COMMERCIAL

LAW

What is a corporation and what are

its attributes?

A corporation is an artificial being

created by operation of law, having the
right of succession and the powers,
attributes and properties especially
authorized by law or incident to its
existence. (Sec. 2, Corporation Code).

The definition of a corporation contains

its attributes.

In a civil action, the certificate of

non-forum shopping was signed by
an officer of petitioner corporation
with the authority of its board of
directors. It was questioned by the
respondents on the ground that it
was not signed by the corporation.
Was the objection to the certificate of
non-forum shopping valid?

The objection was not valid. Physical acts

like signing of documents can be performed
only by natural persons duly authorized for
the purpose by corporate by-laws or by a
specific act of the board of directors. Since
the one who signed for and in behalf of the
corporation had the authority of the board
of directors, it was a valid act of the
corporation. (Cebu Bionic Builders Supply,
Inc. vs. DBP, 635 SCRA 13, Nov. 17, 2010).

What is the meaning

of the doctrine of legal
entity of corporations?

It means that a corporation is a

juridical person with a personality
separate and distinct from that of
each shareholder. It also means that
the stockholders of a corporation
are different from the corporation
itself.[1]
(1) Section 2; Seaoil Petroleum Corp. vs. Autocorp Group,
569 SCRA 387, Oct. 17, 2008; SEC Opinions, Jan. 18, 1993 and

What are the consequences of

the doctrine of legal entity?

1. The stockholders are not personally

liable for the debts of the corporation
and vice-versa.(1) The stockholders are
not liable for corporate acts unless
otherwise provided by law.(2)

13A Fletcher, Sec. 6213.[2] Wise and Co. vs. Man Sun Lung, 40 O.
G. 50
[1]

The stockholders are

not
the
owners
of
corporate properties and
assets.[1]
2.

[1]

Berman Environmental Dev. Corp. vs. CA 167 SCRA, 540.

3. The stockholders cannot sell or

maintain actions in their own name
in connection with corporation
affairs, business or property. Neither
do stockholders have the right to
recover possession of corporation
property or to recover damages for
injury to properties belonging to the
corporation, and vice-versa.[1]
[1] Sulo ng Bayan, Inc. vs. Araneta, Inc. 72 SCRA 347.

4. The property belonging to the

corporation cannot be attached
to satisfy the debt of a
stockholder and vice versa, the
latter having only an indirect
interest in the assets and
business of the former.[1]
[1] Delima vs. Gois, 554 SCRA 731, June 17, 2008; Mandaue Dinghow Dimsum

House, Inc. vs. NLRC, 547 SCRA 402, March 3, 2008.

The Labor Arbiter rendered judgment in favor

of Delima for illegal dismissal against his employer,
Golden Union Aquamarine Corporation (Golden).
The judgment became final. Pursuant to a writ of
execution, the sheriff attached an Isuzu Jeep
registered in the name of Gois who filed a thirdparty claim over the said vehicle. The Labor Arbiter
denied the third-party claim on the ground that
Gois was one of the respondents in the case and
an incorporator/officer of Golden. May the property
of Gois be attached to satisfy the judgment claim
against Golden on the ground that she is an
incorporator/officer of said corporation?

The subject vehicle belonging to Gois cannot be attached

to answer for the liabilities of a corporation of which she
was an incorporator/officer. A corporation has a personality
distinct and separate from its individual stockholders or
members and from that of its officers who manage and run
its affairs. The rule is that obligations incurred by the
corporation, acting through its directors, officers and
employees, are its sole liabilities. Thus, property belonging
to a corporation cannot be attached to satisfy the debt of a
stockholder and vice versa, the latter having only an
indirect interest in the assets and business of the former.[1]

[1] Delima vs. Gois, 554 SCRA 737, June 17, 2008.

Explain the doctrine of

piercing the veil of corporate
fiction.

Piercing the veil of corporate fiction means that while a

corporation can not generally be made liable for acts or liabilities
of its stockholders or members, and vice versa because a
corporation has a personality separate and distinct from its

stockholders or members, however, the corporate existence is

disregarded under this doctrine where the corporation is formed
or used for illegitimate purposes or justify wrong or evade a just
and valid obligation.

In such case, the corporation and the

stockholders shall be considered as one and the same.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409, July 28, 2005;
Federation of Labor Union vs. Ople, 143 SCRA 124; Telephone Engineering & Service Co., Inc. vs.
Workmens Compensation Commission, 104 SCRA 354; Asked, 1985 and 1991 Bar Exams.; No. III, 2004
Bar Exams.; No. I (1), 2006 Bar Exams.

The doctrine of piercing the corporate veil applies only in

three (3) basic instances, namely: a) when the separate and
distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of
an existing obligation; (b) in fraud cases, or when the corporate
entity is used to justify a wrong, protect a fraud, or defend a
crime; or (c) is used in alter ego cases, i.e., where a corporation
is essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit, or adjunct of
another corporation. 1]
1]

Prisma Construction & Dev. Corp. vs. Menchaves, 614 SCRA 590, March 9, 2010; Asked, 1962
and 1985 Bar Exams.; Asked, No. I (2), 2006 Bar Exams .

However, the application of the doctrine of piercing the

corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be
certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against
another, in disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never intended may result
from an erroneous application.[1] Bad faith or wrongdoing of
a corporate officer must be established clearly and
convincingly bad faith is never presumed. .[2]

[1]

Philippine National Bank vs. Andrada Electric & Engineering Company, 381
SCRA 145, April 17, 2002

Seaoil Petroleum Corp. vs. Autocorp Group, 569 SCRA 387, Oct. 17,
2008.
2

VMSC is a family-owned corporation of which Avelino was

president. He offered to sell a car to his cousins, the
Violago spouses. It turned out that he previously sold the
said car to another cousin. Violago spouses signed the
deed of sale, paid a down payment and executed a
promissory note for the balance. The said promissory
note was endorsed to BA Finance. When the car was not
delivered to Violago spouses, they did not pay the
installments. BA Finance sued the Violago spouses for
replevin to recover the car or the amount of the
promissory note with damages. Violago spouses filed a
third-party complaint against Avelino without impleading
VMSC. Avelino claimed that VMSC should have been
included in the complaint and its non-inclusion bars an
action against him. Decide with reasons.

The fact that VSMC was not included as defendant does not
preclude recovery by Violago spouses against Avelino; neither
would such non-inclusion constitute a bar to the application of the
piercing-of-the-corporate veil doctrine. Avelino, knowing fully well
that the vehicle was already sold, and with abuse of his
relationship with the spouses still proceeded with the sale and
collected the down payment. His actions were the proximate
cause of the Violago spouses loss. He cannot now hide behind the
separate corporate personality of VMSC to escape from liability.
For all legal intents and purposes defendant and the corporation
are one and the same. The fiction of separate juridical personality
conferred upon the corporation should be disregarded. [1]

[1]

Violago vs. BA Finance Corporation, 559 SCRA 69.

The employees of Prince Transport, Inc. (PTI)

were holding meetings to form a union. PTI
caused the transfer of all union members and
sympathizers to Lubas Transport, a single
proprietorship belonging to the majority
stockholder of PTI. Despite the transfer, the
schedule of drivers and conductors were
made by PTI. When the employees made a
claim for wages against PTI, the latter denied
the claim on the ground that they were no
longer its employees since they have been
transferred to Lubas. May PTI and Lubas be
treated as one and the same?

Lubas is a mere agent, conduit or adjunct of

PTI. It is true that Lubas is a single
proprietorship and not a corporation,
however PTIs attempt to isolate itself from
and hide behind the supposed separate and
distinct personality of Lubas so as to evade
its liabilities is precisely what the classical
doctrine of piercing the veil of corporate
entity seeks to prevent and remedy. (Prince
Transport, Inc. vs. Garcia, 639 SCRA 312, Jan.
12, 2011).

What is meant by the

alter ego doctrine or
instrumentality rule?

Where one corporation is so organized and

controlled and its affairs are conducted so that
it is, in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate entity
of the 'instrumentality' may be disregarded. The
control necessary to invoke the rule is not
majority or even complete stock control but
such domination of finances, policies and
practices that the controlled corporation has,
so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal .
[1]

[1] Lipat vs. Pacific Banking Corporation 402 SCRA 339, April 30, 2003.

How may a corporation be

established as a mere alter ego of
another corporation or person?

The question of
corporation is a mere
one of fact. Piercing

whether
alter ego

a
is

the veil of
corporation fiction may be allowed only if
the following elements concur:

(1) control not mere stock control, but

complete domination- not only of finances,

but of policy and business practice in
respect to the transaction attacked, must
have been such that the corporate entity as
to this transaction had at the time no
separate mind, will or existence of its own;

(2) such control must have been used

by the defendant to commit fraud or
a wrong doing to perpetuate the
violation of a statutory or other
positive legal duty, or a dishonest
and an unjust act in contravention of
the plaintiffs legal right;

(3) the said control and breach of

duty must have proximately
caused the injury or unjust loss
complained of.[1]

[1] R & E Transport, Inc. vs. Latag, 422 SCRA 698, 707; Heirs of Ramon
Durano, Sr. vs. Uy, 344 SCRA 238.

Is mere ownership by a single

stockholder of nearly all or even
all of the capital stock of a
corporation sufficient ground to
disregard

the

corporation personality?

separate

While the veil of separate corporate

personality may be pierced when the
corporation is merely an adjunct, a business
conduit, or alter ego of a person, the mere
ownership by a single stockholder of nearly all
or even all of the capital stock of a corporation
is not be itself a sufficient ground to disregard
the separate corporate personality.[1]
.

(1) Yamamoto vs. Nishino Leather Industries, Inc., 551 SCRA 447, April 16, 2008;
Kukan International Corporation vs. Reyes, 631 SCRA 596, Sept. 29, 2010.

Is the mere fact that a single

person owns or controls one or
more corporation or substantial
identity of incorporators of two
corporations, sufficient to disregard
the separate personalities of the
corporations?

Mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stocks of a corporation
is not by itself a sufficient ground to disregard the separate
corporate personality.[1] The substantial identity of the incorporators
of two or more corporations does not imply that there was fraud so
as to justify the piercing of the writ of corporate fiction. To disregard
the said separate juridical personality, the wrong doing must be
proven clearly and convincingly.[2]

(1] Secosa vs. Heirs of Erwin Suarez Francisco, 433 SCRA 273, June 29, 2004.
[2] Martinez vs. Court of Appeals, 438 SCRA 130, September 10, 2004.

It is lawful to obtain a corporate

charter, even with a single substantial
stockholder, to engage in specific activity
and such activity may co-exist with the
other private activities of the stockholder.
If the corporation is a substantial one,
conducted lawfully and without fraud on
another, its separate identity is respected .[1]
[1] Lidell & Co., Inc. vs. Collector of Internal Revenue, 2 SCRA 632; Wise & Co., Inc. vs. Man
Sun Lung, 69 Phil. 308; Asked, 1970 Bar Exams. ; Kukai International Corporation vs. Reyes, 631
SCRA 596, Sept. 29, 2010.

Respondent Equitable Savings Bank (ESB) was a

subsidiary of Equitable PCI Bank (EPCIB) which later
merged with Banco de Oro and thence known as Banco
de Oro (BDO). Petitioners were client-depositors of
EPCIB for more than 12 years. Petitioners obtained a loan
amounting to P4,000,000 from EPCIB and to secure the
loan, they mortgaged their land in Quezon City.
Petitioners were able to draw from the loan the sum of
P3,600,000. They demanded from EPCIB copies of the
loan agreement which refused to give them the copies on
the ground that as a matter of practice, they give copies
only after the entire loan has been withdrawn.

Petitioners then did not continue payment of the

amortization after paying a total of P500,000. Respondent,
through counsel wrote a letter to the petitioner
demanding payment of the entire loan released with
interest thereon. Finally, petitioners got copy of the loan
documents and they were surprised to find out that the
lender was the respondent instead of EPCIB. When
petitioners failed to pay the loan, respondent sought to
extrajudicially foreclose the mortgage.
Petitioners
filed a case for injunction and claimed that respondent
was not the real party in interest to foreclose the
mortgage. May foreclose the mortgage made by the
petitioners to secure a loan obtained from EPCIB?

An extrajudicial foreclosure instituted by a

third party to the Loan Agreement and the real
estate mortgage (REM) would be in violation of
the petitioners rights over their property. Thus,
respondent cannot exercise the right of
foreclosure not being a party to the REM.
Respondent,
although
a
wholly-owned
subsidiary of EPCIB, has an independent and
separate juridical personality from its parent
company. The fact that the corporation owns all
of the stocks of another corporation, taken
alone, is not sufficient to justify their being
treated as one entity. If used to perform
legitimate functions, a subsidiarys separate
existence shall be respected. [1]
[1]

Borromeo vs. Court of Appeals, 550 SCRA 269, March 28, 2008.

When
corporation

are

solidarily
corporation?

officers

liable

with

of

the

The general rule is that obligations incurred by the corporation,

acting through its directors, officers, and employees, are its sole
liabilities. However, solidary liability may be incurred, but only under the
following exceptional circumstances: 1) When directors and trustees or,
in appropriate cases, the officers of a corporation: (a) vote for or assent
to patently unlawful acts of the corporation; (b) act in bad faith or with
gross negligence in directing the corporate affairs; (c) are guilty of
conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons; 2) When a director or officer has
consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written
objection thereto; 3) When a director, trustee or officers has
contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; 4) When a director, trustee or
officer is made, by specific provision of law, personally liable for his
personal action. 1]
1] Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1, Dec. 7, 2009.

Lau was the president of Queensland, a

corporation engaged in trading of commodity
futures. Two unlicensed salesman convinced
George to invest in Queensland. On behalf of
Queensland, Collado who also an unlicensed
salesman signed with George a Customers
Agreement. SEC issued a cease and desist order
against Queensland. Alarmed by the said order,
George demanded the return of his investment
from Queensland. When he failed to obtain a return
of his investment, he sued Queensland, Lau and
Collado. May the Lau and Collado as corporate
officers be held solidarily liable with Queensland?

Both Lau and Collado may be held liable solidarily

with Queensland. The presence of unlicensed
salesmen, and Collados participation in the
unlawful execution of orders under the customers
account clearly established the fact that the
management of Queensland failed to implement
the rules and regulations against the hiring of, and
associating with, unlicensed consultants or
traders. How these unlicensed personnel been
able to pursue their unlawful activities is a
reflection of how negligent the management was.
(Queensland-Tokyo Commodities, Inc. vs. George,
630 SCRA 304, Sept. 8, 2010).

When is a corporate officer guilty of

bad faith in terminating employees
and what is the consequence
thereof?

Corporate directors and officers are solidarily

liable with the corporation for termination of
employment of corporate employees done
with malice or in bad faith. Bad faith is never
presumed. Bad faith does not simply connote
bad judgment or negligence it imports a
dishonest purpose or some moral obliquity
and conscious doing of wrong. It means a
breach of a known duty through some motive
or interest or ill-will that partakes of the
nature of fraud. (SHS Perforated Materials,
Inc. vs. Diaz, 633 SCRA 258, Oct. 13, 2010;
Solidbank Corporation vs. Gamier, 634 SCRA
554, Nov. 15, 2010).

May an officer of the corporation who

acted in his official capacity be held
solidarily liable with the corporation
for the illegal dismissal of an
employee?

As a general rule, a corporate officer cannot be held

liable for acts done in his official capacity because a
corporation, by legal fiction, has a personality separate
and distinct from its officers, stockholders, and members.
(Solidbank Corporation vs. Gamier, 364 SCRA 554. Nov.
15, 2010).

To pierce this fictional veil, it must be shown that the

corporate personality was used to perpetuate fraud or an
illegal act, or to evade an existing obligation, or to
confuse a legitimate issue. In illegal dismissal cases,
corporate officers may be held solidarily liable with the
corporation if the termination was done with malice or
bad faith. (Culili vs. Eastern Telecommunications
Philippines, Inc., 642 SCRA 338.)

In general, when may a person or officer

of the corporation bind the corporation?

The general rule is that, in the absence

of authority from the board of directors,
no person, not even its officers, can
validly bind a corporation. The power and
responsibility to decide whether the
corporation should enter into a contract
that will bind the corporation is lodged in
the board of directors. 1]

[1]Associated

Bank vs. Pronstroller, 558 SCRA 113.

What are kinds of authority of an

individual to bind a corporation?

The authority of a corporate officer or agent

in dealing with third persons may be actual
or apparent. Actual authority is either
express or implied. The extent of an agents
express authority is to be measured by the
power delegated to him by the corporation,
while the extent of his implied authority is
measured by his prior acts which have been
ratified or approved, or their benefits
accepted by his principal. (Banate vs.
Philippine Countryside Rural Bank (Liloan,
Cebu), Inc., 625 SCRA 21, July 13, 2010).

From what may apparent authority of

an officer to bind the corporation be
derived?

Apparent authority is derived not merely from

practice. Its existence may be ascertained through:
(1) the general manner in which the corporation
holds out an officer or agent as having the power
to act, or in other words, the apparent authority to
act in general, with which it clothes him, or (2) the
acquiescence in his acts of a particular nature with
actual or constructive knowledge thereof, within or
beyond the scope of his ordinary powers. [1]
[1]Associated
[1]Associated Bank vs. Pronstroller, 558 SCRA 113; Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu),Inc. 625 SCRA 21,
July 13, 2010.

May the by-laws of

provide for additional
of directors?

a corporation
qualifications

The by-laws may provide for the

qualifications of directors or trustees [1]
provided they are not inconsistent with
the Constitution, law or charter of the
corporation and they are reasonable.
The minimum qualification required by
the Corporation Code must however, be
met.[2]
[1] Section 47, par. 5.
[2] SEC Opinion, Dec. 8, 1988.

The by-laws provide that only

members in good standing for at
least five (5) years shall be qualified
to be elected as director. Is such
additional qualification of directors
valid?

Yes, it is valid because the bylaws may

prescribe the qualifications of directors.
Thus, one who was elected despite the fact
that his membership in the corporation has
not reached five (5) years is in violation of
the by-laws and hence, his election is null
and
void.[1]

[1]

Garcia vs. Diapo, SEC Case No. 2169, July 30, 1990.

Who are disqualified from being

elected as directors?

The following are disqualified from being elected as directors:

(a) those convicted by final judgment of an

offense punishable by imprisonment for
a period exceeding six (6) years;
(b) those convicted by final judgment of a
violation of the Corporation Code
committed within five (5) years prior to
the date of his election;[1] (Sec. 27); and
(c) those disqualified by the by-laws .[2]
[1] Section 27.
[2] Gokongwei vs. SEC, 89 SCRA 336.

The by-laws of San Miguel Corporation

(SMC) disqualified from being elected as
director those who were directors of
another corporation whose business was in
competition with or was antagonistic with
SMC. Gokongwei was a director of other
corporations whose lines of business were
in direct competition with some of the
business activities of
SMC.
May
Gokongwei be elected as director of SMC?

Gokongwei was disqualified from being

elected as director of SMC. The provision
of the by-laws of SMC disqualifying a
competitors director from being elected as
director of SMC was valid. Sound principles
of corporate management counsel against
sharing sensitive information with a
director whose fiduciary duty of loyalty
may well require that he disclose this
information to a competitive rival.[1]
[1] Gokongwei vs. SEC, 89 SCRA336; Asked, 1998 Bar Exams.; No. VIII (a), 2000 Bar Exams.; No. XI, 2001 Bar Exams.

Are members of the board of

directors entitled to compensation? If
so, is there any limitation thereto?

The directors of a corporation shall not receive any

compensation for being members of the board of
directors except for reasonable per diems. The two
instances where the directors are to be entitled to
compensation shall be when it is fixed by the
corporations by-laws or when the stockholders,
representing at least a majority of the outstanding capital
stock, vote to grant the same at a regular or special
stockholders meeting, subject to the qualification that, in
any of the situations, the total yearly compensation of
directors, as such directors, shall in no case exceed 10%
of the net income before income tax of the corporation
during the preceding year. (Singson vs. Commission on
Audit, 627 SCRA 36, August 9, 2010).

As a general rule, are

directors/trustees and officers of a
corporation liable personally for
their acts as such?

As a general rule, directors/trustees and officers of

a corporation who purport to act for and in behalf of the
corporation, keep within the lawful scope of their
authority in so acting, and act in good faith, do not
become liable, whether civilly or otherwise, for the
consequences of their acts. Those acts, when they are
of

such

nature

and

are

done

under

such

circumstances, are properly attributed to the corporation

alone and no personal liability is incurred by such
officers and board members/directors.[1]
[1] Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55.

Officers of a corporation who

act as such within the scope of their
authority have no personal liability
for such acts unless it is shown that
they have acted negligently or in bad
faith. They are mere agents of the
corporation who cannot be made
liable if they acted within the scope
of their authority.[1]
[1] Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710; Asked, 1968 and 1999
Bar Exams.

For as long as the corporate officers acted

within the scope of their authority and in good
faith, they cannot be held personally liable for
the consequences of their acts. The separate
corporate personality is a shield against the
personal liability of corporate officers, whose
acts are property attributed to the corporation.[1]

[1] Solidbank Corporation vs. Mindanao Ferroalloy Corporation, et al., 464 SCRA 409, July 28, 2005.

Likewise, officers of a corporation

are not personally liable for their acts as
such officers unless it is shown that they
have exceeded their authority. The
corporation has a personality separate
and distinct from its officers.[1]

[1] Prudential Bank vs. Alviar, 464 SCRA 353.

SSS filed an action against Impact Corporation and

its directors for non-remittance of SSS premium
contributions withheld by said corporation from its
employees. Impact became insolvent and all directors
died except director Garcia. Garcia claimed that only
directors who participate in unlawful acts or are guilty of
gross negligence and bad faith shall be personally liable,
and that being a mere stockholder of the corporation,
she could not be made liable. Is Garcia liable?

Among the exceptions when a director is

liable for the obligations of the corporation is
when a director, trustee or officer is made, by
specific provision of law, personally liable for
his corporate action. The situation of Garcia
falls exactly under the aforesaid situation
because Section 28 (f) of the Social Security Law
imposes a civil liability upon its managing head,
directors or partners for any act or omission
pertaining to the violation of the Social Security
Law when committed by a corporation,
partnership or association.[1]
(1) Garcia vs. Social Security System Commission Legal and Collection, 540 SCRA 459, 475, Dec.
17, 2007

What are the requisites of a

derivative suit?

The requisites of a derivative suit are:

(a) The party bringing suit should be a shareholder during the time
the act or transaction complained of, the number of shares not being
material;
(b) The party has tried to exhaust intra-corporate remedies i.e., has
made a demand on the board of directors for the appropriate relief,
but the latter has failed or refused to heed his pleas; and
The cause of action actually devolves on the corporation; the
wrongdoing or harm having been caused to the corporation and not
the particular stockholder bringing the suit. 1]
1]

Reyes vs. RTC of Makati, 561 SCRA 593, Aug. 11, 2008.

When will merger or consolidation of

two corporations take effect?

The merger or consolidation does not become effective upon

the mere agreement of the constituent corporations. Since a
merger or consolidation includes fundamental changes in the
corporation, as well as in the rights of the stockholders and
creditors, there must be compliance with the steps provided for
by law such as: (a) The board of each corporation draws up a
plan of merger or consolidation; (b) submission of the plan to
stockholders or members for approval; execution of the
formal agreement referred to as articles of merger or
consolidation by the corporate officers of each constituent
corporation; (d) submission of said articles of merger or
consolidation to the SEC for approval; (e) if necessary, SEC shall
set the same for hearing; (f) issuance of certificate of merger or
consolidation.

The merger or consolidation takes effect upon the issuance by

the SEC of the certificate of merger or consolidation. (Mindanao
Savings and Loan Association vs. Wilkom, 634 SCRA 392, Oct.
20, 2010).

What are the effects of failure to

obtain the certificate of merger?

On the other hand, what are the

consequences of merger?

When the certificate of merger is not obtained, there

is no merger and hence, the two corporations shall
not be considered as one but two separate
corporations, and being separate entities, the
property of one cannot be considered as property of
the other.

On the other hand, when merger takes effect, the

absorbed corporation ceases to exist and its rights,
liabilities and properties shall be taken and deemed
transferred to and vested in the surviving
corporation. (Mindanao Savings and Loan
Association, Inc. vs. Wilkom, 634 SCRA 392, Oct. 20,
2010).

Does the merger of two corporations

carry with it the absorption of the
employees of non-surviving
corporation by the surviving
corporation?

While it is true that in case of an approved

merger, all the assets and liabilities of the
dissolved corporation are transferred to the
surviving corporation, however the
employees are not automatically transferred
to the surviving corporation. Human beings
are not included in the terms, assets and
liabilities. The Corporation Code does not
mandate the absorption of the employees of
the non-surviving corporation by the surviving
corporation in the case of merger. (Bank of
the Philippine Islands vs. BPI Employees
Union, 627 SCRA 590, August 10, 2010).

What right does a dissenting stockholder

have when there is a fundamental
change in the articles of incorporation
which substantially prejudice the rights
of the stockholders?

A stockholder who dissents from certain

corporate actions such as amendment of
the articles of incorporation which
prejudice his interest has the right to
demand payment of the fair value of his
shares. This right is known as the
appraisal right. (Turner vs. Lorenzo
Shipping Corp., 636 SCRA 13, Nov. 24,
2010).

Petitioners were stockholders of

respondent corporation. Said
corporation amended its articles of
incorporation by removing the
stockholders pre-emptive rights to
newly issued shares of stock. Petitioners
voted against the amendment and
demanded payment of the value of their
shares. May the petitioners exercise
appraisal rights?

The petitioners may exercise their

appraisal right since there was a
fundamental change in the charter or
articles of incorporation substantially
prejudicing the rights of the stockholders.
It serves the purpose of enabling the
dissenting stockholder to have his interest
purchased and to retire from the
corporation. (Turner vs. Lorenzo Shipping
Corporation, 636 SCRA 13, Nov. 24, 2010).

Is there any limitation on the right of

appraisal of a dissenting stockholder?

Yes, there is a limitation on the right of appraisal

of a stockholder. No payment shall be made to
any dissenting stockholder unless the
corporation has unrestricted retained earnings
in its books to cover the payment. In case the
corporation has no available unrestricted
retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting
stockholder is not paid the value of his shares
within 30 days after the award, his voting and
dividend rights shall immediately be restored.

(continued at next slide)

The trust fund doctrine supports the requirement of

unrestricted retained earnings to fund the payment of
the shares of stocks of the withdrawing stockholders.
Under this doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors who are
preferred in the distribution of corporate assets. The
creditors of the corporation have the right to assume
that the board of directors will not use the assets of
the corporation to purchase its own stock for as long
as the corporation has outstanding debts and
liabilities. (Turner vs. Lorenzo Shipping Corp., 636
SCRA 13, Nov. 24, 2010).

What may be the source of

payment of dividends?

A corporation cannot lawfully declare dividends out

of its capital stock, and thereby reduce the same, or out of
assets which are needed to pay the corporate debts. They
can be declared only out of surplus profits.[1] The reason
for the rule is that it would be a fraud upon the creditors of
a corporation who extend credit to it on the faith of its
capital stock, to permit it to be diverted by a distribution
among the stockholders as dividends. Moreover, each
stockholder is entitled to have the capital stock preserved
unimpaired for the purpose of carrying out the object for
which the corporation is formed.[2]

[1] 11 Fletcher Cyc. Corp. Sec. 5319, 611; Steinberg vs. Velasco, 52 Phil. 953; Asked, No. V, a,
2005 Bar Exams.
[2] 14 C. J. Sec. 1210; Asked, 1953 and 1957 Bar Exams.; No. V c, 2005 Bar Exams.

Distinguish a corporation sole from a

corporation aggregate.

A corporation sole is one formed by the chief

archbishop, bishop, priest, minister, rabbi or
other presiding elder of a religious
denomination, sect, or church, for the
purpose of administering or managing, as
trustee the affairs, properties and
temporalities of such religious denomination,
sect or church.
A corporation aggregate formed for the same
purpose, on the other hand consists of two or
more persons. (IEMELIF vs. Lazaro, 624 SCRA
224, July 6, 2010).

May a corporation sole be converted

into a corporation aggregate by
merely amending its articles of
incorporation or should the
corporation sole be dissolved first
and a corporation aggregate be
created later?

There is no point to dissolving the corporation sole of one

member to enable the corporation aggregate to emerge from
it. The conversion may be done by merely amending the
articles of incorporation of the corporation sole.

If the amendment mechanism of a non-stock corporation shall

be made to operate in a corporation sole, its one member in
whom all the powers of the corporation technically belongs,
needs to get the concurrence of two-thirds of its membership.
Thus, the one member with the concurrence of two-thirds of
the membership of the organization for whom he acts as
trustee, can self-will the amendment. He can, with the
membership concurrence, increase the technical number of
the members of the corporation from sole or one to the
greater number authorized by its amended articles. (IEMELIF
vs. Lazaro, 624 SCRA 224, July 6, 2010).

May a dissolved corporation still sue

or be sued?

Under Section 122 of the Corporation Code, a

dissolved corporation shall nevertheless continue as
a body corporate for three (3) years for the purpose
prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose
and convey its property and to distribute its assts,
but not the purpose of continuing the business for
which it was established. Within those three (3)
years, the corporation may appoint a trustee or
receiver who shall carry out the said purposes
beyond the three year winding-up period. Thus, a
trustee of a dissolved corporation may commence a
suit which can proceed to final judgment even
beyond the three (3) year period of liquidation.
(Metropolitan Bank & Trust Co., Inc. vs. Board of
Trustees of RMCPRF, 630 SCRA 350, Sept. 8, 2010).

Is a foreign corporation not

licensed to do business in the
Philippines
absolutely
incapacitated from filing a suit in
local courts?

When a foreign corporation does business in the Philippines

without the proper license, it cannot maintain any action of
proceeding before Philippine Courts. Doing business implies a
continuity of commercial dealings or arrangement which involve
profit-making. Soliciting purchases has been deleted from the
enumeration of acts or activities which constitute doing business.
Thus, where a foreign company merely imports goods from a
Philippine exporter, without opening an office or appointing an agent
in the Philippines, is not doing business in the Philippines and hence,
not barred from bringing action in Philippine courts. .[1]
.[1] Cargill,

Inc. vs. Intra Strata Assurance Corporation, 615 SCRA 304, March 15, 2010.

Only when a foreign corporation is transacting or

doing business in the Philippines will a license be
necessary before it can institute suits. It may however,
bring suits on isolated business transactions, which is
not prohibited under Philippine Law. Thus, a foreign
insurance company may sue in Philippine courts for
subrogation arising out of marine insurance policies
issued by it abroad to cover international-bound
cargoes shipped by a Philippine carrier, even if it has no
license to do business in the country. It is the act of
engaging in business without the prescribed license,
and not the lack of license per se which bars a foreign
corporation from access to our courts. .[1]
[1]

Aboitiz Shipping Corporation vs. Insurance Company of North America, 561 SCRA 262.

When may an unlicensed foreign

corporation doing business in the
Philippines sue in Philippine Courts?

The exception to the rule that an unlicensed foreign

corporation doing business in the Philippines cannot sue in
Philippine courts is when the principle of estoppel applies.

Thus, a foreign corporation doing business in the Philippines

without license may sue in Philippine courts a Filipino
citizen or a Philippine entity that had contracted with and
benefited from it. A party is estopped from challenging the
personality of a corporation after having acknowledged the
same by entering into a contract with it. The principle is
applied to prevent a person contracting with foreign
corporation from later taking advantage of its noncompliance with the statutes where such person has
received benefits from such contract. (Global Business
Holdings, Inc. vs. Surecomp Software, B. V., 633 SCRA 94,
Oct. 13, 2010).

The Securities Regulation Code

Questions:
What are exempt securities?
What are exempt transactions?

What is a tender offer? What

is its purpose?

A tender offer is a publicly announced

intention by a person acting alone or in concert
with other persons to acquire equity securities
of a public company i. e., one listed on an stock
exchange. It is also defined as an offer by the
acquiring person to stockholders of a public
company for them to tender their shares therein
on the terms specified in the offer.[1]
[1]

Osmena III vs Social Security System of the Philippines, 533 SCRA, Sept. 13,
2007.

Tender offer is in place to protect the

interests of minority stockholders of a
target company against any scheme that
dilutes the share value of their
investments. It affords such minority
shareholders the opportunity to withdraw
or exit from the company under
reasonable terms, a change to sell their
shares at the same price as those of the
majority stockholders.[2]
[2] Ibid.

When must tender offer be

made to shareholders?

Any person or group of persons acting in

concert who intends to acquire at least fifteen percent
(15%) of any class of any equity security of a listed
corporation or of any class of any equity security of a
corporation with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (22) or more
stockholders with at least one hundred (100) shares
each or who intends to acquire at least thirty percent
(30%) of such equity over a period of twelve (12)
months shall make a tender offer to stockholders by
filing with the Commission a declaration to that effect;
and furnish the issuer, a statement containing such of
the information required in Section 17 of this Code as
the Commission may prescribe.

Such person or group of persons shall

publish all requests or invitations for tender, or
materials making a tender offer or requesting or
inviting letters of such a security. Copies of any
additional material soliciting or requesting such
tender offers subsequent to the initial solicitation
or request shall contain such information as the
Commission may prescribe, and shall be filed
with the Commission and sent to the issuer not
later than the time copies of such materials are
first published or sent or given to security
holders.[1]
[1]

Section 19.1; Asked, No. VI, 2002 Bar Exams.

What is the meaning of Swiss

Challenge?

Under the Swiss Challenge format, one

of

the

bidders

is

given

the

option

preferential right to match the winning bid.[1]

[1] Osmena III vs. Social Security System of the Philippines, 533 SCRA 313, 321,
September 13, 2007.

or

PRESIDENTIAL DECREE
NO. 902-A

(As amended by Securities Regulation Code)

Which
over cases
the SEC?

court has jurisdiction

previously cognizable by

The court designated by the Supreme Court

as Special Commercial Court is vested with
jurisdiction over cases previously cognizable by
the Securities and Exchange Commission. When
a case is erroneously filed in the regular
Regional Trial Court, such court does not have
the authority or power to order the transfer of
cases erroneously filed with it to another branch
of the Regional Trial Court the only action that
it could take on the matter is to dismiss the
petition for lack of jurisdiction.

What is an intra-corporate
controversy?

An intra-corporate controversy or
dispute is a suit arising from intracorporate relations or between or
among stockholders or between any
or all of them and the corporation.
(Strategic Alliance Dev. Corp. vs. Star
Infrastructure Dev. Corp., 635 SCRA
380, Nov. 17, 2010).

Are all conflicts between

stockholders and the corporation
considered as intra-corporate
controversies so as to fall within the
jurisdiction of SEC (Now Regional Trial
Court)?

Not all conflicts between the stockholders and the corporation are
classified as intra-corporate so as to fall within the jurisdiction of
the SEC (Now the Regional Trial Court).
The better policy to be followed in determining jurisdiction over a
case should be to consider concurrent factors such as the status or
relationship of the parties or the nature of the question that is the
subject of their controversy. (Strategic Alliance Dev. Corp. vs. Star
Infrastructure Dev. Corp., 635 SCRA 380, Nov. 17, 2010).
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. If the relationship
and its incidents are merely incidental to the controversy or if there
will still be conflict even if the relationship does not exist, then no
intra-corporate controversy exists. (Real vs. Sangu Phils., Inc., 640
SCRA 67, Jan. 19, 2011).

Real was a stockholder, director and

manager of respondent corporation. He
was dismissed by the Board for various
reasons. Claiming illegal dismissal, he
filed a case with the NLRC. Respondent
claims that NLRC did not have jurisdiction
because the case was an intra-corporate
controversy over which the SEC (now
Regional Trial Court) has jurisdiction. Was
the case intra-corporate issue?

The case was not intra-corporate

controversy. The case arose from the
alleged illegal dismissal of the petitioner as
an employee and not by reason of his
capacity as a stockholder or director. He is
not trying to recover a seat in the board of
directors or to any appointive or elective
corporate position which has been declared
vacant by the board. This case is one of
termination of employment which is a labor
controversy and not an intra-corporate
dispute. (Real vs. Sangu Phil., Inc., 640
SCRA 67, Jan. 19, 2011).

Is the dismissal of a vice-president an

intra-corporate controversy so as to
fall under the jurisdiction of SEC
(Now Regional Trial Court)?

If the vice-president is a corporate officer, his dismissal falls

under the jurisdiction of the court, otherwise it falls under the
jurisdiction of the
National Labor Relations Commission.

The vice-president is a corporate officer if his position is

provided for in the Corporation Code or in the by-laws
otherwise, he is not a corporate officer.

To be a corporate officer, it is essential that his position is one

of those expressly mentioned in the Corporation Code or in the
companys by-laws. Thus, the creation of an office pursuant to
or under a by-law provision is not enough to make a position a
corporate office.

The corporate officers mentioned by the Corporation Code are

the President, Treasurer, Secretary and such other officers as
may be provided for in the by-laws. (Matling Industrial and
Commercial Corporation vs. Ricardo Coros, G.R. 157802; 633
SCRA 12, Oct. 13, 2010.)

What is the nature of all orders and

decisions under the Interim Rules on
Intra-corporate controversies?

All decisions and orders issued under the

Interim Rules of Procedure Governing Intracorporate Controversies shall immediately
be executory. No appeal or petition taken
therefrom shall stay the enforcement or
implementation of the decision or order,
unless restrained by an appellate court.
Interlocutory orders shall not be subject to
appeal. (Dee Ping Wee vs. Lee Hiong Wee,
629 SCRA 145, August 25, 2010).

Who may file a petition for

rehabilitation of a corporation?

The petitioner in a Petition for

Rehabilitation of the corporation
must either be: (1) an actual
insolvent debtor; (2) a technically
insolvent debtor; or (3) a creditor or
stockholder of the debtor.

What is technical insolvency?

What is the remedy of the
corporate debtor with technical
insolvency.

Technical
insolvency
is
the
inability of a corporation to pay its
obligations although it has sufficient
assets, for a period longer than one
year from filing of the petition. Its
remedy is to file a Petition for
Rehabilitation. [1]
[1] Union Bank of the Philippines vs. ASB Development Corporation, 560 SCRA
578.

Distinguish actual insolvency

from
technical insolvency.

There is actual insolvency when the

corporations assets are not enough to
cover its liabilities, while technical
insolvency exists when the corporation has
enough assets but it foresees its inability
to pay its obligations for more than one
year from the filing of the petition. [1]
[1] PNB vs. Court of Appeals, 576 SCRA 537, January 7, 2009.

When may a party apply for the

appointment of a management
committee for the corporation,
partnership or association?

A party may apply for the

management
committee
for
partnership or association when
danger of:

appointment of a
the
corporation,
there is imminent

(1) Dissipation,
loss,
wastage
or
destruction or assets or other
properties; and

(2)

Paralyzation of its business operations

which may be prejudicial to the interest of
the minority stockholders, parties-litigants
or the general public. [1]

[1] Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SCRA 465, January 27, 2006, citing
Section 1, Rule 9 of the Interim Rules on Corporate Rehabilitation.

When may receivers

appointed for a corporation?

be

A. Receivers may be appointed whenever:

(1) necessary in order to preserve the

rights of the parties-litigant, and/or
(2) protect the interest of the investing
public and creditors.[1]
[1] Section 6 (c), P. D. 902-A, as amended.

The situations contemplated in

these instances are serious in nature.
There must exist a clear and imminent
danger of losing the corporate assets if
a receiver is not appointed.[1]

[1] Pryce Corporation vs. Court of Appeals, 543 SCRA 657, February 4, 2008.

What is the Serious

Situation Test in corporate
rehabilitation cases?

The Serious Situation Test in a

petition for rehabilitation case means that
there is a clear and imminent danger that
the corporate petitioner will lose its
corporate assets if a receiver is not
appointed.[1]
[1]

Pryce Corporation vs. Court of Appeals, supra.

What is the effect of the

appointment of a rehabilitation
receiver? What is the purpose
thereof?

Upon appointment by the SEC (now,

RTC Special Commercial Court) of a
rehabilitation receiver, all actions for
claims against the corporation pending
before any court, tribunal or board shall
ipso jure be suspended.[1]
[1]

Garcia vs. Philippine Air Lines, Inc., 531 SCRA 574.

When will the suspension of the

enforcement of all claims against the
corporation commence?

The suspension of the enforcement of all

claims against the corporation shall
commence only from the time the
Rehabilitation Receiver is appointed.
(Equitable PCI Bank, Inc. vs. DNG
Realty, supra, citing RCBC vs IAC, 320
SCRA 279).

What are the actions that are

suspended during the process of
rehabilitation?

The actions that are suspended cover all claims against the
corporation whether for damages founded on a breach of
contract of carriage, labor cases, collection suits or any other
claims of a pecuniary nature. No exception in favor of labor
claims is mentioned in the law.[1] No exception either is made
therein in favor of maritime claims. Thus, since the law does
make any exemptions or distinctions, neither should we. [2]

[2] Negros

Navigation Co., Inc. vs. Court of Appeals, 573 SCRA 434, December 10, 2008.

[1] Philippine Airlines, Inc. vs. Heirs of Bernardin J. Zamora, 538 SCRA 456, November 23, 2007.

What is the purpose of

suspending
the
proceedings
initiated by the creditors for the
collection of their credits whenever
a
corporation
is
undergoing
rehabilitation?

The purpose for the suspension of the

proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the rights of
party litigants as well as the interest of the
investing public or creditors. Such suspension is
intended to give enough breathing space for the
management committee or rehabilitation receiver
to make the business viable again, without having
to divert attention and resources to litigations in
various fora.

The suspension would enable the

management
committee
or
rehabilitation
receiver to effectively exercise its/his powers
free from any judicial or extrajudicial
interference that might unduly hinder or prevent
the rescue of the debtor company. To allow
such other action to continue would only add to
the burden of the management committee or
rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims
against the corporation instead of being directed
toward its restructuring and rehabilitation.[1]
[1] Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company,
Inc.. 554 SCRA 561, June 17, 2008

What is the consequence if no

rehabilitation plan is approved by the
court within 180 days from the date
of the initial hearing?

Under Section 11, Rule 4 of the Interim

Rules of Procedure in Corporate
Rehabilitation, a petition for rehabilitation
shall be dismissed is no rehabilitation plan is
approved by the court upon the lapse of 180
days from the date of initial hearing. The
Interim Rules, however allows extension
beyond the 180-day period for justifiable
cause. (De Castro vs. Liberty Broadcasting
Network, Inc., 629 SCRA 77, Aug. 25, 2010).

Will the suspension of all

proceedings as a consequence of
rehabilitation
include
suspension
of
criminal
prosecution for violation of BP
22 or Bouncing Check Law?

Violation of BP 22 is not a claim that can be enjoined within the

purview of P.D. No. 902-A although the conviction of the accused for the
alleged crime could result in the restitution, reparation or indemnification
of the offended party for the damage or injury he sustained by reason of
the felonious act of the accused because prosecution for violation of B.P.
22 is a criminal action. The dominant and primordial objective of the
criminal action is the punishment of the offender. The civil action is
merely incidental to and consequent to the conviction of the accused.
Criminal actions are primarily intended to vindicate an outrage against
the sovereignty of the state and to impose the appropriate penalty for
the vindication of the disturbance to the social order caused by the
offender. On the other hand, the action between the private complainant
and the accused is intended solely to indemnify the former. [1]

[1] Rosario

vs. Co, 563 SCRA 239, Aug. 26, 2008.

What is the difference between

Suspension of Payments under the
Insolvency Law and suspension of
payments of a corporation undergoing
rehabilitation under Presidential Decree
902-A?

Unlike the provisions in the Insolvency

Law which exempts secured creditors from
the suspensive effect of the order issued by
the court in an ordinary suspension of
payment proceedings, the provisions of P.D.
No. 902-A, when it comes to the appointment
of
a
management
committee
or
a
rehabilitation receiver, do not contain an
exemption
for
secured
creditors.[1]

[1] Philippine Islands Corporation for Tourism Development, Inc. vs. Victorias Milling Company,
Inc., supra.

What
is
the
effect
of
the
appointment
of
a
management
committee or rehabilitation receiver on
the right of the secured creditor to
foreclose the mortgage in its favor?

The right to foreclose such mortgage

is
merely
suspended
upon
the
appointment of a management committee
or rehabilitation receiver or upon the
issuance of a stay order by the trial court.
However, the creditor-mortgagee may
exercise his right to foreclose the
mortgage upon the termination of the
rehabilitation proceedings or upon the
lifting of the stay order.[1]
[1] Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465.

What is the consequence if

rehabilitation is no longer feasible
and the assets of the corporation
are finally liquidated?

Secured creditors shall then enjoy

preference over unsecured creditors,
subject only to the provisions of the Civil
Code on concurrence and preference of
credits. Creditors of secured obligations
may pursue their security interest on
lien, or they may choose to abandon the
preference and prove their credits as
ordinary claims.[1]
1] Consuelo Metal Corporation vs. Planters Development Bank, 465 SCRA 465, June 26, 2008.

What is the proper mode of appeal in

corporate rehabilitation cases?

The proper mode of appeal in cases of

corporate rehabilitation is through a
petition for review under Rule 43 of
the Rules of Court to be filed within
fifteen (15) days from notice of the
decision or final order of the Regional
Trial Court. (China Banking Corporation
vs. Cebu Printing and Packaging Corp.,
628 SCRA 154, Aug. 11, 2010).

 INSURANCE

Q. What laws govern insurance?

A. The laws governing insurance in their order of

priority are: (a) Insurance Code; (b) in the
absence of applicable provisions in the Insurance
Code, the Civil Code, and (c) in the absence of
applicable provisions in the Insurance and the
Civil Code, the general principles prevailing on
the subject in the United States, particularly in
the State of California where our Insurance Code
was based.[1]

[1] Constantino vs. Asia Life Ins. Co., 87 Phil. 248;

Gercio vs. Sun Life Assur. Of Canada, 48 Phil. 375.

Q. For purposes of insurance, who

is a public enemy?

A. Public enemy is a nation at war with the

Philippines and every citizen or subject of
such nation. Such term does not include
robbers, thieves and riotous mobs.[1] A
public enemy cannot be insured because
the purpose of war is to cripple the power
and exhaust the resources of the enemy,
and it inconsistent that one country should
destroy its enemy and repay in insurance
the value of what has been so destroyed.
[1] Blacks L. D., citing State v. Moore, 74 Mo.
417, 41 Am. Rep. 322; Asked, VIII (a), 2000 Bar
Exams.

Q. Who may insure a mortgaged property?

A. Both the mortgagor and the mortgagee
may take out separate policies with the same or
different insurance companies. The mortgagor
may insure the property mortgaged to the full
value of such property while the mortgagee can
insure the same only to the extent of the
amount of his credit.[1]

[1] Cosio vs. Panlilio, 17 SCRA 196; Asked, No. IV

(a), 1999 Bar Exams.; 44 C. J. S. 884.

Q. What are the consequences

where the mortgagor insures the
property mortgaged in his own
name but makes the loss payable
to the mortgagee or assigns the
policy to the latter?

A. The consequences of such insurance[1] are as follows:

1. The insurance is still deemed to be upon the interest of the mortgagor who does not
cease to be a party to the original contract. Hence, if the policy is cancelled, notice of
cancellation must be given to the mortgagor and not to the mortgagee.[2]
2. Any act of the mortgagor, prior to the loss, which would otherwise avoid the
insurance, will have the same effect although the property is in the hands of the
mortgagee. Thus, violation by the mortgagor of the policy entitles the insurer to rescind
and will prevent the beneficiary (mortgagee) from recovering from the insurer.[3]
3. Any act which, under the contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee with the same effect as if it has been performed by
the mortgagor. As for example, the policy requires the insured to give notice and proof
of loss without unnecessary delay. Notice or proof of loss may be given by the
mortgagee to whom the loss is made payable with the same effect as if the same was
given by the mortgagor.[4]
4. Upon occurrence of the loss, the mortgagee is entitled to recover to the extent of his
credit[5] and the balance, if any, is payable to the mortgagor since such policy is for the
benefit of both the mortgagor and mortgagee.[6] The mortgagee is the proper party to
prosecute an action for a loss sustained under a policy of insurance where the loss was
made payable to him and such action may be brought by the mortgagee even without
including the mortgagor as party to the action.[7]
5. Upon recovery by the mortgagee to the extent of his credit from the insurer, the
mortgagor is released from his indebtedness.[8]

Q. What are the effects of

insurance procured by the
mortgagee without reference to
the right of the mortgagor?

1. The mortgagee may collect from the insurer upon the occurrence
of the loss to the extent of his credit.[1]
2. Unless otherwise stated in the policy, the mortgagor has no right
to collect the balance of the proceeds of the policy after payment of
the interest of the mortgagee.[2]
3. The insurer, upon payment to the mortgagee-insured, becomes
subrogated to the rights of the mortgagee against the mortgagor
and may collect the debt of the mortgagor to the extent of the
amount paid to the mortgagee.[3] This principle applies only where
the policy obtained by the mortgagee covers his interest alone.[4]
4. The mortgagee-insured can no longer collect the mortgagors
indebtedness after receiving full payment of his credit from the
insurer since the latter thereby acquires the right to collect from the
mortgagor by virtue of subrogation.[5] However, if the mortgageeinsured is unable to collect the whole amount of his credit from the
insurer, he may still charge the mortgagor for the deficiency.[6]
5. The mortgagor is not released from his debt by the insurers
payment to the mortgagee-insured.[7]

Who may be beneficiaries in life

insurance contracts?

Any person may be designated as beneficiary in a life

insurance contract even
though he is a stranger and has no insurable interest in the
life insured, except those
who are forbidden by law to receive donations from the
insured such as:
(a) Those made between persons who are guilty of
adultery or concubinage at the
time of the donation;
(b) Those made between persons found guilty of the
same criminal offense, in
consideration thereof;
(c) Those made to a public officer or his wife,
descendants and ascendants, by
reason of his office.

In essence, a life insurance policy is no different from

a civil donation insofar as designation of beneficiary is
concerned. Both are founded upon the same
consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the
insured pays out of liberality, the beneficiary will
receive the proceeds of the said insurance. As a
consequence, the proscription in Article 739 of the
Civil Code should equally operate in life insurance
contracts. Any person who cannot receive a donation
cannot be named as beneficiary in the life insurance
policy of the person who cannot make the donation.
No legal proscription exists in naming as
beneficiaries the children of illicit relationships of the
insured, and thus they may be named as
beneficiaries.

Q. Must the beneficiary have

insurable interest in the life insured?

A. A person procuring insurance on his

own life may name anyone he chooses as
beneficiary thereof, even though he is
stranger and has no insurable interest in
the life insured. However, a person who
cannot receive donation from the insured
under Article 739 of the Civil Code cannot
be designated as beneficiary.

Q. May the wife who abandoned her

husband be a beneficiary of Social
Security Benefits?

A. In the case of Social Security System, et

al., vs. Gloria de los Santos, the Supreme Court
ruled that a wife who left her husband and
lived with another man is no longer entitled to
receive Social Security benefits upon the death
of the husband because she was no longer
dependent upon him for her support.

Q. Distinguish insurable interest

in property from insurable
interest in life.

1. Insurable interest in property is based on pecuniary

interest [1] while in life, the interest need not
necessarily be strictly and exclusively a pecuniary one,
as in case of consanguinity or affinity;[2]
2. In property insurance, the interest must exist at the
time the policy takes effect and at the time of the loss,
[3] while in life insurance interest need exist only at the
time the insurance takes effect[4] except insurance
taken by a creditor on the life of the debtor wherein
interest must also exist at the time of the loss.
3. Insurable interest in property is limited to the
actual value of the damage the insured may suffer,
while in life there is no limit on the amount of
insurable interest unless it is based on creditordebtor relationship

Q. Must the beneficiary in

property insurance have
insurable interest on the
property insured?

A. Yes. No contract or policy of insurance on

property shall be enforceable except for the
benefit of some person having an insurable
interest in the property insured.[1] Thus,
the beneficiary in property insurance must
have insurable in the property insured. A
stranger having no insurable interest in the
property insured could not be made a
beneficiary in a policy covering the said
property.[2] This principle does not apply to
life insurance wherein insurable interest on
the part of the beneficiary is not necessary.

Q. How is materiality of concealment

or representation determined?

A. 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 the
communication is due, in forming his
estimate of the disadvantages of the
proposed contract, or in making his
inquiries.[1]

[1] Section 31.

Q. To be material, must there be

a causal connection between the
fact concealed and the cause of
the loss?

A. Concealment need not, in order to be material, be

of facts which bring about, or contribute to, or are
connected with the insureds loss. It is immaterial that
there is no causal relationship between the fact
concealed and the loss sustained. The insured,
therefore, need not die of the very disease he failed to
reveal to the insurer. It is sufficient that his nonrevelation has misled the insurer in forming its
estimate of the disadvantages of the proposed policy
or in making its inquiries in order to entitle the
insurer to avoid the contract.[1]

Q. When is causal connection

between the fact concealed and the
case of the loss necessary?

A. In marine insurance, in the

matters mentioned in Sec. 110.

Q. In property insurance, after payment to the

insured what is the right of the insurer as against
persons liable to the insured by reason of thing
insured?
A. In property insurance, after the insured has
received payment from the insurer of the loss covered
by the policy, the insurance company shall be
subrogated to the rights of insured against the
wrongdoer or the person who violated the contract.
The insurers right to subrogation accrues upon
payment of the insurance claim.[1]

Q. What are instances when there is no subrogation in favor of the insurer?

A. The insurer will not be subrogated to the rights of the insured in the following
cases:

(1) In life insurance because subrogation exists only when insurance is a contract of
indemnity.[1] Subrogation therefore, exists only in property insurance.[2]

(2) When the proximate cause of the damage was the negligence of the insured
himself.[3]

(3) When the insurer pays to the insured a loss not covered by the policy.[4]

4. When the insured failed to comply with the legal or stipulated condition precedent
prior to the filing of an action against the wrongdoer, as when no notice of loss was
given by the insured to the carrier liable for the loss despite the stipulation to that
effect, [5] or the notice of claim required by law was not given by the insuredconsigneee.[6]

Q. Oriental Assurance issued a fire insurance

policy in favor of Paramount covering its
properties in Manila. The said properties
were partially burned. It turned out that said
properties were likewise insured with five
other insurance companies. The insured
revealed to Oriental Assurance only two of
these policies and failed to declare to the
insurer the existence of the three other
policies despite the requirement in the policy
that the insured must declare other policies
on the same property insured. Was Oriental
Assurance liable?

A. The insurer was not liable. The insured

failed to declare the actual number of
other insurances taken over the subject
property. Consequently, the whole
foundation of the contract fails, the risk
does not attach and the policy never
becomes a contract between the parties.
[1]

Q. In multiple insurance covering stocks-intrade, when is there no violation of the

prohibition against double insurance?

A. In case of insurance upon stock-in-trade,

there is no violation of the prohibition against
double insurance where the policies taken cover
less than the entire quantity of the stock-in-trade,
[1] or where the total amount of the policies taken
is less than the total value of the stock in trade.[2]

Q. Distinguish over-insurance from

double insurance.
A. The following are the distinctions between
over-insurance and double insurance:
1. In double insurance, there must be two or
more insurers while in over-insurance, one
insurer is sufficient;
2. In double insurance, the total amount of
the polices taken need not exceed the value
of insurable interest while in over-insurance,
the insurance taken must always be more
than the amount of insurable interest.

Q. When is reinsurance compulsory?

A. The insurer must obtain reinsurance in the following cases:

(1) When a non-life insurer insures in any one risk or hazard an
amount exceeding 20% of its net worth, the insurer needs
reinsurance of the excess over said limit so that the retention of
the insurer will be reduced to a maximum of 20% of its net
worth.[1]
(2) When a foreign insurance company withdraws from the
Philippines, it should cause its primary liabilities under policies
insuring residents of the Philippines to be reinsured and
assumed by another insurance company authorized to transact
business in the Philippines.[2]

Q. Distinguish reinsurance from double insurance.

A. Reinsurance may be distinguished from double insurance as

follows:
(1) In double insurance, the insurer remains as insurer while in
reinsurance, the insurer becomes an insured;
(2) In double insurance, the subject matter is property, while in
reinsurance, it is the insurers risk or liability;
(3) In double insurance, the same interest and risk are insured
with another insurer, while in reinsurance, the different risk
and interest is insured.[1]

Q. Distinguish insurance compact from facultative

reinsurance.
A. Facultative reinsurance is one wherein the reinsurer
has the right to accept or not to accept participation in
the risk insured.[1] On the other hand, reinsurance
compact is a contract whereby two or more insurance
companies agree in advance that each will reinsure a
part of any line of insurance taken by the other, and is
a self-executing contract. In such case, reinsurance
attaches automatically upon the acceptance of a risk by
any one of the companies. [2]

Q. What is the meaning of incontestable

clause?

A. An incontestable clause in a life insurance

policy is an agreement by which the insurance
company limits the period of time within which it will
interpose objections to the validity of the policy or
set up any defense. After a policy of life insurance
made payable on the death of the insured shall have
been in force during the lifetime of the insured for a
period of two years from the date of its issue or its
last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentations of
the insured or his agent.

What are the statutory exceptions to the

rule that the insurer is entitled to the
payment of 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 is valid and binding unless and until the
premium thereof has been paid.[1]
The statutory exceptions wherein the policy shall be binding
notwithstanding the non-payment of premiums are:
1. In case of life or industrial life insurance whenever the grace
period applies;[2]
2. When the insurer makes a written acknowledgment of the
receipt of premium, such acknowledgment is a conclusive
evidence of payment of premium to make the policy binding;[3]
3. Where the obligee has accepted the bond or suretyship
contract in which case such bond or suretyship becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety.[4]

Aside from the statutory

exceptions mentioned above
wherein the policy is valid and
binding notwithstanding the nonpayment of premiums, what are
the other exceptions that evolved
from cases decided by the
Supreme Court?

Aside from the statutory exceptions, the following are the instances
when the Supreme Court ruled that the policy is valid and binding
notwithstanding the non-payment of premiums:
1. In case of cover notes which are binding even if premiums are
not paid thereon because no premium could be fixed on the cover
note until all the particulars of the insurance are known. Cover notes
should be integrated to the regular policies so that the premiums on
the regular policies include the consideration for the cover notes.[1]
2. When the parties agreed to have the premiums paid by
installments or payment by installments is an established practice by
the parties, acceptance of the payment of premium by installments
would suffice to make the policy binding.[2]
3. When the insurer has granted the insured a credit term for the
payment of premium, the insurer is barred by estoppel from claiming
forfeiture of the policy due to non-payment of premium within the
credit term.[3]

[1] Pacific Timber and Export Corporation vs. Court of Appeals, 112 SCRA 199.
[2] Makati Tuscany Condominium Corp. vs. Court of Appeals, 215 SCRA 462; Asked, No. V, 2006 Bar Exams.
[3] UCPB vs. Masagana Telamart, Inc., 356 SCRA 307. There are however, strong dissenting opinions in this case.

In case of a continuing bond, is

payment of the premium for the
succeeding year indispensable for
the continued validity of the bond?

Q. When are premiums not recoverable?

A. In the following cases, the insured cannot recover the

premium paid:
1. If the peril insured against has existed, and the insurer
has been liable for any period, the peril being entire and
indivisible.
2. In life insurance.

3. When the insured is guilty of fraud or

misrepresentation.

Q. What are the losses for which the insurer is liable?

A. The insurer is liable for the following losses:

1. Loss of which a peril insured against was the proximate cause.
2. Loss caused by efforts to rescue the thing insured from a peril
insured against.
3. Loss caused by a peril not insured against to which the thing
insured was exposed in the course of rescuing the same from the
peril insured against.
4. Loss, the immediate cause of which was the peril insured
against unless the proximate cause thereof was excepted in the
contract.
5. Loss caused by the negligence of the insured.

Q. Is the insurer liable for losses caused by

negligence of the insured?

A. The insurer is not relieved from liability by the

mere fact that the loss was caused by the negligence of
the insured, or of his agents or others. Accordingly, it
is no defense to an action on the policy that the
negligence of the insured caused or contributed to the
injury. However, when the insureds negligence is so
gross that it is tantamount to a willful act, the insurer is
not liable.

No, the continuing bond will not only be valid for one year
corresponding to the premium paid. In fact, the effectivity of the
bond is not wholly dependent on the payment of premium. Sec.
177 of the Insurance Code provides, x x x No contract of
suretyship or bonding shall be valid and binding unless and
until the premium is paid, except when the obligee has
accepted the bond, in which case the bond become valid and
enforceable irrespective of whether or not the premium has
been paid by the obligor to the surety x x x.

A continuing bond where there is no fixed expiration date, may

be cancelled only by the obligee. In such case, the obligor shall
pay the subsequent annual premium as it falls due until the
contract of suretyship is cancelled by the obligee. (Country
Bankers Ins. Corp., vs. Lagman, G. R. 165487, July 13,m
2011).

Q. Under the present law, must the subject of

marine insurance be exposed to the perils of
marine navigation?
A. The present law has expanded the coverage
of marine insurance so as to include risks that would
otherwise have been classified as some other form
of insurance. Thus, the present law includes within
the coverage of marine insurance risks not
connected with marine navigation such as insurance
of aircraft, goods while being packed or assembled,
injury to passengers, precious stones, jewels,
jewelry whether in the course of transportation or
not. [1]

[1] Section 99.

Q. Distinguish perils of the sea from perils of the ship.

A. Perils of the sea embrace all kinds of marine

casualties and damages done to the ship or goods at sea
by the violent action of the winds or waves, one that
could not be foreseen and not attributable to the fault of
anybody. Perils of the ship, on the other hand, are losses
or damages resulting from (a) natural and inevitable
action of the sea, (b) ordinary wear and tear of the ship,
or (c) negligent failure of the ships owner to provide the
vessel with proper equipment to convey the cargo under
ordinary condition.[1]

Q. Distinguish concealment in marine insurance from concealment in

other insurance.

A. Concealment in marine insurance may be distinguished from

concealment in other insurance as follows:
(1) In ordinary insurance, opinion or belief of a third person or the own
judgment of the insured is not material and need not be communicated,[1]
while in marine insurance information of the belief or expectation of a third
person in reference to a material fact, is material and must be communicated
to the other party.[2]
(2) In ordinary insurance, causal connection between the fact concealed and
the cause of the loss is not necessary to entitle the other party to rescind the
contract,[3] while in marine insurance, concealment of any of the matters
mentioned in Section 110 exonerates the insurer only if the loss resulted from
the risk concealed.

Q. What warranties are implied in marine insurance?

[1]

A. In marine insurance the following warranties are implied:

(a) the ship is seaworthy; [2]

(b) no improper deviation from the voyage will be made; [3]
(c) the vessel will not engage in illegal venture;[4] and
(d) where nationality or neutrality of a ship or cargo is
expressly warranted, it is implied that the ship will carry the
requisite documents to show such nationality or neutrality
and will not carry any document which casts reasonable
suspicion thereon

A. A deviation is proper:
(a) When caused by circumstances over which neither the
master nor the owner of the ship has any control;
(b) When necessary to comply with a warranty or avoid a
peril, whether or not the peril is insured against;
(c) When made in good faith, and upon reasonable grounds of
belief in its necessity to avoid a peril, or
(d) When in good faith, for the purpose of saving human life,
or relieving another vessel in distress.[1] (Sec. 124)
Every deviation which is not proper is improper.[2]

Q. When is deviation proper? And when is it improper?

Q. Explain constructive total loss or technical total loss.

A. A constructive total loss is actually a partial loss,

however, by making abandonment in the cases provided by law,
the loss is thereby converted to a total loss. Illustration: A
vessel valued at P100 million is insured for the said amount.
The vessel suffers damage amounting to P80 million. Although
the loss is partial, upon making an abandonment, the insured is
entitled to recover the full value of the vessel, P100 million
which is equivalent to a total loss. In such case, the insurer
becomes the owner of whatever may remain of the vessel. But
if no abandonment is made, the insured may recover only P80
million.[1]

Q. What are the kinds of averages?

A. Averages may be:[1]

1. Simple or particular average which includes all expenses
and damages caused to the vessel or to her cargo which have
not inured to the common benefit and profit of all the persons
interested in the vessel and her cargo.[2]
2. General or gross average which includes all the damages and
expenses which are deliberately caused in order to save the
vessel, its cargo, or both at the same time, from real and known
risk.[3] All persons having an interest in the vessel and cargo at
the time of the occurrence of the average shall contribute to the
average.[4]

Q. What are the effects of a stipulation that the marine

insurance shall be free from particular average?

A. The effects of a stipulation that the vessel or cargo insured

shall be free from particular average are:
If the damage to the thing insured is a particular average, the
insurer shall not be liable unless the loss suffered is total i. e.,
the insured is deprived of the whole of such thing.[1]
If the damage to the thing insured is a general average, the
insurer shall be liable whether the loss is partial or total or for
the contribution of the insured for his proportion of all general
average losses assessed upon the thing insured which was
saved.[2]

[1] Section 136.

[2] Sections 164 and 165; Asked, No. XIII (b), 2000 Bar Exams.

Q. Define co-insurance.
A. Co-insurance is a form of insurance
in which the person who insures his
property for less than the entire value is
understood to be his own insurer for the
difference which exists between the true
value of the property and the amount of
insurance.[1]

Q. What is the effect of co-insurance?

A. Whenever co-insurance exists, the insurer is

liable upon a partial loss only for such proportion
of the amount insured by him as the loss bears to
the value of the whole interest of the insured in
the property insured.[1] It results in a
proportionate division of risk between the insured
and the insurer with the following formula:
Loss x Insurance = Liability of Insurer
Value

A vessel valued at P100,000 was insured for

only P80,000. The vessel was damaged to
the extent of P50,000. How much is the
liability of the insurer in marine insurance?
Answer:
P50,000 (Loss)
_________
x P80,000(Insurance)
=P40,000
P100,000 (Value)
The insurer is liable only for P40,000
because in marine insurance, there is coinsurance.

In the example given above, suppose a house

was insured against fire. Using the figures
above, how much is the liability of the insurer?
Answer: The insurer is liable for P50,000
because in fire insurance, there is no coinsurance and the insurer is liable for the full
amount of the partial loss.[1] However, if the
parties agreed that there will be co-insurance,
the insurer is liable only for P40,000 pursuant
to the computation shown above.

Q. For what kind of fire is the insurer liable in fire

insurance?

A. In fire insurance, the insured is entitled to recover the

loss suffered where the cause of the damage is a hostile fire,
that is, one which burns at a place where it is not intended to
be, or breaks out from where it is intended to be and becomes
uncontrollable. And where the fire that caused the loss is a
friendly fire, that is, one which is confined within the place
where it was intended to be and employed for the ordinary
purpose of lighting, heating or manufacturing, recovery cannot
be had for loss or damage caused thereby.[1]

Q. What is the effect of alteration in the use or

condition of the thing insured?

A. An alteration in the use or condition of the

thing insured will entitle the insurer to rescind the
contract of insurance provided the following
requisites are present, to wit: (a) there must be a
violation of the provisions of the policy; (b) the
alteration was made without the consent of the
insurer; (c) the alteration was made by means within
the control of the insured and (d) the alteration
increased the risk of loss.[1] (Secs. 168 and 169).

Q. Must alteration be within the control of

the insured?

A. An alteration in the use or condition of the

thing insured must be by means within the
control of the insured so as to entitle the insurer
to rescind the contract. Thus, where the
alterations were made by a tenant of the insured
without the consent of the insured, the policy was
not thereby avoided.[1] But a material alteration
made by a tenant with the knowledge of the
insured will forfeit the policy.[2]

Q. When is there is prima facie evidence of arson?

A. Any of the following circumstances shall constitute prima facie

evidence of arson: [1]
1. If the fire started simultaneously in more than one part of the
building or establishment.
2. If substantial amount of flammable substance or materials are
stored within the building not necessary in the business of the
offender nor for household use.
3. If gasoline, kerosene, petroleum or other flammable or combustible
substances or materials soaked therewith or containers thereof, or any
mechanical, electrical, chemical, or electric contrivance designed to
start a fire, or ashes or traces of any of the foregoing are found in the
ruins or premises of the insured building or property.

4. If the building or property is insured for substantially more

than its actual value at the time of the issuance of the policy.
5. If during the lifetime of the corresponding fire insurance
policy more than two fires have occurred in the same or other
premises owned or under the control of the offender and/or
insured.
6. If shortly before the fire, a substantial portion of the effects
insured on a building or property had been withdrawn from the
premises except in the ordinary course of business.
7. If a demand for money or other valuable consideration was
made before the fire in exchange for the desistance of the
offender or for the safety of the person or property of the
victim.

Q. Is the insurer liable when the

insured suffered a violent death
and assault or murder is
excluded in the policy?

A. In a life insurance policy where death by the

insured by assault or murder, or intentional killing is
excepted from its coverage, the mere fact that the
insured suffered a violent death by the hands of
another person will not necessarily relieve the insurer
of liability. The insurers liability in such case will
depend on whether the insureds death was intended or
not. Thus, if the insured was killed by another person
intentionally the insurer is not liable.[1] But where the
insured was not an intended victim of a felonious
assault, the insurer is still liable.[2]

Q. While they were standing in front

of the main gate of Ojedas
residence, a shot was fired by a
robber. Basilio was hit in the
abdomen and died. The insurer
refused to pay the proceeds of the
policy on the ground that Basilios
death was caused by murder or
assault and therefore, excepted
from the policy. Was the insurer
liable?

A. The insurer was liable. There was no proof

that Basilios death was caused by murder or
assault nor can it be said that the killing was
intentional for there was the possibility that
the robber fired the shot merely to scare
away the people around and not necessarily
to kill the victim. The happening was pure
accident on the part of the victim. It cannot
be pretended that the robber aimed at the
deceased precisely because he wanted to
take his life.[1]

[1]Calanoc vs. Court of Appeals, 98 Phil. 79.

Q. Death due to an injury intentionally inflicted

by a third party was expressly excepted in Bs
life insurance policy. Bs house was robbed. In
committing the robbery, the robbers rushed
towards the doors of the second floor room
where they suddenly met B, the insured. B was
stabbed nine times. Five of the wounds
inflicted caused the death of B. The robbers
were apprehended, charged and convicted of
robbery with homicide. The insurer refused to
pay the additional P5,000 under the accidental
benefit clause on the ground that the insureds
death resulted from injuries intentionally
inflicted by third parties and therefore, not
covered by the policy. Was the insurer liable?

A. The insurer was not liable because the nine wounds inflicted on
the insured were intentionally caused. This case was different from
the Calanoc case where it was found that the victim was not
intentionally killed for there was the possibility that the robber had
fired the shot to scare the people around for his own protection and
not necessarily to kill or hit the victim. While a single shot fired
from a distance, and by a person who was not even seen aiming at
the victim, could have been fired without intent to kill or injure,
nine wounds inflicted with bladed weapons at close range cannot
be considered as innocent insofar as such intent is concerned.[1]

[1] Biagtan vs. Insular Life Assur. Co., Ltd., 44 SCRA

58.

Q. Is the insurer in a life insurance contract

liable where the insured committed suicide?

A. The insurer in a life insurance contract shall be

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 its issue or of its last
reinstatement, unless the policy provides a shorter
period; provided, however, that suicide committed
in the state of insanity shall be compensable
regardless of the date of commission.[1]

[1] Section 180-A.

In an insurance suit, what is the actionable document,

the policy or a
memorandum thereof or a Marine
Risk Note?

A. In an insurance suit, the actionable document is the

policy which must be attached to the complaint pursuant to
Section 7, Rule 9 of the Rules of Court. However, there is
no specific provision in the Rules of Court which prohibits
the admission in evidence of an actionable document in
the event a party fails to comply with the requirement of
the rule on actionable document under Section 7, Rule 9.
But what must be presented as evidence is the policy itself
and not a mere Marine Risk Note.[1]

Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, G. R. No. 172156, Nov.
23, 2007.
[1]

Malayan Insurance with which ABB Koppel

insured the cargo paid ABB Koppel the
insurance claim. Claiming subrogation to the
right of ABB Koppel, Malayan Insurance filed
an action against Paircargo and Regis at the
MeTC of Manila where it presented Marine Risk
Note as proof that Malayan Insurance insured
the cargo. The complaint was dismissed on the
ground that the Marine Risk Note presented as
proof that the cargo was insured was invalid.
(a) Was the Marine Risk Note sufficient to
prove the existence of the insurance contract?
(b) Was Malayan Insurance subrogated to the
rights of ABB Koppel against the party
responsible for the loss of the shipment?

(a) The Marine Risk Note was not the insurance contract itself,
but merely a complementary or supplementary document to the
contract of insurance that may have existed between Malayan
and ABB Koppel. (b) Since Malayan failed to introduce in
evidence the Marine Insurance Policy itself as the main
insurance contract, or even advert to said document in the
complaint, it failed to establish its cause of action for restitution
as a subrogee of ABB Koppel. Malayans right to recovery is
derived from contractual subrogation as an incident to an
insurance relationship, and not from any proximate injury to it
inflicted by the defendants. It is critical that Malayan establish
the legal basis of such right to subrogation by presenting the
contract constitutive of the insurance relationship between it
and ABB Koppel. Without such legal basis, its cause of action
cannot survive. The dismissal of the complaint is correct.[1]

[1] Malayan Insurance Co., Inc. vs. Regis Brokerage Corporation, supra.

In an action by the insurance

company claiming the right of
subrogation upon payment of the
loss to the insured, only the
subrogation receipt and not the
insurance policy was presented as
evidence, is such failure to present
the policy fatal to the claim of the
insurer?

As a general rule, the insurance policy needs to be

presented before the trial court or even belatedly
before the appellate court in a case where the very
existence of the contract is an issue, however where
there is no question on the validity or existence of
the contract of insurance, failure to present the
policy is not fatal to the claim of the insurer for
subrogation. The presentation of the Subrogation
Receipt is sufficient specially where the petitioner
never questioned the respondents right of
subrogation, not did it dispute the coverage of the
insurance contract or policy. (Asian Terminals, Inc.
vs. Malayan Ins. Co., Inc., G. R. 171406, April 4,
2011).

Q. How can the insurer be held

liable under the no fault
indemnity clause in motor
vehicle third party liability
insurance?

A. An insurer may be held liable under the no

fault indemnity provision without the necessity
of proving fault or negligence of any kind
provided the following requisites are present:[1]
The claim is for death or injury to any
passenger or third party;
The total indemnity in respect of any one
person does not exceed P5,000; and
(c) The necessary proof of loss under oath to
substantiate the claim must be submitted.

Q. Which insurer is liable under the no fault

indemnity provision?

A. A claim under the no fault indemnity provision may

be made against the insurer of one motor vehicle only.
Such claim may be made directly by the injured party
against the insurer as follows:
(a) In case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the occupant is
riding, mounting or dismounting from.
(b) In any other case, claim shall lie against the insurer
of the directly offending vehicle.[1]

[1] Section 378; Asked, No. III (1), 1989 Bar Exams; No. 1 (1), 1994 Bar Exams.

Q. Must the driver of the insured

vehicle be a licensed driver?

A. It is a common practice of the insurers to

provide in the policy that the authorized
drivers of the insured vehicle are the
insured himself, or a person permitted or
ordered by him to drive who has a license
to do so.[1]

A. If the insured himself is the driver of the vehicle insured, he has

the right to recover damage thereto even if he has no drivers
license or the same had expired at the time of the accident.[1]
Likewise, when a motor vehicle is covered by a comprehensive policy
that includes theft, the insurer is liable for the damage to the motor
vehicle in case such damage is sustained on the occasion of or while
the theft is being committed even if the thief is not licensed to drive.
This principle applies notwithstanding the provision in the policy that
requires the driver at the time of the accident to be duly licensed.[2]
Also, when the thief had an expired license when the car insured was
stolen, the insured is nonetheless liable because there is no causal
connection between the possession of a valid drivers license and the
loss of a vehicle.[3]

Q. When is license to drive not necessary?

 NEGOTIABLE

INSTRUMENTS

Q. What is the meaning of negotiability?

A. Negotiability is the ability to transfer to
another a title and right better than what the
transferor had. Through the process of
negotiation, the instrument could pass to a
holder in due course[1] who acquires the
instrument free from any defect of title of
prior parties, and free from defenses available
to prior parties.[2]

Q. What is a coupon bond?

A. Coupon bond is an instrument payable to

bearer and are provided with interest
warrants called coupons for each
installment of interest, also payable to
bearer, which when detached are
negotiable and payable to bearer.

Q. How is negotiability of an instrument

determined?

A. The negotiability or non-negotiability of an

instrument is determined from the writing, that is, on
the face of the instrument itself. While the writing
may be read in the light of the surrounding
circumstances in order to more perfectly understand
the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward
and visible expression of their meaning, no other
words are to be added to it or substituted in its
stead.[1]

Q. What is the meaning of stated

installments?

A. Stated installments means that the number of

installments, the maturity of each installment and the
amount of each installment are specified. The time for
payment of installments must at least, be
determinable.[1] Thus, an instrument payable in two
installments is not negotiable as it is not payable in
stated installments since the amount of each
installment and the maturity of each installment are
not stated in the instrument.[2]

[1] Victor v. Warner, 248 Ill. App. 35.

[2] Asked, No. I (b), 1993 Bar Exams.

Q. Will statement of a particular fund in the instrument render

it non-negotiable? Give examples.

A. It depends on whether the fund indicated is the direct source of payment or

merely a source of reimbursement. Thus,

1. Where the fund indicated is the direct source of payment or one out of which
payment is to be made, the instrument is non-negotiable because in such case,
the promise or order to pay is contingent on the sufficiency of the fund on which
it is drawn.

2. Where the particular fund is referred to in an instrument, not for the purpose
of charging payment exclusively thereon, but merely to indicate the source of
reimbursement, or the account to be debited, the instrument is still negotiable
because in such case, payment of the instrument is not contingent on the
sufficiency of the fund indicated.

Q. When is an instrument payable on demand?

A. An instrument is payable on demand:[1]

1. Where it is expressed to be payable on demand,
or at sight, or on presentation;
2. In which no time of payment is expressed;
3. Where the instrument is issued, accepted, or
indorsed when overdue, it is, as regards the person
so issuing, accepting, or indorsing it, payable on
demand.

Q. When is the instrument payable to bearer?

A. The instrument is payable to bearer:[1]

(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer;
or
(c) When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be the
name of any person; or
(e) When the only or last indorsement is an indorsement in
blank.

[1] Section 9.

Q. When is an instrument payable to a

fictitious or non-existing person and
therefore, payable to bearer?
A. Such an instrument is payable to bearer
only if the fictitious or non-existent character of
the payee is known to or intended by the party
making it payable to such person.[1] The reason
for this rule is that when a negotiable instrument
was made payable to a non-existent or fictitious
person there was no one to indorse it, and hence,
if the maker intended to give it negotiability, it
could only be on the theory that it became
payable to bearer.[2]

Q. May an instrument payable to order be

converted into an instrument payable to
bearer?

A. Yes, by indorsing it in blank. When the only or

last indorsement is an indorsement in blank, the
instrument is payable to bearer.[1] However, an
instrument originally payable to bearer cannot be
converted into an order instrument. Thus, where an
instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery.
[2]

[1] Section 9 (e).

[2] Section 40.

Q. What are the kinds of incomplete instruments

under the Negotiable Instruments Law?
A. The following are the kinds of incomplete
instruments:
Mechanically incomplete but duly delivered
instrument;[1]
Mechanically complete but undelivered instrument;[2]
and
Mechanically incomplete and undelivered instrument.
[3]

[1] Section 14.

[2] Section 16.
[3] Section 15.

Q. What are the liabilities of the parties when a mechanically incomplete

instrument has been delivered and the blank has been filled up?
A. When an instrument is a mechanically incomplete but delivered
instrument, the liability of the parties when the instrument is completed, are
as follows:[1]
1. Any person who became a party thereto prior to its completion shall be
liable to:
Person not a holder in due course provided the instrument has been filled
up
(i) Strictly in accordance with the authority given and (ii) within a reasonable
time;
Holder in due course as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.[2]
2. Any person who became a party thereto after its completion shall be liable
to any holder in accordance with his warranties.[3]

Q. Is a mechanically incomplete and

undelivered instrument valid?

A. When 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 whose signature
was placed thereon before delivery.[1]

Q. A made and signed a

promissory note payable to
bearer for P10,000. A kept the
note in his desk. It was stolen
by B who negotiated it to C. May
C hold A liable?

A. If C is not a holder in due course, A is not

liable to him because the latter may raise
the defense that he did not deliver the
instrument. On the other hand, if C is a
holder in due course, A is liable to him since
the latter cannot raise the defense of lack of
delivery against a holder in due course. In
the hands of a holder in due course, a valid
and effectual delivery of the instrument by
all parties prior to him is conclusively
presumed.[1]

Q. What are the kinds of forgery under the Negotiable Instruments

Law?
A. The various kinds of forgery are:
1. Simple forgery which occurs when a person signs the name of another
without the authority of the person whose signature it purports to be.[1] The
counterfeiting of any writing, consisting in the signing of anothers name
with intent to defraud, is forgery.[2]
2. Fraudulent impersonation leading to forgery, which occurs when the
person to whom the instrument has been delivered impersonated the real
person named as payee and signs his name.[3] Likewise, falsely personating
another and signing his name is forgery.[4]
3. Fraud on the very nature of the paper signed such that the person signing
it had no intention of signing a negotiable instrument.[5] This is also
referred to as fraud in factum or fraud in esse contractus.[6]
4. Signature on a blank paper which was converted into a promissory note or
other apparently valid instrument without authority.[7]

Q. What are the effects of forgery?

A. When a signature is forged or made without the

authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to
enforce payment thereon against any party thereto, can
be acquired through or under such signature, unless
the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want
of authority.

Q. Who are precluded from raising the defense of forgery?

A. The following cannot raise the defense of forgery:
The forger as he cannot raise his own malfeasance as a defense;
2. The indorsers and persons negotiating the instrument by delivery
as they warrant that the instrument is genuine and in all respects what
it purports to be;
3. The acceptor with respect to the signature of the drawer as he
admits the existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument;
4. Those that are barred by estoppel or by their own negligence from
raising the defense of forgery;
5. Others who admit the genuineness of the signature expressly or
impliedly, such as those who failed to deny specifically under oath
the genuineness of an actionable document.

Q. What is the effect if both the

drawer and drawee bank are
guilty of negligence in failing to
prevent damage caused by
forgery of an indorsement?

A. Banking business is so impressed with public interest

where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence. Where the drawee bank cannot claim it exercised
such a degree of diligence that is required of it, it cannot
escape liability for such negligence even where the drawers
negligence is the proximate cause of the loss due to forgery of
an indorsement. The drawee banks liability is based on law
and substantial justice and not on mere equity. In such case,
the drawer and the drawee bank must share fifty-fifty the loss
suffered.[1]

[1] Gempesaw vs. Court of Appeals, G. R. No. 92244, Feb. 9, 1993.

Q. What is the effect of want of

consideration?

A. Absence or failure of consideration is

a matter of defense as against any person
not a holder in due course; and partial
failure of consideration is a defense pro
tanto, whether the failure is an ascertained
and liquidated amount or otherwise.

Q. Who is an accommodation party? What is

the liability of an accommodation party?[1]

A. 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 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.[2]

[1] Asked: 1952, 1963, 1964, 1973, 1974, 1975, 1976, 1982, 1985 and 1986
Bar Exams.; No. III (a), 1993 Bar Exams.; No. IX (1), 2003 Bar Exams.
[2] Section 29; Ang vs. Associated Bank, 532 SCRA
244, September 5,
2007.

Q. Can an accommodation party raise the defense of absence or

failure of consideration?

A. An accommodation party cannot raise the defense of absence or

failure of consideration because such kind of party does not really
receive value for lending his name. He shall be liable to a holder for
value, notwithstanding that such holder knew him to be only an
accommodation party. Thus, where one of the signers of a joint and
several promissory note affixes his signature thereto for the
accommodation of his co-maker and the payee advances the face value
of the note to the accommodated party at the time of the creation of the
note, the consideration for the note, as regards both makers, is the money
so advanced to the accommodated party; and it cannot be said that the
note is lacking in consideration as to the accommodating party because
he himself received none of the money. It is enough that value was
given for the note at the time of its creation.

Q. In whose favor must a party sign

as accommodation party?

A. In favor of the debtor and never in

favor of the creditor. If a person
signed to accommodate the creditor,
he is not an accommodation party.
(Maulini vs. Serrano)

Q. What are the kinds and modes of transfer of a negotiable

instrument as distinguished from the method of transfer of an
ordinary chose in action or non-negotiable instrument?

A. The method of transfer of ordinary choses in action is by

assignment, and in such case, the assignee takes only the title of the
assignor.
In case of negotiable instruments, the modes of transfer are: (1) by
indorsement and delivery;(2) by mere delivery without
indorsement, if payable to bearer, or may constitute a mere
assignment where the instrument is payable to order and (3) by a
written assignment on a separate paper. If the transfer is by
indorsement and delivery, or by mere delivery without indorsement
where the instrument is payable to bearer, it constitutes negotiation.

Q. In case a bearer instrument is

pledged as security for a loan, is
mere delivery sufficient to vest
title thereon to the creditor?

A. Under ordinary circumstances, delivery of a negotiable bearer

instrument is sufficient to negotiate the same. However, where
the negotiation is for the purpose of giving the instrument as a
mere security for purchases to be made, mere delivery is not
sufficient since the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal
obligation, must be contractually provided for. The pertinent law
on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value
to the extent of his lien. As such holder of collateral security, he
would be a pledgee but the requirements therefor and the
effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, which provides in Article 2095
thereof that The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.
Indorsement therefore, is necessary in such case.[1]
[1] Caltex (Phils.) Inc. vs. Court of Appeals, G. R. 97753, August
10, 1992.

Q. What is a qualified indorsement?

How is it done?
A. A qualified indorsement constitutes the
indorser a mere assignor of the title to the
instrument. It may be made by adding to
the indorsers signature the words without
recourse or any words of similar import.
Such an indorsement does not impair the
negotiable character of the instrument.

Q. What are the effects of a

qualified indorsement?

A. The fact that indorsement is without

recourse does not mean that the qualified
indorser has absolutely no more liability on
the instrument as he is still chargeable with
the implied warranties of a seller of the
paper,but he has a lesser liability than a
general indorser, since a qualified
indorsement restrains, limits, or qualifies
the liability of the indorser in a manner
different from what the law generally
imports as his true liability as indorser.

Continuation see following slide

A qualified indorser has the same

warranties as a person negotiating by
delivery. But since the qualified indorser
is a mere assignor of the title in the
instrument, the transferee acquires no
greater right or interest than the
transferor then holds and he is liable on
his indorsement only when he violates
any one of his warranties under Section
65.

Q. What is the effect of specially indorsing an instrument payable to

bearer?
A. Where an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his
indorsement.

Section 40 is applicable only to instruments originally payable to bearer.Thus,

this section does not apply to an instrument originally payable to order and
became a bearer instrument only by reason of a blank indorsement. In such
case, the instrument will remain as payable to payable to bearer only for as
long as the only or last indorsement is an indorsement in blank.[
In effect therefore, an instrument originally payable to bearer is always payable
to bearer even when indorsed specially and therefore, may be negotiated by
mere delivery.On the other hand, an instrument originally payable to order can
be converted into a bearer instrument by a blank indorsement.

Q. When may the holder strike

out an indorsement?
A. The holder may at any time strike
out any indorsement which is not
necessary to his title. The indorser
whose indorsement is struck out, and
all indorsers subsequent to him, are
thereby relieved from liability on the
instrument. (Sec. 48).

Q. What is the effect of striking

out an indorsement?
A. The indorser whose indorsement is
struck out, and all indorsers
subsequent to him, are thereby
relieved from liability on the
instrument.[1]

[1] Section 48, 2nd sentence.

Q. What is the effect of transfer without

indorsement of an instrument payable to order?
A. Where the holder of an instrument payable to his
order transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the
transferor. But for the purpose of determining
whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the
indorsement is actually made.[1]

[1] Section 49.

Q. What constitutes a holder in due course?[1]

A. A holder in due course is a holder who has
taken the instrument under the following conditions:
That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it had been
previously dishonored, if such was the fact;
That he took it in good faith and for value;
(d) 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.[2]

Q. What are the rights of a holder in due

course?[1]
A. A holder in due course holds the instrument free
from any defect of title of prior parties, and free
from defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon.[2] Aside therefrom, he has
the basic rights of a holder to sue in his own name
and payment to him in due course discharges the
instrument.[3]

Q. Section 52 provides that a

holder in due course is free
from defenses available to prior
parties among themselves.
Does it mean that no defense
whatsoever could be raised
against a holder in due course?

A. A holder in due course is free only from personal

defenses available to prior parties among themselves.
However, he is still subject to real or absolute
defenses. Personal defenses or equities are those
which grow out of the agreement or conduct of a
particular person in regard to the instrument which
renders it equitable for him, though holding the legal
title, to enforce it against the defendant but which are
not available against a holder in due course. They are
called personal defenses because they are available
only against that person or subsequent holder who
stands in privity with him.[1]

Continuation on next slide

Real or absolute defenses are those that

attach to the thing irrespective of the parties
to it. In other words, they are those which
attach to the instrument itself and are good
against all persons, thus they are good
against a holder in due course. They are
called real defenses because they attach to
the res, that is, the instrument itself,
regardless of the merits or demerits of the
holder.[1]

Q. What are the exceptions to

the rule that a holder in due
course may enforce payment of
the instrument for the full
amount thereof against all
parties liable thereon?

A. When a valid defense even if merely personal, is available to a

party being held liable, even a holder in due course cannot
enforce the instrument for the full amount thereof in the following
cases:
(1) When the holder is a holder for value only to the extent of his
lien since he is a holder in due course only to that extent;[1]
(2) When the holder acquired notice of any infirmity in the
instrument or defect in the title of the person negotiating the same
before he has paid the full amount agreed to be paid therefor,
since he is a holder in due course only to the extent of the amount
theretofore paid by him;[2]
(3) In case of alteration as to amount when a holder in due course
may enforce payment of the instrument only according to its
original tenor.[3]

Q. When is the instrument subject to original

defenses?
A. In the hands of any holder other than a holder
in due course, a negotiable instrument is subject
to the same defenses as if it were non-negotiable.
But a holder who derives his title through a holder
in due course, and who is not himself a party to
any fraud or illegality affecting the instrument, has
all the rights of such former holder in respect of all
parties prior to the latter.[1]

[1] Section 58.

Q. When does a person not a holder in

due course have the same rights as a
holder in due course?
A. When a holder (a) derives his title
through a holder in due course, and (b) he
is not himself a party any fraud or illegality
affecting the instrument, he has all the
rights of a holder in due course in respect
of all parties prior to the latter.[1]

[1] Section 58.

Q. What is the nature of the liability of the

maker?
A. The maker is primarily and unconditionally
liable[1] as his liability is not conditioned on
presentment to any other party for payment or
otherwise.[2] Even where a note was made
payable to the order of myself, and was indorsed
by the maker, such indorsement did not change
his obligation from that of a maker to one of an
indorser[3] and thus, he is still primarily and
unconditionally liable on the note.[4]

Q. What is the nature of the liability

of the drawer?
A. The drawer is only secondarily and
conditionally liable on the instrument,[1]
as he only becomes liable for the payment
of the bill on its non-payment or nonacceptance by the acceptor or the drawee,
as the case may be, and after giving him
notice of dishonor.[2]

Q. May the drawer restrict his liability on

the bill?
A. The drawer may insert in the instrument
an express stipulation negativing or limiting his
own liability to the holder,[1] and therefore,
the drawers liability may be qualified by
express terms.[2] Thus, the drawer may state
in the bill that he will not be liable in case the
instrument is dishonored by the drawee or
acceptor.

Q. What are the warranties of a person negotiating by

delivery or by qualified indorsement?

A. Every person negotiating an instrument by delivery or by

a qualified indorsement warrants:
That the instrument is genuine and in all respects what it
purports to be;
The he has a good title to it;
That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.

Q. Do persons negotiating the instrument by delivery or by

qualified indorsement warrant the solvency of prior
parties?

A. A person negotiating by delivery or by qualified

indorsement does not warrant the solvency of the parties to it.
However, if the transferor knows at the time of the transfer
that the parties to it are insolvent, the transferee may hold the
transferor liable. In such case, it may be said that the
transferor has knowledge of a fact which would impair the
validity of the instrument or render it valueless for which
reason, he is liable to the transferee.

Q. What are the warranties of a general indorser?

A. Every indorser who indorses without qualification, warrants

to all subsequent holders in due course:
That the instrument is genuine and in all respects what it purports
to be;
That he has a good title to it;
That all prior parties had capacity to contract;
That the instrument is at the time of his indorsement valid and
subsisting.
And, in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be, 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 it.

Q. While the first three warranties under Section 65

and Section 66 are the same, is there a distinction
between the fourth warranty under these two
sections?

A. Under Section 65, a person negotiating by delivery or

qualified indorsement warrants that he has no knowledge
of any fact which would impair the validity of the instrument
or render it valueless. Their warranty is violated only if
they have such knowledge and withhold the same from the
transferee.[1] On the other hand under Section 66, a
general indorser warrants that the instrument is at the
time of his indorsement valid and subsisting. Knowledge
on the part of the general indorser of a fact affecting the
validity of the instrument is immaterial.

Q. What is the order in which indorsers

are liable?
A. As respects one another, indorsers are
liable prima facie in the order in which they
indorse; but evidence is admissible to show
that as between or among themselves they
have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to
indorse jointly and severally.[1]

[1] Section 68.

Q. Distinguish the order of liability of the indorsers

insofar as the holder is concerned from their order of
liability among themselves.

A. Insofar as the holder is concerned, once the

instrument is dishonored and notice of dishonor is given, the
indorsers are liable in any order that the holder may choose.
The holder may even prefer to collect from any of the
indorsers instead of collecting from the maker or acceptor.
The reason is that when the instrument is dishonored by
nonpayment, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.[1] The
same principle applies when the instrument is dishonored
by non-acceptance i.e., an immediate right of recourse
against the drawers and indorsers accrues to the holder.[2]

What is the effect of want of demand on the

principal debtor?
A. Presentment for payment is not necessary in
order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms,
payable at a special place, and he is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment
upon his part. But, except as herein otherwise
provided, presentment for payment is necessary in
order to charge the drawer and the indorsers.[1]

[1] Section 70.

Q. When is presentment not

required in order to charge the
drawer?
A. Presentment for payment is not
required in order to charge the drawer
where he has no right to expect or
require that the drawee or acceptor
will pay the instrument.[1]

[1] Section 79.

Q. When is presentment not required

to charge the indorser?
A. Presentment for payment is not
required in order to charge an indorser
where the instrument was made or
accepted for his accommodation and he
has no reason to expect that the
instrument will be paid if presented.[1]

[1] Section 80.

Q. What constitutes payment in

due course?
A. Payment is made in due course
when it is made at or after the maturity
of the instrument to the holder thereof
in good faith and without notice that
his title is defective.[1]

[1] Section 88.

Q. To whom must notice of dishonor

be given?
A. Except as herein otherwise provided,
when a negotiable instrument has been
dishonored by non-acceptance or nonpayment, notice of dishonor must be given
to the drawer and to each indorser, and
any drawer or indorser to whom such
notice is not given is discharged.[1]

[1] Section 89; Asked, 1958, 1963 and

1986 Bar Exams.

Q. How may a negotiable instrument be discharged?

A. A negotiable instrument is discharged:

By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated,
where the instrument is made or accepted for accommodation;
(c) By intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for
the payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.

Q. What is the effect of alteration of an

instrument?
A. Where a negotiable instrument is materially
altered without the assent or all parties liable
thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to
the alteration and subsequent indorsers.
But when an instrument has been materially
altered and is in the hands of a holder in due
course, not a party to the alteration, he may
enforce payment thereof according to its original
tenor.

Q. Is a bill an assignment of funds in

the hands of the drawee? What is the
liability of the drawee?
A. A bill of itself does not operate as
assignment of the funds in the hands of
the drawee available for the payment
thereof, and the drawee is not liable on the
bill unless and until he accepts the same.
[1]

[1] Section 127.

Q. What are crossed checks? What are the kinds of

crossed checks?

A. A crossed check is one with two parallel lines

diagonally written on the left top portion of the check.[1] The
crossing is special where the name of a bank or a business
institution in written between the two parallel lines, which
means the drawee should pay only with the intervention of
that company. The crossing is general where the words
written between the two parallel lines are and Co. or for
payees account only,[2] or nothing is written between the
parallel lines. This means that the drawee bank should not
encash the check but merely accept it for deposit.[3]

[1] Asked, No. III (b), 2004 Bar Exams.; No. II 2 (a), 2005 Bar Exams.
[2] Associated Bank vs. Court of Appeals, 208 SCRA 495.
[3] Associated Bank vs. Court of Appeals, supra; Asked, No. VI, 1995 Bar Exams.

Q. What are the effects of

crossing a check?[1]

Asked, No. III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2 (a), 2005 Bar Exams.
[1] Asked, No.
III (1), 1994 and No. I (d), 1996 Bar Exams.; No. II 2
(a), 2005 Bar Exams.
[1]

The effects of crossing a check are:

The check may not be encashed but deposited only in a bank;
The check may be negotiated only once; and
(3) The act of crossing a 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.[1]
However, issuing a crossed check imposes no legal obligation on
the drawee not to honor such a check. It is more of a warning to the
holder that the check cannot be presented to the drawee bank for
payment in such case. Instead, the check can only be deposited with
the payees bank which in turn must present it for payment with the
drawee bank in the course of normal banking transactions between
banks. The crossed checks cannot be presented for payment but it
can only be deposited and the drawee bank may only pay to another
bank in the payees or indorsers account.[2]

[1] State Investment House vs. IAC, 175 SCRA 310; Associated Bank vs. Court of Appeals, 208 SCRA 465; Traders Royal Bank vs. Radio Phil. Network, Inc.,
390 SCRA 608.
[2] Gempesaw vs. Court of Appeals, G.R. No. 92244, Feb. 9, 1993.

 TRANSPORTATION

Q. What is a test to determine a common

carrier?

A. The test to determine a common carrier is

whether the given undertaking is a part of the
business engaged in by the carrier which he has
held out to the general public as his occupation
rather than the quantity or extent of the business
transacted.[1]

[1] Asia Lighterage and Shipping, Inc. vs. Court of Appeals, 409
SCRA 340, August 19, 2003.

Petitioner contends that she is not a

common carrier but a private carrier
because as a customs broker and
warehouseman, she does not
indiscriminately hold her services
out to the public but only to select
parties with whom she may contract
in the course of her business. Is
petitioner, a customs broker
considered a common carrier?

The petitioner is a common carrier. There is greater reason for

holding the petitioner to be a common carrier because the
transportation of goods is an integral part of her business. To uphold
petitioners contention would be to deprive those with whom she
contracts the protection which the law affords them notwithstanding
the fact that the obligation to carry goods for her customers is part
and parcel of petitioners business. The definition of common
carriers under Article 1732 of the Civil Code makes no distinction
between one who whose principal activity is the carrying of
passengers or goods or both and one who does such carrying only
as an ancillary activity. It does not make any distinction between a
person or enterprise offering such service on a regular or scheduled
service and one on an occasional basis. Neither does the article
distinguish between carriers offering its services to the general
public nor one who offers services only from a narrow segment of
the general population.[1]

[1] Calvo vs. UCPB General Insurance Co., Inc., 379 SCRA 510, March 19, 2002.

GPS Trucking Corporation undertook to deliver (30)

units of Condura refrigerators aboard one of its Isuzu
truck. While the truck was traversing the north
diversion road it collided with an unidentified truck,
causing it to fall into a deep canal, resulting in damage
to the cargoes. FGU as insurer of the shipment, paid to
Concepcion Industries, Inc., the value of the covered
cargoes. FGU sought reimbursement of the amount it
paid to Concepcion Industries from GPS. It was
contended that GPS was only the exclusive hauler of
Concepcion Industries, Inc., since 1988, and it was not
so engaged in business as a common carrier.
Respondent further claimed that the cause of damage
was purely accidental. (a) May GPS be considered as a
common carrier? (b) May GPS, either as a common
carrier or a private carrier, be presumed negligent when
the goods it undertook to transport safely were
damaged while in its protective custody and
possession?

(a) No, GPS cannot be considered as a common

carrier. GPS, being an exclusive contractor and hauler
of Concepcion Industries, Inc., rendering or offering its
services to no other individual or entity, cannot be
considered a common carrier. Common carriers are
persons, corporations, firms or associations engaged
in the business of carrying or transporting passengers
or goods or both, by land, water, or air, for hire or
compensation, offering their services to the public,
whether to the public in general or to a limited
clientele in particular, but never on an exclusive basis.
The true test of a common carrier is the carriage of
passengers or goods, providing space for those who
opt to avail themselves of its transportation service
for a fee. GPS scarcely falls within the term "common
carrier."

(b) Yes, notwithstanding the fact that GPS cannot be

considered as a common carrier it still cannot escape
liability. In culpa contractual, upon which the action of
petitioner rests as being the subrogee of Concepcion
Industries, Inc., the mere proof of the existence of the
contract and the failure of its compliance justify, prima
facie, a corresponding right of relief. The law, recognizing
the obligatory force of contracts, will not permit a party to
be set free from liability for any kind of non-performance
of the contractual undertaking or a contravention of the
tenor thereof. A breach upon the contract confers upon
the injured party a valid cause for recovering that which
may have been lost or suffered.[1]

[1] FGU Insurance Corporation vs. G. P. Sarmiento Trucking Corporation, 386 SCRA
312, August 6, 2002.

Q. What is the presumption when the goods

delivered to a common carrier are lost or destroyed?

A. Common carriers, as a general rule, are

presumed to have been at fault or negligent if the
goods they transported deteriorated or got lost or
destroyed. Mere proof of delivery of the goods in
good order to a common carrier and of their arrival
in bad order at their destination constitutes a prima
facie case of fault or negligence against the carrier.
(Unsworth Trasport Intl. Phils. Inc. vs. Court of
Appeals, 625 SCRA 357, July 26, 2010).

Q. What are the instances wherein the presumption of fault or

negligence will not arise?

A. The presumption of fault or negligence will not arise if the loss is

due to any of the following causes:
(1) Flood, storm, earthquake, lightning, or other natural disaster or
calamity;
(2) An act of the public enemy in war, whether international or civil;
(3) An act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or the
container; or
(5) An order or act of competent public authority.[1]

[1] Ibid.

The carrier denied liability on the

ground that such liability was
extinguished when the vessel
carrying the cargo was gutted by
fire. Will a common carriers
liability be extinguished by
reason of fire?

The common carriers liability will not be extinguished by

reason of fire. Fire is not one of those enumerated
under Art. 1734 which exempts a carrier from liability for
loss or destruction of the cargo. Even if fire were to be
considered a natural disaster within the purview of Article
1734, it is required under Article 1739 of the same Code
that the natural disaster must have been the proximate
and only cause of the loss, and that the carrier has
exercised due diligence to prevent or minimize the loss
before, during or after the occurrence of the disaster.[1]

[1] DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., 413 SCRA 14. October 7, 2003.

Q. What is the diligence required of a common

carrier?

A. A common carrier is mandated under Art. 1733 of the

Civil Code, to observe extraordinary diligence in the
vigilance over the goods it transports according to all the
circumstances of each case. In the event that the goods
are lost, destroyed or deteriorated, it is presumed to
have been at fault or to have acted negligently, unless it
proves that it observed extraordinary diligence. When a
common carrier received the cargoes in good order, it
was incumbent upon it to prove that it exercised
extraordinary diligence in the carriage of the goods.[1]

[1] Ibid.

ECSLI issued Bills of Lading

containing the stipulation that in
case of claim for loss or for damage
to the shipped property, the
liability of the common carrier xxx
shall not exceed the value of the
goods as appearing in the bill of
lading. Is such a stipulation limiting
the common carriers liability valid?

Yes. A stipulation that limits liability is valid as

long as it is not against public policy. In Everett
Steamship Corp. v. CA the Court stated: A
stipulation in the bill of lading limiting the
common carriers liability for loss or destruction of
a cargo to a certain sum, unless the shipper or
owner declares a greater value, is sanctioned by
law, particularly Articles 1749 and 1750 of the
Civil Code.[1]

[1] Edgar Cokaliong Shipping Lines, Inc. vs. UCPB

General Insurance Co., Inc., 404 SCRA 706.

(a) In maritime transportation, what

is the meaning of Limited Liability
Rule?

(b) Who may claim limited liability?

(a) No vessel, no liability, expresses in a nutshell the limited

liability rule. The shipowners or agents liability is merely
coextensive with his interest in the vessel such that a total
loss thereof results in its extinction. The total destruction of
the vessel extinguishes maritime liens because there is no
longer any res to which it can attach. This doctrine is based
on the real and hypothecary nature of maritime law which has
its origin in the prevailing conditions of the maritime trade and
sea voyages during the medieval ages attended by
innumerable hazards and perils. To offset against these
adverse conditions and to encourage shipbuilding and
maritime commerce, it was deemed necessary to confine the
liability of the owner or agent arising from the operation of any
ship to the vessel, equipment, and freight, or insurance of
any. (de la Torre, et al., vs. Concepcion, et al., G. R. 160565,
July 13, 2011).

(b) The Limited Liability Rule is

available to the shipowner or ship
agent and hence, it can not be used
against them. (de la Torre, et al., vs.
Concepcion, et al., supra).

Is the period of prescription of

action based on the relationship
between passenger and carrier
on an international flight
governed by the Warsaw
Convention that sets the period
of prescription of two years from
the accrual of the cause of
action?

In case of damage to passengers baggage,

the period of prescription is two years as
mandated by the Warsaw Convention but in
case of damages caused by humiliation,
embarrassment, mental anguish, serious
anxiety, fear and distress or hurt feelings, the
civil code provisions on tort shall apply and
hence, outside the coverage of the Warsaw
Convention. The period of prescription is four
years.[1]

[1] Philippine Airlines vs. Savillo, 557 SCRA 66.

Q. Under the Code of Commerce, within what period

should the notice of claim be given to the shipper?

A. Under the Code of Commerce, the notice of claim

must be made within twenty-four (24) hours from receipt
of the cargo if the damage is not apparent from the
outside of the package. For damages that are visible
from the outside of the package, the claim must be made
immediately.[1]

[1] Aboitiz Shipping Corporation vs. Insurance Company of North America, 561 SCRA 262, Aug.
6, 2008.

In case of danger of collision

between two aircrafts, which aircraft
has the right of way?

An aircraft taxiing on the

maneuvering area of an aerodrome
shall give way to an aircraft taking
off or about to take off. Therefore, in
case of collision, an aircraft taking off
or about to take off has the right of
way. (GSIS vs. Pacific Airways Corp.,
629 SCRA 220, Aug. 25, 2010).

 SPECIAL

LAWS

Q. Are letters of credit and trust receipts

negotiable instruments?

A. Letters of credit and trust receipts are not

negotiable instruments because they do not
conform to the requirements of a negotiable
instrument stated in Section 1 of the Negotiable
Instruments Law. However, drafts issued in
connection with letters of credit are negotiable
instruments[1] if they comply with the
requirements of Section 1 of the Negotiable
Instruments Law.

[1] Ibid.

In view of the suspension of the

Usury Law, is there any limit to the
interest rate that may be charged by
the lender?

In view of Central Bank Circular NO. 905, s.

1982, which suspended the Usury Law ceiling
on interest effective January 1, 1983, parties to
a loan agreement have wide latitude to
stipulate interest rates. However, such
stipulated interest rates may be declared
illegal if the same is unconscionable. The
Supreme Court has annulled a stipulated 5.5%
per month or 66% per annum interest with
additional service charge of 2% per annum and
penalty charge of 1% per month for being
excessive, iniquitous, unconscionable and
exorbitant. (Toledo vs. Hyden, 637 SCRA 540,
Dec. 8, 2010),

Q. Where should an action involving trademarks,

including charges of unfair competition, cancellation
of trademark and damages for violation of
intellectual property rights be filed?

A. A complaint involving trademarks, including

charges of unfair competition, cancellation of trademark
and damages for violation of intellectual property rights
fall within the jurisdiction of the Intellectual Property
Office Director of Legal Affairs and must therefore be
filed in the said office. Any appeal therefrom should be
filed with the Intellectual Property Office Director
General.[1]

[1] In-N-Out Burger, Inc. vs. Sehwani, Inc., 575 SCRA 535, December 24, 2008.

Q. What are the tests to determine

likelihood of confusion in trademark
infringement cases?

There are two tests to determine likelihood of confusion: the

dominancy test and the holistic test. Dominancy test
focuses on the similarity of the main, prevalent or essential
features of the competing trademarks that might cause
confusion. Infringement takes place when the competing
trademark contains the essential features of another. Imitation
or an effort to imitate is unnecessary. The question is whether
the use of the marks is likely to cause confusion or deceive
purchasers. The holistic test considers the entirety of the
marks, including labels and packaging, in determining
confusing similarity. The focus is not only on the predominant
words but also on the other features appearing on labels.
Dominancy test was applied by the court in the
Philippines. (Societe Des Produits Nestle, S. A. vs. Dy, Jr., 627 SCRA 222, Aug. 9, 2010;
Dermaline, Inc. vs. Myra Pharmaceuticals, Inc. 628 SCRA 356, Aug. 16, 2010).

Q. Is NANNY confusingly similar to

NAN to warrant a claim for
trademark infringement?

A. Yes, they are confusingly similar and

the element of likelihood of confusion
is the gravamen of trademark
infringement. (Societe Des Produits
Nestle, S. A. vs. Dy, 627 SCRA 223Aug.
9, 2010).

May the registration of the trademark

Harvard and its identification of
origin as Cambridge,
Massachusetts be allowed in the
Philippines?

No, it cannot be registered. Harvard is

rated as one of the most famous marks in
the world. It has established considerable
goodwill worldwide since the founding of
Harvard University more than 350 years ago.
Harvard is a mark already protected under
Article 6 and 8 of the Paris Convention. Aside
therefrom, Section 4 (a) of RA 166 prohibits
the registration of a mark which may
disparage or falsely suggest a connection
with persons, living or dead, institutions, or
beliefs. (Fredco vs. Fellows of Harvard
University, G. R. 185917, June 1, 2011).

For how long does the exclusive right of

the patentee to make, use and sell a
patented product exist?

A: The exclusive right of a patentee to

make, use and sell a patented product,
article or process exists only during the
term of the patent. (Phil. Pharmawealth, In.
vs. Pfizer, Inc. , 635 SCRA 140, Nov. 17,
2010).

Q. Is proof of actual use prior to the

filing of the application for patent
necessary?

RA 8293 espouses the first to file

rule. The said law removed the previous
requirement of proof of actual use prior
to the filing of an application for
registration of a mark, proof of prior and
continuous use is necessary to establish
ownership of a mark. (E. Y. Industrial
Sales, Inc. vs. Shen Dar Electricity &
Machinery Co., Ltd., 634 SCRA 363, Oct.
20, 2010).

Thank You!