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2016 University of the Philippines

College of Law
Bar Reviewer

Academics Committee Heads

Evert Callueng
Paulo Faustino
Carlos Hernandez
Audrey Ng
Desiree Sokoken



UP Law Bar Operations Commission 2016

UP Law Bar Operations Commission 2016
BAR OPS 2016
Table of Contents
CREDIT TRANSACTIONS 1 E.3. Satisfaction of lien by sale 8
E.4. At any time before the goods are so
E.5. Effect of sale 9
A. Definition and Nature of Letter of Credit 2 E.6. Other methods of enforcing lien 9
A.1 Definition 2 E.7. How lien may be lost 9
A.2 Purpose 2 E.8. Lien does not preclude other
A.3. Essential Requisites of Letters of remedies 9
Credit 2
A.5. Duration of Letters of Credit 2
A.6. Types of letters of credit 3 I. DEFINITION 11
B. Parties to a Letter of Credit 3
B.1. Rights and Obligations of the Parties 3 A. Definition and Purpose 11
C. Basic Principles of Letter of Credit 4
C.1. Doctrine of Independence 4 II. FORMS AND INTERPRETATION 12
C.2. Fraud Exception Principle 4
C.3. Doctrine of Strict Compliance 5 A. Requisites of Negotiability 12
A.1. In writing and signed by the maker or
II. TRUST RECEIPTS LAW [PD 115 (1973)] 5 drawer 12
A.2. Containing an unconditional promise
A. Definition/Concept of a Trust Receipt to pay or order to pay a sum certain in
Transaction 5 money 12
A.1. Loan/Security Feature 6 A.3. Payable on demand, or at a fixed or
A.2. Ownership of the Goods, Documents determinable future time 14
and Instruments Under a Trust Receipt 6 A.4. Payable to order or to bearer 15
B. Rights of the Entruster 6 A.5. Drawee must be named or
B.1. Validity of the Security Interest As designated with reasonable certainty 16
Against the Creditors of the B. Determination of Negotiability 16
Entrustee/Innocent Purchasers For Value 6
C. Obligation and Liability of the Entrustee 7 III. KINDS OF NEGOTIABLE INSTRUMENTS 17
C.1. Payment/Delivery of Proceeds of Sale
or Disposition of Goods, Documents or A. Promissory Note 17
Instruments 7 A.1. Kinds of Promissory Notes 17
C.2. Return of Goods, Documents or B. Bill of Exchange 17
Instruments In Case of Non-Sale 7 B.1. Kinds of bills of exchange 18
C.3. Liability For Loss of Goods, B.2. Instances when a bill of exchange
Documents or Instruments 7 may be treated as a promissory note 18
C.4. Penal Sanction If Offender is a
D. Remedies Available 7
D.1. Upon default or failure of the A. Steps in the Execution Of Negotiable
entrustee to comply with the terms and Instruments 19
conditions 7 B. Insertion of Date 19
D.2. In case of failure to turn over the C. Effect of Ante-Dating and Post-Dating 19
proceeds of the sale, or failure to return in D. Completion of Blanks 19
case of non-sale 8 E. Incomplete and Undelivered
E. Warehousemans Lien 8 Instruments 19
E.1. Claims included in the F. Complete and Undelivered
warehousemans lien 8 Instruments 20
E.2. Against what property the lien may G. Incomplete and Delivered Instruments 20
be enforced 8 H. Complete And Delivered Instruments 20

V. SIGNATURE 22 B.6. Holder not in due course 39

C. Defenses Against the Holder 39
A. Signing in Trade Name 22
B. Signature of Agent 22 X. LIABILITIES OF PARTIES 40
B.1. Liability of an agent 22
C. Signature Per Procuration 22 A. Parties Primarily Liable 40
D. Indorsement by Minor or Corporation 23 A.1. Maker 40
F. Forgery 23 A.2. Acceptor 40
F.1 Persons precluded from setting up B. Parties Secondarily Liable 40
defense of forgery 23 B.1. Drawer 41
F.2 Rules on forgery 23 B.2. Indorsers 41
G. Acceptance and Payment under Mistake 26 B.3. Order of liability among Indorsers 42


A. Makers Warranties 42
A. Who is a Holder for Value (HFV)? 28 B. Drawers Warranties 42
B. Burden of Proof - Presumption of C. Acceptors Warranties 42
Consideration 28 D. General Indorsers Warranties 43
C. Effect Of Want Of Consideration 28 E. Qualified Indorsers Warranties 43


A. Liability of an Accommodation Party 29
B. Accommodation Party as Surety 29 A. Presentment; Meaning 43
B. Date and Time of Presentment 43
VIII. NEGOTIATION 30 C. Necessity of Presentment for Payment 44
D. Parties to Whom Presentment for
A. Negotiation Distinguished from Payment Should Be Made 44
Assignment 30 E. Dispensation with Presentment for
B. Modes of Negotiation 30 Payment 44
B.1. By delivery if payable to bearer 30 F. Dishonor By Non-Payment 44
B.2. by indorsement completed by
delivery if payable to order 31 XIII. NOTICE OF DISHONOR 45
C. Kinds of Indorsement 31
C.1. As to manner of future method of A. Parties to Be Notified 45
negotiation 32 A.1. To whom in general 45
C.2. As to title transferred 32 A.2. If given by agent 45
C.3. As to kind of liability assumed by A.3. If party is dead 45
indorser 33 A.4. To partners 45
C.4. As to presence/absence of express A.5. To joint parties 45
limitations 33 A.6. To bankrupt 45
C.5. Other kinds of indorsement 34 B. When Given 45
C. When Not Necessary to Give to Drawer 45
IX. RIGHTS OF THE HOLDER 34 D. When Not Necessary to Give to Indorser 46
E. Who Will Benefit 46
A. Definition of a Holder 34 F. Parties Who May Give Notice of Dishonor 46
A.1. Rights of a holder 34 F.1. Who should give 46
B. Holder in Due Course [HDC] 35 G. Effect of Notice 46
B.1. Who are holders in due course 35 H. Form of Notice 46
B.2. The significance of due course I. Waiver 47
holding 35 J. Dispensation with Notice 47
B.3. Rights of a holder in due course 36 K. Effect of Failure to Give Notice 47
B.4. Requisites of a holder in due course 36
B.5. Presumption in favor of due course XIV. DISCHARGE OF NEGOTIABLE
holding 39 INSTRUMENT 47


C. Effects 56
A. Discharge of Negotiable Instrument 47 D. Presentment for Payment 57
B. By Payment in Due Course 47 D.1. Time 57
C. By Intentional Cancellation 48 E. Effect Of Delay 57
D. By Other Acts That Discharge a Simple
Contract 48 INSURANCE 58
E. By Reacquisition of Principal Debtor in
F. By Material Alteration 49
G. Discharge of Parties Secondarily Liable 49 A. Contract of Insurance 59
H. Right of Party Who Discharged A.1. Definition 59
Instrument 50 A.2. Form 59
I. Renunciation By Holder 50 A.3. Insurance and gambling
distinguished 59
XV. MATERIAL ALTERATION 51 B. Doing or Transacting Insurance Business 60
C. Governing law 60
A. Concept 51 D. Parties to an Insurance Contract 60
B. Changes in the Following Constitute E. Bancassurance 61
Material Alterations 51 F. Pre-need plans 61
C. Effect of Material Alteration 51

A. Definition 52 A. In General 62
B. Requisites 52 B. Subject Matter 62
C. Kinds of Acceptance 52 C. Cause and Risk of Loss or Damage 62
D. Proof of acceptance 52 D. Consideration 62
E. Manner 52 E. Risk-Distributing Scheme 62
E.1. Express acceptance 52 F. Meeting of the Minds 62
E.2. Implied acceptance 52
G. Rules Governing Acceptance 52 CONTRACT 63


B. Consensual 63
A. Requisites 53 C. Voluntary 63
B. When Presentment for Acceptance D. Aleatory 63
Necessary 53 E. Executory and Unilateral But
C. When Presentment for Acceptance Synallagmatic 63
Excused 53 F. Conditional 63
D. Time/Place/Manner of Presentment 54 G. Contract of Indemnity (For Non-Life
D.1. When Made 54 Insurance) 64
E. What Constitutes Sufficient H. Contract of Adhesion (Fine Print Rule) 64
Presentment? 54 I. Personal Contract 64
F. How Made 54 J. Property (For Life Insurance) 64
G. Effect of Failure to Make Presentment 54 K. Uberrimae Fides Contract 64
H. Dishonor by Non-Acceptance 54
A. Marine Insurance 65
XIX. CHECKS 56 A.1. Definition 65
A.2. Divisions 65
A. Definition 56 A.3. Bottomry and respondentia
B. Kinds 56 distinguished 66



A.4.A. Perils of the sea 66 CONTRACT 84
A.4.B. Perils of the ship 66
A.5. Loss 66 A. Offer and Acceptance/Consensual 84
A.6. Abandonment 67 B. Premium payment 84
A.7. Average 68 B.1. Authority of agent to receive
B. Fire insurance 69 premium 85
B.1. Definition 69 B.2. Payment by post-dated check 85
B.2. Risks 70 B.3. Non-payment of premium 85
B.3. Alterations in use or condition 70 B.4. Excuses for non-payment 86
B.4. Measure of indemnity 70 C. Cover-Notes 86
C. Casualty Insurance 71 D. Non-Default Options in Life Insurance 86
C.1. Definition 71 D.1. Cash surrender value (CSV) 86
C.2. Intentional and accidental injury D.2. Alternative to CSV 87
distinguished 71 E. Reinstatement of a Lapsed Life Insurance
C.3. Divisions 71 Policy 87
D. Suretyship 72 F. Refund of premiums 87
E. Life Insurance 72
E.2. Types 73 CONTRACTS 88
E.3. Examples of life insurance policies 74
E.4. Risks 74 A.1. Proof of fraud in concealment 88
F. Compulsory Motor Vehicle Liability A.2. Test of materiality 88
Insurance 75 A.3. Effects 89
A.4. Concealment in marine and ordinary
V. INSURABLE INTEREST 76 private insurance distinguished 89
A.5. Concealment in non-medical
A. In General 76 insurance 89
A.1. When insurable interest should exist 77 A.6. Matters which must be disclosed
A.2. Change of interest 77 even in the absence of inquiry 90
B. In Life/Health insurance 77 A.7. Matters which need not be disclosed 90
B.1. In life insurance 78 B. Misrepresentation/omissions 90
B.2. Interest in health insurance 79 B.1. Kinds of representations 90
B.3. Transfer of policy 79 B.2. Test of materiality 91
C. In Property Insurance 79 B.3. Effects 91
C. 1. Time of existence 80 C. Breach of Warranties 92
C.2. Transfer of policy 80 C.1. Warranties, riders, and endorsements 92
C.3. Measure of indemnity 80 C.2. Kinds of warranties 93
C.4. Interest in property and life C.3. Effect 93
distinguished 80
D. Double and Over Insurance; Reinsurance 81 VIII. CLAIMS SETTLEMENT AND
D.1. Double insurance 81 SUBROGATION 94
D.2. Rules for payment 81
D.3. Double and over insurance A. Concept of Loss 94
distinguished 82 A.1. Causes of loss 94
D.4. Reinsurance 82 A.2. Liability for loss 94
D.5. Double insurance and reinsurance B. Notice and Proof of Loss 94
distinguished 82 B.1. Notice of loss 94
E. Multiple or Several Interests on Same B.2. Proof of Loss 95
Property 82 C. Guidelines on Claims Settlement 96
E.1. Open loss payable mortgage clause 83 C.1. Unfair claims settlement; sanctions 97
E.2. Union mortgage or standard C.2. Prescription of action 97
mortgage clause 83


A. Jurisdiction and Adjudicatory Powers 98 B. Limitation of Liability 132

B. Revocation of Certificate of Authority 99 C. Willful misconduct 133
C. Liquidation of Insurance Company 99 D. Jurisdiction 134


A. Definition 136
A. Concept 101 B. Attributes of the Corporation 136
B. Diligence Required 103
C. Liabilities 104 II. CLASSES OF CORPORATIONS 137

II. VIGILANCE OVER GOODS 104 A. Stock Corporation 137

B. Non-Stock Corporation 137
A. Liability, in General 104 C. Other Corporations 137
B. Exempting Causes 104
C. Contributory Negligence 107 III. NATIONALITY OF CORPORATIONS 140
D. Duration of Extraordinary Responsibility
for Goods 107 A. Place of Incorporation Test 140
E. Stipulation for Limitation of Liability 108 B. Control Test 140
F. Liability for baggage of passengers 110 C. Grandfather Rule 141
A. Doctrine of Separate Juridical Personality 143
A. Liability, in General 112 B. Doctrine of Piercing the Corporate Veil 144
B. Void Stipulations 112
C. Duration of Liability 112 V. INCORPORATION AND ORGANIZATION 145
D. Liability for Acts of Others 114
E. Contributory Negligence 115 A. Promoter 145
F. Extent of Liability for Damages 115 B. Number and Qualifications of
Incorporators 147
IV. BILL OF LADING 117 C. Corporate Name Limitations on Use of
Corporate Name 147
A. Three-Fold Character 117 D. Corporate Term 148
B. Refusal to Transport 118 E. Minimum Capital Stock and Subscription
C. Delivery of Goods 118 Requirements 148
D. Period for Filing Claims 119 F. Articles of Incorporation 148
E. Period for Filing Actions 120 G. Registration and Issuance of Certificate
of Incorporation 153
V. ADMIRALTY AND MARITIME H. Adoption of By-Laws 154
A. Charter Parties 121
B. Liability of Ship Owners and Shipping A. General Powers, Theory of General
Agents 122 Capacity 156
C. Accidents and Damages in Maritime B. Specific Powers, Theory of Specific
Commerce 125 Capacity 156
D. Carriage of Goods by Sea Act (COGSA) 129 C. How (Corporate Powers) Exercised 161
D. Trust Fund Doctrine 164
(The Warsaw Convention) 132

A. Applicability 132



A. Doctrine of Centralized Management 165
B. Business Judgment Rule 166 A. State Policies 228
C. Tenure, Qualifications and B. Salient Features 228
Disqualifications of Directors or Trustees 167 C. Creation of the BSP 228
D. Elections 168 C.1. Nature of the BSP 228
E. Removal 169 C.2. Capitalization 228
F. Filling of Vacancies 169 D. Responsibility and Primary Objective 228
G. Compensation [Sec. 30] 169 D.1. Primary Objectives 228
H. Fiduciary Duties and Liability Rules 170 D.2. Other Responsibilities 229
I. Responsibility for Crimes 172 D.3. BSP as transferee of Philippine
J. Inside Information 172 Central Bank powers 229
K. Contracts 173 E. Monetary Board 229
L. Executive Committee 174 F. How the BSP Handles Banks in Distress 230
M. Meetings of BoD 174 F.1. Conservatorship 231
F.2. Closure 232
VIII. STOCKHOLDERS AND MEMBERS 176 F.3. Receivership 233
A. Rights of a Stockholder and Members 176 F.4. Liquidation 234
B. Participation in Management 177 G. How the BSP Handles Exchange Crisis 237
C. Proprietary Rights 182 G.1. Legal Tender Power 237
D. Remedial Rights 187 G.2. Retirement of Old Notes and Coins 237
E. Obligation of a Stockholder 188 G.3. Rate of Exchange 238
F. Meetings 190
A. Subscription Agreements 192
B. Consideration for Stocks 193 A. Policy 238
C. Shares of Stock 194 B. Purpose 238
D. Payment of Balance of Subscription 200 C. Prohibited Acts 238
E. Certificate of Stock 201 D. Deposits Covered 239
F. Stock and Transfer Book 204 E. Exceptions 239
G. Disposition and Encumbrance of Shares 204 F. Power of the Ombudsman to Examine
Accounts 240
X. DISSOLUTION AND LIQUIDATION 206 G. Garnishment of Deposits 241
A. Modes of Dissolution 206 H. Confidentiality of Foreign Currency
B. Methods of Liquidation 209 Deposits 241
I. Penalties 241
A. Close Corporations 211
B. Non-Stock Corporations 217 III. GENERAL BANKING LAW OF 2000 [RA
C. Religious Corporations 219 8791] 242
D. Foreign Corporations 220
A. Introduction 242
XVII. MERGERS AND CONSOLIDATIONS 224 A.1. Definition of Banks 242
A. Definition and Concept 224 A.2. Classification of banks 242
B. Constituent vs. Consolidated Corporation 224 A.3. Quasi-Banks and Trust Entities 243
C. Plan of Merger or Consolidation 225 A.4. Deposit Substitutes 243
D. Articles of Merger or Consolidation 225 A.5. Trust Entities 243
E. Procedure 225 A.6 Core Banking Functions 243
F. Effectivity 226 B. Powers of a Commercial Bank 243
G. Limitations 226 C. Distinction of Banks from Quasi-Banks
and Trust Entities 244


D. Bank Powers and Liabilities 245 E. Cancellation of Patent 264

E. Diligence Required of Banks 248 E.1. Grounds for cancellation of a patent 264
F. Fiduciary Duty 249 E.2. Requirement of the petition 264
G. Nature of Bank Funds and Bank Deposits 250 E.3. Notice of hearing 264
H. Stipulation on Interests 251 E.4. Effect of cancellation of patent or
I. Grant of Loans and Security Requirements claim 264
(Prudential Measures) 251 F. Remedy of the True and Actual Inventor 264
I.1. Ratio of Net Worth to Total Risk G. Rights Conferred by a Patent 265
Assets 251 H. Limitations of Patent Rights 265
I.2. Purpose 251 H.1. Prior user 266
I.3. Effect of Non-compliance 251 H.2. Use by the government 266
I.4. Single Borrowers Limit 251 I. Patent Infringement 267
I.5. Restrictions on Bank Exposure to I.1. Contributory infringer 267
DOSRI (Directors, Officers, Stockholders, I.2. Doctrine of patent exhaustion 267
and their Related Interests) 253 I.3. Tests in patent infringement 267
I.6. Loan-Loss Provisioning 253 I.4. Criminal action for repetition of
I.7. Reserves 254 infringement 268
I.8. PDIC Insurance 254 I.5. Infringement action by foreign
I.9.Equity Investment Limits 255 national 268
I.6. Defenses in action for infringement 268
J.1. Voluntary 269
A. State Policies 257
B. International Conventions Governing A. Definition of Marks, Collective Marks,
Intellectual Property Rights 257 Trade Names 272
C. Intellectual Property Rights 258 B. Acquisition of Ownership of Mark 273
D. Differences Between Copyrights, C. Acquisition of Ownership of Trade Name 273
Trademarks and Patents 258 D. Non-Registrable Marks 274
D.1. Patentable Inventions 258 D.1. Doctrine of secondary meaning 275
D.2. Trademark 258 E. Prior Use of Mark as a Requirement 275
D.3. Trade Name 258 E.1. Use of mark as a requirement 275
D.4. Copyright 258 E.2. Non-use of mark when excused 275
D.5. Other Forms of Intellectual Property 259 F. Well-Known Marks 275
E. Technology Transfer Arrangements 259 F.1. Determinants 276
F.2. Protection extended to well-known
II. PATENTS 260 marks 276
F.3. Rights conferred by a well-known
A. What Are Patentable? 260 mark 276
A.1. Inventions 260 G. Rights Conferred by Registration 277
A.2. Utility model 261 G.1. Limitations on such rights 277
A.3. Industrial designs 261 G.2. Assignment and transfer of
A.4. Lay-out designs (topographies of application and registration 277
integrated circuits) 261 G.3. Protection limited to goods specified
B. Non-Patentable Inventions 262 in registration certificate 278
C. Ownership of a Patent 262 H. Use by Third Parties of Names, Etc.
C.1. Right to a patent 262 Similar to Registered Mark 278
C.2. First-to-file rule 262 I. Infringement and Remedies 278
C.3. Inventions created pursuant to a I.1. Trademark infringement 278
commission 263 I.2. Tests to determine infringement 279
C.4. Right of priority 263 I.3. False designations of origin; false
D. Term of Patent 263 description or representation 280


I.4. Infringement of name and marks of H. Common Rules on Admissibility of

ownership stamp on containers 280 Evidence 303
I.5. Damages 280 I. Evidence in Patent Cases 303
I.6. Requirement of notice 281 J. Evidence in Trademark Infringement and
I.7. Other remedies available: 281 Unfair Competition Cases 304
I.8. Limitations to actions for K. Evidence in Copyright Cases 305
infringement 281 L. Order of Destruction 305
J. Unfair Competition 282
K. Trade Names or Business Names 284 SPECIAL LAWS 306
L. Collective Marks 284


B. Basic Principles 285
C. Copyrightable Works 286 A. Policy of the Law 307
C.1. Original literary and artistic works 286 B. Covered Institutions 307
C.2. Derivative works 287 C. Obligations of Covered Institutions 308
D. Non-Copyrightable Works 288 D. Covered Transactions 310
E. Rights of Copyright Owner 289 E. Suspicious Transactions 310
E.1. Copyright or economic rights 289 F. When is Money Laundering Committed 311
E.2. When copyright vests 290 G. Unlawful Activities or Predicate Crimes 312
E.3. Moral rights 290 H. Anti-Money Laundering Council (AMLC) 314
E.4. Rights to proceeds in subsequent I. Freezing of Monetary Instrument or
transfers (droit de suite or follow up Property 315
rights) 291 J. Authority to Inquire into Bank Deposits 316
E.5. Neighboring rights 291
F. Rules On Ownership Of Copyright 294 III. FOREIGN INVESTMENTS ACT 317
F.1. Ownership of copyright 294
F.2. Duration of copyright 295 A. Policy of the Law 317
F.3. Presumption of authorship 296 B. Definition of Terms 317
F.4. Transfer or assignment of copyright 296 B.1. Foreign Investment 317
G. Limitations on Copyright 296 B.2. Doing Business in the Philippines 318
H. Copyright Infringement 297 B.3. Export Enterprise 318
B.4. Domestic Market Enterprise 318
IV. RULES OF PROCEDURE FOR C. Registration of Investments on Non-
D. Foreign Investments in Export Enterprise 319
A. In What Courts Applicable 301 E. Foreign Investment in Domestic Market
B. Applicability of Regular Rules 301 Enterprise 319
C. Commencement of Civil Action 301 F. Foreign Investment Negative List 319
C.1. Pleadings 301
C.2. Who may file 301
C.3. Form and contents of the petition 301
C.4. Prohibited pleadings 302
C.5. Failure to file complaint where a writ
of search and seizure is issued 302
C.6. Summons 302
C.7. Answer 302
D. Modes of Discovery 302
E. Pre-Trial 303
F. Clarificatory Hearings and Trial 303
G. Commencement of Criminal Action 303



PAGE 1 OF 320

I. Letters Of Credit Those which do not have one of these

conditions shall be mere letters of
(L/C) recom m endation. [Art. 568, Code of


LETTER OF CREDIT (1) Financial device L/Cs are developed
by merchants as a convenient and
relatively safe mode of dealing with sales
A.1 DEFINITION of goods to satisfy the seemingly
Letters of credit (L/C) are those issued by one irreconcilable interests of a seller, who
merchant to another, or for the purpose of refuses to part with his goods before he is
attending to a commercial transaction. [Art. paid, and a buyer, who wants to have
567, Code of Commerce] control of the goods before paying [Bank
A written instrument whereby the writer of America, NT&SA v. Court of Appeals,
requests or authorizes the addressee to pay G.R. No. L-105395 (1993)]
money or deliver goods to a third person and A letter of credit is one of the modes of
assumes responsibility for payment of debt payment, set out in Sec. 8, Central Bank
therefor to the addressee [Transfield Circular No. 1389, "Consolidated Foreign
Philippines v. Luzon Hydro, G.R. No. 146717 Exchange Rules and Regulations," dated
(2004)]. 13 April 1993, by which commercial banks
An engagement by a bank or other person sell foreign exchange to service payments
made at the request of a customer that the for, e.g., commodity imports [Reliance
issuer shall honor drafts or other demands of Commodities v. Daewoo, G.R. No. L-
payment upon compliance with the 100831 (1993)]
conditions specified in the credit [Prudential (2) Composite of three distinct
Bank v. Intermediate Appellate Court, G.R. No. contracts An L/C transaction involves
74886 (1992)] three distinct but intertwined

A.2 PURPOSE (a) First Contract between the party

Its purpose is to substitute for, and support, applying for the L/C
(buyer/importer/account party) and
the agreement of the buyer-importer to pay the party for whose benefit the L/C is
money under a contract or other issued (seller/exporter/beneficiary).
arrangement, but does not necessarily
(b) Second Contract between the
constitute as a condition for the perfection of
buyer and the issuing bank. This
such arrangement [Reliance Commodities, Inc. contract is sometimes called the
v. Daewoo Industrial Co., Ltd., G.R. No. L- "Application and Agreement" or the
100831 (1993)] "Reimbursement Agreement."
(c) Third Contract between the issuing
A.3. ESSENTIAL REQUISITES OF LETTERS bank and the seller, in order to
OF CREDIT: support the contract, under (a) above
[Reliance Commodities v. Daewoo,
(1) Issued in favor of a definite person and
not to order. G.R. No. L-100831 (1993)]

(2) Limited to a fixed and specified amount,

or to one or more undetermined A.5. DURATION OF LETTERS OF CREDIT
amounts, but within a maximum the (1) Period stipulated by the parties; or
limits of which has to be stated exactly.
(2) If no period is fixed;

PAGE 2 OF 320

(a) 6 months from date if used in the the beneficiary that the confirming bank
Philippines will undertake the issuing bank's
obligation as its own according to the
(b) 12 months if abroad
terms and conditions of the credit [Feati
Bank and Trust Co. v. CA, G.R. No. 94209
Commercial Standby
Letter of Credit Letter of Credit
Method of payment Used to guarantee or B.1. RIGHTS AND OBLIGATIONS OF THE
in a contract of sale secure an obligation PARTIES
in a non-sale There would be at least three parties to a
transaction letter of credit:
Reduce the risk of Reduce the risk of
non-payment of non-performance of (1) Buyer/Exporter/Account Party
purchase price under a contractual one who procures the letter of credit and
a contract of sale obligation obliges himself to reimburse the issuing
bank upon receipt of documents of title.
The seller can obtain The credit is payable
payment from the upon certification of (2) Issuing Bank the bank which
issuer of L/C upon a partys non- undertakes: (1) to pay the seller upon
the presentation of performance of the receipt of the draft and proper documents
documents that show agreement of title; and (2) to surrender the
he has taken documents to the buyer upon
affirmative steps to reimbursement.
comply with the sale
The obligation of the issuing bank to pay
the seller is direct, primary, absolute,
Beneficiary must Beneficiary must
definite and solidary with the buyer, in
demonstrate that he certify that his
the absence of stipulation in the letter of
has performed the obligor has not
credit [Metropolitan Waterworks and
contract performed the
Sewerage System v. Daway, G.R. No.
160732 (2004)]
(3) Seller/Im porter/Beneficiary one
who ships the goods to the buyer in
(a) Revocable L/C - One which can be compliance with a contract of sale and
revoked by the issuing bank without the delivers the documents of title and draft
consent of the buyer and seller to the issuing bank to recover payment.
(b) Irrevocable L/C - One which the
issuing bank cannot revoke without the
Depending on the transaction, the number of
consent of the buyer and seller [Feati
parties to the letter of credit may be
Bank and Trust Co. v. CA, G.R. No. 94209
increased. Thus, the different types of
correspondent banks:
(1) Advising/Notifying Bank the bank
III. AS TO THE OBLIGATION ASSUMED which conveys to the seller the existence
(a) Unconfirm ed L/C - One which The bank assumes no liability except to
continues to be the obligation of the notify and/or transmit to the seller the
issuing bank existence of the letter of credit. A
notifying bank is not a privy to the
(b) Confirmed L/C - One which is
contract of sale between the buyer and
supported by the absolute assurance to
PAGE 3 OF 320

the seller, its relationship is only with that falsification or legal effect of any documents,
of the issuing bank and not with the or for the general and/or particular
beneficiary to whom he assumes no conditions stipulated in the documents or
liability. superimposed thereon, nor do they assume
any liability or responsibility for the
The bank may suggest to the seller its
description, quantity, weight, quality,
willingness to negotiate, but this fact
condition, packing, delivery, value or
alone does not imply that the notifying
existence of the goods represented by any
bank promises to accept the draft drawn
documents, or for the good faith or acts
under the documentary credit [Feati Bank
and/or omissions, solvency, performance or
and Trust Co. v. CA, G.R. No. 94209
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
(2) Confirming Bank the bank which whomsoever [Transfield Philippines v. Luzon
lends credence to the letter of credit Hydro, G.R. No. 146717 (2004]
issued by a lesser known issuing bank.
The bank assumes a direct obligation to
The independent nature of the letter of credit
the seller and its liability is a primary one
may be
as if the bank itself had issued the letter
of credit [Feati Bank and Trust Co. v. CA, (a) Independent in toto - the credit is
G.R. No. 94209 (1991)] independent from the justification aspect
and is a separate obligation from the
(3) Negotiating Bank the bank which
underlying agreement;
discounts the draft presented by the
seller. (b) Only as to the justification aspect like in a
commercial letter of credit or repayment
The bank buys or discounts a draft under
standby, which is identical with the same
the letter of credit. Its liability is
obligations under the underlying
dependent upon the stage of the
agreement. [Transfield Philippines v.
negotiation. If before negotiation, it has
Luzon Hydro, G.R. No. 146717 (2004]
no liability with respect to the seller but
after negotiation, a contractual
relationship will then prevail between
the negotiating bank and the seller
[Feati Bank and Trust Co. v. CA, G.R. No. The principle that limits the application of the
94209 (1991)] independence principle only to instances
where it would serve the commercial function
(4) Paying Bank the bank which of the credit and not when fraud attends the
undertakes to encash the drafts drawn transaction.
by the seller.
In the case of Transfield Philippines v. Luzon
Hydro [G.R. No. 146717 (2004)], the petitioner
C. BASIC PRINCIPLES OF LETTER OF alleged misrepresentation as constituting
fraud. The Court, however, made no ruling as
CREDIT to whether the same indeed constitutes fraud.
Petitioner asserts that the "fraud exception"
C.1. DOCTRINE OF INDEPENDENCE exists when the beneficiary, for the purpose of
The principle of independence assures the drawing on the credit, fraudulently presents
seller or the beneficiary of prompt payment to the confirming bank, documents that
independent of any breach of the main contain, expressly or by implication, material
contract and precludes the issuing bank from representations of fact that to his knowledge
determining whether the main contract is are untrue. In such a situation, petitioner
actually accomplished or not. insists, injunction is recognized as a remedy
available to it.
Under this principle, banks assume no
liability or responsibility for the form, Citing Dolan's treatise on letters of credit,
sufficiency, accuracy, genuineness, petitioner argues that the independence
PAGE 4 OF 320

principle is not without limits and it is

important to fashion those limits in light of II. Trust Receipts Law
the principle's purpose, which is to serve the
commercial function of the credit. If it does
[PD 115 (1973)]
not serve those functions, application of the
principle is not warranted, and the common
law principles of contract should apply A. DEFINITION/CONCEPT OF A TRUST
[Transfield Philippines v. Luzon Hydro, G.R. No. RECEIPT TRANSACTION
146717 (2004)] A trust receipt is a written or printed
The untruthfulness of a certificate document whereby the entrustee binds
accompanying a demand for payment under himself:
a standby credit may qualify as fraud (1) to hold the designated goods, documents
sufficient to support an injunction against or instruments in trust for the entruster,
payment. The remedy of injunction is and
available when the following are present:
(2) to sell or otherwise dispose of the goods,
(1) Clear proof of fraud; documents or instruments with the
(2) Fraudulent abuse of the independent obligation to turn over to the entruster
purpose of the letter of credit and only the proceeds thereof to the extent of the
fraud under the main agreement and amount owing to the entruster or as
appears in the trust receipt or the goods,
(3) Irreparable injury might follow if documents or instruments themselves if
injunction is not granted or the recovery they are unsold or not otherwise disposed
of damages would be seriously damaged of, in accordance with the terms and
conditions specified in the trust receipt.
The settled rule in commercial transactions
involving letters of credit requires that the
A trust receipt transaction is any
documents tendered by the seller must
transaction by and between an entruster and
strictly conform to the terms of the letter of
the entrustee, whereby the entruster (who
owns or holds absolute title or security
Otherwise, the issuing bank or the concerned interests over certain specified goods,
correspondent bank is not obliged to perform documents or instruments) releases the same
its undertaking under the contract. to the possession of the entrustee upon the
latter's execution and delivery to the
The tender of documents by the beneficiary
entruster of a signed document called a
(seller) must include all documents required
trust receipt. [PD 115, Sec. 4]
by the letter. A correspondent bank which
departs from what has been stipulated under A trust receipt is a security transaction
the letter of credit, as when it accepts a faulty intended to aid in financing importers and
tender, acts on its own risks and it may not retail dealers who do not have sufficient
thereafter be able to recover from the buyer funds or resources to finance the importation
or the issuing bank, as the case may be, the or purchase of merchandise, and who may
money thus paid to the beneficiary. (Feati v. not be able to acquire credit except through
Court of Appeals, 1991) utilization, as collateral, of the merchandise
imported or purchased. It is a security
agreement that secures an indebtedness and
there can be no such thing as security interest
that secures no obligation [Spouses Dela Cruz
v. Planters Products Inc., G.R. No. 180677

PAGE 5 OF 320

A.1. LOAN/SECURITY FEATURE receipt to the entrustee to the extent of

In a letter of credit-trust receipt arrangement, the amount owing to the entruster or as
a bank extends a loan covered by the letter of appears in the trust receipt
credit, and the trust receipt acts as the (2) In case of non-sale: Right to the return
security for the loan. In other words, the of the goods, documents or instruments
transaction involves a loan feature
represented by the letter of credit, and a (3) Right to the enforcement of all other
security feature which is in the covering rights conferred on him in the trust
trust receipt [Vintola v. Insular Bank of Asia receipt (which are not contrary to the
and America, G.R. No. 73271 (1987) provisions of PD 115)
(4) Right to cancel the trust and take
possession of the goods, documents or
A.2. OWNERSHIP OF THE GOODS, instruments subject of the trust or of the
DOCUMENTS AND INSTRUMENTS UNDER proceeds realized therefrom at any time
A TRUST RECEIPT upon default or failure of the entrustee to
To secure that the banker (entrustee) shall be comply with any of the terms and
repaid at the critical point that is, when the conditions of the trust receipt or any other
imported goods finally reach the hands of the agreement between the entruster and the
intended vendee the banker takes the full entrustee
title to the goods at the very beginning, and (5) Right to sell the goods, documents or
he continues to hold that title as his instruments at public or private sale, not
indispensable security until the goods are less than five days after serving or
sold. sending of notice to the entrustee of the
The importer (entruster) becomes absolute intention to sell
owner of the imported merchandise as soon (6) Right to purchase at a public sale
as he has paid its price. The ownership of the the goods, documents, or instruments
merchandise continues to be vested in the
owner thereof or in the person who has (7) Right to recover deficiency from the
advanced payment (entrustee), until he has entrustee should the proceeds be
been paid in full, or if the merchandise has insufficient [PD 115, Sec. 7]
already been sold, the proceeds of the sale
should be turned over to him by the importer
or by his representative or successor in The entruster holding a security interest
interest. [Prudential Bank v. National Labor shall not, merely by virtue of such interest
Relations Commission, G.R. No. 112592 or having given the entrustee liberty of sale or
(1995), citing National Bank v. Viuda e Hijos de other disposition of the goods, documents or
Angel Jose, G.R. No. L-43117 (1936)] instruments under the terms of the trust
receipt transaction be responsible as
However, in the case of goods delivered principal or as vendor under any sale
under trust receipt for the purpose of or contract to sell m ade by the
manufacturing or processing before its entrustee. [PD 115, Sec. 8]
ultimate sale, the entruster shall retain its
title over the goods whether in its original or
processed form until the entrustee has B.1. VALIDITY OF THE SECURITY INTEREST
complied fully with his obligation under the
trust receipt. [PD 115, Sec. 4 (1)]
B. RIGHTS OF THE ENTRUSTER The entruster's security interest in goods,
documents, or instruments pursuant to the
The entruster shall have the following rights: terms of a trust receipt shall be valid as
(1) In case of sale: Right to the proceeds against all creditors of the entrustee for
from the sale of the goods, documents or the duration of the trust receipt agreement.
instruments released under a trust [PD 115, Sec. 12]
PAGE 6 OF 320

A purchaser of goods from an C.2. RETURN OF GOODS, DOCUMENTS OR

entrustee with right to sell, or of documents INSTRUMENTS IN CASE OF NON-SALE
or instruments through their customary form The failure to return the goods,
of transfer, who buys the goods, documents, documents or instruments if they were not
or instruments for value and in good sold or disposed of in accordance with the
faith from the entrustee, acquires said goods, terms of the trust receipt shall constitute
documents or instruments free from the estafa, punishable under RPC 315, par. 1 (b).
entruster's security interest. [PD 115, Sec. 11] [PD 115, Sec. 13]


The entrustee shall have the following The risk of loss shall be borne by the
obligations: entrustee. Loss of goods, documents or
instruments which are the subject of a trust
(1) Hold the goods, documents or
receipt, pending their disposition,
instruments in trust for the entruster and
irrespective of whether or not it was due to
shall dispose of them strictly in
the fault or negligence of the entrustee,
accordance with the terms and conditions
shall not extinguish his obligation to
of the trust receipt;
the entruster for the value thereof. [PD
(2) Receive the proceeds in trust for the 115, Sec. 10]
entruster and turn over the same to the
entruster to the extent of the amount
owing to the entruster or as appears on C.4. PENAL SANCTION IF OFFENDER IS A
the trust receipt; CORPORATION
(3) Insure the goods for their total value If the violation or offense is committed by a
against loss from fire, theft, pilferage or corporation, partnership, association or other
other casualties; juridical entities, the penalty shall be
im posed upon the directors, officers,
(4) Keep said goods or proceeds thereof employees or other officials or
whether in money or whatever form, persons therein responsible for the
separate and capable of identification as offense, without prejudice to the civil
property of the entruster; liabilities arising from the criminal offense.
(5) Return the goods, documents or [PD 115, Sec. 13]
instruments in the event of non-sale or
upon demand of the entruster; and
(6) Observe terms and conditions of the
trust receipt not contrary to PD 115. [PD
OF SALE OR DISPOSITION OF GOODS, (a) The entruster may cancel the trust and
take possession of the goods, documents
or instruments subject of the trust or of
The failure of an entrustee to turn over the proceeds realized therefrom.
the proceeds of the sale of the goods,
documents or instruments covered by a trust (b) The entruster may sell the goods,
receipt to the extent of the amount owing to documents or instruments not less than
the entruster or as appears in the trust five days after serving or sending of the
receipt shall constitute the crime of estafa, requisite notice, and the entruster may
punishable under RPC 315, par. 1 (b). [PD 115, become a purchaser at a public sale.
Sec. 13]

PAGE 7 OF 320

(c) The proceeds shall be applied (a) to the charges enumerated so far as they are within
payment of the expenses thereof; (b) to Sec. 27 although the amount of the charges is
the payment of the expenses of re-taking, not stated in the receipt. [Act No. 2137, Sec.
keeping and storing the goods, 30]
documents or instruments; (c) to the
satisfaction of the entrustee's
indebtedness to the entruster. [PD 115, E.2. AGAINST WHAT PROPERTY THE LIEN
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
debtor for the claims in regard to which
THE PROCEEDS OF THE SALE, OR FAILURE the lien is asserted, and
(b) Against all goods belonging to others
File a criminal case for estafa under RPC 315,
which have been deposited at any time by
par. 1 (b). [PD 115, Sec. 13]
the person who is liable as debtor for the
claims in regard to which the lien is
asserted if such person had been so
E. WAREHOUSEMANS LIEN entrusted with the possession of goods
The warehousemans lien under the that a pledge of the same by him at the
Warehouse Receipts Law is the time of the deposit to one who took the
warehousemans legal right or interest in the goods in good faith for value would have
depositors property. It is similar to the been valid. [Act No. 2137, Sec. 28]
depositarys right of retention, which is a
means or device by which the depositary is
able to obtain payment of what may be due E.3. SATISFACTION OF LIEN BY SALE
because of the deposit [Gomez-Somera] A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:

E.1. CLAIMS INCLUDED IN THE (1) An itemized statement of the

warehouseman's claim, showing the sum
due at the time of the notice and the date
A warehouseman shall have a lien on the or dates when it becomes due,
goods deposited or the proceeds thereof in
his hands: (2) A brief description of the goods against
which the lien exists,
(1) All lawful charges for storage and
preservation of the goods (3) A demand that the amount of the claim
as stated in the notice of such further
(2) All lawful claims for money advanced, claim as shall accrue, shall be paid on or
interest, insurance, transportation, labor, before a day mentioned, not less than ten
weighing, coopering, and other charges days from the delivery of the notice if it is
and expenses in relation to other goods personally delivered, or from the time
(3) All reasonable charges and expenses for when the notice shall reach its
notice and advertisements of sale destination, according to the due course
of post, if the notice is sent by mail,
(4) Sale of the goods where default had been
made in satisfying the warehousemans (4) A statement that unless the claim is paid
lien [Act No. 2137, Sec. 27] within the time specified, the goods will
be advertised for sale and sold by auction
However, if a negotiable receipt is issued for at a specified time and place. [Act No.
the goods, the warehouseman shall have no 2137, Sec. 33]
lien thereon except for charges for storage of
goods subsequent to the date of the receipt
unless the receipt expressly enumerated In accordance with the terms of a notice so
other charges for which a lien is claimed. In given, a sale of the goods by auction may be
such case, there shall be a lien for the had to satisfy any valid claim of the
PAGE 8 OF 320

warehouseman for which he has a lien on the E.7. HOW LIEN MAY BE LOST
goods. [Act No. 2137, Sec. 33] (1) By surrendering possession of the goods
From the proceeds of such sale, the (2) By refusing to deliver the goods when a
warehouseman shall satisfy his lien including demand is made with which he is bound
the reasonable charges of notice, to comply [Act No. 2137, Sec. 29]
advertisement and sale. The balance, if any,
shall be held by the warehouseman and
delivered on demand to the person to whom E.8. LIEN DOES NOT PRECLUDE OTHER
he would have been bound to deliver or REMEDIES
justified in delivering goods. [Act No. 2137, Whether or not a warehouseman has a lien
Sec. 33] upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor
for the collection of all charges and advances
which the depositor has contracted to pay.
ARE SO SOLD [Act No. 2137, Sec. 32]
General rule: The warehouseman shall
retain the possession of the goods according
to the terms of the original contract of
Exception: At any time before the goods are
so sold, any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to
satisfy his lien and to pay the reasonable
expenses and liabilities incurred. The
warehouseman shall deliver the goods to the
person making payment. [Act No. 2137, Sec.


The warehouseman shall not be liable for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the
receipt given for the goods when they were
deposited, even if such receipt be negotiable.
[Act No. 2137, Sec. 36]


Other remedies allowed by law for the
enforcement of a lien against personal
property are not precluded. The right to
recover so much of the warehouseman's
claim as shall not be paid by the proceeds of
the sale is not barred as well. [Act No. 2137,
Sec. 35]

PAGE 9 OF 320

PAGE 10 OF 320

I. Definition shall be legal tender in amounts not exceeding

Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in
A. DEFINITION AND PURPOSE amounts not exceeding Twenty pesos
Written contract for the payment of (P20.00) for denominations of Ten centavos or
money, by its form and on its face,
intended as substitute for money and
intended to pass from hand to hand to
give the holder in due course (HDC) the Although considered as medium for
right to hold the same and collect the payment of obligations, negotiable
sum due. instruments are not legal tender.
Instruments are negotiable when they Negotiable instruments shall produce the
conform to all the requirements effect of payment only when they have
prescribed by the Negotiable Instruments been encashed or when through the fault
Law (NIL; Act 2031, 03 February 1911). of the creditor they have been impaired.
[Art. 1249, Civil Code]
However, the fact that an instrument
does not meet the foregoing requisites BUT a CHECK which has been cleared and
will not affect its validity, the only credited to the account of the creditor
consequence being that it will be shall be equivalent to a delivery to the
governed not by the NIL but by the creditor of cash.
general law on contracts. (Campos)
Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
Negotiable Instrum ents Not Legal
valid tender of payment. Since a
negotiable instrument is only a substitute
Art. 1249, Civil Code. The payment of debts in for money and not money, the delivery of
money shall be made in the currency such an instrument does not, by itself,
stipulated, and if it is not possible to deliver operate as payment. Mere delivery of
such currency, then in the currency which is checks does not discharge the obligation
legal tender in the Philippines. under a judgment. The obligation is not
extinguished and remains suspended
The delivery of promissory notes payable to until the payment by commercial
order, or bills of exchange or other mercantile document is actually realized. [BPI vs.
documents shall produce the effect of Royeca, G.R. No. 176664 (2008)]
payment only when they have been cashed, or
when through the fault of the creditor they
have been impaired.

In the meantime, the action derived from the

original obligation shall be held in the
abeyance. (1170)

Sec. 52, New Central Bank Act. Legal Tender

Power. - All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and
private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins

PAGE 11 OF 320

II. Forms and something in written form that can be

transferred from person to person. (Abad)

A. REQUISITES OF NEGOTIABILITY General Rule: No person is liable on the

instrument whose signature does not appear
(Most Frequently Asked since 1992; Last
appeared in 2013)
Sec. 1, Negotiable Instruments Law (NIL). Form
of negotiable instruments. - An instrument to One who signs in a trade or assumed
be negotiable must conform to the following name will be liable to the same extent as
requirements: if he had signed in his own name. [Sec. 18,
(a) It must be in writing and signed by the NIL]
maker or drawer;
Signature of any party may be made by
(b) Must contain an unconditional duly authorized agent; no particular form
promise or order to pay a sum certain
of appointment necessary. [Sec. 19, NIL]
in money;
(c) Must be payable on demand, or at a Signature is binding and may be in ones
fixed or determinable future time; handwriting, printed, engraved,
(d) Must be payable to order or to bearer; lithographed or photographed so long as
and it is intended or adopted as the signature
(e) Where the instrument is addressed to of the signer or made with his authority.
a drawee, he must be named or (Campos)
otherwise indicated therein with
reasonable certainty. Signature may appear on any part of the
instrument. However, if the signature is
so placed upon the instrument that it is
Note: Sections 184 and 126 define a not clear in what capacity the person
promissory note and a bill of exchange using intended to sign, he is deemed an
the requisites listed in Section 1. indorser. [Sec. 17 (f), NIL]


Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the Sec. 3, NIL. When promise is unconditional. -
instrument whose signature does not appear An unqualified order or promise to pay is
thereon, except as herein otherwise expressly unconditional within the meaning of this Act
provided. But one who signs in a trade or though coupled with:
assumed name will be liable to the same
(a) An indication of a particular fund out
extent as if he had signed in his own name.
of which reimbursement is to be made
or a particular account to be debited
with the amount; or
(b) A statement of the transaction which
What is considered "In writing" - includes gives rise to the instrument.
print; written or typed. Section 191 of the NIL
provides that the word written includes But an order or promise to pay out of a
printed, and writing includes print. particular fund is not unconditional.

Rationale for requirem ent: Since an

instrument is a document, there must be
PAGE 12 OF 320

UNCONDITIONAL As to promissory note: Promise to pay

should be express on the face of the
The promise or order to pay, to be
instrument. (Campos)
unconditional, must be unqualified.
(Campos) o The word "promise" is not
absolutely necessary. Any
Must not be dependent upon a expression equivalent to a
contingent event that is not certain to promise is sufficient.
happen. (Abad) (Campos)
The fact that the condition appearing on o Mere acknowledgment of a
the instrument has been fulfilled will not debt is insufficient. (Campos)
convert it into a negotiable one. [Sec. 4,
NIL] As to bill of exchange: Order
command made by the drawer
An instrument which contains an order or addressed to the drawee ordering the
promise to do an act in addition to the latter to pay the payee or the holder a
payment of money (with the exception of sum certain in money; the instrument
certain acts enumerated in Sec. 5 of the is, by its nature, demanding a right.
NIL) is not negotiable.
o Words which are equivalent
An instrument where the maker or the to an order are sufficient.
person primarily liable has the option to
require something to be done in lieu of o A mere request or authority to
payment of money is not negotiable. But pay does not constitute an
it is negotiable if the option to require order. Although the mere use
something to be done in lieu of payment of polite words like "please"
of money is with the holder.[Campos] does not of itself deprive the
instrument of its
characteristics as an order, its
language must clearly
Fund indicate a demand upon the
Particular Fund
for Reimbursement drawee to pay.

The drawee pays the The drawee pays SUM PAYABLE MUST BE CERTAIN
payee from his own directly from the
funds. Afterwards, particular fund Sec. 2, NIL. What constitutes certainty as to
the drawee pays indicated. sum. - The sum payable is a sum certain within
himself from the the meaning of this Act, although it is to be
indicated fund. paid:

Indicated fund is not Particular fund (a) with interest; or

the direct source of indicated is the direct (b) by stated installments; or
payment. source of payment. (c) by stated installments, with a
(Sundiang and provision that, upon default in
Aquino) payment of any installment or of
interest, the whole shall become due;
(d) with exchange, whether at a fixed rate
When conditional: A negotiable instrument is or at the current rate; or
conditional when reference to the fund clearly (e) with costs of collection or an
indicates an intention that such fund alone attorney's fee, in case payment shall
should be the source of payment. not be made at maturity.
[Metropolitan Bank vs. CA, G.R. No. 88866
PAGE 13 OF 320

Note: A sum is certain if from the face of the interest, if any, but the obligation to pay the
instrument it can be determined even if it note remains.
requires mathematical computation.
(Sundiang and Aquino)

PAYABLE IN MONEY Only on the stipulated date, and not

before, may the holder demand its
The instrument must be capable of being payment.
transformed into money, since negotiable
instruments are intended to be Should he fail to demand payment, the
substitutes for money instrument becomes overdue but remains
valid and negotiable. It is merely
Money as used in the law is not converted to a demand instrument with
necessarily limited to legal tender as respect to the person who issued,
defined by law but includes any particular accepted, or indorsed it when overdue.
kind of current money. [Sec. 6(e), NIL and [Sec. 7, NIL]
PNB v. Zulueta, G.R. No. L-7271 (1957)]
An agreement to pay in foreign currency AT A DETERMINABLE FUTURE TIME
is valid. (RA 8183)
Sec. 4, NIL. Determinable future time; what
An instrument payable in personal
property like merchandise, shares of constitutes. - An instrument is payable at a
determinable future time, within the meaning
stock or gold is non-negotiable.
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable
future time specified therein; or
Rationale: to inform the holder of the
(c) On or at a fixed period after the
instrument of the date when he may enforce
payment thereof. occurrence of a specified event which
is certain to happen, though the time
of happening be uncertain.
ON DEMAND An instrument payable upon a contingency is
not negotiable, and the happening of the
Sec. 7, NIL. When payable on demand. - An event does not cure the defect.
instrument is payable on demand:

(a) When it is so expressed to be payable

on demand, or at sight, or on Note: It is required that the maturity of the
presentation; or instrument can be absolutely determined
with certainty. (Abad)
(b) In which no time for payment is
expressed. Examples:
At a fixed period after date or sight, e.g.,
Where an instrument is issued, accepted, or 30 days after date.
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, On or before a fixed or determinable
payable on demand. future time specified therein, e.g.,
payable on or before December 1, 2000
On or at a fixed period after the
Note: The holder may call for payment any occurrence of a specified event which is
time; and the maker has an option to pay at certain to happen, though the time of
any time. The refusal of the holder to accept happening be uncertain, e.g., payable
payment will terminate the running of within 60 days after the death of Jose
PAGE 14 OF 320

Effect of Acceleration Provisions A.4. PAYABLE TO ORDER OR TO BEARER

If option (absolute or conditional) to The negotiability or non-negotiability of
accelerate maturity is on the maker, the an instrument is determined from the
instrum ent is still negotiable. (Campos) face of the instrument itself. [Caltex vs.
CA, G.R. No. 97753 (1992)]
If option to accelerate is on the holder
and can be exercised only after the Therefore, the instrument must contain
happening of a specified event/act over words of negotiability. (2012 Bar
which he has no control (conditional), the Question) For example:
instrument is still negotiable. (Campos)
o Pay to the order of Juan Cruz, or
Note: If option on the part of the holder is I promise to pay to the order of
absolute, the instrument is non-negotiable. Juan Cruz
o Pay to Juan Cruz or bearer, or I
promise to pay Juan Cruz or
Insecurity Clauses
Provisions in the contract which allow the
holder to accelerate payment if he deems Instrument need not follow the language
himself insecure. The instrument is rendered of the law, but any term which clearly
non-negotiable. (Sundiang and Aquino) indicates an intention to conform to the
legal requirements is sufficient.

Provisions extending tim e of paym ent

General rule: Negotiability not affected.
Effect is similar with that of an acceleration Sec. 8, NIL. When payable to order. - The
clause at the option of the maker. (Campos) instrument is payable to order where it is
drawn payable to the order of a specified
Exception: Where a note with a fixed person or to him or his order. It may be drawn
maturity provides that the maker has the payable to the order of:
option to extend time of payment until the
happening of contingency, the instrument is (a) A payee who is not maker, drawer, or
NOT negotiable. The time for payment may drawee; or
never come at all. (b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
Extension Clauses (e) One or some of several payees; or
(f) The holder of an office for the time
An instrument is payable at a definite time if being.
by its terms, it is payable at a definite time Where the instrument is payable to order, the
subject to extension at the option of the payee must be named or otherwise indicated
holder, ot to an extension to a further definite therein with reasonable certainty.
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act. (Sundiang and Aquino)
Note: Without the words "to order" or "to the
order of" the instrument is payable only to
Paym ent on Installm ents the person designated therein and is
therefore non-negotiable. [Consolidated
If the instrument states that the amount shall Plywood Industries vs. IFC Leasing, G.R. No.
be paid in two equal installments, the second 72593 (1987)]
being payable pm a fixed date, the
instrument can be considered negotiable
since the first installment would then be
payable on demand. (Vitug)

PAGE 15 OF 320

PAYABLE TO BEARER presenting it for payment without the

drawer's indorsement. [Ang Tek Lian vs.
Sec. 9, NIL. When payable to bearer. - The CA, G.R. No. L-2516 (1950)]
instrument is payable to bearer:
(a) When it is expressed to be so payable;
or W here the Maker is the Payee
(b) When it is payable to a person named In effect making himself liable to himself.
therein or bearer; or Thus, the instrument produces no legal
(c) When it is payable to the order of a effect.
fictitious or non-existing person, and
such fact was known to the person It will produce legal effects only once the
making it so payable; or payee-maker indorses the instrument to
(d) When the name of the payee does not another person because such
purport to be the name of any person; indorsement will then give rise to rights
or and obligations. (Abad)
(e) When the only or last indorsement is
an indorsement in blank.
Exam ples: CERTAINTY

(1) Expressed to be so payable - "I promise Applies only to a bill of exchange.

to pay the bearer the sum" A bill may be addressed to two or more
(2) Payable to a person named therein or drawees jointly whether they are partners
bearer -"Pay to A or bearer" or not, but not to two or more drawees in
the alternative or in succession. [Sec. 128,
(3) Payable to the order of a fictitious person NIL]
or non-existing person, and such fact was
known to the person making it so payable Examples:
- Pay to John Doe or order"
o To Juan Cruz and Jose Reyes
(4) Name of payee does not purport to be the negotiable
name of any person "Pay to cash"; "Pay
o To Juan Cruz or Jose Reyes not
to sundries." negotiable; no certainty as to
(5) Only or last indorsement is an drawee
indorsement in blank.

Fictitious Payee Rule NEGOTIABILITY
It is not necessary that the person
referred to in the instrument is really non- In determining the negotiability of an
existent or fictitious to make the instrument, the instrument in its entirety
instrument payable to bearer. The person and by what appears on its face must be
to whose order the instrument is made considered. It must comply with the
payable may in fact be existing but he is requirements of Sec. 1 of the Negotiable
still fictitious or non-existent under Sec. Instruments Law. [Caltex Phils. v. CA, G.R.
9(c) of the NIL if the person making it so No. 97753 (1992)]
payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R. The acceptance of a bill of exchange is
No. 170325 (2008)] not important in the determination of its
negotiability. The nature of acceptance is
A check drawn payable to the order of important only on the determination of
"CASH" is a check payable to bearer, and the kind of liabilities of the parties
the bank may pay it to the person

PAGE 16 OF 320

involved. [PBCOM vs. Aruego, G.R. Nos. Manila Oil Refining, G.R. No. L-18103
L-25836-37 (1993)] (1922)]

Omissions and
Additional Provisions
Provisions That Do
That Do Not Affect
Not Affect

(1) Non-dating of the (1) Authorizes the

instrument sale of collateral
securities on
(2) Non-specification
of value given, or
that any value (2) Authorizes
had been given confession of
judgment on
(3) Non-specification
of place where it
is drawn or place (3) Waives the benefit
where it is of law intended to
payable protect the
debtor; or
(4) Bears a seal
(4) Allows the
(5) Designation of
creditor the
particular kind of
option to require
currency in which
something in lieu
payment is to be
of money. (Sec. 5)
made. (Sec. 6)

Note: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of

A confession of judgment is provision
given by the maker authorizing the
plaintiff's attorney to sign judgment and
issue execution for the value of the
instrument, costs, and attorney's fees.
This is also called a judgment cognivit
actionem. If accompanied by withdrawal
of plea, it is called judgment relicta
A confession of judgment is not
recognized in our country, as it is against
public policy. It denies due process, and
deprives the right of appeal. [PNB v.

PAGE 17 OF 320

III. Kinds of Negotiable B.1. KINDS OF BILLS OF EXCHANGE

(1) Draft used synonymously with bill of
Instruments exchange although it normally refers to a
bill of exchange used in documentary
exchange like letters of credit
A. PROMISSORY NOTE transactions.
(2) Inland and foreign bill an Inland
Sec. 184, NIL. Promissory note, defined. - A bill is a bill which is, or on its face
negotiable promissory note within the purports to be, both drawn and payable
meaning of this Act is an unconditional within the Philippines. Any other bill is a
promise in writing made by one person to foreign bill.
another, signed by the maker, engaging to pay (3) Time draft draft that is payable at a
on demand, or at a fixed or determinable fixed date.
future time, a sum certain in money to order or
to bearer. Where a note is drawn to the (4) Sight or dem and draft payable
maker's own order, it is not complete until when the holder presents it for payment.
indorsed by him. (5) Trade acceptance used in contracts
of sale where the seller as drawer orders
the buyer (as drawee) to pay a sum
A.1. KINDS OF PROMISSORY NOTES certain to the same seller (payee).
(1) Certificate of deposit a form of (6) Bankers acceptance a time draft
promissory note which is a written across the face which the drawee has
acknowledgment of a bank of its receipt written the word accepted. (Sundiang
of a certain sum with a promise to repay and Aquino)
the same. (7) Check - A bill of exchange drawn on a
(2) Bonds a certificate or evidence of a bank payable on demand (Sec. 185). It is
debt on which the issuing company or the most common form of bill of
governmental body promises to pay the exchange.
bondholders a specified amount of
interest for a specified length of time, and
to repay the loan on the expiration date. B.2. INSTANCES WHEN A BILL OF
(3) Debenture a promissory note or bond PROMISSORY NOTE
backed by the general credit of a
corporation and usually not secured by a (2011 and 2015 Bar Question)
mortgage or lien on any specific property.
Sec. 130, NIL. When bill may be treated as
(Sundiang and Aquino)
promissory note. - Where in a bill the drawer and
drawee are the same person or where the
drawee is a fictitious person or a person not
B. BILL OF EXCHANGE having capacity to contract, the holder may treat
the instrument at his option either as a bill of
Sec. 126, NIL. Bill of exchange, defined. - A bill exchange or as a promissory note.
of exchange is an unconditional order in
writing addressed by one person to another, Sec. 17, NIL. Construction where instrument is
signed by the person giving it, requiring the ambiguous. - Where the language of the
person to whom it is addressed to pay on instrument is ambiguous or there are omissions
demand or at a fixed or determinable future therein, the following rules of construction apply:
time a sum certain in money to order or to x---x
bearer. (Sec. 126)
(e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
PAGE 18 OF 320

x---x IV. Completion and

(1) The drawer and the drawee are the same Delivery
(2) Drawee is a fictitious person; A. STEPS IN THE EXECUTION OF
(3) Drawee does NOT have the capacity to NEGOTIABLE INSTRUMENTS
contract (Sec. 130, NIL)
(4) Where the bill is drawn on a person who (1) Writing of the instrument completely in
is legally absent; accordance with the requisites of
negotiability under Sec. 1.
(5) Where the instrument is so ambiguous
that there is doubt whether it is a bill or (2) Delivery of the instrument by the maker
note, the holder may treat it as either at or the drawer to the payee in order to give
his election (Sec. 17[e], NIL) legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
Promissory Note Bill of Exchange incomplete instrument... It would seem that if
an instrument contains all the requisites for
Unconditional Unconditional order making it a negotiable one, it should be
promise considered as complete though it in fact may
Involves two parties Involves three parties have blanks as to non-essentials... (Campos)
Maker is primarily Drawer is only
liable secondarily liable
Only one Two presentments:
presentment: for for acceptance and for
(2012 Bar Question)
payment payment
Sec. 13, NIL. When date may be inserted. -
Bill of Exchange Check Where an instrument expressed to be payable
at a fixed period after date is issued undated,
Not necessarily It is necessary that a or where the acceptance of an instrument
drawn on a deposit. check be drawn on a payable at a fixed period after sight is
The drawee need not bank deposit. undated, any holder may insert therein the
be a bank Otherwise, there true date of issue or acceptance, and the
would be fraud. instrument shall be payable accordingly. The
Death of a drawer of a Death of the drawer of insertion of a wrong date does not avoid the
BOE, with the a check, with the instrument in the hands of a subsequent
knowledge of the knowledge of the holder in due course; but as to him, the date so
bank, does not revoke bank, revokes the inserted is to be regarded as the true date.
the authority of the authority of the
drawee to pay. banker to pay.
Any holder may insert the true date of issue
or acceptance of an instrument where:
May be presented for Must be presented for
payment within payment within a (1) The instrument is expressed to be
reasonable time after reasonable time after payable at a fixed period after date is
its last negotiation. its issue. issued undated; or
May be payable on Always payable on (2) The acceptance of an instrument
demand or at a fixed demand payable at a fixed period after sight is
or determinable undated.
future time

PAGE 19 OF 320

C. EFFECT OF ANTE-DATING AND In this case a real defense exists and not even
POST-DATING a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
Sec. 12, NIL. Ante-dated and post-dated. - The (Campos)
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided Note: A drawee bank whose negligent
custody of the checks, after partial execution,
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument contributed to its escape, is estopped from
so dated is delivered acquires the title thereto raising the real defense under Sec. 15 of the
NIL. (Campos)
as of the date of delivery.



Sec. 14, NIL. Blanks; when may be filled. -

Sec. 16, NIL. Delivery; when effectual; when
Where the instrument is wanting in any
presumed. - Every contract on a negotiable
material particular, the person in possession
thereof has a prima facie authority to complete instrument is incomplete and revocable until
delivery of the instrument for the purpose of
it by filling up the blanks therein. And a
giving effect thereto. As between immediate
signature on a blank paper delivered by the
parties and as regards a remote party other
person making the signature in order that the
than a holder in due course, the delivery, in
paper may be converted into a negotiable
order to be effectual, must be made either by
instrument operates as a prima facie authority
or under the authority of the party making,
to fill it up as such for any amount. In order,
drawing, accepting, or indorsing, as the case
however, that any such instrument when
may be; and, in such case, the delivery may be
completed may be enforced against any
shown to have been conditional, or for a
person who became a party thereto prior to its
special purpose only, and not for the purpose
completion, it must be filled up strictly in
of transferring the property in the instrument.
accordance with the authority given and within
But where the instrument is in the hands of a
a reasonable time. But if any such instrument,
holder in due course, a valid delivery thereof by
after completion, is negotiated to a holder in
all parties prior to him so as to make them
due course, it is valid and effectual for all
liable to him is conclusively presumed. And
purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance where the instrument is no longer in the
possession of a party whose signature appears
with the authority given and within a
thereon, a valid and intentional delivery by him
reasonable time.
is presumed until the contrary is proved.


Non-delivery of a complete instrument is
INSTRUMENTS a personal defense. (Campos)
Delivery of an instrument is a prerequisite
Sec. 15, NIL. Incomplete instrument not for liability. If the instrument is complete
delivered. - Where an incomplete instrument in all its particulars, but is not delivered,
has not been delivered, it will not, if completed there is no contract. However if the
and negotiated without authority, be a valid instrument is no longer in the possession
contract in the hands of any holder, as against of a party who has signed it, a delivery is
any person whose signature was placed presumed until the contrary is proved.
thereon before delivery. (Campos)
If the holder of the instrument is a holder
in due course, the instrument is not
merely prima facie deemed delivered, but
PAGE 20 OF 320

this fact is conclusively presumed. Thus, evidence that there was no

(Campos) authority or that the authority granted
has been exceeded may be presented by
Until the same is delivered, the the maker in order to avoid liability under
instrument remains revocable. the instrument. [Patrimonio v. Gutierrez
and Marasigan, G.R. No. 187769 (2014)]
G. INCOMPLETE AND DELIVERED (2) The instrument must be filled up strictly
INSTRUMENTS (SEC. 14, NIL) in accordance with the authority given
and within reasonable time
(1) Holder has prima facie authority to fill up (3) HDC may enforce the instrument as if
the instrument, but he must first prove filled up according to (2) above.
that he has the authority to fill up. For
such presumption to apply, issuance is
necessary. This provision merely raises a personal
defense. (Campos)
Note: Prima facie authority to complete
the check does not extend to its use (i.e.,
subsequent transfer or negotiation) once H. COMPLETE AND DELIVERED
the check is completed. Only the INSTRUMENTS
authority to complete the check is
presumed. The laws use of the term
"prima facie" underscores the fact that In a complete and delivered instrument,
the authority which the law accords to a rights and liabilities under the negotiable
holder is a presumption juris tantum only; instruments law attach.
hence, subject to subject to contrary proof.

Section 14 Section 15 Section 16


Delivered Undelivered Undelivered


(1) Wanting in any material

particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature

Authority of Person in Possession

(1) Prima facie authority to

complete it by filling up the May negotiate if delivered to him
blanks; No authority to complete and/or by or under the authority of the
(2) Signature operates as a prima negotiate party making, indorsing, drawing,
facie authority to fill it up for any or accepting

When Enforceable

Delivery is made by or under

Filled up strictly in accordance
authority of the party making,
with authority given and within a Not enforceable
indorsing, drawing, or accepting,
reasonable time
as the case may be

PAGE 21 OF 320

Kind of Defense

Personal Real Personal

Rights of Holder

Can enforce the instrument. Here,

(1) If HDC, he can enforce the the instrument is in the hands of a
instrument as completed as HDC, a valid delivery thereof by all
against parties prior or parties prior to him so as to make
subsequent to the completion; them liable to him is conclusively
(2) If not a HDC, he can enforce None in the hands of any holder. presumed. Where the instrument
the instrument as completed only is no longer in the possession of a
against parties subsequent to the party whose signature appears
completion but not against those thereon, a valid and intentional
prior thereto. delivery to him is presumed until
the contrary is proved.

PAGE 22 OF 320

V. Signature signature words indicating that he signs for or

on behalf of a principal or in a representative
capacity, he is not liable on the instrument if
Sec. 18, NIL. Liability of person signing in trade he was duly authorized; but the mere addition
or assumed name. - No person is liable on the of words describing him as an agent, or as
instrument whose signature does not appear filling a representative character, without
thereon, except as herein otherwise expressly disclosing his principal, does not exempt him
provided. But one who signs in a trade or from personal liability.
assumed name will be liable to the same
extent as if he had signed in his own name.
Signature of any party may be made by duly
authorized agent, established as in ordinary
General rule: One whose signature does agency.
not appear on the instrument shall not be
liable thereon.
General rule: Where a person adds to his
(1) The principal who signs through an agent signature words indicating that he signs on
(2) The forger behalf of a principal, then he is not liable if he
was duly authorized.
(3) One who indorses in a separate
instrument (allonge) OR where an Exceptions:
acceptance is written on a separate paper (1) Mere addition of words describing
(4) One who signs his assumed or trade him as an agent WITHOUT disclosing
name his principal [Sec. 20, NIL]
(5) A person negotiating by delivery (as in the (2) Where a broker or agent negotiates
case of a bearer instrument) is liable only an instrument without indorsement,
to his immediate indorsee. he incurs all liabilities in Sec. 65 of the
NIL, unless he discloses name of
principal and the fact that he is only
A. SIGNING IN TRADE NAME acting as an agent. [Sec. 69, NIL]

One who signs in a trade or assumed name Requisites to negative personal

will be liable to the same extent as if he had liablity of agent:
signed in his own name [Sec. 18, NIL]
(1) He must be duly authorized;
(2) He must act within the scope of his
(3) He must indicate in the instrument that
Sec. 19, NIL. Signature by agent; authority; he is signing merely as agent; and
how shown. - The signature of any party may
be made by a duly authorized agent. No (4) He must disclose his principal.
particular form of appointment is necessary for
this purpose; and the authority of the agent
may be established as in other cases of C. SIGNATURE PER PROCURATION
agency. (2011 Bar Question)
A signature per procuration operates as
notice to the holder that the agent has a
Sec. 20, NIL. Liability of person signing limited authority to sign, and the
as agent, and so forth. - Where the principal is bound only in case the agent
instrument contains or a person adds to his
PAGE 23 OF 320

in so signing acted within the actual the forgery or want of authority.

limits of his authority [Sec. 21, NIL]
According to the majority rule, the words
per proc or procuration must appear Counterfeit making or fraudulent alteration of
on the note for this rule in Section 21 to any writing, which may consist of:
be applicable (Campos) (1) Signing of anothers name with intent to
defraud; or
D. INDORSEMENT BY MINOR OR (2) Alteration of an instrument in the name,
CORPORATION amount, name of payee, etc. with intent
to defraud.

The indorsement or assignment of the

instrument by a corporation or by an General rule: When a signature is forged or
infant (minor) passes the property therein, made without the authority of the person,
notwithstanding that from want of only the forged signature (not the instrument
capacity, the corporation or infant may itself and the other genuine signatures) is
incur no liability thereon. [Sec. 22, NIL] wholly inoperative
The provision does not change the rule in Effects:
civil law on minor's contracts, which
(1) No right to retain the instrument
provides that a contract enetered into by
(2) No right to give a discharge therefor
a minor is voidable, and the minor cannot
(3) No right to enforce payment thereof
be held liable thereon unless he ratifies it
against any party thereto can be acquired
upon reaching majority.
through or under such signature
However, under Section 22 of the NIL, Exception: The party against whom it is
should the minor indorse a negotiable sought to be enforced is precluded from
instrument, although he cannot be held setting up the forgery or want of authority as
liable on his contract of indorsement, title a defense. [Sec. 23, NIL]
to the instrument passes to his indorsee
and the latter can rightfully recover from
the maker, free from the defense of F.1 PERSONS PRECLUDED FROM SETTING
REAL defense but available only to the (1) Those who warrant or admit the
incapacitated party (i.e. the minor or the genuineness of the signature in question.
corporation). This includes indorsers, persons
negotiating by delivery and acceptors.
(2) Those who, by their acts, silence, or
F. FORGERY negligence, are estopped from setting up
(3rd Most Frequently Asked Since 1992) the defense of forgery.
(2006, 2008, 2010, 2011 2015 Bar Question) (3) Those who are negligent.
Sec. 23, NIL. Forged signature; effect of. -
When a signature is forged or made without F.2 RULES ON FORGERY
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no F.2.A. PROMISSORY NOTE
right to retain the instrument, or to give a Makers signature forged
discharge therefor, or to enforce payment
thereof against any party thereto, can be (1) Maker is not liable because he never
acquired through or under such signature, became a party to the instrument.
unless the party against whom it is sought to (2) Indorsers subsequent to forgery are liable
enforce such right is precluded from setting up because of their warranties.
(3) Party who made the forgery is liable.
PAGE 24 OF 320

[Associated Bank vs. CA, G.R. No. 107382

Payees signature forged
(4) Indorsers subsequent to forgery are liable
(1) Payee is not liable.
(such as collecting bank or last endorser)
(2) Maker is still liable. (REASON:
Indorsement is not necessary to title and (5) Party who made the forgery is liable
the maker engages to pay holder)
Payees signature forged
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable. (1) Payee is not liable
(2) Drawer is still secondarily liable
Indorsers signature forged
(3) Drawee is liable if it paid or accepted
(1) Maker, payee, indorser whose signature/s the instrument [Sec. 62, NIL; Price v.
was/were forged, and all indorsers Neal, 3 Burr. 1354 (1762)], but it may
preceding the forgery are not liable. pass liability back through the
(2) Indorsers subsequent to forgery are liable. collection chain
(3) Party who made the forgery is liable.
(4) Indorsers subsequent to forgery are
liable (such as collecting bank)
(5) Party who made the forgery is liable
Drawers signature forged
Indorsers signature forged
(1) Drawer is not liable because he was never
(1) Drawer, payee, indorser whose
a party to the instrument.
signature/s was/were forged and all
(2) Drawee is liable if it paid or accepted the indorsers preceding the forgery are
instrument (no recourse to drawer) not liable.
because he admitted the genuineness of
(2) Drawee is liable if it paid or accepted
the drawers signature [Sec. 62, NIL; Price
the instrument [Sec. 62, NIL; Price v.
v. Neal, 3 Burr. 1354 (1762)]
Neal, 3 Burr. 1354 (1762)]
(3) Drawee cannot recover from the
(3) Indorsers subsequent to forgery are
collecting bank because there is no privity
liable. (such as collecting bank)
between the collecting bank and the
drawer. The collecting bank does not give (4) Party who made the forgery is liable.
any warranty re: the drawers signature.


Order Instrument Bearer Instrument

Makers Signature Forged

Maker is not liable because he never became a party

to the instrument.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

Payees Signature Forged

Maker and payee not liable. Maker is liable.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

PAGE 25 OF 320

Order Instrument Bearer Instrument

Indorsers Signature Forged

Maker, payee and indorser whose signature was Maker is liable. Indorsement is not necessary to
forged are not liable. pass title and the maker engages to pay any bearer
of the instrument.
Indorsers subsequent to forgery are liable because Only the indorser whose signature was forged can
of their warranties. raise the defense of forgery against a HDC.


Order Instrument Bearer Instrument
Drawers Signature Forged
Drawer is not liable because he was never a party to
the instrument.
Drawee-acceptor is liable, without recourse to
Drawee-acceptor is liable if it paid. It cannot recover
drawer, if it paid because he admitted the genuiness
from the collecting bank because it is bound to
of the drawers signature.
know the drawers signature since the latter is its
Drawee also cannot recover from the collecting
bank because there is no privity of contract between
The drawee may recover from the drawer when the
the collecting bank and the drawer. The collecting
latters negligence is the proximate cause of the loss
bank does not give any warranty regarding the
or contributed thereto.
signature of the drawer.
Indorsers subsequent to forgery (such as collecting Indorsers may be made liable to those persons who
bank or last endorser) are liable. obtain title through their indorsements.
Payees Signature Forged
Drawer, drawee and payee not liable. Drawer is liable (his indorsement is not necessary to
pass title).
Cut-off rule applies.
Drawee is liable (no privity between drawer and
Indorsers subsequent to forgery (such as collecting payee because indorsement of payee is not
bank) are liable without prejudice to their right to necessary).
proceed against the forger.
Payee is not liable.

Collecting bank is liable because of warranty.

However, it may recover from the person who forged
the indorsement on the check and deposited or
encashed the same.
Indorsers Signature Forged
Drawer, payee and indroser whose signatures were Drawer is liable even if special indorsement was
forged are not liable. forged because indorsement is not necessary to
Cut-off rule does not apply.
Drawee is liable if it paid. Drawee is liable.
Indorsers subsequent to forgery (such as collecting Indorser whose signature was forged is liable
bank) are liable. because indorsement is not necessary to title.

PAGE 26 OF 320

G. ACCEPTANCE AND PAYMENT Rule: The drawee who pays the holder of the
UNDER MISTAKE bill cannot recover from the holder what he
paid under mistake. (Campos)

Sec. 62, NIL. Liability of acceptor. - The b) Stop Paym ent Order is one issued by
the drawer of a check countermanding
acceptor, by accepting the instrument,
engages that he will pay it according to the his first order to the drawee bank to pay
the check.
tenor of his acceptance and admits:
(1) The existence of the drawer, the Rule: The drawee bank is bound to follow the
genuineness of his signature, and his order, provided it is received prior to its
certification or payment of the check.
capacity and authority to draw the
instrument; and (Campos)

(2) The existence of the payee and his

then capacity to indorse. (3) Effects of Negligence of Depositor
If such negligence of the depositor was
the proximate cause of the loss, the
(1) W hen the drawee accepts or pays a drawee-bank would NOT be liable.
forged instrum ent
The negligence of the depositor/drawer
Price v. Neal doctrine: As between equally would consist of the failure to to carefully
innocent persons, the drawee who pays examine bank statements, cancelled
money on, or accepts, a check or draft the checks, his check stubs, and other
signature on which was forged CANNOT pertinent records within a reasonable
recover the money from the one who time and to report any errors without
received it. The drawee is bound to know unreasonable delay to the drawee bank.
the signature of its depositor.
If a drawer/depositors negligence and
A bank is bound to know the signatures of delay should cause a bank to honor a
its depositors. If a bank pays a forged forged check, the drawer cannot later
check it must be considered as making complain should bank refuse to recredit
the payment out of its own funds and his account. (Campos)
cannot charge the account of the
depositor whose signature was forged.
[PNB vs. Quimpo, G.R. No. L-53194 (4) Effect of Paym ent under Forged
(1988)] Indorsements
A bank is liable, irrespective of its good In the case of a drawee's acceptance or
faith, in paying a forged check. [Samsung payment of a bill on which only an
vs. Far East Bank, G.R. No. 129015 INDORSEMENT has been forged, the
(2004)] drawee can recover the amount paid out
by him. RATIONALE: The drawee makes
no warranty as to the genuineness of any
(2) Extensions of Price v. Neal indorsement. (Campos)
The bar to recovery on the part of a drawee
who pays money on, or accepts, a check or (5) Effect of negligence of drawee in
draft, is extended to overdrafts and stop inform ing recipient of forgery
payment orders.
The rule is that a drawee's acceptance or
a) Overdraft occurs when a check is issued payment of a bill on which only an
for an amount more than what the INDORSEMENT has been forged is not a
drawer has in deposit with the drawee bar to his right to recover the amount
bank. paid out by him; however, there is an
exception to this rule.

PAGE 27 OF 320

If it is shown that the drawee on learning o However, it should be noted that as

of the forgery did not give prompt notice an exception to the rule that a drawee
of it to the holder and that damage bank is not liable for a forged
resulted to said holder, recovery by the indorsement, when the negligence of
drawee is barred [Clearfield Trust Co. vs. the drawee bank is the proximate
US, 318 U.S. 363 (1943)] cause of the collecting banks
payment of a check with a forged
indorsement, the drawee bank may
(6) Effect of negligence of drawer in be held liable to the collecting bank.
case of forged indorsem ent on checks o Furthermore, when both the
The drawer, as soon as he comes to know collecting bank and the drawee bank
of a forged indorsement should promptly are guilty of negligence, the degree of
notify the drawee bank. Otherwise, negligence of each will be weighed in
should his negligent delay be the considering the amount of loss which
proximate cause of any subsequent loss each should bear. [BPI vs. CA, G.R. No.
to the bank, the latter may properly 102383 (1992)]
charge it to the drawer's account.

(7) Com paring the liability of a

collecting bank and a drawee bank
A collecting bank is only liable for forged
indorsements and not forgeries of the
drawer or makers signature. [PNB vs. CA,
G.R. No. L-26001 (1968)]
o Rationale: In presenting the checks
for clearing, the collecting agent
made an express guarantee on the
validity of all the prior
The collecting bank or last indorser
generally suffers the loss because it has
the duty to ascertain the genuineness of
all prior indorsements considering that
the act of presenting the check for
payment to the drawee is an assertion
that the party making the presentment
had done its duty to ascertain the
genuineness of the indorsements. [BPI vs.
CA, G.R. No. 102383 (1992)]
A drawee bank is not liable for forged
o Rationale: The drawee bank is not
similarly situated as the collecting
bank because the former makes no
warranty as to the genuineness of any
indorsement. The drawee banks duty
is but to verify the genuineness of the
drawers signature and not of the
indorsement because only the drawer
is its client.
PAGE 28 OF 320

VI. Consideration
Sec. 25, NIL. Value, what constitutes. Value PRESUMPTION OF CONSIDERATION
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing Sec. 24, NIL. Presumption of consideration. -
debt constitutes value; and is deemed such Every negotiable instrument is deemed prima
whether the instrument is payable on demand facie to have been issued for a valuable
or at a future time. consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
Because of the presumption, it is immaterial
otherwise requires:
whether or not for value received appears in
the instrument.
"Value" means valuable consideration;
Value and consideration are generally
convertible terms. However, they may have CONSIDERATION
different implications.
Consideration is the proper term when the Sec. 28, NIL. Effect of want of consideration. -
payee of a note sues the maker, or the payee Absence or failure of consideration is a matter
of a bill sues the drawer, or an indorsee sues of defense as against any person not a holder
his immediate indorser. in due course; and partial failure of
consideration is a defense pro tanto, whether
Value is the proper term when a holder the failure is an ascertained and liquidated
sues any party to the instrument with whom amount or otherwise.
he himself has not dealt, the term value is
more appropriate.
An antecedent or pre-existing debt Absence or failure of consideration is a
constitutes value; and is deemed such matter of defense as against any person not a
whether the instrument is payable on holder in due course, hence, it is a personal
demand or at a future time. [Sec. 25, NIL] defense.
Value need not be full and a holder will be Partial failure of consideration is a defense
one for value even if he gave less than the pro tanto, meaning a defense to the extent of
face value of the instrument, provided the the failure. (Abad)
intention of the transferor is to transfer the
full amount represented by the instrument.
Effect of an illicit or unlawful
consideration: Illicit or illegal
A. WHO IS A HOLDER FOR VALUE consideration does not affect the negotiability
(HFV)? of the instrument as validity of consideration
is not one of the requisites of a negotiable
instrument. It is merely constitutes a defect of
1. A holder of an instrument for which value, title hence such illegality of consideration is
which need not be in full, has been given
merely a personal defense which cannot be
at any given time but only with respect to raised against a holder in due course. [Sec. 55
all parties who have become parties to
and 57, NIL] [2009 bar question]
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
PAGE 29 OF 320

VII. Accommodation accommodation party. [Stelco Marketing

Corp. v. CA, G.R. No, 96160 (1992)]
Sec. 29, NIL. Liability of accommodation SURETY
party. - An accommodation party is one who
has signed the instrument as maker, drawer, An accommodation party is generally
acceptor, or indorser, without receiving value regarded as a surety for the party
therefor, and for the purpose of lending his accommodated.
name to some other person. Such a person is
When the accommodation party makes
liable on the instrument to a holder for value,
payment to holder of the note, he has the
notwithstanding such holder, at the time of
right to sue the accommodated party for
taking the instrument, knew him to be only an
reimbursement. [Caeda v. CA, G.R. No.
accommodation party.
81322 (1990)]
Note: A corporation cannot act as an
Accom m odation Party
accommodation party. The issue or
(1) Must be a party to the instrument, endorsement of negotiable instruments
signing as maker, drawer, acceptor, or by a corporation without consideration
indorser; and for the accommodation of another is
ultra vires [Crisologo v. CA, G.R. No.
(2) Must not have receieved value therefor;
80599 (1989)]
(3) Signed for the purpose of lending his
Accom modation Party v. Regular
name to some other person.

A. LIABILITY OF AN ACCOMMODATION Accommodation Party Regular Party

PARTY Purpose
Whether the liability is primary or Signs instrument for
secondary will depend on whether he the purpose of Does not sign the
signs as a maker, acceptor, drawer or lending his name or instrument for the
indorser. credit to some other same purpose
The holder for value to whom the Value Received
instrument thus executed is subsequently
negotiated has a right of recourse against Signs the intrument Signs the instrument
the accommodation party in spite of the without receiving for value
formers knowledge that no consideration value therefor
passed between the accommodation and Absence or Failure of Consideration as Defense
accommodated parties. [Sec. 28, NIL]
Cannot avail of the Can avail of said
Does this mean that the accommodation defense of absence or defense against a
party is liable to a holder even if he is not failure of person not a holder in
a holder in due course, provided he is a consideration against due course
holder for value? The Supreme Court has a holder not in due
ruled that an accommodation party is course
liable ONLY to a HOLDER IN DUE Right to Sue
COURSE. However, the mere fact that the
holder knew of the accommodation does After paying the May not sue any
not prevent him from being a holder in holder, may sue the subsequent party for
due course in order to recover from the accommodated party reimbursement
for reimbursement

PAGE 30 OF 320

and completed by delivery.



Sec. 30, NIL. What constitutes negotiation. - Sec. 191, NIL. Definition and meaning of
An instrument is negotiated when it is terms. - In this Act, unless the contract
transferred from one person to another in such otherwise requires:
manner as to constitute the transferee the x---x
holder thereof. If payable to bearer, it is "Delivery" means transfer of possession,
negotiated by delivery; if payable to order, it is actual or constructive, from one person to
negotiated by the indorsement of the holder another;
and completed by delivery. x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who
A. NEGOTIATION DISTINGUISHED takes it as a holder;

Delivery means transfer of possession of

Transfer is a broader term than negotiation. If instrument by the maker or drawer, with
an instrument is transferred without intent to transfer title to the payee and
negotiation, the transfer is a mere recognize him as holder thereof
assignment which constitutes the transferee
as a mere assignee, not a holder, subject to Issuance is the FIRST delivery of the
all defenses existing among prior parties. instrument complete in form to a person who
Transfer thus includes both an ordinary takes it as a holder.
assignment and a negotiation. (Campos)

Negotiation Assignment (1) Mechanical act of writing the instrument
completely and in accordance with the
The transfer of the The transferee does requirements of Section 1 of the NIL; and
instrument from one not become a holder,
person to another so nor can he become a (2) The delivery of the complete instrument
as to constitute the holder in due course; by the maker or drawer, with the
transferee the holder and he merely steps intention of giving effect to it, to the
thereof. [Sec.30, NIL] into the shoes of the payee or holder.
transferor. As such,
any defense available
against the transferor Presumption of delivery
is available against Where the instrument is no longer in the
the transferee. possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
B. MODES OF NEGOTIATION contrary is proved [Sec. 16, NIL]
If it is in the hands of a holder in due
Sec. 30, NIL. What constitutes negotiation. - course, the presumption of a valid
An instrument is negotiated when it is delivery is conclusive [Sec. 16, NIL]
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is Presumption as to date
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder Date is not an essential element of
negotiability; it is not included in the
PAGE 31 OF 320

requirements for an instrument to be CANNOT indorse a part only of the

negotiable under Sec. 1 of the NIL. amount payable; BUT if the instrument
has been paid in part, then the
An undated instrument is considered to
instrument may be indorsed as to the
be dated as of the time it was issued [Sec.
residue [Sec. 32, NIL] (2012 Bar Question)
17 (c), NIL]
CANNOT transfer the instrument to two
or more indorsees severally [Sec. 32, NIL]
DELIVERY IF PAYABLE TO ORDER If not an indorsement of the entire
instrument, the transfer remains valid,
Sec. 191, NIL. Definition and meaning of but as a mere assignment which subjects
terms. - In this Act, unless the contract the holder to all defenses on the
otherwise requires: instrument (Campos)
"Indorsement" means an indorsement
completed by delivery; (4) If name misspelled in
x---x indorsement, indorsement will be
prim a facie deemed not valid.

B.2.A. INDORSEM ENT; HOW DONE Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of
Sec. 31, NIL. Indorsement; how made. - The a payee or indorsee is wrongly designated or
indorsement must be written on the misspelled, he may indorse the instrument as
instrument itself or upon a paper attached therein described adding, if he thinks fit, his
thereto. The signature of the indorser, without proper signature.
additional words, is a sufficient indorsement.

The indorsement should be made by the

(1) W here placed The indorsement holder in the manner he was designated,
must be written [Sec. 31, NIL]: otherwise the signature will prima facie
(a) On the instrument itself [Sec. 31, NIL] , or not be a valid indorsement of the
instrument [Sec 43, NIL]
(b) On a separate piece of paper attached to
the instrument called allonge[Sec. 31, NIL]
(5) Indorsem ent where there are joint
(2) Signature of the indorser,
without additional words, is a Where the instrument is payable or
sufficient indorsement [Sec. 31, NIL] indorsed to A and B, they are joint
payees and an indorsement by either A or
B only will not constitute a valid
(3) Must be of the ENTIRE instrum ent negotiation, UNLESS the one indorsing is
authorized by the other. (Campos)
Sec. 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an But where the instrument is payable to A
indorsement of the entire instrument. An or B, they payees are merely in the
indorsement which purports to transfer to the alternative, and either one may valdily
indorsee a part only of the amount payable, negotiate the same. (Campos)
or which purports to transfer the instrument
to two or more indorsees severally, does not
operate as a negotiation of the instrument. C. KINDS OF INDORSEMENT
But where the instrument has been paid in
part, it may be indorsed as to the residue.
Sec. 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;

PAGE 32 OF 320

and it may also be either restrictive or qualified Specifies the person to whom/to whose
or conditional. order the instrument is to be payable; and
the indorsement of such indorsee is
necessary to further negotiation.
Four bases of classification of A special indorser is liable to all
indorsem ents under the NIL: subsequent holders, unless the
(1) Special or in blank instrument is an originally bearer
instrument, in which case he is liable only
(2) Restrictive or Non-Restrictive to those who take title through his
(3) Qualified or unqualified indorsement. [Sec. 40, NIL]

(4) Conditional or unconditional An instrument, payable to bearer, and

indorsed specially, may nevertheless be
All of the four bases of classification coexist further negotiated by delivery. [Sec 40,
with each other; thus, an indorsement may be NIL]
special and qualified at the same time. It may
also be special and unqualified, special and Originally bearer instrument always
restrictive, special, unrestrictive and remains a bearer instrument. (Sundiang
unqualified and so on. (Campos) and Aquino)


Specifies no indorsee, instrument so
Sec. 34, NIL. Special indorsement; indorsed is payable to bearer, and may be
indorsement in blank. - A special indorsement negotiated by delivery
specifies the person to whom, or to whose The holder may convert a blank
order, the instrument is to be payable, and the indorsement into a special indorsement
indorsement of such indorsee is necessary to by writing over the signature of the
the further negotiation of the instrument. An indorser in blank any contract consistent
indorsement in blank specifies no indorsee, with the character of the indorsement.
and an instrument so indorsed is payable to [Sec 35, NIL]
bearer, and may be negotiated by delivery.
An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
Sec. 40, NIL. Indorsement of instrument reconverted into an order instrument by a
payable to bearer. - Where an instrument, subsequent special indorsement
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as C.2. AS TO TITLE TRANSFERRED
indorser to only such holders as make title
through his indorsement. Sec. 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
Sec. 35, NIL. Blank indorsement; how changed instrument; or
to special indorsement. - The holder may
convert a blank indorsement into a special (b) Constitutes the indorsee the agent of
indorsement by writing over the signature of the indorser; or
the indorser in blank any contract consistent (c) Vests the title in the indorsee in trust
with the character of the indorsement. for or to the use of some other
But the mere absence of words implying power
Special to negotiate does not make an indorsement
PAGE 33 OF 320

(1) Qualified
Constitutes indorser as mere assignor of
Sec. 37, NIL. Effect of restrictive indorsement; title
rights of indorsee. - A restrictive indorsement Made by adding the words without
confers upon the indorsee the right: recourse, sans recourse, indorser not
(a) to receive payment of the instrument; holder, at the indorsers own riske, and
other terms of similar import. [Sec. 38,
(b) to bring any action thereon that the NIL].
indorser could bring;
But this does not mean that the
(c) to transfer his rights as such indorsee, transferee only has the rights of an
where the form of the indorsement assignee; transfer remains a negotiation
authorizes him to do so. and transferee can still be a holder
But all subsequent indorsees acquire only the capable of acquiring a title free from
title of the first indorsee under the restrictive defenses of prior parties.
indorsement. Effects:
1. Relieves the qualified indorser of his
(1) Restrictive Such indorsement either: liability to pay the instrument should the
maker be unable to pay
(a) Prohibits further negotiation of
instrument 2. The qualified indorser does not guarantee
the solvency of the maker, but merely his
(b) Constitutes indorsee as agent of legal title to the instrument
3. A qualified indorsement does not impair
Vests title in indorsee in trust for another [Sec the negotiable charater of the
36, NIL] intstrument
(2) Non-qualified
Receive payment C.4. AS TO PRESENCE/ABSENCE OF
Bring any action thereon that the indorser EXPRESS LIMITATIONS
could bring.
Sec. 39, NIL. Conditional indorsement. - Where
Transfer his rights as such indorsee, but an indorsement is conditional, the party
all subsequent indorsees acquire only the required to pay the instrument may disregard
title of first indorsee under restrictive the condition and make payment to the
indorsement. [Sec 37, NIL] indorsee or his transferee whether the
condition has been fulfilled or not. But any
(2) Non-restrictive
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
indorsing conditionally.
Sec. 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser (1) Conditional
a mere assignor of the title to the instrument.
It may be made by adding to the indorser's Additional condition annexed to
signature the words "without recourse" or any indorsers liability; such condition must
words of similar import. Such an indorsement be expressed
does not impair the negotiable character of Where an indorsement is conditional, a
the instrument. party required to pay the instrument may
PAGE 34 OF 320

disregard the condition, and make

payment to the indorsee or his transferee, IX. Rights of the Holder
whether condition has been fulfilled or
But any person to whom an instrument so
indorsed is negotiated, will hold the same, Sec. 191, NIL. Definition and meaning of terms.
or the proceeds thereof, subject to the - In this Act, unless the contract otherwise
rights of the person indorsing requires:
conditionally. [Sec. 39, NIL]
"Holder" means the payee or indorsee of a bill
(2) Unconditional or note who is in possession of it, or the bearer
(1) Absolute One by which the indorser
binds himself to pay, upon no other
condition than the failure of prior parties A holder is a payee or indorsee of a bill or
to do so, and of due notice to him of such note who is in possession of it, or the bearer
failure thereof [Sec. 191, NIL]. He has the following
rights [Sec. 51, NIL]:
(2) Joint All must indorse when an
instrument is payable to the order of two (1) To sue on the instrument in his
or more payees or indorsees who are not own nam e
partners. [Sec. 41, NIL]
Unindorsed instruments: Section. 49, NIL.
Exceptions: Transfer without indorsement; effect of.
Where the holder of an instrument
Where the payee or indorsee are partners; payable to his order transfers it for value
without indorsing it, the transfer vests in
Where the payee or indorsee indorsing the transferee such title as the transferor
has authority to indorse for the others. had therein, and the transferee acquires
in addition, the right to have the
(3) Irregular A person who, not otherwise indorsement of the transferor. But for the
a party to an instrument, places thereon purpose of determining whether the
his signature in blank before delivery. transferee is a holder in due course, the
[Sec. 64, NIL] negotiation takes effect as of the time
when the indorsement is actually made.
Liability of Irregular Indorser: Note: This section applies only to an
instrument payable to the order of the
If the instrument is payable to the order transferor. This cannot apply to bearer
of a third person, he is liable to the payee instruments.
and to all subsequent parties.
Cancellation of indorsement: Section 48,
If the instrument is payable to the order NIL. Striking out indorsement. The holder
of the maker or drawer, or is payable to may at any time strike out any
bearer, he is liable to all parties indorsement which is not necessary to his
subsequent to the maker or drawer. title. The indorser whose indorsement is
If he signs for the accommodation of the struck out, and all indorsers subsequent
payee, he is liable to all parties to him, are thereby relieved from liability
subsequent to the payee. [NIL, Sec. 64] on the instrument.
Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
PAGE 35 OF 320

person adds to his signature words some person under whom he claims acquired
indicating that he signs for or on behalf of the title as holder in due course. But the last-
a principal or in a representative capacity, mentioned rule does not apply in favor of a
he is not liable on the instrument if he party who became bound on the instrument
was duly authorized; but the mere prior to the acquisition of such defective title.
addition of words describing him as an
agent, or as filling a representative
character, without disclosing his principal, B.1. WHO ARE HOLDERS IN DUE COURSE
does not exempt him from personal
(1) Holder in due course [HDC] under Sec. 52,
(2) Payment in due course to the
(2) HDC under Sec. 58, NIL: A holder who
holder discharges instrum ent
DERIVES title to the instrument through
a HDC has all the rights of the latter even
though he himself satisfies none of the
B. HOLDER IN DUE COURSE [HDC] requirements of due course holding
(2nd Most Frequently Asked since 1992)
HDC under Sec. 59, NIL
[presum ption]: Every holder is deemed
Sec. 52, NIL. What constitutes a holder in due prima facie to be a holder in due course
course. - A holder in due course is a holder Sec. 191 of the NIL defines holder as the
who has taken the instrument under the payee or indorsee of a bill or note, who is in
following conditions: possession of it, or the bearer thereof. The
(a) That it is complete and regular upon word holder in the first clause of Sec. 52
its face; and in the second subsection thereof may be
(b) That he became the holder of it replaced by the definition in Sec. 191 so as to
before it was overdue, and without read a holder in due course is a payee or an
notice that it has been previously indorsee in possession, etc. [De Ocampo vs.
dishonored, if such was the fact, Gatchalian, G.R. No. L-15126 (1961)]
(c) That he took it in good faith and for
(d) That at the time it was negotiated to B.2. THE SIGNIFICANCE OF DUE COURSE
him he had no notice of any infirmity HOLDING
in the instrument or defect in the title The question of whether a holder is a
of the person negotiating it. holder in due course or not is significant
only when there is an existing defense
Sec. 58, NIL. When subject to original between prior parties. (Campos)
defense. - In the hands of any holder other A holder in due course can acquire a
than a holder in due course, a negotiable better title than his predecessors because
instrument is subject to the same defenses as he takes the instrument free from any
if it were non-negotiable. But a holder who defect of title of prior parties. He is
derives his title through a holder in due furthermore free from defenses available
course, and who is not himself a party to any to prior parties among themselves.
fraud or illegality affecting the instrument, (Campos)
has all the rights of such former holder in
respect of all parties prior to the latter. A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
Section 59, NIL. Who is deemed holder in due transferee of a non-negotiable paper.
course. - Every holder is deemed prima facie Real defenses, however, which attach to
to be a holder in due course; but when it is the instrument itself would be available
shown that the title of any person who has even against a holder in due course.
negotiated the instrument was defective, the (Campos)
burden is on the holder to prove that he or
PAGE 36 OF 320


Sec. 51, NIL. Right of holder to sue; payment. Sec. 52, NIL. What constitutes a holder in due
- The holder of a negotiable instrument may course.- A holder in due course is a holder
to sue thereon in his own name; and payment who has taken the instrument under the
to him in due course discharges the following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
Sec. 57, NIL. Rights of holder in due course. - before it was overdue, and without
A holder in due course holds the instrument
notice that it has been previously
free from any defect of title of prior parties, dishonored, if such was the fact;
and free from defenses available to prior
(c) That he took it in good faith and for
parties among themselves, and may enforce value;
payment of the instrument for the full (d) That at the time it was negotiated to
amount thereof against all parties liable
him, he had no notice of any infirmity
thereon. in the instrument or defect in the title
of the person negotiating it.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other These four requisites must concur. If any one
than a holder in due course, a negotiable of them is absent, the holder cannot be
instrument is subject to the same defenses as considered a holder in due course. (Campos)
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any B.4.A. COM PLETE AND REGULAR
fraud or illegality affecting the instrument, UPON ITS FACE
has all the rights of such former holder in An instrument is incomplete when it is
respect of all parties prior to the latter. wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
(1) To sue on the instrument in his own name same will not be complete. (De Leon)
[Sec. 51, NIL]
(2) To receive payment on the instrument
(3) Holds instrument free of any defect of PREVIOUS DISHONOR
title of prior parties [Sec. 57, NIL]
Overdue The Following Cannot Be
(4) Free from defenses available to prior Holders in Due Course:
parties among themselves [Sec. 57, NIL]
(a) A holder who became such after the
(5) May enforce payment of instrument for date of maturity of the instrument
full amount, against all parties liable [instrument is overdue; Sec. 53, NIL]
[Sec. 57, NIL]
(b) In case of demand instruments: a
holder who negotiates it after an
unreasonable length of time after its
issue [Sec. 53, NIL]
The fact that the instrument is overdue is a
strong indication that it was dishonored and
the law puts the potential holder on inquiry
as to whether it was dishonored and the
reason therefor. (Campos)

PAGE 37 OF 320

An instrument may be dishonored either by Value

non-acceptance or by non-payment.
(1) Any consideration sufficient to support a
(1) Dishonor by non-acceptance takes simple contract [Sec. 25, NIL]
place when the drawee refuses to accept
(2) An antecedent or pre-existing debt
the order of the drawer as stated in the
constitutes value, whether the instrument
bill. Can refer only to a bill of exchange.
is payable on demand or at a future time
(2) Dishonor by non-paym ent takes [Sec. 25, NIL]
place when the party primarily liable fails
to pay the instrument at the date of
maturity. (Campos) Holder For Value
(1) Where value has at any time been given
for the instrument, the holder is deemed
a holder for value in respect to all parties
(1) An overdue instrument is still negotiable, who become such prior to that time [Sec.
but it is subject to the defenses (real and 26, NIL]; and
personal) existing at the time of the
(2) Where the holder has a lien on the
instrument, he is deemed a HFV to the
(2) As to what constitutes a reasonable time, extent of his lien [Sec .27, NIL]
regard is to be had to the nature of the
The holder is a holder for value only to the
instrument, the usage of trade or
extent that the consideration agreed upon
business with respect to such instrument,
has been paid, delivered, or performed.
and the facts of the particular case. [Sec.
(Sundiang and Aquino)
193, NIL]
A negotiable instrument may be given as a
(3) An instrument is not invalid for the
gift to the indorsee or transferee. In such
reason only that it is ante-dated or
cases, whatever defenses can be set up
postdated provided it is not done for an
against the transferor can also be set up
illegal or fraudulent purpose. The person
against the transferee, but where the holder
to whom an instrument so dated is
gave valuable consideration for the note and
delivered acquires the title thereto as of
the other requisites of Sec. 52 are present, he
the date of delivery [Sec. 12, NIL]
will be free from such defenses.
(4) Instruments with fixed maturity
Value need not be full and a holder will be
but subject to acceleration: ultimate
one for value even if he gave less than the
date of maturity is the date of maturity for
face value of the instrument, provided that
the purpose of determining whether a
intention of the transferor is to transfer the
purchaser is a HDC
full amount represented by the instrument.
(5) Undated instrum ents: Prima facie (Campos)
presumption that it was negotiated
Presumption: Every negotiable instrument
before it was overdue [Sec. 45, NIL]
is deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
become a party thereto for value. [Sec. 24,
Good Faith
Such presumption cannot be overcome by the
Holder must have taken the instrument in petitioners bare denial of receipt of the
good faith and that at the time it was consideration. [Bayani v. People, G.R. No.
negotiated to him he had no notice of any 154947 (2004)]
infirmity in the instrument or defect in the
title of the person negotiating it. (Campos)
PAGE 38 OF 320

TITLE OF THE PERSON NEGOTIATING Suspicious circumstances

General rule: A purchaser of an instrument
Defective title is not required to investigate every suspicious
circumstance; failure to investigate such
Sec. 55, NIL. When title defective. The title
circumstances does not constitute him as
of a person who negotiates an instrument is
being in bad faith or having a notice of defect.
defective within the meaning of this act when
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or Rationale: The general principle that a
other unlawful means, or for an illegal purchaser who has knowledge of certain facts
consideration, or when he negotiates it in is put on inquiry does not operate to its full
breach of faith, or under such circumstances extent in the law of negotiable instruments.
as amount to a fraud. Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require
Title is defective when [Sec. 55, NIL] investigation of every suspicious
circumstance would hamper their function of
(1) instrument/signature obtained by fraud,
facilitating exchange; thus negligence in
duress, force or fear or other unlawful
tracking down a suspicious circumstance
means OR for an illegal consideration; or
which would put a prudent man on inquiry is
(2) instrument is negotiated in breach of not of itself sufficient to prevent recovery.
faith, or fraudulent circumstances (Campos)
Title is not defective when at the time it was (a) Suspicious circumstances together
negotiated to him, he had no notice of: with other circumstances, may be
admitted as evidence of bad faith.
(1) any infirmity in instrument
(b) Where the suspicious circumstances
(2) any defect in title of person negotiating
are so cogent and obvious
A check with 2 parallel lines in the upper left
Note: Due course holding is not affected by hand corner means that it could only be
the holders acquisition of knowledge after he deposited and may not be converted to cash.
has taken the instrument. Consequently, such circumstance should put
the payee on inquiry and upon him devolves
To constitute notice of an infirmity in the
the duty to ascertain the holders title to the
instrument or defect in the title of the person
check or the nature of his possession. Failing
negotiating the same, the person to whom it
in this respect, the payee is declared guilty of
is negotiated must have had actual
gross negligence amounting to legal absence
knowledge of the infirmity or defect, or
of good faith and as such the consensus of
knowledge of such facts that his action in
authority is to the effect that the holder of the
taking the instrument amounted to bad faith.
check is not a holder in good faith. [State
[Sec. 56, NIL]
Investment House vs. IAC, G.R. No. 72764
A transferee who receives notice of any (1989)]
infirmity or defect before he has paid the full
amount for the instrument will be deemed a
HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]

Gross negligence in itself would not

constitute notice since it is not the equivalent
of actual knowledge nor of bad faith.

PAGE 39 OF 320

B.5. PRESUMPTION IN FAVOR OF DUE Holder in Due Course Not Holder in Due
Every holder is deemed prima facie to be a
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the Has the right to Has the right to
title of any person who has negotiated enforce payment, sue enforce payment, sue
the instrument was defective. Holder in his own name, and in his own name, and
must then prove that he or some person negotiate the negotiate the
under whom he claims acquired the title instrument instrument
as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became C. DEFENSES AGAINST THE HOLDER
bound on the instrument prior to the
acquisition of such defective title.
Real Defenses Personal Defenses

Those which Attach to

B.6. HOLDER NOT IN DUE COURSE the instrument itself
Those wherein a true
(1) One who became a holder of an and generally disclose
contract appears, but
instrument without any, some or all of the an absence of one of
where for some
requisites under Sec. 52 of the NIL the essential
reason, such as fraud,
elements of a contract
(2) With respect to demand instruments, if it the defendant is
or where the admitted
is negotiated an unreasonable length of excused from the
contract is void for all
time after its issue, the holder is deemed obligation to perform
purposes for reasons
not a holder in due course. [Sec. 53, NIL]
of public policy
Rights of a holder not in due course
[Sec. 51, NIL] Available against all Can be raised only
holders, including against holders not in
(1) To sue on the instrument under in his holders in due course due course
own name
(2) To enforce the instrument Forgery, incapacity, Those mentioned in
fraud in the execution, Sec. 55 (fraud, duress,
The only disadvantage of a holder who is not some types of duress, force and fear, other
a holder in due course is that the negotiable and lack of delivery of unlawful means,
instrument is subject to defenses as if it were an incomplete illegal consideration,
non-negotiable. [Chan Wan vs. Tan Kim, G.R. instrument negotiating in breach
No. L-15380 (1960)] of faith), want of
incompleteness of the
Holder in Due Course Not Holder in Due instrument, lack of
Course delivery of a
completed instrument
Compliance with Requisites

All the requisites Not all of the

under Sec. 52, NIL are requisites under Sec.
complied with 52 are complied with


His rights can only be His rights can be

defeated by real defeated by real and
defenses personal defenses

PAGE 40 OF 320

X. Liabilities of Parties genuineness of his signature and his

capacity and authority to draw the
instrument, and
Primary liability: The unconditional (b) The existence of the payee and his
promise attaches the moment the maker then capacity to indorse.
makes the instrument while the acceptors
assent to the unconditional order attaches
the moment he accepts the instrument. No A drawee has no liability on the bill until and
further act is necessary in order for the unless he accepts the same.
liability to accrue. Presentment for payment
Unconditionally liable; the acceptor is duty-
is all that is necessary.
bound to pay the holder at date of maturity,
WON holder demands payment from him,
and he is not relieved from liability even if the
A. PARTIES PRIMARILY LIABLE instrument should become overdue due to
failure of holder to make such demand.
Sec. 192, NIL. Person primarily liable on (Campos)
instrument. The person primarily liable
on an instrument is the person who by the
terms of the instrument is absolutely required Requisites for a valid acceptance
to pay the same. All other parties are
(a) It must be in writing;
secondarily liable.
(b) It must be signed by the drawee; and
(c) It must not change the implied promise of
A.1. MAKER the acceptor to pay only in money. [Sec.
Sec. 60, NIL. Liability of maker. The maker 132, NIL]
of a negotiable instrument by making it
Note: A bill may be accepted even after it is
engages that he will pay it according to its overdue or dishonored, since an instrument
tenor, and admits the existence of the payee does not lose its negotiability by the mere
and his then capacity to indorse. fact that its maturity date has passed or that
the drawee has refused to accept or pay it.
The term maker applies only to the
promissory note.
By signing the note, the maker also
represents to the world that the payee named
has the capacity to indorse at the time of the Secondary liability: A party secondarily
making of such note and thus represents that liable is not bound to pay unless the
the named payee can transfer a good and following have been fulfilled:
valid title to the note by indorsement. The
maker is therefore precluded from setting up (a) Due presentment or demand to the
such defenses as minority or insanity of the primary party
payee or ultra vires act of a payee-corporation. (b) Dishonor by such party
(c) Notice of dishonor to secondary party,
and, in cases of foreign bills of exchange,
A.2. ACCEPTOR protest of the bill
Presentment means that the instrument is
Sec. 62, NIL. Liability of acceptor. The
presented at maturity to the party primarily
acceptor by accepting the instrument
liable for the purpose of obtaining payments
engages that he will pay it according to the
thereof. Without this presentment, the
tenor of his acceptance; and admits:
secondary parties cannot be held liable
(a) The existence of the drawer, the
PAGE 41 OF 320

should the primary party have refused to pay take, he will pay the amount thereof to the
upon such presentment. (Campos) holder, or to any subsequent indorser who
may be compelled to pay it.

W ho is a qualified indorser? One who is
Sec. 61, NIL. Liability of drawer. The drawer
constituted as a mere assignor of the title to
by drawing the instrument admits the
existence of the payee and his then capacity the instrument by adding to his signature the
words "without recourse" or any words of
to indorse; and engages that on due
similar import.
presentment the instrument will be accepted
or paid, or both, according to its tenor, and A qualified indorser does not assume the
that if it be dishonored, and the necessary liability to pay the instrument since he is
proceedings on dishonor be duly taken, he merely an assignor of the title to the
will pay the amount thereof to the holder, or instrument. However, he becomes liable once
to any subsequent indorser who may be he breaches a warranty.
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the W ho is a general or unqualified
holder. indorser? Every person who indorses
without qualification [Sec. 66, NIL]
A person placing his signature upon an
The drawer warrants the existence of the
instrument other than as a maker, drawer, or
payee and the latters capacity to indorse the
acceptor unless he indicates by appropriate
instrument at the time of its issuance.
words his intention to be bound in some other
capacity [Sec. 63, NIL]
A person, who places his signature on an
B.2. INDORSERS instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The following indorsers assume the liability
to pay the instrument: The general indorser makes two contracts:
(1) General or Unqualified Indorser; and (1) An assignment or sale of the
instrument; and
(2) Irregular Indorser
(2) A special contract of indorsement


(2011 Bar Question) When a person not otherwise a party to an
instrument, places thereon his signature in
Sec. 66, NIL. Liability of general indorser.
blank before delivery, he is liable as an
Every indorser who indorses without
indorser, in accordance with these rules:
qualification, warrants to all subsequent
holders in due course: (1) Instrument payable to order of
3rd person: liable to payee and to
(a) The matters and things mentioned in
all subsequent parties
subdivisions [a],[b] and [c] of the next
preceding section; (2) Instrument payable to the
(b) That the instrument is at the time of order of m aker/drawer, or
his indorsement valid and subsisting. payable to bearer: liable to all
And in addition, he engages that on due parties subsequent to maker/drawer
presentment, it shall be accepted or paid, or
(3) Signs for accom m odation of
both, as the case may be, according to its
payee: liable to all parties
tenor, and that if it be dishonored, and the subsequent to payee [Sec. 64, NIL]
necessary proceedings on dishonor be duly
PAGE 42 OF 320

XI. Warranties
The primary or secondary liability of the
Sec. 68, NIL. Order in which indorsers are
liable. As respects one another, indorsers parties should be distinguished from their
are liable prima facie in the order in which warranties.
they indorse; but evidence is admissible to (1) Primary or secondary liability of the
show that as between or among themselves parties makes them liable to pay the
they have agreed otherwise. Joint payees or sum certain in money stated in the
joint indorsees who indorse are deemed to instrument.
indorse jointly and severally.
(2) Warranties are affirmations of the
fact on the part of the parties that
impose no direct obligation to pay in
Among themselves, indorsers are liable prima
the absence of breach thereof.
facie in the order they indorse.
Sec. 68 does not bind the holder, and he may
In case of breach of warranties, the person
sue any of the indorsers, regardless of the
who breached the same may either be liable
order of their indorsement. (Campos)
or he may be barred from asserting a
particular defense.
Promissory Note Bill of Exchange

No person primarily A. MAKERS WARRANTIES

liable to pay until and
unless the drawee (1) The maker admits the existence of the
Maker is the person accepts the order of payee AND
primarily liable the drawer to pay; (2) His then capacity to indorse [Sec. 60, NIL]
when the drawee
accepts, he becomes
the acceptor
Indorsers are Drawer and indorsers
secondarily liable. are secondarily liable (1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse


(1) As to the drawer, the acceptor admits:

(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec. 62,

PAGE 43 OF 320

The acceptor is precluded from setting up

certain defenses by reason of his warranties XII. Presentment for
like the defense that the drawer is a minor or
the signature of the drawer is forged. Payment

WARRANTIES Presentment for payment is the presentation
of the instrument, whether a note or a bill, to
the person primarily liable for the purpose of
(1) That the instrument is genuine in and
demanding and obtaining payment thereof.
in all respects what it purports to be (Campos)
(2) That he has a good title to it
(1) The production of a Bill of Exchange to
(3) That all prior parties had capacity to the drawer or acceptor for payment; or
(2) The production of a Promissory Note to
(4) That the instrument is, at the time of the party liable for payment.
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)] Sec. 72, NIL. What constitutes sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
E. QUALIFIED INDORSERS (a) By the holder, or by some person
WARRANTIES authorized to receive payment on his
(1) That the instrument is genuine in and in (b) At a reasonable hour on a business
all respects what it purports to be day;
(c) At a proper place as herein defined;
(2) That he has a good title to it (d) To the person primarily liable on the
(3) That all prior parties had capacity to instrument, or if he is absent or
contract inaccessible, to any person found at
the place where the presentment is
(4) That he has no knowledge of any fact made.
which would impair the validity of the
instrument or render it valueless. [Sec. 68,
NIL] (1) Bearing fixed m aturity/not
payable on demand on the day it
falls due [Secs. 71 and 85, NIL]
(2) Payable on demand within a
reasonable time after its issue [Sec. 7,
(3) Dem and bill of exchange within a
reasonable time after the last negotiation.
[Sec. 71, NIL]
Presentment for payment cannot be made on
a Sunday or legal holiday, and if the note
matures on such a day, since the maker
cannot be compelled to pay sooner than he
promised, the note or bill will have to be
presented on the next business day. (Campos)
PAGE 44 OF 320

Instruments falling due or becoming payable D. PARTIES TO WHOM PRESENTMENT

on Saturday are to be presented for payment FOR PAYMENT SHOULD BE MADE
on the next succeeding business day, except
that instruments payable on demand may, at
the option of the holder, be presented for General rule: Presentment for payment
payment before twelve oclock noon on must be made to the person primarily liable
Saturday when that entire day is not a holiday. on the instrument or if he is absent or
[Sec. 85, NIL] inaccessible, to any person found at the place
where the presentment is made.
Inevitable or unavoidable causes not
attributable to the fault of the holder and Exceptions: Where the person primarily
making presentment morally or physically liable is/are:
impossible may excuse delay in presentment. (1) Dead presentment for payment
(Campos) must be made to his personal
Note: Although presentment was made representative
within a reasonable time from last (2) Partners presentment for
negotiation, it may have been made within an payment may be made to any one of
unreasonable time from issuance. Thus them, even though there has been a
holder may still not be a holder in due course dissolution of the firm
under Sec. 71.
(3) Several persons, not partners
(joint debtors) presentment for
C. NECESSITY OF PRESENTMENT FOR payment must be made to them all
W hen necessary: In order to charge the PRESENTMENT FOR PAYMENT
drawer and indorsers [Sec. 70, NIL]
W hen Excused:
W hen NOT necessary:
(1) Where, after the exercise of reasonable
(1) To charge the person primarily liable on diligence, presentment cannot be made;
the instrument [Sec. 70, NIL]
(2) Where the drawee is a fictitious person;
(2) To charge the drawer where he has no
(3) By waiver of presentment, express or
right to expect or require that the drawee
implied. [Sec. 82, NIL]
or acceptor will pay the instrument. [Sec.
79, NIL]
(3) To charge an indorser where the F. DISHONOR BY NON-PAYMENT
instrument was made or accepted for his The instrument is dishonored by non-
accommodation and he has no reason to payment when:
expect that the instrument will be paid if
presented. [Sec. 80, NIL] (1) It is duly presented for payment and
payment is refused or cannot be
(4) When the bill of exchange has previously obtained; or
been dishonored by non-acceptance and
has not been subsequently accepted (2) Presentment is excused and the
instrument is overdue and unpaid [Sec.
83, NIL]
In case of waiver of protest, whether
in the case of a foreign bill of
exchange or other NI deemed to be a
waiver not only of a formal protest but also of
presentment and notice of dishonor [Sec. 111,

PAGE 45 OF 320

XIII. Notice of Dishonor Notice of dishonor may be given either to the

party himself or to his agent in that behalf.
[Sec. 97, NIL]
Notice of dishonor is bringing either verbally
or in writing, to the knowledge of the drawer A.2. IF GIVEN BY AGENT
or the indorser of the instrument, the fact
that a specified negotiable instrument, upon Where the instrument has been dishonored in
proper proceedings taken, has not been the hands of an agent, he may either himself
accepted, or has not been paid, and that the give notice to the parties liable thereon, or he
party notified is expected to pay it. [Martin v. may give notice to his principal. [Sec. 94, NIL]
Brown, 75 Ala. 442]
Notice given by holder or his agent to party or A.3. IF PARTY IS DEAD
parties secondarily liable that the instrument
was dishonored by: The notice must be given to a personal
representative, if there be one, and if with
(1) Non-acceptance by the drawee of a reasonable diligence, he can be found.
bill; or
If there be no personal representative, notice
(2) Non-payment by the acceptor of a may be sent to the last residence or last place
bill; or of business of the deceased. [Sec. 98, NIL]
(3) Non-payment by the maker of a note
[Sec. 89, NIL]
Where the parties to be notified are partners,
(a) Given by holder or his agent, or by notice to any one partner is notice to the firm,
any party who may be compelled by even though there has been a dissolution.
the holder to pay [Sec. 90, NIL] [Sec. 99, NIL]
(b) Given to secondary party or his agent
[Sec. 97, NIL]
(c) Given within the periods provided by
law [Sec. 102, NIL] Notice to joint parties who are not partners
must be given to each of them, unless one of
(d) Given at the proper place [Secs. 103 them has authority to receive such notice for
and 104, NIL] the others. [Sec. 10, NIL]


Where a party has been adjudged a bankrupt
(1) Non-acceptance [bill] to
or an insolvent, or has made an assignment
persons secondarily liable, namely,
for the benefit of creditors, notice may be
the drawer and indorsers as the case
given either to the party himself or to his
may be
trustee or assignee. [Sec. 101]
(2) Non-payment (both bill and
note) to indorsers

Note: Notice must be given to persons Notice may be given as soon as the
secondarily liable. Otherwise, such parties instrument is dishonored [Sec. 102, NIL]
are discharged. Notice may be given to the
party himself or to his agent.
PAGE 46 OF 320

(2011 Bar Question) The notice may be given by or on behalf of the

holder, or by or on behalf of any party to the
instrument who might be compelled to pay it
Notice of dishonor is not required to be given to the holder, and who, upon taking it up,
to the drawer in any of the following cases: would have a right to reimbursement from
the party to whom the notice is given. [Sec.
(1) Drawer and drawee are the same;
90, NIL]
(2) Drawee is a fictitious person or not having
the capacity to contract;
(3) Drawer is the person to whom the
instrument is presented for payment; (1) Holder
(4) The drawer has no right to expect or (2) Agent or representative of holder.
require that the drawee or acceptor swill
(3) Any party who may be compelled to
honor the instrument;
pay like indorsers.
(5) Where the drawer has countermanded
(4) Agent of any party who may be
payment [Sec. 114, NIL]
compelled. [Sec. 90, NIL]


INDORSER Notice of dishonor is required to charge
(2011 Bar Question) parties secondarily liable.
Upon valid notice of dishonor, immediate
Notice of dishonor is not required to be given right of recourse against the indorser arises. It
to an indorser in the following cases: is as if the indorser becomes primarily liable
in the sense that the holder need not claim
(1) Drawee is a fictitious person or does payment from the person primarily liable
not have the capacity to contract, and (Sundiang and Aquino)
indorser was aware of that fact at the
time he indorsed the instrument;
(2) Indorser is the person to whom the H. FORM OF NOTICE
instrument is presented for payment; The notice may be:
(3) Instrument was made or accepted for (1) In writing; or
his accommodation. [Sec. 115, NIL]
(2) Merely oral
The notice may be given in any terms which:
E. WHO WILL BENEFIT (1) Sufficiently identify the instrument;
If given by or on behalf of the holder: and
(1) All subsequent holders (2) Indicate that it has been dishonored
(2) All prior parties (as to holder) who have a by non-acceptance or non-payment
right of recourse against the party to It may in all cases be given by delivering it
whom it is given. [Sec. 92, NIL] personally or through the mails. [Sec. 96 NIL]
If given by the indorser:
(1) Holder No misdescription of the amount, or of the
(2) All parties subsequent to the party to date, or of the name of the parties, or of the
whom notice is given. [Sec. 93, NIL] time the paper falls due, or other defect will
vitiate the notice of dishonor, unless it
F. PARTIES WHO MAY GIVE NOTICE OF misleads the party to whom it is sent.

PAGE 47 OF 320

XIV. Discharge of
Notice of dishonor may be waived either
before the time of giving notice has arrived or
Negotiable Instrument
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109, Discharge: The release of all parties,
NIL] whether primary or secondary, from the
Where the waiver is embodied in the obligation on the instrument. It renders the
instrument itself, it is binding upon all instrument without force and effect and,
parties; but, where it is written above the consequently, non-negotiable (De Leon)
signature of an indorser, it binds him only.
[Sec. 110, NIL]
Notice of dishonor is dispensed with: Sec. 119, NIL. Instrument; How discharged. - A
(1) When party to be notified knows about negotiable instrument is discharged:
the dishonor, actually or constructively (1) By payment in due course by or on behalf
[Secs. 114-117, NIL] of the principal debtor;
(2) If waived [Sec. 109, NIL] (2) By payment in due course by the party
(3) When after due diligence, it cannot be accommodated, where the instrument is
given [Sec. 112, NIL] made or accepted for his
(3) By the intentional cancellation thereof by
NOTICE (4) By any other act which will discharge a
simple contract for the payment of
Failure to give notice to parties secondarily money;
liable discharges such parties
(5) When the principal debtor becomes the
An omission to give notice of dishonor by holder of the instrument at or after
non-acceptance does not prejudice the rights maturity in his own right.
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be B. BY PAYMENT IN DUE COURSE
prejudiced by the failure or neglect of a (2000 Bar Question)
previous holder to give notice of dishonor by
Sec. 51, NIL. Right of Holder to Sue for
Payment. The holder of a negotiable
A dishonor by non-payment necessarily instrument may sue thereon in his own name;
presupposes the instrument has matured, and payment to him in due course discharges
and therefore, no holder subsequent thereto the instrument.
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos) Sec. 88, NIL. What Constitutes Payment in
Due Course. - Payment is made in due course
when it is made at or after the maturity of the
payment to the holder thereof in good faith
and without notice that his title is defective.
(Sec. 88)
PAGE 48 OF 320


(1) Payment must be made at or after (2011 Bar Question)
maturity. Sec. 123, NIL. Cancellation; Unintentional;
(2) Payment must be made to the holder. Burden of Proof. - A cancellation made
unintentionally or under a mistake or without
(3) Payment must be made in good faith and the authority of the holder, is inoperative; but
without notice that holders title is where an instrument or any signature thereon
defective. appears to have been cancelled, the burden
Payment should be in money in order to of proof lies on the party who alleges that the
effect its discharge. (Campos) cancellation was made unintentionally or
under a mistake or without authority.
If payment is made before maturity and
the note is negotiated to a HDC, the latter The burden of proving that a cancellation
may recover on the instrument. was made unintentionally or by mistake
or through fraud, is on the person
Payment to one of several payees or claiming its effectiveness. Cancellation is
indorsees in the alternative discharges presumed to be intentional. (Campos)
the instrument, but payment to one of
several joint payees or joint indorsers is Cancellation need not be supported by
not a discharge. The party receiving consideration and is effective even
payment must have been authorized by without notice to the primary party.
others to receive payment.
By whom m ade:
(1) Payment in due course by or on behalf of SIMPLE CONTRACT
the principal debtor.
(2) Payment in due course by party FOR PAYMENT OF MONEY
accommodated where party is made/
accepted for accommodation whether or Any other act which discharges a simple
not he appears to be a party to the contract for payment of money.
instrument. Sec. 1231, Civil Code. Obligations are
If payment is not made by the parties extinguished by:
enumerated, it would constitute a (1) Payment or performance;
purchase or negotiation and the
instrument would remain outstanding. xxx
(3) By condonation or remission of the debt;
Principal debtor: includes the maker
and the acceptor. (4) By the confusion or merger of the rights of
a debtor;
If the primary party is an accommodation
party, like a guarantor or a surety, (5) By compensation;
payment by him does not discharge the (6) By novation
instrument. [Fox v. Kroeger, 119 Tex. 511
(1931)] Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this

PAGE 49 OF 320

E. BY REACQUISITION OF PRINCIPAL (4) By a valid tender or payment made by

DEBTOR IN HIS OWN RIGHT a prior party;
Principal debtor becomes holder of (5) By a release of the principal debtor
instrument at or after maturity in his own unless the holder's right of recourse against
right and not as an agent or for and in behalf the party secondarily liable is expressly
of another. reserved;
Reacquisition must be at or after maturity (6) By any agreement binding upon the
for the instrument to be discharged, holder to extend the time of payment or to
otherwise the instrument may be further postpone the holder's right to enforce the
negotiated. (Campos) instrument unless made with the assent of
the party secondarily liable or unless the right
of recourse against such party is expressly

Section 125, NIL. What constitutes a material

alteration. - Any alteration which changes:
(1) Failure to make due presentment
(1) Date
(2) Sum payable, either for principal or Sec. 144, NIL. When Failure to Present
Releases Drawer and Indorsers. - Except as
herein otherwise provided, the holder of a bill
(3) Time or place of payment which is required by the next preceding
(4) Number or relations of the parties section to be presented for acceptance must
(5) Medium or currency in which payment either present it for acceptance or negotiate it
is to be made within a reasonable time. If he fails to do so,
(6) Or which adds a place of payment the drawer and all indorsers are discharged.
where no place of payment is
(2) Failure to give notice of dishonor
(7) Or any other change or addition
which alters the effect of the (3) Certification of check at instance of
instrument in any respect holder
Sec. 188, NIL. Effect where the holder of check
procures it to be certified. - Where the holder
Material alteration without assent of all
of a check procures it to be accepted or
parties liable avoids instrument except as
certified, the drawer and all indorsers are
against party to alteration and subsequent
discharged from liability thereon.
indorsers [Sec. 124, NIL] (2011 Bar Question)

(4) Reacquisition by prior party

SECONDARILY LIABLE Sec. 121, NIL. Right of party who discharges
instrument. - Where the instrument is paid by
a party secondarily liable thereon, it is not
Sec. 120, NIL. When Persons Secondarily discharged; but the party so paying it is
Liable on, Discharged.- A person secondarily remitted to his former rights as regard all
liable on the instrument is discharged: prior parties, and he may strike out his own
(1) By any act which discharges the and all subsequent indorsements and against
instrument; negotiate the instrument, except:
(2) By the intentional cancellation of his (a) Where it is payable to the order of a
signature by the holder; third person and has been paid by the
drawer; and
(3) By the discharge of a prior party;
(b) Where it was made or accepted for
PAGE 50 OF 320

accommodation and has been paid by third person, and has been paid by the
the party accommodated. drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by
Where instrument negotiated back to a the party accommodated.
prior party, such party may reissue and
further negotiate, but he is not entitled
to enforce payment against any
The discharge of a secondary party is not
intervening party to whom he was
the same as the discharge of the
personally liable
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.
Sec. 50, NIL. When prior party may negotiate
instrument. - Where an instrument is
negotiated back to a prior party, such party
may, subject to the provisions of this Act,
reissue and further negotiable the same. But
he is not entitled to enforce payment thereof Sec. 122, NIL. Renunciation by Holder. - The
against any intervening party to whom he holder may expressly renounce his rights
was personally liable. against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
Where instrument is paid by party against the principal debtor made at or after
secondarily liable, it is not discharged, the maturity of the instrument discharges the
but instrument. But a renunciation does not
affect the rights of a holder in due course
(a) the party so paying it is remitted to without notice. A renunciation must be in
his former rights as regard to all prior writing, unless the instrument is delivered up
parties to the person primarily liable thereon.
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where Two forms of renunciation
it is payable to order of 3rd party and (1) A written declaration to that effect; or
has been paid by drawer or where its
made/accepted for accommodation (2) By surrender of the instrument to the
and has been paid by party primary party.

To Whom Made Effect

(5) By taking a qualified acceptance
At or after maturity in Discharges the
favor of principal instrument
At or after maturity in Discharge only such
Sec. 121, NIL. Where the instrument is paid by favor of any party party and the parties
a party secondarily liable thereon, it is not subsequent to him
discharged; but the party so paying it is
remitted to his former rights as regards to all
prior parties, and he may strike out his own
and all subsequent indorsements, and again Need not be supported by consideration.
negotiate the instrument, except:
(1) Where it is payable to the order of a
PAGE 51 OF 320

XV. Material Alteration HDC, he may enforce payment

thereof according to its original tenor
regardless of whether the alteration
A. CONCEPT was innocent or fraudulent.
(2) Alteration by a stranger
Any change in the instrument which (spoliation) (2011 Bar Question)-
affects or changes the liability of the the effect is the same as where the
parties in any way. alteration was made by a party
wherein a HDC can recover on the
Any alteration which changes the date, original tenor of the instrument. [Sec.
sum payable, time or place of payment, 124, NIL]
number of relation of the parties, or
medium of currency of payment where
none is specified or which alters the effect
of the instrument in any respect [PNB v.
CA, GR No. L-26001 (1968)]
An alteration is said to be material if it
alters the effect of the instrument. In
other words, a material alteration is one
which changes the items which are
required to be stated under Sec. 1 of the
NIL (ibid.)


[Sec. 125, NIL]
(1) Date
(2) Sum payable, either for principal or
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is
to be made
(6) That which adds a place of payment
where no place of payment is specified
(7) Any other change or addition which
alters the effect of the instrument in any


(1) Alteration by a party Avoids the

instrument except as against the
party who made, authorized, or
assented to the alteration and
subsequent indorsers. However, if an
altered instrument is negotiated to a
PAGE 52 OF 320

XVI. Acceptance and, if such request is refused, may treat the

bill as dishonored
Effects: When an acceptance is written on a
A. DEFINITION paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom
Acceptance: an acceptance completed by it is shown and who, on the faith thereof,
delivery or notification. [Sec. 191, NIL] The receives the bill for value.
signification by the drawee of his assent to
the order of the drawer. [Sec. 132, NIL]


[Sec. 132, NIL]
Must be in writing and signed by the drawee
(1) In writing and must not express that the drawee will
(2) Signed by the drawee perform his promise by any other means than
the payment of money. [Sec. 132, NIL]
(3) Does not express that the drawee will
perform his promise by and other means If request for a written acceptance is refused,
than the payment of money the holder may treat the bill as dishonored
[Sec. 13, NIL]

(1) General assents without qualification
to the order of the drawer [Sec. 139, NIL] (1) If the drawee refuses to return the
instrument within 24 hours after it was
(2) Qualified which in express terms
delivered for acceptance.
varies the effect of the bill as drawn [Secs.
141 & 142, NIL]: (2) If the drawee destroys the same.
(a) Conditional makes payment by (3) If the drawee makes an unconditional
the acceptor dependent on the promise in writing before the instrument is
fulfillment of a condition therein drawn, with respect to every person who,
stated upon the faith thereof, receives the bill for
(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 [Sec. 136, NIL]
a particular place.
The drawee is allowed twenty-four hours
(d) Qualified as to time after presentment in which to decide
(e) The acceptance of some one or more whether or not he will accept the bill.
of the drawees but not of all. The acceptance, if given, dates as of the
day of presentation.
The written acceptance may be in the
instrument itself or in a separate instrument. Implication of payment without acceptance
However, under Sec. 133, the holder of a bill by a drawee [FEBTC vs. Gold Palace Jewellery
presenting the same for acceptance may Co,, Nachura, G.R. No. 168274 (2008)]
require the acceptance be written on the bill,

PAGE 53 OF 320

The NIL explicitly provides that the

acceptor, by accepting the instrument,
XVII. Presentment for
engages that he will pay it according to
the tenor of his acceptance. Acceptance
This provision applies with equal force in
case the drawee pays a bill without having A. REQUISITES:
previously accepted it.
(1) By the holder, or by some person
His actual payment of the amount in the
authorized to receive payment on his
check implies not only his assent to the
order of the drawer and a recognition of
his corresponding obligation to pay the (2) At a reasonable hour on a business
aforementioned sum, but also, his clear day;
compliance with that obligation.
(3) At a proper place as herein defined;
Actual payment by the drawee is greater (4) To the person primarily liable on the
than his acceptance, which is merely a instrument, or if he is absent or
promise in writing to pay. The payment of inaccessible, to any person found at the
a check includes its acceptance. place where the presentment is made.
General rule: Presentment for acceptance
Right to unqualified acceptance is not necessary in order to render any party
to the bill liable. [Sec. 143, NIL]
The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the B. WHEN PRESENTMENT FOR
bill as dishonored by non-acceptance.
Where a qualified acceptance is taken,
the drawers and indorsers are discharged Presentment for acceptance must be made:
from liability on the bill unless they have
expressly or impliedly authorized the (1) Where the bill is payable after sight, or
holder to take a qualified acceptance, or in any other case, where presentment
subsequently assent thereto. for acceptance is necessary in order to
fix the maturity of the instrument; or
When the drawer or indorser receives
notice of a qualified acceptance, he must, (2) Where the bill expressly stipulates that
within a reasonable time, express his it shall be presented for acceptance; or
dissent to the holder or he will be deemed (3) Where the bill is drawn payable
to have assented thereto. elsewhere than at the residence or place
However, acceptance is presumed to be of business of the drawee.[Sec. 143, NIL]
unqualified or absolute. (Sundiang and Note: It is not necessary to present a check
Aquino) for acceptance because it is not one of those
required under Sec. 143.



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
PAGE 54 OF 320

person not having capacity to contract by on demand may, at the option of the holder
bill. be presented for payment before twelve
oclock noon on Saturday when that entire day
(2) Where, after the exercise of reasonable
is not a holiday. [Sec. 85, NIL]
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on F. HOW MADE
some other ground. [Sec. 148,NIL] [Sec. 145, NIL]
In general:
D. TIME/PLACE/MANNER OF (1) By or on behalf of the holder
PRESENTMENT (2) At a reasonable hour

D.1. WHEN MADE (3) On a business day

(4) Before the bill is overdue
A bill may be presented for acceptance on
any day on which negotiable instruments may (5) To the drawee or his agent
be presented for payment under the
provisions of Sections 72 and 85 of this Act.
When Saturday is not otherwise a holiday, W here a bill is addressed to 2 or m ore
presentment for acceptance may be made drawees who are not partners
before twelve o'clock noon on that day. [Sec. presentment must be made to them all XPT.
146, NIL] One has authority to accept/refuse for all

E. WHAT CONSTITUTES SUFFICIENT W here the drawee is dead

PRESENTMENT? presentment may be made to his personal
Presentment for payment, to be sufficient,
must be made: W here the drawee has been adjudged
(1) By the holder, or by some person a bankrupt or insolvent or has m ade
authorized to receive payment on his an assignm ent for the benefit of
behalf; creditors presentment may be made to
him or to his trustee or assignee.
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined
(4) To the person primarily liable on the PRESENTMENT
instrument or if he is absent or
inaccessible, to any person found at the Failure to make presentment discharges the
place where the presentment is made. drawer and all indorsers. [Sec. 144, NIL]
[Sec. 72, NIL]

Time of maturity: Every negotiable
instrument is payable at the time fixed therein W hen dishonored by non-acceptance:
without grace. When they day of maturity A bill is dishonored by non-acceptance:
falls upon Sunday, or a holiday, the
instrument is payable on the next succeeding (1) When it is duly presented for acceptance
business day. Instruments falling due or and such an acceptance as is prescribed
becoming payable on Saturday are to be by this Act is refused or cannot be
presented for payment on the next succeeding obtained; or
business day, except that instrument payable
PAGE 55 OF 320

(2) When presentment for acceptance is

excused and the bill is not accepted. [Sec. XVIII. Promissory Notes
149, NIL]
A promissory note is:
Duty of holder: Where a bill is duly (1) An unconditional promise in writing
presented for acceptance and is not accepted
within the prescribed time, the person (2) Made by one person to another
presenting it m ust treat the bill as (3) Signed by the maker
dishonored by non-acceptance or he
(4) Engaging to pay on demand, or at a fixed
loses the right of recourse against the drawer
or determinable future time
and indorsers. [Sec. 150, NIL]
(5) A sum certain in money to order or to
Effect: When a bill is dishonored by non-
(6) Where a note is drawn to the maker's own
acceptance, an immediate right of recourse
order, it is not complete until indorsed by
against the drawer and indorsers accrues to
him. [Sec. 184, NIL]
the holder and no presentment for payment is
necessary. [Sec. 151, NIL] There are originally 2 parties in a promissory
(1) Maker party who executes the written
promise to pay.
(2) Payee party in whose favor the
promissory note is made payable.

PAGE 56 OF 320

XIX. Checks discharged from liability. [Sec. 188,

(c) A check of itself does not operate as
A. DEFINITION an assignment of any part of the
funds to the credit of the drawer with
A check is a bill of exchange drawn on a bank the bank, and the bank is not liable to
payable on demand. Except as herein the holder unless and until it accepts
otherwise provided, the provisions of this Act or certifies the check. [Sec. 189, NIL]
applicable to a bill of exchange payable on (5) Crossed Check The NIL is silent with
demand apply to a check. [Sec. 185, NIL] respect to crossed checks, although the
Code of Commerce makes reference to
such instruments.
Article 541 of the Code of Commerce
states: The maker or any legal holder of
(1) Cashiers Check One drawn by the a check shall be entitled to indicate
cashier of a bank, in the name of the bank therein that it be paid to a certain banker
against the bank itself payable to a third or institution, which he shall do by writing
person. It is a primary obligation of the across the face the name of said banker
issuing bank and accepted in advance or institution, or only the words and
upon issuance. [Tan vs. CA, G.R. No. company.
108555 (1994)]
Under usual practice, crossing a check is
(2) Managers Check A check drawn by done by placing two parallel lines
the manager of a bank in the name of the diagonally on the left top portion of the
bank itself payable to a third person. It is check. [State Investment House vs. IAC,
similar to the cashiers check as to the G.R. No. 72764 (1989)]
effect and use.
In issuing a managers check, the bank
assumed the liabilities of the acceptor Types: Special and General
under Sec. 62, NIL. [Equitable PCI Bank v. The crossing may be special wherein between
Ong, G.R. No. 156207 (2006)] the two parallel lines is written the name of a
(3) Memorandum Check A check given bank or a business institution, in which case
by a borrower to a lender for the amount the drawee should pay only with the
of a short loan, with the understanding intervention of that bank or company, or
that it is not to be presented at the bank, crossing may be general wherein between two
but will be redeemed by the maker parallel diagonal lines are written the words
himself when the loan falls due and "and Co." or none at all as in the case at bar,
which understanding is evidenced by in which case the drawee should not encash
writing the word memorandum, memo the same but merely accept the same for
or mem on the check. deposit.

(4) Certified Check An agreement

whereby the bank against whom a check C. EFFECTS
is drawn undertakes to pay it at any
future time when presented for payment
[Sec. 187, NIL] (1) The check may not be encashed; it may
only be deposited with the bank;
(a) Certification is equivalent to
acceptance. [Sec. 187, NIL] (2) The check may be negotiated only once to
a person who has an account with the
(b) Where the holder of a check procures bank; and
it to be accepted or certified, the
drawer and all indorsers are (3) It serves as a warning to a holder that the
check has been issued for a definite

PAGE 57 OF 320

purpose. [Bataan Cigar vs. CA, G.R. No.

93048 (1994)]


A check of itself does not operate as an

assignment of any part of the funds to the
credit of the drawer with the bank. The bank
is not liable to the holder, unless and until it
accepts or certifies the check. [Sec. 189, NIL]

When to present? A check must be presented
for payment within reasonable time after its


The drawer will be discharged from liability

thereon to the extent of the loss caused by
the delay. [Sec. 186, NIL]

Certification of checks: An agreement

whereby the bank against whom a check is
drawn, undertakes to pay it at any future time
when presented for payment

(1) Equivalent to acceptance [Sec. 187, NIL]
and is the operative act that makes banks
(2) Assignment of the funds of the drawer in
the hands of the drawee [Sec. 189, NIL]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec.
188, NIL]

Refusal of drawee bank to certify: The

holder has no action against the bank but he
has a right of action against the drawer. The
drawer in turn has right of action against the
bank based on the original contact of deposit
between them.

PAGE 58 OF 320


PAGE 58 OF 320

I. Concept of Insurance a designated event only in cases where it has

happened already but the parties do not
know about it, e.g., prior loss of a ship at sea
(applicable only to marine insurance). [De
On August 15, 2013, RA 10607 was signed Leon, The Insurance Code of the Philippines
into law. It is a restatement of the Insurance Annotated (2014)]
Code (PD 612), with amendments.
While RA 10607 restated the whole law, most
of the amendments touch only the A.2. FORM
administrative portion of the Code, and very An Insurance policy is different from the
little on the substantive portion. contract of insurance. The policy is the formal
The section numbers hereinafter generally written instrument evidencing the contract of
pertain to RA 10607, unless otherwise insurance entered into between the insured
indicated. and the insurer. On the other hand, there is
no particular form required for a contract of
Sec. 232. No policy, certificate or contract of
Sec. 2(a).A contract of insurance is an insurance shall be issued or delivered within
agreement whereby one undertakes for a the Philippines unless in the form previously
consideration to indemnify another against approved by the Commissioner, and no
loss, damage or liability arising from an application form shall be used with, and no
unknown or contingent event. rider, clause, warranty or endorsement shall
be attached to, printed or stamped upon such
A contract of suretyship shall be deemed to be policy, certificate or contract unless the form
an insurance contract only if made by a surety of such application, rider, clause, warranty or
who or which, as such, is doing an insurance endorsement has been approved by the
business. Commissioner.

A contract of insurance involves public interest. A.3. INSURANCE AND GAMBLING

Thus, the business is regulated by the state DISTINGUISHED
through the requirement of licenseor
certificate of authority [White Gold Marine A contract of insurance is a contract of
Services v. Pioneer Insurance, G.R. No. 154514 indemnity and is not a wagering or gambling
(2005)]. contract. It is based on contingency, but it is
not a contract of chance for profit.
In a wagering contract, the parties
A.1. DEFINITION contemplate gain through mere chance; in a
Thus, a contract of insurance is: contract of insurance, the parties seek to
distribute possible loss by reason of
(1) A contract of indemnity; mischance [Carale, The Philippine Insurance
(2) Wherein one undertakes for a Law (2014)]
(3) To indemnify another against loss,
damage, or liability;
(4) Arising from an unknown or contingent
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its
happening is not known. A past event may be
PAGE 59 OF 320

B. DOING OR TRANSACTING insurance contracts but are contracts for

INSURANCE BUSINESS personal services;
(2) But, a contract by which a corporation, in
Sec. 2(b). The term doing an insurance consideration of a stipulated amount,
business or transacting an insurance agrees at its own expense to defend a
business includes: physician against all suits for damages
(1) Making or proposing to make, as insurer, for malpractice is one of insurance, and
any insurance contract; the corporation will be deemed as
engaged in the business of insurance
(2) Making or proposing to make, as surety, since the purpose of the contract is to
any contract of suretyship as a vocation indemnify against loss and damage.
and not as merely incidental to any other
legitimate business or activity of the A Protection and Indemnity agreement is
surety; a form of insurance against third party
liability where an association of ship owners
(3) Doing any kind of business, including a in general band together for the specific
reinsurance business, specifically purpose of providing insurance cover on a
recognized as constituting the doing of mutual basis against liabilities incidental to
an insurance business within the ship owning that the members incur against
meaning of the Insurance Code; third parties. In Pandiman Philippines v.
(4) Doing or proposing to do any business in Marine Manning Management, [G.R. No.
substance equivalent to any of the 143313 (2005)] the Court considered a P & I
foregoing in a manner designed to evade agreement as an insurance contract.
the provisions of the Insurance Code.
In the application of the provisions of this C. GOVERNING LAW
Code, the fact that no profit is derived from
the making of insurance contracts, The Insurance Code primarily governs
agreements or transactions or that no insurance contracts, unless there is a special
separate or direct consideration is received law which specifically govern (e.g., insurance
therefor, shall not be deemed conclusive to contract under R.A. 1161 or the Social Security
show that the making thereof does not Act), in which case, the Insurance Code
constitute the doing or transacting of an governs subsidiarily.
insurance business Matters not expressly provided for in the
Insurance Code and special laws are
regulated by the Civil Code.
General rule: An insurance business
consists in undertaking, for a consideration, to
indemnify another against loss, damage or D. PARTIES TO AN INSURANCE
liability arising from an unknown or CONTRACT
contingent event.
Sec. 6 Every person, partnership, association,
Exception: Those not formally designated or corporation duly authorized to transact
as insurance businesses but are deemed insurance business as elsewhere provided in
doing or transacting an insurance business this code, may be an insurer.
as listed in Sec. 2(b).
Sec. 7 Anyone except a public enemy may be
In Philippine Health Care Providers Inc. v. CIR insured.
[G.R. No. 167330 (2009)]the Court clarified
that: There is no definition of what a public enemy
is, but a definition that is generally accepted
(1) Contracts a law firm enters into with and in keeping with the nature of an
clients whereby in consideration of insurance contract is one where a person
periodical payments, the law firm possesses the nationality of the state which
promises to represent such clients in all another is at war [Carale (2014)]
suits for or against them are not
PAGE 60 OF 320

E. BANCASSURANCE Pre-need plans are governed by the Pre-Need

Code (RA 9829). They are not considered as
RA 10607 introduced provisions governing insurance contracts because
1) Pre-need plans can have insurance
Sec. 375. The term bancassurance shall mean coverage, implying that they are separate
the presentation and sale to bank customers contracts
by an insurance company of its insurance 2) Pre-need plans do not involve unknown or
products within the premises of the head office contingent events but events certain to
of such bank duly licensed by the Bangko happen at a certain time.
Sentral ng Pilipinas or any of its branches
under such rules and regulations which the However, all Pre-need plans are under the
Commissioner and the Bangko Sentral ng primary and exclusive power supervision and
Pilipinas may promulgate. regulation of the Insurance Commission [Sec.
5, RA 9829]. In addition, the Insurance
To engage in bancassurance arrangement, a Commissioner shall have the primary and
bank is not required to have equity ownership exclusive power to adjudicate any and all
of the insurance company. No insurance claims involving pre-need plans. If the
company shall enter into a bancassurance amount of benefits does not exceed
arrangement unless it possesses all the P100,000, which decision shall be final and
requirements as may be prescribed by the executory[Sec. 55, RA 9829].
Commissioner and the Bangko Sentral ng
No insurance product, whether life or non-life, G. HEALTH CARE AGREEMENTS
shall be issued or delivered pursuant to a
bancassurance arrangement, unless in the For purposes of determining the liability of
form previously approved by the a health care provider to its members,
Commissioner. jurisprudence holds that a health care
agreement is in the nature of non-life
insurance, which is primarily a contract of
Sec. 376. Personnel tasked to present and sell indemnity. Once the member incurs hospital,
insurance products within the bank premises medical or any other expense arising from
shall be duly licensed by the Commissioner sickness, injury or other stipulated contingent,
and shall be subject to the rules and the health care provider must pay for the
regulations of this Act. same to the extent agreed upon under the
contract. [Fortune Medicare Inc. v. David
Amorin, G.R. No. 195872 (2014)]

F. PRE-NEED PLANS In Mitsubishi Motors Philippines Salaried

Employees Union v. Mitsubishi Motors
RA 9829 (Pre- Need Code), Sec. 4(B). Pre-need Philippines Corp. [G.R. 175773(2013)], the
plans are contracts, agreements, deeds or Court held that there can be no recovery from
plans for the benefit of the planholders which an insurance clause under a CBA if there was
provide for the performance of future already recovery under a Health Care
services, payment of monetary considerations agreement since the court considered the
or delivery of other benefits at the time of agreement as a non-life insurance contract.
actual need or agreed maturity date, as NOTE: In the earlier case of Philippine Health
specified therein, in exchange for cash or Care Providers Inc. v. CIR [G.R. No. 167330
installment amounts with or without interest (2009)], the Court held that Health
or insurance coverage and includes life, Maintenance Organizations, which enter into
pension, education, interment and other Healthcare agreements are not in the
plans, instruments, contracts or deeds. business of insurance

PAGE 61 OF 320

II. Elements of an D. CONSIDERATION

An insurance premium is the agreed price for
Insurance Contract assuming and carrying the risk. It is the
consideration paid to the insurer for
undertaking to indemnify the insured against
A. IN GENERAL a designated peril. It is based on probability
of loss and extent of liability. [43 Am. Jur. 2d
(1) Subject matter what the insured has an 326]
insurable interest in;
Premiums are different from assessments. An
(2) Cause event or peril insured against; assessment, in insurance law, is a sum
(3) Risk of loss or damage being assured specifically levied by mutual insurance
by the Insurer companies or associations, upon a fixed and
definite plan, to pay losses and expenses.
(4) Consideration premium payments [Sec. 403] While premiums are levied and
paid by the insured paid to meet anticipated loss, assessments
(5) Risk-Distributing Schem e are collected to meet actual loss. [Vance on
distribute and transfer by the insurer of Insurance (1951)]
risk of loss, damage or liability among
persons having similar risks;
(6) A Meeting of Minds of the parties
upon all the foregoing essentials. Insurance contracts serve to distribute the
risk of economic loss, damage or liability
among as many as possible of those who are
B. SUBJECT MATTER subject to the same kind of risk. The payment
of premiums by all will inure to a general
The insured must have an insurable interest
fund, out of which payment will be made for
in the subject matter of the insurance
anyone who has suffered an economic loss.
contract or else, it shall be void [Sec. 25]
Hence, each member contributes to a small
Insurable interest is the interest which the degree toward compensation for losses
law requires the owner of an insurance policy suffered by any member of the group.
to have in the person or thing insured.
The unknown event may be past or future.
Insurable interest is not required in industrial Even if the proximate cause of the loss is a
life insurance. [Sec. 235-237] fortuitous event, the insurer may still be liable
if it is the event or peril insured against [De
Leon (2014)]
Cause refers to an event or peril insured
against. The two parties to a contract of insurance
whose minds need to meet regarding the
Peril is the contingent or unknown event essential elements are:
which may cause a loss. Its existence creates
a risk and its occurrence results in loss. The insurer or the party who assumes or
accepts the risk of loss and undertakes for
The event or peril insured against must be consideration to indemnify the insured or to
such that its happening will: pay a certain lump sum on the happening of
(1) Damnify or cause loss to a person having the event or peril insured against, and
insurable interest; or The insured or the person in whose favor the
(2) Create liability against him. [Sec. 3] contract is operative and whose loss is the
occasion for the payment of the insurance
proceeds by the insurer. [De Leon (2014)]

PAGE 62 OF 320

The insured is not always the person whom Exceptions: Insurance contracts particularly
the proceeds are paid. Such person is the liability insurance, may be required by law in
beneficiary. [Vance (1951)] certain instances:
(1) For motor vehicles [Compulsory
Motor Vehicle Liability Insurance,
Secs 386-402, Insurance Code);
III. Characteristics of an (2) For employees [Compulsory Coverage
Insurance Contract in State Insurance Fund, Articles 168-
184, Labor Code];
(3) As a condition to granting a license to
A. IN GENERAL conduct business or calling affecting
the public safety or welfare [De Leon
An insurance contract is:
(1) Consensual;
(4) Social Insurance for members of the
(2) Voluntary; Government Service Insurance
System (GSIS) and for the employees
(3) Aleatory;
of the private Sector covered by the
(4) Executory and unilateral, but Social Security System (SSS).
(5) Conditional;
(6) Contract of indemnity;
It is aleatory because it depends upon some
(7) Contract of adhesion; contingent event. The obligation of the
(8) Personal contract; insurer to pay depends on the happening of
an event which is uncertain, or though certain,
(9) Property; is to occur at an indeterminate time [Article
(10) Uberrimae fides contract (a contract of the 2010, Civil Code].
highest degree of good faith).
It is perfected by the meeting of the minds of Once the insured pays the premium, the
the parties. There must be concurrence of contract already takes effect. After the
offer and acceptance. Unless otherwise payment of premiums, the insurance imposes
stipulated, the policy is not essential to the a unilateral obligation on the insurer who
existence of the contract. It merely evidences promise to indemnify in case of loss.
the terms and conditions thereof [Campos, It is also synallagmatic and reciprocal such
Insurance (1983)] that even if the contingent event or
designated peril does not occur, the insurer
has still provided protection against the risk
C. VOLUNTARY for the period covered by the insurance
General rule: In general, contracts of contract.
Insurance are not compulsory and the parties
are free to incorporate such terms and
conditions they may deem convenient F. CONDITIONAL
provided they are not contrary to law, morals, It is conditional because the insurer incurs
good customs, public order, or public policy. liabilityonly upon the happening of the event
[De Leon (2014)] insured against. However, many other
conditions are usually required (such as
payments of premium or performance of
PAGE 63 OF 320

other act) as precedent to the right of the J. PROPERTY (FOR LIFE INSURANCE)
insured to claim benefit under the insurance.
Life insurance policies, unlike property
insurance, are generally assignable or
transferrable (Sec. 81) as they are in the
nature of property.
The insured who has insurable interest over
the property is only entitled to recover the K. UBERRIMAE FIDES CONTRACT
amount of actual loss sustained. The burden
Each party is required to deal with each other
is upon him to establish the amount of such
in utmost good faith and disclose conditions
affecting the risk, of which he is aware, or any
General rule: Only non-life insurance or material fact which the applicant knows and
property insurance contracts are contracts of those which he ought to know. Violation of
indemnity. Life insurance contracts are not this duty gives the aggrieved party the right
contracts of indemnity because the value of a to rescind the contract. Where the aggrieved
life is immeasurable. party is the insured, the bad faith of the
insurer will preclude it from denying liability
Exception: Where the basis of the insurable
on the policy based on breach of warranty
interest of the policy owner on the life of the
[Campos (1983)].
insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then
such contract is an indemnity contract.


Insurance contracts are already presented to
the insured in its printed form on a take it or
leave it basis. The insured merely has to
agree to its terms. Such contracts of adhesion
are valid. However, ambiguity in such
contracts shall be interpreted liberally in
favor of the insured and strictly against the
insurer who prepared the same.

The contract of insurance is basically
between the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent
of the insurer (Secs 20, 58, and 83).
Property insurance is personal in the sense
that it is the damage to the personal interest
not the property that is being reimbursed.

PAGE 64 OF 320

IV. Classes of Insurance (d) Bridges, tunnels and other

instrumentalities of transportation
and communication (excluding
A. MARINE INSURANCE buildings, their furniture and
furnishings, fixed contents and
A.1. DEFINITION supplies held in storage); piers,
Marine insurance is a type of transportation wharves, docks and slips, and other
insurance which is concerned with the perils aids to navigation and transportation,
of property in, or incidental to, transit as including dry docks and marine
opposed to property perils at a generally railways, dams and appurtenant
fixed location. facilities for the control of waterways.
(2) Marine protection and indemnity
Sec. 101. Marine insurance includes: insurance, meaning insurance against, or
(1) Insurance against loss of or damage to: against legal liability of the insured for
loss, damage, or expense incident to
(a) Vessels, craft, aircraft, vehicles, ownership, operation, chartering,
goods, freights, cargoes, maintenance, use, repair, or construction
merchandise, effects, disbursements, of any vessel, craft or instrumentality in
profits, moneys, Securities, choses in use of ocean or inland waterways,
action, instruments of debts, valuable including liability of the insured for
papers, bottomry, and respondentia personal injury, illness or death or for loss
interests and all other kinds of of or damage to the property of another
property and interests therein, in person
respect to, appertaining to or in
connection with any and all risks or
perils of navigation, transit or
transportation, or while being A.2. DIVISIONS
assembled, packed, crated, baled, Marine insurance has two major divisions:
compressed or similarly prepared for
shipment or while awaiting shipment, (1) Ocean marine insurance insures against
or during any delays, storage, risk connected with navigation, to which a
transhipment, or reshipment incident ship, cargo, freightage, profits or other
thereto, including war risks, marine insurable interest in movable property,
builders risks, and all personal may be exposed during a certain voyage
property floater risks; or a fixed period of time. Its scope
(b) Person or property in connection with
or appertaining to a marine, inland (a) Ships or hulls;
marine, transit or transportation (b) Goods or cargoes;
insurance, including liability for loss
of or damage arising out of or in (c) Earnings such as freight, passage
connection with the construction, money, commissions, or profits; and
repair, operation, maintenance or use (d) Liability (protection and indemnity
of the subject matter of such insurance).
insurance (but not including life
(2) Inland marine insurance covers the land
insurance or surety bonds nor
or over the land transportation perils of
insurance against loss by reason of
property shipped by railroads, motor
bodily injury to any person arising out
trucks, airplanes, and other means of
of ownership, maintenance, or use of
transportation. Italso covers risks of lake,
river or other inland waterway
(c) Precious stones, jewels, jewelry, transportation and other waterborne
precious metals, whether in course of perils outside those covered by ocean
transportation or otherwise; and marine insurance.

PAGE 65 OF 320

A.3. BOTTOMRY AND RESPONDENTIA without the consent of the owner, and to the
DISTINGUISHED prejudice of his interest (e.g., burning the ship,
unlawfully selling the cargo).
No honest error of judgment or mere
A Bottomry loan is a loan that is obtained for
negligence, unless criminally gross, can be
the value of the vessel on a voyage and the
considered as barratry [Roque v. IAC, (1985)]
lender is repaid only if the vessel subject of
the loan arrives safely at its destination. The Exception: The exception to a perils of the
insurable interest of a ship owner on its sea condition for insurer liability is when
bottomed boat is the difference between the there is an all-risk policy [Malayan
amount of the loan and the value of the boat. Insurance Corp v. CA, G.R. No. 119599 (1997)]
Thus, if the amount of the loan does not cover
the total value of the boat, the owner can still
insure the boat. A.4.B. PERILS OF THE SHIP
A Respondentia loan is a loan that is obtained Perils of the ship are those which cause a loss
as Security for the value of the cargo to be which in the ordinary course of events,
transported and the lender is repaid only if results:
the cargo arrives safely at its destination.
(1) From the ordinary, natural and inevitable
action of the sea;
A.4. RISKS (2) From ordinary wear and tear of the ship;
(3) From the negligent failure of the ships
Ocean marine insurance protects ships at sea
owner to provide the vessel with the
and the cargo or freight on such ships from
proper equipment to convey the cargo
standard perils of the sea or perils of
under ordinary conditions. [De Leon
navigation which includes casualties arising
from the violent action of the elements and
does not cover ordinary wear and tear or
other damage usually incident to the voyage.
The mere fact that an injury is due to violence
of some marine force does not necessarily General Rule: In the absence of stipulation,
bring it within the protection of the policy if the risks insured against are only perils of the
such violence was not unusual or unexpected. sea [Go Tiaco y Hermanos v. Union Ins. Society
of Canton, G.R. No. 13983(1919)]
General Rule: The term perils of the sea
extends only to losses caused by sea damage, Exception: However, in an all risk policy, all
or by the violence of the elements, and does risks are covered unless expressly excepted.
not embrace all losses happening at sea. The burden rests on the insurer to prove that
They insure against losses from extraordinary the loss is caused by a risk that is excluded
occurrences only. It thus includes only such [Filipino Merchants Ins. Co. v. CA, G.R. No.
losses as are of extraordinary nature or arise 85141(1989)]
from some overwhelming power which
cannot be guarded against by the ordinary
exertion of human skill or prudence, as A.5. LOSS
distinguished from the ordinary wear and tear Loss may be total or partial.
of the voyage and from injuries suffered by
the vessel in consequence of her not being Total loss may be actual or constructive.
unseaworthy [Roque v. IAC, G.R. No. L-66935,
(1985)] Sec. 132. An actual total loss is caused by:
The phrase also extends to barratry which (a) A total destruction of the thing insured;
refers to the willful and intentional act on the (b) The irretrievable loss of the thing by
part of the master or the crew, in pursuance sinking, or by being broken up;
of some unlawful or fraudulent purpose,
PAGE 66 OF 320

(c) Any damage to the thing which renders it abandoned.

valueless to the owner for the purpose for
which he held it;
(d) Any other event which effectively deprives Actual total loss exists when the subject
the owner of the possession, at the port of matter of the insurance is wholly destroyed or
destination of the thing insured. lost or when it is so damaged as no longer to
exist in its original character. [Vance (1951)]
Constructive total loss or technical total loss
Sec. 133. A constructive total loss is one which
is one in which the loss, although not actually
gives to a person insured a right to abandon,
total, is of such character that the insured is
under Sec. 141.
entitled, if he thinks fit, to treat it as total by
abandonment. [45 CJS 1150]
Sec. 134. An actual loss may be presumed
from the continued absence of a ship without As to when a constructive total loss exists,
being heard of. The length of time which is three rules exist:
sufficient to raise this presumption depends (1) English rule: there is constructive total
on the circumstances of the case. loss when the subject matter of the
insurance, while still existent in specie, is
so damaged as not to be worth, when
Sec. 141. A person insured by a contract of repaired, the cost of the repairs;
marine insurance may abandon the thing
insured, or any particular portion thereof (2) American rule: there is constructive total
separately valued by the policy, or otherwise loss when it is so damaged that the costs
separately insured, and recover for a total of repairs would exceed one-half of the
loss thereof, when the cause of the loss is a value of the thing as acquired; also
peril insured against: known as the fifty percent rule;

(1) If more than three-fourths thereof in (3) Philippine rule: the insured may not
value is actually lost, or would have to be abandon the thing insured unless the loss
expended to recover it from the peril; or damage is more than three-fourths of
its value. [De Leon (2014)]
(2) If it is injured to such an extent as to
reduce its value more than three-fourths;
(3) If the thing insured is a ship, and the A.6. ABANDONMENT
contemplated voyage cannot be lawfully A.6.A. DEFINITION
performed without incurring either an
expense to the insured of more than Sec. 140. Abandonment, in marine insurance,
three-fourths the value of the thing is the act of the insured by which, after a
abandoned or a risk which a prudent man constructive total loss, he declares the
would not take under the circumstances; relinquishment to the insurer of his interest in
or the thing insured.
(4) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured by A.6.B. CONDITIONS
the master, within a reasonable time and
Aside from the requirement under Sec 141
with reasonable diligence, to forward the
already mentioned:
cargo, without incurring either an
expense to the insured of more than (1) An abandonment must be neither partial
three-fourths the value of the thin nor conditional [Sec 142];
abandoned or a risk which a prudent man
(2) An abandonment must be made within a
would not take under the circumstances.
reasonable time after receipt of reliable
But freightage cannot in any case be
information of the loss, but where the
abandoned unless the ship is also
information is of a doubtful character, the
PAGE 67 OF 320

insured is entitled to a reasonable time to (2) If a marine insurer pays for a loss as if it
make inquiry [Sec 142]; were an actual total loss, he is entitled to
whatever may remain of the thing
(3) Abandonment is made by giving notice
insured, or its proceeds or salvage, as if
thereof to the insurer, which may be done
there had been a formal abandonment
orally, or in writing: Provided, That if the
[Sec 149];
notice be done orally, a written notice of
such abandonment shall be submitted (3) Upon an abandonment, acts done in
within seven days from such oral notice good faith by those who were agents of
[Sec 145]; the insured in respect to the thing
insured, subsequent to the loss, are at the
(4) Abandonment must be absolute and
risk of the insurer, and for his benefit [Sec
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves An Average is defined as the extraordinary or
incorrect, or the thing insured was so far accidental expense incurred during the
restored when the abandonment was made voyage for the preservation of the vessel,
that there was in fact no total loss, the cargo or both and all the damages to the
abandonment becomes ineffectual. vessel and cargo from the time it is loaded
and the voyage commenced until it ends and
the cargo is unloaded. [Art. 806, Code of
A valid abandonment has the following There are two kinds of averages:
(1) Gross or general averages; and
(1) There must be an actual relinquishment
(2) Simple or particular averages.
by the person insured of his interest in the
thing insured;
(2) There must be a constructive total loss; Gross averages include damages and
expenses which are deliberately caused by
(3) The abandonment be neither partial nor
the master of the vessel or upon his authority,
conditional [Sec. 142];
in order to save the vessel, her cargo, or both
(4) It must be made within a reasonable time at the same time from a real and known risk.
after receipt of reliable information of the [Art. 811, Code of Commerce] This must be
loss [Sec. 143]; borne equally by all of the interests
concerned in the venture.
(5) It must be factual [Sec. 144];
To claim general average contributions, the
(6) It must be made by giving notice thereof
requisites are:
to the insurer which may be done orally or
in writing [Sec. 145]; and (1) There must be a common danger to the
vessel or cargo;
(7) The notice of abandonment must be
explicit and must specify the particular (2) Part of the vessel or cargo was sacrificed
cause of the abandonment [Sec. 146]. deliberately;
(3) The sacrifice must be for the common
safety or for the benefit of all;
(4) It must be made by the master or upon
(1) An abandonment is equivalent to a
his authority;
transfer by the insured of his interest to
the insurer, with all the chances of (5) It must not be caused by any fault of the
recovery and indemnity [Sec 148]; party asking contribution;

PAGE 68 OF 320

(6) It must be successful (i.e., resulted in the Deviation is proper:

saving of the vessel and/or cargo)
(a) When caused by circumstances over
(7) It must be necessary. [Vance (1951), which neither the master nor the owner of
Magsaysay v Agan, G.R. No. L-6393 the ship has any control;
(1955), Intl. Harvester v Hamburg-
(b) When necessary to comply with a
American Line, G.R. No. L-11515 (1918)]
warranty, or to avoid a peril, whether or
Particular averages include damages and not the peril is insured against;
expenses caused to the vessel or her cargo,
(c) When made in good faith, and upon
which have not inured to the common benefit
reasonable grounds of belief in its
and profit of all the persons interested in the
necessity to avoid a peril; or
vessel and her cargo. [Art. 809, Code of
Commerce] A particular average loss is (e) When made in good faith, for the
suffered by and borne alone by the owner of purpose of saving human life or
the cargo or of the vessel, as the case must relieving another vessel in distress
be.[De Leon (2014)] [Sec. 126]
(3) Implied Warranty of Proper documentation
- Where the nationality or neutrality of a
ship or cargo is expressly warranted, it is
Marine Insurance is unique in that it has implied that the ship will carry the
certain implied warranties requisite documents to show such
nationality or neutrality and that it will
(1) Implied Warranty of Seaworthiness. - In
not carry any documents which cast
every marine insurance upon a ship or
reasonable suspicion thereon [Sec. 122]
freight, or freightage, or upon any thing
which is the subject of marine insurance,
a warranty is implied that the ship is
seaworthy. [Sec. 115]
A vessel is seaworthy if:
(a) It is proper laden B.1. DEFINITION

(b) It is provided with a competent Sec. 169. Fire insurance includes insurance
master against loss by fire, lightning, windstorm,
(c) It is provided with a sufficient number tornado or earthquake and other allied risks,
of competent officers and seamen when such risks are covered by extension to
fire insurance policies or under separate
(d) It is provided with the requisite policies.
appurtenances and equipment
Where different portions of the voyage A fire insurance is a contract of indemnity by
contemplated by a policy differ in respect which the insurer, for a stipulated premium,
to the things requisite to make the ship agrees to indemnify the insured against loss
seaworthy therefor, a warranty of of, or damage to, a property caused by hostile
seaworthiness is complied with if, at the fire.
commencement of each portion, the ship
Fire or other so-called allied risks
is seaworthy with reference to that
portion [Sec. 119] enumerated in Sec. 169 must be the
proximate cause of the damage or loss.
(2) Implied Warranty Against Improper
deviation A Deviation is a departure Fire is oxidation which is so rapid as to
from the course of the voyage insured, or produce either a flame or a glow.
an unreasonable delay in pursuing the Spontaneous combustion is usually rapid
voyage or the commencement of an oxidation. Fire is always caused by
entirely different voyage [Sec.125] combustion, but combustion does not always

PAGE 69 OF 320

cause fire. [Western Woolen Mills Co. v

affected by any act of the insured subsequent
Northern Assurance Co., 139 Fed 637 (1905)]
to the execution of the policy, which does not
The presence of heat, steam, or even smoke is violate its provisions, even though it increases
evidence of fire, but taken by itself will not the risk and is the cause of the loss.
prove the existence of fire.
Fire cannot be considered a natural disaster
or calamity since it almost always arises from Thus, in order that the insurer may rescind a
some acts of man or by human means. It contract of fire insurance for any alteration
cannot be an act of God unless caused by made in the use or condition of the thing
lightning or a natural disaster or casualty not insured, the following requisites must be
attributable to human agency [Phil. Home present:
Assurance Corp. v. CA, G.R. No. 106999
(1) The use or condition of the thing is
specifically limited or stipulated in the
B.2. RISKS (2) Such use or condition as limited by the
policy is altered;
A Hostile fire is one that escapes from the
place where it was intended to burn and (3) The alteration is made without the
ought to be, or one which remains completely consent of the insurer;
within its proper place but because of the
(4) The alteration is made by means within
unsuitable materials used to light it, becomes
the control of the insured; and
inherently dangerous and uncontrollable.
This kind of fire will make the insurer liable.[De (5) The alteration increased the risk. [De
Leon (2014)] Leon (2014)]
A Friendly fire is one that burns in a place
where it is intended to burn and ought to be
Every contract of insurance is made with
like fire burning in a stove or a lamp. [De
reference to the conditions surrounding the
Leon (2014)]
subject matter of the risk [25 CJS 129]. Thus,
Rule: The risk assumed by the insurer is the there is an implied promise or undertaking on
loss and damage caused by hostile fire and the part of the insured that he will not change
not friendly fire. the premises or the character of the business
carried there so as to increase the risk of loss
by fire [44 AmJur 2d 138].
The rule on alteration was strictly applied in
the case of Malayan Insurance Co, Ltd v. Pap
Sec. 170. An alteration in the use or condition
Co, Ltd [G.R. No. 200784 (2013)]: The court
of a thing insured from that to which it is
held that transferring machinery to another
limited by the policy made without the
location, despite a provision in the policy
consent of the insurer, by means within the
stating that the machine cannot be
control of the insured, and increasing the
transferred without the consent of the insurer
risks, entitles an insurer to rescind a contract
is considered an alteration in the condition
of fire insurance
and location of the thing insured. Hence,
Malayan was not liable to Pap.
Sec. 171. An alteration in the use or condition
of a thing insured from that to which it is
limited by the policy, which does not increase
the risk, does not affect a contract of fire (1) In an open policy, only the expense
insurance. necessary to replace the thing lost or
injured in the condition it was at the time
of the injury will be paid;
Sec. 172. A contract of fire insurance is no
PAGE 70 OF 320

(2) In a valued policy, the parties are marine, suretyship and life. It includes, but is
bound by the valuation, in the absence of not limited to, employers liability insurance,
fraud or mistake, similar to marine workmens compensation insurance, public
insurance. [Sec. 173] liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary
If there is a valuation, the effect shall be
and theft insurance, personal accident and
similar to a marine insurance policy wherein
health insurance as written by non-life
the valuation is conclusive between the
insurance companies, and other substantially
parties in adjusting the loss [Sec. 158]
similar kinds of insurance (e.g., robbery and
In the absence of express valuation in a fire theft insurance).
insurance policy, the insured is only entitled
It is governed by the general provisions
to recover the amount of actual loss
applicable to all types of insurance plus
sustained and the burden of proof is upon
stipulations in the insurance contract
him to establish the amount of such loss by
[Fortune Insurance & Surety Co v. CA G.R. No.
preponderance of evidence.
115278 (1995)]
Where the face value of the policy is less than
the agreed valuation, then even in case of
total loss, the insured can only recover up to C.2. INTENTIONAL AND ACCIDENTAL
the policys face value, which is always the INJURY DISTINGUISHED
maximum limit of the insurers liability [Tan
Intentional implies the exercise of the
Chuco v. Yorkshire Fire & Life Ins. Co.G.R. No.
reasoning faculties, consciousness and
volition. Where a provision of the policy
In an open policy, the actual loss, as excludes intentional injury, it is the intention
determined, will represent the total of the person inflicting the injury that is
indemnity due the insured except only that controlling. If the injuries suffered by the
the total indemnity shall not exceed the total insured clearly resulted from the intentional
value of the policy [Devt. Ins. Corp. v. IAC, G.R. act of the third person, the insurer is relieved
No. 71360 (1986)] from liability as stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
C. CASUALTY INSURANCE design, which is unexpected, unusual and
C.1. DEFINITION unforeseen. The terms do not, without
qualification, exclude events resulting in
Sec. 176. Casualty insurance is insurance damage due to fault, recklessness or
covering loss or liability arising from accident negligence of third parties. The concept is not
or mishap, excluding certain types of loss necessarily synonymous with no fault. It
which by law or custom are considered as may be utilized simply to distinguish
falling exclusively within the scope of other intentional or malicious acts from negligent
types of insurance such as fire or marine. It or careless acts of man.
includes, but is not limited to, employers
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary C.3. DIVISIONS
and theft insurance, personal accident and Casualty insurance has two general divisions:
health insurance as written by non-life liability and indemnity insurance.
insurance companies, and other substantially
similar kinds of insurance.
Under policies of this type, the insurer
Casualty insurance includes all forms of assumes the obligation to pay the third party
insurance against loss or liability arising from in whose favor the liability of the insured
accident or mishap excluding certain types of arises. The liability of the insurer attaches as
loss or liability which are not within the scope soon as the liability of the insured to the third
of other types of insurance such as fire,
PAGE 71 OF 320

party is established. It covers liability incurred miscarriage of the principal or obligor, such
from quasi-delict or criminal negligence but as failure to perform, or breach of trust,
cannot cover deliberate criminal acts. [De negligence and the like, in favor of a third
Leon (2014)] party.
It shall be deemed as insurance contract if
the suretys main business is that of
suretyship, and not where the contract is
Under this kind of insurance, no action will lie merely incidental to any other legitimate
against the insurer unless brought by the business or activity of the surety.
insured for loss actually sustained and paid
The contract of a surety is evidenced by a
by him. Liability of the insurer attaches only
document called surety bond which is
after the insured has paid his liability to the
essentially a promise to guarantee the
third party. [De Leon (2014)]
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor
of the insurer. [De Leon (2014)]
It is an accessory contract unlike a contract of
A no action clause is a requirement in a policy
insurance which is the principal contract itself.
of liability insurance which provides that a
suit must first be instituted and a final The liability of the surety or sureties under a
judgment be first obtained against the bond is joint and several, or solidary[Sec. 178].
insured; that only thereafter can the person This means that upon the default of the
injured recover on the policy [Guingon v. Del principal obligor, the surety becomes
Monte, G.R. No. L-22042(1967)] primarily liable. Unlike a guarantor, a surety
is not entitled to the benefit of exhaustion of
But, the no-action clause cannot prevail over
the principal obligors assets and assumes a
the Rules of Court provisions which are aimed
regular party to the undertaking.
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as It is limited or fixed to the amount of the bond.
defendants in a case commenced by the third
What is unique to a contract of suretyship is
party claiming under a liability insurance, as
that when the obligee accepts the bond, the
the right to relief in respect to the same
bond becomes valid and enforceable whether
transactions is alleged to exist [See Sec 5,
or not the premium has been paid by the
Rule 2 and Sec 6, Rule 3, 1997 Rules of Civil
obligor unlike in an insurance contract where
payment of premium is necessary for the
contract to be valid. If the obligee has not yet
accepted, then payment of premium is still
D. SURETYSHIP necessary for the contract of suretyship to be
Sec. 177. A contract of suretyship is an
agreement whereby a party called the surety
guarantees the performance by another party
called the principal or obligor of an obligation
or undertaking in favor of a third party called E.1. DEFINITION
the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by Sec. 181. Life insurance is insurance on human
any company by virtue of and under the lives and insurance appertaining thereto or
provisions of Act. No 536, as amended by connected therewith.
Every contract or undertaking for the
payment of annuities including contracts for
the payment of lump sums under a
A suretyship is an agreement whereby a retirement program where a life insurance
surety guarantees the performance or company manages or acts as a trustee for
undertakes to answer, under specified terms such retirement program shall be considered
and conditions, for the debt, default or
PAGE 72 OF 320


a life insurance contract for purposes of the
Insurance Code.
Sec. 235. The term Industrial life insurance as
used in this code shall mean that form of life
insurance under which the premiums are
Sec. 182. An insurance upon life may be made
payable either monthly or oftener, if the face
payable on the death of the person, or on his
amount of insurance provided in any policy is
surviving a specified period, or otherwise
not more than 500 times that of the current
contingently on the continuance or cessation
statutory minimum daily wage in the City of
of life.
Manila, and if the words industrial policy are
Every contract or pledge for the payment of printed upon the policy as part of the
endowments or annuities shall be considered descriptive matter.
a life insurance contract for purposes of the
Insurance Code.
Industrial life insurance refers to an insurance
policy which provides insurance coverage to
E.2. TYPES industrial workers or people who are unable
to afford insurance for bigger amounts.
Unlike an ordinary life insurance policy, this
kind of insurance shall not lapse after non-
Insurance on human lives and insurance payment of premiums in 3 months after the
appertaining thereto or connected therewith. expiration of the grace period, if such non-
It may be made payable on the death of the payment is due to the failure of the company
person, or after his surviving a specified to send its representatives to the insured to
period (as an annuity or endowment), or collect premium. (Sec. 235 & Carale [2014])
otherwise contingently on the continuation or
cessation of life.

E.2.B. GROUP LIFE Sec. 187. Microinsurance is a financial product

or service that meets the risk protection
It is a blanket policy covering a number of
needs of the poor, where:
individuals who are usually a cohesive group
(e.g., employees of a company) and subjected The amount of contributions, premiums, fees
to a common risk. No medical examination is or charges, computed on a daily basis, does
usually required of each person insured (in not exceed 7.5% of the current daily
contrast to individual life insurance). minimum wage rate for nonagricultural
workers in Metro Manila; and
Group insurance is a single insurance
contract that provides coverage for many The maximum sum of guaranteed benefits is
individuals. The employer-policy holder is the not more than 1,000 times of the said current
agent of the insurer in collecting the premium. daily minimum wage rate.
[Pineda v. CA, G.R. No. 105562 (1993)]
Typically, the policy owner is an employer and
Sec. 188. No insurance company or mutual
the policy covers the employees or members
benefit association shall engage in the
of the group, with one master contract kept
business of Microinsurance unless it
by the employer. Where the employee is
possesses all the requirements as may be
required to pay a portion of the premium, the
prescribed by the Commissioner, who shall
arrangement is called a contributory plan,
issue such rules and regulations governing
wherein his share is deducted from his wages
[Carale (2014)]

PAGE 73 OF 320

E.3. EXAMPLES OF LIFE INSURANCE policy if he outlives the designated

POLICIES period. If he dies within said period,
the insurer pays the proceeds to the
(1) Ordinary or whole life policy, where
beneficiary. This is a combination of
the insurer agrees to pay the face value of
term policy and pure endowment
the policy upon the death of the insured;
Distinct variations of Whole Life Policy:
(2) Term Life Insurance,which provides for
(A) Ordinary Life Insurance Premiums the payment of a specified amount if
are paid throughout the lifetime of death occurs within the time period
the person insured or until the person designated in the policy, usually for
reaches a predetermined specified periods of one to five years.
age at which point the coverage
(3) Modified Life Insurance, which is a
continues without the payment of
policy that combines terms and whole life
additional premiums.
insurance into a single insurance policy.
(B) Limited Payment Life Insurance Premiums paid by the insured are
Premiums are paid only during a substantially less during the first few
specified number of years or until a years then later on increases during the
specified event occurs. remaining term of the policy.
(C) Single Premium Life Insurance the (4) Group Life Insurance, which is a type
coverage is acquired by the payment of life insurance in which a single contract
of a single premium. covers an entire group of people.
(D) Joint Life Insurance coverage is
payable upon the first death among
two or more insured (normally
purchased by business partners or
spouse) and paid to the survivor.
(E) Universal Life Insurance E.4.A. DEATH OR SURVIVAL
emphasizes the separation of the
Life insurance may be made payable on the
portion of the premium that is used to
death of the person, or on his surviving a
cover the insurance protection from
specified period, or otherwise contingently on
the portion of the premium allocated
the continuation or cessation of life [Campos
to an investment.
(F) Variable Life Insurance some
Death of the insured must be proven by the
amount of death benefit provided by
beneficiary before the insurer can be made to
a variable life insurance policy is
guaranteed by the insurer, but the
total death benefit and the cash value
of the insurance before death depend
on the investment performance of
that portion of the premium which is Insurer is liable in any of the following cases:
allocated to a separate fund. (1) If committed after two years from the date
(G) Pure endowment policy where of the policys issue or its last
theinsurer pays the insured if the reinstatement. Unless the policy provides
insured survives a specified period. If for a shorter period. Any stipulation
the insured dies within the period, the extending the 2-year period is void;
insurer is released from liability and (2) If committed in a state of insanity
unless the contract otherwise regardless of the date of the commission
provides, need not reimburse any part unless suicide is an excepted peril;[Sec.
of the premiums paid; 183]
(H) Endowment policy where the
insured is paid the face value of the
PAGE 74 OF 320

Since suicide is contrary to the laws of the death or injury is not the natural or
nature and the ordinary rules of conduct, it is probable result of the insureds voluntary act,
never presumed. The burden of proving lies or if something unforeseen occurs in the
with the insurer who seeks to avoid liability doing of the act which produces the injury,
under a life policy excepting it from coverage the resulting death is within the protection of
[Campos (1983)] the policies insuring against death or injury
from accident [Carale(2014)]


Death at the hands of the law (e.g., legal LIABILITY INSURANCE
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance Sec. 387. It shall be unlawful for any land
(1951)] transportation operator or owner of a motor
vehicle to operate the same in the public
highways unless there is in force in relation
E.4.D. KILLING BY THE BENEFICIARY thereto a policy of insurance or guaranty in
cash or surety bond issued in accordance with
General rule: The interest of a beneficiary
the provisions of this chapter to indemnity the
in a life insurance policy shall be forfeited
death, bodily injury and/or damage to
when the beneficiary is the principal
property of a third-party or passenger, as the
accomplice or accessory in willfully bringing
case may be, arising from the use thereof.
about the death of the insured. In such event,
the other beneficiaries so named shall receive
their share and divide among them the
forfeited share of the guilty beneficiary. In Compulsory motor vehicle liability insurance
the absence of other beneficiaries, proceeds is a policy of insurance or guaranty in cash or
shall be paid according to the policy contract, surety bond to indemnify the death, bodily
and if silent, it shall be paid to the estate of injury, and/or damage to property of a third-
the insured[Sec. 12] party or passenger arising from the use of a
motor vehicle.
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
(1) Accidental killing; transportation operator or owner [Sec. 390].
(2) Self-defense; It is the only type of compulsory insurance
provided for under the Insurance Code.
(3) Insanity of the beneficiary at the time he
It is a species of compulsory insurance that
killed the insured;
provides for protection coverage that will
(4) Negligence. answer for legal liability for losses and
Note: Conviction of the beneficiary is damages for bodily injuries or property
necessary before his interest in the insurance damage that may be sustained by another
policy is forfeited in favor of the others arising from the use and operation of motor
indicated in Sec 12. vehicle by its owner. It applies to all vehicles
whether public or private vehicles.
To the extent that motor vehicle insurance is
E.4.D. ACCIDENTAL DEATH compulsory, it must be a liability policy, and
The terms accident and accidental means the provision making it merely an indemnity
have yet to acquire a technical meaning. In insurance contract cannot have any effect
general they have been taken to mean that [Campos (1983)]
they happen by chance or fortuitously, The insurers liability is direct and primary so
without intention and design and are the insurer need not wait for final judgment
unexpected, unusual, and unforeseen. Where in the criminal case to be liable. The purpose
PAGE 75 OF 320

is to give immediate financial assistance to

victims of motor vehicle accidents and/or V. Insurable Interest
their dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for A. IN GENERAL
the accident sustained [Shafer v. Judge, RTC In general, an insurable interest is that
Olongapo, G.R. No. 78848 (1988)] interest which a person is deemed to have in
The claimants/victims may be a passenger or the subject matter insured, where he has a
a third party. The insured may be the party at relation or connection with or concern in it,
fault as against claims of third parties (third such that the person will derive pecuniary
party liability) or the victim of the contingent benefit or advantage from the preservation of
event. the subject matter insured and will suffer
pecuniary loss or damage from its destruction,
The following clauses are relevant to termination, or injury by the happening of the
compulsory motor vehicle liability insurance: event insured against. The existence of an
(1) Authorized driver clause is a stipulation in insurable interest gives a person the legal
a motor vehicle insurance policy which right to insure the subject matter of the policy
provides that the driver, other than the of insurance [Lalican v. Insular Life Ins., G.R.
insured owner, must be duly licensed to No. 183526 (2009)]
drive the motor vehicle, otherwise the An insurable interest is one of the most basic
insurer is excused from liability; and essential requirements in an insurance
(2) Theft clause is a stipulation including contract. As such, it may NOT be waived by
theft as one of the risks insured against. If stipulation. Absence of insurable interest
there is such a provision and the vehicle renders the insurance contract void. [See Sec.
was unlawfully taken, the insurer is liable 25]
under the theft clause and the authorized The insurable interest need not always be
driver clause does not apply. The insured pecuniary in nature (such as by insuring the
can recover even if the thief has no life of a person) [Lucena v Crawford, 2Bos &
drivers license. PNR 269 (1806)].
(3) No Fault Clause is a provision required in
every compulsory motor vehicle liability
insurance regarding claims for death or Rationale:
injury to a passenger or third party on a (1) As a deterrence to the insured. A policy
liability insurance policy covering the issued to a person without interest is a
vehicle. mere wager policy or contract and is void
Any claim for death or injury to any passenger for illegality. A wager policy is obviously
or third party shall be paid without the contrary to public interest. [De Leon
necessity of proving fault or negligence of any (2014)]
kind, provided the total indemnity in respect There is a moral hazard in removing
of any person shall not exceed P15,000. insurable interest as a requirement for
The claim shall be made against only one the validity of an insurance policy It
motor vehicle. It shall lie against the insurer allows the insured to have an interest in
of the vehicle in which the occupant is riding, the destruction of the subject matter
and no other. The claimant is not free to rather than in its preservation.
choose from which insurer he will claim the (2) As a measure of limit of recovery. The
no fault indemnity. [Perla Compania de insurable interest is the measure of the
Seguros v. Ancheta, G.R. No. L-49699 (1988)] upper limit of his provable loss under the
contract. Sound public policy requires
that insurance should not provide the
insured means of making a net profit
from the happening of the event insured
against. [De Leon (2014)]
PAGE 76 OF 320

(3) A change in the interest in one or more of

several things, separately insured by one
policy, such as a conveyance of one or
more things, does not affect the policy
Policy Insurable interest required with respect to the others not so
conveyed [Sec. 22];
Intervening Occurrence
Inception (4) A change of interest by will or succession
period of loss
on the death of the insured. The death of
Life or the insured does not avoid insurance
P policy. It does not affect the policy except
his interest passes to his heir or legal
Property P P representative who may continue the
insurance policy on the property by
continuing paying premiums [Sec. 23];
For Life Insurance:Insurable interest over (5) A transfer of interest by one of several
life/health mustexist at the time of the partners, joint owners, or owners in
inception of the contract but may be lost common, who are jointly insured, to the
after.[Sec. 19] others. This does not avoid the insurance.
It will avoid the policy only as to the
For Property Insurance: Insurable
selling partners or co-owners but not as
interest must exist at the time of the
to others. The rule applies even though it
inception of the contractand at the
has been agreed that the insurance cease
occurrence of the loss. But it need not exist
upon alienation of the thing [Sec. 24];
during the intervening period or from the
time between when the policy takes effect (6) Automatic transfers of interest in cases in
and the loss occurs. The alienation of insured which the policy is so framed that it will
property will not defeat a recovery if the inure to the benefit of whosoever may
insured has subsequently reacquired the become the owner of the interest insured
property and possesses an insurable interest during the circumstance of the risk [Sec.
at the time of loss [Sec. 19 and Womble v. 57]. It is an exception to the general rule
Dubuque Fire &Marine Ins. Co.310 Mass. 142, that upon maturity, the proceeds of a
144-145 (1941)] policy shall be given exclusively to the
proper interest if the person in whose
name or for whose benefit it is made.
(7) An express prohibition against alienation
Change of interest means the absolute in the policy [Article 1306, Civil Code], in
transfer of the property insured. which case alienation will not merely
General rule:A change of interest in the suspend the contract but avoid it entirely.
thing insured does not transfer the policy, but
suspends the insurance to an equivalent
extent until the interest in the thing and the B. IN LIFE/HEALTH INSURANCE
interest in the insurance policy are vested in
the same person. Thus, the contract is not Sec. 10.Every person has an insurable interest
rendered void but is merely suspended [Sec. in the life and health:
20] (1) Of himself, of his spouse and of his
Exceptions: children;

(1) Life, health, and accident insurance; (2) Of any person on whom he depends
wholly or in part for education or
(2) A change of interest in the thing insured support, or in whom he has a
after the occurrence of an injury which pecuniary interest;
results in a loss does not affect the policy
[Sec. 21]; (3) Of any person under a legal

PAGE 77 OF 320

whenever the insured has a responsible

obligation to him for the payment of
expectation of deriving benefit from the
money, or respecting property or
continuation of the life of the other person or
services, of which death or illness
of suffering detriment through its termination.
might delay or prevent the
performance; and There is no insurable interest in the life of an
illegitimate spouse.
(4) Of any person upon whose life any
estate or interest vested in him A creditor may take out insurance on the life
depends. of his debtor but his insurable interest is only
up to the amount of the debt and only when
the debt is unsecured. [Carale (2014)]
Unless the interest of a person insured is An assignee of the insurance contract is not
susceptible of exact pecuniary measurement, required to have insurable interest in the life
the measure of indemnity under a policy of of the insured. To require such interest in him
insurance upon life or health is the sum fixed is to diminish the investment value of the
in the policy. [Sec. 186] contract to the owner.
Life insurance policies may be divided into Note: An assignment of the insurance
two general classes: contract is different from a change in the
designated beneficiary.
(1) Insurance upon ones life;
(2) Insurance upon life of another.
A beneficiary is the person named or
designated in a contract of life, health, or
B.1.A. INTEREST IN ONES OWN accident insurance as the person who is to
LIFE receive the proceeds or benefits which
become payable, according to the terms of
The Cestui que vie is the insured himself. The the contract, if the insured risk occurs.
insured can designate anyone to be the
beneficiary of the policy. General rule: A person may designate a
beneficiary, irrespective of the beneficiarys
Each person has unlimited interest in his own lack of insurable interest, provided he acts in
life, whether the insurance is for the benefit of good faith and without intent to make the
himself or another. [40 CJS 909] transaction merely a cover for a forbidden
The beneficiary designated need not have any wagering contract [De Leon (2014)]
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and Exceptions:Any person who is forbidden
names himself as the beneficiary, he must from receiving any donation under Article 739,
have insurable interest therein. [De Leon Civil Code cannot be named beneficiary of a
(2014)] life insurance policy by the person who
cannot make any donation to him. [Article
2012, Civil Code]
In life insurance, unless based on commercial Sec. 739, Civil Code: The following donations
relationship, the policy owner does not are void:
necessarily have pecuniary interest on the (1) Those made between persons who were
life of the cestui que vie. A mere relationship is guilty of adultery or concubinage at the
a sufficient interest to be insured. time of the donation;
The insurable interest must be based on (2) Those made between persons found
moral and legal grounds. Such interest exists guilty of the same criminal offense, in
PAGE 78 OF 320

There is no right of subrogation in life

consideration thereof;
insurance, because it is not a contract of
(3) Those made to a public officer or his wife, indemnity.
descendants and ascendants, by reason
of his office.

General Rule: The insured shall have the Sec. 13. Every interest in property, whether
right to change the beneficiary he designated real or personal, or any relation thereto, or
in the policy [Sec. 11] liability in respect thereof, of such nature that
a contemplated peril might directly damnify
Exception: If the insured expressly waived the insured, is an insurable interest.
his right to change the beneficiary, this
makes the latter an irrevocable beneficiary.
But despite the waiver, he can still change Sec. 14. An insurable interest in property may
the beneficiary, provided he obtained the consist in:
beneficiarys consent. [Sec. 11]
(1) An existing interest;
Under the Slayer Statute, when the
(2) An inchoate interest founded on an
beneficiary is the principal, accomplice or
accessory in willfully bringing about the death existing interest; or
of the insured, interest of beneficiary in life (3) An expectancy, coupled with an
insurance policy is forfeited [Sec. 12] existing interest in that out of which
the expectancy arises.


General rule: Interest in the life or health of A person has an insurable interest in property
a person must exist at the inception of the when he sustains such relation with respect
insurance contract but need not exist to it that he has a reasonable expectation of
thereafter or when the loss occurs. [Sec. 19] benefit to be derived from its continued
Exceptions: existence, or of loss or liability from its
destruction [Carale, (2014)]
(1) In the case of a creditors insurance taken
on the life of the debtor, insurable The insurable interest may be in the property
interest disappears once the debt has itself (e.g., ownership), or any relation thereto
been paid. At this point, the (e.g., interest of a trustee or a commission
creditor/insured can no longer recover on agent), or liability in respect thereof (e.g.,
the policy; interest of a carrier or depository of goods).

(2) In the case of a companys insurance (1) An existing interest - may be a legal title
taken on the life of an employee, or equitable title. Examples of those
insurable interest disappears once the having existing interest are owners as
employee leaves the company, in which regards their properties, trustees in the
case, the company can no longer recover case of the seller of property not yet
on the policy. delivered, mortgagors over the property
mortgaged, and lessor, lessee and sub-
lessee over the property leased.
B.3. TRANSFER OF POLICY (2) An inchoate interest must be founded on
The life insurance policy can be transferred existing interests. It exists but is
whether the transferee has insurable interest incomplete or unripe until the happening
or not. Notice of the transfer to the insurer is of an event. Examples of inchoate
not required for the validity of the same. [Sec. interests are the interest of stockholders
184 and 185] with respect to dividends in case of profits
and shares in the assets, and the interest

PAGE 79 OF 320

of a partner in the properties belonging by one policy. This does not avoid the
to the partnership. insurance as to the others [Sec. 22];
(3) An expectancy must be coupled with an (3) A change in interest by will or succession
existing interest out of which the upon the death of the insured [Sec. 23]
expectancy arises. For example, a farmer
(4) A transfer of interest by one of several
who planted crops has insurable interest
partners, joint owners, or owners in
over his harvest which can be expected.
common who are jointly insured. The
[De Leon (2014)]
acquiring co-owner has the same
A mere contingent or expectant interest in interest; his interest merely increases
anything, not founded on an actual right to upon acquiring other co-owners interest
the thing, nor upon any valid contract for it, is (Sec. 24).
not insurable. [German Insurance v. Hyman,
34 Neb. 704, 52 N.W. 401 (1982)]
A son has no insurable interest over the
property of his father because such is just a The policy cannot be transferred without the
mere expectancy and has no legal basis insurers consent, because the insurer has
before he inherits such property. approved the policy based on the personal
qualifications and insurable interest of the
Insurable interest in property may be based
on a perfected contract of sale, vesting an
equitable title even before delivery of the When there is an express prohibition against
goods. [Filipino Merchants Ins. Co. v. CA, alienation in the policy, and there is
(1989)] alienation, the contract of insurance is not
merely suspended but avoided.
When the seller retains ownership only to
ensure that the buyer will pay its debt, the
risk of loss is borne by the buyer. Insurable
interest in property does not imply a property
interest in, or a lien upon, or possession of the Being a contract of indemnity, the measure of
subject matter of the insurance, and neither insurable interest in property is the extent to
ownership nor a beneficial interest is requisite which the insured might be damnified by the
to the existence of such an interest. Anyone loss of injury thereof. [Sec. 17] The insured
has an insurable interest in property who cannot recover a greater value than that of
derives a benefit from its existence or would his actual loss because it would be a
suffer loss from its destruction [Gaisano wagering policy contrary to public policy and
Cagayan Ins. v. Ins. Co. of North America, G.R. void.
No. 14379(2006)]


General rule:Interest in property insured Property Life
must exist both at inception and at time of
loss, but not in the intervening period. [Sec. Extent
Limited to actual Unlimited (save in
value of the interest life insurance
(1) A change in interest over the thing thereon effected by a
insured after the loss contemplated. The creditor on the life
insured may sell the remains without of the debtor
prejudice to his right to recover [Sec. 21]; amount of debt
(2) A change of interest in one or more
several distinct things, separately insured

PAGE 80 OF 320

Property Life (4) The same interest insured; and

(5) The same risk or peril insured against
Existence [Malayan Insurance v Philippine First
Must exist when the Must exist at the Insurance, G.R. No. 184300 (2012)]
insurance takes time the insurance
effect and when the takes effect, BUT
Double insurance is not prohibited under the
loss occurs, BUT need not exist
law, unless the policy contains a stipulation to
need not exist in the thereafter
the contrary. Usually, insurance policies
contain other insurance clause which
Expectation of benefit to be derived requires disclosure of other existing insurance
policy. In such case, non-disclosure will avoid
Must have legal Need not have legal the policy. Such clause is intended to prevent
basis basis over insurance and thus avert the
perpetration of fraud.
Interest of beneficiary If there is double insurance and loss occurs,
each of the insurers will be liable only up to
Must have insurable Need not have
the face value of their respective policies and
interest over the insurable interest
the insured has the option of choosing the
thing insured over the life of the
order by which he will claim from the insurers.
insured if the
insured himself Over-insurance occurs when the value of the
secured the policy. insurance exceeds the value of the insurable
But if the insurance interest. Over-insurance is not per se void but
was obtained by the recovery is allowed only to the extent of the
beneficiary, the loss or damage incurred by the insured
latter must have [Carale (2014)]
insurable interest
If there is over-insurance and loss occurs,
over the life of the
then the insurers will pay pro-rata (or in the
insured [Sundiang
order as stated in contract or excess clause)
and Aquino,
in case of loss.
Reviewer on
Commercial Law Nonetheless, under Sec. 64(f), an insurer may
(2013)] cancel an insurance policy, other than life,
based on a discovery of other insurance
coverage that makes the total insurance in
excess of the value of the property insured
subject to the requirement of prior notice.
Also, under Sec. 83, in case of an over
insurance by several insurers other than life,
D.1. DOUBLE INSURANCE the insured is entitled to a ratable return of
the premium, proportioned to the amount by
Sec. 95. Double insurance exists where the which the aggregate sum insured in all the
same person is insured by several insurers policies exceeds the insurable value of the
separately in respect to the same subject and thing at risk.

Requisites: D.2. RULES FOR PAYMENT

(1) The same person is insured; Sec. 96 enunciates the principle of
(2) Two or more insurers insuring contributionwhich requires each insurer to
separately; contribute ratably to the loss or damage
considering that the several insurances cover
(3) The same subject matter; the same subject matter and interest against
PAGE 81 OF 320

the same peril. If the loss is greater than the D.4.B. REINSURANCE TREATY AND
sum total of all the policies issued, each POLICY DISTINGUISHED
insurer is liable for the amount of his policy.
A reinsurance treaty is an agreement
between two insurance companies whereby
one agrees to cede and the other to accept
reinsurance business pursuant to provisions
specified in the treaty. [De Leon (2014)]
Double insurance Over insurance
A reinsurance policy is a contract of
Amount of Amount of indemnity one insurer makes with another to
protect the first insurer from a risk it has
insurance may or insurance exceeds
may not exceed the the value of the already assumed.
value of the insureds insurable Reinsurance treaties and reinsurance policies
insureds insurable interest are not synonymous. Treaties are contracts
interest for insurance; policies are contracts of
insurance. [Philamlife v. Auditor General, G.R.
There are always There may be one or No. 19255(1968)]
several insurers more insurers



Sec. 97. A contract of reinsurance is one by Double insurance Reinsurance

which an insurer procures a third person to
Same interest Different interest
insure him against loss or liability by reason
of such original insurance. Insurer remains as Insurer becomes the
the insurer insured in relation
to the reinsurer
Sec. 99. A reinsurance is presumed to be a
contract of indemnity against liability, and Insured is a party in The original insured
not merely against damage. interest in the is not a party in the
insurance contracts reinsurance contract
Sec. 100. The original insured has no interest Property is the The original
in a contract of reinsurance. subject matter insurer's risk is the
subject matter

Reinsurance has been referred to as an Insured has to give Insureds consent is

insurance of an insurance. his consent not necessary


The Insurance Code recognizes that both the
The original insurance contract is separate mortgagor and mortgagee have each
and distinct from the reinsurance contract. separate and distinct insurable interest in the
An original insurance contract covers mortgaged property and that they may take
indemnity against damages, while out separate policies with the same or
reinsurance covers indemnity against liability. different insurance companies. Consequently,
insurance taken by one on his own name only
does not inure to the benefit of the other. [Sec.

PAGE 82 OF 320

Thus, a mortgagor has an insurable interest E.2. UNION MORTGAGE OR STANDARD

equal to the value of the mortgaged property MORTGAGE CLAUSE
and a mortgagee, only to the extent of the
This clause is similar to an open loss payable
debt Secured by the mortgage. [Geagonia v.
clause, except that it is stipulated that the
CA, G.R. No. 114427(1995)]
acts of the mortgagor cannot invalidate the
When a mortgagee insures his own interest in insurance, provided that if the mortgagor
the mortgaged property without reference to fails to pay the premiums due, the mortgagee
the right of the mortgagor, mortgagee is shall, on demand, pay said premiums. [De
entitled to the proceeds of the policy in case Leon (2014)]
of loss to the extent of his credit. [De Leon
When a mortgagee insured his own interest
and a loss occurs, he is entitled to recover on
If the proceeds are more than the total the insurance. However, he may no longer
amount of credit, then mortgagee has no claim against the mortgagor, for his claim is
right to the excess. If the proceeds are equal discharged up to the amount the insurer has
to the credit, then insurer is subrogated to the paid him. [Palileo v. Cosio G.R. No. L-7677
mortgagees rights and mortgagee can no (1955)]
longer recover the mortgagors indebtedness.
If the proceeds are less than the credit, then
the mortgagee may recover from the
mortgagor the deficiency. Upon payment, the
insurer is subrogated to the rights of the
mortgagee against the mortgagor to the
extent of the amount paid.
When a mortgagor takes out an insurance for
his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage. A
mortgagor can make the proceeds payable to
or assigned to the mortgagee. [De Leon


An open loss payable clause states that the
proceeds of the insurance contract is payable
to the mortgagee as beneficiary.
The contract, however, is procured by the
mortgagor for his interest in the property. He
is the party to the contract, not the
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
affects the mortgagee, even if the property is
in the hands of said mortgagee.

PAGE 83 OF 320

VI. Perfection of the A.1. DELAY IN ACCEPTANCE

Delay in acting on the application does not
Insurance Contract constitute acceptance even though the
insured has forwarded his first premium with
his application. [Perez v. CA, G.R. No.
A. OFFER AND 112329(2000)]
ACCEPTANCE/CONSENSUAL When there is delay in acceptance due to the
An insurance contract is consensual. It is negligence of the insurance company which
therefore perfected by mere consent. Consent takes unreasonably long time before the
is manifested by the meeting of the offer and application is processed and the applicant
the acceptance upon the object or the cause dies, the contract is not perfected. In this case,
which are to constitute the contract. the insurer can be liable for damages in
accordance with the tort theory. The
There is an offer when the insured submits an insurance business is imbued with public
application to the insurer. There is acceptance interest, thus it is the duty of the insurer to
when the insurer approves the act with reasonable promptness in acting on
application.The insurance contract becomes applications submitted to it [Wallace v.
effective upon payment of first premium, Hartford Fire Insurance Co, 31 Idaho 48r,(1918)]
provided there has been an approval of the
A contract of insurance must be assented to A.2. DELIVERY OF POLICY
by both parties, either in person or through Delivery is the act of placing the insurance
their agents and so long as an application for policy (the physical document) into the
insurance has not been either accepted or possession of the insured. The delivery can be
rejected, it is merely a proposal or an offer to a proof of the acceptance of the insurer of the
make a contract. [Perez v. CA,G.R. No. 112329 offer of the insured. It is not, however, a pre-
(2000)] requisite of a valid contract of insurance.
Also, according to Enriquez v. Sun Life Actual manual delivery is not necessary for
Assurance Co.G.R. No. L-15895 (1920): the validity of the contract. Constructive
delivery may be sufficient.
(1) Submission of application, even with
premium payment is a mere offer on the Actual delivery to the insured is not essential
part of the applicant, and does not bind to give the policy binding effect as long as the
the insurer; insured has complied with every condition
required of him. [New York Life Ins. Co. v.
(2) An insurance contract is also not Babcock, 30 S. E. 273 (1898)]
perfected where the applicant dies before
the approval of his application or it does In Bradley v. New York Life Ins., 275 F. 657
not appear that the acceptance of the (1921),the agent of the insurance company is
application ever came to the knowledge not the agent of the insured. Thus delivery to
of the applicant; the agent cannot be considered delivery to
the insured.
(3) An acceptance made by letter shall not
bind the person making the offer except
from the time it came to his knowledge. B. PREMIUM PAYMENT
The parties may impose additional conditions An insurance premium is the agreed price for
precedent to the validity of the policy as a assuming and carrying the risk, that is, the
contract as they see fit. Usually, it is consideration paid an insurer for undertaking
stipulated in the application that contract to indemnify the insured against the specified
shall not become binding until the policy is peril.
delivered and the first premium is paid [De
Leon (2014)] General rule: No insurance policy issued or
renewal is valid and binding until actual

PAGE 84 OF 320

payment of the premium (Sec 77). Any B.1. AUTHORITY OF AGENT TO RECEIVE
agreement to the contrary is void. PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
Sec. 77. Notwithstanding any agreement to insured, it is deemed to have authorized said
the contrary, no policy or contract of agent to receive the premium in its behalf.
insurance issued by an insurance company is
The insurer is bound by its agents
valid and binding unless and until the
acknowledgement of receipt of payment of
premium thereof has been paid, except in
premium [American Home Assurance Co. v.
the case of a life or an industrial life policy
Chua, G.R. No. 130421 (1999)]
whenever the grace period provision applies
or whenever under the broker and agency
agreements with duly licensed
intermediaries, a 90 day credit extension is
given. No credit extension to a duly licensed The payment of premium by a postdated
intermediary should exceed 90 days from the check at a stated maturity subsequent to the
date of issuance of the policy. loss is insufficient to put the insurance into
But payment by a check bearing a date prior
Sec. 79. An acknowledgment in a policy or
to the loss, assuming availability of funds,
contract of insurance or the receipt of
would be sufficient, even if it remains
premium is conclusive evidence of its
unencashed at the time of the loss. The
payment, so far as to make the policy
subsequent effects of encashment would
binding, notwithstanding nay stipulation
retroact to the date of the instrument and its
therein that it shall not be binding until the
acceptance by the creditor [Vitug, Commercial
premium is actually paid.
Laws and Jurisprudence (2006)]

Note: Under RA 10607, the exceptions B.3. NON-PAYMENT OF PREMIUM

provided by law are as follows:
Non-payment of first premium, unless waived,
(1) Life and industrial life policy [Sec. 77] prevents the contract from becoming binding
notwithstanding the acceptance of the
(2) 90 day credit extensions covered by
application nor the issuance of the policy.
broker or agency agreements with
[Philippine Phoenix Surety and Insurance v
licensed intermediaries [Sec. 77]
Woodworks, G.R. No. L-25317 (1979)]
(3) Acknowledgment in the contract that
Non-payment of subsequent premiumsdoes
premium has been paid [Sec. 79)]
not affect the validity of the contracts unless,
by express stipulation, it is provided that the
policy shall in that event be suspended or
Jurisprudence decided before RA 10607
shall lapse. In case of individual life insurance,
provides two further exceptions:
the policy holder is entitled a grace period of
(1) Agreement to grant payment of premium either 30 days or one month within which
in installment basis and partial payment payment of any premium after the first may
has been made [Makati Tuscany v. CA, be made. [Sec. 233] In cases of industrial life
G.R. No. 95546, (1992)] insurance, the grace period is four weeks, and
where premiums are paid monthly, either 30
(2) When parties are barred by Estoppel
days or one month. [Sec. 236]
[UCPB v. Masagana Telemart, G.R. No.

PAGE 85 OF 320


(1) Fortuitous events which render payment INSURANCE
by the insured wholly impossible will not Sec. 227 (f) The law requires that in case of
prevent forfeiture of the policy when the life or endowment insurance, the policy shall
premium remains unpaid. In other words, contain a provision specifying the options to
it is not an excuse. which the policy holder is entitled in the event
(2) Non-payment of premiums occasioned by of default in a premium payment after three
war causes an insurance to be not merely full annual premiums shall have been paid:
suspended, but is completely abrogated. It (1) Receive the cash surrender value
would be unjust to allow the insurer to
retain the reserve value of the policy, (2) Apply such value as the premium for
which is the excess of the premiums paid an extended insurance
over the actual risk carried during the (3) Apply such value as the premium for
years when the policy had been in force in a paid-up insurance
time of war [Constantino v. Asia Life Ins.
Co. G.R. No. L-1669 (1950)] (4) Secure from such value an automatic
premium loan before the expiration of
the grace period.
Sec. 52. Cover notes may be issued to bind D.1. CASH SURRENDER VALUE (CSV)
insurance temporarily pending the issuance It is the amount that the insured is entitled to
of the policy. Within sixty (60) days after issue receive if he surrenders the policy and
of a cover note, a policy shall be issued in lieu releases his claims upon it. The right to CSV
thereof, including within its terms the accrues only after three full annual premium
identical insurance bound under the cover payments. The insured is given the right to
note and the premium therefor. claim the amount less than the reserve,
Cover notes may be extended or renewed reduced by surrender charge. [Sec. 233(f)]
beyond such sixty (60) days with the written The cash value or cash surrender value is an
approval of the Commissioner if he amount which the insurance company holds
determines that such extension is not in trust for the insured to be delivered to him
contrary to and is not for the purpose of upon demand. When the companys credit for
violating any provisions of this Code. The advances is paid out of the cash value or cash
Commissioner may promulgate rules and surrender value, that value and the
regulations governing such extensions for the companys liability is diminished.
purpose of preventing such violations and [Manufacturers Life Ins. v. MeerG.R. No. L-
may by such rules and regulations dispense 2910(1951)]
with the requirement of written approval by
him in the case of extension in compliance Rationale: The premium is uniform
with such rules and regulations. throughout a lifetime, but the risk is varied
(i.e., higher risk when older, lower when
Cover notes are in effect interim policies that young). Thus, the cost of protection is more
bind the parties until a formal policy is issued, expensive during the early years of the policy.
but the rule is that the cover note will not
amount to a contract unless there is
agreement on the material terms. If the cover
note was issued following the expiration of a
policy, the presumption will be that the cover
is on the same terms as the old policy. [Carale

PAGE 86 OF 320


(1) Extended insurance/term insurance - INSURANCE POLICY
where the insured, after having paid three Reinstatement of a lapsed life insurance
full annual premiums, is given the right to policy is not a non-default option. It does not
have the policy continued in force from create a new contract, but merely revives the
date of default for a time either stated or original policy so insurer cannot require a
equal to the amount of the CSV, taken as higher premium than the amount stipulated
a single premium. The face value of the in the contract. It does not apply to
policy remains the same but only within group/industrial life insurance.
the term. It is also called term insurance
where CSV is taken as a single premium Requisites: [Sec. 233(j)]
(no further payments) to extend the (1) It must be exercised within three years
policy for a fixed period of time. If death from date of default;
occurs during this period, the beneficiary
can recover the face value of the policy, (2) The insured must present evidence of
but if the insured survives, the beneficiary insurability satisfactory to the insurer;
gets nothing. Reinstatement is allowed if (3) He must pay all back premiums and all
made within the term purchased; no indebtedness to the insurer (with interest)
reinstatement after the lapse of the term
purchased. (4) The CSV must not have been duly paid to
the insured nor the extension period
(2) Paid-up insurance - where, after the expired;
insurance is paid-up, the insured who
has paid three full annual premiums is (5) The application must be filed during the
given the right, upon default, to have the insureds lifetime. [Andres v. Crown Life
policy continued from the date of default Ins. G.R. No. L-10874 (1958)]
for the whole period of insurance without
further payment of premiums. It is also
called reduced paid-up because in F. REFUND OF PREMIUMS
effect the policy, terms and conditions are Return of premiums can be made in the
the same but the face value is reduced to following cases:
the paid-up value. The terms and
conditions of the original policy remain (1) If the thing insured was never exposed to
the same, however, the amount will be the risks insured against, the whole
less than the original face value. premium should be refunded [Sec. 80(a)];

(3) Automatic premium loan (APL) - where, (2) When the contract is voidable due to the
upon default, the insurer lends/advances fraud or misrepresentation of insurer or
to the insured without any need of his agent, the whole premium should be
application on his part, the amount refunded [Sec. 82]
necessary to pay overdue premium, but (3) When by any default of the insured other
not to exceed the CSV of the policy. It only than actual fraud, the insurer never
applies if requested in writing by the incurred any liability under the policy, the
insured either in the application or at any whole premium should be refunded [Sec.
time before expiration of the grace period. 82];
In effect, the insurance policy continues in
force for a period covered by the payment. (4) When the contract is voidable because of
After the period, if insured still does not the existence of facts of which the insured
resume paying his premiums, policy was ignorant without his fault, the whole
lapses, unless CSV still remains. If there premium should be refunded [Sec. 82];
is still CSV, APL continues until CSV is (5) Where the insurance is for a definite
exhausted. This is beneficial for the period and the insured surrenders his
insured because it continues the contract policy, the portion of the premium that
and all its features with full force and corresponds to the unexpired time at a
effect. pro rata rate, unless a short period rate
PAGE 87 OF 320

has been agreed upon and appears on

the face of the policy should be return VII. Rescission of
[Sec. 80(b)];
Insurance Contracts
(6) When there is over-insurance by several
insurers, the return premiums should be
proportioned to the amount by which the Sec. 26. A neglect to communicate that which
aggregate sum insured in all the policies a party knows and ought to communicate, is
exceeds the insurable value of the thing called a concealment.
at risk [Sec. 83];
(7) When rescission is granted due to the
insurers breach of contract. Sec. 27. A concealment whether intentional or
unintentional entitles the injured party to
rescind a contract of insurance.

(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty
of the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. l-4611(1955)]


General rule: Fraud need not be proven in
order to prove concealment. Good faith is not
a defense. [Saturnino v Phil. American Life
Insurance, G.R. No. L-16163 (1963)]
Exception: When the concealment is made
by the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded [Sec. 29]


Sec. 31. Materiality relates rather to the

probable and reasonable influence of the
facts upon the party to whom the
communication should have been made, in
assessing the risk involved in making or

PAGE 88 OF 320

(d) The want of necessary documents;

omitting to make further inquiries and in
accepting the application for insurance.
(e) The use of false and simulated papers
[Sec 112].
The test is the effect which the knowledge of
the fact in question would have on the
contract. It is sufficient if the knowledge of it A.4. CONCEALMENT IN MARINE AND
would influence the party in making the ORDINARY PRIVATE INSURANCE
contract. [De Leon (2014)] DISTINGUISHED

The test of materiality is whether the insurer Marine Ordinary

would have agreed to issue the policy had it insurance insurance
known of the facts concealed or impose
additional terms or require higher premium Required Exact and Substantial
[Carale (2014)] disclosure whole truth truth

Effect of Concealment of Any kind of

A.3. EFFECTS concealment the matters concealmen
specified in Sec. t will make
General rule: Concealment vitiates the
112 will not the insurer
contract and entitles the insurer to rescind,
entirely avoid not liable.
even if the death or loss is due to a cause not
the contract
related to the concealed matter. [Sec. 27]
but will merely
Exceptions: exonerate the
(1) Incontestability clause: stipulates that the insurer from
losses resulting
policy shall be incontestable after two
from the risk
years from its date of issue or of its last
reinstatement. The incontestability concealed.
clause is a mandatory provision in life and
endowment policies.[Sec. 233 (b) and Sec.
(2) Concealment after the contract has
become effective, because concealment The waiver of medical examination in a non-
must take place at the time the contract is medical insurance contract renders the
entered into in order that the policy may information required of the applicant
be avoided. [Vance (1951)] Information concerning the previous conditions of health
obtained after the perfection of the and diseases suffered more important. The
contract is no longer necessary to be cause of death is not important because it is
disclosed by the insured, even if the policy well settled that the insured need not die of
has not been issued. the disease he had failed to disclose to the
insurer. It is sufficient that his nondisclosure
(3) Waiver or estoppel; misled the insurer in forming his estimates of
(4) In Marine insurance, where concealment the risks of the proposed policy or in making
of the following matters does not vitiate inquiries. [Sunlife v. Sps. Bacani G.R. No.
the entire contract, but merely exonerates 105135 (1995)]
the insurer from a loss resulting from the Where matters of opinion or judgment are
risk concealed: called for, answers made in good faith and
(a) The national character of the insured; without intent to deceive will not avoid the
policy even though they are untrue. Reason:
(b) The liability of the thing insured to The insurer cannot simply rely on those
capture and detention; statements. He must make further inquiry
(c) The liability to seizure from breach of [Philamcare Health Systems v. CA, G.R. No.
foreign laws of trade; 125678 (2002)]
PAGE 89 OF 320

A.6. MATTERS WHICH MUST BE are open to his inquiry, equally with that of
DISCLOSED EVEN IN THE ABSENCE OF the other, and which may affect the political
INQUIRY or material perils contemplated; and all
general usages of trade.
Sec. 28. Each party to a contract of insurance
must communicate to the other, in good
faith, all facts within his knowledge which are
material to the contract and as to which he
makes no warranty, and which the other has B.MISREPRESENTATION/OMISSIONS
not the means of ascertaining.
Sec. 41. A representation may be altered or
withdrawn before the insurance is effected
but not afterwards.
Note:If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his Sec. 42. A representation must be presumed
application, good faith requires him to to refer to the date on which the contract
disclose that circumstance, though unasked. goes into effect.
[Vance (1951)]
The fact of being a mongoloid is a material
fact that needs to be disclosed [Great Pacific Sec. 44. A representation is to be deemed
Life v. CA, G.R. No. L-31845(1979)]. false when the facts fail to correspond with its
assertions or stipulations.
Mere possibility of previous hypertension is
not enough to establish concealment [Great
Pacific Life v. CA, G.R. No. 113899(1999)]. Sec. 45. If a representation is false in a
material point, whether affirmative or
promissory, the injured party is entitled to
A.7. MATTERS WHICH NEED NOT BE rescind the contract from the time when the
DISCLOSED representation becomes false.
(1) Matters already known to the insurer [Sec
(2) Matters which each party are bound to Representations are factual statements
know [Sec 30(b) and Sec 32]; made by the insured at the time of, or prior to,
the issuance of the policy, which give
(3) Matters of which the insurer waives information to the insurer and induce him to
communication [Sec 30(c) and Sec 33]; enter into the insurance contract.
(4) Matters which prove or tend to prove the There is false representation if the matter is
existence of a risk excluded by a warranty true at the time it was made/represented but
and which are not otherwise material [Sec false at the time the contract takes effect(Sec
30(d)]; 44). There is no false representation if the
(5) Matters which relate to a risk excepted in matter is true at the time the contract takes
the policy, and which are not otherwise effect although false at the time it was
material [Sec 30(e)]; made/represented.

(6) Information of the nature or amount of

the interest of one insured unless if B.1. KINDS OF REPRESENTATIONS
inquired upon by the insurer, except if
required by Sec 51[Sec 34] (1) Affirmative, which refers to any allegation
as to the existence or non-existence of a
(7) Matters of opinion [Sec 35] fact when the contract begins [De Leon

Sec. 32. Each party to a contract of insurance (2) Promissory, which is any promise to be
is bound to know all the general causes which fulfilled after the contract has come into
PAGE 90 OF 320

existence; or any statement concerning (5) Representation by insured based on

what is to happen during the existence of information obtained from third persons
the insurance [Sec 39]. A promissory (not his agent), provided the insured:
representation is substantially a
(a) Has no personal knowledge of the
condition or warranty [De Leon (2014)].
(3) Oral or written [Sec 36].
(b) Believes them to be true; and
(c) Explains to the insurer that he does
Requisites: so on the information of others.
(1) The insured stated a fact which is untrue; (6) A misrepresentation as to age does not
constitute a ground for rescission. If the
(2) Such fact was stated with knowledge that
age of the insured was considered in
it is untrue and with intent to deceive or
determining the premium and the
which he states positively as true without
benefits under the policy and the age is
knowing it to be true and which has a
misstated, the amount payable for the
tendency to mislead;
policy shall be as if the policy was
(3) Such fact in either case is material to the purchased at the correct age [Carale
risk. (2014)].
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on
A representation cannot qualify an express
the ground of misrepresentation [Sec 45].
provision or an express warranty of insurance
(Sec 40) because a representation is not part
of the contract but only a collateral
inducement to it. However, it may qualify as
Sec. 46. The materiality of a representation is an implied warranty.
determined by the same rules as the It is sufficient that the representation is
materiality of a concealment. substantially or materially true, and in case of
promissory representation, it is sufficient that
it is substantially complied with [Carale
B.3. EFFECTS (2014)].

General rule:The injured party is entitled to There is fraud and misrepresentation when
rescind from the time when the another person takes the place of the insured
representation becomes false [Sec 45]. in the medical examination [Eguaras v. Great
EasternG.R. No. L-10436(1916)].
The insurer is not entitled to rescission for
(1) Incontestability clause; misrepresentation of age if the birth date on
(2) Misrepresentation after contract takes the policy leads to the conclusion that the
effect; insured is beyond the age covered and yet the
insurer continued to accept payment and
(3) Waiver, made by acceptance of insurer of issued the policy. Insurer is deemed estopped
premium payments despite knowledge of [Edillon v. Manila Bankers Life G.R. No. L-
the ground for rescission [Sec 45]; 34200 (1982)].
(4) A representation of the expectation, Despite not answering the questions and
belief, opinion, or judgment of the keeping blank certain questions in the
insured, although false, and even if application regarding ailments he has
material to the risk [Philamcare Health suffered, when the insured signed the
Systems, Inc. v. CA, G.R. No. 125678. pension plan application, he adopted the
(2002)]; written representations and declarations
embodied in as his own. Therefore, it is clear
from these representations that he concealed
his chronic heart ailment and diabetes.
PAGE 91 OF 320

[Florendo v. Philam PlansG.R. No.

Sec. 68. A warranty may relate to the past,
the present, the future, or to all of these.
Concealment Misrepresentation

Who may commit Sec. 69. No particular form of words is

necessary to create a warranty.
May be committed Committed only by
by either insured or insured.
Sec. 50 The policy shall be in printed form
Passive form Active form which may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol,
Insured withholds Insured makes
signature, number, or word necessary to
information of erroneous
complete the contract of insurance shall be
material facts from statements of facts
written on the blank spaces provided therein.
the insurer; he with the intent of
maintains silence inducing the insurer Any rider, clause, warranty or endorsement
when he ought to to enter into the purporting to be part of the contract of
speak insurance contract insurance and which is pasted or attached to
said policy is not binding on the insured,
Materiality unless the descriptive title or name of the
rider, clause, warranty or endorsement is also
Determined by the same rules mentioned and written on the blank spaces
provided in the policy.
Unless applied for by the insured or owner,
Same effects on the part of the insured; any rider, clause, warranty or endorsement
insurer has right to rescind issued after the original policy shall be
countersigned by the insured or owner, which
Injured party is entitled to rescind a countersignature shall be taken as his
contract of insurance on ground of agreement to the contents of such rider,
concealment or false representation, clause, warranty or endorsement.
whether intentional or not.
Notwithstanding the foregoing, the policy
may be in electronic form subject to the
pertinent provisions of Republic Act No.
C. BREACH OF WARRANTIES 8792, otherwise known as the Electronic
A Warranty is a statement or promise by the Commerce Act and to such rules and
insured set forth in the policy itself or regulations as may be prescribed by the
incorporated in it by proper reference, the Commissioner.
untruth or nonfulfillment of which in any
respect and without reference to whether the
insurer was in fact prejudiced by such untruth A Rider is a printed or typed stipulation
or non-fulfillment, renders the policy voidable contained in a slip of paper attached to the
by the insurer [Vance (1951)]. policy and forming an integral part thereof.
The signature of the insured is required only if
Statements or promises agreed upon by both
the riders, warranties, or endorsements are
parties to the insurance contract which are
made or issued after the issuance of the
contained in the contract or properly
original policy.
incorporated constitute warranties [Carale
A warranty may also be made by the insurer.
PAGE 92 OF 320

C.2. KINDS OF WARRANTIES (3) The performance becomes impossible[Sec

(1) Express warranty, which is an agreement
contained in the policy or clearly (4) Waiver or estoppel.
incorporated therein as part thereof
relating to the person or thing insured or
to the risk as a fact[Sec. 71]; C.3.B. IMMATERIAL W ARRANTY
(2) Implied warranty,whichisdeemed General rule: Breach of an immaterial
included in the contract although not provision does not avoid the policy [Sec 75].
expressly mentioned (e.g., implied
Exception: Breach of an immaterial
warranty of seaworthiness of the vessel in
provision avoids the policy when the parties
marine insurance and implied warranty
stipulate that violation of a particular
not to alter the circumstances of the
provision, though immaterial, shall avoid the
thing insured);
policy. In effect, the parties converted the
(3) Affirmative warranty, which asserts the immaterial provision into a material one
existence of a fact or condition at the time [Sundiang and Aquino (2013)].
it is made;
A condition in the policy which requires
(4) Promissory warranty or executory warranty, insured to disclose to the insurer of any
which is one where the insured stipulates insurance that, if violated by the insured,
that certain facts or conditions pertaining would ipso facto avoid the contract [Pioneer v.
to the risk shall exist or that certain Yap, G.R. No. L-36232(1974)].
things with reference thereto shall be
Insurer is barred by waiver (or estoppel) to
done or omitted. It is in the nature of a
claim violation of the so-called hydrants
condition subsequent [Secs 72 and 73].
warranty when, despite knowing fully that
only 2 fire hydrants existed (out of the 11
hydrants required), it still issued the
insurance policies and received the premiums
C.3.A. MATERIAL W ARRANTY [Qua Chee Gan v. Law Union, G.R. No. L-4611
Sec. 74. The violation of a material warranty,
or other material provision of the policy, on
the part of either the insured or insurer, Warranty Representation
entitles the other to rescind.
Part of the contract Mere collateral
Breach of a material warranty may either be:
(1) Without fraud, in which case, the insurer
will be exonerated from the time it occurs. Written on the May be written in
If made during the inception, it will policy, actually or by the policy or may be
prevent the policy from taking effect [Sec reference oral
76]. Materiality
(2) With fraud, in which case, the policy is Presumed material Must be proved to
avoided ab initio and the insured is not be material
entitled to the return of the premiums
paid. [De Leon (2014)]
Must be strictly Requires only
Exceptions: complied with substantial truth
(1) Loss occurs before the time of and compliance
performance of the warranty [Sec 73]; Applicability of incontestability clause
(2) The performance becomes unlawful[Sec Does not apply Applies
PAGE 93 OF 320

VIII. Claims Settlement A.2. LIABILITY FOR LOSS

Loss for which the Loss for which the
and Subrogation insurer is liable insurer is not liable

Loss the proximate Loss by insureds

A. CONCEPT OF LOSS cause of which is the willful act
Loss in insurance law embraces injury or peril insured against
damage [Sec 86]
Requisites: Recovery upon a loss requires Loss the immediate Loss due to
that: cause of which is the connivance of the
(1) The insured must have insurable interest peril insured against insured [Sec 89]
in the subject matter; exceptwhere the
proximate cause is
(2) The interest is covered by the policy; an excepted peril
(3) There be a loss; and
Loss through Loss where the
(4) The loss must be one for which the negligence of excepted peril is the
insurer is liable; insured except proximate cause
(5) Notice and proof of loss must be given if where there was
policy is fire insurance or when the same gross negligence
is stipulated in the policy. amounting to willful

A.1. CAUSES OF LOSS Loss caused by

efforts to rescue the
(1) Remote cause is an event preceding thing from peril
another in a causal chain, but separated insured against if,
from it by other events; during the course of
(2) Proximate cause is that cause, which, in the rescue, the thing
natural and continuous sequence, is exposed to a peril
unbroken by any efficient intervening not insured against,
cause, produces the injury, and without which permanently
which the result would not have occurred deprives the insured
[Vda. De Bataclan v. Medina, G.R. No. L- of its possession in
10126 (1957)]. whole or in part (Sec
(3) Immediate cause isthe cause, not the
proximate cause, which immediately
precedes the loss. B. NOTICE AND PROOF OF LOSS


This refers to the formal notice given the
insurer by the insured or claimant under a
policy of the occurrence of the loss insured

Its purpose is to apprise the insurance
company so that it may make proper

PAGE 94 OF 320

investigation and take such action as may be B.2. PROOF OF LOSS

necessary to protect its interest.
It is the formal evidence given to the
In fire insurance, an insurer is exonerated, if insurance company by the insured or
notice thereof be not given to him by an claimant, under a policy, of: the occurrence of
insured, or some person entitled to the the loss, the particulars thereof, and the data
benefit of the insurance, without unnecessary necessary to enable the company to
delay [Sec 90]. determine its liability and the amount. [De
Leon (2014)]
In other types of insurance, failure to give
notice will not exonerate the insurer, unless
there is a stipulation in the policy requiring
the insured to do so. B.2.A. PURPOSE

However, it has been held that formal notice Its purpose is to give the insurer information
of loss is not necessary if insurer has actual by which he may determine the extent of his
notice of loss [Fidelity Phoenix Insurance v liability but also; to afford him a means of
Friedman, 174 SW 215] but there is a ruling to detecting any fraud that may have been
the contrary [Col. Sav. Bank v American practiced upon him, and to operate as a
Surety 87 P 118] check upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
B.1.B. FORM orally or in writing.
In case of loss as regards fire insurance, there The insured is not bound to give such proof as
must be a written notice thereof. [Sec. 90] would be necessary in a court of justice; but it
But as to other non-life insurance policies, is sufficient for him to give the best evidence
the law does not provide for a necessity of which he has in his power at the time [Sec 91].
written notice [De Leon (2014)]


The notice of loss may be in the form of an
informal or provisional claim containing a General rule: Timely compliance with the
minimum of information as distinguished notice and proof of loss is a condition
from a formal claim which contains the full precedent to the right to recover if the policy is
details of the loss, computations of the fire insurance, or when the same is stipulated
amounts claimed, and supporting evidence, in the policy. [Sec. 90]
together with a demand or request for Exceptions:
payment [De Leon (2014)].
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss
B.1.C. Tim e for Giving Notice may be waived when such defects,
Notice of loss must be given within which the insured might remedy, are
reasonable time. [Bachrach v Britain not specified, without unnecessary
American Assurance, G.R. No. L-5715 (1910)] delay, to him as ground of objection
by the insurer [Sec 92];
For compulsory motor vehicle insurance, the
notice must be given within six months from (b) Delay in presentation to an insurer of
the date of the accident. [Sec. 397] notice or proof of loss is waived if
caused by any act of his, or if he omits
For other non-life insurance, the to take objection promptly and
Commissioner may specify the period for the specifically upon that ground [Sec.
submission of the notice of loss [Sec. 90] 93];
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice
of loss.

PAGE 95 OF 320

C. GUIDELINES ON CLAIMS In case of litigation, it is the duty of the

SETTLEMENT Commissioner or the Court to determine
whether the claim has been unreasonably
Claims settlement is the indemnification of denied or withheld. Failure to pay any such
the loss suffered by the insured. The claimant claim within the time prescribed shall be
may be the insured or reinsured, the insurer considered prima facie evidence of
who is entitled to subrogation, or a third unreasonable delay in payment. [Sec. 250]
party who has a claim against the insured
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the
interest of the insured.

Claims Life insurance Non-life insurance

Maturity Either: (1) Upon happening of event insured

against; and
(a) Upon death of the person insured;
(2) Event must occur within the
(b) Upon his surviving a specific
period specified in policy,
period; or
otherwise insurer has no liability
(c) Otherwise contingently on the
continuance or cessation of life
[Sec 180]

Delivery General rule:The proceeds should be (1) Within 30 days after:

delivered immediately upon maturity
of proceeds (a) Proof of loss is received by
of policy.
insurer; and
(b) Ascertainment of loss or
Exceptions: damage is made either by
agreement between the
1. If payable ininstallments or as an
insured and insurer or by
annuity, when such installments
or annuities become due;
(2) If ascertainment is not made
2. If maturity is upon death, within 60
within 60 days after such receipt
days after presentation of claim
by insurer of proof of loss, then
and filing of proof of death of
loss or damage shall be paid
insured. [Sec. 248]
within 90 days after such receipt.
[Sec. 249]

Effect of refusal 1. This entitles the beneficiary to collect interest on the proceeds of policy for
or failure to pay the duration of the delay at rate of twice the ceiling prescribed by the
claim within monetary board (unless refusal to pay is based on ground that claim is
time prescribed fraudulent)
2. In case damages are awarded, this includes attorneys fees and other
expenses incurred due to delay (plus the interest) [Sec. 248 and 249]

PAGE 96 OF 320

C.1. UNFAIR CLAIMS SETTLEMENT; Sec. 247 lists the grounds which are sufficient
SANCTIONS cause for the suspension or revocation of the
insurers certificate of authority [Sec. 247(c)].
Sec. 247. No insurance company doing
business in the Philippines shall refuse,
without just cause, to pay or settle claims C.2. PRESCRIPTION OF ACTION
arising under coverages provided by its
In the absence of an express stipulation in the
policies, nor shall any such company engage
policy, it being based on a written contract,
in unfair claim settlement practices.
the action prescribes in ten years [Article 1144,
Any of the following acts by an insurance Civil Code].
company, if committed without just cause and
However, the parties may validly agree on a
performed with such frequency as to indicate a
shorter period provided it is not less than one
general business practice, shall constitute
year from the time the cause of action
unfair claim settlement practices:
accrues [Sec 63].
Knowingly misrepresenting to claimants
In compulsory motor vehicle insurance, the
pertinent facts or policy provisions relating to
action prescribes in one year from the denial
coverage at issue;
of the claim [Sec. 397]
Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies; C.3. SUBROGATION
Failing to adopt and implement reasonable Subrogation is a process of legal substitution.
standards for the prompt investigation of The insurer, after paying the amount covered
claims arising under its policies; by the insurance policy, steps into the shoes
of the insured and avails himself of the
Not attempting in good faith to effectuate
latter's rights that exist against the
prompt, fair and equitable settlement of
wrongdoer at the time of loss.
claims submitted in which liability has
become reasonably clear; or The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
Compelling policyholders to institute suits to
have paid to the insured.
recover amounts due under its policies by
offering without justifiable reason The Right of Subrogation stems from Art.
substantially less than the amounts 2207 of the Civil Code.
ultimately recovered in suits brought by
Note:Subrogation applies only to property
insurance and non-life insurance.
Evidence as to numbers and types of valid
and justifiable complaints to the
Commissioner against an insurance C.3.A. RIGHTS TRANSFERRED
company, and the Commissioners complaint The subrogee-insurer cannot acquire any
experience with other insurance companies claim, Security, or remedy the subrogor did
writing similar lines of insurance shall be not have (or a greater claim than the original
admissible in evidence in an administrative or insured). In other words, a subrogee cannot
judicial proceeding for the purpose of succeed to a right not possessed by the
determining whether unfair claim settlement subrogor. A subrogee can recover only if the
practices have been committed. insured likewise could have recovered.
If it is found, after notice and an opportunity [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
to be heard, that an insurance company has Corp. G.R. No. 140349 (2005)]
violated this section, each instance of The insured can no longer recover from the
noncompliance may be treated as a separate offended party what was paid to him by the
violation and shall be considered sufficient insurer but he can recover any deficiency if
cause for the suspension or revocation of the the damages suffered are more than what
companys certificate of authority

PAGE 97 OF 320

was paid. The deficiency is not covered by the

right of subrogation. IX. Insurance
The insurer must present the policy as Commissioner
evidence to determine the extent of its
coverage. [Wallem Phil. Shipping v. Prudential
GuaranteeG.R. No. 152158 (2003)] A. JURISDICTION AND ADJUDICATORY
C.3.B. W HEN THERE IS NO RIGHT OF The Insurance Commissioner has the power
SUBROGATION to adjudicate disputes relating to an
insurance companys liability to an insured
(1) Where the insured by his own act releases under a policy. [Sec. 437] A complaint or
the wrongdoer or third party liable for the claim filed with such official is considered an
loss or damage; action or suit the filing of which would
(2) Where the insurer pays the insured the have the effect of tolling the suspending the
value of the loss without notifying the running of the prescriptive period.
carrier who has in good faith settled the (1) Concurrent jurisdiction (with regular civil
insureds claim for loss; courts) over cases where any single claim
(3) Where the insurer pays the insured for a does not exceed P5,000,000 involving
loss or risk not covered by the policy [Pan liability arising from:
Malayan Ins. Co. v. CA, G.R. No. (a) Insurance contract;
(b) Contract of suretyship;
(4) In life insurance;
(c) Reinsurance contract;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2014)]. (d) Membership certificate issued by
members of mutual benefit
The right of subrogation is not dependent association [Sec 439];
upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. (2) Primary and exclusive jurisdiction over
It accrues simply upon payment of the claims for benefits involving pre-need
insurance claim by the insurer [Pan Malayan plans where the amount of benefits does
Ins. Co v. CA, G.R. No. 81026 (1990)]. not exceed P100,000 [Sec. 55, RA 9829].
Since the insurer can be subrogated to only For the purpose of proceeding under its
such rights as the insured may have, should adjudicatory powers under the Insurance
the insured, after receiving payment from the Code, the Commissioner or any officer thereof
insurer, release the wrongdoer who caused designated by him, is empowered to
the loss, the insurer loses his rights against administer oaths and affirmation, subpoena
the latter. But in such a case, the insurer will witnesses, compel their attendance, take
be entitled to recover from the insured evidence and require the production of any
whatever it has paid to the latter, unless the books, papers, documents or contracts or
release was made with the consent of the other records which are relevant or material
insurer [Manila Mahogany v. CA G.R. No. L- to the inquiry [Sec 439].
52576 (1987)]. Note: However, the Insurance Commission
has no jurisdiction to decide the legality of a
contract of agency entered into between an
insurance company and its agent. The same
is not covered by the term doing or
transacting insurance business under Sec 2,
neither is it covered by Sec 439, which grants
the Commissioner adjudicatory powers
[Sundiang and Aquino (2013)].

PAGE 98 OF 320


The Certificate of Authority issued to the If the company is determined by the
domestic or foreign company by the Commissioner to be insolvent or cannot
Commission may be revoked or suspended by resume business, he shall, if public interest
the Insurance Commissioner for any of the requires, order its liquidation [Sec 256].
following grounds:
This should be distinguished from a situation
(1) The company is in an unsound condition; where a conservator is appointed when the
Commissioner finds that a company is in a
(2) That it has failed to comply with the
state of continuing inability or unwillingness
provisions of law or regulations
to maintain a condition of solvency or
obligatory upon it;
liquidity adequate to protect the
(3) That its condition or method of business policyholders and creditors. The conservator
is such as to render its proceedings will take charge of the management of the
hazardous to the public or its insurance company [Sec 255].
(4) That its paid-up capital stock, in the case
of a domestic stock corporation, or its
available cash assets, in the case of a
domestic mutual company, or its Security
deposits, in the case of a foreign company,
is impaired or deficient;
(5) That the margin of solvency required of
such company is deficient.
[Sec. 254]

The Commissioner is authorized to suspend

or revoke all certificates of authority granted
to such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such
company by its agents in the Philippines
while such suspension, revocation, or
disability continues or until its authority to do
business is restored by the Commissioner.
[Sec. 254]
Before restoring such authority, the
Commissioner shall require the company
concerned to submit to him a business plan
showing the companys estimated receipts
and disbursements, as well as the basis
therefor, for the next succeeding three years.
[Sec. 254]

PAGE 99 OF 320


PAGE 100 OF 320


I. Common Carriers Common carriers are:

(1) Persons, corporations, firms or
(Reference is to the Civil Code, unless associations;
otherwise indicated)
(2) Engaged in the business of carrying or
A. CONCEPT (3) Passengers or goods or both;
A contract of transportation is one (4) By land, water, or air;
whereby a certain person or association of
persons obligate themselves to transport (5) For compensation;
persons, things, or news from one to (6) Offering their services to the public [Art.
another for a fixed price. 1732].

Parties to the contract: Art. 1732 makes no distinction:

(1) Shipper - one who gives rise to the (1) Between one whose principal business
contract of transportation by agreeing activity is the carrying of persons or
to deliver the things or news to be goods or both, and one who does such
transported, or to present his own carrying only as an ancillary activity
person or those of other or others in the [Fabre v. CA (1996)];
case of transportation of passengers.
(2) Between a person or enterprise offering
(2) Carrier or conductor - one who binds transportation service on a regular or
himself to transport person, things, or scheduled basis and one offering such
news, as the case may be, or one service on an occasional, episodic, or
employed in or engaged in the business unscheduled basis [Loadstar Shipping
of carrying good for others for hire. Co., Inc. v. CA (1999)];
(3) Consignee - the party to whom the (3) Between a carrier offering its services to
carrier is to deliver the things being the general public and one who offers
transported; to whom the carrier may services or solicits business only from a
lawfully make delivery in accordance narrow segment of the general
with its contract of carriage. The shipper population [De Guzman v. CA (1988)].
and the consignee may be the same
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of
Carriers are persons or corporations who the conveyances used in the activity, but
undertake to transport or convey goods, whether the undertaking is a part of the
property or persons, from one place to activity engaged in by the carrier that he has
another, gratuitously or for hire, and are held out to the general public as his
classified as: business or occupation. If the undertaking is
a single transaction, not a part of the
(1) Private or special carriers, who general business or occupation engaged in,
transport or undertake to transport in a as advertised and held out to the general
particular instance for hire or reward public, the individual or the entity rendering
[Agbayani, Commercial Laws of the such service is a private, not a common,
Philippines (1987)]; and carrier. The question must be determined by
(2) Common or public carriers, defined in the character of the business actually
Art. 1732. carried on by the carrier, not by any secret
intention or mental reservation it may
entertain or assert when charged with the

PAGE 101 OF 320


duties and obligations that the law imposes Common carrier Private carrier
[Teodoro v. Nicolas (2012)].
Governing law
A common carrier need not have fixed and
Civil Code; Code of Law on obligations
publicly known routes. Neither does it have
Commerce and and contracts
to maintain terminals or issue tickets [Asia
special laws, if not
Lighterage and Shipping v. CA (2003)].
regulated by the
One engaged in the business of Civil Code (Art.
transporting petroleum products from 1766); law of the
refineries via pipeline is a common carrier. country to which the
It is engaged in the business of transporting goods are to be
or carrying goods, i.e., petroleum products, transported, if
for hire as a public employment. It regarding liability
undertakes to carry for all persons for loss, destruction,
indifferently, that is, to all persons who or deterioration of
choose to employ its services, and goods
transports the goods by land and for Regulation
compensation. The fact that it has a limited
clientele does not exclude it from the A public service, Not subject to
definition of a common carrier [First Phil. therefore subject to regulation as a
Industrial v. CA (1998)]. provisions common carrier
governing common
A travel agency is not a common carrier. carriers and public
It is not an entity engaged in the business of utilities.
transporting either passengers or goods
and is therefore neither a private nor a
common carrier. Its covenant with its It is not necessary that the carrier be issued
customers is simply to make travel a certificate of public convenience [Loadstar
arrangements on their behalf [Crisostomo v. Shipping Co., Inc. v. CA (1999)].
CA (2003)].

Kabit system:
Common carrier Private carrier (1) It is an arrangement whereby a person
Availability who has been granted a certificate of
convenience allows another person who
Holds himself out in Agrees in some
owns motor vehicles to operate under
common, that is, to special case with
such franchise for a fee [Lita Enterprises,
all persons who some private
Inc. v. IAC (1984)].
choose to employ individual to carry
him, as ready to for hire (2) It is invariably recognized as being
carry for hire contrary to public policy and therefore
Binding effect void and inexistent under Art. 1409.
Thus, for the safety of passengers and
Bound to carry all Not bound to carry the public, the registered owner of the
who offer and for any reason, such vehicle is not allowed to prove that
tender reasonable goods as it is another person has become the owner
compensation for accustomed to so that he may be thereby relieved of
carrying them carry, unless it responsibility [Lim v. CA (2002)].
enters into a special
agreement to do so (3) One of the primary factors considered in
the granting of a certificate of public
Diligence required convenience for the business of public
Extraordinary Ordinary transportation is the financial capacity

PAGE 102 OF 320


of the holder of the license, so that Note: Please be guided by the

liabilities arising from accidents may be requirements under Art. 1732.
duly compensated. The kabit system
renders illusory such purpose and,
worse, may still be availed of by the B. DILIGENCE REQUIRED
grantee to escape civil liability caused
by a negligent use of a vehicle owned by
another and operated under his license. B.1. STANDARD OF DILIGENCE
[Dizon v. Octavio (1955)].
Common carriers, from the nature of their
(4) However, one who has availed of the business and for reasons of public policy,
kabit system is not precluded from filing are bound to observe extraordinary
for damages against another who diligence, according to all the
caused the injury, as the policy against circumstances of each case:
the kabit system will not be defeated by
giving such person standing to sue. [Lim (1) In the vigilance over the goods; and
v CA (2002)] (2) For the safety of the passengers
transported by them [Art. 1733].

Uber/Grab: Extraordinary diligence in the vigilance over

the goods is expressed in Arts 1734, 1735,
Transport Network Company or TNC and 1745, Nos. 5, 6, and 7, while the
is defined as an organization whether a extraordinary diligence for the safety of
corporation, partnership, or sole the passengers is further set forth in Art.s
proprietorship, that provides pre-arranged 1755 and 1756.
transportation services for compensation
using an internet-based technology As stated in Art. 1733, extraordinary
application or a digital platform technology diligence is required because of the (1)
to connect passengers with drivers using nature of the business of common carriers
their personal vehicles [DOTC D.O. No. and (2) for reasons of public policy.
2015-011]. e.g. Uber and Grab. Extraordinary diligence:
The TNC may or may not have been granted (1) Requires rendering service with the
a Certificate of Public Convenience (CPC). If greatest skill and utmost foresight
it is a holder of a valid and current CPC, it is [Agbayani (1987)];
known as a common carrier. Otherwise, it is
classified as a land transportation service (2) Requires carrying passengers safely as
contractor. far as human care and foresight can
provide, using the utmost diligence of
The Partners (owners of the vehicles used in very cautious persons, with a due regard
transporting passengers) forming part of for all the circumstances [Art. 1755];
the network of a TNC, may or may not be a
common carrier, depending on whether the (3) Does not require common carriers to
Partner(s) itself/themselves are holders of a exercise all the care, skill, and diligence
CPC. A mere Accreditation given by LTFRB of which the human mind can conceive,
is not an equivalent to a CPC and will not nor such as will free the transportation
make said holder a common carrier. If the of passengers from all possible perils.
Partner is a holder of a CPC, said Partner is Note: A common carrier is not an insurer of
a common carrier. However, if the Partner the safety of its passengers and is not
is not a holder of a CPC, said Partner is bound absolutely and at all events to carry
merely a land transportation service them safely and without injury [Yobido v. CA
contractor [BIR RMC 70-2015]. (1997)].

PAGE 103 OF 320



II. Vigilance over
The mere proof of delivery of goods in good
order to a carrier, and of their arrival at the Goods
place of destination in bad order, makes out
a prima facie case against the carrier, so
that if no explanation is given as to how the A. LIABILITY, IN GENERAL
injury occurred, the carrier must be held
responsible. It is incumbent upon the carrier
to prove that the loss was due to accident or The law of the country to which the goods
some other circumstance inconsistent with are to be transported shall govern the
its liability [Ynchausti Steamship v. Dexter liability of the common carrier for their loss,
and Unson (1920)]. destruction or deterioration [Art. 1753].
Note: While delay in the delivery of goods Under Philippine law, the liability of the
is a breach of contract of carriage, it does common carrier with respect to vigilance
not raise the presumption of negligence over goods, in general, are as follows:
because the goods are not lost,
deteriorated, or destroyed [see Art. 1735]. (1) Common carriers are responsible for the
loss, destruction, or deterioration of the
In case of death of or injuries to passengers, goods [Art. 1734]. In fact, they are liable
common carriers are presumed to have even in those cases where the cause of
been at fault or to have acted negligently, the loss or damage is unknown
unless they prove that they observed [Agbayani (1987)].
extraordinary diligence as prescribed in Arts
1733 and 1755 [Art. 1756]. (2) Moreover, if the goods are lost,
destroyed, or deteriorated, common
Note: Mere failure to reach ones carriers are presumed to have been at
destination, without injury or death, does fault or to have acted negligently [Art.
not raise the presumption of negligence 1735].
because it does not involve safety of the
passengers. Note: Two-pronged analysis in
determining liability:
(1) Whether or not the cause of the loss,
C. LIABILITIES destruction, or deterioration is included
under Art. 1734;

The obligation of the common carrier (2) If not, whether or not the common
consists in the transportation of passengers carrier exercised extraordinary diligence.
or goods or both [Art. 1732].
The liabilities of a common carrier arises B. EXEMPTING CAUSES
from a contract of carriage. Thus, the cause
of action, when there is failure on its part to
exert extraordinary diligence according to General Rule: Common carriers are
all circumstances, is for breach of contract responsible for the loss, destruction, or
[Isaac v. A.L. Ammen (1957)]. deterioration of the goods
In what follows, these liabilities in case of Exception: The same is due to any of the
breach, both with respect to vigilance over following causes only:
the goods and safety of the passengers
transported, will be discussed. (1) Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
(2) Act of the public enemy in war, whether
international or civil;

PAGE 104 OF 320


(3) Act of omission of the shipper or owner occurrence of the natural disaster, for it to
of the goods; be exempt from liability under the law for
the loss of the goods [Art. 1739].
(4) The character of the goods or defects in
the packing or in the containers; Fire may not be considered a natural
disaster or calamity. This must be so as it
(5) Order or act of competent public
arises almost invariably from some act of
authority [Art. 1734].
man or by human means. It does not fall
In all other cases of loss, destruction, or within the category of an act of God unless
deterioration, the common carrier is caused by lightning or by other natural
presumed to have been at fault or to have disaster or calamity. It may even be caused
acted negligently, unless they prove that by the actual fault or privity of the carrier
they observed extraordinary diligence [Art. [Eastern Shipping Lines v. IAC (1987)].
Note: If the common carrier negligently
Thus, in De Guzman v. CA (1988), it was held incurs in delay in transporting the goods, a
that hijacking, not being included in Art. natural disaster shall not free such carrier
1734, must be dealt with under the from responsibility [Art. 1740].
provisions of Art. 1735, and thus, the
common carrier is presumed to have been
at fault or negligent. B.2. ACT OF PUBLIC ENEMY
B.1. NATURAL DISASTER OR CALAMITY (1) The act of the public enemy was
committed either in an international or
civil war [Art. 1734];
(1) The natural disaster must have been the
(2) The act of the public enemy must have
proximate and only cause of the loss;
been the proximate and only cause;
(2) The common carrier must exercise due
(3) The common carrier must exercise due
diligence to prevent or minimize the
diligence to prevent or minimize the
loss before, during and after the
loss before, during and after the act of
occurrence of the flood, storm or
the public enemy causing the loss,
natural disaster [Art. 1739];
destruction or deterioration of the
(3) The common carrier must not have goods [Art. 1739].
negligently incurred delay [Art. 1740];
In order that a common carrier may be
absolved from liability where the loss,
destruction or deterioration of the goods is
due to a natural disaster or calamity, it must The act or omission of the shipper must
be shown that such natural disaster or have been the proximate and only cause of
calamity was the proximate and only cause the loss, destruction, or deterioration of the
of the loss; there must be an entire goods.
exclusion of human agency from the cause
If the shipper or owner merely contributed
of the injury of the loss [Philippine American
to the loss, destruction or deterioration of
General Insurance Co., Inc. v. MGG Marine
the goods, the proximate cause being the
Services, Inc. (2002)].
negligence of the common carrier, the latter
Moreover, even in cases where a natural shall be liable for the damages, which shall,
disaster is the proximate and only cause of however, be equitably reduced [Art. 1741].
the loss, a common carrier is still required
to exercise due diligence to prevent or
minimize loss before, during and after the

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B.4. CHARACTER OF THE GOODS A fortuitous event has the following

(1) The cause of the unforeseen and
(1) The loss, destruction, or deterioration of
unexpected occurrence, or the failure of
the goods is due to the character of the
the debtor to comply with his
goods or defects in the packing or in the
obligations, must be independent of
containers [Art. 1739];
human will;
(2) The common carrier must exercise due
(2) It must be impossible to foresee the
diligence to forestall or lessen the loss
event which constitutes the caso
[Art. 1741].
fortuito, or if it can be foreseen, it must
If the fact of improper packing is known to be impossible to avoid;
the carrier or its servants or apparent upon
(3) The occurrence must be such as to
ordinary observation, but it accepts the
render it impossible for the debtor to
goods notwithstanding such condition, it is
fulfill his obligation in a normal manner;
not relieved of liability for loss or injury
resulting therefrom [Southern Lines v. CA
(1962)]. (4) The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
There must be an entire exclusion of human
(1) There must be an order or act of agency from the cause of injury or loss.
competent public authority through
Moreover, a common carrier may not be
which the goods are seized or destroyed
absolved from liability in case of force
[Art. 1734];
majeure or fortuitous event alone. The
(2) The said public authority must have had common carrier must still prove that it was
the power to issue the order [Art. 1743]. not negligent in causing the death or injury
resulting from an accident [Yobido v. CA
The intervention of the municipal officials
was not of a character that would render
impossible the fulfillment by the carrier of Loss of a ship and of its cargo, in a wreck
the obligation. A carrier is not duty bound to due to accident or force majeure must, as a
obey an illegal order (of a mayor) to dump general rule, fall upon their respective
into the sea the scrap iron. There is absence owners, except in cases where the wrecking
of sufficient proof that the issuance of the or stranding of the vessel occurred through
order was attended with such force or the malice, carelessness, or lack of skill on
intimidation as to completely overpower the the part of the captain or because the vessel
will of the carriers employees [Ganzon v. CA put to sea is insufficiently repaired and
(1988)). prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the
Force majeure in general, has also been merchandise was due to accident and force
invoked as an exempting cause based on majeure and not to fraud, fault, or
Art. 1174, which states that no person shall negligence on the part of the captain or
be responsible for a fortuitous event which owner of the ship [Tan Chiong Sian v.
could not be foreseen, or which, though Inchausti (1912)].
foreseen, was inevitable.

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C. CONTRIBUTORY NEGLIGENCE actually used can the carrier be said to have

already assumed the obligation of a carrier
The liability of the common carrier shall be [Paras, Civil Code Annotated, 11th Ed].
equitably reduced when the loss,
destruction, or deterioration of the goods Note: The distinction is important in
when: determining when the common carrier is
required to exercise extraordinary
(1) The negligence of the common carrier responsibility. The birth of the contract is
was the proximate cause thereof; and not necessarily the birth of the duty to
(2) The shipper or owner merely exercise extraordinary responsibility.
contributed to such loss, destruction, or
deterioration [Art. 1741].
D. DURATION OF EXTRAORDINARY Under Art. 1736, delivery means
RESPONSIB ILITY FOR GOODS unconditionally placing the goods in the
The responsibility to exercise extraordinary possession of the carrier and the carrier
diligence begins from the time the goods receiving them for transportation.
are unconditionally placed in the possession Thus, if the common carrier received the
of and received by the carrier for goods not for transportation but only for
transportation [Art. 1736]. safekeeping, then the duty of extraordinary
The carriers responsibility terminates in any diligence has not yet started.
of the following cases: Unconditionally placing the goods in the
(1) When the goods are delivered actually possession of the carrier means the shipper
or constructively by the carrier to the cannot get them back from the common
consignee or to the person who has a carrier at will.
right to receive them [Art. 1736]; The liability of the carrier as common carrier
(2) When the goods are temporarily begins with the actual delivery of the
unloaded or stored in transit by reason goods for transportation and not merely
of the exercise of the shipper or owner with the formal execution of a receipt or bill
of his right of stoppage in transitu; of lading; the issuance of a bill of lading is
not necessary to complete delivery and
(3) When the consignee has been advised acceptance. Even where it is provided by
of the arrival of the goods at the place statute that liability commences with the
of destination and has had reasonable issuance of the bill of lading actual delivery
opportunity to remove them or dispose and acceptance are sufficient to bind the
of them from the warehouse of the carrier [Cia. Maritima v. Ins. Co. of North
carrier at the place of destination [Art. America (1964)].
In dealing with the contract of common
carriage of passengers, for purpose of D.2. ACTUAL/CONSTRUCTIVE DELIVERY
accuracy, there are two (2) aspects of the The extraordinary responsibility of the
same, namely: common carrier ends when, subject to Art.
(a) contract to carry (at some future time), 1738, the goods are delivered actually or
which contract is consensual and is constructively by the carrier to:
necessarily perfected by mere consent; and (1) The consignee; or
(b) contract of carriage or of common (2) The person who has a right to receive
carriage, which should be considered as a them (Art. 1736), such as agents, brokers,
real contract for not until the carrier is and the like.

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Art. 1738 provides that the extraordinary Stoppage in transitu is the act by which
liability of the common carrier continues to the unpaid vendor of goods stops their
be operative even during the time the goods progress and resumes possession of them
are stored in a warehouse of the carrier at constructively while they are in the course of
the place of destination, until the consignee transit from him to the purchaser, and not
has: yet actually delivered to the latter [Agbayani
(1) Been advised of the arrival of the goods;
and Basis: Under Art. 1530, when the buyer of
the goods becomes insolvent, the unpaid
(2) Had reasonable opportunity thereafter
seller who has parted with the possession of
to remove them or otherwise dispose of
the goods at any time while they are in
transit, may resume the possession of the
Delivery of the cargo to the customs goods as he would have had if he had never
authorities is not delivery to the consignee parted with the possession.
or to the person who has a right to receive
When the right of stoppage in transitu is
them as contemplated in Art. 1736 because
exercised, the common carrier holds the
in such case the goods are still in the hands
goods in the capacity of an ordinary bailee
of the government and the owner cannot
or warehouseman upon the theory that the
exercise dominion over them. However, the
exercise of the right of stoppage in transitu
parties may agree to limit the liability of the
terminates the contract of carriage. Hence,
carrier considering that the goods still have
only ordinary diligence is required
to go through the inspection of the customs
[Agbayani (1987)].
authorities before they are actually turned
over to the consignee. This stipulation is not
contrary to morals or public policy. This is a
situation where it may be said that the
carrier loses control of the goods because of LIABILITY
a custom regulation and it is unfair that it
be made responsible for what may happen
during the interregnum [Lu Do v. Binamira There are two possible stipulations limiting
(1957)]. the liability of the common carrier:
(1) Stipulation limiting the common
carriers liability as to the diligence
(2) Stipulation limiting the common
The common carriers duty to observe carriers liability as to the amount of
extraordinary diligence over the goods liability.
remains in full force and effect even when
they are temporarily unloaded or stored in An agreement limiting the common carriers
transit, unless the shipper or owner has liability for delay on account of strikes or
made use of the right of stoppage in riots is also valid [Art. 1748].
transitu [Art. 1737].
General rule: Extraordinary diligence over E.1. AS TO DILIGENCE REQUIRED
the goods remains even when the goods are
temporarily unloaded or stored in transit. A stipulation between the common carrier
and the shipper or owner limiting the
Exception: The duty to observe such liability of the former for the loss,
diligence ceases when shipper or owner destruction, or deterioration of the goods to
made use of the right of stoppage in a degree less than extraordinary diligence
transitu. shall be valid, provided it be:

PAGE 108 OF 320


(1) In writing, signed by the shipper or (2) Stipulation providing for an unqualified
owner; limitation of such liability to an agreed
stipulation [Heacock v. Macondray
(2) Supported by a valuable
consideration other than the service
rendered by the common carrier;
(3) Reasonable, just and not contrary to AMOUNT
public policy [Art. 1744].
A stipulation that the common carriers
liability is limited to the value of the goods
appearing in the bill of lading, unless the
Any of the following or similar stipulations
shipper or owner declares a greater value, is
shall be considered unreasonable, unjust
binding [Art. 1749].
and contrary to public policy:
A contract fixing the sum that may be
(1) That the goods are transported at the
recovered by the owner or shipper for the
risk of the owner or shipper;
loss, destruction or deterioration of the
(2) That the common carrier will not be goods is valid if:
liable for any loss, destruction, or
(1) It is reasonable and just under the
deterioration of the goods;
circumstances; and
(3) That the common carrier need not
(2) It has been fairly and freely agreed upon
observe any diligence in the custody of
[Art. 1750].
the goods;
While a passenger may not have signed the
(4) That the common carrier shall exercise
plane ticket, he is nevertheless bound by
a degree of diligence less than that of a
the provision thereof; such provisions have
good father of a family, or of a man of
been held to be part of the contract of
ordinary prudence in the vigilance over
carriage and valid and binding upon the
the movables transported;
passenger regardless of the latters lack of
(5) That the common carrier shall not be knowledge or assent to the regulation. It is
responsible for the acts or omission of what is known as a contract of adhesion
his or its employees; wherein one party imposes a ready-made
form of contract on the other. The one who
(6) That the common carriers liability for
adheres to the contract is in reality free to
acts committed by thieves, or of robbers
reject it entirely. A contract limiting liability
who do not act with grave or irresistible
upon an agreed valuation does not offend
threat, violence or force, is dispensed
against the policy of the law forbidding one
with or diminished;
from contracting against his own
(7) That the common carrier is not negligence [Ong Yiu v. CA (1979)].
responsible for the loss, destruction, or
[However], the fact that the conditions are
deterioration of goods on account of the
printed at the back of the ticket stub in
defective condition of the car, vehicle,
letters so small that they are hard to read
ship, airplane or other equipment used
would not warrant the presumption that the
in the contract of carriage [Art. 1745].
[shipper] was aware of those conditions
such that he had fairly and freely agreed
The following stipulations are also void: to those conditions [Shewaram v. PAL
(1) Stipulation exempting the common
carrier from any and all liability for loss
or damage occasioned by its own

PAGE 109 OF 320


Factors Affecting Agreement F. LIABILITY FOR BAGGAGE OF

The effect of these stipulations is subject to PASSENGERS
the following provisions:
(1) An agreement limiting the common Baggage are things that a passenger will
carriers liability may be annulled by the bring with him consistent with a temporary
shipper or owner if the common carrier absence from where he lives. Passengers
refused to carry the goods unless the baggage must have a direct relationship
former agreed to such stipulation [Art. with the passenger who is traveling.
For instance, a balikbayan box or suitcase is
(2) If the common carrier, without just passengers baggage. However, 10,000
cause, delays the transportation of the cans of corned beef is not considered as
goods or changes the stipulated or passenger baggage. They are considered as
usual route, the contract limiting the goods. They are not part of the contract of
common carriers liability cannot be carriage [of passenger]. A separate contract
availed of in case of the loss, of carriage [or bill of lading] must be
destruction, or deterioration of the entered into in order to transport them.
goods [Art. 1747]. The limitation may be These goods will then be transported
availed of if the delay or change of route whether or not a person is physically
was due to a just cause. traveling with them [Agbayani (1987)].
(3) The fact that the common carrier has no
competitor along the line or route, or a
part thereof, to which the contract There are two kinds of passengers baggage,
refers shall be taken into consideration which are governed differently:
on the question of whether or not a (1) Passenger baggage in the custody of
stipulation limiting the common the passenger (or carry-on luggage);
carriers liability is reasonable, just and and
in consonance with public policy [Art.
1751]. (2) Passenger baggage not in the
custody of the passenger (or
(4) Even when there is an agreement checked-in luggage).
limiting the liability of the common
carrier in the vigilance over the goods,
the common carrier is disputably The liability is greater for baggage that is in
presumed to have been negligent in the custody of the carrier, or checked-in
case of their loss, destruction or baggage, as compared to those in the
deterioration [Art. 1752]. possession of the passenger.


GREATER VALUE The provisions of Arts 1733-1753 shall apply
to passengers baggage which is not in his
A stipulation that the common carriers personal custody or in that of his employee
liability is limited to the value of the goods [Art. 1754].
appearing in the bill of lading, unless the
shipper or owner declares a greater value, is In other words, the rules governing the
binding [Art. 1749]. responsibility of a common carrier in the
transportation of goods just discussed apply.
Thus, extraordinary diligence is required.

PAGE 110 OF 320


F.2. BAGGAGE IN POSSESSION OF The following provisions also figure in

PASSENGERS determining the liability of the common
As to baggage other than checked-in
baggage, they are governed by Arts 1998, (1) The fact that passengers are
and 2000-2003, concerning the constrained to rely on the vigilance of
responsibility of hotel-keepers [Art. 1754]. the common carrier shall be considered
in determining the degree of care
Art. 1998, as applied by analogy, the
required of him [Art. 2000).
baggage of passengers in their personal
custody or in that of their employees, while (2) The common carrier cannot free himself
being transported, are regarded as from responsibility by posting notices to
necessary deposits. The common carriers the effect that he is not liable for the
are responsible as depositaries, provided articles brought by the passenger.
(3) Any stipulation whereby the
(1) Notice was given to them, or to their responsibility of the common carrier as
employees, of the effects brought by the set forth in Articles 1998-2001 is
passengers; and suppressed or diminished shall be void
[Art. 2003].
(2) The passengers take the precautions
which the common carrier advised
relative to the care and vigilance of their

In case of loss or injury to the baggage of

passengers in their personal custody, or in
that of their employees, while being
transported, the carrier is liable if the loss
or injury is caused by:
(1) His servants;
(2) His employees;
(3) Strangers [Art. 2000]; or
(4) A thief or robber done without the use
of arms or irresistible force [Art. 2001].

The carrier is not liable if loss or injury is

caused by:
(1) Force majeure [Art. 2000);
(2) Theft or robbery with the use of arms or
irresistible force [Art. 2001);
(3) The acts of the passenger, his family,
servants, or visitors;
(4) The character of the baggage [Art.

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III. Safety of stipulation limiting the common carriers

liability for willful acts or gross negligence is
Passengers invalid.
The reduction of fare does not justify any
limitation of the common carriers liability

Under Philippine law, the liability of the C. DURATION OF LIABILITY

common carrier with respect to the safety of
passengers, in general, are as follows:
As in the contract of carriage for goods, the
(1) A common carrier is bound to carry the perfection of the contract of carriage of
passengers safely as far as human care passengers does not necessarily coincide
and foresight can provide, using the with the commencement of the duty of
utmost diligence of very cautious extraordinary diligence. It may occur at the
persons, with a due regard for all the same time or later.
circumstances [Art. 1755].
Based on jurisprudence, the duty that the
(2) In case of death of or injuries to carrier of passengers owes to its patrons
passengers, common carriers are extends to persons boarding the cars as
presumed to have been at fault or to well as those alighting therefrom [Del Prado
have acted negligently, unless they v. Manila Railroad (1929)].
prove that they observed extraordinary
diligence [Art. 1756]. This is also reflected in Art. 17, Warsaw
Convention, which applies to international
Note: It is not enough that the accident air carriage. It provides that the liability of a
was caused by force majeure, the common common carrier for injury to the passenger
carrier must still prove that it was not lasts from embarkation to disembarkation,
negligent in causing the injuries resulting including the period when the passenger is
from such accident. [Bachelor Express v. CA on board the aircraft.
(1990)] Bachelor Express illustrates that
force majeure is not itself a defense; the In maritime commerce, Art. 698, Code of
exercise of the diligence required by law is Commerce relates to the period of the
the defense. voyage:
(1) In case a voyage already begun should
be interrupted:
(a) The passengers shall be obliged to
pay the fare in proportion to the
General rule: The responsibility of a distance covered; and
common carrier for the safety of passengers (b) If the interruption is due to a
cannot be dispensed with or lessened by fortuitous event, without right to
stipulation by the posting of notices, by recover for losses and damages; if
statements on tickets, or otherwise [Art. caused by the captain exclusively,
1757]. with a right to indemnity.
Exception: When a passenger is carried (2) If the interruption should be caused by
gratuitously, a stipulation limiting the the disability of the vessel, and a
common carriers liability for negligence is passenger should agree to await the
valid. repairs:
Exception to the exception: Even when
a passenger is carried gratuitously, a

PAGE 112 OF 320


(a) He may not be required to pay any In this connection, however, a person
increased price of passage; but boarding a moving car must be taken to
assume the risk of injury from boarding the
(b) His living expenses during the stay
car under the conditions open to his view,
shall be for his own account.
but he cannot fairly be held to assume the
(3) In case of delay in the departure of risk that the motorman, having the situation
the vessel, the passengers have: in view, will increase the peril by
accelerating the speed of the car before he
(a) The right to remain on board;
is planted safely on the platform [Del Prado
(b) If the delay is not due to a fortuitous v. Manila Railroad (1929)].
event or force majeure, with the right
to be furnished with food for the
account of the vessel; C.2. ARRIVAL AT DESTINATION
(c) If the delay should exceed ten days: As to the termination of the duty of the
common carrier, it has been held that the
(i) Passengers requesting the
relation of carrier and passenger does not
same shall be entitled to the
cease at the moment the passenger alights
return of the fare; and
from the carriers vehicle at a place selected
(ii) If it is due exclusively to the by the carrier at the point of destination, but
fault of the captain or ship continues until the passenger has had a
agent, they may also demand reasonable time or a reasonable
indemnity for losses and opportunity to leave the carriers premises.
damages. What is a reasonable time or a reasonable
A vessel exclusively devoted to the delay within this rule is to be determined
transportation of passengers must take from all the circumstances:
them directly to the port or ports of (1) A person who, after alighting from a
destination, no matter what the number of train, walks along the station platform
passengers may be, making all the stops is considered still a passenger;
indicated in its itinerary.
(2) A passenger, who has alighted at his
destination and is proceeding by the
C.1. WAITING FOR CARRIER OR usual way to leave the companys
BOARDING OF CARRIER premises, but before actually doing so is
halted by the report that his brother, a
As to the commencement of the duty of the fellow passenger, has been shot, and he
common carrier, in Del Prado v. Manila in good faith and without intent of
Railroad (1929), it was held that the duty engaging in the difficulty, returns to
extends to persons boarding the cars as relieve his brother, is deemed
well as those alighting therefrom. reasonably and necessarily delayed and
Thus, it is the duty of common carriers of thus continues to be a passenger
passengers to stop their conveyances at a entitled as such to the protection of the
reasonable length of time in order to afford railroad and company and its agents [La
passengers an opportunity to board and Mallorca v. CA (1966)].
enter, and they are liable for injuries The reasonableness of time should be made
suffered by boarding passengers resulting to depend on the attending circumstances
from the sudden starting up or jerking of of the case, such as the kind of common
their conveyances while they are doing so carrier, the nature of its business, the
[Dangwa Transportation v. CA (1991)]. customs of the place, and so forth, and
therefore precludes a consideration of the
time element per se without taking into
account such other factors. The primary

PAGE 113 OF 320


factor to be considered is the existence of a This liability does not cease even upon proof
reasonable cause as will justify the presence that they exercised all the diligence of a
of the victim on or near the petitioners good father of a family in the selection and
vessel. supervision of their employees [Art. 1759].
In the case of a shipper, the passengers of Also, this liability cannot be eliminated or
vessels are allotted a longer period of time limited by stipulation, by the posting of
to disembark from the ship than other notices, by statements on the tickets or
common carriers such as a passenger bus, otherwise [Art. 1760].
since such vessels are capable of
Ratio: The servant is clothed with
accommodating a bigger volume of both
delegated authority and charged with the
passenger and baggage as compared to the
duty to execute the carriers undertaking to
capacity of a regular commuter bus.
carry the passenger safely [Agbayani (1987)].
Consequently, a ship passenger will need at
Also, the defense of diligence in the
least an hour as is the usual practice, to
selection and supervision of employees
disembark from the vessel and claim his
does not obtain because the liability is not
baggage whereas a bus passenger can
based on quasi-delict, but on culpa
easily get off the bus and retrieve his
contractual. However, there must be a
luggage in a very short period of time
reasonable connection between the act and
[Aboitiz Shipping v. CA (1989)].
the contract of carriage.
The relation of carrier and passenger
Note: The employee must be on duty at the
continues until the latter has been landed
time of the act.
at the port of destination and has left the
carriers premises. Hence, the carrier It is enough that the assault happens
necessarily would still have to exercise within the course of the employees
extraordinary diligence in safeguarding the duty. It is no defense for the carrier that the
comfort, convenience and safety of its act was done in excess of authority or in
stranded passengers until they have disobedience of the carriers orders. The
reached their final destination [PAL v. CA carriers liability here is absolute in the
(1993)]. sense that it practically secures the
passengers from assaults committed by its
Note: Despite the Courts pronouncement
own employees [Maranan v. Perez (1967)].
in PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in
the safety of its passengers. The law does
not mention the words comfort and
A common carrier is responsible for injuries
suffered by a passenger on account of the
D. LIABILITY FOR ACTS OF OTHERS willful acts or negligence of other
passengers or of strangers, if the common
carriers employees through the exercise of
D.1. EMPLOYEES the diligence of a good father of a
fam ily could have prevented or stopped
Common carriers are liable for the death of the act or omission [Art. 1763].
or injuries to passengers through the
negligence or willful acts of the formers Note: The law speaks of injuries suffered by
employees, although such employees may the passenger but not death. However,
have acted beyond the scope of their there appears to be no reason why the
authority or in violation of the orders of the common carrier should not be held liable
common carriers. under such circumstances. The word
injuries should be interpreted to include
death [Agbayani (1987)].

PAGE 114 OF 320


Under Art. 1763, a tort committed by a It is negligence per se for a passenger on a

stranger which causes injury to a passenger railroad to voluntarily or inadvertently
does not accord the latter a cause of action protrude his arm, hand, elbow, or any other
against the carrier. The negligence for part of his body through the window of a
which a common carrier is held responsible moving car beyond the outer edge of the
is the negligent omission by the carriers window or outer surface of the car, so as to
employees to prevent the tort from being come in contact with objects or obstacles
committed when the same could have been near the track; no recovery can be had for
foreseen and prevented by them. Further, an injury which but for such negligence
when the violation of the contract is due to would not have been sustained [Isaac v. A. L.
the willful acts of strangers, as in the Ammen Transportation (1975)]. In this case,
instant case, the degree of care essential to the negligence of the passenger was not
be exercised by the common carrier for the contributory, but was the proximate cause
protection of its passenger is only that of a of the injury. Hence, the common carrier
good father of a family [Pilapil v. CA was exempted from liability.


While the carrier is not an insurer of the
safety of the passengers, it should
nevertheless be held answerable for the Damages recoverable from common
flaws of its equipment, if such flaws were carriers, both in cases of carriage of
discoverable. The rationale for the common passengers and goods, shall be awarded in
carriers liability for manufacturing defects accordance with Title XVIII concerning
is the fact that the passenger has neither Damages.
choice nor control over the carrier in the Art. 2206, on liability, in case of death, for
selection and use of the equipment and loss of earning capacity, support, and moral
appliances in use by the carrier. Having no damages for mental anguish, shall also
privity whatever with the manufacturer or apply to the death of a passenger caused by
vendor of the defective equipment, the the breach of contract by a common carrier
passenger has no remedy against him [Art. 1764].
[Necesito v. Paras (1958)].
Thus, the damages recoverable are:
(1) Actual or compensatory damages;
(2) Moral damages;
(3) Exemplary damages;
The passenger must observe the diligence
(4) Nominal, temperate, and liquidated
of a good father of a family to avoid injury to
himself [Art. 1762].
(5) Attorneys fees.
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 [Art. Actual or compensatory damages
1762]. refer to adequate compensation for such
pecuniary loss suffered as duly proved
(Art. 2199].

PAGE 115 OF 320


Under Art. 2201, the liability for damages (2) The common carrier acted in bad faith
include: [Art. 2220];
(1) In case the common carrier acted in (3) Death of a passenger resulted even in
good faith: the absence of bad faith or fraud [Art.
(a) The natural and probable
consequence of the breach of the Bad faith contemplates a state of mind
obligation; and affirmatively operating with furtive design
or with some motive of self-interest or will
(b) Those which the parties have
or for ulterior purpose [Air France v.
foreseen or could have reasonably
Carrascoso (1966)].
foreseen at the time the obligation
was constituted; When it comes to contracts of common
carriage, inattention and lack of care on the
(2) In case of fraud, bad faith, malice or
part of the carrier resulting in the failure of
wanton attitude, all damages which
the passenger to be accommodated in the
may be reasonably attributed to the
class contracted for amounts to bad faith or
non-performance of the obligation.
fraud which entitles the passenger to the
In case of death, actual damages also award of moral damages in accordance
include: with Art. 2220 [Ortigas v. Lufthansa (1975)].
(1) Loss of earning capacity, unless the Willful and deliberate overbooking on the
deceased had no earning capacity at the part of the airline carrier constitutes bad
time of death; and faith. Under Section 3, Economic
Regulations No. 7 of the Civil Aeronautics
(2) Support for a period not exceeding five
Board, overbooking, which does not exceed
years [Art. 2206].
ten percent, is not considered as deliberate
Note: Art. 2206 applies only in case of and therefore does not amount to bad
death of the passenger. faith [United Airlines v. CA (2001)].
In the absence of a showing that common
carriers attention was called to the special
circumstances requiring prompt delivery of
a passengers luggage, the common carrier In a contract of carriage, exemplary
cannot be held liable for the cancellation of damages may be awarded if the common
passengers contracts [for exhibition of carrier acted in wanton, fraudulent, reckless,
films] as it could not have foreseen such an oppressive, or malevolent manner [Art.
eventuality when it accepted the luggage 2232].
for transit [Pan-Am World Airways v. IAC
Exemplary damages serves as an
instrument to serve the ends of law and
public policy by reshaping socially
deleterious behaviors, specifically, in the
case, to compel the common carrier to
Moral damages, though incapable of control their employees, to tame their
pecuniary computation, if they are the reckless instincts, and to force them to take
proximate result of the common carriers adequate care of human beings and their
wrongful act or omission, may be recovered property [Mecenas v. CA].
[Art. 2217].
In cases of breach of contract of carriage,
moral damages may be recovered where:
(1) The common carrier acted fraudulently;

PAGE 116 OF 320



IV. Bill of Lading
Nominal dam ages are adjudicated in (Reference is to the Code of Commerce,
order that a right of the plaintiff, which has unless otherwise indicated)
been violated by the defendant, may be
vindicated or recognized, not for the
purpose of indemnifying the plaintiff for any Definition
loss suffered by him [Art. 2221]. It may be Bill of lading a written
awarded in case of breach of contract of acknowledgement, signed by the master of
carriage and in every case where any a vessel or other authorized agent of the
property right has been invaded [Art. 2222]. carrier, that he has received the described
A violation of the passengers right to be goods from the shipper, to be transported
treated with courtesy in accordance with the on the expressed terms to the described
degree of diligence required by law to be place of destination, and to be delivered
exercised by every common carrier entitles there to the designated consignee or parties
the passenger to nominal damages [Saludo [70 Am. Jur. 2d 924].
v. CA]. It is not, however, indispensable for the
Temperate or moderate damages, creation of a contract of carriage. [Cia.
which are more than nominal but less than Maritima v. Ins. Co. of North America (1964)].
compensatory damages, may be recovered In the absence of a bill of lading, disputes
when some pecuniary loss has been shall be determined by the legal proofs
suffered but its amount cannot, from the which the parties may present in support of
nature of the case, be proved with certainty their respective claims, according to the
[Art. 2224]. general provisions established in the Code
Liquidated damages are those damages of Commerce for commercial contracts [Art.
agreed upon by the parties to a contract, to 354, Code of Commerce].
be paid in case of breach thereof [Art. 2226]. The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino, Essentials of Transportation
F.5. ATTORNEYS FEES & Public Utilities Law (2011)].
Under Art. 2208, as applicable to a contract In the absence of fraud, concealment, or
of carriage, attorneys fees and expenses of improper conduct, it is presumed that the
litigation may be recovered in the following stipulations of the bill are known to the
cases: shipper, and he is generally bound by his
(1) When exemplary damages are awarded; acceptance whether he reads the bill or not
[Magellan Mfg. Marketing Corp. v. CA (1991)].
(2) When the common carriers act or
omission has compelled the plaintiff to
litigate with third persons or to incur A. THREE-FOLD CHARACTER:
expenses to protect his interest;
(1) Receipt as to the quantity and
(3) Where the common carrier acted in description of the goods shipped;
gross and evident bad faith in refusing
to satisfy the plaintiffs valid, just and (2) Contract to transport and deliver
demandable claim; the goods to the consignee or other
person therein designated, on the terms
(4) In any other case where the court deems specified in such instrument; and
it just and equitable that attorneys fees
and expenses of litigation should be (3) Docum ent of title, which makes it a
recovered. symbol of the goods.

PAGE 117 OF 320


The bill of lading constitutes the legal merchandise which he may make to the
evidence of the contract of transportation, point of delivery. Should he not do so, he
and all disputes between the parties shall be liable for damages cause by the
regarding the execution and performance of delay [Art. 358].
the contract shall be decided by the
If no indemnity is fixed and there is delay,
contents of the bill of lading issued by the
the carrier shall be liable for the damages
carrier. The law admits no exceptions other
which may have been caused by the delay
than the falsity and material error in its
[Art. 370].
drafting [Art. 353].


After the contract has been complied with,
General Rule: The carrier cannot refuse the bill of lading which the carrier has
to carry a particular class of goods. issued shall be returned to him, and by
Exception: When the goods are unfit for virtue of the exchange of this title with the
transportation. thing transported, the respective
obligations and actions shall be considered
If transportation is insisted upon in case of cancelled, unless in the same act the claim
railway transport, the company shall carry which the parties may wish to reserve be
them, but it shall be exempt from all reduced to writing, exception being made of
responsibility if the objections are so stated the provisions of Art. 366, on period for
in the bill of lading [Art. 356]. filing claims [Art. 353, 2nd para.].
If, in case of loss or for any other reason
C. DELIVERY OF GOODS whatsoever, the consignee cannot return,
upon receiving the merchandise, the bill of
lading subscribed by the carrier, he shall
The goods should be delivered to the give said carrier a receipt for the goods
consignee or any other person to whom the delivered. This receipt produces the same
bill of lading was validly transferred or effects as the return of the bill of lading [Art.
negotiated. 353, 3rd para.].
The carrier is duty bound to deliver the
goods in the same condition in which,
according to the bill of lading, they were
found at the time of there were received,
without damage or impairment [Art. 363]. The consignee may refuse to take delivery in
the following cases:
(1) If only part of the goods transported
should be delivered, when he proves
Delivery should be made within the period that he cannot make use thereof
fixed for the delivery of the goods as without the others [Art. 363].
stipulated in the bill of lading [Art. 370].
(2) When the goods are rendered useless
In case of failure to deliver, the carrier shall for purposes of sale or consumption in
pay the indemnity agreed upon in the bill of the use for which they are properly
lading, neither the shipper nor consignee destined, in which case the consignee
being entitled to anything else. may demand payment of the goods at
Should there be no period previously fixed, current market prices [Art. 365];
the carrier is bound to forward the goods in (3) In case part of the goods is in good
the first shipment of the same or similar condition and separation is possible,

PAGE 118 OF 320


the consignee may refuse to receive only governing their actions. Understandably,
the damaged goods [Art. 365]. when the goods were delivered, the
necessary clearance had to be made before
(4) Where the delay is through the fault of
the package was opened. Upon opening
the carrier [Art. 371].
and discovery of the damaged condition of
In case of dispute as to the condition of the the goods, a report to this effect had to pass
goods, the same shall be examined by through the proper channels before it could
experts appointed by the parties, and the be finalized and endorsed by the institution
third one, in case of disagreement, to the claims department of the shipping
appointed by the judicial authority. company.
If the persons interested should not agree No claim whatsoever shall be admitted
with the report, said judicial authority shall against the carrier with regard to the
order the deposits of the merchandise in a condition in which the goods transported
safe warehouse, and the parties interested were delivered:
shall make use of their rights in the proper
(1) After the periods mentioned have
manner. [Art. 367].
elapsed; or
(2) After the transportation charges have
The periods mentioned commence upon
Pursuant to Art. 366, Code of Commerce, a delivery of cargo to the consignee at the
claim , on account of damage found upon place of destination.
opening the packages, must be made Thus, Art. 366 is limited to cases of claims
against the carrier: for damage to goods actually turned over by
(1) Within 24 hours, if the indications of the the carrier and received by the consignee. It
damage cannot be ascertained from the does not apply to misdelivery of goods.
exterior of the packages (i.e., latent Failure to file a claim bars recovery (Aquino
damage); or (2011)].
(2) At the time of receipt, if the indications
damage can be so ascertained (i.e.,
patent damage). Ratio: The rule protects the carrier by
affording it an opportunity to make an
investigation of a claim while the matter is
But the Court in Aboitiz v Insurance still fresh and easily investigated so as to
Company of North America [GR No. 168402, safeguard itself from false and fraudulent
6 Aug 2008] made a pro hac vice ruling, in claims [UCPB General Ins. Co., Inc. v. Aboitiz
that even if the notice was given more than Shipping (2009)].
24 hrs after the receipt of the goods, the However, the periods prescribed may be
notice requirement was held nevertheless to subject to modification by agreement of the
have been complied with, due to the parties. [PHILAMGEN v. Sweet Lines, Inc.
peculiar circumstances: (1992)].
Provisions specifying a time to give notice The value of the goods stated in the bill of
of damage to common carriers are lading is conclusive between the parties,
ordinarily to be given a reasonable and and the shipper is not allowed to prove a
practical, rather than a strict construction. higher value [Art. 372]. It is only when the
We give due consideration to the fact that carriers fault is so gross as to amount to
the final destination of the damaged cargo actual fraud that the actual amount of the
was a school institution where authorities losses an damages suffered may be proved
are bound by rules and regulations by the shipper against the carrier.

PAGE 119 OF 320


Horses, vehicles, vessels and equipment FALSE DECLARATION OF CONTENTS

used by the carrier serves as liens for the
If the carrier has a well-founded suspicion
payment of the value of the goods which the
of falsity in the declaration of the contents
carrier must pay in case of loss or
of the package, the carrier may examine it.
misplacement [Art. 372].
If the declaration should be correct,
examination and repacking expenses shall
be defrayed by the carrier, and in the
E. PERIOD FOR FILING ACTIONS contrary, by the shipper [Art. 357].


The responsibility of the carrier commences
The general rules under the Civil Code on
from the moment he personally or through
extinctive prescription apply. Thus, action
his duly authorized agent receives the
for damages must be filed in court:
merchandise, and at the place indicated for
(1) Within 6 years, if a bill of lading was not their reception [Art. 355].
issued [Art. 1145, Civil Code].
When there is an agreed route, the carrier
(2) Within 10 years, if a bill of lading was shall be liable for losses due not only to the
issued [Art. 1146, Civil Code]. change of route but also to other causes,
together with the indemnity agreed upon
[Art. 359]. When there is no agreed route,
E.2. INTERNATIONAL CARRIAGE OF the carrier must select one which may be
GOODS BY SEA the shortest, least expensive and practically
Suit must be brought within one year: passable.

(1) After delivery of the goods; or All damages and impairment suffered by
the goods during the transportation, by
(2) From the date when the goods should reason of fortuitous event or by the nature
have been delivered. or defect of the articles, shall be for the
Otherwise, the carrier and the ship shall be account of the shipper. Proof of these
discharged from all liability in respect of accidents is incumbent on the carrier [Art.
loss or damage. 361].

The absence of notice shall not affect or Note: Common carriers are responsible
prejudice the right of the shipper to bring for loss, destruction or deterioration of the
suit within one year after the delivery of the goods, unless it exercised extraordinary
goods or the date when the goods should diligence, or the loss is due to Art. 1734 of
have been delivered [Section 3(6), Carriage the Civil Code.
of Goods by Sea Act].
The period for filing the claim is one year, in
accordance with the Carriage of Goods by
Sea Act. The Carriage of Goods by Sea Act,
as adopted and embodied in
Commonwealth Act No. 65, applies
because it is a special law, and, as such,
prevails over the general provisions of the
Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA].

PAGE 120 OF 320


V. Admiralty and (3) Voyage or trip charter [Litonjua

Shipping, Inc. v. National Seamen Board
Maritime Commerce (1989)].
Note: Both time and voyage charters are
said to be contracts of affreightment, where
Concept a common or public carrier is not converted
into a private carrier.
The concept of admiralty, as distinguished
from overland transportation, depends on:
(1) Size of the vessel; and Contract of affreightment one in
which the owner of the vessel leases part or
(2) Size of the body of water over which such all of its space to haul goods for others. It is
vessel traverses. a contract for special service to be rendered
by the owner of the vessel and under such
contract the general owner retains the
Under B.P. 129, jurisdiction over admiralty possession, command and navigation of the
cases depends on the amount, and not on ship, the charterer or freighter merely
the nature of the claim. having use of the space in the vessel in
return for his payment of the charter hire
[Puromines, Inc. v. CA (1993)].

Bill of lading distinguished from a

Charter party a contract by virtue of charter party
which the owner or agent of a vessel binds
himself to transport merchandise or A charter party is a complete contract, while
persons for a fixed price. a bill of lading is a private receipt which the
captain gives to accredit that such goods
It is a contract by which the owner or agent belong to such persons.
of the vessel leases for a certain price the
whole or portion of a vessel for the A charter party is a consensual contract
transportation of the goods or persons from which can be dissolved by means of
one port to another. indemnity for losses and damages; while a
bill of lading is a real contract which exists
It is a contract whereby the whole or part of only after delivery of the goods to be
the ship is let by the owner to a merchant or transported is made.
other person for a specified time or use for
the conveyance of goods, in consideration of Liabilities arising from breach is identical to
the payment of freight [Caltex v. Sulpicio overland transport.
Lines (1999)].
Towage is not a charter party. It is a A.1. BAREBOAT OR DEMISE CHARTER
contract for the hire of services by which a
vessel is engaged to tow another vessel In a bareboat or demise charter, the ship
from one port to another for consideration. owner leases to the charterer the whole
vessel, transferring to the latter the entire
In modern maritime law and usage, there command, possession and consequent
are three distinguishable types of charter control over the vessels navigation,
parties: including the master and the crew, who
(1) Bareboat or demise charter; thereby become the charterers servants
[Aquino (2011)].
(2) Time charter; and

PAGE 121 OF 320


To create a demise, the owner of a vessel A.3. VOYAGE OR TRIP CHARTER

must completely and exclusively relinquish
In a voyage charter, the vessel is leased for
possession, com m and and
a single or particular voyage. The master
navigation thereof to the charterer,
and crew remain the employ of the owner of
anything short of such a complete transfer
the vessel [Litonjua Shipping Co., Inc. v.
is a contract of affreightment (time or
National Seamen Board (1989)].
voyage charter party) or not a charter party
at all.
Although a charter party may transform a B. LIABILITY OF SHIP OWNERS AND
common carrier into a private one, the same, SHIPPING AGENTS
however, is not true in a contract of
affreightment on account of the distinctions
between a contract of affreightment and a The persons participating in maritime
demise or bareboat charter [Puromines, Inc. commerce are the following:
v. CA (1993)].
(1) Ship owners or ship agents
Note: In a bareboat or demise charter, the
common carrier is converted to private (2) Captains and masters
carrier. (3) Other officers and crew
The charterer, to whom the owner of the (4) Supercargoes
vessel relinquishes, completely and
exclusively, the possession, command and
navigation of the vessel, by virtue of a The ship owner has possession, control
demise charter, is considered the owner pro and management of the vessel and the
hac vice. He mans and equips the vessel and consequent right to direct her navigation
assumes all responsibility for navigation, and receive freight earned and paid, while
management and operation. He thus acts his possession continues; he is the person
as the owner of the vessel in all important who is primarily liable for damages
aspects during the duration of the charter sustained in the operation of the vessel,
[Puromines, Inc. v. CA (1993)]. based on the provisions of the Code of

A.2. TIME CHARTER A ship agent is the person entrusted with

the provisioning of a vessel, or who
Time charter a contract for the use of a represents her in the port in which she
vessel for a specified period of time or for happens to be [Art. 586].
the duration of one or more specified
voyages. The ship agent, even though he is not the
owner, is liable in every way to the creditor
In this case, the owner of a time-chartered for losses and damages, without prejudice
vessel retains possession and control to his right against the owner, the vessel
through the master and crew, who remain and its equipment and freight [Aquino
his employees. What the time charterer (2011)].
acquires is the right to utilize the carrying
capacity and facilities of the vessel and to Captains are those who govern vessels
designate her destinations during the term that navigate the high seas or ships of large
of the charter [Litonjua Shipping Co., Inc. v. dimensions and importance, although they
National Seamen Board (1989)]. may be engaged in coastwise trade.
Masters are those who command smaller
ships engaged exclusively in coastwise
trade. In maritime commerce, masters and
captains are the same.

PAGE 122 OF 320


A crew is a person on board who is involved B.1. LIABILIITY FOR ACTS OF CAPTAIN
in highly technical tasks and in manning of
Three (3) distinct roles of a captain:
the vessel (e.g. master, mate).
(1) General agent of the ship owner;
A com plem ent is a person, not a crew,
who is not directly involved in the manning (2) Commander and technical director of
of the vessel (e.g. cook). the vessel;
Supercargo is a person on board the (3) Representative of the country under
vessel, who functions as an agent of the whose flag he navigates [Inter-Orient
owner of the goods shipped as cargo on a Marine Enterprises v. NLRC (1994)].
vessel, who has charge of the cargo on
board, sells the same to the best advantage
in the foreign markets, buys cargo to be The captain shall be liable to the
brought back on the return voyage of the agent, and the latter to third
ship, and comes home with it. persons:
The powers and liabilities of the captain (1) For all the damages suffered by the
shall cease, when there is a supercargo, vessel and his cargo by reason of want
with regard to that part of the of skill or negligence on his part;
administration legitimately conferred upon (2) For all the thefts committed by the crew,
the latter, but shall continue in force for all reserving his right of action against the
acts which are inseparable from his guilty parties;
authority and office [Art. 649].
(3) For the losses, fines, and confiscations
imposed on account of violation of the
The ship owner or ship agent is laws and regulations of customs, police,
liable: health, and navigation;
(1) For the acts of the captain, unless the (4) For the losses and damages caused by
latter exceeds his authority [Art. 586]. mutinies on board the vessel, or by
reason of faults committed by the crew
(2) For contracts entered into by the
in the service and defense of the same,
captain to repair, equip and provision
if he does not prove that he made full
the vessel, provided that the amount
use of his authority to prevent or avoid
claimed was invested for the benefit of
the vessel [Art. 586].
(5) For those arising by reason of an undue
(3) For the indemnities in favor of third
use of powers and non-fulfillment of the
persons which may arise from the
obligations which are his;
conduct of the captain in the care of the
goods transported, as well as for the (6) For those arising by reason of his going
safety of passengers transported [Art. out of his course or taking a course
587]. which he should not have taken without
sufficient cause, in the opinion of the
(4) For damages to third persons for tort or
officers of the vessel at a meeting with
quasi-delict committed by the captain,
the shippers or supercargoes who may
except collision with another vessel [Art.
be on board;
1759, Civil Code].
(7) For those arising by reason of his
(5) For damages in case of collision due to
voluntarily entering a port other than
the fault, negligence, or want of skill of
that of his destination;
the captain, sailing mate, or any other
member of the complement [Art. 826]. (8) For those arising by reason of non-
observance of the provisions contained
in the regulations on situation of lights

PAGE 123 OF 320


and maneuvers for the purpose of contribution to the common fund, for
preventing collisions [Art. 618]. the results of the acts of the captain,
referred to in Art. 587. Each part owner
may exempt himself from this liability
B.2. EXCEPTIONS TO LIMITED LIABILITY by the abandonment before a notary of
the part of the vessel belonging to him
The Doctrine of Limited Liability
[Art. 590].
(Hypothecary Rule)
(3) In case of collision, the liability of the
The real and hypothecary nature of
ship owner shall be understood as
maritime law simply means that the liability
limited to the value of the vessel with all
of the carrier in connection with losses
her appurtenances and all the freight
related to maritime contracts is confined to
earned during the voyage [Art. 837].
the vessel, which is hypothecated for such
obligations or which stands as the guaranty (4) If the vessel and her freight should be
for their settlement. totally lost, by reason of capture or
wreck, all rights of the crew to demand
It has its origin by reason of the conditions
any wages whatsoever shall be
and risks attending maritime trade in its
extinguished, as well as the agent for
earliest years when such trade was replete
the recovery of the advances made [Art.
with innumerable and unknown hazards
since vessels had to go through largely
uncharted waters to ply their trade. It was If the ship owner or agent may in any way be
designed to offset such adverse conditions held civilly liable at all for injury to or death
and to encourage people and entities to of passengers arising from the negligence
venture into maritime commerce despite of the captain in cases of collisions or
the risks and the prohibitive cost of shipwrecks, his liability is merely co-
shipbuilding. extensive with his interest in the vessel such
that a total loss thereof results in its
Thus, the liability of the vessel owner and
extinction. This is based on the exclusively
agent arising from the operation of such
real and hypothecary nature of maritime
vessel were confined to the vessel itself, its
law, which operates to limit such liability to
equipment, freight, and insurance, if any,
the value of the vessel, or to the insurance
which limitation served to induce capitalists
thereon, if any. [Yangco v. Laserna (1941)]
into effectively wagering their resources
against the consideration of the large
profits attainable in the trade [Aboitiz
Shipping Corp. v. General Accident Fire and
Life Assurance Corp. (1993)]. (1) Claims under the Workmens
Compensation Act [Abueg v. San Diego];
(2) Expenses for repairing, provisioning and
Thus, under the doctrine of abandonment:
equipping the vessel;
(1) The agent shall be civilly liable for the
(3) There is an actual finding of negligence
indemnities in favor of third persons
on the part of the vessel owner or agent
which arise from the conduct of the
[Aboitiz Shipping v. General Accident Fire
captain in the care of the goods which
and Life Assurance Corp. (1993)];
the vessel carried, but he may exempt
himself therefrom by abandoning the (4) Vessel is insured, to the extent of the
vessel with all her equipment and the insurance proceeds [Vasquez v. CA
freight he may have earned during the (1985)];
voyage [Art. 587];
(5) There was no total loss;
(2) The owners of a vessel shall be civilly
(6) Collision between two negligent vessels.
liable in the proportion of their

PAGE 124 OF 320


C. ACCIDENTS AND DAMAGES IN saved, as well as lenders on bottomry or

The following shall be considered averages: 1. REQUISITES
(1) All extraordinary or accidental expenses (1) There must be a common danger;
incurred during the navigation for the (2) That for the common safety, part of the
preservation of the vessel or cargo, or vessel or of the cargo or both is
both; sacrificed deliberately;
(2) All damages or deterioration the vessel (3) That from the expenses or damages
may suffer from the time she puts to sea caused follows the successful saving of
from the port of departure until she the vessel and cargo;
casts anchor in the port of destination,
and those suffered by the merchandise (4) That the expenses or damages should
from the time it is loaded in the port of have been incurred or inflicted after
shipment until it is unloaded in the port taking proper legal steps and authority
of consignment [Art. 806]. [Magsaysay, Inc. v. Agan [1955]].
There are two kinds of averages: Common danger means both the ship
and the cargo, after it has been loaded, are
(1) Particular or simple average; and subject to the same danger, whether during
(2) Gross or general average. the voyage, or in the port of loading or
unloading, that the danger arises from the
accidents of the sea, dispositions of the
I. SIMPLE AVERAGE authority, or faults of men, provided that
the circumstances producing the peril
Particular or simple averages shall include should be ascertained and imminent or may
all damages and expenses caused to the rationally be said to be certain and
vessel or cargo that did not inure to the imminent. This last requirement excludes
common benefit and profit of all persons measures undertaken against a distant peril
interested in the vessel and her cargo [Art. [Magsaysay, Inc. v. Agan [1955]].
Note: When a vessel is stranded
The owner of the goods which gave rise to unintentionally, the damages incurred
the expense or suffered the damage shall cannot constitute general averages.
bear this average [Art. 810].


(1) The goods or cash invested in the
General or gross averages shall include all redemption of the vessel or cargo
the damages and expenses which are captured by enemies, privateers, or
deliberately caused in order to save the pirates, and the provisions, wages, and
vessel, her cargo, or both at the same time, expenses of the vessel detained during
from a real and known risk [Art. 811]. the time the arrangement or
The gross or general average shall be borne redemption is taking place;
by those who benefited from the sacrifice. (2) The goods jettisoned to lighten the
These include the ship owner and the vessel, whether they belong to the
owners of the cargoes that were saved. vessel, to the cargo, or to the crew, and
Contribution may also be imposed on the the damage suffered through said act
insurers of the vessel or cargoes that were by the goods kept;

PAGE 125 OF 320


(3) The cables and masts which are cut or cargo should be transferred to lighters
rendered useless, the anchors and the or barges and be lost, the owner of said
chains which are abandoned in order to part shall be entitled to indemnity, as if
save the cargo, the vessel, or both; the loss has originated from a gross
average [Art. 817];
(4) The expenses of removing or
transferring a portion of the cargo in (14) If, as a necessary measure to extinguish
order to lighten the vessel and place her a fire in a port; roadstead; creek, or bay,
in condition to enter a port or roadstead, it should be decided to sink any vessel,
and the damage resulting therefrom to this loss shall be considered gross
the goods removed or transferred; average, to which the vessels saved
shall contribute.
(5) The damage suffered by the goods of
the cargo through the opening made in (15)
the vessel in order to drain her and
prevent her sinking;
The captain shall direct the jettison, and
(6) The expenses caused through floating a
shall order the goods cast overboard in the
vessel intentionally stranded for the
following order:
purpose of saving her;
(1) Goods on deck - beginning with those
(7) The damage caused to the vessel which
which embarrass the maneuver or
it is necessary to break open, scuttle, or
damage the vessel, preferring if
smash in order to save the cargo;
possible, the heaviest ones with the
(8) The expenses of curing and maintaining least utility and value;
the members of the crew who may have
(2) Goods below the upper deck - always
been wounded or crippled in defending
beginning with those of the greatest
or saving the vessel;
weight and smallest value, to the
(9) The wages of any member of the crew amount and number absolutely
detained as hostage by enemies, indispensable [Art. 815].
privateers, or pirates, and the necessary
expenses which he may incur in his
imprisonment, until he is returned to To include the goods jettisoned in the
the vessel or to his domicile, should he general or gross average, the existence of
prefer it; the cargo or goods must be proved:
(10) The wages and victuals of the crew of a (1) For cargo by means of bill of lading;
vessel chartered by the month during
(2) For good belonging to the vessel by
the time it should be embargoed or
means the inventory prepared prior to
detained by force majeure or by order of
departure [Art. 816].
the Government, or in order to repair
the damage caused for the common
(11) The loss suffered in the value of the Jason clause is a provision in the contract
goods sold at arrivals under stress in of carriage that requires the cargo owners
order to repair the vessel because of to contribute in general average though the
gross average; event which gave rise to the sacrifice or
(12) The expenses of the liquidation of the expenditure may have been due to the fault
average [Art. 811]; of one of the parties to the adventure [Rule
D, York Antwerp Rules].
(13) If in lightening a vessel on account of a
storm, in order to facilitate her entry
into a port or roadstead, part of her

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5. PROCEDURE FOR RECOVERY When 2 power-driven vessels are meeting

head on, or nearly head on, so as to involve
(1) Assembly and deliberation with the
risk of collision, each shall alter her course
sailing mate and other officers;
to starboard (right side), so that each may
(2) Resolution of the captain adopted; pass on the port (left) side of the other.
[Smith Bell and Co. v. CA (1991)].
(3) Hearing of the persons interested. In
case an interested person should not be Note: Liability in collision cases is
heard, he shall not contribute to the negligence-based. The person who caused
gross average [Art. 813, Code of the injury is both civilly and criminally liable
Commerce]; [Aquino (2011)].
(4) Resolution to be entered in the log book, Classes of Collision:
stating the motives and reasons
(1) Fortuitous - none was at fault;
therefore as well as the votes and
reason for disagreement [Art. 814, Code (2) Culpable - one or more vessels were at
of Commerce]; fault;
(5) Minutes to be signed by all the persons (3) Inscrutable Fault - it cannot be
present or in urgent cases, the captain; determined which of the vessels was at
(6) Captain shall deliver one copy of the
minutes to the maritime judicial
authority of the first port he may make
within 24 hours [Art. 814];
When it is due to a fortuitous event or force
(7) Captain shall ratify the minutes under
majeure, each vessel and its cargo shall
oath [Art. 814].
bear its own damages [Art. 830].
When, by reason of force m ajeure, a
C.2. COLLISIONS vessel properly anchored and moored
collides with another, the injury occasioned
Collision is an impact or sudden contact
shall be looked upon as particular average
between two moving vessels [Aquino (2011)].
to the vessel run into [Art. 832].
Allision is the striking of a moving vessel
against one that is stationary.
The steamers greater facility of
maneuvering over a sail vessel means it has When only one vessel is at fault, the
the greater ability to avoid collisions; so as a owner of the vessel at fault shall indemnify
general rule, when meeting a sailing vessel, the losses and damages suffered, after an
whether close hauled or with the wind free, expert appraisal.
the sail vessel has a right to keep her course,
When both vessels are at fault, each
and it is the duty of the steamer to adopt
shall suffer its own damages, and both shall
precautions as will avoid the sail vessel
be solidarily responsible for the losses and
Subject to the general rules of evidence in
damages occasioned to their cargoes [Art.
collision cases as to the burden of proof, in
the case of a collision between a steam
vessel and a sail vessel, the presumption is Note: The ship owners cannot successfully
against the steam vessel, and she must maintain an action against the other for the
show that she took the proper measures to loss or injury to his vessel.
avoid a collision. [A. Urrutia & Co. v. Baco
When a third vessel at fault, the owner
River Plantation Co. [1913)].
of the third vessel shall indemnify the losses
and damages caused, the captain thereof
being civilly liable to said owner [Art. 831].

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III. INSCRUTABLE FAULT Note: Expenses for arrival under stress are
particular averages [see Art. 821].
In case of inscrutable fault, that is, if it
cannot be decided which of the two vessels
was the cause of the collision, each shall
bear his own damage and both shall be
jointly responsible for the losses and Shipwreck denotes loss or wreck of a
damages suffered by their cargoes [Art. vessel at sea as a consequence of running
828]. against another vessel or thing at sea or on
coast where the vessel is rendered
incapable of navigation.
The losses and deterioration suffered by the
Arrival under stress is the arrival of a vessel and her cargo shall be individually for
vessel at the nearest and most convenient the account of the owners [Art. 840].
port instead of the port of destination, if
If the wreck was due to malice, negligence
during the voyage the vessel cannot
or lack of skill of the captain, or because the
continue the trip to the port of destination.
vessel put to sea was insufficiently repaired
It is lawful when the inability to continue and equipped, the ship agent or the
voyage is due to: shippers may demand indemnity from said
captain. [Art. 841].
(1) Lack of provisions;
(2) Well-founded fear of seizure, privateers,
or pirates; or C.5. SALVAGE
(3) Any accident of the sea disabling it to Salvage is defined as the service which one
navigate [Art. 819]. person renders to the owner of a ship or
goods, by his own labor, preserving the
It is unlawful when:
goods or the ship which the owner or those
(1) The lack of provisions should arise from entrusted with the care of them have either
the failure to take the necessary abandoned in distress at sea, or are unable
provisions for the voyage, according to to protect and secure. It is founded on
usage and custom, or if they should equity and is compensation for actual
have been rendered useless or lost services rendered.
through bad stowage or negligence in
Three elements are necessary to a valid
their care;
salvage claim:
(2) The risk of enemies, privateers, or
(1) A marine peril;
pirates should not have been well
known or manifest, and based on (2) Service voluntarily rendered when not
positive and justifiable facts; required as an existing duty or from a
special contract;
(3) The injury to the vessel should have
been caused by reason of her not being (3) Success, in whole or in part, or that the
repaired, rigged, equipped, and service rendered contributed to such
arranged in a convenient manner for the success [Erlanger & Galinger v. Swedish
voyage, or by reason of some erroneous East Asiatic Co. Ltd (1916)].
order of the captain; or
The goods saved from the wreck shall be
(4) Malice, negligence, want of foresight, or specially bound for the payment of the
lack of skill on the part of the captain is expenses of the respective salvage, and the
the reason for the act causing the amount thereof must be paid by the owners
damage [Art. 820]. of the former before they are delivered to
them [Art. 842].

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Where a personal action is brought by the (2) If the private carrier is coming to the
salvor against the owner of the ship, the Philippines:
liability of the latter is limited to such part
(a) First: COGSA;
of the salvage compensation due for the
entire service as is proportionate to the (b) Second: Code of Commerce;
value of the ship.
(c) Third: Civil Code (excluding
Distinction between salvage and rules on com m on carriers);
(3) If the private or common carrier is from
Towage a vessel is engaged to tow the Philippines to a foreign country, the
another vessel from one port to another for law of the foreign country applies [Art.
consideration. 1753, Civil Code] unless the parties
make COGSA applicable.
In contract for towage, the crew does not
have any interest or rights with the Under Art. 1766, in all matters not regulated
remuneration pursuant to the contract; only by the Civil Code, the rights and obligations
the owner of the towing vessel is entitled to of common carriers shall be governed by
remuneration. the Code of Commerce and special laws.
Thus, although a special law, COGSA only
Salvage a person preserves the goods or
applies when the Civil Code has no provision
the ship which the owner either abandoned
dealing with the matter.
in distress at sea, or is unable to protect and
In salvage, the crew of the salvaging ship is D.2. NOTICE OF LOSS OR DAMAGES
entitled to salvage, and can look to the
Notice of claim and the general nature of
salvage vessel for its share [Barrios v. Go
the loss or damage must be given in writing
Thong (1963)].
to the carrier or his agent at the port of
discharge before or at the time of the
removal of the goods [Section 3(6), COGSA].
(COGSA) If damage is not patent or cannot be
ascertained from the package, the shipper
should file the claim with the carrier within
D.1. APPLICATION three days from delivery.
COGSA [Commonwealth Act No. 65] is a Under Section 3(6), COGSA, a failure to file a
special law that governs all contracts of notice of claim within three (3) days will not
carriage of goods by sea between or to and bar recovery if it is nonetheless filed within
from the Philippine ports. one year. This one-year prescriptive period
Its application is according to the following also applies to the shipper, the consignee,
scheme: the insurer of the goods or any legal holder
of the bill of lading. Inasmuch as the neither
(1) If the com m on carrier is coming to the the Civil Code nor the Code of Commerce
Philippines: states a specific prescriptive period on the
(a) First: Civil Code; matter, the COGSA may be applied [Belgian
Overseas Chartering and Shipping v.
(b) Second: COGSA (in foreign Philippine First Ins. Co. (2002)].
Note: In the Warsaw Convention, as well
(c) Third: Code of Commerce; as the Code of Commerce, the notice
requirement is a condition precedent for the
right of action against the shipowner to

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D.3. PERIOD OF PRESCRIPTION destined for the services of the industry or

maritime commerce.
The carrier and the ship shall be discharged
from all liability in respect of loss or The word vessel used in the Code of
damage unless suit is brought within one Commerce was not intended to include all
year after delivery of the goods or the date ships, craft, or floating structures of every
when the goods should have been delivered. kind without limitation [Lopez v. Duruelo
The absence of a notice shall not affect or
prejudice the right of the shipper to bring Vessels are considered personal or movable
suit within one year after the delivery of the property [Art. 585]; but they partake to a
goods or the date when the goods should certain extent, of the nature and conditions
have been delivered [Section 3 (6)]. of real property, on account of their value
and importance in the world of commerce.
COGSA, as a special law, prevails over the
general provisions of the Civil Code on Vessel of domestic ownership and of more
prescription of actions [Maritime Agencies & than 15 tons gross is required to acquire a
Services, Inc. v. CA (1990)]. certificate of Philippine register. The
purpose of the certificate is declare the
nationality of a vessel engaged in trade with
D.4. LIMITATION OF LIABILITY foreign nations and to enable her to assert
that nationality wherever found.
Under Section 4(5], COGSA, the limit is set
at a maximum of $500 per package or
customary freight unit.
This is deemed incorporated in the bill of COMMERCE
lading even if not mention therein [Eastern
Shipping v. IAC (1987)].
The declaration made by the shipper stating LOANS ON BOTTOMRY AND
an amount bigger than $500 per package RESPONDENTIA
will make the carrier liable for such bigger Loan on bottom ry is a contract in the
amount, but only if the amount so declared nature of a mortgage, by which the owner of
is the real value of goods [Aquino (2011)]. the ship borrows money for the use,
The Civil Code does not limit the liability of equipment and repair of the vessel and for a
the common carrier to a fixed amount per definite term, and pledges the ship as a
package. In all matters not regulated by the security for its repayment, with maritime or
Civil Code, the right and the obligations of extraordinary interest on account of the
common carriers shall be governed by the maritime risks to be borne by the lender, it
Code of Commerce and special laws. Thus, being stipulated that if the ship be lost in
the COGSA, which is suppletory to the the course of the specific voyage or during
provisions of the Civil Code, supplements the limited time, by any of the perils
the latter by establishing a statutory enumerated in the contract, the lender shall
provision limiting the carriers liability in the also lose his money.
absence of a shippers declaration of a Loan on respondentia is one made on
higher value in the bill of lading. [Belgian the goods laden on board the ship, and
Overseas v. Philippine First Ins. Co. (2002)]. which are to be sold or exchanged in the
course of the voyage, the borrowers
personal responsibility being deemed the
VESSEL principal security for the performance of the
Vessels are those engaged in navigation, contract, which is therefore called
whether coastwise or on the high seas respondentia. The lender must be paid his

PAGE 130 OF 320


principal and interest, though the ship the return of the fare upon request. If
perishes, provided that the goods are saved. the delay is due to the sole fault of the
captain or ship agent, they may demand
indemnity for losses and damages.
PASSENGERS ON SEA VOYAGE (4) To be taken directly to the port or ports
The right to passage issued to a specified of destination, making all the stops
person is non-transferrable without the indicated in its itinerary [Art. 698].
consent of the captain or of the consignee
[Art. 695].

Rights of passengers include:

(1) In case of suspension of voyage
(a) If through the sole fault of the
captain or ship agent, the
passengers shall be entitled to have
their passage refunded and to
recover for losses and damages.
(b) If due to accidental cause or force
majeure, the passengers shall only
be entitled to the return of the
passage money [Art. 697].
(2) In case of interruption of voyage
(a) If due to fortuitous event or force
majeure, the passengers shall be
obliged to pay only the fare in
proportion to their distance covered,
without right to recover for losses or
(b) If due to the sole fault of the captain,
the passengers shall be obliged to
pay only the fare in proportion to
their distance covered, with a right
to indemnity.
(c) If due to the disability of the vessel
and the passenger should agree to
await the repairs, he may not be
required to pay any increased price
of passage, but his living expenses
during the delay shall be for his own
account [Art. 698].
(3) In case of delay in the departure, the
passengers have a right to remain on
board and to be furnished food, unless
the delay is due to accidental cause or
to force majeure. If the delay exceeds
10 days, the passengers are entitled to

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VI. International Air The carrier is liable for damages for:

(1) Death or injury of a passenger if the
Transport accident causing it took place:
The Warsaw Convention (a) On board the aircraft;
(b) In the course of the operations of
embarking or disembarking; or
(c) When there was delay [Art. 17 and 19,
Warsaw Convention];
The Warsaw Convention applies to: (2) Destruction, loss, or damage to any
(1) All international carriage of persons, baggage or goods that are checked in, if
baggage, or cargo performed by aircraft damage occurred:
for reward; (a) During the transportation by air; or
(2) Gratuitous carriage by aircraft (b) When there was delay [Section 18
performed by an air transport and 19, Warsaw Convention];
undertaking [Art. 1(1), Warsaw
Convention]. (3) Delay in the transport by air of
passengers, baggage or goods.
International air carriage or international air
transport means transportation by air The carriage by air contemplated comprises
between points of contact of two high the period in which the baggage or goods
contracting parties, or those countries that are in charge of the carrier, whether in an
have acceded to the Warsaw Convention, airport or on board an aircraft, or, in the
wherein the place of departure and the case of a landing outside an airport, in any
place of destination are situated: place whatsoever [Art. 18, Warsaw
(1) Within the territories of two high
contracting parties, regardless of
whether or not there be a break in the B. LIMITATION OF LIABILITY
transportation or a transshipment; or
(2) Within the territory of a single high
contracting party, if there is an agreed With respect to the following limitations of
stopping place within a territory subject liability, Art. 23, Warsaw Convention
to the sovereignty, mandate or authority provides that any provision tending to
of another power, even though the relieve the carrier of liability or to fix a lower
power is not a party to the Convention limit than that which is laid down shall be
[Art. 1(2), Warsaw Convention]. null and void, but the nullity of any such
provision does not involve the nullity of the
whole contract.
A carriage to be perform ed by Also, under Art. 25, Warsaw Convention:
several successive air carriers is
deemed, for the purposes of the Convention, (1) The carrier shall not be entitled to avail
to be one undivided carriage, if it has been himself of the provisions which exclude
regarded by the parties as a single or limit his liability, if the damage is
operation, whether it had been agreed upon caused by his willful misconduct or by
under the form of a single contract or of a such default on his part as is considered
series of contracts [Art. 1(3), Warsaw to be equivalent to willful misconduct;
Convention]. (2) Similarly the carrier shall not be entitled
to avail himself of the said provisions, if
the damage is caused as aforesaid by

PAGE 132 OF 320


any agent of the carrier acting within The Guatemala Protocol of 1971 increased
the scope of his employment. the limit for passengers to $100,000 and to
$1,000 for baggage. However, the Supreme
Under Art. 29, Warsaw Convention, the right
Court noted in Santos III v. Northwest Orient
to damages under the WC is extinguished
Airlines (1992), that the Guatemala Protocol
after two years from the date of arrival at
is still ineffective [Sundiang and Aquino
the destination or from the date on which
the aircraft ought to have arrived, or from
the date on which the carriage stopped. The The Warsaw Convention should be deemed
method of calculating the period of a limit of liability only in those cases where
limitation shall be determined by the law of the cause of death or injury to person, or
the court seized of the case. destruction, loss or damage to property or
delay in its transport is not attributable to or
attended by any willful misconduct, bad
B.1. LIABILITY TO PASSENGERS faith, recklessness, or otherwise improper
conduct on the part of any official or
General rule: In the carriage of
employee for which the carrier is
passengers, the liability of the carrier for
responsible; and there is otherwise no
each passenger is limited to 250,000 francs
special or extraordinary form of resulting
injury [Alitalia Airways v. CA (1990)].
Exception: By special contract, the carrier
and the passenger may agree to a higher
limit [Art. 22(1), Warsaw Convention]. C. WILLFUL MISCONDUCT

B.2. LIABILITY FOR CHECKED BAGGAGE A common carrier may not avail of the
General rule: In the carriage of baggage limitation in the following cases:
and goods, the liability of the carrier is (1) Willful misconduct;
limited to 250 francs per kilogram.
(2) Default amounting to willful
Exception: The limit does not apply when misconduct [Art. 25, Warsaw
the consignor has made, at the time when Convention];
the package was handed over to the carrier,
a special declaration of the value at delivery (3) Accepting passengers without ticket
and has paid a supplementary sum if the [Art. 3(2), Warsaw Convention];
case so requires. In that case the carrier will (4) Accepting goods without airway bill or
be liable to pay a sum not exceeding the baggage without baggage check.
declared sum, unless he proves that that
sum is greater than the actual value to the Receipt by the person entitled to the
consignor at delivery [Art. 22(2), Warsaw delivery of baggage or cargo without
Convention]. complaint is prima facie evidence that the
same have been delivered in good condition
and in accordance with the document of
B.3. LIABILITY FOR HAND-CARRIED carriage [Art. 26, Warsaw Convention].
As regards hand-carried baggage, the
liability of the carrier is limited to 5,000
francs per passenger [Art. 22(3), Warsaw

PAGE 133 OF 320


An action for damages must be brought at
the option of the plaintiff:
(1) Before the court of the domicile of the
(2) The court of its principal place of
(3) The court where it has a place of
business through which the contract
had been made; or
(4) The court of the place of destination
[Art. 28 (2) WC].
When a passenger buys a roundtrip ticket,
the place of destination is the place of first
departure. E.g. In a round-trip ticket from
San Francisco Manila, the place of
destination is San Francisco [Santos v
Northwest Airlines (1992)].
Note: The Montreal Convention adds a 5th
jurisdiction: residence of the plaintiff.

PAGE 134 OF 320



PAGE 135 OF 320


A corporation, upon coming into existence, is

I. Corporation invested by law with a personality separate
and distinct from those persons composing it
as well as from any other legal entity to which
A. DEFINITION it may be related. [Yutivo Sons Hardware v.
CTA (1961)]
Corporation is an artificial being created
by operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or Mere consent of the parties to form a
incident to its existence [Sec. 2, unless corporation is not sufficient. The State must
otherwise indicated, all sections cited herein give its consent either through a special law
are from B.P. 68, or the Corporation Code]. [in case of government corporations] or a
general law (i.e., Corporation Code in case of
private corporations).
B. ATTRIBUTES OF THE CORPORATION A corporation comes into existence upon the
issuance of the certificate of
B.1. AN ARTIFICIAL BEING incorporation. Then and only then will it
acquire juridical personality to sue and be
A corporation exists by fiction of law. Hence, sued, enter into contracts, hold or convey
it can act only through its directors, officers property or perform any legal act in its own
and employees. name.
Being only a juridical entity, the physical acts
of the corporation, like the signing of
documents, can be performed only by natural B.3. HAS THE RIGHT OF SUCCESSION
persons duly authorized for the purpose by Its continued existence during its stated term
corporate by-laws or by a special act of the cannot be affected by any change in the
Board of Directors (BOD). [Shipside, Inc. v. CA members or stockholders or by any transfer of
(2001)] shares by a stockholder to a third person.


A corporation can recover moral damages PROPERTIES EXPRESSLY AUTHORIZED BY
under Art 2219 (7) if it was the victim of LAW OR INCIDENT TO ITS EXISTENCE
defamation. [Pilipinas Broadcasting Network v. A corporation has no power except those
Ago Medical and Educational Center (2005)] expressly conferred on it by the Corporation
Code and by its articles of incorporation,
those which may be incidental to such
II. CRIMINAL LIABILITY conferred powers, those that are implied from
Since a corporation as a person is a mere its existence, and those reasonably necessary
legal fiction, it cannot be proceeded against to accomplish its purposes. In turn, a
criminally because it cannot commit a crime corporation exercises said powers through its
in which personal violence or malicious intent BOD and/or its duly authorized officers and
is required. Criminal action is limited to agents. [Monfort Hermanos Agricultural Dev.
the corporate agents guilty of an act Corp. v. Monfort III (2004)]
am ounting to a crim e and never
against the corporation itself. [West
Coast Life Ins. Co. v. Hurd (1914); Time Inc. v.
Reyes (1971)]
PAGE 136 OF 320

Stock Non Stock

II. Classes of Composed of Composed of
Corporations stockholders members


Stock corporations corporations which C.1. PUBLIC CORPORATION

have capital stock divided into shares AND Public corporation one formed or
are authorized to distribute to the holders of organized for the government of a portion of
such shares dividends or allotments of the the state. Its purpose is for the general good
surplus profits on the basis of shares held and welfare [Sec. 3, Act 1456].
[Sec. 3]. It is organized for profit.
Beyond cavil, a GOCC has a personality of its
The governing body of a stock corporation is own, distinct and separate from that of the
usually the BOD (except in certain instances, government, and the intervention in a
e.g. close corporations). transaction of the Office of the President
Note: A corporation is deemed to have the through the Executive Secretary does not
power to declare dividends. Thus, so long as change the independent existence of a
the corporation has capital stock and there is government entity as it deals with another
no prohibition in its Articles of Incorporation government entity. [Polytechnic University of
or in its by-laws for it to declare dividends, the Phils. v. CA (2001)]
such corporation is a stock corporation [Sec. Not all corporations which are not GOCC
43]. are ipso facto to be considered private
corporations as there exists another distinct
class of corporations or chartered institutions
B. NON-STOCK CORPORATION which are otherwise known as public
All other corporations are non-stock These corporations are treated by law as
corporations [Sec. 3]. agencies or instrumentalities of the
Non-stock corporation One where no government which are not subject to the
part of the income is distributable as tests of ownership or control and
dividends to its members, trustees, or officers, economic viability but to different criteria
subject to the provisions of the Code on relating to their public
dissolution [Sec. 87]. It is not organized for purposes/interests or constitutional
profit. policies and objectives and their
adm inistrative relationship to the
Its governing body is usually the Board of government or any of its Departm ents
Trustees (BOT). However, non-stock or Offices. [Boy Scouts of the Philippines v.
corporations may, through their articles of COA (2011)]
incorporation or their by-laws, designate their
governing boards by any name other than as
board of trustees [Sec. 138]. C.2. PRIVATE CORPORATION
Stock Non Stock Private corporation One formed for
some private purpose, benefit, aim or end
Purpose is profits for Exists for purposes
[Sec. 3, Act 1456]; it may be either stock or
its shareholders other than profit
non-stock, government-owned or controlled
Profits are distributed Profits are for or quasi-public.
to shareholders furtherance of its
The test to determine whether GOCC or
private corporation: if a corporation is created

PAGE 137 OF 320


by its own charter for the exercise of a public trustee, the affairs, property and
function, then GOCC; if by incorporation temporalities of any religious denomination,
under the general corporation law, then sect, or church, by the chief archbishop,
private corporation. [Baluyot v. Holganza bishop, priest, rabbi, or other presiding elder
(2000)] of such religious denomination, sect or
church [Sec.110].
A corporation sole has no nationality but for
the purpose of applying nationalization laws,
Close corporation - One whose articles of nationality is determined not by the
incorporation provide that: nationality of its presiding elder but by the
nationality of its members constituting the
(1) All issued stock, exclusive of treasury
sect in the Philippines. Thus, the Roman
shares, shall be held by persons not
Catholic Church can acquire lands in the
exceeding 20;
Philippines even if it is headed by the Pope.
(2) All issued stock shall be subject to one or [Roman Catholic Apostolic, etc v. Register of
more specified restrictions on transfer; Deeds of Davao City (1957)]
(3) The corporation shall not list in any stock
Corporation aggregate is a religious
exchange or make any public offering of
corporation incorporated by more than one
any of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation
when at least 2/3 of its voting stock or voting C.6. ELEEMOSYNARY CORPORATION
rights is owned or controlled by another
Eleemosynary corporation One
corporation which is not a close corporation.
organized for a charitable purpose.
[Sec. 96]
Any corporation may be incorporated as a
close incorporation, except: C.7. DOMESTIC CORPORATION
(1) mining or oil companies; Dom estic corporation One formed,
organized, or existing under the laws of the
(2) stock exchanges;
(3) banks;
(4) insurance companies;
(5) public utilities;
Foreign corporation One formed,
(6) educational institutions; and organized or existing under any laws other
than those of the Philippines and whose law
(7) corporations declared to be vested with
allows Filipino citizens and corporations to do
public interest [Sec. 96]
business in its own country and state [Sec.
Educational corporation One C.9. CORPORATION CREATED BY SPECIAL
organized for educational purposes [Sec. 106]. LAWS OR CHARTER
Corporation created by special laws or
C.5. RELIGIOUS CORPORATIONS charter - Corporations which are governed
primarily by the provisions of the special law
I. CORPORATION SOLE or charter creating them. Corporation Code
Corporation sole is one formed for the has suppletory application [Sec. 4].
purpose of administering and managing, as
PAGE 138 OF 320

C.10. SUBSIDIARY CORPORATION existence of such juridical personality

Subsidiary corporation One in which
control, in the form of ownership of majority II. REQUISITES OF DE FACTO
of its shares, is in another corporation [the CORPORATION:
parent corporation].
(1) There is an apparently valid statute
under which the corporation may be
(2) There has been colorable com pliance
Parent corporation Its control lies in its
with the legal requirements in good
power, directly or indirectly, to elect the
faith; and
subsidiarys directors thus controlling its
management policies. (3) There has been user of corporate
powers, i.e. the transaction of business
Holding com pany a parent company
as if it were a corporation [Campos].
which has no other business aside from the
holding of the shares of its subsidiaries, An association of persons cannot claim to be
which it controls. a corporation if it has not been issued a
certificate of incorporation since that fact
Investment company a parent company
belies the claim of good faith compliance
which holds shares in other corporations not
with the requirements of the law. [Hall v.
for the purpose of controlling them but
Piccio (1950)]
merely to invest therein.


Corporation by estoppel Where a
Corporation de jure A corporation
group of persons misrepresent themselves as
organized in accordance with the
a corporation, they are subsequently
requirements of the law.
estopped from claiming lack of corporate life
in order to avoid liability;
C.13. DE FACTO CORPORATION - Also, a third party who had dealt with an
unincorporated association as a corporation
De facto corporation A corporation
is precluded from denying its corporate
where there exists a flaw in its incorporation.
existence on a suit brought by the alleged
I. RULE ON DE FACTO corporation on the contract.
The due incorporation of any corporation
As to liability
claiming in good faith to be a corporation
under this Code, and its right to exercise All persons who assume to act as a
corporate powers, shall not be inquired into corporation knowing it to be without
collaterally in any private suit to which such authority to do so shall be liable as
corporation may be a party. Such inquiry may general partners for all debts, liabilities
be made by the Solicitor General in a quo and damages incurred or arising as a result
warranto proceeding [Sec. 20]. thereof [Sec. 21].
General Rule: The defect in the juridical As to the defense of lack of corporate
personality of a corporation cannot be personality
inquired into by private individuals, much less
When such ostensible corporation is sued, it
used as a defense to avoid claims,
is precluded from raising the defense of lack
Exception: In quo warranto proceedings of corporate personality [Sec. 21].
brought on behalf of the State where the
main action is to question the validity or

PAGE 139 OF 320


As to third party
One who assumes an obligation to an III. Nationality of
ostensible corporation as such, cannot resist
performance thereof on the ground that there Corporations
was in fact no corporation. [Sec. 21]
The doctrine of estoppel applies to a third
party only when he tries to escape liability on A. PLACE OF INCORPORATION TEST
a contract from which he has benefited on the
ground of defective incorporation. It does not
apply to a third party who is not trying to The corporation is a national of the country
under whose laws it is organized or
escape liability from the contract, but rather
is the one claiming from the contract. incorporated [Sec. 123].
[International Express Travel v. CA (2000)] Dom estic corporations organized and
governed under and by Philippine laws

II. DE FACTO CORPORATION VS. Foreign corporations organized under

CORPORATION BY ESTOPPEL laws other than those of the Philippines and
can operate only in the territory of the state
De facto Estoppel under whose laws it was formed. However,
they may be licensed to do business here
Where all the If any of the
requisites of a de requisites are absent,
facto corporation are then the estoppel
present, then the doctrine may be
defectively formed applied only if any of B. CONTROL TEST
corporation will have the parties is
the status of a de jure estopped from
A corporation shall be considered a Filipino
corporation in all defending:
corporation if the Filipino ownership of its
cases brought by or
(1) the defendant capital stock is at least 60%, and where the
against it, except
association is 60-40 Filipino-alien equity ownership is NOT
only as to the State in
estopped from in doubt [SEC Opinion dated 6 November
a direct proceeding
defending on the 1989; DOJ Opinion No. 18, s. 1989].
ground of its lack
Therefore, its shareholdings in another
of capacity to be
corporation shall be considered to be of
sued, or
Filipino nationality when computing the
(2) the defendant percentage of Filipino equity of that second
third party had corporation [SEC Opinion dated 23 November
dealt with the 1993].
plaintiff as a
Control test is applied in the following:
corporation and
is deemed to Exploitation of natural resources -
have admitted its Only Filipino citizens or corporations
existence. whose capital stock is at least 60% owned
by Filipinos can qualify to exploit natural
resources. [Sec. 2, Art. XII, Const.]
Public Utilities - no franchise,
certificate or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of
the Philippines or to corporations or
associations organized under the laws of
the Philippines at least 60% of whose
PAGE 140 OF 320

capital is owned by such citizens. [Sec. 11, SEC Mem orandum Circular No. 8 dated
Art. XII, Const.] 20 May 2013
The term "capital" in Sec. 11, Article XII of Sec. 1. Covered corporations: All corporations
the 1987 Constitution refers only to shares engaged in identified areas of activities or
of stock entitled to vote in the enterprises specifically reserved, wholly or
election of directors, and thus in the partly, to Philippine Nationals by the
present case only to common shares, and not Constitution, the FIA and other existing laws,
to the total outstanding capital stock amendments thereto and IRRs of said laws
[common and non-voting preferred shares]. except as may otherwise be provided therein.
Compliance with the required Filipino Sec. 2. All covered corporations shall, at all
ownership of a corporation shall be times, observe the constitutional or statutory
determined on the basis of outstanding ownership requirement. For purposes of
capital stock whether fully paid or not, determining compliance therewith, the
but only such stocks which are generally required percentage of Filipino ownership
entitled to vote are considered. shall be applied to both
For stocks to be deemed owned and (1) the total number of outstanding shares of
held by Philippine citizens or stock entitled to vote in the election of
Philippine nationals, mere legal title directors; AND
is not enough to m eet the required
(2) the total number of outstanding shares of
Filipino equity. Full beneficial
stock, whether or not entitled to vote in
ownership of the stocks, coupled with
the election of directors.
appropriate voting rights is essential.
Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot
be considered held by Philippine citizens or
Philippine nationals. [Gamboa v. Teves (2011)]

The SC, however, reversed its ruling in 2012. Method used when a domestic corporation
has both domestic and foreign stockholders
The term capital is not lim ited to
to determine whether or not said corporation
voting shares since the constitutional
is qualified to engage in a partially
requirement of at least 60 % Filipino
nationalized business [Campos].
ownership applies not only to voting
control of the corporation, but also to It involves the computation of Filipino
the beneficial ownership of the ownership of a corporation in which another
corporation. It is therefore imperative that corporation of partly Filipino and partly
such requirement apply uniformly and across foreign equity owns capital stock. The
the board to all classes of shares, regardless percentage of shares held by the second
of nomenclature and category, comprising corporation in the first is multiplied by the
the capital of a corporation. latters own Filipino equity, and the product
of these percentages is determined to be the
Preferred shares, denied the right to vote in
ultimate Filipino ownership of the subsidiary
the election of directors, are anyway still
entitled to vote on the eight specific
corporate matters under Sec. 6. of the The Grandfather Rule must be applied to
Corporation Code. accurately determine the actual participation,
both direct and indirect, of foreigners in a
Thus, the 60-40 ownership
corporation engaged in a nationalized activity
requirem ent in favor of Filipino
or business. [SEC Opinion re: Silahis Intl Hotel
citizens m ust apply separately to each
class of shares, whether com m on,
preferred non-voting, preferred voting Compliance with the constitutional
or any other class of shares. [Gamboa v. limitation[s] on engaging in nationalized
Teves, (2012)] activities must be determined by ascertaining
PAGE 141 OF 320

if 60% of the investing corporations below the threshold 60% , the

outstanding capital stock is owned by corporation is im m ediately considered
Filipino citizens, or as interpreted, by foreign-owned, in which case, the
natural or individual Filipino citizens. If such need to resort to the Grandfather
investing corporation is in turn owned to Rule disappears.
some extent by another investing corporation,
On the other hand, a corporation that
the same process must be observed. One
complies with the 60-40 Filipino to foreign
must not stop until the citizenships of the
equity requirement can be considered a
individual or natural stockholders of layer
Filipino corporation if there is no doubt as to
after layer of investing corporations have
who has the beneficial ownership and
been established, the very essence of the
control of the corporation. In that instance,
Grandfather Rule. [Redmont Consolidated
there is no need for a dissection or further
Mines, Corp v. McArthur Mining, Inc., et al.
inquiry on the ownership of the corporate
shareholders in both the investing and
The Grandfather Rule applies only when the investee corporation or the application of the
60-40 Filipino foreign equity ownership is in Grandfather Rule. As a corollary rule, even if
doubt [i.e. in cases where the joint venture the 60-40 Filipino to foreign equity
corporation with Filipino and foreign ratio is apparently m et by the subject
stockholders with less than 60% Filipino or investee corporation, a resort to
stockholdings (or 59%) invests in another the Grandfather Rule is necessary if
joint venture corporation which is either 60- doubt exists as to the locus of the
40% Filipino alien or 59% less Filipino]. beneficial ownership and control.
Stated differently, where the 60-40 In this case (where based on the
Filipino foreign equity ownership is incorporation papers, the Filipino-Owned
not in doubt, the Grandfather Rule corporation subscribed to 60% of the capital
will not apply. [Narra Nickel Mining and while the foreign corporation subscribed to
Dev. Corp v. Redmont Consolidated Mines 40% but the subscription of the former is only
Corp. (2014)] nominally paid-up and such corporation
entered into a financial assistance agreement
The Control Test can be, as it has been,
with the foreign-owned corporation), a
applied jointly with the Grandfather Rule to
further investigation as to the nationality of
determine the observance of foreign
the personalities with the beneficial
ownership restriction in nationalized
ownership and control of the corporate
economic activities. The Control Test and the
shareholders in both the investing and
Grandfather Rule are not, as it were,
investee corporations is necessary. [Narra
incompatible ownership-determinant
Nickel Mining and Dev. Corp v. Redmont
methods that can only be applied alternative
Consolidated Mines Corp. (2015)]
to each other. Rather, these methods can, if
appropriate, be used cumulatively in the
determination of the ownership and control
of corporations engaged in fully or partly
nationalized activities.
The Grandfather Rule, standing alone, should
not be used to determine the Filipino
ownership and control in a corporation, as it
could result in an otherwise foreign
corporation rendered qualified to perform
nationalized or partly nationalized activities.
Hence, it is only when the Control
Test is first complied with that the
Grandfather Rule may be applied. Put
in another m anner, if the subject
corporations Filipino equity falls
PAGE 142 OF 320

IV. Corporate Juridical
Nationality Industry
Requirement Personality
100% Filipino Retail Trade It commences from the date the SEC issues a
ownership certificate of incorporation under its official
Rural Banks seal [Sec. 19].
Mass Media
75% Filipino Inter-island
ownership shipping industry A. DOCTRINE OF SEPARATE JURIDICAL
70% voting stock Banks [except PERSONALITY
Filipino ownership Rural Banks]
[but may be reduced CONCEPT
to 60%] A corporation has a personality separate
60% capital stock Public utilities, and distinct from that of its stockholders
Filipino ownership corporations and members and is not affected by the
engaged in personal rights, obligations, and transactions
exploration, of the latter.
exploitation and A corporation, upon coming into existence, is
utilization of invested by law with a personality separate
natural resources and distinct from the persons comprising it as
well as from any other legal entity to which it
Educational may be related. By this attribute, a
institutions stockholder may not, generally, be made to
answer for acts or liabilities of said
corporation, and vice versa. [Land Bank of the
Philippines v. CA (2001)]

Stockholders have no claim on corporate
property as owners, but mere expectancy or
inchoate right to the same upon dissolution
of the corporation after all corporate creditors
have been paid. Such right is limited only to
their equity interest (doctrine of lim ited
liability). Although a stockholders interest
in the corporation may be attached by his
personal creditor, corporate property cannot
be used to satisfy his claim. [Wise and Co. v.
Man Sun Lung (1940)]


Being an entity with a separate juridical
personality, a corporation can be held liable
for torts committed by its officers for
corporate purpose. [PNB v. CA (1978)]

PAGE 143 OF 320


A.2. RECOVERY OF MORAL DAMAGES personally liable for corporate liabilities. The
mere fact that a stockholder owns majority of
General rule: A corporation has the power
the stock of a corporation is not a ground to
to sue in its corporate name. [Sec. 36]
conclude that said stockholder and
Exception: Moral damages cannot be corporation are one and the same. [Land
awarded in favor of corporations because Bank of the Philippines v. CA (2001)]
they do not have feelings and cannot
The veil of corporate fiction treats as separate
experience mental suffering. They may not
and distinct the affairs of a corporation and
even claim moral damages for besmirched
its officers and stockholders. As a general
reputation. [NAPOCOR v. Philipp Brothers
rule, a corporation will be looked upon as a
Oceanic (2001)]
legal entity, unless and until sufficient reason
Exception to the Exception: However, to the contrary appears. When the notion of
a corporation can recover moral damages legal entity is used to defeat public
under Art 2219 [7] if it was the victim of convenience, justify wrong, protect fraud, or
defamation, as it does not qualify whether defend crime, the law will regard the
the plaintiff is a natural or juridical person. corporation as an association of
[Pilipinas Broadcasting Network v. Ago persons. Also, the corporate entity may be
Medical and Educational Center (2005)] disregarded in the interest of justice in such
cases as fraud that may work inequities
among members of the corporation
CONSTITUTIONAL RIGHTS internally, involving no rights of the public or
Corporate entities are entitled to due process, third persons. In both instances, there must
equal protection, and protection against have been fraud and proof of it. [Suldao v.
unreasonable searches and seizures. Cimech System Construction, Inc. (2006)]
However, a corporation is not entitled to the
privilege against self-incrimination. [Bataan
Shipyard and Engg Co. v. PCGG (1987)]
The corporate fiction may be pierced if used:
B. DOCTRINE OF PIERCING THE (1) to defraud the government of taxes due
(2) to evade payment of civil liability;
Piercing the veil of corporate entity is merely
an equitable remedy, and may be granted (3) by a corporation which is merely a
only in cases: conduit or alter ego of another
(1) when the corporate fiction is used to
defeat public convenience, justify (4) to evade compliance with contractual
wrong, protect fraud or defend crime obligations; or
[Koppel Phil v. Yatco (1946)]; or (5) to evade financial obligation to its
(2) where the corporation is a mere alter employees.
ego; or Only in these and similar instances may the
(3) where the corporation is a business veil be pierced and disregarded: to ward off a
conduit of a person. [Yutivo Sons v. judgment credit, to avoid inclusion of
CTA, (1961)] corporate assets as part of the estate of the
decedent, to escape liability arising from a
In order to disregard the separate juridical debt, or to perpetuate fraud and/or confuse
personality of a corporation, the legitimate issues either to promote or to
wrongdoing must be clearly and shield unfair objectives to cover up an
convincingly established. In the absence otherwise blatant violation of the prohibition
of any malice or bad faith, a stockholder or an against forum shopping. [PNB v. Andrada
officer of a corporation cannot be made Electric and Engineering Co. (2002)]
PAGE 144 OF 320

B.2. TEST IN DETERMINING V. Incorporation and

General rule: the mere fact that a
corporation owns all or substantially all of
the stocks of another corporation is not A. PROMOTER
sufficient to justify their being treated as one
Promoters are persons who, acting alone
Exception: the subsidiary is a mere or with others, take initiative in founding and
instrum entality of the parent corporation. organizing the business or enterprise of the
issuer and receives consideration therefor
[Sec. 3.10, RA 8799, The Securities Regulation
Circumstances rendering subsidiary Code].
an instrum entality:
(1) the parent corporation owns all or most
of the subsidiarys capital stock;
(2) the parent and subsidiary corporations General rule: the promoter binds himself
have common directors or officers; personally and assumes the responsibility
(3) the parent corporation finances the of looking to the proposed corporation for
subsidiary; reimbursement.
(4) the parent corporation subscribes to all
the capital stock of the subsidiary or
otherwise causes its incorporation; (1) Express or implied agreement to the
(5) the subsidiary has grossly inadequate contrary
(2) Novation, not merely adoption or
(6) the parent corporation pays the salaries
ratification of the contract
and other expenses or losses of the
(7) the subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation; General rule: A corporation is NOT bound
(8) in the papers of the parent corporation or by the contract. A corporation, until
in the statements of its officers, the organized, has no life and no legal existence.
subsidiary is described as a department It could not have had an agent [the promoter]
or division of the parent corporation or its who could legally bind it. [Cagayan Fishing
business or financial responsibility is Development Co., Inc. v. Sandiko (1937)]
referred to as the parent corporations Exceptions: A corporation may be bound by
own; the contract if it makes the contract its own
(9) the parent corporation uses the property by:
of the subsidiary as its own;
(10) the directors or executives of the (1) Adoption or ratification of the ENTIRE
subsidiary do not act independently in the contract after incorporation.
interest of the subsidiary but take their Note:
orders from the parent corporation in the
latters interest; and A corporations power to adopt a
(11) the formal ledger requirements of the contract [by its promoters] must be
subsidiary are not observed. [PNB v. understood to be limited to such
Ritratto Group (2001)] contracts as the corporation itself,
after its organization, would be
authorized to make. [Builders Duntile
Co. v. Dunn Mfg. Co. (1929)]
PAGE 145 OF 320

Novation or the intent to novate the courts is that a contract made by

original contract is required to adopt the prom oters of a corporation
or ratify the pre-incorporation contract. on its behalf m ay be adopted,
[Campos] accepted or ratified by the
corporation when organized.
The Courts ruling in Cagayan Fishing v. [Rizal Light v. PSC and Morong Electric
Teodoro Sandiko, that a corporation (1968)]
should have a full and complete
organization and existence as an (2) Acceptance of benefits under the contract
entity before it can enter into any kind with knowledge of the terms thereof.
of a contract or transact any business, (3) Performance of its obligation under the
is not absolute. One of the contract
exceptions recognized by American

Steps Comments
a. Prom otional Stage Prom oter
(See SEC. 2. Definitions) brings together persons who become interested in the
aids in procuring subscriptions and sets in motion the
machinery which leads to the formation of the corporation itself
formulates the necessary initial business and financial plans
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation when formed, shall take over the same.
b. Drafting articles of (see chart below)
incorporation. (See SEC. 14)
c. Filing of articles; AOI & the treasurers affidavit duly signed & acknowledged
payment of fees.
must be filed w/ the SEC & the corresponding fees paid
failure to file the AOI will prevent due incorporation of the
proposed corporation & will not give rise to its juridical
personality. It will not even be a de facto corp.
Under present SEC rules, the AOI once filed , will be published
in the SEC Weekly Bulletin at the expense of the corp.
(SEC Circular # 4, 1982).
d. Exam ination of Process:
articles; approval or
(a) SEC shall examine them in order to determine whether they are
rejection by SEC.
in conformity w/ law.
(b) If not, the SEC must give the incorporators a reasonable time
w/in w/c to correct or modify the objectionable portions.

Grounds for rejection or disapproval of AOI:

(a) AOI /amendment not substantially in accordance w/ the form

PAGE 146 OF 320


Steps Comments
(b) purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules & regulations;
(c) Treasurers Affidavit is false;
(d) required percentage of ownership has not been complied
with (Sec. 17)
(e) corp.s establishment, organization or operation will not be
consistent w/ the declared national economic policies (to be
determined by the SEC, after consultation w/ BOI, NEDA or any
appropriate government agency -- PD 902-A as amended by
PD 1758, Sec. 6 (k))
Decisions of the SEC disapproving or rejecting AOI may be appealed
to the CA by petition for review in accordance w/ the ROC.
e. Issuance of certificate Certificate of Incorporation will be issued if:
of incorporation.
(a) SEC is satisfied that all legal requirements have been complied
with; and
(b) there are no reasons for rejecting or disapproving the AOI.

It is only upon such issuance that the corporation acquires

juridical personality. (See Sec. 19. Commencement of corporate
Should it be subsequently found that the incorporators were
guilty of fraud in procuring the certificate of incorporation, the
same may be revoked by the SEC, after proper notice & hearing.



(1) Natural Persons Corporate name

(2) Any number from 5-15 (1) Must not be identical or deceptively or
confusingly similar to that of any existing
(3) Majority are residents of the Philippines corporation or to any other name already
(4) Each incorporator must own or be a protected by law
subscriber to at least 1 share of the (2) Not patently deceptive, confusing or
capital stock of the corporation [Sec. 20] contrary to existing laws [Sec. 18]

Change of corporate name requires the

amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock [Sec. 16].

PAGE 147 OF 320


Amendment of a corporations Articles of Except as provided for by special law and

Incorporation to change its corporate name subject to the provisions of Sec. 13
does not extinguish the personality of the
Amount of Capital Stock to be
original corporation. It is the same
Subscribed and Paid for the Purposes
corporation with a different name, and its
of Incorporation
character is not changed. Consequently, the
new corporation is still liable for the debts (1) At the time of incorporation, at least 25%
and obligations of the old corporation. of the authorized capital stock stated in
[Republic Planters Bank v. CA (1992)] the Articles of Incorporation should be
(2) At least 25% of the total subscription
D. CORPORATE TERM must be paid upon subscription;
(3) The balance to be payable on
General rule: A corporation shall exist for a
period not exceeding 50 years from the date Dates fixed in the subscription contract
of incorporation. [Sec. 11] without need of call or
Exceptions: Upon call by the BOD in the absence of
fixed dates
(1) Sooner dissolved
(4) The paid-up capital can in no case be
(2) Period extended
lower than P5,000.00 [Sec. 13]
For periods not exceeding 50 years in
any single instance by an amendment
of the Articles of Incorporation F. ARTICLES OF INCORPORATION
Extensions may not be made earlier
than 5 years prior to the original or F.1. NATURE AND FUNCTION OF ARTICLES
subsequent expiry date[s] [Sec. 11]
Constitutes the charter of the corporation
Except: If the SEC determines that and sets forth the rules and conditions
there are justifiable reasons for an upon which the association or corporation
earlier extension. is founded
Rationale: Corporations are creatures of Defines the contractual relationships
the law through the State legislature. The between the State and the corporation, the
State is therefore concerned that this stockholders and the State, and the
privilege be enjoyed by corporations only corporation and the stockholders
under the conditions and not beyond the
period that it sees fit to grant; and The Articles must be filed with the SEC for
particularly, that it not be abused in fraud the issuance of the Certificate of
and to the detriment of other parties; and for Incorporation.
this reason, it has been ruled that the
limitation to a definite period is an exercise of
control in the interest of the public. [Benguet F.2. CONTENTS
Consolidated Mining Co. v. Pineda (1956)] I. CORPORATE NAME
(1) Must not be identical or deceptively or
E. MINIMUM CAPITAL STOCK AND confusingly similar to that of any existing
corporation or to any other name already
(2) Not patently deceptive, confusing or
Stock corporations incorporated under the contrary to existing laws [Sec. 18]
Corporation Code shall not be required to
have a minimum authorized capital stock The policy underlying the prohibition against
[Sec 12] the registration of a corporate name which is
PAGE 148 OF 320

identical or deceptively or confusingly contradict or change the nature of the

similar to that of any existing corporation or corporation [Sec. 14(2)]
which is patently deceptive or patently
confusing or contrary to existing laws is: Must not be patently unconstitutional,
illegal, immoral, and contrary to
(1) The avoidance of fraud upon the public government rules and regulations [Sec. 17
which would have occasion to deal with (2)].
the entity concerned;
Must not be for the purpose of practicing a
(2) The prevention of evasion of profession. [People v. United Medical Service,
legal obligations and duties, and 200 N.E. 157, cited in Campos]
(3) The reduction of difficulties of Under the present state of our law and
administration and supervision over jurisprudence, a corporation cannot be
corporations. [Lyceum of the Philippines v. organized for or engage in the practice of
CA (1993)] law in this country. This interdiction, just
To determine whether a given corporate like the rule against unethical advertising,
name is "identical" or "confusingly or cannot be subverted by employing some
deceptively similar" with another entity's so-called paralegals supposedly rendering
corporate name, one must evaluate corporate the alleged support services. The remedy
names in their entirety. for the apparent breach of this prohibition
is the concern and province of the Solicitor
The corporate name shall contain the word General who can institute the
Corporation or Incorporated, or the corresponding quo warranto action, after
abbreviations Corp. or Inc. respectively. due ascertainment of the factual
[SEC Memo Circ. No.5, s.2008] background and basis for the grant of the
Business or trade name which is different corporate charter, in light of the putative
from the corporate name shall be indicated in misuse thereof. [Ulep v. The Legal Clinic
the articles of incorporation. A company may (1993)]
have more than one business or trade name.
[SEC Memo Circ. No. 12, s. 2008]
Change of corporate name requires the
amendment of the Articles of Incorporation: Must be within the Philippines [Sec. 14 (3)]
majority vote of the board and the vote or
Articles of Incorporation must specify both
written assent of stockholders holding 2/3 of
province or city or town where it is located
the outstanding capital stock, or the vote of
or written assent of at least 2/3 of the SEC Circular No. 3-2006: A specific
members if non-stock [Sec. 16]. address is now required; merely indicating
Amendment of a corporations Articles of Metro Manila is no longer allowed.
Incorporation to change its corporate name Important for [1] determining venue in an
does not extinguish the personality of the action by or against the corporation, and [2]
original corporation. It is the same determining the province where a chattel
corporation with a different name, and its mortgage of shares should be registered.
character is not changed. Consequently, the [Chua Guan vs. Samahang Magsasaka (1935)]
new corporation is still liable for the debts
The residence of a corporation is the place
and obligations of the old corporation.
where its principal office is located, as stated
[Republic Planters Bank v. CA (1992)]
in its Articles of Incorporation. To insist that
the proper venue is the actual principal office
and not that stated in its Articles of
Incorporation would indeed create confusion
Must indicate the specific PRIMARY and and work untold inconvenience. Enterprising
SECONDARY purposes if there are more litigants may, out of some ulterior motives,
than one purpose, which should not easily circumvent the rules on venue by the
PAGE 149 OF 320

simple expedient of closing old offices and If STOCK corporation:

opening new ones in another place that they
may find well to suit their needs. [Hyatt authorized capital stock in lawful money of
Elevators v. Goldstar Elevators (2005)] the Philippines
the number of shares into which the ACS is
If with par value shares, the par value of
Maximum life of 50 years. each share [Sec. 14[8], Sec. 15[7]].
Extendible for a period not exceeding 50 names, citizenship, residences of original
years at any one instance. No extension, subscribers
however, can be made earlier than 5 years
before the end of the term. [Sec. 11] amount subscribed and paid on each
Extension requires an amendm ent of
the Articles of Incorporation subject to fact that some or all shares are w/o par
the exercise of appraisal right by the value
dissenting stockholder [Sec. 37]. If NON-STOCK:
amount of capital
names, nationalities and residences of
amount contributed by each
Stock corporations: directors
Non-stock corporations: trustees BE LESS THAN 25% OF SUBSCRIBED
General rule: Not less than 5 but not more
THAN P5,000 [Sec 15 (8,9)]
than 15 directors/trustees
Exceptions: Non-stock corporations whose
articles or by-laws may provide for more than VIII. NAME OF TREASURER ELECTED
15 trustees [Sec. 92] BY THE SUBSCRIBERS [Sec 15(10)]
Banks may have up to 21 directors for cases of
mergers and consolidation. [Sec. 17, General
Banking Act]
(1) Classes of shares, as well as preferences
Educational non-stock corporations:
or restrictions on any such class [Sec. 6].
trustees may not be less than 5 nor exceed (2) Denial or restriction of pre-emptive right
15 [Sec.39].
number of trustees shall be in multiples of (3) Prohibition against transfer of stock
5 [Sec. 108] which would reduce stock ownership to
Nationalized or partly-nationalzed less than the required minimum in the
industries case of a nationalized business or activity
[Sec. 15(11)].
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares

PAGE 150 OF 320


No transfer clause land. No law disqualifies a person from

purchasing shares in a landholding
If the foreign shareholdings of a landholding
corporation even if the latter will exceed the
corporation exceeds 40%, it is not the foreign
allowed foreign equity, what the law
stockholders ownership of the shares which
disqualifies is the corporation from owning
is adversely affected but the capacity of the
land. [J.G. Summit Holdings, Inc. v. CA
corporation to own land that is, the
corporation becomes disqualified to own

Contents of AOI Comments

Corporate Essential to its existence since it is through it that the corporation can sue and
Name be sued and perform all legal acts
A corporate name shall be disallowed by the SEC if the proposed name is
(1) identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or
(2) patently deceptive, confusing or contrary to existing laws. (Sec. 18)
The policy underlying the prohibition against the registration of a corporate name
which is identical or deceptively or confusingly similar to that of any existing
corporation or which is patently deceptive or patently confusing or contrary to
existing laws is:
(1) the avoidance of fraud upon the public which would have occasion to deal
with the entity concerned;
(2) the prevention of evasion of legal obligations and duties, and
(3) the reduction of difficulties of administration and supervision over
Purpose A corporation can only have one (1) primary purpose. However, it can have
Clause several secondary purposes.
A corporation has only such powers as are expressly granted to it by law & by
its articles of incorporation, those which may be incidental to such conferred
powers , those reasonably necessary to accomplish its purposes & those which
may be incident to its existence.
Corporation may not be formed for the purpose of practicing a profession like
law, medicine or accountancy
Principal Must be within the Philippines
Must specify city or province
Street/number not necessary
important in determining venue in an action by or against the corp., or on
determining the province where a chattel mortgage of shares should be
Term of Cannot specify term which is longer than 50 years at a time
May be renewed for another 50 years, but not earlier than 5 years prior to the

PAGE 151 OF 320


Contents of AOI Comments

original or subsequent expiry date UNLESS there are justifiable reasons for an
earlier extension.
Incorporators Names, nationalities & residences of the incorporators;
and Directors
Names, nationalities & residences of the directors or trustees who will act as
such until the first regular directors or trustees are elected;
Treasurer who has been chosen by the pre-incorporation
subscribers/members to receive on behalf of the corporation, all subscriptions
/contributions paid by them.
Capital Stock Amount of its authorized capital stock in lawful money of the Philippines
Number of shares into which it is divided
In case the shares are par value shares, the par value of each,
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
For a non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each
25% of 25% rule to be certified by Treasurer
Paid up capital should not be less than P5,000
Other Classes of shares into w/c the shares of stock have been divided, preferences
matters of, and restrictions on any such class; and any denial or restriction of the pre-
emptive right of stockholders should also be expressly stated in said articles.
If the corporation is engaged in a wholly or partially nationalized business or
activity, the AOI must contain a prohibition against a transfer of stock which
would reduce the Filipino ownership of its stock to less than the required


Amendment of the Articles of (1) Requirements imposed by the Code or by
Incorporation special laws
(1) By a majority vote of the BOD or trustees (2) Must be for a legitimate purpose
(2) And the vote or written assent of (3) Must be approved by the
directors/trustees and the
2/3 of the outstanding capital stock, stockholders/members through the vote
without prejudice to the appraisal right requirement
of dissenting stockholders in
accordance with the provisions of this (4) Appraisal Right
Code, (5) Both the original and the amended
2/3 of the members if it be a non-stock articles together must contain all the
corporation. [Sec. 16] provisions required by law to be set out in
the articles

PAGE 152 OF 320


(6) If the corporation is governed by a special F.4. NON-AMENDABLE ITEMS

law, the amended articles must be
The following items state accomplished facts,
accompanied by a favorable
therefore, cannot be amended:
recommendation of the appropriate
government agency to the effect that (1) The names, nationalities and residences
such amendment is in accordance with of the incorporators.
law [Lopez]
Otherwise, an amendment would go
(7) Will take effect only against the definition of
incorporators in Sec. 5
Upon their approval by the SEC by the
issuance of a certificate of amended (2) Treasurer-in-trust
articles (3) First set of directors or trustees
Or from the date of filing with the SEC if (4) Original stock subscriptions and paid-in
not acted upon within 6 months from capital
the date of filing for a cause not
attributable to the corporation (5) Place and date of execution
(6) Witnesses [De Leon]

II. PROCEDURE Note: Articles of Incorporation must be

accompanied by Treasurers sworn statement
(1) The original and amended articles of compliance with Sec. 13 on amount of
together shall contain all provisions capital to be subscribed and paid for the
required by law to be set out in the purposes of incorporation; otherwise, SEC
articles of incorporation shall not accept the Articles of Incorporation
(2) The articles, as amended shall be [Sec. 14].
indicated by underscoring the change or
changes made
(3) A copy shall be submitted to the SEC
Duly certified under oath by the
corporate secretary and a majority of
the directors or trustees
Stating the fact that the amendment or DOCUMENTS TO BE FILED W ITH SEC:
amendments have been duly approved
by the required vote of the stockholders (1) Articles of Incorporation, and By-Laws (if
or members crafted prior to incorporation)
The following items are amendable under (2) Treasurers Affidavit certifying that 25%
Sec. 16: of the total authorized capital stock has
been subscribed and at least 25% of such
(1) Change of name of the Corporation
has been fully paid in cash or property
(2) Adding to or changing the purpose/s [Note: SEC Resolution No. 0331 dated
(3) Change of principal office July 20, 2012 no longer requires a bank
certificate of deposit covering the paid-up
(4) Change in the number of directors or
capital if payment for shares is made in
cash; where the capital stock is paid by a
(5) Increase or decrease in authorized capital combination of cash and property, only
stock [subject to Sec. 38] the portion paid by way of property will
require the submission of supporting
(3) Letter authority authorizing the SEC to
examine the bank deposit and other
PAGE 153 OF 320

corporate books and records to H. ADOPTION OF BY-LAWS

determine the existence of paid-up
By-laws has traditionally been defined as
(4) Undertaking to change the corporate regulations, ordinances, rules or laws
name in case there is another person or adopted by an association or corporation for
entity with same or similar name that was its internal governance, including rules for
previously registered routine matters such as calling meetings
(5) Certificate of authority from proper [SMC v. Mandaue (2005)].
government agency whenever
appropriate like BSP for banks and
Insurance Commission for insurance Adoption of By-Laws
corporations. [Sundiang and Aquino] May be done either:
(1) Prior to incorporation - approved and
G.2. ISSUANCE OF CERTIFICATE OF signed by all the incorporators and
INCORPORATION BY SEC submitted to SEC together with Articles
of Incorporation; or
Effect: Commencement of corporate
existence and juridical personality [Sec. 19] (2) After incorporation - within 1 month
after receipt of official notice of the
Revocation of certificate of incorporation: If issuance of its certificate of incorporation
incorporators are found guilty of fraud in by the SEC. [Sec. 46]
procuring the same after due notice and
hearing [Sec. 6(i), PD 902-A]
Effect of failure to file the By-Laws
within the period
ARTICLES OF INCORPORATION: Does not im ply the "dem ise" of the
corporation. By-laws may be required by law
Does not substantially comply with form for an orderly governance and management
prescribed of corporations but they are not essential to
corporate birth. Nonetheless, failure to file
Purpose is patently unconstitutional, illegal,
them within the period required by law by no
immoral, contrary to government rules and
means tolls the automatic dissolution of a
corporation. [Loyola Grand Villas Homeowners
Treasurers Affidavit concerning the Association v. CA (1997)]
amount of capital subscribed and or paid is Note: Sec. 22 on the effect of failure to
false formally organize within 2 years from
Required percentage of ownership of incorporation, the corporations corporate
Filipino citizens has not been complied with powers cease and the corporation is deemed
when required by existing laws or the dissolved. Organization includes: the filing
Constitution. [Sec. 17] and approval of by-laws with the SEC and the
election of directors and officers [Campos].
REMEDY in case of rejection - petition for
review in accordance with the Rules of Court,
i.e. Rule 43 [Sec. 6, last par., PD 902-A] H.1. NATURE AND FUNCTIONS OF BY-
SEC shall give the incorporators reasonable LAWS
tim e to correct or modify objectionable Nature: It is a product of agreement of the
portions of the articles or amendment [Sec. stockholders or members [Campos].
Function: It establishes the rules for
internal government of the corporation

PAGE 154 OF 320


It also regulates the affairs and relationship II. HOW DELEGATION REVOKED:
between and among stockholders, BOD and
Any power delegated to the BOD or trustees
corporation [Lopez].
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked
whenever stockholders owning or
representing a majority of the outstanding
Approval requirement: Must be approved capital stock or a majority of the members in
by the affirmative vote of the stockholders non-stock corporations, shall so vote at a
representing MAJORITY of the outstanding regular or special meeting. [Sec. 48]
capital stock or majority of members
If filed pre-incorporation: must be approved
and signed by all incorporators
Record-Keeping: Must be kept in the
principal office of the corporation, subject to
inspection of stockholders or members during
office hours [Sec. 74]
No provision of the by-laws can be adopted if
it is contrary to law. [Grace Christian High
School v. CA (1997)]


When Binding: ONLY from date of issuance
of SEC of a certification that the by-laws are
not inconsistent with the Code [Sec. 48]
Pending such approval, they cannot bind
stockholders or corporation
Effect to third parties: Mere internal
rules among stockholders and cannot affect
or prejudice 3rd persons who deal with the
corporation unless they have knowledge of
the same [China Banking Corp v CA (1997)].


Effected by: majority vote of the members
of the board and m ajority vote of
owners of the Outstanding Capital Stock or
members, in a meeting duly called for the


By vote of stockholders representing 2/3 of
the Outstanding Capital Stock or 2/3 of the
members [Sec. 48]

PAGE 155 OF 320


(2) Such powers as are essential or

VI. Corporate Powers necessary to carry out its purpose or
purposes as stated in the Articles of
Incorporation catch-all phrase [Sec.

(1) Sue and be sued in its corporate name; SPECIFIC CAPACITY [SECS. 37-44]
(2) Succession;
(3) Adopt and use a corporate seal; (1) Power to Extend or Shorten Corporate
(4) Amend its Articles of Incorporation; Term

(5) Adopt and amend by-laws; (2) Power to Increase or Decrease Capital
Stock or Incur, Create, Increase Bonded
(6) For stock corporations - issue or sell Indebtedness
stocks to subscribers and sell treasury
stocks; for non-stock corporation - admit (3) Power to Deny Pre-Emptive Rights
members to the corporation; (4) Power to Sell or Dispose of Corporate
(7) Purchase, receive, take or grant, hold, Assets
convey, sell, lease, pledge, mortgage and (5) Power to Acquire Own Shares
otherwise deal with such real and
personal property, pursuant to its lawful (6) Power to Invest Corporate Funds in
business; Another Corporation or Business

(8) Enter into merger or consolidation with (7) Power to Declare Dividends
other corporations as provided in the (8) Power to Enter Into Management
Code; Contract
(9) Make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or B.1. EXTEND OR SHORTEN THE
similar purposes: Provided, no CORPORATE TERM [SEC. 37]
corporation, domestic or foreign, shall (1) Must be approved by majority vote of the
give donations in aid of any political party BOD/ BOT
or candidate or for purposes of partisan
(2) Ratified at a meeting by shareholders
political activity;
representing 2/3 of the outstanding
(10) Establish pension, retirement, and other capital stock/ 2/3 of members of non-
plans for the benefit of its directors, stock corporations
trustees, officers and employees; and
(3) Written notice of meeting (includes
(11) Exercise such other powers as may be proposed action, time and place of
essential or necessary to carry out its meeting) shall be addressed to each
purposes shareholders/member at his place of
residence and deposited to the addressee
in the post office, or served personally
(4) Appraisal right may be exercised by the
The Corporation has implied powers which dissenting stockholder for BOTH
are deemed to exist because of the following extension and shortening of corporate
provisions: term [See also Sec. 81]
(1) Except such as are necessary or
incidental to the exercise of the powers so
conferred [Sec. 45]
PAGE 156 OF 320

B.2. INCREASE OR DECREASE CAPITAL (a) From and after approval of the SEC of
STOCK OR INCUR, CREATE, INCREASE its certificate of filing, the capital
BONDED INDEBTEDNESS [SEC. 38] stock shall stand increased or
decreased and the incurring, creating
(1) Same requirements above from 1-3
or increasing of any bonded
(2) A certificate in duplicate must be signed indebtedness authorized
by a majority of the directors of the
(b) SEC shall not accept for filing any
corporation (countersigned by the
certificate of increase unless
chairman and the secretary of the
accompanied by the sworn statement
shareholders meeting), setting forth:
of the treasurer of the corporation
(a) That requirements of this section showing:
have been complied with
(i) That at least 25% of such
(b) The amount of the increase or increased capital stock have been
diminution of the capital stock subscribed and
(c) In case of increase, (ii) that at least 25% of the amount
subscribed has been paid or that
(i) the amount of capital stock or
there has been transferred to the
number of shares of no-par stock
corporation property the value of
actually subscribed
which is equivalent to 25% of the
(ii) names, nationalities and subscription
residences of the persons
(c) SEC shall not approve any decrease
in the capital stock if its effect shall
(iii) the amount of no-par stock prejudice the rights of corporate
subscribed by each creditors
(iv) the amount paid by each on his (5) Bonds issued by a corporation shall be
subscription, or the amount of registered with the SEC
capital stock or number of shares
of no-par stock allotted to each
stockholder if such increase is for B.3. DENY PREEMPTIVE RIGHT [SEC. 39]
the purpose of making effective
General Rule: All shareholders of a stock
stock dividend
corporation have preemptive right to
(d) any bonded indebtedness to be subscribe to all issues or disposition of shares
incurred, created or increased of any class, in proportion to their respective
(e) the actual indebtedness of the
corporation on the day of the meeting Exception: If such right is denied by the
Articles of Incorporation or an amendment
(f) the amount of stock represented at
the meeting
Pre-emptive right shall not extend to:
(g) the vote authorizing the increase or
diminution of the capital stock, or the (1) shares to be issued in compliance
incurring, creating or increasing of with laws requiring stock offerings or
any bonded indebtedness minimum stock ownership by the
(3) prior approval of SEC is required
(2) shares to be issued in good faith with
(4) duplicate certificates shall be kept on file
the approval of 2/3 of the
in the office of the corporation and the
stockholders representing
other shall be filed with the SEC,
outstanding capital stock, in
attached in the original articles of
exchange for property needed for
corporate purposes or in payment of
a previously contracted debt
PAGE 157 OF 320

(1) For a legitimate corporate purpose/s,
(1) Same requirements from 1-3 as Sec. 37 including but not limited to the following:
(a) To eliminate fractional shares arising
(2) Any dissenting shareholders may exercise out of stock dividends
his appraisal right
(b) To collect or compromise an
(3) Deemed to cover substantially all the indebtedness to the corporation,
corporate property and assets arising out of unpaid subscription, in
a delinquency sale, and to purchase
(4) After authorization by the
delinquent shares sold during said
shareholders/members, the BOD/BOT
sale; and
may abandon such sale, lease, exchange,
mortgage, pledge or other disposition, (c) To pay dissenting or withdrawing
subject to the rights of third parties under stockholders
any contract relating thereto, without
(2) Provided there are unrestricted retained
further action or approval by the
earnings in the corporate books to cover
shareholders/ members
the shares purchased or acquired
(5) Corporation is not restricted in its power
to sell or dispose of its assets without the
authorization of shareholders or B.6. INVEST IN ANOTHER CORPORATION
members: OR BUSINESS [SEC. 42]
(a) if the same is necessary in the usual (1) Same requirements from 1-3 as Sec. 37
and regular course of business of the above
corporation or
(2) Any dissenting shareholders shall have
(b) if the proceeds of the sale will be appraisal right
appropriated for the conduct of its
(3) Where the investment is reasonably
remaining business
necessary to accomplish the corporations
While the Corporation Code allows the primary purpose, the approval of the
transfer of all or substantially all the shareholders/ members is not necessary
properties and assets of a corporation, the
transfer should not prejudice the creditors of
the assignor. The only way the transfer can If it is for the same purpose, or incidental, or
proceed without prejudice to the creditors is related to its PRIMARY purpose, the board
to hold the assignee liable for the obligations can invest the corporate fund WITHOUT the
of the assignor. The acquisition by the consent of the stockholders. No appraisal
assignee of all or substantially all of the right.
assets of the assignor necessarily includes If the investment is in another corporation of
the assumption of the assignors liabilities, different business or purpose BUT in
unless the creditors who did not consent to pursuance of the SECONDARY purpose, the
the transfer choose to rescind the transfer on affirmative vote of majority of the board
the ground of fraud. To allow an assignor to consented by stockholders/ members is
transfer all its business, properties and assets required.
without the consent of its creditors and
without requiring the assignee to assume the If the investment is OUTSIDE the purpose/s
assignors obligations will defraud the for which the corporation was organized,
creditors. The assignment will place the Articles of Incorporation must be amended
assignors assets beyond the reach of its first, otherwise it will be an Ultra Vires act.
creditors. [Caltex (Phils.) Inc. v. PNOC A private corporation, in order to accomplish
Shipping and Transport Corp. (2006)] its purpose as stated in its articles of
incorporation, and subject to the limitations
PAGE 158 OF 320

imposed by the Corporation Law, has the Stock dividends cannot be issued to a person
power to acquire, hold, mortgage, pledge or who is not a stockholder in payment of
dispose of shares, bonds, securities, and services rendered.
other evidences of indebtedness of any
A corporation may legally issue shares of
domestic or foreign corporation. Such an act,
stock in consideration of services rendered to
if done in pursuance of the corporate
it by a person not a stockholder, or in
purpose, does not need the approval of the
payment of its indebtedness. A share of stock
stockholders; but when the purchase of
issued to pay for services rendered is
shares of another corporation is done solely
equivalent to a stock issued in exchange of
for investment and not to accomplish the
property, because services is equivalent to
purpose of its incorporation, the vote of
property. It is the shares of stock that are
approval of the stockholders is necessary. [De
originally issued by the corporation and
La Rama v. Ma-ao Sugar Central Co. (1969)]
forming part of the capital that can be
exchanged for cash or services rendered, or
property. A share of stock coming from stock
dividends declared cannot be issued to one
(1) Out of unrestricted retained earnings who is not a stockholder of a corporation.
[Nielson and Co. v. Lepanto Consolidated
(2) Payable in cash, in property, or in stock to
Mining (1968)]
all shareholders on the basis of
outstanding stock held by them
(3) Any cash dividend due on delinquent Cash Dividends v. Stock Dividends
stock shall first be applied to the unpaid
Cash Stock
balance on the subscription plus costs
Dividend Dividend
and expenses
(4) Stock dividends shall be withheld from Voting Board of Board of
the delinquent stockholder until his Requirements Directors Directors +
unpaid subscription is fully paid for issuance 2/3 of SH
holding OCS
(5) Should be approved by 2/3 of
shareholders representing the Effect on Shall be Shall be
outstanding capital stock at a delinquent applied to withheld
regular/special meeting called for that stock the unpaid from the
purpose balance on delinquent
the stockholder
(6) Stock corporations- prohibited from subscription until his
retaining surplus profits in excess of plus costs unpaid
100% of their paid-in capital stock, and subscription
except: expenses. is fully paid.
(a) When justified by definite corporate Can be issued No. [Sec. No, since this
expansion projects or programs by Executive 35] requires SH
approved by the BOD Committee? approval.
(b) When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from B.8. ENTER INTO MANAGEMENT
declaring dividends without its CONTRACTS [SEC. 44]
consent, and such consent has not (1) Should be approved by the BOD and by
yet been secured shareholders owning at least the
(c) When it can be clearly shown that majority of the outstanding capital
such retention is necessary under stock or at least a majority of the
special circumstances obtaining in members of both the managing and the
the corporation
PAGE 159 OF 320

managed corporation at a meeting duly B.9. ULTRA VIRES ACTS

called for that purpose
(2) Should be approved by the 2/3 of
Ultra Vires acts are those acts which a
stockholders owning outstanding capital
corporation is not empowered to do or
stock/members of the managed
perform because they are not conferred by its
corporation when:
Articles of Incorporation or by the
(1) A stockholder or stockholders Corporation Code, or not necessary or
representing the same interest of both incidental to the exercise of the powers so
the managing and managed corporations conferred [Sec. 45].
own more than 1/3 of the total
outstanding capital stock entitled to vote
of the managing corporation; or Types of Ultra Vires Acts
(2) A majority of the members of the BOD of (1) Acts done beyond the powers of the
the managing corporation also constitute corporation as provided in the law or its
a majority of the BOD of the managed articles of incorporation;
(2) Acts or contracts entered into in behalf of
(3) No management contract shall be a corporation by persons who have no
entered into for a period longer than 5 corporate authority (Note: This is
years for any one term technically Ultra Vires acts of officers and
not of the corporation);
(4) 1-3 above applies to any contract
whereby a corporation undertakes to (3) Acts or contracts, which are per se illegal
manage or operate all or substantially all as being contrary to law. [Villanueva]
of the business of another corporation,
whether such are called service contracts,
operating agreements or otherwise i. APPLICABILITY OF ULTRA VIRES
(5) Service contracts or operating
agreements which relate to exploration, It is a question, therefore, in each case of the
development, exploitation or utilization logical relation of the act to the corporate
of natural resources may be entered into purpose expressed in the charter. If that act is
for such periods as may be provided in one which is lawful in itself, and not
the pertinent laws and regulations otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a
NOTES: 2 general restrictions on the power substantial, and not in a remote and fanciful
of the corporation to acquire and hold sense, it may fairly be considered within the
properties: charter powers. The test to be applied is
whether the act in question is in direct and
(1) property must be reasonably and
immediate furtherance of the corporations
necessarily required by the business
business, fairly incident to the express powers
(2) that the power shall be subject to the and reasonably necessary to their exercise. If
limitations prescribed by other special so, the corporation has the power to do it;
laws and the Constitution (corporation otherwise, not. [Montelibano v. Bacolod-
may not acquire more than 30% of voting Murcia Milling Co., Inc. (1962)]
stocks of a bank; corporations are
restricted from acquiring public lands
except by lease of not more than 1000 ii. CONSEQUENCES OF ULTRA VIRES
hectares) ACTS
(1) Executed contract courts will not set
aside or interfere with such contracts;

PAGE 160 OF 320


(2) Executory contracts no enforcement C. HOW (CORPORATE POWERS)

even at the suit of either party (void and EXERCISED
(3) Partly executed and partly C.1. BY THE SHAREHOLDERS
executory principle of no unjust
enrichment at expense of another shall i. CORPORATE ACTS REQUIRING
(4) Executory contracts apparently VOTING SHARES)
authorized but Ultra Vires the
principle of estoppel shall apply. General Rule: Vote necessary to approve a
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
Ultra Vires v. Illegal Acts with voting rights [Sec. 6]
Ultra Vires Acts Illegal Acts Exceptions [Sec. 6]

Not necessarily Unlawful; against law, Voting and non-voting shares shall be
unlawful, but morals, public policy, entitled to vote in the following cases:
outside the powers and public order (1) Amendment of Articles of Incorporation
of the corporation
(2) Adoption, Amendment and Repeal of By-
Can be ratified Cannot be ratified Laws [Sec. 48]
Can bind the parties Cannot bind the (3) Sale, Lease, Mortgage or Other
if wholly or partly parties Disposition of Substantially all corporate
executed assets [Sec. 40]
Voidable, and may Void and cannot be (4) Incurring, Creating or Increasing Bonded
be enforced by validated Indebtedness [Sec. 38]
(5) Increase or Decrease of Capital Stock [Sec.
ratification or
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another
Rem edies in Case of Ultra Vires Acts
corporation or business or for any
(1) State purpose other than the primary purpose
for which it was organized [Sec. 42]
(a) Dissolution of the corporation thru a
quo warranto proceeding Requisites [Sec. 42] (Bar 1995):
(b) Injunction (a) Approval of majority of the BOD or
(c) Suspension or revocation of the
certificate of registration by the SEC (b) Ratification by the stockholders
representing at least 2/3 of the
(2) Stockholders
Outstanding Capital Stock or the
(a) Injunction members at a meeting duly called for
the purpose
(b) Derivative suit
(c) Written notice addressed to each
(c) Ratification (except when a 3rd party
stockholder or member at his place of
is prejudiced or the act is illegal)
residence as shown on the books of
(3) Creditors the corporation
(a) Nullification of contract in fraud of (d) Appraisal right available to
creditors dissenting stockholders or members

PAGE 161 OF 320


(8) Dissolution of the Corporation [Sec. 118- Requisites of a VALID Corporate Act
121] by the BOD [Sec. 25]:
(a) The Board must act as a BODY in a
meeting. Note: Current SEC regulations
allow BOD meetings by teleconferencing
or videoconferencing (SEC Memo Circular
No.15, series of 2001, in relation to Sec. 16
(1) Declaration of Stock Dividends [Sec. 43] of R.A. 8792)
(2) Management Contracts [Sec. 44] (b) There must be a VALIDLY constituted
(3) Fixing the Consideration of No-Par shares
[Sec. 62] (c) Their act must be supported by a
(4) Fixing the Compensation of Directors [Sec.
assembled (Exception: Election of
officers requires a vote of majority of ALL
the members of the board)
C.2. BY THE BOD (d) The act must be within the powers
Board as Repository of Corporate conferred to the Board.
General Rule (Doctrine Of Centralized C.3. BY THE OFFICERS
Management): The corporate powers of the
corporation shall be exercised, all business Corporate Officer Corporate Employee
conducted, and all property of controlled and Position is provided Employed through
held by the BOD or trustees. [Sec. 23] for in the by-laws or the action of the
Exceptions: under the Corp. Code managing officer of
the corporation
(1) Executive Committee duly authorized in
the by-laws [Sec. 35]; RTC has jurisdiction NLRC has jurisdiction
in case of labor in case of labor
(2) A contracted manager which may be an dispute disputes
individual, a partnership, or another
NOTE: In case the contracted manager I. W HO ARE CORPORATE OFFICERS
is another corporation, the special rule in [SEC. 25]
Sec. 44 applies. President Secretary Treasurer
(3) In case of close corporations, the Director YES NO NO
stockholders may manage the business of
the corporation rather than by a BOD, if Filipino NO YES YES
the Articles of Incorporation so provide Citizen
[Sec. 97] Residency NO YES YES
The power to purchase real property is vested Prohibited Secretary President President
in the BOD or trustees. While a corporation concurren or
may appoint agents to negotiate for the t positions Treasurer
purchase of real property needed by the
corporation, the final say will have to be with (1) President must be a director;
the board, whose approval will finalize the (2) Treasurer may or may not be a director;
transaction. [Spouses Constantine Firme v. as a matter of sound corporate practice,
Bukal Enterprises and Development must be a resident and citizen of the Phil
Corporation (2003)] (SEC opinion)

PAGE 162 OF 320


(3) Secretary need not be a director unless Corporation Code. These are the president,
required by the by-laws; must be a secretary and the treasurer. The number
resident and citizen of the Philippines; of officers is not lim ited to these
and three. A corporation may have such other
officers as may be provided for by its by-laws
(4) Other officers as may be provided in the
like, but not limited to, the vice-president,
cashier, auditor or general manager. The
NOTE: Any 2 or more positions may be held number of corporate officers is thus limited
concurrently by the same person, EXCEPT by law and by the corporations by-laws
that no one shall act as president and (citing Garcia v. Eastern Telecommunications
secretary or as president and treasurer at the Philippines, Inc., 2009).
same time.
Additional qualifications of officers may be
provided for in the by-laws [Sec. 47(5)]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
Conformably with Sec. 25 of the Corporation exceeding 6 years
Code, a position must be expressly
(2) Convicted by final judgment of a violation
mentioned in the by-Laws in order to be
of the Corporation Code committed
considered as a corporate office. Thus, the
within 5 years prior to the date of his
creation of an office pursuant to or under a
election or appointment. This includes
by-Law enabling provision is not enough to
violations of rules and regulations issued
make a position a corporate office. Guerrea v.
by the SEC to implement the provisions of
Lezama (1958), the first ruling on the matter,
the Corporation Code.
held that the only officers of a corporation
were those given that character either by
the Corporation Code or by the By-Laws; the
rest of the corporate officers could be
considered only as employees or subordinate
officials. [Matling Industrial and Commercial A person dealing with a corporate officer is
Corp. v. Coros (2010)] put on inquiry as to the scope of the latters
authority but an innocent person cannot be
prejudiced if he had the right to presume
A different interpretation can easily leave the under the circumstances the authority of the
way open for the BOD to circumvent the acting officers.
constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in
the By-Laws of an enabling clause on the Associated Bank v. Pronstroller (2008,
creation of just any corporate officer position. Nachura):
An office is created by the charter of the Q: What is the Doctrine of Apparent
corporation and the officer is elected (or Authority?
appointed) by the directors or stockholders
A: If a corporation knowingly permits one of
[Real v. Sangu Philippines citing Easycall
its officers, or any other agent, to act within
Communications Phils., Inc. v. King, 2005,
the scope of an apparent authority, it holds
him out to the public as possessing the power
to do those acts; the corporation will, as
against anyone who has in good faith dealt
Corporate officers in the context of PD No.
with it through such agent, be estopped from
902-A are those officers of the corporation
denying the agents authority.
who are given that character by the
Corporation Code or by the corporations by-
laws. There are three specific officers whom
a corporation must have under Sec. 25 of the
PAGE 163 OF 320

D. TRUST FUND DOCTRINE procedure for the distribution of capital

assets, embodied in Corporation Code, which
allows the distribution of corporate capital
Trust Fund Doctrine means that the capital only in three instances:
stock, properties and other assets of a
corporation are regarded as equity in trust for (1) amendment of the Articles of
the payment of corporate creditors. Stated Incorporation to reduce the authorized
simply, the trust fund doctrine states that all capital stock,
funds received by the corporation in payment (2) purchase of redeemable shares by the
of the shares of stock shall be held in trust for corporation, regardless of the existence
the corporate creditors and other of unrestricted retained earnings, and
stockholders of the corporation. Under such
doctrine no fund shall be used to buy back (3) dissolution and eventual liquidation of
the issued shares of stock except only in the corporation.
instances specifically allowed by the Furthermore, the doctrine is articulated in
Corporation Code. [Boman Environmental Sec. 41 on the power of a corporation to
Development Corporation v. CA (1988)] acquire its own shares and in Sec. 122 on the
The subscribed capital is the same amount prohibition against the distribution of
that can loosely be termed as the trust fund corporate assets and property unless the
of the corporation. The Trust Fund doctrine stringent requirements therefore are
considers this subscribed capital as a trust complied with. [Ong Yong v. Tiu (2003)]
fund for the payment of the debts of the The creditors of a corporation have the right
corporation, to which the creditors may to assume that so long as there are debts and
look for satisfaction. Until the liabilities, the BOD will not use corporate
liquidation of the corporation, no part assets to purchase its own shares of stock or
of the subscribed capital m ay be to declare dividends to its stockholders when
returned or released to the the corporation is insolvent. [Steinberg v.
stockholder (except in the redemption Velasco (1929)]
of redeem able shares) without
violating this principle. Thus, dividends The trust fund doctrine is not limited to
must never impair the subscribed capital; reaching the stockholders unpaid
subscription commitments cannot be subscriptions. The scope of the doctrine when
condoned or remitted; nor can the the corporation is insolvent encompasses not
corporation buy its own shares using the only the capital stock, but also other
subscribed capital as the consideration property and assets generally regarded in
therefor. [NTC v. CA (1999)] equity as a trust fund for the payment of
corporate debts. All assets and property
Under Sec. 43 of Code, the corporation can belonging to the corporation held in trust for
declare dividends only out of "unrestricted the benefit of creditors that were distributed
retained earnings;" and that under Sec. 122, or in the possession of the stockholders,
no corporation shall distribute any of its regardless of full payment of their
assets or property except upon lawful subscriptions, may be reached by the creditor
dissolution and after payment of all its debts in satisfaction of its claim.
and liabilities. These provisions in essence
provide for the "trust fund doctrine" where Also, under the trust fund doctrine, a
the "subscription to the capital of a corporation has no legal capacity to release
corporation constitute a fund to which an original subscriber to its capital stock from
creditors have a right to look for the obligation of paying for his shares, in
satisfaction of their claims." [Philippine whole or in part, without a valuable
Trust Co. v. Rivera (1923)] consideration, or fraudulently, to the
prejudice of creditors. The creditor is allowed
"The Trust Fund Doctrine, first enunciated by to maintain an action upon any unpaid
this Court in the 1923 case of Philippine Trust subscriptions and thereby steps into the
Co. v. Rivera' is the underlying principle in the

PAGE 164 OF 320


shoes of the corporation for the satisfaction

of its debt. VII. Board Of Directors
To make out a prima facie case in a suit
against stockholders of an insolvent And Trustees
corporation to compel them to contribute to
the payment of its debts by making good A. DOCTRINE OF CENTRALIZED
unpaid balances upon their subscriptions, it
is only necessary to establish that the MANAGEMENT
stockholders have not in good faith paid the
par value of the stocks of the corporation. A.1. BOARD IS SEAT OF CORPORATE
[Donnina Halley v. Printwell, Inc. (2011)] POWERS
General Rule: Unless otherwise provided in
this Code, the corporate powers of all
corporations form ed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by
the BOD or trustees to be elected from
among the holders of stocks, or where there
is no stock, from among the members of the
corporation, who shall hold office for 1 year
until their successors are elected and
qualified. [Sec. 23]
(1) In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
(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 rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
The Corporation Code of the Philippines vests
in the BOD the exercise of the corporate
powers of the corporation, save in those
instances where the Code requires
stockholders approval for certain specific
acts. [Great Asian Sales Center Corp v. CA,
The power to purchase real property is vested
in the BOD 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
PAGE 165 OF 320

the board, whose approval will finalize the (g) Fixing of compensation of directors
transaction. [Spouses Constantine Firme v. [Sec. 30]
Bukal Enterprises and Development
(3) Cannot exercise powers not possessed by
Corporation (2003)]
the corporation.
Indisputably, one of the rights of a
stockholder is the right to participate in the
control or management of the corporation. A.2. PRINCIPLE ON DELEGATION OF
This is exercised through his vote in the BOARD POWER
election of directors because it is the BOD
Under Sec 23, the power and the
that controls or manages the corporation.
responsibility to decide whether the
[Gamboa v. Teves, (2011)]
corporation should enter into a contract that
will bind the corporation is lodged in the
board, subject to the articles of incorporation,
by-laws, or relevant provisions of law.
However, just as a natural person may
(a) The Board must act as a BODY in a authorize another to do certain acts for and
meeting. on his behalf, the BOD may validly delegate
some of its functions and powers to officers,
(b) There must be a VALIDLY constituted
committees or agents. The authority of such
individuals to bind the corporation is
(c) There act must be supported by a generally derived from law, corporate by-laws
MAJORITY OF THE QUORUM duly or authorization from the board, either
assembled (Exception: Election of expressly or impliedly by habit, custom or
officers requires a vote of majority of ALL acquiescence in the general course of
the members of the board) business. [Peoples Aircargo v. CA, (1998)]
(d) The act must be within the powers
conferred to the Board.

ii. LIMITATIONS ON POW ERS OF General Rule: Directors cannot be held

BOD/TRUSTEES liable for mistakes or errors in the exercise of
(1) Limitations imposed by the Constitution, their business judgment as long as they acted
statutes, articles of incorporation or by- in good faith, with due care and prudence.
laws; Contracts entered into by the BOD are
binding upon the corporation and courts will
(2) Certain acts of the corporation that not interfere.
require joint action of the stockholders
and BOD: Exceptions:

(a) Removal of director [Sec. 28] (1) If the contracts are so unconscionable
and oppressive as to amount to a wanton
(b) Amendments of Articles of destruction of the rights of the minority
Incorporation [Sec. 16] [Ingersoll v. Malabon Sugar (1927)];
(c) Fundamental changes [Sec. 6] (2) if they violate their duties under Sec. 31
(d) Declaration of stock dividends [Sec. (director willfully and knowingly assents
43] to patently unlawful acts of the
corporation, or are guilty of gross
(e) Entering into management contracts negligence or bad faith); and
[Sec. 44]
(3) if they violate Sec. 34 (disloyalty of a
(f) Fixing of consideration of non-par director who acquires for himself a
shares [Sec. 62] business opportunity that should have
belonged to the corporation, unless his
PAGE 166 OF 320

act is ratified by a 2/3 vote of committed an act causing damage to the

stockholders). corporation or when the Board is placed in a
conflict of interests scenario whereby it is
unlikely that it would use such business
Consequences of the Business discretion to file such suit for the best interest
Judgment Rule: of the corporation.
(1) The resolution, contracts and
transactions of the board cannot be
overturned or set aside by the C. TENURE, QUALIFICATIONS AND
stockholders or members and not even by DISQUALIFICATIONS OF DIRECTORS
the courts under the principle that the OR TRUSTEES
business of the corporation has been left
to the hands of the board
(2) Directors and duly authorized officers
Directors shall hold office for 1 year until
cannot be held personally liable for acts
their successors are elected and
or contracts done with the exercise of
qualified [Sec. 23]
their business judgment.
Term v. Tenure [Valle Verde Country Club v.
(1) When the Corporation Code expressly
Africa, 2009]
provides otherwise
(2) When the Directors or officers acted with Term Tenure
fraud, gross negligence or in bad faith Time during which the The period within
(Sec. 31). officer may claim to which the director
(3) When Directors or officers act against the hold the office as of actually holds
corporation in conflict of interest right, and fixes the office, including
situation (Villanueva). interval after which the the holdover
several incumbents period after the
shall succeed one end of his term
Rem edies in case of Mism anagement another.

(1) Removal of directors pursuant to Sec. 28 Not affected by Includes holdover

(2) Derivative suit or complaint filed with the
RTC) (Sec. 5.2, R.A. 8799, Securities Fixed by statute and it May be shorter or
Regulation Code; A.M. No. 01-2-04 SC, does not change simply longer (in case of
Interim Rules of Procedure Governing because the office may a holdover) than
Intra-corporate Controversies) have become vacant, the term for
nor because the reasons within or
(3) Receivership incumbent holds over in beyond the power
(4) Injunction if the act has not yet been done office beyond the end of of the incumbent
the term due to the fact
(5) Dissolution if abuse amounts to a ground that a successor has not
for quo warranto but Solicitor General been elected and has
Refuses to act failed to qualify.
NOTE: 1 Year
Dean Villanueva opined that a derivative suit
may be an exception to such Rule: this occurs
when it is apparent that the Board is not in a C.2. QUALIFICATIONS
position to validly exercise its business (1) If STOCK, director must own at least 1
judgment for the protection of the share of the capital stock, which stock
corporation, e.g., when the Board itself has shall stand in his own name [Sec. 23]
PAGE 167 OF 320

Exception: Trustee in a voting trust may D. ELECTIONS

be elected director/trustee.
(2) If NON-STOCK, trustee must be a D.1. CUMULATIVE VOTING
Qualifications: A stockholder is allowed to concentrate his
(1) Majority of the directors/trustees must be votes and give one candidate as many votes
residents of the Philippines. as the number of directors to be elected
multiplied by the number of his shares shall
(2) Natural person equal.
(4) Other qualifications as may be prescribed If there are 5 directors to be elected and
in the by-laws of the corporation. Pedro, as shareholder, has 100 shares, Pedro
With the omission of the phrase "in his own can give 500 (5 x 100 shares) votes to just
right" the election of trustees and other one candidate.
persons who in fact are not beneficial owners
of the shares registered in their names on the
books of the corporation becomes formally ii. CUMULATIVE VOTING BY
legalized. Hence, this is a clear indication DISTRIBUTION
that in order to be eligible as a director, what A stockholder may cumulate his shares by
is material is the legal title to, not beneficial multiplying the number of his shares by the
ownership of, the stock as appearing on the number of directors to be elected and
books of the corporation. [Lee v. CA (1992)] distribute the same among as many
candidates as he shall see fit.


(1) Convicted by final judgment of an offense In the illustration above, Pedro instead may
punishable by imprisonment for a period choose to give 100 votes to candidate 1, 100
exceeding 6 years; or votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
(2) A violation of the Corporation Code, candidate 5.
committed within 5 years prior to the
date of his election. This includes
violations of rules and regulations issued iii. STRAIGHT VOTING
by the SEC to implement the provisions of
the Corporation Code. Every stockholder may vote such number of
shares for as many persons as there are
An amendment to the corporations by-laws directors to be elected.
which renders a stockholder ineligible to be a
director, if he be also a director in a
corporation whose business is in competition D.2. QUORUM
with that of the other corporation, has been
sustained as valid. This is based upon the There must be present, in person or by
principle that where the director is so representative authorized to act by written
employed in the service of a rival company, he proxy, the owners of majority of the
cannot serve both, but must betray one or the Outstanding Capital Stock or majority of the
other. Such an amendment "advances the members entitled to vote in the meeting.
benefit of the corporation and is good." Election must be by ballot if requested.
[Gokongwei, Jr. v. SEC (1979)]

PAGE 168 OF 320


A stockholder cannot be deprived in the F.2. VACANCY BY REASON OF INCREASE

articles of incorporation or in the by-laws of IN THE NUMBER OF THE
his statutory right to use any of the methods DIRECTORS/TRUSTEES
of voting in the election of directors.
Vacancy/ies must be filled by the
No delinquent stock shall be voted. stockholders:
The candidates receiving the highest number (1) in a regular or special meeting called for
of votes shall be declared elected. that purpose; or
(2) in the same meeting authorizing the
increase of directors or trustees if so
E. REMOVAL stated in the notice of the m eeting.

General Rule: Any Director or Trustee of a

corporation may be removed from office, with F.3. VACANCY BY OTHER CAUSES
or without cause. [Sec. 28] Vacancy/ies may be filled by the vote of at
Exception: Directors who have been elected least a majority of the remaining directors or
by minority stockholders exercising trustees, if still constituting a quorum .
cumulative voting can only be removed for
cause. Removal without cause may not be
used to deprive minority stockholders or G. COMPENSATION [SEC. 30]
members of the right of representation to
which they may be entitled under Sec. 24.
General Rule: Directors are only entitled to
Other requisites: reasonable per diems. They are not entitled
to compensation as directors.
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding Exceptions:
capital stock, or if the corporation be a
(1) When Articles of Incorporation, by-laws,
non-stock corporation, by a vote of 2/3 of
or an advance contract provides for
the members entitled to vote
(2) At a regular or special meeting after
(2) Compensation other than per diems may
proper notice is given
also be granted to directors by the vote of
the stockholders representing at least a
majority of the Outstanding Capital Stock
F. FILLING OF VACANCIES at a regular or special stockholders
F.1. VACANCY (1) BY REMOVAL; OR (2) BY The total yearly compensation of directors
EXPIRATION OF TERM; OR (3) WHEN THE shall not exceed 10% of the net income
REMAINING DIRECTORS DO NOT before income tax of the corporation during
CONSTITUTE A QUORUM the preceding year.
Vacancy/ies must be filled by the
stockholders in a regular or special meeting
called for that purpose. COMPENSATION OF DIRECTORS AS
A director or trustee elected to fill a vacancy
shall be elected only for the unexpired term The position of being chairman and Vice-
of his predecessor in office. Chairman, like that of treasurer and
secretary, are not considered directorship
positions but officership positions that would
entitle the occupants to compensation.
Likewise, the limitation placed under Sec. 30
of the Corporation Code that directors cannot
receive compensation exceeding 10% of the
PAGE 169 OF 320

net income of the corporation would not by the corporation, its stockholders or
apply to the compensation given to such members and other persons. [Sec 31]
positions since it is being given in their
The conditions for the application of Sec. 31 of
capacity as officers of the corporation and not
the Corporation Code require factual
as board members. [Western Institute of
foundations to be first laid out in appropriate
Technology v. Salas (1997)]
judicial proceedings. Hence, concluding that
a person breached fiduciary duties as an
officer and member of the BOD of a
H. FIDUCIARY DUTIES AND LIABILITY corporation without com petent evidence
RULES thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
H.1. DUTIES Sandiganbayan (First Division) et al. (2011)]

In this jurisdiction, the members of the BOD

have a three-fold duty: duty of obedience, Duty of Loyalty
duty of diligence, and duty of loyalty.
Directors and trustees should not acquire any
(1) Duty of Obedience - shall direct the personal or pecuniary interest in conflict with
affairs of the corporation only in their duty as such directors or trustees,
accordance with the purposes for which it otherwise they shall be held liable jointly and
was organized; severally for all damages resulting therefrom
(2) Duty of Diligence - shall not willfully suffered by the corporation, its stockholders
and knowingly vote for or assent to or members and other persons. [Sec. 31]
patently unlawful acts of the corporation Where a director, by virtue of his office,
or act in bad faith or with gross acquires for himself a business opportunity
negligence in directing the affairs of the which should belong to the corporation,
corporation; and thereby obtaining profits to the prejudice of
(3) Duty of Loyalty - shall not acquire any such corporation, he must account to the
personal or pecuniary interest in conflict latter for all such profits by refunding the
with their duty as such directors or same, unless his act has been ratified by a
trustees. [Strategic Alliance Development vote of the stockholders owning or
Corp v. Radstock Securities Ltd. (2009)] representing at least 2/3 of the outstanding
capital stock [Sec. 34]

Duty of Obedience
Doctrine of Corporate Opportunity
The Directors or Trustees and Officers to be
elected shall perform the duties enjoined on Unless his act is ratified, a director shall
them by law and by the by-laws of the refund to the corporation all the profits he
corporation [Sec. 25] realizes on a business opportunity which:
(1) corporation is financially able to
Duty of Diligence
(2) from its nature, is in line with
Directors or trustees who (i) willfully and corporations business and is of practical
knowingly vote for or assent to patently advantage to it; and
unlawful acts of the corporation or (ii) who
are guilty of gross negligence or bad faith in (3) one in which the corporation has an
directing the affairs of the corporation or (iii) interest or a reasonable expectancy.
acquire any personal or pecuniary interest in The rule shall be applied notwithstanding the
conflict with their duty as such directors or fact that the director risked his own funds in
trustees shall be liable jointly and severally the venture. [Sec. 34]
for all damages resulting therefrom suffered

PAGE 170 OF 320


By embracing the opportunity, the self- Any director or officer of a corporation

interest of the officer or director will be consenting to the issuance of watered stocks
brought into conflict with that of his or who, having knowledge thereof, does not
corporation. Hence, the law does not permit forthwith express his objection in writing and
him to seize the opportunity even if he will file the same with the corporate secretary
use his own funds in the venture. [Sundiang shall be solidarily liable with the
and Aquino] stockholder concerned to the corporation and
its creditors for the difference in value [Sec.
NOTE: Differences between Sec. 31 and Sec.
(1) First, while both involve the same subject
matter (business opportunity) they iii. PERSONAL LIABILITIES
concern different personalities; Sec. 34 is
applicable only to directors and not to
officers, whereas Sec. 31 applies to Members of the Board, who purport to act in
directors, trustees and officers. good faith for and in behalf of the corporation
within the lawful scope of their authority, are
(2) Second, Sec. 34 allows a ratification of a
not liable for the consequences of their acts.
transaction by a self-dealing director by
When the acts are of such nature and done
vote of stockholders representing at least
under those circumstances, they are
2/3 of the outstanding capital stock.
attributed to the corporation alone and no
personal liability is incurred.
The provisions on seizing corporate
H.2. LIABILITIES opportunity and disloyalty [Secs. 31 and 34]
shall also apply to corporate officers. [Price v.
Innodata Phils., Inc. (2008)]
(1) Willfully and knowingly voting for and
assenting to patently unlawful acts of the Members of the BOD who are also officers are
corporation; [Sec. 31] held to a more stringent liability because they
are in-charge of day-to-day activities
(2) Gross negligence or bad faith in directing
the affairs of the corporation; [Sec. 31]
(3) Acquiring any personal or pecuniary Doctrine of Limited Doctrine of
interest in conflict of duty; [Sec. 31] Liability Immunity

(4) Consenting to the issuance of watered Shields the Protects a person

stocks, or, having knowledge thereof, incorporators from acting for and in
failing to file objections with secretary; corporate liability behalf of the
[Sec. 65] beyond their agreed corporation from
contribution to the being himself
(5) Agreeing or stipulating in a contract to capital or personally liable for
hold himself liable with the corporation; shareholding in the his authorized
or corporation. actions
(6) By virtue of a specific provision of law
Liability of Director, Trustee or Officer
ii. LIABILITY FOR W ATERED STOCKS (Asked in 96 and 97)

W atered Stocks stocks issued for a Personal liability of a corporate director,

consideration less than its par or issued value trustee or officer along (although not
or for a consideration in any form other than necessarily) with the corporation may so
cash, valued in excess of its fair value. validly attach, as a rule, only when:

PAGE 171 OF 320


(1) He assents (a) to a patently unlawful act I. RESPONSIBILITY FOR CRIMES

of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in Since a corporation as a person is a mere
damages to the corporation, its legal fiction, it cannot be proceeded against
stockholders or other persons; criminally because it cannot commit a crime
in which personal violence or malicious intent
(2) He consents to the issuance of watered is required.
stocks or who, having knowledge thereof,
does not forthwith file with the corporate Criminal action is limited to the corporate
secretary his written objection thereto; agents guilty of an act amounting to a crime
and never against the corporation itself.
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or Since the BOD is the repository of corporate
powers and acts as the agent of the
(4) He is made, by a specific provision of law, corporation, the directors may be held
to personally answer for his corporate criminally liable. [West Coast Life Ins. Co. v.
action [Tramat Mercantile, Inc. vs. CA, Hurd (1914); Time Inc. v. Reyes (1971)]
(1994), reiterated in Atrium Management
Corp. v. CA, (2001)] The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
IV. SPECIAL FACTS DOCTRINE entrustee is a corporation, the law makes the
officers or employees or other persons
Even though a director may not be under the responsible for the offense liable to suffer the
obligation of a fiduciary nature to disclose to penalty of imprisonment. The reason is
a shareholder his knowledge affecting the obvious: corporations, partnerships,
value of the shares, that duty may exist in associations and other juridical entities
special cases. [Strong v. Repide (1909)] cannot be put to jail. Hence, the criminal
General Rule: liability falls on the human agent responsible
for the violation of the Trust Receipts Law.
Majority view: Directors only owe its duty to [Ong v. CA (2003)] (see also Sec. 13, P.D. 115)
the corporation. They owe no fiduciary duty to
stockholders but they may deal with each
other at fair and reasonable terms, as if they J. INSIDE INFORMATION
were unrelated. No duty to disclose facts
known to the director or officer. [Taylor v.
Wright, 1945] The fiduciary position of insiders, directors,
and officers prohibits them from using
NOTE: Minority View (Realistic View) confidential information relating to the
recognizes the directors obligation to the business of the corporation to benefit
stockholders individually as well as themselves or any competitor corporation in
collectively, and refuses to permit him to which they may have a mere substantial
profit at the latters expense by the use of interest.
information obtained as a result of official
position and duties. Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
Exception: has a cause of action as long as there is unfair
Special Facts Doctrine: Conceding the use of inside information
absence of a fiduciary relationship in the It is inside information if it is not generally
ordinary case, courts nevertheless hold that available to others and is acquired because of
where special circumstances or facts are the close relationship of the director or officer
present which make it inequitable for the to the corporation
director to withhold information from the
stockholder, the duty to disclose arises and
concealment is fraud. [Strong v. Repide, 1909]
PAGE 172 OF 320


Insider means: In case of absence of the first two conditions
above, contract may be ratified if:
(a) the issuer;
(a) Stockholders representing at least 2/3 of
(b) a director or officer (or person
the outstanding capital stock or at least
performing similar functions) of, or a
2/3 of the members in a meeting called
person controlling the issuer;
for the purpose voted to ratify the
(c) a person whose relationship or former contract.
relationship to the issuer gives or
(b) Full disclosure of the adverse interest of
gave him access to material
the directors or trustees involved is made
information about the issuer or the
at such meeting.
security that is not generally available
to the public; (c) Contract is fair and reasonable under the
(d) a government employee, or director,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to
material information about an issuer
or a security that is not generally Interlocking, characterized
available to the public; or
If the interests of the interlocking director in
(e) a person who learns such information the corporations are both substantial (i.e.,
by a communication from any of the stockholdings exceed 20% of outstanding
foregoing insiders [Sec. 3.8, capital stock). [Sec. 33]
Securities Regulations Code]
General Rule: A contract between two or
more corporations having interlocking
directors shall not be invalidated on that
K. CONTRACTS ground alone. [Sec. 33]
Exception: If contract is fraudulent or not
K.1. BY SELF-DEALING DIRECTORS WITH fair and reasonable under the circumstances
General Rule: A contract of the corporation
with one or more of its directors or trustees is If the interest of the interlocking director in
VOIDABLE, at the option of such corporation. one of the corporations is nom inal
[Sec. 32] (stockholdings 20% or less) while substantial
in the other, the contract shall be VALID, if
Exceptions: the following conditions are met:
Such contract is VALID if all of the following (a) The presence of such director or trustee in
conditions are present: the board meeting in which the contract
(a) That the presence of such director or was approved was NOT necessary to
trustee in the board meeting in which the constitute a quorum for such meeting
contract was approved was not necessary (b) That the vote of such director or trustee
to constitute a quorum for such meeting; was not necessary for the approval of the
(b) That the vote of such director or trustee contract
was not necessary for the approval of the (c) That the contract is fair and reasonable
contract; under the circumstances.
(c) That the contract is fair and reasonable Where (a) and (b) are absent, the contract can
under the circumstances; and be ratified by the vote of the stockholders
(d) That in case of an officer, the contract has representing at least 2/3 of the outstanding
been previously authorized by the BOD. capital stock or at least 2/3 of the members
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in a meeting called for the purpose voted to in this case are silent as to the creation by its
ratify the contract, provided that: BOD of an executive committee.
(a) Full disclosure of the adverse interest of (1) Notwithstanding the silence of the by-
the directors/trustees involved is made laws on the matter, the SC did not rule
on such meeting; that the BODs creation of the executive
committee is illegal or unlawful.
(b) The contract is fair and reasonable under
the circumstances. (2) One reason is the absence of a showing
as to the true nature and functions of said
executive committee considering that the
K.3. MANAGEMENT CONTRACTS [SEC 44] "executive committee," referred to in Sec.
35 of the Corporation Code which is as
See: Corporate Powers (2)(h) above
powerful as the BOD and in effect acting
for the board itself, should be
distinguished from other committees
which are within the competency of the
board to create at anytime and whose
L.1. CREATION actions require ratification and
confirmation by the board.
The by-laws of a corporation may create an
executive committee, composed of not less (3) Another reason is that the BOD has the
than three members of the board, to be power to create positions not provided for
appointed by the board.