UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011
Commercial law
Prepared by:
ATTY. RENATO S. RONDEZ
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031, June 2, 1911)
Written contracts for the payment of money; by
its form, intended as a substitute for money and intended
to pass from hand to hand, to give the holder in due
course the right to hold the same and collect the sum due.
Negotiable instruments produce the effect of
payment only when they have been encashed or through
the fault of the creditor have been impaired. (Article
1249, NCC)
Principal Features and Characteristics
a. negotiability - right of transferee to hold the
instrument and collect the sum due
b. accumulation of secondary contracts -
instrument is negotiated from person to person
Requisites of Negotiability
An instrument to be negotiable must conform to the
following requirements:
a. It must be in writing and signed by maker or
drawer;
b. Must contain an unconditional promise or order to
pay a sum certain in money;
c. Must be payable on demand, or at a fixed or
determinable future time;
d. Must be payable to the order or to bearer; and
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
*For a Promissory Note to be negotiable, requisites a,b,c
and, d must be met.
*For a bill of exchange to be negotiable, all the above
requisites must be met.
Purpose of Negotiability. To allow bills and notes the
effect which money, in the form of government bills or
notes, supplies in the commercial world.
The validity and negotiable character of a negotiable
instrument are NOT affected by the fact that:
1. It is not dated;
2. It does not specify the place where it is drawn or
where it is payable;
3. It bears a seal;
4. It designates a particular kind of current money in
which payment is to be made (Sec. 6)
Kinds of Negotiable Instruments:
A. PROMISSORY NOTE - unconditional promise to pay in
writing made by one person to another, signed by
the maker, engaging to pay on demand or a fixed
determinable future time a sum certain in money to
order or bearer. When the note is drawn to maker’s
own order, it is not complete until indorse by him.
(Sec. 184 NIL)
Parties:
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a. Maker – one who makes a promise and sign the
instrument
b. Payee – one to whom the promise is made or
the instrument is payable.
FORMS OF PROMISSORY NOTE
1. Due bill, an instrument whereby one person
acknowledges his indebtedness to another and
promises to pay a sum certain in money.
2. Bonds, which are in the nature of PN.
3. Certificate of Deposit issued by banks payable to
depositor or his order, or to bearer
B. BILL OF EXCHANGE - unconditional order in writing
addressed by one person to another, signed by the
person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer. (Sec. 126 NIL)
Parties:
a. Drawer – one who gives the order to pay money
to third party.
b. Payee – one to whom the bill is drawn or is
payable
c. Drawee/ acceptor – person to whom the bill is
addressed and who is ordered to pay.
Forms of bill of exchange:
1. Trade Acceptance, A BOE drawn by seller on the
buyer for the purchase price of goods.
2. Clean Bill of Exchange, A BOE wherein no
document is attached upon presentment for
acceptance or payment.
3. Documentary Bill of Exchange, A BOE wherein
documents are attached upon presentment for
acceptance or payment.
4. Bank Acceptance- A draft drawn and accepted by
a bank.
5. Drafts, which are BOE drawn by one bank upon
another.
C. CHECK - bill of exchange drawn on a bank and
payable on demand. (Sec. 185 NIL)
FORMS OF CHECK
1. Ordinary Check
2. Cashier’s Check, A Check payable to third
person which is drawn by the bank upon itself.
(2003 BEQ)
3. Certified check , A personal check with
guaranteed funds to cover the payment of the
check.
4. Voucher Check
5. Traveler’s Check
6. Manager’s Check , A check drawn by the
manager of the bank. (2003 BEQ)
7. Crossed Check ( 2004, 2005 BEQ)
8. Memorandum Check.
Other forms of negotiable instruments:
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Prepared by: ATTY. RENATO S. RONDEZ

a. Certificate of deposit issued by banks, payable to the Check BOE

depositor or his order, or to bearer (CALTEX v. CA, 212
- Always drawn - May or may not be drawn against
SCRA 471)
upon a bank or a bank
b. Trade Acceptance;
banker
c. Bonds, which are in the nature of a promissory notes;
- Always payable on - May be payable on demand or at
d. Drafts which are bills of exchange drawn by one bank
demand a fixed or determinable future time
upon another;
•All of these comply with Sec. 1 NIL.
•Letters of Credit are not negotiable. - Not necessary that - Necessary that it be presented for
it be presented for acceptance
acceptance
DISTINCTIONS: - Drawn on a - Not drawn on a deposit
(2005 BEQ) deposit
Non-negotiable - The death of a - The death of the drawer of the
Negotiable Instruments Instruments drawer of a check, ordinary bill of exchange does not
with knowledge by
Does not contain all the the banks, revokes
Contains all the requisites
requisites of Sec. 1 of the the authority of the
of Sec. 1 of the NIL
NIL banker pay
Transferred by Transferred by - Must be presented - May be presented for payment
negotiation assignment for payment within within a reasonable time after its
Transferee acquires a reasonable time last negotiation.
Holder in due course may after its issue (6
rights only of his
have better rights than months)
transferor
transferor
Prior parties warrant Prior parties merely PN CHECK
payment warrant legality of title - There are two (2) parties, - There are three (3) parties,
Transferee has right of Transferee has no right of the maker and the payee the drawer, the drawee
recourse against recourse bank and the payee
intermediate parties - May be drawn against any - Always drawn against a
person, not necessarily a bank
bank
Negotiable Instruments Negotiable Documents - May be payable on demand -Always payable on demand
of Title or at a fixed or determinable
Have requisites of Sec. 1 Does not contain future time
of the NIL requisites of Sec. 1 of NIL - A promise to pay - An order to pay
Have right of recourse *Note: PN, BOE and Check- definitions (2002 BEQ)
against intermediate No secondary liability of
parties who are intermediate parties
secondarily liable However, these instruments are non-negotiable:
Holder in due course may Transferee merely steps
have rights better than into the shoes of the 1. Treasury warrant are non-negotiable because there is
transferor transferor an indication of the fund as the source of payment of the
disbursement.(Metrobank v. CA, 194 SCRA 169)
Subject is money Subject is goods
2. Since a postal money order is subject to restrictions
Instrument is merely
and limitations under postal laws and issued by the
evidence of title; thing of
Instrument itself is Government which is not engaged in commercial
value are the goods
property of value transactions, it is not governed by NIL. (Phil. Educ. Co.,
mentioned in the
Inc. vs. Soriano, 39 SCRA 587)
document
3. Letters of credit
4. Warehouse receipts - Non-Negotiable for the same as
Bill of lading it merely represents goods, not money.
Bill of Exchange
Promissory Note
Unconditional promise Unconditional order Factors that affect the determination of negotiability of
Involves 2 parties Involves 3 parties instruments:
Maker primarily liable Drawer only secondarily a. Whole instrument;
liable b. What appears on the face of the instrument;
Only 1 presentment - for Generally 2 c. Requisites enumerated in Sec.1 of NIL; and
payment presentments - for d. Should contain words or terms of negotiability.
acceptance and for (Gopenco, Commercial law Bar Reviewer, cited in Aquino
payment p. 23)

 In determining the negotiability of an

instrument, the instrument in its entirety and
what appears on its face must be considered. It
must comply with the requirements of Sec.1 of
NIL. ( Caltex Phils. V. CA, 212 SCRA 448)

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 The acceptance of a bill of exchange is not
important in the determination of its
negotiability. The nature of acceptance is
important only on the determination of the kind
of liabilities of the parties involved. (PBCOM v.
Aruego, 102 SCRA 530)
Notes on Section 1:
- In order to be negotiable, there must be a
writing of some kind, else there would be
nothing to be negotiated or passed from hand to
hand. The writing may be in ink, print or pencil.
It may be upon parchment, cloth, leather or any
other substitute of paper.
- It must be signed by the maker or drawer. It
may consist of mere initials or even numbers,
but the holder must prove that what is written is
intended as a signature of the person sought to
be charged.
- The Bill must contain an order, something more
than the mere asking of a favor.
- Sum payable must be in money only. It cannot
be made payable in goods, wares, or
merchandise or in property.
- A drawee’s name may be filled in under Section
14 of the NIL.
MEANING OF PARTICULAR REQUISITES:
a. UNCONDITIONAL PROMISE OR ORDER
- Where the promise or order is made to depend
on a contingent event, it is conditional, and makes the
instrument non-negotiable.
The conditional nature of the promise or order is not
effected by:
a. An indication of a particular fund from which the
acceptor reimburses himself after paying the
holder;
b. A statement of the transaction which gives rise to
the instrument.
b. CERTAINTY OF SUM
- The sum is certain if the amount fixed.
- The certainty is HOWEVER NOT affected although to be
paid:
1. with interests;
2. by stated installments;
3. by stated installments with acceleration clause;
4. with exchange;
5. with cost of collection or attorney’s fees.
Escalation Clause – an agreement pertaining to a loan or
increased in the event that the applicable maximum rate
of interest is increased by law or by the Monetary Board.
De-escalation Clause – an agreement pertaining to a
loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be
reduced in the event that the applicable maximum rate of
interest is decreased by law or by the Monetary Board.
The presence of an escalation clause or a de-
escalation clause or both in the instrument does not
affect the negotiable character of the instrument.
Acceleration clause - it is a provision that upon default
in payment of any installment or of interest, the whole
shall become due.
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c. PAYABLE IN MONEY
 General Rule: If some other act besides payment of
money is promised or ordered, the instrument
becomes non-negotiable.
 Exceptions:
a. Authorizes the sale of collateral securities on
default;
b. Authorizes confession of judgment on default;
c. Waives the benefit of law intended to protect the
debtor;
d. Allows the creditor the option to require
something to be done in lieu of money.
d. PAYABLE ON DEMAND
An instrument is payable on demand:
a. Where it is expressed to be payable on demand,
at sight or on presentation;
b. Where no period of payment is stated;
c. Where the instrument has been issued, accepted
or indorsed after maturity.
e. DETERMINABLE FUTURE TIME
- Future time is determinable in the following cases:
a. At a fixed period after date or sight;
b. On or before a specified fixed or determinable
future time;
c. On or at a fixed period after the occurrence of a
specified event, certain to happen, although the
exact date is not certain.
f. PAYABLE TO ORDER
- The instrument is payable to order where drawn
payable to the order of a specified person, or to him or his
order.
- The payee must be named or otherwise indicated
therein with reasonable certainty.
g. PAYABLE TO BEARER
a. Where it is expressed to be so payable;
b. When payable to a person named therein or
bearer;
c. When payable to the order of a fictitious or non-
existing person, and such fact was known to the
drawer or maker;
d. When the name of the payee is not the name of a
person;
e. When the only and last indorsement is an
indorsement in blank.
 An original bearer instrument remains to be a bearer
instrument even if indorsed specially and thus can be
negotiated by mere delivery.
 When the payee is vaguely designated, the loss will be
borne by the party who caused it – the drawer.
(Equitable Bank v. IAC, 161 SCRA 518).
RULES AS TO DATES
There are several important principles as to dates in
negotiable instruments. These are:
1. Where the instrument, its acceptance, or
indorsement is dated, such date is presumed to be
the corresponding true date; Date is important -
2. Where the instrument is payable within a specified
period after date, or after acceptance, in which case
the date of the instrument and the date of maturity of
the instrument; in these cases, the holder may insert
the true date;
a. when the instrument is payable on demand,
the date is necessary to determine whether
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the instrument was presented within a
reasonable time from issue in the case of
notes or from last negotiation in the case of
bills, as these factors will show whether the
last holder is a holder in due course or not;
and
b. when the instrument is an interest-bearing
one, to determine when the interest starts
to run.
3. Antedating or postdating an instrument does not
affect validity or negotiability, unless done for an
illegal or fraudulent purpose.
REAL DEFENSES – Those that attach to the instrument
itself and are available against all holders, whether in due
course or not.
(WAD FIMMU WIFE)
1. Want of delivery of incomplete instrument;
2. Alteration;
3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse contractus;
5. Insanity where the insane person has a
guardian appointed by the court;
6. Minority;
7. Marriage in the case of a wife;
8. Ultra vires acts of a corporation; where the
corporation is absolutely prohibited by its
charter or statute from issuing any
commercial paper under any circumstances;
9. Want of authority of agent;
10. Illegality of contract where it is the contract
or instrument itself which is expressly made
illegal by statute;
11. Forgery;
12. Execution of instrument between public
enemies
PERSONAL DEFENSES/ EQUITABLE DEFENSES – Those
which are available only against a person not a holder in
due course or a subsequent holder who stands in privity
with him. (W2A4F2I4N2MU)
1. Want of delivery of complete instrument;
2. Want of authority of agent where he has
apparent authority.
3. Absence or failure of consideration, partial
or total;
4. Acquisition of the instrument by force,
duress or fear;
5. Acquisition of the instrument by unlawful
means;
6. Acquisition of the instrument for an illegal
consideration;
7. Filling up of blank contrary to authority
given or not within reasonable time, where
the instrument is delivered;
8. Fraud in inducement;
9. Insertion of wrong date in an instrument,
where it is payable at a fixed period after
date and it is issued undated or where it is
payable at a fixed period after sight and the
acceptance is undated;
10. Intoxication;
11. Insanity where there is no notice of insanity
on the part of the one contracting with the
insane person;
12. Illegality of contract where the form or
consideration is illegal;
13. Negotiation in breach of faith;
14. Negotiation under circumstances that
amount to fraud;
15. Mistake;
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16. Ultra vires acts of corporations where the
corporation has the power to issue
negotiable paper but the issuance was not
authorized for the particular purpose for
which it was issued.
INSERTION OF DATE (Sec.13)
Rule: If there is a date and it is changed, apply Sec.124 on
ALTERATION OF AN INSTRUMENT.
The date may be inserted in an instrument when:
a. An instrument expressed to be payable at a fixed
period after date is issued undated
b. Where acceptance of an instrument payable at a
fixed period after sight is undated (Sec. 13 NIL)
Effects:
- Any holder may insert the true date of issuance
or acceptance
- The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder
in due course
- As to the holder in due course, the date inserted
(even if it be the wrong date) is regarded as the
true date.
As to a holder in due course- the date inserted is the true
date.
Subsequent Holder in Due Course not affected by the
following deficiencies:
a. Incomplete but delivered instrument (Sec. 14)
b. Complete but undelivered (Sec. 16)
c. Complete and delivered issued without
consideration or a consideration consisting of a
promise which was not fulfilled (Sec 28)
Holder in Due Course Affected by
Abnormality/Deficiency:
a. Incomplete and undelivered instrument (Sec. 15)
b. Maker/drawer’s signature forged (Sec. 23)
Incomplete but Delivered Instrument: (Sec.14)
(2004 & 2005 Bar Exam)
1. Where an instrument is wanting in any material
particular:
a. Holder has prima facie authority to fill up the
blanks therein.
b. It must be filled up strictly in accordance with
the authority given and within a reasonable
time.
c. If negotiated to a holder in due course, it is valid
and effectual for all purpose as though it was
filled up strictly in accordance with the authority
given and within reasonable time. (Sec. 14 NIL)
2. Where only a signature on a blank paper was
delivered:
a. It was delivered by the person making it in order
that it may be converted into a negotiable
instrument
b. The holder has prima facie authority to fill it up
as such for any amount. (Sec. 14 NIL)
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Notes on Section 14
Rule: Sec. 14 applies if there is a signature on the
instrument for the purpose of giving effect thereto.
Rule: If no signature, refer to Sec. 15 or 23.
Rule: Sec. 14 is merely a PERSONAL DEFENSE.
 If the instrument is wanting in material particular,
mere possession of the instrument is enough to
presume prima facie authority to fill it up.
 Material particular may be an omission which will
render the instrument non-negotiable (e.g. name of
payee), an omission which will not render the
instrument non-negotiable (e.g. date)
 In the case of the signature in blank, delivery with
intent to convert it into a negotiable instrument is
required. Mere possession is not enough.
Incomplete and Undelivered Instrument: (Sec.15)
Rules on Interpretation of Instruments:
There are two steps in the execution of a NI:
1. The act of writing the instrument comion of
giving effect pletely and in accordance with Sec.
1 of NIL; and
2. The delivery of the instrument with the
intention of giving effect thereto
 If Completed and negotiated without authority,
not a valid contract against a person who has
signed before delivery of the contract against a
person who has signed before delivery of the
contract even in the hands of a HDC but
subsequent indorsers are liable.
REASON: The law does not make any distinction between
a HDC and one who is not a HDC.
Notes on Section 15
 It is a real defense. It can be interposed against a
holder in due course.
 Where an INCOMLETE and UNDELIVERED
instrument is in the hands of a HDC, there is
PRIMA FACIE PRESUMPTION of delivery.
 Defense of the maker is to prove non-delivery of the
incomplete instrument.
Complete but Undelivered: (Sec.16)
General Rule: Every contract on a negotiable
instrument is incomplete and revocable until
delivery for the purpose of giving effect thereto. .
a. If between immediate parties and remote parties not
holder in due course, to be effectual there must be
authorized delivery by the party making, drawing,
accepting or indorsing. Delivery may be shown to be
conditional or for a special purpose only
b. If the holder is a holder in due course, all prior
deliveries conclusively presumed valid
c. If instrument not in hands of drawer/maker, valid
and intentional delivery is presumed until the
contrary is proven (Sec. 16 NIL)
Rules on delivery of negotiable instruments:
1) Delivery is essential to the validity of any negotiable
instrument
2) As between immediate parties or those is like cases,
delivery must be with intention of passing title
3) An instrument signed but not completed by the
drawer or maker and retained by him is invalid as to
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him for want of delivery even in the hands of a
holder in due course
4) But there is prima facie presumption of delivery of
an instrument signed but not completed by the
drawer or maker and retained by him if it is in the
hands of a holder in due course. This may be
rebutted by proof of non-delivery.
5) An instrument entrusted to another who wrongfully
completes it and negotiates it to a holder in due
course, delivery to the agent or custodian is sufficient
delivery to bind the maker or drawer.
6) If an instrument is completed and is found in the
possession of another, there is prima facie evidence
of delivery and if it be a holder in due course, there is
conclusive presumption of delivery.
7) Delivery may be conditional or for a special purpose
but such do not affect the rights of a holder in due
course.
1. Discrepancy between the Amount in Figures and
that in Words
- the words prevail, but if the words are
ambiguous, reference will be made to the figures
to fix the amount.
2. Instrument NOT dated
- considered dated on the date of issue
3. Conflict between Written and Printed Provisions
- written provisions prevail
4. Interest provided for, but No starting Date was
specified
- starting date is the date of the instrument, in
the absence of said date, from date of issue
5. Instrument Ambiguous
- if the instrument is ambiguous such that there
is doubt whether it is a bill or note, the holder
may treat it as a note or a bill at his option.
6. Signature on Instrument does not Indicate Capacity
in Which Made
- Where it cannot be determined in what
capacity a person affixed his signature to a
negotiable instrument, he is deemed to have
signed as an indorser. As indorser, his liability
under the instrument is secondary, meaning that
if the party primarily liable cannot pay, the
indorser can be made to pay by the holder of the
instrument.
7. Where Promissory Note worded “Promise to Pay” is
signed by two (2) makers
- Under Section 17 (g) of the NIL and Article
1216 of the Civil Code, where the promissory
note was executed jointly and severally by two
or more persons, the payee of the promissory
note had the right to hold any one of the two (2)
signers of the promissory note responsible for
the payment of the whole amount of the note.
(Philippine National Bank vs. Concepcion
Milling Co., 5 SCRA 745).
RULE ON SIGNATURES
General Rule: A person whose signature does not
appear on the instrument in not liable.
Exception:
a. One who signs in a trade or assumed name (Sec.
18)
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b. A duly authorized agent (Sec. 19)
c. A forger (Sec. 23)
LIABILITY of a person SIGNING AS AGENT:
An agent is exempt from personal liability, provided he:
1. Acts within the scope of his authority;
2. Discloses the name of his principal; and
3. Discloses that he is acting in a representative capacity
(Sec. 20)
Notes on Section 20
General rule: An agent is not liable on the instrument if
he were duly authorized to sign for or on behalf
of a principal.
 If an agent does not disclose his principal, the agent
is personally liable on the instrument.
Per Procuration - operates as notice that the agent has a
limited authority to sign.
Effects:
- The principal in only bound if the agent acted
within the limits of the authority given
- The person who takes the instrument is bound
to inquire into the extent and nature of the
authority given. (Sec. 21 NIL)
General rule: Infants and corporations incur no liability
by their indorsement or assignment of an
instrument. (Sec. 22 NIL)
Effects:
- No liability attached to the infant or the
corporation
- The instrument is still valid and the indorsee
acquires title
FORGERY
A. Maker’s Signature
(1989 BEQ)
B. Drawer’s Signature
(2004,2006&2009 BEQ)
C. Payee’s Signature
( 2008 BEQ)
D. Indorser’s Signature
(2008 BEQ)
General rule: A signature, which is forged or made
without authority is wholly inoperative. (Sec.
23)
Effects:
a. No right to retain
b. No right to give a discharge
c. No right to enforce payment can be acquired.
Exception:
- The party against whom it is sought to be
enforced is precluded from setting up the
forgery or want of authority. (Sec.23)
Forgery refers to both a signature which has been forged
or made without authority. Thus, Section 23 is not limited
to counterfeit signatures since it also applies to genuine
ones.
* A person whose signature is forged as maker, drawer,
payee or indorsee of a note or check was never a party to
the instrument. Since his signature does not appear in the
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instrument, he cannot be held liable thereon by anyone.
(Gempsaw v. CA 218 SCRA 682)
CUT-OFF RULE:
General Rule: Parties prior to the forged signature are
cut-off from the parties after the forgery in the sense that
prior parties cannot be held liable and can raise the
defense of forgery. The holder can only enforce the
instrument against parties who became such after
forgery.
Exception: When the prior parties are precluded from
setting up the defense of forgery either because of their
warranties, representation or negligence. (Gempsaw v.
CA)
Persons PRECLUDED from setting up the defense of
forgery:
1. Those who admit/warrant the genuineness of the
signature in question: indorsers, persons negotiating by
delivery and acceptors;
2. Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
3. Holder of a bearer instrument
—Forged signature is not necessary to
the title of the holder.
Notes on Section 23
 Section 23 applies only to forged signatures or
signatures made without authority
 Alterations such as to amounts or like fall under
section 124
 Forms of forgery are a) fraud in factum b) duress
amounting to fraud c) fraudulent impersonation
 Only the signature forged or made without authority
is inoperative, the instrument or other signatures
which are genuine are affected
 The instrument can be enforced by holders to whose
title the forged signature is not necessary
 drawee bank is conclusively presumed to know the
signature of its drawer
 if endorser’s signature is forged, loss will be borne by
the forger and parties subsequent thereto
 drawee bank is not conclusively presumed to know
the signature of the indorser. The responsibility falls
on the bank which last guaranteed the indorsement
and not the drawee bank.
 Where the payee’s signature is forged, payments
made by the drawee bank to collecting bank is
ineffective. No debtor/creditor relationship is
created. An agency to collect is created between the
person depositing and the collecting bank. Drawee
bank may recover from collecting bank who may in
turn recover from the person depositing.
Rules on liabilities of parties on a forged instrument:
In a PN
- A party whose indorsement is forged on a note
payable to order and all parties prior to him
including the maker cannot be held liable by any
holder
- A party whose indorsement is forged on a note
originally payable to bearer and all parties prior
to him including the maker may be held liable by
a holder in due course provided that it was
mechanically complete before the forgery
- A maker whose signature was forged cannot be
held liable by any holder
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In a BOE
- The drawer’s account cannot be charged by the
drawee where the drawee paid
- The drawer has no right to recover from the
collecting bank
- The drawee bank can recover from the collecting
bank
- The payee can recover from the drawer
- The payee can recover from the recipient of the
payment, such as the collecting bank
- The payee cannot collect from the drawee bank
- The collecting bank bears the loss but can
recover from the person to whom it paid
- If payable to bearer, the rules are the same as in
PN.
- If the drawee has accepted the bill, the drawee
bears the loss and his remedy is to go after the
forger
- If the drawee has not accepted the bill but has
paid it, the drawee cannot recover from the
drawer or the recipient of the proceeds, absence
any act of negligence on their part.
Every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration. (Sec. 24)
Effects:
- Every person whose signature appears thereon
is a party for value
- Presumption is disputable
Where value has at any time been given for the
instrument, the holder is deemed a holder for value in
respect to all parties who become such prior to that time.
(Sec. 26)
Absence of Consideration:
(1995 and 1996 Bar Exam)
Effect of want of consideration:
a. Personal defense to the prejudice of a party and
available against any person not holder in due
course.
b. Partial failure of consideration is a defense pro
tanto, whether the failure is an asceratained and
liquidated amount otherwise. (Sec 29)
Notes on Section 28
 Absence of consideration is where no consideration
was intended to pass.
 Failure of consideration implies that consideration
was intended by that it failed to pass
 The defense of want of consideration is ineffective
against a holder in due course
 A drawee who accepts the bill cannot allege want of
consideration against the drawer
Accommodation
Legal arrangement under which a person called the
accommodation party lends his name and credit to
another called the accommodated party, without
consideration.
Effect: A person to whom the instrument thus executed is
subsequently negotiated, has a right of recourse against
the accommodation party inspite of the former’s
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
knowledge that no consideration passed between the
accommodation and accommodated parties.
Requisites of Accommodation:
1. The accommodation party must sign as maker,
drawer, acceptor or indorser;
2. No value is received by the accommodation
party from the accommodation party; and
3. The purpose is to lend the name. (Crisologo-Jose
v. CA, 177 SCRA 594).
Accommodation Party – Is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefore, and for the purpose of
lending his name to another person. (2003 and 2005
BEQ)
 A corporation cannot act as an accommodation
party. Such is an ultra vires act. (Crisologo-Jose v CA,
117SCRA594)
Liability of the Accommodation Party:
- The accommodation party is liable on the
instrument to a holder for value notwithstanding that
such holder at the time of taking the instrument knew
him to be only an accommodation party. It is a valid
defense that the accommodation party did not receive
any valuable consideration when he executed the
instrument. He is liable to a holder for value by virtue of
his being an accommodation party.
*An accommodation party to a negotiable
instrument, inspite of the lack of consideration between
him and the accommodated party, is liable to any other
holder NOT to the accommodated party. (Travel-On, Inc.
v. CA, et al, 210 SCRA 351).
*An accommodation party’s liability as a
solidarily party is unconditional party is unconditional
and is not affected by an extension of payment granted by
the creditor to the debtor. HOWEVER, where the holder
allowed payments by the drawer direct to the contractor
without availing of the deed of assignment in its favor,
said holder is a bad faith holder, NOT a holder in due
course against whom an extension to pay granted by the
drawer is a defense by the accommodation party.
(Prudencio v. CA, 143 SCRA 6).
*The liability of an accommodation party does
not extend to corporate accommodation because the act
of the corporate officers is ultra vires. However, these
officers are personally liable. (Crisologo-Jose v. CA, 177
SCRA 594).
*A promissory note, with an accommodation co-
maker, used to settle an estafa case, has an illegality of
cause, and does not make the accommodation co-maker
liable. (United General Industries v. Paler, 112 SCRA 404)
*A promissory note with an accommodation
maker, utilized to settle an estafa case, has an illegal
consideration, and does not make the co-maker liable.
(United Industries v. Paler, 112 SCRA 404)
RIGHTS OF AN ACCOMMODATION PARTY
1. Against the Accommodated Party
- the accommodation party, if obliged to pay to a
holder of value, can seek reimbursement from the
accommodated party.
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 GREEN NOTES IN COMMERCIAL LAW
2. Against the Co-accommodation Party to the use
of some other persons
- where a solidary accommodation maker paid to the
bank the balance due on a promissory note, he may
seek contribution from the other solidary
accommodation maker, in the absence of a contrary
agreement between them. This rights springs from
an implied promise between the accommodation
makers to share equally the burdens resulting from
their execution of the note. They are joint guarantors
of the principal debtor. (Sadaya v. Sevilla).
A solidary accommodation maker may:
a. demand from the principal debtor reimbursement of
the amount which he paid on the promissory note
and
b.
c. demand contribution from his co-accommodation
maker, without first directing his action against the
principal debtor, PROVIDED that:
b.1. he made the payment by virtue of a
judicial demand, or
b.2. the principal debtor is insolvent.
NEGOTIATION
An instrument is negotiated when:
a. It is transferred from one person to another
b. That the transfer must be in a manner as to
constitute the transferee a holder
Modes of Negotiation:
1. If payable to bearer, it is negotiated by delivery.
Negotiation of negotiable instrument may be
effected by the delivery alone of the instrument
to the transferee in those negotiable
instruments which are:
-originally payable to bearer, or
-originally payable to order
instruments where the last
indorsement is an indorsement in
blank.
2. If payable to order, it negotiated by the indorsement of
the holder completed by delivery.
A negotiable instrument payable to the
order of a specified person, or to him or his
order, may be negotiated by the payee by
indorsement followed by delivery of the
instrument to the indorsee. Subsequent
negotiation may be made in this manner if the
holder who indorses acquired the instrument
under a special indorsement.
The payee of the negotiable instrument acquires
no interest with respect thereto until its delivery
to him. (Development Bank of Rizal v. Sima Wei)
3. Another method of transfer is by assignment which
generally refers to ordinary contracts, and by operation
of law, where title to a note or bill passes upon the death
of the holder to his personal representative.
Indorsement to be valid must be:
a. Written
b. On the instrument itself or upon a piece of paper
attached (Sec. 31 NIL)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
Notes on Section 31
 The paper attached with the indorsement is an
allonge
 An allonge must be attached so that it becomes a part
of the instrument, it cannot be simply pinned or
clipped to it.
Kinds of Indorsements:
a. Special (Sec. 34)
b. Blank (Sec. 35)
c. Restrictive (Sec. 36)
d. Qualified (Sec. 38)
e. Conditional (Sec. 39)
A. SPECIAL- specifies the person to whom or to
whose order, the instrument is to be payable.
(Sec. 34)
B. BLANK- Specifies no person to whom or to
whose order the instrument is to be payable.
1. Instrument becomes payable to bearer and
may be negotiated by delivery (Sec. 34)
2. May be converted to a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with character of indorsement. (Sec. 35)
C. ABSOLUTE- One by which indorser binds
himself to pay:
a. Upon No order condition than failure of
prior parties to do so; and
b. Upon due notice to him of such failure.
D. CONDITIONAL- right of the indorsee is made to
depend on the happening of a contingent event.
Party required to pay may disregard the
conditions. (Sec. 39)
E. RESTRICTIVE- An indorsement is restrictive,
when it either:
a. Prohibits further negotiation of the
instrument; or
b. Constitutes the indorsee the agent of
the indorser; or
c. Vests the title in the indorsee in trust
for or to the use of some other persons.
 But mere absence of words implying power
to negotiate does not make an indorsement
restrictive. (Sec. 36)
EFFECT of Restrictive indorsement:
Confers upon the indorsee the right-
a. Receive payment of the instrument;
b. Bring any action thereon that the indorser could
bring;
c. To transfer his rights as such indorsee, when the
form of the instrument authorizes him to do so.
F. QUALIFIED- Constitutes the indorser a mere
assignor of the title to the instrument. ( Sec38)
 It is made by adding to the indorser’s
signature words like “sans recourse”,
“without recourse”, “indorser not holder”,
“at the indorsers own risk”, other terms of
similar import.
* Hence, it has been held that oral testimony is not
admissible to establish that an unqualified indorsement
is in fact qualified. ( Velasco v. Tan Liuan & Co., March
17,1922)
 A Qualified indorser has limited liability, i. e.
he is liable for breach of warranty if the
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 GREEN NOTES IN COMMERCIAL LAW
instrument is dishonored by non-
acceptance or non- payment due to:
1. Forgery; or
2. Lack of good title on the part of the
indorser; or
3. Lack of capacity to indorse on the part of the
prior parties; or
4. The fact that at the time of the endorsement,
the instrument was valueless or nit valid,
and he knew of the fact.
 A Qualified indorsement does not impair the
negotiable character of the instrument.
As mentioned earlier, Negotiation is the transfer of a
negotiable instrument from one person to another as to
constitute the transferee the holder thereof.
To be valid, negotiation must involve the entire
instrument.
Effects of indorsing an instrument originally payable to
bearer:
- It may further be negotiated by delivery
- The person indorsing is liable as indorser to
such persons as to make title through his
indorsement (Sec. 40)
Notes on Section 40
 Section 40 applies only to instruments originally
payable to bearer
 It cannot apply where the instrument is payable to
bearer because the only or last indorsement is in
blank
A holder may strike out any indorsement which is not
necessary to his title. (Sec. 48)
Effects:
- An indorser whose indorsement is struck out is
discharged
- All indorsers subsequent to such indorser who has
been discharged are likewise relieved
Effects of a transfer without endorsement:
- The transferee acquires such title as the transferor
had
- The transferee acquires the right to have the
indorsement of the transferor
- Negotiation takes effect as of the time the
indorsement is actually made (Sec. 49)
WHO IS A HOLDER IN DUE COURSE?
Every holder is deemed prima facie to be a
holder in due course; but when it is shown that the title of
any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as
holder in due course. But the last-mentioned rule does
not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
(Sec. 59)
RIGHTS OF A HOLDER
- A holder may sue in his own name
- A holder may receive payment.
Effects: (Sec. 51 NIL)
- If in due course it discharges the instrument
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Prepared by: ATTY. RENATO S. RONDEZ
*Note: Holder in due Course (Secs. 52,57&59)
Personal and Real Defenses
( 2000 & 2009 BEQ)
Requisites for a Holder in Due Course (HDC):
a. Receives the instrument complete and regular
on its face
b. Became a holder before it was overdue and had
no notice that it had been previously dishonored
if such was the fact
c. Takes the instrument for value and in good faith
d. At time he took the instrument, no notice of
infirmity in instrument or defect in the title of
the person negotiating it (Sec. 52 NIL)
*Note: Under the "SHELTER PRINCIPLE," the holder-in-
due course, by negotiating the instrument, to a party not
a holder-in-due course, transfers all his rights as such
holder to the latter, who thus acquires the right to
enforce the instrument as if he was a holder-in-due
course. However, this principle presupposes that the
"sheltered" holder is not a party to any fraud or illegality
impairing the validity of the instrument. (2008 BEQ)
Notes on Section 52
 Every holder is presumed to be a HDC (Sec. 59)
 If one of the requisites are lacking, the holder is not a
HDC
 An instrument is considered complete and regular on
its face if a) the omission is immaterial b) the alteration
on the instrument was not apparent on its face
 An instrument is overdue after the date of maturity.
 On the date of maturity, the instrument is not overdue
and the holder is a HDC
 Acquisition of the transferee or indorsee must be in
good faith
 Good faith means lack of knowledge or notice of defect
or infirmity
A holder is not a HDC where an instrument payable on
demand is negotiated at an unreasonable length of time
after its issue (Sec. 53 NIL)
Rights of a Holder in Due Course:
- Holds the instrument free from any defect of title of
prior parties
- Free from defenses available to prior parties among
themselves (personal/ equitable defenses)
- May enforce payment of the instrument for the full
amount against all parties liable(Sec. 57 NIL)
Notes on Section 57
 Personal or equitable defenses are those which grow
out of the agreement or conduct of a particular person
in regard to the instrument which renders it
inequitable for him through legal title to enforce it. Can
be set up against holders not HDC
 Legal or real defenses are those which attach to the
instrument itself and can be set up against the whole
world, including a HDC.
 An instrument not in the hands of a HDC is subject to
the same defenses as if it were non-negotiable.
Exception:
- A holder, who derives his title through a HDC
and is not a party to any fraud or illegality
affecting the instrument, has all the rights of
such HDC in respect to all parties prior. (Sec. 58
NIL)
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 GREEN NOTES IN COMMERCIAL LAW
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Rights of a holder not a HDC circumstances amounting between public enemies

- May sue in his own name to fraud
- May receive payment and if it is in due course, Illegality of contract made
11. Mistake
the instrument is discharged by statue
- Holds the instrument subject to the same 12. Intoxication Forgery
defenses as if it were non-negotiable 13. Ultra vires acts of
- If he derives his title through a HDC and is not a corporations
party to any fraud or illegality thereto, has all 14. Want of authority of
the rights of such HDC the agent where he has
apparent authority
General rule: Every holder is deemed prima facie to be a 15. Illegality of contract
holder in due course. where form or
consideration is illegal
Exception: 16. Insanity where there is
- Where it is shown that the title of any person no notice of insanity
who has negotiated the instrument is defective,
the burden is on the holder to prove that he is a
HDC or that a person under whom he claims is a LIABILITIES OF PARTIES:
HDC (Sec. 59 NIL)
1. A maker is primarily liable:
DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER
Classes of Defenses: Effects of making the instrument, the maker:
1. Real or Absolute Defenses
a. Engages to pay according to tenor of instrument
- a real or absolute defense is a defense which
attaches to the instrument irrespective of the b. Admits existence of payee and his capacity to
parties and is predicated on the principle that indorse (Sec. 60 NIL)
the right sought to be enforced has never existed
Notes on Section 60
or has ceased to exist.
 A maker’s liability is primarily and unconditional
 One who has signed as such is presumed to have acted
- A real defense is available against ALL
with care and to have signed with full knowledge of its
HOLDERS, whether in due course or not.
contents, unless fraud is proved
 The payee’s interest is only to see to it that the note is
2. Personal or Equitable Defenses
paid according to its terms
- a personal or equitable is a defense growing
 When two or more makers sign jointly, each is
out of an agreement or conduct of a particular
individually liable for the full amount even if one did
person in regard to an instrument which
not receive the value given
renders it inequitable for him although owner of
 The maker is precluded from setting up the defense of:
it, to enforce it against the defendant.
a) The payee is fictional,
b) That the payee was insane, a minor or a
corporation acting ultra vires
Personal Defenses Real Defenses
1. Absence or failure of
Alteration 2. A drawer is secondarily liable
consideration
2. Want of delivery of Want of delivery of Effects of drawing the instrument, the drawer:
complete instrument incomplete instrument a. Admits the existence of the payee,
3. Insertion of wrong date b. The capacity of such payee to indorse
where payable at a fixed c. Engages that on due presentment, the
period after date and Duress amounting to instrument will be accepted or paid or both
issued undated; or at a forgery according to its tenor.
fixed period after sight and
acceptance is undated If the instrument is dishonored, and the necessary
4. Filling up the blanks proceedings on dishonor duly taken
contrary to authority given Fraud in factum or in esse a. The drawer will pay the amount thereof to the
or not within reasonable contractus holder
time b. Will pay to any subsequent indorser who may be
compelled to pay it. (Sec. 61 NIL)
5. Fraud in inducement Minority
6. Acquisition of the Notes on Section 61
instrument by force, duress Marriage in case of a wife  A drawer may insert an express stipulation to negative
or fear or limit his liability
7. Acquisition of the Insanity where the insane
instrument by unlawful person has a guardian
3. An acceptor is primarily liable
means appointed by the court
Ultra vires acts of a By accepting the instrument, an acceptor:
8. Acquisition of the corporation where its - Engages that he will pay according to the tenor
instrument for an illegal charter or by statue, it is of his acceptance
consideration prohibited from issuing - Admits the existence of the drawer, the
commercial paper genuineness of his signature and his capacity
9. Negotiation in breach of and authority to draw the instrument
Want of authority of agent - The existence of the payee and his then capacity
faith
indorse
10. Negotiation under Execution of instrument

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 GREEN NOTES IN COMMERCIAL LAW
4. IRREGULAR INDORSER - a person not otherwise a party to
an instrument places his signature in blank before
delivery is liable as an indorser in the following
manner:
a. If payable to order of a third person – liable to
the payee and to all subsequent parties
b. If payable to order of the maker or drawer –
liable to all parties subsequent to the maker or
drawer
c. If payable to bearer – liable to all parties
subsequent to the maker or drawer
d. If signs for an accommodation party – liable to
all parties subsequent to the payee (Sec. 64)
*Note: Irregular Indorser v. General Indorser (2005 BEQ)
Irregular Indorser, is not a party to the instrument but
he places his signature in blank before delivery. He is not
a party but he becomes one because of his signature in
the instrument. Because his signature he is considered an
indorser and he is liable to the parties in the instrument.
While, a General Indorser warrants that the instrument
is genuine, that he has a good title to it, that all prior
parties had capacity to contract; that the instrument at
the time of the indorsement is valid and subsisting; and
that on due presentment, the instrument will be accepted
or paid or both accepted and paid according to its tenor,
and that if it is dishonored, he will pay if the necessary
proceedings for dishonor are made.
5. Warranties where negotiating by delivery or qualified
endorsement:
a. The instrument is genuine and in all respect
what it purports to be
b. The indorser has good title to it
c. All prior parties had the capacity to contract
d. Indorser has no knowledge of any fact that
would impair the validity or the value of the
instrument.
Limitations of warranties:
- If by delivery – extends only to immediate
transferee
- Warranty of capacity to contract does not apply to
persons negotiating public or corporate
securities (Sec. 65 NIL)
Notes on Section 65
 A qualified indorser is one who indorses without
recourse or sans recourse
 Recourse - resort to a person secondarily liable after
default of person primarily liable
 A qualified indorser cannot raise the defense of a)
forgery b) defect of his title or that it is void c) the
incapacity of the maker, drawer or previous indorsers.
 A qualified Indorsement makes the indorser mere
assignor of title of instrument, relieves him of general
obligation to pay if instrument is dishonored, but he is
still liable for the warranties arising from instrument
only up to warranties of general indorser
 The warranty is to the capacity of prior parties at the
time the instrument was negotiated. Subsequent
incapacity does not breach the warranty.
 lack of knowledge of the indorser as to any fact that
would impair the validity or the value of the
instrument must be subsisting all throughout
 A person Negotiating by Delivery warrants same as
those of qualified indorser and extends to immediate
transferees only
Warranties of a general indorser:
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
a. The instrument is genuine and in all respect
what it purports to be
b. The he has good title to it
c. All prior parties had the capacity to contract
d. That the instrument at the time of his
indorsement was valid and subsisting (Sec. 66)
In addition:
- Engages that the instrument will be accepted or
paid or both according to its tenor on due
presentment
- Engages to pay the amount thereof if it be
dishonored and the necessary proceedings on
dishonor are taken
Notes on Section 66
 The indorser under Section 66 warrants the solvency
of a prior party
 The indorser warrants that the instrument is valid and
subsisting regardless of whether he is ignorant of that
fact or not.
 Warranties extend in favor of a) a HDC b) persons who
derive their title from HDC c) immediate transferees
even if not HDC
 The indorser does not warrant the genuineness of the
drawer’s signature
 General indorser is only secondarily liable
PRESENTMENT FOR PAYMENT
General rule: Presentment for payment is not necessary
to charge persons primarily liable on the
instrument. Presentment for payment is
necessary to charge the drawer and indorsers.
(Sec 70 NIL)
Presentment is necessary to charge persons
secondarily liable otherwise they are discharged
Notes on Section 70
 Presentation for payment – production of a BOE to the
drawee for his acceptance, or to a drawee or acceptor
for payment. Also presentment of a PN to the party
liable for payment of the same.
 Consists of a) a personal demand for payment at a
proper place b) the bill or note must be ready to be
exhibited if required and surrendered upon payment.
 Parties primarily liable – persons by the terms of the
instrument are absolutely required to pay the same.
E.g maker and acceptors. They can be sued directly.
 If payable at the special place, and the person liable is
willing to pay there at maturity, such willingness and
ability is equivalent to tender of payment.
 Acts needed to charge persons secondarily liable:
a) Presentment for payment/acceptance
b) Dishonor by non-payment/non-acceptance
c) Notice of dishonor to secondary parties
 Acts needed to charge persons secondarily liable in
other cases:
a) Protest for non-payment by the drawee
b) Protest for non-payment by the acceptor for
honor
Proper presentment:
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 GREEN NOTES IN COMMERCIAL LAW
a. By the holder or an authorized person
b. At a reasonable hour on a business day
c. At a proper place
d. To the person primarily liable or if absent to any
person found at the place where presentment is
made (sec. 72 NIL)
Presentment for payment is made to the maker, or
acceptor. Not to the person secondarily liable.
Notes on Section 72
 Only the holder or one authorized by him has the right
to make presentment for payment
 Presentment cannot be made on a Sunday or holiday
 If the instrument is payable on demand – a) if it is a
note – presentment must be made within reasonable
time after issue b) if it is a bill - presentment must be
made within reasonable time after last negotiation.
General rule: Presentment for payment is necessary to
charge persons secondarily liable otherwise
they are discharged:
Exception:
1. Presentment not required to charge the drawer:
a. He has no right to expect
b. He has no right to require that the drawee
or acceptor will pay (Sec 79)
2. Presentment not required to charge the indorser
where:
a. The instrument was made or accepted for
his accommodation
b. He has no reason to expect that the
instrument will be paid if presented (Sec.
80)
Notes on Section 79 and 80
 Only the drawer or indorser are not discharged. All
other parties secondarily liable are discharged.
Presentment for payment is dispensed with if:
a. After due diligence, presentment cannot be
made
b. Presentment is waived
c. The drawee is a fictitious person (Sec 82)
Notes on Section 82
 What is excused is the failure to make presentment.
There is no need to make any presentment versus
under section 81 (delay in presentment) presentment
for payment is still required after the cause of delay has
ceased.
Other instances where presentment for payment is
not required:
1. in order to charge the drawer, where he has no
right to expect or require that the drawee or
acceptor will pay the instrument;
2. in order to charge an indorser, where the
instrument was made or accepted for his
accommodation and he has no right to expect that
the instrument will be paid if presented; and
3. when a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder and presentment for
payment is necessary
Summary of rules as to presentment for payment:
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
a. Presentment not necessary to charge persons
primarily liable
b. Necessary to charge persons secondarily liable
except:
- The drawer under Sec. 79
- The indorser under Sec. 80
- When excused under Sec. 82
- When the instrument has been dishonored by
non-acceptance under Sec. 83
When instrument dishonored by non-payment
The instrument is dishonored by non-payment when:
a. it is duly presented for payment and payment
is refused or cannot be obtained; or
b. presentment is excused and the instrument is
overdue and unpaid.
Effects of dishonor by non-payment:
- An immediate right of recourse to all parties
secondarily liable accrues to the holder (Sec. 84)
- An “immediate right of recourse” means that the
holder, after the instrument is dishonored by non-
payment and notice of dishonor given to the
persons secondarily liable, may sue any of the
latter without suing first the persons primarily
liable.
Notes on Section 84
 Parties cease to be secondarily liable and become
principal debtors.
 Liability becomes the same as that of the original
obligors.
NOTICE OF DISHONOR
When a negotiable instrument has been
dishonored by non-acceptance non-payment, notice of
dishonor must be given to the drawer and to each
indorsers.
Any drawer or indorser to whom such notice is not given
is discharged.
Exceptions:
a. Waiver (Sec. 109)
b. Notice is dispensed (Sec. 112)
c. Not necessary to Drawer (Sec. 114)
d. Not necessary to Indorser (Sec. 115)
- If notice is delayed, delay may be excused (Sec. 113)
Notice of Dishonor may be given:
a. By or on behalf or the holder
b. By or on behalf of any party who:
- Is a party to the instrument and might be
compelled to pay the instrument.
- To a holder who having taken it up would have a
right of reimbursement from the party to whom
notice is given. (Sec. 90)
Notes on Section 111
 Where notice is waived, presentment is not waived
 Where presentment is waived, notice is also waived
 Where protest is waived, notice and presentment is
waived
Effects of notice:
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 GREEN NOTES IN COMMERCIAL LAW
a. Where notice is given by or on behalf of the
holder, it inures for the benefit of all subsequent holders
and all prior parties who have a right of recourse against
the party to whom it is given.
b. Where notice is given by or on behalf of a
party entitled to give notice, it inures for the benefit of
the holder and all parties subsequent to the party to
whom it is given.
Forms of notice:
a. May be written or oral
b. Written notice need not be signed or may be
supplemented by verbal communication
c. May be by personal delivery or by mail
Notice may be waived either expressly or implied:
a. Before the time of giving notice has arrived
b. After the omission to give due notice
Dispensation with Notice:
Notice of dishonor is dispensed with when, after
the exercise of reasonable diligence, it cannot be given to
or does not reach the parties sought to be charged.
Effects of failure to give notice:
An omission to give notice of dishonor by non-
acceptance does not preclude the rights of a holder in due
course subsequent to the omission.
Instances when Notice Not Required to Indorser
a. Drawee was a fictitious/incapacitated person
and the indorser was aware of such at the time
of indorsement
b. Indorser is the person to whom instrument was
presented for payment
c. Instrument made/accepted for his
accommodation
Discharge of the Instrument
A negotiable instrument is discharged:
a. By payment in due course by or on behalf of the
principal debtor;
b. Payment by in due course by party
accommodated, where the instrument is made
or accepted for accommodation;
c. Intentional cancellation by holder of
instrument;
d. Any other act discharging 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.
NOTES ON SECTION 119
 Discharge of the instrument discharges all the parties
thereto
 Payment must be in due course, and by the principal
debtor or on his behalf
 If payment is not made by the principal debtor,
payment only cancels the liability of the payor and
those obligated after him but does not discharge the
instrument.
 Payment by an accommodation party does not
discharge the instrument.
Discharge of Secondary Parties:
a. Any act discharging the instrument
b. Cancellation of indorser’s signature by indorsers
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
c. Discharge of prior party
d. Tender of payment by prior party
e. Release of principal debtor
f. Extension of payment by the holder/postponement
of right to enforce without assent of secondary
parties and without reservation of right of recourse
against secondary parties (Sec 120 NIL)
RIGHT OF PARTY WHO DISCHARGES INSTRUMENT
(Sec. 121)
A party secondarily liable who pays the
instrument does not discharge it , but instead acquires
certain rights ;
1.Collect from prior parties ; or
2. Negotiate the instrument to new parties- but not to
subsequent parties.
However , Under the exceptions provided in Sec.121, the
instrument is considered discharged when ;
1.The BOE is payable to the order of a third person and
paid by the drawer himself, or
2. Where it was made or accepted for accommodation ,
and has been paid by the party accommodated.
RENUNCIATION BY HOLDER. (Sec 122)
Renunciation- The act of giving up or abandoning a right
without transferring the right to another.
As a Rule ,the holder may expressly renounce his rights
against any party to the instrument before , or after its
maturity. An absolute and unconditional renunciation of
his rights against the principal debtor at or after maturity
of the instrument discharges the instrument.
However , A renunciation does not affect the rights of a
holder in due course without notice of the renunciation.
Notes on Section 122
 if renounced in favor of a party secondarily liable, only
he is exonerated from liability and all parties
subsequent to him
 discharge by novation is allowed
MATERIAL ALTERATION
General rule: When materially altered, without the
consent of all parties liable, the instrument is
avoided except as against:
a. The party who has made the alteration
b. The party who authorized or assented to the
alteration.
c. Subsequent indorsers
Exception:
- If in the hands of a HDC, may be enforced
according to its original tenor
MATERIAL ALTERATION
- Any change in the instrument which affects or
changes the liability of the parties in any way.
 There is no distinction between fraudulent and
innocent alteration
The EFFECTS of material alteration:
1. Alteration by a PARTY
Material alteration by the holder discharged the
instrument and all prior parties thereto who did not give
their consent to such alteration.
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 GREEN NOTES IN COMMERCIAL LAW
Whether the alteration made is favorable or unfavorable
to the party making the alteration, no distinction as to the
effect is made. The intent of the law is to preserve the
integrity of the negotiable instrument.
2. Alteration by a STRANGER ( SPOLIATION )
If subsequently negotiated to a non-Holder in Due
Course—A material alteration avoids the instrument as
against any prior party who has not assented to the
alteration.
If subsequently negotiated to a Holder in Due Course—
He may enforce payment thereof according to its original
tenor regardless of whether the alteration was innocent
or fraudulent.
CHANGES that constitute MATERIAL ALTERATIONS
1. The date;
2. The sum payable, either for principal or interest;
3. The time or place of payment;
4. The number or the relations of the parties;
5. The medium or currency in which payment is to be
made;
6. Or which adds a place of payment where no place of
payment is specified; or
7. Any other change or addition which alters the effect of
the instrument in any respect. (Sec. 125)
 A serial number is an item which is not an
essential requisite for negotiability under
Sec. 1 of NIL, and which does not affect the
right of the parties, hence its alteration is
not material. (PNB v. CA, 256 SCRA 491)
(199 BEQ)
Instances where a BOE may be treated as a PN:
a. Where the drawer and the drawee are one and
the same
b. Where the drawee is a fictitious person
c. Where the drawee has no capacity to contract
(Sec. 130)
The holder has the option to treat it as a BOE or a PN
ACCEPTANCE
The signification by the drawee of his assent to the order
of the drawer. It is an act by which a person on whom the
Bill of Exchange is drawn assents to the request of the
drawer to pay it.
As a general rule, acceptance, in order to be valid must
be:
1. Written;
2. Signed by the drawee; and
3. Must contain an express or implied to pay in
money.
A holder of a bill has the right:
a. Require that acceptance be written on the bill and
if refused, treat it as if dishonored (Sec. 133)
b. Refuse to accept a qualified acceptance and may
treat it as dishonored
Acceptance may be:
a. Actual
b. Constructive
c. General (Sec. 140)
d. Qualified (Sec. 141)
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Kind of acceptance:
A. Constructive Acceptance:
a. Where the drawee to whom the bill has been
delivered destroys it
b. The drawee refuses within 24 hrs after such
delivery or within such time as is given, to
return the bill accepted or not
Notes on Section 137
 Drawee becomes primarily liable as an acceptor.
 Mere retention is equivalent to acceptance
B. General Acceptance:
An acceptance to pay at a particular place is a
general acceptance unless it is expressly states that the
bill is to be paid there only and not elsewhere.
C. Qualified Acceptance – if in express terms varies the
effect of the bill as drawn.
Kinds of Qualified Acceptance:
a. Conditional – one which makes
payment by the acceptor dependent on
the fulfillment of a condition therein
stated;
b. Partial – an acceptance to pay part only
of the amount for which the bill is
drawn;
c. Local – an acceptance to pay only at a
particular place;
d. Qualified as to time
e. The acceptance of some or more
drawees but NOT ALL.
- The holder of the bill has the right to
require GENERAL ACCEPTANCE – thus
he may REFUSE to take qualified
acceptance and if he DOES NOT obtain
an unqualified acceptance – he may
treat the bill as DISHONORED BY NON-
ACCEPTANCE – accordingly the holder
must give notice of dishonor.
- Effect of taking qualified acceptance:
- Where a qualified acceptance is taken –
THE DRAWER and INDORSERS are
discharged from liability on the bill
unless they have expressly or impliedly
authorized the holder to take qualified
acceptance or subsequently assents
thereto.
* When the drawer or indorser receives
notice of qualified acceptance – he must –
within a REASONABLE TIME – express his
dissent to the holder or he will be deemed
to have assented thereto.
Time for acceptance:
The drawee is allowed twenty-four hours after
presentment in which to decide whether or not he will
accept the bill; the acceptance, if given, dates as of the day
of presentation.
Rules governing acceptance:
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 GREEN NOTES IN COMMERCIAL LAW
When an acceptance is written on a paper other
than a bill itself, it does not bind the acceptor except in
favor of a person to whom it is shown and who, on the
faith thereof, receive the bill for value.
An unconditional promise in writing to
accept a bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon the faith
thereof, receives the bill for value.
Where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-
four hours after such delivery, or within such other
period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be
deemed to have accepted the same.
A bill may be accepted before it has been signed
by the drawer, or while otherwise incomplete, or when it
is overdue, or after is has been dishonored by a previous
refusal to accept, or by non-payment. But when a bill
payable after sight is dishonored by non-acceptance and
the drawee subsequently accepts it, the holder, in the
absence of any different agreement, is entitled to have the
bill accepted as of the date of the first presentment.
PRESENTMENT FOR ACCEPTANCE
When presentment for acceptance is necessary:
a. If necessary to fix the maturity of the bill
b. If it is expressly stipulated that it shall be
presented for acceptance
c. If the bill is drawn payable elsewhere than the
residence or place of business of the drawee
(Sec. 143 NIL)
Notes on Section 143
 PRESENTMENT is the production of a bill of exchange
to the drawee for his acceptance.
 PRESENTMENT
 For Acceptance (Sec. 143)
 For Payment ( Sec. 70)
( 2000 & 2003 BEQ)
PURPOSE: To get acceptance of the drawer for purpose
of making him primarily liable as an acceptor.
Presentment is also prerequisite to the accrual of
secondary liability against the drawer and the
indorsers.
On what days presentment must be made:
A bill may be presented for acceptance on any day on
which negotiable instruments may be presented for
payment. When Saturday is not otherwise a holiday,
presentment for acceptance may be made before twelve
o’clock noon, on that day.
Presentment for acceptance must be made:
1. Where the bill is payable after sight; or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument.
2. Where the bill expressly stipulates that it shall be
presented for acceptance.
3. Where the bill is drawn payable elsewhere than
the residence or place of business of the drawee.
BAR OPERATIONS 2011
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Presentment, How made:
Presentment for acceptance must be made by or on
behalf of the holder at a reasonable hour, on a business
day and before the bill is overdue, to the drawee or some
person authorized to accept or refuse acceptance on his
behalf; and
(a.) Where a bill is addressed to two or more drawees
who are not partners, presentment must be made to
them all, unless one has authority to accept or refuse
acceptance for all, in which case presentment may be
made to him alone;
(b.) Where the drawee has been dead, presentment
may be made to his personal representatives;
(c.) Where the drawee has been adjudged a bankrupt
or an insolvent, or has made an instrument for the benefit
of creditors, presentment may be made to him or to his
trustee or assignee.
WHERE PRESENTMENT IS EXCUSED. (Sec. 148.)
Presentment for acceptance is excused , and a bill may
be treated as dishonored by non acceptance , in either of
the following cases:
1. Where the drawee is dead , or has absconded , or is a
fictitious person or a person not having capacity to
contract.
2. Where, after the exercise of reasonable diligence ,
presentment cannot be made.
3. Where, although presentment has been irregular ,
acceptance has been refused on some other ground.
When bill is dishonored by non-acceptance
A bill is dishonored by non-acceptance:
a. When it is duly presented for acceptance and such an
acceptance as is refused or cannot be obtained;
b. When presentment for acceptance is excused, and the
bill is not accepted.
Duty of the holder where bill is not accepted.
Where a bill is duly presented for acceptance and is
not accepted within the prescribed time, the person
presenting it must treat the bill as dishonored by non-
acceptance or he loses the right of recourse against the
drawer and indorsers.
HOW? By giving NOTICE OF DISHONOR or by making a
PROTEST when required.
Rights of holder where bill is NOT accepted:
An immediate right of recourse against the drawer
and indorsers accrues to the holder and NO
PRESENTMENT for payment is necessary.
PROMISSORY NOTES AND CHECKS
Promissory Note – is an unconditional promise in
writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to
order or bearer.
NOTE: Where a note is drawn to the maker’s own order,
it is NOT complete until indorsed by him.
Special types of promissory notes:
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 GREEN NOTES IN COMMERCIAL LAW
1. Certificate of deposit
- is a written acknowledgment by a bank
of the receipt of money on deposit
which the bank promises to pay to the
depositor, bearer, or to some other
person or order.
- It is NOT ipso facto negotiable – it must
first comply with the requirements
provided under Section 1, NIL.
2. Bonds
- A promise, under seal, to pay money.
- The bond certifies that the issuing company is
indebted to the bondholder for the amount
specified on the face of the bond, and contains
an agreement of the company to pay the sum at
a specified time in the future, and meanwhile to
pay a specified interest on the principal amount
at regular intervals, generally six months apart.
They are negotiable if it the requisites in Section
1, NIL are complied with.
Classes of Bonds:
1. Mortgage bonds;
2. Equipment Bonds;
3. Collateral trust bonds;
4. Guaranteed bonds;
5. Debentures; and
6. Income bonds;
7. Convertible bonds;
8. Redeemable Bonds;
9. Registered Bonds; and
- Coupon Bonds – those which are attached
a sheet of dated, numbered and similarly
printed coupons which the bondholder may
cut off when due or thereafter. Such
coupons may be served and deposited in a
bank, negotiated before the maturity of the
interest they represent, and transferred just
like any commercial paper. They are
negotiable if it the requisites in Section 1,
NIL are complied with.
10. Bank Notes
- Are promissory notes of the issuing bank
payable to bearer on demand and intended
to circulate as money. They are regarded as
cash and pass from hand to hand without
any evidence of titled in the holder than that
which arises form possession. However,
they are not money.
11. Due Bills
- is an instrument whereby one person
acknowledges his indebtedness to another.
CHECKS - a bill of exchange drawn on a bank payable on
demand. (Sec. 185)
CONCEPTS:
Certification of Checks- An agreement whereby
the bank against whom a check is drawn, undertakes to
pay at any future time when presented for payment.
EFFECTS:
a. Equivalent to acceptance (Sec 187) and is
the operative act that makes the bank liable.
b. Assignment of the funds of the drawer in
the hands of the drawee (Sec 189)
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c. If obtained by the holder, discharges the
persons secondarily liable thereon ( Sec
188)
A check must be presented for payment within
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay. (Sec. 186)
Reasonable Time: (Sec. 193)
a. Nature of the instrument’
b. Usage of business or trade
c. The facts of the particular case
CROSSED CHECK: (2004 & 2005 BEQ)
- A check which in addition to the usual contents of an
ordinary check contains also the name of a certain banker
or business entity through whom it must be presented for
payment.
- A Crossed Check under accepted banking practice,
crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The
crossing is special where the name of the bank or a
business institution is written between the two parallel
lines, which mean that the drawee should pay only with
the intervention of that company.
EFFECTS:
a. That the check may not be encashed; it may only
be deposited with the bank;
b. That the check may be negotiated only once to a
person who has an account with the bank; and
c. That it serves as a warning to the holder that the
check has been issued for a definite purpose.
(Bataan Cigar v. CA 280 SCRA 643)
*Note: Crossed Checks vs. Cancelled Checks (2004 BEQ)
A crossed check is one with two parallel lines drawn
diagonally across its face or across a corner thereof. On
the other hand, a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on behalf of a
drawee bank to indicate payment thereof.
*State Investment House v IAC (GR 72764 13Jul1989), the
SC considered a crossed check as subjecting a subsequent
holder thereof to the contractual covenants of the payor
and the payee.
2 KINDS:
1. CROSSSED SPECIALLY- The same name of a
particular bank or company is written or
appears between thev. Tan parallel lines in
which case the drawee-bank must pay the check
only upon presentment by such bank or
company (Chan Wan v. tan Kim 109 Phil 706) on
penalty of being made to pay agin by the rightful
owner should the first payment prove to have
been erroneous.
2. CROSSED GENERALLY- only the words “and
Co.” are written between the parallel lines or
when none at all is written at all between said
lines.
* This Court has taken judicial cognizance of the practice
that a check with 2 parallel lines in the upper left hand
corner means that it could only be deposited and not
converted into cash.
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 GREEN NOTES IN COMMERCIAL LAW
IRON CLAD RULE – prohibits the countermanding of
payment of certified checks. (Rep. v. PNB, Dec. 1,
1961)
*Note: The holder must be a holder in due course
before the stop payment order may not be successfully
invoked against him. (Mesina v. IAC, 146 SCRA 497,
505)
TYPES OF CHECKS (Cesar Villanueva, Commercial
Law Review, 2004 ed.)
a. Cashier’s Check- One drawn by the cashier of
a bank, in the name of the bank against the
bank itself payable to a third person. It is a
primary obligation of the issuing bank and
accepted in advance upon issuance. (Tan v. CA
239 SCRA 310)
b. Manager’s Check- A check drawn by the
manager of a bank in the name of the bank
itself payable to a third person. It is similar to
the cashier’s check as to the effect and use.
c. Memorandum Check- A check given by a
borrower to a lender for the amount of a short
loan, with the understanding that it is not to
be presented at the bank, but will be
redeemed by the maker himself when the loan
falls due and which understanding is
evidenced by writing the word
“memorandum”, “memo” or “mem” on the
check.
d. Certified Check- An agreement whereby the
bank against whom a check is drawn
undertakes to pay it at any future time when
presented for payment. (Sec. 187)
e. Traveler’s Check- It is one upon the holder’s
signature must appear twice; one to be affixed
by him at the time it is issued and the second,
for counter-signature, to be affixed by him in
the presence of the payee before it is paid,
otherwise it is incomplete.
CORPORATION LAW
(Batas Pambansa Bilang 68)
A. CORPORATION, DEFINED
An artificial being created by operation of law having
the right of succession, and the powers, attributes and
properties expressly authorized by law and incident to
its existence. (Sec. 2). It has a separate and distinct
personality from its incorporators. (2000 Bar
Examination)
Attributes of a Corporation
1. It is an artificial being.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and properties
expressly authorized by law or incident to its
existence.
Theories on Formation of a Corporation:
1. Concession Theory – a corporation is an artificial
creature without any existence until it has received
the imprimatur of the state acting according to law,
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Prepared by: ATTY. RENATO S. RONDEZ
through the SEC. (Tayag vs. Benguet Consolidated, Inc.,
26 SCRA 242)
2. Theory of corporate enterprise or economic unit –
the corporation is not merely an artificial being, but
more of an aggregation of persons doing business, or
an underlying business unit. (Philippine Corporate
Law, Cesar Villanueva, 2001 ed.)
B. CLASSIFICATION:
1. AS TO ORGANIZERS
a. public – by State only; and
b. private – by private persons alone or with
the State.
2. AS TO FUNCTIONS
a. public – government of a portion of the
territory; and
b. private – usually for profit-making
3. AS TO GOVERNING LAW
a. public – Special Laws; and
b. private – Law on Private Corporations
4. AS TO LEGAL STATUS
a. De jure corporation – organized in accordance
with the requirements of law.
b. De facto corporation – organized with a
colorable compliance with the requirements
of a valid law. Its existence cannot be
inquired collaterally. Such inquiry may be
made by the Solicitor General in a quo
warranto proceeding. (Sec. 20)
Requisites:
1. The existence of a valid law under which
it may be incorporated;
2. A bona fide attempt in good faith to
incorporate under such law;
3. Actual use or exercise in good faith of
corporate powers; and
4. Issuance of a certificate of incorporation
by the SEC as a minimum requirement of
continued good faith.
The only difference between a de facto
corporation and a de jure corporation is that a
de jure corporation can successfully resist a suit
by a state brought to challenge its existence; a
de facto corporation cannot sustain its right to
exist.
c. Corporation by estoppel – group of persons
that assumes to act as a corporation knowing
it to be without authority to do so, and enters
into a transaction with a third person on the
strength of such appearance. It cannot be
permitted to deny its existence in an action
under said transaction. (Sec. 21) It is neither
de jure nor de facto.
d. Corporation by prescription – one which
has exercised corporate powers for an
indefinite period without interference on the
part of the sovereign power, e.g. Roman
Catholic Church.
5. AS TO EXISTENCE OF SHARES OF STOCK
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 GREEN NOTES IN COMMERCIAL LAW
a. Stock corporation – a corporation (1) whose
capital stock is divided into shares and (2)
which is authorized to distribute to
shareholders’ dividends or allotments of the
surplus profits on the basis of the shares held.
(Sec. 3)
b. Non-stock corporation – does not issue stocks
nor distribute dividends to their members.
6. AS TO RELATIONSHIP OF CONTROL AND
MANAGEMENT
a. Holding Corporation - it is one which controls
another as a subsidiary by the power to elect
management. It is one that holds stocks in
other companies for purposes of control
rather than for mere investment.
b. Subsidiary Corporation - one which is so
related to another corporation that the
majority of its directors can be elected
directly or indirectly by such other
corporation. (The Corporation Code of the
Philippines Annotated, Hector de Leon, 2002
ed.)
c. Affiliates - company which is subject to common
control of a mother holding company and
operated as part of the system.
d. Parent and Subsidiary Corporation - separate
entities with power to contract with each
other. The board of directors of the parent
company determines its representatives to
attend and vote in the stockholder’s meeting
of its subsidiary. The stockholders of the
parent company demand representation in
the board meetings of its subsidiary.
7. AS TO PLACE OF INCORPORATION
a. Domestic corporation- a corporation formed,
organized, or existing under Philippine laws.
b. Foreign corporation – a corporation formed,
organized, or existing under any laws other
than those of the Philippines. (Sec. 123)
C. NATIONALITY OF CORPORATION
Test to Determine Nationality of Corporations
1. INCORPORATION TEST – determined by the
state of incorporation, regardless of the
nationality of the stockholders.
2. DOMICILE TEST – determined by the state
where it is domiciled. The domicile of a
corporation is the place fixed by the law
creating or recognizing it; in the absence
thereof, it shall be understood to be the place
where its legal representation is established
or where it exercise its principal functions.
(Art. 51, NCC)
3. CONTROL TEST – determined by the
nationality of the controlling stockholders or
members. This test is applied in times of war.
Also known as the WARTIME TEST.
D. CORPORATE JURIDICAL PERSONALITY
I. Doctrine of Separate Personality
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A corporation has a juridical personality separate
and distinct from that of its stockholders or
members.
Used for purposes of convenience and to subserve
the ends of justice.
Consequences/significance:
1. Liability for acts or contracts – obligations
incurred by a corporation, acting through its
authorized agents are its sole liabilities.
(Creese vs. CA, 93 SCRA 483)
2. Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons. (Art. 46, Civil
Code)
3. Right to acquire and possess property –
property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members. (Art.
44(3), Civil Code)
4. Acquisition of court of jurisdiction – service of
summons may be made on the president,
general manager, corporate secretary,
treasurer or in-house counsel. (Sec. 11, Rule
14, Rules of Court).
5. Changes in individual membership – remains
unchanged and unaffected in its identity by
changes in its individual membership. (The
Corporation Code of the Philippines Annotated,
Hector de Leon, 2002 ed.)
6. Entitlement to constitutional guaranties:
a. Due process (Albert vs. University
Publishing, 13 SCRA 84)
b. Equal protection of the law (Smith, Bell &
Co. vs. Natividad, 40 Phil. 136)
c. Protection against unreasonable searches
and seizures. (Stonehill vs. Diokno, 20
SCRA 383)
A corporation is not entitled to invoke the
right against self-incrimination. (Bataan
Shipyard vs. PCGG)
7. Liability for torts – a corporation is liable
whenever a tortuous act is committed by an
officer or agent under the express direction or
authority of the stockholders or members
acting as a body, or, generally, from the
directors as the governing body. (PNB vs. CA,
83 SCRA 237)
8. A corporation is not entitled to moral
damages because it has no feelings, no
emotions, no senses. (ABS-CBN vs. Court of
Appeals)
9. Liability for Crimes – since a corporation is a
mere legal fiction, it cannot be held liable for a
crime committed by its officers, since it does
not have the essential element of malice; in
such case the responsible officers would be
criminally liable. (People vs. Tan Boon Kong,
54 Phil.607)
II. Doctrine of Piercing the Corporate Veil
1. Doctrine of Piercing the Corporate Veil (2006
Bar Examination)
Under the doctrine of “piercing the veil of
corporate entity”, the legal fiction that a
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 GREEN NOTES IN COMMERCIAL LAW
corporation is an entity with a juridical
personality separate and distinct from its
members or stockholders may be disregarded
and the corporation will be considered as a
mere associations of persons, such that liability
will attach directly to the officers and the
stockholders (Umali vs. Court of Appeals, 189
SCRA 529, 542 [1990]). It is an equitable
doctrine developed to address situations
where the separate corporate personality of a
corporation is abused or used for wrongful
purposes.
Grounds for Application of the Doctrine
(2006 Bar Examination)
The doctrine of “piercing the veil of corporate
entity” will apply when the corporation’s
separate juridical personality is used:
1. to defeat public convenience;
2. to justify wrong, protect fraud, or defend
crime;
3. as a shield to confuse the legitimate issue;
4. where the corporation is the mere alter
ego or business conduit of a person; or
5. 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 (Umali vs. Court of Appeals,
189 SCRA 529, 542 [1990]).
Test in Determining Whether to Pierce the Veil
of Corporate Personality
1. Control, not mere majority or complete stock
control, but complete domination, not only of
the finances, but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal
right;
3. The aforesaid control and breach of duty must
proximately prevent “piercing the corporate
veil”;
4. The wrong – doing must be clearly and
convincingly established. It cannot be
presumed. (Lim vs. Court of Appeals, et al.,
G.R. No. 124715, January 24, 2000
E. CAPITAL STRUCTURE
1. Number and qualifications of incorporators
i. Number of Incorporators (2006 Bar
Examination)
Incorporators are required to be not less
than five (5) but not more than fifteen (15).
ii. Residency requirement (2006 Bar
Examination)
Majority of the incorporators are required
to be residents of the Philippines.
iii. Qualifications
All incorporators:
a. must be natural persons
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
b. must be of legal age
2. Minimum Capital Stock and subscription
requirement
i. Subscription requirement
All incorporators must subscribe to at
least one (1) share of stock of the
corporation being organized.
ii. Capital Stock, minimum subscription
The law requires that the total capital
stock to be subscribed at the time of
incorporation should at least be twenty
five percent (25%) of the authorized
capital stock of the corporation being
organized.
3. Corporate Term
Fifty (50) years from the date of
incorporation unless sooner dissolved or
unless said period is extended (Sec. 11).
4. Classification of Shares
i. COMMON SHARES are the basic class of
stock ordinarily and usually issued
without extraordinary rights and
privileges. The owners thereof are entitle
to a pro rata share in the profits of the
corporation and in its assets upon
dissolution and, likewise, in the
management of its affairs without
preference or advantage whatsoever.
ii. PREFERRED SHARES are those issued
with par value, and preferences either
with respect to:
a. assets after dissolution (PREFERRED
SHARES AS TO ASSETS)
b. distribution of dividends (PREFERRED
SHARES AS TO DIVIDENDS)
c. or both, and other preferences.
Kinds of Preferred Shares as to Dividends
1. Cumulative preferred shares – a share
which entitles the holder thereof not only
the payment of current dividends but also
of dividends in arrears.
2. Non – cumulative preferred shares – a share
which allows the holder thereof to the
payment of current dividends only without
regards to dividends in arrears.
3. Participating preferred shares – a share
which gives the holder the right to
participate with the holders of the common
share in the remaining profits pro rata,
aside from the right to receive the
stipulated dividends at a preferred rate.
4. Non – participating preferred shares – a
share which allows the holder to receive the
stipulated dividends at a preferred rate
only. The holder shall not share in the
dividends distributed to common shares.
REDEEMABLE SHARES are those which permit the
issuing corporation to redeem or purchase its own
shares.
 Limitations:
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 GREEN NOTES IN COMMERCIAL LAW
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i. Redeemable shares may be issued c. Purchase of treasury shares from the

only when expressly provided for in corporation
the articles of incorporation;
ii. Terms and conditions affecting said PURCHASE OF
SUBSCRIPTION
shares must be stated both in the SHARES
articles of incorporation and in the Refers to unissued Refers to issued
certificates of stock representing such shares shares
shares; Corporation still to be The corporation is
iii. Redeemable shares may be deprived form or already in already in existence
of voting rights in the articles of existence
incorporation, unless otherwise The subscriber can The purchaser can
provided in the Code. exercise all his right as a only exercise his
iv. Redeemable shares may be stockholder even before right upon full
redeemed, regardless of the existence full payment of the payment of the
of unrestricted retained earnings subscription purchase price
(Sec. 8), and provided further that the Corporate creditors may Corporate creditor
corporation has, after such proceed against the cannot proceed
redemption, sufficient assets in its subscriber for his unpaid against the
books to absorb corporate debts and subscription in case the purchaser for the
liabilities. corporate asset are not balance of the
sufficient to satisfy their purchase price
TREASURY SHARES are shares that have been claims because of the lack
earlier issued as fully paid and have thereafter of privity of contract
been acquired by the corporation by purchase, between them
donation, redemption or through some lawful Subscriber may not be The corporation can
means (Sec. 9). When treasury shares are sold legally released from the rescind or cancel
below its par or issued value, there can be no payment of his unpaid the contract in case
watering of stock because watering of stock subscription unless no of non – fulfillment
contemplates an original issuance of shares. creditors would be by the buyer.
PAR VALUE SHARES are shares with a value prejudiced and all the
fixed in the certificates of stock and the articles stockholders agree
of incorporation. thereto
Subscription may be in Purchase of shares
NO PAR VALUE SHARES are shares having no any form, not covered by is covered by the
par value but have an issued value stated in the the statute of frauds. statute of frauds in
certificate or articles of incorporation. case of purchases
 Limitations: amounting to more
i. No par value shares can have an issue than Php 500.00
price of less than Php 5.00;
ii. The entire consideration for its Consequently, the subscribers are not real parties
issuance constitutes capital so that no in interest in a case for rescission of the
part of it should be distributed as subscription contract of another subscriber
dividends; because they are not parties thereto. (Ong Yung vs.
iii. They cannot be issued as preferred Tiu, April 06, 2003)
stocks;
iv. They cannot be issued by banks, trust Kinds of Subscription Contract
companies, insurance companies, a. Pre– incorporation subscription
public utilities and building and loan b. Post – incorporation Subscription
association; c. Conditional Subscription
v. The articles of incorporation must d. Absolute Subscription
state the fact that it issued no par e. Subscription with a special term
value shares as well as the number of
said shares; 3. Pre – incorporation Subscription Agreements
vi. Once issued, they are deemed fully One entered into before incorporation. Pre –
paid and non – assessable (Sec. 6). incorporation subscription constitutes a
binding contract among the subscribers.
NOTE: It shall be irrevocable for a period of at
F. INCORPORATION AND ORGANIZATION
least six (6) years from the date of
1. Promoter
subscription unless:
2. Subscription Contract
a. All of the other subscribers consent
Ways to become a Stockholder of a
to the revocation, or
Corporation:
b. The incorporation fails to materialize
a. Subscription contract with the
It shall likewise be irrevocable after the
corporation;
submission of the articles of
b. Purchase or acquisition of shares
incorporation to the SEC.
from existing stockholders; and
UNDERWRITING AGREEMENT between a
corporation and a third person, termed the

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 GREEN NOTES IN COMMERCIAL LAW
“underwriter” is an agreement by which the
latter agrees, for a certain compensation, to
purchase a stipulated amount of stocks or
bonds, specified in the underwriting
agreement, if such securities are not
purchased by those to whom they are first
offered.
4. Consideration of Stocks
 Valid considerations in subscription
agreement:
a. Cash actually received;
b. Property, tangible or intangible necessary
or convenient for its use and lawful
purpose;
c. Labor or services actually rendered to the
corporation;
d. Previously incurred corporate
indebtedness (Note: the indebtedness
involved must be one that is
acknowledged by the board);
e. Amounts transferred from unrestricted
retained earnings to stated capital;
f. Outstanding shares in exchange for stocks
in the event of reclassification or
conversion.
5. Articles of Incorporation
i. Definition: Basic document defining the
charter of the corporation
ii. Significance: Condition precedent in the
acquisition of corporate existence
iii. Contractual significance: A contract
between 3 parties: (1) the State and the
corporation, (2) the stockholders and the
State, and (3) the corporation and its
stockholders.
iv. Effects as to Outsiders: Bind a third person
dealing with the corporation
v. Requisites for Validity
a. Filed and registered with the SEC
b. Banks, public utilities, insurance
companies: needs favorable
recommendation from appropriate
agency that articles are in accordance
with law
c. SEC shall examine AOI upon filing and
upon satisfaction of all legal
requirements, issue certificate of
incorporation and only then shall
Corporation have a personality
separate and distinct from its
stockholders or members
d. Sworn Statement of the Treasurer
regarding subscription requirement
vi. Basic Content (Sec. 14)
a. The name of the corporation;
b. The specific purpose or purposes for
which the corporation is being
incorporated;
c. The place where the principal office
of the corporation is to be located,
which must be within the Philippines;
d. The term for which the corporation is
to exist;
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Prepared by: ATTY. RENATO S. RONDEZ
e. The number of directors or trustees,
which shall not be less than 5 nor
more than 15;
f. The names, nationalities and
residences of persons who shall act as
director or trustees until the first
regular directors or trustees are duly
elected and qualified in accordance
with the Code;
g. If it be a stock corporation, the
amount of its authorized capital stock
in lawful money of the Philippines,
the number of shares into which it is
divided, and in case the share are par
value shares, the par value of each,
the names, nationalities and
residences of the original subscribers,
and the amount subscribed and paid
by each on his subscription, and if
some or all of the shares are without
par value, such fact must be stated;
h. If it be a non – stock corporation, the
amount of its capital, the names,
nationalities and residences of the
contributors and the amount
contributed by each; and
i. Such other matters as are not
inconsistent with law and which the
incorporators may deem necessary
and convenient.
vii. Adoption and Form: File with the Securities and
Exchange Commission articles of incorporation
in any of the official languages duly signed and
acknowledged by all of the incorporators.
viii. Amendment
a. Majority vote of BOD / trustees and vote or
written assent of 2/3 outstanding capital
stock, without prejudice to the appraisal
right of dissenting stockholders.
b. Amendments take effect upon approval by
SEC or from the date of filing with SEC if
not acted upon within 6 months from date
of filing for a cause not attributable to the
corporation.
ix. Grounds for Rejection or Disapproval (Sec. 17)
a. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the from prescribed
herein;
b. That the purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral or contrary to
government rules and regulations;
c. That the Treasurer’s Affidavit concerning
the amount of capital stock subscribed
and / or paid is false;
d. That the percentage of ownership of the
capital stock to be owned by citizens of
the Philippines has not been complied
with as required by existing laws or the
Constitution.
6. Corporate Name
The name of the corporation must not be
identical or deceptively or confusingly similar
to any existing corporation.
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 GREEN NOTES IN COMMERCIAL LAW
7. Registration and issuance of Certificate of
Incorporation
8. Election of directors or trustees
9. Adoption of By – Laws
i. Definition: Meant to be an intramural
document to govern the relationship between
and among the members of a corporate family
ii. Effect as to Outsiders: Does not bind outsiders
iii. Requisites for Validity
a. By – law provisions cannot contravene
law
b. By – law provisions cannot contravene
the charter
c. By – laws must be reasonable and cannot
discriminate.
iv. Basic Content (Sec. 47)
a. The time, place and manner of calling and
conducting regular or special meetings of
the directors or trustees;
b. The time and manner of calling and
conducting regular or special meetings of
the stockholders or members;
c. The required quorum in meetings of
stockholders or members and the manner
of voting therein;
d. The form for proxies of stockholders and
members and the manner of voting them;
e. The qualifications, duties and
compensation of directors or trustees,
officers and employees;
f. The time for holding the annual election
of directors or trustees and the mode or
manner of giving notice thereof;
g. The manner of election or appointment
and the term of office of all officers other
than directors or trustees;
h. The penalties for violation of the by –
laws;
i. In the case of stock corporations, the
manner of issuing stock certificates; and
j. Such other matters as may be necessary
for the proper or convenient transaction
of its corporate business and affairs.
v. Amendment
a. Majority vote of BOD / Trustees and
majority vote of outstanding capital
stock / members at a regular or special
meeting duly called for the purpose of
amending or repealing any by – laws or
adopting new by – laws
b. By delegation of 2/3 outstanding
capital stock or members
G. CORPORATE POWERS
1. GENERAL POWERS, THEORY OF GENERAL
CAPACITY (Sec. 36)
a. To sue and be sued;
b. Of succession;
c. To adopt and use of corporate seal;
d. To amend its Articles of Incorporation;
e. To adopt its by-laws;
f. For stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
g. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds
h. To enter into merger or consolidation;
i. To make reasonable donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes, provided that no
donation is given to any (i) political party, (ii)
candidate and (iii) partisan political activity.
j. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees.
k. To exercise other powers essential or
necessary to carry out its purposes.
2. SPECIFIC POWERS, THEORY OF SEPECIFIC
CAPACITY (Sec. 37 – 44)
a. Power to extend or shorten corporate term
(2000 Bar Examination)
 Majority of BOD, 2/3 of capital stock
 Extension – Sec. 37: right of appraisal for
dissenting stockholders
 Shortening – Sec. 81 allows for right of
appraisal, but technically there shouldn’t be
because investors are also in it for the short
– term (there is no novation)
b. Increase or decrease corporate stock
 Majority of BOD, 2/3 of capital stock
 Needs SEC approval
i. Increase – there must be certification of
subscription to at least 25% of
increased stock, and at least 25% of
that amount paid up
ii. Decrease – won’t approve if it
prejudices corporate creditors.
 Since this is not an inherent power, there
must be strict compliance with
requirements in Sec. 38 and Amendment
provisions in Sec. 16
 NO right of appraisal
i. Increase – would defeat very purpose
of raising capital
ii. Decrease – there already is return of
part of investments
 ALSO, investing into a corporation comes
with expectations of possible increase /
decrease of shares
Ways of Increasing (Decreasing) Capital Stock
1. By increasing (decreasing) the no. of
shares authorized to be issued without
increasing (decreasing) the par value
thereof
2. By increasing (decreasing) the par value
of each share without increasing
(decreasing) the no. thereof
3. By increasing (decreasing) both the no. of
shares authorized to be issued and the
par value thereof (The Corporation Code
of the Phil. Annotated by Hector de Leon,
2006 ed)
Methods to Replenish Capital
1. Additional subscription to shares of stock
of the corporation by stockholders or by
investors;
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 GREEN NOTES IN COMMERCIAL LAW
2. Advances by the stockholders to the
corporation; or
3. Payment of unpaid subscription by the
stockholders.
c. Incur, create, or increase bonded indebtedness
CORPORATE BOND: an obligation to pay a
definite sum of money at a future time at a
fixed rate of interest
 SEC Opinion (1987): only covers
indebtedness of corporation secured by real
/ personal property
 Majority of BOD, 2/3 of capital stock
 Needs SEC approval
Corporation must have minimum net worth
of P 25M and must have been operating for
at least 3 years
 Unlike normal indebtedness, which does
not require 2/3 approval:
i. Usually very large amount
ii. Usually with first lien on important
assets
iii. Usually long period of time
 NO right of appraisal
i. Would drain financial resources
ii. Regardless, corporation’s creditors
always have priority over assets
d. Sell, dispose, lease, encumber all or
substantially all of corporate assets
 Majority of BOD, 2/3 capital stock
 Enterprise – level transaction: Although
there is no effect in relationship between
State and Corporation, it’s just as if there is
resetting to starting point of business life
 Compare:
i. Usual and regular course of business
(Business Judgment Doctrine)
ii. Proceeds of sale for conduct of
remaining business
 The test: It just has to be “ordinary” so the
sale of all business of a corporation in light
of using proceeds to set – up anew still
needs RATIFICATION
 When no ratificatory vote from the
stockholders / members needed:
i. If it is necessary in the usual and
regular course of business
ii. If the proceeds of the sale or other
disposition of such property and assets
be appropriated for the conduct of the
remaining business.
 There is right of appraisal because unlike
shortening of corporate life, where there is
automatic dissolution, here there is none –
so stockholders may be stuck in a non –
performing venture
e. Purchase or acquire own shares provided:
i. there is an unrestricted retained
earnings to purchase the same and its
capital is not thereby impaired; and
ii. it is for a legitimate and proper
corporate purpose.
Instances when Power may be Exercised
1. To eliminate fractional shares
2. To collect / compromise an indebtedness to
the corporation arising from unpaid
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
subscription, in a delinquency sale, and to
purchase the shares sold during said sale
3. To pay dissenting / withdrawing
stockholders entitled to payment for their
shares when exercising appraisal right
4. To decrease cost of doing business by
decreasing amount of dividends to be paid
in the future
5. Other similar situations since this is non -
exclusive
f. Invest corporate funds in another corporation
or business for other purpose other than
primary purpose
 May invest in corporation / business
organized for any purpose apart from the
primary purpose from which the investing
business was organized
 Majority of BOD + 2/3 vote of stockholders
 Sec. 42: When investment is reasonably
necessary to accomplish primary purpose:
approval of stockholders not necessary
i. Lies under business judgment doctrine
ii. THUS whatever the primary purpose of
a corporation, it has a choice of placing
funds in deposit accounts, money
market, treasury bills, or even stocks of
other corporations (fit into power,
discretion and purpose to obtain best
returns for the corporation)
 So in Sec. 42, investment requiring
ratificatory vote: when there is
management involved of the other
company and not just investment per se.
g. Power to declare dividends out of unrestricted
retained earnings
DIVIDENDS: corporate profits set aside,
declared and ordered to be paid by the
directors for distribution among shareholders
at a fixed time.
FORMS:
1. Cash
2. Property
3. Stock
REQUISITES:
1. Existence of unrestricted retained earnings
out of which the dividends may be
declared and paid (2005 Bar
Examination)
2. A corporate resolution of the board of
directors declaring the payment of a
portion or all such earnings to the
stockholders (The Corporation Code of the
Phil. Annotated by Hector de Leon, 2006
ed)
GENERAL RULE: Stock corporation cannot
retain surplus profits in excess of 100% of paid
– up capital stock except: (2001 Bar
Examination)
1. Justified by definite corporate
expansion projects / programs approved by
BOD
2. Loan agreement, where creditor has to
first consent before corporation can declare
dividends
3. Special circumstances
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 GREEN NOTES IN COMMERCIAL LAW
h. Enter into management contract with another
corporation (not with an individual or a
partnership-within general powers) whereby
one corporation undertakes to manage all or
substantially all of the business of the other
corporation for a period not longer than 5
years for any one term.
MANAGEMENT CONTRACT: is an agreement
whereby a corporation undertakes to manage
or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise (Sec. 44)
GENERAL RULE: There shall be no
management contract with another
corporation unless:
 Majority of BOD
 Stockholders owning majority shares in
BOTH managing and managed corporation
EXCEPT where 2/3 votes needed :if a
stockholder/s in both managing and
managed corporation owns more than 1/3
of outstanding voting capital stock of
managing corporation OR majority of BOD
in managing corporation is also majority of
BOD in managed corporation
 The management contract must not be
longer than 5 years
i. ULTRA VIRES ACTS are acts which are beyond
the conferred powers of a corporation or the
purposes or objects for which it is created as
defined by the law of its organization.
(Republic vs. Acoje Mining Co., Inc. 7 SCRAS
361)
An act done by a corporation outside of the
express and implied powers vested in it by its
charter and by the law. (Bar Review Materials
in Commercial Law, Jorge Miravite, 2002 ed.)
Types: (Philippine Corporate Law, Cesar Villanueva,
2001 ed.)
1. Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
2. Acts or contracts entered into in behalf of a
corporation by persons who have no
corporate authority (Note: This is technically
ultra vires acts of officers and not of the
corporation); and
3. Acts or contracts, which are per se illegal as
being contrary to law.
 An ultra vires act may be that of:
a. The corporation;
b. The Board of Directors; and
c. The corporate officers.
 Effects of ultra vires act on:
a. Executed contract – courts will not set aside or
interfere with such contracts;
b. Executory contracts – no enforcement even at
the suit of either party (void and unenforceable);
c. Part executed and part executory – principle of
“no unjust enrichment at expense of another” shall
apply; and
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Prepared by: ATTY. RENATO S. RONDEZ
d. Executory contracts apparently authorized but
ultra vires – the principle of estoppel shall apply.
ULTRA VIRES ACTS AND ILLEGAL ACTS
Ultra vires (“beyond powers”) refers only to an act
outside or beyond corporate powers, including those
that may ostensibly be within such powers but are, by
general or special laws, either prohibited or declared
illegal. It is in this context that the Code has used the
term.
ULTRA VIRES ACTS ILLEGAL ACTS
Not necessarily Unlawful; against law,
unlawful, but outside morals, public policy,
the powers of the and public order
corporation
Can be ratified Cannot be ratified
Can bind the parties if Cannot bind the parties
wholly or partly
executed
TEST whether or not a corporation may perform
an act: consider the logical and necessary relation
between the act questioned and the corporate purpose
expressed by law or in the charter. If the act is lawful
in itself and not prohibited, and is done for the
purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense.
(Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5
SCRA 36)
REMEDIES IN CASE OF ULTRA VIRES ACTS
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate
of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors
a. Nullification of contract in fraud of creditors
j. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION
The subscription in shares of stock is one, entire,
indivisible, and whole contract, which cannot be
divided into portions. (SEC Opinion)
k. DOCTRINE OF EQUALITY OF SHARES
Where the articles of incorporation do not provide for
any distinction of the shares of stock, all shares issued
by the corporation are presumed to be equal and enjoy
the same rights and privileges and are also subject to
the same liabilities. (Sec. 6)
l. TRUST FUND DOCTRINE (TFD)
The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy
their credits, and which the corporation may not
dissipate. The creditors may sue the stockholders
directly for the latter’s unpaid subscription.
 Application of the TFD:
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 GREEN NOTES IN COMMERCIAL LAW
1. Where the corporation has distributed its capital
among the stockholders without providing for
the payment of creditors;
2. Where it had released the subscribers to the
capital stock from their subscriptions;
3. Where it has transferred the corporate property
in fraud of its creditors; and
4. Where the corporation is insolvent.
 Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the
capital stock represented by the corporation’s legal
capital.
2. If the corporation is insolvent, the TFD extends to
the capital stock of the corporation as well as all of its
property and assets.
 Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a
deadlock and the SEC orders the payment of the
appraised value of the stockholder’s share. (Sec. 104)
H. STOCKHOLDERS AND MEMBERS
RIGHTS OF STOCKHOLDERS (Pandect of Commercial
Law and Jurisprudence, Justice Jose Vitug, 1997 ed.)
1. RIGHTS OF A STOCKHOLDER
a. Managerial Rights
b. Proprietary Rights
c. Pre – emptive Rights
d. Remedial Rights
e. Appraisal Rights
f. Inspection Rights
2. MANAGERIAL RIGHTS
a. Voting rights; and
b. Right to remove directors
LIMITATIONS on the stockholder’s RIGHT TO VOTE
a. Where the articles of incorporation provides for
classification of shares pursuant to Sec. 6, non –
voting shares are not entitled to vote except as
provided for in the last paragraph of Sec. 6;
b. Preferred or redeemable shares may be
deprived of the right to vote unless otherwise
provided in the Code;
c Fractional shares of stock cannot be voted;
d. Treasury shares have no voting rights as long
as they remain in the treasury;
e. Holders of stock declared delinquent by the
BOD for unpaid subscription are not entitled to
vote or to a representation at any stockholder’s
meeting; and
f. A transferee of stock cannot vote if his transfer
is not registered in the stock and transfer book
of the coporation.
3. PROPRIETARY RIGHTS
a. Right to dividends;
b. Right to issuance of stock certificate for fully
paid shares;
c. Proportionate participation in the distribution
of assets in liquidation;
d. Corporate Books and Records inspection
rights
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Limitations:
i. The right must be exercised during
reasonable hours on business days;
ii. The person demanding the right has not
improperly used nay information obtained
through any previous examination of the
books and records of the corporation; and
iii. The demand is made in good faith or for a
legitimate purpose. (Sec. 74)
The right extends, in consonance with equity, good
faith, and fair dealing, to a foreign subsidiary wholly-
owned by the corporation.
Books required to be kept by the corporation:
1. Book of Minutes
a. minutes of stockholder or members
meetings; and
b. minutes of board meetings.
2. Book of all business transactions;
3. Stock and transfer book, in case of stock
corporations.
Corporate records required by the SEC to be kept
and/or registered:
1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.
e. Appraisal right (2007 Bar Examination) is the
right of a stockholder who dissents from a
fundamental or extraordinary corporate action to
demand payment of the fair value of his shares.
The corporate acts involves fundamental changes
in the corporate structure namely:
1. An amendment to the articles of incorporation
that has the effect of –
2. Sale, encumbrance or other dispositions of all
or substantially all of the corporate property
or assets
3. Merger or consolidation
4. Investment of corporate funds in another
corporation or in a purpose other than the
primary purpose (Sec. 42)
GENERAL RULE: A dissenting stockholder who
demands payment of his shares is no longer allowed to
withdraw from his decision EXCEPT when:
1. The corporation consents to the withdrawal
2. The proposed corporate action is abandoned
or rescinded by the corporation
3. The proposed corporate action is
disapproved by the SEC where its approval is
necessary
4. The Commission determines that such
stockholder is not entitled to appraisal right.
f. Right to recover stocks unlawfully sold for
delinquent payment of subscription
g. Preemptive right is the shareholders’
preferential right to subscribe to all issues or
dispositions of shares of any class in proportion
to their present stockholdings.
Purpose: to enable the shareholder to retain his
proportionate control in the corporation and to
retain his equity in the surplus.
Extends to treasury shares in case of their reissuance.
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 GREEN NOTES IN COMMERCIAL LAW
If the shares preferentially offered to a stockholder are
not subscribed or purchased by him, it does not follow
that said shares shall again be re-offered on a pro rata
basis to stockholders who already exercised their
preemptive rights. There is no preemptive right with
respect to the share to be re-offered.
 In case additional issues of originally authorized
shares:
GENERAL RULE: There is no preemptive right. This is
on the theory that when a corporation at its inception
offers its first shares, it is presumed to have offered all
of those which it is authorized to issue.
EXCEPTION: When a corporation at its inception offers
only a specified portion of its authorized capital stock
for subscription. If subsequently, it offers the
remaining unsubscribed portion, there would be
preemptive right as to the remaining portion thus
offered for subscription.
 When pre-emptive right not available:
a. When denied by the article of incorporation
b. Shares requiring stock offering or minimum
stock ownership by the public
c. Shares to be issued in good faith with the
approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted debt
PRE-EMPTIVE RIGHT vis – a - vis RIGHT OF FIRST
REFUSAL (Philippine Corporate Law, Cesar Villanueva,
2001 ed.)
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL
May be exercised even Arises only by virtue of
when there is no contractual stipulations
express provision of but is also granted
law under the provisions
on Close Corporation
Pertains to Exercisable against
unsubscribed portion another stockholder of
of the authorized the corporation of his
capital stock. A right shares of stock
that may be claimed
against the corporation
4. REMEDIAL RIGHTS
a. Individual suit – a suit instituted by a
shareholder for his own behalf against the
corporation;
b. Representative suit – a suit filed by a
shareholder in his behalf and in behalf
likewise of other stockholders similarly
situated and with a common cause against the
corporation; and
c. Derivative suit (2009, 2006, 2005, 2004 Bar
Examination) – a suit filed in behalf of the
corporation by its shareholders (not creditors
whose remedies are merely subsidiary such
as accion subrogatoria and accion pauliana)
upon a cause of action belonging to the
corporation, but not duly pursued by it,
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
against any person or against the directors,
officers and/or controlling shareholders of
the corporation.
Requisites:
i. An existing cause of action in favor of
the corporation
ii. The stockholder/member must first
make a demand upon the corporation
or the management to sue unless
such a demand would be futile
iii. The stockholder/member must be
such at the time of the objectionable
acts or transactions unless the
transactions are continuously
injurious
iv. The action must be brought in the
name of the corporation
The number of shares of the stockholder is
immaterial since he is not suing in his own behalf
Note: The mere trustee of shares registered in his
name cannot file a derivative suit for he is not a
stockholder in his own right. (Bitong vs. CA, 292
SCRA 304)
5. LIABILITIES OF STOCKHOLDERS
a. Liability to the corporation for unpaid
subscription
b. Liability to the corporation for interest on
unpaid subscription
c. Liability to creditors of the corporation on the
unpaid subscription
d. Liability for watered stock
e. Liability for dividends unlawfully paid
f. Liability for failure to create corporation
6. STOCKHOLDERS OR MEMBERS MEETING
WHEN:
1. REGULAR - held on the date fixed in the by-laws
or if not fixed on any date in April; and
2. SPECIAL - held at any time deemed necessary or
as so provided in the by-laws.
WHERE:
WHERE: In the city or municipality where the
principal office of the corporation is located, and if
practicable, in the principal office of the corporation.
However, in the case of non-stock corporations, the
by-laws may provide that meetings may be held at any
place even outside the principal place of the
corporation. (Sec. 93)
I. BOARD OF DIRECTORS / TRUSTEES
1. BOARD OF DIRECTORS OR TRUSTEES AS
REPOSITORY OF CORPORATE POWERS
GENERAL RULE: The corporate powers of the
corporation shall be exercised, all business
conducted and all property of such corporation
controlled and held by the board of directors or
trustees. (Sec. 23)
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 GREEN NOTES IN COMMERCIAL LAW
EXCEPTIONS:
1. In case of an Executive Committee duly
authorized in the by-laws;
2. In case of a contracted manager which may
be an individual, a partnership, or another
corporation. Note: In case the contracted
manager is another corporation, the special
rule in Sec. 44 applies.
3. In case of close corporations, the stockholders
may manage the business of the corporation
instead by a board of directors, if the articles
of incorporation so provide.
The power to purchase real property is vested in the
board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of
real property needed by the corporation, the final say
will have to be with the board, whose approval will
finalize the transaction. A corporation can only
exercise its powers and transact its business through
its board of directors and through its officers and
agents when authorized by a board resolution or by its
by-laws. (Spouses Constantine Firme vs. Bukal
Enterprises and Development Corporation, G.R. No.
146608, October, 23, 2003)
LIMITATIONS ON POWERS OF BOARD OR
DIRECTORS/TRUSTEES
1. Limitations imposed by the Constitution, statutes,
articles of incorporation or by-laws.
2. Cannot perform constituent or those involving
fundamental changes in the corporation requiring the
approval of stockholders or members.
3. Cannot exercise powers not possessed by the
corporation. (The Corporation Code of the
Philippines Annotated, Hector de Leon, 2002 ed.)
NATURE OF POWERS OF BOARD OF
DIRECTORS/TRUSTEES (The Corporation Code of the
Philippines Annotated, Hector de Leon, 2002 ed.)
a. Under the Theory of Original Power, the powers
of the board of directors or trustees are
ORIGINAL and UNDELEGATED. The
stockholders or members do not confer, nor
can they revoke those powers.
b. They are DERIVATIVE only in the sense of being
received from the State in the act of
incorporation.
2. TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS
 Qualifications:
1. For a stock corporation, ownership of at least 1
share capital stock of the corporation in his
own name, and if he ceases to own at least one
share in his own name, he automatically ceases
to be a director. (Sec. 23) For a non-stock
corporation, only members of the corporation
can be elected to seat in the Board of Trustees.
In order to be eligible as a director, what is
material is the legal title to, not beneficial
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
ownership of the stocks appearing on the
books of the corporation
2. A majority of the directors/trustees must be
residents of the Philippines. (Sec. 23)
3. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6 years
or a violation of the Corporation Code,
committed within five years from the date of
his election. (Sec. 27)
4. Only natural persons can be elected
directors/trustees.
In case of corporate stockholders or members,
their representation in the board can be
achieved by making their individual
representatives trustees of the shares or
membership to make them
stockholders/members of record.
5. Other qualifications as may be prescribed in
the by-laws of the corporation.
6. Must be of legal age
 Disqualifications of Directors, Trustees or
Officers
1. Conviction by final judgment of offenses
punishable by imprisonment for excess of 6
years, or
2. Violation of code committed within 5 years
prior to date of his election or appointment.
 Terms of Directors
For 1 year or until their successors are elected and
qualified (Hold – over Principle)
3. ELECTION OF DIRECTORS OR TRUSTEES
a. Quorum in Meeting for Election
 Majority of the outstanding capital stock
or member entitled to vote
 Present either in person or by
representative by WRITTEN PROXY
b. How
 Viva Voce, or
 By ballot if requested by any voting
stockholder or member
c. Stock Corporations
Methods of Voting on the Election of Directors
g. STRAIGHT VOTING – Every stockholder
through this method, may vote such
number of shares for as many persons as
there are directors.
h. CUMULATIVE VOTING
i. Every stockholder is entitled to such
number of votes that his number of
shares multiplied by the total number of
directors to be elected will bring. He may
give all such votes to one candidate
(CUMULATIVE VOTING FOR ONE
CANDIDATE) or he may distribute them
among as many candidates as he sees fit
(CUMULATIVE VOTING BY
DISTRIBUTION). (Sec. 24)
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 GREEN NOTES IN COMMERCIAL LAW
ii. A minority director elected through
cumulative voting cannot be removed
without cause. (Sec. 28)
iii. A PROXY is a written instrument, signed
by the stockholder or member (as
principal) and filed before the scheduled
meeting with the corporate secretary, and
given to another person (as agent)
authorizing such person to exercise the
voting rights of the former.
What is the period of validity of proxy? Unless
otherwise provided in the proxy, it should be valid
only for the meeting for which it is intended. No
proxy shall be valid and effective for a longer period
than five years at any one time. (Sec. 58)
Instances whereby Right to vote by Proxy may be
exercised:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust
agreement;
4. Pledge or mortgage of shares;
5. As provided for in it’s by – laws.
Stockholders or members may attend and vote in their
meeting by proxy (Sec. 58); but directors cannot do so.
Directors must always act in person. (Sec. 25)
A VOTING TRUST is an agreement whereby one or
more stockholders transfer their shares of stocks to a
trustee, who thereby acquires for a period of time the
voting rights (and/ or any other rights) over such
shares; and in return, trust certificates are given to the
stockholder/s, which are transferrable like stock
certificates, subject however, to the trust agreement.
d. Non – Stock Corporations
 Members may cast as many votes as there
are trustees to be elected (seats)
 But may not cast more than one vote for a
single candidate
 EXCEPT: when the AOI or by – laws provide
otherwise
e. Adjournment of Meeting for Elections
 May adjourn from day to day or from time
to time
 But NOT sine die or indefinitely if quorum is
not met (majority of stockholders or
members are not present).
NOTE: Proposed amendment to by – laws stipulating
permanent director even without election is contrary
to law. (Grace Christian High School vs. CA)
4. REMOVAL OF DIRECTORS OR TRUSTEES
a. How may be removed
i. 2/3 vote of stockholders or members
entitled to vote
ii. During a regular meeting or a special
meeting called by the secretary upon:
 Order of the President
 Written demand from majority of
stockholders or members entitled to
vote
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
iii. Upon previous notice to stockholders or
members
 Of the intention to propose such
removal at the meeting
 Of the time and place of meeting
 Must be given by publication or by
written notice prescribed in the
Code.
b. If secretary refuses/ fails to call for the special
meeting or give the notice, or there is no
secretary, call may be directly addressed to
stockholders or members by demanding
stockholder or member.
c. Causes for Removal
1. May be with or without cause
 Cause is usually related to the 3 duties of
an officer or director –
a. loyalty
b. obedience
c. diligence
2. Provided that removal without cause may not
be used to deprive minority stockholders or
members of their right of representation
under Sec. 24.
NOTE: Removal of Board of Director or Trustee is
different from removal of a corporate officer.
Stockholder’s approval is necessary only for the
removal of the members of the Board. For the removal
of a corporate officer or employee, the vote of the
Board of Directors is sufficient for the purpose. (2001
Bar Examination)
5. FILLING OV VACANCIES IN THE OFFICE OF
DIRECTOR OR TRUSTEE
a. Ground for Removal
1. Removal by the stockholder or members or
upon expiration of term
 Vacancy shall be filled by the stockholder
in a regular or special meeting called for
that purpose.
2. Other causes other than expiration or
removal by stockholders / members.
 If remaining directors constitute Quorum
– may be filled by the MAJORITY vote of
the remaining directors.
 If no quorum – filled by the stockholders
in a regular or special meeting called for
that purpose.
3. Proposed amendment of Articles of
Incorporation resulting in increase in
number of directors / trustees
 Vacancy shall be filled by the
stockholders in a regular or special
meeting called for that purpose
 Or in the same meeting authorizing
increase of directors or trustees if
so stated in notice of the meeting
b. Director or trustee so elected shall serve
only the unexpired portion of the term.
6. COMPENSATION
Directors are not entitled to compensation as such
directors except that they are allowed reasonable per
diems. However, directors may be given
compensation when:
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 GREEN NOTES IN COMMERCIAL LAW
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a. There is a provision in the by – laws vi. He is made, by specific provision of law, to

authorizing payment of compensation; or personally answer for his corporate
b. By a vote of the Stockholders representing at action (Tramat Mercantile Inc. vs. CA)
least majority of the outstanding capital stock b. Liability for Violation of Duty of Diligence
at a regular or special meeting. shall be liable jointly and severally for all
damages resulting therefrom suffered by the
LIMIT: In either case, the total yearly compensation of corporation, its stockholders or members
the directors shall not exceed 10% of the net income and other persons.
before income tax of the corporation during the
preceding year. 10. LIABILITY FOR WATERED STOCK
Under Sec. 65 on Liability of Directors for
7. DUTY OF LOYALTY Watered Stocks, if director of officer:
To Act according to the corporation’s best  Consents to issuance of stocks for a
interest consideration less than its par or issued
value;
DOCTRINE OF  Consents to payment in consideration other
DISLOYALTY OF A
CORPORATE than cash, which is valued in excess of its fair
DIRECTOR
OPPORTUNITY market value;
Cover same subject Cover same subject  Having knowledge hereof does not object in
which is business which is business writing and file the same with the corporate
opportunity opportunity secretary.
Applicable to directors, Only applicable to Such director or officer shall be SOLIDARILY
trustees and officers DIRECTORS and not LIABLE with the stockholder concerned (buyer)
to officers and its creditors for the DIFFERENCE between
Does not cover Allows RATIFICATION the fair value received at time of issuance of the
ratification. Even if of a transaction by a stock and its par or issued value.
99% of the self – dealing director
stockholders affirm the by the vote of 11. CONTRACTS
transactions, the stockholders
a. By self – dealing directors with the
remaining stockholders representing 2/3 of
can still oppose such a the outstanding corporation
self – dealing capital stock. Contracts between the corporation and one or
transaction and file a more of its directors or trustees or officers are
derivative suit VOIDABLE at the option of the corporation but
Applies to both stock Applies only to stock VALID if the following are present:
and non – stock corporations
i. Presence of director / trustee in the board
corporations
meeting which approved contract was not
8. BUSINESS JUDGMENT RULE necessary to constitute a quorum.
Business judgment rule exists to protect and ii. Vote of director or trustee not necessary for
promote the full and free exercise of managerial approval of contract
power granted to directors. The rule is a “a iii. Contract is fair and reasonable under the
presumption that in making a business decision, circumstances
the directors of a corporation acted on an
iv. In case of an officer, contract has been
informed basis, in good faith and in the honest
belief that the action taken was in the best previously authorized by board of directors.
interest of the company.” (Smith vs. Van Gorkam) NOTE: If director’s presence was required to
meet the quorum (1st requisite) and I his vote
9. DUTY OF DILIGENCE was necessary for approval of the contract (2nd
a. Violations of Duty of Diligence requisite), the contract may still be valid if it is
i. Willfully and knowingly vote for or assent RATIFIED by 2/3 of stockholders or members in
to patently unlawful acts of the a meeting called for that purpose.
corporation
ii. Guilty of gross negligence or bad faith in
b. Between corporation with interlocking
directing the affairs of the corporation
directors
iii. Acquire any personal or pecuniary
 Contract between two or more
interest in conflict with their duty as
corporations with a common director/s
director or trustee
may be valid
iv. He consents to the issuance of watered
stocks or who, having knowledge thereof,  However, to be valid, it must be fair and
does not forthwith file with the corporate reasonable
secretary his written objection thereto;  A contract between the corporations
(Tramat Mercantile Inc. vs CA) with interlocking directors is VOID if
v. He agrees to hold himself personally and there is fraud
solidarily liable with the corporation; or  If the interest of the interlocking director
(Tramat Mercantile Inc. vs. CA) in one corporation is SUBSTANTIAL
(meaning stockholdings exceed 20% of

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 GREEN NOTES IN COMMERCIAL LAW
the outstanding capital stock) and his
interest is merely NOMINAL, contract
shall be treated as under the provisions
of Self – Dealings (voidable but may be
ratified), insofar as the corporation
where he has a nominal interest is
concerned.
NOTE: Corporate officers are not permitted to use
their position of trust and confidence to further their
private interests. The doctrine of CORPORATE
OPPORTUNITY is precisely recognition by the courts
that the fiduciary standards could not be upheld
where the fiduciary was acting for two entities with
competing interest. (Gokongwei Jr. vs. SEC)
12. EXECUTIVE COMMITTEE
a. Creation
A body created by the by-laws and
composed of some members of the board
which, subject to the statutory limitations, has
all the authority of the board to the extent
provided in the board resolution or by-laws.
(The Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.)
Must be provided for in the by-laws and composed
of not less than 3 members of the board appointed
by the board.
May act by a majority vote of all of its members
b. Limitations on its powers
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
5. Cash dividend declaration.
13. MEETINGS
BOARD MEETING (Sec. 53)
WHEN:
1. REGULAR - held monthly, unless otherwise
provided in the by-laws; and
2. SPECIAL - held at any time upon the call of the
president.
WHERE:
May be held anywhere in or outside of the Philippines.
CORPORATE OFFICERS, QUORUM
a. Corporate Officers
 President – must be a director
 Treasurer – may or may not be a director
 Secretary – shall be a resident and a citizen
of the Philippines
 Other officers provided in the by – laws
b. Any 2 or more positions may be held
concurrently except president and secretary or
president and treasurer
c. When elected: Immediately after election of
directors
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Prepared by: ATTY. RENATO S. RONDEZ
d. Duties to be performed by officers
 Enjoined on them by law
 Enjoined by corporate by – laws
e. Quorum – board must act as a body
 For transaction of corporate business –
majority of number of directors or trustees
as fixed in the AOI
 For corporate act to be valid, there must be
a quorum and the act must be approved by
majority of directors or trustees PRESENT
 For election of officers – majority of ALL
members of the board of directors or board
of trustees, whether all members are
present or not.
f. Director or Trustees cannot ATTEND or VOTE
by proxy at board meetings.
POWERS OF CORPORATE OFFICERS
a. Rule on Corporate Officer’s power to bind the
corporation
 An officer’s power as an agent of the
corporation must be sought from the
statute, charter, by – laws or in a delegation
of authority from such officer, from the acts
of the board of directors formally expressed
or implied from a habit or custom of doing
business
b. When Corporation bound by the act of its
President.
In the absence of a charter or by – law
provision to the contrary, the president is
presumed to have the authority to act within
the domain of the general objectives of its
business and within the scope of his or her
usual duties. A party dealing with the President
of a corporation is entitled to assume that he
has the authority to enter, on behalf of the
corporation, into contract that are within the
scope of the powers of said corporation and that
do not violate any statute or rule on public
policy.
Distinctions between a Corporate Officer and
Corporate Employee
CORPORATE
CORPORATE OFFICER
EMPLOYEE
Position is provided for Employed by the action
in the by – laws or of the managing officer
under the Corporation of the corporation
Code
RTC has jurisdiction in NLRC has jurisdiction in
case of LABOR DISPUTE case of labor dispute
J. CAPITAL AFFAIRS
2. CERTIFICATE OF STOCKS
The document evidencing the ownership of shares of
stocks by a stockholder and the full payment of its
issue or subscription price.
a. Nature of the certificate
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It is not essential to the ownership and/or d. The transferee must present the indorsed
existence of the share of stock. certificate to the corporate secretary who
Where the certificate of stock reflects a greater shall effect the transfer in the corporate
volume of shares than the actual number of books, issue a new stock certificate in favor of
shares issued or to be issued, the following rules the transferee and cancel the former
may be considered: certificate.
1. To the extent that there is an over issue, the
excess issuance (over the authorized capital Only absolute transfers need be registered. The
stock or the stated capital) shall be void as pledge or mortgage itself need not be recorded in the
being ultra vires. stock and transfer book, but a chattel mortgage must
2. If there is no over issue, but no payment has comply with the Chattel Mortgage Law, and a pledge
been made to cover the par or stated value of would require the shares to be placed in the
the excess shares, the latter would constitute possession of the creditor/pledgee. The agreement
“watered” stocks. must appear in a public instrument to take effect
3. If there is no over issue and watering of against third persons. (Chemphil vs. CA, 251 SCRA 257)
stocks, the corporation may be bound to
honor the certificate (if duly signed and EFFECTS OF UNREGISTERED TRANSFER OF
released by its authorized officers) in the SHARES
hands of a holder in good faith, reserving a a. It is valid and binding as between the transferor and
right of recourse that an aggrieved party may the transferee
pursue against the culpable or unjustly b. It is invalid as to the corporation except when notice
enriched party. is given to the corporation for purposes of
registration
SHARES OF STOCK c. It is invalid as against corporate creditors and the
CAPITAL STOCK
transferor is still liable to the corporation
Amount paid in or Interest or right which d. It is invalid as to the attaching or executing
secured to be paid in by the stockholder has in creditors of the transferor, as well as subsequent
the stockholders upon the management of the purchasers in good faith without notice of the
which the corporation is corporation, and its transfer.
to conduct its operation. surplus profits, and
c. ISSUANCE OF CERTIFICATE OF STOCK
It is the property of the upon a dissolution, in
corporation itself all of its assets No certificate of stock shall be issued until the full
(monetary value). remaining after amount of the subscription is paid. Basis: Doctrine of
payment of corporate Individuality of Subscription
debts.
D. PROCEDURE FOR ISSUANCE OF NEW
CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN
CERTIFICATE OF OR DESTROYED ONES (Sec. 73)
SHARES OF STOCK
STOCK 1. Filing with the corporation an affidavit in triplicate
Unit of interest in a Evidence of the by the registered owner setting forth the
corporation holder’s ownership of circumstances as to how the certificate was lost, stolen
the stock and of his or destroyed, the number of shares, serial number of
the certificate and the name of the corporation that
right as a shareholder
issued the same.
Incorporeal or Concrete and tangible
intangible property 2. Publication of notice of loss by the corporation in a
May be issued by the May be issued only if newspaper of general circulation in the place of the
corporation even if the the subscription is fully principal office, once a week for 3 consecutive weeks.
subscription is not fully paid.
3. After the lapse of 1 year from the date of the last
paid.
publication, if no contest has been presented, the
corporation shall cancel in its books the certificate of
b. Negotiability stock, which has been lost, stolen or destroyed, and
issue in lieu thereof a new certificate of stock.
REQUIREMENTS FOR TRANSFER OF STOCK
a. In case of shares covered by a certificate, the However, if the registered owner files a bond or other
indorsement of the owner or his agent securities as may be necessary to the board, the new
coupled with delivery is essential certificate of stock may be issued even before the
b. Where no certificate has been issued or for expiration of one (1) year period.
some reason it is not in the possession of the
stockholder, it may be transferred by means The prescribed procedure does not apply to a case
of a deed of assignment duly recorded in the where the certificates are in the company’s possession
books of the corporation when mislaid which thereby obligates the corporation,
c. To be valid against the corporation and third not the stockholder, to suffer the consequences. (SEC
persons, the transfer must be recorded in the Opinion)
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3. WATERED STOCKS
Watered stock is stock issued not in exchange for
its equivalent in cash, property, shares, stock
dividends or services. It includes stock that is
issued (a) without consideration (b) issued as
fully paid when the corporation receives a sum
less than par or issued value (c) issued for a
consideration other than cash, the fair valuation
of which is less than par or issued value (d) stock
dividend without sufficient retained earnings or
surplus.
3. COLLECTION OF UNPAID SUBSCRIPTION
1. Voluntary payment
a. Upon the date specified in the subscription
contract
b. Upon call by the Board of Directors
2. Involuntary payment
a. Extra-judicial
i. Delinquency sale
ii. Application of dividends
b. Judicial action
Note: The prescriptive period in case of subscription
of shares begins to run only from the time the board of
directors declares that the balance are due and
payable. It does not begin to run from the date of the
subscription. (Garcia vs. Suarez, 67 Phil. 441)
4. SALE OF DELINQUENT SHARES
1. If the subscription contract fixes the date for
payment, failure to pay on such date shall render
the entire balance due and payable with interest.
Thirty days therefrom, if still unpaid, the shares
become delinquent, as of the due date, and subject
to sale, unless the board declares otherwise.
2. If no date is fixed in the subscription contract, the
board of directors can make the call for payment,
and specify the due date. The notice of call is
mandatory. The failure to pay on such date shall
render the entire balance due and payable with
interest. Thirty days therefrom, if still unpaid, the
shares become delinquent, as of the date of call,
and subject to sale, unless the board declares
otherwise. (Sec. 67)
A. Effect of Delinquency:
A. Upon the stockholder
1. Accelerates the entire amount of the unpaid
subscription;
2. Subjects the shares to interest, expenses and
costs;
3. Disenfranchises the shares from any right that
inheres to a shareholder, except the right to
dividends (but which shall be applied to any
amount due on said shares or, in the case of
stock dividends, to be withheld by the
corporation until full payment of the
delinquent shares. (Sec. 43)
B. Upon the director owning delinquent shares
1. He can continue serving in that capacity unless and
until said shares are totally bidded away, he continues
to be the owner thereof and in the interim he is not
disqualified.
2. A delinquent stockholder seeking to be elected as
director may not be a candidate for, nor be duly
elected to, the board.
BAR OPERATIONS 2011
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No delinquency stock shall be voted for or be entitled
to vote or representation at any stockholders meeting,
nor shall the holder be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code until and
unless he pays the amount due on his subscription
with accrued interest, and the cost and expenses of
advertisement, if any. (Sec. 71)
PROCEDURE FOR THE SALE OF DELINQUENT
STOCKS (Sec. 68)
Call by resolution demanding payment of the balance.
However, if the contract of subscription prescribes
the date of payment, no call is necessary.
Notice of the board resolution given to the
stockholders by the corporate secretary, either
personally or by registered mail. Publication of
notice of call is not required.
Failure of the stockholder to pay within a grace period
of 30 days from the date specified in the contract
of subscription or in the call, the stocks shall be
declared delinquent and shall be subject to sale.
Notice of delinquency served on the subscribers either
personally or registered mail and publication in a
newspaper of general circulation in the province
or the city where principal office is located for
once a week for 2 consecutive weeks. Notice shall
state the amount due on each subscription plus
accrued interest, and the date, time and place of
the sale which shall not be less than 30 days nor
more than 60 days from the date the stocks
become delinquent.
Sale of the delinquent shares at public auction.
HIGHEST BIDDER IN A DELINQUENCY SALE
a. The person participating in the delinquency sale
who offers to pay the full amount of the balance of the
subscription together with the accrued interest, costs
of advertisement and expenses of sale, for the smallest
number of shares. In other words, the amount of the bid
does not vary but only the number of shares to be
bought changes and determines the highest bidder.
b. If there is no bidder as mentioned above, the
corporation may bid for the same, and the total
amount due shall be credited as paid in full in the
books of the corporation. Such shares shall be
considered as treasury shares.
K. DISSOLUTION AND WINDING UP
(LIQUIDATION)
1. DISSOLUTION
When the corporation ceases to be a juridical
person
METHODS: (Sec 117)
1. Voluntary
2. Involuntary
A corporation may be dissolved by the SEC
upon filing of a verified complaint and after
proper notice and hearing on the grounds
provided by existing laws, rules and
regulations (Sec. 121)
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The 3 Methods by which a Stock Corporation may
be voluntarily Dissolve are: (2002 Bar
Examination)
1. Voluntary dissolution where no creditors
are affected. This is done by a majority vote of
the directors and resolution vote of at least 2/3
vote of the stockholders, submitted to the SEC.
2. Voluntary dissolution where creditors are
affected. This is done by a petition for
dissolution which must be filed with the SEC,
signed by a majority of the members of the
board of directors, verified by the president or
the secretary, and upon affirmative vote of
stockholders representing 2/3 of the
outstanding capital stock
3. Dissolution by shortening of the corporate
term. This is done by amendment of the articles
of incorporation.
management committee or rehabilitation receiver,
or based on the SEC’s own findings, the
continuance of the business of the corporation
would not be feasible or profitable nor work to the
best interest of the stockholders, parties –
litigants, creditors or the general public.
8. When the corporation is guilty of fraud in
procuring its certificate of registration.
9. When the corporation is guilty of serious
misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage
to the general public.
10. Refusal of the corporation to comply or defiance of
any lawful order of the SEC restraining
commission of acts which would amount to a
grave violation of its franchise and
11. Failure of the corporation to file required reports
in appropriate forms as determined by the SEC
within the prescribed period.

When Corporation is Deemed Dissolved: EFFECTS OF DISSOLUTION

WHEN DEEMED a. Transfer of legal title to corporate property to the
METHOD stockholders who become co-owners thereof
DISSOLVED
Sec. 118, when no Upon issuance of b. Corporation ceases as a body politic to continue the
creditors are certificate of SEC business for which it was organized
affected c. It cannot be revived
Sec. 119, where When judgment is d. Dissolution does not by itself imply the diminution
creditors are rendered dissolving the or extinguishment of rights
affected corporation e. The corporation continues as a body corporate for 3
Sec. 120, dissolution Upon approval of the years for purposes of winding up
by shortening amended articles of f. Cessation of corporate existence for all purposes
corporate term incorporation or the upon the expiration of the winding up period of 3
expiration of the years. (The Corporation Code of the Philippines
shortened term, as the Annotated, Hector de Leon, 2002 ed.
case may be.
2. LIQUIDATION
INVOLUNTARY DISSOLUTION The process by which all the assets of the corporation
are converted into liquid assets (cash) in order to
Grounds: facilitate the payment of obligations to creditors, and
1. If the corporation does not formally organize and the remaining balance, if any, is to be distributed to
commence the transaction of its business or the the stockholders or members.
construction of its works within 2 years from the
date of its incorporation, its corporate power Methods:
ceases and the corporation shall be deemed 1. By the corporation itself through its board of
dissolved. directors/trustees;
2. If the corporation has commenced the transaction 2. By a trustee to whom the corporate assets have
of its business; but subsequently becomes been conveyed; and
continuously inoperative for a period of at least 5 3. By a management committee or rehabilitation
years, the same shall be a ground for suspension receiver appointed by the SEC.
or revocation of its corporate franchise or Note: The 3-year period of liquidation does not apply
certificate of incorporation. to Methods 2 and 3 as long as the trustee or the
3. When the corporation fails to adopt and file a code receiver is appointed within the said period.
of by – laws in the manner provided for by the The termination of the life of a juridical entity does not
law. by itself cause the extinction or diminution of the
4. When the corporation has offended against a rights and liabilities of such entity nor those of its
provision of law for its creation or renewal. owners and creditors alike (Sec. 145).
5. When it has committed or omitted an act which The word “trustee” as sued in the corporation statute
amounts to a surrender of its corporate rights, must be understood in its general concept which could
privileges, or franchises. include the counsel to whom was entrusted the
6. When it has misused a right, privilege, or franchise prosecution of the suit filed by the corporation.
conferred upon it by law, or when it has exercised (Spouses Gelano vs. CA)
a right, privilege or franchise in contravention of
law, such as commission by the corporation of LIQUIDATION REHABILITATION
ultra vires or illegal acts. Connotes a winding up Connotes a reopening or
7. When on the basis of findings and or settling with reorganization
recommendations of a duly appointed creditors and debtors

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 GREEN NOTES IN COMMERCIAL LAW
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Winding up process so Contemplates a ORDINARY STOCK

CLOSE CORPORATION
that assets may be continuance of corporate CORPORATION
distributed to those life in an effort to restore Its articles of Its articles must contain
entitled the corporation to its incorporation need the special matters
former successful only contain the prescribed by Sec. 97,
operation general matters aside from the general
enumerated in Sec. matters in Sec. 14.
OTHER COPORATIONS 14 of the Code. Failure to do so
1. CLOSE CORPORATION precludes a de jure close
A special kind of stock corporation: corporation status.
1. whose articles of incorporation should provide Its status as an 2/3 of its voting stock or
that: ordinary stock voting rights must not
a. the number of stockholders shall not exceed corporation is not be owned or controlled
20; affected by the by another corporation
b. issued stocks are subject to transfer ownership of its which is not a close
restrictions, with a right of preemption in voting stock or voting corporation.
favor of the stockholders or the corporation; rights.
and Its articles cannot Its articles may classify
c. the corporation shall not be listed in the classify its directors. its directors.
stock exchange or its stocks should not be Business of the Business of the
publicly offered; AND corporation is corporation may be
2. Whose at least 2/3 of the voting stocks or voting managed by the managed by the
rights should not be owned or controlled by board of directors. stockholders if the
another corporation which is not a close articles so provide, but
corporation. (Sec. 96) they are liable as
Characteristics: directors.
1. Stockholders may act as directors without The corporate Its articles may provide
need of election and therefore are liable as officers and that any or all of the
directors; employees are corporate officers or
2. Stockholders who are involved in the elected by a majority employees may be
management of the corporation are liable in vote of all the elected or appointed by
the same manner as directors are. members of the the stockholders.
3. Quorum may be greater than mere majority; board of directors.
4. Transfers of stocks to others, which would
increase the number of stockholders to more The pre-emptive The pre-emptive right is
than the maximum are invalid; right is subject to the subject to no exceptions
5. Corporate actuations may be binding even exceptions found in unless denied in the
without a formal board meeting, if the Sec. 39. articles
stockholder had knowledge or ratified the The appraisal right The appraisal right may
informal action of the others; may be exercised by a be exercised and
6. Preemptive right extends to all stock issues; stockholder only in compelled against the
7. Deadlocks in board are settled by the SEC, on the cases provided in corporation by a
the written petition by any stockholder; and Secs. 81 and 42 of the stockholder for any
8. Stockholder may withdraw and avail of his Code. reason.
right of appraisal. Except as regards In case of an arbitration
Note: Special rules are provided for close corporations redeemable shares, of an intra-corporate
because it is essentially an incorporated partnership. the purchase by the deadlock by the SEC, the
(The Corporation Code of the Philippines Annotated, corporation of its corporation may be
Hector de Leon, 2002 ed.) own stock must ordered to purchase its
always be made from own shares from the
The following cannot be a close corporation: the unrestricted stockholders regardless
a. mining companies; retained earnings. of the availability of
b. oil companies; unrestricted retained
c. stock exchanges; earnings.
d. banks; Arbitration of intra- Arbitration of intra-
e. insurance companies; corporate deadlock corporate deadlock by
f. public utilities; by the SEC is not a the SEC is an available
g. education institutions; remedy in case the remedy in case the
h. other corporations declared to be vested with directors or directors or
public interest. (Sec. 96) stockholders are so stockholders are so
divided respecting divided respecting the
the management of management of the
the corporation. corporation.

POWERS OF THE SEC IN CASE OF DEADLOCK IN

CLOSE CORPORATIONS

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1. Cancel or alter any provision in the articles of to its stockholders

incorporation or bylaws Stockholders may Members cannot
2. Cancel, alter or enjoin any resolution of the transfer their shares transfer their
corporation membership unless
3. Direct or prohibit any act of the corporation allowed by the articles
4. Require the purchase at their fair value of shares or by-laws
of any stockholder either by any stockholder or by Cumulative voting is Cumulative voting not
the corporation regardless of the availability of available in the available unless
unrestricted retained earnings. election of directors otherwise provided in
5. Appoint a provisional director the articles or by-laws
6. Dissolve the corporation Directors cannot Trustees may exceed
7. Granting such other relief as the circumstances exceed 15 in number 15 in number
may warrant. The term of a director The term of a trustee is
is 1 year 3 years; 1/3 of the
2. NON – STOCK CORPORATIONS Board shall be elected
A corporation organized for an eleemosynary purpose, annually
and no part of whose income is, during its existence, Stockholders may Members may be
distributable as dividends to its members, trustees, or vote by proxy deprived of the right to
officers, subject to the provisions of the Corporation vote by proxy in the
Code on dissolution. (Sec. 87) articles or by-laws
Any profit which it may obtain as an incident to its
Officers are elected by Officers may be
operations shall, whenever necessary or proper, be
the Board of Directors directly elected by the
used for the furtherance of the purpose or purposes
members unless
for which it was organized.
otherwise provided in
the articles or by-laws
Eleemosynary purposes: charitable, religious,
Stockholders and Members may be
educational, professional, cultural, recreational,
directors must act in a allowed by the by-laws
fraternal, literary, scientific, social, civic service, or
meeting, except to vote by mail or
similar purposes, like trade, industry, agricultural.
where a mere written other similar means
(Sec. 88)
assent is sufficient or
They are governed by the same rules established for
a formal meeting
stock corporations, whenever pertinent, subject,
unnecessary
however, to a number of special features.
RULES FOR DISTRIBUTION OF ASSETS IN CASE OF
DISSOLUTION (SEC. 94)
RULES ON CONVERSION (SEC Opinion)
1. All liabilities and obligations of the corporation shall
1. Stock to non-stock corporation be paid, satisfied and discharged or adequate
Conversion may be made by mere amendment of the provision shall be made therefor
articles of incorporation. 2. Assets held by the corporation upon a condition
2. Non-stock to stock corporation requiring return, transfer or conveyance, and which
The corporation must first be dissolved; mere condition occurs by reason of dissolution, shall be
amendment of the articles of incorporation would not returned, transferred or conveyed in accordance with
suffice because the conversion would change the such requirements
corporate nature from non-profit to monetary gain. 3. Assets received and held by the corporation subject
The conversion without dissolving it first would be to limitations permitting their use only for charitable,
tantamount to distribution of its assets or income to religious, benevolent, educational or similar purposes
its members inasmuch as after its conversion, the but not held upon a condition requiring return,
asset of the non-stock corporation would now be transfer or conveyance by reason of dissolution, shall
treated as payment to the subscriptions of the be transferred or conveyed to one or more
members who will now become stockholders of the corporations, societies or organizations engaged in
corporation. activities in the Philippines substantially similar to
those of the dissolving corporation pursuant to a plan
RIGHTS OF MEMBERS of distribution
4. Other assets, if any, shall be distributed in
1. To be entitled to 1 vote unless otherwise accordance with the provisions of the articles of
provided in the articles or by-laws incorporation or the by-laws
2. To vote by proxy unless otherwise provided 5. In any other case, assets may be distributed to such
in the articles or by-laws persons, societies, organizations or corporations,
3. To transfer membership if allowed by the whether or not organized for profit, as may be
articles or by-laws specified in a plan of distribution.
4. To be elected as trustee
 The plan of distribution shall be approved by a
STOCK NON-STOCK majority vote of the board of trustees and by 2/3 of
Has capital stock Does not have shares the members having voting rights at a meeting
divided into shares and may not distribute
and with authority to profits to its members
distribute dividends

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SPECIAL CORPORATIONS transacting business in the Philippines, designated in a

written power of attorney by a foreign corporation
1. EDUCATIONAL CORPORATION authorized to do business in the Philippines, on whom
A stock or non-stock corporation organized to provide any summons and other legal processes may be served
facilities for teaching or instruction. in all actions or other legal proceedings against the
foreign corporation. (Sec. 127-128)
A favorable recommendation of the DECS is essential
for the approval of its articles and by-laws. CONTENTS FOR APPLICATION OF LICENSE
It is primarily governed by special laws and 1. Date and term of incorporation
suppletorily by the provisions of the Code. 2. The address of the principal office in the country
of incorporation
3. The name and address of resident agent
NON-STOCK 4. The place in the Philippines where it intends to
EDUCATIONAL
EDUCATIONAL operate
CORPORATION
CORPORATION 5. The specific purpose or purposes
A non-stock A special corporation 6. The names and addresses of the present directors
corporation which may a stock or and officers of the corporation
non-stock 1. A statement of its authorized capital stock
Governed by the Governed by special 2. A statement of its outstanding capital stock
provisions on non- laws and by the general 3. A statement of the amount actually paid in
stock corporations provisions of the 4. Such additional information as may be necessary
and suppletorily by Corporation Code to enable the SEC to determine whether such
the provisions on corporation is entitled to license
stock corporations
The number of board The number of the GROUNDS FOR REVOCATION OF LICENSE
of trustees may be board of trustees should
1. Failure to file annual reports required by the
more than 15 not be less than 5 but
Code;
not more than 15.
2. Failure to appoint and maintain a resident agent;
The term of office of The term of office of the
3. Failure to inform the SEC of the change of
the board of trustees board of trustees shall
residence of the resident agent;
shall be 3 years be 5 years 4. Failure to submit copy of amended articles or by-
laws or articles of merger or consolidation;
5. A misrepresentation in material matters in
2. RELIGIOUS CORPORATION reports;
A corporation composed entirely of spiritual persons 6. Failure to pay taxes, imposts and assessments;
and which is organized for the furtherance of a 7. Engage in business unauthorized by SEC;
religion or for perpetuating the rights of the church or 8. Acting as dummy of a foreign corporation; and
for the administration of church or religious work or 9. Not licensed to do business in the Philippines.
property. It is different from an ordinary non-stock (Sec. 134)
corporation organized for religious purposes.
Kinds: TEST OF “DOING OR TRANSACTING BUSINESS IN
a) CORPORATION SOLE THE PHILIPPINES”:
- A special form of corporation, usually The Corporation Code does not define the phrase
associated with the clergy, consisting of one person “doing or transacting business.”
only and his successors, who is incorporated by law A. Jurisprudential Test (Philippine Corporate Law, Cesar
to give some legal capacities and advantages; and Villanueva, 2001 ed.)
b) RELIGIOUS SOCIETIES 1. Twin characterization test
- A non-stock corporation governed by a a) Whether the foreign corporation is maintaining
board but with religious purposes. It is incorporated or continuing in the Philippines the body or
by an aggregate of persons, e.g. religious order, substance of the business for which it was
diocese, synod, sect, etc. organized or whether it has substantially retired
4. FOREIGN CORPORATION from it and turned it over another (Substance
A corporation formed, organized or existing under any Test); and
law other than those of the Philippines, and whose b) Whether there is continuity of commercial
laws allow Filipino citizens and corporations to do dealings and arrangements, contemplating to
business in its own country or state. (Sec. 123) some extent the performance of acts or works or
The definition espouses the incorporation test and the the exercise of some functions normally incident
reciprocity rule and is significant for licensing purposes. to and in progressive prosecution of, the purpose
It is not permitted to “transact or do business in the and object of its organization (Continuity Test).
Philippines” until it has secured a license for that 2. Contract Test
purpose from the SEC and a certificate of authority Whether the contracts entered into by the foreign
from the appropriate government agency. corporation, or by an agent acting under the
control and direction of the foreign corporation,
RESIDENT AGENT are consummated in the Philippines.
An individual, who must be of good moral character
and of sound financial standing, residing in the M. MERGER AND CONSOLIDATION
Philippines, or a domestic corporation lawfully

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corporation, shall be deemed transferred to and

MERGER CONSOLIDATION vested in such surviving or consolidated corporation
One or more existing Union of 2 or more without further act or deed;
corporations are corporations to form a 6. The surviving or consolidated corporation shall be
absorbed by another new corporation called responsible for all the liabilities and obligations of
corporation which a consolidated each of the constituent corporations;
survives (A + B = A or B) corporation (A + B = C) 7. Any claim, action or proceeding pending by or
against any of the constituent corporations may be
Parties called constituent Same
prosecuted by or against the surviving or consolidated
corporations
corporations; and
Absorbed corporation All constituent
8. The rights of the creditors or lien upon the property
dissolved without corporation are
of any of each constituent corporation shall not be
liquidation of assets dissolved without
impaired by such merger or consolidation.
liquidation of assets;
consolidated
GENERAL RULE: When one corporation buys all the
corporation survives
shares of another corporation, this will not operate to
Absorbing corporation Consolidated dissolve the other corporation and as the two
acquires all assets and corporation acquires all corporations still maintaining their separate corporate
assumes liabilities of the assets and assumes entities, one will not answer for the debts of the other.
absorbed corporation liabilities f constituent
regardless WON corporations regardless EXCEPTIONS AS TO NON-ASSUMPTION OF LIABILITIES:
creditors consented of WON creditors 1. If there is an express assumption of liabilities;
consented 2. If there is a consolidation or merger;
Stockholders of absorbed Stockholders of 3. If the purchase was in fraud of creditors; and
corporation becomes constituent 4. If the purchaser is merely a continuation of the
stockholders of corporations becomes seller.
absorbing corporation stockholders of DE FACTO MERGER
consolidated One corporation acquiring all or substantially
corporation all of the properties of another corporation in
exchange for shares of stock of the acquiring
PROCEDURE: corporation. The acquiring corporation would end-up
with the business enterprise of the selling corporation
a. The board of directors or trustees of each whereas the latter would end up with basically its
corporation shall approve a plan of merger or remaining assets being the shares of stock of the
consolidation acquiring corporation and may then distribute it as
b. The plan shall be submitted for approval by the liquidating dividend to its stockholders. (Philippine
stockholders or members of each of such Corporate Law, Cesar Villanueva, 2001 ed.)
corporation at separate corporate meetings duly
called for the purpose MERGER and
CONSOLIDATION SALE OF ASSETS
c. The articles of merger or consolidation shall be
executed by each of the constituent corporations Sale of assets is always Merger/consolidatio
involved n is not always
d. Submission to the SEC for approval involved
e. The SEC may or may not conduct a hearing There is automatic Purchasing
assumption of liabilities corporation is not
f. Issuance of certificate of merger or consolidation generally liable for
by the SEC the debts and
liabilities of the
selling corporation
EFFECTS OF MERGER OR CONSOLIDATION (Sec. 80) There is continuance of The selling
1. The constituent corporations shall become a single the enterprise and of the corporation
corporation which, in case of merger shall be the stockholders ordinarily
surviving corporation and, in the case of consolidation, contemplates a
shall be the consolidated corporation; liquidation of the
2. The separate existence of the constituent enterprise
corporation shall cease, except that of the surviving Title to the assets are Transfer of title is by
corporation; transferred by operation virtue of contract
3. The surviving or consolidated corporation shall of law
possess all rights, privileges, immunities and powers The constituent The selling
and subject to all the duties and liabilities of a corporations are corporation is not
corporation; automatically dissolved dissolved by the
4. The surviving or consolidated corporation shall mere transfer of all
thereafter possess all the rights, privileges, immunities its property
and franchises of each of the constituent corporations;
5. All property, real or personal, and all receivables TYPES OF ACQUISITIONS (Philippine Corporate Law,
due to, and all other interest of each constituent Cesar Villanueva, 2001 ed.)

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 GREEN NOTES IN COMMERCIAL LAW
a. “ASSETS-ONLY” LEVEL
The purchaser is interested only in the raw assets and
properties of the business. He is not interested in the
entity of the corporate owner of the assets nor of the
goodwill and other factors relating to the business
itself.
The transferee would not be liable for the debts and
liabilities of his transferor since there is no privity of
contract over debt obligations between the transferee
and the transferor’s creditors
b. “BUSINESS-ENTERPRISE” LEVEL
The transferee merely continues the same business of
the transferor since he obtains the earning capability
of the venture
The transferee is liable for the debts and liabilities of
the transferor
c. “EQUITY” LEVEL
The purchaser takes control and ownership of the
business by purchasing the shareholdings of the
corporate owner. What the purchaser actually
purchased is the ability to elect the members of the
board of the corporation who run the business
INSURANCE
CONTRACT OF INSURANCE
 Agreement whereby one undertakes for a
consideration to indemnify another against
loss, damage, or liability arising from an
unknown or contingent event. (Sec. 2, par. 2)
 A contract of suretyship shall also be deemed
an insurance contract if made by a surety who
or which is doing an insurance business.
NATURE AND CHARACTERISTICS OF A
CONTRACT OF INSURANCE:
 ALEATORY – depends upon some contingent
event.
 Contract of INDEMNITY for Non-Life – recovery
is commensurate to the loss. It is an investment in
life insurance – secured by the insured as a
measure of economic security for him during his
lifetime and for his beneficiary upon his death
except one secured by the creditor on the life of
the debtor.
 PERSONAL contract - insurer contracts with
reference to the character of the insured and vice
versa.
 EXECUTORY & CONDITIONAL on part of the
insurer.
 It is one of PERFECT GOOD FAITH
 Contract of ADHESION – insurance companies
manage to impose upon the insured prepared
contracts, which the insured cannot change.
Consequently, they are to construed as follows:
(a) In case there is no doubt as to the terms of
the insurance contract, it is to be construed
in its plain, ordinary, and popular sense.
(b) If doubtful, ambiguous, certain, it is to be
construed strictly against the insurer and
liberally in favor of the insured because the
latter has no voice in the selection of the
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
words used, and the language used is
selected by the lawyers of the Insurer (Qua
Chee Gan vs. Law Union Rock Ins. Co. Ltd. 52
OG 1982).
ELEMENTS OF AN INSURANCE CONTRACT
1. The insured should possess an interest of
some kind, susceptible of pecuniary
estimation – known as “insurable interest”.
Generally – a person has insurable interest in
the subject matter insured when:
- He has such a relation or connection
with or concern in, such subject
matter that he will derive pecuniary
benefit or advantage from its
preservation or will suffer
pecuniary loss or damage from its
destruction, termination or injury by
the happening of the event insured
against.
- It is necessary because its absence
renders the contract void.
IN WHAT DOES A PERSON HAVE INSURABLE
INTEREST IN (LIFE)
1. Himself, his spouse and of his children.
2. Any person on whom he depends wholly or in
fact for education or support or in whom he
has pecuniary interest.
3. Any person under legal obligation to him for
the payment of money, respecting property or
services of which death or illness might delay
or prevent performance.
4. Any person upon whose life, any estate or
interest vested in him depends.
WHEN MUST INSURABLE INTEREST IN LIFE EXIST
- Insurable interest in life must exist at the
time of the effectivity of the policy and
need not exist at the time of the death of the
insured as life insurance is not a contract of
indemnity. It is meant to give financial
security to the insured or his beneficiaries
(Sec. 19). However, insurable interest of a
creditor on the life of the debtor must exist
only at the time of effectivity but also at the
time of the death of the debtor – as in this
instance it is a contract of indemnity. His
interest is capable of exact pecuniary
measurement.
IS THE CONSENT OF THE INSURED REQUIRED
WHEN INSURANCE IS TAKEN
- The law does not require the consent of the
person insured and such has been considered
as not essential to the validity of the contract
as long as there is insurable interest at the
beginning;
WHEN DOES A PERSON HAVE INSURABLE
INTEREST IN PROPERTY
A person has insurable interest in property as every
interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might
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 GREEN NOTES IN COMMERCIAL LAW
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directly damnify the insured is an insurable COMPARE WITH INSURABLE INTEREST IN LIFE:
interest (Sec. 13). It may consist of: 2002 BAR EXAM (N0.XVII)

(a) An existing interest INSURABLE

(b) An inchoate interest founded on an INSURABLE INTEREST IN
existing interest INTEREST IN LIFE PROPERTY
(c) An expectancy coupled with an existing Must exist only at Must exist at the
interest in that out of which the the time the policy time the policy takes
expectancy arises; takes effect and need effect and when the
Note: not exist at the time loss occurs
- Expectancy must be founded on an actual right of loss
to the thing or a valid contract for it;
Unlimited except in Limited to actual
- A carrier or depository of any kind has insurable
life insurance value of interest in
interest in the thing held by him such to the
effected by creditor property insured.
extent of his liability but not to exceed the value
on life of debtor.
thereof (Sec. 13, 14, and 15).
The expectation of An expectation of a
benefit to be derived benefit to be derived
- But, a mere contingent or expectant interest
from the continued from the continued
in anything, not founded on contract or
existence of life need existence of the
actual right to the thing is not insurable – as
not have any legal property insured
there is no insurable interest (Sec. 16).
basis whatever. A must have a legal
reasonable basis.
INCHOATE RIGHT – The right to lay claim on the fun
probability is
is dependent on the solvency of the insurer and is
sufficient without
subject to all other obligations of the company arising
more.
from its insurance contracts. Thus, the respondents’
interest is merely inchoate. Being a mere expectancy, The beneficiary need The beneficiary must
it has no attribute of property. At this time, it is not have an have insurable
nonexistent and may never exist. Hence, it would be insurable interest interest over the
premature to make the security deposit answerable over the life of the thing insured.
for CISCO’s present obligation to Del Monte Motors. insured if the
(Republic of the Philippines v. Del Monte Motors, Inc., insured himself
Oct.9, 2006 G.R. No. 156956) secured the policy.
However, if the life
INSURABLE INTEREST IN BANK DEPOSITS insurance was
BAR EXAM; 2000 (VIII - b) obtained by the
beneficiary, the
Q: BD has bank deposit of half a million latter must have
pesos.Since the limit of trhe insurance coverage of insurable interest
the Philippine Deposit Insurance Corp Act ( 3591) over the life of the
is only one tenth of BD’s deposit, he would like insured.
some protection for the excess by taking out an
insurance against all risks or contingencies of loss
arising from any unsound or unsafe banking CHANGE OF INTEREST IN PROPERTY INSURED
practices including unforeseen adverse effects of (Transfer or Sale of Insured Property) (1994 &
the continuing crisis involving the banking and 2000 Bar Exams)
financial sector in Asia. Does BD have insurable
interest within the meaning of the Insurance Code? A change of interest in any part of a thing
insured unaccompanied by a corresponding change of
A: Yes, BD has insurable interest in his bank deposit. interest in the insurance suspends the insurance to an
In case of loss of said deposit, more particularly to the equivalent extent, until the interests in the thing and
extent of the amount in excess of the limit covered by the interest in the insurance are vested in the same
the Philippine Deposit Insurance Corporation Act, BD person. (Sec. 20)
will be damnified. He will suffer pecuniary loss of
P400,000.00, that is, his bank deposit of half a million Exceptions: 1) change of interest after the
pesos minus P100,000.00 which is the maximum loss; 2) change of interest in one or more of several
amount recoverable from the PDIC. things separately insured; 3) change of interest by will
or succession; and 4) transfer of interest by a partner,
MUST THE BENEFICIARY IN PROPERTY HAVE joint owner, or common owner, to another partner,
INSURABLE INTEREST ON THE PROPERTY joint owner or common owner.
INSURED?
- YES, as no contract or policy of insurance on Bar Exam (1980):
property shall be enforceable. Except for the Q: A insures his house for P 10, 000 commencing
benefit of some person having insurable January 1, 1952. On February 15, 1952, A sells the
interest in the property insured. house to B for P15,000 without endorsing or
transferring the fire policy to B. On April 20, 1952,
the house is completely destroyed on account of

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 GREEN NOTES IN COMMERCIAL LAW
the accidental fire. Can A or B collect the proceeds
of the policy from the insurer? Explain and give
reasons for your answer. (1952, 1959, 1980 Bar)
A: Neither A, the seller, nor B, the buyer, can collect
under the policy. A transfer of interest in property
without any transfer of interest in the insurance
suspends the latter until the interest in the property
and in the insurance is vested in the same person. A
has transferred his interest in the object of the
insurance (the house) to B without a transfer of his
interest in the insurance to B. As the interests in the
object and in the insurance are in different persons at
the time of the loss, none can recover under the policy.
WHAT CHANGE IS CONTEMPLATED
An absolute transfer of the property not life,
a lease/mortgage.
EXCEPTIONS TO THE REQUIREMENTS OF
INSURABLE INTEREST:
(1) Life, health or accident insurance because they
are not contracts of indemnity and insurable
interest is not required at the time of loss;
(2) A change of interest after occurrence of an
injury and results in loss – does not affect the
right of the insured to indemnity;
- After a loss, the liability of the insurer is
fixed;
(3) A change of interest in one or more several
distinct things, separately insured by one
policy, does not avoid as to the others; (Sec.
22)
(4) A change of interest in one or more several
distinct things, separately insured by one
policy, does not avoid the insurance as to the
insured; (Sec. 23)
(5) A transfer of interest by one or several
partners, joint owners, or owners in common,
who are jointly insured – to the others, does
not avoid insurance even though it has been
agreed that the insurance shall lease upon an
allocation of the thing insured;
(6) When notwithstanding a prohibition, the
consent of the insurer is obtained; and
(7) When the policy is so framed that it will insure
to the benefit of whomsoever may become the
owner during the continuance of the risk.
CONTINUATION OF ELEMENTS:
1. Insurable interest;
2. The insured is subject to risk of loss through
the destruction or impairment of that interest
by the happening of the designated risk;
3. The insurer assumes the risk of loss;
4. Such assertion is part of a general scheme to
distribute actual loss among a large group of
persons bearing somewhat similar risk;
5. As a consideration for the insurers promise,
the insured makes a ratable contribution
called a premium to the general insurance
fund;
WHAT MAY BE INSURED AGAINST
Any unknown or contingent event, whether
past or future, which may damnify a person having
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Prepared by: ATTY. RENATO S. RONDEZ
insurable interest or create a liability against him,
may be insured against (Sec. 3).
NOTE: IN RELATION TO THE INSURANCE SO
SECURE
1. The consent of the husband is not necessary for
the validity of an insurance policy taken by a
married woman on her life and that of her
children. Under Art. 145 of the Family Code, she
can also insure her separate property without the
consent of the husband.
2. A minor may take out a contract for life, health
and accident insurance with any company
authorized to do business in the Philippines,
provided it be taken out on his own life and the
beneficiary named is his estate, father, mother,
husband, wife, child, brother or sister. In so doing,
the married woman/minor may exercise all the
rights or privileges under the policy.
But – What is the effect of the death of the original
owner of a policy, which covers the life of a minor,
ahead of the minor? – all rights, title and interest in the
policy shall automatically vest in the minor unless
otherwise provided in the policy;
WHAT CANNOT BE INSURED
An insurance for or against the drawing of any
lottery or for or against any chance or ticket in a
lottery drawing or prize. Because gambling results
in profit and insurance only seeks to indemnify the
insured against loss (Sec. 4).
PARTIES TO A CONTRACT OF INSURANCE:
1. INSURER – every person, partnership, association
or corporation duly authorized to transact
insurance business as provided in the code may be
an insurer. It is the party who agrees to indemnify
another upon the happening of specified
contingency.
2. INSURED – party to be indemnified in case of loss
(Sec. 6). Anyone except a public enemy (a nation
at war with Philippines and every citizen subject
of such nation.
BAR EXAM; 2000 (VIII - a)
Q: May a member of the Moro Islamic Liberation
Front ( MILF ) or it’s breakaway group, the Abu
Sayaff, be insured with a company licensed to do
business under the Insurance Code of the
Philippines? Explain.
A: A member of the MILF or the Abu Sayyaf may be
insured with a company licensed to do business under
the Insurance Code of the Philippines. What is
prohibited to be insured is a public enemy. A public
enemy is a citizen or national of a country with which
the Philippines is at war. Such member if the MILF or
the Abu Sayyaf is not a citizen or national of another
country, but of the Philippines.
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 GREEN NOTES IN COMMERCIAL LAW
WHO MAY INSURE A MORTGAGED PROPERTY
Both the mortgagor and the mortgagee may
take out separate policies with the same or different
companies. The mortgagor – to the extent of his
property, the mortgagee – to the extent of his credit;
(Sec. 8)
INSURANCE INTEREST ON MORTGAGED PROPERTY
(2005 BAR EXAM (N0. X - 2- a)
Armando Geagonia v. CA 241 SCRA 154
SC:
Condition 3 is what is known as “other
insurance clause” which is a valid provision allowed
by the insurance code in order to prevent in an
increase in the moral hazard and to serve as a
warranty that no other insurance exists. Its
incorporation in fire policies prevents over insurance
and adverts the perpetration of fraud. Its violation will
thus avoid the policy. However, in order to constitute a
violation, the other insurance must be upon the same
subject matter, the same interest therein, and the
same risk.
Double insurance exists where the same
person is insured by several insurers separately in
respect of the same subject and interest.
The court ruled that since the stocks in trade
insured with PFIC were mortgaged property, separate
insurances covering different insurable interests may
be obtained by the mortgagor and mortgagee. The
insurable interests of a mortgagor and mortgagee are
separate and distinct, thus no double insurance exists
since the policies of PFIC do not cover the same
interest as that covered under the policy of Country
Banker’s Insurance Corp. The non-disclosure of the
policies with PFIC was not fatal to Armando’s right to
recover on his policy with Country Banker’s Insurance
Corp.
WHAT ARE THE CONSEQUENCES WHERE THE
MORTGAGOR INSURES THE PROPERTY
MORTGAGED IN HIS OWN NAME BUT MAY THE
LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS
THE POLICY TO HIM:
a. The insurance is still deemed to be upon the
interest of the mortgagor who does not cease to
be a party to the original contract. Hence, if the
policy is cancelled, notice must be given to the
mortgagor.
b. Any act of the mortgagor, prior to loss, which
would otherwise avoid the policy or insurance,
will have the same effect although the property
is in the hands of the mortgagee. Hence, if there
is a violation of the policy by the mortgagor, the
mortgagee cannot recover.
c. Any act required to be done by the mortgagor
may be performed by the mortgagee with the
same effect if it has been performed by the
mortgagor.
d. Upon the occurrence of the loss, the mortgagee
is entitled to recover to the extent of his credit
and the balance if any to be paid to the
mortgagor, since such is for both their benefits;
e. Upon recovery by the mortgagee, his credit is
extinguished;
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Note: Union Mortgage Clause – creates the relation
of insured and insurer between mortgagee and the
insurer independent of the contract of the mortgagor.
In such case, any act of the mortgagor can no longer
affect the rights of the mortgagee – the insurance
contract is now independent of that with the
mortgagor;
WHAT IS THE EFFECT OF INSURANCE PROCURED
BY THE MORTGAGEE WITHOUT REFERENCE TO
THE RIGHT OF THE MORTGAGOR
a. The mortgagee may collect from the insurer upon
the occurrence of the loss to the extent of his
credit.
b. Unless otherwise stated, the mortgagor cannot
collect the balance of the proceeds after the
mortgagee is paid.
c. The insurer, after payment to the mortgagee,
becomes subrogated to the rights of the
mortgagee against the mortgagor and may collect
the debt to the extent paid to the mortgagee.
d. The mortgagee after payment cannot collect
anymore from the mortgagor but if he is unable to
collect in full from insurer, he can recover from
the mortgagor.
e. The mortgagor is not released from the debt
because the insurer is subrogated in place of the
mortgagee.
3. BENEFICIARY – the person who receives the
benefits of an insurance policy upon maturity.
BENEFICIARIES IN LIFE INSURANCE
 Anyone, except who are prohibited by law to
receive donations from the insured. Note Art.
739 of the Civil Code, hence the following
cannot be designated as beneficiaries.
 Those made between persons guilty of
adultery or concubinage at the time of the
designation.
 Those guilty of the same criminal offense in
consideration thereof.
BAR EXAM (2008)
Q: On January 1, 2000, Antonio Rivera secured a
life insurance from SOS Insurance Corp. for P1
Million with Gemma Rivera, his adopted daughter,
as the beneficiary. Antonio Rivera died on March 4,
2005 and in the police investigation, it was
ascertained that Gemma Rivera participated as an
accessory in the killing of Antonio Rivera. Can SOS
Insurance Corp. avoid liability by setting up as a
defense the participation of Gemma Rivera in the
killing of Antonio Rivera? Discuss with reasons.
A: Sec. 12: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or accessory in
willfully bringing about the death of the insured; in
which event, the nearest relative of the insured shall
receive the proceeds of said insurance if not otherwise
disqualified. Thus, the insurance company must still
pay out the proceeds of the life insurance policy to the
nearest qualified relative of the insured.
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 GREEN NOTES IN COMMERCIAL LAW
Those made to a public officer or his wife,
descendants/ascendants by reasons of his office.
- A prior conviction for
adultery/concubinage is not required, it
can be proven by preponderance of evidence
in the same action nullifying the designation.
Note the cases of Insular Life vs. Ebrado, 80
SCRA 181, where a common law wife of the
insured who is married could not be named as
a beneficiary and SSS vs. Davac, 17 SCRA 863,
where the insured designated his second wife
as a beneficiary was upheld as the latter was
not aware of the first marriage.
Beneficiary in life and property insurance (BAR
EXAMS; 2005)
Philippine American Life Insurance Company v.
Pineda (175 SCRA 416)
SC:
Under the law, the beneficiary designated in a
life insurance contract cannot be changed without his
or her consent because of the beneficiary’s vested
interest in the policy. In this regard, it is worth nothing
that the beneficiary designation indorsement which
forms part of the policy in the name of Rodolfo
Dimayuga states that the designation of the
beneficiaries is irrevocable and no right or privilege
under the policy may be exercised, or agreement made
with the insurance company to any change in or
amendment to the policy without the consent of the
said beneficiary. Accordingly, based on the provisions
of the contract and the law applicable, it is only with
the consent of all the beneficiaries that any change or
amendment to the policy concerning the irrevocability
of beneficiaries may be legally and validly effected.
Insurable interest on property
(BAR EXAMS, 2009)
Spouses Nilo Cha v. CA Aug. 18, 1997
SC:
1. The lessor cannot validly be a beneficiary of the
fire insurance policy taken by the spouses Cha. It
has no insurable interest on the merchandize
insured because it remains with the spouses.
2. The automatic assignment of the policy to the
lessor is void for being contrary to law and public
policy. The proceeds of the fire insurance policy
rightfully belong to the Sps. Cha.
3. The insurer cannot be compelled to pay the
proceeds of the policy to the lessor who has no
insurable interest on the property insured.
CAN THE BENEFICIARY BE CHANGED
- The insured shall have the right to change the
beneficiary he designated – unless he has
expressly waived the right in the policy (Sec.
11);
- If he has waived the right, the effect is to
make the designation as irrevocable. Note
that the designation of the guilty spouse as
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Prepared by: ATTY. RENATO S. RONDEZ
irrevocable beneficiary is revocable as the
instance of the innocent spouse in cases of
termination of:
(1) a subsequent marriage;
(2) nullification of marriage;
(3) annulment of marriage; and
(4) legal separation (Art. 34, (4) Family
Code
WHAT IS THE EXTENT OF THE INTEREST OF THE
IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE
CONTRACT
The beneficiary has a vested right that cannot
be taken away without his consent. In fact should the
insured discontinue payment of the premium, the
beneficiary may continue paying. Neither can the
insured get a loan or obtain the cash surrender value
of the policy without his consent (Nario vs.
Philamlife, 20 SCRA 434).
Note: Where the wife and minor children were named
irrevocable beneficiaries, wife dies, the husband seeks
to change the beneficiaries with the consent of the
children. The consent is not valid due to minority.
(Philamlife vs. Pineda, 170 SCRA 416)
BAR EXAM; 2005 (NO. IX -1)
Q: What are the effects of an irrevocable
designation of a beneficiary under the Insurance
Code? Explain.
A: The irrevocable beneficiary has a vested interest in
the policy, including its incident such as the policy loan
and cash surrender value. (Grogorio v. Sun Life
Assurance Company of Canada, 48 Phil. 53 [1925])
2005 BAR EXAM (NO. IX- 2)
Q: Jacob obtained a life insurance policy for P1
Million designating irrevocably Diwata, a friend, as
his beneficiary. Jacob, however, changed his mind
and wants Yob and Jojo, his other friends, to be
included as beneficiaries considering that the
proceeds of the policy are sufficient for the three
friends.Can Jacob still add Yob and Jojo as his
beneficiaries? Explain.
A: The insured cannot add other beneficiaries as this
would diminish the interest of Diwata who is the
irrevocably designated beneficiary. The insured can
only do so with the consent of Diwata.
WHAT IS THE INTEREST OF AN IRREVOCABLE
BENEFICIARY IN AN ENDOWMENT POLICY
His interest is contingent as benefits are to be
paid only if the assured dies before the specified
period. If the insured outlives the period, the benefits
are paid to the insured.
WHAT IS THE EFFECT OF FAILURE TO DESIGNATE
OR BENEFICIARY IS DISQUALIFIED
The benefits of the policy shall accrue to the
estate of the insured.
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 GREEN NOTES IN COMMERCIAL LAW
WHO RECOVERS IF BENEFICIARY PREDECEASES
THE INSURED
 If designation is irrevocable, the legal
representatives of the beneficiary may recover
unless it was stipulated that the benefits are
payable only “if living.”
 If revocable, and no change is made, the benefits
passes to the estate of the insured. The rule
holds also if benefits were payable “only if
living” or “if surviving” and the beneficiary dies
before the insured.
CONCEALMENT
 Neglect to communicate that which a party
knows and ought to communicate (Sec. 26).
EFFECT OF CONCEALMENT
Whether intentional or not, it entitles the
injured party to rescind the contract of insurance (Sec.
27).
2001 BAR EXAM (N0.XVI)
Q: A applied for a non-medical life insurance. The
insured did not inform the insurer that one week
prior to his application for insurance, he was
examined and confined at St. Lukes hospital where
he was diagnosed for lung cancer. The insured
soon thereafter died in a plane crash. Is the
insurer liable considering that the fact concealed
had no bearing with the cause of death of the
insured? Why?
A: No. The concealed fact is material to the approval
and issuance of the insurance policy. It is well settled
that the insured need not die of the disease he failed to
disclose to the insurer. It is sufficient that his non-
disclosure misled the insurer in forming his estimate
of the risks of the proposed insurance policy or in
making inquiries.
WHO MUST PROVE KNOWLEDGE OF THE FACT
CONCEALED?
The party claiming existence of concealment
must prove that there was knowledge on the part of
the party charged with concealment.
AS OF WHAT TIME MUST THE PARTY CHARGED
WITH CONCEALMENT HAVE KNOWLEDGE OF THE
FACT CONCEALED
- Generally, at the time of the effectivity of
the policy. Note that even if a party did not
know of the existence at the crime of
application but before its effectivity, there is
concealment.
- Information acquired after effectivity is
not concealment and does not constitute
ground to rescind the policy, as after the
policy is issued, information subsequently
acquired is no longer material as it will not
affect or influence the party to enter into
contract. However, in case of the
reinstatement of a lapsed policy, facts known
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Prepared by: ATTY. RENATO S. RONDEZ
after effectivity but before reinstatement
must be disclosed.
HOW IS THE MATERIALITY OF THE CONCEALMENT
OR REPRESENTATION DETERMINED?
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. (Sec. 31)
MUST THERE BE A CAUSAL CONNECTION
BETWEEN THE FACT CONCERNED AND THE CAUSE
OF THE LOSS?
Not necessary. It is sufficient that the non-
revelation has misled the insurer in forming its
estimate of disadvantage of fixing the premium.
WHAT FACTS MUST BE COMMUNICATED?
(a) Such fact within his knowledge – as
concealment requires knowledge of the fact
concealed by the party charged with
concealment.
(b) Fact/s material to the contract – it must be
of such nature that had the insurer known of
it, it would not have accepted the risk or
demanded a higher premium.
(c) That the other party had no means of
ascertaining such fact/s.
(d) That the party with a duty to communicate
makes no warranty (Sec. 28) – as the existence
of a warranty make the requirement to disclose
superfluous but – an intentional fraudulent
omission on the part of the one insured to
communicate information on a matter proving or
tending to prove falsity of a warranty entitles the
insurer to rescind. (Sec. 29)
1996, 1997, and 2001 BAR EXAMS
Sun Life Assurance Co. of Canada vs. CA, June 22,
1995
Robert Bacani was issued life insurance non-medical
policy for P100,000.00 with his mother as
beneficiary. In his application, he concealed his
confinement at the Lung Center of the Philippines for
certain illness. He died of a plane crash. The
insurance company refused to pay for breach of the
insurance contract.RTC and CA granted the claim of
the beneficiary because the concealed facts were not
material or irrelevant to the cause of death.
SC:
The SC reversed the ruling and held that the
information which the insured failed to disclose was
material and relevant to the approval and issuance of
the policy. The facts concealed would have affected
the insurer’s action on the application either by
charging a higher rate of premium or rejecting the
same. The insured need not die of the disease he
concealed. It is sufficient that his non-disclosure
misled the insurer in forming his estimate of the risk
involved or in making inquiries. The contract of
insurance can be rescinded by reason of concealment
and this has to be exercised within the two year
contestability period.
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 GREEN NOTES IN COMMERCIAL LAW
REPRESENTATION
 Oral or written statement of a fact or a condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer
to take the risk. (Sec. 36)
WHEN MAY REPRESENTATION BE MADE
Since it is an inducement to entering a
contract – it must ordinarily be made at the same time
as or before – the insurance of the policy (Sec. 37).
Note that it can also be made after the issuance of the
policy when the purpose thereof is to induce the
insurer to modify an existing insurance contract – as
the provisions also apply to a modification (Same with
concealment)
FORMS AND KINDS OF REPRESENTATION
It may be Oral or Written and can either be:
(a) Affirmative –an affirmation of a fact
existing when the contract begins.
(b) Promissory –statement by the insured
concerning what is to happen during the
term of the insurance.
IS A REPRESENTATION PART OF THE CONTRACT
No, it cannot qualify as an express provision
in a contract (it is a collateral inducement to the
contract but it may qualify an implied warranty. (Sec.
40)
CAN A REPRESENTATION BE WITHDRAWN OR
ALTERED
Yes, as long as the insurance has not yet been
effected and the insurer has not yet been induced to
issue the policy. If withdrawn or altered afterwards,
the contract can be rescinded as the insurer has
already been led to issue the policy. (Sec. 41)
TO WHAT DATE DOES A REPRESENTATION REFER
It must be presumed to refer to the date on which
the contract goes into effect. (Sec. 42)
Note: There is no false representation if it is true at
the time the contract takes effect although false at the
time it is made.
WHEN IS THE INSURED REQUIRED TO DISCLOSE
INFORMATION FROM A 3RD PERSON
When the information material to the
transaction was acquired by an agent of the insured, as
knowledge of the agent is also knowledge of the
principal.
WHAT IS THE EFFECT OF MISREPRESENTATION
ON A MATERIAL POINT?
If it is false on material point, whether
affirmative or promissory – the injured party is
entitled to rescind the contract from the time the
representation becomes false. However, the right to
rescind is considered waived by the acceptance of
premium payments despite knowledge of the ground
to rescind. (Sec. 45)
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Prepared by: ATTY. RENATO S. RONDEZ
WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE
EXERCISED
It is exercised previous to the commencement
of an action on the contract (Sec. 48). Note the case of
Tan Chay Hing vs. West Coast Life Insurance Co., 51
Phil 80, where an insurer interposed the defense in an
action to claim the proceeds that the contract is null
and void. Section 48 was held to apply only when
there is a contract to rescind.
It is also qualified by 2nd paragraph of
Section 48 which provides that after a policy of life
insurance payable on the death of the insured shall
have been in force during the lifetime of the insured
for a period of 2 years from the date of issue or its last
reinstatement, the insurer cannot prove that the policy
is void ab initio or is subject to rescission by reason of
a fraudulent concealment or misrepresentation of the
insured or his agent (known as the incontestability
clause).
WHAT IS THE THEORY AND OBJECT BEHIND THE
INCONTESTABILITY CLAUSE
(a) On the part of the insurer – an insurer
has/should have a reasonable
opportunity to investigate the statements
which are made by the applicant an that
after a definite period, it should no longer
be permitted to question its validity.
(b) On part of the insured – its object is to
give the greatest possible assurance that
the beneficiaries would receive payment
of the proceeds without question as to
validity or the policy.
REQUISITES OF INCONTESTABILITY CLAUSE
(1) It is a life insurance policy;
(2) It is payable on the death of the insured;
(3) It has been in force during the lifetime of
the insured for at least two years from
date of issue/or last reinstatement.
WHAT DEFENSES ARE NOT BARRED BY
INCONTESTABILITY EVEN AFTER THE LAPSE OF 2
YEARS?
(1) non-payment of premiums;
(2) lack of insurable interest;
(3) that the cause of death was excepted or
not covered by the terms of the policy;
(4) that the fraud was of a particular vicious
type such as:
a. policy was taken in furtherance of a
scheme to murder the insured;
b. where the insured substituted
another for the medical examination;
c. where the beneficiary feloniously
killed the insured;
(5) violation of a condition in the policy
relating to military or naval service in
time of war;
(6) the necessary notice or proof of death
was not given;
(7) action is not brought within time
specified in the policy, which in no case
should be less than 1 year as per Sec. 63.
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 GREEN NOTES IN COMMERCIAL LAW
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(1) A cover note is valid for 60 days whether

CONCEALMENT AND REPRESENTATION
COMPARED
1.
In concealment – the insured withholds
information of material facts, while in
representation – the insured makes
erroneous statements;
2. In concealment and misrepresentation both
give the insurer the right to rescind the
contract of insurance;
3. The materiality of concealment and
representation are determined by the same
rules;
4. Whether the concealment or representation
is intentional or not, the injured party can
rescind;
5. Since insurance contracts are of utmost good
faith – the insurer is also covered by the
rules.
POLICY
 It is the written instrument in which a
contract of insurance is set forth. (Sec. 49)
WHAT MUST A POLICY SPECIFY?
A policy must specify:
(1) The parties whom the contract is made;
(2) The amount to be insured except in open
or running policies;
(3) The premium, or if the premium is to be
determined at the termination of the
contract, a statement of the basis and
rates upon which the final premium is to
be determined;
(4) The property or life insured;
(5) The interest of the insured in the
property insured, if not the absolute
owner;
(6) The risks insured against;
(7) The period during which the insurance is
to continue. (Sec. 51)
COVER NOTES
 It is a written memorandum of the most
important terms of a preliminary contract of
insurance intended to give protection pending
investigation by the insurer of the risk or until
the insurance of the formal policy (Sec. 52). It
is also known as binding slip or receipt or
binder.
or not a premium is paid but may be
cancelled by either party upon at least 7-
day notice to the other party.
(2) If the other note is not cancelled, a
regular policy must be issued within 60
days from the date of issue of the cover
note including within its terms the
identical insurance.
(3) It may be extended with the written
approval of the commissioner but may be
dispensed with by a certification of the
President, Vice-President or General
Manager of the insurer that the risks
involved and the extension do not violate
the code.
(4) Insurance companies may impose a
deposit premium equivalent to at least
25% of the estimated premium but in no
case less than Php500.00.
IS PAYMENT OF A PREMIUM PAYMENT FOR THE
COVER NOTE NECESSARY TO BE PROTECTED
AGAINST RISK INSURED AGAINST?
Cover note held to be binding despite the
absence of a premium payment for its issuance. No
separate premiums are intended or required to be
paid on a cover note because they do not contain
particulars of the property insured that would
serve as the basis for the computation of
premiums – such being the case no premium can be
fixed. The cover notes should not be treated as a
separate policy but should be integrated in the regular
policy subsequently issued so that premiums on the
regular policy should include that for the cover note
(Pacific Timber vs. CA, 112 SCRA 199);
BAR EXAM; 2009 (IV)
Q: Antarctica Life Assurance Corporation (ALAC)
publicly offered a specially designed insurance
policy covering persons between the ages of 50 to
75 who may be afflicted with serious and
debilitating illnesses. Quirico applied for
insurance coverage, stating that he was already 80
years old. Nonetheless, ALAC approved his
application.Quirico then requested ALAC for the
issuance of a cover note while he was trying to
raise funds to pay the insurance premium. ALAC
granted the request. Ten days after he received the
cover note, Quirico had a heart seizure and had to
be hospitalized. He then filed a claim on the policy.

EFFECTIVITY OF A COVER NOTE a. Can ALAC validly deny the claim on

the ground that the insurance coverage, as
The effectivity of a cover note is 60 days – as
publicly offered, was available only to
within such period, a policy shall be issued including
persons 50 to 75 years of age? Why or why
in its terms the identical assurance found under the
not? (2%)
cover rate and the premium therefore. It may
b. Did ALAC’s issuance of a cover note
however, be extended beyond 60 days and with the
result in the perfection of an insurance
written approval of the Insurance Commissioner if he
contract between Quirico and ALAC?
determines that it does not violate the Insurance Code.
Explain.
NOTE THE FOLLOWING RULES HAVE BEEN
PROMULGATED BY THE INSURANCE A: a. No. There was no concealment on the part of
COMMISSIONER: Quirico as to his age.

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 GREEN NOTES IN COMMERCIAL LAW
b. Yes, one of the exception of the cash and carry rule
is in life insurance when the grace period applies. in
the case at bar, the issuance of the cover note shows
that the insurer granted a grace period.
WHOSE INTEREST IS INSURED
(1) The insurance proceeds shall be applied
exclusively to the proper interest of the
person in whose name or for whose benefit it
is made unless otherwise specified in the
policy (Sec. 53).
MAY A 3RD PERSON SUE THE INSURER – No, in
general rule unless there is stipulation. Unless
otherwise specified in the policy, a 3RD person may sue
if:
(a) The insurance contract contain stipulation
in favor of a 3RD person, the latter though not
a party may sue to enforce before the contract
is revoked by the parties;
(b) The insurance contract provides for
indemnity against liability to 3RD persons.
The test to determine whether a
3rd person may directly sue the insurer of
the wrongdoer is: if the contract provides
indemnity against liability to 3RD persons, then
the latter to whom the insured is liable may
directly sue the insurer, on the other hand, if
the insurance if for the indemnity against actual
loss or payment – then the 3rd person cannot sue
the insurer – recourse is against the insured
alone.
(2) If the contract is executed with an agent or
trustee as the insured, the fact that his
principal or beneficiary is the real party in
interest may be indicated by describing the
insured as the agent/trustee or by general
words in the policy (Sec. 54). If not indicated,
it is as if the insurance is the taken out by the
agent/trustee alone, consequently the
principal has no right against the insurer;
(3) If a partner or part owner effects insurance, it
is necessary that the terms of the policy
should be such as are applicable to the joint
or common interest so that it may be
applicable to the interest of his co-
partners/owners (Sec. 55). Consequently, the
policy must state that the interest of all is
insured, if not, it is only the interest of the one
getting the policy that is insured;
(4) When the description of the insured in the
policy is so general that it may comprehend
any person or any class of persons, only he
who can show that it was intended to include
him can claim the benefit of the policy (Sec.
56).
(5) When a policy is so framed that it will inure to
the benefit of whomsoever, during the
continuance of the risk may become the owner
of the interest insured (Sec. 57). The proceeds
become payable to who may be the owner at
the time the loss or injury occurs. This is an
exception to Sec. 20.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
(6) The mere transfer of a thing insured does not
transfer the policy but suspends it until the
same person becomes the owner of both the
policy and the thing insured (Sec. 58). Note the
exceptions to this rule as found in Sec. 20-24
and 57.
KINDS OF INSURANCE POLICIES:
 Open Policy - value of the thing insured is
not agreed upon, but is left to be
ascertained in case of loss (Sec. 60). What
is mentioned, as the amount is not the
value of the property but merely the
maximum limit of the insurer’s liability. In
case of loss, the insurer only pays the
actual cash value at the time of loss.
 Valued Policy - expresses on its face that
the thing insured shall be valued at a
specified sum (Sec. 61). The valuation of
the property insured is conclusive
between the parties. In the absence of
fraud or mistake, such value will be paid in
case of a total loss.
 Running Policy (Floating Policy) -
contemplates successive insurances and
which provides that the object of the
policy may be from time to time defined
especially as to the subjects of insurance,
by additional statements or indorsements
(Sec. 62). This is also known as a Floating
Policy – usually issued to provide
indemnity for property, which cannot be
covered by specific insurance because of a
frequent change in location and quantity.
VALUED POLICY vs. OPEN POLICY
VALUED POLICY OPEN POLICY
Proof of value of the Insured must prove the
thing after the loss is value of the thing
not necessary. insured.
Parties have Value is not agreed but
conclusively stipulated left to be ascertained
that the property upon loss.
insured is valued at a
specified sum.
CAN THERE BE AGREEMENTS AS TO
PRESCRIPTION OF AN ACTION OR LIMITATIONS
ON THE PERIOD OF TIME TO BRING AN ACTION
Yes, provided the period agreed upon should
not be less than one year (Section 63). If less than
one year, the agreement is void. The period so agreed
shall be considered as having commenced from the
time the cause of action accrues. Usually, the cause of
action accrues from the date of the insurers rejection
of the claim of the beneficiary or of the insured – since
before rejection there is no necessity to bring suit.
When no period is stipulated or if the stipulation is
void, the period is within 10 years under article 1144,
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 GREEN NOTES IN COMMERCIAL LAW
New Civil Code, it being a written contract (Eagle Star
vs. Chia Yu 96 Phil 696, ACCFA vs. Alpha Insurance, 24
SCRA 151).
WHERE IS THE ACTION FILED
The action may be filed in the following:
(1) Courts;
(2) Insurance Commissioner, who has
concurrent jurisdiction with courts for
claims not exceeding Php100,000.00;
(3) POEA/DOLE have the power to compel a
surety to make good on a solidary
undertaking in the same proceeding
where the liability of the principal obligor
is determined.
Note that the claim becomes action upon filing with
the court.
CANCELLATION OF THE POLICY
If policy other than life shall be cancelled by the
insurer except upon prior notice thereof to the
insured. No notice of cancellation shall be effective
if not based on the occurrence, after effective date
of one or more grounds: (Section 64)
(1) Non payment of premium;
(2) Conviction of a crime arising out of acts
increasing the hazard insured against
(3) Discovery of material representation;
(4) Discovery of willful or reckless acts or
omissions increasing the hazard insured
against;
(5) Physical changes in the property insured
which the result in the property being
uninsurable;
(6) Determination by the insurance
commissioner that continuation of the
policy would place the insurer in
violation of the code:
FORM OF NOTICE OF CANCELLATION
It must be in writing, mailed or delivered to
the name insured at the address shown in the policy
which shall state:
(1) The grounds relied upon as per Section
64, and;
(2) That upon written request of the named
insured, the insurer will furnish the facts
on which cancellation is based (Sec. 65).
WARRANTIES
 It is a statement or promise stated in the policy or
incorporated therein by reference, whereby the
insured – expressly or impliedly (Section 67)
contracts as to the past, present or future (Section
68) existence of certain facts, conditions or
circumstances – the literal truth of which is
essential to the validity of the contract.
KINDS OF WARRANTIES
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
(1) Affirmative – those that relate to matters
that exist at or before the issuance of the
policy;
(2) Promissory – those where the insured
promises or undertakes that certain
matters shall exist or will be done or will
be omitted after the policy takes effect. It
is a statement in the policy, which
imparts that it is intended to do or not to
do a thing which materially affects the
risk, is a warranty that such act or
omission shall take place (Section 72);
(3) Express – a statement in a policy of a
matter relating to the person or thing
insured or to the risk as a fact (Section
71) and where the assertion or promise
is clearly set forth in the policy or
incorporated therein by reference. They
can be affirmative or promissory
warranties;
An express warranty made at or before
the execution of the policy should be
contained (a) in the policy itself (b) in
another instrument signed by the insured
and referred to in the policy as making a
part of it (Section 70). This includes a
rider – it is a part of the policy, it need
not be signed unless the rider was issued
after the original policy took effect;
(4) Implied – where the assertion or
promise is not expressly set forth in the
policy but because of the general tenor of
the terms of the policy or from the very
nature of the insurance contract, a
warranty is necessarily inferred or
understood. Note that the law only
provides for implied warranties in
contracts of marine insurance. See Sec.
113 (seaworthiness) and 126 (deviation).
EFFECT OF VIOLATION OF A WARRANTY
 The violation of a material warranty, or other
material provision of the policy, on the part of
either party thereto, entitles the other to
rescind (Sec. 74). Note that the insured can
exercise the right also when the insurer violates
a warranty, like when it refuses to grant a loan
on the policy.
 Note that a causal connection between the
violation of the warranty is not necessary – So,
even if the violation did act contribute in the
loss – the other party may still rescind.
THE NON PERFORMANCE OF A PROMISSORY
WARRANTY DOES NOT AVOID THE POLICY WHEN
BEFORE THE ARRIVAL OF THE TIME FOR
PERFORMANCE (Sec. 73)
(1) The loss insured against happens;
(2) The performance becomes unlawful at
the place of the contract;
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 GREEN NOTES IN COMMERCIAL LAW
(3) The performance becomes impossible.
WARRANTY VS. REPRESENTATIONS
WARRANTY REPRESENTATION
Part of the contract Merely a collateral
inducement thereto
Expressly set forth in May be oral or written
the policy or in another statement
incorporated therein
by reference
Strictly and literally Must be substantially
performed true
Presumed material Must be shown to be so
Breach of warranty is a Misrepresentation is a
breach of the contract ground to rescind the
itself contract
PREMIUM
 The agreed price for assuming and carrying
the risk.
WHEN IS THE INSURER ENTITLED TO A PREMIUM?
The insurer is entitled to the payment of a
premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding
unless and until the premium is paid except in:
(1) In case of life or industrial life (life
insurance policy where the premium is
payable monthly or oftener) whenever
the grace period applies (Sec. 77);
(2) When the insurer makes a written
acknowledgement of the receipt of
premium, such is conclusive evidence of
the payment of the premium to make it
binding notwithstanding any stipulation
therein that it shall not be binding until
the premium is paid (Sec. 78) HENCE, the
effect of an acknowledgement in a
policy or contract of insurance of the
receipt of the premium – is that it is
conclusive evidence of payment – so far
as to make the policy binding. However,
it is conclusive only to make the policy
binding and not for the purpose of
collecting premium, and;
(3) Where the obligee has accepted the bond
or suretyship contract in which case such
bond or suretyship contract becomes
valid and enforceable irrespective of
whether or not the premium has been
paid by the obligor to the surety (Sec.
177).
EXCEPTIONS TO SECTION 77:
UCPB General Insurance Inc. vs .Masagana
Telemart, Inc. (G.R. No. 137172 April 4, 2001)
1. When the grace periods applies; (Sec. 77)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. When the insurer makes a written
acknowledgment of the receipt premium; (Sec.
78)
3. Section 77 may not apply if the parties have
agreed to the payment of the premium in
installments and partial payment has been made
at the time of the loss; (Makati Tuscany
Condominium Corp. v. CA, 215 SCRA 462)
4. If the insurer granted the insured a credit term
for the payment of the premium and loss occurs
before the expiration of the term, recovery
should be allowed even the premium is paid after
the loss but within the credit term;
5. Where the parties are barred by estoppel.
WHAT IS THE EFFECT OF PARTIAL PAYMENT?
Ordinarily, the obligation to pay premium
when due is considered an indivisible obligation.
Hence, forfeiture is not prevented by a part payment
unless, payment by installment has been agreed upon
or is the established practice – the basic principles of
equity and fairness would not allow the insurer to
collect and accept installments and later deny liability
as premiums were not paid in full.
PAYMENT TO INSURANCE AGENT OR BROKER --
payment to the insurance company.
WHEN IS THE INSURED ENTITLED TO A RETURN
OF THE PREMIUMS PAID? 2000 BAR EXAM (IX – a)
The insured is entitled to a return when:
(1) To the whole premium, when no part of
the interest in the thing insured is
exposed to any of the perils insured
against (Sec. 79 –A);
(2) Where the insurance is made for a
definite period of time and the insured
surrenders his policy before the
expiration of the period, here the insured
only recovers a portion of the policy
premiums corresponding with the
unexpired time but it does not apply if:
(a) the policy is not so definite;
(b) a short period rate (insurance is
for a period of less than a year
and a rate has been agreed to if
the policy is surrendered;
Example: If the policy is in force
for a month the insurer retains
20% of the premium) has been
agreed upon;
(c) the policy is a life insurance
policy – it is indivisible but he
has a cash surrender value;
(3) When the contract is voidable on account
of fraud or misrepresentation of the
insurer or the agent (Sec. 81);
(4) Where the contract is voidable on
account of facts, the existence of which
the insured was ignorant without his
fault (Sec. 81);
(5) When by any default of the insured other
than actual fraud, the insurer never
incurred any liability under the policy
(Sec. 81);
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 GREEN NOTES IN COMMERCIAL LAW
(6) In case of over insurance. Here the
insurance is in excess of the amount of
the insurable interest of the insured and
it is insured by several insurers, the
insured is entitled to a RATABLE
RETURN OF PREMIUM, proportional to
the amount by which the aggregate sum
insured in all the policies exceeds the
insurable value;
WHEN ARE THEY NOT RECOVERABLE
Premiums cannot be recovered:
(1) If the peril insured against has existed,
and the insurer has been liable for any
period, the period being entire and
indivisible (Sec. 80).
(2) In life insurance – (Sec. 79-b) cash
surrender value.
(3) When the insured is guilty of fraud or
misrepresentation (Sec. 81).
LOSS AND NOTICE OF LOSS
WHAT ARE THE RULES TO DETERMINE WHETHER
THE INSURER IS LIABLE FOR THE LOSS OF THE
THING INSURED?
1. Loss of which a peril insured is the proximate
cause.
2. Loss caused by efforts to rescue the thing
insured from a peril insured against that
would otherwise have caused a loss, if in the
course if such rescue, the thing is exposed to
peril not insured against, which permanently
deprives the insured of its possession in
whole or in part, or where a loss is caused by
efforts to rescue the thing insured from a peril
insured against (Sec. 85). Here the principle of
proximate cause is extended to loss incurred
while saving the thing insured.
3. Where a peril is especially excepted in a
contract of insurance a loss, which would not
have occurred but for such peril, is thereby
excepted although the immediate cause of the
loss was a peril which was not excepted (Sec.
86). The immediate cause is the CAUSE OR
CONDITION NEAREST THE TIME AND PLACE
OF THE INJURY. Here, the insurer will be
liable if both the immediate cause and the
proximate cause are not excepted. If the
proximate cause is excepted and the
immediate cause is not, the insurer is not
liable.
4. An insurer is not liable for loss caused by the
willful act or through the convenience of the
insured; but he is not exonerated by the
negligence of the insured, or of the insured’s
agent or others (Sec. 87).
2007 BAR EXAM (IV)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
Q: Alfredo took out a policy to insure
his commercial building against fire. The broker
for the insurance company agreed to give a 15-day
credit within which to pay the insurance premium.
Upon delivery of the policy on May 15, 2006,
Alfredo issued a postdated check payable on May
30, 2006. On May 28, 2006, a fire broke out and
destroyed the building owned by Alfredo.Reason
briefly in (a), (b) and (c).
a. May Alfredo recover on the insurance policy?
A: Yes, Alfredo can recover on the insurance policy.
Although Section 77 of the Insurance Code provides
that in fire insurance, payment of premium is
necessary for validity of the policy (also known as
“cash and carry” provision), nonetheless, the rule has
been modified by the decisions of the Supreme Court
after the promulgation of the Insurance Code. Thus, in
UCPB General Insurance v. Masagana Telemart, G.R.
No. 137172, April 4, 2001, it was held that the insured
should be allowed to recover on losses sustained even
when premium was paid after the fact of loss,
provided payment was received by the insurer during
the credit period given to the insured. (See also South
Sea Surety v. Court of Appeals, G.R. No. 102253, June
2, 1995; American Home Assurance v. Chua, G.R. No.
130421, June 28, 1999) where the Supreme Court
ruled that is the check payment for premium was
received by the insurer prior to the loss or within the
credit period, the insured was allowed to recover.
b. Would your answer in (a) be the same if it was
found that the proximate cause of the fire was an
explosion and that fire was but the immediate
cause of loss and there is no excepted peril under
the policy?
Yes, recovering under an insurance contract is
allowed if the cause of the loss was either the
proximate or the immediate cause as long as an
expected peril was not the proximate cause of the loss.
(Section 86, Insurance Code of the Philippines.) The
fire being the immediate cause for the loss of
the commercial building, would warrant recovery
under the policy.
c. If the fire was found to have been caused by
Alfredo's own negligence, can he still recover on
the policy?
Yes, he can still recover. The doctrine of contributory
negligence does not in any way apply to rights under a
contract of insurance, unless it is a case of willful act.
(Section 87, Insurance Code of the Philippines)
RECOGNIZING THAT THERE ARE PROBLEMS IN
DETERMINING PROXIMATE CAUSE – NOTE THE
FOLLOWING RULES:
(a) If there is a single cause which is an insured
peril, clearly it is the proximate cause and
there is liability;
(b) If there are concurrent causes (those
happening together) with no excluded perils,
there if liability if one of the causes is an
insured peril, the others may be ignored;
(c) If there are concurrent causes with an
excepted peril (insured peril operate together
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 GREEN NOTES IN COMMERCIAL LAW
to produce the loss) the claim will be outside
the scope of the policy;
(d) But if the results of the operation of the
insured peril can be clearly separated from
the effects of the excepted peril, the insurer is
liable;
(e) Where a number of causes operate one from
the other, the original cause happens to be a
peril, the insurer is liable.
TRANSFER OF CLAIMS
An agreement not to transfer the claim of the
insured after the loss happens – is VOID if MADE
BEFORE THE LOSS except as otherwise provided in
case of life insurance (Sec. 33).
This means that the insured has an absolute
right to transfer his claim against the insurer AFTER
THE LOSS occurs, what is prohibited is a transfer prior
to the loss.
This is so because such stipulation after the
loss occurs shall hinder the transmission of property.
Neither does it affect the insurer as its liability is
already fixed and what is actually assigned is the
money claim, not the contract itself.
The exception in Sec. 173 that provides that
the transfer of a fire insurance policy to any person or
company who acts as an agent for or otherwise
represents the issuing company is prohibited and is
void insofar as it affects other creditors of the insured.
NOTICE AND PROOF OF LOSS
Notice of loss must be given without
unnecessary delay by the insured or some person
entitled to the benefit of the insurance. IF NOT THEN,
the insurer is exonerated (Sec. 88).
WITHOUT UNNECESSARY DELAY – is within a
reasonable time, depending on circumstances of a
peculiar case, although courts have construed the
requirement liberally in favor of the insured.
PROOF OF LOSS
If the policy requires Preliminary Proof of
Loss (evidence given the insurer of the occurrence of
the loss, its particulars, and data necessary to enable it
to determine liability and the amount thereof) IT IS
NOT NECESSARY that the insured give such proof – AS
MAY OR WOULD BE NECESSARY IN A COURT OF
JUSTICE WHAT IS SUFFICIENT is the BEST EVIDENCE
which he has in his power at that time (Sec. 89).
WHEN ARE DEFECTS IN THE NOTICE OR PROOF
LOSS DEEMED WAIVED BY THE INSURER
 When the insurer fails to specify to the
insured any defect which the insured can
remedy without delay.
 When the insurer denies liability on a ground
other than that defect in the notice or proof of
loss.
WHEN IS DELAY IN THE GIVING OF NOTICE
WAIVED
1. If it is caused by any act of the insurer.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. If the insurer omits to make an objection
promptly and specifically on that ground. –
despite delay, the insurer does not object (Sec.
91).
WHAT HAPPENS AFTER PAYMENT BY THE
INSURER SUBSEQUENT TO GIVING OF NOTICE OF
LOSS
In property insurance, after the insured has
received payment from the insurer of the loss covered
by the policy, the insurance company is SUBROGATED
to the rights of the insured against the wrongdoer or
the person who has violated the contract. The right of
subrogation accrues upon payment of the insurance
claim.
NOTE: Subrogation takes effect by operation of law
and does not require the consent of the wrong doer
(Fireman’s Fire Insurance vs. Jamilla & Company, 70
SCRA 323).
THERE IS NO SUBROGATION IN:
(a) Life insurance as it is not a contract of
indemnity
(b) When proximate cause of the loss is the
insured himself
(c) When the insurer pays to the insured a loss
not covered by the policy;
DOUBLE INSURANCE
Where the same person is insured by several
insurers separately in respect to the same subject or
interest (Sec. 91).
2005 BAR EXAM (N0. X – 2 -b)
Q: What is the nature of the liability of the several
insurers in double insurance? Explain.
A: In double insurance, the insurers considered as co-
insurers. Each one is bound to contribute ratably to
the loss in proportion to the amount for which he is
liable under his contract. (Section 94(e), Insurance
Code.
REQUISITES OF DOUBLE INSURANCE:
1. Same person is insured;
2. There are several insurers;
3. Subject insured is the same;
4. Interest insured is the same;
5. Risk of peril insured against is the
same;
 There is prohibition TO PREVENT OVER-
INSURANCE, thus preventing fraud.
2008 BAR EXAM:
Q: Terrazas de Patio Verde, a condominium
building, has a value of P50 Million. The owner
insured the building against fire with three (3)
insurance companies for the following amounts:
Northern Insurance Corp. 20M,Sounthern
Insurance Corp.30M, Eastern Insurance Corp.50M.
a. Is the owner's taking of insurance for the
building with three (3) insurers valid?
Discuss.
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 GREEN NOTES IN COMMERCIAL LAW
b. The building was totally razed by fire. If the
owner decides to claim from Eastern
Insurance Corp. only P50 Million, will the
claim prosper? Explain.
A: (a). Taking out insurance covering the same
property, same insurable interest and same risk with
three insurance companies is “double insurance”
recognized under sec 93 of ICP. However, in American
Home Assurance Corp vs. Chua June 28, 1999, the
court referred to the common inclusion of the other
insurance clause in the fire insurance policies
requiring disclosure of co-insurance of the same
property with other insurers.
(b) Insured can recover from Eastern Inssurance Corp
up to the extent of his loss. However, Eastern may
refuse to pay if the policy contains an “ other
insurance clause” stipulating that non-disclosure of
double insurance will avoid the policy. (Geagonia
v. Country Bankers Insurance, 2/6/95). As there is
no indication of a contractual prohibition on double or
other insurance, all insurance contracts over the
building are deemed valid and enforceable.
The law prohibits double or over-recovery,
not double insurance. Since eastern insured the
property up 50% the total coverage, it is liable for only
50% of the total actual loss. Eastern Insurance Corp, is
liable to the extent of its coverage but may recover one
half of the total indemnity from the co-insurers in the
proportion of 60% (Southern Insurance)- 40 % (
Northern Insurance)
EFFECTS OF OVER-INSURANCE BY DOUBLE
INSURANCE
1. Insured, unless the policy otherwise provide,
may claim payment from the insurers in such
order as he may select up to the amount for
which the insurers are severally liable under
their respective contracts.
2. Where the policy under which the insured
claims is a valued policy, the insured must
give credit as against the valuation for any
sum received by him under any policy
without regard to the actual value of the
subject matter insured.
3. Where the policy under which the insured
Insurer remains an insurer Insurer becomes the
claims is an unvalued policy, he must give
credit, as against the full insurable value, for
Subject matter is property Subject matter is the
any sum received by him under the policy.
4. Where the insured receives any sum in excess
Same interest and risk is Different interest and
of the valuation in case of a valued policy or
insured with another
the insurable value in case of an unvalued
policy, he must hold such sum in trust for the
insurers, according to their right of
contribution among them;
5. In relation paragraph (4) – Each insurer is
bound, as between himself and the other
insurers to contribute ratably to the loss in
proportion to the amount for which it is liable
under his contract. ALSO REFERRED TO AS
THE PRINCIPLE OF CONTRIBUTION –
WHICH HAS ALREADY BEEN INCOPORATED
IN ALMOST ALL POLICIES – that should there
be other insurances covering the same
property, the liability of the company would
be limited to its ratable proportion of the loss
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or damage (Also known as CONTRIBUTION
CLAUSE).
TEST TO DETERMINE EXISTENCE OF DOUBLE
INSURANCE
Whether the insured, in case of happening of the risk,
can directly benefited by recovering on both policies?
If yes – there is double insurance.
IS DOUBLE INSURANCE VALID?
- It depends, if there is prohibition in the policy
then it is not valid, but if there is no prohibition,
it is valid provided it must follow the provisions
of the law.
-
DOUBLE
OVER INSURANCE
INSURANCE
There must be two or One insurer is sufficient.
more insurers.
The total amount of the The value must always
policies need not exceed be in excess of the
the value of the insurable interest;
insurable interest.
REINSURANCE
Occurs when an insurer procures a 3RD person
to insure him against loss or liability by reason of such
original insurance (Sec. 95).
WHEN IS REINSURANCE COMPULSORY?
1. When a non-life insurer insured in any one
risk or hazard an amount exceeding 20% of its
net worth, the insurer needs reinsurance of
the excess over such limit (Sec. 215 (1)).
2. When a foreign insurance company
withdraws from the Philippines, it should
cause its primary liabilities under policies
insuring residents of the Philippines to be
reinsured by another company authorized to
transact an insurance business in the
Philippines.
DOUBLE INSURANCE VS. REINSURANCE
DOUBLE INSURANCE REINSURANCE
insured
insurer’s risk or liability
risk are insured
WHAT KIND OF CONTRACT IS REINSURANCE?
 It is presumed to be a contract of indemnity
against liability, and merely against
damage (Sec. 97).
 As a RULE, the reinsurer is not liable to the
reinsured for a loss under an original policy if
the reinsured is not liable to the original
policyholder.
EXTENT OF LIABILITY OF THE REINSURER?
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 GREEN NOTES IN COMMERCIAL LAW
The liability of the reinsurer is measured by the
liability of the reinsured to the original policy holder
PROVIDED, it does not exceed the amount of
reinsurance.
 CLASSES OF INSURANCE
MARINE INSURANCE
Insurance against loss or damage to:
(a) Vessels, craft, aircraft, vehicles, goods freight,
cargoes, merchandise effects, disbursements,
profits, moneys, securities, loses in action,
evidences of debt, valuable papers, bottomry or
respondentia interest and all other kind of
property and interests therein, in respect to,
appertaining to or in connection with any and
all risks or perils of navigation, transit or
transportation or while being assembled,
packed, crated, baled, compressed, or similarly
prepared for shipment or while awaiting
shipment or during any delays, storage,
transshipment or reshipment incident thereto;
(b) Person or property in connection with or
appertaining to marine, island marine, transit
or transportation insurance, including liability
for loss or in connection with the construction,
repair, operation, maintenance, use of the
subject matter of the insurance. (But not
including life insurance, or surety bonds nor
insurance against loss by reason of bodily injury
to any person arising out of the ownership,
maintenance, use of automobiles);
(c) Precious stones, jewels, jewelry, precious
metals whether in the course of transportation
or otherwise;
(d) Bridges, tunnels or other instrumentalities of
transportation and communications (excluding
buildings, their furniture and furnishings, fixed
contents, and supplies held in storage), piers,
wharves, docks, slips, and other aids to
navigation and transportation including dry
docks, marine railways, dams and appurtenant
facilities for the control of waterways.
AND – “Marine Protection and Indemnity
Insurance” meaning insurance against, or
against legal liability of the insured for loss,
damage or expense incident to ownership,
operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use in ocean or island
waterways, including liability of the insured
for personal injury, illness or death or for
loss or damage to the property of another
person (Sec. 99).
WHAT RISKS ARE INSURED AGAINST?
- The basic risk insured against is
commonly known as PERILS OF THE SEA.
WHAT ARE NOT COVERED?
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(a) natural and inevitable action of the
sea;
(b) ordinary wear and tear of the ship;
(c) negligent failure of the ship owner to
provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions.
2008 BAR EXAM (IX –b)
Q: On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping
Company (CSC), sank on her voyage from Hong
Kong to Manila. Empire Assurance Company
(Empire) is the insurer of the lost cargoes loaded
on board the vessel which were consigned to
Debenhams Company. After it indemnified
Debenhams, Empire as subrogee filed an action for
damages against CSC.
b) Assume that the vessel was not seaworthy as in
fact its hull had leaked, causing flooding in the
vessel. Will your answer be the same? Explain.
A: When the vessel is not seaworthy, it is an
exception to the hypothecary principle in maritime
commerce. To limit its liability to the amount of the
insurance proceeds, the carrier has the burden of
proving that the unseaworthiness of its vessel was not
due to its fault or negligence. The failure to discharge
such a heavy burden precludes application of the
limited liability rule and the carrier is liable to the full
extent of the claims of the cargo owners (Aboitiz
Shipping v. New India Assurance Company, G.R. No.
156978, 02 May 2006).
2008 EXAM (IX –c)
Q:c) Assume the facts in question (b). Can the
heirs of the three (3) crew members who perished
recover from CSC? Explain fully.
A: Yes, because the crew members died while
performing their assigned duties, aggravated by the
failure of the ship owner to ensure that the vessel is
seaworthy. Workmen’s compensation has been
classified by jurisprudence as an exception to the
hypothecary nature of maritime commerce, [Abueg
v.San Diego, 77 Phil. 730 (1948)], especially in this
case where the vessel was not seaworthy at the time it
sank.
WHAT PERILS ARE INSURED IN AN “ALL RISK
POLICY”
It is to be construed as creating a special
insurance and extending to all risk than are usually
contemplated and will cover all losses except such that
may arise from intentional fraud, intentional
misconduct, or that otherwise excluded. It may include
all losses whether arising from a marine peril or not to
include pilferage during a war (Filipino Merchant
Insurance Co. vs. CA, 179 SCRA 638).
NOTE: Inchamaree Clause – one that covers any loss
other than a willful and fraudulent act of the insured
and avoids putting upon the insured the burden of
establishing that a loss was due to a peril within the
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 GREEN NOTES IN COMMERCIAL LAW
policy’s coverage, whether arising from a marine peril
or not provided the risk is not excluded;
WHAT CONSTITUTES INSURABLE INTEREST IN
OCEAN MARINE INSURANCE?
1. The owner of a vessel has insurable interest in
the vessel such shall continue even if the
vessel has been chartered by one who
covenants to pay the owner the value of the
vessel upon loss but in case of loss, the owner
is liable only for the part of the loss which the
insured cannot recover from the charterer.
(Sec. 100)
2. The insurable interest of the owner of a ship
hypothecated by bottomry is only the excess
of its value over the amount secured by
bottomry. (Sec. 101)
3. The owner of a vessel also has insurable
interest in expected freightage, which
according to the ordinary course of things he
would have earned but for the intervention of
a peril insured against or other peril incident
to the voyage. (Sec. 102)
ARE THERE PERSONS/PARTIES OTHER THAN THE
OWNER WHO HAS INSURABLE INTEREST? YES;
1. One who has an interest in the thing from
which profits are expected to proceed, has
insurable interest on the profits (Sec. 105).
2. The charterer of a ship has insurable interest
to the extent that he is liable to be damnified
by its loss (Sec. 106).
CONCEALMENT IN MARINE INSURANCE
- A party is bound to communicate, in addition
to what is required by section 28 (facts within
his knowledge, material to the contract, other
party has not the means of ascertaining, as to
which party with a duty to communicate
makes no warranty) information that he
possesses, that are material to the risk AND,
to state the EXACT and WHOLE TRUTH in
relation to all matters that he represents, or
upon inquiry discloses or assumes to disclose
EXCEPT those that the insurer knows or those
in the exercise of ordinary care, the other
ought to know, and which the former has no
reason to suppose him to be ignorant under
Section 30 (Section 107);
NOTE: That the rules on concealment in marine
insurance are stricter as it is sufficient that the
insured is in POSSESSION OF THE MATERIAL FACT,
ALTHOUGH HE IS UNAWARE OF IT.
A party is also bound to communicate, the
information belief or expectation of a 3rd person,
in reference to a material fact, is material. Note:
under section 35 such is not required to be
communicated in ordinary insurance (Sec. 108).
PRESUMPTION OF A PRIOR LOSS
Insured in marine insurance is presumed to have
knowledge, at the time of insuring, or prior, if
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information might possibly reached him in the usual
mode of transportation and the usual rate of
communication (Sec. 109).
EFFECT OF CONCEALMENT
It exonerates the insurer from a loss resulting from
the risks concealed as related to:
(a) the national character of the insured;
(b) the liability of the thing insured to
capture and detention;
(c) the liability to seizure from breach of
laws of foreign laws of trade;
(d) the want of necessary documents ;
(e) the use of false/simulated documents
ORDINARY CONCEALMENT vs. MARINE INSURANCE
ORDINARY INSURANCE MARINE INSURANCE
Opinion or belief of a 3RD Belief or expectation of
person or own judgment 3RD person in reference
of the insured is not to a material fact is
material and need not be material and has to be
communicated (Sec. 35) communicated;
A causal connection The concealment of any
between the fact of the matters stated in
concealed and cause of section 110 merely
loss is not necessary for exonerates the insurer
the insurer to rescind; from loss, if the results
from the fact concealed;
REPRESENTATION IN MARINE INSURANCE:
If the representation is intentionally false in
any material respect, or, in respect of any
fact on which the character and nature of
the risk depends, the insurer may rescind
(Section 111). But the eventual falsity of a
representation as to an expectation does
not in the absence of fraud avoid the
contract (Sec. 112).
WHAT ARE THE IMPLIED WARRANTIES IN MARINE
INSURANCE? 2000 BAR EXAM (IX – b)
1. In every contract of marine insurance
upon a ship or freight, freightage or upon
anything which is the subject of marine
insurance, there is an implied warranty
that the ship is sea worthy (Sec. 113).
 A ship is sea worthy when it is reasonably
fit to perform the service and encounter
the ordinary perils of the voyage,
contemplated by the parties (Sec. 114).
Note that it is relative and is made to
depend on the circumstances.
 The implied warranty of seaworthiness
complied with as a general rule when it
is seaworthy at the time of the
commencement of the risk except:
(a) when the insurance is made for a
specified length of time, it must
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 GREEN NOTES IN COMMERCIAL LAW
be seaworthy at the
commencement of every voyage
it undertakes at that time.
(b) when the insurance is upon
cargo, which by the terms of the
policy description of the voyage,
or established custom of trade, it
is required to be transshipped at
an immediate port in which case
– each vessel upon which the
cargo is shipped or transshipped
must be seaworthy at the
commencement of each
particular voyage (Sec. 115).
(c) where different portions of the
voyage contemplated in the
policy differ in respect to the
things requisite to make the ship
seaworthy, I which case it must
be seaworthy at the
commencement of each portion
(Sec. 117).
WARRANTY OF SEAWORTHINESS EXTENDS TO:
The warranty of seaworthiness extends not
only to the condition of the structure of the ship, but it
requires that:
(a) it be properly laden or loaded with
cargo;
(b) is provided with a competent master,
sufficient number of officers and
seamen;
(c) it must have the requisite equipment
and appurtenances like ballast,
cables, anchors, cordage, sails, food,
water, fuel, lights and other necessary
and proper stores and implements
for the voyage (Sec. 116).
 Note that when a ship becomes
unseaworthy during the voyage – it will
not avoid the policy – as long as – there
is no unreasonable delay in repairing the
defect. Otherwise – the insurer is
exonerated on the ship or the ship
owners’ interest from any liability
from any loss arising therefrom (Sec.
118). Hence, if loss is not one due to the
defect or peril was not increased by
the defect insurer is liable.
 Also, while a ship may be seaworthy for
purposes of insurance on it, it may by
reason of being unfitted to receive cargo,
be unseaworthy for the purpose of
insurance on the cargo (Sec. 119).
2. It shall carry the requisite documents to
show its nationality or neutrality and that
it shall not carry any document that will
cast reasonable suspicion on the vessel
(Sec. 120). This warranty arises only when
nationality or the neutrality of the vessel or
cargo is expressly warranted.
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3. That the vessel shall not make any
improper deviation from the intended
voyage.
DEVIATION:
It is a departure from the course of the voyage as
defined by Section 121 and 122 or an unreasonable
delay in pursuing the voyage or the commencement of
an entirely different voyage. (Sec. 123)
WHEN IS DEVIATION PROPER (2005 BAR)
A vessel can properly proceed to a port other than its
port of destination in the following cases:
1. When caused by circumstances over
which neither the master or the owner of the
ship has any control;
2. When necessary to comply with a
warranty, or to avoid a peril, whether or not
the peril is insured against;
3. When made in good faith, and upon
reasonable grounds of belief In the necessity
to avoid peril;
4. When made in good faith for the
purpose of saving human life or relieving
another vessel in distress. (Sec. 124)
2005 BAR EXAM (N0. XIV -1 - a)
Q: On a clear weather, M/V Sundo, carrying
insured cargo, left the port of Manila bound for
Cebu. While at sea, the vessel encountered a strong
typhoon forcing the captain to steer the vessel to
the nearest island where it stayed for seven days.
The vessel ran out of provisions for its passengers.
Consequently, the vessel proceeded to Leyte to
replenish its supplies.
a) Assuming that the cargo was
damaged because of such deviation, who
between the insurance company and the
owner of the cargo bears the loss? Explain.
A: The Insurance company should bear
the loss. Since the deviation was cured by a
strong typhoon, it was caused by
circumstances beyond the control of the
captain, and also to avoid a peril whether or
not insured against. Deviation is therefore
proper. (Sec. 145(a))
CONSEQUENCE OF IMPROPER DEVIATION
Insurer is not liable for any loss happening to the thing
insured subsequent to an improper deviation (Sec.
126).
4. That the vessel does not or will not engage
in any illegal venture;
LOSS IN MARINE INSURANCE
 KINDS OF TOTAL LOSSES: Actual or Constructive
(1) If it is an Actual Total Loss it may be
caused by:
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 GREEN NOTES IN COMMERCIAL LAW
a. total destruction of the thing
insured;
b. the irretrievable loss of the thing
which renders it valueless to the
owner for the purpose that he
held it;
c. any other event which
effectively deprives the owner of
the possession at the port of
destination of the thing insured
(Sec. 130).
 An actual total loss can also be presumed
from the continued absence of the ship
without being heard of (section 132).
The length of time which is sufficient
to raise these presumption depends on
the circumstances of the case;
(2) It is a constructive total loss when the
person insured is given a right to
abandon under Section 139 (Sec. 131).
2005 BAR EXAM (N0. X -1- a)
Q: M/V Pearly Shells, a passenger and cargo vessel,
was insured for P40,000,000.00 against
“constructive total loss.” Due to a typhoon, it sank
near Palawan. Luckily, there were no casualties,
only injured passengers. The shipowner sent a
notice of abandonment of his interest over the
vessel to the insurance company which then hired
professionals to afloat the vessel for P900,000.00.
When re-floated, the vessel needed repairs
estimated at P2,000,000.00. The insurance
company refused to pay the claim of the
shipowner, stating that there was “no constructive
total loss.”
a) Was there “constructive total loss” to entitle the
shipowner to recover from the insurance
company? Explain.
A: There was constructive total loss. When the vessel
sank, it was likely that it would be totally lost because
of the improbability of recovery. (Arnold’s Law of
Marine Insurance and Average, 16th ed., Vol. II, pp. 954-
955)
Suggested Alternative Answer:
There was no constructive total loss. The loss is
not more than ¾ the value of the vessel which was
insured for P40,000,000.00. The cost of refloating is
P900,000.00 and the needed repairs amount
P2,000,000.00, or a total of only P2,900,000.00 which
does not constitute more than ¾ the value of the
vessel.
THE DOCTRINE OF LIMITED LIABILITY – [when not
applicable] – The doctrine of limited liability under
Article 587 of the Code of Commerce is not applicable to
the present case. This rule does not apply to situations
in which the loss or the injury is due to the concurrent
negligence of the ship owner and the captain. It has
already been established that the sinking of the M/V
Central Bohol had been caused by the fault or
negligence of the Ship Captain and the crew, as shown
by the improper stowage of the cargo logs. “Closer
supervision on the part of the ship owner could have
prevented this fatal miscalculation.” As such, the ship
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owner was equally negligent. It cannot escape liability
by virtue of the limited liability rule. (Central Shipping
Company, Inc. v. Insurance Company of North America,
Sept. 20, 2004, G.R. No. 150751)
ABANDONMENT – is the act of the insured by which,
after a constructive total loss, he desires to the insurer
the relinquishment in its favor his interest in the thing
insured (Sec. 138).
A person insured by a contract of marine
insurance may abandon the thing insured, or any
particular portion thereof separately valued by the
policy, or otherwise separately insured and recover a
total loss – when the cause of loss is a peril insured
against if:
 more than ¾ thereof in value is actually lost or
would have to be expended to recover it form the
peril insured against.
 if it is injured to such extent as to reduce its value
by more than ¾ of value.
 if the thing injured is a ship and contemplated
voyage cannot lawfully be performed without
incurring either an expense to the insured of more
than ¾ the value of the thing abandoned or a risk
which a prudent man would not take under the
circumstances.
 if the insured is freightage or cargo – and the
voyage cannot be performed – nor another ship
cannot be procured by the master – within a
reasonable time with reasonable diligence – to
forward the cargo without incurring the like
expense or risk mentioned in item (c) but,
freightage cannot be abandoned unless the ship is
abandoned (Sec. 139).
Abandonment must neither be partial nor
conditional (Sec. 140). Hence, it must be total and
absolute; and must be made within a reasonable time
after receipt of reliable information of the loss but,
where the information is of doubtful character, the
insured is entitled to a reasonable time to make an
inquiry (Sec. 141).
HOW NOTICE OF ABANDONMENT IS MADE
2005 BAR EXAM (N0. X - 1- b)
By giving notice, oral or written notice to the insurer
but if orally given, a written notice of such must be
submitted within seven days from giving oral notice
(Sec. 143). The notice must be explicit and specify
the particular cause of the abandonment but need
start only enough to show that there is probable cause
therefore and need not be accompanied by proof of
interest or of loss (Sec. 144). The requirement as
the explicitness of the notice is due to the fact that
abandonment can only be sustained upon the
cause specified in the notice (Sec. 145).
EFFECTS OF ABANDONMENT
(1) It is equivalent to a transfer by the insured of
his interest to the insurer, with all the chances
of recovery and indemnity (Sec. 146) Note
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 GREEN NOTES IN COMMERCIAL LAW
though, if the insurer pays for a loss as if it
were an actual total loss, he is entitled to
whatever may remain of the thing insured, or
its proceeds or salvage as if there has been a
formal abandonment. Here the insurer has
opted to pay for total actual loss
notwithstanding the absence on actual
abandonment;
(2) Acts done in good faith by those who were
agents of the insured in respect to the thing
insured subsequent to the loss are at the risk
of the insurer and for his benefit (Sec. 148).
The agents of the insured become agents of
the insurer. This retroacts to the date of the
loss when abandonment is effectively made;
EFFECTIVITY OF ABANDONMENT:
Abandonment becomes effective upon the
acceptance of the insurer. If it is not accepted despite
validity, the insured may nevertheless claim an actual
total loss.
LIABILITY FOR AVERAGES
AVERAGE– is any extraordinary or accidental expense
incurred during the voyage for the preservation of the
vessel, cargo, or both and all damages to the vessel or
cargo from the time it is loaded and the voyage
commenced until it ends and the cargo is unloaded.
KINDS OF AVERAGES:
(a) Particular or simple average is a
damage or expense caused to the
vessel, cargo, or which has not inured to
the common benefit and profit of all
persons interested in the cargo or the
vessel. This is borne ordinarily by the
owner of the vessel or cargo that gives
rise to the expenses or suffered the
damage.
(b) General or gross average is an expense
or damage suffered deliberately in
order to save the vessel or its cargo or
both from real and known risk. Thus, all
persons having an interest in the vessel
and cargo or both at the occurrence of
the average shall contribute.
IN CASE OF GENERAL AVERAGE LOSS
The insurer is liable for the loss falling
upon the insured, though a contribution in respect
to the thing insured when required to be made by
him towards a general average loss called for a
peril insured against but liability is limited to the
proportion of the contribution attaching to his
policy value where this is less than the
contributing value of the thing insured (Sec. 164).
Meaning that the insured can hold his insurer liable
for contribution up to the value of the policy;
RIGHT OF SUBROGATION
When a person injured in a contract of
marine insurance has a demand against the others
for contribution, he may claim the whole loss from his
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insurer subrogating the insurer to his own right to
contribution but no such claim can be made upon
the insurer if:
(a) There is separation of the interest liable to
contribution;
(b) When the insured having the right and
opportunity to enforce contribution from
others, has neglected or waived the exercise
of the right (Sec. 165). Meaning that the
insured has a choice of recovery on the
happening of a general average loss. They are:
(1) Enforcing the contribution
against interested parties; or
(2) Claiming from the insurer. If it
be the latter, subrogation takes
place;
MEASURE OF INDEMNITY IN MARINE INSURANCE
IF THE POLICY IS VALUED;
1. A valuation in the policy of marine insurance
is exclusive between the parties thereto in the
adjustment of either a partial or total loss, if the
insured has some interest at risk and there is no fraud
on his part. If there is fraud in valuation, it entitles the
insurer to rescind as it is an exception as to
conclusiveness (Sec. 156);
2. If however, hyphotecated by the bottomry or
respondentia – before insurance and without
knowledge of the person securing it – he may show the
real value;
3. An insurer is liable upon a partial loss – only
for such proportion of the amount insured by him – as
the loss bears to the whole interest of the insured (Sec.
157). The effect is that the insured is deemed a co-
insurer if the value of the insurance is less than the
value of the property. This applies even in the absence
of a stipulation in the contract and is also known as the
average clause.
The two requisites for the application of the average
clause:
a. insurance is for less than actual value;
b. the loss is partial
Note: That co-insurance exist in Marine Insurance: In
Fire Insurance, there is no co-insurance unless
expressly stipulated (Sec. 171-172). In life insurance,
there is none also as value is fixed in the policy (Sec.
183).
4. In case profits are separately insured in a
contract of marine insurance (see Sec. 105) , the
insured can recover in case of a loss (and under Sec.
160, there is a conclusive presumption of a loss from
the loss of the property out of which they were
expected to arise, and the valuation fixes their
amount), a proportion of such profits equivalent to
proportion of the value of the property lost bears to
the value of the whole (Sec. 158).
IF THE POLICY IS OPEN
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(a) The value of the ship is the value at the
beginning of the risk, including all
articles or charges which add to its
permanent value or which are necessary
to prepare it for the voyage insured;
(b) The value of the cargo is its actual cost to
the insured, when laden on board where
the cost cannot be ascertained, its Market
Value at the time and place of lading.
Adding the charges incurred in
purchasing and placing it on board – but
without reference to any loss incurred in
raising money for its purchase or any
DRAWBACK on its EXPROPRIATION or
FLUCTUATION of the market at the port
of destination or expenses incurred on
the way or on arrival;
(c) Value of freightage is the gross
freightage, exclusive or primage without
reference to the cost of earning it;
(d) The cost of insurance is in each case to be
added to the value thus estimated (Sec.
161).
IF THE CARGO INSURED AGAINST PARTIAL LOSS
If it arrives at the port of destination in a
damaged condition, the loss of the insured is
deemed to be the same proportion of the value
which the market price at that port of the thing
so damaged bears to the market price it would
have brought if sound (Sec. 162). Meaning if
reduction in value is 1/5, then amount of
recovery on the insurance is also 1/5.
FIRE INSURANCE
 Insurance against fire includes loss or
damage due to lightning, windstorm, tornado,
earthquake or other allied risks when such
risks are covered by extensions to the fire
insurance policy or under separate
policies (section 167). Hence, while it is
not limited to loss or damage due to fire,
coverage as to other risks is not automatic.
2001 BAR EXAM (N0.XVII)
Q: JQ, owner of the condominium unit, insured the
same against fire with XYZ Insurance Corp. and
made the loss payable to his brother. MLQ. In case
of loss by fire of the said condominium unit, who
may recover on the fire insurance policy? State the
reasons for your answer?
A: JQ can recover on the fire insurance policy for the
loss of the said condominium unit. He has the
insurable interest as owner-insured. As beneficiary in
the fire insurance policy, MLQ cannot recover on the
fire insurance policy. For the beneficiary to recover on
the fire or property insurance policy, it is required that
he must have insurable interest in the property
insured. In this case, MLQ does not have insurable
interest in the condominium unit.
FIRE DEFINED
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In insurance, it is defined as the active
principle of burning, characterized by heat and
light combustion. Combustion without visible light
or glow is not fire
ALTERATION DEFINED
Is a change in the use or condition of a thing
insured from that to which it is limited by the policy,
made without the consent of the insurer, by means
within the control of the insured, and increasing the
risk, which entitles the insurer to rescind the contract
of insurance (Sec. 168).
HOW IS VALUATION MADE:
(1) Whenever the insured would like to have a
valuation stated in a policy insuring a
building or structure against fire, it may be
made by an independent appraiser, who is
paid by the insured and the value may be
fixed between the insurer and the insured;
(2) Subsequently, the clause is then inserted in
the policy that said valuation has thus been
fixed;
(3) In case of loss, provided there is no change
increasing the risk without the consent of
the insured or fraud on the part of the
insured, the insurer will pay the whole
amount so insured and stated in the policy
is paid. If it is a partial loss, the whole
amount of the partial loss is paid. In case
there are 2 or more policies, each shall
contribute pro-rata to the total or partial
loss but the liability of the insurers cannot
be more than the amount stated in the
policy;
(4) Or the parties may stipulate that instead of
payment, the option to repair, rebuild or
replace the property wholly or partially
damaged or destroyed shall be exercised
(Sec. 172).
CASUALTY INSURANCE
 Generally, it is one that covers loss or
liability arising from an accident or
mishap excluding those that fall exclusively
within other types of insurance like fire or
marine. It includes employer’s liability,
workmen’s compensation, public liability,
motor vehicle liability, plate glass liability,
burglary and theft, personal accident and
health insurance as written by non-life
companies and other
1993 and 1994 BAR EXAMS:
Sun Insurance Office vs. CA July 17, 1992
X was issued a personal accident insurance for
P200,000. Two months later, he died of a bullet
wound in his head. He was playing with his hand gun
from which he removed the magazine. He pointed his
gun to his temple and fired. The insurance company
refused to pay the beneficiary. Was there suicide or
accident?
SC:
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 GREEN NOTES IN COMMERCIAL LAW
1. X was negligent but it should not prevent the
beneficiary from recovery because there is
nothing in the policy that exempts the insurer
of the responsibility to pay indemnity if the
insured is shown to have contributed to his own
accident.t
2. The death is accidental. Accident happens by
chance without intention or design and which
is unexpected or unforeseen.
SURETYSHIP
 An agreement whereby a party called the
surety guarantees the performance by
another party called the principal or obligor
of an obligation or undertaking in favor of
a 3RD party called the obligee (Sec. 175).
Includes – official recognizance’s, bonds or
undertakings issued by any company under
Act No. 536, as amended by act no. 2206
(Government transactions – by authorized
companies)
LIABILITY OF THE SURETY
It is joint and several (solidary) with the
obligor but limited to the amount of the bond and
determined strictly by the terms of the contract in
relation to the principal contract between obligor –
obligee (Sec. 176).
IS A SURETYSHIP CONTRACT VALID AND BINDING
WHERE THE PREMIUM HAS NOT YET BEEN PAID?
Generally, payment of the premium is a
condition precedent. Hence the bond is not valid. An
exception is when it is issued and accepted by the
obligor, it is valid despite non payment of the premium
(Sec. 177).
SURETY vs. GUARANTY
SURETY GUARANTY
Assumes liability as a Guarantor’s liability
regular party to the depends on an
agreement. independent agreement
to pay if primary debtor
fails to pay
Primarily liable. Secondarily liable.
Not entitled to Entitled to exhaustion.
exhaustion.
NON-NECESSITY OF A DEMAND ON THE SURETY –
Demand on the surety is not necessary before bringing
the suit against them. On this point, it may be worth
mentioning that a surety is not even entitled, as a
matter of right, to be given notice of the principal’s
default. (Intra-Strata Assurance Corporation, Et Al. v.
Republic of the Philippines, Etc., Jul. 9, 2008 G.R. No.
156571)
LIFE INSURANCE
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
 Is insurance on human lives and insurance
appertaining thereto or connected
therewith (Sec. 179)
WHEN IS IT PAYABLE
An insurance upon life may be made payable upon:
(a) death of the person; or
(b) his surviving a specified period; or
(c) otherwise, contingently on the
continuance or cessation of life;
COMMON KINDS:
 WHOLE LIFE/ORDINARY LIFE/STRAIGHT LIFE:
premiums are payable for life and the insurer
agrees to pay the face value upon the death of the
insured.
 LIMITED PAYMENT LIFE: insured pays
premiums for a limited period after which he
stops with a guarantee by the insurer that upon
death the face amount is to be paid – if death
occurs while payment is not complete –
beneficiary acts face amount.
 TERM POLICY: insurer is liable only upon death
of the insured within the agreed term or period. If
insured survives the insurer is not liable.
 ENDOWMENT : protection is for a limited period,
if the insured is still alive at the end of the period,
the value of the policy is paid to him. If he dies
before the end period, it is paid to the
beneficiaries.
 ANNUITY: where the insured or a named
person/s is paid a sum or sums periodically
during life or a certain period (note that contracts
for the payment of endowment or annuities are
considered as life insurance contracts).
DISTINGUISHING LIFE INSURANCE FROM
PAYMENT OF ANNUITY
(1) In life insurance, it is payable upon the
death of the insured, while in annuity, it is
payable during the lifetime of the
annuitant;
(2) In life insurance, the premium is paid in
installments, while in annuity, annuitant
pays a single premium;
(3) In life insurance, there is lump sum
payment upon death, while in annuity,
annuities are paid until death;
WHAT RISKS ARE COVERED?
(1) Generally - all causes of death are covered
unless excluded by law, by policy or
public policy.
(2) Suicide, if committed after the policy has
been in force for a period of two years
from date of issue or last reinstatement
unless policy provides a shorter period
but it is nevertheless compensable if
committed in the state of insanity
regardless of date of commission (Sec.
180-A)
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 GREEN NOTES IN COMMERCIAL LAW
IS A LIFE INSURANCE POLICY TRANSFERABLE OR
ASSIGNABLE? Yes, it may pass by transfer, will or
succession to any person, whether he has insurable
interest or not. (Sec. 181)
IS NOTICE TO THE INSURER OR TRANSFER OR
BEQUEST REQUIRED? It is not necessary to preserve
the validity of the policy unless thereby expressly
required (Sec. 181)
IS THE CONSENT OF THE BENEFICIARY REQUIRED?
Yes, if he designated as an irrevocable beneficiary as
he has acquired a vested right;
BUSINESS INSURANCE
REQUIREMENTS FOR A CERTIFICATE OF
AUTHORITY FROM THE INSURANCE
COMMISSION:
(a) Qualified by Philippines Laws to transact
insurance business;
(b) Has a name that is not in anyway similar to
another company;
(c) If organized as a stock corporation, it should
have a paid up capital of no less that
Php5,000,000.00;
(d) If it is organized as a mutual company (one
whose capital funds are not contributed by
stockholders but by policy holders) it must
have available cash assets of at least
Php5,000,000.00 above all liabilities for losses
reported, expenses, taxes, legal reserves of all
outstanding risks, and the contributed surplus
fund equal to the amounts required of stock
corporations (Php1,000,000.00 if a life
insurance company or Php500,000.00, if a non
life insurance company).
(e) If a foreign insurance company, it must appoint
a resident agent, deposit securities and
maintain a legal reserve (Sec. 184-193).
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
 It is to provide protection or coverage to
answer for bodily injury or property damage
that may be sustained by another arising from
the use of motor vehicle. Please note though
that what is now compulsory is death of
bodily injury arising from motor vehicle
accidents as per amendment to the insurance
code by PD 1814 and PD 1455 brought about
by insurance losses due to padded claims for
property damage. Hence, property damage is
now optional;
DISTINGUISHED FROM OWN DAMAGE COVERAGE
AND COMPREHENSIVE MOTOR VEHICLE
INSURANCE:
(a) Third party liability answers for
liabilities arising from death or bodily
injury to 3RD persons or passengers.
(b) Own damage insurance answers for
reimbursement of the cost of repairing
the damage to vehicle of the insured.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
(c) Comprehensive insurance answers for
all liabilities/damages arising from the
use/operation of a motor vehicle it
includes third party own damage, theft
and property damage.
WHEN DOES THE LIABILITY OF THE INSURER
ACCRUE?
The occurrence of an injury for which the
insured may be liable immediately gives rise to insurer
liability (Shafer vs. Judge, 167 SCRA 386).
CANCELLATION OF THE POLICY
(a) By the insurer – requires written notice
to motor vehicle owner/land
transportation operator at least 15 days
prior to intended effective date. If so
canceled, the Land Transportation Office
may order the immediate confiscation of
license plates unless it receives a new
valid insurance/surety/proof of cash
deposit or revival by endorsement of the
cancelled policy (Sec. 130);
(b) By the insured – the motor vehicle
owner/land transportation operator shall
secure a similar policy or surety before
the cancelled policy/surety ceases to be
effective or make a cash deposit and file
the same or proof thereof with the Land
Transportation Office (Sec. 381).
PAYMENT OF CLAIMS
A claim for payment must be filed without any
unnecessary delay, within 6 month from the date of
accident by giving written notice setting forth the
nature, extent and duration of the injuries as certified
by a duly licensed physician (Sec. 384).
WHAT IS NO FAULT INDEMNITY?
A no fault indemnity claim is a claim for payment for
death or injury to a passenger of third party without
necessity of proving fault or negligence. This is
payable by the insurer provided:
(a) indemnity in respect of one
person shall not exceed
Php5,000.00;
(b) the necessary proof of loss under
oath to substantiate the claim is
submitted
AGAINST WHOM IS THE PAYMENT CLAIMED
A claim under the no fault indemnity clause may be
made against one motor vehicle insurer only as
follows:
(a) in case of an occupant of a vehicle –
against the insurer of the vehicle in
which the occupant is riding,
mounting or dismounting from;
(b) in any other case, from the insurer of
the directly offending vehicle;
(c) in all cases, the right of the party
paying the claim to recover against
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 GREEN NOTES IN COMMERCIAL LAW
Prepared by: ATTY. RENATO S. RONDEZ

the owner of the vehicle responsible NON-FAULT CLAUSE IN COMPULSORY MOTOR

for the accident shall be maintained; VEHICLE INSURANCE POLICY
(2000 Bar Exam)
INTERPRETATION OF THE AUTHORIZED DRIVER
Proof of fault or negligence is not necessary
CLAUSE (1991 Bar Exams) The authorized driver
for the payment of any claim for death or injury to a
clause is interpreted to refer to the insured or any
passenger or to a third party. The maximum amount
person driving on the order of the insured or with his
of indemnity is P 10, 000.00 upon submission of death
permission provided, such person is permitted to
certificate, medical certificate and police report. The
operate a motor vehicle in accordance with our
purpose is in order to give immediate assistance to the
licensing laws or regulations and who is not otherwise
victim of motor vehicle accidents and/or the
disqualified;
dependents specially if they are poor, regardless of the
NOTE THE FOLLOWING JURISPRUDENCE: financial capability of the owner of the motor vehicle
or operator responsible for the accident. This does not
(1) If license is expired, person is not
include property damage.
authorized to operate a motor vehicle
(Tarco Jr. vs. Phil Guaranty, 15 SCRA 313)
NECESSITY TO REGULATE INSURANCE COMPANIES
(2) Issued a temporary operators permit or a
COVERING PUBLIC UTILITY VEHICLES
temporary vehicle receipt, a person is
authorized to operate a motor vehicle,
The present case shows a clear public
but if it has expired, it is as if he has no
necessity to regulate the proliferation of such
license (Guttierez vs. Capital Insurance,
insurance companies. Because of the PUV operators’
130 SCRA 618, PEZA vs. Alikpala, 160
complaints, the LTFRB thus assessed the situation. It
SCRA 31)
found that in order to protect the interests of the
(3) A tourist with license but in the country
riding public and to resolve problems involving the
for more than 90 days, is not authorized
passenger insurance coverage of PUV’s, it had to issue
to operate a motor vehicle because it is as
Memorandum Circular No. 2001-001 accrediting PAMI
if he has no license (Strokes vs. Malayan,
and PAIC II as the two groups allowed to participate in
127 SCRA 766)
the program.
(4) A drivers license that bears all the
earmarks of a duly issued license is
Memorandum Circular No. 2001-001 required that
presumed genuine.
“[a]ll public utility vehicles whose LTO license plate, as
(5) A license is not necessary, where the
per latest LTO Official Receipt, with an EVEN middle
insured himself is the driver (Paterno vs.
number (0, 2, 4, 6 and 8) shall be insured with UCPB
Pyramid Insurance, 161 SCRA 677, 1986
insurance (PAMI) while those with an ODD middle
BAR)
number (1, 3, 5, 7 and 9) shall be insured with Great
Domestic Insurance (PAIC II) x x x .”
BAR EXAM; 1996
Q: 1.While driving his car, X sideswiped A
causing injuries to the latter. A sued X and the
third party liability insurer for the damage TRANSPORTATION LAWS
sustained by A.
2. The insurance company moved to COMMON CARRIERS
dismiss the complaint contending that theliability
of X has not yet been determined with finality. (Arts. 1732-1766, New Civil Code)
Is the contention of the insurance company Common Carriers are persons, corporations, firms or
correct? May the insurer be held solidarily liable associations engaged in the business of carrying or
with X transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services
A: No. When an insurance policy insures directly to the public.
against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury. Transportation defined. a contract of transportation
is one whereby a certain person or association of
No. The insurer cannot be held solidarily liable with X persons obligate themselves to transport persons,
because its liability is based on a contract while that of things, or news from one place to another for a fixed
X is based on torts. (Vda. De Maglana vs. Consolacion, price
August 6, 1992)
Classification:
COMPREHENSIVE MOTOR VEHICLE INSURANCE 1. As to object: (1) things; (2) persons; (3) news
(1993 & 2000 Bar Exam) 2. As to place of travel: (1) land; (2) water; (3) air
The liability of the insurance company s direct Parties to contract of transportation:
and solidary with the operator but only up to the (1) shipper or consignor.
amount stated in the policy and accrues immediately (2) carrier or conductor.
upon the occurrence of the accident. Any amount (3) consignee
awarded beyond the amount stated in the policy is the Common Carrier Private Carrier
sole responsibility of the carrier.
As to Availability

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 GREEN NOTES IN COMMERCIAL LAW
Prepared by: ATTY. RENATO S. RONDEZ

Holds himself out for all Contracts with The law prohibits unreasonable discrimination by
people indiscriminately particular common carriers.-- The law requires common
individuals or carriers to carry for all persons, either passengers or
groups only property, for exactly the same charge for a like or
As to require Diligence contemporaneous service in the transportation of like
Extraordinary Diligence Ordinary Diligence kind of traffic under substantially similar
circumstances or conditions. The law prohibits
As to regulation
common carriers (CC) from subjecting any person, etc.
Subject to state Not subject to state
regulation regulation
or locality, or any kind of traffic, to any undue or
Stipulation limiting liability
unreasonable prejudice or discrimination whatsoever.
Exception: When the actual cost of handling and
Parties may agree on Parties may limit the transporting is different, then different rates may be
limiting the carrier’s carrier’s liability,
charged
liability except when provided it is not
Determination of justifiable refusal: This involves a
provided by law contrary to morals or
good customs consideration of the following:
Exempting circumstances 1. suitability of the vessels of the company for
Prove extraordinary Caso forfuito, Art. the transportation of such products;
diligence and 1174 NCC 2. reasonable possibility of danger or disaster,
Art.1734,NCC resulting from their transportation in the
Presumption of Negligence form and under the conditions in which they
are offered for carriage;
There is a presumption No presumption of
3. the general nature of the business done by the
of fault or negligence fault or Negligence
carrier;
Governing law
4. all the attendant circumstances which might
Law on Common Law on obligations affect the question of the reasonable necessity
Carriers and contracts
for the refusal by the carrier to undertake the
(2002 Bar exams) transportation of this class of merchandise.
Test for a common carrier: What is the DILIGENCE required by common
1. He must be engaged in the business of carrying carriers?
goods for others as a public employment, and Common carriers, from the nature of their business
must hold himself out as ready to engage in the and for reasons of public policy, are bound to observe
transportation of goods for persons generally as a extraordinary diligence in the vigilance over the goods
business, and not a casual occupation. and for the safety of the passengers transported by
2. He must undertake to carry goods of the kind to them, according to all the circumstances of each case.
which his business is confined. Extraordinary diligence lasts from the time the
3. He must undertake to carry by the methods by cargoes are loaded in the vessel until they are
which his business is conducted, and over his discharged and delivered to the consignee.
established roads. Air carriers can terminate services of pilots for serious
4. The transportation must be for hire. misconduct and drunkenness because of its
extraordinary diligence.
The true test is whether the given undertaking is a
part of the business engaged in by the carrier which he LIABILITY OF COMMON CARRIERS: The common
has held out to the general public as his occupation carrier, is at all times, required to observe
rather than the quantity or extent of the business extraordinary diligence with respect to transport of
actually transacted, or the no. and character of the goods.
conveyances used in the employment (the test is 1. To bring passengers safely to his place of
therefore the character of the business actually carried destination. He is obliged to carry passengers
on by the carrier. safely as far as human care and foresight can
provide, using the utmost diligence of a very
Characteristics of common carriers: cautious person with due regard for all
(1) The common carrier undertakes to carry for all circumstances. In case of death or injury, the
people indifferently; common carriers are presumed to have been
(2) The common carrier cannot lawfully decline to at fault or negligent in transporting the
accept a particular class of goods for carriage to the passengers unless they prove that they
prejudice of the traffic in those goods observed extraordinary diligence.
2. To transport the goods/ cargoes safely to the
Exception : for some sufficient reason, where the point of destination if there is loss or damage
discrimination in such goods is reasonable and to the goods/cargoes, immediately a
necessary (substantial grounds) presumption of negligence arises that the
(3) No monopoly is favored - the Commission has the loss/ damage to the goods/ cargoes was due
power to say what is a reasonable compensation to the to the negligence of the common carrier. The
utility and to make reasonable rules and regulations shipper may only prove that the goods arrived
for the convenience of the traveling public and to in a damaged condition or that they did not
enforce them arrive at all.
(4) Public convenience - for the best interests of the
public

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 GREEN NOTES IN COMMERCIAL LAW
LOADSTAR SHIPPING CO., INC VS. PIONEER ASIA
INSURANCE CORP.Jan 24, 2006
A common carrier is required to observe
extraordinary diligence in the vigilance over the
goods it transports.
I. VIGILANCE OVER THE GOODS
RULES governing common carrier’s LIABILITY
over Goods:
General RULE: Common carriers are responsible for
the loss, destruction, or deterioration of the goods,
UNLESS the same is due to any of the following causes
only:
1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
2) Act of the public enemy in war, whether
international or civil;
3) Act or omission of the shipper or owner of the
goods;
4) The character of the goods or defects in the packing
or in the containers;
5) Order or act of competent public authority. (Art.
1734)
The CC may absolve itself from liability by proving
any of the following DEFENSES:
(2002 Bar exams)
A) That the CC encountered:
a. An act of God;
— there must have been no delay on the part
of the common carrier. Otherwise, if delayed
and not for good reason, then it shall be held
liable notwithstanding the fact that all the
subsequent requisites were present.
— must be an unforeseen event or an event
which cannot be avoided
— The carrier must have exercised
extraordinary
diligence before, during, and after the time of
the accident.
—The proximate cause must not be
committed by the carrier. If the proximate
cause of the event is caused by the carrier,
then he cannot invoke the act of God defense.
Under the rule on Contributory Negligence, if the
negligence attributable to carrier is not proximate in
character, the carrier shall be responsible, although
such liability shall be mitigated.
b. Act of public enemy in war;
c. Act by a competent public authority;
d. Acts/omissions of the shipper or his agent;
e. The goods or the packaging is inherently
defective.
Even if the loss, destruction, or deterioration of the
goods should be caused by the character of the goods,
or the faulty nature of the packing or of the containers,
the common carrier must exercise due diligence to
forestall or lessen the loss.
EXEMPTING CAUSE
REQUISITES for natural disaster or calamity –
1. The natural disaster must have been the
proximate cause of the loss
2. It must have been the only cause of the loss
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
3. The common carrier must have exercised due
diligence to prevent or minimize before ,
during and after the natural disaster
4. The common carrier has not negligently
incurred delay in transporting the goods
REQUISITES for act of public enemy -
1. The act of public enemy must have been the
proximate of the loss
2. It must have been the only cause of the loss
3. The common carrier must have exercised due
diligence to prevent or minimize before ,
during and after the act of public enemy in
war.
REQUSITE FOR act or omission of Shipper -
1. That the act or omission of the shipper
/owner of the goods must have been the
proximate cause of the loss
2. That it must have been the only cause of the
loss.
REQUSITES for character of goods , fault in
packing or containers-
1. That the loss , destruction or deterioration
was caused by the character of the goods ; or the
faulty nature of the packing /containers
2. That the common carrier had exercised due
diligence to forestall or lessen the loss.
REQUISTES for the act of public authority –
1. The common carrier must prove that the public
authority had the power to issue the order for the
destruction / seizure of the goods.
B.) Another defensive strategy to escape liability is
to invoke that it exercised extraordinary diligence to
prevent or minimize the loss at the time the accident
occurred.
Negligence is the failure to observe due diligence with
respect to the circumstances at hand.
Contributory Negligence is the failure to observe due
diligence that an ordinary or prudent man undertakes
in relation to the negligence of another.
When does the carrier’s responsibility over the
goods arise?
The carrier shall be liable the moment the goods
arrive in his possession whether actual or
constructive, until such time that the carrier delivers
the same to the consignee OR the consignee has been
informed of the arrival of the goods and the consignee
had reasonable time to remove the same.
Under maritime laws, the responsibility of the carrier
ends when the goods were transmitted by the carrier
to the customs arrastre operator. Recall that before
the goods are delivered to the consignee, the state has
the responsibility to ensure that the goods being
brought in are in accordance with the law.
EFFECT: The carrier would no longer be liable. The
succeeding relationship would be between the
consignee and the arrastre operator, the
relationship governing them would be akin to a
contract of Deposit.
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There is already an existing Contract of carriage when act with grave or irresistible threat, violence or
the carrier took possession of the cargo by placing it force, is dispensed with or diminished;
on a lighter or barge manned by its authorized 7. that the common carrier is not responsible for the
employees. (COMPANIA MARITIMA vs. INSURANCE loss, destruction, or deterioration of goods on
COMP ) account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in
the contract of carriage.
A bill of lading that was issued covering certain
shipment which contained a provision that the carrier
A stipulation that the common carrier's liability is
does not assume liability for any loss /damage to the
limited to the value of the goods appearing in the bill
goods once they have been under the custody of the
of lading, unless the shipper or owner declares a
custom or other authorities or when they have been
greater value, is binding.
delivered at ship’s tackle have been considered valid ,
A contract fixing the sum that may be recovered by the
because it was held that it is not contrary to morals
owner or shipper for the loss, destruction, or
and public policy ; said stipulation is clear and have
deterioration of the goods is valid, if reasonable and
been adopted to mitigate the responsibility of the
just under the circumstances, and has been fairly and
common carrier. (LU DO vs. BINAMIRA)
freely agreed upon.
The law of the country to which the goods are to be
Stoppage in Transitu is the right of the unpaid seller
transported governs the liability of the common
who has parted with the possession of the goods to
carrier in case of loss, destruction or deterioration.
stop them in transit, when the buyer of goods is or
becomes insolvent.
The provisions of articles 1733 to 1753 shall apply to
Requisites:
the passenger's baggage which is not in his personal
custody or in that of his employee. As to other
1. Seller must be an unpaid seller; baggage, the rules in articles 1998 and 2000 to 2003
2. Goods must be in transit; concerning the responsibility of hotel-keepers shall be
3. Buyer must be in a state of insolvency; applicable.
EFFECT: Once the right is exercised, the common
carrier becomes a mere warehouseman.
Fire may not be considered as a natural disaster or
In the event that the UNPAID Seller exercises its right calamity. It does not fall within the category of act of
of stoppage in transitu , the carrier thereafter holds God UNLESS caused by lighting or by natural disaster
the goods in the capacity of an ordinary bailee or or calamity. It may even be caused by actual privy or
warehouseman and shall be liable only as such , upon fault of the carrier. (EASTERN SHIPPING vs. IAC)
the theory that the exercise of the right by the unpaid
seller , such terminates the contract of carriage. The Civil Code provisions on Common carrier shall not
be applied when the carrier is not acting as such but as
a private carrier. The stipulation in the charter party
A STIPULATION LIMITING LIABILITY IS VALID
absolving the owner from liability for loss due to the
PROVIDED THAT it be: (2002 bar Exam)
negligence of its agent would be void only if strict
1. In writing signed by both parties
public policy governing common carriers are applied.
2. Supported by a valuable consideration other than
Such policy has no force when the public at large is not
the service rendered by common carrier
involved, as in the case of a ship totally chartered for
3. Reasonable, just and not contrary to public policy
the use of a single party (HOME INSURANCE vs.
AMERICAN STEAMSHIP)
SOME VALID STIPULATIONS LIMITING CARRIER'S
LIABILITY:
In case where the Common carrier w/o just cause-
1. Account of strikes or riot;
1. Delays the transportation of goods
2. Value of the goods appearing in bill of lading
2. Changes the stipulated route / usual route
UNLESS shipper declares a greater value;
The annulment of the agreement limiting the carrier’s
3. Contract fixing the sum that may be recovered.
liability is no longer necessary; The carrier cannot
simply avail of the benefit /defense of limited liability.
VOID STIPULATIONS LIMITING CARRIER'S
When the conditions printed in the back of the ticket
LIABILITY (2002 bar exams)
stub are in letters so small that they are hard to read,
1. that the goods are transported at the risk of the
this would not warrant the presumption that the
shipper;
passenger were aware of those conditions such that he
2. that the shipper is not liable for any loss or
had “fairly and freely agreed” to them . The passenger
destruction of the goods;
therefore is not bound by such stipulations.
3. that the common carrier need not observe any
(SHEWARAN vs. PAL)
diligence in the custody of the goods;
4. that the common carrier shall exercise a degree of
II. SAFETY OF PASSENGERS
diligence less than that of a good father of a
DUTY: A common carrier is bound to carry the
family;
passengers safely as far as human care and foresight
5. that the common carrier shall not be responsible
can provide, using the utmost diligence of very
for any acts of its employee;
cautious persons, with a due regard for all the
6. that the common carrier’s liability for acts
circumstances.
committed by thieves, or of robbers who do not

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RULE: The responsibility of a common carrier for the
safety of passengers as required in articles 1733 and
1755 cannot be dispensed with or lessened by
stipulation, by the posting of notices, by statements on
tickets, or otherwise.
EXCEPTION: When a passenger is carried
gratuitously, a stipulation limiting the common
carrier's liability for negligence is valid, but not for
willful acts or gross negligence.
The common carrier is liable even if the ticket issued
to passenger provides exemption of common carrier
from death or injury of paseenger and notices were
posted dispensing extraordinary diligence of the
common carrier or even if the passenger was given a
discount of his fares. (2001 Bar exams)
If the passenger is carried gratuitously,
stipulation limiting CC for negligence is valid but not
for WILLFUL ACT OR GROSS NEGLIGENCE.
A reduction of fare does not justify any limitation of
the common carrier's liability.
 Is the carrier liable for death of or injuries to
the passengers due to the negligence or willful
acts of ITS EMPLOYEES?
YES, although such employees may have acted beyond
the scope of their authority or in violation of the
orders of the common carriers.
Illustrative rule: Two passengers engage in a fist-fight
inside a bus terminal. An on-duty driver attempts to
pacify them but instead kills one. The carrier is liable!
But, if the killing of the passenger occurred while the
driver is off-duty, the carrier is not liable. (Recall the
case of Gillaco v. Manila Railroad, the carrier was held
not liable when its employee, a security guard who
harbored a grudge against a fellow passenger, shot
and killed the latter. The guard committed the killing
while he was off-duty.)
The Common carrier is held liable because -
1. The driver , although stopping the bus,
nevertheless did not put off the engine.
2. He started to run the bus even before the
conductor gave him the signal to go and while
the passenger was still unloading part of the
baggage . ( LA MALLORCA vs. CA)
In the case of LACAM vs. SMITH , the Court held that
an accident caused by defects in the automobile is not
a caso fortuito. The rationale of the carrier’s liability is
the fact that the passenger has neither the choice nor
control over the carrier in the selection and use of the
equipment and appliances in use by the carrier.
Q: Is the carrier liable for death of or injuries to
the passengers due to the willful acts or negligence
of other passengers or of strangers?
YES, a common carrier is responsible for injuries
suffered by a passenger if the common carrier's
employees through the exercise of the diligence of a
good father of a family could have prevented or
stopped the act or omission.
The act of the passengers stabbing another passenger
in the bus. To be absolved, the common carrier must
prove that it was negligent in preventing the injuries
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Prepared by: ATTY. RENATO S. RONDEZ
from accident; otherwise, it would be held liable.
(Bachelor Express vs. CA 188; SCRA 216)
EE riding on train who stepped on watermelons. Held:
The conduct of plaintiff in undertaking to alight while
the train was yet slightly underway was not
characterized by imprudence and that he was not
guilty of contributory negligence.
The circumstances show that it was no means so risky
for him to get off while the train was yet moving. It is
not negligence per se for a traveler to alight from a
slowly moving train. (Cangco vs MRR 38 Phil 768)
The DUTY of the PASSENGER is to observe the
diligence of a good father of a family to avoid injury to
himself. The contributory negligence of the passenger
does not bar recovery of damages for his death or
injuries, if the proximate cause thereof is the
negligence of the common carrier, but the amount of
damages shall be equitably reduced.
Condition printed on the back of a passenger ticket
commonly known as “CONTRACT OF ADHESION” ,
being drafted only by one party , usually the
corporation , and the only participation of the other
party (passenger ) is the signing of his signature “his
adhesion thereto calls for greater strictness and
vigilance on the part of the court of justice with the
view of protecting the weaker party from abuses .
Such contract if enforced will be subversive of public
good , thus placing the common carrier at a decided
advantage over those who may have legitimate claims
against it. The said condition is therefore
unenforceable, as contrary to public policy- to make
the court accessible to all those who have need of their
services.
Moral damages are not recoverable on breach of
contract of carriage in view of ART.2219-20 NCC .
EXCEPTIONS-
1. Where the mishap results in the death of a
passenger; Because the common carrier
becomes subject to the rule in ART.2206 NCC
entitles the spouse, descendants, ascendants
to moral damages for mental anguish as a
result of the death of the deceased.
2. 2.Where it is proved that carrier was guilty of
fraud or bad faith EVEN if death does not
result.
Mere carelessness does not per se justify an inference
of malice or bad faith on the part of the common
carrier ; Must be GROSS negligence
Concurring causes of action arising from negligent
act of the common carrier:
1. Culpa Contractual/breach of contract
(2003 Bar Exams)
Only the carrier is primarily liable not
the driver, because there is no privity
between the driver and the
passenger.(Art 1759, NCC.)
 No defense of due diligence
in the selection and
supervision of the
employees.
2. Culpa aquiliana (quasi delict)
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 GREEN NOTES IN COMMERCIAL LAW
The carrier and the driver are solidarily liable as joint
torfeasors.(Art 2180 NCC)
 Defense of due diligence in the
selection and supervision of employees is
available. Exception: maritime tort resulting
in collision
 Although the relation of passenger
and carrier is contractual both in origin and
nature, nevertheless, the act that breaks the
contract may also be a tort. (Air France vs.
Carrascoso; 18 SCRA 155)
In the case of injury to a passenger due to the
negligence of the driver of the bus on which
the passenger was riding on and of the driver
of another vehicle, the drivers as well as the
owners of the two vehicles are jointly and
severally liable for damages. It should not
make any difference that the liability of the
bus owner springs from a contract while that
of the driver springs from a quasi delict. (Tiu
vs. Arriesgado)
3. Culpa criminal( Criminal Negligence)
The driver is primarily liable. The
carrier is subsidiarilly liable only if
the driver is convicted and declared
insolvent.(art 100 RPC)
The principle of last clear chance would call for
application in a suit between the owners and drivers
of the two colliding vehicles. It does not arise where a
passenger demands responsibility from the carrier to
enforce its contractual obligations.(Phil. Rabbit Bus
Lines vs. CA)
CODE OF COMMERCE OVERLAND
TRANSPORTATION
Nature of Contract
Art. 349. A contract of transportation by land
or waterways of any kind shall be considered
commercial:
1. When it involves merchandise or any
object of commerce.
2. When, no matter what its object may be,
the carrier is a merchant or is customarily [habitually]
engaged in transportation for the public.
Requisites for a contract of transportation by land or
water to be commercial :
(1) transportation of merchandise is always
commercial
(2) transportation of person or news is
commercial only when the CC is a merchant or is
habitually engaged in transportation for the public
* principal requirement : the CC is a merchant
or is habitually engaged in transportation for the
public; the object carried is of little importance
Effect of Civil Code on the provisions of the Code of
Commerce on Overland Transportation
– The NCC does not expressly repeal the
provisions of the Code of Commerce on
overland transportation. Instead, it makes
such provisions suppletory to the provisions
of the NCC on common carriers
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Bill of Lading: Written acknowledgement of
receipt of goods and agreement to transport them
to a specific place to a person named or to his
order or bearer.
 Ambiguity is construed against the
carrier, the contract being one of
adhesion.
Kinds of Bills of Lading
1. Negotiable Bill of Lading – one in which it is
stated that the goods referred to therein will be
delivered to the bearer, or to the order of any
person named in such document.
2. Non–Negotiable Bill of Lading – the goods
referred to therein will be delivered to a specified
person.
3. Clean Bill of Lading – One which does not
indicate any defect in the goods
4. Foul Bill of Lading – Contains a notation
indicating that the goods are in bad Condition.
5. Spent Bill of Lading – Covers goods that have
already been delivered by the carrier without a
surrender of a signed copy of the Lading.
6. Through Bill of Lading – Issued by a carrier
who is obliged to use the facilities of other
carriers.
7. On Board Bill of Lading – one in which it is
stated that the goods have been received on board
the vessel which is to carry the goods.
8. Received for Shipment Bill of Lading – it is
stated that the goods have been received for
shipment with or without specifying the vessel by
which the goods are to be shipped.
9. Custody Bill of Lading – issued by the carrier
to the whom the goods have been delivered for
shipment but the vessel indicated in the bill of
leading which is to carry the goods has not yet
reached the port where the goods are held for
shipment.
10. Port Bill of Lading – one which is issued by
the carrier to whom the goods have been
delivered, and the vessel to carry the goods is
already in the port where the goods are held for
shipment.
Three–Fold Nature of Bills of Lading
1. A contract in itself and the parties are bound by
its terms;
2. A receipt; and
3. A symbol of the covered by it
 They are also documents of title, and if
negotiable in form they can constitute
negotiable documents of title.
Legal effect of the Issuance of Bill of Lading
– Bill of leading constitute the legal evidence of
the contract between the shipper and the
carrier by the contents of which the disputes
which may arise regarding their execution
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 GREEN NOTES IN COMMERCIAL LAW
and performance shall be decided, no
exception being admissible other than those
of falsity and material error in the drafting.
Effect of absence of a bill of lading
– It does not preclude liability on a contract of
transportation. The dispute shall be
determined by the legal proofs which the
parties may present in support of their
respective claims, according to the general
provisions established in the Code for
commercial contracts.
Right to refuse packages
Gen. Rule: – a common carrier cannot ordinarily
refuse to carry a particular class of goods to the
prejudice of the traffic in those goods.
Exception: However, under Art. 365, carriers are
authorized to refuse packages if they are unfit for
transportation.
Time for delivery of goods
 Where no period fixed
The carrier shall be bound to forward them in the
first shipment of the same or similar goods, which
he makes to the points where he must deliver
them. Should he not do so, the damages caused by
the delay shall be for his account.
 Where for delivery of goods
The carrier must deliver the goods within the time
fixed. For failure to do so, the carriers shall pay
the indemnity stipulated in the bill of lading. Also,
damages shall be paid if the carrier refuses to pay
the stipulated indemnity or is guilty of fraud in the
fulfillment of his obligation.
Limitation as to carrier’s liability (2002 Bar
exams)
(1). No Liability
– The carrier will not be liable at all for the
negligent acts of its crew and employees.
This is NULL and VOID for being contrary
to public policy
(2). Limited Liability
– Regardless of the value of the cargo, the
maximum liability of the carrier will be,
for example, P500. This is VOID for being
contrary to public policy.
(3). Qualified Liability
– A stipulation in the bill of lading limiting
the liability of the carrier to a valuation
unless the shipper declares a higher value
and pays a higher rate of freight is valid.
 However, the carrier cannot limit its
liability for injury to, or loss of, good
shipped where such injury or loss
was caused by its own negligence.
Recovery of Damages from carriers for
carriage of goods:
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Prepared by: ATTY. RENATO S. RONDEZ
(1) Inter-island – if goods arrived in damaged
condition:
 If damage is apparent, the shipper
must file a claim immediately.
 If damage is Not apparent he should
file a claim within 24 hours from
delivery.
 The filing of claim is a condition
precedent for recovery.
 If the claim is filed, but the carrier
refuses to pay:
– Enforce carrier’s liability in court
by filing a case:
 Within 6 years, if no bill of
lading has been issued, or
 Within 10 years, if a bill of
lading has been issued.
(2) Overseas – Where goods arrived in a
damaged condition from a foreign port to a
Philippine Port of Entry:
 Upon discharge of goods, if the
damage is apparent claim should be
filed immediately;
 If damage is not apparent, claim
should be filed within 3 days from
delivery.
When may a consignee of goods abandon the
goods and recover the value thereof from the
carrier?
In any of the following cases:
(1) Under Art. 363, in case of partial non-delivery,
where the consignee proves that he cannot
make use of the goods capable of delivery
independently of those not delivered.
(2) Under Art. 365, where the goods are rendered
useless for sale and consumption for the
purpose for which they are properly destined;
or
(3) Under Art. 371, where there is delay through
the fault of the carrier.
Two special sanctions for the enforcement by
the carrier of the payment of expenses and
transportation charges.
(1) Under Art. 374, judicial sale of the goods
transported; and
(2) Under Art. 375, by creating a lien in favor of
the carrier on the goods transported.
AIR TRANSPORTATION
The nature of an airline’s contract of carriage partakes
of two types, namely: a contract to deliver a cargo or
merchandise to its destination, and a contract to
transport passengers to their destination.( British
Airways vs. CA, 285 SCRA 450)
Special rules on liabilities:
 In case of flight diversion due to bad weather
or other circumstances beyond the pilot’s
control, the relation between the carrier and
the passengers continues until the latter has
been landed at the port of destination and has
left the carrier’s premises. The carrier should
necessarily exercise extraordinary diligence
in safeguarding the comfort, convenience and
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 GREEN NOTES IN COMMERCIAL LAW
safety of its stranded passengers until they
have reached their final destination ( Phil
Airlines vs. CA; Sept 15, 1993)
 It is firmly settled that moral damages are
recoverable in suits predicted on breach of a
contract of carriage where it is proved that
the carrier was guilty of fraud or bad faith- in
attention to and lack of care for the interests
of its passengers who are entitled to its
utmost consideration, particularly as to their
convenience- amount to bad faith which
entitles the passenger to an award of moral
damages(Japan Airlines vs. Simangon, April
22, 2009)
 Even where overbooking of passengers is
allowed as a commercial practice, the airline
company would still be guilty of bad faith and
still be liable for damages if it did not properly
inform passenger that it could breach the
contract of carriage even if they were
confirmed passengers( Zalamea vs. CA GR
104235)
 Neglect or malfeasance of the carrier’s
employees could give ground for an action for
damages. Passengers have a right to be
treated by the carrier’s employees with
kindness, respect, courtesy and due
consideration and are entitled to be protected
against personal misconduct, injurious
language, indignities and abuses from such
employees.
 An air carrier is not liable for the loss of
baggage in an amount in excess of the limit
specified in the tariff which was filed with the
proper authorities, such tariff being binding
on the passenger regardless of the
passenger’s lack of knowledge thereof or
assent thereto. In a contract of air carriage, a
declaration by the passenger of a higher value
is needed to recover a greater amount.
 An open dated ticket constitutes a complete
contract between the carrier and passenger.
Hence the airline company is liable if it
refused to confirm a passenger’s flight
reservation (Singson vs.CA, GR No. 119995)
 An airline company which issued a confirmed
ticket to a passenger covering successive trips
on a trips on different airlines can be held
liable for damages occasioned by bumping off
by one of the successive airlines(Lufthansa
German Airlines vs. CA; GR. No. 83612)
MARITIME COMMERCE/ WATER
TRANSPORTATION
Special contract of maritime commerce:
1. Charter party
2. Bill of lading
3. Loan of bottomry/respondentia
4. contract of transportations passengers
5. Marine insurance
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VESSELS (in general)extends to everything floating in
and on the water, built in the form of vessel and used
for navigation regardless of form, right or motive
power.
MERCHANT VESSELS- engaged in the transportation
of passengers and freight from one port to another or
from one place to another.
*Are vessels real or personal property?
PERSONAL- but they partake to a certain extent, of the
nature and conditions of real property, on account of
their value and importance of the world of commerce.
CHARACTERISTICS OF MARITIME TRANSACTIONS:
1. Real- similar to transactions over real property
with respect to effectivity against third persons,
which are done through registration. The evidence
of real nature is shown by:
 the limitation of the liability of the agents
to the actual value of the vessel and the
freight money and
 the right to retain cargo, embargo and
detention of the vessel even in cases
where ordinary civil law would not allow
more than a personal action against
debtor.
2. Hypothecary- the liability of the owner of the
vessel is limited to the vessel itself.
3. Preference of credits- Mortgage of a vessel
properly registered becomes of preferred
mortgage lien which shall have priority over all
claims against the vessel in an extrajudicial
foreclosure for:
a. credit in favor of the public treasury;
b. judicial cost of the proceedings;
c. pilotage and tonnage charges and other sea
and port changes;
d. salaries of depositories and keepers of the
vessel;
e. captain and crew's wages;
f. general average
g. salvage including contract salvage;
h. maritime liens arising prior in time to the
recording of the preferred mortgage;
i. damages arising out of tort; and
j. Preferred mortgage registered prior in time.
A.BILL OF LADING ( 1998 and 2005 bar Exams)
A bill of lading serves two functions:
a. It is a receipt for the goods shipped;
b. It is a contract by which three parties, namely
the shipper, the carrier, and the consignee
undertake specific responsibilities and
assume stipulated obligations.
A bill of lading delivered and accepted constitutes
the contract of carriage even though not signed,
because the acceptance of a paper containing the
terms of a proposed contact generally constitutes
an acceptance of the contract and of all of its terms
and conditions of which the acceptor has actual or
constructive notice (Keng Hua Paper Products
Inc. vs. CA, Feb. 1998)
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 GREEN NOTES IN COMMERCIAL LAW
A bill of lading is in the nature of a contract of
adhesion.
DOCTRINE OF LIMITED LIABILITY (HYPOTHECARY
NATURE OF MARITIME COMMERCE) ART. 587, CODE
OF COMMERCE
1994, 1997,1999 and 2000 bar exams
 The liability of the ship owner is limited to the
value of the vessel. The limited liability of the
owner is confined to the vessel, equipment
and freight or insurance, if any. If the ship
owner has abandoned the ship, equipment
and freight, his liability is extinguished.
 If the vessel sinks the liability of the owner is
extinguished, although he may have other
properties.
 If the vessel does not sink, the owner
May exercise the right of abandonment and
the liability of the ship owner is limited to the
value of the vessel.
EXCEPTIONS TO LIMITED LIABILITY RULE:
1. When the vessel is not abandoned by the
owner or ship agent
2. When the vessel is covered by insurance
3. Expenses for repair of the vessel before it sails
4. Claims of employees under the labor laws
5. When ship owner/ship captain is at fault or
guilty of negligence.
a. lack of proper and adequate
equipment(insufficient life vests)
b. lack of proper technical training of
the offices and of the vessel
Monarch Ins Co. vs. Ca; Allied Guarantee Insurance
Co vs. CA & Equitable Insurance vs. CA, (June 8,
2000)
As a general rule, a ship owner's liability is merely
co-extensive with his interest in the vessel, except
where actual fault is attributable to the ship
owner. Thus, as an exception to the limited liability
doctrine, a ship owner or ship agent may be held
liable for damages when the sinking of the vessel is
attributable to the actual fault or negligence of the ship
owner or its failure to ensure the seaworthiness of the
vessel. The instant petitions cannot be spared from the
application of the exception to the doctrine of limited
liability in view of the unanimous findings of the
courts below that both Aboitiz and the crew failed to
ensure the seaworthiness of the M/V P. Aboitiz.(
Aboitiz Shipping Corp vs CA, October 17,2008)
PHILIPPINE COAST GUARD (PCG) vested with
exclusive authority over the registration and
documentation of Philippine vessels, issuance of all
certificates, licenses or documents, necessary or
incident to registration.
VESSELS REQUIRED TO BE REGISTERED:
1. All vessels used in Philippine water;
2. Vessels of 3 tons gross shall not be registered
UNLESS the owner shall so desire;
3. All undocumented vessels.
Where Registration to be effected?
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
- At its home port (when a coast guard district or
station is on the same port); if none, at the nearest
COAST GUARD DISTRICT OR STATION).
OPTIONS AS TO SMALL BOATS:
1.) If vessel is of domestic ownership and 15 tons
gross or less certificate of Philippine registry is
optional.
Purpose: declare nationality of a vessel
2.) Vessel (5 tons gross or less) & no certificate of
Philippine registry  certificate of ownership is
optional.
Privileges: right to engage in Philippine coastwise
trade and protection of the authorities and the flag
is also subject to the same privileges.
3.) Vessel (3 tons gross or less)  not to be
registered unless the owner shall so desire.
PURPOSE OF REGISTRATION:
Purchaser's rights maybe maintained against a claim
filed by the THIRD PERSON.
*Who shall be entitled to the freightage and who
shall be obliged to pay the crew and other persons
who make up the compliment of the vessel?
>It depends upon the time of the sale.
If made while it is on a voyage, freightage shall
pertain entirely to PURCHASER and payment of the
crew and other persons who make up its compliment
for same voyage shall be for his account.
If made after the vessel has arrived at the port
of its destination, freightage shall pertain to the
VENDOR and other individuals who make up its
complement shall be for his account, UNLESS the
contrary is stipulated in either case.
FORMALITIES FOR VOLUNTARY SALE ABROAD:
1. Execution of the bill of sale before consul of the
Philippines at the port where it terminates its
voyage;
2. Inscription in the registry of the consulate;
3. Forwarding by the consul of a true copy of the
instrument of purchase and sale to the registry of
vessel;
4. Statement whether the vendor receives its price in
whole or in part.
FORMALITIES FOR SALE WHEN VESSEL RENDERED
USELESS:
1. application for examination;
2. notification of the consignee/ insurer;
3. proof of damage and impossibility of the repair of
the vessel;
4. order for the sale of vessel at public auction.
RULES FOR THE SALE OF VESSEL AT PUBLIC
AUCTION:
1. articles of the vessel shall be appraised after
making an inventory
2. posting of the order of the auction
3. announcement
4. auction shall be held on the day fixed
5. Observance of special provisions, governing the
sale of the vessel while it is on the foreign country.
2 METHODS OF SALE:
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 GREEN NOTES IN COMMERCIAL LAW
1. judicial
2. voluntary
*EFFECT OF REGISTRATION OF VOLUNTARY SALE
- if it take place while the vessel is on a voyage, the
preferred & hypothecary nature of the credit
subsists against the vessel until after its return to
the port of registry and 3 months after the
inscription of the sale in the registry of vessels or
after the return, so as to prevent the possibility of
fraud upon creditors through voluntary sale.
PARTICIPANTS IN MARITIME COMMERCE:
a. ship owners and ship agents
b. captains and masters of the vessel
c. officers and crew of the vessel
c.1 sailing (1st mate)
c.2 quartermaster (2nd mate)
c.3 engineer
d. seamen
e. supercargoes
A. SHIP OWNERS AND SHIP AGENTS
Ship owner - A person who has possession or control
in the management of the vessel and the consequent
right to direct her navigation and receive freight
earned and paid, while his possession continues.
Ship agent – A person entrusted with provisioning
and representing the vessel in the port in which it may
be found; also includes the ship owner
LIABILITY OF SHIP OWNER AND SHIP AGENT:
1. for the acts of the captain
2. contracts entered into by the captain to repair,
equip, and provision the vessel PROVIDED that the
amount claimed was invested for the benefit of the
vessel
3. Indemnities in favor of third person that may arise
from the conduct of the captain in the care of
goods and safety of passengers transported.
4. Tort or quasi-delict committed by captain EXCEPT
collision with another vessel.
5. Damages in case of collision due to the fault,
negligence or want of skill of captain, sailing mate
or by other member of the complement.
SHIP AGENT'S AND OWNER’S LIABILITY LIMITED:
- By abandoning the vessel with all her equipment
and the freight it may have earned during the
voyage(by NECESSARY IMPLICATION); limited to
the value of the vessel or its insurance in view of
the so-called REAL AND HYPOTHECARY nature of
maritime law.
- Effect: cessation of the responsibility of the owner
POWER AND FUNCTIONS AND LIABILITIES OF SHIP
AGENT:
1. capacity to trade;
2. discharge duties of the captain in case of the
latter's absence;
3. contract in the name of the owners with respect to
repairs, details of equipment, armament, and all
that relate to the requirements of navigation;
4. order of new voyage and make a new charter or
insure the vessel after obtaining authorization
from the ship owners.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
DUTY OF SHIP AGENT TO DISCHARGE THE
CAPTAIN AND MEMBERS OF THE CREW:
- If the seamen contract is not for a definite period or
voyage, he may discharge them at his discretion
- If for a definite period, he may not discharge them
until after the fulfillment of their contracts
EXCEPT on the ff. grounds:
a. insubordination in serious matters
b. robbery
c. theft
d. habitual drunkenness
e. damage caused to the vessel or to its cargo
through malice, manifest or proven
negligence
EFFECT/LOSS/DESTRUCTION OF VESSEL:
1. extinguishes liability arising from the conduct of
the captain in the vigilance of the goods and for
the safety of the passengers and for any liability
arising from negligent acts of the captain
2. extinguishes liability for the wages of the captain
and the crew and for advances made by the ship
agent if the vessel is lost by shipwreck or capture
3. liability for collision
B. CAPTAINS AND MASTERS OF THE VESSEL
Captain- who govern vessels that navigate the high
seas or ships of large dimensions and importance,
although engaged in the coastwise trade
Masters- who command smaller ships engaged
exclusively in the coastwise trade
NATURE OF POSITION:
1. General agent of the ship owner
2. Technical Director of the vessel
3. Representative of the Government of the country
under whose flag he navigates
QUALIFICATIONS:
1. Filipino citizen
2. Legal capacity to contract
3. Must have passed the required physical, mental
examination required for licensing him as such
INHERENT POWERS OF THE CAPTAIN:
1. appoint crew in the absence of ship agent
2. command and direct crew
3. impose correctional punishment on those who
while on board vessel fail to comply with his
orders or are wanting in discipline
4. make contracts for the charter of vessel in the
absence of ship agent
5. supply, equip, and provision the vessel
6. order repair of vessel to enable it to continue its
voyage
SOURCES OF FUNDS TO COMPLY WITH THE
INHERENT POWERS OF THE CAPTAIN:
1. from the consignee of the vessel
2. from the consignee of the cargo
3. by drawing on the ship agent
4. by a loan on bottomry
5. by sale of part of the cargo
DUTIES OF THE CAPTAIN:
1. bring on board the proper certificate and
document and a copy of the Code of Commerce
2. keep a logbook, accounting book and freight book
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 GREEN NOTES IN COMMERCIAL LAW
3. examine before the voyage
4. stay on board during the loading and unloading of
the cargo
5. be on deck while leaving or entering the port
6. seeks protest, arrival under stress and in case of
shipwreck
7. follow instruction of and render accounting to the
ship agent
8. save the vessel lost in case of wreck
9. hold in custody properties left by deceased by
passengers and crew members
10. comply with the requirements of customs, health,
etc. at the port of arrival
LIABILITIES OF THE SHIP AGENT/SHIP OWNER
FOR ACTS DONE BY THE CAPTAIN TOWARDS
PASSENGERS AND CARGOES MAKING THEM
SOLIDARILY LIABLE TO THE LATTER:
1. damages to vessel and to cargo due to lack of skill
and negligence
2. theft and robbery of the crew
3. losses and fines in violation of laws
4. damages due to mutinies
5. damages due to misuse of power
6. deviations
7. arrival under stress
8. damages due to non-observance of marine
regulations
NO LIABILTY FOR THE FOLLOWING:
1. damages caused to the vessel by force majeure
2. obligations contracted for the repair, equipment
and provisioning of the vessel UNLESS he has
expressly bound himself personally or has signed a bill
of exchange or promissory note in his name
CARGO- which includes all goods, wares and
merchandise aboard a ship which do not from part of
the ship's stores.
REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY:
1. act of public enemy in war was the proximate and
only cause of the loss
2. common carrier exercise due diligence to prevent,
minimize loss before, during, and after occurrence of
the act of the public enemy in war
FORMALITIES REQUIRED WHERE VESSEL HAS
GONE THROUGH HURRICANE
1. Captain must make a protest before competent
authority at the first port he touches
2. Such a protest must be made within 24 hours
following his arrival
3. captain must ratify it within some period when he
arrives at his destination
4. he must immediately proceed with the proof of
the facts
FORMALITIES REQUIRED WHERE VESSEL
SHIPWRECKED:
1. captain must make a protest before the nearest
competent authority
2. protest be made within 24 hours following his
arrival
3. make sworn statement of the facts
4. authority/consul abroad shall verify said facts
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
5. such authority shall take other steps in carrying at
the facts
6. such authority shall also make statements of what
may be the result of the proceeding in the logbook
and in that of the sailing mate
7. he shall deliver the original records to the captain
8. captain must ratify the protest
C. OFFICERS AND CREW
1. Sailing mate/First mate
- second chief of the vessel who takes the place of
the captain in case of absence, sickness, or death
and shall assume all of his duties, powers, and
responsibilities
DUTIES:
1. provide himself with maps, and charts with
astronomical tables necessary for the
discharge of his duties
2. keep the Binnacle book
3. Change the course of the voyage on
consultation with captain and the officers of
the boat, following the decision of the captain
in case of disagreements.
4. Responsible for all the damages caused to the
vessel or to the cargo by reason of his
negligence
2. Second mate
- takes command of the vessel in case of the
inability or disqualification of the captain and the
sailing mate, assuming in such case their powers
and responsibilities and duties
DUTIES:
1. preserve the hull and rigging of the vessel
2. arrange well the cargo
3. discipline the crew
4. assign work to crew members
5. Inventory the rigging and equipment of the
vessel, if laid up.
3. Engineers
- Officers of the vessel but have no authority
EXCEPT in matters to motor apparatus. When 2 or
more are hired, one of them should be the Chief
Engineer
DUTIES:
1. in charge of motor apparatus, spare parts, and
other instruments pertaining to the engines
2. keep the engines and boilers in good
condition
3. not to change or repair the engine without
authority of the captain
4. inform the captain of any damage to the
motor apparatus
5. keep an Engine book
6. supervise all personnel maintaining the
engine
4. Members of the Crew
Hired by the ship agent. Where he is present and in his
absence, the captain hires them preferring Filipinos,
and in their absence, he ,ay take in foreigners but not
exceeding 1/5 of the crew.
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 GREEN NOTES IN COMMERCIAL LAW
CLASSES OF SEAMAN'S CONTRACT:
1. by the voyage
2. by the month
3. by share of profits or freightage
JUST CAUSES FOR THE DISCHARGE OF SEAMAN
WHILE CONTRACT SUBSISTS:
1. perpetration of a crime
2. repeated insubordination, want of discipline
3. repeated incapacity and negligence
4. habitual drunkenness
5. physical incapacity
6. desertion
CAUSES OF REVOCATION OF VOYAGE:
1. war
2. blockade
3. prohibition to receive cargo at destination
4. embargo
5. inability of the vessel to navigate
RULES IN CASE OF DEATH OF A SEAMAN: The
seaman's heirs are entitled to the payment as follows:
1. if death is natural:
a. compensation up to time of death if
engaged on voyage
b. if by voyage- half of amount if death
occurs on voyage out; and full if on
voyage in
c. if by shares- none if before departure; full
if after departure
2. if death is due to defense of vessel- full payment
3. if captured in defense of vessel- full payment
4. if captured due to carelessness- wages up to the
date of the capture
NO LIABILY UNDER THE FOLLOWING
CIRCUMSTANCES:
1. If before beginning voyage, captain attempts to
change it or a naval war with the power to which
was destined occurs
2. If a disease breaks out and be officially declared
an epidemic in the port of destination
3. If the vessel change owner or captain
COMPLEMENT OF THE VESSEL
- All persons on board, from the captain to the cabin
boy, necessary for the management, maneuvers,
and service, thus including the crew, the sailing
mates, engineers, stalkers and other employees on
board not having specific designations
- It does not include the passengers or the person
whom the vessel is transported
FORMALITIES REQUIRED FOR SEAMAN'S
AGREEMENT:
1. reduced to writing in Accounting Book
2. signed by parties
3. visaed by marine authority if executed in
Philippine territory/consul or consular agents if
executed abroad
4. read to the seaman concerned and such fact must
be stated in the agreement
Interdiction of Commerce
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
a governmental prohibition of commercial intercourse
intended to bring about an entire cessation for the
time being of all trade
Embargo
- a proclamation or order of the State usually issued
in time of war/ threatened hostilities prohibiting
the departure ships/ goods from some or all the
ports of such State until further order
Blockade
- a sort of circumvallation of place by all foreign
connections and correspondence is as far as
human power can affect it to be cut-off
SUPERCARGOES
- person who discharge administrative duties
assigned to him by ship agent or shippers, keeping
an account and record of transaction as required
in the accounting book of the captain
B.CHARTER PARTY
- Contract by virtue of which the owner or agent
binds himself to transport merchandise or
persons of a fixed price. It may either be contract
of affreightment (time and Voyage Charter) and
bareboat or demise charter.
CLASSES OF CHARTER PARTY
1. As to extent of vessel hired
a. total- whole of the vessel is chartered
b. partial- only part of the vessel is chartered
2. As to time
a. until a fixed day/ for a determined number of
days and months
b. for a voyage(outgoing/return/roundtrip)
3. As to freightage
a. for a fixed amount for the whole cargo
b. for a fixed amount per ton
c. for an amount per month
a. Contract of Affreightment- the owner of the
vessel leases a part or all of the space of the
vessel to carry goods but retains the
possession, command and navigation of the
vessel. The charter merely has the use of the
space in the vessel in return for the payment
of the charter hire.
b. Bareboat/ Demise Charter—involve the
transfer of full possession and control of the
vessel to the charterer. The entire control and
management of the vessel is given up to the
charterer. The charterer mans the vessel with
his own people. (2003 Bar exams)
The owner of the vessel has no more
insurable interest on the vessel. In case of loss of
the vessel, the ship owner can recover the value of
the vessel from the charterer.(Caltex vs. Sulpicio
line, 1999)
FORMAILITIES REQUIRED FOR A CHARTER PARTY:
1. in writing
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 GREEN NOTES IN COMMERCIAL LAW
2. drawn in duplicate
3. signed by the parties
4. contain stipulation
 not all requisites are essential for the validity of
charter party
Primage
- belongs to owner/ freighters;
- increase of the freight rate
- considered gratuity to master if is stipulated
- a bonus to be paid to a captain after a successful
voyage
Demurrage
- Sum which is fixed by the contract of carriage, or
which is allowed, as remuneration to the owner of
a ship for the detention of his vessel beyond the
number of days allowed by the charter party for
loading/unloading/sailing.
"Lay days"
-days allowed to charter parties for loading and
unlading
- period when vessel will be delayed in port for
loading and unloading.
"Extra Lay Days"
- days which followed after lay days have elapsed
Deadfreight
– A cargo not loaded is considered as deadfreight,
which covers the amount paid by or recoverable from
the charterer for the portion of the ship’s capacity the
latter contracted for but failed to occupy.
GOODS TRANSFERRED MAY BE:
1. sold by captain to necessary repairs
2. jettisoned for the common safety
3. loss by reason of shipwreck/stranding
4. seized by pirates/enemies
5. suffer deterioration/diminutions
6. increase by natural cause and weight or size
RIGHTS AND OBLIGATIONS OF CHARTER PARTY:
A. Of the ship owner or ship agent
1. If the vessel is chartered wholly not to accept
cargo from others;
2. To observe represented capacity;
3. To unload cargo clandestinely placed;
4. To substitute another vessel if load is less
than 3/5 of capacity;
5. To leave the port if the charter does not bring
the cargo within the lay days and extra lay
days allowed;
6. To place in a vessel in a good condition to
navigate;
7. To bring cargo to nearest neutral port in case
of war or blockade.
B. Of the charterer
1. to pay the agreed charter price
2. to pay freightage or unboarded cargoes
3. to pay losses to others for loading
uncontracted cargo and illicit cargo
4. to wait if the vessel needs repair
5. to pay expenses for deviation
RESCISSION OF CHARTER PARTY
A. At charterer's request
1. by abandoning the charter and paying half of
the freightage
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. error in tonnage or flag
3. failure to place the vessel at the charterer's
disposal
4. return of the vessel due to pirates, enemies or
bad weather
5. arrival at the port for repairs
B. At ship owner’s request
1. If the extra lay days terminate without cargo
being placed alongside the vessel
2. Sale by the owner of the vessel before loading
C. Fortuitous causes
1. war
2. blockade
3. prohibition to receive cargo
4. embargo
5. inability of the vessel to navigate
D. LOANS ON BOTTOMRY/ RESPONDENTIA
(1961,1967,& 1980 bar exams)
These loans are secured by the owner or captain
of the vessel for the use of the vessel. In the case of
loans on bottomry, the security of the loan is the vessel
itself; while loan on respondentia, the security of the
loan is the cargo.
The loan is in the nature of insurance. The loan will
only be paid on the safe arrival of the vessel or cargo
fails to reach the port of destination, the creditor loses
his right to recover the amount of the loan.
COMMON ELEMENTS OF LOANS ON BOTTOMRY
AND RESPONDENTIA
1. exposure of security or marine peril
2. obligation of the debtor conditioned only upon
safe arrival of security at the point of destination
HYPOTHECARY NATURE OF BOTTOMRY AND
RESPONDENTIA:
General Rule: the obligation of the borrower to pay is
extinguished if the goods given as security are
absolutely lost by reason of an accident of the voyage
designated, and if it is proven that the goods were on
board.
EXCEPTIONS:
1. loss due to inherent defect
2. loss due to the barratry on the part of the captain
3. loss due to the fault or malice of the borrower
4. that the vessel is engaged in contraband
5. that the cargo loaded on the vessel be different
from that agreed upon
Bottomry/repondentia Simple loan
Marine risk
Duly established existence Not necessary
of a marine risk is
necessary
Form and manner
Must be executed in Formal requisites of
accordance with the form an ordinary contract
and manner prescribed by will suffice
the code of commerce
Registry of Vessels
Must be recorded in the No such registration
registry of Vessel to be is required
binding to third persons
Preference
Preference is extended to Preference is
the last lender extended to the first
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 GREEN NOTES IN COMMERCIAL LAW
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lender value of the owner’s

property saved
Right to recover
When loan on bottomry or respondentia regarded as
No reimbursement There may be
Simple Loan
reimbursement
Requisites of Gross or General average
1. Lender loaned an amount larger than the value of
1. Common danger
the object due to fraudulent means employed by the
 that both the ship and the cargo, after
borrower(art 726 code of commerce)
has been loaded, are subject to the
2. Full amount of the loan is not used for the cargo or
voyage, or in the port of loading or
given on the goods if all of them could not have been
unloading
loaded, the balance will be considered a simple loan(
 that the danger arises from the
art 727 Code of Commerce)
accidents of the sea, dispositions of
3. If the effects on which the money is taken is not
the authority or faults of men,
subjected to any risk(729 Code of commerce
provided that the circumstances
Note: under existing laws, the parties to a loan,
producing the peril should be
whether ordinary or maritime, may agree on any rate
ascertained and imminent or may
of interest (Cb circular 905); provided the same is not
rationally be said to be certain and
contrary to law, morals, good customs, public order or
imminent.
public policy. Art 1306 NCC
2.Deliberate Sacrifice
Gen. rule: sacrifice is made through the
ACCIDENTS IN MARITIME COMMERCE (2000 bar
jettison of the cargo or part of the shipis thrown
exams)
overboard DURING THE VOYAGE.
1 Averages
Exceptions:
2. Arrival Under stress
a. where the sinking of a vessel is necessary to
3. Collision
extinguish a fire in a port, roadsteads, creek
4. Shipwreck
or bay
b. where cargo is transferred to lighten the ship
Average
on account of a storm to facilitate entry into a
An extraordinary or accidental expense incurred
port.
during the voyage in order to preserve the cargo,
3.Sucess
vessel or both, and all damages or deterioration
Pupose: To be able to demand general contribution
suffered by the vessel from departure to the port of
loading to the consignment (art 806 Code of
4.Proper formalities and legal steps
commerce)
a. procedure for recovery
The person whose property has been saved
b. assembly and deliberation
must contribute to reimburse the damage caused or
c. resolution of the caption
expense incurred if the situation constitutes general
d. entry of the resolution in the logbook
average.
e. detailed minutes
It is classified into: (1) general or gross average or (2)
f. delivery of the minutes to the maritime judicial
simple or particular.
authority of the first port, within 24hours from arrival
Particular/ simple Gross/ general
 Ratification by the captain under oath.
Definition
Goods Not Covered By General Average Even if
Damages or expenses Damages or expenses sacrified:
caused to the vessel or deliberately caused in Goods carried on deck
cargo that did not inure order to save the
1.goods not recorded in the books or records of vessel
to the common benefit, vessel, its cargo orboth
2.fuel for the vessel if there is more than sufficient fuel
and borne by from real and known
for the voyage.
respective owner.( art risk.(811)
809)
Liability JETTISON
Act of throwing cargo overboard in order to lighten
The owner of the goods All persons having an
which gave rise to the interest in the vessel
the vessel
expense or suffered the and the cargo therein
damage shall bear this at the time of the ORDER OF GOODS TO BE CAST OVERBOARD IN
average.(810) average shall CASE OF JETTISON:
contribute to satisfy 1. Those which are on the deck, preferring the
this average(812) heaviest one with the least utility of value
The insurers and 2. Those which are below the upper deck beginning
lenders on bottomry with the one with greatest weight and smallest
and respondentia shall value jettisoned goods are not res nullius nor
likewise contribute deemed abandoned within the meaning of civil
Numbers of interests involved law so as to be the object of occupation by salvage.
Only one interest Several interests is
involved involved Arrival Under stress
Share in the damage/expense - arrival of a vessel at a port of destination on
100% share In proportion to the account of lack of provision, well-founded fear of

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 GREEN NOTES IN COMMERCIAL LAW
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seizure, pirates, or accidents in sea disabling when there was not sufficient time to do so or there
navigation was fear of a greater damage or other legitimate
When lawful When Who bears reason.
unlawful expenses 7. The vessel which is not properly moored or
The inability to 1. lack of The ship does not observe the proper distances has the
continue voyage is provisions owner or ship presumption against itself.
due to lack of due to agent is liable 8. The vessel which is moored at a place not
provisions, well negligence to in case of used for the purpose, or which is improperly moored
founded fear of carry unlawful or does not have sufficient cables, or which has been
seizure, according to arrival under left without watch, has also against itself the
privateers, pirates usage and stress. But presumption.
or accidents of the customs; they shall not
9. The same rule applies to those vessels
sea disabling it to 2.risk of be liable for
which do not have buoys to indicate the location of its
navigate enemies not damages
anchors to prevent damage to these vessels which may
well-known caused by a
or manifest; reason of a approach it.
3.defect due lawful arrival.
to improper Zones in time of collisions (3 time zones):
repair;
4.malice, 1. all the time up to the moment when the risk
negligence, of collision may have said to have begun
lack of --> within this zone, no rule is applicable
foresight, lack because none is necessary. Each vessel is free to direct
of skill its course as it deems best with reference to the
Cases of collision: movements of the other vessel.
1. Due to the fault, negligence or lack of skill of the
captain, sailing mate or the complement of the vessel-- 2. the time between the moment when the
under 826, the ship owner shall be liable for the losses risk of collision begins and the moment when it has
and damages become a practical necessity.
2. Due to the fault of both vessels --> under 827, each
vessel shall suffer its own losses, but as regards the 3. the time between the moment when
owners of the cargoes, both vessels shall be jointly and collision has become a practical certainty and the
severally liable moment of actual contact
3. Where it cannot be determined which of the 2 vessels
is at fault --> under 828, each vessel shall suffer its Effect of fault of privileged vessel during third
own losses, and both shall also be solidarily zone :
responsible for the losses and damages caused to their
cargoes If a vessel having a right of way suddenly
4. Collision due to fortuitous event or force majeure --> changes its course during the third zone, in an effort to
under 830, each vessel shall bear its own damages avoid an imminent collision due to the fault of another
5. Where two vessels collide with each other without vessel, such act may be said to be done in extremis,
their fault but by reason of the fault of a third vessel --> and even if wrong, cannot create responsibility on the
under 831, the owner of the third vessel causing the part of said vessel with the right of way. Thus, it has
collision shall be liable for the losses and damages 6. a been held that fault on the part of the sailing vessel at
vessel which is properly anchored and moored may the moment preceding a collision, that is, during the
collide with those nearby by reason of a storm or third division of time, does not absolve the steamship
other cause of force majeure --> under 832, the vessel which has suffered herself and a sailing vessel to get
run into shall suffer its own damages and expenses into such dangerous proximity as to cause inevitable
harm and confusion, and a collision results as a
Nautical Rules to determine negligence : consequence. The steamer having a far greater fault in
1. When 2 vessels are about to enter a port, allowing such proximity to be brought about is charge-
the farther one must allow the nearer to enter first; if able with all the damages resulting from the collision;
they collide, the fault is presumed to be imputable to and the act of the sailing vessel having been done in
the one who arrived later, unless it can be proved that extremis and even wrong, is not responsible for the
there was no fault on its part. result.
2. When 2 vessels meet, the smaller should
give the right of way to the larger one.
3. A vessel leaving port should leave the way
clear for another which may be entering the same CASES COVERED BY COLLISION AND ALLISION:
port. 1. one vessel at fault- such vessel is liable for damage
4. The vessel which leaves later is presumed caused to innocent vessel as well as damages
to have collided against one who has left earlier. suffered by owners of cargo of both vessels
5. There is also a presumption against the 2. both vessels at fault- each vessel must bear its
vessel which sets sail at night. own loss but the shippers of both vessel may go
6. The presumption also works against the against the ship owner who will be solidarily
vessel with spread sails which collide with another liable
which is at anchor, and cannot move, even when the 3. vessel at fault not known- same as rule 2
crew of the latter has received word to lift anchor, 4. third vessel at fault- same rule 1

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 GREEN NOTES IN COMMERCIAL LAW
5. fortuitous event- no liability, each bear its own
loss
Rules governing LIABILITIES of parties in case of
COLLISION: (1995, 1997,1998, & 2007 Bar exams)
1. Where collision is due to the negligence or malice
of the captain and/or other ship officers of one
vessel, the ship owner of such vessel shall be liable for
all resulting damages.
2. Where collision is due to the fault of both vessels,
each vessel shall suffer their respective losses but as
regards to the owners of the cargoes, both vessels
shall be jointly and severally liable.
3. If it cannot be determined which vessel is at
fault, each vessel shall suffer its own loses and both
shall be solidarily liable for loses or damages on the
cargo. (DOCTRINE OF INSCRUTABLE FAULT)
4. The vessels may collide with each other through
fortuitous event or force majeure. In which case,
each shall bear its own damage.
5. Two vessels may collide without their fault but by
reason of a third vessel. The third vessel shall be
liable for losses and damages sustained.
Requisite for RECOVERY arising from collision:
1. Protest must be made within 24 hours before:
a) Competent authority at the point of
collision or
b) At the first port of arrival, if in the
Philippines and to the Philippine Consul,
if the collision took place abroad.
Injuries to persons and damage to cargo of owners not
on board on time of collision need not be protested.
Article 835, Code of Commerce: In case of collision,
there must be a marine protest to recover collision
damage; in such a case, the marine protest is a
condition sine qua non and not merely a disclaimer
unlike in the case of arrival under stress and
shipwreck.
CARRIAGE OF GOODS BY SEA ACT
Applicable to all transportation of goods by sea in
foreign trade to and from Philippine ports AND does
not apply to purely domestic transport.
Laws applicable to a contract for the carriage of
goods by sea:
1. Distinguish - common carrier (Civil Code)
- private carrier
2. Where is the vessel going?
a. Common carrier coming to the Phils.
1st: Civil Code
2nd: COGSA (it's more specific than Code of
Commerce)
- in foreign trade
3rd: Code of Commerce
b. Private carrier coming to the Phils. in foreign trade
1st: COGSA (because it's more specific)
2nd: Code of Commerce
3rd: Civil Code (provisions not on common carriers
e.g. torts, contracts)
c. From the Phils. to a foreign country: apply laws of
such foreign country (Art. 1753)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
- with respect to vessels destined for foreign ports, the
COGSA doesn't apply unless parties make it applicable.
Q: In what situations does COGSA primarily apply?
A: Where the parties expressly stipulate that COGSA
shall govern their respective rights and obligations.
Q: Can the COGSA apply in domestic shipping?
A: Generally, NO.
EXCEPTION: when parties agree to make it apply.
Q: What application does COGSA have in carriage of
passengers?
A: None. Applies only to carriage of goods.
What is the “TACKLE TO TACKLE” RULE?
The shipper shall be responsible for the goods the
moment it passes through one side of the ship for the
purpose of loading until it passes through the other
side for discharging. The reason for this being that
there are two tackles involved in this operation; one
for loading, the other, unloading.
The shipper is responsible for: Loading, Handling,
Transport, Carriage, Custody, and Discharge
What is the Rule for LOSS or DAMAGE to the goods?
(1992, 1995, 20000 & 2005 bar exams)
If the damage is apparent, then notice must be
immediately given. The notice may either be in writing
or orally.
If the damage is not apparent, notice must be given
within three days from such delivery.
Failure to give notice is not a bar to the action to file
provided the filing of the suit is made within one year
from delivery to consignee.
Notice requirements:
 COGSA: Sec. 3(6)
If loss or damage is apparent - protest as soon as receipt
of goods
If not apparent -> within 3 days of delivery
Rationale behind the 3-day notice and relatively short
prescriptive period:
- To provide carrier an opportunity to look for
the lost goods
- To discover who was at fault
-In case of transshipment, to determine, when
and where damage occurred.
 Code of Commerce: Art. 366
apparent - protest at time of receipt
non-apparent - within 24 hours after receipt
 WARSAW: Art. 26
in case of damage of:
baggage - within 3 days from receipt
goods - within 7 days
in case of delay: within 14 days from receipt
Prescriptive period
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 GREEN NOTES IN COMMERCIAL LAW
 the carrier and the agent shall be discharged
form liability in respect of loss or damage
unless suit is brought within 1 year from:
(1) in case of damaged goods: from the time delivery of
the goods was made
(2) in case of non-delivery (i.e., lost goods): from the
date the goods should have been delivered
Loss or damage as applied to the COGSA contemplates
a situation where no delivery at all times was made by
the shipper of the goods because the same had
perished, gone out of commerce, or disappeared in
such a way that their existence is unknown or they
cannot be recovered. It does not include a situation
where there was indeed a delivery but to the wrong
person or a misdelivery (Ang vs. American Steamship
Agencies 19 scra123) and damage arising from delay or
late delivery( Mitsui O.S.K line Ltd vs. CA 287 SCRA 366)
in such instance the civil code rules on prescription
shall apply.
 Hence, in case of misdelivery (delivery to wrong
person) or conversion of the goods, the rules on
prescription found in the Civil Code shall apply
(10 years for contracts; 4 years for tortuous
obligations)
The one year period is suspended by:
a. The express agreement of the parties (Universal
Shipping Lines Inc vs. IAC 1990)
b. The filing of an action in court until it is dismissed
 the 1yr period shall run from delivery of the
last package and is not suspended by
extrajudicial demand.
 the one year period shall run from delivery to
the arrasstre operator and not to the
consignee
SALVAGE LAW (ACT 2616)
I. FOUR REQUISITES FOR SALVAGE REWARD TO
BE WARRANTED:
A. There must be a valid object of salvage,
i.e., vessel, cargo, freight or wreck of
vessel or cargo;
B. Such object must have been exposed to
marine peril;
C. Salvage services must be rendered
voluntarily, i.e., not arising from pre-
existing duty;
D. Salvage effort must be successful.
II. SHIPWRECK AND DERELICT:
A. Shipwreck. A shipwreck refers to the
injuries suffered by the vessel disabling
the latter for navigation.
B. Derelict. It refers to the vessel or cargo
abandoned at sea by those entrusted by
such vessel or cargo. A derelict is a vessel
or cargo badly damaged and abandoned
by the crew to the mercy of the sea. Mere
abandonment of such vessel or cargo does
not make it res nullius so that anybody
can claim it. The proper procedure must
be followed.
III. PROCEDURE:
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A. If the vessel is abandoned, salvor must
tow it to the nearest port where it will be
delivered to the Municipal Treasurer or to
the Collector of Customs who will
advertise the fact of salvage;
B. If owner of salvaged vessel appears, he
may take possession of the vessel and
must pay a reward, the amount of which
is not more than 50% of the value of the
vessel;
C. If no claim for the vessel is made within 3
months after the publication of the
advertisement, the Municipal Treasurer
will sell the property saved at a public
auction and the reward and expenses
shall be deducted from the proceeds. The
balance is deposited with the Treasury;
D. If no one claims the same after 3 years, ½
shall go to the salvors and the other half
to the government.
IV. CONSIDERATIONS IN DETERMINING THE
AMOUNT OF REWARD
1.) First case
A. Value of the property saved;
B. Zeal employed by those who made the
salvage;
C. Danger to the lives of those who
participated;
D. Number of persons who took part;
E. Services rendered;
F. Expenses incurred
2.) Second case: If one vessel saves another
vessel, the reward going to the former shall be
divided as follows:
A. ½ to the ship owner;
B. ¼ to the captain; and
C. ¼ to the crew.
WARSAW CONVENTION
Convention for the Unification of Certain Rules
Relating to International Transportation by Air
The Warsaw Convention:
 mandates carriers to issue passenger
tickets;
 requires carriers to issue baggage
checks for checked luggage;
 creates a limitation period of 2 years
within which a claim must be brought
(Article 29); and
 limits a carrier's liability to at most:
 250,000 Francs or 16,600 Special
Drawing Rights (SDR) for personal
injury;
 17 SDR per kilogram for checked
luggage and cargo, or $20USD per
kilogram for non-signatories of the
amended Montreal Protocols.
 5,000 Francs or 332 SDR for the
hand luggage of a traveler.
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 GREEN NOTES IN COMMERCIAL LAW
I. NATURE AND SCOPE OF WARSAW
CONVENTION
SCOPE: Applies to all international carriage of
persons, luggage or goods performed by aircraft for
reward. It applies equally to gratuitous carriage by
aircraft performed by an air transport undertaking.
International Carriage:
Means any carriage in which, according to the
contract made by the parties, the place of
departure and the place of destination, whether or
not there be a break in the carriage or a
transshipment, are situated either within the
territories of two High Contracting Parties, or
within the territory of a single High Contracting
Party, if there is an agreed stopping place within a
territory subject to the sovereignty, suzerainty,
mandate or authority of another Power, even
though that Power is not a party to this
Convention.
 The Warsaw Convention to which the Republic
of the Philippines is a party and which has the
force and effect of law in this country applies to
all international transportation of persons,
baggage or goods performed by an aircraft
gratuitously or for hire.
 When a contract of carriage is a contract of
international transportation, provisions of the
Convention automatically apply and
exclusively govern the rights and liabilities of
the airline and its passengers. (American
Airlines vs. CA, G.R. No. 116044-45 March 9,
2000)
Two categories of International Transportation
covered:
1.) that where the place of departure and
the place of destination are situated
within the territories of two High
Contracting Parties regardless of
whether or not there be a break in
the transportation or a Convention which exclude or limit his liability, if
transshipment; and
2.) that where the place of departure and
the place of destination are within the
territory of a single High Contracting
Party if there is an agreed stopping
place within a territory subject to the
sovereignty, mandate, or authority of
another power, even though the
power is not a party of the
Convention. (Mapa vs. CA, G.R. No.
122308 July 8, 1997)
(Lhuillier vs. British Airways, G.R. No. 171092
March 15, 2010)
When the airline tickets evidencing the
contract of transportation between Mapa and
TWA, which were purchased in Bangkok, show the
place of departure and the place of destination to
be within the United States, the contract cannot
come within the purview of the first category of
“International Transportation.”
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The linkage of the contract to the Manila-Los
Angeles travel tickets obtained by the Mapas from
PAL cannot bring the arrangements within the
second category, where the same were filled-up
only by the Mapas in response to the query “Your
Complete Intinerary” at the time they claimed for
their lost pieces of baggage. (Mapa vs. CA, G.R. No.
122308 July 8, 1997)
It does not however preclude operation of the
Civil Code or other pertinent laws:
Although the Warsaw Convention has the
force and effect of law in this country, being a
treaty commitment assumed by the Philippine
government, said convention does not operate as
an exclusive enumeration of the instances for
declaring a carrier liable for breach of contract of
carriage or as an absolute limit of the extent of
that liability. The Warsaw Convention declares the
carrier liable in the enumerated cases and under
certain limitations. However, it must not be
construed to preclude the operation of the Civil
Code and pertinent laws. (PAL vs. CA, G.R. No.
119641 May 17, 1996)
II. SALIENT ASPECTS OF THE WARSAW
CONVENTION
A. Provision on the valuation of cargo
Article 22. (1) In the transportation of
passengers, the liability of the carrier for each
passenger shall be limited to the sum of
125,000 francs. Where in accordance with the
law of the court to which the case is submitted,
damages may be awarded in the form of
periodical payments, the equivalent capital
value of the said payments shall not exceed
125,000 francs. Nevertheless, by special
contract, the carrier and the passenger may
agree to a higher limit of liability.
Art 25 (1) The carrier shall not be entitled to
avail himself of the provisions of this
the damage is caused by his willful misconduct
or by such default on his part as, in accordance
with the law of the court to which the case is
submitted, is considered equivalent to willful
misconduct.
Admittedly, in a contract of air carriage a
declaration by the passenger of a higher value is
needed to recover a greater amount, and that the
air carrier is not liable for loss of baggage in an
amount in excess of the limits specified in the
tariff which was filed with the proper authorities,
such tariff being binding on the passenger
regardless of his lack of knowledge thereof or
assent thereto. Nevertheless, there can be no
blind reliance on adhesion of contracts
where:
1.) the facts and circumstances justify that
they should be disregarded; and
2.) when the benefits of limited liability have
been waived when the air carrier failed to
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 GREEN NOTES IN COMMERCIAL LAW
raise timely objections during the trial
when questions and answers regarding the
actual claims and damages sustained by
the passenger were asked. (British
Airways vs. CA, G.R. No. 121824 January
29, 1998)
B. Provision on limiting liability
The Convention's provisions do not "regulate or
exclude the following areas:
1.) liability for other breaches of contract by
the carrier;
2.) misconduct of its officers and employees;
or
3.) for some particular or exceptional type of
damage. (Northwest Airlines vs. CA, G.R.
No. 120334 January 20, 1998)
Varying views as regards misconduct:
1st View – Outside WC Coverage
The Warsaw Convention denies to the carrier
availment of the provisions which exclude or limit
his liability, if the damage is caused by his willful
misconduct or by such default on his part as, in
accordance with the law of the court seized of the
case, is considered to be equivalent to willful
misconduct, or if the damage is similarly caused
by any agent of the carrier acting within the
scope of his employment.
Under domestic law and jurisprudence (the
Philippines being the country of destination), the
attendance of gross negligence (given the
equivalent of fraud or bad faith) holds the
common carrier liable for all damages which can
be reasonably attributed, although unforeseen, to
the non-performance of the obligation, including
moral and exemplary damages. (Sabena
Beligian World Airways vs. CA, G.R. No. 104685
March 14, 1996)
2nd View - Tortious conduct as ground for the
petitioner’s complaint is within the purview
of the Warsaw Convention (Lhuillier vs.
British Airways, G.R. No. 171092 March 15,
2010)
IV. Jurisdiction of Local Courts under the Warsaw
C. On limitation of time to file action
Article 29. (1) The right to damages shall be
extinguished if an action is not brought within
two years, reckoned from the date of arrival at
the destination, or from the date on which the
aircraft ought to have arrived, or from the date
on which the carriage stopped.
(2) The method of calculating the period of
limitation shall be determined by the law of the
court to which the case is submitted.
The two (2)-year limitation incorporated in
Art. 29 as an absolute bar to suit and not to be
made subject to the various tolling provisions of
the laws of the forum. This therefore forecloses
the application of our own rules on interruption
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of prescriptive periods. Article 29, par. (2), was
intended only to let local laws determine
whether an action had been commenced within
the two (2)-year period. (United Airlines vs. Uy,
G.R. No. 127768 November 19, 1999)
Prescription of action covered by Warsaw
convention distinguished from those arising
from torts:
Respondent's complaint reveals that he is
suing on two (2) causes of action: (a) the shabby
and humiliating treatment he received from
petitioner's employees at the San Francisco
Airport which caused him extreme
embarrassment and social humiliation; and, (b)
the slashing of his luggage and the loss of his
personal effects amounting to US $5,310.00.
While his second cause of action — an action
for damages arising from theft or damage to
property or goods — is well within the bounds of
the Warsaw Convention, his first cause of action
— an action for damages arising from the
misconduct of the airline employees and the
violation of respondent's rights as passenger —
clearly is not.
Consequently, insofar as the first cause of
action is concerned, respondent's failure to file
his complaint within the two (2)-year limitation
of the Warsaw Convention does not bar his
action since petitioner airline may still be held
liable for breach of other provisions of the Civil
Code which prescribe a different period or
procedure for instituting the action, specifically,
Art. 1146 thereof which prescribes four (4) years
for filing an action based on torts. (United
Airlines vs. Uy, G.R. No. 127768 November 19,
1999)
Use of delaying tactics by the carrier won’t
preclude enforcement of action even beyond
the prescriptive period:
Despite the express mandate of Art. 29 of the
Warsaw Convention that an action for damages
should be filed within two (2) years from the
arrival at the place of destination, such rule shall
not be applied in the instant case because of the
delaying tactics employed by petitioner airline
itself. (United Airlines vs. Uy, supra)
Convention
Art. 1 (2) For the purposes of this Convention the
expression "international carriage" means any
carriage in which, according to the contract made
by the parties, the place of departure and the place
of destination, whether or not there be a break in
the carriage or a transhipment, are situated either
within the territories of two High Contracting
Parties, or within the territory of a single High
Contracting Party, if there is an agreed stopping
place within a territory subject to the sovereignty,
suzerainty, mandate or authority of another Power,
even though that Power is not a party to this
Convention. A carriage without such an agreed
stopping place between territories subject to the
sovereignty, suzerainty, mandate or authority of
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 GREEN NOTES IN COMMERCIAL LAW
the same High Contracting Party is not deemed to
be international for the purposes of this
Convention. (Emphasis supplied)
Art. 17. The carrier shall be liable for damage
sustained in the event of the death or wounding of a
passenger or any other bodily injury suffered by a
passenger, if the accident which caused the damage
so sustained took place on board the aircraft or in
the course of any of the operations of embarking or
disembarking.
Art 28 (1) An action for damages must be brought
at the option of the plaintiff, in the territory of one
of the High Contracting Parties, either before the
court of the domicile of the carrier or of his
principal place of business or where he has a place
of business through which the contract has been
made, or before the court at the place of
destination.
“Destination” vs. “Agreed Stopping Place”
Article 1(2) also draws a distinction between
a "destination" and an "agreed stopping place." It is the
"destination" and not an "agreed stopping place" that
controls for purposes of ascertaining jurisdiction
under the Convention.
The contract is a single undivided operation,
beginning with the place of departure and ending with
the ultimate destination. The use of the singular in the
expression indicates the understanding of the parties
to the Convention that every contract of carriage has
one place of departure and one place of destination.
An intermediate place where the carriage may be
broken is not regarded as a "place of destination."
(Lhuillier vs. British Airways, G.R. No. 171092 March
15, 2010)
Jurisdictional Character of Art. 28
We further held that Article 28(1) of the
Warsaw Convention is jurisdictional in character.
Thus:
A number of reasons tend to support the
characterization of Article 28(1) as a jurisdiction and
not a venue provision. First, the wording of Article 32,
which indicates the places where the action for
damages "must" be brought, underscores the
mandatory nature of Article 28(1). Second, this
characterization is consistent with one of the
objectives of the Convention, which is to "regulate in a
uniform manner the conditions of international
transportation by air." Third, the Convention does not
contain any provision prescribing rules of jurisdiction
other than Article 28(1), which means that the phrase
"rules as to jurisdiction" used in Article 32 must refer
only to Article 28(1). In fact, the last sentence of
Article 32 specifically deals with the exclusive
enumeration in Article 28(1) as "jurisdictions," which,
as such, cannot be left to the will of the parties
regardless of the time when the damage occurred.
xxxx
In other words, where the matter is governed by the
Warsaw Convention, jurisdiction takes on a dual
concept. Jurisdiction in the international sense must
be established in accordance with Article 28(1) of the
Warsaw Convention, following which the jurisdiction
of a particular court must be established pursuant to
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the applicable domestic law. Only after the question of
which court has jurisdiction is determined will the
issue of venue be taken up. This second question shall
be governed by the law of the court to which the case
is submitted. (Lhuillier vs. British Airways, Supra.)
PUBLIC SERVICE LAW
What is a public utility? (2000 Bar exams)
A public utility is a business or service engaged in
regularly supplying the public with some commodity
or service of public consequence such as electricity,
gas, water, transportation, telephone or telegraph
service. Apart from statutes which define the public
utilities that are within the purview of such statutes, it
would be difficult to construct a definition of a public
utility which would fit every conceivable case. As its
name indicates, however, the term public utility
implies a public use and service to the public. (Am. Jur.
2d V. 64, p.549.) (Albano vs. Reyes)
ORDINARY AND PRIMARY PURPOSE OF THE
PUBLIC SERVICE LAW
 ORDINARY PURPOSE:
To subject public services to state control and
regulation.
 SPECIFIC PURPOSES:
1. To secure adequate, sustained service
for the public at the least possible
cost, and protect the public against
unreasonable charges and poor
inefficient service.
2. To protect and conserve investments
which have already been made for
public service, and prevent ruinous
competition.
BASIS OF THE LEGISLATIVE POWER TO REGULATE
PUBLIC SERVICES:
 POLICE POWER, for the protection of the
public as well as the utilities themselves.
(Pantranco v. P.S.C., 70 Phil 221)
 CONSTITUTIONAL BASIS:
1. ARTICLE XII, SECTION 11:
> A franchise, certificate, or any other
form of authorization for the operation of
public utility shall be granted to:
- Filipino Citizens
- Corporations or associations
organized under Philippine
Laws where at least 60% of
the capital is owned by
Filipino Citizens.
- 100% Filipino Management
> Mass media and commercial
telecommunications shall be:
- 100% Filipino Capital, and
- 100% Filipino management
2. ARTICLE XII, SEC 17:
In times of national emergency, when the
public interest so requires, the State may
during the emergency and under reasonable
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 GREEN NOTES IN COMMERCIAL LAW
terms, temporarily take over or direct the
operation of any private owned public utility
or business affected with public interests.
3. ARTICLE XII, SECTION 18
The state may, in the interest of national
welfare or defense, establish and operate vital
industries and upon payment of just
compensation, transfer to public ownership
utilities and other private enterprises to be
operated by the government.
4. ARTICLE XII, SECTION 19
The state shall regulate or prohibit
monopolies when the public interest so
requires; no combination in restraint of trade
or unfair competition shall be allowed
Distinguish a Certificate of Public Convenience
from a Certificate of Public Convenience and
Necesssity
A CPC is issued whenever the Commission
finds that the operation of the proposed public service
will promote the public interests in a proper and
suitable manner, for which a municipal or legislative
franchise is not necessary. On the other hand, CPCN is
issued upon approval of any political subdivision of
the Philippines when in the judgment of the
Commission, such franchise or privilege will properly
conserve the public interest (Perez, Transportation
Laws and Public service Act).
OFFICES NOW CHARGED WITH ENFORCEMENT OF
PUBLIC SERVICE LAW
The Public Service Commission has been abolished.
The following replaced it:
1. LAND TRANSPORTATION- Department of
Transportation and Communication (DOTC)
and the Land Transportation Franchising and
Regulatory Board (LTFRB)
2. WATER TRANSPORTATION- Maritime
Industry Authority (MARINA)
3. AIR TRANSPORTATION- Air Transportation
Office (ATO) headed by an assistant secretary
and the Civil Aeronautics Board, which has
been placed under the DOTC as an attached
agency.
4. TELECOMMUNICATIONS- National
Telecommunications Commission, which has
been placed under the DOTC as an attached
agency.
5. ENERGY- Board of Energy but transferred to
the Energy Regulatory Board (ERB)
6. WATERWORKS- National Water Resources
Council
LIMITATIONS ON THE POWERS OF THE
REGULATORY BOARDS, COMMISSIONS AND
COUNCILS:
1. General:
Powers are limited from those granted in
the legislation creating the body.
2. Constitutional:
Regulations imposed must not have the
effect of depriving an owner of his property
without due process of law nor confiscating or
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appropriating private property without just
compensation.
3. Judicial:
Boards, commissions are not judicial
tribunals and therefore cannot determine
judicial questions such as validity of contract.
4. Jurisdiction:
Extends only to persons engaged in public
utilities, or over a public utility, which holds a
Certificate of Public Convenience.
B. JURISDICTION
 General Rule: Over persons engaged in public
utilities, or over a public utility, which holds a
Certificate of Public Convenience.
 Exemption: violators of a valid regulation
promulgated under the law
Distinguish Legislative Franchise from a CPC
● A franchise is a grant or privilege from the
sovereign power, while the certificate is a form of
regulation through an administrative agency.
● A franchise is a property right and cannot be
revoked or forfeited without due process of law
(PLDT, Co. v. NTC and CELLCOM, Inc. (Express
Telecommunications Co., Inc. G.R. No. 88404, 18
October 1990), whereas a CPC or a CPCN as far as the
interest of the State is concerned , constitutes neither a
franchise nor a contract, confers no property right, and
is a mere license or a privilege. The holder of said
certificate does not acquire a property right in the
route covered thereby. Nor does it confer upon the
holder any proprietary right or interests or franchise
in the public highways. Revocation of this certificate
deprives him of no vested right. New and additional
burdens alteration of the certificate, or even
revocation or annulment thereof is reserved to the
State (Lugue v. Villegas, G.R. No. L-22545, 28
November 1969).
Essentials before Granting a CPC/ CPCN
1. The granter must be a citizen of the
Philippines or entity sixty percent of which is
owned by such citizens.
2. The grantee must have sufficient financial
capability to undertake the service and,
3. The service will promote public interests and
convenience in a proper and suitable manner.
Note: The overriding principle is a public interest,
necessity and convenience (Sundiang & Aquino,
Reviewer on Commercial Law).
Coverage of CPC
● a ferry boat service is considered as a continuation
of the highway when crossing rivers or lakes , which
are small bodies of water; hence a land transportation
company is no longer required to secure a separate
CPC in order to operate a ferry boat for the use of its
buses.
Grounds for Revocation of Certificate
1. The holder violates or contumaciously refuses
to comply with any order, rule or regulation of
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 GREEN NOTES IN COMMERCIAL LAW
the commission. (Sec.16(n)of Public Service
Act)
2. The holder is a mere dummy.
3. The operator ceased operation and placed his
buses on storage; or
4. The operator abandons totally the service.
(Manzanal v. Ausejo, No. L-31056, August 4,
1988).
Unlawful Acts of Public Utility Companies
1. Engagement in public service business
without first securing the proper certificate
2. Providing or maintaining unsafe, improper or
inadequate service as determined by the
proper authority
3. Committing any act of unreasonable and
unjust preferential treatment to any
particular person, corporation or entity as
determined by the proper authority
4. Refusing or neglecting to carry public mail
upon request (Secs.18 &19).
Prior Old Operator Rule
Before permitting a new operator to invade
the territory of another already established with a
CPC, the prior operator must first be given the
opportunity to extend its service in order to meet
public needs in the matter of transportation. It means
that a public utility operator should be shielded from
ruinous competition by affording him the opportunity
to improve his equipment and service before allowing
a new operator to serve in the same territory he
covers (Mandaluyong Bus Co. v. Francisco).
The law contemplates that the first licensee
will be protected in his investment and will not be
subjected to a ruinous competition. It is not therefore
the policy of the law to issue a CPC to a second
operator to cover the same field and in competition
with a first operator who is rendering sufficient,
adequate and satisfactory service, and who in all
things and respects is complying with the rules and
regulations of the commission. The old operator must
be given the opportunity to improve and extend his
lines. (Batangas Trans Co. v Orlanes, 52 Phil 455)
BASIS OF THE PRIOR OPERATOR RULE
Prevent ruinous and wasteful competition and
interest of public will be preserved.
EXCEPTIONS TO THE PRIOR OPERATOR RULE:
1. Operator fails/ neglects to make improvement
or affect the increase in service when given
the opportunity.
2. When Prior operator offers to meet increases in
demand only when another operator offered to
render additional service
3. Abandonment of operation
4. Prior operators did not oppose application
5. Prior operator cannot satisfy needs of the public
6. When opportunity to improve service is raised
by prior operator only on appeal.
7. CPC granted to the applicant is a maiden
franchise covering a new route, albeit
overlapping with that of the old operator
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8. Expiration of corporate existence of prior
operator.
9. Monopoly
10. Passage through private subdivision which
granted permit to another
Prior Applicant Rule
Where there are various applicants for a
public utility over the same authority, all conditions
being equal, priority in the filing of the application for
a certificate of public convenience becomes an
important factor in granting or refusal of a certificate
of convenience and the Commission is authorized to
determine which of the applicants can best meet the
requirements of public convenience (delos Santos v.
Pasay Trans. Co.).
Protection of Investment Rule
One of the purposes of the Public Service Act
is to protect and conserve investments which have
already been made for that purpose by public service
operators
Registered Owner Rule
The registered owner of a certificate of a
public convenience is liable to the public for the
injuries or damages suffered by third persons caused
by the operation of said vehicle, even though the same
had been transferred to a third person.
The registered owner is not allowed to escape
responsibility by proving that a third person is the
actual and real owner.
The registered owner is the lawful operator
insofar as the public and third persons are concerned;
consequently, it is directly and primarily responsible
for the consequences of its operation. In
contemplation of law, the owner/operator of record is
the employer of the driver, the actual operator and
employer being considered as merely its agent. The
same principle applies even if the registered of any
vehicle does not use it for public service (Equitable
Leasing Corp. v. Suyom, G. R. No.143360, September
5, 2002), or otherwise stated, to privately-owned
vehicles.
A sale, lease or financial lease that is not
registered with the LTO does not bind third persons
who are aggrieved in tortuous incidents, for the latter
need only to rely on the public registration of a motor
vehicle as conclusive evidence of ownership. A lease is
an encumbrance in contemplation of law, which needs
to be registered in order for it to bind third parties
(PCI Leasing Corp and Finance Inc. v. UCPB General
Insurance Co., Inc. G.R. No. 162267, 4 July 2008).
Registered Owner had Recourse against Vendee/
Transferee
A registered owner who has already sold or
transferred a vehicle has a recourse to a third-party
complaint, in the same action brought against him to
recover for the damage or injury done, against the
vendee or transferee of the vehicle (Villanueva v.
Domingo, 438 SCRA 485, 2004).
Kabit System( 2005 Bar exams)
It is an arrangement whereby a person who
has been granted a certificate of public convenience
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 GREEN NOTES IN COMMERCIAL LAW
allows other persons who own motor vehicles to
operate under such license, for a fee or percentage of
such earnings. Although the parties to such agreement
are not out rightly penalized by law,the kabit system is
invariably recognized as being contrary to public
policy and therefore void and inexistent under
Art.1409, New Civil Code ( Lim v. C.A. G.R.No. 125817,
16 January 2002)
Effects
1. The transfer, sale, lease or assignment of the
privilege granted is valid between the
contracting parties but not upon the public or
third persons (Gelisan v. Alday No.L- 30212,
30 September 1987)
2. The registered owner is primarily liable for all
the consequences flowing from the operations
of the carrier. The public has the right to
assume that the registered owner is the actual
or lawful owner thereof. It would be very
difficult and often impossible, as a particular
matter, for the public to enforce their rights of
action for injuries inflicted by the vehicle if
they should be required to prove who the
actual owner is (Benedicto v. IAC G.R No.
70876, 19 July 1990).
3. The thrust of the law in enjoining the Kabit
system is to identify the person upon whom
responsibility may be fixed with the end in
view of protecting the riding public.(Lim v.
C.A. G.R. No 125817, 16 January 2002)
4. Application of Article 1412 of the NCC or in
pari delicto rule. The registered owner cannot
recover from the actual owner and the latter
cannot obtain transfer of the vehicle to
himself, both being in pari delicto. (Teja
Marketing Vs. IAC)
5. For the better protection of the public, both
the registered owner and the actual owner are
jointly and severally liable with the driver
(Zamboanga Transporatation Co. v. C.A, 29
November 1969)
6. The determining factor which negates the
existence of Kabit system is the possession of
the franchise to operate and not the issuance
of one SS I.D. Number for both bus line
(Baliwag Transit V. C.A, 7 January 1987)
Requisites for the Inapplicability of the Kabit
System
1. When neither of the parties to the pernicious
Kabit system is being held liable for damages.
2. When the case arose from the negligence of
another vehicle using the public road to which
no representation or misrepresentation as
regards the ownership and operation of
passenger jeepney was made.
3. When the riding public was not bothered of
inconvenienced at the very least by the illegal
arrangement (Lim v. C.A. 16 January 2002)
Boundary System
1. The driver does not receive a fixed wage but
gets only the excess of the receipt of the fares
collected by him over the amount he pays to
the jeep owner.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. The gasoline consumed by the jeep is for the
account of the driver.
These two features are not sufficient to withdraw
the relationship between the owner and the driver
from that of employer and employee. The jeepney
owner is subsidiarily liable as employer in accordance
with Art.103 of RPC (Magboo v. Bernardo, 30 April
1963).
Indeed to exempt from liability the owner of
public vehicle who operates it under the boundary
system on the ground that he is a mere lessor would
be not only to abet flagrant violations of the public
service law, but also to take place the riding public at
the mercy of reckless and irresponsible drivers
(Spouses Henandez v. Spouses Dolor, 30 July 2004)
The Civil Aeronautics Board is expressly
authorized by R.A. No. 776 to issue a temporary
operating permit of certificate of Public Convenience
and Necessity (PAL v. CAB 26 March 1997)
The Legislature has delegated to the defunct
Public Service Commission and presently the LTFRB,
the power of fixing rates of public services. But
nowhere under the provisions of law are the
regulatory bodies, the PSC and LTFRB alike,
authorized to delegate that power to a common carrier
like transport operator, or other public service (KMU
Labor v. Garcia, 23 December 1984).
A public Utility is entitled to reasonable
compensation in return for the service it provides and
that it may exact reasonable charges in accordance
with the service provided of the rates established
therefore. In computing the just and reasonable rates
to be charged by a public utility, three major factors
are to be considered: 1). Rate of Return; 20. The rate
base, 3) the return itself or the computed revenue to
be earned by the public utility based on the rate of
return and base rate (Davao Light and Power
Company, Inc., 3 April 2003)
A rate is just and reasonable if it conforms to the
following requirements:
1. One which yields to the carrier a fair return
upon the value of the property employed in
performing the service; and
2. One which is fair to the public for the service
rendered.
Service of a Public Utility considered Unlawful
It shall be unlawful for any public service to
provide or maintain ant service that is unsafe,
improper, or inadequate, or withhold or refuse any
service which can be reasonably be demanded and
furnished as founded and determined by the
Commission in a final order which shall be conclusive
and shall effect and shall effect in accordance with this
Act, upon Appeal for otherwise (Sec.19 (a) Public
Service Act)
Certificate of Public Convenience and Necessity
a. A certificate of Public Convenience is issued
where no special government franchise is
required.
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 GREEN NOTES IN COMMERCIAL LAW
b. A certificate of Certificate of Public
Convenience and Necessity is issued where
the public service would require in its
operation the use of government property,
such as the installation of electric and
telephone posts and lines along public streets
requiring a previous franchise therefore
c. No certificate is necessary where the service
of utility is owned, operated and managed for
a private use or where the owner is not
engaged in public service.
Liability of Registered Owner and Authorized
Operator under the Kabit System and Boundary
System
Both the registered owner and the Authorized
operator of a common carrier under the Kabit System
are jointly and severally (solidarily) liable for any
death or injury to the passengers and loss/damage to
the goods.
Under the Boundary System the authorized
operator of a common carrier is liable for the conduct
of the driver, there being an employer-employee
relationship between the operator and the driver.
SPECIAL COMMERCIAL LAWS
LETTERS OF CREDIT
1. A letter of credit is basically an open letter of
request whereby one person requests another to
advance money or give credit to a third person for a
certain amount and promises to repay the person
advancing the money.
1.1 They are intended generally to facilitate the
purchase and sale of goods by providing assurance to
the seller of prompt payment upon compliance with
specified conditions or presentation of stipulated
documents without the seller having to rely upon the
solvency and good faith of the buyer. This is known as
the rule of strict compliance in a letter of credit
transaction means that the documents tendered by the
seller or beneficiary must strictly conform to the terms
of the letter of credit, i.e., they must include all
documents required by the letter of credit such as: (a)
a draft which is also called a bill of exchange, is an
order written by an exporter/seller instructing an
importer/buyer or its agent to pay a specified amount
of money at a specified time (b) a bill of lading, which
is a document issued to the exporter by a common
carrier transporting the merchandise, and (c) invoices.
1.2 The issuing bank in determining compliance
with the terms of the letter of credit is required to
examine only the shipping documents presented by
the seller and is precluded from determining whether
the main contract is actually accomplished or not.
This arrangement assures the seller of prompt
payment, independent of any breach of the main sales
contract. This known as the independence principle in
a letter of credit transaction.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. The primary purpose of a letter of credit is to
substitute for, and therefore support, the agreement of
the buyer-importer to pay money under a contract or
other arrangement.This instrument is basically a
credit security through availment of credit facilities of
the participating banks.
3. The parties to a letter of credit are: (a) The
Buyer- he is the one who procures the letter of credit
and obliges himself to reimburse the issuing bank
upon receipt of the documents of title (b) The Issuing
Bank- is the bank from whom the letter of credit is
procured and which undertakes to pay the seller upon
receipt of the draft and proper documents of titles and
to surrender the documents to the buyer upon
reimbursement, and (c) The seller- who in compliance
with the contract of sale ships the goods to the buyer
and deliver the documents of title and draft to the
issuing bank to recover payment.
3.1. In an international credit transaction carried
through a letter of credit, the parties are: (a) The
Customer- who is the party who applies to a bank in
one country for the opening of a letter of credit in
favor of the seller in another country (b) The Issuing
Bank- is the bank in the country of the customer to
which the customer applies for the issuance of a letter
of credit (c) The Beneficiary- who is the party in
another country who is the creditor of the customer.
Usually, he is the one selling goods to the customer (d)
The Advising Bank – is the bank in the country of the
beneficiary which communicates to the beneficiary the
notice of the credit issued by the issuing bank (e) The
Confirming/Correspondent Bank- is the bank that
undertakes that the letter of credit will be fully paid.
Usually the confirming bank is also the advising bank,
otherwise it is utilized to lend credence to the letter of
credit issued by a lesser known issuing bank and is
directly liable to the beneficiary.
3.2 The relationships of the parties are to be
governed as follows: (a)Issuing bank and
applicant/buyer/importer – Their relationship is
governed by the terms of the application and
agreement for the issuance of the letter of credit by
the bank. Unless the contrary is provided for, the
liability of the issuing bank is solidary with the buyer
(b) Issuing bank and beneficiary/seller/exporter –
Their relationship is governed by the terms of the
letter of credit issued by the bank, and (c) Applicant
and beneficiary – Their relationship is governed by the
sales contract.
3.3 It is clearly settled in law that there are thus
three contracts which make up the letter of credit
transaction: The contract between buyer and seller,
buyer and issuing bank, and the letter of credit proper.
These transactions are to be maintained in a state of
perpetual separation.
4. The essential conditions of a letter of credit
are: (a) That it be issued in favor of a definite person
and not to order; and (b) That it be limited to a fixed
and specified amount, or to one or more undetermined
amounts, but within a maximum the limits of which
has to be stated exactly.
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 GREEN NOTES IN COMMERCIAL LAW
4.1 Hence, a letter of credit is not a negotiable
instrument because it is required to be drawn in favor
of a definite person.
4.2 Those which do not have any of the essential
conditions shall be considered merely as a letter of
recommendation.
4.3 The bank or drawer of a letter of credit shall
be liable to the person on whom it was issued for the
amount paid by virtue thereof, within the maximum
fixed therein, while a notifying bank does not incur
any liability except to notify the beneficiary of the
letter of credit. Before paying, it shall have the right to
demand the proof of the identity of the person in
whose favor the letter of credit is issued.
4.4 The drawer of a letter of credit may annul it,
informing the bearer and the person to whom it is
addressed of such revocation. The waiver of the right
to annul makes the letter of credit irrevocable
4.5 The bearer of a letter of credit shall pay the
amount received to the drawer without delay. Should
he not do so, an action involving execution may be
brought to recover it, with legal interest and current
exchange in the place where payment was made on
the place where it is repaid.
4.6 A letter of credit becomes void if the bearer of
a letter of credit does not make use thereof within the
period agreed upon with the drawer, or, in default of a
period fixed, within 6 months counted from its date, in
any point in the Philippines, and within 12 months
anywhere outside thereof, it shall be void in fact and in
law.
5. A standby letter of credit is a bank-issued
option on a loan involving three parties: the bank
issuing the credit, the party requesting for such
issuance (otherwise known as the account party) and
the beneficiary. Under the terms of standby letter of
credit (SLC), the beneficiary has the right to trigger the
loan option (referred to as taking down the loan) if the
account party fails to meet its commitment, in which
case the issuing bank disburses a specified sum to the
beneficiary and books an equivalent loan to its
customer. SLCs may support nonfinancial obligations
such as those of bidders, or financial obligations such
as those of borrowers. In the latter case, the borrower
purchases an SLC and names the lender as beneficiary.
Should the borrower default, the beneficiary has the
right to take down the SLC and receive the principal
balance from the issuing.
5.1 Another definition is that it is a bank-issued
option on a loan involving three parties: the bank
issuing the credit, the party requesting for such
issuance (account party) and the beneficiary. Under its
terms, the beneficiary has the right to trigger the loan
option if the account party fails to meet its
commitment, in which the case the issuing bank
disburses a specified sum to the beneficiary and books
an equivalent loan to its customer.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
6. The common types of letters of credit are: (a)
Irrevocable vs. revocable – An irrevocable
letter of credit obligates the issuing bank to honor
drafts drawn in compliance with the credit and can be
neither cancelled nor modified without the consent of
all parties, including in particular the
beneficiary/exporter. A revocable letter of credit can
be cancelled or amended at any time before payment;
it is intended to serve as a means of arranging
payment but not as a guarantee of payment (b)
Confirmed vs. unconfirmed – A letter of credit
issued by one bank can be confirmed by another, in
which case both banks are obligated to honor drafts
drawn in compliance with the credit. An unconfirmed
letter of credit is the obligation only of the issuing
bank. Why would an exporter want a foreign bank’s
letter of credit confirmed by a domestic bank? One
reason could be if he has doubts
6.1 Other types: (a) Revolving Letter of Credit-
one that provides for renewed credit to become
available as soon as the opening bank has advised the
negotiating or paying bank that the drafts already
drawn by the beneficiary have been reimbursed to the
opening bank by the buyer (b) Back to Back Letter of
Credit- a credit with identical documentary
requirements and covering the same merchandise as
another letter of credit, except for the difference in
price of the merchandise as shown by the invoice and
draft. The second letter of credit can only be
negotiated after the first is negotiated.
TRUST RECEIPTS
1. A trust receipt is a commercial document
whereby the bank releases the goods in the possession
of the entrustee but retains ownership thereof while
the entrustee shall sell the goods and apply the
proceeds for the full payment of the liability to the
bank.
1.1 It is a security transaction intended to aid in
financing importers and retail dealers who do not
have sufficient funds or resources to finance the
importation or purchases of merchandise, and who
may not be able to acquire credit, except through
utilization, as collaterals, of the merchandise imported
or purchased.
1.2 The subject matter of a trust receipt is always
chattel. It will not apply to chattel so attached to land
so as to become part thereof.
2. A trust receipt transaction is a transaction
between an entruster and an entrustee whereby the
entruster, who owns or hold absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of
the entrustee upon the latter’s execution and delivery
to the entruster of a trust receipt wherein the
entrustee binds himself to hold the specified gods,
documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster, or the
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 GREEN NOTES IN COMMERCIAL LAW
goods, documents or instruments themselves if they
are unsold or not otherwise disposed of.
2.1 A Security Interest means a property interest
in goods, documents or instruments to secure
performance of some obligations of the entrustee or of
some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security
only.
2.2 A trust receipt transaction distinguished
from:(a) A pledge-in a pledge, the person doing the
financing has possession of the property; in a trust
receipt, the property is in the possession of the person
financed (b) A conditional sale-in a conditional sale,
there is a sale of the property from the seller to the
buyer; in a trust receipt, there is no sale of the
property from the entruster to the entrustee (c) A
chattel mortgage-a chattel mortgage involves the
creation of a lien upon the property; a trust receipt
does not involve the creation of a lien (d) A
consignment-in a consignment, the consignor retains
title to the property to secure the indebtedness due
from the consignee; in a trust receipt, the seller does
not retain title to the property but transfers such title
to the entruster, not to the entrustee
2.3 When a debtor has received the goods from a
supplier thereby acquiring title and will after borrow
money from a bank to pay for the same, the
transaction is a loan even he signs a trust receipt
agreement. It is essential for a trust receipt transaction
for the bank to first acquire ownership and possession.
2.4 When a Memorandum of Agreement is
entered between a debtor corporation and a creditor
bank is entered into rescheduling the payments due
from the former, the trust receipt transaction is
novated and transformed into a simple loan.
3. The parties to a trust receipt transaction are:
(a) The entruster- is the person holding title over the
goods, documents or instruments subject to a trust
receipt transaction, and any successor in interest of
such person, and (b) The entrustee – is the person
having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any
successor in interest of such person for the purpose or
purposes specified in the trust receipt
4. The rights of the entruster are: (a) to be
entitled to receive the proceeds of the sale of the
goods released under a trust receipt to the entrustee
to the extent of the amount owing to the entruster (b)
to the return of the said goods, in case they could not
be sold; and (c) to cancel the trust in case the
entrustee defaults, take possession of the goods, and
sell the same at public or private sale.
4.1 The process of taking possession and selling
the goods is as follows: (a) the entruster may cancel
the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure
of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
between the entruster and the entrustee (b) The
entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less
than five days after serving or sending of such notice,
sell the goods, documents or instruments at public or
private sale, and the entruster may, at a public sale,
become a purchaser. Notice of the sale shall be
deemed sufficiently given if in writing, and either
personally served on the entrustee or sent by post-
paid ordinary mail to the entrustee’s last known
business address (c) the proceeds of any such sale,
whether public or private, shall be applied (1) to the
payment of the expenses thereof; (2) to the payment
of the expenses of re-taking, keeping and storing the
goods, documents or instruments; (3) to the
satisfaction of the entrustee’s indebtedness to the
entruster. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency.
4.2 Cancellation of the trust receipt and
repossession is not essential for the entruster to have
a cause of action against the entrustee. They are
options available to the entruster and do not prejudice
resort to other remedies.
5. The obligations of the entrustee are as
follows: (a) to hold the goods in trust for the entruster
and to dispose of them strictly in accordance with the
terms of the trust receipt; This includes the authority
to manufacture or process the goods with the purpose
of ultimate sale. Provided, however, that the entruster
retains title over the goods whether in its original or
processed form until the entrustee has complied with
the obligation under the receipt. It also includes
authority to load, unload, ship or transship or
otherwise deal with the goods in a manner
preliminary or necessary to their sale (b) To receive
the proceeds of the sale of the goods in trust for the
entruster and to turn over the same to the entruster to
the extent of the amount owing to the entruster (c) to
insure the goods for their total value against loss from
fire, theft, pilferage or other casualties (d) to keep the
goods or the proceeds thereof, whether in money or
whatever form, separate and capable of identification
as property of the entruster; and (e) to return the
goods,to the entruster in case they could not be sold or
upon demand of the entruster.
5.1 Notwithstanding the security interest of the
entruster, the entrustee shall be responsible as
principal or as vendor under any sale or contract to
sell made by the entrustee. Hence, although the
entrustee is not the owner of the goods under a trust
receipt (ownership is retained by the entrustor)
anyone who acquires the goods from the entrustee
acquires good title (ownership) over the goods. Note
that it runs counter to the provisions of Article 1505 of
the Civil Code, where there is a contract of sale, the
buyer is to acquire only whatever title the seller had at
the time the sale was perfected.
5.2 Risk of loss shall aslso be borne by the
entrustee. Hence, the loss of goods, documents, or
instruments which are the subject of a trust receipt,
pending their disposition, irrespective of whether or
not it was due to the fault or negligence of the
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 GREEN NOTES IN COMMERCIAL LAW
entrustee, shall not extinguish his obligation to the
entruster for the value thereof. This is not in
accordance with the civil law principle that it is
generally the owner who must bear the risk of loss of
the object
6. A trust receipt arrangement does not involve
a simple loan transaction between a creditor and
debtor-importer. The law warrants the validity of the
trust receipt agreement. Consequently, the goods
covered by the trust receipt cannot be levied upon by
the creditors of the entrustee. The validity of
entruster’s security interest as against creditors-the
entruster’s security interest in goods, documents, or
instruments pursuant to the written terms of a trust
receipt shall be valid as against all creditors of the
entrustee for the duration of the trust receipt
agreement.
7. The acts punishable by the Trust Receipts Law
as Estafa as defined by Article 315, Section 1(b) of the
Revised Penal Code are: (a) The failure to
comply with the provision referring to the obligation
involving the duty to deliver (entregaria) the money
received to the owner of the merchandise sold,
or(b)The failure to comply with the provision
referring to the obligation involving the duty to return
(devolvera) the goods to the owner if not disposed of
in accordance with the terms of the trust receipt.
7.1 There is no need to prove intent to defraud as
the offense is malum prohibitum.
7.2 There is also no need to prove damage to the
entrustor because the nature of a trust receipt
transaction and the damage caused to trade circles
and the banking community in case of a violation
thereof is the basis for the criminal offense.
7.3 Consequently, the law has consistently been
declared as not violating the constitutional
proscription against imprisonment for non-payment
of debt. It is a declaration by the legislative authority
that, as a matter of public policy, the failure of a person
to turn over the proceeds of the sale of goods covered
by the receipt or to return the goods if not sold is a
public nuisance to be abated by penal sanctions.
WAREHOUSE RECEIPTS:
1. The purpose of the Warehouse Receipts Law
is to regulate the status, rights and liabilities of parties.
In particular, it prescribes the rights and duties of a
warehouseman and to regulate his relationship with
(a) the depositor of the goods, or (b) the holder of a
warehouse receipt, or (c) the person lawfully entitled
to the possession of the goods, or (d) other persons. It
also covers all warehouses, whether bonded or not.
1.2 As far as the effect of the New Civil Code
provisions on documents of title to goods which
include quedans or warehouse receipts, there is no
conflict between the two. The Warehouse Receipts
Law refers to and will apply to warehouse receipts
issued by warehouseman, while the New Civil Code
refers to and will apply to receipts that are not issued
by warehouseman.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
2. The purpose of the General Bonded
Warehouse Act is to regulate the business of receiving
commodities for storage in order to protect persons
who may want to avail themselves of warehouse
facilities and to encourage the establishment of more
warehouses.
2.1 Distinguishing between the 2 laws, the
Warehouse Receipts Law refers to the rights and
obligations of parties in a warehousing contract, while
the General Bonded Warehouse Act refers to state
regulation and supervision of warehouses
3. A warehouse receipt is a written
acknowledgment by a warehouseman that he holds
certain goods in store for the person to whom the
document is issued. This is also known as
“warehouse-keeper’s receipt” or “storage receipt.”
3.1 While no particular form is required, it should
however include the necessary terms stating: (a)
Location of the warehouse (b) Date of issue (c)
Number of receipt (d) Description of the goods (e)
Advances made (f) Rate of charges (g) Ownership of
the goods by language indicating if the warehouseman
is an owner, solely or jointly with others, of the goods
deposited (h) Signature of the warehouseman, and (i)
Person to whom goods should be delivered by
language indicating whether the receipt is negotiable
or non-negotiable, that is whether the goods received
will be delivered to the bearer, to a specified person,
or to a specified person or his order
3.2 A negotiable warehouse receipt is not a
negotiable instrument as the same does not comply
with the requisites of Section 1, Act 2031. However,
ownership thereof may be transferred by delivery if it
states that it is deliverable to bearer or a named
person or bearer. If it is deliverable to a named person
or order, ownership may be transferred by special
endorsement and delivery. The endorsement can be to
bearer or to a specified person.
3.3 A negotiable warehouse receipt is not
convertible to a non-negotiable receipt. The insertion
of a provision making it non-negotiable is void. To
make a warehouse receipt non-negotiable, it must be
written out as such and to prevent any person from
supposing it to be negotiable, the words “non-
negotiable” should be placed plainly on its face. A non-
negotiable receipt may only be assigned.
3.4 The advantages of a negotiable warehouse
receipt over one which is non-negotiable are: (a)
goods cannot be garnished or levied upon
under execution unless receipt is surrendered, or
impounded or its negotiation enjoined (Section 25,
Warehouse Receipts Law) (b) In case of
negotiation, holder acquires the direct obligation of
the warehouseman to hold possession of the goods for
him (Section 41, Warehouse Receipts Law), and (c)
Goods are not subject to vendor’s lien or stoppage “in
transitu” (Section 49, Warehouse Receipts Law)
3.5 Other terms may be included in a warehouse
receipt, except: (a) terms that are contrary to the
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 GREEN NOTES IN COMMERCIAL LAW
provisions of this Act, or (b) terms which will in
anyway impair the obligation to exercise due care in
the safekeeping of the goods entrusted to the
warehouseman.
4. A warehouseman defined - is a person
lawfully engaged in the business of storing goods for
profit. Under the General Bonded Warehouse Act he is
defined as a person lawfully engaged in the business of
storing goods for profit. In other words, he is one who
receives and stores goods owned by others and
collects fees for so doing.
4.1 Included in the phrase “the business of
receiving commodity for storage” includes any
contract or transaction wherein: (a) the
warehouseman is to return same commodity
deposited or pay its value (b) the commodity is to be
milled for the owner thereof, or (c) the commodity
delivered is commingled with the commodity
belonging to other persons, and the warehouseman is
obligated to return commodity of the same kind or pay
its value.
5. The Primary Obligations of the
Warehouseman are:(a) he must issue a receipt for any
commodity that he receives for storage (b) he must
exercise that degree of care in the safekeeping of the
goods entrusted to him which a reasonable careful
man would exercise in regard to similar goods of his
own. However, in the absence of an agreement to the
contrary, he shall not be liable for any loss or injury to
the goods which could not have been avoided by the
exercise of such care (c) In the absence of any lawful
excuse, he is bound to deliver the goods upon a
demand by: (1) holder of a receipt for the goods, or
(2) by the depositor, provided that the demand be
accompanied by (a) an offer to satisfy the
warehouseman’s lien (b) an offer to surrender the
receipt if it is negotiable, and (c) a readiness and
willingness to sign acknowledgment of delivery of the
goods if requested by the warehouseman.
5.1 A warehouseman is obliged to deliver goods
to: (a) person lawfully entitled to it. Examples: person
determined by the court to be entitled to it in an
interpleader case, person who purchases the goods at
an auction to satisfy a warehouseman’s lien or because
the goods are hazardous or of a perishable nature (b)
the person who is himself entitled to delivery by the
terms of the receipt. If receipt is non-negotiable,
delivery will be to the person entitled to it under its
terms or by written authority clearly indicated therein
or another document. If receipt is negotiable, to the
person named or the last indorsee.
5.2 A warehouseman may thus legally refuse to
deliver goods covered by a warehouse receipt under
the following instances: (a)When the demand is not
accompanied by the three requirements provided in
Section 8 (b)When he has a lien valid against the
person demanding the goods, he can refuse to deliver
the goods until the lien is satisfied and, (c) In cases
when there are several adverse claimants to the title
or possession of the goods. The warehouseman can
refuse to deliver to any of the claimants until he has
had a reasonable to ascertain the validity of the claims.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
5.3 A misdelivery or conversion occurs when (a)
delivery is made to one not lawfully entitled to it, or
(b) even if delivery is made to a person holding a non-
negotiable or negotiable receipt, if prior to delivery, he
had either been requested not to make delivery by the
person lawfully entitled to a right of property or
possession in the goods or had information that
delivery about to be made was to one not lawfully
entitled to possession of the goods.
5.4 A warehouseman can protect against a
misdelivery by: (a) availing of a the reasonable time
that he is entitled to within which to ascertain the
validity of an adverse claim or to bring legal
proceedings to force the claimants to interplead or
may actually require the claimants to interplead.
5.5 A warehouseman cannot commingle as he is
bound to keep the goods of a depositor separate from
the goods of other depositors or from the goods of the
same depositor for which a separate receipt has been
issued. The purpose of the prohibition is to permit
inspection and redelivery at all times. Exceptions are:
(a) the goods are fungible, as when any unit of the
good is from its nature or mercantile usage, treated as
an equivalent of any other unit (Section 58,
Warehouse Receipts Law) or (b) it is authorized by
agreement or custom.
6. For failure to take up and cancel a negotiable
receipt, or one the negotiation of which would transfer
the right to the possession of the goods when goods
are delivered (Section 11, Warehouse Receipts Law)
or for the failure to take up and cancel a negotiable
receipt or to place upon it a statement of what goods
have been delivered, when goods are partly delivered
(Section 12, Warehouse Receipts Law). The
warehouseman shall be liable for failure to deliver the
goods to anyone who purchases for value in good faith
such receipt whether such purchaser acquired title to
the receipt before or after the delivery of the goods by
warehouseman
6.1 Exception: The warehouseman shall not be
liable for failure to deliver the goods covered by the
receipt or be guilty of a crime where the goods (a)
have been lawfully sold to satisfy the warehouseman’s
lien, or (b) have been lawfully sold or disposed of
because of their perishable or hazardous nature
(Section 36, Warehouse Receipts Law)
7. An alteration in a warehouse receipt is said to
be:(a) Immaterial if it does not change the tenor of the
warehouse receipt (b)Material if it substantially
changes the tenor of the receipt (c) Authorized
if it is made with the authority of the holder and the
warehouseman (d)Unauthorized if it is made without
the authority of the holder and warehouseman. This
may be material or immaterial (e) Fraudulent if it is
made with malice or bad faith by the holder with
intent to defraud subsequent holders (f) Without
fraudulent intent if its is made without malice or bad
faith
7.1 The effects of an alteration in a warehouse
receipt are: (a)Where the alteration is immaterial, the
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warehouseman shall be liable according to the terms
of the receipt as originally issued (b)Where the
alteration is immaterial, whether fraudulent or not,
authorized or not, the warehouseman is liable
according to the terms of the receipt as originally
issued (c) Where the alteration is material and
is authorized, the warehouseman shall be liable
according to the terms of the receipts as altered (d)
Where the alteration is material,
unauthorized but without fraudulent intent, the
warehouseman shall be liable according to the terms
of the receipts as they were before the alteration (e)
Where the alteration is material,
unauthorized and with fraudulent intent, the
warehouseman shall be liable according to the terms
of the receipts as originally issued even (1) to a
purchaser of the receipt for value without notice of the
alteration, or (2) to the person who made the
alteration and to any person who took it with notice of
the alteration. However, in the latter case, such
material and fraudulent alteration shall excuse the
warehouseman from any other liability to the said
persons. Except as regards the alterer and subsequent
holders with notices.
8. For the non-existence or misdescription of
goods, a warehouseman shall be liable to the holder of
a receipt for damages caused by the non-existence of
the goods or by the failure of the goods to correspond
with the description thereof in the receipt at the time
of its issue.
8.1 Exception: No such liability shall attach to the
warehouseman if the goods are described in the
receipt merely (a) by a statement of the marks or
labels upon them or upon the packages containing
them, or (b) by a statement that the goods are of a
certain kind or that the packages containing the goods
contain goods of a certain kind or by words of similar
import.
9. The warehouseman’s lien refers to the lien of
that a warehouseman has on the goods deposited with
him or on the proceeds thereof in his hands for all
lawful charges for storage and preservation of the
goods, money advanced by him in relation to such
goods such as the expenses of transportation or labor,
or other related expenses.
9.1 The basis for the lien is the obligation of the
depositor to pay the warehouseman for (a) Storage
and preservation charges (b) Money advanced (c)
Interest (d) Insurance (e) Transportation (f) Labor (g)
Weighing, and (h)Coopering and other similar charges
(Section 27, Warehouse Receipts Law)
9.2 With the exception of storage and
preservation charges, the other claims must be
expressly specified in the warehouse receipt for it to
serve as basis for the lien (Section 30, Warehouse
Receipts Law)
9.3 The lien may be enforced against all goods
belonging to the person liable for the charges, as well
as against all goods belonging to the others deposited
by the person liable for the charges who has been
entrusted with the possession of the goods and could
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have validly pledged the same (Section 28, Warehouse
Receipts Law). Hence, it is enforceable against the
depositor’s goods and the goods of other persons
stored by depositor, if pledge of such goods by him are
valid but not against the true owner if the depositor
has neither title nor right of possession to the goods
(Section 31, Warehouse Receipts Law; Young v.
Colyear, 201 Pac. 623)
9.4 The warehouseman can enforce his lien by the
sale of the goods (Section 33, Warehouse Receipts
Law) or by an action in court (Section 35, Warehouse
Receipts Law). Provided, however, that notice of sale
of goods in order to satisfy the warehouseman’s lien is
given.
9.5 The lien can be lost if a warehouseman
surrenders possession of the goods, or by refusing to
deliver the goods when a demand is made with which
he is bound to comply under the provisions of the Act
(Section 29, Warehouse Receipts Law)
9.6 The effect of the sale of goods to satisfy the
warehouseman’s lien or on account of the goods’
perishable or hazardous nature under Section 36 shall
not make the warehouseman, after the sale, liable for
failure to deliver the goods to the depositor, or owner
of the goods, or to the holder of a receipt given for the
goods when they were deposited, even if such receipt
were negotiable.
10. A negotiable receipt is negotiated by delivery
when: (a) the goods are deliverable to bearer, or (b)
the goods are deliverable to a specified person and the
latter has indorsed it in blank or to bearer. If endorsed
as deliverable to a person, the bearer receipt is
transformed into a an order receipt.
10.1 A negotiable receipt is negotiated by
indorsement when the goods are, by the terms of the
receipt, deliverable to a specified person (Section 38,
Warehouse Receipts Law)
10.2 The negotiation may be made by the: (a)
owner or (b) the person to whom possession of the
receipt was entrusted by the owner (Section 40,
Warehouse Receipts Law)
10.3 The rights acquired by one to whom a
negotiable warehouse receipt has been duly
negotiated are: (a) Such title to the goods as the one
negotiating could convey to a purchaser in good faith
for value (b) Such title to the goods as the depositor or
one to whose order the goods were to be delivered
could convey to a purchaser in good faith for value,
and (c) Direct obligation of the warehouseman to
hold the goods for him as if the warehouseman
contracted with him directly. Hence, a person to whom
a warehouse receipt has been negotiated by one who
has stolen the goods stated in the receipt cannot claim
a misdelivery if the warehouseman delivers the goods
to the rightful owner, who is the person lawfully
entitled to it.
10.4 Mortgagee or pledgee of a warehouse receipt
to whom a negotiable warehouse receipt has been
indorsed does not acquire title over the goods. He only
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acquires the rights of a pledgee or mortgagee, namely
to foreclose the pledge or mortgage. The intent in this
case is not the negotiation of the receipt with its
consequent transfer of title, but merely as security
(Martinez v. P.N.B., 93 Phil. 765); P.N.B. v. Atendido, 94
Phil. 254)
11. A non-negotiable receipt is transferred by
delivery accompanied with a deed of assignment or
transfer. If this is indorsed, the indorsement will not
give the transferee any right whatsoever (Section 39,
Warehouse Receipts Law)
11.1 Rights acquired by a person to whom a
warehouse receipt has been transferred but not
negotiated are: (a) Title to the goods subject to
the terms of any agreement with the transferor, and
(b)The right to notify the warehouseman of the
transfer in his favor and thereby acquire the direct
obligation of the warehouseman to hold the goods for
him (Section 42, Warehouse Receipts Law). Note that
pending notification, his rights can still be defeated by
a subsequent attaching creditor, or levy on execution,
a vendor’s lien or right of stoppage in transitu.
CHATTEL MORTGAGES:
1. A chattel mortgage defined - personal
property is recorded in the Chattel Mortgage Register
as a security for the performance of an obligation.
1.1 If the movable, instead of being recorded, is
delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage.
1.2 Distinguishing a chattel mortgage from a
pledge: (a) the chattel mortgage is recorded in the
Chattel Mortgage Register; the pledge is not, instead
the movable is delivered to the creditor (b) in a
chattel mortgage, the consent of the mortgagee to the
sale of the thing mortgaged must be in writing and
annotated on the back of the mortgage instrument; in
pledge, the consent of the pledge need not be in
writing but may be oral (c) in a chattel mortgage, in
addition to other formal requirements, the mortgagor
must execute an affidavit of good faith; in pledge, there
is no requirement that the pledgor execute such an
affidavit (d) in a chattel mortgage, in case of
foreclosure of the thing mortgaged, the mortgagee is
not entitled to the entire proceeds of the sale but only
to a portion thereof sufficient to pay the mortgage
debt, interest and incidental expenses; in pledge, the
pledgee is entitled to the entire proceeds of the sale
even if it exceeds the amount of the debt (e) in a
chattel mortgagee, the mortgagee is entitled to recover
deficiency as a rule; in pledge, the pledgee is not
entitled to recover deficiency.
1.3 Distinguishing a chattel mortgage from a real
estate mortgage: (a) in a chattel mortgage, the thing
mortgaged must be personal or movable property; in a
real estate mortgage, the thing mortgaged must be real
or immovable property (b) an affidavit of good faith is
required to be executed in a chattel mortgage but not
in a real estate mortgage (c) in a chattel mortgage, the
mortgagor cannot alienate the thing mortgaged
without the written consent of the mortgagee
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annotated on the back of the mortgage instrument; in
real estate mortgage, the mortgagor can alienate the
thing mortgaged without the consent of the mortgagee
and any stipulation prohibiting such alienation is void
(d) in a chattel mortgage, redemption of the thing
mortgaged may be made only before the sale thereof;
in real estate mortgage, the thing mortgaged may be
redeemed after it is judicially sold but before judicial
confirmation of the sale, or if extrajudicially sold,
within one year from and after the date of sale (except
where the mortgagor is juridical person whose
property has been mortgaged in favor of a bank, quasi-
bank or trust entity, in which case the redemption
shall be made until, but not after, the registration of
the certificate of foreclosure sale with the applicable
Register of Deeds which in no case shall be more 3
months after foreclosure whichever is earlier)
2. The essential requisites of a chattel mortgage
are: (a) It must be constituted to secure the fulfillment
of a principal obligation (b) The mortgagor must be
absolute owner of the property mortgaged (c) The
mortgagor must have free disposal of such property,
or be legally authorized for the purpose (d)The
property involved must be personal or movable, and
(e) Contract must be recorded in the Chattel
Mortgage Register
2.1 A chattel mortgage which provides that the
security stated therein is for the payment of any and
all obligations therein before contracted and which
may thereafter be contracted, or future debts and
obligations, by the mortgagor in favor of the
mortgagee is void. The law requires parties to a
mortgage to execute an affidavit of good faith, that the
debt is honestly due and owing. A valid mortgage
cannot be made to secure a debt to be contracted in
the future (Jaca v. Davao Lumber, L-25771, March 29,
1982, 113 SCRA 107; Vide; Lopez v. CA, 114 SCRA 671,
Co v. PNB, 114 SCRA 842). An affidavit of good faith is
a certificate included in the chattel mortgage contract
executed by both mortgagor and mortgagee that the
mortgage is constituted to secure the specified
obligation, and that said obligation is a valid, just and
subsisting obligation and not one entered into for the
purpose of fraud.
2.2 Although a promise expressed in the chattel
mortgage to include debts that are yet to be contracted
can be a binding commitment that can be acted upon,
the security itself does not come into existence or
arise until after a chattel mortgage agreement
covering the newly contracted debt is executed either
by a fresh chattel mortgage deed or by amending the
old contract to conform to the law, particularly the
execution of an affidavit of good faith (Acme Shoe etal
v. CA, GR No. 103576, August 22, 1996)
2.3. The chattel mortgage cannot be considered to
include after-acquired properties as it shall cover only
the property described in the deed and not any other
like or substituted property (Section 7). Recognized as
exceptions are: (1) properties that are perishable, like
fruits or subject to inevitable wear and tear like tires
or intended to be sold or used but with the
understanding that they would be replaced with
similar properties to be thereafter acquired by the
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mortgagor. An Example is: Where the debtor gives as
security the stock or merchandise in his store and it is
the “intention” of the parties that the mortgage shall
cover the stock that will take its place in the course of
the business. [Torres v. Limjap, 56 Phil. 141 ,1931] (2)
In the case of other properties, if their inclusion is
expressly stipulated and a supplement to the mortgage
specifically listing and describing the property is
executed and registered in the chattel mortgage
register
2.4 The registration in the chattel mortgage
register is not necessary to make it binding between
the parties. It is necessary though to make it binding
on third persons.
3. The remedies of a creditor are: (a)
Extrajudicial Foreclosure (b) An action for replevin (c)
Judicial Foreclosure, and (d) Bring an
action for the payment of a sum of money
3.1 A creditor cannot forceably take possession of
the chattel without court intervention (BPI Credit v.
CA, 204 SCRA 601, Filinvest Credit Corporation v. CA,
248 SCRA 549)
3.2 Neither can the creditor take possession and
appropriate the chattel, since it would constitute
pactum commissorium, referring to an act or a
stipulation giving power to the creditor to appropriate
the thing given as security, if the principal obligation is
not fulfilled without any formality, such as foreclosure
proceedings and public sale. Such an act or stipulation
is null and void (Art. 2088, N.C.C.). In other words, the
mortgagor’s default does not operate to vest in the
mortgagee the ownership of the mortgaged property.
3.3 Availment of the remedy of bringing an action
to collect a sum of money is a waiver or abandonment
of the chattel mortgage. This also bars the recovery of
a deficiency judgment which is only available when
the proceeds of the sale are insufficient to cover the
debts pursuant to a foreclosure. The prescriptive
period for which is ten (10) years.
3.4. Note that when the financing company to
whom a loan and chattel mortgage have been
refinanced had been constituted as the attorney-in-
fact of the borrower to file any insurance claim
covering the chattel, and it failed to do so upon a total
loss of the same, will relieve the borrower-mortgagor
of his obligation (BA Finance Corporation v. CA, 201
SCRA 157)
3.5 There are limitations on the enforcement of
chattel mortgages executed in relation to the sale of
personal property in installments, where the remedies
are: (1) Exact fulfillment of the obligation (2)Cancel
the sale, should the vendee’s failure to pay cover two
or more installments; or (3) Foreclose the chattel
mortgage on the thing sold should the vendee’s failure
to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to
recover any unpaid balance of the price. Any
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agreement to the contrary shall be void (Art. 1484,
N.C.C.). This remedies are exclusive not alternative.
EXTRA-JUDICIAL FORECLOSURE OF REAL ESTATE
MORTGAGES:
1. The resort to the process of extra-judicial
foreclosure emanates from the presence of a
stipulation that allows the creditor/mortgagee to
extra-judicially foreclose and designating the said
party as the attorney-in-fact of the mortgagor to cause
the same and to sell the subject property at a
foreclosure sale by an insertion into or attachment to
the real estate mortgage.
1.1 When a debt is secured by a real estate
mortgage, the creditor has two options: (a) to
foreclose, or (b) file an ordinary action to collect. If he
avails of the option to foreclose, he is still allowed to
bring a claim for any deficiency. On the other hand, if
he avails of the option to file an ordinary action, he
abandons or waives his mortgage lien, without
prejudice to his levying on the same property but
subject to the rights of other creditors, if any.
1.2 When the mortgagor files a criminal case for
violation of BP Blg 22 against the mortgage debtor, he
is deemed to have already availed himself of the
remedy of a collection suit, and following the rule on
alternative remedies, he is barred from subsequently
resorting to an action for foreclosure.
1.3 A mortgage contract is, by nature, indivisible.
The debtor who has paid cannot ask for a
proportionate extinguishment of the mortgage as long
as the debt is not completely satisfied. Generally, the
divisibility of the principal obligation is not affected by
the indivisibility of the mortgage.
2. The foreclosed property shall be redeemed
within 1 year from and after the date of the sale (Sec.
6). The aforementioned date of sale has been
construed by the Supreme Court to mean the date of
registration of the sheriff’s certificate of foreclosure
sale in the office of the Register of Deeds concerned
(Reyes vs. Noblejas, et al., G.R. No. L-23691, November
25, 1967). Note that the period for redemption may
be the subject of an extension as may be agreed upon
by the parties.
2.1 The amount to be paid at redemption is the
Bid Price, plus 12% interest per annum. Note again
that under RA 8791, the redemption amount is such
which is due under the mortgage deed with interest at
the specified rate therein.
2.2 Redemption may be effected by: (a) The
debtor, or (b) His successor in interest , or (c) Any
judicial creditor or judgment creditor of the debtor, or
(d) Any person having a lien on the property
subsequent to the mortgage.
2.3 Notwithstanding the foregoing provision,
juridical persons whose property is sold pursuant to
an extra-judicial foreclosure, shall have the right to
redeem the property until, but not after, the
registration of the certificate of foreclosure sale which
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in no case shall be more than three (3) months after
foreclosure whichever is earlier, as provided in
Section 47 of Republic Act. No. 8791 (A.M. No.99-10-
05-0)
2.4 Note the probable constitutional challenges
that may be brought against the quoted provision of
RA 8791 on the basis of the equal protection clause as
there is no substantive distinction between a
corporate and individual debtor or between a bank or
non-bank lender.
2.5 Further, the application of the law should be
prospective as a corporate mortgagor has acquired as
vested right to the one year redemption period if his
mortgage was executed prior to RA 8791 as the
controlling consideration is the law on redemption at
the time of the execution of the mortgage.
2.6 The purchaser of foreclosed property is not
automatically entitled to the possession thereof during
the redemption period as he must petition the
Regional Trial Court of the province or city where the
property is situated to give him possession thereof
during the redemption period. He must also put up a
bond equivalent in value to the use of the property for
a period of 12 months to indemnify the debtor in case
it is shown that the sale was made without complying
with the requirements of Act No. 3135 or that there
was no violation of the mortgage deed.
3. In general, formal and substantive defects in
the real estate mortgage and the foreclosure
proceedings provide the legal and equitable grounds
to enjoin or eventually nullify foreclosure proceedings,
if not the real estate mortgage itself.
3.1 The general basis would be Article 5, Civil
Code, which provides: Acts executed against the
provisions of mandatory or prohibitory laws shall be
void, except, when the law authorizes their validity
4. Disputes in the amount of the obligation may
cause the foreclosure to be enjoined as a bank may
legally proceed with foreclosure only when the exact
amount of the obligation of the mortgagor is
determined in a trial on the merits and the mortgagor
cannot meet the obligation following that
determination.
4.1 Where the debtor is not given an opportunity
to settle the debt at the correct amount and without
iniquitous interest imposed, no foreclosure
proceedings can be instituted.
4.2 The total amount due on the mortgage is also
undetermined if some of the properties are subject to
the coverage of the CARP, in which case a portion of
the mortgage indebtedness will be assumed by the
government up to the amount equivalent to the
landowner’s compensation. Hence, until the final
valuation of the lands subject to CARP is determined,
the amount of the mortgage debt is unliquidated
5. Issue of the legality of the Floating Rate of
Interest, which refers to the rate of interest
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periodically fixed by a bank based on the prevailing
interest rate in the market, such as the Manila
Reference Rate or Treasury Bill Rate, plus a margin as
determined by the bank.
5.1 If this rate of interest is unilaterally fixed by
the bank for each interest period without the written
conformity of the borrower, the interest may be
declared null and void for being potestative and for
lack of mutuality based on essential equality between
the parties
5.2 Its being a potestative condition (one within
the sole power of the one obligated to perform),
consequently null and void finds basis in Article 1308
of the Civil Code that provides that the fulfillment of a
condition cannot be left to the sole will of one of the
contracting parties
5.3 As held by the Supreme Court in Almeda v.
Court of Appeals and PNB,256 SCRA 293: The binding
effect of any agreement between the parties to
contract is premised on two settled principles: (1) that
any obligation arising from contract has the force of
law between the parties; and (2) that there must be
mutuality between the parties based on their essential
equality. Any contract which appears to be heavily
weighted in favor of one of the parties so as to lead to
an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties is
likewise invalid.
5.4 The floating rate of interest being unilaterally
fixed and determined by the bank also violates the
provision of CB Circular No. 1191 that the interest rate
for each re-pricing period is subject to mutual
agreement between the Borrower and the Bank.
5.5 Under Article 1956 of the Civil Code, no
interest is due unless it has been expressly stipulated
in writing. The floating rate being unilaterally fixed by
the Bank without the written mutual agreement of the
Borrower for each re-pricing of interest is null and
void under Art. 1956 of the Civil Code, and for
violation of CB Circular No. 1191 that the interest rate
for each re-pricing period under the floating rate of
interest in subject to mutual agreement.
5.6 Consequently, if the interest is declared null
and void, the foreclosure sale for a higher amount than
what is legally due is likewise null and void because
under the Civil Code, a mortgage may be foreclosed
only to enforce the fulfillment of the obligation for
whose security it was constituted.
5.7 In fact, because there is a dispute on the
amount of the interest legally due, the Bank may
legally proceed with foreclosure or consolidation only
when the exact amount of the obligations of the
Mortgagor is determined after trial on the merit and
the mortgagor cannot meet the obligation following
that determination.
6. Issue of the mortgage as security for future
loans. The rule is unless a continuing real estate
mortgage is involved, a real estate mortgage is not a
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valid security for future loans under the so called
“Dragnet Clause”.
6.1 This finds basis in the fact that real estate
mortgage is an accessory contract, which cannot exist
independently of the principal obligation. The
consideration for the mortgage is the consideration of
the contract of loan. Consequently, the amount of the
loan must be specified, otherwise the contract of loan,
as well as the accessory contract of mortgage, shall not
be perfected for lack of consideration with respect to
the unspecified loan in the future. The Supreme Court
has held in China Banking Corporation vs. Lichuaco, 46
Phil 460 that: a mortgage is an accessory contract, its
consideration is the very consideration of the principal
contract, from which it derives life, and without which
it cannot exist as an independent contract.
6.2 Further, under Article 2176 of the Civil Code,
a mortgage may only be foreclosed for the fulfillment
of the obligation for whose security it was constituted
6.3 Mortgages with a dragnet clause is a contract
of adhesion that must be strictly construed as against
the bank.
6.4 To constitute a real estate mortgage as
security for future loans, the future loans must be
agreed upon and fixed in the mortgage deed at the
time of the execution of the same
6.5 A stipulation that the amounts named as
consideration in a contract of mortgage do not limit
the amount for which the mortgage may stand as
security if from the four corners of the instrument the
intent to secure future and other indebtedness can be
gathered is valid and binding and is known in
American Jurisprudence as the “blanket mortgage
clause”.
7. Issue of PD 385 prohibiting the issuance of an
injunction against foreclosure by any government
financial institution is arbitrary and unreasonable.
Hence, may be argued as being unconstitutional.
Hence, it cannot be sustained if there is a clear legal
ground to restrain foreclosure
8. Issue of the right to take possession. The rule
is that the purchaser still has to file a petition for the
issuance of a writ of possession to obtain possession.
8.1 The proceedings related thereto allow the
mortgagor to participate although jurisprudence
provides that the hearings are ex-parte. However, with
the mandate of Section 8 of Act 3135 which allow the
mortgagor to set aside foreclosure in the same
proceedings, it is the better rule to actually allow the
mortgagor’s active participation.
8.2 The obligation of the court to issue a writ of
possession in favor of the purchaser in an extrajudicial
foreclosure sale ceases to be ministerial once it is
shown that there is a third party in possession of the
property who is claiming a right adverse to that of the
mortgagor and that such third party is a stranger to
the foreclosure proceedings in which the ex-parte writ
of possession was applied for.
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8.3 As a limitation on the right to possession, a
writ of possession may be legally issued only if the
debtor is in possession and no third person has
intervened.
8.4 Order granting a writ of possession under Act
3135 is a final order. Hence, it is appealable. In
expropriation, it is interlocutory.
9. Grounds for the proper annulment of the
foreclosure sale are the following: (a) there was fraud,
collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser (b) the sale was not
fairly and regularly conducted (c) price was
inadequate and the inadequacy was so great as to
shock the conscience of the court.
Central Bank Act
1. The law was enacted on June 14, 1993 and has
for its policy the maintenance of a central monetary
authority with the power: (a) function and operate as
an independent and accountable body in the discharge
of its responsibilities concerning money, banking and
credit (b) enjoy fiscal and administrative autonomy.
1.1 A central bank is a bank that holds the cash
reserves of a country’s commercial banks, performs
monetary services for the government, issues bank
notes, and makes funds available to commercial banks
Conservatorship
1. The appointintment by the Monetary Board of
a conservator takes place whenever a bank or quasi-
bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity
deemed adequate to protect the interest of depositors
and creditors.
1.1 It is an attempt to save the bank from
bankruptcy and ultimate liquidation.
1.2 The appointed conservator is to take charge of
the assets, liabilities, and the management thereof for
a period not exceeding one (1) year
2. A conservator may take over a bank or quasi-
bank without the need of first declaring the bank
insolvent (P.D. 1937, June 27, 1984). Nonetheless, the
designation of a conservator is not a precondition to
the designation of a receiver (Section 30)
2.1 A conservator is the person appointed to take
over the management of a bank and shall assume
exclusive powers to oversee every aspect of the bank’s
operation and affairs.1
3. The conservatorship is terminated when: (a)
When Monetary Board is satisfied that
institution can continue to operate on its own and the
conservatorship is no longer necessary (b)Should
Monetary Board determine that the continuance in
business of the institution would involve probable loss
1 Central Bank vs. CA, 208 SCRA 652
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to its depositors or creditors, in which case
proceedings for receivership and liquidation shall be
pursued. (Sec. 29).
Proceedings in Receivership:
1. Receivership ensues whenever the Monetary
Board finds that a bank or quasi-bank: (a) Is unable to
pay its liabilities as they become due in the ordinary
course of business BUT: Shall not include inability to
pay caused by extraordinary demands induced by
financial panic in the banking community (b) Has
insufficient realizable assets to meet its liabilities (c)
Cannot continue in business without involving
probable losses to its depositors or creditors; or (d)
Has willfully violated a cease and desist order that has
become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the
institution;
1.1 In which cases, the Monetary Board may
summarily and without need for prior hearing, forbid
the institution from doing business in the Philippines
and designate the PDIC as receiver of the banking
institution.
1.2 There is no requirement that a hearing be first
conducted before a banking institution may be placed
under receivership. The appointment of a receiver
may be made by the Monetary Board without notice
and hearing but its action is subject to judicial inquiry(
Rural Bank of Buhi v. Court of Appeals,162 SCRA 288)
1.3 The Central Bank, through the Monetary
Board, is vested with exclusive authority to assess,
evaluate and determine the condition of any bank and
if it finds the condition to be one of insolvency, or its
continuance in business would involve probable loss
to creditors and depositors, it can forbid the bank to
do business and can designate a receiver to take
charge of its assets and liabilities. Sec. 29 of the Central
Bank Act does not contemplate prior notice and
hearing before a bank is placed under receivership. It
is enough that such action is made the subject of a
subsequent judicial review. “Close now and hear later”
scheme under the Act is for the purpose of protecting
the depositors, creditors, stockholders and general
public (Central Bank v. Court of Appeals, 220 SCRA
536)
1.4 Prior notice and hearing is not required
before placement of bank under receivership. Section
29 does not contemplate prior notice and hearing
before a bank may be directed to stop operation and
placed under receivership. When paragraph 4 (now
paragraph 5 as amended by E.O. 289) provides for the
filing of a case within ten (10) days after the receiver
takes charge of the assets of the bank, it is
unmistakable that the assailed actions should precede
the filing of the case. Plainly, the legislature could not
have intended to authorize “no prior notice and
hearing” in the closure of the bank and at the same
time allow a suit to annul it on the basis of absence
thereof (CB vs. CA, 220 SCRA 539)
1.5 Judicial review is allowed to determine the
presence of arbitrariness and bad faith in placing bank
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under receivership. Admittedly, the mere filing of a
case for receivership by Central Bank can trigger a
bank run. The procedure prescribed in Section 29 is
truly designed to protect the interest of all concerned,
and the summary closure pales in comparison to the
protection afforded public interest. At any rate, the
bank is given full opportunity to prove arbitrariness
and bad faith in placing the bank under receivership,
in which event, the resolution may be properly
nullified and the receivership lifted as the trial court
may determine. Until such determination is made, the
status quo shall be maintained, i.e., the bank shall
continue to be under receivership.
1.6 Receivership is equivalent to an injunction to
restrain in the bank officers from intermeddling with
the property of the bank in any way. Thus, the
appointment of a receiver operates to suspend the
authority of the bank and of its directors and officers
over its property and effects (Villanueva vs. CA, 244
SCRA 395)
Liquidation:
1. Liquidation shall take place is the receiver
determines that the institution cannot be rehabilitated
or permitted to resume business, the Monetary Board
shall notify in writing the Board of Directors of its
findings and direct the receiver to proceed with the
liquidation of the institution.
2. The following are the mandatory
requirements to be complied with before a bank found
to be insolvent can be ordered close: (1) an
examination shall be conducted by the appropriate CB
department as to the condition of the bank (2)
disclosed in the examination is that the condition of
the bank is one of insolvency (3) the director shall
inform the Monetary Board in writing of such fact, and
(4) the Monetary Board shall find the statement of the
department to be true (Banco Filipino vs. Monetary
Board, 204 SCRA 767)
3. The test of insolvency laid down in Section 29
of the Central Bank Act (now Section 30 of the New
Central Bank Act) is measured by determining
whether the realizable assets, realizable within a
reasonable time by a reasonably prudent person of a
bank are less than its liabilities, not considering capital
stock and surplus which are not liabilities for such
purpose. (Ibid)
4. Upon liquidation, the receiver shall then: (a)
File ex parte with Regional Trial Court, and without the
requirement of prior notice or any other action, a
petition for assistance in the liquidation of the
institution pursuant to a liquidation plan adopted by
PDIC (b) Upon acquiring jurisdiction, RTC shall, upon
motion by the institution, assist the enforcement of
individual liabilities of the stockholders, directors and
officers, and decide on other issues as may be material
to implement the liquidation plan adopted (c)Convert
the assets of the institution to money, dispose of the
same to creditors and other parties, for the purpose of
paying the debts of such institution in accordance with
the rules on concurrence and preference of credit
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 GREEN NOTES IN COMMERCIAL LAW
under the Civil Code (d) Institute such actions as may
be necessary to collect and recover accounts and
assets of, or defend any action against, the institution
Selected Issues involving Receivership and
Liquidation:
1. If the Central Bank (now Bangko Sentral)
through its Monetary Board has promised to
rehabilitate the distressed bank, and the stockholders
on said assurance proceeded to mortgage their real
properties to guarantee CB promised loan advances to
said bank, CB cannot renege on said promise, under
the doctrine of promissory estoppel, and cannot insist
in its liquidation (Ramos vs. CB, 41 SCRA 565)
2. Where the Central Bank, in the course of the
rehabilitation of a commercial bank, extended loans
and advances, but subsequently the bank was forced
by CB to close, and subsequently allowed to reopen,
interest due on said loans and advances, cannot be
collected because it should be deemed read into every
contract of deposit with a bank that the obligation to
pay interest on a deposit ceases from the moment the
operation of the bank is completely suspended by the
duly constituted authority the Central Bank (Ibid,;
Overseas Bank vs. CA, 105 SCRA 49)
3. The prescriptive period to institute the
foreclosure proceeding was legally interrupted when
the mortgagee-bank was placed under receivership
with express prohibition from transacting business, a
circumstance considered as force majeure (Provident
vs. CA, 222 SCRA 125)
4. While the closure and liquidation of a bank
may be considered an exercise of police power, the
validity of its exercise is subject to judicial
determination, and could be set aside, if it is
capricious, discriminatory, whimsical, arbitrary, unjust
or a denial of the due process and equal protection
clauses of the Constitution (CB vs. CA, 106 SCRA 143)
5. A deposit in a distressed bank already
forbidden by CB to do business does not become a
preferred credit simply because some depositors went
to court and were able to secure judgments against the
bank (CB vs. Morfe, 63 SCRA 114)
6. Where in the course of bank’s distressed
condition, the Central Bank gave financial assistance to
restore the bank’s viability, but that inspite of these
moves, the bank was closed by CB on August 1968,
and allowed to reopen on January 8, 1981, under a
new name, Commercial Bank of Manila, the obligation
by the bank to pay interest on the CB advances
remained suspended during the whole period of its
closure, following the ruling in OBM vs. CA and Tapia
(105 SCRA 49). Hence, the interest obligation starts to
run from the date of the reopening of the bank on
January 8, 1981 (Ramos vs. CB, 137 SCRA 685)
General Banking Law
1. The policy of the State is the promotion and
maintenance of a stable and efficient banking and
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financial system that is globally competitive, dynamic
and responsive to the demands of a developing
economy.
2. Banks are entities engaged in the lending of
funds obtained in the form of deposits.
2.1 The definition under Section 2 of the old
General Banking Law:2 banks are entities duly
authorized by the Monetary Board to engage in the
business of regularly lending funds obtained regularly
from the public through the receipt of deposits of any
kind. Thus, entities which lend funds obtained from
the public but not as deposits but rather as debts for
their own account, whether done regularly or not, and
those which regularly lend funds obtained through the
occasional receipt of deposits, would not be
considered as banks.
2.2 An entity that is engaged in the business of
buying accounts receivables and is funding their
business from bonds sold to the public from time to
time is not a bank as it does not accept deposits,
instead it buys receivables.
Classification of Banks:
1. Banks are classified under the General
Banking Law as follows:
(a) Universal banks- these are those that used to
be called expanded commercial banks and whose
operations are now primarily governed by the GBL.
They can exercise the powers of an investment house
and invest in non-allied enterprises. They have the
highest capitalization requirement.
An investment house is a company that earns income
solely or primarily by holding and investing in
securities issued by other companies or by
government agencies.
(b) Commercial banks- these are ordinary or
regular commercial banks, as distinguished from a
universal bank. They have a lower capitalization
requirement than universal banks and cannot exercise
the powers of an investment house and invest in non-
allied enterprises.
(c) Thrift banks-these are savings and mortgage
banks, stock savings and loan associations, and private
development banks which are governed primarily by
the Thrift Banks Act.3
(d) Rural banks-these are mandated to make
needed credit available and readily accessible in the
rural areas on reasonable terms and which are
governed primarily by the Rural Banks Act of 1992. 4
(e) Cooperative banks-these are banks organized
primarily to make financial and credit services
2 RA 337
3 RA 7906
4 RA 7353
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 GREEN NOTES IN COMMERCIAL LAW
available to cooperative banks and are governed
primarily by the Cooperative Code.5
(f) Islamic banks-these are banks whose business
dealings and activities are subject to the basic
principles and rulings of Islamic Shari’a, such as the Al
Amanah Islamic Investment Bank of the Philippines
which was created by the Republic Act No. 6848; and
(g) Other classifications of banks as determined
by the Monetary Board.
Incorporation and Organization of Banks
1. The minimum conditions that a prospective
bank must comply with before it may be authorized by
the BSP to be organized as a bank are:
1.1 That the entity must be organized as a stock
corporation;
1.2 That its funds must be obtained from the
public, i.e., 20 or more persons; and
1.3 That the minimum capital requirement
prescribed by the Monetary Board for each category of
banks are satisfied.
2. The SEC cannot register the the articles of
incorporation of any bank, or any amendment thereto,
unless accompanied by a certificate of authority issued
by the Monetary Board, under its seal. Such certificate
shall not be issued by the Monetary Board unless it is
satisfied from the evidence submitted to it:
3. In organizing the bank, it can only issue par
value stocks only.
Supervision and Regulation of Banks:
1. The entity that has supervisory and
regulatory powers over banks is the BSP and such
extends to all banks, quasi-banks, trust entities, and
other financial institutions.
2. This power of the BSP is found in Section 25
of the BSP Law which mandates the conduct of
periodic or special examinations, to include those of its
subsidiaries and affiliates engaged in allied activities,
but such shall be possible only in the in the course of
its examination of such bank.
2.1 A subsidiary corporation is one more than
50% of whose voting stock is owned by the bank or
quasi-bank.
2.2 An affiliate corporation is one less than 50%
of whose voting stock is owned by the bank or quasi-
bank or which is related or linked to such bank or
quasi-bank through common stockholders or such
factors as may be determined by the Monetary Board.6
Management of a Bank:
5 RA 6938
6 Section 25, NCBA
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1. The principle that since a bank is a juridical
person that its powers are to be exercised, its business
is to be conducted, and that its properties are to be
held by a board as provided for by Section 23 of the
Corporation Code obtains.
2. However, an independent director, who is a
person other than an officer or employee of the bank,
its subsidiaries or affiliates or related interests must
be elected to the board. Note that the term
“independent director” is also used in the Securities
Regulation Code7 to refer to a person other than an
officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
3. There must also be adherence to the fit and
proper rule8 which provides that to maintain the
quality of bank management and afford better
protection to depositors and the public in general, the
Monetary Board shall:
3.1 prescribe, pass upon and review the
qualifications and disqualifications of individuals
elected or appointed bank directors or officers and
disqualify those found unfit; or
3.2 After due notice to the board of directors of
the bank, the Monetary Board may disqualify, suspend
or remove any bank director or officer who commits
or omits an act which render him unfit for the
position.
3.3 In determining whether an individual is fit
and proper to hold the position of a director or officer
of a bank, regard shall be given to his integrity,
experience, education, training, and competence.
4. An elective or appointive public official cannot
serve as an officer of a private bank , whether full-time
or part-time shall at the same time serve as officer of
any private bank, save in cases where such service is
incident to financial assistance provided by the
government or a government-owned or controlled
corporation to the bank or unless otherwise provided
under existing laws.
4.1 The Rural Banks Act9, allows an elected or
appointive public official to serve as director, officer,
consultant or in any other capacity in a rural bank.
5. A bank is required to have a board composed
of 5 no more than 15 directors, two of whom must be
independent directors.10
5.1 In case of a merger or consolidation between
banks, the number of directors shall not exceed 21. 11
7 Section 38, Par. 16.25
8 Section 16, GBL, BSP Circular No. 296
9 Section 5, RA 7353
10 Section 15, GBL
11 Section 17, GBL
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 GREEN NOTES IN COMMERCIAL LAW
5.2 Non Filipino citizens may become members of
the board to the extent of the foreign participation in
its equity.12
Limitations imposed on Banking Operations:
1. Single Borrower Limit Rules13- these rules
regulate the total amount of loans, credit
accommodations and guarantees that may be
extended by a bank to any person, partnership,
association, corporation or other entity.
1.1 The rules seek to protect a bank from making
excessive loans to a single borrower by prohibiting it
from lending beyond a specified ceiling. The current
limit is 25% of the net worth of the bank concerned.14
1.2 The ceiling is subject to possible increase by
an additional 10% provided the additional liabilities
of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or
other similar documents transferring or securing title
covering readily marketable, non-perishable goods
which must be fully covered by insurance.
2. DOSRI Rules15- these are rules promulgated
by the BSP, upon the authority of Section 36 of the
GBL, which regulate the amount of credit
accommodations that a bank may extend to its
directors, officers, stockholders and their related
interests, thus the term, DOSRI.
2.1 Generally, a bank’s credit accommodations to
its DOSRI must be in the regular course of business
and on terms not less favorable to the bank than those
offered to non-DOSRI borrowers.
2.2 Related Interests shall include the following:
(a) Spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption,
of a director, officer or stockholder of the bank; (b)
Partnership of which a director, officer or stockholder
or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption,
is a general partner; (c) Co-owner with the director,
officer, stockholder or his spouse or relative within the
first degree of consanguinity or affinity, or relative by
legal adoption, of the property or interest or right
mortgaged, pledged or assigned to secure the loans or
credit accommodations, except when the mortgage,
pledge or assignment covers only said co-owner’s
undivided interest; (d) Corporation, association, or
firm of which a director or officer of such corporation,
association or firm, except (1) where the securities of
such corporation, association or firm are listed and
traded in the big board or commercial and industrial
board of domestic stock exchanges less than fifty
percent (50%) of the voting stock thereof is owned by
any one person or by persons related to each other
12 Section 15, Par. (2), GBL
13 Section 35, GBL
14 BSP Circular No. 425
15 Section 36, GBL
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within the third degree of consanguinity or affinity; or
(2) where the director, officer or stockholder of the
lending bank sits as a representative of the bank in the
board of directors of such corporation: Provided, That
the bank representative shall not have any equity
interest in the borrower corporation except for the
minimum shares required by law, rules and
regulations, or by the by-laws of the corporation:
Provided, further, That the borrowing corporation
under (1) or (2) is not among those mentioned in
Items (e) and (f) hereof; (e) Corporation, association
or firm of which any or a group of directors, officers,
stockholders of the lending bank and/or their spouses
or relatives within the first degree of consanguinity or
affinity, or relative by legal adoption hold/own more
than twenty percent (20%) of the subscribed capital of
such corporation, or of the equity of such association
or firm; (f) Corporation, association of firm wholly or
majority-owned or controlled by any related entity or
a group of related entities mentioned in Items (b), (d)
and (e) hereof.
2.3 A bank may allow a DOSRI to: (a) borrow
from the bank; (b) become a guarantor, indorser or
surety for loans from such bank to others; (c) be an
obligor; or (d) incur any contractual liability with the
written approval of the majority of all the directors of
the bank, excluding the director concerned. 16
However, the written approval shall not be required
for loans, other credit accommodations and advances
granted to officers under a fringe benefit plan
approved by the BSP.
2.4 Consequently, any director or officer who may
wish to borrow from the bank must observe the
following formalities: (a) The borrowing must be in
accordance with the Arms Length Rule, or which must
be upon terms not less favorable to the bank than
those offered to others ,must be with the written
approval of a majority of the bank’s board of directors,
excluding the director concerned (b)Such approval
must be entered upon the records of the bank, i.e., the
minutes of the board meeting in which the approval
was given; and (c) A copy of the entry of such approval
shall be transmitted forthwith to the appropriate
supervising department of the BSP.
2.5 The other conditions are: (a) The DOSRI
borrower is required to waive the secrecy of his/her
deposits of whatever nature in all banks in the
Philippines17 and (b) The ceiling/limitation as to loans
are followed.
2.6 The amount of the borrowing is limited to the
amount equivalent to their unencumbered deposits
and book value of their paid in capital contribution,
unless they are: (a) secured by assets considered by
the Monetary Board as non risk (b) under a fringe
benefit plan approved by the BSP, or is (c) extended by
a cooperative bank to its cooperative stockholders;
16 Section 36, GBL
17 Section 26, NCBA
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 GREEN NOTES IN COMMERCIAL LAW
2.7 Should there be a violation of the DOSRI rules,
after due notice to the board of directors of the bank,
the office of any bank director or officer who violated
the rules may be declared vacant and the director or
officer shall be subject to the penal provisions of
NCBA.
2.8 Loans, credit accommodations or guarantees
extended by a bank to DOSRI are also termed as
“Insider Lending.”
Bank Deposits and Bank Responsibility to Depositors
1. As to nature, all kinds of deposits whether
fixed or current are to be treated as loans and are to be
covered by the law on loan.18
1.1 They are also considered in the nature of
irregular deposits, they are really loans because they
earn interest.19 Considering a deposit involves the
delivery of a thing for safekeeping with the obligation
to return the very same thing upon demand 20 and a
loan is a contract whereby one of the parties delivers
to another money or other consumable thing upon the
condition that the same amount of the same kind and
quality shall be paid.21
1.2 Banks may use the money deposited with
them as money deposited in banks, whether fixed,
savings and current, are really loans to a bank because
the bank can use the same for its ordinary transactions
and for banking business in which it is engaged. 22
1.3 In fact banks are not obligated to return
exactly the money deposited in the same
denomination as it was deposited. While the banks
have the obligation to return the amount deposited,
they have no obligation to return or deliver the same
money deposited. Thus, estafa will not prosper.23
1.4 A bank’s failure to honor a deposit is failure to
pay its obligation as debtor and not a breach of trust
arising from a depository’s failure to return the
subject matter of deposit
2. The relation created between the bank and
depositor is that of a creditor and debtor with the
bank as debtor and the depositor as creditor. 24
2.1 The relationship is fiduciary in nature.25 The
bank assumes to act as an agent for another and the
other reposes confidence in him, although there is no
written contract or nor contract at all.
18 People vs. Ong, 204 SCRA 942
19 BPI vs. Court of Appeals, 232 SCRA 302
20 Article 1962, Civil Code
21 Article 1933, Civil Code
22 Tan Tiong Tick vs. Americal Apothecaries, 65 Phil 417
23 Guingona vs. City Fiscal, 128 SCRA 577
24 Serrano vs. Court of Appeals, 96 SCRA 96
25 PBCom vs. Court of Appeals, 269 SCRA 695, BPI vs. IAC,
206 SCRA 408
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3. A bank should exercise its functions and treat
the accounts of their clients not only with the diligence
of a good father of a family but it should do so with the
highest degree of care considering the fiduciary nature
of their relationships with their depositors.26
3.1 The depositor expects the bank to treat his
account with utmost fidelity, whether such account
consists only of a few hundred pesos or millions. This
is especially true since the bank is engaged in business
impressed with public interest and it is its duty to
protect in return many clients, and depositors who
transact business with it.27
3.2 The bank is under obligation to treat the
accounts of its depositors with meticulous care always
having in mind the fiduciary nature of their
relationship.
3.3 However, the highest degree of diligence is
not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary
relationship with their depositors.28
3.4 In case of negligence in handling the deposit
of its clients on account of a bank officer’s gross
negligence which causes inconvenience, humiliation
and embarrassment to a depositor entitles the latter to
an award of damages.29 This notwithstanding the
absence of malice and bad faith as if the negligence,
nevertheless caused serious anxiety, embarrassment
and humiliation to the depositors.30 As long as the
bank has committed a serious mistake and the bank’s
negligence was a result of lack of due care and caution
required of managers and employees of a firm
engaged in so sensitive and demanding business as
banking, it is liable for moral damages.31
3.5 In view of the fiduciary nature of the
relationship of banks and its clients and because
banking is imbued with public interest, a bank was
also made liable for damages in the following
instances: (a) Failure to honor/pay a check of a
merchant/trader when the deposit is sufficient.32
Conversely, a bank is not liable for its refusal to pay a
check on account of insufficient funds,
notwithstanding the fact that a deposit may be made
later in the day. Before a depositor may maintain a
suit to recover a specific amount from his bank, he
must first show that he had on deposit sufficient
deposits to meet his demand. (b) When a bank teller
validates an incomplete duplicate deposit slip that
lacks the name of the account holder. 33 (c) When the
deposit of PPH 31,500.00 to cover six postdated
checks was not credited to the account of the
depositor because of the omission of one “zero” in the
account number.34 (d) The bank allowed an impostor
26 BPI vs. Court of Appeals, 326 SCRA 641
27 Citytrust Banking vs. IAC, 232 SCRA 559
28 Reyes vs. Court of Appeals, GR No. 118492, August 15,
2001
29 Go vs. IAC, 197 SCRA 22
30 BPI vs. IAC, 206 SCRA 408
31 Prudential Bank vs. Court of Appeals, 328 SCRA 264
32 Moran vs. Court of Appeals, 230 SCRA 799
33 Philbank vs. Court of Appeals, 269 SCRA 695
34 Citytrust vs. IAC, 232 SCRA 559
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 GREEN NOTES IN COMMERCIAL LAW
to negotiate treasury checks.35 (e) The new
accounts teller erroneously used the old account of a
depositor instead of the newly opened joined account
of the depositor and his spouse, leading to the
dishonor of two checks issued by the depositor.36
3.6 The defense of diligence in the selection and
supervision of employees is not a valid defense to
escape or at least mitigate a bank’s liability. A bank’s
liability is not merely vicarious but primary; the
defense of exercise of due diligence in the selection
and supervision of its employees is of no moment. By
the very nature of the work of banks, the degree of
responsibility, care and trustworthiness expected of
their employees and officials is far greater than those
of ordinary clerks and employees. Banks are expected
to exercise the highest degree of diligence in the
selection and supervision of their employees.37
3.7 Malice and bad faith need not be proven
sufficiently to make a bank liable for moral damages
due to the error or negligence of a bank employee as
long as the bank has committed a serious mistake and
the bank’s negligence was a result of lack of due care
and caution required of managers and employees of a
firm engaged in so sensitive and demanding business
as banking, it is liable for moral damages. 38
4. A bank cannot prohibit a borrower from
prepaying his loan as a borrower may at any time
prior to the agreed maturity date prepay, in whole or
in part, the unpaid balance of any bank loan and other
credit accommodation, subject to such reasonable
terms and conditions (such as the payment of a
prepayment fee) as may be agreed upon between the
bank and borrower.
PDIC
1. The Philippine Deposit Insurance Corporation
Act created the Philippine Deposit Insurance
Corporation which is a government corporation
promoting and safeguarding the interests of the
depositing public by providing permanent and
continuing insurance coverage on all insured deposits.
2. It insures the deposit liability of all banks to a
maximum deposit insurance coverage (MDIC) of
P500,000 per depositor in consideration of a premium
paid by the bank to the said corporation.(As per RA
9576)
3. The risk insured against is the closure of a
bank.
3.1. The nature of the coverage is compulsory as
the law provides that the deposit liabilities of any bank
or banking institution which is engaged in the
business of receiving deposits or which thereafter may
35 Go vs. IAC, 197 SCRA 22
36 BPI vs. IAC, 206 SCRA 408
37 PCIBank vs. Court of Appeals, 350 SCRA 446
38 Prudential Bank vs. Court of Appeals, 328 SCRA 264
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engage in the business or receiving deposits, shall be
insured with PDIC.
3.2 Deposits that are covered are savings
accounts, current account, time deposits and deposits
in acceptable foreign currencies pursuant to Foreign
Currency Deposit Act.
3.3 Exempted though from the coverage of the
law are trust funds as it was was expressly excluded
from the term “deposit” under R.A. 7400 and money
market placement as it is not included in the term
“deposit”
DETERMINATION OF THE AMOUNT DUE THE
DEPOSITOR
1. Insured deposits under the law means the net
amount due the depositor for any deposits in the
insured bank after deducting any offsets but should
not exceed PHP 500,000.00.
2. Hence, if a depositor has two or more
accounts maintained in the same right and capacity,
the coverage of PHP 500,000.00 shall be held to apply
to the sum of all such accounts.
3. A joint account (whether “and/or, “or”, “and”
shall be insured separately from any individual-owned
account. If held by a juridical person or entity with a
natural person, the account shall be presumed to
belong to the juridical person.
3.1 Accounts under joint ownership is considered
equally shared among co-depositors unless otherwise
indicated in the deposit document.
TRUTH IN LENDING
Declared Policy of the State
1. The law, which is to be implemented by the
Monetary Board of the Bangko Sentral ng Pilipinas
declares that it is the policy of the state to protect its
citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of such
cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.
2. Specifically, it: (a) aims to protect a debtor
from the effects of misrepresentation or concealment
(b) permits him to fully appreciate and evaluate the
real cost of his borrowing (c) avoid the circumvention
of usury laws
Coverage of the Law
1. As used in the law, the term “credit” means:
(a) loan, mortgage, deed of trust; advance or
discount (b) conditional sales contract (c)contract
to sell or contract of sale of property or services
(d)rental-purchase contract (e)contract for hire,
bailment or leasing of property (f) option, demand,
lien, pledge or other claim against or for the delivery
of property or money (g)purchase of acquisition of any
credit upon security of any obligation arising out of
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 GREEN NOTES IN COMMERCIAL LAW
any of the above (h) any transaction with similar
purpose
2. The provisions of the law apply to creditors,
who is defined by law as: any person engaged in the
business of extending credit, including any person
who as a regular business practice makes loans or sells
or rents property or services on a time, credit or
installment basis either as principal or agent, who
requires as an incident to the extension of credit the
payment of a finance charge.
2.1 The application of the law is compulsory for
(a) banks (b) non-bank financial intermediaries
authorized to engage in quasi-banking are required
strictly to adhere to the law. Banks and non-bank
financial intermediaries authorized to engage in quasi-
banking functions are required to strictly adhere to
the provisions of the “Truth in Lending Act” and shall
make the true and effective cost of borrowing an
integral part of every loan contract (Consolidated vs.
CA, 246 SCRA 195)
3. The provisions of the law does not apply to
the following credit transactions:
a. those that do not involve the payment of any
finance charge by the debtor; and
b. those in which the debtor is the one specifying
a definite and fixed set of credit terms such as bank
deposits, insurance contracts, sale of bonds, etc.
3.1 Finance charges (Sec. 3[3]; Sec. 2[h], CB
Circular 158) are the amounts to be paid by the debtor
incident to the extension of credit such as interests,
discounts, collection fees, credit investigation fees and
attorney’s fees.
3.2 Non Finance charges (Sec. 2[f], CB Circular
158) are the amounts advanced by a creditor for items
normally associated with the ownership of property or
the availment of the services purchased which are not
incident to the extension of credit. For example, when
a debtor purchases a car on credit, the creditor may
advance the insurance premium as well as the
registration fee for the account of the debtor.
4. To accomplish the policy of the law to protect
citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of such
cost, a creditor or lender is obliged to provide the
debtor or borrower with a statement in writing, before
perfection of the contract containing the following: (a)
Cash price of property or service to be
acquired (b) Amount credited as down payment
and or trade-in(c) Charges paid or to be paid
not incident to the extension of credit (d) Charges
paid or to be paid not incident to the extension of
credit (e)Total amount to be financed (f) Finance
charge; and (g)Percentage of finance charge to total
amount to be financed.
4.1 The disclosure must be made in a separate
document, and not one that is merely incorporated in
a document by the statement that the transaction
subjects the debtor to a finance charge.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
4.2 The failure to comply does not render the
principal contract invalid or unenforceable, but would
entitle the debtor to recover any interest payment
made.
4.3 A violation of the law may subject the violator
to: (a) a civil action brought within one year to recover
from the seller/lender an amount of P100.00 or
double the finance charge imposed, whichever is
greater, but not to exceed P2,000.00, plus attorney’s
fees and costs, and (b) a criminal action against the
seller/lender who if convicted may be imposed a fine
ranging from P1,000 to P5,000 or imprisoned from 6
months to 1 year or both. Note that a final judgment
that may be rendered in any criminal proceeding to
the effect that the defendant has willfully violated the
act shall be prima facie evidence against such
defendant in an action or proceeding brought by any
other party against such defendant under the Act as to
all matters respecting which said judgment would be
estoppel as between the parties thereto.
THE ‘INSIDE STORY’ ON THE
‘SECRECY OF BANK DEPOSITS’ LAW
Atty. Renato S. Rondez
Partner, Law Firm of Rondez & Partners
Professor, College of Law
University of the Cordilleras
________________________________
QUESTIONS AND ANSWERS ON SECRECY OF BANK
DEPOSITS-RA 1405 AND RELATED LAWS
1) What is the purpose of the law?
The purpose of the law is to encourage people
to deposit their money in banks and, thereby,
discourage private hoarding so that the banks may
lend out the money and assist in the economic
development of the country39.
2) What does the law prohibit?
(a) The examination and inquiry or looking
into all deposits of whatever nature with banks or
banking institutions in the Philippines including
investments in bonds issued by the Government or its
political subdivisions and instrumentalities by any
person, government official, bureau or office40; and
(b) The disclosure by any official or employee
of any banking institution to any unauthorized person
of any information concerning said deposits.
Note that the law is applicable to trust
accounts or an account that has been set up as an inter
vivos or testamentary trust as Section 2 has been held
to cover not only money that has been deposited but
also to money which has been invested although no
39 Sec. 1, RA 1405.
40 Sec. 2, RA 1405.
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 GREEN NOTES IN COMMERCIAL LAW
creditor-debtor relationship is created between the
bank and the client.41
The law does not apply to money market
placements as they are not deposits, rather, they are
trades in short term negotiable instruments such as
securities or treasury bills.
3) What disclosures or inquiries into deposits are
not prohibited?
a) Upon written permission of the depositor;
b) In cases of impeachment;
c) Upon order of a competent court in cases of
bribery or dereliction of duty of public
officials;
d) In cases where the money deposited or
invested is the subject matter of litigation42;
e) Upon order of the court or subpoena issued
by the Ombudsman in cases of unexplained
wealth43; This is subject to the following
requisites: (1) only an in-camera inspection is
allowed (2) there must be a pending case
before a court of competent jurisdiction (3)
account is clearly identified (4) examination is
limited to account subject of the court case,
and (5) bank personnel and the account
holder must be notified to be present during
the inspection.
f) Upon order of the Commissioner of Internal
Revenue in respect of the bank deposit’s of a
decedent for the purpose of determining such
decedent’s gross estate44;
g) Upon order of the Commissioner of Internal
Revenue when a taxpayer files an application
to compromise his tax liability by reason of
financial incapacity45;
h) Upon examination made in the course of a
special or general audit of a bank as
authorized by the Monetary Board after being
satisfied that there is reasonable ground to
believe that a bank fraud or irregularity is
being committed and it has become necessary
to look into the deposit to establish the same;
i) Upon examination of a bank’s independent
auditor, the result of which are for the
exclusive use of the bank;
j) In case of suspicious transactions under the
Anti-Money Laundering Law46;
k) Under the Anti-Money Laundering Law where
banks are required to report to the Anti-
Money Laundering Council any transaction in
cash or other equivalent monetary instrument
in excess of P500,000 in any one day47;
l) Also under the Money-Laundering Law, the
Anti-Money Laundering Council may inquire
into a deposit or investment maintained with
any financial institution upon order of a
competent court, in cases of violation of the
41 Ejercito vs. Sandiganbayan, GR Nos. 157294-95, November
30, 2006
42 Sec. 2, RA 1405.
43 Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA 91, Marquez
vs. Disierto, 399 SCRA 772
44 Sec. 6, NIRC.
45 Sec. 6, NIRC.
46 Sec. 3 (b-1) , RA 9160.
47 Sec. 3 (b), RA 9160.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
Act, when there is probable cause that the
deposit or investment is in any way related to
an unlawful activity as defined in the Act or a
money laundering offense under the Act48;
m) When a director, officer, stockholder, and
related interest (DOSRI) obtains a loan from
his bank or its subsidiaries, or with related
controlling interests of more than 5% of the
capital or surplus of the bank, it shall
constitute a waiver of secrecy of all his
deposits of whatever nature in all banks in the
Philippines; and
n) Under the Unclaimed Balances Law49.
o) The examination of a bank account under
Section 10, Rule 57 in relation to the
examination of a party whose property is
attached and persons indebted to a defendant
or controlling his property.50
4) Who are primarily liable for violations of the
law?
The persons primarily liable for a violation of
the law would be a bank employee or officer and the
person, government officer, agency or office looking
into the deposit when not authorized by any of the
exceptions to the law.
Note also, that since investigations by the
Monetary Board and the Bureau of Internal Revenue
are confidential in nature, any disclosure in violation
of the confidentiality will create liability.
5) Will the garnishment of a bank deposit violate
the law?
No, garnishment of a bank deposit will not
violate the law. If the existence of the deposit is
disclosed, the same is considered as purely incidental
to the execution process51.
What is to be disclosed only is the existence of
the deposit, particularly whether or not it is sufficient
to satisfy the garnishment. Hence, a disclosure of the
balance may constitute a violation of the law.
6) Is a depositor with a safety deposit box
protected by the law?
No, the deposits made by a depositor in a
safety deposit box are not the deposits contemplated
by the law as the bank is never in possession or
control of the contents of the safety deposit box in this
instance, the depositor is merely leasing the deposit
box from the bank.
Prevailing jurisprudence is that the ensuing
relationship between the bank renting out the safety
deposit box and the client with respect to the contents
of the box is that of bailor-bailee, the bailment being
for hire and mutual benefit. The bank would be liable
for loss of the contents of the box if it is guilty of fraud,
48 Sec. 1, RA 9160.
49 RA 3936.
50 Onate vs. Abrogar, 230 SCRA 181
51 China Banking Corp. vs Court of Appeals, 193 SCRA 454
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 GREEN NOTES IN COMMERCIAL LAW
negligence or delay or contravention of the tenor of
the agreement.52
NOTE: Without order of a court of competent
jurisdiction, disclose to any authorized person any
information relative to the funds or properties in the
custody of the bank belonging to private individuals,
corporations, or any other entity; Provided, that with
respect to bank deposits, the provisions of existing
laws shall prevail53.
7) Would the examination of the bank deposits of
another person in connection with an inquiry into
illegally acquired property of the defendant in anti-
graft cases violate the law?
The permitted inquiry into illegally acquired
property in anti-graft cases extends to instances
where such property is concealed by being held by or
recorded in the name of other persons.
8) In a case where the money deposited or
invested is the subject matter of the litigation,
could an inquiry into the whereabouts of the
amount extend to the deposits held in the name of
persons other that the one responsible?
Even in cases not involving prosecution under
Anti-Graft and Corrupt Practices Act, an inquiry into
the whereabouts of the amount converted necessarily
extends to whatever is concealed, held or recorded in
the name of persons other than the one responsible
inasmuch as the case is aimed at recovering the
amount converted.
9) Are foreign currency deposits covered by the
law?
While the law does not cover foreign currency
deposits, they however are absolutely confidential and
cannot be disclosed pursuant to Republic Act No.
6426, otherwise known as the Foreign Currency
Deposit Act, the only exception to disclosure being
upon the written consent of the depositor54.
An additional exemption has been provided
by the Anti Money Laundering Law when it has been
established that there is probable cause that the
deposits involved are in any way related to the offense
of money laundering.55
10) Will an unlawful examination of a bank
account render the information obtained
inadmissible?
There is nothing in the law that provides that
an unlawful examination shall render the evidence
obtained therefrom to be inadmissible.
11) What is the penalty for a violation of the law?
52 Sia vs. Court of Appeals, 222 SCRA 24
53 Sec. 55.1(b), RA 8791.
54 Sec. 8, RA 6426.
55 Sec. 11, RA 9160
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
Upon conviction, a violator may be sentenced
to imprisonment of not more than 5 years of a fine of
not more than P200,000.00, or both at the discretion
of the court.
INTELLECTUAL PROPERTY CODE
R.A. No. 8293
INTELLECTUAL PROPERTIES
Those property rights which result from the physical
manifestation of an original thought.
(Ballantine’s Law Dictionary)
Purpose: to strengthen the intellectual and industrial
property system in the Philippines as mandated by the
country’s accession to the Agreement establishing the
World Trade Organization (Mirpuri vs. CA GR no
114508)
COVERAGE -intellectual property rights consists of:
a) Copyrights and related rights;
b) Trademarks and service marks;
c) Geographic indications;
d) Industrial designs;
e) Patents;
f) Layout-designs (Topographies) of Integrated
Circuits; and
g) Protection of Undisclosed Information.
Section 7 of Rep. Act No. 9502 (Universally Accessible
Cheaper and Quality Medicines Act of 2008) amends
Section 72 of the Intellectual Property Code in that the
latter law unequivocally grants third persons the right
to import drugs or medicines whose patent were
registered in the Philippines by the owner of the
product (Roma Drug vs. RTC of Guagaua, Pampanga GR
No. 149907)
INTERNATIONAL CONVENTION AND RECIPROCITY
-any person who is a national or who is
domiciled or has a real and effective industrial
establishment in a country which is: a.) a party to any
convention, treaty, or agreement relating to
intellectual property rights or the repression of unfair
competition to which the Philippines is also a party, or
b.) extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to benefits to the
extent necessary to give effect to any provision of such
convention, treaty, or reciprocal law, in addition to the
rights to which any owner of an intellectual property
right is otherwise provided by law. (Sec. 3)
REVERSE RECIPROCITY OF FOREIGN LAWS
– makes reciprocally enforceable on nationals
of a foreign state within Philippine jurisdiction all
conditions, restrictions, limitations, diminutions,
requirements or penalties that may be imposed by
such foreign state on a Filipino national seeking
intellectual property protection in that country.
(Section 231)
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 GREEN NOTES IN COMMERCIAL LAW
ADMINISTRATIVE PENALTIES IMPOSED FOR
VIOLATIONS OF LAWS INVOLVING IPR
a) Cease and desist order (CDO);
b) Acceptance of voluntary assurance compliance
(VAC) or voluntary assurance of discontinuance
(VAD);
c) Condemnation or seizure of products subject of
the offense;
d) Forfeiture of properties used in the commission of
the offense;
e) Imposition of administrative fines;
f) Cancellation of permit, license, authority or
registration;
g) Withholding of permit, license, authority or
registration;
h) Assessment of damages;
- Must be recovered within four (4) years from
the time the cause of action arose (Sec. 226)
i) Censure;
j) Analogous penalties or sanctions (Sec. 10.2 [b])
ELEMENTS OF UNFAIR COMPETITION
(1) confusing similarity in the general appearance
of the goods; and
(2) intent to deceive the public and defraud a
competitor.
The confusing similarity may or may not result from
similarity in the marks, but may result from other
external factors in the packaging or presentation of the
goods. The intent to deceive and defraud may be
inferred from the similarity of the appearance of the
goods as offered for sale to the public. Actual
fraudulent intent need not be shown (In-N-Out Burger
vs. Sehwani GR No. 179127)
LAW ON PATENTS
PATENT – an exclusive right acquired over an
invention, to sell, use, and make the same whether for
commerce or industry(2005 2006 bar exams)
PATENTABLE INVENTIONS
-any technical solution of a problem in any
field of human activity which is (a.)NEW(NOVELTY),
involves an (b).INVENTIVE STEP and is
(c).INDUSTRIALLY APPLICABLE shall be patentable.
(Elidad Kho vs. CA, March 19, 2002) The patentable
invention may be, or may relate to, a product, or
process, or an improvement of any of the foregoing.
(Sec. 21)
Novelty – that which does not form part of a
prior art. (Section 23)
Prior Arts:
a. those previously available to the public
b. that which forms part of an application
provided that:
i. the inventors or applicants are not the same
ii. The contents of the application are published
in accordance with the requirements of
patent application rules.
iii. The filing date of the prior art is earlier.
Inventiveness/Inventive Step
-that which is not obvious to a person skilled
in the art of the time of the filing date or priority date
of the application claiming the invention. (Sec. 26)
Industrial Applicability
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
-an invention that can be produced and used in any
industry. (Sec. 27)
NON-PATENTABLE INVENTIONS
a) Discoveries, Scientific Theories and
Mathematical Methods;
b) Schemes, rules and methods of performing
mental acts, playing games or doing business,
and programs for computer;
c) Methods for treatment of the human or animal
body by surgery or therapy and diagnostic
methods practiced on the human or animal
body;
d) Plant varieties or animal breeds of essentially
biological process for the production of plants
or animals;
e) Aesthetic creations;
f) Anything which is contrary to public order or
morality (Sec. 22)
RIGHT TO A PATENT
The right to a patent belongs:
a) to the inventor, his heirs, or assigns
b) when 2 or more persons have made the
invention jointly – to them jointly
c) if two (2) or more persons have made the
invention separately and independently of
each other – to the person who filed an
application for such invention (FIRST TO
FILE RULE)
d) where 2 or more applications are filed for the
same invention – to the applicant who has the
earliest filing date or the earliest priority date
(FIRST TO FILE RULE) (Sec. 29)
e) In case of inventions created pursuant to a
commission – to the person who commissions
the work UNLESS agreed otherwise.
f) If made by an employee, the patent shall belong
to:
 the employee – if invention not part of his
regular duties even if he uses the time,
facilities and materials of the employer;
OR
 The employer – if the invention is the
result of the performance of his regularly
assigned duties unless agreed otherwise.
Right to Priority
-an application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be
considered as filed as of the date of filing the foreign
application
Requisites:
(a) The local application expressly claims priority;
(b) It is filed within twelve (12) months from the
date the earliest foreign application was filed;
(c) A certified copy of the foreign application
together with an English translation is filed within
six (6) months from the date of filing in the
Philippines. (Sec. 15, R.A. No. 165a)
RIGHTS ACQUIRED BY THE PATENTEE
a. to restrain, prohibit and prevent any
unauthorized person or entity from making, using,
offering for sale, selling or importing a patented
product;
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 GREEN NOTES IN COMMERCIAL LAW
b. to restrain, prevent or prohibit any
unauthorized person or entity from using the
process, and from manufacturing, dealing in, using
or offering for sale, or importing any product
obtained directly or indirectly from a patented
process;
c. to assign, or transfer by succession the patent,
and to conclude licensing contracts for the same
UNITY OF INVENTION
-every application for patent registration
must contain an application over a single invention or
several inventions but must form part of a single
general inventive concept
Utility Models
-models of implement or tools of any
industrial product even if not possessed of the quality
of invention but which is of “practical utility”
Industrial Design
-any composition of lines or colors or any
three-dimensional form, whether or not associated
with lines or colors provided that such composition or
form gives a special appearance to and can serve as
pattern for an industrial product or handicraft.
CANCELLATION OF PATENTS
1. Who may file?
 any person
 IPO motu proprio
2. Grounds
a) That the patent is invalid (Sec. 81);
b) If the invention is not new or patentable;
c) Unclear and incomplete application;
d) Contrary to public order or morality.
Failure to make payments of annual fees
or dues
3. Where to file?
 BLA – if in violation of IPC (administrative)
 RTC – otherwise
INFRINGEMENT
-the making, using, offering for sale, selling or
importing a patented product or a product obtained
directly or indirectly from a patented process or the
use of a patented process without the authorization of
the patentee. (Sec. 76)
Test of Patent Infringement
1) Literal Infringement – resort is had to the
“words” of the claim.
2) Doctrine of Equivalents – if two devices do
the same work in substantially the same way
and produce substantially the same result, they
are the same even though they differ in name,
form, or shape.
REMEDIES IN CASE OF INFRINGEMENT
A) File civil case
- with the appropriate Regional Trial Court to
recover from infringer the damages sustained by
the former, plus attorney’s fees and other
litigation expenses, and to secure an injunction for
the protection of his rights.
B) File criminal case
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
-within 3 years from date of commission of
the crime for repetition of infringement, without
prejudice to the right for damages. (Sec. 84)
1995 & 2004 BAR
Q - X Corporation commissioned W to paint the Mayon
Volcano on the lobby of the new building of X Corp. for
a price of P1M. Who owns the painting? Who owns the
copyright of the painting?
A - X Corporation owns the painting but the copyright
belongs to W unless there is a written stipulation to
the contrary. (Sec.178.4)
While the Rome Convention gives broadcasting
organizations the right to authorize or prohibit the
rebroadcasting of its broadcast, however, this
protection does not extend to cable retransmission
(ABS-CBN vs. PMSI GR Nos. 175769-70)
LAW ON TRADEMARKS
Trademark – anything which is adopted and used to
identify the source of origin of goods, and which is
capable of distinguishing them from goods emanating
from a competitor
-any word, name symbol or devise adopted
and used by a manufacturer or merchant to identify
his goods and distinguish them from those
manufactured and sold by other (Society des Products
Nestle vs. CA April 4, 2001)
Service Mark – distinguishes the services of an
enterprise from the service of other enterprises.
Collective Mark – any visible sign designated as such
in the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods and
services of different enterprises which use the sign
under the control of the registered owner of the
collective mark (Sec. 121.2)
Trade Name – the person (whether natural or
juridical) who does business and produces the goods
or the services is designated by a trade name.
-there is no need to register trade names in order to
secure protection for them.
Trade Dress– involves the total image of a product,
including such features as size, shape, color or color
combinations, texture, and/or graphics.
HOW MARKS ARE ACQUIRED
-Under RA 8293, the rights in a mark shall be
acquired through registration made validly in
accordance with its provisions. (Sec. 122)
-when a person has identified in the mind of the
public the goods he manufactures or deals in his
business or services from those of others, such a
person has a property right in the goodwill of said
goods or services which will be protected in the same
manner as other property rights (Sec. 168.1)
RIGHTS CONFERRED
-to prevent all third parties not having the
owner’s consent from using in the course of trade
identical or similar signs or containers for goods or
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 GREEN NOTES IN COMMERCIAL LAW
services which are identical or similar to those in
respect of which the trademark is registered where
such use would result in a likelihood of confusion.
(Sec. 147)
NON-REGISTRABLE TRADEMARKS, TRADE NAMES
AND SERVICE MARK
a) Immoral, deceptive or scandalous matter, or
matter which may disparage or falsely suggest a
connection with persons, living or dead,
institutions, beliefs, or national symbols, or bring
them into contempt or disrepute;
b) The flag or coat of arms or other insignia of
the Philippines or its political subdivisions, or of
any foreign nation, or any simulation thereof;
c) A name, portrait or signature identifying a
particular living individual except by his written
consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the
life of his widow, if any, except by written consent
of the window;
d) Is identical with a registered mark
belonging to a different proprietor or a mark with
an earlier filing or priority date, in respect of:
(i) The same goods or services, or
(ii)Closely related goods or services, or
(iii) If it nearly resembles such a mark as
to be likely to deceive or cause
confusion;
e) Be identical with or confusingly similar to an
internationally well-known mark, whether or not
registered in the Philippines, provided that:
i. If the internationally well-known mark is
not registered in the Philippines, the
application for registration of the mark can be
rejected only if the goods or services specified
in the application are similar to those of the
internationally well-known mark;
ii. If the internationally well-known mark is
registered in the Philippines, the application
for registration of the mark can be refused
even if the goods or services specified in the
application are not identical or similar to
those of the internationally well-known mark.
f) Is likely to mislead the public;
g) Generic signs for goods or services;
h) Customary in everyday language or in
established trade practice;
i) Designate the kind, quality, quantity, intended
purpose, value, geographical origin, time or
production of the goods or services;
j) Shapes necessitated by technical factors;
k) Color alone, unless defined by a given form; or
l) Is contrary to public order or morality
FILING DATE OF AN APPLICATION
-The filing date of an application shall be the
date on which the office received the following
indications and elements in English or Filipino:
a) An express or implicit indication that the
registration of a mark is sought;
b) Indications sufficient to contact the
applicant or his representative, if any;
c) A reproduction of the mark where
registration is sought; and
d) The list of the goods or services for which
the registration is sought. (Sec. 127.1)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
 NO filing date shall be accorded until the
required fee is paid (Sec. 127.2)
CANCELLATION OF TRADEMARK OR TRADENAME
1. Who may file?
- any person who believes that he is and will be
damaged by the registration of a mark
2. Where to file?
- BLA
3. Grounds:
a) Mark becomes generic for goods for
which it is registered;
b) Abandonment of the mark;
c) Registration obtained fraudulently or
contrary to provisions of RA 8293;
d) Mark used by, or with permission of,
registrant;
e) Non-use within the Philippines for 3
uninterrupted years or longer.
-may be excused if caused by
circumstances arising independently
of the will of the trademark owner,
such as military coup, or political
changes that impede commerce
DOCTRINE OF SECONDARY MEANING
- When a mark has become distinctive of the
applicant’s goods in commerce and, in the mind of the
public, indicates a single source of consumers, it may
be registered.
WHAT CONSTITUTES AN INFRINGEMENT
-Under RA 8293, any person shall, without the
consent of the owner of the registered mark:
1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of a
registered mark or the same container or a
dominant feature thereof in connection with
the sale, offering for sale, distribution,
advertising any goods or services including
other preparatory steps necessary to carry
out the sale of any goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive; or
2) Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such reproduction,
counterfeit, copy, or colorable imitation to
labels, signs, prints, packages, wrappers,
receptacles, or advertisements intended to be
used in commerce upon or in connection with
the sale, offering for sale, distribution, or
advertising of goods or services on, or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive, shall be liable for infringement. (Sec.
155)
TEST OF TRADEMARK INFRINGEMENT
1) Dominancy Test – consists in seeking out the
main, essential or dominant features of a
mark.
2) Holistic Test – takes stock of the other
features of a mark, taking into consideration
the entirety of the marks.
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 GREEN NOTES IN COMMERCIAL LAW
DIFFERENTIATED FROM UNFAIR COMPETITION
1) Cause of action: in infringement, the
cause of action is the unauthorized use of
a registered trademark; in unfair
competition, it is the passing off of one’s
goods as those of another merchant.
2) Fraudulent intent is not necessary in
infringement, but necessary in UC.
3) Registration of trademarks: in
infringement, it is a pre-requisite; in UC, it
is not required.
4) Class of goods involved: in infringement,
the goods must be of similar class; in UC,
the goods need not be of the same class.
 infringement is a form of unfair
competition
REMEDIES AVAILABLE IN CASE OF INFRINGEMENT
OF A REGISTERED MARK
a) Sue for damages (Sec. 156.1);
b) Have the infringing goods impounded
(Sec. 156.2);
c) Ask for double damages (Sec. 156.3)
d) Ask for injunction (156.4)
e) Have the infringing goods disposed of
outside the channels of commerce (Sec.
157.1)
f) Have the infringing goods destroyed (Sec.
157.1)
g) File criminal action (Sec. 170);
h) Administrative Sanctions
UNFAIR COMPETITION
-any person who shall employ deception or
any other means contrary to good faith by which he
shall pass off the goods manufactured by him or in
which he deals, or his business, or services for those of
the one having established such goodwill, or who shall
commit any acts calculated to produce said result,
shall be guilty of unfair competition.
How Committed
a) Making one’s goods appear as the goods of
another;
b) Use of artifice or device to induce the false
belief that one’s goods are those of another;
c) False statements in the course of trade; or
d) Any act contrary to good faith calculated to
discredit another’s goods
TEST OF UNFAIR COMPETITION
-The test is whether certain goods have been
clothed with an appearance likely to deceive the
ordinary purchaser exercising ordinary care.
REMEDIES IN CASE OF UNFAIR COMPETITION
a.) Damages which may either be:
 reasonable profit which would have been
realized, or
 actual profits collected by the defendant, or
 a certain percentage over the gross sales of
defendant in case of the measure of damages
cannot be readily ascertained;
b.) Damages may be doubled in cases where actual
intent to mislead the public or to defraud the
complaint is shown;
c.) Impounding of sales invoices and other
documents evidencing sales;
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
d.) Injunction
e.) Destruction of goods found to be infringing,
and all paraphernalia.
While the Constitution does not encourage the
unlimited entry of foreign goods, services and
investments into the country, it does not prohibit them
either. In fact, it allows an exchange on the basis of
equality and reciprocity, frowning only on foreign
competition that is unfair.
………GATT itself has provided built-in protection from
unfair foreign competition and trade practices
including anti-dumping measures, countervailing
measures and safeguards against import
surges. Where local businesses are jeopardized by
unfair foreign competition, the Philippines can avail of
these measures. There is hardly therefore any basis
for the statement that under the WTO, local industries
and enterprises will all be wiped out and that Filipinos
will be deprived of control of the economy (Tañada vs.
Angara GR No. 118295)
LAW ON COPYRIGHT
COPYRIGHT – system of legal protection an author
enjoys in the form of expression of
ideas(2004,2006,2007,2009 bar exams)
 Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as their content, quality or
purpose (Sec. 172.2)
 Protection extends only to the expression of the
idea, not to the idea itself or to any procedure,
system, method or operation, concept or
principle, discovery or mere data.
 The copyright is distinct from property in the
material object subject to it.
 Copyright, in the strict sense, is purely statutory
right. Being mere statutory right, it is limited to
what the statute confers. It may be obtained and
enjoyed only with respect to the subjects and by
the persons, and on terms and conditions
specified in the statute. Accordingly, it can cover
only works falling within the statutory
enumeration or description (Pearl & Dean Vs
Shoemart GR 148222 August 15, 2003).
CREATION OF A WORK
A copyright work is created when the two (2)
requirements are met:
1) Originality – does not mean novelty or
ingenuity, neither uniqueness nor creativity. It
simply means that the work “owes its origin to the
author”
2) Expression – there must be “fixation.” To be
“fixed”, a work must be embodied in a medium
sufficiently permanent or stable, to permit it to be
perceived, reproduced, or otherwise
communicated for a period of more than
transitory duration.
-if it is not required that the medium be
visible as long as there is a possibility of retrieval,
then there is fixation
-it is fixation that defines the time from when
copyright subsists. Before fixation, there can be no
infringement.
WORKS PROTECTED BY COPYRIGHT
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 GREEN NOTES IN COMMERCIAL LAW
A. Original Work - Literary and artistic works
which include in particular:
a) Books, pamphlets, articles and other writings
b) Periodicals and newspapers
c) Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form
d) Letters
e) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in
dumb shows
f) Musical compositions, with or without words
g) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works of
art
h) Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art.
i) Illustrations, maps, plans, sketches, charts and
three-dimensional works relative to
geography, topography, architecture or
science
j) Drawings or plastic works of a scientific or
technical character
k) Photographic works including works
produced by a process analogous to
photography; lantern slides
l) Audiovisual works and cinematographic or
any process for making audio-visual
recordings
m) Pictorial illustrations and advertisements
n) Computer programs
o) Other literary, scholarly, scientific and artistic
works (Sec. 172)
B. Derivative Works –
a) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary works
b) Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. (Sec. 173)
WORKS NOT PROTECTED
1) Any idea, procedure, system, method or
operation, concept, principle, discovery or
mere data as such, even if expressed,
explained, illustrated, or embodied in a work;
2) News of the day and mere items of press
information;
3) Any official text of a legislative, administrative
or legal nature, as well as any official
translation thereof. (Sec. 175)
4) Any work of the Government of the
Philippines. (Sec. 176)
-prior approval of the government
agency or office wherein the work is created
shall be necessary for exploitation of such
work for profit. Such agency or office, may,
among other things, impose as a condition the
payment of royalties
5) Pleadings;
6) Decisions of courts and tribunals.
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
-this pertains to the “original
decisions” not to the SCRA published in
volumes since these are protected under
derivative works.
RIGHTS OF AN AUTHOR
A. Economic Rights (Sec. 177)
-exclusive right to carry out, authorize or
prevent the following acts
1. Reproduction of the work or substantial
portion of the work
2. Dramatization, translation, adaptation,
abridgement, arrangement or other
transformation of the work;
3. The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership;
4. Rental of the original or a copy of an
audiovisual or cinematographic work;
5. Public display of the original or copy of the
work;
6. Public performance of the work; and
7. Other communication to the public of the
work
B. Moral Rights (Sec. 193)
1) Right to require that the authorship of the
works be attributed to him,;
2) Right of alteration or non-publication
3) Right to preservation of integrity to object to
any distortion, mutilation or other
modification of, or other derogatory action in
relation to, his work which would be
prejudicial to his honor or reputation; and
4) Right not to be identified with work of others
or with distorted work.
Term of moral right
-lifetime of the author and 50 years after his
death
Waiver of moral right
1) by a written instrument (Sec. 195)
2) by contribution to a collective work
unless expressly reserved (Sec. 196)
PRINCIPLE OF AUTOMATIC PROTECTION
Under the Berne Convention, the enjoyment
and exercise of copyright, including moral rights, shall
not be the subject of any formality.
OWNERSHIP OF COPYRIGHT
1. Single creator –the author of the work, his
heirs or assigns.
2. Joint creation –the co-authors jointly as co-
owners. But if the work consists of identifiable
parts, the author of each part owns the part
that he has created.
3. Employee’s creation –the employee if the
creation is not part of his regular duties even
if he uses the time, facilities and materials of
the employer; otherwise it belongs to the
employer
4. Commissioned work –the person
commissioning but the copyright remains
with the creator unless there is a written
stipulation to the contrary.
5. Cinematographic works – the producer has
copyright for purposes of exhibition; for all
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 GREEN NOTES IN COMMERCIAL LAW
other purposes, the producer, the author of
the scenario, the composer, the film director,
the author of the work are the creators.
6. Anonymous and pseudonymous works – the
publishers shall be deemed the representative
of the author unless:
a. the contrary appears
b. the pseudonyms or adopted name leaves
no doubt as to the author’s identity or
c. If the author discloses his identity
7. Collective works – the contributor is deemed
to have waived his right unless he expressly
reserves it. (Sec. 196)
Collective Work – a work created by two or
more persons at the initiative and under the
direction of another with the understanding
that it will be disclosed by the latter under his
own name and that the contributions of
natural persons will not be identified. (Sec.
171.2)
8. In case of transfers, the transferee shall own
one or more or all the economic rights
transferred provided:
a. The assignment, if inter vivos, be in writing
b. The assignment be filed with the National
Library upon payment of the prescribed fee.
LIMITATIONS TO THE RIGHTS ON COPYRIGHT
1) Private performance, private and personal
use – applicable only “when a work has been
lawfully made accessible to the public.”
Personal Use
-making a single reproduction, adaptation,
arrangement or other transformation of another’s
work exclusively for one’s own individual use
Private Use
-making a reproduction, adaptation or other
transformation of it, in a single person as in the
case of “personal use” but also for a common
purpose by a specific circle of persons only.
2) Fair Use of a Copyrighted Work
Fair Use - a privilege in persons other than
the owner of the copyright to use the copyrighted
material in a reasonable manner without its
consent, notwithstanding the monopoly granted to
the owner by the copyright.
-the doctrine of fair use is meant to balance
the monopolies enjoyed by the copyright owner
with interests of the public and of society.
CRITERIA TO DETERMINE WHETHER USE IS FAIR
OR NOT
a) Purpose and the character of the use
b) Nature of the copyrighted work
c) Amount and substantially of the portions used
d) Effect of the use upon the potential market of
the copyrighted work (Sec. 185)
THE “FAIR-USES” OF PROTECTED MATERIAL ARE
 Criticizing, commenting, and news reporting;
 Using for instructional purposes including
producing multiple copies of classroom use,
for scholarship, research and similar purposes
(Sec. 185)
3) Working of Architecture (Sec. 186)
BAR OPERATIONS 2011
Prepared by: ATTY. RENATO S. RONDEZ
-include the right to control the erection of
any building which reproduces the whole or a
substantial part of the work either in its
original or in any form recognizably derived
from the original; Provided, that the copyright
in any such work shall not include the right to
control the reconstruction, or rehabilitation in
the same style as the original of a building to
which that copyright relates
4) Reproduction of Published Work
-exclusively for research and private study.
5) Reprographic Reproduction by Libraries
-any library or archive whose activities are
not for profit may, without the authorization
of the author of copyright owner, make a
single copy of the work by reprographic
reproduction.
6) Reproduction of Computer Programs
-allowed on the ff. conditions:
a)only one copy is made;
b)lawful owner made the copy;
c)purpose of which the reproduction is made
is legal like:
 use to which the program is made
and for which it was purchased demand
the reproduction of a copy; or
 the reproduction of a copy is
necessary to guarantee against loss or
destruction (Sec. 189.1)
7) Importation for Personal Purposes
Requisites:
a) Copies of the work are not available in the
Philippines and:
i. not more than one copy at one time is
imported for strict individual use;
ii. importation is by authority and for the use
of Philippine Government; or
iii. religious, charitable, or educational society
imported not more than 3 copies per title
provided they are not for sale.
b) Copies form part of libraries and personal
baggage belonging to persons or families
arriving from foreign countries and are not
intended for sale: Provided, that such copies
do not exceed three (3). (Sec. 190)
REMEDIES IN CASE OF INFRINGEMENT
1) Injunction to prevent infringement
2) Damages assessed on the basis of the proof
alleged by the plaintiff of sales made by the
defendant of the infringing work minus
whatever costs the defendant may be able to
prove and appreciated by the court.
3) Delivery under oath of all implements
employed in the production of the infringing
products themselves and the infringing items,
for impounding or destruction as the court
may order.
4) Payment of moral and exemplary damages
under the discretion of court.
5) Criminal Action
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 GREEN NOTES IN COMMERCIAL LAW
Prepared by: ATTY. RENATO S. RONDEZ

If the containers originally conformed to the attorneys of the Judiciary. The person compiling shall
description contained in the certificate of submit to the Supreme Court Library a text-file
registration and it appears that they are the same digitized copy of the compilation;
containers being used by the other persons, the use d. The Court shall have the right to purchase copies
is illegal regardless of whether or not their of the compilation at cost, that is, by paying only the
distinctive name, mark or design is partly or entirely cost of reproducing the compilation, the cost of
erased therefrom. (Destileria Ayala, Inc. vs. Tan Tay installation, and the cost of any accompanying
& Co. GR No. l-48793) software license. Such copies shall be used exclusively
by Justices, Judges and court attorneys of the Judiciary
A.M. No. 04-7-06-SC and shall not be re-sold by the Court;
RE: CONDITIONS ON THE COMMERCIAL e. The compilation shall bear the notice “Compiled
EXPLOITATION .OF SUPREME COURT DECISIONS for sale to the public with the permission of the
RESOLUTION Supreme Court”;
a. The person compiling and selling the decisions f. These conditions apply to any updating of the
shall provide the Supreme Court Library twenty (20) compilation.
free copies of the compiled decisions in the format the
compilation is sold to the public;
b. If the compilation is in printed copies, the
Supreme Court Library shall have the right to digitize
the compilation for exclusive use for research
purposes by Justices, Judges and court attorneys of
the Judiciary;
c. If the compilation is in digitized format, the
Supreme Court Library shall have the right to make
available the digitized compilation for exclusive use
for research purposes by Justices, Judges and court

*******************************************************************

THE BARRISTERS’ CLUB OFFICERS:

Virgel Amor Vallejos
(Chancellor)
Seychelles June M. Doringo
(Secretary)
Janilet Mishelle R. Carillo
(Treasurer)
Art Miguel B. Sanlao and Angelito Velasquez Jr.
(Business Managers)
Rachelle May Gallego
(PRO)
Paul Dean Mark Pila
(SSG Representative)
Brenda Filipinas Danganan
(Ex-officio)
Atty. Isagani Calderon
(Adviser)
Atty. Reynaldo U. Agranzamendez
(Dean,College of Law)

BAR OPERATIONS 2011 Page 108