Commercial Law Review Green Notes

COMMERCIAL LAW 2010
Table of Contents
I.
II.
III.
IV.
V.
Negotiable Instruments Law ...............................................................................

2
Corporation Law (BP 68)
...............................................................................................
20
Insurance
.........................................................................................................................
......
50
Transportation Laws
a. Common Carriers
...............................................................................................
102
b. Code of Commerce Overland Transportation ..................................................
107
c. Air Transportation
...............................................................................................
109
d. Maritime Commerce/ Water Transportation .................................................
110
e. Carriage of Goods by Sea Act
.............................................................................. 119
f. Salvage Law
..............................................................................................................
120
g. Warsaw Convention
...............................................................................................
121
h. Public Service Law
...............................................................................................
124
Special Commercial Laws
a. Merchants .
129
b. Joint Accounts
.
131
c. Letters of credit
132
d. Trust receipts
133
e. Bulk Sales .
135
f. Warehouse receipts
.. 136
g. Chattel mortgages 139
h. Extra-judicial foreclosure of real estate mortgages .. 141
i. Insolvency .
143
j. Central Bank Act .
150
k. General Banking Law ..
152
l. PDIC
156
COMMERCIAL LAW
m. Truth in Lending
157
VI.
VII.
The Inside Story On the Secrecy of Bank Deposits Law

159
Intellectual Property Code
..............................................................................................
161
ACKNOWLEDGEMENT
These notes were made under the supervision of Atty. Renato Rondez.
Special thanks to Atty. Aurelio Galacgac for notes and cases in Intellectual Property
Code and to Atty. Abe Dumaguing for notes and cases in Negotiable Instruments Law.
NEGOTIABLE INSTRUMENTS LAW:
Rhonella Ulip, , Jesebel Agdawi, Norilen De Jesus, Missy Maramba, and Victor
Morales .
CORPORATION LAW:
Precious Cabradilla, Richenn Lacamento, Romelyn Kimayong, Analyn Quiniones,
and Rodolfo Santiago.
INSURANCE:
Erwin Lapitan, Ana Cristina Cawed, Julie Nicer, Jan Karlo Lopez, and Jovencio
Robles.
TRANSPORTATION AND INTELLECTUAL PROPERTY CODE:
Myrtle Marayag, Lemwel Alapit, Aileen Bugnosen and Jason Baban.
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.(2005
BEQ)
Note: A negotiable instrument is not a
legal tender.
UC-BCF COLLEGE OF LAW
Dean Reynaldo U. Agranzamendez
LEGAL TENDER is that kind of money

which the law compels the creditor to
accept in payment of his debt. Although
a NI is intended to be a substitute for
money; it is not generally legal tender
(cf. Sec. 60, New Central Bank Act)
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)
Page 2 of 274
COMMERCIAL LAW
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
INCIDENTS IN THE LIFE OF A
NEGOTIABLE INSTRUMENT
(INPADPDND)
(Commercial laws of the Philippines,
Vol.1, Aguedo Agbayani, 1992 ed.)
1. Issue
2. Negotiation
3. Presentment for acceptance, in
certain kinds of bills of exchange
4. Acceptance
5. Dishonor for non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Discharge
DISTINCTIONS:
(2005 BEQ)
Negotiable
Instruments
Contains all the
requisites of Sec. 1
of the NIL
Transferred
by
negotiation
Holder
in
due
course may have
better rights than
transferor
Prior
parties
warrant payment
Transferee
has
right of recourse
against
intermediate
parties
Negotiable
Instruments
Have requisites of
Sec. 1 of the NIL
Have
right
of
recourse
against
intermediate
parties who are
secondarily liable
Holder
in
due
course may have
rights better than
transferor
Subject is money
Instrument itself is
property of value
Negotiable
Documents of
Title
Does not contain
requisites of Sec.
1 of NIL
No
secondary
liability
of
intermediate
parties
Transferee merely
steps into the
shoes
of
the
transferor
Subject is goods
Instrument
is
merely evidence
of title; thing of
value
are
the
goods mentioned
in the document
Non-negotiable
Instruments
Does not contain
all the requisites of
Sec. 1 of the NIL
Transferred
by
assignment
Transferee
acquires
rights
only
of
his
transferor
Prior
parties
merely
warrant
legality of title
Transferee has no
right of recourse

Page 3 of 274
COMMERCIAL LAW
CHECK
- Always drawn upon
a bank or banker
- Always payable on
demand
Promissory Note
Bill of Exchange
Unconditional
promise
Involves 2 parties
Maker
primarily
liable
Only
1
presentment - for
payment
Unconditional
order
Involves 3 parties
Drawer
only
secondarily liable
Generally
2
presentments - for
acceptance
and
for payment
PN
- There are two (2)
parties, the maker
and the payee
CHECK
- There are three
(3) parties, the
drawer,
the
drawee bank and
the payee
- Always drawn
against a bank
- May be drawn
against
any
person,
not
necessarily a bank
- May be payable -Always
payable
on demand or at a on demand
fixed
or
determinable
future time
- A promise to pay - An order to pay
*Note: PN, BOE and Chek- definitions
(2002 BEQ)
PROMISSORY
NOTE
unconditional
promise to pay in writing made by one
person to anther, signed by the
- Not necessary that

it be presented for
acceptance
- Drawn on a deposit
- The death of a
drawer of a check,
with knowledge by
the banks, revokes
the authority of the
banker pay
- Must be presented
for payment within a
reasonable time after
its issue (6 months)
BOE
- May or may
not be drawn
against a bank
May
be
payable
on
demand or at a
fixed
or
determinable
future time
- Necessary that
it be presented
for acceptance
- Not drawn on a
deposit
- The death of
the drawer of
the ordinary bill
of
exchange
does not
May
be
presented
for
payment within
a
reasonable
time after its
last negotiation.
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
makers own order, it is not complete
until indorse by him. (Sec. 184 NIL)
Parties:
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.
Page 4 of 274
COMMERCIAL LAW
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.
CHECK - bill of exchange drawn on a bank
and payable on demand. (Sec. 185
NIL)
Requisites of a Negotiable Note
(PN): Key: (SUDO)
It must:
a. be in writing signed by the drawer
b. contains an unconditional promise
or order to pay a sum certain in
money
c. be payable on demand or at a
fixed determinable future time
d. be payable to order or to bearer
(Sec. 1 NIL)
Requisites of a Negotiable Bill
(BOE):Key: (SUDOC)
It must:
a. be in writing signed by the drawer
b. contains an unconditional promise
or order to pay a sum certain in
money
c. be payable on demand or at a
fixed determinable future time
d. be payable to order or to bearer
e. the drawee must be named or
otherwise
indicated
with
reasonable certainty (Sec. 1 NIL)
OTHER 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
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.
FORMS OF CHECK
1. Ordinary Check
2. Cashiers 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. Travellers Check
6. Managers Check , A check
drawn by the manager of the
bank. (2003 BEQ)
7. Crossed Check ( 2004, 2005
BEQ)
8. Memorandum Check.
Page 5 of 274
COMMERCIAL LAW
HOWEVER,
THESE
ARE
NONNEGOTIABLE:
1.
Treasury warrant are nonnegotiable because there is an
indication of the fund as the
source of payment of the
disbursement.
(Metrobank v. CA, 194 SCRA
169)
2.
Since a postal money order is
subject to restrictions and
limitations under postal laws
and issued by the Government
which is not engaged in
commercial transactions, it is
not governed by NIL. (Phil.
Educ. Co., Inc. vs. Soriano, 39
SCRA 587)
3.
Letters of credit
4.
Warehouse receipts - NonNegotiable for the same as Bill
of lading it merely represents
goods, not money.
d. Should contain words or terms of

negotiability.
(Gopenco, Commercial law Bar Reviewer,
cited in Aquino 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)
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)
FORM OF NI: (Sec. 1) Key: (WUPOA)

1. Must be in Writing, and signed by
the maker or drawer;
2. Must contain an Unconditional
promise or order to pay a sum
certain in money;
3. Must be Payable on demand, or at
a fixed or determinable future
time;
4. Must be payable to Order or to
bearer; and
5. When an instrument is Addressed
to a drawee, he must be named
therein with reasonable certainty.
Factors that affect the determination of

negotiability of instruments:
a. Whole instrument;
b. What appears on the face of the
instrument;
c. Requisites enumerated in Sec.1 of
NIL; and

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.
Page 6 of 274
COMMERCIAL LAW
-
A drawees name may be filled in

under Section 14 of the NIL
A SUM IS CERTAIN EVEN IF IT IS TO

BE PAID (Sec. 2)
1. with interest; or
2. by stated installments; or
3. by stated installments, with
acceleration clause; or
4. with exchange; or
5. with costs of collection or an attorney's
fee
ACCELERATION CLAUSErenders the
whole debt due and demandable upon
failure of the obligor to comply with
certain conditions.
General Rule: The promise or order
should not depend on a contingent
event. If it is conditional, it is nonnegotiable.
Exceptions:
a. Indication of particular fund from
which the acceptor disburses
himself after payment
b. Statement of the transaction which
gives rise to the instrument. (Sec.
3 NIL)
But an order or promise to pay out of
a particular fund is not unconditional
NOTES ON SECTION 3
The particular fund indicated should
not be the direct source of payment,
else it becomes unconditional and
therefore non-negotiable. The fund
should only be the source of
reimbursement.
A statement of the transaction does
not destroy the negotiability of the
instrument.
terms
and
conditions
transaction stated.
of
Payable upon a determinable future

time if:
a. There is a fixed period after
sight/date
b. On or before a specified date/fixed
determinable future time
c. On or at a fixed date after the
occurrence of an event certain to
happen though the exact date is
not certain (Sec. 4 NIL)
Notes on Section 4
If the instrument is payable upon a
contingency, the happening of the
event does not cure the defect (still
non-negotiable)
General Rule:
If some other act is
required other than the payment
of money, it is non-negotiable.
Exceptions:
a. Sale of collateral securities
b. Confession of judgment
c. Waives benefit of law
d. Gives option to the holder to
require something to be done in
lieu of money (Sec. 5 NIL)
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)
AN INSTRUMENT
DEMAND (Sec. 7):
IS
PAYABLE
Exception: Where the promise to

pay or order is made subject to the

the
Page 7 of 274
ON
COMMERCIAL LAW
1. When expressed to be payable on
demand, at sight or on presentation
2. When no period of payment is stated
3. Where issued, accepted, or indorsed
after maturity (as to immediate parties)
Notes on Section 7
- if the time for payment is left blank
(as opposed to being omitted), it may
properly be considered as an
incomplete instrument and fall under
the provisions of Sec. 14, 15, or 16
depending on how the instrument is
delivered.
PAYABLE TO ORDER (Sec. 8)
The instrument is payable to order where
it is drawn payable to the order of a
specified person or to him or his
order. It may be drawn payable to the
order of
1. A payee , who is not a maker , drawer,
or drawee; or
2. The drawer or maker : or
* If the maker is made the payee, the
instrument must be indorsed in order to
complete it. (Sec. 184)
* When the instrument is payable to
the order of the drawer, and it is
accepted by the drawee, the instrument
is equivalent to a promissory note made
by the acceptor in favor of the drawer.
( Commercial Laws of the Phils., Vol.1,
Aguedo Agbayani, 1992,ed.)
3. Two or more payees jointly ; or
4. One or more several payees ; or
5. The holder of an office for the time
being
PAYABLE TO BEARER (Sec.9)
The instrument is payable to bearer
when:
1. It is expressed to be so payable; or
2. It is payable to a person named
therein or bearer; or
3. It is payable to the order of a fictitious
or non-existing person, and such fact was
known to the person making it so

payable; or
4. The name of the payee does not
purport to be the name of any person; or
5. The only or last indorsement is an
indorsement in blank.
The General rule is that an instrument
payable to order may be negotiated
by proper indorsement plus delivery . On
the other hand , an instrument payable
to bearer , can be negotiated by mere
delivery or if originally a order instrument
by blank indorsement plus delivery.
An instrument originally payable to
bearer can be negotiated by mere
delivery even if it is endorsed specifically.
If originally a bearer instrument, it
will
always
remain
a
bearer
instrument.
However, with regards to an original
order instrument , when specifically
indorsed, it can no longer be negotiated
further by mere delivery ; it must be
INDORSED.
* A check that is payable to the order of
cash is payable to bearer. Reason: The
name of the payee does not purport to
be the name of any other person. ( Ang
Tek Lian v. CA, 87 Phil. 383)
Notes on Section 9
fictitious person is not limited to
persons having no legal existence. An
existing person may be considered
fictitious depending on the intention
of the maker or the drawer.
fictitious person means a person
who has no right to the instrument
because the maker or drawer of it so
intended. He was not intended to be
the payee.
where the instrument is drawn, made
or prepared by an agent, the
Page 8 of 274
COMMERCIAL LAW
knowledge or intent of the signer of
the instrument is controlling.
Where the agent has no authority to
execute the instrument, the intent of
the principal is controlling
AMBIGUOUS INSTRUMENTS: RULES
OF CONSTRUCTION of NI (Sec. 17)
(1998 Bar Exam)
The following rules of construction apply:
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. Payment for interest is provided forinterest runs from the date of the
instrument, if undated, from issue
thereof;
3. Instrument undated- consider date of
the issue;
4. Conflict between written and printed
provisions- written provisions prevail;
5. Where the instrument is ambiguous
that there is doubt whether it is a bill or
note, the holder may treat it as either at
his election;
6. If one signs without indicating in what
capacity he has fixed his signature, he is
considered an indorser;
7. If two or more persons sign We
promise to pay, their liability is joint
(each liable for his part) but if they sign I
promise to pay, the liability is solidary
(each can be compelled to comply with
the entire obligation).
PROVISIONS that do not affect the
negotiability of an instrument:
1. Sum payable includes payment of
interest;
2. Payment in stated installments;
The amount of each
installment and the due date of each
installment must be indicated.
3. Sum to be paid on installments with

acceleration clause;
4. Sum to be paid with cost of collection
and attys fees;
Reasonable attys fees
does not affect negotiability but Plus
costs, charges, and attys fees
affects the negotiability since the sum
is not certain.
5. Indication of a particular fund to which
reimbursement is to be paid or a
particular account to which it would be
debited.
OTHER PROVISIONS not affecting the
negotiability of an instrument:
1. Statements which gave rise to the
instruments issuance;
2. Provisions of clauses in regards to
sale of securities;
3. Clause affecting confessions of
judgment;
4. A waiver of benefit intended for
the obligor;
5. Giving the holder the election to
require something to be done in
lieu of payment of money;
6. Absence of date;
7. No seal, place of payment, place of
issuance;
8. Absence of a statement of
consideration has been paid;
9. Negotiation of a particular kind of
money
Provisions
that
affect
the
NEGOTIABILITY
OF
THE
INSTRUMENT:
1. Promise/order to do an act in
addition to the payment of money;
2. Promise/order to pay out of a
particular fund; or
3. Promise/order to pay depends on a
contingency
Page 9 of 274
COMMERCIAL LAW
ANTE-DATING/POST-DATING (Sec.12)
Ante Dating is effected by :
1.Changing the date of the instrument to
an earlier date than when it was made.
2. If the instrument is undated, by
placing an earlier date than when it was
actually issued.
Post - Dating is effected by :
1. Changing the date of the instrument to
a later time than when it was made.
Rule: Does not invalidate/affect the
negotiability of the instrument UNLESS
used for illegal/fraudulent purposes.
INSERTION OF A WRONG 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/drawers signature forged
(Sec. 23)
Incomplete
but
Instrument: (Sec.14)
(2004 & 2005 Bar Exam)
Delivered
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
Page 10 of 274
COMMERCIAL LAW
b. The holder has prima facie
authority to fill it up as such for
any amount. (Sec. 14 NIL)
contract even in the hands of a

HDC but subsequent indorsers are
liable.
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.
REASON: The law does not make any

distinction between a HDC and one who
is not a HDC.
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 nonnegotiable (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) (2000,2004 &
2006 Bar Exam)
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 intentention 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
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 nondelivery 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:
Page 11 of 274
COMMERCIAL LAW
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
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 nondelivery.
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.
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)
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 (Sec.23)
A. Makers Signature
(1989 BEQ)
B. Drawers Signature
(2004,2006&2009 BEQ)
C. Payees Signature
( 2008 BEQ)
D. Indorsers Signature
(2008 BEQ)
Page 12 of 274
COMMERCIAL LAW
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 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 endorsers 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 payees signature is
forged, payments made by the
drawee bank to collecting bank is
ineffective.
No
debtor/creditor
relationship is created. An agency to
Page 13 of 274
COMMERCIAL LAW
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
In a BOE
- The drawers 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)
Sec.28:- Absence or Failure 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
Page 14 of 274
COMMERCIAL LAW
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 Accommodation
is a 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 formers 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
partys
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,
Page 15 of 274
COMMERCIAL LAW
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 comaker 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.
2. Against the Co-accommodation
Partyo 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. demand contribution from his coaccommodation 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.
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
For a bearer instrument
- by
delivery
For payable to order - by
indorsement
and delivery
(Sec. 30)
Indorsement to be must be:
a. Written
b. On the instrument itself or upon a
piece of paper attached (Sec. 31
NIL)
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.
b.
c.
d.
e.
Special (Sec. 34)

Blank (Sec. 35)
Restrictive (Sec. 36)
Qualified (Sec. 38)
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
Page 16 of 274
COMMERCIAL LAW
signature of the indorser in blank
any contract consistent with
character of indorsement. (Sec.
35)
C. ABSOLUTEOne
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. CONDITIONALright
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 righta. 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. QUALIFIEDConstitutes
the
indorser a mere assignor of the
title to the instrument. ( Sec38)
It is made by adding to the
indorsers 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 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
Page 17 of 274
COMMERCIAL LAW
It cannot apply where the instrument
is payable to bearer because the only
or last indorsement is in blank
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)
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)
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
*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
*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-indue 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)
O proof to prove otherwise
If one of the requisites are lacking, the
holder is not 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 HDC:
Page 18 of 274
COMMERCIAL LAW
-
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)
Rights of a holder not a HDC
- May sue in his own name
- May receive payment and if it is in
due course, the instrument is
discharged
- Holds the instrument subject to
the same defenses as if it were
non-negotiable
- If he derives his title through a
HDC and is not a party to any
fraud or illegality thereto, has all
the rights of such HDC

General rule: every holder is deemed

prima facie to be a holder in due
course.
Exception:
- Where it is shown that the title of
any person 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 HDC (Sec. 59
NIL)
Personal
Defenses
1. Absence or
failure of
consideration
2. Want of
delivery of
complete
instrument
3. Insertion of
wrong date where
payable at a fixed
period after date
and issued
undated; or at a
fixed period after
sight and
acceptance is
undated
4. Filling up the
blanks contrary to
authority given or
not within
reasonable time
5. Fraud in
inducement
Real Defenses
Alteration
Want of delivery of
incomplete
instrument
Duress amounting
to forgery
Fraud in factum or
in esse contractus
Minority
Page 19 of 274
COMMERCIAL LAW
6. Acquisition of
the instrument by
force, duress or
fear
7. Acquisition of
the instrument by
unlawful means
8. Acquisition of
the instrument for
an illegal
consideration
9. Negotiation in
breach of faith
10. Negotiation
under
circumstances
amounting to
fraud
11.
Mistake
12. Intoxication
13. Ultra vires
acts of
corporations
14. Want of
authority of the
agent where he
has apparent
authority
15. Illegality of
contract where
form or
consideration is
illegal
16. Insanity
where there is no
notice of insanity
a. Engages to pay according to tenor

of instrument
b. Admits existence of payee and his
capacity to indorse (Sec. 60 NIL)
Marriage in case
of a wife
Insanity where the
insane person has
a guardian
appointed by the
court
Ultra vires acts of
a corporation
where its charter
or by statue, it is
prohibited from
issuing
commercial paper
Want of authority
of agent
Execution of
instrument
between public
enemies
Illegality of
contract made by
statue
Forgery
Notes on Section 60
A makers liability is primarily and
unconditional
One who has signed as such is
presumed to have acted with care and
to have signed with full knowledge of
its contents, unless fraud is proved
The payees interest is only to see to it
that the note is paid according to its
terms
When two or more makers sign jointly,
each is individually liable for the full
amount even if one did not receive the
value given
The maker is precluded from setting up
the defense of:
a) The payee is fictional,
b) That the payee was insane, a
minor or a corporation acting ultra
vires
A drawer is secondarily liable
Effects of drawing the instrument, the
drawer:
a. Admits the existence of the payee,
b. The capacity of such payee to
indorse
c. Engages that on due presentment,
the instrument will be accepted or
paid or both according to its tenor.
If the instrument is dishonored,
and the necessary proceedings on
dishonor duly taken
a. The drawer will pay the amount
thereof to the holder
b. Will pay to any subsequent
indorser who may be compelled to
pay it. (Sec. 61 NIL)
A maker is primarily liable:

Effects of making the instrument, the
maker:
Page 20 of 274
COMMERCIAL LAW
Notes on Section 61
A drawer may insert an express
stipulation to negative or limit his
liability
An acceptor is primarily liable
By accepting the instrument, an
acceptor:
- Engages that he will pay according
to the tenor of his acceptance
- Admits the existence of the
drawer, the genuineness of his
signature and his capacity and
authority to draw the instrument
- The existence of the payee and his
then capacity indorse
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.
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
Page 21 of 274
COMMERCIAL LAW
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:
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 drawers signature
General indorser is only secondarily
liable
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)
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.
Presentment is necessary to charge
persons secondarily liable otherwise
they are discharged
Acts needed to charge persons
secondarily liable:
a) Presentment
for
payment/acceptance
b) Dishonor by non-payment/nonacceptance
Page 22 of 274
COMMERCIAL LAW
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:
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)
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
Presentment for payment is made to
the maker, or acceptor. Not to the
person secondarily liable.
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.
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)
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)
General rule: Presentment for payment
necessary to charge persons
secondarily liable otherwise they
are discharged:
Exception:
- Section 79 and 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 excused 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.
Summary of rules as to presentment
for payment:
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
How dishonored by non-acceptance:
Page 23 of 274
COMMERCIAL LAW
-
The
instrument
was
duly
presented but payment is refused
or cannot be obtained
Presentment is excused and the
instrument is overdue and unpaid
(Sec. 83)
Effects of dishonor by non-payment:

- An immediate right of recourse to all
parties secondarily liable accrues to
the holder (Sec. 84)
Notes on Section 84
Parties cease to be secondarily liable
and become principal debtors.
Liability becomes the same as that of
the original obligors.
Requisites for payment in due
course: (sec. 88)
a. Made at or after the maturity of
the instrument
b. To the holder
c. In good faith
d. Without notice of any defect in the
holders title
Notes on Section 88
Payment must be made to the
possessor of the instrument
Possession of the note by the maker is
presumptive evidence that it has been
paid
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)
Notice:
a. May be written or oral (Sec. 96)
b. Written notice need not be signed
or may be supplemented by verbal
communication (Sec. 95)
c. May be by personal delivery or by
mail (Sec. 96)
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 (Sec. 109)
Protest may be waived:
Effects:
- Deemed a waiver of presentment
and notice of dishonor as well
(Sec. 111)
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
NOTICE OF DISHONOR - given by the
holder to the parties secondarily
liable, drawer and each indorser,
that
the
instrument
was
dishonored by non-acceptance or
non-payment by the drawee/maker
General rule: 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)
Page 24 of 274
COMMERCIAL LAW
- If notice is delayed, delay may be
excused (Sec. 113)
Instances when Notice of Dishonor Not
Necessary to Drawer
a. Drawer and drawee same person
b. Drawee is a fictitious/incapacitated
person
c. Drawer is the person to whom
presentment for payment is made
d. Drawer has no right to expect that
the drawee will accept/pay the
instrument (Sec. 114 NIL)
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 (Sec. 115 NIL)
Omission to give notice of dishonor by
non-acceptance doe not prejudice a HDC
(Sec. 117 NIL)
Protest only necessary for a foreign bill of
exchange. Protest for other negotiable
instruments is optional. (Sec. 118 NIL)
Causes of Discharge of the
Instrument
a. Payment by the debtor
b. Payment by accommodated party
c. Intentional cancellation by holder
of instrument
d. Any other act discharging a simple
monetary obligation
e. Debtor becomes holder of the
instrument at/after maturity in his
own right (Sec 119 NIL)
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 indorsers signature by
indorsers
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.
Page 25 of 274
COMMERCIAL LAW
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.
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
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
SECTION 124: 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
*An alteration is said to be material if it

alters the effect of the instrument. In
other words, a material alteration is one
which changes the items which are
required to be stated under Sec.1, NIL.
( PNB v. CA et al. 256 SCRA 491)
The EFFECTS of 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.
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 nonHolder in Due CourseA 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 CourseHe 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;
Page 26 of 274
COMMERCIAL LAW
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 is 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 BOE is drawn
assents to the request of the drawer
to pay it. (Sec. 132)
Acceptance may be:
a. Actual
b. Constructive
c. General (Sec. 140)
d. Qualified (Sec. 141)
Requisites of actual acceptance:
In writing
Signed by the drawee
Must not express the drawee will
perform his promise by any other
means than payment of money
- Communicated or delivered to the
holder
-

A holder 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 (Sec. 142)
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. (Sec. 137)
Drawee becomes primarily liable as an
acceptor.
Mere
retention
is
equivalent
to
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)
PRESENTMENT is the production of a
BOE 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.
Page 27 of 274
COMMERCIAL LAW
Presentment is also prerequisite to the
accrual of secondary liability against
the drawer and the indorsers.
General rule: Protest is required only

for foreign bills
Exception:
- Inland bills and notes may also be
protested if desired
When is presentment for

acceptance MUST be made.
(Sec. 143)
In the following cases:
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.
The REQUISITES of Presentment:
1. Made within reasonable time- is
meant not more than 6 months from the
date of issue. Beyond said period, it is
unreasonable time and the check
becomes stale.
2. By holder or his agent
3. At a reasonable hour on a business
day
4. Before bill overdue.
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.
Protest is required:
a. Where the foreign bill is dishonored by
non acceptance
b. Where the foreign bill is dishonored by
non-payment
c. Where the bill has been accepted for
honor, it must be protested for nonpayment before it is presented for
payment to the acceptor for honor
d. Where the bill contains a referee in
case of need, it must be protested for
non payment before presentment for
payment to the referee in case of
need (Sec. 152)
NOTES ON SECTION 152

Protest - formal statement in writing
made by a notary under his seal of
office at the request of the holder, in
which it is declare that the some was
presented for payment or acceptance
(as the case may be) and such was
refused.
It
means
all
steps
or
acts
accompanying the dishonor of a bill or
note necessary to charge an indorser
Required when the instrument is a
foreign bill of exchange.
It must be made on the same date of
dishonor, by a notary/respectable
citizen of the place in the presence of 2
Page 28 of 274
COMMERCIAL LAW
credible witnesses
secondary parties
so
recourse
to
ACCEPTANCE FOR HONOR (Sec. 161) an

acceptance of a bill made by a
stranger to it before maturirty,
where the drawee of the bill has:
a. Refused to accept it
b. And the bill has been protested for
non-acceptance
c. Or where the bill has been protested
for better security
Requisites for acceptance for honor:
1. The bill must have been protested
a) for non-acceptance b) or for
better security
2. The acceptor for honor must be a
stranger to the bill
3. Bill must not be overdue
4. Holder must give his consent
NOTES ON ACCEPTANCE FOR HONOR
Purpose: to save the credit of the
parties to the instrument or some party
to it as the drawer, drawee, or indorser
or somebody else.
Acceptor for honor is liable to the
holder and to all the parties to the bill
subsequent to the party for whose
honor he has accepted (Sec. 164)
person for whose account it was drawn.

(Secs. 171-177)
Requisites:
a. The bill has been dishonored by nonpayment;
b. It has been protested for nonpayment;
c. Payment supra protest is made by
any person, even by a party thereto;
d. The payment is attested by a
notarial act of honor which must be
appended to the protest or form an
extension of it;
e. The notarial act must be based on
the declaration made by the payor
for the honor or his agent of his
intention to pay the bill for honor
and for whose honor he pays.
Form for payment of honor:
a. Payment must be attested by
notarial act appended to the protest,
or form an extension to it.
b. Notarial act of honor must be based
on a declaration by the payer for
honor
BILLS IN SET - bill of exchange drawn in
several parts, each part of the set being
numbered and containing a reference to
the other parts, the whole of the parts
just constituting one bill (Sec 178)
How acceptance for honor is made: (Sec.

162 NIL)
a. In writing and indicated that it is
an acceptance for honor
b. Signed by the person making the
acceptance
Purpose: It is usually availed of in cases

where a bill had to be sent to a distant
place through some conveyance. If each
part is sent by different conveyances, the
chance that al least one part of the set
would reach its destination would be
greater.
PAYMENT FOR HONOR - payment made by

a person, whether a party to the bill or
not, after it has been protested for nonpayment, for the benefit of any party
liable thereon or for the benefit of the
CHECKS
- a bill of exchange drawn on a bank
payable on demand. (Sec. 185)

CONCEPTS:
Page 29 of 274
COMMERCIAL LAW
Certification
of
ChecksAn
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)
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.
Page 30 of 274
COMMERCIAL LAW
* 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.
IRON CLAD RULE prohibits the
countermanding of payment of certified
checks. (Rep. v. PNB, Dec. 1, 1961)
e. Travelers Check- It is one upon

the holders 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.
*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. Cashiers 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. Managers 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
cashiers 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)
CORPORATION LAW
BP Blg. 68
x----------------------------------------------------------x
I.
General Principles
A corporation is an artificial being
created by operation of law, having the
right of succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence. (Sec. 2, BP blg. 68). It has a
separate and distinct personality from its
incorporators. (2000 Bar Examination)
Page 31 of 274
COMMERCIAL LAW
Theories on Formation
1. Concession theory
Tayag v Benguet Consolidated:
corporation is creature of State and
has no existence independent of state
recognition/concession
2. Enterprise entity theory
Looks at the underlying enterprise
or group, which has to exist before
the corporate fiction is granted
Just because it is a juridical entity,
it is not a creature of the State it
is a creature of its own volition and
maintains inherent rights under
the law moral individuals lie
under the corporate veil
Tri-level existence in corporate
setting
1. Corporation as juridical entity State
and Corporation relationship
2. Intra-corporation:
a. Corporation and its agents
b. Corporation and its SHs
c. Among SHs
d. Between corporation and third
parties
3. Going concern business enterprise
Corporation as creature of the law
Constitution:
o Congress cannot create private
corporations except by general
law (Art XII, Sec 16)
Private corporation
created by special law
nullity (NDC v Phil
Veterans Bank)
o GOCCs can be created by
special charters
2008 Bar Examination: Since February

8, 1935, the legislature has not passed
even a single law creating a private
corporation. What provision of the
Constitution precludes the passage of
such a law?
Civil Code:
o Person of public corporations
governed by laws
creating/recognizing them
o Person of private corporations
governed by laws of general
application
Franchises of corporations
o Corporate/general franchises:
essential for franchise to exist
as corporation; granted to
individuals who compose the
corporation
o Special/secondary franchises:
rights or privileges granted to
existing corporations
Distinguishing a corporation from a

partnership
As to: (a) the manner of creation a
corporation is created by law, while a
partnership is created by agreement
(b) the number of incorporators- a
corporation generally requires a
minimum of 5 and a maximum of 15
incorporators, while a partnership
requires a minimum of 2. The
exception is a corporation sole (c)
commencement of existence- a
corporation commences to have
existence upon the issuance of a
certificate of incorporation, while a
partnership commences to have
existence upon agreement (d) the
powers that may be exercised- a
corporation can only exercise powers
allowed by law, while a partnership
Page 32 of 274
COMMERCIAL LAW
can exercise powers not contrary to

law or public policy (e) management
a corporation is managed by a
board, while a partnership is
managed by the managing partner/s
(f) right of succession- a corporation
enjoys the right of succession, while
a partnership does not (g) personal
liabilityas
a
general
rule,
stockholders do not have personal
liability beyond the value of their
shares, while partners are liable
beyond what they have contributed
(h) transferability of interest- ones
interest
in
a
corporation
is
transferable without consent, while
that in partnership, requires consent
(i) term of existence- a corporation
can exist for terms of no more than
50 years at any given time but
subject to extension, while a
partnership is not limited as to term
(j) dissolution- a corporation cannot
be dissolved without the consent of
the state, while a partnership can be
dissolved without need for the
consent of the state.
Their similarities are: (a) both have
juridical personality (b) both can only
act through its agents (c) both are
composed of an aggregate of
individuals (d) distribution of profits
is given to those who have
contributed capital (e) both can only
be organized if there is a law
authorizing its registration
A. Classification of Corporation
In Relation to the State

1. Public and Private Corporations
(Distinctions:
2004
Bar
Examination)
Private
Public
formed
for formed for the
some
private government of a
purpose, benefit portion of the
or end
created
by
special
legislation
or
act of Congress
State for the

general good or
welfare
Must
be
organized under
the Corporation
Code.
NOTE: The true test is for the

purpose of the corporation. If
the corporation is created for
political
or
public
purpose
connected with the administration
of government, then it is a public
corporation. If not, it is a private
corporation although the whole or
substantially the whole interest in
the corporation belongs to the
State.
2. Quasi-Public Corporations
As to Place of Incorporation
1. Domestic Corporations
2. Foreign Corporations
Test To Determine Nationality Of
Corporation
i. Incorporation Test determined by
the state of incorporation,
regardless of the nationality of its
stockholders
ii. Domicile Test determined by the
state where it is domiciled.
iii. 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.
As to Legal Status
1. De Jure Corporation
2. Corporation de Facto (2004 Bar
Examination)
A de facto corporation is one which
actually exists for all practical
Page 33 of 274
COMMERCIAL LAW
purposes as a corporation but
which has no legal right to
corporate existence as against the
State. It is essential to the
existence of a de facto corporation
that there be (1) a valid law under
which a corporation might be
incorporated, (2) a bona fide
attempt
to
organize
as
a
corporation under such law, and
(3) actual use or exercise in good
faith
of
corporate
powers
conferred upon it by law.
shares held. All other corporations

are non-stock corporations.
B. Corporation, kinds by method
of creation:
a. by special law or charter
b. by being organized under
the corporation code
C. Corporation, how organized:
Philippine corporate entities are
organized as follows:
3. Corporation by Estoppel (2004

Bar Examination)
It exists when persons assume to
act as a corporation knowing it to
be without authority to do so. In
this case, those persons will be
liable as general partners for all
debts, liabilities and damages
incurred or arising as a result of
their actions.
4. Corporation by Prescription
A body not lawfully organized as a
corporation
but
has
been
recognized by immemorial usage
as a corporation with rights and
duties maintainable by law
As to Existence of Shares of Stocks
1. Stock Corporations
2. Non-Stock Corporations
Distinctions between Stock and NonStock Corporations (2004 Bar
Examinations)
A stock corporation is one that has

capital stock divided into shares
and is authorized to distribute to
the holders of such shares
dividends or allotments of the
surplus profits on the basis of the

a. Number of incorporators:
(2006 Bar Examination)
Incorporators are required to be
not less than five [5] but not more
than fifteen [15].
b.
Residency requirement:
Majority of the incorporators are

required to be residents of the
Philippines.
c.
Qualifications:
All incorporators:
1.
must be natural persons
2.
must be of legal age

d. Components of a
corporation
INCORPORATORS
CORPORATORS
Signatory to the
Articles of
Incorporation
Stockholder or
member
Number is limited
to 5-15
No limit
e. Subscription requirement:
All incorporators must subscribe to
at least one (1) share of stock of
the corporation being organized.
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COMMERCIAL LAW
D. Corporation, 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.
E. Corporation, minimum paid-up
capital:
The paid-up capital of a Philippine
corporation must not be less than
PhP5, 000.00. Thus, it is required
that at least twenty five percent
[25%] of the subscribed capital
stock should be fully paid up but
the amount of which should not be
less than said PhP5,000.00.
F. Corporate Term: (50) years from
the date of incorporation unless
sooner dissolved or unless said
period is extended. (Sec. 11)
G. Corporation, when corporate
existence commences:
The corporate life or existence of a
Philippine corporation commences
from the time a Certificate of
Incorporation is issued in its favor
by the Securities and Exchange
Commission [SEC].
Other Type of Corporation:

Corporation Sole. (2004 Bar
Examination)
Section 110 of the Corporation
Code defines a corporation sole
as one formed for the purpose of
administering and managing, as
trustee, the affairs, property and
temporalities of any religious
denomination, sect or church. It is
formed by the chief archbishop,
bishop, priest, minister, or other
presiding elder of such religious
denomination, sect or church.
I. RULES ON CONVERSION
From Stock to Non-stock corporation
Conversion may be made by mere
amendment
of
the
articles
of
incorporation.
From Non-stock to Stock corporation
The corporation must first be
dissolved.
Mere amendment of the
articles of incorporation would not suffice
because the conversion would change
the corporate nature from non-profit to
one for monetary gain
x----------------------------------------------------------x
II.
Some Doctrines in
Corporation Law
H. Corporation, effect of non-use:

[a] A corporation is deemed
dissolved if the corporate charter
granted in its favor expires by nonuse for a period of at least two [2]
years from issuance thereof.
[b] A corporation is deemed
suspended or its franchise revoked
if it has been duly organized but it
failed to operate for a period of
five [5] years.

1. DOCTRINE OF CORPORATE
OPPORTUNITY (2005 Bar
Examination)
A director is made to account to his
corporation, gains and profits from
transactions
entered
into
by
him/another competing corporation in
which he has substantial interest,
which should have been a transaction
Page 35 of 274
COMMERCIAL LAW
undertaken by the corporation. This
is a breach of fiduciary relationship.
2. DOCTRINE OF PIERCING THE VEIL
OF CORPORATE ENTITY (2006 Bar
Examination)
Under the doctrine of piercing the
veil of corporate entity, the legal
fiction that a 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 v.
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
a. To what circumstances will the
doctrine apply? (2006 Bar
Examination)
The doctrine of piercing the veil
of corporate entity will apply
when the corporations 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 v. Court of
Appeals, 189 SCRA 529, 542

[1990]).
b. Tests in determining whether
to pierce 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
plaintiffs 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 v. Court of
Appeals, et al., G.R. No.
124715, prom. January 24,
2000)
3. TRUST FUND DOCTRINE
The subscribed capital stock of the
corporation is a trust fund for the
Page 36 of 274
COMMERCIAL LAW
payment of debts of the corporation
which the creditors have the right to
look up to satisfy their credits.
Corporations may not dissipate this
and the creditors may sue the
stockholders directly for their unpaid
subscriptions Thus, dividends must
never impair the subscribed capital;
subscription commitments cannot be
condoned or remitted; nor do the
corporation buy its own shares using
the
subscribed
capital
as
the
consideration therefore.
(National
Telecommunications Commission v.
Court of Appeals, et al., G.R. No.
127937, prom. July 28, 1999)
Instances where the Doctrine was
applied:
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
corporate property in fraud
of its creditors; and
4. Where the corporation is
insolvent.
5. If the corporation is
solvent, the TFD extends to
the
capital
stock
represented
by
the
corporation's legal capital.
6. If the corporation is
insolvent, the TFD extends
to the capital stock of the
corporation and all of its
property and assets.
Exceptions
Doctrine
to
the
Trust

Fund
1. Redemption of redeemable
shares (Sec. 8)
2.
In a close corporation,
when there is a deadlock
and the SEC orders the
payment of the appraised
value of the stockholder's
share. (Sec. 104)
4. BUSINESS JUDGEMENT RULE
Business judgment rule exists to
protect and promote the full and free
exercise of managerial power granted
to directors. The rule is a presumption
that in making a business decision, the
directors of a corporation acted on an
informed basis, in good faith and in the
honest belief that the action taken was
in the best interest of the company.
(Smith v Van Gorkam)
x----------------------------------------------------------x
III.
Articles of Incorporation
and By- Laws
A.
Corporation, incorporation
documents:
The following incorporation documents

are required:
a. Articles of Incorporation;
b. By-laws;
c. Treasurer's Affidavit which should
state compliance with the
authorized subscribed and paid-up
capital stock requirements.
d. Bank Certificate that the paid-up
capital portion of the authorized
capital stock has been deposited
with the issuing bank.
B. Corporation, where filed: The
incorporation documents should be
filed with the Securities and Exchange
Commission [SEC] of the Philippines.
Page 37 of 274
COMMERCIAL LAW
C. Corporation, what should be
stated:
a. the name of the corporation which
must not be identical or
deceptively or confusingly similar
to any existing corporation;
b. the purpose of the corporation;
c. principal office of the corporation;
d. The term or life of the corporation
which should not exceed fifty [50]
years. This corporate
lifetime may, however, be
extended for another fifty [50]
years but the extension must not
be effected earlier than five [5]
years before the expiration of its
term
2002 Bar Examination: You have
been asked to incorporate a new
company to be called FSB Savings &
Mortgage
Bank,
Inc.
List
the
documents that you must submit to
the
Securities
and
Exchange
Commission (SEC) to obtain a
certificate of incorporation for FSB
Savings and Mortgage Bank, Inc.
A: The documents to be submitted to
the
Securities
and
Exchange
Commission (SEC) to incorporate a new
company to be called FSB Savings &
Mortgage bank, Inc., to obtain the
certificate of incorporation for said
company, are:
1. Articles of Incorporation
2. Treasurers Affidavit;
3. Certificate of authority from the
Monetary Board of the BSP;
4. Verification slip from the records of
the SEC whether or not the
proposed name has already been
adopted by another corporation,
partnership or association;
5. Letter undertaking to change the

proposed name if already adopted
by
another
corporation,
partnership or association;
6. Bank
certificate
of
deposit
concerning the paid-up capital;
7. Letter authorizing the SEC or
Monetary Board or its duly
authorize
representative
to
examine
the
bank
records
regarding the deposit of the paidup capital;
8. Registration sheet;
x----------------------------------------------------------x
IV.
Corporate Management
Levels of management
There are three levels of control in
the corporate hierarchy: (a)The
Board- which determines corporate
policy and prescribes the manner
of general management of its
business
activities
(b)The
Corporate
Officerswho
are
charged with the mandate to
execute the decisions of the board
and who, oftentimes, determine
the best manner by which the
business is to be run (c) The
Stockholders or Members- who are
considered as having residual
power over fundamental corporate
changes as they are required by
law to give their assent by the
exercise of the right to vote.
The powers that are expressly
reserved by law to stockholders or
members
are:(a)
removal
of
directors or trustees (b) granting of
compensation, other than per
diems, to directors (c) ratification
of acts of self dealing director or
trustee, interlocking director/s,
disloyal director/s (d) delegation of
power to amend by-laws (e) calling
Page 38 of 274
COMMERCIAL LAW
of a meeting, upon good cause,
when no person is authorized to
call it (f) when management of a
close corporation is vested in the
stockholders.

Page 39 of 274
COMMERCIAL LAW
ARTICLES OF INCORPORATION
BY-LAWS
Definition
Basic contract document defining the

charter of the corporation
Meant to be an intramural document,

to govern the relationship between and
among the members of a corporate
family.
Significan
ce
Contractu
al
Significan
ce
Condition Precedent in the acquisition

of corporate existence
A contract between 3 parties: [1] the
state and the corporation, [2] the
stockholders and the state, and [3] the
corporation and its stockholders.
Condition subsequent
Effect as
to
Outsiders
Requisites
for
Validity
Bind a third person dealing with the

corporation
Does not bind outsiders
Basic
Content
SEC14
1. The name of the corporation;
2. The specific purpose or purposes
for which the corporation is being
incorporated.
3. The place where the principal
office of the corporation is to be
located, which must be within the
Philippines;
4.
The term for which the
corporation is to exist;
5. The names, nationalities and
residences of the incorporators;
6. The number of directors or
trustees, which shall not be less
than 5 nor more than 15;
Although the power of the corporation

to adopt by-laws is an inherent right,
by-law provisions cannot contravene
the law
1. filed and registered with the SEC

Requisites of VALID BY LAWS:
2. Banks, public utilities, insurance
1. By-Law Provisions Cannot
companies: needs favorable
Contravene Law
recommendation from appropriate 2. By-Law Provisions Cannot
agency that articles are in
Contravene the Charter
accordance with law.
3. By-Laws Must be reasonable and
3. SEC shall examine AOI upon filing
Cannot Discriminate
and upon satisfaction of all legal
requirements, issue certificate of
Effectivity upon issuance of SEC of
incorporation and only then shall
certification that by-laws are not
Corporation have a personality
inconsistent with Corporation Code
separate and distinct from its
stockholders or members.
4. Sworn Statement of the Treasurer
regarding subscription
requirement.

Sec47
1. The time, place and manner of
calling and conducting regular or
special meetings of the directors or
trustees;
2. The time and manner of calling and
conducting
regular
or
special
meetings of the stockholders or
members;
3. The required quorum in meetings of
stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders
and members and the manner of
voting them;
5. The
qualifications,
duties
and
Page 40 of 274
COMMERCIAL LAW
7.
The names, nationalities and

residences of persons who shall
act as directors or trustees until
the first regular directors or
trustees are duly elected and
qualified in accordance with this
Code;
8. 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;
9. 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
10. Such other matters as are not
inconsistent with law and which
the incorporators may deem
necessary and convenient.
Adoption
Amendme
nt
compensation
of
directors
or
trustees, officers and employees;
6. The time for holding the annual
election of directors of trustees and
the mode or manner of giving notice
thereof;
7. The
manner
of
election
or
appointment and the term of office
of all officers other than directors or
trustees;
8. The penalties for violation of the bylaws;
9. In the case of stock corporations,
the manner of issuing stock
certificates; and
10. Such other matters as may be
necessary
for
the
proper
or
convenient
transaction
of
its
corporate business and affairs.
File with the Securities and Exchange

2 INSTANCES:
Commission articles of incorporation in A. Prior to Incorporation, simultaneous
any of the official languages Duly
with the AOI
signed and acknowledged by all of the
Approved & Signed by ALL
incorporators
incorporators and submitted to
SEC
B. Within 1 month after receipt of
official notice of issuance of
certificate of incorporation by SEC
MAJORITY VOTE OF
OUTSTANDING CAPITAL STOCK
Majority vote of BOD / trustees

AND vote or written assent of
2/3 of outstanding capital

2 Ways:
A. Majority Vote of BOD/Trustees AND
Majority Vote of Outstanding
Page 41 of 274
COMMERCIAL LAW
stock, without prejudice to the

appraisal right of dissenting
stockholders
Amendments take effect upon
approval by SEC or from the
date of filing with SEC if not
acted upon within 6months
from date of filing for a cause
not attributable to the
corporation.
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
Grounds
for
Rejection
or
Disapprov
al
SEC 17
1. That the articles of incorporation or
any amendment thereto is not
substantially in accordance with
the form prescribed herein;
2. That the purpose or purposes of
the
corporation
are
patently
unconstitutional, illegal, immoral,
or contrary to government rules
and regulations;
3. That the Treasurer's Affidavit
concerning the amount of capital
stock subscribed and/or paid if
false;
4. 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.
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.
Signed by the SH or Members voting

for them; A copy duly certified to by
majority of directors or trustees &
counter-signed by Corporation
secretary shall be filed w/ SEC attached
to original AOI.
x-------------------------------------------------------x
V.
Board of Directors,
Trustees, Officers
A. Powers of Board of Directors or
Trustees
1. Exercise corporate powers of
all corporations under
Corporation Code
Page 42 of 274
COMMERCIAL LAW
2. By a vote of the Stockholders
representing at least majority of the
outstanding capital stock at a regular
or special meeting.
2. Conduct all business

3. Control and hold all property
B. Term of Directors
For 1 year, or
Until their successors are elected
and
qualified
[Hold-Over
Principle]
C. Requirements for Directors
a) Must own at least 1 share of
capital stock of corporation,
which shall stand in HIS
name on the corporate books
b) Any director who ceases to
own at least 1 share shall
cease to be a director
c) Majority of Directors in BoD
must be RESIDENTS
RULE: The Board of Directors/Trustees is
the repository of corporate powers.
Hence, all 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)
EXCEPTIONS:
1.
Executive
Committee
duly
authorized in the by-laws;
2. Contracted manager which may be
an individual, a
partnership or another corporation.
3.
Close
corporations,
the
stockholders
may
manage
the
business of the corporation instead of
a board of directors, if the articles of
incorporation so provide.
D. 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
1. There is a provision in the by-laws
authorizing
payment
of
compensation; or
LIMIT: In either case, the total yearly

compensation of the directors shall
not exceed 10% of the net income
before income tax of the corporation
during the preceding year.
E. Requirements for Trustees
a) Must be a member of the
non-stock corporation
b) Majority of Trustees in BoT
must be RESIDENTS
F. Causes of Directors Liability:
1.
Knowing authorization of wrongful
acts;
2.
Negligence; and
3.
Conflict of interest.
When? For a director to be held liable for
the acts of corporate officers, the
following conditions must be present :
( LOWELL HOIT & CO. V. DETIG ET. AL)
The director must have
participated in the act
complained of;
He must be guilty of lack of
ordinary and reasonable
supervision; and
He must be guilty of lack of
ordinary
care
in
the
selection of such officer.
INDEPENDENT DIRECTOR
Is a person who, apart from his fees

and shareholdings, is independent of
management and free from any
business or other relationship which
could, or could reasonably be
perceived to, materially interfere
with his exercise of independent
judgment
in
carrying
out
his
responsibilities as a director.
Page 43 of 274
COMMERCIAL LAW
He must not have any personal,

financial, or professional ties with the
corporation,
its
affiliates,
and
subsidiaries that may adversely
affect his ability to act objectively.
Other qualifications are ownership of
at least one share, college graduate
or has been engaged or exposed to
the business of the corporation for
not less than 5 years, be a person of
integrity, probity and hardworking
Under Section 38 of RA 8799, when
the corporation (a) has a class of
equity securities listed for trading on
an Exchange or (b) is a company with
assets of at least 50 million and
having 200 or more holders who hold
at least 100 shares of a class of
stocks or (c) which has sold a class of
equity securities to the public
pursuant to an effective registration
statement must have at least 2
independent directors or at least
20% of board.
Under Section 15 of RA 8791, a
bank must have 2 independent
directors.
ELECTION OF DIRECTORS OR
TRUSTEES
A. Quorum in Meeting for Election
Majority of the outstanding
capital
stock
or
members
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
Election Of Directors:
On
The
STRAIGHT
VOTINGEvery
stockholder through this method,
may vote such number of shares
for as many persons as there are
directors.
CUMULATIVE VOTING1. 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)
2. A minority director elected
through cumulative voting
cannot be removed without
cause. (Sec. 28)
3. 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;
Page 44 of 274
COMMERCIAL LAW
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 its bylaws.
Stockholders or members may attend
and vote in their meetings 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 transferable 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 Bylaws 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 v CA)
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 ByLaws
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
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
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. Directors
or
Trustees
cannot
ATTEND or VOTE by proxy at board
meetings.
POWERS OF CORPORATE OFFICERS
A. Rule on Corporate Officers Power to
Bind the Corporation
An officers 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
Page 45 of 274
COMMERCIAL LAW
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

bylaw 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 contracts that
are within the scope of the powers
of said corporation and that do not
violate any statute or rule on public
policy.
Distinction between a Corporate
Officer and Corporate Employee
CORPORATE
CORPORATE
OFFICER
EMPLOYEE
Position is provided Employed by the
for in the by-laws or action of the
under the
managing officer of
Corporation Code
the corporation
RTC has jurisdiction NLRC has
in case of LABOR
jurisdiction in case
DISPUTE
of labor dispute
NOTE: RTC has jurisdiction over cases
involving
removal
of
corporate
officers.
Disqualification of Directors, Trustees
or Officers
1. Conviction by final judgment of
offense
punishable
by
imprisonment for excess of
6years, or
2. Violation of Code committed
within 5years prior to date of his
election or appointment
Removal of Directors or Trustees

A. How may be removed
1. 2/3 vote of stockholders or
members entitled to vote
2. During a regular meeting or a
special meeting called by the
secretary upon Order from the president
Written demand from
Majority of stockholders or
members entitled to vote
3. 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
1. Call may be directly addressed
to stockholders or members by
demanding
stockholder
or
member
C. Causes for Removal
1. May be with or without case
Cause is usually related
to the 3 Duties of an
Officer/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 sec24.
NOTE: Removal of Board of Director/
Trustee is different from removal of a
corporate
officer.
Stockholders
approval is necessary only for the
Page 46 of 274
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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 .
Vacancies in the office of director or
trustee
A. Grounds for Removal
1. Removal by the stockholder or
members or upon expiration of
term
Vacancy shall be filled by the
stockholders in a regular or
special meeting called for
that purpose.
2. Other Causes than expiration or
removal by SH/Ms
If
remaining
Directors
constitute Quorum - May be
filled by the MAJORITY vote of
the remaining directors
If no quorum - filled by the
that purpose.
3. Proposed amendment of AoI
resulting in increase in number
of directors/trustees
Vacancy shall be filled by the
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 unexpired portion of the
term
Liability of Directors, Trustees
Officers
DUTY OF DILIGENCE
A. Violations of Duty of Diligence

or
1. Wilfully and knowingly vote for

or assent to patently unlawful
acts of the corporation
2. Guilty of gross negligence or bad
faith in directing the affairs of
the corporation
3. Acquire
any
personal
or
pecuniary interest in conflict
with their duty as director or
trustee
4. He consents to the issuance
of watered stocks or who,
having knowledge thereof, does
not forthwith file with the
corporate secretary his written
objection
thereto;
(Tramat
Mercantile Inc. v CA)
5. He agrees to hold himself
personally
and
solidarily
liable with the corporation ;
or (Tramat Mercantile Inc. v CA)
6. He is made, by a specific
provision of law, to personally
answer for his corporate action.
(Tramat Mercantile Inc. v CA)
B. Liability for Violation of Duty
Diligence
Shall be liable jointly and severally for
damages resulting therefrom suffered
the corporation, its stockholders
members and other persons
of
all
by
or
DUTY OF OBEDIENCE
A corporation, through its BoD, should act
in the manner and within the formalities, if
any, prescribed by its charter or by the
general law.
Since the Code still adheres to the ultra
vires doctrine, then the BoD or Trustees of
a corporation is bound to observe the duty
of obedience, which means that they will
direct the affairs of the corporation only in
accordance with the PURPOSES for which it
was organized.
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COMMERCIAL LAW
DUTY OF LOYALTY
A. To act according
best interest
DOCTRINE OF
CORPORATE
OPPORTUNITY
Cover same
subject which is
business
opportunity
Applicable to
directors, trustees
and officers.
Does not cover
Ratification.
Even if 99% of the
SHs affirm the
transactions, the
remaining minority
SHs can still
oppose such a selfdealing transaction
and file a
derivative suit.
Applies to both
stock and nonstock corporations.
to the corporations
DISLOYALTY OF
A DIRECTOR
Cover same
subject which is
business
opportunity
Only applicable to
DIRECTORS and
not to officers
Allows
RATIFICATION of a
transaction by a
self-dealing
director by the
vote of a SHs
representing 2/3
of the OCS
Applies only to
stock corporations
DUTY TO CREDITORS AND OUTSIDERS

A. Upon the insolvency of the
corporation, the BoD are duty
bound to hold the assets of the
corporation
primarily
for
the
payment of the corporations
liabilities [under the Trust Fund
Doctrine]
B. Under Sec65 on Liability of Directors
for Watered Stocks, if director or
officer:
consents to issuance of
stocks for a consideration
less than its par or issued
value
consents to payment in
consideration
other
than
cash, which is valued in
excess of its fair market

value
having knowledge thereof
does not object in writing and
file the same with the
corporate secretary.
C. Such director or officer shall be
SOLIDARILY
LIABLE
with
the
stockholder concerned [buyer] and
its creditors for the DIFFERENCE
between the fair value received at
time of issuance of the stock and its
par or issued value.
Dealings of Directors, Trustees or
Officers with the Corporation
SELF-DEALINGS
Contract between the corporation and one
or more of its directors or trustees or
officers ARE VOIDABLE at the option of the
corporation
BUT VALID IF THE FOLLOWING
ARE PRESENT:
1. Presence of director/trustee in
the board meeting which
approved contract was not
necessary to constitute a
quorum
2. Vote of director or trustee not
necessary for approval of
contract
3. Contract is fair and reasonable
under the circumstances
4. In case of an officer, contract
has been previously authorized
by board of directors
NOTE: If directors presence was required
to meet the quorum [1st requisite] and if
his vote was necessary for approval of the
contract [2nd requisite], the contract may
still be valid if it is RATIFIED by 2/3 of
stockholders or members in a meeting
called for the purpose.
CONTRACTS BETWEEN
CORPORATIONS WITH INTERLOCKING
DIRECTORS
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COMMERCIAL LAW
Contract between 2 or more
corporations
with
a
common
director/s may be valid.
However, to be valid, it must be fair
and reasonable.
A contract between the corporations
with interlocking directors is VOID if
there is FRAUD.
If the interest of the interlocking
director in one corporation is
SUBSTANTIAL
[meaning
stockholdings exceed 20% of the
outstanding capital stock] and his
interest
is
merely
NOMINAL,
contract shall be treated as under
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
interests. (Gokongwei Jr. v SEC)
EXECUTIVE COMMITTEE
May be created by the By-Laws
1) Composition
3 or more members of the

Board of Directors
Appointed by the Board

2) Scope of Powers
Those specific matters within the
competence of the BoD that the
latter may delegate to the
committee via:
By-laws
Majority vote of the

Board
3) Valid Action by the Executive
Committee
Requires majority vote of all the

members of the committee
4) However, Committee CANNOT act in
the following instances:
1. Approval of action where
shareholders approval is
required
2. Filling of vacancies in the
board of directors
3. Amendment or repeal of bylaws or adoption of new bylaws
4. Amendment or repeal of any
board resolution which by
express
terms
is
not
amendable or repealable
5. Distribution of cash dividends
to shareholders
2005 Bar Examination: A Korean
national joined a corporation which is
engaged in the furniture manufacturing
business. He was elected to the Board of
Directors. To complement its furniture
manufacturing business, the corporation
also engaged in the logging business.
With the additional logging activity, can
the Korean national still be a
member of the Board of Directors?
Explain.
A: Yes. The Korean national can still be a
member of the Board of Directors, if he
has sufficient equity to entitle him to a
seat. Since the corporation is only
required to be at least 60% owned by
Filipino citizens, foreigners can be
members of the board of directors in
proportion to their equity which cannot
exceed 40% (Sec.1 P.D. No. 715,
amending C.A. No. Sec. 2-A of C.A. No.
108, The Anti-Dummy Law)
2001 Bar Examination:
a by-law
provision of X Corporation
rendering ineligible or if elected,
subject to removal, a director if he is
Page 49 of 274
COMMERCIAL LAW
also a director in a corporation
whose business is in competition
with or is antagonistic to said
corporation valid and legal? State
your reasons.
A: Yes, the by-law provision is valid. It is
the right of a corporation to protect itself
against possible harm and prejudice that
may be caused by its competitors. The
position of director is highly sensitive and
confidential. To say the least, to allow a
person, who is a director in a corporation
whose business is in competition with or
is antagonistic to X Corporation, to
become also a director in X Corporation
would be harboring a conflict of interest
which
is harmful to the latter.
[Gokongwei,Jr. v. SEC, 89 SCRA 336
(1979); 97 SCRA 78 (1980)].
x----------------------------------------------------------x
VI.
Powers of the Corporation
1) Corporate powers
2) Power to extend or shorten corporate
term
3) Power in increase or decrease capital
stock, incur, create or increase
indebtedness
4) Power to deny pre-emptive right
5) Sale or other disposition of assets
6) Power to acquire shares
7) Power to invest corporate funds in
another corporation or business or for
any other purpose
8) Power to declare dividends
9) Power to
contract
10)
enter
into
management
Ultra Vires Act of the Corporation
Classification of Corporate Powers

Expressed by law or by the
Corporation Code and its articles
of incorporation (AOI)
Those necessary to the exercise of
the express or incidental powers
Those incidental to its existence
Corporate
powers
distinguished
from natural persons or partnerships
Distinguished from those exercised

by natural persons or partnerships,
corporations can only exercise
those expressly authorized by law,
can be implied or are necessary to
carry out its purpose/s, such as
acts in the usual course of
business or incidental to its
existence because they attach to a
corporation upon its creation and
said to be inherent. Natural
persons or partnerships, on the
other hand can exercise or perform
any act provided it is not contrary
to law. The reason being is that
corporations owe their existence to
the state, while natural persons or
partnerships do not.
Distinguishing express powers from

implied powers
Express and Implied powers can
further be distinguished as follows:
(a)
Express powers deal with
main business, object or purposes
of the corporation, while Implied
powers deal with the means and
methods of attaining the object or
purpose (b) Express powers are
determined by the language of the
Page 50 of 274
COMMERCIAL LAW
law and its charter while implied

powers may change according to
time, place and circumstances.
The Test of Express Powers is
whether they are found in the
words of the law / charter while the
Test of Implied Powers is whether
they are purely incidental to its
express powers and is reasonably
necessary to their being carried
out.
CORPORATE POWERS
1. Sue and be sued

ACTUALLY incidental
Corporations de facto may sue or
be sued
Dissolved corporation after the
expiration
of
the
three-year
winding up period ceases to be
de jure or de facto hence cannot
sue or be sued
Foreign corporation without license
from SEC cannot sue in Philippine
courts
A corporation may have good
reputation, if besmirched, may
be a ground for the award of
moral damages
(The Law on Partnerships and
Private Corporations, 2005 Ed.)
2. Succession
a. NOT incidental or inherent, just
like other powers that go into
the very nature/extent of a
corporations juridical entity
3. Adopt/use seal
4. Acquire and convey property
-Incident power
5. Amend articles of incorporation
6. Adopt/amend by-laws consistent with

law/PP
a. ACTUALLY incidental
7. STOCK: issue/sell stocks and sell
treasury stocks; NON-STOCK: admit
members
8. Transact with real/personal property
including securities/bonds of other
corps as lawful business of corp.
requires
9. Merge/consolidate
with
other
corporations
10.Make
reasonable
non-political
donations
Requisites:
Amount is reasonable
Must not aid political
party or candidate or for
purposes of partisan
political activity (The Law
on Partnerships and
Private Corporations,
2005 Ed.)
11.Establish pension/retirement plans
POWER TO EXTEND/SHORTEN
CORPORATE TERM (2000 Bar
Examination)
Majority of BOD, 2/3rds of capital
stock
Extension Sec 37: right of appraisal
for dissenting stockholders
Shortening Sec 81 allows for right of
appraisal, but technically there
shouldnt be, because investors are
also in it for the short-term (there is
no novation)
POWER TO INCREASE/DECREASE
CAPITAL STOCK
stock
Needs SEC approval
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COMMERCIAL LAW
Increase there must be
certification of subscription to
at least 25% of increased stock,
and at least 25% of that
amount paid-up
o Decrease wont 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
o Increase would defeat very
purpose of raising capital
o Decrease there already is
return of part of investments
anyway
ALSO, investing into a corporation
comes with expectation of possible
increase/decrease of shares
o
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 Page 315-316)
What are the available methods to
replenish capital?
1) Additional subscription to shares of
stock of the
corporation by
stockholders or by investors;
2) Advances by the stockholders to the

corporation; or
3) Payment of unpaid subscription by
the stockholders
2001 Bar Examination: Suppose X
Corporation has an authorized capital
stock of P1M divided into 100,000 shares
of stock par value of P10 each.
a. Give two ways whereby said
authorized capital stock may be
increased to about 1.5 M.
Two ways of increasing the authorize
capital stock of X Corporation to 1.5 M
are :
1.
Increase
the
number of shares from
100,000 to 150,000 shares
with the same par value of
P10 each.
2.
Increase
par
value of the 100,000 shares
to 15 pesos each.
b. Give three practical reasons for a

corporation to increase its capital
stock.
The three practical reasons for a
corporation to increase its capital
stock are: (1) to generate more
working capital; (2) to have more
shares with which to pay for the
acquisition of more assets like
acquisitions of company car,
stocks,
house,
machinery
or
business; and (3) to have extra
share with which to cover or meet
the requirement for declaration of
stock dividend.
Page 52 of 274
COMMERCIAL LAW
POWER TO INCUR/CREATE/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 M over real/personal property
stock
Needs SEC approval
o Corp must have minimum net
worth of P25 M and must have
been operating for at least 3
years
UNLIKE NORMAL INDEBTEDNESS,
which does not require 2/3rds
approval:
o Usually very large amount
o Usually with first lien on
important assets
o Usually long period of time
No right of appraisal:
o Would drain financial resources
o Regardless, corporation's
creditors always have priority
over assets anyway
RIGHT TO
SELL/DISPOSE/LEASE/ENCUMBER
SUBSTANTIALL ALL assets
stock
Enterprise-level
transaction:
ALTHOUGH there is no effect in
relationship
between
State
and
corporation - its just as if there is
resetting to starting point of business
life
Compare:
o Usual and regular course of
business (business judgment
doctrine)
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
substantially all: if the business will
be incapable of
o Continuing the business
o Accomplishing its purpose for
incorporation
Although technically,
through sale, a
corporations can always
pursue the business
again so the test is
intent
o Qualitative test (for all:
quantitative)
When no ratificatory vote from the
stockholders/ members needed:
a. If it is necessary in the usual
and regular course of business
b. If the proceeds of the sale or
other disposition of such
property and assets be
appropriated for the conduct of
the remaining business
o
There is right of appraisal: because

unlike shortening of corporate life,
where there is automatic dissolution,
here there is none so SH may be
stuck in a non-performing venture
POWER TO DENY PRE-EMPTIVE
RIGHT
The pre-emptive right is the option

privilege of an existing stockholder to
subscribe to a proportionate part of
Page 53 of 274
COMMERCIAL LAW
shares subsequently issued by the
corporation before same can be disposed
of in favor of the others.
Extent and limitations of preemptive right under the Code
Law
includes
all
issues
or
dispositions of shares of any class
Where the shares are issued in
exchange for prop needed for
corporate purposes, or for a debt
previously contracted, the SH
cannot demand his pre-emptive
right for right may prejudice
corporate interest
Where the shares are issued by
one corporation in exchange for
shares in another corporation in
pursuance of a merger, the preemptive right does not exist,
provided that the issue is made
with approval of 2/3 of the holders
of outstanding stock and is not
made in bad faith
Code allows waiver or denial of
the pre-emptive right provided
it is made in the Articles of
Incorporation either as an
original
provision
or
an
amendment
Waiver of Pre-emptive Right
Any prior waiver or denial of the
pre-emptive right should appear in
the Articles of Incorporation and
not merely in an ordinary waiver
agreement
A waiver through an amendment
to the Articles of Incorporation
would need only 2/3 who may
have dissented but also all
subsequent SHS
If all the existing SHS unanimously

agree to a waiver, although for
some reason no amendment of the
Articles of Incorporation is made
no one among them can later
complain since they are all bound
by their private agreement. But it
would not bind future SHS
SHS must be given reasonable
time in which to exercise their preemptive rights.
2001 Bar Examination: Suppose that

X Corporation has already issued the
1000 originally authorized shares of the
corporation so that its Board of Directors
and stockholders wish to increase Xs
authorized capital stock. After complying
with the requirements of the law on
increase of capital stock, X issued an
additional 1000 shares of the same
value.
a.) Assume that stockholder A
presently holds 200 out of the
1000 original shares. Would A
have a pre-emptive right to 200
of the new issue of 1000 shares?
Why?
Yes, A would have a pre-emptive
right to 200 of the new issue of 1000
shares. A is a stockholder of record
holding 200 shares in X Corporation.
According to the Corporation Code,
each stockholder has the pre-emptive
right to all issues of shares made by
the corporation in proportion to the
number of shares he holds on record
in the corporation
b.) When should stockholder A
exercise the pre-emptive right?
Pre-emptive right must be exercised
in accordance with the Articles of
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COMMERCIAL LAW
Incorporation or the By-Laws. When
Articles of Incorporation or the ByLaws are silent, the Board may fix a
reasonable time within which the
stockholders may exercise the right.
POWER TO PURCHASE OWN SHARES

The conditions under which a stock
corporation can acquire its own
share are: (2005 Bar Examination)
(a) That it be for a legitimate and proper
corporate purpose; and (b) that there
shall be unrestricted retained earnings to
purchase the same and its capital is not
thereby impaired. (Sec. 41, Corporation
Code)
Instances when power may be
exercised:
1. To eliminate fractional shares
2. To
collect/compromise
an
indebtedness to the corporation
arising from unpaid 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
POWER TO INVEST CORPORATE

FUNDS IN ANOTHER
CORPORATION/BUSINESS
May invest in corporation/business
organized for any purpose apart from
the primary purpose from which the
investing business was organized

Majority of BOD + 2/3rds vote of

stockholders
Sec 42: When investment is
reasonably necessary to accomplish
primary purpose: approval of
stockholders not necessary
o Lies under business judgment
doctrine
o 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 section 42, investment requiring
ratificatory vote: when there is
management involved of the other
company, and not just investment per
se
o If there is no ratificatory vote:
ultra vires where those entering
into the contract have no
authority
POWER TO DECLARE DIVIDENDS

DIVIDENDS: corporate profits set aside,
declared and ordered to be paid by the
directors
for
distribution
among
shareholders at a fixed time.
Forms:
a. Cash
b. Property
c. Stock
Requisites:
1. Existence
of
unrestricted
retained earnings out of which
the
dividends
may
be
declared and paid (2009 Bar
Page 55 of 274
COMMERCIAL LAW
Examination: True or False Q;
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 Page
315-316)
Out of unrestricted retained earnings,

payable in cash, property, or stocks
o To all stockholders, based on
outstanding capital stock held
o HOWEVER, cash dividends due
on delinquent stock:
Apply first to unpaid balance on
subscription
Plus costs and expenses
Stock dividends withheld until
unpaid subscription is fully paid
o No stock dividend issued without
approval of 2/3rds shares at
regular/special meeting
o Nielson v Lepanto: corporation
cannot issue stock dividends to
pay for a non-stockholder
o Report to SEC within 15 days
from declaration
GENERAL RULE: Stock corporations

cannot retain surplus profits in
excess of 100% of paid-up capital
stock (2001 Bar Examination),
except:
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
2005 Bar Examination: Distinguish
dividend from profit; cash dividend
from stock dividend.
Profits
belong to the corporation, while
dividends belong to the stockholders
when dividend is declared.
A
cash
dividend involves disbursement of
earnings to stockholders, while stock
dividend does not involve any
disbursement. A cash dividend affects
the fractional interest in property
which each share represents, while a
stock
dividend
decreases
the
fractional
interest
in
corporate
property which each share represents.
A cash dividend does not increase the
legal capital, while a stock dividend
does, as there is no cash outlay
involved. Cash dividends are subject
to income tax, while stock dividends
are not. Declaration of stock dividend
requires the approval of both the
majority of the members of the board
of directors will suffice.
2001 Bar Examination: Are there
instances when a corporation shall
not be held liable for not declaring
dividends?
The instances when a corporation shall
not be held liable for not declaring
dividends are: 1) when justified by
definite
corporate
expansion
projects or programs approved by
the board of directors; or (2) when
the corporation is prohibited under
any loan agreement with any
financial institution or creditor,
Page 56 of 274
COMMERCIAL LAW
whether local or foreign, from
declaring dividends without its or
his consent, and such consent has
not been secured; or (3) when it can
be clearly shown that such retention
is
necessary
under
special
circumstances
obtaining
in
the
corporation, such as when there is
need for special reserve for probable
contingencies.
POWER TO ENTER INTO
MANAGEMENT CONTRACT
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
o EXCEPT,
where
2/3
votes
needed: if a stockholder/s in
both managing and managed
corporation owns more than 1/3
of total outstanding voting
capital stock of managing
corporation OR majority of BOD
in managing corp. is also
majority of BOD in managed
corporation
The management contract must not
be longer than 5 years
ULTRA VIRES (beyond powers) ACT
2009 Bar Examination
An act committed outside the object for
which a corporation is created as defined
by the law of its organization and

therefore beyond the powers conferred
upon by law. (Republic vs. Acoje Mining
Co., Inc. 7 SCRA 361)
Types: (Philippine Corporate Law,
Villanueva, 2001 ed.)
1. Acts done beyond the powers of the
corporation as provided in the laws
or its AoI;
2. Acts or contracts entered into in
behalf of the corporation by persons
who have no corporate authority
(ultra vires of officers and NOT
the corporation)
3. Acts or contracts, which are per se
illegal as being contrary to law.
x----------------------------------------------------------x
VII.
Meetings
Why required
Meetings
are
necessary
because corporate powers are
vested
in
the
Board
or
stockholders or members as a
body and not as individuals. It
serves
as
protection
and
assurance to stockholders or
members as it affords them an
opportunity to be heard and to
discuss the matter at hand and
vote thereon.
When not necessary
The instances when meetings

are not necessary are (a) when
a
corporation
amends
its
articles and written asset is
Page 57 of 274
COMMERCIAL LAW
sufficient (b) when there is an
agreement to be bound despite
the absence of a meeting (c)
when the Articles of a close
corporation allows directors to
take action without a meeting
Requisites of a valid meeting
A valid meeting is one that is:

(a) held at the proper place
(b)held at the stated date and
time or at a reasonable time
thereafter (c) called by the
proper person (d) with previous
notice
(e) attended by a
quorum.
Effects of action taken during invalid

meetings
In stockholder or member
meetings,
there
being
a
quorum consisting of a majority
of the outstanding capital
stock,
the
business
so
transacted shall be valid if
within the powers of the
corporation. Even if meeting is
improperly called or held, acts
are still valid if within the
powers of the corporation and
all stockholders or members
are
present
or
duly
represented.
In
directors
or
trustees
meetings,
there
being
a
quorum, all acts are valid. But if
not undertaken in a duly
convened meeting, they are
generally invalid but may be
ratified.
Percentage of votes required
Ordinarily a majority vote is

required of stockholders or

members in the following

instances:
(a)
election
of
members of the
Board (b)
removal of directors or trustees
(c) approval of management
contracts
(d)
adopt
by
laws/amend/or repeal or revoke
power delegated to the Board
(e) fix issued price of no par
value
shares
(f)
fixing
compensation of directors. In
all other instances, a 2/3 vote is
required.
In determining compliance with
the 2/3 vote, non-voting shares
shall be included if it involves
the following: (a) amendment
of articles (b)
adoption or
amendment of by laws (c) sale,
lease, exchange, pledge or
other disposition of all or
substantially all of corporate
property (d) increase/decrease
of
corporate
bonded
indebtedness
(e)
increase/decrease of capital
stock (f) merger/consolidation
(g)
investment in another
corporation or business, and (h)
dissolution
Who can vote
Stockholders or Members can

exercise the right to vote as it
is through its exercise that they
are able to participate in
management. The right to vote
is inherent in stock ownership
or in membership. This right
exists provided, they remain as
such
in the books of the
corporation as of the date fixed
in the notice.
If the stock is co-owned, the
consent of all is necessary
except when all of them have
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executed a proxy. If owned in

an and/or capacity, any one can
vote.
All stockholders can exercise
the right to vote provided the
shares are not delinquent, they
are non-voting except if Section
6 applies, or the shares are
treasury shares.
A person not a stockholder may
exercise the right to vote when:
(a) they are pledgees or
mortgagees and are given the
right and such is recorded in
the books of the corporation (b)
they
are
executors,
administrators, receivers and
other
legal
representatives
appointed by the Court (c) heirs
of a stockholder who have
executed a judicial or extrajudicial settlement, registered
with the Registry of Deeds upon
presentation of the settlement.
at any one time (d) it is valid

only for the meeting for which
it is intended unless otherwise
provided.
Voting trust agreements
Manner of voting
The right to vote may be

exercised in person or by proxy
A
proxy
is
a
formal
authorization given by the
holder of the stock who has the
right to vote , or by a member,
to another person to exercise
the voting right of former.
The requisites of a valid proxy
are (a) it must be in writing and
signed by the stockholder or
member (b) filed before the
scheduled meeting with the
corporate
secretary
(c)
it
should not be valid and
effective for a period of 5 years

It is an agreement in writing
whereby
one
or
more
stockholders
transfer
their
share, to any person/s having
authority to act as a trustee for
the purpose of vesting in such
person voting or other rights
pertaining to the shares for a
certain period not exceeding
that fixed in the Corporation
Code and upon terms and
conditions
stated
in
the
agreement.
Its limitations are: (a) it should
not be executed for a period
not excess of 5 years, except if
executed as a condition for a
loan nor should it be executed
to circumvent the law against
monopolies
and
illegal
combinations in restraint of
trade or used for purposes of
fraud (b) must be in writing,
notarized
containing
and
specifying
all
terms
and
conditions (c) a certified copy
must be filed with the SEC,
otherwise it is ineffective or
unenforceable (d) it should be
subject to examination (e) it
should automatically expire at
the end of the agreed period
The voting trustee shall (a)
possess the right to vote (b)
exercise the right to vote in
person / proxy (c) has the right
of inspection (d) since he is
legal holder he can be elected
as a director
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The distinctions between a

proxy and a voting trust are (a)
proxy has no legal title, trustor
has legal title (b) the proxy is
generally revocable, while a
voting trust generally is not
revocable (c) proxy can only act
at a specified meeting unless it
is continuing, a trustee is not so
limited (d) proxy can only vote
if proxy giver is not present
while
a
trustee
votes
nevertheless (e) a proxy is
usually shorter in duration than
a voting trust
x----------------------------------------------------------x
VIII.
Stocks and Stockholders
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 likewise subject to the same
liabilities. (Sec. 6)
How are shares CLASSIFIED?
1. COMMON SHARES are the basic
class of stock ordinarily and usually
issued without extraordinary rights
and privileges. The owners thereof are
entitled 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.
2. 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.
Preferred or Redeemable shares
may be deprived of voting rights (Sec.
6).
KINDS OF PREFERRED SHARES AS TO
DIVIDENDS
1. Cumulative preferred share - a
share which entitles the holder
thereof not only the payment of
current dividends but also of
dividends in arrears.
2. Non cumulative preferred
share- a share which allows the
holder thereof to the payment of
current dividends only without
regards to dividends in arrears.
3. Participating preferred share- 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
share- 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:
i. Redeemable shares may be
issued only when expressly
provided for in the articles of
incorporation;
ii. Terms and conditions affecting
said shares must be stated both
in the articles of incorporation
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and in the certificates of stock
representing such shares;
iii.
Redeemable shares may be
deprived of voting rights in the
articles of incorporation, unless
otherwise provided in the Code.
iv. Redeemable shares may be
redeemed, regardless of the
existence
of
unrestricted
retained earnings (Sec. 8), and
provided further that the
corporation has, after such
redemption, sufficient assets in
its books to absorb corporate
debts and liabilities.
TREASURY SHARES are shares that
have been earlier issued as fully paid
and have thereafter been acquired by the
corporation by purchase, donation,
redemption or through some lawful
means. (Sec. 9)
When treasury shares are sold
below its par or issued value, there
can be no watering of stock
because
watering
of
stock
contemplates
an
original
issuance of shares.
PAR VALUE SHARES are shares with a
value fixed in the certificates of stock and
the articles of incorporation.
NO PAR VALUE SHARES are shares
having no par value but have an issued
value stated in the certificate or articles
of incorporation.
LIMITATIONS:
1. No par value shares can have an
issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so
that no part of it should be
distributed as dividends;
3. They cannot be issued as
preferred stocks;
4. They cannot be issued
by
banks,
trust
companies,
insurance
companies, public
utilities and building and loan

association;
5. The articles of incorporation
must state the fact that it issued
no par value shares as well as
the number of said shares;
6. Once issued, they are deemed
fully paid and non-assessable.
(Sec. 6)
WATERED STOCK
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 returned
earnings or surplus.
WAYS TO BECOME A STOCKHOLDER
OF A CORPORATION.
1. Subscription contract with the
corporation
2. Purchase or acquisition of shares
from existing stockholder; and
3. Purchase of treasury shares from the
corporation
SUBSCRIPTION
PURCHASE OF
SHARES
refers to
refers to issued
unissued shares
shares
Corporation still
Can only be
to be form or
made when the
already in
corporation is
existence
already in
existence
The subscriber
The purchaser
can exercise all
can only
his right as a
exercise his right
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COMMERCIAL LAW
stockholder even
before full
payment of the
subscription.
Corporate
creditors may
proceed against
the subscriber
for his unpaid
subscription in
case the
corporate asset
are not sufficient
to satisfy their
claims.
Subscriber may
not be legally
released from
the payment of
his unpaid
subscription
UNLESS no
creditors would
be prejudiced
and all the
stockholders
agree thereto.
Subscription
may be in any
form , not
covered by the
statute of frauds.
constitutes a binding contract among

the subscribers.
upon full
payment of the
purchase price.
Corporate
creditor cannot
proceed against
the purchaser for
the balance of
the purchase
price , because
of the lack of
privity of contact
between them.
The corporation
can rescind or
cancel the
contract in case
of non fulfillment
by the buyer.
Purchase of
shares is
covered by the
statute of frauds
in cases of
purchases
amounting to
more than P500.
Consequently the subscribers are
not real parties in interest in a
case
for
rescission
of
the
subscription contract of another
subscriber because they are not
parties thereto. (Ong Yong v. Tiu,
April 6, 2003)
Kinds of subscription contract:

1. Pre-incorporation subscription
One entered into before incorporation.
Pre-incorporation
subscription
2.
3.
4.
5.
Note: It shall be irrevocable for a

period of at least 6 years from
the date of subscription unless:
All of the other subscribers
consent to the revocation, or
The
incorporation
fails
to
materialize.
It shall likewise be irrevocable after
the submission of the articles of
incorporations to the SEC.
Post incorporation subscription
Conditional subscription
Absolute subscription
Subscription with a special term.
UNDERWRITING AGREEMENT
An underwriting agreement between a
corporation and a third person, termed
the underwriter, 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.
CONSIDERATION OF STOCKS
Valid considerations in subscription
agreement:
1. Cash actually received;
2. Property,
tangible
or
intangible
necessary
or
convenient for its use and
lawful purpose;
3. Labor or services actually
rendered to the corporation;
4. Previously
incurred
corporate
indebtedness;
(Note:
the
indebtedness
involved must be one that is
acknowledge by the board.)
5. Amounts transferred from
unrestricted
retained
earnings to stated capital;
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6. Outstanding
shares
in
exchange for stocks in the
event of reclassification or
conversion.
CERTIFICATE
OF
STOCK
TRANSFER OF SHARES.
CAPITAL STOCK
Is the amount paid
in or secured to be
paid
in
by
the
stockholders
upon
which
the
corporation
is
to
conduct
its
operation. It is the
property of the
corporation itself.
AND
SHARES
OF
STOCK
Is the interest or
right which the
stockholder has in
the management of
the corporation, its
surplus profits, and
upon dissolution, in
all of its assets
remaining
after
payment
of
corporate debts.
WHEN
do
stocks
become
DELINQUENT?
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.
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)
CERTIFICATE OF STOCKS
It is the paper representation or
tangible evidence of the stock itself
and of the various interest therein.
It is not essential to the ownership
and/ or existence of the share of
stock.
Issuance of Certificate Of Stock
Under
the
Doctrine
of
Individuality of Subscription,
subscription
is
one,
entire,
indivisible, and whole contract
which cannot be divided into
portions. Thus, no certificate of
stock shall be issued until the full
amount of the subscription is paid.
Lost certificates
The
procedure
for
the
procurement
of
lost
or
replacements certificates is as
follows: (a)
the registered
owner or legal representative
shall
file
an
affidavit
in
triplicate setting forth (1)
circumstances of the loss, theft,
or destruction (2) number of
shares, number of certificate
and name of the corporation (3)
such other matter or evidence
he may deem necessary (b)
Upon
verification
of
the
affidavit
and
books,
the
corporation shall cause notice
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COMMERCIAL LAW
of loss to be published at
stockholder expense for 3
consecutive weeks, stating the
specifics of loss and that 1 year
from date of publication, should
no contest be presented, it will
cancel
and
issue
new
certificates,
unless
the
stockholder files a bond or
surety
good
for
1
year
satisfactory to the board.
Provided, in any case, if contest
or suit is brought/presented,
the issuance of the certificate
shall be suspended until a final
decision of the court or
determination of ownership is
made.
Except in case of fraud, bad
faith or negligence of the
corporation, no action can be
brought against it for issuing a
certificate/s pursuant to the
procedure laid down.
MODES OF STOCK TRANSFER

1. Indorsement and delivery of stock
certificate and to issue a new
certificate
unless
the
original
certificate
is
surrendered
for
cancellation or is clearly shown to
have been lost or stolen, or
destroyed.
2. Transfer
made
in
a
separate
instrument- while an assignment may
be valid and binding between parties
despite non-compliance with the
requisite endorsement and delivery, it
does not necessarily make the
transfer effective for the assignee
cannot enjoy the status of a
stockholder until and unless the issue
of ownership is resolved with finality.
3. Judicial or extra judicial settlement of
estate- upon the death of the
stockholder, his administrator or
executor becomes vested with the
legal title of the stock until the

settlement and division of the estate
is made.
WHAT
ARE
THE
RIGHTS
STOCKHOLDERS?
1. Managerial Rights
2. Proprietary Rights
3. Pre-emptive Right
4. Remedial Rights
5. Appraisal Rights
6. Inspection Rights
OF
MANAGERIAL RIGHTS
1. Voting rights; and
2. Right
to
remove
directors
What are the LIMITATIONS on the
stockholders RIGHT TO VOTE?
1. 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;
2. Preferred or redeemable shares
may be deprived of the right to
vote unless otherwise provided in
the Code;
3. Fractional shares of stock cannot
be voted;
4. Treasury shares have no voting
rights as long as they remain in
the treasury;
5. Holders
of
stock
declared
delinquent by the board of
directors for unpaid subscription
are not entitled to vote or to a
representation
at
any
stockholder's meeting; and
6. A transferee of stock cannot vote if
his transfer is not registered in the
stock and transfer book of the
corporation.
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PROPRIETARY RIGHTS
1. Right to dividends;
2. Right
to
issuance
of
stock
certificate for fully paid shares;
3. Proportionate participation in the
distribution of assets in liquidation;
4. Right to transfer of stocks in
corporate books;
5. Preemptive right;
6. Right to inspect books and records;
7. Right to be furnished of the most
recent
financial
statement/financial report;
8. Right to recover stocks unlawfully
sold for delinquent payment of
subscription.
PREEMPTIVE RIGHT OF
STOCKHOLDER
It is the shareholders' preferential
right to subscribe to all issues or
dispositions of shares of any class in
proportion
to
their
present
stockholdings.
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 the corporation 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 offered for
subscription.
REMEDIAL RIGHTS
1. Individual suita suit instituted by a
shareholder for his own behalf against
the corporation;
2. Representative suita 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
3. Derivative suit (2009, 2006, 2005
2004 Bar examination)a suit filed
in behalf of the corporation by its
shareholders upon a cause of action
belonging to the corporation, but not
duly pursued by it, against any person
or against the directors, officers
and/or controlling shareholders of the
corporation.
Creditors
do not
file
derivative suits, but rather
have remedies which are
merely subsidiary such as
accion
subrogatoria
and
accion pauliana.
Requisites for a valid derivative
suit (2004 Bar Examination):
1. Existing cause of action in favor
of the corporation;
2. Stockholder/member must first
make a demand upon the
corporation or the management
to sue unless such a demand
would be futile;
3. Stockholder/member must be
such at the time of the
objectionable
acts
or
transactions
unless
the
transactions are continuously
injurious; and
4. Action must be brought in the
name of the corporation which
must be alleged.
NOTE: The stockholder is only a
nominal party in a derivative suit.
The real party in interest is the
corporation.
APPRAISAL
RIGHTS
Examination)
(2007
Page 65 of 274
Bar
COMMERCIAL LAW
Appraisal right 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. It is the right of a
stockholder to withdraw from the
corporation and demand payment of the
fair value of his shares after dissenting
from certain corporate acts involving
fundamental changes in the corporate
structure namely: (ASIM)
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
What
is
an
intra-corporate
controversy? (2006 Bar Examination)

An intra-corporate controversy is
a dispute between a stockholder and
the corporation of which he is a
stockholder,
or
between
a
stockholder and another stockholder
of the same corporation, where the
subject of the dispute or controversy
arose out of such relationship
(Sunset View Condominium Corp. v.
Campos, Jr., 104 SCRA 303 [1981]).
An intra-corporate dispute is a civil
case involving the following: (a)
devices or schemes employed by,
or any act of, the board of
directors,
business
associates,
officers or partners, amounting to
fraud or misrepresentation which
may be detrimental to the interest
of the public and/ or of the
stockholders,
partners,
or
members of any corporation,
partnership, or association; (b)
controversies arising out of intracorporate,
partnership,
or
association relations, between and
among stockholders, members or
associates; and between, any or all
of them and the corporation,
partnership, or association of
which they are stockholders,
members,
or
associates,
respectively; (c) controversies in
the election or appointment of
directors, trustees, officers, or
managers
of
corporations,
partnerships, or associations; (d)
derivative suits; and (e) inspection
of corporate books (SC Adm.
Memo. No. 01-2-04 [2001]).
INSPECTION RIGHTS
Corporate Books and Financial
Records
The following corporate books and
records must be kept and preserved at its
principal office (1) record of all business
Page 66 of 274
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transactions (2) minutes of stockholders
or Board meetings, setting forth: time
and place, how authorized, notice given,
whether regular or special, those
present/absent, every act done or
ordered. Upon demand, the time that the
a director, trustee or officer entered or
left, the yeas and the nay, and any
protest may be recorded in full (3) stock
and transfer book which should contain a
record
of
all
stocks,
names
of
stockholders, installments paid/unpaid,
statement of alienation, date thereof and
other matters prescribed by the By-Laws.
These records are subject to the
inspection rights of the Stockholders.
LIMITATIONS
of
the
Inspection
rights:
1. Right must be exercised during
reasonable hours on business
days;
2. Person demanding the right has
not improperly used
3. any information obtained through
any previous examination of the
books
and
records
of
the
corporation; and
4. Demand is made in good faith or
for a legitimate purpose. (Sec. 74)
x----------------------------------------------------------x
IX.
STOCKHOLDER PROTECTION
DEVICES
1.
Tender Offers is a public offer to
purchase a specified number of shares
from shareholders usually at a premium
in an attempt to gain control of the
issuing company. Note that in some
instances, the premium is payable only if
the offeror is able to obtain the required
number of shares.
1.1
A Tender Offer disclosure will be
required if a person (Includes a
partnership,
limited
partnership,
syndicate, corporation or any other

group) intends to acquire at least thirty
five percent (35%) or at least thirty five
percent (35%) over a period of twelve
months any class of equity security of a
listed corporation or even if the
acquisition is less than thirty five percent
(35%) it would result in ownership of over
fifty one percent (51%).
2.
Proxy Solicitations is an action to
secure the right to vote of so much a
number of shares to ensure the approval
of a proposed corporate action/s. It
provides shareholders with appropriate
information to permit an intelligent
decision on whether to permit their
shares to be voted as solicited for a
particular matter at a forthcoming
stockholders meeting.
x----------------------------------------------------------x
X.
Merger, Consolidation, and

Dissolution
MERGER
One
or
more
existing corporations
are absorbed
by
another corporation
which survives (A+B
=A or B)
CONSOLIDATIO
N
Union of 2 or
more
corporations
to
form
a
new
corporation
called
a
consolidated
corporation
(A+B =C)
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Parties
called
constituent
corporations
Absorbed corporation
dissolved
without
liquidation of assets
Absorbing
corporation acquires
all
assets
and
assumes liabilities of
the
absorbed
corporation
regardless of WON
creditors consented
SHS
of
absorbed
corporation become
SHS of absorbing
corp.
Same
All
constituent
corporation are
dissolved without
liquidation
of
assets;
consolidated
corporation
survives
Consolidated
corporation
acquires
all
assets
and
assumes
liabilities
of
constituent
corps. regardless
of
WON
creditors
consented
SHS
of
constituent
corps. becomes
SHs
of
consolidated
corp.
DISSOLUTION
When the corporation ceases to be a
juridical person.
METHODS: (Sec 117, BP 68)
1.
Voluntary
2.
Involuntary
A
corporation
may
be
dissolved by the SEC upon filing of
verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules
and regulation. (Sec 121, BP 68)
The three (3) methods by which a
stock corporation may be voluntarily
dissolved
are:
(2002
Bar
Examination)
1. Voluntary dissolution where no

creditors is 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 Securities and Exchange
Commission.
2. Voluntary
dissolution
where
creditors are affected. This is done
by a petition for dissolution which
must be filed with the Securities and
Exchange Commission, 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.
When corporation is deemed
dissolved:
Method
Sec. 118, when no creditors are
affected
Sec. 119, where creditors are affected
Sec. 120, dissolution by shortening
corporate term
When deem
Upon issua
When judg
corporation
Upon appr
incorporati
shortened
INVOLUNTARY DISSOLUTION
Grounds for Involuntary Dissolution:
A. If the corporation does not
formally organize and commence
the transaction of its business or
the construction of its works
within 2years from the date of its
incorporation, its corporate power
ceases and the corporation shall
be deemed dissolved;
Page 68 of 274
COMMERCIAL LAW
B. If
the
corporation
has
commenced the transaction of its
business,
but
subsequently
becomes
continuously
inoperative for a period of at
least 5 years, the same shall be a
ground
for
suspension
or
revocation
of
its
corporate
franchise
or
certificate
of
incorporation
C. When the corporation fails to
adopt and filed a code of by-laws
in the manner provided for by law
D. When
the
corporation
has
offended against a provision of
law for its creation or renewal
E. When it has committed or
omitted an act which amounts to
a surrender of its corporate
rights, privileges, or franchises
F. When it has misused a right,
privilege, or franchise conferred
upon it by law, or when it has
exercised a right, privilege, or
franchise in contravention of law,
such as commission by the
corporation of ultra vires or illegal
acts.
G. When on the basis of findings and
recommendations of a duly
appointed
management
committee
or
rehabilitation
receiver, or based on the SECs
own findings, the continuance of
the business of the corporation
would
not
be
feasible
or
profitable nor work to the best
interest of the SHs, partieslitigants, creditors, or the general
public
H. When the corporation is guilty of
fraud in procuring its certificate of
registration
I. 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.
J. 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
K. Failure of the corporation to file
required reports in appropriate
forms as determined by the SEC
within the prescribed period
EFFECTS OF DISSOLUTION
The effects of dissolution are: (a)
legal title to corporate property is vested
in
stockholders
or
members
(b)
corporation ceases as a body politic to
continue the business for which it was
organized (c) it cannot be revived (d)
dissolution does not by itself imply the
diminution or extinguishment of rights (e)
upon expiration of the winding up period
of 3 years, the corporation ceases, it can
no longer sue or be sued
CORPORATE LIQUIDATION
Every corporation whose charter
expires by its own limitation or is
annulled by forfeiture or otherwise, or
whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be continued
as a body corporate for 3 years after the
time when it would have been so
dissolved, for the purpose of
prosecuting and defending suits by
or against it
enabling it to settle and close its
affairs,
to dispose of and convey its
property and
to distribute its assets,
BUT NOT for the purpose of
continuing the business for which it
was established. At any time during
said 3 years, said corporation is
Page 69 of 274
COMMERCIAL LAW
authorized and empowered to convey all
of its property to trustees for the benefit
of : stockholders, members, creditors,
and other persons in interest.
entitled to one vote. In exercising

the right, he may vote by proxy
and also by mail or other similar
means as authorized by the
Articles of Incorporation or ByLaws with the approval of and
under conditions prescribed by the
SEC (b) membership and all rights
are personal and non transferable
unless provided in the Articles of
Incorporation or By-Laws. It may
be terminated in the manner and
for causes provided in the Articles
of Incorporation or By-Laws. Courts
have
no
power
to
strip
membership as it constitutes an
unwarranted
and
undue
interference with the right of a
corporation
to
determine
its
membership (c) it may have any
number of trustees as fixed in the
Articles of Incorporation or By-law
from the ranks of its membership.
The term of the original trustees is
such that 1/3 of their number shall
serve for a year, the second 1/3 for
two years and the third 1/3 for
three years. Trustees subsequently
elected shall then serve for a term
of three years. Trustees elected to
fill vacancies, shall only serve for
the
unexpired
portion
(d)
corporate officers are elected by
the members, unless otherwise
provided
by
Articles
of
Incorporation
or
By-Laws
(e)
meetings can be held outside the
place
of
principal
business.
Provided, there be notice of the
date, time, and place but should
always be in the Philippines.
BAR
QUESTION:
2001
Bar
Examination
X Corporation shortened its corporate
life
by amending
its articles in
corporation. It has no debt but owns a
prime property located in Quezon City.
How
would
the
property
be
liquidated
among
the
five
stockholders of said corporation?
Discuss two methods of liquidation.
A: The prime property of X Corporation
can be liquidated among the five
stockholders after the property has been
conveyed by the Corporation to the five
stockholders, by dividing or partitioning it
among themselves
in any of the
following ways: (1) by physical division
or partition based on the proportion of
the values of their stockholdings; or (2)
selling the property to a third
person and dividing the proceeds
among the five stockholders in proportion
to their stockholdings; or (3) after the
determination of the value
of the
property, by assigning or transferring
the property to one stockholder with
the obligation on the part of the said
stockholder to pay the other four
stockholders the amount/s in proportion
to the value of the stockholding of each.
x----------------------------------------------------------x
XI.
Non-Stock Corporations
Some
significant
differences
between stock and non-stock are:
(a) subject to the Articles of
Incorporation or By-Laws, the right
to vote may be limited, broadened
or denied to some extent. Unless
so provided, each member is

x----------------------------------------------------------x
XII.
Close Corporations
Page 70 of 274
COMMERCIAL LAW
A close corporation is a corporation
whose articles provide that: (a) all the
corporations issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified of persons not to
exceed 20 (b) all issued stock of all
classes shall be subject to one or
more specified restrictions on transfer
permitted in this title. Any restriction
can be put provided: (1)
the
restriction must appear in the Articles
of Incorporation/By-Laws as well as
the certificate of stock, otherwise it is
not binding on a purchaser in good
faith (2) it or they should not be more
onerous than that granting the
existing
stockholders
or
the
corporation the option to purchase
the shares with such reasonable
terms, conditions or periods stated
therein. If at the end/expiration of the
period, a stockholder/s or the
corporation fails to exercise the option
to
purchase,
the
transferring
stockholder may sell his shares to any
third person (c)the corporation must
not list in any stock exchange or make
any public offering of any of its stock
of any class. Notwithstanding, if 2/3 of
its voting stock or voting rights is
owned or controlled by another
corporation which is not a close
corporation within the meaning of the
Corporation Code, the corporation
shall not be deemed a close
corporation.
x----------------------------------------------------------x
XIII. Special Corporations
Educational Corporations are stock
or
non-stock
corporations
organized to provide facilities for
teaching or instruction and are
governed by special laws and by
general
provisions
of
the
Corporation Code. Prior to its
incorporation,
a
favorable
recommendation must be obtained
from the Department of Education.
Religious
Corporations
are
corporations incorporated by one
or more persons classified as
corporation
sole
or
religious
society. They are composed of
entirely spiritual persons and
which
is
organized
for
the
furtherance of a religion or for
perpetrating the rights of the
church or for the administration of
church or religious work or
property
x----------------------------------------------------------x
XIV.
Foreign Corporations
A foreign corporation is one formed,

organized or existing under any law other
than those of the Philippines and whose
law allow Filipino citizens and corporation
to do business in its own country or state
(sec 123)
It is NOT permitted to transact or

do business in the Philippines until
it has secured a license for that
purpose
from
SEC
and
a
certificate of authority from the
appropriate government agency.
Who is a RESIDENT AGENT? An
individual, who must be of good
moral character and of sound
financial standing, residing in the
Philippines,
or
a
domestic
corporation lawfully transacting
business
in
the
Philippines,
designated in a written power of
attorney by a foreign corporation
Page 71 of 274
COMMERCIAL LAW
authorized to do business in the
Philippines,
on
whom
any
summons
and
other
legal
processes may be served in all
actions or other legal proceedings
against the foreign corporation.
(Sec. 127-128)
What is the test of DOING OR
TRANSACTING BUSINESS IN THE
PHILIPPINES? The Corporation Code
does not define the phrase "doing or
transacting business."
(2002 Bar
Examination)
A. JURISPRUDENTIAL TESTS:
1. TWIN CHARACTERIZATION TEST
a. Substance TestWhether
the foreign corporation is
maintaining or continuing in
the Philippines the body or
substance of the business
for which it was organized or
whether it has substantially
retired from it and turned it
over another); and
b. Continuity TestWhether
there
is
continuity
of
commercial dealings and
arrangements,
contemplating
to
some
extent the performance of
acts or works or the exercise
of some functions normally
incident
to
and
in
progressive prosecution of,
the purpose and object of its
organization
2. CONTRACT TEST
Whether
the
contracts
entered into by the foreign
corporation, or by an agent acting
under the control and direction of
the
foreign
corporation,
are
consummated in the Philippines.

B. STATUTORY TESTS:
Under the Foreign Investment
Act of 1991 (R.A. No. 7042) the
following acts constitute "doing
business":
i. Soliciting orders, service contract
opening offices, whether called
liaison offices or branches;
ii. Appointing
representatives
or
distributors
domiciled
in
the
Philippines or who in any calendar
year stay in the country for a period
or periods totaling 180 days or
more;
iii. Participating in the management,
supervision or control of any
domestic business, firm or entity or
corporation in the Philippines; and
iv. Any other act or acts that imply a
continuity of commercial dealings
or arrangements, and contemplate
to that extent the performance of
acts or works, or the exercise of
some of, the functions normally
incident to, and in progressive
prosecution of, commercial gain or
of the purpose of the
business
organization.
Jurisprudential Rules
1. Doctrine
Transactions
of
Isolated
Foreign
Corporations,
even
unlicensed ones, can sue or be
sued on a transaction or series of
transactions set apart from their
common business in the sense
that there is no intention to
engage in a progressive pursuit of
purpose and object of the business
transaction. (eriks Pte. Ltd vs. CA,
267 SCRA 567)
Page 72 of 274
COMMERCIAL LAW
2. In Pari Delicto Rule
In
the
case
of
Top-Weld
Manufacturing vs. ECED, SA., the
Court denied the relief prayed for
by the petitioner when it ruled that
the very purpose of the law was
circumvented and evaded when
the petitioner entered into the said
agreements despite the prohibition
contained in the questioned law.
The parties are considered in pari
delicto because they equally
violated RA 5455.
3. Estoppel Rule
A
party
is
stopped
from
questioning the capacity of a
foreign corporation to institute an
action in our courts where it had
obtained benefits from its dealings
with such foreign corporations and
thereafter committed a breach or
sought
to
renege
on
its
obligations. (Merrill Lynch vs. CA,
GR No. 978160, July 24, 1992)
x----------------------------------------------------------x
XV. Corporate Rehabilitation
Who can file? Filing of the VERIFIED
POSITION with the appropriate RTC by:
a. Corporate debtor which
foresees the impossibility of
meeting its debts when they
respectively fall due; or
b. Creditors holding at least 25%
of the debtors total liabilities
Upon
filing
and
subsequent
determination by the court that the
petition is sufficient in form and
substance, a stay order may be

issued.
A stay order will, among others,
contain
the
following:
(a)Appointment of a rehabilitation
receiver
or
a
management
committee, who as long is acting in
good faith is immune from suit (b)
Stay of enforcement of all claims,
whether for money or otherwise, and
whether such enforcement is by
court action or otherwise against the
debtor, its guarantors, and sureties
not solidarily liable with the debtor
(c) Prohibiting the debtor from
selling, encumbering, transferring, or
disposing in any manner any of its
properties, except in the ordinary
course of business (d) Prohibiting the
debtor from making any payment of
its outstanding liabilities as of the
date of the filing of the petition
(e)Prohibiting the debtors supplies of
goods and services from withholding
supplies and services in the ordinary
course of business for as long as the
debtor makes payments for the
services and goods supplied after the
issuance of the stay order
Proceedings may be terminated
in case of (a) failure of the debtor to
submit the rehabilitation plan (b)
disapproval of the plan by the court
(c) failure of rehabilitation due to
failure to achieve desired targets or
goal (d) failure of debtor to perform
his obligations (e) determination that
the plan may no longer be
implemented
with
its
terms,
conditions or assumptions (f) upon
successful implementation of the
plan.
2006 Bar Examination: What is the

rationale for the Stay Order?
Page 73 of 274
COMMERCIAL LAW
The stay order is a recognition that
all assets of a corporation under
rehabilitation are held in trust for
the equal benefit of all creditors
under the doctrine of equality is
equity. As all creditors ought to stand
on equal footing, not any one of them
should be paid ahead of others (Ruby
Industrial Corp. v. Court of Appeals, 284
SCRA 445, 4460 [1998]). Furthermore,
the
stay
order
will
enable
the
management committee or rehabilitation
receiver to effectively exercise its or his
powers free from judicial or extrajudicial
interference that might unduly hinder or
prevent rehabilitation of the corporation
or hinder or prevent the rescue of the
distressed company, rather than to waste
its/his time, effort and resources in
defending claims against the corporation
(Rubberworld( Phils.), Inc. v. NLRC, 305
SCRA 721 [2000]).
SC approved Interim Rules of
Procedure
On Corporate Rehabilitation (2000)
1. Filing of the VERIFIED POSITION with
the appropriate RTC by:
a. Corporate debtor which
foresees the impossibility of
meeting its debts when they
respectively fall due; or
b. Creditors holding at least 25%
of the debtors total liabilities
2. The following shall be ANNEXED TO
THE PETITION:
a. Audited Financial Statements
at end of its last fiscal year
b. Interim Financial Statements
c. Schedule of Debts and
Liabilities
d. Inventory of Aseets
e. Rehabilitation Plan
f. Schedule of Payments &
Disposition of Assets w/in 3
mos. preceding filing of

Petition
g. Schedule of Cash Flow for the
last 3 mos.
h. Statement of Possible Claims
i. Affidavit of General Financial
Condition
j. At least 3 nominations for
rehab. receiver
k. Certificate under oath that
directors & SHs have
irrevocable
approved/consented to all
actions/matters necessary
under rehab. plan
3. The REHABILITATION PLAN
4. Issuance of STAY ORDER not later
than 5days from filing of petition
which, among others, shall:
a. Appoint
a
rehabilitation
receiver for the petitioning
corporate debtor
b. Stay all actions for claims
against the debtor, which shall
cover
both
secured
&
unsecured
creditors
or
claimants
c. Set an initial hearing for the
Petition; and
d. Direct the creditors & other
interested parties to file their
verified
comment
on
or
opposition to the petition not
later than 10 days before the
initial hearing and putting
them on notice that their
failure to do so would bar
them from participating in the
proceedings
5. PUBLICATION OF THE STAY ORDER
in
a
newspaper
of
general
circulation in the Philippines once a
week for 2 consecutive weeks which
makes the proceeding in rem in
nature.
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COMMERCIAL LAW
6. INITIAL HEARING ON PETITION not
earlier than 45 days but not later
than 60 days from filing of Petition
7. REFERRAL OF REHABILITATION PLAN
TO REHABILITATION RECEIVER who
shall submit his recommendation
thereon to the RTC not later than 90
days from the initial hearing
8. MEETINGS BETWEEN CORPORATE
DEBTOR AND/OR REHABILITATION
RECEIVER with the creditors and
other interested parties, which
should take place before the final
revision of the plan prior to its final
submission to the RTC for approval
9. MODIFICATION OR REVISION by the
debtor OF THE REHABILITATION
PLAN.
10.SUBMISSION
OF
A
FINAL
REHABILITATION PLAN to the RTC
for its approval
11.The PETITION SHALL BE DISMISSED
[which results into the automatic
lifting of the stay order unless
otherwise ordered by the RTC] if no
rehabilitation plan is approved by
the RTC after 180 days from the
date of initial hearing
12.APPROVAL OR DISAPPROVAL of the
rehabilitation plan by the RTC:
If approved, implementation of the plan
and modifications in the course thereof if
necessary to meet the desired business
targets; If not approved, Petition shall be
dismissed
x----------------------------------------------------------x
XVI. Other Matters
SEC Jurisdiction: original and exclusive
jurisdiction
(1)
fraudulent
devices
and
schemes employed by directors
detrimental to public interest
(2)
intra-corporate disputes and
with the state in relation to
their franchise and right to exist

as such
(3)
Controversies
in
the
election,
appointment
of
directors, trustees, etc.
(4)
petition to be declared in a
state
of
suspension
of
payments
NOTE:
Actions
involving
intracorporate
controversies
are
cognizable by the Regional Trial
Court NOT by the Securities and
Exchange Commission, designated by the
Supreme Court under SC Adm. Memo No.
00-11-03, which has jurisdiction over the
principal office of the corporation,
partnership or association concerned
(Sec. 5, Rule 1, SC Adm. Memo. No. 02-24). (2006 Bar Examination)
INTRA-CORPORATE DISPUTES
1.
For an intra-corporate dispute to
exist, there must be an intra-corporate
relationship and the controversy must
arise from the said relationship. The
controversy
must
be
intrinsically
connected with the regulation of the
internal affairs of the corporation.
(Arranza vs. BF Homes, 333 SCRA 799)
2.
RA 8799, which became effective
on August 8, 2000, transferred the SECs
jurisdiction over intra-corporate disputes
to courts of general jurisdiction or
regional trial courts.
3.
A court that is not designated as a
special commercial court is not vested
with jurisdiction over cases previously
cognizable by the SEC and does not have
the requisite power to order the transfer
of cases erroneously filed with it to
another branch of the RTC, the only
action it could take on the matter is to
dismiss the petition for lack of jurisdiction
( Calleja vs. Panday, 483 SCRA 680)
SECURITIES AND THEIR REGULATION

Page 75 of 274
COMMERCIAL LAW
1.
In general, securities are Shares,
Participation or Interest (SPI) in a
Corporation
or
in
a
Commercial
enterprise or Profit-making venture (CCP)
and evidenced by a Certificate, Contract;
Instrument, whether written or electronic
in character (CCI).
2.
Securities
Registration
is
mandated to accomplish its objective of
disclosure to potential investors.The
reasons for mandating registration are
(a) To give adequate protection and
reliable information to the investing
public (b) To ensure compliance with the
law by the issuer (c)To allow only an
issuer who is solvent, of good repute and
character, and whose business is based
on sound business principles.
3.
Commodity Futures Contracts and
Pre-Need Plans are also required to the
registered.
3.1
A Commodity Futures Contract is a
present right to receive at a future date a
specific quantity of a given commodity
for a fixed price. They are commitments
to buy or sell commodities at a specified
time and place in the future. The object is
to realize profits in anticipation of a
favorable change in price.
3.2
A pre-need plan is a contract that
provides for the performance of future
services or the payment of future
monetary considerations at the time of
actual need, for which plan holders pay
in cash or installment at stated prices,
with or without interest or insurance
coverages and includes life, pension,
education, internment, and other plans
which SEC shall approve.
SECURITIES MANIPULATION
1.
Manipulation is an artificial control
of security prices; it is an attempt to
force securities to sell at prices either
above or below those which would exist

as a result of the normal operations of
supply and demand. The manipulator
hopes to profit by creating fictitious
prices at the expense of the general
trading public.
INSIDER TRADING
1.
Insider Trading occurs when an
insider sells or buys a security of the
issuer, while in possession of material
information with respect to the issuer or
the security that is not generally
available to the public, unless: (a) the
insider proves that the information was
not gained from such relationship; or (b)
If the other party selling to or buying
from the insider (or his agent) is
identified, the insider proves: (i) that he
disclosed the information to the other
party, or (ii) that he had reason to
believe that the other party otherwise is
also in possession of the information.
A purchase or sale of a security of the
issuer make by an insider defined in
Subsection 3.8, or such insiders spouse
or relatives by affinity or consanguinity
within the second degree, legitimate or
common-law, shall be presumed to have
been effected while in possession of
material
non-public
information
if
transacted after such information came
into existence but prior to dissemination
of such information to the public and the
lapse of a reasonable time for the market
to absorb such information: Provided,
however, That this presumption shall be
rebutted upon a showing by the
purchaser or seller that he was not aware
of the material non-public information at
the time of the purchase or sale.
2.
An Insider shall include: (a) the
Issuer (b) a director or officer of, or a
person controlling, controlled by, or
under common control with Issuer (c)a
Page 76 of 274
COMMERCIAL LAW
person whose relationship or former
relationship to Issuer gives or gave him
access to a fact of special significance
about Issuer or the security that is not
generally available (d) a government
employee, or directors, or officer of an
exchange, clearing agency and/or SRO
who has access to material information
about an Issuer or a security that is not
generally available to the public (e) a
person who learns such a fact from any
of the foregoing insiders with knowledge
that the person from whom he learns the
fact is an insider.
3.
Information is considered material
non-public if: (a) It has not been
generally disclosed to the public and
would likely affect the market price of the
security after being disseminated to the
public and the lapse of a reasonable time
for the market to absorb the information;
or (b) would be considered by a
reasonable person important under the
circumstances in determining his course
of action whether to buy, sell or hold a
security.
INSURANCE
PD 1460
PRELIMINARIES
A.
Definition of Contract of
Insurance
B. Requisites of Insurance Contract
C. Concealment and Representation
D. Kinds of Policy
E. Warranties in Insurance Contract
Page 77 of 274
COMMERCIAL LAW
F. Double Insurance
G. Reinsurance Contract
H. Marine Insurance
I .Losses
J .Abandonment
K. Kinds of Insurance
L. Motor Vehicle Insurane
-----------------------------------WHAT LAWS GOVERN INSURANCE
(a)
Insurance Code (PD 1460
whose affectivity date is 11
June 1978)
(b)
In
absence
of
applicable
provisions, the Civil Code;
(c)
In
absence
of
applicable
provisions in the Insurance
Code and Civil Code, the
general
principles
on
the
subject in the United States
(Constantino vs. Asia Life
Insurance, 87 Phil 248)
WHAT IS A CONTRACT OF
INSURANCE
- It is an agreement whereby
one
undertakes
for
a
consideration to indemnify
another
against
loss,
damage, or liability arising
from
an
unknown
or
contingent event;
- A contract of suretyship
shall also be deemed an
insurance contract if made
by a surety who or which is
doing
an
insurance
business;
Doing an insurance business or
transacting an insurance business is:
(a)
making or proposing to make

as
insurer
any
insurance
contract;

(b)
(c)
(d)
making or proposing to make

as surety contract of suretyship
as a vocation and not merely
incidental
to
any
other
legitimate business or activity
of the surety;
doing any business including a
reinsurance
business,
specifically
as
doing
an
insurance business within the
hearing of the Code;
doing or proposing to do any
business
in
substance
equivalent to any of the
foregoing
in
a
manner
designed
to
evade
the
provisions of the Code (section
2);
NATURE AND CHARACTERISTICS OF A

CONTRACT OF INSURANCE
1. It is an ALEATORY contract
2. It is a 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;
3. It is a PERSONAL contract
4. It
is
EXECUTORY
and
CONDITIONAL on part of the
insurer
5. It is one of PERFECT GOOD FAITH
6. It is a 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
Page 78 of 274
COMMERCIAL LAW
(b)
contract, it is to be construed in
its
plain,
ordinary,
and
popular sense;
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 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)
Illustrations:
a. P Bank obtained insurance against
robbery, which excluded loss by
any criminal act of the insured or
any authorized representative.
While transferring funds from one
branch to another, the insureds
armored truck was robbed. The
driver was assigned by a labor
contractor with the insured, while
the security guard was assigned
by an agency contracted by the
insured. Both driver and guard
were found to be involved. Can the
loss be excluded? HELD: The loss
is excluded , the driver/guard
although assigned by labor
contractors are authorized
representatives. The terms are
clear and unambiguous. (Fortune
Insurance vs. CA, 244 SCRA 308).
b. Personal
Accident
policies
providing payment for loss of
hand. The insurance policy
defines it as amputation. The
insured has an accident resulting
in a temporary total disability but
hand is not amputated. HELD:
Insurer is not liable. (Ty vs. First
National Surety and Assurance
Company 17 SCRA 364) But In
case where the policy provided

loss of both, legs by amputation, a
claim against the policy was
allowed for a total paralysis to
exclude total paralysis is contrary
to public policy, public good and
sound morality, as it would force
the insured to have his legs
amputated to be able to claim on
the policy. (Panaton vs. Malayan
2 Court of Appeals 783)
c. Warranty in a fire insurance policy
prohibited storage of oils having a
flash
point
of
below
300
Fahrenheit. Gasoline is stored. Is
there a policy violation? HELD:
The clause is ambiguous. In
ordinary parlance oils means
lubricants not gasoline. There is
no reason why gasoline could not
be expressed clearly in the
language
public
can
readily
understand. (Qua Chee Gan)
d. An action to recover the amount of
PHP 2,000.00 due to death by
drowning
where
the
policy
provided for indemnity in the
amount of PHP 1,000.00 to PHP
3,000.00
HELD:
The
interpretation of the obscure
stipulation in contract must
not favor the one who caused
the obscurity. Hence, judgment
for additional PHP 2,000.00 was
affirmed.
(Del
Rosario
vs.
Equitable Insurance and Casualty
Company, 8 SCRA 343)
e. Denial of a claim on the ground
that the insured vehicle was a
private type vehicle on the
ground that the policy issued to
the insured was a common
carriers liability, Insurance policy
which covers a public vehicle for
Page 79 of 274
COMMERCIAL LAW
hire. HELD: Insurer is liable as
it was aware all along that the
vehicle of the insured was a
private
vehicle.
(Fieldman
Insurance vs. Mercedes Vargas
vda De Songco, 25 SCRA 70)
f. Denial of a claim for benefit due to
the death of Flaviano Landicho in
a plane crash under the GSIS
policy on the ground of non
payment of the premium. HELD:
The policy contained a provision
that the application for insurance
is authority for GSIS to cause the
deduction of premium from the
insureds salary. (Landicho vs.
GSIS, 44 SCRA 7)
Other
case
reference:
New
Life
Enterprises vs. CA, 207 SCRA 669
MARINE
RISK
NOTE
IS
NOT
AN
INSURANCE POLICY Certainly it would
be obtuse for us to even to entertain the
idea that the insurance contract between
Malayan and ABB Koppel was actually
constituted by the Marine Risk Note
alone. (Malayan Insurance Co. vs. Regis
Brokerage Corporation Nov. 23 2007 G.R.
No. 172156)
WHAT ARE THE 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. This is based
on
the
principle
that
insurance is a contract of
indemnity. If the insured
has no interest, he will
not stand to suffer loss
or
injury
by
the
happening of the event
insured against.
INSURANCE CONTRACT [Loss covered

by the insurance policy; Burden of proof
to prove that same] Any loss or damage
happening during the existence of
abnormal conditions (whether physical or
otherwise) which are occasioned by or
through in consequence directly or
indirectly, of any of the said occurrences
shall be deemed to be loss or damage
which is not covered by the insurance,
except to the extent that the insured
shall prove the loss or damage,
happened independently of the existence
of such abnormal conditions.
An Insurance contract, being a
contract of adhesion, should be so
interpreted as to carry out the purpose
for which the parties entered into the
contract which is to insure against risks
of loss or damage to the goods.
Limitations of liability should be regarded
with extreme jealousy and must be
construed in such a way as to preclude
the insurer from noncompliance with its
obligations. (DBP Pool of Accredited
Insurance Companies v. Radio Mindanao
Network, Inc. Jan. 27, 2006, G.R. No.
147039)
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COMMERCIAL LAW
ETERNAL GARDENS MEMORIAL PARK
CORPORATION vs. THE PHILIPPINE
AMERICAN
LIFE
INSURANCE
COMPANY (G.R. No. 166245, April 9,
2008)
Philamlifes assumption of risk of
loss
without
approving
the
application. - The question arises as to
whether Philamlife assumed the risk of
loss without approving the application.
This question must be answered in the
affirmative.
It must be remembered that an insurance
contract is a contract of adhesion which
must be construed liberally in favor of
the insured and strictly against the
insurer in order to safeguard the latters
interest. Thus, in Malayan Insurance
Corporation v. Court of Appeals, this
Court held that:
Indemnity and liability insurance
policies
are
construed
in
accordance with the general rule
of resolving any ambiguity therein
in favor of the insured, where the
contract or policy is prepared by
the
insurer. A
contract
of
insurance, being a contract of
adhesion, par excellence, any
ambiguity therein should be
resolved against the insurer; in
other
words,
it
should
be
construed liberally in favor of the
insured and strictly against the
insurer. Limitations of liability
should be regarded with extreme
jealousy and must be construed in
such a way as to preclude the
insurer from noncompliance with
its obligations.
In the more recent case of Philamcare
Health Systems, Inc. v. Court of
Appeals, we reiterated the above ruling,
stating that:
When the terms of insurance

contract contain limitations on
liability, courts should construe
them in such a way as to preclude
the insurer from non-compliance
with his obligation. Being a
contract of adhesion, the terms of
an insurance contract are to be
construed strictly against the party
which prepared the contract, the
insurer. By reason of the exclusive
control of the insurance company
over the terms and phraseology of
the insurance contract, ambiguity
must
be
strictly
interpreted
against the insurer and liberally in
favor of the insured, especially to
avoid forfeiture.20
GULF RESORTS, INC., vs. PHILIPPINE
CHARTER INSURANCE CORPORATION
(G.R. No. 156167 May 16, 2005)
Provisions of insurance policy; no
piecemeal
construction
or
segregation of certain stipulations
allowed;
all
parts
should
be
reflective of clear intent of parties.The
policy
cannot
be
construed
piecemeal. Certain stipulations cannot be
segregated and then made to control;
neither do particular words or phrases
necessarily determine its character.
Petitioner
cannot
focus
on
the
earthquake shock endorsement to the
exclusion of the other provisions. All the
provisions
and
riders,
taken
and
interpreted together, indubitably show
the intention of the parties to extend
earthquake shock coverage to the two
swimming pools only.
Contract of insurance; payment of
premium
by
the
insured,
an
important element of the contract;
Courts finding that no premium
payments with regard to earthquake
Page 81 of 274
COMMERCIAL LAW
shock coverage, except on the two
swimming
pools.A
careful
examination
of
the
premium
recapitulation will show that it is the clear
intent
of
the
parties
to
extend
earthquake shock coverage only to the
two swimming pools. Section 2(1) of the
Insurance Code defines a contract of
insurance as an agreement whereby one
undertakes for a consideration to
indemnify another against loss, damage
or liability arising from an unknown or
contingent event. Thus, an insurance
contract exists where the elements
concur.
IN WHAT DOES A PERSON HAVE
INSURABLE INTEREST IN (LIFE)
Every person has an insurable
interest in the Life and Health of:
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
(Note article 195 of the Family Code
specifying the persons obligated to
support
each
other.
Example
pecuniary interest-partners, employees);

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.
Example
Mortgagors, Debtors.
4.Any person upon whose life, any
estate or interest vested in him depends
(Example Usufructuary X allows Y to
receive fruits of the land of the former as
long as he is alive. Y has insurable
interest in life of X, because the death of
X will terminate his right and cause him
damage. (Section 10)

WHAT IS THE BASIS OF INSURABLE

INTEREST IN LIFE
- It exist when there is reasonable
ground founded on the relation of
the parties, either pecuniary or
contractual or by blood or by
affinity to expect some benefit
from the continuance of life of the
insured;
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
(Section 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.
WHAT IS THE EXTENT OF INSURABLE
INTEREST IN ONES LIFE
- He has unlimited interest in his
own life or that of another person
regardless of whether or not the
latter has insurable interest.
Provided, that if the beneficiary
has no insurable interest, there is
no fore or bad faith. But if he takes
out a policy on the life of another
and names himself as the
beneficiary, he must have an
insurable interest in the life of the
insured;
Page 82 of 274
COMMERCIAL LAW
INSURABLE INTEREST The insurable
interest of every member of petitioners
health care program in obtaining the
health care agreement is his own health.
Under the agreement, petitioner is bound
to indemnify any member who incurs
hospital, medical or any other expense
asising from sickness, injury or other
stipulated contingency to the extent
agreed upon under the contract.
(Philippine Health Care Providers Inc. V.
Commissioner of Internal Revenue, Jun.
12 2008 G.R. 167330)
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;
IN WHAT 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
directly damnify the insured is
an insurable interest (section
13). It may consist of:
(a)
An existing interest
(b)
An inchoate interest founded

on an existing interest

(c)
(Defined: Interest in real estate

which is not a present interest
but which may ripen into a
vested interest if not barred,
extinguished, or divested.)
An expectancy coupled with an
existing interest in that out of
which the expectancy arises;
Note:
- Expectancy must be founded on an
actual right to the thing or a valid
contract for it;
- A carrier or depository of any kind
has insurable interest in the thing
held by him such to the extent of
his liability but not to exceed the
value thereof (Sections 13, 14, and
15);
-
But, a mere contingent or

expectant interest in anything,
not founded on contract or
actual right to the thing is not
insurable as there is no
insurable interest (Section 16);
WHO IS BOUND BY A CONTRACT OF

INSURANCE The insurance contract
between the insurer and the insured,
under Article 1311 of the Civil Code is
binding only upon the parties (and their
assigns and heirs) who execute the
same.
INCHOATE RIGHT The right to
lay claim on the fun is dependent on the
solvency of the insurer and is subject to
all other obligations of the company
arising from its insurance contracts.
Thus, the respondents interest is merely
inchoate. Being a mere expectancy, it
has no attribute of property. At this time,
it is nonexistent and may never exist.
Hence, it would be premature to make
the security deposit answerable for
Page 83 of 274
COMMERCIAL LAW
CISCOs present obligation to Del Monte
Motors. (Republic of the Philippines v. Del
Monte Motors, Inc., Oct.9, 2006 G.R. No.
156956)
WHAT IS THE TEST OR MEASURE OF
INSURABLE INTEREST IN PROPERTY
-
Whether
one
will
derive
pecuniary
benefit
or
advantage
from
its
preservation or will suffer
pecuniary loss or damage
from its destruction; (Section
17)
INSURABLE
DEPOSITS
INTEREST
IN
BANK
2000 BAR EXAM (VIII - b)

Q: BD has bank deposit of half a
million pesos.Since the limit of trhe
insurance coverage of the Philippine
Deposit Insurance Corp Act ( 3591) is
only one tenth of BDs deposit, he would
like some protection for the excess by
taking out an insurance against all risks
or contingencies of loss arising from any
unsound or unsafe banking practices
including unforeseen adverse effects of
the continuing crisis involving the
banking and financial sector in Asia. Does
BD have insurable interest within the
meaning of the Insurance Code?
A: Yes, BD has insurable interest in
his bank deposit. In case of loss of said
deposit, more particularly to the extent of
the amount in excess of the limit covered
by the Philippine Deposit Insurance
Corporation Act, BD will be damnified.
He will suffer pecuniary loss of
P400,000.00, that is, his bank deposit of
half a million pesos minus P100,000.00
which
is
the
maximum
amount
recoverable from the PDIC.
MUST
THE
BENEFICIARY
IN
PROPERTY
HAVE
INSURABLE
INTEREST
ON
THE
PROPERTY
INSURED?
- YES, as no contract or policy of
insurance on property shall be
enforceable. Except
for the
benefit of some person having
insurable interest in the property
insured;
WHEN MUST INSURABLE INTEREST
IN PROPERTY EXIST
- must exist at the time the
insurance takes effect and when
the loss occurs but need not exits
in the meantime (Section 19);
COMPARE WITH INSURABLE INTEREST IN
LIFE: 2002 BAR EXAM (N0.XVII)
PROPERTY
LIFE
- not necessary
- based
on
can be based
pecuniary
on
interest
consanguinity
or affinity
- only
at - exist at the time
effectivity
of
effectivity
except
that
and loss
taken
by
a
creditor in the
life
of
the
debtor
- no limit exist if - limited to actual
based
on
volume insured
debtor
IN RELATION TO THE NEED FOR THE

EXISTENCE OF INSURABLE INTEREST,
PLEASE NOTE:
Page 84 of 274
COMMERCIAL LAW
-
That a change in interest in any

part
of
a
thing
insured
accompanied by a corresponding
change in the insurance suspends
the insurance to an equivalent
extent until interest in the thing
and interest in the insurance is
vested in the same person;
No claim in insurance contract
while it is suspended because it
can happen that the insurable
interest will be returned;
CHANGE OF INTEREST IN PROPERTY

INSURED (Transfer or Sale of insured
property) (1994 & 200 Bar Exams)
A change of interest in any
part
of
a
thing
insured
unaccompanied by a corresponding
change of interest in the insurance
suspends the insurance to an
equivalent extent, until the interests
in the thing and the interest in the
insurance are vested in the same
person. (Sec. 20)
Exceptions: 1) change of
interest after the loss; 2) change of
interest in one or more of several
things separately insured; 3) change
of interest by will or succession; and
4) transfer of interest by a partner,
joint owner, or common owner, to
another partner, joint owner or
common owner.
collect the proceeds of the policy

from the insurer? Explain and give
reasons for your answer. (1952,
1959, 1980 Bar)
ANSWER:
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)
1980 Bar Exam:

A insures his house for P 10, 000
commencing January 1, 1952. On
February 15, 1952, A sells the 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
the accidental fire.
Can A or B
(2)
Life, health
or
accident
insurance
because
they
are
not
contracts of indemnity and
insurable interest is not
required at the time of loss;
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
Page 85 of 274
COMMERCIAL LAW
(3)
A change of
interest in one or more
several
distinct
things,
separately insured by one
policy, does not avoid as to
the others (Section 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;
(Section 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;
Note:
- There
must
be
no
stipulation against it
otherwise it is avoided;
- Transfer to strangers avoid
the policy
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 insurable
interest or create a liability
against him, may be insured
against (Section 3);
Example: Insurance against damage,
liability, unknown past event (in
marine insurance insurance is over
the vessel against perils of the sea,
lost or not lost), or future event like
loss or theft of the object;
When notwithstanding a
prohibition, the consent of
the insurer is obtained;
(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;
In relation to the insurance

so secured, note:
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;
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;
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,
(6)

Page 86 of 274
COMMERCIAL LAW
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;
enemy, and it is inconsistent to

destroy its resources then pay it
the value of what has been
destroyed) may be insured;
2000 BAR EXAM (VIII - a)
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 (Section 4)
WHO ARE THE 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 (section
6). Anyone except a public enemy
(a nation at war with Philippines
and every citizen subject of such
nation. Reason: the purpose of
war is to cripple the power and
exhaust the resources of the
Q: May a member of the MORo

Islamic Liberation Front ( MILF ) or its
breakawy 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.
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; (section 8)
INSURANCE INTEREST ON
MORTGAGED PROPERTY (2005 BAR
EXAM (N0. X - 2- a)
Armando Geagonia v. CA 241 SCRA
154
SC RULING
Page 87 of 274
COMMERCIAL LAW
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
maybe 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 Bankers
Insurance Corp. The non-disclosure of the
policies with PFIC was not fatal to
Armandos right to recover on his policy
with Country Bankers 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.
UNLESS THE POLICY PROVIDES

OTHERWISE
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. Example: If notice of
loss is required, the mortgagee may
give it;
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;
If on the other hand, (section
insurer assents to the transfer
insurance from the mortgagor
mortgagee, and at the time of his

9), the
of the
to the
assent,
Page 88 of 274
COMMERCIAL LAW
imposes further qualifications on the
assignee, making a new contract with
him, the acts of the mortgagor cannot
affect the rights of the assignee Note
the 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;
property insurance yes the
insured himself but cant assign the
proceeds;
life insurance not required to
have insurable interest;
WHO MAY BE 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;
1. Those made between persons
guilty
of
adultery
or
concubinage at the time of the
designation;
2. Those guilty of the same
criminal
offense
in
consideration thereof;
2008 BAR EXAM
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. (4%)
Answer: Section 12. The interest of a
beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the
principal, accomplice, or accessory in

Page 89 of 274
COMMERCIAL LAW
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.
3. 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
proponderance 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;
The disqualification does not
extend to the children of the
adultery or concubinage in view of
the express recognition of the
successional rights of illegitimate
children (Art. 287, NCC and Art.
176, Family Code);
MUST
THE
BENEFICIARY
HAVE
INSURABLE INTEREST ON THE LIFE
OF THE INSURED
- It is recognized that the insured
may name anyone he chooses
except
those
disqualified
to
receive donations as a beneficiary
in his life insurance, even if he is a
stranger and has no insurable
interest in the life of the insured.

The designation, however, must
be in GOOD FAITH AND WITHOUT
FRAUD OR INTENT TO ENTER INTO
A WAGERING CONTRACT.
Beneficiary in life and property
insurance (2005 bar exams)
Philippine American Life Insurance
Company v. Pineda (175 SCRA 416)
SC Ruling:
Under
the
law,
the
beneficiary
designated in a life insurance contract
cannot be changed without his or her
consent because of the beneficiarys
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
Spouses Nilo Cha v. CA Aug.
18, 1997 2009 bar exams
SC RULING:
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.
Page 90 of 274
COMMERCIAL LAW
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 spouses 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.
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).
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 (Section 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 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
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])
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
2005 BAR EXAM (NO. IX -1)

Q: What are the effects of an irrevocable
designation of a beneficiary under the
Insurance Code? Explain. (2%)
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.
(2%)
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;
Page 91 of 274
COMMERCIAL LAW
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;
WHO RECOVERS IF BENEFICIARY

PREDECEASES THE INSURED
-
If
the
designation
is
irrevocable,
the
legal
representatives
of
the
beneficiary may recover unless
it was stipulated that the
benefits are payable only if
living. If designation is
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;
WHAT HAPPENS TO INTEREST OF

THE BENEFICIARY IN LIFE
INSURANCE WHERE HE WILLFULLY
KILLS THE INSURED
-
If the killing is willful, the

interest is forfeited, if he is the
principal, an accomplice, or an
accessory.
The
nearest
relative of insured gets the
proceeds if not otherwise
disqualified (Section 12). If not
willful or felonious, the provision
does not apply;
CONCEALMENT
WHAT IS CONCEALMENT?
-
Concealment is a neglect to
communicate that which a party

knows and ought to communicate

(Section 26);
WHAT IS THE EFFECT OF
CONCEALMENT?
-
Whether intentional or not, it entitles

the injured party to rescind the
contract of insurance (Section 27).
Examples:
(1)
(2)
The insured does not disclose

sickness but dies of another
cause. There is concealment
because it is material to a
determination of the assumption
of risk by the insurer;
The father of the insured
obtained an insurance policy
over his daughter, but did not
disclose
that
she
was
a
mongoloid child, the child dies of
influenza,
the
concealment
relieves the insurer of liability
(Grepalife vs. CA 89 SCRA 543)
BASIS OF PROVISIONS ON
CONCEALMENT/REPRESENTATION
-
Fundamental characteristic of a
contract of insurance that it is one
of perfect/utmost good faith;
2001 BAR EXAM (N0.XVI): 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
Page 92 of 274
COMMERCIAL LAW
the insurance policy. It is well settled
that the insured need not die of the
disease he failed to disclose to the
insurer.
It is sufficient that his nondisclosure misled the insurer in forming
his estimate of the risks of the proposed
insurance policy or in making inquiries.
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, a party must

have knowledge of the fact
concealed at the time of the
effectivity of the policy. Note that
even if a party did not know of the
existence
at
the
rime
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 after effectivity but
before reinstatement must be
disclosed;

HOW IS THE MATERIALITY OF THE

CONCEALMENT OR REPRESENTATION
DETERMINED?
Materiality is 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 (Section 31);
WHAT IS THE TEST OF MATERIALITY?

The test of materiality is whether
knowledge of the true facts could have
influence a prudent insurer in
determining whether to accept the risk or
in fixing the premiums;
MUST THERE BE A CAUSAL
CONNECTION BETWEEN THE FACT
CONCERNED AND THE CAUSE OF THE
LOSS? Not necessary
Concealment need not be
material, be of facts which about or
contribute to or are connected of the
insureds loss. It is immaterial that there
is no causal relationship between the fact
concealed and the loss sustained. It is
sufficient that the non-revelation has
misled the insurer in forming its estimate
of disadvantage of fixing the premium.
Examples: Insured concealed kidney
disease and enlarged liver later he died
of thrombosis, is the insurer liable? No,
since the fact concealed was material
though the insured did not die therefrom
(Henson vs. Philam 50 OG 73428).
Insured had concealed that he had
kidney disease. He dies in plane crash.
Page 93 of 274
COMMERCIAL LAW
The insurer is not liable (Sunlife vs. CA,
245 SCRA 269);
(1)
WHAT FACTS MUST BE

COMMUNICATED?
Example: Insured discloses that he

has tuberculosis to he agent of the
insurer, who in turn omits to state
the same in the application of the
insured was deemed knowledge of
the insurer (Insular Life Assurance
Co. vs. Feliciano, 74 Phil 468).
Insurer had surveyed the location
and surrounding area of a building
that it is to be insured against fire,
an omission to state that there are
neighboring buildings will not avoid
policy;
Each party to an insurance contract is

bound to communicate to the other all
facts that meet the following requisites:
(a)
(b)
(c)
(d)
Such fact that must be

within his knowledge as
concealment
requires
knowledge
of
the
fact
concealed
by
the
party
charged with concealment;
Fact/s must be 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;
That the other party had no
means of ascertaining such
fact/s;
That the party with a duty
to communicate makes no
warranty (Section 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
(Section 29).
WHAT MATTER NEED NOT BE

COMMUNICATED?
Except in answer to the inquiries of the
other:
Those which the other knows

as the insurer cannot say that it has
been deceived or misled;
(2)
Those which in the exercise of

ordinary care, the other ought to
know, and of which, the former has
no reason to suppose him to be
ignorant. The facts that the other
ought to know as per section 32
are:
(3)
Those of which the other waives

communication. A waiver takes
place either, by the terms of the
insurance or by he neglect to make
inquiries as to such facts where
they are distinctly implied in other
facts of which information is
communicated (section 33).
(4)
Those which prove or tend to prove

the existence of a risk excluded by
a warranty, and which are not
otherwise material.
(5)
Those which relate to the risk

exempted from the policy, and
which are not otherwise material
(section 30).
Page 94 of 274
COMMERCIAL LAW
SUNLIFE
ASSURANCE
CO.
OF
CANADA VS. CA, JUNE 22,
1995
(1996, 1997, and 2001 Bar
Exams)
tending to induce the insurer to take the

risk (Section 36);
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.
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 (section 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)
SC RULING:
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
insurers 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.
REPRESENTATION
WHEN MAY REPRESENTATION BE

MADE
HOW SHOULD REPRESENTATION BE

CONSTRUED
The language of a representation
is to be interpreted by the same rules as
the language of the contracts in general
(section 38). Hence, it need not be
literally true and correct/accurate in
every respect, rather, it is sufficient if it is
substantially or materially true. In case of
a promissory representation, it is
sufficient if it is substantially complied
with;
WHAT ARE THE FORMS AND KINDS

OF REPRESENTATION
Representations may be Oral or
Written and can either be:
(a)
Affirmative which is an
affirmation of a fact existing
when the contract begins;
(b)
Promissory which is a
statement by the insured
WHAT IS REPRESENTATION?
Oral or written statement of a fact
or a condition affecting the risk made by
the insured to the insurance company,
Page 95 of 274
COMMERCIAL LAW
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 (section 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
(section 41);
TO WHAT DATE DOES A
REPRESENTATION REFER
It must be presumed to refer to the
date on which the contract goes into
effect (section 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 A REPRESENTATION SAID
TO BE FALSE
When the facts fail to correspond
with its assertions or stipulations (Section
44);
MUST THE INSURED COMMUNICATE
INFORMATION OF WHICH HE HAS NO
PERSONAL KNOWLEDGE BUT MERELY

RECEIVES THE SAME FROM OTHERS?
When a person has no personal
knowledge of facts he may or may not
communicate such information to the
insurer. If he does communicate, he is
not responsible for its truth (section 43).
Hence, there can be no
misrepresentation;
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 (section 45);
Examples:
(a)
Insurer was aware of the

lack of the extinguishers
required by the policy. But
there is no waiver if the
insurer had no knowledge of
the ground at the time of
the acceptance of the
premium;
Page 96 of 274
COMMERCIAL LAW
(b)
Unauthorized
driver
(Strokes vs. Malayan, 127
SCRA 766)
WHAT IS THE THEORY AND OBJECT

BEHIND THE INCONTESTABILITY
CLAUSE
(a)
HOW IS MATERIALITY DETERMINED?

The same as concealment (Section
46) probable and reasonable influence of
the facts upon the party to whom the
representation is made in forming his
estimate of the advantage/disadvantages
of the contract or I making inquiries;
(b)
WHEN IS THE RIGHT TO RESCIND
SUPPOSED TO BE EXERCISED (SEC
48)
The right to rescind must be
exercised previous to the
commencement of an action on the
contract (section 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);

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;
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
The requisites are:
(1)
(2)
It is a life insurance policy;

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;
Tan vs. CA, 174 SCRA 403 during
the lifetime of the insured means that the
policy is no longer in force if the insured
dies. Facts: Philam issued policy on
November 6, 1973. On April 26, 1975 the
insured died. The beneficiaries claimed
but the insurer denied the claim on
September 11, 1975 and rescinded the
policy on the ground of
misrepresentation and concealment.
Held: Insurer has two years from date of
issue/reinstatement within which to
contest the policy whether or not the
insured still lives within the period;
Page 97 of 274
COMMERCIAL LAW
WHAT DEFENSES ARE NOT BARRED
BY INCONTESTABILITY EVEN AFTER
THE LAPSE OF 2 YEARS?
(1)
(2)
(3)
(4)
(5)
(6)
(7)
non-payment of premiums;
lack of insurable interest;
that the cause of death was
excepted or not covered by the
terms of the policy;
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;
violation of a condition in the
policy relating to military or
naval service in time of war;
the necessary notice or proof
of death was not given;
action is not brought within
time specified in the policy,
which in no case should be less
than 1 year as per section 63;
WHAT ARE THE EFFECTS OF

INCONTESTABILITY?
The insurer can no longer escape
liability, tender the policy or be allowed
to prove that the policy is void ab initio or
may be rescinded by reason of
concealment or misrepresentation by the
agent of the insured or the insured;
DISTINGUISH CONCEALMENT FROM

REPRESENTATION
Concealment is the neglect of one
party to communicate to the other
material facts. The information he gives
in compliance with his duty to reveal

information is representation.
Representation therefore is the
communication required to comply with
the prohibition against concealment;
Concealment is the passive and
misrepresentation is the active form of
the same bad faith;
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
DEFINE POLICY
It is the written instrument in
which a contract of insurance is set forth
(Section 49.);
HOW IS IT CONSTRUED, WHAT IF THE
INSURED DOES NOT UNDERSTAND
THE CONTENTS OF THE POLICY?
Page 98 of 274
COMMERCIAL LAW
Generally in favor of the insured
and against the insurer. The burden of
proving that the terms of the policy have
been explained is upon the party seeking
to enforce it. The claim of the beneficiary
that since the insured was illiterate and
spoke Chinese only, she could not be
held guilty of concealment because the
application and policy was in English
(Tang vs. CA, 90 SCRA 236);
FORM OF THE POLICY
It shall be printed and may contain
blank spaces and any word, phrase,
clause or mark, sign, symbol, signature,
or number necessary to complete it shall
be written in the blank spaces (Section
50). If there are riders, clauses,
warranties or endorsements purporting
to be part of the contract of insurance
and which are pasted or attached to the
policy is not binding on the insured
unless the descriptive title of the same is
also mentioned and written on the blank
spaces provided in the policy. Note: if
pasted or attached to the original policy
at the time it was issued the signature
of the insured is not necessary to make it
binding. If after the original policy is
issued, it must be counter-signed by the
insured unless applied for by the insured;
No rider, clauses, or warranties, or
endorsements shall be attached, printed
or stamped on the policy unless the form
of such application has been approved by
the insurance commissioner;
Riders are forms attached to the policy
when the company finds it necessary to
alter or amend the applicants answer to
any question in the application;
Warranties are written

statement/stipulations inserted on the
face of the contract or incorporated by
proper words or reference where the
insured contracts as to the existence of
facts, circumstances or conditions the
truth of which are essential to the validity
of the contract;
Endorsements are agreements not
contained but may be written or attached
to policy to change or modify a part
thereof;
WHAT MUST A POLICY SPECIFY?

A policy must specify:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The parties whom the contract

is made;
The amount to be insured
except in open or running
policies;
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;
The property or life insured;
The interest of the insured in
the property insured, if not the
absolute owner;
The risks insured against;
The period during which the
insurance
is
to
continue
(Section 51);
FGU INSURANCE CORPORATION vs.

CA ( G.R. No. 137775. March
31,
2005)
Clauses are forms containing

additional stipulations;
Page 99 of 274
COMMERCIAL LAW
Fortuitous event; Definition. Caso
fortuito or force majeure (which in law
are identical insofar as they exempt an
obligor from liability) by definition, are
extraordinary events not foreseeable or
avoidable, events that could not be
foreseen, or which though foreseen, were
inevitable. It is therefore not enough that
the event should not have been foreseen
or anticipated, as is commonly believed
but it must be one impossible to foresee
or to avoid.
of the insured or his agents that will

deprive him the right to recover under
the insurance contract. We say there is.
However, to what extent such negligence
must go in order to exonerate the insurer
from liability must be evaluated in light
of the circumstances surrounding each
case. When evidence show that the
insureds negligence or recklessness is so
gross as to be sufficient to constitute a
willful act, the insurer must be
exonerated.
The fortuitous event should be the

proximate and only cause of the loss;
While the loss of the cargoes was
admittedly caused by the typhoon
Sisang, a natural disaster, ANCO could
not escape liability to respondent SMC.
The records clearly show the failure of
petitioners representatives to exercise
the extraordinary degree of diligence
mandated by law. To be exempted from
responsibility, the natural disaster should
have been the proximate and only cause
of the loss. There must have been no
contributory negligence on the part of
the common carrier. As held in the case
of Limpangco Sons v. Yangco Steamship
Co.:
.
Carelessness and negligence
of the insured or his agents
constitute no defense on the part of
the insurer.
One of the purposes for taking out
insurance is to protect the insured
against the consequences of his own
negligence and that of his agents. Thus,
it is a basic rule in insurance that the
carelessness and negligence of the
insured or his agents constitute no
defense on the part of the insurer.
When the insureds negligence
is gross as to constitute a willful act,
the insurer must be exonerated.- The
question now is whether there is a
certain degree of negligence on the part
The United States Supreme Court has

made a distinction between ordinary
negligence and gross negligence or
negligence amounting to misconduct and
its effect on the insureds right to recover
under the insurance contract. According
to the Court, while mistake and
negligence of the master or crew are
incident to navigation and constitute a
part of the perils that the insurer is
obliged to incur, such negligence or
recklessness must not be of such gross
character as to amount to misconduct or
wrongful
acts;
otherwise,
such
negligence shall release the insurer from
liability under the insurance contract.

WHAT ARE 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 (Section 52). It is also
known as binding slip or receipt or
binder;
EFFECTIVITY OF A COVER NOTE
The effectivity of a cover note is
60 days as within such period, a policy
shall be issued including in its terms the
identical assurance found under the
Page 100 of 274
COMMERCIAL LAW
cover rate and the premium therefore. It
may however, be extended beyond 60
days and with the written approval of the
Insurance Commissioner if he determines
that it does not violate the Insurance
Code;
NOTE THE FOLLOWING RULES HAVE
BEEN PROMULGATED BY THE
INSURANCE COMMISSIONER:
(1)
A cover note is valid for 60

days whether 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)
(4)
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;
Insurance
companies
may
impose a deposit premium
equivalent to at least 25% of
the estimated premium but in
no case less than Php500.00;
WHEN WILL A COVER NOTE GIVE

ADEQUATE INSURANCE PROTECTION?

It gives adequate insurance

protection when it is a preliminary
contract of present insurance and not
a mere agreement to insure a future
time, as on acceptance of the application
or issuance/delivery of the policy. (44 CJS
958)
Example:
(1)
(2)
Agent issued a provisional

policy acknowledging receipt of
premiums and stating that the
insurance shall be effective
upon approval and issuance of
the policy by the head office.
There is no protection as it is a
mere acknowledgement of the
payment of premiums as the
effectivity of the insurance is
expressly provided (Lim vs.
Sunlife, 41 Phil 265);
In life insurance, a binding slip
does not insure by itself as it
was stated that it was subject
to the approval of the insurer
and
the
same
was
subsequently
disapproved
(Grepalife vs. CA, 89 SCRA
546);
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
Page 101 of 274
COMMERCIAL LAW
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);
2009 BAR EXAM (IV)
Antarctica
Life
Assurance
Corporation (ALAC) publicly offered a
specially designed insurance policy
covering persons between the ages of 50
to 75 who may be afflicted with serious
and debilitating illnesses. Quirico applied
for insurance coverage, stating that he
was already 80 years old. Nonetheless,
ALAC approved his application.Quirico
then requested ALAC for the issuance of
a cover note while he was trying to raise
funds to pay the insurance premium.
ALAC granted the request. Ten days after
he received the cover note, Quirico had a
heart seizure and had to be hospitalized.
He then filed a claim on the policy.
a. Can ALAC validly deny the claim
on the ground that the insurance
coverage, as publicly offered, was
available only to persons 50 to 75 years
of age? Why or why not? (2%)
b. Did ALACs issuance of a cover
note result in the perfection of an
insurance contract between Quirico and
ALAC? Explain. (3%)
Answer:
a.
no.
there
was
no
concealment on the part of quirico
as to his age.
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 (Section 53).
Example:
(a)
In the case of Del Val vs. Del

Val, 29 Phil 534, the
designation of a sister as a
sole
beneficiary
in
life
insurance cannot be defeated
by the contention of the
plaintiff that the proceeds
belong to the estate of the
insured was disregarded as
insurance is to be governed by
special law, not by the law
covering
donations
or
succession;
(b)
In the case of Bonifacio

Bros. vs. Mara, G.R. No.
20853, 29 May 1967, action
to recover cost of repairs and
labor to a motor vehicle where
the policy states loss is
payable to H.S. Reyes, the
mortgagee of the vehicle who
had no knowledge of the fact
that Mara had it repaired with
Bonifacio Bros., where the
court ruled that H.S. Reyes is
the one entitled to the
proceeds because a policy of
insurance is a separate and
independent contract between
the insured and the insurer,
and that third persons have no
right to the proceeds of the
insurance.
MAY A 3RD PERSON SUE THE INSURER

No, in general rule unless there is
Page 102 of 274
COMMERCIAL LAW
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;
Example: In case of Coquia vs.
Fieldmens Insurance Co. 26
SCRA 179, the insurance company
undertook to indemnify any
authorized driver who was driving
the motor vehicle insured. Coquia,
while driving the insured motor
vehicle met an accident and died.
His heirs were allowed to sue the
insurer, the policy being considered
in the nature of a contract pour
autrui and therefore the
enforcement thereof may be
demanded by a 3rd party whose
benefit it was made;
(b)
The
insurance
contract
provides for indemnity against
liability to 3RD persons.
Example: In the case of Guingon vs.
Del Monte, 20 SCRA 1043, the
insured procured insurance that
would indemnify him against any
and all sums, which he may be
legally liable to pay in respect to
the death or bodily injury to any
person. A jeepney covered by the
insurance had bumped Guingon
and had caused his death. The
insurance was held to be one for
indemnity for liability to third
persons (Third Party Liability),
and therefore, such third person is
entitled to sue the insurer. 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
(Section 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 (Section
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
Page 103 of 274
COMMERCIAL LAW
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 (Section
56).
(5)
(6)
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 (Section 57).
The proceeds become payable
to who may be the owner at
the time the loss or injury
occurs. This is an exception to
section 20.
the actual cash value at the

time of loss;
A Valued Policy is one, which

expresses on its face that the
thing insured shall be valued at
a specified sum (Section 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;
A Running Policy (Floating

Policy)
is
one
which
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 (Section 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.
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 (Section 58).
Note the exceptions to this rule
as found in sections 20-24 and
57;
WHAT ARE KINDS OF INSURANCE

POLICIES
The kinds of policies are (1) Open,
(2) Valued, or (3) Running (Section 59);
An Open Policy is one in which

the value of the thing insured is
not agreed upon, but is left to
be ascertained in case of loss
(Section
60).
What
is
mentioned, as the amount is
not the value of the property
but merely the maximum limit
of the insurers liability. In case
of loss, the insurer only pays

Example: Insurance procured by a

retail establishment to cover its
inventory that fluctuates in
quantity, or is located in several
areas;
VALUED POLICY DISTINGUISHED
FROM AN OPEN POLICY
(1)
In a valued policy, proof of

value of the thing after the
loss is not necessary. In an
open policy, the insured must
Page 104 of 274
COMMERCIAL LAW
(2)
prove the value of the thing

insured;
In a valued policy, the parties
have conclusively stipulated
that the property insured is
valued at a specified sum. In
an open policy, the value is
not agreed but left to be
ascertained upon loss;
Note: this does not violate the
principle that a contract of
insurance is a contract of
indemnity as long as the
valuation is reasonable and is
bonafide).
OPEN AND VALUED POLICIES

PROBLEM
Suppose A constructed a
house in 1990 at a cost of P
200,000.00 which he insured against
fire to the said amount. The policy
for P 200,000.00 was renewed every
year. In 1995, when the said house
was already P 400,000.00, of the
house was burned or destroyed by
fire. How much can he recover from
the insurer?
ANSWER:
It depends. If the policy is a
valued policy, A can recover only P
50,000.00. If a policy is an open
policy, A can recover his actual loss
of P 100,000.00.
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, New Civil Code, it being a
written contract (Eagle Star vs. Chia Yu
96 Phil 696, ACCFA vs. Alpha Insurance,
24 SCRA 151). If the insured asks for a
reconsideration of the denial, the
period is still counted from the time the
claim is denied at the first instance not
reconsideration - as it gives the
insured a scheme or devise to waste time
until evidence that may be considered
against him can be destroyed (Sun Life
Office Ltd. Vs. CAR, 195 SCRA 193). The
period does not run if action is brought
against an agent of the insurer;
WHAT IS THE PRESCRIPTIVE PERIOD
OF MOTOR VEHICLE INSURANCE
One year from denial of the claim
not date of accident (Summit
Guaranty vs. De Guzman, 15 SCRA 389);
WHERE IS THE ACTION FILED
The action may be filed in the
following:
(1)
(2)
(3)
Courts;
Insurance Commissioner, who
has concurrent jurisdiction with
courts for claims not exceeding
Php100,000.00;
POEA/DOLE have the power to
compel a surety to make good
on a solidary undertaking in
the same proceeding where
Page 105 of 274
COMMERCIAL LAW
the liability of the principal
obligor is determined.
Note that the claim becomes
action upon filing with the court;
It must be in writing, mailed or

delivered to the name insured at the
address shown in the policy which shall
state:
(1)
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
representation;
(4)
Discovery of willful or reckless

acts or omissions increasing
the hazard insured against;
(2)
Notes:
(1)
material
(2)
(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:
The grounds relied upon as per

section 64, and;
That upon written request of
the named insured, the insurer
will furnish the facts on which
cancellation is based (Section
65).
A fire insurance policy is

cancelled on October 15, 1981.
The insurers clerk allegedly
got notice of cancellation by
mail but there was no proof
that it was actually mailed and
received. Insurer relies on the
presumption
of
regularity.
Held: Considering the strict
language of the law that no
policy can be cancelled without
prior notice it behooved on
the insurer to make sure that
cancellation was actually sent
and received by the insured
(Malayan vs. Arnaldo, 156
SCRA 762);
A insured his building against
fire and made the loss payable
to
mortgagee.
Upon
cancellation notice was sent to
the mortgagee. Held: There
was
no
valid
notice
of
cancellation. The notice is
personal to the insured and not
to any unauthorized person
(Saura
Import
Export
vs.
Philippine International Surety
Co., Inc., 8 SCRA 143);
FORM OF NOTICE OF CANCELLATION

IS THE INSURED HAVE THE RIGHT TO
RENEW HIS POLCY
Page 106 of 274
COMMERCIAL LAW
(2)
Yes, in insurance other than life,
the named insured, may renew the
policy upon payment of the premium
due on the effective date of the renewal,
if, he has not been given notice by the
insurer of the intention not to renew
or to condition renewal upon
reduction of limits or elimination of
coverages by mail or delivery at least
forty five days in advance of the end of
the policy;
WHAT ARE THE KINDS OF

WARRANTIES
(1)
(2)
WARRANTIES
Defined
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;
FORM
No particular form of words is
necessary to create a warranty (Section
69). What is essential is what the parties
intend a statement to be and if so
intended as a warranty it must be
included as part of the contract;
Note:
(1)
Whether a warranty is
constituted or not depends
upon the intention of the
parties, the nature of the
contract, or the words used
thereto;

In case of doubt, the

statement is presumed to
be a representation not a
warranty;
(3)
Affirmative those that relate

to matters that exist at or
before the issuance of the
policy;
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);
Note that unless the contrary
intention appears, the courts
will presume that the warranty
is merely an affirmative
warranty.
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
Page 107 of 274
COMMERCIAL LAW
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 section
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
(Section 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. But as far
as the insured, Note also that:
(1)
While a policy may declare that

a violation of a specified
provisions thereof shall avoid
it, otherwise the breach of an
immaterial provision does not
avoid the policy (Section 75).
Meaning ordinarily a breach
of an immaterial provision
does not avoid a policy,

(2)
however, if stipulated that any

breach avoids the policy, the
policy is avoided;
A breach of a warranty without
fraud, merely exonerates an
insurer from the time it occurs,
or where it is broken at its
inception, prevents the policy
from attaching to the risk
(Section 76). Meaning that if
the breach is without fraud
the policy is avoided only from
the time of the breach it is still
effective. Consequently, the
insured is entitled to a pro-rate
return of the premium paid
under section 79 (b) or all
premiums, if the breach occurs
at
the
inception
of
the
contract, as such is void ab
initio and had never become
binding;
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.
Example: A insured building
against fire. A warranty stated that no
hazardous goods should be stored. A
stored fireworks. The building was burned
and the fireworks were discovered stored
in the area not affected by the fire. The
insurer was not held liable as the storage
had increased the risk (Young vs.
Midland Textiles Ins. 30 Phil 617);
THE NON PERFORMANCE OF A
PROMISSORY WARRANTY DOES NOT
AVOID THE POLICY WHEN BEFORE
THE ARRIVAL OF THE TIME FOR
PERFORMANCE (Section 73)
Page 108 of 274
COMMERCIAL LAW
(1)
The
loss
happens;
(2)
The
performance
becomes
unlawful at the place of the
contract;
The
performance
becomes
impossible;
(3)
insured
against
DISTINGUISHING IT FROM
REPRESENTATIONS
WARRANTY
-
REPRESENTATIO
N
A warranty is part
of
the
contract;
A warranty is
expressly
set
forth
in
the policy
or
incorporated
therein
by
reference;
A
warranty
must
strictly and
literally
performed;
A warranty
presumed
material;
Representation
is
merely
a
collateral
inducement
thereto;
A
Representation
my be oral or
written
in
another
statement;
Representation
must
be
substantially
true;
is
-
A
breach
of
warranty is a breach of the
contract itself
A representation
must be shown
to be so;
(mis)representat
ion is a ground
to rescind the
contract;

PREMIUM
DEFINED
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)
(2)
In case of life or industrial life

(life insurance policy where the
premium is payable monthly or
oftener) whenever the grace
period applies (Section 77);
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 (Section 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
Page 109 of 274
COMMERCIAL LAW
(3)
purpose of collecting premium,

and;
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 (Section 177);
EXCEPTIONS TO SECTION 77:

UCPB GENERAL INSURANCE CO., INC.
vs.MASAGANA TELAMART, INC. (G.R.
No. 137172 April 4, 2001)
1. In case of life or industrial life
insurance, when the grace periods
applies; (Sec. 77)
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.

UCPB GENERAL INSURANCE CO. VS.

MASAGANA TELEMART, APRIL 24,
2001
Ruling
.
It was established that UCPB
had been issuing fire policies to
Masagana and these policies were
annually renewed. UCPB had been
granting Masagana a 60 to 90-day
credit term within which to pay the
premium on the renewed policies.
There was no valid notice of nonrenewal
of
the
policies.
The
premium were paid within the 60 to
90 day credit term and duly
accepted by UCPB. It would be
unjust and inequitable if Masagana
cannot recover on the policies.
UCPB is estopped from taking refuge
under Section 77 since Masagana
had relied in good faith on such
practice.
AMERICAN HOME ASSURANCE
CO. VS. ANTONIO CHUA, JUNE
28, 1999
SC RULING:
SC sustained/affirmed the
decision of the RTC and CA because
there was a valid check payment by
Chua to the insurer. The renewal
certificate issued to Chua contained
the acknowledgment that premium
has been paid.
VIRGINIA A. PEREZ vs. CA (G.R. No.
112329
January 28, 2000)
Only when the applicant pays the
premium and receives and accepts
the policy while he is in good health
that the contract of insurance is
deemed to have been perfected.
-Insurance is a contract whereby, for a
stipulated consideration, one party
Page 110 of 274
COMMERCIAL LAW
undertakes to compensate the other for
loss on a specified subject by specified
perils.7 A contract, on the other hand, is a
meeting of the minds between two
persons whereby one binds himself, with
respect to the other to give something or
to render some service.8Under Article
1318 of the Civil Code,
When Primitivo filed an application for
insurance, paid P2,075.00 and submitted
the results of his medical examination,
his application was subject to the
acceptance of private respondent BF
Lifeman Insurance Corporation. The
perfection of the contract of insurance
between the deceased and respondent
corporation was further conditioned upon
compliance with the following requisites
stated in the application form:
there shall be no contract of
insurance unless and until a policy
is issued on this application and
that the said policy shall not take
effect until the premium has been
paid and the policy delivered to
and accepted by me/us in person
while I/We, am/are in good health.9
The assent of private respondent BF
Lifeman Insurance Corporation therefore
was not given when it merely received
the application form and all the requisite
supporting papers of the applicant. Its
assent was given when it issues a
corresponding policy to the applicant.
Under the abovementioned provision, it
is only when the applicant pays the
premium and receives and accepts the
policy while he is in good health that the
contract of insurance is deemed to have
been perfected.
In the case at bar, the following
conditions
were
imposed
by
the
respondent company for the perfection of
the contract of insurance:
(a) a policy
issued;
must
have
been
(b) the premiums paid; and

(c) the policy must have been
delivered to and accepted by the
applicant while he is in good
health.
The condition imposed by the corporation
that the policy must have been delivered
to and accepted by the applicant while
he is in good health can hardly be
considered as a potestative or facultative
condition. On the contrary, the health of
the applicant at the time of the delivery
of the policy is beyond the control or will
of the insurance company. Rather, the
condition is a suspensive one whereby
the acquisition of rights depends upon
the happening of an event which
constitutes the condition. In this case,
the suspensive condition was the policy
must have been delivered and accepted
by the applicant while he is in good
health. There was non-fulfillment of the
condition, however, inasmuch as the
applicant was already dead at the time
the policy was issued. Hence, the nonfulfillment of the condition resulted in the
non-perfection of the contract.
No contract of insurance, unless
unless the minds of the parties have
met in agreement.- A contract of
insurance, like all other contracts, must
be assented to by both parties, either in
person or through their agents and so
long as an application for insurance has
not been either accepted or rejected, it is
merely a proposal or an offer to make a
contract. The contract, to be binding from
the date of application, must have been a
completed contract, one that leaves
nothing to be done, nothing to be
completed, nothing to be passed upon, or
determined, before it shall take effect.
There can be no contract of insurance
Page 111 of 274
COMMERCIAL LAW
unless the minds of the parties have met
in agreement.
Delay in acting on the application
not unreasonable so as to constitute
gross negligence for which the
insurance
corporation
may
be
penalized. - Respondent corporation
cannot be held liable for gross
negligence. It should be noted that an
application is a mere offer which requires
the overt act of the insurer for it to ripen
into a contract. Delay in acting on the
application
does
not
constitute
acceptance even though the insured has
forwarded his first premium with his
application. The corporation may not be
penalized for the delay in the processing
of the application papers. Moreover,
while it may have taken some time for
the application papers to reach the main
office, in the case at bar, the same was
acted upon less than a week after it was
received. The processing of applications
by respondent corporation normally takes
two to three weeks, the longest being a
month.12 In this case, however, the
requisite
medical
examination
was
undergone
by
the
deceased
on
November 1, 1987; the application
papers were forwarded to the head office
on November 27, 1987; and the policy
was issued on December 2, 1987. Under
these circumstances, we hold that the
delay could not be deemed unreasonable
so as to constitute gross negligence.
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. (See
Philippine Phoenix Surety and Ins. vs.
Woodworks 20 SCRA 1270, Makati
Tuscany Condominium Corporation vs.
CA, - payment by installment was agreed
upon, note also Tibay vs. CA 257 SCRA
126 any partial payment when there is
an agreement that the policy shall not be
effective pending payment of full
premium was in the concept of deposit.)
PAYMENT TO INSURANCE AGENT OR
BROKER is payment to the insurance
company;
WILL PAYMENT BY PROMISORY NOTE
OR CHECK BE SUFFICIENT TO MAKE
THE POLICY BINDING?
No, art. 1249 2ND paragraph of the
Civil Code, that such produces payment
only when it is ENCASHED;
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
(Section 79 A);
(2)
Where the insurance is made

for a definite period of time
and the insured surrenders his
Page 112 of 274
COMMERCIAL LAW
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)
(4)
(5)
(6)
When the contract is voidable

on
account
of
fraud
or
misrepresentation
of
the
insurer or the agent (Section
81);
Where the contract is voidable
on account of facts, the
existence of which the insured
was ignorant without his fault
(Section 81);
When by any default of the
insured other than actual
fraud,
the
insurer
never
incurred any liability under the
policy; (Section 81);
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;
WHOM ARE THE PREMIUMS

RETURNED
Unless otherwise stated, they shall
be returned to the insured who paid
them;
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 (Section 80);
(2)
In life insurance (Section 79b) cash surrender value;

When the insured is guilty of
fraud
or
misrepresentation
(Section 81);
(3)
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. Although a peril
not contemplated by the contract
may have been a remote cause
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COMMERCIAL LAW
but the insurer is not liable for a
loss of which the peril insured
against was only a remote cause.
(Section 84)
Proximate cause- that which in natural
and continuous sequence, unbroken by
any efficient intervening cause, produces
an injury and without which the injury
would not have occurred)
Example: In life insurance that covers
death by accident, if the insured sustains
an accident that renders him weak, while
in said state, he contracts a cold that
develops into pneumonia. The proximate
cause is the accident, while the remote
cause is the pneumonia, the insurer is
liable;
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 (Section 85).
Here the principle of proximate
cause is extended to loss incurred
while saving the thing insured.
Examples: (a) When the
thing
insured
is
water
damaged due to efforts to
put out a fire, the fire being
a peril insured against
(b) Theft by 3RD persons

while the goods are brought
out in the course of rescuing
them from a fire, which is
the peril insured against
BUT no loss if the goods
are left out and are lost it
is now due to lack of
reasonable
care
and
vigilance;
(C) A insures the contents of
his house against fire. A fire
breaks out, while removing
the contents, they were
stolen or they were broken
or
damaged,
theft
or
breakage not being perils
insured against;
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
(Section 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.
Page 114 of 274
COMMERCIAL LAW
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 insureds agent or others
(Section 87). Consequently, if the
insured was merely negligent, the
insurer is still liable as one of the
principal reasons of procuring
insurance is to protect himself
against the consequences of his
own negligence or that of his
agents.
2007 BAR EXAM (IV)
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?
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)
ADMISSION OF PRIVATE DOCUMENTS
AS EVIDENCE Before a private
document is admitted in evidence, it
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COMMERCIAL LAW
must be authenticated either by the
person who executed it, the person
before
whom
its
execution
was
acknowledged, any person who was
present and saw executed, or who after
its execution, saw it and recognized the
signatures, or the person to whom the
parties to the instruments had previously
confessed execution thereof. (sec.20 Rule
132 ROC as cited in Malayan Insurance
Co., Inc. V. Philippine Nails and Wires
Corporation, Apr.10, 2002 G.R. No.
138084)
ISSUANCE OF CLAIM FOR LOSS; FILING OF

CLAIM WITHIN THE PERIOD A CONDITION
PRECEDENT The issuance of claim for
loss or damages to cargo should be filed
within 24 hours from the time the goods
were received.
The filing of a claim with the carrier
within the time limitation therefore
actually
constitutes
a
condition
precedent to the accrual of a right of
action against a carrier for loss of, or
damage to, the goods. The shipper or
consignee must allege and prove the
fulfillment of the condition. If it fails to do
so, no right of action against the carrier
can accrue in favor of the former. The
aforementioned
requirement
is
a
reasonable condition precedent; it does
not constitute a limitation of action.
(Philippine Charter Insurance Corp.
v. Chemoil Lighterage Corp., Jun. 29,
2005 G.R. No. 136888)
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
liability;
cause
and
there
is
(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 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 (Section 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.
Page 116 of 274
COMMERCIAL LAW
The exception in section 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 (Section 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 (Section 89)

WHEN ARE DEFECTS IN THE NOTICE

OR PROOF LOSS DEEMED WAIVED
BY THE INSURER
1. When the insurer fails to specify to
the insured any defect which the
insured can remedy without delay;
2. When the insurer denies liability on
a ground other than that defect in
the notice or proof of loss;
Example: Denial is based on
nullity of the contract (Section 90)
WHEN IS DELAY IN THE GIVING OF
NOTICE WAIVED
1. If it is caused by any act of the
insurer.
2. If the insurer omits to make an
objection promptly and specifically
on that ground. despite delay,
the insurer does not object
(Section 91);
REQUIREMENT OF CERTIFICATION OR
TESTIMONY OF A THIRD PERSON
In the giving of preliminary proof
of loss, a certification or testimony of a
third person other than the insured is
required, it is sufficient for the insured to
use REASONABLE DILIGENCE to procure
it. In case of REFUSAL to give it, the
insured
can
furnish
REASONABLE
EVIDENCE to the insurer that such refusal
WAS NOT INDUCED BY ANY JUST
GROUNDS OF DISBELIEF in the facts
necessary to be certified or testified
Page 117 of 274
COMMERCIAL LAW
ONCE SHOWN or GIVEN the requirement
may be dispensed with (Section 92).
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 (Firemans
Fire Insurance vs. Jamilla & Company, 70
SCRA 323).
THERE IS NO SUBROGATION IN:
(a)
(b)
(c)
Life insurance as it is not a

contract of indemnity
When proximate cause of the loss
is the insured himself
When the insurer pays to the
insured a loss not covered by the
policy;
The insured is no longer to
collect from the wrongdoer if
the amount that he received
from the insurer has fully
compensated for the loss;
SUBROGATION (ART. 2207, NEW

CIVIL CODE)
PHILIPPINE AMERICAN GEN.
INSURANCE CO. VS. CA & FELMAN
SHIPPING LINES, JUNE 11,1997.
SC RULING:

It
ordered
Felman
to
pay
Phialamgen P 755, 250.00 plus interest
pursuant to Art. 2207 0f the Civil Code
which provides:
Art. 2207. If the plaintiffs property
has been insured, and he has
received
indemnity
from
the
insurance company for the injury or
loss arising out of the wrong or
breach of contract, the insurance
company shall be subrogated to the
right of the insured against the
wrongdoer or the person who
violated the contract.
DOUBLE INSURANCE
When does double insurance exist?
- Where the same person is
insured by several insurers
separately in respect to the
same
subject
or
interest
(Section 91).
2005 BAR EXAM (N0. X 2 -b)
Q: What is the nature of the liability of
the several insurers in double insurance?
Explain. (2%)
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;
Page 118 of 274
COMMERCIAL LAW
non-disclosure of double insurance

will avoid the policy. ( Geagonia v.
Country Bankers Insurance )6
February, 1995. As there is no
indication
of
a
contractual
prohibition on double or other
insurance, all insurance contracts
over the building are deemed valid
and enforceable.
There
is
prohibition
TO
PREVENT
OVER-INSURANCE,
thus preventing fraud.
2008 BAR EXAM

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.
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)
a. Is the owner's taking of insurance

for the building with three (3) insurers
valid? Discuss. (3%)
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. (2%)
Answer:
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.
Answer: 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
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 claims is an unvalued
policy, he must give credit, as
against the full insurable value, for
Page 119 of 274
COMMERCIAL LAW
any sum received by him under
the policy.
4. Where the insured receives any

sum in excess of the valuation in
case of a valued policy or 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 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.
If
there
is
an
OTHER
INSURANCE CLAUSE one that
prevents other insurance on the
property except without the
consent of the company THEN
IT
WILL
PREVENT
ENFORCEMENT OF THE POLICY,
the policy will be NULL and
VOID. If there is no OTHER
INSURANCE
CLAUSE,
then
double insurance is allowed but
the provisions of Section 94
must be followed because
property insurance is a contract
of indemnity.
DISTINGUSHING OVER INSURANCE

FROM DOUBLE INSURACE
DOUBLE
INSURANCE
OVER
INSURANCE
there must be two or more

insurers;
one insurer
sufficient;
the
total amount of the
policies
need
not exceed the
value of the
insurable
interest;
the value must

always be in
excess of the
insurable
interest;
is
REINSURANCE
- occurs
when
an
insurer
procures a 3RD person to insure
him against loss or liability by
reason
of
such
original
insurance. (Section 95)
WHEN IS REINSURANCE
COMPULSORY?
1. When a non-life insurer insured in
any one risk or hazard an amount
Page 120 of 274
COMMERCIAL LAW
exceeding 20% of its net worth,
the insurer needs reinsurance of
the excess over such limit (Section
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
the
insurer
remains an insurer
insurer
becomes
insured
subject matter is
property
same interest and

risk is insured with
another
the
subject
matter is the
insurers
risk
or liability
different
interest
and
risk
are
insured
the
DIFFERENTIATE
DOUBLE
INSURANCE,
REINSURANCE
&
MUTUAL INSURANCE (for further
discussion)
NEW LIFE ENTERPRISES VS. CA , 207
SCRA 669 (1992)
SC RULING:
The terms of the contract are
clear and unambiguous. The insured is
specifically required to disclose to the
insurer any other insurance and its

particulars which he may have
effected on the same subject matter.
The parties must abide by the terms of
the contract because such terms
constitute the measure of the insurers
liability and compliance therewith is a
condition precedent to the insureds
right of recovery from the insurer.
WHAT MUST BE COMMUNICATED WHEN
THE ORIGINAL INSURER OBTAINS
REINSURANCE?
Except in automatic
reinsurance treaties (when two or
more insurance companies agree in
advance that they will reinsure a
part of any line of insurance taken
by the other. Since such contracts
are self-executing and the obligation
attaches automatically, the
information required to be
communicated herein could not
influence the reinsurer in deciding
whether or not to accept the
reinsurance because it is automatZ
representations of the original
insured;all information or knowledge
he possesses whether previously or
subsequently acquired, which are
material to the risk (Section 96);
WHAT KIND OF CONTRACT IS
REINSURANCE?
-
It is presumed to be a
contract of indemnity against
liability, and merely against
damage (Section 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.
Page 121 of 274
COMMERCIAL LAW
Note: The subject of the reinsurance
contract is the insurers risk not the
property insured in the original
policy Thus, it is not necessary
that the insurer first pay on the
claim on the original policy before
claiming from the insurer;
WHAT IS THE EXTENT OF LIABILITY OF
THE REINSURER?
-
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
WHAT IS MARINE INSURANCE?

-
(a)
Example: A insures his house valued

at 1 million to X insurance for 1.5
Million. X insurance reinsured with Z
insurance for 1.2 million. The house
burns. The liability of Z insurance is
only up to 1 million, which is the
liability of X Insurance. What if the
original insured and insurance
company settles for less, the liability
of Z Insurance is still only up to what
is paid by X Insurance OTHERWISE,
the original insurer profits and thus
violates that the principle that is a
contract of indemnity.
WHAT IS THE INTEREST OF THE ORIGINAL
INSURED IN THE CONTRACT OF
REINSURANCE?
-
The original insured has no

interest in the contract of
reinsurance (section 98).
Hence only the reinsured
can
claim
against
the
reinsurer;

INSURANCE
(b)
Insurance
against
damage to:
loss
or
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,
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
Page 122 of 274
COMMERCIAL LAW
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)
(d)
Precious
stones,
jewels,
jewelry,
precious
metals
whether in the course of
transportation or otherwise;
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 (section 99).

NOTE: That marine insurance is

really TRANSPORTATION INSURANCE
that is a kind of insurance that is
concerned with the perils of
property in (or incidental to) transit
as opposed to property perils at a
generally fixed location. But does
not include normal motor vehicle
insurance which is treated
separately by law;
INSURANCE POLICY [effect of failure to
present insurance policy] since the
Marine insurance policy was never
presented in evidence before the trial
court or the Court of Appeals even, there
is no legal basis to consider such
document in the resolution of this case,
x x x (Malayan Insurance Co. vs. Regis
No. 172156)
MARINE RISK NOTE IS NOT AN
INSURANCE POLICY Certainly it would
be obtuse for us to even to entertain the
idea that the insurance contract between
Malayan and ABB Koppel was actually
constituted by the Marine Risk Note
alone. (Malayan Insurance Co. vs. Regis
No. 172156)
WHAT ARE THE DIVISIONS OF

TRANSPORTATION INSURANCE?
1. Ocean
Marine
Insurance
pertaining primarily to sea

perils of ships and cargoes;
2. Inland
Marine
Insurance
pertaining primarily to land or

overland
(but
sometimes)
transportation
of
property
shipped by railroads, motor
Page 123 of 274
COMMERCIAL LAW
trucks, airplanes, and other
means
of
transportation.
Includes four basic principles
that are:
(a)
Property in transit
providing
protection
to property frequently
exposed to loss while
in transport from one
place to another;
(b)
Bailee
liability
providing
protection
to persons who have
temporary custody of
goods
or
personal
property of others;
(c)
Fixed
transportation
property providing
protection
to
fixed
property
considered
aids to the movement
of
property,
like
bridges and tunnels,
and
(d)
Floater
providing
protection to personal
property
(such
as
precious
stones,
jewelry, works of art)
whenever it may be
located subject always
to territorial limits of
the contract and need
not necessarily be in
the
course
of
transportation.
NOTE: Marine Insurance may be in
form of property insurance,
indemnifying the insured for loss or
damage to property (Par.1, Section 99)
or liability insurance, protecting the
insured against the consequences of
legal liability for loss or damage to
property or for personal injury,
illness or death of a person (Par.2,
Section 99);
WHAT RISKS ARE INSURED AGAINST?

-
The
basic
risk
insured
against is commonly known
as PERILS OF THE SEA (all
kinds of marine casualties
and damages done to the
ship or goods at sea by the
violent action of the winds
or waves, one that could
not be foreseen and is not
attributable to the fault of
anybody.
WHAT ARE NOT COVERED?

Generally, perils of the ship
are not covered losses that
result from:
(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;
-
WHO MUST CHECK ON THE SEA

WORTHINESS OF A VESSEL?
-
Since there is an implied

warranty of seaworthiness,
it becomes the obligation of
the cargo owner or the
insured to look for a
reliable
common carrier,
which keeps it vessels
seaworthy. The insured may
have no control on the
Page 124 of 274
COMMERCIAL LAW
vessel but has full control in
the
choice
of
common
carrier;
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. (2%)
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. (3%)
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.
Workmens 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).
DEFINITION OF TERMS
(a)
Barratry is willful act of

the master and crew in
pursuance
of
some
fraudulent
or
unlawful
purpose
without
the
consent of the owner and to
the
prejudice
of
his
interest.
Example: Burning of the ship
or unlawfully selling the
cargo;
Page 125 of 274
COMMERCIAL LAW
(b)
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
policys
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.
(Section 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. (Section 101);

BOTTOMRY/RESPONDENTIA
is a loan payable only if the
vessel given as a security for
said loan arrives safely at port
from
contemplated
voyage
(bottomry) or a loan payable
only upon the safe arrival in
port of the goods given as a
security (respondentia).
this contracts are in the

nature of a mortgage as the
owner borrows money for the
use, equipment or repair of
the vessel for a definite term
with the ship as security with
maritime
or
extraordinary
interest on account of the
risks borne by the lender, it
being stipulated that if a ship
be lost during the voyage or
within a limited period, the
lender also loses his money
(Note that the lender has
insurable
interest
to
the
extent of loan);
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.
(Section
102)
Freightage are the benefits derived
by the owner from:
(a)
(b)
chartering of a ship;
its employment for the
carriage
of
his
own
Page 126 of 274
COMMERCIAL LAW
goods or those of others
(Section 102)
IT EXIST (a) In case of a charter party
when the ship has broken ground
on the intended voyage (b) if a price
is to be paid for the carriage of
goods, when they are actually on
board or there is contract to put
them on board AND the vessel and
goods are ready for specified voyage
(Section 104);
ARE THERE PERSONS/PARTIES OTHER
THAN THE OWNER WHO HAS INSURABLE
INTEREST? YES;
1. One who has an interest in
thing from which profits
expected to proceed,
insurable
interest
on
profits (Section 105);
the
are
has
the
Example: Owner of a cargo

transported on a vessel not only
has insurable interest on the
cargo but also on the expected
profits from a future sale;
2. The charterer of a ship has
insurable
interest
to
the
extent that he is liable to be
damnified by its loss (Section
106).
Example: A charters Bs vessel on
condition that A would pay B in
case of loss the amount
300,000.00. A has insurable
interest to the extent of
300,000.00
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.
Example: If an agent fails to
notify principal of the loss of the
cargo and the latter, after the loss
but ignorant thereof, secured
insurance lost or not lost, the
insurance will be void due to
concealment;
A party is also bound to communicate,
the information belief or expectation

Page 127 of 274
COMMERCIAL LAW
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 (section 108);
PRESUMPTION OF A PRIOR LOSS
-
Insured in marine insurance

is
presumed
to
have
knowledge, at the time of
insuring,
or
prior,
if
information might possibly
reached him in the usual
mode of transportation and
the
usual
rate
of
communication
(section
109)
EFFECT OF CONCEALMENT
While concealment as a rule
entitles the injured party to
rescind, the rule must yield
to section 110 as it does
not vitiate the contract but
merely
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
-
Example: The vessel is seized

due to lack of documents, the
insurer is exonerated. If the

vessel is lost due to storm, the
insurer is liable despite
concealment due to lack of;
DISTINGUISHING ORDINARY
CONCEALMENT FROM THAT IN MARINE
INSURANCE
Ordinary Insurance
Marine Insu
Opinion or belief of a 3 RD
person or own judgment of
the insured is not material
and
need
not
be
communicated (section 35);
A causal connection between

the fact concealed and cause
of loss is not necessary for
the insurer to rescind;
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 (section 112).
Example: statement as to time

of sailing, nature of the cargo
or amount of profits;
Page 128 of 274
Belief
person
mater
has to
The c
the
sectio
exone
loss, i
fact co
COMMERCIAL LAW
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 (section 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 (section 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
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

(c)
which case each

vessel upon which the
cargo is shipped or
transshipped must be
seaworthy
at
the
commencement
of
each
particular
voyage (section 115);
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 (section
117);
Example: The voyage will

pass thru rivers then seas
the warranty is not
complied with if at the time
it goes out to sea it is not
seaworthy to encounter the
perils of the sea;
TO WHAT DOES THE WARRANTY OF
SEAWORTHINESS EXTEND 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
Page 129 of 274
COMMERCIAL LAW
appurtenances
like
ballast, cables, anchors,
cordage,
sails,
food,
water, fuel, lights and
other
necessary
and
proper
stores
and
implements
for
the
voyage (section 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 (section
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 (section 119).
Example: A cargo of wheat was

laden on a ship which had a
port hole insecurely fastened
at the time of lading. The port
hole was foot above the water
line, and in the course of the
voyage, water entered the
cargo area and damaged the
wheat. The ship was deemed
unworthy with reference to the
cargo, hence the insurer of the
cargo was not liable (Steel vs.

Stateline Steamship, cited Go
Tiaco vs. Union Society of Canton,
40 Phil 40);
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
(section
120).
This
warranty
arises
only
when
nationality or the neutrality of the
vessel or cargo is expressly
warranted;
3. That the vessel shall not make
any improper deviation from
the intended voyage;
HOW IS THE INTENDED VOYAGE
DETERMINED
(a)
When its is described by

places
of
beginning
and
ending, the voyage is the
course of sailing fixed by
mercantile usage between
those places (section 121);
When its is not fixed by mere
usage, the voyage is the way
between
the
places
specified which to a master
of
ordinary
will
and
discretion would seem the
most natural, direct and
advantageous
(section
122);
(b)
WHAT IS DEVIATION
-
is a departure from the

course of the voyage as
Page 130 of 274
COMMERCIAL LAW
defined by section 121 and
122 or an unreasonable
delay
in
pursuing
the
voyage
or
the
commencement
of
an
entirely different voyage
(section 123);
WHEN IS DEVIATION PROPER
(a)
(b)
(c)
When it is caused by
circumstances over which
neither the master nor the
owner of the ship has any
control;
Example: An ailment strikes
the crew of the vessel;
When necessary to comply
with warranty, or to avoid a
peril, whether or not the
peril is insured against;
Example: When repairs are
necessary or to avoid
getting caught in a conflict;
When made in good faith,
for the purpose of saving
human life or relieving
another vessel in distress;
Example: When assistance is
given
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.
(Section 124, Insurance Code)
*** ANY DEVIATION THAT IS NOT
INCLUDED IS NOT PROPER (SECTION 124
AND 125)
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.
Q: Under what circumstances can a

vessel properly proceed to a port other
than its port of destination? Explain. (4%)
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: 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;
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
2005 BAR EXAM (N0. XIV -1- b)

Page 131 of 274
COMMERCIAL LAW
proper. (Section 145(a), Insurance
Code)
CONSEQUENCE OF IMPROPER DEVIATION
(1)
Insurer is not liable for any

loss happening to the thing
insured subsequent to an
improper deviation (section
126). This applies whether
the risk has been increased
or diminished.
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
(section 130)
Example: When palay was
rendered valueless
because they began to
germinate, thus it no
longer remains as the
same thing, it was an
actual total loss. (Pan
Malayan vs. CA 201 SCRA
382)
4. That the vessel does not or

will not engage in any illegal
venture;
LOSS IN MARINE INSURANCE
-
Losses in marine insurance

may be partial or total
(section 127). A loss that is
not total is partial (section
128);
BURDEN OF PROOF AS TO LOSS OR

DAMAGE The burden of proof
contemplated by the aforesaid provision
actually refers to the burden of
evidence (Burden of going forward). As
applied in this case it refers to the duty
of the insured to show that the loss or
damage is covered by the policy. The
foregoing clause notwithstanding, the
burden of proof still rests upon petitioner
to prove that the damage or loss was
caused by an excepted risk in order to
escape any liability under the contract.
(DBP Pool of Accredited Insurance
Companies v. Radio Mindanao Network,
Inc. Jan. 27, 2006, G.R. No. 147039)
KINDS OF TOTAL LOSSES
-
a total loss may be actual or

constructive (section 129)

If it is an Actual Total Loss it

may be caused by:
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;
If the vessel be prevented, at

an
immediate
port,
from
completing the voyage, by the
perils insured against, the
Page 132 of 274
COMMERCIAL LAW
liability
of
the
marine
insurer
on
the
cargo
continues after they are
reshipped (section 133) and
the liability extends to
damages,
expenses
of
discharging,
storage,
shipment, extra freightage
and all other expenses
incurred in saving the cargo
reshipped up to the amount
insured nothing shall render
the insurer liable for an amount
in excess of the insured value
or if none, of the insurable
value (section 134);
Upon actual total loss, the

insured
is
entitled
to
payment without notice of
abandonment (section 135)
and if the insurance is
confined to an actual loss it
will not cover a constructive
loss, but will cover any loss,
which necessarily results in
depriving the insured of
possession, at the port of
destination of the entire
thing insured (section 137);
(2)
It is a constructive total loss

when the person insured is
given a right to abandon
under section 139 (section
131);
ORIENTAL ASSURANCE CORP., VS.
CA AND PANAMA SAWMILL CO., INC.
200 SCRA 459 (1991)
SC RULING:
The policy in question shows
that the subject matter insured was
the entire shipment of apitong logs.
The fact that the logs were loaded
on two different barges did

not
make the contract several and
divisible as to the terms insured.
The logs on the two barges were
not separately valued or separately
valued or separately insured. Only
one premium was paid for the entire
shipment, making only one cause or
consideration.
The insurance contract should
be considered indivisible. Under the
Insurance Code, a total loss may
either be an actual loss or a
constructive
total
loss.
The
appellate court treated the loss
suffered
by
Panama
as
a
constructive total loss, and for the
purpose of computing the more than
three-fourths value of the logs
actually lost, considered the cargo in
one barge as separate from the logs
in the other. The logs having been
insured as one inseparable unit, the
correct basis for determining the
existence of constructive total loss is
the totality of the shipment of logs.
Of the entirety of 1,208 pieces of
logs, only 497 pieces thereof were
lost or 41.45% of the
entire
shipment. Since the cost of those
497 pieces does not exceed 75% of
the value of all 1,208 pieces of logs,
the shipment cannot be said to have
sustained a constructive total loss
under
Section
139(a)
of
the
Insurance Code. In the absence of
either actual or constructive
total loss, there can be no recovery
by Panama against
Oriental
Assurance.
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
Page 133 of 274
COMMERCIAL LAW
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. (Arnolds Law
of Marine Insurance and Average, 16 th
ed., Vol. II, pp. 954-955)
Suggested Alternative Answer:
There was no constructive total
loss. The loss is not more than 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 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 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 (section
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:
1 .more than thereof in
value is actually lost or would have
to be expended to recover it form
the peril insured against;
2 .if it is injured to such extent
as to reduce its value by more than
of value;
3 .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 the value of
the thing abandoned or a risk which
a prudent man would not take under
the circumstances;
4 .if the insured is freightage or
cargo and the voyage cannot be
Page 134 of 274
COMMERCIAL LAW
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
(section 139);
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 (section
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
(section 145);
Abandonment must neither be

partial nor conditional (section 140).
Hence, it must be total and absolute;
Abandonment 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 (section 141). This
is to enable the insurer to take steps
to preserve the property;
If the information proves

incorrect or thing insured is
restored
when
the
abandonment
was
made
that there was then in fact
no
total
loss
the
abandonment
becomes
ineffectual (section 142);
HOW NOTICE OF ABANDONMENT IS

MADE
-
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
(section 143). The notice

2005 BAR EXAM (N0. X - 1- b)

Q: b) Was it proper for the shipowner to
send a notice of abandonment to the
insurance company? Explain. (5%)
A: It was proper for the shipowner to
send a notice of abandonment to the
insurance company, because there was
reliable information of the loss of the
vessel.(Section 141, Insurance Code)
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 (section 146)
Note 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
Page 135 of 274
COMMERCIAL LAW
(2)
absence
on
actual
abandonment;
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 (section
148). The agents of the
insured become agents of the
insurer. This retroacts to the
date of the loss when
abandonment is effectively
made;
the is under section 152

when
the
ground
is
unfounded which is defined
in section 142 and/or as
related to section 145;
-
(2)
EFFECTIVITY OF ABANDONMENT
(1)
Abandonment
becomes
effective
upon
the
acceptance of the insurer.
Acceptance may either be
express or implied from the
conduct of the insurer. The
mere silence of the insurer for
an unreasonable length of time
after
notice
shall
be
construed
acceptance
(section 150). Once accepted,
it is conclusive between the
parties. The loss is admitted
together with the sufficiency
of the abandonment (section
151). It is also irrevocable upon
acceptance and upon its
being made unless the ground
upon which is made proves
to be unfounded (section 152).
Thus, if the insurer accepts
the abandonment, it cannot
raise any question as to
insufficiency of the form
under section 143, time for
giving notice under section
141, or right to abandon
under 139. The only exception

No
abandonment
of
freightage unless ship is
also abandoned;
On
an
accepted
abandonment
involving
a
ship,
freightage
earned
previous to the loss belongs
to
the
insurer
of
the
freightage, that subsequently
earned
belongs
to
the
insurer of the ship (section
153).
Example: The contemplated
voyage of the transport of
cargo is from point X to point
Y. In between, a loss occurs
and the ship is abandoned.
The freightage already
earned from point X until the
point of loss, belongs to the
insurer of the freightage. If
the ship is subsequently
repaired, and continues on to
point Y the freightage due
belongs to the insurer of the
ship;
(3)
If abandonment is not accepted

despite
its
validity,
the
insurer is liable upon an
actual total loss, deducting
from
the
amount
any
proceeds of the thing insured
that may have come to the
hands of the thing insured
(section 154). This is due the
fact that under section 149,
Page 136 of 274
COMMERCIAL LAW
which provides that if notice
is properly given, it does not
prejudice the insured, if the
insurer refuses to accept the
abandonment;
Example: Damage sustained

by a cargo from the time it
is loaded to the time it is
unloaded or additional
expenses that are incurred
by the vessel from the time
it puts out to the sea until it
reaches its destination
IF ABANDONMENT IS NOT MADE OR

OMMITTED
-
The fact that abandonment

is not made or is omitted
does not prejudice the
insured
as
he
may
nevertheless recover his
actual loss (section 155);
LIABILITY FOR AVERAGES

AVERAGE DEFINED 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
damage or expense 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.
Example: Jettisoning of
cargo;
As a rule when it has been agreed that

an insurance upon a particular thing or
class of things shall be free from
particular average, a marine insurer is
not liable for a particular average
loss not depriving the insured of the
possession, at the port of destination, of
the whole such thing, or class of
things, even though it becomes
entirely worthless, but such insurer
is liable for his proportion of all
general average loss assessed upon
the thing insured (section 136);
2009 BAR EXAM (VII)
Global Transport Services, Inc. (GTSI)
operates a fleet of cargo vessels plying
interisland routes. One of its vessels, MV
Dona Juana, left the port of Manila for
Cebu laden with, among other goods,
10,000 television sets consigned to
Romualdo, a TV retailer in Cebu.
Page 137 of 274
COMMERCIAL LAW
When the vessel was about ten
nautical miles away from Manila, the ship
captain heard on the radio that a typhoon
which, as announced by PAG-ASA, was on
its way out of the country, had suddenly
veered back into Philippine territory. The
captain realized that MV Dona Juana
would traverse the storms path, but
decided to proceed with the voyage. True
enough, the vessel sailed into the storm.
The captain ordered the jettison of the
10,000 television sets, along with some
other cargo, in order to lighten the vessel
and make it easier to steer the vessel out
of the path of the typhoon. Eventually,
the vessel, with its crew intact, arrived
safely in Cebu.
a. Will you characterize the jettison
of Romualdos TV sets as an average? If
so, what kind of an average, and why? If
not, why not? (3%)
contribution up to the value of

the policy;
RIGHT OF SUBROGATION
-
(a)
b. Against whom does Romualdo

have a cause of action for indemnity of
his lost TV sets? Explain. (3%)
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 (section 164).
Meaning that the insured can
hold his insurer liable for

there is separation of the

interest
liable
to
contribution;
Example: When the cargo
liable for contribution has
been removed from the
vessel
IN CASE OF GENERAL AVERAGE LOSS

-
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 insurer
subrogating the insurer to
his
own
right
to
contribution but no such
claim can be made upon the
insurer if:
(b)
when the insured having

the right and opportunity
to enforce contribution
from others, has neglected
or waived the exercise of
the right (section 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
Page 138 of 274
COMMERCIAL LAW
be the latter,
subrogation
takes place;
SUBROGEE x x x right to recovery
derives from the contractual subrogation
as an incident to an insurance
relationship and not from any proximate
injury to it inflicted by the respondents x
x x (Malayan Insurance Co. vs. Regis
No. 172156)
SUBROGATION [meaning] Subrogation
is the substitution of one person in the
place of another with reference to a
lawful claim or right, so that he who is
substituted succeeds to the rights of the
other in relation to a debt or claim,
including its remedies or securities. The
principle covers the situation under
which an insurer that has paid loss under
an insurance policy is entitled to all the
rights and remedies belonging to the
insured against a third party with respect
to any loss covered by the policy. It
contemplates full substitution such that it
places the party subrogated in the shoes
of the creditor, and he may use all means
which the creditor could employ to
enforce payment. (Lorenzo Shipping
Corp. v. Chubb and Sons, Inc. Et Al. Jun 8,
2004 G.R. No. 147724)
SUBROGEE The rights to which the
subrogee succeeds the same as, but not
greater than, those of the person for
whom he is substituted he cannot
acquire any claim, security, or remedy
the subrogor did not have. In other
words, a subrogee cannot succeed to a
right not possessed by the subrogor. A
subrogee in effect steps into the shoes of
the insured and can recover only if
insured likewise could have recovered.
However
when
the
insurer
succeeds to the rights of the insured, he
does so only in relation to the debt. The
person substituted (the insurer) will
succeed to all the rights of the
creditor(the insured), having reference to
the debt due the latter. (Lorenzo Shipping
Corp. v. Chubb and Sons, Inc. Et Al. Jun 8,
2004 G.R. No. 147724)
DELSAN TRANSPORT LINES, INC.
vs.
CA
and
AMERICAN
HOME
ASSURANCE CORPORATION (G.R. No.
127897 November 15, 2001)
Common Carriers; Failure to deliver
cargo;
Payment
by
insurance
company of insurable value of the
goods;
Insurance
company
subrogated to the rights of the
assured against the common carrier.
-The payment made by the private
respondent for the insured value of the
lost cargo operates as waiver of its
(private respondent) right to enforce the
term of the implied warranty against
Caltex under the marine insurance policy.
However, the same cannot be validly
interpreted as an automatic admission of
the vessels seaworthiness by the private
respondent as to foreclose recourse
against the petitioner for any liability
under its contractual obligation as a
common carrier. The fact of payment
grants
the
private
respondent
subrogatory right which enables it to
exercise legal remedies that would
otherwise be available to Caltex as owner
of the lost cargo against the petitioner
common carrier.8 Article 2207 of the New
civil Code provides that:
Art. 2207. If the plaintiffs property
has been insured, and he has
received indemnity from the
insurance company for the injury
Page 139 of 274
COMMERCIAL LAW
or loss arising out of the wrong or
breach of contract complained of,
the insurance company shall be
subrogated to the rights of the
insured against the wrongdoer or
the person who has violated the
contract. If the amount paid by the
insurance company does not fully
cover the injury or loss, the
aggrieved party shall be entitled to
recover the deficiency from the
person causing the loss or injury.
Presentation of marine insurance
policy not necessary for insurance
company to go after the vesselowner.- The presentation in evidence of
the marine insurance policy is not
indispensable in this case before the
insurer may recover from the common
carrier the insured value of the lost cargo
in the exercise of its subrogatory right.
The subrogation receipt, by itself, is
sufficient to establish not only the
relationship of herein private respondent
as insurer and Caltex, as the assured
shipper of the lost cargo of industrial fuel
oil, but also the amount paid to settle the
insurance claim. The right of subrogation
accrues simply upon payment by the
insurance company of the insurance
claim.
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 (Section 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 (section 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.
I
The two requisites
for the application of
the average clause:
(1)
(2)
insurance is for less

than actual value;
the loss is partial
Note: That co-insurance exist in

Marine Insurance: In Fire
Insurance, there is no coinsurance unless expressly
stipulated (sections 171-172). In
life insurance, there is none also
as value is fixed in the policy
(section 183)
4.In case profits are
separately insured in a contract of
marine insurance (see section 105) ,
Page 140 of 274
COMMERCIAL LAW
the insured can recover in case of a
loss (and under section 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 (section 158).
(1) IF THE POLICY IS OPEN

(a)
(b)
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;
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;
importer re-exports instead of

selling it;
(c)
Value of freightage is the

gross freightage, exclusive or
primage without reference
to the cost of earning it;
Primage compensation paid by

the shipper to the master of the
vessel for his care and trouble
bestowed on the goods of the
shipper, which he retains in the
absence of a contrary
stipulation with the owner of
the vessel;
(d)
The cost of insurance is in

each case to be added to
the value thus estimated
(section 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 (section 162). Meaning if
reduction in value is 1/5, then
amount of recovery on the
insurance is also 1/5.
The formula is:
Drawback government
allowance upon duties on
imported merchandise when the
Page 141 of 274
COMMERCIAL LAW
(a)
(b)
Market price in sound state

less
market
price
in
damaged
state
equals
reduction in value;
Reduction in value divided
by market price in sound
state multiplied with the
amount of insurance equals
the amount of recovery;
FIRE INSURANCE
COVERAGE IN 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
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.
Example: Damage caused by smoke
from a lamp when no ignition
occurred outside the lamp.
To allow recovery, it must be
the proximate of the damage or loss
and fire must be hostile if it:
a. burns at a piece where
it is not intended to
burn;
b. starts as a friendly fire
but becomes hostile if
it should escape from
the place where it is
intended to burn and
becomes
uncontrollable;
c. is a friendly fire which
becomes HOSTILE by
not escaping from its
proper
place
but
because
of
the
unsuitable
material
used to light it and it
becomes
inherently
dangerous
and
uncontrollable;
-as opposed to friendly fire one
that burns in a place where it is
intended to burn and employed for
the ordinary purpose of lighting,
heating, or manufacturing. But the
policy itself may limit or restrict
coverage to losses under ordinary
conditions but not those due to
extra-ordinary circumstances or
Page 142 of 274
COMMERCIAL LAW
abnormal conditions like war,
invasion, rebellion, civil war or
similar case. In these cases recovery
is still possible;
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 (section 168);
-From the foregoing definition,
the REQUISITES must be present to
constitute an alteration so as to
allow the rescission of the contract
to wit:
(a)
The use or condition of

the thing insured is
specifically
limited
or
stipulated in the policy
but under section 170,
the contract of insurance
is not affected by an act
of
the
insured
subsequent
to
the
execution of the policy,
which does not violate
its
provisions
even
though it increases the
risk and is the cause of
the loss;
Example: (1) If the insured stored

thinner, paints and varnish. A fire
subsequently occurs and there is no
express prohibition as to storage of
such items, even if the risk is
increased, the insurer is still liable
(Bachrach vs. British Assurance, 17

Phil 555);
(2) The policy states that the 1st floor
is unoccupied, it is later occupied.
There is no alteration that entitles
the insurer to rescind, the
description of the house cannot be
said to be a limitation as to use
(Hodges vs. Capital Insurance 60
O.G. 2227)
(b)
There is an alteration in
the said use or condition;
(c)
The alteration is without
the
consent
of
the
insurer;
(d)
The alteration is made by
means
within
the
insureds control. If the
alteration be by accident
or means beyond the
control of the insured,
the requisite is not met.
Example: The alteration is made by a
tenant with the consent or
knowledge of the insured, the
insurer cannot rescind;
(e)
The alteration increases

the risk of loss but under
section
169
any
alteration in the use or
condition of the thing
insured from that to
which is limited by the
policy, which does not
increase the risk does
not affect the contract;
BUT THERE MUST NOT BE ANY VIOLATION

OF THE CONTRACT OTHERWISE
-
The basis for rescission is

that
payment
of
the
premium is based on the
Page 143 of 274
COMMERCIAL LAW
risk as assessed at the time
of the issuance of the policy
when the risk is increased
without a corresponding
increase in premium is paid;
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;
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.
(Section 172).
MEASURE OF INDEMNITY IN FIRE

INSURANCE
-
In an open policy, it is the

expense it would be to the
insured at the time of the
commencement of the fire
to replace the thing lost or
injured in the condition in
which it was at the time of
the injury.
In a valued policy, it is the
same
as
in
marine
insurance, the valuation as
agreed upon by the parties
is
conclusive
in
the
adjustment
of
either
a
partial or total loss in the
absence of fraud (section
171).
(4)
HOW IS VALUATION MADE

(1)
(2)
(3)
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;
Subsequently, the clause is
then inserted in the policy
that said valuation has thus
been fixed;
In case of loss, provided
there is no change increasing
the risk without the consent
of the insured or fraud on

No policy of fire insurance

shall
be
pledged,
hypothecated or transferred
to any person, firm or
company that acts as agent
for or otherwise represents
the issuing company, such
shall be void and of no
effect insofar as it may
affect other creditors of the
insured (section 173)
CASUALTY INSURANCE
CASUALTY INSURANCE DEFINED
-
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
employers
liability,
workmens
Page 144 of 274
COMMERCIAL LAW
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 substantially similar
insurance (section 174);
MOTOR VEHICLE LIABILITY

-
DEFINITIONS
is insurance against loss or

injury arising from the use
of a motor vehicle by its
owner as opposed loss or
damage
to
the
vehicle
itself. Coverage for both
may however be contained
in the policy;
PLATE GLASS
EMPLOYERS LIABILITY
-
WORKMENS COMPENSATION
-
is insurance secured by an
employer for the benefit of
his employees and laborers
for
loss
resulting
from
injuries, disablement,
or
death through industrial
accident,
casualty,
or
disease in connection with
their
employment.
Note
that most if not all types of
this
insurance
is
underwritten by the GSIS or
the SS.
PUBLIC LIABILITY
-
is insurance obtained by the

employer against liability to
an employee for damages
caused or arising from
injuries by reason of his
employment;
is insurance against liability

of the insured to pay
damages
for
accidental
bodily injury or damage to
property arising from an
activity
of
the
insured
defined in the policy;

is
insurance
that
indemnifies
the
insured
against loss caused by the
accidental breaking of plate
glass, windows, doors or
show cases;
BURGLARY AND THEFT

-
is insurance against loss of

property through burglary
and theft;
PERSONAL ACCIDENT
-
is
insurance
against
expense, loss of time and
suffering
from
accidents
that cause a physical injury;
SUN INSURANCE OFFICE vs. CA July

17, 1992 (1993 and 1994 Bar exams)
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 Ruling:
Page 145 of 274
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.
IS A SURETYSHIP CONTRACT VALID AND

BINDING WHERE THE PREMIUM HAS NOT
YET BEEN PAID?
-
HEALTH
-
is insurance for indemnity

for
expenses
or
loss
occasioned by sickness or
disease;
SURETYSHIP
DEFINITION
-
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
(section 175);
Includes
official
recognizances, bonds or
undertakings issued by any
company under act no. 536,
as amended by act no. 2206
(government transactions
by authorized companies)
WHAT IS THE 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 (section
176);
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 (Section
177);
WHAT OTHER LAWS GOVERN A

SURETYSHIP CONTRACT?
In the absence of specific
provisions,
civil
code
provisions
apply
in
a
suppletory
character
if
necessary to interpret the
contract provisions (Section
178);
DISTINGUISHED WITH GUARANTY
-
(1)
(2)
A surety assumes liability

as a regular party to the
agreement, a guarantors
liability depends on an
independent agreement to
pay if primary debtor fails
to pay;
A surety is primarily liable,
a guarantor is secondarily
liable;
Page 146 of 274
COMMERCIAL LAW
(3)
A surety is not entitled to

exhaustion, a guarantor is
entitled to 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 principals default.
(Intra-Strata Assurance Corporation, Et
Al. v. Republic of the Philippines, Etc., Jul.
9, 2008 G.R. No. 156571)
REPUBLIC vs. CA and R & B SURETY
AND INSURANCE COMPANY, INC.
(G.R. No. 103073
March 13, 2001)
Surety of Sureties; Liability of; Joint
and several with the obligor; Limited
to the total amount of the bond.
-Section 176 of the Insurance Code
provides:
"SECTION 176. The liability of the
surety of sureties shall be joint and
several with the obligor and shall
be limited to the amount of the
bond. It is determined strictly by
the terms of the contract of
suretyship in relation to the
principal contract between the
obligor and the obligee, (as
amended by P.D. No. 1455)."
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
-
LIMITED PAYMENT LIFE

-
DEFINITION
Is insurance on human lives
and insurance appertaining
thereto
or
connected
therewith (section 179);

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
LIFE INSURANCE
premiums are payable for

life and the insurer agrees
to pay the face value upon
the death of the insured;
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
Page 147 of 274
COMMERCIAL LAW
policy is paid to him. If he
dies before the end period,
it
is
paid
to
the
beneficiaries;
Examples:
a. By law beneficiary is the
principal, accomplice or
accessory
in
bringing
death of the insured;
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);
b. By policy when it does

not
cover
assault,
murder
or
injuries
inflicted intentionally by
a 3RD person but where
the insured is not the
intended victim, insurer
is liable (Calanoc vs. CA,
98 Phil 79). What must
be considered is that
death or injury is not the
natural
or
probable
result of the insureds
voluntary act (Finman
General
Assurance
Corporation vs. CA, 213
SCRA 493) as opposed to
an act of the insured to
confront
burglars
(Balagtan vs. Insular Life
Assurance Company, 44
SCRA 58).
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.

c. By public policy when the

insured is executed for a
crime committed;
(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 (Section 180-A)
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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.
(Section 181);
Effect, the person to whom
it
is
transferred
may
recover upon it whatever
the insured might have
recovered;
Note while there is no need
for the assignee/transferee
to have insurable interest,
it should not be used to
circumvent
the
law
prohibiting
insurance
without insurable interest.
Thus,
an
assignment
contemporaneous
with
issuance may invalidate the
policy unless made in good
faith;
WHAT IS THE MEASURE OF INDEMNITY IN

LIFE INSURANCE?
-
BUSINESS INSURANCE
ORGANIZATION, CAPITALIZATION AND
AUTHORIZATION
REQUIREMENTS FOR A CERTIFICATE
OF AUTHORITY FROM THE INSURANCE
COMMISSION
(a)
(b)
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 (Section
181);
IS THE CONSENT OF THE BENEFICIARY

REQUIRED?
-
Yes, if he designated as an
irrevocable beneficiary as
he has acquired a vested
right;

Unless the interest of a

person
insured
is
susceptible of pecuniary
estimation,
the
amount
stated or specified in the
policy is the measure of
indemnity (section 183).
Hence
a
life
insurance
policy has been held to be a
valued policy;
(c)
(d)
Qualified by Philippines Laws to

transact insurance business;
Has a name that is not in
anyway similar to another
company;
If
organized
as
a
stock
corporation, it should have a
paid up capital of no less that
Php5,000,000.00;
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
Page 149 of 274
COMMERCIAL LAW
stock
corporations
(Php1,000,000.00
if
a
life
insurance
company
or
Php500,000.00, if a non life
insurance company).
If a foreign insurance company,
it must appoint a resident
agent, deposit securities and
maintain
a
legal
reserve
(Section 184-193);
(e)
MARGIN OF SOLVENCY
-
The margin of solvency is the

excess
of
the
value
of
insurance companys admitted
assets exclusive of its paid up
capital. In case of a domestic
insurance company and the
excess of the value of its
admitted
assets
in
the
Philippines
exclusive
of
security deposits over the
amount
of
its
liabilities,
unearned
premiums,
and
reinsurance reserves in the
Philippines (Section 194);
The required margin is in case
of life insurance companies is
two percent (2%) of the total
amount of its insurance in force
as of the preceding calendar
year on all policies except term
insurance and in case of non
life insurance companies, at
least ten percent (10%) of total
amount of its net premium
during the preceding calendar
year but in no case to be less
than Php500,000.00. If not met,
the insurance company is (a)
not permited to take on any
risk and no dividends can be
declared (section 195).
COMPULSORY
CLE
MOTOR

VEHI
LIABILITY
INSURANCE
CONCEPT OF 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;
HOW IS ITS COMPULSORY NATURE
ENFORCED?
-
The compulsory nature of the

insurance
is
enforced
by
prescribing
that
any
land
transportation
operator
(owner/s or motor vehicles for
transportation of passengers
for
compensation,
including
school buses) or owner of a
motor vehicle (actual legal
owner of a motor vehicle in
whose name the vehicle is
registered with the LTO) would
be considered as unlawfully
operating a motor vehicle (is
any vehicle as defined in
Section (3) RA 4136 which is
propelled by any power other
than muscular power using
public
high
ways
with
exceptions:
(a)
road rollers, holley cars,
street
sweepers,
sprinkles, lawn movers,
Page 150 of 274
COMMERCIAL LAW
bulldozers,
graders,
forklifts, amphibian trucks
or cranes not used on
public highways;
(b)
Those that run on rails or
trucks;
(c)
Tractor,
trailers
(when
propelled or intended to
be
propelled
by
an
attachment to a motor
vehicle is classified as a
motor
vehicle
without
power
rating),
traction
engines of all kinds used
exclusively for agricultural
purposes) Unless there is:
(1)
policy
of
insurance
(contract of insurance
against passenger or
3RD party liability for
death or body injury
arising
from
motor
vehicle accidents); or
(2)
guaranty in cash; or
surety bond
damage to vehicle of the

insured;
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;
(c)
WHEN DOES THE LIABILITY OF THE

INSURER ACCRUE?
-
Compliance by the motor vehicle

owner or the land transportation
operator is monitored as the Land
Transportation Office shall not allow
registration or renewal of
registration without compliance with
section 374 (section 376);
DISTINGUISHED FROM OWN DAMAGE
COVERAGE AND COMPREHENSIVE
MOTOR VEHICLE INSURANCE
(a)
(b)
Third party liability answers

for liabilities arising from
death or bodily injury to 3 RD
persons or passengers;
Own
damage
insurance
answers for reimbursement
of the cost of repairing the

in an insurance policy that

directly
insures
against
liability,
the
insurers
liability
accrues
immediately
upon
the
occurrence of the injury
upon
which
liability
depends, and does not
depend on the recovery of
judgment by the injured
party against the insured.
Hence, there is no need for
the insured to wait for a
decision of the court finding
him
guilty
of
reckless
imprudence. The occurrence
of an injury for which the
insured
may
be
liable
immediately gives rise to
insurer liability (Shafer vs.
Judge, 167 SCRA 386). In
fact a third party can bring
a claim or an action directly
against the insurer as the
general purpose of the
statute is to protect the
injured
against
the
insolvency of the insured;
NATURE OF THE LIABILITY OF THE

INSURER
-
It is not solidary with the

insured. The liability of the
Page 151 of 274
COMMERCIAL LAW
insurer
is
based
on
contract, while that of the
insured is based on tort.
(Malayan Insurance vs. CA,
165 SCRA 536);
(b)
WHO CAN ISSUE POLICY OR SURETY

BOND?
-
Those authorized by the

commissioner in the list
furnished
to
the
Land
Transportation
Office
(Section 375). If the Motor
Vehicle Owner or the Land
Transportation Operator is
unable to obtain or is
unreasonably denied the
policy of insurance, they
will be required to show
proof of a cash deposit with
the commissioner, but the
authority of the insurance
company
to
engage
in
casualty or surety lines of
business shall be withdrawn
immediately (section 379);
EFFECT OF CHANGE IN OWNERSHIP OR

CHANGE IN ENGINE
There is no need to issue a
new policy until the next date of
registration provided the insurer
shall agree to continue the policy
and such change shall be indicated
in a second duplicate which is filed
the Land Transportation Office;
OTHER PROHIBITED ACTS
(1)
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 (Section
130);

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
(Section 381);
(2)
The motor vehicle owner or

the
Land
Transportation
Operator
cannot
require
driver/s/employees
to
contribute to the payment
of the premium (section
385);
Any government office or
agency having the duty to
implement the provisions,
official or employee thereof
shall not act as an agent in
procuring the policy or
surety bond and in no case
shall the commission of the
procuring
agent
exceed
10% of the premiums paid
(section 387);
PENALTIES FOR VIOLATION

Page 152 of 274
COMMERCIAL LAW
-
The penalties for a violation

by the Motor Vehicle Owner
or the Land Transportation
Operator is a fine of not less
than Php500.00 nor more
than Php1,000.00 and/or
imprisonment for not more
than 6 months. If a Land
Transportation
Operator
violates
section
377
(minimum
limits
of
coverage) it is sufficient
cause for revocation of a
certificate
of
public
convenience (section 388);
If the violation is committed
by a corporation/association
or government office/entity,
the executive officer/s who
shall
have
knowingly
permitted
or
failed
to
prevent the violation shall
be held liable as principals
(Section 389);
Commissioner or the Court,

otherwise
the
right
of
action will be deemed as
having prescribed;
WHAT SHALL INSURANCE COMPANY DO
UPON FILING OF THE CLAIM?
-
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
(section 384);
WHAT IS NO FAULT INDEMNITY?

-
EFFECT OF FAILURE TO FILE CLAIM

WITHIN PERIOD
-
The failure to file a claim

will be deemed a waiver. If a
claim is filed but denied, an
action must be brought
within 1 year from date of
denial with the Insurance

It shall forthwith ascertain

the truth and extent of the
claim and make payment
within 5 working days after
reaching an agreement. If
no agreement is reached, it
must nevertheless pay the
no fault indemnity (Section
378) without prejudice to a
further pursuit of the clam
in which case he shall not
be required or compelled to
execute a quit claim or
release from liability. Note
though that in case of
dispute as to enforcement
of policy provisions, the
adjudication shall be within
the original and exclusive
jurisdiction
of
the
commissioner
subject
to
section 416, which provides
for concurrent jurisdiction
but the filing with the
insurance
commissioner
shall preclude filing with
the court (Section 385);
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
Page 153 of 274
COMMERCIAL LAW
(b)
not
exceed
Php5,000.00;
the necessary proof of
loss under oath to
substantiate the claim
is submitted, these
are: police report of
accident and either
the death certificate
and
sufficient
evidence to establish
the payee or medical
report and evidence
of medical or hospital
disbursement
in
respect
of
which
refund is made;
NOTE THE FOLLOWING JURISPRUDENCE

(1)
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
the owner of the vehicle
responsible
for
the
accident
shall
be
maintained;
-
(2)
(3)
(4)
(5)
INTERPRETATION OF THE AUTHORIZED
DRIVER CLAUSE
The
authorized
driver
clause is interpreted to
refer to the insured or any
person driving on the order
of the insured or with his
permission provided, such
person
is permitted
to
operate a motor vehicle in
accordance
with
our
licensing
laws
or
regulations and who is not
otherwise disqualified;
If license is expired, person

is not authorized to operate
a motor vehicle (Tarco Jr.
vs. Phil Guaranty, 15 SCRA
313);
Issued
a
temporary
operators
permit
or
a
temporary vehicle receipt,
a person is authorized to
operate a motor vehicle,
but if it has expired, it is as
if
he
has
no
license
(Guiterez
vs.
Capital
Insurance, 130 SCRA 618,
PEZA vs. Alikpala, 160
SCRA 31);
A tourist with license but in
the country for more than
90 days, is not authorized
to operate a motor vehicle
because it is as if he has no
license
(Strokes
vs.
Malayan, 127 SCRA 766);
A drivers license that bears
all the earmarks of a duly
issued license is presumed
genuine;
A license is not necessary,
where the insured himself
is the driver (Paterno vs.
Page 154 of 274
COMMERCIAL LAW
Pyramid
Insurance,
SCRA 677, 1986 BAR)
161
COMPULSORY
MOTOR
VEHICLE
LIABILITY
INSURANCE(ThirdPartyLiability
Insurance)
The purpose of this kind of
insurance is to indemnify the death or
injury of a third person or passenger from
the use of the motor vehicle. The injured
party can sue immediately and directly
the insurance company. This will protect
the injured person against the insolvency
of the insured. It allows the passenger to
recover from the insurer of the vehicle
where he was riding.
1996 BAR EXAM
PROBLEM
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 sustained
by A.
2. The insurance company moved
to dismiss the complaint contending that
theliability of X has not yet been
determined with finality.
Is the contention of the insurance
company correct? May the insurer be
held solidarily liable with X
ANSWER:
No.
When an insurance policy
insures directly against liability, the
insurers liability accrues immediately
upon the occurrence of the injury.
No. The insurer cannot be held
solidarily liable with X because its liability
is based on a contract while that of X is
based on torts. (Vda. De Maglana

Consolacion, August 6, 1992)
VDA.
DE
CONSOLACION
MAGLANA
vs.
VS.
SC RULING:
Where an insurance policy insures
directly against liability, the insurers
liability accrues immediately upon the
occurrence of the injury or even upon
which the liability depends, and does not
depend upon the recovery of judgment
by the insured party against the insured.
The underlying reason behind the third
party liability of the Compulsory Motor
Vehicle Liability Insurance is to protect
the injured person against the insolvency
of the insured who causes such injury,
and to give such injured person a certain
beneficial interest in the proceeds of the
policy.
However, the direct liability
of the insurer under the indemnity
contracts against third party liability does
not mean that the insurer can be held
solidarily liable with the insured and/or
the other parties found at fault. The
liability of the insurer is based on
contract and the liability of the insured
is based on tort. If the insurer was to be
held solidarily liable with the insured
under the indemnity contract against
third party liability, then this would
violate the principles underlying solidary
obligation and insurance contracts. In
fine, the court concludes that the liability
of AFISCO based on the insurance
contract is direct, but not solidary with
that of Destrajo which is based
on
Article 2180 of the Civil Code. As such,
petitioners have the option either to
claim the 15, 000 from AFISCO , the P
5,000 had already been paid under the
no-fault clause, and the balance
from
Destrajo or enforce the entire judgment
from Destrajo subject to reimbursement
Page 155 of 274
COMMERCIAL LAW
from AFISCO to the extent of the
insurance coverage.
2.COMPREHENSIVE MOTOR VEHICLE
INSURANCE ( 1993 & 2000 Bar
Exam)
The liability of the insurance
company s direct and solidary with the
operator but only up to the amount
stated in the policy and accrues
immediately upon the occurrence of the
accident. Any amount awarded beyond
the amount stated in the policy is the
sole responsibility of the carrier.
PERLA COMPANIA DE SEGUROS, INC.
VS. COURT OF APPEALS
208 SCRA 487 (1992)
SC RULING:
Where a car is admittedly, as in
this case, unlawfully and wrongfully
taken without
the owners consent
or knowledge, such taking constitutes
theft, and therefore it is the theft
clause and not the authorized
driver clause that should apply. Clearly,
the risk
against accident is distinct
from the risk against theft.
The
authorized driver clause in a typical
insurance policy is in contemplation or
anticipation of accident in the legal sense
in which it should be understood, and not
in contemplation or anticipation of an
event such as
theft. In the present
case the loss of the insured vehicle did
not result from accident where intent
was involved; the loss was caused by
theft, the commission of which was
attended by intent. It is worthy to note
that there is no casual connection
between the possession of
a
valid
drivers license and the loss of the
vehicle. To rule otherwise would render
car insurance practically a sham since
the insurance company can easily escape

liability by citing restrictions which are
not applicable or germane to the claim,
thereby reducing indemnity to a shadow.
3. AUTHORIZED DRIVER RULE
(1991 Bar Exams)
For purposes of recovery, the
driver of the vehicle must be in
possession of a valid, subsisting and
professional drivers license.
But this
rule will not apply if the one driving
the vehicle at the time of the
accident was the owner of the vehicle.
(Palermo v. Pyramids Ins., 161 SCRA 677)
PALERMO V. PYRAMIDS INSURANCE
CO., INC.,
MAY 31, 1988
SC RULING:
Since the driver of the insured
motor vehicle at the time of the accident
was the
insured himself, he was an
authorized driver under the policy. Any
infraction of the Motor Vehicle Law which
prohibits a person from operating a
motor vehicle on the highway without a
license or with an expired license,
subjects him to penal sanctions under
the Motor Vehicle Law but does not bar
recovery under the insurance contract.
The requirement that the driver be
permitted in accordance with law and
regulations to drive
the
motor
vehicle and is not disqualified from
driving such vehicle by order of a Court
of law or by reason of any enactment or
regulation applies only when the driver is
driving on the insureds order or
permission, such as a regular driver, a
friend, a member of the family, or the
employee of a car service or repair shop.
Page 156 of 274
COMMERCIAL LAW
It doe not apply when the person driving
is the insured himself.
4.
NON-FAULT
CLAUSE
IN
COMPULSORY
MOTOR
VEHICLE INSURANCE POLICY
(2000 Bar
Exam)
Proof of fault or negligence is not
necessary for the payment of any claim
for death or injury to a passenger or to a
third party. The maximum amount of
indemnity is P 10, 000.00 upon
submission of death certificate, medical
certificate and police report.
The
purpose is in order to give immediate
assistance to the victim of motor vehicle
accidents
and/or
the
dependents
specially if they are poor, regardless of
the financial capability of the owner of
the motor vehicle or operator responsible
for the accident. This does not include
property damage.
- The claim is collected from
the insurer of the vehicle where
the
claimant
is
riding,
mounting or dismounting.
In all other cases, the claim is
against the insurer of
the
offending vehicle.
- The insurer who pays the
claim can ask reimbursement from
the offending vehicle.
The recovery by the
insured from the insurer is direct
and not dependent on the
recovery against the insurer by the
insured party.
NECESSITY TO REGULATE INSURANCE
COMPANIES
COVERING
PUBLIC
UTILITY VEHICLES The present case
shows a clear public necessity to regulate
the proliferation of such insurance
companies.
Because
of
the
PUV
operators complaints, the LTFRB thus
assessed the situation. It found that in

order to protect the interests of the riding
public and to resolve problems involving
the passenger insurance coverage of
PUVs, it had to issue Memorandum
Circular No. 2001-001 accrediting PAMI
and PAIC II as the two groups allowed to
participate in the program.
Memorandum Circular No. 2001-001
required that [a]ll public utility vehicles
whose LTO license plate, as per latest
LTO Official Receipt, with an EVEN middle
number (0, 2, 4, 6 and 8) shall be insured
with UCPB insurance (PAMI) while those
with an ODD middle number (1, 3, 5, 7
and 9) shall be insured with Great
Domestic Insurance (PAIC II) x x x .
It should be stressed that PUVs, as
common carriers, are engaged in a
business affected with public interest.
Under Article 1756 of the Civil Code, in
cases of death or injuries to passengers,
common carriers are presumed to be at
fault and are required to compensate the
victims,
unless
they
observed
extraordinary diligence. To assure this
compensation, PUVs are required to
obtain
insurance
policies.
(Eastern
Assurance
and
Surety
Corporation
[easco]
v.
Land
Transportation
Franchising and Regulatory Board, Oct. 7,
2003 G.R. No. 149717)
OTHER PROVISIONS
1.Chapter VII Mutual Benefit
Associations (Section 390. Any
society, association or corporation,
without capital stock, formed or
organized not for profit but mainly
for the purpose of paying sick
benefits to members, or of
furnishing financial support to
members while out of employment,
or of paying to relatives of deceased
members of fixed or any sum of
Page 157 of 274
COMMERCIAL LAW
money, irrespective of whether such
aim or purpose is carried out by
means of fixed dues or assessments
collected regularly from the
members, or of providing, by the
issuance of certificates of insurance,
payment of its members of accident
or life insurance benefits out of such
fixed and regular dues or
assessments, but in no case shall
include any society, association, or
corporation with such mutual benefit
features and which shall be carried
out purely from voluntary
contributions collected not regularly
and or no fixed amount from
whomsoever may contribute, shall
be known as a mutual benefit
association within the intent of this
Code. Any society, association, or
corporation principally organized as
labor union shall be governed by the
Labor Code notwithstanding any
mutual benefit feature provisions in
its charter as incident to its
organization.) and trust for
charitable institutions (Sec. 410. The
term "trust for charitable uses",
within the intent of this Code, shall
include, all the real or personal
properties or funds, as well as those
acquired with the fruits or income
therefrom or in exchange or
substitution thereof, given to or
received by any person, corporation,
association, foundation, or entity,
except the National Government, it
instrumentalities or political
subdivisions, for charitable,
benevolent, educational, pious,
religious, or other uses for the
benefit of the public at large or a
particular portion thereof or for the
benefit of an indefinite number of
persons.) (Sections 396 to 413);

2.Chapter VIII Insurance

Commissioner (Section 414
Administrative Functions, Section
415 Power to impose
fines/suspensions Section 415,
Adjudicatory Powers Note: it is
concurrent with courts but the filing
with the commissioner shall
preclude civil courts from taking
cognizance of a suit over the same
subject matter. Decisions are
appealable to the CA within 30 days
by notice of appeal (Section 416);
WHITE GOLD MARINE SERVICES,
INC., vs. PIONEER INSURANCE AND
SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., .
[G.R. No. 154514. July 28, 2005]
Relatedly, a mutual insurance
company is a cooperative enterprise
where the members are both the insurer
and insured. In it, the members all
contribute, by a system of premiums or
assessments, to the creation of a fund
from which all losses and liabilities are
paid, and where the profits are divided
among themselves, in proportion to their
interest.[17] Additionally, mutual insurance
associations, or clubs, provide three
types of coverage, namely, protection
and indemnity, war risks, and defense
costs. A P & I Club is a form of
insurance against third party liability,
where the third party is anyone other
than the P & I Club and the members. By
definition then, Steamship Mutual as a P
& I Club is a mutual insurance association
engaged in the marine insurance
business.
The records reveal Steamship
Mutual is doing business in the country
albeit without the requisite certificate of
authority mandated by Section 187[20] of
Page 158 of 274
COMMERCIAL LAW
the Insurance Code. It maintains a
resident agent in the Philippines to solicit
insurance and to collect payments in its
behalf. We note that Steamship Mutual
even renewed its P & I Club cover until it
was cancelled due to non-payment of the
calls. Thus, to continue doing business
here, Steamship Mutual or through its
agent Pioneer, must secure a license
from the Insurance Commission.
Since a contract of insurance involves
public interest, regulation by the State is
necessary. Thus, no insurer or insurance
company is allowed to engage in the
insurance business without a license or a
certificate
of
authority
from
the
Insurance Commission.
The test to determine if a contract is
an insurance contract or not, depends on
the nature of the promise, the act
required to be performed, and the exact
nature of the agreement in the light of
the
occurrence,
contingency,
or
circumstances
under
which
the
performance becomes requisite. It is not
by what it is called.
TRANSPORTATION LAWS
COMMON CARRIERS
(Arts. 1732-1766, New Civil Code)
Common
Carriers
are
persons,
corporations,
firms
or
associations
engaged in the business of carrying or
transporting passengers or goods or
both, by land, water, or air, for
compensation, offering their services to
the public.
Transportation defined. a contract of
transportation is one whereby a certain
person or association of persons obligate
themselves to transport persons, things,
or news from one place to another for a
fixed price
Classification:
1. As to object: (1) things; (2) persons;
(3) news
2. As to place of travel: (1) land; (2)
water; (3) air
Parties to contract of transportation:
(1) shipper or consignor.
(2) carrier or conductor.
(3) consignee
Common

Private
Page 159 of 274
COMMERCIAL LAW
Carrier
Carrier
As to Availability
Holds himself out

for
all
people
indiscriminately
Contracts with
particular
individuals or
groups only
As to require Diligence
Extraordinary
Ordinary
Diligence
Diligence
As to regulation
Subject to state Not subject to
regulation
state regulation
Stipulation limiting liability
Parties
may Parties
may
agree on limiting limit
the
the
carriers carriers
liability
except liability,
when
provided provided it is
by law
not contrary to
morals or good
customs
Exempting circumstances
Prove
Caso
extraordinary
forfuito,art.
diligence
and 1174 NCC
Art.1734,NCC
Presumption of Negligence
There is a
No
presumption of
presumption of
fault or
fault
or
negligence
Negligence
Governing law
Law on Common Law
on
Carriers
obligations and
contracts
(2002 Bar exams)
Test for a common carrier:
1. He must be engaged in the business
of carrying goods for others as a
public employment, and must hold
himself out as ready to engage in the
transportation of goods for persons
generally as a business, and not a
casual occupation.
2. He must undertake to carry goods of

the kind to which his business is
confined.
3. He must undertake to carry by the
methods by which his business is
conducted, and over his established
roads.
4. The transportation must be for hire.
The true test is whether the given
undertaking is a part of the business
engaged in by the carrier which he has
held out to the general public as his
occupation rather than the quantity or
extent
of
the
business
actually
transacted, or the no. and character of
the
conveyances
used
in
the
employment (the test is therefore the
character of the business actually carried
on by the carrier.
Characteristics of common carriers:
(1) The common carrier undertakes to
carry for all people indifferently;
(2) The common carrier cannot lawfully
decline to accept a particular class of
goods for carriage to the prejudice of the
traffic in those goods
Exception : for some sufficient reason,
where the discrimination in such goods is
reasonable and necessary (substantial
grounds)
(3) No monopoly is favored - the
Commission has the power to say what is
a reasonable compensation to the utility
and to make reasonable rules and
regulations for the convenience of the
traveling public and to enforce them
(4) Public convenience - for the best
interests of the public
The law prohibits unreasonable
discrimination by common carriers.-The law requires common carriers to
carry for all persons, either passengers or
property, for exactly the same charge for
Page 160 of 274
COMMERCIAL LAW
a like or contemporaneous service in the
transportation of like kind of traffic under
substantially similar circumstances or
conditions. The law prohibits common
carriers (CC) from subjecting any person,
etc. or locality, or any kind of traffic, to
any undue or unreasonable prejudice or
discrimination whatsoever.
Exception:
When the actual cost of
handling and transporting is different,
then different rates may be charged
Determination of justifiable refusal:
This involves a consideration of the
following:
1. suitability of the vessels of the
company for the transportation of
such products;
2. reasonable possibility of danger or
disaster, resulting from their
transportation in the form and
under the conditions in which they
are offered for carriage;
3. the general nature of the business
done by the carrier;
4. all the attendant circumstances
which might affect the question of
the reasonable necessity for the
refusal by the carrier to undertake
the transportation of this class of
merchandise.
What is the DILIGENCE required by
common carriers?
Common carriers, from the nature of
their business and for reasons of public
policy,
are
bound
to
observe
extraordinary diligence in the vigilance
over the goods and for the safety of the
passengers
transported
by
them,
according to all the circumstances of
each case.
Extraordinary diligence lasts from the
time the cargoes are loaded in the vessel
until they are discharged and delivered to
the consignee.
Air carriers can terminate services of
pilots for serious misconduct and
drunkenness because of its extraordinary

diligence.
LIABILITY OF COMMON CARRIERS:
The common carrier, is at all times,
required
to
observe
extraordinary
diligence with respect to transport of
goods.
1. To bring passengers safely to his
place of destination. He is obliged
to carry passengers safely as far
as human care and foresight can
provide, using the utmost diligence
of a very cautious person with due
regard for all circumstances. In
case of death or injury, the
common carriers are presumed to
have been at fault or negligent in
transporting the passengers unless
they prove that they observed
extraordinary diligence.
2. To transport the goods/ cargoes
safely to the point of destination if
there is loss or damage to the
goods/cargoes,
immediately
a
presumption of negligence arises
that the loss/ damage to the
goods/ cargoes was due to the
negligence of the common carrier.
The shipper may only prove that
the goods arrived in a damaged
condition or that they did not
arrive at all.
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 carriers
LIABILITY over Goods:
Page 161 of 274
COMMERCIAL LAW
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
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.
Page 162 of 274
COMMERCIAL LAW
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 containers1. 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.
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.
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.
There is already an existing Contract of

carriage when the carrier took possession
of the cargo by placing it on a lighter or
barge manned by its authorized
employees. (COMPANIA MARITIMA vs.
INSURANCE COMP )
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
carriers
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
A bill of lading that was issued covering

certain shipment which contained a
provision that the carrier does not
assume liability for any loss /damage to
the goods once they have been under
the custody of the custom or other
authorities or when they have been
delivered at ships tackle have been
considered valid , because it was held
that it is not contrary to morals and
public policy ; said stipulation is clear and
have been adopted to mitigate the
responsibility of the common carrier. (LU
DO vs. BINAMIRA)
Stoppage in Transitu is the right of the
unpaid seller who has parted with the
possession of the goods to stop them in
transit, when the buyer of goods is or
becomes insolvent.
Page 163 of 274
COMMERCIAL LAW
Requisites:
1. Seller must be an unpaid seller;
2. Goods must be in transit;
3. Buyer must be in a state of
insolvency;
EFFECT: Once the right is exercised,
the common carrier becomes a mere
warehouseman.
In the event that the UNPAID Seller
exercises its right of stoppage in
transitu , the carrier thereafter holds the
goods in the capacity of an ordinary
bailee or warehouseman and shall be
liable only as such , upon the theory that
the exercise of the right by the unpaid
seller , such terminates the contract of
carriage.
A STIPULATION LIMITING LIABILITY
IS VALID PROVIDED THAT it be:
(2002 bar Exam)
1. in writing signed by both parties
2. supported by a valuable consideration
other than the service rendered by
common carrier
3. reasonable, just and not contrary to
public policy
SOME VALID STIPULATIONS LIMITING
CARRIER'S LIABILITY:
1. account of strikes or riot;
2. value of the goods appearing in bill of
lading UNLESS shipper declares a
greater value;
3. contract fixing the sum that may be
recovered.
VOID
STIPULATIONS
LIMITING
CARRIER'S
LIABILITY
(2002
bar
exams)
1. that the goods are transported at the
risk of the shipper;
2. that the shipper is not liable for any
loss or destruction of the goods;
3. that the common carrier need not

observe any diligence in the custody
of the goods;
4. that the common carrier shall exercise
a degree of diligence less than that of
a good father of a family;
5. that the common carrier shall not be
responsible for any acts of its
employee;
6. that the common carriers liability for
acts committed by thieves, or of
robbers who do not act with grave or
irresistible threat, violence or force, is
dispensed with or diminished;
7. that the common carrier is not
responsible for the loss, destruction,
or deterioration of goods on account
of the defective condition of the car,
vehicle, ship, airplane or other
equipment used in the contract of
carriage.
A stipulation that the common carrier's
liability is limited to the value of the
goods appearing in the bill of lading,
unless the shipper or owner declares a
greater value, is binding.
A contract fixing the sum that may be
recovered by the owner or shipper for the
loss, destruction, or deterioration of the
goods is valid, if reasonable and just
under the circumstances, and has been
fairly and freely agreed upon.
The law of the country to which the
goods are to be transported governs the
liability of the common carrier in case of
loss, destruction or deterioration.
The provisions of articles 1733 to 1753
shall apply to the passenger's baggage
which is not in his personal custody or in
that of his employee. As to other
baggage, the rules in articles 1998 and
2000 to 2003 concerning the
responsibility of hotel-keepers shall be
applicable.
Page 164 of 274
COMMERCIAL LAW
Fire may not be considered as a natural
disaster or calamity. It does not fall within
the category of act of God UNLESS
caused by lighting or by natural disaster
or calamity. It may even be caused by
actual privy or fault of the carrier.
(EASTERN SHIPPING VS. IAC)
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 absolving the owner from
liability for loss due to the negligence of
its agent would be void only if strict
public policy governing common carriers
are applied. Such policy has no force
when the public at large is not involved,
as in the case of a ship totally chartered
for the use of a single party (HOME
INSURANCE
vs.
AMERICAN
STEAMSHIP)
In case where the Common carrier w/o
just cause1. Delays the transportation of goods
2. Changes the stipulated route /
usual route
The annulment of the agreement limiting
the carriers liability is no longer
necessary ; The carrier cannot simply
avail of the benefit /defense of limited
liability.
When the conditions printed in the back
of the ticket stub are in letters so small
that they are hard to read, this would not
warrant the presumption that the
passenger
were
aware
of
those
conditions such that he had fairly and
freely agreed to them . The passenger
therefore is not bound by such
stipulations. (SHEWARAN vs. PAL)
II. SAFETY OF PASSENGERS
DUTY: A common carrier is bound to
carry the passengers safely as far as
human care and foresight can provide,
using the utmost diligence of very
cautious persons, with a due regard for

all the circumstances.
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
Page 165 of 274
COMMERCIAL LAW
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 carriers
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.
***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 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
.
EXCEPTIONS1. Where the mishap results in the
death of a passenger; Because the
common carrier becomes subject
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COMMERCIAL LAW
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)
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 subsidiaarilly
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
Page 167 of 274
COMMERCIAL LAW
* 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
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.
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.
ThreeFold Nature of Bills of
Lading
2. NonNegotiable Bill of Lading

the goods referred to therein will be
delivered to a specified person.
1. A contract in itself and the parties

are bound by its terms;
3. Clean Bill of Lading One which

does not indicate any defect in the
goods
3. A symbol of the covered by it
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
2. A receipt; and
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
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COMMERCIAL LAW
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 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 carriers 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:
(1) Inter-island if goods arrived in
damaged condition:
If damage is apparent, the
shipper must file a claim
immediately.
Page 169 of 274
COMMERCIAL LAW
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 carriers 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 airlines contract of
carriage partakes of two types, namely: a
contarct
to
deliver
a
cargo
or
merchandise to its destination, and a
contarct 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 pilots
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 carriers premises.
The carrier should necessarily
exercise extraordinary diligence in
safeguarding
the
comfort,
convenience and 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
Page 170 of 274
COMMERCIAL LAW
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
carriers employees could give
ground for an action for damages.
Passengers have a right to be
treated by the carriers 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 passengers 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 passengers
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
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
TRANSACTIONS:
OF
MARITIME
Page 171 of 274
COMMERCIAL LAW
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)
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 shipowner 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 shipowner is limited to the
value of the vessel.
Page 172 of 274
COMMERCIAL LAW
EXCEPTIONS TO LIMITED LIABILITY
RULE:
1. When the vessel is not abandoned
by the owner or shipagent
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 shipowner/ship captain is at
fault or guilty of negligence.
a. lack of proper and
adequate
equipment(insufficient
lifevests)
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 shipowner. Thus, as an exception to
the limited liability doctrine, a
shipowner 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 shipowner 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?
- 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.
Page 173 of 274
COMMERCIAL LAW
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:
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
Page 174 of 274
COMMERCIAL LAW
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
OWNERS
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.
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
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COMMERCIAL LAW
3. Must have passed the required
physical, mental examination required
for licensing him as such
10.comply with the requirements of

customs, health, etc. at the port of
arrival
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
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
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
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
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
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COMMERCIAL LAW
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
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
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COMMERCIAL LAW
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.
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 vesselfull payment
3. if captured in defense of vesselfull
payment
4. if captured due to carelessnesswages 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
a
governmental
prohibition
of
commercial intercourse intended to bring
about an entire cessation for the time
being of all trade
Embargo

Page 178 of 274
COMMERCIAL LAW
-
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 have the use of the
space in the vessel in return for
the payment of the charter hire.
b. Bareboat/
Demise
Charter
involves the transfer of full
possession and contol 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
shipowner can recover the value of the
vessel from the charterer.(Caltex vs.
sulpicio line, 1999)
FORMAILITIES REQUIRED FOR A
CHARTER PARTY:
1. in writing
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
Page 179 of 274
COMMERCIAL LAW
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 ships 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
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 owners 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
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COMMERCIAL LAW
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/repondent Simple loan
ia
Marine risk
Duly
established Not necessary
existence
of
a
marine
risk
is
necessary
Form and manner
Must be executed in Formal
accordance
with requisites
of
the
form
and an
ordinary
manner prescribed contract
will
by the code of suffice
commerce
Registry of Vessels
Must be recorded in No
such
the
registry
of registration is
Vessel
to
be required
binding
to
third
persons
Preference
Preference
is Preference
is
extended to the extended
to
last lender
the first lender
When loan on bottomry or respondentia
regarded as Simple Loan
1. lender loaned an amount larger than
the value of the object due to fraudulent
means employed by the borrower(art 726
code of commerce)
2. Full amount of the loan is not used for
the cargo or given on the goods if all of
them could not have been loaded, the
balance will be considered a simple
loan( art 727 Code of Commerce)
3.If the effects on which the money is
taken is not subjected to any risk(729
Code of commerce
Note: under existing laws, the parties to
a loan, whether ordinary or maritime,
may agree on any rate of interest (Cb
circular 905); provided the same is not
contrary to law, morals, good customs,
public order or public policy.Art 1306 NCC
ACCIDENTS
IN
MARITIME
COMMERCE(2000 bar exams)
1.averages
2. Arrival Under stress
3. collision
4.shipwreck
Average
An extraordinary or accidental expense
incurred during the voyage in order to
preserve the cargo, vessel or both, and
all damages or deterioration suffered by
the vessel from departure to the port of
loading to the consignment (art 806
Code of commerce)
The person whose property has
been saved must contribute to reimburse
the damage caused or expense incurred
if the situation constitutes general
average.
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COMMERCIAL LAW
It is classified into: (1) general or gross
average or (2) simple or particular.
Particular/ simple Gross/ general
definition
Damages
or Damages
or
expenses caused expenses
to the vessel or deliberately
cargo that did caused in order
not inure to the to
save
the
common benefit, vessel, its cargo
and borne
by orboth from real
respective owner. and known risk.
( art 809)
(811)
Liability
The owner of the All
persons
goods
which having
an
gave rise to the interest in the
expense
or vessel and the
suffered
the cargo therein at
damage
shall the time of the
bear
this average
shall
average.(810)
contribute
to
satisfy
this
average(812)
The insurers and
lenders
on
bottomry
and
respondentia
shall
likewise
contribute
Numbers of interests involved
Only one interest Several interests
involved
is involved
Share in the damage/expense
100% share
In proportion to
the value of the
owners
property saved
Right to recover
No
There may be
reimbursement
reimbursement
Requisites of Gross or General
average
1. Common danger
that both the ship and the

cargo,
after
has
been
loaded, are subject to the
voyage, or in the port of
loading or unloading
that the danger arises from
the accidents of the sea,
dispositions of the authority
or faults of men, provided
that
the
circumstances
producing the peril should
be
ascertained
and
imminent or may rationally
be said to be certain and
imminent.
2.Deliberate Sacrifice
Gen. rule: sacrifice is made
through the jettison of the cargo or part
of the shipis thrown overboard DURING
THE VOYAGE.
Exceptions:
a. where the sinking of a vessel is
necessary to extinguish a fire in a
port, roadsteads, creek or bay
b. where cargo is transferred to
lighten the ship on account of a
storm to facilitate entry into a port.
3.Sucess
Pupose:to be able to demand general
contribution
4.Proper formalities and legal steps
a. procedure for recovery
b. assembly and deliberation
c. resolution of the caption
d. entry of the resolution in the logbook
e. detailed minutes
f. delivery of the minutes to the
maritimejudicial authority of the first
port, within 24hours from arrival
Ratification by the captain under
oath.
Goods Not Covered By General Average
Even if sacrified:
Goods carried on deck
1.goods not recorded in the books or
records of vessel
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COMMERCIAL LAW
2.fuel for the vessel if there is more than
sufficient fuel for the voyage.
JETTISON
Act of throwing cargo overboard in order
to lighten the vessel
ORDER OF GOODS TO BE CAST
OVERBOARD IN CASE OF JETTISON:
1. those which are on the deck,
preferring the heaviest one with the
least utility of value
2. those which are below the upper deck
beginning with the one with greatest
weight and smallest value jettisoned
goods are not res nullius nor deemed
abandoned within the meaning of civil
law so as to be the object of
occupation by salvage.
Arrival Under stress
- arrival of a vessel at a port of
destination on account of lack of
provision,
well-founded
fear
of
seizure, pirates, or accidents in sea
disabling navigation
When lawful
When
Who
unlawful
bears
expenses
The inability 1. lack of The
to
continue provision
shipowne
voyage is due s due to r or ship
to
lack
of negligenc agent is
provisions,
e to carry liable in
well founded according case
of
fear
of to usage unlawful
seizure,
and
arrival
privateers,pir
customs;
under
ates
or 2.risk of stress.
accidents
of enemies
But they
the
sea not well- shall not
disabling it to known or be liable
navigate
manifest; for
3.defect
damges
due
to cauded
improper
by
a
repair;
reason of
4.malice, a lawful
negligenc arrival.
e, lack of
foresight,
lack
of
skill
Cases of collision :
1. due to the fault, negligence or lack of
skill of the captain, sailing mate or the
complement of the vessel--under 826,
the shipowner shall be liable for the
losses and damages
2. due to the fault of both vessels -->
under 827, each vessel shall suffer its
own losses, but as regards the owners of
the cargoes, both vessels shall be jointly
and severally liable
3. where it cannot be determined which
of the 2 vessels is at fault --> under 828,
each vessel shall suffer its own losses,
and both shall also be solidarily
responsible for the losses and damages
caused to their cargoes
4. collision due to fortuitous event or
force majeure --> under 830, each vessel
shall bear its own damages
5. where two vessels collide with each
other without their fault but by reason of
the fault of a third vessel --> under 831,
the owner of the third vessel causing the
collision shall be liable for the losses and
damages 6. a vessel which is properly
anchored and moored may collide with
those nearby by reason of a storm or
other cause of force majeure --> under
832, the vessel run into shall suffer its
own damages and expenses
Nautical
Rules
to
determine
negligence :
1. When 2 vessels are about to
enter a port, the farther one must allow
the nearer to enter first; if they collide,
the fault is presumed to be imputable to
the one who arrived later, unless it can
be proved that there was no fault on its
part.
Page 183 of 274
COMMERCIAL LAW
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 port.
4. The vessel which leaves later is
presumed to have collided against one
who has left earlier.
5. There is also a presumption
against the vessel which sets sail at
night.
6. The presumption also works
against the vessel with spread sails
which collides with another which is at
anchor, and cannot move, even when the
crew of the latter has received word to
lift anchor, when there was not sufficient
time to do so or there was fear of a
greater damage or other legitimate
reason.
7. The vessel which is not properly
moored or does not observe the proper
distances, has the presumption against
itself.
8. The vessel which is moored at a
place not used for the purpose, or which
is improperly moored or does not have
sufficient cables, or which has been left
without watch, has also against itself the
presumption.
9. The same rule applies to those
vessels which do not have buoys to
indicate the location of its anchors to
prevent damage to these vessels which
may approach it.
Zones in time of collisions (3 time
zones):
1. all the time up to the moment
when the risk of collision may have said
to have begun
--> within this zone, no rule is
applicable because none is necessary.
Each vessel is free to direct its course as
it deems best with reference to the

movements of the other vessel.
2. the time between the moment
when the risk of collission begins and the
moment when it has become a practical
necessity.
3. the time between the moment
when collission has become a practical
certainty and the moment of actual
contact
Effect of fault of privileged vessel
during third zone :
If a vessel having a right of way
suddenly changes its course during the
third zone, in an effort to avoid an
imminent collision due to the fault of
another vessel, such act may be said to
be done in extremis, and even if wrong,
cannot create responsibility on the part
of said vessel with the right of way. Thus,
it has been held that fault on the part of
the sailing vessel at the moment
preceding a collission, that is, during the
third division of time, does not absolve
the steamship which has suffered herself
and a sailing vessel to get into such
dangerous proximity as to cause
inevitable harm and confusion, and a
collision results as a consequence. The
steamer having a far greater fault in
allowing such proximity to be brought
about is chargeable with all the damages
resulting from the collission; and the act
of the sailing vessel having been done in
extremis and even wrong, is not
responsible for the result.
CASES COVERED BY COLLISION AND

ALLISION:
1. one vessel at fault- such vessel is
liable for damage caused to innocent
Page 184 of 274
COMMERCIAL LAW
2.
3.
4.
5.
vessel as well as damages suffered by

owners of cargo of both vessels
both vessels at fault- each vessel
must bear its own loss but the
shippers of both vessel may go
against the ship owner who will be
solidarily liable
vessel at fault not known- same as
rule 2
third vessel at fault- same rule 1
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)
Page 185 of 274
COMMERCIAL LAW
- 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, 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
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
Page 186 of 274
COMMERCIAL LAW
had perished, gone out of commerce, or
D. Salvage
effort
must
be
disappeared in such a way that their
successful.
existence is unknown or they cannot be
recovered. It does not include a situation
II. SHIPWRECK AND DERELICT:
where there was indeed a delivery but to
A. Shipwreck. A shipwreck refers
the wrong person or a misdelivery (Ang
to the injuries suffered by the
vs. American steamship Agencies 19
vessel disabling the latter for
scra123) and damage arising from delay
navigation.
or late delivery( Mitsui O.S.K line ltd vs
B. Derelict. It refers to the vessel
CA 287 scra 366) in such instance the
or cargo abandoned at sea by
civil code rules on prescription shall
those entrusted by such vessel
apply.
or cargo. A derelict is a vessel
or cargo badly damaged and
Hence, in case of misdelivery
abandoned by the crew to the
(delivery to wrong person) or
mercy of the sea. Mere
conversion of the goods, the rules
abandonment of such vessel or
on prescription found in the Civil
cargo does not make it res
Code shall apply (10 years for
nullius so that anybody can
contracts; 4 years for tortuous
claim it. The proper procedure
obligations)
must be followed.
The one year period is suspended by:
III. PROCEDURE:
a.the
express
agreement
of
the
A. If the vessel is abandoned,
parties(Universal Shipping Lines Inc vs.
salvor must tow it to the
IAC 1990)
nearest port where it will be
b.the filing of an action in court until it is
delivered to the Municipal
dismissed
Treasurer or to the Collector of
the 1yr period shall run from
Customs who will advertise the
delivery of the last package and is
fact of salvage;
not suspended by extrajudicial
B.
If owner of salvaged vessel
demand.
appears,
he
may
take
the one year period shall run from
possession
of
the
vessel
and
delivery to the arrasstre operator
must pay a reward, the amount
and not to the consignee
of which is not more than 50%
of the value of the vessel;
SALVAGE LAW (ACT 2616)
C. If no claim for the vessel is
made within 3 months after the
I. FOUR REQUISITES FOR SALVAGE
publication
of
the
REWARD TO BE WARRANTED:
advertisement, the Municipal
A. There must be a valid object of
Treasurer will sell the property
salvage, i.e., vessel, cargo,
saved at a public auction and
freight or wreck of vessel or
the reward and expenses shall
cargo;
be deducted from the proceeds.
B. Such object must have been
The balance is deposited with
exposed to marine peril;
the Treasury;
C. Salvage services must be
D. If no one claims the same after
rendered voluntarily, i.e., not
3 years, shall go to the
arising from pre-existing duty;
Page 187 of 274
COMMERCIAL LAW
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. to the ship owner;
B. to the captain; and
C. to the crew.
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 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.
The Warsaw Convention to which

the Republic of the Philippines is a
party and which has the force and
Convention for the Unification of
effect of law in this country applies
Certain Rules Relating to
to all international transportation
International Transportation by Air
of persons, baggage or goods
The Warsaw Convention:
performed
by
an
aircraft
mandates carriers to issue passenger tickets;
gratuitously or for hire.
requires carriers to issue baggage checks for checked luggage;
When
contract
ofbe
carriage is a
creates a limitation period of 2 years within
which aa claim
must
contract
of
international
brought (Article 29); and
transportation, provisions of the
limits a carrier's liability to at most:
Convention
automatically
apply
250,000 Francs or 16,600 Special Drawing
Rights (SDR)
for
and
exclusively
govern
the
rights
personal injury;
and
liabilities
the airline and its
17 SDR per kilogram for checked luggage
and
cargo, orof$20USD
passengers.
(American Airlines vs.
per kilogram for non-signatories of the amended
Montreal
CA, G.R. No. 116044-45 March 9,
Protocols.
2000) of a traveller.
5,000 Francs or 332 SDR for the hand luggage
WARSAW CONVENTION
I. NATURE AND SCOPE OF WARSAW

CONVENTION
Two categories of International

Transportation covered:
Page 188 of 274
COMMERCIAL LAW
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
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.
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 passenge

carrier for each passenger shall be limited to th
Where in accordance with the law of the court t
submitted, damages may be awarded in the for
the equivalent capital value of the said paymen
125,000 francs. Nevertheless, by special contra
passenger may agree to a higher limit of liabilit
Art 25 (1) The carrier shall not be entitled

provisions of this Convention which exclude
damage is caused by his willful misconduct or
as, in accordance with the law of the court to w
is considered equivalent to willful misconduct.
Admittedly, in a contract of air
carriage a declaration by the
passenger of a higher value is
Page 189 of 274
COMMERCIAL LAW
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 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
misconduct:
as
st
regards
1 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 wilful 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 wilful 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
petitioners
complaint is within the purview
of
the
Warsaw
Convention
(Lhuillier vs. British Airways,
G.R. No. 171092 March 15, 2010)
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
Page 190 of 274
COMMERCIAL LAW
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 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
wont
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)
IV. Jurisdiction of Local Courts under
the Warsaw 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,
Page 191 of 274
COMMERCIAL LAW
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 the
same High Contracting Party is not
deemed to be international for the
purposes of this Convention. (Emphasis
supplied)
the carriage may be

regarded as a "place
(Lhuillier vs. British
No. 171092 March 15,
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.
A number of reasons tends 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.
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
broken is not
of destination."
Airways, G.R.
2010)
Jurisdictional Character of Art. 28

We further held that Article 28(1) of the
Warsaw Convention is jurisdictional in
character. Thus:
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 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
Page 192 of 274
COMMERCIAL LAW
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
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.
Page 193 of 274
COMMERCIAL LAW
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
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. WATERWORKSNational
Water
Resources Council
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 judgement of
the Commission, such franchise or
privilege will properly conserve the public
interest (Perez, Transportation Laws and
Public service Act).
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
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.
OFFICES
NOW
CHARGED
WITH
ENFORCEMENT OF PUBLIC SERVICE
LAW
The Public Service Commission has been
abolished. The following replaced it:
1. LAND
TRANSPORTATIONDepartment of Transportation and
Communication (DOTC) and the
Land Transportation Franchising
and Regulatory Board (LTFRB)
2. WATER
TRANSPORTATIONMaritime
Industry
Authority
(MARINA)
3. AIR
TRANSPORTATIONAir
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,
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
Page 194 of 274
COMMERCIAL LAW
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. L22545, 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 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. L31056, 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
Page 195 of 274
COMMERCIAL LAW
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
OPERATOR RULE:
THE
PRIOR
1. Operator fails/ neglects to make

improvement or effect 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
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
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COMMERCIAL LAW
the consequences of its operation. In
contemplation of law, the owner/operator
of record I sthe 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 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.L30212,
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 ownercannot 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
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COMMERCIAL LAW
(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.
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.
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COMMERCIAL LAW
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)
is liable for the conduct of the driver,

there being an employer-employee
relationship between the operator and
the driver
Certificate of Public Convenience

and Necessity
a. A certificate of Public Convenience
is issued where no special
government franchise is required.
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
Page 199 of 274
COMMERCIAL LAW
every civilized society as trade is
necessary
(b)
progressive
as
it
accumulates new ideas and keeps
abreast
with
contemporary
developments, and (c) equitable since
commercial transactions involve the
exchange of values or consideration.
2.
Merchants are, those who having
legal capacity to engage in commerce,
habitually devote themselves thereto.
SPECIAL COMMERCIAL
LAWS*
*(Notes of Atty. Renato Rondez)
MERCHANTS AND COMMERCIAL
TRANSACTIONS:
1.
Commercial Law is that branch of
law relating to the rules that govern the
rights, obligations and relations of
persons engaged in commerce or trade.
1.1
It is that branch of private law
which regulates the juridical relations
arising from commercial acts and
according to which, the questions and
controversies arising therefrom are
resolved.
1.2
Law Merchant is the commercial
law consisting of customs, practices, and
usages given the force and effect of law
by
the
courts
through
judicial
pronouncements. It is the common law of
commercial law.
1.3
Its three principal characteristics
are: (a) universal because it exists in
2.1
By definition, only individuals may
be merchants, but it must be noted that
foreigners and companies created abroad
may engage in commerce in the
Philippines, subject to the law of their
country with regard to capacity to
contract, and to the provisions of the
Code of Commerce as regards creation of
the
their
establishments
in
the
Philippines
(Article
15,
Code
of
Commerce), which provision shall be
without prejudice to what, in particular
cases, may be established by treaties or
agreements with other countries. Hence,
it
should
necessarily
follow
that
corporations engaged for business and
partnerships are merchants from the
time they are incorporated or formed.
3.
Persons shall be deemed as having
met the required legal capacity to
habitually engage in commerce if:
3.1
Being an individual: (a) Must be 18
years of age and (b) having free disposal
of property
3.2
As far as an alien is concerned, his
legal capacity is determined by his
national law but is limited by the nature
of the industry that he would like to
participate in and Philippine Law that will
govern
the: (a) creation of the
establishment (b) mercantile operations,
and (c) jurisdiction of our courts or the
Page 200 of 274
COMMERCIAL LAW
provisions of any treaty obtaining
between the Philippines and the country
of which he is a national (Article 15, Code
of Commerce).
3.3
Being a juridical person, it is
required that it be organized in
accordance with law. If it is a foreign
juridical person, it must obtain a license
to transact business in the Philippines
and is subject to the same limitations
imposed on individual aliens.
3.4
The following cannot engage in
commerce nor hold office or have any
direct,
administrative,
or
financial
intervention in commercial or industrial
companies: (a) Persons sentenced to the
penalty of civil interdiction, while they
have not served their sentence or have
not been amnestied or pardoned
(b)Persons who have been declared
bankrupts, while they have not obtained
their discharge, or been authorized by
virtue of an agreement accepted at a
general meeting of creditors and
approved by judicial authority, to
continue
at
the
head
of
their
establishments; the discharge being
considered in such cases is limited to
that expressed in the agreement; and (c)
Persons who, on account of laws or
special provisions, may not engage in
commerce
(Article
13,
Code
of
Commerce)
3.5
Further, the following cannot
engage in the commerce, either in
person or by proxy, nor can they hold any
office or have any direct, administrative,
or financial intervention in commercial or
industrial companies, within the limits of
the districts, provinces or towns in which
they discharge their duties: (a) Justice of
the Supreme Court, judges and officials
of the department of public prosecutors
in active service. This provision shall not
be applicable to the municipal mayors,

judges and prosecuting attorneys, nor to
those who by chance are temporarily
discharging the functions of judges or
prosecuting attorneys (b) Administrative,
economic or military heads of districts,
provinces, or posts (c) Employees
engaged
in
the
collection
and
administration of funds of the State,
appointed by the Government. Persons
who by contract administer and collect
temporarily or their representatives are
exempted (d)
Stock and commercial
brokers of whatever class they may be
(e) Those who by virtue of laws or special
provisions, may not engage in commerce
in a determinate territory.
3.6
Note
further,
the
current
prohibitions
as
appearing
in
the
Constitution as to (a) Members of the
Senate and the House of Representatives
(Section 14, Article VI) (b) President,
Vice-President, Members of the Cabinet,
their deputies or assistants (Section 13,
Article VII) (c) Members of Constitutional
Commissions ( Section 2, Article IX), the
Revised Administrative Code,
as to
municipal officers (Section 2176), the
Anti Graft and Corrupt Practices Act, as to
public officers (Section 3 (h), RA 3019),
Civil Service Rules and Regulations, as to
public officers and employees (Rule XIII
(5), CSC)
3.7
Distinguishing between absolute
and relative incapacity, the former
extends over all Philippines and the act is
void, while in the latter, it is only coextensive with the place wherein the
officer incapacitated exercises functions
and the act is valid but there is a
disciplinary sanction.
3.8
Acts
of
persons
who
are
incapacited are generally voidable as
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COMMERCIAL LAW
they are unable to give effective consent
( Article 1390, Civil Code)
4.
The
legal
presumption
of
habitually engaging in commerce shall
exist from the moment the person who
intends to engage therein announces
through circulars, newspapers, handbills,
posters exhibited to the public, or in any
other
manner
whatsoever,
an
establishment which has for its object
some commercial operation (Article 3,
Code of Commerce)
5.
The applicable laws to commercial
transactions in hierarchical order are: (a)
Code of Commerce (b) Commercial
Customs, and (c) Civil Code. The listed
laws shall apply to the requisites,
modifications,
exceptions,
interpretations, extinction of commercial
contracts and to the capacity of the
contracting parties (Articles 2 and 50,
Code of Commerce)
6.
Commercial Contracts are those
entered into by merchants in the pursuit
of their activities and involve articles of
commerce. It is an agreement between
two or more merchants, and at times
between those who are not, whereby
they bind themselves to give or do
something in commercial transactions.
The rules to be observed in respect to
commercial contracts are:
6.1
As to formalities- commercial
contracts shall be valid and shall give rise
to obligations and causes of action in
suits, whatever the form and language in
which they may be executed, the class to
which they may belong, and the amount
they may involve, provided their
existence is shown by any means
established by the civil law. However,
the testimony of witness alone shall not

be sufficient to prove the existence of a
contract which involves an amount
exceeding
1,500
pesetas
unless
supported by some other evidence
(Article 51, Code of Commerce).
Thus, a commercial contract exceeding
P300.00, which traditionally has been
accepted
as
the
approximate
equivalence of 1,500 pesetas cannot be
proven by parol evidence only.
6.2
The exceptions to the rule on
formalities are: (a) Contracts which, in
accordance with this Code or with special
laws, must be reduced to writing or
require forms or formalities necessary for
their efficacy. Examples: Bottomry or
Respondentia (b)Contracts executed in a
foreign country in which the law requires
certain instruments, forms or formalities
for their validity, although Philippine law
does not require them. In either case,
contracts which do not satisfy the
circumstances respectively required shall
not give rise to obligations or causes of
action (Article 52, Code of Commerce)
6.3
Illicit agreements do not give rise
to obligations or causes of action even if
they should refer to a commercial
transaction
(Article
53,
Code
of
Commerce).
7.
Contracts
entered
into
by
correspondence shall be perfected from
the moment an answer is made
accepting the offer or the conditions by
which the latter may be modified (Article
54, Code of Commerce).
7.1
Generally, commercial contracts
are
perfected
by
mere
consent.
Consequently, prior to, but never after,
the perfection of the contract, an offeror
may withdraw his offer. If a period is
Page 202 of 274
COMMERCIAL LAW
given to the offeree, but no valuable
consideration is paid therefore, the offer
may still be withdrawn as a matter of
right. But, if the withdrawal is exercised
arbitrarily or whimsically, an award for
damage is warranted. (Article 19, Civil
Code, Sanchez vs Rigos, 45 SCRA 368)
7.2
In commercial contracts entered
into by correspondence, the contract is
deemed perfected upon the making of an
answer accepting the offer or from the
time the acceptance is dropped in the
mailbox even before knowledge of the
offeror. There is intent to be bound. This
is known as the Manifestation Theory. In
other contracts not covered by the Code
of Commerce, the acceptance is not
binding until it is made known to the
offeror. This is known as the Cognition
Theory.
8.
In
a
commercial
contract
containing an indemnification clause
against the person who fails to comply
therewith, the aggrieved party may take
legal steps to demand the fulfillment of
the contract or the indemnity stipulated;
but in resorting to either of these two
actions, the other one shall be annulled
unless there is an agreement to the
contrary (Article 56, Code of Commerce).
Note Article 1226 of the Civil Code
9.
In
interpreting
commercial
contracts, the following rules shall be
observed:
9.1
Commercial contracts shall be
executed and complied with in good faith
according to the terms in which they
were made and drafted, without evading
the honest, proper and usual meaning of
written or spoken words with arbitrary
interpretations, nor limiting the effects
which are naturally derived from the
manner in which the contracting parties
may have explained their wishes and

contracted their obligations (Article 57,
Code of Commerce).
9.2
In case of conflict between copies
of the contract, and an agent should
have intervened in its negotiation, that
which appears in the agents book shall
prevail (Article 58, Code of Commerce)
9.3
In case of a doubt, and the rules
enunciated cannot resolve the conflict,
issues shall be decided in favor of the
debtor (Article 59, Code of Commerce)
10.
In commercial contracts, time
generally
is
of
the
essence.
Consequently, every debtor would be in
delay without making a demand. When
compared to the Civil Code, the general
rule is the mere non-compliance at the
designated time or period would not
constitute default, even if a date has
been fixed for the performance of an
obligation. Thus, demand is necessary.
10.1 The rules on computing periods in
commercial contracts are: (a) In all
computations of days, months and years,
it shall be understood that a day has
twenty-four hours, the months as
designated in the Gregorian calendar,
and the year has three hundred sixty-five
days (Article 60, Code of Commerce).
Note that under Article 13 of the Civil
Code, a month is 30 days, unless
designated by name (b) Days of grace,
courtesy or others which under any name
whatsoever defer the fulfillment of
commercial obligations, shall not be
recognized, except those which the
parties may have previously fixed in
contract or which are based on a definite
provision of law (Article 61, Code of
Commerce). Example is the grace period
provided for by Section 230 of the
Insurance Code
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COMMERCIAL LAW
10.2 A debtor in a commercial contract
shall be determined to be in delay when:
(a) On the eleventh day, in obligations
which do not have a period previously
fixed by the parties or by the provisions
of this Code, as they are demandable ten
days after having been contracted if they
give rise only to an ordinary action, or on
the day following the next day if they
involve immediate execution (Article 62,
Code of Commerce) (b) in contracts with
a day fixed for their compliance by the
will of the parties or by law, on the day
following their maturity or in contracts in
which no such day is fixed, from the day
on which the creditor legally makes
demand upon the debtor or notifies him
of the protest of losses and damages
made against him before a justice, notary
or other public official authorized to
admit the same.
10.3 In summary: (a) If period of
performance fixed, next day in delay
without need of demand, debtor in delay
on the day following the day fixed; (b) If
no period fixed, ten (10) days from
execution of contract and on eleventh
day, debtor is in delay without need of
demand (c) If there is a Potestative
period, the debtor is in delay from
demand. Note period, as when the
debtor desires (Article 1182, Civil Code)
not condition as if the debtor desires
(Article 1180), as the latter is a void
obligation.
JOINT ACCOUNTS
1.
A joint account or cuentas en
participacion is an arrangement among
merchants who interest themselves in
the transactions of other merchants,
contributing thereto the part of the
capital they may agree upon, and who

participate
in
the
favorable
or
unfavorable results thereof in the
proportion they may determine (Art.
239).
(b)
A joint account may be formed
without any formality and may be
privately contracted orally or in writing
(Art. 240).
(c)
A joint account shall not adopt a
commercial name common to all the
participants, nor shall any further direct
credit be made use of except that of the
merchant who transacts and manages
the business in his own name and under
his individual responsibility (Art. 241).
(d)
Those who contract with the
merchant who carried on the business
shall have a right of action against him
only and not against the others
interested therein. The latter shall also
have no right against the third person
who contracted with the manager, unless
the latter formally cedes his rights to
them (Art. 242)
(e)
The liquidation of the joint account
shall be made by the manager thereof
who, upon the conclusion of the
transactions, shall render a verified
account of their results (Art. 243)
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
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COMMERCIAL LAW
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.
2.
The primary purpose of a letter of
credit is to substitute for, and therefore
support, the agreement of the buyerimporter 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 Customerwho 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
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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.
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 bankissued 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
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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.
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 banks
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
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upon the latters 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
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
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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 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 entrustees 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 retaking, keeping and storing the goods,
documents or instruments; (3) to the
satisfaction
of
the
entrustees
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 entrustee, shall not extinguish his
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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 entrusters
security interest as against creditors-the
entrusters 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.
BULK SALES
1.
A sale is considered as a sale and
transfer in bulk if: (a) It is a sale, transfer,
mortgage, or assignment of a stock of
goods, wares, merchandise, provisions
otherwise than in the ordinary course of
trade and the regular prosecution of the
business, or (b) It is a sale or transfer of
all or substantially all, of the business or
trade; or (c) It is a sale or transfer of all,
or substantially all, of the fixtures and
equipment used in the business.
1.1
A sale under Section 40 of the
Corporation Code will be covered if the
business involves the buying and selling
of merchandise.
1.2
A Merger or Consolidation however
is not covered as the surviving or
consolidated corporation assumes all the
liabilities of the constituent corporations
2.
A sale or transaction in bulk is not
covered by the Bulk Sales Law when:
(a)the transaction is in the ordinary
course of trade and the regular
prosecution of the business of the vendor
(b) the vendor in bulk produces and
delivers a written waiver of the provisions
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of the Bulk Sales Law from the creditors
(c) the sale in bulk is made by executors,
administrators, receivers, assignees in
insolvency, or public officers acting under
judicial process; and (d) sales of
properties
that
are
exempt
from
attachment or execution by creditors
(Sec. 13, Rule 39 of Rules of Court)
3.
The purpose of the law is to
prevent the defrauding of creditors by
the secret sale in bulk of all or
substantially all of a merchants stock of
goods until the creditors of the sellers
should have been paid in full.
4.
The
protection
afforded
to
creditors of the seller in bulk are: (a)
requirement that the vendor deliver to
the vendee a written statement under
oath of the names and addresses of all
creditors to whom said vendor is
indebted together with the amount of his
indebtedness (b) requirement that at
least ten days before the sale, the vendor
shall make a full detailed inventory
thereof showing the quantity and the
cost price of the goods and shall notify
every creditor of the price, terms and
conditions of the sale (c) requirement
that the purchase price paid must be
applied to the debt owing to the
creditors.
In addition, the law also
prohibits the vendor in bulk to transfer
title to the same without consideration or
for a nominal value.
motivation of the parties or whether they

are in good or bad faith is immaterial
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.
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.
4.1
If the sale in bulk is not made in
accordance with the Bulk Sales Law, the
sale is fraudulent and void. The creditors
may proceed against the vendee who
shall hold the stock of merchandise in
trust for the creditors.
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
4.2
The provision of the law that the
sale is fraudulent and void is not a
mere
presumption.
Therefore,
the
3.
A warehouse receipt is a written
acknowledgment by a warehouseman
that he holds certain goods in store for

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the person to whom the document is
issued.
This is also known as
warehouse-keepers 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
nonnegotiable 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 nonnegotiable 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 vendors 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 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,
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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 warehousemans 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 warehousemans 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 nonnegotiable, 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.
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
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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 any one 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
warehousemans 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
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
to the terms of the receipts as they were
before the alteration (e) Where
the
alteration is material, unauthorized and
with
fraudulent
intent,
the
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
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COMMERCIAL LAW
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 warehousemans 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 have validly
pledged
the
same
(Section
28,
Warehouse Receipts Law). Hence, it is
enforceable against the depositors
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 warehousemans 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 warehousemans 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
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COMMERCIAL LAW
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 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 vendors
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
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COMMERCIAL LAW
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 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.
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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 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
mortgagors 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
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COMMERCIAL LAW
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 vendees failure to pay
cover two or more installments; or (3)
Foreclose the chattel mortgage on the
thing sold should the vendees 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
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 extrajudicial 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 sheriffs
certificate of foreclosure sale in the office
of the Register of Deeds concerned
(Reyes vs. Noblejas, et al., G.R. No. L23691, 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
Page 219 of 274
COMMERCIAL LAW
judgment creditor of the debtor, or (d)
Any person having a lien on the property
subsequent to the mortgage.
No. 3135 or that there was no violation of

the mortgage deed.
2.3
Notwithstanding
the
foregoing
provision,
juridical
persons
whose
property is sold pursuant to an extrajudicial foreclosure, shall have the right
to redeem the property until, but not
after, the registration of the certificate of
foreclosure sale which 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)
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.
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
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
landowners compensation. Hence, until
the final valuation of the lands subject to
CARP is determined, the amount of the
mortgage debt is unliquidated
Page 220 of 274
COMMERCIAL LAW
5.
Issue of the legality of the Floating
Rate of Interest, which refers to the rate
of interest 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 repricing 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
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.
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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
mortgagors 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.
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:
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(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.
INSOLVENCY:
1.
provide for an orderly mechanism by
which the assets of the insolvent debtor
could be converted into money for
distribution among his creditors and
thereby relieve the debtor from the
weight of his debts and permit him to
start anew free from such debts.
2.
The situations contemplated by
law are: (a) suspension of payments (b)
voluntary insolvency, and (c) involuntary
insolvency
2.1
Suspension
of
Payments
contemplates a state desired by a debtor
who, possessing sufficient property to
cover all his debts, foresees the
impossibility of meeting them when they
fall due.
2.2
Insolvency contemplates a state
where the debtor has more obligations
than assets.
2.3
Further distinguishing between the
two: Suspension of Payments is always
initiated by the debtor, while Insolvency
is initiated by the debtor when it is
voluntary, or by his creditors or other
persons when it is involuntary.
2.4
Other distinctions are: (a) The
object of a suspension of payments is the
deferment of the payment of debts until
such time as the debtor, who possesses
sufficient property to cover all his debts,

is able to convert such assets into cash
or otherwise acquires the cash necessary
to pay his debts.
In an insolvency
proceeding, the object is to compel the
presentment of all debts, due or not due,
and secure a complete discharge from
such debts (b)The amount of debts in
suspension of payments is not affected
although their payment is postponed. In
insolvency, the creditors receive less
than what they are entitled to. In some
cases where preferences are proper,
some creditors may not receive any
amount at all
Suspension of Payments in detail:
1.
A petition for the suspension of
payments is initiated by the debtor,
whether he is an individual, corporation,
partnership or association.
1.1
When initiated by a natural person,
he must have assets sufficient to settle
liabilities and will not bar enforcement of
claims by creditors holding contractual
mortgages. If by a juridical entity, it may
avail of the remedy even if it has no
sufficient assets to cover debts and
liabilities but is under the management
of
a
rehabilitation
receiver
or
management committee and it will result
in preferred creditors not being able to
enjoy their preference.
1.2
Jurisdiction is vested in the regular
courts if initiated by a natural person. If
by a juridical person, it is vested with the
designated Special Commercial Court.
2.
The petition may be filed with the
court of the province or city in which the
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debtor has resided for 6 months next
preceding the filing of the petition.
3.
Upon the filing of the petition, the
court shall issue an order calling for a
meeting of the creditors, which to be
published and served on the creditors.
4.
Subsequently,
a
meeting
of
creditors for approval or disapproval of
the debtors proposition is to be held.
4.1
The meeting of the creditors on
the debtors proposal requires a quorum
and minimum vote consisting of the
presence of at least two thirds of the
creditors representing at least three-fifths
of the liabilities (Section 8[e]). This is
known as the two-thirds/three-fifths
rule. There is no requirement for a
majority to reject.
4.2
The action by the creditors on the
debtors proposal shall have the following
effects: (a) If the required vote has not
been achieved, the proceedings are
terminated and the creditors are at
liberty to enforce their respective rights
(b)
If the creditors approve the
proposition and there is no objection on
the part of any creditor, the court issues
an order that the decision be carried out
and that it shall be binding on all
creditors included in the Schedule who
have been properly summoned; and (c)
If the creditors approve the
proposition, but a creditor disagrees with
or objects to the decision, the court shall
conduct a hearing on the objection: (1) If
the objection is found to be meritorious,
the proceedings will terminate and
creditors will be at liberty to enforce their
respective rights, or (2) If found to be
without merit, court shall proceed as
though no objection had been made.

4.3
The grounds for an objection are:
(1)
Defects in call for the meeting, in
the holding thereof, or in deliberations
had thereat, which prejudiced creditors
rights (2) Fraudulent connivance between
one or more creditors and debtor to vote
in favor of the proposed agreement; or
(3) Fraudulent connivance of claims to
obtain a majority.
5.
It shall be forbidden of a petitioner
for suspension of payments to dispose of
his property, unless such disposition is in
the ordinary operation of his business, or
make any payments outside of the
necessary or legitimate expenses of his
business.
6.
The effects of the filing of a
petition for suspension of payments on
the below listed situations:
6.1. An execution pending against the
debtor- Any execution pending against
the debtor shall be suspended before the
sale of the property is made. However,
the debtor must make a request for this
purpose to the court before which the
proceeding for suspension of payments is
pending. Such suspension shall lapse
after 3 months without the proposed
agreement being accepted by the
creditors or as soon as it is denied.
(Section 6)
6.2. An execution against a property of
the debtor specially mortgaged the
execution is not suspended (Section 9)
6.3. An action to be filed against the
debtor for the collection of a sum of
money no creditor may sue to collect
his claim from the debtor from the
moment that suspension of payments is
applied for and while the proceedings are
pending subject to certain exceptions
such as claims for personal labor,
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maintenance, expenses of last illness and
claims by persons having mortgages.
(Sections 6 and 9)
publication, as many times as the court

may deem proper, and all creditors
appearing in the schedule shall be given
notice.
Voluntary Insolvency in detail:
2.3
Meeting of creditors for election of
assignee in insolvency. An assignee in
insolvency is a person selected in both
voluntary and involuntary proceedings,
either by the creditors or by the court, to
whom a debtor declared insolvent, by
legal mandate, makes an assignment of
his properties for the benefit of
creditors.His principal function is to
recover all the estate, debts and effects
of the insolvent. He shall thereafter as
speedily as possible convert the estate,
real or personal, into money.
The
following property of the insolvent debtor
shall pass to the assignee: (a) All real
and personal property and effects (b) All
deeds, books, and papers (c) The
debtors right of action for damages to
real property (d)Right to release property
fraudulently conveyed. The following
property shall not pass to the assignee
and shall remain with the debtor: (a)
After acquired property, except its
fruits
and
income.
After-acquired
property is that acquired by the debtor
subsequent to the filing of petition for
insolvency (b)Non leviable assets, such
as an insurance policy without any cash
surrender value or the premium of which
does
not
exceed
P500.00
(c)An
expectancy to inherit (d) Right of action
in personal injury cases which pertains
exclusively to the debtor (e) Property
held in trust by debtor or merely leased
by debtor (f) Property exempt from
execution. (Sec. 12, Rule 39, Rules of
Court; Art. 223, Civil Code).
1.
Voluntary insolvency is the state
desired by an insolvent debtor who owes
debts exceeding the sum of P1, 000.00.
He may apply to be discharged from his
debts by filing a petition with the
Regional Trial Court of the province or
city in which he has resided for 6 months
next preceding the filing of such petition.
The petition must be accompanied by a
schedule of debts and an inventory of
properties.
1.1
Voluntary Insolvency is different
from Involuntary Insolvency in the
following
manner:
In
voluntary
insolvency, a debtor is deemed insolvent
upon his filing of a petition for voluntary
insolvency;
while
in
involuntary
insolvency, the debtor is considered
insolvent upon the issuance by the court
of an order declaring him an insolvent.
2.
The
procedure
for
voluntary
insolvency is initiated by the filing by the
debtor of a petition.
2.1
Issuance by the court of an order
declaring, among other things, that the
petitioner is insolvent. Note that the filing
of such petition shall be an act of
insolvency. Thus, if the court finds the
petition to be in order, it shall issue on
the same date it is filed an Order of
Adjudication that the debtor is insolvent.
If found to contain a falsity, the petition is
dismissed.
2.2
Publication of order and service
thereof on the creditors. Being
a
proceeding in rem, there must be
2.4
It is the creditors who have filed
their claims who are entitled to elect the
assignee and when they submit the
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name to the court (Section 29). The court
will then appoint the person nominated
and from then on he will be an officer of
the court. A majority of the creditors
concurring with majority of the claims will
be necessary to properly elect the
assignee. (Section 30).
2.5
The assignees duty is to convert
the property of the debtor to cash and,
thereafter, he will declare dividends
(Sec. 43) to the creditors. Dividends
are the equitable distribution of the
property to the creditors. They are the
amounts paid, upon order of the court, to
the creditors of an insolvent out of the
capital or assets of the insolvents estate
for the purpose of liquidating or
discharging a debt.
Thus, the creditors must prove their
claims twice: first, under Sec. 29 in the
election of the assignee; second, under
Sec. 43, to entitle them to dividends. If
the creditor fails to prove his claim under
Sec. 29, then he is not barred from
proving his claim under Sec. 43 in order
to be entitled to dividends. And even if
the creditor does not present the best
proof of his claim under Sec. 29, he can
still show the best proof of his credit
under Sec. 43, even if the claim was
rejected under Sec. 29.
2.6. Composition, if agreed upon.
Composition is an agreement whereby
the creditors of an insolvent agree to
accept a certain percentage of their
claims in full settlement of such claims.
It is a method of dividing the estate of
the insolvent among his creditors
amicably.
2.7
Requisites for Valid Offer of
Composition are: (a) Offer must be made
after the filing of the Schedule of the
debtors property and the list of his
creditors (b) Offer must be accepted in

writing by a majority of the creditors
representing a majority of the claims
which have been allowed (c) Offer must
be made only after the insolvent deposits
the consideration to be paid to the
creditors; and (d) Offer accepted by the
creditors must be confirmed by the
Court. (Sec. 53).
2.8
The effects of composition are: (1)

Insolvency proceedings dismissed,
the amount agreed upon is deposited in
court, and if the court finds settlement
meritorious it shall approve the same (2)
All debts are discharged Effect
shall be as if the debtor has obtained a
discharge, so that all claims against
debtor are extinguished and assignee
must return all properties to debtor.
2.9
Discharge is the release of the
debtor from his debts which were or
might be proved in the insolvency
proceedings such that they are no longer
a charge upon him.
An
insolvent
debtor may apply to the court for a
discharge from his debts any time after
the expiration of 3 months from the
adjudication of insolvency but not later
than 1 year from such adjudication,
unless the property of the insolvent has
not been converted into money.
2.10 To obtain a discharge, the following
should be complied with: (1) Debtor must
have
complied
with
statutory
requirements regarding surrender of his
assets for the benefit of creditors and
regarding the rendition of an account of
his assets and liabilities (2) He must have
applied for discharge after three months
from date of adjudication of insolvency,
but not later than one year thereafter
(3)Debtor must not have committed any
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of the acts of insolvency enumerated in
Sec. 65 of Insolvency Law, preventing
discharge of a debtor.
2.11 If after being adjudged insolvent,
the debtor fails to apply for a discharge
within the required period, he loses his
right to be discharged.
2.12 The debtor would be entitled to a
second discharge if it takes place after 6
years from the first discharge or, if takes
place within 6 years from the first
discharge, if the second insolvency
proceeding is involuntary.
2.13 The effect of a discharge is that it
releases a debtor from all debts
contracted by him prior to the insolvency
proceeding, with the exception of those
expressly mentioned by the law.
The debts that are not discharged
are: (1)Taxes and assessments due to the
government, national or local (2)Debts
created by the fraud or embezzlement of
the debtor (3)
Debts created by the
defalcation of the debtor as a public
officer or while acting in a fiduciary
capacity (4) Debts which have not been
scheduled, unless the creditor had actual
knowledge or notice of the proceedings
in insolvency; and (5) Debts owing to
creditors who were not duly notified and
had no actual knowledge of the
insolvency proceedings.
2.8. Resolution of objections to a
discharge, if any. Such objections are to
be based on any one or more of the
following as the debtor is deemed in bad
faith and not entitled to discharge if:
a.
Debtor submitted a false affidavit,
either in his petition, inventory or
schedule;

b.
He concealed part of his estate or
effects;
c.
Debtor was guilty of fraud or
neglect in care of his property;
d.
Debtor procured an attachment or
execution on his property during the onemonth period prior to the insolvency
proceedings;
e.
Debtor destroyed or falsified
important papers and documents;
f.
Debtor fraudulently gave certain
creditors preferences;
g.
Debtor failed to disclose that
certain claims which had been proven
were false or fraudulent;
h.
Being a merchant, debtor failed to
keep proper books of account;
i.
Debtor influenced the action of
any creditor by pecuniary means;
j.
In contemplation of insolvency,
debtor made fraudulent conveyances of
or encumbrances upon his properties;
k.
Debtor had been convicted of any
of the penal provisions of the Insolvency
Law; or
l.
In case of involuntary insolvency,
debtor had already availed of the
benefits of the Insolvency Law within the
six-year period preceding his application
for discharge.
Note that if debtor is one who is in bad
faith, the concept of after-acquired
properties does not apply.
In such
instance, all properties of the debtor
acquired before or after the date of
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cleavage shall be liable for the payment
of all his debts.
Cleavage is the date when the petition is
filed, from which the period of thirty days
is counted forward or backward in
determining the effects provided for in
the Insolvency Law, as when: (a) Under
Section 20-to determine if at least three
(3) creditors filed the petition for
insolvency-a creditor by assignment of
credit made within thirty (30) days from
date of cleavage shall be disqualified as
petitioning creditor (b) Under Section 32(1) attachment levied upon within a
period of thirty (30) days before the date
of cleavage may be set aside by the
assignee (2) judgments on cases filed
and decided within thirty (30) days prior
to the date of cleavage may be set aside
by the assignee (3)judgments on cases
filed before thirty (30) days from the date
of cleavage but decided within said thirty
(30) days because of confession of
judgment or declaration of default of
debtor may be set aside by action of
assignee (4) properties acquired after
date of cleavage, after discharge of
debtor in good faith shall not be liable for
debts incurred prior to date of cleavage
(5)
Under
Section
70-fraudulent
preferences made within thirty (30) days
prior to the date of cleavage may be set
aside in an action brought by assignee.
Note Section 70 pertains to Fraudulent
Preferences when debtor transferred
property to any person to give him
preference, such transfer may be set
aside by proper court action by the
assignee provided that the transfer took
place within 30 days period from the date
of cleavage. The property transferred
will be returned to the insolvents estate
for equitable distribution among his
creditors. There is a Presumed Fraudulent
Transfer if: (a)
Not in the ordinary
course of business (b)

Under
confession of judgment (c)Not
valuable consideration.
for
Dead Persons Being Under Insolvency

(Section 72) Dead person may be
subject of insolvency proceedings.
If
proceedings filed and debtor dies before
Order of Adjudication, case must be
dismissed and remedy of the creditors
will be to file a claim n the testate or
intestate proceedings. But if the debtor
dies after the Order of Adjudication has
issued, proceedings will continue.
2.9. Appeal to the Supreme Court in
certain cases: (a) From an order granting
or refusing an adjudication of insolvency
and, in the latter case, from the order
fixing the amount of costs, expenses,
damages, and attorneys fees allowed
the debtor (b) From an order made at the
hearing of any account of an assignee,
allowing or rejecting a creditors claim, in
whole or in part, when the amount in
dispute exceeds three hundred pesos (c)
From an order allowing or denying a
claim for property not belonging to the
insolvent, presented under section fortyeight of this Act (d) From an order
settling an account of an assignee (e)
From an order against or in favor of
setting apart homestead or other
property claimed as exempt from
execution (e) From an order granting or
refusing a discharge o the debtor.
(Section 82)
a.
Note that the Insolvency Law
provides that the decision of the trial
court is final and not appealable BUT due
consideration must be accorded the
provisions of the 1997 Rules of Civil
Procedure regarding appeals to the
Supreme Court and what may be the
subject of an appeal, which would tend to
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imply that Insolvency is a case that
allows multiple appeals, being a special
proceedings case.
Involuntary Insolvency is Detail
1.
Involuntary insolvency is the state
of which a debtor may be placed by 3 or
more of his creditors, residents of the
Philippines, whose credits accrued in the
Philippines and the amount of which
credits are in the aggregate not less than
P1,000.00. The said creditors may file a
petition with the Regional Trial Court of
the province or city in which the debtor
resides or has his principal place of
business. The petition must allege the
commission by the debtor of one or more
acts of insolvency.
1.1
One or more of the following 13
acts of insolvency must be alleged in the
petition:
a.
The debtor is about to depart or
has departed from the Philippines with
intent to defraud his creditors;
b.
The debtor, being absent from the
Philippines with intent to defraud his
creditors, remains absent;
c.
The debtor conceals himself to
avoid the service of process for the
purpose of hindering, delaying or
defrauding his creditors; Personal
d.
The debtor conceals or is removing
any of his property to avoid its being
attached or taken on legal process;
e.
The debtor has suffered his
property to remain under attachment or
legal process for 3 days for the purpose
of hindering, delaying or defrauding his
creditors;
f.
The debtor has confessed or
offered to allow judgment in favor or any
creditor or claimant for the purpose of
hindering, delaying or defrauding any
creditor or claimant;
g.
The debtor has willfully suffered
judgment to be taken against him by
default for the purpose of hindering,
delaying of defrauding his creditors;
Judicial
h.
The debtor has suffered or
procured his property to be taken on
legal process with intent to give a
preference to one or more of his creditors
and thereby hinder, delay or defraud any
one of his creditors;
i.
The
debtor
has
made
any
assignment, gift, sale, conveyance or
transfer of his estate, property, rights or
credits with intent to delay, defraud or
hinder his creditors;
j.
The debtor has, in contemplation
of insolvency, made any payment, gift,
grant, sale, conveyance or transfer of his
estate, property, rights or credits;
Preference
k.
The debtor, being a merchant or
tradesman, has generally defaulted in
the payment of his current obligations for
a period of 30 days;
l.
The debtor, for a period of 30
days, has failed after demand to pay any
moneys deposited with him or received
by him in a fiduciary capacity;
m.
The debtor, an execution having
been issued against him on final
judgment for money, shall have been
found to be without sufficient property
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subject to execution
judgment. Merchant
to
2.
The procedure for
insolvency is as follows:
satisfy
the
involuntary
2.1. Filing of petition by creditors of the

debtor (Section 20);
2.2. Order by the court requiring the
debtor to show cause why he should not
be declared insolvent (Section 21);
2.3. Service of the order on the debtor
and publication(Section 22);
2.4. Filing of answer or motion
dismiss by the debtor (Section 23);
2.5.
2.13. Appeal to the Supreme Court in

certain cases (Section 82).
to
Effects of the filing of a Voluntary or

Involuntary Petition of Insolvency on
Proceedings against the debtor:
1.
In general the civil proceedings
against the debtor, upon application by
the debtor himself, any creditor or the
assignee, will be stayed or suspended.
2.
Secured claims already begun
actions for secured claims already begun
are suspended until the assignee is
elected. Upon election of the assignee,
the action will be continued in the same
court where it was filed.
Trial of the case (Section 23);
2.6. If the court finds for the debtor,

then the proceedings shall be dismissed
(Section 23); if the debtor defaults or the
court finds for the creditors, then the
court shall issue an order adjudging
debtor insolvent (Section 24);
2.7. Publication of order and service
thereof on the creditors (Section 25)
2.8. Meeting of creditors for election of
assignee in insolvency (section 30);
2.9. Conveyance of debtors property
to assignee in insolvency (Section 32);
2.10. Liquidation of assets and payment
of debts (Sections 33, et seq.);
2.11. Discharge of the debtor (Section
64);
2.12. Objections to discharge, if any
(Section 66);

2.1
The remedies of a secured
creditor, or of one who holds a real estate
mortgage, chattel mortgage and or a
pledge are: (a)
Rely on the security
then he will not be eligible to take part in
the insolvency proceedings (b) Evaluate
this security he can ask this from the
court, the balance of the loan not
secured may be claimed in the
insolvency proceedings (c)
File
a
contingent claim the creditor will file a
claim in the insolvency proceedings, that
in case the proceeds from the sale of the
security is not enough to cover the loan,
the deficiency shall be recovered in the
insolvency proceedings.
These three alternatives are also
available to a debt secured by a chattel
mortgage with the exception of those
falling of those under Art. 1484 of the
Civil Code (sale of movables under
installments), in which case the creditors
shall only be entitled to remedies (1) and
(2). The same is true with pledge as the
Civil
Code
expressly
prohibits
a
deficiency judgment in pledge.
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3.
Secured claims not yet begun
actions for secured claims may be begun
while the insolvency proceedings are
pending with the permission of the
insolvency court. However, if the
assignee in insolvency has not yet been
elected, the said action will be
suspended until the assignee is elected.
4.
Unsecured claims already begun
actions for unsecured claims already
begun are suspended except in cases
where the amount due the creditor is in
dispute. In such cases, the suit, by leave
of the insolvency court, may proceed to
judgment for the purpose of ascertaining
the amount due, but execution shall be
stayed. After the election of the assignee
in insolvency, such unsecured claims
shall be filed and allowed in the
insolvency proceedings, not in the court
where they were originally filed.
5.
Unsecured claims not yet begun
actions for unsecured claims cannot be
filed during the pendency of the
insolvency proceedings but it filed, such
actions will be dismissed upon motion of
the assignee. Such unsecured claims
shall then be filed and allowed in the
insolvency proceedings, not in the court
where they were originally filed.
How claims are resolved by the Assignee:
In resolving the claims of the creditor
after the debtors assets have been
liquidated, unless a composition has
been agreed upon by the debtors
creditors, obligations of the debtor shall
be paid in the following order:
1.
Equitable claims enumerated in
Section 48 of Insolvency Law- these are
the claims which are entitled to first
priority in payment: (a)Paraphernal
property of debtors wife (b)

Property
held by debtor under lease or usufruct or
on
deposit
or
for
administration
(c)Merchandise held by debtor on
commission, for forwarding or on
consignment and purchase price from
sales on consignment (d)Negotiable
instruments sent to debtor for collection
and the money collected thereby (e)
Money in debtors possession for
remittance to others (f) Merchandise
bought on credit, if no delivery has been
made (g)
Goods wrongfully taken by
the debtor.
2.
Preferred claims under
2241 and 2242 of the Civil Code
Articles
2.1
Article
2241-with
respect
to
specific movable property of debtor, the
following claims are preferred: (a)
taxes (b)
claims arising from
malversation (c)vendors lien (d) claims
secured by pledge or chattel mortgage
(e)mechanics lien (f)
lien of laborers
for wages over goods manufactured
(g)salvage (h)tenancy (i) carriers lien
(j)innkeepers lien (k) crop loan (l)rentals
for one year; and (m) property on deposit
that has been wrongfully sold.
2.2
Article
2242-with
respect
to
specific real property, the following
claims shall be preferred: (a) taxes (b)
unpaid price realty (c)contractors
lien (for amounts due to laborers, or
architects and engineers) (d)
lien
of
suppliers of materials (e) mortgage
credits upon registered real estate
mortgages (f)reimbursable expenses for
improvement and preservation of real
estate (g)credits on property upon which
attachments or executions have been
made (h)claims of co-heirs for warranty
in the partition of an immovable among
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COMMERCIAL LAW
them (i) claims of donors for pecuniary or
other charges on the immovable
donated; and (j)
claims
of
insurers
upon insured property, for premiums not
exceeding two years (repealed by new
Insurance Code)
2.3
Article 2241 lists 13 claims or
credits that enjoy preference with respect
to specific immovable property and real
rights of the debtor: (1) These claims or
credits are considered as liens or
mortgages or pledges, respectively, of
personal or real property (Art. 2243) (2)
These claims or credits shall be paid pro
rata after the payment of any taxes,
duties, fees and assessments, as the
case may be, due the State or any
subdivision thereof (3) If any excess
should remain after payment of the
claims or credits which enjoy preference
with respect to specific property, real or
personal, the same shall be added to the
free property which the debtor may have
for the payment of the other credits, i.e.,
those credits which do not enjoy
preference with respect to the specific
property.
3.
Preferred claims under
2244 of the Civil Code; and
Article
3.1
Article
2244-with
respect
to
property other than those enumerated in
Arts. 2241 and 2242, in the order named:
(a)Funeral expenses of debtor and his
children (b) Credits
for
services
rendered by employees and household
help (c)Expenses incurred during last
illness of debtor, his spouse and children
(d)Compensation due laborers in cases of
labor accident or illness resulting from
nature of employment (e) Debts incurred
by debtor for support of his family during
the year preceding insolvency (f)
Support
during
insolvency
proceedings and for three months

thereafter
(g)
Fines
and
civil
indemnifications arising from crime
(h)Legal
and
other
expenses
for
administration of insolvents estate
(i)Taxes due national government (j)Taxes
due provincial government (k) Taxes
due city or municipality government (l)
Damages arising from a quasidelict or tort (m) Gifts due to charitable
institutions; and (n)
Credits without
special privilege appearing in a public
document or resulting from a final
judgment.
3.2
Article 2244 lists 14 claims or
credits which enjoy preference with
respect to other property of the debtor.
Claims or credits with respect to this
property shall be preferred, and paid, in
the order named, not pro rata. Take not
of No. 14 which refers to credits which,
without special privilege, appear in a
public instrument, or in a final judgment,
if the credits have been the subject of
litigation. These credits have preference
among themselves in the order of priority
of the dates of the instruments (more
specifically, the date when they became
public instruments, i.e., the date of their
notarial acknowledgment) and of the
judgments, respectively.
4.
Ordinary claims under Section 49
of the Insolvency Law, which are claims
other than the above, duly proved and
allowed in the insolvency proceedings,
which shall pro rata in the remainder of
the debtors property, without any
priority or preference.
4.1
Common credits, i.e., credits of
any other kind or class, or by any other
right or title, not included in Articles
2241, 2242, 2243 or 2244, enjoy no
preference (Art. 2245). They shall be
Page 232 of 274
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paid pro rata regardless of dates (Art.
2251[2])
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 countrys
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
banks 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 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
1 Central Bank vs.

CA, 208 SCRA 652

Page 233 of 274
COMMERCIAL LAW
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 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
Page 234 of 274
COMMERCIAL LAW
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 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)
Page 235 of 274
COMMERCIAL LAW
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 banks
distressed condition, the Central Bank
gave financial assistance to restore the
banks 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 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.
2.2An 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
2 RA 337
Page 236 of 274
COMMERCIAL LAW
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 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 Sharia, 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
3 RA 7906
4 RA 7353
5 RA 6938
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, quasibanks, 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
Page 237 of 274
COMMERCIAL LAW
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 quasibank through common stockholders or
such factors as may be determined by
the Monetary Board.6
Management of a Bank:
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.
maintain
the
quality
of
bank
management and afford better protection
to depositors and the public in general,
the Monetary Board shall:
3.1prescribe, 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.
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.
4.
An elective or appointive public
official cannot serve as an officer of a
private bank , whether full-time or parttime 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.
3.There must also be adherence to the fit

and proper rule8 which provides that to
5.A bank is required to have a board

composed of 5 no more than 15
6 Section 25, NCBA

7 Section 38, Par. 16.25
8 Section 16, GBL, BSP Circular No. 296
9 Section 5, RA 7353

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.
Page 238 of 274
COMMERCIAL LAW
directors, two of whom
independent directors.10
must
be
5.1In case of a merger or consolidation

between banks, the number of directors
shall not exceed 21.11
5.2Non Filipino citizens may become
members of the board to the extent of
the foreign participation in its equity. 12
Limitations
Operations:
imposed
on
Banking
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.
1.1The 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
1.2The 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.
10 Section 15, GBL

11 Section 17, GBL
12 Section 15, Par. (2), GBL
13 Section 35, GBL
14 BSP Circular No. 425
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.
2.1Generally,
a
banks
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-owners 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
15 Section 36, GBL

Page 239 of 274
COMMERCIAL LAW
persons related to each other 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.
16 Section 36, GBL

2.4Consequently, 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 banks 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 Philippines 17
and (b) The ceiling/limitation as to loans
are followed.
2.6The 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;
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.
17 Section 26, NCBA

Page 240 of 274
COMMERCIAL LAW
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
1.1They 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 demand20 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
1.2Banks 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
1.3In 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
18 People vs. Ong, 204 SCRA 942

19 BPI vs. Court of Appeals, 232 SCRA 302
deposited.
prosper.23
Thus,
estafa
will
not
1.4A banks failure to honor a deposit is

failure to pay its obligation as debtor and
not a breach of trust arising from a
depositorys 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
2.1The 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.
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
3.1The 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
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
26 BPI vs. Court of Appeals, 326 SCRA 641
Page 241 of 274
COMMERCIAL LAW
many clients, and depositors
transact business with it.27
who
3.2The 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
3.4In case of negligence in handling the
deposit of its clients on account of a bank
officers 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
banks 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
3.5In 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,
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
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 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
3.6The defense of diligence in the
selection and supervision of employees is
not a valid defense to escape or at least
mitigate a banks liability. A banks
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
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
35 Go vs. IAC, 197 SCRA 22
36 BPI vs. IAC, 206 SCRA 408
Page 242 of 274
COMMERCIAL LAW
in the selection and supervision of their
employees.37
3.7Malice 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 banks 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.
PHILIPPINE DEPOSIT INSURANCE
CORPORATION (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.
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 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.
It insures the deposit liability of all
banks to a maximum deposit insurance
coverage (MDIC) of P500,000 per
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.
37 PCIBank vs. Court of Appeals, 350 SCRA 446

38 Prudential Bank vs. Court of Appeals, 328 SCRA
3.
A joint account (whether and/or,
or, and shall be insured separately
from any individual-owned account. If
264
Page 243 of 274
COMMERCIAL LAW
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 codepositors 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 any of the above (h)

transaction with similar purpose
any
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 attorneys fees.
Page 244 of 274
COMMERCIAL LAW
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.
seller/lender an amount of P100.00 or

double the finance charge imposed,
whichever is greater, but not to exceed
P2,000.00, plus attorneys 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.
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.
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
Page 245 of 274
COMMERCIAL LAW
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?
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 office 40;
and
(b) The disclosure by any official or
employee of any banking institution to
any
unauthorized
person
of
any
information concerning said deposits.
39 Sec. 1, RA 1405.
40 Sec. 2, RA 1405.
Page 246 of 274
COMMERCIAL LAW
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
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.
f)
g)
h)
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
43
unexplained wealth ; 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
41 Ejercito vs. Sandiganbayan, GR Nos. 15729495, 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
i)
j)
k)
l)
holder must be notified to be

present during the inspection.
Upon order of the Commissioner of
Internal Revenue in respect of the
bank deposits of a decedent for
the purpose of determining such
decedents gross estate44;
Upon order of the Commissioner of
Internal Revenue when a taxpayer
files an application to compromise
his tax liability by reason of
financial incapacity45;
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;
Upon examination of a banks
independent auditor, the result of
which are for the exclusive use of
the bank;
In case of suspicious transactions
under the Anti-Money Laundering
Law46;
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;
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
44 Sec. 6, NIRC.
45 Sec. 6, NIRC.
46 Sec. 3 (b-1) , RA 9160.
47 Sec. 3 (b), RA 9160.
Page 247 of 274
COMMERCIAL LAW
competent court, in cases of
violation of the 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
violations of the law?
liable
for
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.
48 Sec. 1, RA 9160.
49 RA 3936.
50 Onate vs. Abrogar, 230 SCRA 181
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,
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
51 China Banking Corp. vs Court of Appeals, 193

SCRA 454
52 Sia vs. Court of Appeals, 222 SCRA 24
Page 248 of 274
COMMERCIAL LAW
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
covered by the law?
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
violation of the law?
for
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.
deposits
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
53 Sec. 55.1(b), RA 8791.

54 Sec. 8, RA 6426.
55 Sec. 11, RA 9160
Page 249 of 274
COMMERCIAL LAW
COVERAGE -intellectual property rights
consists of:
a)
b)
c)
d)
e)
f)
Copyrights and related rights;

Trademarks and service marks;
Geographic indications;
Industrial designs;
Patents;
Layout-designs (Topographies) of
Integrated Circuits; and
g) Protection
of
Undisclosed
Information. (Sec. 4)
ROMA DRUG vs. RTC OF GUAGUA,
PAMPANGA (G.R. No. 149907, April 16,
2009)
INTELLECTUAL
PROPERTY CODE
R.A. No. 8293
INTELLECTUAL PROPERTIES
Those property rights which result from the
physical manifestation of an original thought.
(Ballantines Law Dictionary)
Purpose: to strengthen the intellectual and
industrial property system in the Philippines
as mandated by the countrys accession to
the Agreement establishing the World Trade
Organization (Mirpuri vs. CA GR no 114508)

FACTS: NBI operatives and inspectors of the

BFAD conducted a raid on Roma Drug. The
raiding team seized several imported
medicines. The seized medicines, which were
manufactured by SmithKline, were imported
directly from abroad and not purchased
through the local SmithKline, the authorized
Philippine distributor of these products. The
NBI subsequently filed a complaint against
Rodriguez for violation of Section 4 (in
relation to Sections 3 and 5) of Republic Act
No. 8203, also known as the Special Law on
Counterfeit Drugs (SLCD). In this case, there
is no doubt that the subject seized drugs are
identical in content with their Philippineregistered counterparts. There is no claim
that they were adulterated in any way or
mislabeled at least. Their classification as
"counterfeit" is based solely on the fact that
they were imported from abroad and not
purchased from the Philippine-registered
owner of the patent or trademark of the
drugs.
ISSUE: May Rodriguez, the proprietor of
Roma Drug, be prosecuted under the RA
8203?
HELD: No. The issue has been mooted with
the passage in 2008 of Republic Act No.
9502, also known as the "Universally
Accessible Cheaper and Quality Medicines Act
of 2008".
Page 250 of 274
COMMERCIAL LAW
Section 7 of Rep. Act No. 9502 amends
Section 72 of the Intellectual Property Code in
that the later 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.
The challenged provisions of the SLCD
apparently
proscribe
a
range
of
constitutionally permissible behavior. It is
laudable that with the passage of Rep. Act
No. 9502, the State has reversed course and
allowed for a sensible and compassionate
approach with respect to the importation of
pharmaceutical drugs urgently necessary for
the peoples constitutionally-recognized right
to health.
STATE POLICY IN RESPECT OF
INTELLECTUAL PROPERTY RIGHTS (IPR)
-There is a declaration of State Policy
that, among others, the State recognizes that
an effective intellectual and industrial
property system is vital to the development
of domestic and creative activity, facilitates
transfer of technology, attracts foreign
investments and ensures market access for
our products, hence it shall protect and
secure
exclusive
rights
of
scientists,
inventors, artists, and other gifted citizens to
their intellectual property and creations. (Sec.
2)
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:
1) is 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
2) 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)
TECHNOLOGY TRANSFER
ARRANGEMENTS
-contracts or agreements involving the
transfer of systematic knowledge for the
manufacture of a product, the application of a
process, or rendering of a service including
management contracts; and the transfer,
assignment or licensing of all forms of
intellectual
property
rights,
including
licensing of computer software except
computer software developed for mass
market. (Sec. 4)
PRESCRIPTIVE PERIOD OF ACTIONS FOR

DAMAGES UNDER THE IPC
-No damages may be recovered after
four (4) years from the time the cause of
action arose (Sec. 226)
Page 251 of 274
COMMERCIAL LAW
JURISDICTION OVER DISPUTES UNDER
IPC
A. Original Jurisdiction
1) Director General (IPO)
-has original jurisdiction to resolve
disputes relating to the terms of a
license involving the authors right to
public
performance
or
other
communication of his work.
2) Bureau of Legal Affairs
-has jurisdiction over the ff:
i.
Opposition to applications for
registration of marks;
ii.
Cancellation of trademarks;
iii.
Cancellation of patents, utility
models and industrial designs;
iv.
Petition
for
compulsory
licensing of patents;
v.
Administrative Complaints for
violations of laws involving IPR
where the total damages
claimed is not less than
P200,000.00
3) Documentation, Information and
Technology Transfer Bureau
-has jurisdiction to settle disputes
involving
technology
transfer
payments
4) Regular Courts
B. Appellate Jurisdiction
1) Director General
-over all decisions rendered by the ff:
Dir. of Legal Affairs
Dir. of Patents
Dir. of Trademarks
Dir. of the Documentation,

Information and Technology
Transfer
-over decisions of the Director General

in the exercise of his appellate
jurisdiction over the decisions of the:
Dir. of Legal Affairs
Dir. of Patents
Dir. of Trademarks
3) Secretary of Trade and Industry

on the exercise of his appellate
jurisdiction
of
the
Director
of
Documentation,
Information
and
Technology Transfer; AND
in the exercise of his original
jurisdiction relating to the terms of
license involving the authors right.
ADMINISTRATIVE PENALTIES IMPOSED
FOR VIOLATIONS OF LAWS INVOLVING
IPR
-The Director for Legal Affairs may
impose the ff:
a) Issuance of 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;
i) Censure;
j) Analogous penalties or sanctions (Sec.
10.2 [b])
2) Court of Appeals
Page 252 of 274
COMMERCIAL LAW
IN-N-OUT BURGER vs. SEHWANI, (G. R .
N o . 1 79 12 7 , December 24, 2008)
FAC TS: On 2 June 1997, petitioner filed
trademark and service mark applications with
the Bureau of Trademarks (BOT) of the IPO for
IN-N-OUT and IN-N-OUT Burger & Arrow
Design. Petitioner later found out, through
the Official Action Papers issued by
the Intellectual Property Office (IPO) on 31
May
2000,
that
respondent Sehwani,
Incorporated had already obtained Trademark
Registration for the mark IN N OUT (the
inside of the letter O formed like a
star). By virtue of a licensing agreement,
BenitaFrites, Inc. was able to use the
registered mark of respondent Sehwani,
Incorporated.
Petitioner
eventually
filed
on 4
June
2001 before the Bureau of Legal Affairs (BLA)
of the IPO an administrative complaint
against respondents for unfair competition
and cancellation of trademark registration.
The CA held that the IPO Director for Legal
Affairs and the IPO Director General had no
jurisdiction
over
the
administrative
proceedings to rule on issue of unfair
competition, because Section 163 of the
Intellectual Property Code confers jurisdiction
over particular provisions in the law on
trademarks on regular courts exclusively.
ISSUES:
1. W/N the CA was correct in ruling that
the IPO Director for Legal Affairs and
the IPO Director General had no
jurisdiction over the administrative
proceedings to rule on issue of unfair
competition?
2. W/N there was an unfair competition?
HELD: The Court of Appeals erroneously
reasoned that Section 10(a) of the Intellectual
Property Code, conferring upon the BLA-IPO
jurisdiction over administrative complaints for
violations of intellectual property rights, is a
general provision, over which the specific
provision of Section 163 of the same Code,
found under Part III thereof particularly
governing
trademarks,
service
marks,
and trade
names,
must
prevail.
Proceeding therefrom, the Court of Appeals
incorrectly concluded that all actions
involving trademarks, including charges of
unfair competition, are under the exclusive
jurisdiction of civil courts.
Such interpretation is not supported by the
provisions of the Intellectual Property
Code. While Section 163 thereof vests in civil
courts jurisdiction over cases of unfair
competition, nothing in the said section
states that the regular courts have sole
jurisdiction over unfair competition cases, to
the exclusion of administrative bodies. On
the contrary, Sections 160 and 170, which
are also found under Part III of the Intellectual
Property Code, recognize the concurrent
jurisdiction of civil courts and the IPO over
unfair competition cases.
On the issue of unfair competition.
The essential elements of an action for unfair
competition are (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.
MERRIAM SCHOOL AND OFFICE
SUPPLIES CORP vs. CA (G.R. No. L-48413
June 30, 1980)
FACTS: National Book Store was awarded the
right to reprint the book entitled The Head
Nurse:
Her
Leadership
Role.
This,
notwithstanding, Merriam School and Office
Supplies Corporation violated National's
reprinting right by printing two thousand
copies of the said book, and, in concert with
Webster School and Office Supplies, Inc.,
have sold and distributed the reprinted
copies.
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HELD: It appears that National Book Store,
Inc. had complained to the Reprinting
Committee about the supposed violation of
the Presidential Decree No. 285 by the
Merriam and Webster firms.
Acting on that complaint, the Reprinting
Committee, through its staff attorney,
informed National bookstore, Inc. in a letter
dated October 19, 1976 that its complaint
about the printing distribution of the book in
question by the Merriam and Webster firms,
which were not authorized by the committee,
is not the conflict or claim contemplated in
section 4 and is thereof, outside the
Committee's jurisdiction.
The Reprinting Committee opined that the
Merriam firm, not being awardees, did not
have any claim or right which was in conflict
with the right of National Book Store, Inc. and
which should be adjudicated by the
Committee under section 4.
Without prejudging Civil Case No. 109414 for
injunction and damages, we hold that the
Court of First Instance has jurisdiction over
the case and that there is no merit in
petitioners, contention that National Book
Store, Inc. did not exhaust its administrative
remedies.
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 s C, 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)
Requirements:
1.Technical solution of a problem in any
field of human activity
2.Novelty that which does not form part of
a prior art. (Section 23)
Prior Arts:
a. that which has been made available to
the public anywhere in the world before
the filing date or the priority date of the
application
b. that which forms part of an application
whether for patent, utility or industrial
design, effective in the Philippines,
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.
Non-prejudicial Disclosures
-the
disclosure
of
information
contained in the application during the
twelve (12) months preceding the filing
date or the priority date of the application
shall not prejudice the applicant on the
ground of lack of novelty if such disclosure
was made by:
(a) The inventor (includes any person who,
at the filing date of application, had the
right to the patent);
(b) A patent office and the information was
contained (a) in another application filed by
the inventor and should not have been
disclosed by the office, or (b) in an
application filed without the knowledge or
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consent of the inventor by a third party
which obtained the information directly or
indirectly from the inventor; or
(c) A third party which obtained the
information directly or indirectly from the
inventor. (Section 25)
1.)Inventiveness/Inventive Step
-an invention involves an inventive
step if, having regard to prior art, it 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)
2.)Industrial Applicability
-an invention that can be produced and used
in any industry. (Sec. 27)
NON-PATENTABLE INVENTIONS
The following shall be excluded from patent
protection:
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
separately
and
independently 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) in case an employee made the
invention in the course of his
employment, 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;
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(b) It is filed within twelve (12) months
from the date the
earliest foreign
application was filed; and,
(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
The patentee acquires the following
rights under his patent:
a. Where the subject matter of a patent
is a product, to restrain, prohibit and
prevent any unauthorized person or
entity from making, using, offering for
sale, selling or importing that product;
b. Where the subject matter of a patent
is a process, 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 such process;
c. to assign, or transfer by succession
the patent, and to conclude licensing
contracts for the same (Sec. 71)
CONTENTS OF PATENT APPLICATION
A patent application shall contain:
1) a request for the grant of patent;
2) a description of the invention;
-the disclosure of the invention
must be in a manner sufficiently
clear and complete for it to be
carried out by a skilled in the art.
3) Drawings necessary
for the
understanding of the invention;
4) One or more claims
5) An abstract (Sec. 32)

must contain relevant information as

to the identity of the person (no
anonymous person)
if the applicant is not the inventor; he
must show proof of authority to seek
application for registration
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
PROCEDURE FOR THE GRANT OF PATENT
a) According a filing date to the
application (Sec. 41);
b) Examination of compliance by
applicant
with
the
formal
requirements specified in Sec. 32,
i.e., contents of application (Sec.
42);
c) Classification of application and
search for prior art (Sec. 43)
d) Publication of patent application in
the IPO Gazette (Sec. 44);
e) Inspection
of
the
application
documents by any interested party
and written observations by any
third
party
concerning
the
patentability of the invention (Sec.
44.2 and 47);
f) Written request by the applicant,
within 6 months from the date of
publication
of
his
patent
application, for the substantive
examination by the IPO of his
application. (Sec 48);
g) Grant of the patent (Sec. 50), or
refusal of the examiner to grant
the patent (Sec. 51); in the latter
case, the refusal may be appealed
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to the Director of the Bureau of
Patents;
h) Publication of the grant of patent in
the IPO Gazette (Sec. 52)
TERM OF A PATENT, UTILITY MODEL,
INDUSTRIAL DESIGN
a) Patent 20 yrs from the filing date of
application, without renewal
b) Utility model 7 yrs, w/out
renewal
c) Industrial design 5 yrs,
renewable twice
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) That what is claimed as the
invention is not new or
patentable;
c) That the patent does not
disclose the invention in a
manner sufficiently clear
and complete for it to be
carried out by any person
skilled in the art; or
d) That the patent is contrary

to public order or morality.
(Sec. 61)
e) 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, the same
result, 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 for the following
purposes:
1. To recover from the infringer such
damages as the court may award
considering the circumstances of the
case provided it shall not exceed 3
times the amount of the actual
damages sustained plus attorneys
fees and other expenses of litigation;
2. To secure an injunction for the
protection of his rights;
3. To receive a reasonable royalty, if the
damages are inadequate or cannot be
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readily ascertained with reasonable
certainty;
4. To have the infringing goods, materials
and implements predominantly used in
the infringement disposed of outside the
channels of commerce, or destroyed
without compensation;
5. To hold the contributory infringer jointly
and severally liable with the infringer.
04-08-88; that the must-carry rule under the

Memorandum Circular is a valid exercise of
police power.
B) File criminal case

-within 3 years from date of commission of
the crime for repetition of infringement,
without prejudice to the right for
damages(Sec. 84)
HELD: The Director-General of the IPO

correctly found that PMSI is not engaged in
rebroadcasting
and
thus
cannot
be
considered to have infringed ABS-CBNs
broadcasting rights and copyright.
ISSUES:
1. W/N PMSI rebroadcasts Channels 2
and 23 of ABS-CBN thus, infringing the
broadcasting rights and copyrights of
the latter.
2. W/N the must-carry rule violates the
rights of ABS-CBN under the IPL.
ABS-CBN vs. PHILIPPINE MULTI-MEDIA

SYSTEM, INC. ( G.R. Nos. 175769-70,
January 19, 2009)
ABS-CBN creates and transmits its own

signals; PMSI merely carries such signals
which the viewers receive in its unaltered
form. PMSI does not produce, select, or
determine the programs to be shown in
Channels 2 and 23. Likewise, it does not pass
itself off as the origin or author of such
programs. Insofar as Channels 2 and 23 are
concerned, PMSI merely retransmits the same
in accordance with Memorandum Circular 0408-88. With regard to its premium channels,
it buys the channels from content providers
and transmits on an as-is basis to its
viewers. Clearly, PMSI does not perform the
functions of a broadcasting organization;
thus, it cannot be said that it is engaged in
rebroadcasting Channels 2 and 23.
FACTS: PMSI is the operator of Dream

Broadcasting System. ABS-CBN contends that
PMSIs
unauthorized
rebroadcasting
of
Channels 2 and 23 is an infringement of its
broadcasting rights and copyright under the
Intellectual Property Code (IP Code); that the
Court of Appeals interpretation of the mustcarry rule violates Section 9 of Article IIIof the
Constitution because it allows the taking of
property for public use without payment of
just compensation.
Thus, 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. The
retransmission of ABS-CBNs signals by PMSI
which functions essentially as a cable
television does not therefore constitute
rebroadcasting in violation of the formers
intellectual property rights under the IP
Code.
Respondents, on the other hand, argue that

PMSIs rebroadcasting of Channels 2 and 23
is sanctioned by Memorandum Circular No.
2.The
must-carry
rule
under
the
Memorandum Circular 04-08-88 requires all
cable television system operators operating
in a community within Grade A or B
1995 &2004 BAR

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?
X Corporation owns the painting but the
copyright belongs to W unless there is a
written
stipulation
to
the
contrary.
(Sec.178.4)

Page 258 of 274
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contours to carry the television signals of the
authorized television broadcast stations (Ex:
broadcasting organizations with free-to-air
signals such as GMA-7, RPN-9, ABC-5, and
IBC-13)
The carriage of ABS-CBNs signals by virtue of
the must-carry rule in Memorandum Circular
No. 04-08-88 is under the direction and
control of the government though the NTC
which is vested with exclusive jurisdiction to
supervise,
regulate
and
control
telecommunications
and
broadcast
services/facilities in the Philippines. The
imposition of the must-carry rule is within the
NTCs power to promulgate rules and
regulations, as public safety and interest may
require, to encourage a larger and more
effective use of communications, radio and
television broadcasting facilities, and to
maintain effective competition among private
entities in these activities whenever the
Commission finds it reasonably feasible. As
correctly observed by the Director-General of
the IPO:
Accordingly, the Must-Carry Rule under
NTC Circular No. 4-08-88 falls under the
foregoing
category
of
limitations
on
copyright.
LAW ON TRADEMARKS
DEFINITIONS
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
In Society Des Products Nestle vs. CA
April 4, 2001, trademark is defined as 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.
Service Mark distinguishes the services of
an enterprise from the service of other
enterprises. It performs for services what a

trademark does for goods.
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.
-Under the law, 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)
-This proposition of law, however, may
not be converted for it is not true that where
there is no registration, there is no protection.
Acquisition through use
Whether or not a registered trademark
is employed, 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
Page 259 of 274
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same manner as other property rights
(Sec. 168.1)
d)
RIGHTS CONFERRED
-the owner of a registered mark shall
have the exclusive right to prevent all third
parties not having the owners consent from
using in the course of trade identical or
similar signs or containers for goods or
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)
DURATION
-the certificate of registration of a
trademark shall be ten (10) years from the
filing date of application provided the
registrant shall file a declaration of actual use
within a year from the 5th anniversary of
registration date (Sec. 145)
-renewable for another 10 yrs. (Sec.
146)
NON-REGISTRABLE
TRADEMARKS,
TRADE NAMES AND SERVICE MARK
A mark cannot be registered if it:
a)
Consists of 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)
Consists of the flag or coat of
arms or other insignia of the Philippines or
any of its political subdivisions, or of any
foreign nation, or any simulation thereof;
c)
Consists of 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,

e)
f)
during the life of his widow, if any, except

by written consent of the window;
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;
Is identical with, or confusingly
similar to, or constitutes a translation of a
mark which is considered by the
competent authority of the Philippines to
be well-known internationally and in the
Philippines, whether or not it is registered
here, as being already the mark of a
person other than the applicant for
registration, and used for identical or
similar goods or services: provided, that
in determining whether a mark is wellknown, account shall be taken of the
knowledge of the relevant sector of the
public, rather than of the public at large,
including knowledge in the Philippines
which has been obtained as a result of the
promotion of the mark;
Is identical with, or confusingly
similar to, or constitutes a translation of a
mark
considered
well-known
in
accordance with the preceding paragraph,
which is registered in the Philippines with
respect to goods or services which are not
similar to those with respect to which
registration is applied for: provided, that
use of the mark in relation to those goods
or services would indicate a connection
between those goods or services, and the
owner of the registered trademark:
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Provided further that the interests of the
owner of the registered mark are likely to
be damaged by such use;
g)
Is likely to mislead the public,
particularly as to the nature, quality,
characteristics or geographical origin of
the goods or services;
h)
Consists exclusively of signs that
are generic for the goods or services that
they seek to identify;
i)
Consists exclusively of signs or of
indications that have become customary
or usual to designate the goods or
services in everyday language or in a
bonafide and established trade practice;
j)
Consists exclusively of signs or
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods or
rendering of the services, or other
characteristics of the goods or services;
k)
Consists of shapes that may be
necessitated by technical factors or by
the nature of the goods themselves or
factors that affect their intrinsic value;
l)
Consists of color alone, unless
defined by a given form; or
m)
Is contrary to public order or
morality (Sec. 123)
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)
Indications sufficient to contact

the applicant or his representative,
if any;
d) A reproduction of the mark where
registration is sought; and
e)
The list of the goods or services
for which the registration is
sought. (Sec. 127.1)
NO filing date shall be accorded until
the required fee is paid (Sec. 127.2)
PROCEDURE FOR REGISTRATION
a) Examination to determine whether
the
application
satisfies
the
requirements for the grant of a
filing date.
b) Examination to determine whether
the
application
meets
the
requirements of Sec. 124 and the
mark is registrable under Sec. 123.
c) Denial of the application or
amendment thereof or publication
of the application;
d) Opposition to the application;
notice;
hearing;
decision
by
examiner; appeal to the Director of
Bureau of Trademarks; appeal to
the IPO Director General; appeal to
the CA;
e) Issuance
of
Certificate
of
registration
f)
Publication in the IPO Gazette of
the fact of registration
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
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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) Failure to use the mark within
the
Philippines
for
3
uninterrupted years or longer.
EFFECTS OF NON-USE
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
Registration is an administrative
act declaratory of a pre-existing
right that does not, of itself,
perfect a trademark, for what it
does is actual use
Non-use is a ground for removing a
mark from the register
DOCTRINE OF SECONDARY MEANING
-While a generic, indicative or
descriptive mark will, as a general rule, be
denied registration, there is a circumstance
that will allow it to be registered. Under the
doctrine of secondary meaning, when a mark
has become distinctive of the applicants
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.
DIFFERENTIATED
COMPETITION
FROM
UNFAIR
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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 ones 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.
who shall commit any acts calculated to

produce said result, shall be guilty of unfair
competition.
infringement is a form of unfair

competition
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 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
How Committed
a) Making ones goods appear as
the goods of another;
b) Use of artifice or device to
induce the false belief that
ones goods are those of
another;
c) False statements in the course
of trade; or
d) Any act contrary to good faith
calculated
to
discredit
anothers goods
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;
d) Injunction
Page 263 of 274
COMMERCIAL LAW
e) Destruction of goods found to be
infringing, and all paraphernalia.
TAADA vs. ANGARA (G.R. No.
118295, May 2, 1997)
The Constitution did not intend to pursue an
isolationist policy. It did not shut out foreign
investments, goods and services in the
development
of
the
Philippine
economy. 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.
Moreover, 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. Quite the
contrary, the weaker situations of developing
nations like the Philippines have been taken
into account; thus, there would be no basis to
say that in joining the WTO, the respondents
have gravely abused their discretion. True,
they have made a bold decision to steer the
ship of state into the yet uncharted sea of
economic liberalization. But such decision
cannot be set aside on the ground of grave
abuse of discretion, simply because we
disagree with it or simply because we believe
only in other economic policies. As earlier
stated, the Court in taking jurisdiction of this
case will not pass upon the advantages and
disadvantages of trade liberalization as an
economic policy. It will only perform its
constitutional duty of determining whether
the Senate committed grave abuse of
discretion.
COPYRIGHT system of legal protection an

author enjoys in the form of expression of
ideas(2004,2006,2007,2009 bar exams)
BASIC PRINCIPLES
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 are 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
Page 264 of 274
COMMERCIAL LAW
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
A. Original Work - Literary and artistic
works are original intellectual creations in
the literary and artistic domain protected
from the moment of their creation,
irrespective of their mode or form of
expression, as well as of their content,
quality and purpose, and shall 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,
h)
i)
j)
k)
l)
m)
n)
o)
lithography or other works of art;

models or designs for works of art
Original ornamental designs or
models for articles of manufacture,
whether or not registrable as an
industrial design, and other works
of applied art.
Illustrations,
maps,
plans,
sketches,
charts
and
threedimensional works relative to
geography,
topography,
architecture or science
Drawings or plastic works of a
scientific or technical character
Photographic
works
including
works produced by a process
analogous to photography; lantern
slides
Audiovisual
works
and
cinematographic or any process
for making audio-visual recordings
Pictorial
illustrations
and
advertisements
Computer programs
Other literary, scholarly, scientific
and artistic works (Sec. 172)
B. Derivative Works the following

derivative works shall also be protected:
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
The following works are not protected:
Page 265 of 274
COMMERCIAL LAW
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 other facts
having the character of 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)
-however, 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.
-this pertains to the original
decisions not to the SCRA
published in volumes since these
are protected under derivative
works.
RIGHTS OF AN AUTHOR
(Author a natural person who has created
the work.)
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,
a work embodied in a sound
recording, a computer program, a
compilation of data and other
materials or a musical work in graphic
form, irrespective of the ownership of
the original or the copy which is the
subject of the rental; (n)
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 of attribution or paternity
right
To require that the authorship
of the works be attributed to
him, in a prominent way on the
copies, and with the public use
of the work;
2) Right of alteration
publication
or
non-
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.
Page 266 of 274
COMMERCIAL LAW
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 copyright belongs to
the author of the work, his heirs or
assigns.
2. Joint creation copyright belongs to
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. Employees creation copyright
belongs to 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 work
belongs to 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 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
authors identity or
c. If the author discloses his
identity (Sec. 179).
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 (Sec. 180.2)
b. The assignment be filed with
the National Library upon
payment of the prescribed fee.
(Sec. 182)
DURATION OF COPYRIGHT
Literary
artistic
works
and
derivative works of a SINGLE
CREATOR - lifetime of the creator
and for 50 years after his death
Joint creation lifetime of last
surviving co-creator and for 50 years
after his death.
Page 267 of 274
COMMERCIAL LAW
Anonymous or a work under a

pseudonym not identifiable with
the true name of the creator 50
years after the date of their first
publication.
Except where, before the expiration of
said period, the author's identity is
revealed or is no longer in doubt, the
rule for single and joint creation shall
apply
Photographic works 50 years from
the publication of the work, or from
making the same term is given to
audiovisual
works
produced
by
photography or analogous processes.
Work of Applied Art 25 years from
the date of making
Newspaper Article lifetime of the
author and 50 years after his death
A pure news report will no longer find
protection under the new law, BUT a
column or published comment will.
The work of performers not
incorporated
in
RECORDING,
PRODUCTS OF SOUND IMAGE
RECORDINGS, and BROADCASTS
protected for periods of 50 years, 50
years, and 20 years, respectively,
counted from the end of the year of
performance,
recording,
or
broadcasts, respectively.
The term of protection shall be

counted from the first day of January
of the year following the death of the
author or of last publication (Sec. 214)
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
anothers
work
exclusively for ones own individual use in
such cases as personal research, learning
or amusement
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
MATERIAL ARE
OF
PROTECTED
Page 268 of 274
COMMERCIAL LAW
Criticizing, commenting, and news

reporting;
Using
for
instructional
purposes
including producing multiple copies of
classroom
use,
for
scholarship,
research and similar purposes (Sec.
185)
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)
3) Working of Architecture (Sec.

186)
-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
5) Importation for Personal Purposes

-the importation of a
copy of a work by an individual for his
personal purposes shall be permitted
without the authorization of the author of,
or other owner of copyright in, the work
under the following circumstances:
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)
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:

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,
Page 269 of 274
COMMERCIAL LAW
for impounding or destruction as the
court may order.
4) Payment of moral and exemplary
damages under the discretion of
court.
5) Criminal Action
DESTILERIA AYALA, INC. vs. TAN TAY &
CO. (G.R. No. L-48793
August 6, 1943)
FACTS: By reason of shortage of bottles of its
own, defendant Tan Tay & Co. in selling wine
similar to that of the plaintiff, had, prior to
this action, been using bottles registered in
the name of the plaintiff but with the word
"Ayala" generally erased or obliterated
therefrom, leaving only the word "Destileria"
legible on said bottles.
Plaintiff prays that the respondent be
inhibited from using glass receptacles duly
registered by former.
HELD: To make the use of such containers
illegal, it is not essential that they be used by
other persons with the distinctive name,
mark or design engraved thereon. If the
containers originally conformed to the
description contained in the certificate of
registration and it appears that they are the
same containers being used by the other
persons, the use is illegal regardless of
whether or not their distinctive name, mark
or design is partly or entirely erased
therefrom. If the illegality of the use may be
removed by erasing or obliterating from the
containers their distinctive name, mark or
design, the protection of the law would
become useless. In other words, it is the use
of the containers themselves - not merely the
use of the trade-mark engraved thereon that is prohibited by law.
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 attorneys of the
Judiciary. The person compiling shall
submit to the Supreme Court Library a
text-file digitized copy of the compilation;
d. The Court shall have the right to
purchase copies of the compilation at
cost, that is, by paying only the cost of
reproducing the compilation, the cost of
installation, and the cost of any
accompanying software license. Such
copies shall be used exclusively by
Justices, Judges and court attorneys of
the Judiciary and shall not be re-sold by
the Court;
e. The compilation shall bear the notice
Compiled for sale to the public with the
permission of the Supreme Court;
f.
These conditions apply to any
updating of the compilation
A.M. No. 04-7-06-SC

RE: CONDITIONS ON THE COMMERCIAL
EXPLOITATIONOF SUPREME COURT
DECISIONS
RESOLUTION
a.
The person compiling and selling
the decisions shall provide the Supreme
Court Library twenty (20) free copies of
Page 270 of 274
COMMERCIAL LAW

Page 271 of 274
COMMERCIAL LAW

Page 272 of 274
Copyright
It is that system of legal
protection an author enjoys in
he form of expression of ideas
(World Intellectual Property
Organization [WIPO].)
Patent
Definition
Refers to either the grant of rights,
or the instrument (sometimes called
letters patent) containing the grant,
giving an inventor a monopoly on
the inventors invention for a limited
period.
Mark
Any visible sign capable of
distinguishing the goods of an
enterprise (trademark) or the
services of an enterprise (service
mark), and includes a stamped or
COMMERCIAL
marked
container of goods LAW
(Sec.121.1).
Purposes
1.
2.
To stimulate artistic
creativity for the
general public good;
and
To promote the
progress of science
and useful arts.
1.
2.
3.
Not only to reward the

individual, but the
advancement of the arts and
sciences;
To add to the sum of useful
knowledge; and
To encourage dissemination
of information concerning
discoveries and inventions.
1.
2.
3.
4.
5.
To indicate origin or ownership

of articles to which they are
attached;
To guarantee that those
articles come up to a certain
kind of quality;
To advertise articles they
symbolizes;
To assure the public that they
are producing genuine article;
and
To protect the manufacturer
against substitution and sale
of an inferior and different
article.
Requirements
1.
2.
Originality and
Expression
Any technical solution of a problem

in any field of human activity which
is:
1. New or novel
2.
3.
Insensitive; and
Industrially applicable
(Sec.21)
1.
Upon application:
Must be registrable
(Sec.123.1):
a. Absolutely nonregistrable- (a-1) &
(m) of Sec.123.1
b. Qualifiedly
registrable- (j), (k), (l)
of Sec.123.1; Doctrine
of Secondary meaning
(Sec.123.2).
2. Within 3 years from
application:
Declaration and
evidence of actual use
(Sec.124.2).
Term
Single/Joint Creator lifetime
Patent - 20 years from the filing date
of the creator/last surviving co- of the application (Sec.54).
creator and 50 years after his
death
Utility Model 7 years without
Anonymous/Pseudonym - 50
renewal
years after date of first
publication
Industrial Design 5 years
Photographic Works - 50 years
renewable twice
from publication/making
Work of Applied Art - 25 years
from date of making
Newspaper Article
(Column/Published Comment)
lifetime of the author and 50
years after his death
Work of performers not
incorporated in RECORDING,
PRODUCTS OF SOUND IMAGE
RECORDINGS, and
BROADCASTS protected for
UC-BCF
OFyears,
LAW
periods
ofCOLLEGE
50 years, 50
Dean
Reynaldo
U.
Agranzamendez
and 20 years, respectively,
counted from the end of the
year of performance,
recording, or broadcasts
How Created/ Acquired
10 years from the filing date of

the application, provided the
registrant shall file a declaration
of actual use within a year from
the 5th anniversary of registration
date (Sec.145) and renewable for
another 10 years (Sec.146).
Page 273 of 274
COMMERCIAL LAW

Page 274 of 274

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COMMERCIAL LAW 2010

Negotiable Instruments Law ...............................................................................

The Inside Story On the Secrecy of Bank Deposits Law

LEGAL TENDER is that kind of money

UC-BCF COLLEGE OF LAW

- Not necessary that

OTHER FORMS OF PROMISSORY

d. Should contain words or terms of

In determining the negotiability of

The acceptance of a bill of

FORM OF NI: (Sec. 1) Key: (WUPOA)

Factors that affect the determination of

UC-BCF COLLEGE OF LAW

A drawees name may be filled in

A SUM IS CERTAIN EVEN IF IT IS TO

Payable upon a determinable future

Exception: Where the promise to

UC-BCF COLLEGE OF LAW

known to the person making it so

3. Sum to be paid on installments with

Subsequent Holder in Due Course

1. Where an instrument is wanting in

contract even in the hands of a

REASON: The law does not make any

If the instrument is wanting in material

Rules on delivery of negotiable

1. Acts within the scope of his authority;

UC-BCF COLLEGE OF LAW

Persons PRECLUDED from setting up

If the drawee has accepted the bill,

Every negotiable instrument is deemed

A corporation cannot act as an

UC-BCF COLLEGE OF LAW

Liability of the Accommodation

An instrument is negotiated when:

Special (Sec. 34)

A. SPECIAL- specifies the person to

at the indorsers own risk, other

A Qualified indorser has limited

As mentioned earlier, Negotiation is the

c. Takes the instrument for value and

A holder may strike out any indorsement

Holds the instrument free from any

UC-BCF COLLEGE OF LAW

General rule: every holder is deemed

a. Engages to pay according to tenor

A maker is primarily liable:

parties had capacity to contract; that the

The indorser does not warrant the

a. The instrument was made or

Effects of dishonor by non-payment:

from the party to whom notice is given.

NOTES ON SECTION 119

*An alteration is said to be material if it

A serial number is an item which is

Instances where a BOE may

UC-BCF COLLEGE OF LAW

A holder has the right:

General rule: Protest is required only

When is presentment for

NOTES ON SECTION 152

ACCEPTANCE FOR HONOR (Sec. 161) an

person for whose account it was drawn.