Mercantile Revised PDF

COMMERCIAL LAW Compiled Lectures: Atty. Abelardo Dumaguing, Atty.
Renato Rondez, Page 1 of 188

Dean Ricardo Sadac, Dean Willard B. Riano
Part I. NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)
NON – NEGOTIABLE INSTRUMENTS (2005 BAR)
AMBIGUOUS INSTRUMENTS (Sec 17) [1946, 1998 BAR]
CHARACTERISTICS/ FEATURES OF A NEGOTIABLE INSTRUMENT

1. Negotiability – ability to pass from one hand to another so as to give the
holder in due course the right to hold the instrument and collect the sum
payable for himself free from defenses (Sec 58)
2. Accumulation of secondary contracts as they are transferred from one
person to another
PROVISIONS AFFECTING OR NOT AFFECTING NEGOTIABILITY: (Sec 5, 6)

• GENERAL RULE: An instrument which contains an order or promise to
do any act in addition to the payment of money is NOT negotiable (Sec 5)
• EXCEPTIONS: The negotiable character of an instrument otherwise
negotiable is not affected by a provision which –
a. Authorizes the sale collateral securities in case the instrument be not
paid at maturity;
b. Authorizes a confession of judgment if the instrument be not paid at
maturity; or
c. Waives the benefit of any law intended for the advantage or protection
of the obligor; or
d. Gives the holder an election to require something to be done in lieu of
payment of money.
Nothing in this section shall validate any provision or stipulation otherwise
illegal. (Sec 5)
• PNB v Manila Oil, 43 Phil 444
• Negotiability refers to the mode of transferring an instrument from
one person to another and does not refer to the validity of the instrument
• Where an instrument is NOT negotiable, it can only be ASSIGNED.
Assignment is the mode by which a non-negotiable instrument is transferred
• The validity and negotiable character of an instrument are NOT
affected by the fact that: (Sec 6)
a. It is not dated; (Sec 13, 17[c]) or
b. Does not specify the value given, OR that any value has been given
therefore; (Sec 24) or
c. Does not specify the place where it is drawn OR the place where it is
payable; (Sec 73[c], [d]) or
d. Bears a seal; or
e. Designates a particular kind of current money in which payment is to
be made.
Nothing in this section shall alter or repeal any stature requiring in certain
cases the nature of the consideration to be stated in the instrument.
COMMERCIAL LAW Page 2 of 188
Trader’s Royal Bank v Court of Appeals

A person holding a negotiable instrument has an advantage over one who takes a non-negotiable
instrument. The former is free from defects in the title of the previous holder as long as he is a
holder in due course. A mere assignee inherits the defects in the title of the assignor.
FUNCTIONS OF A NEGOTIABLE INSTRUMENT:

1. Acts as a substitute for money. However, it is NOT legal tender;
2. Increases the purchasing medium in circulation; and
3. Serves as a medium of credit.
ELEMENTS OF A NEGOTIABLE INSTRUMENT (Sec 1) – SUDOR

1. In writing and signed by the maker or drawer;
2. Contain an unconditional promise or order to pay a sum certain in money;
3. Payable on demand or at a fixed or determinable future time;
4. Payable to order or to bearer; and
5. Where instrument is addressed to a DRAWEE, he must be named or otherwise indicated
therein with reasonable certainty
SUM CERTAIN IN MONEY (Sec 2) – The sum payable is a sum certain… although
it is to be paid ---
1. With interest; or
2. By stated installments; or
• Means that (a) interest of each installment and (b) due date of each
installment must be fixed in instrument
3. By stated installments with a provision that upon default in payment of any
installment or of interest, the whole shall become due; or
• Acceleration clause
4. With exchange, whether at a fixed rate or at a current rate; or
• Exchange – difference in value between the same amount of amount of
money by different countries
• RA 8183
• PNB v Zulueta, 101 Phil 1017
5. With costs of collection or an attorney’s fee, in case payment shall not be
made at maturity
• No other expenses must be stated – limited only to collection costs or
attorney’s fees
The interest shall be 6% per annum in case of payment of a balance in an

installment sale or sale (CB Circ 416).
The legal rate of 12% per annum shall be applicable in case of forbearance
or loan only.
P100,000
I promise to pay to the order of JDC one hundred thousand pesos only (P100,000) on
January 10, 2009 with an interest.
(SGD) Jose
This bill of exchange is NOT negotiable. It does not comply with the
requirement of stated installments, where the amount and the due date of
each of the stated installments must be specifically stated.
UNCONDITIONAL PROMISE (Sec 3) – An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with:
1. An indication of a particular fund out of which reimbursement is to be made
OR a particular account to be debited with the amount; or
• Subject to the condition that the particular fund is sufficient,
otherwise, payment cannot be made
2. A statement of the transaction which gives rise to the instrument.
BUT an order or promise to pay out of a particular fund is NOT unconditional
(direct source of payment).
Treasury warrants – NOT negotiable since it is payable out of a particular fund;

form of a check
Statement of the transaction which gives rise to the instrument

P69,000
I promise to pay Marta or order the sum of sixty nine thousand pesos only (P69,000).
This PN was issued in connection with the fact that I purchased from her a car on credit and said
account represents my balance.
(SGD) Juanita
Source of payment
P77,000
Pay to the Order of Clara the sum of seventy seven thousand pesos only (P77,000) out of my
money in your custody.
(SGD) Pedrito
The bill of exchange is NOT negotiable. It stated the direct source of payment.
Under the last paragraph of Sec 3, Act 2031, a promise or order to pay out of a
particular fund is not unconditional. In order to be negotiable or in order that it
is payable out of a particular fund, the payment must be subject to the
condition that the fund indicated is sufficient. Otherwise, payment cannot be
made.
DETERMINABLE FUTURE TIME (Sec 4) – An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to be
payable:
1. At a fixed period after date or sight; or
2. On or before a fixed or determinable future time specified therein; or
3. On or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of happening be uncertain.
An instrument payable upon a contingency is NOT negotiable, and the happening
of the event does not cure the defect.
P69,000
I promise to pay Marta or order the sum of sixty nine thousand pesos only (P69,000). Payment of
this PN shall be 3 days after her only carabao dies of syphilis.
(SGD) Juanita
The PN is NOT negotiable since the specified event is not sure to happen and
cannot necessarily happen. The statement of the contingent event no longer
makes the instrument payable at a determinable future time.
CONDITION
P69,000
I promise to pay Marta or order the sum of sixty nine thousand pesos (P69,000). Payment of this
PN shall be immediately when I am able to sell my car.
(SGD) Juanita
The PN is not negotiable. Under the law, in order that the note be negotiable, it
must contain an unconditional promise to pay a sum certain in money (Sec 1)
and that an instrument payable upon a contingency is NOT negotiable and
the happening of the event does NOT cure the defect (Sec 4, last paragraph).
PAYABLE ON DEMAND (Sec 7) – An instrument is payable on demand: ONE

1. Where it is expressed to be payable on demand, at sight, or on
presentation; or
2. In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on demand.
CHECK (Sec 185) – a check is a BOE drawn on a bank payable on demand
BILL OF EXCHANGE (Sec 126) – a BOE is an 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.
PROMISSORY NOTE (Sec 184) – a negotiable 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 to bearer. Where note is drawn to maker’s own order, it is not
complete until indorsed by him.
PAYABLE TO ORDER (Sec 8) PAYABLE TO BEARER (Sec 9)

The instrument is payable to order where it is The instrument is payable to bearer when:
drawn payable to the order of a specified person 1. It is expressed to be so payable;
or to him or his order. It may be drawn payable to 2. It is payable to a person named
the order of: therein or bearer;
1. A payee who is not maker, drawer, or 3. Payable to the order of a fictitious or
drawee; non-existing person, and such fact was
2. Drawer or maker; known to the person making it so
3. Drawee; payable;
4. 2 or more payees jointly; 4. The name of the payee does NOT
5. One or more of several payees; purport to be the name of any person;
6. Holder of an office for the time being. 5. The only or last indorsement is an
7. Where the instrument is payable to order, indorsement in blank
the payee must be named or otherwise
indicated therein with reasonable certainty.
DATE
1. Presumption – Where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of the
making, drawing, acceptance or indorsement, as the case may be (Sec 11)
• Disputable presumption – can be defeated by a competent
evidence to the contrary
2. Antedated1 and postdated2 – The instrument is NOT invalid for the reason
only that it is antedated or postdated, provided this is NOT done for an (a)
illegal or (b) fraudulent purpose
• Purpose of postdating – allow drawer to put money in bank sufficient to
cover the amount written in the check
• Postdated check is still negotiable if it conforms to the elements under
Sec 1, but the drawee cannot be obliged to pay the check before the
arrival of the postdate
3. The person to whom an instrument is so dated is delivered acquires the title
thereto as of the date of delivery
WHEN DATE MUST BE INSERTED: (Sec 13)

1. Instrument is payable at a fixed period after date
2. Acceptance of the instrument is undated and instrument is made payable at
a fixed period after sight
WHY MUST DATE BE INSERTED?

1. To know the maturity of the instrument
2. To determine the amount of stipulated interest, if any
3. To determine whether a party has acted within a reasonable time
EFFECT OF INSERTION OF A WRONG DATE (Sec 13)

• The insertion of a wrong date does NOT avoid the instrument in the
hands of a subsequent holder in due course; but as to him the date so inserted
is to be regarded as the true date
CIRCUMSTANCES OF, WHAT CONSTITUTES, HOW TO BE A HOLDER IN DUE COURSE

(Sec 52) – COGI
A holder in due course is a holder who has taken the instrument under the
following conditions:
1. COMPLETE and REGULAR upon its face;
2. He became the holder of it before it was overdue, and without notice that it
had been previously dishonored;
• OVERDUE – can still be negotiated – see Sec 47
• Sec 47. Continuation of negotiable character. An instrument
negotiable in its origin continues to be negotiable until it has been (a)
restrictively indorsed, or (b) discharged by payment or otherwise.
3. He took it in good faith and for value;
1
Date EARLIER than the actual date of making or drawing
2
Date LATER than the actual date of making or drawing
4. At the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
RIGHTS OF A HOLDER IN DUE COURSE (Sec 57, in relation to Sec 52 and 13)
1. To hold the instrument free from any defect of title of prior parties;
2. Free from defenses available to prior parties among themselves; and
3. To enforce payment of the instrument for the full amount thereof against all
parties liable thereon
WHO IS DEEMED A HDC? (Sec 59)

1. Every holder is deemed prima facie to be a holder in due course
• Disputable presumption – can be overcome by competent
evidence
• When the problem is silent or does not show the conditions
(Secs 1, 13, 52, 57) and does not specify if the holder is HDC, the
presumption stands
2. When it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as holder in due
course – this rule does NOT apply in favor of a party who became bound on
the instrument prior to the acquisition of such defective title
ABNORMAL/DEFICIENT INSTRUMENTS
• REASONS for abnormality/deficiency
1. Lack of essential requisites of contract like consent, consideration,
and lawful object
2. Lack of regularity in the issuance of instruments by absence of
material particulars and delivery of the instrument without the
knowledge or conformity of the maker or drawer to make the transferee
the holder of the instrument
• Illustrations:
1. Sec 14 – Incomplete but delivered instruments (1993, 2005 BAR)
2. Sec 15 – Incomplete and undelivered instruments (1985, 1997, 2000,
2004, 2006 BAR)
3. Sec 16 – Complete but undelivered instruments
4. Sec 28 – Absence or failure of consideration (1995, 1996 BAR)
INCOMPLETE INSTRUMENT BUT DELIVERED (Sec 14, 52, 57)

• Elements in Sec 1 are missing
• Material particular
• Upon delivery – POSSESSOR – not yet a holder and instrument is not yet
negotiable
Sec 14. Blanks, when may be filled – Where the instrument is wanting in many material
particular, the person in possession thereof has a prima facie authority to complete it by filling
up the blanks therein. And a signature on a blank paper delivered by the person making the
signature in order that the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for ANY amount.
In order, however, that any such instrument, when completed, may be enforced against any
person who became a party thereto PRIOR to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with
the authority given and within reasonable time.
WHO MAY COMPLETE THE INSTRUMENT

• Possessor has the authority to complete the instrument
• Upon completion of the instrument, possessor becomes a holder
REQUIREMENTS IN FILLING THE BLANKS

1. Strictly in accordance with the authority given
2. Within a reasonable time
NOTE:
1. Possessor can complete it
2. Signature on the blank paper is the authority
3. Fill up (a) strictly in accordance with authority given and (b) within a
reasonable time
P __________
Pay to the order of Tarzan the sum of _____________ (P ________).
To: Juan (sgd) Pedro
EFFECTS
1. Instrument is filled up NOT strictly
• Holder (not HDC) cannot recover from the person who became a party
to the instrument prior to the completion of the instrument
2. Filled up strictly
• Holder (not HDC) can recover
NOTE: The fact that the instrument was filled up NOT strictly in accordance with
the authority given is a PERSONAL defense. A personal defense is a defense which
a party can avail against a holder who is NOT a HDC.
As far as the HDC is concerned, it does not matter whether or not the
instrument was filled up strictly. Under the last sentence of Sec 14, if any such
instrument, after completion, is negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands, and he may enforce it as if it had been
filled up strictly in accordance with the authority given and within reasonable
time.
HDC may enforce the instrument as if it was filled up strictly in accordance
with the authority given and within a reasonable time. There is a conclusive
presumption in favor of HDC that the incomplete instrument was filled up strictly
in accordance with the authority given.
Sec 57 gives the HDC the right to enforce the instrument for its full amount.
TO WHOM NOTICE OF DISHONOR MUST BE GIVEN (Sec 89)

• Except as herein otherwise provided, when a negotiable instrument has

been dishonored by non-acceptance OR non-payment, notice of dishonor must
be given to:
1. The drawer
2. Each indorser
• EFFECT OF FAILURE TO GIVE NOTICE OF DISHONOR: Any drawer or indorser

to whom such notice is NOT given is discharged
ILLUSTRATION: In the problem, the amount placed was filled up NOT strictly in
accordance with the authority given (which should not exceed P 100,000) and the
amount of P110,000 pesos was written.
P 110, 000
Pay to the order of Tarzan the sum of one hundred and ten thousand pesos only (P 110,000).
To: Juan (sgd) Pedro
(Back of the instrument)
To: Kat (special indorsement under Sec 40)
(sgd) Paz
Is Pedro liable to pay P110,000 to the HDC?

Yes. Under Sec 14, a holder in due course may enforce the instrument as if it
was filled up strictly in accordance with the authority given and within
reasonable time. Further, Sec 57 gives HDC the right to enforce the instrument
for its full amount, to wit:
Sec 57. Rights of a holder in due course – A holder in due course holds the
instrument (a) free from any defect of title of prior parties, and (b) free from
defenses available to prior parties among themselves, and may (c) enforce
payment of the instrument for the full amount thereof against all parties
liable thereon.
What if the holder is NOT a HDC? Is Pedro liable to the holder?

No. Pedro has a personal defense that the instrument was filled up not strictly
in accordance with the authority given and Pedro became a party PRIOR to the
completion of the instrument (Sec 14).
What if Pedro and Juan are nowhere to be found? Is Paz liable to pay the amount?
Yes. Paz, as a special indorser pursuant to Sec 40, which states that the person
indorsing specially is liable when he made title through his special
indorsement.
Further, Paz warrants under Sec 65 to the holder that:
a. The instrument is Genuine and what it purports to be;
b. He has Good title to it;
c. All prior parties had Capacity to contract;
d. He has NO knowledge of any fact which would impair the
validity of the instrument or render it Valueless.
Sec 65 Sec 66
Warranty of (a) person negotiating by Warranty of a general indorser or indorser without
delivery OR (b) qualified indorser3 qualifications
Warranty extends to his immediate Warranty extends to ALL subsequent HDCs

transferee only
The warranties are: [Ge Go Ca Va] The warranties are: [Ge Go Ca Va E]
1. The instrument is genuine and in all 1. Instrument is genuine and in all respect what it
respects what it purports to be purports to be
2. He has good title to the instrument 2. He has good title to it
3. Prior parties have capacity to contract 3. Prior parties have capacity to contract
4. No knowledge of any fact which 4. At the time of his indorsement, the instrument
impairs the validity of the instrument is valid and subsisting
OR render it valueless 5. He engages that on due presentment, the
instrument shall be paid, accepted, or both. If
dishonored, he will pay the holder
INCOMPLETE INSTRUMENT AND UNDELIVERED (Sec 15)

Where an incomplete instrument has not been delivered it will NOT, if completed
and negotiated without authority, be a valid contract in hands of ANY holder, as
against any person whose signature was placed thereon BEFORE delivery.
NOTE: “Undelivered” means that there was NO valid delivery.

The incomplete instrument, when completed and negotiated without authority,
is NOT a valid contract in the hands of any holder. “Any holder” includes the
holder in due course.
Regardless whether the holder is a HDC or not, he cannot enforce the
instrument against the person who placed his signature thereon before delivery.
The phrase “before delivery” refers to a valid delivery after the unauthorized
completion and negotiation.
The fact that the instrument is incomplete and undelivered is a REAL defense.
A real defense is a defense in which a party can set up or avail of against the
holder in due course.
P__________
Pay to the order of Juan Dela Cruz the sum of ______________ (P ______________).
To: PNB (sgd) Pedro
Pedro placed the incomplete instrument in the cabinet. While cleaning the office
of Pedro, Johnny (the janitor and also the son of Juan) got the same instrument
and gave it to his father. Without Pedro’s consent, JDC placed the amount of
P69,000. Later, Juan endorsed it and delivered it to Clara, who also indorsed it to
H. H presented the check to the bank, which dishonored it.
P 69,000.00
Pay to the order of Juan Dela Cruz the sum of sixty nine thousand pesos only (P 69,000.00).
To: PNB
(sgd) Pedro
(Back of the instrument)
To: Clara
(sgd) Juan Dela Cruz
To: H
(sgd) Clara
3
Qualified indorser – indorses the instrument by adding the phrases “without recovery”, “sans recovery”, or “at indorsee’s risk”
Can H demand payment from Pedro?

No. The presumption under Sec 59 is that every holder is deemed prima facie
to be a holder in due course. Thus, H cannot recover from Pedro.
Can H (not HDC) demand payment from Pedro?

No. Under Sec 15, regardless of whether a holder is a holder in due course, he
cannot enforce the instrument against Pedro who placed his signature before
the delivery. As far as Pedro is concerned, the instrument is not a valid contract
in the hands of any holder.
Can H recover from Juan Dela Cruz? Clara?

Yes. Under Sec 66 in relation to Sec 59, JDC as an indorser without
qualification, warrants that:
a) The instrument is genuine and in all respect what it purports to be
b) He has good title to it
c) Prior parties have capacity to contract
d) At the time of his indorsement, the instrument is valid and subsisting
e) He engages that on due presentment, the instrument shall be paid,
accepted, or both. If dishonored, he will pay the holder
What if instrument was indorsed to Clara “without recourse” or “at indorsee’s

risk” or “sans recourse”? Can H recover payment from JDC?
No. The provision of Sec 55 is silent whether a qualified indorser is liable to all
subsequent HDCs. Sec 55 states when title is defective. It states that the title
of a person who negotiates an instrument is defective when he obtained the
instrument, or any signature thereto:
a) by fraud, duress, or force and fear, or other unlawful means, or
b) for an illegal consideration, or
c) when he negotiated it in breach of faith, or
d) under such circumstances as amount to a fraud.
EFFECT OF A QUALIFIED INDORSEMENT

• Qualified indorser merely assigns whatever rights he has. He does NOT
guarantee the solvency of the drawer, so if the instrument is dishonored by the
drawee due to insolvency of drawer (Pedro), Clara has NO recourse against JDC
• The dishonor must be due to insolvency only
SEC 16. Delivery; when effectual; when presumed – Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect
thereto. As between immediate parties and as regards a remote party other than a HDC, the
delivery, in order to be effectual, must be made either by or under the authority of the party
making, drawing, accepting or indorsing, as the case may be; and in such case, the delivery may
be shown to have been conditional, OR for a special purpose only, and NOT for the purpose of
transferring the property in the instrument. BUT where the instrument is in the hands of HDC, a
valid delivery thereof by all parties PRIOR to him is conclusively presumed. And where the
instrument is no longer in the possession of a party whose signature appears thereon, a valid and
intentional delivery is presumed until the contrary is proved.
Pedro placed the check inside the cabinet. Clarita (Clara’s daughter and Pablo’s
janitress) got the check and delivered it to Clara without Pablo’s consent. Clara
indorsed it to Jose and Jose to H.
P80,000
Pay to the order of Clara eighty thousand pesos only (P80,000).
To: Landbank
(sgd) Pablo
- Back of instrument -
To: Jose
(sgd) Clara
To: H
(sgd) Jose
What should H do to preserve right against the persons who may be responsible?
As a holder, H must give notice of dishonor to the drawer and all the indorsers.
What is the effect if H does not give notice of dishonor?

The drawer to whom no notice of dishonor is given is thereby discharged from
liability (Sec 89).
IF H is not a holder in due course, can he require Pablo to pay P80,000?

No. Pablo has a personal defense that there was no effectual delivery of the
instrument since Clarita was unauthorized to deliver the instrument. The law
provides that the delivery in order to be effectual must be …
If H is a holder in due course, can he require Pablo to pay P80,000?

Yes. There is a conclusive presumption made by law that where the instrument
is in the hands of HDC, a valid and intentional delivery by all parties prior to
him (HDC) was made liable to him.
Further, one of the rights of HDC under Sec 57 states that an HDC can enforce
the instrument for its full amount.
Can H require Clara to pay P80,000?

Yes. Every holder is presumed to be a HDC (Sec 59). Clara is liable to H arising
from her warranty. Clara warrants to H that the instrument … Ge Go Ca Va E
(Sec 66).
Further, the warranty of Clara as a general indorser extends to all subsequent
holders in due course.
P99,000
(postdate) 01.15.09
Pay to the order of Rojugan ninety nine thousand pesos only (P99,000).
PNB
(sgd) Roy Mendez
-Back of instrument-
To: Nena
(sgd) Rojogan
To: H
(sgd) Nena
The check is postdated. Roy intended to issue it to Rojogan to pay for Rojogan’s
services and to be issued a day before January 15, 2009. Roy needed money
today and he borrows P10,000 from Rojogan. Rojogan accepted the check as
collateral. Roy pledged the check to Rojogan.
The instrument is complete, but there was NO effectual delivery since the
purpose is for the purpose of transferring title to Rojogan or to negotiate it but
for the purpose of pledge. (Note that if he indorses it on 01.15.09, there is
effectual delivery.
If H is not HDC, can he require Roy Mendez to pay P99,000?

No. There was no effectual delivery as far as Roy is concerned since the
delivery was NOT for the purpose of transferring the property or instrument or
property but only to make Rojogan a pledgee.
As between immediate parties and as regards a remote party other than HDC,
the delivery in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting or indorsing, as the case
may be; and in such case, the delivery may be shown to have been
conditional, OR for a special purpose only, and nor for the purpose of
transferring the property in the instrument (Sec 16, 2nd sentence).
If H is HDC, can he require Roy to pay P99,000?

Yes. There is a conclusive presumption made by law that in the hands of the
HDC, a valid and intentional delivery by all parties prior to HDC may be liable
to him.
SEC 14 SEC 15 SEC 16

Incomplete instrument but Incomplete instrument and Complete instrument but
delivered undelivered undelivered
Instrument – not yet Instrument – not yet Instrument is negotiable
negotiable; wanting in any negotiable
material particular
Personal defense against a Real defense even against a Personal defense against holder
person who is not a holder in holder in due course other than HDC or immediate
due course parties
Instrument is NOT filled up Instrument is NOT a valid There is NO effectual delivery
strictly in accordance with the contract in the hands of any of the instrument for any of the
authority given holder ff reasons:
(a) Delivery was not
authorized;
(b) Delivery was
conditional but the
suspensive condition was
not fulfilled;
(c) Deliver was for a
special purpose only; and
(d) Delivery was not
for the purpose of
transferring the property
in the instrument
Instrument cannot be enforced Instrument cannot be enforced Instrument cannot be enforced
against a person who became against the person who placed against the person who did not
a party thereto prior to his signature thereon before authorize the delivery
completion delivery
HDC can recover or may Even a HDC cannot recover nor HDC can recover or may
enforce instrument enforce instrument enforce instrument
FORGERY (Sec 23)

Effect of a forged signature – When a signature is forged OR made without
authority of the person to whose signature it purports to be, it is wholly
inoperative, and NO rights to retain the instrument, or to give a discharge
therefore, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature UNLESS the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of
authority.
NOTE: The instrument may still be negotiated. It is only the forged signature that
is declared to be inoperative. Thus, rights may still be exist and be enforced by
virtue of such instrument as to those whose signature thereto are found to be
genuine.
PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY:

1. Those who by their acts, silence, or negligence, are estopped from setting
up the defense of forgery;
2. Indorsers (Sec 65, 66)
3. Drawee-acceptors (Sec 62)
4. Where the forged signature is unnecessary to one’s title (ie. bearer
instrument – negotiated by mere delivery)
Payable to ORDER
• Party whose indorsement is forged is NOT liable to any holder, even
HDC since the forged indorsement is wholly inoperative
Payable to BEARER
• Drawee may debit the drawer’s account in spite of the forged
indorsement.
RULES ON FOREGERY DUE TO NEGLIGENCE OF PARTIES:

1. If it is the BANK’s negligence without negligence on the part of the
drawer – the bank shall bear the loss (Samsung Construction v Far East
Bank, Aug 13, 2004)
2. DRAWER without bank’s negligence – drawer shall suffer the loss
(Ilusorio v CA, Nov 27, 2002)
3. If the payee’s signature had been forged, the bank will shoulder the
loss because it was negligent in paying the check NOT in accordance with
its tenor (Westmont Bank v Ong, Jan 30, 2002)
4. If both the drawer and the drawee bank are negligent, both of them
shall suffer the loss on a 50-50 basis (Associated Bank v CA, Jan 31, 1996)
5. If both the drawee and collecting bank’s are negligent, they shall
share the loss in accordance with the degree of their negligence (BPI v CA,
Nov 26, 1992)
6. Between 2 innocent persons, the one whose negligence is the

proximate cause of the loss shall suffer the loss (DOCTRINE OF
COMPARATIVE NEGLIGENCE)
FORGERY OF MAKER’S SIGNATURE (1989 BAR)
FORGERY OF DRAWER’S SIGNATURE (1949, 1987, 1992, 2004, 2006 BAR)

Metropolitan Waterworks and Sewerage System (MWSS) v CA,
143 SCRA, July 14, 1986
FACTS: MWSS maintained a checking account in the PNB under Account #6. By special
arrangement, MWSS printed its own personalized checks to be drawn against the aforementioned
account.
23 MWSS checks amounting to P3.5 M were paid and cleared by PNB and then debited against the
account. Later, the payees of the checks turned out to be fictitious and the checks were spurious
and forged.
ISSUE: Is PNB liable for the loss suffered by MWSS due to the forgery?
HELD: No. Where a depositor was using its own personalized checks, its failure to provide
adequate security measures to prevent the forgeries of its checks constitutes gross negligence
and bars it from setting up the defense of forgery.
PNB could not be faulted for not detecting the fraudulent encashment of the checks because the
printing of the personalized checks was not done under the supervision and control of the bank.
Under the circumstances, MWSS was in a better position to detect and prevent the fraudulent
encashment of the checks.
Natividad Gempesaw v CA, 218 SCRA 682, Feb 9, 1993

FACTS: Gempesaw, a grocery owner, maintains a checking account with the Phil Bank of
Communications (PBC). She issued checks to her suppliers through her bookkeeper, Galang, who
also delivered the same to the payees. Gempesaw signed each check without verifying the
correctness of the amounts due to her full trust and confidence on Galang.
82 checks Gempesaw issued were not delivered to the payees whose names were written on the
checks. Meanwhile, PBC debited Gempesaw’s account for the value of the checks via second
indorsement.
Gempesaw alleged that since the payees denied having received the checks and, thus, never
indorsed the checks, the bank must restore the amount wrongfully charged by PBC.
ISSUE: Who is or are liable for the loss due to forgeries?
HELD: Both of the parties must share in the loss on a 50-50 ratio.
Gempesaw’s negligence was the proximate cause of the loss. She failed to examine her records
with reasonable diligence. Had she been vigilant in going over the daily reports of her issued
checks or scrutinized the cancelled checks report provided by the bank each month, she could
have reported the matter to PBC and the bank could have taken immediate steps to prevent
further commission of the fraud.
PBC violated its internal rules that second indorsements are not to be accepted without the
approval of its branch managers. The failure to discover the irregularity despite periodic inspection
by a team of auditors constitutes negligence of the PBC.
Ilusorio v CA, 393 SCRA 89, Nov 27, 2002

FACTS: Ilusorio is a prominent businessman running 20 corporations in different countries. He
maintained a checking account at Manila Bank. He entrusted his credit cards, checkbook with
blank checks and the reconciliation of the bank statements to his secretary, Eugenio. He
discovered that Eugenio was able to encash 17 checks drawn against his account amounting to
P119,634.34.
ISSUE: Is Manila Bank liable for the encashed checks?
HELD: No. It is Ilusorio who was negligent. His failure to examine his bank statements is the
proximate cause of his own damage.
Under Sec 23, NIL that when a signature is forged or made without the authority of the person
whose signature it appears to be, the check is wholly inoperative UNLESS the party against whom
it is sought to enforce such right is precluded from setting up the forgery or want of authority. In
this case, the exception applies. Ilusorio is precluded from setting up forgery due to his own
negligence in entrusting to his secretary his credit card and checkbook, including the verification
of his statement of accounts.
Samsung Construction Company Philippines (SCP) v Far East Bank and Trust Company and Court
of Appeals, GR 129015, August 13, 2004
FACTS: SCP maintained a current account with Far East Bank (FEB). The sole signatory of the
account is Jong Ku Lee. A certain Gonzaga presented for payment FEB Check #432100 for the
amount of P999,500 to the teller of FEB, which allowed the encashment. Jong demanded that the
bank should credit his account alleging that his signature was forged. The bank failed to do so.
ISSUE: Is the bank liable?
HELD: Yes. Under Sec 23, NIL, a forged signature is “wholly inoperative” and payment made
through or under such signature is ineffectual or does NOT discharge the instrument. Thus, if a
bank pays a forged check, it must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the creditor.
A bank is liable, irrespective of good faith, in paying a forged check.
The general rule remains that the drawee who has paid upon the forged signature bears the loss.
The exception to this rule arises only when negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to weigh the comparative negligence between
the drawer and the drawee to determine who should bear the burden of loss.
For one, the settled rule is that the mere fact that the depositor leaves his checkbook lying
around does not constitute negligence as will free the bank from liability to him, where a clerk of
the depositor or other person taking advantage of the opportunity, abstracts some of the check
blanks, forges the depositor’s signature and collects on the checks from the bank. The drawer
cannot be considered negligent if he reported the forgery immediately upon discovery.
FORGERY OF PAYEE’S SIGNATURE (1948, 1983, 2008 BAR)

Westmont Bank v Ong, Jan 30, 2002
FACTS: Ong owned a current account in Westmont Bank. He sold certain shares of stock through
Island Securities Corp (ISC). To pay Ong, ISC issued 2 Pacific Banking Corp manager’s checks in
his name. Before Ong could get hold of the checks, his friends held them, forged Ong’s signature
and deposited the checks with Westmont Bank. Westmont, without verifying the signature
indorsement appearing at the back thereof accepted and credited both the checks to the account
of Ong’s friend, who immediately withdrew the money and absconded.
ISSUE: Is the bank liable to Ong?
HELD: Yes. Since Ong’s signature was forged, such signature is deemed as inoperative and
ineffectual. Westmont Bank, as the collecting bank, grossly erred in making payment by virtue of
the forged signature. Thus, Ong is allowed to recover the value of the 2 checks that Westmont
paid out of his account, regardless of whether the check was delivered to him or not.
The collecting bank is liable to the payee and must bear the loss since it is its legal duty to
ascertain that the payee’s indorsement is genuine before cashing the check. Banks have the
obligation to treat their clients’ accounts meticulously and with the highest degree of care
considering the fiduciary nature of their relationship. The diligence required is more than that of a
good father of a family. Westmont is grossly negligent in performing its duties.
FORGERY OF INDORSER’S SIGNATURE (1984, 1989, 1990, 1995, 2008 BAR)

Allied Banking Corp v Lim Sio Wan, March 27, 2008
FACTS: Metrobank accepted the check despite the fact that it was cross-checked payable to the
payee’s account only. Metrobank indorsed the check in compliance with the PCHC Rules and
Regulations without verifying the authenticity of Lim’s indorsement.
HELD: The last indorser will be liable for the amount indicated in the negotiable instrument even
if a previous indorsement was forged.
It was held that a collecting bank which indorses a check bearing a forged indorsement and
presents it to the drawee bank guarantees all prior indorsements, including the forged
indorsement, and ultimately should be held liable therefore.
HOWEVER, when the issuance of the check itself is attended with negligence, the institution
issuing the check is just as liable as or more liable than the collecting bank.
MATERIAL ALTERATION
• Any unauthorized substantial change in any of the following: PARIND (Sec
124, 125)
1. Place of payment
2. Amount of payment
3. Relation or number of parties
4. Adds interest which was not stipulated
5. Nature of the instrument
6. Date of payment
Metrobank v Renato Cabilzo, GR 154469, December 6, 2006

HELD: Material alteration is that which changes the effect of the instrument to include that
which:
1. Modifies the obligation of a party
2. Adds numbers or words to an incomplete instrument (Sec 14)
3. Changes in any of the elements required under Sec 1, NIL (SUDOR)
When the drawee bank pays a materially altered check, it violates the term of the check, as well
as its duty to charge its client’s account only for bona fide disbursements he had made. Since the
drawee bank did not pay according to the original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement from the drawer, much less to deduct
erroneous payment it made from the drawer’s account which it was expected to treat with
utmost fidelity.
The EXCEPTION to this rule is when the drawer was the one who made or authorized the
alteration OR when he failed to exercise reasonable diligence to avoid it.
Philippine National Bank v Court of Appeals, 256 SCRA 491, April 25, 1996 (1999 BAR)
FACTS: The Ministry of Education and Culture issued a check to F. Abante Mktg. drawn against
PNB amounting to P97,650. The payee deposited the check to its savings account in Capitol City
Development Bank (CCDB), which in turn deposited said check to CCDB’s account with the Phil
Bank of Communications (PBC). PBC sent the check for clearing and was subsequently cleared by
PNB. PBC credited CCDB’s account with the amount of the check.
After 2 months, PNB returned the same check to PBC and debited its account for the amount of
the check due to the fact that there was a material alteration of the check number. PBC debited
CCDB’s account, but CCDB could not debit the amount since it has already been withdrawn.
CCDB demanded a re-credit but PBC and PNB refused.
ISSUE: Is an alteration of the serial number of a check a material alteration under the NIL?
HELD: No. An alteration is material if it alters the effect of the instrument. It is one which changes
the items which are required to be stated under Sec 1, NIL.
The serial number of the check is an item which is NOT an essential requisite for negotiability
under Sec 1, NIL. The alteration did not change the relations between the parties. The drawer
and the drawee were not altered. The intended payee is the same. The sum of money due to the
payee is the same.
The check’s serial number is not the sole indication of its origin. The check’s issuer is sufficiently
identified, rendering the referral to the serial number redundant and inconsequential.
The International Corporate Bank, Inc. v Court of Appeals, GR 129910, September 5, 2006
The alterations on the serial numbers do not constitute material alteration within the
contemplation of the Negotiable Instruments Law. An alteration is said to be material if it alters the
effect of the instrument. It means an unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party.
EQUITABLE ESTOPPEL
• When one of two innocent persons (not guilty of
intentional or moral wrong) must suffer a loss, it shall be borne by the one
whose act either by omission or commission, has directly caused the injury
• Similar to the doctrine of JUS TERTIIS (PNB v CA, 25 SCRA
683)
DEGREE OF CARE REQUIRED OF BANKS in the (a) selection and supervision of

employees, and (b) custody and care of account of depositors
• Higher than the diligence of a good father
• Utmost diligence
GENERAL RULE OF DILIGENCE – Good father of the family (Art 1163, 1173, NCC)
EXCEPTIONS:
1. Common carrier
• Extraordinary diligence
• Art 1735, 1755, NCC
2. Agreement of parties
• Ordinary diligence
3. Banking laws
• Utmost diligence
EFFECTS OF MATERIAL ALTERATION (Sec 124)

1. The altered instrument is avoided
2. It cannot be enforced against the parties who did NOT authorize, make or
give ASSENT
3. It can be enforced against the:

a. Party who made, authorized or assented to the alteration, OR
b. To a subsequent indorser (warranties)
4. HDC may enforce the instrument according to its original tenor
5. Material alteration is a REAL defense
P 8,000
Pay to the order of Juan the sum of eight thousand pesos only (P 8,000).
PNB (sgd) Pedro
Without authority from Pedro, Juan changed the amount to EIGHTY thousand
pesos (P 80,000) and endorsed it to Pablo, who indorsed it to HDC. Discuss the
liability of Juan, Pedro and Pablo, if any, to HDC if the drawee bank dishonors the
check. Assume that the notice of dishonor was given to each indorser and drawer.
Pedro cannot be held liable to HDC since Pedro has a real defense of material
alteration, which can be set up even against a holder in due course. Pedro can
avoid the altered instrument. The law provides that when an instrument is
materially altered, it can be avoided.
Juan can be made liable to HDC. As the person who is responsible for the
alteration, he is liable. Under the law, the altered instrument can be enforced
against the person who made the alteration. Further, by endorsing the altered
instrument, Juan warrants to all subsequent holders in due course that the
instrument is: Ge Go Ca Va E
Pablo can be liable to HDC. As a subsequent indorser, he warrants that the
instrument is: GeGoCaVa
If HDC would insist to enforce instrument against Pedro, how much can HDC
collect? HDC can collect only P8,000. HDC can only enforce the instrument
according to its ORIGINAL tenor.
FORGERY (Sec 23) MATERIAL ALTERATION (Sec 124)

Defect Unauthorized signature Unauthorized change in PARIND
Effect Wholly inoperated Avoided
Banco Atlantico v Auditor General (81 SCRA 335)

Three checks were issued. These were for the reimbursement of the payment of living quarters of
Azucena Pace. It was signed by the Ambassador of the Philippine Embassy in Madrid, Luis Gonzales.
US $ 37500
Pay to the order of Azucena Pace the sum of To: Virgina Boncan
seventy five dollars only (US $ 37500). (sgd) Pace
To: Banco Atlantico
PNB, New York (sgd) Luis Gonzales (sgd) Boncan
Boncan altered one of the checks to US $ 37,500 and indorsed it to Banco Atlantico. The check was
NEITHER cleared by NOR was it presented for payment to the PNB, New York. However, Banco
Atlantico credited and paid Boncan.
HELD: Since the checks were fraudulently altered by Boncan as to their amounts, they are rendered
wholly inoperative and NO right to pay the amounts thereof could have been acquired by the Banco
Atlantico.
NOTE: Highly criticized by Atty. Dumaguing. Under Sec 124, material alteration avoids the
instrument and it does not render the instrument wholly inoperative. The issue is material
alteration, NOT forgery.
In case of similar problem, give 2 answers: Section 124 and Banco Atlantico case
Can Banco Atlantico require the Philippine Embassy to pay $37,500?

No. The instrument is avoided by the person who did NOT authorize the
material alteration.
Can BA require the PNB to pay the same amount?

No. The liability of PNB never arose when it refused to accept or dishonored the
check. Liability arises only upon acceptance of the drawee bank.
What is the remedy of BA?

It must give notice of dishonor to the indorsers so that it can go after those
secondarily liable or responsible for the alteration.
NEGOTIATION OF ORDER OR BEARER INSTRUMENTS (1988, 1997, 1998,

2001 BAR)
SEC 30. What constitutes negotiation – An instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof.
If payable to bearer, it is negotiated by delivery;
If payable to order, it is negotiated by indorsement of the holder completed by
delivery.
Article 1249, Civil Code

The delivery of promissory notes, bills of exchange or other mercantile documents produce the
effect of payment only when they have been (1) cashed OR when (2) through the fault of the
creditor, they have been impaired.
SEC 40. Indorsement of the instrument payable to bearer – Where an instrument,

payable to bearer, is indorsed SPECIALLY, it may nevertheless be further
negotiated by delivery; but the person indorsing specially is liable as indorser to
only such holders as make title through his indorsement.
SEC 65, SEC 66
RULES:
1. Sec 40 refers to a bearer instrument containing SPECIAL indorsements. A
holder is not precluded from negotiating a bearer instrument by
indorsement. If he indorses it specially, he incurs the liability of a general
indorser under Sec 66. When he negotiates it by delivery, the negotiation is
governed by Sec 65.
2. An instrument payable to bearer although indorsed specially maybe
nevertheless be further negotiated by delivery. Thus, an instrument
originally payable to bearer REMAINS payable to bearer.
3. The person indorsing specially is liable as an indorser only to those holders

who can trace their title to the instrument by a series of unbroken
indorsements from such special indorser.
4. The liability of the person specially shall be that of a general indorser under
Sec 66.
5. The liability of the person who negotiates the instrument by delivery is
governed by Sec 65. His liability extends only to immediate transferee.
6. If the instrument involved is a promissory note, the holder can always
collect from the maker under Sec 60.
NOTE: When the instrument is payable to bearer, it is negotiated by delivery only

(Sec 30). However, this bearer instrument may be indorsed specially (Sec 40).
The person indorsing a bearer instrument is liable only to such holder who
makes title through that special indorsement. Forgery in the signature of the
payee (when the instrument is payable to bearer) is NOT a defense by the payee
nor the drawer. The forged signature of the payee (original indorser) is NOT
necessary to the title of the bearer/holder because a bearer instrument is
negotiated by delivery only.
Forgery in that signature is irrelevant or immaterial to the title of the bearer or
holder.
There is forgery even if the signature is obtained through force.
P80,000 -back of instrument-

Pay to Jose or Bearer the sum of eighty To: Pablo
thousand pesos (P80,000). (sgd) Jose (forged by Pablo)
To: HDC
PNB (sgd) Pedro (sgd) Pablo
Can Jose avail forgery as a defense?

No. Forgery in the signature of the payee is irrelevant or immaterial to the title
of the bearer. Instrument payable to bearer is negotiated by delivery only.
Consequently, an indorsement of payee is not necessary.
Can HDC require Jose to pay P80,000?

No. (Sec 40 prevails over Sec 57) HDC can only make Pablo and Pedro liable to
him.
Suppose bearer is NOT HDC, can Jose raise a defense against him?
Yes. The defense is NO effectual delivery against the person who is NOT HDC
under Sec 16 and not a defense of forgery. The delivery was not made by
payee (Jose) nor by any person under his authority.
Can the holder require Pablo to pay P80,000?

Yes. The bearer made title through special indorsement (Sec 40). The liability
of Pablo arises from his warranty as indorser. Pablo warrants to HDC that Ge Go
Ca Va E…
Can HDC require Jose to pay if Jose delivered the instrument without defect?
No. Under Sec 65, when the negotiation is by delivery only, the warranty
extends only in favor of no holder other than the immediate transferee (Pablo).
P69,000
Pay to Juana or bearer sixty nine thousand pesos only (P69,000).
(sgd) Pedro (forged by Juana)
Juana delivered the instrument to Maria. Maria delivered the instrument to HDC.
HDC went to Pedro. Is Pedro liable?
No. Forgery is a defense. As to him, the signature is inoperative. The holder
had not acquired any right against Pedro.
Holder gave notices of dishonor to Juana and Maria. Can HDC require Juana to
pay?
No. Under Sec 65, when the negotiation is by delivery only, the warranty
extends only in favor of no holder other than the immediate transferee.
BPI v San Carlos Milling Corporation (SCMC), 59 Phil 59 (1910)

SCMC is a sugar mill in Negros which has a sister-company in Hawaii. The manager, Newland
Baldwin, receives money from Hawaii in his personal checking account. Newland Baldwin issues
check payable to SCMC or order. A check was issued for US$100,000 but Wilson and Dolores
forged the signature of Baldwin and encashed the check from BPI. Baldwin objected the
payment. BPI sued SCMC to return the $ 100,000.
HELD: Drawee bank (BPI) is bound to know the signatures of its depositors. If it pays a forged
check, the bank is considered as making payment out of its own funds. It cannot debit the
amount so paid against the account of the depositor or drawer whose signature was forged.
There was no right to give a discharge under Sec 23
25 SCRA 693;
43 Phil 678;
63 Phil 711
SEC 28
LACK or WANT OF PARTIAL FAILURE OF
FAILURE OF CONSIDERATION
CONSIDERATION CONSIDERATION
Parties did not contemplate Parties agreed on a valuable Parties agreed in a
any value for the issuance or consideration but the same did consideration but there was NO
negotiation of the instrument not materialize total performance on the
agreed consideration
Personal defense Personal defense Personal and defense pro tanto
i.e. - where the purpose of For P75,000, parties agreed Delivery of only 2 cows instead
issuing the check is only for that 5 cows will be delivered – of five.
exhibits or forming part of no cow was delivered/ different
lecture notes in the subject NIL thing was delivered
Suppose holder is aware that the check was given to be made part of the NIL
notes, can he holder require drawee to pay?
No. The personal defense of lack of consideration can be used by the drawer.
The defense is available against a holder who is not HDC. No indorsement can
be made since the defect was that it was supposed to be a part of the notes in
NIL.
Suppose holder is unaware of the defect? Can he require drawer to pay?

Yes. Drawer can no longer avail of the personal defense of lack of
consideration, which is available only against a holder in due course.
What is the remedy of the holder (NOT HDC)?

He can go after the immediate indorsers under the warranties stated in Sec 66.
PARTIAL FAILURE OF CONSIDERATION

• Personal defense
• Defense pro tanto – lack of complete performance can be the basis to
reduce the liability
LACK OF CONSIDERATION FAILURE OF CONSIDERATION Sec 16 - CONDITIONAL DELIVERY

Personal defense Personal defense Personal defense – no effectual
delivery
No agreement of valuable Agreement as to consideration Agreement as to object and
consideration but no delivery consideration and there is
DELIVERY
Can the holder require the drawer to pay even if he is aware that only 2 of the five
cows were delivered?
No. The holder is not a holder in due course and partial failure of consideration
can be used as a defense pro tanto and the liability of the drawer is reduced to
the extent of the three undelivered cows.
Suppose holder is not aware, can he require drawer to pay the entire amount?
Yes. Drawer can be made liable for the five cows since the defense of partial
failure of consideration can be made against a holder who is not a holder in
due course.
ACCOMMODATION PARTY (Sec 29)

• 3 requisites:
1. He must be a party to the instrument, signing as maker, drawer,
acceptor or indorser (MADI);
2. He must not receive value therefore; and
3. He must sign for the purpose of lending his name or credit to some
other person.
TO WHOM MAY AN ACCOMMODATION PARTY BE LIABLE?

Ang v Associated Bank, et al., GR 146511, September 5, 2007
The accommodation party is liable on the instrument to a holder for value even though the holder,
at the time of taking the instrument, knew him or her to be merely an accommodation party, as if
the contract was not for accommodation. The relation between an accommodation party and the
accommodated party is one of principal and surety – the accommodation party being the surety.
Since the liability of an accommodation party remains to be primary and unconditional to a holder
for value even if the accommodated party receives an EXTENSION of the period for payment
without the consent of the accommodation party, the accommodation party is still liable for the
whole obligation and such extension does NOT release him because, as far as the holder for value
is concerned, he is a solidary co-debtor.
HOLDER FOR VALUE (Sec 29) HOLDER IN DUE COURSE (Sec 52)
G COGI
One who took the instrument for value when it Automatically a holder for value
is overdue, or who knew of the defect of the
title, infirmity …
RENEGOTIATION or REISSUANCE (Sec 50)

• When the instrument is negotiated back to a prior party, such prior party
may reissue or renegotiate the instrument
• EFFECT of renegotiated or reissued instrument: Prior party who renegotiates
the instrument cannot enforce the instrument against the intervening parties
to whom he was personally liable
P 80,000 To: Clara (sgd) Bella

Pay to the order of Bella the amount of eighty To: Dina (sgd) Clara
thousand pesos only (P80,000). To: Anna (sgd) Dina
(sgd) Anna To: Ester (sgd) Anna
Anna cannot enforce instrument against Clara and Dina, who are intervening
parties to whom she was personally liable.
STRIKING OUT OF INDORSEMENT (Sec 48)

What indorsement can be struck out from the instrument?
Those not necessary to the title of the holder (includes bearer, payee,
indorsee) – example: as bearer, indorsement is NOT necessary to his title.
NOTE: Do not erase – constitutes material alteration
LIABILITY OF PARTIES
A. PARTIES PRIMARILY LIABLE (2008 BAR)
4. Maker (Sec 60)
5. Acceptor (Sec 62)
B. PARTIES SECONDARILY LIABLE

1. Drawer (Sec 61)
2. Indorser (Sec 66)
C. ACCOMONDATION PARTY (Sec 29) [1990,

1991, 1993, 1996, 1998, 2003, 2005, 2008 BAR]
• An accommodation party is liable for the instrument to a holder for
value even if, at the time of its taking, the latter knew the former to be only
an accommodation party.
• The relation between an accommodation party and the party
accommodated is one of principal and surety – the accommodation party
being the surety. A surety is bound equally and absolutely with the
principal and is deemed an original promissory debtor from the beginning.
The liability is immediate and direct.
Garcia v Llamas, December 8, 2003

FACTS: Garcia and De Jesus executed a promissory note in favor of Llamas.
PROMISSORY NOTE
P400,000
Received from Atty. Dionisio Llamas the sum of P400,000, Phil Currency, payable on or
before January 23, 1997 at #144 K-10 St, Kamias, Quezon City, with interest at the rate
of 5% per month or fraction thereof. It is understood that our liability under this loan is
jointly and severally (sic). Done at Quezon City, Metro Manila this 23 rd day of December
1996.
Despite repeated demands, Garcia and De Jesus failed to pay the loan. Garcia alleged that he
assumed no liability under the promissory note since he signed it merely as an accommodation
party for De Jesus and that he was relieved from liability when De Jesus paid the loan through a
check which later bounced.
ISSUE: Is Garcia an accommodation party?
HELD: No. The note was non-negotiable because it is payable to a specific person, hence, Garcia
cannot avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation
party. The promissory note is covered by the provisions of the Civil Code and not by the NIL
D. LIABILITY OF DRAWEE BANK ON: (Sec 187,

189) [2008 BAR]
1. A check is a bill of exchange drawn on a bank payable on demand (Sec 185,
NIL)
• A check of itself does NOT operate as an assignment of any part of
the funds to the credit of the drawer with the bank, and the bank is not
liable the holder, UNLESS and until it accepts or certifies the check (Sec
189, NIL)
• If a bank refuses to pay a check notwithstanding the sufficiency of
funds, the payee-holder cannot sue the bank. The payee should instead
sue the drawer who might in turn sue the bank. Sec 189 is a sound law
based on logic and established legal principles: NO privity of contract
exists between the drawee-bank and the payee (Villanueva v Nite, GR
148211, July 25, 2006)
2. STALE check
• One which has NOT been presented for payment within a reasonable
time after issue
• Under Sec 186, if an instrument is payable on demand, presentment
must be made within a reasonable time after its issue OR last
negotiation, otherwise the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay (International
Corporate Bank v CA, Feb 12, 2001)
• By current practice, a check becomes stale after 6 months or 180 days
after issuance (Wong v CA, Feb 2, 2001). The check becomes valueless
and, therefore, should not be paid
3. CASHIER’S (MANAGER’S) CHECK
• A check drawn by the cashier (manager) upon the bank itself
• The bank becomes the debtor of the holder of the check. It is not subject
to stop payment order, unlike in personal checks, UNLESS the holder is
not a holder in due course (Mesina v IAC, 145 SCRA) [2003 BAR]
• A manager’s check is similar to a cashier’s check both as to effect and
use. In effect, it is a bill of exchange drawn by the bank’s manager upon
the bank itself, and accepted in advance by the act of its issuance. It is
really the bank’s own check and may be treated as a promissory note
with the bank as maker. The check becomes the primary obligation of the
bank which issues it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance thereof
(Equitable PCI v Ong, September 15, 2006)
4. CROSSED CHECK (1994, 1995, 1996, 2004, 2005 BAR)
• RULES:
a. The check may not be encashed but only deposited to the account
of the payee.
b. It may be negotiated only ONCE, to one who has an account with
the bank.
c. The act of crossing a check serves as a warning to the holder that
the check has been issued for a definite purpose and so that he is
bound to inquire whether the check was received pursuant to that
purpose, otherwise, he cannot be considered a holder in due
course.
d. The crossing of checks should put the holder on inquiry and he has
the duty to ascertain the indorser’s title to the check. If he failed to
do that, he is guilty of gross negligence amounting to legal
absence of good faith contrary to Sec 52 (c), NIL. He cannot be
considered a holder in due course.
Note: Under Sec 60 of the New Central Bank Act, checks representing demand
deposits do not have legal tender power and their acceptance in the payment of
debts is at the option of the CREDITOR. Further, when a check has been cleared
and credited to the account of the creditor, it shall be equivalent to a delivery to
the creditor of cash in an amount equal to the amount credited to his account.
Papa v A.U. Valencia & Co., 284 SCRA 643

Failure of the payee to encash a check for more than ten years undoubtedly resulted in the
impairment of the check through his unreasonable and unexplained delay. The presumption is
that the check has been cashed.
EFFECTS OF CERTIFYING A CHECK:

1. It is equivalent to acceptance and is the operative act that makes
the bank liable.
2. It amounts to the assignment of funds of the drawer in the hands of
the drawee.
3. If obtained by the holder, persons secondarily liable are
discharged.
Bataan Cigar & Cigarettes Factory (BCCF) v Court of Appeals, March 3, 1994
FACTS: BCCF issued postdated crossed checks to George King in payment of 4,500 bales of
tobacco leaf which George King failed to deliver. George King sold the checks at a discount to
State Investment House (SIH). Upon maturity, SIH tried to collect from BCCF who refused to pay.
ISSUE: Is SIH, a second indorser, a holder in due course? Can SIH collect from BCCF)?
HELD: SIH is not a holder in due course because of failure of consideration. It cannot collect from
BCCF, but SIH can collect from the indorser, George King.
Atrium Management Corp (AMC) v CA, et al, February 28, 2001

FACTS: Hi-Cement Corp issued 4 postdated crossed checks amounting to P2M in favor of ET
Henry and Co (EHC). The payee indorsed the 4 checks to AMC for valuable consideration. Upon
presentment for payment, the drawee bank dishonored all the 4 checks for “payment stopped”.
AMC demanded payment of the checks.
ISSUE: Is AMC a holder in due course?
HELD: No. The checks were crossed checks and should be indorsed for deposit to the payee’s
account only. AMC was aware of the fact that the checks were all for deposit only to payee’s
account. Clearly, AMC could not be considered a holder in due course. HOWEVER, the NIL does
NOT provide that a holder NOT in due course cannot recover on the instrument.
Hi-Cement Corp v Insular Bank of Asia and America, Sept 28, 2007
Metrobank v Philippine Bank of Communication, Oct 18, 2007
CHECK KITING
It refers to the wrongful practice of taking advantage of the float, the time
that elapses between the deposit of the check in one bank and its collection at
another. In anticipation of the dishonor of the check that was deposited, the
original check will be replaced with another worthless check (Aquino, Notes and
Cases on Banks, Negotiable Instruments and other Commercial Documents, 2006
Edition).
E. COLLECTING BANK
• Indorser (Sec 66)
Banco de Oro v EBC, January 20, 1988
Associated Bank (AB) v CA, January 31, 1996

FACTS: Tarlac Province maintained a checking account with the PNB where parts of the deposited
provincial funds were drawn to the order of the Conception Emergency Hospital of Tarlac (CEH).
Upon audit by the province, it was discovered that several checks amounting to P203,000 were
not received by the hospital. It turned out that the cashier of said hospital inc charge of collecting
the checks forged the signature of the Chief of CEH and deposited the checks to his savings
account in AB and continued to do so even after his retirement. The cashier was able to withdraw
the amounts. Tarlac sought the restoration of the amounts from its account. PNB demanded
reimbursement from AB.
ISSUE: Who shall bear the loss in case of payment of checks bearing forged indorsements – the
drawer, the drawee, or the collecting bank?
HELD: Both the collecting bank (AB) and the drawer (Province of Tarlac) are liable. Thus, AB shall
be liable to PNB for 50% of the P203,000 on its warranties as an indorser of the forged checks
and for being remiss on its duty to ascertain the genuineness of the payee’s indorsement. As for
the Province of Tarlac, it can only recover 50% of the P203,000 from PNB since it contributed to
the loss of the amount of the forged checks by allowing the release of the checks to the retired
cashier despite its knowledge of his disassociation from the hospital, an irregularity that should
have alerted it to the fraud being committed.
GENERAL RULE: The collecting bank or last indorser generally suffers the loss of payment checks
bearing forged indorsements because it has the duty to ascertain the genuineness of all prior
indorsements considering the act of presenting the check for payment to the drawee bank is an
assertion that the party making the presentment had done its duty to ascertain the genuineness
of the indorsement.
The drawee bank makes NO warranty as to the genuineness of any indorsement. It only verifies
the genuineness of the drawer’s signature. BUT it has the duty to promptly inform the collecting
bank of the checks of the forgery upon its discovery. A delay in informing the collecting bank of
the forgery deprives it of the right to recover the amount from the forger, thus, the drawee bank
is deemed negligent and cannot recover from the collecting bank.
RIGHTS OF HOLDERS
A. Holders in Due Course (1992, 1994, 1996, 2000 BAR)
1. Sec 52, 57, 59
• (Sec 52)
• (Sec 57)
• (Sec 59)
2. Personal and Real Defenses
B. Holder other than a holder in due course

• Sec 51
C. Holder who derives his title from holder in due course (1993,
2008 BAR)
• SHELTER PRINCIPLE – Under Section 58 of Act 2031, a holder who is not a
holder in due course but derives his title through a holder in due course,
and who is NOT himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all parties
prior to the latter
D. Holder for value

• Sec 26
PRESENTMENT (1994, 2000, 2003 BAR)

A. For acceptance (Sec 143)
B. For payment (Sec 70)
DISHONOR OF INSTRUMENT
A. Notice of Dishonor (Sec 143) [1996 BAR]
• After an instrument is dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal debtors whose liability
becomes identical to that of the original obligor. The holder of a
negotiable instrument need NOT even proceed against the maker before
suing the indorser. Hence, the drawer is NOT an indispensable party in an
action against the indorser of the checks (Tuazon v Heirs of Ramos, GR
156262, July 14, 2005)
B. PROTEST (Sec 152, 155)

• Where a FOREIGN bill appearing on its face to be such is dishonored
by NON-ACCEPTANCE, it must be duly protested for non-acceptance, and
• Where such a bill has not previously dishonored by non-acceptance is
dishonored by NON-PAYMENT, it must be duly protested for non-payment
• If it is NOT so protested, the drawer and indorsers are DISCHARGED
INLAND BILL OF EXCHANGE FOREIGN BILL OF EXCHANGE

A bill which is or on its face purports to be both It may be drawn outside the Philippines,
drawn and payable within the Philippines (Sec payable outside the Philippines, or both drawn
129) and payable outside the Philippines (BPI v CIR,
GR 137002, July 27, 2006)
Need not be protested Must be protested in case of dishonor to charge
the drawer and the indorsers
Velasquez v Solidbank Corporation (SBC), March 28, 2008

When a FOREIGN bill is dishonored by non-acceptance or non-payment, protest is necessary to
hold the drawer and indorsers liable.
Petitioner was discharged from liability under the sight draft when SBC failed to protest it for non-
acceptance by the bank of Seoul. A sight draft made payable outside the Philippines is a foreign
bill of exchange.
DISCHARGE
• OF (Sec 119)
• OF PERSONS SECONDARILY LIABLE (Sec 120)
Allied Banking Corporation v Court of Appeals, GR 125851, July 11, 2006

CONTRACT OF INDORSEMENT GUARANTY
Primarily that of transfer Primarily that of personal security
Limited liability than that of a guarantor or Liability of guarantor/surety is broader than that
surety – indorser shall be discharged from of an indorser – a demand or notice of default is
liability unless the bill is presented promptly for not required to fix the surety’s liability unless it
payment at maturity and due notice of dishonor is required by the provisions of the contract of
is given to indorser within a reasonable time surety
PART II. INSURANCE

LAWS that govern
1. Insurance Code – PD 1460 ( June 11, 1978)
2. Civil Code – RA 386
3. General principles on Insurance in the United States (Constantino v Asia Life
Insurance, 87 Phil 248)
H applied for insurance with S company. The application was mailed to S & on Nov
26, insurer gave notice of acceptance by cable. H never received the cable & died
on Dec 20. The Insurance Code is silent as to acceptance by cable.
• The Civil Code shall apply. Under Art 1319, an acceptance made by
letter shall not bind the person making the offer EXCEPT from the time it came
to his knowledge. There was no valid contract as H died without knowing the
acceptance of his application (Enriquez v Sun Life Assurance of Canada, 41 Phil
269)
CONTRACT of INSURANCE
– An agreement whereby one undertakes for a consideration to
indemnify another against loss, damage, liability arising from an unknown or
contingent event (A Co I Co)
– A contract of suretyship shall also be deemed an insurance

contract if made by a surety who is doing an insurance business
– DOING or transacting an INSURANCE BUSINESS is:
1. Making/ proposing to make as insurer, any insurance
contract
2. Making/ proposing to make, as surety, any contract of
suretyship as a vocation & not merely incidental to any other legit business/
activity of the surety
3. Doing any business including a reinsurance business,
specifically recognized as doing an insurance business w/in the Code
4. Doing/ proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to evade the
provisions of the Code (2)
KINDS OF INSURANCE
1. Successive insurance (Sec 62)
2. Overinsurance (Sec 82)
3. Marine (Sec 99)
4. Reinsurance (Sec 93)
5. Double (Sec 91)
6. Fire (167)
7. Life (169)
8. Variable insurance contracts (Sec 232)
NOTE:
1. No premium, no insurance coverage
• EXCEPT – (a) grace period applicable in LIFE insurance, (b) receipt
issued, (c) contract of insurance is accepted by the person insured
2. The fact that no profit is derived from making the insurance
contract/agreement/transactions OR that no separate consideration is
received shall NOT be deemed conclusive to show that the making thereof
does not constitute the doing or transacting of an insurance business
NATURE & CHARACTERISTICS of a contract of insurance

1. An ALEATORY contract – liability of the insurer depends upon the happening
of a contingent event
• Not a wagering contract
2. Contract of
(a) INDEMNITY for non-life – recovery is commensurate to the loss
(b)INVESTMENT in life – secured by the insured as a measure of
economic security for him during his lifetime & for his beneficiary
upon his death
• EXCEPT – one secured by the creditor on the life of the debtor
– contract of indemnity
3. PERSONAL contract – an insurer contracts with reference to the character of
the insured & vice versa
4. EXECUTORY & conditional on the part of the insurer – since upon the
happening of the event/ peril insured against, the conditions having met, it
has the obligation to execute the contract by paying the insured
• It is executed on the part of the insured after the payment of
the premium
5. One of PERFECT GOOD FAITH for both insurer & insured
• More so on the part of the insurer – due to its dominant
bargaining position – stricter liability or responsibility
6. Contract of ADHESION – insurance companies manage to impose upon the
insured prepared contracts which the insured cannot change
• Consequently, it is construed as:
a. NO doubt as to terms of the insurance contract –
construed in it plain, ordinary & popular sense
b. DOUBTFUL, AMBIGUOUS, UNCERTAIN – construed strictly
against the insurer & liberally in favor of the insured since latter has
no voice in selection of the words used – language used is selected by
the lawyers of the insurer
• The interpretation of an obscure stipulation in contract must not favor
the one who caused the obscurity (Del Rosario v Equitable Insurance, 8
SCRA 343)
• A bank obtained insurance against robbery that excluded loss by any
criminal act of the insured or by any authorized representative. While
transferring funds, from one branch to another, the insured’s armored
truck was robbed. A labor contractor with insured assigned the driver &
security guard was assigned by an agency. Both driver & security guard
were involved. HELD: Loss is excluded. Driver/guard although assigned
by labor contractors were authorized representatives (Fortune Insurance
v CA, 244 SCRA 308)
• Personal accident policies providing for loss of hand, where policy
defines it as amputation. Insured has an accident resulting in a
temporary total disability but hand is not amputated. HELD: Insurer NOT
liable (Ty v First National Surety, 17 SCRA 364) BUT Policy provided loss
of both legs by amputation. A claim against policy was allowed for total
paralysis – to exclude total paralysis is contrary to public policy, public
good & sound morality, as it would force insured to amputate his legs to
claim on policy (Panaton v Malayan, CA 783)
• Policy prohibited storage of oils having flash point of below 300 F.
Gasoline is stored. HELD: The clause is ambiguous. In ordinary parlance,
oil means lubricants – not gasoline (Qua Chee Gan)
• Denial of a claim on ground that insured vehicle was private owner type
vehicles & policy issued was Common Carrier’s Liability Insurance Policy,
which covers public vehicle for hire. HELD: Insurer is liable as long as it
was aware all along that such vehicle was a private one (Fieldmans
Insurance v Vda De Songco, 25 SCRA 70)
• Denial of claim for benefit due to death of Landicho in a plane crash
under GSIS policy on the ground of non-payment of premium. HELD: The
policy contained a provision that application for insurance is authority for
GSIS to cause deduction of premium from insured’s salary (Landicho v

GSIS, 44 SCRA 7)
INTENT of insurance – to compensate/ indemnify damage suffered
ELEMENTS OF an INSURANCE CONTRACT

1. Insured should possess an interest of some kind, susceptible of pecuniary
estimation – INSURABLE INTEREST
2. The insured is subject to risk of loss through destruction of that interest by
the happening of the designated risks
3. The insurer assumes 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 risks
5. As consideration for the insurer’s promise, the insured makes a ratable
contribution (PREMIUM) to the general insurance fund
A person has INSURABLE INTEREST in the subject matter insured when he

has such a (a) relation or connection with, or concern in, such subject
matter that he will derive (b) pecuniary benefit or advantage from its
preservation or will suffer pecuniary loss or damage from its
destruction, termination or injury (c) by the happening of the event
insured event
It is necessary because its absence renders the contract VOID

• Based on the principle that insurance is a contract of indemnity
• If the insured has no interest – he will not stand to suffer loss or injury by
the happening of the event insured against
IN WHAT DOES A PERSON HAVE INSURABLE INTEREST?

Every person has an insurable interest in the life or health of:
1.Of himself, his spouse, & of his children
2.Any person on whom he depends, wholly or in part, for education or support,
or in whom he has pecuniary interest
3.Any person under a 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
Every 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.
Liability in respect thereof – i.e. warehouseman who insured goods stored in his
warehouse
It (insurable interest in property) may consist of:

1. An existing/ direct interest
• i.e. – conditional deed of sale

2. An inchoate interest founded on an existing interest
• Interest in real estate which is not a present interest but which may ripen
into a vested interest if not barred, extinguished, or divested
• i.e. – Interest in corporate property arising from stockholding but limited
to stock value, partnership interest
3. An expectancy, coupled with an existing interest in that out of which the
expectancy arises
• The expectancy must be founded on an actual right to the thing or a
valid contract for it – must be actual/ proven that he is entitled to the
expectancy
• i.e. – A ship owner has insurable interest in expected freight charges,
future crops a farmer planted on his own land at the time of issuance of
policy
• 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 (16)
• i.e. – A son has no insurable interest in a bldg owned by his father
despite designation as heir in will – as will does not produce any effect
before testator’s death – SUCCESSION – inchoate interest or expectancy
BUT no existing interest
No contract or insurance policy on property shall be enforceable EXCEPT for the

benefit of some person having insurable interest in the property insured
A buyer of a property insured by the previous owner who has not obtained a
transfer of the insurance policy in his name cannot recover
How about seller? No since there is no insurable interest at time of loss (19)
IMPORTANT, IN RELATION TO NEED FOR INSURABLE INTEREST

A change of interest in any part of a thing insured, accompanied by a
corresponding change of interest in the insurance SUSPENDS the insurance to an
equivalent extent until interest in the thing & interest in the insurance is vested in
the same person
• How – (a) reacquires before loss or (b) consent of insurer was obtained or
(c) stipulation that the policy be transferred to new owner
• For a suspension to occur, transfer must be ABSOLUTE – (a) risk of loss
borne by buyer, (b) loss or conveyance of all interest over the property
• If loss occurs is damage suffered? YES – not suspended, NO – suspended
What change is contemplated? An absolute transfer of the property – for

suspension to occur, transfer must be absolute
If loss occurs, is damage suffered? Yes – not suspended; No – suspended
EXCEPTIONS –
1. Life, health or accident insurance – since 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 & result in loss – does not
affect the right of the insured to indemnify (21)
3. A change of interest in one or more several distinct things, separately
insured by one policy, does not avoid the insurance as to the others (22)
4. A change of interest by will or succession on the death of the insured does
not avoid the insurance – his interest on the thing passes to the person
taking his interest on the thing insured (23)
• Automatic transfer to heir
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 the insurance
even though it has been agreed that insurance shall cease upon an
alienation of the thing insured (24)
• There must be a stipulation against it – otherwise, it is avoided
• Transfer to strangers avoid the policy
6. When consent of the insurer is obtained, notwithstanding a prohibition
7. When the policy is so framed that it will insure to the benefit of whomsoever
8. VOID stipulations in PROPERTY insurance:
a. A stipulation for the payment of whether the person
insured has or has no interest in the property insured – since it is a
contract of indemnity
b. Stipulation that the policy shall be received as a proof of
such interest – existence of insurable interest does not depend on the
policy
c. Every policy issued by way of gaining or wagering is void
Those insured without insurable interest are vested profit – as they do not suffer
damage from the occurrence of the event insured against
INSURABLE INTEREST IN LIFE AND PROPERTY INSURANCE (2001, 2002 BAR)

LIFE PROPERTY
Insurable interest is beyond pecuniary Insurable interest is only up to the value of the
estimation property insured
Beneficiary need not have any insurable Beneficiary must have insurable property on the
interest on the life of the insured property insured
Insurable interest exist only at the time of Insurable interest must exist BOTH at the time the
the inception of the policy and need NOT policy is issued and at the time when the loss or
exist at the time of the loss damage occurs but need not exist in the
meantime
WHAT MAY BE INSURED AGAINST

• ANY unknown or contingent event, whether past or future, which may
damnify a person having insurable interest or create liability against him, may
be insured against (3)
• PAST event
– To be a condition, must be unknown to the parties and
jurisprudence requires that the insurer to incur liability for a past event,
must expressly agree to be so liable
– example: marine insurance where the past event insured

against is the insurance over a vessel already lost or sunk but this being
unknown to the owner of the vessel who procured the insurance and the
insurer who expressly agrees to be liable in any event
The consent of the husband is NOT necessary for the validity of an insurance
policy taken by a married woman on her life & that of her children. She can also
insure her separate property without the consent of the husband (145, FC)
A minor (18 years & above) may take out a contract for life, health & accident
insurance with any company authorized to do business in the Philippines,
PROVIDED:
a) It be taken out on his own life
b) Beneficiary named is his estate, father, mother, husband, wife,
child, brother, sister
RA 6809 – lowered age of majority from 21 to 18 years
EFFECT when original owner of policy which covers the life or health of a minor,
DIES AHEAD of MINOR – all rights, title & interest in the policy shall automatically
vest in the minor unless otherwise provided in the policy
Problem: A husband took out a life insurance on the life of his wife who died a few
days after the decree of annulment of their marriage had become final. Can there
be a recovery on the insurance proceeds?
Yes. At the time the husband took out the life insurance, he still had an insurable
interest on the life of the wife. The subsequent annulment of their marriage will
NOT affect the right to recover under the policy because insurable interest in life
must exist when the insurance policy takes effect, but need NOT exist thereafter
or when the loss occurs.
Spouses Nilo Cha v CA, August 18, 1997 (277 SCRA 690)
Facts: Cha were lessees of CKS Development Corp. The lease agreement provides that the lessees
cannot insure the properties stored in the leased premises without first obtaining the consent of
the lessor, otherwise, there is an automatic assignment and the policy is deemed transferred to
the lessor. The Chas insured the merchandise without the lessor’s consent. Fire broke out and
destroyed the merchandise.
Issues: Who is entitled to the proceeds of the policy? Is the automatic transfer provision in the
lease agreement valid?
Held: The Chas are entitled to the proceeds. The lessor is not entitled to the proceeds since he has
no insurable interest on the merchandise both at the time the policy is issued and at the time of
the loss.
The automatic assignment of the policy to the lessor is VOID since it is contrary to law and public
policy. The insurer cannot be compelled to pay the proceeds of the policy to the lessor who has NO
insurable interest on the property insured.
Insurable interest in the property insured must exist at the time the insurance policy takes effect
AND at the time the loss occurs. The basis of such requirement is based on sound public policy; to
prevent a person from taking out an insurance policy on property upon which he has no insurable
interest and collecting the proceeds of said policy in case of loss of the property.
Gaisano Cagayan, Inc. v Insurance Company of North America, GR 147839, June 8, 2006
A vendor or seller retains an insurable interest in the property until full payment of the value of the
delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one’s interest is not determined
by concept of title, but whether insured has substantial economic interest in the property.
Therefore, an insurable interest in the property does not necessarily imply a property interest in, or
lien upon, or possession of, the subject matter of the insurance, and neither the title nor a
beneficial interest is requisite to the existence of such an interest. It is sufficient that the insured is
so situated with reference to the property that he would be liable to loss should it be injured or
destroyed by the peril against which it is insured. Anyone has insurable interest in the property
that derives benefit from its existence or would suffer loss from its destruction. Indeed, a vendor or
seller retains an insurable interest in the property sold so long as he has any interest, in other
words, so long as he would suffer by its destruction, as where he has a vendor’s lien.
Filipino Merchants Insurance v Court of Appeals, November 28, 1984

The buyer has insurable interest over the goods even while the goods are still in transit. The
buyer’s interest is based on the perfected contract of sale. The perfected contract of sale between
him and the seller/shipper of the goods operates to vest in him an equitable title even before
delivery or before he performed the conditions of the sale. The contract of shipment is immaterial
in the determination of whether the buyer has insurable interest or not in the goods in transit.
WHAT CANNOT BE INSURED

• An insurance for & against the drawing of any lottery or for or against any
chance or ticket in a lottery drawing a prize – BECAUSE gambling results in
profit & insurance only seeks to indemnify the insured against loss (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
• The party who agrees to indemnify another upon the happening of
specified contingency (6)
2. INSURED
• Party to be indemnified in case of loss (7)
• Anyone may be insured EXCEPT public enemy – a nation at war with the
Philippines and every citizen or subject of such nation – the purpose of war
is to cripple the power and exhaust the resources of the enemy – it is
inconsistent to destroy its resources then pay it the value of what has
been destroyed
• WHO may insure a MORTGAGED property – both the mortgagor &
mortgagee may take out separate policies w/ the same or diff companies –
The mortgagor to the extent of the value of his property, the mortgagee to
the extent of his credit (8)
• Consequences where mortgagor insures the property mortgaged in his
OWN name but makes the loss payable to OR assigns the policy to
mortgagee:
UNLESS the POLICY PROVIDES OTHERWISE,
a. The insurance is still deemed to be upon the interest of the mortgagor
who does NOT cease to be a party to the original contract – hence if
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, will have the same effect although the property is in the
hands of the mortgagee – hence if the mortgagor violated the policy,
the mortgagee cannot recover
c. Any act required to be done by the mortgagor may be performed by
the mortgagee with the same effect as if it has been performed by the
mortgagor
d. Upon the occurrence of loss, the mortgagee is entitled to recover to
the extent of his credit, & the balance shall be paid to the mortgagor –
since such is for both their benefits
e. Upon recovery by the mortgagee, his credit is extinguished
• If the insurer assents to the transfer of the insurance from mortgagor to
mortgagee, and (at the time of his assent) imposes further qualifications
on the assignee, making a new contract with him, the acts of the
MORTGAGOR cannot affect rights of assignee
• STANDARD or UNION MORTGAGE CLAUSE – Creates the relation of
insured & insurer between the mortgagee and insurer independent of the
contract of the mortgagor
• LOSS PAYABLE CLAUSE – the mortgagor is made merely a beneficiary
under the contract. Any default on the part of the mortgagor, which by the
terms of the policy defeats his rights, will also defeat all rights of the
mortgagee under the contract, even though the latter may not have been
in default
• An insurance taken be either the mortgagor or the mortgagee will not
automatically inure to the benefit of the other. Insurance is a personal
contract and takes effect only between the contracting parties. BUT the
mortgagee has a LIEN on the proceeds of the policy (Geagonia v CA, 241
SCRA 154 [1995])
• EFFECT of insurance procured by the mortgagee without reference to the
right of the mortgagor:
a. The mortgagee may collect to the extent of his credit from the insurer
upon occurrence of loss
b. The mortgagor cannot collect the balance of the proceeds after the
mortgagee is paid UNLESS otherwise stated
c. The insurer, after payment to the mortgagee, becomes subrogated to
the rights of the mortgagee against the mortgagor & may collect the
debt to the extent paid to the mortgagee
d. The mortgagee after payment cannot collect anymore from the
mortgagor BUT if unable to collect in full from insurer, he can recover
from the mortgagor
e. The mortgagor is NOT released from debt since insurer is subrogated
in place of the mortgagee
3. BENEFICIARY
• Person who receives the benefits of an insurance policy upon its maturity
• Who may be made beneficiaries in LIFE insurance – ANYONE
• Who cannot – those prohibited by law to receive donations from the
insured (739, NCC)
a. Those made between persons guilty of adultery or concubinage at the

time of the designation
b. Those found guilty of the same criminal offense in consideration
thereof
c. Those made to a public officer/his spouse/ descendants/ascendants by
reason of his office
• Prior conviction for adultery/concubinage is not required – preponderance
of evidence in the same action nullifying the designation
• Where a common law wife the married insured could NOT be named as
beneficiary (Insular Life v Ebrado, 80 SCRA 181)
• Where the insured designated his second wife as a beneficiary was
UPHELD since the 2nd wife was not aware of the first marriage (SSS v Davac,
17 SCRA 863)
• The disqualification does NOT extend to children of adultery or
concubinage in view of the express recognition of successional rights of
illegitimate children (287, NCC & 176, FC)
MUST BENEFICIARY HAVE INSURABLE INTEREST IN LIFE OF INSURED?

• No. It is recognized that the insured may name anyone he chooses as
beneficiary in his life insurance, even if he is a stranger & has no insurable
interest EXCEPT those disqualified to receive donations
• The designation MUST be in (a) good faith, (b) without intent of fraud, (c)
or without intent to enter into wagering contract
CAN BENEFICIARY be CHANGED?

• The insured shall have the right to change beneficiary he designated
UNLESS he has expressly waived the right in the policy (11)
• If he has waived the right, the effect is to make the designation
irrevocable
• The designation of guilty spouse as irrevocable beneficiary is revocable at
the instance of innocent spouse in case of:
a. Termination of a subsequent marriage
b. Nullification of marriage
c. Annulment of marriage
d. Legal separation (43, FC)
EXTENT of the INTEREST of the irrevocable beneficiary in a LIFE insurance

contract
• The beneficiary has a vested right that cannot be taken away
without his consent
• If the insured discontinued payment of the premium, the
beneficiary may continue paying. Neither can insured get a loan or obtain cash
surrender value of the policy w/out his consent (Nario v Philamlife, 20 SCRA
434)
• The wife & minor children were named irrevocable beneficiaries.
When wife dies, husband seeks to change the beneficiaries with consent of the
children. Consent is not valid due to minority (Philamlife v Pineda, 170 SCRA
416)
INTEREST of an irrevocable beneficiary in ENDOWMENT policy

• His interest is contingent as benefits are to be paid to him only if the
insured dies before the specified period (normally – 20 years)
• If the insured outlives the period, benefits are paid to the insured
EFFECT of (a) failure to designate a beneficiary or (b) beneficiary is disqualified –

the benefits shall accrue to the estate of the insured
WHO RECOVERS if beneficiary PREDECEASES the insured

• If designation is irrevocable, the legal representatives of the beneficiary
may recover UNLESS it was stipulated that the benefits are payable only “if
living”
• If designation is revocable & NO change is made, the benefits pass to the
estate of the insured. The rule holds true also if benefits are payable “only if
living” or “if surviving” and the beneficiary dies before the insured
EFFECT if BENEFICIARY WILLFULLY KILLS the INSURED

• If killing is willful, the interest of the beneficiary is forfeited if he is the
principal, an accomplice, or an accessory.
• The nearest relative of the insured get the proceeds if not otherwise
disqualified (12)
• If not willful/felonious, provision does not apply
BENEFICIARY IN LIFE AND PROPERTY INSURANCE (2005 BAR)

1. Beneficiary in LIFE Insurance need not have any insurable
interest on the life of the insured. His designation may be revocable or
irrevocable
2. If the designation is irrevocable, the insured cannot:
a. Assign the policy,
b. Take the cash surrender value of the policy,
c. Add additional beneficiary or change the irrevocable to
revocable designation without the consent and approval of the
beneficiary
3. The only EXCEPTION in the designation of beneficiary is
found under Art 739, Civil Code (persons disqualified to give donations to
each other), to wit:
The following donations shall be void:
a. Those made between persons who were guilty of adultery or
concubinage at the time of the donation;
b. Those made between persons found guilty of the same criminal
offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants and
ascendants, by reason of his office.
NOTE: This disqualification applies to LIFE insurance (Art 2012, NCC) and
the insurance contract itself remains valid, only the designation of the
beneficiary is void.
4. Beneficiary in PROPERTY Insurance must have an
insurable interest on the property insured which must exist both at the time
when the policy was taken and at the time of the loss
Philippine American Life Insurance Co v Pineda, 175 SCRA 416 (1989)

FACTS: Dimayuga bought an ordinary life insurance policy from Philam Life and designated his wife
and children as irrevocable beneficiaries. After a month, Dimayuga filed a petition to amend
designation of beneficiaries from irrevocable to revocable. Philam Life opposed.
ISSUE: Can the designation of the beneficiaries be amended from irrevocable to revocable without
their consent?
HELD: No. Under the law, the beneficiary designated in a life insurance contract cannot be
changed without his consent due to the beneficiary’s vested interest in the policy. Thus, in this
case, it is not Dimayuga as the legal guardian who must give consent but the guardian ad litem
who shall decide minding the best interest of the children.
Problem: A common-law husband took a life insurance on the life of his common-
law wife at the time when both parties were free to marry. A few days before the
common-law wife died, the common-law husband married somebody else. Can
there be recovery on the insurance proceeds?
Yes, both parties were NOT guilty of adultery or concubinage at the time the
insurance took effect, as they were free to marry. Art 739 of the Civil Code
refers to donations made between persons guilty of adultery or concubinage at
the time of the donation.
Great Pacific Life Assurance Corporation v Court of Appeals, 316 SCRA 677
A Mortgage Redemption Insurance is a group insurance policy of mortgagors which is
intended as a device for the protection of both the mortgagee and mortgagor.
On the part of the mortgagee, it has to enter into such contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the mortgage debt, thereby
relieving the heirs of the mortgagor from paying the obligation. In a similar vein, ample protection
is given to the mortgagor such that in the event of death, the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness.
Consequently, where the mortgagor pays the insurance premium under the group insurance
policy, making the loss payable to the mortgagee, the insurance is on the mortgagor’s interest,
and the mortgagor continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such loss payable clause does not make
the mortgagee a party to the contract.
Vda de Consuegra v GSIS, 37 Phil 315

A RETIREMENT INSURANCE is primarily intended for the benefit of the employee to provide
for his old age or incapacity, after service (in the government) for a required number of years. If
the employee reaches the age of retirement, he gets the retirement benefits even to the exclusion
of the beneficiary or beneficiaries named in his application for retirement insurance. The
beneficiary of the retirement insurance can only claim the proceeds of the retirement insurance if
the employee dies before the retirement.
Blue Cross Health Care, Inc. v Olivares, GR 169737, February 12, 2008
FACTS: Under the policy, disabilities which existed before the commencement of the agreement
are excluded if they become manifest within one year from its effectivity. The insured allegedly
prevented presentment by the insurer of the doctor who will testify on her medical condition
because of the doctor-patient privilege. The insurer, thus, assumed that the testimony would be
adverse as it was willfully suppressed by the insured.
ISSUE: Is the insurer liable?
HELD: Yes. It is an established rule in insurance contracts that when their terms contain limitations
on liability, they should be construed strictly against the insurer. These are contracts of adhesion
the terms of which must be interpreted and enforced stringently against the insurer which
prepared the contract.
The insurer never presented any evidence to prove that the insured’s stroke was due to a pre-
existing condition. It merely speculated that the doctor’s report would be adverse to the insured
based on her invocation of doctor-patient privilege. This was a disputable presumption at best.
CONCEALMENT
• Neglect to communicate that which a party knows and ought to
communicate (26)
• Effect – entitles the injured party to RESCIND contract of insurance (27)
• The right to rescind is optional on the part of the injured party – Reason:
concealment misleads or deceives the insurer into accepting the risk or
accepting it at the rate of premium agreed upon
• Basis – fundamental characteristic of insurance contract is one of perfect
or utmost good faith
WHO MUST HAVE KNOWLEDGE of FACT CONCEALED

• The party claiming the existence of concealment must prove that there
was knowledge on the part of the charged with concealment
• i.e – If the insured stated that there was no hereditary taint/ illness that
affected on either side of his family to his knowledge ----- in order to prove or
show concealment – the insurer must prove that the hereditary taint alleged to
exist was known to the insured.
WHAT TIME must the party charged with concealment HAVE KNOWLEDGE of the
FACT concealed
• Gen Rule – Party must have knowledge at the time of effectivity of the
policy. Note that even if a party did not know of the existence at the time of
application BUT knew it before its effectivity, there is concealment
• Information acquired after effectivity is NOT concealment & does not
constitute ground to rescind
• Information subsequently acquired is no longer material as it will not
affect or influence the party to enter into the contract
• In case of REINSTATEMENT of a LAPSED policy, facts known after
effectivity but before reinstatement must be disclosed
HOW IS MATERIALITY of concealment/ representation DETERMINED

• It is determined solely by the probable & 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 inquiries (31)
TEST of MATERIALITY
• Whether knowledge of the true facts could have influenced a prudent

insurer in determining whether to accept the risk or in fixing the premiums
MUST there be CAUSAL CONNECTION between FACTS CONCEALED and CAUSE OF

LOSS
• No need
• It is sufficient that non-revelation has misled the insurer in forming its
estimate of disadvantage or in fixing the premium
• i.e – Insured concealed kidney disease & enlarged liver. Later, he died of
thrombosis – the insurer is NOT liable since the fact concealed was material
though insured did not die therefrom
• Insured concealed he had kidney disease & dies in plane crash – Insurer
NOT liable (Sunlife v CA, 245 SCRA 269)
WHAT FACTS MUST BE COMMUNICATED

1.Such facts that must be within his knowledge
• Concealment requires knowledge of the fact concealed by the
party charged w/ concealment
2. Facts must be material to the contract
• It must be of such nature that had the insurer known it, he would not have
accepted the risk or demanded a higher premium
3. Other party (insurer) had NO means of ascertaining such facts
4. Party w/ duty to communicate makes NO warranty (28)
• Existence of a warranty makes the requirement to disclose superfluous
• An intentional & fraudulent omission on part of one insured to
communicate information on a matter proving or tending to prove falsity
of a warranty is entitled to rescind (29)
• i.e – Warranty that the ship is seaworthy – the intentional & fraudulent
omission of the insured to state that the ship’s communication equipment
is out of order will entitle the insurer to rescind
WHAT MATTERS need NOT be COMMUNICATED

EXCEPT in answer to the inquiries of the other
1. Those which the other (insurer) knows
a. ie – insured discloses that he has tuberculosis to
the agent of the insurer, who in turn omits to state the same in the
application of the insured was DEEMED knowledge of the knowledge of
the insurer (Insular Life v Feliciano, 74 Phil 468)
b. Insurer surveyed location & surrounding of a bldg
that is to be insured against fire, an omission to state that there are
neighboring buildings will not avoid the policy
2. Those which, in exercise of ordinary care, the other
ought to know, & of which the former (insured) has no reason to suppose
him to be ignorant
• The facts that other ought to know (32):
a. All the general causes which are open to his inquiry, and which
may affect the material perils contemplated
– The source of information is equally open to the insurer, who is

presumed to know them
– i.e. – public events, war, laws or political conditions in other
countries
b. All the general uses of trade
– i.e. – Rules of navigation, all kinds of seasons, risks
3. Those which the other waives communication
• Waiver takes place either by (33):
a. The terms of the insurance, or
b. Neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is
communicated
• i.e. – An application for insurance is made in writing & questions therein
are incompletely answered and the insurer, without further inquiries
issues the policy (Ng Gan Zee v Asian Crusader Life Assurance, 122
SCRA 461)
• Waiver of medical exam is NOT tantamount to waiver of material
information since waiver of medical examination is made when the
insured represents himself to be in good health (Saturnino v Philam
Life, 7 SCRA 316)
4. Those which prove or tend to prove the existence of a
risk excluded by a warranty, & which are not otherwise material
• i.e. – Insurance covers only loss due to hijacking or terrorism. Warranty
that loss due to perils at sea is excluded. In effect, fact that the vessel’s
engine has been fitted with used parts need NOT be disclosed as the
seaworthiness of the vessel is not material
5. Those which relate to a risk exempted from the policy, &
which are not otherwise material (30)
• i.e. – Policy covers loss by theft. No need to disclose that the area
where the object is located is earthquake prone are if loss due to
earthquakes is not covered by the policy
OTHER MATTERS that do NOT NEED TO BE COMMUNICATED

1. Information of the nature or amount of interest of one insured need
not be communicated UNLESS in answer to inquiry
• EXCEPT:
a. Extent of interest of insured in property insured must be
specified if he is NOT absolute owner (51)
b. A trustee, mortgagee or bldg contractor must
communicate his particular insurable interest in the property even
if no inquiry is made (34)
2. Neither party to a contract is bound to communicate even upon
inquiry any information of his own opinion or judgment upon the matters
question (35)
• Only material facts are required – not opinions,
speculations, expectations
• EXCEPT in MARINE insurance where the insured is

required to disclose opinion of marine experts as to seaworthiness of
vessel (108)
Sunlife Assurance Co of Canada v CA, June 22, 1995

Facts: Bacani was issued life insurance (non-medical) policy for P100T with his mother as
beneficiary. In his application, he concealed his confinement at the Lung Center of the Philippines.
He died of a plane crash. The insurance company refused to pay alleging breach of contract for
fraudulent concealment.
Issue: Is the information withheld material and relevant to the approval of the policy?
Held: Yes. The fact concealed would have affected the insurer’s 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 insured to the insurance company, tending to induce the insurer to take the
risk (36)
WHEN MADE
• Ordinarily made at the SAME time OR BEFORE the issuance of the policy
(37)
• Can be made AFTER issuance of policy – when purpose is to induce insurer
to MODIFY an existing insurance contract – as provisions apply to a
modification (same with concealment)
HOW CONSTRUED
• The language of the representation is to be interpreted by the same rules
as the language of contracts in general (38)
• It is sufficient that it is materially/ substantially true
FORM and KINDS of REPRESENTATION

1. Oral
2. Written
3. Affirmative – an affirmation of a fact existing when the
contract begins
4. Promissory – a statement by the insured concerning what
is to happen during the term of the insurance
• i.e. – that the insured will install a fire extinguisher
at a stipulated future date
• A representation as to the future is deemed a
promise UNLESS it was merely a statement of belief/ expectation
IS REPRESENTATION PART OF THE CONTRACT?

• NO, it cannot qualify as an express provision in a contract
Concealment Representation
Defect Insurer withholds information of Insured makes erroneous statements
material facts
Right to Yes, whether concealment is Yes, whether misrepresentation is
rescind intentional or not intentional or not
Rules on Probable & reasonable influence of Probable & reasonable influence of the
Materiality the facts upon the party to whom the facts upon the party to whom the
communication is due, in forming his representation is made in forming his
estimate of the disadvantages of the estimate of the advantage/ disadvantages
proposed contract or in making of the contract or in making inquiries
inquiries
Utmost good faith Utmost good faith
• It is a collateral inducement to the contact and may qualify as an IMPLIED
WARRANTY (40)
• i.e. – Under 113, it is implied that a ship is seaworthy. A representation by
insured that its communication system is defective will qualify the implied
warranty that the vessel is seaworthy, hence the insured can still recover loss
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 (41)
• A representation must be presumed to refer to the date on which the
contract goes into effect (42)
WHEN REPRESENTATION is said to be FALSE

• When facts fail to correspond with its assertions or stipulations (44)
• There is false representation if it is true at the time it is made but false at
the time the contract takes effect
– i.e. – Insured states that he has never been afflicted with pneumonia at
application, but if in the meantime, he is afflicted before the policy takes
effect & he does not disclose – there is false representation
• NO false representation if it is TRUE at the time the contract takes effect
although false at the time it is made
– i.e. – Insured states at application that vessel is in Tokyo but is really in
HK, no false representation if at issuance the vessel is already in HK
MUST INSURED COMMUNICATE INFORMATION RECEIVED FROM 3RD PERSONS

• When a person has NO personal knowledge of facts – he may or may not
communicate such information to the insurer
• If he does communicate, he is NOT responsible for its truth (43) – hence
no misrepresentation
WHEN INSURED MUST COMMUNICATE INFORMATION FROM 3RD PERSONS?

• Information material to the transaction was acquired by an AGENT of the
insured, as knowledge of agent is also knowledge of principal
• i.e. – If a ship captain is aware of a defect that affect the seaworthiness of

the vessel, such should be communicated as the ship captain is under
obligation to disclose it to owner
EFFECT of MISREPRESENTATION ON A MATERIAL POINT

• RESCISSION – If it is false on a material point, whether affirmative or
promissory, the injured party is entitled to rescind the contract from the time
the representation becomes false
• EXCEPTION – the right to rescind is considered waived by acceptance of
the premium payments despite knowledge of the ground to rescind (45)
– i.e. – Insurer is aware of the lack of the required extinguishers required by
the policy
• NO waiver if the insurer had NO knowledge of the ground at the time of
the acceptance of the premium (i.e. – unauthorized driver, Stokes v Malayan,
127 SCRA 766)
HOW MATERIALITY DETERMINED

• Same as concealment (46) – probable & reasonable influence of the facts
upon the party to whom the representation is made in forming his estimate of
the advantage/ disadvantages of the contract or in making inquiries
WHEN RIGHT TO RESCIND is EXERCISED

1. False representation on material point, whether affirmative or
promissory
2. Exercised PREVIOUS to the commencement of an action on the
contract (48)
• Where an insurer interposed the defense in an action to claim
the proceeds that the contract is null & void – there is a contract to rescind
(Tan Chay Hing v West Coast Life, 51 Phil 80)
• Qualification – INCONTESTABILITY CLAUSE
THEORY & OBJECT OF INCONTESTABILITY CLAUSE (48)

1. On the part of INSURER – an insurer has or should have a reasonable
opportunity to investigate the statements made by applicant and that after a
definite period, it should no longer be permitted to question its validity
2. On the part if the INSURED – its object is to give the greatest possible
assurance that the beneficiaries would receive payment of the proceeds
without question as to validity of the policy
REQUISITES OF INCONTESTABILITY CLAUSE

1.It is a LIFE insurance policy
2. Payable on death of insured
3. Policy has been in force during the lifetime of the insured for at least
2 years from the date of issue or last reinstatement
• i.e. – Philam issued policy on Nov 6, 1973. Insured died on
Apr 26, 1975. The beneficiaries claimed but the insurer denied the claim
on Sept 11, 1975 and rescinded the policy on the ground of
misrepresentation & concealment. HELD – Insurer has two years from date
of issue or last reinstatement within which to contest the policy whether
the insured still lives within the period or not
DEFENSES NOT BARRED BY INCONTESTABILITY CLAUSE EVEN AFTER LAPSE OF 2

YEARS
1. Non-payment of premiums
2. Lack of insurable interest
3. Cause of death was NOT covered by terms of the policy
4. Fraud was particularly of a vicious type, wherein:
a. Policy was taken in furtherance of a scheme to murder the
insured
b. The insured substituted another for the medical
examination
c. 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. Necessary notice or proof of death was NOT given
7. Action is NOT brought within specified time in policy – in no case
should exceed 1 year (63)
EFFECTS OF INCONTESTABILITY CLAUSE

The insurer can NO longer
a. Escape liability tender the policy or
b. Be allowed to prove that the policy is void or
c. Rescind the policy by reason of concealment/ misrepresentation
by the insured or agent of the insured
POLICY
• Written instrument in which a contract is set forth (49)
HOW CONSTRUED
• Generally, in favor of the insured and against the insurer
• The burden of proving that the terms of the policy have been explained is
upon the party seeking to enforce it
• The claim of the beneficiary that since the insured was illiterate and spoke
Chinese only, she could not be held guilty of concealment because the
application and policy was in English (Tang v CA, 90 SCRA 236)
FORM
• It shall be printed and may contain blank spaces any word, phrase, clause,
mark, sign, symbol, signature, or number necessary to complete it shall be
written in blank spaces (50)
• Riders, clauses, warranties, endorsements purporting to be part of the
contract and which are attached to the policy is NOT binding on the insured
UNLESS the descriptive title of the same is also mentioned and written on the
blank spaces provided in the policy
• If pasted or attached to the original policy at the time it was issued –

signature of the insured is NOT necessary to make it binding
• If pasted after original policy is issued – it must be counter-signed by the
insured UNLESS applied for by the insured
• No riders, clauses, warranties, endorsements shall be attached, printed or
stamped on the policy UNLESS the form of such application has been approved
by the Insurance Commissioner
DEFINITIONS
1. RIDERS – are forms attached to the policy when the company finds it
necessary to alter or amend the applicant’s answer to any question in the
application
2. CLAUSES – forms containing additional stipulations
3. WARRANTIES – written statements/ stipulations inserted on the face of the
contract or incorporated by proper words or reference where the insured
contracts as to the existence of facts, circumstances, or conditions – the
truth of which are essential to the validity of the contract
4. ENDORSEMENTS – agreements not contained but may be written or
attached to the policy to change or modify a part thereof
WHAT A POLICY MUST SPECIFY (51)

1. Parties between whom the policy is made
2. Amount to be insured EXCEPT in open or running policy
3. Premium to be paid OR if premium is to be determined at termination of
contract, a statement of basis & rates upon which the final premium is to be
determined
4. Property or life of insured
5. Interest of insured in property insured, if NOT absolute owner
6. Risks insured against
7. Period during which insurance is to continue
COVER NOTES (52)

• Written memorandum of the most important terms of a preliminary
contract of insurance intended to give protection pending investigation
• Effectivity – 60 days (WON premium is paid) and then a policy must
be issued in lieu thereof
• It may be extended or renewed beyond 60 days with written approval
of Commissioner if he determines that such extension is not contrary to and is
not for the purpose of violating Insurance Code
• PRELIMINARY contract of PRESENT INSURANCE – true cover note,
coverage is effective immediately
• Preliminary EXECUTORY contract of insurance – coverage at a later
date
• RULES of JOYCE – rules to resolve questions of validity of insurance
issued by agents of insurance companies:
1. It is a valid cover note if the act of accepting risk & issuing
cover note is within authority of an agent
2. If authority in accepting & issuing cover note is present but

subject to the condition that principal must approve, then the cover note
is CONDITIONAL and covered only upon approval
3. If acceptance/ issuance is within authority but subject to
rejection – THEN covered now and coverage stops when subsequently
rejected
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 (53)
• i.e. – the designation of a sister as sole beneficiary cannot be defeated
by the contention of the plaintiff that proceeds belong to the estate of
the insured was disregarded as insurance is to be governed by special
law, NOT by the law covering donations or successions (Del Val v Del
Val, 29 Phil 534)
• MAY 3rd PERSONS SUE INSURER – Unless otherwise specified in the
policy, the 3rd person may sue if:
a. Insurance contract contains a stipulation in favor of a 3 rd
person, the latter though not a party may sue to enforce before
contract is revoked by the parties
– Insurance co undertook to indemnify any authorized
driver who was driving the car insured. Coquia, while driving the
insured car, met an accident & died. His heirs were allowed to
sue insurer, the policy being considered I the nature of a
contract pour atrui and therefore, enforcement may be
demanded by a 3rd party for whose benefit it was made (Coquia
v Fieldmen Insurance, 26 SCRA 179)
b. Insurance contract provides for indemnity against liability to
3 persons (3RD PARTY LIABILITY)
rd
– Insured procured insurance that would indemnify him against all

& any sums which he may be legally liable to pay in respect to
the death or bodily injury to any person. A jeepney covered by
the insurance had bumped Guingon & caused his death. The
insurance co was held to pay for indemnity for liability to 3 rd
person
• TEST to determine if a 3rd person may directly sue the insurer of the
wrongdoer
a. If contract provides for indemnity against liability to
3rd persons – then the latter to whom the insured is liable may
directly sue the insurer
b. If insurance is for indemnity against actual loss or
payment – then the 3rd person cannot sue the insurer and
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 (54)
• If not indicated, it is as if the insurance is taken out by agent/ trustee

alone, in effect principal has no right against insurer
3. If a partner or part owner effects insurance, it is necessary that terms of the
policy should be such are applicable to the joint or common interest so that
it may be applicable to the interest of his co-partners/ owners (55)
• Policy must state that interest of all is insured – if not, it is only interest of
one getting the policy that is insured
4. When the description of the insured in the policy is so general that it may
comprehend any person or any class of persons, the one who can show that
it was intended to include him can claim the benefit of the policy (56)
• In a fire insurance where the insured is Yap & Associates, X must prove
he is a partner to be able to recover his share
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 of
the insure (57)
• The proceeds become payable to who may be the owner at the time the
loss or injury occurs
• Exception is Sec 20 – A change of interest in any part of the 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 in the insurance is vested in the SAME person
EXCEPTIONS:
a. Change of interest after the loss;
b. Change of interest on one or more of several things separately
insured;
c. Change of interest by will or succession; and
d. Transfer of interest by a partner, joint owner or common
owner, to another partner, joint owner or common owner.
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 (58)
• Exception – Sec 20 – 24, 57
1980 BAR: A insures his house for P10T commencing January 1, 1952. On Feb 15,
A sold the house to B for P15T without transferring the fire policy to B. On April
20, the house burned down due to an accidental fire. Can A or B collect the
proceeds of the policy?
Neither A nor B can collect under the policy. Transfer of interest in property
without transfer of interest in insurance suspends the latter until the interest in
the property and in the insurance vest in the same person. In this case, the
interests in the object and in the insurance are in different persons at the time of
the loss, thus, none can recover under the policy.
SUBROGATION (Art 2207, Civil Code)

Philippine-American General Insurance Co (PAGI) v CA, June 11, 1997
Facts: Coca-cola loaded onboard M/V Asilda, owned by Felman Shipping Lines, 7500 cases of coca-
cola bottles to be transported from Zamboanga to Cebu. The shipment is insured with PAGI. The
vessel sank. Coca-cola filed its claim with Felman for recovery of damages which was denied.
Coca-cola filed its claim with PAGI and it was paid P755,250. PAGI sought recovery from Felman but
the latter refused:
Issue: Can PAGI recover from Felman?
Held: Yes. Under Art 2207 of the Civil Code, if the plaintiff's property has been insured, and he has
received indemnity from the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or injury.
Federal Express Corporation v American Home Assurance Company and Philam Insurance
Company, Inc., GR 150094, August 18, 2004
HOW SUBROGATION TAKES PLACE IN A CONTRACT OF INSURANCE
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods,
the insurer’s entitlement to subrogation pro tanto equips it with a cause of action in case of a
contractual breach or negligence. In the exercise of its subrogatory right, an insurer may proceed
against an erring carrier. To all intents and purposes, it stands in the place and in substitution of
the consignee.
EXCEPTIONS to the subrogation rule:

1. When the insured, by his own act, releases the party at
fault from liability;
2. When the insurer pays the insured without notifying the
carrier who has in good faith settled the insured’s claim for loss;
3. When the insurer pays the insured for a loss excepted
from the policy; and
4. When LIFE insurance is involved.
KINDS OF INSURANCE POLICY

1. Open policy
• One in which the value of thing insured is NOT agreed upon BUT is left
to be ascertained in case of loss (60)
• What is mentioned as amount is the MAXIMUM limit of the insurer’s
liability
• In case of loss, the insurer pays only the actual cash value at the time
of loss
2. Valued policy
• One which expresses on its face that the thing insured shall be valued at
a specified sum (61)
• Valuation of property insured is conclusive between the parties
• In absence of fraud or mistake, such value will be paid in case of total
loss
3. Running policy
• One which contemplates successive insurances & 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/ indorsements (62)
• AKA floating policy – usually issued to provide indemnity for property
which cannot be covered by specific insurance because of a frequent
change in location & quantity
• i.e. – Insurance procured by retail establishment to cover its inventory

that fluctuates in quantity or is located in several areas
Valued policy Open policy

Proof of value of thing insured Not necessary Necessary
after loss
Agreement as to value Property insured valued at a Not agreed but left to be
specified sum – conclusive ascertained upon loss
• This does not violate the principle that a contract of insurance is a
contract of indemnity as long as the valuation is reasonable and is bona fide.
Problem: A constructed a house at a cost of P200T and insured it against fire for
the same amount. The policy was renewed every year. After 5 years, the value of
the house increased to P400T. One fourth of the house burned down. How much
can A recover?
If the policy is a VALUED policy, A can recover only P50T. If it is an OPEN policy,
he can recover his actual loss of P100T.
CAN THERE BE AGREEMENT AS TO PRESCRIPTION OF AN ACTION?

CAN PERIOD TO BRING AN ACTION BE LIMITED BY AGREEMENT?
• Yes, provided that the period agreed upon should not be less than 1 year
(63)
• If less than one year – agreement is void
• Period so agreed shall be considered as having commenced from the time
the cause of action accrues – date of insurer’s rejection of claim of the
beneficiary or of the insured
• No stipulated period or stipulation is void – the period of 10 years applies
(1144, NCC), it being a written contract
• If insured asks for RECONSIDERATION of the denial – the period is still
counted from time the claim is denied at the first instance – not
reconsideration as it gives insured a scheme or devise for delay until evidence
that may be used against him can be destroyed (Sun Life v CAR, 195 SCRA
193)
• Period does NOT run if action is brought against an agent of insurer.
PRESCRIPTIVE PERIOD for MOTOR VEHICLE INSURANCE – One year from denial of
claim – not date of accident (Summit Guaranty v De Guzman, 15 SCRA 389)
WHERE ACTION IS FILED – the claim becomes an action upon filing with the court
1. Courts
2. Insurance Commissioner – has concurrent jurisdiction with courts for claims
NOT exceeding P100,000
3. POEA/ DOLE – have power to compel a surety to make good on a solidary
undertaking in same proceeding where the liability of principal obligor is
determined
CANCELLATION of the POLICY (64)

• No policy other than life shall be cancelled by the insurer EXCEPT

upon prior notice thereof to insured
• No notice of cancellation shall be effective UNLESS it is based on the
occurrence, after effective date of the policy of one or more of the following
grounds:
1. Non-payment of premium
2. Conviction of a crime arising out of acts increasing the hazard insured
against
3. Discovery of fraud or material representation
4. Discovery of willful or reckless acts or omissions increasing the hazard
insured against
5. Physical changes in the property insured which result in the property
becoming uninsurable
6. A determination by the Commissioner that the continuation of the policy
would violate or would place the insurer in violation of the Code
FORM of NOTICE of CANCELLATION

• The notice must be (65):
1. In writing, mailed or delivered to the name insured at the address
shown in the policy
2. State the grounds relied upon
3. State that upon written request of the named insured, an insurer will
furnish the facts on which the cancellation is based
• i.e. – A fire insurance was cancelled on Oct 15, 1981. The insurer’s
clerk allegedly sent notice of cancellation by mail but there was no proof that it
was actually mailed or received. Insurer relies on presumption of regularity.
HELD: Considering the strict language of the law that no policy can be
cancelled without prior notice, it behooved on insurer to make sure that
cancellation was actually sent & received by insured (Malayan v Arnaldo, 156
SCRA 672)
• B insured his bldg against fire & made loss payable to mortagagee.
Upon cancellation, notice was sent to mortgagee. HELD: There was no valid
notice of cancellation. The notice is personal to insured and not to any
unauthorized person (Saura Import v Philippine International Surety, 8 SCRA
143)
DOES INSURED HAVE RIGHT TO RENEW HIS POLICY (66)

• Yes, in an insurance other than life, the named insured may renew policy
upon payment of premium due on effective date of the renewal UNLESS the
insurer, at least 45 days in advance of the end of policy, mails to insured its
intention NOT to renew OR to condition its renewal upon reduction of limits or
elimination of coverages
WARRANTY
• Statement or promise stated in the policy or incorporated therein by
reference, whereby the insured – expressly or impliedly – contracts as to the
past, present or future existence of certain facts, conditions or circumstances

the LITERAL truth of which is essential to the validity of the contract
FORM of warranties:
• No particular form is necessary to create warranty
• What is ESSENTIAL is that the parties (a) intend a statement to be, and if
so intended as a warranty it must be (b) included as part of the contract
• Existence of warranty depends upon the (a) intention of the parties, (b)
nature of the contract, (c) words used thereto
• In case of DOUBT – statement is presumed to be a REPRESENTATION not a
warranty
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 omitted after the policy takes effect
• A statement 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
• More onerous
• Courts will presume that the warranty is merely an affirmative
warranty UNLESS contrary intention appears
3. Express – a statement in the policy of a matter relating to the person or
thing insured, or to the risk as a fact and where the assertion or promise is
clearly set forth in the policy or incorporated therein by reference
• Can be affirmative or promissory warranties
• An express warranty made AT or BEFORE the execution of the policy
should be contained in (a) the policy itself, and (b) in another instrument
signed by the insured & referred to in the policy as making a part of it
• Includes a rider – it is part of the policy, need not be signed UNLESS 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 (a) general tenor of the policy or from the very
(b) nature of the insurance contract, a warranty is necessarily inferred or
understood
EFFECTS of VIOLATION of a warranty:

1. Rescission
• The violation of a material warranty or other material provision in the
policy on the part of either party entitles the other to rescind (70)
• When the insurer violates a warranty, like when it refuses to grant a loan
on the policy
2. Ordinarily, a breach of an immaterial provision does NOT avoid a policy
• Exception – if stipulations states that any breach avoids the policy, the
policy is avoided
3. If the breach is without fraud, the policy is avoided only from the time of the
breach – prior to the breach, policy is still effective
• A breach of warranty without fraud merely exonerates an insurer from
the time it occurs or where it is broken at its inception – prevents the
policy from attaching
• Effect – the insured is entitled to a pro-rate return of the premium paid
under (79b) OR all premiums, if the breach occurs at the inception of the
contract, as such is void & had never become binding
4. Causal Connection – unnecessary
• Even if violation did not contribute to the loss, other party may still
rescind
• i.e. – X insured his bldg against fire. Warranty stated that no hazardous
goods would be stored. X stored fireworks. Bldg burned & the fireworks
were discovered stored in are not affected by fire. Insurer was NOT held
liable as the storage had increased the risk (Young v Midland Textile, 30
Phil 617)
5. Non-performance does not avoid policy when before the arrival of time for
performance …(73)
a. The loss insured against happens – i.e. – warranty of
construction of firewall but fire occurs before period of compliance
b. The performance becomes unlawful at place of contract – i.e. –
law/ ordinance prohibits construction of firewall
c. Performance becomes impossible – i.e. – severe lack of
materials to construct
Warranty Representation
1. Part of contract 1. A mere collateral
2. Expressly set forth inducement thereto
in policy or incorporated therein by 2. May be oral or
reference written in another statement
3. Strictly & literally 3. Must be
performed substantially true
4. Presumed material 4. Must be shown to
5. Breach of warranty be material
is breach of contract itself 5. Misrepresentation is
ground to rescind contract
PREMIUM (2007 BAR)

• Agreed price for assuming and carrying the risk
WHEN IS INSURER ENTITLED TO A PREMIUM

• Insurer is entitled to the payment of
premium as soon as thing insured is exposed to the peril insured against
• GR: Notwithstanding any agreement to the contrary,
NO insurance policy issued is valid & binding UNLESS and until premium is paid
– EXCEPT:
a. Life or industrial life insurance, whenever
grace period applies – premium is payable monthly or oftener
b. Insurer makes written acknowledgment of

premium (77) – CONCLUSIVE (78) – only to make policy binding and not
for the purpose of collecting the premium
c. When obligee has accepted bond/ suretyship
contract (177) – bond/ surety contract becomes valid and enforceable
irrespective of whether or not the premium is paid by the obligor of the
surety
d. Parties agreed to installment payment of the
premium and partial payment has been made at the time of the loss
e. 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 if the premium is paid after
the loss but within the credit term – estoppel bars insurer from taking
refuge under Sec 77 (UCPB General Insurance Co v Masagana Telemart,
April 4, 2001)
• There is no excuse for non-payment of
premium since payment on time is of the essence
– The only recognized exception is when failure is due to the wrongful conduct
of insurer
– i.e. – refusal to accept a validly tendered payment of premium
EFFECT OF PARTIAL PAYMENT

• Ordinarily, the obligation to pay premium when due is considered an
indivisible obligation – hence, forfeiture is not prevented by part payment
UNLESS payment by installment has been (1) agreed upon or (2) is the
established practice
• Basic principle of equity & fairness would not allow insurer to collect &
accept installments and later deny liability as premiums were not paid in full
(Phil Phoenix Surety v Woodworks, 20 SCRA 1270; Makati Tuscany
Condominium v CA, 215 SCRA 462)
• Any partial payment, when there is an agreement that the policy shall not
be effective pending payment of full premium, was deemed in the concept of
deposit (Tibay v CA 257 SCRA 126)
• Payment to insurance AGENT or broker is payment to the insurance
company
PAYMENT BY PROMISSORY NOTE OR CHECK

• Payment by PN or check is NOT sufficient to make the policy binding –
under 1249 of the Civil Code, such produces payment only when it is
encashed
American Home Assurance Co v Chua, June 28, 1999

Facts: Chua procured an insurance coverage on his stock-in-trade to expire on March 25, 1990. On
April 5, Chua paid by check to the insurance agent (James Uy) for the renewal of the policy. The
agent delivered a Renewal Certificate to Chua. On April 6, the insured properties were burned.
Chua asked for indemnification but the insurance company refused.
Issue: Can Chua recover from the policy?
Held: Yes. The Renewal Certificate issued to Chua contained the acknowledgement that the
premium had been paid. It is an admission in itself of the payment made through personal check.
Thus, there was a valid payment which would entitle Chua recovery of the proceeds.
WHEN insured entitled to a RETURN OF PREMIUMS PAID

1. To whole premium – when NO part
of his interest in thing insured is exposed to any of the peril insured against
(79a)
• Insurance on a vessel of a
voyage that did not take place
2. A portion – where insurance is
made for a definite period of time & insured surrenders policy before
expiration of period
• It does NOT apply if:
a. The policy is NOT for a definite period
b. A short period rate – period is less than a year & a
rate has been agreed to f the policy is surrendered
c. Life insurance policy – indivisible but he has a cash
surrender value
3. When contract is voidable on
account of fraud or misrepresentation of insurer or agent (81)
• Insurer makes representation not contained
in the policy since policy is not that applied for
4. Where contract is voidable on
account of facts, the existence of which the insurer is ignorant without his
fault (81)
• X insures his car not knowing that he has no
insurable interest since his car had been totally damaged
5. When by any default of the
insured other than actual fraud, the insurer never incurred any liability
under the policy
• A vessel insured for a trip but was destroyed
before the trip
6. To a ratable return proportional to
amount by which the aggregate sum insured in all policies exceeds the
insurable value – in case of over-insurance
TO WHOM PREMIUMS ARE RETURNED – To the insured who paid them UNLESS
otherwise stated
WHEN ARE PREMIUMS NOT RECOVERABLE

1. If peril insured against has existed, and insurer has been liable for any
period – period being entire & indivisible (80)
• The vessel is insured for a voyage that will take 5 days but 2 days into
the voyage, the policy is surrendered
2. In life insurance (79b)
3. Insured is guilty of fraud or misrepresentation (81)
LOSS AND NOTICE of LOSS

1. Loss of which a peril insured against is the proximate cause
• Proximate cause – that which, in a natural & continuous sequence,
unbroken by any efficient intervening cause, produces an injury & w/out
which the injury would not have occurred
• The insurer is NOT liable for a loss which the peril insured against was
due SOLELY to a REMOTE cause – one that may contribute to a loss
• RULES to DETERMINE proximate cause
a. Single cause which is an insured peril – clearly it is the
proximate cause & there is liability
b. Concurrent causes with NO excluded peril – there is liability if
one of the causes is an insured peril & the others are ignored
c. Concurrent causes with an excepted peril – the claim will be
outside the scope of the policy
d. If results of the operation of the insured peril can be separated
from the excepted peril – insurer is liable
e. Where a number of causes operate one after the other & the
original cause happens to be a peril insured against - there is liability
2. Loss caused by efforts to rescue the thing insured from a peril insured
against that would have otherwise caused a loss, if in the course of the
rescue, the thing is exposed to a peril 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 against
• The principle of proximate cause is extended to loss
incurred while saving the thing insured
3. Where a peril especially excepted in a contract of insurance, a loss (which
would not have occurred but for such peril) is excepted although the
immediate cause of the loss was a not excepted peril
• The immediate cause is the cause/condition nearest to the time & place of
injury
• Insurer – liable if both proximate cause & immediate cause is excepted
• Insurer – liable if proximate cause is excepted & immediate cause is not
4. An insurer is not liable for a loss caused by the willful act or through the
connivance of the insured.
• Insurer – liable if loss by negligence of the insured or insured’s agents or
others
• Reason why insurer is still liable – one of the principal reasons of procuring
the insurance is to protect himself (insured) against the consequence of
his own negligence or that of his agents
• BUT if the negligence is so gross as to be a sufficient basis for fraudulent
intent – it can amount to WILLFUL act
TRANSFER of CLAIMS
• The insured has an absolute right to transfer his claim against the insurer
AFTER the loss occurs
• An agreement NOT to transfer claim of insured after the loss happens –

VOID if made BEFORE the loss since it hinders the transmission of property
EXCEPT in life insurance
• Neither does it affect the insurer as its liability is already fixed & what is
actually assigned is the money claim NOT the contract itself
• Exception – the transfer of fire insurance policy to any person/company
who acts as an agent for or otherwise represents the issuing company is
PROHIBITED & void insofar as it affects other creditors of the insured (173)
NOTICE of LOSS
– When given and by whom – by the (a) insured or (b) some person
entitled to benefit from the insurance WITHOUT unnecessary delay
– If not given, insurer is exonerated (88)
– Without unnecessary delay – w/in a reasonable time depending on
circumstances of a peculiar case, although courts have construed the
requirement liberally in favor of the insured
– SPECIFIC application to FIRE insurance – due to the nature of the loss
& urgent need to determine cause thereof.
– REASON – the longer the period that lapses from the time of loss, the
greater is the opportunity to tamper with the evidence in preparation of a
fraudulent claim
PROOF of loss
– It is not necessary to give Preliminary Proof of Loss even if policy
requires it
– Preliminary Proof of Loss – evidence given the insurer of the
occurrence of the loss, its particulars, data necessary to enable it to determine
liability & amount thereof
– SUFFICIENT is the best evidence which he has in his power at the time
(89)
WHEN DEFECTS in notice or proof of loss deemed WAIVED by the insurer:

1. Insurer fails to specify to the insured any defect which the
insured can remedy without delay
2. Insurer denies liability on a ground other than the defect
in the notice or proof of loss (90)
WHEN DELAY in giving NOTICE is WAIVED:

1. If delay is caused by any act of the insurer
2. If insurer omits to make an objection promptly & specifically on that ground
(91)
REQUIREMENT of CERTIFICATION/TESTIMONY of a 3rd person:

1. If in giving preliminary proof of loss, a certification of a 3 rd person other than
the insured is required – it is sufficient for the insured to use reasonable
diligence to procure it
2. In case of refusal – insured can furnish REASONABLE evidence to the insurer

that such refusal was NOT induced by any just grounds of disbelief in the
facts necessary to be certified or testified (92)
WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVING

NOTICE OF LOSS
1. 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 violated the contract
• The right of subrogation accrues upon payment of the insurance claim
• Subrogation takes effect by operation of law and does NOT require
consent of wrongdoer (Fireman’s Fire Insurance v Jamilla & Company, 70
SCRA 323)
2. There is NO subrogation in
a. Life insurance – as it is not a contract of indemnity
b. Proximate cause of loss – gross negligence of insured
c. Insurer pays the insured a loss NOT covered by the policy
The insured is no longer entitled to collect from wrongdoer if the amount that he
received from insurer is FULLY compensated for the loss.
DOUBLE INSURANCE
• Where the same person is insured by several insurers separately in
respect to same subject or interest (93)
• REQUISITES
a. Same person is insured
b. Several insurers
c. Subject insured is the same
d. Interest insured – same
e. Risk or peril insured against – same
• Prohibition to prevent over-insurance, thus preventing fraud
EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE (94)

1. Unless policy otherwise provides (i.e. – contribution clause), insured may
claim payment from insurers in such order as he may select up to the
amount for which the insurers are severally liable under their respective
contracts;
• House is insured with X Insurance for 10,000, with Y Insurance –
20,000, with Z Insurance – 20,000. The house is valued at 20T. In case of
loss, A can recover 10,000 from X Insurance and 10,000 from either Y or
Z
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;
• A owns a house valued at 40,000. A insured it with X Insurance for

35,000 and Y Insurance – 5,000. The value of the house with both
companies is 20,000. If house is lost, A can collect 5,000 from Y
Insurance and 15,000 from X
3. Where the policy under which the insured claims is an OPEN/ UNVALUED
policy, the insured must give credit, as against the full insurable value, for
any sum received by him under any policy;
• A insured his house with X Insurance for 40,000, with Y Insurance –
30,000, with Z Insurance – 20,000. The loss is 70,000. If Y and Z have
paid 50,000 then X can only pay 20,000
4. Where insured receives any sum in excess of the (a) valuation in case of a
valued policy OR the (b) insurable value in case of an unvalued policy, he
must hold such sums in trust for the insurers, according to their right of
contribution among themselves; and
• If A collects 35,000 from X Insurance and 5,000 from Y Insurance when
the value of house is only 20,000, he must hold the excess of 20,000 in
trust
5. In relation to (4) – each insurer is bound as between himself & other insurers
to contribute ratably to the loss in proportion to the amount for which it is
liable under his contract
• Principle of Contribution or CONTRIBUTION CLAUSE – 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
• FORMULA:
Amount of insurer’s policy x Amount of loss = Share of
insurer
Total Amount of Policies
TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE

Whether the insured can be directly benefited by recovering on both policies in
case of happening of the risk – If YES, there is double insurance
IS DOUBLE INSURANCE VALID

1. If there is an OTHER INSURANCE CLAUSE – then it will prevent enforcement
of policy, the policy will be null & void
• Other insurance clause – one that prevents other insurance on the
property EXCEPT with the consent of the insurance company
2. NO other insurance clause – then double insurance is allowed BUT
provisions of 94 must be followed since property insurance is a contract of
indemnity
DOUBLE insurance OVER-insurance

2 or more insurers 1 insurer is sufficient
Total amount of the policies need NOT exceed The value must always be in excess of the
the value of the insurable interest insurable interest
REINSURANCE
• Occurs when an insurer procures a 3rd person to insure him against loss or
liability by reason of an original insurance (95)
WHEN REINSURANCE COMPULSORY

1. When a non-life insurer insures in any one risk or hazard an amount
exceeding 20% of its net worth, the insurer needs reinsurance of the excess
over such limit (215, par 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 (275)
REINSURANCE DOUBLE insurance

Insurer becomes the insured Insurer remains an insurer
Subject matter – insurer’s risk or liability Subject matter – property
Different risk and interest are insured Same risk and interest is insured
WHAT MUST BE COMMUNICATED WHEN ORIGINAL INSURER OBTAINS

REINSURANCE
• EXCEPT in automatic reinsurance treaties since such contracts are self-
executing and the obligation attaches automatically – the information required
to be communicated herein could NOT influence the reinsurer in deciding
whether or not to accept the reinsurance because it is automatic
• Automatic reinsurance treaties – where 2 or more insurance companies
agree in advance that they will reinsure a part of any line of insurance taken by
the other
• He (original insurer) must communicate:
1. All representations of the original insured
2. All information or knowledge he possesses whether previously or
subsequently acquired, which are material to the risk (96)
• The fact that representations on original insured were untrue at the time
of the execution of the reinsurance will not affect liability of insurer, provided
they were true at the time of the original contract
WHAT KIND of CONTRACT IS REINSURANCE

• Presumed to be a contract of indemnity against liability (not merely
against damage) (97)
• RULE: Reinsurer is NOT liable to reinsured for loss under an original policy
if the reinsured is not liable to original policy holder
• BUT when reinsured becomes liable under the original policy, it may
obtain payment from reinsurer even before paying the loss to the original
insured
• NOTE – the subject of the reinsurance contract is the insurer’s risk, NOT
the property insured in the original policy, thus it is NOT necessary that the
insurer first pay on a claim on the original policy before claiming from the
reinsurer
EXTENT OF LIABILITY OF REINSURER

• Measured by the liability of reinsured to the original policy holder,
PROVIDED it does NOT exceed the amount of reinsurance
• IF original insured & insurance company settles for LESS – the liability of
reinsurer is still only up to what is paid by the reinsured. Otherwise, the original
insurer profits & thus violates the principle that it is a contract of indemnity
INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF REINSURANCE

• The original insured has NO interest in the contract of reinsurance (98)
• Only the reinsured can claim against the reinsurer
WHEN ORIGINAL INSURED HAS DIRECT RECOURSE AGAINST THE REINSURER

The original insured may directly sue the reinsurer if the reinsurance policy
clearly contains a stipulation pour autrui in his favor. Such stipulation, however,
should NOT in any way curtail or affect the original insured’s recourse to the
original insurer and the latter’s recourse against the reinsurer.
CLASSES OF INSURANCE
1. Marine Insurance
2. Casualty Insurance
3. Suretyship
4. Life Insurance
5. Fire Insurance
MARINE INSURANCE
Insurance against loss or damage to (99):
(a) Vessels, craft, aircraft, vehicles, goods freights, cargoes, merchandise,
effects, disbursements, profits, moneys, securities, choses in action,
evidences of debt, valuable papers, bottomry, or respondentia interest and
all other kinds of property and interest 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,
• Including war risks, marine builder’s risk, and all personal property
floater risks (follows property wherever it may be)
(b) Person or property in connection with or appertaining to marine,
island marine, transit or transportation insurance, including liability for loss
in connection with the construction, repair, operation, maintenance, use of
the subject matter of the insurance
• But NOT including (1) life insurance or (2) surety bonds or (3) insurance
against loss by reason of bodily injury to any person arising out of the
ownership, maintenance, use of automobiles
(c) Precious stones, jewels, jewelry, precious metals whether in the

course of transportation or otherwise
(d) Bridges, tunnels or other instrumentalities or 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, dry docks, marine railways, dams and
appurtenant facilities for the control of waterways
(e) 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 un use in ocean or inland
waterways, including liability of the insured for personal injury, illness or
death or for loss or damage to the property of another person
NOTE – that the definition of marine insurance is really TRANSPORTATION

insurance, which is a kind of insurance which is concerned with the property in (or
incidental to) transit as opposed to property perils at a generally fixed location
BUT it does not include normal motor vehicle insurance which is related
separately by law
REQUISITES OF CO-INSURANCE in a MARINE INSURANCE

1. There must be partial loss; and
2. The insurance coverage is LESS than the value of the
property insured.
DIVISIONS OF TRANSPORTATION INSURANCE

1. Ocean Marine Insurance – pertaining primarily to sea perils of ships and
cargoes
2. Inland Marine Insurance – pertaining primarily to land over land (sometimes
water) transportation perils of property shipped by railroads, motor trucks,
airplanes and other means of transportation
4 BASIC POLICIES
1. Property in transit – providing protection to property frequently exposed to
loss while in transport from one place to another
2. Bailee liability – providing protection to persons who have temporary
custody of goods or personal property of others
3. Fixed transportation property – providing protection to fixed property
considered aids to the movement of property, like bridges & tunnels
4. Floater – providing protection to personal property (such as precious stones,
jewelry, works of art) wherever it may be located subject always to the
territorial limits of the contract & need not necessarily be in the course of
transportation
FORMS OF MARINE INSURANCE

1. Property insurance – indemnifying the insured for loss or damage to
property (Par 1, Sec 99)
2. Liability insurance – protecting the insured against the consequences of

legal liability for loss or damage to property or for personal injury, illness or
death of a person (Par 2, Sec 99)
RISKS INSURED AGAINST

1. PERILS of the SEA – all kinds of marine casualties and damages done to the
ship or goods at sea by the violent action of the winds and waves, one that
could NOT be foreseen and is NOT attributable to the fault of anybody
• Examples: shipwrecks, foundering, stranding collision, jettisoning of
cargo, if made for purpose of saving the vessel
2. Fire
3. Enemies
4. Pirates
5. Thieves
6. Jettison
7. Surprisals
8. Taking at sea
9. Arrests
10. Restraints
11. Detainment of kings, princes and people of what nation
12. Condition or quality
13. Barratry of the master
14. All other perils, losses misfortunes that have or shall come to hurt,
detriment or damage of said goods, merchandise, ship or any part thereof
WHAT ARE NOT COVERED

• Perils of the SHIP – losses or damages that result from:
a. Natural and inevitable action of the sea
– Insurance upon cargo of rice, when sea water entered the
compartment where rice was found through a steel pipe
– Relative; vessel should be seaworthy
b. Ordinary wear and tear of the ship
– Insured loaded logs unto a barge. Logs are covered by
insurance. Barge sank due to improper loading and leaks because
the barge was cot provided with tarpaulins that could have
prevented the barge from retaining sea water splashing into it
during the voyage
c. Negligent failure of ship owner to provide vessel with proper
equipment to convey the cargo under ordinary conditions
– Ship is unfit to carry cargo
WHO MUST CHECK ON SEAWORTHINESS OF A VESSEL

• Since there is an implied warranty of seaworthiness, it becomes the
obligation of (a) cargo owner or the (b) insured to look for a reliable common
carrier that keeps its vessels seaworthy. The insured may have no control on
the vessel but it has full control in the choice of common carrier
PERILS INSURED IN AN “ALL RISKS POLICY”

• A special insurance extending to all risks that are unusually contemplated

and will cover all losses EXCEPT such that may arise from intentional fraud,
intentional misconduct or that otherwise excluded
• Also includes all losses whether arising from a marine peril or not, such as
pilferage during a war (Filipino Merchants v CA 179 SCRA 638)
BARRATRY – willful act of the master & crew in pursuance of some fraudulent or
unlawful purpose without the consent of the owner and to the prejudice of his
interest
• Example: Burning of the ship or unlawfully selling the cargo
INCHMAREE CLAUSE – provision in marine insurance that it shall cover the loss or
damage to the hull or machinery through negligence of the master, charters,
mariners, engineers, or pilots THROUGH explosion, bursting of boilers, breakage
of shafts or any latent defect in the hull or machinery NOT resulting from want of
due diligence
ALL RISKS CLAUSE – one that covers any loss other than a willful act of the
insured and avoids putting upon the insured the burden of establishing that the
loss was due to a peril within the policy’s coverage, whether arising from a marine
peril or not provided the risk is NOT excluded
LOANS IN MARINE INSURANCE

1. BOTTOMRY – loan payable ONLY IF vessel, given as a security for said
loan, arrives safely at port from contemplated voyage
2. RESPONDENTIA – loan payable ONLY upon the safe arrival in port of
the goods given as security
INSURABLE INTEREST IN OCEAN MARINE INSURANCE

1. Owner of a vessel has insurable interest in the vessel and 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, insurer is liable only for the part of the loss which
insured cannot recover from the charterer (100)
2. Insurable interest of owner of a ship hypothecated by bottomry is only
EXCESS of its value over amount secured by bottomry
• Respondentia, bottomry are contracts in the nature of a mortgage as the
owner borrows money for the use, equipment or repair of the vessel or a
definite term with the ship as security with maritime or extraordinary
interest on account of the risks borne by the lender, it being stipulated
that if the ship be lost during the voyage or within a limited period, the
lender also losses his money
• Note that the lender has insurable interest to the extent of a loan
• Example: Owner of a vessel valued at P300,000 as security for a loan of
P200,000. His insurable interest is the excess of the value of the vessel
over the loan (P100,000). If the vessel is lost, owner does not have to
pay loan of P200,000
3. Owner of a vessel has also insurable interest in expected freightage, which

according to ordinary course of things he would have earned but for the
intervention of a peril insured against or other peril incident to the voyage
(103)
• FREIGHTAGE – benefits derived by the owner from:
a. Chartering of the ship
– Insurable interest in freightage exists when ship has
broken ground on the chartered voyage
b. Its employment for the carriage of his own goods on those of
others (102)
– Insurable interest exists when:
ii. Goods are actually on board or there is a contract to put
them on board AND
iii. Goods are ready for the specified voyage (104)
PARTIES OTHER THAN OWNER who has insurable interest

1. One who has interest in thing from which profits are
expected to proceed, has insurable interest on the profits (105)
• Example: Owner of cargo transported on a vessel
has insurable interest on the cargo and on the expected profits from a
future sale
2. The charterer of a ship has insurable interest to the extent
that he is liable to be damnified by its loss (106)
• A charters B’s vessel on condition that A would pay B in case of loss of
amount of P300,000. A has insurable interest to the extent of P300,000.
CONCEALMENT IN MARINE INSURANCE

A party is bound to communicate:
1. Such facts that must be within his knowledge
• Concealment requires knowledge of the fact concealed by the
party charged w/ concealment
2. Facts must be material to the contract
• It must be of such nature that had the insurer known it, he would not have
accepted the risk or demanded a higher premium
3. Other party (insurer) had NO means of ascertaining such facts
4. Party w/ duty to communicate makes NO warranty (28)
• Existence of a warranty makes the requirement to disclose superfluous
• An intentional & fraudulent omission on part of one insured to
communicate info on a matter proving or tending to prove falsity of a
warranty is entitled to rescind (29)
• i.e. – Warranty that the ship is seaworthy – the intentional & fraudulent
omission of the insured to state that the ship’s communication equipment
is out of order will entitle the insurer to rescind
5. Information that he POSSESSES that are material to the risk
• NOTE that 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
6. To state the exact and whole truth in relation to all matters that he
represents, or upon inquiry discloses or assumes to disclose
• EXCEPT those that 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 Sec 30 (107)
7. Information, belief or expectation of a 3rd person, in reference to a material
fact, which is material
PRESUMPTION OF A PRIOR LOSS

• Insured in marine insurance is presumed to have knowledge AT THE TIME
OF INSURING of a prior loss IF information might possibly reached him in usual
mode of transportation and at usual rate of communication (109)
EFFECTS OF CONCEALMENT
1. General rule – injured party entitled to rescind
2. The general rule must yield to Sec 110 – EXONERATES the insurer from a
LOSS RESULTING FROM RISKS CONCEALED as related to (NLLWU):
a. National character of the insured
b. Liability of the thing insured to capture & detention
c. Liability to seizure from breach of foreign laws of trade
d. Want of necessary documents
e. Use of false/ simulated documents
Examples:
a. If the vessel is seized due to lack of documents, insurer is
exonerated
b. If vessel is lost due to a storm, the insurer is liable despite
concealment due to lack of the NLLWU
ORDINARY INSURANCE MARINE INSURANCE

Opinion, belief of a 3rd person or own judgment Belief, expectation of a 3rd person in reference
of the insured is NOT material and need not be to a material fact and has to be communicated
communicated (35)
A causal connection between the fact concealed Any of the matters enumerated in Sec 110
and cause of loss is not necessary for the exonerates the insurer from loss, if the loss
insurer to rescind results from the fact concealed
REPRESENTATION IN MARINE INSURANCE; WHEN INSURER ENTITLED TO RESCIND

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 (111)
• BUT the eventual falsity of a representation as to EXPECTATION does NOT,
in the absence of fraud, avoid a contract of marine insurance(112)
IMPLIED WARRANTIES IN MARINE INSURANCE

a. In every contract of marine insurance upon a ship or freightage or upon anything
which is the subject of marine insurance, there is an implied warranty that the ship is
seaworthy (113)
b. 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 (120)
c. That the vessel shall not make any improper deviation from the intended voyage
d. That the vessel will not or does not engage in an illegal venture
1. In every contract of marine insurance upon a ship or freightage or upon

anything which is the subject of marine insurance, there is an implied
warranty that the ship is seaworthy (113)
• A ship is SEAWORTHY when it is reasonably fit to perform the service
and to encounter the ordinary perils of the voyage, contemplated by the
parties to the policy (114)
• Note that it is relative and is made to depend on the circumstances
• WHEN IMPLIED WARRANTY OF SEAWORTHINESS IS COMPLIED WITH
– General Rule: The implied warranty of seaworthiness is
complied with when it is seaworthy at the time of the commencement
of the risk
– Exception:
a. When 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 insurance is upon CARGO, which by the terms of the
policy, description of the voyage, or established customs of
trade, is required to be transshipped at an immediate port –
each vessel upon which the cargo is shipped or transshipped
must be seaworthy at the commencement of each particular
voyage (115)
c. Where different portions of the voyage contemplated in the
policy differ in respect to the things requisite to make the ship
seaworthy – it must be seaworthy at the commencement of
each portion (117)
Example: the voyage will pass thru rivers, then seas – the
warranty is not complied with if at the time it goes out to
sea, it is not seaworthy to encounter the perils of the sea
• TO WHAT DOES THE WARRANTY OF SEAWORTHINESS EXTEND TO:
a. Condition of the structure of the ship
b. Ship be properly laden or loaded with cargo
c. Ship is provided with a competent master, sufficient
number of officers and seamen
d. Ship must have the requisite equipment and
appurtenances – ballasts, cables, anchors, cordage, sails, food,
water, fuel, lights, and other necessary and proper stores and
implements for the voyage (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 shipowner’s interest from any liability arising therefrom (118) –
hence, if loss is NOT one due to the defect or the peril was not increased
by the defect, insurer is still liable
• While a ship may be seaworthy for purposes of insurance on it, it may

by reason of being UNFIT to receive cargo, be unseaworthy for the
purpose of insurance upon the cargo (119)
– Example: A cargo of wheat was laden on a
ship which had the port hole insecurely fastened at the time of
lading. In the course of the voyage, water entered the cargo area
and damaged the wheat. The ship was deemed unworthy with
reference to the cargo, hence the insurer of the was NOT liable
(Steel v State Line Steamship, cited in Go Tiaco v Union Society of
Canton, 40 Phil 40)
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 (120)
• This warranty arises ONLY when nationality or neutrality of the vessel or
cargo is EXPRESSLY warranted
3. That the vessel shall not make any improper deviation from the intended
voyage
• HOW INTENTED VOYAGE IS DETERMINED
a. When the voyage is described by the places of
beginning and ending, the voyage insured is one which conforms
to the course of sailing fixed by the mercantile usage between
those places (121)
b. When it is not fixed by mercantile usage, the voyage
insured by the marine insurance policy is that way between places
specified which to a master of ordinary skill and discretion would
seem the most natural, direct and advantageous (122)
• DEVIATION – is
a. A departure from course of the voyage as defined by 121 and 122
OR
b. An unreasonable delay in pursuing the voyage OR
c. The commencement of an entirely different voyage (123)
• WHEN DEVIATION IS PROPER
a. When it is caused by circumstances over
which the neither the master nor the owner of the ship has any
control (Ex. An ailment strikes the crew of the vessel)
b. When necessary to comply with a warranty,
OR to avoid a peril, whether or not the peril is insured against (i.e.
When repairs are necessary OR to avoid getting caught in a
conflict)
c. When made in good faith and upon
reasonable grounds of belief in its necessity to avoid a peril
(Deviate to avoid a storm)
d. When made in good faith, for the purpose of
saving human life or relieving another vessel in distress (Deviate to
give assistance)
• ANY deviation that is NOT so included is NOT PROPER (124, 125)
• CONSEQUENCE OF AN IMPROPER DEVIATION – insurer is NOT liable for

any loss happening to the thing insured subsequent to an improper
deviation (126)
4. That the vessel will not or does not engage in an illegal venture
LOSSES IN MARINE INSURANCE

• May be partial or total (127)
• Loss that is not total is PARTIAL (128)
KINDS OF TOTAL LOSSES (129)

1. Actual Total Loss
• CAUSES of total actual loss(130):
a. Total destruction of the thing insured;
b. Irretrievable loss of the thing by sinking or by being
broken up;
c. Any damage to the thing which renders it valueless
to the owner for the purpose that he held it; or
d. Any other event which effectively deprives owner of
possession, at the port of destination, of thing insured
• PRESUMED WHEN – from the continued absence of the ship without
being heard of (132) – length of time sufficient to raise this presumption
depends on the circumstances of the case
• If the vessel be PREVENTED, AT AN IMMEDIATE PORT, FROM COMPLETING
THE VOYAGE, by the perils insured against
– The liability of the marine insurer on the cargo continues
after they are reshipped (133)
– Such liability extends to damages, expenses of discharging,
storage, reshipment, extra freightage and all other expenses incurred in
saving the cargo reshipped UP TO the amount insured – NOTHING shall
render the insurer liable for an amount in excess of the insured value,
or if none, of the insurable value (134)
• EFFECTS Upon ACTUAL TOTAL LOSS,
a. The insured is entitled to payment without notice of
abandonment (135)
b. If the insurance is confined to an actual total loss, it
will NOT cover a constructive loss, BUT will cover any loss, which
necessarily results in depriving the insured of possession, at the
port of destination, of the entire thing insured (137)
2. Constructive Total Loss – when the person insured is given
a right to abandon under 139 (131)
• ABANDONMENT – act of insured by which, after a constructive total loss,
he declares to insurer the RELINQUISHMENT in its favor of his interest in
• An insured by a contract of marine insurance may abandon the thing
insured, or any portion thereof separately valued by the policy, or
otherwise separately insured AND recover a total loss WHEN THE CAUSE
OF THE LOSS IS A PERIL INSURED AGAINST IF
a. More than ¾ thereof in value is actually lost OR

would have to be expended to recover it from the peril
b. If it is injured to such extent as to reduce its value to
more than ¾ of value
c. If thing injured is a ship, and the contemplated
voyage cannot lawfully be performed without incurring either an
expense to the insured of more than ¾ the value of the thing
abandoned OR a risk which a prudent man would not take under the
circumstances
– Inability to continue, in order to continue insured spends ¾ of the
value of the vessel
d. If the insured is freightage or cargo or both – and
the voyage cannot be performed NOR another ship procured by the
master WITHIN a REASONABLE time with REASONBLE diligence to
forward the cargo without incurring the like expense or risk mentioned
in (c) ---- BUT freightage cannot be abandoned unless the ship is also
abandoned (139)
• Abandonment must be TOTAL and ABSOLUTE (140)
• When ABANDONMENT MADE – within a reasonable time after receipt of
RELIABLE information of the loss
• BUT where the information is of DOUBTFUL character, the insured is
entitled to a reasonable time to make an inquiry (141) – this is to enable
the insurer to take steps to preserve the property
• HOW NOTICE OF ABANDONMENT IS MADE
– By giving oral or written notice to the insurer
– BUT if ORALLY given – written notice of such must be submitted within
7 days from giving oral notice (143)
– Notice must be explicit and specify the PARTICULAR cause of
abandonment
– State only enough to show that there is PROBABLE CAUSE therefore
and need NOT be accompanied by proof of interest or loss (144)
– Requirement as the explicitness of the notice is due to the fact that
abandonment can only be sustained up to the cause specified in the
notice (145)
• EFFECTS OF ABANDONMENT
a. It is equivalent to a transfer by the insured of his interest to
the insurer, with all the chances of recovery and indemnity (146)
– If the insurer pays for a loss as if it were an actual loss, he
is entitled to whatever may remain of the thing insured, or its
proceeds or salvage as if there has been a formal abandonment
– Here, insurer has opted to pay for a total actual loss
notwithstanding absence on actual abandonment
b. 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 (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
a. Abandonment becomes effective upon the acceptance of the insurer
– Acceptance may either be: (i) Express or (ii) Implied from the
conduct of the Insurer
– The mere silence of the insurer for an unreasonable time
length of time after notice shall be construed as acceptance (150)
– Once accepted, it is conclusive between the parties and the
loss is admitted together with sufficiency of abandonment (151)
– It is irrevocable upon acceptance and upon its being made
UNLESS the ground upon which it was made proved to be
unfounded (152)
– Thus, if the insurer accepts the abandonment, it cannot raise
any question as to: (i) insufficiency of the form under Sec 143, (ii)
time for giving notice under Sec 141, or (iii) right to abandon under
Sec 139.
– The only EXCEPTION is under Sec 152, when the ground is
unfounded, as defined in Sec 142 and/or as related to Sec 145
b. On an accepted abandonment involving a ship, the freightage that is
earned PREVIOUS to the loss belongs to the insurer of the freightage;
but SUBSEQUENTLY earned belongs to the insurer of the ship (153)
– Ex. The contemplated voyage for the transport of cargo is from
Point X to Point Y. In between, a loss occurs and the ship is
abandoned. The freightage already earned from point X until the
point of loss, belongs to the insurer of the freightage. If the ship is
subsequently repaired, and continues on to point Y, the freightage
due belongs to the insurer of the ship
c. If abandonment is NOT accepted despite its validity, the insurer is
liable upon ACTUAL TOTAL LOSS, deducting from the amount any
proceeds of the thing insured that may have come to the hands of the
insured (154)
• IF abandonment is NOT made or omitted – if a person insured omits to
abandon, he may nevertheless recover his ACTUAL loss (155)
LIABILITY FOR AVERAGES
AVERAGES
• Any extraordinary or accidental expenses 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
• Purpose of expense/damage – preserve the vessel, cargo or both
KINDS OF AVERAGES
1. Particular or simple average – damage or expense caused to the vessel or

cargo which has NOT inured to the common benefit and profit of all persons
interested in the cargo or vessel
• This damage or expense is borne ordinarily by the owner of the vessel
or cargo that gives rise to the expenses suffered the damage
• Ex – damage sustained by a cargo from the time it is loaded to the
time it is unloaded or additional expenses that are incurred by the vessel
from the time it puts out to sea until it reaches its destination
2. General or gross average – expense or damage suffered deliberately in
order to save the vessel or its cargo or both from a real or known risk
• Thus, ALL persons having an interest in the vessel and cargo or both
at the occurrence of the average shall contribute
• Expenses incurred inures to the benefit of all
• i.e. – jettisoning a cargo
NOTE:
• FREE FROM PARTICULAR AVERAGE or FPA CLAUSE – limits the liability of the
insurer in case of partial loss; an insurance upon a PARTICULAR thing or class
of things shall be FREE from particular average – a marine insurer is NOT liable
for a particular average loss NOT depriving the insured of the possession, at
the port of destination, of the whole such thing or class of things , even though
it becomes entirely worthless BUT such insurer is liable for his proportion of all
general average loss assessed upon the thing insured (136)
• IN case of a general average loss – the insurer is liable for the loss falling
upon the insured, through 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
Meaning – insured can hold his insurer liable for his contribution up to the
value of the policy
REMEDY: (a) go against insurer or (b) claim contribution against those who
were benefited
RIGHT OF SUBROGATION
• When a person insured in a contract of marine insurance has a demand
against the others for contribution, he may claim the whole loss from his
insurer, subrogating his insurer to his own right of contribution
• BUT no such claim can be made upon the insurer if:
1. There is separation of the interest liable to contribution, OR
– i.e. When the cargo liable or contribution has been removed
from the vessel
2. When the insured, having the right and opportunity to enforce
contribution from others, has neglected or waived the exercise of the
right
• Meaning – 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 – subrogation happens if this choice is taken
MEASURE OF INDEMNITY IN MARINE INSURANCE

A. VALUED POLICY
1. A valuation in the policy of marine insurance is CONCLUSIVE
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 to its conclusiveness (156)
– If hypothecated by bottomry or respondentia BEFORE
insurance and without knowledge of the person securing it, he may
show the REAL value – the insurer cannot rescind
2. 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 thing insured (157)
– EFFECT: 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 the stipulation in the
contract (AVERAGE CLAUSE)
– Ex. A vessel valued at P500,000 is insured for P400,000
and the vessel is damaged to the extent of P200,000. The insurer
is liable for the only P160,000. The formula being:
Liability = (Insurance ÷ value of the thing) x Loss
REQUISITES FOR APPLICATION OF AVERAGE CLAUSE:

(a) The insurance is for less than the actual value, and
(b) The loss is partial
NOTE:
– Co-insurance exists in Marine Insurance. There is NO co-insurance
in Fire Insurance UNLESS expressly stipulated (171, 172). In Life
Insurance, there is NONE as value is fixed in the policy (183)
– Sec 157 is further qualified by Sec 166: In case of a partial loss of
the ship or its equipment, the OLD materials are to be applied
towards the payment of the new and, unless stipulated in the
policy, the insurer is liable only for 2/3 of the remaining cost or
repairs after the deduction, EXCEPT that anchors are paid in full
(166) – reason: repairs enhances value of thing insured
3. In case the profits are separately insured in a contract of marine

insurance, the insured can recover in case of a loss
• There is 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 (160)
• A proportion of such profits equivalent to

proportion of the value of the property lost bears to the value of
the whole (158)
• i.e. Goods are valued at P500,000, expected
profits are P50,000. Goods suffered a partial loss of P100,000. The
insured can recover only P10,000 on the insurance over profits, the
formula being:
Amount recoverable = (Insurance of profits ÷ value of

goods) x loss
4. In case of a valued policy on freightage or cargo, if only a PART

of the subject is exposed to the risk, the valuation applies only in
proportion to such part (159)
• Ex. Goods are valued at P500,000.
If only P250,000 are shipped and exposed to the risk, the valuation
is reduced by ½. In case of a total loss, insured can only demand ½
of the valuation or P250,000.
B. OPEN POLICY
1. The value of the SHIP is its 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.
2. The value of the CARGO is its ACTUAL cost to the insured
• When laden on board OR where that cost
cannot be ascertained, its market value at the time and place of
LADING, adding the charges incurred in purchasing and placing it on
board BUT without reference to any loss incurred in raising money for
its purchase or any drawback on its exportation or fluctuation of the
market at the port of destination or expenses incurred on the way or
on arrival
• DRAWBACK – Government allowance upon
duties on imported merchandise when the importer re-exports instead
of selling it
3. Value of freightage is the GROSS freightage, exclusive of primage,
without reference to the cost of earning it
• PRIMAGE – compensation paid by the shipper to the master of the
vessel for his care and trouble bestowed on the goods of the shipper,
which he retains in the absence of a contrary stipulation with the
owner of the vessel
4. Cost of insurance is in each case to be added to the value thus estimated
(161)
C. IF CARGO IS 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 the port of the thing so damaged bears TO the market
price it would have brought if sound (162)
• Meaning – if the reduction in value is 1/5, then the amount of recovery on
the insurance is also 1/5
• The formula is:
Market price (sound state)
Less: Market price (damaged)
Reduction in value
Reduction in value x Insurance = Amount of

Recovery
Market price (sound state)
CONTINUATION OF MEASURE OF INDEMNITY REGARDLESS OF WHETHER POLICY IS

VALUED OR OPEN
1. An insurer is liable for all port of refuge expenses
• Port of refuge expenses – All expenses attendant upon a loss that
forces the ship into port to be repaired. These refer to expenses for
repairing the ship due to damages attributable to perils insured against,
as well as other expenses such as launching, towing, raising, and
navigating the vessel
• SUE AND LABOR CLAUSE – If so stipulated that the insured shall labor
for recovery of the property insured and the insurer is liable for the
expenses incurred thereby – ex. When the vessel is unlawfully detained
• In either case, said expenses are to be added to a TOTAL loss, if that
afterwards occurs (163)
FIRE INSURANCE
Insurance against fire includes loss or damage due to lightning, windstorm,
tornado, earthquake, or other allied risks when such risks are covered by
extensions to the fire insurance policy or under separate policies (167). Hence,
while it is not limited to loss or damage due to fire, coverage as to other risks is
NOT automatic.
FIRE
• Active principle of burning, characterized by heat and light combustion
• Combustion without visible light or glow is NOT fire
• To allow RECOVERY:
1. It must be the proximate cause of the damage or loss, AND
2. The fire must be HOSTILE
– Fire is hostile if it:
a. Burns at a place where it is NOT intended to burn,
b. Starts as a friendly fire but becomes hostile if it should escape
from the place where it is intended to burn and becomes
uncontrollable
c. Is a friendly fire which becomes hostile by NOT escaping from its

proper place but because of the unsuitable material used to
light it, it becomes inherently dangerous and uncontrollable
• Friendly fire – one that burns in a place where it is intended to burn and
employed for the ordinary purpose of lighting, heating or manufacturing
• BUT the policy itself may limit or restrict coverage to losses under ordinary
conditions but NOT those due to extraordinary circumstances or abnormal
conditions like war, invasion, rebellion, civil war, or other similar causes –
recovery is still possible
ALTERATION
• 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
• All requisites must be present to constitute an alteration so as to allow the
rescission of the contract:
1. The use or condition of the thing insured is specifically limited or
stipulated in the policy
– BUT the contract of insurance is NOT affected by an act of the insured
subsequent to the execution of the policy, which does not violate its
provisions, even though it increases the risk and is the cause of the
loss (170)
– i.e. If the insured stored thinner, paints and varnish. A fires
subsequently occurs and there is NO express prohibition as to storage
of such items, even if the risk is increased, the insurer is still liable
(Bachrach v British Assurance, 17 Phil 555)
– i.e. The policy states that 1st floor is unoccupied, it is later occupied.
There is NO alteration that entitles the insurer to rescind, the
description of the house cannot be said to be a limitation as to use
(Hodges v Capital Insurance, 60 OG 2227)
2. There is alteration in the said use or condition
3. The alteration is without the consent of the insured
4. The alteration is made by means within the insured’s control
– Alteration must NOT be by ACCIDENT or means beyond the control of
the insured
– i.e. If alteration is made by a tenant with the consent or knowledge of
the insured, the insurer can rescind. If alteration is made without
consent or knowledge of the insured, the insurer cannot rescind
5. The alteration increases the risk of loss
– BUT any alteration in the use or condition of the thing insured from
that to which is limited by the policy, which does NOT increase the
risk does NOT affect the contract (169)
6. There must NOT BE ANY VIOLATION of the contract otherwise
NOTE: The basis for rescission is that payment of the premium is based on the
risk as assessed at the time of the ISSUANCE of the policy when the risk is
increased without a corresponding increase in premium – it is as if NO premium is

paid
MEASURE OF INDEMNITY IN FIRE INSURANCE

1. OPEN POLICY
• It is the expense it would be to the insured at the time of the
commencement of the fire to replace the thing lost or injured in the
condition in which it was at the time of the injury
2. VALUED POLICY
• Same as in marine insurance
• The valuation as agreed upon by the parties is conclusive in the
adjustment of either a partial or total loss in the absence of fraud (171)
HOW IS THE 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
then 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
• In case of PARTIAL loss, the whole amount of the partial loss is paid
• In case there are 2 or MORE policies, each shall contribute pro-rata to
the total or partial loss BUT the liability of the insurers cannot be more
than the amount stated in the policy
4. OR the parties may stipulate that instead of payment, the OPTION to repair,
rebuild or replace the property wholly or partially damaged shall be
exercised (172)
NOTE: NO policy of Fire Insurance shall be pledged, hypothecated or transferred

to any person, firm, or company that acts as AGENT for or otherwise represents
the issuing company – VOID and of no effect insofar as it may affect other
CREDITORS of the insured (173)
CASUALTY INSURANCE
• 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. In includes employer's liability, workmen's compensation, public
liability, motor vehicle liability, plate glass liability, burglary and theft, personal
accident and health insurance as written by non-life companies and other
substantially similar insurance (174)
Insurance obtained by the employer against liability to an employee for

Employer's liability
damages caused or arising from injuries by reason of his employment
Workmen's Insurance secured by an employer for the benefit of his employees and
laborers for loss resulting from injuries, disablement, or death through

compensation industrial accident, casualty, or disease in connection with their
employment
Insurance against liability of the insured to pay damages for accidental
Public liability bodily injury or damage to property arising from an activity of the
insured defined in the policy
Insurance against loss or injury arising from the use of a motor vehicle
Motor vehicle
by its owner, as opposed to loss or damage to the vehicle itself.
liability
Coverage for both may be contained in one policy
Insurance that indemnifies the insured against loss caused by the
Plate glass
accidental breaking of plate glass, windows, doors, or show cases
Insurance against expense, loss of time and suffering from accidents
Personal accident
that caused a physical injury
Health Insurance Indemnity for expenses or loss occasioned by sickness or disease
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 (175)
• Includes official recognizance, bonds, undertakings issued by any company
under Act #536, as amended by Act #2206 (Government Transactions by
Authorized Companies)
LIABILITY OF THE SURETY

• 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 the obligor and the obligee (176)
IS SURETYSHIP CONTRACT VALID AND BINDING WHERE PREMIUM HAS NOT BEEN
PAID?
Generally, the 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 (177).
OTHER LAWS GOVERNING A SURETYSHIP CONTRACT

In the absence of specific provisions, the CIVIL CODE apply in a suppletory
character if necessary to interpret the contract provisions (176)
SURETYSHIP GUARANTY
A surety assumes liability as a regular party to A guarantor’s liability depends on an
the agreement independent agreement to pay if primary
debtor fails to pay
A surety is primarily liable Guarantor is secondarily liable
A surety is NOT entitled to exhaustion Guarantor is entitled
LIFE INSURANCE
• Insurance on human lives and insurance pertaining thereto or connected
therewith (179)
• When payable:
1. On death of the person,
2. His surviving a specified period, or

3. Otherwise, contingently on the continuance or cessation of life
COMMON KINDS OF LIFE INSURANCE

1. 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
2. Limited payment life – insured pays premium for a limited period after which
the 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 pays face
amount
3. 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
4. Endowment – protection 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 of the period, it is paid to the beneficiaries
5. Annuity – where the insured or named person(s) is (are) paid sums
periodically during life or certain period
• Contracts for the payment of endowment or annuities are considered as
life insurance contracts
INDUSTRIAL LIFE INSURANCE – Under Section 229 of the Insurance Code of the
Philippines, it is one where the premiums are payable either monthly or oftener, if
the face amount of the insurance provided in any policy is NOT more than 500
times than that of the current statutory minimum daily wage in the City of Manila,
and if the words “industrial policy” are printed upon the policy as part of the
descriptive matter.
INSURANCE PAYMENT OF ANNUITY

Payable upon the death of the insured Payable during the life of the annuitant
Premium is paid in installments Annuitant pays a single premium
Lump sum payment upon death Annuities are paid until death
NOTE: Sec 180 also provides that as far as a MINOR, who is insured or a
beneficiary in an insurance contract, in the absence or incapacity of a judicial
guardian, the father, in default, the mother, MAY ACT in behalf of the minor
without need of bond or court authority, when it involves the exercise of any right
under the policy, to include but not limited to:
1. Obtaining a policy loan,
2. Surrendering the policy,
3. Receiving the proceeds of the policy, and
4. Giving the minor’s consent to any transaction on the policy
PROVIDED, the interest of the minor does NOT exceed P20,000.
RISKS COVERED
1. Generally, all causes of death
• Unless excluded by law, by the insurance policy, or public policy

• By law – beneficiary is the principal, accomplice or accessory in
bringing the death of insured
• By policy – when it does not cover, assault, murder or injuries inflicted
intentionally by a 3rd person
BUT where the insured is NOT the intended victim, the insurer is liable
(Calanoc v CA, 98 Phil 79)
• What must be considered is that death or injury is NOT the natural or
probable result of the insured’s voluntary act (Finman General Assurance
Corp v CA, 213 SCRA 493) as opposed to an act of the insured to confront
burglars (Blagtan v Insular Life Assurance Co, 44 SCRA 58)
• By public policy – lethal injection or when the insured is executed for a
crime committed
2. Suicide (BAR)
• Compensable – if committed AFTER the policy has been in force for a
period of 2 years from (a) date of issue OR (b) last reinstatement,
UNLESS policy provides a shorter period
• Compensable – if committed in the state of INSANITY regardless of date
of commission (180 A)
IS LIFE INSURANCE TRANSFERABLE OR ASSIGNABLE?

Yes. It may pass by transfer, will or succession to any person, whether he has
insurable interest or not (181). In EFFECT, the person to whom it is transferred
may recover upon it whatever the insured might have recovered.
Note that while there is NO need for the assignee/transferee to have insurable
interest, it should NOT circumvent the law prohibiting insurance without insurable
interest. THUS, an assignment contemporaneous with issuance may invalidate the
policy UNLESS made in good faith.
IS NOTICE TO THE INSURER OF TRANSFER OR BEQUEST REQUIRED?

No. It is not necessary to preserve the validity of the policy UNLESS thereby
EXPRESSLY required (181).
IS CONSENT OF BENEFICIARY REQUIRED?

Yes, if the designated as an IRREVOCABLE beneficiary, as he has acquired a
vested right.
MEASURE OF INDEMNITY IN LIFE INSURANCE

• The amount stated or specified in the policy is the measure of indemnity
UNLESS the interest of a person insured is susceptible of pecuniary estimation
(183)
• Hence, a life insurance policy has been held to be a VALUED policy.
DEVICES USED TO PREVENT LAPSE OF LIFE INSURANCE POLICY

1. Grace period;
2. Automatic loan policy;
3. Application of dividend; and

4. Restatement clause.
BUSINESS OF INSURANCE
ORGANIZATION, CAPITALIZATION AND AUTHORIZATION
Requirement for a CERTIFICATE OF AUTHORITY from the Insurance Commission

are: (184-193)
1. Qualified by Philippine Laws to transact insurance business;
2. Has a name that is NOT in any way similar to another
company;
3. If organized as a STOCK corporation, its paid-up capital shall
NOT be less than P1,000,000
4. If organized as a MUTAL company, it must have available cash
assets of at least P5,000,000 above all liabilities for losses reported,
expenses, taxes, legal reserves and reinsurance of all outstanding risks, and
the contributed surplus fund equal to the amounts required of stock
corporation:
a. P1,000,000 if a life insurance company,
b. P500,000 if a non-life insurance company
• Mutual company – one whose capital funds are NOT
contributed by stockholders but by policy holders
5. If it is a FOREIGN insurance company, it must appoint a
resident agent, deposit securities and maintain a legal reserve
MARGIN OF SOLVENCY
• Excess of the value of insurance company’s admitted assets EXCLUSIVE of
its paid up capital
• Domestic Insurance – excess of the value of its admitted assets in the
Philippines EXCLUSIVE of security deposit over the amount of its liabilities,
unearned premiums, and reinsurance reserves in the Philippines (194)
• Life Insurance – 2% of the total amount of its insurance in force as of the
preceding calendar year on all policies, EXCEPT term insurance
• Non-life Insurance – at least 10% of the total amount of its net premiums
during the preceding calendar year BUT in no case to be less than P500,000. If
NOT met, the insurance company is (a) NOT permitted to take on any new risk
and (b) NO dividends can be declared (195)
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
CONCEPT – to provide protection or coverage to answer for bodily injury or

property damage that may be sustained by another arising from the use of a
motor vehicle
HOW IS ITS COMPULSORY NATURE ENFORCED?

• By prescribing that ANY land transportation operator OR owner of a motor

vehicle would be considered as unlawfully operating a motor vehicle UNLESS
there is a:
5. Policy of insurance,
6. Guaranty in cash, or
7. Surety bond
to indemnify the DEATH or INJURY of (a) a 3 RD PARTY [excluding a member of
the household or a member of the family of a motor vehicle owner or land
transportation operator or his employee in respect to death, bodily injury or
damage to property arising out of or and in the course of employment] OR (b)
a PASSENGE arising form the USE thereof (373, 374)
Land transportation operator – owner/s or motor vehicles for transportation

of passengers for compensation, including school buses
Owner of a motor vehicle – actual legal owner of a motor vehicle in whose

name the vehicle is registered with the LTO
Motor vehicle – any vehicle as defined in Sec 3, RA 4136 which is propelled

by any power other than muscular power using public highways EXCEPT
a. road rollers, holley cars, street sweepers, sprinklers,
lawn mowers, bulldozers, graders, forklifts, amphibian trucks, or
cranes NOT used on public highways
b. Those that ran on rails or tracks,
c. Tractor or trailers or by an attachment to a motor
vehicle is classified as a motor vehicle without power rating, and
d. Traction engines of all kinds used exclusively for
agricultural purposes
Passenger – any fare paying person being transported or conveyed in and

by motor vehicles for transportation, including persons expressly authorized
by law or by the vehicle’s operator or his agents to ride without fare
• Compliance by the motor vehicle owner or the land

transportation operator is monitored as the LTO shall NOT allow the registration
or renewal of registration without compliance with Sec 374 (376)
EXTENT OF LIABILITY / COVERAGE (377)

1. Land transportation operator – P12,000 per passenger PLUS
a. P50,000 for vehicles with capacity 26 or more passengers,
b. P40,000 for vehicles with capacity of 12-25 passengers,
c. P30,000 for vehicles with capacity of 6-11 passengers
P5,000 per passenger for vehicles with capacity of 5 or less passengers
PROVIDED, that if a cash deposit or surety bond is posted with the
Commissioner, it shall be RESORTED to in case of accidents where the
indemnities for which were NOT settled by the Land Transportation
Operator, and in that event, said deposit of surety bond shall be
replenished, reposted or restored within 60 days from impairment or
expiration, OTHERWISE, he (Land Transportation Operator) shall be required

to get an insurance policy
2. Motor vehicle owner for:
a. Bantam or light car – P20,000
b. Heavy car – P30,000
3. Other private vehicles like tricycles, scooters, motor cycles – P12,000
4. Other vehicles with unladed weight of 2,600 kilos or less – P20,000
5. Other vehicles over 2,600 kilos but not over 3,930 kilos – P30,000
6. Other vehicles over 3,930 kilos – P50,000
DISTINGUISH
Third Party Liability (TPL) Own Damage Insurance (ODI) Comprehensive Insurance
Answers for liabilities arising Answers for reimbursement of Answers for ALL liabilities or
from death or bodily injury to the cost of repairing the damages arising from the
3rd persons or passengers damage to vehicle of the use/operation of a motor
The no fault indemnity clause insured vehicle
is always present here Includes TPL, ODI, Theft and
Property Damage
WHEN LIABILITY OF INSURER ACCRUE?

• In an insurance that DIRECTLY insures against liability – the
insurer’s liability accrues immediately upon the occurrence of the injury upon
which the liability depends
• Hence, there is NO need for the insured to wait for a decision of
the court finding him guilty of reckless imprudence. The occurrence of an injury
for which the insured may be liable immediately gives rise to insurer liability
(Shafer v Judge, 167 SCRA 386)
• In fact, a third party can bring a claim or an action DIRECTLY
against the insurer as the general purpose of the statute is to protect the
injured against the insolvency of the insured
NATURE OF LIABILITY OF INSURER

• NOT solidary with the insured
• The liability of the insurer is based on CONTRACT, while that of the insured
is based on tort (Malayan Insurance v CA, 165 SCRA 536)
William Tiu, Virgilio Te Las Pinas v Pedro Arriesgado, et al., GR 138060, September 1, 2004
In third party liability insurance, the victim may proceed directly against the insurer for indemnity.
The insurance is intended to provide compensation for death or bodily injuries suffered by
innocent third parties or passengers as a result of the negligent operation of motor vehicles. The
victims and their dependents are assured of immediate financial assistance, regardless of the
financial capacity of vehicle owners.
Be that as it may, the direct liability of the insurer under indemnity contracts against third party
liability does NOT mean that the insurer can be held in solidum with the insured and/or other
parties found at fault. For the liability of the insurer is based on contract, and that of the insured
carrier is based on tort.
WHO CAN ISSUE POLICY OR SURETY BOND?

Those authorized by the Commissioner in the list furnished to LTO (375). If the
motor vehicle owner or the land transportation operator is unable to obtain OR is
unreasonably denied the policy of insurance, they will be required to show proof
of cash deposit with the commissioner, BUT the authority of the insurance
company to engage in casualty or surety lines of business shall be withdrawn
immediately (379)
CANCELLATION OF THE POLICY:

1. By the INSURER:
• Requires written notice to the motor vehicle owner or land
transportation operator (mvo/ltor) at least 15 days PRIOR to intended
effective date
• If so cancelled, the LTO 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 (380)
2. By the INSURED:
• The mvo/ltor shall:
a. Secure a similar policy or surety BEFORE the cancelled policy/
surety ceases to be effective, OR
b. Make a cash deposit AND file the same or proof thereof with the
LTO (381)
EFFECT OF CHANGE IN OWNERSHIP OR CHANGE IN ENGINE

There is NO need to issue a new policy until the next date of registration,
PROVIDED, the insurer shall agree to continue the policy and such change shall be
indicated in a second duplicate which is filed with the LTO (382).
OTHER PROHIBITED ACTS:

1. The mvo/ltor cannot require driver/s/employees to contribute to the
payment of the premium (386)
2. Any government office or agency having the duty to implement the
provisions – official or employee thereof shall NOT act as an agent in
procuring the policy or surety bond and in no case shall the commission of
the procuring agent exceed 10% of the premiums paid (387)
PENALTIES FOR VIOLATION

VIOLATOR PENALTY
mvo/ltor Fine of not less than P500 nor more than P1,000 and/or imprisonment for not more
than 6 months
ltor Violation of Sec 377 (minimum limits of coverage) – revocation of certificate of
public convenience (388)
Corp., Executive official/s who shall have knowingly permitted or failed to prevent the
Assoc., or violation shall be held liable as principals (389)
gov’t entity
PAYMENT OF CLAIMS
A claim for payment must be filed without any unnecessary delay within 6 months
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 (384)
EFFECT OF FAILURE TO CLAIM WITHIN THE PERIOD

• Deemed a WAIVER
• If claim is filed but denied – an action must be brought within 1 year from
date of denial with the Insurance Commissioner or the Court, otherwise, the
right of action will be deemed as having PRESCRIBED
DUTY OF INSURANCE COMPANY UPON FILING THE CLAIM

1. Ascertain the truth and extent of the claim
2. Make payment within 5 working days after reaching an AGREEMENT
3. If NO agreement is reached, it must nevertheless pay the NO FAULT
INDEMNITY (387) without prejudice to a further pursuit of the claim – in
which case, claimant shall NOT be required or compelled to execute a quit
claim or release from liability
Note: In case of dispute as to enforcement of policy provisions, the

adjudication shall be within the original and exclusive jurisdiction of the
commissioner subject to Sec 416, which provides for concurrent jurisdiction
BUT the filing with the Insurance Commissioner shall preclude filing with the
court (385)
Sun Insurance Office v CA, July 17, 1992

FACTS: X had a personal accident insurance for P200,000. Two months later, he died of a bullet
wound in his head. He was playing with his handgun from which he removed the magazine. He
pointed the gun to his temple and fired. The insurance company refused to pay the beneficiary.
ISSUE: Was there suicide or accident?
HELD: 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.
The death is accidental. Accidents happen by chance without intention or design and which is
unexpected or unforeseen.
NO FAULT INDEMNITY CLAUSE (387)

• A claim for payment for death or injury to a passenger of 3rd party without
necessity of proving fault or negligence.
• This is payable by the insurer PROVIDED:
1. Indemnity in respect of one person shall NOT exceed P5,000;
2. Necessary proof of loss under oath to substantiate the claim is
submitted, these are:
a. Police report of the accident AND
b. Either the:
– Death certificate and sufficient evidence to establish the
payee OR
– Medical report if medical or hospital disbursement in
respect of which refund is made
AGAINST WHOM IS THE PAYMENT CLAIMED

A claim under the no fault indemnity clause may be made against one motor
vehicle insurer only as follows:
1. A claim may be made against ONE motor vehicle only;
2. In case of an occupant of a vehicle, his case shall lie against the insurer of
the vehicle in which the occupant is riding, mounting, or dismounting from
3. In any other case, right to recover from the insurer of the directly offending
vehicle may be made;
4. Total indemnity in respect of any person shall NOT exceed P15,000 (IC
Memo Circular 4-2006);
5. 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; and
6. Proofs loss shall consist of:
a. Police report;
b. Death certificate; and
c. Medical report and evidence of medical or hospital
disbursement.
INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE

• 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, otherwise, who is NOT is DISQUALIFIED
• If license is expired, the person is
NOT authorized to operate a motor vehicle (Tarco, Jr v Philippine Guaranty, 15
SCRA 313)
• If a person is issued a Temporary
Operator’s Permit or a Temporary Vehicle Receipt, he is authorized to operate,
BUT if it has expired, it is as if he had NO license (Gutierrez v Capital Insurance,
130 SCRA 618; PEZA v 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 had no license (Stokes v Malayan, 127 SCRA 766)
• A driver’s 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 v Pyramid Insurance, 161 SCRA 677)
[1986 BAR]
MUTUAL BENEFIT ASSOCIATIONS (390)
INSURANCE COMMISSIONER (414 – 416)

• Administrative Functions (414)
• Power to impose fines/suspensions (415)
• Adjudicatory powers (415) – Note: It is concurrent with the courts BUT the
filing with the Commissioner shall preclude civil courts from taking cognizance
of a suit over the same subject matter
• Decisions are appealable to the CA within 30 days by notice of appeal (416)
MUTUAL INSURANCE COMPANY

• It is a cooperative enterprise where the members are both the insurer

and the insured. In it, all members contribute by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are
paid, and where the profits are divided among themselves, in proportion to
their interest (White Gold Marine Services, Inc v Pioneer Insurance and Surety
Corporation, GR 154514, July 28, 2005).
Eternal Gardens Memorial Park v Philamlife, GR 166245, April 9, 2008

FACTS: The policy reads: “The insurance of any eligible Lot Purchaser shall be effective on the date
he contracts a loan with the Assured. However, there shall be no insurance if the application of the
Lot Purchaser is not approved by the Company.” It would appear that at the time of loss, a loan has
been contracted with the Assured but it is not clear whether the insurer has approved the
insurance application.
ISSUE: When should the policy be deemed effective?
HELD: While one provision appears to state the insurance coverage of the clients of Assured
already became effective upon contracting a loan with the Assured, another appears to require the
insurer to approve the insurance contract before the same can become effective.
It must be remembered that an insurance contract is one of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer to safeguard the latter’s interest.
Thus, the vague contractual provision must be construed in favor of the insured and in favor of the
effectivity of the insurance contract.
The seemingly conflicting provisions must be harmonized to mean that upon a party’s purchase of
a memorial lot on the installment from the Assured, an insurance contract covering the lot
purchaser is created and the same is effective, valid and binding until terminated by the insurer by
disapproving the insurance application. The second sentence is in the nature of a resolutory
condition which would lead to the cessation of the insurance contract. Moreover, the mere inaction
of the insurer on the insurance application must not work to prejudice the insured; it cannot be
interpreted as a termination of the insurance contract. The termination of the insurance contract
by the insurer must be explicit and unambiguous.
PART III. CORPORATION CODE

Batas Pambansa Blg. 68 (May 1, 1980)
Republic Act 8799 (July 19, 2000)

• SEC jurisdiction was transferred to the RTC
• Thus RTC has jurisdiction over the following:
1. Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public
and/or the stockholders, partners, or members of any corporation,
partnership, or association;
2. Controversies arising out of INTRA-corporate, partnership, or association
relations between and among stockholders, members, or associates; AND
between and/or all of them and the corporation, partnership or association
of which they are stockholders, members or associates, respectively;
3. Controversies in the election or appointment of directors, trustees,
officers, or mangers of corporations, partnerships, or associations;
4. Derivative suits;
5. Petition for suspension pf payment filed by corporations, partnerships or
associations AND rehabilitation cases with the appointment of
rehabilitation receiver or management committee;
6. Inspection of corporate books (Sec 1, Rule 1, Interim Rules of Procedure

Governing Intracorporate Controversies under RA 8799)
INTRA-CORPORATE CONTROVERSY (Yujuico v Qiambao, Jan 29, 2007)

• One which pertains to any of the following relationships:
1. Between the corporation, partnership or association AND the public;
2. Between the c/p/a AND the State insofar as its franchise, permit or license
to operate is concerned;
3. Between the c/p/a AND its stockholders, partners, members or officers;
and
4. Among the stockholders, partners or associates themselves
CORPORATION – an artificial being created by operation of law, having the right of

succession and the powers, attributes and properties expressly authorized by law
or incident to its existence
CONCESSION THEORY
Under this theory, a corporation is a creature without any existence until it
has received the imprimatur of the state acting according to law.
CORPORATION PARTNERSHIP
Created by law OR by operation of Mere agreement of parties
Manner of creation
law
At least 5 except corporation sole Two or more persons
# of incorporators
(Sec 10)
Only from date of issuance of From moment of execution of the
Commencement of
Certificate of Incorporation by the contract of partnership
juridical personality
SEC (19)
Only powers expressly granted by Any power authorized by the
law or implied from those granted partners provided it is not contrary
Powers
or incident to its existence to law, morals, good customs,
public order, public policy
Vested in the Board of Directors/ Manager; No agreement – every
Management Trustees partner is an agent of the
partnership
Right of succession Present Absent
Stockholders are liable only to the General partners are liable
Extent of liability to 3rd extent of their investment as personally & subsidiarily for
persons represented by shares subscribed partnership debts to 3rd persons
by them
50 years, extendible to not more Any period
Term than 50 yrs in any one instance
(perpetual succession)
Only with the consent of the State At any time by will of any or all of
Dissolution
(Certificate of Dissolution) the parties
ATTRIBUTES OF A CORPORATION
1. It is an artificial being;
• Doctrine of Corporate Fiction (1999, 2000, 2001 BAR) – A corporation is a
legal or juridical person with a personality separate and apart from its
individual stockholders or members and from other corporations to which
it may be connected
• Legal effects:
a) Liability for acts or contracts
– GR: Obligations incurred by a corporation, acting through its
authorized agents are its sole liabilities
– Stockholder’s debt is not the debt/ credit of the corporation,
nor is the corporate debt/ credit of the stockholder (Good Earth
Emporium v CA, 194 SCRA 544)
– Exception: Personal or solidarity liability may be incurred by
corporate agents under the ff circ:
 Agent acted maliciously or in bad faith (Sec 31) or
 With gross negligence (65) or
 Agreed to hold himself personally and solidarily liable with
the corporation or
 Made by specific provision of law, personally liable for
corporate action
b) Right to acquire and possess property (Art 46, NCC)
– While a share of stock represents a proportionate interest in
the property, it does NOT vest the owner thereof with any legal
right or title to any of the properties of the corporation --- The
interest of shareholders in corporate is purely INCHOATE and
does NOT entitle them to intervene in a litigation involving
corporate property (Saw v CA, 195 SCRA 740)
c) Bring action, to sue and be sued (Art 46, NCC)
– A corporation has NO personality to bring an action for and in
behalf of its stockholders or members for the purpose of
recovering property which belong to said stockholders or
members in their personal capacities (Sulo ng Bayan, Inc. v G.
Araneta, Inc., 72 SCRA 347)
d) Damages
– A juridical person is not entitled to moral damages because,
not being a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish, or moral shock (Mambulao Lumber v
PNB, 22 SCRA 359; Acme Shoe v CA, 260 SCRA 714; ABS-CBN v
CA, Jan 21, 1999; Solid Homes v CA, 275 SCRA 267)
– A corporation may have a good reputation which, if debased or
besmirched resulting in social humiliation, may be a ground for
recovery for moral damages and attorneys fees (Jardine Davies
v CA, June 19, 2000)
– A private corporation can bring a suit for libel or any other
form of defamation and claim moral damages. Article 2219 (7)
of the Civil Code does NOT qualify whether the plaintiff is a
natural or juridical person. Moreover, where the broadcast is
libelous per se, the law implies damages. In such a case,
evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in MITIGATION of
damages (Filipinas Broadcasting Network, Inc. v Ago Medical
and Educational Center – Bicol Christian College of Medicine, GR

141994, January 17, 2005)
2. It is created by law or by operation of law;
• Corporation as creation of law – special laws,
governed by their own charters
• Corporation as creation by operation of law –
Corporation Code
3. It has the right of succession; and
• Perpetual succession
• Capacity of continuous existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual stockholders or members and
regardless of the transfer of interest or shares of stock
• Life – not exceeding 50 years from date of incorporation UNLESS sooner
dissolved or said period is extended
4. It has only the powers, attributes, and properties expressly authorized by
law or incident to its existence
• A corporation may exercise only such powers as are granted by law of its
creation
• TEST: Whether act of the corporation is direct or immediate furtherance
of its business, fairly incidental to the express powers and reasonably
necessary to their exercise
– If yes – corporation has power to do it
– If no – no power
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

• AKA doctrine of corporate alter ego
• Where the fiction of corporate entity is being used to:
1. Cloak or cover for fraud or illegality
2. Defeat public convenience,
3. Justify wrong,
4. Protect fraud or defend crime,
5. Defeat labor laws,
6. Evade existing obligations,
7. Confuse legitimate issues, or
8. The corporation is merely an adjunct of a person
on EQUITABLE consideration, this fiction will be disregarded and the
individuals composing it will be treated as identical
Almocera v Ong, February 18, 2008

The issuance of piercing the veil of corporate fiction should be raised before the trial court. The
issue cannot be treated for the first time on appeal.
To allow the petitioner to pursue such a defense would undermine basic considerations of due
process. Points of law, theories, issues and arguments not brought to the attention of the trial
court will not be and ought not to be considered by a reviewing court. It would be unfair to the
adverse party who would have no opportunity to present further evidence material to the new
theory not ventilated before the trial court
Yamamoto v Nishino Leather Industries, Inc, April 16, 2008

While the veil of separate corporate personality may be pierced when the corporation is merely
an adjunct, a business conduit, or alter ego of a person, the mere ownership by a single
stockholder of even all or nearly all of the capital stocks of a corporation is NOT by itself a
sufficient ground to disregard the separate corporate personality.
ELEMENTS DETERMINATIVE OF APPLICATION OF THE DOCTRINE OF PIERCING THE

VEIL OF CORPORATE ENTITY (Yamamoto case, ibid)
1. Control, not mere majority or complete stock control, but COMPLETE
DOMINATION of finances, 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 defendant to commit fraud or wrong,
and to perpetuate the violation of a statutory or other positive legal duty or
dishonest and unjust act in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must be the proximate cause of
the injury or loss complained of
Absence of any one of these elements PREVENTS piercing the corporate veil.
LEGAL CONSEQUENCES
1. Directors, trustees, officers are JOINTLY liable with the corporation
2. The 2nd corporation can be held to the obligation of the first corporation
Restaurante Las Conchas v Llego (1999)

When an employer-corporation is NO longer existing and unable to satisfy the judgment in favor
of the employees, the officers can be held PERSONALLY liable for acting in behalf of the
corporation.
SPECIFIC CASES WHERE SEPARATE IDENTITY OF THE CORPORATION COULD BE

PIERCED
1. When the veil of corporate fiction is made as a shield to perpetuate a fraud
or confuse legitimate issues such as the relation of employer and employee
(Claparols v Commissioner of Internal Revenue, 65 SCRA 613);
2. When used as a shield for tax evasion (CIR v Norton and Harrison Co., 11
SCRA 714);
3. When used to shield violation of the prohibition against forum shopping
(First Philippine International Bank v Court of Appeals, 252 SCRA 259);
4. When the separate identity of the corporation is being utilized to violate
intellectual property rights of a third person (Uy v Villanueva, GR 157851,
June 29, 2007).
DOCTRINE OF APPARENT AUTHORITY (2004 BAR)

• Although an officer or agent acts without, or in excess of, his actual
authority if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear as
having such authority. The corporation is bound thereby in favor of a person
who deals with him in good faith in reliance on such apparent authority
• i.e. – where an officer is allowed to exercise a particular authority with
respect to the business or a particular branch of it, continuously and publicly,
for a considerable time (Hydro Resources Contractors, Corp v National

Irrigation Administration, Nov 10, 2004)
Instrumentality rule
CLASSIFICATIONS OF A CORPORATION UNDER BP 68

1. STOCK CORPORATION
2. NON-STOCK CORPORATION
• Governed by Title XI (87 – 95)
STOCK NON – STOCK

Corporations which (a) have One where NO part of its income is
capital stock divided into shares distributable as dividends to its
and (b) are authorized to members, trustees, officers – any
distribute to the holders of such profit which it may obtain as an
Definition4
shares dividends or allotments of incident to its operation shall be used
the surplus profits on the basis of for the furtherance of purpose/s for
the shares held (3) which the corporation was organized
(87)
Ordinary business corporations Charitable, religious, educational,
created and operated for the professional, cultural, fraternal,
Purposes
purpose of making a profit literary, scientific, social, civil service,
or similar purposes (88)
Each share of stock is equal to one Each member is entitled to one vote
Right to vote vote unless limited, broadened or denied
(89)
Transferable Personal and non-transferable unless
Transfer of
otherwise provided by AI or by-laws
membership
(90)
Term of board One year 3 years (92)
Place of meetings Anywhere Only within the Philippines (93)
Asset, Distribution
OTHER CLASSIFICATIONS
A. As to number of persons who compose them:
1. Corporations Aggregate – consisting of more than one member or
corporator
• A corporation aggregate does not become a corporation sole by
the mere fact that its shares of stock become vested in one
person because the shares may again be transferred or sold by
the holder to others
2. Corporation Sole – special form of corporation (religious corporation)
which consists of one member or corporator only and his successors,
such as a bishop (110)
B. As to State under whose laws they have been created
1. Domestic Corporation – one incorporated under the laws of the
Philippines
2. Foreign Corporation – one formed, organized, or existing under any
laws other than those of the Philippines
a) Resident
4
Manila International Airport Authority v Court of Appeals, 495 SCRA 591
b) Non-resident
C. As to their legal right to corporate existence
1. DE JURE Corporation – a corporation existing in fact and in law
2. DE FACTO Corporation – existing in fact but not in law
• The due incorporation of any corporation claiming in good faith to
be a corporation under the Corporation Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party. Such
inquiry may be made by the SOLICITOR GENERAL in a QOU
WARRANTO proceeding. (20)
• Requisites of a de facto corporation:
a. Valid law under which a corporation with powers assumed
might be incorporated
b. Bona fide attempt to organize a corporation under such law,
and
c. Actual user or exercise in good faith of corporate powers
conferred upon it law
• Basis of de facto doctrine – Necessary to promote the security of
business transactions AND to eliminate quibbling over irregularities
Seventh Day Adventist Conference Church of Southern Philippines, Inc. v

Northeastern Mindanao Mission of Seventh Day Adventist, Inc., GR 150416,
July 21, 2006
The filing of articles of incorporation AND the issuance of the certificate of
incorporation are essential for the existence of a de facto corporation. It has
been held that an organization NOT registered with the Securities and
Exchange Commission (SEC) cannot be considered a corporation in any
concept, NOT even as a corporation de facto.
3. ESTOPPEL – All persons who assume to act as a corporation knowing it

to be without authority to do so shall be liable as GENERAL PARTNERS
for all debts, liabilities and damages incurred or arising as a result
thereof
• Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation OR on any
tort committed by it as such, it shall NOT be allowed to use as a
defense its lack of corporate personality (21)
D. As to whether they are for public or private purpose
1. Public Corporations – those formed or organized for the government of
a portion of a State for the general good and welfare
2. Private Corporations – those formed for some private purpose, benefit,
or end; it includes:
a) Government – owned or –controlled corporations
• Those create or organized by the government or of which the
government is the majority stockholder
• Private since they are NOT established for the government of
a portion of the State
• Where the government engages in a particular business thru

the instrumentality of a corporation, t divests itself pro hac
vice of its sovereign character, so as to subject itself to the
rules governing private corporations (PNB v Pabalan, 83
SCRA 595)
• i.e. – GSIS, NPC, PNR, Philippine National Railways
b) Quasi-public corporations
• Private corporations which have accepted from the State the
grant of franchise or contract involving the performance of
public duties but which are organized for profit
• AKA public utilities, public service corporations
• i.e. – electric, water, telephone, transportation companies
E. As to whether they are corporations in a true sense or limited
sense
1. True Corporation – one which exists by statutory authority
2. Quasi-corporation – one which exists without formal legislative grant;
an exception to the GR that corporation can exist only by an authority
of law
a) Corporation by prescription – one which ha exercised corporate
powers for an indefinite period without interference on the part
of the sovereign power and which by fiction of law is given the
status of a corporation
• ROMAN CATHOLIC CHURCH – having acted as such and
assumed corporate powers for a long period of time
b) Corporation by estoppel – one in which in reality is not a
corporation, either de facto or de jure, because it is so
defectively formed, but is considered as a corporation in relation
to those only who, by reason of their acts or admissions, are
precluded from asserting that it is not a corporation
COMPONENTS OF A CORPORATION
1. Corporators – those who compose the corporation, whether stockholders or
members
2. Incorporators – those corporators mentioned in the articles of incorporation
as originally forming and composing the corporation and who executed and
signed the articles of incorporation and acknowledged the same before a
notary public
NUMBER AND QUALIFICATIONS OF INCORPORATORS (10)
• Any number of natural persons NOT less than 5 but NOT more than 15
• All of legal age
• Majority of whom are residents of the Philippines
• Must own at least 1 share of the capital stock of the corporation
3. Stockholders – owners of shares of stock – stock corporation
4. Members – corporators in a non-stock corporation
MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS (12)

• Stock corporations incorporated under the Corporation Code shall NOT be

required to have any minimum authorized capital stock EXCEPT as otherwise
specifically provided for by special law, and subject to the provisions of Section
13, Corporation Code
SEC REGISTRATION REQUIREMENTS

MINIMUM PAID-UP CAPITAL REQUIREMENT (in PhP)
BASED ON INDUSTRY
Break Bulk Agent 250, 000
Cargo Consolidator 400, 000
Financing Company
Metro Manila and other 1st class cities 10, 000, 000
Other classes of cities 5, 000, 000
Municipalities 2, 500, 000
Freight Forwarders
Domestic 250, 000
International 2, 000, 000
Health Maintenance Organization 10, 000, 000
Insurance
Insurance Broker 20, 000, 000
Reinsurance Broker 20, 000, 000
Insurance Broker and Reinsurance Broker 50, 000, 000
Life Insurance 1, 000, 000, 000
Non-life Insurance Company 1, 000, 000, 000
Reinsurance 2, 000, 000, 000
AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR PURPOSES OF

INCORPORATION (13)
• At least 25% of the authorized capital stock as stated in the Articles of
Incorporation must be subscribed at the time of incorporation
• At least 25% of total subscription must be paid upon subscription
– Balance payable on:
a. Date/s fixed in the contract of subscription without need of
call;
b. Absence of (a) – upon call for payment by the board of
directors
• NO case shall the paid-up capital be less than P5,000
Shares
ARTICLES OF INCORPORATION BY LAWS (46)
(14)
Fundamental law – prevails in case of conflict with the by-laws
Filed with SEC prior to incorporation Simultaneously with AI OR
Submission
subsequently within 1 month
after receipt of official notice of

issuance of its certificate of
incorporation by the SEC
Upon issuance by the SEC of a Upon issuance of SEC of a
Effectivity or validity certificate of incorporation certification that the by-laws are
not inconsistent with the Code
1. General and uniform
application
Requisites
2. Reasonable and capable of
performance
1. Name of the corporation 1. Time, place, manner of
– No corporate name may be calling & conducting regular
allowed by the SEC if the or special meetings of D/T
proposed name is: 2. … of stockholders or
a. Identical or members
deceptively or confusingly 3. Required quorum in
similar to that of any existing meetings of stockholders or
corporation OR to any other members and manner of
name protected by law, or voting therein
b. Patently 4. Form for proxies of
deceptive, confusing or stockholders and members
contrary to existing laws and manner of voting them
2. Specific purpose/s for which 5. Qualifications, duties and
the corporation is being compensation of D/T/O/E
incorporated 6. Time for annual election of
– State the primary D/T and mode/manner of
and secondary purposes giving notice thereof
– A corporation may 7. Manner of election or
NOT include a purpose which appointment and term of
would change or contradict its office of all officers other
nature as such than D/T
3. Place of principal office – within 8. Penalties for violation of
the Philippines by-laws
Contents 4. Term of existence 9. Stock corp – manner of
– Not exceeding 50 years issuing stock certificates
UNLESS sooner dissolved or 10. Other matters as may be
such is extended necessary for proper or
– Extension for periods not convenient transaction its
exceeding 50 years un any corporate business and
single instance affairs
– No extension can be made 11. Certificate from the
earlier than 5 years prior to the appropriate government
original or subsequent expiry agency to the effect that
dates UNLESS justifiable reasons such by-laws or amendments
as may be determined by the are in accordance with law
SEC must accompany the by-laws
5. Names, nationalities, of the following corporation:
residences – incorporators – Banks, banking and
6. Number of directors or trustees quasi-banking institutions
– 5 to 15 – Building and loan
7. Names, nationalities, associations
residences – persons who shall act – Trust companies,
as directors or trustees until the other financial
first regular directors or trustees intermediaries
are duly elected and qualified – Insurance
8. Stock corporation: companies
– Amount of authorized capital – Public utilities
stock in lawful money of the – Educational

Phils institutions
– Number of shares into which it – Other corporations
is divided governed by special laws
– Value of each Par value shares
– Names, nationalities,
residences of original
subscribers
– Amount subscribed and paid by
each on his subscription
– State if some or all shares are
without par value
9. Non-stock corporation
– Amount of its capital
– Names, nationalities,
residences of the contributors
– Amount contributed by each
10. Other matters NOT inconsistent
with law AND which incorporators
may deem necessary and
convenient
11. Treasurer’s Affidavit – showing
that:
– At least 25% of the authorized
capital stock has been
subscribed and at least 25%
thereof fully paid to him in
actual cash &/or in property
– Paid-up capital not less than
P5,000
For legitimate purpose, any provision By the vote of majority of BOD
in the AI may be amended by majority AND majority of owners of OCS or
vote of the BOD/T AND vote or written members (48)
Amendment assent of stockholders representing at
General Rule least 2/3 of outstanding capital stock
or 2/3 of members – without prejudice
to the appraisal right of dissenting
stockholder (16)
Otherwise prescribed by the
Exception
Corporation Code OR by special law
1. Amended provisions – indicated
by underscoring the change/s
made
2. Copy thereof duly certified
under oath by the corporate
secretary and majority of the
directors or trustees
1. Approval of the SEC Upon the issuance by the SEC of
2. From the date of filing with SEC a certification that such
Effectivity of
if NOT acted within 6 months from amendments are not inconsistent
Amendments
the date of filing for a cause not with the Code
attributable to the corporation
By 2/3 of owners of OCS or
Delegation of members may delegate to the
Amendment BOD to amend/repeal/ adopt new
by-laws
Revocation of By a vote at a regular meeting of
delegation majority of OCS or members
GROUNDS FOR REJECTION OR DISAPPROVAL OF ARTICLES OF INCORPORATION [AI]

(17)
1. If AI is NOT in compliance with the requirements of Corp Code
2. AI or any amendment thereto is NOT substantially in accordance with the
form prescribed in the Code
3. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations
4. Treasurer’s Affidavit concerning the amount of the capital stock subscribed
and/or paid is FALSE
5. Percentage of ownership of the capital stock to be owned by the citizens of
the Philippines has NOT been complied with
6. Failure to submit a favorable recommendation of the appropriate
government agency to the effect that such articles or amendment is in
accordance with law
– Banks, banking and quasi-banking institutions
– Building and loan associations
– Trust companies and other financial intermediaries
– Insurance companies
– Public utilities
– Educational institutions
– Other corporations governed by special laws
• The SEC shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the AI or amendment
EFFECTS OF NON-USE OF CORPORATE CHARACTER (22)

• Failure to formally organize, commence transaction of business within 2
years from date of incorporation:
• Corporate powers CEASE and
• Corporation shall be deemed DISSOLVED
EFFECT OF SUBSEQUENT CONTINUOUS INOPERATION (22)

• Inoperative for at least 5 years
• Ground for suspension or revocation of its corporate franchise or
certificate of incorporation
EXCEPTION TO NON-USE and INOPERATION:

• Due to causes BEYOND the control of the corporation as may be
determined by the SEC – reason of failure to organize, commence transaction,
or to continuously operate
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
• The corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected
• Hold office for 1 year until their successors are elected and qualified
COMMERCIAL LAW Page 100 of
188
• Requisites:
STOCK CORPORATION NON-STOCK CORPORATION
1. Must own at least 1 share of the capital 1. Must be a member thereof
stock of the corporation 2. Majority of trustees must be
2. Continuously own at least a share residents of the Philippines
3. Majority of directors must be residents 3. Additional qualifications stated in
of the Philippines the by-laws
4. Additional qualifications stated in the
by-laws
• Disqualification of directors, trustees, or officers (27)
1. Conviction by final judgment of an offense punishable by imprisonment
for a period exceeding 6 years
2. Violation of this Code committed within 5 years prior to the date of his
election or appointment
3. If he is a stockholder or director of a competing corporation
4. An independent director of another corporation or of a subsidiary
corporation
• Removal of director, trustee (28)
1. By a vote of:
a. Stockholders representing or holding at least 2/3 of the
outstanding capital stock OR
b. At least 2/3 of members entitled to vote
2. Notice of the time, place, intention to propose such removal must be
given by publication OR by written notice prescribed under the Corp
Code
3. Removal shall take place in a meeting called for the purpose (IMPT)
4. Removal may be with or without cause
5. Removal without cause may NOT be used to deprive minority
stockholders or members of the right of representation to which they
may be entitled under the election of directors or trustees
• Vacancies in office of director, trustee (29)
1. Vacancy other than by removal OR expiration of term
2. May be filled by:
a. Vote – at least majority of remaining directors OR
b. Stockholders in a meeting called for that purpose
3. D/T so elected shall be elected only for the unexpired term of his
predecessor
4. D/T to be filled by reason of an increase in the number of d/t shall be
filled ONLY by:
a. Election at a meeting duly called for the purpose
b. Election in the same meeting authorizing the increase of d/t if so
stated in the notice of meeting
• COMPENSATION of DIRECTORS (30)
1. Provision in the by-laws fixing their compensation
2. If #1 absent – NO compensation except reasonable per diems
3. Any such compensation as may be granted by a stockholders
representing majority of the OCS at a meeting
4. NO case shall the total yearly compensation exceed 10% of net income
before income tax of the corporation during the preceding year
188
• Liability of the D/T/O (31):
1. Liability – SOLIDARY for all damages resulting from
a. Willful and knowing vote for or assent to patently unlawful acts of
corporation
b. Guilty of gross negligence OR bad faith in directing affairs of
corporation
c. Acquire any personal or pecuniary interest in conflict with their
duty as such d/t
2. Liability as TRUSTEE
a. When d/t/o attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter
which has been reposed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf
• Dealings of D/T/O with the corporation (32)
1. A contract of the corporation with one OR more of its d/t/o is VOIDABLE,
at the option of the corporation
2. UNLESS ALL the following conditions are present:
a. Presence of such D/T in the board meeting in which the contract
was approved – NOT necessary to constitute a quorum for such
meeting;
b. Vote of such d/t – NOT necessary for the approval of the contract
c. Contract is fair and reasonable under the circumstances; and
d. In case of an officer – the contract has been previously authorized
by the BOD
e. When (a) & (b) are absent
– Such contract may be ratified by the vote of the stockholders
representing at least 2/3 of the OCS or members in a meeting
called for the purpose
– FULL disclosure of the adverse interest of the d/t involved is
made at such meeting
– Contract is fair and reasonable
• Interlocking directors (33)
1. Stockholdings exceeding 20% of OCS shall be considered substantial for
purposes of interlocking directors
2. A contract between 2 or more corporations having interlocking directors
shall NOT be invalidated on that ground alone PROVIDED
a. Contract is fair and reasonable
b. If the interest of the interlocking director in one corporation is
substantial and in another is merely nominal – he shall be subject
to Sec 32 insofar as the latter (nominal interest) corporation/s are
concerned
3. EXCEPT in cases of fraud
• Disloyalty of a director (34)
1. Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation – he must account to
the latter for all such profits by REFUNDING the same
188
2. UNLESS his act has been ratified by a vote of stockholders owning or
holding at least 2/3 of OCS
3. This provision applies even if director risked his own funds for the
venture
• Executive Committee (35)
1. Composed of 3 or more members of the Board
2. May act, by majority vote of all its members, on such specific matters
within the competence of the board as may be delegated to it in the by-
laws OR on a majority vote of the board
3. EXCEPT: The EC cannot act on the following:
a. Approval of any action for which shareholders’ approval is also
required
b. Filling of vacancies in the board
c. Amendment or repeal of by-laws or adoption of new by-laws
d. Amendment or repeal of any resolution of the board which by its
express terms is NOT so amendable or repealable
e. Distribution of cash dividends to shareholders
LIABILITIES OF D/O WITHOUT PIERCING THE VEIL OF CORPORATE FICTION (1996,

1997 BAR)
1. When d/t/o voted patently unlawful acts of the corporation, and acted in bad
faith or with gross negligence in directing the corporate affairs;
2. Consented to the issuance of watered stocks;
3. Guilty of conflict of interest to the prejudice of the corporation, stockholders
or trustees;
4. Agreed to be solidarily liable with the corporation in the contracts entered
into by the corporation;
5. When by specific provision of law, they are made personally liable for their
acts (PD 115, Trust Receipts Law);
6. In labor cases, when they acted with malice or bad faith in termination of
employees;
7. Conducting business in an unsafe or unsound manner (Sec 56, General

Banking Law of 2000)
BUSINESS JUDGMENT Rule

– Courts cannot undertake to control the discretion of the BOD about
administrative matters as to which they have the legitimate power of action
– Courts cannot interfere UNLESS such contracts are so unconscionable
and oppressive as to amount to a wanton destructive of the rights of the
minority
PROCEDURE OF ELECTION OF D/T

STOCK CORPORATION NON-STOCK CORPORATION
1. There must be present, either in person 1. There must be present a majority of
or by representative authorized to act by the members entitled to vote
written proxy, the owners of a majority of 2. Election be by ballot if requested by
the outstanding capital stock any voting member
188
2. Election be by ballot if requested by
any voting stockholder
CONDITIONS/LIMITATIONS IN THE ELECTION OF D/T

1. Trustees CANNOT be elected by zones or regions
2. Stockholder cannot be deprived in the AI or in by-laws of his statutory right
to use any of the methods of voting in the election of directors
3. No delinquent stock shall be voted
4. If quorum is present, candidates receiving highest of votes shall be declared
elected – law requires only plurality not majority
5. Failure to hold election for any reason – meeting may be adjourned from day
to day or time to time but it cannot be adjourned sine die or indefinitely
6. Requisite notice must be given
STOCK CORP ELECTION; CORPORATE OFFICERS

• Immediately after election, the directors must formally organize by the
election of officers:
OFFICER REQUIREMENT
President Who shall be a director
Treasurer May or may not be a director
Secretary Resident and citizen of the Philippines
Other officers as may be provided for in the by-laws
• LIMITATION – Any 2 or more positions may be held concurrently by the

same person, EXCEPT that no one shall act as president & secretary OR as
president & treasurer at the same time
• Directors, trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation
QUORUM (25)
• UNLESS the AI or by-laws provide for a greater
• Majority of the number of the number of d/t as fixed in the AI shall
constitute a quorum for:
REQUISITES FOR BOARD MEETING

1. Duly assembled as a board
2. Presence of the required quorum
3. Decision of the majority of the quorum or the entire board
4. Meeting at the place, time, manner provided in the by-laws
POWERS OF THE BOARD OF DIRECTORS

1. Corporate powers and capacity (36)
a. Sue and be sued in its corporate name
b. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation
c. Adopt and use a corporate seal
188
– Certificate of stock is signed by the president, countersigned
by the secretary or asst. sec and sealed with the seal of the
corporation (63)
d. Amend its AI in accordance with the provisions of the Corp Code
e. Adopt by-laws NOT contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with the Corp Code
f. In case of stock corporation:
– Issue or sell stocks to subscribers
– Sell treasury stocks in accordance with Corp Code
– Admit members
g. Purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, otherwise deal with such real or personal property as the
transaction of business may reasonably require – subject to limitations
prescribed by law and the Constitution
h. Enter into merger or consolidation with other corporations
i. Make reasonable donations
– Public welfare, hospital, charitable, scientific, civic, similar
purposes
– NO corporation (domestic or foreign) shall give donations in
aid of any political party or candidate OR for the purpose of
partisan political activity
j. Establish pension, retirement, and other plans for the benefit of its
d/t/o and employees
k. Exercise such other powers as may be essential or necessary to carry
out its purpose/s as stated in AI
2. Power to extend or shorten corporate term (37)
• Approval of majority vote of BOD/T and ratified by
stockholders representing at least 2/3 of OCS or members
• In case of EXTENSION
– Any dissenting stockholder may exercise his right of appraisal
– Instances for the exercise of APPRAISAL RIGHT (81)
a. In case
i. Any amendment to AI has the effect of changing or
restricting the rights of any stockholder or class of shares
ii. Of authorizing preferences in any respect superior to those
of the outstanding shares of any class
iii. Of extending or shortening the term of corporate existence
b. In case of sale, lease, exchange, transfer, mortgage,
pledge, other disposition of all or substantially all of the
corporate property and assets
c. In case of merger or consolidation
d. When corporation invests its funds in other business OR
for any purpose other than the primary purpose for which it was
organized, the dissenting stockholder may exercise his right of
appraisal (42)
e. Withdrawal of a stockholder or compulsory dissolution of a
close corporation by reason of an act, which is illegal,
188
fraudulent, dishonest, oppressive, or unfairly prejudicial, by
d/t/o/ person having control of the corporation (105)
– EXERCISE OF APPRAISAL RIGHT (82)
a. Who may exercise: Any stockholder who shall have voted
against the proposed corporate action
b. HOW:
i. By written demand within 30 days after date on which vote
was taken for payment of the fair value of his shares
ii. If proposed action is implemented or affected – corporation
shall pay such stockholder the fair value of his shares (as of
the day prior to the date on which the vote was taken) upon
SURRENDER of the stock certificates
iii. Failure to make demand within 30 days shall be deemed a
waiver of the appraisal right
c. Who shall determine fair value:
i. If withdrawing stockholder & corporation cannot agree on
the fair value of the shares, within 60 days from date
corporate action was approved by stockholders
ii. It shall be determined & appraised by 3 disinterested
persons, one of whom shall be named by the stockholder,
by the corporation, by the 2 thus chosen
iii. Their findings shall be final
iv. Their award shall be paid by the corporation within 30 days
after such award is made
d. CONDITIONS FOR THE PAYMENT OF APPRAISAL RIGHT
i. NO payment shall be made to any dissenting stockholder
UNLESS the corporation has unrestricted retained earnings
in its books to cover such payment
ii. Upon payment of the agreed or awarded price, stockholder
shall transfer his shares to the corporation
– Effect of demand (83)
a. All rights accruing to such shares shall be SUSPENDED, except
right of stockholder to receive payment of the fair value thereof
b. Duration of suspension: Time of demand of payment until
abandonment of the corporate action involved
c. Termination of right – purchase of said shares by the
corporation
d. Failure to pay within 30 days after award – dissenting
stockholder’s voting and dividend rights shall immediately be
restored
– When right to payment ceases (84)
a. If such demand for payment is withdrawn with the consent of
the corporation, or
b. If proposed corporate action is abandoned
c. If proposed corporate action is disapproved by SEC where such
approval is necessary
d. If SEC determines that such stockholder is NOT entitled to the
appraisal right
188
Note: NO demand for payment may be withdrawn UNLESS
corporation consents thereto
– Effect when right to payment ceases:
a. His status as a stockholder is RESTORED
b. All dividend distributions which would have accrued on his
shares shall be paid to him
– Who bears cost of appraisal (85)
a. Corporation
b. Stockholder – when the fair value ascertained by the
appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder
c. Corporation – all costs and expenses in an action to
recover such fair value
d. Stockholder – when his refusal to receive payment is
unjustified
– Notation on certificate (86)
a. Submit shares within 10 days (after demanding payment of his
shares) for notation that such shares are dissenting shares
b. Failure to do so shall terminate his appraisal right, at the
OPTION of the corporation
c. If such shares are transferred and the certificates consequently
cancelled – rights of transferor as dissenting stockholder shall
cease and transferee shall have all the rights of a regular
stockholder AND all dividend distributions which would have
accrued on such shares shall be paid to the transferee
3. Power to increase or decrease capital stock – stock corporation (38)
4. Power to incur, create, or increase bonded indebtedness – stock and non-
stock corporation (38)
• NO corporation shall increase/decrease its capital stock OR
incur/create/increase any bonded indebtedness UNLESS approved by a
majority vote of the BOD AND 2/3 of OCS or members favoring such act
• Written notice of the proposed act, time, place of the stockholder’s
meeting must be addressed to each stockholder at his place of residence
as shown in the corporate books
• SEC shall not accept for filing any certificate of increase of capital stock
UNLESS accompanied by a sworn statement of the treasurer showing
that at least 25% of such INCREASED capital has been subscribed and at
least 25% of the amount subscribed has been paid OR that property the
valuation of which is equal to 25% of subscription has been transferred
to the corporation
• NO decrease of the capital stock shall be approved by SEC if its effect
shall prejudice the rights of corporate creditors
• Bonds issued by a corporation shall be registered with the SEC – shall
have the authority to determine the sufficiency of the terms thereof
5. Power to DENY PRE-EMPTIVE RIGHT
188
• All stockholders of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in proportion
to their respective stockholdings
• UNLESS such right is denied by the AI or an amendment thereto
• Such pre-emptive right shall NOT extend to:
a. Shares to be issued in compliance with laws requiring stock
offerings or minimum stockownership by the public
b. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of OCS
c. In exchange for the property needed for corporate purposes or
d. In payment of a previously contracted debt
6. Power to sell and other disposition of assets (40)
• A corporation may to sell, lease, exchange, pledge, otherwise dispose of
all OR substantially all of its property and assets (inc goodwill) upon such
terms & conditions and for such consideration as its BOD/T may deem
expedient
• By a majority vote of its BOD/T and authorized by 2/3 of OCS or members
• Any dissenting stockholder may exercise his appraisal right under the
conditions provide in the Code
• SUBSTANTIALLY all – if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for
which it was incorporated
• Corp may abandon such s/l/e/p/d of property & assets without further
approval or action by the stockholders or members
• In non-stock corporations where there are NO members with voting
rights, the vote of at least a majority of trustees in office – sufficient
authorization for the corporation to sell/dispose of assets or properties
7. Power to acquire own shares (41)
• For a legitimate corporate purpose or purposes, including but not limited
to:
a. Eliminate fractional shares arising out of stock dividends
b. Collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale
c. Pay dissenting or withdrawing stockholding stockholders entitled to
payment for their shares under the Code
• Provided that the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired
8. Power to invest corporate funds in another corporation or business OR for
any other purpose (42)
• Approved by majority of the BOD/T and ratified by 2/3 OCS or members
• Any dissenting stockholder shall have appraisal right as provided under
the Code
• Where the investment by the corporation is reasonably necessary to
accomplish its primary purpose is stated in AI, the approval of the
stockholders/ members shall NOT be necessary
188
9. Power to declare dividends (43)
• BOD may declare dividends out of the unrestricted retained earnings
which shall be payable on the basis of outstanding stock held by them in:
a. Cash
b. Property
c. Stock
• Any CASH dividends due on delinquent stock shall be first applied to
unpaid balance on subscription (+ cost & expenses)
• STOCK dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid
• NO stock dividend shall be issued without the approval of 2/3 OCS
• Stockholders are prohibited from retaining surplus profits IN EXCESS of
100% of their paid-in capital stock EXCEPT:
a. When justified by definite corporate expansion projects or
programs approved by the BOD
b. When the corporation is prohibited under any loan agreement with
any financial institution or creditor (local or foreign) from declaring
dividends without its/his consent and such consent has NOT yet
been secured
c. When it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation – such as
need for special reserve for probable contingencies
10. Power to enter into management contract (44)
• Approved by the BOD/T and majority of the OCS or members of BOTH the
managing and managed corporation
• Approved by stockholders of the MANAGED corporation owning at least
2/3 of the OCS or members IF:
a. Where stockholder/s representing the same interest of both the
managing and the managed corporations own or control more than
1/3 of the total OCS entitled to vote of the managing corporation
b. Where majority of members of the BOD of the managing
corporation also constitute a majority of the BOD of the managed
corporation
• NO mgmt contract shall be entered into for a period longer than 5 years
for any one term
• Apply to any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating
agreements or otherwise
• Service contracts or operating agreements – exploration, development,
exploitation or utilization of natural resources may be entered into for
such periods as may be provided by the pertinent laws or regulation
LIMITATION ON POWERS OF BOD/T

1. Limitations or restrictions imposed by the Constitution, statutes, articles of
incorporation or by-laws of the corporation
188
2. Cannot perform constituent acts – acts involving fundamental changes in
the corporation which require the approval or ratification of the stockholders
or members
3. Cannot exercise powers NOT possessed by the corporation
ULTRA VIRES ACTS (45)

• NO corporation (under the Code) shall possess or exercise any
corporate powers EXCEPT those:
1. Conferred by the Code
2. Conferred by its by-laws
3. Powers as are necessary or incidental to the exercise of the powers so
conferred
KINDS MEETINGS
1. Regular
2. Special
Regular Meetings Special Meetings

Stockholder’s/ Board of Stockholder’s/ Board of
Members Directors/ Members Directors/
Trustees Trustees
• Annually on • Monthl • Anytime • Anytime
date fixed in by- y deemed upon call of
laws, or • Unless necessary or president
WHEN • On any date by-laws • As • Unless
in April of every provide provided in the by-laws
year (50) otherwise (53) by-laws (50) provide
otherwise (53)
• City/ • Anywh • City/ • Anywhe
municipality of ere in or out municipality of re in or out of
principal office of the principal office the Philippines
• Principal Philippines • Principal • Unless
WHERE
office if practicable • Unless office if by-laws
(51) by-laws practicable (51) provide
provide otherwise (53)
otherwise (53)
• Secretar
y on order of
the Pres (28)
• Written
demand of
WHO CALLS majority OCS or
members
entitled to vote
• Unless
by-laws provide
otherwise
• President, chairman, vice-chairman (54)
• As provided by the by-laws (54)
WHO
• Stockholder, member in a temporary capacity
PRESIDES
• Stockholder, member chosen (50)
• SEC (50)
188
• Majority of the • Majori
outstanding capital ty of the
stock outstanding
• Majority of capital stock
members • Majori
QUORUM • Unless ty of
otherwise provided members
(52) • Unles
s otherwise
provided
(52)
• In writing – state • At least • At • At
time, place 1 day prior to least 1 week least 1 day
• At least 2 weeks meeting prior prior to
prior to meeting • Period • Period meeting
NOTICE • Period fixed in set in by-laws fixed in by- • Period
REQ’T by-laws (50) • Waivab laws (50) set in by-laws
le – express or • Waiva
implied (53) ble – express
or implied
(53)
• GR: The D/T must act as a body and personally to bind the corporation
• Meetings may be postponed EXCEPT for purposes of extension of term of
directors
• Instances where board meeting is NOT necessary:
1. Where directors happen to be the sole stockholders
2. Where similar acts have been approved by the directors as a matter of
general practice, custom and policy
– Authority is established by proof of the course of business, usages,
practices of the company, and by the knowledge of BOD has or
presumed to have
3. Acts ratifies in a subsequent board meeting
4. Acts of one of its directors or agents held out to the public as possessing
power to do those acts
5. The board being inactive, acts of such officers will bind the corporation
6. Stockholders may waive the necessity for a meeting of the board
7. By-laws may create an executive committee with authority
8. Management contract
MANNER OF VOTING BY A STOCKHOLDER

1. Directly
2. Indirectly
a. By means of a proxy (55, 56, 58, 89)
b. By a trustee under a voting trust agreement (59)
c. By executors, administrators, other legal representatives
duly appointed by the court (55)
3. Straight (24)
• Every stockholder may vote such number of shares for as many
persons as there are directors to be elected
188
4. Cumulative (24)
• A stockholder is allowed to concentrate his votes and give one candidate
as many votes as the number of his shares shall equal
• Purpose – Give minority stockholders representation in the board of
directors by electing one or more directors
INSTANCES VOTE REQUIRED

Election of Directors or trustees (24)
Call a special meeting to remove directors or
trustees (28)
Majority of outstanding capital stock
Revoke the preceding power delegated to the
(OCS) or members entitled to vote
board (48)
Compensation of directors (30)
Adopt by-laws (46)
To declare cash or bond dividends (43) Majority of the QUORUM of the Board
Amend or repeal by-laws or adopt new by-laws (48) Majority of the BOD/T and of OCS or
members
To amend AI (16, 120)
To extend or shorten corporate term (37)
To increase or decrease capital stock (38)
To incur, create or increase bond indebtedness (38)
To sell, lease, exchange, mortgage, otherwise
dispose of all or substantially all of the corporate Majority of the BOD/T and vote or
assets (40) written assent of 2/3 of the OCS or
To invest corporate funds in another corporate members
funds in another corporation or business OR for any
purpose other than primary purpose (42)
To effect or amend a plan of merger or
consolidation (77)
To dissolve the corporation (118, 119)
Adopt a plan of distribution of assets of a non-stock Majority of the BOT and 2/3 of the
corporation (95) members
To Issue stock dividends (43) Majority of the QUORUM of the BOD/T
and 2/3 of OCS
Filling the vacancy in office of director or trustee Majority of remaining d/t if still
(29) constituting quorum
Enter into a MGMT contract (44) Majority of the QUORUM of the BOD/T
and
• Majority of OCS or members
of BOTH the managed & managing
corporations,
• In some cases, 2/3 of the total
OCS entitled to vote or members
with respect to the managed
corporation
To ratify a contract of a director/officer with the
corporation (32)
2/3 of the OCS or members entitled to
To delegate to the BOD/T the power to amend or
vote
repeal the by-laws or adopt new by-laws (48)
To remove directors or trustees (28)
QUORUM IN MEETINGS (52)

• GR: Majority of the OCS or members
188
• Unless otherwise provided for in this Code or in the by-laws
IMPROPERLY HELD MEETINGS

• VALID provided:
1. Proceedings and any business transacted at any meeting of stockholders
or members are within the powers or authority of the corporation
2. ALL the stockholders or members are present or duly represented at the
meeting
RIGHT TO VOTE PLEDGORS, MORTGAGORS, ADMINISTRATORS (55)

• Pledged/mortgaged shares in stock corporation
– Pledgor/mortgagor MUST be given a right (to attend stockholders’
meeting) in writing and recorded on corporate books
• Executors, administrators, receivers, other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders/
members WITHOUT need of any written proxy
VOTING IN JOINT OWNERSHIP OF STOCK (56)

• Consent of ALL the co-owners shall be necessary UNLESS written proxy
(signed by all) authorizing one or some of them or any other person to vote
such shares
• When shares are owned in “and/or” capacity – any one of the joint owners
can vote or appoint a proxy therefore
• Does not apply in delinquent shares
VOTING RIGHT FOR TREASURY SHARES (57)

• NO voting right as long as such shares remain in Treasury
PROXIES (58)
• Requisites:
1. In writing
2. Signed by stockholder or member
3. Filed before the scheduled meeting with the corporate secretary
• GR: Proxy shall be valid only for the meeting for which it is intended
UNLESS otherwise provided in the proxy
• NO proxy shall be valid and effective for a period longer than 5 years at
any one time
VOTING TRUSTS AGREEMENTS [VTA] (59)

• For the purpose of conferring upon a trustee/s the right to vote and other
rights pertaining to the shares for a period not exceeding 5 years at any time
• In case of VT specifically required as a condition in a loan agreement –
voting trust may be for a period of 5 years BUT shall automatically expire upon
full payment of the loan
• Requisites:
1. In writing and NOTARIZED
188
2. Specify the terms and conditions thereof
3. Certified copy filed with the corporation and SEC – otherwise such voting
trust is ineffective and unenforceable
• Procedures:
1. The certificate/s of stock covered by VTA shall be cancelled and NEW
ones shall be issued in the name of trustee/s stating that they are issued
pursuant to said agreement
2. Trustee/s shall execute and deliver to transferors VT certificates –
transferable in same manner & same effect as stock certificates
• VTA filed with the corporation shall be subject to examination by any
stockholder of the corporation – PROVIDED both transferor and trustee/s may
exercise the right of inspection of all corporate books and records in
accordance with the Code
• NO VTA shall be entered into for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade OR used for
purposes of fraud
• GR: All rights granted in VTA shall automatically expire at the end of
agreed period UNLESS expressly renewed
• The voting trustee/s may vote by proxy UNLESS otherwise provided in VTA
STOCK AND STOCKHOLDERS
RIGHTS OF STOCKHOLDERS
1. Voting rights or VTA
2. Right to certificate of stock
3. Right of Pre-emption (2001, 2004 BAR)
4. Appraisal right (2003, 2007 BAR)
5. Right to dividends (2001, 2005 BAR)
6. Right of examination and inspection
7. Right to remove directors
8. Remedial rights (2004 BAR)
• An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks after exhausting intra-
corporate remedies in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to
be sued, or hold the control of the corporation
• In such actions, the suing stockholder is regarded as a nominal party,
with the corporation as the real party in interest
• Similarly, if a corporation has a defense to an action against it and is
not asserting it, a stockholder may intervene and defend on behalf of the
corporation (Filipinas Port Services, Inc v Go, March 16, 2007)
ACQUISITION OF STOCKS
A. SUBSCRIPTION CONTRACT (60)
• Subscription
– Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed
188
– Notwithstanding that the parties refer to it as a purchase or some
other contract
• KINDS of subscription contract:
1. Pre-incorporation Subscription (61)
– Subscription for shares of stock of a corporation still to be formed
shall be IRREVOCABLE for a period of at least 6 months from the
date of subscription UNLESS
a. All other subscribers consent to the revocation
b. Incorporation of said fails to materialize within said period
OR within a longer period as may be stipulated in the
contract of subscription
– NO pre-incorporation subscription may be revoked after the
submission of the AI to the SEC
2. Post-incorporation contract
• Stock shall NOT be issued for a consideration less than the par or issued
price thereof
• COMBINATIONS of consideration for issuance of stock:
1. Actual cash paid to the corporation
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued
3. Labor performed for or services actually rendered to the corporation
4. Previously incurred indebtedness of the corporation
5. Amounts transferred from the unrestricted retained earnings to the
stated capital
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion
• The issued price of NO-PAR value shares may be fixed:
1. In the AI
2. By the BOD – pursuant to authority conferred upon it by the AI or by-
laws OR
3. In absence of authority – by the stockholders representing at least
majority of OCS at a meeting duly called for the purpose
B. STOCK CERTIFICATE (63)
• NO shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation
C. ISSUANCE OF STOCK CERTIFICATE (64)
• NO certificate of stock shall be issued to a subscriber UNTIL full amount of
his subscription + interests and expenses has been paid
D. LIABILITY OF DIRECTORS FOR WATERED STOCKS (65)
• Any director or officer:
1. Consenting to the Issuance of stock for a consideration LESS than its
par or issued value OR
2. Issuance for a consideration in any form other than cash, valued in
EXCESS of its fair value OR
3. Having knowledge thereof, did NOT object in writing and filed the
same with the corporate secretary
188
• Shall be SOLIDARILY liable with the stockholder concerned to the
corporation and its creditors for the DIFFERENCE
E. DELINQUENCY SALE (68)
• DELIQUENT shares – if NO payment is made after 30 days from date (of
payment of subscribed shares on subscription contract)
• The BOD, by resolution, may order sale of delinquent stock
• CONTENTS of NOTICE:
1. Amount due on each subscription + all accrued interest
2. Date, time, place of sale – 30 days to 60 days from date the stocks
became delinquent
• PUBLICATION – once a week for 2 consecutive weeks in a newspaper of
general circulation in province/city where principal office of corporation is
located
• The delinquent stock shall be sold at public auction to such bidder who
shall offer to pay the full amount of the balance of subscription + accrued
interest, costs of ads, expenses of sale for the SMALLEST number of shares
or fraction of a share
– UNLESS delinquent stockholder pays balance + interests, costs,
expenses ON or BEFORE date of delinquent sale
– UNLESS BOD otherwise orders
• NO bidder – the corporation may bid for the same and total amount due
shall be credited as paid in full in corporate books as treasury shares
F. WHEN SALE MAY BE QUESTIONED (69)
• GR: NO action to recover delinquent stock sold can be sustained on
ground of irregularity or defect
1. In the notice of sale OR
2. In sale itself of delinquent stock
• UNLESS the party seeking to maintain such action first pays or tenders to
party holding the stock the sum for which it was sold + legal interest from
date of sale
• The complaint must be filed within 6 months from date of sale
G. COURT ACTION TO RECOVER UNPAID SUBSCRIPTION (70)
• NOTHIN in the Code shall prevent the corporation from collecting by action
in a court of proper jurisdiction the amount due on any unpaid subscription
+ accrued interest, costs, expenses
H. EFFECT OF DELINQUENCY (71)
• NO delinquent stock or holder thereof shall be
1. Voted for or
2. Entitled to vote or
3. To representation at any stockholder’s meeting or
4. Entitled to any right of stockholder except right to dividends in
accordance with provision of the Code
• UNTIL and unless he pays amount due
I. RIGHTS OF UNPAID SHARES (72)
• Unpaid but NOT delinquent – have ALL the rights of a stockholder
J. LOST OR DESTROYED, STOLEN CERTIFICATES (73)
188
• Procedure:
1. Registered owner/ legal representative shall file Affidavit – setting
forth:
a. Circumstances HOW the certificate was lost, destroyed,
stolen
b. Number of shares represented by such certificate
c. Serial number of the certificate
d. Name of corporation which issued the same
e. Submission of other information or evidence deem ed
necessary
2. Verification of affidavit and other evidence
3. Corp shall publish notice with name of corporation, of registered
owner, serial number and number of shares represented by certificate
4. If NO contest after expiration of 1 year from date of last publication –
right to contest shall be BARRED
5. Corp shall cancel l/d/s certificates and issue new certificate of stock
6. IF contest is presented OR action is pending in court – issuance of new
certificate is SUSPENDED until final decision by the court regarding
ownership of said certificate
• No action may be brought against any corporation which shall have issued
certificate of stock in lieu of those l/d/s EXCEPT in case of fraud, bad faith
or negligence on the part of the corporation and its officers
MERGER AND CONSOLIDATION

MERGER CONSOLIDATION
2 or more corporation may merge into a single Consolidate into a new single corporation which
corporation which shall be one of the shall be the consolidated corporation
constituent corps
• PROCESS:
1. Plan of merger or consolidation (76) – setting forth the ff:
a. Names of the corps proposing to merge or consolidate –
“constituent corporation”
b. Terms of m/c and mode of carrying it into effect
c. Statement
– Of changes in AI of the surviving corporation (merger)
– Required to be set forth in AI for corporation organized under
this Code (consolidation)
d. Other provisions with respect to proposed merger or consolidation
as are deemed necessary or desirable
2. Approval of majority vote of each of the BOD of the constituent
corporations
3. Submission for approval to stockholders of each corporation at SEPARATE
corporate meetings, REQUISITES (77):
a. Notice of meeting – at least 2 weeks prior to date of
meeting given to all stockholders/members, personal or registered
mail
b. Notice – state purpose of meeting + copy of plan of m/c
188
4. Affirmative vote of stockholders representing at least 2/3 of OCS or
members of EACH corporation
– Necessary to approve plan
– Provided if after approval of stockholders/members, the BOD decides
to abandon plan – the appraisal right shall be extinguished
5. Any amendment to the plan of merger or consolidation may be made
– Approved by majority of BOD of all constituent corporations AND
ratified by affirmative vote of OCS or members of each of the
constituent corporations
6. Articles of merger or consolidation – setting forth (78):
a. Plan of the merger OR plan of consolidation
b. Stock corporation – number of shares outstanding; Non-
stock – number of members
c. As to each corporation – number of shares or members
voting for and against such plan
• EFFECTIVITY OF MERGER OR CONSOLIDATION [M/C] (79)
1. Submission of Articles of M/C to the SEC in 4 copies for its approval
2. Favorable recommendation of the appropriate or regulating government
agency shall be first obtained by the ff corporation:
a. Banks or banking institutions
b. Building and loan assoc
c. Trust co
d. Insurance co
e. Public utilities
f. Educational institutions
g. Other corporation governed by special laws
3. If m/c is consistent with the Code and other laws – SEC shall issue a
CERTIFICATE of M/C, at which time the m/c shall be effective
4. IF SEC has reason to believe that such m/c is contrary to laws:
a. SEC shall set a Hearing
b. Written notice of date, time and place of hearing – at least 2 weeks
before hearing
• EFFECTS OF MERGER OR CONSOLIDATION (80)
1. Constituent corps shall become a SINGLE corporation which shall be
– Surviving corporation designated in plan of merger or
– Consolidated corporation designated in plan of consolidation
2. Separate existence of the constituent corporation shall CEASE, except
that of the surviving or consolidated corporation
3. Surviving or consolidated corporation shall possess all the rights,
privileges, immunities and powers shall be subject to all the duties and
liabilities of a corporation organized under the Code
4. Surviving or consolidated corporation shall possess
a. Rights, privileges, immunities and franchises of each
constituent corporation
b. All property (real or personal) and all receivable due on
whatever account
c. All and every other interest of, belonging to, or due to
each corporation
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d. Shall be deemed transferred to and vested in such
surviving or consolidated corporation WITHOUT further act or deed
5. Surviving or consolidated corporation shall be responsible and liable for
all liabilities and obligations of EACH of the constituent corps
NON-STOCK CORPORATION
DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATION (94) – its assets shall be
applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore
2. Assets held by corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of dissolution – shall be
returned, transferred, conveyed in accordance with such requirements
3. Assets received and held by corporation subject to limitations – shall be
transferred, conveyed to one or more corporation engaged in activities
substantially similar to those of dissolving corporation according to a plan of
distribution of assets (95)
4. Other assets – distributed in accordance with the AI or by-laws
5. Other case – distribution in accordance with the plan of distribution of
ASSETS
PLAN OF DISTRIBUTION OF ASSETS (95)

• By majority vote of BOT to adopt resolution recommending a plan of
distribution
• Submission thereof for approval of at least 2/3 of members at a meeting
CLOSE CORPORATION
Definition (96): One whose AI provide that: (MANDATORY)
1. ALL the corporation’s issued stock of all classes (except treasury shares)
shall be held of record by NOT more than a specified number of persons not
exceeding 20
2. All the issued stock of all classes shall be subject to 1 or more specified
restrictions on transfer (98) permitted by the Code
• Restrictions must appear in the (a) AI, (b) by-laws, (c) as well as in the
certificate of stock – otherwise, same shall not be binding on any
purchaser in good faith
• Restrictions shall NOT be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions, or
period stated therein
• If upon the expiration of said period, existing stockholders or the
corporation fails to exercise the option to purchase – transferring
stockholder may sell his shares to any 3rd person
3. The corporation shall NOT list in any stock exchange OR make any public
offering of any of its stock of any class
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WHEN CORP NOT A CLOSE CORP
• A corporation shall NOT be deemed a close corporation when at least 2/3
of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation
THE FF CANNOT INCORPORATE AS A CLOSE CORPORATION

1. Mining or oil companies
2. Stock exchanges
3. Banks
4. Insurance companies
5. Public utilities
6. Educational institutions
7. Corporations declared to be vested with public interest
ARTICLES OF INCORPORATION OF CLOSE CORP (97); optional provisions

1. Classification of shares or rights
2. Qualifications for owning or holding the shares
3. Restrictions on their transfers as may be stated therein
4. Classification of directors into 1 or more classes, each of whom may be
voted for and elected solely by a particular class of stock
5. AI may provide that the business shall be managed by the stockholders of
the corporation rather than by the BOD – so long as this provision is in
effect:
a. NO meeting of stockholders need be called to elect directors
b. Stockholders of corporation shall be deemed to be directors for the
purpose of applying the provisions of the Code UNLESS context clearly
requires otherwise
c. Stockholders of the corporation shall be subject to all liabilities of
directors
6. AI may provide that all officers/employees OR that specified O/E shall be
elected or appointed by the stockholders, instead of the BOD
EFFECTS OF ISSUANCE OR TRANSFER OF SHARES (99)

1. If stock conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder
2. The person to whom the stock is issued or transferred is conclusively
presumed to have notice of this fact IF
a. Stock certificate conspicuously states number of persons entitled to
be holders of record (not more than 20) and
b. Issuance/transfer of stock to any person would cause the stock to be
held by more than such number of persons
3. Stock certificate conspicuously shows a restriction on transfer of stock, the
transferee of the stock is conclusively presumed to have notice of the fact
that he has acquired stock in violation of the restriction, if such acquisition
violates the restriction
4. Whenever any person to whom stock of a close corporation has been issued
or transferred has, or is conclusively presumed to have, notice either:
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a. That he is a person not eligible to be a holder of stock of the
corporation or
b. That transfer of stock to him would cause the stock of the corporation
to be held by more than the number of persons permitted by its AI to
hold stock of the corporation or
c. That the transfer of stock is in violation of a restriction on transfer of
stock
… the corporation may, at its option, refuse to register the transfer of stock
in the name of transferee
5. #4 shall not be applicable if
a. The transfer of stock, though contrary to #1-#3, has been consented
to by all the stockholders of the close corporation or
b. Close corporation has
6. The term “transfer” – NOT limited to a transfer for value
7. Provisions shall NOT impair
TRUST FUND DOCTRINE (2007 BAR)

• It considers the subscribed capital stock as a trust fund for the payment of
the debts of the corporation, and to which creditors have a right to look up to
for the satisfaction of their credits. Hence, the corporation cannot dissipate it
to the prejudice of its creditors.
DISSOLUTION OF CORPORATIONS (1997, 1999, 2000, 2001, 2002 BAR)

• Signifies extinguishment of the corporate franchise and the termination of
corporate existence, including winding up of its affairs and distribution of its
assets among the creditors/stockholders
2 MODES OF DISSOLUTION
1. Voluntary dissolution
a. Where no creditors are affected (118)
b. Where creditors are affected (119)
c. Shortening the corporate term
2. Involuntary dissolution – commenced by SEC on the ff grounds:
a. Violation of the Corporation Code
b. Failure to organize and commence business within 2 years from
incorporation
c. Expiration of corporate term
d. Continuous non-use of corporate powers for 5 years
NOTE:
• In case of merger, there is NO winding up or liquidation of
absorbed corporation since the surviving corporation acquires the rights,
properties, privileges and liabilities of the absorbed corporation (Associated
Bank v CA, June 29, 1998)
• A corporation whose corporate existence is terminated in any
manner continues to be a body corporate for 3 years after its dissolution for
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purposes of prosecuting and defending suits by and against it and to enable it
to settle and close its affairs, culminating in the disposition and distribution of
its remaining assets (122)
• The corporation may, during the 3-year term, appoint a trustee
or receiver who may act BEYOND that period (Pepsi-Cola Products Phils., Inc v
CA, Nov 24, 2004)
• If the 3-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation, the BOD/T itself,
during that period, may be permitted to so continue as trustees by legal
implication to complete the corporate liquidation (Pepsi-Cola, supra)
FOREIGN CORPORATION
• One which has been organized and incorporated under the laws of foreign
countries
• No foreign corporation shall be permitted to transact business in the
Philippines UNLESS it shall have a license as required by law
• A resident agent of the foreign corporation is required to be appointed to
represent it in the Philippines with authority to receive summons and other
court processes
• “DOING BUSINESS” in the Philippines –
1. If a single or isolated transaction is incidental and casual transaction, it
cannot qualify as “doing business” since it lacks the element of
continuity
2. Where a single or isolated transaction is NOT merely incidental or casual
but indicates the foreign corporation’s intention to do other business in
the Philippines, any single act or transaction constitutes “doing business”
POWER TO SUE AND BE SUED

• Suit by a foreign corporation
1. Foreign corporation transacting business in the Philippines without a
license shall NOT be to maintain or intervene in any action, suit or
proceeding in any court or administrative body
2. BUT a foreign corporation which is NOT doing business in the
Philippines needs NO license to institute a collection suit before
Philippine courts (B. Von Zuider Bros. v GTVL Manufacturing, May 28,
2007)
• Suit against a foreign corporation – any foreign corporation
transacting in the Philippines (WON with a license) may be sued against before
Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine law
MR Holdings, Ltd v Bajar, April 11, 2002

Single or isolated acts, contracts or transactions of foreign corporations are NOT regarded as
doing or carrying on of business. Typical examples of these are the making of a single contract of
sale. MR Holdings, which became the ASSIGNEE of mining properties, facilities and equipment,
cannot be considered as doing business, nor presumed to have the intention of engaging in a
mining business in the country.
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Ericks PTE, Ltd v CA, 267 SCRA 567 (1997)
The grant and extension of the 90-day credit term by a foreign corporation to a domestic
corporation for every purchase made arguably shows an intention to continue transacting with the
latter since in the usual course of business, credit is extended only to customers in good standing
or to those on whom there is an intention to maintain a long-term relationship.
STEPS FOR CORPORATE REHABILITATION

1. Filing of a verified petition with the appropriate RTC by:
a. Corporate debtor who foresees the impossibility of meeting its debts
when they respectively fall due; or
b. Creditors holding at least 25% of the debtor’s total liabilities
2. The following shall be annexed to the petition:
a. Audited financial statement at end of its last fiscal year;
b. Interim financial statement;
c. Schedule of debts and liabilities;
d. Inventory of assets;
e. Rehabilitation plan;
f. Schedule of payments and disposition of assets effected within 3
months preceding the filing of the petition;
g. Schedule of cash flow for the last 3 months;
h. Statement of possible claims;
i. Affidavit of general financial condition;
j. At least 3 nominations for rehabilitation receiver;
k. Certificate under oath that directors and stockholders have
irrevocably approved or consented to all actions/matters necessary
under the rehabilitation plan
3. The court shall determine whether the petition is sufficient in form and
substance;
4. If #3 is satisfied, the court shall issue a STAY ORDER not later than 5 days
from the filing of the petition, which (among others) shall:
a. Appoint a rehabilitation receiver;
b. Stay all actions for claims against the debtor, which shall cover BOTH
secured and unsecured creditors;
c. Set an initial hearing for the petition – 45 to 60 days from the filing of
petition; and
d. Direct the creditors to file their verified comment or opposition within
10 days before the initial hearing
NOTE: FAILURE to do so shall BAR them from any participation in
the proceedings
5. Publication of the stay order in a newspaper of general circulation once a
week for 2 consecutive weeks;
6. Referral of rehabilitation plan to rehabilitation receiver;
7. Meetings between corporate debtor with creditors for discussions on the
rehabilitation plan;
8. Submission of final rehabilitation plan to the RTC for approval;
9. The petition shall be dismissed of NO rehabilitation plan is approved after
180 days from the initial hearing – results to the automatic lifting of the stay
order UNLESS RTC orders otherwise;
10. Approval or disapproval of the rehabilitation plan by RTC
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POWERS AND FUNCTIONS OF MANAGEMENT COMMITTEE or REHABILITATION

RECEIVER
1. Take custody of and control over all the existing assets and property of such
entities under management;
2. To evaluate the existing assets and liabilities, earning and operations of
such corporations, partnerships or other associations;
3. To determine the best way to salvage and protect the interest of the
investors and creditors;
4. To study, review and evaluate the feasibility of continuing operations and
structure and rehabilitate such entities if determined to be feasible by the
RTC;
5. To report and be responsible to the RTC until the corporation is dissolved;
and
6. May overrule or revoke the actions of the previous mgmt and BOD of the
entity under mgmt, notwithstanding any provision of law, AI, or by-laws to
the contrary
CLAIM IN CORPORATE REHABILITATION

• Includes ALL claims or demands of whatever nature or character
against a debtor or its property, whether for money or otherwise
• By the suspension of the proceedings, the receiver is allowed to fully
devote his time and efforts to the rehabilitation and restructuring of the
distressed corporation
• Purpose of SUSPENSION: to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of
party litigants as well as the interest of the investing public or creditors
(Sobrejuanite v ASB Development Corp, Sept 30, 2005) [2006 BAR]
• Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency [Ruby Industrial Corp v CA, 348
Phil 480, 497 (1998)]
• Rehabilitation PETITIONS filed by corporations, partnerships or
associations and rehabilitation cases are transferred from SEC to RTC pursuant
to RA 8799
PART IV. SPECIAL COMMERCIAL LAWS
SPECIAL COMMERCIAL LAW COVERAGE:

1. Merchants and Commercial Transactions
2. Joint Accounts
3. Letters of Credit
4. Trust Receipt
5. Warehouse Receipt, general bonded warehouse act
6. Bulk Sales
7. Banking – BSP, General Banking Law, Central, Secrecy, bank deposits, PDIC,
Truth in Lending
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8. Insolvency laws
COMMERCIAL LAWS
• Branch of private law governing acts of commerce and/or juridical
relationships of those engaged in commerce / trade
LAW MERCHANT
• Customs, practices, usages as between merchants given with the force of
law by judicial judgments or jurisprudence
• Common law of Commercial law
3 PRINCIPAL CHARACTERISTICS OF COMMERCIAL LAW (PUE)

1. PROGRESSIVE – Accumulates new ideas and contemporary principles
2. UNIVERSAL – Exists in every society
3. EQUITABLE – Involves exchange of values or consideration
CODE OF COMMERCE (CC)

• Enacted in Spain; applicability extended to the Philippines on
September 1, 1888
• Still applicable provisions:
1. Merchants
2. Joint account associations
3. Commercial barters
4. Transfer of non-negotiable credits
5. Commercial contract of overland transportation
6. Letter of credit
7. Maritime commerce (Transportation law)
8. Charter Party
9. Respondentia
10. Bottomry
11. Bill of Lading
12. Aval – additional security on collateral on another instrument
13. Crossed checks
14. Arrival under stress
15. Collision
MERCHANT
• A person having legal capacity to engage in commerce and habitually
devotes himself thereto
• If a person is a merchant, then his transactions are considered as
commercial transactions and governed by the CC; otherwise sales, deposits or
other transactions governed by the NCC
A. LEGAL CAPACITY
 Persons involved:
1. Natural persons
• 18+ years AND has legal capacity to enter into a contract
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• MARRIED WOMAN – Either spouse may exercise any legitimate
profession, occupation, business, or activity without the consent of
the other. The latter may object based on VALID, SERIOUS, AND
MORAL GROUNDS (73, FC; Sec 11, 12, CC)
• FOREIGNER/ ALIEN – conditions to engage in commerce:
a. Legal capacity
b. Such legal capacity is determined only by his NATIONAL law
c. For purposes of engaging in business in the Philippines OR
establishment of commercial activity (since not all is open to
aliens)
2. Juridical persons
• May engage in commerce
• WHAT will give it legal capacity or personality to engage in
commerce
a. Corporation – SEC issues its certificate of incorporation
b. Partnership – execution of agreement unless contrary
appears
 Disqualifications
ABSOLUTE DISQUALIFICATION RELATIVE DISQUALIFICATION
Applies wherever he goes Limited by territorial area – such as the place
where they exercise their functions or under
certain circumstances
WHO are absolutely disqualified: Art 13 WHO are relatively disqualified: Art 14
a. Those suffering from the accessory a. Juridical and prosecuting
penalty of civil interdiction – until lifted by officials, department heads in active
pardon, amnesty or service of sentence sentence
b. Those judicially declared b. Administrative,
bankrupt/insolvent – until such time they economic, military chiefs
are already authorized or discharged from c. Government collection
the effects of insolvency OR creditors, agents and custodian of funds
have by virtue of an agreement approved d. Money, stock and
in court, allowing him to engage in commercial brokers
commerce e. Those who by special
c. Those expressly prohibited by law and laws cannot trade in specified territories
special provisions
• Mayor can engage in commerce in places other than his
jurisdictional or territorial district
• Constitution also provides prohibition – the President of
the Philippines, VP, Cabinets, deputies and their assistants; Members of
Congress; Constitutional Commissions
• Prohibition administrative officials (Sec 2176 of Revised
Admin Code and Anti-Graft Act)
• Public officials (Rule 13(5), CSC)
• RA 3019, Sec 3(h)
 Transactions with persons or entity without legal capacity are
generally VOIDABLE
 ENGAGING IN COMMERCE
• When engaged in activity that brings products to
consumers with the intent to gain
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B. HABITUALLY DEVOTES HIMSELF THERETO

 Legal presumption (Art 3):
1. A person who intends to undertake such economic activity announces
through circulars, newspaper, handbills, posters exhibited to the
public, or
2. Advertise his intentions on broadcast and/or print media, or
3. In any other manner whatsoever, an establishment has for its object
some commercial operation
COMMERCIAL TRANSACTIONS
• Those entered into by merchants in the pursuit of their respective
activities and involve articles of commerce
• PARTIES – both parties may not necessarily be merchants – at least
one of them is a merchant for it to be a commercial contract
• COMMERCIAL CONTRACT
– Governed primarily by the CC
– NCC supplies deficiencies only
– Instances when NCC is SUPERIOR:
1. Common carriers – Bill of lading (CC), Diligence (NCC)
2. Insolvency provisions
FORMALITIES
• GR: May be executed in any form (Art 51)
– commercial contracts are valid whatever form and language … provided
existence is shown by nay means as prescribed by the NCC
– BUT if a contract involves a contract which amount exceeds 1500 pesetas
(P300), it cannot be proven by parol evidence – thus, it is better if it is in
writing
• EXCEPTION:
a. If the code requires it to be reduced into writing or the special
laws provide certain formalities of its validity
b. If executed in other country, and such country provides
particular form for its validity although it is not required in the Philippines
– will give rise to a valid cause of action in our country if not complied
with
• Illicit objects of contracts or transactions shall NOT be valid even if
formalities are complied with
• CoC governs unless expressly or impliedly repealed, in which case the
CC is applied suppletorily – in case of inconsistencies in their general provisions
the latter prevails EXCEPT in Bottomry and Respondentia
• PERFECTED upon CONSENT
– Prior to the perfection, an offeror may still withdraw his offer as a matter of
right
– If the withdrawal is exercised arbitrarily or whimsically, an award for
damages is warranted
• CONTRACT BY CORRESPONDENCE
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– Answer is the manifestation of consent
– Mere dropping of the answer in the mailbox perfects the
contract5
– Contract where an agent intervenes is perfected when the
contracting parties accept the offer
– MANIFESTATION THEORY – it is perfected from the moment an
answer is made accepting the offer or from the time the acceptance is
dropped in the mail box even before knowledge of said acceptance by the
offeror – receipt of acceptance is immaterial
– COGNITION THEORY – with respect to other contracts 6, the
acceptance of the offer shall NOT be binding until it is made known to the
offeror
• REMEDIES:
1. Demand for fulfillment; or
2. Seek payment of indemnity stipulated
• RULES IN DEFAULT
1. If there is a fixed period of performance, the next
day is considered in delay,
2. NO fixed period – period of performance is within 10
days and the 11th day is considered in delay,
3. Potestative period – debtor is already in delay from
demand
• RULES IN INTERPRETATION OF COMMERCIAL CONTRACTS (Arts 57 –
59)
1. Interpretation and compliance in good faith and full enforceability of their
provisions in their plain, usual and proper meaning;
2. In case of CONFLICT between copies of the contract and an agent who
should have intervened in its negotiation – that which appears in the
agent’s book shall prevail;
3. In case of DOUBT and the rules enunciated cannot resolve the conflict –
issues shall be decided in favor of the debtor
JOINT ACCOUNTS
JOINT ACCOUNTS PARTNERSHIP

A business arrangement whereby a merchant A contract whereby 2 or more persons bind
interests himself themselves by contributing to a common fund
money, property or industry with the intention
to divide the profits among themselves
No formality is required – oral or written Formality is required if real properties are
involved and when the partnership is a limited
partnership
No common fund is created Common fund is created
Name is NOT required Name is required
No juridical personality is conferred Juridical personality is conferred
The managing merchant makes and directs There is only one ostensible partner who alone
transaction in his own name and individual can sue or be sued. The partnership shall be
5
Unlike in CC, knowledge of acceptance perfects the contract
6
Such as those expressly or impliedly repealed in the CoC by the CC
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responsibility first liable.
3rd person has NO cause of action against

merchant who did NOT engage in joint account
and vice versa
LETTERS OF CREDIT
Preliminaries:
1. Letters of Credit are governed by:

(a) Articles 567-572 of the Code of Commerce, which provides a skeletal
introduction to the subject of letters of credit, and
(b) The Uniform Customs and Practices for Documentary Credits issued by the
International Chamber of Commerce, which reflects accepted commercial usage
and practice on the subject of letters of credit and the application of which in the
Philippines has been acknowledged by the Supreme Court based on Article 2 of
the Code of Commerce which provides that in the absence of any applicable
provision in the Code of Commerce, commercial transactions shall be governed by
usages generally observed. (BPI vs De Reny Fabric Industries, et. al., GR L-24821,
October 16, 1970; Feati Bank vs CA, GR 94209, April 30, 1991; and Bank of
America NT & SA, ibid)
2. They are issued by one merchant to another of for the purpose of attending to
a commercial transaction. (Article 567, Code of Commerce)
Letter of Credit Defined:
1. A letter of credit is basically an open letter of request whereby one person

requests another to advance money or give credit to a third person for a certain
amount and promises to repay the person advancing the money.
1.1 They are intended generally to facilitate the purchase and sale of goods by
providing assurance to the seller of prompt payment upon compliance with
specified conditions or presentation of stipulated documents without the seller
having to rely upon the solvency and good faith of the buyer.
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 (Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd.
228 SCRA 545 [1993]). This instrument is basically a credit security through
availment of credit facilities of the participating banks.
3. The use of a letter of credit is illustrated as follows: If it is a local transaction,

three parties are involved. The person (usually the buyer) who intends to initiate a
letter of credit establishes one with a bank (issuing bank). This LC is issued in
favor of the seller. By virtue of this LC, the seller is authorized by the issuing bank
to draw a draft and promise to pay him upon presentment of shipping documents
and other papers required by the LC. When the LC is made, the seller ships the
goods to the buyer. This process of shipping is evidenced by shipping documents
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or documents of title. To get paid, the seller executes a draft and presents it
together wit the required documents to the issuing bank. Said bank redeems the
draft and pays cash to the seller if it finds that the documents submitted by the
seller are complete and conform with what the LC requires. The issuing bank
obtains possession of the documents by paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires from it the
documents entitling him to the goods.
If it is a transaction where seller is abroad, four parties are involved: the buyer
(importer), the seller (exporter); the issuing bank and the confirming or
correspondent bank.
3.1 A draft is the instrument normally used in international commerce to effect

payment. A draft, sometimes 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.
The person or business initiating the draft is known as the maker, drawer or
originator. The party to whom the draft is addressed is the drawee. The drawee is
asked to honor the draft, i.e., to pay the amount requested according to the
stated terms. In commercial transactions, the drawee is either the buyer, in which
case the draft is called a trade draft, or the buyer’s bank, in which case the draft
is called a bank draft. The latter is usually drawn according to the terms of a letter
of credit. (See Multinational Business Finance, ibid,. p. 529)
Some types of drafts are:

(a) Sight vs. time draft – A sight draft is payable on presentation to the drawee;
the drawee must pay at once or dishonor the draft. A time draft, also called a
usance draft, allows a delay in payment. It is presented to the drawee, who
accepts it by writing or stamping a notice of acceptance on its face. Once
accepted, the time draft becomes a promise to pay by the accepting party. When
a time draft is drawn on and accepted by a bank, it becomes a banker’s
acceptance. When a time draft is drawn on and accepted by a business firm, it
becomes a trade acceptance. The time period of a draft is referred to as its tenor
or usance
(b) Clean vs. documentary – A clean draft is an order to pay unaccompanied by
any other documents. When it is used in trade, the seller has usually sent the
shipping documents directly to the buyer, who thus obtains possession of the
merchandise independent of its payment (on a clean sight draft) or acceptance
(on a clean time draft). Clean drafts are often used by multinational firms
shipping to their own affiliates because matters of trust and credit are not
involved.
Most trade drafts are documentary, which means that various shipping
documents are attached to the draft. Payment (for sight drafts) or acceptance (for
time drafts) is required to obtain possession of the documents, which are in turn
needed to obtain the goods involved in the transaction. If documents are to be
delivered to the buyer on payment of the draft, it is known as a “D/P draft”; if the
documents are delivered on acceptance, the draft is called a “D/A draft” (See
188
Multinational business Finance, ibid., p. 530-532)
4.1 The other documents that may be required by a letter or credit are the
following:
4.1.1 A bill of lading, which is a document issued to the exporter by a common
carrier transporting the merchandise. It serves three purposes as a receipt, a
contract and a document of title:
(a) As a receipt, the bill of lading indicates that the carrier has received the
merchandise described on the fact of the document
(b) As a contract, the bill of lading indicates the obligation of the carrier to
provide certain transportation in return for certain charges
(c) As a document of title, the bill of lading can be used to obtain payment
or a written promise of payment before the merchandise is released to the
importer. The bill of lading can also function as a collateral against which
funds may be advanced to the exporter by its local bank prior to or during
shipment and before final payment by the importer. (See Multinational
Business Finance, ibid., p. 533)
Some types of bills of lading are:

(a) Straight vs. order bill of lading – A straight bill of lading is one which
provides that the carrier deliver the merchandise to the designated consignee. It
is not title to the goods and is not required for the consignee to obtain possession.
It is normally used when the goods have been paid for in advance, when the
transaction is being financed by the exporter, or when the shipment is to an
affiliate. An order bill of lading directs the carrier to deliver the goods to the
order of a designated party. It grants title to the merchandise only to the person
to whom the document is addressed, and surrender of the order bill of lading is
required to obtain the shipment. The order bill of lading is typically made payable
to the order of the exporter who thus retains title to the goods after they have
been handed over to the carrier. Title to the merchandise remains with the
exporter until payment is received, at which time the exporter endorses the order
bill of lading (which is negotiable) in blank or to the party making the payment,
usually a bank. The most common procedure would be for payment to be
advanced against a documentary draft accompanied by the endorsed order bill of
lading. After paying the draft, the exporter’s bank forwards the documents
through bank clearing channels to the bank of the importer. The importer’s bank,
in turn, releases the documents to the importer after payment (sight drafts), after
acceptance (time drafts addressed o the importer and marked D/A), or after
payment terms have been agreed (drafts drawn on the importer’s bank under
provisions of a letter of credit).
(b) Clean vs. foul bill of lading – A clean bill of lading is one which indicates that
the goods were received by the carrier in apparently good condition. The carrier
is not obligated to check the condition of the merchandise beyond external visual
appearance. A foul bill of lading is one which indicates that the merchandise
appeared to have suffered some damage before being received for shipment. It
lacks complete negotiability.
(c) On-board vs. received-for-shipment vs. on-deck bill of lading – On-board bill
of lading indicates that the merchandise has been placed on the board the
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vessel whose name is designated on the document. This form is preferred to a
received-for-shipment bill of lading which allows for the possibility that the
goods are sitting on the dock and might remain there for some time. On-deck
bills of lading indicate that the goods have been stowed on deck. The last two
types are not acceptable unless authorized otherwise by the letter of credit. (See
Multinational Business Finance, ibid., p. 533-535)
4.1.2 Additional documents that may be required as a condition for the final
disposition of a Letter of Credit are:
(a) Commercial invoice – It is a document signed and issued by the seller
and contains a precise description of the merchandise and the terms of the
sale such as unit prices, amount due from the buyer and shipping conditions
related to charges such as FOB (Free on board), FAS (Free alongside), C & F
(cost and freight) or CIF (cost, insurance, freight)
(b) Consular invoice – This is a document issued by the consulate of the
importing country to provide customs information and statistics for that
country and to help prevent false declaration of value.
(c) Certificate of analysis – This is a document that may be required to
ascertain that certain specification may be required, like sanitation, etc.
have been met. These specifications may be required by health or other
officials of the importing country, or they may be insisted on by the
importer as assurance that it is receiving what it ordered.
(d) Packing list – This is an enumeration of the contents of containers so
that they can be identified, either for customs purposes or for importer
identification of the contents of separate containers.
(e) Export declaration – It is a document prepared by the exporter to assist
the government to prepare export statistics.
MWSS v Hon. Daway, GR 160732, June 21, 2004

LETTER OF CREDIT GUARANTY
Engagement by a bank or other person made at Destroys the independence of the bank’s
the request of a customer that the issuer shall responsibility from the contract upon which it
honor drafts or other demands of payment upon was opened
compliance with conditions specified in the
credit
The bank undertakes a primary obligation in an The guarantor’s obligation is merely collateral
irrevocable letter of credit and it arises only upon the default of the person
primarily liable
Parties to a Letter of Credit:
1. The basic 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
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the buyer and deliver the documents of title and draft to the issuing bank to
recover payment. (See Bank of America NT & SA, ibid.)
2. In an international credit transaction carried through a letter of credit, the

parties are:
(a) The Customer- who is the party who applies to a bank in one country for the
opening of a letter of credit in favor of the seller in another country
(b) The Issuing Bank- is the bank in the country of the customer to which the
customer applies for the issuance of a letter of credit
(c) The Beneficiary- who is the party in another country who is the creditor of
the customer. Usually, he is the one selling goods to the customer
(d) The Advising Bank – is the bank in the country of the beneficiary which
communicates to the beneficiary the notice of the credit issued by the issuing
bank
(e) The Confirming Bank- is the bank that undertakes that the letter of credit
will be fully paid. Usually the confirming bank is also the advising bank,
otherwise it is utilized to lend credence to the letter of credit issued by a lesser
known issuing bank and is directly liable to the beneficiary.
3. 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 (MWSS v Daway, GR 160732, June 21,
2004)
(b) Issuing bank and beneficiary/seller/exporter – Their relationship is governed
by the terms of the letter of credit issued by the bank, and
(c) Applicant and beneficiary – Their relationship is governed by the sales
contract (Reliance Commodities v Daewoo Industrial, GR 100831, December
17, 1993)
3.1 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.
Specifics of Letters of Credit:
1. 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. (Article 568, Code of Commerce)
1.1 Hence, a letter of credit is not a negotiable instrument because it is

required to be drawn in favor of a definite person.
1.2 Those which do not have any of the essential conditions shall be
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considered merely as a letter of recommendation.
1.3 The drawer of a letter of credit shall be liable to the person on whom it was
issued, for the amount paid thereof, within the maximum fixed therein.
Letters of credit may not be protested even should they not be paid, nor shall
the bearer thereof acquire any right of action by reason of such non-payment
against the person who issued it.
1.3.1 The drawer (Confirming bank) of a letter of credit shall be liable to the
person on whom it was issued for the amount paid by virtue thereof, within
the maximum fixed therein, while a notifying bank does not incur any
liability except to notify the beneficiary of the letter of credit.
1.3.2 Before paying, the person paying shall have the right to demand the
proof of the identity of the person in whose favor the letter of credit is
issued. (Article 569, Code of Commerce)
1.4 The drawer of a letter of credit may annul it, informing the bearer and the
person to whom it is addressed of such revocation. (Article 570, Code of
Commerce)
1.4.1 The waiver of the right to annul makes the letter of credit irrevocable
1.5 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. (Article 571, Code of Commerce)
1.5.1 If the amount of the letter of credit is paid to the holder thereof, the
holder must pay the amount received to the drawer without delay.
2. 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. (Article 572, Code of Commerce)
Enforcement Rules:
1. The independence principle in a letter of credit transaction means that a

bank, in determining compliance with the terms of a letter of credit is required to
examine only the shipping documents presented by the seller and is precluded
from determining whether the main contract is actually accomplished or not. This
arrangement assures the seller of prompt payment, independent of any breach of
the main sales contract (See Bank of America NT & SA, ibid)
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Transfield Philippines, Inc. v Luzon Hydro Corporation, GR 146717, November 22, 2004
The beneficiary of a letter of credit may invoke the independence principle. To say that the
independence principle may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary.
2. 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. Thus, correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty tender, acts on its
own risk and may not thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the beneficiary. (See Feati
Bank, ibid)
Stand-By Letter of Credit:
1. A standby letter of credit is a bank-issued option on a loan involving three

parties: the bank issuing the credit, the party requesting for such issuance
(otherwise known as the account party) and the beneficiary. Under the terms of
standby letter of credit (SLC), the beneficiary has the right to trigger the loan
option (referred to as taking down the loan) if the account party fails to meet its
commitment, in which case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan to its customer. SLCs may support non-
financial 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.
2. 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.
STANDBY LETTER OF CREDIT COMMERCIAL LETTER OF CREDIT

Involve payment of money under a contract of
sale
Credit is payable upon certification of a party’s Credits become payable upon presentation by
non-performance of the agreement. The the seller-beneficiary of documents that show
documents that accompany the beneficiary’s he as taken affirmative steps to comply with the
draft tend to show that the applicant has NOT sales agreement.
performed his obligation
The beneficiary must certify that his obligor The beneficiary must demonstrate by
has not performed the contract documents that he has performed his contract
Types of Letters of Credit:

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1. 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 bank’s
letter of credit confirmed by a domestic bank? One reason could be if he has
doubts
2. Other types of letter of credits are:
(a) According to the method of transmission:

1. Circular letter of credit – it is one that is addressed to individual person in
general in which the opening bank undertakes to honor the beneficiary’s draft
under certain stipulated conditions.
2. Specially advised letter of credit – This is transmitted to the beneficiary by
the opening bank through the medium of its correspondence within the vicinity
of the beneficiary.
(b) According to the duration of the letter of credit:

1. Confirmed letter of credit – One in which the notifying bank gives its
assurance that the opening/issuing bank will perform its obligation of payment.
2. Revocable letter of credit – One which can be cancelled or amended at any
time before payment as it is intended to serve as a means of arranging
payment but not as a guarantee of payment. The opening bank can withdraw
from the transaction.
3. Irrevocable letter of credit – One which obligates the issuing bank to honor
drafts drawn in compliance with the credit and which can neither be cancelled
nor modified during its lifetime without the consent of all parties, including in
particular the beneficiary/exporter. The issuing bank does not have the right to
revoke the credit.
(c) According to method of payment:

1. Negotiation letter of credit – The beneficiary is instructed to draw his draft in
a foreign currency either on the opening foreign bank or on another designated
foreign bank which drafts so drawn the beneficiary may then sell to the
notifying bank or any other bank in his locality.
2. Simple and reimbursement currency credit – Where it is provided that the
amount of the payment made to the beneficiary plus the paying bank’s
commission for the service performed is debited to this account and this credit
is termed as “simple credit”. If the LC is not debited then the paying bank will
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draw a draft equal to the amount of its payment inclusive of the commission
and interest for the period used until reimbursement either on the opening
bank or on a correspondent of the opening bank. The opening bank maintains
an account (reimbursement credit) where this payment is debited.
3. Non-revolving letter of credit – One that is valid for one transaction only.
4. Revolving letter of credit – One that is valid for several transactions over a
given period of time such as a week or a month as the case may be with
restrictions that the amount will not exceed the limit set in an existing letter of
credit.
5. Cumulative letter of credit – One in which any amount not used by the
beneficiary during the specified period may be carried over to future periods
and drawn against by the beneficiary.
6. Non-cumulative letter of credit – One in which any amount not used by the
beneficiary during the specified period may not be drawn against by the
beneficiary in a later period.
7. Local currency credit – It is one which stipulates that drafts are to be drawn
in the currency of the domicile of the beneficiary and paid in its local currency
credit.
8. Foreign currency credit – It is one which stipulates that the drafts are to be
drawn in a foreign currency, whether that of the accredited buyer or otherwise.
(d) According to method of reimbursement:

1. Straight letter of credit – The beneficiary is paid by a local bank that is
designated by the opening bank.
2. Sight credit – The beneficiary’s draft is drawn payable at sight and once paid
the draft is merely treated as a receipt of payment.
3. Acceptance credit – One that stipulates it be drawn at a time for acceptance,
by well-repute bank in a center of international finance.
(e) According to the accompanying documents attached:

1. Documentary letter of credit – One which requires that certain documents be
included with any drafts drawn under the terms of the credit such as an order
bill of lading, commercial invoice, consular invoice, insurance certificate or
policy, certificate of origin, weight list, certificate of analysis, or packing list.
2. Clean letter of credit – which is not accompanied by any document.
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.
Back to Back Letter of Credit

- a credit with identical documentary
requirements and covering the same merchandise as another letter of
credit, except for the difference in price of the merchandise as shown by the
invoice and draft
- The second letter of credit can only be
negotiated after the first is negotiated.
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TRUST RECEIPTS LAW

Presidential Decree 115, January 29, 1973
Purpose of the Law and Preliminaries
1. As to purpose, it aims to:

(a) To encourage and promote the use of trust receipts as an additional
convenient aid to commerce and trade
(b) To regulate trust receipt transactions in order to assure the protection of the
rights and enforcement of the obligations of the parties involved therein; and
(c) To declare the misuse and/or misappropriation of goods or the proceeds
realized from the sale of goods, documents or instruments released under trust
receipts as a criminal offense punishable under Article 315 of the Revised Penal
Code (i.e., swindling or estafa)
Trust Receipt Defined
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.
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 (Nacu v Court of Appeals, 231 SCRA 237)
Trust Receipt Transaction
1. A trust receipt transaction is a transaction between an entruster and an

entrustee whereby the entruster, who owns or hold absolute title or security
interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s 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 (Section 4)
1.1 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.
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2. A trust receipt transaction distinguished from:
(a) A pledge - in a pledge, the person doing the financing has possession of the
property; in a trust receipt, the property is in the possession of the person
financed.
(b) A conditional sale - in a conditional sale, there is a sale of the property from
the seller to the buyer; in a trust receipt, there is no sale of the property from
the entruster to the entrustee.
(c) A 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)
Parties to a Trust Receipt Transaction
1. The parties to a trust receipt transaction are:

1.1 The entruster- is the person holding title over the goods, documents or
instruments subject to a trust receipt transaction, and any successor in interest
of such person (Section 3 [c])
(a) The rights of the entruster are as follows:
1. 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;
1.1 The entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the terms of
the trust receipt transaction, be responsible as principal or as vendor
under any sale or contract to sell made by the entrustee. (Section 8)
1.2 Although the entrustee is not the owner of the goods under a trust
receipt (ownership is retained by the entrustor) anyone who acquires the
goods from the entrustee acquires good title (ownership) over the goods,
which fact 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.
1.3 Note also that the risk of loss shall be borne by the entrustee. 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 (Section 10). 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.
1.4 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. (Prudential Bank v NLRC, 251 SCRA 421 [1995])
Validity of entruster’s security interest as against creditors-the
entruster’s security interest in goods, documents, or instruments
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pursuant to the written terms of a trust receipt shall be valid as against
all creditors of the entrustee for the duration of the trust receipt
agreement (Section 12)
2. To the return of the said goods, in case they could not be sold; and
3. To cancel the trust in case the entrustee defaults, take possession of the
goods, and sell the same at public or private sale (Section 7).
3.1 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 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 entrustee’s last known business address.
(c) The proceeds of any such sale, whether public or private, shall be
applied to the:
(1) Payment of the expenses thereof;
(2) Payment of expenses of re-taking, keeping and storing the goods,
documents or instruments;
(3) Satisfaction of the entrustee’s indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency.
1.2 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
(Section 3 [b])
(a) The obligations of the entrustee are as follows:
1. To hold the goods in trust for the entruster and to dispose of them strictly
in accordance with the terms of the trust receipt; This includes the authority
to manufacture or process the goods with the purpose of ultimate sale.
Provided, however, that the entruster retains title over the goods whether in
its original or processed form until the entrustee has complied with the
obligation under the receipt. It also includes authority to load, unload, ship
or transship or otherwise deal with the goods in a manner preliminary or
necessary to their sale
2. 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;
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3. To insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;
4. 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
5. To return the goods,to the entruster in case they could not be sold or
upon demand of the entruster (Section 9)
Rosario Textile Mills Corp. v Home Bankers Savings and Trust Co., GR 137232, June 29, 2005
The entrustee owns the goods and thus bears the risk of loss.
If under the trust receipt , the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in
any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt
of giving a stronger security for the loan obtained by the importer. To consider the bank as the true
owner from the inception of the transaction would be to disregard the loan feature thereof.
Landl & Company, Inc. v Metropolitan Bank and Trust Company, GR 159662, July 30, 2004
ISSUE: If the entrustee were to return the goods to the entruster as he was not able to sell them,
would the obligation secured by the trust receipt be extinguished? Is deficiency claim proper in a
trust receipt transaction?
HELD: NO. A trust receipt is a security agreement, pursuant to which a bank acquires a “security
interest” in the goods.
The initial repossession by the bank of the goods subject of the trust receipt did NOT result in the
full satisfaction of the loan obligation. A claim for deficiency would thus be in order.
ISSUE: If the entrustee were to cancel the trust receipt and take possession of the goods, would
this result in dacion en pago?
HELD: NO. Dation in payment takes place when property is alienated to the creditor in satisfaction
of a debt in money and the same is governed by sales. Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.
The repossession of the goods by the entrustee was merely to secure the payment of its obligation
to the entrustor and NOT for the purpose of transferring ownership thereof in satisfaction of the
obligation.
Form of a Trust Receipt
1. As to form, a trust receipt need not be in any particular form, but every such
receipt must substantially contain
(a) a description of the goods, documents or instruments subject of the trust
receipt;
(b) the total invoice value of the goods and the amount of the draft to be paid
by the entrustee;
(c) an undertaking or a commitment of the entrustee
(1) to hold in trust for the entruster the goods, documents or instruments
therein described;
(2) to dispose of them in the manner provided for in the trust receipt;
(3) to turn over the proceeds of the sale of the goods, documents or
instruments to the entruster to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return the goods,
documents or instruments in the event of their non-sale within the period
specified therein.
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2. The trust receipt may contain other terms and conditions agreed upon by the
parties in addition to those hereinabove enumerated provided that such terms
and conditions shall not be contrary to the provisions of this Decree, any existing
laws, public policy or morals, public order or goods customs (Section 5)
Penal Sanctions for Violation of the Trust Receipts Law
1. 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.
2. There is no need to prove intent to defraud (People of the Philippines v Cuervo,

104 SCRA 312). The offense is malum prohibitum (Metropolitan Bank v Tonda, 338
SCRA 254)
3. 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.
4. It does not seek to enforce payment of the loan, rather it punishes the
dishonesty or abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner (Colinares v
Court of Appeals, 339 SCRA 623)
5. Consequently, the law has consistently been declared as not violating the
constitutional proscription against imprisonment for non-payment of debt. It is a
declaration by the legislative authority that, as a matter of public policy, the
failure of a person to turn over the proceeds of the sale of goods covered by the
receipt or to return the goods if not sold is a public nuisance to be abated by
penal sanctions (Tiomico v CA, 304 SCRA 216)
LECTURE OUTLINE ON THE BULK SALES LAW

(Act No. 3952, as amended by RA 111)
Purpose of the Bulk Sales Law
1. The purpose of the law is to prevent the defrauding of creditors by the secret
sale in bulk of all or substantially all of a merchant’s stock of goods until the
creditors of the sellers should have been paid in full.
2. The law generally requires any seller who sells property in bulk, as defined by
law to notify his creditors of the terms and conditions of the sale, and also, before
receiving from the vendee any part of the purchase price, deliver to such vendee
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a written sworn statement of the names and addresses of all his creditors
together with the amount of indebtedness due to each; provided, however, that
these requirement shall not be necessary if the seller could produce and deliver to
the vendee a written waiver by the creditors of their rights under the law (27 C.J.
Sec. 881)
Defining Bulk Sales
1. A sale is considered as a sale and transfer in bulk if: (a) It is a sale, transfer,
mortgage, or assignment of a stock of goods, wares, merchandise, provisions
otherwise than in the ordinary course of trade and the regular prosecution of the
business, or (b) It is a sale or transfer of all or substantially all, of the business or
trade; or (c) It is a sale or transfer of all, or substantially all, of the fixtures and
equipment used in the business (Section 2)
1.1 A sale under Section 40 of the Corporation Code will be covered if the
business involves the buying and selling of merchandise.
1.2 A Merger or Consolidation however is not covered as the surviving or
consolidated corporation assumes all the liabilities of the constituent
corporations
2. A sale or transaction in bulk is not covered by the Bulk Sales Law when: (a)the
transaction is in the ordinary course of trade and the regular prosecution of the
business of the vendor (b) the vendor in bulk produces and delivers a written
waiver of the provisions of the Bulk Sales Law from the creditors (c) the sale in
bulk is made by executors, administrators, receivers, assignees in insolvency, or
public officers acting under judicial process; and (d) sales of properties that are
exempt from attachment or execution by creditors (Sec. 13, Rule 39 of Rules of
Court)
3. The law, being penal in nature is construed strictly. Hence, it has been held to
apply only to sales in bulk of fixtures and equipments used in the mercantile
business which involves the buying and selling of merchandise.
4. The protection afforded to creditors of the seller in bulk are: (a) requirement
that the vendor deliver to the vendee a written statement under oath of the
names and addresses of all creditors to whom said vendor is indebted together
with the amount of his indebtedness (b) requirement that at least ten days before
the sale, the vendor shall make a full detailed inventory thereof showing the
quantity and the cost price of the goods and shall notify every creditor of the
price, terms and conditions of the sale (c) requirement that the purchase price
paid must be applied to the debt owing to the creditors. In addition, the law also
prohibits the vendor in bulk to transfer title to the same without consideration or
for a nominal value.
5. If the sale in bulk is not made in accordance with the Bulk Sales Law, the sale is
fraudulent and void. The creditors may proceed against the vendee who shall hold
the stock of merchandise in trust for the creditors.
188
5.1 The provision of the law that the sale is “fraudulent and void” is not a mere
presumption. Therefore, the motivation of the parties or whether they are in
good or bad faith is immaterial
6. Punishable offenses are those which involve Sections 3 (delivery of a sworn

statement), 4 (application of purchase price to the pro rata payment of bona fide
claims of creditors), 5 ( need for a disclosure and notification) , 6 (failure to make
a correct statement of creditors, amounts due or a false or untrue statement) , 7
(transfer of title without or for nominal consideration) and 9 (registration of the
sale with the Bureau of Trade and Consumer Protection), all of which, except
Section 9 make reference only to the first type of sales in bulk. Considering the
penal character of the law, the other two types must be interpreted as not
punishable by the prescribed penalty of imprisonment of not less than 6 months
nor more than 5 years, or a fine of not more than P 5,000, or both at the court’s
discretion.
AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS

INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGES
Act 3135, as amended
The purpose of the law is to regulate the manner in which the extrajudicial
foreclosure and redemption of real estate mortgages may be made.
The process of extrajudicial foreclosure:
1. The resort to the process of extra-judicial foreclosure emanates from the

presence of a stipulation that allows the creditor/mortgagee to extra-judicially
foreclose and designating the said party as the attorney-in-fact of the mortgagor
to cause the same and to sell the subject property at a foreclosure sale by an
insertion into or attachment to the real estate mortgage.
1.1 When a debt is secured by a real estate mortgage, the creditor has two
options: (a) to foreclose, or (b) file an ordinary action to collect. If he avails of
the option to foreclose, he is still allowed to bring a claim for any deficiency. On
the other hand, if he avails of the option to file an ordinary action, he abandons
or waives his mortgage lien, without prejudice to his levying on the same
property but subject to the rights of other creditors, if any.7
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.8
1.3 A mortgage contract is, by nature, indivisible. The debtor who has paid
cannot ask for a proportionate extinguishment of the mortgage as long as the
debt is not completely satisfied. Generally, the divisibility of the principal
7
Caltex Phils. v IAC, GR 74730, August 25, 1989
8
Chieng v Santos, 531 SCRA 730 (August 31, 2007)
188
obligation is not affected by the indivisibility of the mortgage.9
2. The application for extrajudicial foreclosure of mortgage shall be filed with

the Executive Judge through the Clerk of Court (who is also the Ex-Officio Sheriff).
After receipt of the application, the Clerk of Court shall, among other duties, (a)
examine the same to ensure that the special power of attorney authorizing the
extrajudicial foreclosure of the real property is either inserted into or attached to
the deed of real estate mortgage, (b) raffle the application among the Sheriffs,
and (c) cause the posting and/or publication of the notice of sale (Secs. 1 to 4,
inclusive, of the Guidelines; see Paragraph 11.17). This likewise applies to
applications that involve the conduct of a foreclosure sale under the direction of a
Notary Public, as he is an officer of the Court and is legally subject to its
supervision.
2.1 This examination of the Clerk of Court is always under the supervision of
the Executive Judge as he must see to it that the applicant has fully complied
with the requirements before it is scheduled for auction sale by posting of the
publication and notice of public auction.
2.2 It is within this time, but before clearance is given to proceed that an
administrative objection to the petition for foreclosure can be made. If such is
filed, the Executive Judge shall now cause to be examined whether the
applicant has complied with the requirements before public auction is
conducted. His subsequent finding can only pertain to defects in form or in
substance, which shall then cause him not to give due course to the petition.
There should be no finding as to the validity of the loan or the like.
2.3 If a petition is given due course, the objecting mortgagor has a choice
between two judicial remedies:
a. Filing a Petition for Certiorari and Prohibition with Application for Issuance
of a Writ of Preliminary Injunction or Temporary Restraining Order under
Rule 65 with the court of Appeals to review the Order of the Executive Judge
giving due course to the Petition, if grave abuse of discretion on the part of
the Executive Judge can be shown;
b. An ordinary civil action to annul the Foreclosure Proceedings with
Application for Issuance of a Writ of Preliminary Injunction or Temporary
Restraining Order may be filed with the Regional Trial Court.
3. If a sale is not restrained or enjoined, and is subsequently conducted, the same

must be: (a) made in the province where the property to be sold is situated. Sale
outside the province is illegal (b) In case the mortgage deed specified a place in a
municipality in the province where the sale would be made, such sale shall be
made in such place or (c) if the place of sale in the municipality was not
stipulated, in the municipal building of the municipality in which the property or
part thereof is situated.
4. As a rule, notices of sale shall be posted for not less than 20 days in at least 3
public places in the city or municipality where the property is situated. If the
property is worth more than P400, the notice of sale shall also be published once
9
MBTC v SLGT Holdings Inc., 533 SCRA 516 (September 14, 2007)
188
a week for 3 consecutive weeks in a newspaper of general circulation in the city
or municipality. Unless otherwise stipulated by the parties to the mortgage
contract, the debtor/mortgagor need not be personally served a copy of the notice
of extrajudicial foreclosure (Sec. 4[b][1], Guidelines)
5. The extrajudicial foreclosure sale be conducted by public auction or bidding

made through sealed bids which must be submitted to the Sheriff who shall
conduct the sale between the hours of 9:00 a.m. and 4:00 p.m. of the date of the
auction. The property mortgaged shall be awarded to the party submitting the
highest bid and, in case of a tie, an open bidding shall be conducted between the
highest bidders. Payment of the winning bid shall be made either in cash or in
manager’s check, in Philippine currency, within 5 days from notice (Sec. 5[a],
Guidelines)
5.1 The creditor may be barred from participating in the bidding if so provided
in the mortgage deed.
6. The sheriff shall then sign and issue the certificate of sale, subject to the
approval of the Executive Judge, or in his absence, the Vice-Executive Judge. No
certificate of sale shall be issued in favor of the highest bidder until all fees
provided for in the aforementioned sections and in Rule 141, Section 9(l) as
amended by A.M. No. 00-2-01-SC, shall have been paid; Provided, that in no case
shall the amount payable under Rule 141, Section 9(l) as amended, exceed
P100,000.00
7. After the certificate of sale has been issued to the highest bidder, keep the
complete records, while awaiting any redemption within a period of one (1) year
from date of registration of the certificate of sale with the Register of Deeds
concerned, after which, the records shall be archived.
7.1 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.
7.2 Notwithstanding the foregoing provision, juridical persons whose
property is sold pursuant to an extra-judicial foreclosure, shall have the right to
redeem the property until, but not after, the registration of the certificate of
foreclosure sale which in no case shall be more than three (3) months after
foreclosure whichever is earlier, as provided in Section 47 of Republic Act. No.
8791 (A.M. No.99-10-05-0)
7.3 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.
7.4 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
188
mortgage.10
7.5 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
sheriff’s 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 again the above provision of RA 8791. The purchaser at the foreclosure
sale shall file with the Register of Deeds his sworn statement attesting to the
fact of non-redemption; whereupon the Register of Deeds shall issue a new
certificate of title in favor of the purchaser after the owner’s duplicate
certificate has been previously delivered and cancelled.11
7.6 The period for redemption may be the subject of an extension as may
be agreed upon by the parties.12
7.7 The purchaser of foreclosed property is not automatically entitled to
the possession thereof during the redemption period as he must petition the
Regional Trial Court of the province or city where the property is situated to
give him possession thereof during the redemption period. He must also put
up a bond equivalent in value to the use of the property for a period of 12
months to indemnify the debtor in case it is shown that the sale was made
without complying with the requirements of Act No. 3135 or that there was no
violation of the mortgage deed.
7.8 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.
Grounds to Restrain or Enjoin Foreclosure:
1. 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.
1.1 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
2. 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.13
2.1 Where the debtor is not given an opportunity to settle the debt at the
correct amount and without iniquitous interest imposed, no foreclosure
10
Heirs of Felicidad Cangue v CA, 275 SCRA 741
11
LRA Circular 11-2000, August 17, 2000
12
Lazo v Republic, 31 SCRA 329
13
Almeda v CA, GR No. 113412, April 17, 1996
188
proceedings can be instituted.14
2.2 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 landowner’s compensation. Hence, until the final
valuation of the lands subject to CARP is determined, the amount of the
mortgage debt is unliquidated
3. 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.
3.1 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
3.2 Its being a potestative condition (one within the sole power of the one
obligated to perform), consequently null and void finds basis in Article 1308 of
the Civil Code that provides that the fulfillment of a condition cannot be left to
the sole will of one of the contracting parties
3.3 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 weighed 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.
3.4 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.
3.5 Under Article 1956 of the Civil Code, no interest is due unless it has
been expressly stipulated in writing. The floating rate being unilaterally fixed
by the Bank without the written mutual agreement of the Borrower for each re-
pricing of interest is null and void under Art. 1956 of the Civil Code, and for
violation of CB Circular No. 1191 that the interest rate for each re-pricing
period under the floating rate of interest in subject to mutual agreement.
3.6 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.
3.7 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
14
Heirs of Zoilo Espiritu vs. Landrito, 520 SCRA 383, April 3, 2007
188
on the merit and the mortgagor cannot meet the obligation following that
determination.
4. Issue of the mortgage as security for future loans. The rule is unless a
continuing real estate mortgage is involved, a real estate mortgage is not a valid
security for future loans under the so called “Dragnet Clause”.
4.1 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.
4.2 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
4.3 Mortgages with a dragnet clause is a contract of adhesion that must be
strictly construed as against the bank.15
4.4 To constitute a real estate mortgage as security for future loans, the future
loans must be agreed upon and fixed in the mortgage deed at the time of the
execution of the same
4.5 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”.16
5. 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
6. 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.
6.1 The proceedings related thereto allow the mortgagor to participate

although jurisprudence provides that the hearings are ex-parte. However, with
the mandate of Section 8 of Act 3135 which allow the mortgagor to set aside
foreclosure in the same proceedings, it is the better rule to actually allow the
mortgagor’s active participation.
6.2 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
15
PBC v CA, 253 SCRA 241
16
Cuyco v Cuyco, 487 SCRA 693
188
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.17
6.3 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.18
6.4 Order granting a writ of possession under Act 3135 is a final order. Hence,
it is appealable. In expropriation, it is interlocutory.19
7. Grounds for the proper annulment of the foreclosure sale are the following: (a)
there was fraud, collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser (b) the sale was not fairly and regularly conducted
(c) price was inadequate and the inadequacy was so great as to shock the
conscience of the court.20
LECTURE NOTES ON THE CHATTEL MORTGAGE LAW

Act No. 1508, July 2, 1906 in relation to Articles
1484, 1485, 2140, and 2141 of the Civil Code
Purpose and Application of the law
1. Act 1508 primarily governs chattel mortgages, but the provisions of the Civil
Code on pledges, insofar as they are not in conflict shall apply suppletorily.
2. The law aims to: (a) To promote business and trade in the Philippines; and
(b) To give impetus to economic development of the country (Torres v. Limjap, 56
Phil. 144)
Chattel Mortgage defined
1. Chattel mortgage defined - By a chattel mortgage, 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 (Art. 2140,
Civil Code)
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 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
17
Dayot v Shell Chemicals (Phils) Inc., 525 SCRA 535 (June 26, 2007)
18
Gatchalian v Arlegui, L 41360, February 19, 1997
19
San Fernando Rural Bank Inc. vs. Pampanga Development Corporation, 520 SCRA 564 (April 4, 2007)
20
UCPB v Beluso, 530 SCRA 567 (August 17, 2007)
188
mortgage instrument; in pledge, the consent of the pledge need not be in
writing but may be oral.
c. In chattel mortgage, in addition to other formal requirements, the
mortgagor must execute an affidavit of good faith; in pledge, there is no
requirement that the pledgor execute such an affidavit.
d. In 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, etc.
e. In 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 chattel mortgage, the thing mortgaged must be personal or movable
property; in 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 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 chattel mortgage, redemption of the thing mortgaged may be made
only before the sale thereof; in real estate mortgage, the thing mortgaged
may be redeemed after it is judicially sold but before judicial confirmation of
the sale, or if extrajudicially sold, within one year from and after the date of
sale (except where the mortgagor is juridical person whose property has
been mortgaged in favor of a bank, quasi-bank or trust entity, in which case
the redemption shall be made until, but not after, the registration of the
certificate of foreclosure sale with the applicable Register of Deeds which in
no case shall be more 3 months after foreclosure whichever is earlier)
2. The essential requisites of a chattel mortgage are:

(a) It must be constituted to secure the fulfillment of a principal obligation
(b) The mortgagor must be absolute owner of the property mortgaged
(c) The mortgagor must have free disposal of such property, or be legally
authorized for the purpose
(d) The property involved must be personal or movable, and
(e) Contract must be recorded in the Chattel Mortgage Register
2.1 As far as the first essential requisite note that:

a. Although the Chattel Mortgage Law provides that a chattel mortgage is a
“conditional sale” in Section 3, thereof, it is actually a mere security for the
payment of a debt (Ablaza v. Ignacio, 103 Phil. 1151). This has already been
considered inaccurate by the Code Commission (Serra v. Rodriguez, 56
SCRA 538). The mortgagor is not divested of ownership, as the chattel
188
mortgage is merely a real right of security and does not completely divest
the mortgagor of ownership over the mortgaged property (Ablaza v. Ignacio,
supra). Accordingly, the mortgagor has the right to sell the mortgaged
property without prejudice to any criminal prosecution under the provision
of Art. 319, paragraph 2, Revised Penal Code (Servicewide Specialist, Inc v.
IAC, 174 SCRA 80, Dy v. CA, 198 SCRA 826). On the other hand, the
mortgagee’s title to property is only to hold it as security, and whatever
amount is received as the result of the foreclosure sale is merely a
payment, pro tanto, on the debt (Ablaza v. Ignacio, ibid)
b. The personal property already mortgaged can again be subsequently
mortgaged. In such case, the subsequent or junior mortgagee has the right
to (1) To receive the excess, if any, of the proceeds in the foreclosure sale;
or (2) To exercise equity of redemption, after default but before sale of
property. Also, in case of a second mortgage, the second mortgagee must
wait until after the debtor’s obligation under the first mortgage is fully
settled before he can effectively exercise his rights under the second
mortgage (Alpha Insurance v. Reyes, 106 SCRA 274)
c. 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 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.
While a pledge, real estate mortgage, or antichresis may exceptionally secure

after-incurred obligations so long as these future debts are accurately described, a
chattel mortgage can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in the chattel mortgage to include
debts that are yet to be contracted can be a binding commitment that can be
acted upon, the security itself does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed
either by a fresh chattel mortgage deed or by amending the old contract to
conform to the law, particularly the execution of an affidavit of good faith (Acme
Shoe etal v. CA, GR No. 103576, August 22, 1996)
2.2 As far as to fourth essential requisite pertaining to the subject of a chattel

mortgage contract:
a. Only personal property may be subject of a chattel mortgage. This
personal property is that which is defined by the Civil Code. Examples of
personal properties are: (1) Interest in business [Involuntary Insolvency of
Strocheker v. Ramirez, 44 Phil. 933] (2) Growing fruits [Sibal v. Valdez, 50
188
Phil. 512] (3) Vessels [Phil. Refining Co. v. Jarque, 61 Phil. 229] (4)Shares of
stock [Monserrat v. Ceron, 58 Phil. 469] (5) Machineries placed by tenant in
building belonging to another [Davao Saw Mill v. Castillo, 61 Phil. 709]; and
(6) Other personal properties enumerated in the CC, such as those
movables susceptible of appropriation which are not included in the
preceding article; real property which by any special provision of law is
considered as personality; forces of nature which are brought under control
by science; and in general, all things which can be transported from place to
place without impairment of the real property to which they are fixed
[Article 416].The following are also considered as personal property:
obligations and actions which have for their object movables or demandable
sums; and shares of stock of agricultural, commercial and industrial entities,
although they may have real estate [Article 417]
b. The recognized exceptions as to subject are when: (1) By exercising the
freedom to contract that the law gives them, parties may stipulate that as
between them, real property, such as building, may be considered personal
for purposes of the chattel mortgage law. But this cannot affect third
persons. (Navarro v. Pineda, 9 SCRA 631 [1963], Tumulad v. Vicenio, 41
SCRA 143)BUT , when executed upon it shall still be executed as a real
property and subject to the rules on foreclosure of real estate mortgage (2)
A chattel mortgage can be executed on growing crops, which under the Civil
Code are real property BUT if creditor wants to attach growing crop, the
procedure is still the same as in attachment of real property.
c. Rules on chattel mortgage buildings (a) Buildings which are merely
superimposed on the soil may be subject to chattel mortgage. Example:
Quonset huts (b) True buildings whether built by the owner of his own land
or on the land of another are real properties and cannot be valid subjects of
the chattel mortgage contracts. (Associated Insurance and Surety Co. v. Iya,
103 Phil. 972). However, as between the parties, the same may be
considered valid on the ground of estoppel (Evangelista v. Alto Surety, 103
Phil. 401)
d. The chattel mortgage cannot be considered to include after-acquired
properties as it shall cover only the property described in the deed and not
any other like or substituted property (Sec 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
2.3 As far as the fifth essential requisite, 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.
188
a. There are several views regarding the non registration of a chattel

mortgage, they are:
(a) First view – the contract is void even as between the parties because Art.
2140, N.C.C. is clear
(b) Second view – the contract is void to third persons but valid as between
the parties
(c) Better view – technically, even without registration, the contract is
valid between the parties, but for practical purposes, the same is ineffectual
since the mortgagee acquires no right but to demand registration of the
document (Art. 2125, N.C.C.)
b. Where the chattel mortgage contract is registered: The general rules are:
(1) Mortgagor and property situated in the same province-Chattel Mortgage
Register of the province where mortgagor resides
(2) Mortgagor resides outside of the Philippines-Chattel Mortgage Register
of the province where property is situated
(3) Mortgagor and property situated in different provinces-Chattel Mortgage
Register of both the province in which the mortgagor resides and that in
which the property is situated except where the amount of the mortgage is
more than P500,000 in which case the registration of the mortgage in the
province where the property is situated shall be sufficient registration.
c. In Special cases:
(a) Motor vehicles-proper chattel mortgage register and Bureau of Land
Transportation where vehicle is registered. Where the vehicle is a public
utility, and the mortgage is executed to guaranty a loan not repayable
within one year, the approval of the Board of Transportation must be had
(b) Vessels-the chattel mortgage must be registered at the port of entry
where the vessel is registered with the Bureau of Coast Guard
(c) Shares of stock-chattel mortgage register of province in which the
mortgagor resides and in that of the corporation unless their domicile is the
same, in which case, a single registration is sufficient (Chua Guan v.
Samahang Magsasaka, Inc., 62 Phil. 472)
d. When should a chattel mortgage be registered: No specific time is provided
under the law. Note that without registration it is not binding upon third
persons. Obviously, however, such registration must be made before the
mortgagor has complied with his principal obligation and no right of an
innocent third person is prejudiced.
e. The entry in the Day Book of the chattel mortgage is not sufficient, as it
must also be entered in the Chattel Mortgage Register.
f. The formal requirements which must be observed in the preparation and
execution of a chattel mortgage are:
(1) Signed by the person executing the same in the presence of two
witnesses
(2) Accompanied by an affidavit of good faith and a certificate of oath
(3) Mortgaged property must be described in such a manner as to enable
anybody reading the document, after reasonable inquiry and investigation,
to be able to identify the same
g. If a chattel and a real mortgage are embodied in a single document, it does
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not fuse both securities into an indivisible whole. Both remain distinct
agreements, different not only in the subject matter of the contract but in the
governing legal provision (Philippine Bank of Commerce v. Macadaeg, 109 Phil.
981)
Enforcement of a Chattel Mortgage
1. The remedies of a creditor are:

a. Extrajudicial Foreclosure, the procedure for which is as follows:
1. The mortgagee, 30 days after the condition of a chattel mortgage is
broken, may cause the mortgaged property or any part thereof to be sold at
public auction by a public officer at a public place in the municipality where
the mortgagor resides or where the property is situated. The application for
the foreclosure of the mortgage should be filed with the Executive Judge
through the Clerk of Court (who is also the Ex-Officio Sheriff). After receipt
of the application, the Clerk of Court shall, among other duties, (i) raffle the
application among the Sheriffs, and (ii) cause the posting of the notice of
sale. (See Sections 1 to 4, inclusive, of Circular No. 7-2002, issued January
22, 2002, [hereinafter called “Guidelines”] providing guidelines for the
enforcement of the Supreme Court Resolution of December 14, 1999 in
Administrative Matter No. 99-10-05-0 [Re: Procedure in Extra-Judicial
Foreclosure of Mortgage], as amended by the Resolutions dated January 30,
2001 and August 7, 2001.)
2. Notice of the time, place and purpose of such sale must be posted, at
least 10 days before the date of sale, at 2 or more public places in the
municipality where the mortgagor resides or where the property is situated.
Parties are not prohibited from agreeing on a private sale rather than a sale
at public auction (PNB v. Manila Investment, 38 SCRA 462)
3. The mortgagee shall notify the mortgagor and the persons holding
subsequent mortgages of the time and place of sale, at least 10 days before
the sale, either by notice in writing directed to him or left at his abode, if
within the municipality, or sent by mail if he does not reside in such
municipality.
4. The officer making the sale shall, within 30 days thereafter, make in
writing a return of his doings and file the same in the office of the registry of
deeds where the mortgage is recorded, and the registry of deeds shall
record the same. The return shall particularly describe the articles sold and
state the amount received for each article.
5. In making his return, the officer shall indicate the application of the
proceeds in the following manner: first, to the payment of the costs of
keeping and sale; second, to the payment of the obligation secured by such
mortgage; third, to the payment of the obligations secured by subsequent
mortgages in their order; and the balance shall be paid to the mortgagor.
b. An action for replevin, if the debtor refuses to voluntarily surrender

possession of the personal property to the sheriff. After which, he then
proceeds at public auction.
1. A creditor cannot forceably take possession of the chattel without court
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intervention (BPI Credit v. CA, 204 SCRA 601, Filinvest Credit Corporation v.
CA, 248 SCRA 549)
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 mortgagor’s default does
not operate to vest in the mortgagee the ownership of the mortgaged
property.
c. Judicial Foreclosure in the manner provided for by Section 8, Rule 68 of the

1997 Rules of Civil Procedure relating to foreclosure of a real estate mortgage.
d. Bring an action for the payment of a sum of money

1. Availment of this remedy is a waiver (Industrial Finance Corporation v.
Ramirez, 77 SCRA 152, Movido v. RFC, 56 SCRA 538) or abandonment of the
chattel mortgage (Cerna v. CA, 220 SCRA 517) or discharge (Land
Settlement and Development Corporation v. Carlos, 22 SCRA 202)
2. 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. 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. In suing for the deficiency, the mortgage is merely seeking to enforce
a written promissory note. Art. 1144, NCC, provides that an action to
enforce a written contract prescribes in ten (10) years. Further, a suit for the
recovery of the deficiency after the foreclosure of a mortgage is in the
nature of a mortgage action because its purpose is precisely to enforce the
mortgage contract. Such being the case, Art 1142, CC, is likewise
applicable. Said articles provides: “Art. 1142. – A mortgage action prescribes
after ten years” (DBP v. Tomelden, 101 SCRA 171)
e. Note though the 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 vendee’s failure to pay cover two or more
installments; or
(3) Foreclose the chattel mortgage on the thing sold should the vendee’s
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, CC). This
remedies are exclusive not alternative.
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Other Acts related to Chattel Mortgages that are Punishable by Law:
1. Article 319 of the Revised Penal Code, having repealed Sections 9 to 12 of the
Chattel Mortgage Law, provides that it would be a criminal offense is the debtor-
mortgagor shall:
a. Knowingly remove any personal property mortgaged under the Chattel
Mortgage Law to any province or city other than the one in which it was
located at the time of the execution of the mortgage without the mortgagee’s
consent. Note that as to motor vehicles, the same is allowed as long as not
permanent;
b. Sell or pledge personal property or any part thereof already mortgaged
under the Chattel Mortgage Law without the consent of the mortgagee written
on the back of the mortgage and noted on the record thereof in the office of
the register of deeds of the province or city where such property is located.
Note the absence of a reference to a subsequent chattel mortgage
WAREHOUSE RECEIPTS LAW (Act 2137) AND THE GENERAL BONDED

WAREHOUSE ACT
(Act 3893, as amended by RA 247)
Purposes of the law and Preliminaries:
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
1.1 It places greater responsibility on the warehouseman

1.2 It protects those who, in good faith and for value, acquire negotiable
warehouse receipts by negotiation
1.3 It renders the title to, and right of possession of property stored in
warehouse easily convertible
2. It also covers all warehouses, whether bonded or not.
3. 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.
3.1 To achieve the purpose of the law, a person who wants to engage in the
business of receiving commodities for storage is required to secure a license from
the Department of Trade and Industry
4. Distinguishing between the 2 laws, the Warehouse Receipts Law refers to the
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rights and obligations of parties in a warehousing contract, while the General
Bonded Warehouse Act refers to state regulation and supervision of warehouses
5. 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.
Definition of Terms:
1. Warehouse receipt defined- it 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-keeper’s receipt” or “storage receipt.”
1.1 Quedan defined- it is a warehouse receipt for commodities or goods such as

sugar, tobacco, rice or hemp. Note though that the applicable laws are Articles
1507 to 1520 and 1636 of the Civil Code, as those that actually issue quedans are
not warehousemen as their services are not open to the public
1.2 While no particular form is required, it should however include the necessary
terms stating:
(a) Location of the warehouse
(b) Date of issue
(c) Number of receipt
(d) Description of the goods
(e) Advances made
(f) Rate of charges
(g) Ownership of the goods by language indicating if the warehouseman is an
owner, solely or jointly with others, of the goods deposited
(h) Signature of the warehouseman, and
(i) Person to whom goods should be delivered by language indicating whether
the receipt is negotiable or non-negotiable, that is whether the goods received
will be delivered to the bearer, to a specified person, or to a specified person or
his order
1.2.1 Item (g) addresses the prohibition imposed on a warehouseman to set up

title to goods deposited in himself (Sec 16, Warehouse Receipts Law) or in favor of
a third person (Sec 19, Warehouse Receipts Law) and indicates his compliance
with Sec 53 which requires him to state the fact of his ownership or interest in the
goods deposited.
1.2.2 Item (h) addresses the issue of determination as to whether a warehouse

receipt is negotiable as it should state that the goods received will be delivered to
the bearer, or to the order of any person named therein (Sec 5, Warehouse
Receipts Law) or non-negotiable as such should state that the goods received will
be delivered to the depositor, or to any other specified person (Sec 4, Warehouse
Receipts Law)
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1.2.3 Note that a negotiable warehouse receipt is not a negotiable instrument as

the same does not comply with the requisites of Sec 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.
1.2.4 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 non-negotiable, it must be written out as such and to prevent
any person from supposing it to be negotiable, the words “non-negotiable” should
be placed plainly on its face (Secs 5 and 7, Warehouse Receipts Law). A non-
negotiable receipt may only be assigned.
1.2.5 The failure to mark a warehouse receipt as non-negotiable will allow the
present holder, not the original holder, to have the option of treating it as a
negotiable receipt provided that:
(a) He supposed it to be negotiable, and
(b) He purchased it for value (Sec 7, Warehouse Receipts Law).
Such rights however shall be enforceable only against the warehouseman (Roman
v. Asia Banking Corp., 46 Phil. 705). This means that he can impose upon the
warehouseman the same liabilities he would have incurred if the receipt was
negotiable. The “holder” referred to in Sec 7 cannot be the original holder
because, as the depositor, he is presumed to know whether he is getting a
negotiable or a non-negotiable receipt.
1.2.6 The failure to include any of the above terms in a negotiable warehouse
receipt shall make the warehouseman liable to any person injured by such
omission.
1.2.7 The advantages of a negotiable warehouse receipt over one which is non-
negotiable are:
(a)Goods cannot be garnished or levied upon under execution unless receipt is
surrendered or impounded or its negotiation enjoined (Sec 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 (Sec 41, Warehouse
Receipts Law), and
(c) Goods are not subject to vendor’s lien or stoppage “in transitu” (Sec 49,
Warehouse Receipts Law)
1.2.8 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.
Example: those that provide that risk of loss by fire or theft is to be borne by the
depositor as the warehouseman has the obligation to keep them safe.
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2. Warehouseman defined - is a person lawfully engaged in the business of storing

goods for profit (Sec 58a, Warehouse Receipts Law). He is also defined as a
person lawfully engaged in the business of storing goods for profit (Sec 2, General
Bonded Warehouse Act). In other words, he is one who receives and stores goods
owned by others and collects fees for so doing (Commissioner of Internal Revenue
v. Hawaiian-Philippine Co., 11 SCRA 256)
2.1 Included in the phrase “the business of receiving commodity for storage”
includes any contract or transaction wherein:
(a) The warehouseman is to return same commodity deposited or pay its value
(b) The commodity is to be milled for the owner thereof, or
(c) The commodity delivered is commingled with the commodity belonging to
other persons, and the warehouseman is obligated to return commodity of the
same kind or pay its value (Sec 2, General Bonded Warehouse Act; People v.
Versola, 103 Phil. 201)
2.2 The only persons allowed to issue warehouse receipts are the warehouseman
or his agents (Sec 1, Warehouse Receipts Law, National Bank v. Producers
Warehouse Association, 42 Phil. 608)
Primary Obligations of the Warehouseman:
1. A warehouseman must issue a receipt for any commodity that he receives for
storage (Sec 2, Warehouse Receipts Law)
2. 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 (Sec 3, Warehouse Receipts Law) 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 (Sec 21,
2.1 Under the General Bonded Warehouse Law, he is required to:

(a) Put up a cash bond or a bond secured by real estate, or a bond issued
by a duly authorized bonding company in an amount no less than 33 and 1/3
percent of the market value of the maximum quantity of commodity to be
received by the warehouseman, conditioned as to respond for the market value
of the commodity actually delivered and received at any time by the
warehouseman in case the latter is unable to return the commodity or pay its
value (Sec 4). The bond is available for recourse by a party damaged by the
breach of a warehouseman of any of his obligations. If it be insufficient, the
injured party may sue on any property or asset not otherwise exempt from
attachment and execution. (Sec 7)
(b)Insure the commodity received for storage against fire (Sec 6). The other
instances when he is required to procure insurance are: when notice to that
effect had been made by the warehouseman; as a matter of practice; when
provided for in the warehouse receipt; or where the law so provides (56 AMJUR
188
400)
(c) Receive for storage any commodity of the kind customarily stored by him in
the warehouse, so far as his license and the capacity of the warehouse will
permit, without making any discrimination between persons desiring to avail
themselves of warehouse facilities (Sec 8). The kind of commodities could be
any raw, processed, manufactured or finished product or by-product, goods,
articles, or merchandise, either of domestic or foreign production or origin, that
may be traded or dealt in openly or legally (Sec 2)
(d)Keep a complete record of all commodities received by him, of the receipts
issued therefore, of the withdrawals, of the liquidation, and all receipts
returned to and cancelled by him (Sec 9)
2.2 It would also be unlawful for a warehouseman to:

(a) Engage in the business of receiving commodities for storage without a
license (Sec11), or
(b) Receive a quantity of commodity greater than that stated in his license (Sec
12), or
(c) Conniving or entering into a combination with an unlicensed warehouseman
for the purpose of avoiding compliance with the requirement of obtaining a
license (Sec 13)
2.3 Note that deposits with a bonded warehouseman shall be governed by the
provisions of the General Bonded Warehouse Law, regardless of the fact that the
receipt he issues does not conform strictly to the requirements of a receipt as laid
down by the Warehouse Receipts Law. The argument that they constitute ordinary
deposits as governed by the Civil Code is unavailing (Gonzales vs Go Tiong, GR
No. L-11776, August 30, 1958)
3. In the absence of any lawful excuse, he is bound to deliver the goods upon a
demand by:
(a) Holder of a receipt for the goods, or
(b) By the depositor, provided that the demand be accompanied by:
(a) An offer to satisfy the warehouseman’s 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 (Sec 8, Warehouse Receipts Law)
3.1 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 warehouseman’s 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 (Sec 9,
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3.1 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 Sec 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 (Section 31, Warehouse
Receipts Law) 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 (Sec. 18,
Act 2137; Lua Kian v. Manila Railroad Co., 19 SCRA 5)
3.3 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 (Sec 10, Warehouse Receipts Law)
3.4 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 (Sec 18, Warehouse Receipts Law) or
(b) May actually require the claimants to interplead (Sec 19, Warehouse
Receipts Law)
4. 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 (Sec 22, 23,
4.1 The purpose of the prohibition is to permit inspection and redelivery at all
times.
4.2 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 (Sec 58,
Warehouse Receipts Law) or
(b) it is authorized by agreement or custom.
4.3 If the warehouseman shall commingle the goods, he shall be liable severally
to each depositor for the care and redelivery of the depositor’s share of the mass
of commingled goods to the same extent and under the same circumstances as if
the goods had been kept separate (Section 24, Warehouse Receipts Law)
Other liabilities of a Warehouseman:

188
1. 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 (Sec 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 (Sec 12, Warehouse Receipts
Law). The warehouseman shall be liable for failure to deliver the goods to any one
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
1.1 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 have been:
(a) Lawfully sold to satisfy the warehouseman’s lien, or
(b) Lawfully sold or disposed of because of their perishable or hazardous
nature (Sec 36, Warehouse Receipts Law)
1.2 He shall also be guilty in such case of a crime punishable by fine or

imprisonment, or by both (Sec 54, Warehouse Receipts Law)
2. For altered receipts, the liabilities of the warehouseman shall be determined as

follows: (Sec 13, Warehouse Receipts Law)
2.1 An alteration in a warehouse receipt is said to be:

(a) Immaterial if it does not change the tenor of the warehouse receipt
(b) Material if it substantially changes the tenor of the receipt
(c) Authorized if it is made with the authority of the holder and the
warehouseman
(d) Unauthorized if it is made without 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
2.2 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 be liable according to the terms of the receipts as
originally issued even to:
(a) A purchaser of the receipt for value without notice of the alteration, or
188
(b) 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.
3. For the non-existence or misdescription of goods, a warehouseman shall be

liable to the holder of a receipt for damages caused by the non-existence of the
goods or by the failure of the goods to correspond with the description thereof in
the receipt at the time of its issue (Section 20, Warehouse Receipts Law)
3.1 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.
4. A warehouseman may be penalized with imprisonment or a fine, or both for:

(a) Issuing receipts for goods not received or not under his actual control at the
time of issuance of the receipt (Sec 50, Warehouse Receipts Law) or
(b) Fraudulently issuing receipts knowing that it contains false statements (Sec
51, Warehouse Receipts Law), or
(c) issuing an additional negotiable receipt for goods knowing that a former
negotiable receipt for the same goods or any part of them is outstanding and
uncancelled, without plainly placing upon the face of the receipt the word
“duplicate”, except in the case of a lost or destroyed receipt after proceedings
as provided for in Sec 14 (Sec 52, Warehouse Receipts Law).
(d) Issuing receipts for the warehouseman’s goods which do not state that fact
(Sec 53, Warehouse Receipts Law), or
(e) Delivering goods out of his possession knowing that a negotiable receipt is
outstanding and not cancelled (Sec 54, Warehouse Receipts Law).
Except if the goods have been lawfully sold to satisfy a warehouseman’s lien,
or have been lawfully sold or disposed of because of their perishable or
hazardous nature (Sec 36, Warehouse Receipts Law), or in the case of a lost or
destroyed receipt after proceedings (Sec 14, Warehouse Receipts Law)
Note that in marking the warehouse receipt with the word “duplicate”, the
warehouseman warrants that:
(1) Receipt is an accurate copy of the original receipt properly issued, and
(2)Original receipt is uncancelled at the date of the issue of the duplicate (Sec
15, Warehouse Receipts Law)
4.1 The liability for the acts mentioned in Sections 50 to 54 are not limited only to
the warehouseman, as any officer, agent or servant of the warehouseman may
also be liable for the said acts.
The Warehouseman’s Lien:

188
1. The warehouseman’s lien refers to the lien of that a warehouseman has on the
goods deposited with him or on the proceeds thereof in his hands for all lawful
charges for storage and preservation of the goods, money advanced by him in
relation to such goods such as the expenses of transportation or labor, or other
related expenses (Sec 27, Warehouse Receipts Law)
1.1 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 (Sec 27, Warehouse Receipts Law)
1.2 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
(Sec 30, Warehouse Receipts Law)
2. 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 (Sec 28, Warehouse Receipts
Law). Hence, it is enforceable against the depositor’s goods and the goods of
other persons stored by depositor, if pledge of such goods by him are valid but
not against the true owner if the depositor has neither title nor right of possession
to the goods (Sec 31, Warehouse Receipts Law; Young v. Colyear, 201 Pac. 623)
3. The warehouseman can enforce his lien by the sale of the goods (Sec 33,
Warehouse Receipts Law) or by an action in court (Sec 35, Warehouse Receipts
Law). Provided, however, that notice of sale of goods in order to satisfy the
warehouseman’s lien is given.
3. 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 (Sec 29, Warehouse Receipts Law)
4. The effect of the sale of goods to satisfy the warehouseman’s 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.
Negotiation and Transfer of Receipts:

188
1. A negotiable receipt is negotiated by delivery when:
(a) Goods are deliverable to bearer, or
(b) Goods are deliverable to a specified person and the latter has indorsed it in
blank or to bearer (Sec 37, Warehouse Receipts Law)
2. A negotiable receipt is negotiated by indorsement when the goods are, by the

terms of the receipt, deliverable to a specified person (Sec 38, Warehouse
Receipts Law)
3. The negotiation may be made by the:

(a) Owner or
(b) The person to whom possession of the receipt was entrusted by the owner
(Sec 40, Warehouse Receipts Law)
4. 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 (Sec 41, Warehouse Receipts Law)
3.1 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. PNB, 93
Phil. 765); PNB v. Atendido, 94 Phil. 254)
4. 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 (Sec 39, Warehouse Receipts Law)
4.1 Rights acquired by a person to whom a warehouse receipt has been

transferred but not negotiated are:
(a)Title to the goods subject to the terms of any agreement with the transferor,
and
(b)The right to notify the warehouseman of the transfer in his favor and
thereby acquire the direct obligation of the warehouseman to hold the goods
for him (Sec 42, Warehouse Receipts Law).
Note that pending notification; his rights can still be defeated by a subsequent
attaching creditor, or levy on execution, a vendor’s lien or right of stoppage in
transitu.
A DISCUSSION OF SELECTED PORTIONS OF

THE GENERAL BANKING LAW OF 2000-RA 8791
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Preliminaries:
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. The definition under Section 2 of the old General Banking Law (Republic
Act No. 337, as amended) is better: 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.
2.1 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 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
associations, and private development banks which are governed primarily by
the Thrift Banks Act (Republic Act No. 7906);
(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 (Republic Act No. 7353);
(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 (Republic Act No. 6938);
(f)Islamic banks-these are banks whose business dealings and activities are
subject to the basic principles and rulings of Islamic Shari’a, 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.
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2. Another way of classifying banks is into (a) private banks and (b) government-
owned banks.
3. Quasi-banks are entities engaged in the borrowing of funds through the

issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes (as defined in Sec. 95 of the BSP Law; see Paragraph 1.20) for
purposes of relending or purchasing of receivables and other obligations.
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:
a. That the entity must be organized as a stock corporation;
b. That its funds must be obtained from the public, i.e., 20 or more persons;
and
c. That the minimum capital requirements prescribed by the Monetary Board
for each category of banks are satisfied.
2. The SEC cannot register 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:
a. That all requirements of existing laws and regulations to engage in the
business for which the applicant is proposed to be incorporated have been
complied with;
b. That the public interest and economic conditions, both general and local,
justify the authorization; and
c. That the amount of capital, the financing, organization, direction and
administration, as well as the integrity and responsibility of the organizers and
administrators, reasonably assure the safety of deposits and the public
interest.
3. In organizing the bank, it can only issue par value stocks only.
4. While the Corporation Code shall govern its incorporation as a juridical entity,
note the provisions of the General Banking Act that is not consistent with the
Corporation Code:
a. No bank shall purchase or acquire shares of its own capital stock or accept
its own shares as a security for a loan, except when authorized by the
Monetary Board; provided that in every case the stock so purchased or
acquired shall, within 6 months from the time of its purchase or acquisition; be
sold or disposed of at a public or private sale. Consequently, the right of
appraisal is thus affected in the sense that upon acquisition of the bank of the
shares, the stock purchased or acquired by the bank shall, 6 months from the
time of its purchase or acquisition, be sold or disposed of.
b. The power of a corporation to acquire its own shares to eliminate fractional
shares may also be limited
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c. The GBL also imposes a limitation on the power of a bank to declare a
dividend, as it will not be allowed to do so when:
(1) its clearing account with the Bangko Sentral is overdrawn; or
(2) it is deficient in the required liquidity floor of government deposits for 5
or more consecutive days; or
(3) it does not comply with the liquidity standards/ratios prescribed by the
Bangko Sentral for purposes of determining funds available for dividend
declaration; or (4) it has committed a major violation as may be determined
by the Bangko Sentral.
5. The total number of voting stocks of a domestic bank that could be owned by:
a. A Filipino or a domestic non-bank corporation is 40% of the outstanding
voting stock of a domestic bank. However under Section 8 of Republic Act No.
7721 (An Act Liberalizing the Entry of Foreign Banks), Philippine corporations
whose shares of stock are listed in the Philippine Stock. Exchange or are of
long standing for at least 10 years shall have the right to acquire, purchase or
own up to 60% of the voting stock of a domestic bank.
b. Stockholdings in a bank are deemed owned by a family group or by related
interests if the individual stockholders are related to each other within the 4 th
degree or consanguinity or affinity, legitimate or common-law. Such
relationship must be fully disclosed in all transactions by such individuals with
the bank.
c. A foreign individual or foreign non-bank corporation can own up to 40% of
the outstanding voting stock of a domestic bank which is also the limit on the
aggregate foreign-owned stocks that could be owned by foreign individuals and
foreign non-bank corporations in a domestic bank. However, under Section 73
of the GBL, a foreign bank may own up to 100% of the voting stock of only 1
existing domestic bank within 7 years from the effectivity of the GBL on June
13, 2000.
Supervision and Regulation of Banks:
1. The entity that has supervisory and regulatory powers over banks is the BSP
and such extends to all banks, quasi-banks, trust entities, and other financial
institutions.
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.
3. Examinations may also be conducted if:
a. Necessary to determine compliance with laws and regulations if the
circumstances so warrant as determined by the Monetary Board (Subsection
4.2);
b. Necessary to determine whether an institution is conducting its business on
a safe or sound basis, which regular investigation shall not be oftener than
once a year from the last date of examination (Subsection 4.4);
c. Necessary to inquire into the solvency and liquidity of the institution
(Section 4.5)
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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 Code (Section 38; see Paragraph 16.25) 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 rule as mandated by
Section 16; BSP Circular No. 296, dated September 17, 2001 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 –
a. prescribe, pass upon and review the qualifications and disqualifications of

individuals elected or appointed bank directors or officers and disqualify those
found unfit; or
b. 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.
c. In determining whether an individual is fit and proper to hold the position of
a director or officer of a bank, regard shall be given to his integrity, experience,
education, training, and competence.
4. An elective or appointive public official cannot serve as an officer of a private

bank, except as otherwise provided in the Rural Banks Act, whether full-time or
part-time shall at the same time serve as officer of any private bank, save in
cases where such service is incident to financial assistance provided by the
government or a government-owned or controlled corporation to the bank or
unless otherwise provided under existing laws.
4.1 Section 5 of RA 7353, i.e., the Rural Banks Act, allows an elected or
appointive public official to serve as director, officer, and consultant or in any
other capacity in a rural bank.
5. Under Section 15, a bank is required to have a board composed of 5 no more

than 15 directors, two of whom must be independent directors.
Limitations imposed on Banking Operations:
1. Single Borrower Limit Rules- these are rules promulgated by the BSP, upon the
authority of Section 35 of the GBL, which regulate the total amount of loans,
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credit accommodations and guarantees that may be extended by a bank to any
person, partnership, association, corporation or other entity. 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 20% of the net worth
of the bank concerned, subject to possible increase by an additional 10% under
certain conditions.
2. DOSRI Rules- 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, DOSRI). Generally, a bank’s 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.
2.1 Consequently, any director or officer who may wish to borrow from the
bank must observe the following formalities:
a. The borrowing, which must be upon terms not less favorable to the bank
than those offered to others (Arms Length Rules) ,must be with the written
approval of a majority of the bank’s board of directors, excluding the
director concerned. Further, 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: (1) secured by assets
considered by the Monetary Board as non risk (2) under a fringe benefit
plan approved by the BSP, or is (3) extended by a cooperative bank to its
cooperative stockholders;
b. Such approval must be entered upon the records of the bank, i.e., the
minutes of the board meeting in which the approval was given; and
c. A copy of the entry of such approval shall be transmitted forthwith to the
appropriate supervising department of the BSP.
3. Microfinancing as defined by Sections 40, 43 and 44; BSP Circulars Nos. 272,
dated January 30, 2001 and 273, February 27,2001 is the grant of small loans
(microfinance loans) to the basic sectors, as described in the Social Reform and
Poverty Alleviation Act of 1997 (Republic Act No. 8425), and other loans to the
poor and low-income household for their microenterprises and small businesses
so as to enable them to raise their income levels and improve their living
standards. These loans are granted on the basis of the borrower’s cash flow and
are typically unsecured.
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.
5. The rules governing the acquisition by a bank of real estate is as follows:
a. A bank may acquire real estate as shall be necessary for its own use in the
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conduct of its business; provided, however, that the total investment in such real
estate and improvements thereof, including bank equipment, shall not exceed
50% of the bank’s combined capital accounts and, provided, further, that the
equity investment of a bank in another corporation engaged primarily in real
estate shall be considered as part of the bank’s total investment in real estate,
unless otherwise provided by the Monetary Board.
b. Notwithstanding the limitations in Section 51, a bank may acquire, hold or

convey real property under the following circumstances:
(1) Such as shall be mortgaged to it in good faith by way of security of debts;
(2) Such as shall be conveyed to it in satisfaction of debts previously
contracted in the course of its dealings; or
(3) Such as it shall purchase at sales under judgments, decrees, mortgages, or
trust deeds held by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated above
shall be disposed of by the bank within a period of 5 years or as may be
prescribed by the Monetary Board; provided, however, that the bank may, after
said period, continue to hold the property for its own use, subject to the
limitations of Section 51.
ADDENDUM:
X is the vice-president of ABC Banking Corporation. Y applied for a loan at the

bank with X as his guarantor. The majority of all the directors approved the loan
in writing and subsequently furnished a copy of the written approval to the
Bangko Sentral. The examining officer of the Bangko Sentral then instructed ABC
Banking Corporation to have Y secure another guarantor because X is disqualified
to act as one being an officer of the bank.
(a) Is the Bangko Sentral officer correct? Explain briefly.
(b) Assuming X himself applied for a loan by virtue of a fringe benefit plan
approved by the Bangko Sentral, may the loan be granted without the written
approval of all the bank directors? Explain briefly.
(a) No, the Bangko Sentral officer is not correct. No director or officer of any bank
shall, directly or indirectly, for himself or for another, borrow from such bank nor
shall he become a guarantor, endorser or surety for loans from such bank to
others, or in any manner be an obligor or incur any contractual liability to the
bank, except with the written approval of the majority of all the bank directors
and a copy of such written approval to be transmitted forthwith to the Bangko
Sentral. Having secured the requisite written approval of the majority of all the
bank directors, X can validly act as guarantor of Y.
(b) Yes, the loan may be granted to X. The written approval of all the bank
directors is not required for loans, other credit accommodations and advances
granted to officers under a fringe benefit plan approved by the Bangko Sentral
(Sec. 36, G.B.L.)
May a bank engage in insurance business?

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No, the General Banking Law prohibits a bank from directly engaging in
insurance business as the insurance (Sec. 54, G.B.L.)
X rented a safety deposit box at PQR Bank and placed his valuable stamp
collection therein. A flood gradually managed to enter the bank premises and
water inundated the room where the safety deposit boxes were located. PQR
Bank failed to inform X to retrieve his deposited items on time and so his stamp
collection was destroyed. The contract between the PQR Bank and X stipulated
that the bank would not be liable as a depository for any contents stored in the
safety deposit box.
Is PQR Bank liable for the loss of the stamp collection of X? Explain briefly.
Yes, PQR Bank shall be liable for damages due to the loss of the stamp
collection stored in its safety deposit box. PQR Bank is a depository in this case
and any stipulation that it shall not be held liable as a depository for the contents
of the safety deposit, boxes is void and contrary to law and public policy (Sia vs.
CA, 222 SCRA 24)
Is a stipulation exempting the bank from liability for damages in case of error or
delay in transmitting a telegraphic transfer valid? Explain briefly.
No, any stipulation exempting the bank from liability for damages in case of
error or delay in transmitting a telegraphic transfer is void because it is contrary
to public policy.
JKL Banking Corporation employed X as a casual employee in charge of the time

deposits of its depositors.
Did JKL Banking Corporation violate any law? Explain briefly.
Yes, JKL Banking Corporation violated the provision of the General Banking Law
that provides that no bank shall employ casual or non-regular personnel or too
lengthy probationary personnel in the conduct of its business involving bank
deposits, consistent with the provisions of R.A. 1405 otherwise known as the Bank
Secrecy Law (Sec. 55, G.B.L.)
What is the Bank of International Settlements and what standards has it set?
(Sections 5 and 34; BSP Circular No. 280, dated Mach 29, 2001; see also the New
Palgrave Dictionary of Banking and Finance, The Macmillan Press Limited, 1992
vol. 1, pp. 129-132; The Central Banks by Marjorie Deane and Robert Pringle,
Viking, 1995, pp. 163-165; and International Finance; Transactions, Policy and
Regulation by Hal S. Scott and Philip A. Wellons, The Foundation Press, Inc., 1995,
2nd ed., pp. 232-264)
The Bank of International Settlement is an international organization based in

Basle, Switzerland which was established by the Hague Agreement of January 20,
1930. Its stockholders are central banks, not governments.
a. It is a bank for central banks-the BIS assists central banks in managing and
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investing part of their foreign exchange reserves. Over 80 central banks have
deposits with the BIS. These funds are lent out to central banks (e.g. to provide
bridge financing) or placed in treasury bills or in the international inter-bank
market.
b. It is also a service organization-the BIS provides initiatives and ideas, as well as
the professional, organizational and material logistics, for central bank
cooperation in all areas of common interest. One of its committees, the
Committee on Banking Regulations and Supervisory Practices, more popularly
known as the Basle Committee on Banking Supervision, came up in 1988 with
standards in the measurement and assessment of the capital adequacy of banks
and the minimum standards which all major international banks would be
expected to observe. These standards came to be known as the Basle Accord. The
Bassle Accord is aimed at raising the standards of safety and soundness in the
world’s banking business in a manner consistent with fair competition. It splits a
bank’s capital between core (Tier 1) capital and supplementary (Tier 2) capital.
Tier 1 capital includes stockholders’ quality items that can still be legitimately
recognized as capital such as undisclosed reserves, asset revaluation reserves,
hybrid debt/equity instruments and subordinated term debt.
What is an independent director? (Section 15)

OPERATIONS OF BANKS
Distinguish a universal bank from a commercial bank. (Sections 23, 24 and 30)
a. A universal bank shall have the authority to exercise, in addition to the powers
authorized for a commercial bank in Section 29 of the GBL, the powers of an
investment house as provided in exiting laws and the power to invest in non-allied
enterprises as provided in the GBL; a commercial bank does not have these
additional powers.
b. A universal bank, subject to the conditions stated in Section 24 of the GBL, may
invest in the equities of allied, whether financial or non-financial, and non-allied
enterprises as may be determined by the Monetary Board; a commercial bank,
subject to the conditions stated in Section 30 of the GBL, may only invest in the
equities of allied enterprises, whether financial or non-financial.
Distinguish a universal or commercial bank from other banks (Section 33)

Only a universal or commercial bank can accept or create demand deposits
without the approval of the BSP. Other banks may do so only upon prior approval
of, and subject to such conditions and rules as may be prescribed by, the
Monetary Board.
Apart from the services specified in Section 29, what other services could a bank
perform? (Section 53)
a. Under Section 29 (Powers of a Commercial Bank), a commercial bank shall
have, in addition to the general powers incident to corporations, all such powers
as may be necessary to carry on the business of commercial banking (subject to
such rules as the Monetary Board may promulgate) such as-
1. accepting drafts and issuing letters of credit;
2. discounting and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debt;
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3. accepting or creating demand deposits;
4. receiving other types of deposits and deposit substitutes;
5. buying and selling foreign exchange and gold or silver bullion;
6. acquiring marketable bonds and other debt securities; and
7. extending credit;
b. The other services a bank could perform under Section 53 are as follows:
1. receive in custody funds, documents and valuable objects;
2. act as financial agent and buy and sell, by order of and for the account of
their customers, shares, evidences of indebtedness and all types of
securities;
3. make collections and payments for the account of others and perform such
other services for their customers as are not incompatible with banking
business;
4. upon prior approval of the Monetary Board, act as managing agent, adviser,
consultant or administrator of investment management or advisory or
consultancy accounts; and
5. rent out safety deposit boxes.
The bank shall perform the services permitted under items (i) to (iv) as depositary
or as an agent. Accordingly, it shall keep the funds, securities and other effects
which it receives duly separate from the bank’s own assets and liabilities.
Could a bank engage in the insurance business? (Section 54)

A bank cannot directly engage in the insurance business as the insurer. However,
if it is a universal bank, it could invest in the equity of an insurance company.
Is a bank required to maintain the secrecy or confidentiality of deposits only?

(Section 55.1[b])
No. Without the order of a court of competent jurisdiction, a bank cannot disclose
to any unauthorized 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 prevail. In other words, under Section 55.1[b], a bank is
required to keep secret or confidential not only information relative to deposits
(which is governed principally by the Secrecy of Bank Deposits Law) but also
information about the funds or properties belonging to private entities in the
custody of the bank such as, for example, those held by the bank in its capacity
as trustee or escrow agent.
What functions could a bank outsource? (Section 55.1[e]; BSP Circular No. 268,
dated December 5, 2000)
A bank may not outsource inherent banking functions, i.e., a bank may not enter
into a contract with a service provider for the latter to supply the manpower, e.g.,
tellers, to service the deposit transactions of the former, so as not to violate the
Secrecy of Bank Deposits Law. Subject to the prior approval of the Monetary
Board, a bank may outsource the following:
a. all information technology systems and processes, except
for certain functions affecting the ability of the bank to ensure the fit of
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technology services deployed to meet its strategic and business objectives
and comply with pertinent laws and regulations (such as strategic planning
for the use of information technology, determination of system
functionalities, changing management inclusion of quality assurance and
testing, service level and contract management, and security policy and
administration);
b. data imaging, storage, retrieval and other related
systems;
c. clearing and processing of checks not included in the
Philippine Clearing House System;
d. printing of bank deposit statements;
e. credit card services;
f. printing of bank loan statements and other non-deposit
records, bank forms and promotional materials;
g. credit investigation and collection;
h. processing of export, import and other trading
transactions;
i. transfer agent services for debt and equity securities;
j. property appraisal;
k. property management services;
l. messenger, courier and postal services;
m. security guard services;
n. vehicle service contracts;
o. janitorial services; and
p. such other services as may be determined by the
Monetary Board.
Could a bank employ casual or non-regular personnel? (Section 55.4)

Consistent with the provisions of the Secrecy of Bank Deposits Law, no bank shall
employ casual or non-regular personnel or too lengthy probationary personnel in
the conduct of its business involving bank deposits.
Act No. 1956 (approved May 20, 1909), as amended by Act 3544 (1929),
Act 3616 (1929) and Act 3692 (1932)
The purpose of the law:

1. The purpose of the law is to provide for an orderly mechanism by which the
assets of the insolvent debtor could be converted into money for distribution
among his creditors and thereby relieve the debtor from the weight of his debts
and permit him to start anew free from such debts.
2. The situations contemplated by law are:

(a) Suspension of payments
(b) Voluntary insolvency, and
(c) Involuntary insolvency
Suspension of Payments Insolvency

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Contemplates a state desired by a Contemplates a state where the debtor
debtor who, possessing sufficient has more obligations than assets
property to cover all his debts, foresees
the impossibility of meeting them when
they fall due
Always initiated by the debtor Initiated by the debtor when it is
voluntary, or by his creditors or other
persons when it is involuntary
Object of a suspension of payments is Object is to compel the presentment of
the deferment of the payment of debts all debts, due or not due, and secure a
until such time as the debtor, who complete discharge from such debts
possesses sufficient property to cover
all his debts, is able to convert such
assets into cash or otherwise acquires
the cash necessary to pay his debts
Amount of debts not affected although Creditors receive less than what they
their payment is postponed are entitled to. In some cases where
preferences are proper, some creditors
may not receive any amount at all
Suspension of Payments in detail:
1. A petition for the suspension of payments is initiated by the debtor, whether he

is an individual, corporation, partnership or association.
2. The petition may be filed with the court of the province or city in which the
debtor has resided for 6 months next preceding the filing of the petition.
2.1 To be annexed to the petition are:

a) The debtor’s statement of assets and liabilities (Section 2);
b) The proposed agreement he requests from his creditors (Section 2);
c) A schedule of his debts (Sections 3 and 15); and
d) An inventory of his assets (Sections 3 and 16).
3. Upon the filing of the petition, the court shall issue an order calling for a
meeting of the creditors, which to be published and served on the creditors.
4. Subsequently, a meeting of creditors for approval or disapproval of the debtor’s

proposition is to be held.
4.1. The meeting of the creditors on the debtor’s proposal requires a quorum and
minimum vote consisting of the presence of at least two thirds of the creditors
representing at least three-fifths of the liabilities (Section 8[e]). This is known as
the “two-thirds/three-fifths rule”.
4.2. The action by the creditors on the debtor’s proposal shall have the following
effects:
a. If the required vote has not been achieved, the proceedings are terminated
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and the creditors are at liberty to enforce their respective rights;
b. If the creditors approve the proposition and there is no objection on the part
of any creditor, the court issues an order that the decision be carried out and
that it shall be binding on all creditors included in the Schedule who have been
properly summoned; and
c. If the creditors approve the proposition, but a creditor disagrees with or
objects to the decision, the court shall conduct a hearing on the objection:
(1) If the objection is found to be meritorious, the proceedings will terminate
and creditors will be at liberty to enforce their respective rights, or
(2) If found to be without merit, court shall proceed as though no objection
had been made.
c.1. The grounds for an objection are:

(1) Defects in call for the meeting, in the holding thereof, or in deliberations
had thereat, which prejudiced creditor’s rights
(2) Fraudulent connivance between one or more creditors and debtor to vote
in favor of the proposed agreement; or
(3) Fraudulent connivance of claims to obtain a majority.
5. It shall be forbidden of a petitioner for suspension of payments to dispose of his

property, unless such disposition is in the ordinary operation of his business, or
make any payments outside of the necessary or legitimate expenses of his
business.
6. The effects of the filing of a petition for suspension of payments on the below
listed situations:
6.1. An execution pending against the debtor- Any execution pending against the
debtor shall be suspended before the sale of the property is made. However, the
debtor must make a request for this purpose to the court before which the
proceeding for suspension of payments is pending. Such suspension shall lapse
after 3 months without the proposed agreement being accepted by the creditors
or as soon as it is denied. (Section 6)
6.2. An execution against a property of the debtor specially mortgaged – the

execution is not suspended (Section 9)
6.3. An action to be filed against the debtor for the collection of a sum of money –
no creditor may sue to collect his claim from the debtor from the moment that
suspension of payments is applied for and while the proceedings are pending
subject to certain exceptions such as claims for personal labor, maintenance,
expenses of last illness and claims by persons having mortgages. (Sections 6 and
9)
Voluntary Insolvency in detail:
1. Voluntary insolvency is the state desired by an insolvent debtor who owes

debts exceeding the sum of P1, 000.00. He may apply to be discharged from his
188
debts by filing a petition with the Regional Trial Court of the province or city in
which he has resided for 6 months next preceding the filing of such petition. The
petition must be accompanied by a schedule of debts and an inventory of
properties.
1.1. Voluntary Insolvency is different from Involuntary Insolvency in the following

manner: In voluntary insolvency, a debtor is deemed insolvent upon his filing of a
petition for voluntary insolvency; while in involuntary insolvency, the debtor is
considered insolvent upon the issuance by the court of an order declaring him an
insolvent.
2. The procedure for voluntary insolvency is as follows:
2.1. Filing of petition by the debtor (Section 14);
2.2. Issuance by the court of an order declaring, among other things, that the
petitioner is insolvent (Section 18);
a. Note that the filing of such petition shall be an act of insolvency. Thus, if the
court finds the petition to be in order, it shall issue on the same date it is filed
an Order of Adjudication that the debtor is insolvent. If found to contain a
falsity, the petition is dismissed.
2.3. Publication of order and service thereof on the creditors (Section 19);
a. Being a proceeding in rem, there must be publication, as many times as the
court may deem proper, and all creditors appearing in the schedule shall be
given notice.
2.4. Meeting of creditors for election of assignee in insolvency (Section 30);
a. An assignee in insolvency is a person selected in both voluntary and

involuntary proceedings, either by the creditors or by the court, to whom a
debtor declared insolvent, by legal mandate, makes an assignment of his
properties for the benefit of creditors.
His principal function is to recover all the estate, debts and effects of the
insolvent. He shall thereafter as speedily as possible convert the estate, real
or personal, into money. The assignment and conveyance to the assignee by
the insolvency court, through the clerk of court, of all the real and personal
property, estate and effects of the debtor shall relate back to the
commencement of the proceedings in insolvency. By operation of law, title to
all the debtor’s property, estate and effects shall vest on the assignee as of the
said date.
b. It is the creditors who have filed their claims who are entitled to elect the
assignee and when they submit the name to the court (Section 29). The court
will then appoint the person nominated and from then on he will be an officer
of the court. A majority of the creditors concurring with majority of the claims
will be necessary to properly elect the assignee. (Sec 30).
188
c. The assignee’s duty is to convert the property of the debtor to cash and,
thereafter, he will declare “dividends” (Sec 43) to the creditors. “Dividends”
are the equitable distribution of the property to the creditors. They are the
amounts paid, upon order of the court, to the creditors of an insolvent out of
the capital or assets of the insolvent’s estate for the purpose of liquidating or
discharging a debt.
d. Thus, the creditors must prove their claims twice: first, under Sec. 29 in the
election of the assignee; second, under Sec. 43, to entitle them to dividends. If
the creditor fails to prove him claim under Sec. 29, then he is not barred from
proving his claim under Sec. 43 in order to be entitled to dividends. And even if
the creditor does not present the best proof of his claim under Sec. 29, he can
still show the best proof of his credit under Sec. 43, even if the claim was
rejected under Sec. 29.
e. As far as the assignee is concerned, he owes loyalty to the creditors who

elected him; but he also owes secondary loyalty to the debtor, in the sense
that he should not get property exempt from execution.
f. The following property of the insolvent debtor shall pass to the assignee:
(1) All real and personal property and effects
(2) All deeds, books, and papers
(3) The debtor’s right of action for damages to real property
(4) Right to release property fraudulently conveyed.
g. The following property shall not pass to the assignee and shall remain with
the debtor:
(1) After acquired property, except its fruits and income. After-acquired
property is that acquired by the debtor subsequent to the filing of petition
for insolvency.
(2) Non-leviable assets, such as an insurance policy without any cash
surrender value or the premium of which does not exceed P500.00
(3) An expectancy to inherit
(4) Right of action in personal injury cases which pertains exclusively to the
debtor
(5) Property held in trust by debtor or merely leased by debtor
(6) Property exempt from execution. (Sec. 12, Rule 39, Rules of Court; Art.
223, Civil Code).
2.5. Conveyance of debtor’s property to assignee in insolvency (section 32);
2.6. Composition, if agreed upon. Composition is an agreement whereby the

creditors of an insolvent agree to accept a certain percentage of their claims in
full settlement of such claims. It is a method of dividing the estate of the
insolvent among his creditors amicably.
a. Requisites for Valid Offer of Composition are:

188
(a) Offer must be made after the filing of the Schedule of the debtor’s
property and the list of his creditors
(b) Offer must be accepted in writing by a majority of the creditors
representing a majority of the claims which have been allowed
(c) Offer must be made only after the insolvent deposits the consideration
to be paid to the creditors; and
(d) Offer accepted by the creditors must be confirmed by the Court. (Sec.
53).
b. The effects of composition are:

(1) Insolvency proceedings dismissed, the amount agreed upon is deposited
in court, and if the court finds settlement meritorious it shall approve the
same
(2) All debts are discharged – Effect shall be as if the debtor has obtained a
discharge, so that all claims against debtor are extinguished and assignee
must return all properties to debtor.
2.6. Liquidation of assets and payment of debts (section 33, et seq.);
2.7. Discharge of the debtor, except if composition is agreed upon (Section 64);
a. Discharge is the release of the debtor from his debts which were or might be
proved in the insolvency proceedings such that they are no longer a charge
upon him.
b. An insolvent debtor may apply to the court for a discharge from his debts
any time after the expiration of 3 months from the adjudication of insolvency
but not later than 1 year from such adjudication, unless the property of the
insolvent has not been converted into money.
To obtain a discharge, the following should be complied with:
(1) Debtor must have complied with statutory requirements regarding
surrender of his assets for the benefit of creditors and regarding the
rendition of an account of his assets and liabilities
(2) He must have applied for discharge after three months from date of
adjudication of insolvency, but not later than one year thereafter
(3) Debtor must not have committed any of the acts of insolvency
enumerated in Sec. 65 of Insolvency Law, preventing discharge of a debtor.
c. If after being adjudged insolvent, the debtor fails to apply for a discharge
within the required period, he loses his right to be discharged.
d. The debtor would be entitled to a second discharge if it takes place after 6

years from the first discharge or, if takes place within 6 years from the first
discharge, if the second insolvency proceeding is involuntary.
e. The effect of a discharge is that it releases a debtor from all debts

contracted by him prior to the insolvency proceeding, with the exception of
those expressly mentioned by the law.
188
f. The debts that are not discharged are:

(1) Taxes and assessments due to the government, national or local
(2) Debts created by the fraud or embezzlement of the debtor
(3) Debts crated by the defalcation of the debtor as a public officer or while
acting in a fiduciary capacity
(4) Debts which have not been scheduled, unless the creditor had actual
knowledge or notice of the proceedings in insolvency; and
(5) Debts owing to creditors who were not duly notified and had no actual
knowledge of the insolvency proceedings.
2.8. Resolution of objections to a discharge, if any. Such objections are to be

based on any one or more of the following as the debtor is deemed in bad faith
and not entitled to discharge if:
a. Debtor submitted a false affidavit, either in his petition, inventory or
schedule;
b. He concealed part of his estate or effects;
c. Debtor was guilty of fraud or neglect in care of his property;
d. Debtor procured an attachment or execution on his property during the one-
month period prior to the insolvency proceedings;
e. Debtor destroyed or falsified important papers and documents;
f. Debtor fraudulently gave certain creditors preferences;
g. Debtor failed to disclose that certain claims which had been proven were
false or fraudulent;
h. Being a merchant, debtor failed to keep proper books of account;
i. Debtor influenced the action of any creditor by pecuniary means;
j. In contemplation of insolvency, debtor made fraudulent conveyances of or
encumbrances upon his properties;
k. Debtor had been convicted of any of the penal provisions of the Insolvency
Law; or
l. In case of involuntary insolvency, debtor had already availed of the benefits
of the Insolvency Law within the six-year period preceding his application for
discharge.
Note that if debtor is one who is in bad faith, the concept of “after-acquired
properties” does not apply. In such instance, all properties of the debtor acquired
before or after the date of cleavage shall be liable for the payment of all his debts.
Cleavage is the date when the petition is filed, from which the period of thirty
days is counted forward or backward in determining the effects provided for in the
Insolvency Law, as when:
(a) Under Section 20-to determine if at least three (3) creditors filed the
petition for insolvency-a creditor by assignment of credit made within thirty
(30) days from date of cleavage shall be disqualified as petitioning creditor
(b) Under Section 32-
(1) attachment levied upon within a period of thirty (30) days before the
date of cleavage may be set aside by the assignee
(2) judgments on cases filed and decided within thirty (30) days prior to the
188
date of cleavage may be set aside by the assignee
(3)judgments on cases filed before thirty (30) days from the date of
cleavage but decided within said thirty (30) days because of confession of
judgment or declaration of default of debtor may be set aside by action of
assignee
(4) properties acquired after date of cleavage, after discharge of debtor in
good faith shall not be liable for debts incurred prior to date of cleavage
(5) Under Section 70-fraudulent preferences made within thirty (30) days
prior to the date of cleavage may be set aside in an action brought by
assignee.
Note Section 70 pertains to Fraudulent Preferences when debtor transferred

property to any person to give him preference, such transfer may be set aside by
proper court action by the assignee provided that the transfer took place within
30 days period from the date of cleavage. The property transferred will be
returned to the insolvent’s estate for equitable distribution among his creditors.
There is a Presumed Fraudulent Transfer if:
(a)Not in the ordinary course of business
(b)Under confession of judgment
(c) Not for valuable consideration.
Dead Persons Being Under Insolvency (Section 72) – Dead person may be subject
of insolvency proceedings. If proceedings filed and debtor dies before Order of
Adjudication, case must be dismissed and remedy of the creditors will be to file a
claim n the testate or intestate proceedings. But if the debtor dies after the Order
of Adjudication has issued, proceedings will continue.
2.9. Appeal to the Supreme Court in certain cases:

(a) From an order granting or refusing an adjudication of insolvency and, in the
latter case, from the order fixing the amount of costs, expenses, damages, and
attorney’s fees allowed the debtor
(b) From an order made at the hearing of any account of an assignee, allowing
or rejecting a creditor’s claim, in whole or in part, when the amount in dispute
exceeds three hundred pesos
(c) From an order allowing or denying a claim for property not belonging to the
insolvent, presented under section forty-eight of this Act
(d) From an order settling an account of an assignee
(e) From an order against or in favor of setting apart homestead or other
property claimed as exempt from execution
(f) From an order granting or refusing a discharge o the debtor. (Section 82)
a. Note that the Insolvency Law provides that the decision of the trial court is final
and not appealable BUT due consideration must be accorded the provisions of the
1997 Rules of Civil Procedure regarding appeals to the Supreme Court and what
may be the subject of an appeal, which would tend to imply that Insolvency is a
case that allows multiple appeals, being a special proceedings case.
Involuntary Insolvency is Detail

188
1. Involuntary insolvency is the state of which a debtor may be placed by 3 or

more of his creditors, residents of the Philippines, whose credits accrued in the
Philippines and the amount of which credits are in the aggregate not less than
P1,000.00. The said creditors may file a petition with the Regional Trial Court of
the province or city in which the debtor resides or has his principal place of
business. The petition must allege the commission by the debtor of one or more
acts of insolvency.
1.1 One or more of the following 13 acts of insolvency must be alleged in the
petition:
a. The debtor is about to depart or has departed from the Philippines with
intent to defraud his creditors;
b. The debtor, being absent from the Philippines with intent to defraud his
creditors, remains absent;
c. The debtor conceals himself to avoid the service of process for the purpose
of hindering, delaying or defrauding his creditors; Personal
d. The debtor conceals or is removing any of his property to avoid its being
attached or taken on legal process;
e. The debtor has suffered his property to remain under attachment or legal
process for 3 days for the purpose of hindering, delaying or defrauding his
creditors;
f. The debtor has confessed or offered to allow judgment in favor or any
creditor or claimant for the purpose of hindering, delaying or defrauding any
creditor or claimant;
g. The debtor has willfully suffered judgment to be taken against him by
default for the purpose of hindering, delaying of defrauding his creditors;
Judicial
h. The debtor has suffered or procured his property to be taken on legal
process with intent to give a preference to one or more of his creditors and
thereby hinder, delay or defraud any one of his creditors;
i. The debtor has made any assignment, gift, sale, conveyance or transfer of
his estate, property, rights or credits with intent to delay, defraud or hinder his
creditors;
j. The debtor has, in contemplation of insolvency, made any payment, gift,
grant, sale, conveyance or transfer of his estate, property, rights or credits;
Preference
k. The debtor, being a merchant or tradesman, has generally defaulted in the
payment of his current obligations for a period of 30 days;
l. The debtor, for a period of 30 days, has failed after demand to pay any
moneys deposited with him or received by him in a fiduciary capacity;
m. The debtor, an execution having been issued against him on final judgment
for money, shall have been found to be without sufficient property subject to
execution to satisfy the judgment. Merchant
2. The procedure for involuntary insolvency is as follows:

2.1. Filing of petition by creditors of the debtor (Section 20);
2.2. Order by the court requiring the debtor to show cause why he should not
188
be declared insolvent (Section 21);
2.3. Service of the order on the debtor and publication(Section 22);
2.4. Filing of answer or motion to dismiss by the debtor (Section 23);
2.5. Trial of the case (Section 23);
2.6. If the court finds for the debtor, then the proceedings shall be dismissed
(Section 23); if the debtor defaults or the court finds for the creditors, then the
court shall issue an order adjudging debtor insolvent (Section 24);
2.7. Publication of order and service thereof on the creditors (Section 25)
2.8. Meeting of creditors for election of assignee in insolvency (section 30);
2.9. Conveyance of debtor’s property to assignee in insolvency (Section 32);
2.10. Liquidation of assets and payment of debts (Sections 33, et seq.);
2.11. Discharge of the debtor (Section 64);
2.12. Objections to discharge, if any (Section 66);
2.13. Appeal to the Supreme Court in certain cases (Section 82).
Effects of the filing of a Voluntary or Involuntary Petition of Insolvency on

Proceedings against the debtor:
1. In general – the civil proceedings against the debtor, upon application by the
debtor himself, any creditor or the assignee, will be stayed or suspended.
2. Secured claims already begun – actions for secured claims already begun are
suspended until the assignee is elected. Upon election of the assignee, the action
will be continued in the same court where it was filed.
2.1 The remedies of a secured creditor, or of one who holds a real estate
mortgage, chattel mortgage and or a pledge are:
(a)Rely on the security – then he will not be eligible to take part in the
insolvency proceedings
(b) Evaluate this security – he can ask this from the court, the balance of the
loan not secured may be claimed in the insolvency proceedings
(c) File a contingent claim – the creditor will file a claim in the insolvency
proceedings, that in case the proceeds from the sale of the security is not
enough to cover the loan, the deficiency shall be recovered in the insolvency
proceedings.
These three alternatives are also available to a debt secured by a chattel

mortgage with the exception of those falling of those under Art. 1484 of the Civil
Code (sale of movables under installments), in which case the creditors shall only
be entitled to remedies (1) and (2). The same is true with pledge as the Civil Code
expressly prohibits a deficiency judgment in pledge.
3. Secured claims not yet begun – actions for secured claims may be begun while
the insolvency proceedings are pending with the permission of the insolvency
court. However, if the assignee in insolvency has not yet been elected, the said
action will be suspended until the assignee is elected.
4. Unsecured claims already begun – actions for unsecured claims already begun
188
are suspended except in cases where the amount due the creditor is in dispute.
In such cases, the suit, by leave of the insolvency court, may proceed to judgment
for the purpose of ascertaining the amount due, but execution shall be stayed.
After the election of the assignee in insolvency, such unsecured claims shall be
filed and allowed in the insolvency proceedings, not in the court where they were
originally filed.
5. Unsecured claims not yet begun – actions for unsecured claims cannot be filed
during the pendency of the insolvency proceedings but it filed, such actions will
be dismissed upon motion of the assignee. Such unsecured claims shall then be
filed and allowed in the insolvency proceedings, not in the court where they were
originally filed.
How claims are resolved by the Assignee:
In resolving the claims of the creditor after the debtor’s assets have been
liquidated, unless a composition has been agreed upon by the debtor’s creditors,
obligations of the debtor shall be paid in the following order:
1. Equitable claims enumerated in Section 48 of Insolvency Law- these are the

claims which are entitled to first priority in payment:
(a)Paraphernal property of debtor’s wife
(b)Property held by debtor under lease or usufruct or on deposit or for
administration
(c) Merchandise held by debtor on commission, for forwarding or on
consignment and purchase price from sales on consignment
(d) Negotiable instruments sent to debtor for collection and the money
collected thereby
(e) Money in debtor’s possession for remittance to others
(f) Merchandise bought on credit, if no delivery has been made
(g) Goods wrongfully taken by the debtor.
2. Preferred claims under Articles 2241 and 2242 of the Civil Code
2.1 Article 2241 - with respect to specific movable property of debtor, the
following claims are preferred:
(a)Taxes
(b)Claims arising from malversation
(c) Vendor’s lien
(d) Claims secured by pledge or chattel mortgage
(e) Mechanic’s lien
(f) Lien of laborers for wages over goods manufactured
(g) Salvage
(h) Tenancy
(i) Carrier’s lien
(j) Innkeeper’s lien
(k) Crop loan
(l) Rentals for one year; and
188
(m) Property on deposit that has been wrongfully sold.
2.2 Article 2242 - with respect to specific real property, the following claims shall
be preferred:
(a) Taxes
(b)Unpaid price realty
(c) Contractor’s lien (for amounts due to laborers, or architects and engineers)
(d)Lien of suppliers of materials
(e)Mortgage credits upon registered real estate mortgages
(f) Reimbursable expenses for improvement and preservation of real estate
(g) Credits on property upon which attachments or executions have been made
(h)Claims of co-heirs for warranty in the partition of an immovable among
them
(i) Claims of donors for pecuniary or other charges on the immovable donated;
and
(j) Claims of insurers upon insured property, for premiums not exceeding two
years (repealed by new Insurance Code)
2.3 Article 2241 lists 13 claims or credits that enjoy preference with respect to
specific immovable property and real rights of the debtor:
a) These claims or credits are considered as liens or mortgages or pledges,
respectively, of personal or real property (Art. 2243)
b) These claims or credits shall be paid pro rata after the payment of any
taxes, duties, fees and assessments, as the case may be, due the State or
any subdivision thereof
c) If any excess should remain after payment of the claims or credits which
enjoy preference with respect to specific property, real or personal, the
same shall be added to the free property which the debtor may have for the
payment of the other credits, i.e., those credits which do not enjoy
preference with respect to the specific property.
3. Preferred claims under Article 2244 of the Civil Code; and
3.1 Article 2244-with respect to property other than those enumerated in Arts.
2241 and 2242, in the order named:
a) Funeral expenses of debtor and his children
b) Credits for services rendered by employees and household help
c) Expenses incurred during last illness of debtor, his spouse and children
d) Compensation due laborers in cases of labor accident or illness resulting
from nature of employment
e) Debts incurred by debtor for support of his family during the year preceding
insolvency
f) Support during insolvency proceedings and for three months thereafter
g) Fines and civil indemnifications arising from crime
h) Legal and other expenses for administration of insolvent’s estate
i) Taxes due national government
j) Taxes due provincial government
k) Taxes due city or municipality government
188
l) Damages arising from a quasi-delict or tort
m) Gifts due to charitable institutions; and
n) Credits without special privilege appearing in a public document or resulting
from a final judgment.
3.2 Article 2244 lists 14 claims or credits which enjoy preference with respect to
other property of the debtor. Claims or credits with respect to this property shall
be preferred, and paid, in the order named, not pro rata. Take not of No. 14 which
refers to credits which, without special privilege, appear in a public instrument, or
in a final judgment, if the credits have been the subject of litigation. These credits
have preference among themselves in the order of priority of the dates of the
instruments (more specifically, the date when they became public instruments,
i.e., the date of their notarial acknowledgment) and of the judgments,
respectively.
4. Ordinary claims under Section 49 of the Insolvency Law, which are claims other
than the above, duly proved and allowed in the insolvency proceedings, which
shall pro rata in the remainder of the debtor’s property, without any priority or
preference.
4.1 Common credits, i.e., credits of any other kind or class, or by any other right
or title, not included in Articles 2241, 2242, 2243 or 2244, enjoy no preference
(Art. 2245). They shall be paid pro rata regardless of dates (Art. 2251[2])
CODAL DISCUSSIONS
5. Turn-Over of Property (Sec. 32) – Once the assignee qualifies, the sheriff shall
turn over to him the properties of the debtor and he assignee will no have
personality to se aside three (3) judicial proceedings, all of which are calculated to
prevent undue preferences and bring about a more equitable distribution of the
debtor’s property among his creditors.
6. Consequences on Attachments, Judgments, Etc. – The appointment and

qualification of the assignee shall have the following effects:
a. Attachment levied upon with a period of thirty (30) days prior to the filing of
the petition may be set aside.
b. Judgments on cases filed and decided within the thirty (30) days period prior
to the filing of the petition may be set aside.
c. Judgment on cases filed outside the 30-day period but decided within the
30-day period prior to the filing of the petition because the debtor either
confessed judgment or was declared in default will be set aside.
All the properties which the debtor may acquire after the date of cleavage, by his
own industry, donation or by succession will not form part of the insolvent
debtor’s estate provided he is a debtor in good faith who will alter petition for a
discharge. This is to carry out the second purpose of the law: to give the debtor in
good faith a new lease in life.
188
7. Substitution of Assignee in Pending Cases (Section 33) – The assignee may
substitute himself as plaintiff in cases pending that had been previously brought
by the debtor as these are causes of action which pass to the assignee. Any
favorable judgment would form part of the estate of the Insolvent debtor.
Exceptions: Actions which are personalisima in nature like actions for defamation,
mental anguish and physical injuries.
8. Recording of Assignee’s Appointment (Sections 34 and 35) – Assignee must

record his appointment with courts where cases may be pending by or against the
debtor. Assignee may resign at any time after giving proper accounting.
9. Powers, Authority and Obligations of the Assigned (Section 36) – It is the main
obligation of the assignee to convert the property of the debtor as soon as
possible into cash – and he may thus sell the same at public auction or even in
private sale with prior approval of the insolvency court. (Section 39)
Assignee will be the only one with personality to set aside fraudulent preferences
(Board of Liquidators v. Floro, 110 Phil. 482 [1960]), and may be indebted to the
debtor.
Assignee has the power to ask for examination of persons suspected of having
concealed, embezzled or disposed of any property of the debtor. Liability shall be
double the value of the property. (Sec. 38).
Perishable properties should be sold as soon as possible so as to avoid diminution

of value. (Sec. 40).
Uncollectibles may be sold by the assignee. (Sec. 41).
Assignee is entitled to his fees. (Sec. 42).
Obligation of assignee to render an accounting and penalty for refusal to do so.

(Secs. 46 and 47).
10. Double Indemnity Against Embezzler of Property (Sec. 37) – Any person who
embezzles or disposes of the property of the debtor knowing that insolvency
proceedings have commenced or has reason to believe that they will be filed,
shall be liable for double the value of the property.
a. Statute of Limitations suspended once proceedings filed. (Sec 73)
b. Creditors may be represented by attorneys. (Sec 74)
c. Procedure for excluding from estate property exempt from attachment and
execution. (Sec 75)
d. Procedure deemed commenced upon filing of petition. (Sec 76)
e. Attachment not set aside under Section 32 are preferred. (Sec 79)
f. If no creditor files a claim, then the proceedings will be dismissed. (Sec 81)

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COMMERCIAL LAW Compiled Lectures: Atty. Abelardo Dumaguing, Atty.

Renato Rondez, Page 1 of 188

Part I. NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)

NON – NEGOTIABLE INSTRUMENTS (2005 BAR)

AMBIGUOUS INSTRUMENTS (Sec 17) [1946, 1998 BAR]

CHARACTERISTICS/ FEATURES OF A NEGOTIABLE INSTRUMENT

PROVISIONS AFFECTING OR NOT AFFECTING NEGOTIABILITY: (Sec 5, 6)

Trader’s Royal Bank v Court of Appeals

FUNCTIONS OF A NEGOTIABLE INSTRUMENT:

ELEMENTS OF A NEGOTIABLE INSTRUMENT (Sec 1) – SUDOR

The interest shall be 6% per annum in case of payment of a balance in an

each of the stated installments must be specifically stated.

UNCONDITIONAL PROMISE (Sec 3) – An unqualified order or promise to pay is

Treasury warrants – NOT negotiable since it is payable out of a particular fund;

Statement of the transaction which gives rise to the instrument

DETERMINABLE FUTURE TIME (Sec 4) – An instrument is payable at a

PAYABLE ON DEMAND (Sec 7) – An instrument is payable on demand: ONE

CHECK (Sec 185) – a check is a BOE drawn on a bank payable on demand

BILL OF EXCHANGE (Sec 126) – a BOE is an unconditional order in writing

PROMISSORY NOTE (Sec 184) – a negotiable promissory note is an unconditional

PAYABLE TO ORDER (Sec 8) PAYABLE TO BEARER (Sec 9)

WHEN DATE MUST BE INSERTED: (Sec 13)

WHY MUST DATE BE INSERTED?

EFFECT OF INSERTION OF A WRONG DATE (Sec 13)

CIRCUMSTANCES OF, WHAT CONSTITUTES, HOW TO BE A HOLDER IN DUE COURSE

WHO IS DEEMED A HDC? (Sec 59)

INCOMPLETE INSTRUMENT BUT DELIVERED (Sec 14, 52, 57)

WHO MAY COMPLETE THE INSTRUMENT

REQUIREMENTS IN FILLING THE BLANKS

TO WHOM NOTICE OF DISHONOR MUST BE GIVEN (Sec 89)

• Except as herein otherwise provided, when a negotiable instrument has

• EFFECT OF FAILURE TO GIVE NOTICE OF DISHONOR: Any drawer or indorser

Is Pedro liable to pay P110,000 to the HDC?

What if the holder is NOT a HDC? Is Pedro liable to the holder?

delivery OR (b) qualified indorser3 qualifications

Warranty extends to his immediate Warranty extends to ALL subsequent HDCs

INCOMPLETE INSTRUMENT AND UNDELIVERED (Sec 15)

NOTE: “Undelivered” means that there was NO valid delivery.

Can H demand payment from Pedro?

Can H (not HDC) demand payment from Pedro?

Can H recover from Juan Dela Cruz? Clara?

What if instrument was indorsed to Clara “without recourse” or “at indorsee’s

EFFECT OF A QUALIFIED INDORSEMENT

What is the effect if H does not give notice of dishonor?

IF H is not a holder in due course, can he require Pablo to pay P80,000?

If H is a holder in due course, can he require Pablo to pay P80,000?

Can H require Clara to pay P80,000?

If H is not HDC, can he require Roy Mendez to pay P99,000?

If H is HDC, can he require Roy to pay P99,000?

SEC 14 SEC 15 SEC 16

FORGERY (Sec 23)

PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY:

RULES ON FOREGERY DUE TO NEGLIGENCE OF PARTIES:

6. Between 2 innocent persons, the one whose negligence is the

FORGERY OF MAKER’S SIGNATURE (1989 BAR)

FORGERY OF DRAWER’S SIGNATURE (1949, 1987, 1992, 2004, 2006 BAR)

Natividad Gempesaw v CA, 218 SCRA 682, Feb 9, 1993

Ilusorio v CA, 393 SCRA 89, Nov 27, 2002

FORGERY OF PAYEE’S SIGNATURE (1948, 1983, 2008 BAR)

FORGERY OF INDORSER’S SIGNATURE (1984, 1989, 1990, 1995, 2008 BAR)

Metrobank v Renato Cabilzo, GR 154469, December 6, 2006

DEGREE OF CARE REQUIRED OF BANKS in the (a) selection and supervision of

EFFECTS OF MATERIAL ALTERATION (Sec 124)