Commercial Law

exposed otherwise to the defenses that the buyer may launch

Bar 2011 Notes

Roland Glenn T. Tuazon

TABLE OF CONTENTS:

3.
4.
5.

6.
7.

NEGOTIABLE INSTRUMENTS LAW

MERCANTILE INSTRUMENTS:
A. LETTERS OF CREDIT
B. TRUST RECEIPTS LAW
C. WAREHOUSE RECEIPTS LAW
D. CHATTEL MORTGAGE LAW
E. REAL ESTATE MORTGAGE/FORECLOSURE
F.
SECURITIES REGULATION CODE
G. FOREIGN INVESTMENTS ACT
INSURANCE
INTELLECTUAL PROPERTY LAW
BANKING LAWS
A. TRUTH IN LENDING ACT
B. ANTI-MONEY LAUNDERING ACT
C. PHIL. DEPOSIT INSURANCE LAW
D. CONFIDENTIALITY OF DEPOSITS
E. GENERAL BANKING LAW
F.
CENTRAL BANK ACT
CORPORATION LAW
TRANSPORTATION LAW

ANNEX 1: IN-DEPTH DISCUSSION ON LATTER PART OF NIL

Negotiable Instruments Law

against the seller

Laws solution exempt from personal defenses

Second objection: I dont know the maker, I just know the one
negotiating it to me. How will I know hes solvent?

Laws solution will make the indorser liable

Ateneo de Manila University

1.
2.

First objection: a person stepping into the shoes of the seller is

HISTORY: contrast a negotiable instrument with a non-negotiable PN:

regardless (Accumulation of secondary contracts)

The more indorsers, the more you can sue

Two general parts in the law:
o 1 what makes an instrument negotiable
o 2 rights and obligations of parties
Two basic forms:
o Promise to pay (PN)
o Order to pay (bill of exchange)
What If it does not comply with requisites of negotiability?
o If it does not comply with the requisites of negotiability, it is still
a contract, but not covered by the NIL.
Either:
o Payable to order negotiated by indorsement, and delivery
o Payable to bearer delivery is sufficient
o N.B. If payable to a specific person, it is not negotiable
What are the four basic contracts involved?
o 1. Making
o 2. Drawing
o 3. Negotiating
o 4. Accepting

To show consent
o N.B. But for all, there must be delivery
What are the basic principles of the NIL?
o 1. Bad faith

If a person is in BF, he cannot invoke defenses.

Ex. Issued a negotiable instrument to pay for a car

that is defective. The indorsee knows that the car is

o

defective, he is in bad faith.

2. Estoppel

Ex. A father allowing a son to steal a check and forge

2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are

acknowledgement of an old debt

Exception 1: date of payment is mentioned,

his signature is estopped from denying it

3. Comparative fault

If a bank honors a check with a forged signature, the

bank is considered negligent too

But if the negligence of the drawer outweighs the

negligence of the bank, the law shifts the fault to the

o

drawer
4. The law will only protect you from personal defenses if you

are a holder in due course (Sec. 52)

Good faith

With value

Before overdue (see below)

With no notice of defenses

5. General rule: there must be demand , before an instrument

o
o

each other
An overdue instrument is shouting to the high

deem whether it is absolute.

Distinguish between uncertain events and certain

events, although indeterminate (ex. Moment of death)

2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Specify the denomination; cannot just be a number.

3. Payable on demand or on a determinable future time
4. Payable to order or bearer

Need not use exact words, but there must be

reasonable certainty so people know from whom they

could demand payment

Ex. instead of order pay to X or his indorsees;

pay to X or his assigns

Ex. instead of bearer pay to X or holder; pay to X

heavens I have been dishonored!

Requisites and kinds of negotiable instruments
What are the requirements for a negotiable instrument?
o 1a. It must be in writing
o 1b. It must be signed symbol of consent

If one signed another name or a symbol, it will bind

negotiability) in the old terms

Authorization to pay or a mere request does not

create a binding obligation to pay.

2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine

afloat, so overnight, banks sometimes transact with

or at least, a date of maturity

Exception 2: insertion of or order (words of

yourself within the four corners of the instrument to

becomes overdue. Exception: If time is of the essence.

Ex. Reserve requirements of banks must be kept

fine
Creates a NEW obligation to pay, not a mere

or possessor
5. Where the instrument is addressed to a drawee, he must be
named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete

him if he intended for it to bind him

Location is immaterial

instrument which can be filled up as a remedy

When is a sum certain:

o Does a stipulation of interest still make it a sum certain?

Yes. It must be in writing.

N.B. Remember the rules on unconscionable interest

o

rates
When does the interest become 12% by default?

1. Unconscionable interest

2. Stipulated an interest but no rate

What is required for the instrument to be valid?

1. Amount of installments must be indicated

2. Date of maturity of each installment specified

Ex. Promise to pay Jose Cruz or order P100,000 in

Do instructions on how payment will be entered in the

books of account affect unconditionality?

No.
Does reimburse yourself from X

(ex. Nov 2005)

Does the stipulation of an acceleration clause make it a
sum certain?

Yes.

demandable.
Is it valid to stipulate payment in foreign currency?

Yes. If you talk about an exchange rate, you have to

failure to pay a sum certain?

Yes. Because you know how much is due at the date

of maturity. This is the reckoning point at the date of

subject

to

the

formers

terms

and

conditions
Does mention of a CM securing the original obligation
make it non-negotiable?

Negotiable, because the promise to pay is still

one.
Is I will pay reasonable attorneys fees in case there is

such fund.
What is the rule on how the original obligation came

instrument

talk about at least two currencies. It cannot be just

o

of a particular fund.
When does reference to a particular fund not

about?

In general, it does not affect unconditionality

But not if mention of the original contract makes the

An acceleration clause: failure to pay an

installment will make the entire balance due and

o

source of payment. The latter is not negotiable.

What about treasury warrants?

It is not negotiable because it is payable out

destroy negotiability?

Payment must not be limited to come from

EACH is due. You cannot just give the starting point

o

affect

unconditionality?

No.
What is the test?

It must indicate the source of reimbursement, not

10 installments. not negotiable

N.B. You have to specify both AMOUNT and WHEN

fund

conditional, as long as it is not dependent to the CM.

When is it payable at a determinable future time:
o Distinguish between various insecurity clauses:

1st situation: Pay Jose Cruz or order; if the holder

feels insecure, he may demand that I post reasonable

maturity, the sum is still certain.

N.B. Stipulations on attorneys fees are always

securities, and if I fail to do so, he can declare the

subject to court control anyway.

When is a promise is unconditional:

entire balance due and demandable.

One view: non-negotiable date of maturity

depending on different grounds where the post office can

becomes uncertain because holder can

accelerate

payment,

and

there

is

an

additional undertaking other than payment of

money.
Other view: negotiable the undertaking to
put up a security is merely an accessory
obligation.

The date of maturity is not

uncertain because acceleration is within

control of the maker; he can prevent it by

refuse to pay. Also, it can only be indorsed once.

Does an extension clause affect negotiability?

No, if the extension is for a definite time too.

Ex. Payable within 2 years from date, subject

to one year extension

Option to extend belongs to holder or maker/acceptor.

What additional provisions do not affect negotiability:
o What is the general rule?

Other obligation or undertaking aside from payment of

money makes it non-negotiable (secured by CM over

giving the additional security. (better view)

2nd situation: same if the holder feels unsecure, he

can declare the entire balance due and demandable.

It is not negotiable, because here, the holder

has the absolute option to make the

my car, which I will keep in good condition)

What are the exceptions?

1. Authority for holder to foreclose pledge, CM, or

obligation due and demandable.

o

paid upon maturity

N.B. the SC said, however, this is a void

Differentiate:

When the maker may choose to pay before a certain

date, it is still negotiable (ex. on or before June 15)

Why?
o It benefits everyone because all
other

secondary

contracts

o
o

are

discharged.
When the holder may absolutely choose to have the
obligation due, it is not negotiable.

Why?
o Everybody becomes

collateral securities
2. Authorizes confession of judgment if instrument not

What if

stipulation
3. Waiver of benefit of law
4. Waiver of notice of dishonor
5. Waiver of venue
6. Waiver of exemption from execution
the holder has the option to require something

other than payment of money?

It is valid, as long as the other option is money.

Ex. If option is upon holder to demand either

secondarily

cash or rice, it is still negotiable because the

liable by ripening their obligation.

What if its hinged upon a contingency?

Non-negotiable even if the condition occurs.

Philippine Education v. Soriano: A money order is not

negotiable, because although it says pay to the order of,

under Postal Regulations, obligation to pay is conditional,

holder can ALWAYS demand money

If the maker has the option, not valid.

What omissions do not affect negotiability?
o 1. Not dated
o 2. Failure to mention consideration

It is presumed in this contract

o 3. Does not specify place where it is drawn or payable

o 4. Bears a seal
o 5. Designates currency in which payment will be made
When it is payable on demand?
o 1. Upon sight or presentation
o 2. Instrument is silent on when payment is made
o 3. When it is overdue

As to the maker, he is discharged

BUT as to the indorser, it is upon demand

Upon whose order may an order instrument be paid?
o 1. Payee (who is not maker, drawer, or drawee)
o 2. Drawer

Ex. Jose Cruz writing a check saying Pay to the order

case] are negotiable instruments. The documents

provide that the amounts deposited shall be repayable
to the depositor. And who, according to the document,
o
o

is the depositor? It is the bearer.

2. To person or bearer
3. Order of fictitious person

What is the general rule?

There must be intent by the maker or drawer

of the NI that the instrument be issued to a

of Jose Cruz (better than making a check paid to

1. To bearer

Caltex: The Certificates of Time Deposit [in this

checks.

cash)
In this example, it is not complete until Jose indorses

He drew a check payable to a

corporation where he was just the corporate secretary.

parties to a contract)
3. Drawee
4. Two or more payees jointly

Ex. Pay to the order of Jose Cruz AND Manuel

He was just the corp. sec., and was not authorized to

Santos
5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

Contra: For drawees, it CANNOT be alternative or

bearer.

indorse; but he indorsed the check to himself

nonetheless.

Y, his partner, sued the bank for

restoration of the amount.

HELD: it is payable to

The Drawer did not intend the payee (the

Corporation) to get the proceeds of the check, EVEN

IF the payee actually existed or not. It fell under this
provision.

If, however, the company required two

successive, but it can be jointly.

Ex. drawee can be drawn against A and B

o

X wanted to steal money from the

partnership.

it, because there has to be delivery (at least two

o
o

fictitious person (knowledge is paramount)

Weller and Martin: Either partner can sign or issue

signatories to all checks, and X signed it with

but not A or B
6. Holder of an office for the time being

Ex. Treasurer of the city of Makati

What if the drawee is not indicated with reasonable

intent to steal, and Y signed it not knowing

Xs intent, then it does not become payable
to bearer. For the payee to be fictitious, both

certainty?

It is not negotiable.
When it is payable to bearer?

must have same intent.

American Sash: Had a payroll clerk, who prepares
checks payable to employees.

He then makes the

officers sign the checks. Clerk padded payroll with

issued were cleared, and the checks issued to them

ghost employees, had the officers sign the checks

were from a closed account. Contention of spouses:

(the officers did not know that the employees didnt

How can PNB accept the indorsement of those

exist), and the clerk collected money. Issue: is this

checks, when the ones who indorsed were the

payable to fictitious persons. These ghost employees

officers and not the supposed borrowers. Contention

did not actually exist.

HELD: It was not a bearer

of PNB: it is intended for fictitious persons, since there

The DRAWERS were the officers who

was no intent that they actually get the money (even if

instrument.

signed the checks.

Their intent controls.

the supposed borrowers really exist).

So the

HELD:

checks DID NOT become payable to bearer because

Rodriguez spouses won.

they DID NOT KNOW that the ghost employees were

considered as payable to fictitious persons, the fact

not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a

must be known to the person issuing the negotiable

savings and loan association (SLA).

Rodriguez

know that the supposed payees were not the real

spouses meanwhile, had current accounts with PNB.

borrowers (when it fact it was the officers). PNB must

instrument.

Whenever the SLA lends to members, it issues postdated checks. But most of the time, the SLA does not

have enough money. The borrowers thus endorse the

o

checks to Rodriguez; in turn, Rodriguez rediscounts

the checks (issuing checks lower than face value).

For the checks to be

Here, the Rodriguez spouses did not

reinstate the amounts to the Rodriguez spouses.

4. Payee is not name of existing person

Classic example: payable to cash

5. Last indorsement is in blank

Completion and delivery

The SLA has a policy: when a member has an

outstanding loan, they cannot get another loan. So

the officers who wanted to borrow more, to circumvent

this, they made it appear that it is the other members

who are borrowing. The SLA, in accordance with the
usual procedure, issued post-dated checks to the

What is the effect of ante-dating or post-dating?

o Does not affect negotiability
When can the holder insert a date in the instrument?
o When the date of acceptance is not inserted by the drawee, the
o

supposed borrowers (but really for the officers). The

officers indorsed the checks to Rodriguez. Rodriguez

holder may insert date of issue or date of acceptance

What if he places the wrong date?

If negotiated to a holder in due course, that is the

correct date as far as the holder in due course is

issued discounted checks. PNB found out about this

and closed the SLA account. Meanwhile, the checks

issued to Rodriguez, which bounced because the SLA

concerned even if it is not

Purpose: the law protects a holder in due course, who
is relying on that date in good faith

account was shut down since the checks they

But what if the one who put the wrong date presented it for

payment to the acceptor/drawee?

Not valid. Cannot claim because he was not in GF.

A check drawn by X says Pay to the order of Y P10000 thirty
days after sight. It was accepted by E on Sept. 15, but did not
o

date the instrument. Y negotiated it to Z, telling the latter that

witness signature that the Z will pay X what Z owes. But X

instrument this date.

Can he collect from E?

Yes, even if it is more than 30 days from

actually made it appear that it was a PN where Y promised to

pay money to her.

acceptance. Z is a HIDC and the Nov 1 date

must be intent to leave a signature to make a PN.

What about incomplete and undelivered instruments?
o Will not be a valid contract in the hands of any holder, as

is true as to him.
If Y inserted the wrong date instead and did not

against the person whose signature was placed on the

possessing it has prima facie authority to fill up the blanks

CONTROLLING FACTOR: The blank or incomplete

o

This is an incomplete and undelivered

instrument.
Ex. X went abroad and left signed checks for payment of

the holder turn it into a negotiable instrument

In a case, a person signed an instrument in blank and left

debts. Abusive employees put their own names and signed

it with the bank. The bank filled it up with an amount.

them with employees, it became possible for them to do this.

their own names. HELD: By pre-signing checks and leaving

What happens?

The amount inserted by the bank controls.

What are the two requirements for this instrument to be

enforceable?

1. It must be filled up in accordance with the authority

instrument prior to delivery (real defense)

BUT indorsers are liable

Ex. X left signed checks, and an employee took them and
filled up amounts.

instrument must have been delivered with intent that

HELD: The court believed the contention

that Y never intended for the signature to be for a PN. There

indorse it to Z, can he collect from E?

No. He is not a HIDC.

What is the rule for incomplete but delivered instruments?
o When it is wanting of a material particular the person

P60000 from X?

Yes. The defense does not apply to him.

X asked Y to sign a piece of paper claiming that it was a

the instrument was accepted November 1. Z placed in the

Can Y collect P60000 from X?

No. It was beyond the authority given him.

Y indorsed the check to Z, a HIDC. Can Z collect

The officers were negligent and shared in the loss (60-40).

What about complete but undelivered instruments?
o The NI is incomplete until delivered, but this does not prejudice
o

given to him

2. It must be filled up within reasonable time

X gave a check with a blank amount to Y, telling Y that he

a HIDC
Ex. You cannot sue if you hold checks that were not delivered
to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense it is a

should fill it up according to what X ultimately owes Y, but not

over P50000. X owes Y P30000, but Y put P60000.

personal defense
BPI Family Savings: BPI issued a check payable to City
Treasurer of Iloilo to pay for local taxes. They did not deliver it

to the treasurer, and just gave it to the employee.

The

HELD: There was no payment because BPI never delivered it

3. If not dated, assumed to be dated from time of issue

4. Written > printed provisions
5. If ambiguous whether a bill or note, the holder has the option to treat

to the city treasurer, so BPI cannot claim to have paid.

Associated Bank: Somebody was selling RTW clothes, and

it as either
6. Ambiguous role of signature deemed an indorser
o Because the indorser has the least liability among all

employee used it to pay for somebody elses local taxes.

shopping malls (buyers) issued crossed checks.

Somehow,

the checks fell into the hands of someone else, who indorsed it

to someone else, and were deposited to Associated Bank. The

solidarily liable

seller was wondering why she wasnt being paid. [If you are
legalistic, the RTW seller must sue the shopping malls, etc.,

Signature

because the checks were not delivered to her. In turn, the

shopping malls, etc. must sue the drawee banks, and then the
drawee banks sue Associated Bank why it cleared the checks.
HELD:

The SC allowed the RTW seller to sue Associated

Bank directly because it cleared the checks.

It may be shown that delivery between immediate parties is

conditional, or for a special purpose.

Ex. A godson is taking the CPA test, but X is not in the

Philippines. He gave P10,000 check on the condition that he

pass the test.

The godson cannot enforce payment on the

check. BUT if the godson negotiates the check to a holder in

due course, the law will protect the HDC.

Rules of interpretation

1. Words prevail over figures

o Romero: Amount indicated in words is One Million Two

Hundred Pesos. Amount in figures: 1,200,000. Balance in the

account is 1,100,000.

The check bounced.

characters in a NI
7. If I promise to pay note is signed by two or more persons deemed

What is the general rule as to signatures?

o A person whose signature does not appear on the instrument
is not liable
What are the exceptions?
o 1. Duly authorized agent signing for principal
o 2. Forger liable for signature he forges
o 3. Signature in separate paper (allonge) because the
instrument has no more space
o 4. Estoppel
o 5. Signing under trade/assumed name
o 6. Instrument can be negotiated by mere delivery
What must an agent write to avoid personal liability?
o 1. Agent must disclose he is an agent
o 2. Disclose his principal
3. He has authority
What if the party is a minor or a corporation without capacity?
o Maker of a PN cannot refuse to pay to a holder on the ground
that the indorser is a minor. Neither can he raise the defense

The words

prevailed.
2. Payment of interest
o Runs from date from instrument
o Or if none, date of issue

o
o

that the prior indorsee is a minor.

ONLY the minor can raise the defense of minority, no one else.
Can apply this principle by analogy to other incapacitated

persons (Ex. corporation action ultra vires)

Exceptions:

1. The minor actively misrepresented his age and it

appears that he is physically of such age

2. Minor kept fruits/benefits
3. Minor spent the money in good faith

Forgery of promissory note:

o A. Order instrument: A (signature forged by B)-B-C-D-E

E cannot collect from A (not bound)

E can collect from B (forger)

E can collect from C, D as indorsers (warranted the

Forgery

What if a persons signature is forged?

o Did not give consent to the contract
o Except when he is estopped
What are the kinds of forgery?
o 1. Signature is copied
o 2. Fraud in esse contractus (fraud in factum)

Misled to signing instrument, not knowing it was a

o

instrument)
B. Bearer instrument: A (signature forged by B)-B-C-D-E

Indorsing an instrument that need not be indorsed

leads to a warrant of such

C. Order instrument: A-B-C (signature forged by D)-D-E

E cannot collect from A or B (since it is an order

instrument, there is a cut-off to A and B, since Cs

negotiable instrument
3. Duress amounting to forgery

It must be duress in the execution (ex. Grab the hand

signature is forged)

E cannot collect from C (no consent)

E can collect from D as indorser/forger

D. Bearer instrument: A -B or bearer-C (signature forged by D)D-E

of the intimidated), NOT duress in inducement

4. Fraudulent impersonation

In general, it is NOT a forgery

The person to whom the note was given is presumed

N.B. This is an instrument payable to bearer; delivery

is sufficient, no need for indorsement.

Can E collect from A?

Depends. If E is not a holder in due course,

to be intended to receive the note (because he knew

A will claim that there was no delivery of

the intended payee)

Four general rules for forgeries:
o 1. A party whose signature is forged is not liable unless hes
o

complete instrument by B since C stole it

estopped
2. An acceptor who pays on a BOE cannot recover the money

because he admits the genuineness of the signature of the

o

drawer
3. A Holder in Due Course acquires good title if forged

indorsement is not necessary for his title

Ex. in a bearer instrument

4. A person negotiating an instrument after forgery is liable

from him
If E is a holder in due course, he may collect

from A since it is payable to bearer

Can E run after C?

No, Cs indorsement was forged

Neither can he run after B, because he

cannot trace his right to him [cut off by the

forgery].
He can run after D, because by indorsing the
instrument (even if bearer), he warranted it.

(due to warranties)

N.B. if a bearer instrument is indorsed even

by D)-D-E. X accepted and paid.

Can X debit As account?

No, because it went against As order to pay

if it is not needed, the indorser warrants the

instrument as what it purports to be.

Forgery of Bill of Exchange:
o A. Order instrument: A (signature forged by B) and then

B or order, which was cut off by the forgery of

indorsed to C-D-E. X accepted as drawee.

Can E collect from A?

No. No consent.

Can E run after X?

Yes. By accepting, X admits the instrument

signatures.
Can E run after A, B, or C?

No. They were all cut off by the forgery.

Can E run after D?

Yes, he forged.
F. BOE issued by A payable to B or bearer C (signature

forged by D)-D-E. X accepted and paid.

Can X debit As account?

Yes, because A promised to pay the bearer.

Can X get money back from E?

No. E is the bearer.

What is the remedy?

C can run after D, the forger.

G. BOE issued by A payable to B or bearer C (signature

after X because he did not accept.

C. Same as A, but bearer instrument.

How does the answer change?

Same rules on indorsement of a bearer

forged by D)-D-E. X did not accept.

Can E run after X?

No, X did not accept.

Can E run after C?

No, did not consent.

Can E run after D?

Yes (warranted and forged)

Can E run after B?

No, cut off by the forgery.

Can E run after A?

if there was indorsement even

if there is no need to do so, there is warrant

of the genuineness of the instrument by the
o

Cs signature.
Can X get money back from E?

Yes, because X only admits As signature as

genuine (it was) and not the indorsers

is genuine.

What is Xs remedy?
o Sue B, the forger.

Can E run after B?

o Yes (forger)

Can E run after C and D?

Yes. Warranted by indorsement

B. Same, but X did not accept.

How does the answer change?

Same for everyone, except E cannot run

instrument

E. BOE issued by A payable to B or order C (signature forged

indorsers.
D. Bearer instrument, but an indorsers signature was forged

Even if Cs indorsement to D is forged, the

payee can still collect from A (because he
just promised to pay the bearer). Remedy of
the acceptor is to just run after the thief.

10

Yes, can go after A if E is a HDC. BUT

cannot go after A if E is not HDC. N.B.

but Triumph did not report it to the bank. Robbers were able to

(reason: complete but undelivered instrument

cash checks.

HELD: Triumph was negligent for not reporting the

is a personal defense)
What are the exceptions to these general rules?
o 1. When there is estoppel (ex. father saying that his sons
o

theft.

forgery of his signature was genuine)

2. When there is unreasonable delay by the drawer in informing

forged his signature in a check book left lying there.

o HELD: Not negligent; no reason to suspect friend of bad faith.
An external auditor was hired to reconcile records. He managed to

exercise caution did not ask printing press to

surrender plates, account for spoilage, and MWSS did
o

Secretary forged his signature.

HELD: Ilusorio should

Sued bank, which refused to reinstate the amounts. Bank argued Casa
An external auditor is not an employee.

the

loss

for

his

negligence. He trusted his secretary.

Gempesaw owes several groceries. She trusted a bookkeeper
the checks, and Gempesaw signed the checks without
verifying the statements. The bookkeeper was able to steal

negligence in hiring an employee.

Estoppel does not apply, because Casa had no way to know

more than P1M.

HELD:

the auditor was stealing money, because he was precisely the

Negligent; did not confirm or examine the

invoices, receipts, etc. before signing the checks used

one tasked with safeguarding the school records and

bear

blindly. When she ordered supplies, the bookkeeper prepared

It is an

independent contractor, so you cannot blame Casa for

o

not examine the signatures in the bank returns.

Ilusorio was leaving for abroad and he left his checkbook with
his secretary, who he asked to reconcile bank statements.

forge the signatures of the officers of Casa Montessori over a long time.
was negligent.
o HELD:

The

signatures of the officers of MWSS were forged. PNB paid.

HELD: MWSS must bear the loss for failing to

If the drawer had acted quickly, would the

drawee have been able to stop or freeze payment?

X left a check book with his friend, who was in the car. The friend

The bank should also be held negligent for

authenticating the checks.

MWSS did not have their checks printed by the central bank.
They had a private printing press print their checks.

the drawee about the forgery

Drawer can check the statements sent by the bank to

him
Test:

Robbers broke into Triumph Lumber. Check book was stolen,

comparing with bank records.

Effect of comparative fault?
o Split accountability for the loss (usually 50-50 but can adjust

to pay the suppliers.

Province of Tarlac had account with PNB.

Province issues

checks to the physician/head of the clinic. The cashier already

retired, but he was still hanging around. Cashier was able to

depending on level of negligence)

Illustrate comparative fault principle:

forge when he picked up the checks.

HELD: Province was negligent, for allowing the

cashier to pick up the checks even when he was

11

retired, so he was able to indorse the checks through

forgeries. Split accountability 50-50.

What is the general duty of the collecting bank when the
indorsement is forged?
o The collecting bank must return the money to the drawee bank,
o

the drawer.
This 24 hour rule SHOULD NOT apply when it is the
payees or indorsees signature that is forged,

because the payee did not indorse the check.

N.B. This is NOT a case of negotiation, but presentment for
payment.

Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of

because the drawee bank has no way to find out, until

So the collecting bank cannot claim there was

warranty.
X, employee of Ford, was tasked to pay sales tax (P18M), made a check

the drawer informs them.

(But the SC has at times wrongly applied the 24 hour

payable to Insular Bank (for payees account only), the authorized

rule to the payees forged signature.)

New rules (to prevent ping-pong of checks):

If a check is dishonored, you can only present it one

collecting agent of BIR. X showed a fake BIR receipt to Ford. Instead,

more time. [Usual reason why one failure is allowed

X deposited a worthless check with Insular Bank, which X substituted for

the check issued by Ford. In their internal records, X made it appear the

return the check within 24 hours?

The drawee cannot ask the computer to

worthless check was deposited. X stole the real check, and Citibank
honored it. X collected from Bank of America. Ford had to pay BIR
again. They sued.
o HELD: Citibank must return the money to Ford, because Ford

reverse, while you are litigating, you do not

for payees account only and there was no indorsement from

have the amount.

BIR. Citibank was guilty only of negligence.

Citibank manager (who was complicit) was criminally liable.
JJ doesnt agree with the court as regards Insular Banks

Consideration and Holders for Value

liability.
o Check: G.R. 121413 29 Jan. 2001
Rules on clearing
o Checks are brought to a clearing house and are run through a

IMPT THINGS TO REMEMBER:

o 1. Failure of consideration is a personal defense. This usually
applies when X and Y have a transaction and Xs instrument

clearing house. They check the magnetic strips on the checks.

o

The amount will then be transferred to the collecting bank.

Then the checks will be physically given to the drawee bank.

The drawee bank has 24 hours to honor/dishonor the check.

If it dishonors it, the drawee bank returns the check to the

reverse the entries.

BUT you are not precluded from suing to
collect after. But since the computer cannot

ordered it to pay the BIR, which Citibank disobeyed. It says

o
o

drawn against insufficient funds]

What is the effect when the drawee bank does not

clearing house. The computer will return the amounts paid.

12

bounces, but Ys prestation is only partially fulfilled.

2. But if you bring in a third party (HIDC), then failure of

consideration is not a defense anymore.

3. As discussed in the next section, an accommodation party is

liable to a Holder for Value.

Under the law, consideration is presumed

Travel Inc.: Travel agency sued on the basis of a bouncing

check issued by a guy bringing in passengers. The CA was

sacks of rice.

wrong for asking the agency to prove the value of the ticket

however only delivered 5 sacks of rice. HELD: He

purchased. There is a presumption of valuable consideration,

can only sue for P10000

Want of consideration between drawer and payee cannot be invoked as

and that the check was for such amount.

Ex. in BP 22, there is no need to prove the check was issued

considered valuable consideration.

the drawee, did not accept. Can A launch the defense of

But Jack says that a

partial failure of consideration against B?

Yes. Want of consideration is a defense against the

consideration sufficient to support a simple contract. So love

and affection is valuable consideration.]
Rule on holder for value vis--vis prior parties:
o Rule: Where value is given for the NI, the holder is a holder for

payee.
[Same facts] X accepted. Can X refuse to pay on account
of partial failure of consideration?

No. The acceptor cannot use want of consideration

value in respect to all parties who became such prior to [the

as defense. By accepting, he admits authority of the

time consideration was given]

A issued a PN to B, but there is no consideration.

drawer to draw the instrument, and that he will pay.

indorsed it to C for consideration. C, then to D. What is

Accommodation party

Ds status as holder for value?

D is a holder for value with respect to A, B, and C

because C gave value.

A and b are parties who

became bound prior to the value given.

What is the rule on holder who has a lien on the instrument?
o He is a holder for value only to the extent of the lien.
o Ex. Company appealing a lost case posts supersedeas bond
(ex. P500000).

Surety Company asks for collateral.

Who is an accommodation party?

o Signs as party but does not received consideration or value
therefore, from the underlying contract. Only lends his credit.
What is the accommodation partys liability?
o Liable to a holder for value, even if the holder for value knew
him as merely an accommodation party at the time that holder
took the instrument.

Ex. Some banks try to get borrowers to get surety

The

surety company is a holder for value to the extent of P500K,

companies to sign borrowing agreements.

even if the company issued a certificate of time deposit

The seller

payee, in exchange for 10 cars. B only delivered 5 cars. X,

donation is a simple contract and the law simply requires

The check bounced.

defense of drawee who accepted a BOE

o A drew a BOE for the amount of P10M in favor of B, the

for valuable consideration

In civil law, generosity, love, affection, etc. are valid consideration.
o [N.B. Sundiang says love and affection, etc. cannot be

Ex. Somebody issued a check for P20000 for 10

Surety

companies charge premiums for signing as co-

negotiable for P1M.

What is the nature of absence of consideration?
o 1. Defense against a person not a HIDC (personal defense)
o 2. Partial failure of consideration is a proportionate defense.

makers. The surety company, not receiving any part

13

of the proceeds, is deemed an accommodation party.

Must there be independent consideration for the accommodation?

No, it is not an absolute prerequisite. The consideration that

supports the surety is the same consideration for the original

do when the check bounces, she pays.

obligation.
May a corporation be an accommodation party?
o As a general rule: a corporation cannot be an accommodation

Negotiation

party to an instrument, because there is no business purpose

to such [unless that is the business of the corporation].

Prudencio: Construction project. The constructor borrowed from PNB

Can bearer instruments be negotiated?

o Yes.
When a bearer instrument is indorsed although
o

working capital. The bank required two other signors. The firm got the

project died anyway. PNB sued Prudencio spouses. HELD: Prudencio

spouses are accommodation parties. The court held that PNB is not a
holder in due course, because it knew that the spouses did not receive

consideration. When PNB released a portion of the money, it was in

JJs comment: the law says Holder for value not HIDC. You

cannot claim PNB was in bad faith when it released the money

released funds could have improved the project.

Sec. 52: definition of HIDC point in which a person must be is

50K and Manuel Santos for P50K.

Ratio: This in effect is two indorsements of 50K each

(two partial indorsements)

2. PARTIAL indorsement is treated under law as an
assignment. It is subject to personal defenses.
EXCEPTION: When it has been paid in part (ex. on

in GF is when he took the instrument. The release of the funds

happened long after.
SO IF YOU FOLLOW THE IMPORT OF SEC 29, which

makes accommodation parties liable to holders for value,

then the Prudencio Spouses should pay PNB because PNB is

make it cumbersome.
1. Prohibited to indorse to 2 or more indorsees severally.
Ex: A check for P100K is negotiated to Jose Cruz for

PNB took a risk,

rather than ensure the certain failure of the project, the

Must comply with

indorsement.
Where must the indorsement appear?
o On the instrument itself or to a paper attached to it
What must be indorsed?
o The entire instrument. Indorsing only part of the amount will

BF.

Fall back on the NCC.

requirements of putting it in a public instrument and

agreed to release part of the security money to help the project. But the

because the project was already failing.

unnecessary, it is still ultimately negotiated.

See Caltex case. When pledging a NI, there are no specific
provisions.

Prudencio spouses who issued checks. The project was failing. PNB

HELD: Yes. Thats what an accommodation party is tasked to

a holder for value!

X was exchanging a post-dated check for cash to the disbursing officer

installments)
Types of indorsements:
o Special specified person to whom it is being indorsed
o Blank does not name any person
Indorsement of an order instrument in blank can
convert the indorsement into a special indorsement by

of AFP. AFP asked Y, Xs sister, to sign as accommodation indorser.

The check bounced. Y was acquitted for conspiracy charges, but was

held civilly liable. Correct?

writing his name

This ensures that the order instrument does not
become a bearer instrument

14

Ex.

A issued a PN to B or order for P10K.

Glenn

indorses it to C, but in blank. What can C do?

C can insert To C over the signature to

Tuazon

keep it an order instrument.

C CANNOT put To C, waiving notice of

named

(indorsee
trustee)

dishonor. The contract must be consistent

with the tenor of the indorsement

Types of restrictive indorsements:

Pay to Jose

Negotiabilit

Passing of

Consideratio

Defense

title

n presumed

available

Yes

Yes

X, because

Cruz only

indorsee is
a

as

HIDC,

Rights of indorsee in restrictive indorsement:

o A) collect payment
o B) bring action indorser could bring
o C) transfer rights, if allowed to do so
What is a qualified indorsement?
o Done by writing without recourse although the instrument is
o

defenses

(ex. 5 years), and the indorser does not want to be insecure for

against
indorser

cannot
To

Jose

Cruz,

for

Yes,

but

subject

to

X, because

X,

the

there

because
is

no

defenses

same

indorsee is

only

restriction

that he only

agent of the

be

holds it for

indorser

against

(as

agent only)

transfer of title

apply to him
Yes,

collection

mere

against
indorser can

collection

raised
o

because he

To

Jose

Yes,

but

Cruz,

as

subject

trustee

for

same trust

to

Yes

Yes,
there

because
is

transfer of title

just

such a long time.

But qualified indorser still has some warranties under Sec. 65;

1. Genuine as to what it purports to be

(ex. not forged or materially altered)

2. Warrants his valid title

3. All prior parties have capacity to contract

4. That he is not aware of any fact that makes the

instrument valueless

(ex. that the maker is insolvent)

Ex. A issues a PN to B or order for P50K. B indorses to C,
then C to D. D indorses to E without recourse.

Can E collect from D?

No. The indorsement is qualified.

If As signature turned out to be forged, can E

indorsee
is

still negotiable
This can be done if the instrument will fall due for a long time

an

agent
X, because

collect from D?

Yes.
Because he warranted that the

title

instrument is genuine as to what it purports

transfers

to be.

15

If D turned out to have forged Cs indorsement to

because other parties will not know that there was a mistake

him, can E collect from D?

Yes, more so. He warranted his valid title to

E.
What is the effect of a conditional indorsement?
o 1. The maker (or acceptor) may disregard the condition

The indorser cannot change the original obligation

2. The maker can also say lets wait and see if the condition is

fulfilled
3. If the maker pays, but the conditioned turned out to be

unfulfilled after, the remedy of the conditional indorser is to run

after the indorsee to get back the money.

The conditional

indorser cannot run after the maker/acceptor because the M/A

has every right to dispose of his obligation while he feels

solvent.
What is the effect of an indorser signing of an instrument payable

to bearer?
o It can still be indorsed through mere delivery
o But the special indorser is only liable to those who can make
o
o

made
If he wants, after signing as the misspelled name, he can sign
his real name, so it will appear wrong name indorsed to real

because the maker made an unconditional promise to pay.

o

Must indorse the instrument according to the misspelled name,

name
What if there is date attached to the negotiation?
o The date is presumed to be correct, but rebuttable.
o If there is no date, the negotiation is presumed to have been
done before it was overdue

Useful to establish HIDC

What if it indicates a place?
o Law of that country will govern as to questions of indorsement
N.B. Not every restrictive indorsement will destroy negotiability
o Only that in subsection A (Pay to X only) will destroy
o Crossed check is still negotiable
Can strike out an indorsement not needed for his title:
o Ex. bearer instrument: can strike out indorsements B to E
o If its an order instrument, can E strike out B?

No. Because it is payable to the order of B. You

cannot take him out, or else, E cannot draw title to the

title through his indorsement

Rule: a bearer instrument is always a bearer instrument
Contra: a WHR can be converted from a bearer to an order

instrument.
ABCDE. E cancels the indorsement of C to D. He
loses the right to run after C. D is also discharged, because D

instrument by a special indorsement

What if the instrument is payable to two or more payees?
o All must endorse
o But if they are partners, there is mutual agency
What if the instrument payable to a cashier or fiscal officer?
o Assumed that the instrument is payable to the corporation he

lost his chance to run after C.

RULE: The indorser who is struck out and ALL indorsers after
him are eliminated

Ex. If there is indorsement from A to Z, and you

represents
What is the effect if the name is misspelled?

16

cancel C, persons C to Y are discharged.

What about Instruments transferred without indorsement?
o Transferee will only step into the shoes of the transferor
o So defenses against transferor apply to the transferee too
o But the transferee can compel the transferor to indorse it
o What is the time period to determine if he is a HIDC?

The reckoning point is that time of indorsement, not

the initial transfer

Ex. Did not know necklace was fake at time of

Status on payment

Knowledge

Effect

An installment has not

Holder is aware

HDC as to installments

transfer; knew it was fake at time of indorsement = not

HIDC
Indorsement to a prior indorser:
o Ex. A-B-C-D-E-B
o Can B run after C, D, and E?

No. Because they in turn can run after B too!

There is compensation under law. The law will not

not due on the face of

no acceleration clause
An installment is not

Holder is aware

the instrument
Not a HDC

Holder is not aware

HDC as to installments

acceleration

clause

(automatic)
An installment is not

Rights of the Holder

been paid and there is

paid and there is an

allow them to run around in circles.

Rule on instruments payable on installments and HIDC:

paid and there is an

not due on the face of

acceleration

the instrument

clause

What are the rights of a holder?

o 1. Can sue in own name
o 2. Payment in due course discharges the instrument

Payment at or after maturity is in due course, and

(automatic)
An installment is not

Holder not aware of the

HDC as to installments

paid and there is an

exercise of this option

not due on the face of

without notice his title is defective

Holder in due course (Sec 52)
o Requisites:

1. Instrument is complete and regular on its face

2. Must have become a holder before it was overdue

clause
An installment is not

Holder is aware of its

paid and there is an

exercise

optional

acceleration

optional

the instrument
Not a HDC

acceleration

clause

and without notice of prior dishonor, if so

3. Took it in GF and for value
4. When he took, no notice of infirmity in instrument or

defect in title of the indorser

This elaborates #3
When is there defect in the title of the indorser?

If he took it through unlawful means (ex.

What is the test to know whether or not he is a HIDC?

o A holder must be aware that something is wrong, but chose not
o

stole it), illegal consideration (ex. issued for

marijuana), or negotiated it in breach of faith,

to investigate further as to not be a HDC.

Check: was it honest for him to take the instrument under these

circumstances?
X issued a crossed check to Y, in order to buy a car from Z. However, Y
took the check and paid it to ABC hospital, and the value of the check

fraud (ex. issued for fake ring), or duress (ex.

was greater than his bill to ABC hospital (which gave change).

issued as ransom money)

17

stopped payment.

ABC sued X.

X launched defense of failure of

consideration. Issue: is ABC a HIDC?

o No. Since the check was crossed, it can only be deposited.

has paid the full amount agreed upon as consideration for the

ABC should have inquired as to the title of Y, but it did not.

If the checks are crossed, the taker must inquire as to the

nature of the indorsers title

X paid Y a check, drawn against ABC bank. Y altered the amounts. Y
deposited it in DEF (her bank). Y told DEF not to present the check for

X told Y to just pay him P80K right away because X could not

payment right away, even if it was already due, and to let Y to draw the

wait for the maturity of the check. Y has only paid P40K so far.

amount anyway. The alteration was discovered. ABC refused to pay.

Then Y found out that the check was issued for a fake ring.

DEF sued to recover. Is DEF a HDC?

o No. The circumstances show that the check was already due

The check was presented but it was dishonored. Y sued Z, the

but Y asked DEF not to present it for payment yet. And DEF

drawer. Can he collect?

HELD: Yes, but only to P50K, since that is half the

allowed Y to withdraw even if the check has not been cleared

value of the check, and Y only paid half of the agreed

yet.
The claimant received a check that was not indorsed to it by the payee,

consideration. He is a HIDC only to the extent of half

and the check had a notice of prior dishonor due to DAIF (drawn against

facts
What about a transferee who receives notice of infirmity before he
instrument?
o He is a HIDC only to the extent of the amount paid by him.
o Ex. X issued a post-dated check to Y with value of P100K, and

insufficient funds).
o HELD: Claimant is not a HIDC.
In two cases, there was lack or failure of consideration between the
maker/drawer and payee of the NI. In one case, it was merely issued as
security, and in the other, the car delivered had the wrong chassis
number. But in both cases, the payee already indorsed the check to

the check.
What are the rights of a HIDC?
o 1. Sue in own name and receive payment
o 2. Free from personal defenses
o 3. May enforce payment against all parties liable thereon
o Exception: when he cannot recover full payment

37 restrictive indorsement [GT: I dont know why.]

Maybe JJ meant qualified indorsement under

another person.
o HELD: Those persons are HIDCs and the defense of

Consider the nature of the instrument, customs, and particular

failure/lack of consideration does not vest.

May a payee be a HIDC?
o Yes, because the law simply provides holder. A payee is a

38?
54 notice before full amount is paid
124 when materially altered, a HDC may still
enforce against the maker/drawee according to the
original tenor of the instrument

General rule: the instrument is avoided as to

holder, too.
What about negotiation of an instrument payable on demand after

those not party to the alteration or did not

an unreasonable length of time?

o Holder is not a HIDC.

indorse it
But not everyone can invoke real defenses against a HDC. For
instance, an indorser warrants an instrument is genuine in all

18

respects it purports to be.

Also, an acceptor warrants the

authority of the drawer to pay.

Personal defenses
Theres

contract

Real defenses
with

HDC, E does not have the rights of an HDC.

There can be no curing. So D cant indorse the instrument to
F, an HDC, and have it re-indorsed back to him to cure his

some

No contract because an element is

inequitable or iniquitous fact behind

missing; or void against public policy

it
Voidable contract
Ex: no consideration, undelivered

Void contract
Ex; material

complete instrument, acquired by

consent is not anymore to this

force/illegal

illegal

instrument); undelivered incomplete

consideration, negotiation in breach

instrument (no consent); forgery (no

party that has become bound to the instrument prior to the

of faith, mistake, ultra vires act of

consent); minority (lack of capacity)

corporation
Not applicable to HDC

acquisition of defective title

Ex. A B C D E. D swindled C, then indorsed

Applicable to HDC

Since E derives title from D, who is not an

means,

alteration

Personal defenses are available against a non-HDC.

(so

the

defective, then the holder has to prove that either the holder or
o

bound to the instrument before the defective

title occurred.
Fossum:
o X issued a check to Y, but there was failure of consideration. Y
negotiated to Z, who was not a HIDC (he was aware of the

) and is not a party to the illegality or fraud has

failure of consideration between X and Y). Z sued X to collect.

the same rights as the HDC as to the prior parties to the

o

X refused and raised personal defense of lack of consideration.

indorser, even if he is not.

Ex. A was induced by B through fraud to issue a PN to B or

What is the implication?

The burden of proof shifts upon Z to prove that either

order. B C, who was NOT aware of the fraud (HDC). C

D who was aware of the fraud but not a party to it. What is the

effect?

D is a holder in due course as to the parties prior to

When E runs after A, he is not required to

prove that he is a HDC because A was

This does not

may be raised against him.

(58b) IMPT. Shelter Principle (GT)
o What it simply says is that a holder who (1) derives title from a
HDC (2

the negotiator is a HDC

Exception to the exception the exception does not apply to a

to E.

mean the non-HDC cannot collect. It just means that personal defenses

title. He resumes his position as not a HDC.

PRESUMPTION:
o General rule every holder is a HDC
o Exception if it is shown that the title of the negotiator is

Z or Y is a HIDC. In this case, it failed to do so.

In this case, Z loses the presumption of being HDC
because Ys title, as negotiating party, is defective. Y
has no benefit of the presumption because it is not a

the indorser (A and B)

What if D indorses it to E, who is not an HDC?

holder anymore.
Liabilities of parties

19

Maker

Drawer

Obligations

Warranties

<IF BY DELIVERY

Pay according to tenor

1. Existence of payee

warranties only extend

2. Capacity of payee to

to

indorse
1. Existence of payee

transferee>
1.
Instrument

If

dishonored,

process

of

and

dishonor

Either:

is

2. Capacity of payee to

1.

indorse

presentment

3. On due presentment,

accept/pay

it will be accepted/paid

to tenor

3. All prior parties had

according to its tenor

2. Or if dishonored, he

capacity to contract

2. Or to a subsequent

will pay the amount to

4. The instrument is

indorser who pays for it

the holder, or to a

valid and subsisting at

subsequent

the

completed:
1. He

will pay

the

amount to holder,

<But
express
Acceptor

General indorser

immediate

drawer

may

Upon
he

due

genuine and is what it

will

purports to be

according

indorser

compelled to pay it

2. He has good title

time

of

his

indorsement

stipulation

limiting his liability>

Pay according to tenor

1. Existence of drawer,

of acceptance

2.

Genuineness

of

Liability of Maker:
o X issued a PN to Y. Y collected, by X failed to pay. He lodged
the defense that he used the money to pay for his sick

drawers signature
3.

Drawers

daughters expenses, and his daughter is a beneficiary of a

capacity

trust administered by Y.

HELD: X must pay.

and authority to draw

4. Existence of payee
Qualified indorser or

and capacity to indorse

1.
Instrument
is

indorser by delivery

genuine and is what it

He made an unconditional

promise to pay. What he did with the money is none

purports to be
2. He has good title

of the courts business.

Liability of drawer:
o What is the nature of the drawers liability?

Merely secondary liable only if the instrument is

3. All prior parties had

capacity to contract

dishonored.

He can put without recourse to limit his liability.

D issued a check to P, drawn against BPI. P presented for

4. Has no knowledge of

payment, and BPI debited Ds account.

any

unable to receive the money because BPI withheld payment,

fact

that

would

impair the instrument

However, P was

pending investigation of some anomalies. P ran after D.

20

HELD: D must pay, even if his account has already

been debited. He warranted that P will be paid, and if

the maker or drawer or bearer, he is liable to all

not, he will make good the check.

Liability of acceptor:
o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered

the amount to P40000, and negotiated to H. H presented it for

acceptance to E.

E accepted it.

For how much can the

parties subsequent to the maker or drawer)

What are the warranties where negotiation is by delivery?
o See the list of warranties in the law [see table]
o Person negotiating by delivery: only liable to the person to
whom he delivered the instrument. Not liable to subsequent

check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the

acceptance.
View 2 (better view): Acceptance is assent to the

acceptor is insolvent and he is aware of that fact (since here,

not consent to P40000, since there must be

o

knowledge. (124) In fact, for a HDC, even if there is

such. Examples:

Breach of W1 (genuine): the instrument is forged

Breach of W2 (good title): He stole the NI

Breach of W3 (prior parties had capacity to contract):

He admits authority of the

drawer to draw.
Acceptor admits existence and capacity of payee to indorse,

because the instrument is meant to circulate.

o N.B. Acceptor does not admit signature of indorser.
What is an irregular indorser?
o He signs in blank before delivery. He is called such because

But here, the irregular indorsers signature is found

there was failure of consideration

What is the underlying principle behind this?

Same as Statute of Frauds. An undertaking to

answer for the debt of another must be in writing to be

there first.
What is his liability?

He is actually an accommodation party

Must be an additional party (not a regular party

enforceable. He must be only liable to the person he

signing again will not increase the credit value of the

o

Prior party is a minor

Breach of W4 (no knowledge of fact that would impair
the instrument): Knew that M/D was insolvent; or that

you would normally expect the payee as the first signature

It only

warrants the four listed warranties and is liable for breach of

original tenor
Acceptor admits existence of drawer because without the

there.

there is a breach of warranty).

N.B. In general, a qualified indorser or one negotiating by
delivery DOES NOT ANSWER FOR SOLVENCY.

alteration, he can enforce payment according to the

drawer, the BOE cannot exist.

parties
Unlike a general indorser, a qualified indorser does not warrant
that the instrument will be paid. He is liable only if the maker or

order of the drawer (132), which is just P4000. He did

X is liable to B, C, D and E.
RULE: liable to all subsequent parties. (If payable to

check)
A (X irregular indorser) B C D E:

dealt with
What is the liability of a general indorser?
o 1. Same as first 3 warranties of qualified indorser
o 2. Last warranty he warrants that the instrument is valid and
subsisting

21

If maker is insolvent, even if the indorser was not aware, he is

liable.
X deposited (through indorsement) a check with ABC bank,
drawn against DEF bank.

they indorsed. But parole evidence however may be accepted

X was able to withdraw money

although not cleared. Eventually, the check bounced. ABC

asked for return of money.

HELD: X must pay. When he indorsed, he warranted.

his principal, he will be liable as an indorser

not pay, he is liable.

There is a 45-day holding period if the check deposited is

Click here for longer discussion on presentment, acceptance, and dishonor

and some parts not included in the syllabus

drawn abroad. But RCBC accommodates employees, allowing

them to withdraw right away.

An employee X, received a

How to enforce liability (presentment, dishonor)

check, and deposited. Bank required X to indorse the check as

an irregular indorser.

She was then allowed to withdraw.

Some employee (Y) placed below the indorsement: valid up

75,000 pesos only. The drawee bank dishonored the check,
since the indorsement was irregular. RCBC asked X to return
the immediately withdrawn money.

HELD: RCBC cannot collect.

The check was

dishonored because of the partial indorsement made

o

How do you enforce liability to those primarily liable?

o 1. No need to do anything to hold a maker liable because he
already promised to pay.
o 2. A drawee is liable once he accepts the instrument.
How do you charge those secondarily liable?
o In a PN:

1. Presentment for payment made within required

period to the maker (and then dishonored by non-

by Y. This is why the American bank dishonored.

Signature of indorser was forged. Payee presented the check

for payment to the drawee. It was paid. Payee signed at the

back.

Then the forgery was discovered.

Must the payee

reimburse drawee?

No. It did not indorse the check. The signature is to

o

to prove otherwise.
Ex. A B C, C can prove that while Bs signature appears

first, C indorsed it to him

What if the rule for indorsement by agent?
o If he fails to disclose that he is just an agent, or fails to disclose

If for any reason (whatever reason) the drawee does

o

Indorsers are presumed to be liable in the manner in which

payment)
2. Notice of dishonor is given to the secondarily liable

party
In a BOE:

1. Presentment for acceptance to the drawee OR

negotiation within reasonable time after it was

acknowledge payment, not to indorse.

The law mentions that warranties of general indorser

acquired in the following instances:

A. Bill payable after sight or acceptance

apply only to HDC. Should we follow this?

JJ doesnt think so.

What if it is indorsed when not required?
o He incurs liabilities of an indorser, whether general or qualified
What is the presumption?

needed to fix maturity of instrument

B. Bill expressly requires acceptance
C. Bill is payable elsewhere than residence
or place of business of drawee

22

2. If dishonored by non-acceptance:

A. Give notice of dishonor to the indorsers

drawee bank only in 1994. It was dishonored by the bank. Y gave

notice of dishonor to X. What is the ruling?
o The dishonor was proper because it was presented beyond

acceptance)
3. If the bill is accepted:

A. Presentment for payment to the acceptor

o If dishonored by non-payment, give

reasonable time. Reasonable time is relative, depending on

notice

of

dishonor

to

needed

to

drawee/acceptor) because its their obligation. But the payee

make

or holder cannot demand interest subsequent to maturity and

drawee or acceptor will pay

2. Indorser where the instrument was made or
accepted for his accommodation and he has no

reason to expect instrument will be paid if presented

3. Dispensed with under Sec. 82:

A) after exercise of reasonable diligence,

costs of collection.
When is a bill required to be presented for acceptance?
o [See enumeration above payable after sight etc., expressly
required, payable elsewhere]
o Note that a check does not fall under this enumeration
When is presentment for acceptance excused or dispensed with?
o 1. DELAY EXCUSED for bill payable elsewhere than place of
business or residence of drawee and the holder failed to

presentment cannot be made

B) drawee is fictitious person

C) waiver or presentment

4. Instrument dishonored by non-acceptance

What are the requisites for presentment for payment?
o 1. Presented by the holder or some person authorized by him
o 2. Made at reasonable hour on business day on proper date
o 3. At proper place
o 4. To person primarily liable, or if absent, to any person found
o

contractually just not through that particular check.

What is the implication of failure to make proper presentment for
payment? Does it discharge the person primarily liable?
o It discharges those secondarily liable on the instrument.
o It does not discharge the person primarily liable (maker or

presentment except:

1. To drawer who has no right to expect that the

circumstances. But for checks, they become stale in 6 months.

X is no longer liable based on the check. But if there is an
underlying contract between X and Y, X is still liable

those

secondarily liable
B. (If foreign bill, protest for dishonor by non-

payment)
When is presentment for payment necessary?
o For primary persons never necessary
o For secondary persons, generally

X drew a check in 1990. The holder, Y, presented the check to the

and drawer
B. (If foreign bill, protest for dishonor by non-

present for acceptance even after reasonable diligence

The delay thats excused is the delay in presenting it

for payment due to the delay in presentment for

at the place where presentment is made

5. Person must exhibit the instrument and surrender it

acceptance
2. Drawee is dead, has absconded, is fictitious, or has no

capacity to contract
3. Presentment cannot be made even after exercise of

reasonable diligence
4. Although presentment has been irregular, acceptance
refused on some other ground

23

Requisites for valid acceptance?

o 1. In writing
o 2. Signed by the drawee
o 3. Drawee must assent to the promise to pay a sum certain in
o

reasonable time from receipt of notice of the qualified

money and not any other means

What is proof of acceptance?

It must be written on the instrument itself

If there is acceptance and the holder requests that it

be written on the bill, but the drawee refuses treat it

as dishonored by non-acceptance
What if it is written on another paper?

It only binds the acceptor to persons to whom it is

acceptance
Who should give notice of dishonor?
o 1. The holder
o 2. His agent or representative
o 3. Any party who may be compelled to pay (e.g. indorsers)
o 4. Agent of #3
Who benefits from the notice?
o If given by the holder, benefits all subsequent holders and all
prior parties who have a right of recourse against the party to
whom it was given

Ex. M P or order A B C D (holder). M

shown to and on faith thereof, accepted the bill for

o

value
What is the rule on future bills?

If there is an unconditional promise in writing to

dishonors:

D may notify C since C may be compelled to

accept a bill before it is drawn, and a person on faith

may be liable to him (P, A, or B). And so on.

If D notified B straight up, C benefits

pay D. C may then notify any person who

thereof took a bill for value

When is a bill deemed accepted?
o 1. Bill delivered to the drawee and he destroys the same
o 2. Bill delivered to the drawee but he refuses within 24 hours or

because he need not notify B.

If given by indorser who may be compelled to pay, it benefits
the holder and all parties subsequent to the party to whom

within other period allowed by the holder to return the bill

What are the kinds of acceptance?
o 1. Conditional payment dependent on a condition
o 2. Partial only for part of the amount
o 3. Local only on a particular place
o 4. Qualified as to time
o 5. Acceptance of some of the drawees but not all
What is the rule on qualified acceptances?
o The holder has a right to refuse a qualified acceptance and
o

They must express dissent to the holder within

notice was given

Same example:

If D notified C, and C notified P, then D

deem it as dishonor by non-acceptance.

If he accepts qualified acceptance, the drawer and indorsers
are discharged from liability on the bill.

Unless they assent to the qualified acceptance

benefits through the notice of C, an indorser.

It also benefits A and B.

What is the effect of valid notice of dishonor?
o Immediate right of recourse against the secondarily liable party
arises. He becomes primarily liable.
How must notice be given?
o Parties reside in same place:

1. If at place of business, given before close of

business hours the next day

24

2. If at residence, given before usual hours of rest the

next day
3. If sent by mail, deposited in post office in time to

reach him in usual course the next day

Parties reside in different places

1. If sent by mail, deposited in post office in time to go

would be dishonor.
When is notice of DH not needed to be given to indorser?
o 1. Drawee is fictitious person or has no capacity to contract
o

and the indorser is aware of this fact upon indorsement

2. Indorser is the person to whom presentment for payment

was made
3. Instrument was made or accepted for his accommodation

by mail the day follow day of dishonor. If there is no

mail then, on the next mail thereafter

2. If given through other means, within time that it
would be received in due course of mail in the same

time frame as above

When is notice of dishonor not required in general?
o In general: when after exercise of reasonable diligence, it
cannot be given or it does not reach the parties
When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o 3. Drawer is the person to whom instrument was presented for

Indorser

Drawer and drawee same person

Drawee fictitious or no capacity

Drawee is fictitious or no capacity,

Drawer is to whom instrument was

and indorser knows

Indorser is to whom instrument was

presented for payment

Drawer has no right to expect it will

presented for payment

Made or accepted for indorsers

be paid by drawee

accommodation (same principle: no

right to expect it will be paid)

But R, the drawer, who was the office

manager, was there. And the drawer dishonored.

4. Drawer has no right to expect that drawee or acceptor will
honor

Drawer

Drawer countermanded

payment

Ex. C went to the office of X, the drawee, but he was

not there.

Ex. X withdrew her money from her bank account and

issued a check to cover for expected proceeds of
jewelry she had to sell. She failed to sell the jewelry.
The check was in the hands of Y who had ABC
investment house rediscount it. The check bounced.
HELD: X had no right to expect the bank will pay

N.B. In all these cases, the drawer KNEW that there was or

because she withdrew all her funds.

5. Drawer countermanded payment

Meaning, drawer stopped payment.

When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes
o 2. Or after failure to give it
o Can waiver be implied?

Yes.
o Who is affected by a waiver in an instrument?

If written on the instrument all the parties

If written over a signature just that person

o Waiver of protest

Includes presentment and notice of dishonor (steps to

hold a person secondarily liable)
Failure to give notice of dishonor by non-acceptance does not prejudice
rights of a HIDC subsequent to the omission.

25

Ex. A drew a BOE payable to B. B indorsed to C. C presented

o
o

the BOE for acceptance to X. X dishonored the instrument. C

did not give notice of dishonor to A or B.

C indorsed the

instrument to D, a HIDC. D will not be precluded by Cs failure

to give notice of DH to A and B.

renunciation is not effective.

o It is not effective if unintentional or by mistake
OTHER methods of discharge:
o 48 striking out indorsements (relieves that person and all

Discharge

o
o

against secondarily liable party is expressly reserved

6. By extension of time of payment or right to enforce

recourse to that party

If against primarily liable person discharges the instrument
But it does not affect subsequent HIDC. So if C renounces all

claims against A and B, then negotiates it to D, who is a HIDC,

Failure to dissent within

reasonable time is an assent

186 stale check
188 holder of a check procures it to be accepted or certified

Material Alteration

instrument

Except if secondarily liable party assents

Or right to recourse is expressly reserved

What is the effect of an absolute and unconditional renunciation?
o A holder renouncing against prior parties terminates
o
o

those subsequent to him)

89 those secondarily liable to whom notice was not given
122 renunciation by holder
142 qualified acceptance by drawee discharges those
secondarily liable

Unless they assent to it.

right
How those secondarily liable are discharged:
o 1. Discharge of instrument
o 2. Intentional cancellation of his signature by the holder
o 3. Discharge of a prior party
o 4. Valid tender of payment by prior party
o 5. Release of principal debtor, unless holders right of recourse
o

o
o
o

How is a negotiable instrument discharged?

o 1. Payment in due course by holder
o 2. Payment in due course by accommodated party
o 3. Intentional cancellation by holder
o 4. Any other act that discharges simple contract for money
o 5. Principal debtor becomes holder of instrument in his own

It must be absolute and unconditional

If it is merely oral and the instrument is not surrendered, the

What is the effect of a material alteration?

o Discharges all parties not party to the alteration
o Binds the one who made the alteration, those who assented,
and subsequent indorsers
What is the right of a HIDC?
o If he is not party to the alteration, he may enforce it according
to the instruments original tenor
What is a material alteration?
o 1. Date goes into the obligation
o 2. Sum payable, principal or interest into amount
o 3. Time or place of payment into enforcement
o 4. Number or relations of parties into obligation
o 5. Medium or currency of payment into amount
A issued a PN to B for 4K. B indorsed to C. C changed the amount
to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is

D is not prejudiced by the prior renunciation.

What is the form of renunciation?

Es right?
o Enforce the instrument for 4K against A or B

26

Enforce the instrument for 40K against C (made the alteration)

or D (indorsed and warranted)

BOE

Can a BOE be addressed to more than one drawee?

o Depends. If joint drawees, yes.
o If alternative or successive, no.
When can a BOE be considered a PN?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o But can the holder treat it as a BOE still?

Yes.

chased after the payee to recover.

o HELD: By accepting, the bank admitted authority of drawer to

draw.
Customer bought a managers check and asked that his account be
debited to purchase it.

The bank realized that it made a mistake

because the account was actually closed. The customer already used
the check to buy goods.
o HELD: It was a managers check so the store owner was a

payment immediately
Rules on BOE apply to checks too, such as the 24 hour
acceptance rule. If you dont return it in 24 hours, it is deemed

because there is no proper presentment for payment

Payee of a check presented a check in the morning; the bank said the
computers are offline, so the bank accepted it. Bank found out after and

What is the nature of a check?

o Special kind of BOE.
o No need to present for acceptance you can present them for
o

the check was issued for

But is it still negotiable?

Yes, it is still negotiable.

What if you try to encash a crossed check?

It will be denied. You cannot run after the drawer

drawer had insufficient funds. Presented again in the afternoon, but the

Promissory notes and checks

Special must be deposited only in that bank

3. To be a HIDC, the holder must inquire as to what purpose

accepted
What are cashiers and managers checks?
o Drawer and drawee is the same
What are memorandum checks?
o Its just usually used as evidence of credit, by a drawer who

received goods. He usually redeems it for cash

What is a travelers check?
o You sign it twice (first as a specimen signature, and second

HIDC.
Certified checks:
o Banks usually do not do this anymore
Check must be presented for payment within reasonable amount of time
o Banking practice: 6 months, or else stale
o What happens when the check goes stale?

View one (2 cases): the obligation is discharged.

Payment of an obligation with an NI the obligation is
discharged when there is encashment or the value is

when paying. You present your passport too)

Crossing a check has three consequences:
o 1. Can be negotiated only once
o 2. Cannot be encashed; must be deposited

General can be deposited in any bank

impaired due to the fault of the holder.

View two: the obligation remains because the
drawers bank account was not prejudiced. And there
was no loss caused by the delay.

This will only

happen if the bank becomes insolvent, that if the

27

payee didnt dilly-dally, he would have received

money.
Sito: When the payee delays in presenting a check for payment, the

arrives, PBC will tell ABC Company that the goods arrived.

indorsers are discharged, because they have an interest to discharge

a trust receipt arrangement between them. So the proceeds of

their potential secondary liability.

them.
o

PBC tells ABC Company that it will release the goods if there is

Unreasonable delay will discharge

o

So contrast the rules: the drawer will not be discharged; the

the bill of lading, delivery receipt, etc. to PBC as proof of

MERCANTILE INSTRUMENTS

delivery so that Dupont will be paid.

What is the nature of a LOC?
o A contract between the customer who applied for it and the
o

to open a standby LOC from Z bank. Z bank issued

What is a Letter of Credit (LOC)?

o An instrument issued by banks on behalf of a customer

the LOC, payable when ABC shows documents

proving that X defaulted on the loan. ABC gave this

authorizing a beneficiary to draw a draft/drafts which will be

bank, with a stipulation in favor of a third person

An LOC is a primary, absolute, and unconditional obligation. It
cannot be affected by defects in the underlying obligation

Philamlife: X took a loan from ABC. ABC required X

Letters of credit

the goods can be used to pay PBC if ABC does not pay.
Dupont will not collect directly from PBC. Dupont will issue a
BOE addressed to PBC, to pay Dupont. Dupont then submits

indorsers will be discharged

Dupont ships the chemicals to PBC. So when the bill of lading

document. Z bank, however, refused to pay the whole

honored upon presentation to the bank

Must be drawn in accordance with the terms and conditions

amount stating that X informed it that X had already

made some payments, so these have to be deducted.

specified in the letter of credit

o Purpose: to ensure certainty of payment
Illustrate the nature of a LOC:
o ABC Company wants to buy chemicals from Dupont. But

HELD:

Cannot do this!

The LOC is a primary,

absolute, and unconditional obligation.

It is not an

accessory obligation, so the defect in the underlying

contract cannot affect it.

Dupont has no assurance that when it ships chemicals, it will

be paid. So ABC gets a letter of credit (LOC) with PBC. PBC
then corresponds with a bank in the US (ex. Citibank) PBC

will transmit to Citibank the text of the LOC, through SWIFT.

Dupont then finds out that when it delivers the chemicals, the
bank will pay him. Since the bank is more trustworthy, Dupont

If there really was

overpayment, X just has to run after ABC.

Purposes:

1. Safe mode of importing goods

2. Reduce risk of nonpayment

3. Substitute for and support the agreement of

purchase (although not necessary to perfect it)

is now willing to sell the materials.

28

Types of LOC?
o 1. Commercial LOC

issued as payment pursuant to contract of sale

The seller will be paid if the seller gives proof that he

LOC must be issued in favor of a definite person and

complied with obligation to deliver

2. Stand-by LOC

Secondary payment mechanism, where a seller is

not to order
Limited to fixed or specific amount or to an

undetermined amount but with maximum limit stated

paid upon certification of a partys non-performance of

an agreement
Show proof that the applicant has not performed his

obligations?
o 1. Buyer (applicant)

procures LOC

obliges to reimburse the bank upon receipt of

contract
3. Confirmed LOC

Beneficiary stipulates that the obligation of the issuing

bank should also be the obligation of another bank to

exactly
Who are the parties to a letter of credit (essential) and their

himself (usually the notifying bank)

4. Back-to-back LOC

Credit with identical documentary requirements and

documents title
2. Issuing bank

undertakes to pay seller upon receipt of draft and

proper documents needed

and to surrender the documents to the buyer upon

reimbursement
Obligation is solidary with the buyer. It is a primary

covering the same merchandise as another LOC

except for a difference in the price of the merchandise

obligation (unlike a guaranty, which requires default by

as shown by the invoice and the draft

The second LOC can be negotiated only after the first

is negotiated
When is it considered a consummated contract?
o When the bank pays the creditor (seller-exporter), and not

when the debtor-buyer pays the bank because the bank can

give an extension of payment to the debtor.

What is the governing law?
o 1. Governed now by UCP 600 (Uniform Customs and Practice

the obligor)
3. Seller (beneficiary)

ships goods to the buyer

delivers documents of title and draft to the issuing

bank to recover payment
Who are the optional parties?

1. Advising (notifying) bank

May be utilized to convey to the seller the

for Documentary Credits). This is revised every 10 years or so.

The observance of UCP is justified by Art. 2 of the

will pay and may refuse to accept the drafts

Code of Commerce, which provides that in the

absence of a particular provision in the COC,

commercial transactions are governed by usages and

o

existence of the credit

BUT does not assure that the issuing bank

customs.
2. Code of Commerce, Art. 568:

without being liable

2. Confirming bank

Lends credence to the LOC issued by a

lesser known issuing bank

29

Is directly liable to pay the seller-beneficiary

3. Paying bank

Undertakes to encash drafts drawn by the

seller-exporter
4. Negotiating bank

Instead of going to the place of the issuing

timber to someone abroad.

the buyer that the goods delivered were the proper goods. The
buyer collected the goods but refused to send the certification!
HELD:

o
that

he

always give a fake one if he really wanted to defraud the buyer.

Interpretation of Letters of Credit MUST BE STRICT (Rule of Strict
Compliance)
o 1. Particular genus If the LOC requires that the seller submit

2. LOC

bank tells beneficiary-seller that if it draws the draft, it

an invoice for pine lumber, but the invoice states pine timber,

will pay him after submitting documents

o 3. Underlying contract of sale between buyer and seller
Independence principle (always asked in Bar)
o Basic principle: cannot invoke defect in one of the other 3
o

the bank may refuse to pay

2. Quality specifications If the LOC requires Italian marble
and the document just says marble, the bank may refuse to

contracts to avoid compliance with obligation

A bank which issued a LOC is obliged to pay the draft so long

pay
3. Misspellings If the LOC requires noodles but the

as the beneficiary submits the documents required by the LOC,

document says woodles the Bank may refuse to pay who

without verifying if he actually complied with the obligation in

knows what a woodle is or could be.

When the bank discovers a discrepancy, what does it do?
o It forwards the documents to the buyer and notifies the latter of

the underlying contract

Banks deal with documents only!

They do not deal with

goods nor are they required to examine them.

Ex. Seller-beneficiary submitted the

discrepancies it discovered. If the buyer agrees to waive the

discrepancy, then the bank pays. If the buyer does not waive,

documents

required, so the bank must pay, even if the goods

o

To combat this, the buyer may require a

surveyors certificate to examine the goods. But the seller may

will

pays for bank charges

is at the mercy of the buyer.)

A seller can commit fraud by submitting forged or false
documents.

reimburse the bank when it pays the draft, and also

o

The LOC requires buyers certification, so the bank

need not pay. (This is a stupid move by the seller, because he

approach another bank to have the draft

There was an agreement that

payment is by LOC. Among the documents is a certification of

bank to claim payment, the buyer may

discounted
There are 3 underlying contracts in a LOC:
o 1. Application of customer for LOC

where customer-buyer undertakes

There was a case (Feati Bank) where somebody shipped

delivered turned out to be fake.

PBC v. Chua Tiep Seng: The bank does not guarantee the
genuineness of the documents submitted to it.

the bank does not pay.

Cojack: Buyer is a con artist, so it ordered 3M worth of bags
from Cojac company.

It opened a letter of credit, and the

condition is that an invoice from Cojack be submitted. Cojac

All that is

submitted an invoice, of course, without the misspelled K. The

required is the bank act in good faith.

30

bank asked the buyer if he waives the discrepancy; the buyer

refused. The bank did not pay. Later, the buyer just paid 1M to

Cojac.
Red clause
o A clause, usually written in red ink, where the beneficiary/seller
may get payment

in advance, meaning, even

if the

too.
CASE: The depositor/applicant owed the bank for a LOC, but

beneficiary/seller has not yet delivered the goods to the buyer.

he also assigned the certificate of time deposit to a third party,

This is usually because the beneficiary will purchase goods

who has the better right?

o HELD: The bank. It had a lien on the deposit.
FRAUD EXCEPTION: when can there be enjoinment of payment in

cash (hunters, lumberjacks, etc.). If the beneficiary does not

a stand-by LOC?
o 1) Proof of fraud is strong, 2) fraud must involve abuse of

deliver the goods, too bad. The buyer still bears the risk.
Evergreen clause
o A provision that allows an expiring LOC to be automatically

extended for indefinite number of periods until the issuing bank

o

amount is finished, or it can be cumulative, etc.

Bank lien over applicants property
o Usual stipulation in a LOC if the applicant has a deposit there,
o

from a third party producer that does not accept anything but

Automatically replenishes, whether per month, when the

independence principle, 3) irreparable injury (Transfield)

Distinguish between out and out fraud vis--vis failure to
meet specifications:

In a landmark case by the CA of New York, instead of

informs the beneficiary of its termination.

Ex. A foreign company not doing business here sues and asks

the seller delivering goods, he delivered rubbish. The

for a provisional remedy. The court requires a bond, so the

company obtains one from a surety firm.

court allowed the buyer to have a preliminary

The surety firm

injunction to stop payment be issued because this

requires that the company open a stand-by LOC with a bank,

which will pay the surety firm if the company is held liable. This

LOC will most likely contain an evergreen clause, to keep

renewing it until the case is over.

May the seller in the Feati bank case (where the buyer refused to

to

meet

specifications, you cannot enjoin payment

Metro v. Daway: Case for corporate rehabilitation does not suspend
need to exhaust the resources of the applicant corporation that applied

correspondent bank when it failed or advance funds?

o No. The correspondent bank cannot be sued unless it

failure

payment from a stand-by LOC. It is a solidary obligation, there is no

issue a certification so the seller was not paid) sue the

involves out-and-out fraud.

However, if there is mere

for the stand-by LOC.

confirmed the letter of credit. It becomes solidarily liable.

Revocable, irrevocable
o Revocable: no need to notify the beneficiary, can be done

Trust receipts

anytime
o Usually its irrevocable, for certainty of payment
Revolving letter of credit

What is a Trust receipt transaction (TRT)?

o The entruster (bank), who has absolute title over the goods,
releases these to the entrustee

31

The entrustee (buyer) executes and delivers a trust receipt,

the steel towers. But Meralco hasnt paid X yet, so X couldnt

where:

pay ABC bank. ABC sued X for estafa. HELD: No estafa, no

1. He holds the goods in trust for the entruster
2. Sell or otherwise dispose of the goods
3. Turn over to the bank/entruster the proceeds of the

X tried returning the goods to ABC, but it refused. HELD: X

sale to the extent he is indebted

4. Or turn over the goods to the bank, in case unsold

Note: if the entrustee returns the goods, he does not incur any further

liability. The entruster/bank then sells the goods

What is the nature of the entrusters title?
o The entruster has a security interest.

By fiction of law,

ownership is with the entruster-bank, until it has been paid or

o

did not commit estafa.

Can the trustee execute a Chattel Mortgage over the goods
covered by the TR?
o No. He does not have free disposition of the property.
Can a TR cover a purchase independent from the credit?
o No.
o Illustrate: X purchased goods. Independent of this purchase,

the proceeds of sale turned over to him.

But since it is a mere security interest, the entruster is not

X applied for a credit facility with ABC bank.

responsible as principal in the contracts entered into by the

purchased. HELD: This is invalid. The bank did not have any
lien or title to the goods; they were purchased separately from

goods burn or are stolen).

Since the entrustee is not the owner of the goods he cannot

mortgage them yet. Or, at least, he has no free disposal of

them yet.
Allied Banking: X imported goods, and opened a LOC with ABC bank.

the credit application.

Can TR apply even to domestic transactions?
o Yes, TR can apply even in domestic transactions
What is the nature of ownership/security interest?
o X imported puka shells, covered by a trust receipt with ABC

When the equipment arrived, X took the goods from ABC and issued a

bank. X failed to sell the puka shells. X decided to return the

trust receipt in ABCs favor. X installed the goods in his factory. X failed

shells and claim he is not liable anymore because X claimed

to pay. ABC sued X for violation of PD 115. X claimed the goods were

ABC was the real owner of the shells and X just held it in trust.

HELD: X is wrong. ABC can still recover the money.

not covered because he did not sell nor manufacture/process them.

ABC bank

required X to sign a trust receipt for the goods he just

entrustee. The entrustee bears the losses (ex. if the imported

o

misappropriation.
Another case: X could not sell the goods covered by the TR.

HELD: The goods were covered. It says sell or otherwise dispose.

A TRT is a security transaction, and the buyer is still

Otherwise dispose covers the installed goods.

o Otherwise dispose can cover giving goods to a sister

fiction to create a lien.

really the owner of the goods; it just relies on a legal

company
For estafa, there has to be misappropriation
o Meralco/steel towers case: X fabricated steel towers (hired

ABC still has the right to

recover the money; or it can sell the goods.

PNB Case: The bank getting back the goods does not
terminate the obligation. It just has a lien, and to realize it, the

by Meralco). X imported materials, which X received and gave

bank must foreclose otherwise, it is pactum comissorium.

a trust receipt to ABC bank for. X used the materials to build

The bank then returns the excess or runs after the deficiency.

32

Rights and liabilities of parties:

o 1. Entruster not liable in any sale or contract entered into by the
o

entrustee. He merely has a security interest.

2. Entrustee bears risk of loss thus, loss of the goods does

not extinguish the obligation

3. A purchaser for value and in GF of goods covered by TR is

free from entrusters security interest

4. Failure of entrustee to turn over proceeds of the sale

constitutes estafa or may be basis of suit for damages

5. If the parties agree to reschedule debts and impose

What if an order instrument is only delivered but not

indorsed?

1. Transferee acquires right against the transferor

2. There is no direct obligation by the WHM against

the transferee
3. The transferee can compel the transferor to

complete the negotiation by indorsing the instrument

What is the effect of negotiation?

1. The holder receives title to the goods as the

indorser had [NOTE: the holder never obtains better

conditions incompatible with the TR, then there is a novation

rights than the indorser, unlike under the NIL] and title

and no liability under TRL avails.

that the depositor had over the goods

X stole goods from Y and deposited with

WHM. X negotiated the WHR to Z. WHM

Warehouse Receipts Law

found out that the goods were stolen and

delivered them to Y.

What are the three functions of a WHR?

o 1. Contract for deposit
o 2. Evidence of receipt of goods
o 3. Represents the goods and operates as a transferable

liable?
o No.
title

that it is non-negotiable?

No. The stipulation is void.

This is a key difference between WHR and negotiable

over

the

goods,

so

the

over them either.

2. Direct obligation of the WHM to hold the goods for

him
Who can negotiate a WHR?

1. Owner thereof

2. Person to whom possession of the WHR has been

entrusted to by the owner, if by the terms of the

instruments:

For NIs, a negotiable instrument can be made non

The depositor, X, never had

transferee Z never acquired title

document that carries with it control over the goods

When is a WHR negotiable?
o If payable to order or bearer
o If payable to order or bearer, can one insert a stipulation

Can Z hold WHM

receipt:

1. The WHM must deliver the goods to the

negotiable.
For negotiable WHR, it cannot be converted into a

order of the person to whom possession has

been entrusted, or

non-negotiable WHR. The stipulation is void.

33

WHM delivered a non-negotiable receipt to X. X

mere delivery
Can a thief negotiate a WHR?

YES, but the WHR must be in such form that

transferred the WHR to Y, for value. Meanwhile, C,

he need not forge any signature.

When is it non-negotiable?
o Not payable to order or bearer AND there is a large print,

of goods. Who has a better right?

C, because Y did not obtain title over the

a creditor of X, obtained a judgment against X for

unpaid debt and was levying against the 10 crates

usually in red, that it is non-negotiable

N.B. so if its order or bearer the WHM cannot insist

o

upon it, it will be treated as negotiable.

What is the rule on duplicate WHR?
o Same as non-negotiable if the holder thought in GF that it

to better serve their purpose.

What is the right of a transferee of a non-negotiable WHR?
o 1. Title of the goods subject to the terms of any agreement with
o
o

obligation of the WHM to hold the goods for him

What is implication of failure to notify the WHM of the

right.
What are the obligations of the WHM?
o 1. Safeguard the goods
o 2. Deliver the goods

To deliver

was the original, he could sue the WHM for damages

What is the effect of absence of any of the required provisions to

the transferor
2. Right to notify the WHM of the transfer and acquire the direct

goods due to lack of notification to the WHM.

If Y had informed WHM of the transfer prior
to the levy, then Y would have had a better

on putting the red print that its non-negotiable

What is the consequence of not marking it so?

If someone relied in GF that it is negotiable and acted

be found on a WHR?
o It does not invalidate the WHR. WHRs are liberally construed

Ex. X deposited 10 crates of goods with WHM.

is in such form that it may be negotiated by

2. If at the time of the entrusting, the receipt

What are the conditions before the WHM delivers the goods?
o 1. Holder pays the WHMs liens
o 2. If the WHR is negotiable, to surrender the receipt
o 3. Readiness and willingness to sign an acknowledgment of
receipt of the goods
To whom must the WHM deliver the goods to discharge his
liability?
o 1. Person lawfully entitled to the goods or his agent
o 2. Person entitled to delivery under non-negotiable WHR or
o
o

transfer?

Prior to notification, the title of the transferee can be

defeated by: a) an attaching or executing creditor of
the transferor, or by b) notification by the transferor or

who has authority from the person entitled to delivery (SPA)

3. For negotiable WHR, the person in possession
When is there misdelivery or conversion?

1. Delivery to one not in fact lawfully entitled to the

another transferee of a second transfer

goods
2. The holder of a WHR informs the WHM prior to
delivery not to make such delivery, but he still did

34

E. Attachment or levy by creditor where the document

about to make was to one not lawfully entitled to the

is surrendered or its negotiation is enjoined, or

possession of the goods, but he still did

Rules on refusal to deliver:
o 1. WHM cannot refuse to deliver the goods just because of a

third party claim

But he may submit the situation for interpleader

2. WHM is excused for failure to deliver if he sold the goods to

document is impounded

F. Document of title is attached by creditor

What is the effect of alteration?
o Unlike in NIL, it does not discharge the WHM. The WHM is

3. The bailee had information that the delivery he was

satisfy an unpaid lien

o 3. WHM is excused for selling perishable or hazardous goods
What are valid defenses for non-delivery or misdelivery?
o 1. Loss or destruction of goods fortuitously
o 2. WHM has a right over the goods

A. Failure to satisfy the WHMs lien

B. legal title over the goods through transfer

o 3. Holder of receipt does not comply with requirements

Failure to surrender the WHR

Failure to satisfy the WHMs lien

Failure
to
show
willingness
to
sign
an

telling the WHM to deliver the goods, after proof of loss. He

also has to post a bond, in case the WHR falls in the hands of
a person who took it in GF and for value. The latter goes

receipt have the WHR frozen or surrendered, so it doesnt

end up in the hands of someone who takes it for value and in
GF.

request by the WHM

4. Right or title of third persons

A. Request by person lawfully entitled to goods to

made was to one not lawfully entitled to possession of

because the goods are perishable

D. Delivery to claimant with better right

Until this is done, the WHM cannot be compelled to

deliver.
The WHM in general, as a bailee, cannot claim ownership over the
goods. What are the exceptions?
o 1. WHR negotiated to him, so takes the goods in his own right
o 2. Has unpaid lien, so he foreclosed it and bought the goods

WHM not to deliver the goods

Can lead to interpleader

B. WHM has information that the delivery about to be
the goods

WHM ascertains the facts first

C. Disposed to third person to satisfy WHMs lien or

against the bond.

How does a creditor go about attaching/levying the goods covered
by a negotiable WHR?
o Ask for enjoinment of indorsement or renegotiation of the

acknowledgment when the goods are delivered, upon

o

liable under the original tenor of the WHR.

What is the effect of loss of the receipt?
o The claimant has to file a case in court and get a court order

during auction
What if the WHM delivers the goods without asking for surrender
of the WHR?
o He is liable for damages to any person who takes the WHR in
o

GF and for value.

What if the WHM makes partial delivery of the goods?

He must cancel the WHR and issue a new one

reflecting the balance of the goods, or indicate partial
delivery on the receipt.

35

Again, failure to do so makes him liable to one who

takes the WHR in GF and for value.

Can an unpaid seller claim right over the goods over the holder of
the receipt who purchased it for value?
o No. The vendors lien does not affect the transfer of title to the
o

purchaser for value.

X sold Y 10 sacks of rice on credit. Y deposited the sacks

validity or worth of the receipt

4. He has a right to transfer title to the goods and that the

goods are merchantable or fit for a particular purpose

What is the rule on attachment or levy of the goods covered by a

with WHM, who issued a receipt. Y delivered the receipt to

Z who purchased it for value and for good faith. Who has

receipt is first surrendered to the WHM or its negotiation is

rights of a purchaser for value of the receipt.

The only way for the unpaid seller to get the goods is
to validly reacquire to the receipt from Z and surrender

the receipt for cancellation.

What is the effect of pledge of a receipt?
o The pledgee is in the same footing as a vendee for purposes of
o

the WHR law. He is thus also preferred.

Except of course, once the underlying obligation is paid, the

pledgee has to return the WHR to the pledgor.

X sold Y 10 sacks of rice by quedan, on credit. Y loaned

injunction or otherwise
What if the receipt is non-negotiable?

Remember the discussion above about whether the

creditor could attach or levy.

To safeguard

delivered the quedan to ABC bank. Y died. Who has the

better right, ABC bank (pledgee) or X (unpaid seller)?

Same principle as above ABC bank wins. Even as

a pledgee, it has the same preference as a purchaser.

Xs recourse is run after Ys estate.

What are the warranties of the transferor?
o NOTE: MOST IMPORTANTLY the indorser or one who

If the goods are lost, he is presumed to be at fault

But not for fortuitous events
What is the duty in keeping goods?
o He must segregate the goods belonging to different depositors
o But he is allowed to commingle if:

It is stipulated

It is customary to do so
What are the rules on commingled goods?
o Each depositor gets a pro rata portion of the common mass

negotiates for value is not a guarantor. He is not liable to the

o

bona fide purchaser if the WHM fails to deliver the goods. He

o

enjoined
What can the creditor do?

1. Have the courts attach the receipt

2. Compel the holder to deliver the receipt to him by

transferee was able to notify the WHM first before the

money from ABC bank and to secure his indebtedness, Y

2. He has a legal right to negotiate or transfer it

3. He has no knowledge of any fact which would impair the

negotiable receipt?
o There can be no attachment or levy of the goods unless the

a better right over the rice, Z or X who is still unpaid?

Z. While X has a vendors lien, it cannot defeat the

o
o

does not guarantee to performance of the WHM of his duty.

1. The receipt is genuine

36

upon claim
What happens if there is partial loss?

The depositors also share in the loss proportionately

entrusted with possession of the goods, such that a pledge by

Key distinctions between NI and Negotiable WHR:

Negotiable Instrument

Negotiable WHR

When deliberately altered, becomes

When altered, still valid, but it may

void

be enforced only according to the

him of the goods at the time of deposit would have been valid
When is the lien lost?
o 1. Surrendering possession of the goods

But can he claim a lien over other goods

If payable to bearer, always remain

original tenor
If payable to bearer and it is

deposited to him but under different bailments?

No. His lien only pertains to that one and the

so payable regardless of the way it

endorsed

was endorsed, whether specially or

converted in a receipt deliverable to

in blank
HDC may obtain a title better than

order
Endorsee, even if he is a HDC,

the negotiating party

obtains only such title as the person

specially,

it

will

same

be

negotiating had over the goods

bailment,

which

was

lost

upon

surrender.
o 2. Refusing to deliver the goods when he should have complied
How is the lien enforced?
o 1. Valid refusal to deliver the goods until the lien is satisfied
o 2. Causing EJ sale of the property and applying the proceeds
o

to the value of the lien

3. Filing civil action for collection of claims

WHMs lien

INSURANCE

What are included in the WHMs lien?

o 1. All lawful charges for storage and preservation
o 2. All lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering, and other charges in

In general

relation to the goods

3. Reasonable charges

and

expenses

for

notice,

advertisements, and for sale of goods (to satisfy WHM lien)

What is the rule on notice?
o The charges present at the time of issue of the WHR must be
stated or else there is no lien. He will only have a lien on

charges occurring after the WHR was issued.

What are the properties subject to the lien?
o 1. All goods deposited belonging to the person liable for the
o

Elements:
o 1. Insured possesses interest susceptible of pecuniary
estimation
o 2. Insured is subject to risk of loss
o 3. As consideration, the insured pays premium
Someone organized a jeepney association. They give membership fees
and if a driver gets into an accident, the association pays indemnity.
Sued by Insurance Commission for not having license to do Insurance
Business.
o Held: Was conducting insurance business without license. All

claims
2. All goods belonging to others which have been deposited by

requisites concurred.

the person who is liable for the claims if the person has been

37

Contra Maxicare: Even if all elements are present, but if

Company, and the Philippines was under US at that time. The

an insurance contract.

Germany and USA were at war (WWII) so the company cannot

In Maxicare there is no insurance

therapy after injury or loss, but the main purpose is to give

collect.
What is the standing of mortgagors to sue on an insurance
contract and what is the effect of his acts?
o 1. The mortgagor can sue the insurance company if it does not

medical services. But here, even if you did not get injured or
sick, you can avail of medical checkup.
What are the characteristics of an insurance contract?
o 1. Aleatory

If you dont lose what was insured, there is no

o

indemnity.
2. Personal

It does not adhere to the property insured because

primary consideration for the contract.

Ex. teenagers will be charged higher insurance over

Insurable interest

cars.
The buyer of a car, for instance, will only be insured if

the sellers insurance contract.

3. Unilateral

It is only the insurer that has an obligation to perform

(the insured already paid).

o 4. Conditional
Can you insure against losing the lottery?
o No, this is wagering.

When is there insurable interest over life?

o 1. Own life, spouse and children

Children even if emancipated

Spouse need valid and existing marriage

o 2. Based on support or pecuniary interest

Ex. a key basketball player you signed for your team;

o

a concert impresario in an opera you organized

3. Based on legal obligation, whose death might delay or

prevent performance
4. Any person upon whose life any estate or interest vested in
him depends

Ex. X is allowed to stay in the family home of his

Parties

and it exploded. The mortgagee cannot collect.

3. The mortgagor can have the mortgagee perform acts that
benefit the contract

the insurance company allows for an endorsement of

pay.
2. If the mortgagor performs an act that prejudices, the
mortgagee cannot collect.

Ex. The Mortgagor brought fireworks to the building

the personality of both parties is crucial and is the

German company filed claim with Insurance

primary purpose of contract is to provide services, then it is not

contract because physicians pay for the first six sessions of

Wenfeld:

parents as usufruct. They have interest to continue

Who can be the insurer?

o One authorized by the Insurance Commission
Who can be insured?
o Anyone except a public enemy (citizen of a country with which

the life of their parents

the Philippines is at war with)

38

Note: for the first, mere relationship is enough. For 2-4, there

o
o

must be pecuniary interest. So the interest of the creditor over

the debtors life ceases upon full payment.

So mere friendship does not fall under any of the

categories.
When is there insurable interest over property?
o 1. Existing interest
o 2. Inchoate interest on an existing interest

Ex. stocks, which is based on subscription contract

o 3. Expectancy coupled with existing interest
o N.B. MAIN DIFFERENCE: there must be a valid pecuniary

the life of the person.

Who can be the beneficiary in life insurance?
o 1. If over own life, he can designate anybody, even if the latter

consent
Contra: Assignment of a life insurance policy

The assignee need not have insurable interest

When does the beneficiary forfeit?
o If he causes the insureds death.

Except: When the killing is lawful (ex. self-defense,

the beneficiary is the executioner in death penalty)
What is the effect of unlawful killing?

Benefits go to the estate of the insured

Various situations re: insurable interest over property:
o 1. Importer has insurable interest in goods he is buying even if
o

undelivered, because he can compel delivery. The seller also

prohibited to make donations to

Ex. co-guilty party of adultery/concubinage

2. If you are the beneficiary, you need to have insurable interest

has insurable interest because he has legal title.

2. Contractor has insurable interest over the building he is
erecting because under the law, he bears the risk of loss prior

friend Y as beneficiary. X died, and his debt to Y is worth 50k. The

o
o
o

executor of Xs estate claims only 50k must go to Y and the 950k

must go to Xs estate. Correct?
o No. Since the insured took a policy out of his own life, he is

revoke, the child must consent.

What is the rule for beneficiaries in life insurance?
o 1. The beneficiary/assignee must have insurable interest
o 2. If the policy is going to be assigned, the insurer must

over the life of the insured

X took an insurance policy over his own life for 1M and named his

If the father wanted to

has no insurable interest.

But: you cannot name one to whom you are

with the latters consent.

Ex. A father made his child an irrevocable beneficiary
of an insurance contract.

interest
What is the value of insurable interest over property?
o The insurance cannot go beyond the value of the property
o Whereas in life, you cannot put value over life of a person

EXCEPT: if there is a way to place pecuniary value in

Yes, unless it was made irrevocable in the policy.

If the beneficiary is irrevocable, can it still be changed?

Yes. But if irrevocable, can only change beneficiary

to completion.
3. Mortgagor and Mortgagee both have insurable interest
4. Lessor and lessee both have insurable interest
5. Mere possessor.

Ex. X Colleges was allowed to use a building by the

owner, as a school. It insured the building. It caught

free to name anyone as beneficiary.

The rule would be different if Y took an insurance out of Xs life
o
o

the insurable interest is only P50k.

Can the insured change the beneficiary?

39

fire. HELD: There was insurable interest.

6. Partners, over the property of a partnership
7. Carrier, over goods it is transporting since he will be liable

o 8. WH man, over goods for safekeeping since he will be liable

What is the nature of a mere contingent interest over something?
o Not insurable.
o Ex. Creditor with no collateral over properties of buyer
o Ex. Expectant heir
o Ex. Fictitious contract of sale (completely simulated)
Can smuggled property be insured?
o No against public policy
When must insurable interest exist in life insurance?
o In life, need only exist when the policy takes effect
o Ex. X insured his wifes life. They annulled their marriage. But
the wife failed to revoke the insurance. X can collect.
When must interest exist in property insurance?
o When the policy takes effect and when loss occurs
o Need not exist in the meantime

Ex. Owned a car, insured, then sold it.

o

father when he was still alive?

Insurance does not transfer.

For co-owners, partners, etc:

X Y and Z co-owned a house. X bought Y and Zs

Insurance company must pay because X was part of

Then

repurchased, and then loss in fire.

A person mortgaged his building. The property had been sold

to redemption. HELD: Lost insurable interest.

What if he still possessed the right of redemption?

He still has insurable interest

What happens when there is change of interest?
o If you sold your car, if the buyer wants insurance, you have to

can collect.
What if the children bought the house from the

shares and became sole owner. The house burned.

the original insured.
But if there is a new person brought into the group,

the insurance is avoided.

Can one stipulate against insurable interest?
o No. Stipulation that there need not be an insurance interest for
an insurance contract NULL AND VOID.
What is the interest of a mortgagor over property he mortgaged?
o The extent of the value of the property
o How can the mortgagee be made the beneficial payee in
the mortgagors policy?

1. Assign (with insurers consent) or pledge (no need

X died and

children inherited. The house burned. The children

in foreclosure. Then it was lost by fire. He had no more right

X insured Family Home against fire.

for insurers consent) the insurance K

2. The original policy may have a mortgage clause or

endorse the policy.

Change in interest after the loss does not change indemnity. It

there is a rider making the policy payable to the

is already an accrued liability at this time. It is a chose in

clause)
3. Independent contract between mortgagor and

mortgagee
4. Acquired by the mortgagor under a contract duty to

mortgagee as long as he has interest (loss payable

action.
Change in interest in one or more listed things:

A taxi company insured 20 units. Sold 4 of them. The

insurance over 16 is still valid.
Change of interest in will or succession does not avoid

insure the mortgagees benefit (in which case the

insurance.

collected by the mortgagor)

mortgagee acquires an equitable lien on proceeds

40

What is the extent of the mortgagees interest on the property

mortgaged to him?
o To the extent of the debt secured
o The interest exists until the debt is extinguished
o N.B. the mortgagee may procure the policy and have the

mortgagor pay for the premiums

Distinguish:
o Standard/union mortgage clause subsequent acts of
o

mortgagor cannot affect the rights of the mortgagee

Open/loss payable mortgage clause acts of the mortgagor

o Need not be intentional

What is the consequence?
o Insurer can rescind
Requisites:
o 1. Party must have known the fact concealed

Ex. he did not know he had cancer

o 2. Must be material to the policy

Test:

Insurer would not have entered into the

contract had he known of the fact concealed
or the conditions in the K would have been

can affect the mortgagees rights, because the former is a party

to the contract
D had a loan of 3M from C. To secure it, D mortgaged his house

worth 5M in favor of C.
o Who has insurable interest over the house?

D 5M (value of house)

C 3M (extent of loan)
o Will insurance procured by D in his own name and for his

different
Concealment in life insurance:

Failure to disclose serious ailments

Need not disclose very minor sickness/injury

A Couple got an insurance policy for their mongoloid

baby, but they did not say he was a mongoloid.

HELD: concealment
There is a law prohibiting insurance companies from

own benefit inure to benefit of C?

No. Insurance is a personal contract and just like any

refusing to issue insurance to someone with AIDS, as

other contract, it just involves the parties unless there

is a stipulation pour autrui (see examples above)

But under Art. 2127 of the NCC, the mortagee has an

equitable lien on the proceeds of the policy.

C procured insurance. D fully paid C. The house burned

the injured party can rescind.

So if X, a laundrywoman, did not disclose
that she had stomach cancer because she

down. Can C recover? Can D recover?

No and no. C has no more insurable interest. D is

not a party to the insurance contract.

did not know, there is still concealment.

3. Party must make no warranty of the fact concealed

In this case, if there was a warranty, the violation is

not a concealment but a breach of contract

4. Other party has no means to ascertain the fact concealed

If a party discloses that he has been hospitalized and

Concealment

long as he discloses that he has AIDS

Is good faith a defense in concealment?

No. Whether it is intentional or unintentional,

What is the nature of concealment?

o Failure to communicate what a party knows and ought to

gave the contact # of the hospital, the insurers failure

communicate

41

to look into his records there were means to

Representations

ascertain the fact

If the agent commits a concealment, the applicant will be bound by that,

the insured made the agent his own agent for the purpose of filling up

the application form

There are matters the party need not indicate:
o 1. Insurer could have known

The inspectors went to the place and found that it was

near a squatters area. But the company issued a fire

insurance policy anyway.

A fire broke out.

The

insurance company cannot use the defense that it

was near a squatters area, because it sent
o

inspectors.
2. Matters of public knowledge/insurer should have known

Insured an oil tanker. Cannot use the defense, why

did you not disclose that there was a war in

o
o

Afghanistan. They should have known.

3. Information of ones own judgment.
4. Matters which pertain to excluded or exempted risks.

Ex. need not disclose that members of NPA are

burning houses in their neighborhood if the fire

insurance policy exempts rebellion/coup/etc.-related

What is a representation in general?

o Statements made to induce the other party to enter into the
contract
What is a misrepresentation?
o 1. Untrue statement
o 2. With knowledge and intent to deceive; or stated as true
without knowing it to be true and which tends to mislead
o 3. Fact is material
What is the consequence?
o Voidable at option of insurer
o But waived for acceptance of premium payments despite
knowledge of ground for rescission
What are the kinds of representations?
o PROMISSORY: Representation as to the future
o AFFIRMATIVE: Representation as to a present fact
What is the nature of a representation?
o Can be written or oral
o Representation is not part of the contract. It is a collateral
inducement.
o But it may qualify as an implied warranty
As a rule, parole evidence is not allowed to vary the terms and
conditions of the contract. It may qualify an implied warranty.

destruction
What if the insured dies from another reason apart from the fact

concealed?
o Insurer still not liable because it wouldnt have issued a policy.
Can there be waiver?
o Yes. Either express (in the terms of insurance) or implied (as

It is

imposed by law.
When is a representation presumed to refer to?
o A representation is presumed to refer to the date on which the
o

policy goes into effect.

If somebody applied to insure his vessel.

Ex. voyage from

when there is failure to make follow up inquiries as to facts

Manila to Cebu. Where is the vessel? It is anchored in

already communicated).
Is there need to disclose nature or amount of ones interest?
o No. EXCEPT if one is not the absolute owner of the insured

Manila Yacht Club. But it is actually in Curimao. However,

when the policy takes effect and the vessel is in Manila already,

property.

42

there is no misrepresentation.
What if the insured has no personal knowledge of a fact?

He may repeat the information he has on the subject which he

believes to be true
Ex. There is a question in life insurance about medical history

under different conditions

of the family. If one thinks his father died as a soldier, in action,

Warranties

when he actually died of AIDS, and he says the former.

But if the info came from the insureds agent, and exercise of

due diligence was possible, he is liable for the truth of the

o

statement
Ex. There is no misrepresentation because he relied on what

the physician told him.

Representation is false if facts do not coincide with what was asserted
o Test for defense: substantially true in every particular
o

material to the risk

EXCEPT: Marine insurance where what is required is the

exact and whole truth

Ex. Have you ever applied for a life insurance policy and the

application was rejected? He said no. But before, he had an

application denied, but then accepted on reconsideration.

HELD: No misrepresentation.
Do you take alcoholic beverages? Applicant said no. But he

has been drinking since he was 16. He died of liver failure.

HELD: Misrepresentation. But if he only drank small
amounts on cocktail parties, it is not material. There
o

is no misrepresentation.
Insured filled up the application form. The insurance company

said that they will only accept if the applicant is not more than

Express or implied:
o Express found in terms and conditions
o Implied imposed by law

Only exists in Marine insurance

Usually embodied in a rider
o These riders, issued with the policy, need not be signed
What is the difference of warranties from representations?
o Warranties are express and placed in the contract
o Representations are not written and are but collateral
inducements
May relate to:
o Past ex. warranty that insured was never confined
o Present ex. warranty that insured is in good health
o Future ex. warranty in fire insurance that owner of property
will not store flammable materials
When does non-compliance with a future warranty not avoid the
policy?
o 1. Loss occurs prior to the warranty taking effect
o 2. Performance becomes unlawful
o 3. Performance becomes impossible
Give an example:
o Somebody tried to insure his house for fire. Inspectors said his
neighborhood is not nice. Insurer said that it will insure, but

60 years old. He was more than 60 years old.

HELD: he wrote on the application form his date of

insured must put up a firewall within 30 days. A fire razed his

birth, but the company still issued a policy. There was

If the other party would not have entered into the contract, or

no misrepresentation.
Test of materiality?
o SAME AS CONCEALMENT.

43

house in 10 days.
HELD: the insurer is liable.

Same if there is no cement

available (impossible) or if it becomes unlawful.

What is the effect of violation of warranty?
o Allows the other party to rescind.

Even if not rescinded, it can be launched as defense by the

insurer.
Can the insured argue that it is not material?

No. The fact that it is in the policy entitles the insurer

them again, where there is loss proceeds go to mortgagee.

to rescind. The basis is not materiality but breach of

Different interests

Fire destroyed the things.

involved. First goes to the mortgagor. Second goes

material.
If there is a breach of warranty, and loss occurs EVEN IF not related to

brought fireworks inside.

o
o

He

His kitchen caught fire without

relation to the fireworks. Insurer not liable.

Because the risk increased regardless.
What is the exception?

When it is merely incidental to the business.

to the mortgagee. It is not double insurance.

When is there a waiver by the insurer?
o Despite knowledge of the breach, it accepts the renewal
premium
X was issued an ordinary drivers license. Can only drive 4 wheeled
vehicles. He drove a 10 wheeler. Vehicle involved in accident.
o HELD: Insurer not liable because X is not authorized to drive

For

the 10-wheeled vehicle.

How is the authorized driver clause interpreted?
o Usually it means that its just the owner of the policy and an

instance, placing alcohol to retouch the varnish of

ones insured furniture store does not breach the

authorized third party with a license that must drive the vehicle.
Is the expiration of ones license a violation of the
authorized driver clause?

No. While it may be a violation of the law, it does not

warranty against placing inflammable materials.

Ex. where there was gasoline in the warehouse for
consumption of the owners car within 2 days.

Insurer said X did not disclose

second insurance.

HELD: No need to disclose.

contract.
When there is breach of warranty, it is presumed to be

the breach of warranty, the insurer is not liable.

o Ex. cannot bring explosive materials into his house.

X insured his stocks in trade. Mortgaged them, and insured

violate the authorized driver clause that would breach

Or

mothballs in a drug store.

Double insurance not just to those he acquired before but also the

future. Failure to give information is a breach of warranty.

o X obtained fire insurance over his house with Insurer A.

He warranted against past and future double insurance.

Then he obtained fire insurance over his house with

Insurer B. The same clause is included. The house burns

down. Is Insurer A liable? Is insurer B liable?

Both are not liable. There was breach of future

double insurance warranty for contract A and breach

of past double insurance for contract B.

44

the warranties in an insurance policy.

The requirement for a license applies for a third party

not the insured himself.

When the car is stolen or misused by a repairman, is it a

violation of the ADC?

No. It is considered theft under the policy.

What does under influence of liquor clause mean?
o No need to actually be drunk, as long as he is under the
influence
When there is breach of warranty without fraud, what is the rule?
o It only exempts the insurer from the time the breach occurred.
o Give an example.

X obtained fire insurance over his house. Warranted

against storage of inflammable materials.
31, a fire broke out.

fraudulent misrepresentation or concealment, but not anything

On Sept

On December 31 he stored

inflammable materials (fireworks) then a fire broke

out. The insurer is not liable for the Dec 31 fire, but is
o

liable for the Sept fire.

What if there was fraud, i.e. there were inflammable

materials inside the house?

The policy doesnt attach in the first place.

Compare a warranty from a representation:

Warranty

Representation

Part of the contract

Written in policy/rider
Conclusively presumed

Collateral inducement
Need not be written
Must be established to be material

to

material
Fact must be strictly complied with

be

else
Requisites for incontestability clause:
o 1. Life insurance
o 2. Payable proceeds upon death
o 3. In force for 2 years since issuance or reinstatement

Can the 2 year period be shortened

agreement?

Yes,

Rescission of insurance contracts

o
Sec48(a) action to rescind
If insurer has right to rescind, insurer must rescind prior to

commencement of action on the contract

Tender of premiums and notice that the policy is cancelled before suit is

it

cannot

be

lengthened

by

1. Claimant has no insurable interest

2. Uncovered risks (ex. insured engaged in car racing)
3. Policy lapsed and insured did not pay
4. Policy was entered into pursuant to scheme to kill insured
(vicious fraud)
5. Someone substituted for the insured during medical test

This fraud is not barred by the clause there is NO

perfected contract with the insured because it was

deemed a rescission
Sec 48(b) incontestability clause

but

by

stipulation.
o What if the policy lapsed but was reinstated?

The 2 year period will run again.

BUT there are still defenses that can be invoked even after this
period:
o
o
o
o

Fact can be merely substantially true

N.B. Really, what you are barring are defenses against

If a life insurance policy has been in force for at least 2 years since first
effect or last reinstatement insurer is BARRED from questioning it or
alleging misrepresentation or concealment, or deceit/fraud

45

another person
6. If insured is riding in a plane and it is not a commercial flight

(ex. 8-seater plane)

o 7. Entered into military without consent
o 8. Failure to furnish proof of death
o 9. Action not filed on time
What defenses are barred?
o 1. Misrepresentation
o 2. Concealment
o 3. Fraud
When must the two year period lapse?

It must have lapsed while the insured was alive. If the insured

dies within two years, the heirs cannot wait for the 2 years to

lapse and claim incontestability.

extend beyond 60 days.

Who receives insurance proceeds?
o Applied exclusively to person in whose name or for whose

The Policy

What is a preliminary policy/cover note?

o Has terms and conditions of policy that will be issued.

preliminary policy and actual policy.

Common in car insurance and marine insurance

Because there is still some delay or information to be

common interest
Rules on interpretation:
o If the provision is clear, there is no room to interpret
o Tantoco Terminal: had two mills. Old mill was insured. When

insurance first [give to LTO the cover note] or looking

for adequate carrier for goods for marine goods

can claim the benefit.

When does insurance taken by one partner or part-owner apply to
the interest of his co-partners or co-owners?
o The terms of the policy must be applicable to the joint or

determined (ex. looking for third-party liability in car

since the policy depends on the state of the boat

What must be the form of policies?
o Must be in printed form. It cant be handwritten anymore.

the new mill was finished it was insured. The policy however

Before you issue a new policy, the terms and conditions have

insured, not the old one even if the policy says

mentioned the old mill. Burned. Insurer refused.

HELD: Clearly they intended the new mill to be

to be approved by insurance commission.

What is the rule on riders and additional attached clauses?
o Does not bind insured UNLESS the descriptive name/title of

They stole money.

Insurance

company refused to pay because it claimed they were not

spaces in the policy

What is the rule on additional riders or clauses issued after the

employees of the company, but the agency.

HELD: The insurance company pays.

original?
o Must be countersigned by the insured or owner
o N.B. No need for signature of insured for earlier riders and

otherwise.
Fortune: Security guard and driver of armored van had
possession of the money.

the rider or clause is mentioned and written on the blank

benefit the policy is made

If description is so general that it may comprehend any class or
persons, only he who can show it was intended to include him

Insurance company cannot collect separate premium on

o

But now: there is a circular that allows cover notes to

The very

purpose of the insurance is to insure against acts of

those holding the money, which in this case are the
two.
What is an Open policy?
o There must be a maximum amount mentioned.

additional clauses
When must a policy be issued upon issue of cover note?
o Within 60 days, the policy must be issued.

If the cover note extends beyond 60 days, written

agreement of insured must be obtained.

quantify the value within this amount.

46

It is a

maximum liability of the insurer.

So there can be an amount mentioned, but you still have to

 What is a Valued policy?

o One expressing a policy that the thing be valued at a specified

Asking for reconsideration from the company does not suspend

sum

Ex. Marine policies are usually this

What is a Running policy?
o Successive insurances
Ex. Goodyear, instead of getting insurance whenever

it ships tires to distributors, it gets a running policy that

o

N.B. One year period to file a case is not like period for appeal.

running of the period.

When can non-life policies be cancelled?
o 1. Only with prior notice AND
o 2. On the following grounds:

1. Non-payment of premium

2. Conviction of crime from acts increasing hazard

covers all of these

In any case, it would have to notify the insurance company

which would issue an indorsement, for it to be covered

What is the rule on validity of agreements limiting times for

hazard insured against

Ex. a bus company that always gets into

commencing action?
o In general, a clause in an insurance policy that action upon the

policy must be brought upon by the insured within a certain

accidents every week

5. Physical changes in property that makes it

period is valid
But if the period fixed is less than one year from the time cause

uninsurable
6. Determination by Commissioner that continuation
of policy will place the insurer in violation of the code

Ex. Maximum risk it can insure is 20% of its

of action accrues, the stipulation is void (the period becomes

the default 10 years, from a written contract)

In industrial life insurance period cannot be less

o

insured against
3. Discovery of fraud/material misrepresentation
4. Discovery of willful or reckless acts increasing

net worth (Ex. 100M net worth, so they can

issue up to 20M).

than 6 months from accrual of cause of action

When does cause of action accrue?

From rejection of the claim by the insurer, because

It can issue policies

beyond that but it must be reinsured.

prior to this, there is no necessity to bring suit yet

What if the clause says that action must be brought one
year from loss?

Its void, because you have to submit your claim to the

insurer first, and this takes time. The insurer might

decide beyond one year sometimes. In this case, the
action given to the insured will be less than 1 year

Notice of cancellation:
o 1. Must be in writing
o 2. State ground for cancellation
o 3. State that if the insured asks for the facts as basis, the
insurer will disclose
When can there be automatic renewal in a non-life policy?
o Insured can automatically renew the policy as long as he is
o

from the time cause of action accrues.

willing to pay the premium

Except: 45 days before expiration of policy, the insurer informs
him that it will not renew

47

If insurer does not do this, insured can renew as a

there is usually a 60-90 credit period to pay renewal.

matter of right
Policy written for term longer than 1 year, it will be treated as written for

The market burned within the period and UCPB paid

successive terms of 1 year

o Ex. construction contract requires policy covering the building

Masagana a credit period.

What is Cash Surrender Value?
o Amount of cash the insurer receives upon surrender of the life

insurance policy prior to maturity

What is Paid-up Insurance?
o When the insured defaults, he gets the cash surrender value.

as it is completed. There were 2 fires, and 3 years. It will be

treated as if it is expiring at every anniversary of the policy.
Premiums

When is the insurer entitled to the payment of the premium?

o As soon as the thing insured is exposed to the peril insured

The insurer then applies the cash surrender value to check

against
What is the effect of payment of premium to the liability of the

insurer?
o Notwithstanding any agreement to the contrary, no policy is

to show he is insurable, and pay the premium in

been paid is conclusive evidence, even if there is no actual

payment yet

But this does not estop the insurer from recovering the
payments afterwards
2. Payment in installments

Makati Tuscany: In fact, if only a few installments

o
o

arrears
What are the rules on refund of premium?
o Insured entitled to a refund of the premium if no part of the

interest was exposed to the peril

Ex. Insured shipment of rice was never shipped

What if the insurance is for a particular period and there
was surrender prior to the end of the period?

Entitled to refund corresponding to unexpired time

Deducting any previous payment of the insurer due to

were paid, the insurer can sue to collect the rest

Tibay: The policy provided that it will not be binding
until all installments have been paid.

how much insurance it can buy until the end of the policy.
Can the insured apply for reinstatement at the end of the
policy?

Yes, but he has to undergo medical examination again

binding until the premium has been paid.

What are the exceptions?
o 1. An acknowledgement under the policy that the premium has

the premiums a day after. The insurer was held liable.

5. Estoppel

As in Masagana where UCPB always granted

Thus, here,

Makati Tuscany does not apply.

3. Grace period in life and industrial life policies by default,

losses
What the exception to partial refund rule?

In life insurance, because the insurance on human life

is not divisible. So no matter how short, the insured is

there is a 30 day grace period. But it can be increased

4. Grant of credit by the insurer to the insured

Masagana added this. There was a market insuring

not entitled to a return of the premium.

its premises with UCPB since 1988, and every year

48

X insured a shipment of goods from Manila to Cebu. Can

he can cancel it halfway, i.e. when it is in Romblon, and

ask for refund of premium?

No. The insurer was already exposed to the risk; he

cannot ask or the return of the premium.
o
o

they were brought out, they were stolen. Insurer is

insured furniture, the firemen pointed their hoses. The

policy never attached.

Avoided due to fault of insured, with actual fraud?

No return.

Ex. Insured claimed he had a firewall, but he really did

furniture was soaked and damaged insurer is liable.

When is the insurer not liable even if there is loss?
o 1. The insurer is not liable for loss caused by connivance of
insured

Ex. told someone to steal his car, sell parts, and claim

not.
Can there be return of the premium due to over insurance?
o Yes. The insured gets a ratable return of the premium.
o Ex. a house worth 10M is insured for 10M with X, 5M with Y,

o
o

5M with Z. Paid premiums: 10K to X, 5K to Y, 5K to Z. He is

While distracted, robbers

broke into the store and stole the stocks in trade. Fire
o

is just a remote cause.

4. Loss, the proximate cause of which is an excepted risk

Fire insurance policies say that they do not cover loss

due to coup detat, rebellion, riots, etc.

5. Loss where the insured is guilty of gross negligence

SMC hired a shipping company to transport thousand

Loss, claims settlement, subrogation

When will the occurrence of the peril insured against make the
insurer liable?
o 1. If it is the immediate cause.

Ex. Insured against fire.

The house across the street caught fire.

Everyone congregated.

from Z.
Agreement not to transfer the policy after loss has occurred is void,
because at that time, the liability has accrued. It is a chose in action.

insurance
2. Loss from unlawful act not liable

Ex. committed arson

3. Loss in which peril insured against is only a remote cause

Ex. fire insurance policy covers store and stocks in

trade.

entitled to return of premium: 5K from X, 2.5K from Y, 2.5K

liable.
Ex. Fire broke out in neighbors house. To prevent the
fire from spreading to the other house contained

incur any liability.

Ex. Pre-condition for fire insurance over house is to
build a firewall. Insured didnt get to build it, so the

down a tree, which fell and destroyed a house.

3. If it is damaged in the process of rescuing the insured
against the peril insured against.

Ex. Saving insured furniture from a house fire. When

It is not

divisible.
What if the contract is avoided due to fault of the insurer?

Insured gets the premium returned.

Avoided due to fault of the insured, but not actual fraud?

Insured gets return of premium, if the insurer did not

2. If it is the proximate cause of the immediate cause

Ex. Insured against fire. Fire broke out and burned

cases of beer. The SMC rep met the captain and told
the latter that the boat should be moved to a safer

Faulty wiring exploded

place since there is a typhoon brewing. The captain

(proximate cause) and led to fire.

49

ignored it and tied the barge to the wharf. During the

But the insurer will be discharged from its liability to the insured

typhoon the rope broke, the barge was cut loose.

Burden is on the insurer to prove that it is an excepted risk
o But for fire insurance, the burden is on the insured to prove that

if the insured committed any act that would prevent the insurer

it is not under an exempted risk

Ratio: because the thing is in possession of the insured, so he

the wrongdoer for P2500. The insured still claimed

can best give an explanation for the loss

How must notice to the insurer of loss be given?
o 1. Notice must be given without unnecessary delay

If reported an unreasonable time later ex. 6 months

wrongdoer, which raised the defense that there was a

opportunity is gone
Usually policies have a provision that claims must be

filed within a certain time. Beyond that, barred.

Delay in presentation of a claim/proof of loss is waived

from recovering from the wrongdoer

In motor vehicle insurance, the insured settled with

from the insurer, which paid. The insurer ran after the
settlement.
o

if the insurance company did not invoke that as a

o

reason to deny the claim

2. When proof is required, insured is not required to give proof

Requisites:
o 1. Insured must be the same

Ex. mortgagor mortgagee not the same

o 2. Several insurers

If someone takes an insurance from Insurer X, then

the insurer didnt specify are waived, because the

insured is usually a layman
3. If the policy requires a certificate, and the insured cannot
produce it, it is enough to say that he cannot produce it not

because the document is prejudicial but because he could not

procure it

I cannot submit the report not because the contents

of the report are prejudicial, but because the

liability
2. Insurer mistakenly paid for an excepted risk
3. Life insurance
4. Recovery of loss in excess of insurance coverage

Double insurance

that stands in court

Noda: police report should be sufficient

Defects in the notice or substantiation thereof which

The insurer thus can recover from the

insured because it paid by mistake.

What are the grounds when there is no subrogation?

1. Insured by his own act releases the wrongdoer from

takes another after 6 months, no double insurance

3. Same subject matter

Ex. factory and stocks in trade not the same

4. Same interest

Ex. Insured property with proceeds payable to him,

then mortgaged same property with proceeds payable

investigator is abroad and cannot be found

What is the rule on subrogation and release of liability?
o General rule: when the insurer pays the insured, the insurer

to the mortgagee for his interest no double

o

becomes subrogated to the rights of the insured and can run

after the wrongdoer

insurance
5. Risk is the same

Ex. against fire, and then against earthquake not the

same

50

to wait until the original insurer sues the reinsurer to recover, if

What is the consequence of double insurance?

o Usually there is a clause in insurance policies that will release
insurers from liability if there is double insurance
What is the consequence of over-insurance?
o The insurers can ask for reimbursement
o

based

on

the original insurer fails to pay, the reinsurer will be liable to

proportionate liability
Ex. A house worth 10M is insured for 10M with X, 5 M with Y,
5M with Z:

Owner cannot recover more than 10M, the value of

from Y and 2.5M from Z.

In the same way, depending on who the owner
collects from, they have to reimburse each other in the

reinsurers will pay too. They will rise and fall with the fortunes of the

said proportions.
In car insurance policies, there is a usual clause that for overcovering a car worth P500K can only be liable for P250K each,

Reinsurance

original insurer.
Can the insured sue the reinsurer directly?
o No. There is no privity of contract between them.
What is the exception?
o The cut-through clause

Insured can go straight to the reinsurer

o Ok in California, invalid in England

Marine insurance

and nothing more.

pay.
Most of the time, there is a clause that says that the original reinsurance
need not litigate with every reinsurer. If the original insurer paid, the

the house
If owner recovered 10M from X, X can ask for 2.5M

insurance you can just collect proportionately. So two insurers

it wants to raise defenses.

Insurance is covered by the rule of uberrimae fides
What is the nature of a contract of reinsurance?
o It is presumed to be against liability, not damages. So even if

What is reinsurance?
o Insurer obtains another insurance to cover for loss for liability

What is an all-risk policy?

o All the insured has to prove is that the property was lost; no
o

due to the original insurance

o The reinsurer is a liability insurer
o What is retrocession?

Subsequent layers after the first reinsurance

Two types:
o Treaty
o Facultative case by case
Can a reinsurer intervene in the original action?
o A reinsurer cannot intervene in the case of insurer and insured

because the reinsurer has his own interest anyway. So he has

51

need to prove that it was due to fortuitous events.

The only defense the insurer can raise is that the loss was due

to misconduct of the insured.

What is its not an all-risk policy?
o It only covers perils of the sea.
Perils of the sea:
o 1. Connected with navigation
o 2. Unusual movement of the sea/winds

There must be a fortuitous event. A normal typhoon

is not a fortuitous event.
It does not cover perils of the ship. What are these?

If the ship is not sea worthy, or that the cause is due to the poor

condition of the ship.

o Ex. if it springs a leak.
What is barratry?
o Insuring against the willful misconduct of the master or crew,
o

not mere wrong judgment.

A ship captain cuts loose a barge. Was this barratry?

Just an error of judgment. There has to be willful

misconduct by the master or crew of the ship. So the

insured cannot claim from the barratry clause.

When is arrest of the ship recoverable from?
o Covers arrest of the ship by administrative or executive order

which was lost.

Insurer answers for general average
o Those who were saved will contribute to the general average
o Insurance policy will cover share in general average
o DOES NOT cover particular average

Ex. fruits became rotten due to nature of the fruits

Rule on concealment is stricter, because the ship is usually in the high
seas so the insurer is at a disadvantage harder to inspect.
What is the different rule as to concealment in marine insurance?
o Usually, the cause of the loss need not be due to the fact
concealed. But for the following matters, concealment does

as settled in English jurisprudence. But in Malayan our SC

not avoid the policy EXCEPT if these were also the cause of

included arrest by court order.

What is the insurable interest of the owner of a vessel that has

the loss:

1. National character of the insured

2. Liability of the thing to capture/detention

3. Liability to seizure due to breach of foreign laws

4. Want of necessary documents

5. Use of false/simulated papers

Ex. Insured conceal that certain important documents are

been chartered?
o Only the amount which the charterer did not agree to cover, in
o

C can only collect 100K because that is the profit

case of loss.
Ex. the ship is worth 10M. The charterer agreed to pay 5M in

case of loss. The insurable interest is 5M.

What is freight?
o It is the expected profits of the owner of a ship which has been

missing. The vessel encountered a perfect storm and sank.

The insurer is still liable even if there was concealment,

chartered to ship goods. These expected profits (freight) can

o
o

be insured.
What is the insurable interest of the charterer?

To the extent that can be indemnified for his loss.

O is the owner of a boat. C chartered it, agreeing to pay

because the fact concealed was not the cause of the loss.
What is the different rule as to belief of a third person as to marine
insurance?
o Marine insurance belief of a third person as regards what is

P500K if the vessel arrives safely and C was able to solicit

goods paying freight of P600K. The vessel sinks. What

happens?

C need not pay O, because the ship did not arrive

safely.

material
Ex. surveyor saying that the ship is not seaworthy MUST BE

DISCLOSED it is material
What is the rule on misrepresentation as to expectation?
o If there is no fraud, misrepresentation as to expectation does
o

not avoid the policy.

Ex. The insurer asks the owner when the vessel will go out to
sea, and the latter said April. The vessel only went to sea on

52

June. The misrepresentation was not tainted with fraud and

does not avoid the policy.

Subject

Ordinary insurance

Marine insurance

Concealment

Can rescind even if

Five

concealed fact was not

grounds apply

exceptional

Belief of a third person

cause of loss
Need not be disclosed;

Must

Misrepresentation as to

immaterial
Can rescind

material
If there is no fraud,

expectation
Implied warranties

N/A

cannot rescind
Four implied warranties

o
o

be

disclosed;

automatically apply

When must a ship be seaworthy?

o At the start of the voyage
o If there are different portions of the voyage, it must be

insurer is discharged.
What must the voyage route follow?
o Usual maritime usage
o If none, then the most natural, direct, and advantageous

been received by the owner in usual rate of communication.

What are the implied warranties?
o 1. Sea worthy

May there be a waiver of warranty of

Three types of deviation?

o 1. Departure from course of the voyage
o 2. Unreasonable delay in pursuing the voyage
o 3. Commencement of an entirely different voyage
When it is proper to make deviations?
o 1. Caused by circumstances which neither the master or owner

seaworthiness?

Yes. If there is a waiver, even if the ship is

not seaworthy, the insurer is still liable.

2. will not deviate

3. Will not engage in illegal ventures
4. It will carry necessary papers if nationality was expressly

warranted
When is a ship seaworthy?
o If it can perform the services and encounter the peril of the
o

ships must be seaworthy

What if the ship becomes unseaworthy during the voyage?

There must be no delay in the repairs; else, the

Deviation

What is the presumption on knowledge of loss?

o There is a presumption if the knowledge of the loss could have

o
o
o

seaworthy in all such portions

If it is an insurance of cargo taken by different ships, all the

voyage contemplated.
Warranty of seaworthiness extends from the hull also that it

has control

Ex. when there is a typhoon

2. Necessary to comply with a warranty or avoid a peril
(whether insured against or not)

Ex. when the engine gets busted

3. Made in GF, upon reasonable belief to avoid a peril

Ex. received of reports waiting in ambush, thus

deviated
o 4. Made in GF, to save human life or another ship
Once the vessel deviates, even if it returns to the original route, the
insurer is exonerated.

is properly laden, and the complement of the vessel (master,

Loss

etc.) is fit

53

Loss is either total or partial

Total loss is either:
o A. Actual total loss

Actual loss of the thing, renders it valueless

Examples of total loss:

1. Total destruction
o Ex. the ship burned

2. Loss by sinking or being broken up

o The ship sank or was broken up,

o
o
o

making it irretrievable
3. Damage to thing rendering it valueless for

cannot race anymore

4. Any other event depriving the owner of

factual basis for abandonment

o 6. Give notice to insurer whether orally or in writing
o 7. Notice of abandonment must specify the particular cause
What is the effect of abandonment?
o The insurer gets all the interest of the insured over the vessel

the trip and were sold by the captain, there is no

destination
o Ex. Ship was ordered seized
Is there need for abandonment for actual total

(ex. salvage, proceeds of the salvage, etc.)

This same effect will result if the insurer paid as if

No, the insurer become liable upon actual

there was actual total loss as if there had been

total loss
B. Constructive total loss

Unique in marine insurance

Abandonment is act of insured after constructive total

loss
5. Must be factual

Ex. So in a case where the shipment of oranges was

reportedly lost, but they actually just ripened during

possession of the thing at the port of

loss?

over the thing insured

2. Constructive total loss
3. Unconditional and not partial abandonment
4. Made within reasonable time from receipt of information of

seedlings
Ex. a race horse broke its legs, so it

storage, reshipment, and all other expenses to save the cargo

What if loss occurs?

The insurer is liable for the general average\

What are the requisites of abandonment?
o 1. Actual relinquishment by the person insured of his interest
o

the purpose it was shipped

o Ex. palay got wet and became

The insurer is liable for expenses for transfer, discharge,

abandonment
Acts done in good faith by the agents of the insured after
abandonment is for the risk/benefit of the insurer (ex. effort to
repair the ship is for the risk/benefit of the insurer. So the

loss. He relinquishes his share to the insurer

If damage is more than of value of property insured,

insured can declare constructive total loss

What if the ship cannot continue but the cargo is transferred, what

is the effect?
o The marine policy on the cargo remains

insurer pays for it, and if the ship gets repaired, benefits.)
Insurer is liable for those acts of insured in good faith
o Ex. salvors fee, repairs in GF
Acceptance:
o If abandonment is proper but insurer refuses unjustly, it does
o

54

not prejudice the insured

Acceptance of the abandonment can be express or implied

Mere silence of insurer after notice is not an

acceptance
Acceptance is conclusive and cannot be revoked [except if the

ground is not factual, like the oranges case]

What if the insurer unjustly refuses to accept the

destroyed. Insured can recover 60M as insurance for expected

profit.

[100:120], so loss of 50M worth of sugar is loss of

abandonment?

The insured can sell the vessel and earn scrap value.

destroyed. Insured can recover of 20M, which is 10M for

freightage?
o Freightage earned before the loss to the insurer of the

expenses, because the insurer is presumed to be willing to

stipulated in fire or other insurance.

The prerequisites are:

1. Loss is partial

2. The property is insured for less than its total value

What is the effect?

The insurer is liable only for the difference between

Fire insurance

the amount of insurance and the value of the property.

Huh? Give an example na lang.

Vessel X was worth 1M but was insured for only

800K. It was damaged to the extent of 200K. The

incur these expenses to avoid loss.

Is a marine insurer liable for contribution expenses made by the
insured for general average loss?
o Yes.

What is the Co-insurance clause?

o It applies by default only to marine insurance. It has to be
o

expected profit.
Is a marine insurer liable for expenses attendant upon damage and
subsequent repairs?
o Yes, the insurance is liable pursuant to sue and labor

freightage
Freightage earned after the loss to the insurer of the ship

Measure of indemnity

60M in profits)
Not separately insured: Sugar being shipped is worth 100M
and has expected profit of 120M. 50M worth of sugar was

The insurer is liable for the balance.

Upon accepted abandonment, who is entitled to the earned

(Because for every 5 M of sugar it earns 6M sugar

insured can recover 160,000 which is 1/5 of 800k

(since 200K is 1/5 of 1M)

What is the difference in what the insured can recover if the profits

are separately insured and if not?

o Profits separately insured: Sugar being shipped is worth 100M

and has expected profit of 120M. 50M worth of sugar was

55

What are the requisites of alteration?

o 1. Change in the use or condition of a thing insured
o 2. Which is limited by the policy
o 3. Without consent of insurer
o 4. Through means within control of insured
o 5. Increasing the risk
What is the consequence of alteration?
o The insurer can rescind the contract
Give an example of alteration that increases the risk.
o Conversion of a bookstore to a restaurant
Give an example which does not.
o Conversion of a residential condominium into an office
condominium.
What is a hostile fire and friendly fire?

Hostile fire fire that escapes and burns in a place where it is

not supposed to
Friendly fire fire that burns in a place where it is supposed to

burn

Friendly fire can convert into hostile fire

X is seeking to recover from the insurer for soot marks

caused on the wall by a gas stove burner. Can X recover?

No. The marks were caused by friendly fire.

Does co-insurance apply to fire insurance?
o Not by law. But it is a standard clause placed by companies.
What is the rule on valuation for fire insurance (if there is none

before it was burned.

SMC had a building worth 100M, which burned.
instead

of

depreciating,

the

materials that year skyrocketed.

Exercise of reasoning faculties, consciousness, and volition of

o
o

the person.
It is the intention of the person inflicting the injury that controls.
Usual accident policy doesnt cover death or injury caused by

assault or murder. You have to pay extra to cover this.

What does accident or accidental mean?
o No technical meaning. Something that happens by chance or
fortuitously, without design or intention.
Is this the same as no fault?

No. It just distinguishes itself from intentional.

What is the rule on third party liability?
o There can be a provision allowing a third party to directly sue
o

provided in the policy)?

o The valuation must reflect depreciation suffered by the property
o

the insurer.

But the insurer is not solidarily liable; just directly

But

liable. The liability of the insurer is contractual, not

construction

quasi-delictual. The liability of the insurer is limited by

So SMC is trying to

the policy.
If there is no such provision, the contracts are separate, so the

value

of

recover insurance based on those new prices.

But the

insurer claimed SMC thus was underinsured in this case.

o

SMC said that it was not, based on the old prices. What
happens?

SMC cannot use new valuation for the amount to be

to wait for the insured to pay him.

recovered, and old prices to disclaim underinsurance.

What is the effect if the insurance gives the insurer the option to

rebuild the property instead of paying?

o This is valid. The contract is novated and it becomes a
o

contract for a piece of work.

The insurer becomes liable for quality of the work done.

The insured

recovers from the insurer.

What if the indemnity is against liability?

The insured need not pay first before proceeding

against the insurer.

Is the insurer liable even if the insured commits criminal
negligence?
o Yes. This is still accidental. What is not covered is intentional

Casualty insurance

third person cannot sue the insurer.

What if the indemnity is against actual loss or payment?

The third party cannot sue the insurer, because it has

If intentional injuries caused by the insured or a third person are

or deliberate criminal acts.

A guy was showing off his gun. A friend asked if it was loaded,
and he said no. To prove it, he pointed the gun at himself and

excepted, what does intentional mean?

56

pulled the trigger. There was a bullet. He died. Can the heirs

collect?
o HELD: Yes, because it was accidental.
o JJs viewpoint: No, because he was stupid.
Sometimes, there is a clause where the insurer will defend the case on

denial of the application. Even the taxes paid shall be

behalf of the insured in court. In a case, the insured sued the insurer

Life insurance

made liable) but because the insurer was negligent in defending the
case.

Suretyship

returned.
What is a continuing bond?
o One that will last until the end of the case. The company is
entitled to charge premiums every year.

not because of the liability clause (because the insured was not yet

Kinds:
o

another of an undertaking or obligation in favor of a third party.

Examples?
o Fidelity bond contract of insurance against loss from

Surrender value after 3 years.

2. Limited payment policy

Insured pays premium for limited period. If he outlives

the period, he does not get anything.

3. Endowment policy

Insured pays premium for specified period.

misconduct
Fidelity guaranty insurance for consideration, one agrees to

integrity, fidelity, or honesty of persons holding positions of trust

What is the nature of a suretyship agreement?
o Solidary agreement, but only to the extent of the contractual
o

paid. It will go against the surety when the obligation is not

paid or the insured absconds.
What if the bond is not accepted?
o The principal-applicant is entitled to return of the premiums
o
o

service fees, like what was spent to review the application.

What is the exception?

to him. If not, the beneficiaries receive the benefit.

4. Term insurance

Insured pays premium only once, and is insured for a

specified period. If he outlives the period, no person

amount in the bond

The court/obligee is not concerned w/n the premium has been

paid.
But not entitled to return of taxes paid (ex. DST) and other

If he

outlives the period, the face value of the policy is paid

indemnify the assured against loss arising from want of

1. Ordinary life, general life, or old line policy

Insured pays a premium every year until he dies.

What is suretyship?
o Agreement where surety guarantees the performance by

If there was fault of the insurance company, leading to

benefits from the insurance.

No cash surrender value.
N.B. kind of like life insurance policies you take before

flying commercial
5. Industrial life

Insured pays premiums weekly, or monthly, or oftener

What is the effect of death of insured through suicide?
o The insurer is only liable if the insured committed suicide after
o

the policy has been in force for a period of two years from date
of issue or last reinstatement, unless shorter period is provided

57

If the suicide was committed in a state of insanity, the insurer is

liable too, regardless of date of suicide

injury without necessity of proving fault or negligence, under

The business of insurance

paid-up capital, over the amount of liabilities, unearned

premiums, and reinsurance reserves
For a foreign firm, the excess of its admitted assets in the

Philippines excluding security deposits, over the amount of

liabilities, unearned premiums, and reinsurance reserves

Agents and brokers:
o Must be licensed

Soliciting for compensation without license

o
o

criminally liable
Rebate of premiums is also prohibited.
Can agreements regarding kickbacks be enforced?

No, they are illegal.

from the insurer, but he has to prove there was negligence or

o

Third party excludes

o Driver, etc.
o Relative by affinity/consanguinity within 2nd degree
o Employee [see qualification]
What if a provision says that final judgment is needed before

liability attaches?
o Its a void provision. If you have to wait until final judgment, it

the insurer of the vehicle he is riding in

o Else, against the insurer of the directly offending vehicle
What is the right of the insurer paying under the no-fault clause?
o It can directly claim against the owner of the offending vehicle
What if the claim exceeds the amount awarded under the no fault
clause?
o If the claim exceeds 15,000, then the insured can still claim it

Compulsory motor vehicle liability insurance

the ff conditions:
1. Indemnity shall not exceed P15,000

N.B. this value can adjust please check

o 2. Ff proof of loss is sufficient to substantiate the claim:

If theres death, death certificate

If theres injury, medical certificate

In all cases, police report

o 3. Claim is against one motor vehicle only
From whom must the insured claim against?
o If a passenger, mounting, or dismounting the vehicle, against
o

Certificate of authority from the Commissioner lasts one year

What is the margin of solvency for insurance companies?
o For a domestic firm, the excess of its admitted assets excluding

The injured third party or passenger can claim for death or

fault.
The insurer cannot ask the insured to waive the rest of the

claim as a precondition to pay under the no fault clause.

What are the important periods?
o Claim from the insurer within 6 months from accident
o Go to court within 1 year from denial of claim
Importance of a license:
o If the one recovering is the driver himself, he can recover
damages even if his license is expired. The authorized driver

will take a really long time.

What is the no fault clause?

clause does not apply to the owner.

If it is someone else, who is authorized, he must have a valid

license
What if the car is unlawfully taken and driven by a person
who is not authorized?

58

The theft clause applies, and not the authorized driver

clause
Ex. a repairman took the car out for a joyride

if services) of an enterprise, including stamped or marked

o

In general

service (including management contracts), and transfer,

assignment, or licensing of all forms of IP rights (including nono

reputation is attributable to the place

4. Industrial designs
5. Patents
6. Layout designs of integrated circuits
7. Protection of undisclosed information

Natural and legal persons can prevent information

acquired by, or used by others without their consent in

a manner contrary to honest commercial practices.
As long as:

A. It is a secret

B. It has commercial value because it is a

Rights of intellectual creator exists from moment of creation

o Even if you havent registered yet with the National Library

Who owns the copyright?

lawfully within their control from being disclosed to,

mass market computer software)

N.B. this cannot cover mass market software such as Windows

Copyright

place where a given quality, characteristic, or

applicable
What are technology transfer agreements?
o Contracts involving transfer of systematic knowledge for the
manufacture of a product, application of process, rendering of

What do intellectual property rights cover?

o 1. Copyright
o 2. Trademarks
o 3. Geographic indications

Indication identifying a good as originating in a certain

o
o
o
o

container of goods
Patent: technical solution of a problem in any field of human
activity which is new, involves an inventive step, and industrially

Intellectual Property Law

Trademark: visible sign of distinguishing goods (servicemark

secret
C. It has been subject or reasonable steps to

keep it a secret
Differentiate between copyrights, trademarks, and patents:
o Copyright: literary and artistic works which are original

One creator
Joint creators, where individual parts

Creator, heirs, assigns

Co-owned by authors

are not identifiable

Joint creators, if the joint authorship

Copyright

consists of separate and identifiable

prepared

parts
Commissioned work

Creator (although the commissioning

Audio-visual work

person owns the work)

For exhibition, producer

over

the

parts

they

For other purposes: producer, author

of

intellectual creations, protection upon creation

59

scenario,

composer,

director,

photo director, author of work

Publisher

Anonymous

translations, or adaptations (ex. Miss Saigon, from

But if the writer can be identified (ex.

Quijano de Manila is Nick Joaquin,

Employees work in regular course of

he still gives consent)

Employer

employment
Employees work, if not part of his

Employee

those whose stories he included in the compilation.

And if someone else wants to make another
compilation, he cannot use the same set of stories
since these were chosen by the first compiler; unless,

What are covered:

o Even choreography, musical compositions, drawings, paintings,

architecture, sculptures, computer etc.

Are email and letters also covered?

Yes. Any form of text is covered.

Can a dictionary be copyrighted?

A dictionary can be copyrighted. While no one has a

o
o

monopoly on words, the court held that the original

of course, he gets permission.

What is the main principle?
o To be protected it must be original.
What are not copyrightable?
o 1. Mere data, idea, procedure, system, etc. even if embodied in
o

a work
2. News of the day or miscellaneous facts amounting to press

information
3. Official text of legislative, administrative, or legal nature, and

writer used his judgment in selecting which words will

o

be used.
For DVDs?

The producer,

o
music

composer,

director

of

photography, screenwriter, author of the work on

Madame Butterfly)
What about compilations?

Yes, they are covered by the rule on derivative works.

This involves judgment of, for instance, the best

Filipino short stories. So he has to get the consent of

duties

Examples of these are dramatizations of novels,

which the movie is based, etc.

But for collecting, the producer has the right

Architect exclusive rights over the plans he makes.

Also covered by special law

You cannot use these same plans to make another

building
Are derivative works also covered by copyright?
o Yes, but you have to get the consent of the original creator.

60

their translations
4. Works of the government

But if the work will be economically exploited, need

permission of the government agency

Transfer or assignment of copyright:
o If you sell, mortgage, convey your copyright, you must register
it with the National Library to bind third parties.
o The transfer or assignment must be in writing
What if an authors work is distorted?
o Owner can object to the distortion of his work.
o Will transfer to new media distort a work?

No.
How long is the copyright?
o Lifetime of author + 50 years

o
o

What if there are several authors?

From death of last author

What if the author is anonymous?

Count 50 years from first publication (commence from

Jan 1 following the date of publication)

What if the authors identity is found out?

You change the period to his lifetime + 50

acknowledgement, or rewriting in ones own words the idea

expressed by another

BUT you cannot have a copyright over an idea. So

plagiarism does not.

Case: There was a book on grammar and styles of writing,
and it quoted actual literary works exhibiting those figures of
speech. There was infringement when another book copied

the work.
Ex. The character Charlie Brown is copyrighted. So

even the same examples.

Is intent needed for plagiarism?
o Law requires bad faith or intentionality
o But academic institutions as a matter of discipline remove this
requirement
There must be copying for there to be infringement. How do you
establish this?
o Through circumstantial evidence
o Ex. a book has a missing page 23. Another book that is similar

sporting goods cannot use Charlie Brown on their

goods. Or a bakery cannot use Cookie Monster.
Some artist connoisseurs bought Xs paintings for a cheap price.
Then they sold the paintings for a fortune when he became

copying an idea is plagiarism, but not infringement.

Must copying be substantial for plagiarism?
o No.
Because infringement requires substantial copying,
o

an entire book)
2. Derivative works
3. Public distribution or exhibition

Businesses started playing certain songs to drum

plagiarism is infringement.
Plagiarism is passing off the work of another as ones own. It
may consist of copying verbatim the work of another w/o

years
What if its work of applied art (artistic creation with

up business. Is this exploitation of the work?

Technically, this is economic exploitation of

the value of the original work is substantially diminished

Is infringement the same as plagiarism?
o No. Every act of infringement is plagiarism. Not every act of
o

utilitarian functions or incorporated in a useful article)?

25 years from making

o What about broadcast?

20 years from date of broadcast

o They are not extended by assignment
The economic rights of author need his permission for:
o 1. Reproduction or substantial reproduction (ex. photocopying
o
o

Piracy or substantial reproduction, and so much is taken that

famous. What is Xs right?

o He must get 5% of the selling price. (Sec 200 Droit de suede)
o This ensures that the artist benefits from the higher price
o This right exists as long as the copyright exists.
What is infringement?

61

is also missing page 23.

Action for infringement. Remedies?
o 1. Injunction to restrain infringement
o 2. Payment of damages
Within 4 years

But usually its hard to prove the amount lost since

infringers do not have accounts or receipts.

So

usually temperate damages are awarded.

3. Order delivery under oath of the infringing works and

tools/instruments that produced the work

Moral and exemplary damages awarded
o 4. Criminal case
When is there no infringement of copyright?
o [Limited use]
o 1. Used for the benefit of a charitable institution, or if privately
o

and for free

2. Ephemeral recordings by broadcasting organization using

o
o

dances
4. Used for judicial proceedings or giving advice

Ex. citing law book in legal opinion or memorandum to

o
o

that fact from another book.

3. Extent

Amount of work used

Infringement requires substantial copying.

But this

does not just involve quantitative, but also qualitative

Ex. Quoth the raven nevermore is just five

words but is qualitatively the heart of the E.A.

Poes The Raven

Ex. In a satirical work, you are poking fun at
another

court
5. Fair use

For criticism.

Ex. quoting portions of a book for comment

For research and private study

[Back-up]
6. Reproduction by libraries of fragile works, isolated articles in

work.

For

it

to

work,

the

viewer/listener must identify the work being

satirized.

So copying must really be

substantial.
Libraries can make photocopies (ex. the book is
fragile already ex. Maximo Kalaws The Malolos
Congress or Apolinario Mabinis books). If you only

composite works, brief portions of published work, or to

because of nature of the work

Example of a statement that can be reproduced?

Ex. simple fact that Rizal died on

December 30. Cannot claim that one stole

the camera caught a mural in the footage this is

valid use, the artist cannot demand money
[Valid purpose]
3. Used as teaching aid

Ex. using Filipino folk dance songs to teach native

writing a brief or a thesis, is this fair use?

Yes.
If one is citing portions to use for an anthology, is

this fair use?

No. This is economic exploitation

2. Nature of work

What is example of nature preventing copyright?

Trying to copyright the phone book invalid

own facilities for broadcast use

Production of works as part of current events

Ex. newscast covering ribbon cutting in an event, and

1. Purpose

If one is citing portions of a work because one is

need isolated portions of the work for a thesis or

preserve or replace a copy

o 7. One back-up copy of computer programs
Four factors to determine fair use:

research; instead of photocopying the whole book,

you can just copyright the 10 or so pages.

62

To complete a set, where it is missing one book or so,

and it cannot be procured the library can borrow a

book and photocopy it

4. Effect on the market

Patents

What can be patented?

o 1. Any technical solution to a human problem which is new,
involves an inventive step, and industrially applicable
Ex. Machine, computer, cellphone,

5. Aesthetic creations

Covered by industrial design

o 6. Against public policy
Ex. invention to help commit suicide
To patent an invention:
o 1. New
When is it not new?
1. Already available to the public anywhere in
o

product,

medicines, process, etc.

Example of process:
Developing a synthetic replacement for wood

o
o

patent non-prejudicial?
1. Disclosed by the inventor
2. Disclosed by the patent office and the
information was in an application filed by the
inventor or a third party who got the
information from the inventor but did not get

of

microorganisms
What cannot be patented?
o 1. Discoveries
Newton cannot patent the law on gravity
But he can patent inventions based on it
Ex. parachutes
o 2. Mathematical methods, scientific formulae, schemes, forms,
o

or industrial design
When is prior disclosure of the information in the
patent in the 12 months preceding application for

alcohol to prevent jamming the barrel of a

gun
2. An improvement on current machines
Ex. colored television, 3G phones
3. Microorganisms created artificially in a laboratory
Ex. those to combat oil slicks
Budapest treaty: governs the patentability

the world
o Ex. a plow
2. Prior filed or effective patent, utility model,

his consent in filing the application

3. Disclosed by third party who obtained the
information

It does not show

flash of genius
3. Industrially applicable
Something that spins perpetually. Has no industrial
use, so it cannot be patented.

63

the

mechanical skill can do it it cannot be patented

Ex. putting a block of wood over two rollers to rewind
printer ribbon is not patentable.

treatment, which is not humanitarian

Contra: machines used for treatment can be patented
4. Plant varieties, animals, etc.

from

inventor
2. Involves an inventive step
If it is useful, but it is not an invention and anyone with

or methods to do mental acts

3. Methods for treatment of animal or human bodies
If patented, patients have to pay royalties to get

directly/indirectly

The rule on invention patents: who wins?

o First to file gets the right.
o The same rule applies for industrial design
o Must be registered with intellectual property office.
What is the first-to-file rule?
o First to file first to apply wins.
o If they file the same day, they will be joint owners of the patent.
o What is the right to priority for a foreign registered patent?
If there was an earlier application for patent filed in a

registered with the Intellectual Property Office.

protected.
What is an industrial design?
o Any composition, lines, colors, etc. which form a pattern for

citizens, then one can use that date of filing in the

same date of filing in the

subsequent Filipino application

Provided, that it is filed within 12 months of earliest

making a product. Ornamental design may be copyrighted

Ex. design for jewelry, clothes, shoes, cars, tiles, etc.
Compare to: Integrated circuits electronic components of

digital equipment (ex. cars with electronic keys, elevators, etc.)

What is required for it to be registrable?
o The design must be new.
Someone copied a design for a suitcase from a
foreign catalogue. This is cannot be registered under

foreign registration and the local application expressly

claims this priority rule

What is the remedy of the actual inventor after proving in court that

the one who filed attained it through fraud?

o 1. Order patent to be cancelled OR
o 2. Substitute the actual inventor in the patent (alternative)
If two or more persons invented it?
o The patent is owned jointly
Ex. Wright brothers over flying machine
o What if it is commissioned?
Follow their agreement.
If there is none, the one who commissioned the work
o

industrial design.
Someone registered as industrial design the Y design

on jockey briefs.
How long is the term of protection for ID?
o Term of protection for industrial design is 5 years, renewable

for two consecutive terms of 5 years.

EXCEPT: period of 10 years for layout design
Period starts from first commercial exploitation anywhere in the

world
Compare patents and industrial design:
o Limitations of the right of owners of industrial design are the
same as patents, but industrial design cannot be the subject of

owns the patent.

What about employees?
If it is part of his duties, it belongs to the employer. If

it is not, he owns the patents.

Ex. an employee in the NFA invented a

machine to salvage rotten rice. It belongs to

Otherwise,

subsequent buyers or mortgagees in good faith will be

foreign country that allows same rights for Filipino

foreign country as the

Assignments in order to bind third parties must be

him because its not his job to do it.

What is the value of registration?

compulsory licensing
What is the term of a patent?
o 20 years from date of filing of application
What is infringement?
o Infringement is the making, using, or importing of the patent of
o

the product without authorization by the owner

But importation of medicines has been excluded parallel
importation is allowed (see notes below)

64

What are the grounds to cancel registration of a patent?

o 1. What is patented is not new or patentable
o 2. Patent does not disclose the invention in a manner

infringement?
o Yes, as long as its country gives Filipinos reciprocal right to do

sufficiently clear and complete for it to be carried out by a

person skilled in the art

o 3. Patent is contrary to public order or morality
Two tests to determine infringement:
o 1. Literal infringement

When you file an application for a patent, you submit a

claim explaining how the product works.

If you

compare the patented product with the claim, and it is

o

Can a foreign corporation not doing business here sue for

exactly the same, then it is literal infringement.

2. Doctrine of equivalence

If you appropriate an invention and make some

this.
Defenses against infringement?
o 1. Prescription

Action prescribes after 4 years from infringement

o 2. Patent is not new or patentable
o 3. Patent does not disclose an invention in a manner that will
make a skilled person to make that invention
o 4. Against public policy
Remedies?
o 1. Damages

If the damages cannot be readily ascertained, the

changes, but it performs substantially the same

functions, and it achieves the same results, its the

exemplary damages) so trebling and exemplary

same thing.
N.B. Having the same effect, but not proving that it
achieves it through the same means does not prove

equivalence
What is contributory infringement?
o Aside from the infringer, anyone who induces the infringer or

o
o

damages are mutually exclusive

2. Injunction
3. Destruction of infringing product and implements used to

make that product

4. Cancellation of patent if the invention is not new, patentable,
or does not disclose the invention sufficiently to make a person

provides the infringer with the component knowing that it is

specially adapted for infringing and not for any other use is an
o

court can award reasonable royalty

Court may treble the actual damages (equivalent to

infringer too.
Betamax case: the VCR was alleged as being used to pirate,

but it was proved to be usable for lawful purposes

Is an improver an infringer?
o Yes, if there is no consent from the owner of the patent.
What if there is a pending petition to cancel a patent?
o A petition for infringement may prosper, because it is still

skilled in the art to produce it

5. Criminal action against

the

infringer

for

repeated

infringement even after finality of judgment against him

Cheaper Medicines Law amendments:
o The CML provides for what medicines cannot be patented.
o If you just discovered a new form for the medicine it is not
patentable as a separate invention.
Ex. Medicine sold in liquid form, and then converted to

effective.

capsule form. It cannot be patented.

Neither if you just discover a new property, but did not add a
new chemical reagent.

65

Ex. Viagra was originally used for heart ailments, but

agreement or to third parties brought about by suits re: use of

serendipitously they discovered it can cure erectile

dysfunction.

the licensed product

[Beyond actual use]
10. Require payments of royalties for patents which are not

used
11. Restricting use of the technology even after expiration of

o
o
o

the patent
12. Require payment of patents after expiration of agreement
[Anti-adaptation]
13. Restricting R&D of the licensee which gear towards

We cannot abolish it, for being

constitutionally mandated, so it was restored, when initially

o
o

It cannot be patented again because

there was no chemical reagent added.

Voluntary licensing:
o IPL regulates technology transfers.
o There was a decree providing for regulation of technology
transfer arrangements.

omitted.
Prohibited provisions in licensing agreements:
o [Anti-competitive measures]
o 1. That the licensee must get goods, products, raw materials

adaptation/application of the technology to local context, or for

from specific sources. Then the license becomes a captive

o

market of the supplier.

2. Prohibits the use of competitive technology, and the

technology transfer agreement was not exclusive

3. Require that the technology recipient should not contest the

o
o

validity of any of the patents of the tech supplier

[Too much control]
4. The licensor can fix the sale or resale price of the products

o
o

produced under the license

5. Restricting volume and structure of production
6. Prohibit the licensee to export the product, except if it is

o
o
o

(purchase option)
8. Obligates licensee to transfer for free to the licensor the

new products, processes, or equipment

14. Preventing licensee from adapting imported technology to
local conditions or introducing innovations to it, as long as it

because some other country has exclusive contract with the

owner of the patent
[Exploitative benefit to licensor]
7. Gives licensor option to buy the product used by the licensee

9. Exempting the licensor from obligations under the

improvements or licensed obtained through the licensed

technology

does not impair the quality standards imposed by the licensor

o [Catch-basin]
o 15. Analogous cases
Law provides compulsory provisions :
o 1. Philippine Law must govern
o 2. In case of litigation, proper court in the Philippines governs
o 3. If there is arbitration, venue is Philippines or a neutral

country only

Governed by UNCITRAL rules or ICC ONLY

o 4. Licensor bears all taxes
When may the IPO grant exceptions from prohibited or mandatory

provisions?
o If there is substantial benefit for the country:

High technology content

Increase in for-ex earnings

Generate jobs
What if the agreement does not comply with the prohibited or
mandatory provisions?
o It is unenforceable

66

What is the right of the licensor and licensee?

o The licensor is not prohibited from entering into licensing

rights and anybody can make that invention. But in

agreement with a third person or exploiting the subject matter

the case of medicines, use of that for experiment

himself

UNLESS there is provision to the contrary

The licensee can exploit the subject matter of the agreement

should be allowed even if the patent has not yet

expired. You need lead time to study that medicine
(ex. 3 years), so the moment the patent expires, they

during the whole term

What are rules on the rights of the owner of the patent?
o 1. For patented products: restrain, prohibit, and prevent

the product
2. For patented processes: restrain, prohibit, and prevent
unauthorized

persons

from

using

the

process

safety, etc. requires it

Ex. if there is public health need for a medicine and

product obtained directly/indirectly from the process

What are the limits on these patent rights i.e. when can the owner

the demand is not fulfilled by the supply, the

of the patent not claim the rights above?

o 1. When product has been put on the market by the patent

able to use the product. So the old rule that you can

buy an IBM product but you cannot use it unless you

used anywhere in the world. Ex. it was registered in

the US and the inventor allows it to be used

(Of

o
o
o

course you must buy the patented medicine)

2. Charitable purpose
3. Valid parallel importation
4. Where the act is done privately, for non-commercial

purposes
5. Used for educational/scientific purposes

Supreme Court
8. Invention is used in a ship, vessel, craft, or land vehicle of
another country entering Philippine territory temporarily or

pay a royalty is not allowed.

The moment a patented medicine is allowed to be

elsewhere, automatically you can use it here.

government can import it

If a person is allowed to use it for these needs, the
use is non-exclusive (so others can use it too)

This use can only be enjoined by the

owner or with his consent

If you bought the patented product, you should be

medical professional, for individual cases

7. Government or a 3rd person authorized by government may
exploit an invention when public interest, national security,

or

manufacturing, dealing with, using, selling, or importing any

will be ready to produce that medicine.

6. Act is to prepare a medicine in accordance with prescription
or acts concerning the medicine so prepared, by a pharmacy or

unauthorized persons from making, using, selling, or importing

o

Once a patent expires, the owner loses his exclusive

accidentally

It must be exclusively used for the vessel

What is the prior user rule?
o When there is a prior user in GF of the invention or has
undertaken serious preparations to do so, before the filing or
priority date of the application by another, the prior user can
keep on using the invention even when the patent is granted to
o

another.
The right of the prior user may only be transferred along with
the enterprise or business, and not separately.

67

When can the government use the invention even without prior

agreement by the patent owner (compulsory licensing)?

o 1. National emergency
o 2. Public interest/national security, health, development of vital

national economy
3. Judicial or administrative determination that the exploitation

o
o

of the patent has been used for anti-competitive purposes

4. Has not satisfied the demands of the market (for medicine)
5. Public non-commercial use of the patent with no satisfactory

reason
6. Where the demand for patented medicine is not being met,

1. Anything fanciful can be used as a trademark. If a word is

arbitrary and fanciful, it is entitled to immediate protection.

Ex. selecta (Spanish word for selected), maiden

form bra, Big Mac, Citi

2. Secondary meaning is only required if it is originally not
trademarkable, but after long use, it has acquired another

and on reasonable terms determined by the Sec. of Health

What is the effect/role of compulsory licensing?
o N.B. Most cases involve medicine.
o Compulsory license in medicine usually is done to decrease

meaning
What cannot be registered?
o [public policy]
o 1. Immoral
o 2. Public order or morality
o [same or misleading]
o 1. Identical with a registered mark

A. Referring to same goods/services or closely related

goods/services

Ex. Ang Tibay is registered for shoes and

prices through competition

Petition to compulsory license:
o Can only be filed after four years from filing of the application of

slippers. Ang Tibay cannot be registered for

pants and shirts, because theyre both

the patent, or three years from the date the patent, whichever

haberdashery products and its reasonable to

ends later must fall within both periods

o Medicines anytime
What are the terms of the licensing agreement?
o Usually parties are given time to negotiate terms and

o
o

that could cause confusion (see tests below)

C. Too similar to a trademark known around the world
D. Identical to a translation of a foreign trademark

Ex. Promesa soaps becomes promise

2. Deceptive
3. Likely to mislead public publicly known symbol

Ex. red/white/blue barbershop pole

[relating to persons]
4. May disparage or falsely create belief that it is related to a

o
o

person living or dead

5. With signature of living individual unless with his consent
6. Name of deceased president during lifetime of the widow,

conditions of compulsory license, but then the Director will step

in after
o
o

Trademarks

assume they expanded.

B. Not exactly identical but one is a colorable imitation

What is a trademark?
o Visible sign capable of distinguishing goods/services/enterprise

Ex. including Coca-Cola bottle, which was specially

designed
What can be a trademark?

except with the latters consent

68

o
o
o
o
o
o

[generic symbols]
7. National symbol
8. Flag of Philippines or other foreign country
9. Uses geographical indicator known for that product

Ex. Isabella tobacco

10. Signs that are customary or usual in everyday language
11. Signs that are used to designate the kind or quality of the

product

Ex. Shoes or Funeral Parlor

o 12. Over a color or shape
o 13. Emblem of the United Nations (under special law)
What if the applicant is registering a similar trademark for closely

targeted

to

physicians? Illiterate household helpers?)

Ex. Physicians are less likely to be confused
2. Kind of product, since more expensive

purchased with great care.

Examples:

Ex. Fruit of Eve was challenged by Fruit of

the Loom. Fruit of Eve was rectangular with
concave sides, and just had a green apple.
Fruit of Loom was circular, and had a red

products)

Ex. Wonder Beauty Soap Wonder Laundry Soap

o Examples of not closely related goods (VALID):

Ex. Esso Oil =/= Esso Cigarettes

Ex. Bruth briefs =/= Bruth soaps

Ex. cigarettes =/= liquor

Ex. Jollibee sandals =/= Jollibee restaurant

What are the tests to determine if two products are confusingly

similar?
o 1. Dominance test

This looks past trivial differences

This applies if a questioned TM contained the main

likely result
Deception need not be actually proved
Ex. Both Paddocks and Dockers jeans had the words

apple, with bananas, and grapes.

Ex. Lorenzana Patis had a carp.

patis had a bangus and had the same font.

Ex. Lard was sold with a big Roman V.

Another used III

Ex. Black Cat Tea and Black Dog Tea
Ex. Master Roast and Famous Master, since

Lorenz

the dominant word is master

What if the TM is internationally well-known?
o It can be protected even if not sold here, whether or not
o

pictures of the older TM, such that confusion would

it

products will have more prudent buyers

o Ordinary household items are not

related goods?
o The prior trademark will be protected.
o Examples of closely related goods (INVALID):

Ex. X-7 Soap X-7 Pomade (both bathroom

2. Holistic test

Consider the TMs in their entirety

What must be considered?

1. Relevant market (is

registered
Passage of time will not bar action to protect that international

trademark
What is the rule on secondary meanings?
o Trademarks which originally may not be registrable may be
registered if it already obtained a second meaning.

Ex. California manufacturing

Not just the State but the manufacturer of

as the dominant design, and not the eagle, so its not

confusingly similar to Levis

Ladys Choice mayonnaise

69

Ex. Some colors or shapes

What are the requirements?

1. The use of such as a trademark must be exclusive

2. The name has been used for at least 5 years (long

became

period of time, according to law)

Is prior use necessary to register a trademark?
o No. Prior use is no longer a requirement to register a trademark
When must a registered trademark be used?
o Within 3 years from registration
o What if you did not use it?

If you did not use it, you must file an affidavit of non-

use and explain why. Otherwise, it will be cancelled.

What is the ONLY acceptable reason?

Force majeure

N.B. other reasons like poor economy are invalid

How long is the duration of registration?
o 10 years, with indefinite renewal for similar periods
What if someone just imports or distributes a foreign product?
o He cannot register the TM. He does not own it.
Can a TM be assigned or transferred?
o Yes. A trademark may be assigned or transferred without
o

generic,

cellophane,

Thermos bottle)
2. Abandonment failure to use for

uninterrupted period of 3 years

3. Misrepresentation of source of

goods
N.B. compare this with periods for actions under copyright and

patent which are generally both 4 years

When is there infringement of trademark?
o Use, copying, etc.
o Includes preparatory steps to carry out the sale of goods

This applies to those who make fake shirts. They

make the shirts first, without attaching the label. They
will only sell the label when they are about the sell the
shirts. So this way, even if they havent attached the
labels, the manufacturer can be held liable for
o

transferring the business.

What is the principle in registration?
o The law adopts the Torrens principle. If the assignment is to

bind third parties, it must be registered in the IPO.

o Otherwise a third party may buy it in GF.
What are the inter partes cases (contested cases before the IPO)?
o 1. Opposition against registration of mark

Within 30 days after publication

Ground: registration will damage the

o

Grounds:
o 1. Mark became generic (aspirin

oppositor
2. Petition to cancel the registration of mark

A. Within 5 years of registration

Ground: confusingly similar

B. Any time

infringement.
Copying, counterfeiting, making colorable imitations of TMs

and using it for labels, packages, etc.

Three elements to prove infringement?
o 1. The TM is valid
o 2. The plaintiff owns it
o 3. There is likelihood of confusion due to use of defendant
When is registration not needed for an action?
o 1. For unfair competition

A. Passing off a product format of another

B. Giving goods the appearance of another

o 2. False designation of origin
The law says the right is acquired from time of registration. When
is this counted?
o From filing of the date of application

70

Or from the priority date.

This is when there is actual

registration in other countries covered by the reciprocity rule.

Types of confusion?
o 1. Confusion of goods
o 2. Confusion of business

Goods are different but the product can be reasonably

Ex. moving vehicles, shares of stock, machinery

placed by persons on property of another, etc.

Can personal property considered real property

assumed to originate form the plaintiff, deceiving the

under the NCC by subject to CM?

Yes.
What is the status of standing crops?

They are real property under the NCC but

public

personal property under CM Law, so it can

Chattel Mortgage

the NCC may be personal property under

What are the requisites of Chattel Mortgage?

o 1. Constituted to provide security for a principal obligation

If the principal obligation fails, there can be no CM

o 2. The mortgagor must be the absolute owner of the property

special law.
The parties considered the house as personal
property, and subjected it to CM.

parties. But this does not bind third parties,

because it will not occur to third parties to
check with the CM registry if real property is

signed the CM mortgage, the car hasnt been

delivered to him yet.

HELD: Cannot CM the car because delivery

is needed to transfer ownership.

Seller sold an oil tanker, and seller has not been fully
paid.

treated as personal.
5. Mortgage must be registered

If the residence of the mortgagor and the property are

in different places, they must be registered in both
places

They agreed the buyer will not register the

property until there has been full payment. The buyer

and the mortgagor lives in Pasig. It must be

the mortgagee was in GF and the buyer was

Ex. Shares of stock have situs in the

principal office of the corporation (ex. Makati)

breached the agreement and registered it.

HELD: The registration was valid, because

Does it bind

them and third parties?

By estoppel this classification binds the

mortgaged

X bought a car and placed it up for CM. But when he

be chattel mortgaged.
Property which may be real property under

the absolute owner by that time anyway.

3. Must have free disposal of the property

Trustee cannot CM property because he has no free

registered in both.
Register with appropriate specialized agency:

If Motor Vehicle, with LTO, aircraft, Civil

Aeronatics, ships, Maritime office, copyright,

disposal
4. Must be personal property

71

National Library, trademark, IPO.

What if it is not registered?

Valid between the parties, but not against

Someone mortgaged his car and it was completely wrecked,

collected money from Insurance, and bought a new car, does the

third persons.
6. Affidavit of GF

What if there is no affidavit of GF?

Binds the parties, but not third parties.

But if a third party actually knows of the execution of a

CM cover the new car?

o No. Must constitute a new CM.
Who owns the property under CM? Can he sell it?
o Still the mortgagor. He can sell the property since he retains

CM and the CM was done in good faith, it will bind the

third party.
Can the CM extend to improvements and future property?
o No.
o Contra: In REM, the mortgage extends to improvements

wins?
o

building is built, the REM extends on it.

There was a CM over machines in a factory. But then more

machines were introduced later on. Does the CM extend

property so the parties are estopped and cannot apply

the REM principle.
Can a CM secure future loans or indebtedness?
o No. Cannot constitute CM to provide security for future
indebtedness, whereas REM can be used to do this.

The

provision that it will cover future loans is void.

You can amend the CM over the first loan to cover the

equity of redemption and not the property itself.

If the mortgagor defaults, can the mortgagee appropriate the

sell it.
Is a private sale of the property to foreclose valid?
o Yes.
To foreclose, what is needed?
o 1. Publication in the newspaper is not needed,
o 2. Notice must be posted in two or more public places, where
the mortgagee resides or where the property is located at least

new one if the first loan still exists.

If the first loan has been extinguished, you constitute

a new CM.
Because here, the parties have to swear that they constituted it

to secure a valid obligation and not to defraud creditors.

You cannot swear by an obligation that does not exist yet.

The creditor must respect the CM. He can only garnish on the

property?
o No. This is pactum commissorium which is invalid.
o Can the mortgagee take the property?

Not forcibly. He can file for replevin to get it, and then

over the new improvements?

No. Because the machines were treated as personal

something that has been mortgaged under CM Law.

If a personal property was mortgaged and the mortgagor has a
judgment creditor who levied on the property mortgaged, who

introduced on the real property by the mortgagor.

Ex. REM over land with one property, and another

o

ownership.
The sale is valid, but he can be liable under the RPC for selling

o
o

72

10 days before the sale.

3. Notice to mortgagor
What if there is a stipulation as to where the property must

be sold?

It must be followed
What if the proceeds of the foreclosure exceed the amount owed?
o Return to the mortgagor.
o If there is deficiency, the E can run after mortgagor for it.

Exception?

Art 1484.

formula on how to increase the interest rate. This will

Sale of property payable in installment

basis. If sale was done to cover for the balance of the

make the formula valid.

What if the foreclosure was done in another place as opposed to
what was stipulated in the agreement?
o Valid. If there were no words of exclusivity, there is waiver of

price, if the foreclosure sale results in deficiency, the E

can no longer sue for payment of the deficiency.

venue (Rule 4 of ROC).

What is the notice requirement?
o 1. Notice must be published once a week for 3 consecutive

Extrajudicial foreclosure of REM

weeks in a newspaper of general circulation

N.B. If you publish it on Monday the first week, it must

ALWAYS be Monday the next two weeks.

What is required before property can be foreclosed extrajudicially?

o There must be stipulation giving the mortgagee a SPA to

foreclose it extra-judicially.
If a loan is overdue, what will not preclude foreclosure of the REM?
o 1. Allegations that the mortgagee did not furnish the mortgagor
an updated statement of account
o 2. Negotiation for restructuring of the loan
What is the rule on interest rates?
o While the ceiling rates on interests have been lifted by the

Wednesday or Friday.
2. It must be posted in 3 public places where the property is

located
Is personal notice to the mortgagor needed? What if there

o
o

monetary board, it doesnt mean the parties can stipulate on

any rate of interest. If it is unconscionable, it will be void.

Ex. 5% a month or 6% a month are contra bonus

o

mores for being unconscionable.

What is the effect of this on the foreclosure?

The foreclosure is thus void, because you have to first

is failure to do so?

No need. No effect.
What if there was no posting but there was publishing?

It is sufficient.
What if the sale is postponed?

You must give notices again through posting and

publishing.
What are the exceptions?

1. Sale not finished that day and will continue the next

determine the amount that is properly due to the

day
2. Waiver (see below What if mortgagor talks to the

bank)
What if there are clerical errors in spelling the name of the

mortgagor?

If the property is properly described, then it is valid.

But what if the notice puts the wrong date when the

mortgagee.
What if the provision says the bank can unilaterally
increase the interest?

The provision is void, violating mutuality of contracts

mortgage was executed?

in the NCC. The parties have to agree in advance a

73

Not

This made the foreclosure invalid because there was

after filing the case, the redemption price was

no mortgage constituted on that date

What if the mortgagor talks to the bank before foreclosure

determined when before it was unknown, he must

promising to pay the loan, and the bank makes him sign a waiver

of republication, is it valid?
o Yes.
o While commentators have said that third parties who want to

buy the property will be prejudiced since they did not know, this
property.
Can the foreclosure be done by a Notary Public and not a sheriff?
o Yes, although the courts now require the payment of filing fees

redeem. If the property is covered by Torrens title, count from

for foreclosure even if it is a notary public who does it. The

soon as the loan is covered. So if a subdivision developer

when the deed of sale was registered whichever comes first.

In the ROC, if real property is sold on execution you have to pay

1% per month for interest. What if the lender-mortgagee is a bank?

o The rate stipulated on the loan document governs.
What if there are two loans falling due on two dates, where one
was due, and the second fell due during redemption?
o The R must pay for BOTH loans; otherwise the first redemption

mortgaged all the lots, they can be sold in EJ foreclosure lump

sum.
What happens to the excess or deficiency after foreclosure?
o Excess goes to mortgagor
o Mortgagee can sue for payment of deficiency
Is there a right to redemption?
o Yes.
How do you redeem?
o 1. Tender the correct redemption price, or
o 2. File a case to compel delivery of property for redemption

is not valid.
What can the buyer of the foreclosed property do?
o He can ask for a writ of possession. Granting this is ministerial
and non-litigious. This is ex parte and there is no need to
o

(tantamount to tender of payment)

BUT this doctrine is based on the premise that the

redemption price is not settled.

registration of the sale.

If the mortgagor is an artificial person like a corporation, the
redemption period is three months from date of sale or the date

judge also has to confirm it after.

To what extent does Rule 39 apply to EJ foreclosure of mortgage?
o Only to the extent of redemption.
o But not for other provisions, such as the requirement in Rule 39
that the sheriff must sell the properties one by one and stop as

redeem and the bank-mortgagee did not object.

Under the Banking Law, i.e. the mortgagee is a bank, what is
provided?
o If the mortgagor is a natural person, he has one year to

waiver is valid because it is for the benefit of the owner of the

then tender the redemption price.

Can the parties agree to extend the redemption period?
o Yes, this is valid.
o Ex. In a case, the sheriff placed that there are 2 years to

require presentation of evidence.

He must just allege that there was a valid mortgage, default,

foreclosure sale, and the sale was according to Act 3135.

When can you ask for a writ of possession?
o Either during redemption period or after lapse of redemption
period.

If the redemption

price is not disputed, this doctrine does not apply. If

74

Does the rule in Rule 39 where enforcement of decision is

through motion for 5 years and independent action til 10

mortgagor, it cannot be enforced against him because

years apply here?

No. This right is imprescriptible.

What if you enter into a new contract ex. a K of lease?

That new contract will govern the relationship of the

it violates due process. It violates their rights without

prior hearing.

Ex. A third party claims that he bought the

parties. You cannot file for writ of possession you

o

file for ejectment.

To whom can the writ of possession not be enforced

property prior to it being mortgaged.

How can the mortgagor question the validity of foreclosure?
o Within 30 days from when buyer takes possession, the
mortgagor can file a petition to annul the foreclosure sale.

N.B. if he fails to file the petition within the 30 day

against?

The writ of possession cannot be enforced against a

third party who is in possession of the land in GF and

case has to be ejectment.

What if the owner-mortgagor of the property has a lessee

mortgagor can file a case to litigate to question the

on the property?

A lessee stands in privity with the owner of the

possession.
But the writ of possession cannot be enforced
against the lessee when:

1. The lease hasnt expired and it is

annotated on the title

2. The lease is not annotated but the buyer

has actual knowledge

3. House Rental Law: if the property of the

N.B. for other aspects of CM Law and REM Law, see Civil Law and
Remedial Law notes.

Truth in Lending Act

Law, the buyer must honor the lease even if

deed of sale even if the owners duplicate was not given.

Otherwise, the owner can prevent mortgage from being
effective just by withholding the owners duplicate.

apartment is covered by the House Rental

it is not registered.

validity of foreclosure (ordinary civil case)

What if the owners duplicate remained with the mortgagor (since
he failed to surrender it), and there was failure to register?
o The court should order the register of deeds to annotate the

property so the lessee has to respect the writ of

period, it will be barred.

But what if possession hasnt been delivered yet (since
you count the period from there)?

When no writ of possession has yet been issued, the

is not in privity with the parties in the mortgage. The

o

If the rights of the third party are adverse against the

He cannot evict the

tenant until the expiration of the contract

What if a third partys rights are adverse against the

owner-mortgagor?

What is the purpose of the law?

o To protect citizens from lack of awareness as to true cost of
credit by assuring full disclosure of the cost

75

To prevent uninformed use of credit to the detriment of national

economy
What is the basic obligation of the lender?
o The debtor must be informed how much it is costing him to
borrow money the charges he has to pay
Which creditors are covered?
o 1. Any person engaged in the business of extending credit,
o

who requires a finance charge

2. Any person engaged in the business of loaning or selling

o
o

1. The credit agreement is still binding

2. The borrower is entitled to be paid double the finance

charges (not less than 100 pesos, not more than 2,000 pesos)
3. When the debtor sues the creditor for payment of finance

charges, he can get attys fees.

4. The creditor who did not comply with the law may be

prosecuted criminally
Manual of regulation for banks
o If a bank lends more than P500,000, it can charge a handling

property/services on a time, credit, or installment basis (either

as principal or agent), who requires a finance charge

What does the Act cover?
o 1. Any loan, mortgage, deed of trust, advance, or discount
o 2. Any contract to sell, contract of sale property or services, on
o
o
o

installment basis;
3. Lease purchase contract with financing company
4. Hire, bailment, lease of property
5. Option, demand, lien, pledge, or claim against property or

money
6. Purchase, acquisition of, or any credit upon the security of

Truth in Lending Act, the bank cannot charge the handling fee
The statement given did not mention that the bank can increase
the penalty in case of default. Can the bank charge this increase in
a penalty?
o No.

Anti Money Laundering Act

any obligation arising from any of the foregoing

What must be indicated?
o Cash price
o How much downpayment will go to the principal, and the

interest
o Total amount to be financed + finance charges

Percentage of finance charges vis--vis total amount

Central bank prescribed a form to be used by banks to give this

What is money laundering?

o Crime where proceeds of illegal activity are transacted, to
make them appear to have originated from legitimate sources
Who are guilty?
o 1. Person who transacts the money coming from the illegal
o

information. But this law is not limited to financial institutions. This law

activity
2. He who knows that the money came from an illegal source,
but performs acts to facilitate the transaction

Ex. Bank officer who helps open bank account, with

even covers private persons (5-6 lending, for instance).

o What if the form is not given to the debtor?

Need not follow the exact form, as long as the

fee.
If that was not disclosed in the statement to comply with the

instrument reveals the pertinent information

Effects of failure to comply?

76

knowledge that the funds came from kidnapping

3. Person who does not comply with disclosure requirements of

law
Who are covered?

o
o
o

1. Banks
2. Quasi-banks
3. Financing institutions (ex. financing companies, pawnshops,
investment houses, trust companies, institutions supervised by
Central

Bank, insurance companies,

securities dealers,

brokers, investment houses, investment managers, mutual

funds, common trust funds, pre-need companies, foreign
o

exchange corporations, money changers)

4. Those engaged in exchange of valuable property like

jewelry, paintings, etc.

Does it cover real estate companies?
o NO. So if someone uses illegally obtained money to buy land,
the real estate company is not required to comply with AMLA.
What are the two kinds of transactions?
o 1. Covered transactions

More than P500,000 or its equivalent on one banking

day
Automatically, these have to be reported although

legitimate
2. Suspicious transactions

The amount is irrelevant, even if less than P500,000.

If it is suspicious, it mus be reported.

Ex. there is no underlying legal or trade obligation or

justification.
Ex. the transaction is structured to avoid reporting (for
instance, instead of remitting an amount more than

1. Kidnap for ransom

2.Violation of dangerous drugs law
3. Piracy
4. Hijacking, destructive arson, murder

(N.B. this is the HK-MAD enumeration + piracy)

o [Obtaining property illegally]
o 1. Robbery and extortion
o 2. Jueteng and illegal betting on jai alai
o 3. Qualified theft
o 4. Swindling
o 5. Smuggling
o [Commercial violations]
o 1. Violation of e-commerce law
o 2. Securities regulation code violation
What is the composition of the AMLC?
o 1. Governor of Bangko Sentral, 2. Chairman of SEC, 3.
o
o
o
o

P500,000, everyday he remits P499,999.)

The underlying crimes whose commission will give rise to violation
of AMLA:
o [By public officers]
o 1. Violation of Graft and corrupt practices
o 2. Plunder
o [Grave crimes with property implications]

Insurance Commissioner
How are decisions reached?
o Decisions must be unanimous (all 3 of them)
Powers of the AMLC?
o 1. Implement measures to prevent AML
o 2. Coordinate with foreign countries for enforcement of AML
o 3. Investigate transactions
o 4. Recommend for prosecution
o 5. Apply for order, ex parte, for freezing accounts (with the CA)
o 6. Could institute forfeiture proceedings
o 7. Enforce sanctions for violations
What are duties of covered institutions?
o Establish true identities of their clients
o Are anonymous accounts allowed?

No. The Bank must know who actually owns the

account, even if its just numbers indicated.
What is the effect of compliance with required reporting under this
law?

77

Transaction is removed from coverage of law on secrecy of

bank deposits
The officers who make the reports in GF are given immunity

from prosecution.
Petition for ex-parte order to freeze an account:
o Filed with the CA
o The freeze order is valid for 20 days.

But it may extend the period

o Contra: in the case of inquiring into deposits or investments, it

If considered deposit liabilities upon order of the

PDIC, may be covered also

Deposits of a branch of a domestic bank abroad (ex. BPI
has a branch abroad) what is the rule?

Not required to be insured.

But the domestic bank may ask the PDIC to insure the

is not ex parte so the court has to conduct a hearing first.

General rule: The AMLC must get court order to investigate any
deposit in accordance with this law.

deposits of the branches abroad.

What banking transactions are not covered by insurance?
o 1. Investment products like bonds, securities, trust receipts
o 2. Deposit accounts that are unfunded

Ex. Issued a check that bounced, so he had no

Then they have to establish

money. Then the bank closed. Cannot recover from

probable cause.
o When is court order not required to inquire?

In case of: kidnapping, DDL, hijacking, destructive

PDIC.
o 3. Deposits from unsafe/unsound bank practices
o 4. Proceeds from money laundering
o 5. Contents of safety deposit box
What is the maximum coverage?
o P500,000
What is the period to claim?
o Within 2 years from actual takeover by the receiver
Somebody has a current account, saving accounts, time deposits,

arson, and murder (HK-MAD)

Contrast with powers of the BSP?
o The BSP is authorized to inquire into any deposit or investment
o

to ensure that the Bank is complying with this law.

It may be done in accordance with its regular annual

inspection, or through special examination.

So the Monetary Board can inspect the accounts even without

and if you add it all up, the value exceeds P500000. If the bank

the order.

Phil. Deposit Insurance Corporation Law

closes, how much can he collect?

o P500000 only. You add it up. Its not per account.
What is the rule to determine what is covered?
o Add up all deposits altogether. But if he has another deposit in
another capacity (ex. guardian of minor, administrator of
estate), this is a different capacity so its another P500K. (Per

What is the mandatory coverage of the PDIC?

o The law requires that checking accounts, savings accounts,
o
o

and time deposits must be insured with the PDIC

Does the PDIC law cover trust accounts?

No. Remember this. It applies to deposits.

What about other obligations of the banks?

capacity rule)
X has a separate account and a joint account (X and/or Y).
What is the rule?

Two separate accounts, one for the separate account,

one for the joint account.

78

The rule is that joint accounts are insured separately

from any individually-owned account.

What if there are two or more depositors, such as in a joint

account?
o The P500K will be divided among them unless there is a
o

different agreement.
What if the account is held jointly by a juridical entity and

just officers.
If you have a person with several joint accounts, then what is the
total he can get?
o Add all joint accounts together, and subject to the ceiling
o Ex. three separate joint accounts, with A, B, and with C, then

relative.
What is the period to pay?
o It must be within 120 days from closure of the bank. If beyond

this, there is no payment, it is a criminal act.

Decisions of PDIC are FINAL. What is the remedy?
o Certiorari.

Corporation Law

his share will be added up and the shares on the three

accounts cannot exceed P500K

What if the depositor owes the bank too?
o There will be set-off with what he collects.
Two ways for PDIC to comply:
o 1. Hand over the money to the depositor
o 2. Open another account in another bank in the name of the

Corporation, defined

depositor
What is the right of PDIC after payment?
o There is subrogation, so in liquidation of the bank, the PDIC

It is an artificial person, created by law.

o What is the implication?

It cannot recover moral damages since it cannot

can represent the depositor.

What if there is monetary or financial instability in the banking
system?
o If established by the Monetary Board, the PDIC directors may
adjust the maximum coverage. But they must be unanimous

of the bank.
Ex. He has 1M so he transfers P500K to the name of his

corporation. The natural persons are assumed to be

the bank.
Can a person split his deposits or create fictitious accounts?
o No. It is illegal to create fictitious deposit accounts or split
deposits to circumvent the maximum liability in case of closure

one or more natural persons?

It is presumed that the deposit entirely belongs to the

He cannot collect unless his name is recorded in the books of

and it will have to be approved by the President.

What if somebody owns a negotiable certificate and it is payable to

reputation.
It has the right of succession. What is this?
o Stockholders may come and go but its personality remains the

same
Cannot perform an act unless authorized by law.
o As opposed to natural persons who can do anything as long as

bearer?

79

experience wounded feelings, mental anguish, etc.

It can, however, recover damages for besmirched

not prohibited by law

Does a defective incorporation result into partnership?

No. A partnership requires delectus personarum, which is not

always existent in a corporation, so it is not a fall back.

But the liability of persons who form a defective corporation

they are liable as partners.

Those who merely subscribed are not liable as such.

It has separate juridical personality.

Implications?
o The corporate property does not belong to SHs.

corporation to recover property.

Case: A SH sued to annul foreclosure of a mortgage.

Nationality of corporations

He wanted to annotate a notice lis pendens. This was

Primary test:
o Place of incorporation test is the principal doctrine: country

against

corporation,

or

against property of the SHs, and vice versa.

o A SH cannot be sued if the corporation breaches its contract.
The purpose of the law is justice and fairness. Therefore, when the law
not allow that. So there is piercing the veil of corporate fiction.
When is there piercing?
o 1. If it is used to commit fraud, violate the law, etc. (fraud
cases)

Requisites for this to apply?

1. Complete control, not just of stocks but

change it?
o XYZ and ABC both own 50% of the corporation. ABC is 50%
XYZ is 60% Filipino and 40%

foreign. What are the implications?

XYZ makes it 30% Filipino and 20% foreign. ABC

makes it 25% and 25%. So it becomes 55% Filipino

government

sequestration order against the corporation.

If there is a judgment against corporation, it cannot be enforced

creates a device like the corporate vehicle, and it is abused, the law will

private

corporation is determined by control test

o 4. Grandfather rule
What is the Grandfather rule in corporations and how did the FIA

Filipino and 50% foreign.

not allowed because he was just a SH.

Case: SH cannot question the search warrant filed by
the

under whose laws it was organized

When does the control test also apply in addition to the place of
incorporation test?
o 1. Exploitation of natural resources
o 2. Operating public utilities, mass media, advertising
o 3. War-time test

During war time, the nationality of a

The SHs

cannot recover property or intervene in a case of the

and 45% foreign.

How did the foreign investments act change this rule?
o XYZ becomes 100% Filipino because it is at least 60% Filipino.

also policy and business practice

2. Control used to commit fraud or wrong

3. Proximately causes injury or loss

Case: There was a tax imposed on the sale of cars of
a corporation. This companys 95% owner would sell
the cars exclusively to the second corporation, owned
95% of his wife, for a very cheap price, and the wifes

So XYZ contributes full 50% Filipino ownership, added to

corporation sells to the public. This was tax fraud and

ABCs 25% = the corporation is 75% Filipino and is thus

there was piercing.

qualified to own land.

Corporate juridical personality

80

2. In the internal dealings, if the SHs show that they are not

holdings of silver. Merrill-Lynch NY delayed it, and by the time

treating the corporation as a separate juridical personality

it was sold, the price of silver plummeted. The client sued both

(alter ego cases)

The corporation is only a conduit or alter ego of the

M-L Philippines and M-L NY. MLP said the contract was with

controlling SH.
Here, no fraudulent intent but there is systemic

so it cannot be sued. HELD: MLNY earns business in the

MLNY. MLNY said it was not doing business in the Philippines

disregard for separate juridical personality, and so

third persons could not be expected to be bound by

Philippines but circumvents it through MLP. So it was pierced.

In piercing cases, how can an officer be held liable while still
respecting the due process clause?
o The general rule is that a judgment cannot bind a person not

such
Ex. there was a controlling SH where she gave four

impleaded in a case. Check if the officers were actually given

minor employees 1 share each, and had the four

endorse the certificates in blank to her.

the chance to be apprised and be involved in the defense of

The

controlling SH also confused her own funds with the

problem. When the corporation however has ceased to exist

corporations. There were no meetings held, etc.

Is mere control of a corporation sufficient to pierce?
o No. It must be control plus something else.
o If a holding company is exercising control over management of

already it has been held as an exception to the rule that an

a subsidiary this is in itself is not enough. The management

must be control for the purpose of committing fraud.

Against whom can you invoke this rule against?
o You can invoke this only against the majority SHs. You cannot

the act
Who is this proved?

1. Corporation issued a resolution

2. Corporation took advantage of the act

What is the corporations liability for criminal acts?
o An officer may be held personally liable for the crime per se if
o

The

there is a law expressly making the person liable for the

corporation cannot invoke it for its favor.

Ex. A SH sued on behalf of a corporation, claiming that since

corporations criminal offense

he was the controlling SH, the veil must be pierced. INVALID

officer must be impleaded under AC Ransom.

What is the corporations liability for torts?
o Corporation liable for a tortuous act by an officer or agent only
when the corporation has expressly directed the commission of

invoke it against minority SHs.

Can the corporation use piercing for its favor?
o No. The underlying basis for piercing is that the separate
juridical personality is being used to commit fraud.

the case.
If the officers were sued in their official capacity, there is no

Capital Structure

cannot use piercing for the corporations favor.

Piercing can apply even for affiliate companies:
o Ex. Merrill-Lynch Phils. was organized. The AOI said primary

purpose is to transmit orders of customers if you want to play

the stock market abroad. A client placed an order to sell his

81

What is needed to form a corporation?

o 5-15 incorporators

Majority are residents

incorporator.
What is the maximum corporate life?
o 50 years, extendible for additional periods of 50 years
o You can only extend in the last five years of its corporate
existence
Minimum required paid up capital?
o Generally, none

Except for banks,

o
o
o

Only natural persons

At least one share each

Can a corporation be a subscriber?

Yes. A corporation can be a subscriber but not an

subscribed, and 25% of the subscription must be paid

What if 5 natural persons held 1 share each and the rest of
the shares are held by a holding company? Is this valid?

Yes. While a corporation cannot be an incorporator, it

public

utilities,

can be a subscriber. You count the subscription of the

insurance

companies, etc.
For all, at least 25% of the authorized shares must be

subscribed
At least 25% of those must be paid.

Minimum paid-up is P5000.

Must everyone pay for 25% of their subscriptions?

It is not required that everyone must pay 25%.

Someone can pay less, although one paid 100%.

You just have to pay the 25%, total.

A corporation may be stock or non-stock (NS).
o Stock:

1. Must have shares and

2. Must be authorized to declare dividends

So country clubs are NS because they

o

o Corporators: those who compose the corporation

o Incorporators: sign the AOI
o SHs: for stock corporation
o Members: for NS
What is the 25-25 rule?
o At least 25% of the authorized capital stock must be

corporation to see whether the 25-25 rule is met.

Classification of shares:
o Generally, broad discretion.
o Shares are presumed to be equal, so unless provided
otherwise, they get same voting rights, dividends.
What are exceptions to this general rule?
o 1. Shares must not be denied voting rights unless:

A. Preferred

B. Redeemable
o 2. Banks, trust companies, insurance companies, etc. are not

cannot declare dividends

A government corporation is governed by its own special Law.

allowed to issue no-par-value shares.

Because they need capital.

3. Preferred shares must be par value shares.

What are preferred shares as to assets?

Priority in distribution of assets in case of

But the Corporation Code is suppletory to its charters.

So there can be no amendment of the Special Law

authorizing that there be less than 5 directors

liquidation
Can preferred shares be given preference over
creditors?

No,

because the Corporation Code is still suppletorily

applicable.

liquidation
What are preferred shares as to dividends?

Priority in distribution of dividends in case of

because

Doctrine.

Distinguish:

82

this

violates

Trust

Fund

Ex. You are liquidating a corporation. You

cannot benefit shares prior to the creditors.

4. Cumulative vs. Non-cumulative shares

Cumulative preferred shares: entitle holders to

Shares deemed retired after redemption.

What is required for the corporation to do?

Corp required to maintain a sinking fund to

cover for redemption price if required to

payment of current dividends AND back dividends

before holders of common shares are paid

Non-cumulative preferred shares: entitle holders to

before shares are redeemed but there must

payment of current dividends only, before holders of

be sufficient assets to pay creditors/answer

common shares are paid

5. Participating vs. non-participating

Participating: entitle holders to participate with holders

for operations, or else there can be no

redemption (The latter qualification is based

of common shares in retained earnings after the

stipulated dividend paid to preferred shares

i.e. paid their dividends, THEN still share in

the common pie

Non-participating: entitle holders only to stipulated

o
o

Filipinos, class B anyone) to make sure its always

They will become outstanding again when the

o

AOI.
What happens in redemption?

Corporation pays money in exchange for the

Option

rests

entirely

upon

corporation sells the treasury shares

Can there be stock dividends declared from treasury
shares?

No.

in the AOI. Terms and conditions stated in

stock.

corporation

Still considered issued; not considered as outstanding

Considered fully paid for and held by the corporation

May be distributed as property dividends
What is their status?

Not outstanding, not cancelled.

In a state of
dormancy, which in the possession of the corporation.

60% owned by Filipinos

7. Redeemable shares

How can these be issued?

May only be issued when expressly provided

on the Trust Fund Doctrine)

8. Founders shares

If theres a right to exclusively for or be voted for as

director, it must not be for a period exceeding 5 years

What are treasury shares?
o Those issued and fully paid for, and then reacquired by the

preferred dividends and nothing more

This is the DEFAULT RULE

6. You can classify shares according to nationalization
requirements.

Ex. SMC (class A shares can only be owned by

redeem
No need for unrestricted retained earnings

These are not outstanding.

Cannot vote and

cannot have dividends declared from them. This is a

the

tax evasion scheme.

Besides, the terminology is wrong.

You can only

declare stock dividends from authorized but unissued

corporation, and cannot be compelled or

refused.

83

shares.
o

consideration for it.

Distinguish:
o Promoters contracts: both parties know corporation doesnt
o

is not yet constituted

What is pre-incorporation subscription?
o 1. Acquisition of unissued stock in existing or still to be formed
o

property
[Changes in the corporation]

1. Merger/consolidation

2. Investment of funds in another corporation or

not materialize (offer theory)

2. Or all other subscribers consented to the revocation

(contract theory)
When is revocation disallowed already?

When the AOI have been submitted to SEC

Is a corporation bound by a promoters contract once it is

formed?

It is not, unless it had received benefits from the

contract by the time it was constituted

What about other promoters contracts?
o In general contract law this would have been void because a
non-existent corporation cannot give consent until it is formed,

those who didnt oppose it in writing which was filed to

the secretary
Liability is the difference in value

but these are exceptions to this general rule.

What is needed to validate and enforce promoters
contracts?

The corporation has to ratify the acts when it is

Incorporation and organization

corporation is deemed a subscription regardless of appellation

2. Subscription is irrevocable for 6 months

1. But revocation valid thereafter if the corporation did

retained earnings/surplus
Who is liable?

Solidary liability of director/officer who issued it and all

exist yet
Contracts entered into with defective corporations (de facto or
by estoppel): at least one party is unaware that the corporation

another business purpose

3. Corporate dissolution
What are watered stocks?
o 1. Issued without consideration
o 2. Discounted shares
o 3. Issued as stock dividend when there are no sufficient
o

Promoter one who, acting alone or with others, takes initiative

in founding and organizing business/enterprise and receives

property dividends.
Can cash dividends be declared from the shares?

NOT entitled to dividends because the corporation

cannot declare dividends for itself

When do non-voting shares vote?
o [Key agreements]

1. AOI amendment

2. BLs adoption and amendment

o [Property-related]

1. Increase/decrease of bonded indebtedness

2. Increase/decrease of capital stock

3. Sale/disposition of all/substantially all of corporate

o

From treasury shares, you can declare

Who is a promoter?

84

formed
Who are personally liable for the promoters contracts?

The investors who are the moving spirit behind the

its better to just consider the subscription valid, but the

incorporation personally liable for expenses incurred

by the corporation. Those who are not are not.

Promoters are also and personally liable for pre-

incorporation expenses.
Subscription:
o Subscription, not payment, grants rights to stockholders, even

if not fully paid for. Holders of non-delinquent shares have all

o

the rights of a stockholder.

This is a consensual contract

No need for tradition, unlike sales shares deemed

issued already.
Only need to register in the Stock and Transfer Book

for dispositions, so no need to register for issuance

Not covered by SOF because subscription itself

and the directors/officers are liable for watered stocks.

Articles of incorporation:
o 1. Name of the corporation

Registration of business names is with SEC

o 2. Purposes

Can have several secondary purposes so if the

Ignore the

condition.
What is valid consideration for issuance of shares?
o 1. Actual cash

Cannot be a PN or future services

o 2. Property:

Actually received, necessary or convenient

o
o
o
for

o
o
o

corporate purpose, with fair valuation

Appraised by SEC
3. Labor actually performed
4. Previously incurred indebtedness
5. Amounts transferred from unrestricted retained earnings to

stated capital
6. Outstanding shares exchanged for stocks in event of

consideration void.
The subscriber has outstanding payable consideration in cash,

primary purpose does not become profitable, you can

executes the contract.

When a condition for issuance of shares is void, then it
becomes a pure, valid subscription agreement.

It would violate the TFD if the subscription is deemed void. So

85

and number
4. Term for which it will exist

Period of maximum 50 years, extendable

No extension until last 5 years of term

5. Names, nationalities, residences of directors
6. Names, nationalities, residences of incorporators
7. If a Stock Corporation, amount of authorized capital stock

If there are par value shares, the amount each

The amount subscribed and paid each by the

incorporators
What is required for amendment?
o Must be authorized by 2/3 of the SHs and majority of the
directors
When does it take effect?

Upon approval by SEC

Or lapse of six months from filing

Grounds for disapproving application/amendment?
o 1. Articles not sufficient in form
o

reclassification/conversion
What if the consideration is unlawful?

shift without amending the AOI

SEC can only reject if patently illegal

3. Place of principal business

Must be in the Philippines

The SEC now requires that you put even the street

o
o
o

2. Purpose is illegal, unconstitutional, illegal, immoral, etc.

3. Treasurers affidavit is false
4. Did not comply with nationalization requirement

N.B. Applies where required. The SEC will endorse it

be against the de facto corporation and not the individuals

with the relevant government agency (education

CHED, etc.)
What is the requirement as to the name?
o Required to submit undertaking that you will change the

corporate name if it is the same or confusingly similar.

o What must be considered?

1. The same/confusingly similar name

2. Engaged in the same line of business

Can you make a corporation that practices a profession?
o No.
o Acevedo: It is not engaged in the practice of optometry. It

secrecy of bank deposits, so they can check starting capital.

Can the proceeds of a bank loan be counted as paid-up

corporation?
o No. There is no law allowing that.
What is a corporation by estoppel?
o So defective in form that it is neither de jure or de facto, but it is
existence.
When it applies:
o Someone must deal with the association like a corporation and
claims that the association is not a corporation. So it covers

include it.
When does a de facto corporation exist?
o 1. Valid law under which it was organized
o 2. Attempt in good faith to form a corporation

There must also be a certificate issued by the SEC

obligations to the defective corporation.

Differences between de facto and estoppel?
o 1. De facto has real existence in law; estoppel has none
o 2. De facto may exist even if there are no dealings between
o

with a blue ribbon and the seal. Without this, cannot

liabilities of valid officers.

Can a corporation to practice a profession be a de facto

contracted with this association, and after receiving benefits,

capital?

No. This is a liability, not paid-up capital. You cannot

Gen.
What is the nature of its acts?
o Valid, like that of a de jure corporation.
o Even the acts of the officers are valid, although they also have

a corporation as to those who cannot deny its corporate

hires employees engaged in optometry. So its allowed.

How does the SEC check for the starting capital?
o When you incorporate, the SEC will require you to waive
o

behind it.
Can its existence be attacked collaterally?
o No. Just directly, through quo warranto, and only by the Sol-

claim to be a corporation.
o 3. User of corporate powers
What is the scope of the de facto corporation doctrine?
o Situations where the defective enterprise contracts with an

parties on a corporate basis; estoppel needs these

3. A corporation cannot be de facto unless the requisites are

present; estoppel, even without any requisite

Two associations of jeep drivers incorporated as NS, non-profit. They
agreed to merge. One president got majority votes. The other guy
refused to recognize the others win and continued to collect dues.
o HELD: There was no intra-corporate dispute because there
was no valid merger; there were no articles of merger. There is

outsider. The suit by or against the defective enterprise must

86

no corporation by estoppel because both presidents knew they

did not merge.

What is the nature of the liabilities of those behind a corporation

as limited partners (only properties they intended to invest)

Can the person behind the corporation claim that it is a

there was no corporation, so there was no genuine belief on his

part.
What are by-laws?
o Intramural document, to govern intra-corporate relationship.
When are by-laws valid?
o 1. Do not contravene law
o 2. Reasonable and non-discriminatory
o 3. Do not contradict Articles of Incorporation
If there is conflict, AOIs win out
Is it possible that an express by-law provision be violated and still

express or implied, whether empowered or ratified.

When can a third party be bound by by-laws?
o He must be duly informed in time of the pertinent provisions,

dissolve

the

stock
2. 2/3 of outstanding capital stock may delegate to the

may revoke this delegation.

What should be included in the by-laws?
o 1. When regular and special meetings are held
o 2. Quorum
o 3. Proxies
o 4. Qualifications, duties, compensation of directors or officers

Can impose additional qualifications (like minimum

o

number of shares)
5. When annual election of officers is done, and manner of

o
o

appointment
6. Manner of issuance of stock certificates
Citibank: By-laws allowed country managers to sue and

this power to the lawyer is valid.

Valley Golf: A member pledged his proprietary shares to Chinabank.
He forfeited, and Chinabank foreclosed and bought the shares.
Chinabank sought registration of the shares by Valley Golf refused
because the shares were delinquent. Valley Golf claimed its bylaws

actually or constructively. Otherwise, he cannot be prejudiced

automatically

defend lawsuits, and delegate this power. So a delegation of

bind the corporation?

o Yes, as long as there is corporate approval through the BOD,

to

BOD the power to amend or repeal the by-laws.

N.B. Majority of outstanding capital stock

execution of properties (because the corporation did not exist)?

o No. Cannot invoke this. Because the person KNOWS that

ground

revoke the certificate.

How can BLs be amended or repealed?

1. Majority of BOD + Majority of outstanding capital

liable as general partners (all properties)

If the incorporators did not know or there was no fraud liable

corporation by estoppel, when the person was being sued for

corporation, but it can be a ground for the SEC to

by estoppel?
o If the incorporators knew there was no corporation (fraud)
o

Not

gave it a lien over proprietary shares.

o HELD: Valley Golf lost. By-laws do not bind third parties

by the by-laws because its an intramural document.

How can BLs be adopted?
o Majority vote of outstanding capital stock.
o What if BLs are not adopted within 1 month from

without actual knowledge.

Corporate Powers

incorporation?

87

What is the underlying theory behind corporate powers?

o
o

All powers are exercised by the BOD.

No person or officer can bind the corporation; it has to be the

BOD. Agents must not exceed the power granted by BOD.

There are instances, however, where stockholders or members

have to give their consent this is where the underlying

Is there a right of appraisal?

No
D. Power to deny preemptive rights:
o Where is there a right of preemption by SHs?

1. If there is increase of capital stock OR

2. If the corporation acquired treasury shares

o What is the purpose of preemption?

So a SH can prevent dilution of his % ownership.

o When is there no right to preemption?

1. Provided for in the AOI

2. Shares issued to comply with order to make a

o

contractual relationship is being altered or amended.

A Corporation can sue or be sued in its own name. It must indicate its
corporate name in the pleadings and not use an acronym
A. Power to extend or shorten corporate term:
o Majority of BOD + 2/3 of OCS
o There is right of appraisal for dissenting stockholders (although
some commentators say there shouldnt be for mere shortening

of corporate term)
B. Power to increase or decrease capital stock:
o Majority of BOD + 2/3 of OCS
o Need SEC approval:

For increase to check whether there is subscription

property for a corporate purpose

4. Conversion of corporate debt to SH equity

E. Sale/lease/exchange/mortgage all or substantially all of its
property:
o Majority of BOD + 2/3 of OCS
o What is the test of substantially all?

W/N it can still continue business afterwards.

Qualitative test, whereas it is quantitative for all.

o Compare to sale in usual and regular course of business,

to at least 25% of increased stock, and at least 25%

public offering to comply with the law

3. When the shares issued are in exchange for

paid-up
For decrease it must not prejudice corporate

creditors
Until approval, the funds are just held by the corporation in trust

which is covered by business judgment doctrine. This does not

for the stockholders. Its not part of paid-up capital yet.

o Is there a right of appraisal?

No
C. Power to create, incur, or increase bonded indebtedness:
o Majority of BOD + 2/3 of OCS
o What is a bonded indebtedness?

Usually a very large amount

With first lien on important corporate assets

For a long period of time

o Need SEC approval

To check if the corporation has at least P25M net

need SH approval.
o Is there a right of appraisal?

Yes
F. Power to purchase own shares:
o What is required?

The corporation must have unrestricted retained

o

worth and 3 years operating experience

88

earnings
Exception?

Redeemable shares, which do not require URE for

them to be redeemed by the corporation
When can the corporation buy shares from SHs?

1. To eliminate fractional shares because of stock

dividends
2. To collect indebtedness out of an unpaid

subscription
3. To pay dissenting or withdrawing stockholders

entitled to payment of their shares

4. To decrease cost of doing business, by decreasing

amount of dividends to be paid in the future

5.
Other
similar
situations
(non-exclusive

be illegal. In effect you are returning the investment of the

SHs.

enumeration)
o What happens to the shares?

They become treasury shares. These cannot vote.

G. Power to invest corporate funds in another corporation or
business:
o When do you need SH approval?

If it is in line with the primary purpose of the company,

o
o

the same amount.

Even if a subscription has not been fully paid, the SH will

for a premium, i.e. P120/share.

purpose
Mau Sugar Central buying a company manufacturing

dividends, because dividends can only be declared

above

implies

During the war, the

Japanese took over the management of Lepanto. After the

obtain best returns.

THUS, the investment in another corporation that
approval

from corporate earnings.

They must be retained as part of capital.

Nielsen had a mgt. contract with Lepanto mining (because
Nielsen had technical expertise).

the power, discretion, and purpose of corporation to

SH

What happens to the

premium surplus?

The surplus cannot be declared as cash or stock

These do not require SH approval because this fits in

requires

to his outstanding dues.

A corporation made public offering of shares with par
value of P100. But it was able to sell it in the stock market

deposit accounts, money markets, treasury bills, and the

illegally obtained
In what forms?

Stock, property, or cash dividends

For property or cash dividends, no need for

SH approval

For stock dividends, 2/3 SH approval is needed

Presumed that rights of shares are equal. So they will receive

sugar bags same doctrine

What is the nature of investing in another corporation,
like?

Creditors can sue the SHs for the dividends they

receive dividends. What is the exception?

If it is delinquent. The cash dividends will be applied

then you dont need SH approval

If it is not, you need Majority of BOD + 2/3 of OCS

Example:

SMC buying a brewery abroad is in line with primary

H. Power to declare dividends:

o It must have unrestricted retained earnings. Otherwise, it will

war,

Nielsen

wanted

to

continue

the

unexpired

management contract with Lepanto, and the latter refused.

some

The agreement included that everything Lepanto declared

management power involved of the other company,

dividends, part of it should go to Nielsen. HELD:

and not just investment per se.

89

Lepanto is guilty of breach of contract, and must pay

Nielsen, including the dividends that were not given.

Stock dividends can only be declared out of the authorized, but
unissued shares. Treasury shares cannot be declared as stock

dividends, but as property dividends.

Book keeping entry: from retained earnings capital

Sometimes property is reappraised to increase value.

transfer book, it only binds the parties but not the corporation.

So the remedy is the seller gets the dividends and

turns it over to the buyer

I. Management contracts
o There is now regulation of management contracts to prevent
abuse. It is usually done when one company has technical or

deducted
Stock corporations are prohibited from retaining surplus profits

in excess of 100% of paid-in capital stock.

Exceptions?

1. Justified by definite corporate expansion

because its still the same pie, cut in smaller pieces

You only get taxed when you sell the stocks.

Dividends will be given to stock holders in the books. If a sale
of shares is made and the buyer is not put into the stock and

What are the conditions?

1. There are earnings from operations

2. The property must have depreciated

So land cannot be reappraised

3. The depreciation allowance must have been

o

What are the tax implications?

There is no tax consequence for stock dividends,

special expertise.
Requirement?

Approval by BOD

And majority of the SHs of BOTH corporations

Except, when are 2/3 votes needed from the managed
corporation?

1. If a SH or SHs who own stocks in both corporations

projects approved by the board

2. Corporation obtained a loan and there is a
condition in the loan that the corporation
cannot declare dividends without creditors

approval

3. Special circumstances justify retention

If you invoke any of these provisions, your financial

statements must include an explanation

The power to demand dividends is one of the few

majority of BOD in the managed corporation

Validity?

5 years for any one term. You can keep renewing it.
Does the principle that a principal can terminate an agent

any time apply here?

No. This is a contract for lease of services.

What if the management contract is with an outsider

powers of SHs where they can initiate action.

Once a cash dividend has been declared, it cannot anymore be

have more than 1/3 of shares in managing corporation

2. Majority of BOD in the managing corporation is

individual and not a corporation?

No need for SH approval because the corporation is

revoked. Because otherwise, a corporation can manipulate the

price. (Ex. the corporation says we will declare dividends in a

really just appointing an agent in this instance.

month, so prices go up and shares are bought. If they can

revoke it, then the prices can go down and the corporation can

Power

re-buy the shares.)

90

Requirements

Non-

Appraisa

voting

l right?

stocks
Enter

vote?
Increase or decrease

Majority of BOD + 2/3 of

Yes

Yes

corporate term
Increase or decrease

OCS
Majority of BOD + 2/3 of

Yes

Yes

capital stock
Create,

OCS
Majority of BOD + 2/3 of

increase

incur,
bonded

Yes

into

management

of

contracts

company + Majority of

rights

2.

Comply

No

with

No

more than 1/3 shares in

managing company, or
2.

Substantially all of

Yes

Yes

property
Purchase

OCS
1. Eliminate fractions

No

No

2.Pay

subscription

cost

of

business

in

another

5. Other similar
Majority of BOD + 2/3 of

Yes

OCS

Yes

URE exceeding 100% of

paid-in

capital

No

achieve the primary purpose:

Ex. a hotel can hire entertainers

What are the type of ultra vires acts?

1. Acts done beyond powers of the corporation, as

another
line

Declare dividends

(if

going into

business

shared

Ultra vires acts:

o What is the scope of a corporations allowable powers?

Powers of corporation include those necessary to

3. Pay appraising SH
Decrease

Commonly

majority of BOD

indebtedness

funds

managed

1. Common SH/s possess

public

4. Debt for equity

Majority of BOD + 2/3 of

corporate

No

managed company if:

No

3. For property

Invest

of

Yes

managing

company

offering law

4.

of

Change to 2/3 of OCS of

1. Provided in AOI

shares

OCS

OCS

OCS

indebtedness
Denying pre-emptive

own

Can be demanded by SHs

Majority of BOD + Majority

of

business)
No

provided by law or AOI

2. Acts on behalf of a corporation done by those

without authority

3. Acts which are per se illegal

What is the SCs attitude in interpreting whether acts are
ultra vires?

Strict, if the act is per se illegal.

If the act is not per se illegal, as long as fairly

stock

(subject to exceptions)

incidental and reasonably necessary to corporate

purpose, acts are deemed valid.

91

But if the AOI or purpose clause has limiting words,

then the court will hold the corporation to such limited

regarded as equity in trust for the payment of corporate

business.

Ex. Transportation of goods by water

What is the effect if an act is ultra vires?

First type of ultra vires: void and does not bind the

What is the Trust Fund Doctrine?

o Capital stock, property, and other assets of the corporation are

stock (which the creditors can check to satisfy their

corporation, but can be ratified by the SHs through:

1. Performance

2. Ratification

3. Estoppel
Second type: no authority so unenforceable contract

But if the corporation cloaked the person with

apparent authority, the corporation cannot

deny the contract entered into by that person

executed by both sides, one cannot invoke ultra vires

If it has been partially executed (by one side), it

cannot be invoked because one side is in estoppel

If it is merely executory on both sides then ultra vires

sue

SHs

directly

for

unpaid

unpaid subscription.
2. Payment of dividends without URE.
3. Properties transferred in fraud of creditors.
4. Properties disposed or undue preference given to

some creditors even if the corporation is insolvent.

The TFD is the backbone as to why there is a strict procedure
if: 1) there is amendment of AOI to decrease ACS, 2) purchase
of redeemable shares regardless of URE, 3) dissolution and
liquidation of the corporation.

The Corporation cannot

distribute assets whimsically.

Stockholders and members

violates the trust fund doctrine

When is it valid?

If it has a business purpose, for instance:

1. A mother company guaranteeing the debt

may

in distribution of corporate assets, and that it can only be done

can be invoked
Can a corporation guarantee the debt of another?
o No, because it might prejudice the claims of its creditors and it
o

credits).
Creditors

subscription.
Examples of when the TFD is violated:

1. Corporation releases or condones payment of

with external indicia of authority

Third type: always void

When can ultra vires be invoked?

For purposes of enforceability, if it has been fully

creditors.
Implications:

Corporation may not dissipate the subscribed capital

Who can vote?

o Any share, except those deprived of right to vote, which is

of the subsidiary
2. Will result in increased business
3. Will enhance the chances of collecting

o
o

allowed only for preferred and redeemable shares

There must always be a class with complete voting rights
For joint owners of shares, consent of all is needed, unless one

from

is constituted an agent
Pledgor or mortgagor still votes for his shares.

the

party

whose

obligation

is

guaranteed

92

Take note of instances when even non-voting shares can vote

(fundamental changes in the corporation)
What are the kinds of meetings of SHs?
o Meetings may be regular or special.
o Provision on meetings applies only if there is no provision in

the bylaws or articles to the contrary.

What matters can be taken up?
o General meeting: anything can be taken up
o Special meeting: only matters previously indicated can be
taken up

If everybody is present and nobody objected, it is

tantamount to waiver
But if some were absent and those present waived,

those absent may question the waiver

Where must it be held?
o City or municipality where the corporation is located

Metro Manila considered a city

o Need not be in the office
What determines quorum?
o What is provided for in the BLs. Most of the time its a majority
o Once a quorum is announced to be present, the SH is

3. Pooling agreement, where several SHs agree to vote their

shares together
What are required for a valid proxy agreement?
o 1. In writing
o 2. Signed by the SH
o 3. Filed with corporate secretary before the meeting
o How long is a proxy valid?

Unless it provides that it is a continuing proxy, its only

o

valid for the period for which it was issued

What is the ceiling for continuous proxies?

5 years, maximum validity

Is it revocable?

Yes, unless it is coupled with an interest

If he shows up to vote, the attendance to vote will

result in nullifying the proxy, unless it is coupled with

competent to take up matters, even if some leave after

What is the power of executors, administrators, receivers, and

an interest
BUT he must show up to vote. If he doesnt vote, it

doesnt revoke the proxy.

What are required for a valid voting trust agreement?
o 1. In writing and notarized
o 2. Cannot exceed 5 years at a time (except for longer loan)
o 3. Certified true copy of agreement filed with the corporation

guardians?
o Can vote the shares of stocks they administer without need for

proxy
What if there are two or more owners of shares?
o They must go together, but if and/or, either can vote
o If both attend and cannot agree on how to vote, the vote is not

and SEC
What is the maximum duration?

5 years
What are the powers of the trustee?

Trustee is qualified to sit in the board

If the voting trust agreement was given to a lender, as

is required in a loan agreement, it is coupled with an

counted
There are different devices how to get votes. How?
o 1. Proxy solicitation
o 2. Voting trusts

interest
Can the voting trust agreement be coterminous with a
loan?

Yes. It will remain until the loan has been paid; for
instance, 10 years.

93

Is it revocable for a period of time?

No, because it is based on contract, unlike proxies

purpose germane to the corporations interest.

which are based on agency.

Who receives dividends?

The trustee, with obligation to turn over dividends to

o
o

the beneficial owner.

Derivative suits requisites?
o 1. Cause of action which calls for such remedy

If its covered by business judgment rule, cannot sue

There must be violation of the rights of the corporation

o
o

not just the private parties

The cause of action must benefit the corporation, and

not the particular stockholder bringing suit

2. Must be filed in the name of the corporation

Since the cause of action belongs to the corporation,

No need to compel the

the object of the suit is to nullify the BODs own acts.

This is futile.
o 5. No right of appraisal for the rights complained of
Contrast with other kinds of suits?
o Individual suit brought by the SH in his own name against the
o

corporation for a wrong directly inflicted on him

Representative suit brought by SH in his own behalf and all
other SHs similarly situated when a wrong is inflicted on them

the corporation has the burden of proof to contest GF.

2. Directors: broader, because they make decisions
Remedies for refusal to allow inspection?

Mandamus

Criminal case

Damages
Grounds to deny inspection?

1. Must improperly use information received before

2. Asking for trade secrets

3. No good faith

4. No valid purpose

Ex. bought one share just to inspect

What is the rule for SHs of corporations with wholly-

equity, GF, and fairness, the SH can inspect records

continued when he became one

4. Must have exhausted intra-corporate remedies

Unless excused

Ex. BOD of corporation granted its own directors

BOD to file a suit on behalf of the corporation since

But

owned subsidiaries?

Even if not a SH of the subsidiary, if consistent with

the corporation gets the damages that are awarded

3. Must be a SH when the offense was committed, but the acts

excessive compensation.

Must be exercised in his interest as SH for some

as a group
Nature of right to inspection?
o 1. SHs: to protect themselves

94

of the subsidiary
Appraisal rights:
o Any dissenting SH can ask to be bought out.
o When is there appraisal right?

1. Amendment affects the rights of SHs

2. Creating preferred shares

3. Shortening or extending corporate life

4. Increase authorized capital stock

5. Going into another line of business

6. Merger/consolidation

7. Corp. sells, leases, mortgages, encumbers, or

disposes all or substantially all of its assets

8. Close corporations (anytime)

N.B. If the amendment does not affect the rights of SHs (ex.

change of corporate name), no appraisal rights.

What is the rule for close corporations?

o
o
o

Can ask anytime to be bought out

When can a SH be asked to be bought out?

Must have voted against the action, not for the action.
When can the SH exercise right?

Within 30 days of the action

What is the value of shares based on?

Value the day before the action was done. This is

His SH rights will be restored

When will his SH rights be restored?

1. Any of the three above

2. The corp. fails to pay within 30 days

What are the obligations of SHs?
o 1. Liability to corporation for unpaid subscription
o 2. Liability to corporation for interest on unpaid subscription if
o

because the action would inevitably change the value

of the shares.
What if they cannot decide on the value of the

o
o

shares within 60 days from the time the action

o
o

was taken?

Appraisal will be done

Pay within 30 days after award was made

Cost of appraisal borne by corporation. But

Directors and officers

if the value offered is close to the value

offered by the corporation, then the SH will

bear the cost because it was close to the
o

amount offered by the corporation.

SH cannot be paid unless there are unrestricted retained

When martial law was declared, the members of the Board fled
to the Middle East. A corrupt member of the board sold the

are no UREs he can ask to be bought out.

What is the effect of appraisal?

The SH will lose all his rights, except to receive

land to Iglesia. HELD: Invalid, because it was not the board

o

payment
When will his right to be paid cease?

1. Demand for payment is withdrawn with consent of

corporation, or
2. Act he is protesting against is reversed or

disapproved by SEC, or
3. SEC says he is not entitled to appraisal rights
What is the effect of this?

Powers of the corporation are vested where?

o Board
Can the president make a decision on behalf of the corporation,
without board authorization?
o No. It does not bind the corporation
o Islamic directory of the Phils: Acquired parcel of land.

earnings, otherwise you violate the Trust Fund doctrine.

Exception?

For close corporations, where even if there

o

required by by-laws
3. Liability to creditors of corporation for unpaid subscription
4. Liability for watered stock

Solidary with corporate officers responsible

5. Liability for dividends unlawfully paid
6. Liability for failure to create corporation

that sold to INC.

A corporate officer cannot file a case for BP22. There must be

board authorization.
Requirements to be a director?
o 1.Must own at least 1 share of stock in his name in the STB

What if he is merely holding that as trustee?

He is still qualified.

The by-laws can require a bigger number (ex. 50K

shares for San Miguel)

95


o
o

The moment a SH ceases to hold even one share, he

automatically ceases to be a director

2. Majority of directors must be Philippine residents
3. Independent directors

Required for banks (at least 2) and listed companies

(either 2 or 20% of board, whichever is fewer)

4. Not disqualified:

A. Criminal offense punishable by more than 6 years

B. Or violation of Corp. Code 5 years prior to election

C. Public officials, appointed or elected, cannot serve

corporation. At what point must the director be a SH, at point of

nomination or assumption of office?
o There are conflicting decisions in US jurisprudence (some say

when nominated, some say upon assumption of office).

stock. So he must be a SH at time of election.

There are two devises peculiar to election of directors:
o 1. Proxy voting

A person need not be personally present to vote; can

just give written proxy.

Even if his shares have not been fully paid, as long as

not delinquent
2. Cumulative voting

If someone holds multiple shares, he can cast all

those votes for one person (ex. 1,000 shares 1,000

minority SHs to win positions as directors.

What if shares are delinquent?
o Not allowed to vote
How may a director be removed?
o 2/3 vote of SHs (or members if non-stock)
o In what kind of meeting?

At regular or special meeting, but the notice must

specifically state removal of the officer will be taken up
What if its not mentioned?

Cannot be taken up
Who are the directors that cannot be removed without cause?
o 1. Director representing minority of SHs
o 2. Independent directors (as required by law either 2
independent directors or 20% of the board, whichever is less)
The law mentions conviction as a DQ for becoming a member of
the board. Can the By laws add other qualifications?
o Yes.
o For instance, providing that SHs holding shares in rival

Majority view: enough when he assumes office.

JJ believes that the minority rule must prevail The provision
says that they must be elected from among the holders of

Its provided by law as mechanisms to allow

in BOD of non-rural banks

Directors must be elected every year among the SHs of the

No.

companies cannot run for the board.

Term of office of directors?
o Usually one year.
o But if the annual meeting is delayed, they remain in hold-over
capacity until successors are elected.
How are vacancies filled? (CLV DISCUSSION)
o 1. Special vote by majority of directors

Assuming they still compose a quorum

o 2. General or special meeting of SHs

This is required when the remaining directors do not

votes in favor of one person)

Can the board pass a resolution prohibiting proxy voting

and cumulative voting?

96

compose a quorum anymore

3. If vacancy is due to increase in seats must be through
election by SHs
What is the term of the replacement?

Only the unexpired term of the one replaced

Do they get compensation?

o None, except:

1, If the by-laws provide

2. Reasonable per diems.

o Who fixes the compensation?

SHs, not directors; otherwise, there would be conflict

of interest

SHs can give directors performance bonus.

Is there a limit to director compensation?

The total yearly compensation of the directors cannot

there are losses

Differentiate treatment of officers from non-officers?
o 1. Officers are hired or fired by the BOD in exercise of business
o

exceed 10% of the income prior to tax.

What about officers?

The prohibitions re: compensation do not apply to

ordinary duties of a director

Special qualifications of officers:
o President must be director
o Sec must be resident of Philippines and a citizen
o Treasurer need not be a director
Can an officer occupy two or more positions?
o Yes.
o Exceptions:

1. President cannot be the same as treasurer

2. President cannot be the same as secretary

o Because there are some requirements that require assent of

o
o
o

President and treasurer/secretary as check and balance.

There were two separate conflicting lists of officers shown. Which

prevent shenanigans bad faith

Ex. cooked the books of account to pretend losses, to

justify retrenchment
1c. Gross negligence
1d. Conflict of interest
2. Issued watered stock or being aware of this, did not object to

the corporate secretary.

o 3. Bound oneself solidarily to the obligations of the corporation
o 4. By provision of law
Examples of bad faith:
o Did not remit SSS collections
o A director acquired interest adverse to the corporation
o Director received kickback from contractors
o Grabbed corporate opportunity (ex. the director bought a goods
up for sale which is in the line of business of the company

wins out?
o The ones mentioned in the General Information Sheet win out

judgment. Non-officers are protected by security of tenure.

2. Officers are subject to common law duties of loyalty and

diligence. Non-officers are not bound by these.

When can officers be held personally liable?
o 1a. Assented to patently unlawful act of corporation

Ex. approved bribe

o 1b. Bad faith

Ex. fired a manager who was instituting reforms to

them because they perform services beyond the

Courts will not second guess the wisdom of the officers even if

because its required to be filed with the SEC.

What is the business judgment rule?
o Courts will not set aside decisions/resolutions of officers of the

which he works in)

What is the duty of loyalty?
o The Doctrine of corporate opportunity. Directors or Trustees
who acquire personal or pecuniary interest in conflict with their

corporation unless there is bad faith or illegality or gross

negligence

duty as director are liable solidarily for damages.

Officer X acquires interest adverse to corporation. What
are his responsibilities?

97

Officer

opportunity for himself which should belong to the

corporation. What are his responsibilities?

1. Account all profits to the corporation

2. Refund profits that would have accrued to the

quorum
2. His vote was not needed to approve the contract
N.B. these are the same first two requirements as in

corporation
Which can be waived or ratified?

Adverse interest cannot be ratified or waived by the

self-dealing directors
What is an executive committee?
o By laws can provide for it, composed of at least 3 members of

SHs
Business opportunity can be ratified by 2/3 of the

outstanding capital stock

What is the nature of contracts of the corporation with its own

annul the contract.

When will it be not voidable?

1. Presence of the director must not be needed for

the BOD.

N.B. They must be directors.

What powers are delegated?

The BOD must specify what powers are delegated.

The BOD cannot just make a blanket delegation of its

directors and officers?

o They are voidable. The corporation has the exclusive right to
o

When is there substantial interest?

When his equity exceeds 20%.

What is the effect if a director has substantial interest in

one and minimal in the other corporation?

1. Presence of director must not be needed for

1. Liable for all damages to the corporation

2. Compensate for all lost potential profits
CANNOT be waived/ratified
Y by virtue of his office acquires a business

quorum
2. His vote was not be needed to approve the contract
3. The contract was fair and reasonable

It must be an arms-length transaction

4. If the party is an officer, prior authorization of the

powers to the Ex Com.

What cannot be delegated?

1. Matters requiring SH approval

2. Filling vacancies in the board

3. Amending/repealing by-laws

4. Amending/repealing board resolution which by its

express terms cannot be amended/repealed

5. Declaration of stock dividends

What is the power of the board over resolutions of the Ex
Com?

BOD
What is the effect of the first two defects?

Can be ratified by the SHs in a meeting with full

disclosure.
What about contracts between corporations with interlocking

BOD can approve or revoke it.

What is the exception?

When rights of third parties are involved.

Ex. A third party entered into a K with the Ex

Com, relying in good faith on the power of

directors?
o They are not per se prohibited.
o But if a director has substantial interest in one and minimal in

the Ex Com to enter into contracts.

Powers are vested on the board. An officer acting alone cannot
bind the board. What is the exception?

another, he would be tempted to favor the first.

98

Ratification by the authority who should have performed that

If somebody has not yet paid full subscription, he cannot assign

act.
What is the general scope of powers of the officers of a

part of the shares; it is all or nothing

If he sells all the shares, it is a novation of contract, with a

corporation?
o Can operate without authorization on the usual course of
o

substitution of debtor.

So you need corporations consent.

The buyer becomes the debtor for the unpaid

business, or administrative matters

Ex. Insurance company can sell insurance even without board

resolution
Capital affairs

deliver. All transfer of shares are valid just between the parties

What are the requisites to issue a certificate of stock (COS)?

o 1. Signed by the P/VP and countersigned by the secretary/asst.
o
o
o

balance.
What is the nature of shares of stock?
o Quasi-negotiable. Just like N.I., endorse at the back and

secretary
2. Delivery of the COS
3. Pay par value of the shares (or entire value if no par value)
4. Original certificate surrendered, if the shares are being

until registered in the STB.

No need to execute separate deed of sale or assignment,

because they are quasi-negotiable.

If there is a deed of sale which is a public document, it is akin
to delivery even if the stock certificate is not itself delivered (as

transferred
What are the remedies of the SH when the corporation refuses to
issue a COS?
o 1. Specific performance
o 2. Damages if specific performance not granted
o 3. Mandamus to compel issuance of COS
o 4. Rescind the subscription contract
What is the nature of the duty to issue a COS?
o It is ministerial , so even if there is a case filed, the buyer must

in usual rule in Sales Law).

How does one sell shares?
o 1. He must Sign AND deliver the COS; and

Mere signing without delivery no sale

o 2. Have transaction recorded in the STB
What if there is a conflict between the Stock and Transfer Book and
the AOI?
o The AOI wins. The AOI is the basic contract between the SHs
and the corporation, while the STB is merely kept for

be given a certificate
What are the unpaid claims contemplated by the law?
o Payment for subscription, not unpaid claims for monthly dues
When is the COS issued?
o No certificate will be issued until full amount paid
What is the nature of a subscription contract?
o It is indivisible.

99

convenience.
Who may post in the STB?
o The president cannot post the entries, it must be the Secretary.
o If the secretary refuses, compel performance, but one cannot
record the entries himself.
What are the allowable restrictions in sale of shares?
o Procedural: Restriction must appear in the AOI, BL, and COS

Substantive: Not more onerous than allowing the corporation to

purchase the shares of the transferring SH for reasonable

and if unsatisfied, the creditors can sue SHs

terms
What if the seller of the COS is not the true owner?
o The buyer cannot get valid title.
o The first buyer, however, was given a fake COS. Effect?

None. The real owner cannot be deprived.

o What if the first buyer sold to a second buyer, signing and

delivering the fake COS?

The new buyer will be protected. Give her shares too.

The corporation runs after the seller for damages.

What is the exception?

When there are no more shares to issue. In

this case, the new buyer does not obtain any

down stocks and those who know about it and didnt give their

objections:
o Solidarily liable with the non-paying SH
If someone only paid part of the stocks, when must the rest be

1. By provision
2. Upon call by the directors
What is the nature of the call?

It must be uniform for all, not just for particular

persons.
When is there interest payable?

Only if there is a provision

If there is no rate mentioned, just that interest must be

least amount of shares for the highest price get it.

What if there are dividends before sale?

They will be applied to the unpaid dues.

If the SH wants to question the sale, what are

the shares?
o Sue the SH in a collection case.
What is the remedy for a lost COS?
o 1. Owner submits affidavit of loss
o 2. Corporation verifies the affidavit and publishes notice in

o
o

100

etc.)
How is the bidding for the shares done?

There is a fixed price, but those willing to accept the

prerequisites?

File case within 6 months from the date of sale

He must tender payment of unpaid dues and interest

What is the other option of the corporation, apart from auction of

paid, apply the legal rate

What is the nature of the unpaid portion of the subscription?
o It is an asset of the corporation, and is thus a receivable
o What is the implication?

Creditors can run after these.

on unpaid subscriptions.
B. If the corporation is insolvent, the SHs can

automatically be included as co-defendants.

If after 30 days of call there is no payment, what happens?
o 1. The shares become delinquent.
o 2. The directors can auction the shares

Personal notice sent through registered mail

Published in newspaper of GC for 2 weeks

o How can the SH prevent sale of the shares?

Pay unpaid dues, interest, and costs (for publication,

shares, but can sue for damages.

Directors responsible for issuance of shares who issue watered-

paid?
o
o
o

A. But first they have to sue the corporation,

newspaper of GC for 3 consecutive weeks at owners expense

3. After 1 year from publication, right to contest is barred and
the corporation can issue a new COS to the SH
What if the applicant issues a bond to cover for damages?

The 1 year period is waived

What if there is a contest of the application?

The corporation cannot issue COS until resolved

What is the free and harmless clause?

If there is no bad faith or gross negligence, there can

be no action against the corporation for issuance of

o

the new certificate

What if the corporation fails to comply with the procedure

When and how can a corporation voluntarily dissolve?

o 1. Vote of majority of BOD + 2/3 of OCS

What if dissolution will not prejudice any creditor?

1. Just need SEC approval

2. After 3 consecutive weeks publication in

above and just issues a new COS?

It is valid, but the corporation cannot avail of the free

and harmless clause

What is the rule on involuntary dealings with shares?
o A. Mortgage, if not covered by COS

Mortgage binding on third parties with notice

o B. Mortgage, if covered by COS

Register in the CM registry of both the domicile of the

owner and place of principal office of the corporation

No need to register if the COS was delivered

to the pledgee/mortgagee

No need to log in the STB

C. Attachment or levy

Creditor must leave with the president or managing

was attached
Priority rules:
o A. Two judgment creditors

Whoever serves writ first

o B. Judgment creditor v. mortgagee/pledgee

Whichever is first in service of writ v. registry in CM

o
o

creditors will be mentioned.

2. Set for hearing, so if someone has

objections, he can oppose.

3. Order published in newspaper of GC for 3

consecutive weeks

4. SEC will decide w/n dissolution is proper

o 2. Amending the AOI, shortening corporate life

Fastest and simplest way

Who decides on dissolution?
o The SEC
o There must be a tax clearance first from the BIR before the
SEC dissolves a corporation (because this is the last chance to

agent a copy of the writ and a notice stating the stock

newspaper of GC, dissolution takes effect

What if creditors are affected?

1. Petition filed and all the names of the

registry
C. Mortgagee/pledgee v. buyer/assignee

First between registry v. STB entry

D. Judgment creditor v. buyer/assignee

First between service of writ v. STB entry

recover taxes)
Involuntary dissolution:
o 1. Based on grounds provided in the Corp. Code (see above)
o 2. Violations of PD 902-A (SEC reorganization act see above
for some acts)
o 3. Quo Warranto
What are the specific grounds?
o 1. Does not commence business within 2 years from its
o
o
o
o

registration
2. Suspended transactions for 5 years
3. Failure to adopt and file BLs within required time
4. Offended provision of law for creation (or renewal)
5. Commission or omission of act deemed as surrender of
corporate rights

Dissolution and liquidation

101

o
o
o
o

6. Misuse or right or privilege granted by law

7. Receiver recommended against continuation of business
8. Serious misrepresentation to public
9. Refusal to comply with SEC order leading to grave abuse of

corporation;

even if not operating.

Is dissolution automatic?
o No, the SEC determines the cause first.
Can a minority stockholder file a dissolution case?
o Yes.
o For what grounds?

1. Majority is mismanaging assets

2. Dissipating its assets

3. Fraudulently disposing its properties

o Can a receiver be appointed in an action for involuntary

over

properties

of

N.B. Three year period does not count anymore if this

option is chosen
o 3. Receiver appointed
What is the effect of dissolution on existing rights and obligations?
o It does not impair its rights and obligations
o Ex. Even if a corporation has been dissolved, it must still be
paid
How long must winding up be?
o Three years from the time SEC approved dissolution
What can the corporation do and not do during this period?
o It can only wind up its affairs disposing its properties. It cannot
acts of that of a going concern.
Will corporate dissolution abate any ongoing case against or filed

can be filed against the trustee provided the

does not wear an ID

Ex. but you can dissolve a corporation that engages in banking

prescriptive period has not lapse. The trust will last

without authorization from the Monetary Board because it

title

by the corporation not finished within the three year period?

o Yes, under the old rule.
o This now only applies if:

1. The directors are in charge of winding up (option 1)

2. Receivership (option 3)

But not if under trusteeship (option 2), because suit

This is like the death penalty for corporations.

o Ex. do not dissolve a company just because one employee

legal

for example renew a contract of lease. It must not pertain to

dissolution?

Yes.
N.B. You do not dissolve a corporation for every single minor infraction.

acquire

SH

franchise
o 10. Failure to file reports with SEC within prescribed period
What if the corporation claims that the economy was depressed
business?
o Even so, it has to file an ITR and the general information sheet,

will

corporation to pay off creditors and distributing the residue to

and there was no demand for its goods; thus, there was no

2. Appoint trustee to whom they assign assets of the

harms public interest

Where is the dissolution case filed?
o SEC, not RTC
Three ways of providing for mechanics for dissolution:
o 1. Directors themselves can take care of winding up

until the affairs have been wound up.

What is the common practice now for the cases that are
still pending before the three years end?

Appoint a trustee. The lawyer handling the case is

often constituted as the trustee himself. Sometimes,
its the directors themselves that are the trustees.

Non-stock/non-profit

102

What are the characteristics of NSNP corporations?

o 1. No shares of stock
o 2. Not be authorized to declare dividends

As indicated in the by-laws or AOI

Only exception: distribution as a consequence of

for every year (for policy continuation)

N.B. But you can also provide that everybody will be

dissolution
o 3. Eleemosynary purpose
For what purposes may a NSNP corporation be organized?
o 1. Charitable
o 2. Religious order, to manage its properties
o 3. Educational
o 4. Others: professional associations, cultural, fraternal, literary,

But usually associate and honorary

eleemosynary

purposes

to

organizations with similar purpose

4. Other assets distributed according to BLs or AOI, or follow

plan of distribution
Can a NSNP corporation be converted to a stock corporation

Why are close corporations important?

o Most corporations in the Philippines are family corporations.
What is the definition of a close corporation? What are the
features that make up a close corporation?
o 1. AOI provides there are at most 20 SHs and none more
o 2. There are restrictions on transfers

Ex. before a SH sells shares, he must ask permission

His son Y inherits his shares. He does not

automatically become a member.

for

Close corporations

members do not have voting rights, just playing rights.

What are the peculiar rules in proxy voting?
o Can be allowed to vote by e-mail or similar means.
o Membership is not transferred in proxies.

Ex. X is a member of a golf and country club. He

died.

usage

members. You have dissolve the NSNP corporation first.

fundamental issues, unlike in stock corporations.

NSNP corporations can make classifications of members.
Example:

Golf and country clubs for instance have honorary

of

through amendment of AOI?

o No, because this is tantamount to distribution of profits to the

certain transactions. Does this rule apply to NSNP?

No. They can even be denied voting rights for these

members.

condition of dissolution
3. Transfer assets received by the corporation subject to
limitations

commerce
What is the rule on the right to vote?
o By default, each member may vote
o Unless limited, broadened, or denied in the AOI or BLs
o For stock corporations, even non-voting shares vote for

elected every year or any other system

How are assets distributed upon dissolution?
o 1. Pay all liabilities and obligations of the corporation
o 2. Return all assets held by corporation with resolutory
o

scientific, social, civic service, similar purpose like chambers of

What is the policy in elections of the board?

o 1. There can be more than 15 directors

Purpose: to broaden representation

o 2. By default, the voting is staggered, 1/3 of positions are voted

He has to be

from the other SHs

Usually it provides too that if none of the SHs are
willing to buy the shares, it must be offered to the

approved first. But he has proprietary rights, so he

corporation itself

can sell it, pledge it, etc.

103

o
o

o
o

3. Prohibition on listing shares in the stock market

4. Articles may provide for classification of shares

Ex. If there are three brothers, there can be class A,

title

Close

Corporations

or

reduce

quorum/voting

requirement not valid or effective unless there is 2/3 vote of

to ensure that each has equal ownership; can only

OCS (all, even those with no voting rights), or a higher

hold shares of the class pertaining to his family

5. Can provide for higher quorum or voting requirements
6. Can agree that the SHs manage the corporation and not the

proportion of votes if required by AOI.

What are the remedies that may be done by SEC in case of
deadlock in close corporations?
o 1. Amend/alter provision in the AOI that causes the deadlock
o 2. Alter, prohibit, or cancel any resolution or action of the

of directors
Which corporations are not allowed to be close corporations?
o Those vested with public interest.
o Specifically:

1. Mining companies, oil companies

2. Stock exchanges, banks, insurance companies

3. Public utilities

4. Schools
How can the restrictions on transfers bind third parties?
o 1. Must appear in AOI, and
o 2. Must also appear in BLs, and
o 3. Must also appear at the back of the COS
Whats the effect of pre-incorporation agreements?
o They remain binding even after incorporation
o Ex. a pre-agreement that the president comes from Family A,

corporation, board, SHs, or officers

3. Require the purchase of the shares of a SH even if there are

o
o

no unrestricted retained earnings

4. Appoint a provisional director as tiebreaker
5. For extreme cases, dissolving the corporation

Educational corporations

How many trustees must be there?

o Always multiples of five (5, 10, 15, etc.)
How long must their terms be?
o Five years
o Every year, only 1/5 is elected to provide for continuity
o But can there be contrary stipulations as to term and
elections of trustees?

Yes.

the treasurer from Family B, etc.

When are board meeting not necessary?
o Board meetings not necessary if everyone signs or SHs know

Religious corporations

that the board members were signing minutes without a

on

B, and C shares one for each brother and his family,

directors

In this case, the SHs have powers, duties, obligations

What is required for amendment of AOI?

o If the amendment seeks to delete any provision required by the

meeting and they did not object.

What is the nature of the preemptive right?
o Covers ALL issuances of stock.
o There is right of pre-emption even if debt is being converted to
equity.

104

How can a religious organization administer its properties?

o 1. NSNP corporation
o 2. Corporation sole

One person only: ex. the Archbishop

o 3. Religious aggregate or society
How does a corporation sole come about?

1. File affidavit with the SEC, stating that:

A. the affiant is the head of a religious sect and would

corporation

Resident agent required to be in good financial

want to be corporation sole

B. His religion allows him to incorporate as a

corporation sole

C. He is charged with administration of properties

o 2. Submit the following:

A. Inventory

B. Manner for choosing successor

C. Where he will hold office

Can the archbishop be a foreigner and hold land?
o Yes. He is actually just administering it, and the property really

jurisdiction over it.

What if the corporation is doing business and is not licensed and
the other party was aware of it?
o Then it cannot have the case dismissed because the other

of the Philippines
2. AND whose laws allow Philippine corporations to do

sue for the foreign corp. Here, it can sue.

How can you sue a corporation not doing business here and also
without a license?
o Make the action quasi in rem by attaching its property to obtain

What is a foreign corporation?

o 1. One formed, organized, existing under laws other than those

doing business?
o It cannot sue.
o If its not doing business, and has no license: can sue.
What is required to do business here:

The other corporation said that the

contract is void. Valid?

o The contract is valid; the only effect is that there is no power to

Foreign corporations

business there
What is the effect of a foreign corporation having no license and

summons
X is a foreign corporation with no license. It entered into a contract
license, and then it sued.

him to dispose or mortgage real property

What is the nature of a religious aggregate or society?
o Incorporated to manage its properties.
o The articles provide that members constitute a religious society

may be served to the SEC

Also, any officer in the Philippines may be served with

with another corporation, which breached the contract. X got a

belongs to the faithful.

What if the corporation sole wants to dispose property?
o He must get authorization from RTC unless his religion allows

standing
What else must it do?

To say that if it has no resident agent, summonses

and at least 2/3 of members have agreed to incorporate.

Must appoint resident agent to receive summonses for the

party benefited from the contract.

When is it considered doing business?
o 1. There must be habituality. Transactions must not be
isolated.

If the corporation is just buying here, its not doing

business because there is no profit from buying

Except isolated transactions that indicate intent to
habitually do business is doing business. Ex. renting

out a space for lease and sending officers here.

2. Substantial portion of the business of the primary purpose of
the corporation

105

4. Failure to submit to SEC notice of amendment of AOI or by-

purpose
3. Contract consummated in the Philippines

If the contract is consummated abroad then the

o
o
o
o

laws or articles of mergers/consideration

5. Misrepresentation of material matter
6. Failure to pay taxes or fees due to the Government
7. Transacting business outside of purpose clause
8. Transacting business as agent of foreign corporation not

foreign corporation is not doing business here

Foreign investments act has a definition of what is doing business.

licensed to do business here

9. Any other ground that would render it unfit to do business

If a shipping company goes here and hires a cook,

thats not doing business because its not as
substantial portion of its business of the primary

here

The definition includes:

o 1. Soliciting orders

Even if its isolated transaction, as long as its

indicative of doing business

2. Service contracts
3. Opening offices

Whether liaison office or branch

4. Appointing representatives or distributors who are either

Domiciled here

Or staying here for at least 180 days

5. Participating in management, supervision, or control of any

domestic business, firm, entity, or corporation here

6. Any other acts implying continuity of dealings/operations

o
o
o

Merger and consolidation

What is a merger, and what is a consolidation?

o Merger one corporation absorbed by another
o Consolidation combine to form a new corporation
What is the procedure?
o 1. Plan for merger or consolidation drafted by each

corporation, signed by P or VP and certified by Sec/Asst. Sec,

here
What doing business under FIA does not include:
o 1. Mere investment of a foreign entity in a local entity or
o

exercise of rights as investor

2. Having nominee officer or director to represent its interests in

that local corporation

3. Having a distributor or representative doing business in its

corporations BOD

Approved by majority of BOD and at least 2/3 of OCS

Any amendment subject to same voting requirement

2. Articles of merger or consolidation executed by each
setting forth:

A. Plan of merger or consolidation

B. For stock corporation, the number of outstanding

own name
What are the grounds to revoke a license?
o 1. Failure to file annual report or pay fees
o 2. Failure to appoint or maintain a resident agent
o 3. Failure to submit to SEC notice of change of resident agent

or address

106

shares, and for non stock, the number of members

C. The result of voting

3. Four copies of Articles submitted to SEC for approval

For special corporations, must have approval of the

designated government agency as well (ex. banks)

Can dissenting SHs exercise appraisal right?
o Yes.
When does merger or consolidation take place?
o Upon SEC approval

What is the effect of merger or consolidation?

o 1. The separate existence of the absorbed corporation will
o
o

cease to exist
2. Acquire rights, portfolio of business, and assume liabilities of

covered by this law. So concept of deposit is not limited to

the absorbed corporations

Is it bound to absorb the employees?

No, as long as it is done in GF. The decision to retain

employees is within legitimate sphere of management

Does this law cover trust accounts?

o Yes.
o The law says that deposits of whatever kind or nature are
savings, time, or current deposits.
Exceptions?
o 1. Depositor gave written consent
o 2. If a bank officer or SH will borrow money from his own bank,

then sought to enforce the PN against ABC. Is it liable, even if the

o
o

hes required to waive secrecy of bank deposits

3. Examination in an impeachment case
4. When there is an order from the court in cases of bribery or

PN was in XYZs name?

o Yes. ABC assumed XYZs liabilities.

dereliction of duty
5. When the money/bank account is the subject matter of the

prerogative.
XYZ corp issued a PN to D. XYZ was then absorbed by ABC. D

litigation
Even if it is no longer in the possession of the

Laws on confidentiality of bank transactions (RA 1405)

What is the purpose of this law?

o To encourage people to deposit in banks and avoid private
hoarding
What is secrecy of bank deposits?
o Bank deposits and investment in bonds issued by the

account to account to make it difficult to trace

Ex. To settle the estate of the deceased (in Special

Proceedings)
Contra: X sold treasury bills to Y for a sum of money.
performance.

Y sued for specific

Y then wanted to examine the bank

account of X.

HELD: This is NOT covered by this exception

because the account is not the subject

So this prohibition does not cover private

persons.
What deposits are covered?
o 1. ALL DEPOSITS OF WHATEVER NATURE, with banks or
o

defendant
Ex. in a case, the money was transferred from

X refused to deliver the bills.

government are confidential

o The very existence of the account is confidential
Who are covered by the prohibition under law?
o Prohibition against giving details is only limited to bank officers
and employees.

matter of litigation.
6. Under the AMLA, the AMLC can inquire into deposits where
there is probable case of money laundering (some requiring
court order, some not see discussion of AMLA), or if there
are covered or suspicious transactions

banking institutions
2. Investments in bonds issued by the Philippine Government,
its subdivisions and instrumentalities

107

7. Under the HSA, Anti-terror council can apply with CA for

deposit with Chinabank.

authority to examine deposits upon probable cause of

cannot be garnished. HELD:

It can be garnished. The FCDA was for the

commission of terrorism/conspiracy
8. Under the NIRC, the CIR can examine bank deposits if:

1. The depositor died, to check net estate

2. Taxpayer applied for compromise of tax liability on

ground that he is in no financial position to pay

3. Upon the request of information from the foreign tax

purposes of encouraging investment, which

authority pursuant to an international convention or

o

agreement to which the Philippines is party

9. The PDIC may examine deposits in case of findings that

banks engage in unsafe or unsound bank practices

10. Under the Unclaimed Balances Act, disclosure to the

Treasurer of the Philippines of dormant deposits of at least 10

years
Gangcaico: The OMB Law provides that the OMB can inquire into bank

deposits during investigation. This was the old doctrine. But in this

case it was reversed. Requisites now before OMB can examine:

o 1. There must be a case in court already
o 2. The account must be clearly identified
o 3. Inspection covers only the account identified
o 4. Bank employees and owner are notified
Is there a violation of secrecy of bank deposits if the account is

this situation does not fall under.

Only one exception under the FCDA itself:

Depositor gave written consent

Which exceptions under other laws apply to FCDA?

1. AMLA exceptions

2. HSA exceptions

3. NIRC exceptions
Who can inquire?

1. PDIC

2. AMLC

N.B. But not the Anti-terrorism council because the

law forgot to provide for it

General Banking Law:
o There is secrecy of bank transactions. No officer or employee
may disclose information about funds or property belonging to
private individuals without court order. This covers all funds
o
o

and property, unlike FCDA.

It covers even safety deposit boxes.
It does not cover public officials accounts (ex. Clarissa
Ocampo during impeachment trial) requisites:

1. Funds belonged to public officer

2. It was disclosed to an official body (ex. Senate)

3. And it was by court processes

garnished?
o No, there is none. Bank accounts can still be garnished. The

The bank argued it

amount is not actually disclosed.

Foreign Currency Deposits Act
o Foreign deposits are exempt from examination
o And also exempt from garnishment

BUT see exception below, in the rape case

Judgment was rendered against a foreign national

General Banking Law

Types, definition

who raped a Filipino child. He escaped. The only

source of money he had was a foreign currency

108

What is the definition of banks?

An entity engaged in lending funds obtained in the form of

o
o

deposits
Receives money from the public and lends it out to them
What is required?

Banks must be STOCK corporation with funds

What are thrift banks?

o Those that provide short-term working capital, medium-to-long
term financing to businesses engaged in agriculture, services,
industry, and housing, by
o 1. Accumulating savings of depositors and investing them
o 2. Capital loans secured by mortgages, bonds, CM, etc.
What are rural banks?
o Those that provide credit facilities to farmers and merchants, to

obtained from the public

Public means that there must be at least 20

depositors
How are banks classified?
o 1. Universal banks
o 2. Commercial banks
o 3. Thrift banks (RA 7906 primary)

A. Savings and mortgage banks

B. Stock savings and loan associations

C. Private development banks

o 4. Rural banks (RA 7353 primary)
o 5. Cooperative banks (RA 6938)
o 6. Islamic banks (RA 6848)
What are the powers of a universal bank?
o 1. Everything commercial banks can do
o 2. Powers of an investment house
o 3. Power to invest in non-allied enterprises
What are the powers of a commercial bank, in addition to ordinary

as director, officer, or consultant

2. Must have purely 100% Filipino equity
3. Cooperatives or corporations primarily organized to

hold equities in rural banks may be incorporators

What are cooperative banks?
o Those organized primarily to provide financial and credit

services to cooperatives
What are quasi-banks?
o Entities engaged in borrowing through deposit substitutes for
the purpose of relending or purchasing receivables/other

powers?
o [Instruments]
o 1. Accepting and issuing LOC
o 2. Discounting and negotiating PNs, drafts, BOEs, and
o
o
o
o
o
o
o

their cooperatives, people of rural communities

Special rules:

1. Can have elective or appointive local officials serve

obligations
o (Ex. money market placements)
What are trust entities?
o Trust entities are those authorized by the MB to act as trustee
or administrator of any trust, or hold property in trust or on

evidences of debt
3. Accepting and creating demand deposits (checks and drafts)
[Deposit, credit]
4. Receiving other types of deposits and deposit substitutes
5. Extending credit
[Foreign exchange, securities]
6. Buying and selling foreign exchange, gold, and silver bullion
7. Acquiring marketable bonds and debt securities

deposit for benefit/use of others.

These funds and properties in trust must be kept separate from

those held under general banking functions.

Central Bank (CB) supervises bank operations.
o CB can examine companies where banks or quasi-banks have
o

controlling interest
Nobody can engage in banking or quasi-banking without
Monetary Board authorization.

109

Shares, etc

What kind of shares can banks issue?

o Banks can only issue par-value shares so you can ensure it

got them.
What is the limit on ownership of shares?
o Unlike the former law, the GBL does not impose a limit on the

related interest.
Rules on family groups and related interests

What are family groups?

Stockholdings of individuals related to each

affinity, legitimate or common law, are

owned

or

controlled by the same group of persons or

immediately below)
investments of universal

family group are related interests.

What is required?

The family group or related interests MUST

financial

allied

Type of shareholder

Limitation on shares

Family groups, related interests

Foreign individuals and non-bank

Unlimited, but must disclose

40% of total voting shares of local

foreign corporations
Filipino individuals and domestic

bank
40% individual equity

non-bank corporations
Foreign banks
Universal bank

60% equity of domestic banks

100% equity of thrift bank, rural
bank, or financial allied enterprise
100% equity of only one other

with the bank.

Foreign individuals and foreign non-bank corporations can only
own up to 40% of total voting shares of a local bank.

The restriction here refers to TOTAL

in

rural bank, or financial allied enterprise

Universal or commercial bank can own up to 100% voting stock

disclose such fact in all their transactions

o

banks

of only one other universal or commercial bank.

other within 4th degree of consanguinity or

Equity

participation of non-bank domestic corporations

Foreign banks

Up to 60% equity of domestic banks (see discussion

enterprises:
o Universal bank can own up to 100% equity of a thrift bank,

number of shares that can be owned by the same family or

considered family groups.

What are related interests?

Two or more corporations

place of incorporation
Filipino individuals and domestic non-bank corporations can
only own up to 40% of the voting stock of a local bank.

The restriction here refers to individual equity

met the minimum paid-up capital requirement.

Can banks acquire their own shares?
o No, unless given as security as loan.
o The bank has to dispose these shares within six months after it

Control test of majority stockholders, and not

Commercial bank

universal or commercial bank

100% equity of only one other
universal or commercial bank

equity

participation of foreigners in the bank

What is the test of foreign citizenship under this

rule?

What are the three modes of entry for foreign banks in the
Philippines?
o 1. Acquiring up to 60% of an existing domestic bank

110

o
o
o
o

2. Investing up to 60% of a new banking subsidiary

incorporated under Philippine laws
3. Establishing branches with full banking authority
What is common among the three?

Need MB approval
What is the extent of their powers?

Same functions and privileges as a Philippine bank of

Commercial banks automatically have the power to engage in

quasi-banking.
Can automatically accept opening of current accounts

Unlike other banks (e.g. saving and mortgage or thrift

banks) which can accept current accounts, only with

the same category

When is a head office guarantee required?

Only for establishment of branches (mode 3)

Requirements on directors?
o 5-15
o At least 2 must be independent not connected with the bank,
o

its subsidiaries, or affiliates

o What if there are bank mergers?

Can have up to 21.

Appointive or elective official limits?
o Cannot work in a bank, whether part or full time.
o Exceptions?

1.Incidental to financial assistance (ex. PDIC gave

MB approval.

N.B. For universal, even non-allied enterprises

Universal banks:
o Universal banks may act as an investment house
o But universal banks HAVE TO list shares in the stock market
What is the nature of deposits?
o They are in the nature of simple loans. Thus, the bank is the
o

debtor, and the depositor is the creditor.

Thus, the bank can make use as its own the money deposited.

The money is not held in trust or for safekeeping.

Third persons may not have a right to the money deposited
unless there is court order for garnishment.

trustee in that companys law)

2. Provided by existing laws (ex. DBP is required to

invest in all rural banks, so they can have people sit in

the boards)
How can meetings be conducted?
o Can conduct meetings by teleconference or video conference.
Rule on banks and their branches:
o Universal and commercial banks may open branches in the
o

not third persons.

Officers are not liable for estafa if they used the money
deposited or failed to return the amount.
Does right to compensation exist?

Yes. The bank can set-off indebtedness of the

Philippines or abroad with prior approval by the CB.

A bank and its branches shall be treated as one unit.

Special powers of commercial banks (and universal)?

111

depositor with deposits, if the requisites apply.

BUT the bank must inform the depositor prior to such

set-off.
What is the degree of diligence required to be exercised by banks?
o Extraordinary diligence in the handling of deposits
o What about deposit substitutes (ex. money market

Powers of banks

The debtor-

creditor relationship is between the bank and the depositor, and

financial assistance; can require that an officer sit as

special authorization from Monetary Board.

Commercial banks can invest in allied enterprises, subject to

placements)?

Just ordinary diligence

What are essential for a bank to be a mortgagee in GF?

1. Ascertain mortgagors title or ownership of the

property mortgaged
2. Check both duplicate original title of the property

and the title in the ROD

3. Conduct ocular inspection of the property if there is

accommodation
3. The loan or accommodation is from:

a) his bank,

b) a bank that is a subsidiary of a bank

something which would arouse suspicion and require

holding company [and both his bank and

an ocular inspection
Single Borrowers Limit (SBL) the law limits this to 20% of net worth

owns a controlling proportion of shares of his

CB bills, bills of lading, trust receipts, and other readily-

maximum amount allowed by law, whichever is lower

Generally, DOSRI transactions are allowed, however, what
restrictions must be complied with?

1. Procedural: Approved by majority of the directors

partnership/association
What is not included?

1. Loans that are secured by obligations of the BSP or

bank
4. The loan or financial accommodation is in excess of
5% of capital and surplus of the lending bank or in the

marketable goods the ceiling can be increased by 10%

Who are included in the calculated of SBL?

Loan to corporation where the SB has majority

interest, subsidiaries of a corporation, members of a

deposits

excluding the director concerned

2. Terms must be arms-length
3. Limits on amount that would be lent

Loan must be limited also to amount

maintained in the lending bank and held in the

equivalent to his encumbered deposits and

Philippines
3. Loans under LOC to extent covered by the margin

book

the government
2. Loans covered

by

assignment

of

value

of

their

paid-in

capital

contribution to the bank

o N.B. so, not just his deposits but

deposits (security deposit by a customer with a broker

lending bank are subsidiaries],

c) a bank in which controlling proportion of
shares is owned by the same interest that

of the bank to a single borrower

o The MB has discretion to raise this
o In computing this, if the loan is secured with treasury bills or

2. He contracts a loan or any form of financial

for futures or option contracts)

4. Other non-risk items as specified by the MB

DOSRI loans (bank exposure to Directors, Officers, Stockholders and

also his paid-in capital contribution

When does an individual ceiling not
apply?
o 1. Fringe benefits extended by the

Related Interests)
o What are requisites to be covered under the DOSRI rule?

1. Borrower is a director, officer, stockholder, or has

related interest

bank to officers
2. Loans by cooperative banks to
members

112

secured by the REM, and the 2nd loan became due during

3. Secured by collateral which MB

considers as non-risk items

4. Aggregate ceiling

The MB may regulate amount of loans,

credits,

accommodations

extended

redemption period, he must pay both.

Total investment in real estate, including equipment for use by the

bank:
o 1. Cannot exceed 50% of capital
o 2. If it acquires real property it must be disposed within 5 years
Is it valid to stipulate that the bank will not be liable for losses of

to

DOSRIs, including bank investment in their

enterprises.
Current Manual for Regulation of Banks

property in the safety deposit box?

o This is void. This is a bailment and this is part of the nature of

provision sets ceilings:

o 15% of total loan portfolio of bank
o 100% of combined capital accounts
o Whichever is lower
5. Reportorial requirement: approval of the loan must

be entered in bank records and a copy of the entry

transmitted to the Supervising and Examination

similarly void.
Can a bank engage in insurance?
o No.
o But the bank can sell insurance policies if the insurance
company is a subsidiary or affiliate of the bank.

Sector of the BSP

Value of collaterals?
o If secured by REM up to 75% of value of property
o 60% of the improvements
o CM 75%
Statement of purpose:
o When a borrower loans money from a bank, he must state his
o

Prohibitions

Prohibitions against officers or employees:

o 1. Making false records of transactions affecting the operations
o

purpose for doing so

If he diverts it for some other reason, the bank may demand

o
o
o

immediate payment
Foreclosure:
o Check special laws on banks foreclosure [already know this]

Note that the purchaser in the auction sale, whether

judicial or extra-judicial shall have the right to enter

upon and take possession of the property immediately
o

after the date of the confirmation of the auction sale

If the property will be redeemed, the mortgagor must pay
amounts due on the mortgage.

the obligation.
Stipulation that a bank is not liable for delay in wire-transfer is

Ex. there are two loans

of the bank
2. Disclosing bank deposits to unauthorized persons without
prior court authorization
3. Overvaluing securities
4. Accept gifts or fees to approve a loan
5. Outsourcing inherent bank functions

Ex. lending and accepting deposits

6. Employing employees with lengthy probationary periods

Cannot do the usual S.M. practice for bank tellers

(replacing them every 5 months or so)
7. Engaging in unsafe or unsound banking practice:

A. material loss/damage or abnormal risk/danger to

institution

113

B. same, to depositors, creditors, investors, SH, public

in general
C. undue injury or unwarranted benefits through

manifest partiality, evident BF, or gross negligence

D. manifestly and grossly disadvantageous to the

department store to buy clothes using the money. The victims

cannot claim the money back from the store. This the analogy

bank (w/n the officer or director profits)

8. Declaring dividends:

A. that are greater than accumulated net profits

B. if its clearing account with BSP is overdrawn

C. deficient in required liquidity floor for government

of the SCs reasoning.

Senator Villar floated bonds abroad in dollars and started Camella
Homes.
Camella.

A customer asked to invest her funds in the long term

with the JV. The long term papers plunged in value, so the customer
lost money. The customer sued the bank. HELD: The customer bears

deposits for 5 days or more

D. does not comply with liquidity standards/ratios

E. committed major violation as prescribed by BSP

An urban bank was closed, and that some favored clientele

the risks because she gave the instructions to the bank. She cannot
blame the bank for her bad investment decision.

Central Bank Act (RA 7653)

there a violation?
o Yes, this was an act that caused unwarranted benefit to parties
due to partiality, bad faith, etc.
Head office guarantees prompt payment by its Philippine branches.
Banco Filipino: SC appointed judge Cosico to receive evidence and he

What are the State policies?

o 1. State maintains a central monetary authority that functions
and operates as an independent and accountable body

made a finding that Banco Filipino (BF) must be closed. The sc issued

corporate in discharging mandated responsibilities re: money,

a resolution that these hearings were not thorough, so they appointed

Judge Ynares. Ynares said BF was solvent and had 1B in assets. The

closure violated due process because the bank was closed before the
investigation was finished. The law was then changed saying that a

There were talks that Ayala will start a joint venture with

commercial papers of Camella homes. But Ayala did not push through

received advance warning so they could take out their loans. Is

Ex. A robber held up passengers in a jeepney and went to a

bank may be closed before completing examination.

BPI family bank had three depositors. A deposited a check issued by B.

The money inside Bs account came from an authorization allegedly

autonomy.
Creation of the Bangko Sentral ng Pilipinas (BSP):
o It is the central monetary authority mentioned above
What is the responsibility and primary objective of the BSP?
o 1. Provide policy directions in areas of money, banking, and

signed by C to debit his account and transfer the amount to B.

o
o

Depositor C claimed it was forged so the bank debited the account of A,

because the money was eventually credited to him. HELD: Wrong,
because money was the medium of exchange. Money is money, and no

evidence of title is required to transfer.

114

banking, and credit.

2. BSP is a GOCC that enjoys fiscal and administrative

credit.
2. Supervise operations of banks
3. Exercise regulatory powers over finance companies and

quasi-banks and those performing quasi-banking functions

What is the Monetary Board (MB)?

o
o

It exercises the powers and functions of the BSP

It is composed of 7 members, appointed by the President for 6-

year terms:

1. Governor of BSP (treated as department head

move on to receivership/liquidation (see next

o

within 72 hours
What steps can the MB take when the bank is under distress?
o 1. Place it under conservatorship

When the bank is having liquidity problems

What are the powers of the conservator?

1. Take charge of assets, liabilities, and

management thereof
2. Reorganize the management of the bank
3. Collect all monies and debts due the bank
4. Exercise all powers necessary to restore

viability
5. Can overrule the decisions of the bank

part)
2. Receivership

Must there be prior conservatorship?

No.

What is the difference?

The bank must be in insolvent here

When can you declare receivership?

1. Unable to pay liabilities as they become

due in the ordinary course of business
o Does not include inability to pay due
o

officers/directors when it will prejudice the

bank
o
o

necessary
2. Continuance of business will involve
probable loss to depositors or creditors

decision

But have to report to the President and Congress

can survive
When is conservatorship terminated?

1. MB is satisfied the institution can operate

on its own and conservatorship is no longer

subject to CONA confirmation)

2. Cabinet member designated by President

3. 5 from private sector (staggered terms)

How does the Monetary Board (MB) act?
o It needs 4 votes to approve any decision
o In case of emergency, the governor with 2 concurring
members of the board can act on any matter requiring MB

1 year. Afterwards, it will be determined if it

To what power does this apply?

Only to defective contracts

Can it apply to valid contracts?

No.
This will impair

to extraordinary demands
Ex. Equitable bank run

after

impeachment trial
2. Insufficient realizable assets to meet

liabilities
3. Cannot continue without probable loss to

depositors or creditors
4. Willfully violated cease and desist order
that has become final, or dissipation of
assets of the bank
o In this case, forbidding from doing
business and appointment of PDIC

freedom of contracts
How long can conservatorship last?

115

as receiver is summary
Who is the statutory receiver?

The PDIC is the statutory receiver

But if quasi-bank, any person of recognized

competence in banking or finance

Duties of the receiver?

1. Gather and take charge of all assets and

receiver and close the bank. It is enough

that subsequent judicial review is given. To
require prior hearing would defeat purpose of

liabilities, and administer these for the

creditors
2. General powers of receiver in ROC
o Cannot pay or dissipate any of the
assets

What is the close now, hear later scheme?

No prior hearing needed to appoint a

UNLESS

it

is

closure.
General Bank: It was closed and nobody was willing
to invest fresh capital.
rehabilitated it.

for

run. But the court found that there was bankruptcy

institution in non-speculative interests

Case: Manila Banking was placed under receivership.

The officers sold real property belonging to Manila

because they extended unlimited credit facilities

What happens in liquidation?

1. Receiver files ex parte in the RTC petition

for assistance in liquidation
o According to liquidation plan by

Banking and the receiver approved it.

HELD: Invalid. The moment the bank was

placed under receivership, the officers lost

their authority to dispose its properties

The receiver cannot approve

employees, and issues re: liquidation plan

3. Convert assets to cash and pay claims

the sale because his powers are limited to

according to concurrence and preference of

acts of administration.
What must the receiver decide within 90 days

credits
Effect of receivership or liquidation?

1. Assets of institution cannot be garnished,

from taking over?

1. Whether

the

institution

may

be

attached, levied, executed

o Because they are

rehabilitated or is in a condition that it may

PDIC (or MB, if quasi-bank)

2. RTC adjudicates disputed claims against
the institution, liabilities of officers and

because they now pass under the control of

The old orders to close it were

questioned. They claimed there was an unusual bank

administrative expenditures
3. May deposit or place funds of the

the receiver.

Allied Bank bought and

deemed

in

resume business (with safety to general

custodia legis when in the hands of

public and creditors).

o MB must approve this determination

the receiver
2. No preference even if the claimant-

depositor obtained a writ of preliminary

of resumption
2. Otherwise, proceed to liquidation

attachment

3. Liquidation

116

Remedy is to join in liquidation

proceedings.
3. Appointment of receiver does not dissolve
corporation.

It does not eliminate legal

What is the provisional remedy against erring officers?

o 1. MB may place under preventive suspension any officer of
o

and desist order

Officers can request for a hearing within 5 days from

personality of bank. It can sue and be sued,

but

all

actions

pass

through

the

order to question the cease and desist order, or else it

receiver/liquidator.
Can the BSP forbid the bank to do business?

Yes, but when the BSP decides this, the

prescriptive period to foreclose is not tolled.

Is an insolvent bank closed by the BSP liable to
pay interests on deposits of clients?

No. A bank cannot pay interest when it is not

to 100 pesos.
Denominations of 1, 5, and 10 are legal tender up to 1000

operating.
But interests on loans extended by the BSP

pesos.
N.B. The old rates were 25 and 50 pesos, but they have been

changed to these rates in 2006 by CB Circular 537

Someone went shopping in the supermarket and paid

becomes final
Only the CB can issue currency and all notes issued by the CB are
legal currency:
o Coins, denominations of 25c, 10c, and 5c are legal tender up

bank can still foreclose mortgages and the

the bank pending investigation up to 120 days

2. If the officers continue with the violation, can issue a cease

are still demandable.

What is the character of all these remedies?
o No prior hearing required
o Final and executory
o What is the remedy?

Within 10 days, file a petition for certiorari

o From when do you count the 10 days?

Count from receipt of order by the BOD

Filing must be authorized by majority of SHs interest

MB may impose sanctions including liquidation of a bank when:
o [violations]
o 1. There are violations of articles and by-laws
o 2. Willful failure to comply with banking law/regulation of Mb
o 3. Conducting business with irregularities
o [re: information and supervision]
o 4. Failure to submit reports
o 5. Refusal of examination
o 6. Willfully making false statements to MB

coins to the cashier, total more than 1000 pesos.

The

cashier said it is not legal tender. Is she correct?

Yes.
What is its powers regarding money function?

May prevent circulation of foreign currency or of

currency substitutes, or of reproduction of facsimiles

of BSP notes
Investigate, make arrests, conduct search and seizure
in accordance with law to maintain integrity of

currency
What is the responsibility and primary objective of the BSP?
o Maintain price stability conducive to a balanced
sustainable growth of the economy.

117

and

Promote and maintain

monetary stability and the convertibility of the peso.

There are different tools held by the MB for this purpose:

1. CB maintains international reserves. The CB maintains an

a government instrumentality (and guaranteed by the

account with the Federal Reserve system in the US. The CB

o

thus can buy and sell foreign currency.

2. With concurrence of MB and with president, the MB can
restrict sales of foreign currency.

Government)
7. Reserve requirements can increase this (to decrease the
amount available for loans by the banks) vis--vis deposit
liabilities

Back in the 60s the MB

ordered all banks to surrender all their foreign currency to the

o

CB.
3. Require exchange obtained by anyone to be sold to the
bank.

Securities Regulations Code

There are laws on paper saying that upon earning

State policy and SEC

money in dollars, you have to sell them to the bank

within 5 days. But because of our commitment to the

IMF, this is not implemented anymore.

Code?
o 1. Protect public investors from fraudulent schemes
o 2. Encourage public investments by regulating sale and

The MB can:
o 1. Determine exchange policy,
o 2. Require banks to sell excess foreign exchange,
o 3. Buy and sell credit instruments from banks (Discount

policy)

Extend loans and advances (w/ charges and interests)

o

enterprises, enhance democratization of wealth, and promote

to banking institutions to influence volume of credit

4. Extend loans to banks for up to 7 days without collateral for

development of capital market

4. Protect investors, ensure full and fair disclosure of securities,
minimize/eliminate insider trading and fraudulent/manipulative

with the objective of price stability

5. In national emergency, by vote of at least 5 members, the

MB can approve of extraordinary loans

Amount must not exceed 50% of the banks total

disposition of securities
3. Establish a socially conscious free market that selfregulates, encourages widest participation of ownership in

the sake of liquidity

This can influence the volume of credit, consistent

o

What is the purpose and scheme of the Securities Regulations

deposits and deposit substitutes

Loans released in two tranches (installments)

6. Can buy and sell debt instruments (Open Market

Operations)

BSP may buy and sell in the open market evidence of

devices that distort the free market

Composition of SEC:
o 1 chairperson, 4 commissioners
o Collegial body
o 7 year terms each
What are the powers and functions of the SEC?
o [Registration and supervisory]
o 1. Jurisdiction and supervision over business organizations
o 2. Approve, reject, suspend, revoke, require amendments to
registration statements, and registration/licensing applications

indebtedness directly issued by the government or by

118

3. Supervise, monitor, suspend, take over exchanges, clearing

o
o

agencies, and SROs

[Regulation]
1. Regulate, investigate, supervise activities of persons to

ensure compliance with SRC

2. Compel officers of registered corporations or association to

call meetings of SHs or members

3. Issue subpoenas duces tecum or summon witnesses in

o
o

proceedings, or procure books

[quasi-legislative]
1. Formulate policies and recommendations on issues re:

o
o
o
o

securities market and make recommendations to Congress

2. Issue rules and regulations and opinions
[compliance and punishment]
1. Impose sanctions for violation of rules and regulations
2. Enlist aid and support of government agencies to implement

its powers and functions

3. Issue cease and desist orders to prevent fraud/injury to

o
o

public
4. Punish for contempt according to ROC
5. Suspend or revoke the franchises or certificates of

1. Investors and corporate affairs

Particularly fraudulent
employed

by

directors

devices

and

detrimental

interest/other firms

Ex. insider trading, etc.

2. State and corporate affairs

In relation to legal existence

election,

appointment

or

What is an investment contract requisites?

o 1. Investment of money

N.B. a no money out transaction is not an

o
o
o

investment
2. In a common enterprise

N.B. thus charitable institutions are not covered

3. With expectation of profits
4. To be derived primarily from efforts of others

N.B. So if the investor contributes actual work, its

not an investment contract

What are securities?
o Shares, participation, or interests in a corporation/commercial
enterprise/profit-making
o

venture,

and

evidenced

by

certificate, contract, instrument (written or electronic)

In particular:

1. Shares of stock, bonds, debentures, notes,

evidence of indebtedness, asset-backed securities

2. Investment Ks, certificates of interest or
participation in profit-sharing agreement, certificates
of deposit for future subscription

Investment K a person seeks to use the

public

of

in

directors or trustees
4. Petitions for suspension of payment corporate rehabilitation

schemes
to

Controversies

Registration of securities

registration
o 6. Exercise necessary or incidental powers
Which cases have been transferred to RTC jurisdiction from the
SEC?
o

e.g.

corporations,

money of others on the promise of profits

3. Fractional undivided interests in oil, gas, or other
mineral rights
4. Derivatives (options and warrants)

Options contracts that give the buyer the

right to buy/sell an underlying security at a

partnerships, and associations

3. Intra-corporate and partnership relations

119

predetermined price on or before an expiry

date

Derivatives limitless (depends on creativity of the human

mind)

o Call options rights to buy

o Put options rights to sell
Warrants right to subscribe/purchase new

bought $1000 (where exchange rate is 43 pesos to a

dollar), but the seller gives credit: 10 days to pay.

shares or existing shares in a company on or

5.

before an expiry date

Certificates of assignments,

certificates

Here, you are not speculating, you have already

of

participation, trust certificates, voting trust certificates,

and the like

6. Proprietary

or

non-proprietary

membership

certificates in corporations; other instruments

XYZ borrows money from persons and in exchange issues
interest, maturing after 2 months. The lenders can re-lend

these amounts after and even increase contribution when

transactions, but another for an elaborate scheme that

turns postdated checks as instruments for pseudoSecurities also include commercial

papers evidencing indebtedness of any person or

entity.
What are specific examples of securities?
o A foreign exchange trading transaction is an investment
o

political subdivision or agency, or instrumentality of government

2. Security issued or guaranteed by government of any country
with which Philippines maintains diplomatic relations (or

SEC right?

Yes, it is. It is one thing to issue checks for isolated

statement filed with and approved by the SEC

2. Prior to sale, information on securities made available to

each prospective purchaser

Which securities need not be registered?
o 1. Security issued or guaranteed by the Phil. Government,

the checks mature. The SEC found out and issued a cease
and desist order for selling unregistered securities. Is the

agreed to a price, you are just given credit.

Whereas in derivatives, you must have a license from

the MB.
Rules on registration?
o 1. No securities can be sold or offered without registration
o

postdated checks in an amount equivalent to their value +

investment.

Different from spot trading. Spot trading is where X

subdivision) on the basis of reciprocity

3. Certificates issued by receiver/trustee in bankruptcy

approved by proper adjudicatory body

4. Security or derivatives which sale or transfer is under

o
o

supervision of Insurance Comm, HLURB, BIR

5. Security issued by a bank except its own shares of stock
N.B. Usually these are issued by the government or
regulated by another agency.
issued

contract
Pyramiding scheme is an investment contract

Because there is expectation of profit from the efforts

of other people (you get commissions)

Someone with exploration contracts for oil or gas can sell

participation rights

120

in

bankruptcy

For instance, certificates

proceedings,

lots,

condominiums,

securities issued by banks.

Why are they exempt securities?

These are non-speculative in nature. The return on

investment is somewhat assured.

What transactions are exempt from registration?

[A. isolated and minor transactions]

1. Isolated transactions

Not in repeated and successive transactions

2. Sale of securities to less than 20 persons within 12 months

o
o
o
o

(deemed isolated)
[B. with existing underlying relationships]
1. Stock dividends (to existing SHs)
2. Sale of shares to existing SHs
3. Issue and delivery of security in exchange for any other

for

o
o

exchange it for stocks

4. Pre-incorporation subscription or pursuant to increase in
A.C.S. without compensation or remuneration for the

o
o
o
o
o

transaction and where purpose of solitication is to comply

o

with legal requirements

5. Exchange of securities by the issuer with its existing security

o
o
o

holders exclusively, where no remuneration is paid

[C. secured by mortgage and the like]
1. Sale by pledgee or mortgagee foreclosing
2. Issuance of bonds secured by mortgage, where the entire

buyer (who is the underwriter)

Ex. Meralco will float $500M bonds secured by

admin/guardian/receiver/trustee in insolvency or bankruptcy

2. Brokers transactions, executed upon customers orders, on

any registered exchange or trading market

3. Sale to banks, etc. and other sophisticated investors not

such
4. Issuing officer/SH convicted of moral turpitude or fraud
[misinformation or lack thereof]
5. False or misleading annotations as to material facts
6. Failed to comply with conditions for registration
7. Registration is inaccurate or incomplete

What is the shift of the Philippine securities registration system?

o It has shifted from a merit-based system to a disclosure-based
system.

So even if securities are potentially valueless (ex.

issued by a company on the brink of insolvency), as long as

mortgage on its assets. One bank bought all that.

o
o

of

Protection of investors

mortgage + all the bonds/notes secured thereby sold to one

This is exempt.
[D. sophisticated transactions]
1. Judicial sale or any extra-judicial sale/execution sale by

government or those authorized by government

Investment company
Others, as deemed by the SEC
disapproving application for registration

securities?
o 1. If corporation is insolvent
o [violations]
o 2. Violation of SRC
o 3. Engaged in fraudulent transactions or about to engage in

security of the same issuer pursuant to right of conversion

If a corporation floated bonds and there is an option to

o

Grounds

Regulated investment house

Insurance company
Pension fund/retirement plan maintained by the RP

these facts are properly disclosed, the SEC will not deny

registration.
What is a tender offer?
o Publicly announced intention by a person or group of persons
to acquire equity securities of a public company (a type of
takeover bid).

It is a public, open offer to all stockholders of the

corporation.

needing protection from the SEC

Bank

121

It is an offer for them to tender their shares on the

terms specified in the offer.

Purpose: To protect minority SHs from any scheme to dilute
their shares. It gives them the chance to exit the company
under reasonable terms and the chance to sell their shares at

the same price as those of majority SHs.

When is a tender offer required?
o If a person or group intends to acquire:

1. At least 35% equity of a listed corporation

2. At least 35% equity of an unlisted corporation, if it

What is the procedure for making a tender offer?

o 1. File a declaration with SEC of intent to make tender offer
o 2. Furnish the issuer of securities the necessary info
o 3. Publish and send out requests/invitation to tender shares
o 4. SHs deposit securities pursuant to the offer or request

Requisites if the depositor wants to withdraw the

securities deposited?

1. Done throughout period the offer remains

has at least 50M+ assets and 200 SHs with at least

tender offer or request

o except as the SEC may otherwise

100 shares each

3. At least 35% of equity of a listed corporation over a

period of 12 months
NOTE: in the codal this was 15% and 30% but the SEC rules

changed these to 35%

N.B. This requirement applies even to indirect means of

will be sold
What are not covered by the tender offer rule?
o [New stocks]
o 1. Purchase from unissued capital
o 2. Purchase of shares from increase in ACS
o [In relation to proceedings]
o 1. Purchases in connection with privatization undertaken by the
o

government
2. Purchases in connection with corporate rehabilitation under

o
o
o
o

court supervision
3. Merger or consolidation
[Public sales]
1. Purchases through open market at prevailing market price
2. Purchase in connection with foreclosure proceedings

What

if

the

prescribe
securities offered

exceeded

what

the

person/group intend to purchase?

The offered securities are purchased pro rata,

acquiring control

Ex. Shares of mother corp. which owns a subsidiary

open, and
2. Not yet been accepted by the offeror, and
3. After 60 days from the date of the original

disregarding fractions
This rule also covers: securities deposited within 10

days from increased consideration offer

N.B. if the person/group offers higher consideration to
attract more offers, the initial depositors must also be

given the higher consideration

What is proxy solicitation?
o A request that a corporate shareholder authorize another

person to cast the shareholders vote at a corporate meeting.

What is the rule on proxy solicitation?
o No broker or dealer can give any proxy in respect to any
security carried for the account of the customer to a person
other than the customer, if without express written authorization
of the customer

involving a pledge/security arrangement

122

A broker or dealer who holds or acquires proxy for at least 10%

of the shares must identify who the beneficial owner is, within

What are covered by the short-swing profit rule?

o Directors, officers, and principal stockholders (owns more than
10% of a particular class of securities) (i.e. corporate

10 days of acquisition, in a report given to:

1. SEC,

2. Issuer of the security, and

3. The exchange where the security is traded

insiders) who enter into a purchase-and-sale or sale-ando

purchase transaction within a gap of 6 months

What is the effect?

The corporate insider must return any profits derived

to the securities-issuer
What transactions are exempted from forfeiture of profits?

1. If the securities were acquired in good faith in

Prohibited and Fraudulent Acts

What are prohibited acts?

o [Market manipulations]
o 1. Manipulation of security prices, false transactions, where to

falsely show active trading, there are multiple transactions

Wash sales (transaction that involves no change in

beneficial ownership thereof)

Matched orders

Market rigging or jiggling

2. Effecting alone or with others a series of transactions in

o
o

fix, or stabilize its price

4. Manipulative or deceptive devices or contrivance in

o
o

purchase or sale of security

[Deception]
1. Circulate or disseminate information that the price of a

prosecute, the issuer fails to do so

What is a short sale?
o It is the sale of a security that the seller doesnt own. A short
seller often borrows shares from a broker and sells them to a
third person, hoping the price will drop. He then buys back
from the public, at a lower price, the same number and type of
shares he borrowed from the broker and returns them, profiting
o

from the lower value of shares.

N.B. This is perfectly legal. Contrast this with the short-swing

profit sale (which the code actually calls short sales)

What are fraudulent transactions?
o Obtain money or property through untrue statements
o Involves deceit
What is insider trading? (Usually asked in the Bar)
o Illegal for an insider to buy or sell security while in possession

security will rise or fall because of manipulative market

o

time of purchase and sale

When is suit filed?

2 years from when profit was realized, in the RTC

Brought by the issuer, or the owner of the securities

issued by the issuer if after 60 days from request to

securities that:

Raise price to induce purchase

Depress price to induce sale

Create active trading to induce purchase/sale through

manipulative devices
3. Series of transactions for purchase/sale of security to peg,

connection with a debt contracted prior

2. If the beneficial owner was not such both at the

operations
2. Make false/misleading statement with respect to material
facts, which he knew or had ground to believe was

of material information not available to the public

false/misleading to induce purchase or sale of any security

123

Unless that insider proves that the information was not

obtained from insider relationship

Or if he had reason to believe the other party knew of

any such provision, shall have made or engaged in the

performance of the contract

Ex. Company who knowingly issued unregistered

this information or he himself made it known

Who is an insider?

1. Issuer

2. Officer of issuer

3. Person whose relationship gives him access to

material information
4. Government employee, director, etc. (of SEC) with

access to this information

5. Person who learns this info from the foregoing

1. Void as regards the rights of any person who, in violation of

securities (the infirmity of which the buyer wasnt

aware of) cannot file action for specific performance to

compel payment
N.B. It is unilaterally void only as for the violator. So
the buyer can void it because the seller was
fraudulent, but the seller cannot decide to invoke that

persons

N.B. not if it wasnt communicated to the

it is void.
2. Void as regards a non-party to the contract who was aware
of the violation

person (ex. just randomly stumbled upon a

o

letter containing such information)

When is information material?

If it will affect the price

Or important in the decision to buy, sell, or hold the

Transportation Law

Distinguish common carrier from private carrier:

security

Civil liabilities:
o Any person acquiring a security may sue if the registration or
o

statement is untrue as to a material fact

Who:

1. Issuer and every person

who

signed

the

Time sharing:
o Can offer staying in cottages, clubs, etc. to non-members
because sometimes they are empty. These are securities that

Private carrier

Holds self out in common to all

Agrees to carry persons/goods for

persons who choose to employ him

Bound to all who offer such goods as

hire in a special agreement

Only by virtue of special agreement

it is accustomed to carry and tender

registration statement
2. [See enumeration in the Code] prospectus,
fraudulent transactions, insider trading, etc.

Common carrier

reasonable compensation
Subject to regulation; as a public

Not subject to regulation to same

service
Extraordinary diligence
Cannot stipulate exemption from

regulations
Diligence of GFF
May validly stipulate such

liability for negligence (void against

must be registered.
What is the effect of contracts made in violation of the SRC?

PP)

124

What are common carriers?

o Hold themselves out to the public as ready to engage in

(fortuitous event does not justify major delays

carrying goods or passengers or both for compensation as

public employment.

Even if thats not his primary business

Does not need to have a regular schedule, and can

o

have limited service (ex. school bus)

What about transportation of oil through a pipeline?

Still a common carrier it does not have to be a

vehicle.
Is a travel agency a common carrier?

No, it only makes arrangements for the passenger.

What is the level of diligence for a common carrier?
o Extraordinary diligence, as opposed to GFF for a private carrier
o Both in transportation of persons and custody of goods
o Can a common carrier invoke the last clear chance

o
o
o

Its traceable to human negligence.

What about robbery?

Robbers must be acting with irresistible force

2. Acts of public enemy in war
3. Acts or omissions of the shipper or owner
4. Character of the goods or faulty packaging

Character of goods: ex. ripening of fruits

Faulty packaging: If obvious from external

still the carrier accepted it, it is liable.

An owner under-declared the weight of his

to liability of passengers.
What about diligence in selection and supervision of

package to save money. The carrier accepted it.

employees?

No, its just a defense in quasi-delict but not breach of

Held?

This caused the goods to spill from the package.

transportation contract.
What about defects in the parts, even if brand new?

Its still not a defense. Even if its brand new, the

goods and noticing that they are obviously

o
o

components or car part is not a good defense.

What are the defenses available to the carrier?
o 1. Fortuitous event

When is fortuitous event not allowed to be

There is shared liability. Extraordinary

diligence includes the carrier examining the

common carrier cannot be complacent. Defect in

concurrent negligence by the transporter

Is fire a fortuitous event?

As a rule, no, except if caused by lightning.

appearance that they are not properly packed, and

defense?

No, it is a defense in quasi-delict, but does not apply

o

after the event)

If there is failure to comply with this there is

Before, during, and even after the event

invoked?

If there is negligence or delay

When is extraordinary diligence required, even

under-declared.
5. Order of competent public authority
6. Exercise of extraordinary diligence

If the goods are damaged or lost, what is

during a fortuitous event?

125

presumed?

The carrier is presumed to have been in fault

Burden of proof is on the carrier to prove exercise of

extraordinary diligence
When does responsibility of the carrier begin?

From the time the goods were placed in its possession until the

Notice given to consignee re: the arrival of

goods are actually delivered

Carrier was delivering hemp, but it cannot approach the wharf

the goods
Given reasonable opportunity to remove

because the water was shallow. It sent a lighter to send the

hemp, but it sank.

HELD: The carrier is liable. The transportation

through the lighter was a preparatory act to delivery,

o

and so was within the K of transportation.

Carrier was delivering oil, and when it got to the wharf, it was
pumping oil into a tank. The hose was severed, without the
carrier noticing, and the oil placed in the tanks spilled into the

water. Caltex, the shipper, sued.

HELD: No final delivery yet because the oil spilled

o

them or dispose of them

2. There was exercise of extraordinary diligence
When does the K of transportation terminate?
o 1. When the goods are actually received
o 2. When there is unreasonable delay in receiving the goods

What is the implication?

The carrier becomes a depositary, and

prior to loading or in transit?

The common carrier is still liable, because it has

back. Carrier was liable.

X was waiting for the LRT on the platform, after buying a token

and entering the turnstile. He got into an altercation with the

guard who assaulted him. X fell onto the tracks and got hit by

control and responsibility over the goods

How could the carrier avoid liability?
o Through stoppage in transitu
This is exercised by the seller/owner, before it has

the train. Is LRT liable?

Yes, because he was there in pursuit of boarding the

o

reached the consignee. Its as if the owner never

LRT.
After alighting a bus, but waiting to pick up luggage, the same

bus hit one of the passengers. Is the bus liable?

Yes, responsibility only ends after passage of

consignee is akin to that of warehouseman/depositary and

destination.
The contract of carriage does not automatically end

upon alighting. Contract of carriage includes chance

parted with ownership of the goods.

Legal effect: the contract of carriage is terminated; the shipper

becomes akin to a warehouseman/bailee

What is the nature of services of an arrastre operator?
o The legal relationship between the arrastre operator and the

reasonable time and opportunity to leave the

diligence is reduced to GFF.

What if the goods were placed in a bonded warehouse

to get the baggage.

Upon landing on the dock, and the goods were placed in a

warehouse, but there was no consignee was there delivery?

o No.
o What are the defenses?
1. There was delivery

126

depositor
Maritime law does not apply to govern the arrastre operators

responsibility
When is a stipulation limiting carrier liability valid?
o It must be reasonable to be valid.
o What are unreasonable?

1. No liability at all

2. Limited liability up to a certain amount

3. Goods transported at risk of owner

4. Exercise of diligence less than GFF

N.B. so this is the minimum

5. That the common carrier is not liable for acts of its

employees
What is valid:

1. Limiting carrier liability in case of strikes or riots

2. Limiting liability up to a certain amount UNLESS

How does gratuitous transportation affect stipulation limiting

liability?
o It becomes valid
o But not for willful acts and gross negligence
Contributory negligence of passenger will not exculpate carrier but
minimize liability
o Ex. Passenger left his elbow hanging out the bus window, got

the shipper declares the actual damage

N.B. if the carrier is a private carrier, such stipulations

hit and severed. His contributory negligence reduced the

otherwise deemed unreasonable are valid.

Which countrys laws govern the transshipment of goods between

amuck and started hurting the passengers with a knife. The

countries?
o The law of the country wherein the goods will be shipped
o

other passengers panicked and ran out, and fell, died.

HELD: The bus company was liable because a

governs.
Ex. If there are two carriers (A and B) with a transshipment

passenger ran amuck and the employees did not do

agreement and As transportation ends in Davao, its liability is

governed by Philippine law even if B proceeds to deliver to

is required to exercise extraordinary diligence but is

Service Act, Customs and Tariff Code, Civil Aeronautics Act

Tertiary: Carriage of Goods by Sea Act
Can the parties deviate from this hierarchy?

Yes. Stipulate in contract of carriage what laws

should govern (Paramount Clause). It applies by

not an absolute insurer.

What is the rule re: explosives, etc?
o Airline companies liable because they are authorized to
search bags
o Bus not authorized to search bags, so not liable.
If the carrier ends up in an accident, what are the remedies of the
passenger?
o A passenger can sue under breach of contract or quasi-delict.
o N.B. Breach of contract is easier to prove because there is

reason of contract, as long as it is not against public

anything, stop the bus, or whatever.

A bystander threw a stone at a bus and it struck a passenger.
Carrier liable?
HELD: No. It has no control over this occurrence. It

USA.
What specific laws will govern under Philippine law?
o Primary: New Civil Code provision on common carriers
o Secondary: Code of Commerce and other special laws: Public
o
o

carriers liability.
A bus was cruising along the highway. One passenger ran

policy.
What are the rules governing baggage of passengers?
o If it is checked in, liable as common carrier
o If it is hand carried, it is considered necessary deposit only

presumption and the defense of diligence in

o

required to exercise diligence of GFF

127

selection/supervision is not available.

Why would you sue under quasi-delict then?

There are more damages recoverable, but the case is

tougher. But you can recover moral damages from

physical injuries here.

What damages can be recovered in breach of contract?
o 1. Passenger was injured:
Medical expenses
Loss of income if incapacitated to work
Attorneys fees, if the carrier unjustifiably resisted the

claim
If the driver was negligent, you cannot impose

awareness of the drivers recklessness)

Moral damages?
General rule: not demandable
Exceptions:
o Obligor acted in bad faith or fraud
o Gross negligence tantamount to

by the personnel using GFF, there is liability.

o If not, it is a fortuitous event.
Can this liability be eliminated by stipulation, posted notices,

Warsaw Convention

bad faith
2. Passenger died
Medical expenses
Funeral expenses
Where there is no proof of funeral expenses,

defense.
What if the passenger was caused by co-passenger or stranger?
o If the act of the stranger could have been prevented or stopped

statements on tickets, or otherwise?

o No.

something that makes the employer liable (ex.

When does the Warsaw Convention apply?

o To transport of persons, baggage, goods in international air
transport
o Although domestic flights may apply it in a Paramount clause
When is there international transport?
o 1. Point of departure and point of destination are in two high
o

award of 25K as temperate damages

Moral damages
Exemplary damages apply same doctrine above
Lost income
(80 actual age) (annual income) (2/3) =

the common carrier?

o The CC is liable EVEN IF the act was done in violation of
or

beyond

scope

of

the

employees

contracting States to the convention

2. Point of departure and point of destination is within one high
contracting State, and there is an intermediate point, which is a

indemnity
What bout injuries caused by acts or omissions of employees of

orders,

automobile, then diligence of GFF is a defense.

Ex. But if at the same time, there is liability for injuries
caused to passenger, diligence of GFF is not a

exemplary damages on the employer unless there is

Must be in the course of his employment

Ex. If the liability is for damages caused to another

State that may or may not be a high contracting party

What is the single operation rule?

The moment a person is covered by the WC, then it

also covers even domestic portions of the itinerary

Ex. ML Amsterdam Madrid Barcelona

KLM issues a ticket from ML to Amsterdam. Then it helps
the passenger secure a ticket from Amsterdam to Paris,
but flown through Air France. Is KLM liable for problems

authority

in the flight to Paris?

(Respondeat superior)

128

NO. It is a mere agent of the other airline company.

What documents are involved in international transport by air?
o Passenger ticket
o Baggage check
o Airway bill
Is the issuance of an airway bill necessary in order to establish

o
o

contract of carriage?
o Yes, because an airway bill is a document that would establish

of carriage
When must claim notice be given to the carrier?
o Baggage loss: 3 days from receipt of baggage
o Goods loss: 7 days from receipt of goods
o Delay in delivery of baggage or goods: 14 days from delivery
o What if the consignee does not give such claim notice to
the carrier?

Further action by the consignee is barred (similar to

a contract of carriage between the carrier and the owner of

goods. It establishes receipt of goods and the condition of the

goods loaded on board.

Can the carrier accept the goods without issuing an airway bill?
o Yes, but it would be liable to the shipper, had it delivered the

goods to the consignee without asking for surrender of the

o
o

airway bill.
The carrier will be liable to shipper for misdelivery.
Also liable to real person with lawful right over the goods who

the rule in the Code of Commerce and unlike COGSA)

o See directly below for period to file claims in cour
What is the period to file claims for damages in court?
o 2 years from arrival at the destination, or when arrival should
o

holds the airway bill.

When does the right of the shipper to dispose the goods cease?
o From the time when the right of the consignee begins (when

the goods are delivered to the latter)

o He couldnt recall the goods anymore or stop delivery in transit.
If the consignee refuses to exercise his rights as consignee, what

happens?
o The shipper resumes right over the goods and can exercise

2. Goods are missing

N.B. Consignee will have right to enforce rights under contract

have happened, or stoppage of carriage

What is the exception for period to file claims?

Action based on passenger being humiliated (follow

tort law) 4 years
Where can you sue the airline company?

1. Where you bought the ticket

2. Where the airline company was incorporated

3. Where the airline company has its principal office

4. Point of destination
In a roundtrip flight (ex. SF ML SF), can you sue in
ML?

rights and obligations over goods under Warsaw Convention

Rights of consignee upon arrival of goods at port of destination:
o 1. Right to demand from the carrier to deliver the airway bill

and the goods to him

o 2. Pay transportation costs to carrier if stipulated
When is the consignee allowed to enforce provisions of contract

(airway bill)?
o 1. Goods not delivered before expiry of 7 days from the time

No, because in a roundtrip flight, your point of

departure is the same as your point of destination.
When can you sue in ML?

If the return date is left open. Meaning, ML

is the point of destination.

Who is the defendant?
o 1. As regards passengers:

In case of successive carriers, the carrier in which the

accident or delay occurred

they were supposed to arrive

129

Unless by express agreement, the first carrier

embarkation or disembarkation, or delay) or goods (damage or

assumed liability for the whole journey

2. As regards baggage or goods:

Passenger or consignor can sue first carrier,

Passenger or consignee can sue last carrier, or

Against carrier I which destruction, damage, or loss

baggage and goods

What are the defenses available to the carrier?
o 1. Carrier/agents took all necessary measures to avoid
o

delay) is limited to the stated amounts.

When does limited liability NOT apply?
o Limited liability does not apply when there is dol or willful
misconduct

Ex. the PAL situation where bags were unloaded so it

occurred

N.B. all carriers are jointly and severally liable

What is the liability of carriers to passengers?
o Liable for death or injury if caused on board, during
embarkation, or disembarkation
What is the period of responsibility for the air carrier?
o As soon as the carrier has possession and custody over the

could take in more freight

Ex. Recklessness in handling luggage

What is the limitation of liability?
o 1. Carriage of passengers 250K francs

Except if by special contract, the carrier and

o

damage or it was impossible to take these measures

2. Error in piloting and the carrier/agents had taken all

special declaration of interest in the delivery and has

paid a supplementary sum if it is required

In this case, what happens to the liability?

The limit will be the declared amount

Unless it is proven the actual value is higher

3. Hand-carried baggage 5K francs per passenger
What is the effect of the Guatemala Protocol?

Increased limits to $100K for passenger and $1K for

impossible to take these measures

Ex. pilot mistakenly identified one airport as another

3. Error in handling of aircraft and the carrier/agents had taken

o
o

all necessary measures to prevent the accident or it was

o

passenger agree to a higher limit

2. Carriage of registered baggage and cargo 250 francs per
kg (of the baggage concerned, not total baggage)

Except if the passenger or consignor has made a

necessary measures to prevent the accident or it was

Liability to passengers (injury on board, injury during

impossible to take these measures

4. Error in navigating and the carrier/agents had taken all
necessary measures to prevent the accident or it was

impossible to take these measures

5. Contributory negligence

Liability reduced appropriately by the degree of

negligence contributed by the shipper/consignees

What is the concept of limited liability?

baggage, but its not yet effective

Do you apply Warsaw Convention when suing on a tort? (Ex.
humiliation)
o No.
When a passenger is downgraded, can he recover damages?
o Yes.
How much are airlines allowed to overbook?
o Up to 10%.
o If everybody shows up, then the airline company asks for
volunteers to be transferred to the next flight.

130

If no one wants to be transferred, the last ones to check in will

Maritime law

be left behind.
o N.B. But our SC does not accept this reasoning.
X and his wife went to HK with another couple, with their friends. When

they were returning, X was informed that he was being transferred to

first class, against his wishes. He sued.
o HELD: He won. There was still a breach of contract, in spite of

the upgrade.
X was a soprano who was scheduled to perform in KL. X booked with

when it received them. The clean BOL shows that they were in

Sing Air a flight from Frankfurt to ML, and then ML to KL. Because of

the bad weather, Sing Air wasnt able to fly her to ML on time to reach
KL. So X just flew directly to KL with another flight and wasnt able to

practice, and performed badly.

o HELD: Sing Air was liable; it was not beyond remedy.

different NW flights. A family was rebooked in an itinerary that was

in additional cargo and freight.

o HELD: this was bad faith, leading to moral damages.
Unloading baggage to prevent airplane from being overweight, for safety

considerations
o HELD: not liable
JAL was unable to land in MLA for two weeks because Pinatubo erupted

the costs.
When can the consignee of the goods refuse to take delivery of the
goods and just claim damages?
o 1. When the partial loss makes the entire thing useless
o 2. When the damage makes the goods useless for the purpose
o
o

and the runway had lahar.

o HELD: It is a fortuitous event. JAL not liable for

good condition when received.

What if the package appears unfit for transportation?
o The carrier can refuse to accept the goods
What if the carrier suspects the goods as misdeclared?
o It can open the package. If the carrier is right, the owner
shoulders costs of inspection. If the carrier is wrong, it bears

Couldve booked another flight to make it possible.

A Northwest flight was aborted so the passengers were all rebooked in
more roundabout and longer compared to other passengers.
o HELD: NW was liable.
PAL in a stopover unloaded pieces of baggage of its passengers to take

What is the 3-fold character of a BOL?

o 1. Contract
o 2. Receipt for goods
o 3. Symbol of the goods
What does a clean bill of lading bar?
o Any argument by the shipper that the goods were damaged

accommodations, food, etc.

Immigration refuses to let a passenger leave due to defects in

passport/travel documents.
o HELD: This is not the airlines fault.

for which they were intended

3. Delay through fault of carrier
4. Damage apparent from external appearance of package
When must claim be made?
Immediately, or else barred
What if the damage is not apparent?
Within 24 hours from receipt, or else barred
When does this provision not apply?
For international shipping, the COGSA

applies
If goods are transshipped, who is liable?
o The ultimate carrier
o What if the goods were actually damaged during the first
leg?

131

The ultimate carrier is still liable

It can just sue the prior carrier for reimbursement
Against whom does the shipper or consignee have right of

action?
Carrier who executed the transportation contract, or

which crashed and damaged the goods. Claim was against the
vessel. Vessel claimed it was not liable because the harbor pilot

reservation
When does a reservation have no effect in

was not part of the crew. HELD?

o Vessel liable. The captain still retained control over the vessel.
When he saw that the harbor pilot was about to crash the ship,

is responsible
When must the consignee pay for freight and expenses?
o Within 24 hours of receipt
o Otherwise, the carrier may ask that the goods be dissolved

he should have intervened.

Responsibilities of ship owners and ship agents?
o 1. Acts of the captain
o 2. Contracts signed by the captain to repair, provision, or equip

until enough to pay arrears

The contract between buyer and seller stated that there should be

the vessel
3. For indemnities due to third persons due to conduct in the

no transshipment. The shipping company issued a BOL which

care of the goods

4. Quasi-delict in case of negligence in selection/supervision of

stated on its face that there will be transshipment. When the

goods arrived, the buyer refused to receive the goods. The seller

sued the vessel. HELD?

o The seller lost. The BOL clearly stated that there will be

persons
Goods arrived at the pier. Then the vessel hired a harbor pilot,

other carriers who received the goods without

relieving responsibility?
When the carrier who made the reservation

Registration of vessels with the Maritime Industry Authority

o Where the sale was not registered, the sale does not bind third

employees
o 5. Collision due to the fault of the captain
Real and hypothecary nature of maritime commerce:
o If liability is incurred, it is not the owner that incurs the liability
attaches to the thing. So if the vessel sinks, the liability is

transshipment but the seller agreed.

The goods which arrived to the buyer did not meet specifications

extinguished.
The liability of the ship owner is limited to the value of

so the buyer refused to receive the goods. The carriage piled up.

the vessel, earned freightage, and proceeds of

Who is liable?
o The consignee. The contract of sale and the contract of
shipment are two different contracts. The consignee should

have just received the goods and sued the seller.

The goods were shipped from ML to Davao by one shipper, then

insurance. No vessel, no liability.

What is the effect of abandonment?
Abandonment of the vessel and all her
equipment and freight leads to exemption

Davao to SF by another. The goods were damaged upon arrival in

o

Davao, but suit was made upon arrival in SF. HELD?

o Period for filing the claim was barred. Should have claimed in

from liability.
What are the exceptions (usually asked)?
1. If the ship owner is at fault (i.e. the vessel is not
seaworthy)

Davao.

132

Ex. the ship did not have enough lifeboats

2. The vessel was insured the proceeds of the

insurance will take the place of the vessel

3. Even if the vessel sinks, the ship owner will be

owner over the goods

In a bareboat charter, there is no such lien if

liable for repairs and provisioning of the vessel

undertaken before its loss

N.B.: workmans compensation is not anymore an

stipulation that the owner will not be liable for damages due to

claims for injury, sickness, or death in the course of

employment. File claim with ECC

What are Charter parties?
o In essence, a lease of the vessel
o What are the basic types of CPs?
1. Bareboat charter
The ship owner turns over the possession of

the charterer does not pay the ship owner

The vessel remains a common carrier
In a charter party with a private carrier, a stipulation that the
ship owner will not be liable for damages is valid, or a

exception the sinking of the ship is irrelevant for

If the charterer does not pay, there is a lien by the ship

fault of the captain is valid.

Averages
o Averages may be particular or general
o Items mentioned in Art. 809 and 811 are merely illustrative. It
is not exhaustive.

General averages

Particular averages

the vessel to the charterer

The charterer undertakes to provide the

Common danger to vessel and cargo

Deliberate sacrifice of part of the

None
Accidental damage

officers, supplies, provisions during the

vessel or cargo, with authority

Inured to common benefit
All persons with interest in the vessel

No such common benefit

Owner of the thing damaged bears

and cargo saved must contribute in

damage alone

voyage
What is owner pro hac vice?
o Owner for this occasion
o If it is a public carrier, it temporarily

the indemnity

becomes a private carrier (diligence

becomes GFF)
2. Time charter
Contract for the use of the vessel for a

specific duration or voyages

3. Voyage charter/contract of affreightment
Contract for carriage of goods from one or

more ports of loading to one or more ports of

o

unloading
What is the nature of the time/vessel charter?
The owner of the ship retains ownership and control

133

General average samples:

o [Enemies and bad people!]
o 1. Goods or cash invested in redemption of the vessel or cargo
o

captured by pirates/enemies, etc. or expenses for repair

2. Curing and maintaining members of the crew who were

o
o
o

wounded in defending the vessel or saving it

3. Wages of member of the crew detained as hostage
[Too heavy, brother]
1. Goods jettisoned to lighten the vessel

2. Removing or transferring portion of cargo to lighten the

vessel
3. Loss suffered in value of goods sold at arrivals under stress

o
o
o

to lighten load
[Emo solutions]
1. Cables or masts cut or anchors and chains abandoned
2. Damages suffered by goods through opening made in vessel

o
o

for draining (to avoid sinking)

3. Floating a vessel intentionally stranded to save it
4. Damage to the vessel which had to be opened, scuttled, or

o
o
o

broken to save cargo

[Expenses pursuant to average]
1. Expenses to liquidate average
2. Wages of crew of a vessel chartered by the month during the

(Maritime tort)
o The provisions on civil tort do not apply
ex. last clear chance, rule of comparative fault, due
o

overboard
What are the requisites of general averages?
o 1. There is common danger
There is no common danger when the damage was
due to fault of the captain
2. For common safety part of the vessel/cargo is sacrificed

o
o

foundation of general averages

3. It was successful
4. Legal steps should have been taken before general average

is made
i.e. the captain conferred with the officers, the cargo

diligence in selection/supervision of employee

If two vessels collided and it is the fault of one:
Latter bears it own costs
Bears the other vessels costs
Bears cost of goods damaged
If both are at fault:
Each one will bear its loss
Do not consider LCC, comparative fault, etc.
Solidarily liable for the damaged goods onboard both

vessels
If you cannot tell which one is at fault:
Same rules as if both are at fault
Rule of inscrutable fault
o If a third vessel is at fault:
The third vessel is liable for losses and damages
o If collision was due to fortuitous event:
Each shall bear their own damage
What is the doctrine of error in extremis in collisions?
o There are three zones in collision:
First time up to the moment when risk of collision
o

time vessel was detained by force majeure

When are there particular averages?
o The damage did not benefit persons interested in the cargo
o Ex. fruits became rotten
o Ex. pirates intercepted the vessel, so the captain threw money

What are the rules on apportionment of liability in collisions?

begins
Second when risk of collision begins until the

moment it becomes a practical certainty

Third when collision is certain up to the time of

impact
Thus, even when a ship with right of way suddenly changes its
course during third zone, in an effort to avoid collision due to

owner, entered in log book, marine protest made

Protest must be made within 24 hours (unless the

the other vessels fault, the act is in extremis and cannot

create responsibility on the part of the former (meaning, since

captain is injured, or is unable to do so for some

reason)

134

its a useless effort, the ship with right of way must not be

penalized for it).

lading and the BOL indicates this greater amount, the ship
owner is liable for that greater amount

It must apply on the BOL itself, not a mere reference

Carriage of goods by sea act/COC

When does the COGSA apply?

o Shipment from foreign country to the Philippines
o It is valid for parties in inter-island shipping to stipulate that the

COGSA applies
Even if the cargo owner did not file a claim, it can still sue. Filing a claim

is not a condition precedent.

1 year period to file a case
o Count the one year from the last day delivery was made (if
o

unloaded Mon-Wed, count from Wed)

If the goods were not delivered, count it from the last day the

vessel was here and could have delivered the goods

Does the provision in the civil code that the filing of the

BUT if the nature and value of the goods are stated in the bill of

to another document
Compare the prescriptive periods:
o Code of commerce:

Period to file a claim:

Immediately if damage is apparent

Within 24 hours if damage is not apparent

What is the caveat?

o For both cases, the claim must be
made before the payment of the

claim interrupts the prescriptive period apply?

No, it does not. Public policy dictates expeditious

o

disposition of the cases under COGSA.

Can the consignee-insured sue the insurer instead?

No. This is a circumvention of the rule. The insurer

COGSA:

Claim is not a condition precedent. But periods are

here anyway:

Immediately if damage is apparent

Within 3 days from delivery if damages is not

will step into his shoes and will find himself barred
o

transportation charge
Prescription for court claim
Claim is a condition precedent

For non-delivery or misdelivery:

o Within 6 years if there is no BOL
o Within 10 years if there is a BOL

from recovery.
When does the one year prescription not apply?

1. Agreement by parties to extend the period

2. In case of misdelivery delivered to wrong party

Apply NCC: 10 years under a written K, 5

apparent
Prescription for court claim

Within 1 year form delivery or when the

goods should have been delivered

years if suing under tort

3. Delay in the delivery of the goods

IMPT: COGSA doesnt apply to misdelivery and delayed

Public service law

delivery. COGSA only applies to non-delivery and damaged

goods.
$500/carton limit

135

What are not public utilities:

In the old law, ice plants were regulated as public utility, but

when the PSC was abolished, there is no more body regulating

them.
In case of tricycles, it is now the municipalities/cities who issue

certificates of public convenience

A shipyard is not a public utility, because you have to render

services to the public. A shipyard does not.

The law mentions entities that are not public utilities:
o Warehouses
o Vehicles drawn by animals
o Bancas, tugboats, lighters
o Tricycles
o Pedal-driven pedicabs
o Public utilities operated by national or local government

Ex. PNR, Olongapo City power plant

But these are regulated by appropriate regulatory

the Philippines and 60% Filipino

o 2. Applicant must prove public service and interest is promoted
o 3. Applicant is financially capable
What is the prior operator rule?
o Before allowing a new applicant to come in, a prior operator
o

must first be given the chance to expand his service

Provided that his service is efficient, to prevent ruinous
competition

Not all competition is ruinous competition, but the

returns in income should drastically lower the income

of the prior operator that he loses a lot of money

Exceptions?

1. Prior operator is operating less units than

agency
Can foreigners own public utility properties?
o Mere ownership of the properties used by public utilities does

authorized
2. Operator denies there is a need to expand his

not make one a public utility. So a foreign entity can own the

service
3. The old operator did not apply until a new applicant

emerged
4. Service of the prior operator must be deficient
5. Prior operator given a chance to expand but failed

LRT facilities and lease it out.

In case of radio and telecommunication companies, what is
required?
o A legislative franchise. What is granted is a certificate of
o

necessity and public convenience.

If legislative franchise is not required, its just a certificate of

public convenience.
So: if the legislative grants a franchise, its a CNPC. If no

legislative franchise is needed and what is just needed is

o 3. Holder ceases operations or abandons services

Requirements to get a Certificate of Public convenience?
o 1. Applicant must be Filipino or corp/association organized in

authorization given by the regulatory body, its a CPC.

When can a CPC be revoked?
o 1. Violation or refusal to comply with order, rule or regulation of
o

the authority
2. Holder is just a dummy

136

to do so

6. Abandoned his service

7. Routes are different, although partially overlapping

Who has the burden of proof to establish need for public
transportation service?
o Always the applicant
Unlawful acts:
o 1. Provide unsafe or inadequate service
o 2. Charge rates not authorized
Up to how long is suspension allowed?
o Director can suspend up to 30 days the certificate of authority.

Acts requiring commission approval:

o 1. Fixing rates

BUT Usually regulatory agencies are allowed to issue

But the SC also approved using present value of properties

used to render public service as basis

Meralco case: Court adopted the present value of the assets

provisional rate increases

This needs no hearing. Reason: they are temporary

used to render services as basis to determine rate of return.

by nature and subject to adjustment after final

rates because they just had their assets reappraised, and

Now and then, this is why power plants can submit adjusted

hearing.
2. Construct, maintain, operate new units to extend facilities

Somebody had a certificate of public convenience for

inter-island shipping and had one vessel which was

these increased in value.

If a customer claims he was overcharged, where does he file?
o With the courts
o NOT with regulatory agency, because this does not involve

indicated. It became unseaworthy, and he sold the

CPC. The sale is void because there was no valid

o
o
o

arrived at its calculations and to ask for an explanation on the

subject matter of the sale.

NOTE: the CPC indicates what units will be used. If

you replace the unit you have to get approval.

3. Increase capitalization
4. Sell, mortgage, lease, encumber its CPC and properties
Sale of units covered by a CPC without commission

approval valid?

Yes, but only between the parties and not to third

particulars.
If a customer claims that his service of electricity was improperly
disconnected, where does he file?
o With the ERC, which has the power to direct the power

persons.
What is the standard that should be used when an admin body
fixes rates of public utilities?
o The only standard is that it must be reasonable and just.
o Factors considered:

1. Rate of return (usually 12%)

2. Rate base

3. Return itself or computed revenue to be earned by

rate-fixing.
Same file with the court if you want to question how Meralco

companies to reconnect the service

Generally: need 72 hour notice prior to disconnection of service
o EPIRA provision

If a customer was caught in flagrante delicto using a

o

jumper, the service can be disconnected immediately.

Requisites?

1. Caught in flagrante delicto

When the owner was not present and just his

the public utility

There is a circular saying that provincial buses can charge more or less

with allowed variance of up to 15% in costs. Is this valid?

o No, because this is undue delegation.
What is the fair rate of return for investment?
o 12% - citing US jurisprudence

137

househelper was, there, not in flagrante

2. A representative of the ERC or officer of the law

must be present when the inspection was conducted

When is notice and hearing required?
o 1. Issuance of CPC/CNPC
o 2. Fixing standards and qualifications
o 3. Fixing standards of measuring quantity

4. Establishment of rules to secure accuracy of meters and

measuring appliances
o 5. Order to compel operators to furnish proper service
o 6. Allowing extension of facilities
When is notice and hearing not required?
o 1. Investigation of public utilities
o 2. Valuation of properties of public utilities
o 3. Examination and test of measuring appliances
o 4. Grant of special permits to make extra or special trips in

contribute

Philippines, and duly registered with the BSP which shall

assess/appraise the other assets other than foreign exchange

Define doing business:
o 1. Soliciting orders
o 2. Service contracts
o 3. Opening offices whether liaison offices or branches
o 4. Appointing representatives staying in the Philippines 180
o
o

with unclean hands.

Kabit system jurisprudence talks about liabilities to third

parties. So if a kabit jeepney is hit by a truck from behind, the

participation in the enterprise

Define foreign investment:
o Equity investment by non-Philippine nationals in the form of
foreign exchange or assets actually transferred to the

recover units which were the subject of Kabit system?

No. They are in pari delicto. You cant come to court

o

Constitution
In general, no restrictions on foreign investments, except for
to undertake measures to gradually improve Philippine

actual operator and ostensible operator (grantee of franchise)

actual operator for indemnity.

Can the ostensible operator sue the actual operator to

and socio-economic

industries in the negative list, but foreign firms are encouraged

service will be able to do so. So to protect the public, the

to national development

development of the country, to the extent allowed by the

territories specified in the certificate

o 5. Investigation of accidents
o 6. Compel compliance with law and regulations
Kabit system is this legal?
o No, because someone not financially capable to render public

are SOLIDARILY liable to victims.

But the ostensible operator (with the franchise) can sue the

What is the policy of the FIA?

o To attract and promote foreign investments in activities that

truck is still liable.

If a taxi was used as a get-away vehicle by robbers, can the CPC be
cancelled?
o No, not unless there is proof of collusion.

days or more
5. Participating in management of domestic business
6. Any other act that implies continuity of business dealings for
commercial gain or pursuant to objective of the organization
Does not include:

1. Mere investment as SH in domestic firm

2. Exercising rights as SH or having nominee

Foreign investments act

138

director/officer in that corporation

3. Appointing representative/distributor that acts in its

own name
Define export enterprise:
o Enterprise where the manufacturer, processor, or service
(including tourism) enterprise exports at least 60% of its output
o Or purchase-and-export of at least 60% of the products
Define domestic market enterprise:

Enterprise which produces goods for sale or renders service to

the domestic market entirely, or export fails to consistently

reach at least 60% of its output

Is there need for prior approval before a non-Philippine enterprise

BTRCP (for sole proprietorships, the Bureau of Trade

where the paid in capital is less than $200,000

But
if
it
involves
highly-advanced

made by the firm.

Of course, subject to constitutional limitations and the

technologies (approved by DOST) or they

negative lists.
o If they seek incentives, register with the BOI.
What is the rule on foreign investments in export-oriented

capital can be at least $100,000

o Outside of these two lists, its open to all foreigners.
What is the right of Natural Born Filipinos and naturalized citizens?
o They have the same rights as Filipinos although they have lost

employ at least 50 employees the paid up

enterprises?
o Can be up to 100%, if not on the negative lists
o If the export-oriented enterprise is not a Philippine national,
register with BOI, which will check compliance with the 60%

o
o

their citizenship as to investments.

Ex. in rural banks
Natural born Filipinos who lost their citizenships can acquire up

to 3 hectares of rural land or 500 sq. m. of urban land

Cannot acquire more than 2 lots, which must be in different

export requirement, and require reduction of domestic sales if

they fail to comply, under threat of cancellation of registration

municipalities or cities

by the SEC/BTRCP.
What is the rule on foreign investments in domestic market
enterprises?
o Can be up to 100%, if not prohibited or limited in the

regulated, not totally prohibited)

3. Small and medium sized domestic enterprises

Regulation and Consumer Protection).

The SEC or BTRCP cannot limit the amount of investment

Defense
2. Activities which impact public health and morals

Ex. manufacture and sale of dangerous

drugs (since there are drugs that are

may invest or do business in the Philippines?

o None. The enterprise just has to register with the SEC or the

Unless approved by the Sec. of National

Annex 1: in-depth discussion of presentment,

dishonor, acceptance in NIL

Constitution or negative lists

Negative lists:
o Board of Investments draws up negative list A and B.
o List A: covers business enterprises reserved for Filipinos by
o

Presentment for payment

the Constitution and specific laws.

List B: commercial activities which are nationalized and:

1. Defense-related activities due to national security

When is presentment for payment necessary?

When is it not

necessary?
o Presentment for payment not necessary to charge the primarily

reasons

liable person

139

Maker and acceptor

If the instrument is payable in special place and he is

able and willing to pay there at maturity = such

willingness is equivalent to tender of payment

What does this imply?

o If the person primarily liable is there

Instrument not payable on demand

Make presentment on date due

instrument payable on demand

Must be presented within reasonable time from issue

If its a BOE, you make it after a reasonable time after

last negotiation

What does negotiation here cover?

o Negotiation
for
value,
not

on the place where it is payable on

the stated time, holder loses right to

negotiation for collection between

recover interest due subsequent to

o
o

maturity + costs of collection

BUT he does not lose the right to

get paid
But for those secondarily liable (indorsers and drawer) there
is need for presentment for payment

What if the holder does not make presentment to

the person primarily liable?

Those secondarily liable are discharged

But he can still go after the person primarily

liable
So, the bottomline: the instrument must be

Sec. 71 for special rules on when an

instrument must be presented
What is presentment?

Production of BOE to drawee for acceptance or

wife. Bank should pay the wife.

Sec 73 proper place for presentment
o If there is a stipulation where presentment must be made, it
o
o
o

payment, or acceptor for payment, or of a PN to the

maker for payment
What constitutes presentment?

1. Personal demand for payment

2. Readiness to present the note and surrender it if

paid

Bank refused to pay her because they paid the

husband. HELD: it was not presented by the husband, but the

charge the secondarily liable persons see

in place where presentment is made

There is a wife who presented a negotiable certificate of time
deposit.

presented for payment on date it is due to

banks
Sec 72 when presentment is sufficient
o REQUISITES:

1. Made by holder or agent

2. Reasonable hour on business day

3. At proper place defined

4. To person primarily liable

Is absent/inaccessible to any person found

140

of

business/residence
Sec 74
o NI must be exhibited to the person from whom payment is
o
o

Sec 71

must be made there.

If none provided, but address of maker is stated, go there
If none provided, to usual place of business/residence
Wherever he may be found/last known place

demanded
So he can check genuineness
This is why telephone as demand is not allowed

First Pacific (?) Check negotiated by car dealer to financing

company. When the instrument not paid, company sued maker

when there is no reasonable expectation that the drawee or

and indorser. Indorser said he was discharged because there

acceptor will pay the instrument

Ex. knows there are no funds or there is stoppage of

was no proper presentment for payment.

HELD:

Letter of

demand is not sufficient. Law requires that the instrument be

shown to the maker.
o

Therefore, presentment not valid and

made during banking hours. Law assumes that the bank will
be the source of the funds.
But if presentment is made beyond banking hours, it is valid if

the funds will not come from the bank, as long as it falls on the

payment
INDORSER when instrument was made/accepted for
indorsers accommodation, and indorser has no reason to

indorsement is discharged.
Failure excused on two grounds:

1) Instrument was lost

2) payment refused on some other ground

Ex. no funds, and not because it was not

shown
Sec 75
o Presentment where instrument payable at bank must be

DRAWER presentment not required to charge the drawer

date of maturity.
Sec 76-78
o Applies when principal debtors is:

Dead

Liable as partners

Liable as Joint debtors

o If there is an address stipulated, pay there.
o If dead, give to executor/admin

If there is one, and he can be found with reasonable

expect it will be paid if presented

Fortuitous event excuses delay in presentment
Presentment for PAYMENT excused if:
o 1. Cannot be done even after reasonable diligence
o 2. Drawee is fictitious person
o 3. Waiver of presentment express or implied
When is an instrument dishonored by non-payment?
o 1. Duly presented for payment and payment is refused or
cannot be obtained
o 2. Presentment is excused and it is overdue and unpaid
What is the effect of dishonor by non-payment?
o Under the law, the moment it is dishonored, there is
immediately a right of recourse against those secondarily

liable. NO NEED to go to the primarily liable.

Sec 85
o If payable in a fixed period, it must be paid on that day
o If on a Sunday or holiday, then go to next business day
o If on a Saturday

On next business day. Because even if some offices

hold business on Saturday, they are usually half day.

diligence
o If partners, to any of the partners

Even if dissolved already

o If joint debtors, to all of them
When presentment is not required to charge those secondarily liable:

The law wants a whole business day

Except instruments payable on demand can

present before 12 noon, Saturday, if it is not a holiday

Contrast:

Ex. Payable on Friday. But it was declared a public

holiday. So it becomes Saturday. But the law says
present it on next business day. So Monday.

141

Ex. BUT if it is payable on demand then the

maker/acceptor MUST pay provided it is presented on

prior parties that have right of recourse against the one given

working hours of Saturday.

Sec 86
o Time exclude first day, include last day
Sec 87 when instrument is payable at a bank
o Implied: that it is an order to the bank to pay for account of the

notice against
o Notice may be given by holder himself or agent of the holder.
Sec 90 Who can give notice of dishonor
o 1. Holder
o 2. Agent of holder
o 3. Party to the instrument who may be compelled to pay the

principal debtor
First National bank: PN payable at FNB. Maker had sufficient

holder, but only to those other parties he may seek

funds. But holder did not show up at day of maturity. Dillydallied then the maker became insolvent. Had he shown up
by then, he would have been paid.

HELD:

No.

o
o

The fact

remains that he is the maker, so he is primarily liable, and

o

should pay.
N.B. Remember, failure to make proper presentment only
discharges those secondarily liable.

The primarily liable

person is still liable, although the holder may not claim interest

subsequent to maturity and costs of collection.

Sec 88 Payment in due course
o 1. At or after maturity
o 2. To the holder
o 3. By the debtor, in GF and w/o notice that the holders title is

Notice of dishonor
Sec 89 dishonor
o Give notice of dishonor
o Any party may be compelled to pay it to the holder with right of
o

reimbursement from
4. Agent of such party
What about strangers?

Cannot give notice, except as agents

Who is considered a stranger?

Party discharged from the instrument

Person primarily liable who dishonored the instrument

Sec 91
o Notice may be given by a party or an agent
o Agent need not be authorized by the party

Because this is beneficial

o If the agent wants to give notice, on a instrument dishonored
on Monday, two options:

A) notify principal

On Tuesday

Principal has until Wednesday to notify

defective

Notice given by a holder benefits all subsequent holders and

reimbursement
ABCDE

D giving notice to B will benefit E

secondarily liable parties

B) notify parties who are secondarily liable

o If agent receives notice of dishonor, he must be authorized

Because this is prejudicial

Form of notice:
o In writing or oral

As long as it sufficiently describes the instrument and

indicates that it has been dishonored

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o
o

Misdescription does not vitiate notice unless the party

to whom it is given is in fact misled

Personal or through mail
If written, need not be signed

In sufficient written notice may be supplemented by

o
o
o

others not covered by 68?

Give notice to all

Sec 103 and 104 time within which notice must given
o Know the difference in rules where parties reside in the same

place (103) or different places (104)

SAME PLACE:

1. If given at place of business before close of

business hours the next day

2. If given at residence before usual hours of rest

the next day

3. If by mail sufficient to reach him the next day

DIFF PLACES:

1. If by post office in time to go by mail the next day;

if no mail at a convenient hour that day, the next mail

2. If not by post office within the time it would have
been received in due course had it been sent by post

post-office, due notice is deemed given

What is deposit in the post office?

Deposited in any branch of the P.O.

Deposited in any P.O. box

Sec 108: WHERE notice must be sent
o 1. Post office nearest to residence or where he is accustomed
o

verbal/oral communication
Rule as to jointly liable parties:
o If partners?

Notice to one is notice to all

o If joint payees or joint indorsees who indorse?

Sec 68 treats them as solidarily liable

o If joint drawers or joint accommodation indorsers, and

to receiving letters
2. To place of business or residence
3. Place where he is sojourning
If notice is actually received, although not according to

these provisions, what happens?

It is still valid
When can there be waiver of notice of dishonor?
o 1. Before actual time for giving it comes
o 2. Or after failure to give it
o Can waiver be implied?

Yes.
Who is affected by a waiver in an instrument?
o If written on the instrument all the parties
o If written over a signature just that person
Waiver of protest
o Includes presentment and notice of dishonor (steps to hold a
person secondarily liable)
When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o 3. Drawer is the person to whom instrument was presented for
payment

Ex. C went to the office of X, the drawee, but he was

office
N.B. This same time is counted again, after a party receives

not there.

notice of dishonor, to give that party a chance to give notice to

Sec 105 if notice was duly addressed and deposited in the

antecedent parties
What is the effect of miscarriage in mails?

honor

143

But R, the drawer, who was the office

manager, was there. And the drawer dishonored.

4. Drawer has no right to expect that drawee or acceptor will

Ex. X withdrew her money from her bank account and

What is the exception?

If it was accepted in the meantime.

Failure to give notice of dishonor by non-acceptance does not prejudice
o

issued a check to cover for expected proceeds of

jewelry she had to sell. She failed to sell the jewelry.

rights of a HIDC subsequent to the omission.

o Ex. A drew a BOE payable to B. B indorsed to C. C presented

The check was in the hands of Y who had ABC

investment house rediscount it. The check bounced.

the BOE for acceptance to X. X dishonored the instrument. C

HELD: X had no right to expect the bank will pay

o
o

did not give notice of dishonor to A or B.

because she withdrew all her funds.

5. Drawer countermanded payment

Meaning, drawer stopped payment.

N.B. In all these cases, the drawer KNEW that there was or

instrument to D, a HIDC. D will not be precluded by Cs failure

to give notice of DH to A and B.
Acceptance

would be dishonor.
When is notice of DH not needed to be given to indorser?
o 1. Drawee is fictitious person or has no capacity to contract
o

and the indorser is aware of this fact upon indorsement

2. Indorser is the person to whom presentment for payment

was made
3. Instrument was made or accepted for his accommodation

Drawer

Indorser

Drawer and drawee same person

Drawee fictitious or no capacity

Drawee is fictitious or no capacity,

Drawer is to whom instrument was

and indorser knows

Indorser is to whom instrument was

presented for payment

Drawer has no right to expect it will

presented for payment

Made or accepted for indorsers

be paid by drawee

accommodation (same principle: no

Acceptance assent to order of drawer

o Must be in writing and signed by drawee

What if the drawee refuses to sign?

If drawee refused to write and sign, holder

may treat it as dishonored

What if the acceptance is written on a different
sheet of paper?

It does not bind the drawee, except to

someone to whom it is shown and receives

the bill for value upon faith thereof

NB: this applies when the bill exists as of

time of acceptance
What if there is a promise to accept in writing?

Deemed an actual acceptance in favor of

those who receive the bill for value upon faith

right to expect it will be paid)

Drawer countermanded

C indorsed the

thereof
NB: this applies for bills that do not exist yet
when the promise is made (Ex. BOE

If an instrument was not accepted, and notice of dishonor by nonacceptance is given, is there need to give notice of dishonor by
non-payment?
o No.

144

pursuant to a LOC)
o Cannot be other than payment of money
Must accept within 24 hours from presentment
o Acceptance deemed done on date of presentment

When is a bill deemed accepted?

Failed to act on it within 24 hours

Does the drawee have a right to retain the

discharged

Unless they assent

Failure to dissent is assent

bill for the whole 24 hours?

o No. The holder can ask for it back.

Presentment for acceptance

But the drawee will still have the

rest of the 24 hours to decide.
Destroys the bill

NB: destruction must be on purpose

What are the special situations when can the drawee

payment
What is the special rule if the bill was dishonored

by prior non-acceptance, but it was accepted

thereafter?

The holder can consider the date of first

When is presentment for acceptance needed?

o 1. Bill payable after sight or acceptance needed to fix maturity
o
o

accept pa rin?

1. Even before it is signed by the drawer

2. Even when it is incomplete

3. When it is overdue

4. Dishonored by prior non-acceptance or non

If holder allows qualified acceptance, indorser and drawer

presentment as date of acceptance

Kinds of acceptance:
o 1. General

Includes local but not confined only at a particular

of instrument
2. Bill expressly requires acceptance
3. Bill is payable elsewhere than residence or place of business
of drawee
What about other cases?

No need for presentment for acceptance to render any

party to the bill liable

What is the option of the holder?
o Must present the bill for acceptance within reasonable time
o Or negotiate the bill within reasonable time
What is the consequence of failure to present for acceptance?
o Discharges those secondarily liable
Time for presentment same as presentment for payment
Special rule when there is little time to present for acceptance
before presenting for payment, where presentment for acceptance
is needed?
o Delay caused by prior presentment for acceptance is excused

place
o 2. Qualified

Conditional

Partial

Local (ONLY at a particular place)

As to time

Only some of drawees, but not all

What is the right of parties as to qualified acceptance?
o Holder can deem it DH by non-acceptance

145

and does not discharge those secondarily liable

When is presentment for acceptance excused?
o 1. Drawee is dead, has absconded, fictitious, lacks capacity
o 2. Cannot make presentment even after reasonable diligence
o 3. Although presentment is irregular, acceptance refused on
some other ground
What if a bill is DH by non-acceptance?

Immediate recourse to secondarily liable parties avail; no need

expect

for presentment for payment

[Step-by-step

guide

on

presentment

for

acceptance,

dishonor,

payment]

business of drawee
OTHER OPTION May choose to negotiate it within a reasonable time
Consequence: will discharge drawer and all other indorsers
EXCEPTIONS no need to present if/or treated as dishonored if:
o 1. Drawee is dead, has absconded, fictitious, or lacks capacity
o
o

is

excused

will

be

for

paid

if

fortuitous

circumstances
Except: will not prejudice rights of HIDC after omission

persons (if dishonored by non-payment)

o See notes above
o EXCEPT: When presentment for payment is excused

1. Drawee is fictitious person

2. Presentment cannot be made even

the maturity of the instrument

2. BOE expressly requires presentment for acceptance
3. BOE payable elsewhere apart from residence or place of

to contract
2. Presentment cannot be made even after reasonable

presented
2. Delay

instrument

to protest
Step 3: Give notice of dishonor by non-payment to secondarily liable

Step 1: Presentment for acceptance required if

o 1. BOE is payable after sight, or acceptance is needed to fix
o
o

the

after

reasonable diligence
3. Waiver of presentment, express or implied

Protest

Protest necessary for DH of a bill that on its face appears to be a foreign

diligence
3. Although presentment is irregular, acceptance was refused

bill
Made by Notary Public or respectable resident + two or more credible

on some other ground

Step 2: Give notice of dishonor by non-acceptance to secondarily liable

persons
o EXCEPT,

no

need to

give

notice: if

instrument

was

anytime

made/accepted for his accommodation and he has no reason

o
o

to expect the instrument will be paid if presented

AND will not prejudice rights of HIDC after omission to give
notice of dishonor
IF foreign bill,

Protest for non-acceptance or protest for non-payment

witnesses
When must it be done?
o Day of DH
o If bill is noted in the notarial register, protest may be made

needed
Except

1. If instrument was made/accepted for his

Where?
o Place of DH
o Except when expressly payable at the residence/business of
another person apart from the drawee
What is protest for better security?
o If the drawee was adjudged bankrupt or insolvent, or made
assignment for benefit of creditors even before the bill
o

accommodation and he has no reason to

146

matures
Is this mandatory?

Nope
What is the purpose?

To inform the drawer/indorsers that the drawee is

insolvent and therefore they should prepare to pay

When is protest excused or dispensed with?
o Dispensed with for same grounds notice of DH is dispensed

with
o Excused for fortuitous event
When is protest also done?
o When bill is lost, destroyed, wrongly detained protest made

on copy/written particulars of the bill

Bills in set

[usually, it is done to ensure that bills can be collected from

even if one part is lost in the mail or so]

[So usually bills in a set are several copies of the same thing,

sent separately]
What if different parts are negotiated to different HIDCs?
o The one whose title accrues first is the true owner
o But the one who gets acceptance or payment first is the one
who will be able to collect
Indorser of two different parts is liable on every such part
How should the drawee accept?
o Accept on any part, and on one part ONLY. If he accepts on
o

multiple parts and these are severed, he is liable on all parts.

If he pays and did not get back the part with the acceptance,
and it once again falls in the hands of an HIDC, he can still be

Main Principle: each part of the bill, numbered and referring to the other
parts, the whole of the parts constitute one bill

147

liable
Discharge of one part is discharge of all