Commercial Law Notes (Atty. Rondez)

UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011
Commercial law
Prepared by:
ATTY. RENATO S. RONDEZ
NEGOTIABLE INSTRUMENTS
LAW
(Act No. 2031, June 2, 1911)
Written contracts for the
payment of money; by its form,
intended as a substitute for
money and intended to pass from
hand to hand, to give the holder in
due course the right to hold the
same and collect the sum due.
Negotiable
instruments
produce the effect of payment
only when they have been
encashed or through the fault of
the creditor have been impaired.
(Article 1249, NCC)
Principal
Features
and
Characteristics
a. negotiability
- right of
transferee to hold the
instrument and collect the
sum due
b. accumulation of secondary
contracts - instrument is
negotiated from person to
person
Requisites of Negotiability
An instrument to be negotiable
must conform to the following
requirements:
a. It must be in writing and
signed by maker or drawer;
BAR OPERATIONS 2011
b.
Must
contain
an
unconditional promise or order
to pay a sum certain in money;
c. Must be payable on demand,
or at a fixed or determinable
future time;
d. Must be payable to the order
or to bearer; and
e. Where the instrument is
addressed to a drawee, he must
be named or otherwise
indicated
therein
with
reasonable certainty.
*For a Promissory Note to be
negotiable, requisites a,b,c and, d
must be met.
*For a bill of exchange to be
negotiable,
all
the
above
requisites must be met.
Purpose of Negotiability. To allow
bills and notes the effect which
money, in the form of government
bills or notes, supplies in the
commercial world.
The validity and negotiable
character of a negotiable
instrument are NOT affected by
the fact that:
1. It is not dated;
2. It does not specify the place
where it is drawn or where it is
payable;
3. It bears a seal;
Page 1
GREEN NOTES IN COMMERCIAL LAW

Prepared by: ATTY. RENATO S. RONDEZ
4. It designates a particular
kind of current money in which
payment is to be made (Sec. 6)
Kinds
of
Instruments:
Negotiable
A. PROMISSORY
NOTE
unconditional promise to pay
in writing made by one person
to another, signed by the
maker, engaging to pay on
demand
or
a
fixed
determinable future time a
sum certain in money to order
or bearer. When the note is
drawn to makers own order, it
is not complete until indorse by
him. (Sec. 184 NIL)
Parties:
a. Maker one who makes a
promise
and
sign
the
instrument
b. Payee one to whom the
promise is made or
the
instrument is payable.
FORMS OF PROMISSORY
NOTE
1. Due bill, an instrument
whereby
one
person
acknowledges his indebtedness
to another and promises to pay
a sum certain in money.
2. Bonds, which are in the
nature of PN.
3. Certificate of Deposit
issued by banks payable to
depositor or his order, or to
bearer
BAR OPERATIONS 2011
B.
BILL OF EXCHANGE unconditional order in writing

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

5. Drafts, which are BOE

drawn by one bank upon
another.
C. CHECK - bill of exchange drawn
on a bank and payable on
demand. (Sec. 185 NIL)
FORMS OF CHECK
1. Ordinary Check
2. Cashiers Check, A Check
payable to third person
which is drawn by the bank
upon itself. (2003 BEQ)
3. Certified check , A personal
check with guaranteed funds
to cover the payment of the
check.
4. Voucher Check
5. Travelers Check
6. Managers Check , A check
drawn by the manager of the
bank. (2003 BEQ)
7. Crossed Check ( 2004, 2005
BEQ)
8. Memorandum Check.
Other forms of negotiable
instruments:
a. Certificate of deposit issued by
banks, payable to the depositor or
his order, or to bearer (CALTEX v.
CA, 212 SCRA 471)
b. Trade Acceptance;
c. Bonds, which are in the nature
of a promissory notes;
d. Drafts which are bills of
exchange drawn by one bank
upon another;
All of these comply with
Sec. 1 NIL.
BAR OPERATIONS 2011
Letters of Credit are not

negotiable.
DISTINCTIONS:
(2005 BEQ)
Negotiable
Instruments
Nonnegotiable
Instruments
Does
not
Contains all the
contain all the
requisites
of
requisites
of
Sec. 1 of the
Sec. 1 of the
NIL
NIL
Transferred by Transferred by
negotiation
assignment
Holder in due Transferee
course
may acquires rights
have
better only of his
rights
than transferor
transferor
Prior parties
Prior parties
merely
warrant
warrant
payment
legality of title
Transferee has
right
of Transferee has
recourse
no right of
against
recourse
intermediate
parties
Negotiable
Instruments
Negotiable
Documents of
Title
Does
not
Have requisites
contain
of Sec. 1 of the
requisites of
NIL
Sec. 1 of NIL
Page 3

Have right of
recourse
against
intermediate
parties who are
secondarily
liable
Holder in due
course
may
have
rights
better
than
transferor
Subject
is
money
Instrument
itself
property
value
No secondary
liability
of
intermediate
parties
Transferee
merely steps
into the shoes
of
the
transferor
Subject
is
goods
Instrument is
merely
evidence
of
is title; thing of
of value are the
goods
mentioned in
the document
Promissory
Note
Unconditional
promise
Involves
2
parties
Maker
primarily liable
Bill of
Exchange
Unconditional
order
Involves
3
parties
Drawer only
secondarily
liable
Only
1 Generally
2
presentment - presentments
for payment
for
acceptance
and
for
payment
BAR OPERATIONS 2011
Check
Always
drawn
upon
a
bank
or
banker
Always
payable on
demand
BOE
- May or may not be
drawn against a
bank
- May be payable on
demand or at a fixed
or
determinable
future time
Not - Necessary that it be
necessary
presented
for
that it be acceptance
presented
for
acceptance
- Drawn on - Not drawn on a
a deposit
deposit
- The death - The death of the
of a drawer drawer
of
the
of a check, ordinary bill of
with
exchange does not
knowledge
by
the
banks,
revokes the
authority of
the banker
pay
- Must be - May be presented
presented
for payment within a
for
reasonable
time
payment
after
its
last
within
a negotiation.
reasonable
time after
its issue (6
months)
PN
CHECK
- There are two - There are three
Page 4

(2) parties, the (3) parties, the

maker and the drawer,
the
payee
drawee
bank
and the payee
- May be drawn - Always drawn
against
any against a bank
person,
not
necessarily
a
bank
- May be payable -Always payable
on demand or at on demand
a
fixed
or
determinable
future time
- A promise to - An order to pay
pay
*Note: PN, BOE and Checkdefinitions (2002 BEQ)
However, these instruments
are non-negotiable:
1. Treasury warrant are nonnegotiable because there is an
indication of the fund as the
source of payment of the
disbursement.(Metrobank v. CA,
194 SCRA 169)
2. Since a postal money order is
subject to restrictions and
limitations under postal laws and
issued by the Government which
is not engaged in commercial
transactions, it is not governed by
NIL. (Phil. Educ. Co., Inc. vs.
Soriano, 39 SCRA 587)
3. Letters of credit
4. Warehouse receipts - NonNegotiable for the same as Bill of
lading it merely represents goods,
not money.
BAR OPERATIONS 2011
Factors
that
affect
the
determination of negotiability of
instruments:
a. Whole instrument;
b. What appears on the face of
the instrument;
c. Requisites enumerated in
Sec.1 of NIL; and
d. Should contain words or
terms of negotiability.
(Gopenco, Commercial law Bar
Reviewer, cited in Aquino p. 23)
In
determining
the
negotiability
of
an
instrument, the instrument
in its entirety and what
appears on its face must be
considered. It must comply
with the requirements of
Sec.1 of NIL. ( Caltex Phils. V.
CA, 212 SCRA 448)
The acceptance of a bill of
exchange is not important in
the determination of its
negotiability. The nature of
acceptance is important only
on the determination of the
kind of liabilities of the
parties involved. (PBCOM v.
Aruego, 102 SCRA 530)
Notes on Section 1:
- In order to be negotiable,
there must be a writing of
some kind, else there would
be nothing to be negotiated
or passed from hand to
hand. The writing may be in
Page 5

ink, print or pencil. It may

be upon parchment, cloth,
leather or any other
substitute of paper.
It must be signed by the
maker or drawer. It may
consist of mere initials or
even numbers, but the
holder must prove that what
is written is intended as a
signature of the person
sought to be charged.
The Bill must contain an
order, something more than
the mere asking of a favor.
Sum payable must be in
money only. It cannot be
made payable in goods,
wares, or merchandise or in
property.
A drawees name may be
filled in under Section 14 of
the NIL.
MEANING OF
REQUISITES:
PARTICULAR
a. UNCONDITIONAL PROMISE
OR ORDER
- Where the promise or
order is made to depend on a
contingent event, it is conditional,
and makes the instrument nonnegotiable.
The conditional nature of the
promise or order is not effected
by:
a. An indication of a particular
fund from which the acceptor
reimburses himself after
paying the holder;
BAR OPERATIONS 2011
b. A
statement
of
the
transaction which gives rise
to the instrument.
b. CERTAINTY OF SUM
- The sum is certain if the amount
fixed.
- The certainty is HOWEVER NOT
affected although to be paid:
1. with interests;
2. by stated installments;
3. by stated installments with
acceleration clause;
4. with exchange;
5. with cost of collection or
attorneys fees.
Escalation Clause an
agreement pertaining to a loan or
increased in the event that the
applicable maximum rate of
interest is increased by law or by
the Monetary Board.
De-escalation Clause an
agreement pertaining to a loan or
forbearance of money, goods or
credits may stipulate that the rate
of interest agreed upon may be
reduced in the event that the
applicable maximum rate of
interest is decreased by law or by
the Monetary Board.
The
presence
of
escalation clause or a
escalation clause or both in
instrument does not affect
negotiable character of
instrument.
an
dethe
the
the
Page 6

Acceleration clause - it is a
provision that upon default in
payment of any installment or of
interest, the whole shall become
due.
c. PAYABLE IN MONEY
General Rule: If some other
act besides payment of money
is promised or ordered, the
instrument becomes nonnegotiable.
Exceptions:
a. Authorizes the sale of
collateral
securities
on
default;
b. Authorizes confession of
judgment on default;
c. Waives the benefit of law
intended to protect the
debtor;
d. Allows the creditor the
option to require something
to be done in lieu of money.
d. PAYABLE ON DEMAND
An instrument is payable on
demand:
a. Where it is expressed to be
payable on demand, at sight
or on presentation;
b. Where no period of payment
is stated;
c. Where the instrument has
been issued, accepted or
indorsed after maturity.
e. DETERMINABLE FUTURE
TIME
- Future time is determinable in
the following cases:
BAR OPERATIONS 2011
a. At a fixed period after date

or sight;
b. On or before a specified
fixed or determinable future
time;
c. On or at a fixed period after
the occurrence of a specified
event, certain to happen,
although the exact date is
not certain.
f. PAYABLE TO ORDER
- The instrument is payable to
order where drawn payable to the
order of a specified person, or to
him or his order.
- The payee must be named or
otherwise indicated therein with
reasonable certainty.
g. PAYABLE TO BEARER
a. Where it is expressed to be
so payable;
b. When payable to a person
named therein or bearer;
c. When payable to the order
of a fictitious or non-existing
person, and such fact was
known to the drawer or
maker;
d. When the name of the payee
is not the name of a person;
e. When the only and last
indorsement
is
an
indorsement in blank.
An original bearer instrument
remains to be a bearer
instrument even if indorsed
specially and thus can be
negotiated by mere delivery.
Page 7

When the payee is vaguely

designated, the loss will be
borne by the party who caused
it the drawer. (Equitable
Bank v. IAC, 161 SCRA 518).
RULES AS TO DATES
There are several important
principles as to dates in
negotiable instruments. These
are:
1. Where the instrument, its
acceptance, or indorsement is
dated, such date is presumed to
be the corresponding true date;
Date is important 2. Where the instrument is
payable within a specified
period after date, or after
acceptance, in which case the
date of the instrument and the
date of maturity of the
instrument; in these cases, the
holder may insert the true
date;
a. when the instrument is
payable on demand, the
date is necessary to
determine whether the
instrument was presented
within a reasonable time
from issue in the case of
notes or from last
negotiation in the case of
bills, as these factors will
show whether the last
holder is a holder in due
course or not; and
b. when the instrument is an
interest-bearing one, to
BAR OPERATIONS 2011
determine
when
the
interest starts to run.
3. Antedating or postdating an
instrument does not affect
validity or negotiability, unless
done for an illegal or
fraudulent purpose.
REAL DEFENSES Those that
attach to the instrument itself and
are available against all holders,
whether in due course or not.
(WAD FIMMU WIFE)
1. Want of delivery of
incomplete instrument;
2. Alteration;
3. Duress amounting to
forgery;
4. Fraud in factum or fraud
in esse contractus;
5. Insanity where the insane
person has a guardian
appointed by the court;
6. Minority;
7. Marriage in the case of a
wife;
8. Ultra vires acts of a
corporation; where the
corporation is absolutely
prohibited by its charter
or statute from issuing
any commercial paper
under any circumstances;
9. Want of authority of
agent;
10. Illegality of contract
where it is the contract or
instrument itself which is
expressly made illegal by
statute;
11. Forgery;
Page 8

12. Execution
instrument
public enemies
of
between
PERSONAL
DEFENSES/
EQUITABLE DEFENSES Those
which are available only against a
person not a holder in due course
or a subsequent holder who
stands in privity with him.
(W2A4F2I4N2MU)
1. Want of delivery of
complete instrument;
2. Want of authority of
agent where he has
apparent authority.
3. Absence or failure of
consideration, partial or
total;
4. Acquisition
of
the
instrument
by
force,
duress or fear;
5. Acquisition
of
the
instrument by unlawful
means;
6. Acquisition
of
the
instrument for an illegal
consideration;
7. Filling up of blank
contrary to authority
given or not within
reasonable time, where
the
instrument
is
delivered;
8. Fraud in inducement;
9. Insertion of wrong date in
an instrument, where it is
payable at a fixed period
after date and it is issued
undated or where it is
payable at a fixed period
BAR OPERATIONS 2011
after sight and the

acceptance is undated;
10.
Intoxication;
11. Insanity where there is
no notice of insanity on
the part of the one
contracting
with
the
insane person;
12. Illegality of contract
where the form or
consideration is illegal;
13. Negotiation in breach
of faith;
14. Negotiation
under
circumstances
that
amount to fraud;
15. Mistake;
16. Ultra vires acts of
corporations where the
corporation
has
the
power to issue negotiable
paper but the issuance
was not authorized for
the particular purpose for
which it was issued.
INSERTION OF DATE (Sec.13)
Rule: If there is a date and it is
changed, apply Sec.124 on
ALTERATION
OF
AN
INSTRUMENT.
The date may be inserted in an
instrument when:
a. An instrument expressed to
be payable at a fixed period
after date is issued undated
b. Where acceptance of an
instrument payable at a
Page 9

fixed period after sight is

undated (Sec. 13 NIL)
Effects:
- Any holder may insert the
true date of issuance or
acceptance
- The insertion of a wrong
date does not avoid the
instrument in the hands of a
subsequent holder in due
course
- As to the holder in due
course, the date inserted
(even if it be the wrong date)
is regarded as the true date.
As to a holder in due course- the
date inserted is the true date.
Subsequent Holder in Due
Course not affected by the
following deficiencies:
a. Incomplete
but delivered
instrument (Sec. 14)
b. Complete but undelivered
(Sec. 16)
c. Complete
and delivered
issued
without
consideration
or
a
consideration consisting of a
promise which was not
fulfilled (Sec 28)
Holder in Due Course Affected
by Abnormality/Deficiency:
a.
b.
Incomplete and undelivered

instrument (Sec. 15)
Maker/drawers
signature
forged (Sec. 23)
BAR OPERATIONS 2011
Incomplete
but
Delivered
Instrument: (Sec.14)
(2004 & 2005 Bar Exam)
1.
Where an instrument is
wanting
in
any
material
particular:
a. Holder
has prima facie
authority to fill up the blanks
therein.
b. It must be filled up strictly in
accordance
with
the
authority given and within a
reasonable time.
c. If negotiated to a holder in
due course, it is valid and
effectual for all purpose as
though it was filled up
strictly in accordance with
the authority given and
within reasonable time. (Sec.
14 NIL)
2. Where only a signature on a
blank paper was delivered:
a. It was delivered by the
person making it in order
that it may be converted into
a negotiable instrument
b. The holder has prima facie
authority to fill it up as such
for any amount. (Sec. 14
NIL)
Notes on Section 14
Rule: Sec. 14 applies if there is a
signature on the instrument for
the purpose of giving effect
thereto.
Rule: If no signature, refer to Sec.
15 or 23.
Page 10

Rule: Sec. 14 is merely

PERSONAL DEFENSE.
If the instrument is wanting in

material
particular,
mere
possession of the instrument is
enough to presume prima facie
authority to fill it up.
Material particular may be an
omission which will render the
instrument non-negotiable (e.g.
name of payee), an omission
which will not render the
instrument non-negotiable (e.g.
date)
In the case of the signature in
blank, delivery with intent to
convert it into a negotiable
instrument is required. Mere
possession is not enough.
Incomplete and Undelivered
Instrument: (Sec.15)
There are two steps in the
execution of a NI:
1. The act of writing the
instrument comion of giving
effect
pletely
and
in
accordance with Sec. 1 of
NIL; and
2. The
delivery
of
the
instrument
with
the
intention of giving effect
thereto
If Completed and negotiated
without authority, not a
valid contract against a
person who has signed
before delivery of the
contract against a person
BAR OPERATIONS 2011
who has signed before

delivery of the contract even
in the hands of a HDC but
subsequent indorsers are
liable.
REASON: The law does not make
any distinction between a HDC
and one who is not a HDC.
Notes on Section 15
It is a real defense. It can be
interposed against a holder in
due course.
Where an INCOMLETE and
UNDELIVERED instrument
is in the hands of a HDC,
there is PRIMA FACIE
PRESUMPTION of delivery.
Defense of the maker is to
prove non-delivery of the
incomplete instrument.
Complete but Undelivered:
(Sec.16)
General Rule: Every contract on
a negotiable instrument is
incomplete and revocable
until delivery for the
purpose of giving effect
thereto. .
a. If between immediate parties
and remote parties not holder
in due course, to be effectual
there must be authorized
delivery by the party making,
drawing,
accepting
or
indorsing. Delivery may be
shown to be conditional or for
a special purpose only
Page 11

b.
c.
If the holder is a holder in due

course, all prior deliveries
conclusively presumed valid
If instrument not in hands of
drawer/maker,
valid
and
intentional
delivery
is
presumed until the contrary is
proven (Sec. 16 NIL)
Rules on delivery of negotiable

instruments:
1) Delivery is essential to the
validity of any negotiable
instrument
2) As between immediate parties
or those is like cases, delivery
must be with intention of
passing title
3) An instrument signed but not
completed by the drawer or
maker and retained by him is
invalid as to him for want of
delivery even in the hands of a
holder in due course
4) But there is prima facie
presumption of delivery of an
instrument signed but not
completed by the drawer or
maker and retained by him if it
is in the hands of a holder in
due course.
This may be
rebutted by proof of nondelivery.
5) An instrument entrusted to
another
who
wrongfully
completes it and negotiates it
to a holder in due course,
delivery to the agent or
custodian is sufficient delivery
to bind the maker or drawer.
BAR OPERATIONS 2011
6) If an instrument is completed
and is found in the possession
of another, there is prima facie
evidence of delivery and if it be
a holder in due course, there is
conclusive presumption of
delivery.
7) Delivery may be conditional or
for a special purpose but such
do not affect the rights of a
holder in due course.
Rules on Interpretation
Instruments:
of
1. Discrepancy between the

Amount in Figures and that in
Words
- the words prevail, but if the
words are ambiguous,
reference will be made to
the figures to fix the amount.
2. Instrument NOT dated
- considered dated on the
date of issue
3. Conflict between Written and
Printed Provisions
- written provisions prevail
4. Interest provided for, but No
starting Date was specified
- starting date is the date of
the instrument, in the
absence of said date, from
date of issue
5. Instrument Ambiguous
- if the instrument is
ambiguous such that there is
doubt whether it is a bill or
note, the holder may treat it
Page 12

as a note or a bill at his

option.
6. Signature on Instrument
does not Indicate Capacity in
Which Made
- Where it cannot be
determined in what capacity
a
person
affixed
his
signature to a negotiable
instrument, he is deemed to
have signed as an indorser.
As indorser, his liability
under the instrument is
secondary, meaning that if
the party primarily liable
cannot pay, the indorser can
be made to pay by the
holder of the instrument.
7. Where Promissory Note
worded Promise to Pay is
signed by two (2) makers
- Under Section 17 (g) of the
NIL and Article 1216 of the
Civil Code, where the
promissory
note
was
executed
jointly
and
severally by two or more
persons, the payee of the
promissory note had the
right to hold any one of the
two (2) signers of the
promissory note responsible
for the payment of the whole
amount
of
the
note.
(Philippine National Bank
vs. Concepcion Milling Co.,
5 SCRA 745).
RULE ON SIGNATURES
General Rule: A person whose
signature does not appear
BAR OPERATIONS 2011
on the instrument in not

liable.
Exception:
a. One who signs in a trade or
assumed name (Sec. 18)
b. A duly authorized agent
(Sec. 19)
c. A forger (Sec. 23)
LIABILITY of a person SIGNING
AS AGENT:
An agent is exempt from personal
liability, provided he:
1. Acts within the scope of his
authority;
2. Discloses the name of his
principal; and
3. Discloses that he is acting in a
representative capacity (Sec. 20)
Notes on Section 20
General rule: An agent is not
liable on the instrument if he
were duly authorized to sign
for or on behalf of a
principal.
If an agent does not disclose his
principal,
the
agent
is
personally liable on the
instrument.
Per Procuration - operates as
notice that the agent has a limited
authority to sign.
Effects:
- The principal in only bound
if the agent acted within the
limits of the authority given
Page 13

- The person who takes the

instrument is bound to
inquire into the extent and
nature of the authority
given. (Sec. 21 NIL)
General rule:
Infants and
corporations
incur
no
liability
by
their
indorsement or assignment
of an instrument. (Sec. 22
NIL)
Effects:
- No liability attached to the
infant or the corporation
- The instrument is still valid
and the indorsee acquires
title
FORGERY
A. Makers Signature
(1989 BEQ)
B. Drawers Signature
(2004,2006&2009
BEQ)
C. Payees Signature
( 2008 BEQ)
D. Indorsers Signature
(2008 BEQ)
General rule: A signature, which
is forged or made without
authority
is
wholly
inoperative. (Sec. 23)
Effects:
a. No right to retain
b. No right to give a discharge
c. No right to enforce payment
can be acquired.
BAR OPERATIONS 2011
Exception:
- The party against whom it is
sought to be enforced is
precluded from setting up
the forgery or want of
authority. (Sec.23)
Forgery refers to both a signature
which has been forged or made
without authority. Thus, Section
23 is not limited to counterfeit
signatures since it also applies to
genuine ones.
* A person whose signature is
forged as maker, drawer, payee or
indorsee of a note or check was
never a party to the instrument.
Since his signature does not
appear in the instrument, he
cannot be held liable thereon by
anyone. (Gempsaw v. CA 218 SCRA
682)
CUT-OFF RULE:
General Rule: Parties prior to the
forged signature are cut-off from
the parties after the forgery in the
sense that prior parties cannot be
held liable and can raise the
defense of forgery. The holder can
only enforce the instrument
against parties who became such
after forgery.
Exception: When the prior parties
are precluded from setting up the
defense of forgery either because
of
their
warranties,
representation or negligence.
(Gempsaw v. CA)
Page 14

Persons PRECLUDED from

setting up the defense of
forgery:
1. Those who admit/warrant the
genuineness of the signature in
question: indorsers, persons
negotiating by delivery and
acceptors;
2. Those who by their acts,
silence, or negligence, are
estopped from claiming forgery;
3. Holder of a bearer instrument
Forged signature is
not necessary to the title of the
holder.
Notes on Section 23
Section 23 applies only to
forged signatures or signatures
made without authority
Alterations such as to amounts
or like fall under section 124
Forms of forgery are a) fraud in
factum b) duress amounting to
fraud
c)
fraudulent
impersonation
Only the signature forged or
made without authority is
inoperative, the instrument or
other signatures which are
genuine are affected
The
instrument
can
be
enforced by holders to whose
title the forged signature is not
necessary
drawee bank is conclusively
presumed to
know
the
signature of its drawer
if endorsers signature is
forged, loss will be borne by
the
forger
and
parties
subsequent thereto
BAR OPERATIONS 2011
drawee
bank
is
not
conclusively
presumed
to
know the signature of the
indorser. The responsibility
falls on the bank which last
guaranteed the indorsement
and not the drawee bank.
Where the payees signature is
forged, payments made by the
drawee bank to collecting bank
is
ineffective.
No
debtor/creditor relationship is
created. An agency to collect is
created between the person
depositing and the collecting
bank.
Drawee bank may
recover from collecting bank
who may in turn recover from
the person depositing.
Rules on liabilities of parties on
a forged instrument:
In a PN
- A party whose indorsement
is forged on a note payable
to order and all parties prior
to him including the maker
cannot be held liable by any
holder
- A party whose indorsement
is forged on a note originally
payable to bearer and all
parties prior to him
including the maker may be
held liable by a holder in due
course provided that it was
mechanically complete
before the forgery
- A maker whose signature
was forged cannot be held
liable by any holder
Page 15

In a BOE
- The drawers account cannot
be charged by the drawee
where the drawee paid
- The drawer has no right to
recover from the collecting
bank
- The drawee bank can
recover from the collecting
bank
- The payee can recover from
the drawer
- The payee can recover from
the recipient of the payment,
such as the collecting bank
- The payee cannot collect
from the drawee bank
- The collecting bank bears
the loss but can recover
from the person to whom it
paid
- If payable to bearer, the
rules are the same as in PN.
- If the drawee has accepted
the bill, the drawee bears
the loss and his remedy is to
go after the forger
- If the drawee has not
accepted the bill but has
paid it, the drawee cannot
recover from the drawer or
the recipient of the
proceeds, absence any act of
negligence on their part.
Every negotiable instrument is
deemed prima facie to have been
issued
for
a
valuable
consideration. (Sec. 24)
Effects:
BAR OPERATIONS 2011
- Every
person
whose
signature appears thereon is
a party for value
- Presumption is disputable
Where value has at any time been
given for the instrument, the
holder is deemed a holder for
value in respect to all parties who
become such prior to that time.
(Sec. 26)
Absence of Consideration:
(1995 and 1996 Bar
Exam)
Effect of want of consideration:
a. Personal defense to the
prejudice of a party and
available against any person
not holder in due course.
b. Partial
failure
of
consideration is a defense
pro tanto, whether the
failure is an asceratained
and
liquidated
amount
otherwise. (Sec 29)
Notes on Section 28
Absence of consideration is
where no consideration was
intended to pass.
Failure
of
consideration
implies that consideration was
intended by that it failed to
pass
The defense of want of
consideration is ineffective
against a holder in due course
Page 16

A drawee who accepts the bill

cannot
allege
want
of
consideration
against
the
drawer
Accommodation
Legal arrangement under which a
person called the accommodation
party lends his name and credit to
another called the accommodated
party, without consideration.
Effect: A person to whom the
instrument thus executed is
subsequently negotiated, has a
right of recourse against the
accommodation party inspite of
the formers knowledge that no
consideration passed between the
accommodation
and
accommodated parties.
Requisites of Accommodation:
1. The accommodation party
must sign as maker, drawer,
acceptor or indorser;
2. No value is received by the
accommodation party from
the accommodation party;
and
3. The purpose is to lend the
name. (Crisologo-Jose v. CA,
177 SCRA 594).
Accommodation Party Is one
who has signed the instrument as
maker, drawer, acceptor, or
indorser, without receiving value
therefore, and for the purpose of
lending his name to another
person. (2003 and 2005 BEQ)
BAR OPERATIONS 2011
A corporation cannot act as an

accommodation party. Such is
an ultra vires act. (CrisologoJose v CA, 117SCRA594)
Liability of the Accommodation
Party:
- The accommodation party
is liable on the instrument to a
holder for value notwithstanding
that such holder at the time of
taking the instrument knew him
to be only an accommodation
party. It is a valid defense that the
accommodation party did not
receive
any
valuable
consideration when he executed
the instrument. He is liable to a
holder for value by virtue of his
being an accommodation party.
*An accommodation party to
a negotiable instrument, inspite of
the lack of consideration between
him and the accommodated party,
is liable to any other holder NOT
to the accommodated party.
(Travel-On, Inc. v. CA, et al, 210
SCRA 351).
*An accommodation partys
liability as a solidarily party is
unconditional
party
is
unconditional and is not affected
by an extension of payment
granted by the creditor to the
debtor. HOWEVER, where the
holder allowed payments by the
drawer direct to the contractor
without availing of the deed of
assignment in its favor, said
Page 17

holder is a bad faith holder, NOT a

holder in due course against
whom an extension to pay
granted by the drawer is a
defense by the accommodation
party. (Prudencio v. CA, 143 SCRA
6).
*The
liability
of
an
accommodation party does not
extend
to
corporate
accommodation because the act
of the corporate officers is ultra
vires. However, these officers are
personally liable. (Crisologo-Jose
v. CA, 177 SCRA 594).
*A promissory note, with an
accommodation co-maker, used
to settle an estafa case, has an
illegality of cause, and does not
make the accommodation comaker liable. (United General
Industries v. Paler, 112 SCRA 404)
*A promissory note with an
accommodation maker, utilized to
settle an estafa case, has an illegal
consideration, and does not make
the co-maker liable. (United
Industries v. Paler, 112 SCRA 404)
RIGHTS OF AN
ACCOMMODATION PARTY
1. Against the Accommodated
Party
- the accommodation party, if
obliged to pay to a holder of
value, can seek reimbursement
from the accommodated party.
2. Against
the
Coaccommodation Party to the
use of some other persons
where
a
solidary
accommodation maker paid to
the bank the balance due on a
promissory note, he may seek
contribution from the other
solidary
accommodation
maker, in the absence of a
contrary agreement between
them. This rights springs from
an implied promise between
the accommodation makers to
share equally the burdens
resulting from their execution
of the note. They are joint
guarantors of the principal
debtor. (Sadaya v. Sevilla).
A solidary accommodation maker
may:
a. demand from the principal
debtor reimbursement of the
amount which he paid on the
promissory note and
b.
c. demand contribution from his
co-accommodation
maker,
without first directing his
action against the principal
debtor, PROVIDED that:
b.1. he made the payment
by virtue of a judicial
demand, or
b.2. the principal debtor is
insolvent.
NEGOTIATION
An instrument is
when:
BAR OPERATIONS 2011
negotiated
Page 18

a. It is transferred from one

person to another
b. That the transfer must be in a
manner as to constitute the
transferee a holder
Modes of Negotiation:
1. If payable to bearer, it is
negotiated by delivery.
Negotiation of negotiable
instrument may be effected
by the delivery alone of the
instrument to the transferee
in
those
negotiable
instruments which are:
-originally payable to
bearer, or
-originally payable to
order
instruments
where
the
last
indorsement is an
indorsement in blank.
2. If payable to order, it
negotiated by the indorsement of
the holder completed by delivery.
A
negotiable
instrument payable to the
order of a specified person,
or to him or his order, may
be negotiated by the payee
by indorsement followed by
delivery of the instrument to
the indorsee. Subsequent
negotiation may be made in
this manner if the holder
who indorses acquired the
instrument under a special
indorsement.
BAR OPERATIONS 2011
The payee of the negotiable

instrument acquires no
interest with respect thereto
until its delivery to him.
(Development Bank of Rizal
v. Sima Wei)
3. Another method of transfer is
by assignment which generally
refers to ordinary contracts, and
by operation of law, where title to
a note or bill passes upon the
death of the holder to his
personal representative.
Indorsement to be valid must
be:
a. Written
b. On the instrument itself or
upon a piece of paper
attached (Sec. 31 NIL)
Notes on Section 31
The paper attached with the
indorsement is an allonge
An allonge must be attached so
that it becomes a part of the
instrument, it cannot be simply
pinned or clipped to it.
Kinds of Indorsements:
a.
b.
c.
d.
e.
Special (Sec. 34)

Blank (Sec. 35)
Restrictive (Sec. 36)
Qualified (Sec. 38)
Conditional (Sec. 39)
A. SPECIALspecifies
the
person to whom or to whose
order, the instrument is to
be payable. (Sec. 34)
Page 19

B. BLANK- Specifies no person

to whom or to whose order
the instrument is to be
payable.
1. Instrument
becomes
payable to bearer and
may be negotiated by
delivery (Sec. 34)
2. May be converted to a
special indorsement by
writing over the signature
of the indorser in blank
any contract consistent
with
character
of
indorsement. (Sec. 35)
C. ABSOLUTE- One by which
indorser binds himself to
pay:
a. Upon No order condition
than failure of prior
parties to do so; and
b. Upon due notice to him of
such failure.
D. CONDITIONAL- right of the
indorsee is made to depend
on the happening of a
contingent event. Party
required to pay may
disregard the conditions.
(Sec. 39)
E. RESTRICTIVEAn
indorsement is restrictive,
when it either:
a. Prohibits
further
negotiation of
the
instrument; or
b. Constitutes
the
indorsee the agent of
the indorser; or
c. Vests the title in the
indorsee in trust for or
BAR OPERATIONS 2011
to the use of some

other persons.
But mere absence of
words implying power to
negotiate does not make
an
indorsement
restrictive. (Sec. 36)
EFFECT
of
Restrictive
indorsement:
Confers upon the indorsee the
righta. Receive payment of the
instrument;
b. Bring any action thereon
that the indorser could
bring;
c. To transfer his rights as such
indorsee, when the form of
the instrument authorizes
him to do so.
F. QUALIFIED- Constitutes the
indorser a mere assignor of
the title to the instrument. (
Sec38)
It is made by adding to
the indorsers signature
words
like
sans
recourse,
without
recourse, indorser not
holder, at the indorsers
own risk, other terms of
similar import.
* Hence, it has been held that oral
testimony is not admissible to
establish that an unqualified
indorsement is in fact qualified. (
Velasco v. Tan Liuan & Co., March
17,1922)
Page 20

A Qualified indorser has

limited liability, i. e. he is
liable for breach of
warranty
if
the
instrument is dishonored
by non-acceptance or
non- payment due to:
1. Forgery; or
2. Lack of good title on the
part of the indorser; or
3. Lack of capacity to
indorse on the part of the
prior parties; or
4. The fact that at the time of
the endorsement, the
instrument was valueless
or nit valid, and he knew
of the fact.
A Qualified indorsement
does not impair the
negotiable character of
the instrument.
As
mentioned
earlier,
Negotiation is the transfer of a
negotiable instrument from one
person to another as to constitute
the transferee the holder thereof.
To be valid, negotiation must
involve the entire instrument.
Effects of indorsing an instrument
originally payable to bearer:
- It may further be negotiated
by delivery
- The person indorsing is
liable as indorser to such
persons as to make title
through his indorsement
(Sec. 40)
BAR OPERATIONS 2011
Notes on Section 40
Section 40 applies only to
instruments originally payable
to bearer
It cannot apply where the
instrument is payable to bearer
because the only or last
indorsement is in blank
A holder may strike out any
indorsement which is not
necessary to his title. (Sec. 48)
Effects:
- An
indorser
whose
indorsement is struck out is
discharged
- All indorsers subsequent to
such indorser who has been
discharged
are
likewise
relieved
Effects of a transfer without
endorsement:
- The transferee acquires such
title as the transferor had
- The transferee acquires the
right to have the indorsement
of the transferor
- Negotiation takes effect as of
the time the indorsement is
actually made (Sec. 49)
WHO IS A HOLDER IN DUE
COURSE?
Every holder is deemed
prima facie to be a holder in due
course; but when it is shown that
the title of any person who has
negotiated the instrument was
defective, the burden is on the
Page 21

holder to prove that he or some

person under whom he claims
acquired the title as holder in due
course. But the last-mentioned
rule does not apply in favor of a
party who became bound on the
instrument
prior
to
the
acquisition of such defective title.
(Sec. 59)
RIGHTS OF A HOLDER
- A holder may sue in his own
name
-A
holder
may
receive
payment.
Effects: (Sec. 51 NIL)
- If in due course it discharges
the instrument
*Note: Holder in due Course
(Secs. 52,57&59)
Personal and Real Defenses
( 2000 & 2009 BEQ)
Requisites for a Holder in Due
Course (HDC):
a. Receives
the instrument
complete and regular on its
face
b. Became a holder before it
was overdue and had no
notice that it had been
previously dishonored if
such was the fact
c. Takes the instrument for
value and in good faith
d. At
time he took the
instrument, no notice of
infirmity in instrument or
defect in the title of the
BAR OPERATIONS 2011
person negotiating it (Sec.

52 NIL)
*Note: Under the "SHELTER
PRINCIPLE," the holder-in-due
course, by negotiating the
instrument, to a party not a
holder-in-due course, transfers all
his rights as such holder to the
latter, who thus acquires the right
to enforce the instrument as if he
was a holder-in-due course.
However,
this
principle
presupposes that the "sheltered"
holder is not a party to any fraud
or illegality impairing the
validity of the instrument. (2008
BEQ)
Notes on Section 52
Every holder is presumed to
be a HDC (Sec. 59)
If one of the requisites are
lacking, the holder is not a HDC
An instrument is considered
complete and regular on its face
if a) the omission is immaterial
b) the alteration on the
instrument was not apparent on
its face
An instrument is overdue
after the date of maturity.
On the date of maturity, the
instrument is not overdue and
the holder is a HDC
Acquisition of the transferee
or indorsee must be in good
faith
Good faith means lack of
knowledge or notice of defect or
infirmity
Page 22

A holder is not a HDC where an

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

title through a HDC and is
not a party to any fraud or
illegality
affecting
the
instrument, has all the rights
of such HDC in respect to all
parties prior. (Sec. 58 NIL)
- Holds the instrument free from

any defect of title of prior
parties
- Free from defenses available to
prior
parties
among
themselves
(personal/
equitable defenses)
- May enforce payment of the
instrument for the full amount
against all parties liable(Sec. 57
NIL)
Rights of a holder not a HDC

- May sue in his own name
- May receive payment and if
it is in due course, the
instrument is discharged
- Holds the instrument subject
to the same defenses as if it
were non-negotiable
- If he derives his title through
a HDC and is not a party to
any fraud or illegality
thereto, has all the rights of
such HDC
Notes on Section 57
Personal
or
equitable
defenses are those which grow
out of the agreement or conduct
of a particular person in regard
to the instrument which renders
it inequitable for him through
legal title to enforce it. Can be
set up against holders not HDC
Legal or real defenses are
those which attach to the
instrument itself and can be set
up against the whole world,
including a HDC.
An instrument not in the
hands of a HDC is subject to the
same defenses as if it were nonnegotiable.
Exception:
BAR OPERATIONS 2011
General rule: Every holder is

deemed prima facie to be a
holder in due course.
Exception:
- Where it is shown that the
title of any person who has
negotiated the instrument is
defective, the burden is on
the holder to prove that he is
a HDC or that a person
under whom he claims is a
HDC (Sec. 59 NIL)
DEFENSES OF PRIOR PARTIES
AGAINST THE HOLDER
Classes of Defenses:
1. Real or Absolute Defenses
- a real or absolute defense
is a defense which attaches
Page 23

to
the
instrument
irrespective of the parties
and is predicated on the
principle
that the right
sought to be enforced has
never existed or has ceased
to exist.
- A real defense is available
against
ALL
HOLDERS,
whether in due course or
not.
2. Personal or Equitable
Defenses
- a personal or equitable is a
defense growing out of an
agreement or conduct of a
particular person in regard
to an instrument which
renders it inequitable for
him although owner of it, to
enforce it against the
defendant.
Personal
Defenses
1. Absence or
failure of
consideration
2. Want of
delivery of
complete
instrument
3. Insertion of
wrong date
where payable
at a fixed period
after date and
issued undated;
or at a fixed
Real Defenses
Alteration
Want of
delivery of
incomplete
instrument
Duress
amounting to
forgery
BAR OPERATIONS 2011
period after
sight and
acceptance is
undated
4. Filling up the
blanks contrary
to authority
given or not
within
reasonable time
5. Fraud in
inducement
6. Acquisition
of the
instrument by
force, duress or
fear
Fraud in factum
or in esse
contractus
Minority
Marriage in
case of a wife
Insanity where
7. Acquisition
the insane
of the
person has a
instrument by
guardian
unlawful means appointed by
the court
Ultra vires acts
of a corporation
where its
8. Acquisition of
charter or by
the instrument
statue, it is
for an illegal
prohibited from
consideration
issuing
commercial
paper
9. Negotiation Want of
in breach of
authority of
faith
agent
10. Negotiation
Execution of
under
instrument
circumstances
between public
amounting to
enemies
fraud
Illegality of
11. Mistake
contract made
Page 24

by statue
12. Intoxication Forgery
13. Ultra vires
acts of
corporations
14. Want of
authority of the
agent where he
has apparent
authority
15. Illegality of
contract where
form or
consideration is
illegal
16. Insanity
where there is
no notice of
insanity
LIABILITIES OF PARTIES:
1. A maker is primarily liable:
Effects
of
making
the
instrument, the maker:
a. Engages to pay according to
tenor of instrument
b. Admits existence of payee
and his capacity to indorse
(Sec. 60 NIL)
Notes on Section 60
A makers liability is
primarily and unconditional
One who has signed as such
is presumed to have acted with
care and to have signed with full
knowledge of its contents,
unless fraud is proved
BAR OPERATIONS 2011
The payees interest is only

to see to it that the note is paid
according to its terms
When two or more makers
sign jointly, each is individually
liable for the full amount even if
one did not receive the value
given
The maker is precluded from
setting up the defense of:
a) The payee is fictional,
b) That the payee was insane, a
minor or a corporation
acting ultra vires
2. A drawer is secondarily
liable
Effects
of
drawing
the
instrument, the drawer:
a. Admits the existence of the
payee,
b. The capacity of such payee
to indorse
c. Engages that on due
presentment, the instrument
will be accepted or paid or
both according to its tenor.
If
the
instrument
is
dishonored, and the necessary
proceedings on dishonor duly
taken
a. The drawer will pay the
amount thereof to the holder
b. Will pay to any subsequent
indorser who may be
compelled to pay it. (Sec. 61
NIL)
Page 25

Notes on Section 61
A drawer may insert an
express stipulation to negative
or limit his liability
3. An acceptor is primarily
liable
By accepting the instrument, an
acceptor:
- Engages that he will pay
according to the tenor of his
acceptance
- Admits the existence of the
drawer, the genuineness of
his signature and his
capacity and authority to
draw the instrument
- The existence of the payee
and his then capacity
indorse
4. IRREGULAR INDORSER - a person
not otherwise a party to an
instrument places his signature
in blank before delivery is
liable as an indorser in the
following manner:
a. If payable to order of a third
person liable to the payee
and to all subsequent parties
b. If payable to order of the
maker or drawer liable to
all parties subsequent to the
maker or drawer
c. If payable to bearer liable
to all parties subsequent to
the maker or drawer
d. If
signs
for
an
accommodation party
liable
to
all
parties
subsequent to the payee
(Sec. 64)
BAR OPERATIONS 2011
*Note: Irregular Indorser v.

General Indorser (2005 BEQ)
Irregular Indorser, is not a party
to the instrument but he places
his signature in blank before
delivery. He is not a party but he
becomes one because of his
signature in the instrument.
Because his signature he is
considered an indorser and he is
liable to the parties in the
instrument. While, a General
Indorser warrants that the
instrument is genuine, that he has
a good title to it, that all prior
parties had capacity to contract;
that the instrument at the time of
the indorsement is valid and
subsisting; and that on due
presentment, the instrument will
be accepted or paid or both
accepted and paid according to its
tenor, and that if it is dishonored,
he will pay if the necessary
proceedings for dishonor are
made.
5. Warranties where negotiating
by delivery or qualified
endorsement:
a. The instrument is genuine
and in all respect what it
purports to be
b. The indorser has good title
to it
c. All prior parties had the
capacity to contract
d. Indorser has no knowledge
of any fact that would impair
the validity or the value of
the instrument.
Page 26

Limitations of warranties:
- If by delivery extends only
to
immediate
transferee
- Warranty of capacity to
contract does not apply
to persons negotiating
public or corporate
securities (Sec. 65 NIL)
Notes on Section 65
A qualified indorser is one
who indorses without recourse
or sans recourse
Recourse - resort to a person
secondarily liable after default of
person primarily liable
A qualified indorser cannot
raise the defense of a) forgery b)
defect of his title or that it is void
c) the incapacity of the maker,
drawer or previous indorsers.
A qualified Indorsement
makes the indorser mere
assignor of title of instrument,
relieves
him
of
general
obligation to pay if instrument is
dishonored, but he is still liable
for the warranties arising from
instrument
only
up
to
warranties of general indorser
The warranty is to the
capacity of prior parties at the
time the instrument was
negotiated.
Subsequent
incapacity does not breach the
warranty.
lack of knowledge of the
indorser as to any fact that
would impair the validity or the
BAR OPERATIONS 2011
value of the instrument must be

subsisting all throughout
A person Negotiating by
Delivery warrants same as those
of qualified indorser and
extends
to
immediate
transferees only
Warranties of a general
indorser:
a. The instrument is genuine
and in all respect what it
purports to be
b. The he has good title to it
c. All prior parties had the
capacity to contract
d. That the instrument at the
time of his indorsement was
valid and subsisting (Sec.
66)
In addition:
- Engages that the instrument
will be accepted or paid or
both according to its tenor
on due presentment
- Engages to pay the amount
thereof if it be dishonored
and
the
necessary
proceedings on dishonor are
taken
Notes on Section 66
The indorser under Section
66 warrants the solvency of a
prior party
The indorser warrants that
the instrument is valid and
subsisting regardless of whether
he is ignorant of that fact or not.
Page 27

Warranties extend in favor

of a) a HDC b) persons who
derive their title from HDC c)
immediate transferees even if
not HDC
The indorser does not
warrant the genuineness of the
drawers signature
General indorser is only
secondarily liable
PRESENTMENT FOR PAYMENT
General rule: Presentment for
payment is not necessary to
charge persons primarily
liable on the instrument.
Presentment for payment is
necessary to charge the
drawer and indorsers. (Sec
70 NIL)
Presentment is necessary to
charge persons secondarily
liable otherwise they are
discharged
Notes on Section 70
Presentation for payment
production of a BOE to the
drawee for his acceptance, or to
a drawee or acceptor for
payment. Also presentment of a
PN to the party liable for
payment of the same.
Consists of a) a personal
demand for payment at a proper
place b) the bill or note must be
ready to be exhibited if required
and surrendered upon payment.
BAR OPERATIONS 2011
Parties primarily liable

persons by the terms of the
instrument
are
absolutely
required to pay the same. E.g
maker and acceptors. They can
be sued directly.
If payable at the special place,
and the person liable is willing
to pay there at maturity, such
willingness and ability is
equivalent to tender of payment.
Acts needed to charge persons
secondarily liable:
a) Presentment
for
payment/acceptance
b) Dishonor
by
nonpayment/non-acceptance
c) Notice of dishonor to
secondary parties
Acts needed to charge persons
secondarily liable in other cases:
a) Protest for non-payment by
the drawee
b) Protest for non-payment by
the acceptor for honor
Proper presentment:
a. By the holder or an
authorized person
b. At a reasonable hour on a
business day
c. At a proper place
d. To the person primarily
liable or if absent to any
person found at the place
where presentment is made
(sec. 72 NIL)
Page 28


made to the maker, or acceptor.
Not to the person secondarily
liable.
Notes on Section 72
Only the holder or one
authorized by him has the right
to make presentment for
payment
Presentment cannot be made
on a Sunday or holiday
If the instrument is payable on
demand a) if it is a note
presentment must be made
within reasonable time after
issue b) if it is a bill
presentment must be made
within reasonable time after last
negotiation.
General rule: Presentment for
payment is necessary to
charge persons secondarily
liable otherwise they are
discharged:
Exception:
1. Presentment not required to
charge the drawer:
a. He has no right to expect
b. He has no right to require
that the drawee or
acceptor will pay (Sec 79)
2. Presentment not required to
charge the indorser where:
a. The instrument was made
or accepted for his
accommodation
BAR OPERATIONS 2011
b. He has no reason to
expect
that
the
instrument will be paid if
presented (Sec. 80)
Notes on Section 79 and 80
Only the drawer or indorser
are not discharged. All other
parties secondarily liable are
discharged.
dispensed with if:
a. After
due
diligence,
presentment cannot be
made
b. Presentment is waived
c. The drawee is a fictitious
person (Sec 82)
Notes on Section 82
What is excused is the
failure to make presentment.
There is no need to make any
presentment
versus
under
section
81
(delay
in
presentment) presentment for
payment is still required after
the cause of delay has ceased.
Other
instances
where
presentment for payment is not
required:
1. in order to charge the
drawer, where he has no right
to expect or require that the
drawee or acceptor will pay the
instrument;
2. in order to charge an
indorser, where the instrument
was made or accepted for his
accommodation and he has no
right to expect that the
Page 29

instrument will be paid if

presented; and
3. when a bill is dishonored by
non-acceptance, an immediate
right of recourse against the
drawer and indorsers accrues
to the holder and presentment
for payment is necessary
Summary of rules as to
presentment for payment:
a. Presentment not necessary to
charge persons primarily liable
b. Necessary to charge persons
secondarily liable except:
- The drawer under Sec. 79
- The indorser under Sec. 80
- When excused under Sec. 82
- When the instrument has
been dishonored by nonacceptance under Sec. 83
When instrument dishonored
by non-payment
The instrument is dishonored by
non-payment when:
a. it is duly presented for
payment and payment is
refused or cannot be
obtained; or
b. presentment is excused
and the instrument is
overdue and unpaid.
Effects of dishonor by nonpayment:
- An immediate right of
recourse to all parties
secondarily liable accrues to
the holder (Sec. 84)
- An immediate right of
recourse means that the
BAR OPERATIONS 2011
holder, after the instrument is

dishonored by non-payment
and notice of dishonor given
to the persons secondarily
liable, may sue any of the
latter without suing first the
persons primarily liable.
Notes on Section 84
Parties
cease
to
be
secondarily liable and become
principal debtors.
Liability becomes the same
as that of the original obligors.
NOTICE OF DISHONOR
When
a
negotiable
instrument has been dishonored
by non-acceptance non-payment,
notice of dishonor must be given
to the drawer and to each
indorsers.
Any drawer or indorser to whom
such notice is not given is
discharged.
Exceptions:
a. Waiver (Sec. 109)
b. Notice is dispensed (Sec.
112)
c. Not necessary to Drawer
(Sec. 114)
d. Not necessary to Indorser
(Sec. 115)
- If notice is delayed, delay may
be excused (Sec. 113)
Page 30

Notice of Dishonor may be

given:
a. By or on behalf or the holder
b. By or on behalf of any party
who:
- Is a party to the
instrument and might be
compelled to pay the
instrument.
- To a holder who having
taken it up would have a
right of reimbursement from
the party to whom notice is
given. (Sec. 90)
Notes on Section 111
Where notice is waived,
presentment is not waived
Where presentment is
waived, notice is also waived
Where protest is waived,
notice and presentment is
waived
Effects of notice:
a. Where notice is given by
or on behalf of the holder, it
inures for the benefit of all
subsequent holders and all prior
parties who have a right of
recourse against the party to
whom it is given.
b. Where notice is given by
or on behalf of a party entitled to
give notice, it inures for the
benefit of the holder and all
parties subsequent to the party to
whom it is given.
Forms of notice:
BAR OPERATIONS 2011
a. May be written or oral

b. Written notice need not be
signed
or
may
be
supplemented by verbal
communication
c. May be by personal delivery
or by mail
Notice may be waived either
expressly or implied:
a. Before the time of giving
notice has arrived
b. After the omission to give
due notice
Dispensation with Notice:
Notice of dishonor is
dispensed with when, after the
exercise of reasonable diligence, it
cannot be given to or does not
reach the parties sought to be
charged.
Effects of failure to give notice:
An omission to give notice of
dishonor by non-acceptance does
not preclude the rights of a holder
in due course subsequent to the
omission.
Instances when Notice Not
Required to Indorser
a. Drawee
was
a
fictitious/incapacitated
person and the indorser was
aware of such at the time of
indorsement
b. Indorser is the person to
whom
instrument
was
presented for payment
c. Instrument made/accepted
for his accommodation
Page 31

b.
Discharge of the Instrument

A negotiable instrument is
discharged:
a. By payment in due course
by or on behalf of the
principal debtor;
b. Payment by in due course
by party accommodated,
where the instrument is
made or accepted for
accommodation;
c. Intentional cancellation by
holder of instrument;
d. Any other act discharging a
simple contract for the
payment of money;
e. When the principal debtor
becomes the holder of the
instrument at or after
maturity in his own right.
NOTES ON SECTION 119
Discharge of the instrument
discharges all the parties thereto
Payment must be in due
course, and by the principal
debtor or on his behalf
If payment is not made by
the principal debtor, payment
only cancels the liability of the
payor and those obligated after
him but does not discharge the
instrument.
Payment
by
an
accommodation party does not
discharge the instrument.
Discharge of Secondary Parties:
a.
Any act discharging

instrument
BAR OPERATIONS 2011
c.
d.
e.
f.
Cancellation
of
indorsers
signature by indorsers
Discharge of prior party
Tender of payment by prior
party
Release of principal debtor
Extension of payment by the
holder/postponement of right
to enforce without assent of
secondary parties and without
reservation of right of recourse
against secondary parties (Sec
120 NIL)
RIGHT OF PARTY WHO

DISCHARGES INSTRUMENT (Sec.
121)
A party secondarily liable
who pays the instrument does not
discharge it , but instead acquires
certain rights ;
1.Collect from prior parties ; or
2. Negotiate the instrument to
new parties- but not to
subsequent parties.
However , Under the exceptions
provided in Sec.121, the
instrument is considered
discharged when ;
1.The BOE is payable to the order
of a third person and paid by the
drawer himself, or
2. Where it was made or accepted
for accommodation , and has been
paid by the party accommodated.
RENUNCIATION BY
(Sec 122)
HOLDER.
the
Page 32

Renunciation- The act of giving

up or abandoning a right without
transferring the right to another.
As a Rule ,the holder may
expressly renounce his rights
against any party to the
instrument before , or after its
maturity. An absolute and
unconditional renunciation of his
rights against the principal debtor
at or after maturity of the
instrument
discharges
the
instrument.
However , A renunciation does
not affect the rights of a holder in
due course without notice of the
renunciation.
if renounced in favor of a
party secondarily liable, only he
is exonerated from liability and
all parties subsequent to him
discharge by novation is
allowed
MATERIAL ALTERATION
General rule: When materially
altered, without the consent
of all parties liable, the
instrument is avoided except
as against:
a. The party who has made the
alteration
b. The party who authorized or
assented to the alteration.
c. Subsequent indorsers
Exception:
BAR OPERATIONS 2011
- If in the hands of a HDC, may

be enforced according to its
original tenor
MATERIAL ALTERATION
- Any change in the instrument
which affects or changes the
liability of the parties in any
way.
There is no distinction
between
fraudulent
and
innocent alteration
The EFFECTS of material
alteration:
1. Alteration by a PARTY
Material alteration by the holder
discharged the instrument and all
prior parties thereto who did not
give their consent to such
alteration.
Whether the alteration made is
favorable or unfavorable to the
party making the alteration, no
distinction as to the effect is
made. The intent of the law is to
preserve the integrity of the
negotiable instrument.
2. Alteration by a STRANGER (
SPOLIATION )
If subsequently negotiated to a
non-Holder in Due CourseA
material alteration avoids the
instrument as against any prior
party who has not assented to the
alteration.
If subsequently negotiated to a
Holder in Due CourseHe may
Page 33

enforce
payment
thereof
according to its original tenor
regardless of whether the
alteration was innocent or
fraudulent.
CHANGES
that
constitute
MATERIAL ALTERATIONS
1. The date;
2. The sum payable, either for
principal or interest;
3. The time or place of payment;
4. The number or the relations of
the parties;
5. The medium or currency in
which payment is to be made;
6. Or which adds a place of
payment where no place of
payment is specified; or
7. Any other change or addition
which alters the effect of the
instrument in any respect. (Sec.
125)
A serial number is an item
which is not an essential
requisite for negotiability
under Sec. 1 of NIL, and
which does not affect the
right of the parties, hence
its alteration is not
material. (PNB v. CA, 256
SCRA 491) (199 BEQ)
Instances where a BOE may be
treated as a PN:
a. Where the drawer and the
drawee are one and the
same
b. Where the drawee is a
fictitious person
BAR OPERATIONS 2011
c. Where the drawee has no

capacity to contract (Sec.
130)
The holder has the option to treat
it as a BOE or a PN
ACCEPTANCE
The signification by the drawee of
his assent to the order of the
drawer. It is an act by which a
person on whom the Bill of
Exchange is drawn assents to the
request of the drawer to pay it.
As a general rule, acceptance, in
order to be valid must be:
1. Written;
2. Signed by the drawee; and
3. Must contain an express or
implied to pay in money.
A holder of a bill has the right:
a. Require that acceptance be
written on the bill and if
refused, treat it as if
dishonored (Sec. 133)
b. Refuse to accept a qualified
acceptance and may treat it as
dishonored
Acceptance may be:
a. Actual
b. Constructive
c. General (Sec. 140)
d. Qualified (Sec. 141)
Kind of acceptance:
A. Constructive Acceptance:
Page 34

a. Where the drawee to whom

the bill has been delivered
destroys it
b. The drawee refuses within
24 hrs after such delivery or
within such time as is given,
to return the bill accepted or
not
c. Local an acceptance
to pay only at a
particular place;
d. Qualified as to time
e. The acceptance of
some
or
more
drawees but NOT
ALL.

Drawee
becomes
primarily liable as an
acceptor.
Mere
retention
is
equivalent to acceptance
- The holder of the bill

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

must give notice of
dishonor.
B. General Acceptance:
An acceptance to pay at a
particular place is a general
acceptance unless it is expressly
states that the bill is to be paid
there only and not elsewhere.
C. Qualified Acceptance if in
express terms varies the effect of
the bill as drawn.
Kinds
of
Qualified
Acceptance:
a. Conditional one
which makes payment
by
the
acceptor
dependent
on
the
fulfillment
of
a
condition
therein
stated;
b. Partial an acceptance
to pay part only of the
amount for which the
bill is drawn;
BAR OPERATIONS 2011
- Effect
of
taking
qualified acceptance:
- Where a qualified
acceptance is taken
THE DRAWER and
INDORSERS
are
discharged
from
liability on the bill
unless
they
have
expressly or impliedly
authorized the holder
to
take
qualified
acceptance
or
subsequently assents
thereto.
Page 35

* When the drawer or

indorser receives notice
of qualified acceptance
he must within a
REASONABLE TIME
express his dissent to the
holder or he will be
deemed to have assented
thereto.
Time for acceptance:
The drawee is allowed
twenty-four
hours
after
presentment in which to decide
whether or not he will accept the
bill; the acceptance, if given, dates
as of the day of presentation.
Rules governing acceptance:
When an acceptance is
written on a paper other than a
bill itself, it does not bind the
acceptor except in favor of a
person to whom it is shown and
who, on the faith thereof, receive
the bill for value.
An unconditional promise in
writing to accept a bill before it
is drawn is deemed an actual
acceptance in favor of every
person who, upon the faith
thereof, receives the bill for value.
Where a drawee to whom a
bill is delivered for acceptance
destroys the same, or refuses
within twenty-four hours after
such delivery, or within such
other period as the holder may
allow, to return the bill accepted
BAR OPERATIONS 2011
or non-accepted to the holder, he

will be deemed to have accepted
the same.
A bill may be accepted
before it has been signed by the
drawer, or while otherwise
incomplete, or when it is overdue,
or after is has been dishonored by
a previous refusal to accept, or by
non-payment. But when a bill
payable after sight is dishonored
by non-acceptance and the
drawee subsequently accepts it,
the holder, in the absence of any
different agreement, is entitled to
have the bill accepted as of the
date of the first presentment.
PRESENTMENT FOR
ACCEPTANCE
When presentment for
acceptance is necessary:
a. If necessary to fix the
maturity of the bill
b. If it is expressly stipulated
that it shall be presented for
acceptance
c. If the bill is drawn payable
elsewhere
than
the
residence or place of
business of the drawee (Sec.
143 NIL)
PRESENTMENT
is
the
production of a bill of exchange
to the drawee for his acceptance.
Page 36

PRESENTMENT
For Acceptance (Sec. 143)
For Payment ( Sec. 70)
( 2000 & 2003 BEQ)
PURPOSE: To get acceptance of

the drawer for purpose of
making him primarily liable as
an acceptor. Presentment is also
prerequisite to the accrual of
secondary liability against the
drawer and the indorsers.
On what days presentment
must be made:
A bill may be presented for
acceptance on any day on which
negotiable instruments may be
presented for payment. When
Saturday is not otherwise a
holiday,
presentment
for
acceptance may be made before
twelve oclock noon, on that day.
Presentment for
must be made:
acceptance
1. Where the bill is payable

after sight; or in any other case,
where
presentment
for
acceptance is necessary in order
to fix the maturity of the
instrument.
2. Where the bill expressly
stipulates that it shall be
presented for acceptance.
3. Where the bill is drawn
payable elsewhere than the
residence or place of business of
the drawee.
BAR OPERATIONS 2011
Presentment, How made:

Presentment for acceptance
must be made by or on behalf of
the holder at a reasonable hour,
on a business day and before the
bill is overdue, to the drawee or
some person authorized to accept
or refuse acceptance on his
behalf; and
(a.) Where a bill is addressed
to two or more drawees who are
not partners, presentment must
be made to them all, unless one
has authority to accept or refuse
acceptance for all, in which case
presentment may be made to him
alone;
(b.) Where the drawee has
been dead, presentment may be
made
to
his
personal
representatives;
(c.) Where the drawee has
been adjudged a bankrupt or an
insolvent, or has made an
instrument for the benefit of
creditors, presentment may be
made to him or to his trustee or
assignee.
WHERE
PRESENTMENT
EXCUSED. (Sec. 148.)
IS
Presentment for acceptance is

excused , and a bill may be treated
as dishonored by non acceptance ,
in either of the following cases:
1. Where the drawee is dead ,
or has absconded , or is a
fictitious person or a person not
having capacity to contract.
Page 37

2. Where, after the exercise of

reasonable diligence ,
presentment cannot be made.
3.
Where,
although
presentment has been irregular ,
acceptance has been refused on
some other ground.
When bill is dishonored by nonacceptance
A bill is dishonored by nonacceptance:
a. When it is duly presented for
acceptance
and
such
an
acceptance as is refused or cannot
be obtained;
b.
When
presentment
for
acceptance is excused, and the bill
is not accepted.
Duty of the holder where bill is
not accepted.
Where a bill is duly presented
for acceptance and is not accepted
within the prescribed time, the
person presenting it must treat
the bill as dishonored by nonacceptance or he loses the right of
recourse against the drawer and
indorsers.
HOW? By giving NOTICE OF
DISHONOR or by making a
PROTEST when required.
Rights of holder where bill is
NOT accepted:
An
immediate
right
of
recourse against the drawer and
indorsers accrues to the holder
BAR OPERATIONS 2011
and NO PRESENTMENT
payment is necessary.
for
PROMISSORY NOTES AND

CHECKS
Promissory Note is an
unconditional promise in writing
made by one person to another,
signed by the maker, engaging to
pay on demand, or at a fixed or
determinable future time, a sum
certain in money to order or
bearer.
NOTE: Where a note is drawn to
the makers own order, it is NOT
complete until indorsed by him.
Special types of promissory
notes:
1. Certificate of deposit
- is
a
written
acknowledgment by a
bank of the receipt of
money on deposit
which
the
bank
promises to pay to the
depositor, bearer, or to
some other person or
order.
- It is NOT ipso facto
negotiable it must
first comply with the
requirements provided
under Section 1, NIL.
2. Bonds
- A promise, under seal, to
pay money.
- The bond certifies that the
issuing company is indebted
Page 38

to the bondholder for the

amount specified on the face
of the bond, and contains an
agreement of the company
to pay the sum at a specified
time in the future, and
meanwhile to pay a specified
interest on the principal
amount at regular intervals,
generally six months apart.
They are negotiable if it the
requisites in Section 1, NIL
are complied with.
10.
Bank Notes
- Are promissory notes of
the issuing bank payable
to bearer on demand and
intended to circulate as
money. They are regarded
as cash and pass from
hand to hand without any
evidence of titled in the
holder than that which
arises form possession.
However, they are not
money.
Classes of Bonds:
1. Mortgage bonds;
2. Equipment Bonds;
3. Collateral trust bonds;
4. Guaranteed bonds;
5. Debentures; and
6. Income bonds;
7. Convertible bonds;
8. Redeemable Bonds;
9. Registered Bonds; and
- Coupon Bonds those
which are attached a
sheet of dated, numbered
and similarly printed
coupons
which
the
bondholder may cut off
when due or thereafter.
Such coupons may be
served and deposited in a
bank, negotiated before
the maturity of the
interest they represent,
and transferred just like
any commercial paper.
They are negotiable if it
the requisites in Section 1,
NIL are complied with.
11.
Due Bills
- is an instrument
whereby one person
acknowledges
his
indebtedness to another.
BAR OPERATIONS 2011
CHECKS - a bill of exchange

drawn on a bank payable on
demand. (Sec. 185)
CONCEPTS:
Certification of Checks- An
agreement whereby the bank
against whom a check is drawn,
undertakes to pay at any future
time
when
presented
for
payment.
EFFECTS:
a. Equivalent to acceptance
(Sec 187) and is the
operative act that makes
the bank liable.
b. Assignment of the funds
of the drawer in the hands
of the drawee (Sec 189)
Page 39

c. If obtained by the holder,

discharges the persons
secondarily liable thereon
( Sec 188)
A check must be presented for
payment within reasonable time
after its issue or the drawer will
be discharged from liability
thereon to the extent of the loss
caused by the delay. (Sec. 186)
Reasonable Time: (Sec. 193)
a. Nature of the instrument
b. Usage of business or trade
c. The facts of the particular
case
CROSSED CHECK: (2004 & 2005
BEQ)
- A check which in addition to the
usual contents of an ordinary
check contains also the name of a
certain banker or business entity
through whom it must be
presented for payment.
- A Crossed Check under accepted
banking practice, crossing a check
is done by writing two parallel
lines diagonally on the left top
portion of the checks. The
crossing is special where the
name of the bank or a business
institution is written between the
two parallel lines, which mean
that the drawee should pay only
with the intervention of that
company.
EFFECTS:
BAR OPERATIONS 2011
a. That the check may not be

encashed; it may only be
deposited with the bank;
b. That the check may be
negotiated only once to a
person who has an account
with the bank; and
c. That it serves as a warning
to the holder that the check
has been issued for a
definite purpose. (Bataan
Cigar v. CA 280 SCRA 643)
*Note: Crossed Checks vs.
Cancelled Checks (2004 BEQ)
A crossed check is one with two
parallel lines drawn diagonally
across its face or across a corner
thereof. On the other hand, a
cancelled check is one marked
or stamped "paid" and/or
"cancelled" by or on behalf of a
drawee bank to indicate payment
thereof.
*State Investment House v IAC (GR
72764 13Jul1989), the SC
considered a crossed check as
subjecting a subsequent holder
thereof to the contractual
covenants of the payor and the
payee.
2 KINDS:
1. CROSSSED SPECIALLY- The
same name of a particular
bank or company is written
or appears between thev.
Tan parallel lines in which
case the drawee-bank must
pay the check only upon
presentment by such bank
Page 40

or company (Chan Wan v.

tan Kim 109 Phil 706) on
penalty of being made to pay
agin by the rightful owner
should the first payment
prove
to
have
been
erroneous.
2. CROSSED
GENERALLYonly the words and Co. are
written between the parallel
lines or when none at all is
written at all between said
lines.
* This Court has taken judicial
cognizance of the practice that a
check with 2 parallel lines in the
upper left hand corner means that
it could only be deposited and not
converted into cash.
IRON CLAD RULE prohibits the
countermanding of payment of
certified checks. (Rep. v. PNB, Dec.
1, 1961)
*Note: The holder must be a
holder in due course before the
stop payment order may not be
successfully invoked against him.
(Mesina v. IAC, 146 SCRA 497,
505)
TYPES OF CHECKS (Cesar
Villanueva, Commercial Law
Review, 2004 ed.)
a. Cashiers Check- One
drawn by the cashier of a
bank, in the name of the
bank against the bank itself
payable to a third person. It
is a primary obligation of the
issuing bank and accepted in
BAR OPERATIONS 2011
b.
c.
d.
e.
advance upon issuance. (Tan

v. CA 239 SCRA 310)
Managers Check- A check
drawn by the manager of a
bank in the name of the bank
itself payable to a third
person. It is similar to the
cashiers check as to the
effect and use.
Memorandum Check- A
check given by a borrower
to a lender for the amount of
a short loan, with the
understanding that it is not
to be presented at the bank,
but will be redeemed by the
maker himself when the
loan falls due and which
understanding is evidenced
by writing the word
memorandum, memo or
mem on the check.
Certified Check- An
agreement whereby the
bank against whom a check
is drawn undertakes to pay
it at any future time when
presented for payment. (Sec.
187)
Travelers Check- It is one
upon the holders signature
must appear twice; one to be
affixed by him at the time it
is issued and the second, for
counter-signature, to be
affixed by him in the
presence of the payee before
it is paid, otherwise it is
incomplete.
CORPORATION LAW
Page 41

(Batas Pambansa Bilang 68)

A. CORPORATION, DEFINED
An artificial being created by
operation of law having the right
of succession, and the powers,
attributes
and
properties
expressly authorized by law and
incident to its existence. (Sec. 2).
It has a separate and distinct
personality
from
its
incorporators.
(2000
Bar
Examination)
Attributes of a Corporation
1. It is an artificial being.
2. It is created by operation of
law.
3. It enjoys the right of
succession.
4. It has the powers, attributes
and
properties
expressly
authorized by law or incident
to its existence.
Theories on Formation of a
Corporation:
1. Concession
Theory
a
corporation is an artificial
creature without any existence
until it has received the
imprimatur of the state acting
according to law, through the SEC.
(Tayag vs. Benguet Consolidated,
Inc., 26 SCRA 242)
2. Theory of corporate enterprise
or economic unit the corporation
is not merely an artificial being,
but more of an aggregation of
persons doing business, or an
underlying
business
unit.
BAR OPERATIONS 2011
(Philippine Corporate Law, Cesar

Villanueva, 2001 ed.)
B. CLASSIFICATION:
1. AS TO ORGANIZERS
a. public by State only; and
b. private by private persons
alone or with the State.
2. AS TO FUNCTIONS
a. public government of a
portion of the territory; and
b. private usually for profitmaking
3. AS TO GOVERNING LAW
a. public Special Laws; and
b. private Law on Private
Corporations
4. AS TO LEGAL STATUS
a. De jure corporation
organized in accordance
with the requirements of
law.
b. De facto corporation
organized with a colorable
compliance
with
the
requirements of a valid law.
Its existence cannot be
inquired collaterally. Such
inquiry may be made by the
Solicitor General in a quo
warranto proceeding. (Sec.
20)
Requisites:
1. The existence of a valid
law under which it may
be incorporated;
2. A bona fide attempt in
good faith to incorporate
under such law;
Page 42

3. Actual use or exercise in

good faith of corporate
powers; and
4. Issuance of a certificate of
incorporation by the SEC
as
a
minimum
requirement of continued
good faith.
The only difference between a
de facto corporation and a de
jure corporation is that a de
jure
corporation
can
successfully resist a suit by a
state brought to challenge its
existence;
a
de
facto
corporation cannot sustain its
right to exist.
c. Corporation by estoppel
group of persons that
assumes to act as a
corporation knowing it to be
without authority to do so,
and enters into a transaction
with a third person on the
strength of such appearance.
It cannot be permitted to
deny its existence in an
action
under
said
transaction. (Sec. 21) It is
neither de jure nor de facto.
d. Corporation
by
prescription one which
has exercised corporate
powers for an indefinite
period without interference
on the part of the sovereign
power, e.g. Roman Catholic
Church.
BAR OPERATIONS 2011
5. AS TO EXISTENCE OF SHARES
OF STOCK
a.
Stock corporation a
corporation
(1)
whose
capital stock is divided into
shares and (2) which is
authorized to distribute to
shareholders dividends or
allotments of the surplus
profits on the basis of the
shares held. (Sec. 3)
b. Non-stock corporation
does not issue stocks nor
distribute dividends to their
members.
6. AS TO RELATIONSHIP OF
CONTROL AND MANAGEMENT
a. Holding Corporation - it is
one which controls another
as a subsidiary by the power
to elect management. It is
one that holds stocks in
other
companies
for
purposes of control rather
than for mere investment.
b. Subsidiary Corporation one which is so related to
another corporation that the
majority of its directors can
be elected directly or
indirectly by such other
corporation. (The
Corporation Code of the
Philippines Annotated,
Hector de Leon, 2002 ed.)
c. Affiliates - company which is
subject to common control
of
a
mother
holding
company and operated as
part of the system.
Page 43

d.
Parent and Subsidiary

Corporation
separate
entities with power to
contract with each other.
The board of directors of the
parent company determines
its representatives to attend
and vote in the stockholders
meeting of its subsidiary.
The stockholders of the
parent company demand
representation in the board
meetings of its subsidiary.
7. AS
TO
PLACE
OF
INCORPORATION
a. Domestic corporation- a
corporation
formed,
organized, or existing under
Philippine laws.
b. Foreign corporation a
corporation
formed,
organized, or existing under
any laws other than those of
the Philippines. (Sec. 123)
C. NATIONALITY
CORPORATION
OF
Test to Determine Nationality

of Corporations
1. INCORPORATION TEST
determined by the state of
incorporation, regardless of
the nationality of the
stockholders.
2.
DOMICILE
TEST
determined by the state

where it is domiciled. The
domicile of a corporation is
the place fixed by the law
BAR OPERATIONS 2011
creating or recognizing it; in

the absence thereof, it shall
be understood to be the
place where its legal
representation
is
established or where it
exercise
its
principal
functions. (Art. 51, NCC)
3. CONTROL
TEST
determined
by
the
nationality of the controlling
stockholders or members.
This test is applied in times
of war. Also known as the
WARTIME TEST.
D. CORPORATE
PERSONALITY
JURIDICAL
I. Doctrine
of
Separate
Personality
A corporation has a juridical
personality
separate
and
distinct from that of its
Used
for
purposes
of
convenience and to subserve
the ends of justice.
Consequences/significance:
1. Liability for acts or contracts
obligations incurred by a
corporation, acting through
its authorized agents are its
sole liabilities. (Creese vs. CA,
93 SCRA 483)
2. Right to bring actions may
bring civil and criminal
actions in its own name in
the same manner as natural
persons. (Art. 46, Civil Code)
Page 44

3. Right to acquire and possess

property
property
conveyed to or acquired by
the corporation is in law the
property of the corporation
itself as a distinct legal entity
and not that of the
(Art. 44(3), Civil Code)
4. Acquisition of court of
jurisdiction service of
summons may be made on
the
president,
general
manager,
corporate
secretary, treasurer or inhouse counsel. (Sec. 11, Rule
14, Rules of Court).
5. Changes
in
individual
membership remains
unchanged and unaffected in
its identity by changes in its
individual membership. (The
Philippines
Annotated,
6. Entitlement to constitutional
guaranties:
a. Due process (Albert vs.
University Publishing, 13
SCRA 84)
b. Equal protection of the
law (Smith, Bell & Co. vs.
Natividad, 40 Phil. 136)
c. Protection
against
unreasonable
searches
and seizures. (Stonehill vs.
Diokno, 20 SCRA 383)
A corporation is not entitled
to invoke the right against
self-incrimination. (Bataan
Shipyard vs. PCGG)
BAR OPERATIONS 2011
7. Liability for torts a

corporation
is liable
whenever a tortuous act is
committed by an officer or
agent under the express
direction or authority of the
stockholders or members
acting as a body, or,
generally, from the directors
as the governing body. (PNB
vs. CA, 83 SCRA 237)
8. A corporation is not entitled
to moral damages because it
has no feelings, no emotions,
no senses. (ABS-CBN vs.
Court of Appeals)
9. Liability for Crimes since a
corporation is a mere legal
fiction, it cannot be held
liable for a crime committed
by its officers, since it does
not have the essential
element of malice; in such
case the responsible officers
would be criminally liable.
(People vs. Tan Boon Kong,
54 Phil.607)
II. Doctrine of Piercing the
Corporate Veil
1. Doctrine of Piercing the
Corporate Veil (2006 Bar
Examination)
Under the doctrine of
piercing
the
veil
of
corporate entity, the legal
fiction that a corporation is
an entity with a juridical
personality separate and
distinct from its members or
stockholders
may
be
disregarded
and
the
Page 45

corporation
will
be
considered as a mere
associations of persons, such
that liability will attach
directly to the officers and
the stockholders (Umali vs.
Court of Appeals, 189 SCRA
529, 542 [1990]). It is an
equitable doctrine developed
to address situations where
the
separate
corporate
personality of a corporation
is abused or used for
wrongful purposes.
Grounds for Application of
the Doctrine (2006 Bar
Examination)
The doctrine of piercing the
veil of corporate entity will
apply when the corporations
separate juridical personality
is used:
1. to
defeat
public
convenience;
2. to justify wrong, protect
fraud, or defend crime;
3. as a shield to confuse the
legitimate issue;
4. where the corporation is
the mere alter ego or
business conduit of a
person; or
5. where the corporation is
so
organized
and
controlled and its affairs
are so conducted as to
make
it
merely an
instrumentality, agency,
conduit or adjunct of
another
corporation
BAR OPERATIONS 2011
(Umali vs. Court of Appeals,

189 SCRA 529, 542 [1990]).
Test in Determining Whether
to Pierce the Veil of Corporate
Personality
1. Control, not mere majority
or complete stock control,
but complete domination,
not only of the finances, but
of policy and business
practice in respect to the
transaction attacked so that
the corporate entity as to
this transaction had at the
time no separate mind, will
or existence of its own;
2. Such control must have
been used by the defendant
to commit fraud or wrong,
to perpetuate the violation
of a statutory or other
positive legal duty, or
dishonest and unjust act in
contravention of plaintiffs
legal right;
3. The aforesaid control and
breach of duty must
proximately
prevent
piercing the corporate veil;
4. The wrong doing must be
clearly and convincingly
established. It cannot be
presumed. (Lim vs. Court of
Appeals, et al., G.R. No.
124715, January 24, 2000
E. CAPITAL STRUCTURE
1. Number and qualifications
of incorporators
i. Number of Incorporators
(2006 Bar Examination)
Page 46

Incorporators
are
required to be not less
than five (5) but not more
than fifteen (15).
ii. Residency
requirement
Majority
of
the
incorporators are required
to be residents of the
Philippines.
iii. Qualifications
All incorporators:
a. must be natural
persons
b. must be of legal age
2. Minimum Capital Stock and
subscription requirement
i. Subscription requirement
All incorporators must
subscribe to at least one
(1) share of stock of the
corporation
being
organized.
ii. Capital Stock, minimum
subscription
The law requires that the
total capital stock to be
subscribed at the time of
incorporation should at
least be twenty five
percent (25%) of the
authorized capital stock
of the corporation being
organized.
3. Corporate Term
Fifty (50) years from the
date of incorporation
unless sooner dissolved
BAR OPERATIONS 2011
or unless said period is

extended (Sec. 11).
4. Classification of Shares
i. COMMON SHARES are
the basic class of stock
ordinarily and usually
issued
without
extraordinary rights and
privileges. The owners
thereof are entitle to a pro
rata share in the profits of
the corporation and in its
assets upon dissolution
and, likewise, in the
management of its affairs
without preference or
advantage whatsoever.
ii. PREFERRED SHARES are
those issued with par
value, and preferences
either with respect to:
a. assets after dissolution
(PREFERRED SHARES
AS TO ASSETS)
b. distribution of dividends
(PREFERRED SHARES
AS TO DIVIDENDS)
c. or both, and other
preferences.
Kinds of Preferred Shares as
to Dividends
1. Cumulative
preferred
shares a share which
entitles the holder thereof
not only the payment of
current dividends but also
of dividends in arrears.
2. Non cumulative preferred
allows the holder thereof
Page 47

to the payment of current

dividends only without
regards to dividends in
arrears.
3. Participating
preferred
gives the holder the right to
participate
with
the
holders of the common
share in the remaining
profits pro rata, aside from
the right to receive the
stipulated dividends at a
preferred rate.
4. Non
participating
preferred shares a share
which allows the holder to
receive the
stipulated
dividends at a preferred
rate only. The holder shall
not share in the dividends
distributed to common
shares.
REDEEMABLE SHARES are
those which permit the issuing
corporation to redeem or
purchase its own shares.
Limitations:
i. Redeemable
shares
may be issued only
when
expressly
provided for in the
articles
of
incorporation;
ii. Terms and conditions
affecting said shares
must be stated both in
the
articles
of
incorporation and in
the certificates of stock
BAR OPERATIONS 2011
representing
such
shares;
iii. Redeemable
shares
may be deprived of
voting rights in the
articles
of
incorporation, unless
otherwise provided in
the Code.
iv. Redeemable
shares
may be redeemed,
regardless
of
the
existence
of
unrestricted retained
earnings (Sec. 8), and
provided further that
the corporation has,
after such redemption,
sufficient assets in its
books
to
absorb
corporate debts and
liabilities.
TREASURY SHARES are
shares that have been earlier
issued as fully paid and have
thereafter been acquired by
the corporation by purchase,
donation, redemption or
through some lawful means
(Sec. 9). When treasury
shares are sold below its par
or issued value, there can be
no watering of stock because
watering
of
stock
contemplates an original
issuance of shares.
PAR VALUE SHARES are
shares with a value fixed in
the certificates of stock and
the articles of incorporation.
Page 48

NO PAR VALUE SHARES are

shares having no par value
but have an issued value
stated in the certificate or
articles of incorporation.
Limitations:
i. No par value shares
can have an issue price
of less than Php 5.00;
ii. The
entire
consideration for its
issuance
constitutes
capital so that no part
of
it
should
be
distributed
as
dividends;
iii. They cannot be issued
as preferred stocks;
iv. They cannot be issued
by
banks,
trust
companies, insurance
companies,
public
utilities and building
and loan association;
v. The
articles
of
incorporation
must
state the fact that it
issued no par value
shares as well as the
number of said shares;
vi. Once issued, they are
deemed fully paid and
non assessable (Sec.
6).
F. INCORPORATION
AND
ORGANIZATION
1. Promoter
2. Subscription Contract
BAR OPERATIONS 2011
Ways to become a
Stockholder
of
a
Corporation:
a. Subscription contract
with the corporation;
b. Purchase or acquisition
of shares from existing
stockholders; and
c. Purchase of treasury
shares
from
the
corporation
SUBSCRIPTIO
N
Refers
to
unissued shares
Corporation
still to be form
or already in
existence
The subscriber
can exercise all
his right as a
stockholder
even before full
payment of the
subscription
Corporate
creditors may
proceed against
the subscriber
for his unpaid
subscription in
case
the
corporate asset
are
not
sufficient
to
satisfy
their
PURCHASE
OF SHARES
Refers
to
issued
shares
The
corporation
is already in
existence
The
purchaser
can
only
exercise his
right upon
full
payment of
the
purchase
price
Corporate
creditor
cannot
proceed
against the
purchaser
for
the
balance of
the
purchase
price
Page 49

claims
Subscriber may
not be legally
released from
the payment of
his
unpaid
subscription
unless
no
creditors would
be prejudiced
and all the
stockholders
agree thereto
Subscription
may be in any
form,
not
covered by the
statute
of
frauds.
because of
the lack of
privity
of
contract
between
them
The
corporation
can rescind
or
cancel
the contract
in case of
non
fulfillment
by
the
buyer.
Purchase of
shares
is
covered by
the statute
of frauds in
case
of
purchases
amounting
to
more
than
Php
500.00
Consequently, the subscribers

are not real parties in interest
in a case for rescission of the
subscription
contract
of
another subscriber because
they are not parties thereto.
(Ong Yung vs. Tiu, April 06,
2003)
Kinds
Contract
of
BAR OPERATIONS 2011
Subscription
a. Pre
incorporation
subscription
b. Post
incorporation
Subscription
c. Conditional Subscription
d. Absolute Subscription
e. Subscription with a special
term
3. Pre
incorporation
Subscription Agreements
One entered into before
incorporation.
Pre
incorporation subscription
constitutes
a
binding
contract
among
the
subscribers.
NOTE: It shall be irrevocable
for a period of at least six (6)
years from the date of
subscription unless:
a. All of the other
subscribers consent to
the revocation, or
b. The incorporation fails
to materialize
It shall likewise be
irrevocable after the
submission of the articles
of incorporation to the
SEC.
UNDERWRITING
AGREEMENT between a
corporation and a third
person,
termed
the
underwriter
is
an
agreement by which the
latter agrees, for a certain
compensation, to purchase a
stipulated amount of stocks
or bonds, specified in the
underwriting agreement, if
Page 50

such securities are not

purchased by those to whom
they are first offered.
4. Consideration of Stocks
Valid considerations in
subscription agreement:
a. Cash actually received;
b. Property, tangible or
intangible necessary or
convenient for its use and
lawful purpose;
c. Labor or services actually
rendered
to
the
corporation;
d. Previously
incurred
corporate indebtedness
(Note: the indebtedness
involved must be one that
is acknowledged by the
board);
e. Amounts
transferred
from
unrestricted
retained
earnings
to
stated capital;
f. Outstanding shares in
exchange for stocks in the
event of reclassification
or conversion.
5. Articles of Incorporation
i. Definition:
Basic
document defining the
charter of the corporation
ii. Significance:
Condition
precedent
in
the
acquisition of corporate
existence
iii. Contractual significance: A
contract
between
3
parties: (1) the State and
the corporation, (2) the
BAR OPERATIONS 2011
stockholders and the

State,
and
(3)
the
corporation
and
its
stockholders.
iv. Effects as to Outsiders:
Bind a third person
dealing
with
the
corporation
v. Requisites for Validity
a. Filed and registered
with the SEC
b. Banks, public utilities,
insurance companies:
needs
favorable
recommendation from
appropriate
agency
that articles are in
accordance with law
c. SEC shall examine AOI
upon filing and upon
satisfaction of all legal
requirements,
issue
certificate
of
incorporation and only
then shall Corporation
have a personality
separate and distinct
from its stockholders
or members
d. Sworn Statement of the
Treasurer
regarding
subscription
requirement
vi. Basic Content (Sec. 14)
a. The name of the
corporation;
b. The specific purpose or
purposes for which the
corporation is being
incorporated;
c. The place where the
principal office of the
Page 51

d.
e.
f.
g.
corporation is to be
located, which must be
within the Philippines;
The term for which the
corporation is to exist;
The
number
of
directors or trustees,
which shall not be less
than 5 nor more than
15;
The
names,
nationalities
and
residences of persons
who shall act as
director or trustees
until the first regular
directors or trustees
are duly elected and
qualified in accordance
with the Code;
If it be a stock
corporation,
the
amount
of
its
authorized
capital
stock in lawful money
of the Philippines, the
number of shares into
which it is divided, and
in case the share are
par value shares, the
par value of each, the
names,
nationalities
and residences of the
original
subscribers,
and
the
amount
subscribed and paid by
each
on
his
subscription, and if
some or all of the
shares are without par
value, such fact must be
stated;
BAR OPERATIONS 2011
h. If it be a non stock
corporation,
the
amount of its capital,
the
names,
nationalities
and
residences
of
the
contributors and the
amount contributed by
each; and
i. Such other matters as
are not inconsistent
with law and which the
incorporators
may
deem necessary and
convenient.
vii. Adoption and Form: File with
the Securities and Exchange
Commission
articles
of
incorporation in any of the
official languages duly signed
and acknowledged by all of the
incorporators.
viii. Amendment
a. Majority vote of BOD /
trustees and vote or
written assent of 2/3
outstanding capital stock,
without prejudice to the
appraisal
right
of
dissenting stockholders.
b. Amendments take effect
upon approval by SEC or
from the date of filing with
SEC if not acted upon
within 6 months from date
of filing for a cause not
attributable
to
the
corporation.
ix. Grounds for Rejection or
Disapproval (Sec. 17)
a. That the articles of
incorporation or any
Page 52

amendment thereto is not

substantially
in
accordance with the from
prescribed herein;
b. That the purpose or
purposes
of
the
corporation are patently
unconstitutional, illegal,
immoral or contrary to
government rules and
regulations;
c. That the Treasurers
Affidavit concerning the
amount of capital stock
subscribed and / or paid
is false;
d. That the percentage of
ownership of the capital
stock to be owned by
citizens of the Philippines
has not been complied
with as required by
existing laws or the
Constitution.
6. Corporate Name
The name of the corporation
must not be identical or
deceptively or confusingly
similar to any existing
corporation.
7. Registration and issuance of
Certificate of Incorporation
8. Election
trustees
of
directors
or
9. Adoption of By Laws
i. Definition: Meant to be an
intramural document to
govern the relationship
between and among the
BAR OPERATIONS 2011
ii.
iii.
iv.
members of a corporate
family
Effect as to Outsiders: Does
not bind outsiders
Requisites for Validity
a. By law provisions
cannot contravene law
b. By law provisions
cannot contravene the
charter
c. By laws must be
reasonable and cannot
discriminate.
Basic Content (Sec. 47)
a. The time, place and
manner of calling and
conducting regular or
special meetings of the
directors or trustees;
b. The time and manner of
calling and conducting
regular
or
special
meetings
of
the
stockholders or members;
c. The required quorum in
meetings of stockholders
or members and the
manner of voting therein;
d. The form for proxies of
stockholders
and
members and the manner
of voting them;
e. The qualifications, duties
and compensation of
directors or trustees,
officers and employees;
f. The time for holding the
annual
election
of
directors or trustees and
the mode or manner of
giving notice thereof;
Page 53

g. The manner of election or

appointment and the term
of office of all officers
other than directors or
trustees;
h. The penalties for violation
of the by laws;
i. In the case of stock
corporations, the manner
of
issuing
stock
certificates; and
j. Such other matters as
may be necessary for the
proper or convenient
transaction
of
its
corporate business and
affairs.
v. Amendment
a. Majority vote of BOD /
Trustees and majority
vote of outstanding
capital stock / members
at a regular or special
meeting duly called for
the purpose of amending
or repealing any by
laws or adopting new by
laws
b. By delegation of 2/3
outstanding capital stock
or members
G. CORPORATE POWERS
1. GENERAL POWERS, THEORY
OF GENERAL CAPACITY (Sec.
36)
a. To sue and be sued;
b. Of succession;
c. To adopt and use of
corporate seal;
BAR OPERATIONS 2011
d. To amend its Articles of

Incorporation;
e. To adopt its by-laws;
f. For stock corporations: issue
and sell stocks to subscribers
and treasury stocks; for nonstock corporations: admit
members;
g. To purchase, receive, take or
grant, hold, convey, sell,
lease, pledge, mortgage and
deal with real and personal
property, securities and
bonds
h. To enter into merger or
consolidation;
i. To
make
reasonable
donations for public welfare,
hospital, charitable, cultural,
scientific, civic or similar
purposes, provided that no
donation is given to any (i)
political party, (ii) candidate
and (iii) partisan political
activity.
j. To
establish
pension,
retirement, and other plans
for the benefit of its
directors, trustees, officers
and employees.
k. To exercise other powers
essential or necessary to
carry out its purposes.
2. SPECIFIC POWERS, THEORY
OF SEPECIFIC CAPACITY
(Sec. 37 44)
a. Power to extend or shorten
corporate term (2000 Bar
Examination)
Majority of BOD, 2/3 of
capital stock
Page 54

Extension Sec. 37: right of

appraisal for dissenting
stockholders
Shortening Sec. 81 allows
for right of appraisal, but
technically there shouldnt
be because investors are
also in it for the short
term (there is no novation)
b. Increase
or
decrease
corporate stock
capital stock
Needs SEC approval
i. Increase there must be
certification
of
subscription to at least
25% of increased stock,
and at least 25% of that
amount paid up
ii. Decrease
wont
approve if it prejudices
corporate creditors.
Since this is not an
inherent power, there must
be strict compliance with
requirements in Sec. 38
and
Amendment
provisions in Sec. 16
NO right of appraisal
i. Increase
would
defeat very purpose of
raising capital
ii. Decrease
there
already is return of
part of investments
ALSO, investing into a
corporation comes with
expectations of possible
increase / decrease of
shares
BAR OPERATIONS 2011
Ways
of
Increasing
(Decreasing) Capital Stock
1. By
increasing
(decreasing) the no. of
shares authorized to be
issued without increasing
(decreasing) the par value
thereof
2. By
increasing
(decreasing) the par value
of each share without
increasing (decreasing)
the no. thereof
3. By
increasing
(decreasing) both the no.
of shares authorized to be
issued and the par value
thereof (The Corporation
Code
of
the
Phil.
Annotated by Hector de
Leon, 2006 ed)
Methods to Replenish Capital
1. Additional subscription to
shares of stock of the
corporation
by
stockholders
or
by
investors;
2. Advances
by
the
stockholders
to
the
corporation; or
3. Payment
of
unpaid
subscription
by
the
stockholders.
c. Incur, create, or increase
bonded indebtedness
CORPORATE
BOND:
an
obligation to pay a definite
sum of money at a future
time at a fixed rate of interest
SEC Opinion (1987): only
covers indebtedness of
Page 55

corporation secured by
real / personal property
capital stock
Needs SEC approval
Corporation must have
minimum net worth of P
25M and must have been
operating for at least 3
years
Unlike
normal
indebtedness, which does
not require 2/3 approval:
i. Usually
very
large
amount
ii. Usually with first lien on
important assets
iii. Usually long period of
time
NO right of appraisal
i. Would drain financial
resources
ii. Regardless, corporations
creditors
always
have
priority over assets
d. Sell, dispose, lease, encumber
all or substantially all of
corporate assets
Majority of BOD, 2/3
capital stock
Enterprise
level
transaction: Although there
is no effect in relationship
between
State
and
Corporation, its just as if
there is resetting to
starting point of business
life
Compare:
BAR OPERATIONS 2011
i. Usual and regular course

of business (Business
Judgment Doctrine)
ii. Proceeds of sale for
conduct of remaining
business
The test: It just has to be
ordinary so the sale of all
business of a corporation
in light of using proceeds to
set up anew still needs
RATIFICATION
When no ratificatory vote
from the stockholders /
members needed:
i. If it is necessary in the
usual and regular course
of business
ii. If the proceeds of the
sale or other disposition
of such property and
assets be appropriated
for the conduct of the
remaining business.
There is right of appraisal
because unlike shortening
of corporate life, where
there
is
automatic
dissolution, here there is
none so stockholders may
be stuck in a non
performing venture
e. Purchase or acquire own
shares provided:
i. there is an unrestricted
retained earnings to
purchase the same and
its capital is not thereby
impaired; and
ii. it is for a legitimate and
proper
corporate
purpose.
Page 56

Instances when Power may

be Exercised
1. To eliminate fractional
shares
2. To collect / compromise an
indebtedness
to
the
corporation arising from
unpaid subscription, in a
delinquency sale, and to
purchase the shares sold
during said sale
3. To pay dissenting /
withdrawing stockholders
entitled to payment for
their
shares
when
exercising appraisal right
4. To decrease cost of doing
business by decreasing
amount of dividends to be
paid in the future
5. Other similar situations
since this is non - exclusive
f. Invest corporate funds in
another
corporation
or
business for other purpose
other than primary purpose
May invest in corporation
/ business organized for
any purpose apart from
the primary purpose from
which
the
investing
business was organized
Majority of BOD + 2/3 vote
of stockholders
Sec. 42: When investment
is reasonably necessary to
accomplish
primary
purpose:
approval
of
stockholders
not
necessary
BAR OPERATIONS 2011
i. Lies under business

judgment doctrine
ii. THUS whatever the
primary purpose of a
corporation, it has a
choice of placing funds
in deposit accounts,
money market, treasury
bills, or even stocks of
other corporations (fit
into power, discretion
and purpose to obtain
best returns for the
corporation)
So in Sec. 42, investment
requiring ratificatory vote:
when
there
is
management involved of
the other company and not
just investment per se.
g. Power to declare dividends
out of unrestricted retained
earnings
DIVIDENDS:
corporate
profits set aside, declared
and ordered to be paid by the
directors for distribution
among shareholders at a
fixed time.
FORMS:
1. Cash
2. Property
3. Stock
REQUISITES:
1. Existence of unrestricted
retained earnings out of
which the dividends may
be declared and paid
Page 57

2. A corporate resolution of
the board of directors
declaring the payment of a
portion or all such
earnings
to
the
stockholders
(The
Phil. Annotated by Hector
de Leon, 2006 ed)
GENERAL
RULE:
Stock
corporation cannot retain
surplus profits in excess of
100% of paid up capital
stock except: (2001 Bar
Examination)
1. Justified by definite
corporate
expansion
projects
/
programs
approved
by
BOD
2. Loan agreement, where
creditor has to first consent
before corporation
can
declare dividends
3. Special circumstances
h. Enter into management
contract
with
another
corporation (not with an
individual or a partnershipwithin
general
powers)
whereby one corporation
undertakes to manage all or
substantially all of the
business of the other
corporation for a period not
longer than 5 years for any
one term.
MANAGEMENT CONTRACT:
is an agreement whereby a
corporation undertakes to
manage or operate all or
BAR OPERATIONS 2011
business
of
another
corporation, whether such
contracts are called service
contracts,
operating
agreements or otherwise
(Sec. 44)
GENERAL RULE: There shall
be no management contract
with another corporation
unless:
Majority of BOD
Stockholders
owning
majority shares in BOTH
managing and managed
corporation EXCEPT where
2/3 votes needed :if a
stockholder/s in both
managing and managed
corporation owns more
than 1/3 of outstanding
voting capital stock of
managing corporation OR
majority
of
BOD
in
managing corporation is
also majority of BOD in
managed corporation
The management contract
must not be longer than 5
years
i. ULTRA VIRES ACTS are acts
which are beyond the
conferred powers of a
corporation or the purposes
or objects for which it is
created as defined by the law
of its organization. (Republic
vs. Acoje Mining Co., Inc. 7
SCRAS 361)
An act done by a corporation
outside of the express and
Page 58

implied powers vested in it

by its charter and by the law.
(Bar Review Materials in
Commercial
Law,
Jorge
Miravite, 2002 ed.)
Types:
(Philippine Corporate
Law, Cesar Villanueva, 2001 ed.)
1. Acts done beyond the
powers
of
the
corporation as provided in
the law or its articles of
incorporation;
2. Acts or contracts entered
into in behalf of a
corporation by persons who
have no corporate authority
(Note: This is technically
ultra vires acts of officers and
not of the corporation); and
3. Acts or contracts, which are
per se illegal as being
contrary to law.
An ultra vires act may be that
of:
a. The corporation;
b. The Board of Directors;
and
c. The corporate officers.
Effects of ultra vires act on:
a. Executed contract courts
will not set aside or interfere
with such contracts;
b. Executory contracts no
enforcement even at the suit of
either
party
(void
and
unenforceable);
c. Part executed and part
executory principle of no
BAR OPERATIONS 2011
unjust enrichment at expense

of another shall apply; and
d.
Executory
contracts
apparently authorized but ultra
vires the principle of estoppel
shall apply.
ULTRA VIRES
ILLEGAL ACTS
ACTS
AND
Ultra vires (beyond powers)

refers only to an act outside or
beyond
corporate
powers,
including
those
that
may
ostensibly be within such powers
but are, by general or special
laws, either prohibited or
declared illegal. It is in this context
that the Code has used the term.
ULTRA VIRES
ACTS
Not
necessarily
unlawful, but
outside
the
powers of the
corporation
Can be ratified
ILLEGAL ACTS
Unlawful;
against
law,
morals, public
policy,
and
public order
Cannot
be
ratified
Can bind the Cannot
bind
parties
if the parties
wholly
or
partly
executed
TEST whether or not a
corporation may perform an
act: consider the logical and
necessary relation between the
act questioned and the corporate
purpose expressed by law or in
Page 59

the charter. If the act is lawful in

itself and not prohibited, and is
done for the purpose of serving
corporate ends, and reasonably
contributes to the promotion of
those ends in a substantial and
not in a remote and fanciful sense.
(Montelibano vs. Bacolod-Murcia
Milling Co., Inc., 5 SCRA 36)
REMEDIES IN CASE OF ULTRA
VIRES ACTS
1. State
a.
Obtain a judgment of
forfeiture; or
b. The SEC may suspend or
revoke the certificate of
registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors
a. Nullification of contract in
fraud of creditors
j. DOCTRINE OF INDIVIDUALITY
OF SUBSCRIPTION
The subscription in shares of
stock is one, entire, indivisible,
and whole contract, which cannot
be divided into portions. (SEC
Opinion)
k. DOCTRINE OF EQUALITY OF
SHARES
Where
the
articles
of
incorporation do not provide for
any distinction of the shares of
stock, all shares issued by the
corporation are presumed to be
BAR OPERATIONS 2011
equal and enjoy the same rights

and privileges and are also
subject to the same liabilities.
(Sec. 6)
l.
TRUST FUND DOCTRINE

(TFD)
The subscribed capital stock of
the corporation is a trust fund for
the payment of debts of the
corporation which the creditors
have the right to look up to satisfy
their credits, and which the
corporation may not dissipate.
The creditors may sue the
stockholders directly for the
latters unpaid subscription.
Application of the TFD:
1. Where the corporation has
distributed its capital among
the stockholders without
providing for the payment of
creditors;
2. Where it had released the
subscribers to the capital
stock
from
their
subscriptions;
3. Where it has transferred the
corporate property in fraud
of its creditors; and
4. Where the corporation is
insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the
TFD extends to the capital stock
represented by the corporations
legal capital.
2. If the corporation is insolvent,
the TFD extends to the capital
stock of the corporation as well as
all of its property and assets.
Page 60

Exceptions to the TFD:
1. Redemption of redeemable
shares (Sec. 8)
2. In close corporation, when
there should be a deadlock and
the SEC orders the payment of the
appraised
value
of
the
stockholders share. (Sec. 104)
H. STOCKHOLDERS
MEMBERS
AND
RIGHTS OF STOCKHOLDERS
(Pandect of Commercial Law and
Jurisprudence, Justice Jose Vitug,
1997 ed.)
1. RIGHTS OF A STOCKHOLDER
a. Managerial Rights
b. Proprietary Rights
c. Pre emptive Rights
d. Remedial Rights
e. Appraisal Rights
f. Inspection Rights
2. MANAGERIAL RIGHTS
a. Voting rights; and
b. Right to remove directors
LIMITATIONS
on
the
stockholders RIGHT TO VOTE
a. Where the articles of
incorporation provides for
classification
of
shares
pursuant to Sec. 6, non
voting shares are not entitled
to vote except as provided
for in the last paragraph of
Sec. 6;
BAR OPERATIONS 2011
b. Preferred or redeemable
shares may be deprived of
the right to vote unless
otherwise provided in the
Code;
c Fractional shares of stock
cannot be voted;
d. Treasury shares have no
voting rights as long as they
remain in the treasury;
e. Holders of stock declared
delinquent by the BOD for
unpaid subscription are not
entitled to vote or to a
representation
at
any
stockholders meeting; and
f. A transferee of stock cannot
vote if his transfer is not
registered in the stock and
transfer
book
of
the
coporation.
3. PROPRIETARY RIGHTS
a. Right to dividends;
b. Right to issuance of stock
certificate for fully paid
shares;
c. Proportionate participation
in the distribution of assets
in liquidation;
d. Corporate
Books
and
Records inspection rights
Limitations:
i. The
right
must
be
exercised
during
reasonable
hours
on
business days;
ii.The person demanding the
right has not improperly
used nay information
obtained through any
previous examination of
Page 61

the books and records of

the corporation; and
iii. The demand is made in
good faith or for a
legitimate purpose. (Sec.
74)
The right extends, in consonance
with equity, good faith, and fair
dealing, to a foreign subsidiary
wholly-owned by the corporation.
Books required to be kept by the
corporation:
1. Book of Minutes
a. minutes of stockholder
or members meetings;
and
b. minutes
of
board
meetings.
2. Book
of
all
business
transactions;
3. Stock and transfer book, in
case of stock corporations.
Corporate records required by
the SEC to be kept and/or
registered:
1. Books of Account;
2.
List of Stockholders or
Members; and
3. Financial Records.
e. Appraisal right (2007 Bar
Examination) is the right of a
stockholder who dissents from
a
fundamental
or
extraordinary
corporate
action to demand payment of
the fair value of his shares. The
corporate
acts
involves
fundamental changes in the
corporate structure namely:
BAR OPERATIONS 2011
1. An amendment to the
articles of incorporation that
has the effect of
2. Sale, encumbrance or other
dispositions of all or
corporate property or assets
3. Merger or consolidation
4. Investment of corporate
funds in another corporation
or in a purpose other than
the primary purpose (Sec.
42)
GENERAL RULE: A dissenting
stockholder
who
demands
payment of his shares is no longer
allowed to withdraw from his
decision EXCEPT when:
1. The corporation consents to
the withdrawal
2. The proposed corporate
action is abandoned or
rescinded
by
the
corporation
3. The proposed corporate
action is disapproved by the
SEC where its approval is
necessary
4. The
Commission
determines
that
such
stockholder is not entitled
to appraisal right.
f. Right to recover stocks
unlawfully sold for delinquent
payment of subscription
g. Preemptive right is the
shareholders
preferential
right to subscribe to all issues
or dispositions of shares of
any class in proportion to their
present stockholdings.
Page 62

Purpose: to enable
shareholder to retain
proportionate control in
corporation and to retain
equity in the surplus.
the
his
the
his
Extends to treasury shares in case

of their reissuance.
If the shares preferentially
offered to a stockholder are not
subscribed or purchased by him,
it does not follow that said shares
shall again be re-offered on a pro
rata basis to stockholders who
already
exercised
their
preemptive rights. There is no
preemptive right with respect to
the share to be re-offered.
In case additional issues of
originally authorized shares:
GENERAL RULE: There is no
preemptive right. This is on the
theory that when a corporation at
its inception offers its first shares,
it is presumed to have offered all
of those which it is authorized to
issue.
EXCEPTION: When a corporation
at its inception offers only a
specified portion of its authorized
capital stock for subscription. If
subsequently, it offers the
remaining unsubscribed portion,
there would be preemptive right
as to the remaining portion thus
offered for subscription.
BAR OPERATIONS 2011
When pre-emptive right not

available:
a. When denied by the article of
incorporation
b. Shares
requiring
stock
offering or minimum stock
ownership by the public
c. Shares to be issued in good
faith with the approval of
the
stockholders
representing 2/3 of the
outstanding capital stock, in
exchange
for
property
needed
for
corporate
purposes or in payment of a
previously contracted debt
PRE-EMPTIVE RIGHT vis a vis RIGHT OF FIRST REFUSAL
PREEMPTIVE
RIGHT
May
be
exercised even
when there is
no
express
provision of
law
Pertains
to
unsubscribed
portion of the
authorized
capital stock.
A right that
may
be
claimed
RIGHT OF
FIRST
REFUSAL
Arises only by
virtue
of
contractual
stipulations
but is also
granted under
the provisions
on
Close
Corporation
Exercisable
against
another
stockholder of
the
corporation of
his shares of
stock
Page 63

against
the
corporation
4. REMEDIAL RIGHTS
a. Individual suit a suit
instituted by a shareholder
for his own behalf against
the corporation;
b. Representative suit a suit
filed by a shareholder in his
behalf and in behalf likewise
of
other
stockholders
similarly situated and with a
common cause against the
corporation; and
c. Derivative suit (2009, 2006,
2005,
2004
Bar
Examination) a suit filed
in behalf of the corporation
by its shareholders (not
creditors whose remedies
are merely subsidiary such
as accion subrogatoria and
accion pauliana) upon a
cause of action belonging to
the corporation, but not duly
pursued by it, against any
person or against the
directors, officers and/or
controlling shareholders of
the corporation.
Requisites:
i. An existing cause of
action in favor of the
corporation
ii. The
stockholder/member
must first make a
demand
upon
the
corporation or the
management to sue
BAR OPERATIONS 2011
unless such a demand

would be futile
iii. The
stockholder/member
must be such at the
time
of
the
objectionable acts or
transactions unless the
transactions
are
continuously injurious
iv. The action must be
brought in the name of
the corporation
The number of shares of the
stockholder is immaterial since
he is not suing in his own
behalf
Note: The mere trustee of
shares registered in his name
cannot file a derivative suit for
he is not a stockholder in his
own right. (Bitong vs. CA, 292
SCRA 304)
5. LIABILITIES
OF
STOCKHOLDERS
a. Liability to the corporation
for unpaid subscription
b. Liability to the corporation
for interest on unpaid
subscription
c. Liability to creditors of the
corporation on the unpaid
subscription
d. Liability for watered stock
e. Liability for dividends
unlawfully paid
f. Liability for failure to create
corporation
Page 64

6. STOCKHOLDERS
MEMBERS MEETING
OR
WHEN:
1. REGULAR - held on the date
fixed in the by-laws or if not
fixed on any date in April; and
2. SPECIAL - held at any time
deemed necessary or as so
provided in the by-laws.
WHERE:
WHERE:
In
the
city
or
municipality where the principal
office of the corporation is
located, and if practicable, in the
principal office of the corporation.
However, in the case of non-stock
corporations, the by-laws may
provide that meetings may be
held at any place even outside the
principal place of the corporation.
(Sec. 93)
I. BOARD OF
TRUSTEES
DIRECTORS
1. BOARD OF DIRECTORS OR
TRUSTEES AS REPOSITORY
OF CORPORATE POWERS
GENERAL RULE: The corporate
powers of the corporation
shall be exercised, all business
conducted and all property of
such corporation controlled
and held by the board of
directors or trustees. (Sec. 23)
BAR OPERATIONS 2011
EXCEPTIONS:
1. In case of an Executive
Committee duly authorized
in the by-laws;
2. In case of a contracted
manager which may be an
individual, a partnership, or
another corporation. Note:
In case the contracted
manager
is
another
corporation, the special rule
in Sec. 44 applies.
3. In case of close corporations,
the
stockholders
may
manage the business of the
corporation instead by a
board of directors, if the
articles of incorporation so
provide.
The power to purchase real
property is vested in the board of
directors or trustees. While a
corporation may appoint agents
to negotiate for the purchase of
real property needed by the
corporation, the final say will
have to be with the board, whose
approval
will
finalize
the
transaction. A corporation can
only exercise its powers and
transact its business through its
board of directors and through its
officers
and
agents
when
authorized by a board resolution
or by its by-laws. (Spouses
Constantine Firme vs. Bukal
Enterprises and Development
Corporation, G.R. No. 146608,
October, 23, 2003)
Page 65

LIMITATIONS ON POWERS OF
BOARD
OR
DIRECTORS/TRUSTEES
1. Limitations imposed by the
Constitution, statutes, articles of
incorporation or by-laws.
2. Cannot perform constituent or
those involving fundamental
changes in the corporation
requiring
the
approval
of
3. Cannot exercise powers not
possessed by the corporation.
(The Corporation Code of the
Philippines Annotated, Hector
de Leon, 2002 ed.)
NATURE OF POWERS OF BOARD
OF DIRECTORS/TRUSTEES (The
Corporation
Code
of
the
de Leon, 2002 ed.)
a. Under the Theory of Original
Power, the powers of the
board of directors or trustees
are
ORIGINAL
and
UNDELEGATED.
The
stockholders or members do
not confer, nor can they
revoke those powers.
b. They are DERIVATIVE only
in the sense of being received
from the State in the act of
incorporation.
2. TENURE, QUALIFICATIONS
AND DISQUALIFICATIONS
OF DIRECTORS
BAR OPERATIONS 2011
Qualifications:
1. For a stock corporation,
ownership of at least 1 share
capital
stock
of
the
corporation in his own name,
and if he ceases to own at
least one share in his own
name,
he
automatically
ceases to be a director. (Sec.
23)
For
a
non-stock
corporation, only members
of the corporation can be
elected to seat in the Board of
Trustees.
In order to be eligible as a
director, what is material is
the legal title to, not
beneficial ownership of the
stocks appearing on the
books of the corporation
2. A
majority
of
the
directors/trustees must be
residents of the Philippines.
(Sec. 23)
3. He must not have been
convicted by final judgment
of an offense punishable by
imprisonment for a period
exceeding 6 years or a
violation of the Corporation
Code, committed within five
years from the date of his
election. (Sec. 27)
4. Only natural persons can be
elected directors/trustees.
In
case
of
corporate
stockholders or members,
their representation in the
board can be achieved by
making
their
individual
Page 66

representatives trustees of
the shares or membership to
make
them
stockholders/members
of
record.
5. Other qualifications as may
be prescribed in the by-laws
of the corporation.
6. Must be of legal age
Disqualifications
Directors,
Trustees
Officers
of
or
1. Conviction by final judgment

of offenses punishable by
imprisonment for excess of 6
years, or
2. Violation of code committed
within 5 years prior to date of
his election or appointment.
Terms of Directors
For 1 year or until their
successors are elected and
qualified (Hold over Principle)
3. ELECTION OF DIRECTORS
OR TRUSTEES
a. Quorum in Meeting for
Election
Majority
of
the
outstanding capital stock
or member entitled to
vote
Present either in person
or by representative by
WRITTEN PROXY
b. How
Viva Voce, or
BAR OPERATIONS 2011
By ballot if requested by
any voting stockholder or
member
c. Stock Corporations
Methods of Voting on the
Election of Directors
g. STRAIGHT VOTING Every
stockholder through this
method, may vote such
number of shares for as
many persons as there are
directors.
h. CUMULATIVE VOTING
i. Every stockholder is
entitled to such number
of votes that his number
of shares multiplied by
the total number of
directors to be elected
will bring. He may give all
such votes
to one
candidate (CUMULATIVE
VOTING
FOR
ONE
CANDIDATE) or he may
distribute them among as
many candidates as he
sees fit (CUMULATIVE
VOTING
BY
DISTRIBUTION). (Sec. 24)
ii. A
minority
director
elected
through
cumulative voting cannot
be
removed
without
cause. (Sec. 28)
iii. A PROXY is a written
instrument, signed by the
stockholder or member
(as principal) and filed
before the scheduled
meeting
with
the
corporate secretary, and
given to another person
Page 67

(as agent) authorizing

such person to exercise
the voting rights of the
former.
What is the period of validity
of proxy? Unless otherwise
provided in the proxy, it should
be valid only for the meeting for
which it is intended. No proxy
shall be valid and effective for a
longer period than five years at
any one time. (Sec. 58)
Instances whereby Right to
vote by Proxy may be
exercised:
1. Election of the board of
directors or trustees;
2. Voting in case of joint
ownership of stock;
3. Voting by trustee under
voting trust agreement;
4. Pledge or mortgage of
shares;
5. As provided for in its by
laws.
Stockholders or members may
attend and vote in their meeting
by proxy (Sec. 58); but directors
cannot do so. Directors must
always act in person. (Sec. 25)
A VOTING TRUST is an
agreement whereby one or more
stockholders transfer their shares
of stocks to a trustee, who
thereby acquires for a period of
time the voting rights (and/ or
any other rights) over such
shares; and in return, trust
BAR OPERATIONS 2011
certificates are given to the

stockholder/s,
which
are
transferrable
like
stock
certificates, subject however, to
the trust agreement.
d. Non Stock Corporations
Members may cast as many
votes as there are trustees
to be elected (seats)
But may not cast more than
one vote for a single
candidate
EXCEPT: when the AOI or
by
laws
provide
otherwise
e. Adjournment of Meeting for
Elections
May adjourn from day to
day or from time to time
But NOT sine die or
indefinitely if quorum is
not met (majority of
are not present).
NOTE: Proposed amendment to
by laws stipulating permanent
director even without election is
contrary to law. (Grace Christian
High School vs. CA)
4. REMOVAL OF DIRECTORS
OR TRUSTEES
a. How may be removed
i. 2/3 vote of stockholders
or members entitled to
vote
ii. During
a
regular
meeting or a special
meeting called by the
secretary upon:
Page 68

Order of the President

Written demand from
majority
of
stockholders
or
members entitled to
vote
iii. Upon previous notice to
stockholders
or
members
Of the intention to
propose such removal
at the meeting
Of the time and place
of meeting
Must be given by
publication or by
written
notice
prescribed in the
Code.
b. If secretary refuses/ fails to
call for the special meeting or
give the notice, or there is no
secretary, call may be directly
addressed to stockholders or
members
by
demanding
stockholder or member.
c. Causes for Removal
1. May be with or without
cause
Cause is usually related to
the 3 duties of an officer
or director
a. loyalty
b. obedience
c. diligence
2. Provided that removal
without cause may not be
used to deprive minority
stockholders or members of
their right of representation
under Sec. 24.
BAR OPERATIONS 2011
NOTE: Removal of Board of

Director or Trustee is different
from removal of a corporate
officer. Stockholders approval is
necessary only for the removal of
the members of the Board. For
the removal of a corporate officer
or employee, the vote of the
Board of Directors is sufficient for
the
purpose.
(2001
Bar
Examination)
5. FILLING OV VACANCIES IN
THE OFFICE OF DIRECTOR
OR TRUSTEE
a. Ground for Removal
1.
Removal
by
the
stockholder or members
or upon expiration of
term
Vacancy shall be filled by
the stockholder in a
regular or special meeting
called for that purpose.
2. Other causes other than
expiration or removal by
stockholders / members.
If remaining directors
constitute Quorum may
be filled by the MAJORITY
vote of the remaining
directors.
If no quorum filled by
the stockholders in a
regular or special meeting
called for that purpose.
3. Proposed amendment of
Articles of Incorporation
resulting in increase in
number of directors /
trustees
Page 69

Vacancy shall be filled

by the stockholders in
a regular or special
meeting called for
that purpose
Or in the same
meeting authorizing
increase of directors
or trustees if so stated
in notice of the
meeting
b. Director or trustee so
elected shall serve only the
unexpired portion of the
term.
6. COMPENSATION
Directors are not entitled to
compensation as such directors
except that they are allowed
reasonable per diems. However,
directors
may
be
given
compensation when:
a. There is a provision in the by
laws authorizing payment
of compensation; or
b. By a vote of the Stockholders
representing
at
least
majority of the outstanding
capital stock at a regular or
special meeting.
LIMIT: In either case, the total
yearly compensation of the
directors shall not exceed 10% of
the net income before income tax
of the corporation during the
preceding year.
7. DUTY OF LOYALTY
To Act according to the
corporations best interest
BAR OPERATIONS 2011
DOCTRINE OF
CORPORATE
OPPORTUNIT
Y
Cover
same
subject which
is
business
opportunity
Applicable to
directors,
trustees and
officers
DISLOYALTY
OF A
DIRECTOR
Cover same
subject which
is
business
opportunity
Only
applicable to
DIRECTORS
and not to
officers
Allows
RATIFICATIO
N
of
a
transaction by
a
self
dealing
director
by
the vote of
stockholders
representing
2/3 of the
outstanding
capital stock.
Does not cover

ratification.
Even if 99% of
the
stockholders
affirm
the
transactions,
the remaining
stockholders
can
still
oppose such a
self dealing
transaction
and
file
a
derivative suit
Applies to both Applies only
stock and non to
stock
stock corporations
corporations
8. BUSINESS JUDGMENT RULE
Business judgment rule exists
to protect and promote the full
and
free
exercise
of
managerial power granted to
directors. The rule is a a
presumption that in making a
business
decision,
the
Page 70

directors of a corporation
acted on an informed basis, in
good faith and in the honest
belief that the action taken
was in the best interest of the
company. (Smith vs. Van
Gorkam)
9. DUTY OF DILIGENCE
a. Violations of Duty of
Diligence
i. Willfully and knowingly
vote for or assent to
patently unlawful acts of
the corporation
ii. Guilty of gross negligence
or bad faith in directing
the
affairs
of
the
corporation
iii. Acquire any personal
or pecuniary interest in
conflict with their duty as
director or trustee
iv. He consents to the
issuance
of
watered
stocks or who, having
knowledge thereof, does
not forthwith file with the
corporate secretary his
written objection thereto;
(Tramat Mercantile Inc. vs
CA)
v. He agrees to hold himself
personally and solidarily
liable
with
the
corporation; or (Tramat
Mercantile Inc. vs. CA)
vi. He is made, by specific
provision of law, to
personally answer for his
BAR OPERATIONS 2011
corporate action (Tramat

Mercantile Inc. vs. CA)
b. Liability for Violation of
Duty of Diligence shall be
liable jointly and severally
for all damages resulting
therefrom suffered by the
corporation,
its
and other persons.
10. LIABILITY FOR WATERED
STOCK
Under Sec. 65 on Liability of
Directors for Watered Stocks,
if director of officer:
Consents to issuance of
stocks for a consideration
less than its par or issued
value;
Consents to payment in
consideration other than
cash, which is valued in
excess of its fair market
value;
Having knowledge hereof
does not object in writing
and file the same with the
corporate secretary.
Such director or officer shall
be SOLIDARILY LIABLE with
the stockholder concerned
(buyer) and its creditors for
the DIFFERENCE between the
fair value received at time of
issuance of the stock and its
par or issued value.
11. CONTRACTS
Page 71

a.
By self dealing
directors
with
the
corporation
Contracts
between
the
corporation and one or more
of its directors or trustees or
officers are VOIDABLE at the
option of the corporation but
VALID if the following are
present:
i. Presence of director /
trustee in the board
meeting which approved
contract was not necessary
to constitute a quorum.
ii. Vote of director or trustee
not necessary for approval
of contract
iii. Contract is fair and
reasonable
under
the
circumstances
iv. In case of an officer,
contract
has
been
previously authorized by
board of directors.
NOTE: If directors presence
was required to meet the
quorum (1st requisite) and I
his vote was necessary for
approval of the contract (2nd
requisite), the contract may
still be valid if it is RATIFIED
by 2/3 of stockholders or
members in a meeting called
for that purpose.
BAR OPERATIONS 2011
b.
Between corporation
with interlocking directors
Contract between two or
more corporations with a
common director/s may
be valid
However, to be valid, it
must
be
fair
and
reasonable
A contract between the
corporations
with
interlocking directors is
VOID if there is fraud
If the interest of the
interlocking director in
one
corporation
is
SUBSTANTIAL (meaning
stockholdings
exceed
20% of the outstanding
capital stock) and his
interest
is
merely
NOMINAL, contract shall
be treated as under the
provisions of Self
Dealings (voidable but
may be ratified), insofar
as the corporation where
he has a nominal interest
is concerned.
NOTE: Corporate officers are not
permitted to use their position of
trust and confidence to further
their private interests.
The
doctrine
of
CORPORATE
OPPORTUNITY
is
precisely
recognition by the courts that the
fiduciary standards could not be
upheld where the fiduciary was
acting for two entities with
competing interest. (Gokongwei Jr.
vs. SEC)
Page 72

12. EXECUTIVE COMMITTEE

a. Creation
A body created by the bylaws and composed of some
members of the board which,
subject to the statutory
limitations, has all the
authority of the board to the
extent provided in the board
resolution or by-laws. (The
de Leon, 2002 ed.)
Must be provided for in the bylaws and composed of not less
than 3 members of the board
appointed by the board.
May act by a majority vote of
all of its members
b. Limitations on its powers
It cannot act on the following:
1. Matters needing stockholder
approval;
2. Filling
up
of
board
vacancies;
3. Amendment,
repeal
or
adoption of by-laws;
4. Amendment or repeal of any
resolution of the Board
which by its express terms is
not
amendable
or
repealable; and
5. Cash dividend declaration.
13. MEETINGS
BOARD MEETING (Sec. 53)
WHEN:
BAR OPERATIONS 2011
1. REGULAR - held monthly,

unless otherwise provided in
the by-laws; and
2. SPECIAL - held at any time
upon the call of the
president.
WHERE:
May be held anywhere in or
outside of the Philippines.
CORPORATE
OFFICERS,
QUORUM
a. Corporate Officers
President must be a
director
Treasurer may or may
not be a director
Secretary shall be a
resident and a citizen of the
Philippines
Other officers provided in
the by laws
b. Any 2 or more positions may
be held concurrently except
president and secretary or
president and treasurer
c. When elected: Immediately
after election of directors
d. Duties to be performed by
officers
Enjoined on them by law
Enjoined by corporate by
laws
e. Quorum board must act as a
body
For
transaction
of
corporate
business
majority of number of
Page 73

directors or trustees as
fixed in the AOI
For corporate act to be
valid, there must be a
quorum and the act must
be approved by majority of
directors
or
trustees
PRESENT
For election of officers
majority of ALL members
of the board of directors or
board of trustees, whether
all members are present or
not.
f. Director or Trustees cannot
ATTEND or VOTE by proxy at
board meetings.
POWERS
OF
CORPORATE
OFFICERS
a. Rule on Corporate Officers
power to bind the corporation
An officers power as an
agent of the corporation
must be sought from the
statute, charter, by laws
or in a delegation of
authority from such officer,
from the acts of the board
of
directors
formally
expressed or implied from
a habit or custom of doing
business
b. When Corporation bound by
the act of its President.
In the absence of a charter
or by law provision to the
contrary, the president is
presumed to have the
authority to act within the
BAR OPERATIONS 2011
domain of the general

objectives of its business and
within the scope of his or her
usual duties. A party dealing
with the President of a
corporation is entitled to
assume that he has the
authority to enter, on behalf
of the corporation, into
contract that are within the
scope of the powers of said
corporation and that do not
violate any statute or rule on
public policy.
Distinctions
between
a
Corporate
Officer
and
Corporate Employee
CORPORATE
OFFICER
Position
is
provided for in
the by laws
or under the
Corporation
Code
RTC
has
jurisdiction in
case of LABOR
DISPUTE
CORPORATE
EMPLOYEE
Employed by
the action of
the managing
officer of the
corporation
NLRC
has
jurisdiction in
case of labor
dispute
J. CAPITAL AFFAIRS
2. CERTIFICATE OF STOCKS
The document evidencing the
ownership of shares of stocks by a
Page 74

stockholder and the full payment

of its issue or subscription price.
a. Nature of the certificate
It is not essential to the
ownership and/or existence
of the share of stock.
Where the certificate of stock
reflects a greater volume of
shares than the actual
number of shares issued or to
be issued, the following rules
may be considered:
1. To the extent that there is an
over issue, the excess
issuance
(over
the
authorized capital stock or
the stated capital) shall be
void as being ultra vires.
2. If there is no over issue, but
no payment has been made
to cover the par or stated
value of the excess shares,
the latter would constitute
watered stocks.
3. If there is no over issue and
watering of stocks, the
corporation may be bound
to honor the certificate (if
duly signed and released by
its authorized officers) in the
hands of a holder in good
faith, reserving a right of
recourse that an aggrieved
party may pursue against
the culpable or unjustly
enriched party.
CAPITAL
STOCK
SHARES OF
STOCK
Amount paid in Interest

BAR OPERATIONS 2011
or
or secured to
be paid in by
the
stockholders
upon which the
corporation is
to conduct its
operation. It is
the property of
the
corporation
itself
(monetary
value).
right
which
the
stockholder
has in the
management
of
the
corporation,
and its surplus
profits,
and
upon
a
dissolution, in
all of its assets
remaining
after payment
of corporate
debts.
SHARES OF
STOCK
Unit of interest
in
a
corporation
CERTIFICATE
OF STOCK
Evidence
of
the
holders
ownership of
the stock and
of his right as
a shareholder
Incorporeal or Concrete and
intangible
tangible
property
May be issued May be issued
by
the only if the
corporation
subscription is
even if the fully paid.
subscription is
not fully paid.
b. Negotiability
Page 75

REQUIREMENTS
FOR
TRANSFER OF STOCK
a. In case of shares covered by
a
certificate,
the
indorsement of the owner or
his agent coupled with
delivery is essential
b. Where no certificate has
been issued or for some
reason it is not in the
possession
of
the
stockholder, it may be
transferred by means of a
deed of assignment duly
recorded in the books of the
corporation
c. To be valid against the
corporation
and
third
persons, the transfer must
be recorded in the stock and
transfer book
d. The transferee must present
the indorsed certificate to
the corporate secretary who
shall effect the transfer in
the corporate books, issue a
new stock certificate in favor
of the transferee and cancel
the former certificate.
Only absolute transfers need be
registered.
The
pledge
or
mortgage itself need not be
recorded in the stock and transfer
book, but a chattel mortgage must
comply with the Chattel Mortgage
Law, and a pledge would require
the shares to be placed in the
possession
of
the
creditor/pledgee. The agreement
BAR OPERATIONS 2011
must appear in a public

instrument to take effect against
third persons. (Chemphil vs. CA,
251 SCRA 257)
EFFECTS OF UNREGISTERED
TRANSFER OF SHARES
a. It is valid and binding as
between the transferor and the
transferee
b. It is invalid as to the
corporation
except
when
notice is given to the
corporation for purposes of
registration
c. It is invalid as against corporate
creditors and the transferor is
still liable to the corporation
d. It is invalid as to the attaching
or executing creditors of the
transferor,
as
well
as
subsequent purchasers in good
faith without notice of the
transfer.
c. ISSUANCE OF CERTIFICATE OF
STOCK
No certificate of stock shall be
issued until the full amount of the
subscription is paid. Basis:
Doctrine of Individuality of
Subscription
D. PROCEDURE FOR ISSUANCE
OF NEW CERTIFICATE OF
STOCK IN LIEU OF LOST,
STOLEN OR DESTROYED ONES
(Sec. 73)
1. Filing with the corporation an
affidavit in triplicate by the
registered owner setting forth the
Page 76

circumstances as to how the

certificate was lost, stolen or
destroyed, the number of shares,
serial number of the certificate
and the name of the corporation
that issued the same.
2. Publication of notice of loss by
the corporation in a newspaper of
general circulation in the place of
the principal office, once a week
for 3 consecutive weeks.
3. After the lapse of 1 year from
the date of the last publication, if
no contest has been presented,
the corporation shall cancel in its
books the certificate of stock,
which has been lost, stolen or
destroyed, and issue in lieu
thereof a new certificate of stock.
However, if the registered owner
files a bond or other securities as
may be necessary to the board,
the new certificate of stock may
be issued even before the
expiration of one (1) year period.
The prescribed procedure does
not apply to a case where the
certificates are in the companys
possession when mislaid which
thereby obligates the corporation,
not the stockholder, to suffer the
consequences. (SEC Opinion)
3. WATERED STOCKS
Watered stock is stock issued
not in exchange for its
equivalent in cash, property,
shares, stock dividends or
BAR OPERATIONS 2011
services. It includes stock that

is
issued
(a)
without
consideration (b) issued as
fully
paid
when
the
corporation receives a sum
less than par or issued value
(c) issued for a consideration
other than cash, the fair
valuation of which is less than
par or issued value (d) stock
dividend without sufficient
retained earnings or surplus.
3. COLLECTION OF UNPAID
SUBSCRIPTION
1. Voluntary payment
a. Upon the date specified in
the subscription contract
b. Upon call by the Board of
Directors
2. Involuntary payment
a. Extra-judicial
i. Delinquency sale
ii. Application of dividends
b. Judicial action
Note: The prescriptive period in
case of subscription of shares
begins to run only from the time
the board of directors declares
that the balance are due and
payable. It does not begin to run
from the date of the subscription.
(Garcia vs. Suarez, 67 Phil. 441)
4. SALE
OF
SHARES
DELINQUENT
1. If the subscription contract

fixes the date for payment,
failure to pay on such date shall
render the entire balance due
and payable with interest.
Thirty days therefrom, if still
Page 77

unpaid, the shares become

delinquent, as of the due date,
and subject to sale, unless the
board declares otherwise.
2. If no date is fixed in the
subscription contract, the
board of directors can make
the call for payment, and
specify the due date. The notice
of call is mandatory. The failure
to pay on such date shall
render the entire balance due
and payable with interest.
Thirty days therefrom, if still
unpaid, the shares become
delinquent, as of the date of
call, and subject to sale, unless
the board declares otherwise.
(Sec. 67)
A. Effect of Delinquency:
A. Upon the stockholder
1. Accelerates
the
entire
amount of the unpaid
subscription;
2. Subjects the shares to
interest, expenses and costs;
3. Disenfranchises the shares
from any right that inheres
to a shareholder, except the
right to dividends (but
which shall be applied to any
amount due on said shares
or, in the case of stock
dividends, to be withheld by
the corporation until full
payment of the delinquent
shares. (Sec. 43)
B. Upon the director owning
delinquent shares
1. He can continue serving in that
capacity unless and until said
BAR OPERATIONS 2011
shares are totally bidded away, he

continues to be the owner thereof
and in the interim he is not
disqualified.
2. A delinquent stockholder
seeking to be elected as director
may not be a candidate for, nor be
duly elected to, the board.
No delinquency stock shall be
voted for or be entitled to vote or
representation
at
any
stockholders meeting, nor shall
the holder be entitled to any of
the rights of a stockholder except
the right to dividends in
accordance with the provisions of
this Code until and unless he pays
the amount due on his
subscription
with
accrued
interest, and the cost and
expenses of advertisement, if any.
(Sec. 71)
PROCEDURE FOR THE SALE OF
DELINQUENT STOCKS (Sec. 68)
Call by resolution demanding
payment of the balance.
However, if the contract of
subscription prescribes the
date of payment, no call is
necessary.
Notice of the board resolution
given to the stockholders by
the corporate secretary, either
personally or by registered
mail. Publication of notice of
call is not required.
Failure of the stockholder to pay
within a grace period of 30
days from the date specified in
the contract of subscription or
Page 78

in the call, the stocks shall be

declared delinquent and shall
be subject to sale.
Notice of delinquency served on
the
subscribers
either
personally or registered mail
and publication in a newspaper
of general circulation in the
province or the city where
principal office is located for
once a week for 2 consecutive
weeks. Notice shall state the
amount
due
on
each
subscription plus accrued
interest, and the date, time and
place of the sale which shall not
be less than 30 days nor more
than 60 days from the date the
stocks become delinquent.
Sale of the delinquent shares at
public auction.
HIGHEST
BIDDER
IN
A
DELINQUENCY SALE
a. The person participating in the
delinquency sale who offers to
pay the full amount of the balance
of the subscription together with
the accrued interest, costs of
advertisement and expenses of
sale, for the smallest number of
shares. In other words, the amount
of the bid does not vary but only
the number of shares to be bought
changes and determines the
highest bidder.
b. If there is no bidder as
mentioned above, the corporation
may bid for the same, and the
total amount due shall be credited
as paid in full in the books of the
BAR OPERATIONS 2011
corporation. Such shares shall be

considered as treasury shares.
K. DISSOLUTION AND WINDING
UP (LIQUIDATION)
1.DISSOLUTION
When the corporation ceases
to be a juridical person
METHODS: (Sec 117)
1. Voluntary
2. Involuntary
A corporation may be
dissolved by the SEC upon
filing of a verified complaint
and after proper notice and
hearing on the grounds
provided by existing laws,
rules and regulations (Sec.
121)
The 3 Methods by which a Stock
Corporation may be voluntarily
Dissolve are: (2002 Bar
Examination)
1. Voluntary
dissolution
where no creditors are
affected. This is done by a
majority vote of the directors
and resolution vote of at least
2/3 vote of the stockholders,
submitted to the SEC.
2. Voluntary
dissolution
where
creditors
are
affected. This is done by a
petition for dissolution which
must be filed with the SEC,
signed by a majority of the
members of the board of
directors, verified by the
Page 79

president or the secretary,

and upon affirmative vote of
stockholders
representing
2/3 of the outstanding capital
stock
3. Dissolution by shortening
of the corporate term. This
is done by amendment of the
articles of incorporation.
When Corporation is Deemed
Dissolved:
WHEN
METHOD
DEEMED
DISSOLVED
Sec.
118, Upon issuance
when
no of certificate of
creditors are SEC
affected
Sec.
119, When
where
judgment
is
creditors are rendered
affected
dissolving the
corporation
Sec.
120, Upon approval
dissolution of the amended
by
articles
of
shortening
incorporation
corporate
or
the
term
expiration of
the shortened
term, as the
case may be.
INVOLUNTARY DISSOLUTION
Grounds:
1. If the corporation does not
formally
organize
and
commence the transaction of
its business or the construction
BAR OPERATIONS 2011
2.
3.
4.
5.
6.
7.
of its works within 2 years

from
the
date
of
its
incorporation, its corporate
power
ceases
and
the
corporation shall be deemed
dissolved.
If
the
corporation
has
commenced the transaction of
its business; but subsequently
becomes
continuously
inoperative for a period of at
least 5 years, the same shall be
a ground for suspension or
revocation of its corporate
franchise or certificate of
incorporation.
When the corporation fails to
adopt and file a code of by
laws in the manner provided
for by the law.
When the corporation has
offended against a provision of
law for its creation or renewal.
When it has committed or
omitted an act which amounts
to a surrender of its corporate
rights, privileges, or franchises.
When it has misused a right,
privilege,
or
franchise
conferred upon it by law, or
when it has exercised a right,
privilege or franchise in
contravention of law, such as
commission by the corporation
of ultra vires or illegal acts.
When on the basis of findings
and recommendations of a duly
appointed
management
committee or rehabilitation
receiver, or based on the SECs
own findings, the continuance
of the business of the
Page 80

corporation would not be

feasible or profitable nor work
to the best interest of the
stockholders,
parties
litigants, creditors or the

general public.
8. When the corporation is guilty
of fraud in procuring its
certificate of registration.
9. When the corporation is guilty
of serious misrepresentation as
to what the corporation can do
or is doing to the great
prejudice of or damage to the
general public.
10. Refusal of the corporation to
comply or defiance of any
lawful order of the SEC
restraining commission of acts
which would amount to a grave
violation of its franchise and
11. Failure of the corporation to
file required reports in
appropriate
forms
as
determined by the SEC within
the prescribed period.
EFFECTS OF DISSOLUTION
a. Transfer of legal title to
corporate property to the
stockholders who become coowners thereof
b. Corporation ceases as a body
politic to continue the business
for which it was organized
c. It cannot be revived
d. Dissolution does not by itself
imply
the
diminution
or
extinguishment of rights
BAR OPERATIONS 2011
e. The corporation continues as a

body corporate for 3 years for
purposes of winding up
f. Cessation of corporate existence
for all purposes upon the
expiration of the winding up
period of 3 years. (The
Corporation
Code
of
the
Philippines Annotated, Hector de
Leon, 2002 ed.
2. LIQUIDATION
The process by which all the
assets of the corporation are
converted into liquid assets
(cash) in order to facilitate the
payment of obligations to
creditors, and the remaining
balance, if any, is to be distributed
to the stockholders or members.
Methods:
1. By the corporation itself
through
its
board
of
directors/trustees;
2. By a trustee to whom the
corporate assets have been
conveyed; and
3. By a management committee
or
rehabilitation
receiver
appointed by the SEC.
Note: The 3-year period of
liquidation does not apply to
Methods 2 and 3 as long as the
trustee or the receiver is
appointed within the said period.
The termination of the life of a
juridical entity does not by itself
cause
the
extinction
or
diminution of the rights and
liabilities of such entity nor those
Page 81

of its owners and creditors alike

(Sec. 145).
The word trustee as sued in the
corporation statute must be
understood in its general concept
which could include the counsel
to whom was entrusted the
prosecution of the suit filed by the
corporation. (Spouses Gelano vs.
CA)
LIQUIDATIO
N
Connotes
a
winding up or
settling with
creditors and
debtors
Winding up
process
so
that
assets
may
be
distributed to
those entitled
REHABILITAT
ION
Connotes
a
reopening or
reorganization
Contemplates a
continuance of
corporate life
in an effort to
restore
the
corporation to
its
former
successful
operation
OTHER COPORATIONS
1. CLOSE CORPORATION
A
special kind of
stock
corporation:
1.
whose
articles
of
incorporation should provide
that:
a.
the
number
of
stockholders
shall
not
exceed 20;
b. issued
stocks
are
subject
to
transfer
restrictions, with a right of
preemption in favor of the
BAR OPERATIONS 2011
stockholders
or
the
corporation; and
c.
the corporation shall
not be listed in the stock
exchange or its stocks
should not be publicly
offered; AND
2. Whose at least 2/3 of the
voting stocks or voting rights
should not be owned or
controlled
by
another
corporation which is not a
close corporation. (Sec. 96)
Characteristics:
1. Stockholders may act as
directors without need of
election and therefore are
liable as directors;
2. Stockholders
who
are
involved in the management
of the corporation are liable
in the same manner as
directors are.
3. Quorum may be greater than
mere majority;
4. Transfers of stocks to others,
which would increase the
number of stockholders to
more than the maximum are
invalid;
5. Corporate actuations may be
binding even without a
formal board meeting, if the
stockholder had knowledge
or ratified the informal
action of the others;
6. Preemptive right extends to
all stock issues;
7. Deadlocks in board are
settled by the SEC, on the
written petition by any
stockholder; and
Page 82

8. Stockholder may withdraw

and avail of his right of
appraisal.
Note: Special rules are provided
for close corporations because it
is essentially an incorporated
partnership. (The Corporation
Code of the Philippines Annotated,
The following cannot be a close
corporation:
a. mining companies;
b. oil companies;
c. stock exchanges;
d. banks;
e. insurance companies;
f. public utilities;
g. education institutions;
h. other corporations declared
to be vested with public
interest. (Sec. 96)
ORDINARY
STOCK
CORPORATI
ON
Its articles of
incorporatio
n need only
contain the
general
matters
enumerated
in Sec. 14 of
the Code.
CLOSE
CORPORATIO
N
Its
articles
must contain
the
special
matters
prescribed by
Sec. 97, aside
from
the
general
matters in Sec.
BAR OPERATIONS 2011
Its status as
an ordinary
stock
corporation
is
not
affected by
the
ownership of
its
voting
stock
or
voting rights.
Its
articles
cannot
classify
its
directors.
Business of
the
corporation
is managed
by the board
of directors.
The
corporate
officers and
employees
are elected
by a majority
vote of all the
members of
the board of
directors.
14. Failure to
do
so
precludes a de
jure
close
corporation
status.
2/3
of
its
voting stock or
voting rights
must not be
owned
or
controlled by
another
corporation
which is not a
close
corporation.
Its articles may
classify
its
directors.
Business of the
corporation
may
be
managed
by
the
stockholders if
the articles so
provide,
but
they are liable
as directors.
Its articles may
provide
that
any or all of
the corporate
officers
or
employees
may be elected
or appointed
by
the
stockholders.
Page 83

The
preemptive right
is subject to
the
exceptions
found in Sec.
39.
The appraisal
right may be
exercised by
a stockholder
only in the
cases
provided in
Secs. 81 and
42 of the
Code.
Except
as
regards
redeemable
shares, the
purchase by
the
corporation
of its own
stock must
always
be
made from
the
unrestricted
retained
earnings.
Arbitration
of
intracorporate
deadlock by
the SEC is not
a remedy in
case
the
The
preemptive right
is subject to no
exceptions
unless denied
in the articles
The appraisal
right may be
exercised and
compelled
against
the
corporation by
a stockholder
for any reason.
In case of an
arbitration of
an
intracorporate
deadlock
by
the SEC, the
corporation
may
be
ordered
to
purchase
its
own
shares
from
the
stockholders
regardless of
the availability
of unrestricted
retained
earnings.
Arbitration of
intracorporate
deadlock
by
the SEC is an
available
remedy in case
BAR OPERATIONS 2011
directors or
stockholders
are
so
divided
respecting
the
management
of
the
corporation.
the directors
or
stockholders
are so divided
respecting the
management
of
the
corporation.
POWERS OF THE SEC IN CASE

OF DEADLOCK IN CLOSE
CORPORATIONS
1. Cancel or alter any provision in
the articles of incorporation or
bylaws
2. Cancel, alter or enjoin any
resolution of the corporation
3. Direct or prohibit any act of the
corporation
4. Require the purchase at their
fair value of shares of any
stockholder either by any
stockholder
or
by
the
corporation regardless of the
availability of unrestricted
retained earnings.
5. Appoint a provisional director
6. Dissolve the corporation
7. Granting such other relief as
the
circumstances
may
warrant.
2. NON
STOCK
CORPORATIONS
A corporation organized for an
eleemosynary purpose, and no
part of whose income is, during
its existence, distributable as
dividends to its members,
trustees, or officers, subject to the
Page 84

provisions of the Corporation

Code on dissolution. (Sec. 87)
Any profit which it may obtain as
an incident to its operations shall,
whenever necessary or proper, be
used for the furtherance of the
purpose or purposes for which it
was organized.
the asset of the non-stock

corporation would now be
treated as payment to the
subscriptions of the members
who
will
now
become
stockholders of the corporation.
Eleemosynary
purposes:
charitable, religious, educational,
professional,
cultural,
recreational, fraternal, literary,
scientific, social, civic service, or
similar purposes, like trade,
industry, agricultural. (Sec. 88)
They are governed by the same
rules established for stock
corporations,
whenever
pertinent, subject, however, to a
number of special features.
1. To be entitled to 1 vote
unless otherwise provided
in the articles or by-laws
2. To vote by proxy unless
otherwise provided in the
articles or by-laws
3. To transfer membership if
allowed by the articles or
by-laws
4. To be elected as trustee
RULES ON CONVERSION (SEC

Opinion)
1. Stock to non-stock corporation
Conversion may be made by mere
amendment of the articles of
incorporation.
2. Non-stock to stock corporation
The corporation must first be
dissolved; mere amendment of
the articles of incorporation
would not suffice because the
conversion would change the
corporate nature from non-profit
to monetary gain.
The
conversion
without
dissolving it first would be
tantamount to distribution of its
assets or income to its members
inasmuch as after its conversion,
BAR OPERATIONS 2011
RIGHTS OF MEMBERS
STOCK
Has
capital
stock divided
into shares
and
with
authority to
distribute
dividends to
its
stockholders
Stockholders
may transfer
their shares
NON-STOCK
Does not have
shares
and
may
not
distribute
profits to its
members
Members
cannot
transfer their
membership
unless
allowed
by
the articles or
by-laws
Cumulative
Cumulative
voting
is voting
not
available in available
the election unless
Page 85

of directors
otherwise
provided in
the articles or
by-laws
Directors
Trustees may
cannot
exceed 15 in
exceed 15 in number
number
The term of a The term of a
director is 1 trustee is 3
year
years; 1/3 of
the
Board
shall
be
elected
annually
Stockholders Members may
may vote by be deprived of
proxy
the right to
vote by proxy
in the articles
or by-laws
Officers are Officers may
elected by the be
directly
Board
of elected by the
Directors
members
unless
otherwise
provided in
the articles or
by-laws
Stockholders Members may
and directors be allowed by
must act in a the by-laws to
meeting,
vote by mail
except where or
other
a
mere similar means
written
assent
is
sufficient or a
formal
meeting
unnecessary
BAR OPERATIONS 2011
RULES FOR DISTRIBUTION OF

ASSETS
IN
CASE
OF
DISSOLUTION (SEC. 94)
1. All liabilities and obligations of
the corporation shall be paid,
satisfied and discharged or
adequate provision shall be made
therefor
2. Assets held by the corporation
upon a condition requiring return,
transfer or conveyance, and
which condition occurs by reason
of dissolution, shall be returned,
transferred or conveyed in
accordance
with
such
requirements
3. Assets received and held by the
corporation subject to limitations
permitting their use only for
charitable, religious, benevolent,
educational or similar purposes
but not held upon a condition
requiring return, transfer or
conveyance
by
reason
of
dissolution, shall be transferred
or conveyed to one or more
corporations,
societies
or
organizations
engaged
in
activities in the Philippines
substantially similar to those of
the
dissolving
corporation
pursuant to a plan of distribution
4. Other assets, if any, shall be
distributed in accordance with
the provisions of the articles of
incorporation or the by-laws
5. In any other case, assets may be
distributed to such persons,
societies,
organizations
or
corporations, whether or not
Page 86

organized for profit, as may be

specified in a plan of distribution.
The plan of distribution shall
be approved by a majority vote of
the board of trustees and by 2/3
of the members having voting
rights at a meeting
SPECIAL CORPORATIONS
1. EDUCATIONAL CORPORATION
A stock or non-stock corporation
organized to provide facilities for
teaching or instruction.
A favorable recommendation of
the DECS is essential for the
approval of its articles and bylaws.
It is primarily governed by special
laws and suppletorily by the
provisions of the Code.
NON-STOCK
EDUCATION
AL
CORPORATI
ON
A non-stock
corporation
Governed by
the provisions
on non-stock
corporations
and
suppletorily
by
the
EDUCATIONA
L
CORPORATIO
N
A
special
corporation
which may a
stock or nonstock
Governed by
special
laws
and by the
general
provisions of
the
Corporation
BAR OPERATIONS 2011
provisions on
stock
corporations
The number
of board of
trustees may
be more than
15
The term of
office of the
board
of
trustees shall
be 3 years
Code
The number of
the board of
trustees should
not be less
than 5 but not
more than 15.
The term of
office of the
board
of
trustees shall
be 5 years
2. RELIGIOUS CORPORATION
A corporation composed entirely
of spiritual persons and which is
organized for the furtherance of a
religion or for perpetuating the
rights of the church or for the
administration of church or
religious work or property. It is
different from an ordinary nonstock corporation organized for
religious purposes.
Kinds:
a) CORPORATION SOLE
- A special form of
corporation, usually associated
with the clergy, consisting of
one person only and his
successors, who is incorporated
by law to give some legal
capacities and advantages; and
b) RELIGIOUS SOCIETIES
- A non-stock corporation
governed by a board but with
religious
purposes.
It
is
incorporated by an aggregate of
Page 87

persons, e.g. religious order,

diocese, synod, sect, etc.
4. FOREIGN CORPORATION
A corporation formed, organized
or existing under any law other
than those of the Philippines, and
whose laws allow Filipino citizens
and corporations to do business
in its own country or state. (Sec.
123)
The definition espouses the
incorporation test and the
reciprocity rule and is significant
for licensing purposes.
It is not permitted to transact or
do business in the Philippines
until it has secured a license for
that purpose from the SEC and a
certificate of authority from the
appropriate government agency.
RESIDENT AGENT
An individual, who must be of
good moral character and of
sound financial standing, residing
in the Philippines, or a domestic
corporation lawfully transacting
business in the Philippines,
designated in a written power of
attorney by a foreign corporation
authorized to do business in the
Philippines, on whom any
summons and other
legal
processes may be served in all
actions or other legal proceedings
against the foreign corporation.
(Sec. 127-128)
CONTENTS FOR APPLICATION
OF LICENSE
1. Date and term of incorporation
BAR OPERATIONS 2011
2. The address of the principal

office in the country of
incorporation
3. The name and address of
resident agent
4. The place in the Philippines
where it intends to operate
5. The specific purpose or
purposes
6. The names and addresses of
the present directors and
officers of the corporation
1. A statement of its authorized
capital stock
2. A statement of its outstanding
capital stock
3. A statement of the amount
actually paid in
4. Such additional information as
may be necessary to enable the
SEC to determine whether such
corporation is entitled to
license
GROUNDS FOR REVOCATION OF
LICENSE
1. Failure to file annual reports
required by the Code;
2. Failure
to
appoint
and
maintain a resident agent;
3. Failure to inform the SEC of
the change of residence of the
resident agent;
4. Failure to submit copy of
amended articles or by-laws or
articles
of
merger
or
consolidation;
5. A
misrepresentation
in
material matters in reports;
6. Failure to pay taxes, imposts
and assessments;
Page 88

7. Engage
in
business
unauthorized by SEC;
8. Acting as dummy of a foreign
corporation; and
9. Not licensed to do business in
the Philippines. (Sec. 134)
TEST
OF
DOING
OR
TRANSACTING BUSINESS IN
THE PHILIPPINES:
The Corporation Code does not
define the phrase doing or
transacting business.
A. Jurisprudential Test (Philippine
Corporate Law, Cesar Villanueva,
2001 ed.)
1. Twin characterization test
a) Whether the foreign
corporation is maintaining or
continuing in the Philippines
the body or substance of the
business for which it was
organized or whether it has
substantially retired from it
and turned it over another
(Substance Test); and
b) Whether there is continuity
of commercial dealings and
arrangements, contemplating
to
some
extent
the
performance of acts or works
or the exercise of some
functions normally incident to
and in progressive prosecution
of, the purpose and object of its
organization (Continuity Test).
2. Contract Test
Whether the contracts entered
into by the foreign corporation,
or by an agent acting under the
control and direction of the
foreign
corporation,
are
BAR OPERATIONS 2011
consummated
Philippines.
in
M. MERGER
CONSOLIDATION
MERGER
One or more
existing
corporations
are absorbed
by
another
corporation
which survives
(A + B = A or B)
Parties called
constituent
corporations
Absorbed
corporation
dissolved
without
liquidation of
assets
Absorbing
corporation
acquires
all
assets
and
assumes
liabilities of the
absorbed
corporation
regardless
WON creditors
consented
Stockholders of
the
AND
CONSOLIDATI
ON
Union of 2 or
more
corporations
to form a new
corporation
called
a
consolidated
corporation (A
+ B = C)
Same
All constituent
corporation
are dissolved
without
liquidation of
assets;
consolidated
corporation
survives
Consolidated
corporation
acquires
all
assets
and
assumes
liabilities
f
constituent
corporations
regardless of
WON creditors
consented
Stockholders
Page 89

absorbed
of constituent
corporation
corporations
becomes
becomes
stockholders of stockholders
absorbing
of consolidated
corporation
corporation
PROCEDURE:
a. The board of directors or
trustees of each corporation
shall approve a plan of merger
or consolidation
b. The plan shall be submitted
for
approval
by
the
stockholders or members of
each of such corporation at
separate corporate meetings
duly called for the purpose
c. The articles of merger or
consolidation shall be executed
by each of the constituent
corporations
d. Submission to the SEC for
approval
e. The SEC may or may not
conduct a hearing
f. Issuance of certificate of
merger or consolidation by the
SEC
EFFECTS OF MERGER
CONSOLIDATION (Sec. 80)
OR
1. The constituent corporations

shall become a single corporation
which, in case of merger shall be
the surviving corporation and, in
the case of consolidation, shall be
the consolidated corporation;
BAR OPERATIONS 2011
2. The separate existence of the

constituent corporation shall
cease, except that of the surviving
corporation;
3. The surviving or consolidated
corporation shall possess all
rights, privileges, immunities and
powers and subject to all the
duties and liabilities of a
corporation;
corporation
shall
thereafter
possess all the rights, privileges,
immunities and franchises of each
of the constituent corporations;
5. All property, real or personal,
and all receivables due to, and all
other interest of each constituent
corporation, shall be deemed
transferred to and vested in such
surviving
or
consolidated
corporation without further act or
deed;
corporation shall be responsible
for all the liabilities and
obligations of each of the
constituent corporations;
7.
Any claim, action or
proceeding pending by or against
any
of
the
constituent
corporations may be prosecuted
by or against the surviving or
consolidated corporations; and
8. The rights of the creditors or
lien upon the property of any of
each constituent corporation shall
not be impaired by such merger
or consolidation.
GENERAL RULE: When one
corporation buys all the shares of
Page 90

another corporation, this will not

operate to dissolve the other
corporation and as the two
corporations still maintaining
their separate corporate entities,
one will not answer for the debts
of the other.
EXCEPTIONS
AS
TO
NONASSUMPTION OF LIABILITIES:
1. If there is an express
assumption of liabilities;
2. If there is a consolidation or
merger;
3. If the purchase was in fraud of
creditors; and
4. If the purchaser is merely a
continuation of the seller.
DE FACTO MERGER
One corporation acquiring
all or substantially all of the
properties of another corporation
in exchange for shares of stock of
the acquiring corporation. The
acquiring corporation would endup with the business enterprise of
the selling corporation whereas
the latter would end up with
basically its remaining assets
being the shares of stock of the
acquiring corporation and may
then distribute it as liquidating
dividend to its stockholders.
MERGER and
SALE OF
CONSOLIDATI
ASSETS
ON
Sale of assets is Merger/cons
always
olidation is
involved
not always
BAR OPERATIONS 2011
There
is
automatic
assumption of
liabilities
There
is
continuance of
the enterprise
and of the
stockholders
Title to the
assets
are
transferred by
operation
of
law
The
constituent
corporations
are
automatically
dissolved
involved
Purchasing
corporation
is
not
generally
liable for the
debts
and
liabilities of
the
selling
corporation
The selling
corporation
ordinarily
contemplates
a liquidation
of
the
enterprise
Transfer of
title is by
virtue
of
contract
The selling
corporation
is
not
dissolved by
the
mere
transfer of all
its property
TYPES
OF
ACQUISITIONS
a. ASSETS-ONLY LEVEL
The purchaser is interested only
in the raw assets and properties
of the business. He is not
interested in the entity of the
corporate owner of the assets nor
of the goodwill and other factors
relating to the business itself.
Page 91

The transferee would not be

liable for the debts and liabilities
of his transferor since there is no
privity of contract over debt
obligations
between
the
transferee and the transferors
creditors
b.
BUSINESS-ENTERPRISE
LEVEL
The transferee merely continues
the same business of the
transferor since he obtains the
earning capability of the venture
The transferee is liable for the
debts and liabilities of the
transferor
c. EQUITY LEVEL
The purchaser takes control and
ownership of the business by
purchasing the shareholdings of
the corporate owner. What the
purchaser actually purchased is
the ability to elect the members of
the board of the corporation who
run the business
INSURANCE
CONTRACT OF INSURANCE
Agreement whereby one
undertakes
for
a
consideration to indemnify
another
against
loss,
damage, or liability arising
from an unknown or
contingent event. (Sec. 2, par.
2)
A contract of suretyship
shall also be deemed an
BAR OPERATIONS 2011
insurance contract if made

by a surety who or which is
doing an insurance business.
NATURE
AND
CHARACTERISTICS OF A
CONTRACT OF INSURANCE:
ALEATORY depends upon
some contingent event.
Contract of INDEMNITY for
Non-Life
recovery is
commensurate to the loss. It is
an
investment
in
life
insurance secured by the
insured as a measure of
economic security for him
during his lifetime and for his
beneficiary upon his death
except one secured by the
creditor on the life of the
debtor.
PERSONAL contract - insurer
contracts with reference to the
character of the insured and vice
versa.
EXECUTORY & CONDITIONAL
on part of the insurer.
It is one of PERFECT GOOD
FAITH
Contract of ADHESION
insurance companies manage
to impose upon the insured
prepared contracts, which the
insured
cannot
change.
Consequently, they are to
construed as follows:
(a) In case there is no doubt as
to the terms of the
insurance contract, it is to
be construed in its plain,
Page 92

ordinary, and popular

sense.
(b) If doubtful, ambiguous,
certain, it is to be
construed strictly against
the insurer and liberally in
favor of the insured
because the latter has no
voice in the selection of the
words used, and the
language used is selected
by the lawyers of the
Insurer (Qua Chee Gan vs.
Law Union Rock Ins. Co. Ltd.
52 OG 1982).
ELEMENTS OF AN INSURANCE
CONTRACT
1. The insured should possess
an interest of some kind,
susceptible of pecuniary
estimation known as
insurable
interest.
Generally a person has
insurable interest in the
subject
matter
insured
when:
- He has such a relation
or connection with or
concern
in,
such
subject matter that he
will derive pecuniary
benefit or advantage
from its preservation
or
will
suffer
pecuniary loss or
damage
from
its
destruction,
termination or injury by
the happening of the
event insured against.
BAR OPERATIONS 2011
- It is necessary because
its absence renders the
contract void.
IN WHAT DOES A PERSON HAVE
INSURABLE INTEREST IN (LIFE)
1. Himself, his spouse and of
his children.
2. Any person on whom he
depends wholly or in fact for
education or support or in
whom he has pecuniary
interest.
3. Any person under legal
obligation to him for the
payment
of
money,
respecting
property
or
services of which death or
illness might delay or
prevent performance.
4. Any person upon whose life,
any estate or interest vested
in him depends.
WHEN MUST INSURABLE
INTEREST IN LIFE EXIST
- Insurable interest in life
must exist at the time of
the effectivity of the policy
and need not exist at the
time of the death of the
insured as life insurance is
not a contract of indemnity.
It is meant to give
financial security to the
insured
or
his
beneficiaries (Sec. 19).
However, insurable interest
of a creditor on the life of
the debtor must exist only at
the time of effectivity but
Page 93

also at the time of the death

of the debtor as in this
instance it is a contract of
indemnity. His interest is
capable of exact pecuniary
measurement.
IS THE CONSENT OF THE
INSURED REQUIRED WHEN
INSURANCE IS TAKEN
- The law does not require
the consent of the person
insured and such has been
considered as not essential
to the validity of the
contract as long as there is
insurable interest at the
beginning;
WHEN DOES A PERSON HAVE
INSURABLE INTEREST IN
PROPERTY
A person has insurable interest in
property as every interest in
property, whether real or
personal, or any relation
thereto, or liability in respect
thereof, of such nature that a
contemplated
peril
might
directly damnify the insured is
an insurable interest (Sec. 13).
It may consist of:
(a) An existing interest
(b) An inchoate interest
founded on an existing
interest
(c) An expectancy coupled
with an existing interest
in that out of which the
expectancy arises;
BAR OPERATIONS 2011
Note:
- Expectancy must be founded
on an actual right to the thing
or a valid contract for it;
- A carrier or depository of any
kind has insurable interest in
the thing held by him such to
the extent of his liability but
not to exceed the value thereof
(Sec. 13, 14, and 15).
- But, a mere contingent or
expectant
interest
in
anything, not founded on
contract or actual right to
the thing is not insurable
as there is no insurable
interest (Sec. 16).
INCHOATE RIGHT The right to
lay claim on the fun is dependent
on the solvency of the insurer and
is subject to all other obligations
of the company arising from its
insurance contracts. Thus, the
respondents interest is merely
inchoate.
Being
a
mere
expectancy, it has no attribute of
property. At this time, it is
nonexistent and may never exist.
Hence, it would be premature to
make the security deposit
answerable for CISCOs present
obligation to Del Monte Motors.
(Republic of the Philippines v. Del
Monte Motors, Inc., Oct.9, 2006 G.R.
No. 156956)
INSURABLE INTEREST IN BANK
DEPOSITS
BAR EXAM; 2000 (VIII - b)
Page 94

Q: BD has bank deposit of half a

million pesos.Since the limit of
trhe insurance coverage of the
Philippine Deposit Insurance
Corp Act ( 3591) is only one
tenth of BDs deposit, he would
like some protection for the
excess by taking out an
insurance against all risks or
contingencies of loss arising
from any unsound or unsafe
banking practices including
unforeseen adverse effects of
the continuing crisis involving
the banking and financial
sector in Asia. Does BD have
insurable interest within the
meaning of the Insurance Code?
A: Yes, BD has insurable interest
in his bank deposit. In case of loss
of said deposit, more particularly
to the extent of the amount in
excess of the limit covered by the
Philippine Deposit Insurance
Corporation Act, BD will be
damnified.
He will suffer
pecuniary loss of P400,000.00,
that is, his bank deposit of half a
million pesos minus P100,000.00
which is the maximum amount
recoverable from the PDIC.
MUST THE BENEFICIARY IN
PROPERTY HAVE INSURABLE
INTEREST ON THE PROPERTY
INSURED?
- YES, as no contract or policy
of insurance on property
shall be enforceable. Except
for the benefit of some
person having insurable
BAR OPERATIONS 2011
interest in the property

insured.
COMPARE WITH INSURABLE
INTEREST IN LIFE: 2002 BAR
EXAM (N0.XVII)
INSURABLE
INTEREST
IN LIFE
Must exist
only at the
time the
policy takes
effect and
need not
exist at the
time of loss
Unlimited
except in life
insurance
effected by
creditor on
life
of
debtor.
The
expectation
of benefit to
be derived
from
the
continued
existence of
life need not
have
any
legal basis
whatever. A
reasonable
probability
is sufficient
without
more.
INSURABLE
INTEREST
IN
PROPERTY
Must exist at
the time the
policy takes
effect and
when the
loss occurs
Limited to
actual value
of interest in
property
insured.
An
expectation
of a benefit
to be derived
from
the
continued
existence of
the property
insured must
have a legal
basis.
Page 95

The
beneficiary
need
not
have
an
insurable
interest over
the life of the
insured
if
the insured
himself
secured the
policy.
However, if
the
life
insurance
was
obtained by
the
beneficiary,
the
latter
must have
insurable
interest over
the life of the
insured.
The
beneficiary
must have
insurable
interest over
the
thing
insured.
CHANGE OF INTEREST IN
PROPERTY INSURED (Transfer
or Sale of Insured Property)
(1994 & 2000 Bar Exams)
A change of interest in any
part of a thing insured
unaccompanied
by
a
corresponding change of interest
in the insurance suspends the
insurance to an equivalent extent,
until the interests in the thing and
the interest in the insurance are
vested in the same person. (Sec.
20)
BAR OPERATIONS 2011
Exceptions: 1) change of
interest after the loss; 2) change
of interest in one or more of
several things separately insured;
3) change of interest by will or
succession; and 4) transfer of
interest by a partner, joint owner,
or common owner, to another
partner, joint owner or common
owner.
Bar Exam (1980):
Q: A insures his house for P 10,
000 commencing January 1,
1952. On February 15, 1952, A
sells the house to B for P15,000
without
endorsing
or
transferring the fire policy to B.
On April 20, 1952, the house is
completely
destroyed
on
account of the accidental fire.
Can A or B collect the proceeds
of the policy from the insurer?
Explain and give reasons for
your answer. (1952, 1959, 1980
Bar)
A: Neither A, the seller, nor B, the
buyer, can collect under the
policy. A transfer of interest in
property without any transfer of
interest
in
the
insurance
suspends the latter until the
interest in the property and in the
insurance is vested in the same
person. A has transferred his
interest in the object of the
insurance (the house) to B
without a transfer of his interest
in the insurance to B. As the
interests in the object and in the
Page 96

insurance are in different persons

at the time of the loss, none can
recover under the policy.
WHAT CHANGE IS
CONTEMPLATED
An absolute transfer of the
property
not
life,
a
lease/mortgage.
EXCEPTIONS TO THE
REQUIREMENTS OF INSURABLE
INTEREST:
(1) Life, health or accident
insurance because they are
not contracts of indemnity
and insurable interest is not
required at the time of loss;
(2) A change of interest after
occurrence of an injury and
results in loss does not
affect the right of the insured
to indemnity;
- After a loss, the liability of
the insurer is fixed;
(3) A change of interest in one or
more several distinct things,
separately insured by one
policy, does not avoid as to
the others; (Sec. 22)
(4) A change of interest in one or
more several distinct things,
separately insured by one
policy, does not avoid the
insurance as to the insured;
(Sec. 23)
(5) A transfer of interest by one
or several partners, joint
owners, or owners in
common, who are jointly
insured to the others, does
not avoid insurance even
BAR OPERATIONS 2011
though it has been agreed

that the insurance shall lease
upon an allocation of the
thing insured;
(6) When notwithstanding a
prohibition, the consent of
the insurer is obtained; and
(7) When the policy is so framed
that it will insure to the
benefit of whomsoever may
become the owner during
the continuance of the risk.
CONTINUATION OF ELEMENTS:
1. Insurable interest;
2. The insured is subject to
risk of loss through the
destruction or impairment
of that interest by the
happening of the designated
risk;
3. The insurer assumes the
risk of loss;
4. Such assertion is part of a
general scheme to distribute
actual loss among a large
group of persons bearing
somewhat similar risk;
5. As a consideration for the
insurers
promise,
the
insured makes a ratable
contribution
called
a
premium to the general
insurance fund;
Page 97

WHAT MAY BE INSURED

AGAINST
Any unknown or contingent
event, whether past or future,
which may damnify a person
having insurable interest or
create a liability against him, may
be insured against (Sec. 3).
NOTE: IN RELATION TO THE
INSURANCE SO SECURE
1. The consent of the husband is
not necessary for the validity of
an insurance policy taken by a
married woman on her life and
that of her children. Under Art.
145 of the Family Code, she can
also insure her separate
property without the consent
of the husband.
2. A minor may take out a
contract for life, health and
accident insurance with any
company authorized to do
business in the Philippines,
provided it be taken out on his
own life and the beneficiary
named is his estate, father,
mother, husband, wife, child,
brother or sister. In so doing,
the married woman/minor
may exercise all the rights or
privileges under the policy.
But What is the effect of the
death of the original owner of a
policy, which covers the life of a
minor, ahead of the minor? all
rights, title and interest in the
policy shall automatically vest in
BAR OPERATIONS 2011
the minor unless otherwise

provided in the policy;
WHAT CANNOT BE INSURED
An insurance for or against
the drawing of any lottery or for
or against any chance or ticket in
a lottery drawing or prize.
Because gambling results in
profit and insurance only seeks
to indemnify the insured
against loss (Sec. 4).
PARTIES TO A CONTRACT OF
INSURANCE:
1. INSURER every person,
partnership, association or
corporation duly authorized to
transact insurance business as
provided in the code may be an
insurer. It is the party who
agrees to indemnify another
upon
the
happening
of
specified contingency.
2. INSURED party to be
indemnified in case of loss (Sec.
6). Anyone except a public
enemy (a nation at war with
Philippines and every citizen
subject of such nation.
BAR EXAM; 2000 (VIII - a)
Q: May a member of the Moro
Islamic Liberation Front ( MILF
) or its breakaway group, the
Abu Sayaff, be insured with a
company licensed to do
business under the Insurance
Code of the Philippines?
Explain.
Page 98

A: A member of the MILF or the

Abu Sayyaf may be insured with a
company licensed to do business
under the Insurance Code of the
Philippines. What is prohibited to
be insured is a public enemy. A
public enemy is a citizen or
national of a country with which
the Philippines is at war. Such
member if the MILF or the Abu
Sayyaf is not a citizen or national
of another country, but of the
Philippines.
WHO MAY INSURE A
MORTGAGED PROPERTY
Both the mortgagor and the
mortgagee may take out separate
policies with the same or different
companies. The mortgagor to
the extent of his property, the
mortgagee to the extent of his
credit; (Sec. 8)
INSURANCE INTEREST ON
MORTGAGED PROPERTY (2005
BAR EXAM (N0. X - 2- a)
Armando Geagonia v. CA 241
SCRA 154
SC:
Condition 3 is what is known

as other insurance clause
which is a valid provision allowed
by the insurance code in order to
prevent in an increase in the
moral hazard and to serve as a
warranty that no other insurance
exists. Its incorporation in fire
policies prevents over insurance
and adverts the perpetration of
BAR OPERATIONS 2011
fraud. Its violation will thus avoid

the policy. However, in order to
constitute a violation, the other
insurance must be upon the same
subject matter, the same interest
therein, and the same risk.
Double insurance exists
where the same person is insured
by several insurers separately in
respect of the same subject and
interest.
The court ruled that since
the stocks in trade insured with
PFIC were mortgaged property,
separate insurances covering
different insurable interests may
be obtained by the mortgagor and
mortgagee.
The
insurable
interests of a mortgagor and
mortgagee are separate and
distinct, thus no double insurance
exists since the policies of PFIC do
not cover the same interest as
that covered under the policy of
Country Bankers Insurance Corp.
The non-disclosure of the policies
with PFIC was not fatal to
Armandos right to recover on his
policy with Country Bankers
Insurance Corp.
WHAT
ARE
THE
CONSEQUENCES WHERE THE
MORTGAGOR INSURES THE
PROPERTY MORTGAGED IN HIS
OWN NAME BUT MAY THE LOSS
PAYABLE TO THE MORTGAGEE
OR ASSIGNS THE POLICY TO
HIM:
a. The insurance is still deemed
to be upon the interest of the
Page 99

mortgagor who does not

cease to be a party to the
original contract. Hence, if the
policy is cancelled, notice
must be given to the
mortgagor.
b. Any act of the mortgagor,
prior to loss, which would
otherwise avoid the policy or
insurance, will have the same
effect although the property is
in the hands of the mortgagee.
Hence, if there is a violation of
the policy by the mortgagor,
the
mortgagee
cannot
recover.
c. Any act required to be done
by the mortgagor may be
performed by the mortgagee
with the same effect if it has
been performed by the
mortgagor.
d. Upon the occurrence of the
loss, the mortgagee is entitled
to recover to the extent of his
credit and the balance if any
to be paid to the mortgagor,
since such is for both their
benefits;
e. Upon recovery by the
mortgagee, his credit is
extinguished;
Note: Union Mortgage Clause
creates the relation of insured
and insurer between mortgagee
and the insurer independent of
the contract of the mortgagor. In
such case, any act of the
mortgagor can no longer affect
the rights of the mortgagee the
insurance contract is now
BAR OPERATIONS 2011
independent of that with the

mortgagor;
WHAT IS THE EFFECT OF
INSURANCE PROCURED BY THE
MORTGAGEE
WITHOUT
REFERENCE TO THE RIGHT OF
THE MORTGAGOR
a. The mortgagee may collect
from the insurer upon the
occurrence of the loss to the
extent of his credit.
b. Unless otherwise stated, the
mortgagor cannot collect the
balance of the proceeds after
the mortgagee is paid.
c. The insurer, after payment to
the
mortgagee,
becomes
subrogated to the rights of the
mortgagee
against
the
mortgagor and may collect the
debt to the extent paid to the
mortgagee.
d. The mortgagee after payment
cannot collect anymore from
the mortgagor but if he is
unable to collect in full from
insurer, he can recover from
the mortgagor.
e. The mortgagor is not released
from the debt because the
insurer is subrogated in place
of the mortgagee.
3. BENEFICIARY the person
who receives the benefits of an
insurance
policy
upon
maturity.
Page 100

BENEFICIARIES IN LIFE
INSURANCE
Anyone, except who are
prohibited by law to receive
donations from the insured.
Note Art. 739 of the Civil
Code, hence the following
cannot be designated as
beneficiaries.
Those
made
between
persons guilty of adultery or
concubinage at the time of
the designation.
Those guilty of the same
criminal
offense
in
consideration thereof.
BAR EXAM (2008)
Q: On January 1, 2000, Antonio
Rivera secured a life insurance
from SOS Insurance Corp. for
P1 Million with Gemma Rivera,
his adopted daughter, as the
beneficiary. Antonio Rivera
died on March 4, 2005 and in
the police investigation, it was
ascertained that Gemma Rivera
participated as an accessory in
the killing of Antonio Rivera.
Can SOS Insurance Corp. avoid
liability by setting up as a
defense the participation of
Gemma Rivera in the killing of
Antonio Rivera? Discuss with
reasons.
A: Sec. 12: The interest of a
beneficiary in a life insurance
policy shall be forfeited when the
beneficiary is the principal,
accomplice, or accessory in
willfully bringing about the death
of the insured; in which event, the
BAR OPERATIONS 2011
nearest relative of the insured

shall receive the proceeds of said
insurance if not otherwise
disqualified. Thus, the insurance
company must still pay out the
proceeds of the life insurance
policy to the nearest qualified
relative of the insured.
Those made to a public officer or
his wife, descendants/ascendants
by reasons of his office.
- A prior conviction for
adultery/concubinage is
not required, it can be
proven by preponderance of
evidence in the same action
nullifying the designation.
Note the cases of Insular Life
vs. Ebrado, 80 SCRA 181,
where a common law wife of
the insured who is married
could not be named as a
beneficiary and SSS vs.
Davac, 17 SCRA 863, where
the insured designated his
second wife as a beneficiary
was upheld as the latter was
not aware of the first
marriage.
Beneficiary in life and property
insurance (BAR EXAMS; 2005)
Philippine
American
Life
Insurance Company v. Pineda
(175 SCRA 416)
SC:
Under
the
law,
the
beneficiary designated in a life
Page 101

insurance contract cannot be

changed without his or her
consent
because
of
the
beneficiarys vested interest in
the policy. In this regard, it is
worth
nothing
that
the
beneficiary
designation
indorsement which forms part of
the policy in the name of Rodolfo
Dimayuga
states
that
the
designation of the beneficiaries is
irrevocable and no right or
privilege under the policy may be
exercised, or agreement made
with the insurance company to
any change in or amendment to
the policy without the consent of
the said beneficiary. Accordingly,
based on the provisions of the
contract and the law applicable, it
is only with the consent of all the
beneficiaries that any change or
amendment
to
the
policy
concerning the irrevocability of
beneficiaries may be legally and
validly effected.
Insurable interest on property
(BAR EXAMS, 2009)
Spouses Nilo Cha v. CA Aug. 18,
1997
SC:
1. The lessor cannot validly be a
beneficiary
of
the
fire
insurance policy taken by the
spouses Cha. It has no
insurable interest on the
merchandize insured because
it remains with the spouses.
BAR OPERATIONS 2011
2. The automatic assignment of

the policy to the lessor is void
for being contrary to law and
public policy. The proceeds of
the fire insurance policy
rightfully belong to the Sps.
Cha.
3. The
insurer
cannot
be
compelled to pay the proceeds
of the policy to the lessor who
has no insurable interest on
the property insured.
CAN THE BENEFICIARY BE
CHANGED
- The insured shall have the
right
to
change
the
beneficiary he designated
unless he has expressly
waived the right in the
policy (Sec. 11);
- If he has waived the right,
the effect is to make the
designation as irrevocable.
Note that the designation of
the guilty spouse as
irrevocable beneficiary is
revocable as the instance of
the innocent spouse in cases
of termination of:
(1) a subsequent marriage;
(2) nullification
of
marriage;
(3) annulment of marriage;
and
(4) legal separation (Art. 34,
(4) Family Code
WHAT IS THE EXTENT OF THE
INTEREST OF THE
Page 102

IRREVOCABLE BENEFICIARY IN
A LIFE INSURANCE CONTRACT
The beneficiary has a vested
right that cannot be taken away
without his consent. In fact should
the insured discontinue payment
of the premium, the beneficiary
may continue paying. Neither can
the insured get a loan or obtain
the cash surrender value of the
policy without his consent (Nario
vs. Philamlife, 20 SCRA 434).
Note: Where the wife and minor
children were named irrevocable
beneficiaries, wife dies, the
husband seeks to change the
beneficiaries with the consent of
the children. The consent is not
valid due to minority. (Philamlife
vs. Pineda, 170 SCRA 416)
BAR EXAM; 2005 (NO. IX -1)
Q: What are the effects of an
irrevocable designation of a
beneficiary
under
the
Insurance Code? Explain.
A: The irrevocable beneficiary has
a vested interest in the policy,
including its incident such as the
policy loan and cash surrender
value. (Grogorio v. Sun Life
Assurance Company of Canada,
48 Phil. 53 [1925])
2005 BAR EXAM (NO. IX- 2)
Q: Jacob obtained a life
insurance policy for P1 Million
designating irrevocably Diwata,
a friend, as his beneficiary.
Jacob, however, changed his
BAR OPERATIONS 2011
mind and wants Yob and Jojo,

his other friends, to be included
as beneficiaries considering
that the proceeds of the policy
are sufficient for the three
friends.Can Jacob still add Yob
and Jojo as his beneficiaries?
Explain.
A: The insured cannot add other
beneficiaries as this would
diminish the interest of Diwata
who is the irrevocably designated
beneficiary. The insured can only
do so with the consent of Diwata.
WHAT IS THE INTEREST OF AN
IRREVOCABLE BENEFICIARY IN
AN ENDOWMENT POLICY
His interest is contingent as
benefits are to be paid only if the
assured dies before the specified
period. If the insured outlives the
period, the benefits are paid to
the insured.
FAILURE TO DESIGNATE OR
BENEFICIARY IS DISQUALIFIED
The benefits of the policy
shall accrue to the estate of the
insured.
WHO
RECOVERS
IF
BENEFICIARY
PREDECEASES
THE INSURED
If designation is irrevocable,
the legal representatives of
the beneficiary may recover
unless it was stipulated that
Page 103

the benefits are payable only

if living.
If revocable, and no change is
made, the benefits passes to
the estate of the insured. The
rule holds also if benefits were
payable only if living or if
surviving
and
the
beneficiary dies before the
insured.
CONCEALMENT
Neglect to communicate that
which a party knows and
ought to communicate (Sec.
26).
EFFECT OF CONCEALMENT
Whether intentional or not,
it entitles the injured party to
rescind the contract of insurance
(Sec. 27).
2001 BAR EXAM (N0.XVI)
Q: A applied for a non-medical
life insurance. The insured did
not inform the insurer that one
week prior to his application
for insurance, he was examined
and confined at St. Lukes
hospital
where
he
was
diagnosed for lung cancer. The
insured soon thereafter died in
a plane crash. Is the insurer
liable considering that the fact
concealed had no bearing with
the cause of death of the
insured? Why?
A: No. The concealed fact is
material to the approval and
BAR OPERATIONS 2011
issuance of the insurance policy.

It is well settled that the insured
need not die of the disease he
failed to disclose to the insurer. It
is sufficient that his nondisclosure misled the insurer in
forming his estimate of the risks
of the proposed insurance policy
or in making inquiries.
WHO MUST PROVE
KNOWLEDGE OF THE FACT
CONCEALED?
The party claiming existence
of concealment must prove that
there was knowledge on the part
of the party charged with
concealment.
AS OF WHAT TIME MUST THE
PARTY
CHARGED
WITH
CONCEALMENT
HAVE
KNOWLEDGE OF THE FACT
CONCEALED
- Generally, at the time of
the effectivity of the
policy. Note that even if a
party did not know of the
existence at the crime of
application but before its
effectivity,
there
is
concealment.
- Information
acquired
after effectivity is not
concealment and does not
constitute
ground
to
rescind the policy, as after
the
policy
is
issued,
information subsequently
acquired is no longer
material as it will not affect
Page 104

or influence the party to

enter
into
contract.
However, in case of the
reinstatement of a lapsed
policy, facts known after
effectivity
but
before
reinstatement must be
disclosed.
HOW IS THE MATERIALITY OF
THE
CONCEALMENT
OR
REPRESENTATION
DETERMINED?
Determined not by the
event, but solely by the probable
and reasonable influence of the
facts upon the party to whom the
communication is due, in forming
his estimate of the disadvantages
of the proposed contract or in
making his inquiries. (Sec. 31)
MUST THERE BE A CAUSAL
CONNECTION BETWEEN THE
FACT CONCERNED AND THE
CAUSE OF THE LOSS?
Not necessary. It is sufficient
that the non-revelation has
misled the insurer in forming
its estimate of disadvantage of
fixing the premium.
WHAT FACTS MUST BE
COMMUNICATED?
(a)
Such fact within his
knowledge
as
concealment
requires
knowledge of the fact
concealed by the party
charged with concealment.
(b)
Fact/s material to the
contract it must be of
BAR OPERATIONS 2011
such nature that had the

insurer known of it, it would
not have accepted the risk
or demanded a higher
premium.
(c)
That the other party
had
no
means
of
ascertaining such fact/s.
(d)
That the party with a
duty to communicate makes
no warranty (Sec. 28) as the
existence of a warranty make
the requirement to disclose
superfluous
but
an
intentional
fraudulent
omission on the part of the one
insured
to
communicate
information on a matter
proving or tending to prove
falsity of a warranty entitles
the insurer to rescind. (Sec. 29)
1996, 1997, and 2001 BAR
EXAMS
Sun Life Assurance Co. of
Canada vs. CA, June 22, 1995
Robert Bacani was issued life
insurance non-medical policy for
P100,000.00 with his mother as
beneficiary. In his application, he
concealed his confinement at the
Lung Center of the Philippines
for certain illness. He died of a
plane crash.
The insurance
company refused to pay for
breach
of
the
insurance
contract.RTC and CA granted the
claim of the beneficiary because
the concealed facts were not
Page 105

material or irrelevant to the

cause of death.
SC:
The SC reversed the ruling

and held that the information
which the insured failed to
disclose was material and
relevant to the approval and
issuance of the policy. The facts
concealed would have affected
the insurers action on the
application either by charging a
higher rate of premium or
rejecting the same. The insured
need not die of the disease he
concealed. It is sufficient that his
non-disclosure
misled
the
insurer in forming his estimate of
the risk involved or in making
inquiries. The contract of
insurance can be rescinded by
reason of concealment and this
has to be exercised within the
two year contestability period.
REPRESENTATION
Oral or written statement of a
fact or a condition affecting the
risk made by the insured to the
insurance company, tending to
induce the insurer to take the
risk. (Sec. 36)
WHEN MAY REPRESENTATION
BE MADE
Since it is an inducement to
entering a contract it must
ordinarily be made at the same
time as or before the insurance
of the policy (Sec. 37). Note that it
can also be made after the
BAR OPERATIONS 2011
issuance of the policy when the

purpose thereof is to induce the
insurer to modify an existing
insurance contract as the
provisions also apply to a
modification
(Same
with
concealment)
FORMS
AND
KINDS
REPRESENTATION
OF
It may be Oral or Written and

can either be:
(a) Affirmative
an
affirmation of a fact
existing
when
the
contract begins.
(b) Promissory statement
by the insured concerning
what is to happen during
the term of the insurance.
IS A REPRESENTATION PART
OF THE CONTRACT
No, it cannot qualify as an
express provision in a contract (it
is a collateral inducement to the
contract but it may qualify an
implied warranty. (Sec. 40)
CAN A REPRESENTATION BE
WITHDRAWN OR ALTERED
Yes, as long as the insurance
has not yet been effected and the
insurer has not yet been induced
to issue the policy. If withdrawn
or altered afterwards, the
contract can be rescinded as the
insurer has already been led to
issue the policy. (Sec. 41)
TO WHAT DATE DOES
REPRESENTATION REFER
Page 106

It must be presumed to refer to

the date on which the contract
goes into effect. (Sec. 42)
Note: There is no false
representation if it is true at the
time the contract takes effect
although false at the time it is
made.
WHEN
IS
THE
INSURED
REQUIRED
TO
DISCLOSE
INFORMATION FROM A 3RD
PERSON
When
the
information
material to the transaction was
acquired by an agent of the
insured, as knowledge of the
agent is also knowledge of the
principal.
MISREPRESENTATION ON A
MATERIAL POINT?
If it is false on material
point, whether affirmative or
promissory the injured party is
entitled to rescind the contract
from the time the representation
becomes false. However, the right
to rescind is considered waived
by the acceptance of premium
payments despite knowledge of
the ground to rescind. (Sec. 45)
WHEN IS THE RIGHT TO
RESCIND SUPPOSED TO BE
EXERCISED
It is exercised previous to
the commencement of an action
on the contract (Sec. 48). Note the
case of Tan Chay Hing vs. West
Coast Life Insurance Co., 51 Phil
80, where an insurer interposed
BAR OPERATIONS 2011
the defense in an action to claim

the proceeds that the contract is
null and void. Section 48 was held
to apply only when there is a
contract to rescind.
It is also qualified by 2nd
paragraph of Section 48 which
provides that after a policy of life
insurance payable on the death of
the insured shall have been in
force during the lifetime of the
insured for a period of 2 years
from the date of issue or its last
reinstatement, the insurer cannot
prove that the policy is void ab
initio or is subject to rescission by
reason
of
a
fraudulent
concealment
or
misrepresentation of the insured
or his agent (known as the
incontestability clause).
WHAT IS THE THEORY AND
OBJECT
BEHIND
THE
INCONTESTABILITY CLAUSE
(a) On the part of the
insurer an insurer
has/should
have
a
reasonable opportunity
to
investigate
the
statements which are
made by the applicant an
that after a definite
period, it should no
longer be permitted to
question its validity.
(b) On part of the insured
its object is to give the
greatest
possible
assurance
that
the
beneficiaries
would
receive payment of the
Page 107

proceeds
without
question as to validity or
the policy.
REQUISITES
OF
INCONTESTABILITY CLAUSE
(1) It is a life insurance
policy;
(2) It is payable on the death
of the insured;
(3) It has been in force
during the lifetime of the
insured for at least two
years from date of
issue/or
last
reinstatement.
WHAT DEFENSES ARE NOT
BARRED
BY
INCONTESTABILITY
EVEN
AFTER THE LAPSE OF 2 YEARS?
(1) non-payment
of
premiums;
(2) lack of insurable interest;
(3) that the cause of death
was excepted or not
covered by the terms of
the policy;
(4) that the fraud was of a
particular vicious type
such as:
a. policy was taken in
furtherance
of
a
scheme to murder the
insured;
b. where the insured
substituted another for
the
medical
examination;
BAR OPERATIONS 2011
c. where the beneficiary

feloniously killed the
insured;
(5) violation of a condition in
the policy relating to
military or naval service
in time of war;
(6) the necessary notice or
proof of death was not
given;
(7) action is not brought
within time specified in
the policy, which in no
case should be less than 1
year as per Sec. 63.
CONCEALMENT
AND
REPRESENTATION COMPARED
1. In concealment the
insured
withholds
information of material
facts,
while
in
representation
the
insured makes erroneous
statements;
2. In
concealment
and
misrepresentation both give
the insurer the right to
rescind the contract of
insurance;
3. The
materiality
of
concealment
and
representation
are
determined by the same
rules;
4. Whether the concealment
or
representation
is
intentional or not, the
injured party can rescind;
5. Since insurance contracts
are of utmost good faith
Page 108

the insurer is also covered

by the rules.
POLICY
It is the written instrument
in which a contract of
insurance is set forth. (Sec.
49)
WHAT MUST A POLICY
SPECIFY?
A policy must specify:
(1) The parties whom the
contract is made;
(2) The amount to be insured
except in open or running
policies;
(3) The premium, or if the
premium
is
to
be
determined
at
the
termination
of
the
contract, a statement of
the basis and rates upon
which the final premium
is to be determined;
(4) The property or life
insured;
(5) The interest of the
insured in the property
insured, if not the
absolute owner;
(6) The risks insured against;
(7) The period during which
the insurance is to
continue. (Sec. 51)
COVER NOTES
It is a written memorandum
of the most important terms
of a preliminary contract of
insurance intended to give
protection
pending
BAR OPERATIONS 2011
investigation by the insurer

of the risk or until the
insurance of the formal
policy (Sec. 52). It is also
known as binding slip or
receipt or binder.
EFFECTIVITY OF A COVER NOTE
The effectivity of a cover
note is 60 days as within such
period, a policy shall be issued
including in its terms the identical
assurance found under the cover
rate and the premium therefore.
It may however, be extended
beyond 60 days and with the
written approval of the Insurance
Commissioner if he determines
that it does not violate the
Insurance Code.
NOTE THE FOLLOWING RULES
HAVE BEEN PROMULGATED BY
THE
INSURANCE
COMMISSIONER:
(1) A cover note is valid for
60 days whether or not a
premium is paid but may
be cancelled by either
party upon at least 7-day
notice to the other party.
(2) If the other note is not
cancelled, a regular policy
must be issued within 60
days from the date of
issue of the cover note
including within its terms
the identical insurance.
(3) It may be extended with
the written approval of
the commissioner but
may be dispensed with by
Page 109

a certification of the
President, Vice-President
or General Manager of the
insurer that the risks
involved
and
the
extension do not violate
the code.
(4) Insurance companies may
impose
a
deposit
premium equivalent to at
least
25%
of
the
estimated premium but in
no
case
less
than
Php500.00.
IS PAYMENT OF A PREMIUM
PAYMENT FOR THE COVER
NOTE NECESSARY TO BE
PROTECTED AGAINST RISK
INSURED AGAINST?
Cover note held to be
binding despite the absence of a
premium
payment
for
its
issuance. No separate premiums
are intended or required to be
paid on a cover note because they
do not contain particulars of
the property insured that
would serve as the basis for the
computation of premiums
such being the case no premium
can be fixed. The cover notes
should not be treated as a
separate policy but should be
integrated in the regular policy
subsequently issued so that
premiums on the regular policy
should include that for the cover
note (Pacific Timber vs. CA, 112
SCRA 199);
BAR EXAM; 2009 (IV)
BAR OPERATIONS 2011
Q: Antarctica Life Assurance

Corporation (ALAC) publicly
offered a specially designed
insurance
policy
covering
persons between the ages of 50
to 75 who may be afflicted with
serious
and
debilitating
illnesses. Quirico applied for
insurance coverage, stating
that he was already 80 years
old.
Nonetheless,
ALAC
approved
his
application.Quirico
then
requested
ALAC
for
the
issuance of a cover note while
he was trying to raise funds to
pay the insurance premium.
ALAC granted the request. Ten
days after he received the cover
note, Quirico had a heart
seizure and had to be
hospitalized. He then filed a
claim on the policy.
a. Can ALAC validly
deny the claim on the
ground that the insurance
coverage,
as
publicly
offered, was available only
to persons 50 to 75 years
of age? Why or why not?
(2%)
b. Did ALACs issuance
of a cover note result in
the perfection of an
insurance
contract
between
Quirico
and
ALAC? Explain.
A: a. No. There was no
concealment on the part of
Quirico as to his age.
Page 110

b. Yes, one of the exception of the

cash and carry rule is in life
insurance when the grace period
applies. in the case at bar, the
issuance of the cover note shows
that the insurer granted a grace
period.
WHOSE INTEREST IS INSURED
(1) The insurance proceeds
shall be applied exclusively
to the proper interest of the
person in whose name or for
whose benefit it is made
unless otherwise specified
in the policy (Sec. 53).
MAY A 3RD PERSON SUE THE
INSURER No, in general rule
unless there is stipulation. Unless
otherwise specified in the policy,
a 3RD person may sue if:
(a)
The insurance
contract
contain
stipulation in favor of a 3RD
person, the latter though not
a party may sue to enforce
before the contract is
revoked by the parties;
(b)
The insurance
contract
provides
for
indemnity against liability
to 3RD persons.
The test to determine
whether a 3rd person may
directly sue the insurer of
the wrongdoer is: if the
contract provides indemnity
against liability to 3RD
persons, then the latter to
whom the insured is liable
may directly sue the insurer,
BAR OPERATIONS 2011
on the other hand, if the

insurance if for the indemnity
against actual loss or
payment then the 3rd person
cannot sue the insurer
recourse is against the
insured alone.
(2) If the contract is executed
with an agent or trustee as
the insured, the fact that his
principal or beneficiary is
the real party in interest
may be indicated by
describing the insured as
the agent/trustee or by
general words in the policy
(Sec. 54). If not indicated, it
is as if the insurance is the
taken
out
by
the
agent/trustee
alone,
consequently the principal
has no right against the
insurer;
(3) If a partner or part owner
effects insurance, it is
necessary that the terms of
the policy should be such as
are applicable to the joint or
common interest so that it
may be applicable to the
interest
of
his
copartners/owners (Sec. 55).
Consequently, the policy
must state that the interest
of all is insured, if not, it is
only the interest of the one
getting the policy that is
insured;
Page 111

(4) When the description of the

insured in the policy is so
general
that
it
may
comprehend any person or
any class of persons, only he
who can show that it was
intended to include him can
claim the benefit of the
policy (Sec. 56).
(5) When a policy is so framed
that it will inure to the
benefit of whomsoever,
during the continuance of
the risk may become the
owner of the interest insured
(Sec. 57). The proceeds
become payable to who may
be the owner at the time the
loss or injury occurs. This is
an exception to Sec. 20.
(6) The mere transfer of a thing
insured does not transfer the
policy but suspends it until
the same person becomes
the owner of both the policy
and the thing insured (Sec.
58). Note the exceptions to
this rule as found in Sec. 2024 and 57.
KINDS OF INSURANCE
POLICIES:
Open Policy - value of the
thing insured is not
agreed upon, but is left to
be ascertained in case of
loss (Sec. 60). What is
mentioned, as the amount
is not the value of the
BAR OPERATIONS 2011
property but merely the

maximum limit of the
insurers liability. In case
of loss, the insurer only
pays the actual cash value
at the time of loss.
Valued Policy - expresses
on its face that the thing
insured shall be valued at
a specified sum (Sec. 61).
The valuation of the
property
insured
is
conclusive between the
parties. In the absence of
fraud or mistake, such
value will be paid in case
of a total loss.
Running Policy (Floating
Policy)
-contemplates
successive insurances and
which provides that the
object of the policy may be
from time to time defined
especially as to the
subjects of insurance, by
additional statements or
indorsements (Sec. 62).
This is also known as a
Floating Policy usually
issued
to
provide
indemnity for property,
which cannot be covered
by specific insurance
because of a frequent
change in location and
quantity.
VALUED POLICY vs. OPEN
POLICY
Page 112

OPEN POLICY
Phil 696, ACCFA vs.

Insurance, 24 SCRA 151).
Proof of value
of the thing
after the loss
is
not
necessary.
Insured must
prove
the
value of the
thing insured.
WHERE IS THE ACTION FILED
Parties have
conclusively
stipulated that
the property
insured
is
valued at a
specified sum.
Value is not
agreed but left
to
be
ascertained
upon loss.
VALUED
POLICY
CAN THERE BE AGREEMENTS

AS TO PRESCRIPTION OF AN
ACTION OR LIMITATIONS ON
THE PERIOD OF TIME TO BRING
AN ACTION
Yes, provided the period
agreed upon should not be less
than one year (Section 63). If
less than one year, the agreement
is void. The period so agreed shall
be
considered
as
having
commenced from the time the
cause of action accrues. Usually,
the cause of action accrues from
the date of the insurers rejection
of the claim of the beneficiary or
of the insured since before
rejection there is no necessity to
bring suit. When no period is
stipulated or if the stipulation
is void, the period is within 10
years under article 1144, New
Civil Code, it being a written
contract (Eagle Star vs. Chia Yu 96
BAR OPERATIONS 2011
Alpha
The action may be filed in

the following:
(1) Courts;
(2) Insurance Commissioner,
who
has
concurrent
jurisdiction with courts
for claims not exceeding
Php100,000.00;
(3) POEA/DOLE have the
power to compel a surety
to make good on a
solidary undertaking in
the same proceeding
where the liability of the
principal
obligor
is
determined.
Note that the claim becomes
action upon filing with the court.
CANCELLATION OF THE POLICY
If policy other than life shall be
cancelled by the insurer except
upon prior notice thereof to the
insured. No notice of
cancellation shall be effective if
not based on the occurrence,
after effective date of one or
more grounds: (Section 64)
(1) Non
payment
of
premium;
(2) Conviction of a crime
arising out of acts
increasing the hazard
insured against
(3) Discovery of material
representation;
Page 113

(4) Discovery of willful or

reckless acts or omissions
increasing the hazard
insured against;
(5) Physical changes in the
property insured which
the result in the property
being uninsurable;
(6) Determination by the
insurance commissioner
that continuation of the
policy would place the
insurer in violation of the
code:
FORM OF NOTICE OF
CANCELLATION
It must be in writing, mailed
or delivered to the name insured
at the address shown in the policy
which shall state:
(1) The grounds relied upon
as per Section 64, and;
(2) That
upon
written
request of the named
insured, the insurer will
furnish the facts on which
cancellation is based (Sec.
65).
WARRANTIES
It is a statement or promise
stated in the policy or
incorporated
therein
by
reference, whereby the insured
expressly or impliedly
(Section 67) contracts as to the
past, present or future (Section
68) existence of certain facts,
conditions or circumstances
BAR OPERATIONS 2011
the literal truth of which is

essential to the validity of the
contract.
KINDS OF WARRANTIES
(1) Affirmative those that
relate to matters that
exist at or before the
issuance of the policy;
(2) Promissory those
where
the
insured
promises or undertakes
that certain matters shall
exist or will be done or
will be omitted after the
policy takes effect. It is a
statement in the policy,
which imparts that it is
intended to do or not to
do
a
thing
which
materially affects the risk,
is a warranty that such
act or omission shall take
place (Section 72);
(3)
Express a statement in
a policy of a matter
relating to the person or
thing insured or to the
risk as a fact (Section 71)
and where the assertion
or promise is clearly set
forth in the policy or
incorporated therein by
reference. They can be
affirmative or promissory
warranties;
An express warranty
made at or before the
Page 114

execution of the policy

should be contained (a)
in the policy itself (b) in
another
instrument
signed by the insured and
referred to in the policy as
making a part of it
(Section
70).
This
includes a rider it is a
part of the policy, it need
not be signed unless the
rider was issued after the
original policy took effect;
(4) Implied where the
assertion or promise is
not expressly set forth in
the policy but because of
the general tenor of the
terms of the policy or
from the very nature of
the insurance contract, a
warranty is necessarily
inferred or understood.
Note that the law only
provides for implied
warranties in contracts of
marine insurance. See Sec.
113 (seaworthiness) and
126 (deviation).
EFFECT OF VIOLATION OF A
WARRANTY
The violation of a material
warranty, or other material
provision of the policy, on the
part of either party thereto,
entitles the other to rescind
(Sec. 74).
Note that the
insured can exercise the right
also when the insurer violates
a warranty, like when it
BAR OPERATIONS 2011
refuses to grant a loan on the

policy.
Note
that
a
causal
connection between the
violation of the warranty is
not necessary So, even if the
violation did act contribute in
the loss the other party may
still rescind.
THE NON PERFORMANCE OF A
PROMISSORY WARRANTY DOES
NOT AVOID THE POLICY WHEN
BEFORE THE ARRIVAL OF THE
TIME FOR PERFORMANCE (Sec.
73)
(1) The loss insured against
happens;
(2) The
performance
becomes unlawful at the
place of the contract;
(3) The
performance
becomes impossible.
WARRANTY VS.
REPRESENTATIONS
WARRANTY REPRESENTATIO
N
Part of the Merely a collateral
contract
inducement
thereto
Expressly
set forth in
the policy or
incorporate
d therein by
reference
Strictly and
literally
performed
May be oral or
written in another
statement
Must be
substantially true
Page 115

Presumed
material
Must be shown to
be so
Breach
of
warranty is
a breach of
the contract
itself
Misrepresentation
is a ground to
rescind the
contract
PREMIUM
The agreed price for
assuming and carrying the
risk.
WHEN
IS
THE
INSURER
ENTITLED TO A PREMIUM?
The insurer is entitled to the
payment of a premium as soon as
the thing insured is exposed to
the peril insured against.
Notwithstanding any agreement
to the contrary, no policy or
contract of insurance issued by an
insurance company is valid and
binding unless and until the
premium is paid except in:
(1) In case of life or industrial
life (life insurance policy
where the premium is
payable
monthly
or
oftener) whenever the
grace period applies (Sec.
77);
(2) When the insurer makes
a
written
acknowledgement of the
receipt of premium, such
is conclusive evidence of
the payment of the
premium to make it
binding notwithstanding
any stipulation therein
BAR OPERATIONS 2011
that it shall not be

binding
until
the
premium is paid (Sec. 78)
HENCE, the effect of an
acknowledgement in a
policy or contract of
insurance of the receipt
of the premium is that it
is conclusive evidence of
payment so far as to
make the policy binding.
However, it is conclusive
only to make the policy
binding and not for the
purpose of collecting
premium, and;
(3) Where the obligee has
accepted the bond or
suretyship contract in
which case such bond or
suretyship
contract
becomes
valid
and
enforceable irrespective
of whether or not the
premium has been paid
by the obligor to the
surety (Sec. 177).
EXCEPTIONS TO SECTION
77:
UCPB General Insurance Inc. vs
.Masagana Telemart, Inc. (G.R.
No. 137172 April 4, 2001)
1. When the grace periods
applies; (Sec. 77)
2. When the insurer makes a
written acknowledgment of
the receipt premium; (Sec. 78)
3. Section 77 may not apply if the
parties have agreed to the
Page 116

payment of the premium in

installments
and
partial
payment has been made at the
time of the loss; (Makati
Tuscany Condominium Corp. v.
CA, 215 SCRA 462)
4. If the insurer granted the
insured a credit term for the
payment of the premium and
loss
occurs
before
the
expiration of the term,
recovery should be allowed
even the premium is paid after
the loss but within the credit
term;
5. Where the parties are barred
by estoppel.
PARTIAL PAYMENT?
Ordinarily, the obligation to
pay premium when due is
considered
an
indivisible
obligation. Hence, forfeiture is
not prevented by a part payment
unless, payment by installment
has been agreed upon or is the
established practice the basic
principles of equity and
fairness would not allow the
insurer to collect and accept
installments and later deny
liability as premiums were not
paid in full.
PAYMENT TO INSURANCE
AGENT OR BROKER --payment
to the insurance company.
WHEN IS THE INSURED
ENTITLED TO A RETURN OF
BAR OPERATIONS 2011
THE PREMIUMS PAID? 2000

BAR EXAM (IX a)
The insured is entitled to a
return when:
(1) To the whole premium,
when no part of the
interest in the thing
insured is exposed to any
of the perils insured
against (Sec. 79 A);
(2) Where the insurance is
made for a definite period
of time and the insured
surrenders his policy
before the expiration of
the period, here the
insured only recovers a
portion of the policy
premiums corresponding
with the unexpired time
but it does not apply if:
(a) the policy is not so
definite;
(b) a short period rate
(insurance is for a
period of less than a
year and a rate has
been agreed to if the
policy
is
surrendered;
Example: If the
policy is in force for
a month the insurer
retains 20% of the
premium) has been
agreed upon;
(c) the policy is a life
insurance policy it
is indivisible but he
has a cash surrender
value;
Page 117

(3) When the contract is

voidable on account of
fraud
or
misrepresentation of the
insurer or the agent (Sec.
81);
(4) Where the contract is
voidable on account of
facts, the existence of
which the insured was
ignorant without his fault
(Sec. 81);
(5) When by any default of
the insured other than
actual fraud, the insurer
never
incurred
any
liability under the policy
(Sec. 81);
(6) In case of over insurance.
Here the insurance is in
excess of the amount of
the insurable interest of
the insured and it is
insured
by
several
insurers, the insured is
entitled to a RATABLE
RETURN OF PREMIUM,
proportional
to
the
amount by which the
aggregate sum insured in
all the policies exceeds
the insurable value;
WHEN ARE THEY NOT
RECOVERABLE
Premiums cannot be
recovered:
(1) If the peril insured
against has existed, and
the insurer has been
liable for any period, the
BAR OPERATIONS 2011
period being entire and

indivisible (Sec. 80).
(2) In life insurance (Sec.
79-b) cash surrender
value.
(3) When the insured is
guilty
of
fraud
or
misrepresentation (Sec.
81).
LOSS AND NOTICE OF
LOSS
WHAT ARE THE RULES TO
DETERMINE WHETHER THE
INSURER IS LIABLE FOR THE
LOSS OF THE THING INSURED?
1. Loss of which a peril insured
is the proximate cause.
2. Loss caused by efforts to
rescue the thing insured
from a peril insured against
that would otherwise have
caused a loss, if in the course
if such rescue, the thing is
exposed to peril not insured
against, which permanently
deprives the insured of its
possession in whole or in
part, or where a loss is
caused by efforts to rescue
the thing insured from a
peril insured against (Sec.
85). Here the principle of
proximate cause is extended
to loss incurred while saving
the thing insured.
Page 118

3. Where a peril is especially

excepted in a contract of
insurance a loss, which
would not have occurred but
for such peril, is thereby
excepted
although
the
immediate cause of the loss
was a peril which was not
excepted (Sec. 86). The
immediate cause is the
CAUSE
OR
CONDITION
NEAREST THE TIME AND
PLACE OF THE INJURY.
Here, the insurer will be
liable if both the immediate
cause and the proximate
cause are not excepted. If the
proximate cause is excepted
and the immediate cause is
not, the insurer is not liable.
4. An insurer is not liable for
loss caused by the willful act
or through the convenience
of the insured; but he is not
exonerated
by
the
negligence of the insured, or
of the insureds agent or
others (Sec. 87).
2007 BAR EXAM (IV)
Q: Alfredo took out a policy to
insure
his commercial
building against
fire.
The
broker for the insurance
company agreed to give a 15day credit within which to pay
the insurance premium. Upon
delivery of the policy on May
15, 2006, Alfredo issued a
postdated check payable on
BAR OPERATIONS 2011
May 30, 2006. On May 28, 2006,

a fire broke out and destroyed
the
building
owned
by
Alfredo.Reason briefly in (a),
(b)
and
(c).
a. May Alfredo recover on the
insurance
policy?
A: Yes, Alfredo can recover on the
insurance
policy.
Although
Section 77 of the Insurance Code
provides that in fire insurance,
payment of premium is necessary
for validity of the policy (also
known as cash and carry
provision), nonetheless, the rule
has been modified by the
decisions of the Supreme Court
after the promulgation of the
Insurance Code. Thus, in UCPB
General Insurance v. Masagana
Telemart, G.R. No. 137172, April
4, 2001, it was held that the
insured should be allowed to
recover on losses sustained even
when premium was paid after the
fact of loss, provided payment
was received by the insurer
during the credit period given to
the insured. (See also South Sea
Surety v. Court of Appeals, G.R.
No. 102253, June 2, 1995;
American Home Assurance v.
Chua, G.R. No. 130421, June 28,
1999) where the Supreme Court
ruled that is the check payment
for premium was received by the
insurer prior to the loss or within
the credit period, the insured was
allowed
to
recover.
b. Would your answer in (a) be
Page 119

the same if it was found that the

proximate cause of the fire was
an explosion and that fire was
but the immediate cause of loss
and there is no excepted peril
under
the
policy?
Yes,
recovering
under
an insurance contract is allowed if
the cause of the loss was either
the proximate or the immediate
cause as long as an expected peril
was not the proximate cause of
the loss. (Section 86, Insurance
Code of the Philippines.) The fire
being the immediate cause for the
loss of the commercial building,
would warrant recovery under
the
policy.
c. If the fire was found to have
been caused by Alfredo's own
negligence, can he still recover
on
the
policy?
Yes, he can still recover. The
doctrine
of
contributory
negligence does not in any way
apply to rights under a contract of
insurance, unless it is a case of
willful act. (Section 87, Insurance
Code of the Philippines)
RECOGNIZING THAT THERE
ARE
PROBLEMS
IN
DETERMINING
PROXIMATE
CAUSE NOTE THE FOLLOWING
RULES:
(a)
If there is a single cause
which is an insured peril,
clearly it is the proximate
cause and there is liability;
BAR OPERATIONS 2011
(b)
If there are concurrent
causes (those happening
together) with no excluded
perils, there if liability if one
of the causes is an insured
peril, the others may be
ignored;
(c)
If there are concurrent
causes with an excepted
peril (insured peril operate
together to produce the
loss) the claim will be
outside the scope of the
policy;
(d)
But if the results of the
operation of the insured
peril
can
be
clearly
separated from the effects of
the excepted peril, the
insurer is liable;
(e)
Where a number of
causes operate one from the
other, the original cause
happens to be a peril, the
insurer is liable.
TRANSFER OF CLAIMS
An agreement not to
transfer the claim of the insured
after the loss happens is VOID if
MADE BEFORE THE LOSS except
as otherwise provided in case of
life insurance (Sec. 33).
This means that the insured
has an absolute right to transfer
his claim against the insurer
AFTER THE LOSS occurs, what is
prohibited is a transfer prior to
the loss.
This is so because such
stipulation after the loss occurs
Page 120

shall hinder the transmission of

property. Neither does it affect
the insurer as its liability is
already fixed and what is actually
assigned is the money claim, not
the contract itself.
The exception in Sec. 173
that provides that the transfer of
a fire insurance policy to any
person or company who acts as
an agent for or otherwise
represents the issuing company is
prohibited and is void insofar as it
affects other creditors of the
insured.
NOTICE AND PROOF OF LOSS
Notice of loss must be given
without unnecessary delay by the
insured or some person entitled
to the benefit of the insurance. IF
NOT THEN, the insurer is
exonerated (Sec. 88).
WITHOUT UNNECESSARY
DELAY is within a reasonable
time, depending on circumstances
of a peculiar case, although courts
have construed the requirement
liberally in favor of the insured.
PROOF OF LOSS
If the policy requires
Preliminary Proof of Loss
(evidence given the insurer of the
occurrence of the loss, its
particulars, and data necessary to
enable it to determine liability
and the amount thereof) IT IS
NOT NECESSARY that the insured
give such proof AS MAY OR
WOULD BE NECESSARY IN A
COURT OF JUSTICE WHAT IS
BAR OPERATIONS 2011
SUFFICIENT
is
the
BEST
EVIDENCE which he has in his
power at that time (Sec. 89).
WHEN ARE DEFECTS IN THE
NOTICE OR PROOF LOSS
DEEMED WAIVED BY THE
INSURER
When the insurer fails to
specify to the insured any
defect which the insured
can remedy without delay.
When the insurer denies
liability on a ground other
than that defect in the notice
or proof of loss.
WHEN IS DELAY IN THE GIVING
OF NOTICE WAIVED
1. If it is caused by any act of
the insurer.
2. If the insurer omits to make
an objection promptly and
specifically on that ground.
despite delay, the insurer
does not object (Sec. 91).
WHAT
HAPPENS
AFTER
PAYMENT BY THE INSURER
SUBSEQUENT TO GIVING OF
NOTICE OF LOSS
In property insurance, after
the insured has received payment
from the insurer of the loss
covered by the policy, the
insurance
company
is
SUBROGATED to the rights of the
insured against the wrongdoer or
the person who has violated the
contract. The right of subrogation
Page 121

accrues upon payment of the

insurance claim.
NOTE: Subrogation takes effect
by operation of law and does not
require the consent of the wrong
doer (Firemans Fire Insurance vs.
Jamilla & Company, 70 SCRA 323).
THERE IS NO SUBROGATION IN:
(a)
Life insurance as it is
not a contract of indemnity
(b)
When proximate cause
of the loss is the insured
himself
(c)When the insurer pays to
the insured a loss not
covered by the policy;
DOUBLE INSURANCE
Where the same person is
insured by several insurers
separately in respect to the same
subject or interest (Sec. 91).
2005 BAR EXAM (N0. X 2 -b)
Q: What is the nature of the
liability of the several insurers
in double insurance? Explain.
A: In double insurance, the
insurers considered as coinsurers. Each one is bound to
contribute ratably to the loss in
proportion to the amount for
which he is liable under his
contract.
(Section
94(e),
Insurance Code.
REQUISITES
OF
DOUBLE
INSURANCE:
1. Same
person
is
insured;
2. There
are
several
insurers;
3. Subject insured is the
same;
4. Interest insured is the
same;
5. Risk of peril insured
against is the same;
There is prohibition TO
PREVENT
OVERINSURANCE,
thus
preventing fraud.
2008 BAR EXAM:
Q: Terrazas de Patio Verde, a
condominium building, has a
value of P50 Million. The owner
insured the building against
fire with three (3) insurance
companies for the following
amounts: Northern Insurance
Corp. 20M,Sounthern Insurance
Corp.30M, Eastern Insurance
Corp.50M.
a. Is the owner's taking of
insurance for the building
with three (3) insurers
valid? Discuss.
b. The building was totally
razed by fire. If the owner
decides to claim from
Eastern Insurance Corp.
only P50 Million, will the
claim prosper? Explain.
A: (a). Taking out insurance
covering the same property, same
insurable interest and same risk
BAR OPERATIONS 2011
Page 122

with three insurance companies is

double insurance recognized
under sec 93 of ICP. However, in
American Home Assurance Corp
vs. Chua June 28, 1999, the court
referred to the common inclusion
of the other insurance clause in
the fire insurance policies
requiring disclosure of coinsurance of the same property
with other insurers.
(b) Insured can recover from
Eastern Inssurance Corp up to the
extent of his loss. However,
Eastern may refuse to pay if the
policy contains an other
insurance clause stipulating that
non-disclosure
of
double
insurance will avoid the policy.
(Geagonia v. Country Bankers
Insurance, 2/6/95). As there is
no indication of a contractual
prohibition on double or other
insurance, all insurance contracts
over the building are deemed
valid and enforceable.
The law prohibits double or
over-recovery,
not
double
insurance. Since eastern insured
the property up 50% the total
coverage, it is liable for only 50%
of the total actual loss. Eastern
Insurance Corp, is liable to the
extent of its coverage but may
recover one half of the total
indemnity from the co-insurers in
the proportion of 60% (Southern
Insurance)- 40 % ( Northern
Insurance)
BAR OPERATIONS 2011
EFFECTS OF OVER-INSURANCE
BY DOUBLE INSURANCE
1. Insured, unless the policy
otherwise provide, may
claim payment from the
insurers in such order as he
may select up to the amount
for which the insurers are
severally liable under their
respective contracts.
2. Where the policy under
which the insured claims is a
valued policy, the insured
must give credit as against
the valuation for any sum
received by him under any
policy without regard to the
actual value of the subject
matter insured.
3. Where the policy under
which the insured claims is
an unvalued policy, he must
give credit, as against the
full insurable value, for any
sum received by him under
the policy.
4. Where the insured receives
any sum in excess of the
valuation in case of a valued
policy or the insurable value
in case of an unvalued
policy, he must hold such
sum in trust for the insurers,
according to their right of
contribution among them;
5. In relation paragraph (4)
Each insurer is bound, as
between himself and the
other insurers to contribute
ratably to the loss in
proportion to the amount
for which it is liable under
Page 123

his
contract.
ALSO
REFERRED TO AS THE
PRINCIPLE
OF
CONTRIBUTION WHICH
HAS
ALREADY
BEEN
INCOPORATED IN ALMOST
ALL POLICIES that should
there be other insurances
covering the same property,
the liability of the company
would be limited to its
ratable proportion of the
loss or damage (Also known
as
CONTRIBUTION
CLAUSE).
TEST TO DETERMINE
EXISTENCE OF DOUBLE
INSURANCE
Whether the insured, in case of
happening of the risk, can directly
benefited by recovering on both
policies? If yes there is double
insurance.
IS DOUBLE INSURANCE VALID?
- It depends, if there is
prohibition in the policy then
it is not valid, but if there is no
prohibition, it is valid
provided it must follow the
provisions of the law.
DOUBLE
OVER
INSURANCE
INSURANCE
There must be One insurer is
two or more sufficient.
insurers.
The
total The value must
amount of the always be in
policies need excess of the
not exceed the insurable
BAR OPERATIONS 2011
value of
insurable
interest.
the interest;
REINSURANCE
Occurs when an insurer
procures a 3RD person to insure
him against loss or liability by
reason of such original insurance
(Sec. 95).
WHEN IS REINSURANCE
COMPULSORY?
1. When a non-life insurer
insured in any one risk or
hazard an amount exceeding
20% of its net worth, the
insurer needs reinsurance of
the excess over such limit
(Sec. 215 (1)).
2. When a foreign insurance
company withdraws from
the Philippines, it should
cause its primary liabilities
under policies insuring
residents of the Philippines
to be reinsured by another
company authorized to
transact
an
insurance
business in the Philippines.
DOUBLE INSURANCE VS.
REINSURANCE
DOUBLE
REINSURANC
INSURANCE
E
Insurer remains Insurer
an insurer
becomes the
insured
Subject matter is Subject matter
property
is the insurers
risk or liability
Same
interest Different
Page 124

and
risk
is interest
insured
with risk
another
insured
and
are
WHAT KIND OF CONTRACT IS

REINSURANCE?
It is presumed to be a
contract
of
indemnity
against
liability,
and
merely against damage
(Sec. 97).
As a RULE, the reinsurer is
not liable to the reinsured
for a loss under an original
policy if the reinsured is not
liable to the original
policyholder.
EXTENT OF LIABILITY OF THE
REINSURER?
The liability of the reinsurer is
measured by the liability of the
reinsured to the original policy
holder PROVIDED, it does not
exceed
the
amount
of
reinsurance.
CLASSES OF INSURANCE
MARINE INSURANCE
Insurance against loss or damage
to:
(a)
Vessels,
craft,
aircraft,
vehicles,
goods
freight, cargoes, merchandise
effects,
disbursements,
profits, moneys, securities,
loses in action, evidences of
debt,
valuable
papers,
BAR OPERATIONS 2011
bottomry or respondentia
interest and all other kind of
property
and
interests
therein, in respect to,
appertaining to or in
connection with any and all
risks or perils of navigation,
transit or transportation or
while
being
assembled,
packed,
crated,
baled,
compressed, or similarly
prepared for shipment or
while awaiting shipment or
during any delays, storage,
transshipment or reshipment
incident thereto;
(b) Person or property in
connection
with
or
appertaining
to
marine,
island marine, transit or
transportation
insurance,
including liability for loss or
in connection with the
construction,
repair,
operation, maintenance, use
of the subject matter of the
insurance. (But not including
life insurance, or surety bonds
nor insurance against loss by
reason of bodily injury to any
person arising out of the
ownership, maintenance, use
of automobiles);
(c)
Precious
stones,
jewels, jewelry, precious
metals whether in the course
of
transportation
or
otherwise;
Page 125

(d)
Bridges, tunnels or
other instrumentalities of
transportation
and
communications (excluding
buildings, their furniture and
furnishings, fixed contents,
and supplies held in storage),
piers, wharves, docks, slips,
and other aids to navigation
and transportation including
dry docks, marine railways,
dams
and
appurtenant
facilities for the control of
waterways.
AND Marine Protection
and Indemnity Insurance
meaning insurance against,
or against legal liability of
the insured for loss, damage
or expense incident to
ownership,
operation,
chartering,
maintenance,
use, repair, or construction
of any vessel, craft or
instrumentality in use in
ocean or island waterways,
including liability of the
insured for personal injury,
illness or death or for loss
or damage to the property
of another person (Sec. 99).
WHAT RISKS ARE INSURED
AGAINST?
- The basic risk insured
against is commonly
known as PERILS OF THE
SEA.
WHAT ARE NOT COVERED?
BAR OPERATIONS 2011
(a) natural and inevitable

action of the sea;
(b) ordinary wear and tear
of the ship;
(c) negligent failure of the
ship owner to provide
the vessel with the
proper equipment to
convey the cargo under
ordinary conditions.
2008 BAR EXAM (IX b)
Q: On October 30, 2007, M/V
Pacific, a Philippine registered
vessel owned by Cebu Shipping
Company (CSC), sank on her
voyage from Hong Kong to
Manila.
Empire
Assurance
Company (Empire) is the
insurer of the lost cargoes
loaded on board the vessel
which were consigned to
Debenhams Company. After it
indemnified
Debenhams,
Empire as subrogee filed an
action for damages against CSC.
b) Assume that the vessel was
not seaworthy as in fact its hull
had leaked, causing flooding in
the vessel. Will your answer be
the same? Explain.
A: When the vessel is not
seaworthy, it is an exception to
the hypothecary principle in
maritime commerce. To limit its
liability to the amount of the
insurance proceeds, the carrier
has the burden of proving that the
unseaworthiness of its vessel was
not due to its fault or negligence.
Page 126

The failure to discharge such a

heavy
burden
precludes
application of the limited liability
rule and the carrier is liable to the
full extent of the claims of the
cargo owners (Aboitiz Shipping
v.
New
India
Assurance
Company, G.R. No. 156978, 02
May 2006).
2008 EXAM (IX c)
Q:c)
Assume the facts in
question (b). Can the heirs of
the three (3) crew members
who perished recover from
CSC? Explain fully.
A: Yes, because the crew
members died while performing
their assigned duties, aggravated
by the failure of the ship owner to
ensure that the vessel is
seaworthy.
Workmens
compensation has been classified
by jurisprudence as an exception
to the hypothecary nature of
maritime commerce, [Abueg
v.San Diego, 77 Phil. 730
(1948)], especially in this case
where the vessel was not
seaworthy at the time it sank.
WHAT PERILS ARE INSURED IN
AN ALL RISK POLICY
It is to be construed as
creating a special insurance and
extending to all risk than are
usually contemplated and will
cover all losses except such that
may arise from intentional fraud,
intentional misconduct, or that
BAR OPERATIONS 2011
otherwise excluded. It may

include all losses whether arising
from a marine peril or not to
include pilferage during a war
(Filipino Merchant Insurance Co.
vs. CA, 179 SCRA 638).
NOTE: Inchamaree Clause one
that covers any loss other than a
willful and fraudulent act of the
insured and avoids putting upon
the insured the burden of
establishing that a loss was due to
a peril within the policys
coverage, whether arising from a
marine peril or not provided the
risk is not excluded;
WHAT CONSTITUTES
INSURABLE INTEREST IN
OCEAN MARINE INSURANCE?
1. The owner of a vessel has
insurable interest in the
vessel such shall continue
even if the vessel has been
chartered by one who
covenants to pay the owner
the value of the vessel upon
loss but in case of loss, the
owner is liable only for the
part of the loss which the
insured cannot recover from
the charterer. (Sec. 100)
2. The insurable interest of the
owner
of
a
ship
hypothecated by bottomry is
only the excess of its value
over the amount secured by
bottomry. (Sec. 101)
3. The owner of a vessel also
has insurable interest in
Page 127

expected freightage, which

according to the ordinary
course of things he would
have earned but for the
intervention of a peril
insured against or other
peril incident to the voyage.
(Sec. 102)
ARE THERE PERSONS/PARTIES
OTHER THAN THE OWNER
WHO HAS INSURABLE
INTEREST? YES;
1. One who has an interest in
the thing from which profits
are expected to proceed, has
insurable interest on the
profits (Sec. 105).
2. The charterer of a ship has
insurable interest to the
extent that he is liable to be
damnified by its loss (Sec.
106).
CONCEALMENT IN MARINE
INSURANCE
- A party is bound to
communicate, in addition to
what is required by section
28
(facts
within
his
knowledge, material to the
contract, other party has not
the means of ascertaining, as
to which party with a duty to
communicate makes no
warranty) information that
he possesses, that are
material to the risk AND, to
state the EXACT and WHOLE
TRUTH in relation to all
matters that he represents,
BAR OPERATIONS 2011
or upon inquiry discloses or

assumes to disclose EXCEPT
those that the insurer knows
or those in the exercise of
ordinary care, the other
ought to know, and which
the former has no reason to
suppose him to be ignorant
under Section 30 (Section
107);
NOTE: That the rules on
concealment
in
marine
insurance are stricter as it is
sufficient that the insured is in
POSSESSION OF THE MATERIAL
FACT,
ALTHOUGH
HE
IS
UNAWARE OF IT.
A party is also bound to
communicate, the information
belief or expectation of a 3rd
person, in reference to a
material fact, is material. Note:
under section 35 such is not
required to be communicated in
ordinary insurance (Sec. 108).
PRESUMPTION OF A PRIOR
LOSS
Insured in marine insurance is
presumed to have knowledge, at
the time of insuring, or prior, if
information
might
possibly
reached him in the usual mode of
transportation and the usual rate
of communication (Sec. 109).
EFFECT OF CONCEALMENT
It exonerates the insurer from a
loss resulting from the risks
concealed as related to:
Page 128

(a) the national character

of the insured;
(b) the liability of the thing
insured to capture and
detention;
(c) the liability to seizure
from breach of laws of
foreign laws of trade;
(d) the want of necessary
documents ;
(e) the
use
of
false/simulated
documents
ORDINARY CONCEALMENT vs.
MARINE INSURANCE
ORDINARY
INSURANCE
MARINE
INSURANCE
Opinion
or
belief of a 3RD
person or own
judgment
of
the insured is
not
material
and need not
be
communicated
(Sec. 35)
A
causal
connection
between
the
fact concealed
and cause of
loss is not
necessary for
the insurer to
rescind;
Belief
or
expectation of
3RD person in
reference to a
material fact is
material
and
has
to
be
communicated;
The
concealment of
any
of
the
matters stated
in section 110
merely
exonerates the
insurer
from
loss, if the
results
from
the
fact
concealed;
BAR OPERATIONS 2011
REPRESENTATION IN MARINE
INSURANCE:
If the representation is
intentionally false in any
material respect, or, in
respect of any fact on
which the character and
nature of the risk depends,
the insurer may rescind
(Section 111). But the
eventual falsity of a
representation as to an
expectation does not in the
absence of fraud avoid the
contract (Sec. 112).
WHAT ARE THE IMPLIED
WARRANTIES IN MARINE
INSURANCE? 2000 BAR EXAM
(IX b)
1. In every contract of
marine insurance upon a
ship or freight, freightage or
upon anything which is the
subject
of
marine
insurance, there is an
implied warranty that the
ship is sea worthy (Sec. 113).
A ship is sea worthy when
it is reasonably fit to
perform the service and
encounter the ordinary
perils of the voyage,
contemplated by the
parties (Sec. 114). Note
that it is relative and is
made to depend on the
circumstances.
Page 129

The implied warranty of

seaworthiness complied
with as a general rule
when it is seaworthy at
the
time
of
the
commencement of the
risk except:
(a) when the insurance
is made for a
specified length of
time, it must be
seaworthy at the
commencement of
every voyage it
undertakes at that
time.
(b) when the insurance
is upon cargo, which
by the terms of the
policy description of
the
voyage,
or
established custom
of trade, it is
required
to
be
transshipped at an
immediate port in
which case each
vessel upon which
the cargo is shipped
or
transshipped
must be seaworthy
at
the
commencement of
each
particular
voyage (Sec. 115).
(c) where
different
portions
of
the
voyage
contemplated in the
policy
differ
in
respect to the things
requisite to make
BAR OPERATIONS 2011
the ship seaworthy, I

which case it must
be seaworthy at the
commencement of
each portion (Sec.
117).
WARRANTY OF
SEAWORTHINESS EXTENDS TO:
The
warranty
of
seaworthiness extends not only to
the condition of the structure of
the ship, but it requires that:
(a) it be properly laden or
loaded with cargo;
(b) is provided with a
competent
master,
sufficient number of
officers and seamen;
(c) it must have the
requisite
equipment
and appurtenances like
ballast, cables, anchors,
cordage, sails, food,
water, fuel, lights and
other necessary and
proper stores and
implements for the
voyage (Sec. 116).
Note that when a ship
becomes
unseaworthy
during the voyage it will
not avoid the policy as
long as there is no
unreasonable delay in
repairing
the
defect.
Otherwise the insurer
is exonerated on the
ship or the ship owners
interest
from
any
Page 130

liability from any loss

arising therefrom (Sec.
118). Hence, if loss is not
one due to the defect or
peril was not increased
by the defect insurer is
liable.
Also, while a ship may
be
seaworthy
for
purposes of insurance
on it, it may by reason of
being unfitted to receive
cargo, be unseaworthy
for the purpose of
insurance on the cargo
(Sec. 119).
2. It shall carry the requisite
documents to show its
nationality or neutrality
and that it shall not carry
any document that will
cast reasonable suspicion
on the vessel (Sec. 120).
This warranty arises only
when nationality or the
neutrality of the vessel or
cargo
is
expressly
warranted.
3. That the vessel shall not
make
any
improper
deviation
from
the
intended voyage.
DEVIATION:
It is a departure from the course
of the voyage as defined by
Section 121 and 122 or an
unreasonable delay in pursuing
the voyage or the commencement
BAR OPERATIONS 2011
of an entirely different voyage.

(Sec. 123)
WHEN IS DEVIATION PROPER
(2005 BAR)
A vessel can properly proceed to a
port other than its port of
destination in the following cases:
1. When
caused
by
circumstances over which
neither the master or the
owner of the ship has any
control;
2. When necessary to
comply with a warranty, or
to avoid a peril, whether or
not the peril is insured
against;
3. When made in good
faith, and upon reasonable
grounds of belief In the
necessity to avoid peril;
4. When made in good
faith for the purpose of
saving human life or
relieving another vessel in
distress. (Sec. 124)
2005 BAR EXAM (N0. XIV -1 - a)
Q: On a clear weather, M/V
Sundo, carrying insured cargo,
left the port of Manila bound
for Cebu. While at sea, the
vessel encountered a strong
typhoon forcing the captain to
steer the vessel to the nearest
island where it stayed for seven
days. The vessel ran out of
Page 131

provisions for its passengers.

Consequently,
the
vessel
proceeded to Leyte to replenish
its supplies.
a) Assuming that the
cargo
was
damaged
because of such deviation,
who
between
the
insurance company and
the owner of the cargo
bears the loss? Explain.
A:
The
Insurance
company should bear the
loss. Since the deviation was
cured by a strong typhoon, it
was
caused
by
circumstances beyond the
control of the captain, and
also to avoid a peril whether
or not insured against.
Deviation
is
therefore
proper. (Sec. 145(a))
CONSEQUENCE OF IMPROPER
DEVIATION
Insurer is not liable for any loss
happening to the thing insured
subsequent to an improper
deviation (Sec. 126).
4. That the vessel does not or
will not engage in any
illegal venture;
LOSS IN MARINE INSURANCE
KINDS OF TOTAL LOSSES:
Actual or Constructive
BAR OPERATIONS 2011
(1) If it is an Actual Total

Loss it may be caused
by:
a. total destruction of
the thing insured;
b. the
irretrievable
loss of the thing
which renders it
valueless to the
owner
for
the
purpose that he
held it;
c. any other event
which
effectively
deprives the owner
of the possession at
the
port
of
destination of the
thing insured (Sec.
130).
An actual total loss can
also be presumed from
the continued absence
of the ship without
being heard of (section
132). The length of time
which is sufficient to
raise these presumption
depends
on
the
circumstances of the
case;
(2) It is a constructive
total loss when the
person insured is given
a right to abandon
under Section 139 (Sec.
131).
2005 BAR EXAM (N0. X -1- a)
Page 132

Q: M/V Pearly Shells, a

passenger and cargo vessel,
was insured for P40,000,000.00
against constructive
total
loss. Due to a typhoon, it sank
near Palawan. Luckily, there
were no casualties, only injured
passengers. The shipowner
sent a notice of abandonment
of his interest over the vessel to
the insurance company which
then hired professionals to
afloat
the
vessel
for
P900,000.00. When re-floated,
the vessel needed repairs
estimated at P2,000,000.00.
The
insurance
company
refused to pay the claim of the
shipowner, stating that there
was no constructive total loss.
a) Was there constructive total
loss to entitle the shipowner to
recover from the insurance
company? Explain.
A: There was constructive total
loss. When the vessel sank, it was
likely that it would be totally lost
because of the improbability of
recovery. (Arnolds Law of Marine
Insurance and Average, 16th ed.,
Vol. II, pp. 954-955)
P2,900,000.00 which does not

constitute more than the value
of the vessel.
Suggested Alternative Answer:

There was no constructive
total loss. The loss is not more
than the value of the vessel
which
was
insured
for
P40,000,000.00.
The cost of
refloating is P900,000.00 and the
needed
repairs
amount
P2,000,000.00, or a total of only
ABANDONMENT is the act of

the insured by which, after a
constructive total loss, he desires
to the insurer the relinquishment
in its favor his interest in the
thing insured (Sec. 138).
BAR OPERATIONS 2011
THE DOCTRINE OF LIMITED

LIABILITY
[when
not
applicable] The doctrine of
limited liability under Article 587
of the Code of Commerce is not
applicable to the present case.
This rule does not apply to
situations in which the loss or the
injury is due to the concurrent
negligence of the ship owner and
the captain. It has already been
established that the sinking of the
M/V Central Bohol had been
caused by the fault or negligence
of the Ship Captain and the crew,
as shown by the improper
stowage of the cargo logs. Closer
supervision on the part of the
ship owner could have prevented
this fatal miscalculation. As such,
the ship owner was equally
negligent. It cannot escape
liability by virtue of the limited
liability rule. (Central Shipping
Company, Inc. v. Insurance
Company of North America, Sept.
20, 2004, G.R. No. 150751)
A person insured by a contract

of marine insurance may abandon
the thing insured, or any
Page 133

particular
portion
thereof
separately valued by the policy, or
otherwise separately insured and
recover a total loss when the
cause of loss is a peril insured
against if:
the loss but, where the

information is of doubtful
character, the insured is entitled
to a reasonable time to make an
inquiry (Sec. 141).
more than thereof in value is

actually lost or would have to
be expended to recover it form
the peril insured against.
HOW NOTICE OF
ABANDONMENT IS MADE
2005 BAR EXAM (N0. X - 1- b)
if it is injured to such extent as

to reduce its value by more
than of value.
By giving notice, oral or written

notice to the insurer but if orally
given, a written notice of such
must be submitted within seven
days from giving oral notice (Sec.
143). The notice must be
explicit
and
specify
the
particular
cause
of
the
abandonment but need start only
enough to show that there is
probable cause therefore and
need not be accompanied by
proof of interest or of loss (Sec.
144). The requirement as the
explicitness of the notice is due
to the fact that abandonment
can only be sustained upon the
cause specified in the notice
(Sec. 145).
if the thing injured is a ship and

contemplated voyage cannot
lawfully be performed without
incurring either an expense to
the insured of more than the
value of the thing abandoned
or a risk which a prudent man
would not take under the
circumstances.
if the insured is freightage or
cargo and the voyage cannot
be performed nor another
ship cannot be procured by the
master within a reasonable
time with reasonable diligence
to forward the cargo without
incurring the like expense or
risk mentioned in item (c) but,
freightage
cannot
be
abandoned unless the ship is
abandoned (Sec. 139).
Abandonment must neither be
partial nor conditional (Sec.
140). Hence, it must be total
and absolute; and must be made
within a reasonable time after
receipt of reliable information of
BAR OPERATIONS 2011
EFFECTS OF ABANDONMENT
(1) It is equivalent to a transfer
by the insured of his interest
to the insurer, with all the
chances of recovery and
indemnity (Sec. 146) Note
though, if the insurer pays
for a loss as if it were an
actual total loss, he is
entitled to whatever may
remain of the thing insured,
Page 134

or its proceeds or salvage as

if there has been a formal
abandonment. Here the
insurer has opted to pay for
total
actual
loss
notwithstanding the absence
on actual abandonment;
(2) Acts done in good faith by
those who were agents of
the insured in respect to the
thing insured subsequent to
the loss are at the risk of the
insurer and for his benefit
(Sec. 148). The agents of the
insured become agents of
the insurer. This retroacts to
the date of the loss when
abandonment is effectively
made;
EFFECTIVITY
OF
ABANDONMENT:
Abandonment
becomes
effective upon the acceptance of
the insurer. If it is not accepted
despite validity, the insured may
nevertheless claim an actual total
loss.
LIABILITY FOR AVERAGES
AVERAGE is any extraordinary
or accidental expense incurred
during the voyage for the
preservation of the vessel, cargo,
or both and all damages to the
vessel or cargo from the time it is
loaded
and
the
voyage
commenced until it ends and the
cargo is unloaded.
KINDS OF AVERAGES:
BAR OPERATIONS 2011
(a) Particular or simple

average is a damage or
expense caused to the
vessel, cargo, or which
has not inured to the
common benefit and
profit of all persons
interested in the cargo
or the vessel. This is
borne ordinarily by the
owner of the vessel or
cargo that gives rise to
the expenses or suffered
the damage.
(b) General
or
gross
average is an expense or
damage
suffered
deliberately in order to
save the vessel or its
cargo or both from real
and known risk. Thus, all
persons
having
an
interest in the vessel
and cargo or both at the
occurrence
of
the
average shall contribute.
IN CASE OF GENERAL AVERAGE
LOSS
The insurer is liable for
the loss falling upon the
insured, though a contribution
in respect to the thing insured
when required to be made by
him towards a general average
loss called for a peril insured
against but liability is limited to
the
proportion
of
the
contribution attaching to his
policy value where this is less
than the contributing value of
Page 135

the thing insured (Sec. 164).

Meaning that the insured can hold
his insurer liable for contribution
up to the value of the policy;
RIGHT OF SUBROGATION
When a person injured in
a contract of marine insurance
has a demand against the
others for contribution, he may
claim the whole loss from his
insurer subrogating the insurer
to his own right to contribution
but no such claim can be made
upon the insurer if:
(a)
There is separation of
the interest liable to
contribution;
(b)
When the insured
having the right and
opportunity
to
enforce
contribution from others,
has neglected or waived the
exercise of the right (Sec.
165). Meaning that the
insured has a choice of
recovery on the happening
of a general average loss.
They are:
(1) Enforcing
the
contribution
against interested
parties; or
(2) Claiming from the
insurer. If it be the
latter, subrogation
takes place;
BAR OPERATIONS 2011
MEASURE OF INDEMNITY IN
MARINE INSURANCE
IF THE POLICY IS VALUED;
1. A valuation in the policy of
marine insurance is exclusive
between the parties thereto in the
adjustment of either a partial or
total loss, if the insured has some
interest at risk and there is no
fraud on his part. If there is fraud
in valuation, it entitles the insurer
to rescind as it is an exception as to
conclusiveness (Sec. 156);
2.
If however, hyphotecated by
the bottomry or respondentia
before insurance and without
knowledge of the person securing
it he may show the real value;
3.
An insurer is liable upon a
partial loss only for such
proportion of the amount insured
by him as the loss bears to the
whole interest of the insured (Sec.
157). The effect is that the insured
is deemed a co-insurer if the value
of the insurance is less than the
value of the property. This applies
even in the absence of a stipulation
in the contract and is also known
as the average clause.
The two requisites for the
application of the average clause:
a.
b.
insurance is for less than

actual value;
the loss is partial
Note: That co-insurance exist in

Marine Insurance: In Fire
Insurance, there is no coinsurance
unless
expressly
Page 136

stipulated (Sec. 171-172). In life

insurance, there is none also as
value is fixed in the policy (Sec.
183).
4.
In
case
profits
are
separately insured in a contract of
marine insurance (see Sec. 105) ,
the insured can recover in case of
a loss (and under Sec. 160, there
is a conclusive presumption of a
loss from the loss of the property
out of which they were expected
to arise, and the valuation fixes
their amount), a proportion of
such profits equivalent to
proportion of the value of the
property lost bears to the value of
the whole (Sec. 158).
IF THE POLICY IS OPEN
(a) The value of the ship is
the value at the beginning
of the risk, including all
articles or charges which
add to its permanent
value or which are
necessary to prepare it
for the voyage insured;
(b) The value of the cargo is
its actual cost to the
insured, when laden on
board where the cost
cannot be ascertained, its
Market Value at the time
and place of lading.
Adding
the
charges
incurred in purchasing
and placing it on board
but without reference to
any loss incurred in
BAR OPERATIONS 2011
raising money for its

purchase
or
any
DRAWBACK
on
its
EXPROPRIATION
or
FLUCTUATION of the
market at the port of
destination or expenses
incurred on the way or on
arrival;
(c) Value of freightage is the
gross
freightage,
exclusive or primage
without reference to the
cost of earning it;
(d) The cost of insurance is in
each case to be added to
the value thus estimated
(Sec. 161).
IF THE CARGO INSURED
AGAINST PARTIAL LOSS
If it arrives at the port of
destination in a damaged
condition, the loss of the
insured is deemed to be the
same proportion of the value
which the market price at
that port of the thing so
damaged bears to the market
price it would have brought if
sound (Sec. 162). Meaning if
reduction in value is 1/5,
then amount of recovery on
the insurance is also 1/5.
FIRE INSURANCE
Insurance against fire
includes loss or damage
due to lightning, windstorm,
tornado, earthquake or other
Page 137

allied risks when such risks

are covered by extensions
to the fire insurance policy
or under separate policies
(section
167).
Hence,
while it is not limited to
loss or damage due to fire,
coverage as to other risks
is not automatic.
2001 BAR EXAM (N0.XVII)
Q:
JQ,
owner
of
the
condominium unit, insured the
same against fire with XYZ
Insurance Corp. and made the
loss payable to his brother.
MLQ. In case of loss by fire of
the said condominium unit,
who may recover on the fire
insurance policy? State the
reasons for your answer?
A: JQ can recover on the fire
insurance policy for the loss of the
said condominium unit. He has
the insurable interest as ownerinsured. As beneficiary in the fire
insurance policy, MLQ cannot
recover on the fire insurance
policy. For the beneficiary to
recover on the fire or property
insurance policy, it is required
that he must have insurable
interest in the property insured.
In this case, MLQ does not have
insurable
interest
in
the
condominium unit.
FIRE DEFINED
as
In insurance, it is defined
the active principle of
BAR OPERATIONS 2011
burning, characterized by heat

and
light
combustion.
Combustion without visible
light or glow is not fire
ALTERATION DEFINED
Is a change in the use or
condition of a thing insured from
that to which it is limited by the
policy, made without the consent
of the insurer, by means within
the control of the insured, and
increasing the risk, which entitles
the insurer to rescind the contract
of insurance (Sec. 168).
HOW IS VALUATION MADE:
(1) Whenever the insured
would like to have a
valuation stated in a policy
insuring a building or
structure against fire, it
may be made by an
independent
appraiser,
who is paid by the insured
and the value may be fixed
between the insurer and
the insured;
(2) Subsequently, the clause is
then inserted in the policy
that said valuation has thus
been fixed;
(3) In case of loss, provided
there
is
no
change
increasing the risk without
the consent of the insured
or fraud on the part of the
insured, the insurer will
pay the whole amount so
insured and stated in the
policy is paid. If it is a
partial loss, the whole
amount of the partial loss
Page 138

is paid. In case there are 2

or more policies, each shall
contribute pro-rata to the
total or partial loss but the
liability of the insurers
cannot be more than the
amount stated in the
policy;
(4) Or the parties may
stipulate that instead of
payment, the option to
repair, rebuild or replace
the property wholly or
partially
damaged
or
destroyed
shall
be
exercised (Sec. 172).
CASUALTY INSURANCE
Generally, it is one that
covers loss or liability
arising from an accident
or mishap excluding those
that fall exclusively within
other types of insurance
like fire or marine. It
includes employers liability,
workmens compensation,
public
liability,
motor
vehicle liability, plate glass
liability, burglary and theft,
personal accident and health
insurance as written by nonlife companies and other
1993 and 1994 BAR EXAMS:
Sun Insurance Office vs. CA July
17, 1992
X was issued a personal accident
insurance for P200,000. Two
months later, he died of a bullet
wound in his head. He was
BAR OPERATIONS 2011
playing with his hand gun from

which he removed the magazine.
He pointed his gun to his temple
and fired. The insurance company
refused to pay the beneficiary.
Was there suicide or accident?
SC:
1. X was negligent but it should
not prevent the beneficiary
from recovery because there
is nothing in the policy that
exempts the insurer of the
responsibility
to
pay
indemnity if the insured is
shown to have contributed to
his own accident.t
2. The death is accidental.
Accident happens by chance
without intention or design
and which is unexpected or
unforeseen.
SURETYSHIP
An agreement whereby a
party called the surety
guarantees
the
performance by another
party called the principal
or obligor of an obligation
or undertaking in favor of
a 3RD party called the
obligee (Sec. 175).
Includes
official
recognizances, bonds or
undertakings issued by any
company under Act No. 536,
as amended by act no. 2206
Page 139

(Government transactions
by authorized companies)
LIABILITY OF THE SURETY
It is joint and several
(solidary) with the obligor but
limited to the amount of the bond
and determined strictly by the
terms of the contract in relation
to the principal contract between
obligor obligee (Sec. 176).
IS A SURETYSHIP CONTRACT
VALID AND BINDING WHERE
THE PREMIUM HAS NOT YET
BEEN PAID?
Generally, payment of the
premium
is
a
condition
precedent. Hence the bond is not
valid. An exception is when it is
issued and accepted by the
obligor, it is valid despite non
payment of the premium (Sec.
177).
SURETY vs. GUARANTY
SURETY
GUARANTY
Assumes
liability as a
regular party
to
the
agreement.
Primarily
liable.
Guarantors
liability
depends on an
independent
agreement to
pay if primary
debtor fails to
pay
Secondarily
liable.
Not entitled to Entitled

to
exhaustion.
exhaustion.
BAR OPERATIONS 2011
NON-NECESSITY OF A DEMAND
ON THE SURETY Demand on
the surety is not necessary before
bringing the suit against them. On
this point, it may be worth
mentioning that a surety is not
even entitled, as a matter of right,
to be given notice of the
principals default. (Intra-Strata
Assurance Corporation, Et Al. v.
Republic of the Philippines, Etc.,
Jul. 9, 2008 G.R. No. 156571)
LIFE INSURANCE
Is insurance on human
lives
and
insurance
appertaining thereto or
connected therewith (Sec.
179)
WHEN IS IT PAYABLE
An insurance upon life may be
made payable upon:
(a) death of the person; or
(b) his
surviving
a
specified period; or
(c) otherwise, contingently
on the continuance or
cessation of life;
COMMON KINDS:
WHOLE
LIFE/ORDINARY
LIFE/STRAIGHT
LIFE:
premiums are payable for life
and the insurer agrees to pay
the face value upon the death
of the insured.
Page 140

LIMITED PAYMENT LIFE:

insured pays premiums for a
limited period after which he
stops with a guarantee by the
insurer that upon death the
face amount is to be paid if
death occurs while payment is
not complete beneficiary acts
face amount.
TERM POLICY: insurer is liable
only upon death of the insured
within the agreed term or
period. If insured survives the
insurer is not liable.
ENDOWMENT : protection is
for a limited period, if the
insured is still alive at the end
of the period, the value of the
policy is paid to him. If he dies
before the end period, it is paid
to the beneficiaries.
ANNUITY: where the insured
or a named person/s is paid a
sum or sums periodically
during life or a certain period
(note that contracts for the
payment of endowment or
annuities are considered as life
insurance contracts).
DISTINGUISHING
LIFE
INSURANCE FROM PAYMENT
OF ANNUITY
(1) In life insurance, it is
payable upon the death of
the insured, while in
annuity, it is payable
during the lifetime of the
annuitant;
(2) In life insurance, the
premium is paid in
BAR OPERATIONS 2011
installments, while in
annuity, annuitant pays a
single premium;
(3) In life insurance, there is
lump sum payment upon
death, while in annuity,
annuities are paid until
death;
WHAT RISKS ARE COVERED?
(1) Generally - all causes of
death are covered unless
excluded by law, by policy
or public policy.
(2) Suicide, if committed after
the policy has been in
force for a period of two
years from date of issue
or last reinstatement
unless policy provides a
shorter period but it is
nevertheless
compensable
if
committed in the state of
insanity regardless of
date of commission (Sec.
180-A)
IS A LIFE INSURANCE POLICY
TRANSFERABLE
OR
ASSIGNABLE? Yes, it may pass by
transfer, will or succession to any
person, whether he has insurable
interest or not. (Sec. 181)
IS NOTICE TO THE INSURER OR
TRANSFER
OR
BEQUEST
REQUIRED? It is not necessary to
preserve the validity of the policy
unless thereby expressly required
(Sec. 181)
Page 141

IS THE CONSENT OF THE

BENEFICIARY REQUIRED? Yes, if
he designated as an irrevocable
beneficiary as he has acquired a
vested right;
BUSINESS INSURANCE
REQUIREMENTS
FOR
A
CERTIFICATE OF AUTHORITY
FROM
THE
INSURANCE
COMMISSION:
(a) Qualified by Philippines Laws
to
transact
insurance
business;
(b) Has a name that is not in
anyway similar to another
company;
(c) If organized as a stock
corporation, it should have a
paid up capital of no less that
Php5,000,000.00;
(d) If it is organized as a mutual
company (one whose capital
funds are not contributed by
stockholders but by policy
holders) it must have
available cash assets of at
least Php5,000,000.00 above
all liabilities for losses
reported, expenses, taxes,
legal
reserves
of
all
outstanding risks, and the
contributed surplus fund
equal to the amounts
required
of
stock
corporations
(Php1,000,000.00 if a life
insurance
company
or
Php500,000.00, if a non life
insurance company).
BAR OPERATIONS 2011
(e) If a foreign insurance

company, it must appoint a
resident
agent,
deposit
securities and maintain a
legal reserve (Sec. 184-193).
COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
It is to provide protection or
coverage to answer for
bodily injury or property
damage that may be
sustained by another arising
from the use of motor
vehicle. Please note though
that
what
is
now
compulsory is death of
bodily injury arising from
motor vehicle accidents as
per amendment to the
insurance code by PD 1814
and PD 1455 brought about
by insurance losses due to
padded claims for property
damage. Hence, property
damage is now optional;
DISTINGUISHED FROM OWN
DAMAGE
COVERAGE
AND
COMPREHENSIVE
MOTOR
VEHICLE INSURANCE:
(a) Third party liability
answers for liabilities
arising from death or
bodily injury to 3RD
persons or passengers.
(b) Own damage insurance
answers
for
reimbursement of the
cost of repairing the
Page 142

damage to vehicle of the

insured.
(c) Comprehensive
insurance answers for all
liabilities/damages
arising
from
the
use/operation of a motor
vehicle it includes third
party own damage, theft
and property damage.
WHEN DOES THE LIABILITY OF
THE INSURER ACCRUE?
The occurrence of an injury
for which the insured may be
liable immediately gives rise to
insurer liability (Shafer vs. Judge,
167 SCRA 386).
CANCELLATION OF THE POLICY
(a) By the insurer requires
written notice to motor
vehicle
owner/land
transportation operator
at least 15 days prior to
intended effective date. If
so canceled, the Land
Transportation Office may
order the immediate
confiscation of license
plates unless it receives a
new
valid
insurance/surety/proof
of cash deposit or revival
by endorsement of the
cancelled policy (Sec.
130);
(b) By the insured the
motor vehicle owner/land
transportation operator
BAR OPERATIONS 2011
shall secure a similar

policy or surety before
the
cancelled
policy/surety ceases to be
effective or make a cash
deposit and file the same
or proof thereof with the
Land
Transportation
Office (Sec. 381).
PAYMENT OF CLAIMS
A claim for payment must be
filed without any unnecessary
delay, within 6 month from the
date of accident by giving written
notice setting forth the nature,
extent and duration of the injuries
as certified by a duly licensed
physician (Sec. 384).
WHAT IS NO FAULT
INDEMNITY?
A no fault indemnity claim is a
claim for payment for death or
injury to a passenger of third
party without necessity of
proving fault or negligence. This
is payable by the insurer
provided:
(a) indemnity in respect
of one person shall
not
exceed
Php5,000.00;
(b) the necessary proof
of loss under oath to
substantiate
the
claim is submitted
AGAINST WHOM IS THE
PAYMENT CLAIMED
Page 143

A claim under the no fault

indemnity clause may be made
against one motor vehicle insurer
only as follows:
(a) in case of an occupant
of a vehicle against
the insurer of the
vehicle in which the
occupant is riding,
mounting
or
dismounting from;
(b) in any other case, from
the insurer of the
directly
offending
vehicle;
(c) in all cases, the right of
the party paying the
claim
to
recover
against the owner of
the vehicle responsible
for the accident shall
be maintained;
INTERPRETATION OF THE
AUTHORIZED DRIVER CLAUSE
(1991
Bar
Exams)
The
authorized driver clause is
interpreted to refer to the insured
or any person driving on the
order of the insured or with his
permission provided, such person
is permitted to operate a motor
vehicle in accordance with our
licensing laws or regulations and
who is not otherwise disqualified;
NOTE THE FOLLOWING
JURISPRUDENCE:
(1) If license is expired,
person is not authorized
to operate a motor
BAR OPERATIONS 2011
(2)
(3)
(4)
(5)
vehicle (Tarco Jr. vs. Phil

Guaranty, 15 SCRA 313)
Issued
a
temporary
operators permit or a
temporary
vehicle
receipt, a person is
authorized to operate a
motor vehicle, but if it has
expired, it is as if he has
no license (Guttierez vs.
Capital Insurance, 130
SCRA 618, PEZA vs.
Alikpala, 160 SCRA 31)
A tourist with license but
in the country for more
than 90 days, is not
authorized to operate a
motor vehicle because it
is as if he has no license
(Strokes vs. Malayan, 127
SCRA 766)
A drivers license that
bears all the earmarks of
a duly issued license is
presumed genuine.
A license is not necessary,
where
the
insured
himself is the driver
(Paterno vs. Pyramid
Insurance, 161 SCRA 677,
1986 BAR)
BAR EXAM; 1996

Q: 1.While driving his car, X
sideswiped A causing injuries
to the latter. A sued X and the
third party liability insurer for
the damage sustained by A.
2. The insurance company
moved to dismiss the complaint
contending that theliability of X
Page 144

has not yet been determined

with finality.
Is the contention of the
insurance company correct?
May the insurer be held
solidarily liable with X
A: No. When an insurance policy
insures directly against liability,
the insurers liability accrues
immediately upon the occurrence
of the injury.
No. The insurer cannot be held
solidarily liable with X because its
liability is based on a contract
while that of X is based on torts.
(Vda.
De
Maglana
vs.
Consolacion, August 6, 1992)
COMPREHENSIVE
VEHICLE INSURANCE
2000 Bar Exam)
MOTOR
(1993 &
The liability of the insurance

company s direct and solidary
with the operator but only up to
the amount stated in the policy
and accrues immediately upon
the occurrence of the accident.
Any amount awarded beyond the
amount stated in the policy is the
sole responsibility of the carrier.
NON-FAULT CLAUSE IN
COMPULSORY MOTOR
VEHICLE INSURANCE POLICY
(2000 Bar Exam)
Proof of fault or negligence
is not necessary for the payment
of any claim for death or injury to
BAR OPERATIONS 2011
a passenger or to a third party.

The
maximum
amount
of
indemnity is P 10, 000.00 upon
submission of death certificate,
medical certificate and police
report.
The purpose is in order
to give immediate assistance to
the victim of motor vehicle
accidents and/or the dependents
specially if they are poor,
regardless of the financial
capability of the owner of the
motor vehicle or operator
responsible for the accident. This
does not include property
damage.
NECESSITY
TO
REGULATE
INSURANCE
COMPANIES
COVERING PUBLIC UTILITY
VEHICLES
The present case shows a
clear public necessity to regulate
the
proliferation
of
such
insurance companies. Because of
the PUV operators complaints,
the LTFRB thus assessed the
situation. It found that in order to
protect the interests of the riding
public and to resolve problems
involving the passenger insurance
coverage of PUVs, it had to issue
Memorandum Circular No. 2001001 accrediting PAMI and PAIC II
as the two groups allowed to
participate in the program.
Memorandum Circular No. 2001001 required that [a]ll public
utility vehicles whose LTO license
plate, as per latest LTO Official
Page 145

Receipt, with an EVEN middle

number (0, 2, 4, 6 and 8) shall be
insured with UCPB insurance
(PAMI) while those with an ODD
middle number (1, 3, 5, 7 and 9)
shall be insured with Great
Domestic Insurance (PAIC II) x x x
.
TRANSPORTATION LAWS
COMMON CARRIERS
(Arts. 1732-1766, New Civil
Code)
Common Carriers are persons,
corporations,
firms
or
associations engaged in the
business
of
carrying
or
transporting passengers or goods
or both, by land, water, or air, for
compensation, offering their
services to the public.
Transportation
defined.
a
contract of transportation is one
whereby a certain person or
association of persons obligate
themselves to transport persons,
things, or news from one place to
another for a fixed price
Classification:
1. As to object: (1) things; (2)
persons; (3) news
2. As to place of travel: (1) land;
(2) water; (3) air
Parties
to
contract
transportation:
(1) shipper or consignor.
(2) carrier or conductor.
BAR OPERATIONS 2011
of
(3) consignee
Common
Private
Carrier
Carrier
As to Availability
Holds himself
out for all
people
indiscriminat
ely
Contracts
with
particular
individuals
or groups
only
As to require Diligence
Extraordinary Ordinary
Diligence
Diligence
As to regulation
Subject
to Not subject
state
to
state
regulation
regulation
Stipulation limiting
liability
Parties may Parties may
agree
on limit
the
limiting the carriers
carriers
liability,
liability
provided it
except when is
not
provided by contrary to
law
morals
or
good
customs
Exempting circumstances
Prove
Caso
extraordinary forfuito, Art.
diligence and 1174 NCC
Art.1734,NCC
Presumption of
Negligence
There is a
No
presumption presumptio
of fault or
n of fault or
negligence
Negligence
Governing law
Page 146

Law
Common
Carriers
on Law
on
obligations
and
contracts
(2002 Bar exams)
Test for a common carrier:
1. He must be engaged in the
business of carrying goods for
others as a public employment,
and must hold himself out as
ready to engage in the
transportation of goods for
persons
generally
as
a
business, and not a casual
occupation.
2. He must undertake to carry
goods of the kind to which his
business is confined.
3. He must undertake to carry by
the methods by which his
business is conducted, and
over his established roads.
4. The transportation must be for
hire.
The true test is whether the given
undertaking is a part of the
business engaged in by the carrier
which he has held out to the
general public as his occupation
rather than the quantity or extent
of
the
business
actually
transacted, or the no. and
character of the conveyances used
in the employment (the test is
therefore the character of the
business actually carried on by
the carrier.
Characteristics
carriers:
BAR OPERATIONS 2011
of
common
(1)
The
common
carrier
undertakes to carry for all people
indifferently;
(2) The common carrier cannot
lawfully decline to accept a
particular class of goods for
carriage to the prejudice of the
traffic in those goods
Exception : for some sufficient
reason, where the discrimination
in such goods is reasonable and
necessary (substantial grounds)
(3) No monopoly is favored - the
Commission has the power to say
what
is
a
reasonable
compensation to the utility and to
make reasonable rules and
regulations for the convenience of
the traveling public and to
enforce them
(4) Public convenience - for the
best interests of the public
The
law
prohibits
unreasonable discrimination
by common carriers.-- The law
requires common carriers to
carry for all persons, either
passengers or property, for
exactly the same charge for a like
or contemporaneous service in
the transportation of like kind of
traffic under substantially similar
circumstances or conditions. The
law prohibits common carriers
(CC) from subjecting any person,
etc. or locality, or any kind of
traffic, to any undue or
unreasonable
prejudice
or
discrimination whatsoever.
Page 147

Exception: When the actual cost

of handling and transporting is
different, then different rates may
be charged
Determination of justifiable
refusal:
This
involves
a
consideration of the following:
1. suitability of the vessels of
the company for the
transportation
of
such
products;
2. reasonable possibility of
danger or disaster, resulting
from their transportation in
the form and under the
conditions in which they are
offered for carriage;
3. the general nature of the
business done by the carrier;
4. all
the
attendant
circumstances which might
affect the question of the
reasonable necessity for the
refusal by the carrier to
undertake
the
transportation of this class
of merchandise.
What
is
the
DILIGENCE
required by common carriers?
Common carriers, from the nature
of their business and for reasons
of public policy, are bound to
observe extraordinary diligence
in the vigilance over the goods
and for the safety of the
passengers transported by them,
according to all the circumstances
of each case.
Extraordinary diligence lasts from
the time the cargoes are loaded in
BAR OPERATIONS 2011
the vessel until they are

discharged and delivered to the
consignee.
Air carriers can terminate
services of pilots for serious
misconduct and drunkenness
because of its extraordinary
diligence.
LIABILITY
OF
COMMON
CARRIERS: The common carrier,
is at all times, required to
observe extraordinary diligence
with respect to transport of
goods.
1. To bring passengers safely
to his place of destination.
He is obliged to carry
passengers safely as far as
human care and foresight
can provide, using the
utmost diligence of a very
cautious person with due
regard for all circumstances.
In case of death or injury,
the common carriers are
presumed to have been at
fault
or
negligent
in
transporting the passengers
unless they prove that they
observed
extraordinary
diligence.
2. To transport the goods/
cargoes safely to the point of
destination if there is loss or
damage
to
the
goods/cargoes, immediately
a presumption of negligence
arises that the loss/ damage
to the goods/ cargoes was
due to the negligence of the
common
carrier.
The
Page 148

shipper may only prove that

the goods arrived in a
damaged condition or that
they did not arrive at all.
LOADSTAR SHIPPING CO., INC
VS. PIONEER ASIA INSURANCE
CORP.Jan 24, 2006
A common carrier is required
to
observe
extraordinary
diligence in the vigilance over
the goods it transports.
I. VIGILANCE OVER THE GOODS
RULES governing common
carriers LIABILITY over Goods:
General RULE: Common carriers
are responsible for the loss,
destruction, or deterioration of
the goods,
UNLESS the same is due to any of
the following causes only:
1)
Flood, storm, earthquake,
lightning, or other natural
disaster or calamity;
2) Act of the public enemy in war,
whether international or civil;
3) Act or omission of the shipper
or owner of the goods;
4) The character of the goods or
defects in the packing or in the
containers;
5) Order or act of competent
public authority. (Art. 1734)
The CC may absolve itself from
liability by proving any of the
following DEFENSES:
(2002 Bar exams)
A) That the CC encountered:
a. An act of God;
BAR OPERATIONS 2011
there must have been no

delay on the part of the
common carrier. Otherwise,
if delayed and not for good
reason, then it shall be held
liable notwithstanding the
fact that all the subsequent
requisites were present.
must be an unforeseen
event or an event which cannot
be avoided
The carrier must have
exercised extraordinary
diligence before, during, and
after the time of the
accident.
The proximate cause
must not be committed by
the carrier. If the proximate
cause of the event is caused
by the carrier, then he
cannot invoke the act of God
defense.
Under the rule on Contributory
Negligence, if the negligence
attributable to carrier is not
proximate in character, the
carrier shall be responsible,
although such liability shall be
mitigated.
b. Act of public enemy in war;
c. Act by a competent public
authority;
d.
Acts/omissions of the
shipper or his agent;
e. The goods or the packaging
is inherently defective.
Even if the loss, destruction, or
deterioration of the goods should
be caused by the character of the
Page 149

goods, or the faulty nature of the

packing or of the containers, the
common carrier must exercise
due diligence to forestall or
lessen the loss.
EXEMPTING CAUSE
REQUISITES
for
natural
disaster or calamity
1. The natural disaster must
have been the proximate
cause of the loss
2. It must have been the only
cause of the loss
3. The common carrier must
have exercised due diligence
to prevent or minimize
before , during and after the
natural disaster
4. The common carrier has not
negligently incurred delay in
transporting the goods
REQUISITES for act of public
enemy 1. The act of public enemy
must have been the proximate
of the loss
2. It must have been the only
cause of the loss
have exercised due diligence
to prevent or minimize
before , during and after the
act of public enemy in war.
REQUSITE FOR act or
omission of Shipper 1. That the act or omission of
the shipper /owner of the
goods must have been the
proximate cause of the loss
BAR OPERATIONS 2011
2. That it must have been the

only cause of the loss.
REQUSITES for character of
goods , fault in packing or
containers1. That the loss , destruction or
deterioration was caused by
the character of the goods ; or
the faulty nature of the packing
/containers
2. That the common carrier
had exercised due diligence to
forestall or lessen the loss.
REQUISTES for the act of
public authority
prove that the public authority
had the power to issue the
order for the destruction /
seizure of the goods.
B.) Another defensive strategy
to escape liability is to invoke that
it
exercised
extraordinary
diligence to prevent or minimize
the loss at the time the accident
occurred.
Negligence is the failure to
observe due diligence with
respect to the circumstances at
hand.
Contributory Negligence is the
failure to observe due diligence
that an ordinary or prudent man
undertakes in relation to the
negligence of another.
Page 150

When does the carriers

responsibility over the goods
arise?
The carrier shall be liable the
moment the goods arrive in his
possession whether actual or
constructive, until such time that
the carrier delivers the same to
the consignee OR the consignee
has been informed of the arrival
of the goods and the consignee
had reasonable time to remove
the same.
Under maritime laws, the
responsibility of the carrier ends
when the goods were transmitted
by the carrier to the customs
arrastre operator. Recall that
before the goods are delivered to
the consignee, the state has the
responsibility to ensure that the
goods being brought in are in
accordance with the law.
EFFECT: The carrier would no
longer be liable. The succeeding
relationship would be between
the consignee and the arrastre
operator,
the
relationship
governing them would be akin to
a contract of Deposit.
There is already an existing
Contract of carriage when the
carrier took possession of the
cargo by placing it on a lighter or
barge manned by its authorized
employees. (COMPANIA
MARITIMA vs. INSURANCE COMP
)
BAR OPERATIONS 2011
A bill of lading that was issued

covering certain shipment which
contained a provision that the
carrier does not assume liability
for any loss /damage to the goods
once they have been under the
custody of the custom or other
authorities or when they have
been delivered at ships tackle
have been considered valid ,
because it was held that it is not
contrary to morals and public
policy ; said stipulation is clear
and have been adopted to
mitigate the responsibility of the
common carrier. (LU DO vs.
BINAMIRA)
Stoppage in Transitu is the right
of the unpaid seller who has
parted with the possession of the
goods to stop them in transit,
when the buyer of goods is or
becomes insolvent.
Requisites:
1. Seller must be an unpaid
seller;
2. Goods must be in transit;
3. Buyer must be in a state of
insolvency;
EFFECT: Once the right is
exercised, the common carrier
becomes a mere
warehouseman.
In the event that the UNPAID
Seller exercises its right of
stoppage in transitu , the carrier
thereafter holds the goods in the
capacity of an ordinary bailee or
warehouseman and shall be liable
Page 151

only as such , upon the theory that

the exercise of the right by the
unpaid seller , such terminates
the contract of carriage.
A
STIPULATION
LIMITING
LIABILITY IS VALID PROVIDED
THAT it be: (2002 bar Exam)
1. In writing signed by both
parties
2. Supported by a valuable
consideration other than the
service rendered by common
carrier
3. Reasonable, just and not
contrary to public policy
SOME VALID STIPULATIONS
LIMITING
CARRIER'S
LIABILITY:
1. Account of strikes or riot;
2. Value of the goods appearing in
bill of lading UNLESS shipper
declares a greater value;
3. Contract fixing the sum that
may be recovered.
VOID STIPULATIONS LIMITING
CARRIER'S LIABILITY (2002 bar
exams)
1. that the goods are transported
at the risk of the shipper;
2. that the shipper is not liable for
any loss or destruction of the
goods;
3. that the common carrier need
not observe any diligence in
the custody of the goods;
4. that the common carrier shall
exercise a degree of diligence
BAR OPERATIONS 2011
less than that of a good father

of a family;
5. that the common carrier shall
not be responsible for any acts
of its employee;
6. that the common carriers
liability for acts committed by
thieves, or of robbers who do
not act with grave or
irresistible threat, violence or
force, is dispensed with or
diminished;
7. that the common carrier is not
responsible for the loss,
destruction, or deterioration of
goods on account of the
defective condition of the car,
vehicle, ship, airplane or other
equipment used in the contract
of carriage.
A stipulation that the common
carrier's liability is limited to the
value of the goods appearing in
the bill of lading, unless the
shipper or owner declares a
greater value, is binding.
A contract fixing the sum that may
be recovered by the owner or
shipper for the loss, destruction,
or deterioration of the goods is
valid, if reasonable and just under
the circumstances, and has been
fairly and freely agreed upon.
The law of the country to which
the goods are to be transported
governs the liability of the
common carrier in case of loss,
destruction or deterioration.
Page 152

The provisions of articles 1733 to

1753 shall apply to the
passenger's baggage which is not
in his personal custody or in that
of his employee. As to other
baggage, the rules in articles 1998
and 2000 to 2003 concerning the
responsibility of hotel-keepers
shall be applicable.
Fire may not be considered as a
natural disaster or calamity. It
does not fall within the category
of act of God UNLESS caused by
lighting or by natural disaster or
calamity. It may even be caused
by actual privy or fault of the
carrier. (EASTERN SHIPPING vs.
IAC)
The Civil Code provisions on
Common carrier shall not be
applied when the carrier is not
acting as such but as a private
carrier. The stipulation in the
charter party absolving the owner
from liability for loss due to the
negligence of its agent would be
void only if strict public policy
governing common carriers are
applied. Such policy has no force
when the public at large is not
involved, as in the case of a ship
totally chartered for the use of a
single party (HOME INSURANCE
vs. AMERICAN STEAMSHIP)
In case where the Common
carrier w/o just cause1. Delays the transportation of
goods
BAR OPERATIONS 2011
2. Changes the stipulated route

/ usual route
The annulment of the agreement
limiting the carriers liability is no
longer necessary; The carrier
cannot simply avail of the benefit
/defense of limited liability.
When the conditions printed in
the back of the ticket stub are in
letters so small that they are hard
to read, this would not warrant
the
presumption
that
the
passenger were aware of those
conditions such that he had fairly
and freely agreed to them . The
passenger therefore is not bound
by such stipulations. (SHEWARAN
vs. PAL)
II. SAFETY OF PASSENGERS
DUTY: A common carrier is
bound to carry the passengers
safely as far as human care and
foresight can provide, using the
utmost diligence of very cautious
persons, with a due regard for all
the circumstances.
RULE: The responsibility of a
common carrier for the safety of
passengers as required in articles
1733 and 1755 cannot be
dispensed with or lessened by
stipulation, by the posting of
notices, by statements on tickets,
or otherwise.
EXCEPTION: When a passenger is
carried
gratuitously,
a
stipulation limiting the common
carrier's liability for negligence is
valid, but not for willful acts or
gross negligence.
Page 153

The common carrier is liable even

if the ticket issued to passenger
provides exemption of common
carrier from death or injury of
paseenger and notices were
posted dispensing extraordinary
diligence of the common carrier
or even if the passenger was given
a discount of his fares. (2001 Bar
exams)
If the passenger is carried
gratuitously, stipulation limiting
CC for negligence is valid but not
for WILLFUL ACT OR GROSS
NEGLIGENCE.
A reduction of fare does not
justify any limitation of the
common carrier's liability.
Is the carrier liable for death
of or injuries to the
passengers due to the
negligence or willful acts of
ITS EMPLOYEES?
YES, although such employees
may have acted beyond the scope
of their authority or in violation of
the orders of the common
carriers.
fellow passenger, shot and killed

the latter. The guard committed
the killing while he was off-duty.)
The Common carrier is held liable
because 1. The driver , although
stopping
the
bus,
nevertheless did not put off
the engine.
2. He started to run the bus
even before the conductor
gave him the signal to go and
while the passenger was still
unloading part of the
baggage . ( LA MALLORCA
vs. CA)
Illustrative rule: Two passengers

engage in a fist-fight inside a bus
terminal. An on-duty driver
attempts to pacify them but
instead kills one. The carrier is
liable! But, if the killing of the
passenger occurred while the
driver is off-duty, the carrier is
not liable. (Recall the case of
Gillaco v. Manila Railroad, the
carrier was held not liable when
its employee, a security guard
who harbored a grudge against a
Q: Is the carrier liable for death

of or injuries to the passengers
due to the willful acts or
negligence of other passengers
or of strangers?
BAR OPERATIONS 2011
In the case of LACAM vs. SMITH ,

the Court held that an accident
caused by defects in the
automobile is not a caso fortuito.
The rationale of the carriers
liability is the fact that the
passenger has neither the choice
nor control over the carrier in the
selection and use of the
equipment and appliances in use
by the carrier.
YES, a common carrier is

responsible for injuries suffered
by a passenger if the common
carrier's employees through the
exercise of the diligence of a good
father of a family could have
Page 154

prevented or stopped the act or

omission.
The act of the passengers
stabbing another passenger in the
bus. To be absolved, the common
carrier must prove that it was
negligent in preventing the
injuries from accident; otherwise,
it would be held liable. (Bachelor
Express vs. CA 188; SCRA 216)
EE riding on train who stepped on
watermelons. Held: The conduct
of plaintiff in undertaking to
alight while the train was yet
slightly underway was not
characterized by imprudence and
that he was not guilty of
contributory negligence.
The circumstances show that it
was no means so risky for him to
get off while the train was yet
moving. It is not negligence per
se for a traveler to alight from a
slowly moving train. (Cangco vs
MRR 38 Phil 768)
The DUTY of the PASSENGER is to
observe the diligence of a good
father of a family to avoid injury
to himself. The contributory
negligence of the passenger does
not bar recovery of damages for
his death or injuries, if the
proximate cause thereof is the
negligence of the common carrier,
but the amount of damages shall
be equitably reduced.
Condition printed on the back of a
passenger
ticket
commonly
BAR OPERATIONS 2011
known as CONTRACT OF
ADHESION , being drafted only
by one party , usually the
corporation , and the only
participation of the other party
(passenger ) is the signing of his
signature his adhesion thereto
calls for greater strictness and
vigilance on the part of the court
of justice with the view of
protecting the weaker party from
abuses . Such contract if enforced
will be subversive of public good ,
thus placing the common carrier
at a decided advantage over those
who may have legitimate claims
against it. The said condition is
therefore
unenforceable,
as
contrary to public policy- to make
the court accessible to all those
who have need of their services.
Moral
damages
are
not
recoverable on breach of
contract of carriage in view of
ART.2219-20
NCC
.
EXCEPTIONS1. Where the mishap results in
the death of a passenger;
Because the common carrier
becomes subject to the rule
in ART.2206 NCC entitles the
spouse,
descendants,
ascendants
to
moral
damages for mental anguish
as a result of the death of the
deceased.
2. 2.Where it is proved that
carrier was guilty of fraud or
bad faith EVEN if death does
not result.
Page 155

Mere carelessness does not per se

justify an inference of malice or
bad faith on the part of the
common carrier ; Must be GROSS
negligence
Concurring causes of action
arising from negligent act of the
common carrier:
1. Culpa Contractual/breach of
contract
(2003 Bar Exams)
Only the carrier is
primarily liable not the
driver, because there is
no privity between the
driver
and
the
passenger.(Art 1759,
NCC.)
No defense of due
diligence in the
selection
and
supervision of the
employees.
2. Culpa
aquiliana
(quasi
delict)
The carrier and the driver are
solidarily
liable
as
joint
torfeasors.(Art 2180 NCC)
Defense
of
due
diligence in the selection and
supervision of employees is
available.
Exception:
maritime tort resulting in
collision
Although the relation
of passenger and carrier is
contractual both in origin
and nature, nevertheless, the
act that breaks the contract
may also be a tort. (Air
BAR OPERATIONS 2011
France vs. Carrascoso; 18

SCRA 155)
In the case of injury to a
passenger due to the
negligence of the driver of
the bus on which the
passenger was riding on and
of the driver of another
vehicle, the drivers as well
as the owners of the two
vehicles are jointly and
severally liable for damages.
It should not make any
difference that the liability
of the bus owner springs
from a contract while that of
the driver springs from a
quasi delict. (Tiu vs.
Arriesgado)
3. Culpa criminal( Criminal
Negligence)
The driver is primarily
liable. The carrier is
subsidiarilly liable only
if
the
driver
is
convicted and declared
insolvent.(art 100 RPC)
The principle of last clear
chance would call for application
in a suit between the owners and
drivers of the two colliding
vehicles. It does not arise where a
passenger demands responsibility
from the carrier to enforce its
contractual
obligations.(Phil.
Rabbit Bus Lines vs. CA)
CODE OF COMMERCE
OVERLAND TRANSPORTATION
Nature of Contract
Page 156

Art. 349.
A contract of
transportation by land or
waterways of any kind shall be
considered commercial:
1.
When it involves
merchandise or any object of
commerce.
2. When, no matter what its
object may be, the carrier is a
merchant or is customarily
[habitually]
engaged
in
transportation for the public.
Requisites for a contract of
transportation by land or water to
be commercial :
(1)
transportation
of
merchandise
is
always
commercial
(2) transportation of person
or news is commercial only when
the CC is a merchant or is
habitually
engaged
in
transportation for the public
* principal requirement : the
CC is a merchant or is habitually
engaged in transportation for the
public; the object carried is of
little importance
Effect of Civil Code on the
provisions of the Code of
Commerce
on
Overland
Transportation
The NCC does not expressly
repeal the provisions of the
Code of Commerce on
overland transportation.
Instead, it makes such
provisions suppletory to the
provisions of the NCC on
common carriers
BAR OPERATIONS 2011
Bill of Lading: Written

acknowledgement of receipt of
goods and agreement to
transport them to a specific
place to a person named or to
his order or bearer.
Ambiguity is construed
against the carrier, the
contract being one of
adhesion.
Kinds of Bills of Lading
1. Negotiable Bill of Lading
one in which it is stated that
the goods referred to therein
will be delivered to the bearer,
or to the order of any person
named in such document.
2. NonNegotiable Bill of
Lading the goods referred to
therein will be delivered to a
specified person.
3. Clean Bill of Lading One
which does not indicate any
defect in the goods
4. Foul Bill of Lading
Contains a notation indicating
that the goods are in bad
Condition.
5. Spent Bill of Lading
Covers goods that have already
been delivered by the carrier
without a surrender of a signed
copy of the Lading.
6. Through Bill of Lading
Issued by a carrier who is
obliged to use the facilities of
other carriers.
7. On Board Bill of Lading
one in which it is stated that
Page 157

the goods have been received

on board the vessel which is to
carry the goods.
8. Received for Shipment Bill
of Lading it is stated that the
goods have been received for
shipment with or without
specifying the vessel by which
the goods are to be shipped.
9. Custody Bill of Lading
issued by the carrier to the
whom the goods have been
delivered for shipment but the
vessel indicated in the bill of
leading which is to carry the
goods has not yet reached the
port where the goods are held
for shipment.
10. Port Bill of Lading one
which is issued by the carrier
to whom the goods have been
delivered, and the vessel to
carry the goods is already in
the port where the goods are
held for shipment.
ThreeFold Nature of Bills of
Lading
1. A contract in itself and the
parties are bound by its terms;
2. A receipt; and
3. A symbol of the covered by it
They are also documents
of title, and if negotiable
in
form
they
can
constitute
negotiable
documents of title.
Legal effect of the Issuance of
Bill of Lading
BAR OPERATIONS 2011
Bill of Lading
Bill of leading constitute the
legal evidence of the
contract
between
the
shipper and the carrier by
the contents of which the
disputes which may arise
regarding their execution
and performance shall be
decided, no exception being
admissible other than those
of falsity and material error
in the drafting.
Effect of absence of a bill of

lading
It does not preclude liability
on
a
contract
of
transportation. The dispute
shall be determined by the
legal proofs which the
parties may present in
support of their respective
claims, according to the
general
provisions
established in the Code for
commercial contracts.
Right to refuse packages
Gen. Rule: a common carrier
cannot ordinarily refuse to
carry a particular class of
goods to the prejudice of the
traffic in those goods.
Exception: However, under Art.
365, carriers are authorized to
refuse packages if they are
unfit for transportation.
Time for delivery of goods
Where no period fixed
Page 158

The carrier shall be bound to

forward them in the first
shipment of the same or
similar goods, which he makes
to the points where he must
deliver them. Should he not do
so, the damages caused by the
delay shall be for his account.
Where for delivery of
goods
The carrier must deliver the
goods within the time fixed.
For failure to do so, the carriers
shall pay the indemnity
stipulated in the bill of lading.
Also, damages shall be paid if
the carrier refuses to pay the
stipulated indemnity or is
guilty of fraud in the fulfillment
of his obligation.
Limitation as to carriers
liability (2002 Bar exams)
(1). No Liability
The carrier will not be
liable at all for the
negligent acts of its crew
and employees. This is
NULL and VOID for being
contrary to public policy
(2). Limited Liability
Regardless of the value of
the cargo, the maximum
liability of the carrier will
be, for example, P500.
This is VOID for being
contrary to public policy.
(3). Qualified Liability
A stipulation in the bill of
lading
limiting
the
liability of the carrier to a
BAR OPERATIONS 2011
valuation
unless
the
shipper declares a higher
value and pays a higher
rate of freight is valid.
However, the carrier
cannot limit its liability
for injury to, or loss of,
good shipped where
such injury or loss was
caused by its own
negligence.
Recovery of Damages from
carriers for carriage of
goods:
(1) Inter-island if goods
arrived in damaged condition:
If damage is apparent,
the shipper must file a
claim immediately.
If damage is Not
apparent he should file
a claim within 24 hours
from delivery.
The filing of claim is a
condition precedent for
recovery.
If the claim is filed, but
the carrier refuses to
pay:
Enforce
carriers
liability in court by
filing a case:
Within 6 years, if
no bill of lading
has been issued,
or
Within 10 years, if
a bill of lading has
been issued.
Page 159

(2) Overseas Where goods

arrived in a damaged condition
from a foreign port to a
Philippine Port of Entry:
(2) Under Art. 375, by creating

a lien in favor of the carrier on
the goods transported.
Upon discharge of
goods, if the damage is
apparent claim should
be filed immediately;
If damage is not
apparent, claim should
be filed within 3 days
from delivery.
When may a consignee of
goods abandon the goods
and recover the value
thereof from the carrier?
AIR TRANSPORTATION
The nature of an airlines contract
of carriage partakes of two types,
namely: a contract to deliver a
cargo or merchandise to its
destination, and a contract to
transport passengers to their
destination.( British Airways vs.
CA, 285 SCRA 450)
In any of the following cases:

(1)
Under Art. 363, in case
of
partial
non-delivery,
where the consignee proves
that he cannot make use of
the goods capable of
delivery independently of
those not delivered.
(2)
Under Art. 365, where
the goods are rendered
useless
for
sale
and
consumption
for
the
purpose for which they are
properly destined; or
(3)
Under Art. 371, where
there is delay through the
fault of the carrier.
Two special sanctions for the
enforcement by the carrier
of the payment of expenses
and transportation charges.
(1) Under Art. 374, judicial sale
of the goods transported; and
BAR OPERATIONS 2011
Special rules on liabilities:

In case of flight diversion
due to bad weather or other
circumstances beyond the
pilots control, the relation
between the carrier and the
passengers continues until
the latter has been landed at
the port of destination and
has
left
the carriers
premises. The carrier should
necessarily
exercise
extraordinary diligence in
safeguarding the comfort,
convenience and safety of its
stranded passengers until
they have reached their final
destination ( Phil Airlines vs.
CA; Sept 15, 1993)
It is firmly settled that moral
damages are recoverable in
suits predicted on breach of
a contract of carriage where
it is proved that the carrier
was guilty of fraud or bad
faith- in attention to and lack
Page 160

of care for the interests of its

passengers who are entitled
to its utmost consideration,
particularly as to their
convenience- amount to bad
faith which entitles the
passenger to an award of
moral
damages(Japan
Airlines vs. Simangon, April
22, 2009)
Even where overbooking of
passengers is allowed as a
commercial practice, the
airline company would still
be guilty of bad faith and still
be liable for damages if it did
not
properly
inform
passenger that it could
breach the contract of
carriage even if they were
confirmed
passengers(
Zalamea vs. CA GR 104235)
Neglect or malfeasance of
the carriers employees
could give ground for an
action
for
damages.
Passengers have a right to
be treated by the carriers
employees with kindness,
respect, courtesy and due
consideration
and
are
entitled to be protected
against
personal
misconduct,
injurious
language, indignities and
abuses
from
such
employees.
An air carrier is not liable
for the loss of baggage in an
BAR OPERATIONS 2011
amount in excess of the limit

specified in the tariff which
was filed with the proper
authorities, such tariff being
binding on the passenger
regardless of the passengers
lack of knowledge thereof or
assent thereto. In a contract
of air carriage, a declaration
by the passenger of a higher
value is needed to recover a
greater amount.
An open dated ticket
constitutes
a
complete
contract between the carrier
and passenger. Hence the
airline company is liable if it
refused to confirm a
passengers
flight
reservation (Singson vs.CA,
GR No. 119995)
An airline company which
issued a confirmed ticket to
a
passenger
covering
successive trips on a trips on
different airlines can be held
liable
for
damages
occasioned by bumping off
by one of the successive
airlines(Lufthansa German
Airlines vs. CA; GR. No.
83612)
MARITIME COMMERCE/
WATER TRANSPORTATION
Special contract of maritime
commerce:
1. Charter party
2. Bill of lading
Page 161

3. Loan
of
bottomry/respondentia
4. contract of transportations
passengers
5. Marine insurance
VESSELS (in general)extends to
everything floating in and on the
water, built in the form of vessel
and
used
for
navigation
regardless of form, right or
motive power.
MERCHANT VESSELS- engaged in
the transportation of passengers
and freight from one port to
another or from one place to
another.
*Are vessels real or personal
property?
PERSONAL- but they partake to a
certain extent, of the nature and
conditions of real property, on
account of their value and
importance of the world of
commerce.
CHARACTERISTICS
OF
MARITIME TRANSACTIONS:
1. Real- similar to transactions
over real property with respect
to effectivity against third
persons, which are done
through
registration.
The
evidence of real nature is
shown by:
the limitation of the
liability of the agents to
the actual value of the
vessel and the freight
money and
BAR OPERATIONS 2011
the right to retain cargo,

embargo and detention of
the vessel even in cases
where ordinary civil law
would not allow more
than a personal action
against debtor.
2. Hypothecary- the liability of
the owner of the vessel is
limited to the vessel itself.
3. Preference of credits- Mortgage
of a vessel properly registered
becomes of preferred mortgage
lien which shall have priority
over all claims against the
vessel in an extrajudicial
foreclosure for:
a. credit in favor of the public
treasury;
b. judicial
cost
of
the
proceedings;
c. pilotage
and
tonnage
charges and other sea and
port changes;
d. salaries of depositories and
keepers of the vessel;
e. captain and crew's wages;
f. general average
g. salvage including contract
salvage;
h. maritime liens arising prior
in time to the recording of
the preferred mortgage;
i. damages arising out of tort;
and
j. Preferred
mortgage
registered prior in time.
A.BILL OF LADING ( 1998 and
2005 bar Exams)
Page 162

A bill of lading serves two

functions:
a. It is a receipt for the goods
shipped;
b. It is a contract by which
three parties, namely the
shipper, the carrier, and the
consignee undertake specific
responsibilities and assume
stipulated obligations.
A bill of lading delivered and
accepted
constitutes
the
contract of carriage even
though not signed, because the
acceptance
of
a
paper
containing the terms of a
proposed contact generally
constitutes an acceptance of
the contract and of all of its
terms and conditions of which
the acceptor has actual or
constructive notice (Keng Hua
Paper Products Inc. vs. CA,
Feb. 1998)
A bill of lading is in the nature of a
contract of adhesion.
DOCTRINE
OF
LIMITED
LIABILITY
(HYPOTHECARY
NATURE
OF
MARITIME
COMMERCE) ART. 587, CODE OF
COMMERCE
1994, 1997,1999 and 2000 bar
exams
The liability of the ship
owner is limited to the value
of the vessel. The limited
liability of the owner is
confined to the vessel,
equipment and freight or
BAR OPERATIONS 2011
insurance, if any. If the ship

owner has abandoned the
ship, equipment and freight,
his liability is extinguished.
If the vessel sinks the
liability of the owner is
extinguished, although he
may have other properties.
If the vessel does not sink,
the owner
May exercise the right of
abandonment
and
the
liability of the ship owner is
limited to the value of the
vessel.
EXCEPTIONS
TO
LIMITED
LIABILITY RULE:
1. When the vessel is not
abandoned by the owner or
ship agent
2. When the vessel is covered
by insurance
3. Expenses for repair of the
vessel before it sails
4. Claims of employees under
the labor laws
5. When ship owner/ship
captain is at fault or guilty of
negligence.
a. lack of proper and
adequate
equipment(insufficient
life vests)
b. lack of proper
technical training of
the offices and of the
vessel
Monarch Ins Co. vs. Ca; Allied
Guarantee Insurance Co vs. CA &
Page 163

Equitable Insurance
(June 8, 2000)
vs.
CA,
As a general rule, a ship

owner's liability is merely coextensive with his interest in
the vessel, except where actual
fault is attributable to the ship
owner. Thus, as an exception to
the limited liability doctrine, a
ship owner or ship agent may be
held liable for damages when the
sinking of the vessel is
attributable to the actual fault or
negligence of the ship owner or
its failure to ensure the
seaworthiness of the vessel. The
instant petitions cannot be spared
from the application of the
exception to the doctrine of
limited liability in view of the
unanimous findings of the courts
below that both Aboitiz and the
crew failed to ensure the
seaworthiness of the M/V P.
Aboitiz.( Aboitiz Shipping Corp
vs CA, October 17,2008)
PHILIPPINE COAST GUARD
(PCG) vested with exclusive
authority over the registration
and documentation of Philippine
vessels, issuance of all certificates,
licenses or documents, necessary
or incident to registration.
VESSELS REQUIRED TO BE
REGISTERED:
1. All vessels used in Philippine
water;
BAR OPERATIONS 2011
2. Vessels of 3 tons gross shall not

be registered UNLESS the
owner shall so desire;
3. All undocumented vessels.
Where Registration to be
effected?
- At its home port (when a coast
guard district or station is on
the same port); if none, at the
nearest
COAST
GUARD
DISTRICT OR STATION).
OPTIONS AS TO SMALL BOATS:
1.) If vessel is of domestic
ownership and 15 tons gross or
less certificate of Philippine
registry is optional.
Purpose: declare nationality of
a vessel
2.) Vessel (5 tons gross or less)
& no certificate of Philippine
registry certificate of
ownership is optional.
Privileges: right to engage in
Philippine coastwise trade and
protection of the authorities
and the flag is also subject to
the same privileges.
3.) Vessel (3 tons gross or less)
not to be registered unless
the owner shall so desire.
PURPOSE OF REGISTRATION:
Purchaser's
rights
maybe
maintained against a claim filed
by the THIRD PERSON.
*Who shall be entitled to the
freightage and who shall be
obliged to pay the crew and
Page 164

other persons who make up the

compliment of the vessel?
>It depends upon the time of the
sale.
If made while it is on a
voyage, freightage shall pertain
entirely to PURCHASER and
payment of the crew and other
persons who make up its
compliment for same voyage shall
be for his account.
If made after the vessel has
arrived at the port of its
destination,
freightage
shall
pertain to the VENDOR and other
individuals who make up its
complement shall be for his
account, UNLESS the contrary is
stipulated in either case.
FORMALITIES FOR VOLUNTARY
SALE ABROAD:
1. Execution of the bill of sale
before consul of the Philippines
at the port where it terminates
its voyage;
2. Inscription in the registry of
the consulate;
3. Forwarding by the consul of a
true copy of the instrument of
purchase and sale to the
registry of vessel;
4. Statement whether the vendor
receives its price in whole or in
part.
FORMALITIES FOR SALE WHEN
VESSEL RENDERED USELESS:
1. application for examination;
2. notification of the consignee/
insurer;
BAR OPERATIONS 2011
3. proof
of
damage
and
impossibility of the repair of
the vessel;
4. order for the sale of vessel at
public auction.
RULES FOR THE SALE OF
VESSEL AT PUBLIC AUCTION:
1. articles of the vessel shall be
appraised after making an
inventory
2. posting of the order of the
auction
3. announcement
4. auction shall be held on the day
fixed
5. Observance
of
special
provisions, governing the sale
of the vessel while it is on the
foreign country.
2 METHODS OF SALE:
1. judicial
2. voluntary
*EFFECT OF REGISTRATION OF
VOLUNTARY SALE
- if it take place while the vessel
is on a voyage, the preferred &
hypothecary nature of the
credit subsists against the
vessel until after its return to
the port of registry and 3
months after the inscription of
the sale in the registry of
vessels or after the return, so
as to prevent the possibility of
fraud upon creditors through
voluntary sale.
PARTICIPANTS IN MARITIME
COMMERCE:
Page 165

a. ship owners and ship agents

b. captains and masters of the
vessel
c. officers and crew of the vessel
c.1 sailing (1st mate)
c.2 quartermaster (2nd mate)
c.3 engineer
d. seamen
e. supercargoes
A. SHIP OWNERS AND SHIP
AGENTS
Ship owner - A person who has
possession or control in the
management of the vessel and the
consequent right to direct her
navigation and receive freight
earned and paid, while his
possession continues.
Ship agent A person entrusted
with
provisioning
and
representing the vessel in the
port in which it may be found;
also includes the ship owner
LIABILITY OF SHIP OWNER
AND SHIP AGENT:
1. for the acts of the captain
2. contracts entered into by the
captain to repair, equip, and
provision the vessel PROVIDED
that the amount claimed was
invested for the benefit of the
vessel
3. Indemnities in favor of third
person that may arise from the
conduct of the captain in the
care of goods and safety of
passengers transported.
4. Tort or quasi-delict committed
by captain EXCEPT collision
with another vessel.
BAR OPERATIONS 2011
5. Damages in case of collision

due to the fault, negligence or
want of skill of captain, sailing
mate or by other member of
the complement.
SHIP AGENT'S AND OWNERS
LIABILITY LIMITED:
- By abandoning the vessel with
all her equipment and the
freight it may have earned
during
the
voyage(by
NECESSARY
IMPLICATION);
limited to the value of the
vessel or its insurance in view
of the so-called REAL AND
HYPOTHECARY
nature
of
maritime law.
- Effect:
cessation
of
the
responsibility of the owner
POWER AND FUNCTIONS AND
LIABILITIES OF SHIP AGENT:
1. capacity to trade;
2. discharge duties of the captain
in case of the latter's absence;
3. contract in the name of the
owners with respect to repairs,
details
of
equipment,
armament, and all that relate to
the requirements of navigation;
4. order of new voyage and make
a new charter or insure the
vessel
after
obtaining
authorization from the ship
owners.
DUTY OF SHIP AGENT TO
DISCHARGE THE CAPTAIN AND
MEMBERS OF THE CREW:
- If the seamen contract is not for
a definite period or voyage, he
Page 166

may discharge them at his

discretion
- If for a definite period, he may
not discharge them until after
the
fulfillment
of
their
contracts EXCEPT on the ff.
grounds:
a. insubordination in serious
matters
b. robbery
c. theft
d. habitual drunkenness
e. damage caused to the vessel
or to its cargo through
malice, manifest or proven
negligence
EFFECT/LOSS/DESTRUCTION
OF VESSEL:
1. extinguishes liability arising
from the conduct of the captain
in the vigilance of the goods
and for the safety of the
passengers and for any liability
arising from negligent acts of
the captain
2. extinguishes liability for the
wages of the captain and the
crew and for advances made by
the ship agent if the vessel is
lost by shipwreck or capture
3. liability for collision
B. CAPTAINS AND MASTERS OF
THE VESSEL
Captain- who govern vessels that
navigate the high seas or ships of
large dimensions and importance,
although
engaged
in
the
coastwise trade
Masters- who command smaller
ships engaged exclusively in the
coastwise trade
BAR OPERATIONS 2011
NATURE OF POSITION:
1. General agent of the ship
owner
2. Technical Director of the vessel
3. Representative
of
the
Government of the country
under whose flag he navigates
QUALIFICATIONS:
1. Filipino citizen
2. Legal capacity to contract
3. Must have passed the required
physical, mental examination
required for licensing him as
such
INHERENT POWERS OF THE
CAPTAIN:
1. appoint crew in the absence of
ship agent
2. command and direct crew
3. impose
correctional
punishment on those who
while on board vessel fail to
comply with his orders or are
wanting in discipline
4. make contracts for the charter
of vessel in the absence of ship
agent
5. supply, equip, and provision
the vessel
6. order repair of vessel to enable
it to continue its voyage
SOURCES
OF
FUNDS
TO
COMPLY WITH THE INHERENT
POWERS OF THE CAPTAIN:
1. from the consignee of the
vessel
2. from the consignee of the cargo
3. by drawing on the ship agent
Page 167

4. by a loan on bottomry
5. by sale of part of the cargo
DUTIES OF THE CAPTAIN:
1. bring on board the proper
certificate and document and a
copy of the Code of Commerce
2. keep a logbook, accounting
book and freight book
3. examine before the voyage
4. stay on board during the
loading and unloading of the
cargo
5. be on deck while leaving or
entering the port
6. seeks protest, arrival under
stress and in case of shipwreck
7. follow instruction of and
render accounting to the ship
agent
8. save the vessel lost in case of
wreck
9. hold in custody properties left
by deceased by passengers and
crew members
10. comply
with
the
requirements
of
customs,
health, etc. at the port of arrival
LIABILITIES OF THE SHIP
AGENT/SHIP OWNER FOR ACTS
DONE
BY
THE
CAPTAIN
TOWARDS PASSENGERS AND
CARGOES
MAKING
THEM
SOLIDARILY LIABLE TO THE
LATTER:
1. damages to vessel and to cargo
due to lack of skill and
negligence
2. theft and robbery of the crew
3. losses and fines in violation of
laws
BAR OPERATIONS 2011
4. damages due to mutinies

5. damages due to misuse of
power
6. deviations
7. arrival under stress
8. damages
due
to
nonobservance
of
marine
regulations
NO
LIABILTY
FOR
THE
FOLLOWING:
1. damages caused to the vessel
by force majeure
2. obligations contracted for the
repair,
equipment
and
provisioning of the vessel UNLESS
he has expressly bound himself
personally or has signed a bill of
exchange or promissory note in
his name
CARGO- which includes all goods,
wares and merchandise aboard a
ship which do not from part of the
ship's stores.
REQUIREMENTS FOR DEFENSE
OF PUBLIC ENEMY:
1. act of public enemy in war was
the proximate and only cause of
the loss
2. common carrier exercise due
diligence to prevent, minimize
loss before, during, and after
occurrence of the act of the public
enemy in war
FORMALITIES
REQUIRED
WHERE VESSEL HAS GONE
THROUGH HURRICANE
Page 168

1. Captain must make a protest

before competent authority at
the first port he touches
2. Such a protest must be made
within 24 hours following his
arrival
3. captain must ratify it within
some period when he arrives at
his destination
4. he must immediately proceed
with the proof of the facts
FORMALITIES
REQUIRED
WHERE VESSEL SHIPWRECKED:
1. captain must make a protest
before the nearest competent
authority
2. protest be made within 24
hours following his arrival
3. make sworn statement of the
facts
4. authority/consul abroad shall
verify said facts
5. such authority shall take other
steps in carrying at the facts
6. such authority shall also make
statements of what may be the
result of the proceeding in the
logbook and in that of the
sailing mate
7. he shall deliver the original
records to the captain
8. captain must ratify the protest
C. OFFICERS AND CREW
1. Sailing mate/First mate
- second chief of the vessel who
takes the place of the captain in
case of absence, sickness, or
death and shall assume all of
BAR OPERATIONS 2011
his duties, powers,

responsibilities
and
DUTIES:
1. provide himself with maps,
and
charts
with
astronomical
tables
necessary for the discharge
of his duties
2. keep the Binnacle book
3. Change the course of the
voyage on consultation with
captain and the officers of
the boat, following the
decision of the captain in
case of disagreements.
4. Responsible for all the
damages caused to the
vessel or to the cargo by
reason of his negligence
2. Second mate
- takes command of the vessel in
case of the
inability or
disqualification of the captain
and the sailing mate, assuming
in such case their powers and
responsibilities and duties
DUTIES:
1. preserve the hull and rigging
of the vessel
2. arrange well the cargo
3. discipline the crew
4. assign work to crew
members
5. Inventory the rigging and
equipment of the vessel, if
laid up.
3. Engineers
Page 169

- Officers of the vessel but have

no authority EXCEPT in
matters to motor apparatus.
When 2 or more are hired, one
of them should be the Chief
Engineer
DUTIES:
1. in
charge
of
motor
apparatus, spare parts, and
other
instruments
pertaining to the engines
2. keep the engines and boilers
in good condition
3. not to change or repair the
engine without authority of
the captain
4. inform the captain of any
damage to the motor
apparatus
5. keep an Engine book
6. supervise all personnel
maintaining the engine
4. Members of the Crew
Hired by the ship agent. Where he
is present and in his absence, the
captain hires them preferring
Filipinos, and in their absence, he
,ay take in foreigners but not
exceeding 1/5 of the crew.
CLASSES
OF
SEAMAN'S
CONTRACT:
1. by the voyage
2. by the month
3. by share of profits or freightage
JUST
CAUSES
FOR
THE
DISCHARGE OF SEAMAN WHILE
CONTRACT SUBSISTS:
1. perpetration of a crime
BAR OPERATIONS 2011
2. repeated
insubordination,
want of discipline
3. repeated
incapacity
and
negligence
4. habitual drunkenness
5. physical incapacity
6. desertion
CAUSES OF REVOCATION OF
VOYAGE:
1. war
2. blockade
3. prohibition to receive cargo at
destination
4. embargo
5. inability of the vessel to
navigate
RULES IN CASE OF DEATH OF A
SEAMAN: The seaman's heirs are
entitled to the payment as
follows:
1. if death is natural:
a. compensation up to time
of death if engaged on
voyage
b. if by voyage- half of
amount if death occurs on
voyage out; and full if on
voyage in
c. if by shares- none if
before departure; full if
after departure
2. if death is due to defense of
vesselfull payment
3. if captured in defense of vesselfull payment
4. if captured due to carelessnesswages up to the date of the
capture
Page 170

NO LIABILY UNDER THE

FOLLOWING CIRCUMSTANCES:
to bring about an entire cessation

for the time being of all trade
1. If before beginning voyage,

captain attempts to change it
or a naval war with the power
to which was destined occurs
2. If a disease breaks out and be
officially declared an epidemic
in the port of destination
3. If the vessel change owner or
captain
Embargo
- a proclamation or order of the
State usually issued in time of
war/ threatened hostilities
prohibiting the departure
ships/ goods from some or all
the ports of such State until
further order
COMPLEMENT OF THE VESSEL

- All persons on board, from the
captain to the cabin boy,
necessary for the management,
maneuvers, and service, thus
including the crew, the sailing
mates, engineers, stalkers and
other employees on board not
having specific designations
- It does not include the
passengers or the person
whom the vessel is transported
FORMALITIES REQUIRED FOR
SEAMAN'S AGREEMENT:
1. reduced
to
writing
in
Accounting Book
2. signed by parties
3. visaed by marine authority if
executed
in
Philippine
territory/consul or consular
agents if executed abroad
4. read to the seaman concerned
and such fact must be stated in
the agreement
Interdiction of Commerce
a governmental prohibition of
commercial intercourse intended
BAR OPERATIONS 2011
Blockade
- a sort of circumvallation of
place by all foreign connections
and correspondence is as far as
human power can affect it to be
cut-off
SUPERCARGOES
- person
who
discharge
administrative duties assigned
to him by ship agent or
shippers, keeping an account
and record of transaction as
required in the accounting
book of the captain
B.CHARTER PARTY
- Contract by virtue of which the
owner or agent binds himself
to transport merchandise or
persons of a fixed price. It may
either
be
contract
of
affreightment
(time
and
Voyage Charter) and bareboat
or demise charter.
CLASSES OF CHARTER PARTY
1. As to extent of vessel hired
a. total- whole of the vessel is
chartered
Page 171

b. partial- only part of the

vessel is chartered
2. As to time
a. until a fixed day/ for a
determined number of days
and months
b. for
a
voyage(outgoing/return/ro
undtrip)
3. As to freightage
a. for a fixed amount for the
whole cargo
b. for a fixed amount per ton
c. for an amount per month
a. Contract of Affreightmentthe owner of the vessel
leases a part or all of the
space of the vessel to carry
goods but retains the
possession, command and
navigation of the vessel. The
charter merely has the use
of the space in the vessel in
return for the payment of
the charter hire.
b. Bareboat/ Demise Charter
involve the transfer of full
possession and control of
the vessel to the charterer.
The entire control and
management of the vessel is
given up to the charterer.
The charterer mans the
vessel with his own people.
(2003 Bar exams)
BAR OPERATIONS 2011
The owner of the vessel has

no more insurable interest on
the vessel. In case of loss of the
vessel, the ship owner can
recover the value of the vessel
from the charterer.(Caltex vs.
Sulpicio line, 1999)
FORMAILITIES REQUIRED FOR
A CHARTER PARTY:
1. in writing
2. drawn in duplicate
3. signed by the parties
4. contain stipulation
not all requisites are essential
for the validity of charter party
Primage
- belongs to owner/ freighters;
- increase of the freight rate
- considered gratuity to master if
is stipulated
- a bonus to be paid to a captain
after a successful voyage
Demurrage
- Sum which is fixed by the
contract of carriage, or which is
allowed, as remuneration to
the owner of a ship for the
detention of his vessel beyond
the number of days allowed by
the
charter
party
for
loading/unloading/sailing.
"Lay days"
-days allowed to charter parties
for loading and unlading
- period when vessel will be
delayed in port for loading and
unloading.
"Extra Lay Days"
- days which followed after lay
days have elapsed
Page 172

Deadfreight
A cargo not loaded is considered
as deadfreight, which covers the
amount paid by or recoverable
from the charterer for the portion
of the ships capacity the latter
contracted for but failed to
occupy.
GOODS TRANSFERRED MAY BE:
1. sold by captain to necessary
repairs
2. jettisoned for the common
safety
3. loss
by
reason
of
shipwreck/stranding
4. seized by pirates/enemies
5. suffer
deterioration/diminutions
6. increase by natural cause and
weight or size
RIGHTS AND OBLIGATIONS OF
CHARTER PARTY:
A. Of the ship owner or ship agent
1. If the vessel is chartered
wholly not to accept cargo
from others;
2. To observe represented
capacity;
3. To
unload
cargo
clandestinely placed;
4. To substitute another vessel
if load is less than 3/5 of
capacity;
5. To leave the port if the
charter does not bring the
cargo within the lay days
and extra lay days allowed;
6. To place in a vessel in a good
condition to navigate;
BAR OPERATIONS 2011
7. To bring cargo to nearest

neutral port in case of war
or blockade.
B. Of the charterer
1. to pay the agreed charter
price
2. to
pay
freightage
or
unboarded cargoes
3. to pay losses to others for
loading uncontracted cargo
and illicit cargo
4. to wait if the vessel needs
repair
5. to
pay
expenses
for
deviation
RESCISSION OF CHARTER PARTY
A. At charterer's request
1. by abandoning the charter
and paying half of the
freightage
2. error in tonnage or flag
3. failure to place the vessel at
the charterer's disposal
4. return of the vessel due to
pirates, enemies or bad
weather
5. arrival at the port for repairs
B. At ship owners request
1. If the extra lay days
terminate without cargo
being placed alongside the
vessel
2. Sale by the owner of the
vessel before loading
C. Fortuitous causes
1. war
2. blockade
3. prohibition to receive cargo
4. embargo
Page 173

5. inability of the vessel to

navigate
D. LOANS
ON
BOTTOMRY/
RESPONDENTIA (1961,1967,&
1980 bar exams)
These loans are secured by the
owner or captain of the vessel for
the use of the vessel. In the case of
loans on bottomry, the security of
the loan is the vessel itself; while
loan on respondentia, the security
of the loan is the cargo.
The loan is in the nature of
insurance. The loan will only be
paid on the safe arrival of the
vessel or cargo fails to reach the
port of destination, the creditor
loses his right to recover the
amount of the loan.
COMMON ELEMENTS OF LOANS
ON
BOTTOMRY
AND
RESPONDENTIA
1. exposure of security or marine
peril
2. obligation of the debtor
conditioned only upon safe
arrival of security at the point
of destination
HYPOTHECARY NATURE OF
BOTTOMRY
AND
RESPONDENTIA:
General Rule: the obligation of
the borrower to pay is
extinguished if the goods given as
security are absolutely lost by
reason of an accident of the
voyage designated, and if it is
proven that the goods were on
board.
BAR OPERATIONS 2011
EXCEPTIONS:
1. loss due to inherent defect
2. loss due to the barratry on the
part of the captain
3. loss due to the fault or malice
of the borrower
4. that the vessel is engaged in
contraband
5. that the cargo loaded on the
vessel be different from that
agreed upon
Bottomry/reponden Simple
tia
loan
Marine risk
Duly
established Not
existence of a marine risk neces
is necessary
sary
Form and manner
Must be executed in Formal
accordance with the requisi
form
and
manner tes of
prescribed by the code an
of commerce
ordina
ry
contra
ct will
suffice
Registry of Vessels
Must be recorded in No such
the registry of Vessel registratio
to be binding to third n
is
persons
required
Preference
Preference
is Preferenc
extended to the last e
is
lender
extended
to the first
lender
Page 174

When loan on bottomry or

respondentia regarded as Simple
Loan
1. Lender loaned an amount
larger than the value of the object
due
to
fraudulent
means
employed by the borrower(art
726 code of commerce)
2. Full amount of the loan is not
used for the cargo or given on the
goods if all of them could not have
been loaded, the balance will be
considered a simple loan( art 727
Code of Commerce)
3. If the effects on which the
money is taken is not subjected to
any risk(729 Code of commerce
Note: under existing laws, the
parties to a loan, whether
ordinary or maritime, may agree
on any rate of interest (Cb
circular 905); provided the same
is not contrary to law, morals,
good customs, public order or
public policy. Art 1306 NCC
ACCIDENTS
IN
MARITIME
COMMERCE (2000 bar exams)
1 Averages
2. Arrival Under stress
3. Collision
4. Shipwreck
Average
An extraordinary or accidental
expense incurred during the
voyage in order to preserve the
cargo, vessel or both, and all
damages or deterioration suffered
by the vessel from departure to
the port of loading to the
BAR OPERATIONS 2011
consignment (art 806 Code of

commerce)
The person whose property
has been saved must contribute to
reimburse the damage caused or
expense incurred if the situation
constitutes general average.
It is classified into: (1) general or
gross average or (2) simple or
particular.
Particular/ Gross/ general
simple
Definition
Damages
or Damages
or
expenses
expenses
caused to the deliberately
vessel or cargo caused in order
that did not to save the
inure to the vessel, its cargo
common
orboth from real
benefit,
and and
known
borne
by risk.(811)
respective
owner.(
art
809)
Liability
The owner of All
persons
the
goods having
an
which gave rise interest in the
to the expense vessel and the
or suffered the cargo therein at
damage shall the time of the
bear
this average
shall
average.(810) contribute
to
satisfy
this
average(812)
The
insurers
and lenders on
bottomry and
respondentia
shall
likewise
Page 175

contribute
Numbers of interests involved
Only
one Several interests
interest
is involved
involved
Share in the damage/expense
100% share
In proportion to
the value of the
owners
property saved
Right to recover
No
There may be
reimbursement reimbursement
Requisites of Gross or General
average
1. Common danger
that both the ship and
the cargo, after has
been
loaded,
are
subject to the voyage,
or in the port of loading
or unloading
that the danger arises
from the accidents of
the sea, dispositions of
the authority or faults
of men, provided that
the
circumstances
producing the peril
should be ascertained
and imminent or may
rationally be said to be
certain and imminent.
2.Deliberate Sacrifice
Gen. rule: sacrifice is made
through the jettison of the cargo
or part of the shipis thrown
overboard DURING THE VOYAGE.
Exceptions:
a. where the sinking of a vessel
is necessary to extinguish a
BAR OPERATIONS 2011
fire in a port, roadsteads,

creek or bay
b. where cargo is transferred
to lighten the ship on
account of a storm to
facilitate entry into a port.
3.Sucess
Pupose: To be able to demand
general contribution
4.Proper formalities and legal
steps
a. procedure for recovery
b. assembly and deliberation
c. resolution of the caption
d. entry of the resolution in the
logbook
e. detailed minutes
f. delivery of the minutes to the
maritime judicial authority of the
first port, within 24hours from
arrival
Ratification by the captain
under oath.
Goods Not Covered By General
Average Even if sacrified:
Goods carried on deck
1.goods not recorded in the books
or records of vessel
2.fuel for the vessel if there is
more than sufficient fuel for the
voyage.
JETTISON
Act of throwing cargo overboard
in order to lighten the vessel
ORDER OF GOODS TO BE CAST
OVERBOARD IN CASE OF
JETTISON:
Page 176

1. Those which are on the deck,

preferring the heaviest one
with the least utility of value
2. Those which are below the
upper deck beginning with the
one with greatest weight and
smallest value jettisoned goods
are not res nullius nor deemed
abandoned within the meaning
of civil law so as to be the
object of occupation by salvage.
When boarded on the deck-- not a gen average (internation carriage);
not on domestic carriage
Arrival Under stress Art 819

- arrival of a vessel at a port of
destination on account of lack
of provision, well-founded fear
of seizure, pirates, or accidents
in sea disabling navigation
When
When
Who
lawful
unlawful
bears
expense
s
The
1. lack of The ship
inability
provisions owner or
to
due
to ship
continue negligence agent is
voyage is to carry liable in
due
to according case of
lack
of to usage unlawful
provisions and
arrival
,
well customs; under
founded
2.risk of stress.
fear
of enemies
But they
seizure,
not well- shall not
privateers known or be liable
, pirates manifest; for
or
3.defect
damages
accidents due
to caused
of the sea improper by
a
disabling repair;
reason of
it
to 4.malice,
a lawful
navigate
negligence arrival.
BAR OPERATIONS 2011
, lack of
foresight,
lack
of
skill
Cases of collision:
1. Due to the fault, negligence or
lack of skill of the captain, sailing
mate or the complement of the
vessel--under 826, the ship owner
shall be liable for the losses and
damages
2. Due to the fault of both vessels -> under 827, each vessel shall
suffer its own losses, but as
regards the owners of the
cargoes, both vessels shall be
jointly and severally liable
3. Where it cannot be determined
which of the 2 vessels is at fault -->
under 828, each vessel shall suffer
its own losses, and both shall also
be solidarily responsible for the
losses and damages caused to
their cargoes
4. Collision due to fortuitous event
or force majeure --> under 830,
each vessel shall bear its own
damages
5. Where two vessels collide with
each other without their fault but
by reason of the fault of a third
vessel --> under 831, the owner of
the third vessel causing the
collision shall be liable for the
losses and damages 6. a vessel
which is properly anchored and
moored may collide with those
nearby by reason of a storm or
other cause of force majeure -->
under 832, the vessel run into
shall suffer its own damages and
expenses
Page 177

Nautical Rules to determine

negligence :
1. When 2 vessels are about
to enter a port, the farther one
must allow the nearer to enter
first; if they collide, the fault is
presumed to be imputable to the
one who arrived later, unless it
can be proved that there was no
fault on its part.
2. When 2 vessels meet, the
smaller should give the right of
way to the larger one.
3. A vessel leaving port
should leave the way clear for
another which may be entering
the same port.
4. The vessel which leaves
later is presumed to have collided
against one who has left earlier.
5. There is also a
presumption against the vessel
which sets sail at night.
6. The presumption also
works against the vessel with
spread sails which collide with
another which is at anchor, and
cannot move, even when the crew
of the latter has received word to
lift anchor, when there was not
sufficient time to do so or there
was fear of a greater damage or
other legitimate reason.
7. The vessel which is not
properly moored or does not
observe the proper distances has
the presumption against itself.
8. The vessel which is
moored at a place not used for the
purpose, or which is improperly
moored or does not have suffiBAR OPERATIONS 2011
cient cables, or which has been

left without watch, has also
against itself the presumption.
9. The same rule applies to
those vessels which do not have
buoys to indicate the location of
its anchors to prevent damage to
these
vessels
which
may
approach it.
Zones in time of collisions (3
time zones):
1. all the time up to the
moment when the risk of collision
may have said to have begun
--> within this zone, no rule
is applicable because none is
necessary. Each vessel is free to
direct its course as it deems best
with reference to the movements
of the other vessel.
2. the time between the
moment when the risk of collision
begins and the moment when it
has become a practical necessity.
3. the time between the
moment when collision has
become a practical certainty and
the moment of actual contact
Effect of fault of privileged
vessel during third zone :
If a vessel having a right of
way suddenly changes its course
during the third zone, in an effort
to avoid an imminent collision
due to the fault of another vessel,
such act may be said to be done in
Page 178

extremis, and even if wrong,

cannot create responsibility on
the part of said vessel with the
right of way. Thus, it has been
held that fault on the part of the
sailing vessel at the moment
preceding a collision, that is,
during the third division of time,
does not absolve the steamship
which has suffered herself and a
sailing vessel to get into such
dangerous proximity as to cause
inevitable harm and confusion,
and a collision results as a
consequence. The steamer having
a far greater fault in allowing such
proximity to be brought about is
chargeable with all the damages
resulting from the collision; and
the act of the sailing vessel having
been done in extremis and even
wrong, is not responsible for the
result.
CASES COVERED BY COLLISION

AND ALLISION:
1. one vessel at fault- such vessel
is liable for damage caused to
innocent vessel as well as
damages suffered by owners of
cargo of both vessels
2. both vessels at fault- each
vessel must bear its own loss
but the shippers of both vessel
may go against the ship owner
who will be solidarily liable
3. vessel at fault not known- same
as rule 2
4. third vessel at fault- same rule
1
BAR OPERATIONS 2011
5. fortuitous event- no liability,

each bear its own loss
Rules governing LIABILITIES of
parties in case of COLLISION:
(1995, 1997,1998, & 2007 Bar
exams)
1. Where collision is due to the
negligence or malice of the
captain and/or other ship
officers of one vessel, the ship
owner of such vessel shall be
liable for all resulting damages.
2. Where collision is due to the
fault of both vessels, each vessel
shall suffer their respective losses
but as regards to the owners of
the cargoes, both vessels shall be
jointly and severally liable.
3. If it cannot be determined
which vessel is at fault, each
vessel shall suffer its own loses
and both shall be solidarily liable
for loses or damages on the cargo.
(DOCTRINE OF INSCRUTABLE
FAULT)
4. The vessels may collide with
each other through fortuitous
event or force majeure. In which
case, each shall bear its own
damage.
5. Two vessels may collide
without their fault but by
reason of a third vessel. The
third vessel shall be liable for
losses and damages sustained.
Requisite for RECOVERY arising
from collision:
1. Protest must be made within 24
hours before:
a) Competent authority at
the point of collision or
Page 179

b) At the first port of arrival,

if in the Philippines and to
the Philippine Consul, if
the collision took place
abroad.
Injuries to persons and damage to
cargo of owners not on board on
time of collision need not be
protested.
Article 835, Code of Commerce:
In case of collision, there must be
a marine protest to recover
collision damage; in such a case,
the marine protest is a condition
sine qua non and not merely a
disclaimer unlike in the case of
arrival
under
stress
and
shipwreck.
CARRIAGE OF GOODS BY SEA
ACT
Applicable to all transportation of
goods by sea in foreign trade to
and from Philippine ports AND
does not apply to purely domestic
transport.
Laws applicable to a contract
for the carriage of goods by
sea:
1. Distinguish - common carrier
(Civil Code)
- private carrier
2. Where is the vessel going?
a. Common carrier coming to the
Phils.
1st: Civil Code
2nd: COGSA (it's more specific
than Code of Commerce)
- in foreign trade
BAR OPERATIONS 2011
3rd: Code of Commerce

b. Private carrier coming to the
Phils. in foreign trade
1st: COGSA (because it's more
specific)
2nd: Code of Commerce
3rd: Civil Code (provisions not
on common carriers e.g. torts,
contracts)
c. From the Phils. to a foreign
country:
apply laws of such
foreign country (Art. 1753)
- with respect to vessels destined
for foreign ports, the COGSA
doesn't apply unless parties make
it applicable.
Q: In what situations does COGSA
primarily apply?
A: Where the parties expressly
stipulate that COGSA shall govern
their respective rights and
obligations.
Q: Can the COGSA apply in
domestic shipping?
A: Generally, NO.
EXCEPTION: when parties agree
to make it apply.
Q: What application does COGSA
have in carriage of passengers?
A: None. Applies only to carriage
of goods.
What is the TACKLE TO
TACKLE RULE?
The shipper shall be responsible
for the goods the moment it
Page 180

passes through one side of the

ship for the purpose of loading
until it passes through the other
side for discharging. The reason
for this being that there are two
tackles involved in this operation;
one for loading, the other,
unloading.
The shipper is responsible for:
Loading, Handling, Transport,
Carriage, Custody, and Discharge
What is the Rule for LOSS or
DAMAGE to the goods? (1992,
1995, 20000 & 2005 bar exams)
If the damage is apparent, then
notice must be immediately given.
The notice may either be in
writing or orally.
If the damage is not apparent,
notice must be given within three
days from such delivery.
Failure to give notice is not a bar
to the action to file provided the
filing of the suit is made within
one year from delivery to
consignee.
Notice requirements:
COGSA: Sec. 3(6)
If loss or damage is apparent protest as soon as receipt of goods
If not apparent -> within 3 days of
delivery
Rationale behind the 3-day notice
and relatively short prescriptive
period:
BAR OPERATIONS 2011
To provide carrier an
opportunity to look for the lost
goods
- To discover who was at fault
-In case of transshipment, to
determine, when and where
damage occurred.
Code of Commerce: Art. 366
apparent - protest at time of
receipt
non-apparent - within 24 hours
after receipt
WARSAW: Art. 26
in case of damage of:
baggage - within 3 days from
receipt
goods - within 7 days
in case of delay: within 14 days
from receipt
Prescriptive period
the carrier and the agent
shall be discharged form
liability in respect of loss or
damage unless suit is
brought within 1 year from:
(1) in case of damaged goods: from
the time delivery of the goods was
made
(2) in case of non-delivery (i.e., lost
goods): from the date the goods
should have been delivered
Loss or damage as applied to the
COGSA contemplates a situation
where no delivery at all times was
made by the shipper of the goods
because the same had perished,
gone out of commerce, or
Page 181

disappeared in such a way that

their existence is unknown or
they cannot be recovered. It does
not include a situation where
there was indeed a delivery but to
the
wrong
person or
a
misdelivery (Ang vs. American
Steamship Agencies 19 scra123)
and damage arising from delay or
late delivery( Mitsui O.S.K line Ltd
vs. CA 287 SCRA 366) in such
instance the civil code rules on
prescription shall apply.
Hence, in case of misdelivery
(delivery to wrong person) or
conversion of the goods, the
rules on prescription found in
the Civil Code shall apply (10
years for contracts; 4 years
for tortuous obligations)
The one year period is suspended
by:
a. The express agreement of the
parties (Universal Shipping Lines
Inc vs. IAC 1990)
b. The filing of an action in court
until it is dismissed
the 1yr period shall run
from delivery of the last
package
and
is
not
suspended by extrajudicial
demand.
the one year period shall run
from
delivery
to
the
arrasstre operator and not
to the consignee
SALVAGE LAW (ACT 2616)
BAR OPERATIONS 2011
I. FOUR REQUISITES FOR

SALVAGE REWARD TO BE
WARRANTED:
A. There must be a valid
object of salvage, i.e.,
vessel, cargo, freight or
wreck of vessel or cargo;
B. Such object must have
been exposed to marine
peril;
C. Salvage services must be
rendered voluntarily, i.e.,
not arising from preexisting duty;
D. Salvage effort must be
successful.
II. SHIPWRECK AND DERELICT:
A. Shipwreck. A shipwreck
refers to the injuries
suffered by the vessel
disabling the latter for
navigation.
B. Derelict. It refers to the
vessel
or
cargo
abandoned at sea by
those entrusted by such
vessel or cargo. A derelict
is a vessel or cargo badly
damaged and abandoned
by the crew to the mercy
of
the
sea.
Mere
abandonment of such
vessel or cargo does not
make it res nullius so that
anybody can claim it. The
proper procedure must be
followed.
III. PROCEDURE:
A. If the vessel is abandoned,
salvor must tow it to the
Page 182

nearest port where it will

be delivered to the
Municipal Treasurer or to
the Collector of Customs
who will advertise the
fact of salvage;
B. If owner of salvaged
vessel appears, he may
take possession of the
vessel and must pay a
reward, the amount of
which is not more than
50% of the value of the
vessel;
C. If no claim for the vessel
is made within 3 months
after the publication of
the advertisement, the
Municipal Treasurer will
sell the property saved at
a public auction and the
reward and expenses
shall be deducted from
the proceeds. The balance
is deposited with the
Treasury;
D. If no one claims the same
after 3 years, shall go to
the salvors and the other
half to the government.
IV. CONSIDERATIONS IN
DETERMINING THE AMOUNT
OF REWARD
1.)
First case
A. Value of the property
saved;
B. Zeal employed by those
who made the salvage;
C. Danger to the lives of
those who participated;
BAR OPERATIONS 2011
D. Number of persons who

took part;
E. Services rendered;
F. Expenses incurred
2.)
Second case: If one
vessel saves another vessel,
the reward going to the
former shall be divided as
follows:
A. to the ship owner;
B. to the captain; and
C. to the crew.
WARSAW CONVENTION
Convention for the Unification
of Certain Rules Relating to
International Transportation
by Air
The Warsaw Convention:
mandates carriers to
issue passenger tickets;
requires carriers to
issue baggage checks for
checked luggage;
creates a limitation
period of 2 years within
which a claim must be
brought (Article 29);
and
limits a carrier's liability
to at most:
250,000 Francs or
16,600 Special
Drawing Rights (SDR)
for personal injury;
17 SDR per kilogram
for checked luggage
and cargo, or $20USD
Page 183

per kilogram for nonsignatories of the

amended Montreal
Protocols.
5,000 Francs or 332
SDR for the hand
luggage of a traveler.
I. NATURE AND SCOPE OF

WARSAW CONVENTION
SCOPE:
Applies
to
all
international carriage of persons,
luggage or goods performed by
aircraft for reward. It applies
equally to gratuitous carriage by
aircraft performed by an air
transport undertaking.
International Carriage:
Means any carriage in which,
according to the contract made
by the parties, the place of
departure and the place of
destination, whether or not
there be a break in the carriage
or a transshipment, are
situated either within the
territories
of
two
High
Contracting Parties, or within
the territory of a single High
Contracting Party, if there is an
agreed stopping place within a
territory subject to the
sovereignty,
suzerainty,
mandate or authority of
another Power, even though
that Power is not a party to this
Convention.
BAR OPERATIONS 2011
The Warsaw Convention to

which the Republic of the
Philippines is a party and
which has the force and effect
of law in this country applies
to
all
international
transportation of persons,
baggage or goods performed
by an aircraft gratuitously or
for hire.
When a contract of carriage
is a contract of international
transportation, provisions of
the
Convention
automatically apply and
exclusively govern the rights
and liabilities of the airline
and
its
passengers.
(American Airlines vs. CA,
G.R. No. 116044-45 March 9,
2000)
Two categories of International
Transportation covered:
1.)
that where the
place of departure and
the place of destination
are situated within the
territories of two High
Contracting
Parties
regardless of whether
or not there be a break
in the transportation or
a transshipment; and
2.)
that where the
Overlordship
place of departure and
the place of destination
are within the territory
of a single High
Contracting Party if
there is an agreed
Page 184

stopping place within a

territory subject to the
sovereignty, mandate,
or authority of another
power, even though the
power is not a party of
the Convention. (Mapa
vs. CA, G.R. No. 122308
July 8, 1997)
(Lhuillier vs. British Airways,
G.R. No. 171092 March 15, 2010)
When the airline tickets
evidencing the contract of
transportation between Mapa
and
TWA,
which
were
purchased in Bangkok, show
the place of departure and the
place of destination to be
within the United States, the
contract cannot come within
the purview of the first
category of International
Transportation.
The linkage of the contract
to the Manila-Los Angeles
travel tickets obtained by the
Mapas from PAL cannot bring
the arrangements within the
second category, where the
same were filled-up only by the
Mapas in response to the query
Your Complete Intinerary at
the time they claimed for their
lost pieces of baggage. (Mapa
vs. CA, G.R. No. 122308 July 8,
1997)
BAR OPERATIONS 2011
It does not however preclude

operation of the Civil Code or
other pertinent laws:
Although
the
Warsaw
Convention has the force and
effect of law in this country,
being a treaty commitment
assumed by the Philippine
government, said convention
does not operate as an
exclusive enumeration of the
instances for declaring a
carrier liable for breach of
contract of carriage or as an
absolute limit of the extent of
that liability. The Warsaw
Convention declares the carrier
liable in the enumerated cases
and under certain limitations.
However, it must not be
construed to preclude the
operation of the Civil Code and
pertinent laws. (PAL vs. CA,
G.R. No. 119641 May 17,
1996)
II. SALIENT ASPECTS OF THE
WARSAW CONVENTION
A. Provision on the valuation
of cargo
Article 22. (1) In the
transportation of passengers,
the liability of the carrier for
each passenger shall be
limited to the sum of 125,000
francs. Where in accordance
with the law of the court to
which the case is submitted,
damages may be awarded in
the form of periodical
payments, the equivalent
Page 185

capital value of the said

payments shall not exceed
125,000 francs. Nevertheless,
by special contract, the
carrier and the passenger
may agree to a higher limit of
liability.
Art 25 (1) The carrier shall
not be entitled to avail
himself of the provisions of
this
Convention
which
exclude or limit his liability, if
the damage is caused by his
willful misconduct or by such
default on his part as, in
accordance with the law of
the court to which the case is
submitted, is considered
equivalent
to
willful
misconduct.
Admittedly, in a contract of
air carriage a declaration by
the passenger of a higher
value is needed to recover a
greater amount, and that the
air carrier is not liable for loss
of baggage in an amount in
excess of the limits specified in
the tariff which was filed with
the proper authorities, such
tariff being binding on the
passenger regardless of his
lack of knowledge thereof or
assent thereto. Nevertheless,
there can be no blind
reliance on adhesion of
contracts where:
1.) the facts and
circumstances justify that
BAR OPERATIONS 2011
they should be
disregarded; and
2.) when the benefits of
limited liability have been
waived when the air
carrier failed to raise
timely objections during
the trial when questions
and answers regarding the
actual claims and damages
sustained by the
passenger were asked.
(British Airways vs. CA,
G.R. No. 121824 January
29, 1998)
B. Provision on limiting
liability
The Convention's provisions
do not "regulate or exclude the
following areas:
1.) liability
for
other
breaches of contract by
the carrier;
2.) misconduct
of
its
officers and employees; or
3.) for some particular or
exceptional
type
of
damage.
(Northwest
Airlines vs. CA, G.R. No.
120334 January 20,
1998)
Varying views as regards
misconduct:
1st View Outside WC
Coverage
The Warsaw Convention
denies to the carrier availment
Page 186

of the provisions which exclude

or limit his liability, if the
damage is caused by his willful
misconduct or by such default
on his part as, in accordance
with the law of the court
seized of the case, is
considered to be equivalent to
willful misconduct, or if the
damage is similarly caused by
any agent of the carrier acting
within the scope of his
employment.
Under domestic law and
jurisprudence (the Philippines
being
the
country
of
destination), the attendance of
gross negligence (given the
equivalent of fraud or bad
faith) holds the common
carrier liable for all damages
which can be reasonably
attributed,
although
unforeseen, to the nonperformance of the obligation,
including
moral
and
exemplary damages. (Sabena
Beligian World Airways vs.
CA, G.R. No. 104685 March
14, 1996)
2nd View - Tortious conduct
as
ground
for
the
petitioners complaint is
within the purview of the
Warsaw
Convention
G.R. No. 171092 March 15,
2010)
BAR OPERATIONS 2011
C. On limitation of time to
file action
Article 29. (1) The right to
damages shall be
extinguished if an action is
not brought within two
years, reckoned from the
date of arrival at the
destination, or from the date
on which the aircraft ought
to have arrived, or from the
date on which the carriage
stopped.
(2) The method of calculating
the period of limitation shall
be determined by the law of
the court to which the case is
submitted.
The two (2)-year limitation
incorporated in Art. 29 as an
absolute bar to suit and not to
be made subject to the various
tolling provisions of the laws
of the forum. This therefore
forecloses the application of
our own rules on interruption
of prescriptive periods. Article
29, par. (2), was intended only
to let local laws determine
whether an action had been
commenced within the two
(2)-year
period.
(United
Airlines vs. Uy, G.R. No.
127768 November 19, 1999)
Prescription of action
covered
by
Warsaw
convention
distinguished
from those arising from
torts:
Page 187

Respondent's
complaint
reveals that he is suing on two
(2) causes of action: (a) the
shabby
and
humiliating
treatment he received from
petitioner's employees at the
San Francisco Airport which
caused
him
extreme
embarrassment and social
humiliation; and, (b) the
slashing of his luggage and the
loss of his personal effects
amounting to US $5,310.00.
While his second cause of
action an action for
damages arising from theft or
damage to property or goods
is well within the bounds of
the Warsaw Convention, his
first cause of action an
action for damages arising
from the misconduct of the
airline employees and the
violation of respondent's rights
as passenger clearly is not.
Consequently, insofar as the
first cause of action is
concerned,
respondent's
failure to file his complaint
within the two (2)-year
limitation of the Warsaw
Convention does not bar his
action since petitioner airline
may still be held liable for
breach of other provisions of
the Civil Code which prescribe
a
different
period
or
procedure for instituting the
action, specifically, Art. 1146
thereof which prescribes four
(4) years for filing an action
BAR OPERATIONS 2011
based on torts. (United

Airlines vs. Uy, G.R. No.
127768 November 19, 1999)
Use of delaying tactics by the
carrier
wont
preclude
enforcement of action even
beyond the prescriptive
period:
Despite the express mandate
of Art. 29 of the Warsaw
Convention that an action for
damages should be filed
within two (2) years from the
arrival at the place of
destination, such rule shall not
be applied in the instant case
because of the delaying tactics
employed by petitioner airline
itself. (United Airlines vs. Uy,
supra)
IV. Jurisdiction of Local
Courts under the Warsaw
Convention
Art. 1 (2) For the purposes of
this Convention the expression
"international carriage" means
any carriage in which, according
to the contract made by the
parties, the place of departure
and the place of destination,
whether or not there be a break
in
the
carriage
or
a
transhipment, are situated
either within the territories of
two High Contracting Parties, or
within the territory of a single
High Contracting Party, if there
is an agreed stopping place
within a territory subject to the
sovereignty,
suzerainty,
mandate or authority of another
Page 188

Power, even though that Power

is not a party to this Convention.
A carriage without such an
agreed stopping place between
territories subject to the
sovereignty,
suzerainty,
mandate or authority of the
same High Contracting Party is
not deemed to be international
for the purposes of this
Convention.
(Emphasis
supplied)
Art. 17. The carrier shall be
liable for damage sustained in
the event of the death or
wounding of a passenger or any
other bodily injury suffered by a
passenger, if the accident which
caused the damage so sustained
took place on board the aircraft
or in the course of any of the
operations of embarking or
disembarking.
Art 28 (1) An action for
damages must be brought at the
option of the plaintiff, in the
territory of one of the High
Contracting
Parties,
either
before the court of the domicile
of the carrier or of his principal
place of business or where he
has a place of business through
which the contract has been
made, or before the court at the
place of destination.
Destination
vs.
Agreed
Stopping Place
Article 1(2) also draws a
distinction
between
a
"destination" and an "agreed
BAR OPERATIONS 2011
stopping place." It is the

"destination" and not an "agreed
stopping place" that controls for
purposes
of
ascertaining
jurisdiction
under
the
Convention.
The contract is a single
undivided operation, beginning
with the place of departure and
ending
with
the
ultimate
destination. The use of the
singular in the expression
indicates the understanding of the
parties to the Convention that
every contract of carriage has one
place of departure and one place
of destination. An intermediate
place where the carriage may be
broken is not regarded as a "place
of destination." (Lhuillier vs.
British Airways, G.R. No. 171092
March 15, 2010)
Jurisdictional Character of Art.
28
We further held that Article
28(1) of the Warsaw Convention
is jurisdictional in character.
Thus:
A number of reasons tend to
support the characterization of
Article 28(1) as a jurisdiction and
not a venue provision. First, the
wording of Article 32, which
indicates the places where the
action for damages "must" be
brought,
underscores
the
mandatory nature of Article
28(1).
Second,
this
characterization is consistent
with one of the objectives of the
Convention, which is to "regulate
Page 189

in a uniform manner the

conditions
of
international
transportation by air." Third, the
Convention does not contain any
provision prescribing rules of
jurisdiction other than Article
28(1), which means that the
phrase "rules as to jurisdiction"
used in Article 32 must refer only
to Article 28(1). In fact, the last
sentence of Article 32 specifically
deals
with
the
exclusive
enumeration in Article 28(1) as
"jurisdictions," which, as such,
cannot be left to the will of the
parties regardless of the time
when the damage occurred.
xxxx
In other words, where the matter
is governed by the Warsaw
Convention, jurisdiction takes on
a dual concept. Jurisdiction in the
international sense must be
established in accordance with
Article 28(1) of the Warsaw
Convention, following which the
jurisdiction of a particular court
must be established pursuant to
the applicable domestic law. Only
after the question of which court
has jurisdiction is determined will
the issue of venue be taken up.
This second question shall be
governed by the law of the court
to which the case is submitted.
Supra.)
PUBLIC SERVICE LAW
BAR OPERATIONS 2011
What is a public utility? (2000

Bar exams)
A public utility is a business or
service engaged in regularly
supplying the public with some
commodity or service of public
consequence such as electricity,
gas,
water,
transportation,
telephone or telegraph service.
Apart from statutes which define
the public utilities that are within
the purview of such statutes, it
would be difficult to construct a
definition of a public utility which
would fit every conceivable case.
As its name indicates, however,
the term public utility implies a
public use and service to the
public. (Am. Jur. 2d V. 64, p.549.)
(Albano vs. Reyes)
ORDINARY AND PRIMARY
PURPOSE OF THE PUBLIC
SERVICE LAW
ORDINARY PURPOSE:
To subject public services to
state control and regulation.
SPECIFIC PURPOSES:
1. To secure adequate,
sustained service for
the public at the least
possible
cost,
and
protect the public
against unreasonable
charges
and
poor
inefficient service.
2. To
protect
and
conserve investments
which have already
been made for public
Page 190

service, and prevent

ruinous competition.
BASIS OF THE LEGISLATIVE
POWER TO REGULATE PUBLIC
SERVICES:
POLICE POWER, for the
protection of the public as
well
as
the
utilities
themselves. (Pantranco v.
P.S.C., 70 Phil 221)
CONSTITUTIONAL BASIS:
1. ARTICLE XII, SECTION
11:
> A franchise, certificate,
or any other form of
authorization for the
operation of public utility
shall be granted to:
- Filipino Citizens
- Corporations or
associations
organized under
Philippine Laws
where at least
60% of the capital
is
owned
by
Filipino Citizens.
- 100%
Filipino
Management
> Mass
media
and
commercial
telecommunications shall
be:
- 100%
Filipino
Capital, and
- 100%
Filipino
management
BAR OPERATIONS 2011
2. ARTICLE XII, SEC 17:

In
times
of
national
emergency, when the public
interest so requires, the
State may during the
emergency
and
under
reasonable
terms,
temporarily take over or
direct the operation of any
private owned public utility
or business affected with
public interests.
18
The state may, in the
interest of national welfare
or defense, establish and
operate vital industries and
upon payment of just
compensation, transfer to
public ownership utilities
and
other
private
enterprises to be operated
by the government.
19
The state shall regulate or
prohibit monopolies when
the public interest so
requires; no combination in
restraint of trade or unfair
competition shall be allowed
Distinguish a Certificate of
Public Convenience from a
Certificate
of
Public
Convenience and Necesssity
A CPC is issued whenever
the Commission finds that the
operation of the proposed public
service will promote the public
Page 191

interests in a proper and suitable

manner, for which a municipal or
legislative franchise is not
necessary. On the other hand,
CPCN is issued upon approval of
any political subdivision of the
Philippines when in the judgment
of the Commission, such franchise
or
privilege
will
properly
conserve the public interest
(Perez, Transportation Laws and
Public service Act).
OFFICES NOW CHARGED WITH
ENFORCEMENT OF PUBLIC
SERVICE LAW
The Public Service Commission
has been abolished. The following
replaced it:
1. LAND TRANSPORTATIONDepartment
of
Transportation
and
Communication (DOTC) and
the Land Transportation
Franchising and Regulatory
Board (LTFRB)
2. WATER TRANSPORTATIONMaritime Industry Authority
(MARINA)
3. AIR TRANSPORTATION- Air
Transportation Office (ATO)
headed by an assistant
secretary and the Civil
Aeronautics Board, which
has been placed under the
DOTC as an attached agency.
4. TELECOMMUNICATIONSNational
Telecommunications
Commission, which has been
BAR OPERATIONS 2011
placed under the DOTC as an

attached agency.
5. ENERGY- Board of Energy
but transferred to the
Energy Regulatory Board
(ERB)
6. WATERWORKSNational
Water Resources Council
LIMITATIONS ON THE POWERS
OF THE REGULATORY
BOARDS,
COMMISSIONS
AND COUNCILS:
1. General:
Powers are limited from
those granted in the
legislation creating the body.
2. Constitutional:
Regulations
imposed
must not have the effect of
depriving an owner of his
property
without
due
process
of
law
nor
confiscating
or
appropriating
private
property
without
just
compensation.
3. Judicial:
Boards, commissions are
not judicial tribunals and
therefore cannot determine
judicial questions such as
validity of contract.
4. Jurisdiction:
Extends only to persons
engaged in public utilities, or
over a public utility, which
holds a Certificate of Public
Convenience.
B.
JURISDICTION
Page 192

General Rule: Over persons

engaged in public utilities, or
over a public utility, which
holds a Certificate of Public
Convenience.
Exemption: violators of a
valid
regulation
promulgated under the law
Distinguish
Legislative
Franchise from a CPC
A franchise is a grant or
privilege from the sovereign
power, while the certificate is a
form of regulation through an
administrative agency.
A franchise is a property
right and cannot be revoked or
forfeited without due process of
law (PLDT, Co. v. NTC and
CELLCOM,
Inc.
(Express
Telecommunications Co., Inc. G.R.
No. 88404, 18 October 1990),
whereas a CPC or a CPCN as far as
the interest of the State is
concerned , constitutes neither a
franchise nor a contract, confers
no property right, and is a mere
license or a privilege. The holder
of said certificate does not acquire
a property right in the route
covered thereby. Nor does it
confer upon the holder any
proprietary right or interests or
franchise in the public highways.
Revocation of this certificate
deprives him of no vested right.
New and additional burdens
alteration of the certificate, or
even revocation or annulment
thereof is reserved to the State
BAR OPERATIONS 2011
(Lugue v. Villegas, G.R. No. L22545, 28 November 1969).

Essentials before Granting a
CPC/ CPCN
1. The granter must be a
citizen of the Philippines or
entity sixty percent of which
is owned by such citizens.
2. The grantee must have
sufficient financial capability
to undertake the service
and,
3. The service will promote
public
interests
and
convenience in a proper and
suitable manner.
Note: The overriding principle is
a public interest, necessity and
convenience (Sundiang
&
Aquino,
Reviewer
on
Commercial Law).
Coverage of CPC
a ferry boat service is
considered as a continuation of
the highway when crossing rivers
or lakes , which are small bodies
of
water;
hence
a
land
transportation company is no
longer required to secure a
separate CPC in order to operate a
ferry boat for the use of its buses.
Grounds for Revocation of
Certificate
1. The holder violates or
contumaciously refuses to
comply with any order, rule
or
regulation
of
the
Page 193

commission.
(Sec.16(n)of
Public Service Act)
2. The holder is a mere
dummy.
3. The
operator
ceased
operation and placed his
buses on storage; or
4. The operator abandons
totally
the
service.
(Manzanal v. Ausejo, No. L31056, August 4, 1988).
Unlawful Acts of Public Utility
Companies
1. Engagement
in
public
service business without
first securing the proper
certificate
2. Providing or maintaining
unsafe,
improper
or
inadequate
service
as
determined by the proper
authority
3. Committing any act of
unreasonable and unjust
preferential treatment to
any
particular
person,
corporation or entity as
determined by the proper
authority
4. Refusing or neglecting to
carry public mail upon
request (Secs.18 &19).
Prior Old Operator Rule
Before permitting a new
operator to invade the territory of
another already established with
a CPC, the prior operator must
first be given the opportunity to
extend its service in order to meet
public needs in the matter of
transportation. It means that a
BAR OPERATIONS 2011
public utility operator should be

shielded
from
ruinous
competition by affording him the
opportunity to improve his
equipment and service before
allowing a new operator to serve
in the same territory he covers
(Mandaluyong Bus Co. v.
Francisco).
The law contemplates that
the first licensee will be protected
in his investment and will not be
subjected
to
a
ruinous
competition. It is not therefore
the policy of the law to issue a
CPC to a second operator to cover
the same field and in competition
with a first operator who is
rendering sufficient, adequate and
satisfactory service, and who in
all things and respects is
complying with the rules and
regulations of the commission.
The old operator must be given
the opportunity to improve and
extend his lines. (Batangas Trans
Co. v Orlanes, 52 Phil 455)
BASIS OF THE PRIOR
OPERATOR RULE
Prevent
ruinous
and
wasteful competition and interest
of public will be preserved.
EXCEPTIONS TO THE PRIOR
OPERATOR RULE:
Page 194

1. Operator fails/ neglects to

make improvement or affect
the
increase in service
when given the opportunity.
2. When Prior operator offers to
meet increases in demand
only when another operator
offered to render additional
service
3. Abandonment of operation
4. Prior operators did not
oppose application
5. Prior operator cannot satisfy
needs of the public
6. When opportunity to improve
service is raised by prior
operator only on appeal.
7. CPC granted to the applicant
is a maiden franchise covering
a new route, albeit
overlapping with that of the
old operator
8. Expiration of corporate
existence of prior operator.
9. Monopoly
10.
Pass
age through private
subdivision which granted
permit to another
Prior Applicant Rule
Where there are various
applicants for a public utility over
the same authority, all conditions
being equal, priority in the filing
of the application for a certificate
of public convenience becomes an
important factor in granting or
refusal of a certificate of
convenience and the Commission
is authorized to determine which
of the applicants can best meet
BAR OPERATIONS 2011
the requirements of public

convenience (delos Santos v.
Pasay Trans. Co.).
Protection of Investment Rule
One of the purposes of the
Public Service Act is to protect
and conserve investments which
have already been made for that
purpose by public service
operators
Registered Owner Rule
The registered owner of a
certificate of a public convenience
is liable to the public for the
injuries or damages suffered by
third persons caused by the
operation of said vehicle, even
though the same had been
transferred to a third person.
The registered owner is not
allowed to escape responsibility
by proving that a third person is
the actual and real owner.
The registered owner is the
lawful operator insofar as the
public and third persons are
concerned; consequently, it is
directly and primarily responsible
for the consequences of its
operation. In contemplation of
law, the owner/operator of
record is the employer of the
driver, the actual operator and
employer being considered as
merely its agent. The same
principle applies even if the
registered of any vehicle does not
use it for public service
(Equitable Leasing Corp. v.
Suyom,
G.
R.
No.143360,
Page 195

September
5,
2002),
or
otherwise stated, to privatelyowned vehicles.
A sale, lease or financial
lease that is not registered with
the LTO does not bind third
persons who are aggrieved in
tortuous incidents, for the latter
need only to rely on the public
registration of a motor vehicle as
conclusive evidence of ownership.
A lease is an encumbrance in
contemplation of law, which
needs to be registered in order for
it to bind third parties (PCI
Leasing Corp and Finance Inc. v.
UCPB General Insurance Co., Inc.
G.R. No. 162267, 4 July 2008).
Registered
Owner
had
Recourse
against
Vendee/
Transferee
A registered owner who has
already sold or transferred a
vehicle has a recourse to a thirdparty complaint, in the same
action brought against him to
recover for the damage or injury
done, against the vendee or
transferee
of
the
vehicle
(Villanueva v. Domingo, 438
SCRA 485, 2004).
Kabit System( 2005 Bar exams)
It is an arrangement
whereby a person who has been
granted a certificate of public
convenience allows other persons
who own motor vehicles to
operate under such license, for a
fee or percentage of such
BAR OPERATIONS 2011
earnings. Although the parties to

such agreement are not out
rightly penalized by law,the kabit
system is invariably recognized as
being contrary to public policy
and therefore void and inexistent
under Art.1409, New Civil Code (
Lim v. C.A. G.R.No. 125817, 16
January 2002)
Effects
1. The transfer, sale, lease or
assignment of the privilege
granted is valid between the
contracting parties but not
upon the public or third
persons (Gelisan v. Alday
No.L- 30212, 30 September
1987)
2. The registered owner is
primarily liable for all the
consequences flowing from
the operations of the carrier.
The public has the right to
assume that the registered
owner is the actual or lawful
owner thereof. It would be
very difficult and often
impossible, as a particular
matter, for the public to
enforce their rights of action
for injuries inflicted by the
vehicle if they should be
required to prove who the
actual owner is (Benedicto
v. IAC G.R No. 70876, 19
July 1990).
3. The thrust of the law in
enjoining the Kabit system is
to identify the person upon
whom responsibility may be
fixed with the end in view of
Page 196

protecting
the
riding
public.(Lim v. C.A. G.R. No
125817, 16 January 2002)
4. Application of Article 1412
of the NCC or in pari delicto
rule. The registered owner
cannot recover from the
actual owner and the latter
cannot obtain transfer of the
vehicle to himself, both
being in pari delicto. (Teja
Marketing Vs. IAC)
5. For the better protection of
the
public,
both
the
registered owner and the
actual owner are jointly and
severally liable with the
driver
(Zamboanga
Transporatation Co. v. C.A,
29 November 1969)
6. The determining factor
which negates the existence
of Kabit system is the
possession of the franchise
to operate and not the
issuance of one SS I.D.
Number for both bus line
(Baliwag Transit V. C.A, 7
January 1987)
Requisites
for
the
Inapplicability of the Kabit
System
1. When neither of the parties
to the pernicious Kabit
system is being held liable
for damages.
2. When the case arose from
the negligence of another
vehicle using the public road
to which no representation
or misrepresentation as
BAR OPERATIONS 2011
regards the ownership and

operation of passenger
jeepney was made.
3. When the riding public was
not
bothered
of
inconvenienced at the very
least
by
the
illegal
arrangement (Lim v. C.A. 16
January 2002)
Boundary System
1. The driver does not receive
a fixed wage but gets only
the excess of the receipt of
the fares collected by him
over the amount he pays to
the jeep owner.
2. The gasoline consumed by
the jeep is for the account of
the driver.
These two features are not
sufficient to withdraw the
relationship between the owner
and the driver from that of
employer and employee. The
jeepney owner is subsidiarily
liable as employer in accordance
with Art.103 of RPC (Magboo v.
Bernardo, 30 April 1963).
Indeed to exempt from liability
the owner of public vehicle who
operates it under the boundary
system on the ground that he is a
mere lessor would be not only to
abet flagrant violations of the
public service law, but also to take
place the riding public at the
mercy
of
reckless
and
irresponsible drivers (Spouses
Henandez v. Spouses Dolor, 30
July 2004)
Page 197

The Civil Aeronautics Board is

expressly authorized by R.A. No.
776 to issue a temporary
operating permit of certificate of
Public Convenience and Necessity
(PAL v. CAB 26 March 1997)
The Legislature has delegated
to the defunct Public Service
Commission and presently the
LTFRB, the power of fixing rates
of public services. But nowhere
under the provisions of law are
the regulatory bodies, the PSC and
LTFRB alike, authorized to
delegate that power to a common
carrier like transport operator, or
other public service (KMU Labor
v. Garcia, 23 December 1984).
A public Utility is entitled to
reasonable
compensation
in
return for the service it provides
and that it may exact reasonable
charges in accordance with the
service provided of the rates
established
therefore.
In
computing
the
just
and
reasonable rates to be charged by
a public utility, three major
factors are to be considered: 1).
Rate of Return; 20. The rate base,
3) the return itself or the
computed revenue to be earned
by the public utility based on the
rate of return and base rate
(Davao Light and Power
Company, Inc., 3 April 2003)
BAR OPERATIONS 2011
A rate is just and reasonable if

it conforms to the following
requirements:
1. One which yields to the
carrier a fair return upon the
value of the property
employed in performing the
service; and
2. One which is fair to the
public for the service
rendered.
Service of a Public Utility
considered Unlawful
It shall be unlawful for any
public service to provide or
maintain ant service that is
unsafe, improper, or inadequate,
or withhold or refuse any service
which can be reasonably be
demanded and furnished as
founded and determined by the
Commission in a final order which
shall be conclusive and shall effect
and shall effect in accordance
with this Act, upon Appeal for
otherwise (Sec.19 (a) Public
Service Act)
Certificate
of
Public
Convenience and Necessity
a. A certificate of Public
Convenience is issued where
no
special
government
franchise is required.
b. A certificate of Certificate of
Public Convenience and
Necessity is issued where
the public service would
require in its operation the
use of government property,
such as the installation of
Page 198

electric and telephone posts

and lines along public
streets requiring a previous
franchise therefore
c. No certificate is necessary
where the service of utility is
owned,
operated
and
managed for a private use or
where the owner is not
engaged in public service.
Liability of Registered Owner
and Authorized Operator under
the Kabit System and Boundary
System
Both the registered owner
and the Authorized operator of a
common carrier under the Kabit
System are jointly and severally
(solidarily) liable for any death or
injury to the passengers and
loss/damage to the goods.
Under the Boundary System
the authorized operator of a
common carrier is liable for the
conduct of the driver, there being
an
employer-employee
relationship
between
the
operator and the driver.
SPECIAL COMMERCIAL LAWS
LETTERS OF CREDIT
1. A letter of credit is basically
an open letter of request whereby
one person requests another to
advance money or give credit to a
third person for a certain amount
BAR OPERATIONS 2011
and promises to repay the person

advancing the money.
1.1 They are intended generally
to facilitate the purchase and sale
of goods by providing assurance
to the seller of prompt payment
upon compliance with specified
conditions or presentation of
stipulated documents without the
seller having to rely upon the
solvency and good faith of the
buyer. This is known as the rule of
strict compliance in a letter of
credit transaction means that the
documents tendered by the seller
or beneficiary must strictly
conform to the terms of the letter
of credit, i.e., they must include all
documents required by the letter
of credit such as: (a) a draft
which is also called a bill of
exchange, is an order written by
an exporter/seller instructing an
importer/buyer or its agent to
pay a specified amount of money
at a specified time (b) a bill of
lading, which is a document
issued to the exporter by a
common carrier transporting the
merchandise, and (c) invoices.
1.2 The
issuing
bank
in
determining compliance with the
terms of the letter of credit is
required to examine only the
shipping documents presented by
the seller and is precluded from
determining whether the main
contract is actually accomplished
or not. This arrangement assures
the seller of prompt payment,
Page 199

independent of any breach of the

main sales contract. This known
as the independence principle in
a letter of credit transaction.
2. The primary purpose of a
letter of credit is to substitute for,
and therefore support, the
agreement of the buyer-importer
to pay money under a contract or
other
arrangement.This
instrument is basically a credit
security through availment of
credit
facilities
of
the
participating banks.
3. The parties to a letter of
credit are: (a) The Buyer- he is the
one who procures the letter of
credit and obliges himself to
reimburse the issuing bank upon
receipt of the documents of title
(b) The Issuing Bank- is the bank
from whom the letter of credit is
procured and which undertakes
to pay the seller upon receipt of
the draft and proper documents
of titles and to surrender the
documents to the buyer upon
reimbursement, and (c) The
seller- who in compliance with
the contract of sale ships the
goods to the buyer and deliver the
documents of title and draft to the
issuing bank to recover payment.
3.1. In an international credit
transaction carried through a
letter of credit, the parties are: (a)
The Customer- who is the party
who applies to a bank in one
country for the opening of a letter
BAR OPERATIONS 2011
of credit in favor of the seller in

another country (b) The Issuing
Bank- is the bank in the country
of the customer to which the
customer applies for the issuance
of a letter of credit (c) The
Beneficiary- who is the party in
another country who is the
creditor of the customer. Usually,
he is the one selling goods to the
customer (d) The Advising Bank
is the bank in the country of the
beneficiary which communicates
to the beneficiary the notice of the
credit issued by the issuing bank
(e)
The
Confirming/Correspondent Bankis the bank that undertakes that
the letter of credit will be fully
paid. Usually the confirming bank
is also the advising bank,
otherwise it is utilized to lend
credence to the letter of credit
issued by a lesser known issuing
bank and is directly liable to the
beneficiary.
3.2 The relationships of the
parties are to be governed as
follows: (a)Issuing bank and
applicant/buyer/importer Their
relationship is governed by the
terms of the application and
agreement for the issuance of the
letter of credit by the bank. Unless
the contrary is provided for, the
liability of the issuing bank is
solidary with the buyer (b)
Issuing
bank
and
beneficiary/seller/exporter
Their relationship is governed by

the terms of the letter of credit
Page 200

issued by the bank, and (c)

Applicant and beneficiary Their
relationship is governed by the
sales contract.
3.3 It is clearly settled in law
that there are thus three contracts
which make up the letter of credit
transaction:
The
contract
between buyer and seller, buyer
and issuing bank, and the letter of
credit proper. These transactions
are to be maintained in a state of
perpetual separation.
4. The essential conditions of a
letter of credit are: (a)
That it
be issued in favor of a definite
person and not to order; and (b)
That it be limited to a fixed
and specified amount, or to one or
more undetermined amounts, but
within a maximum the limits of
which has to be stated exactly.
4.1 Hence, a letter of credit is
not a negotiable instrument
because it is required to be drawn
in favor of a definite person.
4.2 Those which do not have
any of the essential conditions
shall be considered merely as a
letter of recommendation.
4.3 The bank or drawer of a
letter of credit shall be liable to
the person on whom it was issued
for the amount paid by virtue
thereof, within the maximum
fixed therein, while a notifying
BAR OPERATIONS 2011
bank does not incur any liability

except to notify the beneficiary of
the letter of credit. Before paying,
it shall have the right to demand
the proof of the identity of the
person in whose favor the letter
of credit is issued.
4.4 The drawer of a letter of
credit may annul it, informing the
bearer and the person to whom it
is addressed of such revocation.
The waiver of the right to annul
makes the letter of credit
irrevocable
4.5 The bearer of a letter of
credit shall pay the amount
received to the drawer without
delay. Should he not do so, an
action involving execution may be
brought to recover it, with legal
interest and current exchange in
the place where payment was
made on the place where it is
repaid.
4.6 A letter of credit becomes
void if the bearer of a letter of
credit does not make use thereof
within the period agreed upon
with the drawer, or, in default of a
period fixed, within 6 months
counted from its date, in any
point in the Philippines, and
within 12 months anywhere
outside thereof, it shall be void in
fact and in law.
5. A standby letter of credit is a
bank-issued option on a loan
involving three parties: the bank
Page 201

issuing the credit, the party

requesting for such issuance
(otherwise known as the account
party) and the beneficiary. Under
the terms of standby letter of
credit (SLC), the beneficiary has
the right to trigger the loan option
(referred to as taking down the
loan) if the account party fails to
meet its commitment, in which
case the issuing bank disburses a
specified sum to the beneficiary
and books an equivalent loan to
its customer. SLCs may support
nonfinancial obligations such as
those of bidders, or financial
obligations such as those of
borrowers. In the latter case, the
borrower purchases an SLC and
names the lender as beneficiary.
Should the borrower default, the
beneficiary has the right to take
down the SLC and receive the
principal balance from the
issuing.
5.1 Another definition is that it
is a bank-issued option on a loan
involving three parties: the bank
issuing the credit, the party
requesting for such issuance
(account
party)
and
the
beneficiary. Under its terms, the
beneficiary has the right to trigger
the loan option if the account
party
fails
to
meet
its
commitment, in which the case
the issuing bank disburses a
specified sum to the beneficiary
and books an equivalent loan to
its customer.
BAR OPERATIONS 2011
6. The common types of letters

of credit are: (a)
Irrevocable
vs. revocable An irrevocable
letter of credit obligates the
issuing bank to honor drafts
drawn in compliance with the
credit and can be neither
cancelled nor modified without
the consent of all parties,
including in particular the
beneficiary/exporter.
A
revocable letter of credit can be
cancelled or amended at any time
before payment; it is intended to
serve as a means of arranging
payment but not as a guarantee of
payment (b) Confirmed
vs.
unconfirmed A letter of credit
issued by one bank can be
confirmed by another, in which
case both banks are obligated to
honor drafts drawn in compliance
with the credit. An unconfirmed
letter of credit is the obligation
only of the issuing bank. Why
would an exporter want a foreign
banks letter of credit confirmed
by a domestic bank? One reason
could be if he has doubts
6.1 Other types: (a) Revolving
Letter of Credit-one that provides
for renewed credit to become
available as soon as the opening
bank has advised the negotiating
or paying bank that the drafts
already drawn by the beneficiary
have been reimbursed to the
opening bank by the buyer (b)
Back to Back Letter of Credit- a
credit with identical documentary
requirements and covering the
Page 202

same merchandise as another

letter of credit, except for the
difference in price of the
merchandise as shown by the
invoice and draft. The second
letter of credit can only be
negotiated after the first is
negotiated.
1. A trust receipt is a
commercial document whereby
the bank releases the goods in the
possession of the entrustee but
retains ownership thereof while
the entrustee shall sell the goods
and apply the proceeds for the full
payment of the liability to the
bank.
whereby the entruster, who owns

or hold absolute title or security
interests over certain specified
goods, documents or instruments,
releases the same to the
possession of the entrustee upon
the latters execution and delivery
to the entruster of a trust receipt
wherein the entrustee binds
himself to hold the specified gods,
documents or instruments in
trust for the entruster and to sell
or otherwise dispose of the goods,
documents or instruments with
the obligation to turn over to the
entruster the proceeds thereof to
the extent of the amount owing to
the entruster, or the goods,
documents
or
instruments
themselves if they are unsold or
not otherwise disposed of.
1.1 It is a security transaction

intended to aid in financing
importers and retail dealers who
do not have sufficient funds or
resources
to
finance
the
importation or purchases of
merchandise, and who may not be
able to acquire credit, except
through utilization, as collaterals,
of the merchandise imported or
purchased.
2.1 A Security Interest means a

property interest in goods,
documents or instruments to
secure performance of some
obligations of the entrustee or of
some third persons to the
entruster and includes title,
whether or not expressed to be
absolute, whenever such title is in
substance taken or retained for
security only.
1.2 The subject matter of a trust

receipt is always chattel. It will
not apply to chattel so attached to
land so as to become part thereof.
2.2 A trust receipt transaction

distinguished from:(a) A pledgein a pledge, the person doing the
financing has possession of the
property; in a trust receipt, the
property is in the possession of
the person financed (b) A
conditional sale-in a conditional
TRUST RECEIPTS
2. A trust receipt transaction is

a
transaction between
an
entruster and an entrustee
BAR OPERATIONS 2011
Page 203

sale, there is a sale of the property

from the seller to the buyer; in a
trust receipt, there is no sale of
the property from the entruster to
the entrustee (c) A chattel
mortgage-a chattel mortgage
involves the creation of a lien
upon the property; a trust receipt
does not involve the creation of a
lien (d) A consignment-in a
consignment,
the
consignor
retains title to the property to
secure the indebtedness due from
the consignee; in a trust receipt,
the seller does not retain title to
the property but transfers such
title to the entruster, not to the
entrustee
2.3 When a debtor has received
the goods from a supplier thereby
acquiring title and will after
borrow money from a bank to pay
for the same, the transaction is a
loan even he signs a trust receipt
agreement. It is essential for a
trust receipt transaction for the
bank to first acquire ownership
and possession.
2.4 When a Memorandum of
Agreement is entered between a
debtor corporation and a creditor
bank is entered into rescheduling
the payments due from the
former,
the
trust
receipt
transaction is novated and
transformed into a simple loan.
3. The parties to a trust receipt
transaction
are:
(a)
The
entruster- is the person holding
BAR OPERATIONS 2011
title over the goods, documents or

instruments subject to a trust
receipt transaction, and any
successor in interest of such
person, and (b) The entrustee is
the person having or taking
possession of goods, documents
or instruments under a trust
receipt transaction, and any
successor in interest of such
person for the purpose or
purposes specified in the trust
receipt
4. The rights of the entruster
are: (a) to be entitled to receive
the proceeds of the sale of the
goods released under a trust
receipt to the entrustee to the
extent of the amount owing to the
entruster (b) to the return of the
said goods, in case they could not
be sold; and (c) to cancel the trust
in case the entrustee defaults,
take possession of the goods, and
sell the same at public or private
sale.
4.1 The process of taking
possession and selling the goods
is as follows: (a) the entruster
may cancel the trust and take
possession
of
the
goods,
documents or instruments subject
of the trust or of the proceeds
realized therefrom at any time
upon default or failure of the
entrustee to comply with any of
the terms and conditions of the
trust receipt or any other
agreement between the entruster
and the entrustee (b)
The
Page 204

entruster in possession of the

goods, documents or instruments
may, on or after default, give
notice to the entrustee of the
intention to sell, and may, not less
than five days after serving or
sending of such notice, sell the
goods, documents or instruments
at public or private sale, and the
entruster may, at a public sale,
become a purchaser. Notice of the
sale shall be deemed sufficiently
given if in writing, and either
personally
served
on
the
entrustee or sent by post-paid
ordinary mail to the entrustees
last known business address (c)
the proceeds of any such sale,
whether public or private, shall be
applied (1) to the payment of the
expenses thereof; (2) to the
payment of the expenses of retaking, keeping and storing the
goods, documents or instruments;
(3) to the satisfaction of the
entrustees indebtedness to the
entruster. The entrustee shall
receive any surplus but shall be
liable to the entruster for any
deficiency.
4.2 Cancellation of the trust
receipt and repossession is not
essential for the entruster to have
a cause of action against the
entrustee. They are options
available to the entruster and do
not prejudice resort to other
remedies.
5. The obligations of the
entrustee are as follows: (a) to
BAR OPERATIONS 2011
hold the goods in trust for the

entruster and to dispose of them
strictly in accordance with the
terms of the trust receipt; This
includes
the
authority
to
manufacture or process the goods
with the purpose of ultimate sale.
Provided, however, that the
entruster retains title over the
goods whether in its original or
processed
form
until
the
entrustee has complied with the
obligation under the receipt. It
also includes authority to load,
unload, ship or transship or
otherwise deal with the goods in a
manner preliminary or necessary
to their sale (b) To receive the
proceeds of the sale of the goods
in trust for the entruster and to
turn over the same to the
entruster to the extent of the
amount owing to the entruster (c)
to insure the goods for their total
value against loss from fire, theft,
pilferage or other casualties (d) to
keep the goods or the proceeds
thereof, whether in money or
whatever form, separate and
capable of identification as
property of the entruster; and (e)
to return the goods,to the
entruster in case they could not
be sold or upon demand of the
entruster.
5.1 Notwithstanding
the
security interest of the entruster,
the entrustee shall be responsible
as principal or as vendor under
any sale or contract to sell made
by the entrustee. Hence, although
Page 205

the entrustee is not the owner of

the goods under a trust receipt
(ownership is retained by the
entrustor) anyone who acquires
the goods from the entrustee
acquires good title (ownership)
over the goods. Note that it runs
counter to the provisions of
Article 1505 of the Civil Code,
where there is a contract of sale,
the buyer is to acquire only
whatever title the seller had at the
time the sale was perfected.
5.2 Risk of loss shall aslso be
borne by the entrustee. Hence, the
loss of goods, documents, or
instruments which are the subject
of a trust receipt, pending their
disposition,
irrespective
of
whether or not it was due to the
fault or negligence of the
entrustee, shall not extinguish his
obligation to the entruster for the
value thereof. This is not in
accordance with the civil law
principle that it is generally the
owner who must bear the risk of
loss of the object
6. A trust receipt arrangement
does not involve a simple loan
transaction between a creditor
and debtor-importer. The law
warrants the validity of the trust
receipt agreement. Consequently,
the goods covered by the trust
receipt cannot be levied upon by
the creditors of the entrustee. The
validity of entrusters security
interest as against creditors-the
entrusters security interest in
BAR OPERATIONS 2011
goods, documents, or instruments

pursuant to the written terms of a
trust receipt shall be valid as
against all creditors of the
entrustee for the duration of the
trust receipt agreement.
7. The acts punishable by the
Trust Receipts Law as Estafa as
defined by Article 315, Section
1(b) of the Revised Penal Code
are: (a) The failure to comply
with the provision referring to the
obligation involving the duty to
deliver (entregaria) the money
received to the owner of the
merchandise
sold,
or(b)The
failure to comply with the
provision referring to the
obligation involving the duty to
return (devolvera) the goods to
the owner if not disposed of in
accordance with the terms of the
trust receipt.
7.1 There is no need to prove
intent to defraud as the offense is
malum prohibitum.
7.2 There is also no need to
prove damage to the entrustor
because the nature of a trust
receipt transaction and the
damage caused to trade circles
and the banking community in
case of a violation thereof is the
basis for the criminal offense.
7.3 Consequently, the law has
consistently been declared as not
violating
the
constitutional
proscription
against
Page 206

imprisonment for non-payment of

debt. It is a declaration by the
legislative authority that, as a
matter of public policy, the failure
of a person to turn over the
proceeds of the sale of goods
covered by the receipt or to
return the goods if not sold is a
public nuisance to be abated by
penal sanctions.
WAREHOUSE RECEIPTS:
1. The
purpose
of
the
Warehouse Receipts Law is to
regulate the status, rights and
liabilities of parties. In particular,
it prescribes the rights and duties
of a warehouseman and to
regulate his relationship with (a)
the depositor of the goods, or (b)
the holder of a warehouse receipt,
or (c) the person lawfully entitled
to the possession of the goods, or
(d) other persons. It also covers
all warehouses, whether bonded
or not.
1.2 As far as the effect of the
New Civil Code provisions on
documents of title to goods which
include quedans or warehouse
receipts, there is no conflict
between the two. The Warehouse
Receipts Law refers to and will
apply to warehouse receipts
issued by warehouseman, while
the New Civil Code refers to and
will apply to receipts that are not
issued by warehouseman.
BAR OPERATIONS 2011
2. The purpose of the General

Bonded Warehouse Act is to
regulate the business of receiving
commodities for storage in order
to protect persons who may want
to avail themselves of warehouse
facilities and to encourage the
establishment
of
more
warehouses.
2.1 Distinguishing between the
2 laws, the Warehouse Receipts
Law refers to the rights and
obligations of parties in a
warehousing contract, while the
General Bonded Warehouse Act
refers to state regulation and
supervision of warehouses
3. A warehouse receipt is a
written acknowledgment by a
warehouseman that he holds
certain goods in store for the
person to whom the document is
issued. This is also known as
warehouse-keepers receipt or
storage receipt.
3.1 While no particular form is
required, it should however
include the necessary terms
stating: (a) Location of the
warehouse (b) Date of issue (c)
Number of receipt (d) Description
of the goods (e) Advances made
(f) Rate of charges (g) Ownership
of the goods by language
indicating if the warehouseman is
an owner, solely or jointly with
others, of the goods deposited (h)
Signature of the warehouseman,
and (i) Person to whom goods
Page 207

should be delivered by language

indicating whether the receipt is
negotiable or non-negotiable, that
is whether the goods received will
be delivered to the bearer, to a
specified person, or to a specified
person or his order
3.2 A negotiable warehouse
receipt is not a negotiable
instrument as the same does not
comply with the requisites of
Section 1, Act 2031. However,
ownership thereof may be
transferred by delivery if it states
that it is deliverable to bearer or a
named person or bearer. If it is
deliverable to a named person or
order,
ownership
may
be
transferred
by
special
endorsement and delivery. The
endorsement can be to bearer or
to a specified person.
3.3 A negotiable warehouse
receipt is not convertible to a
non-negotiable
receipt.
The
insertion of a provision making it
non-negotiable is void. To make a
warehouse
receipt
nonnegotiable, it must be written out
as such and to prevent any person
from supposing it to be
negotiable, the words nonnegotiable should be placed
plainly on its face. A nonnegotiable receipt may only be
assigned.
3.4 The
advantages
of
a
negotiable warehouse receipt
over one which is non-negotiable
BAR OPERATIONS 2011
are: (a) goods

cannot
be
garnished or levied upon under
execution unless receipt is
surrendered, or impounded or its
negotiation enjoined (Section 25,
Warehouse Receipts Law) (b) In
case of negotiation, holder
acquires the direct obligation of
the warehouseman to hold
possession of the goods for him
(Section 41, Warehouse Receipts
Law), and (c) Goods are not
subject to vendors lien or
stoppage in transitu (Section 49,
Warehouse Receipts Law)
3.5 Other
terms
may
be
included in a warehouse receipt,
except:
(a) terms that are
contrary to the provisions of this
Act, or (b) terms which will in
anyway impair the obligation to
exercise due care in the
safekeeping
of
the
goods
entrusted to the warehouseman.
4. A warehouseman defined - is
a person lawfully engaged in the
business of storing goods for
profit. Under the General Bonded
Warehouse Act he is defined as a
person lawfully engaged in the
business of storing goods for
profit. In other words, he is one
who receives and stores goods
owned by others and collects fees
for so doing.
4.1 Included in the phrase the
business of receiving commodity
for storage includes any contract
or transaction wherein: (a) the
Page 208

warehouseman is to return same

commodity deposited or pay its
value (b) the commodity is to be
milled for the owner thereof, or
(c) the commodity delivered is
commingled with the commodity
belonging to other persons, and
the warehouseman is obligated to
return commodity of the same
kind or pay its value.
5. The Primary Obligations of
the Warehouseman are:(a) he
must issue a receipt for any
commodity that he receives for
storage (b) he must exercise that
degree of care in the safekeeping
of the goods entrusted to him
which a reasonable careful man
would exercise in regard to
similar goods of his own.
However, in the absence of an
agreement to the contrary, he
shall not be liable for any loss or
injury to the goods which could
not have been avoided by the
exercise of such care (c) In the
absence of any lawful excuse, he
is bound to deliver the goods
upon a demand by: (1) holder of
a receipt for the goods, or (2) by
the depositor, provided that the
demand be accompanied by (a) an
offer
to
satisfy
the
warehousemans lien (b) an offer
to surrender the receipt if it is
negotiable, and (c) a readiness
and
willingness
to
sign
acknowledgment of delivery of
the goods if requested by the
warehouseman.
BAR OPERATIONS 2011
5.1 A warehouseman is obliged

to deliver goods to: (a) person
lawfully entitled to it. Examples:
person determined by the court
to be entitled to it in an
interpleader case, person who
purchases the goods at an auction
to satisfy a warehousemans lien
or because the goods are
hazardous or of a perishable
nature (b) the person who is
himself entitled to delivery by the
terms of the receipt. If receipt is
non-negotiable, delivery will be to
the person entitled to it under its
terms or by written authority
clearly indicated therein or
another document. If receipt is
negotiable, to the person named
or the last indorsee.
5.2 A warehouseman may thus
legally refuse to deliver goods
covered by a warehouse receipt
under the following instances:
(a)When the demand is not
accompanied by the three
requirements provided in Section
8 (b)When he has a lien valid
against the person demanding the
goods, he can refuse to deliver the
goods until the lien is satisfied
and, (c) In cases when there are
several adverse claimants to the
title or possession of the goods.
The warehouseman can refuse to
deliver to any of the claimants
until he has had a reasonable to
ascertain the validity of the
claims.
Page 209

5.3 A misdelivery or conversion

occurs when (a) delivery is made
to one not lawfully entitled to it,
or (b) even if delivery is made to a
person holding a non-negotiable
or negotiable receipt, if prior to
delivery, he had either been
requested not to make delivery by
the person lawfully entitled to a
right of property or possession in
the goods or had information that
delivery about to be made was to
one not lawfully entitled to
possession of the goods.
5.4 A
warehouseman
can
protect against a misdelivery by:
(a) availing of a the reasonable
time that he is entitled to within
which to ascertain the validity of
an adverse claim or to bring legal
proceedings
to
force
the
claimants to interplead or may
actually require the claimants to
interplead.
5.5 A warehouseman cannot
commingle as he is bound to keep
the goods of a depositor separate
from the goods of other
depositors or from the goods of
the same depositor for which a
separate receipt has been issued.
The purpose of the prohibition is
to
permit
inspection
and
redelivery at all times. Exceptions
are: (a) the goods are fungible, as
when any unit of the good is from
its nature or mercantile usage,
treated as an equivalent of any
other unit (Section 58, Warehouse
Receipts Law) or (b) it is
BAR OPERATIONS 2011
authorized
custom.
by
agreement
or
6. For failure to take up and

cancel a negotiable receipt, or one
the negotiation of which would
transfer the right to the
possession of the goods when
goods are delivered (Section 11,
Warehouse Receipts Law) or for
the failure to take up and cancel a
negotiable receipt or to place
upon it a statement of what goods
have been delivered, when goods
are partly delivered (Section 12,
Warehouse Receipts Law). The
warehouseman shall be liable for
failure to deliver the goods to
anyone who purchases for value
in good faith such receipt whether
such purchaser acquired title to
the receipt before or after the
delivery of the goods by
warehouseman
6.1 Exception:
The
warehouseman shall not be liable
for failure to deliver the goods
covered by the receipt or be guilty
of a crime where the goods (a)
have been lawfully sold to satisfy
the warehousemans lien, or (b)
have been lawfully sold or
disposed of because of their
perishable or hazardous nature
Law)
7. An alteration in a warehouse
receipt is said to be:(a)
Immaterial if it does not change
the tenor of the warehouse
Page 210

receipt
(b)Material
if
it
substantially changes the tenor of
the receipt (c) Authorized if it is
made with the authority of the
holder and the warehouseman
(d)Unauthorized if it is made
without the authority of the
holder and warehouseman. This
may be material or immaterial (e)
Fraudulent if it is made with
malice or bad faith by the holder
with intent to defraud subsequent
holders (f)
Without
fraudulent intent if its is made
without malice or bad faith
be liable according to the terms of

the receipts as originally issued
even (1) to a purchaser of the
receipt for value without notice of
the alteration, or (2) to the person
who made the alteration and to
any person who took it with
notice of the alteration. However,
in the latter case, such material
and fraudulent alteration shall
excuse the warehouseman from
any other liability to the said
persons. Except as regards the
alterer and subsequent holders
with notices.
7.1 The effects of an alteration

in a warehouse receipt are:
(a)Where the alteration is
immaterial, the warehouseman
shall be liable according to the
terms of the receipt as originally
issued (b)Where the alteration is
immaterial, whether fraudulent
or not, authorized or not, the
warehouseman is liable according
to the terms of the receipt as
originally issued (c) Where the
alteration is material and is
authorized, the warehouseman
shall be liable according to the
terms of the receipts as altered
(d) Where the alteration is
material,
unauthorized
but
without fraudulent intent, the
warehouseman shall be liable
according to the terms of the
receipts as they were before the
alteration (e) Where
the
alteration
is
material,
unauthorized and with fraudulent
intent, the warehouseman shall
8. For the non-existence or

misdescription of goods, a
warehouseman shall be liable to
the holder of a receipt for
damages caused by the nonexistence of the goods or by the
failure of the goods to correspond
with the description thereof in the
receipt at the time of its issue.
BAR OPERATIONS 2011
8.1 Exception: No such liability

shall attach to the warehouseman
if the goods are described in the
receipt merely (a) by a statement
of the marks or labels upon them
or upon the packages containing
them, or (b) by a statement that
the goods are of a certain kind or
that the packages containing the
goods contain goods of a certain
kind or by words of similar
import.
9. The warehousemans lien
refers to the lien of that a
warehouseman has on the goods
Page 211

deposited with him or on the

proceeds thereof in his hands for
all lawful charges for storage and
preservation of the goods, money
advanced by him in relation to
such goods such as the expenses
of transportation or labor, or
other related expenses.
9.1 The basis for the lien is the
obligation of the depositor to pay
the warehouseman for (a) Storage
and preservation charges (b)
Money advanced (c) Interest (d)
Insurance (e) Transportation (f)
Labor
(g)
Weighing,
and
(h)Coopering and other similar
charges (Section 27, Warehouse
Receipts Law)
9.2 With the exception of
storage and preservation charges,
the other claims must be
expressly specified in
the
warehouse receipt for it to serve
as basis for the lien (Section 30,
9.3 The lien may be enforced
against all goods belonging to the
person liable for the charges, as
well as against all goods
belonging to the others deposited
by the person liable for the
charges who has been entrusted
with the possession of the goods
and could have validly pledged
the same (Section 28, Warehouse
Receipts Law). Hence, it is
enforceable
against
the
depositors goods and the goods
of other persons stored by
BAR OPERATIONS 2011
depositor, if pledge of such goods

by him are valid but not against
the true owner if the depositor
has neither title nor right of
possession to the goods (Section
31, Warehouse Receipts Law;
Young v. Colyear, 201 Pac. 623)
9.4 The warehouseman can
enforce his lien by the sale of the
goods (Section 33, Warehouse
Receipts Law) or by an action in
court (Section 35, Warehouse
Receipts
Law).
Provided,
however, that notice of sale of
goods in order to satisfy the
warehousemans lien is given.
9.5 The lien can be lost if a
warehouseman
surrenders
possession of the goods, or by
refusing to deliver the goods
when a demand is made with
which he is bound to comply
under the provisions of the Act
Law)
9.6 The effect of the sale of
goods
to
satisfy
the
warehousemans lien or on
account of the goods perishable
or hazardous nature under
Section 36 shall not make the
warehouseman, after the sale,
liable for failure to deliver the
goods to the depositor, or owner
of the goods, or to the holder of a
receipt given for the goods when
they were deposited, even if such
receipt were negotiable.
Page 212

10. A negotiable receipt is

negotiated by delivery when: (a)
the goods are deliverable to
bearer, or (b) the goods are
deliverable to a specified person
and the latter has indorsed it in
blank or to bearer. If endorsed as
deliverable to a person, the
bearer receipt is transformed into
a an order receipt.
10.1 A negotiable receipt is
negotiated by indorsement when
the goods are, by the terms of the
receipt, deliverable to a specified
person (Section 38, Warehouse
Receipts Law)
10.2 The negotiation may be
made by the: (a) owner or (b) the
person to whom possession of the
receipt was entrusted by the
owner (Section 40, Warehouse
Receipts Law)
10.3 The rights acquired by one
to whom a negotiable warehouse
receipt has been duly negotiated
are: (a) Such title to the goods as
the one negotiating could convey
to a purchaser in good faith for
value (b) Such title to the goods as
the depositor or one to whose
order the goods were to be
delivered could convey to a
purchaser in good faith for value,
and (c) Direct obligation of the
warehouseman to hold the goods
for him as if the warehouseman
contracted with him directly.
Hence, a person to whom a
warehouse receipt has been
BAR OPERATIONS 2011
negotiated by one who has stolen

the goods stated in the receipt
cannot claim a misdelivery if the
warehouseman delivers the goods
to the rightful owner, who is the
person lawfully entitled to it.
10.4 Mortgagee or pledgee of a
warehouse receipt to whom a
negotiable warehouse receipt has
been indorsed does not acquire
title over the goods. He only
acquires the rights of a pledgee or
mortgagee, namely to foreclose
the pledge or mortgage. The
intent in this case is not the
negotiation of the receipt with its
consequent transfer of title, but
merely as security (Martinez v.
P.N.B., 93 Phil. 765); P.N.B. v.
Atendido, 94 Phil. 254)
11. A non-negotiable receipt is
transferred
by
delivery
accompanied with a deed of
assignment or transfer. If this is
indorsed, the indorsement will
not give the transferee any right
whatsoever
(Section
39,
11.1 Rights acquired by a person
to whom a warehouse receipt has
been
transferred
but
not
negotiated are: (a) Title to the
goods subject to the terms of any
agreement with the transferor,
and (b)The right to notify the
warehouseman of the transfer in
his favor and thereby acquire the
direct
obligation
of
the
warehouseman to hold the goods
Page 213

for him (Section 42, Warehouse

Receipts Law). Note that pending
notification, his rights can still be
defeated by a subsequent
attaching creditor, or levy on
execution, a vendors lien or right
of stoppage in transitu.
CHATTEL MORTGAGES:
1. A chattel mortgage defined personal property is recorded in
the Chattel Mortgage Register as a
security for the performance of an
obligation.
1.1 If the movable, instead of
being recorded, is delivered to the
creditor or a third person, the
contract is a pledge and not a
chattel mortgage.
1.2 Distinguishing a chattel
mortgage from a pledge: (a) the
chattel mortgage is recorded in
the Chattel Mortgage Register; the
pledge is not, instead the movable
is delivered to the creditor (b) in
a chattel mortgage, the consent of
the mortgagee to the sale of the
thing mortgaged must be in
writing and annotated on the
back of the mortgage instrument;
in pledge, the consent of the
pledge need not be in writing but
may be oral (c) in a chattel
mortgage, in addition to other
formal
requirements,
the
mortgagor must execute an
affidavit of good faith; in pledge,
there is no requirement that the
pledgor execute such an affidavit
BAR OPERATIONS 2011
(d) in a chattel mortgage, in case

of foreclosure of the thing
mortgaged, the mortgagee is not
entitled to the entire proceeds of
the sale but only to a portion
thereof sufficient to pay the
mortgage debt, interest and
incidental expenses; in pledge, the
pledgee is entitled to the entire
proceeds of the sale even if it
exceeds the amount of the debt
(e) in a chattel mortgagee, the
mortgagee is entitled to recover
deficiency as a rule; in pledge, the
pledgee is not entitled to recover
deficiency.
1.3 Distinguishing a chattel
mortgage from a real estate
mortgage: (a) in a chattel
mortgage, the thing mortgaged
must be personal or movable
property; in a real estate
mortgage, the thing mortgaged
must be real or immovable
property (b) an affidavit of good
faith is required to be executed in
a chattel mortgage but not in a
real estate mortgage (c) in a
chattel mortgage, the mortgagor
cannot
alienate
the
thing
mortgaged without the written
consent of the mortgagee
annotated on the back of the
mortgage instrument; in real
estate mortgage, the mortgagor
can alienate the thing mortgaged
without the consent of the
mortgagee and any stipulation
prohibiting such alienation is void
(d) in a chattel mortgage,
redemption
of
the
thing
Page 214

mortgaged may be made only

before the sale thereof; in real
estate mortgage, the thing
mortgaged may be redeemed
after it is judicially sold but before
judicial confirmation of the sale,
or if extrajudicially sold, within
one year from and after the date
of sale (except where the
mortgagor is juridical person
whose
property has been
mortgaged in favor of a bank,
quasi-bank or trust entity, in
which case the redemption shall
be made until, but not after, the
registration of the certificate of
foreclosure
sale
with
the
applicable Register of Deeds
which in no case shall be more 3
months
after
foreclosure
whichever is earlier)
2. The essential requisites of a
chattel mortgage are: (a) It must
be constituted to secure the
fulfillment
of
a
principal
obligation (b) The mortgagor
must be absolute owner of the
property mortgaged (c) The
mortgagor must have free
disposal of such property, or be
legally authorized for the purpose
(d)The property involved must be
personal or movable, and (e)
Contract must be recorded
in the Chattel Mortgage Register
2.1 A chattel mortgage which
provides that the security stated
therein is for the payment of any
and all obligations therein before
contracted and which may
BAR OPERATIONS 2011
thereafter be contracted, or future

debts and obligations, by the
mortgagor in favor of the
mortgagee is void. The law
requires parties to a mortgage to
execute an affidavit of good faith,
that the debt is honestly due and
owing. A valid mortgage cannot
be made to secure a debt to be
contracted in the future (Jaca v.
Davao Lumber, L-25771, March
29, 1982, 113 SCRA 107; Vide;
Lopez v. CA, 114 SCRA 671, Co v.
PNB, 114 SCRA 842). An affidavit
of good faith is a certificate
included in the chattel mortgage
contract executed by both
mortgagor and mortgagee that
the mortgage is constituted to
secure the specified obligation,
and that said obligation is a valid,
just and subsisting obligation and
not one entered into for the
purpose of fraud.
2.2 Although
a
promise
expressed in the chattel mortgage
to include debts that are yet to be
contracted can be a binding
commitment that can be acted
upon, the security itself does not
come into existence or arise until
after
a
chattel
mortgage
agreement covering the newly
contracted debt is executed either
by a fresh chattel mortgage deed
or by amending the old contract
to conform to the law, particularly
the execution of an affidavit of
good faith (Acme Shoe etal v. CA,
GR No. 103576, August 22, 1996)
Page 215

2.3. The chattel mortgage cannot

be considered to include afteracquired properties as it shall
cover only the property described
in the deed and not any other like
or substituted property (Section
7). Recognized as exceptions are:
(1) properties that are perishable,
like fruits or subject to inevitable
wear and tear like tires or
intended to be sold or used but
with the understanding that they
would be replaced with similar
properties to be thereafter
acquired by the mortgagor. An
Example is: Where the debtor
gives as security the stock or
merchandise in his store and it is
the intention of the parties that
the mortgage shall cover the stock
that will take its place in the
course of the business. [Torres v.
Limjap, 56 Phil. 141 ,1931] (2) In
the case of other properties, if
their inclusion is expressly
stipulated and a supplement to
the mortgage specifically listing
and describing the property is
executed and registered in the
chattel mortgage register
2.4 The registration in the
chattel mortgage register is not
necessary to make it binding
between the parties. It is
necessary though to make it
binding on third persons.
3. The remedies of a creditor
are: (a) Extrajudicial Foreclosure
(b) An action for replevin (c)
BAR OPERATIONS 2011
Judicial Foreclosure, and (d)

Bring an action for the
payment of a sum of money
3.1 A creditor cannot forceably
take possession of the chattel
without court intervention (BPI
Credit v. CA, 204 SCRA 601,
Filinvest Credit Corporation v. CA,
248 SCRA 549)
3.2 Neither can the creditor take
possession and appropriate the
chattel, since it would constitute
pactum commissorium, referring
to an act or a stipulation giving
power to the creditor to
appropriate the thing given as
security,
if
the
principal
obligation is not fulfilled without
any formality, such as foreclosure
proceedings and public sale. Such
an act or stipulation is null and
void (Art. 2088, N.C.C.). In other
words, the mortgagors default
does not operate to vest in the
mortgagee the ownership of the
mortgaged property.
3.3 Availment of the remedy of
bringing an action to collect a sum
of money is a waiver or
abandonment of the chattel
mortgage. This also bars the
recovery of a deficiency judgment
which is only available when the
proceeds of the sale are
insufficient to cover the debts
pursuant to a foreclosure. The
prescriptive period for which is
ten (10) years.
Page 216

3.4. Note that when the financing

company to whom a loan and
chattel mortgage have been
refinanced had been constituted
as the attorney-in-fact of the
borrower to file any insurance
claim covering the chattel, and it
failed to do so upon a total loss of
the same, will relieve the
borrower-mortgagor
of
his
obligation
(BA
Finance
Corporation v. CA, 201 SCRA 157)
3.5 There are limitations on the
enforcement of chattel mortgages
executed in relation to the sale of
personal property in installments,
where the remedies are: (1)
Exact fulfillment of the
obligation (2)Cancel the sale,
should the vendees failure to pay
cover two or more installments;
or (3) Foreclose the chattel
mortgage on the thing sold should
the vendees failure to pay cover
two or more installments. In this
case, he shall have no further
action against the purchaser to
recover any unpaid balance of the
price. Any agreement to the
contrary shall be void (Art. 1484,
N.C.C.). This remedies are
exclusive not alternative.
EXTRA-JUDICIAL
FORECLOSURE
OF
REAL
ESTATE MORTGAGES:
1. The resort to the process of
extra-judicial
foreclosure
emanates from the presence of a
stipulation that allows the
BAR OPERATIONS 2011
creditor/mortgagee to extrajudicially
foreclose
and
designating the said party as the
attorney-in-fact of the mortgagor
to cause the same and to sell the
subject property at a foreclosure
sale by an insertion into or
attachment to the real estate
mortgage.
1.1 When a debt is secured by a
real estate mortgage, the creditor
has two options: (a) to foreclose,
or (b) file an ordinary action to
collect. If he avails of the option to
foreclose, he is still allowed to
bring a claim for any deficiency.
On the other hand, if he avails of
the option to file an ordinary
action, he abandons or waives his
mortgage lien, without prejudice
to his levying on the same
property but subject to the rights
of other creditors, if any.
1.2 When the mortgagor files a
criminal case for violation of BP
Blg 22 against the mortgage
debtor, he is deemed to have
already availed himself of the
remedy of a collection suit, and
following the rule on alternative
remedies, he is barred from
subsequently resorting to an
action for foreclosure.
1.3 A mortgage contract is, by
nature, indivisible. The debtor
who has paid cannot ask for a
proportionate extinguishment of
the mortgage as long as the debt
is not completely satisfied.
Page 217

Generally, the divisibility of the

principal obligation is not affected
by the indivisibility of the
mortgage.
2. The foreclosed property
shall be redeemed within 1 year
from and after the date of the sale
(Sec. 6). The aforementioned date
of sale has been construed by the
Supreme Court to mean the date
of registration of the sheriffs
certificate of foreclosure sale in
the office of the Register of Deeds
concerned (Reyes vs. Noblejas, et
al., G.R. No. L-23691, November
25, 1967). Note that the period
for redemption may be the
subject of an extension as may be
agreed upon by the parties.
2.1 The amount to be paid at
redemption is the Bid Price, plus
12% interest per annum. Note
again that under RA 8791, the
redemption amount is such which
is due under the mortgage deed
with interest at the specified rate
therein.
2.2 Redemption may be effected
by: (a) The debtor, or (b) His
successor in interest , or (c) Any
judicial creditor or judgment
creditor of the debtor, or (d) Any
person having a lien on the
property subsequent to the
mortgage.
2.3 Notwithstanding
foregoing provision,
BAR OPERATIONS 2011
the
juridical
persons whose property is sold

pursuant to an extra-judicial
foreclosure, shall have the right to
redeem the property until, but not
after, the registration of the
certificate of foreclosure sale
which in no case shall be more
than three (3) months after
foreclosure whichever is earlier,
as provided in Section 47 of
Republic Act. No. 8791 (A.M.
No.99-10-05-0)
2.4 Note
the
probable
constitutional challenges that may
be brought against the quoted
provision of RA 8791 on the basis
of the equal protection clause as
there is no substantive distinction
between
a
corporate
and
individual debtor or between a
bank or non-bank lender.
2.5 Further, the application of
the law should be prospective as a
corporate
mortgagor
has
acquired as vested right to the
one year redemption period if his
mortgage was executed prior to
RA 8791 as the controlling
consideration is the law on
redemption at the time of the
execution of the mortgage.
2.6 The purchaser of foreclosed
property is not automatically
entitled to the possession thereof
during the redemption period as
he must petition the Regional
Trial Court of the province or city
where the property is situated to
give him possession thereof
Page 218

during the redemption period. He

must also put up a bond
equivalent in value to the use of
the property for a period of 12
months to indemnify the debtor
in case it is shown that the sale
was made without complying
with the requirements of Act No.
3135 or that there was no
violation of the mortgage deed.
3. In general, formal and
substantive defects in the real
estate
mortgage
and
the
foreclosure proceedings provide
the legal and equitable grounds to
enjoin or eventually nullify
foreclosure proceedings, if not the
real estate mortgage itself.
3.1 The general basis would be
Article 5, Civil Code, which
provides: Acts executed against
the provisions of mandatory or
prohibitory laws shall be void,
except, when the law authorizes
their validity
4. Disputes in the amount of
the obligation may cause the
foreclosure to be enjoined as a
bank may legally proceed with
foreclosure only when the exact
amount of the obligation of the
mortgagor is determined in a trial
on the merits and the mortgagor
cannot meet the obligation
following that determination.
4.1 Where the debtor is not
given an opportunity to settle the
BAR OPERATIONS 2011
debt at the correct amount and

without
iniquitous
interest
imposed,
no
foreclosure
proceedings can be instituted.
4.2 The total amount due on the
mortgage is also undetermined if
some of the properties are subject
to the coverage of the CARP, in
which case a portion of the
mortgage indebtedness will be
assumed by the government up to
the amount equivalent to the
landowners
compensation.
Hence, until the final valuation of
the lands subject to CARP is
determined, the amount of the
mortgage debt is unliquidated
5. Issue of the legality of the
Floating Rate of Interest, which
refers to the rate of interest
periodically fixed by a bank based
on the prevailing interest rate in
the market, such as the Manila
Reference Rate or Treasury Bill
Rate, plus a margin as determined
by the bank.
5.1 If this rate of interest is
unilaterally fixed by the bank for
each interest period without the
written conformity of the
borrower, the interest may be
declared null and void for being
potestative and for lack of
mutuality based on essential
equality between the parties
5.2 Its being a potestative
condition (one within the sole
power of the one obligated to
Page 219

perform), consequently null and

void finds basis in Article 1308 of
the Civil Code that provides that
the fulfillment of a condition
cannot be left to the sole will of
one of the contracting parties
5.3 As held by the Supreme
Court in Almeda v. Court of
Appeals and PNB,256 SCRA 293:
The binding effect of any
agreement between the parties to
contract is premised on two
settled principles: (1) that any
obligation arising from contract
has the force of law between the
parties; and (2) that there must
be mutuality between the parties
based on their essential equality.
Any contract which appears to be
heavily weighted in favor of one
of the parties so as to lead to an
unconscionable result is void. Any
stipulation regarding the validity
or compliance of the contract
which is left solely to the will of
one of the parties is likewise
invalid.
5.4 The floating rate of interest
being unilaterally fixed and
determined by the bank also
violates the provision of CB
Circular No. 1191 that the interest
rate for each re-pricing period is
subject to mutual agreement
between the Borrower and the
Bank.
5.5 Under Article 1956 of the
Civil Code, no interest is due
unless it has been expressly
BAR OPERATIONS 2011
stipulated in writing. The floating

rate being unilaterally fixed by
the Bank without the written
mutual
agreement
of
the
Borrower for each re-pricing of
interest is null and void under
Art. 1956 of the Civil Code, and
for violation of CB Circular No.
1191 that the interest rate for
each re-pricing period under the
floating rate of interest in subject
to mutual agreement.
5.6 Consequently, if the interest
is declared null and void, the
foreclosure sale for a higher
amount than what is legally due is
likewise null and void because
under the Civil Code, a mortgage
may be foreclosed only to enforce
the fulfillment of the obligation
for whose security it was
constituted.
5.7 In fact, because there is a
dispute on the amount of the
interest legally due, the Bank may
legally proceed with foreclosure
or consolidation only when the
exact amount of the obligations of
the Mortgagor is determined after
trial on the merit and the
mortgagor cannot meet the
obligation
following
that
determination.
6. Issue of the mortgage as
security for future loans. The rule
is unless a continuing real estate
mortgage is involved, a real estate
mortgage is not a valid security
Page 220

for future loans under the so

called Dragnet Clause.
6.1 This finds basis in the fact
that real estate mortgage is an
accessory contract, which cannot
exist independently of the
principal
obligation.
The
consideration for the mortgage is
the consideration of the contract
of loan. Consequently, the amount
of the loan must be specified,
otherwise the contract of loan, as
well as the accessory contract of
mortgage, shall not be perfected
for lack of consideration with
respect to the unspecified loan in
the future. The Supreme Court
has held in China Banking
Corporation vs. Lichuaco, 46 Phil
460 that: a mortgage is an
accessory
contract,
its
consideration
is
the
very
consideration of the principal
contract, from which it derives
life, and without which it cannot
exist as an independent contract.
6.2 Further, under Article 2176
of the Civil Code, a mortgage may
only be foreclosed for the
fulfillment of the obligation for
whose security it was constituted
6.3 Mortgages with a dragnet
clause is a contract of adhesion
that must be strictly construed as
against the bank.
6.4 To constitute a real estate
mortgage as security for future
loans, the future loans must be
BAR OPERATIONS 2011
agreed upon and fixed in the

mortgage deed at the time of the
execution of the same
6.5 A stipulation that the
amounts named as consideration
in a contract of mortgage do not
limit the amount for which the
mortgage may stand as security if
from the four corners of the
instrument the intent to secure
future and other indebtedness
can be gathered is valid and
binding and is known in American
Jurisprudence as the blanket
mortgage clause.
7. Issue of PD 385 prohibiting
the issuance of an injunction
against foreclosure
by any
government financial institution
is arbitrary and unreasonable.
Hence, may be argued as being
unconstitutional. Hence, it cannot
be sustained if there is a clear
legal
ground
to
restrain
foreclosure
8. Issue of the right to take
possession. The rule is that the
purchaser still has to file a
petition for the issuance of a writ
of
possession
to
obtain
possession.
8.1 The proceedings related
thereto allow the mortgagor to
participate
although
jurisprudence provides that the
hearings are ex-parte. However,
with the mandate of Section 8 of
Act 3135 which allow the
Page 221

mortgagor
to
set
aside
foreclosure
in
the
same
proceedings, it is the better rule
to actually allow the mortgagors
active participation.
8.2 The obligation of the court
to issue a writ of possession in
favor of the purchaser in an
extrajudicial foreclosure sale
ceases to be ministerial once it is
shown that there is a third party
in possession of the property who
is claiming a right adverse to that
of the mortgagor and that such
third party is a stranger to the
foreclosure proceedings in which
the ex-parte writ of possession
was applied for.
8.3 As a limitation on the right
to possession, a writ of possession
may be legally issued only if the
debtor is in possession and no
third person has intervened.
8.4 Order granting a writ of
possession under Act 3135 is a
final order. Hence, it is
appealable. In expropriation, it is
interlocutory.
9. Grounds for the proper
annulment of the foreclosure sale
are the following: (a) there was
fraud, collusion, accident, mutual
mistake, breach of trust or
misconduct by the purchaser (b)
the sale was not fairly and
regularly conducted (c) price was
inadequate and the inadequacy
BAR OPERATIONS 2011
was so great as to shock the

conscience of the court.
Central Bank Act
1. The law was enacted on June
14, 1993 and has for its policy the
maintenance
of
a
central
monetary authority with the
power: (a) function and operate
as
an
independent
and
accountable body in the discharge
of its responsibilities concerning
money, banking and credit (b)
enjoy fiscal and administrative
autonomy.
1.1 A central bank is a bank that
holds the cash reserves of a
countrys commercial banks,
performs monetary services for
the government, issues bank
notes, and makes funds available
to commercial banks
Conservatorship
1. The appointintment by the
Monetary Board of a conservator
takes place whenever a bank or
quasi-bank is in a state of
continuing
inability
or
unwillingness to maintain a
condition of liquidity deemed
adequate to protect the interest of
depositors and creditors.
1.1 It is an attempt to save the
bank from bankruptcy and
ultimate liquidation.
Page 222

1.2 The appointed conservator

is to take charge of the assets,
liabilities, and the management
thereof for a period not exceeding
one (1) year
2. A conservator may take over
a bank or quasi-bank without the
need of first declaring the bank
insolvent (P.D. 1937, June 27,
1984).
Nonetheless,
the
designation of a conservator is
not a precondition to the
designation of a receiver (Section
30)
2.1 A conservator is the person
appointed to take over the
management of a bank and shall
assume exclusive powers to
oversee every aspect of the banks
operation and affairs.1
3. The
conservatorship
is
terminated when: (a)
When
Monetary Board is satisfied that
institution can continue to
operate on its own and the
conservatorship is no longer
necessary (b)Should Monetary
Board determine that the
continuance in business of the
institution
would
involve
probable loss to its depositors or
creditors,
in
which
case
proceedings for receivership and
liquidation shall be pursued. (Sec.
29).
Proceedings in Receivership:
1
1. Receivership
ensues
whenever the Monetary Board
finds that a bank or quasi-bank:
(a) Is unable to pay its liabilities
as they become due in the
ordinary course of business BUT:
Shall not include inability to
pay caused by extraordinary
demands induced by financial
panic in the banking community
(b) Has insufficient realizable
assets to meet its liabilities (c)
Cannot continue in business
without involving probable losses
to its depositors or creditors; or
(d) Has willfully violated a cease
and desist order that has become
final,
involving
acts
or
transactions which amount to
fraud or a dissipation of the assets
of the institution;
1.1 In which cases, the Monetary
Board may summarily and
without need for prior hearing,
forbid the institution from doing
business in the Philippines and
designate the PDIC as receiver of
the banking institution.
1.2 There is no requirement that
a hearing be first conducted
before a banking institution may
be placed under receivership. The
appointment of a receiver may be
made by the Monetary Board
without notice and hearing but its
action is subject to judicial
inquiry( Rural Bank of Buhi v.
Court of Appeals,162 SCRA 288)
Central Bank vs. CA, 208 SCRA 652
BAR OPERATIONS 2011
Page 223

1.3 The Central Bank, through

the Monetary Board, is vested
with exclusive authority to assess,
evaluate and determine the
condition of any bank and if it
finds the condition to be one of
insolvency, or its continuance in
business would involve probable
loss to creditors and depositors, it
can forbid the bank to do business
and can designate a receiver to
take charge of its assets and
liabilities. Sec. 29 of the Central
Bank Act does not contemplate
prior notice and hearing before a
bank is placed under receivership.
It is enough that such action is
made the subject of a subsequent
judicial review. Close now and
hear later scheme under the Act
is for the purpose of protecting
the
depositors,
creditors,
stockholders and general public
(Central Bank v. Court of Appeals,
220 SCRA 536)
1.4 Prior notice and hearing is
not required before placement of
bank under receivership. Section
29 does not contemplate prior
notice and hearing before a bank
may be directed to stop operation
and placed under receivership.
When
paragraph
4
(now
paragraph 5 as amended by E.O.
289) provides for the filing of a
case within ten (10) days after the
receiver takes charge of the assets
of the bank, it is unmistakable
that the assailed actions should
precede the filing of the case.
Plainly, the legislature could not
BAR OPERATIONS 2011
have intended to authorize no

prior notice and hearing in the
closure of the bank and at the
same time allow a suit to annul it
on the basis of absence thereof
(CB vs. CA, 220 SCRA 539)
1.5 Judicial review is allowed to
determine the presence of
arbitrariness and bad faith in
placing bank under receivership.
Admittedly, the mere filing of a
case for receivership by Central
Bank can trigger a bank run. The
procedure prescribed in Section
29 is truly designed to protect the
interest of all concerned, and the
summary closure pales in
comparison to the protection
afforded public interest. At any
rate, the bank is given full
opportunity
to
prove
arbitrariness and bad faith in
placing
the
bank
under
receivership, in which event, the
resolution may be properly
nullified and the receivership
lifted as the trial court may
determine.
Until
such
determination is made, the status
quo shall be maintained, i.e., the
bank shall continue to be under
receivership.
1.6 Receivership is equivalent to
an injunction to restrain in the
bank officers from intermeddling
with the property of the bank in
any way. Thus, the appointment
of a receiver operates to suspend
the authority of the bank and of
Page 224

its directors and officers over its

property and effects (Villanueva
vs. CA, 244 SCRA 395)
Liquidation:
1. Liquidation shall take place
is the receiver determines that
the
institution
cannot
be
rehabilitated or permitted to
resume business, the Monetary
Board shall notify in writing the
Board of Directors of its findings
and direct the receiver to proceed
with the liquidation of the
institution.
2. The following are the
mandatory requirements to be
complied with before a bank
found to be insolvent can be
ordered close: (1) an examination
shall be conducted by the
appropriate CB department as to
the condition of the bank (2)
disclosed in the examination is
that the condition of the bank is
one of insolvency (3) the director
shall inform the Monetary Board
in writing of such fact, and (4) the
Monetary Board shall find the
statement of the department to be
true (Banco Filipino vs. Monetary
Board, 204 SCRA 767)
3. The test of insolvency laid
down in Section 29 of the Central
Bank Act (now Section 30 of the
New Central Bank Act) is
measured
by
determining
whether the realizable assets,
realizable within a reasonable
BAR OPERATIONS 2011
time by a reasonably prudent

person of a bank are less than its
liabilities, not considering capital
stock and surplus which are not
liabilities for such purpose. (Ibid)
4. Upon
liquidation,
the
receiver shall then: (a) File ex
parte with Regional Trial Court,
and without the requirement of
prior notice or any other action, a
petition for assistance in the
liquidation of the institution
pursuant to a liquidation plan
adopted by PDIC (b) Upon
acquiring jurisdiction, RTC shall,
upon motion by the institution,
assist
the
enforcement
of
individual liabilities of the
stockholders,
directors
and
officers, and decide on other
issues as may be material to
implement the liquidation plan
adopted (c)Convert the assets of
the institution to money, dispose
of the same to creditors and other
parties, for the purpose of paying
the debts of such institution in
accordance with the rules on
concurrence and preference of
credit under the Civil Code (d)
Institute such actions as may be
necessary to collect and recover
accounts and assets of, or defend
any action against, the institution
Selected
Issues
involving
Receivership and Liquidation:
1. If the Central Bank (now
Bangko Sentral) through its
Monetary Board has promised to
Page 225

rehabilitate the distressed bank,

and the stockholders on said
assurance proceeded to mortgage
their real properties to guarantee
CB promised loan advances to
said bank, CB cannot renege on
said promise, under the doctrine
of promissory estoppel, and
cannot insist in its liquidation
(Ramos vs. CB, 41 SCRA 565)
2. Where the Central Bank, in
the course of the rehabilitation of
a commercial bank, extended
loans
and
advances,
but
subsequently the bank was forced
by CB to close, and subsequently
allowed to reopen, interest due on
said loans and advances, cannot
be collected because it should be
deemed read into every contract
of deposit with a bank that the
obligation to pay interest on a
deposit ceases from the moment
the operation of the bank is
completely suspended by the duly
constituted authority the Central
Bank (Ibid,; Overseas Bank vs. CA,
105 SCRA 49)
3. The prescriptive period to
institute
the
foreclosure
proceeding
was
legally
interrupted when the mortgageebank
was
placed
under
receivership
with
express
prohibition from transacting
business,
a
circumstance
considered as force majeure
(Provident vs. CA, 222 SCRA 125)
BAR OPERATIONS 2011
4. While the closure and

liquidation of a bank may be
considered an exercise of police
power, the validity of its exercise
is
subject
to
judicial
determination, and could be set
aside, if it is capricious,
discriminatory,
whimsical,
arbitrary, unjust or a denial of the
due process and equal protection
clauses of the Constitution (CB vs.
CA, 106 SCRA 143)
5. A deposit in a distressed
bank already forbidden by CB to
do business does not become a
preferred credit simply because
some depositors went to court
and were able to secure
judgments against the bank (CB
vs. Morfe, 63 SCRA 114)
6. Where in the course of
banks distressed condition, the
Central Bank gave financial
assistance to restore the banks
viability, but that inspite of these
moves, the bank was closed by CB
on August 1968, and allowed to
reopen on January 8, 1981, under
a new name, Commercial Bank of
Manila, the obligation by the bank
to pay interest on the CB
advances remained suspended
during the whole period of its
closure, following the ruling in
OBM vs. CA and Tapia (105 SCRA
49). Hence, the interest obligation
starts to run from the date of the
reopening of the bank on January
8, 1981 (Ramos vs. CB, 137 SCRA
685)
Page 226

General Banking Law

1. The policy of the State is the
promotion and maintenance of a
stable and efficient banking and
financial system that is globally
competitive,
dynamic
and
responsive to the demands of a
developing economy.
2. Banks are entities engaged
in the lending of funds obtained in
the form of deposits.
2.1 The definition under Section
2 of the old General Banking
Law:2 banks are entities duly
authorized by the Monetary
Board to engage in the business of
regularly lending funds obtained
regularly from the public through
the receipt of deposits of any
kind. Thus, entities which lend
funds obtained from the public
but not as deposits but rather as
debts for their own account,
whether done regularly or not,
and those which regularly lend
funds obtained through the
occasional receipt of deposits,
would not be considered as
banks.
2.2 An entity that is engaged in
the business of buying accounts
receivables and is funding their
business from bonds sold to the
public from time to time is not a
2
RA 337
BAR OPERATIONS 2011
bank as it does not accept

deposits,
instead
it
buys
receivables.
Classification of Banks:
1. Banks are classified under
the General Banking Law as
follows:
(a) Universal banks- these are
those that used to be called
expanded commercial banks and
whose operations are now
primarily governed by the GBL.
They can exercise the powers of
an investment house and invest in
non-allied enterprises. They have
the
highest
capitalization
requirement.
An investment house is a
company that earns income solely
or primarily by holding and
investing in securities issued by
other
companies
or
by
government agencies.
(b) Commercial banks- these are
ordinary or regular commercial
banks, as distinguished from a
universal bank. They have a lower
capitalization requirement than
universal banks and cannot
exercise the powers of an
investment house and invest in
non-allied enterprises.
(c) Thrift
banks-these
are
savings and mortgage banks,
stock
savings
and
loan
Page 227

associations,
and
private
development banks which are
governed primarily by the Thrift
Banks Act.3
(d) Rural
banks-these
are
mandated to make needed credit
available and readily accessible in
the rural areas on reasonable
terms and which are governed
primarily by the Rural Banks Act
of 1992.4
(e) Cooperative banks-these are
banks organized primarily to
make financial and credit services
available to cooperative banks
and are governed primarily by the
Cooperative Code.5
(f) Islamic banks-these are
banks whose business dealings
and activities are subject to the
basic principles and rulings of
Islamic Sharia, such as the Al
Amanah Islamic Investment Bank
of the Philippines which was
created by the Republic Act No.
6848; and
(g) Other
classifications
of
banks as determined by the
Monetary Board.
Incorporation and Organization of
Banks
1. The minimum conditions
that a prospective bank must
comply with before it may be

authorized by the BSP to be
organized as a bank are:
1.1 That the entity must be
organized as a stock corporation;
1.2 That its funds must be
obtained from the public, i.e., 20
or more persons; and
1.3 That the minimum capital
requirement prescribed by the
Monetary Board for each category
of banks are satisfied.
2. The SEC cannot register the
the articles of incorporation of
any bank, or any amendment
thereto, unless accompanied by a
certificate of authority issued by
the Monetary Board, under its
seal. Such certificate shall not be
issued by the Monetary Board
unless it is satisfied from the
evidence submitted to it:
3. In organizing the bank, it can
only issue par value stocks only.
Supervision and Regulation of
Banks:
1. The
entity
that
has
supervisory
and
regulatory
powers over banks is the BSP and
such extends to all banks, quasibanks, trust entities, and other
financial institutions.
RA 7906
RA 7353
5 RA 6938
3
4
BAR OPERATIONS 2011
Page 228

2. This power of the BSP is

found in Section 25 of the BSP
Law which mandates the conduct
of
periodic
or
special
examinations, to include those of
its subsidiaries and affiliates
engaged in allied activities, but
such shall be possible only in the
in the course of its examination of
such bank.
2.1 A subsidiary corporation is
one more than 50% of whose
voting stock is owned by the
bank or quasi-bank.
2.2 An affiliate corporation is
one less than 50% of whose
voting stock is owned by the bank
or quasi-bank or which is related
or linked to such bank or quasibank
through
common
stockholders or such factors as
may be determined by the
Monetary Board.6
Management of a Bank:
1. The principle that since a
bank is a juridical person that its
powers are to be exercised, its
business is to be conducted, and
that its properties are to be held
by a board as provided for by
Section 23 of the Corporation
Code obtains.
2. However, an independent
director, who is a person other
than an officer or employee of the
bank, its subsidiaries or affiliates

or related interests must be
elected to the board. Note that the
term independent director is
also used in the Securities
Regulation Code7 to refer to a
person other than an officer or
employee of the corporation, its
parent or subsidiaries, or any
other
individual
having
a
relationship with the corporation,
which would interfere with the
exercise of independent judgment
in
carrying
out
the
responsibilities of a director.
3. There
must
also
be
adherence to the fit and proper
rule8
which provides that to
maintain the quality of bank
management and afford better
protection to depositors and the
public in general, the Monetary
Board shall:
3.1 prescribe, pass upon and
review the qualifications and
disqualifications of individuals
elected or appointed bank
directors
or
officers
and
disqualify those found unfit; or
3.2 After due notice to the board
of directors of the bank, the
Monetary Board may disqualify,
suspend or remove any bank
director or officer who commits
or omits an act which render him
unfit for the position.
7
6
Section 25, NCBA
BAR OPERATIONS 2011
Section 38, Par. 16.25

Section 16, GBL, BSP Circular No. 296
Page 229

3.3 In determining whether an

individual is fit and proper to hold
the position of a director or
officer of a bank, regard shall be
given to his integrity, experience,
education,
training,
and
competence.
the extent of the foreign

participation in its equity.12
4. An elective or appointive
public official cannot serve as an
officer of a private bank , whether
full-time or part-time shall at the
same time serve as officer of any
private bank, save in cases where
such service is incident to
financial assistance provided by
the government or a governmentowned or controlled corporation
to the bank or unless otherwise
provided under existing laws.
1. Single
Borrower
Limit
Rules13- these rules regulate the
total amount of loans, credit
accommodations and guarantees
that may be extended by a bank to
any
person,
partnership,
association, corporation or other
entity.
4.1 The Rural Banks Act9, allows

an elected or appointive public
official to serve as director,
officer, consultant or in any other
capacity in a rural bank.
5. A bank is required to have a
board composed of 5 no more
than 15 directors, two of whom
must be independent directors.10
5.1 In case of a merger or
consolidation between banks, the
number of directors shall not
exceed 21.11
5.2 Non Filipino citizens may
become members of the board to
Section 5, RA 7353
Section 15, GBL
11 Section 17, GBL
Limitations imposed on Banking

Operations:
1.1 The rules seek to protect a

bank from making excessive loans
to a single borrower by
prohibiting it from lending
beyond a specified ceiling. The
current limit is 25% of the net
worth of the bank concerned.14
1.2 The ceiling is subject to
possible increase by an additional
10% provided the additional
liabilities of any borrower are
adequately secured by trust
receipts, shipping documents,
warehouse receipts or other
similar documents transferring or
securing title covering readily
marketable, non-perishable goods
which must be fully covered by
insurance.
Section 15, Par. (2), GBL

Section 35, GBL
14 BSP Circular No. 425
12
10
13
BAR OPERATIONS 2011
Page 230

2. DOSRI Rules15- these are

rules promulgated by the BSP,
upon the authority of Section 36
of the GBL, which regulate the
amount of credit accommodations
that a bank may extend to its
directors, officers, stockholders
and their related interests, thus
the term, DOSRI.
2.1 Generally, a banks credit
accommodations to its DOSRI
must be in the regular course of
business and on terms not less
favorable to the bank than those
offered to non-DOSRI borrowers.
2.2 Related
Interests
shall
include the following: (a) Spouse
or relative within the first degree
of consanguinity or affinity, or
relative by legal adoption, of a
director, officer or stockholder of
the bank; (b) Partnership of
which a director, officer or
stockholder or his spouse or
relative within the first degree of
consanguinity or affinity, or
relative by legal adoption, is a
general partner; (c) Co-owner
with
the
director,
officer,
stockholder or his spouse or
relative within the first degree of
relative by legal adoption, of the
property or interest or right
mortgaged, pledged or assigned
to secure the loans or credit
accommodations, except when
the
mortgage,
pledge
or
15
Section 36, GBL
BAR OPERATIONS 2011
assignment covers only said coowners undivided interest; (d)

Corporation, association, or firm
of which a director or officer of
such corporation, association or
firm, except (1) where the
securities of such corporation,
association or firm are listed and
traded in the big board or
commercial and industrial board
of domestic stock exchanges less
than fifty percent (50%) of the
voting stock thereof is owned by
any one person or by persons
related to each other within the
third degree of consanguinity or
affinity; or (2) where the director,
officer or stockholder of the
lending
bank
sits
as
a
representative of the bank in the
board of directors of such
corporation: Provided, That the
bank representative shall not
have any equity interest in the
borrower corporation except for
the minimum shares required by
law, rules and regulations, or by
the by-laws of the corporation:
Provided, further, That the
borrowing corporation under (1)
or (2) is not among those
mentioned in Items (e) and (f)
hereof;
(e)
Corporation,
association or firm of which any
or a group of directors, officers,
stockholders of the lending bank
and/or their spouses or relatives
within the first degree of
relative by legal adoption
hold/own more than twenty
percent (20%) of the subscribed
Page 231

capital of such corporation, or of

the equity of such association or
firm; (f) Corporation, association
of firm wholly or majority-owned
or controlled by any related entity
or a group of related entities
mentioned in Items (b), (d) and
(e) hereof.
upon the records of the bank, i.e.,

the minutes of the board meeting
in which the approval was given;
and (c) A copy of the entry of such
approval shall be transmitted
forthwith to the appropriate
supervising department of the
BSP.
2.3 A bank may allow a DOSRI

to: (a) borrow from the bank; (b)
become a guarantor, indorser or
surety for loans from such bank to
others; (c) be an obligor; or (d)
incur any contractual liability
with the written approval of the
majority of all the directors of the
bank, excluding the director
concerned.16
However,
the
written approval shall not be
required for loans, other credit
accommodations and advances
granted to officers under a fringe
benefit plan approved by the BSP.
2.5 The other conditions are: (a)

The DOSRI borrower is required
to waive the secrecy of his/her
deposits of whatever nature in all
banks in the Philippines17 and (b)
The ceiling/limitation as to loans
are followed.
2.4 Consequently, any director

or officer who may wish to
borrow from the bank must
observe the following formalities:
(a) The borrowing must be in
accordance with the Arms Length
Rule, or which must be upon
terms not less favorable to the
bank than those offered to others
,must be with the written
approval of a majority of the
banks board of directors,
excluding the director concerned
(b)Such approval must be entered
16
Section 36, GBL
BAR OPERATIONS 2011
2.6 The
amount
of
the
borrowing is limited to the
amount equivalent to their
unencumbered deposits and book
value of their paid in capital
contribution, unless they are: (a)
secured by assets considered by
the Monetary Board as non risk
(b) under a fringe benefit plan
approved by the BSP, or is (c)
extended by a cooperative bank
to its cooperative stockholders;
2.7 Should there be a violation
of the DOSRI rules, after due
notice to the board of directors of
the bank, the office of any bank
director or officer who violated
the rules may be declared vacant
and the director or officer shall be
subject to the penal provisions of
NCBA.
17
Section 26, NCBA
Page 232

2.8 Loans,
credit
accommodations or guarantees
extended by a bank to DOSRI are
also termed as Insider Lending.
Bank
Deposits
and
Bank
Responsibility to Depositors
1. As to nature, all kinds of
deposits whether fixed or current
are to be treated as loans and are
to be covered by the law on
loan.18
1.1 They are also considered in
the nature of irregular deposits,
they are really loans because they
earn interest.19 Considering a
deposit involves the delivery of a
thing for safekeeping with the
obligation to return the very same
thing upon demand20 and a loan is
a contract whereby one of the
parties delivers to another money
or other consumable thing upon
the condition that the same
amount of the same kind and
quality shall be paid.21
1.2 Banks may use the money
deposited with them as money
deposited in banks, whether fixed,
savings and current, are really
loans to a bank because the bank
can use the same for its ordinary
transactions and for banking

business in which it is engaged.22
1.3 In fact banks are not
obligated to return exactly the
money deposited in the same
denomination as it was deposited.
While the banks have the
obligation to return the amount
deposited, they have no obligation
to return or deliver the same
money deposited. Thus, estafa
will not prosper.23
1.4 A banks failure to honor a
deposit is failure to pay its
obligation as debtor and not a
breach of trust arising from a
depositorys failure to return the
subject matter of deposit
2. The
relation
created
between the bank and depositor
is that of a creditor and debtor
with the bank as debtor and the
depositor as creditor.24
2.1 The relationship is fiduciary
in nature.25 The bank assumes to
act as an agent for another and
the other reposes confidence in
him, although there is no written
contract or nor contract at all.
3. A bank should exercise its
functions and treat the accounts
of their clients not only with the
Tan Tiong Tick vs. Americal Apothecaries, 65 Phil 417
Guingona vs. City Fiscal, 128 SCRA 577
24 Serrano vs. Court of Appeals, 96 SCRA 96
25 PBCom vs. Court of Appeals, 269 SCRA 695, BPI vs. IAC,
206 SCRA 408
22
People vs. Ong, 204 SCRA 942

19 BPI vs. Court of Appeals, 232 SCRA 302
20 Article 1962, Civil Code
21 Article 1933, Civil Code
18
BAR OPERATIONS 2011
23
Page 233

diligence of a good father of a

family but it should do so with the
highest
degree
of
care
considering the fiduciary nature
of their relationships with their
depositors.26
3.1 The depositor expects the
bank to treat his account with
utmost fidelity, whether such
account consists only of a few
hundred pesos or millions. This is
especially true since the bank is
engaged in business impressed
with public interest and it is its
duty to protect in return many
clients, and depositors who
transact business with it.27
3.2 The bank is under obligation
to treat the accounts of its
depositors with meticulous care
always having in mind the
fiduciary
nature
of
their
relationship.
3.3 However, the highest degree
of diligence is not expected to be
exerted by banks in commercial
transactions that do not involve
their fiduciary relationship with
their depositors.28
3.4 In case of negligence in
handling the deposit of its clients
on account of a bank officers
gross negligence which causes
inconvenience, humiliation and
embarrassment to a depositor
BPI vs. Court of Appeals, 326 SCRA 641
Citytrust Banking vs. IAC, 232 SCRA 559
28 Reyes vs. Court of Appeals, GR No. 118492, August 15,
2001
entitles the latter to an award of

damages.29 This notwithstanding
the absence of malice and bad
faith as if the negligence,
nevertheless
caused serious
anxiety, embarrassment and
humiliation to the depositors.30 As
long as the bank has committed a
serious mistake and the banks
negligence was a result of lack of
due care and caution required of
managers and employees of a
firm engaged in so sensitive and
demanding business as banking, it
is liable for moral damages.31
3.5 In view of the fiduciary
nature of the relationship of
banks and its clients and because
banking is imbued with public
interest, a bank was also made
liable for damages in the
following instances: (a) Failure to
honor/pay a check of a
merchant/trader
when
the
deposit is sufficient.32 Conversely,
a bank is not liable for its refusal
to pay a check on account of
insufficient
funds,
notwithstanding the fact that a
deposit may be made later in the
day. Before a depositor may
maintain a suit to recover a
specific amount from his bank, he
must first show that he had on
deposit sufficient deposits to
meet his demand. (b)
When a
bank
teller
validates
an
incomplete duplicate deposit slip
Go vs. IAC, 197 SCRA 22
BPI vs. IAC, 206 SCRA 408
31 Prudential Bank vs. Court of Appeals, 328 SCRA 264
32 Moran vs. Court of Appeals, 230 SCRA 799
26
29
27
30
BAR OPERATIONS 2011
Page 234

that lacks the name of the account

holder.33 (c) When the deposit of
PPH 31,500.00 to cover six
postdated checks was not
credited to the account of the
depositor because of the omission
of one zero in the account
number.34 (d) The bank allowed
an impostor to negotiate treasury
checks.35 (e) The new accounts
teller erroneously used the old
account of a depositor instead of
the newly opened joined account
of the depositor and his spouse,
leading to the dishonor of two
checks issued by the depositor.36
3.6 The defense of diligence in
the selection and supervision of
employees is not a valid defense
to escape or at least mitigate a
banks liability. A banks liability
is not merely vicarious but
primary; the defense of exercise
of due diligence in the selection
and supervision of its employees
is of no moment. By the very
nature of the work of banks, the
degree of responsibility, care and
trustworthiness expected of their
employees and officials is far
greater than those of ordinary
clerks and employees. Banks are
expected to exercise the highest
degree of diligence in the
selection and supervision of their
employees.37
Philbank vs. Court of Appeals, 269 SCRA 695

Citytrust vs. IAC, 232 SCRA 559
35 Go vs. IAC, 197 SCRA 22
36 BPI vs. IAC, 206 SCRA 408
37 PCIBank vs. Court of Appeals, 350 SCRA 446
3.7 Malice and bad faith need

not be proven sufficiently to make
a bank liable for moral damages
due to the error or negligence of a
bank employee as long as the
bank has committed a serious
mistake and the banks negligence
was a result of lack of due care
and caution required of managers
and employees of a firm engaged
in so sensitive and demanding
business as banking, it is liable for
moral damages.38
4. A bank cannot prohibit a
borrower from prepaying his loan
as a borrower may at any time
prior to the agreed maturity date
prepay, in whole or in part, the
unpaid balance of any bank loan
and other credit accommodation,
subject to such reasonable terms
and conditions (such as the
payment of a prepayment fee) as
may be agreed upon between the
bank and borrower.
PDIC
1. The
Philippine
Deposit
Insurance
Corporation
Act
created the Philippine Deposit
Insurance Corporation which is a
government
corporation
promoting and safeguarding the
interests of the depositing public
by providing permanent and
33
34
BAR OPERATIONS 2011
38
Prudential Bank vs. Court of Appeals, 328 SCRA 264
Page 235

continuing insurance coverage on

all insured deposits.
DETERMINATION
OF
THE
AMOUNT DUE THE DEPOSITOR
2. It insures the deposit

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

law means the net amount due
the depositor for any deposits in
the insured bank after deducting
any offsets but should not exceed
PHP 500,000.00.
3. The risk insured against is

the closure of a bank.
3.1. The nature of the coverage is
compulsory as the law provides
that the deposit liabilities of any
bank or banking institution which
is engaged in the business of
receiving deposits or which
thereafter may engage in the
business or receiving deposits,
shall be insured with PDIC.
3.2 Deposits that are covered
are savings accounts, current
account, time deposits and
deposits in acceptable foreign
currencies pursuant to Foreign
Currency Deposit Act.
3.3 Exempted though from the
coverage of the law are trust
funds as it was was expressly
excluded from the term deposit
under R.A. 7400 and money
market placement as it is not
included in the term deposit
BAR OPERATIONS 2011
2. Hence, if a depositor has two

or more accounts maintained in
the same right and capacity, the
coverage of PHP 500,000.00 shall
be held to apply to the sum of all
such accounts.
3. A joint account (whether
and/or, or, and shall be
insured separately from any
individual-owned account. If held
by a juridical person or entity
with a natural person, the account
shall be presumed to belong to
the juridical person.
3.1 Accounts
under
joint
ownership is considered equally
shared among co-depositors
unless otherwise indicated in the
deposit document.
TRUTH IN LENDING
Declared Policy of the State
1. The law, which is to be
implemented by the Monetary
Board of the Bangko Sentral ng
Pilipinas declares that it is the
Page 236

policy of the state to protect its

citizens from a lack of awareness
of the true cost of credit to the
user by assuring a full disclosure
of such cost with a view of
preventing the uninformed use of
credit to the detriment of the
national economy.
2. Specifically, it: (a) aims to
protect a debtor from the effects
of
misrepresentation
or
concealment (b) permits him to
fully appreciate and evaluate the
real cost of his borrowing (c)
avoid the circumvention of usury
laws
Coverage of the Law
1. As used in the law, the term
credit means: (a) loan,
mortgage, deed of trust; advance
or discount (b) conditional sales
contract (c)contract to sell or
contract of sale of property or
services
(d)rental-purchase
contract (e)contract for hire,
bailment or leasing of property (f)
option, demand, lien, pledge or
other claim against or for the
delivery of property or money
(g)purchase of acquisition of any
credit upon security of any
obligation arising out of any of the
above (h) any transaction with
similar purpose
2. The provisions of the law
apply to creditors, who is defined
by law as: any person engaged in
the business of extending credit,
BAR OPERATIONS 2011
including any person who as a

regular business practice makes
loans or sells or rents property or
services on a time, credit or
installment basis either as
principal or agent, who requires
as an incident to the extension of
credit the payment of a finance
charge.
2.1 The application of the law is
compulsory for (a) banks (b)
non-bank financial intermediaries
authorized to engage in quasibanking are required strictly to
adhere to the law. Banks and nonbank financial intermediaries
authorized to engage in quasibanking functions are required to
strictly adhere to the provisions
of the Truth in Lending Act and
shall make the true and effective
cost of borrowing an integral part
of
every
loan
contract
(Consolidated vs. CA, 246 SCRA
195)
3. The provisions of the law
does not apply to the following
credit transactions:
a.
those that do not involve the
payment of any finance charge by
the debtor; and
b. those in which the debtor is
the one specifying a definite and
fixed set of credit terms such as
bank
deposits,
insurance
contracts, sale of bonds, etc.
Page 237

3.1 Finance charges (Sec. 3[3];

Sec. 2[h], CB Circular 158) are the
amounts to be paid by the debtor
incident to the extension of credit
such as interests, discounts,
collection
fees,
credit
investigation fees and attorneys
fees.
3.2 Non Finance charges (Sec.
2[f], CB Circular 158) are the
amounts advanced by a creditor
for items normally associated
with the ownership of property or
the availment of the services
purchased which are not incident
to the extension of credit. For
example,
when
a
debtor
purchases a car on credit, the
creditor may advance the
insurance premium as well as the
registration fee for the account of
the debtor.
4. To accomplish the policy of
the law to protect citizens from a
lack of awareness of the true cost
of credit to the user by assuring a
full disclosure of such cost, a
creditor or lender is obliged to
provide the debtor or borrower
with a statement in writing,
before perfection of the contract
containing the following: (a)
Cash price of property or
service to be acquired (b)
Amount credited as down
payment and or trade-in(c)
Charges paid or to be paid
not incident to the extension of
credit (d) Charges paid or to be
paid not incident to the extension
BAR OPERATIONS 2011
of credit (e)Total amount to be

financed (f)
Finance charge;
and (g)Percentage of finance
charge to total amount to be
financed.
4.1 The disclosure must be
made in a separate document, and
not
one
that
is
merely
incorporated in a document by
the statement that the transaction
subjects the debtor to a finance
charge.
4.2 The failure to comply does
not render the principal contract
invalid or unenforceable, but
would entitle the debtor to
recover any interest payment
made.
4.3 A violation of the law may
subject the violator to: (a) a civil
action brought within one year to
recover from the seller/lender an
amount of P100.00 or double the
finance
charge
imposed,
whichever is greater, but not to
exceed P2,000.00, plus attorneys
fees and costs, and (b) a criminal
action against the seller/lender
who if convicted may be imposed
a fine ranging from P1,000 to
P5,000 or imprisoned from 6
months to 1 year or both. Note
that a final judgment that may be
rendered
in
any
criminal
proceeding to the effect that the
defendant has willfully violated
the act shall be prima facie
evidence against such defendant
in an action or proceeding
Page 238

brought by any other party

against such defendant under the
Act as to all matters respecting
which said judgment would be
estoppel as between the parties
thereto.
THE INSIDE STORY ON THE
SECRECY OF BANK DEPOSITS
LAW
Atty. Renato S. Rondez
Partner, Law Firm of Rondez &
Partners
Professor, College of Law
University of the Cordilleras
________________________________
QUESTIONS AND ANSWERS ON
SECRECY OF BANK DEPOSITS-RA
1405 AND RELATED LAWS
1) What is the purpose of the
law?
The purpose of the law is to
encourage people to deposit their
money in banks and, thereby,
discourage private hoarding so
that the banks may lend out the
money and assist in the economic
development of the country39.
2) What does the law prohibit?
the
Philippines
including
investments in bonds issued by
the Government or its political
subdivisions
and
instrumentalities by any person,
government official, bureau or
office40; and
(b) The disclosure by any
official or employee of any
banking institution to any
unauthorized person of any
information concerning said
deposits.
Note that the law is
applicable to trust accounts or an
account that has been set up as an
inter vivos or testamentary trust
as Section 2 has been held to
cover not only money that has
been deposited but also to money
which has been invested although
no creditor-debtor relationship is
created between the bank and the
client.41
The law does not apply to
money market placements as they
are not deposits, rather, they are
trades in short term negotiable
instruments such as securities or
treasury bills.
3)
What
disclosures
or
inquiries into deposits are not
prohibited?
a) Upon written permission of
the depositor;
b) In cases of impeachment;
(a) The examination and

inquiry or looking into all
deposits of whatever nature with
banks or banking institutions in
Sec. 2, RA 1405.
Ejercito vs. Sandiganbayan, GR Nos. 157294-95, November
30, 2006
40
41
39
Sec. 1, RA 1405.
BAR OPERATIONS 2011
Page 239

c) Upon order of a competent

court in cases of bribery or
dereliction of duty of public
officials;
d) In cases where the money
deposited or invested is the
subject matter of litigation42;
e) Upon order of the court or
subpoena issued by the
Ombudsman in cases of
unexplained wealth43; This
is subject to the following
requisites: (1) only an incamera inspection is allowed
(2) there must be a pending
case before a court of
competent jurisdiction (3)
account is clearly identified
(4) examination is limited to
account subject of the court
case, and (5) bank personnel
and the account holder must
be notified to be present
during the inspection.
f) Upon
order
of
the
Commissioner of Internal
Revenue in respect of the
bank deposits of a decedent
for
the
purpose
of
determining such decedents
gross estate44;
g) Upon
order
of
the
Commissioner of Internal
Revenue when a taxpayer
files an application to
compromise his tax liability
by reason of financial
incapacity45;
Sec. 2, RA 1405.
Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA 91, Marquez
vs. Disierto, 399 SCRA 772
44 Sec. 6, NIRC.
45 Sec. 6, NIRC.
h) Upon examination made in

the course of a special or
general audit of a bank as
authorized by the Monetary
Board after being satisfied
that there is reasonable
ground to believe that a
bank fraud or irregularity is
being committed and it has
become necessary to look
into the deposit to establish
the same;
i) Upon examination of a
banks independent auditor,
the result of which are for
the exclusive use of the
bank;
j) In case of suspicious
transactions under the AntiMoney Laundering Law46;
k) Under
the
Anti-Money
Laundering Law where
banks are required to report
to
the
Anti-Money
Laundering Council any
transaction in cash or other
equivalent
monetary
instrument in excess of
P500,000 in any one day47;
l) Also under the MoneyLaundering Law, the AntiMoney Laundering Council
may inquire into a deposit or
investment maintained with
any financial institution
upon order of a competent
court, in cases of violation of
the Act, when there is
probable cause that the
deposit or investment is in
42
43
BAR OPERATIONS 2011
46
47
Sec. 3 (b-1) , RA 9160.

Sec. 3 (b), RA 9160.
Page 240

any way related to an

unlawful activity as defined
in the Act or a money
laundering offense under the
Act48;
m)
When
a
director,
officer, stockholder, and
related interest (DOSRI)
obtains a loan from his bank
or its subsidiaries, or with
related controlling interests
of more than 5% of the
capital or surplus of the
bank, it shall constitute a
waiver of secrecy of all his
deposits of whatever nature
in all banks in the
Philippines; and
n) Under
the
Unclaimed
Balances Law49.
o) The examination of a bank
account under Section 10,
Rule 57 in relation to the
examination of a party
whose property is attached
and persons indebted to a
defendant or controlling his
property.50
Note also, that since

investigations by the Monetary
Board and the Bureau of Internal
Revenue are confidential in
nature, any disclosure in violation
of the confidentiality will create
liability.
4) Who are primarily liable for

violations of the law?
No, the deposits made by a

depositor in a safety deposit box
are not the deposits contemplated
by the law as the bank is never in
possession or control of the
contents of the safety deposit box
in this instance, the depositor is
merely leasing the deposit box
from the bank.
The persons primarily liable

for a violation of the law would be
a bank employee or officer and
the person, government officer,
agency or office looking into the
deposit when not authorized by
any of the exceptions to the law.
Sec. 1, RA 9160.
RA 3936.
50 Onate vs. Abrogar, 230 SCRA 181
5) Will the garnishment of a

bank deposit violate the law?
No, garnishment of a bank
deposit will not violate the law. If
the existence of the deposit is
disclosed, the same is considered
as purely incidental to the
execution process51.
What is to be disclosed only
is the existence of the deposit,
particularly whether or not it is
sufficient
to
satisfy
the
garnishment. Hence, a disclosure
of the balance may constitute a
violation of the law.
6) Is a depositor with a safety
deposit box protected by the
law?
48
49
BAR OPERATIONS 2011
51
China Banking Corp. vs Court of Appeals, 193 SCRA 454
Page 241

Prevailing jurisprudence is
that the ensuing relationship
between the bank renting out the
safety deposit box and the client
with respect to the contents of the
box is that of bailor-bailee, the
bailment being for hire and
mutual benefit. The bank would
be liable for loss of the contents of
the box if it is guilty of fraud,
negligence
or
delay
or
contravention of the tenor of the
agreement.52
NOTE: Without order of a court of
competent jurisdiction, disclose
to any authorized person any
information relative to the funds
or properties in the custody of the
bank belonging to private
individuals, corporations, or any
other entity; Provided, that with
respect to bank deposits, the
provisions of existing laws shall
prevail53.
7) Would the examination of the
bank deposits of another person
in connection with an inquiry into
illegally acquired property of the
defendant in anti-graft cases
violate the law?
The permitted inquiry into
illegally acquired property in antigraft cases extends to instances
where such property is concealed
by being held by or recorded in
the name of other persons.
52
53
Sia vs. Court of Appeals, 222 SCRA 24

Sec. 55.1(b), RA 8791.
BAR OPERATIONS 2011
8) In a case where the money

deposited or invested is the
subject matter of the litigation,
could an inquiry into the
whereabouts of the amount
extend to the deposits held in
the name of persons other that
the one responsible?
Even in cases not involving
prosecution under Anti-Graft and
Corrupt Practices Act, an inquiry
into the whereabouts of the
amount converted necessarily
extends to whatever is concealed,
held or recorded in the name of
persons other than the one
responsible inasmuch as the case
is aimed at recovering the amount
converted.
9)
Are foreign
currency
deposits covered by the law?
While the law does not cover
foreign currency deposits, they
however
are
absolutely
confidential and cannot be
disclosed pursuant to Republic
Act No. 6426, otherwise known as
the Foreign Currency Deposit Act,
the only exception to disclosure
being upon the written consent of
the depositor54.
An additional exemption has
been provided by the Anti Money
Laundering Law when it has been
established that there is probable
cause that the deposits involved
54
Sec. 8, RA 6426.
Page 242

are in any way related to the

offense of money laundering.55
Trade Organization (Mirpuri vs.

CA GR no 114508)
10)
Will
an
unlawful
examination of a bank account
render
the
information
obtained inadmissible?
COVERAGE -intellectual property
There is nothing in the law

that provides that an unlawful
examination shall render the
evidence obtained therefrom to
be inadmissible.
11) What is the penalty for a
violation of the law?
Upon conviction, a violator
may
be
sentenced
to
imprisonment of not more than 5
years of a fine of not more than
P200,000.00, or both at the
discretion of the court.
INTELLECTUAL PROPERTY
CODE
R.A. No. 8293
INTELLECTUAL PROPERTIES
Those property rights which
result
from
the
physical
manifestation of an original
thought.
(Ballantines Law Dictionary)
Purpose: to strengthen the
intellectual
and
industrial
property
system
in
the
Philippines as mandated by the
countrys accession to the
Agreement establishing the World
55
rights consists of:

a) Copyrights
and
related
rights;
b) Trademarks and service
marks;
c) Geographic indications;
d) Industrial designs;
e) Patents;
f) Layout-designs
(Topographies)
of
Integrated Circuits; and
g) Protection of Undisclosed
Information.
Section 7 of Rep. Act No. 9502
(Universally Accessible Cheaper
and Quality Medicines Act of
2008) amends Section 72 of the
Intellectual Property Code in that
the latter law unequivocally
grants third persons the right to
import drugs or medicines whose
patent were registered in the
Philippines by the owner of the
product (Roma Drug vs. RTC of
Guagaua, Pampanga GR No.
149907)
INTERNATIONAL CONVENTION
AND RECIPROCITY
-any person who is a
national or who is domiciled or
has a real and effective industrial
Sec. 11, RA 9160
BAR OPERATIONS 2011
Page 243

establishment in a country which

is: a.) a party to any convention,
treaty, or agreement relating to
intellectual property rights or the
repression of unfair competition
to which the Philippines is also a
party, or b.) extends reciprocal
rights to nationals of the
Philippines by law, shall be
entitled to benefits to the extent
necessary to give effect to any
provision of such convention,
treaty, or reciprocal law, in
addition to the rights to which
any owner of an intellectual
property right is otherwise
provided by law. (Sec. 3)
c) Condemnation or seizure of
products subject of the offense;
d) Forfeiture of properties used in
the commission of the offense;
e) Imposition of administrative
fines;
f) Cancellation of permit, license,
authority or registration;
g) Withholding of permit, license,
authority or registration;
h) Assessment of damages;
- Must be recovered within
four (4) years from the time
the cause of action arose
(Sec. 226)
i) Censure;
j) Analogous
penalties
or
sanctions (Sec. 10.2 [b])
REVERSE RECIPROCITY OF
FOREIGN LAWS
makes
reciprocally
enforceable on nationals of a
foreign state within Philippine
jurisdiction
all
conditions,
restrictions,
limitations,
diminutions, requirements or
penalties that may be imposed by
such foreign state on a Filipino
national
seeking
intellectual
property protection in that
country. (Section 231)
ELEMENTS
OF
UNFAIR
COMPETITION
(1) confusing similarity in the
general appearance of the
goods; and
(2) intent to deceive the public
and defraud a competitor.
The confusing similarity may or
may not result from similarity in
the marks, but may result from
other
external
factors
in the packaging or presentation
of the goods. The intent to deceive
and defraud may be inferred from
the similarity of the appearance of
the goods as offered for sale to
the public. Actual fraudulent
intent need not be shown (In-NOut Burger vs. Sehwani GR No.
179127)
ADMINISTRATIVE PENALTIES
IMPOSED FOR VIOLATIONS OF
LAWS INVOLVING IPR
a) Cease and desist order (CDO);
b) Acceptance
of
voluntary
assurance compliance (VAC) or
voluntary
assurance
of
discontinuance (VAD);
BAR OPERATIONS 2011
LAW ON PATENTS
Page 244

PATENT an exclusive right

acquired over an invention, to
sell, use, and make the same
whether for commerce or
industry(2005 2006 bar exams)
PATENTABLE INVENTIONS
-any technical solution of a
problem in any field of human
activity
which
is
(a.)NEW(NOVELTY), involves an
(b).INVENTIVE STEP and is
(c).INDUSTRIALLY APPLICABLE
shall be patentable. (Elidad Kho
vs. CA, March 19, 2002) The
patentable invention may be, or
may relate to, a product, or
process, or an improvement of
any of the foregoing. (Sec. 21)
Novelty that which does
not form part of a prior art.
(Section 23)
Prior Arts:
a. those previously available to
the public
b. that which forms part of an
application provided that:
i. the inventors or applicants
are not the same
ii. The
contents
of
the
application are published
in
accordance with the
requirements of patent
application rules.
iii. The filing date of the prior
art is earlier.
Inventiveness/Inventive
Step
-that which is not obvious to
a person skilled in the art of the
time of the filing date or priority
BAR OPERATIONS 2011
date of the application claiming

the invention. (Sec. 26)
Industrial Applicability
-an invention that can be
produced and used in any
industry. (Sec. 27)
NON-PATENTABLE
INVENTIONS
a) Discoveries,
Scientific
Theories and Mathematical
Methods;
b) Schemes, rules and methods
of performing mental acts,
playing games or doing
business, and programs for
computer;
c) Methods for treatment of the
human or animal body by
surgery or therapy and
diagnostic methods practiced
on the human or animal body;
d) Plant varieties or animal
breeds
of
essentially
biological process for the
production of plants or
animals;
e) Aesthetic creations;
f) Anything which is contrary to
public order or morality (Sec.
22)
RIGHT TO A PATENT
The right to a patent belongs:
a) to the inventor, his heirs, or
assigns
b) when 2 or more persons
have made the invention
jointly to them jointly
c) if two (2) or more persons
have made the invention
separately
and
Page 245

independently of each other

to the person who filed an
application
for
such
invention (FIRST TO FILE
RULE)
d) where
2
or
more
applications are filed for the
same invention to the
applicant who has the
earliest filing date or the
earliest priority date (FIRST
TO FILE RULE) (Sec. 29)
e) In case of inventions created
pursuant to a commission
to
the
person
who
commissions
the
work
UNLESS agreed otherwise.
f) If made by an employee, the
patent shall belong to:
the
employee
if
invention not part of his
regular duties even if he
uses the time, facilities
and materials of the
employer; OR
The employer if the
invention is the result of
the performance of his
regularly assigned duties
unless agreed otherwise.
Right to Priority
-an application for patent filed by
any person who has previously
applied for the same invention in
another country which by treaty,
convention, or law affords similar
privileges to Filipino citizens,
shall be considered as filed as of
the date of filing the foreign
application
Requisites:
BAR OPERATIONS 2011
(a) The local application

expressly claims priority;
(b) It is filed within twelve (12)
months from the date the
earliest foreign application was
filed;
(c) A certified copy of the
foreign application together
with an English translation is
filed within six (6) months
from the date of filing in the
Philippines. (Sec. 15, R.A. No.
165a)
RIGHTS ACQUIRED BY THE
PATENTEE
a. to restrain, prohibit and
prevent any unauthorized
person or entity from making,
using, offering for sale, selling
or importing a patented
product;
b. to restrain, prevent or
prohibit any unauthorized
person or entity from using the
process,
and
from
manufacturing, dealing in,
using or offering for sale, or
importing
any
product
obtained directly or indirectly
from a patented process;
c. to assign, or transfer by
succession the patent, and to
conclude licensing contracts
for the same
UNITY OF INVENTION
-every application for patent
registration must contain an
application
over
a
single
invention or several inventions
Page 246

but must form part of a single

general inventive concept
Utility Models
-models of implement or
tools of any industrial product
even if not possessed of the
quality of invention but which is
of practical utility
Industrial Design
-any composition of lines or
colors or any three-dimensional
form, whether or not associated
with lines or colors provided that
such composition or form gives a
special appearance to and can
serve as pattern for an industrial
product or handicraft.
CANCELLATION OF PATENTS
1. Who may file?
any person
IPO motu proprio
2. Grounds
a) That the patent is invalid
(Sec. 81);
b) If the invention is not new
or patentable;
c) Unclear and incomplete
application;
d) Contrary to public order
or morality. Failure to
make payments of annual
fees or dues
3. Where to file?
BLA if in violation of IPC
(administrative)
RTC otherwise
INFRINGEMENT
BAR OPERATIONS 2011
-the making, using, offering

for sale, selling or importing a
patented product or a product
obtained directly or indirectly
from a patented process or the
use of a patented process without
the authorization of the patentee.
(Sec. 76)
Test of Patent Infringement
1) Literal Infringement
resort is had to the words
of the claim.
2) Doctrine of Equivalents if
two devices do the same
work in substantially the
same way and produce
substantially the same result,
they are the same even
though they differ in name,
form, or shape.
REMEDIES
IN
CASE
OF
INFRINGEMENT
A) File civil case
- with the appropriate
Regional Trial Court to recover
from infringer the damages
sustained by the former, plus
attorneys fees and other
litigation expenses, and to
secure an injunction for the
protection of his rights.
B) File criminal case
-within 3 years from date of
commission of the crime for
repetition of infringement,
without prejudice to the right
for damages. (Sec. 84)
1995 & 2004 BAR
Page 247

Q - X Corporation commissioned
W to paint the Mayon Volcano on
the lobby of the new building of X
Corp. for a price of P1M. Who
owns the painting? Who owns the
copyright of the painting?
A - X Corporation owns the
painting but the copyright
belongs to W unless there is a
written
stipulation to
the
contrary. (Sec.178.4)
Collective Mark any visible

sign designated as such in the
application for registration and
capable of distinguishing the
origin or any other common
characteristic,
including
the
quality of goods and services of
different enterprises which use
the sign under the control of the
registered owner of the collective
mark (Sec. 121.2)
While the Rome Convention gives

broadcasting organizations the
right to authorize or prohibit the
rebroadcasting of its broadcast,
however, this protection does not
extend to cable retransmission
(ABS-CBN vs. PMSI GR Nos.
175769-70)
Trade Name the person

(whether natural or juridical)
who does business and produces
the goods or the services is
designated by a trade name.
-there is no need to register trade
names in order to secure
protection for them.
LAW ON TRADEMARKS
Trade Dress involves the total

image of a product, including such
features as size, shape, color or
color
combinations,
texture,
and/or graphics.
Trademark anything which is

adopted and used to identify the
source of origin of goods, and
which is capable of distinguishing
them from goods emanating from
a competitor
-any word, name symbol or
devise adopted and used by a
manufacturer or merchant to
identify his goods and distinguish
them from those manufactured
and sold by other (Society des
Products Nestle vs. CA April 4,
2001)
Service Mark distinguishes the
services of an enterprise from the
service of other enterprises.
BAR OPERATIONS 2011
HOW MARKS ARE ACQUIRED

-Under RA 8293, the rights in
a mark shall be acquired through
registration made validly in
accordance with its provisions.
(Sec. 122)
-when a person has identified
in the mind of the public the
goods he manufactures or deals in
his business or services from
those of others, such a person has
a property right in the goodwill of
said goods or services which will
be protected in the same manner
Page 248

as other property rights (Sec.

168.1)
RIGHTS CONFERRED
-to prevent all third parties
not having the owners consent
from using in the course of trade
identical or similar signs or
containers for goods or services
which are identical or similar to
those in respect of which the
trademark is registered where
such use would result in a
likelihood of confusion. (Sec. 147)
NON-REGISTRABLE
TRADEMARKS, TRADE NAMES
AND SERVICE MARK
a)
Immoral, deceptive or
scandalous matter, or matter
which may disparage or falsely
suggest a connection with
persons, living or dead,
institutions, beliefs, or national
symbols, or bring them into
contempt or disrepute;
b) The flag or coat of arms or
other
insignia
of
the
Philippines or its political
subdivisions, or of any foreign
nation, or any simulation
thereof;
c)
A name, portrait or
signature
identifying
a
particular living individual
except by his written consent,
or the name, signature, or
portrait
of
a
deceased
President of the Philippines,
during the life of his widow, if
any, except by written consent
of the window;
BAR OPERATIONS 2011
d) Is identical with a
registered mark belonging to a
different proprietor or a mark
with an earlier filing or priority
date, in respect of:
(i)
The same goods
or services, or
(ii)
Closely
related
goods or services, or
(iii)
If
it
nearly
resembles such a mark as
to be likely to deceive or
cause confusion;
e) Be
identical
with
or
confusingly similar to an
internationally
well-known
mark,
whether
or
not
registered in the Philippines,
provided that:
i. If the internationally wellknown
mark
is
not
registered in the Philippines,
the
application
for
registration of the mark can
be rejected only if the goods
or services specified in the
application are similar to
those of the internationally
well-known mark;
ii. If the internationally wellknown mark is registered in
the
Philippines,
the
application for registration
of the mark can be refused
even if the goods or services
specified in the application
are not identical or similar
to
those
of
the
internationally well-known
mark.
f) Is likely to mislead the
public;
Page 249

g) Generic signs for goods or

services;
h) Customary in everyday
language or in established
trade practice;
i) Designate the kind, quality,
quantity, intended purpose,
value, geographical origin, time
or production of the goods or
services;
j) Shapes necessitated by
technical factors;
k) Color alone, unless defined
by a given form; or
l) Is contrary to public order
or morality
FILING
DATE
OF
AN
APPLICATION
-The filing date of an
application shall be the date on
which the office received the
following
indications
and
elements in English or Filipino:
a) An express or implicit
indication
that
the
registration of a mark is
sought;
b) Indications sufficient to
contact the applicant or
his representative, if any;
c) A reproduction of the
mark where registration
is sought; and
d) The list of the goods or
services for which the
registration is sought.
(Sec. 127.1)
NO filing date shall be
accorded until the required
fee is paid (Sec. 127.2)
BAR OPERATIONS 2011
CANCELLATION
OF
TRADEMARK OR TRADENAME
1. Who may file?
- any person who believes
that he is and will be
damaged by the registration
of a mark
2. Where to file?
- BLA
3. Grounds:
a) Mark becomes generic for
goods for which it is
registered;
b) Abandonment of the
mark;
c) Registration
obtained
fraudulently or contrary
to provisions of RA 8293;
d) Mark used by, or with
permission of, registrant;
e) Non-use
within
the
Philippines
for
3
uninterrupted years or
longer.
-may be excused if
caused
by
circumstances arising
independently of the
will of the trademark
owner, such as military
coup,
or
political
changes that impede
commerce
DOCTRINE OF SECONDARY
MEANING
- When a mark has become
distinctive of the applicants
goods in commerce and, in the
mind of the public, indicates a
single source of consumers, it
may be registered.
Page 250

WHAT
CONSTITUTES
AN
INFRINGEMENT
-Under RA 8293, any person
shall, without the consent of the
owner of the registered mark:
1) Use in commerce any
reproduction,
counterfeit,
copy, or colorable imitation
of a registered mark or the
same
container
or
a
dominant feature thereof in
connection with the sale,
offering
for
sale,
distribution, advertising any
goods or services including
other preparatory steps
necessary to carry out the
sale of any goods or services
on or in connection with
which such use is likely to
cause confusion, or to cause
mistake, or to deceive; or
2) Reproduce, counterfeit, copy
or colorably imitate a
registered mark or a
dominant feature thereof
and
apply
such
reproduction,
counterfeit,
copy, or colorable imitation
to labels, signs, prints,
packages,
wrappers,
receptacles,
or
advertisements intended to
be used in commerce upon
or in connection with the
sale, offering for sale,
distribution, or advertising
of goods or services on, or in
connection with which such
use is likely to cause
confusion, or to cause
BAR OPERATIONS 2011
mistake, or to deceive, shall

be liable for infringement.
(Sec. 155)
TEST
OF
TRADEMARK
INFRINGEMENT
1) Dominancy Test consists
in seeking out the main,
essential
or
dominant
features of a mark.
2) Holistic Test takes stock
of the other features of a
mark,
taking
into
consideration the entirety of
the marks.
DIFFERENTIATED
FROM
UNFAIR COMPETITION
1) Cause of action: in
infringement, the cause of
action is the unauthorized
use of a registered
trademark; in
unfair
competition, it is the
passing off of ones goods
as those of another
merchant.
2) Fraudulent intent is not
necessary
in
infringement,
but
necessary in UC.
3) Registration
of
trademarks:
in
infringement, it is a prerequisite; in UC, it is not
required.
4) Class of goods involved:
in infringement, the goods
must be of similar class;
in UC, the goods need not
be of the same class.
Page 251

infringement is a form of
unfair competition
REMEDIES AVAILABLE IN CASE
OF INFRINGEMENT OF A
REGISTERED MARK
a) Sue for damages (Sec.
156.1);
b) Have the infringing goods
impounded (Sec. 156.2);
c) Ask for double damages
(Sec. 156.3)
d) Ask for injunction (156.4)
e) Have the infringing goods
disposed of outside the
channels of commerce
(Sec. 157.1)
f) Have the infringing goods
destroyed (Sec. 157.1)
g) File criminal action (Sec.
170);
h) Administrative Sanctions
UNFAIR COMPETITION
-any person who shall
employ deception or any other
means contrary to good faith by
which he shall pass off the goods
manufactured by him or in which
he deals, or his business, or
services for those of the one
having established such goodwill,
or who shall commit any acts
calculated to produce said result,
shall be guilty of unfair
competition.
How Committed
a) Making ones goods appear
as the goods of another;
b) Use of artifice or device to
induce the false belief that
BAR OPERATIONS 2011
ones goods are

another;
c) False statements
course of trade; or
d) Any act contrary
faith calculated to
anothers goods
those of
in
the
to good
discredit
TEST OF UNFAIR COMPETITION

-The test is whether certain
goods have been clothed with an
appearance likely to deceive the
ordinary purchaser exercising
ordinary care.
REMEDIES IN CASE OF UNFAIR
COMPETITION
a.) Damages which may either
be:
reasonable profit which
would have been realized, or
actual profits collected by
the defendant, or
a certain percentage over
the gross sales of defendant in
case of the measure of
damages cannot be readily
ascertained;
b.) Damages may be doubled in
cases where actual intent to
mislead the public or to
defraud the complaint is
shown;
c.) Impounding of sales
invoices and other documents
evidencing sales;
d.)
Injunction
e.) Destruction of goods found
to be infringing, and all
paraphernalia.
Page 252

While the Constitution does not

encourage the unlimited entry of
foreign goods, services and
investments into the country, it
does not prohibit them either. In
fact, it allows an exchange on the
basis of equality and reciprocity,
frowning
only
on
foreign
competition that is unfair.
GATT itself has provided
built-in protection from unfair
foreign competition and trade
practices including anti-dumping
measures,
countervailing
measures and safeguards against
import
surges. Where
local
businesses are jeopardized by
unfair foreign competition, the
Philippines can avail of these
measures. There
is
hardly
therefore any basis for the
statement that under the WTO,
local industries and enterprises
will all be wiped out and that
Filipinos will be deprived of
control of the economy (Taada
vs. Angara GR No. 118295)
LAW ON COPYRIGHT
COPYRIGHT system of legal
protection an author enjoys in the
form
of
expression
of
ideas(2004,2006,2007,2009 bar
exams)
Works are protected by the
sole fact of their creation,
irrespective of their mode or
form of expression, as well as
their content, quality or
purpose (Sec. 172.2)
Protection extends only to the
expression of the idea, not to
BAR OPERATIONS 2011
the idea itself or to any

procedure, system, method or
operation,
concept
or
principle, discovery or mere
data.
The copyright is distinct from
property in the material
object subject to it.
Copyright, in the strict sense,
is purely statutory right.
Being mere statutory right, it
is limited to what the statute
confers. It may be obtained
and enjoyed only with respect
to the subjects and by the
persons, and on terms and
conditions specified in the
statute. Accordingly, it can
cover only works falling
within
the
statutory
enumeration or description
(Pearl & Dean Vs Shoemart GR
148222 August 15, 2003).
CREATION OF A WORK
A copyright work is created when
the two (2) requirements are
met:
1) Originality does not mean
novelty or ingenuity, neither
uniqueness nor creativity. It
simply means that the work
owes its origin to the author
2) Expression there must be
fixation. To be fixed, a work
must be embodied in a medium
sufficiently
permanent
or
stable, to permit it to be
perceived, reproduced, or
otherwise communicated for a
period of more than transitory
duration.
Page 253

-if it is not required that the

medium be visible as long as
there is a possibility of
retrieval, then there is fixation
-it is fixation that defines the
time from when copyright
subsists. Before fixation, there
can be no infringement.
WORKS
PROTECTED
BY
COPYRIGHT
A. Original Work - Literary and
artistic works which include in
particular:
a) Books, pamphlets, articles
and other writings
b) Periodicals and newspapers
c) Lectures,
sermons,
addresses,
dissertations
prepared for oral delivery,
whether or not reduced in
writing or other material
form
d) Letters
e) Dramatic or dramaticomusical
compositions;
choreographic works or
entertainment in dumb
shows
f) Musical compositions, with
or without words
g) Works of drawing, painting,
architecture,
sculpture,
engraving, lithography or
other works of art; models
or designs for works of art
h) Original ornamental designs
or models for articles of
manufacture, whether or not
registrable as an industrial
design, and other works of
applied art.
BAR OPERATIONS 2011
i) Illustrations, maps, plans,

sketches, charts and threedimensional works relative
to geography, topography,
architecture or science
j) Drawings or plastic works of
a scientific or technical
character
k) Photographic
works
including works produced
by a process analogous to
photography; lantern slides
l) Audiovisual
works
and
cinematographic or any
process for making audiovisual recordings
m)
Pictorial illustrations
and advertisements
n) Computer programs
o) Other literary, scholarly,
scientific and artistic works
(Sec. 172)
B. Derivative Works
a) Dramatizations, translations,
adaptations, abridgments,
arrangements, and other
alterations of literary works
b) Collections
of
literary,
scholarly or artistic works,
and compilations of data and
other materials which are
original by reason of the
selection or coordination or
arrangement
of
their
contents. (Sec. 173)
WORKS NOT PROTECTED
1) Any idea, procedure, system,
method
or
operation,
concept, principle, discovery
or mere data as such, even if
Page 254

expressed,
explained,
illustrated, or embodied in a
work;
2) News of the day and mere
items of press information;
3) Any official text of a
legislative, administrative or
legal nature, as well as any
official translation thereof.
(Sec. 175)
4) Any work of the Government
of the Philippines. (Sec. 176)
-prior approval of the
government agency or office
wherein the work is created
shall be necessary for
exploitation of such work for
profit. Such agency or office,
may, among other things,
impose as a condition the
payment of royalties
5) Pleadings;
6) Decisions of courts and
tribunals.
-this pertains to the
original decisions not to the
SCRA published in volumes
since these are protected
under derivative works.
RIGHTS OF AN AUTHOR
A. Economic Rights (Sec.
177)
-exclusive right to carry out,
authorize or prevent the
following acts
1. Reproduction of the work or
substantial portion of the
work
2. Dramatization, translation,
adaptation,
abridgement,
BAR OPERATIONS 2011
3.
4.
5.
6.
7.
arrangement
or
other
transformation of the work;
The first public distribution
of the original and each copy
of the work by sale or other
forms
of
transfer
of
ownership;
Rental of the original or a
copy of an audiovisual or
cinematographic work;
Public display of the original
or copy of the work;
Public performance of the
work; and
Other communication to the
public of the work
B. Moral Rights (Sec. 193)

1) Right to require that the
authorship of the works be
attributed to him,;
2) Right of alteration or nonpublication
3) Right to preservation of
integrity to object to any
distortion, mutilation or
other modification of, or
other derogatory action in
relation to, his work which
would be prejudicial to his
honor or reputation; and
4) Right not to be identified
with work of others or with
distorted work.
Term of moral right
-lifetime of the author and
50 years after his death
Waiver of moral right
1) by a written instrument
(Sec. 195)
2) by contribution to a
collective work unless
Page 255

expressly reserved (Sec.

196)
PRINCIPLE OF AUTOMATIC
PROTECTION
Under the Berne Convention,
the enjoyment and exercise of
copyright, including moral rights,
shall not be the subject of any
formality.
OWNERSHIP OF COPYRIGHT
1. Single creator the author
of the work, his heirs or
assigns.
2. Joint creation the coauthors jointly as co-owners.
But if the work consists of
identifiable parts, the author
of each part owns the part
that he has created.
3. Employees creation the
employee if the creation is
not part of his regular duties
even if he uses the time,
facilities and materials of the
employer;
otherwise
it
belongs to the employer
4. Commissioned work the
person commissioning but
the copyright remains with
the creator unless there is a
written stipulation to the
contrary.
5. Cinematographic works
the producer has copyright
for purposes of exhibition;
for all other purposes, the
producer, the author of the
scenario, the composer, the
film director, the author of
the work are the creators.
BAR OPERATIONS 2011
6. Anonymous
and
pseudonymous works the
publishers shall be deemed
the representative of the
author unless:
a. the contrary appears
b. the pseudonyms or
adopted name leaves no
doubt as to the authors
identity or
c. If the author discloses
his identity
7. Collective works the
contributor is deemed to
have waived his right unless
he expressly reserves it.
(Sec. 196)
Collective Work a work
created by two or more
persons at the initiative and
under the direction of
another
with
the
understanding that it will be
disclosed by the latter under
his own name and that the
contributions of natural
persons
will
not
be
identified. (Sec. 171.2)
8. In case of transfers, the
transferee shall own one or
more or all the economic
rights transferred provided:
a. The assignment, if inter
vivos, be in writing
b. The assignment be filed
with the National Library
upon payment of the
prescribed fee.
LIMITATIONS TO THE RIGHTS
ON COPYRIGHT
Page 256

1) Private
performance,
private and personal use
applicable only when a work
has been lawfully made
accessible to the public.
Personal Use
-making
a
single
reproduction,
adaptation,
arrangement
or
other
transformation of anothers
work exclusively for ones own
individual use Private Use
-making a reproduction,
adaptation
or
other
transformation of it, in a single
person as in the case of
personal use but also for a
common purpose by a specific
circle of persons only.
2) Fair Use of a Copyrighted
Work
Fair Use - a privilege in
persons other than the owner of
the copyright to use the
copyrighted material in a
reasonable manner without its
consent, notwithstanding the
monopoly granted to the owner
by the copyright.
-the doctrine of fair use is
meant
to
balance
the
monopolies enjoyed by the
copyright owner with interests
of the public and of society.
CRITERIA
TO
DETERMINE
WHETHER USE IS FAIR OR NOT
a) Purpose and the character of
the use
b) Nature of the copyrighted
work
BAR OPERATIONS 2011
c) Amount and substantially of

the portions used
d) Effect of the use upon the
potential market of the
copyrighted work (Sec. 185)
THE
FAIR-USES
OF
PROTECTED MATERIAL ARE
Criticizing, commenting, and
news reporting;
Using
for
instructional
purposes
including
producing multiple copies of
classroom
use,
for
scholarship, research and
similar purposes (Sec. 185)
3) Working of Architecture
(Sec. 186)
-include the right to control
the erection of any building
which reproduces the whole
or a substantial part of the
work either in its original or
in any form recognizably
derived from the original;
Provided, that the copyright
in any such work shall not
include the right to control
the
reconstruction,
or
rehabilitation in the same
style as the original of a
building to which that
copyright relates
4) Reproduction of Published
Work
-exclusively for research and
private study.
Page 257

5)
Reprographic
Reproduction by Libraries
-any library or archive
whose activities are not for
profit may, without the
authorization of the author
of copyright owner, make a
single copy of the work by
reprographic reproduction.
6)
Reproduction of
Computer Programs
-allowed on the ff. conditions:
a)
only
one
copy is made;
b)lawful owner made the
copy;
c)purpose of which the
reproduction is made is legal
like:
use to which the
program is made and for
which it was purchased
demand the reproduction
of a copy; or
the reproduction of a
copy is necessary to
guarantee against loss or
destruction (Sec. 189.1)
7) Importation for Personal
Purposes
Requisites:
a)
Copies of the work
are not available in the
Philippines and:
i. not more than one copy at
one time is imported for strict
individual use;
ii.
importation is by
authority and for the use of
Philippine Government; or
BAR OPERATIONS 2011
iii. religious, charitable, or

educational society imported
not more than 3 copies per
title provided they are not for
sale.
b) Copies form part of libraries
and
personal
baggage
belonging to persons or
families
arriving
from
foreign countries and are
not intended for sale:
Provided, that such copies
do not exceed three (3). (Sec.
190)
REMEDIES
IN
CASE
OF
INFRINGEMENT
1) Injunction
to
prevent
infringement
2) Damages assessed on the
basis of the proof alleged by
the plaintiff of sales made by
the defendant of the
infringing
work
minus
whatever
costs
the
defendant may be able to
prove and appreciated by
the court.
3) Delivery under oath of all
implements employed in the
production of the infringing
products themselves and the
infringing
items,
for
impounding or destruction
as the court may order.
4) Payment of moral and
exemplary damages under
the discretion of court.
5) Criminal Action
If the containers originally
conformed to the description
Page 258

contained in the certificate of

registration and it appears that
they are the same containers
being used by the other persons,
the use is illegal regardless of
whether or not their distinctive
name, mark or design is partly
or entirely erased therefrom.
(Destileria Ayala, Inc. vs. Tan Tay
& Co. GR No. l-48793)
A.M. No. 04-7-06-SC
RE: CONDITIONS ON THE
COMMERCIAL EXPLOITATION
.OF SUPREME COURT
DECISIONS
RESOLUTION
a. The person compiling and
selling the decisions shall provide
the Supreme Court Library
twenty (20) free copies of the
compiled decisions in the format
the compilation is sold to the
public;
b. If the compilation is in
printed copies, the Supreme Court
Library shall have the right to
digitize
the
compilation for
exclusive use for research
purposes by Justices, Judges and
court attorneys of the Judiciary;
c. If the compilation is in
digitized format, the Supreme
Court Library shall have the right
to make available the digitized
compilation for exclusive use for

research purposes by Justices,
Judges and court attorneys of the
Judiciary. The person compiling
shall submit to the Supreme Court
Library a text-file digitized copy
of the compilation;
d. The Court shall have the right
to purchase copies of the
compilation at cost, that is, by
paying only the cost of
reproducing the compilation, the
cost of installation, and the cost of
any
accompanying
software
license. Such copies shall be used
exclusively by Justices, Judges and
court attorneys of the Judiciary
and shall not be re-sold by the
Court;
e. The compilation shall bear the
notice Compiled for sale to the
public with the permission of the
Supreme Court;
f. These conditions apply to any
updating of the compilation.
*******************************************************************
THE BARRISTERS CLUB OFFICERS:

BAR OPERATIONS 2011
Page 259

Virgel Amor Vallejos

(Chancellor)
Seychelles June M. Doringo
(Secretary)
Janilet Mishelle R. Carillo
(Treasurer)
Art Miguel B. Sanlao and Angelito Velasquez Jr.
(Business Managers)
Rachelle May Gallego
(PRO)
Paul Dean Mark Pila
(SSG Representative)
Brenda Filipinas Danganan
(Ex-officio)
Atty. Isagani Calderon
(Adviser)
Atty. Reynaldo U. Agranzamendez
(Dean,College of Law)
BAR OPERATIONS 2011
Page 260

Commercial Law Notes (Atty. Rondez)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Commercial Law Notes (Atty. Rondez)

Uploaded by

Copyright:

Available Formats

UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011

ATTY. RENATO S. RONDEZ

BAR OPERATIONS 2011

GREEN NOTES IN COMMERCIAL LAW

BILL OF EXCHANGE unconditional order in writing

GREEN NOTES IN COMMERCIAL LAW

5. Drafts, which are BOE

Letters of Credit are not

GREEN NOTES IN COMMERCIAL LAW

BAR OPERATIONS 2011

GREEN NOTES IN COMMERCIAL LAW

(2) parties, the (3) parties, the

GREEN NOTES IN COMMERCIAL LAW

ink, print or pencil. It may

GREEN NOTES IN COMMERCIAL LAW

a. At a fixed period after date

GREEN NOTES IN COMMERCIAL LAW

When the payee is vaguely

GREEN NOTES IN COMMERCIAL LAW

after sight and the

GREEN NOTES IN COMMERCIAL LAW

fixed period after sight is

Incomplete and undelivered

BAR OPERATIONS 2011

GREEN NOTES IN COMMERCIAL LAW

Rule: Sec. 14 is merely

If the instrument is wanting in

who has signed before

GREEN NOTES IN COMMERCIAL LAW

If the holder is a holder in due

Rules on delivery of negotiable

1. Discrepancy between the

GREEN NOTES IN COMMERCIAL LAW

as a note or a bill at his

on the instrument in not

GREEN NOTES IN COMMERCIAL LAW

- The person who takes the

GREEN NOTES IN COMMERCIAL LAW

Persons PRECLUDED from

BAR OPERATIONS 2011

GREEN NOTES IN COMMERCIAL LAW

GREEN NOTES IN COMMERCIAL LAW

A drawee who accepts the bill

A corporation cannot act as an

GREEN NOTES IN COMMERCIAL LAW

holder is a bad faith holder, NOT a

BAR OPERATIONS 2011

GREEN NOTES IN COMMERCIAL LAW

a. It is transferred from one

The payee of the negotiable

Special (Sec. 34)

GREEN NOTES IN COMMERCIAL LAW

B. BLANK- Specifies no person

to the use of some

GREEN NOTES IN COMMERCIAL LAW

A Qualified indorser has

GREEN NOTES IN COMMERCIAL LAW

holder to prove that he or some

person negotiating it (Sec.

GREEN NOTES IN COMMERCIAL LAW

A holder is not a HDC where an

- A holder, who derives his

- Holds the instrument free from

Rights of a holder not a HDC