Q and A COMMERCIAL LAW

FROM Nth Time BAR CHALLENGER TO ATTORNEY
MERCANTILE LAW
ARRANGED BAR QUESTIONS AND ANSWERS 1990 TO 2019

ARRANGED AND SEQUENCED
BASED ON THE MOST FREQUENTY ASKED TOPICS
1990 - 2019 BAR EXAMINATIONS
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MERCANTILE LAW
The questions for the 2019 COMLAW bar examinations are all recycled popular
topics of the past exams. WALANG BINAGO saved for Data Privacy Act. KAGAYA
NG LABOR LAW, MUKHA LANG MAHIRAP ANG MERCANTILE LAW PERO
LIMITED LANG ANG MGA TOPICS NA TINATANONG. WHY IS IT SO? Take for
example ang Insurance law. Napaka-haba niyan pero halos 10% lang niyan ang
relevant sa atin. Unlike Crim and Poli law, mga 40-60 % ng provisions ng isang
batas ay dapat madaanan ng mata mo.
After reading all the bar questions, I suggest you get the book of Judge Miravite.
Yan ang pinka-mahusay na book sa ComLaw Review dahil siya lang ang may Bar
Questions discussion. Yung Iba walang BQA, sagana lang sa maputing papel
hahaha. Manipis lang yan. Basahin ninyo lahat kasi selected na ginawa ni Judge M
sa book niya. Wonderful Book. Mura at napakahusay. Kalimitan sa mga mahuhusay
na book yung mga self-published like Miravite and Nachura for Poli. Pag published
ng third party, shortchanged sa discussion at napaka-mahal. Let us support those
authors.
Also, read current events – lalo na yung Data Privacy at National ID system. I think
if may new questions to come up manggagaling ito sa mga topics na yan.
I can’t imagine how many 2019 bar students spent as much as P100,000 sa mga
school materials, big books and centers. Ang kailangan lang naman is to familiarize
with bqas and a simple book to quick scan to pass the 2019bar. Kaya, save your
money, enjoy while studying smart for your bar exam.
THIS BAR REVIEW MATERIAL is composed of 249 pages. The sources used are UPLC, PALS, books with
BQAs and other materials that can be found in the internet. I just have the patience to ARRANGE them based
on the most asked topics from 1987 to 2019, and SEQUENCE them by year. Some answers were paraphrased
to suit the ALAC format and some were found to be so informative in lecture type answer and better left out as
they are. We are giving credits to the authors of those materials.
KINLDY REFER BAR QUESTIONS AND ANSWERS TO YOUR COLLEAGUES PARA GOOD VIVES.
BAR QUESTIONS AND ANSWERS 1990-2019

MERCANTILE LAW
FIRST EDITION
OCTOBER 8, 2020
MANILA, PHILIPPINES
The ARRANGER is a humble partner to succeed in your quest for a law degree and to clinch the evasive “Attorney”
title to your name. He believes that no one has the monopoly of knowledge so you may email him for any correction,
modification and suggestion at barlawfordummies@yahoo.com.ph. Other law subjects will soon be available for
2020 Bar Exams. For orders visit FB Page: Law Reviewers, Books and Bookstand for Sale/OR TEXT 09325293595
MERCANTILE LAW

ALL RIGHTS RESERVED
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MERCANTILE LAW

AVAILABLE TRAINING MATERIALS
For those who failed more than twice in the bar, I suggest you read BAR LAW FOR DUMMIES
(BLD2020) Training Materials on how to answer bar questions and spot the issue. I used Civil Law
subjects to come up with the materials to “re-wire” the brain of the examinees, because it is the
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foundation of all other bar subjects. BLD 2020 is also recommended for freshman students. Each BLD
training materials is complete with jurisprudence, 20 years of bar questions and answers and
annotation.
BAR LAW FOR DUMMIES (BLD 2020)
1. PERSONS AND FAMILY RELATIONS
2. PROPERTY
3. SUCCESSION
4. OBLIGATION AND CONTRACTS
5. SPECAIL CONTRACTS
TOPICAL BAR QUESTIONS AND ANSWERS
1. POLITICAL LAW
2. LABOR LAW
3. CIVIL LAW
4. TAXATION LAW
5. CRIMINAL LAW
6. COMMERCIAL/MERCANTILE LAW
7. REMEDIAL LAW
8. LEGAL ETHICS
FORTHCOMING MATERIALS
1. TOP 20 MOST ASKED QUESTIONS AND 20 MOST DIFFICULT QUESTIONS OF LAW FOR
EACH BAW LAW SUBJECT TO BE RELEASED ON OR BEFORE MARCH 2021.
2. VBLOG DISCUSSING THE 20 MOST DIFFICULT QUESTIONS OF LAW
MERCANTILE LAW

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MERCANTILE LAW

HOW TO ANSWER BAR QUESTIONS
Oftentimes, examinees, who have studied enough for the bar, answer lengthly, mga dalawang pages, tapos puro bura, one
to two pages are all erased. It happened to me on the first day, fortunately, i passed that first two subjects. Mababa nga lang yung grade.
So, how to answer bar questions in a precise and concise way.
Use the ALAC pattern. Eventually, pag sanay na sanay na sanay na kayong mag answer in this format, you will develop a Page | 5
more coherent way. So, start muna tayo sa basic.
A – your direct Answer

L – state the Legal basis or bases
A – Apply the law to the pertinent facts of the case
C – Conclude
A – your direct Answer
Its either Yes, No or very seldom yung “Assuming”, Walang “It depends”. Sa mga BQA books maraming answer sila na nag-
start sa “it depends”. Well, sila yun. They intend to lecture and give you a wide range of information kaya they lecture which is good. But
answering for bar questions is very different. Dapat first sentence pa lang tama na agad ang answer. With all 8,000 booklets to check,
the examiner would just glance at the first sentence, if tama ang answer, he would just look for the legal basis, then ok na. You would
get Five (5) points. So dapat maigsi lang, at the first two sentences pa lang nadun na yung correct answer at legal basis dahil most likely
yan na lang yung babasahin ng exminer.
Pwede rin naman na hindi “yes or no” ang first word na gamitin mo. You can write a positive or negative statement like “ The
RTC’s decision to annul the marriage is not proper”. That is a negative statement. “The RTC is correct”. That is a positive statement.
If you want to be more emphatic, you can answer like this “Yes, the RTC is correct to annul the marriage” or “No, the RTC is
not correct”.
L – state the Legal basis or bases
Here, you may start with the phrase “In Article 101 of the Revised Penal Code”, “In one of the decisions of the Supreme Court”,
“In the annals of decision”, According to the Family Code”, “According to Section 10, Rule 100 of the Rules of Court”. Etc. Ayan, ganyan.
You are now justifying your answer. Do you have state the whole law, provision or case number? Wag na. You know why? Alam na ng
examiner ang batas, you don’t have to state every detail. Just state the “magic words”. Yung mga importante lang to justify your direct
Answer. That is my general suggestion. Pero, if you are 100% sure of the case number, section or law, sige ilagay mo. The problem with
that is paano if the examiner had different jurisrudence or law in mind. Di ba maraming jurisprudence na iisa lang naman ang basis? So,
I suggest wag na lang. Bawas points din yan.
Yung mga nag-fail sa bar, ang lagi nilang tanong ay “Paano ako bumagsak. Eh sure naman ako sa answer ko”. Yes, you are sure sa
direct Answer but what about your legal basis. Ayan, ito na yung crux of contention.
I talked to one passer of the 2005bar. That time sina-sauli pa ng SC ang mga answer booklet pero ngayon hindi na. So, the
exminers ay talagang mapipilitang basahin lahat ng full answers. Kasi pwedeng mag compare ang mga examinees ng results, and
contest if may lapses ang examiner in checking the answers. Ngayon hindi na, and your guess is as good as mine why?
The guy came from “#notsunga” law school. He was so confident with his answers and even thought to top the bar hahahahah
dyarannnn! 75%! Mali ang checking nito. So he aksed for the booklet and checked. Binasa niya ulit yung mga answers niya hahahah
sabi niya ... Hahahah mali nga ako.
Akala niya lang tama, pero mali. So yung mga challengers natin, if you happen to get your booklet, baka ganyan nga. Tama
yung direct answer pero mali yung legal basis.
Because A and L are the most important part of your answer, let us have an actual bar questions and answer. This time,
maging emphatic muna tayo and we state the whole law para mabasa ninyo as part of your review.
MERCANTILE LAW

2018 BAR No. 1, Remedial Law
Danielle, a Filipino citizen and permanent resident of Milan, Italy, filed with the Regional Trial Court (RTC) of Davao City, where she owns
a rest house, a complaint for ejectment against Dan, a resident of Barangay Daliao, Davao City. Danielle's property, which is located in
Digos City, Davao del Sur, has an assessed value of PhP25,000. Appended to the complaint was Danielle's certification on non-forum
shopping executed in Davao City duly notarized by Atty. Dane Danoza, a notary public.
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(a) Was there a need to refer the case to the Lupong Tagapamayapa for prior barangay conciliation before the court can take cognizance
of the case? (2.5%)
Paano mo ito babasahin? Read first the question. Why? Para alam mo na what to look for from the facts of he case. Para may automatic
elimination ng mga unnecessary words at magfofocus ka na agad sa issue. Yan, that is how to spot the issue. So basahin ang question.
Anong papasok sa kukote mo as you read the question? Local government code, rules on conciliation before Lupon
Tagapayapa, cases and the exception to the rule, di ba? So, ayan...eh di naka-focus ka na agad sa issue.
LCG, Section 408, paragraph F.
The lupon of each barangay shall have authority to bring together the parties actually residing in the same city or municipality for amicable
settlement of all disputes, except:
[f] disputes involving parties who actually reside in barangays of different cities or municipalities, except where such barangay units adjoin
each other and the parties thereto agree to submit their differences to amicable settlement by an appropriate lupon.
Then, basahin mo na yung question and eliminate the non-pertinent facts.
Danielle, a Filipino citizen and permanent resident of Milan, Italy, filed with the Regional Trial Court (RTC) of Davao City, where she owns
a rest house, a complaint for ejectment against Dan, a resident of Barangay Daliao, Davao City. Danielle's property, which is located in
Digos City, Davao del Sur, has an assessed value of PhP25,000. Appended to the complaint was Danielle's certification on non-forum
shopping executed in Davao City duly notarized by Atty. Dane Danoza, a notary public.
After mental elimination, the question would only be like this.
Danielle, a resident of Milan, Italy, owns a resthouse in Digos City, filed an ejectment case against Dan, a resident of baranggay Daliao,
Davao City.
So, Danielle and Dan are not residents of one barangay unit nor their barangays are adjoined.
The direct answer therefor is NO. Let us be emphatic muna for reading purposes. The answer could be any of the following.
[1] No, there was no need to refer the case to the Lupong Tagapamyapa for prior barangay conciliation before the court can take
cognizance of the case. According to Section 408, paragraph F, of the 1991 Local Government Code, the lupon of each barangay shall
have authority to bring together the parties actually residing in the same city or municipality for amicable settlement of all disputes, except:
[f] disputes involving parties who actually reside in barangays of different cities or municipalities, except where such barangay units adjoin
each other and the parties thereto agree to submit their differences to amicable settlement by an appropriate lupon.
[2] No, there is no need to refer the case to the Lupon Tagapamayapa for prior barangay conciliation. According to the 1991
Local Gocernment Code, disputes involving parties who actually resides in barangays of different cities or municipalities except where
such barangay units adjoin each other and the parties thereto agree to submit their differences to amicable settlement by an appropriate
lupon, are exempted from the pre-condition requirement of conciliation before filing of complaint in court.
[3] No. Disputes involving parties who reside in different barangay units located in different cities or municipalites except when
the barangay units are adjoined and the parties agreed thereto to submit their differences for conciliation to an appropriate lupon are
exempted from the pre-conciliatory condition before filing of complaint to court.
MERCANTILE LAW

O, IKAW NAMAN. Get a pice of paper. Write your empatic answer using number 1. Then, sanayin mo ng sanayin ang iyong sarili na
mapaigsi ang answer without leaving the pertinent or magic words. Ypu can use the blank portion provided for your aswers.
[1]
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[2]
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Mas mahusay if you answer as a class or group then compare kayo ng answers kasi may mag students talaga na mahusay sa language.
Remember hanggang A and L muna tayo ng ALAC. Dont anwer the A and C portion.
So, get as many bar questions you can get, open your codals at magsanay ng magsanay ng sumagot sa A and L. Practice
makes perfect.
Practice, practice, practice. Stop muna, at mag practice.

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Now that you have perfected how to the A and L, lets go to A (the second A of ALAC).
A – apply the law to the pertinent facts.
Pertinent facts means facts in the question relevant to the legal basis. So sa question above, ang mga pertinente lang yung
actual residence ni Danille and Dan.
Danielle lives is Milan while Dan lives in Daliao, Davao City. Obviously, the dispute between the parties are one of the
exceptions.
So the answer for the A portion would be like this.
MERCANTILE LAW

HERE, Danielle is a permanent resident of Milan, Italy while Dan resides in Daliao, Davao City. They actually reside in different baranggay
units of different cities or municipalities and neither the units are adjoined.
IN THE CASE AT BAR, Danielle is a permanent resident of Milan, Italy while Dan resides in Daliao, Davao City. They actually reside in
different baranggay units of different cities or municipalities and neither the units are adjoined.
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You may use phrases and words such as HERE, IN THE CASE AT BAR, o kahit wala na kung snay na sanay ka na.
Danielle is a permanent resident of Milan, Italy while Dan resides in Daliao, Davao City. They actually reside in different
baranggay units of different cities or municipalities and neither the units are adjoined.
Ok let us combine ALA.
No. Disputes involving parties who reside in different barangay units located in different cities or municipalites except when the barangay
units are adjoined and the parties agreed thereto to submit their differences for conciliation to an appropriate lupon are exempted from
the pre-conciliatory condition before filing of complaint to court.
HERE, Danielle is a permanent resident of Milan, Italy while Dan resides in Daliao, Davao City. They actually reside in different baranggay
units of different cities or municipalities and neither the units are adjoined.
C – conclusion
Sa C portion, for emphasis na lang ito.
HENCE, the dispute can be filed directly in court.
Totoo, dapat ganyan lang kaigsi. Kasi dadaanan lang yan ng mata ng examiner. Ang importante ay yung A (direct answer) at
L (legal basis). Yung second A and C, dadaanan lang yan ng mata ng examiner kung tama na yung A and L.
So, ang ating final answer ay....
No. Disputes involving parties who reside in different barangay units located in different cities or municipalites except when
the barangay units are adjoined and the parties agreed thereto to submit their differences for conciliation to an appropriate
lupon are exempted from the pre-conciliatory condition before filing of complaint to court.
HERE, Danielle is a permanent resident of Milan, Italy, while Dan resides in Daliao, Davao City. They actually reside in different
baranggay units of different cities or municipalities and neither the units are adjoined. HENCE, the dispute can be filed directly
in court.
Compare our answer sa suggested answer of UPLC.
SUGGESTED ANSWER:
(a) No. Since Danielle is not an actual resident of Barangay Daliao, or a barangay adjacent thereto, this case is not subject to the
Katarungang Pambarangay Law; hence, prior referral to the Lupong Tagapamayapa is not a pre-condition to the filing of this
case in court (Pascual v. Pascual, G.R. No. 157830, 17 November 2005).
Di ba mas matututo ka sana if the legal basis is stated in the aswer. Pero hindi na dapat ilagay ng UPLC yun. It is for us to look for the
legal basis . Hahanapin na lang natin yung batas sa codals. Also, sa BQA Books the questions are not arranged per topic, tatatalon-
talon kayo ng topic. Mawawalan kayo ng coherence. In civil law, the first question is about annulment, then the next is about subrogation
hahahah eh di sabaw na ulit. Kasi Family code pa lang pinag-aaralan mo.
The good thing about UPLC, PALS, and other QA Books, mahahaba yung answer nila kasi they intend to teach or lecture. So maraming
information you can get from their sugested answers.
MERCANTILE LAW

To help examinees to have a coherent preparation for the bar, I prepared BQA arranged per topic and sequenced by year. Some
suggested answers are retained kasi naka lecture type. Napaka-laking tulong for you. Some are rephrased to suit the ALAC format.
For those who have stopped for a long time and wanted to take the bar or for those who have a poor foundation, I prepared bar law for
dummies Civil Law subjects (BLDs from book 1 to 5). Mas appropriate ito sa inyo. Basahin ninyo yung BLDs because it intends to re-
wire your brain on how to study law, spot the issue and answer bar questions.
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The training that you will get from BLD book 1 to 5, can also help you how to read other bar law subjects. Pinababaw ko ang discussion
to the level of k-12 para mas mahusay ninyong maintindihan. Start with Book1 Family Code hanggang book 5. So 5 training materials
yan, P600 each. Not expensive if you compare the cost sa mga training centers. Actually this lecture on how to answer bar questions
would cost you P2,000 per hour in some review centers, pero sa atin free lang yan. Bukod pa ang bayad sa individual coach.
There is no problem with undergoing review centers, but seld-study is more encouraged. Mahirap ang buhay ngayon. This pandemic
would not get away and even if it does, the economy would not be the same the way it was not after three to five years. So, study smart
and spend less. The best assurance to pass the bar is self-study and attend free webinars and video lectures. Marami yan sa net. You
dont have spend much.
One more, mag-aral kayo how to manipulate computers and internet. No matter how good you are, if you cannot transfer your knowledge
or skills via internet...sabaw ka. One corporation prof (mga 60 years old na siya) said “ I dont know how to that (video lecture via zoom)”.
See, pag hindi siya natuto, he could be replaced by another techie prof.
Nanood ako one time ng webinar on law and video lecture, puro mukha lang nakikta ko hahaha nakakasawa. Law profs should also get
education earning units para matuto ng art of teaching. Iba kasi ang art of teaching. Teachers prepare and use instructional materials at
hindi pwede puro boses lang. Nakakapagod tumitig ng tumitig sa face ng lecturer. They should learn how to use the environment as
instructional materials.
Kaya wait for my vlog. Sa kitchen ako mag lelecture. We will teach legitime using cakes, spoon and fork for annulment, refrigerator for
intestate9 and testate succession, washing the dishes for obligation and actual contracts for contracts. Hahahaha...
Let us support each other. My clients can text me or message me anytime. Mas marami yung mga hindi ko clients na nanghihingi ng
advice kaya ang sagot ko lagi ay read BLD kasi nadoon n lahat ang issasagot ko sa inyo. May free naman na mga 50 pages ng training
so, you can download them. If you want the whole, just message me at FB Page Law Reviewers, Books and Bookstand and you can
enjoy my free advice until you take the bar2021.
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MERCANTILE LAW

TABLE OF CONTENTS
GENERAL PRINCIPLES OF MERCANTILE LAW…10
ELECTRONIC COMMERCE ACT…11
DATA PRIVACY ACT…13
INSURANCE…14
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GENERAL PRINCIPLES…14
PAYMENT OF PREMIUM…14
INSURABLE INTERESTS…17
ASSIGNMENT OF POLICY…20
PERFECTION OF THE CONTRACT…21
PRESCRIPTION OF CLAIMS…21
MARITIME INSURANCE…22
LIFE INSURANCE ….24
PROPERTY INSURANCE…33
COMPULSORY VEHICLE LIABILITY INSURANCE…38
GROUP INSURANCE…41
NEGOTIABLE INSTRUMENTS…42
NEGOTIABILITY…44
DEFENSES…50
CHECKS…57
DEFENSES…65
FINANCIAL REHABILITATION AND INSOLVENCY ACT…71
SECURITY REGULATION CODE…77
CORPORATION CODE…88
INTRA-CORPORATE CONTROVERSY…106
PIERCING THE VEIL…109
BOD …115
DIVIDENDS…123
SHARES OF STOCKS…126
RIGHTS OF THE STOCKHOLDERS..131
CLOSE CORPORATIONS…139
CORPORATION SOLE…141
SEC…141
ULTRA-VIRES ACTS…141
ANTI-MONEY LAUNDERING ACTS…142
BANKING LAWS…146
SECRECY OF PESO DEPOSITS…147
FOREIGN CURRENCY DEPOSIT…154
BULK SALES LAW…166
INTELLECTUAL PROPERTY LAW…170
COPYRIGHT…172
TRADEMARK…179
PATENT…185
MARITIME COMMERCE…190
WAREHOUSE RECEIPT LAW…202
TRANSPORTATION LAW….206
TRUST RECEIPT LAW…218
LETTER OF CREDIT…221
PUBLIC UTILITIES…228
MERCANTILE LAW

RETAIL TRADE LAW…229
CONSUMER PROTECTION LAW…232
PUBLIC SERVICE LAW…233
OTHER SPECIAL LAWS…236
2019 SUGGESTED ANSWER…238

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MERCANTILE LAW

GENERAL PRINCIPLES OF MERCANTILE LAW
ENGAGING IN COMMERCIAL TRANSACTION
(2009) Cecilio is planning to put up a grocery store in the subdivision where he and his family reside. To promote this proposed business
venture, he told his wife and three children to send out promotional text messages to all the residents in the subdivision. Cecilio’s family
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members did as instructed, and succeeded in reaching, through text messages, more than 80% of the residents in the subdivision.
Is Cecilio habitually engaged in commerce even if the grocery store has yet to be established? Explain your answer. (3%)
Yes. Even if the grocery store has yet to be established, Cecilio already habitually engaged in commerce, when per his instruction the
members of his family contacted more than 80% the residents of the subdivision where they reside. According to Article 3 of the Code of
Commerce, “legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage
therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever an
establishment which has for its object some commercial operation. Text messages may qualify to be equivalent to electronic
documents.
(2003) What do you understand by the term “commercial transaction”? Is it essential that at least one party to a contract be a merchant
in order to consider such a commercial transaction? (4%)
A “Commercial transaction” is defined as ...... It is not essential that at least one party to the commercial transaction be a merchant. What
is essential is that the transaction evince an intent to engage in commerce or trade.
(1997) The Civil Code adopts the theory of cognition, while the Code of Commerce generally recognizes the theory of manifestation, in
the perfection of contracts. How do these two theories differ?
Under the theory of cognition, the acceptance is considered to effectively bind the offeror only from the time it came to his knowledge.
Under the theory of manifestation, the contract is perfected at the moment when the acceptance is declared or made by the offeree.
JOINT ACCOUNT (2000)

What is a joint account? (2%)
A joint account is a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon, and
participating in the favorable or unfavorable results thereof in the proportion they may determine.
JOINT ACCOUNT VS. PARTNERSHIP

(2000) Distinguish joint account from partnership. (3%)
The following are the distinctions between joint account and partnership:
(1) A partnership has a firm name while a joint account has none and is conducted in the name of the ostensible partner.
(2) While a partnership has juridical personality and may sue or be sued under its firm name, a joint account has no juridical
personality and can sue or be sued only in the name of the ostensible partner.
(3) While a partnership has a common fund, a joint account has none.
(4) While in a partnership, all general partners have the right of management, in a joint account, the ostensible partner manages
its business operations.
(5) While liquidations of a partnership may, by agreement, be entrusted to a partner or partners, in a joint account liquidation
thereof can only be done by the ostensible partner.
MERCANTILE LAW

ELECTRONIC COMMERCE ACT
(2019) A.7. Ms. J offered to sell her car to Ms. K, an interested buyer. Consequently, Ms. J emailed Ms. K a copy of the proposed Deed
of Sale covering the same. After agreeing to its terms, Ms. K printed and then signed the emailed copy of the Deed of Sale. She then
faxed it to Ms. J who signed the faxed copy.
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Is the copy of the Deed of Sale faxed by Ms. K to Ms. J considered an electronic document under the Electronic Commerce Act? Explain.
(2%)
NO. Facsimile transmittal is not considered an electronic document under E-Commerce Act. “Electronic document” refers to information
or the representation of information, data, figures, symbols or other modes of written expression, described or however represented, by
which a right is established or an obligation extinguished, or by which a fact may be proved and affirmed, which is received, recorded,
transmitted, stored, processed, retrieved or produced electronically. (R.A. No. 8792)
Therefore, it is not within the scope as the subject document in a fax machine cannot be stored, processed, retrieved or produced
electronically after being received or transmitted.
(2018) Yvan was a slot machine operator supervisor in a casino operated by the Philippine Amusement and Gaming Corporation
(PAGCOR). On the basis of an intelligence report, he was found, in connivance with some slot machine customers, to have padded the
credit meter readings of slot machines in the casino where he was employed. After being served with notice and opportunity to contest
the findings, he was found guilty of the charges and ordered dismissed by PAGCOR. After receiving his copy of the order for dismissal,
he claimed to have sent to the Board of PAGCOR his motion for reconsideration through facsimile transmission. After a considerable
time, when his motion for reconsideration was unacted upon, he filed an action with the Civil Service Commission (CSC) for illegal
dismissal. PAGCOR claimed that his action has prescribed because it was filed more than 15 days after his dismissal became final. Yvan
claimed that there was no final decision yet because the Board of PAGCOR has not yet acted on his motion for reconsideration. He
presented a copy of his facsimile transmission addressed to the Board of PAGCOR seeking reconsideration of his dismissal, and the fact
that there has been no action taken. He claimed that based on the Electronic Commerce Act of 2000, his facsimile transmission should
be considered like any genuine and authentic paper pleading. PAGCOR denied having received it and was able to prove that the
telephone number of PAGCOR used in the facsimile transmission was wrong. CSC denied his complaint on account of prescription. He
appealed CSC's dismissal in court.
(a) Was CSC correct in dismissing the case? (2.5%)
CSC is correct in dismissing the case. The E-commerce law does not cover or allow e-filing or facsimile transmission as a mode of filing
of pleadings in administrative cases. Torres vs PAGCOR, GR 193531, December 6, 2011
(b) Can Yvan's bank be ordered by the court to disclose if there were unreasonable increases in his bank deposit when the alleged acts
were committed? (2.5%)
No, Yvan’s bank cannot be ordered by the court to disclose if there were unreasonable increases in his bank deposit when the alleged
acts were committed. The inquiry into bank deposits allowable under RA 1405 must be premised on the fact that the money deposited
in the account is itself the subject of the action. Otherwise, the inquiry will amount to an impermissible encroachment into one’s right to
privacy. (BSB Group vs Go, GR No. 168644, February 16, 2010)
(2007) Name at least five predicate crimes to money laundering. (5%)
Any five of the following are predicate crimes to money laundering:

1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;
2. Sections 3,4,5,7,8 and 9 of Article Two of Republic Act No. 6425, as amended, otherwise known as the Dangerous Drugs Act of
1972;
MERCANTILE LAW

3. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended; otherwise known as the Anti-graft and Corrupt
Practices Act;
3. Plunder under Republic Act No. 7080, as amended;
4. Robbery and extortion under Articles 294,295,296,299,300,301 and 302 of the Revised Penal Code, as amended;
Page | 14
5. Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code, as amended; (9) Swindling under Article 315 of the Revised Penal Code,
as amended.
9. Swindling under 315 of the Revised Penal code, as amended;
10. Smuggling under Republic Act Nos. 455 and 1937 Violations under Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000
11. Hijacking and other violations under Republic Act No 6235; destructive arson and murder, as defined under the Revised Penal Code,
as amended, including those perpetrated by terrorist against non-combatant persons and similar targets;
12. Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the securities Regulation Code of 2000
13. Felonies or offenses of a similar nature those are punishable under the penal laws of other countries. (Sec 3, Anti-Money Laundering
Act of 2001).
(2009) Cecilio is planning to put up a grocery store in the subdivision where he and his family reside. To promote this proposed business
venture, he told his wife and three children to send out promotional text messages to all the residents in the subdivision. Cecilio’s family
members did as instructed, and succeeded in reaching, through text messages, more than 80% of the residents in the subdivision.
Is Cecilio habitually engaged in commerce even if the grocery store has yet to be established? Explain your answer. (3%)
Yes. Even if the grocery store has yet to be established, Cecilio already habitually engaged in commerce, when per his instruction the
members of his family contacted more than 80% the residents of the subdivision where they reside. According to Article 3 of the Code of
Commerce, “legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage
therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever an
establishment which has for its object some commercial operation. Text messages may qualify to be equivalent to electronic
documents.
MERCANTILE LAW

DATA PRIVACY ACT
(2019) B.3. Enumerate at least two (2) rights of a data subject under the Data Privacy Act. (2%)
The data subject has the right to: (1) be informed whether personal information pertaining to him or her shall be, are being or have been
processed; and (2) suspend, withdraw or order the blocking, removal or destruction of his or her personal information from the personal Page | 15
information controller’s filing system upon discovery and substantial proof that the personal information are incomplete, outdated, false,
unlawfully obtained, used for unauthorized purposes or are no longer necessary for the purposes for which they were collected.
( I EXPECT A QUESTION ABOUT THE NATIONAL ID SYSTEM FOR 2021 BAR)
MERCANTILE LAW

INSURANCE
GENERAL PRINCIPLES
Insurance; Co-Insurance vs. Re-Insurance
Page | 16
(1994) Distinguish co-insurance from re-insurance.
CO-INSURANCE is the percentage in the value of the insured property which the insured himself assumes or undertakes to act as insurer
to the extent of the deficiency in the insurance of the insured property. In case of loss or damage, the insurer will be liable only for such
proportion of the loss or damage as the amount of insurance bears to the designated percentage of the full value of the property insured.
REINSURANCE is where the insurer procures a third party, called the reinsurer, to insure him against liability by reason of such original
insurance. Basically, a reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured.
PAYMENT OF PREMIUM
(2015) (B) Will an insurance policy be binding even if the premium is unpaid? What if it were partially paid? (3%)
(B) As a general rule, the insurance policy is not valid and binding, unless the premium thereof has been paid. This is the cash-and-carry
rule under the Insurance Code. Premium is the consideration for the undertaking of the insurer to indemnify the insured against a specified
peril. There are exceptions, however, one of them is, when there is an agreement allowing the insured to pay the premium in – installments
and partial payment has been made at the time of the loss (Makati Tuscany Condominium Corporation v. Court of Appeals, G.R. No.
95546, November 6, 1992, 215 SCRA 463).
(2014) On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a face value of P5,000,000.00 from RN
Insurance Company (RN), with his wife Tina Marcial(Tina) as sole beneficiary. On the same day, Danny issued an undated check to RN
for the full amount of the premium. On October 1, 2013, RN issued the policy covering Danny’s life insurance. On October 5, 2013, Danny
met a tragic accident and died. Tina claimed the insurance benefit, but RN was quick to deny the claim because at the time of Danny’s
death, the check was not yet encashed and therefore the premium remained unpaid.
Is RN correct? (4%)
No, RN Insurance is wrong. The case at bar shows that Danny procured insurance on his life on September 25, 2013, with his wife Tina
as beneficiary, and that on the same day of September 25, 2013, he issued an undated check to RN for the full amount of the premium.
Since the undated check was issued to RN on September 25, 2013, it will be considered dated as of the same day pursuant to Section
17(c) of the Negotiable Instruments Law. The facts also show that RN Insurance issued the policy on Danny’s life on October 1, 2013
and that Danny died in an accident on October 5, 2013.
Addendum to the answer. Not necessarily should be included in the answer. Sarap ng answer ng UPLC kasi nag-lelecture sila.
RN Insurance denied that claim of Tina because at the time of Danny’s death, the check was not yet encashed and, therefore, the
premium remained unpaid. Presumably, RN Insurance is relying on the second paragraph of Article 1249 of the Civil Code which states
that the “delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.”
Whose fault was it that the check was not encashed? Certainly not Danny or Tina. RN Insurance had the check as early as September
25, 2013 and could have encashed the check before the death of Danny on October 5, 2013. The problem did not indicate that there was
any problem with the check, e.g. that it was not adequately funded. RN Insurance was at fault and Tina should not be denied the proceeds
of the policy.
MERCANTILE LAW

(See the case of Malayan Insurance Co., Inc. vs Arnaldo (1987), where the Court held that the insurer could no longer claim forfeiture of
the insured’s right because it held the check used to pay the premium on a fire insurance policy for an unreasonable time; see also the
comments of Justice Jose C. Vitug (ret.) in his book, Commercial Laws and Jurisprudence, 2006 Vol 1., p. 250, that “payment x x x by
means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming an availability of funds thereof, would be
sufficient even if it remains uncashed at the time of the loss. The subsequent effects of encashment (or impairment by the fault of the
creditor) or of legal compensation under Articles 1278-1279, in relation to Article 1249 of the Civil Code, would retroact to the date of the
Page | 17
mercantile instrument and its acceptance by the creditor.” (IMPORTANTE ITO. SAULUHIN)
Will your answer be the same if the check is dated October 15, 2013?
My answer would not be the same if the check were dated October 15, 2013. This answer assumes that Danny was the one who dated
the check and, therefore what he issued was a postdated check. The payment of a promissory note or a postdated check at a stated
maturity subsequent to the loss, assuming that there was no estoppel (e.g. written acknowledgment of the receipt of premium), is
insufficient to put the insurance into effect. (Vitug, Commercial Laws and Jurisprudence, 2006, Vol 1 p 250)
If it were RN Insurance who dated the check October 15, 2013, then my answer would be the same as my answer to the first question.
This is my observation. Since RN has already issued a policy in spite of the post-dated check. The presumption is that the
insurance was bought in credit. Hence, the insurance policy is effective on the day it was issued.
(2013) No.VII. Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a long-standing insurance relationship with
each other; SPMC secures the comprehensive fire insurance on its plant and facilities from SIC. The standing business practice between
them has been to allow SPMC a credit period of 90 days from the renewal of the policy with which to pay the premium.
Soon after the new policy was issued and before premium payments could be made, a fire gutted the covered plant and facilities to the
ground. The day after the fire, SPMC issued a manager’s check to SIC for the fire insurance premium, for which it was issued a receipt;
a week later SPMC issued its notice of loss.
SIC responded by issuing its own manager’s check for the amount of the premiums SPMC had paid, and denied SPMC’s claim on
the ground that under the cash and carry principle governing fire insurance, no coverage existed at the time the fire occurred because
the insurance premium had not been paid.
Is SPMC entitled to recover for the loss form SIC? (8%)
St. Peter Manufacturing Company is entitled to recover for the loss from stable Insurance Company. Stable Insurance Company granted
a credit term to pay the premiums. This is not against the law, because the standing business practice of allowing St. Peter Manufacturing
Company to pay the premiums after 60 or 90 days, was relied upon in good faith by SPMC. Stable Insurance Company is in estoppels
(UCPB General Insurance Company, Inc. v. Masagana Telemart, Inc. 356 SCRA 307, 2001).
(2006) The Peninsula Insurance Company offered to insure Francis' brand new car against all risks in the sum of PI Million for 1 year.
The policy was issued with the premium fixed at 160,000.00 payable in 6 months. Francis only paid the first two months installments.
Despite demands, he failed to pay the subsequent installments. Five months after the issuance of the policy, the vehicle was carnapped.
Francis filed with the insurance company a claim for its value. However, the company denied his claim on the ground that he failed to
pay the premium resulting in the cancellation of the policy.
Can Francis recover from the Peninsula Insurance Company? (5%)
Yes, when insured and insurer have agreed to the payment of premium by installments and partial payment has been made at the time
of loss, then the insurer becomes liable. When the car loss happened on the 5th month, the six months agreed period of payment had
MERCANTILE LAW

not yet elapsed (UCPB General Insurance v. Masagana Telamart, G.R. No. 137172, April 4, 2001). Francis can recover from Peninsula
Insurance Company, but the latter has the right to deduct the amount of unpaid premium from the insurance proceeds.
(2010) No.XI. Enrique obtained from Seguro Insurance Company a comprehensive motor vehicle insurance to cover his top of the line
Aston martin. The policy was issued on March 31, 2010 and, on even date, Enrique paid the premium with a personal check postdated
April 6, 2010. On April 5, 2010, the car was involved in an accident that resulted in its total loss. Page | 18
On April 10, 2010, the drawee bank returned Enrique’s check with the notation ―Insufficiency of funds. Upon notification,
Enrique immediately deposited additional funds with the bank and asked the insurer to redeposit the check.
Enrique thereupon claimed indemnity from the insurer. Is the insurer liable under the insurance coverage? Why or why not?
The insurer is not liable under the insurance policy. Under Article 1249 of the Civil Code, the delivery of a check produces the effect of
payment only when it is encashed. The loss occurred on April 5, 2010. When the check was deposited, it was returned on April 10, 2010,
for insufficiency of funds. The check was honored only after Enrique deposited additional funds with the bank. Hence, it did not produce
the effect of payment (Vitug, Commercial Laws and Jurisprudence, Vol. I, p.250).
ALTERNATIVE ANSWER:
Yes. The insurer is liable. The insurance policy was issued. In effect, there was a grant of credit for the payment of the premium. The
insurer can deduct the amount of the check from the proceeds of the insurance.
(2007) No.IV. Alfredo took out a policy to insure this commercial building fire. The broker for the insurance company agreed to give a 15-
day credit within which pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo issued a postdated check
payable on May 30, 2006. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo. May Alfredo recover on the
insurance policy?
Yes, Alfredo may recover on the policy. It is valid to stipulate that the insured will be granted credit term for payment of premium. Payment
by means of a check which was accepted by the insurer, bearing a date prior to the loss, would be sufficient. The subsequent effects of
encashment retroact to the date of the check (UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc., 356 SCRA 307 [2001]).
Would your answer in (a) be the same if it was found that the proximate cause of the fire was an explosion and that fire was but the
immediate cause of loss and there is no excepted peril under the policy?
Yes, recovery under the insurance contract is allowed if the cause of the loss was either the proximate or the immediate cause as long
as an excepted peril, if any was not the proximate cause of the loss (Section 86, Insurance Code of the Philippines).
If the fire was found to have been caused by Alfredo’s own negligence, can he still recover on the policy?
Yes, mere negligence on the part of the insured will not prevent recovery under the insurance policy. The law merely prevents recovery
when the cause of loss is the willful act of the insured, alone or in connivance with others (Section 87, Insurance Code of the Philippines).
(2000) Name at least three instances when an insured is entitled to a return of the premium paid.
Three instances when an insured is entitled to a return of premium paid are:
1. To the WHOLE PREMIUM, if no part of his interest in the thing insured be exposed to any of the perils insured against.
2. Where the insurance is made for a definite period of time and the insured surrenders his policy, to such portion of the premium
as corresponds with the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of
the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued.
3. When the contract is voidable on account of the fraud or misrepresentation of the insurer or of his agent or on account of facts
the existence of which the insured was ignorant without his fault; or when, by any default of the insured other than actual fraud, the insurer
never incurred any liability under the policy.
MERCANTILE LAW

ALTERNATIVE INSTANCE:
In case of an over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by
which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.
INSURABLE INTERESTS
Page | 19
(2019) (c) Insurable interest in property (2%)
Sec. 14 of the Insurance Code provides that an insurable interest in property may consist in (a) an existing interest; (b) an inchoate
interest founded on an existing interest; (c) an expectancy, coupled with an interest out of which the expectancy arises. Furthermore,
such an insurable interest in property must exist when the insurance takes effect, and when the loss occurs, but need not exist in the
meantime.
(2018) Shortly after Yin and Yang were wed, they each took out separate life insurance policies on their lives, and mutually designated
one another as sole beneficiary. Both life insurance policies provided for a double indemnity clause, the cost for which was added to the
premium rate. During the last 10 years of their marriage, the spouses had faithfully paid for the annual premiums over the life policies
from both their salaries. Unfortunately, Yin fell in love with his officemate, Vessel, and they carried on an affair. After two years, their
relationship bore them a daughter named Vinsel. Without the knowledge of Yang, Yin changed the designation of the beneficiary to an
"irrevocable designation" of Vinsel and Vessel jointly. When Yang learned of the affair, she was so despondent that, having chanced
upon Yin and Vessel on a date, she rammed them down with the car she was driving, resulting in Vin's death and Vessel's complete loss
of mobilization. Yang was sued for parricide, and while the case was pending, she filed a claim on the proceeds of the life insurance of
Yin as irrevocable beneficiary, or at least his legal heir, and opposed the claims on behalf of Vessel and her daughter Vinsel. Yang
claimed that her designation as beneficiary in Vin's life insurance policy was irrevocable, in the nature of one "coupled with interest,"
since it was made in accordance with their mutual agreement to designate one another as sole beneficiary in their respective life policies.
She also claimed that the beneficiary designation of Vessel and the illegitimate minor child Vinsel was void being the product of an illicit
relationship, and therefore without "insurable interest."
(a) Is Yang correct in saying that her designation as beneficiary was irrevocable? (2.5%)
A. Yang is not correct. The insured shall have the right to change the beneficiary he designated in the policy unless he has expressly
waived this right in the policy. There is nothing in the life insurance policy taken by Yang which indicated that the designation of Ying is
irrevocable. As such, it is deemed to be revocable.
(b) Do Vessel and Vinsel have "insurable interest" on the life of Yin? (2.5%)
Vessel has no insurable interest on the life of Yin because she cannot be lawfully designated as beneficiary. Persons who are proscribed
to become donees under the rules on donation cannot be designated as beneficiary in life insurance. These include persons in illicit
relations as in the case of Yin and Veseel. Vinsel, however, has insurable interest on the life of Yin. There is no proscription in naming
an illegitimate child as a beneficiary. Heirs of Loreta Maramag vs Maramag, GR No. 181132, June 5, 2009
(2017) The newly restored Ford Mustang muscle car was just released from the car restoration shop to its owner, Seth, an avid
sportsman. Given his passion for sailing, he needed to go to a round-the-world voyage with his crew on his brand-new 180-meter yacht.
Hearing about his coming voyage, Sean, his bosom friend, asked Seth if he could borrow the car for his next roadshow. Sean, who had
been in the business of holding motor shows and promotions, proposed to display the restored car of Seth in major cities of the country.
Seth agreed and lent the Ford Mustang to Sean. Seth further expressly allowed Sean to use the car even for his own purposes on special
occasions during his absence from the country. Seth and Sean then went together to Bayad Agad Insurance Co. (BAIC) to get separate
policies for the car in their respective names.
BAIC consults you as its lawyer on whether separate policies could be issued to Seth and Sean in respect of the same car.
a. What is insurable interest? (2%)
There is insurable interest in property when he derives a benefit from its existence or would suffer a loss from its destruction, termination
or injury by the happening of the event insured against it.
MERCANTILE LAW

b. Do Seth and Sean have separate insurable interests? Explain briefly your answer. (3%)
Seth and Sean have separate insurable interests. Seth’s insurable interest is his legal and/or equitable interests over the vehicle as an
owner while Sean’s insurable interest is the safety of the vehicle which may become the basis of liability in case of loss or damage to the
vehicle.
Another Answer: Page | 20

Both has insurable interest in it. Insurable interest in property consists of either an (1) existing interest, (2) an inchoate interest founded
on an existing interest, or (3) an expectancy coupled with an existing interest in that out of which the expectancy arises. Seth, being the
owner, has an existing interest. Sean has an inchoate interest founded on an existing interest. He could be held civilly liable for the value
of the car in case of loss, destruction or damage.
(2015) (A) Novette entered into a contract for the purchase of certain office supplies. The goods were shipped. While in transit, the goods
were insured by Novette. Does she have an insurable interest over the goods even before delivery of the same to her? Explain. (2%)
Yes, Novette has an insurable interest in the goods. The contract of sale was already perfected and Novette acquired interest thereon,
although the goods have yet to be delivered.
(2014) Carlo and Bianca met in the La Boracay festivities. Immediately, they fell in love with each other and got married soon after. They
have been cohabiting blissfully as husband and wife, but they did not have any offspring. As the years passed by, Carlo decided to take
out an insurance on Bianca’s life for P1,000,000.00 with him (Carlo) as sole beneficiary, given that he did not have a steady source of
income and he always depended on Bianca both emotionally and financially. During the term of the insurance, Bianca died of what
appeared to be a mysterious cause so that Carlo immediately requested for an autopsy to be conducted. It was established that Bianca
died of a natural cause. More than that, it was also established that Bianca was a transgender all along – a fact unknown to Carlo. Can
Carlo claim the insurance benefit? (5%)
Yes, Carlo can claim the insurance benefit. He had insurable interest on Bianca’s life under Section 10 (b) of the Insurance Code as the
problem states that Carlo “always depended on Bianca both emotionally and financially”. The insurable interest upon the life of another
under the aforesaid provision need not be based on kinship or legal obligation to give support. The fact that their marriage may be void
is irrelevant.
(2014) A person is said to have an insurable interest in the subject matter insured where he has a relation or connection with, or concern
in it that he will derive pecuniary benefit or advantage from its preservation. Which among the following subject matters is not considered
insurable? (1%)
(B) A general creditor on debtor’s property
BANK DEPOSIT
(2000) BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the Philippine Deposit Insurance Corp
(PDIC) (RA 3591) is only one tenth of BD’s deposit, he would like some protection for the excess by taking out an insurance against all
risks or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing
crisis involving the banking and financial sector in the Asian region. Does BD have an insurable interest within the meaning of the
Insurance Code of the Philippines (PD1460)? (2%)
Yes. BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess
of the limit covered by the PDIC Act, PBD will be damnified. He will suffer pecuniary loss of P300,000.00, that is, his bank deposit of half
a million pesos minus P200,000.00 which is the maximum amount recoverable from the PDIC.
PUBLIC ENEMY
(2000) May a member of the MILF or its breakaway group, the Abu Sayyaf, be insured with a company licensed to do business under
the Insurance Code of the Phils (PD 1460)? Explain. (3%)
MERCANTILE LAW

A member of the MILF or the Abu Sayyaf may be insured with a company licensed to do business under the Insurance Code of the
Phils. What is prohibited to be insured is a public enemy. A public enemy is a citizen or national of a country with which the Philippines
is at war. Such member of the MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines.
SEPARATE INSURABLE INTEREST Page | 21

(1999) A businessman in the grocery business obtained from First Insurance an insurance policy for P5M to fully cover his stocks-in-
trade from the risk of fire. Three months thereafter, a fire of accidental origin broke out and completely destroyed the grocery including
his stocks-in-trade. This prompted the businessman to file with First Insurance a claim for five million pesos representing the full value of
his goods.
First Insurance denied the claim because it discovered that at the time of the loss, the stocks-in-trade were mortgaged to a creditor who
likewise obtained from Second Insurance Company fire insurance coverage for the stocks at their full value of P5M.
a) May the businessman and the creditor obtain separate insurance coverages over the same stocks- in-trade? Explain (3%)
b) First Insurance refused to pay claiming that double insurance is contrary to law. Is this contention tenable? (3%)
c) Suppose you are the Judge, how much would you allow the businessman and the creditor to recover from their respective
insurers. Explain (3%)
a) Yes. The businessman, as owner, and the creditor, as mortgagee, have separate insurable interests in the same stocks-in-
trade. Each may insure such interest to protect his own separate interest.
b) The contention of First Insurance that double insurance is contrary to law is untenable. There is no law providing that double
insurance is illegal per se. Moreover, in the problem at hand, there is no double insurance because the insured with the First Insurance
is different from the insured with the Second Insurance Company. The same is true with respect to the interests insured in the two policies.
c) As Judge, I would allow the businessman to recover his total loss of P5M representing the full value of his goods which were
lost through fire. As to the creditor, I would allow him to recover the amount to the extent of or equivalent to the value of the credit he
extended to the businessman for the stocks-in-trade which were mortgaged by the businessman.
EQUITABLE INTEREST
(1991) A piece of machinery was shipped to Mr Pablo on the basis of C&F Manila. Pablo insured said machinery with the Talaga
Merchants Ins Co (Tamic) for loss or damage during the voyage. The vessel sank en route to Manila. Pablo then filed a claim with Tamic
which was denied for the reason that prior to deliver, Pablo had no insurable interest. Decide the case.
Pablo had an existing insurable interest on the piece of machinery he bought. The purchase of goods under a perfected contract of sale
already vests equitable interest on the property in favor of the buyer even while it is pending delivery (Filipino Merchants Ins Co v CA GR
85144, 28 Nov 1989)
LIFE VS. PROPERTY INSURANCE

(1997)
a) A obtains a fire insurance on his house and as a generous gesture names his neighbor as the beneficiary. If A’s house is
destroyed by fire, can B successfully claim against the policy?
b) A obtains insurance over his life and names his neighbor B the beneficiary because of A’s secret love for B. If A dies, can B
successfully claim against the policy?
a) No. In property insurance, the beneficiary must have insurable interest in the property insured. (Sec 18 Ins Code). B does not
have insurable interest in the house insured.
b) Yes. In life insurance, it is not required that the beneficiary must have insurable interest in the life of the insured. It was the
insured himself who took the policy on his own life.
MERCANTILE LAW

(2000) IS, an elderly bachelor with no known relatives, obtained life insurance coverage for P250,000.00 from Starbrite Insurance
Corporation, an entity licensed to engage in the insurable business under the Insurance Code of the Philippines (PD1460). He also
insured his residential house for twice that amount within the same corporation. He immediately assigned all his rights to the insurance
proceeds to BX, a friend-companion living with him. Three years later, IS died in a fire that gutted his insured house two days after he
had sold it. There is no evidence of suicide or arson or involvement of BX in these events. BX demanded payment of the insurance
proceeds from the two policies, the premiums for which IS had been faithfully paying during all the time he was alive. Starbrite refused
payment, contending that BX had no insurable interest and therefore was not entitled to receive the proceeds from IS’s insurance
Page | 22
coverage on his life and also on his property. Is Starbrite’s contention valid? Explain? (5%)
Starbrite is correct with respect to the insurance coverage on the property of IS. The beneficiary in the property insurance policy or the
assignee thereof must have insurable interest in the property insured. BX, a mere friend-companion of IS, has no insurable interest in
the residential house of IS. BX is not entitled to receive the proceeds from IS’s insurance on his property.
As to the insurance coverage on the life of IS, BX is entitled to receive the proceeds. There is no requirement that BX should have
insurable interest in the life of IS. It was IS himself who took the insurance on his own life.
(2002) Distinguish insurable interest in property insurance from insurable interest in life insurance. (5%)
a) In property insurance, the expectation of benefit must have a legal basis. In life insurance, the expectation of benefit to be
derived from the continued existence of a life need not have any legal basis.
b) In property insurance, the actual value of the interest therein is the limit of the insurance that can validly be placed thereon. In
life insurance, there is no limit to the amount of insurance that may be taken upon life.
c) In property insurance, an interest insured must exist when the insurance takes effect and when the loss occurs but need not
exist in the meantime. In life insurance, it is enough that insurable interest exists at the time when the contract is made but it need not
exist at the time of loss.
ASSIGNMENT OF POLICY
(2009) No.XIII. Ciriaco leased a commercial apartment from Supreme Building Corporation (SBC). One of the provisions of the one-year
lease contract states:
―18.xxx The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed at any stall or
store or space in the leased premises without first obtaining the written consent of the LESSOR. If the LESSEE obtains fire insurance
coverage without the consent of the LESSOR, the insurance policy is deemed assigned and transferred to the LESSOR for the
latter’s benefit.
Notwithstanding the stipulation in the contract, without the consent of SBC, Ciriaco insured the merchandise inside the leased premises
against loss by fire in the amount of P500, 000 with First United Insurance Corporation (FUIC).
A day before the lease contract expired, fire broke out inside the leased premises, damaging Ciriaco’s merchandise. Having learned of
the insurance earlier procured by Ciriaco, SBC demanded from FUIC that the proceeds of the insurance policy be paid directly to it, as
provided in the lease contract.
Who is legally entitled to receive the insurance proceeds? Explain. (4%)
Ciriaco is entitled to receive the proceeds of the insurance policy. The stipulation that the policy is deemed assigned and transferred to
SBC is void, because SBC has no insurable interest in the merchandise of Ciriaco (Cha v. Court of Appeals, 277 SCRA 690 (1997))
MERCANTILE LAW

(1991) The policy of insurance upon his life, with a face value of P100th was assigned by Jose, a married man with 2 legitimate children,
to his nephew Y as security for a loan of P50th. He did not give the insurer any written notice of such assignment despite the explicit
provision to that effect in the policy. Jose died. Upon the claim on the policy by the assignee, the insurer refused to pay on the ground
that it was not notified of the assignment. Upon the other hand, the heirs of Jose contended that Y is not entitled to any amount under
the policy because the assignment without due notice to the insurer was void. Resolve the issues.
Page | 23
A life insurance is assignable. A provision, however, in the policy stating that written notice of such an assignment should be given to the
insurer is valid (Secs 181-182 Ins Code). The failure of the notice of assignment would thus preclude the assignee from claiming rights
under the policy. The failure of notice did not, however, avoid the policy; hence, upon the death of Jose, the proceeds would, in the
absence of a designated beneficiary, go to the estate of the insured. The estate, in turn, would be liable for the loan of P50,000 owing in
favor of Y.
PERFECTION OF INSURANCE CONTRACTS
(2009) No.IV. Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed insurance policy covering persons
between the ages of 50 to 75 who may be afflicted with serious and debilitating illnesses. Quirico applied for insurance coverage, stating
that he was already 80 years old. Nonetheless, ALAC approved his application.
Quirico then requested ALAC for the issuance of a cover note while he was trying to raise funds to pay the insurance premium. ALAC
granted the request. Ten days after he received the cover note, Quirico had a heart seizure and had to be hospitalized. He then filed a
claim on the policy.
Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly offered, was available only to persons 50 to 75
years of age? Why or why not? (2%)
No. By approving the application of Quirino who disclosed that he was already 80 years old, ALAC waived the age requirement. ALAC is
now stopped from raising such defense of age of the insured.
Did ALAC’s issuance of a cover note result in the perfection of an insurance contract between Quirico and ALAC? Explain. (3%)
The issuance of a cover note by ALAC resulted in the perfection of the contract of insurance. In that case, it is only because there is
delay in the issuance of the policy that the cover notes was issued. The cover note is a receipt whereby the company agrees to insure
the insured for 60 days pending the issuance of a regular policy. No separate premium is to be paid on a cover note. It is not a separate
policy but is integrated in the regular policy to be subsequently issued.
(2003) Josie Gatbonton obtained from Warranty Insurance Corporation a comprehensive motor vehicle insurance to cover her brand new
automobile. She paid, and the insurer accepted payment in check. Before the check could be encashed, Josie was involved in a motor
vehicle accident where her car became a total wreck. She sought payment from the insurer. Could the insurer be made liable under the
insurance coverage? (6%)
Yes, because there was a perfected contract of insurance the moment there is a meeting of the minds with respect to the object and the
cause of payment. The payment of check is a valid payment unless upon encashment the check bounced.
PRESCRIPTION OF CLAIMS
(1996) Robin insured his building against fire with EFG Assurance. The insurance policy contained the usual stipulation that any action
or suit must be filed within one year after the rejection of the claim.
MERCANTILE LAW

After his building burned down, Robin filed his claim for fire loss with EFG. On Feb 28, 1994, EFG denied Robin’s claim. On April 3, 1994,
Robin sought reconsideration of the denial, but EFG reiterated its position. On March 20, 1995, Robin commenced judicial action against
EFG. Should Robin’s action be given due course? Explain.
No, Robin’s action should not be given due course. Is filing of the request for reconsideration did not suspend the running of the
prescriptive period of one year stipulated in the insurance policy. Thus, when robin commenced judicial action against EFG Assurance
Page | 24
on March 2 0, 1995, his ability to do so had already prescribed. The one-year period is counted from Feb 28, 1994 when EFG
denied Robin’s claim, not from the date (presumably after April 3, 1994) when EFG reiterated its position denying Robin’s claim. The
reason for this rule is to insure that claims against insurance companies are promptly settled and that insurance suits are brought by the
insured while the evidence as to the origin and cause of the destruction has not yet disappeared. (See Sun Ins Office Ltd v CA gr 89741,
Mar 13 91 195s193)
MARITIME INSURANCE
NATURE & DEFINITION
(2006) What is a mutual insurance company or association?
A mutual life insurance corporation is a cooperative that promotes the welfare of its own members, with the money collected from among
themselves and solely for their own protection and not for profit. Members are both the insurer and insured. A mutual life insurance
company has no capital stock and relies solely upon its contributions or premiums to meet unexpected losses, contingencies and
expenses (Republic v. Sunlife, G.R. No 158085, October 14, 2005).
IMPLIED WARRANTIES
(2000) What warranties are implied in marine insurance?
The following warranties are implied in marine insurance:
1) That the ship is seaworthy to make the voyage and/or to take in certain cargoes
2) That the ship shall not deviate from the voyage insured;
3) That the ship shall carry the necessary documents to show nationality or neutrality and that it will not carry any document
which will cast reasonable suspicion thereon;
4) That the ship shall not carry contraband, especially if it is making a voyage through belligerent waters.
PERIL OF THE SHIP VS. PERIL OF THE SEA

(1998) A marine insurance policy on a cargo states that “the insurer shall be liable for losses incident to perils of the sea.” During the
voyage, seawater entered the compartment where the cargo was stored due to the defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages caused to the cargo. May the insured recover damages? (5%)
No. The proximate cause of the damage to the cargo insured was the defective drainpipe of the ship. This is peril of the ship, and not
peril of the sea. The defect in the drainpipe was the result of the ordinary use of the ship. To recover under a marine insurance policy,
the proximate cause of the loss or damage must be peril of the sea.
ALL RISK INSURANCE POLICY
(2017) A. Absolute Timber Co. (ATC) has been engaged in the logging business in Isabela. To secure one of its shipments of logs to
be transported by Andok Shipping Co., ATC purchased a marine policy with an all-risk provision. Because of a strong typhoon then hitting
Northern Luzon, the vessel sank and the shipment of logs was totally lost. ATC filed its claim, but the insurer denied the claim on several
grounds, namely: (1) the vessel had not been seaworthy; (2) the vessel’s crew had lacked sufficient training; (3) the improper loading of
MERCANTILE LAW

the logs on only one side of the vessel had led to the tilting of the ship to that side during the stormy voyage; and (4 the extremely bad
weather had been a fortuitous event.
ATC now seeks your legal advice to know if its claim was sustainable. What is your advice? Explain your answer. (3%)
The insurance claim is sustainable. An all risk insurance policy covers all causes of conceivable loss or damage, except as otherwise
excluded in the policy or due to fraud or intentional misconduct on the part of the insured. Since there was no stipulation as to what losses
Page | 25
are excluded from the coverage, the insured can recover.
SUBROGATION
(2014) ELP Insurance, Inc. issued Marine Policy No. 888 in favor of FCL Corp. to insure the shipment of 132 bundles of electric copper
cathodes against all risks. Subsequently, the cargoes were shipped on board the vessel "M/V Menchu" from Leyte to Pier 10, North
Harbor, Manila.
Upon arrival, FCL Corp. engaged the services of CGM, Inc. for the release and withdrawal of the cargoes from the pier and the subsequent
delivery to its warehouses/plants in Valenzuela City. The goods were loaded on board twelve (12) trucks owned by CGM, Inc., driven by
its employed drivers and accompanied by its employed truck helpers. Of the twelve (12) trucks en route to Valenzuela City, only eleven
(11) reached the destination. One (1) truck, loaded with eleven (11) bundles of copper cathodes, failed to deliver its cargo.
Because of this incident, FCL Corp. filed with ELP Insurance, Inc. a claim for insurance indemnity in the amount of P1,500,000.00. After
the requisite investigation and adjustment, ELP Insurance, Inc. paid FCL Corp. the amount of P1,350,000.00 as insurance indemnity.
ELP Insurance, Inc., thereafter, filed a complaint for damages against CGM, Inc. before the Regional Trial Court (RTC), seeking
reimbursement of the amount it had paid to FCL Corp. for the loss of the subject cargo. CGM, Inc. denied the claim on the basis that it is
not privy to the contract entered into by and between FCL Corp. and ELP Insurance, Inc., and hence, it is not liable therefor. If you are
the judge, how will you decide the case? (4%)
I will decide the case in favor of ELP Insurance. Even if CGM, Inc. is not privy to the contract between FCL Corp. and ELP Insurance, it
is still liable for the loss of the subject cargo. Art. 2207 of the Civil Code states if the plaintiff’s property has been insured and he has
received indemnity from the insurance company for injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrong-doer or the person who has violated the contract,
which in this case is CGM. Since ELP Insurance is subrogated to the rights of FCL Corporation to the extent of the amount it paid to the
latter under the marine insurance contract, it has the right to seek reimbursement from CGM, Inc, for breach of contract and/or tort
(Loadmasters Customs Services, Inc. vs Glodel Brokerage Corporation and R & B Insurance Corp (2011)
ACTUAL TOTAL LOSS

(1992) An insurance company issued a marine insurance policy covering a shipment by sea from Mindoro to Batangas of 1,000 pieces
of Mindoro garden stones against “total loss only.” The stones were loaded in two lighters, the first with 600 pieces and the second with
400 pieces. Because of rough seas, damage was caused the second lighter resulting in the loss of 325 out of the 400 pieces. The owner
of the shipment filed claims against the insurance company on the ground of constructive total loss inasmuch as more than ¾ of the
value of the stones had been lost in one of the lighters.
Is the insurance company liable under its policy? Why?
The insurance company is not liable under its policy covering against “total loss only” the shipment of 1,000 pieces of Mindoro garden
stones. There is no constructive total loss that can claimed since the ¾ rule is to be computed on the total 1,000 pieces of Mindoro garden
stones covered by the single policy coverage (see Oriental Assurance Co v CA 200 s 459)
(1996) RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to stormy weather, the ship carrying the rice
became submerged in sea water, and with it the rice cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the
MERCANTILE LAW

insurer, because the rice was no longer fit for human consumption. Admittedly, the rice could still be used as animal feed. Is RC’s claim
for total loss justified? Explain.
Yes, RC’s claim for total loss is justified. The rice, which was imported from Thailand for sale locally, is obviously intended for consumption
by the public. The complete physical destruction of the rice is not essential to constitute an actual total loss. Such a loss exists in this
case since the rice, having been soaked in sea water and thereby rendered unfit for human consumption, has become totally useless for
Page | 26
the purpose for which it was imported (Pan Malayan Ins. Co v CA GR 95070 Sep 5, 1991)
CONSTRUCTIVE TOTAL LOSS

(2005) M/V Pearly Shells, a passenger and cargo vessel, was insured for P40,000,000.00 against “constructive total loss.” Due to a
typhoon, it sank near Palawan. Luckily, there were no casualties, only injured passengers. The ship owner sent a notice of abandonment
of his interest over the vessel to the insurance company which then hired professionals to afloat the vessel for P900,000.00. When re-
floated, the vessel needed repairs estimated at P2,000,000.00. The insurance company refused to pay the claim of the ship owner,
stating that there was “no constructive total loss.”
a) Was there “constructive total loss” to entitle the ship owner to recover from the insurance company? Explain.
b) Was it proper for the ship owner to send a notice of abandonment to the insurance company? Explain. (5%)
No, there was no "constructive total loss" because the vessel was refloated and the costs of refloating plus the needed repairs (P 2.9
Million) will not be more than three-fourths of the value of the vessel. A constructive total loss is one which gives to a person insured a
right to abandon. (Sec, 131, Insurance Code) There would have been a constructive total loss had the vessel MN Pearly Shells suffer
loss or needed refloating and repairs of more than the required three-fourths of its value, i.e., more than P30.0 Million (Sec. 139, Insurance
Code, cited in Oriental Assurance v. Court of Appeals and Panama Saw Mill, G.R. No. 94052, August 9, 1991)
However, the insurance company shall pay for the total costs of refloating and needed repairs (P2.9 Million).
c) Was it proper for the ship owner to send a notice of abandonment to the insurance company? Explain.
No, it was not proper for the ship owner to send a notice of abandonment to the insurance company because abandonment can only be
availed of when, in a marine insurance contract, the amount to be expended to recover the vessel would have been more than three-
fourths of its value. Vessel MN Pearly Shells needed only P2.9 Million, which does not meet the required three- fourths of its value to
merit abandonment. (Section 139, Insurance Code, cited in Oriental Assurance v. Court of Appeals and Panama Saiv Mill, G.R. No.
94052, August 9, 1991)
BARRATRY
(2010) (B) What is barratry in marine insurance? (2%)
Barratry is any willful misconduct in the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the
consent of the owner and to the prejudice of the interest of the owner (Roque v. Intermediate Appellate Court, supra).
LIFE INSURANCE
UNLIMITED INSURANCE ON LIFE
(2017) The law on life insurance prohibits double insurance. (2%)
FALSE. The danger of over insurance, which is present in double insurance, is not present in life insurance. Insurable interest in life is
unlimited. Thus, the same is allowed.
MERCANTILE LAW

MISREPRESENTATION
(2018) On June 21, 2008, Yate took out a life insurance policy on her life in the amount of PhP 10 million and named her husband Vandy
and daughter as joint irrevocable beneficiaries. Before the policy was issued and the premiums were paid, Yate underwent a medical
checkup with a physician accredited by the insurer, and the only result found was that she was suffering from high blood pressure. Yate
was previously diagnosed by a private physician of having breast cancer which she did not disclose to the insurer in her application, nor
to the insurer's accredited physician because by then, she was told that she was already cancer-free after undergoing surgery which Page | 27
removed both her breasts. She was later diagnosed with psychotic tendency that graduated into extreme despondency. She was found
dead hanging in her closet 36 months after the issuance of the policy. The police authorities declared it to be a case of suicide. The policy
did not include suicide as an excepted risk.
(a) Can the insurer raise the issue of failure to disclose that she had cancer as a cause for denying the claim of the beneficiaries? (2.5%)
A. The insurer cannot raise the issue of concealment because only material facts known to the insured at the time of the issuance of the
policy should be disclosed to the insurer. (Section 28 of the IC ) Yate’s previous cancer diagnosis is no longer a material fact at the time
she procured the policy.
(2016) X insured his life for P20 million. X, plays golf and regularly exercises every day, hence is considered in good health. He did not
know, however, that his frequent headache is really caused by his being hypertensive. In his application form for a life insurance for
himself, he did not put a check to the question if he is suffering from hypertension, believing that because of his active lifestyle, being
hypertensive is a remote possibility. While playing golf one day, X collapsed at the fairway and was declared dead on arrival at the
hospital. His death certificate stated that X suffered a massive heart attack.
[a] Will the beneficiary of X be entitled to the proceeds of the life insurance under the circumstances, despite the non-disclosure
that he is hypertensive at the time of application? (2.5%)
No, the beneficiary of X is not entitled to the proceeds of the life insurance. The hypertension of X is a material fact that should have been
disclosed to the insurer. The concealment of such material fact entitles the insurer to rescind the insurance policy.
ALTERNATIVE ANSWER
The beneficiary of X should be entitled to the proceeds of the insurance since the non-disclosure of his health condition was out of good
faith for he was not aware that he was suffering from hypertension.
Take this as a lecture
Yes. The beneficiary of X shall be entitled to the proceeds of the insurance.
Section 28 of the Insurance Code provides that each party to a contract of insurance must communicate to the other, in good faith, all
facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the
means of ascertaining. The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer. In the case at bar, the insurer failed to clearly and satisfactorily establish its
defense, and is therefore liable to pay the proceeds of the insurance. There was no fraudulent intent on the part of the insured. (GREAT
PACIFIC LIFE ASSURANCE CORP., vs. COURT OF APPEALS AND MEDARDA V. LEUTERIO)
[b] If X died in an accident instead of a heart attack, would the fact of X's failure to disclose that he is hypertensive be considered
as material information? (2.5%)
It is still a material information. It is settled that the insured cannot recover even though the material fact not disclosed is not the cause
of the loss.
Kunf alam lang ng insurer na hypertensive si insured, hindi sila mag-iissue ng policy in the first place.
Take this as a lecture.
MERCANTILE LAW

Yes. It is a material information.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the other, in good faith, all
facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has no means
of ascertaining. Said Section provides: A neglect to communicate that which a party knows and ought to communicate, is called
concealment.
Page | 28
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom
communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (The Insurance
Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health. The
information which the insured failed to disclose were material and relevant to the approval and issuance of the insurance policy. The
matters concealed would have definitely affected petitioner's action on his application, either by approving it with the corresponding
adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured
by petitioner in order for it to reasonably assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld does not depend on
the state of mind of the insured. Neither does it depend on the actual or physical events which ensue. Anent the finding that the facts
concealed had no bearing to the cause of death of the insured, it is well settled that the insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed
insurance policy or in making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]), (SUNLIFE
ASSURANCE COMPANY OF CANADA vs. The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI).
(2013) No.II. Benny applied for life insurance for Php 1.5 Million. The insurance company approved his application and issued an
insurance policy effective Nov, 6, 2008. Benny named his children as his beneficiaries. On April 6, 2010, Benny died of hepatoma, a liver
ailment.
The insurance company denied the children’s claim for the proceeds of the insurance policy on the ground that Benny failed to disclose
in his application two previous consultations with his doctors for diabetes and hypertension, and that he had been diagnosed to be
suffering from hepatoma. The insurance company also rescinded the policy and refunded the premiums paid.
Was the insurance company correct? (8%)
The insurance company correctly rescinded the policy because of concealment (Section 27 of Insurance Code). Benny did not disclose
that he was suffering from diabetes, hypertension, and hepatoma. The concealment is material, because these are serious ailments
(Florendo v. Philam Plans, Inc., 666 SCRA 618, 2012). Benny died less than two years from the date of the issuance of the policy (Section
48 of Insurance Code).
(2001) A applied for a non-medical life insurance. The insured did not inform the insurer that one week prior to his application for
insurance, he was examined and confined at St. Luke’s Hospital where he was diagnosed for lung cancer. The insured soon thereafter
died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured?
Why? (5%)
No. The concealed fact is material to the approval and issuance of the insurance policy. It is well settled that the insured need not die of
the disease he failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate of the risks
of the proposed insurance policy or in making inquiries.
INCONTESTABILITY PERIOD
(2019) A.6. In January 2016, Mr. H was issued a life insurance policy by XYZ Insurance Co., wherein his wife, Mrs. W, was designated
as the sole beneficiary. Unbeknownst to XYZ Insurance Co., however, Mr. H had been previously diagnosed with colon cancer, the fact
of which Mr. H had concealed during the entire time his insurance policy was being processed.
MERCANTILE LAW

In January 2019, Mr. H unfortunately committed suicide. Due to her husband’s death, Mrs. W, as beneficiary, filed a claim with XYZ
Insurance Co. to recover the proceeds of the late Mr. H’s life insurance policy. However, XYZ Insurance Co. resisted the claim, contending
that: 1. the policy is void ab initio because Mr. H fraudulently concealed or misrepresented his medical condition, i.e., his colon cancer;
and 2. as an insurer in a life insurance policy, it cannot be held liable in case of suicide. Rule on each of XYZ Insurance Co.’s contentions.
Rule on each of XYZ Insurance Co.’s contentions. (5%)

Page | 29
The first contention is not tenable. Section 48 of the Insurance Code provides that under the incontestability clause, after a policy of life
insurance made payable upon the death of the insured shall have been in force during the lifetime of the insured for a period of two years
from the issuance of the policy or last reinstatement, the insurer must make good on the policy even though the policy was obtained
through fraud, concealment or misrepresentation. Even if Mr. H had concealed or misrepresented that he was previously diagnosed with
colon cancer, XYZ can no longer rescind the policy since it has been in force already for three years.
On the second contention, XYZ Insurance is liable despite the suicide of Mr. H. Under Section 180-A of the Insurance Code, the insurer
is liable when suicide is committed after the policy has been in force for a period of two years from the date of issue or its last
reinstatement. In this case, Mr. H committed suicide three years after issuance of the policy; thus, XYZ should be liable to the beneficiary
of Mr. H.
(2018) On June 21, 2008, Yate took out a life insurance policy on her life in the amount of PhP 10 million and named her husband Vandy
and daughter as joint irrevocable beneficiaries. Before the policy was issued and the premiums were paid, Yate underwent a medical
checkup with a physician accredited by the insurer, and the only result found was that she was suffering from high blood pressure. Yate
was previously diagnosed by a private physician of having breast cancer which she did not disclose to the insurer in her application, nor
to the insurer's accredited physician because by then, she was told that she was already cancer-free after undergoing surgery which
removed both her breasts. She was later diagnosed with psychotic tendency that graduated into extreme despondency. She was found
dead hanging in her closet 36 months after the issuance of the policy. The police authorities declared it to be a case of suicide. The policy
did not include suicide as an excepted risk.
(b) Are the beneficiaries entitled to receive the proceeds of the life insurance notwithstanding the fact that the cause of death was
suicide? (2.5%)
Yes, the insurer is liable. The rule is that the insurer in life insurance is liable in case of suicide only when it is committed after the policy
has been in force for a period of two years from the date of issue or last reinstatement. The rule, however, admits of an exception so that
when suicide is committed in the state of insanity, it shall be compensable regardless of the date of commission. (Section 183 of the
Insurance Code). In the given facts, Yate was diagnosed with psychotic tendency that graduated into extreme despondency. Thus, even
though Yate committed 36 months from issuance of the policy, the insurer is liable.
(2014) On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Ilocos Bankers Life Insurance Corporation (Ilocos Life)
designating Creencia Aban (Aban), her niece, as her beneficiary. Ilocos Life issued Policy No. 747, with a face value of P100,000.00, in
Sotero’s favor on August 30, 1993, after the requisite medical examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a claim for the insurance proceeds on July 9, 1996. Ilocos Life conducted an investigation into
the claim and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to pay the premium on the policy.
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance application and designated herself as the beneficiary.
For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16, 1997, but refunded the premium paid on the policy.
(A) May Sotero validly designate her niece as beneficiary?
MERCANTILE LAW

Yes, Sotero may validly designate her niece as beneficiary. The same is not prohibited under the Insurance Code or any other law
pertinent to the problem.
(B) May the incontestability period set in even in cases of fraud as alleged in this case?
Yes, the incontestability period applies even in cases of fraud as claimed in this problem. Note that the findings are those of the insurer
and these were made in an investigation conducted unilaterally by the insurer more than 3 years after the policy was taken out by Sotero. Page | 30
These findings may very well be dismissed as self-serving considering the incontestability clause set out in Sec. 48 of the Insurance
Code.
CONSIDER THIS AS A LECTURE
Sec. 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers enough time to inquire whether
the policy was obtained by fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious enterprise. At the same
time, legitimate policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of insurance
proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers, claims which may no longer be set up after
the two-year period expires as ordained under the law.
Thus, the self-regulating feature of Sec. 48 lies in the fact that both the insurer and the insured are given the assurance that any dishonest
scheme to obtain life insurance would be exposed, and attempts at unduly denying a claim would be struck down. Life insurance policies
that pass the statutory two-year period are essentially treated as legitimate and beyond question, and the individuals who wield them are
made secure by the thought that they will be paid promptly upon claim. In this manner, Sec. 48 contributes to the stability of the insurance
industry.
Sec. 48 prevents a situation where the insurer knowingly continues to accept annual premium payments on life insurance, only to later
on deny a claim on the policy on specious claims of fraudulent concealment and misrepresentation, such as what obtains in the instant
case. Thus, instead of conducting at the first instance an investigation into the circumstances surrounding the issuance of the insurance
policy which would have timely exposed the supposed flaws and irregularities attending it as it now professes, Ilocos Life appears to have
turned a blind eye and opted instead to continue collecting collected the premiums and devoted the same to its own profit. It cannot now
deny the claim when it is called to account. Sec. 48 must be applied to it with full force and effect.
Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that the inevitable may be put off for
years – or even decades – by the pendency of these unnecessary court cases. In the meantime, they benefit from collecting the interest
and/or returns on both the premiums previously paid by the insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in the country, and is imbued with public interest. An
insurance contract is a contract of adhesion that must be construed liberally in favor of the insured and strictly against the insurer in order
to safeguard the former’s interest (Manila Bankers Life Insurance Corp vs Aban (2013)
(C) Is Aban entitled to claim the proceeds under the policy?
Yes, Aban is entitled to claim the proceeds under the policy as beneficiary for the same reasons adduced in (B) above.
(2014) On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a face value of P5,000,000.00 from RN
Insurance Company (RN), with his wife Tina Marcial(Tina) as sole beneficiary. On the same day, Danny issued an undated check to RN
for the full amount of the premium. On October 1, 2013, RN issued the policy covering Danny’s life insurance. On October 5, 2013, Danny
met a tragic accident and died. Tina claimed the insurance benefit, but RN was quick to deny the claim because at the time of Danny’s
death, the check was not yet encashed and therefore the premium remained unpaid.
Is RN correct? (4%)
MERCANTILE LAW

No, RN Insurance is wrong. The case at bar shows that Danny procured insurance on his life on September 25, 2013, with his wife Tina
as beneficiary, and that on the same day of September 25, 2013, he issued an undated check to RN for the full amount of the premium.
Since the undated check was issued to RN on September 25, 2013, it will be considered dated as of the same day pursuant to Section
17(c) of the Negotiable Instruments Law. The facts also show that RN Insurance issued the policy on Danny’s life on October 1, 2013
and that Danny died in an accident on October 5, 2013.
Addendum to the answer. Not necessarily should be included in the answer. Sarap ng answer ng UPLC kasi nag-lelecture sila. Page | 31
RN Insurance denied that claim of Tina because at the time of Danny’s death, the check was not yet encashed and, therefore, the
premium remained unpaid. Presumably, RN Insurance is relying on the second paragraph of Article 1249 of the Civil Code which states
that the “delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired.”
Whose fault was it that the check was not encashed? Certainly not Danny or Tina. RN Insurance had the check as early as September
25, 2013 and could have encashed the check before the death of Danny on October 5, 2013. The problem did not indicate that there was
any problem with the check, e.g. that it was not adequately funded. RN Insurance was at fault and Tina should not be denied the proceeds
of the policy.
(See the case of Malayan Insurance Co., Inc. vs Arnaldo (1987), where the Court held that the insurer could no longer claim forfeiture of
the insured’s right because it held the check used to pay the premium on a fire insurance policy for an unreasonable time; see also the
comments of Justice Jose C. Vitug (ret.) in his book, Commercial Laws and Jurisprudence, 2006 Vol 1., p. 250, that “payment x x x by
means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming an availability of funds thereof, would be
sufficient even if it remains uncashed at the time of the loss. The subsequent effects of encashment (or impairment by the fault of the
creditor) or of legal compensation under Articles 1278-1279, in relation to Article 1249 of the Civil Code, would retroact to the date of the
mercantile instrument and its acceptance by the creditor.” (IMPORTANTE ITO. SAULUHIN)
Will your answer be the same if the check is dated October 15, 2013?
My answer would not be the same if the check were dated October 15, 2013. This answer assumes that Danny was the one who dated
the check and, therefore what he issued was a postdated check. The payment of a promissory note or a postdated check at a stated
maturity subsequent to the loss, assuming that there was no estoppel (e.g. written acknowledgment of the receipt of premium), is
insufficient to put the insurance into effect. (Vitug, Commercial Laws and Jurisprudence, 2006, Vol 1 p 250)
If it were RN Insurance who dated the check October 15, 2013, then my answer would be the same as my answer to the first question.
This is my observation. Since RN has already issued a policy in spite of the post-dated check. The presumption is that the
insurance was bought in credit. Hence, the insurance policy is effective on the day it was issued.
(1994) On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on November 6, 1990. He died on
April 26, 1992 of hepatoma. The insurance company denied the beneficiaries’ claim and rescinded the policy by reason of alleged
misrepresentation and concealment of material facts made by Tan in his application. It returned the premiums paid.
The beneficiaries contend that the company had no right to rescind the contract as rescission must be done “during the lifetime” of the
insured within two years and prior to the commencement of the action. Is the contention of the beneficiaries tenable?
No. The incontestability clause does not apply. The insured dies within less than two years from the issuance of the policy on September
23, 1990. The insured died on April 26, 1992, or less than 2 years from September 23, 1990. The right of the insurer to rescind is only
lost if the beneficiary has commenced an action on the policy. There is no such action in this case. (Tan v CA 174 s 143)
(1996) Juan procured a “non-medical” life insurance from Good Life Insurance. He designated his wife, Petra, as the beneficiary. Earlier,
in his application in response to the question as to whether or not he had ever been hospitalized, he answered in the negative. He forgot
to mention his confinement at the Kidney Hospital.
MERCANTILE LAW

After Juan died in a plane crash, Petra filed a claim with Good Life. Discovering Juan’s previous hospitalization, Good Life rejected Petra’s
claim on the ground of concealment and misrepresentation. Petra sued Good Life, invoking good faith on part of Juan.
Will Petra’s suit prosper? Explain.
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No, Petra’s suit will not prosper (assuming that the policy of life insurance has been in force for a period of less than 2 years from the
date of its issue). The matters which Juan failed to disclose was material and relevant to the approval and issuance of the insurance
policy. They would have affected Good Life’s action on his application, either by approving it with the corresponding adjustment for a
higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of Juan by Good Life in order
for it to reasonably assess the risk involved in accepting the application. In any case, good faith is no defense in concealment. The waiver
of a medical examination in the ‘non-medical’ life insurance from Good Life makes it even more necessary that Juan supply complete
information about his previous hospitalization for such information constitutes an important factor which Good Life takes into consideration
in deciding whether to issue the policy or not. (See Sunlife Assurance Co of Canada v CA GR 105135, June 22, 1995 245 s 268)
If the policy of life insurance has been in force for a period of 2 years or more from the date of its issue (on which point the given facts
are vague) then Good Life can no longer prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of Juan ( Sec 48 Ins Code)
(1997) The assured answers “No” to the question in the application for a life policy: “Are you suffering from any form of heart illness?” In
fact, the assured has been a heart patient for many years. On 7 Sep 1991, the assured is killed in a plane crash. The insurance company
denies the claim for insurance proceeds and returns the premiums paid. Is the decision of the insurance company justified?
Assuming that the incontestability clause does not apply because the policy has not been in force for 2 years, from the date of issue,
during the lifetime of the insured, the decision of the insurance company not to pay is justified. There was fraudulent concealment. It is
not material that the insured died of a different cause than the fact concealed. The fact concealed, that is heart ailment, is material to the
determination by the insurance company whether or not to accept the application for insurance and to require the medical examination
of the insured.
However, if the incontestability clause which applies to the insurance policy covering the life of the insured had been in force for 2 years
from issuance thereof, the insurance company would not be justified in denying the claim for proceeds of the insurance and in returning
the premium paid. In that case, the insurer cannot prove the policy void ab initio or resciissible by reason of fraudulent concealment or
misrepresentation of the insured.
(1991) Atty Roberto took out a life insurance policy from the Dana Ins Co (DIC) on 1 Sep 1989. On 31 Aug 1990, Roberto died. DIC
refused to pay his beneficiaries because it discovered that Robert had misrepresented certain material facts in his application. The
beneficiaries sued on the basis that DIC can contest the validity of the insurance policy only within 2 years from the date of issue and
during the lifetime of the insured. Decide the case.
I would rule in favor of the insurance company. The incontestability clause, applies only if the policy had been in effect for at least 2 years.
The 2-year period is counted from the time the insurance becomes effective until the death of the insured and not thereafter (Tan v CA
GR 48044, 29 Jun 1989)
ALTERNATIVE ANSWER:
I would rule in favor of the insurance company. Although an insurer may not rescind the contract on ground of misrepresentation after an
action is commenced for recovery under the policy, the insurer is not precluded from invoking the ground of misrepresentation as a
defense in the action for recovery. This is alright since the bar problem is not covered yet by the incontestability clause.
MERCANTILE LAW

(1998) Renato was issued a life insurance policy on January 2, 1990. He concealed the fact that 3 years prior to the issuance of his life
insurance policy, he had been seeing a doctor about his heart ailment.
On March 1, 1992, Renato died of heart failure. May the heirs file a claim on the proceeds of the life insurance policy of Renato? (5%)
Yes. The life insurance policy in question was issued on January 9, 1990. More than 2 years had elapsed when Renato, the insured,
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died on March 1, 1992. The incontestability clause applies.
INCONTESTABILITY CLAUSE
The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the
policy, whether or not, the insured still lives within such period. After two years, the defenses of concealment or misrepresentation, no
matter how patent or well founded, no longer lie.
BENEFICIARY
DEATH OF INSURED DUE TO BENEFICIARY

(2008) No.VI. On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1 Million with Gemma Rivera,
his adopted daughter, as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police investigation, it was ascertained that
Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid liability by setting up as a
defense the participation of Gemma Rivera in the killing of Antonio Rivera? Discuss with reasons.
Under Sec. 12 of the Insurance Code. The interest of a beneficiary shall be forfeited when the beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of the insured. In which event, the nearest relative of the insured shall receive the proceeds
of said insurance, if not otherwise disqualified. Thus, the insurance company must still pay out the proceed of the life insurance policy to
the nearest qualified relative of the insured.
IRREVOCABLE BENEFICIARY
(2005) What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2%)
The irrevocable designation gives the beneficiary a vested right over Life Insurance. The Insured cannot act to divest the irrevocable
beneficiary, in whole or in part, without the beneficiary's consent. To be specific:
(1) The beneficiary designated in a life insurance contract cannot be changed without the consent of the beneficiary because he
has a vested interest in the policy (Philamlife v. Pineda, G.R. No. 54216, July 19, 1989, citing Gcrcio v. Sun Life, G.R. No. 23703,
September 28, 1925; and Go v. Redfern, G.R. No. 47705, April 25, 1841);
(2) Neither can the Insured take the cash surrender value, assign or even borrow on said policy without the beneficiary's consent
(Nario v. Philamlife, G.R. No. 22796, June 26, 1967);
(3) The Insured cannot add another beneficiary because that would reduce the amount which the first beneficiary may recover
and therefore adversely affect his vested right (Go v. Redfem, G.R. No. 47705, April 25, 1941);
(4) Unless the policy allows, the Insured cannot even designate another beneficiary should the original beneficiary predecease
him. His estate acquires the beneficiary's vested right upon his death; and
(5) The Insured cannot allow his creditors to attach or execute on the policy. (Philamlife v. Pineda, G.R. No. 54216, July 19, 1989)
MERCANTILE LAW

(2005) Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his beneficiary. Jacob, however,
changed his mind and wants Yob and Jojo, his other friends, to be included as beneficiaries considering that the proceeds of the policy
are sufficient for the three friends. Can Jacob still add Yob and Jojo as his beneficiaries? Explain. (2%)
No, Jacob can no longer add Yob and Jojo as his beneficiaries in addition to Diwata. As the irrevocable beneficiary, Diwata has acquired
a-vested right over Jacob's life insurance policy. Any additional beneficiaries will reduce the amount which Diwata, as the first beneficiary,
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may recover, which will adversely affect her vested right. (Go v. Redfern, G.R. No. 47705, April 25, 1941)
(1998) Juan de la Cruz was issued Policy No. 8888 of the Midland Life Insurance Co on a whole life plan for P20,000 on August 19,
1989. Juan is married to Cynthia with whom he has three legitimate children. He, however, designated Purita, his common-law wife, as
the revocable beneficiary. Juan referred to Purita in his application and policy as the legal wife. Three (3) years later, Juan died. Purita
filed her claim for the proceeds of the policy as the designated beneficiary therein. The widow, Cynthia, also filed a claim as the legal
wife. To whom should the proceeds of the insurance policy be awarded? (5%)
The proceeds of the insurance policy shall be awarded to the ESTATE of Juan de la Cruz. Purita, the common- law-wife, is disqualified
as the beneficiary of the deceased because of illicit relation between the deceased and Purita, the designated beneficiary. Due to such
illicit relation, Purita cannot be a donee of the deceased. Hence, she cannot also be his beneficiary.
INSURED
Accident Policy
(2004) CNI insure SAM under a homeowner's policy against claims for accidental injuries by neighbors. SAM's minor son, BOY, injured
3 children of POS, a neighbor, who sued SAM for damages. SAM's lawyer was ATT, who was paid for his services by the insurer for
reporting periodically on the case to CNI. In one report, ATT disclosed to CNI that after his investigations, he found the injuries to the 3
children not accidental but intentional.
SAM lost the case in court, and POS was awarded one million pesos in damages which he sought to collect from the insurer. But CNI
used ATTs report to deny the claim on the ground that the injuries to POS's 3 children were intentional, hence excluded from the policy's
coverage. POS countered that CNI was estopped from using ATTs report because it was unethical for ATT to provide prejudicial
information against his client to the insurer, CNI.
Who should prevail: the claimant, POS; or the insurer, CNI? Decide with reasons briefly. (5%)
CNI is not estopped from using ATT's report, because CNI, in the first place, commissioned it and paid ATT for it. On the other hand,
ATT has no conflict of interest because SAM and CNI are on the same side — their interests being congruent with each other, namely,
to oppose POS's claim. It cannot be said that ATT has used the information to the disadvantage or prejudice of SAM.
However, in Finman General Assurance Corp. v. Court of Appeals, 213 SCRA 493 (1992), it was explained that there is no "accident" in
the context of an accident policy, if it is the natural result of the insured's voluntary act, unaccompanied by anything unforeseen except
the injury. There is no accident when a deliberate act is performed, unless some additional and unforeseen happening occurs that brings
about the injury. This element of deliberateness is not clearly shown from the facts of the case, especially considering the fact that BOY
is a minor, and the injured parties are also children. Accordingly, it is possible that CNI may not prosper. ATT's report is not conclusive
on POS or the court.
Accident vs. Suicide

(1990) Luis was the holder of an accident insurance policy effective Nov 1, 1988 to Oct 31, 1989. At a boxing contest held on Jan 1, 1989
and sponsored by his employer, he slipped and was hit on the fact by his opponent so he fell and his head hit one of the posts of the
boxing ring. He was rendered unconscious and was dead on arrival at the hospital due to “intra-cranial hemorrhage.”
MERCANTILE LAW

Can his father who is a beneficiary under said insurance policy successfully claim indemnity from the insurance company? Explain.
Yes, the father who is a beneficiary under the accidental insurance can successfully claim indemnity for the death of the insured. Clearly,
the proximate cause of death was the boxing contest. Death sustained in a boxing contest is an accident. (De la Cruz v Capital Ins &
Surety)
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(1993) S Insurance Co issued a personal accident policy to Bob Tan with a face value of P500th. In the evening of Sep 5, 1992, after
his birthday party, Tan was in a happy mood but not drunk. He was playing with his hand gun, from which he previously removed the
magazine. As his secretary was watching television, he stood in front of her and pointed the gun at her. She pushed it aside and said
that it may be loaded. He assured her that it was not and then pointed it at his temple. The next moment, there was an explosion and
Tan slumped to the floor lifeless.
The wife of the deceased sought payment on the policy but her claim was rejected. The insurance company agreed that there was no
suicide. However, it was the submission of the insurance company that there was no accident. In support thereof, it contended a) that
there was no accident when a deliberate act was performed unless some additional, unexpected, independent and unforeseen happening
occur which produces or brings about the injury or death; and b) that the insured willfully exposed himself to needless peril and thus
removed himself from the coverage of the insurance policy. Are the two contentions of the insurance company tenable? Explain.
No. These two contentions are not tenable. The insurer is liable for injury or death even due to the insured’s gross negligence. The fact
that the insured removed the magazine from the hand gun means that the insured did not willfully expose himself to needless peril. At
most, the insured is only guilty of negligence (Sun Ins v CA 211 s 554)
(1995) Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value of P500th. A provision in the policy states
that “the company shall not be liable in respect of “bodily injury’ consequent upon the insured person attempting to commit suicide or
willfully exposing himself to needless peril except in an attempt to save human life.” Six months later Henry Dy died of a bullet wound in
his head. Investigation showed that one evening Henry was in a happy mood although he was not drunk. He was playing with his handgun
from which he had previously removed its magazine. He pointed the gun at his sister who got scared. He assured her it was not loaded.
He then pointed the gun at his temple and pulled the trigger. The gun fired and Henry slumped on the floor.
Henry’s wife Beverly, as the designated beneficiary, sought to collect under the policy. Sun-Moon Insurance rejected her claim on the
ground that the death of Henry was not accidental. Beverly sued the insurer.
Decide and Discuss fully.
Beverly can recover the proceeds of the policy from the insurer. The death of the insured was not due to suicide or willful exposure to
needless peril which are excepted risks. The insured’s act was purely an act of negligence which is covered by the policy and for which
the insured got the insurance for his protection. In fact, he removed the magazine from the gun and when he pointed the gun to his temple
he did so because he thought that it was safe for him to do so. He did so to assure his sister that the gun was harmless. There is none
in the policy that would relieve the insurer of liability for the death of the insured since the death was an accident.
PROPERTY INSURANCE
THEORY OF COGNITION
(2016) Jason is the proud owner of a newly-built house worth P5 million. As a protection against any possible loss or damage to his
house, Jason applied for a fire insurance policy thereon with Shure Insurance Corporation (Shure) on October 11, 2016 and paid the
premium in cash. It took the company a week to approve Jason's application.
MERCANTILE LAW

On October 18, 2016, Shure mailed the approved policy to Jason which the latter received five (5) days later. However, Jason's house
had been razed by fire which transpired a day before his receipt of the approved policy. Jason filed a written claim with Shure under the
insurance policy. Shure prays for the denial of the claim on the ground that the theory of cognition applies to contracts of insurance.
Decide Jason's claim with reasons. (5%)
Jason cannot recover on the insurance policy since he had no knowledge of the insurer's acceptance of his application before his house
Page | 36
(insured property) was raze by fire.
An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the
object and the cause or consideration. What is being followed in insurance contracts is what is known as the “cognition theory”. In
Enriquez vs. Sun Life Assurance Co., the contract for a life annuity in was not perfected because it has not been proved satisfactorily
that the acceptance of the application ever came to the knowledge of the applicant.
In the case at bar, the policy was received by Jason only a day after the occurrence of the insured risk. There was no perfected contract
of fire insurance yet. Thus, Jason's claim under said policy should be denied.
Answer (2):
Jason written claim with Shure under the insurance policy will prosper. Fire insurance policy was paid in cash to Shure Insurance
Corporation on October 11, 2016 and the contract was perfected on October 18, 2016 with receipt of the approved policy.
Section 77. “An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies.”
Article 78 of the Insurance Code “An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence
of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium
is actually paid“.
What is being followed in insurance contracts is what is known as the “cognition theory” Thus, “an acceptance made by letter shall not
bind the person making the offer except from the time it came to his knowledge”.(Enriquez vs. Sun Life Assurance Co. of Canada, 41
Phil. 269)
Essential elements of the general rule pertaining to the mailing and delivery of mail matter as announced by the American courts, namely,
when a letter or other mail matter is addressed and mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mails. But if any one of these
elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will not be presumed to have been received by the
addressee unless it is shown that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A.
[N. S.], pp. 458, et seq., notes.)
Cognition theory applies only to life and health insurance and not to property and liability insurance.
TRANSFER OF THE THING INSURED
(2014) On May 13, 1996, PAM, Inc. obtained a P15,000,000.00 fire insurance policy from Ilocano Insurance covering its machineries
and equipment effective for one (1) year or until May 14, 1997. The policy expressly stated that the insured properties were located at
"Sanyo Precision Phils. Building, Phase III, Lots 4 and 6, Block 15, PEZA, Rosario, Cavite." Before its expiration, the policy was renewed
on "as is" basis for another year or until May 13, 1998. The subject properties were later transferred to Pace Factory also in PEZA. On
October 12, 1997, during the effectivity of the renewed policy, a fire broke out at the Pace Factory which totally burned the insured
properties.
The policy forbade the removal of the insured properties unless sanctioned by Ilocano. Condition 9(c) of the policy provides that "the
insurance ceases to attach as regards the property affected unless the insured, before the occurrence of any loss or damage, obtains
the sanction of the company signified by endorsement upon the policy x x x (c) if the property insured is removed to any building or place
MERCANTILE LAW

other than in that which is herein stated to be insured." PAM claims that it has substantially complied with notifying Ilocano through its
sister company, the RBC, which, in fact, referred PAM to Ilocano for the insurance coverage. Is Ilocano liable under the policy? (4%)
Ilocano Insurance is not liable under the policy. By the clear and express condition in the renewal policy, the removal of the insured
property to any building or place required the consent of Ilocano. Any transfer effected by PAM, Inc. without Ilocano’s consent (as is the
case here) would free the latter from any liability. (Malayan Insurance Company vs PAPCO (2013)
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DOUBLE INSURANE
(2012) No.V X borrowed from CCC Bank. She mortgaged her house and lot in favor of the bank. X insured her house. The bank also
got the house insured. Is this double insurance? Explain your answer. (3%)
No, there is no double insurance. Double insurance exists where the same person is insured by several insurers separately with respect
to the same subject and interest. (Sec. 93, Insurance Code)
Is this legally valid? Explain your answer. (3%)
Yes, X and CCC Bank can both insure the house as they have different insurable interest therein. X, the borrower mortgagor, has an
insurable interest in the house being the owner thereof while CCC Bank, the lender, also has an insurable interest in the house as
mortgagee thereof.
In case of damage, can X and CCC Bank separately claim for the insurance proceeds? (4%)
Yes. If X obtained an open policy then she could claim an amount corresponding to the extent of the damage based on the value of the
house determined as of the date the damage occurred, but not to exceed the face value of the insurance policy; however, if she obtained
a valued policy then she could claim an amount corresponding to the extent of the damage based on the agreed upon valuation of the
house.
As for CCC Bank, it could claim an amount corresponding to the extent of the damage but not to exceed the amount of the loan it
extended to X or so much thereof as may remain unpaid.
(2005) When does double insurance exist? (2%)
Under Section 93 of the Insurance Code, there is double insurance when there is over-insurance with two or more companies, covering
the same property, the same insurable interest and the same risk. Double insurance exists where the same person is insured by several
insurers separately in respect of the same subject matter and interests. (Geagonia v. Court of Appeals, G.R. No. 114427, February 6,
1995)
(1993) Julie and Alma formed a business partnership. Under the business name Pino Shop, the partnership engaged in a sale of
construction materials. Julie insured the stocks in trade of Pino Shop with WGC Insurance Co for P350th. Subsequently, she again got
an insurance contract with RSI for P1m and then from EIC for P200th. A fire of unknown origin gutted the store of the partnership. Julie
filed her claims with the three insurance companies. However, her claims were denied separately for breach of policy condition which
required the insured to give notice of any insurance effected covering the stocks in trade. Julie went to court and contended that she
should not be blamed for the omission, alleging that the insurance agents for WGC, RSI and EIC knew of the existence of the additional
insurance coverages and that she was not informed about the requirement that such other or additional insurance should be stated in
the policy.
Is the contention of Julie tenable? Explain.
MERCANTILE LAW

May she recover on her fire insurance policies? Explain.
1) No. An insured is required to disclose the other insurances covering the subject matter of the insurance being applied for.
(New Life Ent v CA 207 s 669)
2) No, because she is guilty of violation of a warranty/ condition.
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(2005) What is the nature of the liability of the several insurers in double insurance? Explain. (2%)
The nature of the liability of the several insurers in double insurance is that each insurer is bound to the contribute ratably to the loss in
proportion to the amount for which he is liable under his contract as provided for by Sec 94 of ICP par. The ratable contribution of each
of each insurer will be determined based on the following formula: AMOUNT OF POLICY divided by TOTAL INSURANCE TAKEN
multiplied by LOSS = LIABILITY OF THE INSURER.
ALTERNATIVE ANSWER:
Each insurer is bound, as between himself and other insurers, to contribute ratably to the loss in proportion to the amount for which he is
liable under his contract. (Sec. 94, Insurance Code)
(2008) No.VII. Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner insured the building against fire
with three (3) insurance companies for the following amounts:
Northern Insurance Corp. – P20 Million

Southern Insurance Corp. – P30 Million
Eastern Insurance Corp. – P50 Million
Is the owner’s taking of insurance for the building with three (3) insurers valid? Discuss. (3%)
Taking out insurance covering the same property, same insurable interest and same risk with three insurance companies is “double
insurance,” recognized under Sec. 93 of the Insurance Code. However, in American Home Assurance Co. v, Chua, G.R. No. 130421, 28
June 1999, the court referred to the common inclusion of the “other insurance clause” in fire insurance policies, requiring disclosure of
co-insurance of the same property with other insurers.
The Building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50 Million, will the claim prosper?
Explain. (2%)
Insured can recover from Eastern Insurance Corp. up to the extent of his loss. However, Eastern may refuse to pay if the policy
contains an “other insurance clause” stipulating that non- disclosure of double insurance will avoid the policy (Geagonia v. Country
Bankers Insurance, G.R. No. 114427, 06 February 1995.) As there is no indication of a contractual prohibition on double or other
insurance, all insurance contracts over the building are deemed valid and enforceable.
The law prohibits double or over- recovery, not double insurance. Since Eastern insured the property up 50% of the total coverage, it is
liable for only 50% of the total actual loss. Eastern insurance Corp. is liable to the extent of its coverage but may recover one-half of the
total indemnity from the co-insurers in the proportion of 60% (Southern Insurance) – 40% (Northern Insurance).
(1990)
a) Suppose that Fortune owns a house valued at P600th and insured the same against fire with 3 insurance companies as
follows:
X – P400th
MERCANTILE LAW

Y – P200th
Z – P600th
In the absence of any stipulation in the policies from which insurance company or companies may Fortune recover in case fire should
destroy his house completely?
Page | 39
Fortune may recover from the insurers in such order as he may select up to their concurrent liability (Sec 94 Ins Code)
Valued Policy
b) If each of the fire insurance policies obtained by Fortune in the problem (a) is a valued policy and the value of his house was
fixed in each of the policies at P1m, how much would Fortune recover from X if he has already obtained full payment on the insurance
policies issued by Y and Z?
Fortune may still recover only the balance of P200,000 from X insurance company since the insured may only recover up to the extent
of his loss.
ALTERNATIVE:
Having already obtained full payment on the insurance policies issued by Y and Z, Fortune may no longer recover from X insurance
policy.
Open Policy
c) If each of the policies obtained by Fortune in the problem (a) above is an open policy and it was immediately determined after
the fire that the value of Fortune’s house was P2.4m, how much may he collect from X,Y and Z?
In an open policy, the insured may recover his total loss up to the amount of the insurance cover. Thus, the extent of recovery would be
P400th from X, P200th from Y, and P600th from Z.
d) In problem (a), what is the extent of the liability of the insurance companies among themselves?
In problem (a), the insurance companies among themselves would be liable, viz:
X – 4/12 of P600th = P200th

Y – 2/12 of P600th = P100th
Z – 6/12 of P600th = P300th
e) Supposing in problem (a) above, Fortune was able to collect from both Y and Z, may he keep the entire amount he was able
to collect from the said 2 insurance companies?
No, he can only be indemnified for his loss, not profit thereby; hence he must return P200th of the P800th he was able to collect.
(2010) No.X. To secure a loan of P10 million, Mario mortgaged his building to Armando. In accordance with the loan arrangements, Mario
had the building insured with First Insurance Company for P10 million, designating Armando as the beneficiary. Armando also took an
insurance of the building upon his own interest with Second Insurance Company for P5 million. The building was totally destroyed by fire,
a peril insured against under both insurance policies. It was subsequent determined that the fire had been intentionally started by Mario
and that in violation of the loan agreement, he had been storing inflammable materials in the building.
How much, if any, can Armando recover from either or both insurance companies? (2%)
MERCANTILE LAW

Armando can receive P5 million from Second Insurance Company. As mortgagee, he had an insurable interest in the building (Panlileo
v. Cosio, 97 Phil. 919 (1955)). Armando cannot collect anything from First Insurance Company. First Insurance Company is not liable for
the loss of the building. First, it was due to a willful act of Mario, who committed arson (Section 87 of the Insurance Code; East Furnitures,
Inc. v. Globe & Rutgers Fire Insurance Company, 57 Phil. 576 (1932)). Second, fire insurance policies contain a warranty that the insured
will not store hazardous materials within the insured premises. Mario breached this warranty when he stored inflammable materials in
the building. (Young v. Midland Textile Insurance Company, 30 Phil. 617 (1915)).These two factors exonerate First Insurance Company
Page | 40
from liability to Armando as mortgagee even though it was Mario who committed them (Section 8 of the Insurance Code).
What happens to the P10 million debt of Mario to Armando? Explain.
Since Armando would have collected P5 million from Second Insurance Company, this amount should be considered as partial payment
of the loan. Armando can only collect the balance of P5 million (Panlileo v. Cosio, supra). Second Insurance Company can recover from
Mario the amount of P5 million it paid, because it became subrogated to the rights of Armando (Panlileo v. Cosio, supra).
1994) In a civil suit, the Court ordered Benjie to pay Nat P500,000.00. To execute the judgment, the sheriff levied upon Benjie’s registered
property (a parcel of land and the building thereon),and sold the same at public auction to Nat, the highest bidder. The latter, on March
18, 1992, registered with the Register of Deeds the certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie
insured with Garapal Insurance for P1,000,000.00 the same building that was sold at public auction to Nat. Benjie failed to redeem the
property by March 18, 1993.
On March 19, 1993, a fire razed the building to the ground. Garapal Insurance refused to make good its obligation to Benjie under the
insurance contract.
1) Is Garapal Insurance legally justified in refusing payment to Benjie?

2) Is Nat entitled to collect on the insurance policy?
1) Yes. At the time of the loss, Benjie was no longer the owner of the property insured as he failed to redeem the property. The
law requires in property insurance that a person can recover the proceeds of the policy if he has insurable interest at the time of the
issuance of the policy and also at the time when the loss occurs. At the time of fire, Benjie no longer had insurable interest in the property
insured.
2) No. While at the time of the loss he had insurable interest in the building, as he was the owner thereof, Nat did not have any
interest in the policy. There was no automatic transfer clause in the policy that would give him such interest in the policy.
(2001) JQ, owner of a condominium unit, insured the same against fire with the XYZ Insurance Co., and made the loss payable to his
brother, MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy? State the reason(s) for
your answer. (5%)
JQ can recover on the fire insurance policy for the loss of said condominium unit. He has the insurable interest as owner-insured. As
beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or
property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have
insurable interest in the condominium unit.
COMPULSORY VEHICLE LIABILITY INSURANCE

(2014) On May 26, 2014, Jess insured with Jack Insurance (Jack) his 2014 Toyota Corolla sedan under a comprehensive motor vehicle
insurance policy for one year. On July 1, 2014, Jess’ car was unlawfully taken. Hence, he immediately reported the theft to the Traffic
Management Command (TMC) of the Philippine National Police (PNP), which made Jess accomplish a complaint sheet as part of its
procedure. In the complaint sheet, Jess alleged that a certain Ric Silat (Silat) took possession of the subject vehicle to add accessories
and improvements thereon. However, Silat failed to return the subject vehicle within the agreed 3-day period. As a result, Jess notified
MERCANTILE LAW

Jack of his claim for reimbursement of the value of the lost vehicle under the insurance policy. Jack refused to pay claiming that there is
no theft as Jess gave Silat lawful possession of the car. Is Jack correct? (4%)
Jack Insurance is not correct. Ric Silat was merely given physical possession of the car. He did not have juridical possession over the
same. It is also apparent that the taking by Silat of the car of Jess is without the consent or authority of the latter. Thus, the act of Silat in
depriving Jess of his car, soon after the transfer of physical possession of the same to him, constitutes theft under the insurance policy
that is compesable. (Paramount Insurance vs Spouse Remondeulaz (2012) Page | 41
(2014) As a rule, an insurance contract is consensual and voluntary. The exception is in the case of: (1%)
(C) Motor Vehicle Liability Insurance, IT SHOULD BE COMPULSORY VEHICLE LIABILITY INSURANCE
(2014) On February 21, 2013, Barrack entered into a contract of insurance with Matino Insurance Company (Matino) involving a motor
vehicle. The policy obligates Matino to pay Barrack the amount of Six Hundred Thousand Pesos (P600,000.00) in case of loss or damage
to said vehicle during the period covered, which is from February 26, 2013 to February 26, 2014.
On April 16, 2013, at about 9:00 a.m., Barrack instructed his driver, JJ, to bring the motor vehicle to a near-by auto shop for tune-up.
However, JJ no longer returned and despite diligent efforts to locate the said vehicle, the efforts proved futile. Resultantly, Barrack
promptly notified Matino of the said loss and demanded payment of the insurance proceeds of P600,000.00.
In a letter dated July 5, 2013. Matino denied the claim, reasoning as stated in the contract that "the company shall not be liable for any
malicious damage caused by the insured, any member of his family or by a person in the insured’s service. Is Matino correct in denying
the claim? (4%)
MATINO INSURANCE IS NOT CORRECT. Under the insurance policy, he loss of the motor vehicle is not excluded as the loss was due
to theft, not malicious damage. The malicious damage” clause under the policy is not applicable but rather the “theft” clause. Thus, the
provision under the policy that “the company shall not be liable for any malicious damage caused by the insured, any member of his
family or by a person in the insured’s service” is not applicable. (Alpha Insurance and Surety Co vs Castor (2003)
3RD PARTY LIABILITY

(1996) While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the latter, Roberto sued Cesar and the third party
liability insurer for damages and/or insurance proceeds. The insurance company moved to dismiss the complaint, contending that the
liability of Cesar has not yet been determined with finality.
a) Is the contention of the insurer correct? Explain.

b) May the insurer be held liable with Cesar?
No, the contention of the insurer is not correct. There is no need to wait for the decision of the court determining Cesar’s liability with
finality before the third party liability insurer could be sued. The occurrence of the injury to Roberto immediately gave rise to the liability
of the insurer under its policy. In other words, where an insurance policy insures directly against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or event upon which the liability depends (Sherman Shafer v Judge RTC Olongapo City
Branch 75 GR l-78848, Nov 14 88 167s386)
The insurer cannot be held solidarily liable with Cesar. The liability of the insurer is based on contract while that of Cesar is based on tort.
If the insurer were solidarily liable with Cesar, it could be made to pay more than the amount stated in the policy. This would, however,
be contrary to the principles underlying insurance contracts. On the other hand, if the insurer were solidarily liable with Cesar and it is
made to pay only up to the amount stated in the insurance policy, the principles underlying solidary obligations would be violated.
(Malayan Ins Co v CA GR L-36413 Sep 26, 88 165s536; Figuracion vda de Maglana v Consolacion GR 60506 Aug 6, 92 212s268)
(2000) X was riding a suburban utility vehicle (SUV) covered by a comprehensive motor vehicle liability insurance (CMVLI) underwritten
by FastPay Insurance Company when it collided with a speeding bus owned by RM Travel Inc. The collision resulted in serious injuries
MERCANTILE LAW

to X; Y, a passenger of the bus; and Z, a pedestrian waiting for a ride at the scene of the collision. The police report established that the
bus was the offending vehicle. The bus had CMVLI policy issued by Dragon Ins Co. X, Y, and Z jointly sued RM Travel and Dragon Ins
for indemnity under the Insurance Code of the Phils (PD1460). The lower court applied the “no fault” indemnity policy of the statute,
dismissed the suit against RM Travel, and ordered Dragon Ins to pay indemnity to all three plaintiffs. Do you agree with the court’s
judgment? Explain (2%)
Page | 42
No. The cause of action of Y is based on the contract of carriage, while that of X and Z is based on torts. The court should not have
dismissed the suit against RM Travel. The court should have ordered Dragon Ins to pay each of X, Y , and Z to the extent of the insurance
coverage, but whatever amount is agreed upon in the policy should be answered first by RM Travel and the succeeding amount should
be paid by Dragon Insurance up to the amount of the insurance coverage. The excess of the claims of X, Y, and Z, over and above such
insurance coverage, if any, should be answered or paid by RM Travel.
(1994) What is your understanding of a “no fault indemnity” clause found in an insurance policy?
Under the “NO FAULT INDEMNITY” clause, any claim for death or injury of any passenger or third party shall be paid without the necessity
of proving fault or negligence of any kind. The indemnity in respect of any one person shall not exceed P5,000.00, provided they are
under oath, the following proofs shall be sufficient:
1. police report of the accident; and

2. death certificate and evidence sufficient to establish the proper payee; or
3. medical report and evidence of medical or hospital disbursement in respect of which refund is claimed.
4. Claim may be made against one motor vehicle only.
(1994) Raul’s truck bumped the car owned by Luz. The car was insured by Cala Insurance. For the damage caused, Cala paid Luz
P5,000.00 in amicable settlement. Luz executed a release of claim, subrogating Cala to all her rights against Raul. When Cala demanded
reimbursement from Raul, the latter refused saying that he had already paid Luz P4,500 for the damage to the car as evidenced by a
release of claim executed by Luz discharging Raul.
So Cala demanded reimbursement from Luz, who refused to pay, saying that the total damage to the car was P9,500.00 Since Cala paid
P5,000 only, Luz contends that she was entitled to go after Raul to claim the additional P4,500.00
1) Is Cala, as subrogee of Luz, entitled to reimbursement from Raul?

2) May Cala recover what it has paid Luz?
1) No. Luz executed a release in favor of Raul (Manila Mahogany Mfg Corp v CA GR 52756, 12 Oct 1987)
2) Yes. Cala lost its right against Raul because of the release executed by Luz. Since the release was made without the consent
of Cala, Cala may recover the amount of P5,000 form Luz (Manila Mahogany Mfg Corp v CA GR 52756, 12 Oct 1987).
AUTHORIZED DRIVER CLAUSE

(1991) Sheryl insured her newly acquired car, a Nissan Maxima against any loss or damage for P50th and against 3rd party liability for
P20th with the XYZ Ins Co. Under the policy, the car must be driven only by an authorized driver who is either: 1) the insured, or 2) any
person driving on the insured’s order or with his permission: provided that the person driving is permitted in accordance with the licensing
or other laws or regulations to drive the motor vehicle and is not disqualified from driving such motor vehicle by order of a court.
During the effectivity of the policy, the car, then driven by Sheryl herself, who had no driver’s license, met an accident and was extensively
damaged. The estimated cost of repair was P40th. Sheryl immediately notified XYZ, but the latter refused to pay on the policy alleging
that Sheryl violated the terms thereof when she drove it without a driver’s license. Is the insurer correct?
MERCANTILE LAW

The insurer was not correct in denying the claim since the proviso “that the person driving is permitted in accordance with the licensing,
etc.” qualified only a person driving the vehicle other than the insured at the time of the accident (Palermo v Pyramid Ins Co GR 36480
31 May 88)
ALTERNATIVE ANSWER:
The insurer is correct. The clause “authorized driver” in the policy evidently applies to both the insured and any other person driving the Page | 43
vehicle at the time of the accident. The term “authorized driver” should be construed as a person who is authorized by law to driver the
vehicle.
(2003) Rick de la Cruz insured his passenger jeepney with Asiatic Insurers, Inc. The policy provided that the authorized driver of the
vehicle should have a valid and existing driver’s license. The passenger jeepney of Rick de la Cruz which was at the time driven by Jay
Cruz,
figured in an accident resulting in the death of a passenger. At the time of the accident, Jay Cruz was licensed to drive but it was
confiscated by an LTO agent who issued him a Traffic Violation Report (TVR) just minutes before the accident. Could Asiatic Insurers,
Inc., be made liable under its policy? Why? (6%)
Asiatic Insurers, Inc., should be made liable under the policy. The fact that the driver was merely holding a TVR does not violate the
condition that the driver should have a valid and existing driver’s license.
Besides, such a condition should be disregarded because what is involved is a passenger jeepney, and what is involved here is not own
damage insurance but third party liability where the injured party is a third party not privy to the contract of insurance.
(1993) HL insured his brand new car with P Ins Co for comprehensive coverage wherein the insurance company undertook to indemnify
him against loss or damage to the car a) by accidental collision ... b) by fire, external explosion, burglary, or theft, and c) malicious act.
After a month, the car was carnapped while parked in the parking space in front of the Intercontinental Hotel in Makati. HL’s wife who
was driving said car before it was carnapped reported immediately the incident to various government agencies in compliance with the
insurance requirements.
Because the car could not be recovered, HL filed a claim for the loss of the car with the insurance company but it was denied on the
ground that his wife who was driving the car when it was carnapped was in the possession of an expired driver’s license, a violation of
the “authorized driver” clause of the insurance company.
1) May the insurance company be held liable to indemnify HL for the loss of the insured vehicle? Explain.
2) Supposing that the car was brought by HL on installment basis and there were installments due and payable before the loss
of the car as well as installments not yet payable. Because of the loss of the car, the vendor demanded from HL the unpaid balance of
the promissory note. HL resisted the demand and claimed that he was only liable for the installments due and payable before the loss of
the car but no longer liable for other installments not yet due at the time of the loss of the car. Decide.
1) Yes. The car was lost due to theft. What applies in this case is the “theft” clause, and not the “authorized driver” clause. It is
immaterial that HL’s wife was driving the car with an expired driver’s license at the time it was carnapped.
2) The promissory note is not affected by whatever befalls the subject matter of the accessory contract. The unpaid balance on
the promissory note should be paid and not only the installments due and payable before the loss of the car.
GROUP INSURANCE
MERCANTILE LAW

(2000) X company procured a group accident insurance policy for its construction employees variously assigned to its provincial
infrastructure projects. Y Insurance Company underwrote the coverage, the premiums of which were paid for entirely by X Company
without any employee contributions. While the policy was in effect, five of the covered employees perished at sea on their way to their
provincial assignments. Their wives sued Y Insurance Company for payment of death benefits under the policy. While the suit was
pending, the wives signed a power of attorney designating X Company executive, PJ, as their authorized representative to enter into a
settlement with the insurance company. When a settlement was reached, PJ instructed the insurance company to issue the settlement
check to the order of X Company, which will undertake the payment to the individual claimants of their respective shares. PJ
Page | 44
misappropriated the settlement amount and the wives pursued their case against Y Insurance Co. Will the suit prosper? Explain (3%)
Yes. The suit will prosper. Y Ins Co is liable. X Co, through its executive, PJ, acted as agent of Y Ins Co. The latter is thus bound by the
misconduct of its agent. It is the usual practice in the group insurance business that the employer-policy holder is the agent of the insurer.
MERCANTILE LAW

NEGOTIABLE INSTRUMENTS
NEGOTIABLE INSTRUMENT
DEFINITION & CHARACTERISTICS

Page | 45
(2005) What is a negotiable instrument? Give the characteristics of a negotiable instrument. (2%)
Negotiable Instrument is a written contract for the payment of money which is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free from defenses
available to prior parties. Such instrument must comply with Sec. 1 of the Negotiable Instrument Law to be considered negotiable.
The characteristics of a negotiable instrument are the following:
1) Negotiability - That quality or attribute whereby a bill, note or check passes or may pass from hand to hand, similar to money,
so as to give the holder in due course the right to hold the instrument and collect the sum payable for himself free from defenses.
2) Accumulation of Secondary Contracts as they are transferred from one person to another.
(2005) State and explain whether the following are negotiable instruments under the Negotiable Instruments Law: (5%)
1) Postal Money Order;

2) A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND
PESOS (P4,000.00) only, repayable to the depositor 200 days after date.”
3) Letters of credit;
4) Warehouse receipts;
5) Treasury warrants payable from a specific fund.
1) Postal Money Order – Non-Negotiable as it is governed by postal rules and regulation which may be inconsistent with the NIL
and it can only be negotiated once.
2) A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND
PESOS (P4,000.00) only, repayable to the depositor 200 days after date.” – Non-Negotiable as it does not comply with the requisites of
Sec. 1 of NIL
3) Letters of credit - Non-Negotiable
4) Warehouse receipts - Non-Negotiable for the same as Bill of Lading it merely represents good, not money.
5) Treasury warrants payable from a specific fund - Non-Negotiable being payable out of a particular fund.
(2005) Distinguish a negotiable document from a negotiable instrument. (2%)
Negotiable Instrument have requisites of Sec. 1 of the NIL, a holder of this instrument have right of recourse against intermediate parties
who are secondarily liable, Holder in due course may have rights better than transferor, its subject is money and the Instrument itself is
property of value. On the other hand, negotiable document does not contain requisites of Sec. 1 of NIL, it has no secondary liability of
intermediate parties, transferee merely steps into the shoes of the transferor, its subject are goods and the instrument is merely evidence
of title; thing of value are the goods mentioned in the document.
(1997) Can a bill of exchange or a promissory note qualify as a negotiable instrument if –
a. it is not dated; or
b. the day and the month, but not the year of its maturity, is given; or
c. it is payable to “cash”’ or
MERCANTILE LAW

d. it names two alternative drawees
a) Yes. Date is not a material particular required by Sec 1 NIL for the negotiability of an instrument.
b) No. The time for payment is not determinable in this case. The year is not stated.
c) Yes. Sec 9d NIL makes the instrument payable to bearer because the name of the payee does not purport to be the name of
any person.
Page | 46
d) A bill may not be addressed to two or more drawees in the alternative or in succession, to be negotiable (Sec 128 NIL). To do
so makes the order conditional.
(1998) Richard Clinton makes a promissory note payable to bearer and delivers the same to Aurora Page. Aurora Page, however,
endorses it to X in this manner:
“Payable to X. Signed: Aurora Page.”
Later, X, without endorsing the promissory note, transfers and delivers the same to Napoleon. The note is subsequently dishonored by
Richard Clinton. May Napoleon proceed against Richard Clinton for the note? (5%)
Yes. Richard Clinton is liable to Napoleon under the promissory note. The note made by Richard Clinton is a bearer instrument. Despite
special indorsement made by Aurora Page thereon, the note remained a bearer instrument and can be negotiated by mere delivery.
When X delivered and transferred the note to Napoleon, the latter became a holder thereof. As such holder, Napoleon can proceed
against Richard Clinton.
(1997) A delivers a bearer instrument to B. B then specially indorses it to C and C later indorses it in blank to D. E steals the instrument
from D and, forging the signature of D, succeeds in “negotiating” it to F who acquires the instrument in good faith and for value.
a) If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument against the drawer?
b) In case of the dishonor of the check by both the drawee and the drawer, can F hold any of B, C and D liable secondarily on
the instrument?
a) Yes. The instrument was payable to bearer as it was a bearer instrument. It could be negotiated by mere delivery despite the
presence of special indorsements. The forged signature is unnecessary to presume the juridical relation between or among the parties
prior to the forgery and the parties after the forgery. The only party who can raise the defense of forgery against a holder in due course
is the person whose signature is forged.
b) Only B and C can be held liable by F. The instrument at the time of the forgery was payable to bearer, being a bearer
instrument. Moreover, the instrument was indorsed in blank by C to D. D, whose signature was forged by E cannot be held liable by F.
(2001) A issued a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C. C placed the note in his
drawer, which was stolen by the janitor X. X indorsed the note to D by forging C’s signature. D indorsed the note to E who in turn delivered
the note to F, a holder in due course, without indorsement. Discuss the individual liabilities to F of A, B and C. (5%)
A is liable to F. As the maker of the promissory note, A is directly or primarily liable to F, who is a holder in due course. Despite the
presence of the special indorsements on the note, these do not detract from the fact that a bearer instrument, like the promissory note in
question, is always negotiable by mere delivery, until it is indorsed restrictively “For Deposit Only.”
B, as a general indorser, is liable to F secondarily, and warrants that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; that he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless; that at the time of his indorsement, the instrument is valid and subsisting; and that on due
presentment, it shall be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay.
MERCANTILE LAW

C is not liable to F since the latter cannot trace his title to the former. The signature of C in the supposed indorsement by him to D was
forged by X. C can raise the defense of forgery since it was his signature that was forged.
ALTERNATIVE ANSWER:
As a general endorser, B is secondarily liable to F. C is liable to F since it is due to the negligence of C in placing the note in his drawer Page | 47
that enabled X to steal the same and forge the signature of C relative to the indorsement in favor of D. As between C and F who are both
innocent parties, it is C whose negligence is the proximate cause of the loss. Hence C should suffer the loss.
NOTICE DISHONOR
When is notice of dishonor not required to be given to the drawer?
Notice of dishonor is not required to be given to the drawer in any of the following cases:
a) Where the drawer and drawee are the same person;
b) When the drawee is a fictitious person or a person not having capacity to contract;
c) When the drawer is the person to whom the instrument is presented for payment;
d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
e) Where the drawer has countermanded payment (Sec 114 NIL)
PLACE OF PAYMENT
PN is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law (Act 2031). The note was originally
issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the
specified maturity date as the office of the corporate secretary of PX Bank during banking hours. ON maturity date, RP was at the
aforesaid office ready to pay the note but PN did not show up. What PN later did was to sue XL for the face value of the note, plus interest
and costs. Will the suit prosper? Explain. (5%)
Yes. The suit will prosper as far as the face value of the note is concerned, but not with respect to the interest due subsequent to the
maturity of the note and the costs of collection. RP was ready and willing to pay the note at the specified place of payment on the specified
maturity date, but PN did not show up. PN lost his right to recover the interest due subsequent to the maturity of the note and the costs
of collection.
NEGOTIABILITY
(2018) On November 23, 2017, Yas Ysmael (Ysmael) loaned the amount of PhP 5 million to Yarn & Thread Corporation (YTC), through
its President, Ylmas Yektas (Yektas), which loan was evidenced by a Promissory Note (PN), which reads as follows:
Date: _______
Within one year from date hereof, I promise to pay to the order of YAS YSMAEL, the sum of PhP 5 million with interest at 120% per
annum.
YARN & THREAD Corporation
By:
(Sgd.)
Ylmas Yektas
MERCANTILE LAW

Yektas was the controlling stockholder of YTC at the time the PN was issued. As security for the payment of the PN, Yektas issued and
delivered to Ysmael a postdated personal check covering the face value of the PN drawn from his account with Yellow Bell Bank and
Trust Company. The proceeds of the loan under the PN were used by YTC as working capital.
A year later, Ysmael inserted the date of "November 23, 2017" on the date section of the PN, and made a formal demand upon YTC,
through Yektas, to pay the note, but which was refused on the ground that Yektas was no longer the President and controlling shareholder
of YTC. By this time, all the shares of YTC had already been sold to a new group of investors. Ysmael deposited the personal check Page | 48
issued by Yektas which was dishonored. He then filed a collection suit against YTC and Yektas including the accrued interest.
The defendants raised the following defenses in the collection suit. Rule on the merits of each defense. (2% each)
(a) A PN issued with a blank date is one that is not payable on demand or on a fixed or determinable future time, and therefore the
insertion of the date constituted material alteration that nullified it, so that no cause of action arose.
A. The defense is not meritorious. Where the instrument is not dated, it will be considered to be dated as of the time it was issued (Section
17 of NIL ( C ). Section 14 of NIL also concedes to the payee the prima facie authority to fill-in the blanks in a negotiable instrument.
Such prima facie stands in the absence of evidence to the contrary.
(b) Yektas cannot be made liable on the PN since he signed in his capacity as President of YTC, which fact was known to Ysmael
although not indicated on the PN.
B. The defense is not meritorious. Where the instrument contains or a person adds to his signature words indicating that he signs for or
on behalf of a principal or in a representative capacity, he must disclose his principal and must indicate that he is acting on behalf of his
principal (Section 20 of NIL).
Alternative answer
The defense is meritorious. Since the matter of signing the note by Yektas on behalf of YTC is known to Ysmael, then, Yektas has no
personal liability as it may be inferred from the note that he is acting only in a representative capacity.
(c) Yektas signed the PN merely as an accommodation to YTC. As he received no consideration for the PN, it is void for lack of
consideration.
C. The defense is not meritorious. An accommodation party signs a negotiable instrument as a maker, drawer, endorser, acceptor without
receiving value therefor and only for the purpose of lending his name in another. He is liable to a holder for value notwithstanding such
holder, at the time of taking the instrument, knew him only to be an accommodation party ( Section 29 of NIL )
(d) YTC, now owned by new owners, cannot be held liable on the PN since it was entered into by its former owner and President, which
act the new Board of Directors did not ratify.
D. The defense is not meritorious. In stock sales, where shareholder sell a block of stock to new or existing shareholders, the transaction
takes place at the shareholder level only. Because the corporation has a legal personality separate and distinct from that of its
shareholders, a change in the composition of shareholders will not affect its existence nor extinguish its separate legal personality (SME
Bank vs Samson, GR No. 186641, October 8, 2013)
(e) The PN .is void for being in violation of the Usury Law seeking interest at an unconscionable rate of 120% p.a.
E. The defense is not meritorious. The Usury law is currently suspended in view of CB Circular 905 series of 1982 which lifted the ceiling
on interest rate for loans. Moreover, if the interest rate is deemed to be unconscionable despite the absence of the Usury Law, the legal
rate of interest shall be deemed to apply. Thus, the PN remains valid
Alternative answer
The PN remains valid because the obligation to pay the principal amount of the loan is distinct from the obligation to pay the interest on
the loan.
MERCANTILE LAW

(2014) Which of the following instruments is negotiable if all the other requirements of negotiability are met? (1%)
(A) A promissory note with promise to pay out of the U.S. Dollar account of the maker in XYZ Bank
(B) A promissory note which designates the U.S. Dollar currency in which payment is to be made
(C) A promissory note which contains in addition a promise to paint the portrait of the bearer Page | 49
(D) A promissory note made payable
(1993) Discuss the negotiability or non-negotiability of the following notes
1) Manila, September 1, 1993
P2,500.00
I promise to pay Pedro San Juan or order the sum of P2,500.
(Sgd.) Noel Castro
2) Manila, June 3, 1993 P10,000.00
For value received, I promise to pay Sergio Dee or order the sum of P10,000.00 in five (5) installments, with the first
installment payable on October 5, 1993 and the other installments on or before the fifth day of the succeeding month or
thereafter.
(Sgd.) Lito Villa
The promissory note is negotiable as it complies with Sec 1, NIL.

• Firstly, it is in writing and signed by the maker, Noel Castro.
• Secondly, the promise is unconditional to pay a sum certain in money, that is, P2,500.00
• Thirdly, it is payable on demand as no date of maturity is specified.
• Fourth, it is payable to order.
The promissory note is negotiable. All the requirements of Sec 1 NIL are complied with. The sum to be paid is still certain despite that
the sum is to be paid by installments (Sec 2b NIL)
(2013) Antonio issued the following instrument:
August 10, 2013

Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or his designated representative the sum of ONE HUNDRED THOUSAND PESOS
(P100,000.00) from my BPI Acct. No. 1234, if, by this due date, the sun still sets in the west to usher in the evening and rises in the
east the following morning to welcome the day.
MERCANTILE LAW

(Sgd.) Antonio Reyes
Explain each requirement of negotiability present or absent in the instrument.
The instrument contains a promise to pay and was signed by the maker, Antonio Reyes (Section 1(a) of Negotiable Instruments Law).
The promise to pay is unconditional insofar as the reference to the setting of the sun in the west in the evening and its rising in the east
in the morning are concerned. These are certain to happen (Section 4(c) of Negotiable Instruments Law). The promise to pay is
Page | 50
conditional, because the money will be taken from a particular fund, BPI Account No. 1234 (Section 3 of Negotiable Instruments Law).
The Instrument contains a promise to pay a sum certain in money, P100,000.00 (Section (b) of Negotiable Instruments Law). The money
is payable at a determinable future time, sixty days after August 10, 2013 (Section 4(a) of Negotiable Instruments Law). The instrument
is not payable to order or to bearer (Section 1(d) of Negotiable Instruments Law).
(2012) Indicate and explain whether the promissory note is negotiable or non- negotiable.
I promise to pay A or bearer Php100,000.00 from my inheritance which I will get after the death of my father. (2%)
Not negotiable. There is no unconditional promise to pay a sum certain in money (Sec. 1 [b], NIL) as the promise is to pay the amount
out of a particular fund, i.e., the inheritance from the father of the promisor (Sec. 3, NIL).
I promise to pay A or bearer Php100,000 plus the interest rate of ninety (90) – day treasury bills. (2%)
Not negotiable. There is no unconditional promise to pay a sum certain in money. The promise to pay “the interest rate of ninety
(90)-day treasury bills” is vague because, first, there are no 90-day treasury bills (although there are 91-day, 182-day, and
364-days bills); second the promise does not specify whether the so-called “interest rate” is that established at the primary market (where
new T-bills are sold for the first time by the Bureau of Treasury) or at the secondary market (where T-bills can be bought and sold after
they have been issued in the primary market).; and third, T-bills are conventionally quoted in terms of their discount rate, rather than their
interest rate. They do not pay any interest directly; instead, they are sold at a discount of their face value and this “earn” by selling at face
value upon maturity.
I promise to pay A or bearer the sum of Php100,000 if A passes the 2012 bar exams. (2%)
Not negotiable. The promise to pay is subject to a condition, i.e., that A will pass the 2012 bar exams (Sec.1[b],NIL).
I promise to pay A or bearer the sum of Php100.000 on or before December 30, 2012. (2%)
Negotiable. It conforms fully with the requirements of negotiability under Section 1, NIL.
I promise to pay A or bearer the sum of Php100,000. (2%)
Negotiable. It conforms fully with the requirements of negotiability under Section 1,NIL. It is payable on demand because the note does
not express a time for its payment (Sec.7[b], NIL).
(2002) Which of the following stipulations or features of a promissory note (PN) affect or do not affect its negotiability, assuming that the
PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below
and your corresponding answer, either “Affected” or “Not affected.” Explain (5%).
a) The date of the PN is “February 30, 2002.”

b) The PN bears interest payable on the last day of each calendar quarter at a rate equal to five percent (5%) above the then
prevailing 91-day Treasury Bill rate as published at the beginning of such calendar quarter.
c) The PN gives the maker the option to make payment either in money or in quantity of palay or equivalent value.
d) The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or
escort of the holder for 30 days.
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a) Paragraph 1 – negotiability is “NOT AFFECTED.” The date is not one of the requirements for negotiability.
b) Paragraph 2 – negotiability is “NOT AFFECTED” The interest is to be computed at a particular time and is determinable. It
does not make the sum uncertain or the promise conditional.
c) Paragraph 3 – negotiability is “AFFECTED.” Giving the maker the option renders the promise conditional
d) Paragraph 4 – negotiability is “NOT AFFECTED.” Giving the option to the holder does not make the promise conditional.
Page | 51
(2002)
A. Define the following: (1) a negotiable promissory note, (2) a bill of exchange and (3) a check. (3%)
B. You are Pedro Cruz. Draft the appropriate contract language for (1) your negotiable promissory note and (2) your check, each
containing the essential elements of a negotiable instrument (2%)
(1) A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging
to pay on demand or at a fixed or determinable future time, a sum certain in money to order or bearer.
(2) A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer.
(3) A check is a bill of exchange drawn on a bank payable on demand.
B. (1) Negotiable promissory note -
“September 15, 2002
“For value received, I hereby promise to pay Juan Santos or order the sum of TEN THOUSAND PESOS (P10,000) thirty (30) days from
date hereof.
(Signed) Pedro Cruz to: Philippine National Bank

Escolta, Manila Branch”
(1996) What are the requisites of a negotiable instrument?
The requisites of a negotiable instrument are as follows:
a) It must be in writing and signed by the maker or drawer;

b) It must contain an unconditional promise or order to pay a sum certain in money;
c) It must be payable to order or to bearer; and
d) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
(Sec 1 NIL)
(2009) (D) A document, dated July 15, 2009 that reads: ―Pay to X or order the sum of P5,000.00 five days after his pet dog,
Sparky, dies. Signed Y is a negotiable instrument.
True. The document is subject to a term and not a condition. The dying of the dog is a day which is certain to come. Therefore, the order
to pay is unconditional, in compliance with Section 1 of the Negotiable Instruments Law (NIL).
(Note: This answers presumes that there is a drawee)
(2000)
a) MP bought a used cell phone from JR. JR preferred cash but MP is a friend so JR accepted MR’s promissory note for P10,000.
JR thought of converting the note into cash by endorsing it to his brother KR. The promissory note is a piece of paper with the following
MERCANTILE LAW

hand-printed notation: “MP WILL PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM TODAY.”
Below this notation MP’s signature with “8/1/00” next to it, indicating the date of the promissory note. When JR presented MP’s note to
KR, the latter said it was not a negotiable instrument under the law and so could not be a valid substitute for cash. JR took the opposite
view, insisting on the note’s negotiability. You are asked to referee. Which of the opposing views is correct?
b) TH is an indorsee of a promissory note that simply states: “PAY TO JUAN TAN OR ORDER 400 PESOS.” The note has no
date, no place of payment and no consideration mentioned. It was signed by MK and written under his letterhead specifying the address,
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which happens to be his residence. TH accepted the promissory note as payment for services rendered to SH, who in turn received the
note from Juan Tan as payment for a prepaid cell phone card worth 450 pesos. The payee acknowledged having received the note on
August 1, 2000. A Bar reviewee had told TH, who happens to be your friend, that TH is not a holder in due course under Article 52 of the
Negotiable Instruments Law (Act 2031) and therefore does not enjoy the rights and protection under the statute. TH asks for our advice
specifically in connection with the note being undated and not mentioning a place of payment and any consideration. What would your
advice be? (2%).
a) KR is right. The promissory note is not negotiable. It is not issued to order or bearer. There is no word of negotiability containing
therein. It is not issued in accordance with Section 1 of the Negotiable Instruments Law
b) The fact that the instrument is undated and does not mention the place of payment does not militate against its being
negotiable. The date and place of payment are not material particulars required to make an instrument negotiable.
The fact that no mention is made of any consideration is not material. Consideration is presumed.
Ambiguous Instruments
(1998) How do you treat a negotiable instrument that is so ambiguous that there is doubt whether it is a bill or a note? (5%)
1. Where a negotiable instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it either as a bill
of exchange or a promissory note at his election.
BILL OF EXCHANGE AS PROMISSORY NOTE
(2015) (C) When can you treat a bill of exchange as a promissory note? (3%)
A bill of exchange may be treated as a promissory note in the following instances:
1. the drawee is a fictitious person or a person not having the capacity to contract;
2. the drawer and the drawee are one and the same person;
3. where the instrument is so ambiguous that there is a doubt as to whether the instrument is a bill or a note, the holder may treat it either
as a bill or note, at the option of the holder (Sections 130 and 17 of the Negotiable Instruments Law).
7653).
to the order of Jose Cruz or Josefa Cruz
INDORSER
Irregular Indorser vs. General Indorser (2005)
Distinguish an irregular indorser from a general indorser. (3%)
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Irregular Indorser is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes
one because of his signature in the instrument. Because his signature he is considered an indorser and he is liable to the parties in the
instrument. While, a General Indorser warrants that the instrument is genuine, that he has a good title to it, that all prior parties had
capacity to contract; that the instrument at the time of the indorsement is valid and subsisting; and that on due presentment, the instrument
will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary
proceedings for dishonor are made.
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DEFENSES
FORGERY: LIABILITIES OF PRIOR & SUBSEQUENT PARTIES
(1990) Jose loaned Mario some money and, to evidence his indebtedness, Mario executed and delivered to Jose a promissory note
payable to his order. Jose endorsed the note to Pablo. Bert fraudulently obtained the note from Pablo and endorsed it to Julian by forging
Pablo’s signature. Julian endorsed the note to Camilo.
a) May Camilo enforce the said promissory note against Mario and Jose?
b) May Camilo go against Pablo?
c) May Camilo enforce said note against Julian?
d) Against whom can Julian have the right of recourse?
e) May Pablo recover from either Mario or Jose?
a) Camilo may not enforce said promissory note against Mario and Jose. The promissory note at the time of forgery being
payable to order, the signature of Pablo was essential for the instrument to pass title to subsequent parties. A forged signature was
inoperative (Sec 23 NIL). Accordingly, the parties before the forgery are not juridically related to parties after the forgery to allow such
enforcement.
b) Camilo may not go against Pablo, the latter not having indorsed the instrument.
c) Camilo may enforce the instrument against Julian because of his special indorsement to Camilo, thereby making him
secondarily liable, both being parties after the forgery.
d) Julian, in turn, may enforce the instrument against Bert who, by his forgery, has rendered himself primarily liable.
e) Pablo preserves his right to recover from either Mario or Jose who remain parties juridically related to him. Mario is still
considered primarily liable to Pablo. Pablo may, in case of dishonor, go after Jose who, by his special indorsement, is secondarily liable.
Note: It is possible that an answer might distinguish between blank and special indorsements of prior parties which can thereby materially
alter the above suggested answers. The problem did not clearly indicate the kind of indorsements made.
(1995) Alex issued a negotiable PN (promissory note) payable to Benito or order in payment of certain goods. Benito indorsed the PN to
Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celso’s possession the PN was stolen
by Dennis who forged Celso’s signature and discounted it with Edgar, a money lender who did not make inquiries about the PN. Edgar
indorsed the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex the latter refused to pay. Dennis
could no longer be located.
1. What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar? Explain
2. Does Celso have any right against Alex, Benito and Felix? Explain.
1. Felix has no right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celso’s signature by Dennis.
Parties to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the
forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be
held liable by the latter.
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2. Celso has the right to collect from Alex and Benito. Celso is a party subsequent to the two. However, Celso has no right to
claim against Felix who is a party subsequent to Celso (Sec 60 and 66 NIL)
INCOMPLETE AND UNDELIVERED INSTRUMENT
(2018) Yolanda executed and signed a promissory note with all the requisites for negotiability being present, except for the amount which
was left blank. She kept the promissory note in her desk and decided to place the amount at a later date. The indicated payee, Yohann, Page | 54
managed to obtain the promissory note from Yolanda's desk and filled out the amount for the sum of PhP 10 million, which was the
amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann later endorsed and delivered the check to Yvette,
under circumstances that would constitute the latter to be a holder in due course.
(a) May Yvette hold Yolanda liable on the note? (2.5%)
A. Yvette cannot hold Yolanda liable on the note. This a case of incomplete and undelivered instrument insofar as Yolanda is concerned.
Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in
the hands of any holder, including a holder in due course as against Yolanda, whose signature was placed thereon before delivery
(Section 15 of the Negotiable instruments law)
(2000) PN makes a promissory note for P5,000.00, but leaves the name of the payee in blank because he wanted to verify its correct
spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note
was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have filched the note from PN’s
office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he
did not authorize its completion and delivery. But X said he had no participation in, or knowledge about, the pilferage and alteration of
the note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law.
a) Who is correct and why? (3%)
b) Can the payee in a promissory note be a “holder in due course” within the meaning of the Negotiable Instruments Law (Act 2031)?
Explain your answer. (2%)
a) PN is right. The instrument is incomplete and undelivered. It did not create any contract that would bind PN to an obligation
to pay the amount thereof.
b) A payee in a promissory note cannot be a “holder in due course” within the meaning of the Negotiable Instruments Law,
because a payee is an immediate party in relation to the maker. The payee is subject to whatever defenses, real of personal,
available to the maker of the promissory note.
ALTERNATIVE ANSWER:
b) A payee can be a “holder in due course.” A holder is defined as the payee or indorsee of the instrument who is in possession
of it. Every holder is deemed prima facie to be a holder in due course.
(2008) AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB Corporation who was
instructed deliver it to XY Bank. Instead , the officer intending to defraud the Corporation, filled up the check by making himself as
the payee and delivered it to XY Bank for deposit to his personal account. XY Bank debited AB Corporation’s account. AB
Corporation came to know of the officer’s fraudulent act after he absconded. AB Corporation asked XY Bank to re-credit its
amount. XY Bank refused.
If you were the judge, what issues would you consider relevant to resolve the case? Explain. (3%)
The filling up by the officer of his name as payee does not constitute forgery, and contemplates a mechanically incomplete but delivered
instrument. Under Sec. 14 of the NIL, in order to enforce an incomplete but delivered instrument against a prior party, it must be filled-up
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strictly in accordance with the authority given. The doctrine of comparative negligence provides that AB Corp. is deemed negligent for
having issued the check with a blank payee section that facilitated the fraud; it should be AB Corp. that must bear the loss, and not XY
Bank.
How would you decide the case? Explain. (2%)
I would fin AB Corp. liable for its negligence in delivering an incomplete instrument to XY Bank (Sec. 14, NIL). Page | 55
(1997) A, single proprietor of a business concern, is about to leave for a business trip and, as he so often does on these occasions, signs
several checks in blank. He instructs B, his secretary, to safekeep the checks and fill them out when and as required to pay accounts
during his absence. B fills out one of the checks by placing her name as payee, fills in the amount, endorses and delivers the check to C
who accepts it in good faith as payment for goods sold to B. B regrets her action and tells A what she did. A directs the Bank in time to
dishonor the check. When C encashes the check, it is dishonored. Can A be held liable to C?
Yes, A can be held liable to C, assuming that the latter gave notice of dishonor to A. This is a case of an incomplete instrument but
delivered as it was entrusted to B, the secretary of A. Moreover, under the doctrine of comparative negligence, as between A and C, both
innocent parties, it was the negligence of A in entrusting the check to B which is the proximate cause of the loss.
INCOMPLETE & DELIVERED
(2004) AX, a businessman, was preparing for a business trip abroad. As he usually did in the past, he signed several checks in blank
and entrusted them to his secretary with instruction to safeguard them and fill them out only when required to pay accounts during his
absence. OB, his secretary, filled out one of the checks by placing her name as the payee. She filled out the amount, endorsed and
delivered the check to KC, who accepted it in good faith for payment of gems that KC sold to OB. Later, OB told AX of what she did with
regrets. AX timely directed the bank to dishonor the check. Could AX be held liable to KC? Answer and reason briefly. (5%)
Yes. AX could be held liable to KC. This is a case of an incomplete check, which has been delivered. Under Section 14 of the Negotiable
Instruments Law, KC, as a holder in due course, can enforce payment of the check as if it had been filled up strictly in accordance with
the authority given by AX to OB and within a reasonable time.
(2005) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brad’s life if he failed to pay.
Brad and Pete went to see Señorita Isobel, Brad’s rich cousin, and asked her if she could sign a promissory note in his favor in the
amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad, Señorita Isobel acceded to the request. She affixed her signature
on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then filled up the blank paper, making a promissory
note for the amount of P100,000.00. He then indorsed and delivered the same to Pete, who accepted the note as payment of the debt.
What defense or defenses can Señorita Isobel set up against Pete? Explain. (3%)
The defense (personal defense) which Señorita Isobel can set up against Pete is that the amount of P100,000.00 is not in accordance
with the authority given to her to Brad (in the presence of Pete) and that Pete was not a holder in due course for acting in bad faith when
accepted the note as payment despite his knowledge that it was only 10,000.00 that was allowed by Señorita Isobel during their meeting
with Brad.
INCOMPLETE DELIVERED INSTRUMENTS VS. INCOMPLETE UNDELIVERED INSTRUMENT

(2006) Jun was about to leave for a business trip. As his usual practice, he signed several blank checks. He instructed Ruth, his secretary,
to fill them as payment for his obligations. Ruth filled one check with her name as payee, placed P30,000.00 thereon, endorsed and
delivered it to Marie. She accepted the check in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what
MERCANTILE LAW

she did and apologized to Jun. Immediately he directed the drawee bank to dishonor the check. When Marie encashed the check, it was
dishonored.
1. Is Jun liable to Marie? (5%)
Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable Instruments Law, which provides that
Page | 56
there was prima facie authority on the part of Ruth to fill-up any of the material particulars thereof. Having done so, and when it is first
completed before it is negotiated to a holder in due course like Marie, it is valid for all purposes, and Marie may enforce it within a
reasonable time, as if it had been filled up strictly in accordance with the authority given.
2. Supposing the check was stolen while in Ruth's possession and a thief filled the blank check, endorsed and delivered it to
Marie in payment for the goods he purchased from her, is Jun liable to Marie if the check is dishonored? (5%)
No. Even though Marie is a holder in due course, this is an incomplete and undelivered instrument, covered by Section 15 of the
Negotiable Instruments Law. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as against any person, including Jun, whose signature was placed thereon before
delivery. Such defense is a real defense even against a holder in due course, available to a party like Jun whose signature appeared
prior to delivery.
COMPLETE AND UNDELIVERED INSTRUMENT
(2018) Yolanda executed and signed a promissory note with all the requisites for negotiability being present, except for the amount which
was left blank. She kept the promissory note in her desk and decided to place the amount at a later date. The indicated payee, Yohann,
managed to obtain the promissory note from Yolanda's desk and filled out the amount for the sum of PhP 10 million, which was the
amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann later endorsed and delivered the check to Yvette,
under circumstances that would constitute the latter to be a holder in due course.
(a) May Yvette hold Yolanda liable on the note? (2.5%)
A. Yvette cannot hold Yolanda liable on the note. This a case of incomplete and undelivered instrument insofar as Yolanda is concerned.
Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in
the hands of any holder, including a holder in due course as against Yolanda, whose signature was placed thereon before delivery
(Section 15 of the Negotiable instruments law)
(b) Would your answer be the same if the promissory note was actually completed by Yolanda (including the amount of PhP 10 million),
but stolen from her desk by Yohann? Can Yvette enforce the note against Yolanda? (2.5%)
B. The answer will not be the same. Now that the instrument is complete but undelivered and in the hands of Yvette, a holder in due
course, a valid and intentional delivery to make all parties prior to Yvette liable is conclusively presumed under Section 16 of the NIL.
Therefore, Yvette can hold Yolanda, a prior party, liable. A complete but undelivered instrument is only a personal defense not available
against a holder in due course.
ILLICIT/ILLEGAL CONSIDERATION
(2007) R issued a check for P1m which he used to pay S for killing his political enemy. (10%)
Can be the check be considered a negotiable instrument?
Yes, the check can be considered a negotiable instrument even if it was issued to pay S to kill his political enemy. The validity of the
consideration is not one of the requisites of a negotiable instruments (Section 1, Negotiable Instruments Law.) it merely constitute a
defect of title (Section 55, Negotiable Instruments Law).
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Does S have a cause of action against R in case of dishonor by the drawee bank?
No, S does not have a cause of action against R in case of dishonor of the check by the drawee bank. S is not a holder in due course,
thus, R can raise the defense that the check was issued for an illegal consideration (Section 58, Negotiable Instruments Law).
Page | 57
If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily liable by T?
Yes, R may be held secondarily liable by T who took the check in good faith and for value. T is a holder in due course. R cannot raise
the defense of illegality of the considerarion, because T took the check fre from the defect of title of S (Section 57, Negotiable Instrumets
Law).
(2009) Lorenzo drew a bill of exchange in the amount of P100,000.00 payable to Barbara or order, with his wife, Diana, as drawee. At
the time the bill was drawn. Diana was unaware that Barbara is Lorenzo’s paramour. Barbara then negotiated the bill to her sister, Elena,
who paid for it for value, and who did not know who Lorenzo was. On due date, Elena presented the bill to Diana for payment, but the
latter promptly dishonored the instrument because, by then, Diana had already learned of her husband’s dalliance.
Was the bill lawfully dishonored by Diana? Explain. (3%)
No, the bill was not lawfully dishonored by Diana. Elena, to whom the instrument was negotiated, was a holder in due course inasmuch
as she paid value therefore in good faith.
Does the illicit cause or consideration adversely affect the negotiability of the bill? Explain. (3%)
No. the illicit cause or consideration does not adversely affect the negotiability of the bill, especially in the hands of a holder in due course.
Under Sec. 1 of the Negotiable Instruments law, the bill of exchange is a negotiable instrument. Every negotiable instrument is deemed
prima facie to have been issued for valuable consideration, and every person whose signature appears thereon is deemed to have
become a party thereto for value (Sec. 24, Negotiable Instruments Law).
HOLDER IN DUE COURSE
(2017) Forgery is a real defense but may only be raised against a holder not in due course. (2%)
FALSE. Being a real defense, it can be raised even against a holder in due course.
FORGERY
(2016) After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as drawee. The bill reads:
"October 1, 2016. Pay to the order of B the sum of Pl million. To: C (drawee).
Signed, A."
A then delivered the bill to B who, however, lost it. It turned out that it was stolen by D, B's brother. D lost no time in forging B's signature
and negotiated it to E who acquired it for value and in good faith.
May E recover on the bill from C, the drawee? Explain. (5%)
E cannot recover from C, the drawee. The forged endorsement of B did not result in transfer of the title in favor of E as no right can be
acquired under such forged endorsement.
Alternative Answer
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The drawee, C, is not liable unless he accepted the instrument.
Take this as a lecture
Yes. E may recover on the bill from C, the drawee; Provided, that C accepts the instrument presented by E.
Section 62 of the Negotiable Instruments Law, provides that the acceptor, by accepting the instrument, engages that he will pay it
Page | 58
according to the to the tenor of his acceptance and admits:
a) the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and
b) the existence of the payee and his then capacity to indorse.
Upon C’s acceptance of the instrument, he shall automatically be primarily liable to the holder of the instrument even if the drawer’s
signature is really forged, because at the time of making his acceptance, he warrants that the drawer’s signature is genuine.
(1992) Perla brought a motor car payable on installments from Automotive Company for P250th. She made a down payment of P50th
and executed a promissory note for the balance. The company subsequently indorsed the note to Reliable Finance Corporation which
financed the purchase. The promissory note read:
“For value received, I promised to pay Automotive Company or order at its office in Legaspi City, the sum of P200,000.00 with interest at
twelve (12%) percent per annum, payable in equal installments of P20,000.00 monthly for ten (10) months starting October 21, 1991.
Manila September 21, 1991.
(sgd) Perla
Pay to the order of Reliable Finance Corporation.

Automotive Company By: (Sgd) Manager
Because Perla defaulted in the payment of her installments, Reliable Finance Corporation initiated a case against her for a sum of
money. Perla argued that the promissory note is merely an assignment of credit, a non-negotiable instrument open to all defenses
available to the assignor and, therefore, Reliable Finance Corporation is not a holder in due course.
a) Is the promissory note a mere assignment of credit or a negotiable instrument? Why?

b) Is Reliable Finance Corp a holder in due course? Explain briefly.
a) The promissory note in the problem is a negotiable instrument, being in compliance with the provisions of Sec 1 NIL. Neither
the fact that the payable sum is to be paid with interest nor that the maturities are in stated installments renders uncertain the amount
payable (Sec 2 NIL)
b) Yes, Reliable Finance Corporation is a holder in due course given the factual settings. Said corporation apparently took the
promissory note for value, and there are no indications that it acquired it in bad faith (Sec 52 NIL see Salas v CA 181 s 296)
(2012) X borrowed money from Y in the amount of Php1Million and as payment, issued a check. Y then indorsed the check to his sister
Z for no consideration. When Z deposited the check to her account, the check was dishonored for insufficiency of funds. Is Z a holder in
due course? Explain your answer. (5%)
Z is not a holder in due course. She did not give any valuable consideration for the check. To be a holder in due course, the holder must
have taken the check in good faith and for value (Sec. 52[c], Negotiable Instruments Law).
MERCANTILE LAW

Who is liable on the check. The drawer or the indorser? Explain your answer. (5%)
X, the drawer, will be liable. As the drawer, X engaged that on due presentment the check would be paid according to its tenor and that
if it is dishonored and he is given notice of dishonor, he will pay the amount to the holder (Sec. 61, NIL). No notice of dishonor need be
given to X if he is aware that he has insufficient funds in his account. Under Section 114(d) of the Negotiable Instruments Law, notice of
dishonor is not required to be given to the drawer where he has no right to expect that the drawee will honor the instrument. Z cannot
Page | 59
hold Y, the endorser, liable as the latter can raise the defense that there was no valuable consideration for the endorsement of the check
(Sec. 58, NIL).
(1993) Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account
in the sum of P1,000. However, Evelyn inserted P5,000 in violation of the instruction. She negotiated the note to Julie who had knowledge
of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity.
1) Can Devi enforce the note against Larry and if she can, for how much? Explain.
2) Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the latter enforce the note
against Larry?
1) Yes, Devi can enforce the negotiable promissory note against Larry in the amount of P5,000. Devi is a holder in due course
and the breach of trust committed by Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a holder in due
course, Devi is not subject to such personal defense.
2) Yes. Baby is not a holder in due course because she has knowledge of the breach of trust committed by Evelyn against Larry
which is just a personal defense. But having taken the instrument from Devi, a holder in due course, Baby has all the rights of a holder
in due course. Baby did not participate in the breach of trust committed by Evelyn who filled the blank but filled up the instrument with
P5,000 instead of P1,000 as instructed by Larry (Sec 58 NIL)
(1996) What constitutes a holder in due course?
A holder in due course is one who has taken the instrument under the following conditions:
1. That it is complete and regular upon its face;

2. That he became holder of it before it was overdue and without notice that it had been previously dishonored, if such was the
fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person
negotiating it. (Sec 52, NIL)
(1996) Eva issued to Imelda a check in the amount of P50th post-dated Sep 30, 1995, as security for a diamond ring to be sold on
commission. On Sep 15, 1995, Imelda negotiated the check to MT investment which paid the amount of P40th to her. Eva failed to sell
the ring, so she returned it to Imelda on Sep 19, 1995. Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus,
when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her, Eva
raised the defense of absence of consideration, the check having been issued merely as security for the ring that she could not sell. Does
Eva have a valid defense? Explain.
No. Eva does not have a valid defense. First, MT Investment is a holder in due course and, as such, holds the postdated check free from
any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence
of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a
holder in due course. Second, it is not a ground for the discharge of the postdated check as against a holder in due course that it was
issued merely as security. The only grounds for the discharge of negotiable instruments are those set forth in Sec 119 of the NIL and
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none of those grounds are available to Eva. The latter may not unilaterally discharge herself from her liability by the mere expediency of
withdrawing her funds from the drawee bank. (State Investments v CA GR 101163, Jan 11, 1993).
(1998) X makes a promissory note for P10,000 payable to A, a minor, to help him buy school books. A endorses the note to B for value,
who in turn endorses the note to C. C knows A is a minor. If C sues X on the note, can X set up the defenses of minority and lack of
consideration? (3%)
Page | 60
Yes. C is not a holder in due course. The promissory note is not a negotiable instrument as it does not contain any word of negotiability,
that is, order or bear, or words of similar meaning or import. Not being a holder in due course, C is to subject such personal defenses of
minority and lack of consideration. C is a mere assignee who is subject to all defenses.
ALTERNATIVE ANSWER:
X cannot set up the defense of the minority of A. Defense of minority is available to the minor only. Such defense is not available to X.
X cannot set up the defense against C. Lack of consideration is a personal defense which is only available between immediate parties
or against parties who are not holders in due course. C’s knowledge that A is a minor does not prevent C from being a holder in due
course. C took the promissory note from a holder for value, B.
(2002)
A. AB issued a promissory note for P1,000 payable to CD or his order on September 15, 2002. CD indorsed the note in blank
and delivered the same to EF. GH stole the note from EF and on September 14, 2002 presented it to AB for payment. When asked by
AB, GH said CD gave him the note in payment for two cavans of rice. AB therefore paid GH P1,00 on the same date. On September 15,
2002, EF discovered that the note of AB was not in his possession and he went to AB. It was then that EF found out that AB had already
made payment on the note. Can EF still claim payment from AB? Why? (3%)
B. As a sequel to the same facts narrated above, EF, out of pity for AB who had already paid P1,000.00 to GH, decided to forgive
AB and instead go after CD who indorsed the note in blank to him. Is CD still liable to EF by virtue of the indorsement in blank? Why?
(2%)
A. No. EF cannot claim payment from AB. EF is not a holder of the promissory note. To make the presentment for payment, it is
necessary to exhibit the instrument, which EF cannot do because he is not in possession thereof.
B. No, because CD negotiated the instrument by delivery.
(2008) (A) As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice versa. Give two
(2) instances where a prior party may hold a subsequent party liable.
In the following cases, a prior party may hold a subsequent party liable:
(1) where an instrument is negotiated back to a prior party, and he reissues and further negotiates the same, he is entitled to en force
payment against a subsequent party who qualifies as an intervening party to whom the prior party is not personally liable; and
(2) in the case of an accommodation party arrangement, where the accommodation party may recover from the party accommodated,
even when the latter is a subsequent party (Sec. 29, NIL).
(B) How does the shelter principle embodied in the Negotiable Instruments Law operate to give the rights of a holder- in-dine course to
a holder who does not have the status of a holder-in-due course? Briefly explain. (2%)
The “shelter principle” provides that a holder who is not himself a holder in due course but is not a party to any fraud or illegality affecting
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the instrument, and who derives his title from a holder in due course, acquires the rights of a holder in due course (Sec. 58, NIL).
CHECKS
KINDS OF CHECKS Page | 61
(2015) (B) Is a manager’s check as good as cash? Why or why not? (2%)
(B) Yes, the Supreme Court held in various decisions that a manager’s check is good as cash. A manager’s check is a check drawn by
the bank against itself. It is deemed pre-accepted by the bank from the moment of issuance. The check becomes the primary obligation
of the bank which issues it and constitutes its written promise to pay. By issuing it, the bank in effect commits its total resources, integrity
and honor behind the check (Tan v. Court of Appeals, G.R. No. 108555, December 20, 1994, 239 SCRA 310; International Corporate
Bank V. Gueco, G.R. No. 141968, February 12, 2001. 351 SCRA 516; Metrobank and Trust Company v. Chiok, G.R. No. 172652,
November 26, 2014).
ALTERNATIVE ANSWER
Manager’s check is not legal tender because under Article 1249 of the Civil Code, checks do not produce the effect of payment until
encashed, or through the fault of the creditor, their value has been impaired. Moreover, under the Central Bank Act, the debtor cannot
compel the creditor to accept checks in payment of a debt whether public or private.
(2014) Paul George Pua (Pua) filed a complaint for a sum of money against the spouses Benito and Caroline James (Spouses James).
In the complaint, Pua prayed that the defendants pay Pua the amount of P8,500,000.00, covered by a check. Pua asserts that defendants
owed him a sum of money way back in 1988 for which the Spouses James gave him several checks. These checks, however, had all
been dishonored and Pua has not been paid the amount of the loan plus the agreed interest. In 1996, the Spouses James approached
Pua to get the computation of their liability including the 2% compounded interest. After bargaining to lower the amount of their liability,
the Spouses James gave Puaa postdated check bearing the discounted amount of P8,500,000.00. Like the 1988 checks, the drawee
bank likewise dishonored this check. To prove his allegations, Pua submitted the original copies of the 17 checks issued by Caroline in
1988 and the check issued in 1996, Manila trust Check No. 750. The Spouses James, on the other hand, completely denied the existence
of the debt asserting that they had never approached Pua to borrow money in 1988 or in 1996. They assert, instead, that Pua is simply
acting at the instance of his sister, Lilian, to file a false charge against them using a check left to fund a gambling business previously
operated by Lilian and Caroline. Decide. (5%)
I will decide against the Spouses James’ position. A check is evidence of indebtedness and proof of an obligation. It can be used in lieu
of and for the same purpose as a promissory note. In other words, a check functions more than a promissory note since it not only
contains an undertaking to pay an amount of money but is an order addressed to a bank and partakes of a representation that the drawer
has funds on deposit against which the check is drawn, sufficient to ensure payment upon its presentation to the bank. A check, the
entries of which are in writing, could prove a loan transaction. Thus, under the NIL, every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party for value.
(Pua vs Spouse Benito Tiong (2013)
CROSSED CHECKS
(2005) What is a crossed check? What are the effects of crossing a check? Explain.
A Crossed Check under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion
of the checks. The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which
means that the drawee should pay only with the intervention of that company.
Effects of Crossed Checks
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1) The check may not be encashed but only deposited in the bank.
2) The check may be negotiated only once—to one who has an account with a bank.
3) The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose, so that
he must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.
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(2004) Distinguish clearly (1) crossed checks from cancelled checks;
A crossed check is one with two parallel lines drawn diagonally across its face or across a corner thereof. On the other hand, a cancelled
check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof.
(1996) What are the effects of crossing a check?
The effects of crossing a check are as follows:
a. The check may not be encashed but only deposited in a bank;

b. The check may be negotiated only once to one who has an account with a bank;
c. The act of crossing a check serves as a warning to the holder thereof that the check has been issued for a definite purpose
so that the holder must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course (See
Bataan Cigar and Cigarette Factory, Inc. v CA GR 93048, Mar 3, 1994)
(1996) On March 1, 1996, Pentium Company ordered a computer from CD Bytes, and issued a crossed check in the amount of P30,000
post-dated Mar 31, 1996. Upon receipt of the check, CD Bytes discounted the check with Fund House. On April 1, 1996, Pentium stopped
payment of the check for failure of CD Bytes to deliver the computer. Thus, when Fund House deposited the check, the drawee bank
dishonored it.
If Fund House files a complaint against Pentium and CD Bytes for the payment of the dishonored check, will the complaint prosper?
Explain.
The complaint filed by Fund House against Pentium will not prosper but the one against CD Bytes will. Fund House is not a holder in due
course and, therefore, Pentium can raise the defense of failure of consideration against it. The check in question was issued by Pentium
to pay for a computer that it ordered from CD Bytes. The computer not having been delivered, there was a failure of consideration. The
check discounted with Fund House by CD Bytes is a crossed check and this should have put Fund House on inquiry. It should have
ascertained the title of CD Bytes to the check or the nature of the latter’s possession. Failing in this respect, Fund House is deemed guilty
of gross negligence amounting to legal absence of good faith and, thus, not a holder in due course. Fund House can collect from CD
Bytes as the latter was the immediate indorser of the check. (See Bataan Cigar and Cigarette Factory v CA et al GR 93048 Mar 3, 1994)
(1994) Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold
and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to
deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants
to know from you as counsel:
1) What are the effects of crossing a check?

2) Whether as second indorser and holder of the crossed check, is it a holder in due course?
3) Whether Po’s defense of lack of consideration as against Jose is also available as against Excel?
1) The effects of crossing a check are:

a. The check is for deposit only in the account of the payee
b. The check may be indorsed only once in favor of a person who has an account with a bank
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c. The check is issued for a specific purpose and the person who takes it not in accordance with said purpose does
not become a holder in due course and is not entitled to payment thereunder.
2) No. It is a crossed check and Excel did not take it in accordance with the purpose for which the check was issued. Failure on
its part to inquire as to said purpose, prevented Excel from becoming a holder in due course, as such failure or refusal constituted bad
faith.
3) Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press can set up against Jose
Page | 63
(State Investment House v IAC 175 S 310)
(1995) On Oct 12, 1993, Chelsea Straights, a corp engaged in the manufacture of cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed checks postdated 15 Mar 94 and 15 Apr 94 in full payment therefor. On 19 Jan 94 Moises
sold to Dragon Investment House at a discount the two checks drawn by Chelsea in his favor. Moises failed to deliver the bales of tobacco
as agreed despite Chelsea’s demand. Consequently, on 1 Mar 94 Chelsea issued a “stop payment” order on the 2 checks issued to
Moises. Dragon, claiming to be a holder in due course, filed a complaint for collection against Chelsea for the value of the checks.
Rule on the complaint of Dragon. Give your legal basis.
(1991) Mr Pablo sought to borrow P200th from Mr Carlos. Carlos agreed to loan the amount in the form of a postdated check which
was crossed (i.e. 2 parallel lines diagonally drawn on the top left portion of the check). Before the due date of the check, Pablo discounted
it with Noble On due date, Noble deposited the check with his bank. The check was dishonored. Noble sued Pablo. The court dismissed
Noble’s complaint. Was the court’s decision correct?
The court’s decision was incorrect. Pablo and Carlos, being immediate parties to the instrument, are governed by the rules of privity.
Given the factual circumstances of the problem, Pablo has no valid excuse from denying liability, (State investment House v IAC GR
72764 13 July 1989). Pablo undoubtedly had benefited in the transaction. To hold otherwise would also contravene the basic rules of
unjust enrichment. Even in negotiable instruments, the Civil Code and other laws of general application can still apply suppletorily.
ALTERNATIVE ANSWER:
The dismissal by the court was correct. A check whether or not post-dated or crossed, is still a negotiable instrument and unless Pablo
is a general indorser, which is not expressed in the factual settings, he cannot be held liable for the dishonor of the instrument. In State
Investment House v IAC (GR 72764 13Jul1989), the court did not go so far as to hold that the fact of crossing would render the instrument
non-negotiable.
ALTERNATIVE ANSWER:
In State Investment House v IAC (GR 72764 13Jul1989), the SC considered a crossed check as subjecting a subsequent holder thereof
to the contractual covenants of the payor and the payee. If such were the case, then the instrument is not one which can still be said to
contain an unconditional promise to pay or order a sum certain in money. In the transfer of non-negotiable credits by assignment, the
transferor does not assume liability for the fault of the debtor or obligor. Accordingly the court’s decision was correct.
ALTERNATIVE ANSWER:
Yes. The check is crossed. It should have forewarned Mr. Noble that it was issued for a specific purpose. Hence, Mr Noble could not be
a holder in due course. He is subject to the personal defense of breach of trust/ agreement by Mr. Pablo. Such defense is available in
favor of Mr Carlos against Mr Noble.
Dragon cannot collect from Chelsea. The instruments are crossed checks which were intended to pay for the 2,000 bales of tobacco to
be delivered to Moises. It was therefore the obligation of Dragon to inquire as to the purpose of the issuance of the 2 crossed checks
before causing them to be discounted. Failure on its part to make such inquiry, which resulted in its bad faith, Dragon cannot claim to be
a holder in due course. Moreover, the checks were sold, not endorsed, by him to Dragon which did not become a holder in due course.
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Not being a holder in due course, Dragon is subject to the personal defense on the part of Chelsea concerning the breach of trust on the
part of Moises Lim in not complying with his obligation to deliver the 2000 bales of tobacco.
REASONABLE TIME TO ENCASH THE CHECK
(2017) In 2006, Donald, an American temporarily residing in Cebu City, issued to Rhodora a check for $50,000 drawn against Wells Page | 64
Fargo Bank with offices in San Francisco, California. Rhodora negotiated the check and delivered it to Yaasmin, a Filipina socialite who
frequently travelled locally and internationally. Because of her frequent travels, Yaasmin misplaced the check. It was only 11 years later
on, in 2017, when she found the check inside a diary kept in her vault in her Hollywood, California house.
Discuss and explain the rights of Yaasmin on the check. (4%)
The check is considered a stale one already, and Yaasmin cannot expect payment on it. A stale check is one which has not been
presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, a check must be presented for payment within a reasonable time after its issue. In banking parlance, that is 6 months
from issue date. Failure of a payee to encash a check for more than ten years undoubtedly resulted in the check becoming stale.
LIABILITY OF DRAWEE BANK
(2019) B.8. Mrs. T maintained a checking account with Bank U. While Mrs. T was abroad, she left her checkbook inside her office drawer,
which she kept under lock and key. However, Mrs. T’s long-time secretary, Ms. S, knew where the checkbook was hidden. Ms. S then
broke the lock on the office drawer, took one of Mrs. T’s blank checks, and succeeded to encash ₱200,000.00 from Bank U by imitating
Mrs. T’s signature. As soon as Mrs. T returned from abroad and discovered the incident, she immediately reported the matter to Bank U,
seeking that the transaction be reversed. However, the bank refused, contending that Mrs. T should bear the loss arising from the forgery.
(a) Is the imitation of Mrs. T’s signature considered as a material alteration under the Negotiable Instruments Law? Explain.
No, the imitation of Mrs. T’s signature is not considered a material alteration.
Section 124 of the Negotiable Instruments Law explicitly relates to a negotiable instrument being altered and Section 125 enumerates
what can be altered in order to become material alteration. They presuppose that there is already an existing negotiable instrument before
an alteration can occur. A blank and unissued check, as in this case, lacks all the requisites of a negotiable instrument. Ms. S cannot
materially alter what is not a negotiable instrument. Therefore, the imitation of Ms. U’s signature cannot be considered as material
alteration.
(b) Is Bank U’s contention tenable? Explain.
No, Bank U’s contention is not tenable. In the case of Samsung Construction Company Phils., Inc. v. FEBTC the Supreme Court held
that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be
traced on the part of the drawer whose signature was forged. In this case, there was no negligence on the part of Ms. U in keeping her
checkbook. Bank U must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.
Therefore, Bank U’s contention is untenable.
(2015) (A) Nadine has a checking account with Fair & Square Bank. One day, she lost her checkbook and the finder was able to forge
her signature and encash the forged check. Will Nadine be able to recover the amount debited from her checking account from Fair &
Square Bank? Justify your answer. (3%)
Yes, Nadine should be able to recover the amount debited from her checking account from Fair and Square Bank. The Bank is supposed
to know the signature of its clients. The Bank was thus negligent in not detecting the forgery of Nadine’s signature, and paying the check.
Under the circumstances, there was no negligence on the part of Nadine which would preclude her from invoking forgery (Philippine
National Bank v. Quimpo, G.R. No. 53194, March 14, 1988, 158 SCRA 582).
(1998) X draws a check against his current account with the Ortigas branch of Bonifacio Bank in favor of B. Although X does not have
sufficient funds, the bank honors the check when it is presented for payment. Apparently, X has conspired with the bank’s bookkeeper
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so that his ledger card would show that he still has sufficient funds. The bank files an action for recovery of the amount paid to B because
the check presented has no sufficient funds. Decide the case (5%)
The bank cannot recover the amount paid to B for the check. When the bank honored the check, it became an acceptor. As acceptor,
the bank became primarily and directly liable to the payee/holder B. The recourse of the bank should be against X and its bookkeeper
who conspired to make X’s ledger show that he has sufficient funds.
Page | 65
ALTERNATIVE ANSWER:
The bank can recover from B. This is solutio indebiti because there is payment by the bank to B when such payment is not due. The
check issued by X to B as payee had no sufficient funds.
LIABILITY OF DRAWER AND DRAWEE BANK

(2010) Marlon deposited with LYRIC Bank a money market placement of P1 million for tern of 31 days. On Maturity date, one claiming
to be Marlon called up the LYRIC Bank account officer and instructed him to give the manager’s check representing the proceeds of the
money market placement to Marlon’s girlfriend Ingrid. The check, which bore the forged signature of Marlon, was deposited in
Ingrid’s account with YAMAHA Bank. YAMAHA Bank stamped a guaranty on the check reading: ―All prior endorsements
and/or lack of endorsement guaranteed.
Upon presentment of the check, LYRIC Bank funds the check. Days later, Marlon goes to LYRIC Bank to collect his money market
placement and discovers the foregoing transactions. Marlon thereupon sues LYRIC Bank which in turn files a third-party complaint against
YAMAHA Bank. Discuss the respective rights and liabilities of the banks. (5%)
Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the
money market placement to Ingrid, the obligation of Lyric Bank to him has not been paid. Lyric Bank still has the obligation to pay him.
Since Yamaha Bank indorsed the check bearing the forged indorsement of Marlon and guaranteed all indorsements, including the forged
indorsement, when it presented the check to Lyric Bank, it should be held liable to it. However, since the issuance of the check was
attended with the negligence of Lyric Bank, it should share the loss with Yamaha Bank on a fifty percent basis (Allied Banking Corporation
v. Lim Sio Wan, 549 SCRA 504 (2008)).
(2009) A bank is bound to know its depositor’s signature‖ is an inflexible rule in determining the liability of a bank in forgery cases.
False. In cases of forgery, the forger may not necessarily be a depositor of the bank, especially in the case of a drawee bank. Yet in
many cases of forgery, it is the drawee that is held liable for the loss.
(1995) Mario Guzman issued to Honesto Santos a check for P50th as payment for a 2nd hand car. Without the knowledge of Mario,
Honesto changed the amount to P150th which alteration could not be detected by the naked eye. Honesto deposited the altered check
with Shure Bank which forwarded the same to Progressive Bank for payment. Progressive Bank without noticing the alteration paid the
check, debiting P150th from the account of Mario. Honesto withdrew the amount of P15th from Shure Bank and disappeared. After
receiving his bank statement, Mario discovered the alteration and demanded restitution from Progressive Bank.
Discuss fully the rights and the liabilities of the parties concerned.
The demand of Mario for restitution of the amount of P150,000 to his account is tenable. Progressive Bank has no right to deduct said
amount from Mario’s account since the order of Mario is different. Moreover, Progressive Bank is liable for the negligence of its employees
in not noticing the alteration which, though it cannot be detected by the naked eye, could be detected by a magnifying instrument used
by tellers.
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As between Progressive Bank and Shure Bank, it is the former that should bear the loss. Progressive Bank failed to notify Shure Bank
that there was something wrong with the check within the clearing hour rule of 24 hours.
LIABILITY OF COLLECTING BANK
(2017) Alfred issued a check for P1,000 to Benjamin, his friend, as payment for an electronic gadget. The check was drawn against
Alfred’s account with Good Bank. Benjamin then indorsed the check specially in favor of Cesar. However, Cesar misplaced the check. Page | 66
Dexter, a dormmate of Cesar, found the check, altered its amount to P91,000 and forged Cesar’s indorsement by way of a blank
indorsement in favor of Felix, a known jeweler. Felix then caused the deposit of the check in his account with Solar Bank. As collecting
bank, Solar Bank stamped “all previous indorsements guaranteed” on the check. Seeing such stamp of the collecting bank, Good Bank
paid the amount of P91,000 on the check.
May Good Bank claim reimbursement from Alfred? Explain your answer.
The figure being a material alteration, the instrument can be enforced according to its original tenor, which is P1,000 only, on Alfred.
However, considering that there was an indorsement by Solar Bank, Good Bank, in case of dishonor of the check by Alfred, can collect
from Solar Bank the sum of P91,000. Solar Bank acted as an indorser and thus warrants, among others, the genuineness of the
instrument.
(2016) Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the Bureau of Internal Revenue (BIR)
for the company's taxes for the third quarter of 1997. The check was deposited with Bank B, the collecting bank with which the BIR has
an account. The check was subsequently cleared and the amount of P500,000.00 was deducted from the company's balance. Thereafter,
Company X was notified by the BIR of its non-payment of its unpaid taxes despite the P500,000.00 debit from its account. This prompted
the company to seek assistance from the proper authorities to investigate on the matter.
The results of the investigation disclosed that unknown then to Company X, its chief accountant Bonifacio Santos is part of a syndicate
that devised a scheme to syphon its funds. It was discovered that though deposited, the check was never paid to the BIR but was passed
on by Santos to Winston Reyes, Bank B's branch manager and Santos' co-conspirator. Instead of bringing the check to the clearing
house, Reyes replaced Check No. 12345 with a worthless check bearing the same amount, and tampered documents to cover his tracks.
No amount was then credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the amount therein credited into
the accounts of fictitious persons, to be later withdrawn by Santos and Reyes.
Company X then sued Bank B for the amount of P500,000.00 representing the amount deducted from its account. Bank B interposed the
defense that Company X was guilty of contributory negligence since its confidential employee Santos was an integral part of the scheme
to divert the proceeds of Check No. 12345. Is Company X entitled to reimbursement from Bank B, the collecting bank? Explain. ( 5%)
Yes. Company X is entitled to reimbursement from the collecting bank. In similar case, the Supreme Court ruled that the drawer could
recover the amount deducted from its account because it failed to ensure that the check be paid to the designated payee while the
collecting bank should share ½ of the loss because its branch manager conspired in the fraud.
Take this as a lecture.
On this point, jurisprudence regarding the imputed negligence of employer in a master- servant relationship is instructive. Since a master
may be held for his servant’s wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master,
for which he is liable. The general rule is that if the master is injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his superior and will defeat the superiors action against the
third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.
As defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces
the injury, and without which the result would not have occurred.
It appears that although the employee initiated the transactions attributable to an organized syndicate, their actions were not the proximate
cause of encashing the checks payable to the BIR. The degree of the company’s negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.
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As to the preparation of Checks, it was established that these checks were made payable to the BIR. Both were crossed checks. These
checks were apparently turned around by company employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by
virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This rule likewise
applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession. Page | 67
Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank to ascertain that the check be deposited in payees account only.
Therefore, it is the collecting bank which is bound to scrutinize the check and to know its depositors before it could make the clearing
indorsement all prior indorsements and/or lack of indorsement guaranteed. (PCIB vs CA)
NOTICE OF DISHONOR
(2009) Gaudencio, a store owner, obtained a P1-million loan from Bathala Financing Corporation (BFC). As security, Gaudencio
executed a ―Deed of Assignment of Receivables. Assigning fifteen checks received from various customers who bought
merchandise from his store. The checks were duly indorsed by Gaudencio’s customers.
The Deed of Assignment contains the ff. stipulation:
―If, for any reason, the receivables or any part thereof cannot be paid by the obligors, the ASSIGNOR unconditionally and irrevocably
agrees to pay the same, assuming the liability to pay by way of penalty, three percent of the total amount unpaid, for the period of delay
until the same is fully paid.”
When the checks became due, BFC deposited them for collection, but the drawee banks dishonored all the checks for one of the ff.
reasons: ―account closed, ―payment stopped, ―account under garnishment, ―or ―insufficiency of funds.
BFC wrote Gaudencio notifying him of the dishonored checks, and demanding payment of the loan. Because Gaudencio did not
pay, BFC filed a collection suit.
In his defense, Gaudencio contended that BFC did not give timely notice of dishonor (of the checks); and (b) considering that the checks
were duly indorsed, BfC should proceed against the drawers and the indorsers of the checks.
Are Gaudencio’s defenses tenable? Explain.
No. Gaudencio’s defenses are untenable. The cause of action of BFC was really on the contract of loan, with the checks merely
serving as collateral to secure the payment of the loan. By virtue of the Deed of Assignment which he signed, Gaudencio undertook
to pay for the receivables if for any reason they cannot be paid by the obligors (Velasquez v. Solidbank Corporation, 550 SCRA 119
(2008)).
PRESENTMENT
(1994) Gemma drew a check on September 13, 1990. The holder presented the check to the drawee bank only on March 5, 1994. The
bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma
through a letter dated April 27, 1994.
1) What is meant by “unreasonable time” as applied to presentment?

2) Is Gemma liable to the holder?
1) As applied to presentment for payment, “reasonable time: is meant not more than 6 months from the date of issue. Beyond
said period, it is “unreasonable time” and the check becomes stale.
MERCANTILE LAW

2) No. Aside form the check being already stale, Gemma is also discharged form liability under the check, being a drawer and a
person whose liability is secondary, this is due to the giving of the notice of dishonor beyond the period allowed by law. The giving of
notice of dishonor on April 27, 1994 is more than one (1) month from March 5, 1994 when the check was dishonored. Since it is not
shown that Gemma and the holder resided in the same place, the period within which to give notice of dishonor must be the same time
that the notice would reach Gemma if sent by mail. (NIL Sec 103 & 104; Far East Realty Investment Inc v CA 166 S 256)
Page | 68
ALTERNATIVE ANSWER:
2) Gemma can still be liable under the original contract for the consideration of which the check was issued.
WAIVER OF BANK’S LIABILITY FOR NEGLIGENCE

(1991) Mr. Lim issued a check drawn against BPI Bank in favor of Mr Yu as payment of certain shares of stock which he purchased. On
the same day that he issued the check to Yu, Lim ordered BPI to stop payment. Per standard banking practice, Lim was made to sign a
waiver of BPI’s liability in the event that it should pay Yu through oversight or inadvertence. Despite the stop order by Lim, BPI
nevertheless paid Yu upon presentation of the check. Lim sued BPI for paying against his order. Decide the case.
In the event that Mr. Lim, in fact, had sufficient legal reasons to issue the stop payment order, he may sue BPI for paying against his
order. The waiver executed by Mr Lim did not mean that it need not exercise due diligence to protect the interest of its account holder. It
is not amiss to state that the drawee, unless the instrument has earlier been accepted by it, is not bound to honor payment to the holder
of the check that thereby excludes it from any liability if it were to comply with its stop payment order (Sec 61 NIL)
ALTERNATIVE ANSWER:
BPI would not be liable to Mr Lim. Mr Lim and BPI are governed by their own agreement. The waiver executed by Mr Lim, neither being
one of future fraud or gross negligence, would be valid. The problem does not indicate the existence of fraud or gross negligence on the
part of BPI so as to warrant liability on its part.
DEFENSES
NOVATION
(2014) Bong bought 300 bags of rice from Ben for P300,000.00. As payment, Bong indorsed to Ben a Bank of the Philippine Islands
(BPI) check issued by Baby in the amount of P300,000.00. Upon presentment for payment, the BPI check was dishonored because
Baby’s account from which it was drawn has been closed. To replace the dishonored check, Bong indorsed a crossed Development Bank
of the Philippines (DBP) check issued also by Baby for P300,000.00. Again, the check was dishonored because of insufficient funds. Ben
sued Bong and Baby on the dishonored BPI check. Bong interposed the defense that the BPI check was discharged by novation when
Ben accepted the crossed DBP check as replacement for the BPI check. Bong cited Section 119 of the Negotiable Instruments Law
which provides that a negotiable instrument is discharged "by any other act which will discharge a simple contract or the payment of
money." Is Bong correct? (4%)
Bong is not correct. THERE WAS NO NOVATION OF THE OLD OBLIGATION. His claim that the BPI check was discharged by novation
when Ben accepted the crossed DBP check as replacement for the BPI check is unmeritorious. Ben’s acceptance of the DBP check,
which replaced the dishonored BPI check, did not result in novation as there was no express agreement to establish that Bong was
already discharged from the liability to pay Ben the amount of P300,000.00 as payment for the 300 bags of rice. Novation is never
presumed. There must be an express intention to novate. In fact, when the DBP check was delivered to Ben, the same was also indorsed
by Bong which shows Bong’s recognition of the existing obligation to Ben to pay P300,000.00 subject of the replaced BPI check.
Moreover, Ben’s acceptance of the DBP check did not result in any incompatibility, since the two checks – BPI and DBP checks – were
precisely for the purpose of paying the amount of P300,000.00,
MERCANTILE LAW

i.e. the credit obtained from the purchase of the 300 bags of rice from Ben. Indeed, there was no substantial change in the object or
principal condition of the obligation of Bong as the indorser of the check to pay the amount of P300,000.00. It would appear that Ben
accepted the DBP check to give Bong the chance to pay his obligation. (Salazar vs J.Y. Brothers Marketing Corporation, (2010))
MATERIAL ALTERATIONS
(2019) B.8. Mrs. T maintained a checking account with Bank U. While Mrs. T was abroad, she left her checkbook inside her office drawer, Page | 69
which she kept under lock and key. However, Mrs. T’s long-time secretary, Ms. S, knew where the checkbook was hidden. Ms. S then
broke the lock on the office drawer, took one of Mrs. T’s blank checks, and succeeded to encash ₱200,000.00 from Bank U by imitating
Mrs. T’s signature. As soon as Mrs. T returned from abroad and discovered the incident, she immediately reported the matter to Bank U,
seeking that the transaction be reversed. However, the bank refused, contending that Mrs. T should bear the loss arising from the forgery.
(a) Is the imitation of Mrs. T’s signature considered as a material alteration under the Negotiable Instruments Law? Explain.
No, the imitation of Mrs. T’s signature is not considered a material alteration.
Section 124 of the Negotiable Instruments Law explicitly relates to a negotiable instrument being altered and Section 125 enumerates
what can be altered in order to become material alteration. They presuppose that there is already an existing negotiable instrument before
an alteration can occur. A blank and unissued check, as in this case, lacks all the requisites of a negotiable instrument. Ms. S cannot
materially alter what is not a negotiable instrument. Therefore, the imitation of Ms. U’s signature cannot be considered as material
alteration.
(b) Is Bank U’s contention tenable? Explain.
No, Bank U’s contention is not tenable. In the case of Samsung Construction Company Phils., Inc. v. FEBTC the Supreme Court held
that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be
traced on the part of the drawer whose signature was forged. In this case, there was no negligence on the part of Ms. U in keeping her
checkbook. Bank U must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.
Therefore, Bank U’s contention is untenable.
(1999) A check for P50,000.00 was drawn against drawee bank and made payable to XYZ Marketing or order. The check was deposited
with payee’s account at ABC Bank which then sent the check for clearing to drawee bank.
Drawee bank refused to honor the check on ground that the serial number thereof had been altered.
XYZ marketing sued drawee bank.
a. Is it proper for the drawee bank to dishonor the check for the reason that it had been altered? Explain (2%)
b. In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the drawee bank as there was no privity
between then. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain.
a. No. The serial number is not a material particular of the check. Its alteration does not constitute material alteration of the
instrument. The serial number is not material to the negotiability of the instrument.
b. Yes. As a general rule, the drawee is not liable under the check because there is no privity of contract between XYZ Marketing,
as payee, and ABC Bank as the drawee bank. However, if the action taken by the bank is an abuse of right which caused damage not
only to the issuer of the check but also to the payee, the payee has a cause of action under quasi-delict.
(1996) William issued to Albert a check for P10,000 drawn on XM Bank. Albert altered the amount of the check to P210,000 and deposited
the check to his account with ND Bank. When ND Bank presented the check for payment through the Clearing House, XM Bank honored
it. Thereafter, Albert withdrew the P210,000 and closed his account. When the check was returned to him after a month, William
discovered the alteration. XM Bank recredited P210,000 to William’s current account, and sought reimbursement from ND Bank. ND
Bank refused, claiming that XM Bank failed to return the altered check to it within 24 hour clearing period.
MERCANTILE LAW

Who, as between, XM Bank and ND Bank, should bear the loss? Explain.
ND Bank should bear the loss if XM Bank returned the altered check to ND Bank within twenty-four hours after its discovery of the
alteration. Under the given facts, William discovered the alteration when the altered check was returned to him after a month. It may
safely be assumed that William immediately advised XM Bank of such fact and that the latter promptly notified ND Bank thereafter.
Central Bank Circular No. 9, as amended, on which the decisions of the Supreme Court in Hongkong & Shanghai Banking Corp v People’s
Page | 70
Bank & Trust Co and Republic Bank vs CA were based was expressly cancelled and superseded by CB No 317 dated Dec 23 1970. The
latter was in turn amended by CB Circular No 580, dated Sept 19, 1977. As to altered checks, the new rules provide that the drawee
bank can still return them even after 4:00 pm of the next day provided it does so within 24 hours from discovery of the alteration but in
no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same.
Assuming that the relationship between the drawee bank and the collecting bank is evidenced by some written document, the prescriptive
period would be 10 years.
ALTERNATIVE ANSWER:
XM Bank should bear the loss. When the drawee bank (XM Bank) failed to return the altered check to the collecting bank (ND Bank)
within the 24 hour clearing period provided in Sec 4c of CB Circular 9, dated Feb 17, 1949, the latter is absolved from liability. (See HSBC
v PB&T Co GR L-28226 Sep 30 1970; also Rep Bank v CA GR 42725 Apr 22, 1991)
FORGED CHECKS
(2008) Pancho drew a check to Bong and Gerard jointly, Bong indorsed the check and also forged Gerard’s indorsement . The
payor bank paid the check and charged Pancho’s account for the amount of the Check. Gerard received nothing from the payment.
Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully. (3%)
Yes, Sec. 41 of the NIL provides that all payees or indorsees who are not partners must indorse jointly, unless the one indorsing has
authority to endorse for the others. Since the signature of Gerard was forged, then the endorsement by Bong was wholly inoperative.
The Bank is under strict liability to pay to the order of payee. Payment under a forged endorsement is not to the drawer’s order,
and consequently, the drawee bank must bear the loss as against the drawer (Associated Bank v. CA, G.R. Nos. 107382 and 107612,
31 January 1996).
Based on the facts, was Pancho as drawer discharged on the instrument? Why? (2%)
No. The payee Gerard can recover as he still retains his claim on the debt of Pancho.
(2006) Discuss the legal consequences when a bank honors a forged check. (5%)
The legal consequences when a bank honors a forged check are as follows:
(a) When Drawer's Signature is Forged: Drawee-bank by accepting the check cannot set up the defense of forgery, because by
accepting the instrument, the drawee bank admits the genuineness of signature of drawer. (Sec. 23 NIL)
Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the drawee-bank is against
the party responsible for the forgery. Otherwise, drawee-bank bears the loss. A drawee-bank paying on a forged check must
be considered as paying out of its funds and cannot charge the amount to the drawer. If the drawee-bank has charged
drawer's account, the latter can recover such amount from the drawee-bank.
However, the drawer may be precluded or estopped from setting up the defense of forgery as against the drawee- bank,
when it is shown that the drawer himself had been guilty of gross negligence as to have facilitated the forgery.
MERCANTILE LAW

(NOTA BENE: The question does not qualify the term "forged check". An answer addressing the liabilities of a drawer should
be deemed sufficient. Answers addressing liabilities of parties should likewise be given full credit)
Drawee Bank versus Collecting Bank — When the signature of the drawer is forged, as between the drawee- bank and
collecting bank, the drawee-bank sustains the loss, since the collecting bank does not guarantee the signature of the drawer.
The payment of the check by the drawee bank constitutes the proximate negligence since it has the duty to know the
Page | 71
signature of its client-drawer. (Philippine National Bank v. Court of Appeals, G.R. No. L-26001, October 29, 1968).
(b) Forged Payee's Signature: When drawee-bank pays the forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary
duty is to verify the authenticity of the payee's signature.
(c) Forged Indorsement:

• Drawer's account cannot be charged, and if charged, he can recover from the drawee-bank (Associated Bank v.
Court of Appeals, G.R. No. 107382 January 31,1996).
• Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee. A
collecting bank is not guilty of negligence over a forged indorsement on checks for it has no way of ascertaining the authority
of the endorsement and when it caused the checks to pass through the clearing house before allowing withdrawal of the
proceeds thereof (Manila Lighter Transportation, Inc. v. Court of Appeals, G.R. No. 50373, February 15, 1990). On the other
hand, a collecting bank which endorses a check bearing a forged endorsement and presents it to the drawee bank
guarantees all prior endorsements including the forged endorsement itself and should be held liable therefor (Traders
Royal Bank v. RPN, G.R. No. 138510, October 10, 2002).
• Drawee-bank can recover from the collecting bank (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank,
G.R. No. 18657, August 23,1922) because even if the indorsement on the check deposited by the bank's client is forged,
collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank
(Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996).
(2004) CX maintained a checking account with UBANK, Makati Branch. One of his checks in a stub of fifty was missing. Later, he
discovered that Ms. DY forged his signature and succeeded to encash P15,000 from another branch of the bank. DY was able to encash
the check when ET, a friend, guaranteed due execution, saying that she was a holder in due course.
Can CX recover the money from the bank? Reason briefly. (5%)
Yes, CX can recover from the bank. Under Section 23 of the Negotiable Instruments Law, forgery is a real defense. The forged check is
wholly inoperative in relation to CX. CX cannot be held liable thereon by anyone, not even by a holder in due course. Under a forged
signature of the drawer, there is no valid instrument that would give rise to a contract which can be the basis or source of liability on the
part of the drawer. The drawee bank has no right or authority to touch the drawer's funds deposited with the drawee bank.
ACCOMMODATION PARTY
(2014) A criminal complaint for violation of B.P. 22 was filed by Foton Motors (Foton), an entity engaged in the business of car dealership,
against Pura Felipe (Pura) with the Office of the City Prosecutor of Quezon City. The Office found probable cause to indict Pura and filed
an information before the Metropolitan Trial Court (MeTC) of Quezon City, for her issuance of a postdated check in the amount of
P1,020,000.00 which was subsequently dishonored upon presentment due to "Stop Payment."
Pura issued the check because her son, Freddie, attracted by a huge discount of P220,000.00, purchased a Foton Blizzard 4x2 from
Foton. The term of the transaction was Cash-on-Delivery and no downpayment was required. The car was delivered on May 14, 1997,
but Freddie failed to pay upon delivery. Despite non-payment, Freddie took possession of the vehicle.
MERCANTILE LAW

Pura was eventually acquitted of the charge of violating B.P. 22 but was found civilly liable for the amount of the check plus legal interest.
Pura appealed the decision as regards the civil liability, claiming that there was no privity of contract between Foton and Pura. No civil
liability could be adjudged against her because of her acquittal from the criminal charge. It was Freddie who was civilly liable to Foton,
Pura claimed. Pura added that she could not be an accommodation party either because she only came in after Freddie failed to pay the
purchase price, or six (6) months after the execution of the contract between Foton and Freddie. Her liability was limited to her act of
issuing a worthless check, but by her acquittal in the criminal charge, there was no more basis for her to be held civilly liable to Foton.
Pura’s act of issuing the subject check did not, by itself, assume the obligation of Freddie to Foton or automatically make her a party to
Page | 72
the contract. Is Pura liable? (5%)
Pura is liable as an accommodation party. Under Sec. 29 of the NIL, an accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew
him to be only an accommodation party.
Pura’s liability existed although Pura issued the check after the delivery of the car. Under Sec. 25 of the NIL, and antecedent or pre-
existing debt constitutes value and is deemed such whether the instrument is payable on demand or at a future time.
CONSIDER THIS AS A LECTURE
Pura is liable to Foton Motors because it sold a car to her son and was a holder for value of the check issued in its favor by Pura. Any
person criminally liable for felony is also civilly liable. Thus, her acquittal in the criminal charge does not carry with it extinction of her civil
liability unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist.
(People vs Maniego (1987)
(1990) To accommodate Carmen, maker of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to
Raffy, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accomodation party only. When the promissory
note was not paid, and Raffy discovered that Carmen had no funds, he sued Jorge. Jorge pleads in defense the fact that he had endorsed
the instrument without receiving value therefor, and the further fact that Raffy knew that at the time he took the instrument Jorge had not
received any value or consideration of any kind for his indorsement. Is Jorge liable? Discuss.
Yes. Jorge is liable. Sec 29 of the NIL provides that an accommodation party is liable on the instrument to a holder for value,
notwithstanding the holder at the time of taking said instrument knew him to be only an accommodation party. This is the nature or the
essence of accommodation.
(1991) On June 1, 1990, A obtained a loan of P100th from B, payable not later than 20 Dec 1990. B required A to issue him a check for
that amount to be dated 20 Dec 1990. Since he does not have any checking account, A, with the knowledge of B, requested his friend,
C, President of Saad Banking Corp (Saad) to accommodate him. C agreed, he signed a check for the aforesaid amount dated 20 Dec
1990, drawn against Saad’s account with the ABC Commercial Banking Co. The By-laws of Saad requires that checks issued by it must
be signed by the President and the Treasurer or the Vice-President. Since the Treasurer was absent, C requested the Vice-President to
co-sign the check, which the latter reluctantly did. The check was delivered to B. The check was dishonored upon presentment on due
date for insufficiency of funds.
a) Is Saad liable on the check as an accommodation party?

b) If it is not, who then, under the above facts, is/are the accommodation party?
a) Saad is not liable on the check as an accommodation party. The act of the corporation in accommodating a friend of the
President, is ultra vires (Crisologo-Jose v CA GR 80599, 15Sep1989). While it may be legally possible for the corporation, whose business
is to provide financial accommodations in the ordinary course of business, such as one given by a financing company to be an
accommodation party, this situation, however, is not the case in the bar problem.
MERCANTILE LAW

b) Considering that both the President and Vice- President were signatories to the accommodation, they themselves can be
subject to the liabilities of accommodation parties to the instrument in their personal capacity (Crisologo-Jose v CA 15 Sep 1989)
(1996) Nora applied for a loan of P100th with BUR Bank. By way of accommodation, Nora’s sister, Vilma, executed a promissory note in
favor of BUR Bank. When Nora defaulted, BUR Bank sued Vilma, despite its knowledge that Vilma received no part of the loan. May
Vilma be held liable? Explain. Page | 73
Yes, Vilma may be held liable. Vilma is an accommodation party. As such, she is liable on the instrument to a holder for value such as
BUR Bank. This is true even if BUR Bank was aware at the time it took the instrument that Vilma is merely an accommodation party and
received no part of the loan (See Sec 29, NIL; Eulalio Prudencio v CA GR L-34539, Jul 14, 1986)
(1998) For the purpose of lending his name without receiving value therefore, Pedro makes a note for P20,000 payable to the order of
X who in turn negotiates it to Y, the latter knowing that Pedro is not a party for value.
1. May Y recover from Pedro if the latter interposes the absence of consideration? (3%)
2. Supposing under the same facts, Pedro pays the said P20,000 may he recover the same amount from X? (2%)
1. Yes. Y can recover from Pedro. Pedro is an accommodation party. Absence of consideration is in the nature of an
accommodation. Defense of absence of consideration cannot be validly interposed by accommodation party against a holder in due
course.
2. If Pedro pays the said P20,000 to Y, Pedro can recover the amount from X. X is the accommodated party or the party ultimately
liable for the instrument. Pedro is only an accommodation party. Otherwise, it would be unjust enrichment on the part of X if he is not to
pay Pedro.
(2003) Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with Rose Reyes who did not receive any
amount from the bank, to execute a promissory note payable to the bank, or its order on stated maturities. The note was executed as so
agreed. What kind of liability was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain. (4%)
Rose may be held liable. Rose is an accommodation party. Absence of consideration is in the nature of an accommodation. Defense of
absence of consideration cannot be validly interposed by accommodation party against a holder in due course.
(2003) Juan Sy purchased from “A” Appliance Center one generator set on installment with chattel mortgage in favor of the vendor. After
getting hold of the generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa.
To settle the case extra judicially, Juan Sy paid the sum of P20,000 and for the balance of P5,000.00 he executed a promissory note for
said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance.
1) What is the liability of Ben Lopez as an accommodation party? Explain.

2) What is the liability of Juan Sy?
1) Ben Lopez, as an accommodation party, is liable as maker to the holder up to the sum of P5,000 even if he did not receive
any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement from Juan
Sy, the accommodation party.
2) Juan Sy is liable to the extent of P5,000 in the hands of a holder in due course (Sec 14 NIL). If Ben Lopez paid the promissory
note, Juan Sy has the obligation to reimburse Ben Lopez for the amount paid. If Juan Sy pays directly to the holder of the promissory
note, or he pays Ben Lopez for the reimbursement of the payment by the latter to the holder, the instrument is discharged.
MERCANTILE LAW

(2005) Dagul has a business arrangement with Facundo. The latter would lend money to another, through Dagul, whose name would
appear in the promissory note as the lender. Dagul would then immediately indorse the note to Facundo. Is Dagul an accommodation
party? Explain. (2%)
YES! Dagul is an accommodation party because in the case at bar, he is essentially, a person who signs as maker without receiving any
Page | 74
consideration, signs as an accommodation party merely for the purpose of lending the credit of his name. And as an accommodation
party he cannot set up lack of consideration against any holder, even as to one who is not a holder in due course.
MERCANTILE LAW

FINANCIAL REHABILITATION AND INSOLVENCY ACT
(INSOLVENCY LAW)
(2019) B.2. EFG, Inc. is indebted to Bank Y in the amount of P50,000,000.00. The loan was secured by a suretyship agreement issued
by Z Insurance Co.
Page | 75
Due to EFG, Inc’s default, Bank Y filed a case against Z Insurance Co. as surety. There is also a pending criminal case for violation of
the Bouncing Checks Law against the President of EFG, Inc., Mr. P, who signed the check as signatory for the company.
Unable to meet its obligations as they fell due, EFG, Inc. filed a petition for rehabilitation. Finding the petition sufficient in form and
substance, the court issued a Commencement Order, which was thereafter published.
(a) Should the case filed against Z Insurance Co. be suspended in light of the Commencement Order? Explain. (2.5%)
No, the case against Z Insurance Co should not be suspended despite the commencement order. Under FRIA, the stay order, which is
included in the commencement order, shall not apply to the enforcement of claims against sureties solidarily liable with the debtor (Section
18[c] FRIA) for the simple reason that it is not the one subject of the petition for rehabilitation.
Hence, the case filed against Z Insurance Co. as surety of EFG, Inc. in a loan agreement with Bank Y will not be suspended for the
simple reason that it is not the one subject of the petition for rehabilitation.
(b) Should the criminal case filed against Mr. P be suspended in light of the Commencement Order? Explain. (2.5%)
The criminal case against Mr. P is not suspended by the commencement order. Under FRIA, any criminal action against an individual
debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under the FRIA (Section 18
[g]).
Therefore, the violation of the bouncing checks law committed by Mr. P who signed the check will not be affected by the pending
rehabilitation of the insolvent debtor. This is because the prosecution of the officers has no bearing on the pending rehabilitation of the
insolvent debtor (Panlilio v. Regional Trial Court, G.R. No. 173846, February 2, 2011).
(2019) B.1. W Medical, Inc. operated a full-service hospital named WMed. Using its stockholders’ advances and a mortgage loan from
Bank X, W Medical, Inc. commenced the construction of a new 11-storey WMed Annex Building. Unfortunately, due to financial
constraints, only seven (7) floors were constructed and the WMed Annex Building remained unfinished.
Despite the non-completion of the WMed Annex Building, W Medical, Inc. continued its operations and earned modest revenues. While
W Medical, Inc.’s assets are more than its liabilities and it is able to turn a monthly profit, it could not pay its loan installments to Bank X
as they fall due.
(a) What is the concept of “insolvency” under the Financial Rehabilitation and Insolvency Act (FRIA)? May W Medical, Inc. be considered
“insolvent” under the FRIA? Explain. (3%)
Under RA No. 10142 4(p), insolvency refers to the financial condition of a debtor that is generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has liabilities that are greater than its or his assets. W Medical cannot be considered as
insolvent because to be insolvent under FRIA, liabilities must be greater than assets. In this case, W Medical Inc. assets are more than
its liabilities. Moreover, nothing in the facts state that it foresees its inability to pay its obligations for more than one year. Therefore, it
cannot be considered insolvent.
(b) Assuming that W Medical, Inc. is considered “insolvent”, may it file a petition for suspension of payments under the FRIA? Explain.
(2%)
No. Petition for suspension of payments under Sec. 94 of FRIA may only be filed by an individual debtor who has sufficient properties to
cover all his debts but foresees the impossibility of meeting his debts when they are respectively due. In the case at bar, if W Medical
MERCANTILE LAW

Inc., is insolvent, then he has no sufficient properties to cover all his debts because his liabilities are greater than his assets. Thus, W
Medical Inc., cannot file a petition for suspension of payments under FRIA.
(c) Assuming that W Medical, Inc. is considered “insolvent”, what are the legally recognized modes of rehabilitation it may opt to avail
of? (3%)
Under the FRIA, W Medical, Inc., may opt to avail court supervised voluntary proceedings or pre-negotiated rehabilitation. W Medical, Page | 76
Inc., may avail the former should it foresee the impossibility of meeting debts when they respectively fall due. W Medical, Inc., may
likewise file a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan, which has been endorsed or approved
by creditors holding at least 2/3 of the total liabilities of the debtor, including secured creditors holding more than 50% of the total secured
claims of the debtor and unsecured creditors holding more than 50% of the total unsecured claims of the debtor.
(d) If W Medical, Inc. files a petition for rehabilitation before the court, is it possible for the rehabilitation proceedings to be converted into
one for liquidation? Explain. (2%)
Yes. Under Section 25 of FRIA, when the debtor is insolvent and there is no substantial likelihood for a successful rehabilitation and there
is failure of rehabilitation, the court may convert the proceedings to liquidation proceedings. Thus, is it possible for the rehabilitation
proceedings to be converted into one for liquidation.
(2018) Yellow Fin Tuna Corporation (Yellow Fin), a domestic corporation, applied for a credit facility in the amount of PhP 50 million with
Yengzi Financial Corporation (YFC). The application was approved and the Credit Agreement was signed and took effect. Ysko and
Yuan, Yellow Fin Chairman and President, respectively, executed a Continuing Suretyship Agreement in favor of YFC wherein they
guaranteed the due and full payment and performance of Yellow Fin's guarantee obligations under the credit facility. YFC soon discovered
material inconsistencies in the financial statements given by Yellow Fin, drawing YFC to conclude that Yellow Fin committed
misrepresentation. Under the Credit Agreement, any misrepresentation by Yellow Fin or its sureties will constitute an event of default.
YFC thus called an event of default and filed a complaint for sum of money against Yellow Fin, Ysko, and Yuan. Immediately thereafter,
Yellow Fin filed a petition for rehabilitation. The court suspended the proceedings in YFC's complaint until the rehabilitation court disposed
of the petition for rehabilitation. YFC posits that the suspension of the proceedings should only be with respect to Yellow Fin but not with
respect to Ysko and Yuan.
Is YFC correct? (2.5%)
YFC is correct. Actions or proceedings against the surety of the insolvent debtor that filed a petition for rehabilitation are not subject to
the stay order. Consequently, the suit may continue against him. ( Section 18 ( c ) of FRIA )
(2017) Wyatt, an internet entrepreneur, engaged in a sideline business of creating computer programs for selected clients on a per project
basis and for servicing basic computer problems of his friends and family members. His main job was being an IT consultant at Futurex
Co., a local computer company. Because of his ill-advised investments in the stock market and the fraud perpetrated against him by his
trusted confidante, Wyatt was already drowning in debt, that is, he had far more liabilities than his entire assets.
What legal recourse remained available to Wyatt? Explain your answer. (5%)
Assuming that Wyatt is registered as sole proprietorship, he may file a petition for rehabilitation or voluntary liquidation. Under FRIA, an
insolvent debtor may file a petition for rehabilitation even if the assets are less than the liabilities. The petition should include a
rehabilitation plan and nominee for rehabilitation receiver. He can also file a petition for voluntary liquidation since his liabilities exceeds
his assets. The objective of liquidation is to get a discharge, maximize recovery of assets and effect equitable distribution of such assets
based on the rules on concurrence of credits.
Assuming that Wyatt is not registered as a sole proprietorship, he may only file a petition for voluntary liquidation since his assets are
less than liabilities (Section 103 FRIA). Petition for suspension of payments is not available as remedy to an individual debtor not
registered as sole proprietorship.
Other answer
MERCANTILE LAW

He can apply for voluntary liquidation. It applies when the individual debtor has properties are not sufficient to cover his liabilities, and
owing debts exceeding P500,000. Suspension of payments is not feasible considering it applies only if he possesses sufficient property
to cover all his debts but foresees the impossibility of meeting them when they respectively fall due. Here, Wyatt has more liabilities than
assets thus voluntary liquidation is the only remedy available to him.
(2017) A. Hortencio owned a modest grocery business in Laguna. Because of the economic downturn, he incurred huge financial
liabilities. he remained afloat only because of the properties inherited from his parents who had both come from landed families in Laguna. Page | 77
His main creditor was Puresilver Company (Puresilver), the principal supplier of the merchandise sold in his store. To secure his credit
with Puresilver, he executed a real estate mortgage with a dragnet clause involving his family’s assets worth several millions of pesos.
Nonetheless, Hortencio, while generally in the black, now faces a situation where he is unable to pay his liabilities as they fall due in the
ordinary course of business. What will you advise him to do to resolve his dire financial condition? Explain your answer. (5%)
Assuming that Hortencio is doing business as a registered sole proprietorship, he can file a petition for rehabilitation. Rehabilitation
contemplates a continuance of business life and activities in an effort to restore and reinstate the business to its former position of
successful operation and solvency, the purpose being to enable the debtor to gain a new lease on life and allow its creditors to be paid
their claims out of its earnings. Though Hortencio is a natural person and not a corporation, rehabilitation is possible considering that
FRIA covers an insolvent debtor, whether a natural or juridical one. In the petition, he ay pray for the issuance of a commencement order
coupled with a stay order to suspend all payments and claims against him.
Even assuming that he is not registered as sole proprietorship, he can file a petition for suspension of payments in the city or province in
which he has resided for six months prior to the filing of the petition, a remedy available to an individual debtor who has more assets that
liabilities but foresees the impossibility of paying his debts when they respectively fall due.
(2017) Procopio, a Director and the CEO of Parisian Hotel Co., Inc. (Parisian), was charged along with other company officials with
several counts of estafa in connection with the non-remittance of SSS premiums the company had collected from its employees. During
the pendency of the cases, Parisian filed a petition for rehabilitation. The court, finding the petition to be sufficient in form and substance,
issued a commencement order together with a stay or suspension order.
Citing the commencement order, Procopio and the other officers facing the criminal charges moved to suspend the proceedings in the
estafa cases.
a. What is a commencement order, and what is the effect of its issuance? Explain your answer. (4%)
The rehabilitation proceeding formally commences upon issuance of a commencement order includes the stay order. Generally, the
same: (1) suspends all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (2) suspend all
actions to enforce any judgment, attachment or other provisional remedies against the debtor; (3) prohibit the debtor from selling,
encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (4) prohibit the
debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein. (Section
16, FRIA)
b. Suppose you are the trial judge, will you grant the motion to suspend of Procopio, et al.? Explain your answer. (4%)
No. Any criminal action against the individual debtor or owner, partner, director or officer of a debtor shall not be affected by any
proceeding commenced under this Act.
(2017) Data Realty, Inc. (DRI) was engaged in realty development. The family of Matteo owned 100% of the capital stock of DRI. Matteo
was also the President and Chairman of the Board of Directors. Other members of Matteo’s family held the major positions in DRI.
Because of a nasty takeover fight with D&E Realty Co., Inc. (D&E), another realty developer, for the control of a smaller realty company
with vast landholdings, DRI and D&E engaged in an expensive litigation that eventually led to a money judgment being rendered in favor
of D&E.
Meantime, DRI, facing inability to pay its liabilities as they fall due but still holding substantial assets, filed a petition for voluntary
rehabilitation. Trying to beat the consequences of rehabilitation proceedings, D&E moved in the trial court for the issuance of a writ of
execution. The trial court also happened to be the rehabilitation court. The writ of execution was issued. Serving the writ of execution,
MERCANTILE LAW

Metro, the court sheriff who had just passed his Credit Transactions subject in law school, garnished Matteo’s bank accounts, and levied
his real properties, including his house and lot in Makati.
Are the garnishment and levy of Matteo’s assets lawful and proper? Explain your answer.
The garnishment and levy of Matteo’s assets are not valid, because Matteo is not covered by the rehabilitation proceedings or any stay
order that the rehabilitation court may issue. It is the DRI, with legal personality separate and distinct from Matteo, which filed the petition
Page | 78
for rehabilitation and would have been entitled to the effects of any commencement order (and stay order) that the court may issue. The
commencement order would have the effect of setting aside any seizure of property or attempt to enforce a claim against the debtor.
Other Answer
The garnishment and levy of Matteo’s assets are lawful and proper provided that DRI’s legal personality may be pierced to make it one
and the same with Matteo and considering there is no issuance yet of any Commencement Order which necessarily includes a Stay or
Suspension Order which results to, among others, suspension of all actions to enforce any judgment, attachment or other provisional
remedies against the debtor.
(2014) DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB) secured by a real estate mortgage over a 63,380-
square-meter land situated in Cabanatuan City. Due to the Asian Economic Crisis, DMP experienced liquidity problems disenabling it
from paying its loan on time. For that reason, NB sought the extra judicial foreclosure of the said mortgage by filing a petition for sale on
June 30, 2003. On September 4, 2003, the mortgaged property was sold at public auction, which was eventually awarded to NB as the
highest bidder. That same day, the Sheriff executed a Certificate of Sale in favor of NB.
On October 21, 2003, DMP filed a Petition for Rehabilitation before the Regional Trial Court (RTC). Pursuant to this, a Stay Order was
issued by the RTC on October 27, 2003.
On the other hand, NB caused the recording of the Sheriff’s Certificate of Sale on December 3, 2003 with the Register of Deeds of
Cabanatuan City. NB executed an Affidavit of Consolidation of Ownership and had the same annotated on the title of DMP. Consequently,
the Register of Deeds cancelled DMP’s title and issued a new title in the name of NB on December 10, 2003.
NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance of Writ of Possession before the RTC of Cabanatuan City. After
hearing, the RTC issued on September 6, 2004 an Order directing the Issuance of the Writ of Possession, which was issued on October
4, 2004.
DMP claims that all subsequent actions pertaining to the Cabanatuan property should have been held in abeyance after the Stay Order
was issued by the rehabilitation court. Is DMP correct? (4%)
DMP is WRONG. Since the foreclosure of DMP’s mortgage AND the issuance of the certificate of sale in NB’s favor were done prior to
the appointment of a Rehabilitation Receiver and the Stay Order, all the actions taken with respect to the foreclosed mortgage property
which were subsequent to the issuance of the Stay Order were not affected by the Stay Order. Thus, after the redemption period expired
without DMP redeeming the foreclosed property, NB becomes the absolute owner of the property and it was within its right to ask for the
consolidation of title and the issuance of new title in its name as a consequence of ownership; thus, it is entitled to the possession and
enjoyment of the property (Equitable PCI Bank vs DNG Realty and Development Corp. (2010)
(2014) Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a petition for voluntary rehabilitation must be approved
by: (1%)
(A) A majority vote of the Board of Directors and authorized by the vote of the stockholders representing at least a majority of the
outstanding capital stock
(2014) PA Assurance (PA) was incorporated in 1980 to engage in the sale of pre-need educational plans. It sold open-ended educational
plans which guaranteed the payment of tuition and other fees to planholders irrespective of the cost at the time of availment. It also
engaged in the sale of fixed value plans which guaranteed the payment of a pre-determined amount to planholders. In 1982, PA was
among the country’s top corporations. However, it subsequently suffered financial difficulties.
MERCANTILE LAW

On September 8, 2005, PA filed a Petition for Corporate Rehabilitation before the Regional Trial Court (RTC) of Makati City. On October
17, 2005, ten (10) plan holders filed an Opposition and Motion to Exclude Planholders from Stay Order on the ground that planholders
are not creditors as they (planholders) have a trust relationship with PA. Are the planholders correct? (4%)
THE PLANHOLDERS ARE NOT CORRECT. Section 6 of the Supreme Court Interim Rules of Procedure on Corporate Rehabilitation of
2000 does not provide that a claim arising from a pre-need contract is an exception to the power of the trial court to stay enforcement of
all claims if the court finds the petition for rehabilitation to be sufficient in form and substance. Page | 79
(Hindi kasama sa coverage ito. Don’t be afraid of this kind of question)
FRIA’S EFFECTIVITY IS JULY 18, 2010 REPEALING INSOLVENCY ACT 1956. TAKE NOTE OF THIS. KAYA WE
WILL NOT INCLUDE QUESTIONS 2010 THERETOFORE.
REHABILITATION
REHABILITATION & INSOLVENCY
(2012) (A) Can be distressed corporation file a petition for corporation rehabilitation after the dismissal of its earlier petition for insolvency?
Why? (2%)
Yes, when a distressed corporation’s petition for insolvency has been dismissed, it can only mean that it still possesses more than
enough assets to coverallitsliabilities,andconsequently, it can still be “rehabilitated” (PAL v. Zamora, G.R. No. 166996, 06 February
2007, and Sec. 5[d], Securities Regulation Act).
Under Sec. 6(d) of P.D. 902-A, a petition for corporate rehabilitation is allowed only in cases where the corporation possesses sufficient
property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the
corporation has no sufficient assets to cover liabilities, but is under the management of a rehabilitation receiver or management committee
created pursuant to this Decree.
Under Sec. 1, Rule 4, Interim Rule of Procedure for Corporate Rehabilitation. A petitioner corporate debtor must be one who is “Any
debtor who foresees the impossibility of meeting its debts when they respectively fall due,” which means that it is not insolvent, but
merely illiquid, which under Section 2 provides the minimum that the debtor is “rehabilitable” thus: “the manner by which the debtor
may be rehabilitated and how such rehabilitation may benefit the general body of creditors, employees and stock holders.
Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition foR insolvency? Why?
Although in Ching v. LBP, G.R. No. 73123, 02 September 1991, it was held that when a petitioning corporate debtor has been denied
rehabilitation, the SEC may declare a corporation insolvent as an incident and in continuation of its already acquired jurisdiction over
petitioner, such a procedure does not seem warranted under the Interim Rules of Procedure for Corporate Rehabilitation.
Sec. 27, Rule 4 of the Interim Rules state that, “the court shall upon motion, motu porprio or upon the recommendation of the
Rehabilitation Receiver, terminate the proceedings, without proceeding to insolvency/dissolution.” In other words, a different petition for
insolvency proceedings fall with the general jurisdiction of RTC, whereas petition for corporate rehabilitation fall within the original and
exclusive jurisdiction of RTC special Commercial Courts.
Explain the key phrase ―equality is equity in corporate rehabilitation proceedings. (2%)
The principle of “equality in equity” means that when a corporation is placed under the control of a court-appointed rehabilitation
receiver, then “all the creditors should stand on equal footing. Not anyone of them should be given any preference by paying one or
some of them ahead of the others. This is precisely the reason for the suspension of all pending claims against the corporation under
receivership” (Sobrejuanite v. ASB Dev. Corp., G.R. No. 165675, 30 September 2005: Ruby Industrial v. Lim, G.R. Nos. 124185-87, 20
January 1998).
MERCANTILE LAW

STAY ORDER
(2012) ABC Company filed a Petition for Rehabilitation with the Court. An Order was issued by the Court, (1) staying enforcement of all
claims, whether money or otherwise against ABC Company, its guarantors and sureties not solidarily liable with the company; and (2)
prohibiting ABC Company from making payments of its liabilities, outstanding as of the date of the filing of the Petition. XYC Company is
a holder of an irrevocable Standby Letter of Credit which was previously procured by ABC Company in favor of XYC Company to secure
performance of certain obligations. In the light of the Order issued by the Court.
Page | 80
(A) Can XYC Company still be able to draw on their irrevocable Standby Letter of Credit when due? Explain your answer. (5%)
Yes, As an exception to a Stay or Suspension Order included in a Commencement Order issued pursuant to Section 16(q) of the FRIA,
Section 18(c) if the said law provides that a Stay or Suspension Order shall not apply “to the enforcement of claims against sureties
and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit
x xx.” Similarly, assuming that it has not been superseded by the FRIA, Section 7(b) of the Supreme Court Rules of Procedure on
Corporate Rehabilitation (2008) provides that a stay order shall not cover claims against letters of credit and similar security arrangements
issued by a third party to secure the payment of the debtor’s obligations. This was the basis of the decision in the case of Metropolitan
Waterworks and Sewerage System v. Hon. Reynaldo B. Daway, et al. (G.R. No. 160732, June 21,2004).
MERCANTILE LAW

SECURITY REGULATION CODE
(1998) What is the principal purpose of laws and regulations governing securities in the Philippines? (2%)
The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against the nefarious practices
of unscrupulous brokers and salesmen in selling securities.
Page | 81
SECURITIES
(1996) Define securities.


Q and A COMMERCIAL LAW

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Q and A COMMERCIAL LAW

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FROM Nth Time BAR CHALLENGER TO ATTORNEY

BAR QUESTIONS AND ANSWERS 1990-2019

A – your direct Answer

A – your direct Answer

L – state the Legal basis or bases

LCG, Section 408, paragraph F.

Then, basahin mo na yung question and eliminate the non-pertinent facts.

After mental elimination, the question would only be like this.

Practice, practice, practice. Stop muna, at mag practice.

A – apply the law to the pertinent facts.

So the answer for the A portion would be like this.

Ok let us combine ALA.

Sa C portion, for emphasis na lang ito.

HENCE, the dispute can be filed directly in court.

So, ang ating final answer ay....

Compare our answer sa suggested answer of UPLC.

2019 SUGGESTED ANSWER…238

JOINT ACCOUNT (2000)

JOINT ACCOUNT VS. PARTNERSHIP

(a) Was CSC correct in dismissing the case? (2.5%)

(2007) Name at least five predicate crimes to money laundering. (5%)

Any five of the following are predicate crimes to money laundering:

( I EXPECT A QUESTION ABOUT THE NATIONAL ID SYSTEM FOR 2021 BAR)

Can Francis recover from the Peninsula Insurance Company? (5%)

Three instances when an insured is entitled to a return of premium paid are:

a. What is insurable interest? (2%)

Another Answer: Page | 20

(B) A general creditor on debtor’s property

SEPARATE INSURABLE INTEREST Page | 21

LIFE VS. PROPERTY INSURANCE

Who is legally entitled to receive the insurance proceeds? Explain. (4%)

PERFECTION OF INSURANCE CONTRACTS

The following warranties are implied in marine insurance:

PERIL OF THE SHIP VS. PERIL OF THE SEA

ALL RISK INSURANCE POLICY

ACTUAL TOTAL LOSS

CONSTRUCTIVE TOTAL LOSS

(2010) (B) What is barratry in marine insurance? (2%)

(2017) The law on life insurance prohibits double insurance. (2%)

Take this as a lecture

Yes. The beneficiary of X shall be entitled to the proceeds of the insurance.

Take this as a lecture.

Rule on each of XYZ Insurance Co.’s contentions. (5%)

2. Sotero was sickly since 1990.

4. Sotero did not sign the application for insurance.

(A) May Sotero validly designate her niece as beneficiary?

CONSIDER THIS AS A LECTURE

(C) Is Aban entitled to claim the proceeds under the policy?

Will Petra’s suit prosper? Explain.

DEATH OF INSURED DUE TO BENEFICIARY

Accident vs. Suicide

Decide Jason's claim with reasons. (5%)

TRANSFER OF THE THING INSURED

Is this legally valid? Explain your answer. (3%)

(2005) When does double insurance exist? (2%)

Is the contention of Julie tenable? Explain.

Northern Insurance Corp. – P20 Million

X – 4/12 of P600th = P200th

What happens to the P10 million debt of Mario to Armando? Explain.

1) Is Garapal Insurance legally justified in refusing payment to Benjie?

COMPULSORY VEHICLE LIABILITY INSURANCE

3RD PARTY LIABILITY

a) Is the contention of the insurer correct? Explain.

1. police report of the accident; and