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RFBT Discussion Handouts Laco Notes PDF
RFBT Discussion Handouts Laco Notes PDF
Law on Obligation
1. Definition of Obligation: Article 1156 of the Civil Code defines an obligation as a juridical necessity to
give, to do or not to do.
a. An active subject, who has the power to demand prestation, also known as the obligee or
creditor.
b. A passive subject, who is bound to perform the prestation, also known as the obligor or
debtor.
d. Efficient cause, the tie which binds the parties to the obligation, also known as juridical tie or
vinculum.
i. Examples of juridical tie or vinculum
1. Relation established by law
2. Relation established by contract
3. Relation established by quasi-contract
4. Relation established quasi-delict or culpa aquiliania or tort
5. Relation established by crime or delict
I. Civil obligations derive their binding force from positive law or substantive law, while natural
obligations derive their binding effect from equity and natural justice.
II. Civil obligations can be enforced by court action or the coercive power of public authority,
while the fulfilment of natural obligations cannot be compelled by court action but depends
exclusively upon the good conscience of the debtor. However, voluntarily fulfilment of natural
obligation by the debtor will preclude him from asking for reimbursement from the creditor of
the amount he has voluntarily paid.
a. Law refers to the principles and regulations established in a community by some authority and
applicable to its people, whether in the form of legislation or of custom and policies recognized
and enforced by judicial decision.
i. Only obligations expressly determined in the Civil Code or in special laws are
demandable.
ii. The obligations derived from law are never presumed.
iii. The law cannot exist as a source of obligations, unless the acts to which its principles
may be applied exist.
iv. The obligations and correlative rights arising from law shall be governed by the law by
which they are created.
b. Contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.
i. Obligations arising from contracts have the force of law between contracting parties.
ii. Obligations arising from contracts should be complied with in good faith.
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c. Quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral
acts, to the end that no one may be unjustly enriched or benefited at the expense of another.
2. Solutio Indebiti refers to the juridical relation which is created when something
is received when there is no right to demand it and it was unduly delivered
through mistake.
i. Nature of Liability of Payees in Solutio Indebiti - The liability is solidary.
i. Persons who are exempted from criminal liability but still civilly liable for their
crime committed
1. An imbecile or insane person.
2. A person under 18 of age.
3. Any person who acts under the compulsion of an irresistible force.
4. Any person who acts under the impulse of an uncontrollable fear of an equal or
greater injury.
ii. Persons who are exempt from criminal liability and civil liability
1. Any person who acts in self-defense.
2. Any person who acts in the performance of his duties or obligations.
3. Any person suffering from battered woman syndrome.
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a. The right violated by a quasi-delict is a private right while the right violated by a crime is a
public right.
b. Every quasi-delict gives rise to liability for damages to the injured party but there are crimes
from which no civil liability arises.
c. Criminal liability can never be compromised except in criminal negligence but liability from
quasi-delict can be compromised.
d. In quasi-delict, criminal intent is not necessary, while in crime, criminal intent is necessary
except in criminal negligence.
e. Claims arising from quasi delict must be proven by preponderance of evidence while crime
must be proven by proof beyond reasonable doubt.
b. Obligation to deliver the fruits of the determinate thing if the fruits occur after the
obligation to deliver the determinate thing arises.
i. Accessories refer to those which destined for the embellishment, use or their
preservation of another thing or more importance, have for their object the completion of
the latter for which they are indispensable or convenient.
ii. Accessions include everything which is produced by a thing, or which is incorporated or
attached thereto, either naturally or artificially.
9. Types of Rights of Creditor over the thing and its fruits (Moment the right is obtained)
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a. A real right is the power belonging to a person over a specific thing, without a passive subject
individually determined, against whom such right may be personally exercised. It refers to a
right that can be exercised against the whole world thereby allowing an action to recover the
ownership or possession of a specific thing regardless of the possessor of such thing. Real right
over a determinate thing is acquired from the moment of its actual or constructive delivery.
b. A personal right is the power belonging to one person to demand of another, as a definite
passive subject, the fulfillment of a prestation to give, to do or not to do. It refers to a right that
can be exercised only against a specific person thereby prohibiting an action to recover the
ownership or possession of a specific thing if already with a third person but only allows action
for damages against a specific person. Personal right over a determinate thing is acquired from
the moment provided by the Civil Code or Special Law.
10. General remedies available to creditor when the debtor fails to comply with his obligation
a. Action for specific performance with damages
b. Action to rescind the obligation with damages
c. Action for damages
11. Remedies of the creditor in the case the debtor fails to comply with his obligation to deliver a
determinate or specific thing
a. Action for specific performance in addition to damages under Article 1170
b. Action for damages if action for specific performance becomes legally impossible
12. Remedies of the creditor in the case the debtor fails to comply with his obligation to deliver an
indeterminate or generic thing
a. Action for specific performance with damages
b. He may ask the obligation to be complied with by a third person at the expense of the debtor
with damages.
13. Remedy of the creditor if the debtor fails to do the prestation in obligation to do
a. The creditor or third person may do it in a proper manner at the expense of the debtor.
14. In an obligation to do whereby only the debtor can do the thing, remedy of the creditor if the
debtor fails to do the prestation
a. Action for indemnification for damages
15. In case a public official or officer of a private corporation refuses to perform his ministerial duty,
remedy of the injured person
a. Special civil action of mandamus
16. In an obligation to do, remedy of the creditor in case the debtor did it in contravention of the
tenor of the obligation or did it poorly
a. The creditor or third person may do it in a proper manner or it may be decreed that what had
been poorly done be undone at the expense of the debtor.
17. In an obligation consisting in not doing, remedy of the creditor in case the debtor does what has
been forbidden him
a. It shall be undone at the expense of debtor with indemnification for damages.
18. Definition of Delay – Default – Mora refers to the non-fulfilment of the obligation with respect to time.
19. Requisites in order that the debtor may be in default or for debtor’s delay or mora to exist
a. The obligation must be demandable and already liquidated.
b. The debtor delays performance of the obligation.
c. The creditor demands the performance either judicially or extrajudicially.
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20. As a general rule, judicial or extrajudicial demand is necessary for delay to exist. However, the
following are the cxceptional instances when demand by the creditor shall not be necessary in
order that delay may exist
a. When the obligation expressly so declares that demand is excused or waived.
b. When the law expressly so declares that demand is excused or waived.
c. When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract.
d. When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
23. Grounds for damages in the performance of obligation under Article 1170 or Grounds for breach
of contract
a. Fraud – Dolo refers to the deliberate and intentional evasion of the normal fulfilment of
obligations.
b. Negligence - Fault – Culpa is the failure to observe for the protection of the interests of
another person, that degree of care, precaution and vigilance which the circumstances justly
demand, whereby such person suffers injury.
c. Delay – Default – Mora refers to the non-fulfilment of the obligation with respect to time.
d. Contravention of the tenor of obligation refers to illicit act which impairs the strict and faithful
fulfilment of the obligation or every kind of defective performance.
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II. Additional damages to any of the mutually exclusive damages
a. Moral damages are damages awarded by reason of physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury
b. Exemplary damages or corrective damages are damages imposed, by way of
example or correction for the public good, in addition to the moral, temperate, liquidated
or compensatory damages.
28. In order to satisfy their claims against the debtor, the unpaid creditor has the following
successive rights in order of priority after prevailing in the civil action for exact fulfillment
a. To levy by attachment and execution upon all the property of the debtor including garnishment
of bank deposits, except such as exempt by law from execution.
b. To exercise all rights and actions of the debtor, except such as are inherently personal to him.
(Accion subrogatoria)
c. To ask for the rescission of the contracts made by the debtor in fraud of his rights. (Accion
pauliana)
d. To file an action for damages against the third person who acquired the property of debtor in
bad faith.
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32. Obligations not demandable at once
a. Obligation ex die or obligation with a suspensive period
b. Obligation when the debtor's means permit him to do so
c. Obligation with a suspensive condition
35. Conditions that annul the obligation which depends upon them for their existence
a. Impossible conditions
b. Suspensive conditions which depend upon sole will of debtor
c. Conditions contrary to good customs or public policy
d. Conditions prohibited by law
36. Effect if the obligor voluntarily prevented the fulfillment of the condition of an obligation subject
to a suspensive condition
a. The suspensive condition shall be deemed fulfilled and the obligation becomes demandable.
37. Retroactive effect of fulfillment of suspensive condition in conditional obligation to give subject
a suspensive condition
a. It shall retroact to the day of the constitution of the obligation once the condition has been
fulfilled.
38. Effects of fulfillment of condition on the determinate thing's fruits occurring during the
pendency of the condition
a. In conditional reciprocal obligation, the fruits and interests during the pendency of the condition
shall be deemed to have been mutually compensated.
b. In conditional unilateral obligation to give or unilateral obligation to give subject to a period, the
fruits shall inure to the sole benefit of the debtor whether the condition is suspensive or
resolutory in the absence of stipulation to the contrary.
c. In conditional obligation to do or not to do, the courts shall determine, in each case, the
retroactive effect to the fruits of the condition that has been complied with taking into account
the agreement of the parties.
d. Before the fulfillment or pendency of the suspensive condition, the creditor may bring
appropriate actions for the preservation of his right regarding the fruits.
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39. Effects of payment or delivery by mistake in a condition subject to a suspensive condition or
suspensive period
a. If during the pendency of the suspensive condition, the debtor has paid by mistake a sum of
money, the debtor can recover the sum of money but with interests only if the creditor acted in
bad faith.
b. If during the pendency of the period in an obligation with a period, the debtor has paid by
mistake a sum of money, the debtor can recover the sum of money and with interests whether
the creditor acted in good faith or bad faith.
c. If during the pendency of the suspensive condition, the debtor has delivered a determinate or
specific thing by mistake, the debtor may file (1) an accion reinvidicatoria if the thing is still with
the creditor or (2) an action for indemnification for damages if the thing is no longer with the
creditor.
40. Rules to be observed in case of the improvement, loss or deterioration of the determinate thing
during the pendency of the suspensive condition in an obligation to give a determinate thing or
pendency of the suspensive period in obligation to give a determinate thing
a. If the thing is lost without the fault of the debtor, the obligation shall be extinguished.
b. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages.
c. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor.
d. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor.
e. If it is improved at the expense of the debtor, he shall have no other right than that granted to
the usufructuary which means that he shall only have the right to use the improved thing for a
reasonable period.
41. Alternative remedies of creditor when the determinate thing deteriorates through the fault of the
debtor during the pendency of the suspensive condition in an obligation to give a determinate
thing or suspensive period in an obligation to give a determinate thing
a. He may ask for the rescission of the obligation with indemnity for damages.
b. He may ask for the performance of the obligation with indemnity for damages.
44. Reciprocal obligation refers to a type of obligation which arises from the same cause and in which
each party is a debtor and creditor of the other, such than the obligation of one is dependent upon the
obligation of the other.
45. Right to ask for Rescission of Reciprocal Obligation by the Injured Party
a. The injured party can ask for judicial rescission of the obligations in case one of the obligors
should not comply with what is incumbent upon him because the power to rescind obligations is
implied in reciprocal ones.
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47. Principles concerning reciprocal obligations
a. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
b. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts.
c. If it cannot be determined which of the parties first violated the contract, the same shall be
deemed extinguished, and each shall bear his own damages.
48. Obligation with a period is an obligation which is subject to a space of time which, exerting an
influence on obligations as a consequence of a juridical act, suspends their demandability or
determines their extinguishment.
52. As a general rule, the court is not allowed to fix a period in an obligation. However, the following
are the exceptional instances wherein the court may fix the period of an obligation with a
period
a. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended.
b. If the period depends upon the sole will of the debtor.
c. In case of pure obligation, to prevent unreasonable interpretations of its immediate
demandability.
53. Instances wherein the debtor shall lose every right to make use of the period and therefore the
obligation with a period becomes due and demandable which allows the creditor to demand its
performance from the debtor
a. When after the obligation has been contracted, the debtor becomes insolvent and he does not
give a guaranty or security for the debt.
b. When the debtor does not furnish to the creditor the guaranties or securities which he has
promised.
c. When by debtor’s own acts he has impaired or destroyed said guaranties or securities after their
establishment, unless he immediately gives new one equally satisfactory.
d. When through a fortuitous event the guaranties or securities after their establishment
disappeared, unless the debtor immediately gives new one equally satisfactory.
e. When the debtor violates any undertaking, in consideration of which the creditor agreed to the
period.
f. When the debtor attempts to abscond.
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54. Alternative Obligation vs. Facultative Obligation vs. Conjunctive Obligation
a. Alternative Obligation is an obligation where the debtor is alternatively bound by different
prestations and it is extinguished by the complete performance of any of them.
b. Facultative Obligation is an obligation wherein only one prestation has been agreed upon but
the obligor may render another in substitution.
c. Conjunctive Obligation is an obligation where the debtor has to perform several prestations
and it is extinguished only by the performance of all of them.
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60. Acts if made by any of the solidary creditors with any of the solidary debtors extinguish the
solidary obligation but may be subject to possible reimbursement among the solidary creditors
and solidary debtors themselves except in case of remission wherein reimbursement is not
allowed
a. Novation
b. Compensation
c. Confusion
d. Remission
a. Payment made by one of the solidary debtors extinguishes the obligation and if two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.
b. He who made the payment may claim from his co-debtors only the share which corresponds to
each with the interest for the payment already made.
c. If payment is made before the debt is due, no interest for the intervening period may be
demanded.
d. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such shall be borne by the paying debtor and the other co-debtors
pro-rata.
e. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or become illegal.
f. The remission made by the creditor of the share which affects one of the solidary debtors does
not release the latter from his responsibility towards the co-debtors, in case the debt had been
totally paid by anyone of them before the remission was effected.
g. The remission of the whole obligation, obtained by one the solidary debtors, does not entitle him
to reimbursement from his co-debtors.
h. If the thing has been lost or if the prestation has become impossible without the fault of the
solidary debtors, the obligation shall be extinguished.
62. Defenses that may be availed of by the solidary debtor in actions filed by the creditor
a. Defenses which are inherent from the nature of the solidary obligation
b. Defenses personal to defendant-debtor for the whole amount of the obligation
c. Defenses personal to other debtors as regards that part of the debt for which the latter are
responsible
a. Divisible Obligation is one which is susceptible of partial performance; that is, the debtor can
legally perform the obligation by parts and the creditor cannot demand a single performance of
the entire obligation.
b. Indivisible Obligation is one which is not susceptible of partial performance or the law provides
that the performance of the obligation is indivisible or the contract provides that the performance
of the obligation is indivisible.
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64. Principles pertaining to divisible obligations and indivisible obligations
a. Divisibility or indivisibility of the obligation refers not to the object or thing but to the performance
of the obligation.
b. A divisible obligation, whatever may be the nature of the thing which is the object thereof, refers
to one which can be validly performed in parts.
c. The thing or object may be divisible, yet the obligation may be indivisible.
d. Obligations to give definite things and those which are not susceptible of partial performance
shall be deemed indivisible.
e. When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
f. Even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.
g. In obligations to do, divisibility or indivisibility shall be determined by the character of the
prestation in each particular case.
66. Obligation with a penal clause is an obligation which has an accessory undertaking to assume
greater liability in case of breach. The penalty is also known as liquidated damages which are stipulated
or predetermined by the contracting parties.
67. Principles pertaining to obligations with a penal clause
a. The debtor does not have absolute right to just pay the penalty for non-performance of the
obligation instead of fulfilling the obligation.
b. The penalty stipulated must not be contrary to law, morals, or public order to be enforceable.
c. Obligations with a penal clause must be construed strictly against the awarding of penalty.
d. In case of breach of obligations with a penal clause, the debtor cannot have both enforcement
of penalty for non-compliance of obligation and specific performance of obligation because they
are inconsistent remedies.
e. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may
be demanded because they are liquidated or predetermined damages by the contracting
parties.
f. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor and even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.
g. The nullity of the principal obligation carries with it that of the penal clause.
h. The nullity of the penal clause does not carry with it that of the principal obligation.
68. As a general rule, penalty or liquidated damages for breach of obligation with a penal clause are
awarded in lieu of damages and interest. However, the following are the exceptional instances
when the creditor may demand payment of damages and interest aside from penalty in
obligation with a penal clause
a. If there is stipulation that damages and interests may be demanded in addition to penalty in
case of breach of obligation with a penal clause.
b. When the debtor is guilty of bad faith or fraud in the breach of the obligation with a penal clause.
c. When the debtor fails to pay the penalty in case of breach of the obligation with a penal clause.
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69. Modes of extinguishment of obligations: (No-Co-Me-Re-Pa-Lo-Pre-Re-Ful-An)
a. No – Novation
b. Co – Compensation or Offset
c. Me – Merger or Confusion
d. Re – Remission or Donation or Condonation or Renunciation
e. Pa – Payment or Performance
f. Lo – Loss of the thing due
g. Pre – Prescription of Right to File Action converting the civil obligation to natural obligation
h. Re – Rescission of Rescissible Obligation or Rescissible Contract
i. Full – Fulfillment of Resolutory Condition or Resolutory Period
j. An – Annulment of Voidable Obligation or Voidable Contract
70. Prescription refers to the mode of extinguishment of right to file an action or obligation by the mere
lapse of time fixed by law.
a. 6 years for quasi contract
b. 6 years for oral contract
c. 10 years for written contract
d. 10 years for court judgment
e. 4 years for quasi-delict
72. Payment or Performance is a mode of extinguishing obligation which refers to the fulfillment of the
prestation due.
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75. Payment concepts
a. In obligations to give, payment made by one who does not have the free disposal of the thing
due and capacity to alienate it shall not be valid.
b. Payment to a person who is incapacitated to administer his property shall be valid if he has kept
the thing delivered or insofar as the payment has been beneficial to him.
c. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain
the debt shall not be valid.
d. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
e. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
f. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality
and circumstances have not been stated, the creditor cannot demand a thing of superior quality
and the debtor cannot deliver a thing of inferior quality.
78. Right of a third person who pays for the debtor without the knowledge or against the will of the
debtor
a. The third person may recover only insofar as the payment has been beneficial to the debtor but
there is no legal subrogation.
79. As a general rule, payment to a third person is not valid. However, the following are the
exceptional instances wherein payment by a debtor to a third person is valid
a. When in good faith, the debtor pays to one in possession of the credit.
b. When, without notice of the assignment of the credit, the debtor pays to the original creditor.
c. When the payment to a third person redounded to the benefit of the creditor.
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80. Generally, it is the obligation of the debtor to prove that the payment to a third person
redounded to the benefit of the creditor in order for the payment to be valid. The following are
exceptional instances when benefit to creditor need not be proved by a debtor who pays a third
person for such payment to be valid:
a. If after the payment, the third person acquires the creditor’s rights.
b. If the third person is authorized by the creditor.
c. If the creditor ratifies the payment to the third person.
d. If by the creditor’s conduct, the debtor has led to believe that the third person had authority to
receive payment.
82. Dation in payment or Dacion en Pago refers to a special form of payment whereby a property is
alienated to the creditor in satisfaction of a debt in money when the loan in money is already due at the
time of change. This special mode of payment shall be governed by Law on Sales. If the change occurs
before the maturity day of the obligation to pay a sum of money, the mode of extinguishment of
obligation is not dation en pago but it will be novation.
83. Cession refers to a special type of payment which involves the voluntary abandonment of the
universality of the property of the debtor for the benefit of his creditors, in order that such property may
be applied to the payment of the credits.
85. Application of payment refers to the designation of the debt which is being paid by a debtor who has
several obligations of the same kind in favor of the creditor to whom payment is made. The right of
application of payment belongs to the debtor.
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87. Limitations to the preferential right of the debtor to choose the debt to which his payment is to
be made
a. If the debtor owes two debts, one for P50 and another for P200, and he makes a payment of
P50, he cannot choose to apply it to the P200 debt because the creditor cannot be compelled to
accept partial payment.
b. If there is only one obligation bearing stipulated interest, the debtor can apply the payment to
the interest before the capital.
c. The debtor cannot apply the payment to a debt that is not yet liquidated.
d. He cannot choose a debt with a period for the benefit of the creditor, when the period has not
yet arrived.
e. When there is an agreement as to the debts which are to be paid first, the debtor cannot vary
the agreement.
90. As a general rule, consignation shall be preceded by valid tender of payment for consignation
to be valid. However, the following are the exceptional instances of valid consignation releasing
the debtor from liability even without valid tender of payment:
a. When the creditor is absent or unknown, or does not appear at the place of payment
b. When the creditor is incapacitated to receive the payment at the time it is due
c. When, without just cause, the creditor refuses to give a receipt
d. When two or more persons claim the same right to collect
e. When the title of the obligation has been lost
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93. Effects once the consignation has been accepted by the creditor or the court has declared that
it has been validly made
a. The debtor is released in the same manner as if he had performed the obligation at the time of
the consignation, because this produces the same effect as a valid payment.
b. The accrual of interest on the obligation is suspended from the moment of consignation.
c. The deterioration or loss of the thing or amount consigned occurring without fault of the debtor
must be borne by the creditor, because the risks of the thing are transferred to the creditor from
the moment of deposit.
d. Any increment or increase in value of the thing after the consignation inures to the benefit of the
creditor.
94. Effects if, after the consignation has been made, the creditor should authorize the debtor to
withdraw the same
a. The creditor shall lose every preference which he may have over the thing.
b. The co-debtors shall be released of its solidary obligation but not of their respective shares in
the obligation. It means that the obligation of the other co-debtors is converted into joint
obligation. However, it will remain to be solidary obligation of the part of the consigning debtor.
c. The guarantors and sureties shall be released.
97. Exceptional instances when the debtor is liable even there is fortuitous event at the time of loss
a. When the law expressly provides that the debtor shall be liable even if the loss is due to
fortuitous event.
b. When by express stipulation, the obligor is made liable even if loss occurs through fortuitous
events.
c. When the nature of the obligation requires the assumption of risk.
d. When the fault or negligence of the debtor concurs with the fortuitous event in causing the loss.
e. When the loss occurs after the debtor has incurred in delay.
f. When the debtor has promised to deliver the same thing to two or more different parties.
g. When the obligation to deliver a determinate object arises from a criminal act.
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99. Remission or Donation or Condonation or Renunciation is a mode of extinguishing obligation which
is an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same.
It is essentially gratuitous and requires acceptance by the debtor.
103. Confusion or merger is a mode of extinguishing obligation that occurs where there is meeting
in one person of the qualities of creditor and debtor with respect to the same obligation.
106. Compensation or Offset is a mode of extinguishing to the concurrent amount, the obligations
of those persons who in their own right are reciprocally debtors and creditors of each other.
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108. Requisites of legal compensation or compensation by operation of law
a. Each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other.
b. Both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated.
c. Both debts must be due.
d. Both debts must be liquidated and demandable.
e. That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
111. Instances wherein the debtor may still set up compensation against the assignee of
creditor in case of assignment of credit
a. When the creditor communicated the assignment of his right to the third persons to the debtor
and the latter did not consent thereto.
b. When the debtor has consented to the assignment of rights made by a creditor in favor of a third
person and the assignor reserved his right to the compensation at the time he gave his consent.
c. When the assignment is made without the knowledge of the debtor.
d. When the debtor has consented to the assignment of rights made by a creditor with reservation
as to his right to compensation.
112. Instances when legal compensation is prohibited by law but facultative compensation is
allowed
a. When there is a renunciation of the effect of compensation by a party.
b. When one of the debts arises from obligation of depositary in depositum
c. When one of the debts arises from or of a bailee in commodatum.
d. When the one of the creditor has a claim for future support due by gratuitous title.
e. When one of the debts consists in civil liability arising from a crime.
f. When one of the debts pertains to taxes.
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114. Novation is the extinguishment of an obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies the first.
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120. Effects of Insolvency of New Debtor to liability of Old Debtor
a. In Expromission the insolvency of new debtor or non-fulfillment of the obligation shall not
generally give rise to any liability on the part of the original debtor because the original debtor
did not have the initiative in making the change, which might have been made even without his
knowledge. However, if the original debtor gives consent to the substitution, he may become
liable to the insolvency of the new debtor especially of the original debtor acted in bad faith.
b. In delegacion the insolvency of new debtor does not generally revive the obligation of old
debtor unless (1) when said insolvency of new debtor was already existing and of public
knowledge when he delegated his debt, or (2) when said insolvency of new debtor is known to
the debtor, when he delegated his debt.
121. Subrogation refers to the transfer of all the rights of the creditor to a third person, who
substitute him in all his rights.
b. Legal subrogation is the substitution of new creditor in exceptional cases provided by law.
Legal subrogation is never presumed and available only in cases provided by law.
i. Instances wherein legal subrogation is presumed or instances of legal
subrogation
1. When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge.
2. When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter’s share.
3. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third
persons by reason of the loss.
4. In contract of property insurance, when the insurance company pays the insured.
5. Under Negotiable Instruments Law, when there is a valid payment for honor
supra protest.
a. Subrogation transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third persons, be they guarantors or
possessors of mortgages, subject to stipulation in a conventional subrogation.
Page 21 of 21
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
Law on Contracts
1. Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service. It is one of the five sources of civil obligations.
a. Obligations arising from contracts have the force of law between contracting parties.
b. Obligations arising from contracts should be complied with in good faith.
2. Stages of a contract
3. Characteristics of contracts
a. Obligatory force of contract means that the contractual agreement constitutes the law as between
the parties.
i. Obligations arising from contracts have the force of law between contracting parties.
ii. Obligations arising from contracts should be complied with in good faith.
b. Mutuality of contract means that the validity and performance cannot be left to the will of only one
of the parties.
c. Relativity of contract means that contract is binding only upon the parties and their successors
such as heirs and assignees.
a. The heirs are liable to the debts of decedent but only up to the extent of
the property they inherited. It is only the natural obligation of the heirs to
pay the unpaid debts of their predecessors beyond the value of the
properties they inherited.
e. Void contract that directly affects a third person – A third person affected
by a void contract may file an action for declaration of nullity of a contract.
d. Liberality of Contract or Freedom to Contract or Autonomy of Contract means that the parties
may establish such stipulations, clauses, terms, and conditions as they may deem convenient
provided they are not contrary to any of the following:
i. Law
ii. Morals
iii. Good customs
iv. Public order
v. Public policy
e. Consensuality of contract means that contracts are perfected by mere consent except in real
contracts and formal or solemn contracts which require additional requirements.
a. Essential elements refer to those which are required in order for a contract to exist. They are
necessary for validity of contract and may not be waived by the parties. Absence of any of the
essential elements will make the contract void the remedy of which of injured party is declaration of
nullity.
i. Consensual Contract
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established
b. Natural elements refer to those which already exist in certain contract unless set aside or
suppressed by the parties. They may be waived by the parties as long as the waiver is made in good
faith.
i. Warranty against eviction in a contract of sale.
ii. Warranty against hidden defects in a contract of sale.
iii. Warranty for merchantability in a contract of sale.
iv. Warranty against hidden and unregistered encumbrance in a contract of sale.
c. Accidental elements refer to those that do not normally exist in a contract unless stipulated or
provided by the parties.
i. Terms of payment in a contract of sale.
ii. Conventional interest in a contract of loan.
5. Types of Contracts
a. As to Perfection of Contract
ii. Real contract is a contract perfected by the delivery of the object of the contract.
1. Contract of deposit
2. Contract of pledge
3. Contract of loan or mutuum
4. Contract of commodatum
iii. Solemn or Formal contract is a contract perfected by the execution of the formality
required by law.
ii. Gratuitous contract is a contract whereby one party receives no equivalent consideration.
These contracts are referred to as contracts of pure beneficence, the cause of which is the
liberality or generosity of the benefactor.
1. Contract of donation
2. Contract of commodatum
iii. Remuneratory contract is a contract whereby the cause here is the service or benefit
remunerated.
1. Contract of service or employment
c. Other Contracts
ii. Accessory contract is a contract whose existence depends upon another contract known
as principal contract.
1. Contract of pledge,
2. Contract of chattel mortgage
3. Contract of antichresis
4. Contract of real estate mortgage
5. Contract of guarantee
iii. Preparatory contract is a contract which serves as a means by which other contracts may
be entered into.
1. Contract of agency
2. Contract of partnership.
v. Innominate contract is a contract without any name under the Civil Code or special law.
1. Do ut des (I give that you may give.)
2. Do ut facias (I give that you may do.)
3. Facio ut des (I do that you may give.)
4. Facio ut facias (I do that you may do.)
vi. Commutative contract is a contract whereby the parties give almost equivalent values;
hence, there is real fulfillment.
1. Contract of sale
2. Contract of lease
3. Contract of barter
viii. Unilateral contract is a contract whereby only one of the parties is obligated to give or to do
something.
1. Contract of commodatum (bailee)
2. Contract of gratuitous deposit (depositary)
ix. Bilateral contract is a contract whereby both parties are required to give or to do something.
1. Contract of sale
2. Contract of lease
x. Reciprocal contract is a contract whereby the cause on the other party is the object on the
other party.
1. Contract of sale
2. Contract of barter
xii. Contract of adhesion is a contract wherein one party has already prepared the form of the
contract, containing the stipulations he desires, and he simply asks the other party to agree
to them if he wants to enter into the contract. In case of ambiguity or doubt, it shall be
construed strictly against the preparer of the document of the contract.
1. Contract of insurance
2. Contract of enrollment
xiii. Executory contract is a contract that has not yet been performed. Certain executory
contracts are covered by Statute of Fraud and required to be in writing in order for them to be
enforceable.
xiv. Executed contract is a contract which has been performed. It is a contract not covered by
Statute of Fraud.
8. Nature of contract
a. Contract is determined by the principles of law.
15. Instances which if happened to either party before acceptance make the offer ineffective
a. Civil interdiction
b. Insanity
c. Death
d. Insolvency
19. Difference between contract wherein consent is wanting and contract wherein consent is vitiated
a. The contract is void if the consent is wanting requiring declaration of nullity of contract.
b. The contract is voidable if the consent is vitiated requiring annulment of contract.
I. There is violence when in order to wrest consent, serious or irresistible force is employed.
a. Requisites of violence to vitiate consent
i. There must be physical force.
ii. The physical force must be irresistible.
iii. The force must be the determining cause in giving the consent to the contract.
II. There is intimidation when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the person or property
of his spouse, descendants or ascendants, to give his consent.
a. Requisites of intimidation to vitiate consent
i. The intimidation must be the determining cause of the consent.
ii. The threatened act must be unjust or unlawful.
iii. The threat must be real and serious.
iv. It must produce a reasonable and well-grounded fear.
III. There is undue influence when a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice.
IV. There is causal fraud when, through insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to.
a. Requisites of fraud to vitiate consent
i. It must have been employed by one of the contracting parties only.
ii. It must have induced the other party to enter into the contract.
iii. It must have been serious.
iv. It may or may not result to damage or injury to the contracting parties.
22. Difference between causal fraud (Dolo causante) and incidental fraud (Dolo incidente)
a. In causal fraud, the contract is voidable requiring annulment of contract.
b. In incidental fraud, the contract is perfectly valid but action for damages is the proper remedy.
26. Object or Prestation is one of the essential elements of contract. It refers to the promise or conduct to be
performed in the performance of the contractual, and may consist of giving, doing or not doing a thing.
29. Cause of contract is one of the essential elements of contract. It refers to the immediate and proximate
purpose of the contract or the essential reason which impels the contracting parties to enter into it and which
explains and justifies the creation of the obligation through such contract.
33. Reformation of instrument is the legal remedy available to the injured party in a contract when the instrument
or document that serves as tangible evidence of the contract does not express the true intention of the contracting
parties.
35. Documents or Instrument which cannot be reformed or reformation of instrument is not allowed
a. Simple donation inter vivos wherein no condition is imposed or unconditional donation inter vivos
b. Last will and testament whether holographic will or notarial will
c. When the real agreement is void
37. Action for reformation of instrument and Action for exact fulfillment or specific performance are
inconsistent remedies and the complainant cannot have both.
40. Rescissible contract is a contract that has caused a particular damage to one of the parties or to a third
person, and which for equitable reasons may be set aside even if it is valid. The proper legal remedy is action for
rescission of rescissible contract.
A. Those contracts wherein the ward or absentee suffered by more than ¼ the value of the things on
the contracts entered into by their guardian or representative.
a. Those which are entered into by guardians whenever the wards they represent suffer lesion by more
than ¼ the value of the things which are the object thereof.
b. Those agreed upon in representation of absentees, if the latter suffer more than ¼ the value of the
things which are the object thereof.
43. Rescission of contract is a remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract.
46. Rules to be observed in counting the 4-year period for prescription of an action for rescission
a. For incapacitated persons or under guardianship, 4 years shall be counted from the termination of
the ward’s incapacity.
b. For absentee, 4 years shall be counted from the date the domicile of absentee is known.
c. For contracts intended to defraud creditor, 4 years shall be counted from the knowledge of the
contract.
d. For contracts intended to defraud creditor but involving immovable, 4 years shall be counted from
the registration of the sale.
47. Voidable or annullable contract is a contract in which the consent of one party is defective, either because of
want of capacity or because it is vitiated, but which contract is valid until set aside by a competent court. The proper
legal remedy is action for annulment of voidable contract.
50. Rules to be observed in counting the 4-year period for prescription of an action for annulment.
a. In cases of intimidation, violence or undue influence, 4 years shall begin from the time the defect of
the consent ceases.
b. In cases of fraud or mistake, 4 years shall begin from the time of the discovery of the fraud or
mistake.
c. In cases of contracts entered into by wards or incapacitated persons, 4 years shall begin from the
time the guardianship or incapacity ceases.
54. Unenforceable contract is a contract that for some reason cannot be enforced, unless it is ratified in the
manner provided by law. There is no legal remedy required but to leave the contract as it is.
57. Executory Contracts which shall be in writing to be enforceable under Statute of Fraud
a. An agreement that by its terms is not to be performed within a year from the making thereof.
b. A special promise to answer for the debt, default or miscarriage of another.
c. An agreement made in consideration of marriage, other than a mutual promise to marry.
d. An agreement for the sale of goods, chattels or things in action at a price not less than P500 pesos.
e. An agreement for the leasing of real property for a longer period than one year regardless of rent.
f. An agreement for the sale of real property or of an interest therein regardless of price.
g. A representation to the credit of a third person.
59. Void or inexistent contract is an absolute nullity and produces no effect, as if had never been executed or
entered into and cannot be ratified. The proper legal remedy is action for declaration of nullity of void contract.
1. Essential requisites of the contracts of pledge, real estate mortgage and chattel mortgage
b. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
even if the pledgor or mortgagor is not the principal debtor.
i. Period the pledgor or mortgagor required to be the owner of the thing pledged or
mortgaged for the validity of contract of pledge or mortgage
1. At the time the contract of pledge or mortgage is constituted or perfected
c. That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
d. That when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment of the creditor.
i. Pactum Commissorium is a stipulation whereby the thing pledged or mortgaged shall
automatically become the property of the creditor in the event of non-payment of the
secured debt within the term fixed. This stipulation is null and void for being contrary to
law and public policy. However, the contract of loan and contract of pledge or mortgage
remain to be valid.
2. The following are the instances where the thing pledged or mortgaged may be sold or alienated
in public auction for the payment of the secured contract of loan or principal obligations
a. If the pledgor or mortgagor fails to fulfill certain conditions and such violation would make the
debt due and demandable.
b. If the debtor has lost the right to make use of the period of the obligation making the obligation
with a suspensive period immediately due and demandable.
c. Upon default to pay the obligation at maturity.
4. Contract of pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable, or instrument evidencing incorporeal rights for the purpose of securing the fulfillment
of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered
shall be returned with all its fruits and accessions.
9. Form of contract of pledge for validity or to bind contracting parties vs. form of contract of
pledge to bind third persons - Contract of pledge may be in any form for its validity to bind
contracting parties because it is a real contract perfected by the delivery of the thing pledged but it must
be notarized with the description of the thing pledged and its date stated in the notarized contract in
order to bind third persons.
10. Nature of a contract to constitute a pledge vs. nature of contract of pledge - Contract to constitute
a pledge is a consensual contract perfected by mere consent while contract of pledge is a real contract
perfected by the delivery of the thing pledged.
15. Instances when a third person who pledges his own movable property to secure the debt of
another shall be released from liability
a. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the
creditor thereafter loses the same by eviction.
b. If an extension of time is granted to the debtor by the creditor without pledgor’s consent.
c. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages
and preferences of the creditor.
d. If the thing pledged is deteriorated on the fault of the pledgee.
b. Direct Modes of Extinguishment of contract of pledge that do not extinguish the secured
contract of loan
i. Return by the pledgee of the thing pledged to the pledgor or owner.
ii. Renunciation or abandonment in writing by the pledgee of the contract of pledge.
c. Direct Modes of Extinguishment of contract of pledge that also extinguish the secured
contract of loan
i. Sale of the thing pledged regardless of the net proceeds of the sale.
ii. Appropriation of the thing pledged by the pledgee if the thing pledged is not sold in at
least two public auctions.
21. Real Estate Mortgage is a contract whereby the debtor or third person secures to the creditor the
fulfillment of a principal obligation, specially subjecting to such security immovable property or real
rights over immovable property in case the principal obligation is not complied with at the time
stipulated.
27. Formality of a contract of real estate mortgage for validity vs. Formality of a contract of real
estate mortgage to bind third persons - Contract of real estate mortgage may be in any form for its
validity to bind contracting parties because it is a consensual contract perfected by mere consent but it
must be notarized and registered with Registry of Deeds in order to affect or to bind third persons.
28. Foreclosure refers to the remedy available to the mortgagee by which he subjects the property
mortgaged to the satisfaction of the obligation secured when the principal obligation is not paid when
due or when there is any violation of any condition, stipulation or warranty by the mortgagor.
a. Judicial Foreclosure is a type of foreclosure made through the filling of a petition in court
under Rule 68 of Rules of Court and availed of when the deed of real estate mortgage does not
provide for special power of attorney (SPA) authorizing the mortgagee-creditor to foreclosure it
extrajudicially.
i. Equity of Redemption – The judgment debtor/mortgagor has a period of not less than
90 days nor more than 120 days from the entry of judgment to pay his liability to prevent
the public sale of his mortgaged property.
b. Extrajudicial Foreclosure is a type of foreclosure made in compliance with Act No. 3135 and
available when there is a stipulation in the mortgage contract that the mortgage may be
foreclosed extrajudicially or when such foreclosure sale is made under a special power of
attorney inserted in the contract of mortgage.
i. Equity of Redemption – The mortgagor may pay his obligation to prevent the public
sale of his property in the grace period given by the mortgagee.
ii. Right of Redemption – The mortgagor may repurchase the property sold in public
auction within a period of:
1. Generally within 12 months or 1 year from public sale (Act No. 3135 - Real
Estate Mortgage Law)
2. Exceptionally within 3 months or 90 days from public sale if the mortgagee is a
bank and the mortgagor is a juridical or artificial person. (General Banking Law)
32. Chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or
the performance of some other obligation specified therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum of money or doing some other act named. If the
condition is performed according to its terms the mortgage and sale immediately become void, and the
mortgagee is thereby divested of his title.
39. Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an immovable
of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to
the principal of his credit. It is a formal contract perfected by the execution of the written instrument
containing the antichretic agreement together with the amount of the principal and interest of the loan
49. Acts requiring special power of appointment to the agent (Acts of Strict Ownership or Strict
Dominion)
a. To make such payments as are not usually considered as acts of administration
b. To effect novations which put an end to obligations already in existence at the time the agency
was constituted
c. To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired
d. To waive any obligation gratuitously
e. To enter into any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration
f. To make gifts, except customary ones for charity or those made to employees in the business
managed by the agent
g. To loan or borrow money, unless the latter act be urgent and indispensable for the preservation
of the things which are under administration
h. To lease any real property to another person for more than one year
i. To bind the principal to render some service without compensation
j. To bind the principal in a contract of partnership
k. To obligate the principal as a guarantor or surety
l. To create or convey real rights over immovable property
m. To accept or repudiate an inheritance
n. To ratify or recognize obligations contracted before the agency
o. Any other act of strict dominion or strict ownership.
50. The acceptance by the agent of the contract of agency may be express or implied.
a. Instances of implied acceptance by agent of the agency:
a. Acts of the agent to carry out the agency.
b. Silence or inaction by the agent according to the circumstances.
c. Between persons who are absent, when the principal transmits his power to the agent, and
the latter returns it without objection.
d. Between persons who are absent, when the principal entrusts to him by letter or telegram a
power of attorney with respect to the business in which he is habitually engaged as an
agent, and he did not reply to the letter or telegram.
53. Effects if the agent acts within the scope of his authority but in his (agent’s) behalf or without
disclosing the principal
a. The principal has no right of action against the person with whom the agent has contracted.
b. The person with whom the agent has contracted has no right of action against the principal.
c. The agent is directly bound in favor of the one with whom he has contracted.
d. The contract binds the third person and the principal if the contract involves thing belonging to
the principal.
56. Rules that shall be observed as regards to the liability of agent when he appoints a substitute
a. If the agent is not prohibited to appoint a substitute, the agent may appoint a substitute but he
shall be responsible for the acts of the substitute.
b. If the agent is authorized to appoint a substitute and the principal designated the person to be
appointed as substitute, the agent is not responsible for the acts of the substitute.
c. If the agent is authorized to appoint a substitute and the principal does not designate the person
to be appointed as a substitute, the agent shall be liable if the person appointed as substitute is
notoriously incompetent or insolvent man.
d. If the agent is prohibited to appoint a substitute, the agent cannot appoint a substitute. If he
appoints one, all the acts of the substitute shall be void against the principal.
58. Rights and obligations of third persons who have contracted with an agent who has exceeded
his authority
a. As to third persons, an act is deemed to have been performed within the scope of the agent’s
authority, if such act is within the power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an understanding between the principal and the
agent.
b. A third person cannot set up the fact that the agent has exceeded his powers, if the principal
has ratified or has signified his willingness to ratify the agent’s acts.
c. A third person may require the agent to present his power of attorney or the instructions as
regards the agency.
d. Private or secret orders and instructions of the principal do not prejudice third persons who have
relied upon the power of attorney or instructions shown them.
59. Commission agent or Consignee is a person who buys and sells goods or chattels consigned or
delivered to him by his principal, for a compensation known as commission.
62. Degree of liability of two or more agents if they have been appointed simultaneously
a. Joint or proportionate unless agreed otherwise.
63. Degree of liability of two or more persons who have appointed a single agent to the same
transaction
a. Solidary unless agreed otherwise.
64. Instances wherein the principal shall not be liable for the expenses incurred by the agent
a. When the agent acted in contravention of the principal’s instructions and the principal does not
himself of the benefits derived from the contract.
b. When the expenses were due to the fault of the agent.
c. When the agent incurred them with knowledge that an unfavorable result would ensue if the
principal was not aware thereof.
d. When it was stipulated that the expenses would be borne by the agent, or that the latter would
be allowed only a certain amount.
67. Revocation refers to the act of the principal of terminating the agency at will. The principal may revoke
the agency at will and compel the agent to return the document evidencing the agency. The revocation
may be express or implied. The following acts are considered implied revocation by principal of
the contract of agency:
a. When a new agent is appointed for the same business or transaction.
b. If the principal directly manages the business entrusted to the agent by dealing directly with third
persons.
c. When a special power of attorney is granted to an agent with a general power of attorney.
68. As a general rule, the principal may revoke the contract of agency at will. The following are the
exceptional instances when contract of agency may not be revoked at will by the principal
a. If a bilateral contract depends upon an agency.
b. If the agency is a means of fulfilling an obligation already contracted.
c. If a partner is appointed as a manager of the partnership in the articles or contract of partnership
and his removal from the management is unjustifiable.
d. If the agency is coupled with interest.
71. As a general rule, the death of the principal extinguishes the agency. However, the agency is not
extinguished by the death of the principal in the following exceptional instances
a. If the agency has been constituted in the common interest of the principal and the agent.
b. If the agency has been constituted in the interest of a third person who has accepted the
stipulation in his favor.
c. In so far as to finish the business already begun on the death of the principal, should delay
entail any danger.
72. Status of the acts done by the agent after the death of the principal or other cause of
extinguishment of the agency
a. The acts are valid if done without the knowledge of the death of the principal or of any other
cause of extinguishment and shall be fully effective with respect to third persons who may have
contracted in good faith.
Law on Sales
1. Contract of Sales is a contract whereby one of the contracting parties, known as the seller or vendor,
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other party,
known as the buyer or vendee, obligates himself to pay therefore a price certain in money or its
equivalent.
3. Essential elements of the contract of sale – These are elements necessary for validity and
perfection of contract of sale.
ii. Things that may become the subject matter of a contract of sale
iii. Things not allowed to become the subject matter of a contract of sale making the
contract null and void
1. Emptio rei speratae is the sale of future thing while emptio spei is a sale of
hope or expectancy.
2. Sale of future harvest is emptio rei speratae while sale of lottery ticket No. 113
is emptio spei.
3. In emptio rei speratae the thing expected will definitely come into existence, but
its quality or quantity unknown; while in emptio spei it is not certain that the thing
will exist much less its quantity or quality.
4. Emptio rei speratae is subject to the condition that the thing should exist, so that
if it does not, there will be no contract of sale by reason of the absence of an
essential element of subject matter while emptio spei produces effects even
though the thing does not come into existence because the subject matter is the
hope itself.
1. It must be certain.
2. It must be real
3. It must not be fictitious.
1. If the parties have agreed upon a definite amount for the sale.
iii. The third person is prevented from fixing the price or terms by
fault of the seller or the buyer.
1. The injured party may ask for damages.
4. If the price is fixed by the court which price may no longer be changed by the
contracting parties.
5. If the price fixed is that which the thing sold would have on a definite day, or in a
particular exchange or market, or when an amount is fixed above or below the
price on such day, or in such exchange or market, provided said amount is
certain.
6. If the price is fixed by one of the contracting parties and accepted by the other.
1. It does not affect a contract of sale, except as it may indicate a defect in the
consent which makes the contract voidable requiring annulment of contract.
2. It renders the contract one of donation if that is the real intention of parties. Thus,
it will require reformation of instrument.
1. If the price is absolutely simulated, the contract of sale is null and void requiring
declaration of nullity.
2. It the price is relatively simulated, the intent of the parties is hidden requiring
reformation of instrument.
c. Consent of the contracting parties on the determinate thing and the price certain in
money
1. At the moment there is a meeting of minds upon the thing which is the object of
the contract and upon the price.
1. When the auctioneer announces its perfection by the fall of the hammer or
in any other manner.
a. Rights of auctioneer and highest bidder before the perfection of
contract of sale by auction
i. Before perfection, any bidder may retract his bid.
ii. Before perfection, the auctioneer may generally withdraw the
goods from the sale unless the auction has been announced
without reservation by auctioneer.
b. Rights of auctioneer and highest bidder after the perfection of
contract of sale by auction
i. After perfection, the winning bidder cannot retract his bid.
ii. After perfection, the auctioneer cannot withdraw the goods.
c. Requisites before auctioneer may participate in bidding or auction
i. The right to bid must have been reserved expressly by or on
behalf of the seller.
ii. The right to bid must not be prohibited by law or stipulation.
iii. Notice must be given that the sale is subject to a right to bid by or
on behalf of the seller.
d. By bidders or puffers refer to persons employed by the seller to bid in
his behalf, the purpose of which is to raise the price, but the said persons
are not in themselves bound by their bids. The employment by the seller
of by-bidders or puffers without notice to the other bidders may make the
perfected contract of sale voidable because the consent of the highest
bidder is vitiated by causal fraud.
4. Natural elements of the contract of sale – These are elements which are presumed to exist in a
contract of sale unless validly waived by the contracting parties.
5. Accidental elements in the contract of sale – These are elements which do not exist in a contract of
sale unless provided by the contracting parties.
a. In sale, there is no pre-existing credit while in payment by cession, there are pre-existing
credits.
b. A sale creates obligations while payment by cession extinguishes obligations.
c. In sale, the cause or consideration is the price from the seller’s point of view, and the delivery of
the object, from the buyer’s point of view while in payment by cession, the cause or
consideration is the extinguishment of the obligation from the debtor’s point of view and the
assignment of the things to be sold from the creditor’s point of view.
d. In sale, there is greater freedom in fixing the price while in payment by cession there is less
freedom in fixing the price because of the fixed amount of the pre-existing credits which the
parties seek to extinguish.
e. In sale, the buyer becomes the owner of the thing transferred upon delivery while in cession,
the creditors do not become the owners of the property assigned to them but are merely given
the right to sell such property and apply the proceeds to their claims.
f. Contract of sale is governed by Law on Sales while payment by cession is governed by
Financial Rehabilitation and Insolvency Act, a special law.
a. It is a contact of sale if it is for the delivery at a certain price of an article which the vendor in
the ordinary course of business, manufactures or procures for the general market, whether the
same is on hand or not while it is a contract for a piece of work if the goods are to be
manufactured especially for the customer upon his special order and not for the general market.
b. Contract of sale of movable property with a price of at least P500 or sale of immovable
regardless of price is covered by Statute of Fraud while contract for a piece of work at a price
of P500 is not covered by Statute of Fraud.
a. In a contract of sale, the cause is cash while in a contract of barter, the cause is a noncash
asset.
b. Contract of sale of movable property with a price of at least P500 or sale of immovable
regardless of price is covered by Statute of Fraud while contract of barter of movable with
price of at least P500 or barter of immovable regardless of price is not covered by Statute of
Fraud.
11. Rules for determining whether a contract is one of sale or barter if the cause is a combination of
cash and noncash asset.
b. If the evident intention of the parties is not present, apply the following rules:
i. The contract is one of barter if the value of the thing given as part of the consideration
exceeds the monetary consideration.
ii. The contract is one of sale if the monetary consideration is more than the value of the
thing given as part of the consideration.
iii. The contract is one of sale if the monetary consideration is equal to the value of the
thing given as part of the consideration.
a. In contract of sale, ownership passes to the buyer upon delivery while in contract to sell, the
title to the goods does not pass to the buyer until some future time and oftentimes upon
payment of the price.
b. In contract of sale, the risk of loss or damage to the goods upon delivery is on the buyer, under
the rule “res perit domino”, or the thing perished with the owner; while in contract to sell, the
risk is borne by the seller after delivery based on the same principle that the thing perishes with
the owner.
c. In contract of sale, the non-payment of the price is a resolutory condition while in contract to
sell, the payment in full of the price is a suspensive condition.
Note: The rule on double sale applies only if both contracts are of sale but it is not applicable to contract to
sell.
a. In sale, ownership passes to the buyer, while in agency to sell, ownership is retained by the
principal.
b. In sale, the buyer pays the seller, while in agency to sell, the buyer pays the agent and the
latter transmits the money to the principal.
c. In sale, the goods are delivered by the seller to the buyer while in agency to sell, it is delivered
by the agent to the final consumer.
14. Principles on sale of an undivided share of a specific mass of fungible goods though the seller
purports to sell and the buyer purports to buy a definite number, weight or measure of the
goods in the mass, and though the number, weight or measure of the goods in the mass is
undetermined.
I. If the quantity, number, weight or measure, of the mass is more than the quantity sold, the parties
shall become co-owners of the mass.
II. If the quantity of the mass is less than the quantity sold, the buyer becomes the owner of the whole
mass, with the seller being bound to make good the deficiency from goods of the same kind and
quality, unless a contrary intent appears.
15. Distinction between Bilateral promise to buy and sell and Unilateral promise to buy or sell
a. Bilateral promise to buy and sell is as good as perfected contract of sale while unilateral
promise to buy or sell accepted by the promissee is binding only if supported by option
money.
b. Policitacion refers to unilateral promise not accepted by the promisee, therefore, it does not
produce any effect.
a. Option money is proof of perfection of contract of option while earnest money is proof of
perfection of contract of sale.
b. Option money is not part of the purchase price while earnest money is part of the purchase
price.
c. Option money is intended to reserve the property within the promised period while earnest
money is intended as down payment on the contract of sale.
17. Moment of obtaining personal rights by the buyer over the fruits of the determine thing sold in a
contract of sale
18. Effect of the complete loss of the object of the contract of sale before the perfection of the
contract or at the moment of perfection of contract of sale
a. The contract of sale is null and void for absence of essential element of subject matter.
19. Remedies of the buyer in case of the partial loss of the object of the contract of sale at the time
of the perfection of the contract of sale
20. Party who shall bear the risk of the complete loss of the object of the contract of sale after
perfection of contract of sale but before delivery of the subject matter
a. Seller based on the concept of Res perit domino which means that the thing perishes with the
owner
b. Buyer on the basis of Provision of the Civil Code.
21. Effects of the complete loss of the object of the contract of sale after perfection of contract of
sale and after delivery of the subject matter
b. Alternative remedies if the vendee or lessee fails to pay two or more installments
i. Exact fulfillment of the obligation with right to recovery for damages.
ii. Cancel the sale should the vendee fails to pay two or more installments resulting to
mutual restitution. However, the vendor may retain the installments already received if
there is agreement to that effect provided such agreement is not unconscionable.
iii. Foreclose the chattel mortgage on the thing sold, if one has been constituted without
right to recover any deficiency. Any stipulation for recovery of deficiency is null and void.
24. Rights of the Buyer in Sale of residential property in installments governed by RA 6552 or
Maceda Law
a. Right to a grace period from the date the installment became due with no interest which
can be exercised only once every five (5) years.
i. For buyer who has paid at less than two years of installments, the minimum grace period
is 60 days.
ii. For buyer who has paid more than two years of installments, the grace period is 30 days
for every year of installment paid. (One month per year of installment paid)
b. Right to additional 30 days but with interest, after the expiration of the initial grace period,
before the seller can cancel the contract by notarial act.
i. For buyer who has paid less than two years of installments, he is not entitled to any cash
surrender value.
ii. For buyer who has paid two to five years of installments, he is entitled to 50% cash
surrender value.
iii. For buyer who has paid more than five years of installments, he entitled to an additional
five per cent every year aside from the initial 50% but not to exceed ninety per cent of
the total payments made.
25. Rights of Buyer of Subdivision or condominium unit under PD 957 also known as Subdivision
and Condominium buyer's Protective Decree
a. In case of noncompliance by the developer with the plan, the buyer may suspend payment of
the price and ask for the cancellation of contract with corresponding demand for the return of
the price he has paid.
b. The developer shall pay the real property tax before transfer of ownership to buyer.
c. The developer can only collect fees for registration of sale from the buyer.
ii. Exceptional instances when husband and wife may validly sell to each other
27. Persons who are prohibited from acquiring by purchase, even at public or judicial auction, sales
in legal redemption, compromises or renunciation
a. The guardian, the property of the person or persons under his guardianship.
b. Agents, the property whose administration or sale may have been entrusted to them, unless the
consent of the principal has been given.
c. Executors and administrators, the property of the estate under administration.
d. Public officers and employees, the property of the State or GOCC under their administration.
e. Justices, judges, prosecuting attorneys, clerks of court and other officers and employees
connected with the administration of justice, the property and rights in litigation.
Note: The contract of sale is null and void because it is contrary to law.
30. Delivery is a mode of acquiring ownership whereby the object of the contract is placed in the control
and possession of the vendee. It is the act that transfers ownership from seller to buyer in a contract of
sale. However, the contracting parties may agree that ownership will be transferred from the seller to
the buyer by any other acts such as full payment of the price.
b. Symbolic delivery (traditio simbolica or traditio clavium) – This is delivery that takes place
by delivering the keys of the place or depository where the movable is stored or kept.
c. Traditio longa manu – It is the delivery of a movable by mere consent or agreement of the
parties if the thing cannot be transferred to the possession of the vendee at the time of sale.
d. Traditio brevi manu – It is a delivery that takes place when the vendee is already in the
possession of the thing sold even before the sale and thereafter continues in possession thereof
in the concept of an owner. It applies to movables only.
e. Traditio constitutum possessorium – It is a delivery that takes place when the vendor
continues in possession of the thing sold after the sale but in another capacity such as that of a
lessee or depositary. It applies to both movable and immovable property.
34. Delivery to the common carrier (FOB Shipping Point) - The law presumes that the contract of sale
is FOB Shipping Point which means that delivery to the carrier means delivery to the buyer.
35. As a general rule, a non-owner cannot transfer ownership to his buyer. However, these are the
exceptional instances when the sale of a non-owner transfers ownership to the buyer:
a. When the sale is made with authority or consent of the owner.
b. When the owner is precluded by his conduct from denying the seller’s authority to sell.
c. When the sale is made under the provisions of any factor’s acts, recording laws or any other
provisions of law enabling the apparent owner to dispose of the goods as if he were the true
owner thereof.
d. When the sale is made under a statutory power of sale or under the order of court of competent
jurisdiction.
e. When the purchase is made in a merchant’s store, or in fairs, or markets.
38. As a general rule, it is the obligation of the vendor to deliver the thing sold to the buyer after
perfection of contract of sale. However, the following are the instances when a vendor is not
bound to deliver the thing sold after perfection of contract of sale:
39. Unpaid seller is one who has not been paid or tendered the whole of the price or who has received a
bill of exchange or other negotiable instruments as conditional payment and the condition under which
it was received has been broken by reason of the dishonor of the instrument, the insolvency of the
buyer, or otherwise. It includes an agent of the seller to whom the bill of lading has been indorsed, or a
consignor or agent who has himself paid, or is directly responsible for the price, or any other person
who is in the position of a seller
1. From the time they are delivered to the carrier or other bailee for the purpose of
transmission to the buyer, until the buyer or his agent, takes delivery of them
from such carrier or other bailee.
2. If the goods are rejected by the buyer, and the carrier or other bailee continues in
possession of them, even if the seller has refused to receive them back.
1. If the buyer obtains delivery of the goods before arrival at the appointed
destination.
2. If the carrier or other bailee acknowledges to the buyer or his agent, that he is
holding the goods in his behalf, after arrival of the goods at their appointed
destination.
3. If the carrier or other bailee wrongfully refuses to deliver the goods to buyer or his
agent.
c. Right of resale
iv. Note: The unpaid seller is prohibited from participating as a bidder, directly or indirectly,
in the public sale or private sale of the goods.
41. Remedies of buyer in sale of real estate with a statement of its area at the rate of a certain price
per unit of measure or number if the vendor delivers the following area:
a. Excess area
i. Accept the whole area and pay for the contract rate; or
ii. Accept the agreed area and reject the excess
b. Lacking area
i. Lacking of Less than 10% of Actual Area
1. Action quanti minoris or proportionate reduction of price; or
2. Action for cancellation but only if the lacking area of less than 10% of Actual Area
is very important
ii. Lacking of 10% or more of Actual Area
1. Action quanti minoris or proportionate reduction of price; or
2. Action for cancellation whether or not the lacking area of 10% or more of Actual
Area is very important
c. Poor quality
i. Poor Quality of 10% or less of Actual Area
1. Action quanti minoris or proportionate reduction of price
2. Action for cancellation but only if the poor quality of not more than 10% of Actual
Area is very important
ii. Poor Quality of more than 10% of Actual Area
1. Action quanti minoris or proportionate reduction of price; or
2. Action for cancellation whether or not the poor quality of more than 10% of Actual
Area is very important
Note: Prescriptive period of the action – It shall be filed within 6 months from the date of delivery.
42. Rights of buyer and seller in sale real estate for a lump sum and not at the rate of a certain sum
for a unit of measure or number
a. In sale of real estate for a lump sum and not at the rate of a certain sum for a unit of measure or
number, the vendor is bound to deliver all that it is included within the boundaries stated in the
contract although there be greater or less area or number than that stated in the contract.
b. The buyer has the obligation to pay the lump sum stipulated in the contract with no increase or
decrease in the price although there be greater or less area or number than that stated in the
contract unless the lacking or excess area is already unconscionable.
47. Eviction refers to the deprivation of the vendee of the whole or a part of the thing sold by virtue of a
final judgment based on a right prior to the sale or an act imputable to the vendor.
48. Requisites in order that the seller’s warranty against eviction may be enforced
a. There must be a final judgment depriving the vendee of the whole or part of the thing sold.
b. The vendee must not appeal from the decision or judgment depriving him of the thing sold.
c. The deprivation is based on a right prior to the sale or an act imputable to the vendor.
d. The vendor must have been notified of the suit for eviction at the instance of the vendee.
49. Other Instances of Eviction which makes the seller liable for breach of warranty
a. If the property is sold for non-payment of taxes due and not made known to the vendee before
the sale.
b. In case of judicial sales unless otherwise decreed in the judgment.
a. Waiver Consciente is a type of waiver made by the buyer when he acted in good faith
because he has no knowledge of risk of eviction. The seller is still liable for eviction.
b. Waiver Intentionada is a type of waiver made by the buyer when acted in bad faith because
he has knowledge of risk of eviction. The seller is no longer liable for eviction.
a. Stipulation exempting a vendor from the obligation to answer for eviction is valid if he acted in
good faith.
b. Stipulation exempting a vendor from the obligation to answer for eviction is void if he acted in
bad faith.
53. Remedies of buyer for breach of warranty against hidden encumbrance or non-apparent
servitude in contract of sale of immovable
b. Within one year from the discovery of servitude after the lapse of the one year period
from the date of contract
i. Action for damages only
Note: Prescriptive period – One year from the date of contract or discovery of servitude
58. Remedies of Buyer of Breach of Implied Warranties for Merchantability or Hidden Defect
a. Accion redhibitoria is one of the two remedies of the vendee in case of breach of warranties
against hidden defects, of merchantability, of merchantable quality or fitness for a particular
purpose. It refers to the withdrawal from the contract or rescission.
b. Accion quanti minoris is one of the two remedies of the vendee in case of breach of
warranties against hidden defects, of merchantability, of merchantable quality or fitness for a
particular purpose. It refers to demanding a proportionate reduction in the price.
59. Prescriptive period of action based on breach of warranty against hidden defect
a. 6 months from the date of delivery
60. Extent of Liability of Seller in case of loss of thing sold with Hidden Defects
a. The seller acted in bad faith and the cause of loss is the hidden defect
i. Return the price, refund the expenses of the contract and pay damages
b. The seller acted in good faith and the cause of loss is the hidden defect
i. Return the price, refund the expenses of the contract and pay interests of the price
c. The seller acted in bad faith and the cause of loss is the fault of buyer or fortuitous event
i. Return the price paid less the value of the thing at the time of loss and to pay damages.
d. The seller acted in good faith and the cause of loss is the fault of buyer or fortuitous
event
i. Return the price paid less the value of the thing at the time of loss
a. Stipulation exempting a vendor from the obligation to answer for hidden defect is valid if he
acted in good faith.
b. Stipulation exempting a vendor from the obligation to answer for hidden defect is void if he
acted in bad faith.
63. Alternative remedies for redhibitory defect of an animal sold together with other animals not as
a pair
64. Remedy for redibitory defects of two animals sold together as a pair
65. Prescriptive period of action based on breach of warranty of animal with redhibitory defect
a. Null and void for being contrary to law and public policy
68. Requisites in order for the vendor to be liable in case the animal dies of disease
69. Instances when the buyer’s deemed to have accepted the delivered goods
70. As a general rule, the buyer may inspect the goods. However, the following are the exceptional
instances when the buyer cannot examine the goods
71. Effects when the buyer refuses to accept delivery and the refusal is justified such as when the
quantity is not complete or the goods being delivered are different from that stipulated
a. Buyer has no duty to return goods to the seller unless otherwise agreed.
b. The buyer shall not be obliged to pay the price.
c. If the buyer constitutes himself as depositary of the goods, he shall be liable as such.
72. Effects when the buyer refuses to accept delivery and the refusal is unjustified
a. Title to the goods passes to the buyer from the moment the goods are placed at his disposal.
b. The buyer shall be obliged to pay the price.
73. The time and place of payment of the price of the contract of sale
75. Grounds for the suspension of the payment of the price by the vendee
a. Disturbance in the vendee’s possession or ownership of the thing purchased.
b. Reasonable grounds to fear such disturbance, by a vindicatory action or foreclosure of
mortgage.
c. Loss of the thing due to the fault of the vendor.
76. Instances wherein the right to suspend payment by the vendee is not available
a. If the vendor gives security for the return of the price.
b. If it has been stipulated that the vendee shall pay the price notwithstanding the existence of
disturbance or danger.
c. If the disturbance is a mere act of trespass.
77. Remedy of vendor to sue for immediate rescission of the contract of sale of immovable
a. If there are reasonable grounds to fear the loss of the immovable property sold and its price.
78. Alternative remedies of vendor in case there is reasonable ground to fear the loss of the
immovable property or its price
79. Effects if the buyer failed to pay the price of the contract of sales of immovable at maturity date
80. Grounds for immediate rescission of the sale of a movable at vendor’s option
I. If at the time of the delivery of the thing, the vendee does not appear to receive the thing.
II. If at the time of the delivery of the thing, the vendee having appeared, does not pay the price,
unless a longer period is stipulated for its payment.
81. Remedies or Actions by the seller for breach of contract of sale of goods committed by buyer
a. Assuming the goods have already been delivered, maintain an action for the price of the goods
if the buyer wrongfully neglects or refuses to pay.
b. Maintain an action for damages if the buyer wrongfully neglects or refuses to accept and pay for
the goods.
c. Rescind the contract if the buyer has repudiated the sale or manifested his inability to perform
his obligation or has committed a breach of contract, where the goods have not been delivered
to buyer.
82. Proper Action or remedy by the buyer if the seller has broken the contract to deliver specific or
ascertained goods by not delivering the goods
a. Bring an action for specific performance plus damages.
b. Action for rescission plus damages.
c. Action for damages.
a. Conventional redemption is a type of redemption that occurs when the vendor reserved the
right to repurchase the thing sold with the obligation to return to the vendee the price of the sale,
expenses of the contract and necessary and useful expenses made on the thing sold and to
comply with other stipulations which may have been agreed upon.
2. By an adjoining rural lot owner. If a piece of rural land not exceeding one
hectare is alienated to a person who is not landless, the adjoining rural owner
shall have the right of legal redemption unless the grantee does not own any
rural land. Order of Preference:
a. Adjoining rural owner with smallest area
b. Adjoining rural owner who first exercised the right
3. By adjoining urban lot owner. If a small piece of urban land which was bought
for speculation has been resold, the owner of the adjoining land has a right of
redemption at a reasonable price.
a. The adjacent urban land owner whose intended use of the land in
question appears best justified shall be preferred.
Note: It is only the adjoining urban lot owner who has the right of legal pre-
emption which is the right to be given the first opportunity before being offered to
other person.
Note: A co-owner has better right over adjoining rural or urban lot owner in the
exercise of right of legal redemption.
87. Assignment of credit is a contract whereby a person transfers his credit, right or action against a third
person to another person for a consideration which is certain in money or its equivalent. It is perfected
by mere consent.
b. For assignment of credit involving real property, it must be recorded in the Registry of Property.
91. Exceptional instances when the vendor or assignor of credit is liable for the insolvency of the
debtor of the credit
a. When the assignor expressly warrants the solvency of the debtor of the credit.
i. Prescriptive period of warranty for solvency of debtor in assignment of credit
1. 1 year from the maturity date of credit or date of assignment whichever is later
b. When the assignor acted in bad faith because the insolvency of the debtor of the credit is of
public knowledge when he assigned the credit.
Law on Partnership
1. Contract of Partnership is a contract of two or more persons who bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves. It may also be formed by two or more persons for the exercise of a profession.
4. Delectus Personae means that a partner has a right to choose those whom he wants to be associated
with the partnership.
7. Generally, receipt by a person of share of the profits of a business is a prima facie evidence that
he is a partner. However, these are exceptional instances when the receipt by a person of a
share of the profits of a business shall not be considered a prima facie evidence that he is a
partner in a business:
a. As a debt by installment or otherwise
b. As wages of an employee
c. As rent to a landlord.
d. As an annuity to a widow or representative of a deceased partner.
e. As interest on a loan, though the amounts of payment vary with the profits of the business.
f. As the consideration for the sale of a goodwill of a business or other property by installment or
otherwise.
9. Properties that shall belong to the common fund in a universal partnership of all present
property
a. Property belonging to the partners at the time of the constitution of the partnership.
b. Profits that may be acquired from the present property.
c. Property acquired by each partner after the formation of the partnership if stipulated.
d. Profits and fruits from property acquired by each partner, even those from property acquired by
inheritance, legacy or donation after the formation of the partnership if stipulated.
10. Universal partnership of profits is a partnership whereby the common fund comprises all that the
partners may acquire by their work or industry during the existence of the partnership.
11. Properties that shall belong to the common fund in a universal partnership of profits
a. Profits obtained by the partners by their work or industry during the existence of the partnership.
b. The usufruct or use of the property belonging to each partner at the time of the constitution of
the partnership.
c. The profits and fruits from the properties mentioned in letter a and b.
d. The profits and fruits, if stipulated, of the property acquired by each partner after the
constitution of the partnership.
12. Persons who cannot enter into a universal partnership but can enter into a particular
partnership
a. Husband and wife
b. Persons who were guilty of adultery or concubinage at the time of formation
c. Persons who were guilty of the same criminal offense
d. Public officer or his wife, descendants or ascendants and another person by reason of the
public officer’s position
13. In case Universal Partnership is entered into without specification of the type of Universal Partnership, it
shall be presumed to be a Universal Partnership of Profits. Since Universal Partnership is a
gratuitous contract of donation, the ambiguity shall be interpreted in favor of least transmission of rights
and Universal Partnership of Profits involves lesser transmission of rights.
14. Particular partnership is a partnership which has for its object determinate things, their use or fruits,
or a specified undertaking, or the exercise of a profession. Example is General Professional
Partnership.
20. Status of Stipulation exempting a partner from share in partnership profit or partnership loss
a. Stipulation excluding any partner from share in partnership profit is void.
b. Stipulation excluding a capitalist partner from share in partnership loss is void.
c. Stipulation excluding an industrial partner from share in partnership loss is valid.
21. Rules in case of designation of profits or losses by a third person as agreed by the partners
a. If entrusted by the partners to a third person, it is binding upon the partners and may be
impugned only when it is manifestly inequitable.
b. If the designation by a third person is manifestly inequitable, it can no longer be impugned by a
partner who has begun to execute it.
c. If the designation by a third person is manifestly inequitable, it can no longer be impugned by
any partner if three months had already lapsed from the time he obtained knowledge thereof.
23. Rules on partnership management when a partner has been appointed manager in the articles
of co-partnership
a. The managing partner may execute all acts of administration despite the opposition of his
partners unless he acts in bad faith.
b. With just or lawful cause, the revocation of the power of the managing partner can be made by
the vote of the partners representing the controlling interest.
c. Without just or lawful cause, the revocation of the power of the managing partner can be made
only with the consent of all the partners including the managing partner.
24. Rules on partnership management when a partner has been appointed manager after the
partnership has been constituted or has been appointed in a separate document other than
articles of co-partnership
a. The managing partner may execute all acts of administration.
b. In case of opposition to the decision of the managing partner on acts of administration, the
partners representing the controlling interest may resort to voting for his removal as manager.
c. He may be removed with or without just cause by the vote of the partners representing the
controlling interest.
25. Rules of management when two or more partners have been appointed as managers
a. When there is a specification of their respective duties, each managing partner shall perform
only the duties specified in his appointment.
b. When there is no specification of their respective duties and there is no stipulation that one shall
not act without the consent of the others, each one may separately execute all acts of
administration.
c. When there is no specification of their respective duties and there is no stipulation that one shall
not act without the consent of the others, the decision of the majority of the managing partners
shall prevail in case of opposition.
d. When there is no specification of their respective duties and there is no stipulation that one shall
not act without the consent of the others, the decision of partner owning the controlling interest
shall prevail in case of tie in voting.
e. When there is a stipulation that none of the managing partners shall act without the consent of
the others, the unanimous vote of all managing partners shall be necessary for the validity of the
acts. However, if there is imminent danger to the partnership involving an act of administration,
the absence of any of the managing partners may be alleged by the present partners to justify
the approval of act of administration despite the absence of one of the managing partners.
26. Rules of management when the manner of management has not been agreed upon
a. All the partners shall be considered agents of the partnership or all of them are managers.
b. Whatever any of the partners may do alone shall bind the partnership.
c. In case of opposition of the other partners, the decision of the majority shall prevail and the
decision of the partners owning the controlling interest shall prevail in case of tie.
28. Acts that are not considered for apparently carrying on in the usual way of business of the
partnership and may not be performed by a partner unless he is authorized by all the other
partners or these are acts which require unanimous vote of the partners because they are
considered act of strict ownership or dominion
a. Assignment of partnership property in trust for creditors or on the assignee’s promise to pay the
debts of the partnership.
b. Disposition of the goodwill of the business.
c. Acts which would make it impossible to carry on the ordinary business of the partnership.
d. Confession of judgment.
e. Entering into a compromise concerning a partnership’s claim or liability.
f. Submission of a partnership claim or liability to arbitration.
g. Renunciation of a claim of the partnership.
31. Nature of liability of a general partner, whether capitalist or industrial, for the partnership debts
a. They shall be liable pro rata and subsidiarily with all their separate property and after all the
partnership assets have been exhausted.
33. Exceptional cases wherein the partnership shall be solidarily liable with all the partners and
wherein all partners are liable solidarily with the partnership for everything chargeable to the
partnership
a. For loss or injury caused to a third person or any penalty is incurred by reason of the wrongful
act or omission of any partner acting in the ordinary course of business of the partnership or
with the authority of his co-partners.
b. Where one partner acting within the scope of his apparent authority receives money or property
of a third person and misapplies it.
c. Where the partnership in the course of business receives money or property of a third person
and such money or property is misapplied by any partner while it is in custody of the
partnership.
37. The partnership shall bear the risk of loss for the following contributions of partners
a. Fungible things or those that cannot be kept without deteriorating.
b. Things contributed to be sold.
c. Things brought and appraised in the inventory unless there is a stipulation to the contrary but
the liability of the partnership is limited only to the value of the things at which they were
appraised.
39. Distinctions partner’s right to specific partnership property and partner’s interest in the
partnership
a. A partner cannot assign a partner’s right to specific partnership property but he can assign his
partner’s interest in the partnership.
b. A partner’s personal creditor cannot attach a partner’s right to specific partnership property but
such creditor can attach the partner’s interest in the partnership.
40. Rules for application of payment when a person owes separate demandable debts to the
partnership and to the partner authorized to receive also known as managing partner
a. If the partner authorized to receive issues the receipt for the partnership, payment shall be
applied to the partnership credit in its entirety.
b. If the partner authorized to receive issues his own receipt, payment shall be applied to the
partnership credit and partner’s credit proportionately
c. If the debt to the partnership is not yet due, the payment shall be applied to the partner’s credit
in its entirety.
d. If the debt owed to the partner is more onerous, the selection by the debtor of the more onerous
debt as to the application of payment shall be followed.
41. Rules for application of payment when a person owes separate demandable debts to the
partnership and to a partner not authorized to receive credit also known as non-managing
partner
a. If the debt is owed to a partner not authorized to receive payment and he issues his own receipt,
the payment shall be applied to the personal credit or the debt to the partner in its entirety.
43. As a general rule, notice to any partner of any matter relating to partnership affairs binds the
partnership. The following knowledge of a partner binds the partnership
a. The knowledge of a partner acting in the particular matter if he acquires the same while already
a partner.
b. The knowledge of a partner acting on a particular matter if he acquires it before his admission to
the partnership provided the same was still present on his mind.
c. The knowledge of any other partner not acting on a particular matter if he acquired the same
while already a partner and he could and should have reasonably communicated the same to
the partner acting on a particular matter.
a. The nominal partner is liable pro-rata and subsidiarily like a general partner only to persons to
whom such representation has been made, who has, on the faith of such representation, given
credit to the actual or apparent partnership.
a. The nominal partner is liable pro-rata and subsidiarily like a general partner to persons giving
credit whether the representation has or has not been communicated to the latter.
a. When a person has been thus represented to be a partner in an existing partnership, or with
one or more persons not actual partners, he is an agent of the persons consenting to such
representation to bind them to the same extent and in the same manner as though he were a
partner in fact, with respect to persons who rely upon the representation.
b. When all the members of the existing partnership consent to the representation, a partnership
act or obligation results; but in all other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation.
a. The partner’s personal creditors have preference over the partner’s personal assets.
b. The partnership’s creditors have preference over the partnership’s assets.
c. Partner’s separate creditor shall be paid out of the share of the partner owing him if there is an
excess in the partnership’s assets over partnership’s liabilities.
d. Partnership creditors shall be paid out first using partnership’s separate assets.
a. Partnership Dissolution is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business.
b. Partnership Liquidation is the process of settling the disputes or affairs of the partnership after
dissolution or winding up of the partnership business.
c. Partnership Termination refers to the point when all the business or affairs of the partnership
are completely wound up.
49. Causes of dissolution of a partnership without violation of the agreement of the parties
a. By the termination of the definite term or particular undertaking specified in the agreement.
b. By the express will of all the partners who have not assigned their interests or suffered them to
be charged for their separate debts, either before or after the termination of any specified term
or undertaking.
c. By the expulsion of any partner bona fide or in good faith from the business in accordance with
such power conferred by the agreement of the parties.
51. Grounds for court-ordered dissolution of partnership also known as non-automatic causes of
dissolution
a. A partner has been declared insane in any judicial proceeding or is shown to be of unsound
mind.
b. A partner becomes in any way incapable of performing his part in the partnership contract.
c. A partner has been guilty of such conduct as tend to affect prejudicially the carrying on of the
business.
d. A partner willfully or persistently commits a breach of the partnership contracts
e. The business of the partnership can be carried only at a loss.
f. Other circumstances that render dissolution equitable.
52. Proper order of payment of partnership liabilities and equity in General Parnership
I. Those owing to the creditors other than partners.
II. Those owing to partners other than for capital and profits.
III. Those owing to partners in respect of capital.
IV. Those owing to partners in respect of profits.
53. Order on priority of claims against the separate property of a debtor who is insolvent or whose
estate is insolvent.
I. Those owing to separate creditors.
II. Those owing to partnership creditors.
III. Those owing to partners by way of contribution.
55. Limited Partnership is a partnership where there is there is at least one general partner, who is liable
up to the extent of his separate assets after the exhaustion of partnership assets, and there is at least
one limited partner, who is liable only up to the extent his capital contribution.
56. Formality of Limited Partnership - A certificate of limited co-partnership must be signed under oath
by the partners and must be recorded with the SEC for it to be considered a limited partnership.
57. Effect if there is no substantial compliance with the registration of certificate of limited co-
partnership with the SEC
a. The partnership will be considered a general partnership as to third persons.
60. Effect if a limited partner’s name appears in the limited partnership name contrary to allowed
instances provided by law
a. The limited partner is liable pro-rata and subsidiarily to partnership creditors who extend credit
to the partnership without actual knowledge that he is not a general partner.
61. Instances when a limited partner is liable pro-rata and subsidiarily like a general partner to the
partnership creditors
a. If he allows his name to be included in the partnership name contrary to allowed instances of
law.
b. If he takes part in the control or management of the business.
62. A general partner shall have all the rights and powers and be subject to all the restrictions and
liabilities of a partner in a partnership without limited partners. However, the following acts can
only be made by a general partner if there is written consent or ratification by all the limited
partners
a. Do any act in contravention of the certificate of limited co-partnership
b. Do any act which would make it impossible to carry on the ordinary business of the partnership
c. Confess a judgment against the partnership
d. Possess partnership property, or assign their rights in specific partnership property, for other
than a partnership purpose
e. Admit a person as a general partner
f. Admit a person as a limited partner, unless the right so to do is given in the certificate of limited
co-partnership
g. Continue the business with partnership property on the death, retirement, insanity, civil
interdiction or insolvency of a general partner, unless the right so to do is given in the certificate
63. Rights enjoyed by a limited partner which are also enjoyed by a general partner
a. Have the partnership books kept at the principal place of business of the partnership, and at a
reasonable hour to inspect and copy any of them;
b. Have on demand true and full information of all things affecting the partnership, and a formal
account of partnership affairs whenever circumstances render it just and reasonable; and
c. Have dissolution and winding up by decree of court.
66. Instances when certificate of limited co-partnership may be amended only but not cancelled
a. There is a change in the name of the partnership or in the amount or character of the
contribution of any limited partner
b. A person is substituted as a limited partner
c. An additional limited partner is admitted
d. A person is admitted as a general partner
e. A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction
and the business is continued under article 1860
f. There is a change in the character of the business of the partnership
g. There is a false or erroneous statement in the certificate
h. There is a change in the time as stated in the certificate for the dissolution of the partnership or
for the return of a contribution
i. A time is fixed for the dissolution of the partnership, or the return of a contribution, no time
having been specified in the certificate
j. The members desire to make a change in any other statement in the certificate in order that it
shall accurately represent the agreement among them
Definition of Corporation – It is 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.
a. It is an artificial being.
1. The corporation cannot be held criminally liable particularly the penalty of imprisonment but it may
be held liable for fines for corporate crimes. The corporate officers who approve the particular
corporate crime will be the ones to be held criminally liable.
2. As a general rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock except when a corporation has a reputation that is debased,
resulting in its humiliation in the business realm such in the case of civil action for damages on the
ground of libel or defamation.
ii. Doctrine of separate personality means that a corporation has a personality separate and distinct from the
stockholders and affiliated companies.
iii. Limited liability rule means that the stockholders are liable only up to the extent of their capital contribution
when it comes to corporation’s liabilities.
iv. Trust fund doctrine means that assets of the corporations are considered trust fund reserved for payment
of liabilities to creditors of the corporation.
v. Doctrine of Piercing the veil of corporate fiction as an exception to doctrine of separate personality
b. Alter ego cases – When the corporation is a mere instrumentality or alter ego of the
stockholders or owners.
c. Defeat public convenience cases – When the corporate fiction is used to commit tax
evasion or to justify a wrong or to defend a crime.
b. It is created: (1) by operation of law in case of private corporation or (2) by enactment of special law in case
of public corporation.
i. The 1987 Constitution provides that only public corporations may be created by special law while all private
corporations must be created by operation of general corporation law which is the Corporation Code of the
Philippines a.ka. BP Blg. 68 through filing articles of incorporation to SEC and waiting for the latter's
issuance of certificate of registration.
ii. Concession theory means that a corporation owes its existence to the law and the state and the extent of
its existence, powers and liberties is fixed by its charter. Thus, it only possesses properties, attributes, rights
and powers provided by law or incident to its existence.
c. It enjoys the right of succession because it continues to exist despite the death of the founders since the
heirs or assignees of the stockholders will inherit the shares of their predecessors.
i. Right of succession best describes the strong juridical personality of the corporation.
ii. Corporate Tem - A corporation shall have perpetual existence unless its articles of incorporation provides
otherwise. Corporations with certificates of incorporation issued prior to the effectivity of this Code and which
continue to exist shall have perpetual existence, unless the corporation, upon a vote of its stockholders
representing a majority of its articles of incorporation: Provided, That any change in the corporate right of
dissenting stockholders in accordance with the provisions of this Code. A corporation whose term has
expired may apply for revival of its corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival.
Upon approval by the Commission, the corporation shall be deemed revived and a certificate of revival of
corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides
otherwise. No application for revival of certificate of incorporation of banks, banking and quasi-banking
institutions, preneed, insurance and trust companies, non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service business, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable recommendation of the appropriate
government agency.
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iii. Period for renewal of corporate term of private corporation
1. A corporate term for a specific period may be extended or shortened by amending the articles of
incorporation: Provided, That no extension may be made earlier than three (3) years prior to the
original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as
may be determined by the Commission: Provided, further, That such extension of the corporate
term shall take effect only on the day following the original or subsequent expiry date(s).
iv. Effect of failure to renew the corporate term within the deadline for renewal
1. Previously, the corporation is ipso facto or automatically dissolved by operation of law without need
for a court order or SEC decision. However, under the Revised Corporation Code, a corporation
whose term has expired may apply for revival of its corporate existence, together with all the rights
and privileges under its certificate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival.
d. It has the powers, attributes, properties expressly authorized by law or incident to its existence.
1. Express powers refer to the powers expressly provided, enumerated and granted by the
Corporation Code or special law to a corporation
a. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and bonds.
b. For stock corporations, to issue and sell stocks to subscribers and treasury stock, for
nonstock corporation, to admit members
c. To enter into merger or consolidation
d. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees
e. To sue and be sued
f. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific,
civic or similar purposes
g. Right of succession
h. To adopt and use of corporate seal
i. To amend its articles of incorporation
j. To adopt its by-laws
k. In case of domestic corporation to give donations in aid of any political party or candidate
or for purposes of partisan political activity. However, no foreign corporation shall give
donations in aid of any political party or candidate or for purposes of partisan political
activity.
2. Implied or necessary powers are those inferred from or reasonably necessary for the exercise of
the provided powers of the Corporation. They flow from the nature of the underlying business
enterprise.
a. To issue checks or promissory note or bill of exchange or mercantile documents
b. To establish a local post office in case of a mining company
c. To operate power plant in case of a cement factory company
d. To sell, supply or manage advertising materials in case of an advertising company
3. Incidental or inherent powers are powers that attached to a corporation at the moment of its
creation without regard to its expressed powers or particular primary purpose and may be said to
necessarily arise from its being a juridical person engaged in business. They flow from the nature
of the corporation as a juridical person.
a. Right of succession
b. Right to have corporate name
c. Right to make by-laws for its governance
d. Right to sue and be sued
e. Right to acquire and hold properties for the purposes authorized by the charter
ii. Ultra Vires Acts or Contracts are acts committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the express, implied and incidentals powers of
the corporation.
1. Ultra vires acts which are illegal per se – Null and void
2. Ultra vires acts for failure to comply with voting formality required by law – Null and void but the
declaration of nullity may be barred by estoppel
3. Ultra vires acts for being outside the primary and secondary purposes of the corporation – Voidable
on the part of the other party
iv. Status of ultra vires acts or contracts by the corporate officers in behalf of the Corporation
1. Ultra vires acts which are illegal per se – Null and void
2. Ultra vires acts which are unauthorized or when the corporate officers exceed their authority –
Unenforceable but they may become enforceable on the basis of (1) express or implied ratification
by the corporation (2) doctrine of estoppel or (3) doctrine of apparent authority of the corporate
officers
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e. Advantages of forming a corporation
i. Continuity of existence
ii. Limited liability on the part of investors
iii. Strong juridical personality
iv. Legal capacity to act as a distinct unit
v. Centralized management
vi. Ease in transferability of shares of stocks in case of stock corporation
vii. Ease in raising funds
1. Municipal corporation is a public corporation created by special law for the governance of a
particular local territory.
2. Government owned and controlled corporation is a public corporation created by special law for
public purpose but performing proprietary or commercial functions.
ii. Private corporation is a corporation created by operation of law for private interest.
iii. Corporation by prescription is a corporation created by lapse of time. It is the only corporation that obtains
juridical personality even without franchise granted by state or even without filing articles of incorporation to
SEC.
b. As to purpose
ii. Lay corporation is a corporation created for a purpose other than religion.
i. De jure corporation is a corporation both in fact and in law. Its juridical personality is not subject to the
direct attack by the state.
ii. De facto corporation is a corporation in fact but not in law. Its juridical personality is subject to direct attack
by the state through a special civil action of quo warranto proceedings.
iii. Ostensible corporation or corporation by estoppel is not actually a corporation since it does not have a
charter. However, the persons pretending to be corporation will be liable as general partners for the
contracts they have entered into.
1. When 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 defense its lack of corporate
personality.
2. When persons entered into a contract or obligation with ostensible corporation as such, such
persons cannot resist performance of the obligation on the ground that there was in fact no
corporation.
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d. As to nationality - Doctrine of Incorporation means that the nationality of the corporation is determined by the
place of its incorporation or the law that created such corporation.
i. Domestic corporation is a corporation created by Philippine Law particularly BP 68. Domestic corporation
is no longer required to obtain license from SEC to engage business in the Philippines. It may sue and be
sued in Philippine courts.
ii. Foreign corporation is a corporation created by law of other countries. Foreign corporation is required to
obtain license from SEC before it may engage in business in the Philippines. It must appoint a resident
agent in the Philippines before it may be given by license by SEC to engage in business in the Philippines.
1. Right to sue of foreign corporation not doing business in the Philippines before Philippine Courts
a. It may sue and be sued in Philippine courts for isolated transactions it entered into within
Philippine territory.
b. It may sue in Philippine courts for violation of its intellectual property rights.
2. Right to sue or personality to be sued of a foreign corporation doing business in the Philippines with
license
a. It may sue and be sued in Philippine courts.
3. Effects if a foreign corporation doing business in the Philippines without licenses
a. It may be sued on Philippine courts.
b. Generally, it may not sue before Philippine courts except in case of estoppel. However, it
must obtain the necessary license and submit proof of its compliance with the requirement
of law for the suit to prosper.
e. As to control or ownership
i. Stock corporation is a corporation whose capital stock is divided into shares of stocks and is authorized to
declare dividends to its stockholders.
ii. Nonstock corporation is a corporation which has no shares of stocks and is not authorized to declare
dividends.
a. As to rights
i. Common stocks or ordinary shares are those shares of stocks with complete voting rights. They must be
present in every corporation. They may be issued as par value or no-par value shares.
ii. Preferred stocks or preference shares are those shares of stocks with special privilege in dividend
distribution or liquidation. They must be issued with stated par value.
1. Cumulative Preferred Stocks entitle the owner thereof to payment not only of current dividends
but also back dividends not previously paid whether or not during the past year’s dividends were
declared or paid.
2. Noncumulative Preferred Stocks grant the holders of such shares only to the payment of current
dividends but not back dividends when and if dividends are paid to the extent agreed upon before
any other stockholders are paid the same.
3. Participating Preferred Stocks entitle the shareholders to participate with the common shares in
excess distribution at some predetermined or at a fixed ratio as may be determined.
4. Nonparticipating Preferred Stocks entitle the shareholder thereof to receive the stipulated
preferred dividends and no more.
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iii. Redeemable preference shares are those shares of stocks which may be redeemed by the issuing
corporation at the period stated despite the absence of unrestricted retained earnings.
iv. Convertible preference shares are those that are changeable by the stockholder from one class to another
at a certain price and within a certain period.
v. Treasury shares are those shares issued but subsequently reacquired by the corporation. They have no
voting rights whatsoever and may be issued even below par value so long as the price is reasonable. They
may be acquired only if there is unrestricted retained earnings in order not to violate the concept of Trust
Fund Doctrine.
b. As to voting
i. Voting shares are those which have complete voting rights which are the common stocks.
ii. Nonvoting shares are those classified as such in the Articles of Incorporation and shall have limited voting
rights.
1. Corporate acts when nonvoting preferred shares may still vote (I3 AM SAD)
2. Corporate acts when nonvoting preferred shares are not allowed to vote (GRRADE)
i. Par value shares are those shares with face value stated in the certificate of stock.
2. Minimum issue price of par value – The minimum issue price of par value shares is the par value
because shares as a general rule shall not be issued below par except treasury shares which may
be issued below par as long as the price is reasonable.
3. Legal capital in case of par value shares – The total par value of shares issued and subscribed.
ii. No par value shares are those shares without face value but must be issued with stated value. Only
common stocks may be classified as no par value shares.
3. Legal capital in case of no-par value shares – The total consideration received.
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IV. Formation of Private Stock Corporation or Incorporation refers to the performance of conditions, acts, deeds, and writings
by incorporators, and the official acts, certification or records, which give the corporation its existence. Filing of articles of
incorporation and applications for amendments thereto with SEC in the form of electronic document is now allowed
subject to the rules and regulations to be issued by SEC.
a. Any person, partnership, association or corporation, singly or jointly but not more than fifteen
(15) in number may become incorporators.
b. Majority must be residents of the Philippines and all must be of legal age.
c. In stock corporations, each must own or subscribe to at least one share, while in nonstock
corporations, members are not owners of shares of stocks, and their membership depends on
terms provided in the articles of incorporation.
d. Compliance with the required minimum ownership of Filipino or maximum ownership of
foreigners in industries reserved to Filipinos
3. Contents of Articles of Incorporation (Refer to the table at the last page of the handout)
1. Minimum authorized capital stock – There is no express minimum authorized capital stock
unless required by special law.
2. Minimum subscribed capital – None
3. Minimum paid-up capital – None
ii. Certificate of registration refers to the document issued by the SEC to a newly formed corporation which
evidenced the existence of the juridical personality of the corporation. It is also known as the primary
franchise of a corporation.
iii. Effect of failure to formally organize within 5 years from the date of incorporation
1. The corporation is ipso facto or automatically dissolved by operation of law without need of a court
order or SEC decision.
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iv. Effect of continuous inoperation for a period of at least 5 years after its formal organization
1. The SEC may, after due notice and hearing, place a corporation which subsequently becomes
inoperative for a period of at least five (5) years under delinquent status. A delinquent corporation
shall have a period of two (2) years to resume operations and comply with all requirements that
SEC shall prescribe. Upon compliance by the corporation, the SEC shall issue an order lifting the
delinquent status. Failure to comply with the requirements and resume operations within the period
given by the SEC shall cause the revocation of the corporation’s certification of incorporation. The
SEC shall give reasonable notice to, and coordinate with the appropriate regulatory agency prior to
the suspension, revocation of the certificate of incorporation of companies under their special
regulatory jurisdiction.
V. Governance of a Corporation
a. By-Laws refers to the rules of action adopted by a corporation for its internal government and for the regulation of
conduct, and it prescribes the rights and duties of its stockholders or members towards itself and among themselves
in reference to the management of its affairs. It neither affects nor prejudices third persons. It is less important than
Articles of Incorporation.
i. Contents of By-Laws (Refer to the table at the last page)
ii. Submission of By-Laws – By-laws shall be submitted to SEC at the time of submission of Articles of
Incorporation.
iii. Required vote for adoption or amendment of by-laws or delegation to board of directors of power to
amend by-laws or revocation of delegated power to the board
Note: The Corporation may provide additional qualifications to directors in its corporate by-laws provided
such qualifications are just and reasonable and not violative of Corporation Code of the Philippines.
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f. Mandatory Presence of Independent Directors - The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty percent (20%) of such board:
i. Corporations covered by Section 17.2 of “Securities Regulation Code” namely those whose securities are
registered with SEC, corporations listed with an exchange (PSE) or with assets of at least P50,000,000 and
having 200 or more shareholders, each holding at least 100 shares of a class of its equity shares.
ii. Banks and quasi-banks, nonstock savings and loan associations, pawnshops, corporations engaged in
money service business, preneed, trust and insurance companies, and other financial intermediaries; and
iii. Other corporations engaged in business vested with public interest similar to the above, as may be
determined by the SEC, after taking into account relevant factors which are germane to the objective and
purpose of requiring the election of an independent director, such as the extent of minority ownership, type
of financial products, or securities issued or offered to investors, public interest involved in the nature of
business operations, and other analogous factors.
Definition of Independent Director - An independent director is a person who, apart from shareholdings
and fees received from the corporation, is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director. Independent directors must be
elected by the shareholders present or entitled to vote in absentia during the election of directors.
Independent directors shall be subject to rules and regulations governing their qualifications,
disqualifications, voting requirements, duration of term and their limit, maximum number of board
memberships and other requirements that the SEC will prescribe to strengthen their independence and align
with international business practices
g. Grounds for temporary disqualifications of members of the board for a period of at least five (5) years from
conviction
i. Conviction by final judgment (1) Of an offense punishable by imprisonment for a period exceeding six (6)
years, (2) For violating this Code; and (3) For violating “The Securities Regulation Code”; or
ii. Found administratively liable for any offense involving fraudulent acts; or
iii. By a foreign court or equivalent foreign regulatory for acts, violations or misconduct similar to those
enumerate in letter (i) and (ii) above.
ii. By remaining board of directors with quorum but only if the reason of vacancy is death, resignation,
abandonment or disqualification.
1. Reasons of vacancy in the board that disqualifies the board with quorum to fill up the
vacancy therefore stockholders may only fill up the vacancy.
a. Removal of directors
b. Expiration of term
c. Increase in sits
j. Emergency Board - When the vacancy prevents the remaining directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy may
be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or
trustees. The action by the designated director or trustee shall be limited to the emergency action necessary, and the
term shall cease within a reasonable time from the termination of the emergency or upon election of the replacement
director or trustee, whichever comes earlier. The corporation must notify the SEC within three (3) days from the
creation of the emergency board, stating therein the reason for its creation.
k. Compensation or salary of board members – The directors as a general rule are not entitled to compensation
except reasonable per diems.
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l. Creation of Executive Committee
iii. Powers that cannot be delegated by board of directors to executive committee (FAAD)
1. Filling up of vacancy in the board
2. Adoption or amendment of by-laws
3. Approval of corporate acts requiring approval or ratification by stockholders
4. Distribution or declaration of cash dividends
iii. Business judgment rule means that the decision of the board of directors on matters of management
cannot be changed by the court unless such management decision is ultra vires or destructive of the interest
of minority stockholders.
1. President
a. Qualifications of a corporate President
i. He must be a stockholder.
ii. He must be a director.
iii. He must be neither secretary nor treasurer.
2. Secretary
a. Qualifications of a corporate Secretary
i. He must be a Filipino national.
ii. He must be a resident of the Philippines.
iii. He must not be a president.
3. Treasurer
a. Qualification of a corporate treasurer
i. He must not be a president.
ii. He must be a resident of the Philippines.
4. Compliance Officer - If the corporation is vested with public interest, the board shall elect a
compliance officer.
o. Three-fold duties of directors - The directors or trustees elected shall perform their duties as prescribed by law,
rules of good governance, and by-laws of the corporation.
i. Duty of loyalty
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ii. Duty of obedience
1. The Board of Directors must follow BP 68 and all implementing rules and regulations issued by
SEC.
i. Place of Meeting
q. Management Contract is a legal agreement that grants operational control of a business initiative (managed
corporation) to a separate group (managing corporation).
1. At least majority vote of board of directors with ratification of at least majority of stockholders of
managed corporation
2. At least majority vote of board of directors with ratification of at least majority of stockholders of
managing corporation
ii. Required vote for approval of management contract with interlocking director
1. At least majority vote of board of directors with ratification of at least 2/3 of stockholders of
managed corporation
2. At least majority vote of board of directors with ratification of at least majority of stockholders of
managing corporation
a. Doctrine of equality of shares means that all shares have equal rights except as provided in the Articles of
Incorporation.
i. Entitlement to vote – As a general rule, all stocks are entitled to vote to except those which have limited
voting rights because they classified as non-voting in the Articles of Incorporation and therefore allowed to
vote only on fundamental corporate acts.
a. Proxy refers to a written authorization given by one person to another so that the second
can act for the first. It also refers to the agent or holder of authority or person authorized
by an absent stockholder or member to vote for him at a stockholders’ meeting.
c. Term of proxy
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i. A period not exceeding 5 years.
a. Proxy need not be notarized while voting trust agreement must be notarized.
b. There is no transfer of title to proxy while there is transfer of title to trustee.
c. The proxy must vote in person while the trustee may vote in person or by proxy.
d. Proxy can only act at a specified meeting if not continuing proxy while trustee is not
limited to act at any particular meeting.
e. Proxy is revocable at any time while voting trust agreement is irrevocable.
f. The proxy votes as an agent while the trustee votes as an owner.
5. Voting by co-owners
a. Unanimously
b. Exceptional case when a co-owner may vote alone
i. When the certificate of stock provides “and/or”
ii. When there is proxy or voting trust granted to a co-owner
c. Meeting of Stockholders
i. Place of Meeting
1. Always in the city or municipality where the Principal Office of the Corporation is located preferably
in the principal office of the corporation
d. Propriety rights
i. Right to dividends
1. Entitlement to dividends
a. The stockholders are entitled to dividends only upon declaration by the board of directors.
Page 11 of 22
1. Requirements for exercise of the right to inspect
1. Preemptive right refers to the natural right of shareholders to subscribe to all issues or disposition
of shares of any class in proportion to their present shareholdings unless denied in the articles of
incorporation. It is intended to protect both the proprietary and voting rights of a stockholder in a
corporation, since such proportionate interest determines his proportionate power to vote in
corporate affairs when the law gives the shareholders a right to affirm or deny board actions.
a. Shares to be issued to comply with laws requiring stock offering or minimum stock
ownership by the public such in the case of initial public offering (IPO)
b. To shares that are being reoffered by the corporation after they were initially offered
together with all the shares to the existing stockholders who initially refused them
c. Shares issued in good faith with approval of the stockholders holding 2/3 of the
outstanding capital stock in exchange for the property needed for corporate purposes
d. Shares issued, with approval of the stockholders holding 2/3 of the outstanding capital
stock, in payment of previously contracted debts of the corporation
e. Waiver of the right by the stockholder
f. In case of non-stock corporation since there is no control in membership
g. In so far as the assignee is concerned, where the assignors have previously exercised
their pre-emptive rights to subscribe to new shares
h. When the pre-emptive right is denied in the articles of incorporation or amendment thereto
a. It must be denied in the articles of incorporation and cannot be validly denied in the by-
laws. The required vote for denial of pre-emptive right is 2/3 of outstanding capital stock.
1. Right of first refusal provides that a stockholder who may wish to sell or assign his shares must
first offer the shares to the corporation or to other existing stockholders of the corporation, under
terms and conditions which are reasonable; and that only when the corporation or the other
stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of
his shares to third parties. It arises only by virtue of contractual stipulations, in which case the right
is construed strictly against the right of persons to dispose of or deal with their property. It is
normally available in a close corporation as stated in its articles of incorporation. It is a contractual
right of a stockholder.
v. Right of Appraisal
1. Appraisal right refers to the right of a dissenting stockholder to demand the payment of the fair
value of his shares after dissenting from a proposed corporate action involving a fundamental
change in the corporation in the cases provided by law when such right is available. This right may
be waived by a shareholder if he has done so knowingly and intelligently. There must be
unrestricted retained earnings before the stockholder in an ordinary corporation may exercise this
right.
a. Amendment to the articles that has the effect of changing or restricting the rights of
shareholder, or of authorizing preference over those of outstanding shares
b. Investment of corporate funds in another corporation or in a purpose other than the
primary purpose.
Page 12 of 22
c. Merger or consolidations
d. Changing corporate term whether shortening or extending
e. Sale, encumbrance or other disposition of all or substantially all of the corporate property
or assets.
f. In a Close corporation, a stockholder may for any reason, compel the corporation to
purchase his shares when the corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock.
a. The dissenting stockholder shall make a written demand on the corporation within 30 days
after the date on which the vote was taken for the payment of the fair value of his shares.
b. The withdrawing stockholder must submit his shares to the corporation for notation of
being dissenting stockholder within 10 days from his written demand.
c. All rights accruing to such shares shall be suspended from time of demand for payment of
the fair value of the shares until either the abandonment of the corporate action.
d. The dissenting stockholder shall be entitled to receive payment of the fair value of shares
thereof as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
e. The payment must be made by the corporation within 30 days from the determination by
the Board of Appraisers of the fair value of the shares otherwise the rights of the
dissenting stockholders will be restored. The Board of Appraisers consists of a person
appointed by the corporation, a person appointed by the dissenting stockholder and the
third person appointed by the two appointees. The decision of majority of the Board of
Appraisers on the determination of fair value of shares shall prevail.
f. Stockholder must transfer his shares to the corporation upon payment by the corporation.
g. Upon payment of the fair value of shares, all the rights of dissenting stockholders are
terminated and not merely suspended.
h. There must be unrestricted retained earnings for the exercise of appraisal right to prosper.
e. Remedial Right
i. Individual suit is an action brought by a stockholder against the corporation for direct violation of his
contractual rights. (Stockholder vs. Corporation)
ii. Representative suit refers to an action brought by a person in his own behalf or on behalf of all similarly
situated. (Association of Stockholders vs. Corporation)
iii. Derivative suit refers to a suit brought by one or more stockholders or members in the name and on behalf
of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the
corporation. The corporation is a necessary party to the suit. It is a suit filed by a person who must be a
shareholder to enforce a corporation’s cause of action. (Stockholder in behalf of corporation vs. Board of
Directors of Corporation)
f. Obligations of a stockholder
i. Limited liability rule means that a stockholder is personally liable for the financial obligations of the
corporation to the extent only of his unpaid subscription or that a stockholder’s liability for corporate debts
extends only up to the amount of his capital contribution.
ii. Trust fund doctrine means that assets of the corporations are considered trust fund reserved for payment
of liabilities to creditors of the corporation.
a. Subscription agreement
Page 13 of 22
a.
Period of irrevocability
i. It is irrevocable for a period of 6 months from the date of subscription and after its
submission to SEC.
b. Period for cancellation
i. It may be revoked after 6 months from the date of subscription but it must be
made before its submission to SEC.
2. Post-incorporation subscription
i. It may not be revoked unless there is unrestricted retained earnings to support its
retirement in order not to violate trust fund doctrine.
b. Consideration for issuance of shares of stocks
i. Valid consideration
1. Cash
2. Noncash asset
3. Preexisting obligation of the corporation in case of equity swap
4. Services rendered
5. Conversion of other class of shares of stocks in case of conversion of convertible bonds or
conversion of convertible preference stocks
6. Unrestricted retained earnings in case of distribution of stock dividends
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration.
1. Promissory note
2. Future services
c. Shares of stocks refer to the interests or rights which the owner has in the management of the corporation and its
surplus profits, and on dissolution, in all of its assets remaining after the payment of its debts. They do not represent
co-ownership in the assets of the corporation but such interests are merely indirect and inchoate.
a. Civil action by filing before a regular court an action to collect a sum of money
b. Sale of delinquent shares
i. To highest bidder
ii. Acquisition by corporation and placing them to treasury
iii. Period fixed by law for the sale of delinquent shares
1. Not less than 30 days nor more than 60 days from the date the stocks
become delinquent
Page 14 of 22
ii. Requirements for issuance of certificate of stock
1. The certificate must be signed by the president or vice president and countersigned by the
secretary or assistant secretary.
2. The certificate must be sealed with the seal of the corporation.
3. The par value, as to par value shares or the subscription as to no par value shares must first be
fully paid.
4. The certificate must be delivered.
5. The original certificate must be surrendered where the person requesting the issuance of a
certificate is a transferee from the stockholder.
i. It refers to corporate book which contains the record of all stocks in the names of the stockholders
alphabetically arranged; the installment paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made,
the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. It must be
set up and registered by the Corporation with the SEC within 30 days from receipt of its certificate of
registration.
ii. All entries must be made only by the corporate secretary in the absence of a stock and transfer agent
employed by the corporation. If any entry is made by any officer other than the corporate secretary, such
entry is null and void.
a. Dissolution
1. Voluntary modes
a. Where creditors are not affected - By administrative application to SEC submitting the
board resolution and ratification by the stockholders.
i. At least majority vote of the board of directors with ratification of at least majority
of stockholders
b. Where creditors are affected - By formal petition to SEC with notice and hearing with
creditors
i. At least majority vote of the board of directors with ratification of at least 2/3 of
stockholders
c. By shortening of corporate term - By amending the articles of incorporation and submitting
such amendment to SEC.
d. By merger or consolidation - By submitting the Board resolution and ratification of the
merging or consolidating corporation.
2. Involuntary modes
a. By expiration of corporate term
b. Failure to formally organize within 5 years from incorporation
c. Legislative dissolution
d. Dissolution by SEC on grounds under existing laws
4. Grounds which will not automatically dissolve a corporation but will require court order or
SEC decision
i. Being De facto
ii. Violation of laws or rulings of SEC
iii. Failure to submit annual report or financial statements to SEC
iv. Continuous inoperation for a period of at least 5 years
v. Failure to submit by-laws within 30 days from incorporation
Page 15 of 22
b. Liquidation
ii. Period of Liquidation – It shall be finished within a recommendatory period of 3 years counted from the
dissolution of a corporation.
iii. Consolidation refers to a business combination whereby two or more existing corporations form a new
corporation different from the combining corporation. (Equitable Bank + PCI Bank = Equitable-PCI Bank)
Page 16 of 22
d. Effects of merger and consolidation
i. There is automatic transfer of assets and the liabilities of the absorbed corporation or constituent
corporations which are dissolved to the merged corporation or constituted corporation.
ii. The absorbed or constituent corporations are ipso facto dissolved by operation of law without necessity of
any further act or deed meaning the separate existence of the constituent corporations shall cease.
iii. It will neither prejudice the rights of creditors nor impair any lien of the creditor over the property of the
absorbed corporations.
iv. It involves exchanges of properties, a transfer of the assets of the constituent corporations in exchange for
securities in the new or surviving corporation but neither involves winding up of the affairs of the constituent
corporations in the sense that their assets are distributed to the stockholders.
1. Definition of One Person Corporation. A One Person Corporation is a corporation with a single stockholder.
a. Banks
b. Non-bank financial institutions
c. Quasi-banks
d. Pre-need
e. Trust entity/company
f. Insurance
g. Public entities
h. Publicly listed entities
i. Non-charted government-owned and controlled corporations (GOCCs)
j. A natural person who is licensed to exercise a profession (CPA or Lawyers) for the purpose of exercising such
profession except as otherwise provided under special laws
4. Minimum Capital Stock Not Required for One Person Corporation. - A One Person Corporation shall not be required to
have a minimum authorized capital stock except as otherwise provided by special law.
5. Articles of Incorporation of One Person Corporation. A One Person Corporation shall file articles of incorporation in
accordance with the requirements under Section 14 of Revised Corporation Code. It shall likewise substantially contain the
following:
(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator, executor,
guardian, conservator, custodian, or other person exercising fiduciary duties together with the proof of such authority to act on
behalf of the trust or estate; and
(b) Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the authority.
6. Bylaws of One Person Corporation - The One Person Corporation is not required to submit and file corporate bylaws.
7. Display of Corporate Name or SUFFIX of One Person Corporation. - A One Person Corporation shall indicate the letters
"OPC" either below or at the end of its corporate name.
8. Officers of One Person Corporation - The single stockholder shall be the sole director and president of the One Person
Corporation.
9. Appointment of Treasurer, Corporate Secretary, and Other Officers. - Within fifteen (15) days from the issuance of its
certificate or incorporation, the One Person Corporation shall appoint a treasurer, corporate secretary, and other officers as it
may deem necessary, and notify the Commission thereof within five (5) days from appointment. The single stockholder may
not be appointed as the corporate secretary. A single stockholder who is likewise the self-appointed treasurer of the
corporation shall give a bond to the Commission in such a sum as may be required: Provided, That the said
stockholder/treasurer shall undertake in writing to faithfully administer the One person Corporation's funds to be received as
treasurer, and to disburse and invest the same according to the articles of incorporation as approved by the Commission. The
bond shall be renewed every two (2) years or as often as may be required.
10. Special Functions of the Corporate Secretary in One Person Corporation. - In addition to the functions designated by the
One Person Corporation, the corporate secretary shall:
(a) Be responsible for maintaining the minutes book and/or records of the corporation;
(b) Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which notice shall be given no
later than five (5) days from such occurrence;
(c) Notify the Commission of the death of the single stockholder within five (5) days from such occurrence and stating in such
notice he names, residence addresses, and contact details of all known legal heirs; and
(d) Call the nominee or alternate nominee and the known legal heir to meeting and advise the legal heirs with regard to,
among others, the election of a new director, amendment of the articles of incorporation, and other ancillary and/or
consequential matters
11. Nominee and Alternate Nominee of One Person Corporation. - The single stockholder shall designate a nominee and an
alternate nominee who shall, in the event of the single stockholder's death or incapacity, take the place of the single
stockholder as director and shall manage the corporation's affairs. The articles of incorporation shall state the names,
residence addresses and contact details of the nominee and alternate nominee, as well as the extent and limitations of their
authority in managing the affairs of the One Person Corporation until the stockholder, by self determination, regains the
capacity to assume such duties. In case of death or permanent incapacity of the single stockholder, the nominee shall sot as
Page 17 of 22
director and manage the affairs of the One Person Corporation until the legal heirs of the single stockholder have been lawfully
determined, and the heors have designated one of them or have agreed that the estate shall be the single stockholder of the
One Person Corporation. The alternate nominee shall sit as director and manage the One Person Corporation in case of the
nominee's inability, incapacity, death, or refusal to discharge the functions as director and manager of the corporation, and
only for the same term and under the same conditions applicable to the nominee.
12. Change of Nominee or Alternate Nominee of One Person Corporation. - The singe stockholder may, at any time, change
its nominee and alternate nominee by submitting to the Commission the names of the new nominees and their corresponding
written consent. For this purpose, the articles of incorporation need not be amended.
13. Minute Book of one Person Corporation. - A One Person Corporation shall maintain a minutes book which shall contain all
actions, decisions, and resolutions taken by the One Person Corporation.
14. Records in Lieu of Meetings of One Person Corporation. - When action is needed on any matter, it shall be sufficient to
prepare a written resolution, signed and dated by the single stockholder; and recorded in the minutes book of the One Person
Corporation. The date of recording in the minutes for all purposes under this Code.
15. Reportorial Requirements of One Person Corporation. - The One Person Corporation shall submit the following within
such period as the Commission may prescribe:
(a) Annual financial statements audited by an independent certified public accountant: Provided, That if the total assets or total
liabilities of the corporation are less than Six hundred thousand pesos (₱600,000.00), the financial statements shall be certified
under oath by the corporation's treasurer and president;
(b) A report containing explanations or comments by the president on every qualification, reservation, or adverse remark or
disclaimer made by the auditor in the latter's report;
(c) A disclosure of all self-dealings and related party transactions entered into between the One Person Corporation and the
single stockholder; and
(d) Other reports as the Commission may require.
For the purpose of this provision, the fiscal year of a One Person Corporation shall be that set forth in its articles of
incorporation or, in the absence thereof, the calendar year.
The Commission may place the corporation fail to submit the reportorial requirements three (3) times, consecutively or
intermittently, within a period of five (5) years.
16. Liability of Single Shareholder in One Person Corporation. - A sole shareholder claiming limited liability has the burden of
affirmatively showing that the corporation was adequately financed. Where the single stockholder cannot prove that the
property of the One Person Corporation is independent of the stockholder's personal property, the stockholder shall be jointly
and severally liable for the debts and other liabilities of the One Person Corporation. The principles of piercing the corporate
veil applies with equal force to One Person Corporations as with other corporations.
17. Conversion from an Ordinary Corporation to a One Person Corporation. When a single stockholder acquires all the
stocks of an ordinary stock corporation, the later may apply for conversion into a One Person Corporation, subject to the
submission of such documents as the Commission may require. If the application for conversion is approved, the Commission
shall issue a certificate of filing of amended articles of incorporation reflecting the conversion. The One Person Corporation
converted from an ordinary stock corporation shall succeed the later and be legally responsible for all the latter's outstanding
liabilities as of the date of conversion.
18. Conversion from One Person Corporation to an Ordinary Stock Corporation. - A One Person Corporation may be
converted into an ordinary stock corporation after due notice to the Commission of such fact and of the circumstances leading
to the conversion, and after compliance with all other requirements for stock corporations under this Code and applicable rules.
Such notice shall be filed with the Commission within sixty (60) days from the occurrence of the circumstances leading to the
conversion into an ordinary stock corporation. If all requirement a have been complied with, the Commission shall issue a
certificate of filing or amended articles of incorporation reflecting the conversion. In case of death if the single stockholder, the
nominee or alternate nominee shall transfer the shares to the duly designated legal heir or estate within seven (7) days from
receipt of either an affidavit of heirship or self-adjudication executed by a sole heir, or any other legal document declaring the
legal heirs of the single stockholder and notify the Commission of the transfer. Within sixty (60) days from the transfer of the
shares, the legal heirs shall notify the Commission of their decision to either wind up and dissolve the One Person Corporation
or convert it into an ordinary stock corporation. The ordinary stock corporation converted from One Person Corporation shall
succeed the latter and be legally responsible for all the latter's outstanding liabilities as of the date of conversion.
Page 18 of 22
CORPORATE ACTS WHICH REQURE AT LEAST MAJORITY VOTE OF THE BOD ALONE
(EVP)
Corporate Act Salient Points
Majority vote of all the members of the
Election of officers (Sec. 25, CC)
BOD
Vacancies in BOD if NOT due to removal, • If the directors do not
Majority vote of remaining directors if
expiration of the term or increase in constitute a quorum, stockholders
quorum still exists
number of directors (Sec. 29, CC) have the right to elect
• Provided that there is
Power to acquire own shares (Sec. 41,
Majority vote unrestricted retained earnings
CC)
• Only for legislative purposes
CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF THE
STOCKHOLDERS REPRESENTING AT LEAST MAJORITY OF THE OCS (FAM)
Corporate Act Salient Points
Fixing the issued Price of No-
Majority of quorum of BOD, if Majority of OCS, if BOD is not
par value shares (Sec. 62, last
authorized by AOI or by-laws authorized by the AOI
par., CC)
Amendment may be made by
Amendment or repeal of By- the Board only after due
laws or Adoption of new By- Majority vote Majority of OCS delegation by the
laws (Sec. 48, CC) stockholders.
Non-voting shares can vote
Majority of OCS/members of
Majority vote of BOD of both
Management Contract (Sec. both managing and managed
managing and managed
44, CC) corporation and in some
corporation
cases 2/3 of OCS/members
CORPORATE ACTS WHICH REQUIRE VOTE OF THE STOCKHOLDERS REPRESENTING AT LEAST 2/3
OF THE OCS ALONE
(PARDS)
Corporate Act Salient Points
• Only if the AOI or amendment thereto denies
pre-emptive right
Denial of pre-emptive right (Sec. 39, CC) 2/3 of OCS • Denial extends to shares issued in good faith in
exchange for property needed for corporate purposes
or in payment of previously contracted debts
Delegation of the power to Amend,
• Delegation can be revoked by majority OCS
Repeal or Adopt New By-laws to BOD 2/3 of OCS
• Non-voting shares cannot vote
(Sec. 48, CC)
• Notice and statement of purpose are necessary
• Must be made in a meeting called by the
secretary on President’s order or on written demand of
Removal of Directors/Trustees majority of OCS
2/3 of OCS/members
(Sec. 28, CC) • Non-voting shares cannot vote
• Removal without cause cannot be used to
deprive minority stockholders of their right of
representation
Ratification of act of disloyal director
2/3 of OCS
(Sec. 34, CC)
• The contract must be fair and reasonable under
Ratification of a contract of self-dealing
2/3 of OCS/members the circumstances
directors (Sec. 32, CC)
• Full disclosure of adverse interest of
Page 19 of 22
directors/trustees involved is necessary
• Presence of director/trustee must be necessary
to constitute quorum OR the vote of director/trustee
must be necessary for the approval of the contract
CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF
STOCKHOLDERS REPRESENTING AT LEAST 2/3 OF THE OCS (ADAM-LI³ES)
Page 20 of 22
Matters Usually Matters Usually Found Other Matters that Matters that may be Matters that cannot
Found in the in the By-Laws under May be Included in found in Either be provided for in the
Articles of Section 47 the By-laws Articles of By-Laws and must be
Incorporation Incorporation or By- provided in the
Laws articles of
incorporation
1. Name of the 1. Time, place and 1. Designation of time 1. Providing for 1. Classification of
corporation manger of calling and when voting rights cumulative voting in shares of stock and
conducting regular and may be exercised by nonstock corporations. preferences granted to
special meetings of stockholders of record. (24) preferred shares. (6)
directors, trustees, places (24)
for meetings of directors
or trustees may be
outside the Philippines if it
so provided in the by-
laws.
2. Purpose clause 2. Time and manner of 2. Providing for 2. Providing for higher 2. Provisions on
including primary calling and conducting additional officers for quorum requirement for founder’s shares. (7)
and secondary regular and special the corporation. (25) a valid board meeting.
purpose which may meetings of the (25)
be unrelated stockholders or members.
3. Place of principal 3. Required quorum in 3. Provisions for the 3. Limiting, broadening 3. Providing for
office within the meetings of stockholders compensation of or denial of the right to redeemable shares. (8)
Philippines and the manner of voting. directors. (30) vote, including voting
by proxy for members
in nonstock
corporations. (29)
4. Term of existence 4. Form for proxies of 4. Creation of an 4. Transferability of 4. Provisions on the
stockholders and executive committee. membership in a purposes of the
members and manner of (35) nonstock corporation. corporation. (14, 15,
voting. (90) 36(11) and 45)
5. Names, 5. Qualifications, duties 5. Date of the annual 5. Termination of 5. Providing for the
nationalities and and compensation of meeting or provisions membership in corporate term of
residences of directors, trustees, of special meetings of nonstock corporations. existence. (13 and 14)
incorporators officers and employees. the stockholders or (91)
members. (50 and 53)
6. Number of6. Time for holding annual 6. Quorum on meeting 6. Manner of election 6. Capitalization of
directors or trustees election of directors or of stockholders or and term of office of stock corporations. (14
trustees, mode and members. (52) trustees and officers in and 18)
manner of giving notice nonstock corporation.
thereto. (92)
7. Names, 7. Manner of election or 7. Providing for the 7, Manner of 7. Corporate name (39)
nationalities and appointment and the term presiding officer at distribution of assets in
residences of of office of all officers meetings of the nonstock corporations
temporary directors except directors and directors or trustees upon dissolution. (94)
or trustees until the trustee. as well as of
election stockholders or
members. (54)
8. In case of stock 8. Penalties for violation 8. Procedure for 8. Providing for 8. Denial of pre-emptive
corporation, amount of by-laws. issuance of certificate staggered board in rights (48)
of authorized capital of shares of stock. (63) educational institutions.
stock, number of (108)
shares, par value of
shares, issue price
of no par value
shares, original
subscribers and
amount paid by each
9. Manner of issuing stock 9. Providing for
certificates. interest on unpaid
subscriptions. (66)
10. Such other matters 10. Entries to be made
necessary for the proper in the stock and
means of corporate transfer book. (74)
business and affairs.
11. Providing for
meetings of the
Page 21 of 22
members in a
nonstock corporation
outside of the principal
office of the
corporation. (93)
-END-
Page 22 of 22
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
1. Maker - He drew the promissory note and therefore primarily liable up to the
extent of the tenor of the promissory note.
2. Payee - He is the person to whom the instrument is originally payable.
3. Indorser - He signs and delivers the instruments to the subsequent holder after
its issuance by the maker and therefore secondarily liable for the nonpayment of
the promissory note. He negotiates the instrument by indorsement coupled with
delivery.
4. Person negotiating the instrument by mere delivery - He negotiates the
instrument by mere delivery and therefore not secondarily liable for the
nonpayment of the promissory note unless there is violation of his warranties.
5. Holder is the payee or indorsee of an order negotiable instrument, who is in
possession of it or the bearer of a bearer negotiable instrument.
1. Acceptor - He assented to the order of the drawer and therefore primarily liable
to the bill of exchange up to the extent of his acceptance.
2. Drawer - He drew the bill of exchange and commanded the drawee and
therefore secondarily liable for the nonacceptance or nonpayment of the bill of
exchange.
3. Payee - He is the person to whom the instrument is originally payable.
4. Indorser - He signs and delivers the instruments to the subsequent holder after
its issuance by the drawer and therefore secondarily liable for the nonacceptance
or nonpayment of the bill of exchange. He negotiates the instrument by
indorsement coupled with delivery.
5. Person negotiating the instrument by mere delivery - He negotiates the
instrument by mere delivery and therefore not secondarily liable for the
nonacceptance or nonpayment of the bill of exchange unless there is violation of
his warranties.
6. Holder is the payee or indorsee of an order negotiable instrument, who is in
possession of it or the bearer of a bearer negotiable instrument.
7. Referee in case of need is a person whose name is inserted by a drawer of a
bill or any indorser to whom the holder may resort in case of need; that is to say,
in case the bill is dishonored by non-acceptance or non-payment. He becomes a
party only upon his acceptance.
8. Acceptor for honor is a person who accepted the bill of exchange instrument to
save the credit of the parties to the instrument or some party to it as the drawer,
drawee, or indorser or somebody else by intervening the protested bill of
exchange and accepting it with the consent of the holder.
c. Negotiable Check is a special type bill of exchange drawn on a bank payable on demand.
a. The sum payable is sum certain for negotiable instruments although it is to be paid
under the following instances
i. With interest
1. Pay to C or order P1,000 with 6% interest p.a. until paid
ii. By stated installments
1. I promise to pay to B or bearer P4,000 in four equal monthly installments
beginning January 1,2001.
2. I promise to pay to the order of B the sum of P100 in two installments as follows:
(1) P45 on Feb. 1, 1985 and (2) P55 on June 1, 1985.
iii. By stated installments with escalation clause
iv. With exchange, whether at a fixed rate or at a current rate.
1. Pay to B or order USA $1,000 on the December 31, 2016 exchange rate.
v. With costs of collections or an attorney’s fee
1. Pay to C or order P100,000 with collection costs and attorney’s fee if not paid at
maturity.
7. Instances when the promise remains to be unconditional making the instrument negotiable
c. 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.
10. Instances when the instrument is non-negotiable because not payable at a determinable future
time
a. 5 days before the death of Alice, I promise to pay P or bearer P10,000.
b. I promise to pay P or bearer P12,000 10 days after L passes the bar examination.
c. I promise to pay P or order P15,000 when my means permit me to do so.
c. Where an instrument is issued, accepted, or indorsed when overdue, as regards to the person
issuing, accepting or indorsing it.
i. Dated January 5, 2018. I promise to pay to the order of P P1,000.
a. Authorization of sale of collateral securities in case the instrument be not paid at maturity.
i. I promise to pay to B or order P4,000 on October 1, 2014, provided, however, that if this
note is not paid at maturity date, the ring pledged may be sold at public auction.
c. Waiver of the benefit the law intended for the advantage or protection of the obligor.
i. Six months after December 1, 2043, I promise to pay to P or order P3,000 waiving the
right to appeal and all of valuation appraisement.
d. Giving the holder an election to require something to be done in lieu of payment of money.
i. I promise to pay B or order P1,000 or 10 dogs at the option of holder.
a. It is not dated.
b. It does not specify the value given, or than any value had been given therefore.
c. It does not specify the place where it is drawn or the place where it is payable.
d. It bears a seal.
e. It designated a particular kind of current money in which payment is to be made.
a. Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable, but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount.
b. Where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from the date of the instrument, and if the instrument is
undated, from the issue thereof.
c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued.
d. Where there is a conflict between the handwritten and printed provisions of the instrument, the
handwritten provisions prevail.
e. Where the instrument is so ambiguous that there is doubt whether it is a bill of exchange or
promissory note, the holder may treat it as either bill of exchange or promissory note at his
election.
f. Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is deemed to be an indorser.
g. Where an instrument containing the words “I promise to pay” is signed by two or more persons,
they are deemed to be solidarly liable thereon while where an instrument containing the words
“We promise to pay” is signed by two or more persons, they are deemed to be jointly liable.
21. Requisites for an agent signing in behalf of the principal to escape liability on the instrument
22. Incidents in the life of negotiable instrument particularly negotiable bill of exchange
a. Issuance or Issue is the first delivery of the instrument complete in form to a person who takes
it as a holder.
b. Delivery refers to the transfer of possession with intent to transfer title or it consists principally
by placing the transferee in possession of the instrument but it must be accompanied by an
intent to transfer title.
c. Negotiation is the transfer of an instrument from one person to another as to constitute the
transferee the holder of the instrument.
i. Bearer instrument is negotiated by (1) mere delivery or (2) indorsement coupled with
delivery.
4. Kinds of indorsement
a. Special indorsement is an indorsement which specifies the person to
whom, or to whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further negotiaition of
the instrument. If the instrument is originally an order instrument, it will
revert an instrument converted to bearer by blank indorsement to its
original character of being order instrument.
b. Blank indorsement is an indorsement which specifies no indorsee and
an instrument so indorsed becomes bearer instrument and may be
negotiated by delivery.
c. Restrictive indorsement is an indorsement which either prohibits the
further negotiation of the instrument, or constitutes the indorsee the agent
of the indorser or vests the title in the indorsee in trust for or to the use of
some other person. But the mere absence of words implying power to
negotiate does not make an indorsement this kind of indorsement.
5. Examples of Indorsements
a. Pay to A. Sgd. B
b. Sgd. B
c. Pay to C only. Sgd. B or Pay to C and no other person. Sgd. B
d. Pay to C for collection. Sgd. B or Pay to C for deposit. Sgd. B
e. Pay to X in trust for C. Sgd. B
f. Pay to X for the use of C. Sgd. B
g. Pay to C, at indorsee’s risk. Sgd. B or Sans recourse, Pay to C. Sgd. B or
Without recourse, Pay to C. Sgd. B
h. Pay to X if he passed the board exam. Sgd. B
i. Pay to X, notice of dishonor waived. Sgd. B
I. The indorser whose indorsement is struck out is relieved from his liability on the
instrument.
II. All subsequent indorsers are likewise relieved from their liability on the
instrument.
d. Presentment for Acceptance consists of exhibiting the bill to the drawee, and demanding that
he accepts it, that is, signify his assent to the order or command of the drawer.
1. Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument.
2. Where the bill expressly stipulates that it shall be presented for acceptance.
3. Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.
iii. Effect if the holder of a bill of exchange who is required by the preceding number
to present the bill for acceptance fails to do so or fails to negotiate it within a
reasonable time.
1. The drawers and all indorsers are discharged.
iv. Instances when presentment for acceptance is excused and a bill may be treated
as dishonored despite the absence of presentment for acceptance
1. Where the drawee is dead, or has absconded, or is a fictitious person or a
person not having capacity to contract by bill.
2. Where, after the exercise of reasonable diligence, presentment cannot be made.
3. Where, although presentment has been irregular, acceptance has been refused
on some other ground.
1. Where a bill is duly presented for acceptance and is not accepted within the
prescribed time, the person presenting it must treat the bill as dishonored by
nonacceptance or he loses the right of recourse against the drawer and
indorsers.
2. When a bill is dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no presentment for
payment is necessary
e. Acceptance is the signification by the drawee of his assent to the order of the drawer.
1. The holder of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused, may treat the
bill as dishonored.
2. Where an acceptance is written on a paper other than the bill itself, it does not
bind the acceptor except in favor of a person to whom it is shown and who, on
the faith thereof, receives the bill for value.
3. An unconditional promise in writing to accept a bill before it is drawn is deemed
an actual acceptance in favor of every person who, upon the faith thereof,
receives the bill for value.
iii. Period allowed by law for the drawee to accept the bill
2. Qualified acceptance
a. Conditional; that is to say, which makes payment by the acceptor
dependent on the fulfillment of a condition therein stated.
b. Partial; that is to say, an acceptance to pay part only of the amount for
which the bill is drawn.
c. Local; that is to say, an acceptance to pay only at a particular place.
d. Qualified as to time.
e. The acceptance of some, one or more of the drawees but not of all.
3. Principles of Acceptance
a. The holder may refuse to take a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance.
b. Where a qualified acceptance is taken, the drawer and indorsers are
discharged from liability on the bill unless they have expressly or impliedly
authorized the holder to take a qualified acceptance, or subsequently
assent thereto.
c. When the drawer or an indorser receives notice of a qualified acceptance,
he must, within a reasonable time, express his dissent to the holder or he
will be deemed to have assented thereto.
d. The qualified acceptance by the drawee of the instrument will not make
the instrument non-negotiable.
e. A bill may be accepted before it has been signed by the drawer, or while
otherwise incomplete, or when it is overdue, or after it has been
dishonored by a previous refusal to accept, or by non payment. But when
a bill payable after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, he is entitled to acceptance as of the date of first
presentment for acceptance.
i. The acceptor for honor is liable to the holder and to all parties to
the bill subsequent to the party for whose honor he has accepted.
f. Dishonor by Non-Acceptance occurs when the bill is presented for acceptance, and
acceptance is refused by the drawee, or cannot be obtained, or when present for acceptance is
excused, and the bill is not accepted.
g. Presentment for Payment consists of exhibiting the instrument to the person primarily liable
thereon and demanding payment from him on the date of maturity.
1. When the drawer has no right to expect or require the drawee or acceptor will
pay the instrument.
2. Where the instrument was made or accepted for his accommodation and he has
no reason to expect that the instrument will be paid if presented.
3. When presentment is dispensed with.
4. When a bill is dishonored by non-acceptance.
1. Presentment for payment must be made on the date fixed without grace period
unless delay in presentment for payment is excused when it is caused by
circumstances beyond the control of the holder and not imputable to his default
or negligence.
2. The time of presentment shall be on a reasonable hour on a business day and if
payable at a bank, it must be made during the banking hours.
3. A check must be presented for payment within a reasonable time after its issue.
4. If the promissory is payable on demand, presentment for payment must be made
within a reasonable time after issuance.
5. If the bill of exchange is payable on demand, presentment for payment must be
made within a reasonable time after its last negotiation.
6. If the instrument is not payable on demand or it is payable at a fixed or
determinable future time, presentment for payment must be made on the day it
falls due.
h. Dishonor by Non-Payment occurs when the instrument is presented for payment, and
payment is refused or cannot be obtained, or where presentment for payment is excused and
the instrument is overdue and unpaid.
iii. Instances when notice of dishonor is not necessary to charge a general indorser
1. Notary public; or
2. By any respectable resident of the place where the bill is dishonored
4. By NO-CO-ME-RE-PA-LO-PRE-RE-FUL-AN
5. When the principal debtor becomes the holder of the instrument at or after
maturity in his own right or by merger or confusion
1. The party paying is remitted to his former rights as regards to all prior parties.
a. The party paying may strike out his own indorsement and all subsequent
indorsements.
b. The party paying may renegotiate the instrument except where it is
payable to the order of a third person and has been paid by the drawer or
where it was made or accepted for accommodation and has been paid by
the party accommodated.
a. Holder of an order instrument is the payee or indorsee of a bill or note, who is in possession
of it.
b. Holder of a bearer instrument is the bearer or possessor thereof.
c. Holder for value is holder who has given value for an instrument issued or negotiated to him.
d. Holder in due course is a holder against whom personal defenses will not be available but
against whom real defenses will lie.
e. Holder not in due course is a holder against whom both personal and real defenses can be
used.
Material Alteration (May be enforced by Holder in Due Course according to original tenor) (Quasi-real
Quasi-personal)
It is a personal defense as to the original amount but it is a real defense as to the excess of the original
amount.
30. Liability of Acceptor by accepting the order by the drawer in a negotiable bill of exchange
a. He engages that on due presentment, the instrument will be accepted or paid or both, according
to its tenor, and that if it be dishonored and the proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be compelled to
pay it.
a. He engages that on due presentment, the instrument will be accepted or paid or both, according
to its tenor, and that if it be dishonored and the proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be compelled to
pay it.
a. That the instrument is genuine and in all respects what it purports to be.
b. That he has good title to it.
c. That all prior parties had capacity to contract.
d. That the instrument, is at the time of his indorsement, is valid and subsisting.
36. A qualified indorser is not secondarily liable to the instrument because he does not guarantee the
solvency of the person primarily liable. Warranties of a Qualified Indorser by qualifiedly indorsing
the instrument although his warranties extend only to those parties who can trace their title
from such qualified indorsement
a. That the instrument is genuine and in all respects what it purports to be.
b. That he has good title to it.
c. That all prior parties had capacity to contract.
d. That he has no knowledge of any fact which would impair the validity of the instrument or render
it valueless.
a. In the hands of a holder not in due course, the instrument is avoided as against the party prior to
alteration.
b. Any holder, whether in due course or not, may enforce payment of new amount to a party who
has himself made, authorized or assented to the alteration and subsequent indorsers.
c. The instrument is not avoided in hands of holder in due course as against the party prior to
alteration as to the original amount but it will be avoided as to the excess.
a. Where a bill is drawn in a set, each part of the set being numbered and containing a reference
to the other parts, the whole of the parts constitutes one bill.
b. Where two or more parts of bills in set are negotiated to different holders in due course, the true
owner of the bills in set is presumed to be the holder whose title first accrues.
c. Where two or more parts of bills in set are negotiated to different holders in due course, the
payment or acceptance of the parts by drawee-acceptor first presented by the untrue owner of
the bills in set will not prejudice the drawee-acceptor.
d. Where the holder of a set indorses two or more parts to different persons he is liable on every
such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as
if such parts were separate bills.
e. The acceptance may be written on any part and it must be written on one part only.
f. If the drawee accepts more than one part and such accepted parts negotiated to different
holders in due course, he is liable on every such part as if it were a separate bill.
g. When the acceptor of a bill drawn in a set pays it without requiring the part bearing his
acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a
holder in due course, he is liable to the holder thereon.
h. Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged
by payment or otherwise, the whole instrument is discharged and not that part only.
41. Where the instrument is so ambiguous that there is doubt on whether it is a bill or a note, the holder
may treat it as either at his option. The following are the instances when a bill of exchange may be
treated as a promissory note by the holder
a. A check of itself does not operate as an assignment of the funds of the drawer in the hands of
the bank and the bank is not liable until he accepts or certifies the check.
b. A check must be presented for payment within a reasonable time (6 months) after its issue
otherwise the drawer will be discharged from liability thereon to the extent of loss caused by the
delay.
c. A check not presented within a reasonable time (6 months) after issue is stale check.
a. It is equivalent to acceptance.
b. If procured by the holder, the drawer and all general indorsers are discharged.
c. It operates as an assignment of the funds of the drawer in the hands of the drawee bank.
a. Memo check is a check which, across its face, is written the word memorandum or memo and it
is regarded as a contract whereby the drawer engages to pay the bona fide holder absolutely
and not upon a condition to pay upon presentment and non-payment.
b. Cashier's check is a check drawn by the cashier of a bank in the name of the bank and against
the bank itself payable to a third person or order.
c. Manager's check is a check drawn by the manager of a bank in the name of the bank and
against the bank itself payable to a third person.
d. Traveler's check is a check used by traveler to supply him with funds in lieu of cash.
e. Certified check is a check which bears the word certified on its face signifying that the check is
recognized and accepted by the bank as a valid appropriation of the amount specified thereon.
f. Crossed check is a check which bears two parallel lines usually drawn diagonally on the upper
left portion of its face.
g. Stale check is a check not presented for payment within reasonable time from its issue or
within 6 months from its maturity date.
h. Postdated check is a check wherein the date stated in the check is later than the actual date of
issuance of check.
i. Antedated check is a check wherein the date stated in the check is earlier than the actual date
of issuance of check.