BUSINESS LAW

CPA BOARD EXAM LECTURE NOTES

LAW
- limits man’s actions & words
- chained to
o hands
o feet
o mouth
a) reasonable rule of conduct & action
b) just & obligatory
c) promulgated by competent authority – Philippine Congress
d) for common observance & benefit

I. OBLIGATIONS (CO, NO)

1) Kinds of Obligation
a) Civil (1156-1304) - a JURIDICAL NECESSITY TO GIVE, TO DO or NOT TO DO
- creditor has right of action to enforce performance
- creditor has right to file a case in court/to sue
b) Natural (1423-1430)- no right of action/file a case in court
- voluntary fulfillment/performance
 benefited person has right of retention what has been paid or
delivered
- NOT based on POSITIVE LAW
- based on EQUITY & NATURAL LAW

2) 4 Elements of Obligation (AS, PS, P, JT)

a) active subject - creditor/obligor
b) passive subject - debtor/obligee
c) prestation - the conduct to be observed in the performance of the obligation
 to give - real (thing)
 to do - Personal(act - positive
 not to do - or service) - negative
d) juridical tie/vinculum juris - reason why obligation exists

3) Sources of Obligation (L, C, QC, D, QD)

a) Law - cannot be presumed, always w/basis
- non-performance or erroneous/wrong performance of an obligation
prescribed by law (taxes, licenses)
b) Contract - with meeting of the minds
- have the force of law b/w contracting parties
- should be complied w/ in good faith
c) Quasi-contract - no pre-existing contract (SI, NG)
- he who is benefited by the act of another MUST PAY
to prevent unjust enrichment
 Solutio indebeti - return what is not due to you
- sense of gratitude
 Negotiorum Gestio - voluntary management of abandoned property
- officious manager has right to reimbursement
d) Delict/crime - criminal liability (vs. people of the Philippines) – source of civil liability
- imprisonment
- civil liabilities: (R, R, I)
 Restitution - return the thing
 Reparation - pay the value of the thing
 Indemnification - pay damages
e) Quasi-delict - cause damage without intention
- without contract
- damage done not intentional but due to NEGLIGENCE
- pay damages
- ex: CULPA AQUILIANA

4) Prestations (OBLIGATIONS) (TG, TD, NTD)

a) To Give (Real Obligation) (S,G)
i. Specific or Determinate Thing
 only one
 ONLY SPECIFIC THING CAN BE LOST
 Creditor may compel debtor to deliver
 Debtor must take care of the thing before delivery. HOW?
 Stipulation

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  Law
 Deligence of a good father of the family
 Includes delivery of accessions & accessories unless stipulated
 Excludes fruits that arise before maturity
 Rights of person who paid:
 Before Delivery - Personal - to demand delivery
(On or after maturity) - extra judicial (out of court)
- judicial (inside court)
 After Delivery - Real - ownership
ii. Generic or Indeterminate Thing
 Many of the same kind
 Belongs to a group or class
 Cannot be lost
 Rights of person who paid:
 Ask another person to deliver at the expense of the debtor
 File a case in court
b) To Do (Positive Personal)
 Debtor must do it properly in accordance w/ agreement
 May be sued for damages
 What is poorly done should be undone at the debtor’s expense
 If debtor refuses to do, creditor cannot compel debtor to do nor
file in court
 Reason - the law does not allow involuntary servitude
- law against slavery
 Remedy - ask another person to perform, pay the person
& demand payment from debtor including
damages
- if debtor still refuses to pay - SUE
c) Not To Do (Negative Personal)
 Anything done shall be undone at the debtor’s expense
 Debtor cannot be sued for doing what should have not been
done
 While still doing what should have not been done – can be sued

5) Sources of liability for damages(F, N, D)

a) Fraud (DOLO) (DC, DI)
i. Dolo causante (causal fraud) - to induce another to enter into
Contract
- voidable contract
 Remedy - ANNULMENT
ii. Dolo incidente - fraud in the performance
 Remedy - demand for DAMAGES
 ANY WAIVER OF AN ACTION FOR FUTURE FRAUD IS VOID
b) Negligence (CULPA) - omission of diligence required by the (CA, CC)
 NATURE OF THE OBLIGATION
- corresponds w/ the circumstances of the
 Person
 Time
 Place
i. Culpa aquilliana - no contract
- quasi-delict
ii. Culpa contractual - arise in the performance of a contract
 FORTUITOUS EVENT
 NO LIABILITY FOR FORTUITOUS EVENT, EXCEPT: (SLN)
i. Stipulation
ii. Law
iii. Nature of obligation
 EVEN IF THE DEBTOR HAS NO FAULT/DUE TO FORTUITOUS EVENT, DEBTOR
IS LIABLE WHEN:
i. He is already in delay
ii. Me made several promises to several persons
iii. The thing lost is a proceed of a crime
 IF ALREADY DELIVERED BUT CREDITOR REFUSES TO ACCEPT AND LOST DUE TO
FORTUITOUS EVENT, OBLIGATION IS EXTINGUISHED
 ONLY SPECIFIC THING CAN BE LOST
c) Delay/Default (MORA) (MS, MA, CM)
i. Mora solvendi - delay of debtor
 MS ex re - to give
 MS ex persona - to do

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 ii. Mora accipiendi - delay of creditor
iii. Compensatio morae - delay in both debtor and creditor
 NO DEMAND, NO DELAY, EXCEPT: (RTOLD)
a. Reciprocal obligation - performance of one is dependent upon
the performance by the other
- both are ready, NO DELAY
- when one is ready & the other is
- not, DELAY BEGINS
b. Time is the essential motive in the establishment of the obligation
- ex: wedding
c. Obligation so provides - stipulated
d. Law declares - ex: tax
e. Demand would be useless
 NO DELAY in obligation NOT TO DO
d) Contravention of the tenor of the obligation

6) KINDS OF OBLIGATIONS (PCPAFJSDIP)

a) Pure - not subject to a condition
- demandable at once
 Also DEMANDABLE AT ONCE if SUBJECT TO A RESOLUTORY CONDITION OR
PERIOD
b) Conditional - subject to a FUTURE and UNCERTAIN EVENT or
PAST EVENT unknown to both parties
 KINDS OF CONDITIONS (S, R, P, C, M, I)
i. Suspensive - demandability of obligation is DEPENDENT upon
The FULFILLMENT of the condition
- ex: I WILL PAY you if you pass the CPA board
exam in May 2007
 OBLIGATION TO GIVE
- RETRO effect
- Fruits and interests DEEMED COMPENSATED
ii. Resolutory - DEMANDABLE AT ONCE
- upon FULFILLMENT of the condition, obligation
is EXTINGUISHED
- ex: I WILL NOT PAY you if you pass the CPA
board exam in May 2007
iii. Potestative - dependent upon the SOLE WILL OF THE DEBTOR
- condition makes the OBLIGATION VOID
- ex: I will pay you if I jump in Pasig River
iv. Causal - dependent upon CHANCE
v. Mixed - dependent upon CHANCE and WILL of THIRD
PERSONS
vi. Impossible - physical - to fly to the moon
- legal - to kill somebody
- OBLIGATION is VOID
 condition NOT TO DO AN IMPOSSIBLE THING - disregarded
- OBLIGATION becomes PURE and DEMANDABLE
AT ONCE
c) With a period - depends upon the arrival of the term
 Definite
 Indefinite
o Statutory - taxes
o Potestative - “when his means permits him to do so”
- dependent upon the capacity of the debtor
- VALID, UNLIKE in POTESTATIVE CONDITION
 PERIOD
 GENERALLY for the benefit of both CREDITOR & DEBTOR
 BEFORE MATURITY - debtor cannot compel acceptance
- creditor cannot demand payment
 Debtor shall lose right to the period if: (IGIVA)
a) Debtor is insolvent
b) Debtor failed to furnish the promised guaranty
c) Guaranty is impaired
 Due to his fault
 Even due to fortuitous even, unless he furnishes a new 1
d) Debtor violates any undertaking agreed upon
e) Debtor attempts to abscond
 May be for the benefit of the DEBTOR - “on or before”
 Court shall fix the period if:
a) Not fixed by the parties

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 b) Depends upon the sole will of the debtor
c) Debtor binds to pay when his means permits him to do so
PERIOD CONDITION
Certain Uncertain
Future May be past
Potestative period – obligation is valid Potestative condition – obligation
is void
d) Alternative - prestations are connected by “OR”
 several prestations
 complete performance of one is sufficient
 generally, right of choice belongs to the debtor
o loss of alternative objects at debtor’s fault:
 one or some are lost
 debtor may choose from the remaining plus damages
 all are lost
 basis - value of last thing lost or last service w/c became
impossible of performance plus damages
 right of choice may also be expressly granted to the creditor
 one or some are lost
 creditor may choose from the remaining plus damages
 demand for the value of any of the lost things plus damages – also
applicable when all are lost due to debtor’s fault
 if only one is left, debtor loses the right of choice
e) Facultative
 Only one prestation has been agreed upon
 Debtor is given right to render another in substitution
 Only debtor has the right of choice
 Right cannot be transferred to creditor
 In ALTERNATIVE & FACULTATIVE obligation, CHOICE becomes EFFECTIVE only when
COMMUNICATED
 After it has been communicated, obligation becomes SIMPLE
ALTERNATIVE FACULTATIVE
Several prestations Only one prestation
Complete performance of one is ok Debtor may render another in substitution
Right of choice – debtor or creditor Right of choice – debtor only
Right of choice may be transferred to Right of choice cannot be transferred
creditor

Effectivity of choice – upon communication

When choice has been communicated – no longer A/F but SIMPLE
f) Joint & solidary – refer to the PARTIES involved
 Several debtors and/or creditors
 One and the same obligation
 Generally joint
o To each his own
 Solidary only if SLN
o Act, benefit, misfortune of one is act, benefit, misfortune of all
o “I promise to pay” – signed by several persons
o jointly & severally
o any one solidary debtor can be compelled performance of the obligation
o If one is not ready and incurred delay and became liable for damages, the debtor
in default will be liable for damages to the other debtors.
o if already for delivery but due to fault of one solidary debtor, the thing is lost,
solidary debtor in fault carries the burden with respect to the other solidary debtors
o requires trust and confidence
o solidary debtor cannot transfer his share without the knowledge of the
other solidary debtors
o ex: partners & partnership – solidarily liable in quasi-delict
 Division of claim and/or liability is always based on the # of joint parties, whether
debtor or creditor
g) Divisible & indivisible – refer to the OBJECT or SUBJECT MATTER
 Divisible - capable of partial performance
- services, as a general rule is divisible
 Indivisible - not capable of partial performance
 Even though divisible, may be indivisible if S/L

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 h) With a penal clause - debtor assumes accessory liability in case of non-
performance of the principal obligation
 Purposes of penal clause (ESP)
 Ensure performance of the obligation
 Substitute as indemnity for damages or interest
 Penalize debtor in case of non-performance
 If PENAL CLAUSE is VOID, PRINCIPAL OBLIGATION remains VALID
 If PRINCIPAL OBLIGATION is VOID, PENAL CLAUSE is also VOID
 Court shall reduce penalty agreed upon if:
 Penalty is excessive or unconscionable
 Principal obligation partly or irregularly complied with
 Proof of actual damages not necessary to enforce penalty

7) Extinguishment of Obligation (PLCCCN) or (NoCoMeRePaLo) + others

a) Payment - refers not only to payment of money
 Who should pay (D, SII, AP, IP, TP)
i. Debtor
ii. Successors in interest
 Heirs - cannot be compelled to pay more than the value of
inheritance
- rights & obligations are inherited unless:
 Prohibited by law
 Rights & obligations are purely personal
 assigns
iii. Authorized person - agent
iv. Interested person
v. Third person, provided accepted by creditor – has right to demand reimbursement
 Change in debtor
 Delegacion - With knowledge & consent of the debtor
- right to reimbursement in full
 Expromission - W/o knowledge & consent of the debtor
- right to reimbursement only up to the
amount beneficial to the debtor
- no subrogation
- all guarantees & securities are
extinguished
 Payment by incapacitated person is not valid

 To
whom should the payment be made (C, SII, AP, TP)
i.
Creditor
ii.
Successors in interest – heirs & assigns
iii.
Authorized person - agent
iv.
Third person – valid only if:
 Inured to the benefit of the creditor
 Ratified by the creditor
 Third person acquired the right
 Change in creditor- subrogation
 Payment to incapacitated persons - NOT VALID(VOIDABLE)
 Valid only if:
 He kept the thing paid
 He is benefited by it
 What should be paid - what has been agreed upon
- creditor cannot be compelled to accept a different thing
even though it is more valuable
- if object is indeterminate & the quality has not been
stipulated, purpose & circumstances of the obligation
shall be considered
- average quality depends on P & C
 Where should the payment be made
 Place agreed upon
 No place agreed upon if the object is:
 Indeterminate - debtor’s domicile
 Determinate - place where the thing is at time of constitution of
the contract
- when debtor is prevented by fortuitous event, deliver to
a place nearest the agreed place
 Who should shoulder the expenses - general rule: debtor
 How should you pay - completely

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 - if incomplete or irregular but creditor accepted w/o
protest – valid & obligation is paid & extinguished
 Payment by incapacitated person is not valid
 SPECIAL FORMS OF PAYMENT: (Aop, Pbc, Dep Top)
i. Application of payment
 several debts to one creditor are due & demandable
 if no application specified, apply to most onerous debt
 one debtor – incomplete payment to one creditor – debtor has right of
application
 if one/two (but not all) creditors are paid, unpaid creditor can demand for
cancellation of payment & compel application to all creditors proportionately –
usually, partial only
ii. Payment by cession
 Debtor is insolvent
 Several creditors
 Transfers all properties
 Debtor is released only up to the proceeds of the properties sold
iii. Dation in payment
 Debt is money paid with property
 Released only if accepted by the creditor
iv. Tender of payment & consignation
 Deposit of payment in proper court
 Always preceded by tender of payment EXCEPT when TRIAL:
 Two or persons are claiming the same debt
 Receipt – creditor refuses to issue
 Incapacitated creditor
 Absent/unknown/missing creditor
 Lost – title of obligation is lost
b) Condonation or Remission
 Gratuitous abandonment of creditor’s right to collect
 ESSENTIALLY gratuitous – essentially means NO EXEMPTION
 May be express or implied; total or partial
 Requires debtor’s consent
 Examples:
i. Implied
 Cancellation of promissory note
 Return of negotiable instrument w/o collecting
i. Express
 Legacy of 10,000 given by creditor to debtor who owes him the same amount
c) Confusion or Merger of Rights - one person becomes the debtor & creditor of one
& the same obligation
d) Compensation – “quits”
 Two persons in their own rights are debtors & creditors of each other
 May be legal or voluntary, total or partial
 Requisites of legal compensation (Pb, Skq, Dad, Nc)
i. Each obligors are principally bound
ii. Both debts are in money or same kind and quality of thing (if stated)
iii. Both debts are due & demandable
iv. No controversy over the debts commenced by third persons
 There can be no compensation in: (S, D, C, Cd)
i. Support
ii. Deposit
iii. Commodatum (hiram)
iv. Civil liability arising from crime or delict
e) Novation
 Change of obligation by a new one resulting in its (old) extinguishment
 Kinds of Novation (R, P)
i. Real - change of object or principal condition
ii. Personal - change of parties (see payment)
 Creditor - subrogation
 Debtor - substitution
 Expromission - without knowledge or consent of debtor
 Delegacion - with knowledge or consent of debtor
 Partial payment - partially paid creditor preferred in case debtor becomes
insolvent
 If new obligation is VOID, original obligation SUBSISTS
 If original obligation is VOID, new obligation is also VOID
 If old obligation is subject to a CONDITION or PERIOD, new obligation shall be
subject to the SAME CONDITION or PRERIOD, unless otherwise stipulated

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 f) Loss of Thing Due
 Only SPECIFIC thing can be LOST
 If SPECIFIC thing LOST W/O debtor’s fault or due to FORTUITOUS event,
obligation is EXTINGUISHED, except SLN
 Thing is considered lost if:
i. It perishes
ii. Goes out of commerce
iii. Disappears, existence unknown or can no longer be recovered
g) Other causes of extinguishments (P A R Frc)
 Prescription
 Annulment
 Recission
 Fulfillment of resolutory condition

II. CONTRACTS
 NOT ALL AGREEMENTS are CONTRACTS
 ALL CONTRACTS are AGREEMENTS
1) DEFINITION
 Meeting of the minds b/w 2 or more persons whereby binds himself with respect of the
other(s) to give something or to deliver some service

2) ELEMENTS (N, E, A)
a) Natural - inherent in some contracts (ex: warranty against eviction &
against hidden defects – contract of sale)

b) Essential - must be present in order that there will be a valid contract (C,
O, C)
 Consent
 Meeting of the offer and acceptance upon the thing and the cause
 OFFER
 may be made thru an agent
 Advertisements are not definite offers but mere invitation to make an
offer
 May be withdrawn before perfection of the contract
 If offeree is given option period, offeror cannot withdraw if offeree gives an
option money
 Option period – period of time
given to the oferree within which to decide whether to accept the offer or
not
 Option money – given for the
exercise of the option period
 Earnest money – given to show the
buyer’s interest in the contract of sale
 ACCEPTANCE
 thru letter, telegram or correspondence perfects contract only upon
acceptance reaches knowledge of the offerer
 VICES THAT MAKE CONSENT DEFECTIVE (IMVIFU) - VOIDABLE
 Incapacity
o Deaf mute who do not know how to write
o Minors
o Insane
o Drunk
 Incapacitated persons cannot validly give consent except if the objects
involved are necessaries such as food, clothing, shelter, medicine
and education according to economic standing of the family
 Capacitated persons disqualified to enter into contract:
o Contract of sale or donation b/w husband and wife
o Contract of sale b/w guardian and ward involving property of the
ward
 Consent given in the state of drunkenness or under hypnotic spell is also
defective - VOIDABLE
 Mistake
 Violence
 Intimidation
 Fraud
 Undue influence
 Consent of one of the parties defective, contract is voidable; remedy,
annulment

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  Object (T R S)
 May be
 Things
 Rights
 Services
 Future things may be the object of a contract but NOT FUTURE
INHERITANCE
 Future things
o Emptio rei esperati – future things
o Emptio spei - hope or expectancy
 Cannot be the object of a contract
 Things or services outside the commerce of men
 Future inheritance
 Things & services contrary to LAW, MORALS, GOOD CUSTOMS, PUBLIC
ORDER & PUBLIC POLICY
 Impossible service – physical or illegal
 Intransmissible rights
 Cause or consideration
 Essential or impelling reason why the parties enter into a contract
 Prestation to be performed by one in favor of the other
 Thing/service already delivered or rendered, or the liberality of the benefactor
 Distinctions b/w motive & cause:
CAUSE MOTIVE
Essential reason why parties enter Indirect and remote reason why a
into a contract party gives consent
Always known Not always known
Essential element of a contract Not an essential element of a
contract
Affects the validity of a contract Does not affect the validity of a
contract

c) Accidental - matters stipulated by the parties such as payment of interest in a

contract of loan.

3) IMPORTANT DISTINCTIONS B/W OBLIGATION & CONTRACT

OBLIGATION CONTRACT
Effect of the contract Cause/juridical tie of an obligation
There can be an obligation w/o a There can be no contract w/o an
contract obligation

4) BASIC PRINCIPLES OF CONTRACT (F, OF, PC, M, R)

a) Freedom or liberty to contract
 Not absolute
 Subject to limitations on law, morals, good customs, public order & public policy
b) Obligatory force & compliance in good faith
c) Perfection by mere consent
 General rule – consensual contract
 Contracts perfected by delivery – real contracts
 Pledge
 Commodatum – hiram (for free)
 Deposit
 Loan
d) Mutuality of contract
 Both parties are mutually bound by what they have agreed upon
e) Relativity of contract
 Binding b/w the parties, their heirs & assigns
 In some cases, even third persons are bound such as:
 Stipulation pour atrui
 agreement b/w 2 persons whereby a favor is given to a third person & third
persons accepted it
 if the third person accepted & debtor fails to fulfill, third person has right to
demand payment for the principal obligation
 creditor is defrauded by the debtor
 third person who induced to violate the contract
 third persons who acquired rights over immovable properties – must respect
existing contracts involving such immovable property

5) CHARACTERISTICS OF CONTRACT
a) Consensual or real

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 i. Consensual - perfected by mere consent
ii. Real - perfected by delivery
b) Principal, accessory or preparatory
i. Principal - not dependent to any other contract
ii. Accessory - dependent to a principal contract
iii. Preparatory - other contracts will follow (agency & partnership)
c) Nominate or innominate
i. Nominate - with a name in the law
ii. Innominate - no particular designation under the law (memorandum)
d) Commutative or aleatory
i. Commutative - demandable, not dependent on chance
ii. Aleatory - performance depends on chance
e) Onerous, gratuitous or remuneratory
i. Onerous - there is exchange of compensation
ii. Gratuitous - for free
iii. Remuneratory - payment for services rendered
f) Unilateral or bilateral
i. Unilateral - only one party has obligation
ii. Bilateral - both parties have obligation for each other
g) Oral or written
i. Oral - perfected orally
ii. Written - formality is required to be perfected

6) KINDS OF DEFECTIVE CONTRACTS

a) Rescissible contracts
 No defects in the essential elements
 Damage or injury is suffered by another person such as:
 B/w guardian & ward – lesion of >1/4
 B/w administrator & absentee – lesion of > ¼
 Debtor who defrauds creditor
 Defendant sells property w/c is the subject of a case to the disadvantage of the
plaintiff
 Subsidiary remedy – RECISSION
 Cancellation of contract as if no contract has occurred
 Can be done only if there is no other available remedy
 Requires restoration of properties
 Cannot be allowed if
 Party seeking recission can no longer return what must be returned
 Property is already in the possession of a third person who acted in good faith
b) Voidable contracts (IMVIFU)
 Consent of one of the parties is defective because of:
i. Incapacity
ii. Mistake
iii. Violence
iv. Intimidation
v. Fraud – CAUSAL (dolo causante)
vi. Undue influence – youngest daughter who knows that her father cannot refuse
whatever she asks for, threatens her father that she will elope if her father doesn’t
sign a contract giving all his properties to her as inheritance.
 Remedy – RATIFICATION or ANNULMENT
 Once ratified - cleansed of all its defects & becomes VALID
 Only the injured party can ask for annulment w/in FOUR (4) YEARS except when
there is mutual mistake
c) Unenforceable contracts (A,SF,BPI)
 Cannot file a case in court
1. Entered into w/o authority or in excess of authority
2. Violates statute of fraud – agreements which MUST BE IN WRITING
i. Agreement NOT TO BE PERFORMED w/in one year
ii. Guaranty or special promise to answer for the debt or miscarriage of another
iii. Agreement made in consideration of marriage other than mutual promise to marry
iv. Agreement for the sale of goods, chattels or things in action at a price = or > P500
v. Lease for > one year
vi. Sale of real property or an interest therein
vii. Representation as to the credit of a third person
 Refer to PURELY EXECUTORY contracts
 PARTIALLY PERFORMED obligations – NOT COVERED BY STATUTES OF
FRAUD
3. Both parties are incapable of giving consent
 May be ratified & once ratified, is cleansed of all defects & becomes valid
d) Void contracts (or INEXISTENT CONTRACTS)

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 1. OBJECT or CAUSE is DEFECTIVE
2. ONE or SOME or ALL of the ESSENTIAL ELEMENTS of a contract is MISSING
 Cannot be assailed by third persons – can be brought to court only by directly affected
parties
 Cannot be ratified
 No prescriptive period
 Right to defense cannot be waived
 PARI DELICTO – BOTH GUILTY
 Cannot file a case in court against each other because both will be persecuted
 Land acquired thru CARP cannot be sold
 Illegal but not criminal
 Sale is VOID

7) SIMULATION
a) Absolutely Simulated
 Purely fictitious
 Parties do not intend to be bound by the agreement
 Cannot be reformed
b) Relatively Simulated
 Parties hide/conceal the true agreement
 Contract is valid as to the true agreement
 May be caused by
 Fraud
 Accident
 Mistake
 Inequitable conduct
 REMEDY - REFORMATION
 The process of changing the instrument when what is embodied therein is different
from the intention of the parties
 Allowed only before the contract has been enforced by the party who has
the right to ask for reformation
 Contracts that cannot be reformed:
 Wills
 Simple donation inter vivos when no condition is imposed
 Void contracts

III. SALES
1) DEFINITION

2) CHARACTERISTICS
a) Consensual - perfected by mere consent
b) Bilateral - both parties have obligations to perform
c) Cummutative - values exchanged are generally equivalent to each other
d) Principal - existence does not depend upon another contract
e) Onerous – requires an exchange of valuable consideration
f) Nominate – has a name provided in the civil code
g) Generally reciprocal – the performance of the obligation by one party is dependent
upon the performance of the other’s obligation

3) STAGES OF A CONTRACT OF SALE (same w/ contract)

a) Conception or birth
b) Perfection
c) Consummation or death

4) OBJECT OF SALE – never services

a) Things
 Things with potential existence - VALID
 Future things – emptio rei esperati
 Hope – emptio spei
 Sale of VAIN HOPE OR EXPECTANCY - VOID
b) Rights

5) CONTRACT OF SALE REQUIRED TO BE WRITTEN

a) Real property – notarized (public document)
b) Sale to be performed beyond one year
c) => P500 – must be in writing to be enforceable

6) IMPORTANT DISTINCTIONS

10
 Sale Dation in Contract for a Barter Sale or Sale on
Payment Piece of Work Return Trial,
Approval or
Satisfaction

No pre-existing W/ pre-existing
credit credit
Cause – price Extinguishment
of existing
obligation
Obligations are Obligation is
created extinguished
Greater freedom Lesser freedom
in determining in determining
the price the price
Goods Goods
manufactured for manufactured
sale to the especially for
general market the customer &
upon his
special order
Consideration is Consideration
money is another thing
C>O C<O
C=O
Ownership is Ownership
transferred is retained
upon delivery by the seller
but w/ option even though
to return delivered
Subject to Subject to
resolutory suspensive
condition condition

7) PACTO DE RETRO SALE

 Upon sale, buyer becomes unconditional owner
 If seller does not repurchase, buyer becomes absolute owner
 Sale with right of redemption
 With prohibitive period – redemption period begins after the prohibitive period
 No agreed period – period to redeem is within 4 YEARS from date of contract
 In either case, redemption period MUST NOT EXCEED 10 YEARS FROM DATE OF
CONTRACT
 Agreement to repurchase as soon as the seller has the money to redeem is one
with a period (indefinite)
 Distinctions b/w Mortgage
PACTO DE RETRO SALE MORTGAGE
No foreclosure With foreclosure if obligation is not paid
No pre-existing contract With pre-existing contract
Principal contract Accessory contract
 What MUST BE RETURNED to the buyer in case of redemption in pacto de retro sale
a) Price of the sale
b) Expenses of the contract
c) Other legitimate expenses made by reason of the sale
d) Necessary & useful expenses made on the thing sold
 What MUST NOT BE RETURNED to the buyer in case of redemption in pacto de retro
sale
 INTEREST
 Reason: DEEMED MUTUALLY COMPENSATED
 Seller – by the use of the price paid by the buyer
 Buyer – by the use of the thing sold by the seller

8) OFFER TO SELL
 May be withdrawn before acceptance even if there is period given to buyer to decide
EXCEPT:
e) When there is OPTION MONEY
 Distinctions b/w OPTION MONEY & EARNEST MONEY
OPTION MONEY EARNEST MONEY
Given for the exercise of period Given to show buyer’s interest in the

11
 contract of sale
Given before perfection of the contract Given after the perfection of the
of sale contract of sale
Separate & distinct from the purchase Part of the purchase price – down
price payment

9) OBLIGATIONS OF THE SELLER

a) Deliver the thing sold
b) Transfer ownership – CANNOT BE WAIVED BY THE BUYER, all others can be waived
c) Warrant the thing sold against
f) Eviction – seller warrants that he is the legal owner of the thing sold
 In case of eviction, recoverable value is the value at the time of eviction
 Legal owner of the thing can get back the thing from the buyer even without
compensation except when buyer acquired it from:
1. The public market
2. Public auction
g) Hidden defects
 Must be substantial
 Even though the seller is not aware of the defect
 In case of hidden defects, remedy of buyer:
1. Cancel the contract of sale
2. Proportionate reduction of price
d) Take care of the thing pending delivery

10) OBLIGATIONS OF THE BUYER

a) Accept the thing
b) Pay the price – a sum certain in money

11) KINDS OF DELIVERY OR TRADITION

a) Actual or real
h) Thing is placed in the possession & control of the buyer
b) Constructive
1. Execution of a public document (legal formalities) – in sale of RP
2. Symbolic delivery or traditio symbolica (delivery of the key) – sale of a car
3. Traditio longa manu (mere pointing at the object) – new owner bears the loss
4. Traditio brevi manu (buyer is already in possession, no need to deliver)
5. Traditio constitutum possessorium (no delivery because seller will continue in
possession
c) Quasi-delivery
i) Object is intangible or incorporeal
 Placing of title of ownership in the name of the buyer
 Allowing the buyer to exercise right

12) TRANSFER OF OWNERSHIP

 OWNERSHIP IS TRANSFERRED ONLY UPON DELIVERY

13) RIGHTS OF UNPAID SELLER

a) Right of possessory lien – seller retains the goods until payment of the price
j) Once delivered, seller has no more right to possessory lien
b) Right of stoppage in transitu – stop delivery while in transit when buyer becomes
insolvent
c) Right of resale
k) When stipulated
l) When perishable in nature
m) When debtor is in default for an UNREASONABLE LENGTH OF TIME
 If resold at HIGHER PRICE, SELLER RETAINS EXCESS
 If resold at LOWER PRICE, BUYER MUST PAY DEFICIENCY
d) Right to rescind or cancel contract of sale
n) If buyer is already in possession of the thing sold, rescission may only be done thru
court or judicial proceedings
e) Right to demand payment of the price – specific performance
o) Judicial
p) Extra judicial

14) RIGHT OF BUYER

a) Buyer may suspend payment of the price when there is valid ground that he will be
deprived of his right on the property by a third person
b) Before payment of the price
i. Inspect
ii. Examine

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 c) In COD sale – buyer has no right under (b)

15) RECTO LAW

 Applicable to PERSONAL PROPERTY sold
 INSTALLMENT BASIS
 Property is mortgaged to the seller to secure payment of the price
 Applicable upon failure of buyer to pay one or more installments
 Analogous to Lease w/ Option to Buy
 Remedy of seller:
a) 1 or more unpaid installments
i. Demand specific performance
b) 2 or more unpaid installments
i. Demand specific performance
ii. Rescind the contract
iii. Foreclose property
c) If immediately foreclosed & proceeds are less than the outstanding obligation, buyer
has no more obligation on the balance or deficiency & seller has no right to demand
for the balance or deficiency
d) Any stipulation to the contrary is VOID

16) MACEDA LAW

 Applicable to PARCEL OF LAND or REAL PROPERTY sold
 INSTALLMENT BASIS
a) @ Least 2 installments paid
 30-day grace period to pay for every year without interest
b) @ Least 5 years paid
 If rescinded – CASH SURRENDER VALUE=
 50% (of all payments) refund + 5% for every year in excess of 5 years
 not to exceed 90% of all payments
 If rescission is stipulated & rescinded:
a) Notice of rescission MUST BE NOTARIZED, to be valid
b) If not notarized, buyer CAN COMPEL SELLER TO ACCEPT PAYMENT even after
maturity date

17) PD 957 – CONDOMINIUM LAW

 RULES WHEN SELLER/DEVELOPER DOES NOT FOLLOW WHAT HAS BEEN
STIPULATED IN THE DEVELOPMENT OF THE PROJECT
a) Buyer may suspend payment when what has been stipulated is not followed by the
seller
b) Developer/seller cannot rescind contract for such non-payment
c) Buyer may withdraw all payments + interest
 In case of non-payment of the buyer w/o fault on the seller, follow MACEDA LAW

18) SALE OF REAL PROPERTY THRU AGENT

 Must be in writing to be valid
 If AUTHORITY is ORAL – sale executed by the agent is VOID
 Under the STATUTES OF FRAUD
 SALE of LAND or REAL PROPPERTY must be in writing to be VALID &
ENFORCEABLE (even not thru agent)

19) DEFECTIVE CONTRACTS OF SALE

a) Rescissible
b) Voidable
c) Unenforceable
d) Void

20) DOUBLE OR MULTIPLE SALES – OWNERSHIP BELONGS TO:

a) REAL PROPERTY
1. First registered in good faith
2. First possessed in good faith, if there is no registration
3. Buyer who possesses OLDEST TITLE, if there is no registration or possession
b) PERSONAL PROPERTY
1. First possessed in good faith, if there is no registration
2. Buyer who possesses OLDEST TITLE, if there is no registration or possession

21) LEGAL REDEMPTION OF PROPERTIES SOLD TO OTHER PERSONS

a) CO-OWNERS
 Redemption proportionate to the share of co-ownership
 Within 30 days from WRITTEN NOTICE from seller

13
  Seller cannot hide the sale because the REGISTRY of DEED requires the written notice
to co-owners before registration
 REASON: to discourage co-ownership
b) ADJACENT OWNERS
1. Rural Land < 1 hectare
 Priority redemption to adjacent owner with SMALLEST AREA
 Reason: to foster agricultural development
2. Urban Land – no practical use
 Priority redemption to adjacent owner with the most justified or most important use
 Reason: to discourage impractical use of urban land

22) ANTICHRESIS
Antichresis, in civil law, is a contract whereby a person borrowing money of another, hands over his property to the
creditor, allowing the use and occupation thereof, for the interest on the money lent.

IV. AGENCY
1) PARTIES TO A CONTRACT OF AGENCY
a) Principal
b) Agent

2) CAPACITY OF THE PARTIES

a) Principal – must be capacitated
b) Agent – may or may not be capacitated as long as the principal is capacitated

3) KINDS OF AGENCY
a. Express
 Oral – general rule, except when immovables or real property is involved
 Written

b. Implied
i. Acts of the principal
ii. Principal’s silence
iii. Principal’s lack of action
iv. Principal’s failure to repudiate agency

4) HOW CREATED
a. By CONTRACT

b. By OPERTATION OF LAW
 Son temporarily taking over the agency after death of father

c. By ESTOPPEL
 Thru acts of the agent
 Estoppe – barring from denying what you have said w/c others have relied upon

d. By RATIFICATION
 Validation by principal

5) INTERPRETATION OF THE AGENT’S POWER

a. POWER TO SELL – for CASH ONLY unless stipulated or subsequently ratified
 If not authorized to sell on installment:
 Agent may be required to pay the principal on cash basis but agent is entitled
to the benefits of the contract
 Principal may ratify the sale on credit
 If authorized to sell on installment
 Agent must inform principal of the sale w/ the statement of the names of
the buyers & amount due from them
 Otherwise, principal may demand payment in cash
b. POWER TO SELL – does not include power to barter, mortgage or pledge
c. POWER TO MORTGAGE – does not include power to sell or secure a second mortgage
d. POWER TO COMPROMISE – does not authorize submission for arbitration

6) DIFFERENCES B/W AUTHORITY & INSTRUCTIONS

AUTHORITY INSTRUCTIONS
Affects third persons Does not affect third persons
Must be verified by third persons Need not be verified
Violations make acts of the agent not Does not affect validity of the contract of
valid (unenforceable) agency but agent is liable to the principal
for damages

14
 a. General – all business of the principal
b. Specific – particular business only

7) APPOINTMENT OF AGENT THRU LETTER/TELEGRAM

 Agent’s silence is not considered an implied acceptance, EXCEPT:
a. When he acknowledged receipt of the letter/telegram
b. Letter/telegram entrusting to him power with respect to a business he is
habitually engaged

8) APPOINTMENT OF A SUBSTITUTE OR SUB-AGENT

 All substitutes APPOINTED AGAINST THE PROHIBITION OF THE PRINCIPAL - VOID
 Agent may appoint a substitute unless EXPRESSLY PROHIBITED
 Agent is liable for the acts of the substitute if:
a. He is not given the power to appoint
b. Though given, the substitute is not designated & he appointed a notoriously
incompetent & insolvent person
 If appointed by the principal, no liability on the part of the agent

9) LIABILITIES OF SEVERAL AGENTS/PRINCIPALS

 Several Agents – JOINTLY LIABLE, unless SOLIDARITY has been STIPULATED
 Several Principals – JOINT, except when agent is appointed for a common
transaction

10) ADVANCES MADE BY THE AGENT

 General rule: all advances made by agent for the execution of the agency must be
REIMBURSED + INTEREST from the day on w/c advances were made EVEN IF THE
BUSINESS IS UNSUCCESSFUL provided AGENT is FREE from FRAUD or FAULT
 Exceptions: Principal is not liable for expenses incurred by agent if:
a. Agent violated the instructions of the principal unless the principal wants to
avail of the benefits derived from the contract
b. Expenses were due to the agent’s fault
c. Agent incurred them with knowledge that unfavorable result would ensue
d. Stipulated that the agent would bear the expenses

11) MODES OF EXTINGUISHMENT OF THE CONTRACT OF AGENCY

a) Expiration of the contract
b) Death of one of the parties
c) Withdrawal by the AGENT
 May withdraw anytime
 Must notify principal
 Must give the principal reasonable opportunity to take necessary steps to meet the
situation
 Agent shall be liable if the principal shall suffer damages by reason of agent’s
withdrawal unless it is impossible to continue agency w/o detriment to agent
 FILING A CASE AGAINST THE PRINCIPAL FOR MONETARY CLAIM is
EQUIVALENT TO WITHDRAWAL
d) Accomplishment of the purpose of agency
e) Revocation by the PRINCIPAL
 REQUISITES OF VALID REVOCATION
 Must be done in good faith
 Must be brought to the attention of specified third persons
 WHEN AGENCY IS IRREVOCABLE
 Coupled with interest
 A bilateral contract depends on the agency
 It is a means of fulfilling an obligation already contracted
f) Dissolution of the firm (if one of the parties is a firm)

12) DEL CREDERE AGENT

 Commission agent with guarantee commission to collect when due
 Even if not collected, agent is obliged to remit what is due

V. PLEDGE & MORTGAGE

1) COMMON CHARACTERISTICS
PLEDGE CHATTEL REAL
MORTGAGE ESTATE
MORTGAGE
a) Accessory contract as security Same Same
b) Pledgor must be absolute owner Same Same
c) Plegor must be authorized or has free Same Same

15
 disposal of the thing pledged
d) Thing pledged may be alienated, if debtor Same Same
cannot pay
e) Thing pledged must be delivered to the No delivery No delivery
creditor

2) DISTINCTIONS
PLEDGE CHATTEL REAL ESTATE
MORTGAGE MORTGAGE
a) Object Personal or movable Personal or movable Real or immovable
property property property
b) Right to sell Can be sold even w/o Cannot be sold w/o Can sell even w/o the
pledgee’s consent. consent of creditor. consent of the
To transfer Must be in writing & mortgagee. (any
ownership to buyer annotated on the prohibition not to sell
requires consent, instrument is VOID – pactum
written or oral commissorium)
c) Effect to third Description of thing There must be an Must be recorded in
persons pledged must appear affidavit of good faith the OFFICE OF THE
in a public document & must be recorded REGISTRY OF
in CHATTEL DEEDS
MORTGAGE
REGISTRY
d) Effect of sale Proceeds > debt – Proceeds > debt – Proceeds > debt –
creditor is entitled creditor not creditor not
to excess UNLESS entitled to excess entitled to excess
otherwise
STIPULATED Proceeds > debt – Proceeds > debt –
creditor can creditor can recover
Proceeds < debt – recover deficiency deficiency
creditor cannot
recover the
deficiency EVEN IF
there is
STIPULATION

3) PLEDGE
 Real contract – if thing pledged is NOT DELIVERED - VOID
 Subject matter
a) Movable property
b) Within the commerce of man
c) Capable of possession
 Extinguishment of pledge (does not include extinguishments of debt)
a) Payment
b) Destruction of thing pledged
c) Return of thing pledged
d) Renunciation of the thing pledged
e) Other forms of extinguishments of obligation
4) MORTGAGE
 In case of auction, mortagor can participate. If same w/ highest bidder, preferred
 By-bidder or puffer – bids for & on behalf of the seller; public must be notified
 TIPO OR UPSET PRICE- FIXED AMOUNT agreed upon for w/c the property mortgaged
shall be sold - VOID

a) CHATTEL MORTGAGE

b) REAL MORTGAGE
 Involves real property (binds the property & third persons if registered)
 Real right (can be sold or assigned)
 Accessory contract
 A limitation on ownership (a lien but does not transfer ownership)
 Inseparable from the property
 Indivisible (cannot be partially extinguished by partial payment)

5) PACTUM COMMISSORIUM – VOID

 A stipulation for the automatic ownership of the property by the creditor-mortgagee in
case of non-payment of the obligation.
 An agreement prohibiting the debtor-mortgagor to sell the property while the obligation
remains unpaid

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VI. PARTNERSHIP
1) DEFINITION
 By the contract of partnership, two or more persons binds themselves to contribute
money, property or industry with the intention of dividing the profit among themselves

2) CHARACTERISTICS
a) Consensual
b) Nominate
c) Onerous
d) Bilateral
e) Principal
f) Preparatory

3) ESSENTIAL REQUISITES

4) DISTINGUISHED FROM CORPORATION

PARTNERSHIP CORPORATION
Creation By contract By operation of law
Existence Indefinite Not more than 50 years
Management Managed by all partners if there is Managed by BOD
no managing partner
Liability of partners General partners’ liability extends Stockholders’ liability does not
/stockholders to separate properties extend to separate properties
Right against Partners may bind the partnership Stockholders cannot bind the
partnership or corporation
corporation
Dissolution Death of a general partner may Death of a stockholder does not
dissolve the partnership (if there dissolve the partnership
are no other general partners)

5) DISTINGUISHED FROM OTHER FORMS OF ORGANIZATION

a. Co-ownership
b. Conjugal partnership of gains
c. Joint accounts
d. Joint venture
e. Voluntary association
f. Business trust
g. Syndicate
h. Tenancy
 Partnership HAS A SEPARATE JURIDICAL PERSONALITY, all of the above do not have

6) KINDS OF PARTNERSHIP
A. As to object
a) UNIVERSAL PARTNERSHIP
i. Universal partnership of ALL PRESENT PROPERTY
 ALL PROPERTIES belonging to the partners at the time of constitution of the
partnership become COMMON PROPERTY including ALL PROFITS w/c they may
acquire therewith
 Properties subsequently acquired by inheritance, legacy or donation, not
included, FRUITS from SUCH PROPERTIES ARE ALSO INCLUDED
ii. Universal partnership of ALL PROFITS
 Comprises what the partners may acquire thru industry or work
 Properties are not contributed
 Only the usufructs of such properties are contributed
 If the nature of universal partnership is not specified, considered of ALL
PROFITS

17
 b) PARTICULAR PARTNERSHIP
B. As to liability of partners
a) General - With one or more general partners
b) Limited
 With one or more limited partners & one or more general partners
 Cannot be oral
 Must be written & registered with SEC
 Must always be written as limited, otherwise considered as general (under the
statutes of fraud)
C. As to duration
a. Partnership at will
b. Partnership with a fixed term
D. As to representation to others
a. Ordinary
b. Partnership by estoppel
E. As to legality of existence
a. De jure – complied with all the requirements
b. De facto – failed to comply with all requirements
F. As to publicity
a. Secret
b. Open

7) PERSONS PROHIBITED TO ENTER INTO A UNIVERSAL PARTNERSHIP

a) Husband & wife during their marriage
b) Persons guilty of adultery or concubinage at the time of donation
c) Person found guilty of the same criminal offense in consideration thereof
d) Public officer or his wife with another person by reason of his office

8) KINDS OF PARTNER
A. As to contributions
a) Capitalist – money or property
b) Industrial - industry
B. As to liability
a) General – liability to third persons extends to separate property
b) Limited - liability to third persons extends only to his contribution, as if an outsider to
the partnership
C. As to management
a) Managing – manages & actively participates in the business of the partnership
b) Silent partner – does not actively participate in the management of the partnership
D. Other classifications
a) Partner by estoppel
b) Nominal partner – specified in the articles of partnership
c) Secret partner – NOT KNOWN to third persons as a partner
d) Dormant partner – SILENT + SECRET
e) General/limited partner
 General in all respects
 Limited only as to return of capital
f) Substituted limited partner – assigned w/ the interest of a deceased limited partner
g) Liquidating partner – in charge of liquidation, winding up & termination
h) Sub-partner – no right to interfere in the business of the partnership, has right against
the partner only

9) PARTNERSHIP/PARTNER BY ESTOPPEL
 One which is not really a partner or a partnership but because of representation which had
been relied upon by others
 Considered a partnership/partner for the protection of third persons

10) CONTRIBUTIONS OF PARTNERS

a) Capitalist partner – money or property
 Cannot engage in business similar to the partnership’s business
b) Capitalist industrial partner – money or property & industry
c) Industrial partner – industry
 Cannot engage in any other business
d) Limited partner – money or property only

11) LIABILITIES OF PARTNERS

a) General partner
 Separate properties are liable for partnership liabilities in case properties have already
been exhausted
 Liability to third persons – prorata (interpreted as equal-only as to third persons)

18
 b) Industrial partner
 Also liable to partnership creditors
 Since not liable for losses, CAN DEMAND REIMBURSEMENT from the other partners
 Cannot engage in any kind of business – if he does so, he can be (alternative
remedies)
 Excluded from the partnership OR
 He may be compelled to turn over his income to the partnership with damages in
either case
c) Capitalist partner
 Liability to third persons – prorata (interpreted as equal-only as to third persons)
 Cannot engage in the same line of business w/o the consent of the other
partners
 If he does so, he must bring to the partnership the profits gained from such
business
 If he suffers losses, he must suffer alone
d) Limited partner
 Who takes active part in the management of the partnership business shall be liable as
a general partner
e) Newly admitted partner
 Liable for the partnership liabilities incurred before his admission ONLY UP TO
THE EXTENT OF HIS CONTRIBUTION

12) NON-REGISTRATION OF GENERAL PARTNERSHIP

 Valid even though
 Capital > P3,000, not in writing & not registered with SEC
 When immovables are contributed
 Must be in wriring
 Must have inventory of the immovables attached to the document
 Otherwise, VOID

13) SHARE IN THE PROFITS & LOSSES

 Based on agreement
 In the absence of agreement – proportionate to capital contribution
 When only share in profits has been agreed upon - share in losses shall be the same
proportion with share in profits
 INDUSTRIAL PARTNER
 Entitled to a just & reasonable share in the PROFITS if his share has not been agreed
upon
 Not liable for losses of the partnership
 If he pays a creditor, HAS RIGHT TO REIMBURSEMENT

14) MANAGEMENT OF THE PARTNERSIP

 No managing partner
 All partners are agents of the partnership
 With managing partner
 Appointed in the articles of partnership
 Can execute all acts of administration despite opposition of other partners
 Power is irrevocable without just cause
 Revocation requires the consent of the partner with controlling interest
 Appointed after establishment of the partnership
 May be removed any time with or without cause
 MANAGING PARTNER COLLECTS FROM HIS DEBTOR WHO IS A DEBTOR OF THE
PARTNERSHIP AT THE SAME TIME
 If issued a receipt in the name of the partnership – must apply payment to partnership
credit
 If issued receipt applying payment to his own account, must divide payment
proportionately b/w the managing partner & partnership
 If debt to managing partner is more onerous, apply to debt to managing partner
 If managing partner applied payment to his own account, & debtor becomes insolvent,
must remit to the partnership what he has collected

15) ORDER OR PREFERENCE OF DISTRIBUTION OF PARTNERSHIP ASSETS

 Out of partnership assets – partnership creditors
 Out of separate assets – separate creditors
GENERAL PARTNERSHIP LIMITED PARTNERSHIP
Outside creditors Outside creditors
Partners as creditors Limited partners’ profits
Partners’ capital Limited partners’ capital
Partners’ profit General partner as creditors

19
 General partners’ profits
General partners’ capital

16) CAUSES OF DISSOLUTION

a) Voluntary
i. Express will of a partner or all of the partners or expulsion of a partner
ii. Termination of the term of a particular undertaking
b) Involuntary
i. Business becomes unlawful
ii. Specific thing to be contributed perished before delivery
iii. Death of any partner, insolvency or civil interdiction of any partner
iv. Insolvency of the partnership
v. By decree of court

17) DEATH OF PARTNERS

a) General partner – may dissolve the partnership
b) Limited partner – does not dissolve the partnership

VII. CORPORATION
1) DEFINITION
 Artificial being created by operation of law, having the RIGHT OF SUCCESSION & the
POWERS, ATTRIBUTES & PROPERTIES EXPRESSLY AUTHORIZED BY LAW or INCIDENT TO
ITS EXISTENCE
 Existence begins from the issuance of CERTIFICATE OF INCORPORATION by the SEC

2) CREATION OF PRIVATE CORPOTATION

 By operation of law

3) DOCTRINE OF SEPARATE ENTITY

4) PIERCING THE VEIL OF CORPORATE ENTITY

5) TRUST FUND DOCTRINE

6) CORPORATE FORMATION
a) STAGES OF FORMATION
i. Promotion
ii. Incorporation
iii. Commencement of business
 Commenced
 If commenced within TWO YEARS, but STOPPED OPERATIONS &
REMAINED IDLE for at least FIVE YEARS, GROUND FOR DISSOLUTION
 Not commenced
 If not commenced within TWO YEARS, DISSOLVED
b) INCORPORATORS – MUST BE
 Natural persons
 Capacitated
 Majority are residents of the Philippines
 Subscriber of at least one share
c) REGISTRATION WITH SEC
 If not registered cannot even be considered a DE FACTO corporation
d) CAPITAL STOCK
 25% of authorized must be subscribed
 25% of subscribed must be paid
 Minimum paid up should not be less than P5,000
e) BY LAWS
 Generally simultaneous with ARTICLES OF INCORPORATION
 May be filed before incorporation or within 30 days from issuance of
certificate of incorporation

7) DISADVANTAGES OF CORPORATION COMPARED TO PARTHERSHIP

 Subvervience of the minority stockholders to the wisher of the controlling interest

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8) TEST OF NATIONALITY OF A CORPORATION
a) Control test
 Nationality of controlling stockholders
b) Incorporation test
 Laws of the country under which it is incorporated
c) Domicile test
 Place where it is conducting business
 Where principal office is located

9) KINDS OF CORPORATION

10) MANAGEMENT OF A CORPORATION

 Managed by BOD

11) SHARES OF STOCKS

a) Promotion stocks
 Issued to persons who rendered services for the promotion of the corporation
b) Watered stocks
 Illegal but contract is not void
 Subscriber may be compelled to pay the balance
 Directors consenting to such are SOLIDARILY LIABLE with the subscriber
c) Treasury shares
 Not part of the outstanding capital stock
 No voting right
 Not entitled to dividends
 Cannot be issued as stock dividend
 Can be issued as property dividend only
 Can be sold for less than par or issued value
d) Unpaid shares
 Entitled to all the rights unless declared delinquent
 When declared delinquent
 Failure to pay on the due date based on contract or call
 Declared delinquent
 30 day grace period to pay in full
 Subscription amount + interest
e) Delinquent shares
 All rights are suspended EXCEPT RIGHT TO DIVIDENDS
 If cash dividends are issued, shall be applied to the balance
 If stock dividends are issued, withheld until fully paid
 If offered at public auction, shall be sold to the HIGHEST BIDDER
 HIGHEST BIDDER – he who offers the FULL AMOUNT for the LEAST NUMBER OF
SHARES
 Remedy on delinquent shares
 File in court based on contract of subscription
 Sell to public – highest bidder
 If no highest bidder, reacquire

12) SUBSCRIPTION
 Contract for the acquisition of unissued shares from an existing corporation or an
corporation still to be formed

13) DIVIDENDS
 Issued out of SURPLUS PROFIT OR UNRESTRICTED RETAINED EARNINGS
 Corporation is compelled to pay dividends once UNRESTRICTED RETAINED
EARNINGS EXCEEDS 100% of its PAID UP CAPITAL
 Kinds of dividends
 Cash – declared only by the BOD
 Stock – require approval of SH – do not increase authorized capital of
the corporation nor the controlling interest of the stockholders

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14) POWERS OF THE CORPORATION
a) Express
 Expressly stated in the articles of incorporation
b) Implied
 Implied in the purpose expressed in the articles
c) Intra vires
 Within the powers of the corporation
d) Ultra vires
 Not within the powers of the corporation
 Voidable if not illegal per se
 Can be ratified by the approval of ALL stockholders or members
expressly or impliedly

15) RULES ON VOTING REQUIREMENTS

 BOD
 ALWAYS MAJORITY of those present constituting a quorum
 STOCKHOLDERS
 2/3 of outstanding shares OR
 Majority votes of the outstanding shares
 MAJORITY = 50% + 1
 GENERALLY majority = quorum
 Any action decided w/o a quorum = VOID
 VOTING REQUIREMENTS
a) Majority of the BOD constituting a quorum
1. Resolution of the Board

b) Majority of the votes of the outstanding capital stock

1. Adoption, amendment or repeal of BY-LAWS
2. Revocation of power delegated to BOD to adopt, amend or repeal by-laws
3. Election of directors (cumulative voting)
 Cumulative voting may be done by
a. Lump sum
b. Straight
c. Distribution
4. Grant of compensation to directors
5. Approval of management contract with another corporation

c) 2/3 of the outstanding shares of stocks – MAS MABIGAT NA DECISION

1. Adoption, amendment or repeal of ARTICLES
2. Authorizing the board to amend, revise or adopt by-laws
3. OTHERS

16) VACANCY IN THE BOARD

 May be filled up by REMAINING DIRECTORS constituting a QUORUM, EXCEPT the ff
w/c can ONLY BE FILLED UP BY STOCKHOLDERS
a) Vacancy caused by removal
b) Vacancy caused by expiration of term
c) Vacancy the filling up of w/c is referred to by the BOD to the stockholders
d) Vacancy caused by the increase in number of directors which means an amendment of
the articles
 DIRECTOR representing MINORITY INTEREST CANNOT BE REMOVED WITHOUT JUST CAUSE

17) OFFICERS OF THE CORPORATION

a) President
 Must be a director, therefore must also be a stockholder
 Cannot be secretary or treasurer at the same time
b) Secretary
 Need not be a stockholder
 Must be a resident
c) Treasurer
d) Director
 Must be a stockholder
 Must have not been convicted of a crime with imprisonment of > 6 years

18) PRE-EMPTIVE RIGHT

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 19) APPRAISAL RIGHT
 Right of a dissenting stockholder to DEMAND FOR THE FMV of his shares
 May be exercised only in the following cases:
a) Amendment of articles
b) Disposition of all or substantially all of the corporate assets
c) Merger or consolidation
d) Investment of corporate funds in another corporation or business
 All rights of the share are suspend except the right to appraisal
 Dissenting stockholder must:
a) Make a written demand within 30 days
b) Present shares within 10 days from date of demand
c) Such shares are stamped as dissenting shares
d) Failure of the corporation to pay within 30 days revives all the rights of the
dissenting rights
 If right is sold to another buyer, can no longer exercise the appraisal right of the seller

20) LEGAL EFFECTS OF MERGER OR CONSOLIDATION

 All properties, rights, powers & liabilities of the constituent corporations are transferred to
the surviving corporation

21) PROXY
 Power
 Person
 Document
 Authority
 For a particular power, date & meeting only
 Revocable any time

22) VOTING TRUST AGREEMENT

 Exercises not only voting right but all rights of the shares
 Not limited to a particular meeting, date or power
 Should not exceed 5 years unless provided in the agreement
 A means of disposing of the shares yet retaining interest

23) FOREIGN CORPORATION

 Incorporated under laws other than the that of the Philippines
 The law of that country allows Filipinos to form a corporation in their country
 License to do business in the Philippines
 Bond of P100,000
 Business in the Philippines is a continuous activity
 Appoint resident agent

VIII. NEGOTIABLE INSTRUMENTS

1) FUNCTIONS & IMPORTANCE
a) Substitute for money
b) Media of exchange for most commercial transactions
c) Media of credit transactions
d) Increases purchasing power
 Negotiable instruments are NOT LEGAL TENDER
 Delivery of a negotiable instrument DOES NOT EXTINGUISH an obligation
2) CHARACTERISTICS
a) Negotiability
 Quality or attribute whereby a NI passes or may pass from hand to hand similar to
money as to give the holder in due course the right to hold the instrument & collect
the sum payable for himself free from defenses.
 NEGOTIABILITY is TERMINATED when:
 Restrictively indorsed
 Discharged
b) Accumulation of secondary contracts
 It makes as many secondary contracts as the number of times negotiated
3) REQUISITES (DEFINITION)
a) In writing & signed by maker or drawer
 PN - maker
 BOE - drawer
b) Unconditional promise or order to pay a sum certain in money
 PN - unconditional promise
 BOE - unconditional order
 If not payable in money – negotiable document

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  May indicate particular fund out of which reimbursement is to be made or
particular account to be debited
 If payable out of a particular fund – NOT NEGOTIABLE – becomes conditional
 Sum is certain even if w/ interest, w/ fixed or current exchange rate or payable by
stated installments
 Payable in four equal installments – NOT STATED INSTATALLMENT – NOT
NEGOTIABLE
 Must state beginning or exact dates of installments
 A promise to do an act other than payment of money is not negotiable
except if it is the HOLDER’S OPTION – alternative w/ the use of OR
c) Payable on demand or at fixed or determinable future time
 On demand
 When so expressed
 No time for payment is expressed
 Instrument is issued, accepted or indorsed when overdue as regards the
person so issuing, accepting or indorsing it
 At a fixed time
 After date of NI
 After sight – after presentment – if this is the basis of maturity, count from date of
presentment & not on date accepted
 Payable on or before Christmas - not determinable – NOT NEGOATIABLE - must
indicate year
 On or after the occurrence of a specified event which is certain to happen even
though the time of happening is uncertain
 5 days after you pass the CPA board examination
 Before the occurrence of a specified event which is certain to happen even though the
time of happening is uncertain – NOT NEGOTIABLE
 5 days before you pass the CPA board examination
d) Payable to order or bearer – Instruments payable to a specified person is not
negotiable
 Pay to Juan dela Cruz
 Payable to ORDER(ORDER INSTRUMENT)
 Payable to the order of a specified person
 Payee who is not maker, drawer or drawee
 Pay to the order of P
 Pay to P or order
 Drawer or maker
 I promise to pay to the order of myself
 Drawee
 Pay to the order of yourself
 Two or more payees jointly
 Pay to the order of P & A
 One or more of several payees
 Pay to the order of P, A or B
 Pay to the order of P, A or B or any one of them
 Pay to the order of P, A or B or any two of them
 Holder of an office of the time being
 Pay to the president of the Philippines
 If indorsed in blank, becomes a bearer instrument
 Payable to BEARER (BEARER INSTRUMENT)
 When expressed to be so payable
 Pay to bearer
 Pay to bearer, P – NOT NEGOTIABLE
 Payable to a person named therein or bearer
 Pay to P or bearer
 Payable to the order of a fictitious person & such fact is known to the person
making it so payable
 Pay to the order of Tarzan
 Payee does not purport to be the name of a person
 Pay to blackboard or order
 Only or last indorsement is blank
 Pay to P or order, signed M, indorsed as follows

Pay to A
(Sgd) P

Pay to B
(Sgd) A

Pay to C 24
(Sgd) B

(Sgd) C
  Remains a bearer instrument no matter how indorsed
e) Drawee must be named or indicated with reasonable certainty

4) COMMON TYPES OF NEGOTIABLE INSTRUMENTS

a) Promissory notes
 Unconditional promise to pay
 If drawn to the maker’s own name, INCOMPLETE UNTIL INDORSED BY HIM
 I promise to pay myself or order
 Mere acknowledgement of debt – NOT PROMISE TO PAY
 Examples:
 Certificate of deposit
 Bond
 Bank note
 Due bill
b) Bills of exchange
 Unconditional order to pay
 Example(s):
 Certificate of deposit
c) Checks
 Always payable on demand
 Bank may refuse payment if:
a. Bank becomes insolvent
b. Drawer has insufficient funds or no account
c. Drawer dies or becomes insolvent & notice is received by the bank
d. Drawer has countermanded payment – drawer orders bank not to pay
e. Holder refuses to identify himself
f. Check is believed to be a forgery
g. Check is staled or postdated
5) ORIGINAL PARTIES TO A NEGOTIABLE INSTRUMENT
a) PROMISSORY NOTE
1. Maker – person who makes the promise & signs the instrument
2. Payee (order instrument) or bearer (bearer instrument) – the party to whom the
promise is made or the instrument is payable

b) BILL OF EXCHANGE
1. Drawer – person who draws the bill
2. Drawee – party upon whom bill is drawn, becomes the acceptor upon acceptance
(usually a bank)
3. Payee – party in whose favor the bill is drawn or is payable

6) LIABILITIES OF THE PARTIES

a) PRIMARILY LIABLE
1. Maker
2. Acceptor (drawee)
3. Certifier of a check
b) SECONDARILY LIABLE
1. Drawer
2. Indorsers
c) NOT LIABLE
1. Drawee, until he accepts

7) INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT

a) Preparation
 Writing of the instrument
b) Issue
 First delivery of an instrument, complete in form to a person who takes it as
holder
 Delivery – transfer of possession, actual or constructive from one person to another
c) Negotiation
 Methods of Transfer of a Negotiable Instrument
1. By assignment
2. By operation of law
3. By negotiation
 Transfer of a negotiable instrument from one person to another in such a manner as
to constitute the transferee the HOLDER thereof.
 KINDS OF HOLDER
1. Holder
 Whoever holds, in general

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 2. Holder for value
 Holds & gave a valuable consideration in exchange

3. Holder in due course

 One who has taken the instrument under the ff conditions
a) It is complete & regular upon its face
b) He became the holder of it before it was overdue, & w/o notice that it
had been dishonored if such was the fact
c) He took it in good faith & for value
d) 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
 DEFENSES
1. Personal or equitable
 Available against parties who are NOT HOLDERS IN DUE COURSE
a) Filling of wrong date
b) Filling up of blanks not in accordance with authority given & within
reasonable time
c) Want of delivery of a complete instrument
d) Absence or failure of consideration
e) Simple fraud
f) Acquisition of instrument (not signature) by duress, or force & fear
g) Acquisition of instrument by unlawful means
h) Acquisition of instrument for an illegal consideration
i) Negotiation in breach of faith
j) Negotiation under circumstances that amount to fraud
k) Innocent alteration or spoliation
 Spoliation – alteration made by a stranger to an instrument
l) Set-off between immediate parties
m) Discharge of party secondarily liable by discharge of prior party
n) Discharge by payment or renunciation or release before maturity
o) Usury, because the contract of loan itself is not void but only the agreed
interest
p) Want of authority but agent has apparent authority

2. Real or Absolute
 Available against ALL parties
a) Incapacity
b) Insolvency
c) Illegality of contract when declared by law
d) Material alteration
e) Want of delivery of incomplete instrument
f) Forgery
g) Want of authority, apparent & real
h) Duress amounting to forgery as where one takes the hands of another &
forces him to sign his name
i) Fraud in factum or fraud in esse contractus
j) Fraudulent alteration by holder
k) Prescription
l) Other infirmities appearing on the face of the instrument
m) Discharge at or after maturity
 How Negotiated
1. BEARER instrument
 By mere delivery
2. ORDER instrument
 By indorsement plus delivery
 Kinds of Indorsement
2. Restrictive
 Prohibits further negotiation
 Negotiable character of an instrument is terminated
a) Pay to H only
b) Pay to H for collection only
c) Pay to H in trust for M
3. Qualified
 Transfers the right without guaranteeing payment
 Indorser does not guarantee payment in case maker becomes insolvent
a) Sans recourse
b) Without recourse
4. Facultative
 Waives any right

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 a) Right to notice
b) Right to presentment
5. Anomalous or irregular
 Indorsement in blank by a person who is not the payee before delivery
 Liable to the payee & all subsequent persons
6. Conditional
 Payer may:
a) Honor the condition
 The person paid holds the money subject to the condition
 If condition is not fulfilled, must return the money
b) Disregard the condition
 Assignment is NOT negotiation & transferee does not become a holder
 Indorsement must be for the entire amount unless partially paid
 An NI cannot be indorsed severally,
 Indorsement cannot be in the alternative or in succession
 Signature by Procuration (Per Procuration, P.P., pp, Per Proc)
 Operates as notice that the agent has but limited authority to sign
 Principal is bound only when agent acted within the limits of his authority
d) Presentment for acceptance
 Not necessary before presentment for payment
 Necessary only when:
 Bill is payable after sight or presentment is necessary to fix maturity
o Reason: to give advance notice that such instrument is to be paid at a
fixed/determinable future time
 Expressly stipulated
 Payable elsewhere than the residence or place of business of drawee
 Requisites of proper presentment
 Must be made by or on behalf of the holder
 Must be made at a reasonable hour
 Must be made on a business day
 Must be made before the bill is overdue & within a reasonable time
 Must be made to the drawee or some person authorized to accept or refuse
acceptance on his behalf
 Dishonor by non-acceptance
 When duly presented for acceptance & acceptance is refused or cannot be
obtained
 When presentment for acceptance is excused & the bill is not accepted
o Duty of holder
 Treat as dishonored or he looses the right of recourse against drawer &
indorsers
o Right of holder
 Give notice of dishonor & protest when required
 Immediately proceed against the drawer & indorsers w/o waiting for the
date of maturity
o Reason: payment cannot be expected after acceptance is refused.
Hence, presentment for payment is not necessary unless the bill is
subsequently accepted
e) Acceptance
 Drawee has 24 hours to decide w/in w/c to accept the bill or not
 Deemed accepted when drawee:
 Destroys it
 Refuses to return it w/in the required period
 If accepted, the drawee-acceptor is primarily liable according to the tenor of his
acceptance

f) Presentment for payment

 PN payable on demand – must be within a reasonable time from DATE OF ISSUE
 BOE payable on demand – must be within reasonable time from DATE OF LAST
NEGOTIATION
 PN or BOE not presented within the time provided by law discharges the
parties secondarily liable
 Delay in the presentment for payment does not discharge the drawer but holder shall
suffer the loss caused by the delay
 Payment in due course discharges the instrument
 Payment by accommodation party does not discharge the accommodated
party
 Accommodation party – lends his name without consideration
 Accommodated party – not discharged in case of payment by accommodation
party because the accommodation party can demand reimbursement from him

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g) Dishonor by non-payment
 When drawee refuses to pay

h) Notice of dishonor
 When NOT NECESSARY
 Er & ee are the same person
 Ee is fictitious or incapacitated person
 Er is the person to whom it is presented
 Er has no right to expect that ee will honor the instrument
 Er has countermanded payment
 Notice to prior parties benefits subsequent parties

i) Protest in certain cases

 Necessary only in case of dishonored foreign bills
 May be for non-acceptance or non-payment
 Must be in writing & notarized
 Must be done on the day instrument was dishonored
 Must be done @ the place of dishonor
 Acceptance for honor
 REQUISITES
a) Bill must have been protested for non-acceptance or non-payment
b) Acceptor for honor must be a stranger to the bill
c) Bill must not be overdue at the time of acceptance
d) Must be with the consent of the holder
 Acceptor for honor is secondarily liable on the instrument
 If not specified for whose honor he is accepting, must be for honor of the drawer
 Payment for honor
 Any person whether party to the bill or not
 Not secondarily liable on the instrument
 Does not require consent of the holder
 Refusal to accept payment for honor discharges the party for whose honor
payment was offered & subsequent parties
 When TWO OR MORE PERSONS offered payment for honor for different parties, the
person whose payment will discharge most parties will be given preference

j) Discharge
 Negotiable instrument may be discharged by:
 Payment in due course by or on behalf of the principal debtor
 IN DUE COURSE - @ or after maturity in good faith
 Payment in due course by accommodated party
 Intentional cancellation by the holder
 Any act which may discharge a contract for the payment of money
(NOCOMEREPALO)
 When principal debtor becomes holder at or after maturity
 When holder intentionally cancels the signature of an indroser, such indorse is
discharged
 Subsequent parties are discharged when prior parties are discharged
 Refusal to accept a valid tender of payment made by a prior party also discharges
subsequent parties

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