falsity of a
representation
as
to
an
expectation does not in the absence
of fraud avoid the contract (Sec.
112).
WHAT ARE THE IMPLIED WARRANTIES IN
MARINE INSURANCE? 2000 BAR EXAM
(IX b)
1. In every contract of marine
insurance upon a ship or freight,
freightage or upon anything which is
the subject of marine insurance,
there is an implied warranty that
the ship is sea worthy (Sec. 113).

A ship is sea worthy when it is


reasonably fit to perform the
service and encounter the
ordinary perils of the voyage,
contemplated by the parties
(Sec. 114). Note that it is relative
and is made to depend on the
circumstances.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

The
implied
warranty
of
seaworthiness complied with as a
general
rule
when
it
is
seaworthy at the time of the
commencement of the risk
except:
(a)
when the insurance is
made for a specified length
of
time,
it
must
be
seaworthy
at
the
commencement of every
voyage it undertakes at
that time.
(b)
when the insurance is upon
cargo, which by the terms
of the policy description of
the voyage, or established
custom of trade, it is
required to be transshipped
at an immediate port in
which case each vessel
upon which the cargo is
shipped or transshipped
must be seaworthy at the
commencement of each
particular
voyage
(Sec.
115).
(c)
where different portions of
the voyage contemplated in
the policy differ in respect
to the things requisite to
make the ship seaworthy, I
which case it must be
seaworthy
at
the
commencement of each
portion (Sec. 117).

WARRANTY OF SEAWORTHINESS
EXTENDS TO:
The
warranty
of
seaworthiness
extends not only to the condition of the
structure of the ship, but it requires that:
(a)
it be properly laden or loaded
with cargo;
(b)
is provided with a competent
master, sufficient number of
officers and seamen;
(c)
it must have the requisite
equipment and appurtenances
like ballast, cables, anchors,
cordage, sails, food, water,

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fuel, lights and other necessary


and
proper
stores
and
implements for the voyage
(Sec. 116).

Note that when a ship becomes


unseaworthy during the voyage
it will not avoid the policy as
long
as

there
is
no
unreasonable delay in repairing
the defect. Otherwise the
insurer is exonerated on the
ship or the ship owners
interest from any liability from
any loss arising therefrom
(Sec. 118). Hence, if loss is not
one due to the defect or peril
was not increased by the
defect insurer is liable.
Also, while a ship may be
seaworthy for purposes of
insurance on it, it may by
reason of being unfitted to
receive cargo, be unseaworthy
for the purpose of insurance
on the cargo (Sec. 119).

2. It
shall
carry
the
requisite
documents to show its nationality
or neutrality and that it shall not
carry any document that will cast
reasonable
suspicion
on
the
vessel (Sec. 120). This warranty
arises only when nationality or the
neutrality of the vessel or cargo is
expressly warranted.
3. That the vessel shall not make
any improper deviation from the
intended voyage.
DEVIATION:
It is a departure from the course of the
voyage as defined by Section 121 and 122 or
an unreasonable delay in pursuing the
voyage or the commencement of an entirely
different voyage. (Sec. 123)
WHEN IS DEVIATION PROPER (2005 BAR)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
A vessel can properly proceed to a port other
than its port of destination in the following
cases:
1. When caused by circumstances over
which neither the master or the owner
of the ship has any control;
2. When necessary to comply with a
warranty, or to avoid a peril, whether
or not the peril is insured against;
3. When made in good faith, and upon
reasonable grounds of belief In the
necessity to avoid peril;
4. When made in good faith for the
purpose of saving human life or
relieving another vessel in distress.
(Sec. 124)

4. That the vessel does not or will


not engage in any illegal venture;
LOSS IN MARINE INSURANCE

KINDS OF TOTAL LOSSES: Actual or


Constructive
(1)

2005 BAR EXAM (N0. XIV -1 - a)


Q: On a clear weather, M/V Sundo,
carrying insured cargo, left the port of
Manila bound for Cebu. While at sea, the
vessel encountered a strong typhoon
forcing the captain to steer the vessel
to the nearest island where it stayed for
seven days. The vessel ran out of
provisions
for
its
passengers.
Consequently, the vessel proceeded to
Leyte to replenish its supplies.
a) Assuming that the cargo
was damaged because of such
deviation,
who
between
the
insurance company and the owner
of the cargo bears the loss?
Explain.
A: The Insurance company should
bear the loss. Since the deviation was
cured by a strong typhoon, it was
caused by circumstances beyond the
control of the captain, and also to
avoid a peril whether or not insured
against. Deviation is therefore proper.
(Sec. 145(a))
CONSEQUENCE OF IMPROPER DEVIATION
Insurer is not liable for any loss happening to
the thing insured subsequent to an improper
deviation (Sec. 126).

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(2)

If it is an Actual Total Loss it may


be caused by:
a. total destruction of the
thing insured;
b. the irretrievable loss of the
thing which renders it
valueless to the owner for
the purpose that he held it;
c. any other event which
effectively deprives the
owner of the possession at
the port of destination of
the thing insured (Sec.
130).
An actual total loss can also be
presumed from the continued
absence of the ship without
being heard of (section 132).
The length of time which is
sufficient
to
raise
these
presumption depends on the
circumstances of the case;
It is a constructive total loss
when the person insured is
given a right to abandon under
Section 139 (Sec. 131).

2005 BAR EXAM (N0. X -1- a)


Q: M/V Pearly Shells, a passenger and
cargo
vessel,
was
insured
for
P40,000,000.00 against constructive
total loss. Due to a typhoon, it sank
near Palawan. Luckily, there were no
casualties, only injured passengers. The
shipowner
sent
a
notice
of
abandonment of his interest over the
vessel to the insurance company which
then hired professionals to afloat the
vessel for P900,000.00. When refloated, the vessel needed repairs
estimated
at
P2,000,000.00.
The
insurance company refused to pay the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
claim of the shipowner, stating that
there was no constructive total loss.
a) Was there constructive total loss to
entitle the shipowner to recover from
the insurance company? Explain.
A: There was constructive total loss. When
the vessel sank, it was likely that it would be
totally lost because of the improbability of
recovery. (Arnolds Law of Marine Insurance
and Average, 16th ed., Vol. II, pp. 954-955)
Suggested Alternative Answer:
There was no constructive total loss.
The loss is not more than the value of the
vessel which was insured for P40,000,000.00.
The cost of refloating is P900,000.00 and the
needed repairs amount P2,000,000.00, or a
total of only P2,900,000.00 which does not
constitute more than the value of the
vessel.
THE DOCTRINE OF LIMITED LIABILITY
[when not applicable] The doctrine of
limited liability under Article 587 of the Code
of Commerce is not applicable to the present
case. This rule does not apply to situations in
which the loss or the injury is due to the
concurrent negligence of the ship owner and
the captain. It has already been established
that the sinking of the M/V Central Bohol had
been caused by the fault or negligence of the
Ship Captain and the crew, as shown by the
improper stowage of the cargo logs. Closer
supervision on the part of the ship owner
could
have
prevented
this
fatal
miscalculation. As such, the ship owner was
equally negligent. It cannot escape liability by
virtue of the limited liability rule. (Central
Shipping
Company,
Inc.
v.
Insurance
Company of North America, Sept. 20, 2004,
G.R. No. 150751)
ABANDONMENT is the act of the insured
by which, after a constructive total loss, he
desires to the insurer the relinquishment in
its favor his interest in the thing insured (Sec.
138).
A person insured by a contract of marine
insurance may abandon the thing insured, or
any particular portion thereof separately

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Page 83

valued by the policy, or otherwise separately


insured and recover a total loss when the
cause of loss is a peril insured against if:

more than thereof in value is actually


lost or would have to be expended to
recover it form the peril insured against.

if it is injured to such extent as to reduce


its value by more than of value.

if the thing injured is a ship and


contemplated voyage cannot lawfully be
performed without incurring either an
expense to the insured of more than
the value of the thing abandoned or a risk
which a prudent man would not take
under the circumstances.

if the insured is freightage or cargo and


the voyage cannot be performed nor
another ship cannot be procured by the
master within a reasonable time with
reasonable diligence to forward the
cargo without incurring the like expense
or risk mentioned in item (c) but,
freightage cannot be abandoned unless
the ship is abandoned (Sec. 139).

Abandonment must neither be partial


nor conditional (Sec. 140). Hence, it
must be total and absolute; and must be
made within a reasonable time after receipt
of reliable information of the loss but, where
the information is of doubtful character, the
insured is entitled to a reasonable time to
make an inquiry (Sec. 141).
HOW NOTICE OF ABANDONMENT IS
MADE
2005 BAR EXAM (N0. X - 1- b)
By giving notice, oral or written notice to
the insurer but if orally given, a written notice
of such must be submitted within seven days
from giving oral notice (Sec. 143). The
notice must be explicit and specify the
particular cause of the abandonment but
need start only enough to show that there is
probable cause therefore and need not be
accompanied by proof of interest or of loss
(Sec.
144).
The requirement as the
explicitness of the notice is due to the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
fact that abandonment can only be
sustained upon the cause specified in
the notice (Sec. 145).
EFFECTS OF ABANDONMENT
(1)

(b)

It is equivalent to a transfer by the


insured of his interest to the insurer,
with all the chances of recovery and
indemnity (Sec. 146) Note though, if
the insurer pays for a loss as if it were
an actual total loss, he is entitled to
whatever may remain of the thing
insured, or its proceeds or salvage as
if
there
has
been
a
formal
abandonment. Here the insurer has
opted to pay for total actual loss
notwithstanding the absence on actual
abandonment;

(2)

Acts done in good faith by those who


were agents of the insured in respect
to the thing insured subsequent to the
loss are at the risk of the insurer and
for his benefit (Sec. 148). The agents
of the insured become agents of the
insurer. This retroacts to the date of
the loss when abandonment is
effectively made;

EFFECTIVITY OF ABANDONMENT:
Abandonment becomes effective upon
the acceptance of the insurer. If it is not
accepted despite validity, the insured may
nevertheless claim an actual total loss.
LIABILITY FOR AVERAGES
AVERAGE is any extraordinary or accidental
expense incurred during the voyage for the
preservation of the vessel, cargo, or both and
all damages to the vessel or cargo from the
time it is loaded and the voyage commenced
until it ends and the cargo is unloaded.
KINDS OF AVERAGES:
(a)

Particular or simple average is


a damage or expense caused
to the vessel, cargo, or which
has not inured to the common
benefit and profit of all persons
interested in the cargo or the

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vessel. This is borne ordinarily


by the owner of the vessel or
cargo that gives rise to the
expenses
or
suffered
the
damage.
General or gross average is an
expense or damage suffered
deliberately in order to save
the vessel or its cargo or both
from real and known risk. Thus,
all persons having an interest
in the vessel and cargo or both
at the occurrence of the
average shall contribute.

IN CASE OF GENERAL AVERAGE LOSS


The insurer is liable for the loss
falling upon the insured, though a
contribution in respect to the thing
insured when required to be made by
him towards a general average loss
called for a peril insured against but
liability is limited to the proportion of
the contribution attaching to his policy
value where this is less than the
contributing value of the thing insured
(Sec. 164). Meaning that the insured can hold
his insurer liable for contribution up to the
value of the policy;
RIGHT OF SUBROGATION
When a person injured in a
contract of marine insurance has a
demand
against
the
others
for
contribution, he may claim the whole loss
from his insurer subrogating the insurer
to his own right to contribution but no
such claim can be made upon the
insurer if:
(a)

There is separation of the interest


liable to contribution;

(b)

When the insured having the right and


opportunity to enforce contribution
from others, has neglected or waived
the exercise of the right (Sec. 165).
Meaning that the insured has a choice
of recovery on the happening of a
general average loss. They are:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(1)
(2)

MEASURE OF
INSURANCE

Enforcing the contribution


against interested parties;
or
Claiming from the insurer.
If it be
the
latter,
subrogation takes place;
INDEMNITY

IN

MARINE

IF THE POLICY IS VALUED;


1.
A valuation in the policy of marine
insurance is exclusive between the parties
thereto in the adjustment of either a partial
or total loss, if the insured has some interest
at risk and there is no fraud on his part. If
there is fraud in valuation, it entitles the
insurer to rescind as it is an exception as to
conclusiveness (Sec. 156);

loss of the property out of which they were


expected to arise, and the valuation fixes
their amount), a proportion of such profits
equivalent to proportion of the value of the
property lost bears to the value of the whole
(Sec. 158).
IF THE POLICY IS OPEN
(a)
The value of the ship is the value
at the beginning of the risk,
including all articles or charges
which add to its permanent value
or which are necessary to prepare
it for the voyage insured;
(b)

2.
If however, hyphotecated by the
bottomry or respondentia before insurance
and without knowledge of the person
securing it he may show the real value;
3.
An insurer is liable upon a partial loss
only for such proportion of the amount
insured by him as the loss bears to the
whole interest of the insured (Sec. 157). The
effect is that the insured is deemed a coinsurer if the value of the insurance is less
than the value of the property. This applies
even in the absence of a stipulation in the
contract and is also known as the average
clause.
The two requisites for the application of the
average clause:
a.
b.

insurance is for less than actual value;


the loss is partial

Note: That co-insurance exist in Marine


Insurance: In Fire Insurance, there is no coinsurance unless expressly stipulated (Sec.
171-172). In life insurance, there is none also
as value is fixed in the policy (Sec. 183).
4.
In case profits are separately insured
in a contract of marine insurance (see Sec.
105) , the insured can recover in case of a
loss (and under Sec. 160, there is a
conclusive presumption of a loss from the

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(c)

(d)

The value of the cargo is its actual


cost to the insured, when laden on
board where the cost cannot be
ascertained, its Market Value at
the time and place of lading.
Adding the charges incurred in
purchasing and placing it on board
but without reference to any loss
incurred in raising money for its
purchase or any DRAWBACK on its
EXPROPRIATION or FLUCTUATION
of the market at the port of
destination or expenses incurred
on the way or on arrival;
Value of freightage is the gross
freightage, exclusive or primage
without reference to the cost of
earning it;
The cost of insurance is in each
case to be added to the value thus
estimated (Sec. 161).

IF THE CARGO
PARTIAL LOSS

INSURED

AGAINST

If it arrives at the port of


destination in a damaged condition,
the loss of the insured is deemed
to be the same proportion of the value
which the market price at that port of
the thing so damaged bears to the
market price it would have brought if
sound
(Sec.
162).
Meaning
if
reduction in value is 1/5, then
amount
of
recovery
on
the
insurance is also 1/5.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

FIRE

entitles the insurer to rescind the contract of


insurance (Sec. 168).

INSURANCE

Insurance against fire includes


loss or damage due to lightning,
windstorm, tornado, earthquake or
other allied risks when such risks
are covered by extensions to the
fire insurance policy or under
separate policies (section 167).
Hence, while it is not limited to
loss or damage due to fire,
coverage as to other risks is not
automatic.
2001 BAR EXAM (N0.XVII)
Q: JQ, owner of the condominium unit,
insured the same against fire with XYZ
Insurance Corp. and made the loss
payable to his brother. MLQ. In case of
loss by fire of the said condominium
unit, who may recover on the fire
insurance policy? State the reasons for
your answer?
A: JQ can recover on the fire insurance policy
for the loss of the said condominium unit. He
has the insurable interest as owner-insured.
As beneficiary in the fire insurance policy,
MLQ cannot recover on the fire insurance
policy. For the beneficiary to recover on the
fire or property insurance policy, it is required
that he must have insurable interest in the
property insured. In this case, MLQ does not
have insurable interest in the condominium
unit.
FIRE DEFINED
In insurance, it is defined as the
active
principle
of
burning,
characterized
by
heat
and
light
combustion. Combustion without visible
light or glow is not fire
ALTERATION DEFINED
Is a change in the use or condition of a
thing insured from that to which it is limited
by the policy, made without the consent of
the insurer, by means within the control of
the insured, and increasing the risk, which

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HOW IS VALUATION MADE:


(1)

(2)
(3)

(4)

Whenever the insured would like to


have a valuation stated in a policy
insuring a building or structure
against fire, it may be made by an
independent appraiser, who is paid
by the insured and the value may
be fixed between the insurer and
the insured;
Subsequently, the clause is then
inserted in the policy that said
valuation has thus been fixed;
In case of loss, provided there is no
change increasing the risk without
the consent of the insured or fraud
on the part of the insured, the
insurer will pay the whole amount
so insured and stated in the policy is
paid. If it is a partial loss, the whole
amount of the partial loss is paid. In
case there are 2 or more policies,
each shall contribute pro-rata to the
total or partial loss but the liability
of the insurers cannot be more than
the amount stated in the policy;
Or the parties may stipulate that
instead of payment, the option to
repair, rebuild or replace the
property
wholly
or
partially
damaged or destroyed shall be
exercised (Sec. 172).

CASUALTY

INSURANCE

Generally, it is one that covers


loss or liability arising from an
accident or mishap excluding
those that fall exclusively within
other types of insurance like fire
or marine. It includes employers
liability, workmens compensation,
public liability, motor vehicle liability,
plate glass liability, burglary and theft,
personal
accident
and
health
insurance as written by non-life
companies and other
1993 and 1994 BAR EXAMS:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Sun Insurance Office
1992

vs. CA July 17,

X was issued a personal accident insurance


for P200,000. Two months later, he died of a
bullet wound in his head. He was playing
with his hand gun from which he removed the
magazine. He pointed his gun to his temple
and fired. The insurance company refused to
pay the beneficiary. Was there suicide or
accident?
SC:
1. X was negligent but it should not
prevent the beneficiary from recovery
because there is nothing in the policy
that exempts the insurer of the
responsibility to pay indemnity if the
insured is shown to have contributed
to his own accident.t
2. The death is accidental. Accident
happens by chance without intention
or design and which is unexpected or
unforeseen.
SURETYSHIP
An agreement whereby a party
called the surety guarantees the
performance by another party
called the principal or obligor of an
obligation or undertaking in favor
of a 3RD party called the obligee
(Sec. 175).
Includes official recognizances,
bonds or undertakings issued by any
company under Act No. 536, as
amended
by
act
no.
2206
(Government
transactions

by
authorized companies)

IS A SURETYSHIP CONTRACT VALID AND


BINDING WHERE THE PREMIUM HAS NOT
YET BEEN PAID?
Generally, payment of the premium is
a condition precedent. Hence the bond is not
valid. An exception is when it is issued and
accepted by the obligor, it is valid despite
non payment of the premium (Sec. 177).
SURETY vs. GUARANTY
SURETY
GUARANTY
Assumes liability as
a regular party to
the agreement.

Guarantors liability
depends
on
an
independent
agreement to pay if
primary debtor fails
to pay

Primarily liable.

Secondarily liable.

Not
entitled
exhaustion.

to

Entitled
exhaustion.

to

NON-NECESSITY OF A DEMAND ON THE


SURETY Demand on the surety is not
necessary before bringing the suit against
them. On this point, it may be worth
mentioning that a surety is not even entitled,
as a matter of right, to be given notice of the
principals default. (Intra-Strata Assurance
Corporation, Et Al. v. Republic of the
Philippines, Etc., Jul. 9, 2008 G.R. No.
156571)
LIFE

INSURANCE

Is insurance on human lives and


insurance appertaining thereto or
connected therewith (Sec. 179)
WHEN IS IT PAYABLE

LIABILITY OF THE SURETY


It is joint and several (solidary) with
the obligor but limited to the amount of the
bond and determined strictly by the terms of
the contract in relation to the principal
contract between obligor obligee (Sec.
176).

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An insurance upon life may be made payable


upon:
(a)
death of the person; or
(b)
his surviving a specified period;
or
(c)
otherwise, contingently on the
continuance or cessation of
life;

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(1)
COMMON KINDS:
(2)

WHOLE
LIFE/ORDINARY
LIFE/STRAIGHT LIFE: premiums are
payable for life and the insurer agrees to
pay the face value upon the death of the
insured.

LIMITED PAYMENT LIFE: insured pays


premiums for a limited period after which
he stops with a guarantee by the insurer
that upon death the face amount is to be
paid if death occurs while payment is
not complete beneficiary acts face
amount.
TERM POLICY: insurer is liable only upon
death of the insured within the agreed
term or period. If insured survives the
insurer is not liable.
ENDOWMENT : protection is for a limited
period, if the insured is still alive at the
end of the period, the value of the policy
is paid to him. If he dies before the end
period, it is paid to the beneficiaries.
ANNUITY: where the insured or a named
person/s is paid a sum or sums
periodically during life or a certain period
(note that contracts for the payment of
endowment or annuities are considered
as life insurance contracts).

DISTINGUISHING LIFE INSURANCE FROM


PAYMENT OF ANNUITY
(1)

(2)

(3)

In life insurance, it is payable upon


the death of the insured, while in
annuity, it is payable during the
lifetime of the annuitant;
In life insurance, the premium is
paid in installments, while in
annuity, annuitant pays a single
premium;
In life insurance, there is lump sum
payment upon death, while in
annuity, annuities are paid until
death;

WHAT RISKS ARE COVERED?

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Generally - all causes of death are


covered unless excluded by law,
by policy or public policy.
Suicide, if committed after the
policy has been in force for a
period of two years from date of
issue or last reinstatement unless
policy provides a shorter period
but it is nevertheless compensable
if committed in the state of
insanity regardless of date of
commission (Sec. 180-A)

IS
A
LIFE
INSURANCE
POLICY
TRANSFERABLE OR ASSIGNABLE? Yes, it
may pass by transfer, will or succession to
any person, whether he has insurable interest
or not. (Sec. 181)
IS
NOTICE
TO
THE
INSURER
OR
TRANSFER OR BEQUEST REQUIRED? It is
not necessary to preserve the validity of the
policy unless thereby expressly required
(Sec. 181)
IS THE CONSENT OF THE BENEFICIARY
REQUIRED? Yes, if he designated as an
irrevocable beneficiary as he has acquired a
vested right;
BUSINESS

INSURANCE

REQUIREMENTS FOR A CERTIFICATE


OF AUTHORITY FROM THE INSURANCE
COMMISSION:
(a)
(b)
(c)
(d)

Qualified by Philippines Laws to


transact insurance business;
Has a name that is not in anyway
similar to another company;
If organized as a stock corporation, it
should have a paid up capital of no less
that Php5,000,000.00;
If it is organized as a mutual company
(one whose capital funds are not
contributed by stockholders but by
policy holders) it must have available
cash
assets
of
at
least
Php5,000,000.00 above all liabilities for
losses reported, expenses, taxes, legal
reserves of all outstanding risks, and
the contributed surplus fund equal to

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

(e)

the
amounts
required
of
stock
corporations (Php1,000,000.00 if a life
insurance company or Php500,000.00,
if a non life insurance company).
If a foreign insurance company, it must
appoint a resident agent, deposit
securities and maintain a legal reserve
(Sec. 184-193).

rise to insurer liability (Shafer vs. Judge, 167


SCRA 386).
CANCELLATION OF THE POLICY
(a)

COMPULSORY MOTOR VEHICLE LIABILITY


INSURANCE
It is to provide protection or coverage
to answer for bodily injury or property
damage that may be sustained by
another arising from the use of motor
vehicle. Please note though that what
is now compulsory is death of bodily
injury arising from motor vehicle
accidents as per amendment to the
insurance code by PD 1814 and PD
1455 brought about by insurance
losses due to padded claims for
property damage. Hence, property
damage is now optional;
DISTINGUISHED FROM OWN DAMAGE
COVERAGE
AND
COMPREHENSIVE
MOTOR VEHICLE INSURANCE:
(a)

Third party liability answers for


liabilities arising from death or
bodily injury to 3RD persons or
passengers.

(b)

Own damage insurance answers


for reimbursement of the cost of
repairing the damage to vehicle of
the insured.

(c)

Comprehensive
insurance
answers for all liabilities/damages
arising from the use/operation of a
motor vehicle it includes third
party own damage, theft and
property damage.

WHEN DOES THE LIABILITY OF THE


INSURER ACCRUE?
The occurrence of an injury for which
the insured may be liable immediately gives

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(b)

By the insurer requires written


notice to motor vehicle owner/land
transportation operator at least 15
days prior to intended effective
date. If so canceled, the Land
Transportation Office may order
the immediate confiscation of
license plates unless it receives a
new valid insurance/surety/proof of
cash
deposit
or
revival
by
endorsement of the cancelled
policy (Sec. 130);
By the insured the motor
vehicle owner/land transportation
operator shall secure a similar
policy or surety before the
cancelled policy/surety ceases to
be effective or make a cash
deposit and file the same or proof
thereof
with
the
Land
Transportation Office (Sec. 381).

PAYMENT OF CLAIMS
A claim for payment must be filed
without any unnecessary delay, within 6
month from the date of accident by giving
written notice setting forth the nature, extent
and duration of the injuries as certified by a
duly licensed physician (Sec. 384).
WHAT IS NO FAULT INDEMNITY?
A no fault indemnity claim is a claim for
payment for death or injury to a passenger of
third party without necessity of proving fault
or negligence. This is payable by the insurer
provided:
(a)
indemnity in respect of one
person shall not exceed
Php5,000.00;
(b)
the necessary proof of loss
under oath to substantiate
the claim is submitted

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
AGAINST WHOM IS THE PAYMENT
CLAIMED

(4)

A claim under the no fault indemnity clause


may be made against one motor vehicle
insurer only as follows:
(a)
in case of an occupant of a
vehicle against the insurer of
the vehicle in which the
occupant is riding, mounting or
dismounting from;
(b)
in any other case, from the
insurer of the directly offending
vehicle;
(c)
in all cases, the right of the
party paying the claim to
recover against the owner of
the vehicle responsible for the
accident shall be maintained;
INTERPRETATION OF THE AUTHORIZED
DRIVER CLAUSE (1991 Bar Exams) The
authorized driver clause is interpreted to
refer to the insured or any person driving on
the order of the insured or with his
permission
provided,
such
person
is
permitted to operate a motor vehicle in
accordance with our licensing laws or
regulations and who is not otherwise
disqualified;
NOTE THE FOLLOWING JURISPRUDENCE:
(1)

(2)

(3)

If license is expired, person is not


authorized to operate a motor
vehicle (Tarco Jr. vs. Phil Guaranty,
15 SCRA 313)
Issued a temporary operators
permit or a temporary vehicle
receipt, a person is authorized to
operate a motor vehicle, but if it
has expired, it is as if he has no
license (Guttierez vs. Capital
Insurance, 130 SCRA 618, PEZA
vs. Alikpala, 160 SCRA 31)
A tourist with license but in the
country for more than 90 days, is
not authorized to operate a motor
vehicle because it is as if he has
no license (Strokes vs. Malayan,
127 SCRA 766)

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(5)

A drivers license that bears all the


earmarks of a duly issued license
is presumed genuine.
A license is not necessary, where
the insured himself is the driver
(Paterno vs. Pyramid Insurance,
161 SCRA 677, 1986 BAR)

BAR EXAM; 1996


Q:
1.While
driving
his
car,
X
sideswiped A causing injuries to the
latter. A sued X and the third party
liability
insurer
for
the
damage
sustained by A.
2. The insurance company moved
to dismiss the complaint contending
that theliability of X has not yet been
determined with finality.
Is the contention of the insurance
company correct? May the insurer be
held solidarily liable with X
A: No. When an insurance policy insures
directly against liability, the insurers liability
accrues immediately upon the occurrence of
the injury.
No. The insurer cannot be held solidarily
liable with X because its liability is based on a
contract while that of X is based on torts.
(Vda. De Maglana vs. Consolacion, August 6,
1992)
COMPREHENSIVE
MOTOR
VEHICLE
INSURANCE (1993 & 2000 Bar Exam)
The liability of the insurance company
s direct and solidary with the operator but
only up to the amount stated in the policy
and
accrues
immediately
upon
the
occurrence of the accident. Any amount
awarded beyond the amount stated in the
policy is the sole responsibility of the carrier.
NON-FAULT CLAUSE IN COMPULSORY
MOTOR VEHICLE INSURANCE POLICY
(2000 Bar Exam)
Proof of fault or negligence is not
necessary for the payment of any claim for
death or injury to a passenger or to a third
party. The maximum amount of indemnity is

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
P 10, 000.00 upon submission of death
certificate, medical certificate and police
report.
The purpose is in order to give
immediate assistance to the victim of motor
vehicle accidents and/or the dependents
specially if they are poor, regardless of the
financial capability of the owner of the motor
vehicle or operator responsible for the
accident.
This does not include property
damage.
NECESSITY TO REGULATE INSURANCE
COMPANIES COVERING PUBLIC UTILITY
VEHICLES
The present case shows a clear public
necessity to regulate the proliferation of such
insurance companies. Because of the PUV
operators complaints, the LTFRB thus
assessed the situation. It found that in order
to protect the interests of the riding public
and to resolve problems involving the
passenger insurance coverage of PUVs, it
had to issue Memorandum Circular No. 2001001 accrediting PAMI and PAIC II as the two
groups allowed to participate in the program.
Memorandum Circular No. 2001-001 required
that [a]ll public utility vehicles whose LTO
license plate, as per latest LTO Official
Receipt, with an EVEN middle number (0, 2,
4, 6 and 8) shall be insured with UCPB
insurance (PAMI) while those with an ODD
middle number (1, 3, 5, 7 and 9) shall be
insured with Great Domestic Insurance (PAIC
II) x x x .

TRANSPORTATION LAWS
COMMON CARRIERS
(Arts. 1732-1766, New Civil Code)
Common
Carriers
are
persons,
corporations, firms or associations engaged
in the business of carrying or transporting
passengers or goods or both, by land, water,
or air, for compensation, offering their
services to the public.

Transportation defined. a contract of


transportation is one whereby a certain
person or association of persons obligate
themselves to transport persons, things, or
news from one place to another for a fixed
price
Classification:
1. As to object: (1) things; (2) persons; (3)
news
2. As to place of travel: (1) land; (2) water;
(3) air
Parties to contract of transportation:
(1) shipper or consignor.
(2) carrier or conductor.
(3) consignee
Common Carrier

Private Carrier

As to Availability
Holds himself out
for
all
people
indiscriminately

Contracts
particular
individuals
groups only

Page 91

or

As to require Diligence
Extraordinary
Ordinary
Diligence
Diligence
As to regulation
Subject to state Not subject to
regulation
state regulation
Stipulation limiting liability
Parties may agree Parties may limit
on
limiting
the the
carriers
carriers
liability liability, provided
except
when it is not contrary
provided by law
to morals or good
customs
Exempting circumstances
Prove extraordinary Caso forfuito, Art.
diligence
and 1174 NCC
Art.1734,NCC
Presumption of Negligence
There is a
No presumption
presumption of fault of
fault
or
or negligence
Negligence
Governing law
Law on Common Law
on
Carriers
obligations
and
contracts

(2002 Bar exams)


Test for a common carrier:

BAR OPERATIONS 2011

with

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1

2
3

He must be engaged in the business of


carrying goods for others as a public
employment, and must hold himself out
as ready to engage in the transportation
of goods for persons generally as a
business, and not a casual occupation.
He must undertake to carry goods of the
kind to which his business is confined.
He must undertake to carry by the
methods by which his business is
conducted, and over his established
roads.
The transportation must be for hire.

The true test is whether the given


undertaking is a part of the business engaged
in by the carrier which he has held out to the
general public as his occupation rather than
the quantity or extent of the business
actually transacted, or the no. and character
of the conveyances used in the employment
(the test is therefore the character of the
business actually carried on by the carrier.
Characteristics of common carriers:
(1) The common carrier undertakes to carry
for all people indifferently;
(2) The common carrier cannot lawfully
decline to accept a particular class of goods
for carriage to the prejudice of the traffic in
those goods
Exception : for some sufficient reason, where
the discrimination in such goods is
reasonable
and
necessary
(substantial
grounds)
(3) No monopoly is favored - the Commission
has the power to say what is a reasonable
compensation to the utility and to make
reasonable rules and regulations for the
convenience of the traveling public and to
enforce them
(4) Public convenience - for the best interests
of the public
The
law
prohibits
unreasonable
discrimination by common carriers.-- The
law requires common carriers to carry for all
persons, either passengers or property, for
exactly the same charge for a like or
contemporaneous
service
in
the

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transportation of like kind of traffic under


substantially
similar
circumstances
or
conditions. The law prohibits common
carriers (CC) from subjecting any person, etc.
or locality, or any kind of traffic, to any undue
or unreasonable prejudice or discrimination
whatsoever.
Exception: When the actual cost of handling
and transporting is different, then different
rates may be charged
Determination of justifiable refusal: This
involves a consideration of the following:
1 suitability of the vessels of the
company for the transportation of
such products;
2 reasonable possibility of danger or
disaster,
resulting
from
their
transportation in the form and under
the conditions in which they are
offered for carriage;
3 the general nature of the business
done by the carrier;
4 all the attendant circumstances which
might affect the question of the
reasonable necessity for the refusal by
the
carrier
to
undertake
the
transportation
of
this
class
of
merchandise.
What is the DILIGENCE required by
common carriers?
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence in
the vigilance over the goods and for the
safety of the passengers transported by
them, according to all the circumstances of
each case.
Extraordinary diligence lasts from the time
the cargoes are loaded in the vessel until
they are discharged and delivered to the
consignee.
Air carriers can terminate services of pilots
for serious misconduct and drunkenness
because of its extraordinary diligence.
LIABILITY OF COMMON CARRIERS: The
common carrier, is at all times, required to
observe extraordinary diligence with respect
to transport of goods.
1 To bring passengers safely to his place
of destination. He is obliged to carry

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

passengers safely as far as human


care and foresight can provide, using
the utmost diligence of a very
cautious person with due regard for all
circumstances. In case of death or
injury, the common carriers are
presumed to have been at fault or
negligent
in
transporting
the
passengers unless they prove that
they observed extraordinary diligence.
To transport the goods/ cargoes safely
to the point of destination if there is
loss or damage to the goods/cargoes,
immediately
a
presumption
of
negligence arises that the loss/
damage to the goods/ cargoes was
due to the negligence of the common
carrier. The shipper may only prove
that the goods arrived in a damaged
condition or that they did not arrive at
all.

LOADSTAR SHIPPING CO., INC VS.


PIONEER ASIA INSURANCE CORP.Jan 24,
2006
A common carrier is required to observe
extraordinary diligence in the vigilance
over the goods it transports.
I. VIGILANCE OVER THE GOODS
RULES governing common carriers
LIABILITY over Goods:
General
RULE:
Common
carriers
are
responsible for the loss, destruction, or
deterioration of the goods,
UNLESS the same is due to any of the
following causes only:
1) Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
2) Act of the public enemy in war, whether
international or civil;
3) Act or omission of the shipper or owner of
the goods;
4) The character of the goods or defects in
the packing or in the containers;
5) Order or act of competent public authority.
(Art. 1734)
The CC may absolve itself from liability
by proving any of the following
DEFENSES:

BAR OPERATIONS 2011

Page 93

(2002 Bar exams)


A) That the CC encountered:
a An act of God;
there must have been no delay on
the part of the common carrier.
Otherwise, if delayed and not for good
reason, then it shall be held liable
notwithstanding the fact that all the
subsequent requisites were present.
must be an unforeseen event or an
event which cannot be avoided
The carrier must have exercised
extraordinary
diligence before, during, and after the
time of the accident.
The proximate cause must not be
committed by the carrier. If the
proximate cause of the event is
caused by the carrier, then he cannot
invoke the act of God defense.
Under
the
rule
on
Contributory
Negligence, if the negligence attributable to
carrier is not proximate in character, the
carrier shall be responsible, although such
liability shall be mitigated.
b. Act of public enemy in war;
c. Act by a competent public authority;
d. Acts/omissions of the shipper or his
agent;
e.
The goods or the packaging is
inherently defective.
Even if the loss, destruction, or deterioration
of the goods should be caused by the
character of the goods, or the faulty nature of
the packing or of the containers, the
common carrier must exercise due
diligence to forestall or lessen the loss.
EXEMPTING CAUSE
REQUISITES for natural disaster or
calamity
1 The natural disaster must have been
the proximate cause of the loss
2 It must have been the only cause of
the loss
3 The common carrier must have
exercised due diligence to prevent or
minimize before , during and after the
natural disaster

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
4

The
common
carrier
negligently
incurred
transporting the goods

has
delay

not
in

REQUISITES for act of public enemy 1. The act of public enemy must have
been the proximate of the loss
2 It must have been the only cause of
the loss
3 The common carrier must have
exercised due diligence to prevent or
minimize before , during and after the
act of public enemy in war.
REQUSITE FOR act or omission of
Shipper 1 That the act or omission of the shipper
/owner of the goods must have been
the proximate cause of the loss
2 That it must have been the only cause
of the loss.
REQUSITES for character of goods ,
fault in packing or containers1. That the loss , destruction or
deterioration was caused by the character
of the goods ; or the faulty nature of the
packing /containers
2. That
the
common
carrier
had
exercised due diligence to forestall or
lessen the loss.
REQUISTES for the act of public
authority
1. The common carrier must prove that
the public authority had the power to
issue the order for the destruction /
seizure of the goods.
B.) Another defensive strategy to escape
liability is to invoke that it exercised
extraordinary diligence to prevent or
minimize the loss at the time the accident
occurred.
Negligence is the failure to observe due
diligence with respect to the circumstances
at hand.
Contributory Negligence is the failure to
observe due diligence that an ordinary or

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prudent man undertakes in relation to the


negligence of another.
When does the carriers responsibility
over the goods arise?
The carrier shall be liable the moment the
goods arrive in his possession whether actual
or constructive, until such time that the
carrier delivers the same to the consignee OR
the consignee has been informed of the
arrival of the goods and the consignee had
reasonable time to remove the same.
Under maritime laws, the responsibility of the
carrier ends when the goods were
transmitted by the carrier to the customs
arrastre operator. Recall that before the
goods are delivered to the consignee, the
state has the responsibility to ensure that the
goods being brought in are in accordance
with the law.
EFFECT: The carrier would no longer be
liable. The succeeding relationship would be
between the consignee and the arrastre
operator, the relationship governing them
would be akin to a contract of Deposit.
There is already an existing Contract of
carriage when the carrier took possession of
the cargo by placing it on a lighter or barge
manned by its authorized employees.
(COMPANIA MARITIMA vs. INSURANCE
COMP )
A bill of lading that was issued covering
certain shipment which contained a provision
that the carrier does not assume liability for
any loss /damage to the goods once they
have been under the custody of the custom
or other authorities or when they have been
delivered at ships tackle have been
considered valid , because it was held that it
is not contrary to morals and public policy ;
said stipulation is clear and have been
adopted to mitigate the responsibility of the
common carrier. (LU DO vs. BINAMIRA)
Stoppage in Transitu is the right of the
unpaid seller who has parted with the
possession of the goods to stop them in
transit, when the buyer of goods is or
becomes insolvent.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Requisites:

1
2
3

Seller must be an unpaid seller;


Goods must be in transit;
Buyer must be in a state of
insolvency;
EFFECT: Once the right is exercised, the
common carrier becomes a mere
warehouseman.
In the event that the UNPAID Seller exercises
its right of stoppage in transitu , the carrier
thereafter holds the goods in the capacity of
an ordinary bailee or warehouseman and
shall be liable only as such , upon the theory
that the exercise of the right by the unpaid
seller , such terminates the contract of
carriage.
A STIPULATION LIMITING LIABILITY IS
VALID PROVIDED THAT it be: (2002 bar
Exam)
1 In writing signed by both parties
2 Supported by a valuable consideration
other than the service rendered by
common carrier
3 Reasonable, just and not contrary to
public policy
SOME VALID STIPULATIONS LIMITING
CARRIER'S LIABILITY:
1 Account of strikes or riot;
2 Value of the goods appearing in bill of
lading UNLESS shipper declares a greater
value;
3 Contract fixing the sum that may be
recovered.
VOID STIPULATIONS LIMITING CARRIER'S
LIABILITY (2002 bar exams)
1 that the goods are transported at the risk
of the shipper;
2 that the shipper is not liable for any loss
or destruction of the goods;
3 that the common carrier need not
observe any diligence in the custody of
the goods;
4 that the common carrier shall exercise a
degree of diligence less than that of a
good father of a family;

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that the common carrier shall not be


responsible for any acts of its employee;
that the common carriers liability for acts
committed by thieves, or of robbers who
do not act with grave or irresistible threat,
violence or force, is dispensed with or
diminished;
that
the
common
carrier
is
not
responsible for the loss, destruction, or
deterioration of goods on account of the
defective condition of the car, vehicle,
ship, airplane or other equipment used in
the contract of carriage.

A stipulation that the common carrier's


liability is limited to the value of the goods
appearing in the bill of lading, unless the
shipper or owner declares a greater value, is
binding.
A contract fixing the sum that may be
recovered by the owner or shipper for the
loss, destruction, or deterioration of the
goods is valid, if reasonable and just under
the circumstances, and has been fairly and
freely agreed upon.
The law of the country to which the goods
are to be transported governs the liability of
the common carrier in case of loss,
destruction or deterioration.
The provisions of articles 1733 to 1753 shall
apply to the passenger's baggage which is
not in his personal custody or in that of his
employee. As to other baggage, the rules in
articles 1998 and 2000 to 2003 concerning
the responsibility of hotel-keepers shall be
applicable.
Fire may not be considered as a natural
disaster or calamity. It does not fall within the
category of act of God UNLESS caused by
lighting or by natural disaster or calamity. It
may even be caused by actual privy or fault
of the carrier. (EASTERN SHIPPING vs.
IAC)
The Civil Code provisions on Common carrier
shall not be applied when the carrier is not
acting as such but as a private carrier. The
stipulation in the charter party absolving the
owner from liability for loss due to the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
negligence of its agent would be void only if
strict public policy governing common
carriers are applied. Such policy has no force
when the public at large is not involved, as in
the case of a ship totally chartered for the
use of a single party (HOME INSURANCE
vs. AMERICAN STEAMSHIP)
In case where the Common carrier w/o just
cause1 Delays the transportation of goods
2 Changes the stipulated route / usual
route
The annulment of the agreement limiting the
carriers liability is no longer necessary; The
carrier cannot simply avail of the benefit
/defense of limited liability.
When the conditions printed in the back of
the ticket stub are in letters so small that
they are hard to read, this would not warrant
the presumption that the passenger were
aware of those conditions such that he had
fairly and freely agreed to them . The
passenger therefore is not bound by such
stipulations. (SHEWARAN vs. PAL)
II. SAFETY OF PASSENGERS
DUTY: A common carrier is bound to carry
the passengers safely as far as human care
and foresight can provide, using the utmost
diligence of very cautious persons, with a due
regard for all the circumstances.
RULE: The responsibility of a common carrier
for the safety of passengers as required in
articles 1733 and 1755 cannot be dispensed
with or lessened by stipulation, by the
posting of notices, by statements on tickets,
or otherwise.
EXCEPTION: When a passenger is carried
gratuitously, a stipulation limiting the
common carrier's liability for negligence is
valid, but not for willful acts or gross
negligence.
The common carrier is liable even if the ticket
issued to passenger provides exemption of
common carrier from death or injury of
paseenger
and
notices
were
posted
dispensing
extraordinary diligence of the
common carrier or even if the passenger was
given a discount of his fares. (2001 Bar
exams)

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If
the
passenger
is
carried
gratuitously, stipulation limiting CC for
negligence is valid but not for WILLFUL ACT
OR GROSS NEGLIGENCE.
A reduction of fare does not justify any
limitation of the common carrier's liability.
Is the carrier liable for death of or
injuries to the passengers due to the
negligence or willful acts of ITS
EMPLOYEES?
YES, although such employees may have
acted beyond the scope of their authority or
in violation of the orders of the common
carriers.
Illustrative rule: Two passengers engage in a
fist-fight inside a bus terminal. An on-duty
driver attempts to pacify them but instead
kills one. The carrier is liable! But, if the
killing of the passenger occurred while the
driver is off-duty, the carrier is not liable.
(Recall the case of Gillaco v. Manila Railroad,
the carrier was held not liable when its
employee, a security guard who harbored a
grudge against a fellow passenger, shot and
killed the latter. The guard committed the
killing while he was off-duty.)
The Common carrier is held liable because 1 The driver , although stopping the
bus, nevertheless did not put off the
engine.
2 He started to run the bus even before
the conductor gave him the signal to
go and while the passenger was still
unloading part of the baggage . ( LA
MALLORCA vs. CA)
In the case of LACAM vs. SMITH , the Court
held that an accident caused by defects in
the automobile is not a caso fortuito. The
rationale of the carriers liability is the fact
that the passenger has neither the choice nor
control over the carrier in the selection and
use of the equipment and appliances in use
by the carrier.
Q: Is the carrier liable for death of or
injuries to the passengers due to the
willful acts or negligence of other
passengers or of strangers?

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
YES, a common carrier is responsible for
injuries suffered by a passenger if the
common carrier's employees through the
exercise of the diligence of a good father of a
family could have prevented or stopped the
act or omission.
The act of the passengers stabbing another
passenger in the bus. To be absolved, the
common carrier must prove that it was
negligent in preventing the injuries from
accident; otherwise, it would be held liable.
(Bachelor Express vs. CA 188; SCRA 216)
EE riding on train who stepped on
watermelons. Held: The conduct of plaintiff
in undertaking to alight while the train was
yet slightly underway was not characterized
by imprudence and that he was not guilty of
contributory negligence.
The circumstances show that it was no
means so risky for him to get off while the
train was yet moving. It is not negligence per
se for a traveler to alight from a slowly
moving train. (Cangco vs MRR 38 Phil
768)
The DUTY of the PASSENGER is to observe
the diligence of a good father of a family to
avoid injury to himself. The contributory
negligence of the passenger does not bar
recovery of damages for his death or injuries,
if the proximate cause thereof is the
negligence of the common carrier, but the
amount of damages shall be equitably
reduced.
Condition printed on the back of a passenger
ticket commonly known as CONTRACT OF
ADHESION , being drafted only by one
party , usually the corporation , and the only
participation of the other party (passenger )
is the signing of his signature his adhesion
thereto calls for greater strictness and
vigilance on the part of the court of justice
with the view of protecting the weaker party
from abuses . Such contract if enforced will
be subversive of public good , thus placing
the common carrier at a decided advantage
over those who may have legitimate claims
against it. The said condition is therefore
unenforceable, as contrary to public policy- to

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make the court accessible to all those who


have need of their services.
Moral damages are not recoverable on
breach of contract of carriage in view of
ART.2219-20 NCC . EXCEPTIONS1 Where the mishap results in the death
of a passenger; Because the common
carrier becomes subject to the rule in
ART.2206 NCC entitles the spouse,
descendants, ascendants to moral
damages for mental anguish as a
result of the death of the deceased.
2 2.Where it is proved that carrier was
guilty of fraud or bad faith EVEN if
death does not result.
Mere carelessness does not per se justify an
inference of malice or bad faith on the part of
the common carrier ; Must be GROSS
negligence
Concurring causes of action arising from
negligent act of the common carrier:
1 Culpa Contractual/breach of contract
(2003 Bar Exams)
Only the carrier is primarily
liable not the driver, because
there is no privity between the
driver and the passenger.(Art
1759, NCC.)
No defense of due
diligence
in
the
selection
and
supervision
of
the
employees.
2 Culpa aquiliana (quasi delict)
The carrier and the driver are solidarily liable
as joint torfeasors.(Art 2180 NCC)
Defense of due diligence in the
selection
and
supervision
of
employees is available. Exception:
maritime tort resulting in collision
Although the relation of passenger
and carrier is contractual both in
origin and nature, nevertheless, the
act that breaks the contract may also
be
a
tort.
(Air
France
vs.
Carrascoso; 18 SCRA 155)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

In the case of injury to a passenger


due to the negligence of the driver of
the bus on which the passenger was
riding on and of the driver of another
vehicle, the drivers as well as the
owners of the two vehicles are jointly
and severally liable for damages. It
should not make any difference that
the liability of the bus owner springs
from a contract while that of the driver
springs from a quasi delict. (Tiu vs.
Arriesgado)
Culpa criminal( Criminal Negligence)
The driver is primarily liable.
The carrier is subsidiarilly liable
only if the driver is convicted
and declared insolvent.(art 100
RPC)

The principle of last clear chance would


call for application in a suit between the
owners and drivers of the two colliding
vehicles. It does not arise where a passenger
demands responsibility from the carrier to
enforce its contractual obligations.(Phil.
Rabbit Bus Lines vs. CA)
CODE OF COMMERCE OVERLAND
TRANSPORTATION
Nature of Contract
Art. 349. A contract of transportation
by land or waterways of any kind shall be
considered commercial:
1. When it involves merchandise or
any object of commerce.
2. When, no matter what its object
may be, the carrier is a merchant or is
customarily
[habitually]
engaged
in
transportation for the public.
Requisites for a contract of transportation by
land or water to be commercial :
(1) transportation of merchandise is
always commercial
(2) transportation of person or news is
commercial only when the CC is a merchant
or is habitually engaged in transportation for
the public
* principal requirement : the CC is a
merchant or is habitually engaged in
transportation for the public; the object
carried is of little importance

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Effect of Civil Code on the provisions of the


Code
of
Commerce
on
Overland
Transportation

The NCC does not expressly repeal the


provisions of the Code of Commerce
on overland transportation. Instead, it
makes such provisions suppletory to
the provisions of the NCC on common
carriers

Bill of Lading: Written acknowledgement


of receipt of goods and agreement to
transport them to a specific place to a
person named or to his order or bearer.
Ambiguity is construed against
the carrier, the contract being one
of adhesion.
Kinds of Bills of Lading
1. Negotiable Bill of Lading one in
which it is stated that the goods referred
to therein will be delivered to the bearer,
or to the order of any person named in
such document.
2. NonNegotiable Bill of Lading the
goods referred to therein will be delivered
to a specified person.
3. Clean Bill of Lading One which does
not indicate any defect in the goods
4. Foul Bill of Lading Contains a
notation indicating that the goods are in
bad Condition.
5. Spent Bill of Lading Covers goods
that have already been delivered by the
carrier without a surrender of a signed
copy of the Lading.
6. Through Bill of Lading Issued by a
carrier who is obliged to use the facilities
of other carriers.
7. On Board Bill of Lading one in
which it is stated that the goods have
been received on board the vessel which
is to carry the goods.
8. Received for Shipment Bill of
Lading it is stated that the goods have
been received for shipment with or

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
without specifying the vessel by which the
goods are to be shipped.
9. Custody Bill of Lading issued by
the carrier to the whom the goods have
been delivered for shipment but the
vessel indicated in the bill of leading
which is to carry the goods has not yet
reached the port where the goods are
held for shipment.
10. Port Bill of Lading one which is
issued by the carrier to whom the goods
have been delivered, and the vessel to
carry the goods is already in the port
where the goods are held for shipment.
ThreeFold Nature of Bills of Lading
1. A contract in itself and the parties are
bound by its terms;
2. A receipt; and
3. A symbol of the covered by it
They are also documents of title,
and if negotiable in form they can
constitute negotiable documents
of title.
Legal effect of the Issuance of Bill of
Lading

Bill of leading constitute the legal


evidence of the contract between the
shipper and the carrier by the
contents of which the disputes which
may arise regarding their execution
and performance shall be decided, no
exception being admissible other than
those of falsity and material error in
the drafting.

Effect of absence of a bill of lading

It does not preclude liability on a


contract of transportation.
The
dispute shall be determined by the
legal proofs which the parties may
present in support of their respective
claims, according to the general
provisions established in the Code for
commercial contracts.

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Right to refuse packages


Gen. Rule: a common carrier cannot
ordinarily refuse to carry a particular class
of goods to the prejudice of the traffic in
those goods.
Exception: However, under Art. 365,
carriers are authorized to refuse packages
if they are unfit for transportation.
Time for delivery of goods
Where no period fixed
The carrier shall be bound to forward
them in the first shipment of the same or
similar goods, which he makes to the
points where he must deliver them.
Should he not do so, the damages caused
by the delay shall be for his account.
Where for delivery of goods
The carrier must deliver the goods within
the time fixed. For failure to do so, the
carriers shall pay the indemnity stipulated
in the bill of lading. Also, damages shall
be paid if the carrier refuses to pay the
stipulated indemnity or is guilty of fraud
in the fulfillment of his obligation.
Limitation as to carriers liability (2002
Bar exams)
(1). No Liability
The carrier will not be liable at all
for the negligent acts of its crew
and employees. This is NULL and
VOID for being contrary to public
policy
(2). Limited Liability

Regardless of the value of the


cargo, the maximum liability of the
carrier will be, for example, P500.
This is VOID for being contrary to
public policy.
(3). Qualified Liability

A stipulation in the bill of lading


limiting the liability of the carrier
to a valuation unless the shipper
declares a higher value and pays a
higher rate of freight is valid.
However, the carrier cannot
limit its liability for injury to, or

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
loss of, good shipped where
such injury or loss was caused
by its own negligence.
Recovery of Damages from carriers
for carriage of goods:
1

Inter-island if goods arrived in


damaged condition:
If damage is apparent, the
shipper must file a claim
immediately.
If damage is Not apparent he
should file a claim within 24
hours from delivery.

The filing of claim is a


condition
precedent
for
recovery.
If the claim is filed, but the
carrier refuses to pay:
Enforce carriers liability in
court by filing a case:
Within 6 years, if no bill
of lading has been
issued, or
Within 10 years, if a bill
of lading has been
issued.
(2) Overseas Where goods arrived in a
damaged condition from a foreign port to
a Philippine Port of Entry:

Upon discharge of goods, if the


damage is apparent claim
should be filed immediately;
If damage is not apparent,
claim should be filed within 3
days from delivery.
When may a consignee of goods
abandon the goods and recover the
value thereof from the carrier?
In any of the following cases:
1

Under Art. 363, in case of partial nondelivery, where the consignee proves
that he cannot make use of the goods
capable of delivery independently of
those not delivered.
Under Art. 365, where the goods are
rendered
useless
for sale
and

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consumption for the purpose for which


they are properly destined; or
3 Under Art. 371, where there is delay
through the fault of the carrier.
Two
special
sanctions
for
the
enforcement by the carrier of the
payment
of
expenses
and
transportation charges.
(1) Under Art. 374, judicial sale of the
goods transported; and
(2) Under Art. 375, by creating a lien in
favor of the carrier on the goods
transported.
AIR TRANSPORTATION
The nature of an airlines contract of carriage
partakes of two types, namely: a contract to
deliver a cargo or merchandise to its
destination, and a contract to transport
passengers to their destination.( British
Airways vs. CA, 285 SCRA 450)
Special rules on liabilities:
In case of flight diversion due to bad
weather
or
other
circumstances
beyond the pilots control, the relation
between
the
carrier
and
the
passengers continues until the latter
has been landed at the port of
destination and has left the carriers
premises.
The
carrier
should
necessarily
exercise
extraordinary
diligence in safeguarding the comfort,
convenience and safety of its stranded
passengers until they have reached
their final destination ( Phil Airlines vs.
CA; Sept 15, 1993)

It is firmly settled that moral damages


are recoverable in suits predicted on
breach of a contract of carriage where
it is proved that the carrier was guilty
of fraud or bad faith- in attention to
and lack of care for the interests of its
passengers who are entitled to its
utmost consideration, particularly as
to their convenience- amount to bad
faith which entitles the passenger to
an award of moral damages(Japan

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Airlines vs. Simangon, April 22,
2009)

Even
where
overbooking
of
passengers is allowed as a commercial
practice, the airline company would
still be guilty of bad faith and still be
liable for damages if it did not
properly inform passenger that it
could breach the contract of carriage
even
if
they
were
confirmed
passengers( Zalamea vs. CA GR
104235)
Neglect or malfeasance of the
carriers employees could give ground
for an action for damages. Passengers
have a right to be treated by the
carriers employees with kindness,
respect,
courtesy
and
due
consideration and are entitled to be
protected
against
personal
misconduct,
injurious
language,
indignities and abuses from such
employees.
An air carrier is not liable for the loss
of baggage in an amount in excess of
the limit specified in the tariff which
was filed with the proper authorities,
such tariff being binding on the
passenger
regardless
of
the
passengers lack of knowledge thereof
or assent thereto. In a contract of air
carriage, a declaration by the
passenger of a higher value is needed
to recover a greater amount.

An open dated ticket constitutes a


complete contract between the carrier
and passenger. Hence the airline
company is liable if it refused to
confirm
a
passengers
flight
reservation (Singson vs.CA, GR No.
119995)

An airline company which issued a


confirmed ticket to a passenger
covering successive trips on a trips on
different airlines can be held liable for
damages occasioned by bumping off

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by
one
of
the
successive
airlines(Lufthansa German Airlines
vs. CA; GR. No. 83612)
MARITIME COMMERCE/ WATER
TRANSPORTATION
Special contract of maritime commerce:
1 Charter party
2 Bill of lading
3 Loan of bottomry/respondentia
4 contract of transportations passengers
5 Marine insurance
VESSELS (in general)extends to everything
floating in and on the water, built in the form
of vessel and used for navigation regardless
of form, right or motive power.
MERCHANT VESSELS- engaged in the
transportation of passengers and freight from
one port to another or from one place to
another.
*Are vessels real or personal property?
PERSONAL- but they partake to a certain
extent, of the nature and conditions of real
property, on account of their value and
importance of the world of commerce.
CHARACTERISTICS
OF
MARITIME
TRANSACTIONS:
1 Real- similar to transactions over real
property with respect to effectivity
against third persons, which are done
through registration. The evidence of real
nature is shown by:
the limitation of the liability of the
agents to the actual value of the
vessel and the freight money and
the right to retain cargo, embargo
and detention of the vessel even in
cases where ordinary civil law
would not allow more than a
personal action against debtor.
2 Hypothecary- the liability of the owner of
the vessel is limited to the vessel itself.
3 Preference of credits- Mortgage of a
vessel properly registered becomes of
preferred mortgage lien which shall have
priority over all claims against the vessel
in an extrajudicial foreclosure for:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a
b
c
d
e
f
g
h
i
j

credit in favor of the public treasury;


judicial cost of the proceedings;
pilotage and tonnage charges and
other sea and port changes;
salaries of depositories and keepers of
the vessel;
captain and crew's wages;
general average
salvage including contract salvage;
maritime liens arising prior in time to
the recording of the preferred
mortgage;
damages arising out of tort; and
Preferred mortgage registered prior in
time.

A.BILL OF LADING ( 1998 and 2005 bar


Exams)
A bill of lading serves two functions:
a It is a receipt for the goods shipped;
b It is a contract by which three parties,
namely the shipper, the carrier, and
the consignee undertake specific
responsibilities and assume stipulated
obligations.
A bill of lading delivered and accepted
constitutes the contract of carriage even
though
not
signed,
because
the
acceptance of a paper containing the
terms of a proposed contact generally
constitutes an acceptance of the contract
and of all of its terms and conditions of
which the acceptor has actual or
constructive notice (Keng Hua Paper
Products Inc. vs. CA, Feb. 1998)
A bill of lading is in the nature of a contract of
adhesion.
DOCTRINE
OF
LIMITED
LIABILITY
(HYPOTHECARY
NATURE
OF
MARITIME
COMMERCE) ART. 587, CODE OF COMMERCE
1994, 1997,1999 and 2000 bar exams
The liability of the ship owner is
limited to the value of the vessel. The
limited liability of the owner is
confined to the vessel, equipment and
freight or insurance, if any. If the ship
owner has abandoned the ship,

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equipment and freight, his liability is


extinguished.
If the vessel sinks the liability of the
owner is extinguished, although he
may have other properties.
If the vessel does not sink, the owner
May
exercise
the
right
of
abandonment and the liability of the
ship owner is limited to the value of
the vessel.

EXCEPTIONS
TO
LIMITED
LIABILITY
RULE:
1 When the vessel is not abandoned by
the owner or ship agent
2 When the vessel is covered by
insurance
3 Expenses for repair of the vessel
before it sails
4 Claims of employees under the labor
laws
5 When ship owner/ship captain is at
fault or guilty of negligence.
a. lack of proper and adequate
equipment(insufficient
life
vests)
b. lack of proper technical
training of the offices and of
the vessel
Monarch Ins Co. vs. Ca; Allied Guarantee
Insurance Co vs. CA & Equitable
Insurance vs. CA, (June 8, 2000)
As a general rule, a ship owner's
liability is merely co-extensive with his
interest in the vessel, except where
actual fault is attributable to the ship
owner. Thus, as an exception to the limited
liability doctrine, a ship owner or ship
agent may be held liable for damages when
the sinking of the vessel is attributable to the
actual fault or negligence of the ship owner
or its failure to ensure the seaworthiness of
the vessel. The instant petitions cannot be
spared from the application of the exception
to the doctrine of limited liability in view of
the unanimous findings of the courts below
that both Aboitiz and the crew failed to
ensure the seaworthiness of the M/V P.
Aboitiz.( Aboitiz Shipping Corp vs CA,
October 17,2008)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
PHILIPPINE COAST GUARD (PCG) vested
with exclusive authority over the registration
and documentation of Philippine vessels,
issuance of all certificates, licenses or
documents,
necessary
or
incident
to
registration.
VESSELS REQUIRED TO BE REGISTERED:
1 All vessels used in Philippine water;
2 Vessels of 3 tons gross shall not be
registered UNLESS the owner shall so
desire;
3 All undocumented vessels.
Where Registration to be effected?
- At its home port (when a coast guard
district or station is on the same port); if
none, at the nearest COAST GUARD
DISTRICT OR STATION).
OPTIONS AS TO SMALL BOATS:
1 If vessel is of domestic ownership and 15
tons gross or less certificate of Philippine
registry is optional.
Purpose: declare nationality of a vessel
2 Vessel (5 tons gross or less) & no
certificate
of
Philippine
registry

certificate of ownership is optional.


Privileges: right to engage in Philippine
coastwise trade and protection of the
authorities and the flag is also subject to
the same privileges.
3 Vessel (3 tons gross or less) not to be
registered unless the owner shall so
desire.
PURPOSE OF REGISTRATION:
Purchaser's rights maybe maintained against
a claim filed by the THIRD PERSON.
*Who shall be entitled to the freightage
and who shall be obliged to pay the
crew and other persons who make up
the compliment of the vessel?
>It depends upon the time of the sale.
If made while it is on a voyage,
freightage
shall
pertain
entirely
to
PURCHASER and payment of the crew and
other persons who make up its compliment
for same voyage shall be for his account.

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If made after the vessel has arrived at


the port of its destination, freightage shall
pertain to the VENDOR and other individuals
who make up its complement shall be for his
account, UNLESS the contrary is stipulated in
either case.
FORMALITIES FOR VOLUNTARY SALE
ABROAD:
1 Execution of the bill of sale before consul
of the Philippines at the port where it
terminates its voyage;
2 Inscription in the registry of the consulate;
3 Forwarding by the consul of a true copy of
the instrument of purchase and sale to
the registry of vessel;
4 Statement whether the vendor receives
its price in whole or in part.
FORMALITIES FOR SALE WHEN VESSEL
RENDERED USELESS:
1 application for examination;
2 notification of the consignee/ insurer;
3 proof of damage and impossibility of the
repair of the vessel;
4 order for the sale of vessel at public
auction.
RULES FOR THE SALE OF VESSEL AT
PUBLIC AUCTION:
1 articles of the vessel shall be appraised
after making an inventory
2 posting of the order of the auction
3 announcement
4 auction shall be held on the day fixed
5 Observance
of
special
provisions,
governing the sale of the vessel while it is
on the foreign country.
2 METHODS OF SALE:
1 judicial
2 voluntary
*EFFECT
OF
REGISTRATION
OF
VOLUNTARY SALE
- if it take place while the vessel is on a
voyage, the preferred & hypothecary
nature of the credit subsists against the
vessel until after its return to the port of
registry and 3 months after the inscription
of the sale in the registry of vessels or
after the return, so as to prevent the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
possibility of fraud upon creditors through
voluntary sale.
PARTICIPANTS IN MARITIME COMMERCE:
a ship owners and ship agents
b captains and masters of the vessel
c officers and crew of the vessel
c.1 sailing (1st mate)
c.2 quartermaster (2nd mate)
c.3 engineer
d seamen
e supercargoes
A SHIP OWNERS AND SHIP AGENTS
Ship owner - A person who has possession
or control in the management of the vessel
and the consequent right to direct her
navigation and receive freight earned and
paid, while his possession continues.
Ship agent A person entrusted with
provisioning and representing the vessel in
the port in which it may be found; also
includes the ship owner
LIABILITY OF SHIP OWNER AND SHIP
AGENT:
1 for the acts of the captain
2 contracts entered into by the captain to
repair, equip, and provision the vessel
PROVIDED that the amount claimed was
invested for the benefit of the vessel
3 Indemnities in favor of third person that
may arise from the conduct of the captain
in the care of goods and safety of
passengers transported.
4 Tort or quasi-delict committed by captain
EXCEPT collision with another vessel.
5 Damages in case of collision due to the
fault, negligence or want of skill of
captain, sailing mate or by other member
of the complement.
SHIP AGENT'S AND OWNERS LIABILITY
LIMITED:
- By abandoning the vessel with all her
equipment and the freight it may have
earned during the voyage(by NECESSARY
IMPLICATION); limited to the value of the
vessel or its insurance in view of the socalled REAL AND HYPOTHECARY nature of
maritime law.

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Effect: cessation of the responsibility of


the owner

POWER
AND
FUNCTIONS
AND
LIABILITIES OF SHIP AGENT:
1 capacity to trade;
2 discharge duties of the captain in case of
the latter's absence;
3 contract in the name of the owners with
respect to repairs, details of equipment,
armament, and all that relate to the
requirements of navigation;
4 order of new voyage and make a new
charter or insure the vessel after
obtaining authorization from the ship
owners.
DUTY OF SHIP AGENT TO DISCHARGE
THE CAPTAIN AND MEMBERS OF THE
CREW:
- If the seamen contract is not for a definite
period or voyage, he may discharge them at
his discretion
- If for a definite period, he may not
discharge them until after the fulfillment
of their contracts EXCEPT on the ff.
grounds:
a insubordination in serious matters
b robbery
c theft
d habitual drunkenness
e damage caused to the vessel or to its
cargo through malice, manifest or
proven negligence
EFFECT/LOSS/DESTRUCTION OF VESSEL:
1 extinguishes liability arising from the
conduct of the captain in the vigilance of
the goods and for the safety of the
passengers and for any liability arising
from negligent acts of the captain
2 extinguishes liability for the wages of the
captain and the crew and for advances
made by the ship agent if the vessel is
lost by shipwreck or capture
3 liability for collision
B. CAPTAINS AND MASTERS OF THE
VESSEL
Captain- who govern vessels that navigate
the high seas or ships of large dimensions
and importance, although engaged in the
coastwise trade

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Masters- who command smaller ships
engaged exclusively in the coastwise trade
NATURE OF POSITION:
1 General agent of the ship owner
2 Technical Director of the vessel
3 Representative of the Government of the
country under whose flag he navigates
QUALIFICATIONS:
1 Filipino citizen
2 Legal capacity to contract
3 Must have passed the required physical,
mental examination required for licensing
him as such
INHERENT POWERS OF THE CAPTAIN:
1 appoint crew in the absence of ship agent
2 command and direct crew
3 impose correctional punishment on those
who while on board vessel fail to comply
with his orders or are wanting in discipline
4 make contracts for the charter of vessel in
the absence of ship agent
5 supply, equip, and provision the vessel
6 order repair of vessel to enable it to
continue its voyage
SOURCES OF FUNDS TO COMPLY WITH
THE
INHERENT
POWERS
OF
THE
CAPTAIN:
1 from the consignee of the vessel
2 from the consignee of the cargo
3 by drawing on the ship agent
4 by a loan on bottomry
5 by sale of part of the cargo
DUTIES OF THE CAPTAIN:
1 bring on board the proper certificate and
document and a copy of the Code of
Commerce
2 keep a logbook, accounting book and
freight book
3 examine before the voyage
4 stay on board during the loading and
unloading of the cargo
5 be on deck while leaving or entering the
port
6 seeks protest, arrival under stress and in
case of shipwreck
7 follow
instruction
of
and
render
accounting to the ship agent

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8
9

save the vessel lost in case of wreck


hold in custody properties left by
deceased by passengers and crew
members
10 comply with the requirements of customs,
health, etc. at the port of arrival
LIABILITIES OF THE SHIP AGENT/SHIP
OWNER FOR ACTS DONE BY THE
CAPTAIN TOWARDS PASSENGERS AND
CARGOES MAKING THEM SOLIDARILY
LIABLE TO THE LATTER:
1 damages to vessel and to cargo due to
lack of skill and negligence
2 theft and robbery of the crew
3 losses and fines in violation of laws
4 damages due to mutinies
5 damages due to misuse of power
6 deviations
7 arrival under stress
8 damages due to non-observance of
marine regulations
NO LIABILTY FOR THE FOLLOWING:
1.
damages caused to the vessel by force
majeure
2.
obligations contracted for the repair,
equipment and provisioning of the vessel
UNLESS he has expressly bound himself
personally or has signed a bill of exchange or
promissory note in his name
CARGO- which includes all goods, wares and
merchandise aboard a ship which do not from
part of the ship's stores.
REQUIREMENTS
FOR
DEFENSE
OF
PUBLIC ENEMY:
1.
act of public enemy in war was the
proximate and only cause of the loss
2. common carrier exercise due diligence to
prevent, minimize loss before, during, and
after occurrence of the act of the public
enemy in war
FORMALITIES REQUIRED WHERE VESSEL
HAS GONE THROUGH HURRICANE
1 Captain must make a protest before
competent authority at the first port he
touches
2 Such a protest must be made within 24
hours following his arrival

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
3
4

captain must ratify it within some period


when he arrives at his destination
he must immediately proceed with the
proof of the facts

FORMALITIES REQUIRED WHERE VESSEL


SHIPWRECKED:
1 captain must make a protest before the
nearest competent authority
2 protest be made within 24 hours following
his arrival
3 make sworn statement of the facts
4 authority/consul abroad shall verify said
facts
5 such authority shall take other steps in
carrying at the facts
6 such authority shall also make statements
of what may be the result of the
proceeding in the logbook and in that of
the sailing mate
7 he shall deliver the original records to the
captain
8 captain must ratify the protest
C

OFFICERS AND CREW

1
-

Sailing mate/First mate


second chief of the vessel who takes the
place of the captain in case of absence,
sickness, or death and shall assume all of
his duties, powers, and responsibilities

DUTIES:
1 provide himself with maps, and charts
with astronomical tables necessary for
the discharge of his duties
2 keep the Binnacle book
3 Change the course of the voyage on
consultation with captain and the
officers of the boat, following the
decision of the captain in case of
disagreements.
4 Responsible for all the damages
caused to the vessel or to the cargo
by reason of his negligence
2
-

Second mate
takes command of the vessel in case of
the
inability or disqualification of the
captain and the sailing mate, assuming in
such
case
their
powers
and
responsibilities and duties

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DUTIES:
1 preserve the hull and rigging of the
vessel
2 arrange well the cargo
3 discipline the crew
4 assign work to crew members
5 Inventory the rigging and equipment
of the vessel, if laid up.
3
-

Engineers
Officers of the vessel but have no
authority EXCEPT in matters to motor
apparatus. When 2 or more are hired, one
of them should be the Chief Engineer

DUTIES:
1 in charge of motor apparatus, spare
parts,
and
other
instruments
pertaining to the engines
2 keep the engines and boilers in good
condition
3 not to change or repair the engine
without authority of the captain
4 inform the captain of any damage to
the motor apparatus
5 keep an Engine book
6 supervise all personnel maintaining
the engine
4 Members of the Crew
Hired by the ship agent. Where he is present
and in his absence, the captain hires them
preferring Filipinos, and in their absence,
he ,ay take in foreigners but not exceeding
1/5 of the crew.
CLASSES OF SEAMAN'S CONTRACT:
1 by the voyage
2 by the month
3 by share of profits or freightage
JUST CAUSES FOR THE DISCHARGE OF
SEAMAN WHILE CONTRACT SUBSISTS:
1 perpetration of a crime
2 repeated
insubordination,
want
of
discipline
3 repeated incapacity and negligence
4 habitual drunkenness
5 physical incapacity
6 desertion

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
CAUSES OF REVOCATION OF VOYAGE:
1 war
2 blockade
3 prohibition to receive cargo at destination
4 embargo
5 inability of the vessel to navigate
RULES IN CASE OF DEATH OF A SEAMAN:
The seaman's heirs are entitled to the
payment as follows:
1 if death is natural:
a compensation up to time of death
if engaged on voyage
b if by voyage- half of amount if
death occurs on voyage out; and
full if on voyage in
c if by shares- none if before
departure; full if after departure
2 if death is due to defense of vessel- full
payment
3 if captured in defense of vessel- full
payment
4

if captured due to carelessness- wages up


to the date of the capture

NO LIABILY UNDER THE FOLLOWING


CIRCUMSTANCES:
1
2
3

If before beginning voyage, captain


attempts to change it or a naval war with
the power to which was destined occurs
If a disease breaks out and be officially
declared an epidemic in the port of
destination
If the vessel change owner or captain

COMPLEMENT OF THE VESSEL


- All persons on board, from the captain to
the cabin boy, necessary for the
management, maneuvers, and service,
thus including the crew, the sailing mates,
engineers, stalkers and other employees
on board not having specific designations
- It does not include the passengers or the
person whom the vessel is transported

3
4

Interdiction of Commerce
a governmental prohibition of commercial
intercourse intended to bring about an entire
cessation for the time being of all trade
Embargo
- a proclamation or order of the State
usually issued in time of war/ threatened
hostilities prohibiting the departure ships/
goods from some or all the ports of such
State until further order
Blockade
- a sort of circumvallation of place by all
foreign connections and correspondence
is as far as human power can affect it to
be cut-off
SUPERCARGOES
- person who discharge administrative
duties assigned to him by ship agent or
shippers, keeping an account and record
of transaction as required in the
accounting book of the captain
B.CHARTER PARTY
- Contract by virtue of which the owner or
agent
binds
himself
to
transport
merchandise or persons of a fixed price. It
may either be contract of affreightment
(time and Voyage Charter) and bareboat
or demise charter.
CLASSES OF CHARTER PARTY
1

As to extent of vessel hired


a total- whole of the vessel is chartered
b partial- only part of the vessel is
chartered

As to time
a until a fixed day/ for a determined
number of days and months
b for
a
voyage(outgoing/return/roundtrip)

As to freightage

FORMALITIES REQUIRED FOR SEAMAN'S


AGREEMENT:
1 reduced to writing in Accounting Book
2 signed by parties

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visaed by marine authority if executed in


Philippine territory/consul or consular
agents if executed abroad
read to the seaman concerned and such
fact must be stated in the agreement

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
a
b
c

for a fixed amount for the whole cargo


for a fixed amount per ton
for an amount per month

Contract of Affreightment- the owner


of the vessel leases a part or all of the
space of the vessel to carry goods but
retains the possession, command and
navigation of the vessel. The charter
merely has the use of the space in the
vessel in return for the payment of the
charter hire.

Bareboat/ Demise Charterinvolve


the transfer of full possession and
control of the vessel to the charterer.
The entire control and management of
the vessel is given up to the charterer.
The charterer mans the vessel with his
own people. (2003 Bar exams)

The owner of the vessel has no more


insurable interest on the vessel. In case of
loss of the vessel, the ship owner can
recover the value of the vessel from the
charterer.(Caltex vs. Sulpicio line,
1999)
FORMAILITIES
REQUIRED
FOR
A
CHARTER PARTY:
1 in writing
2 drawn in duplicate
3 signed by the parties
4 contain stipulation
not all requisites are essential for the
validity of charter party
Primage
- belongs to owner/ freighters;
- increase of the freight rate
- considered gratuity to master if is
stipulated
- a bonus to be paid to a captain after a
successful voyage
Demurrage
- Sum which is fixed by the contract of
carriage, or which is allowed, as
remuneration to the owner of a ship for
the detention of his vessel beyond the
number of days allowed by the charter
party for loading/unloading/sailing.

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"Lay days"
-days allowed to charter parties for loading
and unlading
- period when vessel will be delayed in port
for loading and unloading.
"Extra Lay Days"
- days which followed after lay days have
elapsed
Deadfreight
A cargo not loaded is considered as
deadfreight, which covers the amount paid by
or recoverable from the charterer for the
portion of the ships capacity the latter
contracted for but failed to occupy.
GOODS TRANSFERRED MAY BE:
1 sold by captain to necessary repairs
2 jettisoned for the common safety
3 loss by reason of shipwreck/stranding
4 seized by pirates/enemies
5 suffer deterioration/diminutions
6 increase by natural cause and weight or
size
RIGHTS AND OBLIGATIONS OF CHARTER
PARTY:
A Of the ship owner or ship agent
1 If the vessel is chartered wholly not to
accept cargo from others;
2 To observe represented capacity;
3 To unload cargo clandestinely placed;
4 To substitute another vessel if load is
less than 3/5 of capacity;
5 To leave the port if the charter does
not bring the cargo within the lay days
and extra lay days allowed;
6 To place in a vessel in a good
condition to navigate;
7 To bring cargo to nearest neutral port
in case of war or blockade.
B

Of the charterer
1 to pay the agreed charter price
2 to pay freightage or unboarded
cargoes
3 to pay losses to others for loading
uncontracted cargo and illicit cargo
4 to wait if the vessel needs repair
5 to pay expenses for deviation

RESCISSION OF CHARTER PARTY


A At charterer's request

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1

by abandoning the charter and paying


half of the freightage
2 error in tonnage or flag
3 failure to place the vessel at the
charterer's disposal
4 return of the vessel due to pirates,
enemies or bad weather
5 arrival at the port for repairs
At ship owners request
1 If the extra lay days terminate without
cargo being placed alongside the
vessel
2 Sale by the owner of the vessel before
loading
Fortuitous causes
1 war
2 blockade
3 prohibition to receive cargo
4 embargo
5 inability of the vessel to navigate
LOANS
ON
BOTTOMRY/
RESPONDENTIA (1961,1967,& 1980 bar
exams)

These loans are secured by the owner or


captain of the vessel for the use of the
vessel. In the case of loans on bottomry, the
security of the loan is the vessel itself; while
loan on respondentia, the security of the loan
is the cargo.
The loan is in the nature of insurance. The
loan will only be paid on the safe arrival of
the vessel or cargo fails to reach the port of
destination, the creditor loses his right to
recover the amount of the loan.
COMMON ELEMENTS OF LOANS ON
BOTTOMRY AND RESPONDENTIA
1 exposure of security or marine peril
2 obligation of the debtor conditioned only
upon safe arrival of security at the point
of destination
HYPOTHECARY NATURE OF BOTTOMRY
AND RESPONDENTIA:
General Rule: the obligation of the borrower
to pay is extinguished if the goods given as
security are absolutely lost by reason of an
accident of the voyage designated, and if it is
proven that the goods were on board.
EXCEPTIONS:
1 loss due to inherent defect

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2
3
4
5

loss due to the barratry on the part of the


captain
loss due to the fault or malice of the
borrower
that the vessel is engaged in contraband
that the cargo loaded on the vessel be
different from that agreed upon

Bottomry/repondenti
Simple loan
a
Marine risk
Duly
established Not necessary
existence of a marine
risk is necessary
Form and manner
Must be executed in Formal requisites
accordance with the of an ordinary
form
and
manner contract
will
prescribed by the code suffice
of commerce
Registry of Vessels
Must be recorded in No
such
the registry of Vessel registration
is
to be binding to third required
persons
Preference
Preference is extended Preference
is
to the last lender
extended to the
first lender

When loan on bottomry or respondentia


regarded as Simple Loan
1. Lender loaned an amount larger than the
value of the object due to fraudulent means
employed by the borrower(art 726 code of
commerce)
2. Full amount of the loan is not used for the
cargo or given on the goods if all of them
could not have been loaded, the balance will
be considered a simple loan( art 727 Code of
Commerce)
3. If the effects on which the money is taken
is not subjected to any risk(729 Code of
commerce
Note: under existing laws, the parties to a
loan, whether ordinary or maritime, may
agree on any rate of interest (Cb circular
905); provided the same is not contrary to
law, morals, good customs, public order or
public policy. Art 1306 NCC

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
ACCIDENTS IN MARITIME
(2000 bar exams)
1 Averages
2. Arrival Under stress
3. Collision
4. Shipwreck

COMMERCE

Average
An extraordinary or accidental expense
incurred during the voyage in order to
preserve the cargo, vessel or both, and all
damages or deterioration suffered by the
vessel from departure to the port of loading
to the consignment (art 806 Code of
commerce)
The person whose property has been
saved must contribute to reimburse the
damage caused or expense incurred if the
situation constitutes general average.
It is classified into: (1) general or gross
average or (2) simple or particular.
Particular/ simple
Gross/ general
Definition
Damages
or Damages
or
expenses caused to expenses
the vessel or cargo deliberately caused
that did not inure to in order to save the
the
common vessel, its cargo
benefit, and borne orboth from real
by
respective and known risk.
owner.( art 809)
(811)
Liability
The owner of the All persons having
goods which gave an interest in the
rise to the expense vessel
and
the
or
suffered
the cargo therein at the
damage shall bear time of the average
this average.(810)
shall contribute to
satisfy
this
average(812)
The insurers and
lenders
on
bottomry
and
respondentia shall
likewise contribute
Numbers of interests involved

Requisites of Gross or General average


1. Common danger
that both the ship and the
cargo, after has been loaded,
are subject to the voyage, or in
the port of loading or unloading
that the danger arises from the
accidents
of
the
sea,
dispositions of the authority or
faults of men, provided that
the circumstances producing
the peril should be ascertained
and imminent or may rationally
be said to be certain and
imminent.
2.Deliberate Sacrifice
Gen. rule: sacrifice is made through
the jettison of the cargo or part of the shipis
thrown overboard DURING THE VOYAGE.
Exceptions:
a where the sinking of a vessel is
necessary to extinguish a fire in a
port, roadsteads, creek or bay
b where cargo is transferred to lighten
the ship on account of a storm to
facilitate entry into a port.
3.Sucess
Pupose: To be able to demand general
contribution
4.Proper formalities and legal steps
a. procedure for recovery
b. assembly and deliberation
c. resolution of the caption
d. entry of the resolution in the logbook
e. detailed minutes
f. delivery of the minutes to the maritime
judicial authority of the first port, within
24hours from arrival
Ratification by the captain under oath.
Goods Not Covered By General Average Even
if sacrified:
Goods carried on deck
1.goods not recorded in the books or records
of vessel

Only one interest Several interests is


involved
involved
Share in the damage/expense
100% share
In proportion to
the value of the

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owners
property
saved
Right to recover
No reimbursement
There may be
reimbursement

Page 110

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2.fuel for the vessel if there is more than
sufficient fuel for the voyage.
JETTISON
Act of throwing cargo overboard in order to
lighten the vessel
ORDER
OF
GOODS
TO
BE
CAST
OVERBOARD IN CASE OF JETTISON:
1 Those which are on the deck, preferring
the heaviest one with the least utility of
value
2 Those which are below the upper deck
beginning with the one with greatest
weight and smallest value jettisoned
goods are not res nullius nor deemed
abandoned within the meaning of civil law
so as to be the object of occupation by
salvage.
Arrival Under stress
- arrival of a vessel at a port of destination
on account of lack of provision, wellfounded fear of seizure, pirates, or
accidents in sea disabling navigation
When lawful
The inability to
continue
voyage is due
to
lack
of
provisions, well
founded fear of
seizure,
privateers,
pirates
or
accidents
of
the
sea
disabling it to
navigate

When
unlawful
1. lack of
provisions
due
to
negligence
to
carry
according
to
usage
and
customs;
2.risk
of
enemies
not
wellknown
or
manifest;
3.defect
due
to
improper
repair;
4.malice,
negligence,
lack
of
foresight,
lack of skill

Who bears
expenses
The
ship
owner
or
ship agent
is liable in
case
of
unlawful
arrival
under
stress. But
they
shall
not
be
liable
for
damages
caused by a
reason of a
lawful
arrival.

Cases of collision:
1. Due to the fault, negligence or lack of skill
of the captain, sailing mate or the

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complement of the vessel--under 826, the


ship owner shall be liable for the losses and
damages
2. Due to the fault of both vessels --> under
827, each vessel shall suffer its own losses,
but as regards the owners of the cargoes,
both vessels shall be jointly and severally
liable
3. Where it cannot be determined which of
the 2 vessels is at fault --> under 828, each
vessel shall suffer its own losses, and both
shall also be solidarily responsible for the
losses and damages caused to their cargoes
4. Collision due to fortuitous event or force
majeure --> under 830, each vessel shall
bear its own damages
5. Where two vessels collide with each other
without their fault but by reason of the fault
of a third vessel --> under 831, the owner of
the third vessel causing the collision shall be
liable for the losses and damages 6. a vessel
which is properly anchored and moored may
collide with those nearby by reason of a
storm or other cause of force majeure -->
under 832, the vessel run into shall suffer its
own damages and expenses
Nautical Rules to determine negligence :
1. When 2 vessels are about to enter a
port, the farther one must allow the nearer to
enter first; if they collide, the fault is
presumed to be imputable to the one who
arrived later, unless it can be proved that
there was no fault on its part.
2. When 2 vessels meet, the smaller
should give the right of way to the larger one.
3. A vessel leaving port should leave
the way clear for another which may be
entering the same port.
4. The vessel which leaves later is
presumed to have collided against one who
has left earlier.
5. There is also a presumption against
the vessel which sets sail at night.
6. The presumption also works against
the vessel with spread sails which collide with
another which is at anchor, and cannot move,
even when the crew of the latter has received
word to lift anchor, when there was not
sufficient time to do so or there was fear of a
greater damage or other legitimate reason.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
7. The vessel which is not properly
moored or does not observe the proper
distances has the presumption against itself.
8. The vessel which is moored at a
place not used for the purpose, or which is
improperly moored or does not have sufficient cables, or which has been left without
watch,
has
also
against
itself
the
presumption.
9. The same rule applies to those
vessels which do not have buoys to indicate
the location of its anchors to prevent damage
to these vessels which may approach it.
Zones in
zones):

time

of

collisions

(3

time

1. all the time up to the moment when


the risk of collision may have said to have
begun
--> within this zone, no rule is
applicable because none is necessary. Each
vessel is free to direct its course as it deems
best with reference to the movements of the
other vessel.
2. the time between the moment
when the risk of collision begins and the
moment when it has become a practical
necessity.
3. the time between the moment
when collision has become a practical
certainty and the moment of actual contact
Effect of fault of privileged vessel during
third zone :
If a vessel having a right of way
suddenly changes its course during the third
zone, in an effort to avoid an imminent
collision due to the fault of another vessel,
such act may be said to be done in extremis,
and
even
if
wrong,
cannot
create
responsibility on the part of said vessel with
the right of way. Thus, it has been held that
fault on the part of the sailing vessel at the
moment preceding a collision, that is, during
the third division of time, does not absolve
the steamship which has suffered herself and
a sailing vessel to get into such dangerous
proximity as to cause inevitable harm and

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confusion, and a collision results as a


consequence. The steamer having a far
greater fault in allowing such proximity to be
brought about is chargeable with all the
damages resulting from the collision; and the
act of the sailing vessel having been done in
extremis and even wrong, is not responsible
for the result.

CASES COVERED BY COLLISION AND


ALLISION:
1 one vessel at fault- such vessel is liable
for damage caused to innocent vessel as
well as damages suffered by owners of
cargo of both vessels
2 both vessels at fault- each vessel must
bear its own loss but the shippers of both
vessel may go against the ship owner
who will be solidarily liable
3 vessel at fault not known- same as rule 2
4 third vessel at fault- same rule 1
5 fortuitous event- no liability, each bear its
own loss
Rules governing LIABILITIES of parties in
case of COLLISION: (1995, 1997,1998, &
2007 Bar exams)
1. Where collision is due to the negligence
or malice of the captain and/or other
ship officers of one vessel, the ship owner
of such vessel shall be liable for all resulting
damages.
2. Where collision is due to the fault of both
vessels, each vessel shall suffer their
respective losses but as regards to the
owners of the cargoes, both vessels shall be
jointly and severally liable.
3. If it cannot be determined which
vessel is at fault, each vessel shall suffer
its own loses and both shall be solidarily
liable for loses or damages on the cargo.
(DOCTRINE OF INSCRUTABLE FAULT)
4. The vessels may collide with each other
through
fortuitous
event
or
force
majeure. In which case, each shall bear its
own damage.
5. Two vessels may collide without their
fault but by reason of a third vessel. The
third vessel shall be liable for losses and
damages sustained.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Requisite for RECOVERY arising from
collision:
1. Protest must be made within 24 hours
before:
a) Competent authority at the point of
collision or
b At the first port of arrival, if in the
Philippines and to the Philippine
Consul, if the collision took place
abroad.
Injuries to persons and damage to cargo of
owners not on board on time of collision need
not be protested.
Article 835, Code of Commerce: In case
of collision, there must be a marine protest to
recover collision damage; in such a case, the
marine protest is a condition sine qua non
and not merely a disclaimer unlike in the case
of arrival under stress and shipwreck.
CARRIAGE OF GOODS BY SEA ACT
Applicable to all transportation of goods by
sea in foreign trade to and from Philippine
ports AND does not apply to purely domestic
transport.
Laws applicable to a contract for the
carriage of goods by sea:
1. Distinguish - common carrier (Civil Code)
- private carrier
2. Where is the vessel going?
a. Common carrier coming to the Phils.
1st: Civil Code
2nd: COGSA (it's more specific than Code
of Commerce)
- in foreign trade
3rd: Code of Commerce
b. Private carrier coming to the Phils. in
foreign trade
1st: COGSA (because it's more specific)
2nd: Code of Commerce
3rd: Civil Code (provisions not on common
carriers e.g. torts, contracts)
c. From the Phils. to a foreign country:
apply laws of such foreign country (Art. 1753)
- with respect to vessels destined for foreign
ports, the COGSA doesn't apply unless
parties make it applicable.

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Q: In what situations does COGSA primarily


apply?
A: Where the parties expressly stipulate that
COGSA shall govern their respective rights
and obligations.
Q: Can the COGSA apply in domestic
shipping?
A: Generally, NO.
EXCEPTION: when parties agree to make it
apply.
Q: What application does COGSA have in
carriage of passengers?
A: None. Applies only to carriage of goods.
What is the TACKLE TO TACKLE RULE?
The shipper shall be responsible for the
goods the moment it passes through one side
of the ship for the purpose of loading until it
passes through the other side for discharging.
The reason for this being that there are two
tackles involved in this operation; one for
loading, the other, unloading.
The shipper is responsible for: Loading,
Handling, Transport, Carriage, Custody, and
Discharge
What is the Rule for LOSS or DAMAGE to
the goods? (1992, 1995, 20000 & 2005
bar exams)
If the damage is apparent, then notice
must be immediately given. The notice may
either be in writing or orally.
If the damage is not apparent, notice
must be given within three days from such
delivery.
Failure to give notice is not a bar to the action
to file provided the filing of the suit is made
within one year from delivery to consignee.
Notice requirements:
COGSA: Sec. 3(6)
If loss or damage is apparent - protest as soon
as receipt of goods
If not apparent -> within 3 days of delivery

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Rationale behind the 3-day notice and
relatively short prescriptive period:
- To provide carrier an opportunity to
look for the lost goods
- To discover who was at fault
-In case of transshipment, to determine,
when and where damage occurred.

The one year period is suspended by:


a. The express agreement of the parties
(Universal Shipping Lines Inc vs. IAC 1990)
b. The filing of an action in court until it is
dismissed
the 1yr period shall run from delivery
of the last package and is not
suspended by extrajudicial demand.
the one year period shall run from
delivery to the arrasstre operator and
not to the consignee

Code of Commerce: Art. 366


apparent - protest at time of receipt
non-apparent - within 24 hours after receipt
WARSAW: Art. 26
in case of damage of:
baggage - within 3 days from receipt
goods - within 7 days

SALVAGE LAW (ACT 2616)


I

FOUR REQUISITES FOR SALVAGE


REWARD TO BE WARRANTED:
A There must be a valid object of
salvage, i.e., vessel, cargo, freight
or wreck of vessel or cargo;
B Such object must have been
exposed to marine peril;
C Salvage services must be rendered
voluntarily, i.e., not arising from
pre-existing duty;
D Salvage effort must be successful.

II

SHIPWRECK AND DERELICT:


A Shipwreck. A shipwreck refers to
the injuries suffered by the vessel
disabling the latter for navigation.
B Derelict. It refers to the vessel or
cargo abandoned at sea by those
entrusted by such vessel or cargo.
A derelict is a vessel or cargo
badly damaged and abandoned by
the crew to the mercy of the sea.
Mere abandonment of such vessel
or cargo does not make it res
nullius so that anybody can claim
it. The proper procedure must be
followed.

in case of delay: within 14 days from receipt


Prescriptive period
the carrier and the agent shall be
discharged form liability in respect of
loss or damage unless suit is brought
within 1 year from:
(1) in case of damaged goods: from the time
delivery of the goods was made
(2) in case of non-delivery (i.e., lost goods):
from the date the goods should have been
delivered
Loss or damage as applied to the COGSA
contemplates a situation where no delivery at
all times was made by the shipper of the
goods because the same had perished, gone
out of commerce, or disappeared in such a
way that their existence is unknown or they
cannot be recovered. It does not include a
situation where there was indeed a delivery
but to the wrong person or a misdelivery
(Ang vs. American Steamship Agencies 19
scra123) and damage arising from delay or
late delivery( Mitsui O.S.K line Ltd vs. CA 287
SCRA 366) in such instance the civil code
rules on prescription shall apply.
Hence, in case of misdelivery (delivery
to wrong person) or conversion of the
goods, the rules on prescription found
in the Civil Code shall apply (10 years
for contracts; 4 years for tortuous
obligations)

BAR OPERATIONS 2011

III PROCEDURE:
A If the vessel is abandoned, salvor
must tow it to the nearest port
where it will be delivered to the
Municipal Treasurer or to the
Collector of Customs who will
advertise the fact of salvage;

Page 114

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
B

If owner of salvaged vessel


appears, he may take possession
of the vessel and must pay a
reward, the amount of which is not
more than 50% of the value of the
vessel;
If no claim for the vessel is made
within
3
months
after
the
publication of the advertisement,
the Municipal Treasurer will sell the
property saved at a public auction
and the reward and expenses shall
be deducted from the proceeds.
The balance is deposited with the
Treasury;
If no one claims the same after 3
years, shall go to the salvors
and the other half to the
government.

IV CONSIDERATIONS IN DETERMINING THE


AMOUNT OF REWARD
1 First case
A Value of the property saved;
B Zeal employed by those who made
the salvage;
C Danger to the lives of those who
participated;
D Number of persons who took part;
E Services rendered;
F Expenses incurred
2

Second case: If one vessel saves


another vessel, the reward going to
the former shall be divided as follows:
A to the ship owner;
B to the captain; and
C to the crew.

250,000 Francs or 16,600 Special Drawing


injury;
17 SDR per kilogram for checked luggage
kilogram for non-signatories of the amend
5,000 Francs or 332 SDR for the hand lug

NATURE AND SCOPE OF WARSAW


CONVENTION

SCOPE: Applies to all international carriage


of persons, luggage or goods performed by
aircraft for reward. It applies equally to
gratuitous carriage by aircraft performed by
an air transport undertaking.
International Carriage:
Means any carriage in which, according to
the contract made by the parties, the
place of departure and the place of
destination, whether or not there be a
break in the carriage or a transshipment,
are situated either within the territories of
two High Contracting Parties, or within the
territory of a single High Contracting
Party, if there is an agreed stopping place
within a territory subject to the
sovereignty, suzerainty, mandate or
authority of another Power, even though
that Power is not a party to this
Convention.

The Warsaw Convention to which the


Republic of the Philippines is a party
and which has the force and effect of
law in this country applies to all
international
transportation
of
persons, baggage or goods performed
by an aircraft gratuitously or for hire.

When a contract of carriage is a


contract
of
international
transportation,
provisions
of the
Convention for the Unification of Certain
Convention
automatically
apply
and
Rules Relating to International
exclusively
govern
the
rights
and
Transportation by Air
liabilities of the airline and its
The Warsaw Convention:
passengers. (American Airlines vs. CA,
mandates carriers to issue passenger tickets; G.R. No. 116044-45 March 9, 2000)
requires carriers to issue baggage checks for checked luggage;
creates a limitation period of 2 years within which a claim must be
Two categories of International
brought (Article 29); and
Transportation covered:
limits a carrier's liability to at most:
WARSAW CONVENTION

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GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1

that where the place of


departure and the place of
destination are situated within
the territories of two High
Contracting Parties regardless
of whether or not there be a
break in the transportation or a
transshipment; and

that where the place of


departure and the place of
destination are within the
territory of a single High
Contracting Party if there is an
agreed stopping place within a
territory
subject
to
the
sovereignty,
mandate,
or
authority of another power,
even though the power is not a
party of the Convention. (Mapa
vs. CA, G.R. No. 122308 July 8,
1997)

(Lhuillier vs. British Airways, G.R. No.


171092 March 15, 2010)
When the airline tickets evidencing
the contract of transportation between
Mapa and TWA, which were purchased in
Bangkok, show the place of departure and
the place of destination to be within the
United States, the contract cannot come
within the purview of the first category of
International Transportation.
The linkage of the contract to the
Manila-Los Angeles travel tickets obtained
by the Mapas from PAL cannot bring the
arrangements within the second category,
where the same were filled-up only by the
Mapas in response to the query Your
Complete Intinerary at the time they
claimed for their lost pieces of baggage.
(Mapa vs. CA, G.R. No. 122308 July 8,
1997)
It does not however preclude
operation of the Civil Code or other
pertinent laws:
Although the Warsaw Convention has
the force and effect of law in this country,
being a treaty commitment assumed by

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the
Philippine
government,
said
convention does not operate as an
exclusive enumeration of the instances
for declaring a carrier liable for breach of
contract of carriage or as an absolute
limit of the extent of that liability. The
Warsaw Convention declares the carrier
liable in the enumerated cases and under
certain limitations. However, it must not
be construed to preclude the operation of
the Civil Code and pertinent laws. (PAL
vs. CA, G.R. No. 119641 May 17,
1996)
II

SALIENT ASPECTS OF THE WARSAW


CONVENTION
A

Provision on the valuation of


cargo

Article 22. (1) In the transportation of passengers, th


each passenger shall be limited to the sum of 125,0
accordance with the law of the court to which the ca
may be awarded in the form of periodical payments,
of the said payments shall not exceed 125,000 franc
contract, the carrier and the passenger may agree t

Art 25 (1) The carrier shall not be entitled to avail hi


Convention which exclude or limit his liability, if t
willful misconduct or by such default on his part as,
the court to which the case is submitted, is con
misconduct.
Admittedly, in a contract of air
carriage a declaration by the passenger
of a higher value is needed to recover a
greater amount, and that the air carrier
is not liable for loss of baggage in an
amount in excess of the limits specified
in the tariff which was filed with the
proper authorities, such tariff being
binding on the passenger regardless of
his lack of knowledge thereof or assent
thereto. Nevertheless, there can be
no blind reliance on adhesion of
contracts where:
1

the facts and circumstances justify


that they should be disregarded;
and

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2

when the benefits of limited liability


have been waived when the air
carrier failed to raise timely
objections during the trial when
questions and answers regarding
the actual claims and damages
sustained by the passenger were
asked. (British Airways vs. CA,
G.R. No. 121824 January 29,
1998)

The Convention's provisions do not


"regulate or exclude the following areas:

2
3

liability for other breaches of


contract by the carrier;
misconduct of its officers and
employees; or
for some particular or exceptional
type of damage. (Northwest
Airlines vs. CA, G.R. No.
120334 January 20, 1998)

Varying
views
misconduct:

as

regards

1st View Outside WC Coverage


The Warsaw Convention denies to the
carrier availment of the provisions which
exclude or limit his liability, if the
damage is caused by his willful
misconduct or by such default on his
part as, in accordance with the law of the
court seized of the case, is considered to
be equivalent to willful misconduct, or if
the damage is similarly caused by any
agent of the carrier acting within the
scope of his employment.
Under domestic law and jurisprudence
(the Philippines being the country of
destination), the attendance of gross
negligence (given the equivalent of fraud
or bad faith) holds the common carrier
liable for all damages which can be
reasonably
attributed,
although
unforeseen, to the non-performance of
the obligation, including moral and
exemplary damages. (Sabena Beligian

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Page 117

G.R.

No.

2nd View - Tortious conduct as


ground
for
the
petitioners
complaint is within the purview of
the Warsaw Convention (Lhuillier vs.
British Airways, G.R. No. 171092
March 15, 2010)
C

Provision on limiting liability

World Airways vs. CA,


104685 March 14, 1996)

On limitation of time to file action


Article 29. (1) The right to damages
shall be extinguished if an action is not
brought within two years, reckoned
from the date of arrival at the
destination, or from the date on which
the aircraft ought to have arrived, or
from the date on which the carriage
stopped.
(2) The method of calculating the
period of limitation shall be determined
by the law of the court to which the
case is submitted.

The
two
(2)-year
limitation
incorporated in Art. 29 as an absolute
bar to suit and not to be made subject to
the various tolling provisions of the laws
of the forum. This therefore forecloses
the application of our own rules on
interruption of prescriptive periods.
Article 29, par. (2), was intended only to
let local laws determine whether an
action had been commenced within the
two (2)-year period. (United Airlines
vs. Uy, G.R. No. 127768 November
19, 1999)
Prescription of action covered by
Warsaw convention distinguished
from those arising from torts:
Respondent's complaint reveals that
he is suing on two (2) causes of action:
(a) the shabby and humiliating treatment
he received from petitioner's employees
at the San Francisco Airport which
caused him extreme embarrassment and
social humiliation; and, (b) the slashing
of his luggage and the loss of his

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
personal effects
$5,310.00.

amounting

to

US

While his second cause of action an


action for damages arising from theft or
damage to property or goods is well
within the bounds of the Warsaw
Convention, his first cause of action
an action for damages arising from the
misconduct of the airline employees and
the violation of respondent's rights as
passenger clearly is not.
Consequently, insofar as the first
cause
of
action
is
concerned,
respondent's failure to file his complaint
within the two (2)-year limitation of the
Warsaw Convention does not bar his
action since petitioner airline may still be
held liable for breach of other provisions
of the Civil Code which prescribe a
different period or procedure
for
instituting the action, specifically, Art.
1146 thereof which prescribes four (4)
years for filing an action based on torts.
(United Airlines vs. Uy, G.R. No.
127768 November 19, 1999)
Use of delaying tactics by the carrier
wont preclude enforcement of
action even beyond the prescriptive
period:
Despite the express mandate of Art.
29 of the Warsaw Convention that an
action for damages should be filed within
two (2) years from the arrival at the
place of destination, such rule shall not
be applied in the instant case because of
the delaying tactics employed by
petitioner airline itself. (United Airlines
vs. Uy, supra)
IV Jurisdiction of Local Courts under the
Warsaw Convention
Art. 1 (2) For the purposes of this
Convention the expression "international
carriage" means any carriage in which,
according to the contract made by the
parties, the place of departure and the
place of destination, whether or not there
be a break in the carriage or a
transhipment, are situated either within the
territories of two High Contracting Parties,

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Page 118

or within the territory of a single High


Contracting Party, if there is an agreed
stopping place within a territory subject to
the sovereignty, suzerainty, mandate or
authority of another Power, even though
that Power is not a party to this
Convention. A carriage without such an
agreed stopping place between territories
subject to the sovereignty, suzerainty,
mandate or authority of the same High
Contracting Party is not deemed to be
international for the purposes of this
Convention. (Emphasis supplied)
Art. 17. The carrier shall be liable for
damage sustained in the event of the death
or wounding of a passenger or any other
bodily injury suffered by a passenger, if the
accident which caused the damage so
sustained took place on board the aircraft
or in the course of any of the operations of
embarking or disembarking.
Art 28 (1) An action for damages must be
brought at the option of the plaintiff, in the
territory of one of the High Contracting
Parties, either before the court of the
domicile of the carrier or of his principal
place of business or where he has a place
of business through which the contract has
been made, or before the court at the place
of destination.
Destination vs. Agreed Stopping
Place
Article 1(2) also draws a distinction
between a "destination" and an "agreed
stopping place." It is the "destination" and
not an "agreed stopping place" that controls
for purposes of ascertaining jurisdiction under
the Convention.
The contract is a single undivided
operation, beginning with the place of
departure and ending with the ultimate
destination. The use of the singular in the
expression indicates the understanding of the
parties to the Convention that every contract
of carriage has one place of departure and
one place of destination. An intermediate
place where the carriage may be broken is
not regarded as a "place of destination."

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
(Lhuillier vs. British Airways, G.R. No.
171092 March 15, 2010)
Jurisdictional Character of Art. 28
We further held that Article 28(1) of
the Warsaw Convention is jurisdictional in
character. Thus:
A number of reasons tend to support
the characterization of Article 28(1) as a
jurisdiction and not a venue provision. First,
the wording of Article 32, which indicates the
places where the action for damages "must"
be brought, underscores the mandatory
nature of Article 28(1). Second, this
characterization is consistent with one of the
objectives of the Convention, which is to
"regulate in a uniform manner the conditions
of international transportation by air." Third,
the Convention does not contain any
provision prescribing rules of jurisdiction
other than Article 28(1), which means that
the phrase "rules as to jurisdiction" used in
Article 32 must refer only to Article 28(1). In
fact, the last sentence of Article 32
specifically
deals
with
the
exclusive
enumeration
in
Article
28(1)
as
"jurisdictions," which, as such, cannot be left
to the will of the parties regardless of the
time when the damage occurred.
xxxx
In other words, where the matter is governed
by the Warsaw Convention, jurisdiction takes
on a dual concept. Jurisdiction in the
international sense must be established in
accordance with Article 28(1) of the Warsaw
Convention, following which the jurisdiction of
a particular court must be established
pursuant to the applicable domestic law. Only
after the question of which court has
jurisdiction is determined will the issue of
venue be taken up. This second question
shall be governed by the law of the court to
which the case is submitted. (Lhuillier vs.
British Airways, Supra.)
PUBLIC SERVICE LAW
What is a public utility?
exams)

BAR OPERATIONS 2011

(2000 Bar

Page 119

A public utility is a business or service


engaged in regularly supplying the public
with some commodity or service of public
consequence such as electricity, gas, water,
transportation,
telephone
or
telegraph
service. Apart from statutes which define the
public utilities that are within the purview of
such statutes, it would be difficult to
construct a definition of a public utility which
would fit every conceivable case.
As its
name indicates, however, the term public
utility implies a public use and service to the
public. (Am. Jur. 2d V. 64, p.549.) (Albano
vs. Reyes)
ORDINARY AND PRIMARY PURPOSE OF
THE PUBLIC SERVICE LAW
ORDINARY PURPOSE:
To subject public services to state
control and regulation.
SPECIFIC PURPOSES:
1 To secure adequate, sustained
service for the public at the
least possible cost, and protect
the
public
against
unreasonable charges and poor
inefficient service.
2 To
protect
and
conserve
investments
which
have
already been made for public
service, and prevent ruinous
competition.
BASIS OF THE LEGISLATIVE POWER TO
REGULATE PUBLIC SERVICES:

POLICE POWER, for the protection of


the public as well as the utilities
themselves. (Pantranco v. P.S.C., 70
Phil 221)

CONSTITUTIONAL BASIS:
1 ARTICLE XII, SECTION 11:
> A franchise, certificate, or any
other form of authorization for the
operation of public utility shall be
granted to:
-

Filipino Citizens
Corporations
or
associations organized

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

under Philippine Laws


where at least 60% of
the capital is owned by
Filipino Citizens.
100%
Filipino
Management

> Mass media and commercial


telecommunications shall be:
- 100% Filipino Capital,
and
- 100%
Filipino
management
2 ARTICLE XII, SEC 17:
In times of national emergency, when
the public interest so requires, the
State may during the emergency and
under reasonable terms, temporarily
take over or direct the operation of
any private owned public utility or
business
affected
with
public
interests.
3 ARTICLE XII, SECTION 18
The state may, in the interest of
national welfare or defense, establish
and operate vital industries and upon
payment
of
just
compensation,
transfer to public ownership utilities
and other private enterprises to be
operated by the government.
4 ARTICLE XII, SECTION 19
The state shall regulate or prohibit
monopolies when the public interest
so requires; no combination in
restraint of trade or unfair competition
shall be allowed
Distinguish a Certificate of Public
Convenience from a Certificate of Public
Convenience and Necesssity
A CPC is issued whenever the
Commission finds that the operation of the
proposed public service will promote the
public interests in a proper and suitable
manner, for which a municipal or legislative
franchise is not necessary. On the other hand,
CPCN is issued upon approval of any political
subdivision of the Philippines when in the
judgment of the Commission, such franchise
or privilege will properly conserve the public

BAR OPERATIONS 2011

Page 120

interest (Perez, Transportation


Public service Act).

Laws

and

OFFICES
NOW
CHARGED
WITH
ENFORCEMENT OF PUBLIC SERVICE LAW
The Public Service Commission has been
abolished. The following replaced it:
1

2
3

5
6

LAND TRANSPORTATION- Department


of Transportation and Communication
(DOTC) and the Land Transportation
Franchising and Regulatory Board
(LTFRB)
WATER TRANSPORTATION- Maritime
Industry Authority (MARINA)
AIR
TRANSPORTATIONAir
Transportation Office (ATO) headed by
an assistant secretary and the Civil
Aeronautics Board, which has been
placed under the DOTC as an attached
agency.
TELECOMMUNICATIONSNational
Telecommunications
Commission,
which has been placed under the
DOTC as an attached agency.
ENERGYBoard
of
Energy
but
transferred to the Energy Regulatory
Board (ERB)
WATERWORKSNational
Water
Resources Council

LIMITATIONS ON THE POWERS OF THE


REGULATORY
BOARDS,
COMMISSIONS AND COUNCILS:
1 General:
Powers are limited from those
granted in the legislation creating the
body.
2 Constitutional:
Regulations imposed must not
have the effect of depriving an owner
of his property without due process of
law nor confiscating or appropriating
private
property
without
just
compensation.
3 Judicial:
Boards, commissions are not
judicial tribunals and therefore cannot
determine judicial questions such as
validity of contract.
4 Jurisdiction:

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Extends only to persons engaged
in public utilities, or over a public
utility, which holds a Certificate of
Public Convenience.
B.

JURISDICTION
General Rule: Over persons engaged
in public utilities, or over a public
utility, which holds a Certificate of
Public Convenience.
Exemption: violators of a valid
regulation promulgated under the law

Distinguish Legislative Franchise from a


CPC
A franchise is a grant or privilege
from the sovereign power, while the
certificate is a form of regulation through an
administrative agency.
A franchise is a property right and
cannot be revoked or forfeited without due
process of law (PLDT, Co. v. NTC and
CELLCOM, Inc. (Express Telecommunications
Co., Inc. G.R. No. 88404, 18 October 1990),
whereas a CPC or a CPCN as far as the
interest of the State is concerned ,
constitutes neither a franchise nor a contract,
confers no property right, and is a mere
license or a privilege. The holder of said
certificate does not acquire a property right
in the route covered thereby. Nor does it
confer upon the holder any proprietary right
or interests or franchise in the public
highways. Revocation of this certificate
deprives him of no vested right. New and
additional
burdens
alteration
of
the
certificate, or even revocation or annulment
thereof is reserved to the State (Lugue v.
Villegas, G.R. No. L-22545, 28 November
1969).
Essentials before Granting a CPC/ CPCN
1 The granter must be a citizen of the
Philippines or entity sixty percent of
which is owned by such citizens.
2 The grantee must have sufficient
financial capability to undertake the
service and,

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The service will promote public


interests and convenience in a proper
and suitable manner.

Note: The overriding principle is a public


interest,
necessity
and
convenience
(Sundiang
& Aquino, Reviewer on
Commercial Law).
Coverage of CPC
a ferry boat service is considered as a
continuation of the highway when crossing
rivers or lakes , which are small bodies of
water; hence a land transportation company
is no longer required to secure a separate
CPC in order to operate a ferry boat for the
use of its buses.
Grounds for Revocation of Certificate
1 The holder violates or contumaciously
refuses to comply with any order, rule
or regulation of the commission.
(Sec.16(n)of Public Service Act)
2 The holder is a mere dummy.
3 The operator ceased operation and
placed his buses on storage; or
4 The operator abandons totally the
service. (Manzanal v. Ausejo, No.
L-31056, August 4, 1988).
Unlawful Acts of Public Utility Companies
1 Engagement in public service business
without first securing the proper
certificate
2 Providing or maintaining unsafe,
improper or inadequate service as
determined by the proper authority
3 Committing any act of unreasonable
and unjust preferential treatment to
any particular person, corporation or
entity as determined by the proper
authority
4 Refusing or neglecting to carry public
mail upon request (Secs.18 &19).
Prior Old Operator Rule
Before permitting a new operator to
invade the territory of another already
established with a CPC, the prior operator
must first be given the opportunity to extend
its service in order to meet public needs in
the matter of transportation. It means that a

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
public utility operator should be shielded
from ruinous competition by affording him
the opportunity to improve his equipment
and service before allowing a new operator to
serve in the same territory he covers
(Mandaluyong Bus Co. v. Francisco).
The law contemplates that the first
licensee will be protected in his investment
and will not be subjected to a ruinous
competition. It is not therefore the policy of
the law to issue a CPC to a second operator
to cover the same field and in competition
with a first operator who is rendering
sufficient, adequate and satisfactory service,
and who in all things and respects is
complying with the rules and regulations of
the commission. The old operator must be
given the opportunity to improve and extend
his lines. (Batangas Trans Co. v Orlanes,
52 Phil 455)
BASIS OF THE PRIOR OPERATOR RULE
Prevent
ruinous
and
wasteful
competition and interest of public will be
preserved.
EXCEPTIONS TO THE PRIOR OPERATOR
RULE:
1

3
4
5
6
7

8
9

Operator fails/ neglects to make


improvement or affect the
increase
in service when given the opportunity.
When Prior operator offers to meet
increases in demand only when another
operator offered to render additional
service
Abandonment of operation
Prior operators did not oppose
application
Prior operator cannot satisfy needs of
the public
When opportunity to improve service is
raised by prior operator only on appeal.
CPC granted to the applicant is a
maiden franchise covering a new route,
albeit overlapping with that of the old
operator
Expiration of corporate existence of
prior operator.
Monopoly

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10 Passage through private subdivision


which granted permit to another
Prior Applicant Rule
Where there are various applicants for
a public utility over the same authority, all
conditions being equal, priority in the filing of
the application for a certificate of public
convenience becomes an important factor in
granting or refusal of a certificate of
convenience
and
the
Commission
is
authorized to determine which of the
applicants can best meet the requirements of
public convenience (delos Santos v. Pasay
Trans. Co.).
Protection of Investment Rule
One of the purposes of the Public
Service Act is to protect and conserve
investments which have already been made
for that purpose by public service operators
Registered Owner Rule
The registered owner of a certificate of
a public convenience is liable to the public for
the injuries or damages suffered by third
persons caused by the operation of said
vehicle, even though the same had been
transferred to a third person.
The registered owner is not allowed to
escape responsibility by proving that a third
person is the actual and real owner.
The registered owner is the lawful
operator insofar as the public and third
persons are concerned; consequently, it is
directly and primarily responsible for the
consequences
of
its
operation.
In
contemplation of law, the owner/operator of
record is the employer of the driver, the
actual
operator
and
employer
being
considered as merely its agent. The same
principle applies even if the registered of any
vehicle does not use it for public service
(Equitable Leasing Corp. v. Suyom, G. R.
No.143360, September 5, 2002), or
otherwise stated, to
privately-owned
vehicles.
A sale, lease or financial lease that is
not registered with the LTO does not bind
third persons who are aggrieved in tortuous

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
incidents, for the latter need only to rely on
the public registration of a motor vehicle as
conclusive evidence of ownership. A lease is
an encumbrance in contemplation of law,
which needs to be registered in order for it to
bind third parties (PCI Leasing Corp and
Finance Inc. v. UCPB General Insurance
Co., Inc. G.R. No. 162267, 4 July 2008).
Registered Owner had Recourse against
Vendee/ Transferee
A registered owner who has already
sold or transferred a vehicle has a recourse to
a third-party complaint, in the same action
brought against him to recover for the
damage or injury done, against the vendee or
transferee of the vehicle (Villanueva v.
Domingo, 438 SCRA 485, 2004).
Kabit System( 2005 Bar exams)
It is an arrangement whereby a person
who has been granted a certificate of public
convenience allows other persons who own
motor vehicles to operate under such license,
for a fee or percentage of such earnings.
Although the parties to such agreement are
not out rightly penalized by law,the kabit
system is invariably recognized as being
contrary to public policy and therefore void
and inexistent under Art.1409, New Civil
Code ( Lim v. C.A. G.R.No. 125817, 16
January 2002)
Effects
1 The
transfer,
sale,
lease
or
assignment of the privilege granted is
valid between the contracting parties
but not upon the public or third
persons (Gelisan v. Alday No.L30212, 30 September 1987)
2 The registered owner is primarily
liable for all the consequences flowing
from the operations of the carrier. The
public has the right to assume that
the registered owner is the actual or
lawful owner thereof. It would be very
difficult and often impossible, as a
particular matter, for the public to
enforce their rights of action for
injuries inflicted by the vehicle if they
should be required to prove who the

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actual owner is (Benedicto v. IAC


G.R No. 70876, 19 July 1990).
The thrust of the law in enjoining the
Kabit system is to identify the person
upon whom responsibility may be
fixed with the end in view of
protecting the riding public.(Lim v.
C.A. G.R. No 125817, 16 January
2002)
Application of Article 1412 of the NCC
or in pari delicto rule. The registered
owner cannot recover from the actual
owner and the latter cannot obtain
transfer of the vehicle to himself, both
being in pari delicto. (Teja Marketing
Vs. IAC)
For the better protection of the public,
both the registered owner and the
actual owner are jointly and severally
liable with the driver (Zamboanga
Transporatation Co. v. C.A, 29
November 1969)
The determining factor which negates
the existence of Kabit system is the
possession of the franchise to operate
and not the issuance of one SS I.D.
Number for both bus line (Baliwag
Transit V. C.A, 7 January 1987)

Requisites for the Inapplicability of the


Kabit System
1 When neither of the parties to the
pernicious Kabit system is being held
liable for damages.
2 When the case arose from the
negligence of another vehicle using
the
public road to which no
representation or misrepresentation
as regards the ownership and
operation of passenger jeepney was
made.
3 When the riding public was not
bothered of inconvenienced at the
very least by the illegal arrangement
(Lim v. C.A. 16 January 2002)
Boundary System
1 The driver does not receive a fixed
wage but gets only the excess of the
receipt of the fares collected by him
over the amount he pays to the jeep
owner.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2

The gasoline consumed by the jeep is


for the account of the driver.

These two features are not sufficient to


withdraw the relationship between the owner
and the driver from that of employer and
employee. The jeepney owner is subsidiarily
liable as employer in accordance with Art.103
of RPC (Magboo v. Bernardo, 30 April
1963).
Indeed to exempt from liability the owner
of public vehicle who operates it under the
boundary system on the ground that he is a
mere lessor would be not only to abet
flagrant violations of the public service law,
but also to take place the riding public at the
mercy of reckless and irresponsible drivers
(Spouses Henandez v. Spouses Dolor, 30
July 2004)
The Civil Aeronautics Board is expressly
authorized by R.A. No. 776 to issue a
temporary operating permit of certificate of
Public Convenience and Necessity (PAL v.
CAB 26 March 1997)
The Legislature has delegated to the
defunct Public Service Commission and
presently the LTFRB, the power of fixing rates
of public services. But nowhere under the
provisions of law are the regulatory bodies,
the PSC and LTFRB alike, authorized to
delegate that power to a common carrier like
transport operator, or other public service
(KMU Labor v. Garcia, 23 December
1984).
A public Utility is entitled to reasonable
compensation in return for the service it
provides and that it may exact reasonable
charges in accordance with the service
provided of the rates established therefore. In
computing the just and reasonable rates to
be charged by a public utility, three major
factors are to be considered: 1). Rate of
Return; 20. The rate base, 3) the return itself
or the computed revenue to be earned by the
public utility based on the rate of return and
base rate (Davao Light and Power
Company, Inc., 3 April 2003)

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A rate is just and reasonable if it conforms


to the following requirements:
1 One which yields to the carrier a fair
return upon the value of the property
employed in performing the service;
and
2 One which is fair to the public for the
service rendered.
Service of a Public Utility considered
Unlawful
It shall be unlawful for any public
service to provide or maintain ant service
that is unsafe, improper, or inadequate, or
withhold or refuse any service which can be
reasonably be demanded and furnished as
founded and determined by the Commission
in a final order which shall be conclusive and
shall effect and shall effect in accordance
with this Act, upon Appeal for otherwise
(Sec.19 (a) Public Service Act)
Certificate of Public Convenience and
Necessity
a A certificate of Public Convenience is
issued where no special government
franchise is required.
b A certificate of Certificate of Public
Convenience and Necessity is issued
where the public service would require
in its operation the use of government
property, such as the installation of
electric and telephone posts and lines
along public streets requiring a
previous franchise therefore
c No certificate is necessary where the
service of utility is owned, operated
and managed for a private use or
where the owner is not engaged in
public service.
Liability of Registered Owner and
Authorized Operator under the Kabit
System and Boundary System
Both the registered owner and the
Authorized operator of a common carrier
under the Kabit System are jointly and
severally (solidarily) liable for any death or
injury to the passengers and loss/damage to
the goods.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Under the Boundary System the
authorized operator of a common carrier is
liable for the conduct of the driver, there
being an employer-employee relationship
between the operator and the driver.

SPECIAL COMMERCIAL LAWS


LETTERS OF CREDIT
1.
A letter of credit is basically an open
letter of request whereby one person
requests another to advance money or give
credit to a third person for a certain amount
and promises to repay the person advancing
the money.
1.1
They are intended generally to
facilitate the purchase and sale of goods by
providing assurance to the seller of prompt
payment upon compliance with specified
conditions or presentation of stipulated
documents without the seller having to rely
upon the solvency and good faith of the
buyer. This is known as the rule of strict
compliance in a letter of credit transaction
means that the documents tendered by the
seller or beneficiary must strictly conform to
the terms of the letter of credit, i.e., they
must include all documents required by the
letter of credit such as: (a) a draft which is
also called a bill of exchange, is an order
written by an exporter/seller instructing an
importer/buyer or its agent to pay a specified
amount of money at a specified time (b) a bill
of lading, which is a document issued to the
exporter by a common carrier transporting
the merchandise, and (c) invoices.
1.2
The issuing bank in determining
compliance with the terms of the letter of
credit is required to examine only the
shipping documents presented by the seller
and is precluded from determining whether
the main contract is actually accomplished or
not. This arrangement assures the seller of
prompt payment, independent of any breach
of the main sales contract. This known as the
independence principle in a letter of credit
transaction.

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2.
The primary purpose of a letter of
credit is to substitute for, and therefore
support, the agreement of the buyer-importer
to pay money under a contract or other
arrangement.This instrument is basically a
credit security through availment of credit
facilities of the participating banks.
3.
The parties to a letter of credit are: (a)
The Buyer- he is the one who procures the
letter of credit and obliges himself to
reimburse the issuing bank upon receipt of
the documents of title (b) The Issuing Bankis the bank from whom the letter of credit is
procured and which undertakes to pay the
seller upon receipt of the draft and proper
documents of titles and to surrender the
documents
to
the
buyer
upon
reimbursement, and (c) The seller- who in
compliance with the contract of sale ships the
goods to the buyer and deliver the
documents of title and draft to the issuing
bank to recover payment.
3.1.
In an international credit transaction
carried through a letter of credit, the parties
are: (a) The Customer- who is the party who
applies to a bank in one country for the
opening of a letter of credit in favor of the
seller in another country (b) The Issuing
Bank- is the bank in the country of the
customer to which the customer applies for
the issuance of a letter of credit (c) The
Beneficiary- who is the party in another
country who is the creditor of the customer.
Usually, he is the one selling goods to the
customer (d) The Advising Bank is the bank
in the country of the beneficiary which
communicates to the beneficiary the notice
of the credit issued by the issuing bank (e)
The Confirming/Correspondent Bank- is the
bank that undertakes that the letter of credit
will be fully paid. Usually the confirming bank
is also the advising bank, otherwise it is
utilized to lend credence to the letter of credit
issued by a lesser known issuing bank and is
directly liable to the beneficiary.
3.2
The relationships of the parties are to
be governed as follows: (a)Issuing bank and
applicant/buyer/importer Their relationship

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
is governed by the terms of the application
and agreement for the issuance of the letter
of credit by the bank. Unless the contrary is
provided for, the liability of the issuing bank
is solidary with the buyer (b) Issuing bank
and
beneficiary/seller/exporter

Their
relationship is governed by the terms of the
letter of credit issued by the bank, and (c)
Applicant and beneficiary Their relationship
is governed by the sales contract.

The waiver of the right to annul makes the


letter of credit irrevocable

3.3
It is clearly settled in law that there
are thus three contracts which make up the
letter of credit transaction: The contract
between buyer and seller, buyer and issuing
bank, and the letter of credit proper. These
transactions are to be maintained in a state
of perpetual separation.

4.6
A letter of credit becomes void if the
bearer of a letter of credit does not make use
thereof within the period agreed upon with
the drawer, or, in default of a period fixed,
within 6 months counted from its date, in any
point in the Philippines, and within 12 months
anywhere outside thereof, it shall be void in
fact and in law.

4.
The essential conditions of a letter of
credit are: (a) That it be issued in favor of a
definite person and not to order; and (b)
That it be limited to a fixed and
specified amount, or to one or more
undetermined
amounts,
but
within
a
maximum the limits of which has to be stated
exactly.

5.
A standby letter of credit is a bankissued option on a loan involving three
parties: the bank issuing the credit, the party
requesting for such issuance (otherwise
known as the account party) and the
beneficiary. Under the terms of standby letter
of credit (SLC), the beneficiary has the right
to trigger the loan option (referred to as
taking down the loan) if the account party
fails to meet its commitment, in which case
the issuing bank disburses a specified sum to
the beneficiary and books an equivalent loan
to its customer.
SLCs may support
nonfinancial obligations such as those of
bidders, or financial obligations such as those
of borrowers. In the latter case, the borrower
purchases an SLC and names the lender as
beneficiary. Should the borrower default, the
beneficiary has the right to take down the
SLC and receive the principal balance from
the issuing.

4.1
Hence, a letter of credit is not a
negotiable instrument because it is required
to be drawn in favor of a definite person.
4.2
Those which do not have any of the
essential conditions shall be considered
merely as a letter of recommendation.
4.3
The bank or drawer of a letter of credit
shall be liable to the person on whom it was
issued for the amount paid by virtue thereof,
within the maximum fixed therein, while a
notifying bank does not incur any liability
except to notify the beneficiary of the letter
of credit. Before paying, it shall have the right
to demand the proof of the identity of the
person in whose favor the letter of credit is
issued.
4.4
The drawer of a letter of credit may
annul it, informing the bearer and the person
to whom it is addressed of such revocation.

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4.5
The bearer of a letter of credit shall
pay the amount received to the drawer
without delay. Should he not do so, an action
involving execution may be brought to
recover it, with legal interest and current
exchange in the place where payment was
made on the place where it is repaid.

5.1
Another definition is that it is a bankissued option on a loan involving three
parties: the bank issuing the credit, the party
requesting for such issuance (account party)
and the beneficiary. Under its terms, the
beneficiary has the right to trigger the loan
option if the account party fails to meet its
commitment, in which the case the issuing
bank disburses a specified sum to the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
beneficiary and books an equivalent loan to
its customer.
6.
The common types of letters of credit
are: (a)
Irrevocable vs. revocable An
irrevocable letter of credit obligates the
issuing bank to honor drafts drawn in
compliance with the credit and can be neither
cancelled nor modified without the consent of
all parties, including in particular the
beneficiary/exporter. A revocable letter of
credit can be cancelled or amended at any
time before payment; it is intended to serve
as a means of arranging payment but not as
a guarantee of payment (b) Confirmed
vs.
unconfirmed A letter of credit issued by one
bank can be confirmed by another, in which
case both banks are obligated to honor drafts
drawn in compliance with the credit. An
unconfirmed letter of credit is the obligation
only of the issuing bank. Why would an
exporter want a foreign banks letter of credit
confirmed by a domestic bank? One reason
could be if he has doubts
6.1
Other types: (a) Revolving Letter of
Credit-one that provides for renewed credit to
become available as soon as the opening
bank has advised the negotiating or paying
bank that the drafts already drawn by the
beneficiary have been reimbursed to the
opening bank by the buyer (b) Back to Back
Letter of Credit- a credit with identical
documentary requirements and covering the
same merchandise as another letter of credit,
except for the difference in price of the
merchandise as shown by the invoice and
draft. The second letter of credit can only be
negotiated after the first is negotiated.
TRUST RECEIPTS
1.
A trust receipt is a commercial
document whereby the bank releases the
goods in the possession of the entrustee but
retains ownership thereof while the entrustee
shall sell the goods and apply the proceeds
for the full payment of the liability to the
bank.

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1.1
It is a security transaction intended to
aid in financing importers and retail dealers
who do not have sufficient funds or resources
to finance the importation or purchases of
merchandise, and who may not be able to
acquire credit, except through utilization, as
collaterals, of the merchandise imported or
purchased.
1.2
The subject matter of a trust receipt is
always chattel. It will not apply to chattel so
attached to land so as to become part
thereof.
2.
A trust receipt transaction is a
transaction between an entruster and an
entrustee whereby the entruster, who owns
or hold absolute title or security interests
over certain specified goods, documents or
instruments, releases the same to the
possession of the entrustee upon the latters
execution and delivery to the entruster of a
trust receipt wherein the entrustee binds
himself to hold the specified gods, documents
or instruments in trust for the entruster and
to sell or otherwise dispose of the goods,
documents or instruments with the obligation
to turn over to the entruster the proceeds
thereof to the extent of the amount owing to
the entruster, or the goods, documents or
instruments themselves if they are unsold or
not otherwise disposed of.
2.1
A Security Interest means a property
interest in goods, documents or instruments
to secure performance of some obligations of
the entrustee or of some third persons to the
entruster and includes title, whether or not
expressed to be absolute, whenever such title
is in substance taken or retained for security
only.
2.2
A
trust
receipt
transaction
distinguished from:(a) A pledge-in a pledge,
the person doing the financing has
possession of the property; in a trust receipt,
the property is in the possession of the
person financed (b) A conditional sale-in a
conditional sale, there is a sale of the
property from the seller to the buyer; in a
trust receipt, there is no sale of the property
from the entruster to the entrustee (c) A

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
chattel mortgage-a chattel mortgage involves
the creation of a lien upon the property; a
trust receipt does not involve the creation of
a lien (d) A consignment-in a consignment,
the consignor retains title to the property to
secure the indebtedness due from the
consignee; in a trust receipt, the seller does
not retain title to the property but transfers
such title to the entruster, not to the
entrustee
2.3
When a debtor has received the goods
from a supplier thereby acquiring title and
will after borrow money from a bank to pay
for the same, the transaction is a loan even
he signs a trust receipt agreement. It is
essential for a trust receipt transaction for
the bank to first acquire ownership and
possession.
2.4
When a Memorandum of Agreement is
entered between a debtor corporation and a
creditor bank is entered into rescheduling the
payments due from the former, the trust
receipt
transaction
is
novated
and
transformed into a simple loan.
3.
The parties to a trust receipt
transaction are: (a) The entruster- is the
person holding title over the goods,
documents or instruments subject to a trust
receipt transaction, and any successor in
interest of such person, and (b) The entrustee
is the person having or taking possession of
goods, documents or instruments under a
trust receipt transaction, and any successor
in interest of such person for the purpose or
purposes specified in the trust receipt
4.
The rights of the entruster are: (a) to
be entitled to receive the proceeds of the sale
of the goods released under a trust receipt to
the entrustee to the extent of the amount
owing to the entruster (b) to the return of the
said goods, in case they could not be sold;
and (c) to cancel the trust in case the
entrustee defaults, take possession of the
goods, and sell the same at public or private
sale.
4.1
The process of taking possession and
selling the goods is as follows: (a) the

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entruster may cancel the trust and take


possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time upon
default or failure of the entrustee to comply
with any of the terms and conditions of the
trust receipt or any other agreement between
the entruster and the entrustee (b) The
entruster in possession of the goods,
documents or instruments may, on or after
default, give notice to the entrustee of the
intention to sell, and may, not less than five
days after serving or sending of such notice,
sell the goods, documents or instruments at
public or private sale, and the entruster may,
at a public sale, become a purchaser. Notice
of the sale shall be deemed sufficiently given
if in writing, and either personally served on
the entrustee or sent by post-paid ordinary
mail to the entrustees last known business
address (c) the proceeds of any such sale,
whether public or private, shall be applied (1)
to the payment of the expenses thereof; (2)
to the payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments; (3) to the satisfaction of the
entrustees indebtedness to the entruster.
The entrustee shall receive any surplus but
shall be liable to the entruster for any
deficiency.
4.2
Cancellation of the trust receipt and
repossession is not essential for the entruster
to have a cause of action against the
entrustee. They are options available to the
entruster and do not prejudice resort to other
remedies.
5.
The obligations of the entrustee are as
follows: (a) to hold the goods in trust for the
entruster and to dispose of them strictly in
accordance with the terms of the trust
receipt; This includes the authority to
manufacture or process the goods with the
purpose of ultimate sale. Provided, however,
that the entruster retains title over the goods
whether in its original or processed form until
the entrustee has complied with the
obligation under the receipt. It also includes
authority to load, unload, ship or transship or
otherwise deal with the goods in a manner
preliminary or necessary to their sale (b) To

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
receive the proceeds of the sale of the goods
in trust for the entruster and to turn over the
same to the entruster to the extent of the
amount owing to the entruster (c) to insure
the goods for their total value against loss
from fire, theft, pilferage or other casualties
(d) to keep the goods or the proceeds
thereof, whether in money or whatever form,
separate and capable of identification as
property of the entruster; and (e) to return
the goods,to the entruster in case they could
not be sold or upon demand of the entruster.
5.1
Notwithstanding the security interest
of the entruster, the entrustee shall be
responsible as principal or as vendor under
any sale or contract to sell made by the
entrustee. Hence, although the entrustee is
not the owner of the goods under a trust
receipt (ownership is retained by the
entrustor) anyone who acquires the goods
from the entrustee acquires good title
(ownership) over the goods. Note that it runs
counter to the provisions of Article 1505 of
the Civil Code, where there is a contract of
sale, the buyer is to acquire only whatever
title the seller had at the time the sale was
perfected.
5.2
Risk of loss shall aslso be borne by the
entrustee. Hence, the loss of goods,
documents, or instruments which are the
subject of a trust receipt, pending their
disposition, irrespective of whether or not it
was due to the fault or negligence of the
entrustee, shall not extinguish his obligation
to the entruster for the value thereof. This is
not in accordance with the civil law principle
that it is generally the owner who must bear
the risk of loss of the object
6.
A trust receipt arrangement does not
involve a simple loan transaction between a
creditor and debtor-importer.
The law
warrants the validity of the trust receipt
agreement.
Consequently, the goods
covered by the trust receipt cannot be levied
upon by the creditors of the entrustee. The
validity of entrusters security interest as
against creditors-the entrusters security
interest in goods, documents, or instruments

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pursuant to the written terms of a trust


receipt shall be valid as against all creditors
of the entrustee for the duration of the trust
receipt agreement.
7.
The acts punishable by the Trust
Receipts Law as Estafa as defined by Article
315, Section 1(b) of the Revised Penal Code
are: (a)
The failure to comply with the
provision referring to the obligation involving
the duty to deliver (entregaria) the money
received to the owner of the merchandise
sold, or(b)The failure to comply with the
provision referring to the obligation involving
the duty to return (devolvera) the goods to
the owner if not disposed of in accordance
with the terms of the trust receipt.
7.1
There is no need to prove intent to
defraud as the offense is malum prohibitum.
7.2
There is also no need to prove
damage to the entrustor because the nature
of a trust receipt transaction and the damage
caused to trade circles and the banking
community in case of a violation thereof is
the basis for the criminal offense.
7.3
Consequently,
the
law
has
consistently been declared as not violating
the
constitutional
proscription
against
imprisonment for non-payment of debt. It is a
declaration by the legislative authority that,
as a matter of public policy, the failure of a
person to turn over the proceeds of the sale
of goods covered by the receipt or to return
the goods if not sold is a public nuisance to
be abated by penal sanctions.
WAREHOUSE RECEIPTS:
1.
The purpose of the Warehouse
Receipts Law is to regulate the status, rights
and liabilities of parties. In particular, it
prescribes the rights and duties of a
warehouseman
and
to
regulate
his
relationship with (a) the depositor of the
goods, or (b) the holder of a warehouse
receipt, or (c) the person lawfully entitled to
the possession of the goods, or (d) other
persons. It also covers all warehouses,
whether bonded or not.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1.2
As far as the effect of the New Civil
Code provisions on documents of title to
goods which include quedans or warehouse
receipts, there is no conflict between the two.
The Warehouse Receipts Law refers to and
will apply to warehouse receipts issued by
warehouseman, while the New Civil Code
refers to and will apply to receipts that are
not issued by warehouseman.
2.
The purpose of the General Bonded
Warehouse Act is to regulate the business of
receiving commodities for storage in order to
protect persons who may want to avail
themselves of warehouse facilities and to
encourage the establishment of more
warehouses.
2.1
Distinguishing between the 2 laws, the
Warehouse Receipts Law refers to the rights
and obligations of parties in a warehousing
contract,
while
the
General
Bonded
Warehouse Act refers to state regulation and
supervision of warehouses
3.
A warehouse receipt is a written
acknowledgment by a warehouseman that he
holds certain goods in store for the person to
whom the document is issued. This is also
known as warehouse-keepers receipt or
storage receipt.
3.1
While no particular form is required, it
should however include the necessary terms
stating: (a) Location of the warehouse (b)
Date of issue (c) Number of receipt (d)
Description of the goods (e) Advances made
(f) Rate of charges (g) Ownership of the
goods by language indicating if the
warehouseman is an owner, solely or jointly
with others, of the goods deposited (h)
Signature of the warehouseman, and (i)
Person to whom goods should be delivered by
language indicating whether the receipt is
negotiable or non-negotiable, that is whether
the goods received will be delivered to the
bearer, to a specified person, or to a specified
person or his order
3.2
A negotiable warehouse receipt is not
a negotiable instrument as the same does

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not comply with the requisites of Section 1,


Act 2031. However, ownership thereof may
be transferred by delivery if it states that it is
deliverable to bearer or a named person or
bearer. If it is deliverable to a named person
or order, ownership may be transferred by
special endorsement and delivery. The
endorsement can be to bearer or to a
specified person.
3.3
A negotiable warehouse receipt is not
convertible to a non-negotiable receipt. The
insertion of a provision making it nonnegotiable is void. To make a warehouse
receipt non-negotiable, it must be written out
as such and to prevent any person from
supposing it to be negotiable, the words
non-negotiable should be placed plainly on
its face. A non-negotiable receipt may only be
assigned.
3.4
The advantages of a negotiable
warehouse receipt over one which is nonnegotiable are: (a)
goods
cannot
be
garnished or levied upon under execution
unless receipt is surrendered, or impounded
or its negotiation enjoined (Section 25,
Warehouse Receipts Law) (b)
In case of
negotiation, holder acquires the direct
obligation of the warehouseman to hold
possession of the goods for him (Section 41,
Warehouse Receipts Law), and (c) Goods are
not subject to vendors lien or stoppage in
transitu (Section 49, Warehouse Receipts
Law)
3.5
Other terms may be included in a
warehouse receipt, except: (a) terms that are
contrary to the provisions of this Act, or (b)
terms which will in anyway impair the
obligation to exercise due care in the
safekeeping of the goods entrusted to the
warehouseman.
4.
A warehouseman defined - is a person
lawfully engaged in the business of storing
goods for profit. Under the General Bonded
Warehouse Act he is defined as a person
lawfully engaged in the business of storing
goods for profit. In other words, he is one
who receives and stores goods owned by
others and collects fees for so doing.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
4.1
Included in the phrase the business
of receiving commodity for storage includes
any contract or transaction wherein: (a) the
warehouseman is to return same commodity
deposited or pay its value (b) the commodity
is to be milled for the owner thereof, or (c)
the commodity delivered is commingled with
the commodity belonging to other persons,
and the warehouseman is obligated to return
commodity of the same kind or pay its value.
5.
The Primary Obligations of the
Warehouseman are:(a) he must issue a
receipt for any commodity that he receives
for storage (b) he must exercise that degree
of care in the safekeeping of the goods
entrusted to him which a reasonable careful
man would exercise in regard to similar goods
of his own. However, in the absence of an
agreement to the contrary, he shall not be
liable for any loss or injury to the goods which
could not have been avoided by the exercise
of such care (c) In the absence of any lawful
excuse, he is bound to deliver the goods
upon a demand by: (1) holder of a receipt for
the goods, or (2) by the depositor, provided
that the demand be accompanied by (a) an
offer to satisfy the warehousemans lien (b)
an offer to surrender the receipt if it is
negotiable, and (c) a readiness and
willingness to sign acknowledgment of
delivery of the goods if requested by the
warehouseman.
5.1
A warehouseman is obliged to deliver
goods to: (a) person lawfully entitled to it.
Examples: person determined by the court to
be entitled to it in an interpleader case,
person who purchases the goods at an
auction to satisfy a warehousemans lien or
because the goods are hazardous or of a
perishable nature (b) the person who is
himself entitled to delivery by the terms of
the receipt. If receipt is non-negotiable,
delivery will be to the person entitled to it
under its terms or by written authority clearly
indicated therein or another document. If
receipt is negotiable, to the person named or
the last indorsee.

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5.2
A warehouseman may thus legally
refuse to deliver goods covered by a
warehouse receipt under the following
instances: (a)When the demand is not
accompanied by the three requirements
provided in Section 8 (b)When he has a lien
valid against the person demanding the
goods, he can refuse to deliver the goods
until the lien is satisfied and, (c) In cases
when there are several adverse claimants to
the title or possession of the goods. The
warehouseman can refuse to deliver to any of
the claimants until he has had a reasonable
to ascertain the validity of the claims.
5.3
A misdelivery or conversion occurs
when (a) delivery is made to one not lawfully
entitled to it, or (b) even if delivery is made
to a person holding a non-negotiable or
negotiable receipt, if prior to delivery, he had
either been requested not to make delivery
by the person lawfully entitled to a right of
property or possession in the goods or had
information that delivery about to be made
was to one not lawfully entitled to possession
of the goods.
5.4
A warehouseman can protect against
a misdelivery by: (a) availing of a the
reasonable time that he is entitled to within
which to ascertain the validity of an adverse
claim or to bring legal proceedings to force
the claimants to interplead or may actually
require the claimants to interplead.
5.5
A warehouseman cannot commingle
as he is bound to keep the goods of a
depositor separate from the goods of other
depositors or from the goods of the same
depositor for which a separate receipt has
been issued. The purpose of the prohibition is
to permit inspection and redelivery at all
times. Exceptions are: (a) the goods are
fungible, as when any unit of the good is from
its nature or mercantile usage, treated as an
equivalent of any other unit (Section 58,
Warehouse Receipts Law) or (b) it is
authorized by agreement or custom.
6.
For failure to take up and cancel a
negotiable receipt, or one the negotiation of
which would transfer the right to the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
possession of the goods when goods are
delivered (Section 11, Warehouse Receipts
Law) or for the failure to take up and cancel a
negotiable receipt or to place upon it a
statement of what goods have been
delivered, when goods are partly delivered
(Section 12, Warehouse Receipts Law). The
warehouseman shall be liable for failure to
deliver the goods to anyone who purchases
for value in good faith such receipt whether
such purchaser acquired title to the receipt
before or after the delivery of the goods by
warehouseman
6.1
Exception: The warehouseman shall
not be liable for failure to deliver the goods
covered by the receipt or be guilty of a crime
where the goods (a) have been lawfully sold
to satisfy the warehousemans lien, or (b)
have been lawfully sold or disposed of
because of their perishable or hazardous
nature (Section 36, Warehouse Receipts Law)
7.
An alteration in a warehouse receipt is
said to be:(a) Immaterial if it does not change
the tenor of the warehouse receipt
(b)Material if it substantially changes the
tenor of the receipt (c)
Authorized if it is
made with the authority of the holder and the
warehouseman (d)Unauthorized if it is made
without the authority of the holder and
warehouseman. This may be material or
immaterial (e) Fraudulent if it is made with
malice or bad faith by the holder with intent
to defraud subsequent holders (f) Without
fraudulent intent if its is made without malice
or bad faith
7.1
The effects of an alteration in a
warehouse receipt are:
(a)Where the
alteration is immaterial, the warehouseman
shall be liable according to the terms of the
receipt as originally issued (b)Where the
alteration is immaterial, whether fraudulent
or not, authorized or not, the warehouseman
is liable according to the terms of the receipt
as originally issued (c)
Where
the
alteration is material and is authorized, the
warehouseman shall be liable according to
the terms of the receipts as altered (d)
Where the alteration is material,

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unauthorized but without fraudulent intent,


the warehouseman shall be liable according
to the terms of the receipts as they were
before the alteration (e)
Where
the
alteration is material, unauthorized and with
fraudulent intent, the warehouseman shall be
liable according to the terms of the receipts
as originally issued even (1) to a purchaser of
the receipt for value without notice of the
alteration, or (2) to the person who made the
alteration and to any person who took it with
notice of the alteration. However, in the
latter case, such material and fraudulent
alteration shall excuse the warehouseman
from any other liability to the said persons.
Except as regards the alterer and subsequent
holders with notices.
8.
For
the
non-existence
or
misdescription of goods, a warehouseman
shall be liable to the holder of a receipt for
damages caused by the non-existence of the
goods or by the failure of the goods to
correspond with the description thereof in the
receipt at the time of its issue.
8.1
Exception: No such liability shall
attach to the warehouseman if the goods are
described in the receipt merely (a) by a
statement of the marks or labels upon them
or upon the packages containing them, or (b)
by a statement that the goods are of a
certain kind or that the packages containing
the goods contain goods of a certain kind or
by words of similar import.
9.
The warehousemans lien refers to the
lien of that a warehouseman has on the
goods deposited with him or on the proceeds
thereof in his hands for all lawful charges for
storage and preservation of the goods,
money advanced by him in relation to such
goods such as the expenses of transportation
or labor, or other related expenses.
9.1
The basis for the lien is the obligation
of the depositor to pay the warehouseman for
(a) Storage and preservation charges (b)
Money advanced (c) Interest (d) Insurance (e)
Transportation (f) Labor (g) Weighing, and
(h)Coopering and other similar charges
(Section 27, Warehouse Receipts Law)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
9.2
With the exception of storage and
preservation charges, the other claims must
be expressly specified in the warehouse
receipt for it to serve as basis for the lien
(Section 30, Warehouse Receipts Law)
9.3
The lien may be enforced against all
goods belonging to the person liable for the
charges, as well as against all goods
belonging to the others deposited by the
person liable for the charges who has been
entrusted with the possession of the goods
and could have validly pledged the same
(Section 28, Warehouse Receipts Law).
Hence, it is enforceable against the
depositors goods and the goods of other
persons stored by depositor, if pledge of such
goods by him are valid but not against the
true owner if the depositor has neither title
nor right of possession to the goods (Section
31, Warehouse Receipts Law; Young v.
Colyear, 201 Pac. 623)
9.4
The warehouseman can enforce his
lien by the sale of the goods (Section 33,
Warehouse Receipts Law) or by an action in
court (Section 35, Warehouse Receipts Law).
Provided, however, that notice of sale of
goods in order to satisfy the warehousemans
lien is given.
9.5
The
lien
can
be
lost
if
a
warehouseman surrenders possession of the
goods, or by refusing to deliver the goods
when a demand is made with which he is
bound to comply under the provisions of the
Act (Section 29, Warehouse Receipts Law)
9.6
The effect of the sale of goods to
satisfy the warehousemans lien or on
account of the goods perishable or
hazardous nature under Section 36 shall not
make the warehouseman, after the sale,
liable for failure to deliver the goods to the
depositor, or owner of the goods, or to the
holder of a receipt given for the goods when
they were deposited, even if such receipt
were negotiable.
10.
A negotiable receipt is negotiated by
delivery when: (a) the goods are deliverable

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to bearer, or (b) the goods are deliverable to


a specified person and the latter has indorsed
it in blank or to bearer. If endorsed as
deliverable to a person, the bearer receipt is
transformed into a an order receipt.
10.1 A negotiable receipt is negotiated by
indorsement when the goods are, by the
terms of the receipt, deliverable to a
specified person (Section 38, Warehouse
Receipts Law)
10.2 The negotiation may be made by the:
(a) owner or (b) the person to whom
possession of the receipt was entrusted by
the owner (Section 40, Warehouse Receipts
Law)
10.3 The rights acquired by one to whom a
negotiable warehouse receipt has been duly
negotiated are: (a) Such title to the goods as
the one negotiating could convey to a
purchaser in good faith for value (b) Such
title to the goods as the depositor or one to
whose order the goods were to be delivered
could convey to a purchaser in good faith for
value, and (c) Direct
obligation
of
the
warehouseman to hold the goods for him as if
the warehouseman contracted with him
directly. Hence, a person to whom a
warehouse receipt has been negotiated by
one who has stolen the goods stated in the
receipt cannot claim a misdelivery if the
warehouseman delivers the goods to the
rightful owner, who is the person lawfully
entitled to it.
10.4 Mortgagee or pledgee of a warehouse
receipt to whom a negotiable warehouse
receipt has been indorsed does not acquire
title over the goods. He only acquires the
rights of a pledgee or mortgagee, namely to
foreclose the pledge or mortgage. The intent
in this case is not the negotiation of the
receipt with its consequent transfer of title,
but merely as security (Martinez v. P.N.B., 93
Phil. 765); P.N.B. v. Atendido, 94 Phil. 254)
11.
A non-negotiable receipt is transferred
by delivery accompanied with a deed of
assignment or transfer. If this is indorsed, the
indorsement will not give the transferee any

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
right whatsoever (Section 39, Warehouse
Receipts Law)
11.1 Rights acquired by a person to whom
a warehouse receipt has been transferred but
not negotiated are: (a)
Title
to
the
goods subject to the terms of any agreement
with the transferor, and (b)The right to notify
the warehouseman of the transfer in his favor
and thereby acquire the direct obligation of
the warehouseman to hold the goods for him
(Section 42, Warehouse Receipts Law). Note
that pending notification, his rights can still
be defeated by a subsequent attaching
creditor, or levy on execution, a vendors lien
or right of stoppage in transitu.
CHATTEL MORTGAGES:
1.
A chattel mortgage defined - personal
property is recorded in the Chattel Mortgage
Register as a security for the performance of
an obligation.
1.1
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.
1.2
Distinguishing a chattel mortgage
from a pledge: (a) the chattel mortgage is
recorded in the Chattel Mortgage Register;
the pledge is not, instead the movable is
delivered to the creditor (b) in a chattel
mortgage, the consent of the mortgagee to
the sale of the thing mortgaged must be in
writing and annotated on the back of the
mortgage instrument; in pledge, the consent
of the pledge need not be in writing but may
be oral (c) in a chattel mortgage, in addition
to other formal requirements, the mortgagor
must execute an affidavit of good faith; in
pledge, there is no requirement that the
pledgor execute such an affidavit (d) in a
chattel mortgage, in case of foreclosure of
the thing mortgaged, the mortgagee is not
entitled to the entire proceeds of the sale but
only to a portion thereof sufficient to pay the
mortgage debt, interest and incidental
expenses; in pledge, the pledgee is entitled
to the entire proceeds of the sale even if it
exceeds the amount of the debt (e) in a

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chattel mortgagee, the mortgagee is entitled


to recover deficiency as a rule; in pledge, the
pledgee is not entitled to recover deficiency.
1.3
Distinguishing a chattel mortgage
from a real estate mortgage: (a) in a chattel
mortgage, the thing mortgaged must be
personal or movable property; in a real estate
mortgage, the thing mortgaged must be real
or immovable property (b) an affidavit of
good faith is required to be executed in a
chattel mortgage but not in a real estate
mortgage (c) in a chattel mortgage, the
mortgagor
cannot
alienate
the
thing
mortgaged without the written consent of the
mortgagee annotated on the back of the
mortgage
instrument;
in
real
estate
mortgage, the mortgagor can alienate the
thing mortgaged without the consent of the
mortgagee and any stipulation prohibiting
such alienation is void (d) in a chattel
mortgage,
redemption
of
the
thing
mortgaged may be made only before the sale
thereof; in real estate mortgage, the thing
mortgaged may be redeemed after it is
judicially sold but before judicial confirmation
of the sale, or if extrajudicially sold, within
one year from and after the date of sale
(except where the mortgagor is juridical
person whose property has been mortgaged
in favor of a bank, quasi-bank or trust entity,
in which case the redemption shall be made
until, but not after, the registration of the
certificate of foreclosure sale with the
applicable Register of Deeds which in no case
shall be more 3 months after foreclosure
whichever is earlier)
2.
The essential requisites of a chattel
mortgage are: (a) It must be constituted to
secure the fulfillment of a principal obligation
(b) The mortgagor must be absolute owner of
the property mortgaged (c) The mortgagor
must have free disposal of such property, or
be legally authorized for the purpose (d)The
property involved must be personal or
movable, and (e)
Contract
must
be
recorded in the Chattel Mortgage Register
2.1
A chattel mortgage which provides
that the security stated therein is for the
payment of any and all obligations therein

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
before contracted and which may thereafter
be contracted, or future debts and
obligations, by the mortgagor in favor of the
mortgagee is void. The law requires parties to
a mortgage to execute an affidavit of good
faith, that the debt is honestly due and
owing. A valid mortgage cannot be made to
secure a debt to be contracted in the future
(Jaca v. Davao Lumber, L-25771, March 29,
1982, 113 SCRA 107; Vide; Lopez v. CA, 114
SCRA 671, Co v. PNB, 114 SCRA 842). An
affidavit of good faith is a certificate included
in the chattel mortgage contract executed by
both mortgagor and mortgagee that the
mortgage is constituted to secure the
specified obligation, and that said obligation
is a valid, just and subsisting obligation and
not one entered into for the purpose of fraud.
2.2
Although a promise expressed in the
chattel mortgage to include debts that are
yet to be contracted can be a binding
commitment that can be acted upon, the
security itself does not come into existence
or arise
until after a chattel mortgage
agreement covering the newly contracted
debt is executed either by a fresh chattel
mortgage deed
or by amending the old
contract to conform to the law, particularly
the execution of an affidavit of good faith
(Acme Shoe etal v. CA, GR No. 103576,
August 22, 1996)
2.3.
The chattel mortgage cannot be
considered
to
include
after-acquired
properties as it shall cover only the property
described in the deed and not any other like
or
substituted
property
(Section
7).
Recognized as exceptions are: (1) properties
that are perishable, like fruits or subject to
inevitable wear and tear like tires or intended
to be sold or used but with the understanding
that they would be replaced with similar
properties to be thereafter acquired by the
mortgagor. An Example is: Where the debtor
gives as security the stock or merchandise in
his store and it is the intention of the
parties that the mortgage shall cover the
stock that will take its place in the course of
the business. [Torres v. Limjap, 56 Phil. 141 ,
1931] (2) In the case of other properties, if
their inclusion is expressly stipulated and a

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supplement to the mortgage specifically


listing and describing the property is
executed and registered in the chattel
mortgage register
2.4
The registration in the chattel
mortgage register is not necessary to make it
binding between the parties. It is necessary
though to make it binding on third persons.
3.
The remedies of a creditor are: (a)
Extrajudicial Foreclosure (b) An action for
replevin (c)
Judicial Foreclosure, and (d)
Bring an action for the payment of a
sum of money
3.1
A creditor cannot forceably take
possession of the chattel without court
intervention (BPI Credit v. CA, 204 SCRA 601,
Filinvest Credit Corporation v. CA, 248 SCRA
549)
3.2
Neither
can
the
creditor
take
possession and appropriate the chattel, since
it would constitute pactum commissorium,
referring to an act or a stipulation giving
power to the creditor to appropriate the thing
given as security, if the principal obligation is
not fulfilled without any formality, such as
foreclosure proceedings and public sale. Such
an act or stipulation is null and void (Art.
2088,
N.C.C.).
In
other
words,
the
mortgagors default does not operate to vest
in the mortgagee the ownership of the
mortgaged property.
3.3
Availment of the remedy of bringing
an action to collect a sum of money is a
waiver or abandonment of the chattel
mortgage.
This also bars the recovery of a
deficiency judgment which is only available
when the proceeds of the sale are insufficient
to cover the debts pursuant to a foreclosure.
The prescriptive period for which is ten (10)
years.
3.4.
Note
that
when
the
financing
company to whom a loan and chattel
mortgage have been refinanced had been
constituted as the attorney-in-fact of the

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
borrower to file any insurance claim covering
the chattel, and it failed to do so upon a total
loss of the same, will relieve the borrowermortgagor of his obligation (BA Finance
Corporation v. CA, 201 SCRA 157)
3.5
There
are
limitations
on
the
enforcement of chattel mortgages executed
in relation to the sale of personal property in
installments, where the remedies are: (1)
Exact fulfillment of the obligation
(2)Cancel the sale, should the vendees
failure to pay cover two or more installments;
or (3) Foreclose the chattel mortgage on the
thing sold should the vendees failure to pay
cover two or more installments. In this case,
he shall have no further action against the
purchaser to recover any unpaid balance of
the price. Any agreement to the contrary
shall be void (Art. 1484, N.C.C.). This
remedies are exclusive not alternative.
EXTRA-JUDICIAL FORECLOSURE OF REAL
ESTATE MORTGAGES:
1.
The resort to the process of extrajudicial foreclosure emanates from the
presence of a stipulation that allows the
creditor/mortgagee
to
extra-judicially
foreclose and designating the said party as
the attorney-in-fact of the mortgagor to
cause the same and to sell the subject
property at a foreclosure sale by an insertion
into or attachment to the real estate
mortgage.
1.1
When a debt is secured by a real
estate mortgage, the creditor has two
options: (a) to foreclose, or (b) file an
ordinary action to collect. If he avails of the
option to foreclose, he is still allowed to bring
a claim for any deficiency. On the other hand,
if he avails of the option to file an ordinary
action, he abandons or waives his mortgage
lien, without prejudice to his levying on the
same property but subject to the rights of
other creditors, if any.
1.2
When the mortgagor files a criminal
case for violation of BP Blg 22 against the
mortgage debtor, he is deemed to have
already availed himself of the remedy of a

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collection suit, and following the rule on


alternative remedies, he is barred from
subsequently resorting to an action for
foreclosure.
1.3
A mortgage contract is, by nature,
indivisible. The debtor who has paid cannot
ask for a proportionate extinguishment of the
mortgage as long as the debt is not
completely
satisfied.
Generally,
the
divisibility of the principal obligation is not
affected by the indivisibility of the mortgage.
2.
The foreclosed property shall be
redeemed within 1 year from and after the
date of the sale (Sec. 6). The aforementioned
date of sale has been construed by the
Supreme Court to mean the date of
registration of the sheriffs certificate of
foreclosure sale in the office of the Register of
Deeds concerned (Reyes vs. Noblejas, et al.,
G.R. No. L-23691, November 25, 1967). Note
that the period for redemption may be the
subject of an extension as may be agreed
upon by the parties.
2.1
The amount to be paid at redemption
is the Bid Price, plus 12% interest per annum.
Note again that under RA 8791, the
redemption amount is such which is due
under the mortgage deed with interest at the
specified rate therein.
2.2
Redemption may be effected by: (a)
The debtor, or (b) His successor in interest ,
or (c) Any judicial creditor or judgment
creditor of the debtor, or (d) Any person
having a lien on the property subsequent to
the mortgage.
2.3
Notwithstanding
the
foregoing
provision, juridical persons whose property is
sold pursuant to an extra-judicial foreclosure,
shall have the right to redeem the property
until, but not after, the registration of the
certificate of foreclosure sale which in no
case shall be more than three (3) months
after foreclosure whichever is earlier, as
provided in Section 47 of Republic Act. No.
8791 (A.M. No.99-10-05-0)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
2.4
Note the probable constitutional
challenges that may be brought against the
quoted provision of RA 8791 on the basis of
the equal protection clause as there is no
substantive distinction between a corporate
and individual debtor or between a bank or
non-bank lender.
2.5
Further, the application of the law
should be prospective as a corporate
mortgagor has acquired as vested right to
the one year redemption period if his
mortgage was executed prior to RA 8791 as
the controlling consideration is the law on
redemption at the time of the execution of
the mortgage.
2.6
The purchaser of foreclosed property
is not automatically entitled to the possession
thereof during the redemption period as he
must petition the Regional Trial Court of the
province or city where the property is
situated to give him possession thereof
during the redemption period. He must also
put up a bond equivalent in value to the use
of the property for a period of 12 months to
indemnify the debtor in case it is shown that
the sale was made without complying with
the requirements of Act No. 3135 or that
there was no violation of the mortgage deed.
3.
In general, formal and substantive
defects in the real estate mortgage and the
foreclosure proceedings provide the legal and
equitable grounds to enjoin or eventually
nullify foreclosure proceedings, if not the real
estate mortgage itself.
3.1
The general basis would be Article 5,
Civil Code, which provides: Acts executed
against the provisions of mandatory or
prohibitory laws shall be void, except, when
the law authorizes their validity
4.
Disputes in the amount of the
obligation may cause the foreclosure to be
enjoined as a bank may legally proceed with
foreclosure only when the exact amount of
the obligation of the mortgagor is determined
in a trial on the merits and the mortgagor

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cannot meet the obligation following that


determination.
4.1
Where the debtor is not given an
opportunity to settle the debt at the correct
amount and without iniquitous interest
imposed, no foreclosure proceedings can be
instituted.
4.2
The total amount due on the
mortgage is also undetermined if some of the
properties are subject to the coverage of the
CARP, in which case a portion of the
mortgage indebtedness will be assumed by
the government up to the amount equivalent
to the landowners compensation. Hence,
until the final valuation of the lands subject to
CARP is determined, the amount of the
mortgage debt is unliquidated
5.
Issue of the legality of the Floating
Rate of Interest, which refers to the rate of
interest periodically fixed by a bank based on
the prevailing interest rate in the market,
such as the Manila Reference Rate or
Treasury Bill Rate, plus a margin as
determined by the bank.
5.1
If this rate of interest is unilaterally
fixed by the bank for each interest period
without the written conformity of the
borrower, the interest may be declared null
and void for being potestative and for lack of
mutuality based on essential equality
between the parties
5.2
Its being a potestative condition (one
within the sole power of the one obligated to
perform), consequently null and void finds
basis in Article 1308 of the Civil Code that
provides that the fulfillment of a condition
cannot be left to the sole will of one of the
contracting parties
5.3
As held by the Supreme Court in
Almeda v. Court of Appeals and PNB,256
SCRA 293: The binding effect of any
agreement between the parties to contract is
premised on two settled principles: (1) that
any obligation arising from contract has the
force of law between the parties; and (2) that
there must be mutuality between the parties

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
based on their essential equality. Any
contract which appears to be heavily
weighted in favor of one of the parties so as
to lead to an unconscionable result is void.
Any stipulation regarding the validity or
compliance of the contract which is left solely
to the will of one of the parties is likewise
invalid.
5.4
The floating rate of interest being
unilaterally fixed and determined by the bank
also violates the provision of CB Circular No.
1191 that the interest rate for each re-pricing
period is subject to mutual agreement
between the Borrower and the Bank.
5.5
Under Article 1956 of the Civil Code,
no interest is due unless it has been
expressly stipulated in writing. The floating
rate being unilaterally fixed by the Bank
without the written mutual agreement of the
Borrower for each re-pricing of interest is null
and void under Art. 1956 of the Civil Code,
and for violation of CB Circular No. 1191 that
the interest rate for each re-pricing period
under the floating rate of interest in subject
to mutual agreement.
5.6
Consequently, if the interest is
declared null and void, the foreclosure sale
for a higher amount than what is legally due
is likewise null and void because under the
Civil Code, a mortgage may be foreclosed
only to enforce the fulfillment of the
obligation for whose security it was
constituted.
5.7
In fact, because there is a dispute on
the amount of the interest legally due, the
Bank may legally proceed with foreclosure or
consolidation only when the exact amount of
the obligations of the Mortgagor is
determined after trial on the merit and the
mortgagor cannot meet the obligation
following that determination.
6.
Issue of the mortgage as security for
future loans. The rule is unless a continuing
real estate mortgage is involved, a real
estate mortgage is not a valid security for
future loans under the so called Dragnet
Clause.

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6.1
This finds basis in the fact that real
estate mortgage is an accessory contract,
which cannot exist independently of the
principal obligation. The consideration for the
mortgage is the consideration of the contract
of loan. Consequently, the amount of the loan
must be specified, otherwise the contract of
loan, as well as the accessory contract of
mortgage, shall not be perfected for lack of
consideration with respect to the unspecified
loan in the future. The Supreme Court has
held in China Banking Corporation vs.
Lichuaco, 46 Phil 460 that: a mortgage is an
accessory contract, its consideration is the
very consideration of the principal contract,
from which it derives life, and without which
it cannot exist as an independent contract.
6.2
Further, under Article 2176 of the Civil
Code, a mortgage may only be foreclosed for
the fulfillment of the obligation for whose
security it was constituted
6.3
Mortgages with a dragnet clause is a
contract of adhesion that must be strictly
construed as against the bank.
6.4
To constitute a real estate mortgage
as security for future loans, the future loans
must be agreed upon and fixed in the
mortgage deed at the time of the execution
of the same
6.5
A stipulation that the amounts named
as consideration in a contract of mortgage do
not limit the amount for which the mortgage
may stand as security if from the four corners
of the instrument the intent to secure future
and other indebtedness can be gathered is
valid and binding and is known in American
Jurisprudence as the blanket mortgage
clause.
7.
Issue of PD 385 prohibiting the
issuance of an injunction against foreclosure
by any government financial institution is
arbitrary and unreasonable. Hence, may be
argued as being unconstitutional. Hence, it
cannot be sustained if there is a clear legal
ground to restrain foreclosure

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
8.
Issue of the right to take possession.
The rule is that the purchaser still has to file a
petition for the issuance of a writ of
possession to obtain possession.

and accountable body in the discharge of its


responsibilities concerning money, banking
and credit (b) enjoy fiscal and administrative
autonomy.

8.1
The proceedings related thereto allow
the mortgagor to participate although
jurisprudence provides that the hearings are
ex-parte. However, with the mandate of
Section 8 of Act 3135 which allow the
mortgagor to set aside foreclosure in the
same proceedings, it is the better rule to
actually allow the mortgagors active
participation.

1.1
A central bank is a bank that holds the
cash reserves of a countrys commercial
banks, performs monetary services for the
government, issues bank notes, and makes
funds available to commercial banks

8.2
The obligation of the court to issue a
writ of possession in favor of the purchaser in
an extrajudicial foreclosure sale ceases to be
ministerial once it is shown that there is a
third party in possession of the property who
is claiming a right adverse to that of the
mortgagor and that such third party is a
stranger to the foreclosure proceedings in
which the ex-parte writ of possession was
applied for.
8.3
As a limitation on the right to
possession, a writ of possession may be
legally issued only if the debtor is in
possession and no third person has
intervened.
8.4
Order granting a writ of possession
under Act 3135 is a final order. Hence, it is
appealable.
In
expropriation,
it
is
interlocutory.
9.
Grounds for the proper annulment of
the foreclosure sale are the following: (a)
there was fraud, collusion, accident, mutual
mistake, breach of trust or misconduct by the
purchaser (b) the sale was not fairly and
regularly conducted (c) price was inadequate
and the inadequacy was so great as to shock
the conscience of the court.
Central Bank Act
1.
The law was enacted on June 14, 1993
and has for its policy the maintenance of a
central monetary authority with the power:
(a) function and operate as an independent

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Conservatorship
1.
The appointintment by the Monetary
Board of a conservator takes place whenever
a bank or quasi-bank is in a state of
continuing inability or unwillingness to
maintain a condition of liquidity deemed
adequate to protect the interest of depositors
and creditors.
1.1
It is an attempt to save the bank from
bankruptcy and ultimate liquidation.
1.2
The appointed conservator is to take
charge of the assets, liabilities, and the
management thereof for a period not
exceeding one (1) year
2.
A conservator may take over a bank
or quasi-bank without the need of first
declaring the bank insolvent (P.D. 1937, June
27, 1984). Nonetheless, the designation of a
conservator is not a precondition to the
designation of a receiver (Section 30)
2.1
A conservator is the person appointed
to take over the management of a bank and
shall assume exclusive powers to oversee
every aspect of the banks operation and
affairs.1
3.The conservatorship is terminated when:
(a)
When Monetary Board is satisfied that
institution can continue to operate on its own
and the conservatorship is no longer
necessary
(b)Should
Monetary
Board
determine that the continuance in business of
the institution would involve probable loss to
its depositors or creditors, in which case

1 Central Bank vs.

CA, 208 SCRA 652

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
proceedings for receivership and liquidation
shall be pursued. (Sec. 29).
Proceedings in Receivership:
1.
Receivership ensues whenever the
Monetary Board finds that a bank or quasibank: (a) Is unable to pay its liabilities as they
become due in the ordinary course of
business BUT:
Shall
not
include
inability to pay caused by extraordinary
demands induced by financial panic in the
banking community (b) Has insufficient
realizable assets to meet its liabilities (c)
Cannot continue in business without involving
probable losses to its depositors or creditors;
or (d) Has willfully violated a cease and desist
order that has become final, involving acts or
transactions which amount to fraud or a
dissipation of the assets of the institution;
1.1
In which cases, the Monetary Board
may summarily and without need for prior
hearing, forbid the institution from doing
business in the Philippines and designate the
PDIC as receiver of the banking institution.
1.2
There is no requirement that a hearing
be first
conducted before a banking
institution may be placed under receivership.
The appointment of a receiver may be made
by the Monetary Board without notice and
hearing but its action is subject to judicial
inquiry( Rural Bank of Buhi v. Court of
Appeals,162 SCRA 288)
1.3
The Central Bank, through the
Monetary Board, is vested with exclusive
authority to assess, evaluate and determine
the condition of any bank and if it finds the
condition to be one of insolvency, or its
continuance in business would involve
probable loss to creditors and depositors, it
can forbid the bank to do business and can
designate a receiver to take charge of its
assets and liabilities. Sec. 29 of the Central
Bank Act does not contemplate prior notice
and hearing before a bank is placed under
receivership. It is enough that such action is
made the subject of a subsequent judicial
review. Close now and hear later scheme
under the Act is for the purpose of protecting

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the depositors, creditors, stockholders and


general public (Central Bank v. Court of
Appeals, 220 SCRA 536)
1.4
Prior notice and hearing is not
required before placement of bank under
receivership.
Section
29
does
not
contemplate prior notice and hearing before
a bank may be directed to stop operation and
placed under receivership. When paragraph 4
(now paragraph 5 as amended by E.O. 289)
provides for the filing of a case within ten
(10) days after the receiver takes charge of
the assets of the bank, it is unmistakable that
the assailed actions should precede the filing
of the case. Plainly, the legislature could not
have intended to authorize no prior notice
and hearing in the closure of the bank and
at the same time allow a suit to annul it on
the basis of absence thereof (CB vs. CA, 220
SCRA 539)
1.5
Judicial review is allowed to determine
the presence of arbitrariness and bad faith in
placing bank under receivership. Admittedly,
the mere filing of a case for receivership by
Central Bank can trigger a bank run. The
procedure prescribed in Section 29 is truly
designed to protect the interest of all
concerned, and the summary closure pales in
comparison to the protection afforded public
interest. At any rate, the bank is given full
opportunity to prove arbitrariness and bad
faith in placing the bank under receivership,
in which event, the resolution may be
properly nullified and the receivership lifted
as the trial court may determine. Until such
determination is made, the status quo shall
be maintained, i.e., the bank shall continue to
be under receivership.

1.6
Receivership is equivalent to an
injunction to restrain in the bank officers from
intermeddling with the property of the bank
in any way. Thus, the appointment of a
receiver operates to suspend the authority of
the bank and of its directors and officers over
its property and effects (Villanueva vs. CA,
244 SCRA 395)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Liquidation:
1.
Liquidation shall take place is the
receiver determines that the institution
cannot be rehabilitated or permitted to
resume business, the Monetary Board shall
notify in writing the Board of Directors of its
findings and direct the receiver to proceed
with the liquidation of the institution.
2.
The following are the mandatory
requirements to be complied with before a
bank found to be insolvent can be ordered
close: (1) an examination shall be conducted
by the appropriate CB department as to the
condition of the bank (2) disclosed in the
examination is that the condition of the bank
is one of insolvency (3) the director shall
inform the Monetary Board in writing of such
fact, and (4) the Monetary Board shall find
the statement of the department to be true
(Banco Filipino vs. Monetary Board, 204 SCRA
767)
3.
The test of insolvency laid down in
Section 29 of the Central Bank Act (now
Section 30 of the New Central Bank Act) is
measured by determining whether the
realizable
assets,
realizable
within
a
reasonable time by a reasonably prudent
person of a bank are less than its liabilities,
not considering capital stock and surplus
which are not liabilities for such purpose.
(Ibid)
4.
Upon liquidation, the receiver shall
then: (a) File ex parte with Regional Trial
Court, and without the requirement of prior
notice or any other action, a petition for
assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by
PDIC (b) Upon acquiring jurisdiction, RTC
shall, upon motion by the institution, assist
the enforcement of individual liabilities of the
stockholders, directors and officers, and
decide on other issues as may be material to
implement the liquidation plan adopted
(c)Convert the assets of the institution to
money, dispose of the same to creditors and
other parties, for the purpose of paying the
debts of such institution in accordance with
the rules on concurrence and preference of

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credit under the Civil Code (d) Institute such


actions as may be necessary to collect and
recover accounts and assets of, or defend
any action against, the institution
Selected Issues involving Receivership and
Liquidation:
1.
If the Central Bank (now Bangko
Sentral) through its Monetary Board has
promised to rehabilitate the distressed bank,
and the stockholders on said assurance
proceeded to mortgage their real properties
to guarantee CB promised loan advances to
said bank, CB cannot renege on said promise,
under the doctrine of promissory estoppel,
and cannot insist in its liquidation (Ramos vs.
CB, 41 SCRA 565)
2.
Where the Central Bank, in the course
of the rehabilitation of a commercial bank,
extended
loans
and
advances,
but
subsequently the bank was forced by CB to
close, and subsequently allowed to reopen,
interest due on said loans and advances,
cannot be collected because it should be
deemed read into every contract of deposit
with a bank that the obligation to pay interest
on a deposit ceases from the moment the
operation of the bank is completely
suspended by the duly constituted authority
the Central Bank (Ibid,; Overseas Bank vs.
CA, 105 SCRA 49)
3.
The prescriptive period to institute the
foreclosure
proceeding
was
legally
interrupted when the mortgagee-bank was
placed under receivership with express
prohibition from transacting business, a
circumstance considered as force majeure
(Provident vs. CA, 222 SCRA 125)
4.
While the closure and liquidation of a
bank may be considered an exercise of police
power, the validity of its exercise is subject to
judicial determination, and could be set
aside, if it is capricious, discriminatory,
whimsical, arbitrary, unjust or a denial of the
due process and equal protection clauses of
the Constitution (CB vs. CA, 106 SCRA 143)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
5.
A deposit in a distressed bank already
forbidden by CB to do business does not
become a preferred credit simply because
some depositors went to court and were able
to secure judgments against the bank (CB vs.
Morfe, 63 SCRA 114)
6.
Where in the course of banks
distressed condition, the Central Bank gave
financial assistance to restore the banks
viability, but that inspite of these moves, the
bank was closed by CB on August 1968, and
allowed to reopen on January 8, 1981, under
a new name, Commercial Bank of Manila, the
obligation by the bank to pay interest on the
CB advances remained suspended during the
whole period of its closure, following the
ruling in OBM vs. CA and Tapia (105 SCRA
49). Hence, the interest obligation starts to
run from the date of the reopening of the
bank on January 8, 1981 (Ramos vs. CB, 137
SCRA 685)
General Banking Law
1.
The policy of the State is the
promotion and maintenance of a stable and
efficient banking and financial system that is
globally competitive, dynamic and responsive
to the demands of a developing economy.
2.
Banks are entities engaged in the
lending of funds obtained in the form of
deposits.
2.1
The definition under Section 2 of the
old General Banking Law:2 banks are entities
duly authorized by the Monetary Board to
engage in the business of regularly lending
funds obtained regularly from the public
through the receipt of deposits of any kind.
Thus, entities which lend funds obtained from
the public but not as deposits but rather as
debts for their own account, whether done
regularly or not, and those which regularly
lend funds obtained through the occasional
receipt of deposits, would not be considered
as banks.

Classification of Banks:
1.
Banks are classified under the General
Banking Law as follows:
(a)
Universal banks- these are those that
used to be called expanded commercial
banks and whose operations are now
primarily governed by the GBL. They can
exercise the powers of an investment house
and invest in non-allied enterprises. They
have the highest capitalization requirement.
An investment house is a company that earns
income solely or primarily by holding and
investing in securities issued by other
companies or by government agencies.
(b)
Commercial banks- these are ordinary
or
regular
commercial
banks,
as
distinguished from a universal bank. They
have a lower capitalization requirement than
universal banks and cannot exercise the
powers of an investment house and invest in
non-allied enterprises.
(c)
Thrift banks-these are savings and
mortgage banks, stock savings and loan
associations, and private development banks
which are governed primarily by the Thrift
Banks Act.3
(d)Rural banks-these are mandated to make
needed
credit
available
and
readily
accessible in the rural areas on reasonable
terms and which are governed primarily by
the Rural Banks Act of 1992.4
(e)Cooperative
banks-these
are
banks
organized primarily to make financial and
credit services available to cooperative banks

3 RA 7906
4 RA 7353

2 RA 337
BAR OPERATIONS 2011

2.2An entity that is engaged in the business


of buying accounts receivables and is funding
their business from bonds sold to the public
from time to time is not a bank as it does not
accept deposits, instead it buys receivables.

Page 142

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
and
are
governed
Cooperative Code.5

primarily

by

the

(f)Islamic banks-these are banks whose


business dealings and activities are subject to
the basic principles and rulings of Islamic
Sharia, such as the Al Amanah Islamic
Investment Bank of the Philippines which was
created by the Republic Act No. 6848; and
(g)
Other classifications of banks
determined by the Monetary Board.

as

Incorporation and Organization of Banks


1.
The minimum conditions that a
prospective bank must comply with before it
may be authorized by the BSP to be
organized as a bank are:
1.1
That the entity must be organized as a
stock corporation;
1.2
That its funds must be obtained from
the public, i.e., 20 or more persons; and
1.3
That the minimum capital requirement
prescribed by the Monetary Board for each
category of banks are satisfied.
2.
The SEC cannot register the the
articles of incorporation of any bank, or any
amendment thereto, unless accompanied by
a certificate of authority issued by the
Monetary Board, under its seal. Such
certificate shall not be issued by the
Monetary Board unless it is satisfied from the
evidence submitted to it:
3.
In organizing the bank, it can only
issue par value stocks only.
Supervision and Regulation of Banks:
1.
The entity that has supervisory and
regulatory powers over banks is the BSP and
such extends to all banks, quasi-banks, trust
entities, and other financial institutions.

5 RA 6938
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Page 143

2.
This power of the BSP is found in
Section 25 of the BSP Law which mandates
the
conduct
of
periodic
or
special
examinations, to include those of its
subsidiaries and affiliates engaged in allied
activities, but such shall be possible only in
the in the course of its examination of such
bank.
2.1
A subsidiary corporation is one more
than 50% of whose voting stock is owned by
the bank or quasi-bank.
2.2
An affiliate corporation is one less
than 50% of whose voting stock is owned by
the bank or quasi-bank or which is related or
linked to such bank or quasi-bank through
common stockholders or such factors as may
be determined by the Monetary Board.6
Management of a Bank:
1.The principle that since a bank is a juridical
person that its powers are to be exercised, its
business is to be conducted, and that its
properties are to be held by a board as
provided for by Section 23 of the Corporation
Code obtains.
2.
However, an independent director,
who is a person other than an officer or
employee of the bank, its subsidiaries or
affiliates or related interests must be elected
to the board. Note that the term
independent director is also used in the
Securities Regulation Code7 to refer to a
person other than an officer or employee of
the corporation, its parent or subsidiaries, or
any other individual having a relationship
with the corporation, which would interfere
with the exercise of independent judgment in
carrying out the responsibilities of a director.
3.There must also be adherence to the fit and
proper rule8 which provides that to maintain
the quality of bank management and afford
better protection to depositors and the public
in general, the Monetary Board shall:

6 Section 25, NCBA


7 Section 38, Par. 16.25
8 Section 16, GBL, BSP Circular No. 296

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
3.1prescribe, pass upon and review the
qualifications
and
disqualifications
of
individuals elected or appointed bank
directors or officers and disqualify those
found unfit; or
3.2
After due notice to the board of
directors of the bank, the Monetary Board
may disqualify, suspend or remove any bank
director or officer who commits or omits an
act which render him unfit for the position.
3.3
In determining whether an individual
is fit and proper to hold the position of a
director or officer of a bank, regard shall be
given to his integrity, experience, education,
training, and competence.
4.
An elective or appointive public official
cannot serve as an officer of a private bank ,
whether full-time or part-time shall at the
same time serve as officer of any private
bank, save in cases where such service is
incident to financial assistance provided by
the government or a government-owned or
controlled corporation to the bank or unless
otherwise provided under existing laws.
4.1
The Rural Banks Act9, allows an
elected or appointive public official to serve
as director, officer, consultant or in any other
capacity in a rural bank.
5.A bank is required to have a board
composed of 5 no more than 15 directors,
two of whom must be independent
directors.10
5.1In case of a merger or consolidation
between banks, the number of directors shall
not exceed 21.11
5.2Non
Filipino
citizens
may
become
members of the board to the extent of the
foreign participation in its equity.12

9 Section 5, RA 7353
10 Section 15, GBL
11 Section 17, GBL
12 Section 15, Par. (2), GBL
BAR OPERATIONS 2011

Limitations imposed on Banking Operations:


1.Single Borrower Limit Rules13- these rules
regulate the total amount of loans, credit
accommodations and guarantees that may
be extended by a bank to any person,
partnership, association, corporation or other
entity.
1.1The rules seek to protect a bank from
making excessive loans to a single borrower
by prohibiting it from lending beyond a
specified ceiling. The current limit is 25% of
the net worth of the bank concerned.14
1.2The ceiling is subject to possible increase
by an additional 10% provided the additional
liabilities of any borrower are adequately
secured
by
trust
receipts,
shipping
documents, warehouse receipts or other
similar documents transferring or securing
title covering readily marketable, nonperishable goods which must be fully covered
by insurance.
2.
DOSRI Rules15- these are rules
promulgated by the BSP, upon the authority
of Section 36 of the GBL, which regulate the
amount of credit accommodations that a
bank may extend to its directors, officers,
stockholders and their related interests, thus
the term, DOSRI.
2.1Generally,
a
banks
credit
accommodations to its DOSRI must be in the
regular course of business and on terms not
less favorable to the bank than those offered
to non-DOSRI borrowers.
2.2
Related Interests shall include the
following: (a) Spouse or relative within the
first degree of consanguinity or affinity, or
relative by legal adoption, of a director,
officer or stockholder of the bank; (b)

13 Section 35, GBL


14 BSP Circular No. 425
15 Section 36, GBL
Page 144

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
Partnership of which a director, officer or
stockholder or his spouse or relative within
the first degree of consanguinity or affinity, or
relative by legal adoption, is a general
partner; (c) Co-owner with the director,
officer, stockholder or his spouse or relative
within the first degree of consanguinity or
affinity, or relative by legal adoption, of the
property or interest or right mortgaged,
pledged or assigned to secure the loans or
credit accommodations, except when the
mortgage, pledge or assignment covers only
said co-owners undivided interest; (d)
Corporation, association, or firm of which a
director or officer of such corporation,
association or firm, except (1) where the
securities of such corporation, association or
firm are listed and traded in the big board or
commercial and industrial board of domestic
stock exchanges less than fifty percent (50%)
of the voting stock thereof is owned by any
one person or by persons related to each
other within the third degree of consanguinity
or affinity; or (2) where the director, officer or
stockholder of the lending bank sits as a
representative of the bank in the board of
directors of such corporation: Provided, That
the bank representative shall not have any
equity interest in the borrower corporation
except for the minimum shares required by
law, rules and regulations, or by the by-laws
of the corporation: Provided, further, That the
borrowing corporation under (1) or (2) is not
among those mentioned in Items (e) and (f)
hereof; (e) Corporation, association or firm of
which any or a group of directors, officers,
stockholders of the lending bank and/or their
spouses or relatives within the first degree of
consanguinity or affinity, or relative by legal
adoption hold/own more than twenty percent
(20%) of the subscribed capital of such
corporation, or of the equity of such
association
or
firm;
(f)
Corporation,
association of firm wholly or majority-owned
or controlled by any related entity or a group
of related entities mentioned in Items (b), (d)
and (e) hereof.
2.3
A bank may allow a DOSRI to: (a)
borrow from the bank; (b) become a
guarantor, indorser or surety for loans from
such bank to others; (c) be an obligor; or (d)

BAR OPERATIONS 2011

Page 145

incur any contractual liability with the written


approval of the majority of all the directors of
the bank, excluding the director concerned. 16
However, the written approval shall not be
required
for
loans,
other
credit
accommodations and advances granted to
officers under a fringe benefit plan approved
by the BSP.
2.4Consequently, any director or officer who
may wish to borrow from the bank must
observe the following formalities: (a) The
borrowing must be in accordance with the
Arms Length Rule, or which must be upon
terms not less favorable to the bank than
those offered to others ,must be with the
written approval of a majority of the banks
board of directors, excluding the director
concerned (b)Such approval must be entered
upon the records of the bank, i.e., the
minutes of the board meeting in which the
approval was given; and (c) A copy of the
entry of such approval shall be transmitted
forthwith to the appropriate supervising
department of the BSP.
2.5
The other conditions are: (a) The
DOSRI borrower is required to waive the
secrecy of his/her deposits of whatever
nature in all banks in the Philippines17 and (b)
The ceiling/limitation as to loans are followed.
2.6The amount of the borrowing is limited to
the
amount
equivalent
to
their
unencumbered deposits and book value of
their paid in capital contribution, unless they
are: (a) secured by assets considered by the
Monetary Board as non risk (b) under a fringe
benefit plan approved by the BSP, or is (c)
extended by a cooperative bank to its
cooperative stockholders;
2.7
Should there be a violation of the
DOSRI rules, after due notice to the board of
directors of the bank, the office of any bank
director or officer who violated the rules may
be declared vacant and the director or officer

16 Section 36, GBL


17 Section 26, NCBA

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
shall be subject to the penal provisions of
NCBA.
2.8
Loans, credit accommodations or
guarantees extended by a bank to DOSRI are
also termed as Insider Lending.
Bank Deposits and Bank Responsibility to
Depositors
1.
As to nature, all kinds of deposits
whether fixed or current are to be treated as
loans and are to be covered by the law on
loan.18
1.1They are also considered in the nature of
irregular deposits, they are really loans
because they earn interest.19 Considering a
deposit involves the delivery of a thing for
safekeeping with the obligation to return the
very same thing upon demand 20 and a loan is
a contract whereby one of the parties
delivers to another money or other
consumable thing upon the condition that the
same amount of the same kind and quality
shall be paid.21
1.2Banks may use the money deposited with
them as money deposited in banks, whether
fixed, savings and current, are really loans to
a bank because the bank can use the same
for its ordinary transactions and for banking
business in which it is engaged.22
1.3In fact banks are not obligated to return
exactly the money deposited in the same
denomination as it was deposited. While the
banks have the obligation to return the
amount deposited, they have no obligation to
return or deliver the same money deposited.
Thus, estafa will not prosper.23

18 People vs. Ong, 204 SCRA 942


19 BPI vs. Court of Appeals, 232 SCRA 302
20 Article 1962, Civil Code
21 Article 1933, Civil Code
22 Tan Tiong Tick vs. Americal Apothecaries, 65
Phil 417
23 Guingona vs. City Fiscal, 128 SCRA 577

BAR OPERATIONS 2011

1.4A banks failure to honor a deposit is


failure to pay its obligation as debtor and not
a breach of trust arising from a depositorys
failure to return the subject matter of deposit
2.
The relation created between the bank
and depositor is that of a creditor and debtor
with the bank as debtor and the depositor as
creditor.24
2.1The relationship is fiduciary in nature. 25
The bank assumes to act as an agent for
another and the other reposes confidence in
him, although there is no written contract or
nor contract at all.
3.A bank should exercise its functions and
treat the accounts of their clients not only
with the diligence of a good father of a family
but it should do so with the highest degree of
care considering the fiduciary nature of their
relationships with their depositors.26
3.1The depositor expects the bank to treat
his account with utmost fidelity, whether
such account consists only of a few hundred
pesos or millions. This is especially true since
the bank is engaged in business impressed
with public interest and it is its duty to
protect in return many clients, and depositors
who transact business with it.27
3.2The bank is under obligation to treat the
accounts of its depositors with meticulous
care always having in mind the fiduciary
nature of their relationship.
3.3
However, the highest degree of
diligence is not expected to be exerted by
banks in commercial transactions that do not
involve their fiduciary relationship with their
depositors.28

24 Serrano vs. Court of Appeals, 96 SCRA 96


25 PBCom vs. Court of Appeals, 269 SCRA 695, BPI
vs. IAC, 206 SCRA 408
26 BPI vs. Court of Appeals, 326 SCRA 641

27 Citytrust Banking vs. IAC, 232 SCRA 559


Page 146

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
3.4In case of negligence in handling the
deposit of its clients on account of a bank
officers gross negligence which causes
inconvenience,
humiliation
and
embarrassment to a depositor entitles the
latter to an award of damages.29 This
notwithstanding the absence of malice and
bad faith as if the negligence, nevertheless
caused serious anxiety, embarrassment and
humiliation to the depositors.30 As long as the
bank has committed a serious mistake and
the banks negligence was a result of lack of
due care and caution required of managers
and employees of a firm engaged in so
sensitive and demanding business as
banking, it is liable for moral damages.31
3.5In view of the fiduciary nature of the
relationship of banks and its clients and
because banking is imbued with public
interest, a bank was also made liable for
damages in the following instances: (a)
Failure to honor/pay a check of a
merchant/trader
when
the
deposit
is
sufficient.32 Conversely, a bank is not liable
for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact
that a deposit may be made later in the day.
Before a depositor may maintain a suit to
recover a specific amount from his bank, he
must first show that he had on deposit
sufficient deposits to meet his demand.
(b)When a bank teller validates an
incomplete duplicate deposit slip that lacks
the name of the account holder. 33 (c) When
the deposit of PPH 31,500.00 to cover six
postdated checks was not credited to the
account of the depositor because of the
omission of one zero in the account
number.34 (d) The bank allowed an impostor

28 Reyes vs. Court of Appeals, GR No. 118492,


August 15, 2001
29 Go vs. IAC, 197 SCRA 22

30 BPI vs. IAC, 206 SCRA 408


31 Prudential Bank vs. Court of Appeals, 328 SCRA
264
32 Moran vs. Court of Appeals, 230 SCRA 799

33 Philbank vs. Court of Appeals, 269 SCRA 695


34 Citytrust vs. IAC, 232 SCRA 559
BAR OPERATIONS 2011

Page 147

to negotiate treasury checks.35 (e)The new


accounts teller erroneously used the old
account of a depositor instead of the newly
opened joined account of the depositor and
his spouse, leading to the dishonor of two
checks issued by the depositor.36
3.6The defense of diligence in the selection
and supervision of employees is not a valid
defense to escape or at least mitigate a
banks liability. A banks liability is not merely
vicarious but primary; the defense of exercise
of due diligence in the selection and
supervision of its employees is of no moment.
By the very nature of the work of banks, the
degree
of
responsibility,
care
and
trustworthiness expected of their employees
and officials is far greater than those of
ordinary clerks and employees. Banks are
expected to exercise the highest degree of
diligence in the selection and supervision of
their employees.37
3.7Malice and bad faith need not be proven
sufficiently to make a bank liable for moral
damages due to the error or negligence of a
bank employee as long as the bank has
committed a serious mistake and the banks
negligence was a result of lack of due care
and caution required of managers and
employees of a firm engaged in so sensitive
and demanding business as banking, it is
liable for moral damages.38
4.A bank cannot prohibit a borrower from
prepaying his loan as a borrower may at any
time prior to the agreed maturity date
prepay, in whole or in part, the unpaid
balance of any bank loan and other credit
accommodation, subject to such reasonable
terms and conditions (such as the payment of
a prepayment fee) as may be agreed upon
between the bank and borrower.

35 Go vs. IAC, 197 SCRA 22


36 BPI vs. IAC, 206 SCRA 408
37 PCIBank vs. Court of Appeals, 350 SCRA 446
38 Prudential Bank vs. Court of Appeals, 328 SCRA
264

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
PDIC
1.
The Philippine Deposit Insurance
Corporation Act created the Philippine
Deposit Insurance Corporation which is a
government corporation promoting and
safeguarding the interests of the depositing
public
by
providing
permanent
and
continuing insurance coverage on all insured
deposits.

2.
Hence, if a depositor has two or more
accounts maintained in the same right and
capacity, the coverage of PHP 500,000.00
shall be held to apply to the sum of all such
accounts.
3.
A joint account (whether and/or, or,
and shall be insured separately from any
individual-owned account. If held by a
juridical person or entity with a natural
person, the account shall be presumed to
belong to the juridical person.

2.
It insures the deposit liability of all
banks to a maximum deposit insurance
coverage (MDIC) of P500,000 per depositor in
consideration of a premium paid by the bank
to the said corporation.(As per RA 9576)

3.1
Accounts under joint ownership is
considered equally shared among codepositors unless otherwise indicated in the
deposit document.

3.
The risk insured against is the closure
of a bank.

TRUTH IN LENDING

3.1.
The nature of the coverage is
compulsory as the law provides that the
deposit liabilities of any bank or banking
institution which is engaged in the business
of receiving deposits or which thereafter may
engage in the business or receiving deposits,
shall be insured with PDIC.
3.2
Deposits that are covered are savings
accounts, current account, time deposits and
deposits in acceptable foreign currencies
pursuant to Foreign Currency Deposit Act.
3.3
Exempted though from the coverage
of the law are trust funds as it was was
expressly excluded from the term deposit
under R.A. 7400 and
money market
placement as it is not included in the term
deposit
DETERMINATION OF THE AMOUNT DUE THE
DEPOSITOR
1.
Insured deposits under the law means
the net amount due the depositor for any
deposits in the insured bank after deducting
any offsets but should not exceed PHP
500,000.00.

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Page 148

Declared Policy of the State


1.
The law, which is to be implemented
by the Monetary Board of the Bangko Sentral
ng Pilipinas declares that it is the policy of the
state to protect its citizens from a lack of
awareness of the true cost of credit to the
user by assuring a full disclosure of such cost
with a view of preventing the uninformed use
of credit to the detriment of the national
economy.
2.
Specifically, it: (a) aims to protect a
debtor from the effects of misrepresentation
or concealment (b) permits him to fully
appreciate and evaluate the real cost of his
borrowing (c) avoid the circumvention of
usury laws
Coverage of the Law
1.
As used in the law, the term credit
means: (a)
loan, mortgage, deed of trust;
advance or discount (b)
conditional sales
contract (c)contract to sell or contract of sale
of property or services (d)rental-purchase
contract (e)contract for hire, bailment or
leasing of property (f) option, demand, lien,
pledge or other claim against or for the
delivery of property or money (g)purchase of
acquisition of any credit upon security of any

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
obligation arising out of any of the above (h)
any transaction with similar purpose

as well as the registration fee for the account


of the debtor.

2.
The provisions of the law apply to
creditors, who is defined by law as: any
person engaged in the business of extending
credit, including any person who as a regular
business practice makes loans or sells or
rents property or services on a time, credit or
installment basis either as principal or agent,
who requires as an incident to the extension
of credit the payment of a finance charge.

4.
To accomplish the policy of the law to
protect citizens from a lack of awareness of
the true cost of credit to the user by assuring
a full disclosure of such cost, a creditor or
lender is obliged to provide the debtor or
borrower with a statement in writing, before
perfection of the contract containing the
following: (a) Cash price of property or
service to be acquired (b)
Amount credited
as down payment and or trade-in(c)
Charges paid or to be paid not
incident to the extension of credit (d)
Charges paid or to be paid not
incident to the extension of credit (e)Total
amount to be financed (f)
Finance charge;
and (g)Percentage of finance charge to total
amount to be financed.

2.1
The application of the law is
compulsory for
(a) banks (b) non-bank
financial intermediaries authorized to engage
in quasi-banking are required strictly to
adhere to the law. Banks and non-bank
financial intermediaries authorized to engage
in quasi-banking functions are required to
strictly adhere to the provisions of the Truth
in Lending Act and shall make the true and
effective cost of borrowing an integral part of
every loan contract (Consolidated vs. CA, 246
SCRA 195)
3.
The provisions of the law does not
apply to the following credit transactions:
a.
those that do not involve the payment
of any finance charge by the debtor; and
b.
those in which the debtor is the one
specifying a definite and fixed set of credit
terms such as bank deposits, insurance
contracts, sale of bonds, etc.
3.1
Finance charges (Sec. 3[3]; Sec. 2[h],
CB Circular 158) are the amounts to be paid
by the debtor incident to the extension of
credit such as interests, discounts, collection
fees, credit investigation fees and attorneys
fees.
3.2
Non Finance charges (Sec. 2[f], CB
Circular 158) are the amounts advanced by a
creditor for items normally associated with
the ownership of property or the availment of
the services purchased which are not incident
to the extension of credit. For example, when
a debtor purchases a car on credit, the
creditor may advance the insurance premium

BAR OPERATIONS 2011

Page 149

4.1
The disclosure must be made in a
separate document, and not one that is
merely incorporated in a document by the
statement that the transaction subjects the
debtor to a finance charge.
4.2
The failure to comply does not render
the
principal
contract
invalid
or
unenforceable, but would entitle the debtor
to recover any interest payment made.
4.3
A violation of the law may subject the
violator to: (a) a civil action brought within
one year to recover from the seller/lender an
amount of P100.00 or double the finance
charge imposed, whichever is greater, but
not to exceed P2,000.00, plus attorneys fees
and costs, and (b) a criminal action against
the seller/lender who if convicted may be
imposed a fine ranging from P1,000 to P5,000
or imprisoned from 6 months to 1 year or
both. Note that a final judgment that may be
rendered in any criminal proceeding to the
effect that the defendant has willfully violated
the act shall be prima facie evidence against
such defendant in an action or proceeding
brought by any other party against such
defendant under the Act as to all matters
respecting which said judgment would be
estoppel as between the parties thereto.

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

THE INSIDE STORY ON THE


SECRECY OF BANK
DEPOSITS LAW
Atty. Renato S. Rondez
Partner, Law Firm of Rondez & Partners
Professor, College of Law
University of the Cordilleras
________________________________
QUESTIONS AND ANSWERS ON SECRECY OF
BANK DEPOSITS-RA 1405 AND RELATED
LAWS

creditor-debtor
relationship
is
created
between the bank and the client.41
The law does not apply to money
market placements as they are not deposits,
rather, they are trades in short term
negotiable instruments such as securities or
treasury bills.
3) What disclosures or inquiries into
deposits are not prohibited?
a
b
c
d

1) What is the purpose of the law?


The purpose of the law is to
encourage people to deposit their money in
banks and, thereby, discourage private
hoarding so that the banks may lend out the
money
and
assist
in
the
economic
development of the country39.

2) What does the law prohibit?


(a) The examination and inquiry or
looking into all deposits of whatever nature
with banks or banking institutions in the
Philippines including investments in bonds
issued by the Government or its political
subdivisions and instrumentalities by any
person, government official, bureau or
office40; and
(b) The disclosure by any official or
employee of any banking institution to any
unauthorized person of any information
concerning said deposits.
Note that the law is applicable to trust
accounts or an account that has been set up
as an inter vivos or testamentary trust as
Section 2 has been held to cover not only
money that has been deposited but also to
money which has been invested although no

39 Sec. 1, RA 1405.
40 Sec. 2, RA 1405.
BAR OPERATIONS 2011

Upon written permission of the


depositor;
In cases of impeachment;
Upon order of a competent court in
cases of bribery or dereliction of duty
of public officials;
In cases where the money deposited
or invested is the subject matter of
litigation42;
Upon order of the court or subpoena
issued by the Ombudsman in cases of
unexplained wealth43; This is subject
to the following requisites: (1) only an
in-camera inspection is allowed (2)
there must be a pending case before a
court of competent jurisdiction (3)
account is clearly identified (4)
examination is limited to account
subject of the court case, and (5) bank
personnel and the account holder
must be notified to be present during
the inspection.
Upon order of the Commissioner of
Internal Revenue in respect of the
bank deposits of a decedent for the
purpose
of
determining
such
decedents gross estate44;
Upon order of the Commissioner of
Internal Revenue when a taxpayer
files an application to compromise his
tax liability by reason of financial
incapacity45;

41 Ejercito vs. Sandiganbayan, GR Nos. 15729495, November 30, 2006


42 Sec. 2, RA 1405.

43 Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA


91, Marquez vs. Disierto, 399 SCRA 772
44 Sec. 6, NIRC.

45 Sec. 6, NIRC.
Page 150

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
h

Upon examination made in the course


of a special or general audit of a bank
as authorized by the Monetary Board
after being satisfied that there is
reasonable ground to believe that a
bank fraud or irregularity is being
committed and it has become
necessary to look into the deposit to
establish the same;
i
Upon examination of a banks
independent auditor, the result of
which are for the exclusive use of the
bank;
j
In case of suspicious transactions
under the Anti-Money Laundering
Law46;
k Under the Anti-Money Laundering Law
where banks are required to report to
the Anti-Money Laundering Council
any transaction in cash or other
equivalent monetary instrument in
excess of P500,000 in any one day47;
l
Also under the Money-Laundering
Law, the Anti-Money Laundering
Council may inquire into a deposit or
investment maintained with any
financial institution upon order of a
competent court, in cases of violation
of the Act, when there is probable
cause that the deposit or investment
is in any way related to an unlawful
activity as defined in the Act or a
money laundering offense under the
Act48;
m When a director, officer, stockholder,
and related interest (DOSRI) obtains a
loan from his bank or its subsidiaries,
or with related controlling interests of
more than 5% of the capital or surplus
of the bank, it shall constitute a
waiver of secrecy of all his deposits of
whatever nature in all banks in the
Philippines; and
n Under the Unclaimed Balances Law49.
o The examination of a bank account
under Section 10, Rule 57 in relation
to the examination of a party whose
property is attached and persons

46 Sec. 3 (b-1) , RA 9160.


47 Sec. 3 (b), RA 9160.
BAR OPERATIONS 2011

indebted to a defendant or controlling


his property.50
4) Who are primarily liable for violations
of the law?
The persons primarily liable for a
violation of the law would be a bank
employee or officer and the person,
government officer, agency or office looking
into the deposit when not authorized by any
of the exceptions to the law.
Note also, that since investigations by
the Monetary Board and the Bureau of
Internal Revenue are confidential in nature,
any
disclosure
in
violation
of
the
confidentiality will create liability.
5) Will the garnishment
deposit violate the law?

bank

No, garnishment of a bank deposit will


not violate the law. If the existence of the
deposit is disclosed, the same is considered
as purely incidental to the execution
process51.
What is to be disclosed only is the existence
of the deposit, particularly whether or not it is
sufficient to satisfy the garnishment. Hence, a
disclosure of the balance may constitute a
violation of the law.
6) Is a depositor with a safety deposit
box protected by the law?
No, the deposits made by a depositor
in a safety deposit box are not the deposits
contemplated by the law as the bank is never
in possession or control of the contents of the
safety deposit box in this instance, the
depositor is merely leasing the deposit box
from the bank.
Prevailing jurisprudence is that the
ensuing relationship between the bank

48 Sec. 1, RA 9160.
49 RA 3936.
50 Onate vs. Abrogar, 230 SCRA 181
51 China Banking Corp. vs Court of Appeals, 193
SCRA 454

Page 151

of

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
renting out the safety deposit box and the
client with respect to the contents of the box
is that of bailor-bailee, the bailment being for
hire and mutual benefit. The bank would be
liable for loss of the contents of the box if it is
guilty of fraud, negligence or delay or
contravention
of
the
tenor
of
the
agreement.52
NOTE: Without order of a court of competent
jurisdiction, disclose to any authorized person
any information relative to the funds or
properties in the custody of the bank
belonging to private individuals, corporations,
or any other entity; Provided, that with
respect to bank deposits, the provisions of
existing laws shall prevail53.
7) Would the examination of the bank
deposits of another person in connection with
an inquiry into illegally acquired property of
the defendant in anti-graft cases violate the
law?
The permitted inquiry into illegally acquired
property in anti-graft cases extends to
instances where such property is concealed
by being held by or recorded in the name of
other persons.
8) In a case where the money deposited
or invested is the subject matter of the
litigation, could an inquiry into the
whereabouts of the amount extend to
the deposits held in the name of
persons other that the one responsible?
Even
in
cases
not
involving
prosecution under Anti-Graft and Corrupt
Practices Act, an inquiry into the whereabouts
of the amount converted necessarily extends
to whatever is concealed, held or recorded in
the name of persons other than the one
responsible inasmuch as the case is aimed at
recovering the amount converted.
9)
Are
foreign
currency
covered by the law?

deposits

52 Sia vs. Court of Appeals, 222 SCRA 24


53 Sec. 55.1(b), RA 8791.
BAR OPERATIONS 2011

While the law does not cover foreign


currency
deposits,
they
however
are
absolutely confidential and cannot be
disclosed pursuant to Republic Act No. 6426,
otherwise known as the Foreign Currency
Deposit Act, the only exception to disclosure
being upon the written consent of the
depositor54.
An additional exemption has been provided
by the Anti Money Laundering Law when it
has been established that there is probable
cause that the deposits involved are in any
way related to the offense of money
laundering.55
10) Will an unlawful examination of a
bank account render the information
obtained inadmissible?
There is nothing in the law that provides that
an unlawful examination shall render the
evidence
obtained
therefrom
to
be
inadmissible.
11) What is the penalty for a violation of
the law?
Upon conviction, a violator may be
sentenced to imprisonment of not more than
5 years of a fine of not more than
P200,000.00, or both at the discretion of the
court.

INTELLECTUAL PROPERTY
CODE
R.A. No. 8293
INTELLECTUAL PROPERTIES
Those property rights which result from the
physical manifestation of an original thought.
(Ballantines Law Dictionary)
Purpose: to strengthen the intellectual and
industrial property system in the Philippines
as mandated by the countrys accession to

54 Sec. 8, RA 6426.
55 Sec. 11, RA 9160
Page 152

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
the Agreement establishing the World Trade
Organization (Mirpuri vs. CA GR no 114508)
COVERAGE -intellectual property rights
consists of:
a
b
c
d
e
f
g

Copyrights and related rights;


Trademarks and service marks;
Geographic indications;
Industrial designs;
Patents;
Layout-designs
(Topographies)
of
Integrated Circuits; and
Protection of Undisclosed Information.

Section 7 of Rep. Act No. 9502 (Universally


Accessible Cheaper and Quality Medicines Act
of 2008) amends Section 72 of the
Intellectual Property Code in that the latter
law unequivocally grants third persons the
right to import drugs or medicines whose
patent were registered in the Philippines by
the owner of the product (Roma Drug vs. RTC
of Guagaua, Pampanga GR No. 149907)
INTERNATIONAL CONVENTION AND
RECIPROCITY
-any person who is a national or who
is domiciled or has a real and effective
industrial establishment in a country which is:
a.) a party to any convention, treaty, or
agreement relating to intellectual property
rights or the repression of unfair competition
to which the Philippines is also a party, or b.)
extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to
benefits to the extent necessary to give
effect to any provision of such convention,
treaty, or reciprocal law, in addition to the
rights to which any owner of an intellectual
property right is otherwise provided by law.
(Sec. 3)
REVERSE RECIPROCITY OF FOREIGN LAWS
makes reciprocally enforceable on
nationals of a foreign state within Philippine

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jurisdiction
all
conditions,
restrictions,
limitations, diminutions, requirements or
penalties that may be imposed by such
foreign state on a Filipino national seeking
intellectual property protection in that
country. (Section 231)
ADMINISTRATIVE PENALTIES IMPOSED
FOR VIOLATIONS OF LAWS INVOLVING
IPR
a Cease and desist order (CDO);
b Acceptance
of
voluntary
assurance
compliance (VAC) or voluntary assurance
of discontinuance (VAD);
c Condemnation or seizure of products
subject of the offense;
d Forfeiture of properties used in the
commission of the offense;
e Imposition of administrative fines;
f Cancellation of permit, license, authority
or registration;
g Withholding of permit, license, authority
or registration;
h Assessment of damages;
- Must be recovered within four (4)
years from the time the cause of
action arose (Sec. 226)
i
Censure;
j
Analogous penalties or sanctions (Sec.
10.2 [b])
ELEMENTS OF UNFAIR COMPETITION
(1) confusing similarity in the general
appearance of the goods; and
(2) intent to deceive the public and
defraud a competitor.
The confusing similarity may or may not
result from similarity in the marks, but may
result
from
other
external
factors
in the packaging
or presentation of the
goods. The intent to deceive and defraud
may be inferred from the similarity of the
appearance of the goods as offered for sale
to the public. Actual fraudulent intent need
not be shown (In-N-Out Burger vs. Sehwani
GR No. 179127)

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
LAW ON PATENTS

PATENT an exclusive right acquired over an


invention, to sell, use, and make the same
whether for commerce or industry(2005
2006 bar exams)
PATENTABLE INVENTIONS
-any technical solution of a problem in
any field of human activity which is
(a.)NEW(NOVELTY),
involves
an
(b).INVENTIVE STEP and is (c).INDUSTRIALLY
APPLICABLE shall be patentable. (Elidad
Kho vs.
CA, March 19, 2002) The
patentable invention may be, or may relate
to, a product, or process, or an improvement
of any of the foregoing. (Sec. 21)
Novelty that which does not form
part of a prior art. (Section 23)
Prior Arts:
a those previously available to the public
b that which forms part of an application
provided that:
i
the inventors or applicants are not
the same
ii
The contents of the application are
published in accordance with the
requirements of patent application
rules.
iii
The filing date of the prior art is
earlier.
Inventiveness/Inventive Step
-that which is not obvious to a person
skilled in the art of the time of the filing date
or priority date of the application claiming the
invention. (Sec. 26)
Industrial Applicability
-an invention that can be produced and used
in any industry. (Sec. 27)
NON-PATENTABLE INVENTIONS
a
Discoveries, Scientific Theories
Mathematical Methods;

and

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e
f

Schemes, rules and methods of


performing mental acts, playing games
or doing business, and programs for
computer;
Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the
human or animal body;
Plant varieties or animal breeds of
essentially biological process for the
production of plants or animals;
Aesthetic creations;
Anything which is contrary to public
order or morality (Sec. 22)

RIGHT TO A PATENT
The right to a patent belongs:
a to the inventor, his heirs, or assigns
b when 2 or more persons have made the
invention jointly to them jointly
c if two (2) or more persons have made
the
invention
separately
and
independently of each other to the
person who filed an application for
such invention (FIRST TO FILE
RULE)
d where 2 or more applications are filed
for the same invention to the
applicant who has the earliest filing
date or the earliest priority date
(FIRST TO FILE RULE) (Sec. 29)
e In case of inventions created pursuant
to a commission to the person who
commissions the work UNLESS agreed
otherwise.
f If made by an employee, the patent
shall belong to:
the employee if invention not
part of his regular duties even if he
uses the time, facilities and
materials of the employer; OR
The employer if the invention is
the result of the performance of

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
his regularly assigned duties
unless agreed otherwise.
Right to Priority
-an application for patent filed by any person
who has previously applied for the same
invention in another country which by treaty,
convention, or law affords similar privileges
to Filipino citizens, shall be considered as
filed as of the date of filing the foreign
application
Requisites:
(a) The local application expressly claims
priority;
(b) It is filed within twelve (12) months
from the date the
earliest foreign
application was filed;
(c) A certified copy of the foreign
application together with an English
translation is filed within six (6) months
from the date of filing in the Philippines.
(Sec. 15, R.A. No. 165a)
RIGHTS ACQUIRED BY THE PATENTEE
a to restrain, prohibit and prevent any
unauthorized person or entity from
making, using, offering for sale, selling or
importing a patented product;
b to restrain, prevent or prohibit any
unauthorized person or entity from using
the process, and from manufacturing,
dealing in, using or offering for sale, or
importing any product obtained directly or
indirectly from a patented process;
c to assign, or transfer by succession the
patent, and to conclude licensing
contracts for the same
UNITY OF INVENTION
-every
application
for
patent
registration must contain an application over
a single invention or several inventions but
must form part of a single general inventive
concept

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Utility Models
-models of implement or tools of any
industrial product even if not possessed of
the quality of invention but which is of
practical utility
Industrial Design
-any composition of lines or colors or
any three-dimensional form, whether or not
associated with lines or colors provided that
such composition or form gives a special
appearance to and can serve as pattern for
an industrial product or handicraft.
CANCELLATION OF PATENTS
1 Who may file?
any person
2

IPO motu proprio


Grounds
a That the patent is invalid (Sec. 81);
b If the invention is not new or
patentable;
c Unclear
and
incomplete
application;
d Contrary to public order or
morality. Failure to make payments
of annual fees or dues
Where to file?
BLA if in violation of IPC
(administrative)
RTC otherwise

INFRINGEMENT
-the making, using, offering for sale,
selling or importing a patented product or a
product obtained directly or indirectly from a
patented process or the use of a patented
process without the authorization of the
patentee. (Sec. 76)
Test of Patent Infringement

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
1

Literal Infringement resort is had


to the words of the claim.
Doctrine of Equivalents if two
devices do the same work in
substantially the same way and
produce substantially the same result,
they are the same even though they
differ in name, form, or shape.

and which is capable of distinguishing them


from goods emanating from a competitor
-any word, name symbol or devise
adopted and used by a manufacturer or
merchant to identify his goods and
distinguish them from those manufactured
and sold by other (Society des Products
Nestle vs. CA April 4, 2001)

REMEDIES IN CASE OF INFRINGEMENT


A File civil case
- with the appropriate Regional Trial
Court to recover from infringer the
damages sustained by the former, plus
attorneys fees and other litigation
expenses, and to secure an injunction for
the protection of his rights.

Service Mark distinguishes the services of


an enterprise from the service of other
enterprises.

File criminal case


-within 3 years from date of
commission of the crime for repetition of
infringement, without prejudice to the right
for damages. (Sec. 84)

1995 & 2004 BAR


Q - X Corporation commissioned W to paint
the Mayon Volcano on the lobby of the new
building of X Corp. for a price of P1M. Who
owns the painting? Who owns the copyright
of the painting?
A - X Corporation owns the painting but the
copyright belongs to W unless there is a
written
stipulation
to
the
contrary.
(Sec.178.4)
While
the
Rome
Convention
gives
broadcasting organizations the right to
authorize or prohibit the rebroadcasting of its
broadcast, however, this protection does not
extend to cable retransmission (ABS-CBN vs.
PMSI GR Nos. 175769-70)
LAW ON TRADEMARKS
Trademark anything which is adopted and
used to identify the source of origin of goods,

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Collective Mark any visible sign


designated as such in the application for
registration and capable of distinguishing the
origin or any other common characteristic,
including the quality of goods and services of
different enterprises which use the sign under
the control of the registered owner of the
collective mark (Sec. 121.2)
Trade Name the person (whether natural
or juridical) who does business and produces
the goods or the services is designated by a
trade name.
-there is no need to register trade names in
order to secure protection for them.
Trade Dress involves the total image of a
product, including such features as size,
shape, color or color combinations, texture,
and/or graphics.
HOW MARKS ARE ACQUIRED
-Under RA 8293, the rights in a mark
shall be acquired through registration made
validly in accordance with its provisions. (Sec.
122)
-when a person has identified in the mind
of the public the goods he manufactures or
deals in his business or services from those of
others, such a person has a property right in

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
the goodwill of said goods or services which
will be protected in the same manner as
other property rights (Sec. 168.1)
RIGHTS CONFERRED
-to prevent all third parties not having
the owners consent from using in the course
of trade identical or similar signs or
containers for goods or services which are
identical or similar to those in respect of
which the trademark is registered where such
use would result in a likelihood of confusion.
(Sec. 147)
NON-REGISTRABLE
TRADEMARKS,
TRADE NAMES AND SERVICE MARK
a
Immoral, deceptive or scandalous
matter, or matter which may disparage or
falsely suggest a connection with persons,
living or dead, institutions, beliefs, or
national symbols, or bring them into
contempt or disrepute;
b The flag or coat of arms or other insignia
of the Philippines or its political
subdivisions, or of any foreign nation, or
any simulation thereof;
c
A name, portrait or signature
identifying a particular living individual
except by his written consent, or the
name, signature, or portrait of a deceased
President of the Philippines, during the life
of his widow, if any, except by written
consent of the window;
d Is identical with a registered mark
belonging to a different proprietor or a
mark with an earlier filing or priority date,
in respect of:
i The same goods or services, or
ii Closely related goods or services, or
iii If it nearly resembles such a mark as
to be likely to deceive or cause
confusion;

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Be identical with or confusingly similar to


an internationally well-known mark,
whether or not registered in the
Philippines, provided that:
i. If the internationally well-known
mark is not registered in the
Philippines,
the
application
for
registration of the mark can be
rejected only if the goods or services
specified in the application are similar
to those of the internationally wellknown mark;
ii. If the internationally well-known
mark is registered in the Philippines,
the application for registration of the
mark can be refused even if the goods
or services specified in the application
are not identical or similar to those of
the internationally well-known mark.
f
Is likely to mislead the public;
g Generic signs for goods or services;
h Customary in everyday language or in
established trade practice;
iDesignate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods or
services;
jShapes necessitated by technical factors;
k
Color alone, unless defined by a given
form; or
lIs contrary to public order or morality
FILING DATE OF AN APPLICATION
-The filing date of an application shall
be the date on which the office received the
following indications and elements in English
or Filipino:
a
An express or implicit indication
that the registration of a mark is
sought;
b
Indications sufficient to contact
the applicant or his representative,
if any;
c
A reproduction of the mark where
registration is sought; and

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
d

The list of the goods or services for


which the registration is sought.
(Sec. 127.1)
NO filing date shall be accorded until
the required fee is paid (Sec. 127.2)
CANCELLATION OF TRADEMARK OR
TRADENAME
1 Who may file?
- any person who believes that he is
and will be damaged by the
registration of a mark
2 Where to file?
- BLA
3 Grounds:
a Mark becomes generic for goods
for which it is registered;
b Abandonment of the mark;
c Registration obtained fraudulently
or contrary to provisions of RA
8293;
d Mark used by, or with permission
of, registrant;
e Non-use within the Philippines for
3 uninterrupted years or longer.
-may be excused if caused by
circumstances
arising
independently of the will of the
trademark owner, such as
military coup, or political
changes
that
impede
commerce
DOCTRINE OF SECONDARY MEANING
- When a mark has become distinctive
of the applicants goods in commerce and, in
the mind of the public, indicates a single
source of consumers, it may be registered.
WHAT CONSTITUTES AN INFRINGEMENT
-Under RA 8293, any person shall,
without the consent of the owner of the
registered mark:

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Use in commerce any reproduction,


counterfeit,
copy,
or
colorable
imitation of a registered mark or the
same container or a dominant feature
thereof in connection with the sale,
offering
for
sale,
distribution,
advertising any goods or services
including other preparatory steps
necessary to carry out the sale of any
goods or services on or in connection
with which such use is likely to cause
confusion, or to cause mistake, or to
deceive; or
Reproduce,
counterfeit,
copy
or
colorably imitate a registered mark or
a dominant feature thereof and apply
such reproduction, counterfeit, copy,
or colorable imitation to labels, signs,
prints,
packages,
wrappers,
receptacles,
or
advertisements
intended to be used in commerce
upon or in connection with the sale,
offering for sale, distribution, or
advertising of goods or services on, or
in connection with which such use is
likely to cause confusion, or to cause
mistake, or to deceive, shall be liable
for infringement. (Sec. 155)

TEST OF TRADEMARK INFRINGEMENT


1 Dominancy Test consists in seeking
out the main, essential or dominant
features of a mark.
2 Holistic Test takes stock of the
other features of a mark, taking into
consideration the entirety of the
marks.
DIFFERENTIATED
FROM
UNFAIR
COMPETITION
1 Cause of action: in infringement,
the cause of action is the
unauthorized use of a registered

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
trademark; in unfair competition, it
is the passing off of ones goods as
those of another merchant.
2 Fraudulent
intent
is
not
necessary in infringement, but
necessary in UC.
3 Registration of trademarks: in
infringement, it is a pre-requisite;
in UC, it is not required.
4 Class of goods involved: in
infringement, the goods must be
of similar class; in UC, the goods
need not be of the same class.
infringement is a form of unfair
competition
REMEDIES AVAILABLE IN CASE OF
INFRINGEMENT OF A REGISTERED MARK
a Sue for damages (Sec. 156.1);
b Have
the
infringing
goods
impounded (Sec. 156.2);
c Ask for double damages (Sec.
156.3)
d Ask for injunction (156.4)
e Have the infringing goods disposed
of outside
the
channels of
commerce (Sec. 157.1)
f Have
the
infringing
goods
destroyed (Sec. 157.1)
g File criminal action (Sec. 170);
h Administrative Sanctions
UNFAIR COMPETITION
-any person who shall employ
deception or any other means contrary to
good faith by which he shall pass off the
goods manufactured by him or in which he
deals, or his business, or services for those of
the one having established such goodwill, or
who shall commit any acts calculated to
produce said result, shall be guilty of unfair
competition.
How Committed

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a
b

c
d

Making ones goods appear as the


goods of another;
Use of artifice or device to induce the
false belief that ones goods are those
of another;
False statements in the course of
trade; or
Any act contrary to good faith
calculated to discredit anothers goods

TEST OF UNFAIR COMPETITION


-The test is whether certain goods
have been clothed with an appearance likely
to deceive the ordinary purchaser exercising
ordinary care.
REMEDIES
IN
CASE
OF
UNFAIR
COMPETITION
a Damages which may either be:
reasonable profit which would have been
realized, or
actual profits collected by the defendant,
or
a certain percentage over the gross sales
of defendant in case of the measure of
damages cannot be readily ascertained;
b.) Damages may be doubled in cases
where actual intent to mislead the public
or to defraud the complaint is shown;
c.) Impounding of sales invoices and other
documents evidencing sales;
d Injunction
e Destruction of goods found to be
infringing, and all paraphernalia.
While the Constitution does not encourage
the unlimited entry of foreign goods, services
and investments into the country, it does not
prohibit them either. In fact, it allows an
exchange on the basis of equality and
reciprocity,
frowning
only
on
foreign
competition that is unfair.
GATT itself has provided built-in
protection from unfair foreign competition

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
and trade practices including anti-dumping
measures, countervailing measures and
safeguards against import surges. Where
local businesses are jeopardized by unfair
foreign competition, the Philippines can avail
of these measures. There is hardly therefore
any basis for the statement that under the
WTO, local industries and enterprises will all
be wiped out and that Filipinos will be
deprived of control of the economy (Taada
vs. Angara GR No. 118295)
LAW ON COPYRIGHT
COPYRIGHT system of legal protection an
author enjoys in the form of expression of
ideas(2004,2006,2007,2009 bar exams)
Works are protected by the sole fact of
their creation, irrespective of their mode
or form of expression, as well as their
content, quality or purpose (Sec. 172.2)
Protection extends only to the expression
of the idea, not to the idea itself or to
any procedure, system, method or
operation,
concept
or
principle,
discovery or mere data.
The copyright is distinct from property in
the material object subject to it.
Copyright, in the strict sense, is purely
statutory right. Being mere statutory
right, it is limited to what the statute
confers. It may be obtained and enjoyed
only with respect to the subjects and by
the persons, and on terms and
conditions specified in the statute.
Accordingly, it can cover only works
falling within the statutory enumeration
or description (Pearl & Dean Vs
Shoemart GR 148222 August 15, 2003).
CREATION OF A WORK
A copyright work is created when the two
(2) requirements are met:
1 Originality does not mean novelty or
ingenuity,
neither
uniqueness
nor

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creativity. It simply means that the work


owes its origin to the author
Expression there must be fixation. To
be fixed, a work must be embodied in a
medium sufficiently permanent or stable,
to permit it to be perceived, reproduced,
or otherwise communicated for a period
of more than transitory duration.
-if it is not required that the medium
be visible as long as there is a possibility
of retrieval, then there is fixation
-it is fixation that defines the time
from when copyright subsists. Before
fixation, there can be no infringement.

WORKS PROTECTED BY COPYRIGHT


A Original Work - Literary and artistic
works which include in particular:
a Books, pamphlets, articles and other
writings
b Periodicals and newspapers
c Lectures,
sermons,
addresses,
dissertations
prepared
for
oral
delivery, whether or not reduced in
writing or other material form
d Letters
e Dramatic
or
dramatico-musical
compositions; choreographic works or
entertainment in dumb shows
f Musical compositions, with or without
words
g Works
of
drawing,
painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art
h Original ornamental designs or models
for articles of manufacture, whether or
not registrable as an industrial design,
and other works of applied art.
i
Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
j

Drawings or plastic works of a


scientific or technical character
k Photographic works including works
produced by a process analogous to
photography; lantern slides
l
Audiovisual
works
and
cinematographic or any process for
making audio-visual recordings
m Pictorial
illustrations
and
advertisements
n Computer programs
o Other literary, scholarly, scientific and
artistic works (Sec. 172)
B

Derivative Works
Dramatizations,
translations,
adaptations,
abridgments,
arrangements, and other alterations of
literary works
b
Collections of literary, scholarly or
artistic works, and compilations of
data and other materials which are
original by reason of the selection or
coordination or arrangement of their
contents. (Sec. 173)
a

WORKS NOT PROTECTED


1 Any idea, procedure, system, method
or operation, concept, principle,
discovery or mere data as such, even
if expressed, explained, illustrated, or
embodied in a work;
2 News of the day and mere items of
press information;
3 Any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof.
(Sec. 175)
4 Any work of the Government of the
Philippines. (Sec. 176)
-prior
approval
of
the
government agency or office wherein
the work is created shall be necessary

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5
6

for exploitation of such work for profit.


Such agency or office, may, among
other things, impose as a condition
the payment of royalties
Pleadings;
Decisions of courts and tribunals.
-this pertains to the original
decisions not to the SCRA published
in volumes since these are protected
under derivative works.

RIGHTS OF AN AUTHOR
A Economic Rights (Sec. 177)
-exclusive right to carry out, authorize
or prevent the following acts
1 Reproduction
of
the
work
or
substantial portion of the work
2 Dramatization, translation, adaptation,
abridgement, arrangement or other
transformation of the work;
3 The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership;
4 Rental of the original or a copy of an
audiovisual or cinematographic work;
5
Public display of the original or copy
of the work;
6 Public performance of the work; and
7 Other communication to the public of
the work
B
1
2
3

Moral Rights (Sec. 193)


Right to require that the authorship of
the works be attributed to him,;
Right of alteration or non-publication
Right to preservation of integrity to
object to any distortion, mutilation or
other modification of, or other
derogatory action in relation to, his
work which would be prejudicial to his
honor or reputation; and

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
4

Right not to be identified with work of


others or with distorted work.
Term of moral right
-lifetime of the author and 50 years
after his death
Waiver of moral right
1 by a written instrument (Sec. 195)
2 by contribution to a collective work
unless expressly reserved (Sec.
196)

PRINCIPLE OF AUTOMATIC PROTECTION


Under the Berne Convention, the
enjoyment and exercise of copyright,
including moral rights, shall not be the
subject of any formality.
OWNERSHIP OF COPYRIGHT
1 Single creator the author of the
work, his heirs or assigns.
2 Joint creation the co-authors jointly
as co-owners. But if the work consists
of identifiable parts, the author of
each part owns the part that he has
created.
3 Employees creation the employee
if the creation is not part of his regular
duties even if he uses the time,
facilities
and
materials
of
the
employer; otherwise it belongs to the
employer
4 Commissioned work the person
commissioning but the copyright
remains with the creator unless there
is a written stipulation to the contrary.
5 Cinematographic works the
producer has copyright for purposes of
exhibition; for all other purposes, the
producer, the author of the scenario,
the composer, the film director, the
author of the work are the creators.
6 Anonymous and pseudonymous
works the publishers shall be

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deemed the representative of the


author unless:
a the contrary appears
b the pseudonyms or adopted name
leaves no doubt as to the authors
identity or
c If the author discloses his identity
7 Collective works the contributor is
deemed to have waived his right
unless he expressly reserves it. (Sec.
196)
Collective Work a work created by
two or more persons at the initiative
and under the direction of another
with the understanding that it will be
disclosed by the latter under his own
name and that the contributions of
natural persons will not be identified.
(Sec. 171.2)
8 In case of transfers, the transferee
shall own one or more or all the
economic rights transferred provided:
a The assignment, if inter vivos, be in
writing
b The assignment be filed with the
National Library upon payment of the
prescribed fee.
LIMITATIONS
TO
THE
RIGHTS
ON
COPYRIGHT
1 Private performance, private and
personal use applicable only when a
work has been lawfully made accessible to
the public.
Personal Use
-making
a
single
reproduction,
adaptation,
arrangement
or
other
transformation
of
anothers
work
exclusively for ones own individual use
Private Use
-making a reproduction, adaptation or
other transformation of it, in a single
person as in the case of personal use but

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
also for a common purpose by a specific
circle of persons only.
2

copyright in any such work shall not


include the right to control the
reconstruction, or rehabilitation in the
same style as the original of a building
to which that copyright relates

Fair Use of a Copyrighted Work


Fair Use - a privilege in persons other
than the owner of the copyright to use the
copyrighted material in a reasonable
manner
without
its
consent,
notwithstanding the monopoly granted to
the owner by the copyright.
-the doctrine of fair use is meant to
balance the monopolies enjoyed by the
copyright owner with interests of the
public and of society.

CRITERIA TO DETERMINE WHETHER USE


IS FAIR OR NOT
a Purpose and the character of the use
b Nature of the copyrighted work
c Amount and substantially of the
portions used
d Effect of the use upon the potential
market of the copyrighted work (Sec.
185)

Working of Architecture (Sec.


186)
-include the right to control the
erection of any building which
reproduces the whole or a substantial
part of the work either in its original or
in any form recognizably derived from
the original; Provided, that the

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Page 163

Reproduction of Published Work


-exclusively for research and private
study.

5)

Reprographic Reproduction by
Libraries
-any library or archive whose activities
are not for profit may, without the
authorization
of
the
author
of
copyright owner, make a single copy
of
the
work
by
reprographic
reproduction.

6)
Reproduction of Computer
Programs
-allowed on the ff. conditions:
a only one copy is made;
b)lawful owner made the copy;
c)purpose of which the reproduction is
made is legal like:
use to which the program is made
and for which it was purchased
demand the reproduction of a
copy; or
the reproduction of a copy is
necessary to guarantee against
loss or destruction (Sec. 189.1)

THE
FAIR-USES
OF
PROTECTED
MATERIAL ARE
Criticizing, commenting, and news
reporting;
Using
for
instructional
purposes
including producing multiple copies of
classroom
use,
for
scholarship,
research and similar purposes (Sec.
185)
3

Importation for Personal Purposes


Requisites:
a
Copies of the work are not available in
the Philippines and:
i
not more than one copy at one time is
imported for strict individual use;
ii
importation is by authority and for the use
of Philippine Government; or

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ
iii. religious, charitable, or educational
society imported not more than 3 copies
per title provided they are not for sale.
b Copies form part of libraries and
personal
baggage
belonging
to
persons or families arriving from
foreign countries and are not intended
for sale: Provided, that such copies do
not exceed three (3). (Sec. 190)
REMEDIES IN CASE OF INFRINGEMENT
1 Injunction to prevent infringement
2 Damages assessed on the basis of
the proof alleged by the plaintiff of
sales made by the defendant of the
infringing work minus whatever costs
the defendant may be able to prove
and appreciated by the court.
3 Delivery
under
oath
of
all
implements
employed
in
the
production of the infringing products
themselves and the infringing items,
for impounding or destruction as the
court may order.
4 Payment of moral and exemplary
damages under the discretion of
court.
5 Criminal Action
If the containers originally conformed
to the description contained in the
certificate of registration and it appears
that they are the same containers being
used by the other persons, the use is illegal
regardless of whether or not their
distinctive name, mark or design is partly or
entirely erased therefrom.
(Destileria
Ayala, Inc. vs. Tan Tay & Co. GR No. l48793)

RE: CONDITIONS ON THE COMMERCIAL


EXPLOITATION .OF SUPREME COURT
DECISIONS
RESOLUTION
a.
The person compiling and selling the
decisions shall provide the Supreme Court
Library twenty (20) free copies of the
compiled decisions in the format the
compilation is sold to the public;
b. If the compilation is in printed copies,
the Supreme Court Library shall have the
right
to
digitize
the
compilation for
exclusive use for research purposes by
Justices, Judges and court attorneys of the
Judiciary;
c.
If the compilation is in digitized format,
the Supreme Court Library shall have the
right to make available the digitized
compilation for exclusive use for research
purposes by Justices, Judges and court
attorneys of the Judiciary. The person
compiling shall submit to the Supreme Court
Library a text-file digitized copy of the
compilation;
d. The Court shall have the right to
purchase copies of the compilation at cost,
that is, by paying only the cost of reproducing
the compilation, the cost of installation, and
the cost of any accompanying software
license.
Such copies shall be used
exclusively by Justices, Judges and court
attorneys of the Judiciary and shall not be resold by the Court;
e. The compilation shall bear the notice
Compiled for sale to the public with the
permission of the Supreme Court;
f. These conditions apply to any updating of
the compilation.

A.M. No. 04-7-06-SC

*******************************************************************
BAR OPERATIONS 2011

Page 164

GREEN NOTES IN COMMERCIAL LAW


Prepared by: ATTY. RENATO S. RONDEZ

THE BARRISTERS CLUB OFFICERS:


Virgel Amor Vallejos
(Chancellor)

Seychelles June M. Doringo


(Secretary)

Janilet Mishelle R. Carillo


(Treasurer)

Art Miguel B. Sanlao and Angelito Velasquez Jr.


(Business Managers)

Rachelle May Gallego


(PRO)

Paul Dean Mark Pila


(SSG Representative)

Brenda Filipinas Danganan


(Ex-officio)

Atty. Isagani Calderon


(Adviser)

Atty. Reynaldo U. Agranzamendez


(Dean,College of Law)

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