Vous êtes sur la page 1sur 108


Commercial law
Prepared by:

NEGOTIABLE INSTRUMENTS LAW a. Maker – one who makes a promise and sign the
(Act No. 2031, June 2, 1911)
b. Payee – one to whom the promise is made or
the instrument is payable.
Written contracts for the payment of money; by
its form, intended as a substitute for money and intended
to pass from hand to hand, to give the holder in due FORMS OF PROMISSORY NOTE
course the right to hold the same and collect the sum due. 1. Due bill, an instrument whereby one person
acknowledges his indebtedness to another and
Negotiable instruments produce the effect of promises to pay a sum certain in money.
payment only when they have been encashed or through 2. Bonds, which are in the nature of PN.
the fault of the creditor have been impaired. (Article 3. Certificate of Deposit issued by banks payable to
1249, NCC) depositor or his order, or to bearer

Principal Features and Characteristics B. BILL OF EXCHANGE - unconditional order in writing

a. negotiability - right of transferee to hold the addressed by one person to another, signed by the
instrument and collect the sum due person giving it, requiring the person to whom it is
b. accumulation of secondary contracts - addressed to pay on demand or at a fixed or
instrument is negotiated from person to person determinable future time a sum certain in money to
order or to bearer. (Sec. 126 NIL)
Requisites of Negotiability
An instrument to be negotiable must conform to the a. Drawer – one who gives the order to pay money
following requirements: to third party.
a. It must be in writing and signed by maker or b. Payee – one to whom the bill is drawn or is
drawer; payable
b. Must contain an unconditional promise or order to c. Drawee/ acceptor – person to whom the bill is
pay a sum certain in money; addressed and who is ordered to pay.
c. Must be payable on demand, or at a fixed or
determinable future time;
d. Must be payable to the order or to bearer; and Forms of bill of exchange:
e. Where the instrument is addressed to a drawee, he 1. Trade Acceptance, A BOE drawn by seller on the
must be named or otherwise indicated therein with buyer for the purchase price of goods.
reasonable certainty. 2. Clean Bill of Exchange, A BOE wherein no
document is attached upon presentment for
*For a Promissory Note to be negotiable, requisites a,b,c acceptance or payment.
and, d must be met. 3. Documentary Bill of Exchange, A BOE wherein
documents are attached upon presentment for
*For a bill of exchange to be negotiable, all the above acceptance or payment.
requisites must be met. 4. Bank Acceptance- A draft drawn and accepted by
a bank.
Purpose of Negotiability. To allow bills and notes the 5. Drafts, which are BOE drawn by one bank upon
effect which money, in the form of government bills or another.
notes, supplies in the commercial world.
C. CHECK - bill of exchange drawn on a bank and
The validity and negotiable character of a negotiable payable on demand. (Sec. 185 NIL)
instrument are NOT affected by the fact that:
1. It is not dated; FORMS OF CHECK
2. It does not specify the place where it is drawn or 1. Ordinary Check
where it is payable; 2. Cashier’s Check, A Check payable to third
3. It bears a seal; person which is drawn by the bank upon itself.
4. It designates a particular kind of current money in (2003 BEQ)
which payment is to be made (Sec. 6) 3. Certified check , A personal check with
guaranteed funds to cover the payment of the
Kinds of Negotiable Instruments: check.
4. Voucher Check
A. PROMISSORY NOTE - unconditional promise to pay in 5. Traveler’s Check
writing made by one person to another, signed by 6. Manager’s Check , A check drawn by the
the maker, engaging to pay on demand or a fixed manager of the bank. (2003 BEQ)
determinable future time a sum certain in money to 7. Crossed Check ( 2004, 2005 BEQ)
order or bearer. When the note is drawn to maker’s 8. Memorandum Check.
own order, it is not complete until indorse by him.
(Sec. 184 NIL)
Other forms of negotiable instruments:



a. Certificate of deposit issued by banks, payable to the Check BOE

depositor or his order, or to bearer (CALTEX v. CA, 212
- Always drawn - May or may not be drawn against
SCRA 471)
upon a bank or a bank
b. Trade Acceptance;
c. Bonds, which are in the nature of a promissory notes;
- Always payable on - May be payable on demand or at
d. Drafts which are bills of exchange drawn by one bank
demand a fixed or determinable future time
upon another;
•All of these comply with Sec. 1 NIL.
•Letters of Credit are not negotiable. - Not necessary that - Necessary that it be presented for
it be presented for acceptance
DISTINCTIONS: - Drawn on a - Not drawn on a deposit
(2005 BEQ) deposit
Non-negotiable - The death of a - The death of the drawer of the
Negotiable Instruments Instruments drawer of a check, ordinary bill of exchange does not
with knowledge by
Does not contain all the the banks, revokes
Contains all the requisites
requisites of Sec. 1 of the the authority of the
of Sec. 1 of the NIL
NIL banker pay
Transferred by Transferred by - Must be presented - May be presented for payment
negotiation assignment for payment within within a reasonable time after its
Transferee acquires a reasonable time last negotiation.
Holder in due course may after its issue (6
rights only of his
have better rights than months)
Prior parties warrant Prior parties merely PN CHECK
payment warrant legality of title - There are two (2) parties, - There are three (3) parties,
Transferee has right of Transferee has no right of the maker and the payee the drawer, the drawee
recourse against recourse bank and the payee
intermediate parties - May be drawn against any - Always drawn against a
person, not necessarily a bank
Negotiable Instruments Negotiable Documents - May be payable on demand -Always payable on demand
of Title or at a fixed or determinable
Have requisites of Sec. 1 Does not contain future time
of the NIL requisites of Sec. 1 of NIL - A promise to pay - An order to pay
Have right of recourse *Note: PN, BOE and Check- definitions (2002 BEQ)
against intermediate No secondary liability of
parties who are intermediate parties
secondarily liable However, these instruments are non-negotiable:
Holder in due course may Transferee merely steps
have rights better than into the shoes of the 1. Treasury warrant are non-negotiable because there is
transferor transferor an indication of the fund as the source of payment of the
disbursement.(Metrobank v. CA, 194 SCRA 169)
Subject is money Subject is goods
2. Since a postal money order is subject to restrictions
Instrument is merely
and limitations under postal laws and issued by the
evidence of title; thing of
Instrument itself is Government which is not engaged in commercial
value are the goods
property of value transactions, it is not governed by NIL. (Phil. Educ. Co.,
mentioned in the
Inc. vs. Soriano, 39 SCRA 587)
3. Letters of credit
4. Warehouse receipts - Non-Negotiable for the same as
Bill of lading it merely represents goods, not money.
Bill of Exchange
Promissory Note
Unconditional promise Unconditional order Factors that affect the determination of negotiability of
Involves 2 parties Involves 3 parties instruments:
Maker primarily liable Drawer only secondarily a. Whole instrument;
liable b. What appears on the face of the instrument;
Only 1 presentment - for Generally 2 c. Requisites enumerated in Sec.1 of NIL; and
payment presentments - for d. Should contain words or terms of negotiability.
acceptance and for (Gopenco, Commercial law Bar Reviewer, cited in Aquino
payment p. 23)

 In determining the negotiability of an

instrument, the instrument in its entirety and
what appears on its face must be considered. It
must comply with the requirements of Sec.1 of
NIL. ( Caltex Phils. V. CA, 212 SCRA 448)



 The acceptance of a bill of exchange is not c. PAYABLE IN MONEY

important in the determination of its  General Rule: If some other act besides payment of
negotiability. The nature of acceptance is money is promised or ordered, the instrument
important only on the determination of the kind becomes non-negotiable.
of liabilities of the parties involved. (PBCOM v.  Exceptions:
Aruego, 102 SCRA 530) a. Authorizes the sale of collateral securities on
Notes on Section 1: b. Authorizes confession of judgment on default;
- In order to be negotiable, there must be a c. Waives the benefit of law intended to protect the
writing of some kind, else there would be debtor;
nothing to be negotiated or passed from hand to d. Allows the creditor the option to require
hand. The writing may be in ink, print or pencil. something to be done in lieu of money.
It may be upon parchment, cloth, leather or any
other substitute of paper.
- It must be signed by the maker or drawer. It d. PAYABLE ON DEMAND
may consist of mere initials or even numbers, An instrument is payable on demand:
but the holder must prove that what is written is a. Where it is expressed to be payable on demand,
intended as a signature of the person sought to at sight or on presentation;
be charged. b. Where no period of payment is stated;
- The Bill must contain an order, something more c. Where the instrument has been issued, accepted
than the mere asking of a favor. or indorsed after maturity.
- Sum payable must be in money only. It cannot
be made payable in goods, wares, or e. DETERMINABLE FUTURE TIME
merchandise or in property. - Future time is determinable in the following cases:
- A drawee’s name may be filled in under Section a. At a fixed period after date or sight;
14 of the NIL. b. On or before a specified fixed or determinable
future time;
MEANING OF PARTICULAR REQUISITES: c. On or at a fixed period after the occurrence of a
specified event, certain to happen, although the
a. UNCONDITIONAL PROMISE OR ORDER exact date is not certain.
- Where the promise or order is made to depend
on a contingent event, it is conditional, and makes the f. PAYABLE TO ORDER
instrument non-negotiable. - The instrument is payable to order where drawn
payable to the order of a specified person, or to him or his
The conditional nature of the promise or order is not order.
effected by: - The payee must be named or otherwise indicated
a. An indication of a particular fund from which the therein with reasonable certainty.
acceptor reimburses himself after paying the
b. A statement of the transaction which gives rise to a. Where it is expressed to be so payable;
the instrument. b. When payable to a person named therein or
b. CERTAINTY OF SUM c. When payable to the order of a fictitious or non-
- The sum is certain if the amount fixed. existing person, and such fact was known to the
- The certainty is HOWEVER NOT affected although to be drawer or maker;
paid: d. When the name of the payee is not the name of a
1. with interests; person;
2. by stated installments; e. When the only and last indorsement is an
3. by stated installments with acceleration clause; indorsement in blank.
4. with exchange;
5. with cost of collection or attorney’s fees.  An original bearer instrument remains to be a bearer
instrument even if indorsed specially and thus can be
Escalation Clause – an agreement pertaining to a loan or negotiated by mere delivery.
increased in the event that the applicable maximum rate  When the payee is vaguely designated, the loss will be
of interest is increased by law or by the Monetary Board. borne by the party who caused it – the drawer.
(Equitable Bank v. IAC, 161 SCRA 518).
De-escalation Clause – an agreement pertaining to a
loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be
There are several important principles as to dates in
reduced in the event that the applicable maximum rate of
negotiable instruments. These are:
interest is decreased by law or by the Monetary Board.
1. Where the instrument, its acceptance, or
indorsement is dated, such date is presumed to be
The presence of an escalation clause or a de- the corresponding true date; Date is important -
escalation clause or both in the instrument does not 2. Where the instrument is payable within a specified
affect the negotiable character of the instrument. period after date, or after acceptance, in which case
the date of the instrument and the date of maturity of
Acceleration clause - it is a provision that upon default the instrument; in these cases, the holder may insert
in payment of any installment or of interest, the whole the true date;
shall become due. a. when the instrument is payable on demand,
the date is necessary to determine whether



the instrument was presented within a 16. Ultra vires acts of corporations where the
reasonable time from issue in the case of corporation has the power to issue
notes or from last negotiation in the case of negotiable paper but the issuance was not
bills, as these factors will show whether the authorized for the particular purpose for
last holder is a holder in due course or not; which it was issued.
b. when the instrument is an interest-bearing
one, to determine when the interest starts INSERTION OF DATE (Sec.13)
to run.
3. Antedating or postdating an instrument does not Rule: If there is a date and it is changed, apply Sec.124 on
affect validity or negotiability, unless done for an ALTERATION OF AN INSTRUMENT.
illegal or fraudulent purpose.
The date may be inserted in an instrument when:
REAL DEFENSES – Those that attach to the instrument a. An instrument expressed to be payable at a fixed
itself and are available against all holders, whether in due period after date is issued undated
course or not. b. Where acceptance of an instrument payable at a
(WAD FIMMU WIFE) fixed period after sight is undated (Sec. 13 NIL)
1. Want of delivery of incomplete instrument;
2. Alteration; Effects:
3. Duress amounting to forgery; - Any holder may insert the true date of issuance
4. Fraud in factum or fraud in esse contractus; or acceptance
5. Insanity where the insane person has a - The insertion of a wrong date does not avoid the
guardian appointed by the court; instrument in the hands of a subsequent holder
6. Minority; in due course
7. Marriage in the case of a wife; - As to the holder in due course, the date inserted
8. Ultra vires acts of a corporation; where the (even if it be the wrong date) is regarded as the
corporation is absolutely prohibited by its true date.
charter or statute from issuing any
commercial paper under any circumstances; As to a holder in due course- the date inserted is the true
9. Want of authority of agent; date.
10. Illegality of contract where it is the contract
or instrument itself which is expressly made Subsequent Holder in Due Course not affected by the
illegal by statute; following deficiencies:
11. Forgery; a. Incomplete but delivered instrument (Sec. 14)
12. Execution of instrument between public
b. Complete but undelivered (Sec. 16)
c. Complete and delivered issued without
PERSONAL DEFENSES/ EQUITABLE DEFENSES – Those consideration or a consideration consisting of a
which are available only against a person not a holder in promise which was not fulfilled (Sec 28)
due course or a subsequent holder who stands in privity
with him. (W2A4F2I4N2MU) Holder in Due Course Affected by
1. Want of delivery of complete instrument; Abnormality/Deficiency:
2. Want of authority of agent where he has a. Incomplete and undelivered instrument (Sec. 15)
apparent authority. b. Maker/drawer’s signature forged (Sec. 23)
3. Absence or failure of consideration, partial
or total; Incomplete but Delivered Instrument: (Sec.14)
4. Acquisition of the instrument by force, (2004 & 2005 Bar Exam)
duress or fear;
5. Acquisition of the instrument by unlawful 1. Where an instrument is wanting in any material
means; particular:
6. Acquisition of the instrument for an illegal
a. Holder has prima facie authority to fill up the
blanks therein.
7. Filling up of blank contrary to authority
given or not within reasonable time, where b. It must be filled up strictly in accordance with
the instrument is delivered; the authority given and within a reasonable
8. Fraud in inducement; time.
9. Insertion of wrong date in an instrument, c. If negotiated to a holder in due course, it is valid
where it is payable at a fixed period after and effectual for all purpose as though it was
date and it is issued undated or where it is filled up strictly in accordance with the authority
payable at a fixed period after sight and the given and within reasonable time. (Sec. 14 NIL)
acceptance is undated;
10. Intoxication; 2. Where only a signature on a blank paper was
11. Insanity where there is no notice of insanity delivered:
on the part of the one contracting with the a. It was delivered by the person making it in order
insane person; that it may be converted into a negotiable
12. Illegality of contract where the form or instrument
consideration is illegal; b. The holder has prima facie authority to fill it up
13. Negotiation in breach of faith; as such for any amount. (Sec. 14 NIL)
14. Negotiation under circumstances that
amount to fraud;
15. Mistake;



Notes on Section 14 him for want of delivery even in the hands of a

Rule: Sec. 14 applies if there is a signature on the holder in due course
instrument for the purpose of giving effect thereto. 4) But there is prima facie presumption of delivery of
Rule: If no signature, refer to Sec. 15 or 23. an instrument signed but not completed by the
Rule: Sec. 14 is merely a PERSONAL DEFENSE. drawer or maker and retained by him if it is in the
hands of a holder in due course. This may be
 If the instrument is wanting in material particular, rebutted by proof of non-delivery.
mere possession of the instrument is enough to 5) An instrument entrusted to another who wrongfully
presume prima facie authority to fill it up. completes it and negotiates it to a holder in due
 Material particular may be an omission which will course, delivery to the agent or custodian is sufficient
render the instrument non-negotiable (e.g. name of delivery to bind the maker or drawer.
payee), an omission which will not render the 6) If an instrument is completed and is found in the
instrument non-negotiable (e.g. date) possession of another, there is prima facie evidence
 In the case of the signature in blank, delivery with of delivery and if it be a holder in due course, there is
intent to convert it into a negotiable instrument is conclusive presumption of delivery.
required. Mere possession is not enough. 7) Delivery may be conditional or for a special purpose
but such do not affect the rights of a holder in due
Incomplete and Undelivered Instrument: (Sec.15)
Rules on Interpretation of Instruments:
There are two steps in the execution of a NI:
1. The act of writing the instrument comion of 1. Discrepancy between the Amount in Figures and
giving effect pletely and in accordance with Sec. that in Words
1 of NIL; and - the words prevail, but if the words are
2. The delivery of the instrument with the ambiguous, reference will be made to the figures
intention of giving effect thereto to fix the amount.
 If Completed and negotiated without authority,
not a valid contract against a person who has 2. Instrument NOT dated
signed before delivery of the contract against a - considered dated on the date of issue
person who has signed before delivery of the
contract even in the hands of a HDC but 3. Conflict between Written and Printed Provisions
subsequent indorsers are liable. - written provisions prevail

REASON: The law does not make any distinction between 4. Interest provided for, but No starting Date was
a HDC and one who is not a HDC. specified
- starting date is the date of the instrument, in
the absence of said date, from date of issue
Notes on Section 15 5. Instrument Ambiguous
 It is a real defense. It can be interposed against a - if the instrument is ambiguous such that there
holder in due course. is doubt whether it is a bill or note, the holder
 Where an INCOMLETE and UNDELIVERED may treat it as a note or a bill at his option.
instrument is in the hands of a HDC, there is 6. Signature on Instrument does not Indicate Capacity
PRIMA FACIE PRESUMPTION of delivery. in Which Made
 Defense of the maker is to prove non-delivery of the - Where it cannot be determined in what
incomplete instrument. capacity a person affixed his signature to a
negotiable instrument, he is deemed to have
Complete but Undelivered: (Sec.16) signed as an indorser. As indorser, his liability
General Rule: Every contract on a negotiable under the instrument is secondary, meaning that
instrument is incomplete and revocable until if the party primarily liable cannot pay, the
delivery for the purpose of giving effect thereto. . indorser can be made to pay by the holder of the
a. If between immediate parties and remote parties not instrument.
holder in due course, to be effectual there must be 7. Where Promissory Note worded “Promise to Pay” is
authorized delivery by the party making, drawing, signed by two (2) makers
accepting or indorsing. Delivery may be shown to be - Under Section 17 (g) of the NIL and Article
conditional or for a special purpose only 1216 of the Civil Code, where the promissory
b. If the holder is a holder in due course, all prior note was executed jointly and severally by two
deliveries conclusively presumed valid or more persons, the payee of the promissory
note had the right to hold any one of the two (2)
c. If instrument not in hands of drawer/maker, valid
signers of the promissory note responsible for
and intentional delivery is presumed until the
the payment of the whole amount of the note.
contrary is proven (Sec. 16 NIL)
(Philippine National Bank vs. Concepcion
Milling Co., 5 SCRA 745).
Rules on delivery of negotiable instruments:
1) Delivery is essential to the validity of any negotiable
instrument General Rule: A person whose signature does not
2) As between immediate parties or those is like cases, appear on the instrument in not liable.
delivery must be with intention of passing title
3) An instrument signed but not completed by the Exception:
drawer or maker and retained by him is invalid as to a. One who signs in a trade or assumed name (Sec.



b. A duly authorized agent (Sec. 19) instrument, he cannot be held liable thereon by anyone.
c. A forger (Sec. 23) (Gempsaw v. CA 218 SCRA 682)


General Rule: Parties prior to the forged signature are
An agent is exempt from personal liability, provided he: cut-off from the parties after the forgery in the sense that
1. Acts within the scope of his authority; prior parties cannot be held liable and can raise the
2. Discloses the name of his principal; and defense of forgery. The holder can only enforce the
3. Discloses that he is acting in a representative capacity instrument against parties who became such after
(Sec. 20) forgery.

Notes on Section 20 Exception: When the prior parties are precluded from
General rule: An agent is not liable on the instrument if setting up the defense of forgery either because of their
he were duly authorized to sign for or on behalf warranties, representation or negligence. (Gempsaw v.
of a principal. CA)

 If an agent does not disclose his principal, the agent Persons PRECLUDED from setting up the defense of
is personally liable on the instrument. forgery:
1. Those who admit/warrant the genuineness of the
Per Procuration - operates as notice that the agent has a signature in question: indorsers, persons negotiating by
limited authority to sign. delivery and acceptors;
2. Those who by their acts, silence, or negligence, are
Effects: estopped from claiming forgery;
- The principal in only bound if the agent acted 3. Holder of a bearer instrument
within the limits of the authority given —Forged signature is not necessary to
- The person who takes the instrument is bound the title of the holder.
to inquire into the extent and nature of the
authority given. (Sec. 21 NIL) Notes on Section 23
 Section 23 applies only to forged signatures or
General rule: Infants and corporations incur no liability signatures made without authority
by their indorsement or assignment of an  Alterations such as to amounts or like fall under
instrument. (Sec. 22 NIL) section 124
 Forms of forgery are a) fraud in factum b) duress
Effects: amounting to fraud c) fraudulent impersonation
- No liability attached to the infant or the  Only the signature forged or made without authority
corporation is inoperative, the instrument or other signatures
- The instrument is still valid and the indorsee which are genuine are affected
acquires title  The instrument can be enforced by holders to whose
title the forged signature is not necessary
FORGERY  drawee bank is conclusively presumed to know the
signature of its drawer
A. Maker’s Signature  if endorser’s signature is forged, loss will be borne by
(1989 BEQ) the forger and parties subsequent thereto
B. Drawer’s Signature  drawee bank is not conclusively presumed to know
(2004,2006&2009 BEQ) the signature of the indorser. The responsibility falls
C. Payee’s Signature on the bank which last guaranteed the indorsement
( 2008 BEQ) and not the drawee bank.
D. Indorser’s Signature  Where the payee’s signature is forged, payments
(2008 BEQ) made by the drawee bank to collecting bank is
ineffective. No debtor/creditor relationship is
General rule: A signature, which is forged or made created. An agency to collect is created between the
without authority is wholly inoperative. (Sec. person depositing and the collecting bank. Drawee
23) bank may recover from collecting bank who may in
Effects: turn recover from the person depositing.
a. No right to retain
b. No right to give a discharge Rules on liabilities of parties on a forged instrument:
c. No right to enforce payment can be acquired.
In a PN
Exception: - A party whose indorsement is forged on a note
- The party against whom it is sought to be payable to order and all parties prior to him
enforced is precluded from setting up the including the maker cannot be held liable by any
forgery or want of authority. (Sec.23) holder
- A party whose indorsement is forged on a note
Forgery refers to both a signature which has been forged originally payable to bearer and all parties prior
or made without authority. Thus, Section 23 is not limited to him including the maker may be held liable by
to counterfeit signatures since it also applies to genuine a holder in due course provided that it was
ones. mechanically complete before the forgery
- A maker whose signature was forged cannot be
* A person whose signature is forged as maker, drawer, held liable by any holder
payee or indorsee of a note or check was never a party to
the instrument. Since his signature does not appear in the



In a BOE knowledge that no consideration passed between the

- The drawer’s account cannot be charged by the accommodation and accommodated parties.
drawee where the drawee paid
- The drawer has no right to recover from the Requisites of Accommodation:
collecting bank 1. The accommodation party must sign as maker,
- The drawee bank can recover from the collecting drawer, acceptor or indorser;
bank 2. No value is received by the accommodation
- The payee can recover from the drawer party from the accommodation party; and
- The payee can recover from the recipient of the 3. The purpose is to lend the name. (Crisologo-Jose
payment, such as the collecting bank v. CA, 177 SCRA 594).
- The payee cannot collect from the drawee bank
- The collecting bank bears the loss but can Accommodation Party – Is one who has signed the
recover from the person to whom it paid instrument as maker, drawer, acceptor, or indorser,
- If payable to bearer, the rules are the same as in without receiving value therefore, and for the purpose of
PN. lending his name to another person. (2003 and 2005
- If the drawee has accepted the bill, the drawee BEQ)
bears the loss and his remedy is to go after the
forger  A corporation cannot act as an accommodation
- If the drawee has not accepted the bill but has party. Such is an ultra vires act. (Crisologo-Jose v CA,
paid it, the drawee cannot recover from the 117SCRA594)
drawer or the recipient of the proceeds, absence
any act of negligence on their part. Liability of the Accommodation Party:
- The accommodation party is liable on the
Every negotiable instrument is deemed prima facie to instrument to a holder for value notwithstanding that
have been issued for a valuable consideration. (Sec. 24) such holder at the time of taking the instrument knew
him to be only an accommodation party. It is a valid
Effects: defense that the accommodation party did not receive
- Every person whose signature appears thereon any valuable consideration when he executed the
is a party for value instrument. He is liable to a holder for value by virtue of
- Presumption is disputable his being an accommodation party.

*An accommodation party to a negotiable

Where value has at any time been given for the instrument, inspite of the lack of consideration between
instrument, the holder is deemed a holder for value in him and the accommodated party, is liable to any other
respect to all parties who become such prior to that time. holder NOT to the accommodated party. (Travel-On, Inc.
(Sec. 26) v. CA, et al, 210 SCRA 351).

*An accommodation party’s liability as a

solidarily party is unconditional party is unconditional
and is not affected by an extension of payment granted by
Absence of Consideration: the creditor to the debtor. HOWEVER, where the holder
(1995 and 1996 Bar Exam) allowed payments by the drawer direct to the contractor
without availing of the deed of assignment in its favor,
Effect of want of consideration: said holder is a bad faith holder, NOT a holder in due
a. Personal defense to the prejudice of a party and course against whom an extension to pay granted by the
available against any person not holder in due drawer is a defense by the accommodation party.
course. (Prudencio v. CA, 143 SCRA 6).
b. Partial failure of consideration is a defense pro
tanto, whether the failure is an asceratained and *The liability of an accommodation party does
liquidated amount otherwise. (Sec 29) not extend to corporate accommodation because the act
of the corporate officers is ultra vires. However, these
Notes on Section 28 officers are personally liable. (Crisologo-Jose v. CA, 177
 Absence of consideration is where no consideration SCRA 594).
was intended to pass.
 Failure of consideration implies that consideration *A promissory note, with an accommodation co-
was intended by that it failed to pass maker, used to settle an estafa case, has an illegality of
 The defense of want of consideration is ineffective cause, and does not make the accommodation co-maker
against a holder in due course liable. (United General Industries v. Paler, 112 SCRA 404)
 A drawee who accepts the bill cannot allege want of
consideration against the drawer *A promissory note with an accommodation
maker, utilized to settle an estafa case, has an illegal
Accommodation consideration, and does not make the co-maker liable.
(United Industries v. Paler, 112 SCRA 404)
Legal arrangement under which a person called the
accommodation party lends his name and credit to RIGHTS OF AN ACCOMMODATION PARTY
another called the accommodated party, without 1. Against the Accommodated Party
consideration. - the accommodation party, if obliged to pay to a
holder of value, can seek reimbursement from the
Effect: A person to whom the instrument thus executed is accommodated party.
subsequently negotiated, has a right of recourse against
the accommodation party inspite of the former’s

2. Against the Co-accommodation Party to the use Notes on Section 31

of some other persons  The paper attached with the indorsement is an
- where a solidary accommodation maker paid to the allonge
bank the balance due on a promissory note, he may  An allonge must be attached so that it becomes a part
seek contribution from the other solidary of the instrument, it cannot be simply pinned or
accommodation maker, in the absence of a contrary clipped to it.
agreement between them. This rights springs from
an implied promise between the accommodation Kinds of Indorsements:
makers to share equally the burdens resulting from
a. Special (Sec. 34)
their execution of the note. They are joint guarantors
b. Blank (Sec. 35)
of the principal debtor. (Sadaya v. Sevilla).
c. Restrictive (Sec. 36)
d. Qualified (Sec. 38)
A solidary accommodation maker may:
e. Conditional (Sec. 39)
a. demand from the principal debtor reimbursement of
the amount which he paid on the promissory note
A. SPECIAL- specifies the person to whom or to
whose order, the instrument is to be payable.
(Sec. 34)
c. demand contribution from his co-accommodation
maker, without first directing his action against the
B. BLANK- Specifies no person to whom or to
principal debtor, PROVIDED that:
whose order the instrument is to be payable.
b.1. he made the payment by virtue of a
1. Instrument becomes payable to bearer and
judicial demand, or
may be negotiated by delivery (Sec. 34)
b.2. the principal debtor is insolvent.
2. May be converted to a special indorsement
by writing over the signature of the
NEGOTIATION indorser in blank any contract consistent
with character of indorsement. (Sec. 35)
An instrument is negotiated when: C. ABSOLUTE- One by which indorser binds
himself to pay:
a. It is transferred from one person to another a. Upon No order condition than failure of
prior parties to do so; and
b. That the transfer must be in a manner as to b. Upon due notice to him of such failure.
constitute the transferee a holder D. CONDITIONAL- right of the indorsee is made to
depend on the happening of a contingent event.
Modes of Negotiation: Party required to pay may disregard the
1. If payable to bearer, it is negotiated by delivery. conditions. (Sec. 39)
Negotiation of negotiable instrument may be E. RESTRICTIVE- An indorsement is restrictive,
effected by the delivery alone of the instrument when it either:
to the transferee in those negotiable a. Prohibits further negotiation of the
instruments which are: instrument; or
-originally payable to bearer, or b. Constitutes the indorsee the agent of
-originally payable to order the indorser; or
instruments where the last c. Vests the title in the indorsee in trust
indorsement is an indorsement in for or to the use of some other persons.
blank.  But mere absence of words implying power
to negotiate does not make an indorsement
2. If payable to order, it negotiated by the indorsement of restrictive. (Sec. 36)
the holder completed by delivery.
A negotiable instrument payable to the EFFECT of Restrictive indorsement:
order of a specified person, or to him or his Confers upon the indorsee the right-
order, may be negotiated by the payee by a. Receive payment of the instrument;
indorsement followed by delivery of the b. Bring any action thereon that the indorser could
instrument to the indorsee. Subsequent bring;
negotiation may be made in this manner if the c. To transfer his rights as such indorsee, when the
holder who indorses acquired the instrument form of the instrument authorizes him to do so.
under a special indorsement. F. QUALIFIED- Constitutes the indorser a mere
assignor of the title to the instrument. ( Sec38)
The payee of the negotiable instrument acquires  It is made by adding to the indorser’s
no interest with respect thereto until its delivery signature words like “sans recourse”,
to him. (Development Bank of Rizal v. Sima Wei) “without recourse”, “indorser not holder”,
“at the indorsers own risk”, other terms of
3. Another method of transfer is by assignment which similar import.
generally refers to ordinary contracts, and by operation
of law, where title to a note or bill passes upon the death * Hence, it has been held that oral testimony is not
of the holder to his personal representative. admissible to establish that an unqualified indorsement
is in fact qualified. ( Velasco v. Tan Liuan & Co., March
Indorsement to be valid must be:
a. Written  A Qualified indorser has limited liability, i. e.
b. On the instrument itself or upon a piece of paper he is liable for breach of warranty if the
attached (Sec. 31 NIL)



instrument is dishonored by non- *Note: Holder in due Course (Secs. 52,57&59)

acceptance or non- payment due to: Personal and Real Defenses
1. Forgery; or ( 2000 & 2009 BEQ)
2. Lack of good title on the part of the
indorser; or Requisites for a Holder in Due Course (HDC):
3. Lack of capacity to indorse on the part of the a. Receives the instrument complete and regular
prior parties; or on its face
4. The fact that at the time of the endorsement, b. Became a holder before it was overdue and had
the instrument was valueless or nit valid, no notice that it had been previously dishonored
and he knew of the fact. if such was the fact
 A Qualified indorsement does not impair the c. Takes the instrument for value and in good faith
negotiable character of the instrument.
d. At time he took the instrument, no notice of
infirmity in instrument or defect in the title of
As mentioned earlier, Negotiation is the transfer of a
the person negotiating it (Sec. 52 NIL)
negotiable instrument from one person to another as to
constitute the transferee the holder thereof.
*Note: Under the "SHELTER PRINCIPLE," the holder-in-
due course, by negotiating the instrument, to a party not
To be valid, negotiation must involve the entire
a holder-in-due course, transfers all his rights as such
holder to the latter, who thus acquires the right to
enforce the instrument as if he was a holder-in-due
Effects of indorsing an instrument originally payable to
course. However, this principle presupposes that the
"sheltered" holder is not a party to any fraud or illegality
- It may further be negotiated by delivery
impairing the validity of the instrument. (2008 BEQ)
- The person indorsing is liable as indorser to
such persons as to make title through his
Notes on Section 52
indorsement (Sec. 40)
 Every holder is presumed to be a HDC (Sec. 59)
Notes on Section 40  If one of the requisites are lacking, the holder is not a
 Section 40 applies only to instruments originally HDC
payable to bearer  An instrument is considered complete and regular on
 It cannot apply where the instrument is payable to its face if a) the omission is immaterial b) the alteration
bearer because the only or last indorsement is in on the instrument was not apparent on its face
blank  An instrument is overdue after the date of maturity.
 On the date of maturity, the instrument is not overdue
A holder may strike out any indorsement which is not and the holder is a HDC
necessary to his title. (Sec. 48)  Acquisition of the transferee or indorsee must be in
Effects: good faith
- An indorser whose indorsement is struck out is  Good faith means lack of knowledge or notice of defect
discharged or infirmity
- All indorsers subsequent to such indorser who has
been discharged are likewise relieved A holder is not a HDC where an instrument payable on
demand is negotiated at an unreasonable length of time
Effects of a transfer without endorsement: after its issue (Sec. 53 NIL)
- The transferee acquires such title as the transferor Rights of a Holder in Due Course:
- The transferee acquires the right to have the - Holds the instrument free from any defect of title of
indorsement of the transferor prior parties
- Negotiation takes effect as of the time the - Free from defenses available to prior parties among
indorsement is actually made (Sec. 49) themselves (personal/ equitable defenses)
- May enforce payment of the instrument for the full
amount against all parties liable(Sec. 57 NIL)
Notes on Section 57
 Personal or equitable defenses are those which grow
Every holder is deemed prima facie to be a
out of the agreement or conduct of a particular person
holder in due course; but when it is shown that the title of
in regard to the instrument which renders it
any person who has negotiated the instrument was
inequitable for him through legal title to enforce it. Can
defective, the burden is on the holder to prove that he or
be set up against holders not HDC
some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does
 Legal or real defenses are those which attach to the
not apply in favor of a party who became bound on the
instrument itself and can be set up against the whole
instrument prior to the acquisition of such defective title.
world, including a HDC.
(Sec. 59)
 An instrument not in the hands of a HDC is subject to
the same defenses as if it were non-negotiable.
- A holder may sue in his own name
- A holder, who derives his title through a HDC
- A holder may receive payment.
and is not a party to any fraud or illegality
affecting the instrument, has all the rights of
Effects: (Sec. 51 NIL)
such HDC in respect to all parties prior. (Sec. 58
- If in due course it discharges the instrument



Rights of a holder not a HDC circumstances amounting between public enemies

- May sue in his own name to fraud
- May receive payment and if it is in due course, Illegality of contract made
11. Mistake
the instrument is discharged by statue
- Holds the instrument subject to the same 12. Intoxication Forgery
defenses as if it were non-negotiable 13. Ultra vires acts of
- If he derives his title through a HDC and is not a corporations
party to any fraud or illegality thereto, has all 14. Want of authority of
the rights of such HDC the agent where he has
apparent authority
General rule: Every holder is deemed prima facie to be a 15. Illegality of contract
holder in due course. where form or
consideration is illegal
Exception: 16. Insanity where there is
- Where it is shown that the title of any person no notice of insanity
who has negotiated the instrument is defective,
the burden is on the holder to prove that he is a
HDC or that a person under whom he claims is a LIABILITIES OF PARTIES:
HDC (Sec. 59 NIL)
1. A maker is primarily liable:
Classes of Defenses: Effects of making the instrument, the maker:
1. Real or Absolute Defenses
a. Engages to pay according to tenor of instrument
- a real or absolute defense is a defense which
attaches to the instrument irrespective of the b. Admits existence of payee and his capacity to
parties and is predicated on the principle that indorse (Sec. 60 NIL)
the right sought to be enforced has never existed
Notes on Section 60
or has ceased to exist.
 A maker’s liability is primarily and unconditional
 One who has signed as such is presumed to have acted
- A real defense is available against ALL
with care and to have signed with full knowledge of its
HOLDERS, whether in due course or not.
contents, unless fraud is proved
 The payee’s interest is only to see to it that the note is
2. Personal or Equitable Defenses
paid according to its terms
- a personal or equitable is a defense growing
 When two or more makers sign jointly, each is
out of an agreement or conduct of a particular
individually liable for the full amount even if one did
person in regard to an instrument which
not receive the value given
renders it inequitable for him although owner of
 The maker is precluded from setting up the defense of:
it, to enforce it against the defendant.
a) The payee is fictional,
b) That the payee was insane, a minor or a
corporation acting ultra vires
Personal Defenses Real Defenses
1. Absence or failure of
Alteration 2. A drawer is secondarily liable
2. Want of delivery of Want of delivery of Effects of drawing the instrument, the drawer:
complete instrument incomplete instrument a. Admits the existence of the payee,
3. Insertion of wrong date b. The capacity of such payee to indorse
where payable at a fixed c. Engages that on due presentment, the
period after date and Duress amounting to instrument will be accepted or paid or both
issued undated; or at a forgery according to its tenor.
fixed period after sight and
acceptance is undated If the instrument is dishonored, and the necessary
4. Filling up the blanks proceedings on dishonor duly taken
contrary to authority given Fraud in factum or in esse a. The drawer will pay the amount thereof to the
or not within reasonable contractus holder
time b. Will pay to any subsequent indorser who may be
compelled to pay it. (Sec. 61 NIL)
5. Fraud in inducement Minority
6. Acquisition of the Notes on Section 61
instrument by force, duress Marriage in case of a wife  A drawer may insert an express stipulation to negative
or fear or limit his liability
7. Acquisition of the Insanity where the insane
instrument by unlawful person has a guardian
3. An acceptor is primarily liable
means appointed by the court
Ultra vires acts of a By accepting the instrument, an acceptor:
8. Acquisition of the corporation where its - Engages that he will pay according to the tenor
instrument for an illegal charter or by statue, it is of his acceptance
consideration prohibited from issuing - Admits the existence of the drawer, the
commercial paper genuineness of his signature and his capacity
9. Negotiation in breach of and authority to draw the instrument
Want of authority of agent - The existence of the payee and his then capacity
10. Negotiation under Execution of instrument



a. The instrument is genuine and in all respect

4. IRREGULAR INDORSER - a person not otherwise a party to what it purports to be
an instrument places his signature in blank before b. The he has good title to it
delivery is liable as an indorser in the following c. All prior parties had the capacity to contract
manner: d. That the instrument at the time of his
a. If payable to order of a third person – liable to indorsement was valid and subsisting (Sec. 66)
the payee and to all subsequent parties
b. If payable to order of the maker or drawer –
liable to all parties subsequent to the maker or In addition:
drawer - Engages that the instrument will be accepted or
c. If payable to bearer – liable to all parties paid or both according to its tenor on due
subsequent to the maker or drawer presentment
d. If signs for an accommodation party – liable to - Engages to pay the amount thereof if it be
all parties subsequent to the payee (Sec. 64) dishonored and the necessary proceedings on
*Note: Irregular Indorser v. General Indorser (2005 BEQ) dishonor are taken
Irregular Indorser, is not a party to the instrument but
he places his signature in blank before delivery. He is not Notes on Section 66
a party but he becomes one because of his signature in  The indorser under Section 66 warrants the solvency
the instrument. Because his signature he is considered an of a prior party
indorser and he is liable to the parties in the instrument.  The indorser warrants that the instrument is valid and
While, a General Indorser warrants that the instrument subsisting regardless of whether he is ignorant of that
is genuine, that he has a good title to it, that all prior fact or not.
parties had capacity to contract; that the instrument at  Warranties extend in favor of a) a HDC b) persons who
the time of the indorsement is valid and subsisting; and derive their title from HDC c) immediate transferees
that on due presentment, the instrument will be accepted even if not HDC
or paid or both accepted and paid according to its tenor,  The indorser does not warrant the genuineness of the
and that if it is dishonored, he will pay if the necessary drawer’s signature
proceedings for dishonor are made.  General indorser is only secondarily liable

5. Warranties where negotiating by delivery or qualified PRESENTMENT FOR PAYMENT

a. The instrument is genuine and in all respect General rule: Presentment for payment is not necessary
what it purports to be to charge persons primarily liable on the
b. The indorser has good title to it instrument. Presentment for payment is
c. All prior parties had the capacity to contract necessary to charge the drawer and indorsers.
d. Indorser has no knowledge of any fact that (Sec 70 NIL)
would impair the validity or the value of the Presentment is necessary to charge persons
instrument. secondarily liable otherwise they are discharged

Limitations of warranties:
- If by delivery – extends only to immediate Notes on Section 70
transferee  Presentation for payment – production of a BOE to the
- Warranty of capacity to contract does not apply to drawee for his acceptance, or to a drawee or acceptor
persons negotiating public or corporate for payment. Also presentment of a PN to the party
securities (Sec. 65 NIL) liable for payment of the same.

Notes on Section 65  Consists of a) a personal demand for payment at a

 A qualified indorser is one who indorses without proper place b) the bill or note must be ready to be
recourse or sans recourse exhibited if required and surrendered upon payment.
 Recourse - resort to a person secondarily liable after
default of person primarily liable  Parties primarily liable – persons by the terms of the
 A qualified indorser cannot raise the defense of a) instrument are absolutely required to pay the same.
forgery b) defect of his title or that it is void c) the E.g maker and acceptors. They can be sued directly.
incapacity of the maker, drawer or previous indorsers.
 A qualified Indorsement makes the indorser mere  If payable at the special place, and the person liable is
assignor of title of instrument, relieves him of general willing to pay there at maturity, such willingness and
obligation to pay if instrument is dishonored, but he is ability is equivalent to tender of payment.
still liable for the warranties arising from instrument
only up to warranties of general indorser  Acts needed to charge persons secondarily liable:
 The warranty is to the capacity of prior parties at the a) Presentment for payment/acceptance
time the instrument was negotiated. Subsequent b) Dishonor by non-payment/non-acceptance
incapacity does not breach the warranty. c) Notice of dishonor to secondary parties
 lack of knowledge of the indorser as to any fact that
would impair the validity or the value of the  Acts needed to charge persons secondarily liable in
instrument must be subsisting all throughout other cases:
 A person Negotiating by Delivery warrants same as a) Protest for non-payment by the drawee
those of qualified indorser and extends to immediate b) Protest for non-payment by the acceptor for
transferees only honor

Warranties of a general indorser: Proper presentment:



a. By the holder or an authorized person a. Presentment not necessary to charge persons

b. At a reasonable hour on a business day primarily liable
c. At a proper place b. Necessary to charge persons secondarily liable
d. To the person primarily liable or if absent to any except:
person found at the place where presentment is - The drawer under Sec. 79
made (sec. 72 NIL) - The indorser under Sec. 80
- When excused under Sec. 82
Presentment for payment is made to the maker, or - When the instrument has been dishonored by
acceptor. Not to the person secondarily liable. non-acceptance under Sec. 83

Notes on Section 72 When instrument dishonored by non-payment

 Only the holder or one authorized by him has the right
The instrument is dishonored by non-payment when:
to make presentment for payment
 Presentment cannot be made on a Sunday or holiday a. it is duly presented for payment and payment
 If the instrument is payable on demand – a) if it is a is refused or cannot be obtained; or
note – presentment must be made within reasonable
time after issue b) if it is a bill - presentment must be b. presentment is excused and the instrument is
made within reasonable time after last negotiation. overdue and unpaid.
Effects of dishonor by non-payment:
- An immediate right of recourse to all parties
General rule: Presentment for payment is necessary to secondarily liable accrues to the holder (Sec. 84)
charge persons secondarily liable otherwise - An “immediate right of recourse” means that the
they are discharged: holder, after the instrument is dishonored by non-
Exception: payment and notice of dishonor given to the
persons secondarily liable, may sue any of the
1. Presentment not required to charge the drawer: latter without suing first the persons primarily
a. He has no right to expect liable.
b. He has no right to require that the drawee
Notes on Section 84
or acceptor will pay (Sec 79)
 Parties cease to be secondarily liable and become
principal debtors.
2. Presentment not required to charge the indorser
 Liability becomes the same as that of the original
a. The instrument was made or accepted for
his accommodation
b. He has no reason to expect that the
instrument will be paid if presented (Sec.
80) When a negotiable instrument has been
dishonored by non-acceptance non-payment, notice of
Notes on Section 79 and 80 dishonor must be given to the drawer and to each
 Only the drawer or indorser are not discharged. All indorsers.
other parties secondarily liable are discharged.
Any drawer or indorser to whom such notice is not given
Presentment for payment is dispensed with if: is discharged.
a. After due diligence, presentment cannot be Exceptions:
made a. Waiver (Sec. 109)
b. Presentment is waived b. Notice is dispensed (Sec. 112)
c. Not necessary to Drawer (Sec. 114)
c. The drawee is a fictitious person (Sec 82)
d. Not necessary to Indorser (Sec. 115)
Notes on Section 82
 What is excused is the failure to make presentment. - If notice is delayed, delay may be excused (Sec. 113)
There is no need to make any presentment versus
under section 81 (delay in presentment) presentment Notice of Dishonor may be given:
for payment is still required after the cause of delay has
a. By or on behalf or the holder
Other instances where presentment for payment is b. By or on behalf of any party who:
not required: - Is a party to the instrument and might be
1. in order to charge the drawer, where he has no compelled to pay the instrument.
right to expect or require that the drawee or - To a holder who having taken it up would have a
acceptor will pay the instrument; right of reimbursement from the party to whom
2. in order to charge an indorser, where the notice is given. (Sec. 90)
instrument was made or accepted for his
accommodation and he has no right to expect that Notes on Section 111
the instrument will be paid if presented; and  Where notice is waived, presentment is not waived
3. when a bill is dishonored by non-acceptance, an  Where presentment is waived, notice is also waived
immediate right of recourse against the drawer and  Where protest is waived, notice and presentment is
indorsers accrues to the holder and presentment for waived
payment is necessary
Effects of notice:
Summary of rules as to presentment for payment:

a. Where notice is given by or on behalf of the c. Discharge of prior party

holder, it inures for the benefit of all subsequent holders d. Tender of payment by prior party
and all prior parties who have a right of recourse against e. Release of principal debtor
the party to whom it is given.
f. Extension of payment by the holder/postponement
b. Where notice is given by or on behalf of a
of right to enforce without assent of secondary
party entitled to give notice, it inures for the benefit of
parties and without reservation of right of recourse
the holder and all parties subsequent to the party to
against secondary parties (Sec 120 NIL)
whom it is given.
Forms of notice:
(Sec. 121)
a. May be written or oral
b. Written notice need not be signed or may be
A party secondarily liable who pays the
supplemented by verbal communication
instrument does not discharge it , but instead acquires
c. May be by personal delivery or by mail
certain rights ;
1.Collect from prior parties ; or
Notice may be waived either expressly or implied:
2. Negotiate the instrument to new parties- but not to
a. Before the time of giving notice has arrived
subsequent parties.
b. After the omission to give due notice
However , Under the exceptions provided in Sec.121, the
Dispensation with Notice:
instrument is considered discharged when ;
Notice of dishonor is dispensed with when, after
1.The BOE is payable to the order of a third person and
the exercise of reasonable diligence, it cannot be given to
paid by the drawer himself, or
or does not reach the parties sought to be charged.
2. Where it was made or accepted for accommodation ,
and has been paid by the party accommodated.
Effects of failure to give notice:
An omission to give notice of dishonor by non-
acceptance does not preclude the rights of a holder in due
course subsequent to the omission.
Renunciation- The act of giving up or abandoning a right
without transferring the right to another.
Instances when Notice Not Required to Indorser
a. Drawee was a fictitious/incapacitated person As a Rule ,the holder may expressly renounce his rights
and the indorser was aware of such at the time against any party to the instrument before , or after its
of indorsement maturity. An absolute and unconditional renunciation of
b. Indorser is the person to whom instrument was his rights against the principal debtor at or after maturity
presented for payment of the instrument discharges the instrument.
c. Instrument made/accepted for his However , A renunciation does not affect the rights of a
accommodation holder in due course without notice of the renunciation.

Discharge of the Instrument Notes on Section 122

 if renounced in favor of a party secondarily liable, only
A negotiable instrument is discharged: he is exonerated from liability and all parties
subsequent to him
a. By payment in due course by or on behalf of the
 discharge by novation is allowed
principal debtor;
b. Payment by in due course by party
accommodated, where the instrument is made
or accepted for accommodation; MATERIAL ALTERATION
c. Intentional cancellation by holder of
General rule: When materially altered, without the
consent of all parties liable, the instrument is
d. Any other act discharging a simple contract for avoided except as against:
the payment of money; a. The party who has made the alteration
e. When the principal debtor becomes the holder b. The party who authorized or assented to the
of the instrument at or after maturity in his alteration.
own right. c. Subsequent indorsers
NOTES ON SECTION 119 - If in the hands of a HDC, may be enforced
 Discharge of the instrument discharges all the parties according to its original tenor
 Payment must be in due course, and by the principal MATERIAL ALTERATION
debtor or on his behalf - Any change in the instrument which affects or
 If payment is not made by the principal debtor, changes the liability of the parties in any way.
payment only cancels the liability of the payor and
those obligated after him but does not discharge the  There is no distinction between fraudulent and
instrument. innocent alteration
 Payment by an accommodation party does not
discharge the instrument. The EFFECTS of material alteration:
1. Alteration by a PARTY
Discharge of Secondary Parties:
Material alteration by the holder discharged the
a. Any act discharging the instrument instrument and all prior parties thereto who did not give
b. Cancellation of indorser’s signature by indorsers their consent to such alteration.



Whether the alteration made is favorable or unfavorable Kind of acceptance:

to the party making the alteration, no distinction as to the
effect is made. The intent of the law is to preserve the A. Constructive Acceptance:
integrity of the negotiable instrument. a. Where the drawee to whom the bill has been
delivered destroys it
2. Alteration by a STRANGER ( SPOLIATION ) b. The drawee refuses within 24 hrs after such
If subsequently negotiated to a non-Holder in Due delivery or within such time as is given, to
Course—A material alteration avoids the instrument as return the bill accepted or not
against any prior party who has not assented to the
alteration. Notes on Section 137
 Drawee becomes primarily liable as an acceptor.
If subsequently negotiated to a Holder in Due Course—  Mere retention is equivalent to acceptance
He may enforce payment thereof according to its original
tenor regardless of whether the alteration was innocent B. General Acceptance:
or fraudulent. An acceptance to pay at a particular place is a
general acceptance unless it is expressly states that the
CHANGES that constitute MATERIAL ALTERATIONS bill is to be paid there only and not elsewhere.
1. The date;
2. The sum payable, either for principal or interest; C. Qualified Acceptance – if in express terms varies the
3. The time or place of payment; effect of the bill as drawn.
4. The number or the relations of the parties;
5. The medium or currency in which payment is to be Kinds of Qualified Acceptance:
made; a. Conditional – one which makes
6. Or which adds a place of payment where no place of payment by the acceptor dependent on
payment is specified; or the fulfillment of a condition therein
7. Any other change or addition which alters the effect of stated;
the instrument in any respect. (Sec. 125) b. Partial – an acceptance to pay part only
of the amount for which the bill is
 A serial number is an item which is not an drawn;
essential requisite for negotiability under c. Local – an acceptance to pay only at a
Sec. 1 of NIL, and which does not affect the particular place;
right of the parties, hence its alteration is d. Qualified as to time
not material. (PNB v. CA, 256 SCRA 491) e. The acceptance of some or more
(199 BEQ) drawees but NOT ALL.
Instances where a BOE may be treated as a PN: - The holder of the bill has the right to
a. Where the drawer and the drawee are one and require GENERAL ACCEPTANCE – thus
the same he may REFUSE to take qualified
b. Where the drawee is a fictitious person acceptance and if he DOES NOT obtain
c. Where the drawee has no capacity to contract an unqualified acceptance – he may
(Sec. 130) treat the bill as DISHONORED BY NON-
The holder has the option to treat it as a BOE or a PN ACCEPTANCE – accordingly the holder
must give notice of dishonor.

ACCEPTANCE - Effect of taking qualified acceptance:

The signification by the drawee of his assent to the order - Where a qualified acceptance is taken –
of the drawer. It is an act by which a person on whom the THE DRAWER and INDORSERS are
Bill of Exchange is drawn assents to the request of the discharged from liability on the bill
drawer to pay it. unless they have expressly or impliedly
authorized the holder to take qualified
As a general rule, acceptance, in order to be valid must acceptance or subsequently assents
be: thereto.
1. Written;
2. Signed by the drawee; and * When the drawer or indorser receives
3. Must contain an express or implied to pay in notice of qualified acceptance – he must –
money. within a REASONABLE TIME – express his
dissent to the holder or he will be deemed
A holder of a bill has the right: to have assented thereto.
a. Require that acceptance be written on the bill and
if refused, treat it as if dishonored (Sec. 133) Time for acceptance:
b. Refuse to accept a qualified acceptance and may The drawee is allowed twenty-four hours after
treat it as dishonored presentment in which to decide whether or not he will
accept the bill; the acceptance, if given, dates as of the day
Acceptance may be: of presentation.
a. Actual
b. Constructive
c. General (Sec. 140) Rules governing acceptance:
d. Qualified (Sec. 141)



When an acceptance is written on a paper other

than a bill itself, it does not bind the acceptor except in Presentment, How made:
favor of a person to whom it is shown and who, on the
faith thereof, receive the bill for value. Presentment for acceptance must be made by or on
behalf of the holder at a reasonable hour, on a business
An unconditional promise in writing to day and before the bill is overdue, to the drawee or some
accept a bill before it is drawn is deemed an actual person authorized to accept or refuse acceptance on his
acceptance in favor of every person who, upon the faith behalf; and
thereof, receives the bill for value. (a.) Where a bill is addressed to two or more drawees
who are not partners, presentment must be made to
Where a drawee to whom a bill is delivered for them all, unless one has authority to accept or refuse
acceptance destroys the same, or refuses within twenty- acceptance for all, in which case presentment may be
four hours after such delivery, or within such other made to him alone;
period as the holder may allow, to return the bill (b.) Where the drawee has been dead, presentment
accepted or non-accepted to the holder, he will be may be made to his personal representatives;
deemed to have accepted the same. (c.) Where the drawee has been adjudged a bankrupt
or an insolvent, or has made an instrument for the benefit
A bill may be accepted before it has been signed of creditors, presentment may be made to him or to his
by the drawer, or while otherwise incomplete, or when it trustee or assignee.
is overdue, or after is has been dishonored by a previous
refusal to accept, or by non-payment. But when a bill WHERE PRESENTMENT IS EXCUSED. (Sec. 148.)
payable after sight is dishonored by non-acceptance and
the drawee subsequently accepts it, the holder, in the Presentment for acceptance is excused , and a bill may
absence of any different agreement, is entitled to have the be treated as dishonored by non acceptance , in either of
bill accepted as of the date of the first presentment. the following cases:
1. Where the drawee is dead , or has absconded , or is a
fictitious person or a person not having capacity to
2. Where, after the exercise of reasonable diligence ,
When presentment for acceptance is necessary: presentment cannot be made.
a. If necessary to fix the maturity of the bill 3. Where, although presentment has been irregular ,
b. If it is expressly stipulated that it shall be acceptance has been refused on some other ground.
presented for acceptance
c. If the bill is drawn payable elsewhere than the When bill is dishonored by non-acceptance
residence or place of business of the drawee
(Sec. 143 NIL) A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and such an
Notes on Section 143 acceptance as is refused or cannot be obtained;
b. When presentment for acceptance is excused, and the
 PRESENTMENT is the production of a bill of exchange bill is not accepted.
to the drawee for his acceptance.
Duty of the holder where bill is not accepted.
 PRESENTMENT Where a bill is duly presented for acceptance and is
 For Acceptance (Sec. 143) not accepted within the prescribed time, the person
 For Payment ( Sec. 70) presenting it must treat the bill as dishonored by non-
( 2000 & 2003 BEQ) acceptance or he loses the right of recourse against the
drawer and indorsers.
PURPOSE: To get acceptance of the drawer for purpose
of making him primarily liable as an acceptor. HOW? By giving NOTICE OF DISHONOR or by making a
Presentment is also prerequisite to the accrual of PROTEST when required.
secondary liability against the drawer and the
indorsers. Rights of holder where bill is NOT accepted:
An immediate right of recourse against the drawer
On what days presentment must be made: and indorsers accrues to the holder and NO
PRESENTMENT for payment is necessary.
A bill may be presented for acceptance on any day on
which negotiable instruments may be presented for
payment. When Saturday is not otherwise a holiday,
presentment for acceptance may be made before twelve
o’clock noon, on that day.
Promissory Note – is an unconditional promise in
writing made by one person to another, signed by the
Presentment for acceptance must be made:
maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to
1. Where the bill is payable after sight; or in any
order or bearer.
other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument.
NOTE: Where a note is drawn to the maker’s own order,
2. Where the bill expressly stipulates that it shall be
it is NOT complete until indorsed by him.
presented for acceptance.
3. Where the bill is drawn payable elsewhere than
Special types of promissory notes:
the residence or place of business of the drawee.



1. Certificate of deposit c. If obtained by the holder, discharges the

- is a written acknowledgment by a bank persons secondarily liable thereon ( Sec
of the receipt of money on deposit 188)
which the bank promises to pay to the
depositor, bearer, or to some other A check must be presented for payment within
person or order. reasonable time after its issue or the drawer will be
- It is NOT ipso facto negotiable – it must discharged from liability thereon to the extent of the loss
first comply with the requirements caused by the delay. (Sec. 186)
provided under Section 1, NIL.
2. Bonds Reasonable Time: (Sec. 193)
- A promise, under seal, to pay money. a. Nature of the instrument’
- The bond certifies that the issuing company is b. Usage of business or trade
indebted to the bondholder for the amount c. The facts of the particular case
specified on the face of the bond, and contains
an agreement of the company to pay the sum at CROSSED CHECK: (2004 & 2005 BEQ)
a specified time in the future, and meanwhile to
pay a specified interest on the principal amount - A check which in addition to the usual contents of an
at regular intervals, generally six months apart. ordinary check contains also the name of a certain banker
They are negotiable if it the requisites in Section or business entity through whom it must be presented for
1, NIL are complied with. payment.
- A Crossed Check under accepted banking practice,
Classes of Bonds: crossing a check is done by writing two parallel lines
1. Mortgage bonds; diagonally on the left top portion of the checks. The
2. Equipment Bonds; crossing is special where the name of the bank or a
3. Collateral trust bonds; business institution is written between the two parallel
4. Guaranteed bonds; lines, which mean that the drawee should pay only with
5. Debentures; and the intervention of that company.
6. Income bonds;
7. Convertible bonds; EFFECTS:
8. Redeemable Bonds; a. That the check may not be encashed; it may only
9. Registered Bonds; and be deposited with the bank;
- Coupon Bonds – those which are attached b. That the check may be negotiated only once to a
a sheet of dated, numbered and similarly person who has an account with the bank; and
printed coupons which the bondholder may c. That it serves as a warning to the holder that the
cut off when due or thereafter. Such check has been issued for a definite purpose.
coupons may be served and deposited in a (Bataan Cigar v. CA 280 SCRA 643)
bank, negotiated before the maturity of the
interest they represent, and transferred just *Note: Crossed Checks vs. Cancelled Checks (2004 BEQ)
like any commercial paper. They are A crossed check is one with two parallel lines drawn
negotiable if it the requisites in Section 1, diagonally across its face or across a corner thereof. On
NIL are complied with. the other hand, a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on behalf of a
10. Bank Notes drawee bank to indicate payment thereof.
- Are promissory notes of the issuing bank
payable to bearer on demand and intended *State Investment House v IAC (GR 72764 13Jul1989), the
to circulate as money. They are regarded as SC considered a crossed check as subjecting a subsequent
cash and pass from hand to hand without holder thereof to the contractual covenants of the payor
any evidence of titled in the holder than that and the payee.
which arises form possession. However,
they are not money. 2 KINDS:
1. CROSSSED SPECIALLY- The same name of a
11. Due Bills particular bank or company is written or
- is an instrument whereby one person appears between thev. Tan parallel lines in
acknowledges his indebtedness to another. which case the drawee-bank must pay the check
only upon presentment by such bank or
company (Chan Wan v. tan Kim 109 Phil 706) on
CHECKS - a bill of exchange drawn on a bank payable on penalty of being made to pay agin by the rightful
demand. (Sec. 185) owner should the first payment prove to have
been erroneous.
CONCEPTS: 2. CROSSED GENERALLY- only the words “and
Certification of Checks- An agreement whereby Co.” are written between the parallel lines or
the bank against whom a check is drawn, undertakes to when none at all is written at all between said
pay at any future time when presented for payment. lines.
* This Court has taken judicial cognizance of the practice
EFFECTS: that a check with 2 parallel lines in the upper left hand
a. Equivalent to acceptance (Sec 187) and is corner means that it could only be deposited and not
the operative act that makes the bank liable. converted into cash.
b. Assignment of the funds of the drawer in
the hands of the drawee (Sec 189)



IRON CLAD RULE – prohibits the countermanding of through the SEC. (Tayag vs. Benguet Consolidated, Inc.,
payment of certified checks. (Rep. v. PNB, Dec. 1, 26 SCRA 242)
2. Theory of corporate enterprise or economic unit –
*Note: The holder must be a holder in due course the corporation is not merely an artificial being, but
before the stop payment order may not be successfully more of an aggregation of persons doing business, or
invoked against him. (Mesina v. IAC, 146 SCRA 497, an underlying business unit. (Philippine Corporate
505) Law, Cesar Villanueva, 2001 ed.)

TYPES OF CHECKS (Cesar Villanueva, Commercial B. CLASSIFICATION:

Law Review, 2004 ed.) 1. AS TO ORGANIZERS
a. Cashier’s Check- One drawn by the cashier of a. public – by State only; and
a bank, in the name of the bank against the b. private – by private persons alone or with
bank itself payable to a third person. It is a the State.
primary obligation of the issuing bank and
accepted in advance upon issuance. (Tan v. CA 2. AS TO FUNCTIONS
239 SCRA 310) a. public – government of a portion of the
b. Manager’s Check- A check drawn by the territory; and
manager of a bank in the name of the bank b. private – usually for profit-making
itself payable to a third person. It is similar to
the cashier’s check as to the effect and use. 3. AS TO GOVERNING LAW
c. Memorandum Check- A check given by a a. public – Special Laws; and
borrower to a lender for the amount of a short b. private – Law on Private Corporations
loan, with the understanding that it is not to
be presented at the bank, but will be 4. AS TO LEGAL STATUS
redeemed by the maker himself when the loan a. De jure corporation – organized in accordance
falls due and which understanding is with the requirements of law.
evidenced by writing the word b. De facto corporation – organized with a
“memorandum”, “memo” or “mem” on the colorable compliance with the requirements
check. of a valid law. Its existence cannot be
d. Certified Check- An agreement whereby the inquired collaterally. Such inquiry may be
bank against whom a check is drawn made by the Solicitor General in a quo
undertakes to pay it at any future time when warranto proceeding. (Sec. 20)
presented for payment. (Sec. 187) Requisites:
e. Traveler’s Check- It is one upon the holder’s 1. The existence of a valid law under which
signature must appear twice; one to be affixed it may be incorporated;
by him at the time it is issued and the second, 2. A bona fide attempt in good faith to
for counter-signature, to be affixed by him in incorporate under such law;
the presence of the payee before it is paid, 3. Actual use or exercise in good faith of
otherwise it is incomplete. corporate powers; and
4. Issuance of a certificate of incorporation
by the SEC as a minimum requirement of
CORPORATION LAW continued good faith.
(Batas Pambansa Bilang 68)
The only difference between a de facto
corporation and a de jure corporation is that a
A. CORPORATION, DEFINED de jure corporation can successfully resist a suit
An artificial being created by operation of law having by a state brought to challenge its existence; a
the right of succession, and the powers, attributes and de facto corporation cannot sustain its right to
properties expressly authorized by law and incident to exist.
its existence. (Sec. 2). It has a separate and distinct
personality from its incorporators. (2000 Bar c. Corporation by estoppel – group of persons
Examination) that assumes to act as a corporation knowing
it to be without authority to do so, and enters
Attributes of a Corporation into a transaction with a third person on the
1. It is an artificial being. strength of such appearance. It cannot be
2. It is created by operation of law. permitted to deny its existence in an action
3. It enjoys the right of succession. under said transaction. (Sec. 21) It is neither
4. It has the powers, attributes and properties de jure nor de facto.
expressly authorized by law or incident to its d. Corporation by prescription – one which
existence. has exercised corporate powers for an
indefinite period without interference on the
Theories on Formation of a Corporation: part of the sovereign power, e.g. Roman
1. Concession Theory – a corporation is an artificial Catholic Church.
creature without any existence until it has received
the imprimatur of the state acting according to law, 5. AS TO EXISTENCE OF SHARES OF STOCK



a. Stock corporation – a corporation (1) whose A corporation has a juridical personality separate
capital stock is divided into shares and (2) and distinct from that of its stockholders or
which is authorized to distribute to members.
shareholders’ dividends or allotments of the
Used for purposes of convenience and to subserve
surplus profits on the basis of the shares held.
the ends of justice.
(Sec. 3)
b. Non-stock corporation – does not issue stocks Consequences/significance:
nor distribute dividends to their members.
1. Liability for acts or contracts – obligations
incurred by a corporation, acting through its
authorized agents are its sole liabilities.
(Creese vs. CA, 93 SCRA 483)
a. Holding Corporation - it is one which controls
2. Right to bring actions – may bring civil and
another as a subsidiary by the power to elect
criminal actions in its own name in the same
management. It is one that holds stocks in
manner as natural persons. (Art. 46, Civil
other companies for purposes of control
rather than for mere investment.
3. Right to acquire and possess property –
b. Subsidiary Corporation - one which is so
property conveyed to or acquired by the
related to another corporation that the
corporation is in law the property of the
majority of its directors can be elected
corporation itself as a distinct legal entity and
directly or indirectly by such other
not that of the stockholders or members. (Art.
corporation. (The Corporation Code of the
44(3), Civil Code)
Philippines Annotated, Hector de Leon, 2002
4. Acquisition of court of jurisdiction – service of
summons may be made on the president,
c. Affiliates - company which is subject to common general manager, corporate secretary,
control of a mother holding company and treasurer or in-house counsel. (Sec. 11, Rule
operated as part of the system. 14, Rules of Court).
d. Parent and Subsidiary Corporation - separate 5. Changes in individual membership – remains
entities with power to contract with each unchanged and unaffected in its identity by
other. The board of directors of the parent changes in its individual membership. (The
company determines its representatives to Corporation Code of the Philippines Annotated,
attend and vote in the stockholder’s meeting Hector de Leon, 2002 ed.)
of its subsidiary. The stockholders of the 6. Entitlement to constitutional guaranties:
parent company demand representation in a. Due process (Albert vs. University
the board meetings of its subsidiary. Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell &
7. AS TO PLACE OF INCORPORATION Co. vs. Natividad, 40 Phil. 136)
a. Domestic corporation- a corporation formed, c. Protection against unreasonable searches
organized, or existing under Philippine laws. and seizures. (Stonehill vs. Diokno, 20
b. Foreign corporation – a corporation formed, SCRA 383)
organized, or existing under any laws other A corporation is not entitled to invoke the
than those of the Philippines. (Sec. 123) right against self-incrimination. (Bataan
Shipyard vs. PCGG)
7. Liability for torts – a corporation is liable
whenever a tortuous act is committed by an
Test to Determine Nationality of Corporations
officer or agent under the express direction or
1. INCORPORATION TEST – determined by the
authority of the stockholders or members
state of incorporation, regardless of the
acting as a body, or, generally, from the
nationality of the stockholders.
directors as the governing body. (PNB vs. CA,
2. DOMICILE TEST – determined by the state 83 SCRA 237)
where it is domiciled. The domicile of a
8. A corporation is not entitled to moral
corporation is the place fixed by the law
damages because it has no feelings, no
creating or recognizing it; in the absence
emotions, no senses. (ABS-CBN vs. Court of
thereof, it shall be understood to be the place
where its legal representation is established
or where it exercise its principal functions. 9. Liability for Crimes – since a corporation is a
(Art. 51, NCC) mere legal fiction, it cannot be held liable for a
3. CONTROL TEST – determined by the crime committed by its officers, since it does
nationality of the controlling stockholders or not have the essential element of malice; in
members. This test is applied in times of war. such case the responsible officers would be
Also known as the WARTIME TEST. criminally liable. (People vs. Tan Boon Kong,
54 Phil.607)
II. Doctrine of Piercing the Corporate Veil
1. Doctrine of Piercing the Corporate Veil (2006
I. Doctrine of Separate Personality
Bar Examination)
Under the doctrine of “piercing the veil of
corporate entity”, the legal fiction that a

corporation is an entity with a juridical b. must be of legal age

personality separate and distinct from its
members or stockholders may be disregarded
and the corporation will be considered as a 2. Minimum Capital Stock and subscription
mere associations of persons, such that liability requirement
will attach directly to the officers and the i. Subscription requirement
stockholders (Umali vs. Court of Appeals, 189 All incorporators must subscribe to at
SCRA 529, 542 [1990]). It is an equitable least one (1) share of stock of the
doctrine developed to address situations corporation being organized.
where the separate corporate personality of a ii. Capital Stock, minimum subscription
corporation is abused or used for wrongful The law requires that the total capital
purposes. stock to be subscribed at the time of
incorporation should at least be twenty
Grounds for Application of the Doctrine five percent (25%) of the authorized
(2006 Bar Examination) capital stock of the corporation being
The doctrine of “piercing the veil of corporate organized.
entity” will apply when the corporation’s
separate juridical personality is used: 3. Corporate Term
1. to defeat public convenience; Fifty (50) years from the date of
2. to justify wrong, protect fraud, or defend incorporation unless sooner dissolved or
crime; unless said period is extended (Sec. 11).
3. as a shield to confuse the legitimate issue;
4. where the corporation is the mere alter 4. Classification of Shares
ego or business conduit of a person; or i. COMMON SHARES are the basic class of
5. where the corporation is so organized and stock ordinarily and usually issued
controlled and its affairs are so conducted without extraordinary rights and
as to make it merely an instrumentality, privileges. The owners thereof are entitle
agency, conduit or adjunct of another to a pro rata share in the profits of the
corporation (Umali vs. Court of Appeals, corporation and in its assets upon
189 SCRA 529, 542 [1990]). dissolution and, likewise, in the
management of its affairs without
Test in Determining Whether to Pierce the Veil preference or advantage whatsoever.
of Corporate Personality ii. PREFERRED SHARES are those issued
1. Control, not mere majority or complete stock with par value, and preferences either
control, but complete domination, not only of with respect to:
the finances, but of policy and business a. assets after dissolution (PREFERRED
practice in respect to the transaction SHARES AS TO ASSETS)
attacked so that the corporate entity as to b. distribution of dividends (PREFERRED
this transaction had at the time no separate SHARES AS TO DIVIDENDS)
mind, will or existence of its own; c. or both, and other preferences.
2. Such control must have been used by the
defendant to commit fraud or wrong, to Kinds of Preferred Shares as to Dividends
perpetuate the violation of a statutory or 1. Cumulative preferred shares – a share
other positive legal duty, or dishonest and which entitles the holder thereof not only
unjust act in contravention of plaintiff’s legal the payment of current dividends but also
right; of dividends in arrears.
3. The aforesaid control and breach of duty must 2. Non – cumulative preferred shares – a share
proximately prevent “piercing the corporate which allows the holder thereof to the
veil”; payment of current dividends only without
4. The wrong – doing must be clearly and regards to dividends in arrears.
convincingly established. It cannot be 3. Participating preferred shares – a share
presumed. (Lim vs. Court of Appeals, et al., which gives the holder the right to
G.R. No. 124715, January 24, 2000 participate with the holders of the common
share in the remaining profits pro rata,
E. CAPITAL STRUCTURE aside from the right to receive the
1. Number and qualifications of incorporators stipulated dividends at a preferred rate.
i. Number of Incorporators (2006 Bar 4. Non – participating preferred shares – a
Examination) share which allows the holder to receive the
Incorporators are required to be not less stipulated dividends at a preferred rate
than five (5) but not more than fifteen (15). only. The holder shall not share in the
ii. Residency requirement (2006 Bar dividends distributed to common shares.
Majority of the incorporators are required REDEEMABLE SHARES are those which permit the
to be residents of the Philippines. issuing corporation to redeem or purchase its own
iii. Qualifications shares.
All incorporators:
a. must be natural persons  Limitations:



i. Redeemable shares may be issued c. Purchase of treasury shares from the

only when expressly provided for in corporation
the articles of incorporation;
ii. Terms and conditions affecting said PURCHASE OF
shares must be stated both in the SHARES
articles of incorporation and in the Refers to unissued Refers to issued
certificates of stock representing such shares shares
shares; Corporation still to be The corporation is
iii. Redeemable shares may be deprived form or already in already in existence
of voting rights in the articles of existence
incorporation, unless otherwise The subscriber can The purchaser can
provided in the Code. exercise all his right as a only exercise his
iv. Redeemable shares may be stockholder even before right upon full
redeemed, regardless of the existence full payment of the payment of the
of unrestricted retained earnings subscription purchase price
(Sec. 8), and provided further that the Corporate creditors may Corporate creditor
corporation has, after such proceed against the cannot proceed
redemption, sufficient assets in its subscriber for his unpaid against the
books to absorb corporate debts and subscription in case the purchaser for the
liabilities. corporate asset are not balance of the
sufficient to satisfy their purchase price
TREASURY SHARES are shares that have been claims because of the lack
earlier issued as fully paid and have thereafter of privity of contract
been acquired by the corporation by purchase, between them
donation, redemption or through some lawful Subscriber may not be The corporation can
means (Sec. 9). When treasury shares are sold legally released from the rescind or cancel
below its par or issued value, there can be no payment of his unpaid the contract in case
watering of stock because watering of stock subscription unless no of non – fulfillment
contemplates an original issuance of shares. creditors would be by the buyer.
PAR VALUE SHARES are shares with a value prejudiced and all the
fixed in the certificates of stock and the articles stockholders agree
of incorporation. thereto
Subscription may be in Purchase of shares
NO PAR VALUE SHARES are shares having no any form, not covered by is covered by the
par value but have an issued value stated in the the statute of frauds. statute of frauds in
certificate or articles of incorporation. case of purchases
 Limitations: amounting to more
i. No par value shares can have an issue than Php 500.00
price of less than Php 5.00;
ii. The entire consideration for its Consequently, the subscribers are not real parties
issuance constitutes capital so that no in interest in a case for rescission of the
part of it should be distributed as subscription contract of another subscriber
dividends; because they are not parties thereto. (Ong Yung vs.
iii. They cannot be issued as preferred Tiu, April 06, 2003)
iv. They cannot be issued by banks, trust Kinds of Subscription Contract
companies, insurance companies, a. Pre– incorporation subscription
public utilities and building and loan b. Post – incorporation Subscription
association; c. Conditional Subscription
v. The articles of incorporation must d. Absolute Subscription
state the fact that it issued no par e. Subscription with a special term
value shares as well as the number of
said shares; 3. Pre – incorporation Subscription Agreements
vi. Once issued, they are deemed fully One entered into before incorporation. Pre –
paid and non – assessable (Sec. 6). incorporation subscription constitutes a
binding contract among the subscribers.
NOTE: It shall be irrevocable for a period of at
least six (6) years from the date of
1. Promoter
subscription unless:
2. Subscription Contract
a. All of the other subscribers consent
Ways to become a Stockholder of a
to the revocation, or
b. The incorporation fails to materialize
a. Subscription contract with the
It shall likewise be irrevocable after the
submission of the articles of
b. Purchase or acquisition of shares
incorporation to the SEC.
from existing stockholders; and
corporation and a third person, termed the



“underwriter” is an agreement by which the e. The number of directors or trustees,

latter agrees, for a certain compensation, to which shall not be less than 5 nor
purchase a stipulated amount of stocks or more than 15;
bonds, specified in the underwriting f. The names, nationalities and
agreement, if such securities are not residences of persons who shall act as
purchased by those to whom they are first director or trustees until the first
offered. regular directors or trustees are duly
elected and qualified in accordance
4. Consideration of Stocks with the Code;
 Valid considerations in subscription g. If it be a stock corporation, the
agreement: amount of its authorized capital stock
a. Cash actually received; in lawful money of the Philippines,
b. Property, tangible or intangible necessary the number of shares into which it is
or convenient for its use and lawful divided, and in case the share are par
purpose; value shares, the par value of each,
c. Labor or services actually rendered to the the names, nationalities and
corporation; residences of the original subscribers,
d. Previously incurred corporate and the amount subscribed and paid
indebtedness (Note: the indebtedness by each on his subscription, and if
involved must be one that is some or all of the shares are without
acknowledged by the board); par value, such fact must be stated;
e. Amounts transferred from unrestricted h. If it be a non – stock corporation, the
retained earnings to stated capital; amount of its capital, the names,
f. Outstanding shares in exchange for stocks nationalities and residences of the
in the event of reclassification or contributors and the amount
conversion. contributed by each; and
i. Such other matters as are not
5. Articles of Incorporation inconsistent with law and which the
i. Definition: Basic document defining the incorporators may deem necessary
charter of the corporation and convenient.
ii. Significance: Condition precedent in the vii. Adoption and Form: File with the Securities and
acquisition of corporate existence Exchange Commission articles of incorporation
iii. Contractual significance: A contract in any of the official languages duly signed and
between 3 parties: (1) the State and the acknowledged by all of the incorporators.
corporation, (2) the stockholders and the viii. Amendment
State, and (3) the corporation and its a. Majority vote of BOD / trustees and vote or
stockholders. written assent of 2/3 outstanding capital
iv. Effects as to Outsiders: Bind a third person stock, without prejudice to the appraisal
dealing with the corporation right of dissenting stockholders.
v. Requisites for Validity b. Amendments take effect upon approval by
a. Filed and registered with the SEC SEC or from the date of filing with SEC if
b. Banks, public utilities, insurance not acted upon within 6 months from date
companies: needs favorable of filing for a cause not attributable to the
recommendation from appropriate corporation.
agency that articles are in accordance ix. Grounds for Rejection or Disapproval (Sec. 17)
with law a. That the articles of incorporation or any
c. SEC shall examine AOI upon filing and amendment thereto is not substantially in
upon satisfaction of all legal accordance with the from prescribed
requirements, issue certificate of herein;
incorporation and only then shall b. That the purpose or purposes of the
Corporation have a personality corporation are patently unconstitutional,
separate and distinct from its illegal, immoral or contrary to
stockholders or members government rules and regulations;
d. Sworn Statement of the Treasurer c. That the Treasurer’s Affidavit concerning
regarding subscription requirement the amount of capital stock subscribed
vi. Basic Content (Sec. 14) and / or paid is false;
a. The name of the corporation; d. That the percentage of ownership of the
b. The specific purpose or purposes for capital stock to be owned by citizens of
which the corporation is being the Philippines has not been complied
incorporated; with as required by existing laws or the
c. The place where the principal office Constitution.
of the corporation is to be located, 6. Corporate Name
which must be within the Philippines; The name of the corporation must not be
d. The term for which the corporation is identical or deceptively or confusingly similar
to exist; to any existing corporation.



7. Registration and issuance of Certificate of g. To purchase, receive, take or grant, hold,

Incorporation convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
8. Election of directors or trustees bonds
h. To enter into merger or consolidation;
9. Adoption of By – Laws i. To make reasonable donations for public
i. Definition: Meant to be an intramural welfare, hospital, charitable, cultural, scientific,
document to govern the relationship between civic or similar purposes, provided that no
and among the members of a corporate family donation is given to any (i) political party, (ii)
ii. Effect as to Outsiders: Does not bind outsiders candidate and (iii) partisan political activity.
iii. Requisites for Validity j. To establish pension, retirement, and other
a. By – law provisions cannot contravene plans for the benefit of its directors, trustees,
law officers and employees.
b. By – law provisions cannot contravene k. To exercise other powers essential or
the charter necessary to carry out its purposes.
c. By – laws must be reasonable and cannot
iv. Basic Content (Sec. 47) CAPACITY (Sec. 37 – 44)
a. The time, place and manner of calling and a. Power to extend or shorten corporate term
conducting regular or special meetings of (2000 Bar Examination)
the directors or trustees;  Majority of BOD, 2/3 of capital stock
b. The time and manner of calling and  Extension – Sec. 37: right of appraisal for
conducting regular or special meetings of dissenting stockholders
the stockholders or members;  Shortening – Sec. 81 allows for right of
c. The required quorum in meetings of appraisal, but technically there shouldn’t be
stockholders or members and the manner because investors are also in it for the short
of voting therein; – term (there is no novation)
d. The form for proxies of stockholders and b. Increase or decrease corporate stock
members and the manner of voting them;  Majority of BOD, 2/3 of capital stock
e. The qualifications, duties and  Needs SEC approval
compensation of directors or trustees, i. Increase – there must be certification of
officers and employees; subscription to at least 25% of
f. The time for holding the annual election increased stock, and at least 25% of
of directors or trustees and the mode or that amount paid up
manner of giving notice thereof; ii. Decrease – won’t approve if it
g. The manner of election or appointment prejudices corporate creditors.
and the term of office of all officers other  Since this is not an inherent power, there
than directors or trustees; must be strict compliance with
h. The penalties for violation of the by – requirements in Sec. 38 and Amendment
laws; provisions in Sec. 16
i. In the case of stock corporations, the  NO right of appraisal
manner of issuing stock certificates; and i. Increase – would defeat very purpose
j. Such other matters as may be necessary of raising capital
for the proper or convenient transaction ii. Decrease – there already is return of
of its corporate business and affairs. part of investments
v. Amendment  ALSO, investing into a corporation comes
a. Majority vote of BOD / Trustees and with expectations of possible increase /
majority vote of outstanding capital decrease of shares
stock / members at a regular or special
meeting duly called for the purpose of Ways of Increasing (Decreasing) Capital Stock
amending or repealing any by – laws or 1. By increasing (decreasing) the no. of
adopting new by – laws shares authorized to be issued without
b. By delegation of 2/3 outstanding increasing (decreasing) the par value
capital stock or members thereof
2. By increasing (decreasing) the par value
of each share without increasing
(decreasing) the no. thereof
3. By increasing (decreasing) both the no. of
CAPACITY (Sec. 36)
shares authorized to be issued and the
a. To sue and be sued;
par value thereof (The Corporation Code
b. Of succession;
of the Phil. Annotated by Hector de Leon,
c. To adopt and use of corporate seal;
2006 ed)
d. To amend its Articles of Incorporation;
Methods to Replenish Capital
e. To adopt its by-laws;
1. Additional subscription to shares of stock
f. For stock corporations: issue and sell stocks to
of the corporation by stockholders or by
subscribers and treasury stocks; for non-stock
corporations: admit members;



2. Advances by the stockholders to the subscription, in a delinquency sale, and to

corporation; or purchase the shares sold during said sale
3. Payment of unpaid subscription by the 3. To pay dissenting / withdrawing
stockholders. stockholders entitled to payment for their
c. Incur, create, or increase bonded indebtedness shares when exercising appraisal right
CORPORATE BOND: an obligation to pay a 4. To decrease cost of doing business by
definite sum of money at a future time at a decreasing amount of dividends to be paid
fixed rate of interest in the future
 SEC Opinion (1987): only covers 5. Other similar situations since this is non -
indebtedness of corporation secured by real exclusive
/ personal property f. Invest corporate funds in another corporation
 Majority of BOD, 2/3 of capital stock or business for other purpose other than
 Needs SEC approval primary purpose
Corporation must have minimum net worth  May invest in corporation / business
of P 25M and must have been operating for organized for any purpose apart from the
at least 3 years primary purpose from which the investing
 Unlike normal indebtedness, which does business was organized
not require 2/3 approval:  Majority of BOD + 2/3 vote of stockholders
i. Usually very large amount  Sec. 42: When investment is reasonably
ii. Usually with first lien on important necessary to accomplish primary purpose:
assets approval of stockholders not necessary
iii. Usually long period of time i. Lies under business judgment doctrine
 NO right of appraisal ii. THUS whatever the primary purpose of
i. Would drain financial resources a corporation, it has a choice of placing
ii. Regardless, corporation’s creditors funds in deposit accounts, money
always have priority over assets market, treasury bills, or even stocks of
d. Sell, dispose, lease, encumber all or other corporations (fit into power,
substantially all of corporate assets discretion and purpose to obtain best
 Majority of BOD, 2/3 capital stock returns for the corporation)
 Enterprise – level transaction: Although  So in Sec. 42, investment requiring
there is no effect in relationship between ratificatory vote: when there is
State and Corporation, it’s just as if there is management involved of the other
resetting to starting point of business life company and not just investment per se.
 Compare: g. Power to declare dividends out of unrestricted
i. Usual and regular course of business retained earnings
(Business Judgment Doctrine) DIVIDENDS: corporate profits set aside,
ii. Proceeds of sale for conduct of declared and ordered to be paid by the
remaining business directors for distribution among shareholders
 The test: It just has to be “ordinary” so the at a fixed time.
sale of all business of a corporation in light
of using proceeds to set – up anew still FORMS:
needs RATIFICATION 1. Cash
 When no ratificatory vote from the 2. Property
stockholders / members needed: 3. Stock
i. If it is necessary in the usual and
regular course of business REQUISITES:
ii. If the proceeds of the sale or other 1. Existence of unrestricted retained earnings
disposition of such property and assets out of which the dividends may be
be appropriated for the conduct of the declared and paid (2005 Bar
remaining business. Examination)
 There is right of appraisal because unlike 2. A corporate resolution of the board of
shortening of corporate life, where there is directors declaring the payment of a
automatic dissolution, here there is none – portion or all such earnings to the
so stockholders may be stuck in a non – stockholders (The Corporation Code of the
performing venture Phil. Annotated by Hector de Leon, 2006
e. Purchase or acquire own shares provided: ed)
i. there is an unrestricted retained GENERAL RULE: Stock corporation cannot
earnings to purchase the same and its retain surplus profits in excess of 100% of paid
capital is not thereby impaired; and – up capital stock except: (2001 Bar
ii. it is for a legitimate and proper Examination)
corporate purpose. 1. Justified by definite corporate
expansion projects / programs approved by
Instances when Power may be Exercised BOD
1. To eliminate fractional shares 2. Loan agreement, where creditor has to
2. To collect / compromise an indebtedness to first consent before corporation can declare
the corporation arising from unpaid dividends
3. Special circumstances



h. Enter into management contract with another d. Executory contracts apparently authorized but
corporation (not with an individual or a ultra vires – the principle of estoppel shall apply.
partnership-within general powers) whereby
one corporation undertakes to manage all or ULTRA VIRES ACTS AND ILLEGAL ACTS
substantially all of the business of the other
Ultra vires (“beyond powers”) refers only to an act
corporation for a period not longer than 5
outside or beyond corporate powers, including those
years for any one term.
that may ostensibly be within such powers but are, by
general or special laws, either prohibited or declared
MANAGEMENT CONTRACT: is an agreement
illegal. It is in this context that the Code has used the
whereby a corporation undertakes to manage
or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts, ULTRA VIRES ACTS ILLEGAL ACTS
operating agreements or otherwise (Sec. 44) Not necessarily Unlawful; against law,
GENERAL RULE: There shall be no unlawful, but outside morals, public policy,
management contract with another the powers of the and public order
corporation unless: corporation
 Majority of BOD Can be ratified Cannot be ratified
 Stockholders owning majority shares in Can bind the parties if Cannot bind the parties
BOTH managing and managed corporation wholly or partly
EXCEPT where 2/3 votes needed :if a executed
stockholder/s in both managing and
managed corporation owns more than 1/3 TEST whether or not a corporation may perform
of outstanding voting capital stock of an act: consider the logical and necessary relation
managing corporation OR majority of BOD between the act questioned and the corporate purpose
in managing corporation is also majority of expressed by law or in the charter. If the act is lawful
BOD in managed corporation in itself and not prohibited, and is done for the
 The management contract must not be purpose of serving corporate ends, and reasonably
longer than 5 years contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense.
i. ULTRA VIRES ACTS are acts which are beyond (Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
the conferred powers of a corporation or the SCRA 36)
purposes or objects for which it is created as
defined by the law of its organization. REMEDIES IN CASE OF ULTRA VIRES ACTS
(Republic vs. Acoje Mining Co., Inc. 7 SCRAS 1. State
361) a. Obtain a judgment of forfeiture; or
An act done by a corporation outside of the b. The SEC may suspend or revoke the certificate
express and implied powers vested in it by its of registration
charter and by the law. (Bar Review Materials 2. Stockholders
in Commercial Law, Jorge Miravite, 2002 ed.) a. Injunction; or
b. Derivative suit
Types: (Philippine Corporate Law, Cesar Villanueva,
2001 ed.) 3. Creditors
1. Acts done beyond the powers of the a. Nullification of contract in fraud of creditors
corporation as provided in the law or its
2. Acts or contracts entered into in behalf of a
corporation by persons who have no The subscription in shares of stock is one, entire,
corporate authority (Note: This is technically indivisible, and whole contract, which cannot be
ultra vires acts of officers and not of the divided into portions. (SEC Opinion)
corporation); and
3. Acts or contracts, which are per se illegal as k. DOCTRINE OF EQUALITY OF SHARES
being contrary to law. Where the articles of incorporation do not provide for
any distinction of the shares of stock, all shares issued
 An ultra vires act may be that of: by the corporation are presumed to be equal and enjoy
a. The corporation; the same rights and privileges and are also subject to
b. The Board of Directors; and the same liabilities. (Sec. 6)
c. The corporate officers.
 Effects of ultra vires act on: The subscribed capital stock of the corporation is a
a. Executed contract – courts will not set aside or trust fund for the payment of debts of the corporation
interfere with such contracts; which the creditors have the right to look up to satisfy
b. Executory contracts – no enforcement even at their credits, and which the corporation may not
the suit of either party (void and unenforceable); dissipate. The creditors may sue the stockholders
c. Part executed and part executory – principle of directly for the latter’s unpaid subscription.
“no unjust enrichment at expense of another” shall
apply; and  Application of the TFD:



1. Where the corporation has distributed its capital Limitations:

among the stockholders without providing for i. The right must be exercised during
the payment of creditors; reasonable hours on business days;
2. Where it had released the subscribers to the ii. The person demanding the right has not
capital stock from their subscriptions; improperly used nay information obtained
3. Where it has transferred the corporate property through any previous examination of the
in fraud of its creditors; and books and records of the corporation; and
4. Where the corporation is insolvent. iii. The demand is made in good faith or for a
 Coverage of the TFD: legitimate purpose. (Sec. 74)
1. If the corporation is solvent, the TFD extends to the The right extends, in consonance with equity, good
capital stock represented by the corporation’s legal faith, and fair dealing, to a foreign subsidiary wholly-
capital. owned by the corporation.
2. If the corporation is insolvent, the TFD extends to
the capital stock of the corporation as well as all of its Books required to be kept by the corporation:
property and assets. 1. Book of Minutes
a. minutes of stockholder or members
 Exceptions to the TFD: meetings; and
b. minutes of board meetings.
1. Redemption of redeemable shares (Sec. 8) 2. Book of all business transactions;
2. In close corporation, when there should be a 3. Stock and transfer book, in case of stock
deadlock and the SEC orders the payment of the corporations.
appraised value of the stockholder’s share. (Sec. 104)
Corporate records required by the SEC to be kept
H. STOCKHOLDERS AND MEMBERS and/or registered:
1. Books of Account;
RIGHTS OF STOCKHOLDERS (Pandect of Commercial 2. List of Stockholders or Members; and
Law and Jurisprudence, Justice Jose Vitug, 1997 ed.) 3. Financial Records.

e. Appraisal right (2007 Bar Examination) is the

right of a stockholder who dissents from a
a. Managerial Rights
fundamental or extraordinary corporate action to
b. Proprietary Rights
demand payment of the fair value of his shares.
c. Pre – emptive Rights
The corporate acts involves fundamental changes
d. Remedial Rights
in the corporate structure namely:
e. Appraisal Rights
1. An amendment to the articles of incorporation
f. Inspection Rights
that has the effect of –
2. Sale, encumbrance or other dispositions of all
or substantially all of the corporate property
a. Voting rights; and
or assets
b. Right to remove directors
3. Merger or consolidation
4. Investment of corporate funds in another
LIMITATIONS on the stockholder’s RIGHT TO VOTE
corporation or in a purpose other than the
a. Where the articles of incorporation provides for
primary purpose (Sec. 42)
classification of shares pursuant to Sec. 6, non –
GENERAL RULE: A dissenting stockholder who
voting shares are not entitled to vote except as
demands payment of his shares is no longer allowed to
provided for in the last paragraph of Sec. 6;
withdraw from his decision EXCEPT when:
b. Preferred or redeemable shares may be
1. The corporation consents to the withdrawal
deprived of the right to vote unless otherwise
2. The proposed corporate action is abandoned
provided in the Code;
or rescinded by the corporation
c Fractional shares of stock cannot be voted;
3. The proposed corporate action is
d. Treasury shares have no voting rights as long
disapproved by the SEC where its approval is
as they remain in the treasury;
e. Holders of stock declared delinquent by the
4. The Commission determines that such
BOD for unpaid subscription are not entitled to
stockholder is not entitled to appraisal right.
vote or to a representation at any stockholder’s
meeting; and
f. Right to recover stocks unlawfully sold for
f. A transferee of stock cannot vote if his transfer
delinquent payment of subscription
is not registered in the stock and transfer book
g. Preemptive right is the shareholders’
of the coporation.
preferential right to subscribe to all issues or
dispositions of shares of any class in proportion
to their present stockholdings.
a. Right to dividends;
b. Right to issuance of stock certificate for fully
Purpose: to enable the shareholder to retain his
paid shares;
proportionate control in the corporation and to
c. Proportionate participation in the distribution
retain his equity in the surplus.
of assets in liquidation;
d. Corporate Books and Records inspection
Extends to treasury shares in case of their reissuance.

against any person or against the directors,

If the shares preferentially offered to a stockholder are officers and/or controlling shareholders of
not subscribed or purchased by him, it does not follow the corporation.
that said shares shall again be re-offered on a pro rata Requisites:
basis to stockholders who already exercised their i. An existing cause of action in favor of
preemptive rights. There is no preemptive right with the corporation
respect to the share to be re-offered. ii. The stockholder/member must first
make a demand upon the corporation
 In case additional issues of originally authorized or the management to sue unless
shares: such a demand would be futile
iii. The stockholder/member must be
GENERAL RULE: There is no preemptive right. This is such at the time of the objectionable
on the theory that when a corporation at its inception acts or transactions unless the
offers its first shares, it is presumed to have offered all transactions are continuously
of those which it is authorized to issue. injurious
iv. The action must be brought in the
EXCEPTION: When a corporation at its inception offers name of the corporation
only a specified portion of its authorized capital stock
for subscription. If subsequently, it offers the The number of shares of the stockholder is
remaining unsubscribed portion, there would be immaterial since he is not suing in his own behalf
preemptive right as to the remaining portion thus
offered for subscription. Note: The mere trustee of shares registered in his
name cannot file a derivative suit for he is not a
 When pre-emptive right not available: stockholder in his own right. (Bitong vs. CA, 292
a. When denied by the article of incorporation SCRA 304)
b. Shares requiring stock offering or minimum
stock ownership by the public 5. LIABILITIES OF STOCKHOLDERS
c. Shares to be issued in good faith with the a. Liability to the corporation for unpaid
approval of the stockholders representing 2/3 subscription
of the outstanding capital stock, in exchange b. Liability to the corporation for interest on
for property needed for corporate purposes unpaid subscription
or in payment of a previously contracted debt c. Liability to creditors of the corporation on the
unpaid subscription
PRE-EMPTIVE RIGHT vis – a - vis RIGHT OF FIRST d. Liability for watered stock
REFUSAL (Philippine Corporate Law, Cesar Villanueva, e. Liability for dividends unlawfully paid
2001 ed.) f. Liability for failure to create corporation


May be exercised even Arises only by virtue of WHEN:
when there is no contractual stipulations 1. REGULAR - held on the date fixed in the by-laws
express provision of but is also granted or if not fixed on any date in April; and
law under the provisions 2. SPECIAL - held at any time deemed necessary or
on Close Corporation as so provided in the by-laws.
Pertains to Exercisable against WHERE:
unsubscribed portion another stockholder of WHERE: In the city or municipality where the
of the authorized the corporation of his principal office of the corporation is located, and if
capital stock. A right shares of stock practicable, in the principal office of the corporation.
that may be claimed
against the corporation
However, in the case of non-stock corporations, the
4. REMEDIAL RIGHTS by-laws may provide that meetings may be held at any
a. Individual suit – a suit instituted by a place even outside the principal place of the
shareholder for his own behalf against the corporation. (Sec. 93)
b. Representative suit – a suit filed by a
shareholder in his behalf and in behalf I. BOARD OF DIRECTORS / TRUSTEES
likewise of other stockholders similarly
situated and with a common cause against the
corporation; and
c. Derivative suit (2009, 2006, 2005, 2004 Bar
Examination) – a suit filed in behalf of the
GENERAL RULE: The corporate powers of the
corporation by its shareholders (not creditors
corporation shall be exercised, all business
whose remedies are merely subsidiary such
conducted and all property of such corporation
as accion subrogatoria and accion pauliana)
controlled and held by the board of directors or
upon a cause of action belonging to the
trustees. (Sec. 23)
corporation, but not duly pursued by it,



ownership of the stocks appearing on the

EXCEPTIONS: books of the corporation
1. In case of an Executive Committee duly
2. A majority of the directors/trustees must be
authorized in the by-laws;
residents of the Philippines. (Sec. 23)
2. In case of a contracted manager which may
be an individual, a partnership, or another 3. He must not have been convicted by final
corporation. Note: In case the contracted judgment of an offense punishable by
manager is another corporation, the special imprisonment for a period exceeding 6 years
rule in Sec. 44 applies. or a violation of the Corporation Code,
3. In case of close corporations, the stockholders committed within five years from the date of
may manage the business of the corporation his election. (Sec. 27)
instead by a board of directors, if the articles
4. Only natural persons can be elected
of incorporation so provide.
The power to purchase real property is vested in the
In case of corporate stockholders or members,
board of directors or trustees. While a corporation
their representation in the board can be
may appoint agents to negotiate for the purchase of
achieved by making their individual
real property needed by the corporation, the final say
representatives trustees of the shares or
will have to be with the board, whose approval will
membership to make them
finalize the transaction. A corporation can only
stockholders/members of record.
exercise its powers and transact its business through
its board of directors and through its officers and 5. Other qualifications as may be prescribed in
agents when authorized by a board resolution or by its the by-laws of the corporation.
by-laws. (Spouses Constantine Firme vs. Bukal
6. Must be of legal age
Enterprises and Development Corporation, G.R. No.
146608, October, 23, 2003)  Disqualifications of Directors, Trustees or
DIRECTORS/TRUSTEES 1. Conviction by final judgment of offenses
punishable by imprisonment for excess of 6
1. Limitations imposed by the Constitution, statutes, years, or
articles of incorporation or by-laws.
2. Violation of code committed within 5 years
2. Cannot perform constituent or those involving prior to date of his election or appointment.
fundamental changes in the corporation requiring the
approval of stockholders or members.  Terms of Directors

3. Cannot exercise powers not possessed by the For 1 year or until their successors are elected and
corporation. (The Corporation Code of the qualified (Hold – over Principle)
Philippines Annotated, Hector de Leon, 2002 ed.)
NATURE OF POWERS OF BOARD OF a. Quorum in Meeting for Election
DIRECTORS/TRUSTEES (The Corporation Code of the  Majority of the outstanding capital stock
Philippines Annotated, Hector de Leon, 2002 ed.) or member entitled to vote
 Present either in person or by
a. Under the Theory of Original Power, the powers representative by WRITTEN PROXY
of the board of directors or trustees are b. How
ORIGINAL and UNDELEGATED. The  Viva Voce, or
stockholders or members do not confer, nor  By ballot if requested by any voting
can they revoke those powers. stockholder or member
b. They are DERIVATIVE only in the sense of being c. Stock Corporations
received from the State in the act of Methods of Voting on the Election of Directors
incorporation. g. STRAIGHT VOTING – Every stockholder
through this method, may vote such
number of shares for as many persons as
2. TENURE, QUALIFICATIONS AND there are directors.
i. Every stockholder is entitled to such
 Qualifications: number of votes that his number of
1. For a stock corporation, ownership of at least 1 shares multiplied by the total number of
share capital stock of the corporation in his directors to be elected will bring. He may
own name, and if he ceases to own at least one give all such votes to one candidate
share in his own name, he automatically ceases (CUMULATIVE VOTING FOR ONE
to be a director. (Sec. 23) For a non-stock CANDIDATE) or he may distribute them
corporation, only members of the corporation among as many candidates as he sees fit
can be elected to seat in the Board of Trustees. (CUMULATIVE VOTING BY
In order to be eligible as a director, what is DISTRIBUTION). (Sec. 24)
material is the legal title to, not beneficial



ii. A minority director elected through iii. Upon previous notice to stockholders or
cumulative voting cannot be removed members
without cause. (Sec. 28)  Of the intention to propose such
iii. A PROXY is a written instrument, signed removal at the meeting
by the stockholder or member (as  Of the time and place of meeting
principal) and filed before the scheduled  Must be given by publication or by
meeting with the corporate secretary, and written notice prescribed in the
given to another person (as agent) Code.
authorizing such person to exercise the b. If secretary refuses/ fails to call for the special
voting rights of the former. meeting or give the notice, or there is no
secretary, call may be directly addressed to
What is the period of validity of proxy? Unless stockholders or members by demanding
otherwise provided in the proxy, it should be valid stockholder or member.
only for the meeting for which it is intended. No c. Causes for Removal
proxy shall be valid and effective for a longer period 1. May be with or without cause
than five years at any one time. (Sec. 58)  Cause is usually related to the 3 duties of
an officer or director –
Instances whereby Right to vote by Proxy may be a. loyalty
exercised: b. obedience
1. Election of the board of directors or trustees; c. diligence
2. Voting in case of joint ownership of stock; 2. Provided that removal without cause may not
3. Voting by trustee under voting trust be used to deprive minority stockholders or
agreement; members of their right of representation
4. Pledge or mortgage of shares; under Sec. 24.
5. As provided for in it’s by – laws.
NOTE: Removal of Board of Director or Trustee is
Stockholders or members may attend and vote in their different from removal of a corporate officer.
meeting by proxy (Sec. 58); but directors cannot do so. Stockholder’s approval is necessary only for the
Directors must always act in person. (Sec. 25) removal of the members of the Board. For the removal
of a corporate officer or employee, the vote of the
A VOTING TRUST is an agreement whereby one or Board of Directors is sufficient for the purpose. (2001
more stockholders transfer their shares of stocks to a Bar Examination)
trustee, who thereby acquires for a period of time the
voting rights (and/ or any other rights) over such 5. FILLING OV VACANCIES IN THE OFFICE OF
shares; and in return, trust certificates are given to the DIRECTOR OR TRUSTEE
stockholder/s, which are transferrable like stock a. Ground for Removal
certificates, subject however, to the trust agreement. 1. Removal by the stockholder or members or
upon expiration of term
d. Non – Stock Corporations  Vacancy shall be filled by the stockholder
 Members may cast as many votes as there in a regular or special meeting called for
are trustees to be elected (seats) that purpose.
 But may not cast more than one vote for a 2. Other causes other than expiration or
single candidate removal by stockholders / members.
 EXCEPT: when the AOI or by – laws provide  If remaining directors constitute Quorum
otherwise – may be filled by the MAJORITY vote of
e. Adjournment of Meeting for Elections the remaining directors.
 May adjourn from day to day or from time  If no quorum – filled by the stockholders
to time in a regular or special meeting called for
 But NOT sine die or indefinitely if quorum is that purpose.
not met (majority of stockholders or 3. Proposed amendment of Articles of
members are not present). Incorporation resulting in increase in
number of directors / trustees
NOTE: Proposed amendment to by – laws stipulating  Vacancy shall be filled by the
permanent director even without election is contrary stockholders in a regular or special
to law. (Grace Christian High School vs. CA) meeting called for that purpose
 Or in the same meeting authorizing
4. REMOVAL OF DIRECTORS OR TRUSTEES increase of directors or trustees if
a. How may be removed so stated in notice of the meeting
i. 2/3 vote of stockholders or members b. Director or trustee so elected shall serve
entitled to vote only the unexpired portion of the term.
ii. During a regular meeting or a special
meeting called by the secretary upon: 6. COMPENSATION
 Order of the President Directors are not entitled to compensation as such
 Written demand from majority of directors except that they are allowed reasonable per
stockholders or members entitled to diems. However, directors may be given
vote compensation when:



a. There is a provision in the by – laws vi. He is made, by specific provision of law, to

authorizing payment of compensation; or personally answer for his corporate
b. By a vote of the Stockholders representing at action (Tramat Mercantile Inc. vs. CA)
least majority of the outstanding capital stock b. Liability for Violation of Duty of Diligence
at a regular or special meeting. shall be liable jointly and severally for all
damages resulting therefrom suffered by the
LIMIT: In either case, the total yearly compensation of corporation, its stockholders or members
the directors shall not exceed 10% of the net income and other persons.
before income tax of the corporation during the
Under Sec. 65 on Liability of Directors for
7. DUTY OF LOYALTY Watered Stocks, if director of officer:
To Act according to the corporation’s best  Consents to issuance of stocks for a
interest consideration less than its par or issued
DOCTRINE OF  Consents to payment in consideration other
CORPORATE than cash, which is valued in excess of its fair
OPPORTUNITY market value;
Cover same subject Cover same subject  Having knowledge hereof does not object in
which is business which is business writing and file the same with the corporate
opportunity opportunity secretary.
Applicable to directors, Only applicable to Such director or officer shall be SOLIDARILY
trustees and officers DIRECTORS and not LIABLE with the stockholder concerned (buyer)
to officers and its creditors for the DIFFERENCE between
Does not cover Allows RATIFICATION the fair value received at time of issuance of the
ratification. Even if of a transaction by a stock and its par or issued value.
99% of the self – dealing director
stockholders affirm the by the vote of 11. CONTRACTS
transactions, the stockholders
a. By self – dealing directors with the
remaining stockholders representing 2/3 of
can still oppose such a the outstanding corporation
self – dealing capital stock. Contracts between the corporation and one or
transaction and file a more of its directors or trustees or officers are
derivative suit VOIDABLE at the option of the corporation but
Applies to both stock Applies only to stock VALID if the following are present:
and non – stock corporations
i. Presence of director / trustee in the board
meeting which approved contract was not
8. BUSINESS JUDGMENT RULE necessary to constitute a quorum.
Business judgment rule exists to protect and ii. Vote of director or trustee not necessary for
promote the full and free exercise of managerial approval of contract
power granted to directors. The rule is a “a iii. Contract is fair and reasonable under the
presumption that in making a business decision, circumstances
the directors of a corporation acted on an
iv. In case of an officer, contract has been
informed basis, in good faith and in the honest
belief that the action taken was in the best previously authorized by board of directors.
interest of the company.” (Smith vs. Van Gorkam) NOTE: If director’s presence was required to
meet the quorum (1st requisite) and I his vote
9. DUTY OF DILIGENCE was necessary for approval of the contract (2nd
a. Violations of Duty of Diligence requisite), the contract may still be valid if it is
i. Willfully and knowingly vote for or assent RATIFIED by 2/3 of stockholders or members in
to patently unlawful acts of the a meeting called for that purpose.
ii. Guilty of gross negligence or bad faith in
b. Between corporation with interlocking
directing the affairs of the corporation
iii. Acquire any personal or pecuniary
 Contract between two or more
interest in conflict with their duty as
corporations with a common director/s
director or trustee
may be valid
iv. He consents to the issuance of watered
stocks or who, having knowledge thereof,  However, to be valid, it must be fair and
does not forthwith file with the corporate reasonable
secretary his written objection thereto;  A contract between the corporations
(Tramat Mercantile Inc. vs CA) with interlocking directors is VOID if
v. He agrees to hold himself personally and there is fraud
solidarily liable with the corporation; or  If the interest of the interlocking director
(Tramat Mercantile Inc. vs. CA) in one corporation is SUBSTANTIAL
(meaning stockholdings exceed 20% of



the outstanding capital stock) and his d. Duties to be performed by officers

interest is merely NOMINAL, contract  Enjoined on them by law
shall be treated as under the provisions  Enjoined by corporate by – laws
of Self – Dealings (voidable but may be e. Quorum – board must act as a body
ratified), insofar as the corporation  For transaction of corporate business –
where he has a nominal interest is majority of number of directors or trustees
concerned. as fixed in the AOI
NOTE: Corporate officers are not permitted to use  For corporate act to be valid, there must be
their position of trust and confidence to further their a quorum and the act must be approved by
private interests. The doctrine of CORPORATE majority of directors or trustees PRESENT
OPPORTUNITY is precisely recognition by the courts  For election of officers – majority of ALL
that the fiduciary standards could not be upheld members of the board of directors or board
where the fiduciary was acting for two entities with of trustees, whether all members are
competing interest. (Gokongwei Jr. vs. SEC) present or not.
f. Director or Trustees cannot ATTEND or VOTE
by proxy at board meetings.
A body created by the by-laws and a. Rule on Corporate Officer’s power to bind the
composed of some members of the board corporation
which, subject to the statutory limitations, has  An officer’s power as an agent of the
all the authority of the board to the extent corporation must be sought from the
provided in the board resolution or by-laws. statute, charter, by – laws or in a delegation
(The Corporation Code of the Philippines of authority from such officer, from the acts
Annotated, Hector de Leon, 2002 ed.) of the board of directors formally expressed
Must be provided for in the by-laws and composed or implied from a habit or custom of doing
of not less than 3 members of the board appointed business
by the board. b. When Corporation bound by the act of its
May act by a majority vote of all of its members President.

b. Limitations on its powers In the absence of a charter or by – law

It cannot act on the following: provision to the contrary, the president is
1. Matters needing stockholder approval; presumed to have the authority to act within
2. Filling up of board vacancies; the domain of the general objectives of its
3. Amendment, repeal or adoption of by-laws; business and within the scope of his or her
4. Amendment or repeal of any resolution of the usual duties. A party dealing with the President
Board which by its express terms is not of a corporation is entitled to assume that he
amendable or repealable; and has the authority to enter, on behalf of the
5. Cash dividend declaration. corporation, into contract that are within the
scope of the powers of said corporation and that
13. MEETINGS do not violate any statute or rule on public

BOARD MEETING (Sec. 53) Distinctions between a Corporate Officer and

WHEN: Corporate Employee
1. REGULAR - held monthly, unless otherwise
provided in the by-laws; and CORPORATE
2. SPECIAL - held at any time upon the call of the EMPLOYEE
president. Position is provided for Employed by the action
in the by – laws or of the managing officer
under the Corporation of the corporation
May be held anywhere in or outside of the Philippines.
RTC has jurisdiction in NLRC has jurisdiction in
case of LABOR DISPUTE case of labor dispute
a. Corporate Officers
 President – must be a director
 Treasurer – may or may not be a director
 Secretary – shall be a resident and a citizen
of the Philippines
 Other officers provided in the by – laws 2. CERTIFICATE OF STOCKS
b. Any 2 or more positions may be held The document evidencing the ownership of shares of
concurrently except president and secretary or stocks by a stockholder and the full payment of its
president and treasurer issue or subscription price.
c. When elected: Immediately after election of
directors a. Nature of the certificate



It is not essential to the ownership and/or d. The transferee must present the indorsed
existence of the share of stock. certificate to the corporate secretary who
Where the certificate of stock reflects a greater shall effect the transfer in the corporate
volume of shares than the actual number of books, issue a new stock certificate in favor of
shares issued or to be issued, the following rules the transferee and cancel the former
may be considered: certificate.
1. To the extent that there is an over issue, the
excess issuance (over the authorized capital Only absolute transfers need be registered. The
stock or the stated capital) shall be void as pledge or mortgage itself need not be recorded in the
being ultra vires. stock and transfer book, but a chattel mortgage must
2. If there is no over issue, but no payment has comply with the Chattel Mortgage Law, and a pledge
been made to cover the par or stated value of would require the shares to be placed in the
the excess shares, the latter would constitute possession of the creditor/pledgee. The agreement
“watered” stocks. must appear in a public instrument to take effect
3. If there is no over issue and watering of against third persons. (Chemphil vs. CA, 251 SCRA 257)
stocks, the corporation may be bound to
honor the certificate (if duly signed and EFFECTS OF UNREGISTERED TRANSFER OF
released by its authorized officers) in the SHARES
hands of a holder in good faith, reserving a a. It is valid and binding as between the transferor and
right of recourse that an aggrieved party may the transferee
pursue against the culpable or unjustly b. It is invalid as to the corporation except when notice
enriched party. is given to the corporation for purposes of
SHARES OF STOCK c. It is invalid as against corporate creditors and the
transferor is still liable to the corporation
Amount paid in or Interest or right which d. It is invalid as to the attaching or executing
secured to be paid in by the stockholder has in creditors of the transferor, as well as subsequent
the stockholders upon the management of the purchasers in good faith without notice of the
which the corporation is corporation, and its transfer.
to conduct its operation. surplus profits, and
It is the property of the upon a dissolution, in
corporation itself all of its assets No certificate of stock shall be issued until the full
(monetary value). remaining after amount of the subscription is paid. Basis: Doctrine of
payment of corporate Individuality of Subscription
STOCK 1. Filing with the corporation an affidavit in triplicate
Unit of interest in a Evidence of the by the registered owner setting forth the
corporation holder’s ownership of circumstances as to how the certificate was lost, stolen
the stock and of his or destroyed, the number of shares, serial number of
the certificate and the name of the corporation that
right as a shareholder
issued the same.
Incorporeal or Concrete and tangible
intangible property 2. Publication of notice of loss by the corporation in a
May be issued by the May be issued only if newspaper of general circulation in the place of the
corporation even if the the subscription is fully principal office, once a week for 3 consecutive weeks.
subscription is not fully paid.
3. After the lapse of 1 year from the date of the last
publication, if no contest has been presented, the
corporation shall cancel in its books the certificate of
b. Negotiability stock, which has been lost, stolen or destroyed, and
issue in lieu thereof a new certificate of stock.
a. In case of shares covered by a certificate, the However, if the registered owner files a bond or other
indorsement of the owner or his agent securities as may be necessary to the board, the new
coupled with delivery is essential certificate of stock may be issued even before the
b. Where no certificate has been issued or for expiration of one (1) year period.
some reason it is not in the possession of the
stockholder, it may be transferred by means The prescribed procedure does not apply to a case
of a deed of assignment duly recorded in the where the certificates are in the company’s possession
books of the corporation when mislaid which thereby obligates the corporation,
c. To be valid against the corporation and third not the stockholder, to suffer the consequences. (SEC
persons, the transfer must be recorded in the Opinion)
stock and transfer book



3. WATERED STOCKS No delinquency stock shall be voted for or be entitled

Watered stock is stock issued not in exchange for to vote or representation at any stockholders meeting,
its equivalent in cash, property, shares, stock nor shall the holder be entitled to any of the rights of a
dividends or services. It includes stock that is stockholder except the right to dividends in
issued (a) without consideration (b) issued as accordance with the provisions of this Code until and
fully paid when the corporation receives a sum unless he pays the amount due on his subscription
less than par or issued value (c) issued for a with accrued interest, and the cost and expenses of
consideration other than cash, the fair valuation advertisement, if any. (Sec. 71)
of which is less than par or issued value (d) stock
dividend without sufficient retained earnings or PROCEDURE FOR THE SALE OF DELINQUENT
surplus. STOCKS (Sec. 68)
3. COLLECTION OF UNPAID SUBSCRIPTION Call by resolution demanding payment of the balance.
1. Voluntary payment However, if the contract of subscription prescribes
a. Upon the date specified in the subscription the date of payment, no call is necessary.
contract Notice of the board resolution given to the
b. Upon call by the Board of Directors stockholders by the corporate secretary, either
2. Involuntary payment personally or by registered mail. Publication of
a. Extra-judicial notice of call is not required.
i. Delinquency sale Failure of the stockholder to pay within a grace period
ii. Application of dividends of 30 days from the date specified in the contract
b. Judicial action of subscription or in the call, the stocks shall be
Note: The prescriptive period in case of subscription declared delinquent and shall be subject to sale.
of shares begins to run only from the time the board of Notice of delinquency served on the subscribers either
directors declares that the balance are due and personally or registered mail and publication in a
payable. It does not begin to run from the date of the newspaper of general circulation in the province
subscription. (Garcia vs. Suarez, 67 Phil. 441) or the city where principal office is located for
once a week for 2 consecutive weeks. Notice shall
4. SALE OF DELINQUENT SHARES state the amount due on each subscription plus
accrued interest, and the date, time and place of
1. If the subscription contract fixes the date for the sale which shall not be less than 30 days nor
payment, failure to pay on such date shall render more than 60 days from the date the stocks
the entire balance due and payable with interest. become delinquent.
Thirty days therefrom, if still unpaid, the shares
become delinquent, as of the due date, and subject Sale of the delinquent shares at public auction.
to sale, unless the board declares otherwise.
2. If no date is fixed in the subscription contract, the HIGHEST BIDDER IN A DELINQUENCY SALE
board of directors can make the call for payment, a. The person participating in the delinquency sale
and specify the due date. The notice of call is who offers to pay the full amount of the balance of the
mandatory. The failure to pay on such date shall subscription together with the accrued interest, costs
render the entire balance due and payable with of advertisement and expenses of sale, for the smallest
interest. Thirty days therefrom, if still unpaid, the number of shares. In other words, the amount of the bid
shares become delinquent, as of the date of call, does not vary but only the number of shares to be
and subject to sale, unless the board declares bought changes and determines the highest bidder.
otherwise. (Sec. 67) b. If there is no bidder as mentioned above, the
corporation may bid for the same, and the total
A. Effect of Delinquency: amount due shall be credited as paid in full in the
A. Upon the stockholder books of the corporation. Such shares shall be
1. Accelerates the entire amount of the unpaid considered as treasury shares.
2. Subjects the shares to interest, expenses and K. DISSOLUTION AND WINDING UP
3. Disenfranchises the shares from any right that
inheres to a shareholder, except the right to 1. DISSOLUTION
dividends (but which shall be applied to any When the corporation ceases to be a juridical
amount due on said shares or, in the case of person
stock dividends, to be withheld by the
corporation until full payment of the METHODS: (Sec 117)
delinquent shares. (Sec. 43) 1. Voluntary
B. Upon the director owning delinquent shares 2. Involuntary
1. He can continue serving in that capacity unless and A corporation may be dissolved by the SEC
until said shares are totally bidded away, he continues upon filing of a verified complaint and after
to be the owner thereof and in the interim he is not proper notice and hearing on the grounds
disqualified. provided by existing laws, rules and
2. A delinquent stockholder seeking to be elected as regulations (Sec. 121)
director may not be a candidate for, nor be duly
elected to, the board.



The 3 Methods by which a Stock Corporation may management committee or rehabilitation receiver,
be voluntarily Dissolve are: (2002 Bar or based on the SEC’s own findings, the
Examination) continuance of the business of the corporation
would not be feasible or profitable nor work to the
1. Voluntary dissolution where no creditors best interest of the stockholders, parties –
are affected. This is done by a majority vote of litigants, creditors or the general public.
the directors and resolution vote of at least 2/3 8. When the corporation is guilty of fraud in
vote of the stockholders, submitted to the SEC. procuring its certificate of registration.
2. Voluntary dissolution where creditors are 9. When the corporation is guilty of serious
affected. This is done by a petition for misrepresentation as to what the corporation can
dissolution which must be filed with the SEC, do or is doing to the great prejudice of or damage
signed by a majority of the members of the to the general public.
board of directors, verified by the president or 10. Refusal of the corporation to comply or defiance of
the secretary, and upon affirmative vote of any lawful order of the SEC restraining
stockholders representing 2/3 of the commission of acts which would amount to a
outstanding capital stock grave violation of its franchise and
3. Dissolution by shortening of the corporate 11. Failure of the corporation to file required reports
term. This is done by amendment of the articles in appropriate forms as determined by the SEC
of incorporation. within the prescribed period.

When Corporation is Deemed Dissolved: EFFECTS OF DISSOLUTION

WHEN DEEMED a. Transfer of legal title to corporate property to the
METHOD stockholders who become co-owners thereof
Sec. 118, when no Upon issuance of b. Corporation ceases as a body politic to continue the
creditors are certificate of SEC business for which it was organized
affected c. It cannot be revived
Sec. 119, where When judgment is d. Dissolution does not by itself imply the diminution
creditors are rendered dissolving the or extinguishment of rights
affected corporation e. The corporation continues as a body corporate for 3
Sec. 120, dissolution Upon approval of the years for purposes of winding up
by shortening amended articles of f. Cessation of corporate existence for all purposes
corporate term incorporation or the upon the expiration of the winding up period of 3
expiration of the years. (The Corporation Code of the Philippines
shortened term, as the Annotated, Hector de Leon, 2002 ed.
case may be.
INVOLUNTARY DISSOLUTION The process by which all the assets of the corporation
are converted into liquid assets (cash) in order to
Grounds: facilitate the payment of obligations to creditors, and
1. If the corporation does not formally organize and the remaining balance, if any, is to be distributed to
commence the transaction of its business or the the stockholders or members.
construction of its works within 2 years from the
date of its incorporation, its corporate power Methods:
ceases and the corporation shall be deemed 1. By the corporation itself through its board of
dissolved. directors/trustees;
2. If the corporation has commenced the transaction 2. By a trustee to whom the corporate assets have
of its business; but subsequently becomes been conveyed; and
continuously inoperative for a period of at least 5 3. By a management committee or rehabilitation
years, the same shall be a ground for suspension receiver appointed by the SEC.
or revocation of its corporate franchise or Note: The 3-year period of liquidation does not apply
certificate of incorporation. to Methods 2 and 3 as long as the trustee or the
3. When the corporation fails to adopt and file a code receiver is appointed within the said period.
of by – laws in the manner provided for by the The termination of the life of a juridical entity does not
law. by itself cause the extinction or diminution of the
4. When the corporation has offended against a rights and liabilities of such entity nor those of its
provision of law for its creation or renewal. owners and creditors alike (Sec. 145).
5. When it has committed or omitted an act which The word “trustee” as sued in the corporation statute
amounts to a surrender of its corporate rights, must be understood in its general concept which could
privileges, or franchises. include the counsel to whom was entrusted the
6. When it has misused a right, privilege, or franchise prosecution of the suit filed by the corporation.
conferred upon it by law, or when it has exercised (Spouses Gelano vs. CA)
a right, privilege or franchise in contravention of
law, such as commission by the corporation of LIQUIDATION REHABILITATION
ultra vires or illegal acts. Connotes a winding up Connotes a reopening or
7. When on the basis of findings and or settling with reorganization
recommendations of a duly appointed creditors and debtors



Winding up process so Contemplates a ORDINARY STOCK

that assets may be continuance of corporate CORPORATION
distributed to those life in an effort to restore Its articles of Its articles must contain
entitled the corporation to its incorporation need the special matters
former successful only contain the prescribed by Sec. 97,
operation general matters aside from the general
enumerated in Sec. matters in Sec. 14.
OTHER COPORATIONS 14 of the Code. Failure to do so
1. CLOSE CORPORATION precludes a de jure close
A special kind of stock corporation: corporation status.
1. whose articles of incorporation should provide Its status as an 2/3 of its voting stock or
that: ordinary stock voting rights must not
a. the number of stockholders shall not exceed corporation is not be owned or controlled
20; affected by the by another corporation
b. issued stocks are subject to transfer ownership of its which is not a close
restrictions, with a right of preemption in voting stock or voting corporation.
favor of the stockholders or the corporation; rights.
and Its articles cannot Its articles may classify
c. the corporation shall not be listed in the classify its directors. its directors.
stock exchange or its stocks should not be Business of the Business of the
publicly offered; AND corporation is corporation may be
2. Whose at least 2/3 of the voting stocks or voting managed by the managed by the
rights should not be owned or controlled by board of directors. stockholders if the
another corporation which is not a close articles so provide, but
corporation. (Sec. 96) they are liable as
Characteristics: directors.
1. Stockholders may act as directors without The corporate Its articles may provide
need of election and therefore are liable as officers and that any or all of the
directors; employees are corporate officers or
2. Stockholders who are involved in the elected by a majority employees may be
management of the corporation are liable in vote of all the elected or appointed by
the same manner as directors are. members of the the stockholders.
3. Quorum may be greater than mere majority; board of directors.
4. Transfers of stocks to others, which would
increase the number of stockholders to more The pre-emptive The pre-emptive right is
than the maximum are invalid; right is subject to the subject to no exceptions
5. Corporate actuations may be binding even exceptions found in unless denied in the
without a formal board meeting, if the Sec. 39. articles
stockholder had knowledge or ratified the The appraisal right The appraisal right may
informal action of the others; may be exercised by a be exercised and
6. Preemptive right extends to all stock issues; stockholder only in compelled against the
7. Deadlocks in board are settled by the SEC, on the cases provided in corporation by a
the written petition by any stockholder; and Secs. 81 and 42 of the stockholder for any
8. Stockholder may withdraw and avail of his Code. reason.
right of appraisal. Except as regards In case of an arbitration
Note: Special rules are provided for close corporations redeemable shares, of an intra-corporate
because it is essentially an incorporated partnership. the purchase by the deadlock by the SEC, the
(The Corporation Code of the Philippines Annotated, corporation of its corporation may be
Hector de Leon, 2002 ed.) own stock must ordered to purchase its
always be made from own shares from the
The following cannot be a close corporation: the unrestricted stockholders regardless
a. mining companies; retained earnings. of the availability of
b. oil companies; unrestricted retained
c. stock exchanges; earnings.
d. banks; Arbitration of intra- Arbitration of intra-
e. insurance companies; corporate deadlock corporate deadlock by
f. public utilities; by the SEC is not a the SEC is an available
g. education institutions; remedy in case the remedy in case the
h. other corporations declared to be vested with directors or directors or
public interest. (Sec. 96) stockholders are so stockholders are so
divided respecting divided respecting the
the management of management of the
the corporation. corporation.





1. Cancel or alter any provision in the articles of to its stockholders

incorporation or bylaws Stockholders may Members cannot
2. Cancel, alter or enjoin any resolution of the transfer their shares transfer their
corporation membership unless
3. Direct or prohibit any act of the corporation allowed by the articles
4. Require the purchase at their fair value of shares or by-laws
of any stockholder either by any stockholder or by Cumulative voting is Cumulative voting not
the corporation regardless of the availability of available in the available unless
unrestricted retained earnings. election of directors otherwise provided in
5. Appoint a provisional director the articles or by-laws
6. Dissolve the corporation Directors cannot Trustees may exceed
7. Granting such other relief as the circumstances exceed 15 in number 15 in number
may warrant. The term of a director The term of a trustee is
is 1 year 3 years; 1/3 of the
2. NON – STOCK CORPORATIONS Board shall be elected
A corporation organized for an eleemosynary purpose, annually
and no part of whose income is, during its existence, Stockholders may Members may be
distributable as dividends to its members, trustees, or vote by proxy deprived of the right to
officers, subject to the provisions of the Corporation vote by proxy in the
Code on dissolution. (Sec. 87) articles or by-laws
Any profit which it may obtain as an incident to its
Officers are elected by Officers may be
operations shall, whenever necessary or proper, be
the Board of Directors directly elected by the
used for the furtherance of the purpose or purposes
members unless
for which it was organized.
otherwise provided in
the articles or by-laws
Eleemosynary purposes: charitable, religious,
Stockholders and Members may be
educational, professional, cultural, recreational,
directors must act in a allowed by the by-laws
fraternal, literary, scientific, social, civic service, or
meeting, except to vote by mail or
similar purposes, like trade, industry, agricultural.
where a mere written other similar means
(Sec. 88)
assent is sufficient or
They are governed by the same rules established for
a formal meeting
stock corporations, whenever pertinent, subject,
however, to a number of special features.
1. All liabilities and obligations of the corporation shall
1. Stock to non-stock corporation be paid, satisfied and discharged or adequate
Conversion may be made by mere amendment of the provision shall be made therefor
articles of incorporation. 2. Assets held by the corporation upon a condition
2. Non-stock to stock corporation requiring return, transfer or conveyance, and which
The corporation must first be dissolved; mere condition occurs by reason of dissolution, shall be
amendment of the articles of incorporation would not returned, transferred or conveyed in accordance with
suffice because the conversion would change the such requirements
corporate nature from non-profit to monetary gain. 3. Assets received and held by the corporation subject
The conversion without dissolving it first would be to limitations permitting their use only for charitable,
tantamount to distribution of its assets or income to religious, benevolent, educational or similar purposes
its members inasmuch as after its conversion, the but not held upon a condition requiring return,
asset of the non-stock corporation would now be transfer or conveyance by reason of dissolution, shall
treated as payment to the subscriptions of the be transferred or conveyed to one or more
members who will now become stockholders of the corporations, societies or organizations engaged in
corporation. activities in the Philippines substantially similar to
those of the dissolving corporation pursuant to a plan
RIGHTS OF MEMBERS of distribution
4. Other assets, if any, shall be distributed in
1. To be entitled to 1 vote unless otherwise accordance with the provisions of the articles of
provided in the articles or by-laws incorporation or the by-laws
2. To vote by proxy unless otherwise provided 5. In any other case, assets may be distributed to such
in the articles or by-laws persons, societies, organizations or corporations,
3. To transfer membership if allowed by the whether or not organized for profit, as may be
articles or by-laws specified in a plan of distribution.
4. To be elected as trustee
 The plan of distribution shall be approved by a
STOCK NON-STOCK majority vote of the board of trustees and by 2/3 of
Has capital stock Does not have shares the members having voting rights at a meeting
divided into shares and may not distribute
and with authority to profits to its members
distribute dividends



SPECIAL CORPORATIONS transacting business in the Philippines, designated in a

written power of attorney by a foreign corporation
1. EDUCATIONAL CORPORATION authorized to do business in the Philippines, on whom
A stock or non-stock corporation organized to provide any summons and other legal processes may be served
facilities for teaching or instruction. in all actions or other legal proceedings against the
foreign corporation. (Sec. 127-128)
A favorable recommendation of the DECS is essential
for the approval of its articles and by-laws. CONTENTS FOR APPLICATION OF LICENSE
It is primarily governed by special laws and 1. Date and term of incorporation
suppletorily by the provisions of the Code. 2. The address of the principal office in the country
of incorporation
3. The name and address of resident agent
NON-STOCK 4. The place in the Philippines where it intends to
CORPORATION 5. The specific purpose or purposes
A non-stock A special corporation 6. The names and addresses of the present directors
corporation which may a stock or and officers of the corporation
non-stock 1. A statement of its authorized capital stock
Governed by the Governed by special 2. A statement of its outstanding capital stock
provisions on non- laws and by the general 3. A statement of the amount actually paid in
stock corporations provisions of the 4. Such additional information as may be necessary
and suppletorily by Corporation Code to enable the SEC to determine whether such
the provisions on corporation is entitled to license
stock corporations
The number of board The number of the GROUNDS FOR REVOCATION OF LICENSE
of trustees may be board of trustees should
1. Failure to file annual reports required by the
more than 15 not be less than 5 but
not more than 15.
2. Failure to appoint and maintain a resident agent;
The term of office of The term of office of the
3. Failure to inform the SEC of the change of
the board of trustees board of trustees shall
residence of the resident agent;
shall be 3 years be 5 years 4. Failure to submit copy of amended articles or by-
laws or articles of merger or consolidation;
5. A misrepresentation in material matters in
A corporation composed entirely of spiritual persons 6. Failure to pay taxes, imposts and assessments;
and which is organized for the furtherance of a 7. Engage in business unauthorized by SEC;
religion or for perpetuating the rights of the church or 8. Acting as dummy of a foreign corporation; and
for the administration of church or religious work or 9. Not licensed to do business in the Philippines.
property. It is different from an ordinary non-stock (Sec. 134)
corporation organized for religious purposes.
- A special form of corporation, usually The Corporation Code does not define the phrase
associated with the clergy, consisting of one person “doing or transacting business.”
only and his successors, who is incorporated by law A. Jurisprudential Test (Philippine Corporate Law, Cesar
to give some legal capacities and advantages; and Villanueva, 2001 ed.)
b) RELIGIOUS SOCIETIES 1. Twin characterization test
- A non-stock corporation governed by a a) Whether the foreign corporation is maintaining
board but with religious purposes. It is incorporated or continuing in the Philippines the body or
by an aggregate of persons, e.g. religious order, substance of the business for which it was
diocese, synod, sect, etc. organized or whether it has substantially retired
4. FOREIGN CORPORATION from it and turned it over another (Substance
A corporation formed, organized or existing under any Test); and
law other than those of the Philippines, and whose b) Whether there is continuity of commercial
laws allow Filipino citizens and corporations to do dealings and arrangements, contemplating to
business in its own country or state. (Sec. 123) some extent the performance of acts or works or
The definition espouses the incorporation test and the the exercise of some functions normally incident
reciprocity rule and is significant for licensing purposes. to and in progressive prosecution of, the purpose
It is not permitted to “transact or do business in the and object of its organization (Continuity Test).
Philippines” until it has secured a license for that 2. Contract Test
purpose from the SEC and a certificate of authority Whether the contracts entered into by the foreign
from the appropriate government agency. corporation, or by an agent acting under the
control and direction of the foreign corporation,
RESIDENT AGENT are consummated in the Philippines.
An individual, who must be of good moral character
and of sound financial standing, residing in the M. MERGER AND CONSOLIDATION
Philippines, or a domestic corporation lawfully



corporation, shall be deemed transferred to and

MERGER CONSOLIDATION vested in such surviving or consolidated corporation
One or more existing Union of 2 or more without further act or deed;
corporations are corporations to form a 6. The surviving or consolidated corporation shall be
absorbed by another new corporation called responsible for all the liabilities and obligations of
corporation which a consolidated each of the constituent corporations;
survives (A + B = A or B) corporation (A + B = C) 7. Any claim, action or proceeding pending by or
against any of the constituent corporations may be
Parties called constituent Same
prosecuted by or against the surviving or consolidated
corporations; and
Absorbed corporation All constituent
8. The rights of the creditors or lien upon the property
dissolved without corporation are
of any of each constituent corporation shall not be
liquidation of assets dissolved without
impaired by such merger or consolidation.
liquidation of assets;
GENERAL RULE: When one corporation buys all the
corporation survives
shares of another corporation, this will not operate to
Absorbing corporation Consolidated dissolve the other corporation and as the two
acquires all assets and corporation acquires all corporations still maintaining their separate corporate
assumes liabilities of the assets and assumes entities, one will not answer for the debts of the other.
absorbed corporation liabilities f constituent
regardless WON corporations regardless EXCEPTIONS AS TO NON-ASSUMPTION OF LIABILITIES:
creditors consented of WON creditors 1. If there is an express assumption of liabilities;
consented 2. If there is a consolidation or merger;
Stockholders of absorbed Stockholders of 3. If the purchase was in fraud of creditors; and
corporation becomes constituent 4. If the purchaser is merely a continuation of the
stockholders of corporations becomes seller.
absorbing corporation stockholders of DE FACTO MERGER
consolidated One corporation acquiring all or substantially
corporation all of the properties of another corporation in
exchange for shares of stock of the acquiring
PROCEDURE: corporation. The acquiring corporation would end-up
with the business enterprise of the selling corporation
a. The board of directors or trustees of each whereas the latter would end up with basically its
corporation shall approve a plan of merger or remaining assets being the shares of stock of the
consolidation acquiring corporation and may then distribute it as
b. The plan shall be submitted for approval by the liquidating dividend to its stockholders. (Philippine
stockholders or members of each of such Corporate Law, Cesar Villanueva, 2001 ed.)
corporation at separate corporate meetings duly
called for the purpose MERGER and
c. The articles of merger or consolidation shall be
executed by each of the constituent corporations Sale of assets is always Merger/consolidatio
involved n is not always
d. Submission to the SEC for approval involved
e. The SEC may or may not conduct a hearing There is automatic Purchasing
assumption of liabilities corporation is not
f. Issuance of certificate of merger or consolidation generally liable for
by the SEC the debts and
liabilities of the
selling corporation
EFFECTS OF MERGER OR CONSOLIDATION (Sec. 80) There is continuance of The selling
1. The constituent corporations shall become a single the enterprise and of the corporation
corporation which, in case of merger shall be the stockholders ordinarily
surviving corporation and, in the case of consolidation, contemplates a
shall be the consolidated corporation; liquidation of the
2. The separate existence of the constituent enterprise
corporation shall cease, except that of the surviving Title to the assets are Transfer of title is by
corporation; transferred by operation virtue of contract
3. The surviving or consolidated corporation shall of law
possess all rights, privileges, immunities and powers The constituent The selling
and subject to all the duties and liabilities of a corporations are corporation is not
corporation; automatically dissolved dissolved by the
4. The surviving or consolidated corporation shall mere transfer of all
thereafter possess all the rights, privileges, immunities its property
and franchises of each of the constituent corporations;
5. All property, real or personal, and all receivables TYPES OF ACQUISITIONS (Philippine Corporate Law,
due to, and all other interest of each constituent Cesar Villanueva, 2001 ed.)



a. “ASSETS-ONLY” LEVEL words used, and the language used is

The purchaser is interested only in the raw assets and selected by the lawyers of the Insurer (Qua
properties of the business. He is not interested in the Chee Gan vs. Law Union Rock Ins. Co. Ltd. 52
entity of the corporate owner of the assets nor of the OG 1982).
goodwill and other factors relating to the business
The transferee would not be liable for the debts and 1. The insured should possess an interest of
liabilities of his transferor since there is no privity of some kind, susceptible of pecuniary
contract over debt obligations between the transferee estimation – known as “insurable interest”.
and the transferor’s creditors Generally – a person has insurable interest in
the subject matter insured when:
b. “BUSINESS-ENTERPRISE” LEVEL - He has such a relation or connection
The transferee merely continues the same business of with or concern in, such subject
the transferor since he obtains the earning capability matter that he will derive pecuniary
of the venture benefit or advantage from its
The transferee is liable for the debts and liabilities of preservation or will suffer
the transferor pecuniary loss or damage from its
destruction, termination or injury by
c. “EQUITY” LEVEL the happening of the event insured
The purchaser takes control and ownership of the against.
business by purchasing the shareholdings of the - It is necessary because its absence
corporate owner. What the purchaser actually renders the contract void.
purchased is the ability to elect the members of the
board of the corporation who run the business
1. Himself, his spouse and of his children.
INSURANCE 2. Any person on whom he depends wholly or in
fact for education or support or in whom he
CONTRACT OF INSURANCE has pecuniary interest.
3. Any person under legal obligation to him for
 Agreement whereby one undertakes for a the payment of money, respecting property or
consideration to indemnify another against services of which death or illness might delay
loss, damage, or liability arising from an or prevent performance.
unknown or contingent event. (Sec. 2, par. 2) 4. Any person upon whose life, any estate or
 A contract of suretyship shall also be deemed interest vested in him depends.
an insurance contract if made by a surety who
or which is doing an insurance business. WHEN MUST INSURABLE INTEREST IN LIFE EXIST
NATURE AND CHARACTERISTICS OF A - Insurable interest in life must exist at the
CONTRACT OF INSURANCE: time of the effectivity of the policy and
need not exist at the time of the death of the
 ALEATORY – depends upon some contingent insured as life insurance is not a contract of
event. indemnity. It is meant to give financial
 Contract of INDEMNITY for Non-Life – recovery security to the insured or his beneficiaries
is commensurate to the loss. It is an investment in (Sec. 19). However, insurable interest of a
life insurance – secured by the insured as a creditor on the life of the debtor must exist
measure of economic security for him during his only at the time of effectivity but also at the
lifetime and for his beneficiary upon his death time of the death of the debtor – as in this
except one secured by the creditor on the life of instance it is a contract of indemnity. His
the debtor. interest is capable of exact pecuniary
 PERSONAL contract - insurer contracts with measurement.
reference to the character of the insured and vice
insurer. - The law does not require the consent of the
 It is one of PERFECT GOOD FAITH person insured and such has been considered
 Contract of ADHESION – insurance companies as not essential to the validity of the contract
manage to impose upon the insured prepared as long as there is insurable interest at the
contracts, which the insured cannot change. beginning;
Consequently, they are to construed as follows:
(a) In case there is no doubt as to the terms of WHEN DOES A PERSON HAVE INSURABLE
the insurance contract, it is to be construed INTEREST IN PROPERTY
in its plain, ordinary, and popular sense.
(b) If doubtful, ambiguous, certain, it is to be A person has insurable interest in property as every
construed strictly against the insurer and interest in property, whether real or personal, or
liberally in favor of the insured because the any relation thereto, or liability in respect thereof,
latter has no voice in the selection of the of such nature that a contemplated peril might



directly damnify the insured is an insurable COMPARE WITH INSURABLE INTEREST IN LIFE:
interest (Sec. 13). It may consist of: 2002 BAR EXAM (N0.XVII)

(a) An existing interest INSURABLE

(b) An inchoate interest founded on an INSURABLE INTEREST IN
(c) An expectancy coupled with an existing Must exist only at Must exist at the
interest in that out of which the the time the policy time the policy takes
expectancy arises; takes effect and need effect and when the
Note: not exist at the time loss occurs
- Expectancy must be founded on an actual right of loss
to the thing or a valid contract for it;
Unlimited except in Limited to actual
- A carrier or depository of any kind has insurable
life insurance value of interest in
interest in the thing held by him such to the
effected by creditor property insured.
extent of his liability but not to exceed the value
on life of debtor.
thereof (Sec. 13, 14, and 15).
The expectation of An expectation of a
benefit to be derived benefit to be derived
- But, a mere contingent or expectant interest
from the continued from the continued
in anything, not founded on contract or
existence of life need existence of the
actual right to the thing is not insurable – as
not have any legal property insured
there is no insurable interest (Sec. 16).
basis whatever. A must have a legal
reasonable basis.
INCHOATE RIGHT – The right to lay claim on the fun
probability is
is dependent on the solvency of the insurer and is
sufficient without
subject to all other obligations of the company arising
from its insurance contracts. Thus, the respondents’
interest is merely inchoate. Being a mere expectancy, The beneficiary need The beneficiary must
it has no attribute of property. At this time, it is not have an have insurable
nonexistent and may never exist. Hence, it would be insurable interest interest over the
premature to make the security deposit answerable over the life of the thing insured.
for CISCO’s present obligation to Del Monte Motors. insured if the
(Republic of the Philippines v. Del Monte Motors, Inc., insured himself
Oct.9, 2006 G.R. No. 156956) secured the policy.
However, if the life
BAR EXAM; 2000 (VIII - b) obtained by the
beneficiary, the
Q: BD has bank deposit of half a million latter must have
pesos.Since the limit of trhe insurance coverage of insurable interest
the Philippine Deposit Insurance Corp Act ( 3591) over the life of the
is only one tenth of BD’s deposit, he would like insured.
some protection for the excess by taking out an
insurance against all risks or contingencies of loss
arising from any unsound or unsafe banking CHANGE OF INTEREST IN PROPERTY INSURED
practices including unforeseen adverse effects of (Transfer or Sale of Insured Property) (1994 &
the continuing crisis involving the banking and 2000 Bar Exams)
financial sector in Asia. Does BD have insurable
interest within the meaning of the Insurance Code? A change of interest in any part of a thing
insured unaccompanied by a corresponding change of
A: Yes, BD has insurable interest in his bank deposit. interest in the insurance suspends the insurance to an
In case of loss of said deposit, more particularly to the equivalent extent, until the interests in the thing and
extent of the amount in excess of the limit covered by the interest in the insurance are vested in the same
the Philippine Deposit Insurance Corporation Act, BD person. (Sec. 20)
will be damnified. He will suffer pecuniary loss of
P400,000.00, that is, his bank deposit of half a million Exceptions: 1) change of interest after the
pesos minus P100,000.00 which is the maximum loss; 2) change of interest in one or more of several
amount recoverable from the PDIC. things separately insured; 3) change of interest by will
or succession; and 4) transfer of interest by a partner,
MUST THE BENEFICIARY IN PROPERTY HAVE joint owner, or common owner, to another partner,
INSURABLE INTEREST ON THE PROPERTY joint owner or common owner.
- YES, as no contract or policy of insurance on Bar Exam (1980):
property shall be enforceable. Except for the Q: A insures his house for P 10, 000 commencing
benefit of some person having insurable January 1, 1952. On February 15, 1952, A sells the
interest in the property insured. house to B for P15,000 without endorsing or
transferring the fire policy to B. On April 20, 1952,
the house is completely destroyed on account of



the accidental fire. Can A or B collect the proceeds insurable interest or create a liability against him,
of the policy from the insurer? Explain and give may be insured against (Sec. 3).
reasons for your answer. (1952, 1959, 1980 Bar)
A: Neither A, the seller, nor B, the buyer, can collect SECURE
under the policy. A transfer of interest in property
without any transfer of interest in the insurance 1. The consent of the husband is not necessary for
suspends the latter until the interest in the property the validity of an insurance policy taken by a
and in the insurance is vested in the same person. A married woman on her life and that of her
has transferred his interest in the object of the children. Under Art. 145 of the Family Code, she
insurance (the house) to B without a transfer of his can also insure her separate property without the
interest in the insurance to B. As the interests in the consent of the husband.
object and in the insurance are in different persons at
the time of the loss, none can recover under the policy. 2. A minor may take out a contract for life, health
and accident insurance with any company
WHAT CHANGE IS CONTEMPLATED authorized to do business in the Philippines,
An absolute transfer of the property not life, provided it be taken out on his own life and the
a lease/mortgage. beneficiary named is his estate, father, mother,
husband, wife, child, brother or sister. In so doing,
EXCEPTIONS TO THE REQUIREMENTS OF the married woman/minor may exercise all the
INSURABLE INTEREST: rights or privileges under the policy.
(1) Life, health or accident insurance because they
are not contracts of indemnity and insurable But – What is the effect of the death of the original
interest is not required at the time of loss; owner of a policy, which covers the life of a minor,
(2) A change of interest after occurrence of an ahead of the minor? – all rights, title and interest in the
injury and results in loss – does not affect the policy shall automatically vest in the minor unless
right of the insured to indemnity; otherwise provided in the policy;
- After a loss, the liability of the insurer is
(3) A change of interest in one or more several An insurance for or against the drawing of any
distinct things, separately insured by one lottery or for or against any chance or ticket in a
policy, does not avoid as to the others; (Sec. lottery drawing or prize. Because gambling results
22) in profit and insurance only seeks to indemnify the
(4) A change of interest in one or more several insured against loss (Sec. 4).
distinct things, separately insured by one
policy, does not avoid the insurance as to the PARTIES TO A CONTRACT OF INSURANCE:
insured; (Sec. 23) 1. INSURER – every person, partnership, association
(5) A transfer of interest by one or several or corporation duly authorized to transact
partners, joint owners, or owners in common, insurance business as provided in the code may be
who are jointly insured – to the others, does an insurer. It is the party who agrees to indemnify
not avoid insurance even though it has been another upon the happening of specified
agreed that the insurance shall lease upon an contingency.
allocation of the thing insured;
(6) When notwithstanding a prohibition, the 2. INSURED – party to be indemnified in case of loss
consent of the insurer is obtained; and (Sec. 6). Anyone except a public enemy (a nation
(7) When the policy is so framed that it will insure at war with Philippines and every citizen subject
to the benefit of whomsoever may become the of such nation.
owner during the continuance of the risk.
BAR EXAM; 2000 (VIII - a)
CONTINUATION OF ELEMENTS: Q: May a member of the Moro Islamic Liberation
1. Insurable interest; Front ( MILF ) or it’s breakaway group, the Abu
2. The insured is subject to risk of loss through Sayaff, be insured with a company licensed to do
the destruction or impairment of that interest business under the Insurance Code of the
by the happening of the designated risk; Philippines? Explain.
3. The insurer assumes the risk of loss;
4. Such assertion is part of a general scheme to A: A member of the MILF or the Abu Sayyaf may be
distribute actual loss among a large group of insured with a company licensed to do business under
persons bearing somewhat similar risk; the Insurance Code of the Philippines. What is
5. As a consideration for the insurers promise, prohibited to be insured is a public enemy. A public
the insured makes a ratable contribution enemy is a citizen or national of a country with which
called a premium to the general insurance the Philippines is at war. Such member if the MILF or
fund; the Abu Sayyaf is not a citizen or national of another
country, but of the Philippines.
Any unknown or contingent event, whether
past or future, which may damnify a person having




Both the mortgagor and the mortgagee may Note: Union Mortgage Clause – creates the relation
take out separate policies with the same or different of insured and insurer between mortgagee and the
companies. The mortgagor – to the extent of his insurer independent of the contract of the mortgagor.
property, the mortgagee – to the extent of his credit; In such case, any act of the mortgagor can no longer
(Sec. 8) affect the rights of the mortgagee – the insurance
contract is now independent of that with the
(2005 BAR EXAM (N0. X - 2- a)
Condition 3 is what is known as “other a. The mortgagee may collect from the insurer upon
insurance clause” which is a valid provision allowed the occurrence of the loss to the extent of his
by the insurance code in order to prevent in an credit.
increase in the moral hazard and to serve as a b. Unless otherwise stated, the mortgagor cannot
warranty that no other insurance exists. Its collect the balance of the proceeds after the
incorporation in fire policies prevents over insurance mortgagee is paid.
and adverts the perpetration of fraud. Its violation will c. The insurer, after payment to the mortgagee,
thus avoid the policy. However, in order to constitute a becomes subrogated to the rights of the
violation, the other insurance must be upon the same mortgagee against the mortgagor and may collect
subject matter, the same interest therein, and the the debt to the extent paid to the mortgagee.
same risk. d. The mortgagee after payment cannot collect
Double insurance exists where the same anymore from the mortgagor but if he is unable to
person is insured by several insurers separately in collect in full from insurer, he can recover from
respect of the same subject and interest. the mortgagor.
The court ruled that since the stocks in trade e. The mortgagor is not released from the debt
insured with PFIC were mortgaged property, separate because the insurer is subrogated in place of the
insurances covering different insurable interests may mortgagee.
be obtained by the mortgagor and mortgagee. The
insurable interests of a mortgagor and mortgagee are 3. BENEFICIARY – the person who receives the
separate and distinct, thus no double insurance exists benefits of an insurance policy upon maturity.
since the policies of PFIC do not cover the same
interest as that covered under the policy of Country
Banker’s Insurance Corp. The non-disclosure of the BENEFICIARIES IN LIFE INSURANCE
policies with PFIC was not fatal to Armando’s right to  Anyone, except who are prohibited by law to
recover on his policy with Country Banker’s Insurance receive donations from the insured. Note Art.
Corp. 739 of the Civil Code, hence the following
cannot be designated as beneficiaries.
WHAT ARE THE CONSEQUENCES WHERE THE  Those made between persons guilty of
MORTGAGOR INSURES THE PROPERTY adultery or concubinage at the time of the
LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS  Those guilty of the same criminal offense in
THE POLICY TO HIM: consideration thereof.
BAR EXAM (2008)
a. The insurance is still deemed to be upon the
interest of the mortgagor who does not cease to Q: On January 1, 2000, Antonio Rivera secured a
be a party to the original contract. Hence, if the life insurance from SOS Insurance Corp. for P1
policy is cancelled, notice must be given to the Million with Gemma Rivera, his adopted daughter,
mortgagor. as the beneficiary. Antonio Rivera died on March 4,
b. Any act of the mortgagor, prior to loss, which 2005 and in the police investigation, it was
would otherwise avoid the policy or insurance, ascertained that Gemma Rivera participated as an
will have the same effect although the property accessory in the killing of Antonio Rivera. Can SOS
is in the hands of the mortgagee. Hence, if there Insurance Corp. avoid liability by setting up as a
is a violation of the policy by the mortgagor, the defense the participation of Gemma Rivera in the
mortgagee cannot recover. killing of Antonio Rivera? Discuss with reasons.
c. Any act required to be done by the mortgagor A: Sec. 12: The interest of a beneficiary in a life
may be performed by the mortgagee with the insurance policy shall be forfeited when the
same effect if it has been performed by the beneficiary is the principal, accomplice, or accessory in
mortgagor. willfully bringing about the death of the insured; in
d. Upon the occurrence of the loss, the mortgagee which event, the nearest relative of the insured shall
is entitled to recover to the extent of his credit receive the proceeds of said insurance if not otherwise
and the balance if any to be paid to the disqualified. Thus, the insurance company must still
mortgagor, since such is for both their benefits; pay out the proceeds of the life insurance policy to the
e. Upon recovery by the mortgagee, his credit is nearest qualified relative of the insured.



irrevocable beneficiary is revocable as the

Those made to a public officer or his wife, instance of the innocent spouse in cases of
descendants/ascendants by reasons of his office. termination of:
(1) a subsequent marriage;
- A prior conviction for (2) nullification of marriage;
adultery/concubinage is not required, it (3) annulment of marriage; and
can be proven by preponderance of evidence (4) legal separation (Art. 34, (4) Family
in the same action nullifying the designation. Code
Note the cases of Insular Life vs. Ebrado, 80
SCRA 181, where a common law wife of the
insured who is married could not be named as
a beneficiary and SSS vs. Davac, 17 SCRA 863,
where the insured designated his second wife
as a beneficiary was upheld as the latter was The beneficiary has a vested right that cannot
not aware of the first marriage. be taken away without his consent. In fact should the
insured discontinue payment of the premium, the
Beneficiary in life and property insurance (BAR beneficiary may continue paying. Neither can the
EXAMS; 2005) insured get a loan or obtain the cash surrender value
of the policy without his consent (Nario vs.
Philippine American Life Insurance Company v. Philamlife, 20 SCRA 434).
Pineda (175 SCRA 416)
Note: Where the wife and minor children were named
irrevocable beneficiaries, wife dies, the husband seeks
to change the beneficiaries with the consent of the
Under the law, the beneficiary designated in a
children. The consent is not valid due to minority.
life insurance contract cannot be changed without his
(Philamlife vs. Pineda, 170 SCRA 416)
or her consent because of the beneficiary’s vested
interest in the policy. In this regard, it is worth nothing
that the beneficiary designation indorsement which BAR EXAM; 2005 (NO. IX -1)
forms part of the policy in the name of Rodolfo Q: What are the effects of an irrevocable
Dimayuga states that the designation of the designation of a beneficiary under the Insurance
beneficiaries is irrevocable and no right or privilege Code? Explain.
under the policy may be exercised, or agreement made
with the insurance company to any change in or A: The irrevocable beneficiary has a vested interest in
amendment to the policy without the consent of the the policy, including its incident such as the policy loan
said beneficiary. Accordingly, based on the provisions and cash surrender value. (Grogorio v. Sun Life
of the contract and the law applicable, it is only with Assurance Company of Canada, 48 Phil. 53 [1925])
the consent of all the beneficiaries that any change or
amendment to the policy concerning the irrevocability 2005 BAR EXAM (NO. IX- 2)
of beneficiaries may be legally and validly effected.
Q: Jacob obtained a life insurance policy for P1
Million designating irrevocably Diwata, a friend, as
Insurable interest on property
his beneficiary. Jacob, however, changed his mind
(BAR EXAMS, 2009)
and wants Yob and Jojo, his other friends, to be
included as beneficiaries considering that the
Spouses Nilo Cha v. CA Aug. 18, 1997
proceeds of the policy are sufficient for the three
friends.Can Jacob still add Yob and Jojo as his
beneficiaries? Explain.
1. The lessor cannot validly be a beneficiary of the
fire insurance policy taken by the spouses Cha. It A: The insured cannot add other beneficiaries as this
has no insurable interest on the merchandize would diminish the interest of Diwata who is the
irrevocably designated beneficiary. The insured can
insured because it remains with the spouses.
only do so with the consent of Diwata.
2. The automatic assignment of the policy to the
lessor is void for being contrary to law and public
policy. The proceeds of the fire insurance policy
rightfully belong to the Sps. Cha.
3. The insurer cannot be compelled to pay the His interest is contingent as benefits are to be
paid only if the assured dies before the specified
proceeds of the policy to the lessor who has no
period. If the insured outlives the period, the benefits
insurable interest on the property insured.
are paid to the insured.
- The insured shall have the right to change the WHAT IS THE EFFECT OF FAILURE TO DESIGNATE
beneficiary he designated – unless he has OR BENEFICIARY IS DISQUALIFIED
expressly waived the right in the policy (Sec.
The benefits of the policy shall accrue to the
estate of the insured.
- If he has waived the right, the effect is to
make the designation as irrevocable. Note
that the designation of the guilty spouse as



WHO RECOVERS IF BENEFICIARY PREDECEASES after effectivity but before reinstatement

THE INSURED must be disclosed.
 If designation is irrevocable, the legal
representatives of the beneficiary may recover HOW IS THE MATERIALITY OF THE CONCEALMENT
unless it was stipulated that the benefits are OR REPRESENTATION DETERMINED?
payable only “if living.”
Determined not by the event, but solely by the
 If revocable, and no change is made, the benefits
probable and reasonable influence of the facts upon
passes to the estate of the insured. The rule
the party to whom the communication is due, in
holds also if benefits were payable “only if
forming his estimate of the disadvantages of the
living” or “if surviving” and the beneficiary dies
proposed contract or in making his inquiries. (Sec. 31)
before the insured.
 Neglect to communicate that which a party
Not necessary. It is sufficient that the non-
knows and ought to communicate (Sec. 26).
revelation has misled the insurer in forming its
estimate of disadvantage of fixing the premium.
Whether intentional or not, it entitles the
(a) Such fact within his knowledge – as
injured party to rescind the contract of insurance (Sec.
concealment requires knowledge of the fact
concealed by the party charged with
2001 BAR EXAM (N0.XVI)
(b) Fact/s material to the contract – it must be
Q: A applied for a non-medical life insurance. The
of such nature that had the insurer known of
insured did not inform the insurer that one week
it, it would not have accepted the risk or
prior to his application for insurance, he was
demanded a higher premium.
examined and confined at St. Lukes hospital where
(c) That the other party had no means of
he was diagnosed for lung cancer. The insured
ascertaining such fact/s.
soon thereafter died in a plane crash. Is the
(d) That the party with a duty to communicate
insurer liable considering that the fact concealed
makes no warranty (Sec. 28) – as the existence
had no bearing with the cause of death of the
of a warranty make the requirement to disclose
insured? Why?
superfluous but – an intentional fraudulent
omission on the part of the one insured to
A: No. The concealed fact is material to the approval
communicate information on a matter proving or
and issuance of the insurance policy. It is well settled
tending to prove falsity of a warranty entitles the
that the insured need not die of the disease he failed to
insurer to rescind. (Sec. 29)
disclose to the insurer. It is sufficient that his non-
disclosure misled the insurer in forming his estimate
of the risks of the proposed insurance policy or in 1996, 1997, and 2001 BAR EXAMS
making inquiries. Sun Life Assurance Co. of Canada vs. CA, June 22,
Robert Bacani was issued life insurance non-medical
policy for P100,000.00 with his mother as
The party claiming existence of concealment beneficiary. In his application, he concealed his
must prove that there was knowledge on the part of confinement at the Lung Center of the Philippines for
the party charged with concealment. certain illness. He died of a plane crash. The
insurance company refused to pay for breach of the
insurance contract.RTC and CA granted the claim of
the beneficiary because the concealed facts were not
material or irrelevant to the cause of death.
- Generally, at the time of the effectivity of SC:
the policy. Note that even if a party did not The SC reversed the ruling and held that the
know of the existence at the crime of information which the insured failed to disclose was
application but before its effectivity, there is material and relevant to the approval and issuance of
concealment. the policy. The facts concealed would have affected
- Information acquired after effectivity is the insurer’s action on the application either by
not concealment and does not constitute charging a higher rate of premium or rejecting the
ground to rescind the policy, as after the same. The insured need not die of the disease he
policy is issued, information subsequently concealed. It is sufficient that his non-disclosure
acquired is no longer material as it will not misled the insurer in forming his estimate of the risk
affect or influence the party to enter into involved or in making inquiries. The contract of
contract. However, in case of the insurance can be rescinded by reason of concealment
reinstatement of a lapsed policy, facts known and this has to be exercised within the two year
contestability period.


It is exercised previous to the commencement
 Oral or written statement of a fact or a condition
of an action on the contract (Sec. 48). Note the case of
affecting the risk made by the insured to the
Tan Chay Hing vs. West Coast Life Insurance Co., 51
insurance company, tending to induce the insurer
Phil 80, where an insurer interposed the defense in an
to take the risk. (Sec. 36)
action to claim the proceeds that the contract is null
WHEN MAY REPRESENTATION BE MADE and void. Section 48 was held to apply only when
there is a contract to rescind.
Since it is an inducement to entering a
contract – it must ordinarily be made at the same time It is also qualified by 2nd paragraph of
as or before – the insurance of the policy (Sec. 37). Section 48 which provides that after a policy of life
Note that it can also be made after the issuance of the insurance payable on the death of the insured shall
policy when the purpose thereof is to induce the have been in force during the lifetime of the insured
insurer to modify an existing insurance contract – as for a period of 2 years from the date of issue or its last
the provisions also apply to a modification (Same with reinstatement, the insurer cannot prove that the policy
concealment) is void ab initio or is subject to rescission by reason of
a fraudulent concealment or misrepresentation of the
insured or his agent (known as the incontestability
It may be Oral or Written and can either be: clause).
(a) Affirmative –an affirmation of a fact WHAT IS THE THEORY AND OBJECT BEHIND THE
existing when the contract begins. INCONTESTABILITY CLAUSE
(b) Promissory –statement by the insured
(a) On the part of the insurer – an insurer
concerning what is to happen during the
has/should have a reasonable
term of the insurance.
opportunity to investigate the statements
which are made by the applicant an that
IS A REPRESENTATION PART OF THE CONTRACT after a definite period, it should no longer
be permitted to question its validity.
No, it cannot qualify as an express provision
(b) On part of the insured – its object is to
in a contract (it is a collateral inducement to the
give the greatest possible assurance that
contract but it may qualify an implied warranty. (Sec.
the beneficiaries would receive payment
of the proceeds without question as to
Yes, as long as the insurance has not yet been REQUISITES OF INCONTESTABILITY CLAUSE
effected and the insurer has not yet been induced to
(1) It is a life insurance policy;
issue the policy. If withdrawn or altered afterwards,
(2) It is payable on the death of the insured;
the contract can be rescinded as the insurer has
(3) It has been in force during the lifetime of
already been led to issue the policy. (Sec. 41)
the insured for at least two years from
TO WHAT DATE DOES A REPRESENTATION REFER date of issue/or last reinstatement.
It must be presumed to refer to the date on which
the contract goes into effect. (Sec. 42) WHAT DEFENSES ARE NOT BARRED BY
Note: There is no false representation if it is true at YEARS?
the time the contract takes effect although false at the
time it is made. (1) non-payment of premiums;
(2) lack of insurable interest;
WHEN IS THE INSURED REQUIRED TO DISCLOSE (3) that the cause of death was excepted or
INFORMATION FROM A 3RD PERSON not covered by the terms of the policy;
When the information material to the (4) that the fraud was of a particular vicious
transaction was acquired by an agent of the insured, as type such as:
knowledge of the agent is also knowledge of the a. policy was taken in furtherance of a
principal. scheme to murder the insured;
b. where the insured substituted
WHAT IS THE EFFECT OF MISREPRESENTATION another for the medical examination;
ON A MATERIAL POINT? c. where the beneficiary feloniously
If it is false on material point, whether killed the insured;
affirmative or promissory – the injured party is (5) violation of a condition in the policy
entitled to rescind the contract from the time the relating to military or naval service in
representation becomes false. However, the right to time of war;
rescind is considered waived by the acceptance of (6) the necessary notice or proof of death
premium payments despite knowledge of the ground was not given;
to rescind. (Sec. 45) (7) action is not brought within time
specified in the policy, which in no case
should be less than 1 year as per Sec. 63.



(1) A cover note is valid for 60 days whether

CONCEALMENT AND REPRESENTATION or not a premium is paid but may be
COMPARED cancelled by either party upon at least 7-
day notice to the other party.
In concealment – the insured withholds
(2) If the other note is not cancelled, a
information of material facts, while in
regular policy must be issued within 60
representation – the insured makes
days from the date of issue of the cover
erroneous statements;
note including within its terms the
2. In concealment and misrepresentation both
identical insurance.
give the insurer the right to rescind the
(3) It may be extended with the written
contract of insurance;
approval of the commissioner but may be
3. The materiality of concealment and
dispensed with by a certification of the
representation are determined by the same
President, Vice-President or General
Manager of the insurer that the risks
4. Whether the concealment or representation
involved and the extension do not violate
is intentional or not, the injured party can
the code.
(4) Insurance companies may impose a
5. Since insurance contracts are of utmost good
deposit premium equivalent to at least
faith – the insurer is also covered by the
25% of the estimated premium but in no
case less than Php500.00.
 It is the written instrument in which a
contract of insurance is set forth. (Sec. 49)
A policy must specify: Cover note held to be binding despite the
absence of a premium payment for its issuance. No
(1) The parties whom the contract is made;
separate premiums are intended or required to be
(2) The amount to be insured except in open
paid on a cover note because they do not contain
or running policies;
particulars of the property insured that would
(3) The premium, or if the premium is to be
serve as the basis for the computation of
determined at the termination of the
premiums – such being the case no premium can be
contract, a statement of the basis and
fixed. The cover notes should not be treated as a
rates upon which the final premium is to
separate policy but should be integrated in the regular
be determined;
policy subsequently issued so that premiums on the
(4) The property or life insured;
regular policy should include that for the cover note
(5) The interest of the insured in the
(Pacific Timber vs. CA, 112 SCRA 199);
property insured, if not the absolute
owner; BAR EXAM; 2009 (IV)
(6) The risks insured against; Q: Antarctica Life Assurance Corporation (ALAC)
(7) The period during which the insurance is publicly offered a specially designed insurance
to continue. (Sec. 51) policy covering persons between the ages of 50 to
75 who may be afflicted with serious and
COVER NOTES debilitating illnesses. Quirico applied for
insurance coverage, stating that he was already 80
 It is a written memorandum of the most years old. Nonetheless, ALAC approved his
important terms of a preliminary contract of application.Quirico then requested ALAC for the
insurance intended to give protection pending issuance of a cover note while he was trying to
investigation by the insurer of the risk or until raise funds to pay the insurance premium. ALAC
the insurance of the formal policy (Sec. 52). It granted the request. Ten days after he received the
is also known as binding slip or receipt or cover note, Quirico had a heart seizure and had to
binder. be hospitalized. He then filed a claim on the policy.

EFFECTIVITY OF A COVER NOTE a. Can ALAC validly deny the claim on

the ground that the insurance coverage, as
The effectivity of a cover note is 60 days – as
publicly offered, was available only to
within such period, a policy shall be issued including
persons 50 to 75 years of age? Why or why
in its terms the identical assurance found under the
not? (2%)
cover rate and the premium therefore. It may
b. Did ALAC’s issuance of a cover note
however, be extended beyond 60 days and with the
result in the perfection of an insurance
written approval of the Insurance Commissioner if he
contract between Quirico and ALAC?
determines that it does not violate the Insurance Code.
PROMULGATED BY THE INSURANCE A: a. No. There was no concealment on the part of
COMMISSIONER: Quirico as to his age.



b. Yes, one of the exception of the cash and carry rule

is in life insurance when the grace period applies. in (6) The mere transfer of a thing insured does not
the case at bar, the issuance of the cover note shows transfer the policy but suspends it until the
that the insurer granted a grace period. same person becomes the owner of both the
policy and the thing insured (Sec. 58). Note the
exceptions to this rule as found in Sec. 20-24
(1) The insurance proceeds shall be applied and 57.
exclusively to the proper interest of the
person in whose name or for whose benefit it
is made unless otherwise specified in the
policy (Sec. 53).  Open Policy - value of the thing insured is
not agreed upon, but is left to be
MAY A 3RD PERSON SUE THE INSURER – No, in ascertained in case of loss (Sec. 60). What
general rule unless there is stipulation. Unless is mentioned, as the amount is not the
otherwise specified in the policy, a 3RD person may sue value of the property but merely the
if: maximum limit of the insurer’s liability. In
case of loss, the insurer only pays the
(a) The insurance contract contain stipulation actual cash value at the time of loss.
in favor of a 3RD person, the latter though not
a party may sue to enforce before the contract  Valued Policy - expresses on its face that
is revoked by the parties; the thing insured shall be valued at a
(b) The insurance contract provides for specified sum (Sec. 61). The valuation of
indemnity against liability to 3RD persons. the property insured is conclusive
The test to determine whether a between the parties. In the absence of
3rd person may directly sue the insurer of fraud or mistake, such value will be paid in
the wrongdoer is: if the contract provides case of a total loss.
indemnity against liability to 3RD persons, then
the latter to whom the insured is liable may  Running Policy (Floating Policy) -
directly sue the insurer, on the other hand, if contemplates successive insurances and
the insurance if for the indemnity against actual which provides that the object of the
loss or payment – then the 3rd person cannot sue policy may be from time to time defined
the insurer – recourse is against the insured especially as to the subjects of insurance,
alone. by additional statements or indorsements
(2) If the contract is executed with an agent or (Sec. 62). This is also known as a Floating
trustee as the insured, the fact that his Policy – usually issued to provide
principal or beneficiary is the real party in indemnity for property, which cannot be
interest may be indicated by describing the covered by specific insurance because of a
insured as the agent/trustee or by general frequent change in location and quantity.
words in the policy (Sec. 54). If not indicated,
it is as if the insurance is the taken out by the VALUED POLICY vs. OPEN POLICY
agent/trustee alone, consequently the
principal has no right against the insurer; VALUED POLICY OPEN POLICY
Proof of value of the Insured must prove the
(3) If a partner or part owner effects insurance, it thing after the loss is value of the thing
is necessary that the terms of the policy not necessary. insured.
should be such as are applicable to the joint
or common interest so that it may be Parties have Value is not agreed but
applicable to the interest of his co- conclusively stipulated left to be ascertained
partners/owners (Sec. 55). Consequently, the that the property upon loss.
policy must state that the interest of all is insured is valued at a
insured, if not, it is only the interest of the one specified sum.
getting the policy that is insured;

(4) When the description of the insured in the CAN THERE BE AGREEMENTS AS TO
policy is so general that it may comprehend PRESCRIPTION OF AN ACTION OR LIMITATIONS
any person or any class of persons, only he ON THE PERIOD OF TIME TO BRING AN ACTION
who can show that it was intended to include
Yes, provided the period agreed upon should
him can claim the benefit of the policy (Sec.
not be less than one year (Section 63). If less than
one year, the agreement is void. The period so agreed
shall be considered as having commenced from the
(5) When a policy is so framed that it will inure to
time the cause of action accrues. Usually, the cause of
the benefit of whomsoever, during the
action accrues from the date of the insurers rejection
continuance of the risk may become the owner
of the claim of the beneficiary or of the insured – since
of the interest insured (Sec. 57). The proceeds
before rejection there is no necessity to bring suit.
become payable to who may be the owner at
When no period is stipulated or if the stipulation is
the time the loss or injury occurs. This is an
void, the period is within 10 years under article 1144,
exception to Sec. 20.



New Civil Code, it being a written contract (Eagle Star (1) Affirmative – those that relate to matters
vs. Chia Yu 96 Phil 696, ACCFA vs. Alpha Insurance, 24 that exist at or before the issuance of the
SCRA 151). policy;

(2) Promissory – those where the insured

WHERE IS THE ACTION FILED promises or undertakes that certain
matters shall exist or will be done or will
The action may be filed in the following:
be omitted after the policy takes effect. It
(1) Courts; is a statement in the policy, which
(2) Insurance Commissioner, who has imparts that it is intended to do or not to
concurrent jurisdiction with courts for do a thing which materially affects the
claims not exceeding Php100,000.00; risk, is a warranty that such act or
(3) POEA/DOLE have the power to compel a omission shall take place (Section 72);
surety to make good on a solidary
undertaking in the same proceeding
(3) Express – a statement in a policy of a
where the liability of the principal obligor
matter relating to the person or thing
is determined.
insured or to the risk as a fact (Section
Note that the claim becomes action upon filing with
71) and where the assertion or promise
the court.
is clearly set forth in the policy or
CANCELLATION OF THE POLICY incorporated therein by reference. They
can be affirmative or promissory
If policy other than life shall be cancelled by the
insurer except upon prior notice thereof to the
insured. No notice of cancellation shall be effective
if not based on the occurrence, after effective date An express warranty made at or before
of one or more grounds: (Section 64) the execution of the policy should be
contained (a) in the policy itself (b) in
(1) Non payment of premium;
another instrument signed by the insured
(2) Conviction of a crime arising out of acts
and referred to in the policy as making a
increasing the hazard insured against
part of it (Section 70). This includes a
(3) Discovery of material representation;
rider – it is a part of the policy, it need
(4) Discovery of willful or reckless acts or
not be signed unless the rider was issued
omissions increasing the hazard insured
after the original policy took effect;
(5) Physical changes in the property insured (4) Implied – where the assertion or
which the result in the property being promise is not expressly set forth in the
uninsurable; policy but because of the general tenor of
(6) Determination by the insurance the terms of the policy or from the very
commissioner that continuation of the nature of the insurance contract, a
policy would place the insurer in warranty is necessarily inferred or
violation of the code: understood. Note that the law only
provides for implied warranties in
contracts of marine insurance. See Sec.
113 (seaworthiness) and 126 (deviation).
It must be in writing, mailed or delivered to
the name insured at the address shown in the policy
which shall state:
 The violation of a material warranty, or other
(1) The grounds relied upon as per Section
material provision of the policy, on the part of
64, and;
either party thereto, entitles the other to
(2) That upon written request of the named
rescind (Sec. 74). Note that the insured can
insured, the insurer will furnish the facts
exercise the right also when the insurer violates
on which cancellation is based (Sec. 65).
a warranty, like when it refuses to grant a loan
on the policy.
WARRANTIES  Note that a causal connection between the
violation of the warranty is not necessary – So,
 It is a statement or promise stated in the policy or
even if the violation did act contribute in the
incorporated therein by reference, whereby the
loss – the other party may still rescind.
insured – expressly or impliedly (Section 67)
contracts as to the past, present or future (Section
68) existence of certain facts, conditions or THE NON PERFORMANCE OF A PROMISSORY
circumstances – the literal truth of which is WARRANTY DOES NOT AVOID THE POLICY WHEN
essential to the validity of the contract. BEFORE THE ARRIVAL OF THE TIME FOR
KINDS OF WARRANTIES (1) The loss insured against happens;
(2) The performance becomes unlawful at
the place of the contract;



(3) The performance becomes impossible. 2. When the insurer makes a written
acknowledgment of the receipt premium; (Sec.
3. Section 77 may not apply if the parties have
WARRANTY REPRESENTATION agreed to the payment of the premium in
installments and partial payment has been made
Part of the contract Merely a collateral at the time of the loss; (Makati Tuscany
inducement thereto Condominium Corp. v. CA, 215 SCRA 462)
Expressly set forth in May be oral or written 4. If the insurer granted the insured a credit term
the policy or in another statement for the payment of the premium and loss occurs
incorporated therein before the expiration of the term, recovery
by reference should be allowed even the premium is paid after
Strictly and literally Must be substantially the loss but within the credit term;
performed true 5. Where the parties are barred by estoppel.

Presumed material Must be shown to be so

Breach of warranty is a Misrepresentation is a
breach of the contract ground to rescind the Ordinarily, the obligation to pay premium
itself contract when due is considered an indivisible obligation.
Hence, forfeiture is not prevented by a part payment
unless, payment by installment has been agreed upon
PREMIUM or is the established practice – the basic principles of
equity and fairness would not allow the insurer to
 The agreed price for assuming and carrying collect and accept installments and later deny liability
the risk. as premiums were not paid in full.
The insurer is entitled to the payment of a payment to the insurance company.
premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement WHEN IS THE INSURED ENTITLED TO A RETURN
to the contrary, no policy or contract of insurance OF THE PREMIUMS PAID? 2000 BAR EXAM (IX – a)
issued by an insurance company is valid and binding The insured is entitled to a return when:
unless and until the premium is paid except in:
(1) To the whole premium, when no part of
(1) In case of life or industrial life (life the interest in the thing insured is
insurance policy where the premium is exposed to any of the perils insured
payable monthly or oftener) whenever against (Sec. 79 –A);
the grace period applies (Sec. 77); (2) Where the insurance is made for a
(2) When the insurer makes a written definite period of time and the insured
acknowledgement of the receipt of surrenders his policy before the
premium, such is conclusive evidence of expiration of the period, here the insured
the payment of the premium to make it only recovers a portion of the policy
binding notwithstanding any stipulation premiums corresponding with the
therein that it shall not be binding until unexpired time but it does not apply if:
the premium is paid (Sec. 78) HENCE, the (a) the policy is not so definite;
effect of an acknowledgement in a (b) a short period rate (insurance is
policy or contract of insurance of the for a period of less than a year
receipt of the premium – is that it is and a rate has been agreed to if
conclusive evidence of payment – so far the policy is surrendered;
as to make the policy binding. However, Example: If the policy is in force
it is conclusive only to make the policy for a month the insurer retains
binding and not for the purpose of 20% of the premium) has been
collecting premium, and; agreed upon;
(3) Where the obligee has accepted the bond (c) the policy is a life insurance
or suretyship contract in which case such policy – it is indivisible but he
bond or suretyship contract becomes has a cash surrender value;
valid and enforceable irrespective of (3) When the contract is voidable on account
whether or not the premium has been of fraud or misrepresentation of the
paid by the obligor to the surety (Sec. insurer or the agent (Sec. 81);
177). (4) Where the contract is voidable on
account of facts, the existence of which
EXCEPTIONS TO SECTION 77: the insured was ignorant without his
fault (Sec. 81);
UCPB General Insurance Inc. vs .Masagana (5) When by any default of the insured other
Telemart, Inc. (G.R. No. 137172 April 4, 2001) than actual fraud, the insurer never
incurred any liability under the policy
1. When the grace periods applies; (Sec. 77) (Sec. 81);



(6) In case of over insurance. Here the Q: Alfredo took out a policy to insure
insurance is in excess of the amount of his commercial building against fire. The broker
the insurable interest of the insured and for the insurance company agreed to give a 15-day
it is insured by several insurers, the credit within which to pay the insurance premium.
insured is entitled to a RATABLE Upon delivery of the policy on May 15, 2006,
RETURN OF PREMIUM, proportional to Alfredo issued a postdated check payable on May
the amount by which the aggregate sum 30, 2006. On May 28, 2006, a fire broke out and
insured in all the policies exceeds the destroyed the building owned by Alfredo.Reason
insurable value; briefly in (a), (b) and (c).
a. May Alfredo recover on the insurance policy?
A: Yes, Alfredo can recover on the insurance policy.
Premiums cannot be recovered: Although Section 77 of the Insurance Code provides
that in fire insurance, payment of premium is
(1) If the peril insured against has existed,
necessary for validity of the policy (also known as
and the insurer has been liable for any
“cash and carry” provision), nonetheless, the rule has
period, the period being entire and
been modified by the decisions of the Supreme Court
indivisible (Sec. 80).
after the promulgation of the Insurance Code. Thus, in
(2) In life insurance – (Sec. 79-b) cash
UCPB General Insurance v. Masagana Telemart, G.R.
surrender value.
No. 137172, April 4, 2001, it was held that the insured
(3) When the insured is guilty of fraud or
should be allowed to recover on losses sustained even
misrepresentation (Sec. 81).
when premium was paid after the fact of loss,
provided payment was received by the insurer during
LOSS AND NOTICE OF LOSS the credit period given to the insured. (See also South
Sea Surety v. Court of Appeals, G.R. No. 102253, June
WHAT ARE THE RULES TO DETERMINE WHETHER 2, 1995; American Home Assurance v. Chua, G.R. No.
THE INSURER IS LIABLE FOR THE LOSS OF THE 130421, June 28, 1999) where the Supreme Court
THING INSURED? ruled that is the check payment for premium was
received by the insurer prior to the loss or within the
1. Loss of which a peril insured is the proximate credit period, the insured was allowed to recover.
b. Would your answer in (a) be the same if it was
2. Loss caused by efforts to rescue the thing found that the proximate cause of the fire was an
insured from a peril insured against that explosion and that fire was but the immediate
would otherwise have caused a loss, if in the cause of loss and there is no excepted peril under
course if such rescue, the thing is exposed to the policy?
peril not insured against, which permanently Yes, recovering under an insurance contract is
deprives the insured of its possession in allowed if the cause of the loss was either the
whole or in part, or where a loss is caused by proximate or the immediate cause as long as an
efforts to rescue the thing insured from a peril expected peril was not the proximate cause of the loss.
insured against (Sec. 85). Here the principle of (Section 86, Insurance Code of the Philippines.) The
proximate cause is extended to loss incurred fire being the immediate cause for the loss of
while saving the thing insured. the commercial building, would warrant recovery
under the policy.
3. Where a peril is especially excepted in a
contract of insurance a loss, which would not c. If the fire was found to have been caused by
have occurred but for such peril, is thereby Alfredo's own negligence, can he still recover on
excepted although the immediate cause of the the policy?
loss was a peril which was not excepted (Sec. Yes, he can still recover. The doctrine of contributory
86). The immediate cause is the CAUSE OR negligence does not in any way apply to rights under a
CONDITION NEAREST THE TIME AND PLACE contract of insurance, unless it is a case of willful act.
OF THE INJURY. Here, the insurer will be (Section 87, Insurance Code of the Philippines)
liable if both the immediate cause and the
proximate cause are not excepted. If the RECOGNIZING THAT THERE ARE PROBLEMS IN
proximate cause is excepted and the DETERMINING PROXIMATE CAUSE – NOTE THE
immediate cause is not, the insurer is not FOLLOWING RULES:
(a) If there is a single cause which is an insured
4. An insurer is not liable for loss caused by the peril, clearly it is the proximate cause and
willful act or through the convenience of the there is liability;
insured; but he is not exonerated by the (b) If there are concurrent causes (those
negligence of the insured, or of the insured’s happening together) with no excluded perils,
agent or others (Sec. 87). there if liability if one of the causes is an
insured peril, the others may be ignored;
2007 BAR EXAM (IV) (c) If there are concurrent causes with an
excepted peril (insured peril operate together



to produce the loss) the claim will be outside 2. If the insurer omits to make an objection
the scope of the policy; promptly and specifically on that ground. –
(d) But if the results of the operation of the despite delay, the insurer does not object (Sec.
insured peril can be clearly separated from 91).
the effects of the excepted peril, the insurer is
(e) Where a number of causes operate one from INSURER SUBSEQUENT TO GIVING OF NOTICE OF
the other, the original cause happens to be a LOSS
peril, the insurer is liable.
In property insurance, after the insured has
received payment from the insurer of the loss covered
by the policy, the insurance company is SUBROGATED
An agreement not to transfer the claim of the to the rights of the insured against the wrongdoer or
insured after the loss happens – is VOID if MADE the person who has violated the contract. The right of
BEFORE THE LOSS except as otherwise provided in subrogation accrues upon payment of the insurance
case of life insurance (Sec. 33). claim.

This means that the insured has an absolute NOTE: Subrogation takes effect by operation of law
right to transfer his claim against the insurer AFTER and does not require the consent of the wrong doer
THE LOSS occurs, what is prohibited is a transfer prior (Fireman’s Fire Insurance vs. Jamilla & Company, 70
to the loss. SCRA 323).
This is so because such stipulation after the
loss occurs shall hinder the transmission of property. THERE IS NO SUBROGATION IN:
Neither does it affect the insurer as its liability is
already fixed and what is actually assigned is the (a) Life insurance as it is not a contract of
money claim, not the contract itself. indemnity
The exception in Sec. 173 that provides that (b) When proximate cause of the loss is the
the transfer of a fire insurance policy to any person or insured himself
company who acts as an agent for or otherwise (c) When the insurer pays to the insured a loss
represents the issuing company is prohibited and is not covered by the policy;
void insofar as it affects other creditors of the insured.
NOTICE AND PROOF OF LOSS Where the same person is insured by several
Notice of loss must be given without insurers separately in respect to the same subject or
unnecessary delay by the insured or some person interest (Sec. 91).
entitled to the benefit of the insurance. IF NOT THEN,
the insurer is exonerated (Sec. 88). 2005 BAR EXAM (N0. X – 2 -b)
Q: What is the nature of the liability of the several
WITHOUT UNNECESSARY DELAY – is within a insurers in double insurance? Explain.
reasonable time, depending on circumstances of a
peculiar case, although courts have construed the A: In double insurance, the insurers considered as co-
requirement liberally in favor of the insured. insurers. Each one is bound to contribute ratably to
the loss in proportion to the amount for which he is
PROOF OF LOSS liable under his contract. (Section 94(e), Insurance
If the policy requires Preliminary Proof of Code.
Loss (evidence given the insurer of the occurrence of
the loss, its particulars, and data necessary to enable it REQUISITES OF DOUBLE INSURANCE:
to determine liability and the amount thereof) IT IS 1. Same person is insured;
NOT NECESSARY that the insured give such proof – AS 2. There are several insurers;
MAY OR WOULD BE NECESSARY IN A COURT OF 3. Subject insured is the same;
JUSTICE WHAT IS SUFFICIENT is the BEST EVIDENCE 4. Interest insured is the same;
which he has in his power at that time (Sec. 89). 5. Risk of peril insured against is the
2008 BAR EXAM:
 When the insurer fails to specify to the
insured any defect which the insured can Q: Terrazas de Patio Verde, a condominium
remedy without delay. building, has a value of P50 Million. The owner
insured the building against fire with three (3)
 When the insurer denies liability on a ground insurance companies for the following amounts:
other than that defect in the notice or proof of Northern Insurance Corp. 20M,Sounthern
loss. Insurance Corp.30M, Eastern Insurance Corp.50M.

WHEN IS DELAY IN THE GIVING OF NOTICE a. Is the owner's taking of insurance for the
WAIVED building with three (3) insurers valid?
1. If it is caused by any act of the insurer. Discuss.



b. The building was totally razed by fire. If the or damage (Also known as CONTRIBUTION
owner decides to claim from Eastern CLAUSE).
Insurance Corp. only P50 Million, will the
A: (a). Taking out insurance covering the same Whether the insured, in case of happening of the risk,
property, same insurable interest and same risk with can directly benefited by recovering on both policies?
three insurance companies is “double insurance” If yes – there is double insurance.
recognized under sec 93 of ICP. However, in American
Home Assurance Corp vs. Chua June 28, 1999, the IS DOUBLE INSURANCE VALID?
court referred to the common inclusion of the other - It depends, if there is prohibition in the policy
insurance clause in the fire insurance policies then it is not valid, but if there is no prohibition,
requiring disclosure of co-insurance of the same it is valid provided it must follow the provisions
property with other insurers. of the law.
(b) Insured can recover from Eastern Inssurance Corp -
up to the extent of his loss. However, Eastern may DOUBLE
refuse to pay if the policy contains an “ other INSURANCE
insurance clause” stipulating that non-disclosure of There must be two or One insurer is sufficient.
double insurance will avoid the policy. (Geagonia more insurers.
v. Country Bankers Insurance, 2/6/95). As there is
The total amount of the The value must always
no indication of a contractual prohibition on double or
policies need not exceed be in excess of the
other insurance, all insurance contracts over the
the value of the insurable interest;
building are deemed valid and enforceable.
insurable interest.
The law prohibits double or over-recovery,
not double insurance. Since eastern insured the
property up 50% the total coverage, it is liable for only REINSURANCE
50% of the total actual loss. Eastern Insurance Corp, is Occurs when an insurer procures a 3RD person
liable to the extent of its coverage but may recover one to insure him against loss or liability by reason of such
half of the total indemnity from the co-insurers in the original insurance (Sec. 95).
proportion of 60% (Southern Insurance)- 40 % (
1. When a non-life insurer insured in any one
EFFECTS OF OVER-INSURANCE BY DOUBLE risk or hazard an amount exceeding 20% of its
INSURANCE net worth, the insurer needs reinsurance of
1. Insured, unless the policy otherwise provide, the excess over such limit (Sec. 215 (1)).
may claim payment from the insurers in such 2. When a foreign insurance company
order as he may select up to the amount for withdraws from the Philippines, it should
which the insurers are severally liable under cause its primary liabilities under policies
their respective contracts. insuring residents of the Philippines to be
2. Where the policy under which the insured reinsured by another company authorized to
claims is a valued policy, the insured must transact an insurance business in the
give credit as against the valuation for any Philippines.
sum received by him under any policy
without regard to the actual value of the DOUBLE INSURANCE VS. REINSURANCE
subject matter insured. DOUBLE INSURANCE REINSURANCE
3. Where the policy under which the insured
Insurer remains an insurer Insurer becomes the
claims is an unvalued policy, he must give
credit, as against the full insurable value, for
Subject matter is property Subject matter is the
any sum received by him under the policy.
insurer’s risk or liability
4. Where the insured receives any sum in excess
Same interest and risk is Different interest and
of the valuation in case of a valued policy or
insured with another risk are insured
the insurable value in case of an unvalued
policy, he must hold such sum in trust for the
insurers, according to their right of WHAT KIND OF CONTRACT IS REINSURANCE?
contribution among them;  It is presumed to be a contract of indemnity
5. In relation paragraph (4) – Each insurer is against liability, and merely against
bound, as between himself and the other damage (Sec. 97).
insurers to contribute ratably to the loss in
proportion to the amount for which it is liable  As a RULE, the reinsurer is not liable to the
under his contract. ALSO REFERRED TO AS reinsured for a loss under an original policy if
THE PRINCIPLE OF CONTRIBUTION – the reinsured is not liable to the original
IN ALMOST ALL POLICIES – that should there
be other insurances covering the same
property, the liability of the company would EXTENT OF LIABILITY OF THE REINSURER?
be limited to its ratable proportion of the loss



The liability of the reinsurer is measured by the (a) natural and inevitable action of the
liability of the reinsured to the original policy holder sea;
PROVIDED, it does not exceed the amount of (b) ordinary wear and tear of the ship;
reinsurance. (c) negligent failure of the ship owner to
provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions.
Insurance against loss or damage to: Q: On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping
(a) Vessels, craft, aircraft, vehicles, goods freight, Company (CSC), sank on her voyage from Hong
cargoes, merchandise effects, disbursements, Kong to Manila. Empire Assurance Company
profits, moneys, securities, loses in action, (Empire) is the insurer of the lost cargoes loaded
evidences of debt, valuable papers, bottomry or on board the vessel which were consigned to
respondentia interest and all other kind of Debenhams Company. After it indemnified
property and interests therein, in respect to, Debenhams, Empire as subrogee filed an action for
appertaining to or in connection with any and damages against CSC.
all risks or perils of navigation, transit or b) Assume that the vessel was not seaworthy as in
transportation or while being assembled, fact its hull had leaked, causing flooding in the
packed, crated, baled, compressed, or similarly vessel. Will your answer be the same? Explain.
prepared for shipment or while awaiting
shipment or during any delays, storage, A: When the vessel is not seaworthy, it is an
transshipment or reshipment incident thereto; exception to the hypothecary principle in maritime
commerce. To limit its liability to the amount of the
(b) Person or property in connection with or insurance proceeds, the carrier has the burden of
appertaining to marine, island marine, transit proving that the unseaworthiness of its vessel was not
or transportation insurance, including liability due to its fault or negligence. The failure to discharge
for loss or in connection with the construction, such a heavy burden precludes application of the
repair, operation, maintenance, use of the limited liability rule and the carrier is liable to the full
subject matter of the insurance. (But not extent of the claims of the cargo owners (Aboitiz
including life insurance, or surety bonds nor Shipping v. New India Assurance Company, G.R. No.
insurance against loss by reason of bodily injury 156978, 02 May 2006).
to any person arising out of the ownership,
maintenance, use of automobiles);
2008 EXAM (IX –c)
(c) Precious stones, jewels, jewelry, precious Q:c) Assume the facts in question (b). Can the
metals whether in the course of transportation heirs of the three (3) crew members who perished
or otherwise; recover from CSC? Explain fully.

(d) Bridges, tunnels or other instrumentalities of A: Yes, because the crew members died while
transportation and communications (excluding performing their assigned duties, aggravated by the
buildings, their furniture and furnishings, fixed failure of the ship owner to ensure that the vessel is
contents, and supplies held in storage), piers, seaworthy. Workmen’s compensation has been
wharves, docks, slips, and other aids to classified by jurisprudence as an exception to the
navigation and transportation including dry hypothecary nature of maritime commerce, [Abueg
docks, marine railways, dams and appurtenant v.San Diego, 77 Phil. 730 (1948)], especially in this
facilities for the control of waterways. case where the vessel was not seaworthy at the time it
AND – “Marine Protection and Indemnity
Insurance” meaning insurance against, or WHAT PERILS ARE INSURED IN AN “ALL RISK
against legal liability of the insured for loss, POLICY”
damage or expense incident to ownership,
operation, chartering, maintenance, use, It is to be construed as creating a special
repair, or construction of any vessel, craft or insurance and extending to all risk than are usually
instrumentality in use in ocean or island contemplated and will cover all losses except such that
waterways, including liability of the insured may arise from intentional fraud, intentional
for personal injury, illness or death or for misconduct, or that otherwise excluded. It may include
loss or damage to the property of another all losses whether arising from a marine peril or not to
person (Sec. 99). include pilferage during a war (Filipino Merchant
Insurance Co. vs. CA, 179 SCRA 638).


NOTE: Inchamaree Clause – one that covers any loss
- The basic risk insured against is other than a willful and fraudulent act of the insured
commonly known as PERILS OF THE SEA. and avoids putting upon the insured the burden of
establishing that a loss was due to a peril within the



policy’s coverage, whether arising from a marine peril information might possibly reached him in the usual
or not provided the risk is not excluded; mode of transportation and the usual rate of
communication (Sec. 109).
1. The owner of a vessel has insurable interest in It exonerates the insurer from a loss resulting from
the vessel such shall continue even if the the risks concealed as related to:
vessel has been chartered by one who (a) the national character of the insured;
covenants to pay the owner the value of the (b) the liability of the thing insured to
vessel upon loss but in case of loss, the owner capture and detention;
is liable only for the part of the loss which the (c) the liability to seizure from breach of
insured cannot recover from the charterer. laws of foreign laws of trade;
(Sec. 100) (d) the want of necessary documents ;
2. The insurable interest of the owner of a ship (e) the use of false/simulated documents
hypothecated by bottomry is only the excess
of its value over the amount secured by
bottomry. (Sec. 101)
3. The owner of a vessel also has insurable ORDINARY INSURANCE MARINE INSURANCE
interest in expected freightage, which
according to the ordinary course of things he Opinion or belief of a 3RD Belief or expectation of
would have earned but for the intervention of person or own judgment 3RD person in reference
a peril insured against or other peril incident of the insured is not to a material fact is
to the voyage. (Sec. 102) material and need not be material and has to be
communicated (Sec. 35) communicated;


A causal connection The concealment of any
1. One who has an interest in the thing from between the fact of the matters stated in
which profits are expected to proceed, has concealed and cause of section 110 merely
insurable interest on the profits (Sec. 105). loss is not necessary for exonerates the insurer
2. The charterer of a ship has insurable interest the insurer to rescind; from loss, if the results
to the extent that he is liable to be damnified from the fact concealed;
by its loss (Sec. 106).


If the representation is intentionally false in
- A party is bound to communicate, in addition any material respect, or, in respect of any
to what is required by section 28 (facts within fact on which the character and nature of
his knowledge, material to the contract, other the risk depends, the insurer may rescind
party has not the means of ascertaining, as to (Section 111). But the eventual falsity of a
which party with a duty to communicate representation as to an expectation does
makes no warranty) information that he not in the absence of fraud avoid the
possesses, that are material to the risk AND, contract (Sec. 112).
to state the EXACT and WHOLE TRUTH in
relation to all matters that he represents, or
upon inquiry discloses or assumes to disclose WHAT ARE THE IMPLIED WARRANTIES IN MARINE
EXCEPT those that the insurer knows or those INSURANCE? 2000 BAR EXAM (IX – b)
in the exercise of ordinary care, the other 1. In every contract of marine insurance
ought to know, and which the former has no upon a ship or freight, freightage or upon
reason to suppose him to be ignorant under anything which is the subject of marine
Section 30 (Section 107); insurance, there is an implied warranty
that the ship is sea worthy (Sec. 113).
NOTE: That the rules on concealment in marine
insurance are stricter as it is sufficient that the  A ship is sea worthy when it is reasonably
insured is in POSSESSION OF THE MATERIAL FACT, fit to perform the service and encounter
ALTHOUGH HE IS UNAWARE OF IT. the ordinary perils of the voyage,
A party is also bound to communicate, the contemplated by the parties (Sec. 114).
information belief or expectation of a 3rd person, Note that it is relative and is made to
in reference to a material fact, is material. Note: depend on the circumstances.
under section 35 such is not required to be  The implied warranty of seaworthiness
communicated in ordinary insurance (Sec. 108). complied with as a general rule when it
is seaworthy at the time of the
PRESUMPTION OF A PRIOR LOSS commencement of the risk except:
Insured in marine insurance is presumed to have (a) when the insurance is made for a
knowledge, at the time of insuring, or prior, if specified length of time, it must



be seaworthy at the 3. That the vessel shall not make any

commencement of every voyage improper deviation from the intended
it undertakes at that time. voyage.
(b) when the insurance is upon
cargo, which by the terms of the
policy description of the voyage,
or established custom of trade, it It is a departure from the course of the voyage as
is required to be transshipped at defined by Section 121 and 122 or an unreasonable
an immediate port in which case delay in pursuing the voyage or the commencement of
– each vessel upon which the an entirely different voyage. (Sec. 123)
cargo is shipped or transshipped
must be seaworthy at the
commencement of each
particular voyage (Sec. 115). A vessel can properly proceed to a port other than its
(c) where different portions of the port of destination in the following cases:
voyage contemplated in the 1. When caused by circumstances over
policy differ in respect to the which neither the master or the owner of the
things requisite to make the ship ship has any control;
seaworthy, I which case it must
2. When necessary to comply with a
be seaworthy at the
commencement of each portion warranty, or to avoid a peril, whether or not
(Sec. 117). the peril is insured against;
3. When made in good faith, and upon
WARRANTY OF SEAWORTHINESS EXTENDS TO: reasonable grounds of belief In the necessity
to avoid peril;
The warranty of seaworthiness extends not 4. When made in good faith for the
only to the condition of the structure of the ship, but it
purpose of saving human life or relieving
requires that:
(a) it be properly laden or loaded with another vessel in distress. (Sec. 124)
(b) is provided with a competent master, 2005 BAR EXAM (N0. XIV -1 - a)
sufficient number of officers and Q: On a clear weather, M/V Sundo, carrying
seamen; insured cargo, left the port of Manila bound for
(c) it must have the requisite equipment Cebu. While at sea, the vessel encountered a strong
and appurtenances like ballast, typhoon forcing the captain to steer the vessel to
cables, anchors, cordage, sails, food, the nearest island where it stayed for seven days.
water, fuel, lights and other necessary The vessel ran out of provisions for its passengers.
and proper stores and implements Consequently, the vessel proceeded to Leyte to
for the voyage (Sec. 116). replenish its supplies.
a) Assuming that the cargo was
 Note that when a ship becomes damaged because of such deviation, who
unseaworthy during the voyage – it will between the insurance company and the
not avoid the policy – as long as – there owner of the cargo bears the loss? Explain.
is no unreasonable delay in repairing the
defect. Otherwise – the insurer is A: The Insurance company should bear
exonerated on the ship or the ship the loss. Since the deviation was cured by a
owners’ interest from any liability strong typhoon, it was caused by
from any loss arising therefrom (Sec. circumstances beyond the control of the
118). Hence, if loss is not one due to the captain, and also to avoid a peril whether or
defect or peril was not increased by not insured against. Deviation is therefore
the defect insurer is liable. proper. (Sec. 145(a))
 Also, while a ship may be seaworthy for
purposes of insurance on it, it may by CONSEQUENCE OF IMPROPER DEVIATION
reason of being unfitted to receive cargo,
be unseaworthy for the purpose of Insurer is not liable for any loss happening to the thing
insurance on the cargo (Sec. 119). insured subsequent to an improper deviation (Sec.
2. It shall carry the requisite documents to
show its nationality or neutrality and that 4. That the vessel does not or will not engage
it shall not carry any document that will in any illegal venture;
cast reasonable suspicion on the vessel
(Sec. 120). This warranty arises only when
nationality or the neutrality of the vessel or LOSS IN MARINE INSURANCE
cargo is expressly warranted.  KINDS OF TOTAL LOSSES: Actual or Constructive
(1) If it is an Actual Total Loss it may be
caused by:



a. total destruction of the thing owner was equally negligent. It cannot escape liability
insured; by virtue of the limited liability rule. (Central Shipping
b. the irretrievable loss of the thing Company, Inc. v. Insurance Company of North America,
which renders it valueless to the Sept. 20, 2004, G.R. No. 150751)
owner for the purpose that he
held it;
ABANDONMENT – is the act of the insured by which,
c. any other event which
after a constructive total loss, he desires to the insurer
effectively deprives the owner of
the relinquishment in its favor his interest in the thing
the possession at the port of
insured (Sec. 138).
destination of the thing insured
(Sec. 130). A person insured by a contract of marine
 An actual total loss can also be presumed insurance may abandon the thing insured, or any
from the continued absence of the ship particular portion thereof separately valued by the
without being heard of (section 132). policy, or otherwise separately insured and recover a
The length of time which is sufficient total loss – when the cause of loss is a peril insured
to raise these presumption depends on against if:
the circumstances of the case;
 more than ¾ thereof in value is actually lost or
would have to be expended to recover it form the
(2) It is a constructive total loss when the
peril insured against.
person insured is given a right to
abandon under Section 139 (Sec. 131).  if it is injured to such extent as to reduce its value
by more than ¾ of value.
2005 BAR EXAM (N0. X -1- a)
 if the thing injured is a ship and contemplated
Q: M/V Pearly Shells, a passenger and cargo vessel, voyage cannot lawfully be performed without
was insured for P40,000,000.00 against incurring either an expense to the insured of more
“constructive total loss.” Due to a typhoon, it sank than ¾ the value of the thing abandoned or a risk
near Palawan. Luckily, there were no casualties, which a prudent man would not take under the
only injured passengers. The shipowner sent a circumstances.
notice of abandonment of his interest over the
vessel to the insurance company which then hired  if the insured is freightage or cargo – and the
professionals to afloat the vessel for P900,000.00. voyage cannot be performed – nor another ship
When re-floated, the vessel needed repairs cannot be procured by the master – within a
estimated at P2,000,000.00. The insurance reasonable time with reasonable diligence – to
company refused to pay the claim of the forward the cargo without incurring the like
shipowner, stating that there was “no constructive expense or risk mentioned in item (c) but,
total loss.” freightage cannot be abandoned unless the ship is
abandoned (Sec. 139).
a) Was there “constructive total loss” to entitle the
shipowner to recover from the insurance Abandonment must neither be partial nor
company? Explain. conditional (Sec. 140). Hence, it must be total and
absolute; and must be made within a reasonable time
A: There was constructive total loss. When the vessel
after receipt of reliable information of the loss but,
sank, it was likely that it would be totally lost because
where the information is of doubtful character, the
of the improbability of recovery. (Arnold’s Law of
insured is entitled to a reasonable time to make an
Marine Insurance and Average, 16th ed., Vol. II, pp. 954-
inquiry (Sec. 141).

Suggested Alternative Answer:

There was no constructive total loss. The loss is
2005 BAR EXAM (N0. X - 1- b)
not more than ¾ the value of the vessel which was
insured for P40,000,000.00. The cost of refloating is
By giving notice, oral or written notice to the insurer
P900,000.00 and the needed repairs amount
but if orally given, a written notice of such must be
P2,000,000.00, or a total of only P2,900,000.00 which
submitted within seven days from giving oral notice
does not constitute more than ¾ the value of the
(Sec. 143). The notice must be explicit and specify
the particular cause of the abandonment but need
start only enough to show that there is probable cause
therefore and need not be accompanied by proof of
applicable] – The doctrine of limited liability under
interest or of loss (Sec. 144). The requirement as
Article 587 of the Code of Commerce is not applicable to
the explicitness of the notice is due to the fact that
the present case. This rule does not apply to situations
abandonment can only be sustained upon the
in which the loss or the injury is due to the concurrent
cause specified in the notice (Sec. 145).
negligence of the ship owner and the captain. It has
already been established that the sinking of the M/V
Central Bohol had been caused by the fault or EFFECTS OF ABANDONMENT
negligence of the Ship Captain and the crew, as shown
(1) It is equivalent to a transfer by the insured of
by the improper stowage of the cargo logs. “Closer
his interest to the insurer, with all the chances
supervision on the part of the ship owner could have
of recovery and indemnity (Sec. 146) Note
prevented this fatal miscalculation.” As such, the ship



though, if the insurer pays for a loss as if it insurer subrogating the insurer to his own right to
were an actual total loss, he is entitled to contribution but no such claim can be made upon
whatever may remain of the thing insured, or the insurer if:
its proceeds or salvage as if there has been a
formal abandonment. Here the insurer has (a) There is separation of the interest liable to
opted to pay for total actual loss contribution;
notwithstanding the absence on actual
abandonment; (b) When the insured having the right and
opportunity to enforce contribution from
(2) Acts done in good faith by those who were others, has neglected or waived the exercise
agents of the insured in respect to the thing of the right (Sec. 165). Meaning that the
insured subsequent to the loss are at the risk insured has a choice of recovery on the
of the insurer and for his benefit (Sec. 148). happening of a general average loss. They are:
The agents of the insured become agents of (1) Enforcing the contribution
the insurer. This retroacts to the date of the against interested parties; or
loss when abandonment is effectively made; (2) Claiming from the insurer. If it
be the latter, subrogation takes
Abandonment becomes effective upon the
acceptance of the insurer. If it is not accepted despite
validity, the insured may nevertheless claim an actual
1. A valuation in the policy of marine insurance
LIABILITY FOR AVERAGES is exclusive between the parties thereto in the
adjustment of either a partial or total loss, if the
AVERAGE– is any extraordinary or accidental expense
insured has some interest at risk and there is no fraud
incurred during the voyage for the preservation of the
on his part. If there is fraud in valuation, it entitles the
vessel, cargo, or both and all damages to the vessel or
insurer to rescind as it is an exception as to
cargo from the time it is loaded and the voyage
conclusiveness (Sec. 156);
commenced until it ends and the cargo is unloaded.
2. If however, hyphotecated by the bottomry or
respondentia – before insurance and without
(a) Particular or simple average is a knowledge of the person securing it – he may show the
damage or expense caused to the real value;
vessel, cargo, or which has not inured to
3. An insurer is liable upon a partial loss – only
the common benefit and profit of all
for such proportion of the amount insured by him – as
persons interested in the cargo or the
the loss bears to the whole interest of the insured (Sec.
vessel. This is borne ordinarily by the
157). The effect is that the insured is deemed a co-
owner of the vessel or cargo that gives
insurer if the value of the insurance is less than the
rise to the expenses or suffered the
value of the property. This applies even in the absence
of a stipulation in the contract and is also known as the
(b) General or gross average is an expense
average clause.
or damage suffered deliberately in
order to save the vessel or its cargo or The two requisites for the application of the average
both from real and known risk. Thus, all clause:
persons having an interest in the vessel
a. insurance is for less than actual value;
and cargo or both at the occurrence of
b. the loss is partial
the average shall contribute.

Note: That co-insurance exist in Marine Insurance: In

Fire Insurance, there is no co-insurance unless
The insurer is liable for the loss falling expressly stipulated (Sec. 171-172). In life insurance,
upon the insured, though a contribution in respect there is none also as value is fixed in the policy (Sec.
to the thing insured when required to be made by 183).
him towards a general average loss called for a
4. In case profits are separately insured in a
peril insured against but liability is limited to the
contract of marine insurance (see Sec. 105) , the
proportion of the contribution attaching to his
insured can recover in case of a loss (and under Sec.
policy value where this is less than the
160, there is a conclusive presumption of a loss from
contributing value of the thing insured (Sec. 164).
the loss of the property out of which they were
Meaning that the insured can hold his insurer liable
expected to arise, and the valuation fixes their
for contribution up to the value of the policy;
amount), a proportion of such profits equivalent to
proportion of the value of the property lost bears to
RIGHT OF SUBROGATION the value of the whole (Sec. 158).
When a person injured in a contract of
marine insurance has a demand against the others IF THE POLICY IS OPEN
for contribution, he may claim the whole loss from his



(a) The value of the ship is the value at the In insurance, it is defined as the active
beginning of the risk, including all principle of burning, characterized by heat and
articles or charges which add to its light combustion. Combustion without visible light
permanent value or which are necessary or glow is not fire
to prepare it for the voyage insured;
(b) The value of the cargo is its actual cost to Is a change in the use or condition of a thing
the insured, when laden on board where insured from that to which it is limited by the policy,
the cost cannot be ascertained, its Market made without the consent of the insurer, by means
Value at the time and place of lading. within the control of the insured, and increasing the
Adding the charges incurred in risk, which entitles the insurer to rescind the contract
purchasing and placing it on board – but of insurance (Sec. 168).
without reference to any loss incurred in
raising money for its purchase or any
DRAWBACK on its EXPROPRIATION or (1) Whenever the insured would like to have a
FLUCTUATION of the market at the port valuation stated in a policy insuring a
of destination or expenses incurred on building or structure against fire, it may be
the way or on arrival; made by an independent appraiser, who is
(c) Value of freightage is the gross paid by the insured and the value may be
freightage, exclusive or primage without fixed between the insurer and the insured;
reference to the cost of earning it; (2) Subsequently, the clause is then inserted in
(d) The cost of insurance is in each case to be the policy that said valuation has thus been
added to the value thus estimated (Sec. fixed;
161). (3) In case of loss, provided there is no change
increasing the risk without the consent of
the insured or fraud on the part of the
insured, the insurer will pay the whole
If it arrives at the port of destination in a amount so insured and stated in the policy
damaged condition, the loss of the insured is is paid. If it is a partial loss, the whole
deemed to be the same proportion of the value amount of the partial loss is paid. In case
which the market price at that port of the thing there are 2 or more policies, each shall
so damaged bears to the market price it would contribute pro-rata to the total or partial
have brought if sound (Sec. 162). Meaning if loss but the liability of the insurers cannot
reduction in value is 1/5, then amount of be more than the amount stated in the
recovery on the insurance is also 1/5. policy;
(4) Or the parties may stipulate that instead of
payment, the option to repair, rebuild or
FIRE INSURANCE replace the property wholly or partially
damaged or destroyed shall be exercised
 Insurance against fire includes loss or
(Sec. 172).
damage due to lightning, windstorm, tornado,
earthquake or other allied risks when such
risks are covered by extensions to the fire CASUALTY INSURANCE
insurance policy or under separate
 Generally, it is one that covers loss or
policies (section 167). Hence, while it is
liability arising from an accident or
not limited to loss or damage due to fire,
mishap excluding those that fall exclusively
coverage as to other risks is not automatic.
within other types of insurance like fire or
marine. It includes employer’s liability,
2001 BAR EXAM (N0.XVII) workmen’s compensation, public liability,
Q: JQ, owner of the condominium unit, insured the motor vehicle liability, plate glass liability,
same against fire with XYZ Insurance Corp. and burglary and theft, personal accident and
made the loss payable to his brother. MLQ. In case health insurance as written by non-life
of loss by fire of the said condominium unit, who companies and other
may recover on the fire insurance policy? State the
1993 and 1994 BAR EXAMS:
reasons for your answer?
Sun Insurance Office vs. CA July 17, 1992
A: JQ can recover on the fire insurance policy for the
loss of the said condominium unit. He has the X was issued a personal accident insurance for
insurable interest as owner-insured. As beneficiary in P200,000. Two months later, he died of a bullet
the fire insurance policy, MLQ cannot recover on the wound in his head. He was playing with his hand gun
fire insurance policy. For the beneficiary to recover on from which he removed the magazine. He pointed his
the fire or property insurance policy, it is required that gun to his temple and fired. The insurance company
he must have insurable interest in the property refused to pay the beneficiary. Was there suicide or
insured. In this case, MLQ does not have insurable accident?
interest in the condominium unit.

1. X was negligent but it should not prevent the  Is insurance on human lives and insurance
beneficiary from recovery because there is appertaining thereto or connected
nothing in the policy that exempts the insurer therewith (Sec. 179)
of the responsibility to pay indemnity if the
insured is shown to have contributed to his own WHEN IS IT PAYABLE
accident.t An insurance upon life may be made payable upon:
2. The death is accidental. Accident happens by (a) death of the person; or
chance without intention or design and which (b) his surviving a specified period; or
is unexpected or unforeseen. (c) otherwise, contingently on the
continuance or cessation of life;
 An agreement whereby a party called the COMMON KINDS:
surety guarantees the performance by  WHOLE LIFE/ORDINARY LIFE/STRAIGHT LIFE:
another party called the principal or obligor premiums are payable for life and the insurer
of an obligation or undertaking in favor of agrees to pay the face value upon the death of the
a 3RD party called the obligee (Sec. 175). insured.
Includes – official recognizance’s, bonds or  LIMITED PAYMENT LIFE: insured pays
undertakings issued by any company under premiums for a limited period after which he
Act No. 536, as amended by act no. 2206 stops with a guarantee by the insurer that upon
(Government transactions – by authorized death the face amount is to be paid – if death
companies) occurs while payment is not complete –
beneficiary acts face amount.
LIABILITY OF THE SURETY  TERM POLICY: insurer is liable only upon death
of the insured within the agreed term or period. If
It is joint and several (solidary) with the
insured survives the insurer is not liable.
obligor but limited to the amount of the bond and
determined strictly by the terms of the contract in  ENDOWMENT : protection is for a limited period,
relation to the principal contract between obligor – if the insured is still alive at the end of the period,
obligee (Sec. 176). the value of the policy is paid to him. If he dies
before the end period, it is paid to the
WHERE THE PREMIUM HAS NOT YET BEEN PAID?  ANNUITY: where the insured or a named
person/s is paid a sum or sums periodically
Generally, payment of the premium is a
during life or a certain period (note that contracts
condition precedent. Hence the bond is not valid. An
for the payment of endowment or annuities are
exception is when it is issued and accepted by the
considered as life insurance contracts).
obligor, it is valid despite non payment of the premium
(1) In life insurance, it is payable upon the
death of the insured, while in annuity, it is
Assumes liability as a Guarantor’s liability payable during the lifetime of the
regular party to the depends on an annuitant;
agreement. independent agreement (2) In life insurance, the premium is paid in
to pay if primary debtor installments, while in annuity, annuitant
fails to pay pays a single premium;
(3) In life insurance, there is lump sum
Primarily liable. Secondarily liable.
payment upon death, while in annuity,
Not entitled to Entitled to exhaustion. annuities are paid until death;
NON-NECESSITY OF A DEMAND ON THE SURETY – (1) Generally - all causes of death are covered
Demand on the surety is not necessary before bringing unless excluded by law, by policy or
the suit against them. On this point, it may be worth public policy.
mentioning that a surety is not even entitled, as a (2) Suicide, if committed after the policy has
matter of right, to be given notice of the principal’s been in force for a period of two years
default. (Intra-Strata Assurance Corporation, Et Al. v. from date of issue or last reinstatement
Republic of the Philippines, Etc., Jul. 9, 2008 G.R. No. unless policy provides a shorter period
156571) but it is nevertheless compensable if
committed in the state of insanity
regardless of date of commission (Sec.



IS A LIFE INSURANCE POLICY TRANSFERABLE OR (c) Comprehensive insurance answers for

ASSIGNABLE? Yes, it may pass by transfer, will or all liabilities/damages arising from the
succession to any person, whether he has insurable use/operation of a motor vehicle it
interest or not. (Sec. 181) includes third party own damage, theft
and property damage.
BEQUEST REQUIRED? It is not necessary to preserve
the validity of the policy unless thereby expressly WHEN DOES THE LIABILITY OF THE INSURER
required (Sec. 181) ACCRUE?
IS THE CONSENT OF THE BENEFICIARY REQUIRED? The occurrence of an injury for which the
Yes, if he designated as an irrevocable beneficiary as insured may be liable immediately gives rise to insurer
he has acquired a vested right; liability (Shafer vs. Judge, 167 SCRA 386).


(a) By the insurer – requires written notice
to motor vehicle owner/land
transportation operator at least 15 days
prior to intended effective date. If so
(a) Qualified by Philippines Laws to transact canceled, the Land Transportation Office
insurance business; may order the immediate confiscation of
(b) Has a name that is not in anyway similar to license plates unless it receives a new
another company; valid insurance/surety/proof of cash
(c) If organized as a stock corporation, it should deposit or revival by endorsement of the
have a paid up capital of no less that cancelled policy (Sec. 130);
Php5,000,000.00; (b) By the insured – the motor vehicle
(d) If it is organized as a mutual company (one owner/land transportation operator shall
whose capital funds are not contributed by secure a similar policy or surety before
stockholders but by policy holders) it must the cancelled policy/surety ceases to be
have available cash assets of at least effective or make a cash deposit and file
Php5,000,000.00 above all liabilities for losses the same or proof thereof with the Land
reported, expenses, taxes, legal reserves of all Transportation Office (Sec. 381).
outstanding risks, and the contributed surplus
fund equal to the amounts required of stock
corporations (Php1,000,000.00 if a life
insurance company or Php500,000.00, if a non A claim for payment must be filed without any
life insurance company). unnecessary delay, within 6 month from the date of
(e) If a foreign insurance company, it must appoint accident by giving written notice setting forth the
a resident agent, deposit securities and nature, extent and duration of the injuries as certified
maintain a legal reserve (Sec. 184-193). by a duly licensed physician (Sec. 384).


A no fault indemnity claim is a claim for payment for
 It is to provide protection or coverage to death or injury to a passenger of third party without
answer for bodily injury or property damage necessity of proving fault or negligence. This is
that may be sustained by another arising from payable by the insurer provided:
the use of motor vehicle. Please note though (a) indemnity in respect of one
that what is now compulsory is death of person shall not exceed
bodily injury arising from motor vehicle Php5,000.00;
accidents as per amendment to the insurance (b) the necessary proof of loss under
code by PD 1814 and PD 1455 brought about oath to substantiate the claim is
by insurance losses due to padded claims for submitted
property damage. Hence, property damage is
now optional;
A claim under the no fault indemnity clause may be
made against one motor vehicle insurer only as
(a) Third party liability answers for (a) in case of an occupant of a vehicle –
liabilities arising from death or bodily against the insurer of the vehicle in
injury to 3RD persons or passengers. which the occupant is riding,
mounting or dismounting from;
(b) Own damage insurance answers for (b) in any other case, from the insurer of
reimbursement of the cost of repairing the directly offending vehicle;
the damage to vehicle of the insured. (c) in all cases, the right of the party
paying the claim to recover against



the owner of the vehicle responsible NON-FAULT CLAUSE IN COMPULSORY MOTOR

for the accident shall be maintained; VEHICLE INSURANCE POLICY
(2000 Bar Exam)
Proof of fault or negligence is not necessary
CLAUSE (1991 Bar Exams) The authorized driver
for the payment of any claim for death or injury to a
clause is interpreted to refer to the insured or any
passenger or to a third party. The maximum amount
person driving on the order of the insured or with his
of indemnity is P 10, 000.00 upon submission of death
permission provided, such person is permitted to
certificate, medical certificate and police report. The
operate a motor vehicle in accordance with our
purpose is in order to give immediate assistance to the
licensing laws or regulations and who is not otherwise
victim of motor vehicle accidents and/or the
dependents specially if they are poor, regardless of the
NOTE THE FOLLOWING JURISPRUDENCE: financial capability of the owner of the motor vehicle
or operator responsible for the accident. This does not
(1) If license is expired, person is not
include property damage.
authorized to operate a motor vehicle
(Tarco Jr. vs. Phil Guaranty, 15 SCRA 313)
(2) Issued a temporary operators permit or a
temporary vehicle receipt, a person is
authorized to operate a motor vehicle,
The present case shows a clear public
but if it has expired, it is as if he has no
necessity to regulate the proliferation of such
license (Guttierez vs. Capital Insurance,
insurance companies. Because of the PUV operators’
130 SCRA 618, PEZA vs. Alikpala, 160
complaints, the LTFRB thus assessed the situation. It
SCRA 31)
found that in order to protect the interests of the
(3) A tourist with license but in the country
riding public and to resolve problems involving the
for more than 90 days, is not authorized
passenger insurance coverage of PUV’s, it had to issue
to operate a motor vehicle because it is as
Memorandum Circular No. 2001-001 accrediting PAMI
if he has no license (Strokes vs. Malayan,
and PAIC II as the two groups allowed to participate in
127 SCRA 766)
the program.
(4) A drivers license that bears all the
earmarks of a duly issued license is
Memorandum Circular No. 2001-001 required that
presumed genuine.
“[a]ll public utility vehicles whose LTO license plate, as
(5) A license is not necessary, where the
per latest LTO Official Receipt, with an EVEN middle
insured himself is the driver (Paterno vs.
number (0, 2, 4, 6 and 8) shall be insured with UCPB
Pyramid Insurance, 161 SCRA 677, 1986
insurance (PAMI) while those with an ODD middle
number (1, 3, 5, 7 and 9) shall be insured with Great
Domestic Insurance (PAIC II) x x x .”
BAR EXAM; 1996
Q: 1.While driving his car, X sideswiped A
causing injuries to the latter. A sued X and the
third party liability insurer for the damage TRANSPORTATION LAWS
sustained by A.
2. The insurance company moved to COMMON CARRIERS
dismiss the complaint contending that theliability
of X has not yet been determined with finality. (Arts. 1732-1766, New Civil Code)
Is the contention of the insurance company Common Carriers are persons, corporations, firms or
correct? May the insurer be held solidarily liable associations engaged in the business of carrying or
with X transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services
A: No. When an insurance policy insures directly to the public.
against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury. Transportation defined. a contract of transportation
is one whereby a certain person or association of
No. The insurer cannot be held solidarily liable with X persons obligate themselves to transport persons,
because its liability is based on a contract while that of things, or news from one place to another for a fixed
X is based on torts. (Vda. De Maglana vs. Consolacion, price
August 6, 1992)
COMPREHENSIVE MOTOR VEHICLE INSURANCE 1. As to object: (1) things; (2) persons; (3) news
(1993 & 2000 Bar Exam) 2. As to place of travel: (1) land; (2) water; (3) air
The liability of the insurance company s direct Parties to contract of transportation:
and solidary with the operator but only up to the (1) shipper or consignor.
amount stated in the policy and accrues immediately (2) carrier or conductor.
upon the occurrence of the accident. Any amount (3) consignee
awarded beyond the amount stated in the policy is the Common Carrier Private Carrier
sole responsibility of the carrier.
As to Availability



Holds himself out for all Contracts with The law prohibits unreasonable discrimination by
people indiscriminately particular common carriers.-- The law requires common
individuals or carriers to carry for all persons, either passengers or
groups only property, for exactly the same charge for a like or
As to require Diligence contemporaneous service in the transportation of like
Extraordinary Diligence Ordinary Diligence kind of traffic under substantially similar
circumstances or conditions. The law prohibits
As to regulation
common carriers (CC) from subjecting any person, etc.
Subject to state Not subject to state
regulation regulation
or locality, or any kind of traffic, to any undue or
Stipulation limiting liability
unreasonable prejudice or discrimination whatsoever.
Exception: When the actual cost of handling and
Parties may agree on Parties may limit the transporting is different, then different rates may be
limiting the carrier’s carrier’s liability,
liability except when provided it is not
Determination of justifiable refusal: This involves a
provided by law contrary to morals or
good customs consideration of the following:
Exempting circumstances 1. suitability of the vessels of the company for
Prove extraordinary Caso forfuito, Art. the transportation of such products;
diligence and 1174 NCC 2. reasonable possibility of danger or disaster,
Art.1734,NCC resulting from their transportation in the
Presumption of Negligence form and under the conditions in which they
are offered for carriage;
There is a presumption No presumption of
3. the general nature of the business done by the
of fault or negligence fault or Negligence
Governing law
4. all the attendant circumstances which might
Law on Common Law on obligations affect the question of the reasonable necessity
Carriers and contracts
for the refusal by the carrier to undertake the
(2002 Bar exams) transportation of this class of merchandise.
Test for a common carrier: What is the DILIGENCE required by common
1. He must be engaged in the business of carrying carriers?
goods for others as a public employment, and Common carriers, from the nature of their business
must hold himself out as ready to engage in the and for reasons of public policy, are bound to observe
transportation of goods for persons generally as a extraordinary diligence in the vigilance over the goods
business, and not a casual occupation. and for the safety of the passengers transported by
2. He must undertake to carry goods of the kind to them, according to all the circumstances of each case.
which his business is confined. Extraordinary diligence lasts from the time the
3. He must undertake to carry by the methods by cargoes are loaded in the vessel until they are
which his business is conducted, and over his discharged and delivered to the consignee.
established roads. Air carriers can terminate services of pilots for serious
4. The transportation must be for hire. misconduct and drunkenness because of its
extraordinary diligence.
The true test is whether the given undertaking is a
part of the business engaged in by the carrier which he LIABILITY OF COMMON CARRIERS: The common
has held out to the general public as his occupation carrier, is at all times, required to observe
rather than the quantity or extent of the business extraordinary diligence with respect to transport of
actually transacted, or the no. and character of the goods.
conveyances used in the employment (the test is 1. To bring passengers safely to his place of
therefore the character of the business actually carried destination. He is obliged to carry passengers
on by the carrier. safely as far as human care and foresight can
provide, using the utmost diligence of a very
Characteristics of common carriers: cautious person with due regard for all
(1) The common carrier undertakes to carry for all circumstances. In case of death or injury, the
people indifferently; common carriers are presumed to have been
(2) The common carrier cannot lawfully decline to at fault or negligent in transporting the
accept a particular class of goods for carriage to the passengers unless they prove that they
prejudice of the traffic in those goods observed extraordinary diligence.
2. To transport the goods/ cargoes safely to the
Exception : for some sufficient reason, where the point of destination if there is loss or damage
discrimination in such goods is reasonable and to the goods/cargoes, immediately a
necessary (substantial grounds) presumption of negligence arises that the
(3) No monopoly is favored - the Commission has the loss/ damage to the goods/ cargoes was due
power to say what is a reasonable compensation to the to the negligence of the common carrier. The
utility and to make reasonable rules and regulations shipper may only prove that the goods arrived
for the convenience of the traveling public and to in a damaged condition or that they did not
enforce them arrive at all.
(4) Public convenience - for the best interests of the



LOADSTAR SHIPPING CO., INC VS. PIONEER ASIA 3. The common carrier must have exercised due
INSURANCE CORP.Jan 24, 2006 diligence to prevent or minimize before ,
A common carrier is required to observe during and after the natural disaster
extraordinary diligence in the vigilance over the 4. The common carrier has not negligently
goods it transports. incurred delay in transporting the goods

I. VIGILANCE OVER THE GOODS REQUISITES for act of public enemy -

RULES governing common carrier’s LIABILITY 1. The act of public enemy must have been the
over Goods: proximate of the loss
General RULE: Common carriers are responsible for 2. It must have been the only cause of the loss
the loss, destruction, or deterioration of the goods, 3. The common carrier must have exercised due
UNLESS the same is due to any of the following causes diligence to prevent or minimize before ,
only: during and after the act of public enemy in
1) Flood, storm, earthquake, lightning, or other war.
natural disaster or calamity;
2) Act of the public enemy in war, whether REQUSITE FOR act or omission of Shipper -
international or civil; 1. That the act or omission of the shipper
3) Act or omission of the shipper or owner of the /owner of the goods must have been the
goods; proximate cause of the loss
4) The character of the goods or defects in the packing 2. That it must have been the only cause of the
or in the containers; loss.
5) Order or act of competent public authority. (Art.
1734) REQUSITES for character of goods , fault in
packing or containers-
The CC may absolve itself from liability by proving 1. That the loss , destruction or deterioration
any of the following DEFENSES: was caused by the character of the goods ; or the
(2002 Bar exams) faulty nature of the packing /containers
2. That the common carrier had exercised due
A) That the CC encountered: diligence to forestall or lessen the loss.
a. An act of God;
— there must have been no delay on the part REQUISTES for the act of public authority –
of the common carrier. Otherwise, if delayed 1. The common carrier must prove that the public
and not for good reason, then it shall be held authority had the power to issue the order for the
liable notwithstanding the fact that all the destruction / seizure of the goods.
subsequent requisites were present.
— must be an unforeseen event or an event B.) Another defensive strategy to escape liability is
which cannot be avoided to invoke that it exercised extraordinary diligence to
— The carrier must have exercised prevent or minimize the loss at the time the accident
extraordinary occurred.
diligence before, during, and after the time of
the accident. Negligence is the failure to observe due diligence with
—The proximate cause must not be respect to the circumstances at hand.
committed by the carrier. If the proximate
cause of the event is caused by the carrier, Contributory Negligence is the failure to observe due
then he cannot invoke the act of God defense. diligence that an ordinary or prudent man undertakes
Under the rule on Contributory Negligence, if the in relation to the negligence of another.
negligence attributable to carrier is not proximate in
character, the carrier shall be responsible, although When does the carrier’s responsibility over the
such liability shall be mitigated. goods arise?
The carrier shall be liable the moment the goods
b. Act of public enemy in war; arrive in his possession whether actual or
c. Act by a competent public authority; constructive, until such time that the carrier delivers
d. Acts/omissions of the shipper or his agent; the same to the consignee OR the consignee has been
e. The goods or the packaging is inherently informed of the arrival of the goods and the consignee
defective. had reasonable time to remove the same.
Under maritime laws, the responsibility of the carrier
Even if the loss, destruction, or deterioration of the ends when the goods were transmitted by the carrier
goods should be caused by the character of the goods, to the customs arrastre operator. Recall that before
or the faulty nature of the packing or of the containers, the goods are delivered to the consignee, the state has
the common carrier must exercise due diligence to the responsibility to ensure that the goods being
forestall or lessen the loss. brought in are in accordance with the law.
EXEMPTING CAUSE EFFECT: The carrier would no longer be liable. The
REQUISITES for natural disaster or calamity – succeeding relationship would be between the
1. The natural disaster must have been the consignee and the arrastre operator, the
proximate cause of the loss relationship governing them would be akin to a
2. It must have been the only cause of the loss contract of Deposit.



There is already an existing Contract of carriage when act with grave or irresistible threat, violence or
the carrier took possession of the cargo by placing it force, is dispensed with or diminished;
on a lighter or barge manned by its authorized 7. that the common carrier is not responsible for the
employees. (COMPANIA MARITIMA vs. INSURANCE loss, destruction, or deterioration of goods on
COMP ) account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in
the contract of carriage.
A bill of lading that was issued covering certain
shipment which contained a provision that the carrier
A stipulation that the common carrier's liability is
does not assume liability for any loss /damage to the
limited to the value of the goods appearing in the bill
goods once they have been under the custody of the
of lading, unless the shipper or owner declares a
custom or other authorities or when they have been
greater value, is binding.
delivered at ship’s tackle have been considered valid ,
A contract fixing the sum that may be recovered by the
because it was held that it is not contrary to morals
owner or shipper for the loss, destruction, or
and public policy ; said stipulation is clear and have
deterioration of the goods is valid, if reasonable and
been adopted to mitigate the responsibility of the
just under the circumstances, and has been fairly and
common carrier. (LU DO vs. BINAMIRA)
freely agreed upon.
The law of the country to which the goods are to be
Stoppage in Transitu is the right of the unpaid seller
transported governs the liability of the common
who has parted with the possession of the goods to
carrier in case of loss, destruction or deterioration.
stop them in transit, when the buyer of goods is or
becomes insolvent.
The provisions of articles 1733 to 1753 shall apply to
the passenger's baggage which is not in his personal
custody or in that of his employee. As to other
1. Seller must be an unpaid seller; baggage, the rules in articles 1998 and 2000 to 2003
2. Goods must be in transit; concerning the responsibility of hotel-keepers shall be
3. Buyer must be in a state of insolvency; applicable.
EFFECT: Once the right is exercised, the common
carrier becomes a mere warehouseman.
Fire may not be considered as a natural disaster or
In the event that the UNPAID Seller exercises its right calamity. It does not fall within the category of act of
of stoppage in transitu , the carrier thereafter holds God UNLESS caused by lighting or by natural disaster
the goods in the capacity of an ordinary bailee or or calamity. It may even be caused by actual privy or
warehouseman and shall be liable only as such , upon fault of the carrier. (EASTERN SHIPPING vs. IAC)
the theory that the exercise of the right by the unpaid
seller , such terminates the contract of carriage. The Civil Code provisions on Common carrier shall not
be applied when the carrier is not acting as such but as
a private carrier. The stipulation in the charter party
absolving the owner from liability for loss due to the
PROVIDED THAT it be: (2002 bar Exam)
negligence of its agent would be void only if strict
1. In writing signed by both parties
public policy governing common carriers are applied.
2. Supported by a valuable consideration other than
Such policy has no force when the public at large is not
the service rendered by common carrier
involved, as in the case of a ship totally chartered for
3. Reasonable, just and not contrary to public policy
the use of a single party (HOME INSURANCE vs.
In case where the Common carrier w/o just cause-
1. Account of strikes or riot;
1. Delays the transportation of goods
2. Value of the goods appearing in bill of lading
2. Changes the stipulated route / usual route
UNLESS shipper declares a greater value;
The annulment of the agreement limiting the carrier’s
3. Contract fixing the sum that may be recovered.
liability is no longer necessary; The carrier cannot
simply avail of the benefit /defense of limited liability.
When the conditions printed in the back of the ticket
LIABILITY (2002 bar exams)
stub are in letters so small that they are hard to read,
1. that the goods are transported at the risk of the
this would not warrant the presumption that the
passenger were aware of those conditions such that he
2. that the shipper is not liable for any loss or
had “fairly and freely agreed” to them . The passenger
destruction of the goods;
therefore is not bound by such stipulations.
3. that the common carrier need not observe any
diligence in the custody of the goods;
4. that the common carrier shall exercise a degree of
diligence less than that of a good father of a
DUTY: A common carrier is bound to carry the
passengers safely as far as human care and foresight
5. that the common carrier shall not be responsible
can provide, using the utmost diligence of very
for any acts of its employee;
cautious persons, with a due regard for all the
6. that the common carrier’s liability for acts
committed by thieves, or of robbers who do not



RULE: The responsibility of a common carrier for the from accident; otherwise, it would be held liable.
safety of passengers as required in articles 1733 and (Bachelor Express vs. CA 188; SCRA 216)
1755 cannot be dispensed with or lessened by
stipulation, by the posting of notices, by statements on EE riding on train who stepped on watermelons. Held:
tickets, or otherwise. The conduct of plaintiff in undertaking to alight while
EXCEPTION: When a passenger is carried the train was yet slightly underway was not
gratuitously, a stipulation limiting the common characterized by imprudence and that he was not
carrier's liability for negligence is valid, but not for guilty of contributory negligence.
willful acts or gross negligence. The circumstances show that it was no means so risky
for him to get off while the train was yet moving. It is
The common carrier is liable even if the ticket issued not negligence per se for a traveler to alight from a
to passenger provides exemption of common carrier slowly moving train. (Cangco vs MRR 38 Phil 768)
from death or injury of paseenger and notices were
posted dispensing extraordinary diligence of the The DUTY of the PASSENGER is to observe the
common carrier or even if the passenger was given a diligence of a good father of a family to avoid injury to
discount of his fares. (2001 Bar exams) himself. The contributory negligence of the passenger
If the passenger is carried gratuitously, does not bar recovery of damages for his death or
stipulation limiting CC for negligence is valid but not injuries, if the proximate cause thereof is the
for WILLFUL ACT OR GROSS NEGLIGENCE. negligence of the common carrier, but the amount of
A reduction of fare does not justify any limitation of damages shall be equitably reduced.
the common carrier's liability.
 Is the carrier liable for death of or injuries to Condition printed on the back of a passenger ticket
the passengers due to the negligence or willful commonly known as “CONTRACT OF ADHESION” ,
acts of ITS EMPLOYEES? being drafted only by one party , usually the
YES, although such employees may have acted beyond corporation , and the only participation of the other
the scope of their authority or in violation of the party (passenger ) is the signing of his signature “his
orders of the common carriers. adhesion thereto calls for greater strictness and
vigilance on the part of the court of justice with the
Illustrative rule: Two passengers engage in a fist-fight view of protecting the weaker party from abuses .
inside a bus terminal. An on-duty driver attempts to Such contract if enforced will be subversive of public
pacify them but instead kills one. The carrier is liable! good , thus placing the common carrier at a decided
But, if the killing of the passenger occurred while the advantage over those who may have legitimate claims
driver is off-duty, the carrier is not liable. (Recall the against it. The said condition is therefore
case of Gillaco v. Manila Railroad, the carrier was held unenforceable, as contrary to public policy- to make
not liable when its employee, a security guard who the court accessible to all those who have need of their
harbored a grudge against a fellow passenger, shot services.
and killed the latter. The guard committed the killing
while he was off-duty.) Moral damages are not recoverable on breach of
The Common carrier is held liable because - contract of carriage in view of ART.2219-20 NCC .
1. The driver , although stopping the bus, EXCEPTIONS-
nevertheless did not put off the engine. 1. Where the mishap results in the death of a
2. He started to run the bus even before the passenger; Because the common carrier
conductor gave him the signal to go and while becomes subject to the rule in ART.2206 NCC
the passenger was still unloading part of the entitles the spouse, descendants, ascendants
baggage . ( LA MALLORCA vs. CA) to moral damages for mental anguish as a
result of the death of the deceased.
In the case of LACAM vs. SMITH , the Court held that 2. 2.Where it is proved that carrier was guilty of
an accident caused by defects in the automobile is not fraud or bad faith EVEN if death does not
a caso fortuito. The rationale of the carrier’s liability is result.
the fact that the passenger has neither the choice nor Mere carelessness does not per se justify an inference
control over the carrier in the selection and use of the of malice or bad faith on the part of the common
equipment and appliances in use by the carrier. carrier ; Must be GROSS negligence

Q: Is the carrier liable for death of or injuries to Concurring causes of action arising from negligent
the passengers due to the willful acts or negligence act of the common carrier:
of other passengers or of strangers? 1. Culpa Contractual/breach of contract
(2003 Bar Exams)
YES, a common carrier is responsible for injuries Only the carrier is primarily liable not
suffered by a passenger if the common carrier's the driver, because there is no privity
employees through the exercise of the diligence of a between the driver and the
good father of a family could have prevented or passenger.(Art 1759, NCC.)
stopped the act or omission.  No defense of due diligence
in the selection and
The act of the passengers stabbing another passenger supervision of the
in the bus. To be absolved, the common carrier must employees.
prove that it was negligent in preventing the injuries 2. Culpa aquiliana (quasi delict)



The carrier and the driver are solidarily liable as joint Bill of Lading: Written acknowledgement of
torfeasors.(Art 2180 NCC) receipt of goods and agreement to transport them
 Defense of due diligence in the to a specific place to a person named or to his
selection and supervision of employees is order or bearer.
available. Exception: maritime tort resulting  Ambiguity is construed against the
in collision carrier, the contract being one of
 Although the relation of passenger adhesion.
and carrier is contractual both in origin and
nature, nevertheless, the act that breaks the Kinds of Bills of Lading
contract may also be a tort. (Air France vs.
1. Negotiable Bill of Lading – one in which it is
Carrascoso; 18 SCRA 155)
stated that the goods referred to therein will be
delivered to the bearer, or to the order of any
In the case of injury to a passenger due to the
person named in such document.
negligence of the driver of the bus on which
the passenger was riding on and of the driver 2. Non–Negotiable Bill of Lading – the goods
of another vehicle, the drivers as well as the referred to therein will be delivered to a specified
owners of the two vehicles are jointly and person.
severally liable for damages. It should not
3. Clean Bill of Lading – One which does not
make any difference that the liability of the
indicate any defect in the goods
bus owner springs from a contract while that
of the driver springs from a quasi delict. (Tiu 4. Foul Bill of Lading – Contains a notation
vs. Arriesgado) indicating that the goods are in bad Condition.
3. Culpa criminal( Criminal Negligence)
The driver is primarily liable. The 5. Spent Bill of Lading – Covers goods that have
carrier is subsidiarilly liable only if already been delivered by the carrier without a
the driver is convicted and declared surrender of a signed copy of the Lading.
insolvent.(art 100 RPC) 6. Through Bill of Lading – Issued by a carrier
who is obliged to use the facilities of other
The principle of last clear chance would call for carriers.
application in a suit between the owners and drivers
of the two colliding vehicles. It does not arise where a 7. On Board Bill of Lading – one in which it is
passenger demands responsibility from the carrier to stated that the goods have been received on board
enforce its contractual obligations.(Phil. Rabbit Bus the vessel which is to carry the goods.
Lines vs. CA) 8. Received for Shipment Bill of Lading – it is
stated that the goods have been received for
CODE OF COMMERCE OVERLAND shipment with or without specifying the vessel by
TRANSPORTATION which the goods are to be shipped.
Nature of Contract
9. Custody Bill of Lading – issued by the carrier
Art. 349. A contract of transportation by land
to the whom the goods have been delivered for
or waterways of any kind shall be considered
shipment but the vessel indicated in the bill of
leading which is to carry the goods has not yet
1. When it involves merchandise or any
reached the port where the goods are held for
object of commerce.
2. When, no matter what its object may be,
the carrier is a merchant or is customarily [habitually] 10. Port Bill of Lading – one which is issued by
engaged in transportation for the public. the carrier to whom the goods have been
Requisites for a contract of transportation by land or delivered, and the vessel to carry the goods is
water to be commercial : already in the port where the goods are held for
(1) transportation of merchandise is always shipment.
(2) transportation of person or news is
commercial only when the CC is a merchant or is Three–Fold Nature of Bills of Lading
habitually engaged in transportation for the public
1. A contract in itself and the parties are bound by
* principal requirement : the CC is a merchant
its terms;
or is habitually engaged in transportation for the
public; the object carried is of little importance 2. A receipt; and
3. A symbol of the covered by it
Effect of Civil Code on the provisions of the Code of
Commerce on Overland Transportation  They are also documents of title, and if
negotiable in form they can constitute
– The NCC does not expressly repeal the negotiable documents of title.
provisions of the Code of Commerce on Legal effect of the Issuance of Bill of Lading
overland transportation. Instead, it makes
such provisions suppletory to the provisions – Bill of leading constitute the legal evidence of
of the NCC on common carriers the contract between the shipper and the
carrier by the contents of which the disputes
which may arise regarding their execution



and performance shall be decided, no (1) Inter-island – if goods arrived in damaged

exception being admissible other than those condition:
of falsity and material error in the drafting.  If damage is apparent, the shipper
must file a claim immediately.
Effect of absence of a bill of lading  If damage is Not apparent he should
file a claim within 24 hours from
– It does not preclude liability on a contract of delivery.
transportation. The dispute shall be  The filing of claim is a condition
determined by the legal proofs which the precedent for recovery.
parties may present in support of their  If the claim is filed, but the carrier
respective claims, according to the general refuses to pay:
provisions established in the Code for – Enforce carrier’s liability in court
commercial contracts. by filing a case:
 Within 6 years, if no bill of
Right to refuse packages lading has been issued, or
 Within 10 years, if a bill of
Gen. Rule: – a common carrier cannot ordinarily lading has been issued.
refuse to carry a particular class of goods to the (2) Overseas – Where goods arrived in a
prejudice of the traffic in those goods. damaged condition from a foreign port to a
Exception: However, under Art. 365, carriers are Philippine Port of Entry:
authorized to refuse packages if they are unfit for  Upon discharge of goods, if the
transportation. damage is apparent claim should be
Time for delivery of goods filed immediately;
 If damage is not apparent, claim
 Where no period fixed should be filed within 3 days from
The carrier shall be bound to forward them in the delivery.
first shipment of the same or similar goods, which When may a consignee of goods abandon the
he makes to the points where he must deliver goods and recover the value thereof from the
them. Should he not do so, the damages caused by carrier?
the delay shall be for his account.
In any of the following cases:
 Where for delivery of goods
The carrier must deliver the goods within the time (1) Under Art. 363, in case of partial non-delivery,
fixed. For failure to do so, the carriers shall pay where the consignee proves that he cannot
the indemnity stipulated in the bill of lading. Also, make use of the goods capable of delivery
damages shall be paid if the carrier refuses to pay independently of those not delivered.
the stipulated indemnity or is guilty of fraud in the (2) Under Art. 365, where the goods are rendered
fulfillment of his obligation. useless for sale and consumption for the
purpose for which they are properly destined;
Limitation as to carrier’s liability (2002 Bar or
exams) (3) Under Art. 371, where there is delay through
(1). No Liability the fault of the carrier.
Two special sanctions for the enforcement by
– The carrier will not be liable at all for the the carrier of the payment of expenses and
negligent acts of its crew and employees. transportation charges.
This is NULL and VOID for being contrary
to public policy (1) Under Art. 374, judicial sale of the goods
(2). Limited Liability transported; and

– Regardless of the value of the cargo, the (2) Under Art. 375, by creating a lien in favor of
maximum liability of the carrier will be, the carrier on the goods transported.
for example, P500. This is VOID for being
contrary to public policy. AIR TRANSPORTATION
(3). Qualified Liability The nature of an airline’s contract of carriage partakes
– A stipulation in the bill of lading limiting of two types, namely: a contract to deliver a cargo or
the liability of the carrier to a valuation merchandise to its destination, and a contract to
unless the shipper declares a higher value transport passengers to their destination.( British
and pays a higher rate of freight is valid. Airways vs. CA, 285 SCRA 450)
 However, the carrier cannot limit its
liability for injury to, or loss of, good Special rules on liabilities:
shipped where such injury or loss  In case of flight diversion due to bad weather
was caused by its own negligence. or other circumstances beyond the pilot’s
control, the relation between the carrier and
the passengers continues until the latter has
Recovery of Damages from carriers for been landed at the port of destination and has
carriage of goods: left the carrier’s premises. The carrier should
necessarily exercise extraordinary diligence
in safeguarding the comfort, convenience and



safety of its stranded passengers until they VESSELS (in general)extends to everything floating in
have reached their final destination ( Phil and on the water, built in the form of vessel and used
Airlines vs. CA; Sept 15, 1993) for navigation regardless of form, right or motive
 It is firmly settled that moral damages are
recoverable in suits predicted on breach of a MERCHANT VESSELS- engaged in the transportation
contract of carriage where it is proved that of passengers and freight from one port to another or
the carrier was guilty of fraud or bad faith- in from one place to another.
attention to and lack of care for the interests
of its passengers who are entitled to its *Are vessels real or personal property?
utmost consideration, particularly as to their PERSONAL- but they partake to a certain extent, of the
convenience- amount to bad faith which nature and conditions of real property, on account of
entitles the passenger to an award of moral their value and importance of the world of commerce.
damages(Japan Airlines vs. Simangon, April
1. Real- similar to transactions over real property
 Even where overbooking of passengers is with respect to effectivity against third persons,
allowed as a commercial practice, the airline which are done through registration. The evidence
company would still be guilty of bad faith and of real nature is shown by:
still be liable for damages if it did not properly  the limitation of the liability of the agents
inform passenger that it could breach the to the actual value of the vessel and the
contract of carriage even if they were freight money and
confirmed passengers( Zalamea vs. CA GR  the right to retain cargo, embargo and
104235) detention of the vessel even in cases
where ordinary civil law would not allow
 Neglect or malfeasance of the carrier’s more than a personal action against
employees could give ground for an action for debtor.
damages. Passengers have a right to be 2. Hypothecary- the liability of the owner of the
treated by the carrier’s employees with vessel is limited to the vessel itself.
kindness, respect, courtesy and due 3. Preference of credits- Mortgage of a vessel
consideration and are entitled to be protected properly registered becomes of preferred
against personal misconduct, injurious mortgage lien which shall have priority over all
language, indignities and abuses from such claims against the vessel in an extrajudicial
employees. foreclosure for:
a. credit in favor of the public treasury;
 An air carrier is not liable for the loss of b. judicial cost of the proceedings;
baggage in an amount in excess of the limit c. pilotage and tonnage charges and other sea
specified in the tariff which was filed with the and port changes;
proper authorities, such tariff being binding d. salaries of depositories and keepers of the
on the passenger regardless of the vessel;
passenger’s lack of knowledge thereof or e. captain and crew's wages;
assent thereto. In a contract of air carriage, a f. general average
declaration by the passenger of a higher value g. salvage including contract salvage;
is needed to recover a greater amount. h. maritime liens arising prior in time to the
recording of the preferred mortgage;
 An open dated ticket constitutes a complete i. damages arising out of tort; and
contract between the carrier and passenger. j. Preferred mortgage registered prior in time.
Hence the airline company is liable if it
refused to confirm a passenger’s flight
reservation (Singson vs.CA, GR No. 119995) A.BILL OF LADING ( 1998 and 2005 bar Exams)
A bill of lading serves two functions:
 An airline company which issued a confirmed a. It is a receipt for the goods shipped;
ticket to a passenger covering successive trips b. It is a contract by which three parties, namely
on a trips on different airlines can be held the shipper, the carrier, and the consignee
liable for damages occasioned by bumping off undertake specific responsibilities and
by one of the successive airlines(Lufthansa assume stipulated obligations.
German Airlines vs. CA; GR. No. 83612)
A bill of lading delivered and accepted constitutes
MARITIME COMMERCE/ WATER the contract of carriage even though not signed,
TRANSPORTATION because the acceptance of a paper containing the
Special contract of maritime commerce: terms of a proposed contact generally constitutes
1. Charter party an acceptance of the contract and of all of its terms
2. Bill of lading and conditions of which the acceptor has actual or
3. Loan of bottomry/respondentia constructive notice (Keng Hua Paper Products
4. contract of transportations passengers Inc. vs. CA, Feb. 1998)
5. Marine insurance



A bill of lading is in the nature of a contract of - At its home port (when a coast guard district or
adhesion. station is on the same port); if none, at the nearest
OF COMMERCE 1.) If vessel is of domestic ownership and 15 tons
1994, 1997,1999 and 2000 bar exams gross or less certificate of Philippine registry is
 The liability of the ship owner is limited to the optional.
value of the vessel. The limited liability of the Purpose: declare nationality of a vessel
owner is confined to the vessel, equipment 2.) Vessel (5 tons gross or less) & no certificate of
and freight or insurance, if any. If the ship Philippine registry  certificate of ownership is
owner has abandoned the ship, equipment optional.
and freight, his liability is extinguished. Privileges: right to engage in Philippine coastwise
 If the vessel sinks the liability of the owner is trade and protection of the authorities and the flag
extinguished, although he may have other is also subject to the same privileges.
properties. 3.) Vessel (3 tons gross or less)  not to be
 If the vessel does not sink, the owner registered unless the owner shall so desire.
May exercise the right of abandonment and
the liability of the ship owner is limited to the PURPOSE OF REGISTRATION:
value of the vessel. Purchaser's rights maybe maintained against a claim
filed by the THIRD PERSON.
1. When the vessel is not abandoned by the *Who shall be entitled to the freightage and who
owner or ship agent shall be obliged to pay the crew and other persons
2. When the vessel is covered by insurance who make up the compliment of the vessel?
3. Expenses for repair of the vessel before it sails
4. Claims of employees under the labor laws >It depends upon the time of the sale.
5. When ship owner/ship captain is at fault or If made while it is on a voyage, freightage shall
guilty of negligence. pertain entirely to PURCHASER and payment of the
a. lack of proper and adequate crew and other persons who make up its compliment
equipment(insufficient life vests) for same voyage shall be for his account.
b. lack of proper technical training of If made after the vessel has arrived at the port
the offices and of the vessel of its destination, freightage shall pertain to the
VENDOR and other individuals who make up its
Monarch Ins Co. vs. Ca; Allied Guarantee Insurance complement shall be for his account, UNLESS the
Co vs. CA & Equitable Insurance vs. CA, (June 8, contrary is stipulated in either case.
As a general rule, a ship owner's liability is merely 1. Execution of the bill of sale before consul of the
co-extensive with his interest in the vessel, except Philippines at the port where it terminates its
where actual fault is attributable to the ship voyage;
owner. Thus, as an exception to the limited liability 2. Inscription in the registry of the consulate;
doctrine, a ship owner or ship agent may be held 3. Forwarding by the consul of a true copy of the
liable for damages when the sinking of the vessel is instrument of purchase and sale to the registry of
attributable to the actual fault or negligence of the ship vessel;
owner or its failure to ensure the seaworthiness of the 4. Statement whether the vendor receives its price in
vessel. The instant petitions cannot be spared from the whole or in part.
application of the exception to the doctrine of limited
liability in view of the unanimous findings of the FORMALITIES FOR SALE WHEN VESSEL RENDERED
courts below that both Aboitiz and the crew failed to USELESS:
ensure the seaworthiness of the M/V P. Aboitiz.( 1. application for examination;
Aboitiz Shipping Corp vs CA, October 17,2008) 2. notification of the consignee/ insurer;
3. proof of damage and impossibility of the repair of
PHILIPPINE COAST GUARD (PCG) vested with the vessel;
exclusive authority over the registration and 4. order for the sale of vessel at public auction.
documentation of Philippine vessels, issuance of all
certificates, licenses or documents, necessary or RULES FOR THE SALE OF VESSEL AT PUBLIC
incident to registration. AUCTION:
1. articles of the vessel shall be appraised after
1. All vessels used in Philippine water; 2. posting of the order of the auction
2. Vessels of 3 tons gross shall not be registered 3. announcement
UNLESS the owner shall so desire; 4. auction shall be held on the day fixed
3. All undocumented vessels. 5. Observance of special provisions, governing the
sale of the vessel while it is on the foreign country.
Where Registration to be effected?




- If the seamen contract is not for a definite period or
*EFFECT OF REGISTRATION OF VOLUNTARY SALE voyage, he may discharge them at his discretion
- if it take place while the vessel is on a voyage, the - If for a definite period, he may not discharge them
preferred & hypothecary nature of the credit until after the fulfillment of their contracts
subsists against the vessel until after its return to EXCEPT on the ff. grounds:
the port of registry and 3 months after the a. insubordination in serious matters
inscription of the sale in the registry of vessels or b. robbery
after the return, so as to prevent the possibility of c. theft
fraud upon creditors through voluntary sale. d. habitual drunkenness
e. damage caused to the vessel or to its cargo
PARTICIPANTS IN MARITIME COMMERCE: through malice, manifest or proven
a. ship owners and ship agents negligence
b. captains and masters of the vessel EFFECT/LOSS/DESTRUCTION OF VESSEL:
c. officers and crew of the vessel 1. extinguishes liability arising from the conduct of
c.1 sailing (1st mate) the captain in the vigilance of the goods and for
c.2 quartermaster (2nd mate) the safety of the passengers and for any liability
c.3 engineer arising from negligent acts of the captain
d. seamen 2. extinguishes liability for the wages of the captain
e. supercargoes and the crew and for advances made by the ship
agent if the vessel is lost by shipwreck or capture
A. SHIP OWNERS AND SHIP AGENTS 3. liability for collision
Ship owner - A person who has possession or control
in the management of the vessel and the consequent B. CAPTAINS AND MASTERS OF THE VESSEL
right to direct her navigation and receive freight Captain- who govern vessels that navigate the high
earned and paid, while his possession continues. seas or ships of large dimensions and importance,
Ship agent – A person entrusted with provisioning although engaged in the coastwise trade
and representing the vessel in the port in which it may Masters- who command smaller ships engaged
be found; also includes the ship owner exclusively in the coastwise trade


1. for the acts of the captain 1. General agent of the ship owner
2. contracts entered into by the captain to repair, 2. Technical Director of the vessel
equip, and provision the vessel PROVIDED that the 3. Representative of the Government of the country
amount claimed was invested for the benefit of the under whose flag he navigates
3. Indemnities in favor of third person that may arise QUALIFICATIONS:
from the conduct of the captain in the care of 1. Filipino citizen
goods and safety of passengers transported. 2. Legal capacity to contract
4. Tort or quasi-delict committed by captain EXCEPT 3. Must have passed the required physical, mental
collision with another vessel. examination required for licensing him as such
5. Damages in case of collision due to the fault,
negligence or want of skill of captain, sailing mate INHERENT POWERS OF THE CAPTAIN:
or by other member of the complement. 1. appoint crew in the absence of ship agent
2. command and direct crew
SHIP AGENT'S AND OWNER’S LIABILITY LIMITED: 3. impose correctional punishment on those who
- By abandoning the vessel with all her equipment while on board vessel fail to comply with his
and the freight it may have earned during the orders or are wanting in discipline
voyage(by NECESSARY IMPLICATION); limited to 4. make contracts for the charter of vessel in the
the value of the vessel or its insurance in view of absence of ship agent
the so-called REAL AND HYPOTHECARY nature of 5. supply, equip, and provision the vessel
maritime law. 6. order repair of vessel to enable it to continue its
- Effect: cessation of the responsibility of the owner voyage

1. capacity to trade; 1. from the consignee of the vessel
2. discharge duties of the captain in case of the 2. from the consignee of the cargo
latter's absence; 3. by drawing on the ship agent
3. contract in the name of the owners with respect to 4. by a loan on bottomry
repairs, details of equipment, armament, and all 5. by sale of part of the cargo
that relate to the requirements of navigation;
4. order of new voyage and make a new charter or DUTIES OF THE CAPTAIN:
insure the vessel after obtaining authorization 1. bring on board the proper certificate and
from the ship owners. document and a copy of the Code of Commerce
2. keep a logbook, accounting book and freight book



3. examine before the voyage 5. such authority shall take other steps in carrying at
4. stay on board during the loading and unloading of the facts
the cargo 6. such authority shall also make statements of what
5. be on deck while leaving or entering the port may be the result of the proceeding in the logbook
6. seeks protest, arrival under stress and in case of and in that of the sailing mate
shipwreck 7. he shall deliver the original records to the captain
7. follow instruction of and render accounting to the 8. captain must ratify the protest
ship agent
8. save the vessel lost in case of wreck C. OFFICERS AND CREW
9. hold in custody properties left by deceased by
passengers and crew members 1. Sailing mate/First mate
10. comply with the requirements of customs, health, - second chief of the vessel who takes the place of
etc. at the port of arrival the captain in case of absence, sickness, or death
and shall assume all of his duties, powers, and
SOLIDARILY LIABLE TO THE LATTER: 1. provide himself with maps, and charts with
1. damages to vessel and to cargo due to lack of skill astronomical tables necessary for the
and negligence discharge of his duties
2. theft and robbery of the crew 2. keep the Binnacle book
3. losses and fines in violation of laws 3. Change the course of the voyage on
4. damages due to mutinies consultation with captain and the officers of
5. damages due to misuse of power the boat, following the decision of the captain
6. deviations in case of disagreements.
7. arrival under stress 4. Responsible for all the damages caused to the
8. damages due to non-observance of marine vessel or to the cargo by reason of his
regulations negligence


1. damages caused to the vessel by force majeure - takes command of the vessel in case of the
2. obligations contracted for the repair, equipment inability or disqualification of the captain and the
and provisioning of the vessel UNLESS he has sailing mate, assuming in such case their powers
expressly bound himself personally or has signed a bill and responsibilities and duties
of exchange or promissory note in his name
CARGO- which includes all goods, wares and 1. preserve the hull and rigging of the vessel
merchandise aboard a ship which do not from part of 2. arrange well the cargo
the ship's stores. 3. discipline the crew
4. assign work to crew members
REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY: 5. Inventory the rigging and equipment of the
1. act of public enemy in war was the proximate and vessel, if laid up.
only cause of the loss
2. common carrier exercise due diligence to prevent, 3. Engineers
minimize loss before, during, and after occurrence of - Officers of the vessel but have no authority
the act of the public enemy in war EXCEPT in matters to motor apparatus. When 2 or
more are hired, one of them should be the Chief
1. Captain must make a protest before competent DUTIES:
authority at the first port he touches 1. in charge of motor apparatus, spare parts, and
2. Such a protest must be made within 24 hours other instruments pertaining to the engines
following his arrival 2. keep the engines and boilers in good
3. captain must ratify it within some period when he condition
arrives at his destination 3. not to change or repair the engine without
4. he must immediately proceed with the proof of authority of the captain
the facts 4. inform the captain of any damage to the
motor apparatus
SHIPWRECKED: 6. supervise all personnel maintaining the
1. captain must make a protest before the nearest engine
competent authority
2. protest be made within 24 hours following his 4. Members of the Crew
arrival Hired by the ship agent. Where he is present and in his
3. make sworn statement of the facts absence, the captain hires them preferring Filipinos,
4. authority/consul abroad shall verify said facts and in their absence, he ,ay take in foreigners but not
exceeding 1/5 of the crew.



a governmental prohibition of commercial intercourse

CLASSES OF SEAMAN'S CONTRACT: intended to bring about an entire cessation for the
1. by the voyage time being of all trade
2. by the month
3. by share of profits or freightage Embargo
- a proclamation or order of the State usually issued
JUST CAUSES FOR THE DISCHARGE OF SEAMAN in time of war/ threatened hostilities prohibiting
WHILE CONTRACT SUBSISTS: the departure ships/ goods from some or all the
1. perpetration of a crime ports of such State until further order
2. repeated insubordination, want of discipline
3. repeated incapacity and negligence Blockade
4. habitual drunkenness - a sort of circumvallation of place by all foreign
5. physical incapacity connections and correspondence is as far as
6. desertion human power can affect it to be cut-off
CAUSES OF REVOCATION OF VOYAGE: - person who discharge administrative duties
1. war assigned to him by ship agent or shippers, keeping
2. blockade an account and record of transaction as required
3. prohibition to receive cargo at destination in the accounting book of the captain
4. embargo
5. inability of the vessel to navigate B.CHARTER PARTY
- Contract by virtue of which the owner or agent
RULES IN CASE OF DEATH OF A SEAMAN: The binds himself to transport merchandise or
seaman's heirs are entitled to the payment as follows: persons of a fixed price. It may either be contract
1. if death is natural: of affreightment (time and Voyage Charter) and
a. compensation up to time of death if bareboat or demise charter.
engaged on voyage
b. if by voyage- half of amount if death CLASSES OF CHARTER PARTY
occurs on voyage out; and full if on
voyage in 1. As to extent of vessel hired
c. if by shares- none if before departure; full a. total- whole of the vessel is chartered
if after departure b. partial- only part of the vessel is chartered
2. if death is due to defense of vessel- full payment
3. if captured in defense of vessel- full payment 2. As to time
a. until a fixed day/ for a determined number of
4. if captured due to carelessness- wages up to the days and months
date of the capture b. for a voyage(outgoing/return/roundtrip)


CIRCUMSTANCES: a. for a fixed amount for the whole cargo
b. for a fixed amount per ton
1. If before beginning voyage, captain attempts to c. for an amount per month
change it or a naval war with the power to which
was destined occurs
2. If a disease breaks out and be officially declared a. Contract of Affreightment- the owner of the
an epidemic in the port of destination vessel leases a part or all of the space of the
3. If the vessel change owner or captain vessel to carry goods but retains the
possession, command and navigation of the
vessel. The charter merely has the use of the
- All persons on board, from the captain to the cabin
space in the vessel in return for the payment
boy, necessary for the management, maneuvers,
of the charter hire.
and service, thus including the crew, the sailing
mates, engineers, stalkers and other employees on
b. Bareboat/ Demise Charter—involve the
board not having specific designations
transfer of full possession and control of the
- It does not include the passengers or the person
vessel to the charterer. The entire control and
whom the vessel is transported
management of the vessel is given up to the
charterer. The charterer mans the vessel with
his own people. (2003 Bar exams)
1. reduced to writing in Accounting Book
The owner of the vessel has no more
2. signed by parties
insurable interest on the vessel. In case of loss of
3. visaed by marine authority if executed in
the vessel, the ship owner can recover the value of
Philippine territory/consul or consular agents if
the vessel from the charterer.(Caltex vs. Sulpicio
executed abroad
line, 1999)
4. read to the seaman concerned and such fact must
be stated in the agreement
1. in writing
Interdiction of Commerce



2. drawn in duplicate 2. error in tonnage or flag

3. signed by the parties 3. failure to place the vessel at the charterer's
4. contain stipulation disposal
 not all requisites are essential for the validity of 4. return of the vessel due to pirates, enemies or
charter party bad weather
5. arrival at the port for repairs
Primage B. At ship owner’s request
- belongs to owner/ freighters; 1. If the extra lay days terminate without cargo
- increase of the freight rate being placed alongside the vessel
- considered gratuity to master if is stipulated 2. Sale by the owner of the vessel before loading
- a bonus to be paid to a captain after a successful C. Fortuitous causes
voyage 1. war
Demurrage 2. blockade
- Sum which is fixed by the contract of carriage, or 3. prohibition to receive cargo
which is allowed, as remuneration to the owner of 4. embargo
a ship for the detention of his vessel beyond the 5. inability of the vessel to navigate
number of days allowed by the charter party for D. LOANS ON BOTTOMRY/ RESPONDENTIA
loading/unloading/sailing. (1961,1967,& 1980 bar exams)
"Lay days"
-days allowed to charter parties for loading and These loans are secured by the owner or captain
unlading of the vessel for the use of the vessel. In the case of
- period when vessel will be delayed in port for loans on bottomry, the security of the loan is the vessel
loading and unloading. itself; while loan on respondentia, the security of the
"Extra Lay Days" loan is the cargo.
- days which followed after lay days have elapsed
Deadfreight The loan is in the nature of insurance. The loan will
– A cargo not loaded is considered as deadfreight, only be paid on the safe arrival of the vessel or cargo
which covers the amount paid by or recoverable from fails to reach the port of destination, the creditor loses
the charterer for the portion of the ship’s capacity the his right to recover the amount of the loan.
latter contracted for but failed to occupy.
1. sold by captain to necessary repairs 1. exposure of security or marine peril
2. jettisoned for the common safety 2. obligation of the debtor conditioned only upon
3. loss by reason of shipwreck/stranding safe arrival of security at the point of destination
4. seized by pirates/enemies HYPOTHECARY NATURE OF BOTTOMRY AND
5. suffer deterioration/diminutions RESPONDENTIA:
6. increase by natural cause and weight or size General Rule: the obligation of the borrower to pay is
extinguished if the goods given as security are
RIGHTS AND OBLIGATIONS OF CHARTER PARTY: absolutely lost by reason of an accident of the voyage
A. Of the ship owner or ship agent designated, and if it is proven that the goods were on
1. If the vessel is chartered wholly not to accept board.
cargo from others; EXCEPTIONS:
2. To observe represented capacity; 1. loss due to inherent defect
3. To unload cargo clandestinely placed; 2. loss due to the barratry on the part of the captain
4. To substitute another vessel if load is less 3. loss due to the fault or malice of the borrower
than 3/5 of capacity; 4. that the vessel is engaged in contraband
5. To leave the port if the charter does not bring 5. that the cargo loaded on the vessel be different
the cargo within the lay days and extra lay from that agreed upon
days allowed;
6. To place in a vessel in a good condition to Bottomry/repondentia Simple loan
navigate; Marine risk
7. To bring cargo to nearest neutral port in case Duly established existence Not necessary
of war or blockade. of a marine risk is
B. Of the charterer Form and manner
1. to pay the agreed charter price Must be executed in Formal requisites of
2. to pay freightage or unboarded cargoes accordance with the form an ordinary contract
3. to pay losses to others for loading and manner prescribed by will suffice
uncontracted cargo and illicit cargo the code of commerce
4. to wait if the vessel needs repair Registry of Vessels
5. to pay expenses for deviation Must be recorded in the No such registration
registry of Vessel to be is required
RESCISSION OF CHARTER PARTY binding to third persons
A. At charterer's request Preference
1. by abandoning the charter and paying half of Preference is extended to Preference is
the freightage the last lender extended to the first



lender value of the owner’s

property saved
Right to recover
When loan on bottomry or respondentia regarded as
No reimbursement There may be
Simple Loan
Requisites of Gross or General average
1. Lender loaned an amount larger than the value of
1. Common danger
the object due to fraudulent means employed by the
 that both the ship and the cargo, after
borrower(art 726 code of commerce)
has been loaded, are subject to the
2. Full amount of the loan is not used for the cargo or
voyage, or in the port of loading or
given on the goods if all of them could not have been
loaded, the balance will be considered a simple loan(
 that the danger arises from the
art 727 Code of Commerce)
accidents of the sea, dispositions of
3. If the effects on which the money is taken is not
the authority or faults of men,
subjected to any risk(729 Code of commerce
provided that the circumstances
Note: under existing laws, the parties to a loan,
producing the peril should be
whether ordinary or maritime, may agree on any rate
ascertained and imminent or may
of interest (Cb circular 905); provided the same is not
rationally be said to be certain and
contrary to law, morals, good customs, public order or
public policy. Art 1306 NCC
2.Deliberate Sacrifice
Gen. rule: sacrifice is made through the
jettison of the cargo or part of the shipis thrown
1 Averages
2. Arrival Under stress
a. where the sinking of a vessel is necessary to
3. Collision
extinguish a fire in a port, roadsteads, creek
4. Shipwreck
or bay
b. where cargo is transferred to lighten the ship
on account of a storm to facilitate entry into a
An extraordinary or accidental expense incurred
during the voyage in order to preserve the cargo,
vessel or both, and all damages or deterioration
Pupose: To be able to demand general contribution
suffered by the vessel from departure to the port of
loading to the consignment (art 806 Code of
4.Proper formalities and legal steps
a. procedure for recovery
The person whose property has been saved
b. assembly and deliberation
must contribute to reimburse the damage caused or
c. resolution of the caption
expense incurred if the situation constitutes general
d. entry of the resolution in the logbook
e. detailed minutes
It is classified into: (1) general or gross average or (2)
f. delivery of the minutes to the maritime judicial
simple or particular.
authority of the first port, within 24hours from arrival
Particular/ simple Gross/ general
 Ratification by the captain under oath.
Goods Not Covered By General Average Even if
Damages or expenses Damages or expenses sacrified:
caused to the vessel or deliberately caused in Goods carried on deck
cargo that did not inure order to save the
1.goods not recorded in the books or records of vessel
to the common benefit, vessel, its cargo orboth
2.fuel for the vessel if there is more than sufficient fuel
and borne by from real and known
for the voyage.
respective owner.( art risk.(811)
Liability JETTISON
Act of throwing cargo overboard in order to lighten
The owner of the goods All persons having an
which gave rise to the interest in the vessel
the vessel
expense or suffered the and the cargo therein
damage shall bear this at the time of the ORDER OF GOODS TO BE CAST OVERBOARD IN
average.(810) average shall CASE OF JETTISON:
contribute to satisfy 1. Those which are on the deck, preferring the
this average(812) heaviest one with the least utility of value
The insurers and 2. Those which are below the upper deck beginning
lenders on bottomry with the one with greatest weight and smallest
and respondentia shall value jettisoned goods are not res nullius nor
likewise contribute deemed abandoned within the meaning of civil
Numbers of interests involved law so as to be the object of occupation by salvage.
Only one interest Several interests is
involved involved Arrival Under stress
Share in the damage/expense - arrival of a vessel at a port of destination on
100% share In proportion to the account of lack of provision, well-founded fear of



seizure, pirates, or accidents in sea disabling when there was not sufficient time to do so or there
navigation was fear of a greater damage or other legitimate
When lawful When Who bears reason.
unlawful expenses 7. The vessel which is not properly moored or
The inability to 1. lack of The ship does not observe the proper distances has the
continue voyage is provisions owner or ship presumption against itself.
due to lack of due to agent is liable 8. The vessel which is moored at a place not
provisions, well negligence to in case of used for the purpose, or which is improperly moored
founded fear of carry unlawful or does not have sufficient cables, or which has been
seizure, according to arrival under left without watch, has also against itself the
privateers, pirates usage and stress. But presumption.
or accidents of the customs; they shall not
9. The same rule applies to those vessels
sea disabling it to 2.risk of be liable for
which do not have buoys to indicate the location of its
navigate enemies not damages
anchors to prevent damage to these vessels which may
well-known caused by a
or manifest; reason of a approach it.
3.defect due lawful arrival.
to improper Zones in time of collisions (3 time zones):
4.malice, 1. all the time up to the moment when the risk
negligence, of collision may have said to have begun
lack of --> within this zone, no rule is applicable
foresight, lack because none is necessary. Each vessel is free to direct
of skill its course as it deems best with reference to the
Cases of collision: movements of the other vessel.
1. Due to the fault, negligence or lack of skill of the
captain, sailing mate or the complement of the vessel-- 2. the time between the moment when the
under 826, the ship owner shall be liable for the losses risk of collision begins and the moment when it has
and damages become a practical necessity.
2. Due to the fault of both vessels --> under 827, each
vessel shall suffer its own losses, but as regards the 3. the time between the moment when
owners of the cargoes, both vessels shall be jointly and collision has become a practical certainty and the
severally liable moment of actual contact
3. Where it cannot be determined which of the 2 vessels
is at fault --> under 828, each vessel shall suffer its Effect of fault of privileged vessel during third
own losses, and both shall also be solidarily zone :
responsible for the losses and damages caused to their
cargoes If a vessel having a right of way suddenly
4. Collision due to fortuitous event or force majeure --> changes its course during the third zone, in an effort to
under 830, each vessel shall bear its own damages avoid an imminent collision due to the fault of another
5. Where two vessels collide with each other without vessel, such act may be said to be done in extremis,
their fault but by reason of the fault of a third vessel --> and even if wrong, cannot create responsibility on the
under 831, the owner of the third vessel causing the part of said vessel with the right of way. Thus, it has
collision shall be liable for the losses and damages 6. a been held that fault on the part of the sailing vessel at
vessel which is properly anchored and moored may the moment preceding a collision, that is, during the
collide with those nearby by reason of a storm or third division of time, does not absolve the steamship
other cause of force majeure --> under 832, the vessel which has suffered herself and a sailing vessel to get
run into shall suffer its own damages and expenses into such dangerous proximity as to cause inevitable
harm and confusion, and a collision results as a
Nautical Rules to determine negligence : consequence. The steamer having a far greater fault in
1. When 2 vessels are about to enter a port, allowing such proximity to be brought about is charge-
the farther one must allow the nearer to enter first; if able with all the damages resulting from the collision;
they collide, the fault is presumed to be imputable to and the act of the sailing vessel having been done in
the one who arrived later, unless it can be proved that extremis and even wrong, is not responsible for the
there was no fault on its part. result.
2. When 2 vessels meet, the smaller should
give the right of way to the larger one.
3. A vessel leaving port should leave the way
clear for another which may be entering the same CASES COVERED BY COLLISION AND ALLISION:
port. 1. one vessel at fault- such vessel is liable for damage
4. The vessel which leaves later is presumed caused to innocent vessel as well as damages
to have collided against one who has left earlier. suffered by owners of cargo of both vessels
5. There is also a presumption against the 2. both vessels at fault- each vessel must bear its
vessel which sets sail at night. own loss but the shippers of both vessel may go
6. The presumption also works against the against the ship owner who will be solidarily
vessel with spread sails which collide with another liable
which is at anchor, and cannot move, even when the 3. vessel at fault not known- same as rule 2
crew of the latter has received word to lift anchor, 4. third vessel at fault- same rule 1



5. fortuitous event- no liability, each bear its own - with respect to vessels destined for foreign ports, the
loss COGSA doesn't apply unless parties make it applicable.

Rules governing LIABILITIES of parties in case of Q: In what situations does COGSA primarily apply?
COLLISION: (1995, 1997,1998, & 2007 Bar exams) A: Where the parties expressly stipulate that COGSA
1. Where collision is due to the negligence or malice shall govern their respective rights and obligations.
of the captain and/or other ship officers of one
vessel, the ship owner of such vessel shall be liable for Q: Can the COGSA apply in domestic shipping?
all resulting damages. A: Generally, NO.
2. Where collision is due to the fault of both vessels,
each vessel shall suffer their respective losses but as EXCEPTION: when parties agree to make it apply.
regards to the owners of the cargoes, both vessels
shall be jointly and severally liable. Q: What application does COGSA have in carriage of
3. If it cannot be determined which vessel is at passengers?
fault, each vessel shall suffer its own loses and both A: None. Applies only to carriage of goods.
shall be solidarily liable for loses or damages on the
4. The vessels may collide with each other through The shipper shall be responsible for the goods the
fortuitous event or force majeure. In which case, moment it passes through one side of the ship for the
each shall bear its own damage. purpose of loading until it passes through the other
5. Two vessels may collide without their fault but by side for discharging. The reason for this being that
reason of a third vessel. The third vessel shall be there are two tackles involved in this operation; one
liable for losses and damages sustained. for loading, the other, unloading.
Requisite for RECOVERY arising from collision:
1. Protest must be made within 24 hours before: The shipper is responsible for: Loading, Handling,
a) Competent authority at the point of Transport, Carriage, Custody, and Discharge
collision or
b) At the first port of arrival, if in the What is the Rule for LOSS or DAMAGE to the goods?
Philippines and to the Philippine Consul, (1992, 1995, 20000 & 2005 bar exams)
if the collision took place abroad.
If the damage is apparent, then notice must be
Injuries to persons and damage to cargo of owners not immediately given. The notice may either be in writing
on board on time of collision need not be protested. or orally.
Article 835, Code of Commerce: In case of collision, If the damage is not apparent, notice must be given
there must be a marine protest to recover collision within three days from such delivery.
damage; in such a case, the marine protest is a
condition sine qua non and not merely a disclaimer Failure to give notice is not a bar to the action to file
unlike in the case of arrival under stress and provided the filing of the suit is made within one year
shipwreck. from delivery to consignee.

CARRIAGE OF GOODS BY SEA ACT Notice requirements:

Applicable to all transportation of goods by sea in  COGSA: Sec. 3(6)
foreign trade to and from Philippine ports AND does If loss or damage is apparent - protest as soon as receipt
not apply to purely domestic transport. of goods
If not apparent -> within 3 days of delivery
Laws applicable to a contract for the carriage of
goods by sea: Rationale behind the 3-day notice and relatively short
prescriptive period:
1. Distinguish - common carrier (Civil Code) - To provide carrier an opportunity to look for
- private carrier the lost goods
2. Where is the vessel going? - To discover who was at fault
a. Common carrier coming to the Phils. -In case of transshipment, to determine, when
1st: Civil Code and where damage occurred.
2nd: COGSA (it's more specific than Code of
Commerce)  Code of Commerce: Art. 366
- in foreign trade apparent - protest at time of receipt
3rd: Code of Commerce non-apparent - within 24 hours after receipt

b. Private carrier coming to the Phils. in foreign trade  WARSAW: Art. 26

1st: COGSA (because it's more specific) in case of damage of:
2nd: Code of Commerce baggage - within 3 days from receipt
3rd: Civil Code (provisions not on common carriers goods - within 7 days
e.g. torts, contracts)
in case of delay: within 14 days from receipt
c. From the Phils. to a foreign country: apply laws of
such foreign country (Art. 1753) Prescriptive period



 the carrier and the agent shall be discharged A. If the vessel is abandoned, salvor must
form liability in respect of loss or damage tow it to the nearest port where it will be
unless suit is brought within 1 year from: delivered to the Municipal Treasurer or to
(1) in case of damaged goods: from the time delivery of the Collector of Customs who will
the goods was made advertise the fact of salvage;
(2) in case of non-delivery (i.e., lost goods): from the B. If owner of salvaged vessel appears, he
date the goods should have been delivered may take possession of the vessel and
must pay a reward, the amount of which
Loss or damage as applied to the COGSA contemplates is not more than 50% of the value of the
a situation where no delivery at all times was made by vessel;
the shipper of the goods because the same had C. If no claim for the vessel is made within 3
perished, gone out of commerce, or disappeared in months after the publication of the
such a way that their existence is unknown or they advertisement, the Municipal Treasurer
cannot be recovered. It does not include a situation will sell the property saved at a public
where there was indeed a delivery but to the wrong auction and the reward and expenses
person or a misdelivery (Ang vs. American Steamship shall be deducted from the proceeds. The
Agencies 19 scra123) and damage arising from delay or balance is deposited with the Treasury;
late delivery( Mitsui O.S.K line Ltd vs. CA 287 SCRA 366) D. If no one claims the same after 3 years, ½
in such instance the civil code rules on prescription shall go to the salvors and the other half
shall apply. to the government.
 Hence, in case of misdelivery (delivery to wrong
person) or conversion of the goods, the rules on IV. CONSIDERATIONS IN DETERMINING THE
prescription found in the Civil Code shall apply AMOUNT OF REWARD
(10 years for contracts; 4 years for tortuous 1.) First case
obligations) A. Value of the property saved;
B. Zeal employed by those who made the
The one year period is suspended by: salvage;
a. The express agreement of the parties (Universal C. Danger to the lives of those who
Shipping Lines Inc vs. IAC 1990) participated;
b. The filing of an action in court until it is dismissed D. Number of persons who took part;
 the 1yr period shall run from delivery of the E. Services rendered;
last package and is not suspended by F. Expenses incurred
extrajudicial demand.
 the one year period shall run from delivery to 2.) Second case: If one vessel saves another
the arrasstre operator and not to the vessel, the reward going to the former shall be
consignee divided as follows:
A. ½ to the ship owner;
SALVAGE LAW (ACT 2616) B. ¼ to the captain; and
C. ¼ to the crew.
A. There must be a valid object of salvage, WARSAW CONVENTION
i.e., vessel, cargo, freight or wreck of
vessel or cargo; Convention for the Unification of Certain Rules
B. Such object must have been exposed to Relating to International Transportation by Air
marine peril; The Warsaw Convention:
C. Salvage services must be rendered  mandates carriers to issue passenger
voluntarily, i.e., not arising from pre- tickets;
existing duty;  requires carriers to issue baggage
D. Salvage effort must be successful. checks for checked luggage;
 creates a limitation period of 2 years
II. SHIPWRECK AND DERELICT: within which a claim must be brought
A. Shipwreck. A shipwreck refers to the (Article 29); and
injuries suffered by the vessel disabling  limits a carrier's liability to at most:
the latter for navigation.  250,000 Francs or 16,600 Special
B. Derelict. It refers to the vessel or cargo Drawing Rights (SDR) for personal
abandoned at sea by those entrusted by injury;
such vessel or cargo. A derelict is a vessel
 17 SDR per kilogram for checked
or cargo badly damaged and abandoned
luggage and cargo, or $20USD per
by the crew to the mercy of the sea. Mere
kilogram for non-signatories of the
abandonment of such vessel or cargo does
amended Montreal Protocols.
not make it res nullius so that anybody
 5,000 Francs or 332 SDR for the
can claim it. The proper procedure must
hand luggage of a traveler.
be followed.




I. NATURE AND SCOPE OF WARSAW The linkage of the contract to the Manila-Los
CONVENTION Angeles travel tickets obtained by the Mapas from
PAL cannot bring the arrangements within the
SCOPE: Applies to all international carriage of second category, where the same were filled-up
persons, luggage or goods performed by aircraft for only by the Mapas in response to the query “Your
reward. It applies equally to gratuitous carriage by Complete Intinerary” at the time they claimed for
aircraft performed by an air transport undertaking. their lost pieces of baggage. (Mapa vs. CA, G.R. No.
122308 July 8, 1997)
International Carriage:
Means any carriage in which, according to the
contract made by the parties, the place of It does not however preclude operation of the
departure and the place of destination, whether or Civil Code or other pertinent laws:
not there be a break in the carriage or a Although the Warsaw Convention has the
transshipment, are situated either within the force and effect of law in this country, being a
territories of two High Contracting Parties, or treaty commitment assumed by the Philippine
within the territory of a single High Contracting government, said convention does not operate as
Party, if there is an agreed stopping place within a an exclusive enumeration of the instances for
territory subject to the sovereignty, suzerainty, declaring a carrier liable for breach of contract of
mandate or authority of another Power, even carriage or as an absolute limit of the extent of
though that Power is not a party to this that liability. The Warsaw Convention declares the
Convention. carrier liable in the enumerated cases and under
certain limitations. However, it must not be
 The Warsaw Convention to which the Republic construed to preclude the operation of the Civil
of the Philippines is a party and which has the Code and pertinent laws. (PAL vs. CA, G.R. No.
force and effect of law in this country applies to 119641 May 17, 1996)
all international transportation of persons,
baggage or goods performed by an aircraft II. SALIENT ASPECTS OF THE WARSAW
gratuitously or for hire. CONVENTION

 When a contract of carriage is a contract of A. Provision on the valuation of cargo

international transportation, provisions of the Article 22. (1) In the transportation of
Convention automatically apply and passengers, the liability of the carrier for each
exclusively govern the rights and liabilities of passenger shall be limited to the sum of
the airline and its passengers. (American 125,000 francs. Where in accordance with the
Airlines vs. CA, G.R. No. 116044-45 March 9, law of the court to which the case is submitted,
2000) damages may be awarded in the form of
periodical payments, the equivalent capital
Two categories of International Transportation value of the said payments shall not exceed
covered: 125,000 francs. Nevertheless, by special
1.) that where the place of departure and contract, the carrier and the passenger may
the place of destination are situated agree to a higher limit of liability.
within the territories of two High
Contracting Parties regardless of Art 25 (1) The carrier shall not be entitled to
whether or not there be a break in avail himself of the provisions of this
the transportation or a Convention which exclude or limit his liability, if
transshipment; and the damage is caused by his willful misconduct
2.) that where the place of departure and or by such default on his part as, in accordance
the place of destination are within the with the law of the court to which the case is
territory of a single High Contracting submitted, is considered equivalent to willful
Party if there is an agreed stopping misconduct.
place within a territory subject to the
sovereignty, mandate, or authority of Admittedly, in a contract of air carriage a
another power, even though the declaration by the passenger of a higher value is
power is not a party of the needed to recover a greater amount, and that the
Convention. (Mapa vs. CA, G.R. No. air carrier is not liable for loss of baggage in an
122308 July 8, 1997) amount in excess of the limits specified in the
tariff which was filed with the proper authorities,
(Lhuillier vs. British Airways, G.R. No. 171092 such tariff being binding on the passenger
March 15, 2010) regardless of his lack of knowledge thereof or
assent thereto. Nevertheless, there can be no
When the airline tickets evidencing the blind reliance on adhesion of contracts
contract of transportation between Mapa and where:
TWA, which were purchased in Bangkok, show the
place of departure and the place of destination to 1.) the facts and circumstances justify that
be within the United States, the contract cannot they should be disregarded; and
come within the purview of the first category of 2.) when the benefits of limited liability have
“International Transportation.” been waived when the air carrier failed to



raise timely objections during the trial of prescriptive periods. Article 29, par. (2), was
when questions and answers regarding the intended only to let local laws determine
actual claims and damages sustained by whether an action had been commenced within
the passenger were asked. (British the two (2)-year period. (United Airlines vs. Uy,
Airways vs. CA, G.R. No. 121824 January G.R. No. 127768 November 19, 1999)
29, 1998)
Prescription of action covered by Warsaw
B. Provision on limiting liability convention distinguished from those arising
from torts:
The Convention's provisions do not "regulate or Respondent's complaint reveals that he is
exclude the following areas: suing on two (2) causes of action: (a) the shabby
and humiliating treatment he received from
1.) liability for other breaches of contract by petitioner's employees at the San Francisco
the carrier; Airport which caused him extreme
2.) misconduct of its officers and employees; embarrassment and social humiliation; and, (b)
or the slashing of his luggage and the loss of his
3.) for some particular or exceptional type of personal effects amounting to US $5,310.00.
damage. (Northwest Airlines vs. CA, G.R.
No. 120334 January 20, 1998) While his second cause of action — an action
for damages arising from theft or damage to
Varying views as regards misconduct: property or goods — is well within the bounds of
the Warsaw Convention, his first cause of action
1st View – Outside WC Coverage — an action for damages arising from the
The Warsaw Convention denies to the carrier misconduct of the airline employees and the
availment of the provisions which exclude or limit violation of respondent's rights as passenger —
his liability, if the damage is caused by his willful clearly is not.
misconduct or by such default on his part as, in Consequently, insofar as the first cause of
accordance with the law of the court seized of the action is concerned, respondent's failure to file
case, is considered to be equivalent to willful his complaint within the two (2)-year limitation
misconduct, or if the damage is similarly caused of the Warsaw Convention does not bar his
by any agent of the carrier acting within the action since petitioner airline may still be held
scope of his employment. liable for breach of other provisions of the Civil
Code which prescribe a different period or
Under domestic law and jurisprudence (the procedure for instituting the action, specifically,
Philippines being the country of destination), the Art. 1146 thereof which prescribes four (4) years
attendance of gross negligence (given the for filing an action based on torts. (United
equivalent of fraud or bad faith) holds the Airlines vs. Uy, G.R. No. 127768 November 19,
common carrier liable for all damages which can 1999)
be reasonably attributed, although unforeseen, to
Use of delaying tactics by the carrier won’t
the non-performance of the obligation, including
preclude enforcement of action even beyond
moral and exemplary damages. (Sabena
the prescriptive period:
Beligian World Airways vs. CA, G.R. No. 104685
March 14, 1996) Despite the express mandate of Art. 29 of the
Warsaw Convention that an action for damages
2nd View - Tortious conduct as ground for the should be filed within two (2) years from the
petitioner’s complaint is within the purview arrival at the place of destination, such rule shall
of the Warsaw Convention (Lhuillier vs. not be applied in the instant case because of the
British Airways, G.R. No. 171092 March 15, delaying tactics employed by petitioner airline
2010) itself. (United Airlines vs. Uy, supra)
IV. Jurisdiction of Local Courts under the Warsaw
C. On limitation of time to file action Convention
Article 29. (1) The right to damages shall be Art. 1 (2) For the purposes of this Convention the
extinguished if an action is not brought within expression "international carriage" means any
two years, reckoned from the date of arrival at carriage in which, according to the contract made
the destination, or from the date on which the by the parties, the place of departure and the place
aircraft ought to have arrived, or from the date of destination, whether or not there be a break in
on which the carriage stopped. the carriage or a transhipment, are situated either
(2) The method of calculating the period of within the territories of two High Contracting
limitation shall be determined by the law of the Parties, or within the territory of a single High
court to which the case is submitted. Contracting Party, if there is an agreed stopping
place within a territory subject to the sovereignty,
suzerainty, mandate or authority of another Power,
The two (2)-year limitation incorporated in even though that Power is not a party to this
Art. 29 as an absolute bar to suit and not to be Convention. A carriage without such an agreed
made subject to the various tolling provisions of stopping place between territories subject to the
the laws of the forum. This therefore forecloses sovereignty, suzerainty, mandate or authority of
the application of our own rules on interruption

the same High Contracting Party is not deemed to the applicable domestic law. Only after the question of
be international for the purposes of this which court has jurisdiction is determined will the
Convention. (Emphasis supplied) issue of venue be taken up. This second question shall
Art. 17. The carrier shall be liable for damage be governed by the law of the court to which the case
sustained in the event of the death or wounding of a is submitted. (Lhuillier vs. British Airways, Supra.)
passenger or any other bodily injury suffered by a
passenger, if the accident which caused the damage PUBLIC SERVICE LAW
so sustained took place on board the aircraft or in
the course of any of the operations of embarking or What is a public utility? (2000 Bar exams)
Art 28 (1) An action for damages must be brought A public utility is a business or service engaged in
at the option of the plaintiff, in the territory of one regularly supplying the public with some commodity
of the High Contracting Parties, either before the or service of public consequence such as electricity,
court of the domicile of the carrier or of his gas, water, transportation, telephone or telegraph
principal place of business or where he has a place service. Apart from statutes which define the public
of business through which the contract has been utilities that are within the purview of such statutes, it
made, or before the court at the place of would be difficult to construct a definition of a public
destination. utility which would fit every conceivable case. As its
name indicates, however, the term public utility
implies a public use and service to the public. (Am. Jur.
“Destination” vs. “Agreed Stopping Place” 2d V. 64, p.549.) (Albano vs. Reyes)
Article 1(2) also draws a distinction between
a "destination" and an "agreed stopping place." It is the ORDINARY AND PRIMARY PURPOSE OF THE
"destination" and not an "agreed stopping place" that PUBLIC SERVICE LAW
controls for purposes of ascertaining jurisdiction  ORDINARY PURPOSE:
under the Convention. To subject public services to state control and
The contract is a single undivided operation, regulation.
beginning with the place of departure and ending with  SPECIFIC PURPOSES:
the ultimate destination. The use of the singular in the 1. To secure adequate, sustained service
expression indicates the understanding of the parties for the public at the least possible
to the Convention that every contract of carriage has cost, and protect the public against
one place of departure and one place of destination. unreasonable charges and poor
An intermediate place where the carriage may be inefficient service.
broken is not regarded as a "place of destination." 2. To protect and conserve investments
(Lhuillier vs. British Airways, G.R. No. 171092 March which have already been made for
15, 2010) public service, and prevent ruinous
Jurisdictional Character of Art. 28 competition.
We further held that Article 28(1) of the
Warsaw Convention is jurisdictional in character.
A number of reasons tend to support the  POLICE POWER, for the protection of the
characterization of Article 28(1) as a jurisdiction and public as well as the utilities themselves.
not a venue provision. First, the wording of Article 32, (Pantranco v. P.S.C., 70 Phil 221)
which indicates the places where the action for
damages "must" be brought, underscores the  CONSTITUTIONAL BASIS:
mandatory nature of Article 28(1). Second, this 1. ARTICLE XII, SECTION 11:
characterization is consistent with one of the > A franchise, certificate, or any other
objectives of the Convention, which is to "regulate in a form of authorization for the operation of
uniform manner the conditions of international public utility shall be granted to:
transportation by air." Third, the Convention does not
contain any provision prescribing rules of jurisdiction - Filipino Citizens
other than Article 28(1), which means that the phrase - Corporations or associations
"rules as to jurisdiction" used in Article 32 must refer organized under Philippine
only to Article 28(1). In fact, the last sentence of Laws where at least 60% of
Article 32 specifically deals with the exclusive the capital is owned by
enumeration in Article 28(1) as "jurisdictions," which, Filipino Citizens.
as such, cannot be left to the will of the parties - 100% Filipino Management
regardless of the time when the damage occurred.
xxxx > Mass media and commercial
telecommunications shall be:
In other words, where the matter is governed by the
- 100% Filipino Capital, and
Warsaw Convention, jurisdiction takes on a dual
- 100% Filipino management
concept. Jurisdiction in the international sense must
be established in accordance with Article 28(1) of the
In times of national emergency, when the
Warsaw Convention, following which the jurisdiction
public interest so requires, the State may
of a particular court must be established pursuant to
during the emergency and under reasonable



terms, temporarily take over or direct the appropriating private property without just
operation of any private owned public utility compensation.
or business affected with public interests. 3. Judicial:
3. ARTICLE XII, SECTION 18 Boards, commissions are not judicial
The state may, in the interest of national tribunals and therefore cannot determine
welfare or defense, establish and operate vital judicial questions such as validity of contract.
industries and upon payment of just 4. Jurisdiction:
compensation, transfer to public ownership Extends only to persons engaged in public
utilities and other private enterprises to be utilities, or over a public utility, which holds a
operated by the government. Certificate of Public Convenience.
The state shall regulate or prohibit B. JURISDICTION
monopolies when the public interest so
requires; no combination in restraint of trade  General Rule: Over persons engaged in public
or unfair competition shall be allowed utilities, or over a public utility, which holds a
Certificate of Public Convenience.
 Exemption: violators of a valid regulation
Distinguish a Certificate of Public Convenience promulgated under the law
from a Certificate of Public Convenience and
Necesssity Distinguish Legislative Franchise from a CPC
A CPC is issued whenever the Commission ● A franchise is a grant or privilege from the
finds that the operation of the proposed public service sovereign power, while the certificate is a form of
will promote the public interests in a proper and regulation through an administrative agency.
suitable manner, for which a municipal or legislative
franchise is not necessary. On the other hand, CPCN is ● A franchise is a property right and cannot be
issued upon approval of any political subdivision of revoked or forfeited without due process of law
the Philippines when in the judgment of the (PLDT, Co. v. NTC and CELLCOM, Inc. (Express
Commission, such franchise or privilege will properly Telecommunications Co., Inc. G.R. No. 88404, 18
conserve the public interest (Perez, Transportation October 1990), whereas a CPC or a CPCN as far as the
Laws and Public service Act). interest of the State is concerned , constitutes neither a
franchise nor a contract, confers no property right, and
OFFICES NOW CHARGED WITH ENFORCEMENT OF is a mere license or a privilege. The holder of said
PUBLIC SERVICE LAW certificate does not acquire a property right in the
route covered thereby. Nor does it confer upon the
The Public Service Commission has been abolished. holder any proprietary right or interests or franchise
The following replaced it: in the public highways. Revocation of this certificate
deprives him of no vested right. New and additional
1. LAND TRANSPORTATION- Department of burdens alteration of the certificate, or even
Transportation and Communication (DOTC) revocation or annulment thereof is reserved to the
and the Land Transportation Franchising and State (Lugue v. Villegas, G.R. No. L-22545, 28
Regulatory Board (LTFRB) November 1969).
Industry Authority (MARINA) Essentials before Granting a CPC/ CPCN
3. AIR TRANSPORTATION- Air Transportation 1. The granter must be a citizen of the
Office (ATO) headed by an assistant secretary Philippines or entity sixty percent of which is
and the Civil Aeronautics Board, which has owned by such citizens.
been placed under the DOTC as an attached 2. The grantee must have sufficient financial
agency. capability to undertake the service and,
4. TELECOMMUNICATIONS- National 3. The service will promote public interests and
Telecommunications Commission, which has convenience in a proper and suitable manner.
been placed under the DOTC as an attached
agency. Note: The overriding principle is a public interest,
5. ENERGY- Board of Energy but transferred to necessity and convenience (Sundiang & Aquino,
the Energy Regulatory Board (ERB) Reviewer on Commercial Law).
6. WATERWORKS- National Water Resources
Council Coverage of CPC
● a ferry boat service is considered as a continuation
LIMITATIONS ON THE POWERS OF THE of the highway when crossing rivers or lakes , which
REGULATORY BOARDS, COMMISSIONS AND are small bodies of water; hence a land transportation
COUNCILS: company is no longer required to secure a separate
1. General: CPC in order to operate a ferry boat for the use of its
Powers are limited from those granted in buses.
the legislation creating the body.
2. Constitutional: Grounds for Revocation of Certificate
Regulations imposed must not have the 1. The holder violates or contumaciously refuses
effect of depriving an owner of his property to comply with any order, rule or regulation of
without due process of law nor confiscating or



the commission. (Sec.16(n)of Public Service 8. Expiration of corporate existence of prior

Act) operator.
2. The holder is a mere dummy. 9. Monopoly
3. The operator ceased operation and placed his 10. Passage through private subdivision which
buses on storage; or granted permit to another
4. The operator abandons totally the service.
(Manzanal v. Ausejo, No. L-31056, August 4, Prior Applicant Rule
1988). Where there are various applicants for a
public utility over the same authority, all conditions
Unlawful Acts of Public Utility Companies being equal, priority in the filing of the application for
1. Engagement in public service business a certificate of public convenience becomes an
without first securing the proper certificate important factor in granting or refusal of a certificate
2. Providing or maintaining unsafe, improper or of convenience and the Commission is authorized to
inadequate service as determined by the determine which of the applicants can best meet the
proper authority requirements of public convenience (delos Santos v.
3. Committing any act of unreasonable and Pasay Trans. Co.).
unjust preferential treatment to any
particular person, corporation or entity as Protection of Investment Rule
determined by the proper authority One of the purposes of the Public Service Act
4. Refusing or neglecting to carry public mail is to protect and conserve investments which have
upon request (Secs.18 &19). already been made for that purpose by public service
Prior Old Operator Rule
Before permitting a new operator to invade Registered Owner Rule
the territory of another already established with a The registered owner of a certificate of a
CPC, the prior operator must first be given the public convenience is liable to the public for the
opportunity to extend its service in order to meet injuries or damages suffered by third persons caused
public needs in the matter of transportation. It means by the operation of said vehicle, even though the same
that a public utility operator should be shielded from had been transferred to a third person.
ruinous competition by affording him the opportunity The registered owner is not allowed to escape
to improve his equipment and service before allowing responsibility by proving that a third person is the
a new operator to serve in the same territory he actual and real owner.
covers (Mandaluyong Bus Co. v. Francisco). The registered owner is the lawful operator
insofar as the public and third persons are concerned;
The law contemplates that the first licensee consequently, it is directly and primarily responsible
will be protected in his investment and will not be for the consequences of its operation. In
subjected to a ruinous competition. It is not therefore contemplation of law, the owner/operator of record is
the policy of the law to issue a CPC to a second the employer of the driver, the actual operator and
operator to cover the same field and in competition employer being considered as merely its agent. The
with a first operator who is rendering sufficient, same principle applies even if the registered of any
adequate and satisfactory service, and who in all vehicle does not use it for public service (Equitable
things and respects is complying with the rules and Leasing Corp. v. Suyom, G. R. No.143360, September
regulations of the commission. The old operator must 5, 2002), or otherwise stated, to privately-owned
be given the opportunity to improve and extend his vehicles.
lines. (Batangas Trans Co. v Orlanes, 52 Phil 455)
A sale, lease or financial lease that is not
BASIS OF THE PRIOR OPERATOR RULE registered with the LTO does not bind third persons
Prevent ruinous and wasteful competition and who are aggrieved in tortuous incidents, for the latter
interest of public will be preserved. need only to rely on the public registration of a motor
vehicle as conclusive evidence of ownership. A lease is
EXCEPTIONS TO THE PRIOR OPERATOR RULE: an encumbrance in contemplation of law, which needs
to be registered in order for it to bind third parties
1. Operator fails/ neglects to make improvement (PCI Leasing Corp and Finance Inc. v. UCPB General
or affect the increase in service when given Insurance Co., Inc. G.R. No. 162267, 4 July 2008).
the opportunity.
2. When Prior operator offers to meet increases in Registered Owner had Recourse against Vendee/
demand only when another operator offered to Transferee
render additional service A registered owner who has already sold or
3. Abandonment of operation transferred a vehicle has a recourse to a third-party
4. Prior operators did not oppose application complaint, in the same action brought against him to
5. Prior operator cannot satisfy needs of the public recover for the damage or injury done, against the
6. When opportunity to improve service is raised vendee or transferee of the vehicle (Villanueva v.
by prior operator only on appeal. Domingo, 438 SCRA 485, 2004).
7. CPC granted to the applicant is a maiden
franchise covering a new route, albeit Kabit System( 2005 Bar exams)
overlapping with that of the old operator It is an arrangement whereby a person who
has been granted a certificate of public convenience



allows other persons who own motor vehicles to 2. The gasoline consumed by the jeep is for the
operate under such license, for a fee or percentage of account of the driver.
such earnings. Although the parties to such agreement
are not out rightly penalized by law,the kabit system is These two features are not sufficient to withdraw
invariably recognized as being contrary to public the relationship between the owner and the driver
policy and therefore void and inexistent under from that of employer and employee. The jeepney
Art.1409, New Civil Code ( Lim v. C.A. G.R.No. 125817, owner is subsidiarily liable as employer in accordance
16 January 2002) with Art.103 of RPC (Magboo v. Bernardo, 30 April
1. The transfer, sale, lease or assignment of the Indeed to exempt from liability the owner of
privilege granted is valid between the public vehicle who operates it under the boundary
contracting parties but not upon the public or system on the ground that he is a mere lessor would
third persons (Gelisan v. Alday No.L- 30212, be not only to abet flagrant violations of the public
30 September 1987) service law, but also to take place the riding public at
2. The registered owner is primarily liable for all the mercy of reckless and irresponsible drivers
the consequences flowing from the operations (Spouses Henandez v. Spouses Dolor, 30 July 2004)
of the carrier. The public has the right to
assume that the registered owner is the actual The Civil Aeronautics Board is expressly
or lawful owner thereof. It would be very authorized by R.A. No. 776 to issue a temporary
difficult and often impossible, as a particular operating permit of certificate of Public Convenience
matter, for the public to enforce their rights of and Necessity (PAL v. CAB 26 March 1997)
action for injuries inflicted by the vehicle if
they should be required to prove who the The Legislature has delegated to the defunct
actual owner is (Benedicto v. IAC G.R No. Public Service Commission and presently the LTFRB,
70876, 19 July 1990). the power of fixing rates of public services. But
3. The thrust of the law in enjoining the Kabit nowhere under the provisions of law are the
system is to identify the person upon whom regulatory bodies, the PSC and LTFRB alike,
responsibility may be fixed with the end in authorized to delegate that power to a common carrier
view of protecting the riding public.(Lim v. like transport operator, or other public service (KMU
C.A. G.R. No 125817, 16 January 2002) Labor v. Garcia, 23 December 1984).
4. Application of Article 1412 of the NCC or in
pari delicto rule. The registered owner cannot A public Utility is entitled to reasonable
recover from the actual owner and the latter compensation in return for the service it provides and
cannot obtain transfer of the vehicle to that it may exact reasonable charges in accordance
himself, both being in pari delicto. (Teja with the service provided of the rates established
Marketing Vs. IAC) therefore. In computing the just and reasonable rates
5. For the better protection of the public, both to be charged by a public utility, three major factors
the registered owner and the actual owner are are to be considered: 1). Rate of Return; 20. The rate
jointly and severally liable with the driver base, 3) the return itself or the computed revenue to
(Zamboanga Transporatation Co. v. C.A, 29 be earned by the public utility based on the rate of
November 1969) return and base rate (Davao Light and Power
6. The determining factor which negates the Company, Inc., 3 April 2003)
existence of Kabit system is the possession of
the franchise to operate and not the issuance A rate is just and reasonable if it conforms to the
of one SS I.D. Number for both bus line following requirements:
(Baliwag Transit V. C.A, 7 January 1987) 1. One which yields to the carrier a fair return
upon the value of the property employed in
Requisites for the Inapplicability of the Kabit performing the service; and
System 2. One which is fair to the public for the service
1. When neither of the parties to the pernicious rendered.
Kabit system is being held liable for damages.
2. When the case arose from the negligence of Service of a Public Utility considered Unlawful
another vehicle using the public road to which It shall be unlawful for any public service to
no representation or misrepresentation as provide or maintain ant service that is unsafe,
regards the ownership and operation of improper, or inadequate, or withhold or refuse any
passenger jeepney was made. service which can be reasonably be demanded and
3. When the riding public was not bothered of furnished as founded and determined by the
inconvenienced at the very least by the illegal Commission in a final order which shall be conclusive
arrangement (Lim v. C.A. 16 January 2002) and shall effect and shall effect in accordance with this
Act, upon Appeal for otherwise (Sec.19 (a) Public
Boundary System Service Act)
1. The driver does not receive a fixed wage but
gets only the excess of the receipt of the fares Certificate of Public Convenience and Necessity
collected by him over the amount he pays to a. A certificate of Public Convenience is issued
the jeep owner. where no special government franchise is



b. A certificate of Certificate of Public 2. The primary purpose of a letter of credit is to

Convenience and Necessity is issued where substitute for, and therefore support, the agreement of
the public service would require in its the buyer-importer to pay money under a contract or
operation the use of government property, other arrangement.This instrument is basically a
such as the installation of electric and credit security through availment of credit facilities of
telephone posts and lines along public streets the participating banks.
requiring a previous franchise therefore
c. No certificate is necessary where the service 3. The parties to a letter of credit are: (a) The
of utility is owned, operated and managed for Buyer- he is the one who procures the letter of credit
a private use or where the owner is not and obliges himself to reimburse the issuing bank
engaged in public service. upon receipt of the documents of title (b) The Issuing
Bank- is the bank from whom the letter of credit is
procured and which undertakes to pay the seller upon
Liability of Registered Owner and Authorized receipt of the draft and proper documents of titles and
Operator under the Kabit System and Boundary to surrender the documents to the buyer upon
System reimbursement, and (c) The seller- who in compliance
Both the registered owner and the Authorized with the contract of sale ships the goods to the buyer
operator of a common carrier under the Kabit System and deliver the documents of title and draft to the
are jointly and severally (solidarily) liable for any issuing bank to recover payment.
death or injury to the passengers and loss/damage to
the goods. 3.1. In an international credit transaction carried
through a letter of credit, the parties are: (a) The
Under the Boundary System the authorized Customer- who is the party who applies to a bank in
operator of a common carrier is liable for the conduct one country for the opening of a letter of credit in
of the driver, there being an employer-employee favor of the seller in another country (b) The Issuing
relationship between the operator and the driver. Bank- is the bank in the country of the customer to
which the customer applies for the issuance of a letter
of credit (c) The Beneficiary- who is the party in
another country who is the creditor of the customer.
SPECIAL COMMERCIAL LAWS Usually, he is the one selling goods to the customer (d)
The Advising Bank – is the bank in the country of the
LETTERS OF CREDIT beneficiary which communicates to the beneficiary the
notice of the credit issued by the issuing bank (e) The
1. A letter of credit is basically an open letter of Confirming/Correspondent Bank- is the bank that
request whereby one person requests another to undertakes that the letter of credit will be fully paid.
advance money or give credit to a third person for a Usually the confirming bank is also the advising bank,
certain amount and promises to repay the person otherwise it is utilized to lend credence to the letter of
advancing the money. credit issued by a lesser known issuing bank and is
directly liable to the beneficiary.
1.1 They are intended generally to facilitate the
purchase and sale of goods by providing assurance to 3.2 The relationships of the parties are to be
the seller of prompt payment upon compliance with governed as follows: (a)Issuing bank and
specified conditions or presentation of stipulated applicant/buyer/importer – Their relationship is
documents without the seller having to rely upon the governed by the terms of the application and
solvency and good faith of the buyer. This is known as agreement for the issuance of the letter of credit by
the rule of strict compliance in a letter of credit the bank. Unless the contrary is provided for, the
transaction means that the documents tendered by the liability of the issuing bank is solidary with the buyer
seller or beneficiary must strictly conform to the terms (b) Issuing bank and beneficiary/seller/exporter –
of the letter of credit, i.e., they must include all Their relationship is governed by the terms of the
documents required by the letter of credit such as: (a) letter of credit issued by the bank, and (c) Applicant
a draft which is also called a bill of exchange, is an and beneficiary – Their relationship is governed by the
order written by an exporter/seller instructing an sales contract.
importer/buyer or its agent to pay a specified amount
of money at a specified time (b) a bill of lading, which 3.3 It is clearly settled in law that there are thus
is a document issued to the exporter by a common three contracts which make up the letter of credit
carrier transporting the merchandise, and (c) invoices. transaction: The contract between buyer and seller,
buyer and issuing bank, and the letter of credit proper.
1.2 The issuing bank in determining compliance These transactions are to be maintained in a state of
with the terms of the letter of credit is required to perpetual separation.
examine only the shipping documents presented by
the seller and is precluded from determining whether
the main contract is actually accomplished or not. 4. The essential conditions of a letter of credit
This arrangement assures the seller of prompt are: (a) That it be issued in favor of a definite person
payment, independent of any breach of the main sales and not to order; and (b) That it be limited to a fixed
contract. This known as the independence principle in and specified amount, or to one or more undetermined
a letter of credit transaction. amounts, but within a maximum the limits of which
has to be stated exactly.



6. The common types of letters of credit are: (a)

4.1 Hence, a letter of credit is not a negotiable Irrevocable vs. revocable – An irrevocable
instrument because it is required to be drawn in favor letter of credit obligates the issuing bank to honor
of a definite person. drafts drawn in compliance with the credit and can be
neither cancelled nor modified without the consent of
4.2 Those which do not have any of the essential all parties, including in particular the
conditions shall be considered merely as a letter of beneficiary/exporter. A revocable letter of credit can
recommendation. be cancelled or amended at any time before payment;
it is intended to serve as a means of arranging
4.3 The bank or drawer of a letter of credit shall payment but not as a guarantee of payment (b)
be liable to the person on whom it was issued for the Confirmed vs. unconfirmed – A letter of credit
amount paid by virtue thereof, within the maximum issued by one bank can be confirmed by another, in
fixed therein, while a notifying bank does not incur which case both banks are obligated to honor drafts
any liability except to notify the beneficiary of the drawn in compliance with the credit. An unconfirmed
letter of credit. Before paying, it shall have the right to letter of credit is the obligation only of the issuing
demand the proof of the identity of the person in bank. Why would an exporter want a foreign bank’s
whose favor the letter of credit is issued. letter of credit confirmed by a domestic bank? One
reason could be if he has doubts
4.4 The drawer of a letter of credit may annul it,
informing the bearer and the person to whom it is 6.1 Other types: (a) Revolving Letter of Credit-
addressed of such revocation. The waiver of the right one that provides for renewed credit to become
to annul makes the letter of credit irrevocable available as soon as the opening bank has advised the
negotiating or paying bank that the drafts already
4.5 The bearer of a letter of credit shall pay the drawn by the beneficiary have been reimbursed to the
amount received to the drawer without delay. Should opening bank by the buyer (b) Back to Back Letter of
he not do so, an action involving execution may be Credit- a credit with identical documentary
brought to recover it, with legal interest and current requirements and covering the same merchandise as
exchange in the place where payment was made on another letter of credit, except for the difference in
the place where it is repaid. price of the merchandise as shown by the invoice and
draft. The second letter of credit can only be
4.6 A letter of credit becomes void if the bearer of negotiated after the first is negotiated.
a letter of credit does not make use thereof within the
period agreed upon with the drawer, or, in default of a
period fixed, within 6 months counted from its date, in TRUST RECEIPTS
any point in the Philippines, and within 12 months
anywhere outside thereof, it shall be void in fact and in 1. A trust receipt is a commercial document
law. whereby the bank releases the goods in the possession
of the entrustee but retains ownership thereof while
5. A standby letter of credit is a bank-issued the entrustee shall sell the goods and apply the
option on a loan involving three parties: the bank proceeds for the full payment of the liability to the
issuing the credit, the party requesting for such bank.
issuance (otherwise known as the account party) and
the beneficiary. Under the terms of standby letter of 1.1 It is a security transaction intended to aid in
credit (SLC), the beneficiary has the right to trigger the financing importers and retail dealers who do not
loan option (referred to as taking down the loan) if the have sufficient funds or resources to finance the
account party fails to meet its commitment, in which importation or purchases of merchandise, and who
case the issuing bank disburses a specified sum to the may not be able to acquire credit, except through
beneficiary and books an equivalent loan to its utilization, as collaterals, of the merchandise imported
customer. SLCs may support nonfinancial obligations or purchased.
such as those of bidders, or financial obligations such
as those of borrowers. In the latter case, the borrower 1.2 The subject matter of a trust receipt is always
purchases an SLC and names the lender as beneficiary. chattel. It will not apply to chattel so attached to land
Should the borrower default, the beneficiary has the so as to become part thereof.
right to take down the SLC and receive the principal
balance from the issuing. 2. A trust receipt transaction is a transaction
between an entruster and an entrustee whereby the
5.1 Another definition is that it is a bank-issued entruster, who owns or hold absolute title or security
option on a loan involving three parties: the bank interests over certain specified goods, documents or
issuing the credit, the party requesting for such instruments, releases the same to the possession of
issuance (account party) and the beneficiary. Under its the entrustee upon the latter’s execution and delivery
terms, the beneficiary has the right to trigger the loan to the entruster of a trust receipt wherein the
option if the account party fails to meet its entrustee binds himself to hold the specified gods,
commitment, in which the case the issuing bank documents or instruments in trust for the entruster
disburses a specified sum to the beneficiary and books and to sell or otherwise dispose of the goods,
an equivalent loan to its customer. documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster, or the



goods, documents or instruments themselves if they between the entruster and the entrustee (b) The
are unsold or not otherwise disposed of. entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the
2.1 A Security Interest means a property interest entrustee of the intention to sell, and may, not less
in goods, documents or instruments to secure than five days after serving or sending of such notice,
performance of some obligations of the entrustee or of sell the goods, documents or instruments at public or
some third persons to the entruster and includes title, private sale, and the entruster may, at a public sale,
whether or not expressed to be absolute, whenever become a purchaser. Notice of the sale shall be
such title is in substance taken or retained for security deemed sufficiently given if in writing, and either
only. personally served on the entrustee or sent by post-
paid ordinary mail to the entrustee’s last known
2.2 A trust receipt transaction distinguished business address (c) the proceeds of any such sale,
from:(a) A pledge-in a pledge, the person doing the whether public or private, shall be applied (1) to the
financing has possession of the property; in a trust payment of the expenses thereof; (2) to the payment
receipt, the property is in the possession of the person of the expenses of re-taking, keeping and storing the
financed (b) A conditional sale-in a conditional sale, goods, documents or instruments; (3) to the
there is a sale of the property from the seller to the satisfaction of the entrustee’s indebtedness to the
buyer; in a trust receipt, there is no sale of the entruster. The entrustee shall receive any surplus but
property from the entruster to the entrustee (c) A shall be liable to the entruster for any deficiency.
chattel mortgage-a chattel mortgage involves the
creation of a lien upon the property; a trust receipt 4.2 Cancellation of the trust receipt and
does not involve the creation of a lien (d) A repossession is not essential for the entruster to have
consignment-in a consignment, the consignor retains a cause of action against the entrustee. They are
title to the property to secure the indebtedness due options available to the entruster and do not prejudice
from the consignee; in a trust receipt, the seller does resort to other remedies.
not retain title to the property but transfers such title
to the entruster, not to the entrustee 5. The obligations of the entrustee are as
follows: (a) to hold the goods in trust for the entruster
2.3 When a debtor has received the goods from a and to dispose of them strictly in accordance with the
supplier thereby acquiring title and will after borrow terms of the trust receipt; This includes the authority
money from a bank to pay for the same, the to manufacture or process the goods with the purpose
transaction is a loan even he signs a trust receipt of ultimate sale. Provided, however, that the entruster
agreement. It is essential for a trust receipt transaction retains title over the goods whether in its original or
for the bank to first acquire ownership and possession. processed form until the entrustee has complied with
the obligation under the receipt. It also includes
2.4 When a Memorandum of Agreement is authority to load, unload, ship or transship or
entered between a debtor corporation and a creditor otherwise deal with the goods in a manner
bank is entered into rescheduling the payments due preliminary or necessary to their sale (b) To receive
from the former, the trust receipt transaction is the proceeds of the sale of the goods in trust for the
novated and transformed into a simple loan. entruster and to turn over the same to the entruster to
the extent of the amount owing to the entruster (c) to
3. The parties to a trust receipt transaction are: insure the goods for their total value against loss from
(a) The entruster- is the person holding title over the fire, theft, pilferage or other casualties (d) to keep the
goods, documents or instruments subject to a trust goods or the proceeds thereof, whether in money or
receipt transaction, and any successor in interest of whatever form, separate and capable of identification
such person, and (b) The entrustee – is the person as property of the entruster; and (e) to return the
having or taking possession of goods, documents or goods,to the entruster in case they could not be sold or
instruments under a trust receipt transaction, and any upon demand of the entruster.
successor in interest of such person for the purpose or
purposes specified in the trust receipt 5.1 Notwithstanding the security interest of the
entruster, the entrustee shall be responsible as
4. The rights of the entruster are: (a) to be principal or as vendor under any sale or contract to
entitled to receive the proceeds of the sale of the sell made by the entrustee. Hence, although the
goods released under a trust receipt to the entrustee entrustee is not the owner of the goods under a trust
to the extent of the amount owing to the entruster (b) receipt (ownership is retained by the entrustor)
to the return of the said goods, in case they could not anyone who acquires the goods from the entrustee
be sold; and (c) to cancel the trust in case the acquires good title (ownership) over the goods. Note
entrustee defaults, take possession of the goods, and that it runs counter to the provisions of Article 1505 of
sell the same at public or private sale. the Civil Code, where there is a contract of sale, the
buyer is to acquire only whatever title the seller had at
4.1 The process of taking possession and selling the time the sale was perfected.
the goods is as follows: (a) the entruster may cancel
the trust and take possession of the goods, documents 5.2 Risk of loss shall aslso be borne by the
or instruments subject of the trust or of the proceeds entrustee. Hence, the loss of goods, documents, or
realized therefrom at any time upon default or failure instruments which are the subject of a trust receipt,
of the entrustee to comply with any of the terms and pending their disposition, irrespective of whether or
conditions of the trust receipt or any other agreement not it was due to the fault or negligence of the



entrustee, shall not extinguish his obligation to the

entruster for the value thereof. This is not in 2. The purpose of the General Bonded
accordance with the civil law principle that it is Warehouse Act is to regulate the business of receiving
generally the owner who must bear the risk of loss of commodities for storage in order to protect persons
the object who may want to avail themselves of warehouse
facilities and to encourage the establishment of more
6. A trust receipt arrangement does not involve warehouses.
a simple loan transaction between a creditor and
debtor-importer. The law warrants the validity of the 2.1 Distinguishing between the 2 laws, the
trust receipt agreement. Consequently, the goods Warehouse Receipts Law refers to the rights and
covered by the trust receipt cannot be levied upon by obligations of parties in a warehousing contract, while
the creditors of the entrustee. The validity of the General Bonded Warehouse Act refers to state
entruster’s security interest as against creditors-the regulation and supervision of warehouses
entruster’s security interest in goods, documents, or
instruments pursuant to the written terms of a trust 3. A warehouse receipt is a written
receipt shall be valid as against all creditors of the acknowledgment by a warehouseman that he holds
entrustee for the duration of the trust receipt certain goods in store for the person to whom the
agreement. document is issued. This is also known as
“warehouse-keeper’s receipt” or “storage receipt.”
7. The acts punishable by the Trust Receipts Law
as Estafa as defined by Article 315, Section 1(b) of the 3.1 While no particular form is required, it should
Revised Penal Code are: (a) The failure to however include the necessary terms stating: (a)
comply with the provision referring to the obligation Location of the warehouse (b) Date of issue (c)
involving the duty to deliver (entregaria) the money Number of receipt (d) Description of the goods (e)
received to the owner of the merchandise sold, Advances made (f) Rate of charges (g) Ownership of
or(b)The failure to comply with the provision the goods by language indicating if the warehouseman
referring to the obligation involving the duty to return is an owner, solely or jointly with others, of the goods
(devolvera) the goods to the owner if not disposed of deposited (h) Signature of the warehouseman, and (i)
in accordance with the terms of the trust receipt. Person to whom goods should be delivered by
language indicating whether the receipt is negotiable
7.1 There is no need to prove intent to defraud as or non-negotiable, that is whether the goods received
the offense is malum prohibitum. will be delivered to the bearer, to a specified person,
or to a specified person or his order
7.2 There is also no need to prove damage to the
entrustor because the nature of a trust receipt 3.2 A negotiable warehouse receipt is not a
transaction and the damage caused to trade circles negotiable instrument as the same does not comply
and the banking community in case of a violation with the requisites of Section 1, Act 2031. However,
thereof is the basis for the criminal offense. ownership thereof may be transferred by delivery if it
states that it is deliverable to bearer or a named
7.3 Consequently, the law has consistently been person or bearer. If it is deliverable to a named person
declared as not violating the constitutional or order, ownership may be transferred by special
proscription against imprisonment for non-payment endorsement and delivery. The endorsement can be to
of debt. It is a declaration by the legislative authority bearer or to a specified person.
that, as a matter of public policy, the failure of a person
to turn over the proceeds of the sale of goods covered 3.3 A negotiable warehouse receipt is not
by the receipt or to return the goods if not sold is a convertible to a non-negotiable receipt. The insertion
public nuisance to be abated by penal sanctions. of a provision making it non-negotiable is void. To
make a warehouse receipt non-negotiable, it must be
WAREHOUSE RECEIPTS: written out as such and to prevent any person from
supposing it to be negotiable, the words “non-
1. The purpose of the Warehouse Receipts Law negotiable” should be placed plainly on its face. A non-
is to regulate the status, rights and liabilities of parties. negotiable receipt may only be assigned.
In particular, it prescribes the rights and duties of a
warehouseman and to regulate his relationship with 3.4 The advantages of a negotiable warehouse
(a) the depositor of the goods, or (b) the holder of a receipt over one which is non-negotiable are: (a)
warehouse receipt, or (c) the person lawfully entitled goods cannot be garnished or levied upon
to the possession of the goods, or (d) other persons. It under execution unless receipt is surrendered, or
also covers all warehouses, whether bonded or not. impounded or its negotiation enjoined (Section 25,
Warehouse Receipts Law) (b) In case of
1.2 As far as the effect of the New Civil Code negotiation, holder acquires the direct obligation of
provisions on documents of title to goods which the warehouseman to hold possession of the goods for
include quedans or warehouse receipts, there is no him (Section 41, Warehouse Receipts Law), and (c)
conflict between the two. The Warehouse Receipts Goods are not subject to vendor’s lien or stoppage “in
Law refers to and will apply to warehouse receipts transitu” (Section 49, Warehouse Receipts Law)
issued by warehouseman, while the New Civil Code
refers to and will apply to receipts that are not issued 3.5 Other terms may be included in a warehouse
by warehouseman. receipt, except: (a) terms that are contrary to the



provisions of this Act, or (b) terms which will in

anyway impair the obligation to exercise due care in 5.3 A misdelivery or conversion occurs when (a)
the safekeeping of the goods entrusted to the delivery is made to one not lawfully entitled to it, or
warehouseman. (b) even if delivery is made to a person holding a non-
negotiable or negotiable receipt, if prior to delivery, he
4. A warehouseman defined - is a person had either been requested not to make delivery by the
lawfully engaged in the business of storing goods for person lawfully entitled to a right of property or
profit. Under the General Bonded Warehouse Act he is possession in the goods or had information that
defined as a person lawfully engaged in the business of delivery about to be made was to one not lawfully
storing goods for profit. In other words, he is one who entitled to possession of the goods.
receives and stores goods owned by others and
collects fees for so doing. 5.4 A warehouseman can protect against a
misdelivery by: (a) availing of a the reasonable time
4.1 Included in the phrase “the business of that he is entitled to within which to ascertain the
receiving commodity for storage” includes any validity of an adverse claim or to bring legal
contract or transaction wherein: (a) the proceedings to force the claimants to interplead or
warehouseman is to return same commodity may actually require the claimants to interplead.
deposited or pay its value (b) the commodity is to be
milled for the owner thereof, or (c) the commodity 5.5 A warehouseman cannot commingle as he is
delivered is commingled with the commodity bound to keep the goods of a depositor separate from
belonging to other persons, and the warehouseman is the goods of other depositors or from the goods of the
obligated to return commodity of the same kind or pay same depositor for which a separate receipt has been
its value. issued. The purpose of the prohibition is to permit
inspection and redelivery at all times. Exceptions are:
5. The Primary Obligations of the (a) the goods are fungible, as when any unit of the
Warehouseman are:(a) he must issue a receipt for any good is from its nature or mercantile usage, treated as
commodity that he receives for storage (b) he must an equivalent of any other unit (Section 58,
exercise that degree of care in the safekeeping of the Warehouse Receipts Law) or (b) it is authorized by
goods entrusted to him which a reasonable careful agreement or custom.
man would exercise in regard to similar goods of his
own. However, in the absence of an agreement to the 6. For failure to take up and cancel a negotiable
contrary, he shall not be liable for any loss or injury to receipt, or one the negotiation of which would transfer
the goods which could not have been avoided by the the right to the possession of the goods when goods
exercise of such care (c) In the absence of any lawful are delivered (Section 11, Warehouse Receipts Law)
excuse, he is bound to deliver the goods upon a or for the failure to take up and cancel a negotiable
demand by: (1) holder of a receipt for the goods, or receipt or to place upon it a statement of what goods
(2) by the depositor, provided that the demand be have been delivered, when goods are partly delivered
accompanied by (a) an offer to satisfy the (Section 12, Warehouse Receipts Law). The
warehouseman’s lien (b) an offer to surrender the warehouseman shall be liable for failure to deliver the
receipt if it is negotiable, and (c) a readiness and goods to anyone who purchases for value in good faith
willingness to sign acknowledgment of delivery of the such receipt whether such purchaser acquired title to
goods if requested by the warehouseman. the receipt before or after the delivery of the goods by
5.1 A warehouseman is obliged to deliver goods
to: (a) person lawfully entitled to it. Examples: person 6.1 Exception: The warehouseman shall not be
determined by the court to be entitled to it in an liable for failure to deliver the goods covered by the
interpleader case, person who purchases the goods at receipt or be guilty of a crime where the goods (a)
an auction to satisfy a warehouseman’s lien or because have been lawfully sold to satisfy the warehouseman’s
the goods are hazardous or of a perishable nature (b) lien, or (b) have been lawfully sold or disposed of
the person who is himself entitled to delivery by the because of their perishable or hazardous nature
terms of the receipt. If receipt is non-negotiable, (Section 36, Warehouse Receipts Law)
delivery will be to the person entitled to it under its
terms or by written authority clearly indicated therein 7. An alteration in a warehouse receipt is said to
or another document. If receipt is negotiable, to the be:(a) Immaterial if it does not change the tenor of the
person named or the last indorsee. warehouse receipt (b)Material if it substantially
changes the tenor of the receipt (c) Authorized
5.2 A warehouseman may thus legally refuse to if it is made with the authority of the holder and the
deliver goods covered by a warehouse receipt under warehouseman (d)Unauthorized if it is made without
the following instances: (a)When the demand is not the authority of the holder and warehouseman. This
accompanied by the three requirements provided in may be material or immaterial (e) Fraudulent if it is
Section 8 (b)When he has a lien valid against the made with malice or bad faith by the holder with
person demanding the goods, he can refuse to deliver intent to defraud subsequent holders (f) Without
the goods until the lien is satisfied and, (c) In cases fraudulent intent if its is made without malice or bad
when there are several adverse claimants to the title faith
or possession of the goods. The warehouseman can
refuse to deliver to any of the claimants until he has 7.1 The effects of an alteration in a warehouse
had a reasonable to ascertain the validity of the claims. receipt are: (a)Where the alteration is immaterial, the



warehouseman shall be liable according to the terms have validly pledged the same (Section 28, Warehouse
of the receipt as originally issued (b)Where the Receipts Law). Hence, it is enforceable against the
alteration is immaterial, whether fraudulent or not, depositor’s goods and the goods of other persons
authorized or not, the warehouseman is liable stored by depositor, if pledge of such goods by him are
according to the terms of the receipt as originally valid but not against the true owner if the depositor
issued (c) Where the alteration is material and has neither title nor right of possession to the goods
is authorized, the warehouseman shall be liable (Section 31, Warehouse Receipts Law; Young v.
according to the terms of the receipts as altered (d) Colyear, 201 Pac. 623)
Where the alteration is material,
unauthorized but without fraudulent intent, the 9.4 The warehouseman can enforce his lien by the
warehouseman shall be liable according to the terms sale of the goods (Section 33, Warehouse Receipts
of the receipts as they were before the alteration (e) Law) or by an action in court (Section 35, Warehouse
Where the alteration is material, Receipts Law). Provided, however, that notice of sale
unauthorized and with fraudulent intent, the of goods in order to satisfy the warehouseman’s lien is
warehouseman shall be liable according to the terms given.
of the receipts as originally issued even (1) to a
purchaser of the receipt for value without notice of the 9.5 The lien can be lost if a warehouseman
alteration, or (2) to the person who made the surrenders possession of the goods, or by refusing to
alteration and to any person who took it with notice of deliver the goods when a demand is made with which
the alteration. However, in the latter case, such he is bound to comply under the provisions of the Act
material and fraudulent alteration shall excuse the (Section 29, Warehouse Receipts Law)
warehouseman from any other liability to the said
persons. Except as regards the alterer and subsequent 9.6 The effect of the sale of goods to satisfy the
holders with notices. warehouseman’s lien or on account of the goods’
perishable or hazardous nature under Section 36 shall
8. For the non-existence or misdescription of not make the warehouseman, after the sale, liable for
goods, a warehouseman shall be liable to the holder of failure to deliver the goods to the depositor, or owner
a receipt for damages caused by the non-existence of of the goods, or to the holder of a receipt given for the
the goods or by the failure of the goods to correspond goods when they were deposited, even if such receipt
with the description thereof in the receipt at the time were negotiable.
of its issue.
10. A negotiable receipt is negotiated by delivery
8.1 Exception: No such liability shall attach to the when: (a) the goods are deliverable to bearer, or (b)
warehouseman if the goods are described in the the goods are deliverable to a specified person and the
receipt merely (a) by a statement of the marks or latter has indorsed it in blank or to bearer. If endorsed
labels upon them or upon the packages containing as deliverable to a person, the bearer receipt is
them, or (b) by a statement that the goods are of a transformed into a an order receipt.
certain kind or that the packages containing the goods
contain goods of a certain kind or by words of similar 10.1 A negotiable receipt is negotiated by
import. indorsement when the goods are, by the terms of the
receipt, deliverable to a specified person (Section 38,
9. The warehouseman’s lien refers to the lien of Warehouse Receipts Law)
that a warehouseman has on the goods deposited with
him or on the proceeds thereof in his hands for all 10.2 The negotiation may be made by the: (a)
lawful charges for storage and preservation of the owner or (b) the person to whom possession of the
goods, money advanced by him in relation to such receipt was entrusted by the owner (Section 40,
goods such as the expenses of transportation or labor, Warehouse Receipts Law)
or other related expenses.
10.3 The rights acquired by one to whom a
9.1 The basis for the lien is the obligation of the negotiable warehouse receipt has been duly
depositor to pay the warehouseman for (a) Storage negotiated are: (a) Such title to the goods as the one
and preservation charges (b) Money advanced (c) negotiating could convey to a purchaser in good faith
Interest (d) Insurance (e) Transportation (f) Labor (g) for value (b) Such title to the goods as the depositor or
Weighing, and (h)Coopering and other similar charges one to whose order the goods were to be delivered
(Section 27, Warehouse Receipts Law) could convey to a purchaser in good faith for value,
and (c) Direct obligation of the warehouseman to
9.2 With the exception of storage and hold the goods for him as if the warehouseman
preservation charges, the other claims must be contracted with him directly. Hence, a person to whom
expressly specified in the warehouse receipt for it to a warehouse receipt has been negotiated by one who
serve as basis for the lien (Section 30, Warehouse has stolen the goods stated in the receipt cannot claim
Receipts Law) a misdelivery if the warehouseman delivers the goods
to the rightful owner, who is the person lawfully
9.3 The lien may be enforced against all goods entitled to it.
belonging to the person liable for the charges, as well
as against all goods belonging to the others deposited 10.4 Mortgagee or pledgee of a warehouse receipt
by the person liable for the charges who has been to whom a negotiable warehouse receipt has been
entrusted with the possession of the goods and could indorsed does not acquire title over the goods. He only



acquires the rights of a pledgee or mortgagee, namely annotated on the back of the mortgage instrument; in
to foreclose the pledge or mortgage. The intent in this real estate mortgage, the mortgagor can alienate the
case is not the negotiation of the receipt with its thing mortgaged without the consent of the mortgagee
consequent transfer of title, but merely as security and any stipulation prohibiting such alienation is void
(Martinez v. P.N.B., 93 Phil. 765); P.N.B. v. Atendido, 94 (d) in a chattel mortgage, redemption of the thing
Phil. 254) mortgaged may be made only before the sale thereof;
in real estate mortgage, the thing mortgaged may be
11. A non-negotiable receipt is transferred by redeemed after it is judicially sold but before judicial
delivery accompanied with a deed of assignment or confirmation of the sale, or if extrajudicially sold,
transfer. If this is indorsed, the indorsement will not within one year from and after the date of sale (except
give the transferee any right whatsoever (Section 39, where the mortgagor is juridical person whose
Warehouse Receipts Law) property has been mortgaged in favor of a bank, quasi-
bank or trust entity, in which case the redemption
11.1 Rights acquired by a person to whom a shall be made until, but not after, the registration of
warehouse receipt has been transferred but not the certificate of foreclosure sale with the applicable
negotiated are: (a) Title to the goods subject to Register of Deeds which in no case shall be more 3
the terms of any agreement with the transferor, and months after foreclosure whichever is earlier)
(b)The right to notify the warehouseman of the
transfer in his favor and thereby acquire the direct 2. The essential requisites of a chattel mortgage
obligation of the warehouseman to hold the goods for are: (a) It must be constituted to secure the fulfillment
him (Section 42, Warehouse Receipts Law). Note that of a principal obligation (b) The mortgagor must be
pending notification, his rights can still be defeated by absolute owner of the property mortgaged (c) The
a subsequent attaching creditor, or levy on execution, mortgagor must have free disposal of such property,
a vendor’s lien or right of stoppage in transitu. or be legally authorized for the purpose (d)The
property involved must be personal or movable, and
(e) Contract must be recorded in the Chattel
CHATTEL MORTGAGES: Mortgage Register
1. A chattel mortgage defined - personal
property is recorded in the Chattel Mortgage Register 2.1 A chattel mortgage which provides that the
as a security for the performance of an obligation. security stated therein is for the payment of any and
all obligations therein before contracted and which
1.1 If the movable, instead of being recorded, is may thereafter be contracted, or future debts and
delivered to the creditor or a third person, the obligations, by the mortgagor in favor of the
contract is a pledge and not a chattel mortgage. mortgagee is void. The law requires parties to a
mortgage to execute an affidavit of good faith, that the
1.2 Distinguishing a chattel mortgage from a debt is honestly due and owing. A valid mortgage
pledge: (a) the chattel mortgage is recorded in the cannot be made to secure a debt to be contracted in
Chattel Mortgage Register; the pledge is not, instead the future (Jaca v. Davao Lumber, L-25771, March 29,
the movable is delivered to the creditor (b) in a 1982, 113 SCRA 107; Vide; Lopez v. CA, 114 SCRA 671,
chattel mortgage, the consent of the mortgagee to the Co v. PNB, 114 SCRA 842). An affidavit of good faith is
sale of the thing mortgaged must be in writing and a certificate included in the chattel mortgage contract
annotated on the back of the mortgage instrument; in executed by both mortgagor and mortgagee that the
pledge, the consent of the pledge need not be in mortgage is constituted to secure the specified
writing but may be oral (c) in a chattel mortgage, in obligation, and that said obligation is a valid, just and
addition to other formal requirements, the mortgagor subsisting obligation and not one entered into for the
must execute an affidavit of good faith; in pledge, there purpose of fraud.
is no requirement that the pledgor execute such an
affidavit (d) in a chattel mortgage, in case of 2.2 Although a promise expressed in the chattel
foreclosure of the thing mortgaged, the mortgagee is mortgage to include debts that are yet to be contracted
not entitled to the entire proceeds of the sale but only can be a binding commitment that can be acted upon,
to a portion thereof sufficient to pay the mortgage the security itself does not come into existence or
debt, interest and incidental expenses; in pledge, the arise until after a chattel mortgage agreement
pledgee is entitled to the entire proceeds of the sale covering the newly contracted debt is executed either
even if it exceeds the amount of the debt (e) in a by a fresh chattel mortgage deed or by amending the
chattel mortgagee, the mortgagee is entitled to recover old contract to conform to the law, particularly the
deficiency as a rule; in pledge, the pledgee is not execution of an affidavit of good faith (Acme Shoe etal
entitled to recover deficiency. v. CA, GR No. 103576, August 22, 1996)

1.3 Distinguishing a chattel mortgage from a real 2.3. The chattel mortgage cannot be considered to
estate mortgage: (a) in a chattel mortgage, the thing include after-acquired properties as it shall cover only
mortgaged must be personal or movable property; in a the property described in the deed and not any other
real estate mortgage, the thing mortgaged must be real like or substituted property (Section 7). Recognized as
or immovable property (b) an affidavit of good faith is exceptions are: (1) properties that are perishable, like
required to be executed in a chattel mortgage but not fruits or subject to inevitable wear and tear like tires
in a real estate mortgage (c) in a chattel mortgage, the or intended to be sold or used but with the
mortgagor cannot alienate the thing mortgaged understanding that they would be replaced with
without the written consent of the mortgagee similar properties to be thereafter acquired by the



mortgagor. An Example is: Where the debtor gives as agreement to the contrary shall be void (Art. 1484,
security the stock or merchandise in his store and it is N.C.C.). This remedies are exclusive not alternative.
the “intention” of the parties that the mortgage shall
cover the stock that will take its place in the course of EXTRA-JUDICIAL FORECLOSURE OF REAL ESTATE
the business. [Torres v. Limjap, 56 Phil. 141 ,1931] (2) MORTGAGES:
In the case of other properties, if their inclusion is 1. The resort to the process of extra-judicial
expressly stipulated and a supplement to the mortgage foreclosure emanates from the presence of a
specifically listing and describing the property is stipulation that allows the creditor/mortgagee to
executed and registered in the chattel mortgage extra-judicially foreclose and designating the said
register party as the attorney-in-fact of the mortgagor to cause
the same and to sell the subject property at a
2.4 The registration in the chattel mortgage foreclosure sale by an insertion into or attachment to
register is not necessary to make it binding between the real estate mortgage.
the parties. It is necessary though to make it binding
on third persons. 1.1 When a debt is secured by a real estate
mortgage, the creditor has two options: (a) to
foreclose, or (b) file an ordinary action to collect. If he
3. The remedies of a creditor are: (a) avails of the option to foreclose, he is still allowed to
Extrajudicial Foreclosure (b) An action for replevin (c) bring a claim for any deficiency. On the other hand, if
Judicial Foreclosure, and (d) Bring an he avails of the option to file an ordinary action, he
action for the payment of a sum of money abandons or waives his mortgage lien, without
prejudice to his levying on the same property but
subject to the rights of other creditors, if any.
3.1 A creditor cannot forceably take possession of
the chattel without court intervention (BPI Credit v. 1.2 When the mortgagor files a criminal case for
CA, 204 SCRA 601, Filinvest Credit Corporation v. CA, violation of BP Blg 22 against the mortgage debtor, he
248 SCRA 549) is deemed to have already availed himself of the
remedy of a collection suit, and following the rule on
3.2 Neither can the creditor take possession and alternative remedies, he is barred from subsequently
appropriate the chattel, since it would constitute resorting to an action for foreclosure.
pactum commissorium, referring to an act or a
stipulation giving power to the creditor to appropriate 1.3 A mortgage contract is, by nature, indivisible.
the thing given as security, if the principal obligation is The debtor who has paid cannot ask for a
not fulfilled without any formality, such as foreclosure proportionate extinguishment of the mortgage as long
proceedings and public sale. Such an act or stipulation as the debt is not completely satisfied. Generally, the
is null and void (Art. 2088, N.C.C.). In other words, the divisibility of the principal obligation is not affected by
mortgagor’s default does not operate to vest in the the indivisibility of the mortgage.
mortgagee the ownership of the mortgaged property.

3.3 Availment of the remedy of bringing an action 2. The foreclosed property shall be redeemed
to collect a sum of money is a waiver or abandonment within 1 year from and after the date of the sale (Sec.
of the chattel mortgage. This also bars the recovery of 6). The aforementioned date of sale has been
a deficiency judgment which is only available when construed by the Supreme Court to mean the date of
the proceeds of the sale are insufficient to cover the registration of the sheriff’s certificate of foreclosure
debts pursuant to a foreclosure. The prescriptive sale in the office of the Register of Deeds concerned
period for which is ten (10) years. (Reyes vs. Noblejas, et al., G.R. No. L-23691, November
25, 1967). Note that the period for redemption may
3.4. Note that when the financing company to be the subject of an extension as may be agreed upon
whom a loan and chattel mortgage have been by the parties.
refinanced had been constituted as the attorney-in-
fact of the borrower to file any insurance claim 2.1 The amount to be paid at redemption is the
covering the chattel, and it failed to do so upon a total Bid Price, plus 12% interest per annum. Note again
loss of the same, will relieve the borrower-mortgagor that under RA 8791, the redemption amount is such
of his obligation (BA Finance Corporation v. CA, 201 which is due under the mortgage deed with interest at
SCRA 157) the specified rate therein.

3.5 There are limitations on the enforcement of 2.2 Redemption may be effected by: (a) The
chattel mortgages executed in relation to the sale of debtor, or (b) His successor in interest , or (c) Any
personal property in installments, where the remedies judicial creditor or judgment creditor of the debtor, or
are: (1) Exact fulfillment of the obligation (2)Cancel (d) Any person having a lien on the property
the sale, should the vendee’s failure to pay cover two subsequent to the mortgage.
or more installments; or (3) Foreclose the chattel
mortgage on the thing sold should the vendee’s failure 2.3 Notwithstanding the foregoing provision,
to pay cover two or more installments. In this case, he juridical persons whose property is sold pursuant to
shall have no further action against the purchaser to an extra-judicial foreclosure, shall have the right to
recover any unpaid balance of the price. Any redeem the property until, but not after, the
registration of the certificate of foreclosure sale which



in no case shall be more than three (3) months after periodically fixed by a bank based on the prevailing
foreclosure whichever is earlier, as provided in interest rate in the market, such as the Manila
Section 47 of Republic Act. No. 8791 (A.M. No.99-10- Reference Rate or Treasury Bill Rate, plus a margin as
05-0) determined by the bank.

2.4 Note the probable constitutional challenges 5.1 If this rate of interest is unilaterally fixed by
that may be brought against the quoted provision of the bank for each interest period without the written
RA 8791 on the basis of the equal protection clause as conformity of the borrower, the interest may be
there is no substantive distinction between a declared null and void for being potestative and for
corporate and individual debtor or between a bank or lack of mutuality based on essential equality between
non-bank lender. the parties

2.5 Further, the application of the law should be 5.2 Its being a potestative condition (one within
prospective as a corporate mortgagor has acquired as the sole power of the one obligated to perform),
vested right to the one year redemption period if his consequently null and void finds basis in Article 1308
mortgage was executed prior to RA 8791 as the of the Civil Code that provides that the fulfillment of a
controlling consideration is the law on redemption at condition cannot be left to the sole will of one of the
the time of the execution of the mortgage. contracting parties

2.6 The purchaser of foreclosed property is not 5.3 As held by the Supreme Court in Almeda v.
automatically entitled to the possession thereof during Court of Appeals and PNB,256 SCRA 293: The binding
the redemption period as he must petition the effect of any agreement between the parties to
Regional Trial Court of the province or city where the contract is premised on two settled principles: (1) that
property is situated to give him possession thereof any obligation arising from contract has the force of
during the redemption period. He must also put up a law between the parties; and (2) that there must be
bond equivalent in value to the use of the property for mutuality between the parties based on their essential
a period of 12 months to indemnify the debtor in case equality. Any contract which appears to be heavily
it is shown that the sale was made without complying weighted in favor of one of the parties so as to lead to
with the requirements of Act No. 3135 or that there an unconscionable result is void. Any stipulation
was no violation of the mortgage deed. regarding the validity or compliance of the contract
which is left solely to the will of one of the parties is
likewise invalid.
3. In general, formal and substantive defects in
the real estate mortgage and the foreclosure 5.4 The floating rate of interest being unilaterally
proceedings provide the legal and equitable grounds fixed and determined by the bank also violates the
to enjoin or eventually nullify foreclosure proceedings, provision of CB Circular No. 1191 that the interest rate
if not the real estate mortgage itself. for each re-pricing period is subject to mutual
agreement between the Borrower and the Bank.
3.1 The general basis would be Article 5, Civil
Code, which provides: Acts executed against the 5.5 Under Article 1956 of the Civil Code, no
provisions of mandatory or prohibitory laws shall be interest is due unless it has been expressly stipulated
void, except, when the law authorizes their validity in writing. The floating rate being unilaterally fixed by
the Bank without the written mutual agreement of the
4. Disputes in the amount of the obligation may Borrower for each re-pricing of interest is null and
cause the foreclosure to be enjoined as a bank may void under Art. 1956 of the Civil Code, and for
legally proceed with foreclosure only when the exact violation of CB Circular No. 1191 that the interest rate
amount of the obligation of the mortgagor is for each re-pricing period under the floating rate of
determined in a trial on the merits and the mortgagor interest in subject to mutual agreement.
cannot meet the obligation following that
determination. 5.6 Consequently, if the interest is declared null
and void, the foreclosure sale for a higher amount than
4.1 Where the debtor is not given an opportunity what is legally due is likewise null and void because
to settle the debt at the correct amount and without under the Civil Code, a mortgage may be foreclosed
iniquitous interest imposed, no foreclosure only to enforce the fulfillment of the obligation for
proceedings can be instituted. whose security it was constituted.

4.2 The total amount due on the mortgage is also 5.7 In fact, because there is a dispute on the
undetermined if some of the properties are subject to amount of the interest legally due, the Bank may
the coverage of the CARP, in which case a portion of legally proceed with foreclosure or consolidation only
the mortgage indebtedness will be assumed by the when the exact amount of the obligations of the
government up to the amount equivalent to the Mortgagor is determined after trial on the merit and
landowner’s compensation. Hence, until the final the mortgagor cannot meet the obligation following
valuation of the lands subject to CARP is determined, that determination.
the amount of the mortgage debt is unliquidated
6. Issue of the mortgage as security for future
5. Issue of the legality of the Floating Rate of loans. The rule is unless a continuing real estate
Interest, which refers to the rate of interest mortgage is involved, a real estate mortgage is not a



valid security for future loans under the so called

“Dragnet Clause”. 8.3 As a limitation on the right to possession, a
writ of possession may be legally issued only if the
6.1 This finds basis in the fact that real estate debtor is in possession and no third person has
mortgage is an accessory contract, which cannot exist intervened.
independently of the principal obligation. The
consideration for the mortgage is the consideration of 8.4 Order granting a writ of possession under Act
the contract of loan. Consequently, the amount of the 3135 is a final order. Hence, it is appealable. In
loan must be specified, otherwise the contract of loan, expropriation, it is interlocutory.
as well as the accessory contract of mortgage, shall not
be perfected for lack of consideration with respect to 9. Grounds for the proper annulment of the
the unspecified loan in the future. The Supreme Court foreclosure sale are the following: (a) there was fraud,
has held in China Banking Corporation vs. Lichuaco, 46 collusion, accident, mutual mistake, breach of trust or
Phil 460 that: a mortgage is an accessory contract, its misconduct by the purchaser (b) the sale was not
consideration is the very consideration of the principal fairly and regularly conducted (c) price was
contract, from which it derives life, and without which inadequate and the inadequacy was so great as to
it cannot exist as an independent contract. shock the conscience of the court.

6.2 Further, under Article 2176 of the Civil Code, Central Bank Act
a mortgage may only be foreclosed for the fulfillment
of the obligation for whose security it was constituted 1. The law was enacted on June 14, 1993 and has
for its policy the maintenance of a central monetary
6.3 Mortgages with a dragnet clause is a contract authority with the power: (a) function and operate as
of adhesion that must be strictly construed as against an independent and accountable body in the discharge
the bank. of its responsibilities concerning money, banking and
credit (b) enjoy fiscal and administrative autonomy.
6.4 To constitute a real estate mortgage as
security for future loans, the future loans must be 1.1 A central bank is a bank that holds the cash
agreed upon and fixed in the mortgage deed at the reserves of a country’s commercial banks, performs
time of the execution of the same monetary services for the government, issues bank
notes, and makes funds available to commercial banks
6.5 A stipulation that the amounts named as
consideration in a contract of mortgage do not limit Conservatorship
the amount for which the mortgage may stand as
security if from the four corners of the instrument the 1. The appointintment by the Monetary Board of
intent to secure future and other indebtedness can be a conservator takes place whenever a bank or quasi-
gathered is valid and binding and is known in bank is in a state of continuing inability or
American Jurisprudence as the “blanket mortgage unwillingness to maintain a condition of liquidity
clause”. deemed adequate to protect the interest of depositors
and creditors.
7. Issue of PD 385 prohibiting the issuance of an
injunction against foreclosure by any government 1.1 It is an attempt to save the bank from
financial institution is arbitrary and unreasonable. bankruptcy and ultimate liquidation.
Hence, may be argued as being unconstitutional.
Hence, it cannot be sustained if there is a clear legal 1.2 The appointed conservator is to take charge of
ground to restrain foreclosure the assets, liabilities, and the management thereof for
a period not exceeding one (1) year
8. Issue of the right to take possession. The rule
is that the purchaser still has to file a petition for the 2. A conservator may take over a bank or quasi-
issuance of a writ of possession to obtain possession. bank without the need of first declaring the bank
insolvent (P.D. 1937, June 27, 1984). Nonetheless, the
8.1 The proceedings related thereto allow the designation of a conservator is not a precondition to
mortgagor to participate although jurisprudence the designation of a receiver (Section 30)
provides that the hearings are ex-parte. However, with
the mandate of Section 8 of Act 3135 which allow the 2.1 A conservator is the person appointed to take
mortgagor to set aside foreclosure in the same over the management of a bank and shall assume
proceedings, it is the better rule to actually allow the exclusive powers to oversee every aspect of the bank’s
mortgagor’s active participation. operation and affairs.1

8.2 The obligation of the court to issue a writ of 3. The conservatorship is terminated when: (a)
possession in favor of the purchaser in an extrajudicial When Monetary Board is satisfied that
foreclosure sale ceases to be ministerial once it is institution can continue to operate on its own and the
shown that there is a third party in possession of the conservatorship is no longer necessary (b)Should
property who is claiming a right adverse to that of the Monetary Board determine that the continuance in
mortgagor and that such third party is a stranger to business of the institution would involve probable loss
the foreclosure proceedings in which the ex-parte writ
of possession was applied for.
1 Central Bank vs. CA, 208 SCRA 652



to its depositors or creditors, in which case under receivership. Admittedly, the mere filing of a
proceedings for receivership and liquidation shall be case for receivership by Central Bank can trigger a
pursued. (Sec. 29). bank run. The procedure prescribed in Section 29 is
truly designed to protect the interest of all concerned,
Proceedings in Receivership: and the summary closure pales in comparison to the
protection afforded public interest. At any rate, the
1. Receivership ensues whenever the Monetary bank is given full opportunity to prove arbitrariness
Board finds that a bank or quasi-bank: (a) Is unable to and bad faith in placing the bank under receivership,
pay its liabilities as they become due in the ordinary in which event, the resolution may be properly
course of business BUT: Shall not include inability to nullified and the receivership lifted as the trial court
pay caused by extraordinary demands induced by may determine. Until such determination is made, the
financial panic in the banking community (b) Has status quo shall be maintained, i.e., the bank shall
insufficient realizable assets to meet its liabilities (c) continue to be under receivership.
Cannot continue in business without involving
probable losses to its depositors or creditors; or (d)
Has willfully violated a cease and desist order that has 1.6 Receivership is equivalent to an injunction to
become final, involving acts or transactions which restrain in the bank officers from intermeddling with
amount to fraud or a dissipation of the assets of the the property of the bank in any way. Thus, the
institution; appointment of a receiver operates to suspend the
authority of the bank and of its directors and officers
1.1 In which cases, the Monetary Board may over its property and effects (Villanueva vs. CA, 244
summarily and without need for prior hearing, forbid SCRA 395)
the institution from doing business in the Philippines
and designate the PDIC as receiver of the banking Liquidation:
1. Liquidation shall take place is the receiver
1.2 There is no requirement that a hearing be first determines that the institution cannot be rehabilitated
conducted before a banking institution may be placed or permitted to resume business, the Monetary Board
under receivership. The appointment of a receiver shall notify in writing the Board of Directors of its
may be made by the Monetary Board without notice findings and direct the receiver to proceed with the
and hearing but its action is subject to judicial inquiry( liquidation of the institution.
Rural Bank of Buhi v. Court of Appeals,162 SCRA 288)
2. The following are the mandatory
1.3 The Central Bank, through the Monetary requirements to be complied with before a bank found
Board, is vested with exclusive authority to assess, to be insolvent can be ordered close: (1) an
evaluate and determine the condition of any bank and examination shall be conducted by the appropriate CB
if it finds the condition to be one of insolvency, or its department as to the condition of the bank (2)
continuance in business would involve probable loss disclosed in the examination is that the condition of
to creditors and depositors, it can forbid the bank to the bank is one of insolvency (3) the director shall
do business and can designate a receiver to take inform the Monetary Board in writing of such fact, and
charge of its assets and liabilities. Sec. 29 of the Central (4) the Monetary Board shall find the statement of the
Bank Act does not contemplate prior notice and department to be true (Banco Filipino vs. Monetary
hearing before a bank is placed under receivership. It Board, 204 SCRA 767)
is enough that such action is made the subject of a
subsequent judicial review. “Close now and hear later” 3. The test of insolvency laid down in Section 29
scheme under the Act is for the purpose of protecting of the Central Bank Act (now Section 30 of the New
the depositors, creditors, stockholders and general Central Bank Act) is measured by determining
public (Central Bank v. Court of Appeals, 220 SCRA whether the realizable assets, realizable within a
536) reasonable time by a reasonably prudent person of a
bank are less than its liabilities, not considering capital
1.4 Prior notice and hearing is not required stock and surplus which are not liabilities for such
before placement of bank under receivership. Section purpose. (Ibid)
29 does not contemplate prior notice and hearing
before a bank may be directed to stop operation and 4. Upon liquidation, the receiver shall then: (a)
placed under receivership. When paragraph 4 (now File ex parte with Regional Trial Court, and without the
paragraph 5 as amended by E.O. 289) provides for the requirement of prior notice or any other action, a
filing of a case within ten (10) days after the receiver petition for assistance in the liquidation of the
takes charge of the assets of the bank, it is institution pursuant to a liquidation plan adopted by
unmistakable that the assailed actions should precede PDIC (b) Upon acquiring jurisdiction, RTC shall, upon
the filing of the case. Plainly, the legislature could not motion by the institution, assist the enforcement of
have intended to authorize “no prior notice and individual liabilities of the stockholders, directors and
hearing” in the closure of the bank and at the same officers, and decide on other issues as may be material
time allow a suit to annul it on the basis of absence to implement the liquidation plan adopted (c)Convert
thereof (CB vs. CA, 220 SCRA 539) the assets of the institution to money, dispose of the
same to creditors and other parties, for the purpose of
1.5 Judicial review is allowed to determine the paying the debts of such institution in accordance with
presence of arbitrariness and bad faith in placing bank the rules on concurrence and preference of credit



under the Civil Code (d) Institute such actions as may financial system that is globally competitive, dynamic
be necessary to collect and recover accounts and and responsive to the demands of a developing
assets of, or defend any action against, the institution economy.

Selected Issues involving Receivership and 2. Banks are entities engaged in the lending of
Liquidation: funds obtained in the form of deposits.

1. If the Central Bank (now Bangko Sentral) 2.1 The definition under Section 2 of the old
through its Monetary Board has promised to General Banking Law:2 banks are entities duly
rehabilitate the distressed bank, and the stockholders authorized by the Monetary Board to engage in the
on said assurance proceeded to mortgage their real business of regularly lending funds obtained regularly
properties to guarantee CB promised loan advances to from the public through the receipt of deposits of any
said bank, CB cannot renege on said promise, under kind. Thus, entities which lend funds obtained from
the doctrine of promissory estoppel, and cannot insist the public but not as deposits but rather as debts for
in its liquidation (Ramos vs. CB, 41 SCRA 565) their own account, whether done regularly or not, and
those which regularly lend funds obtained through the
2. Where the Central Bank, in the course of the occasional receipt of deposits, would not be
rehabilitation of a commercial bank, extended loans considered as banks.
and advances, but subsequently the bank was forced
by CB to close, and subsequently allowed to reopen, 2.2 An entity that is engaged in the business of
interest due on said loans and advances, cannot be buying accounts receivables and is funding their
collected because it should be deemed read into every business from bonds sold to the public from time to
contract of deposit with a bank that the obligation to time is not a bank as it does not accept deposits,
pay interest on a deposit ceases from the moment the instead it buys receivables.
operation of the bank is completely suspended by the
duly constituted authority the Central Bank (Ibid,; Classification of Banks:
Overseas Bank vs. CA, 105 SCRA 49)
1. Banks are classified under the General
3. The prescriptive period to institute the Banking Law as follows:
foreclosure proceeding was legally interrupted when
the mortgagee-bank was placed under receivership
with express prohibition from transacting business, a (a) Universal banks- these are those that used to
circumstance considered as force majeure (Provident be called expanded commercial banks and whose
vs. CA, 222 SCRA 125) operations are now primarily governed by the GBL.
They can exercise the powers of an investment house
4. While the closure and liquidation of a bank and invest in non-allied enterprises. They have the
may be considered an exercise of police power, the highest capitalization requirement.
validity of its exercise is subject to judicial
determination, and could be set aside, if it is An investment house is a company that earns income
capricious, discriminatory, whimsical, arbitrary, unjust solely or primarily by holding and investing in
or a denial of the due process and equal protection securities issued by other companies or by
clauses of the Constitution (CB vs. CA, 106 SCRA 143) government agencies.

5. A deposit in a distressed bank already (b) Commercial banks- these are ordinary or
forbidden by CB to do business does not become a regular commercial banks, as distinguished from a
preferred credit simply because some depositors went universal bank. They have a lower capitalization
to court and were able to secure judgments against the requirement than universal banks and cannot exercise
bank (CB vs. Morfe, 63 SCRA 114) the powers of an investment house and invest in non-
allied enterprises.
6. Where in the course of bank’s distressed
condition, the Central Bank gave financial assistance to (c) Thrift banks-these are savings and mortgage
restore the bank’s viability, but that inspite of these banks, stock savings and loan associations, and private
moves, the bank was closed by CB on August 1968, development banks which are governed primarily by
and allowed to reopen on January 8, 1981, under a the Thrift Banks Act.3
new name, Commercial Bank of Manila, the obligation
by the bank to pay interest on the CB advances (d) Rural banks-these are mandated to make
remained suspended during the whole period of its needed credit available and readily accessible in the
closure, following the ruling in OBM vs. CA and Tapia rural areas on reasonable terms and which are
(105 SCRA 49). Hence, the interest obligation starts to governed primarily by the Rural Banks Act of 1992. 4
run from the date of the reopening of the bank on
January 8, 1981 (Ramos vs. CB, 137 SCRA 685) (e) Cooperative banks-these are banks organized
primarily to make financial and credit services

General Banking Law

1. The policy of the State is the promotion and

2 RA 337
maintenance of a stable and efficient banking and
3 RA 7906
4 RA 7353



available to cooperative banks and are governed

primarily by the Cooperative Code.5 1. The principle that since a bank is a juridical
person that its powers are to be exercised, its business
(f) Islamic banks-these are banks whose business is to be conducted, and that its properties are to be
dealings and activities are subject to the basic held by a board as provided for by Section 23 of the
principles and rulings of Islamic Shari’a, such as the Al Corporation Code obtains.
Amanah Islamic Investment Bank of the Philippines
which was created by the Republic Act No. 6848; and 2. However, an independent director, who is a
person other than an officer or employee of the bank,
(g) Other classifications of banks as determined its subsidiaries or affiliates or related interests must
by the Monetary Board. be elected to the board. Note that the term
“independent director” is also used in the Securities
Incorporation and Organization of Banks Regulation Code7 to refer to a person other than an
officer or employee of the corporation, its parent or
1. The minimum conditions that a prospective subsidiaries, or any other individual having a
bank must comply with before it may be authorized by relationship with the corporation, which would
the BSP to be organized as a bank are: interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
1.1 That the entity must be organized as a stock
corporation; 3. There must also be adherence to the fit and
proper rule8 which provides that to maintain the
1.2 That its funds must be obtained from the quality of bank management and afford better
public, i.e., 20 or more persons; and protection to depositors and the public in general, the
Monetary Board shall:
1.3 That the minimum capital requirement
prescribed by the Monetary Board for each category of 3.1 prescribe, pass upon and review the
banks are satisfied. qualifications and disqualifications of individuals
elected or appointed bank directors or officers and
2. The SEC cannot register the the articles of disqualify those found unfit; or
incorporation of any bank, or any amendment thereto,
unless accompanied by a certificate of authority issued 3.2 After due notice to the board of directors of
by the Monetary Board, under its seal. Such certificate the bank, the Monetary Board may disqualify, suspend
shall not be issued by the Monetary Board unless it is or remove any bank director or officer who commits
satisfied from the evidence submitted to it: or omits an act which render him unfit for the
3. In organizing the bank, it can only issue par
value stocks only. 3.3 In determining whether an individual is fit
and proper to hold the position of a director or officer
of a bank, regard shall be given to his integrity,
Supervision and Regulation of Banks: experience, education, training, and competence.

1. The entity that has supervisory and 4. An elective or appointive public official cannot
regulatory powers over banks is the BSP and such serve as an officer of a private bank , whether full-time
extends to all banks, quasi-banks, trust entities, and or part-time shall at the same time serve as officer of
other financial institutions. any private bank, save in cases where such service is
incident to financial assistance provided by the
2. This power of the BSP is found in Section 25 government or a government-owned or controlled
of the BSP Law which mandates the conduct of corporation to the bank or unless otherwise provided
periodic or special examinations, to include those of its under existing laws.
subsidiaries and affiliates engaged in allied activities,
but such shall be possible only in the in the course of 4.1 The Rural Banks Act9, allows an elected or
its examination of such bank. appointive public official to serve as director, officer,
consultant or in any other capacity in a rural bank.
2.1 A subsidiary corporation is one more than
50% of whose voting stock is owned by the bank or 5. A bank is required to have a board composed
quasi-bank. of 5 no more than 15 directors, two of whom must be
independent directors.10
2.2 An affiliate corporation is one less than 50%
of whose voting stock is owned by the bank or quasi- 5.1 In case of a merger or consolidation between
bank or which is related or linked to such bank or banks, the number of directors shall not exceed 21. 11
quasi-bank through common stockholders or such
factors as may be determined by the Monetary Board.6

Management of a Bank: 7 Section 38, Par. 16.25

8 Section 16, GBL, BSP Circular No. 296
9 Section 5, RA 7353
5 RA 6938 10 Section 15, GBL
6 Section 25, NCBA 11 Section 17, GBL



5.2 Non Filipino citizens may become members of within the third degree of consanguinity or affinity; or
the board to the extent of the foreign participation in (2) where the director, officer or stockholder of the
its equity.12 lending bank sits as a representative of the bank in the
board of directors of such corporation: Provided, That
the bank representative shall not have any equity
Limitations imposed on Banking Operations: interest in the borrower corporation except for the
minimum shares required by law, rules and
regulations, or by the by-laws of the corporation:
1. Single Borrower Limit Rules13- these rules Provided, further, That the borrowing corporation
regulate the total amount of loans, credit under (1) or (2) is not among those mentioned in
accommodations and guarantees that may be Items (e) and (f) hereof; (e) Corporation, association
extended by a bank to any person, partnership, or firm of which any or a group of directors, officers,
association, corporation or other entity. stockholders of the lending bank and/or their spouses
or relatives within the first degree of consanguinity or
1.1 The rules seek to protect a bank from making affinity, or relative by legal adoption hold/own more
excessive loans to a single borrower by prohibiting it than twenty percent (20%) of the subscribed capital of
from lending beyond a specified ceiling. The current such corporation, or of the equity of such association
limit is 25% of the net worth of the bank concerned.14 or firm; (f) Corporation, association of firm wholly or
majority-owned or controlled by any related entity or
1.2 The ceiling is subject to possible increase by a group of related entities mentioned in Items (b), (d)
an additional 10% provided the additional liabilities and (e) hereof.
of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or 2.3 A bank may allow a DOSRI to: (a) borrow
other similar documents transferring or securing title from the bank; (b) become a guarantor, indorser or
covering readily marketable, non-perishable goods surety for loans from such bank to others; (c) be an
which must be fully covered by insurance. obligor; or (d) incur any contractual liability with the
written approval of the majority of all the directors of
the bank, excluding the director concerned. 16
2. DOSRI Rules15- these are rules promulgated However, the written approval shall not be required
by the BSP, upon the authority of Section 36 of the for loans, other credit accommodations and advances
GBL, which regulate the amount of credit granted to officers under a fringe benefit plan
accommodations that a bank may extend to its approved by the BSP.
directors, officers, stockholders and their related
interests, thus the term, DOSRI.
2.4 Consequently, any director or officer who may
2.1 Generally, a bank’s credit accommodations to wish to borrow from the bank must observe the
its DOSRI must be in the regular course of business following formalities: (a) The borrowing must be in
and on terms not less favorable to the bank than those accordance with the Arms Length Rule, or which must
offered to non-DOSRI borrowers. be upon terms not less favorable to the bank than
those offered to others ,must be with the written
2.2 Related Interests shall include the following: approval of a majority of the bank’s board of directors,
(a) Spouse or relative within the first degree of excluding the director concerned (b)Such approval
consanguinity or affinity, or relative by legal adoption, must be entered upon the records of the bank, i.e., the
of a director, officer or stockholder of the bank; (b) minutes of the board meeting in which the approval
Partnership of which a director, officer or stockholder was given; and (c) A copy of the entry of such approval
or his spouse or relative within the first degree of shall be transmitted forthwith to the appropriate
consanguinity or affinity, or relative by legal adoption, supervising department of the BSP.
is a general partner; (c) Co-owner with the director,
officer, stockholder or his spouse or relative within the 2.5 The other conditions are: (a) The DOSRI
first degree of consanguinity or affinity, or relative by borrower is required to waive the secrecy of his/her
legal adoption, of the property or interest or right deposits of whatever nature in all banks in the
mortgaged, pledged or assigned to secure the loans or Philippines17 and (b) The ceiling/limitation as to loans
credit accommodations, except when the mortgage, are followed.
pledge or assignment covers only said co-owner’s
undivided interest; (d) Corporation, association, or
firm of which a director or officer of such corporation, 2.6 The amount of the borrowing is limited to the
association or firm, except (1) where the securities of amount equivalent to their unencumbered deposits
such corporation, association or firm are listed and and book value of their paid in capital contribution,
traded in the big board or commercial and industrial unless they are: (a) secured by assets considered by
board of domestic stock exchanges less than fifty the Monetary Board as non risk (b) under a fringe
percent (50%) of the voting stock thereof is owned by benefit plan approved by the BSP, or is (c) extended by
any one person or by persons related to each other a cooperative bank to its cooperative stockholders;

12 Section 15, Par. (2), GBL

13 Section 35, GBL
14 BSP Circular No. 425 16 Section 36, GBL
15 Section 36, GBL 17 Section 26, NCBA



2.7 Should there be a violation of the DOSRI rules, 3. A bank should exercise its functions and treat
after due notice to the board of directors of the bank, the accounts of their clients not only with the diligence
the office of any bank director or officer who violated of a good father of a family but it should do so with the
the rules may be declared vacant and the director or highest degree of care considering the fiduciary nature
officer shall be subject to the penal provisions of of their relationships with their depositors.26
3.1 The depositor expects the bank to treat his
2.8 Loans, credit accommodations or guarantees account with utmost fidelity, whether such account
extended by a bank to DOSRI are also termed as consists only of a few hundred pesos or millions. This
“Insider Lending.” is especially true since the bank is engaged in business
impressed with public interest and it is its duty to
protect in return many clients, and depositors who
Bank Deposits and Bank Responsibility to Depositors transact business with it.27

3.2 The bank is under obligation to treat the

1. As to nature, all kinds of deposits whether accounts of its depositors with meticulous care always
fixed or current are to be treated as loans and are to be having in mind the fiduciary nature of their
covered by the law on loan.18 relationship.

1.1 They are also considered in the nature of 3.3 However, the highest degree of diligence is
irregular deposits, they are really loans because they not expected to be exerted by banks in commercial
earn interest.19 Considering a deposit involves the transactions that do not involve their fiduciary
delivery of a thing for safekeeping with the obligation relationship with their depositors.28
to return the very same thing upon demand 20 and a
loan is a contract whereby one of the parties delivers 3.4 In case of negligence in handling the deposit
to another money or other consumable thing upon the of its clients on account of a bank officer’s gross
condition that the same amount of the same kind and negligence which causes inconvenience, humiliation
quality shall be paid.21 and embarrassment to a depositor entitles the latter to
an award of damages.29 This notwithstanding the
1.2 Banks may use the money deposited with absence of malice and bad faith as if the negligence,
them as money deposited in banks, whether fixed, nevertheless caused serious anxiety, embarrassment
savings and current, are really loans to a bank because and humiliation to the depositors.30 As long as the
the bank can use the same for its ordinary transactions bank has committed a serious mistake and the bank’s
and for banking business in which it is engaged. 22 negligence was a result of lack of due care and caution
required of managers and employees of a firm
1.3 In fact banks are not obligated to return engaged in so sensitive and demanding business as
exactly the money deposited in the same banking, it is liable for moral damages.31
denomination as it was deposited. While the banks
have the obligation to return the amount deposited, 3.5 In view of the fiduciary nature of the
they have no obligation to return or deliver the same relationship of banks and its clients and because
money deposited. Thus, estafa will not prosper.23 banking is imbued with public interest, a bank was
also made liable for damages in the following
1.4 A bank’s failure to honor a deposit is failure to instances: (a) Failure to honor/pay a check of a
pay its obligation as debtor and not a breach of trust merchant/trader when the deposit is sufficient.32
arising from a depository’s failure to return the Conversely, a bank is not liable for its refusal to pay a
subject matter of deposit check on account of insufficient funds,
notwithstanding the fact that a deposit may be made
later in the day. Before a depositor may maintain a
2. The relation created between the bank and suit to recover a specific amount from his bank, he
depositor is that of a creditor and debtor with the must first show that he had on deposit sufficient
bank as debtor and the depositor as creditor. 24 deposits to meet his demand. (b) When a bank teller
validates an incomplete duplicate deposit slip that
2.1 The relationship is fiduciary in nature.25 The lacks the name of the account holder. 33 (c) When the
bank assumes to act as an agent for another and the deposit of PPH 31,500.00 to cover six postdated
other reposes confidence in him, although there is no checks was not credited to the account of the
written contract or nor contract at all. depositor because of the omission of one “zero” in the
account number.34 (d) The bank allowed an impostor

26 BPI vs. Court of Appeals, 326 SCRA 641

18 People vs. Ong, 204 SCRA 942 27 Citytrust Banking vs. IAC, 232 SCRA 559
19 BPI vs. Court of Appeals, 232 SCRA 302 28 Reyes vs. Court of Appeals, GR No. 118492, August 15,
20 Article 1962, Civil Code 2001
21 Article 1933, Civil Code 29 Go vs. IAC, 197 SCRA 22
22 Tan Tiong Tick vs. Americal Apothecaries, 65 Phil 417 30 BPI vs. IAC, 206 SCRA 408
23 Guingona vs. City Fiscal, 128 SCRA 577 31 Prudential Bank vs. Court of Appeals, 328 SCRA 264
24 Serrano vs. Court of Appeals, 96 SCRA 96 32 Moran vs. Court of Appeals, 230 SCRA 799
25 PBCom vs. Court of Appeals, 269 SCRA 695, BPI vs. IAC, 33 Philbank vs. Court of Appeals, 269 SCRA 695

206 SCRA 408 34 Citytrust vs. IAC, 232 SCRA 559



to negotiate treasury checks.35 (e) The new engage in the business or receiving deposits, shall be
accounts teller erroneously used the old account of a insured with PDIC.
depositor instead of the newly opened joined account
of the depositor and his spouse, leading to the 3.2 Deposits that are covered are savings
dishonor of two checks issued by the depositor.36 accounts, current account, time deposits and deposits
in acceptable foreign currencies pursuant to Foreign
3.6 The defense of diligence in the selection and Currency Deposit Act.
supervision of employees is not a valid defense to
escape or at least mitigate a bank’s liability. A bank’s 3.3 Exempted though from the coverage of the
liability is not merely vicarious but primary; the law are trust funds as it was was expressly excluded
defense of exercise of due diligence in the selection from the term “deposit” under R.A. 7400 and money
and supervision of its employees is of no moment. By market placement as it is not included in the term
the very nature of the work of banks, the degree of “deposit”
responsibility, care and trustworthiness expected of
their employees and officials is far greater than those DETERMINATION OF THE AMOUNT DUE THE
of ordinary clerks and employees. Banks are expected DEPOSITOR
to exercise the highest degree of diligence in the
selection and supervision of their employees.37 1. Insured deposits under the law means the net
amount due the depositor for any deposits in the
3.7 Malice and bad faith need not be proven insured bank after deducting any offsets but should
sufficiently to make a bank liable for moral damages not exceed PHP 500,000.00.
due to the error or negligence of a bank employee as
long as the bank has committed a serious mistake and 2. Hence, if a depositor has two or more
the bank’s negligence was a result of lack of due care accounts maintained in the same right and capacity,
and caution required of managers and employees of a the coverage of PHP 500,000.00 shall be held to apply
firm engaged in so sensitive and demanding business to the sum of all such accounts.
as banking, it is liable for moral damages. 38
3. A joint account (whether “and/or, “or”, “and”
shall be insured separately from any individual-owned
4. A bank cannot prohibit a borrower from account. If held by a juridical person or entity with a
prepaying his loan as a borrower may at any time natural person, the account shall be presumed to
prior to the agreed maturity date prepay, in whole or belong to the juridical person.
in part, the unpaid balance of any bank loan and other
credit accommodation, subject to such reasonable 3.1 Accounts under joint ownership is considered
terms and conditions (such as the payment of a equally shared among co-depositors unless otherwise
prepayment fee) as may be agreed upon between the indicated in the deposit document.
bank and borrower.

Declared Policy of the State
1. The Philippine Deposit Insurance Corporation
Act created the Philippine Deposit Insurance 1. The law, which is to be implemented by the
Corporation which is a government corporation Monetary Board of the Bangko Sentral ng Pilipinas
promoting and safeguarding the interests of the declares that it is the policy of the state to protect its
depositing public by providing permanent and citizens from a lack of awareness of the true cost of
continuing insurance coverage on all insured deposits. credit to the user by assuring a full disclosure of such
cost with a view of preventing the uninformed use of
2. It insures the deposit liability of all banks to a credit to the detriment of the national economy.
maximum deposit insurance coverage (MDIC) of
P500,000 per depositor in consideration of a premium 2. Specifically, it: (a) aims to protect a debtor
paid by the bank to the said corporation.(As per RA from the effects of misrepresentation or concealment
9576) (b) permits him to fully appreciate and evaluate the
real cost of his borrowing (c) avoid the circumvention
3. The risk insured against is the closure of a of usury laws
Coverage of the Law
3.1. The nature of the coverage is compulsory as
the law provides that the deposit liabilities of any bank 1. As used in the law, the term “credit” means:
or banking institution which is engaged in the (a) loan, mortgage, deed of trust; advance or
business of receiving deposits or which thereafter may discount (b) conditional sales contract (c)contract
to sell or contract of sale of property or services
(d)rental-purchase contract (e)contract for hire,
bailment or leasing of property (f) option, demand,
35 Go vs. IAC, 197 SCRA 22 lien, pledge or other claim against or for the delivery
36 BPI vs. IAC, 206 SCRA 408 of property or money (g)purchase of acquisition of any
37 PCIBank vs. Court of Appeals, 350 SCRA 446
credit upon security of any obligation arising out of
38 Prudential Bank vs. Court of Appeals, 328 SCRA 264



any of the above (h) any transaction with similar

purpose 4.2 The failure to comply does not render the
principal contract invalid or unenforceable, but would
2. The provisions of the law apply to creditors, entitle the debtor to recover any interest payment
who is defined by law as: any person engaged in the made.
business of extending credit, including any person
who as a regular business practice makes loans or sells 4.3 A violation of the law may subject the violator
or rents property or services on a time, credit or to: (a) a civil action brought within one year to recover
installment basis either as principal or agent, who from the seller/lender an amount of P100.00 or
requires as an incident to the extension of credit the double the finance charge imposed, whichever is
payment of a finance charge. greater, but not to exceed P2,000.00, plus attorney’s
fees and costs, and (b) a criminal action against the
2.1 The application of the law is compulsory for seller/lender who if convicted may be imposed a fine
(a) banks (b) non-bank financial intermediaries ranging from P1,000 to P5,000 or imprisoned from 6
authorized to engage in quasi-banking are required months to 1 year or both. Note that a final judgment
strictly to adhere to the law. Banks and non-bank that may be rendered in any criminal proceeding to
financial intermediaries authorized to engage in quasi- the effect that the defendant has willfully violated the
banking functions are required to strictly adhere to act shall be prima facie evidence against such
the provisions of the “Truth in Lending Act” and shall defendant in an action or proceeding brought by any
make the true and effective cost of borrowing an other party against such defendant under the Act as to
integral part of every loan contract (Consolidated vs. all matters respecting which said judgment would be
CA, 246 SCRA 195) estoppel as between the parties thereto.

3. The provisions of the law does not apply to

the following credit transactions: THE ‘INSIDE STORY’ ON THE
a. those that do not involve the payment of any ‘SECRECY OF BANK DEPOSITS’ LAW
finance charge by the debtor; and

b. those in which the debtor is the one specifying Atty. Renato S. Rondez
a definite and fixed set of credit terms such as bank Partner, Law Firm of Rondez & Partners
deposits, insurance contracts, sale of bonds, etc. Professor, College of Law
University of the Cordilleras
3.1 Finance charges (Sec. 3[3]; Sec. 2[h], CB
Circular 158) are the amounts to be paid by the debtor ________________________________
incident to the extension of credit such as interests, QUESTIONS AND ANSWERS ON SECRECY OF BANK
discounts, collection fees, credit investigation fees and DEPOSITS-RA 1405 AND RELATED LAWS
attorney’s fees.

3.2 Non Finance charges (Sec. 2[f], CB Circular 1) What is the purpose of the law?
158) are the amounts advanced by a creditor for items
normally associated with the ownership of property or The purpose of the law is to encourage people
the availment of the services purchased which are not to deposit their money in banks and, thereby,
incident to the extension of credit. For example, when discourage private hoarding so that the banks may
a debtor purchases a car on credit, the creditor may lend out the money and assist in the economic
advance the insurance premium as well as the development of the country39.
registration fee for the account of the debtor.
2) What does the law prohibit?
4. To accomplish the policy of the law to protect
citizens from a lack of awareness of the true cost of (a) The examination and inquiry or looking
credit to the user by assuring a full disclosure of such into all deposits of whatever nature with banks or
cost, a creditor or lender is obliged to provide the banking institutions in the Philippines including
debtor or borrower with a statement in writing, before investments in bonds issued by the Government or its
perfection of the contract containing the following: (a) political subdivisions and instrumentalities by any
Cash price of property or service to be person, government official, bureau or office40; and
acquired (b) Amount credited as down payment (b) The disclosure by any official or employee
and or trade-in(c) Charges paid or to be paid of any banking institution to any unauthorized person
not incident to the extension of credit (d) Charges of any information concerning said deposits.
paid or to be paid not incident to the extension of
credit (e)Total amount to be financed (f) Finance Note that the law is applicable to trust
charge; and (g)Percentage of finance charge to total accounts or an account that has been set up as an inter
amount to be financed. vivos or testamentary trust as Section 2 has been held
to cover not only money that has been deposited but
4.1 The disclosure must be made in a separate also to money which has been invested although no
document, and not one that is merely incorporated in
a document by the statement that the transaction
subjects the debtor to a finance charge. 39 Sec. 1, RA 1405.
40 Sec. 2, RA 1405.



creditor-debtor relationship is created between the Act, when there is probable cause that the
bank and the client.41 deposit or investment is in any way related to
The law does not apply to money market an unlawful activity as defined in the Act or a
placements as they are not deposits, rather, they are money laundering offense under the Act48;
trades in short term negotiable instruments such as m) When a director, officer, stockholder, and
securities or treasury bills. related interest (DOSRI) obtains a loan from
his bank or its subsidiaries, or with related
3) What disclosures or inquiries into deposits are controlling interests of more than 5% of the
not prohibited? capital or surplus of the bank, it shall
constitute a waiver of secrecy of all his
a) Upon written permission of the depositor; deposits of whatever nature in all banks in the
b) In cases of impeachment; Philippines; and
c) Upon order of a competent court in cases of n) Under the Unclaimed Balances Law49.
bribery or dereliction of duty of public o) The examination of a bank account under
officials; Section 10, Rule 57 in relation to the
d) In cases where the money deposited or examination of a party whose property is
invested is the subject matter of litigation42; attached and persons indebted to a defendant
e) Upon order of the court or subpoena issued or controlling his property.50
by the Ombudsman in cases of unexplained
wealth43; This is subject to the following 4) Who are primarily liable for violations of the
requisites: (1) only an in-camera inspection is law?
allowed (2) there must be a pending case
before a court of competent jurisdiction (3) The persons primarily liable for a violation of
account is clearly identified (4) examination is the law would be a bank employee or officer and the
limited to account subject of the court case, person, government officer, agency or office looking
and (5) bank personnel and the account into the deposit when not authorized by any of the
holder must be notified to be present during exceptions to the law.
the inspection. Note also, that since investigations by the
f) Upon order of the Commissioner of Internal Monetary Board and the Bureau of Internal Revenue
Revenue in respect of the bank deposit’s of a are confidential in nature, any disclosure in violation
decedent for the purpose of determining such of the confidentiality will create liability.
decedent’s gross estate44;
g) Upon order of the Commissioner of Internal 5) Will the garnishment of a bank deposit violate
Revenue when a taxpayer files an application the law?
to compromise his tax liability by reason of
financial incapacity45; No, garnishment of a bank deposit will not
h) Upon examination made in the course of a violate the law. If the existence of the deposit is
special or general audit of a bank as disclosed, the same is considered as purely incidental
authorized by the Monetary Board after being to the execution process51.
satisfied that there is reasonable ground to What is to be disclosed only is the existence of
believe that a bank fraud or irregularity is the deposit, particularly whether or not it is sufficient
being committed and it has become necessary to satisfy the garnishment. Hence, a disclosure of the
to look into the deposit to establish the same; balance may constitute a violation of the law.
i) Upon examination of a bank’s independent
auditor, the result of which are for the 6) Is a depositor with a safety deposit box
exclusive use of the bank; protected by the law?
j) In case of suspicious transactions under the
Anti-Money Laundering Law46; No, the deposits made by a depositor in a
k) Under the Anti-Money Laundering Law where safety deposit box are not the deposits contemplated
banks are required to report to the Anti- by the law as the bank is never in possession or
Money Laundering Council any transaction in control of the contents of the safety deposit box in this
cash or other equivalent monetary instrument instance, the depositor is merely leasing the deposit
in excess of P500,000 in any one day47; box from the bank.
l) Also under the Money-Laundering Law, the
Anti-Money Laundering Council may inquire Prevailing jurisprudence is that the ensuing
into a deposit or investment maintained with relationship between the bank renting out the safety
any financial institution upon order of a deposit box and the client with respect to the contents
competent court, in cases of violation of the of the box is that of bailor-bailee, the bailment being
for hire and mutual benefit. The bank would be liable
for loss of the contents of the box if it is guilty of fraud,
41 Ejercito vs. Sandiganbayan, GR Nos. 157294-95, November
30, 2006
42 Sec. 2, RA 1405.
43 Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA 91, Marquez

vs. Disierto, 399 SCRA 772

44 Sec. 6, NIRC. 48 Sec. 1, RA 9160.
45 Sec. 6, NIRC. 49 RA 3936.
46 Sec. 3 (b-1) , RA 9160. 50 Onate vs. Abrogar, 230 SCRA 181
47 Sec. 3 (b), RA 9160. 51 China Banking Corp. vs Court of Appeals, 193 SCRA 454

BAR OPERATIONS 2011 Page 100


negligence or delay or contravention of the tenor of Upon conviction, a violator may be sentenced
the agreement.52 to imprisonment of not more than 5 years of a fine of
not more than P200,000.00, or both at the discretion
NOTE: Without order of a court of competent of the court.
jurisdiction, disclose to any authorized person any
information relative to the funds or properties in the
custody of the bank belonging to private individuals, INTELLECTUAL PROPERTY CODE
corporations, or any other entity; Provided, that with R.A. No. 8293
respect to bank deposits, the provisions of existing
laws shall prevail53. INTELLECTUAL PROPERTIES
Those property rights which result from the physical
7) Would the examination of the bank deposits of manifestation of an original thought.
another person in connection with an inquiry into (Ballantine’s Law Dictionary)
illegally acquired property of the defendant in anti-
graft cases violate the law? Purpose: to strengthen the intellectual and industrial
property system in the Philippines as mandated by the
country’s accession to the Agreement establishing the
The permitted inquiry into illegally acquired
World Trade Organization (Mirpuri vs. CA GR no
property in anti-graft cases extends to instances
where such property is concealed by being held by or
recorded in the name of other persons.
COVERAGE -intellectual property rights consists of:
8) In a case where the money deposited or
invested is the subject matter of the litigation, a) Copyrights and related rights;
could an inquiry into the whereabouts of the b) Trademarks and service marks;
amount extend to the deposits held in the name of c) Geographic indications;
persons other that the one responsible? d) Industrial designs;
e) Patents;
Even in cases not involving prosecution under f) Layout-designs (Topographies) of Integrated
Anti-Graft and Corrupt Practices Act, an inquiry into Circuits; and
the whereabouts of the amount converted necessarily g) Protection of Undisclosed Information.
extends to whatever is concealed, held or recorded in
the name of persons other than the one responsible Section 7 of Rep. Act No. 9502 (Universally Accessible
inasmuch as the case is aimed at recovering the Cheaper and Quality Medicines Act of 2008) amends
amount converted. Section 72 of the Intellectual Property Code in that the
latter law unequivocally grants third persons the right
9) Are foreign currency deposits covered by the to import drugs or medicines whose patent were
law? registered in the Philippines by the owner of the
product (Roma Drug vs. RTC of Guagaua, Pampanga GR
While the law does not cover foreign currency No. 149907)
deposits, they however are absolutely confidential and
cannot be disclosed pursuant to Republic Act No. INTERNATIONAL CONVENTION AND RECIPROCITY
6426, otherwise known as the Foreign Currency
Deposit Act, the only exception to disclosure being
upon the written consent of the depositor54. -any person who is a national or who is
domiciled or has a real and effective industrial
An additional exemption has been provided establishment in a country which is: a.) a party to any
by the Anti Money Laundering Law when it has been convention, treaty, or agreement relating to
established that there is probable cause that the intellectual property rights or the repression of unfair
deposits involved are in any way related to the offense competition to which the Philippines is also a party, or
of money laundering.55 b.) extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to benefits to the
10) Will an unlawful examination of a bank extent necessary to give effect to any provision of such
account render the information obtained convention, treaty, or reciprocal law, in addition to the
inadmissible? rights to which any owner of an intellectual property
right is otherwise provided by law. (Sec. 3)
There is nothing in the law that provides that
an unlawful examination shall render the evidence
obtained therefrom to be inadmissible. REVERSE RECIPROCITY OF FOREIGN LAWS
– makes reciprocally enforceable on nationals
11) What is the penalty for a violation of the law? of a foreign state within Philippine jurisdiction all
conditions, restrictions, limitations, diminutions,
requirements or penalties that may be imposed by
such foreign state on a Filipino national seeking
intellectual property protection in that country.
52 Sia vs. Court of Appeals, 222 SCRA 24
(Section 231)
53 Sec. 55.1(b), RA 8791.
54 Sec. 8, RA 6426.
55 Sec. 11, RA 9160

BAR OPERATIONS 2011 Page 101


ADMINISTRATIVE PENALTIES IMPOSED FOR -an invention that can be produced and used in any
a) Cease and desist order (CDO);
b) Acceptance of voluntary assurance compliance NON-PATENTABLE INVENTIONS
(VAC) or voluntary assurance of discontinuance a) Discoveries, Scientific Theories and
(VAD); Mathematical Methods;
c) Condemnation or seizure of products subject of b) Schemes, rules and methods of performing
the offense; mental acts, playing games or doing business,
d) Forfeiture of properties used in the commission of and programs for computer;
the offense; c) Methods for treatment of the human or animal
e) Imposition of administrative fines; body by surgery or therapy and diagnostic
f) Cancellation of permit, license, authority or methods practiced on the human or animal
registration; body;
g) Withholding of permit, license, authority or d) Plant varieties or animal breeds of essentially
registration; biological process for the production of plants
h) Assessment of damages; or animals;
- Must be recovered within four (4) years from e) Aesthetic creations;
the time the cause of action arose (Sec. 226) f) Anything which is contrary to public order or
i) Censure; morality (Sec. 22)
j) Analogous penalties or sanctions (Sec. 10.2 [b])
ELEMENTS OF UNFAIR COMPETITION The right to a patent belongs:
(1) confusing similarity in the general appearance a) to the inventor, his heirs, or assigns
of the goods; and b) when 2 or more persons have made the
(2) intent to deceive the public and defraud a invention jointly – to them jointly
competitor. c) if two (2) or more persons have made the
The confusing similarity may or may not result from invention separately and independently of
similarity in the marks, but may result from other each other – to the person who filed an
external factors in the packaging or presentation of the application for such invention (FIRST TO
goods. The intent to deceive and defraud may be FILE RULE)
inferred from the similarity of the appearance of the d) where 2 or more applications are filed for the
goods as offered for sale to the public. Actual same invention – to the applicant who has the
fraudulent intent need not be shown (In-N-Out Burger earliest filing date or the earliest priority date
vs. Sehwani GR No. 179127) (FIRST TO FILE RULE) (Sec. 29)
e) In case of inventions created pursuant to a
LAW ON PATENTS commission – to the person who commissions
the work UNLESS agreed otherwise.
PATENT – an exclusive right acquired over an f) If made by an employee, the patent shall belong
invention, to sell, use, and make the same whether for to:
commerce or industry(2005 2006 bar exams)  the employee – if invention not part of his
regular duties even if he uses the time,
PATENTABLE INVENTIONS facilities and materials of the employer;
-any technical solution of a problem in any OR
field of human activity which is (a.)NEW(NOVELTY),  The employer – if the invention is the
involves an (b).INVENTIVE STEP and is result of the performance of his regularly
(c).INDUSTRIALLY APPLICABLE shall be patentable. assigned duties unless agreed otherwise.
(Elidad Kho vs. CA, March 19, 2002) The patentable Right to Priority
invention may be, or may relate to, a product, or -an application for patent filed by any person who has
process, or an improvement of any of the foregoing. previously applied for the same invention in another
(Sec. 21) country which by treaty, convention, or law affords
Novelty – that which does not form part of a similar privileges to Filipino citizens, shall be
prior art. (Section 23) considered as filed as of the date of filing the foreign
Prior Arts: application
a. those previously available to the public Requisites:
b. that which forms part of an application (a) The local application expressly claims priority;
provided that: (b) It is filed within twelve (12) months from the
i. the inventors or applicants are not the same date the earliest foreign application was filed;
ii. The contents of the application are published (c) A certified copy of the foreign application
in accordance with the requirements of together with an English translation is filed within
patent application rules. six (6) months from the date of filing in the
iii. The filing date of the prior art is earlier. Philippines. (Sec. 15, R.A. No. 165a)
Inventiveness/Inventive Step
-that which is not obvious to a person skilled RIGHTS ACQUIRED BY THE PATENTEE
in the art of the time of the filing date or priority date a. to restrain, prohibit and prevent any
of the application claiming the invention. (Sec. 26) unauthorized person or entity from making, using,
Industrial Applicability offering for sale, selling or importing a patented

BAR OPERATIONS 2011 Page 102


b. to restrain, prevent or prohibit any -within 3 years from date of commission of

unauthorized person or entity from using the the crime for repetition of infringement, without
process, and from manufacturing, dealing in, using prejudice to the right for damages. (Sec. 84)
or offering for sale, or importing any product
obtained directly or indirectly from a patented 1995 & 2004 BAR
process; Q - X Corporation commissioned W to paint the Mayon
c. to assign, or transfer by succession the patent, Volcano on the lobby of the new building of X Corp. for
and to conclude licensing contracts for the same a price of P1M. Who owns the painting? Who owns the
copyright of the painting?
UNITY OF INVENTION A - X Corporation owns the painting but the copyright
-every application for patent registration belongs to W unless there is a written stipulation to
must contain an application over a single invention or the contrary. (Sec.178.4)
several inventions but must form part of a single
general inventive concept While the Rome Convention gives broadcasting
organizations the right to authorize or prohibit the
Utility Models rebroadcasting of its broadcast, however, this
-models of implement or tools of any protection does not extend to cable retransmission
industrial product even if not possessed of the quality (ABS-CBN vs. PMSI GR Nos. 175769-70)
of invention but which is of “practical utility”
Industrial Design
-any composition of lines or colors or any Trademark – anything which is adopted and used to
three-dimensional form, whether or not associated identify the source of origin of goods, and which is
with lines or colors provided that such composition or capable of distinguishing them from goods emanating
form gives a special appearance to and can serve as from a competitor
pattern for an industrial product or handicraft. -any word, name symbol or devise adopted
and used by a manufacturer or merchant to identify
CANCELLATION OF PATENTS his goods and distinguish them from those
1. Who may file? manufactured and sold by other (Society des Products
 any person Nestle vs. CA April 4, 2001)
 IPO motu proprio
2. Grounds Service Mark – distinguishes the services of an
a) That the patent is invalid (Sec. 81); enterprise from the service of other enterprises.
b) If the invention is not new or patentable;
c) Unclear and incomplete application; Collective Mark – any visible sign designated as such
d) Contrary to public order or morality. in the application for registration and capable of
Failure to make payments of annual fees distinguishing the origin or any other common
or dues characteristic, including the quality of goods and
3. Where to file? services of different enterprises which use the sign
 BLA – if in violation of IPC (administrative) under the control of the registered owner of the
 RTC – otherwise collective mark (Sec. 121.2)

INFRINGEMENT Trade Name – the person (whether natural or

-the making, using, offering for sale, selling or juridical) who does business and produces the goods
importing a patented product or a product obtained or the services is designated by a trade name.
directly or indirectly from a patented process or the -there is no need to register trade names in order to
use of a patented process without the authorization of secure protection for them.
the patentee. (Sec. 76)
Trade Dress– involves the total image of a product,
Test of Patent Infringement including such features as size, shape, color or color
1) Literal Infringement – resort is had to the combinations, texture, and/or graphics.
“words” of the claim.
2) Doctrine of Equivalents – if two devices do HOW MARKS ARE ACQUIRED
the same work in substantially the same way -Under RA 8293, the rights in a mark shall be
and produce substantially the same result, they acquired through registration made validly in
are the same even though they differ in name, accordance with its provisions. (Sec. 122)
form, or shape. -when a person has identified in the mind of the
public the goods he manufactures or deals in his
REMEDIES IN CASE OF INFRINGEMENT business or services from those of others, such a
A) File civil case person has a property right in the goodwill of said
- with the appropriate Regional Trial Court to goods or services which will be protected in the same
recover from infringer the damages sustained by manner as other property rights (Sec. 168.1)
the former, plus attorney’s fees and other
litigation expenses, and to secure an injunction for RIGHTS CONFERRED
the protection of his rights. -to prevent all third parties not having the
owner’s consent from using in the course of trade
B) File criminal case identical or similar signs or containers for goods or

BAR OPERATIONS 2011 Page 103


services which are identical or similar to those in  NO filing date shall be accorded until the
respect of which the trademark is registered where required fee is paid (Sec. 127.2)
such use would result in a likelihood of confusion.
1. Who may file?
NON-REGISTRABLE TRADEMARKS, TRADE NAMES - any person who believes that he is and will be
AND SERVICE MARK damaged by the registration of a mark
a) Immoral, deceptive or scandalous matter, or 2. Where to file?
matter which may disparage or falsely suggest a - BLA
connection with persons, living or dead, 3. Grounds:
institutions, beliefs, or national symbols, or bring a) Mark becomes generic for goods for
them into contempt or disrepute; which it is registered;
b) The flag or coat of arms or other insignia of b) Abandonment of the mark;
the Philippines or its political subdivisions, or of c) Registration obtained fraudulently or
any foreign nation, or any simulation thereof; contrary to provisions of RA 8293;
c) A name, portrait or signature identifying a d) Mark used by, or with permission of,
particular living individual except by his written registrant;
consent, or the name, signature, or portrait of a e) Non-use within the Philippines for 3
deceased President of the Philippines, during the uninterrupted years or longer.
life of his widow, if any, except by written consent -may be excused if caused by
of the window; circumstances arising independently
d) Is identical with a registered mark of the will of the trademark owner,
belonging to a different proprietor or a mark with such as military coup, or political
an earlier filing or priority date, in respect of: changes that impede commerce
(i) The same goods or services, or
(ii)Closely related goods or services, or DOCTRINE OF SECONDARY MEANING
(iii) If it nearly resembles such a mark as - When a mark has become distinctive of the
to be likely to deceive or cause applicant’s goods in commerce and, in the mind of the
confusion; public, indicates a single source of consumers, it may
e) Be identical with or confusingly similar to an be registered.
internationally well-known mark, whether or not
registered in the Philippines, provided that: WHAT CONSTITUTES AN INFRINGEMENT
i. If the internationally well-known mark is -Under RA 8293, any person shall, without the
not registered in the Philippines, the consent of the owner of the registered mark:
application for registration of the mark can be 1) Use in commerce any reproduction,
rejected only if the goods or services specified counterfeit, copy, or colorable imitation of a
in the application are similar to those of the registered mark or the same container or a
internationally well-known mark; dominant feature thereof in connection with
ii. If the internationally well-known mark is the sale, offering for sale, distribution,
registered in the Philippines, the application advertising any goods or services including
for registration of the mark can be refused other preparatory steps necessary to carry
even if the goods or services specified in the out the sale of any goods or services on or in
application are not identical or similar to connection with which such use is likely to
those of the internationally well-known mark. cause confusion, or to cause mistake, or to
f) Is likely to mislead the public; deceive; or
g) Generic signs for goods or services; 2) Reproduce, counterfeit, copy or colorably
h) Customary in everyday language or in imitate a registered mark or a dominant
established trade practice; feature thereof and apply such reproduction,
i) Designate the kind, quality, quantity, intended counterfeit, copy, or colorable imitation to
purpose, value, geographical origin, time or labels, signs, prints, packages, wrappers,
production of the goods or services; receptacles, or advertisements intended to be
j) Shapes necessitated by technical factors; used in commerce upon or in connection with
k) Color alone, unless defined by a given form; or the sale, offering for sale, distribution, or
l) Is contrary to public order or morality advertising of goods or services on, or in
connection with which such use is likely to
FILING DATE OF AN APPLICATION cause confusion, or to cause mistake, or to
-The filing date of an application shall be the deceive, shall be liable for infringement. (Sec.
date on which the office received the following 155)
indications and elements in English or Filipino:
a) An express or implicit indication that the TEST OF TRADEMARK INFRINGEMENT
registration of a mark is sought; 1) Dominancy Test – consists in seeking out the
b) Indications sufficient to contact the main, essential or dominant features of a
applicant or his representative, if any; mark.
c) A reproduction of the mark where 2) Holistic Test – takes stock of the other
registration is sought; and features of a mark, taking into consideration
d) The list of the goods or services for which the entirety of the marks.
the registration is sought. (Sec. 127.1)

BAR OPERATIONS 2011 Page 104



1) Cause of action: in infringement, the e.) Destruction of goods found to be infringing,
cause of action is the unauthorized use of and all paraphernalia.
a registered trademark; in unfair
competition, it is the passing off of one’s While the Constitution does not encourage the
goods as those of another merchant. unlimited entry of foreign goods, services and
2) Fraudulent intent is not necessary in investments into the country, it does not prohibit them
infringement, but necessary in UC. either. In fact, it allows an exchange on the basis of
3) Registration of trademarks: in equality and reciprocity, frowning only on foreign
infringement, it is a pre-requisite; in UC, it competition that is unfair.
is not required. ………GATT itself has provided built-in protection from
4) Class of goods involved: in infringement, unfair foreign competition and trade practices
the goods must be of similar class; in UC, including anti-dumping measures, countervailing
the goods need not be of the same class. measures and safeguards against import
 infringement is a form of unfair surges. Where local businesses are jeopardized by
competition unfair foreign competition, the Philippines can avail of
these measures. There is hardly therefore any basis
REMEDIES AVAILABLE IN CASE OF INFRINGEMENT for the statement that under the WTO, local industries
OF A REGISTERED MARK and enterprises will all be wiped out and that Filipinos
a) Sue for damages (Sec. 156.1); will be deprived of control of the economy (Tañada vs.
b) Have the infringing goods impounded Angara GR No. 118295)
(Sec. 156.2);
c) Ask for double damages (Sec. 156.3) LAW ON COPYRIGHT
d) Ask for injunction (156.4)
COPYRIGHT – system of legal protection an author
e) Have the infringing goods disposed of
enjoys in the form of expression of
outside the channels of commerce (Sec.
ideas(2004,2006,2007,2009 bar exams)
 Works are protected by the sole fact of their
f) Have the infringing goods destroyed (Sec.
creation, irrespective of their mode or form of
expression, as well as their content, quality or
g) File criminal action (Sec. 170);
purpose (Sec. 172.2)
h) Administrative Sanctions
 Protection extends only to the expression of the
idea, not to the idea itself or to any procedure,
system, method or operation, concept or
-any person who shall employ deception or
principle, discovery or mere data.
any other means contrary to good faith by which he
shall pass off the goods manufactured by him or in  The copyright is distinct from property in the
which he deals, or his business, or services for those of material object subject to it.
the one having established such goodwill, or who shall  Copyright, in the strict sense, is purely statutory
commit any acts calculated to produce said result, right. Being mere statutory right, it is limited to
shall be guilty of unfair competition. what the statute confers. It may be obtained and
How Committed enjoyed only with respect to the subjects and by
a) Making one’s goods appear as the goods of the persons, and on terms and conditions
another; specified in the statute. Accordingly, it can cover
b) Use of artifice or device to induce the false only works falling within the statutory
belief that one’s goods are those of another; enumeration or description (Pearl & Dean Vs
c) False statements in the course of trade; or Shoemart GR 148222 August 15, 2003).
d) Any act contrary to good faith calculated to
discredit another’s goods CREATION OF A WORK
A copyright work is created when the two (2)
TEST OF UNFAIR COMPETITION requirements are met:
-The test is whether certain goods have been 1) Originality – does not mean novelty or
clothed with an appearance likely to deceive the ingenuity, neither uniqueness nor creativity. It
ordinary purchaser exercising ordinary care. simply means that the work “owes its origin to the
REMEDIES IN CASE OF UNFAIR COMPETITION 2) Expression – there must be “fixation.” To be
a.) Damages which may either be: “fixed”, a work must be embodied in a medium
 reasonable profit which would have been sufficiently permanent or stable, to permit it to be
realized, or perceived, reproduced, or otherwise
communicated for a period of more than
 actual profits collected by the defendant, or
transitory duration.
 a certain percentage over the gross sales of
-if it is not required that the medium be
defendant in case of the measure of damages
visible as long as there is a possibility of retrieval,
cannot be readily ascertained;
then there is fixation
b.) Damages may be doubled in cases where actual
-it is fixation that defines the time from when
intent to mislead the public or to defraud the
copyright subsists. Before fixation, there can be no
complaint is shown;
c.) Impounding of sales invoices and other
documents evidencing sales;
BAR OPERATIONS 2011 Page 105

A. Original Work - Literary and artistic works -this pertains to the “original
which include in particular: decisions” not to the SCRA published in
a) Books, pamphlets, articles and other writings volumes since these are protected under
b) Periodicals and newspapers derivative works.
c) Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not RIGHTS OF AN AUTHOR
reduced in writing or other material form A. Economic Rights (Sec. 177)
d) Letters -exclusive right to carry out, authorize or
e) Dramatic or dramatico-musical compositions; prevent the following acts
choreographic works or entertainment in 1. Reproduction of the work or substantial
dumb shows portion of the work
f) Musical compositions, with or without words 2. Dramatization, translation, adaptation,
g) Works of drawing, painting, architecture, abridgement, arrangement or other
sculpture, engraving, lithography or other transformation of the work;
works of art; models or designs for works of 3. The first public distribution of the original
art and each copy of the work by sale or other
h) Original ornamental designs or models for forms of transfer of ownership;
articles of manufacture, whether or not 4. Rental of the original or a copy of an
registrable as an industrial design, and other audiovisual or cinematographic work;
works of applied art. 5. Public display of the original or copy of the
i) Illustrations, maps, plans, sketches, charts and work;
three-dimensional works relative to 6. Public performance of the work; and
geography, topography, architecture or 7. Other communication to the public of the
science work
j) Drawings or plastic works of a scientific or
technical character B. Moral Rights (Sec. 193)
k) Photographic works including works 1) Right to require that the authorship of the
produced by a process analogous to works be attributed to him,;
photography; lantern slides 2) Right of alteration or non-publication
l) Audiovisual works and cinematographic or 3) Right to preservation of integrity to object to
any process for making audio-visual any distortion, mutilation or other
recordings modification of, or other derogatory action in
m) Pictorial illustrations and advertisements relation to, his work which would be
n) Computer programs prejudicial to his honor or reputation; and
o) Other literary, scholarly, scientific and artistic 4) Right not to be identified with work of others
works (Sec. 172) or with distorted work.
Term of moral right
B. Derivative Works – -lifetime of the author and 50 years after his
a) Dramatizations, translations, adaptations, death
abridgments, arrangements, and other Waiver of moral right
alterations of literary works 1) by a written instrument (Sec. 195)
b) Collections of literary, scholarly or artistic 2) by contribution to a collective work
works, and compilations of data and other unless expressly reserved (Sec. 196)
materials which are original by reason of the
selection or coordination or arrangement of PRINCIPLE OF AUTOMATIC PROTECTION
their contents. (Sec. 173) Under the Berne Convention, the enjoyment
and exercise of copyright, including moral rights, shall
WORKS NOT PROTECTED not be the subject of any formality.
1) Any idea, procedure, system, method or
operation, concept, principle, discovery or OWNERSHIP OF COPYRIGHT
mere data as such, even if expressed, 1. Single creator –the author of the work, his
explained, illustrated, or embodied in a work; heirs or assigns.
2) News of the day and mere items of press 2. Joint creation –the co-authors jointly as co-
information; owners. But if the work consists of identifiable
3) Any official text of a legislative, administrative parts, the author of each part owns the part
or legal nature, as well as any official that he has created.
translation thereof. (Sec. 175) 3. Employee’s creation –the employee if the
4) Any work of the Government of the creation is not part of his regular duties even
Philippines. (Sec. 176) if he uses the time, facilities and materials of
-prior approval of the government the employer; otherwise it belongs to the
agency or office wherein the work is created employer
shall be necessary for exploitation of such 4. Commissioned work –the person
work for profit. Such agency or office, may, commissioning but the copyright remains
among other things, impose as a condition the with the creator unless there is a written
payment of royalties stipulation to the contrary.
5) Pleadings; 5. Cinematographic works – the producer has
6) Decisions of courts and tribunals. copyright for purposes of exhibition; for all

BAR OPERATIONS 2011 Page 106


other purposes, the producer, the author of -include the right to control the erection of
the scenario, the composer, the film director, any building which reproduces the whole or a
the author of the work are the creators. substantial part of the work either in its
6. Anonymous and pseudonymous works – the original or in any form recognizably derived
publishers shall be deemed the representative from the original; Provided, that the copyright
of the author unless: in any such work shall not include the right to
a. the contrary appears control the reconstruction, or rehabilitation in
b. the pseudonyms or adopted name leaves the same style as the original of a building to
no doubt as to the author’s identity or which that copyright relates
c. If the author discloses his identity
7. Collective works – the contributor is deemed
to have waived his right unless he expressly 4) Reproduction of Published Work
reserves it. (Sec. 196) -exclusively for research and private study.
Collective Work – a work created by two or
more persons at the initiative and under the 5) Reprographic Reproduction by Libraries
direction of another with the understanding -any library or archive whose activities are
that it will be disclosed by the latter under his not for profit may, without the authorization
own name and that the contributions of of the author of copyright owner, make a
natural persons will not be identified. (Sec. single copy of the work by reprographic
171.2) reproduction.
8. In case of transfers, the transferee shall own
one or more or all the economic rights 6) Reproduction of Computer Programs
transferred provided: -allowed on the ff. conditions:
a. The assignment, if inter vivos, be in writing a)only one copy is made;
b. The assignment be filed with the National b)lawful owner made the copy;
Library upon payment of the prescribed fee. c)purpose of which the reproduction is made
is legal like:
LIMITATIONS TO THE RIGHTS ON COPYRIGHT  use to which the program is made
1) Private performance, private and personal and for which it was purchased demand
use – applicable only “when a work has been the reproduction of a copy; or
lawfully made accessible to the public.”  the reproduction of a copy is
Personal Use necessary to guarantee against loss or
-making a single reproduction, adaptation, destruction (Sec. 189.1)
arrangement or other transformation of another’s
work exclusively for one’s own individual use 7) Importation for Personal Purposes
Private Use Requisites:
-making a reproduction, adaptation or other a) Copies of the work are not available in the
transformation of it, in a single person as in the Philippines and:
case of “personal use” but also for a common i. not more than one copy at one time is
purpose by a specific circle of persons only. imported for strict individual use;
ii. importation is by authority and for the use
2) Fair Use of a Copyrighted Work of Philippine Government; or
Fair Use - a privilege in persons other than iii. religious, charitable, or educational society
the owner of the copyright to use the copyrighted imported not more than 3 copies per title
material in a reasonable manner without its provided they are not for sale.
consent, notwithstanding the monopoly granted to b) Copies form part of libraries and personal
the owner by the copyright. baggage belonging to persons or families
-the doctrine of fair use is meant to balance arriving from foreign countries and are not
the monopolies enjoyed by the copyright owner intended for sale: Provided, that such copies
with interests of the public and of society. do not exceed three (3). (Sec. 190)


OR NOT 1) Injunction to prevent infringement
a) Purpose and the character of the use 2) Damages assessed on the basis of the proof
b) Nature of the copyrighted work alleged by the plaintiff of sales made by the
c) Amount and substantially of the portions used defendant of the infringing work minus
d) Effect of the use upon the potential market of whatever costs the defendant may be able to
the copyrighted work (Sec. 185) prove and appreciated by the court.
3) Delivery under oath of all implements
THE “FAIR-USES” OF PROTECTED MATERIAL ARE employed in the production of the infringing
 Criticizing, commenting, and news reporting; products themselves and the infringing items,
 Using for instructional purposes including for impounding or destruction as the court
producing multiple copies of classroom use, may order.
for scholarship, research and similar purposes 4) Payment of moral and exemplary damages
(Sec. 185) under the discretion of court.
5) Criminal Action
3) Working of Architecture (Sec. 186)

BAR OPERATIONS 2011 Page 107


If the containers originally conformed to the attorneys of the Judiciary. The person compiling shall
description contained in the certificate of submit to the Supreme Court Library a text-file
registration and it appears that they are the same digitized copy of the compilation;
containers being used by the other persons, the use d. The Court shall have the right to purchase copies
is illegal regardless of whether or not their of the compilation at cost, that is, by paying only the
distinctive name, mark or design is partly or entirely cost of reproducing the compilation, the cost of
erased therefrom. (Destileria Ayala, Inc. vs. Tan Tay installation, and the cost of any accompanying
& Co. GR No. l-48793) software license. Such copies shall be used exclusively
by Justices, Judges and court attorneys of the Judiciary
A.M. No. 04-7-06-SC and shall not be re-sold by the Court;
RE: CONDITIONS ON THE COMMERCIAL e. The compilation shall bear the notice “Compiled
EXPLOITATION .OF SUPREME COURT DECISIONS for sale to the public with the permission of the
RESOLUTION Supreme Court”;
a. The person compiling and selling the decisions f. These conditions apply to any updating of the
shall provide the Supreme Court Library twenty (20) compilation.
free copies of the compiled decisions in the format the
compilation is sold to the public;
b. If the compilation is in printed copies, the
Supreme Court Library shall have the right to digitize
the compilation for exclusive use for research
purposes by Justices, Judges and court attorneys of
the Judiciary;
c. If the compilation is in digitized format, the
Supreme Court Library shall have the right to make
available the digitized compilation for exclusive use
for research purposes by Justices, Judges and court



Virgel Amor Vallejos
Seychelles June M. Doringo
Janilet Mishelle R. Carillo
Art Miguel B. Sanlao and Angelito Velasquez Jr.
(Business Managers)
Rachelle May Gallego
Paul Dean Mark Pila
(SSG Representative)
Brenda Filipinas Danganan
Atty. Isagani Calderon
Atty. Reynaldo U. Agranzamendez
(Dean,College of Law)

BAR OPERATIONS 2011 Page 108