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M E M O R Y A I D

CBO OVER-ALL CHAIRPERSON: Evangeline Co


ASSISTANT CHAIRPERSON: Rose Lyn Rabanera
ACADEMICS COMMITTEE - HEADS:
Reigel Prado, Omar Gabrieles
SECRETARIAT – HEAD: Romino Arzadon
FINANCE COMMITTEE – HEAD: Kyan Sioco
LOGISTICS COMMITTEE - HEAD: Janis Ruckenbrod
COMMERCIAL LAW COMMITTEE
HEAD: Darlene Fae Arizobal

NEGOTIABLE INSTRUMENTS LAW: Kathlyn Giaewa Leuterio


MEMBER: Marian Allam

INSURANCE: Marty Cachapero


MEMBER: Anthony Cruz

TRANSPORTATION LAW: Dianne Elizabeth Feeney

CORPORATION LAW: Darlene Fae Arizobal

BANKING AND INTELLECTUAL PROPERTY LAWS: Charina Sabangan


MEMBERS: Aristotle Almario, Rowena Gonzales

SPECIAL LAWS: Marissa Corazon Nefalar

SUBJECT ADVISER:

Atty. Manuel T. Gatcho


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C E N T R A L B A R O P E R A T I O N S 2 0 0 6
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

NEGOTIABLE INSTRUMENTS LAW 2. Only what appears on the face of the


(Act No. 2031, effective June 2, 1911) instrument
3. Provisions of the NIL, Sec.1
NEGOTIABLE INSTRUMENT - a written
contract for the payment of money which NEGOTIABLE NON-
complies with the requirements of Sec. 1 of the INSTRUMENTS NEGOTIABLE
NIL, which by its form and on its face, is INSTRUMENTS
intended as a substitute for money and passes 1. Must contain all 1. Does not contain
from hand to hand as money, so as to give the requisites of sec.1 all requisites of
holder in due course (HDC) the right to hold the sec.1
instrument free from defenses available to prior 2. Transferable by 2. Transferable by
parties. negotiation and assignment only
assignment.
Functions of Negotiable Instrument: 3. HDC can have 3. A transferee
1. Substitute for money rights better than acquires no better
2. Medium of exchange his transferor right than his
3. Tool used in commercial transaction. transferor
4. Prior parties 4. Prior parties do
Requisites: (Sec.1 NIL) warrant payment not warrant payment
a. Must be in writing and signed by the (secondary but merely the
maker or drawer; liability). legality of his title.
b. Must contain an unconditional promise 5. NIL only applies
or order to pay a sum certain in money; 5. Governed by NIL by analogy
c. Must be payable on demand, or at a 6. Transferee is
fixed or determinable future time; 6. Transferee is a assignee only.
d. Must be payable to order or bearer; holder in due 7. All defenses
e. Where the instrument is addressed to a course. available against last
drawee, he must be named or otherwise 7. Defenses generally transferee.
indicated therein with reasonable not available.
certainty.
Classes of Negotiable Instruments:
Two Distinctive Features of NI: 1. PROMISSORY NOTE (PN) - unconditional
1. NEGOTIABILITY - it is that attribute or promise in writing by one person to another
property whereby a bill or note or check signed by the maker engaging to pay on
may pass from hand to hand similar to demand or at a fixed or determinable future
money, so as to give the holder in due time, a sum certain in money to order or to
course the right to hold the instrument and bearer. (Sec. 184)
to collect the sum payable for himself free
from defenses. 2. BILL OF EXCHANGE (BE) -an
unconditional order in writing addressed by
2. ACCUMULATION OF SECONDARY one person to another, signed by the person
CONTRACTS - secondary contracts are giving it, requiring the person to whom it is
picked up and carried along with Negotiable addressed to pay on demand or at a fixed or
Instruments as they are negotiated from one determinable future time a sum certain in
person to another; or in the course of money to order or to bearer. (Sec. 126)
negotiation of negotiable instruments, a
series of juridical ties between the parties 3. CHECK- a bill of exchange drawn on a bank
thereto arise either by law or by privity. The payable on demand. (Sec. 185)
indorsers become secondarily liable to the
holder. Kinds:
 Manager’s / Cashier’s Check –
Test of Negotiability: presence of drawn by a bank on itself and therefore,
requirements in Section 1 of NIL. it is a primary obligation of the bank.
- It is accepted in advance by the act of
Factors that determine Negotiability: its issuance and is not subject to
1. The whole instrument itself
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

countermand by the payor after that he must inquire if he has


indorsement. received the check pursuant to
- The bank’s manager signs manager’s that purpose.
check while cashier’s check is signed by
the bank cashier.  Stale check – one which has not been
presented for payment within a
 Memorandum Check reasonable time after its issue
– it is like an ordinary check except that
the word “memorandum,” “mem” or NEGOTIABLE NEGOTIABLE
“memo” is written upon the face of the INSTRUMENT DOCUMENT OF
check, signifying that the drawer TITLE
engages to pay the bona fide holder 1. The subject is 1. The subject is
absolutely, and not upon a condition to Money goods
pay upon presentment at maturity and if 2. Is itself the 2. The document is
due notice of the presentment and non- property with a mere evidence
payment should be given. value of title – the
things of value
 Certified Check – one being the goods
drawn by a depositor upon funds to his mentioned in the
credit in a bank which a proper officer of document
the bank certifies will be paid when duly 3. Has all the 3. Does not have
presented for payment requisites of Sec these requisites
1 of NIL
 Traveler’s check – one 4. A holder of NI 4. Intermediate
upon which the holder’s signature must may run after parties are not
appear twice, one to be affixed by him at the secondary secondarily liable
the time it is issued and the second o parties for if the document
counter-signature, to be affixed by him payment if is dishonored
in the presence of the payee before it is dishonored by
paid, otherwise it is incomplete the party
primarily liable
5. A holder, if HDC, 5. A holder can
 Crossed check – when may acquire never acquire
2 parallel lines are drawn across its face rights over the rights to the
or across a corner thereof. If the name of instrument document better
a bank appears between the parallel better than his than his
lines, the check is said to be specially predecessors predecessors
crossed, and payment should be made
only if presented by the named bank. If PROMISSORY BILL OF
no name appears between the parallel NOTE EXCHANGE
lines, the check is said to be generally 1.Unconditional 1.Unconditional
crossed, and payment should be made promise order
only upon presentment by some bank. 2. Involves 2 parties 2.Involves 3 parties
3. Maker is primarily 3.Drawer is only
Effects of crossing a check: liable secondarily liable
a. That the check may not be 4.Only one 4.Two presentments:
encashed but only be deposited presentment: for for acceptance and
in the bank; payment for payment

b. That the check may be Instances when BILL may be treated as a


negotiated only once to one who NOTE:
has an account with a bank; and 1. Drawer and drawee are the same person.
2. Drawee is a fictitious person.
c. That the act of crossing the 3. Drawee has no capacity to contract.
check serves as a warning to the 4. When instrument is so ambiguous, the
holder that the check has been holder may treat it either as a BILL or a
issued for a definite purpose so NOTE.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

1. Issue
BILLOF CHECK 2. Delivery
EXCHANGE 3. Negotiation
1.Not necessarily 1.It is necessary 4. Presentment for acceptance, in certain kinds
drawn on a that a check is of bills of exchange
deposit. The drawn on a bank 5. Acceptance
drawee need not deposit. The 6. Dishonor by non-acceptance
be a bank. drawee is always a 7. Presentment for payment
bank. 8. Dishonor by non-payment
2.Death of a drawer 2.Death of the 9. Notice of dishonor
of a BOE, with the drawer of a check, 10. Discharge
knowledge of the with the
bank, does not knowledge of the I. ISSUE
revoke the authority bank, revokes the
of the drawee to authority of the A. CONCEPTS
pay. banker to pay. Issue - the first delivery of the instrument,
3. May be presented 3. Must be complete in form, to a person who takes it as a
for payment within presented for holder (sec. 191)
a reasonable time payment within a
after its last reasonable time Delivery - transfer of possession, actual or
negotiation because after its issue. constructive, from one person to another
it may be further (sec.191)
negotiated.
4.May be payable 4. Always payable Holder – refers to the:
on demand or at a on demand a. The payee or indorsee of a bill or note
fixed or who is in possession of it, or
determinable b. The bearer thereof (sec.191)
future time
Bearer - the person in possession of a bill or
OTHER FORMS OF NEGOTIABLE note which is payable to bearer (sec. 191)
INSTRUMENTS
1. Certificate of deposit issued by banks, Person - includes a body of persons, whether
payable to the depositor or his order, or to incorporated or not (sec. 191)
bearer
2. Trade acceptance B. FORM AND INTERPRETATION
3. Bonds, which are in the nature of
promissory notes Requisites of negotiable instruments
4. Drafts, which are bills of exchange drawn by a. It must be in writing and signed by the
one bank upon another maker or drawer;
b. Must contain an unconditional promise
 All of these must comply with Sec. 1, NIL
or order to pay a sum certain in money;
Note: Letters of credit are not negotiable.
c. Must be payable on demand, or at a
fixed or determinable future time;
d. Must be payable to order or to bearer;
LEGAL TENDER
and
 That kind of money that the law compels a e. Where the instrument is addressed to a
creditor to accept in payment of his debt drawee, he must be named or otherwise
when tendered by the debtor in the right indicated therein with reasonable
amount. certainty. (sec. 1)
Note: A negotiable instrument although 1. Must be in writing, signed by the
intended to be a substitute for money, is maker or drawer;
generally not a legal tender. - Otherwise it cannot be a substitute for money.
(See notes under New Central Bank Act)
2. Must contain an unconditional
INCIDENTS IN “LIFE” OF NEGOTIABLE promise or order to pay a sum certain in
INSTRUMENT money;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. Indication in the 3. Indication in


Certainty of sum payable. instrument does not the
The sum payable is a sum certain although it is affect the instrument
to be paid: unconditional nature makes the
a. With interest; or of the promise or promise or
b. By stated installments; or order. order
c. By stated installments, with a provision conditional.
that, upon default in payment of any
installment or of interest, the whole
shall become due; or 3. Payable on demand or at a fixed
d. With exchange, whether at a fixed rate determinable future time;
or at the current rate; or
e. With costs of collection or an attorney's Certainty of time of payment
fee, in case payment shall not be made at An instrument is payable at a determinable
maturity. (sec. 2) future time which is expressed to be payable:
a. At a fixed period after date or sight; or
Acceleration clause - renders whole debt due b. On or before a fixed or determinable
and demandable upon failure of obligor to future time specified therein; or
comply with certain conditions. c. On or at a fixed period after the
occurrence of a specified event which is
When promise is unconditional certain to happen, though the time of
An unqualified order or promise to pay is happening be uncertain.
unconditional though coupled with:
a. An indication of a particular fund out of  An instrument payable upon a contingency
which reimbursement is to be made or a is not negotiable, and the happening of the
particular account to be debited with the event does not cure the defect. (sec. 4)
amount; or
b. A statement of the transaction which  A promise to pay “when able,” “as soon as I
gives rise to the instrument. can”, etc., without specification of an
absolute date is not negotiable. However,
 An order or promise to pay out of a there is a difference of opinion as to whether
particular fund is not unconditional. (sec. 3) it is a conditional promise or an absolute
promise to pay at un unreasonable time:
FUND FOR PARTICULAR
REIMBURSEMENT FUND FOR a. Under the first view,
PAYMENT negotiability is destroyed both by the
1. Drawee pays the 1. There is only condition and by want of a fixed time
payee from his own one act- the for payment;
funds; afterwards, drawee pays b. Under the second view, by
the drawee pays directly from the general principle that a promise
himself from the the particular to pay within a reasonable time is
particular fund fund not so certain as to render an
indicated. indicated. instrument negotiable.
Payment is Aftersight Draft - payable only after the
subject to the expiration of the stipulated period from
condition acceptance (legal sight).
that the fund
is sufficient. When payable on demand:
2. Particular fund 2. Particular a. When it is so expressed to be payable on
indicated is NOT the fund demand, or at sight, or on presentation;
direct source of indicated is or
payment but only the direct b. In which no time for payment is
the source of source of expressed.
reimbursement. payment. Note: Where an instrument is issued, accepted,
or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand. (sec. 7)
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. Payable to order or to bearer forth the basis of liability and authorizing


the entry of judgment thereon.
When payable to order
The instrument is drawn payable:  Kinds of confession of judgment
a. To the order of a specified person or a. cognivit actiomen – literally means “he
b. To him or his order. has confessed action”. It is a written
confession of action by the defendant
 The payee must be named or otherwise acknowledging is indebtedness to the
indicated therein with reasonable certainty. plaintiff after the action has been filed. It
(Sec. 8) is given after the action is brought to
 It may be drawn payable to the order of: save expenses.
a. A payee who is not maker, drawer, or b. relicta verificationem – literally means
drawee; or “his pleadings being abandoned.” It is
b. The drawer or maker; or confession of judgment by withdrawal of
c. The drawee; or the defense.
d. Two or more payees jointly; or
e. One or some of several payees; or Note: However, warrants of attorney to confess
f. The holder of an office for the time judgment, are not authorized nor contemplated
being. by our law. They are void as against public
policy because they enlarge the field for fraud,
When payable to bearer. because under these instruments, the
a. When it is expressed to be so payable; or promissory bargains away his right to a day in
b. When it is payable to a person named court. The NIL does not sanction nor validated
therein or bearer; or any provision otherwise illegal.
c. When it is payable to the order of a
fictitious or non-existing person, and Omissions; seal; particular money.
such fact was known to the person The validity and negotiable character of an
making it so payable; or instrument are not affected by the fact that:
d. When the name of the payee does not a. it is not dated; or
purport to be the name of any person; or b. does not specify the value given, or that
e. When the only or last indorsement is an any value had been given therefore; or
indorsement in blank. (Sec. 9) c. does not specify the place where it is
drawn or the place where it is payable;
Additional provisions not affecting or
negotiability. d. bears a seal; or
GENERAL RULE: the instrument is non- e. designates a particular kind of current
negotiable if it contains a promise or order to do money in which payment is to be made.
any act in addition to the payment of money. (sec. 6)

EXCEPTIONS:  if it is not dated, the instrument will be


considered to be dated as of the time it was
a. authorizes the sale of collateral issued (sec. 17[c])
securities in case the instrument be not
paid at maturity; or  consideration for the instrument is
b. authorizes a confession of judgment if presumed (art. 154 NCC & sec. 25 NIL)
the instrument be not paid at maturity;  sec. 73 specifies where presentment for
or payment should be made when the place of
c. waives the benefit of any law intended payment is not specified
for the advantage or protection of the
obligor; or Rules of construction:
d. gives the holder an election to require a. Where the sum payable is expressed in
something to be done in lieu of payment words and also in figures and there is a
of money. discrepancy between the two, the sum
denoted by the words is the sum
 Confession of judgment – a written payable; but if the words are ambiguous
statement signed by the defendant, setting

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

or uncertain, reference may be had to  where the holder has a lien on the
the figures to fix the amount; instrument arising either from contract or
b. Where the instrument provides for the by implication of law, he is deemed a holder
payment of interest, without specifying for value to the extent of his lien. (sec. 27)
the date from which interest is to run,
the interest runs from the date of the Effect of want of consideration: a matter
instrument, and if the instrument is of defense as against any person not a holder in
undated, from the issue thereof; due course; and partial failure of consideration
c. Where the instrument is not dated, it is a defense pro tanto, whether the failure is an
will be considered to be dated as of the ascertained and liquidated amount or
time it was issued; otherwise. (sec. 28)
d. Where there is a conflict between the
written and printed provisions of the Absence of consideration – total lack of any
instrument, the written provisions valid consideration for the contract, only a
prevail; personal defense.
e. Where the instrument is so ambiguous
that there is doubt whether it is a bill or Failure of consideration – failure or refusal or
note, the holder may treat it as either at one party to do, perform or comply with the
his election; consideration agreed upon, only a personal
f. Where a signature is so placed upon the defense.
instrument that it is not clear in what
capacity the person making the same II. NEGOTIATION
intended to sign, he is to be deemed an
indorser; TRANSFER AND NEGOTIATION
g. Where an instrument containing the
word "I promise to pay" is signed by two Types of transfers:
or more persons, they are deemed to be
jointly and severally liable thereon. (sec. 1. Assignment - transfer of title to the
17) instrument, with the assignee generally
taking only such title as his assignor has,
C. CONSIDERATION subject to all defenses available against his
assignor;
Consideration – inducement to a contract 2. By operation of law – such as by
succession, by insolvency
Presumption of consideration. - every 3. Negotiation - transfer of a negotiable
negotiable instrument is deemed prima facie to instrument from one person to another
have been issued for a valuable consideration; made in such a manner as to constitute the
and every person whose signature appears transferee the holder thereof (sec. 30)
thereon to have become a party thereto for
value. (sec. 24)
NEGOTIATION ASSIGNMENT
Value - any consideration sufficient to support 1. Refers only to 1. Refers generally
a simple contract. An antecedent or pre-existing negotiable to an ordinary
debt constitutes value; and is deemed such instruments; contract;
whether the instrument is payable on demand 2. The transferee is a 2. The transferee is
or at a future time. (sec. 25) holder; an assignee;
3. A holder in due 3. An assignee is
Holder for value – one who has given a course is subject subject to both
valuable consideration for the instrument only to real real and personal
issued or negotiated to him. defenses; defenses;
4. Generally, an
4. A holder in due assignee merely
What constitutes holder for value: course may steps into the
 where value has at any time been given for acquire a better shoes of the
the instrument, the holder is deemed a right than that of a assignor;
holder for value in respect to all parties who prior party 5. An assignor does
become such prior to that time. (sec. 26) 5. A general indorser not warrant the

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

warrants the solvency of prior contract consistent with character of


solvency of prior parties unless indorsement (sec. 35)
parties; expressly
stipulated or the c. Restrictive - when the indorsement
insolvency is either:
known to him; i. Prohibits further negotiation of
6. An indorser is not 6. An assignor is the instrument; or
liable unless there liable even ii. Constitutes the indorsee the
be presentment without notice of agent of the indorser; or
and notice of dishonor; iii. Vests the title in the indorsee in
dishonor; trust for or to the use of some
7. Negotiation is 7. Governed by Arts. other persons. But mere absence
governed y the 1624 to 1635 (on of words implying power to
NIL. assignment of negotiate does not make an
credits) of the indorsement restrictive.(sec. 36)
Civil Code.  A restrictive indorsement confers
upon the indorsee the right:
Methods of negotiation a. To receive payment of the
instrument;
Instruments Indoresment and
payable to order delivery b. To bring any action thereon
Instruments Delivery that the indorser could bring;
payable to bearer
c. To transfer his rights as such
Indorsement - legal transaction effected by indorsee, where the form of
the writing of one's own name at the: the indorsement authorizes
a. back of the instrument or him to do so.
b. upon a paper (allonge) attached thereto But all subsequent indorsees acquire
with or without additional words only the title of the first indorsee
specifying the person to whom or to under the restrictive indorsement.
whose order the instrument is to be (sec. 37)
payable whereby one not only transfers
legal title to the paper transferred but  Such indorsement destroys the
likewise enters into an implied guaranty negotiability of the instrument and
that the instrument will be duly paid bars further negotiation to a holder
(sec. 31) in due course.

General Rule: indorsement must be of the d. Qualified - constitutes the indorser a


entire instrument. mere assignor of the title to the
Exception: where instrument has been paid in instrument. (sec. 38)
part, it may be indorsed as to the residue. (sec.  made by adding to the indorser's
32) signature words like "sans recourse,”
“without recourse", "indorser not
Kinds of indorsement: holder", "at the indorser's own risk",
a. Special - specifies the person to whom or etc.
to whose order, the instrument is to be
payable (sec. 34)  The purpose of this kind of
indorsement is to transfer title
b. Blank - specifies no indorsee: without guaranteeing payment by
 Instrument is payable to bearer the primary party.
and may be negotiated by delivery
(sec. 34)  It does not mean, however, that
the qualified indorser incurs no
 May be converted to special liability at all. The effect is merely to
indorsement by writing over the limit his liability. He is secondarily
signature of indorser in blank any liable for breach of is warranties as

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

an indorser under Sec. 65. Thus, he


is liable if the instrument is h. Successive (Secs. 50, 68)
dishonored by NON-ACCEPTANCE
or NON-PAYMENT due to: i. Irregular - a person who, not otherwise a
a. forgery; party to an instrument, places thereon
b. lack of good title to his signature in blank before delivery
the instrument indorsed; (sec. 64)
c. lack of capacity to
contract on the part of prior j. Facultative
parties; or
d. the fact that the Rules on Indorsements:
instrument was valueless or
not valid at the time of the  Effect of transfer without
indorsement which fact was indorsement:
known to him.
a. transfer vests in the transferee such
e. Conditional - right of the indorsee is title as the transferor had therein
made to depend on the happening of a (assignment), and
contingent event b. the right to have the indorsement of
 Party required to pay may the transferor
disregard the conditions. (sec. 39)
 For the purpose of determining
 This kind of indorsement has no whether the transferee is a holder in
effect on the further negotiation of due course, the negotiation takes
the instrument. The party required effect as of the time when the
to pay, if he chooses, may make indorsement is actually made (sec.
payment, disregarding the condition 49)
without incurring any liability
because he is expressly authorized to  Applicable only to order instruments
do so under Sec. 39. But the person
who received payment will hold the  Indorsement of a bearer instrument:
proceeds subject to the right of the where an instrument, payable to bearer, is
conditional indorser. indorsed specially, it may nevertheless be
further negotiated by delivery; but the
person indorsing specially is liable as
f. Absolute - one by which indorser binds indorser to only such holders as make title
himself to pay: through his indorsement. (sec. 40)
i. upon no other condition than
failure of prior parties to do so;  The rule only applies to originally bearer
and instruments. If it is originally a BEARER
ii. upon due notice to him of such instrument, it will always be a BEARER
failure. instrument.

g. Joint - indorsement of instrument  As opposed to an original order


payable to 2 or more persons (sec. 41); instrument becoming payable to bearer,
all must indorse in order for the if the same is indorsed specifically, it can
transaction to operate as a negotiation. NO LONGER be negotiated further by
 Exceptions to the rule mere delivery, it has to be indorsed.
requiring joint indorsement:
a. Where the payees or  Striking out indorsements: the holder
indorsees are partners; and may at any time strike out any indorsement,
which is not necessary to his title. The
b. Where the payee or indorser whose indorsement is struck out
indorsee indorsing has and all indorsers subsequent to him, are
authority to indorse for the thereby relieved from liability on the
others. instrument. (sec. 48)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

has been previously dishonored, if such


 If the instrument is payable to bearer was the fact;
on its face, then whether or not there are c. That he took it in good faith and for
indorsements on the back of the value;
instrument would be immaterial to the d. That at the time it was negotiated to
title of the bearer, who is presumptively him, he had no notice of any infirmity in
the owner and holder by his mere the instrument or defect in the title of
possession of such instrument. None of the person negotiating it. (Sec. 52)
the indorsement would be necessary to
it’s title since mere delivery would have When title defective - The title of a person
been sufficient to transfer title from one who negotiates an instrument is defective when
holder to another. he obtained the instrument or any signature
thereto, by:
 Where the instrument is payable to a. fraud,
order on its face, the situation is b. duress, or force and fear,
different. First, the indorsement of a c. other unlawful means,
special indorsee is necessary for the d. illegal consideration,
further negotiation of the instrument. e. negotiation in breach of faith,
Second, the last indorsement controls f. circumstances amounting to fraud.(sec.
the method of further negotiation. 55)

 When prior party (reacquirer) may What constitutes notice of defect. - The
negotiate: where an instrument is person to whom it is negotiated must have:
negotiated back to a prior party, such party a. actual knowledge of the infirmity
may reissue and further negotiate the same. or defect, or
But he is not entitled to enforce payment b. knowledge of such facts that his
thereof against any intervening party to action in taking the instrument
whom he was personally liable. (sec. 50) amounted to bad faith. (sec. 56)
Notice before full amount is paid - where
 In the following cases, a prior party the transferee receives notice of any infirmity in
cannot further negotiate the instrument: the instrument or defect in the title of the
person negotiating the same before he has paid
1. Where it is payable to the order of the full amount agreed to be paid, he will be
a third person, and has been paid deemed a holder in due course only to the
by the drawer; extent of the amount paid by him (sec. 54)
2. Where it was made or accepted for
accommodation and has been paid When person not deemed a holder in due
by the party accommodated; course - where an instrument payable on
3. In other cases, where the demand is negotiated on an unreasonable
instrument is discharged when length of time after its issue, the holder is not
acquired by a prior party. deemed a holder in due course (sec. 53)

HOLDERS:  Reasonable time,


Classes of holders: what constitutes. - regard is to be had to
1. simple holder (sec. 51) the
2. holder for value (sec. 26) a. nature of the instrument,
3. holder in due course (sec.52, 57) b. the usage of trade or
business with respect to such
Holder in Due Course instruments, and the
 holder who has taken the instrument under c. facts of the particular
the following conditions: case. (sec. 193)

a. That it is complete and regular upon its  Effect: in the hands of any holder other
face; than a holder in due course, a negotiable
b. That he became the holder of it before it instrument is subject to the same
was overdue, and without notice that it defenses as if it were non-negotiable
(sec. 58)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. He is entitled to the
General Rule: every holder is deemed prima instrument but holds it subject to the
facie to be a holder in due course same defenses as if it were non-
negotiable; and
Exception: when it is shown that the title of 4. He has all the rights of
any person who has negotiated the instrument the holder in due course from whom
was defective, the burden is on the holder to he derived his title in respect of all
prove that he or some person under whom he parties prior to such holder,
claims acquired the title as holder in due course provided he is not himself a party to
(shifting of burden of proof). any fraud or illegality affecting the
instrument.
Limitation: the last-mentioned rule does not
apply in favor of a party who became bound on LIABILITY OF PARTIES
the instrument prior to the acquisition of such
defective title. (sec. 59) Persons primarily liable on instrument:
the person who, by the terms of the instrument,
 Rights of a holder in due course: is absolutely required to pay the same. All other
parties are "secondarily" liable(sec.192)
a. he may sue on the instrument in his own
name; Classification of parties according to
b. he may receive payment and if payment liability
is in due course, the instrument is
discharged (sec. 51) Persons liable: Maker
c. holds the instrument free from any In a Promissory Indorser
defect of title of prior parties, Note 3. Persons
d. holds the instrument free from defenses negotiating by
available to prior parties among delivery
themselves, and In a Bill of Drawer
e. may enforce payment of the instrument Exchange: Acceptor
for the full amount thereof against all Indorsers
parties liable thereon (sec. 57) 4. Persons
negotiating by
 Payment in due course is payment delivery
made:
at or after the maturity of the
instrument
to the holder thereof 1. PARTIES PRIMARILY LIABLE
in good faith and without notice that his a. MAKER (sec. 60)
title is defective.  engages to pay according to the
tenor of the instrument; and
 Shelter Rule:  admits the existence of the payee
a. derives his title through a holder in due and his then capacity to indorse at
course, and the time of the making of the note.
b. who is not himself a party to any fraud  A person placing his name on the
or illegality affecting the instrument, has face of a note is prima facie a maker
all the rights of such former holder in and liable as such; and he is
respect of all parties prior to the latter presumed to have acted with care
(sec. 58) and to have signed the instrument
with full knowledge of its contents.
RIGHTS OF HOLDER NOT IN DUE
COURSE: b. ACCEPTOR OR DRAWEE (sec. 62)
 engages to pay according to the
1. He may sue on the tenor of his acceptance;
instrument in his own name;  admits:
2. He may receive payment 1. the existence of the drawer,
and if the payment is in due course,
the instrument is discharged;
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. the genuineness of his  warrants ---


signature and 1. genuineness of the
3. his capacity and authority to instrument;
draw the instrument; and 2. his good title to it;
4. the existence of the payee 3. capacity to contract of prior
and his then capacity to parties; and
indorse. 4. instrument is valid and
subsisting.
Note: the drawee is not liable until he
accepts the instrument  engages that the instrument will be
accepted or paid by the party
 Where a check is certified by a primarily liable; and
bank, it is equivalent to an  engages that if the instrument is
acceptance. (Sec. 187) Since dishonored and proper proceedings
certification is equivalent to are taken, he will pay to the party
acceptance, a bank which has entitled to be paid.
certified a check whether at the
request of the holder or of a drawer, c. IRREGULAR INDORSER – a person,
has the same liabilities and makes not otherwise a party to an instrument,
the same warranties as an acceptor. places his signature thereon in blank
It cannot, after certification, before delivery. (sec. 64)
question the genuineness of the Rules:
drawer’s signature. If it discovers  If instrument payable to the order of
that such signature is forged a 3rd person, he is liable to the payee
subsequent to certification but prior and subsequent parties.
to payment, it cannot refuse to pay
 If instrument payable to order of
on the check. If its discovery comes
maker or drawer, he is liable to all
after it has paid the check, it cannot
parties subsequent to the maker or
recover back what it paid on the
drawer.
ground of mistaken payment unless
the holder is guilty of fraud or  If he signs for accommodation of the
negligence. payee, he is liable to all parties
subsequent to the payee.
 If a drawee-bank accepts or pays
PRIMARY PARTY SECONDARY
a check despite a stop payment order
PARTY
from the drawer, through oversight
1. Unconditionally 1. Conditionally
or otherwise, it cannot refuse to pay
Bound; bound;
the holder or recover what has been
2.Absolutely 2. Undertakes to pay
paid; neither may it debit the
required to pay upon only after certain
drawer’s account unless the
the maturity of the conditions have been
acceptance nor payment was made
instrument. fulfilled:
prior to the receipt of the order.
a. due
presentment for
2. PARTIES SECONDARILY LIABLE
payment or
a. DRAWER (sec. 61)
acceptance to
 admits the existence of the payee
primary party;
and his capacity to indorse;
b. dishonor by
 engages that the instrument will be such party; and
accepted or paid by the party c. the taking of
primarily liable; and proceedings
 engages that if the instrument is required by law
dishonored and proper proceedings after dishonor.
are brought, he will pay to the party
entitled to be paid.
INDORSER DRAWER
1. A party to either a 1. A party only to a
b. GENERAL INDORSER (sec. 66)
note or a bill; bill;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. Does not make 2. The drawer makes 3. Action can be 3. Action may be
any admission such admission; brought only brought anytime.
regarding the 3. Makes no on maturity
existence of the warranties, but he of
payee and his engages to pay after instrument.
capacity to indorse; certain conditions
and are complied with.
3. Has warranties. Negotiating by
Mere delivery or by General
Qualified Indorser
GENERAL IRREGULAR Indorsement
INDORSER INDORSER 1. No secondary 1. With secondary
1. Makes either a 1. Always makes a liability; liability;
blank or special blank indorsement;
indorsement; 2. Indorses before its 2. Warrants that he 2. Warrants that
2. Indorses the delivery; has no knowledge the instrument
instrument after its 3. Liable to the payee of any fact, which is, at the time
delivery to the and subsequent would impair the of his
payee; and parties unless he validity of the indorsement,
3. Liable only to signs for the instrument or valid and
parties subsequent accommodation of render it valueless. subsisting.
to him the payee in which 4. OTHER PARTIES:
case he is liable only
to all parties General Rule:
subsequent to the One whose signature does not appear on the
payee. instrument shall not be liable thereon (sec. 18)

3. PARTIES WITH LIMITED LIABILITY (sec. Exceptions:


65; Metropol Financing v. Sambok, 120 1. The principal who signs through an agent is
SCRA 864) liable;
2. The forger is liable;
a. QUALIFIED INDORSER - 3. One who indorses in a separate instrument
warrants that: (allonge) is liable;
 instrument is genuine and in all 4. One who signs his assumed or trade name is
respects what it purports to be; liable; and
 he has good title to it; 5. A person negotiating by delivery (as in the
 all prior parties had capacity to case of a bearer instrument) is liable to his
contract; immediate indorsee.
 he has no knowledge of any fact
which would impair the validity of Requisites for an Agent to escape
the instrument or render it valueless. liability: (sec. 20)
1. must be duly authorized;
b. PERSONS NEGOTIATING 2. add words to his signature indicating
BY DELIVERY that he signs as an agent, that is, for or on
behalf of a principal, or in a representative
 warranties same as those of qualified
capacity; and
indorsers; and
3. disclose his principal.
 warranties extend to immediate
 A signature by “procuration” operates as
transferee only.
notice that the agent has but a limited
authority to sign, and the principal is bound
Liability Warranty
only in case the agent in so signing acted
1. To pay a sum 1. No obligation to
within the actual limits of his authority.
certain. pay.
(sec. 21)
2. Requires 2. Notice of
Notice of Dishonor is not a
Dishonor. requirement.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Indorsement or assignment of the NI by a DEFENSES


corporation or by an infant passes the Kinds:
property therein, notwithstanding that from 1. REAL/ABSOLUTE DEFENSES - those that
want of capacity, the corporation or infant attach to the instrument itself and are
may incur no liability thereon. (sec. 22) available against all holders, whether in due
course or not.
Accomodation Party - one who has signed Examples:
the instrument as maker, drawer, acceptor, or 1. Alteration;
indorser, without receiving value therefor, and 2. Non-delivery of incomplete
for the purpose of lending his name to some instrument;
other person 3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse
 Liability: such a person is liable on the contractus;
instrument to a holder for value, 5. Minority;
notwithstanding such holder, at the time 6. Marriage in the case of a wife;
of taking the instrument, knew him to be 7. Insanity where the insane person
only an accommodation party (sec. 29) has a guardian appointed by the court;
8. Ultra vires acts of a corporation,
 Effects: where the corporation is absolutely
1. accommodation party is prohibited by its charter or statute from
generally regarded as a surety for issuing any commercial paper under any
the party accommodated; circumstances;
2. When accommodation party 9. Want of authority of agent;
makes payment to holder of the 10. Execution of instrument between
note, he has the right to sue the public enemies;
accommodated party for 11. Illegality of contract where it is
reimbursement. the contract or instrument itself which is
expressly made illegal by statute; and
 Rights of accommodation parties as 12. Forgery.
against each other: the other may
demand contribution from his co- 2. PERSONAL/EQUITABLE DEFENSES –
accommodation party without first those which are available only against a
directing his action against the principal person not a holder in due course or a
debtor provided: subsequent holder who stands in privity
with him.
1. he made the payment by Examples:
virtue of judicial demand; or 1. Absence or failure of
2. the principal debtor is consideration, partial or total;
insolvent. 2. Want of delivery of complete
Note: A corporation cannot act as an instrument;
accommodation party. The issuance or 3. Insertion of wrong date in an
indorsement of negotiable instrument by a instrument, where it is payable at a fixed
corporation without consideration and for the period after date and it is issued undated
accommodation of another is ultra vires. or where it is payable at a fixed period
(Crisologo v. CA, 117 SCRA 594). after sight and the acceptance is
undated;
Order of liability of indorsers: 4. Filling up of blank contrary to
1. among themselves – indorsers are liable authority given or not within reasonable
prima facie in the order in which they time, where the instrument is delivered;
indorse; but evidence is admissible to show 5. Fraud in inducement;
that, as between or among themselves, they 6. Acquisition of instrument by
have agreed otherwise (sec. 68) force, duress, or fear;
7. Acquisition of the instrument by
2. to the holder – indorsers are liable in any unlawful means;
order 8. Acquisition of the instrument for
an illegal consideration;
9. Negotiation in breach of faith;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

10. Negotiation under circumstances read, signed a note


that amount to fraud; but failed to read it.
11. Mistake;
12. Intoxication (according to better Effects of Defenses:
authority); 1. Complete and undelivered
13. Ultra vires acts of corporations instrument (sec. 16)
where the corporation has the power to  as between immediate parties and as
issue negotiable paper but the issuance regards a remote party other than a
was not authorized for the particular holder in due course, the delivery must
purpose for which it was issued; be authorized in order to be effectual
14. Want of authority of agent where
he has  where the instrument is in the hands of
15. apparent authority; a holder in due course, a valid delivery
16. Insanity where there is no notice thereof by all parties prior to him so as
of insanity on the part of the one to make them liable to him is
contracting with the insane person; and conclusively presumed
17. Illegality of contract where the
form or consideration is illegal.  where the instrument is no longer in the
possession of a party whose signature
FRAUD IN FRAUD IN appears thereon, a valid and intentional
FACTUM INDUCEMENT delivery by him is presumed until the
1. It exists in those 1. It is that which contrary is proved
cases in which a related to the
person, without quality, quantity, 2. Incomplete but delivered instrument
negligence, has value or character of (sec. 14)
signed an the consideration of  where the instrument is wanting in any
instrument which the instrument. In material particular, the person in
was in fact a this case, the signer possession thereof has a prima facie
negotiable is led by deception to authority to complete it by filling up the
instrument, but was execute what he blanks therein
deceived as to the knows is a
character of the negotiable
 it must be filled up strictly in accordance
instrument and instrument. It
with the authority given and within a
without knowledge implies that the
reasonable time
of its, as where a not signer knew what he
was signed by one was signing but that
under the belief that he was induced by  if any such instrument, after completion,
he was signing as a fraud to sign. is negotiated to a holder in due course, it
witness to a deed. is valid and effectual for all purposes in
his hands, and he may enforce it as if it
2. This kind of fraud 2. Such type of fraud
had been filled up strictly in accordance
is a real defense is only a personal
with the authority given and within a
because there is no defense because it
reasonable time.
contract. It implies does not prevent a
that the person did contract.
3. Incomplete and undelivered
not know what he
instrument (sec. 15)
was signing. But
where the signer by  it will not, if completed and negotiated
the exercise of without authority, be a valid contract in
reasonable diligence the hands of any holder, as against any
could have person whose signature was placed
discovered the thereon before delivery.
nature of the
instrument, the  Subsequent indorsers are liable however
fraud cannot be
considered a real 4. Forgery (sec.2)
defense, as where a
person, who can
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 counterfeit making or fraudulent cannot charge the account of the drawer


alteration of any writing, which may BUT he can recover from the one to
consist of: whom he paid since he makes no
1. signing of another’s name with warranty as to genuineness of any
intent to defraud; or indorsement.

2. alteration of an instrument in the BUT IF BEARER instrument, the


name, amount, name of payee, etc. drawee may debit the drawer’s account
with intent to defraud. since the indorsement may be
disregarded.
 Effect: signature is wholly
inoperative, and no right to retain the HOWEVER: if the DRAWEE’S
instrument, or to give a discharge negligence is the proximate cause of the
therefore, or to enforce payment thereof payment under a forged instrument, the
against any party thereto, can be drawee is liable to the collecting bank.
acquired through or under such
signature BUT: Where both the drawee and the
collecting banks are guilty of negligence,
 Exception: unless the party against the degree of negligence of each shall be
whom it is sought to enforce such right weighed in considering the amount of
is precluded from setting up the forgery loss which each should bear.
or want of authority.
 Where a check has several indorsements
 Persons precluded from setting up on it and one of the indorser’s
defense of forgery: signatures is forged, it was held that
it is only the negotiation based on the
1. Those who warrant or admit the forged or unauthorized signature, which
genuineness of the signature in is inoperative. Thus, where the drawee
question. This includes indorsers, bank paid it to the encasher, the drawee
persons negotiating by delivery and bank can recover since the indorser [Sec.
acceptors. 65-66] is supposed to warrant to the
2. Those who, by their acts, silence, drawee that the signature of the payee
or negligence, are estopped from and previous indorsers are genuine. One
setting up the defense of forgery. who purchases a check is bound to
satisfy himself that the paper is genuine
and that by indorsing it or presenting it
RULES IN CASES OF FORGED for payment, he impliedly assets that he
SIGNATURE: has performed his duty.
 Where the drawer’s signature is  Prior parties are not liable to forgery of
forged and the drawee pays it without signature.
having detected the forgery, he cannot
charge the amount thereof to the
drawer’s account. MOREOVER: The NOTE: CUT-OFF RULE – only if forged
drawee who has paid a forged bill. signature is necessary to vest title to
whether previously accepted or not, is subsequent parties will prior parties be
prevented from recovering from the excused from liability.
recipient the amount he paid because he
is bound to know the drawer’s signature. 5. Alteration (sec. 124)
EXCEPT, if the person to whom it was  Effect: the instrument is avoided
paid was guilty of fraud, negligence, or
who has not given value therefore.  Exceptions:
1. against a party who has himself
RECOURSE: Recover from the forger. made, authorized, or assented to the
alteration
 Where the payee’s indorsement is 2. subsequent indorsers
forged and the drawee bank pays it, he

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. holder in due course not a party to


the alteration - he may enforce III. PRESENTMENT FOR ACCEPTANCE
payment according to its original
tenor Presentment for acceptance – the production or
exhibition of a bill of exchange to the drawee for
 Changes constituting his acceptance or payment
material alteration:
a. date; General Rule: presentment for acceptance is
b. sum payable, either for not necessary to render any party to the bill
principal or interest; liable.
c. time or place of payment; Exception: presentment for acceptance must
d. number or relations of be made:
the parties; a. Where the bill is payable after sight, or
e. medium or currency in where presentment for acceptance is
which payment is to be made; necessary in order to fix the maturity of
f. that which adds a place of the instrument; or
payment where no place of
payment is specified; and b. Where the bill expressly stipulates that it
g. any other change or shall be presented for acceptance; or
addition which alters the effect of
the instrument in any respect. c. Where the bill is drawn payable
(sec. 125) elsewhere, then at the residence or place
of business of the drawee. (sec. 143)
 Spoliation – alteration made by a
stranger. Note: in all the above cases, the holder must
either present the bill for acceptance or
 The general rule denies the drawee negotiate it within a reasonable time; otherwise,
bank’s right to charge against the the drawer and all indorsers are discharged.
drawer’s account the amount of an (sec. 144)
altered check. However, the latter’s
negligence, before or after the How made:
alteration, may estop him from 1. made by or on behalf of the holder
setting such alteration as against an 2. at a reasonable hour
innocent drawee bank who has paid 3. on a business day
the check. 4. before the bill is overdue and within
reasonable time
 In cases of altered checks and checks 5. to the drawee or some person authorized
with forged indorsements, the to accept or refuse acceptance on his
drawee bank must notify and return behalf
them to the collecting bank before
4:00 p.m. of the next day of clearing, Days presentment may be made. If date of
but the drawee bank may still return presentment is:
them even after such time provided a. Sunday or a holiday – must be made on
he does so within 24 hours from its the next succeeding business day
discovery of the alteration or forged b. Saturday – before 12:00 noon on
instruments so that recovery of the Saturday provided that it is not a holiday
amount may be had. BUT, in no (sec. 146)
event beyond the period fixed or
provided by law for filing of a legal When delay for presentment excused:
action by the returning bank against a. bill is drawn payable elsewhere than at
the bank sending the same. the place of business or the residence of
the drawee
NOTE: Alteration is only a partial real
defense because a holder in due course b. holder has no time, with the exercise of
can still enforce it according to its reasonable diligence, to present the bill
original tenor. for acceptance before presenting it for
payment on the day that it falls due

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

acceptance is given, it dates as of the day of


Effect: does not discharge the drawers and presentation (sec. 136)
indorsers (sec. 147)
Constructive acceptance: where a drawee
Where presentment is excused: refuses within 24 hours after delivery or within
a. Where the drawee is dead, or has such other period as the holder may allow, to
absconded, or is a fictitious person or a return the bill accepted or non-accepted to the
person not having capacity to contract holder, he will be deemed to have accepted the
by bill. same (sec. 137)
b. Where presentment can not be made Note: same effect if the drawee destroys the
after the exercise of reasonable diligence instrument
Kinds:
c. Where, although presentment has been 1. General - assents without qualification to
irregular, acceptance has been refused the order of the drawer.
on some other ground.
2. Qualified - which in express terms varies the
Note: bill may be treated as dishonored by effect of the bill as drawn.
non-acceptance (sec. 148) a. Conditional - makes payment by the
acceptor dependent on the fulfillment of
Duty of holder where bill not accepted. - a condition therein stated.
where a bill is duly presented for acceptance b. Partial - an acceptance to pay part only
and is not accepted within the prescribed time of the amount for which the bill is
(24 hours – sec. 136), the person presenting it drawn.
must treat the bill as dishonored by non- i. Local - an acceptance to pay only
acceptance or he loses the right of recourse at a particular place.
against the drawer and indorsers (sec. 150) ii. Qualified as to time
iii. The acceptance of some one or
IV. ACCEPTANCE more of the drawees but not of
all. (sec. 141)
Acceptance:
 the signification by the drawee of his assent 3. Constructive (sec. 137)
to the order of the drawer. It is the act by
which the drawee manifests his consent to Rights of parties as to qualified
comply with the request contained in the bill acceptance.
of exchange directed to him.  Holder: he may refuse to take a qualified
acceptance and if he does not obtain an
How made : unqualified acceptance, he may treat the bill
1) must be in writing as dishonored by non-acceptance.
2) signed by the drawee
3) must not express that the drawee will  Drawer or indorser: when he receives
perform his promise by any other means notice of a qualified acceptance, he must,
than the payment of money. (sec. 132) within a reasonable time, express his dissent
 the holder of the bill presenting the same for to the holder or he will be deemed to have
acceptance may require that the acceptance assented thereto (implied assent).
be written on the bill, and if such request is
refused, may treat the bill as dishonored. Effect of taking a qualified acceptance:
(sec. 133) the drawer and indorsers are discharged from
 where an acceptance is written on a paper liability on the bill unless they have expressly or
other than the bill itself, it does not bind the impliedly authorized the holder to take a
acceptor except in favor of a person to qualified acceptance, or subsequently assent
whom it is shown and who, on the faith thereto. (sec.142)
thereof, receives the bill for value (sec. 134)
Other rules of acceptance:
Period for drawee to accept - allowed 24  a bill may be accepted before it has been
hours after presentment in which to decide signed by the drawer, or while otherwise
whether or not he will accept the bill; if incomplete, or when it is overdue, or after it

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

has been dishonored by a previous refusal to When instrument is dishonored by non-


accept, or by non payment acceptance:
a. When it is duly presented for
 when a bill payable after sight is acceptance and such an acceptance is
dishonored by non-acceptance and the refused or can not be obtained; or
drawee subsequently accepts it, the holder, b. When presentment for
in the absence of any different agreement, is acceptance is excused and the bill is not
entitled to have the bill accepted as of the accepted (sec. 149)
date of the first presentment. (sec. 138)  where a bill is duly presented for acceptance
and is not accepted within the prescribed
 an unconditional promise in writing to time (24 hours – sec. 136), the person
accept a bill before it is drawn is deemed an presenting it must treat the bill as
actual acceptance in favor of every person dishonored by non-acceptance (sec. 150)
who, upon the faith thereof, receives the bill  subsection (a) refers to secs. 132, 133 and
for value.(sec. 135) 142
 subsection (b) refers to sec. 148
 where a check is certified by the bank on
which it is drawn, the certification is Rights of holder where bill not accepted.
equivalent to an acceptance. (sec. 187) - when a bill is dishonored by non-acceptance,
Effect: the drawer and all indorsers are an immediate right of recourse against the
discharged from liability thereon (sec. 188) drawer and indorsers accrues to the holder and
no presentment for payment is necessary (sec.
Acceptance for Honor - an undertaking by a 151)
stranger to a bill after protest for the benefit of
any party liable thereon or for the honor of the VI. PRESENTMENT FOR PAYMENT
person for whose account the bill is drawn
which acceptance inures also to the benefit of all Presentment for payment – the presentation of
parties subsequent to the person for whose an instrument to the person primarily liable for
honor it is accepted, and conditioned to pay the the purpose of demanding and receiving
bill when it becomes due if the original drawee payment.
does not pay it. (Secs. 161-170)
General Rules:
 presentment for payment to charge
 Requisites: persons primarily liable is not necessary
1. the bill must have been protested  presentment for payment to charge
for dishonor by non-acceptance or persons secondarily liable is necessary
for better security;
2. the acceptor for honor must be a Exceptions:
stranger and not a party already a. drawer - where he has no right to
liable on the instrument; expect or require that the drawee or
3. bill must not be overdue; acceptor will pay the instrument (sec. 79)
4. acceptance for honor must be b. indorser - where the instrument was
with the consent of the holder of the made or accepted for his accommodation
instrument. and he has no reason to expect that the
instrument will be paid if presented (sec.
 Formalities: 80)
1. must be in writing;
2. must indicate that it is an c. when dispensed:
acceptance for honor; i. where, after the exercise of
3. signed by the acceptor for honor; reasonable diligence,
4. must contain an express or presentment as required cannot
implied promise to pay money; be made;
5. the accepted bill for honor must ii. where the drawee is a fictitious
be delivered to the holder. person;
iii. by waiver of presentment,
V. DISHONOR BY NON-ACCEPTANCE express or implied. (sec. 82)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

d. when the instrument has been  a check must be presented for payment
dishonored by non-acceptance (sec. 151) within a reasonable time after its issue or
the drawer will be discharged from liability
Sufficiency of presentment. thereon to the extent of the loss caused by
It must be: the delay (Sec. 186)
1. made by the holder or any
person authorized to receive Time of maturity:
payment on his behalf;  every negotiable instrument is payable
2. at a reasonable hour on a at the time fixed therein without grace
business day;
3. at a proper place;  when the day of maturity falls upon a
4. to the person primarily liable or Sunday or a holiday, the instruments are to
if he is absent or inaccessible, to any be presented for payment on the next
person found at the place where the succeeding business day
presentment is made. (sec. 72)
 when the day of maturity falls upon a
How made: Saturday:
1. personal demand for payment at the
 Instrument is payable at a fixed or
proper place; and
determinable future time (time
instrument) - presented for payment
2. readiness to exhibit the instrument if
is on the next succeeding business
required, and to receive payment and to
day
surrender the instrument if the debtor is
willing to pay.
 instruments is payable on demand -
at the option of the holder, be
 Purpose of exhibition:
presented for payment:
To enable the debtor to:
a. before 12:00 noon on
1. determine the genuineness of the
Saturday when that entire
instrument and the right of the holder to
day is not a holiday or
receive payment; and
b. the next succeeding
2. to enable him to reclaim
business day (sec. 85)
possession upon payment.
How computed:
 When exhibition excused:
 excluding the day from which the time is
1. when debtor does not demand to
to begin to run, and by including the
see the instrument but refuses payment
date of payment
on some other grounds, and
2. when the instrument is lost or  applies to instruments which are
destroyed. payable at a fixed period after date, after
sight, or after that happening of a
When made: specified event (sec. 86)
Where made (proper place):
 where the instrument is payable at a
a. Where a place of payment is
fixed or determinable future time,
specified in the instrument and it is
presentment must be made on the day it
there presented;
falls due
b. Where no place of payment is
specified but the address of the person
 where it is payable on demand: to make payment is given in the
a. promissory note: presentment instrument and it is there presented;
must be made within a reasonable c. Where no place of payment is
time after its issue specified and no address is given and the
b. bill of exchange: presentment for instrument is presented at the usual
payment will be sufficient if made place of business or residence of the
within a reasonable time after the person to make payment;
last negotiation thereof (sec.71) d. In any other case if presented to
the person to make payment wherever
he can be found, or if presented at his

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

last known place of business or 1. Given by holder or his agent, or


residence. (sec. 73) by any party who may be compelled by
the holder to pay (sec. 90);
When delay in presentment excused – 2. Given to secondary party or his
delay is caused by circumstances beyond the agent (sec. 97);
control of the holder and not imputable to his 3. Given within the periods
default, misconduct, or negligence. When the provided by law (sec. 102); and
cause of delay ceases to operate, presentment 4. Given at the proper place (Secs.
must be made with reasonable diligence. (sec. 103 and 104)
81)
When notice of dishonor dispensed with:
VII. WHEN INSTRUMENT 1. when party to be notified knows
CONSIDERED TO BE DISHONORED: about the dishonor, actually or
constructively (Secs. 114-117);
1. If it is not accepted when presented 2. if waived (sec. 109); and
for acceptance; or 3. when after due diligence, it
2. If it is not paid when presented for cannot be given (sec. 112).
payment at maturity; or
3. If presentment is excused or waived How given:
and the instrument is past due and 1. by bringing verbally or
unpaid. 2. by writing to the knowledge of
the person liable the fact that a specified
VIII. DISHONOR BY NON-PAYMENT instrument, upon proper proceedings
taken, has not been accepted or has not
When instrument dishonored by non-payment: been paid, and that the party notified is
a. it is duly presented for payment expected to pay it.
and payment is refused or cannot be
obtained; or To whom given:
b. presentment is excused and the 1. Non-acceptance (bill) – to
instrument is overdue and unpaid. (sec. persons secondarily liable, namely, the
83.) drawer and indorsers as the case may
be.
Effect of dishonor: an immediate right of 2. Non-payment (both bill and
recourse to all parties secondarily liable thereon note) – indorsers.
accrues to the holder (sec. 84)
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
IX. NOTICE OF DISHONOR AND are discharged. Notice may be given to the
PROTEST party himself or to his agent.

A. Notice of Dishonor By whom given:


1. the holder
Notice of Dishonor - notice given by the holder 2. another on behalf of the holder
or his agent to a party or parties secondarily 3. any party to the instrument who
liable that the instrument was dishonored by may be compelled to pay it to the holder,
non-acceptance by the drawee of a bill, or by and who would have a right of
non-payment by the acceptor of a bill or by non- reimbursement from the party to whom
payment by a maker of a note. (Sec. 89) notice is given. (sec. 90)

 If such notice is given by a notary  Notice of dishonor given by or on behalf of a


public, it is called PROTEST. holder inures to the benefit of:
a. all parties prior to the holder,
Effect of failure to give notice: parties who have a right of recourse against
secondarily liable are discharged the party to whom the notice is
given; and
Requisites: b. all holders subsequent to the
holder giving notice. (sec. 92)
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. the drawer has no right to expect


 Notice of dishonor given by or on behalf of a or require that the drawee or
party entitled to give notice inures to the acceptor will honor the instrument;
benefit of: 5. where the drawer has
a. the holder; and countermanded payment. (sec. 114)
b. all parties subsequent to the
party to whom notice is given. (sec.  Notice of dishonor is not required to be
93) given to an indorser in the ff. cases:
1. drawee is a fictitious person or
 Where an instrument is dishonored in the does not have the capacity to
hands of an agent, he can do either of the ff.: contract, and indorser was aware of
a. directly give notice to persons that fact at the time he indorsed the
secondarily liable thereon; or instrument;
b. give notice to his principal. In 2. indorser is the person to whom
such case, he must give notice within the instrument is presented for
the time allowed by law as if he were payment;
a holder. (sec. 94) 3. instrument was made or
accepted for his accommodation.
 A party giving notice is deemed to have (sec. 115)
given due notice where:
a. the notice of dishonor is duly  If an instrument is not accepted by the
addressed, and drawee, there is no sense presenting it again
b. deposited in the post-office, even for payment, and notice of dishonor must at
when there is miscarriage of mail. once be given. If there was acceptance,
(sec. 105) presentment for payment is still required
and if payment is refused, there is a need for
 Where a party receives notice of dishonor, notice of dishonor. (sec. 116)
he has, after the receipt of such notice, the
same time for giving notice to antecedent  An omission to give notice of dishonor by
parties that the holder has after the non-acceptance does not prejudice the
dishonor. (sec. 107) rights of a holder in due course subsequent
to the omission. (sec. 117)
 Notice may be waived either before the time
of giving notice, or after the omission to give B. Protest
due notice. Waiver may be expressed or
implied. (sec. 109) Protest - the formal instrument executed
usually by a notary public certifying that the
 As to who are affected by an express waiver legal steps necessary to fix the liability of the
depends on where the waiver is written: drawee and the indorsers have been taken.
a. if it appears in the body or on the
face of the instrument, it binds all Effect of waiver: where protest is waived,
parties; but presentment and notice of dishonor are also
b. if it is written above the deemed waived. But where the notice of
signature of an indorser, it binds dishonor is waived, presentment is not waived.
him only. (sec. 110)
Applicability: protest is necessary only in case
 Notice of dishonor is not required to be of foreign bills of exchange which have been
given to the drawer in any of the ff. cases: dishonored by non-acceptance or non-payment,
1. drawer and drawee are the same; as the case may be. If it is not so protested, the
2. drawee is a fictitious person or drawer and indorsers are discharged. (Sec. 118)
not having the capacity to contract;
3. drawer is the person to whom FOREIGN BILL OF EXCHANGE:
the instrument is presented for 1. Drawn in the Philippines but payable
payment; outside the Philippines.
2. Payable in the Philippines but drawn
outside the Philippines.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. By a valid tender of payment


PROTEST MAY BE MADE BY: made by a prior party;
1. a notary public; or 5. By the release of the principal
2. any respectable resident of the place where debtor, unless the holder’s right of
the bill is dishonored, in the presence of 2 or recourse against the party secondarily
more credible witnesses. (Sec. 154) liable is expressly reserved;
 Protest for better security is one made by 6. By any agreement binding upon
the holder of a bill after it has been accepted the holder to extend the time of payment
but before it matures, against the drawer or to postpone the holder’s right to
and indorsers, where the acceptor has been enforce the instrument. (Sec. 120)
adjudged a bankrupt or an insolvent, or has
made an assignment for the benefit of the  In the following cases, the agreement to
creditors. (Sec. 158) extend the time of payment does not
discharge a party secondarily liable:
X. DISCHARGE a. where the extension of time is
consented to by such party;
Discharge of instrument - a release of all b. where the holder expressly
parties, whether primary or secondary, from the reserves his right of recourse against
obligations arising thereunder. It renders the such party.
instrument without force and effect and,
consequently, it can no longer be negotiated.  Payment at or after maturity by a party
secondarily liable does not discharge the
How discharged: instrument. It only cancels his own liability
1. By payment in due course by or and that of the parties subsequent to him.
on behalf of the principal debtor; (Sec. 121)
2. Payment by accommodated
party; Effects of Renunciation:
3. Intentional cancellation by the 1. A renunciation in favor of a
holder; secondary party may be made by the
4. By any act which will discharge a holder before, at or after maturity of the
simple contract for the payment of instrument. Effect: only such secondary
money; party is discharged and all parties
5. When the principal debtor subsequent to him but the instrument
becomes the holder of the instrument at itself remains in force.
or after maturity in his own right (sec. 2. A renunciation in favor of the
119) principal debtor may be effected at or
after maturity. Effect: the instrument is
By any act which would discharge a simple discharged and all parties thereto
contract: provided the renunciation is made
1. Payment or performance; unconditionally and absolutely. (sec.
2. Loss of the thing due; 122)
3. Condonation or remission;
4. Confusion or Merger; Note: In either case, renunciation does not
5. Compensation; affect the rights of a holder in due course
6. Novation; without notice.
7. Annulment or Rescission;
8. Fulfillment of a resolutory condition;  Cancellation of an instrument includes
9. Prescription. tearing, erasure, obliteration, or burning. It
is not limited to writing of the word
When persons secondarily liable on the ‘cancelled”, or “paid”, or drawing of criss-
instrument are discharged: cross lines across the instrument. (Sec. 123)
1. By any act which discharges the
instrument; Payment for Honor - payment made by a
2. By the intentional cancellation of person, whether a party to the bill or not, after it
his signature by the holder; has been protested for non-payment, for the
3. By the discharge of a prior party; benefit of any party liable thereon or for the

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

benefit of the person for whose account it was Insurance - an agreement whereby one
drawn. (Secs. 171-177) undertakes for a consideration to indemnify
another against loss, damage or liability arising
Requisites: from an unknown or contingent event. (Sec. 2,
1. the bill has been dishonored by par. 2, ICP)
non-payment;
2. it has been protested for non- TYPES OF INSURANCE CONTRACTS:
payment; 1. LIFE INSURANCE
3. payment supra protest (another a. individual life (Secs. 179–183,
term for payment for honor because 227)
prior protest for non-payment is b. group life (Secs. 50, last par.,
required) is made by any person, even 228)
by a party thereto; c. industrial life (Secs. 229–231)
4. the payment is attested by a 2. NON-LIFE INSURANCE
notarial act of honor which must be a. Marine (Secs. 99–166)
appended to the protest or form an b. Fire (Secs. 167–173)
extension of it; c. Casualty (Sec. 174)
5. the notarial act must be based on 3. CONTRACTS OF SURETYSHIP OR
the declaration made by the payor for BONDING (Secs. 175–178)
honor or his agent of his intention to pay
the bill for honor and for whose honor C. Nature and Characteristics
he pays.
1. Risk distributing device - By
Note: If the above formalities are not complied paying a pre-determined amount into a
with, payment will operate as a mere voluntary general fund out of which payment will
payment and the payor will acquire no right to be made for an economic loss of a
full reimbursement against the party for whose defined type, each member contributes
honor he pays. to a small degree toward compensation
for losses suffered by any member of the
 In payment for honor, the payee cannot group.
refuse payment. If he refuses, he cannot 2. Contract of adhesion or Fine
recover from the parties who would have Print Rule - most of the terms of the
been discharged had he accepted the same. contract do not result from mutual
In acceptance for honor, the holder’s negotiations between the parties as they
consent is necessary. are prescribed by the insurer in printed
form to which the insured adhere if he
 The payor for honor is given the right to chooses but which he cannot change.
receive both the bill and the protest Hence, in case of doubt, the contract
obviously to enable him to enforce his rights shall be interpreted strictly against the
against the parties who are liable to him. insurer and liberally in favor of the
insured.( Rizal Surety and Insurance Co.
v. C.A.,336 SCRA 12 [2000].
INSURANCE CODE 3. Aleatory - there is an obligation on
(P.D. No. 1460, effective June 11, 1978) the part of the insurer to pay the
proceeds of the insurance upon the
happening of the event which is
I. INTRODUCTION
uncertain, or which is to occur at an
indeterminate time.
A. Laws governing Insurance:
4. Contract of Indemnity - there is
a. Insurance Code of 1978;
an exchange of value for value (quid pro
b. Civil Code, Art. 2011 and other
qou), applies only to property insurance
articles;
except the creditor insuring the life of
c. Family Code (E.O 209);
his debtor.
d. Other Special laws.
5. Uberrimae fides contract /
principle of utmost good faith - It
B. General concept of insurance
requires the parties to the contract of
insurance to disclose conditions

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

affecting the risk of which he is aware, or indemnity whereby the insurer promises to
material fact, which the applicant make good only the loss of the insured.
knows, and those which he ought to
know. Requisites for recovery:
6. Personal Contract - insurer 1. The insured must have insurable
considers the personal qualifications of interest in the subject matter;
the insured in approving the contract. 2. That interest is covered by the
7. Consensual – it is perfected by the policy;
meeting of the minds of the parties. 3. There must be a loss; and
8. Bilateral - both parties are bound 4. The loss must be proximately caused
to do something. by the peril insured against.
9. Onerous - there is a valuable
consideration called the premium. D. Elements of Insurance
10. Conditional - subject to conditions 1. Existence of an insurable interest
such as the happening of the event (Secs. 12-14,ICP);
insured against, payment of premium, 2. Risk of loss (Sec. 51, par. 9, ICP);
etc. 3. Assumption of Risk (Sec. 2, ICP);
11. Property in legal contemplation 4. Scheme to distribute losses; and
5. Payment of premiums (Sec.77, ICP).
CONSTRUCTION OF INSURANCE (Philamcare Health Systems, Inc. v. CA,
CONTRACTS: No. 125678, March 18,2002).

As a general rule, it is to be construed liberally  A contract possessing only the first 3


in favor of the insured and strictly against the elements above is a risk-shifting device. If
insurer. Such rule applies only in cases of doubt all the elements, it is a risk-distributing
and not when the intention of the policy is clear device.
or the language is sufficiently clear to convey
the meaning of the parties. II. CONTRACT OF INSURANCE

PRINCIPLE OF SUBROGATION A. Requisites of a contract of


 A process of legal substitution insurance:
where the insurer steps into the shoes of the a. A subject matter in which the insured
insured and he avails of the latter’s rights has an insurable interest;
against the wrongdoer at the time of loss. b. Event or peril insured against which
 Applicable only to property may be any contingent or unknown
insurance. event, past or future, and a duration for
 The insurer can only recover the risk thereof;
from the third person what the insured c. A promise to pay or indemnify in a fixed
could have recovered. or ascertainable amount;
 There can be no subrogation in d. A consideration for the promise, known
cases: as the premium
1. Where the insured by his own act e. A meeting of minds of the parties upon
releases the wrongdoer or third party all the foregoing essentials
liable for the loss or damage; f. The parties must be competent to enter
2. Where the insurer pays the insured the into the contract
value of the loss without notifying the g. The contract must be for a purpose not
carrier who has in good faith settled the contrary to law or public policy.
insured’s claim for loss;
3. Where the insurer pays the insured for a B. Perfection
loss or risk not covered by the policy.  consensual contract
(Pan Malayan Insurance Company v. and therefore perfected the moment
CA, 184 SCRA 54) there is meeting of the minds with
respect to the object and the cause or
PRINCIPLE OF INDEMNITY consideration. (Cognition Theory)
 Mere submission of
 Except life and accident insurance, a
the application without the
contract of insurance is a contract of
corresponding approval of the policy

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

does not result in the perfection of the  The consent of the husband
contract of insurance (Great Pacific Life is not necessary for the validity of an
Assurance Corp. v. CA, 89 SCRA 543) insurance policy taken out by a married
woman on her life or that of her children.
(Sec. 3)
C. Parties to a contract of insurance
a. Insurer – the person who  The married woman or the
undertakes to indemnify another minor herein allowed to take out an
b. Insured – the person with capacity insurance policy may exercise all the rights
to contract and having an insurable and privileges of an owner under a policy.
interest in the life or property of the (Sec. 3)
insured Foreign Insurance Corporations
c. Beneficiary – person designated to  May be authorized by the
receive the proceeds of the policy when Commission to engage in insurance
the risk attaches business in the country.
 Every person, partnership,
association, or corporation duly Requirements:
authorized to transact insurance a. appointment of a resident
business as elsewhere provided in this as a general agent
code, may be an insurer. (Sec. 6) b. paid-up unimpaired assets
 Anyone except a public enemy may or capital and reserves not less than
be insured. (Sec. 7) that required of domestic
 Public enemy means a nation with corporation.
whom the Philippines is at war and it c. Deposit for the benefit and
includes every citizen or subject of such security of policyholders, securities
nation. satisfactory to the Commission
d. Investments should not
Rules on minors exceed 20% of the net worth of the
 For life, health or accident insurance foreign corporation or 20% of the
– A minor may enter into a valid contract of capital of the registered enterprise.
insurance provided:
a. He is 18 years D. Subject matter of insurance
of age or over;  Any contingent or unknown event, whether
b. the insurance past or future, which may damnify a person
is taken on his own life, and having an insurable interest, or create a
c. the beneficiary liability against him, may be insured
appointed is the minor's estate or the against, subject to the provisions of this
minor's father, mother, husband, chapter. (Sec. 3)
wife, child, brother or sister. (Sec. 3)  An insurance for or against the drawing
of any lottery, or for or against any chance
 Other insurance – taken by or ticket in a lottery drawing a prize is not
the minor is voidable authorized. (Sec. 4)

 All rights, title and interest E. Insurance not a wagering contract


in the policy of insurance taken out by an  An insurance for or
original owner on the life or health of a against the drawing of any lottery, or
minor shall automatically vest in the minor  for or against any chance
upon the death of the original owner, unless or ticket in a lottery drawing a prize is not
otherwise provided for in the policy. (Sec. 3) authorized. (Sec. 4)

Note: the law has lowered the age of majority to GAMBLING INSURANCE
18 years hence a minor is no longer qualified CONTRACT CONTRACT
to take insurance by himself. 1. The parties 1. The parties seek
contemplate gain to distribute
Rules on married women through mere possible loss by
chance. reason of

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

mischance. perfection of the contract and need not exist


thereafter. (Sec. 19)
2. The gambler 2. The insured seeks C. Insurable interest in property
courts fortune. to avoid misfortune. insurance
 Every interest in property whether real
3. Tends to 3. Tends to equalize or personal, or any relation thereto, or
increase the fortune. liability in respect thereof, of such
inequality of nature that the contemplated peril might
fortune directly damnify the insured (Sec. 13),
4. Essence: 4. What the insured which may consist in:
whatever one gains is not at the 1. an existing interest;
person wins from a expense of another 2. any inchoate interest founded on
wager is lost by the insured. an existing interest; or
other party. 3. an expectancy coupled with an
existing interest in that out of
III. INSURABLE INTEREST which the expectancy arises.
(Sec. 14)
A. Concept of insurable interest in  The measure of insurable interest in
general property is the extent to which the
 A person has an insurable interest in insured might be damnified by loss or
the subject matter if he is so connected, injury thereof. (Sec. 17)
so situated, so circumstanced, so related,
that by the preservation of the property INSURABLE INSURABLE
he shall derive pecuniary benefit, and by INTE INTEREST IN
its destruction he shall suffer pecuniary REST PROPERTY
loss, damage or prejudice. IN
LIFE
B. Insurable interest in life insurance 1. Must exist only at 1. Must exist at
 Every person has an the time the policy time the policy
insurable interest in the life and health: takes effect and takes effect and
a. Of himself, of his spouse and of his need not exist at when the loss
children; the time of loss occurs
b. Of any person on whom he depends 2. Insurable interest 2. Insurable
wholly or in part for education or unlimited except interest limited
support, or in whom he has a in life insurance to actual value
pecuniary interest; effected by of interest in
c. Of any person under a legal creditor on life of property
obligation to him for the payment of debtor insured
money, or respecting property or 3. The expectation of 3. An expectation
services, of which death or illness benefit to be of a benefit to
might delay or prevent the derived from the be derived
performance; and continued from the
d. Of any person upon whose life any existence of life continued
estate or interest vested in him need not have any existence of the
depends. (Sec. 10) legal basis property
whatever. A insured must
General Rule: No limit in the amount the reasonable have a legal
insured can insure his life. probability is basis.
Exception: In a creditor-debtor relationship sufficient without
 where the creditor insures more.
the life of his debtor,
 the limit of insurable interest a. Insurable interest in case of
is equal to the amount of the debt. mortgaged property
 Both the mortgagor and the
Note: Insurable interest in the life of mortgagee have insurable interest in
another need exist only at the time of

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

the property which is separate and IV. DEVICES FOR ASCERTAINING


distinct from each other. AND CONTROLLING RISK AND
 Mortgagor’s insurable interest - LOSS
to the extent of its value, even
though the mortgage debt equals 1. CONCEALMENT - neglect to
such value. communicate that which a party knows and
 Mortgagee's interest - up to the ought to communicate
extent of the debt only. 2. REPRESENTATION - factual
statements made by the insured at the time
STANDARD OPEN OR LOSS of, or prior to, the issuance of the policy to
OR UNION PAYABLE give information to the insurer and induce
MORTGAGE MORTGAGE him to enter into the insurance contract.
CLAUSE CLAUSE 3. WARRANTIES - statements or
the subsequent the mortgagor does promise by the insured set forth in the
acts of the not cease to be a policy itself or incorporated in it by proper
mortgagor cannot party to the contract. reference, the untruth or non-fulfillment of
affect the rights of Thus, the acts of which in any respect and without reference
the assignee the mortgagor to whether the insurer was in fact
affect the prejudiced by such untruth or non-
mortgagee (Secs. fulfillment. The same may be expressed,
8 and 9) implied, affirmative or promissory.
4. CONDITIONS - the insurer may also
b. Effect of change in interest in the protect himself against fraudulent claims of
thing insured loss and this he attempts to do by inserting
in the policy various conditions, which take
General Rule: suspends the insurance the form of conditions precedent. For
until the interests in the thing and the instance, there are conditions requiring
interest in the insurance are vested in immediate notice of loss or injury and
the same person. (Sec. 20) detailed proofs of loss within a limited
Exceptions: period.
1. In life, health and accident insurance 5. EXCEPTIONS - provisions that may
(Sec. 20); specify excepted perils. It makes more
2. Change in interest in the thing definite the coverage indicated by the
insured after occurrence of an injury general description of the risk by excluding
which results in a loss (Sec. 21); certain specified risk that otherwise would
3. Change in interest in one or more of be included under the general language
several distinct things separately describing the risks assumed
insured by one policy (Sec. 22);
4. Change of interest, by will or A. Concealment
succession, on the death of the
insured (Sec. 23); a. Concept
5. Transfer of interest by one of several  A neglect to communicate that
partners, joint owners, or owners in which a party knows and ought to
common, who are jointly insured, to communicate, is called a concealment.
others (Sec. 24); (Sec. 26)
6. When a policy is so framed that it
will inure to the benefit of b. Duty to communicate
whomsoever, during the continuance  Each party to a contract of
of the risk, may become the owner of insurance must communicate to the
the interest insured (Sec. 57); other, in good faith, all facts within his
7. When there is an express prohibition knowledge which are material to the
against alienation in the policy, in contract and as to which he makes no
case of alienation, the contract of warranty, and which the other has not
insurance is not merely suspended the means of ascertaining. (Sec. 28)
but avoided (Art. 1306, NCC).
c. Test of Materiality

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Materiality is to be determined  The waiver of medical


not by the event, but solely by the examination in a non-medical
probable and reasonable influence of the insurance contract renders even
facts upon the party to whom the more material the information
communication is due, in forming his required of the applicant concerning
estimate of the disadvantages of the the previous conditions of health and
proposed contract, or in making his diseases suffered (Sunlife v. Sps.
inquiries. (Sec. 31) Bacani, 246 SCRA 268).

d. Requisites: f. Matters which need not be


a. The matters concealed communicated
must be material;  Neither party to a contract of
b. There must be an insurance is bound to communicate
obligation for the insured to reveal the information of the matters following,
same; except in answer to the inquiries of the
c. The matters concealed are other:
those to which he makes no warranty; a. Those which the other
d. And the insurer has no knows;
means of ascertaining those matters. b. Those which, in the exercise
of ordinary care, the other ought
e. Effects of concealment to know, and of which the former
has no reason to suppose him
General Rule: Rescission of the contract by ignorant;
the insurer, whether the concealment is c. Those of which the other
intentional or unintentional. Good faith waives communication;
therefore is not a defense. (Sec. 27) d. Those which prove or tend to
prove the existence of a risk
Exceptions: excluded by a warranty, and
a. Incontestability clause which are not otherwise
 In life insurance, after the material; and
policy has been in force for at least e. Those which relate to a risk
2 years, the insurer cannot rescind excepted from the policy and
the policy due to fraudulent which are not otherwise
concealment or misrepresentation material. (Sec. 30)
by the insured.  Each party to a contract of
insurance is bound to know all the
b. Certain Concealments in Marine general causes which are open to his
Insurance inquiry, equally with that of the other,
 The following matters, and which may affect the political or
though concealed will not vitiate material perils contemplated; and all
the contract except when they general usages of trade. (Sec. 32)
caused the loss:
a. National  Information of the nature or
character of the insured; amount of the interest of one insured
b. Liability of need not be communicated unless in
insured thing to capture or answer to an inquiry, except as
detention; prescribed by section 51. (Sec. 34)
c. Liability to
seizure from breach of foreign  Neither party to a contract of
laws; insurance is bound to communicate,
d. Want of even upon inquiry, information of his
necessary documents; own judgment upon the matters in
e. Use of false or question. (Sec. 35)
simulated papers.
g. Waiver of information
 By:

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 the terms of the that he does so on the information of


insurance or others; or he may submit the
 by neglect to make information, in its whole extent, to the
inquiry as to such facts, where insurer; and in neither case is he
they are distinctly implied in responsible for its truth, unless it
other facts of which information proceeds from an agent of the insured,
is communicated. (Sec. 33) whose duty it is to give the information.
(Sec. 43)
B. Representation
7. When presumed false, effect of
1. Concept falsity
 oral or written statement of a fact  A representation is to be deemed
or condition affecting the risk, made by false when the facts fail to correspond
insured to insurer, tending to induce with its assertions or stipulations. (Sec.
insurer to assume risk. (Sec. 36) 44)

2. Kinds of representation  If a representation is false in a


a. AFFIRMATIVE – affirmation of material point, whether affirmative or
a fact when the contract begins; and promissory,
(Sec. 37)  the injured party is
b. PROMISSORY – promise to be entitled to rescind the contract from
performed after policy was issued. (Sec. the time when the representation
39) becomes false.
 exception: The
 A representation may be made at acceptance of premium payments
the time of, or before, issuance of the despite knowledge of the ground for
policy. (Sec. 37) rescission. (Sec. 45).
 A representation as to the future
is to be deemed a promise, unless it C. Remedies available in case of
appears that it was merely a statement concealment or false representation
of belief or expectation. (Sec. 39)
GROUNDS FOR RESCISSION OF INSURANCE
3. Test of materiality CONTRACT:
 The materiality of a a. Concealment;
representation is determined by the b. Misrepresentation;
same rules as the materiality of c. Breach of warranty
concealment. (Sec. 46)
WAIVER OF RIGHT TO RESCIND: The right to
4. Effect of alteration or withdrawal rescind is waived by the acceptance of premium
payments despite the knowledge of the ground
 A representation may be altered
for rescission. (Sec. 45)
or withdrawn before the insurance is
effected, but not afterwards. (Sec. 41)
LIMITATIONS ON THE RIGHT OF THE
INSURER TO RESCIND:
5. Time to which representation refers  In non-life policy – such right must
be exercised prior to the commencement of
 A representation must be
an action on the contract;
presumed to refer to the date on which
the contract goes into effect. (Sec. 42)
 In life insurance – such right must
6. Effect when representation is be availed of during the first 2 years from
obtained from third persons the date of issue of policy or its last
reinstatement. (Sec. 48)
 When a person insured has no
personal knowledge of a fact, he may
1. When recission by the insurer may
nevertheless repeat information which
be exercised
he has upon the subject, and which he
believes to be true, with the explanation

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Whenever a right to rescind a coverage once the period of


contract of insurance is given to the contestability passes.
insurer by any provision of this chapter,
such right must be exercised previous to c. Defenses not barred by
the commencement of an action on the incontestability
contract. (Sec. 48) i. That the person taking the
2. When life insurance policy becomes insurance lacked insurable
incontestable interest as required by law;
 After (1) a policy of life insurance ii. That the cause of the death of
(2) made payable on the death of the the insured is an excepted
insured (3) shall have been in force risk;
during the lifetime of the insured for a iii. That the premiums have not
period of 2 years from the date of its been paid (Secs. 77, 227[b],
issue or of its last reinstatement the 228[b], 230[b]);
insurer cannot prove that the policy is iv. That the conditions of the
void ab initio or is rescindible by reason policy relating to military or
of the fraudulent concealment or naval service have been
misrepresentation of the insured or his violated (Secs. 227[b],
agent. (Sec. 48) 228[b]);
v. That the fraud is of a
a. Requisites for incontestability particularly vicious type;
i. The insurance is a life vi. That the beneficiary failed to
insurance policy payable on furnish proof of death or to
the death of the insured. comply with any condition
ii. It has been enforced during imposed by the policy after
the lifetime of the insured for the loss has happened; or
at least two years from its vii. That the action was not
date of issue or of its last brought within the time
reinstatement. specified.

b. Theory and object of D. Warranties


incontestability
1. Concept
As to the insurer – the theory is  Statement or promise by the
that an insurer should have a insured set forth in the policy or by
reasonable opportunity to reference incorporated therein, the
investigate the statements which untruth or non-fulfillment of which in
the applicant makes in procuring any respect, and without reference to
his policy and that after a whether insurer was in fact prejudiced
definite period, the insurer by such untruth or non-fulfillment,
should not be permitted to renders the policy voidable by the
question the validity of the insurer.
policy, either by affirmative
action or by defense to a suit PURPOSE: In order to eliminate potentially
bought on the life policy by the increasing hazards which may either be due
beneficiary (Powell vs Mut. Life to the acts of the insured or to the change to
Ins. Co., 144 N.E. 825) the condition of the property.

As to the insured – the clause


has as its object to give the WARRANTY REPRESENTATION
greatest possible assurance to a 1. part of the 1. mere collateral
policyholder that his contract inducement
beneficiaries would receive 2. written on 2. may be written in the
payment without question as to the policy, policy or may be oral.
the validity of the policy (Newton actually or
vs New York Life Ins. , 35 F. 2d by reference
498) or the existence of the
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. conclusively 3. must be proved to be subject matter, the same interest therein


presumed material. and the same risk.
material.
4. must be 4. requires only V. POLICY OF INSURANCE
strictly substantial truth and
complied compliance. A. Definition and form
with. Policy of insurance - the written
instrument in which a contract of insurance
2. Kinds of warranties is set forth. (Sec. 49)
a. EXPRESS
b. IMPLIED - it is deemed included  shall be in printed form which
in the contract although not expressly may contain blank spaces; and any
mentioned. Example: In marine word, phrase, clause, mark, sign,
insurance, seaworthiness of the vessel. symbol, signature, number, or word
c. AFFIRMATIVE- asserts the necessary to complete the contract of
existence of the fact or condition at the insurance shall be written on the blank
time it is made. spaces provided therein.
d. PROMISSORY- the insured  Unless applied for by the insured
stipulates that certain facts or conditions or owner, any rider, clause, warranty or
shall exist or thing shall be done or endorsement issued after the original
omitted. (Sec. 67) policy shall be countersigned by the
3. Time to which warranty refers insured or owner, which
 A warranty may relate to the countersignature shall be taken as his
past, the present, the future, or to any or agreement to the contents of such rider,
all of these. (Sec. 68) clause, warranty or endorsement.

4. Effects of breach  Group insurance and group


 Violation of material warranty annuity policies, however, may be
Rule: Violation of material warranty or typewritten and need not be in printed
of a material provision of a policy will form. (Sec. 50)
entitle the other party to rescind the
contract. (Sec. 74) B. Contents of the policy
a. Parties
 Violation of immaterial provision b. Amount of insurance, except in open
General Rule: it will not avoid the or running policies;
policy. c. Rate of premium;
Exception: when the policy expressly d. Property or life insured;
provides or declares that a violation e. Interest of the insured in the
thereof will avoid it. (Sec. 75) property if he is not the absolute
owner;
 A breach of warranty without f. Risk insured against; and
fraud merely exonerates an insurer from g. Duration of the insurance.
the time that it occurs, or where it is
broken in its inception, prevents the C. Papers attached to the policy and
policy from attaching to the risk. (Sec. their binding effect
76)
RIDER – printed stipulation usually
“OTHER INSURANCE” CLAUSE attached to the policy because they
 A condition in the policy constitute additional stipulations between
requiring the insured to inform the insurer the parties.
of any other insurance coverage of the
property insured is lawful and specifically General Rule: not binding
allowed under Sec. 75 of the ICP Exception: Valid when:
 the descriptive title or name of the rider,
 To constitute a violation, the clause, warranty or endorsement is also
other insurance must be upon the same

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

mentioned and written on the blank e. Physical changes in property


spaces provided in the policy. (Sec. 50) making the property uninsurable;
and
D. Kinds of policy f. Determination by the Insurance
a. Open - one in which the value of the Commissioner that the continuation
thing insured is not agreed upon, but of the policy would violate the
is left to be ascertained in case of Insurance Code. (Sec. 64)
loss. (Sec. 60)
REQUIREMENTS FOR CANCELLATION
b. Valued - one which expresses on its OF POLICY:
face an agreement that the thing a. prior notice of cancellation to the
insured shall be valued at a specific insured;
sum. (Sec. 61) b. notice must be based on the
c. Running - one which contemplates occurrence after the effectivity date
successive insurances, and which of the policy;
provides that the object of the policy c. notice must be in writing, mailed
may be from time to time defined, or delivered to the named insured at
especially as to the subjects of the address shown in the policy;
insurance, by additional statements d. notice must state which of the
or indorsements. (Sec. 62) grounds set forth in Sec. 64 is relied
upon and that upon written request
E. Cover notes of the insured, the insurer will
 a concise and temporary written furnish the facts on which the
contract issued to the insurer through its cancellation is based. (Sec. 65)
duly authorized agent embodying the
principal terms of an expected policy of Rule on renewal of policy:
insurance. General Rule: entitled to renewal
Exceptions:
 It is intended to give temporary a. life insurance; or
insurance protection coverage to the b. the insurer does not intend to renew,
applicant pending the acceptance or provided:
rejection of his application for a period  the insurer at least 45
of not exceeding 60 days unless a longer days in advance of the end of the
period is approved by Insurance policy period
Commissioner (Sec. 52).  mails or delivers to the
named insured at the address
BINDING RECEIPT - merely an shown in the policy
acknowledgment on behalf of the  notice of its intention not
company that their branch office had to renew the policy or to condition
received from the applicant the its renewal upon reduction of
insurance premium and had accepted limits or elimination of coverage
the application subject to processing by
the head office. G. Time to commence action on the policy;
effect of stipulation
F. Cancellation of policy  A condition, stipulation, or
agreement in any policy of
GROUNDS (EXCEPT LIFE INSURANCE): insurance, limiting the time for
a. Non-payment of premium; commencing an action thereunder to
b. Conviction of a crime out of acts a period of less than 1 year from the
increasing the hazard insured time when the cause of action
against; accrues, is void. (Sec. 63)
c. Discovery of fraud or material
misrepresentation; VI. PREMIUM
d. Discovery of willful or reckless
acts of omissions increasing the A. Concept
hazard insured against;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 A consideration paid to an insurer inexistent from the beginning. (Art.


for undertaking to indemnify the 1306 NCC)
insured against a specified peril.
C. When insured entitled to the
 The basis of the right of the return of premiums
insurer to collect premiums is the
assumption of risk. 1. If thing insured was never exposed
to the risks insured against (Sec. 79);
B. Effect of non-payment of
premium; exceptions 2. Contract is voidable due to the fraud
or misrepresentation of insurer or his
General Rule: No policy issued by an agents; (Sec. 81)
insurance company is valid and
binding until actual payment of 3. Contract is voidable because of the
premium. Any agreement to the existence of facts of which the insured
contrary is void. (Sec. 77) was ignorant without his fault; (Sec. 81)
Exceptions to the requirement for pre-
payment of premiums: 4. When by any default of the insured
1. in case of life or industrial life other than actual fraud, the insurer
insurance, when the grace periods never incurred liability (Sec. 81);
applies; (Sec. 77)  In 1-4 above, the whole premium
2. when the insurer makes a written is returned.
acknowledgment of the receipt 5. When the insurance is for a definite
premium; (Sec. 78) period and the insured surrenders his
3. when there is a stipulation which policy before the termination thereof;
provides for the payment of the  Only pro rata return of the
premium on installment, the same unexpired time. Exceptions:
not being contrary to law, morals, a. policy not made for a definite
good custom, public order or public period of time
policy b. short period rate is agreed
4. In suretyship, where the obligee upon
has accepted the bond (Sec. 177) c. life insurance policy
5. cover note
6. When there is over-insurance (Sec.
Effect of non-payment: notwithstanding 82);
any agreement to the contrary, no policy or  Only pro rata return to the
contract of insurance issued by an insurance amount by which the aggregate
company is valid and binding unless and sum insured exceeds the
until the premium thereof has been paid. insurable value of the thing at
(Sec. 77) risk. (Sec. 82)

 Section 77 merely precludes the 7. When rescission is granted due to


parties from stipulating that the policy is the insurer’s breach of contract. (Sec.
valid even if the premiums are not paid. 82)
(Makati Tuscanny Condominium Corp.  Only pro rata return of the
v. CA, 215 SCRA 462) unexpired time.

 The contracting parties may  If a peril insured against has existed,


establish such stipulations, clauses, and the insurer has been liable for any
terms, and conditions as they may deem period, however short, the insured is not
convenient, provided they are not entitled to return of premiums, so far as
contrary to law, morals, good customs, that particular risk is concerned. (Sec.
public order or public policy. If the 80)
stipulation is contrary to law, morals or
public policy, the contract is void and

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

VII. PERSONS ENTITLED TO applicable to the joint or common


RECOVER ON THE POLICY AND interest. (Sec. 55)
CONDITIONS FOR RECOVERY
D. Notice and proof of loss
A. Beneficiary  When a preliminary proof of loss is
General Rule: Designation is revocable. required by a policy, the insured is not
Exception: Express provision in the policy bound to give such proof as would be
that it is irrevocable necessary in a court of justice; but it is
sufficient for him to give the best
 The interest of a beneficiary in a life evidence which he has in his power at
insurance policy shall be forfeited when the time. (Sec. 89)
the beneficiary is the principal,
accomplice, or accessory in willfully  All defects in a notice of loss, or in
bringing about the death of the insured; preliminary proof thereof, which the
in which event, the nearest relative of insured might remedy, and which the
the insured shall receive the proceeds of insurer omits to specify to him, without
said insurance if not otherwise unnecessary delay, as grounds of
disqualified. (Sec. 12) objection, are waived. (Sec. 90)

 The insurance proceeds shall be  Delay in the presentation to an


applied exclusively to the proper interest insurer of notice or proof of loss is
of the person in whose name or for waived if caused by any act of him, or if
whose benefit it is made unless he omits to take objection promptly and
otherwise specified in the policy. (Sec. specifically upon that ground. (Sec. 91)
53)
 If the policy requires, by way of
 When the description of the insured preliminary proof of loss, the certificate
in a policy is so general that it may or testimony of a person other than the
comprehend any person or any class of insured, it is sufficient for the insured to
persons, only he who can show that it use reasonable diligence to procure it,
was intended to include him can claim and in case of the refusal of such person
the benefit of the policy. (Sec. 56) to give it, then to furnish reasonable
evidence to the insurer that such refusal
 A policy may be so framed that it will was not induced by any just grounds of
inure to the benefit of whomsoever, disbelief in the facts necessary to be
during the continuance of the risk, may certified or testified. (Sec. 92)
become the owner of the interest
insured. (Sec. 57) LOSS - injury or damage sustained by
insured from perils insured against.
B. Rule where insurance is made by
an agent or trustee PROXIMATE CAUSE - an event which
 When an insurance contract is sets all other events in motion without any
executed with an agent or trustee as the intervening or independent case, without
insured, the fact that his principal or which the injury or loss would not have
beneficiary is the real party in interest occurred.
may be indicated by describing the
insured as agent or trustee, or by other LOSS FOR WHICH INSURER IS LIABLE:
general words in the policy. (Sec. 54) 1. loss the proximate cause of
which is the peril insured against
C. Rule where insurance if made by (Sec. 84);
the partner or part owner 2. loss the immediate cause of
 To render an insurance effected by which is the peril insured against
one partner or part-owner, applicable to except where proximate cause is an
the interest of his co-partners or other excepted peril;
part-owners, it is necessary that the 3. loss through negligence of
terms of the policy should be such as are insured except where there was

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

gross negligence amounting to B. Stipulation against double


willful acts; and insurance
4. loss caused by efforts to rescue  The purpose of the prohibition
the thing from peril insured against; against double insurance is to prevent
5. if during the course of rescue, the over-insurance and thus avert the
thing is exposed to a peril not perpetration of fraud. The public, as well
insured against, which permanently as the insurer, is interested in
deprives the insured of its preventing the situation in which a loss
possession, in whole or in part (Sec. would be profitable to the insured.
85). (Pioneer insurance & Surety Corp. vs
Yap)
LOSS FOR WHICH INSURER IS NOT
LIABLE: C. Rules for payment where there is
1. loss by insured’s willful act; over-insurance by double insurance
2. loss due to connivance of the a. The insured, unless the policy
insured (Sec. 87); and otherwise provides, may claim payment
3. loss where the excepted peril is from the insurers in such order as he
the proximate cause. may select, up to the amount for which
the insurers are severally liable under
EFFECT OF FAILURE TO GIVE NOTICE their respective contracts;
OF LOSS:
1. In fire insurance - it will defeat b. Where the policy under which the
the right of the insured to recover; insured claims is a valued policy, the
2. In other types of insurance – it insured must give credit as against the
will not exonerate the insurer unless valuation for any sum received by him
there is a stipulation in the policy to under any other policy without regard to
that effect. the actual value of the subject matter
insured;
VIII. DOUBLE INSURANCE
c. Where the policy under which the
A. Definition insured claims is an unvalued policy he
 exists where the same person is must give credit, as against the full
insured by several insurers separately in insurable value, for any sum received by
respect to the same subject and interest. him under any policy;
(Sec. 93)
REQUISITES: d. Where the insured receives any sum
1. The person insured is the same; in excess of the valuation in the case of
2. Two or more insurers insuring valued policies, or of the insurable value
separately; in the case of unvalued policies, he must
3. The subject matter is the same; hold such sum in trust for the insurers,
4. The interest insured is also the according to their right of contribution
same; among themselves;
5. The risk or peril insured against
is likewise the same. e. Each insurer is bound, as between
himself and the other insurers, to
OVER- DOUBLE contribute ratably to the loss in
INSURANCE INSURANCE proportion to the amount for which he is
1. One insurer is 1. Two or more liable under his contract. (sec. 94)
sufficient insurers
2. Insurance taken 2. Total amount of IX. REINSURANCE
must be more than policies taken need
the amount of not exceed the A. Definition
insurable interest amount of the  one by which an insurer procures a
insurable interest third person to insure him against loss
or liability by reason of such original
insurance. (Sec. 95)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 In every reinsurance, the original 1. vessels, goods, freight, cargo,


contract of insurance and the contract of merchandise, profits, money,
reinsurance are covered by separate valuable papers, bottomry and
policies. respondentia, and interest in respect
to all risks or perils of navigation;
B. Nature 2. persons or property in connection
 A reinsurance is presumed to be a with marine insurance;
contract of indemnity against liability, 3. precious stones, jewels, jewelry and
and not merely against damage. (Sec. precious metals whether in the
97) course of transportation or
 The original insured has no interest otherwise; and
in a contract of reinsurance. (Sec. 98) 4. bridges, tunnels, piers, docks and
other aids to navigation and
DOUBLE REINSURANCE transportation. (Sec. 99)
INSURANCE
1. involves the 1. involves different  Cargo can be the subject of marine
same interest interest insurance, and once it is entered into,
2. insurer 2. insurer becomes the implied warranty of seaworthiness
remains in the insured in immediately attaches to whoever is
such capacity relation to insuring the cargo, whether he be the
reinsurer shipowner or not. (Roque v. IAC, 139
3. insured is the 3. original insured SCRA 596)
party in has no interest in
interest in the the reinsurance C. Risk or losses covered in marine
2 contracts contract. insurance
4. subject of 4. subject of
insurance is insurance is the a. perils of the sea vs. perils of the ship
property original insurer’s
risk PERILS OF THE SEA
5. insured has to 5. insured’s consent  includes only those casualties
give his not necessary due to the unusual violence or
consent extraordinary action of wind and wave
or to other extraordinary causes
C. Duty of reinsured to disclose facts connected with navigation.
 Where an insurer obtains
reinsurance, except under automatic PERILS OF THE SHIP
reinsurance treaties, he must  a loss which in the ordinary
communicate all the representations of course of events, results from the:
the original insured, and also all the 1. natural and inevitable
knowledge and information he action of the sea
possesses, whether previously or 2. ordinary wear and tear of
subsequently acquired, which are the ship or
material to the risk. (Sec. 96) 3. negligent failure of the
ship’s owner to provide the
X. MARINE INSURANCE vessel with proper equipment to
convey the cargo under ordinary
A. Definition conditions.
 insurance against risks connected BARRATRY
with navigation, to which a ship, cargo,  any willful misconduct on the
freightage, profits or other insurable part of the master or crew in pursuance
interest in movable property, may be of some unlawful or fraudulent purpose
exposed during a certain voyage or a without consent of owners, and to the
fixed period of time. (Sec. 99) prejudice of the owner’s interest.

B. Scope of marine insurance b. “all risks” marine insurance policy

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 insurance against all causes of 2. charterer’s insurable


conceivable loss or damage, except: (1) interest
as otherwise excluded in the policy or  to the extent that he is liable to
(2) due to fraud or intentional be damnified by its loss. (Sec. 106)
misconduct on the part of the insured.
3. cargo owner’s insurable
INCHAMAREE CLAUSE – covers loss or interest
damage to the hull or machinery through:  over the cargo and the expected
1. negligence of the captain, engineers, profits (Sec. 105)
etc.
2. explosions, breakage of shafts; and E. Concealment
3. latent defect of machinery or hull. 1. Meaning of concealment in marine
insurance
D. Insurable interest in marine  failure to disclose any material
insurance fact or circumstance which in fact or
1. ship owner’s insurable law is within, or which ought to be
interest within the knowledge of one party
a. rule where vessel is chartered and of which the other has no actual
 The owner of a ship has in all or presumptive knowledge.
cases an insurable interest in it,
even when it has been chartered 2. Duty to communicate
by one who covenants to pay him  each party is bound to
its value in case of loss except communicate, in addition to what is
that in this case the insurer shall required by section 28, all the
be liable for only that part of the information which he possesses,
loss which the insured cannot material to the risk, except such as is
recover from the charterer. (Sec. mentioned in section 30, and to state
100) the exact and whole truth in relation
to all matters that he represents, or
b. rule where vessel is hypothecated upon inquiry discloses or assumes to
by bottomry disclose. (Sec. 107)
 difference between the value
of vessel and the amount of loan. 3. Opinions or expectations of third
(Sec. 101) persons
Creditor’s insurable interest:  information of the belief or
amount of the loan. expectation of a third person, in
reference to a material fact, is
c. insurable interest in freightage material. (Sec. 108)

Freightage - in the sense of a policy 4. when concealment does not vitiate


of marine insurance signifies all the the entire contract
benefits derived by the owner, either  A concealment in a marine
from the chartering of the ship or its insurance, in respect to any of the
employment for the carriage of his following matters, does not vitiate
own goods or those of others. (Sec. the entire contract, but merely
102) exonerates the insurer from a loss
resulting from the risk concealed:
 The owner of a ship has an a. The national character of
insurable interest in expected the insured;
freightage which according to the b. The liability of the thing
ordinary and probable course of insured to capture and
things he would have earned but for detention;
the intervention of a peril insured c. The liability to seizure
against or other peril incident to the from breach of foreign laws of
voyage. (Sec. 103) trade;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

d. The want of necessary condition of the structure of the ship itself,


documents; but requires that it be:
e. The use of false and a. properly laden, and
simulated papers. (Sec. 110) b. provided with a
competent master,
F. Representations c. sufficient number of
1. Effect of false representation by competent officers and seamen, and
the insured the
 If a representation is d. requisite
intentionally false in any material appurtenances and equipment, such
respect, or in respect of any fact on as ballasts, cables and anchors,
which the character and nature of cordage and sails, food, water, fuel
the risk depends, the insurer may and lights, and
rescind the entire contract. (Sec. 111) e. other necessary or
proper stores and implements for
2. Effect of false representation as the voyage. (Sec. 116)
to expectation
 The eventual falsity of a  A ship which is seaworthy
representation as to expectation for the purpose of an insurance upon the
does not, in the absence of fraud, ship may, nevertheless, by reason of being
avoid a contract of marine insurance. unfitted to receive the cargo, be
(Sec. 112) unseaworthy for the purpose of the
insurance upon the cargo. (Sec. 119)
G. Implied Warranties in Marine
Insurance  It becomes the obligation
a. that the ship is seaworthy at the of a cargo owner to look for a reliable
inception of the insurance (Sec. 113); common carrier which keeps its vessels in
b. that the ship will not deviate from seaworthy conditions. The shipper may have
agreed voyage unless deviation is proper no control over the vessel but he has control
(Sec. 123, 124, 125); in the choice of the common carrier that will
c. that the ship will not engage in an transport his goods (Roque v. IAC, 139
illegal venture; SCRA 596).
d. warranty of neutrality: that the ship
will carry the requisite documents of  when complied with;
nationality or neutrality of the ship or exceptions
cargo where such nationality or  An implied
neutrality is expressly warranted; (Sec. warranty of seaworthiness is complied
120) with if the ship be seaworthy at the time
e. presence of insurable interest. of the of commencement of the risk.

Seaworthiness Exceptions:
 In every marine insurance upon a. When the insurance is
a ship or freight, or freightage, or upon any made for a specified length of time,
thing which is the subject of marine the implied warranty is not complied
insurance, a warranty is implied that the with unless the ship be seaworthy at
ship is seaworthy. (Sec. 113) the commencement of every voyage
it undertakes during that time;
 what constitutes seaworthiness b. When the insurance is
 A ship is seaworthy when it is upon the cargo which, by the terms
reasonably fit to perform the service and of the policy, description of the
to encounter the ordinary perils of the voyage, or established custom of the
voyage contemplated by the parties to trade, is to be transhipped at an
the policy. (Sec. 114) intermediate port, the implied
warranty is not complied with unless
 A warranty of each vessel upon which the cargo is
seaworthiness extends not only to the shipped, or transhipped, be

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

seaworthy at the commencement of Note: Every deviation not specified above is


each particular voyage. (Sec. 115) improper. (Sec. 125)
 effect of improper deviation
 Rule  An insurer is not liable for
where ship becomes unseaworthy in the any loss happening to the thing
course of the voyage insured subsequent to an improper
 When the ship becomes unseaworthy deviation. (Sec. 126)
during the voyage to which an insurance
relates, an unreasonable delay in H. Loss
repairing the defect exonerates the 1. Kinds of losses
insurer on ship or shipowner's interest a. TOTAL LOSS:
from liability from any loss arising i. actual loss - cause by:
therefrom. (Sec. 118) a. A total destruction of the
thing insured;
Warranty that necessary documents are b. The irretrievable loss of the
carried thing by sinking, or by being
 Where the nationality or broken up;
neutrality of a ship or cargo is expressly c. Any damage to the thing
warranted, it is implied that the ship will which renders it valueless to the
carry the requisite documents to show such owner for the purpose for which
nationality or neutrality and that it will not he held it; or
carry any documents which cast reasonable d. Any other event which
suspicion thereon. (Sec. 120) effectively deprives the owner of
the possession, at the port of
Warranty against improper deviation destination, of the thing insured.
 Deviation is a departure (Sec. 130)
from the course of the voyage insured or
an unreasonable delay in pursuing the ii. constructive total loss - one
voyage or the commencement of an which gives to a person insured a
entirely different voyage. (Sec. 123) right to abandon (sec. 131 & sec. 139)
 Proper voyage: (in order)
i. that stated in the insurance b. PARTIAL LOSS – that which is
contract not total (Sec. 128)
ii. that fixed by mercantile  An actual loss may be presumed
usage from the continued absence of a ship
iii. that which is most natural, without being heard of. The length of
direct and advantageous time which is sufficient to raise this
presumption depends on the
 when deviation proper: circumstances of the case. (Sec. 132)
i. When caused by
circumstances over which neither the CO-INSURANCE - A marine insurer is liable
master nor the owner of the ship has any upon a partial loss, only for such proportion of
control; the amount insured by him as the loss bears to
ii. When necessary to comply the value of the whole interest of the insured in
with a warranty, or to avoid a peril, the property insured. (Sec. 157)
whether or not the peril is insured
against; When the property is insured for less than its
iii. When made in good faith, value, the insured is considered a co-insurer of
and upon reasonable grounds of belief in the difference between the amount of insurance
its necessity to avoid a peril; or and the value of the property.
iv. When made in good faith, for
the purpose of saving human life or Requisites:
relieving another vessel in distress. (Sec. 1. The loss is partial;
124) 2. The amount of insurance is
less than the value of the
property insured (Sec 157).

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

freightage cannot in any case be


Note: In fire insurance, in addition to abandoned unless the ship is also
the above 2 requisites, there has to be an abandoned. (Sec. 139)
express stipulation to that effect.
Note: In case of constructive total loss,
2. Right to payment upon an actual total loss insured may
 Upon an actual total loss, a 1. abandon goods or vessel to
person insured is entitled to payment the insurer and claim for whole
without notice of abandonment. (Sec. insured value (Sec. 139), or
135) 2. he may, without abandoning
vessel, claim for partial actual
3. Scope of insurance against actual total loss loss. (Sec. 155)
 An insurance confined in terms
to an actual loss does not cover a 5. Concept of abandonment and its requisites
constructive total loss, but covers any  the act of the insured by which,
loss, which necessarily results in after a constructive total loss, he
depriving the insured of the possession, declares the relinquishment to the
at the port of destination, of the entire insurer of his interest in the thing
thing insured. (Sec. 137) insured. (Sec. 138)

4. When constructive total loss exists Effects:


 A person insured by a contract of  equivalent to a transfer by
marine insurance may abandon the the insured of his interest to the insurer,
thing insured, or any particular portion with all the chances of recovery and
thereof separately valued by the policy, indemnity. (Sec. 146)
or otherwise separately insured, and  acts done in good faith by
recover for a total loss thereof, when the those who were agents of the insured in
cause of the loss is a peril insured respect to the thing insured, subsequent
against: to the loss, are at the risk of the insurer
a. If more than 3/4 thereof in and for his benefit. (Sec. 148)
value is actually lost, or would have  acceptance of an
to be expended to recover it from the abandonment, whether express or
peril; implied, is conclusive upon the parties,
and admits the loss and the sufficiency
b. If it is injured to such an of the abandonment. (Sec. 151)
extent as to reduce its value more  once made and accepted is
than 3/4; irrevocable, unless the ground upon
which it was made proves to be
c. If the thing insured is a ship, unfounded. (Sec. 152)
and the contemplated voyage cannot
be lawfully performed without Requisites:
incurring either an expense to the 1. There must be an actual
insured of more than 3/4 the value relinquishment by the person insured of
of the thing abandoned or a risk his interest in the thing insured (Sec.
which a prudent man would not take 138);
under the circumstances; or 2. There must be a constructive
total loss (Sec. 139);
d. If the thing insured, being 3. The abandonment be neither
cargo or freightage, and the voyage partial nor conditional (Sec. 140);
cannot be performed, nor another 4. It must be made within a
ship procured by the master, within reasonable time after receipt of reliable
a reasonable time and with information of the loss (Sec. 141);
reasonable diligence, to forward the 5. It must be factual (Sec. 142);
cargo, without incurring the like 6. It must be made by giving
expense or risk mentioned in the notice thereof to the insurer which may
preceding sub-paragraph. But be

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

done orally or in writing (Sec. 143); and insured which may have come to the
7. The notice of abandonment hands of the insured. (Sec. 154)
must be explicit and must specify the
particular cause of the abandonment 6. Average
(Sec. 144). 1. Kinds of average (particular
and general)
 where the information
regarding the loss is of a doubtful GENERAL AVERAGE LOSS - includes
character, the insured is entitled to a damages and expenses which are
reasonable time to make inquiry. (Sec. deliberately caused by the master of the
141) vessel or upon his authority, in order to save
 where the information upon the vessel, her cargo, or both at the same
which an abandonment has been made time from real or known risk. It must be
proves incorrect, or the thing insured borne equally by all of the interests
was so far restored when the concerned in the venture.
abandonment was made that there was
then in fact no total loss, the PARTICULAR AVERAGE LOSS - includes
abandonment becomes ineffectual (Sec. all damages and expenses caused to the
142) vessel or to her cargo which have not inured
 if the notice be done orally, a to the common benefit and profit of all
written notice of such abandonment persons interested in the vessel and her
shall be submitted within seven days cargo. It is borne alone by the owner of the
from such oral notice.(Sec. 143) cargo or the vessel, as the case may be.
 an abandonment can be
sustained only upon the cause specified 2. Requisites of general average
in the notice thereof (sec. 145) 1. There must be a common
danger to the vessel or cargo;
 where notice of
2. Part of the vessel or cargo
abandonment is properly given, the
was sacrificed deliberately;
rights of the insured are not prejudiced
3. The sacrifice must be for the
by the fact that the insurer refuses to
common safety or for the benefit of
accept the abandonment. (Sec. 149)
all;
4. It must be made by the
Other Rules:
master or upon his authority;
 If a marine insurer pays for a loss 5. It must be not be caused by
as if it were an actual total loss, he is any fault of the party asking the
entitled to whatever may remain of the contribution;
thing insured, or its proceeds or salvage, 6. It must be successful, i.e.
as if there had been a formal resulted in the saving of the vessel or
abandonment. (Sec. 147) cargo; and
 The acceptance of an 7. It must be necessary.
abandonment may be either express or
implied from the conduct of the insurer. 3. Insurer’s liability for general
The mere silence of the insurer for an average
unreasonable length of time after notice  the liability of the insurer shall
shall be construed as an acceptance. be limited to the proportion of
(Sec. 150) contribution attaching to his policy
 On an accepted abandonment of value where this is less than the
a ship, freightage earned previous to the contributing value of the thing
loss belongs to the insured of said insured. (Sec. 164)
freightage; but freightage subsequently
earned belongs to the insurer of the  when a person insured by a
ship. (Sec. 153) contract of marine insurance has a
 If an insurer refuses to accept a demand against others for
valid abandonment, he is liable as upon contribution, he may claim the
actual total loss, deducting from the whole loss from the insurer,
amount any proceeds of the thing

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

subrogating him to his own right to  the measure of indemnity in an


contribution. (Sec. 165) insurance against fire is the expense it
would be to the insured at the time of
No liability: the commencement of the fire to replace
a. after the separation of the the thing lost or injured in the condition
interests liable to the contribution in which at the time of the injury (Sec.
b. when the insured, having 171)
the right and opportunity to enforce
the contribution from others, has Valued Policy:
neglected or waived the exercise of  the effect shall be the same as in a
that right. (Sec. 165) policy of marine insurance (Sec. 171)
Note: Insured is not a co-insurer in the
XI. FIRE INSURANCE absence of stipulation

A. Definition and scope of fire FALL-OF-BUILDING CLAUSE – provides


insurance that if the building or any part thereof falls,
 a contract by which the insurer for a except as a result of fire, all insurance by the
consideration agrees to indemnify the policy shall immediately cease.
insured against loss of, or damage to,
property by fire, but may include loss by OPTION TO REBUILD CLAUSE – option of
lightning, windstorm, tornado or insurer to reinstate or replace the property
earthquake and other allied risks, when damaged or destroyed or any part thereof,
such risks are covered by extension to instead of paying the amount of the loss or
fire insurance policies or under separate the damage. The insurer, after electing to
policies. (Sec. 167) rebuild, cannot be compelled to perform
this undertaking by specific performance
B. Risks or losses covered because this is an obligation to do, not to
1. direct losses give. Remedy: ‘the same be executed at his
2. indirect or consequential losses cost’. (Art. 1167 Civil Code)
a. physical damage
b. loss of earnings XII. CASUALTY INSURANCE
c. extra expense
A. Concept
C. Effect of alteration in the thing  insurance covering loss or liability
insured arising from accident or mishap,
 entitles an insurer to rescind a excluding certain types of loss which by
contract of fire insurance; (Sec. 168) law or custom are considered as falling
provided: exclusively within the scope of other
1. The use or condition of the thing types of insurance such as fire or
is specifically limited or marine.
stipulated in the policy;
2. Such use or condition as limited  includes, but is not limited to:
by the policy is altered;  employer's liability insurance,
3. The alteration is made without  motor vehicle liability insurance,
the consent of the insurer;
 plate glass insurance,
4. The alteration is made by means
within the control of the insured;  burglary and theft insurance,
5. The alteration increases the risk;  personal accident and health
(Sec. 168) and insurance as written by non-life
6. There must be a violation of a insurance companies, and
policy provision. (Sec. 170)  other substantially similar kinds
of insurance.
D. Measure of indemnity

Open policy: B. Liability insurable


a. liability for quasi-delict or non-
fulfillment of contract

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

b. liability for criminal negligence The liability of the insurer to the 3rd
party is based on contract; that of the
insured is based on tort. (Malayan
LIABILITY OF INSURER IF INSURED Insurance Co. Inc. vs CA 165 SCRA 136)
WAS COMMITTING A FELONY - liabilities  While in a solidary obligation the
arising out of acts of negligence, which are creditor may enforce the entire
also criminal, are also insurable on the obligation against one of the solidary
ground that such acts are accidental. But debtors, in an insurance contract, the
liability consequences of deliberate criminal insurer undertakes to indemnify the
acts are not insurable. insured against loss, damage or liability
arising from unknown or contingent
C. Meaning of “accident” and event. To make the insurer solidarily
“accidental” in casualty insurance liable with the latter’s entire obligation
beyond the sum limited in the insurance
ACCIDENTAL - The terms “accident” and contract would result in “evident breach
“accidental” have been taken to mean that of the concept of solidary obligations.”
which happens by chance or fortuitously, (Vda. De Maglana vs Consolacion, 212
without intention or design, which is SCRA 268)
unexpected, unusual and unforeseen.
XIII. SURETYSHIP
INTENTIONAL - as used in an accident
policy excepting intentional injuries A. Definition
inflicted by the insured or any other person,  An agreement whereby a surety
implies the exercise of the reasoning guarantees the performance by the
faculties, consciousness and volition. Where principal or obligor of an obligation or
a provision of the policy excludes undertaking in favor of an obligee. (Sec.
intentional injury, it is the intention of the 175) It is essentially a credit
person inflicting the injury that is accommodation.
controlling. If the injuries suffered by the
insured clearly resulted from the intentional Kinds:
act of the third person, the insurer is relieve a. Fidelity Bond – contract of
from liability as stipulated (Biagtan v. the insurance against loss from misconduct
Insular Life Assurance Co. Ltd., 44 SCRA
58, 1972) b. Fidelity Guaranty Insurance – a
contract whereby one, for a
D. Basis and extent of insurer’s consideration, agrees to indemnify the
liability assured against loss arising from want of
 Casualty insurance may provide for integrity, fidelity or honesty of
3rd party liability (in the nature of employees or other persons holding
stipulation pour autrui for personal positions of trust
injury and even damage to property), in B. Nature of liability of surety
which case, the third party may directly 1. Solidary;
sue the insurer upon the occurrence of 2. Limited to the amount of the bond;
the loss. (First Integrated Bonding and 3. It is determined strictly by the terms
Ins. Co., Inc. vs Hernando, 199 SCRA of the contract of suretyship in
769) relation to the principal contract
 If the policy provides for between the obligor and the obligee.
“reimbursement after actual payment by (Sec. 176)
the insured,” or for the indemnity
against loss, a third person has no cause SURETYSHIP PROPERTY
of action against the insurer. (Bonifacio INSURAN
Brothers vs Mora 20 SCRA 261) CE
 The direct liability of the insurer 1.accessory contract 1. principal contract
under indemnity contract against 3rd 2. parties: surety, 2. parties: insurer
party does not mean that the insurer can obligor and and insured
be held solidarily liable with the insured obligee
and / or the other parties found at fault.
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. credit 3. contract of weekly, or where premiums are payable


accommodation indemnity monthly or oftener; and
4. surety can 4. no such right;
recover from only right of 6. VARIABLE CONTRACT – any policy
principal subrogation or contract on either a group or
5. bond can be 5. may be cancelled individual basis issued by an insurance
cancelled only unilaterally company providing for benefits or other
with consent of either by insured contractual payments or values
obligee, or insurer on thereunder to vary so as to reflect
Commissioner or grounds investment results of any segregated
court provided by law portfolio of investment.
6. requires 6. no need of
acceptance of acceptance by C. Liability of insurer in case of
obligee to be any third party suicide
valid
7. risk-shifting 7. risk-distributing 1. If committed after 2 years from the
device, premium device, premium date of the policy’s issue or its last
paid being in the paid as a ratable reinstatement;
nature of a contribution to a 2. If committed after a shorter period
service fee common fund provided in the policy; and
3. If committed in a state of insanity
XIV. LIFE INSURANCE regardless of the date of the commission
unless suicide is an excepted peril. (Sec.
A. Definition 180-A)
 insurance on human lives and
insurance appertaining thereto or Note: Any stipulation extending the 2-year
connected therewith which includes period is null and void.
every contract or pledge for the payment
of endowments or annuities. (Sec. 179)  Premiums paid out of conjugal funds,
the proceeds are considered conjugal. If
B. Kinds of life insurance the beneficiary is other than the
1. ORDINARY LIFE, GENERAL LIFE insured’s estate, the source of premiums
OR OLD LINE POLICY - insured pays a would not be relevant (Del Val v. Del
fixed premium every year until he dies. Val, 29 Phil 534).
Surrender value after 3 years.  If the insured or beneficiary is a minor,
and the amount involved does not
2. LIMITED PAYMENT POLICY – exceed P20,000, the father, in the
insured pays premium for a limited absence of a judicial guardian, or in his
period. If he dies within the period, his absence or incapacity, the mother may
beneficiary is paid; if he outlives the exercise the minor’s rights under the
period, he does not get anything. policy, without the need of a court
authority or a board. (Sec. 180)
3. ENDOWMENT POLICY – pays
premium for specified period. If he D. Right to assign life insurance
outlives the period, the face value of the policy
policy is paid to him; if not, his  A policy of insurance upon life or
beneficiaries receive the benefit. health may pass by transfer, will or
succession to any person, whether he
4. TERM INSURANCE – insurer pays has an insurable interest or not, and
once only, and he is insured for a such person may recover upon it
specified period. If he dies within the whatever the insured might have
period, his beneficiaries benefits. If he recovered. (Sec. 181)
outlives the period, no person benefits  Notice to an insurer of a transfer or
from the insurance. bequest thereof is not necessary to
preserve the validity of a policy of
5. INDUSTRIAL LIFE - life insurance
entitling the insured to pay premiums
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

insurance upon life or health, unless money and the debtor incurs in delay, the
thereby expressly required. (Sec. 182) indemnity for damages, there being no
stipulation to the contrary, shall be the payment
E. Measure of indemnity of interest agreed upon, and in the absence of
 Unless the interest of a person stipulation, the legal interest which is 6% per
insured is susceptible of exact pecuniary annum.". (Tio Kho Chio vs CA, 202 SCRA 119).
measurement, the measure of indemnity
under a policy of insurance upon life or Prescriptive period: 10 years
health is the sum fixed in the policy. Exception: the parties may validly agree on a
(Sec. 183) shorter period provided it is not less than 1 year
from the time the cause of action accrues.
XV. CLAIMS SETTLEMENT  The cause of action accrues from the
final rejection of the claim of the insured
a. Life insurance and not from the time of loss.
 The proceeds of the policy shall
be paid immediately upon maturity of Prescriptive period commences from the
the policy, unless such proceeds are initial denial of the claim, not from the
made payable in installments or as an resolution of the motion for
annuity, in which case the installments, reconsideration filed by the insured.
or annuities shall be paid as they (Sun Insurance Office Ltd. vs. CA, 195
become due. SCRA 193)
 That in the case of a policy
maturing by the death of the insured, Note:Under Sec. 384 of the insurance Code,
the proceeds thereof shall be paid within notice of claim setting for the nature, extent and
60 days after presentation of the claim duration of the injuries sustained must be filed
and filing of the proof of the death of the otherwise the claim is waived. This is different
insured. (Sec. 242) from the prescription period of 1 year from the
denial of the claim within which to file an action
b. Property Insurance against the insurer. (Vda. De Gabriel vs. CA,
 Proceeds under the policy shall be paid 264 SCRA 17)
within 30 days after proof loss is
received by the insurer and XVI. COMPULSORY MOTOR VEHICLE
ascertainment of the loss or damage is LIABILITY INSURANCE (CMVLI)
made either by agreement between the
insured and the insurer or by  a protection coverage that will
arbitration. (Sec. 243) answer for legal liability for losses
and damages for bodily injuries or
Effect of delay: the beneficiary is entitled to property damage that may be
payment of: sustained by another arising from
a. interest for the duration of the delay the use and operation of motor
at the rate of twice the legal interest vehicle by its owner.
(24% interest)
b. attorney’s fees and other litigation A. Reason for the requirement
expenses  primarily intended to provide
c. appropriate damages under the Civil compensation for the death or bodily
Code like moral and exemplary injuries suffered by innocent third
damages. (Sec. 244; Zenith parties or passengers as a result of a
Insurance Corp. vs. CA, 185 SCRA negligent operation and use of motor
389) vehicles. The victims and / or their
dependents are assured of immediate
Note: Sections 243 and 244 of the Insurance financial assistance, regardless of the
Code apply only when the court finds an financial capacity of motor vehicle
unreasonable delay or refusal in the payment of owners. (Shafer vs Judge, RTC 167
the claims. The applicable law is Article 2209 of SCRA 386)
the Civil Code which provides that if the
obligation consists in the payment of a sum of B. Scope of coverage required

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

a. Private motorists – comprehensive or dismounting from. The said vehicle


against 3rd party liability for death or might not be the one that caused the
bodily injuries accident is of no moment since the law
b. Operators of land transportation – itself provides that the party paying may
comprehensive against both passenger recover against the owner of the vehicle
and 3rd party liabilities for death or responsible for the accident. (Perla
bodily injuries Compania de Seguros, Inc. v. Ancheta,
169 SCRA 144).
C. Persons subject to the
requirement  See also Casualty Insurance, basis
1. motor vehicle owner (MVO) – one and extent of insurer’s liability
who is the actual legal owner of a motor
vehicle in whose name such vehicle is Period to file notice: written notice of claim
registered with the Land Transportation must be presented within 6 months from
Office the date of the accident otherwise the claim
is deemed waived. (Sec. 384)
2. land transportation operator (LTO)
– one who is the owner of a motor Prescriptive period: within 1 year from
vehicle or vehicles being used for denial of the claim (Sec. 384)
conveying passengers for compensation  It shall commence from the
including school buses denial of the claim, not from the
resolution of the motion for
D. No-fault indemnity claim reconsideration, otherwise it can be
used by the insured as a scheme or
“NO-FAULT” CLAUSE – any claim for death device to waste time until the
or injury shall be paid up to P5,000.00 evidence which may be used against
without necessity of proving fault or him is destroyed (Sun Insurance
negligence, provided the following proofs of Office, Ltd. v. CA, 195 SCRA).
loss under oath are submitted:
1. police report of accident; Jurisdiction: where the amount involved
2. death certificate and evidence does not exceed P100,000.00, the Office of
sufficient to establish proper the Insurance Commission and the RTC
payee; have concurrent jurisdiction. Where the
3. medical report and evidence of amount exceeds P100,000.00, RTC has
medical or hospital jurisdiction
disbursement. (Sec. 378)
FUNCTIONS OF THE COMMISSIONER:
E. Rules of recovery 1. Adjudicatory functions -
1. In the case of an occupant of a except when amount involved in
vehicle, claim shall lie against the maritime insurance is within the
insurer of the vehicle in which the exclusive jurisdiction of the RTC
occupant is riding, mounting or 2. Administrative functions –
dismounting includes suspension or revocation of
2. if not an occupant, case or claim license, power to examine books and
shall lie against the insurer of the records, etc.
directly offending vehicle
3. In all cases, the right of the party Note: The Insurance Commissioner has no
paying the claim to recover against the jurisdiction to decide the legality of a
owner of the vehicle responsible for the contract of agency entered into between an
accident shall be maintained. insurance company and its agent. The same
is not covered by the term “doing or
 The claimant is not free to choose transacting insurance business” under Sec
from which insurer he will claim the “no 2, ICP, neither is it covered by Sec. 416 of
fault indemnity.” As the law, makes it the same Code which grants the
mandatory that the claim shall lie Commissioner adjudicatory powers
against the insurer of the vehicle in (Philippine American Life Insurance Co. v.
which the occupant is riding, mounting Ansaldo, 234 SCRA 509).
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

even if the parties expressly


AUTHORIZED DRIVER CLAUSE – The provide for it.
clause means that it indemnifies the insured B. Foreign Ports to Philippine Ports
owner against loss or damage to the car but a. New Civil Code - primary
limits the use of the insured vehicle to the law
insured himself or any person who drives on b. Code of Commerce
his order or with his permission (Villacorta c. Carriage of Goods by Sea
v. Insurance Commissioner) Act
 The requirement that the person  the law of the Philippines
driving the insured vehicle is permitted still applies even if the collision
in accordance with the licensing laws or actually takes place in foreign
other laws or regulations to drive the waters.
motor vehicle. It is applicable only if the C. Philippine Ports to Foreign Ports
person driving is other than the insured.  laws of the country to
which the goods are to be
 Where the car is unlawfully and transported. (Eastern Shipping v.
wrongfully taken without the owner’s IAC, 150 SCRA 463)
consent or knowledge, such taking
constitutes theft, and thus, it is the “theft 3. Air transportation
clause” and not the “authorized driver A. Domestic - Civil Code
clause” that should apply (Palermo v. B. International - Warsaw
Pyramids Ins., 161 SCRA 677). Convention
 applies to all
COOPERATION CLAUSE – clause in an international transportation of
automobile insurance policy which provides person, baggage or goods
in essence that the insured shall give all performed by aircraft for hire.
such information and assistance as the
insurer may require, usually requiring When not applicable: (WCN)
attendance at trials or hearings. 1. If there is willful misconduct on
the part of the carrier’s employees.
 The Convention does not
TRANSPORTATION LAWS regulate, much less exempt, carrier from
liability for damages for violating the
I. PRELIMINARY CONSIDERATIONS rights of its passengers under the
contract of carriage (PAL v. CA, 257
Governing Laws: SCRA 33).
2. when it contradicts public policy;
1. Land Transportation 3. if the requirements under the
A. Overland Transportation Convention are not complied with.
a. Common carriers
i. Civil Code - primary law International transportation means any
ii. Code of Commerce - transportation in which the place of departure
suppletory law and the place of destination are situated either
b. Private carriers 1. within the territories of two High
B. Object merchandise Contracting Parties regardless of
a. Code of Commerce - whether or not there be a break in
primary law the transportation or transshipment,
b. Civil Code - suppletory or
law 2. within the territory of a single High
Contracting Party, if there is an
2. Transportation by Sea agreed stopping place within a
A. Coastwise territory subject to the sovereignty,
a. Civil Code - primary law mandate or authority of another
b. Code of Commerce - power, even though that power is not
suppletory law a party to the Convention.
 COGSA - inapplicable

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Whether the transportation is Constitution)


"international" is determined by the
contract of the parties, which in the case  No franchise, certificate, or any other form
of passengers is the ticket. When the of authorization for the operation of a public
contract of carriage provides for the utility shall be granted except to:
transportation of the passenger between 1. Citizens of the Philippines
certain designated terminals "within the 2. Corporations or associations
territories of two High Contracting organized under the laws of the
Parties," the provisions of the Philippines at least sixty (60%) per
Convention automatically apply and centum of whose capital is owned by
exclusively govern the rights and such citizens (Art. XII Sec. 11 1987
liabilities of the airline and its Constitution)
passenger. (Santos III vs. Northwest
Orient Airlines 210 SCRA 256)  The State may, in the interest of national
welfare or defense, establish and operate
 Transportation to be performed by vital industries and upon payment of just
several successive air carriers shall be compensation, transfer to public ownership
deemed to be one undivided utilities and other private enterprises to be
transportation if it has been regarded by operated by the government. (Art. XII, Sec.
the parties as a single operation, 18).
whether it has been agreed upon under
the form of a single contract or of a  The State shall regulate or prohibit
series of contracts, and it shall not lose monopolies when the public interest so
its international character merely requires; no combination in restraint of
because one contract or a series of trade or unfair competition shall be allowed.
contracts is to be performed entirely (Art. XII, Sec. 19).
within a territory subject to the  The right to operate a public utility may
sovereignty, suzerainty, mandate, or exist independently and separately from the
authority of the same High Contracting ownership of the facilities thereof. One can
Party. (Art. 1 WC) own said facilities without operating them
as a public utility, or conversely, one may
 Warsaw Convention prevails over the operate a public utility without owning the
Civil Code, Rules of Court and all laws in facilities used to serve the public. The
the Philippines since an international devotion of property to serve the public may
law prevails over general law. be done by the owner or by the person in
control thereof who may not necessarily be
 Concept of Public Utility & Public the owner thereof. (Tatad vs. Garcia G.R.
Service (Sec. 13, Public Service Act) No. 114222)
Public Service Regulatory Agencies
 includes every person that operates,
manages or controls in the Philippines for Government agencies that replaced the Public
hire or compensation, with general or Service Commission:
limited clientele, whether permanent, 1. Land Transportation Franchising
occasional or accidental, and done for Regulatory Board (LTFRB) – land
general business purposes, any common transportation (The Land
carrier or public utility, ice plants, power Transportation Office registers motor
and water supplies communication and vehicles)
similar public services. (Sec. 13b, CA 146)
2. Maritime Industry Authority (MARINA)
Public Utility – water transportation
 refers to a business or service engaged in
supplying the public with some commodity 3. National Telecommunications
or service of public consequence. Commission – communication utilities
and services, radio communications
Constitutional limitations on operation systems, wire or wireless telephone and
of public utilities (Art. XII, 1987
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

telegraph systems,, radio and television Requirements for granting Certificate of Public
broadcasting systems and other similar Convenience: (CPPS)
public utilities 1. The applicant must be a citizen
of the Philippines or a corporation or
4. Energy Regulatory Board – electric or entity 60% of the capital of which is
power companies owned by such citizens;

5. National Water Resources Council – 2. The applicant must prove public


water resources necessity.

6. Civil Aeronautics Board 0 air 3. The applicant must prove that


transportation (The Air Transportation the operation of the public service
Office undertakes the maintenance and proposed and the authorization to do
operation of airports and other similar business will promote the public interest
facilities. The ATO also registers on a proper and suitable manner;
aircrafts.)
4.The applicant must have
Concept of franchise and certificate of public sufficient financial capability to
convenience undertake the proposed services and
meeting the responsibilities incident to
Certificate of Certificate of its operation;
Public Public Grounds for the Revocation of the Certificate:
Convenience Convenience and (VDCA)
Necessity when the holder:
1. any authorization 1. issued by the 1. Violates or contumaciously
to operate a public appropriate refuses to comply with any order, rule or
service issued by government agency regulation of the commission
the appropriate to a public service to 2. Is a mere dummy
government agency which any political 3. Ceases operations by placing his
subdivision has buses in storage
granted a franchise 4. Abandons the service
2. an authorization 2. an authorization
for the operation of for the operation of Grounds for Suspension: when the operator
public services for public services for willfully or contumaciously refuses to comply
which no franchise, which a franchise is with any order, rule or regulation.
either municipal or required by law  General Rule: Prior notice and
legislative is hearing.
required by law  Exception: When it is necessary to
3. it is a “property” 3. neither a franchise avoid serious and irreparable damage or
and have a nor a contract, inconvenience to the public or private
considerable value confers no property interest, in which case, a suspension not
and can be the right, and is a license more than 30 days may be ordered, prior to
subject of sale by or a privilege. the hearing. (Soriano v. Medina, 164 SCRA
the holder (Cogeo- Revocation of this 36)
Cubao Operators certificate deprives
and Drivers Assn. v. him of no vested II. GENERAL CONCEPTS
CA, 207 SCRA 343) right. New and
additional burdens, Contract of Transportation - a contract
alteration of the whereby a person, natural or juridical, obligates
certificate, or even to transport persons, goods or both, from one
revocation or place to another by land, air or water for a price
annulment thereof or compensation.
are reserved to the
State. (Luque v. Kinds of Contracts of Transportation:
Villegas, 30 SCRA 1. Carriage of passengers or Carriage of
408) goods
2. Common carrier or Private carrier

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

b. contract of carriage - which is a


Parties to the Contract of Transportation: real contract for not until the carrier
A. Carriage of Passengers is actually used can the carrier be
1. Common carrier - persons, said to have already assumed the
corporations, firms or associations obligation of the carrier
engaged in the contract of  aircrafts:
transportation as defined above and  Perfected contract - if it was
offering their services to the public. established:
(Art. 1732, NCC)  that the passenger had
2. Passenger - one who travels in a checked in at the
public conveyance by virtue of departure counter,
contract, express or implied, with  passed through customs
the carrier as to the payment of fare and immigration,
or that which is accepted as an
 boarded the shuttle
equivalent thereof.
buses and
Note: someone is still considered as  proceeded to the ramp of
passenger even if he is being carried the aircraft, and
gratuitously or under a reduced fare.  his baggage had already
However, a stipulation limiting the been loaded in the
common carrier’s liability for negligence aircraft to be flown with
is valid. him to his destination.

B. Carriage of Goods  in buses, jeepneys and street


1. Shipper - one who delivers the goods cars:
to the carrier for transportation and  Once a public utility bus or
who pays the consideration or on jeepney stops, it is in effect
whose behalf payment is made making a continuous offer to
2. Common carrier bus riders.
3. Consignee - to whom the goods are  A passenger is deemed to be
to be delivered which could be: accepting the offer if he is
 the shipper himself or already attempting to board
 may be a 3rd person who the conveyances and the
is not actually a party to the contract of carriage is
contract perfected from that point.
 trains:
Note: there are instances when the  Perfected when:
third-party consignee is bound by the  the passenger purchases
agreement between the shipper and the a ticket and
carrier, when it was established that he  presents himself at the
accepted the same and is trying to proper place and in the
enforce the agreement. (Everett proper manner to be
Steamship Corp. v. CA, 297 SCRA 496) transported and
 must also have the bona
Perfection of the Contract of fide intention to use the
Transportation: facilities of the carrier.
1. Carriage of Passengers
a. contract to carry - an agreement 2. Carriage of Goods
to carry the passenger at some future a. contract to carry - whereby the
date which is consensual carrier agrees to accept and
 in aircrafts, contract to carry is transport goods at some future date
perfected even if no tickets have b. contract of carriage - when the goods
been issued so long as there was are unconditionally placed in the
already meeting of minds with possession and control of the carrier,
respect to the subject matter and and upon their receipt by the carrier
the consideration for transportation

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

(Asia Lighterage and Shipping Inc. v. CA,


Tests for determining whether the GR No. 147246, August 19, 2003)
carrier is a common carrier of goods:
(EUMH) g. A person or entity need not be engaged in
1. he must be engaged in the business of the business of public transportation for the
carrying goods for others provisions of the Civil Code on common
 as public employment, and carriers to apply to them (Fabre Jr. v. CA,
 must hold himself out as ready to engage 259 SCRA 426)
in the transportation of goods generally
as a business and not as a casual Private Carrier - not engaged in business of
occupation carrying as a public employment, undertakes to
2. he must undertake to carry goods of the deliver goods or passengers for compensation
kind to which his business is confined (requires only ordinary diligence). (Home
Insurance Co. vs. American Steamship Agency,
3. he must undertake to carry by the method 23 SCRA 24)
by which his business is conducted and over
his established roads and Distinctions between a common carrier
and a private carrier:
4. the transportation must be for hire (First
Phil. International Corporation v. CA, 300
SCRA 66) Common Private Carrier
Characteristics of common carrier under Carrier
Art. 1732 and under the Public Service 1. holds himself 1. contracts with
Act: out for all people particular
a. Art. 1732 makes no distinction between one indiscriminately individuals or
whose principal business activity is the groups only
carrying of persons or goods or both, and 2. extraordinary 2. ordinary
one who does such carrying only as an diligence is diligence is
ancillary activity (in local idiom, as a required required
sideline) (De Guzman v. CA, 168 SCRA 612) 3. subject to State 3. not subject to
regulation State regulation
b. Art. 1732 also carefully avoids making any 4. parties may not 4. parties may
distinction between a person or enterprise agree on limiting limit the carrier’s
offering transportation service on a regular the carrier’s liability provided
or scheduled basis and one offering such liability except it is not contrary
service on an occasional, episodic or when provided by to law, morals or
unscheduled basis law good customs
5. exempting 5. general
c. Art. 1732 does not distinguish between a circumstance; exempting
carrier offering its services to the general prove circumstance;
public and one who offers services or solicits extraordinary caso fortuito, Art.
business only from a narrow segment of the diligence and Art. 1174 NCC
general population 1733, NCC
6. there is 6. no presumption
d. A person or entity is a common carrier and presumption of of fault or
has the obligations of the common carrier fault or negligence negligence
under the Civil Code even if he did not
secure a Certificate of Public Convenience
Functions of Arrastre Operator:
e. The Civil Code makes no distinction as to 1. to receive, handle, care for, and deliver
the means of transporting, as long as it is by all merchandise imported and exported,
land, water or air (First Philippine upon or passing over government-
Industrial Corp. v. CA, 300 SCRA 661) owned wharves and piers in the port
2. to record or check all merchandise
f. The Civil Code does not provide that the which may be delivered to said port at
transportation should be by motor vehicle shipside

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. to furnish light, and water services and although the same was already sold or
other incidental services in order to conveyed to another person at the time of
undertake its arrastre service the accident.

Note: The arrastre operator’s services are Kabit System


clearly not maritime. They are in fact no  A system whereby a person who has been
different from those of a depositary or granted a certificate of public convenience
warehouseman. allows other persons who own motor
vehicles to operate under such license, for a
Nature of Business fee or percentage of such earnings.
 common carriers are impressed with public  It is void and inexistent
interest and concern hence, common
carriers are subject to regulation by the Effects of the System:
State. 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, 152 SCRA 388)
Common 2. The registered owner is generally liable
Carrier for all the consequences flowing from
Towage A vessel is Persons, the operations of the carrier.
hired to bring corporations,  The public has the right to
another vessel firms or assume that the registered owner is
to another associations the actual or lawful owner thereof.
place. It engaged in the  It would be very difficult and
refers to a business of often impossible, as a practical
service carrying or matter, for the public to enforce
rendered to a transporting their rights of action that they may
vessel by passengers or have for injuries inflicted by the
towing for the goods or both, vehicle if they should be required to
mere purpose by land, water, prove who the actual owner is
of expediting or air, for (Benedicto v. IAC, 187 SCRA 547).
her voyage compensation,  The thrust of the law in enjoining
without offering their the kabit system is not so much as to
reference to services to the penalize the parties but to identify
any public. the person upon whom
circumstances responsibility may be fixed in case of
of danger an accident with the end view of
protecting the riding public. The
Arrastre A contract for policy therefore loses its force if the
the unloading public at large is not deceived, much
of goods from less involved. (Lim vs. CA G.R. No.
a vessel 125817)
3. The registered owner cannot recover
Stevedorin Involves the from the actual owner and the latter
g loading and cannot obtain transfer of the vehicle to
unloading of himself, both being in pari delicto (Teja
coastwise Marketing v. IAC)
vessels calling 4. For the better protection of the public,
at the port both the registered owner and the actual
owner are jointly and severally liable
with the driver (Zamboanga
Registered Owner Rule Transportation Co. v. CA).
 the person who is the registered owner of a
vehicle is liable for any damage caused by III. OBLIGATIONS OF THE COMMON
the negligent operation of the vehicle CARRIER IN A CONTRACT OF

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

CARRIAGE OF GOODS to receive them. (Art. 1736)


 It remains in full force and effect
A. Vigilance over the Goods: even when they are temporarily
unloaded or stored in transit
 Duty to exercise extraordinary diligence unless the shipper or owner has
 From the nature of their business and made use of the right of stoppage
for reasons of public policy, they are in transitu (Art. 1737).
bound to observe extraordinary  It continues to be operative even
diligence in the vigilance over the goods during the time the goods are
and for the safety of the passengers stored in a warehouse of the
transported by them, according to all the carrier at the place of
circumstances of each case. (Art. 1733) destination until the consignee
 a common carrier is required to has been advised of the arrival of
faithfully comply with his obligation the goods and has had
to deliver the goods to the point of reasonable opportunity
destination thereafter to remove them or
otherwise dispose of them (Art.
 Presumption of negligence 1738).
 In case of loss, destruction and
deterioration of the goods, common  Defenses of common carriers
carriers are presumed to be at fault or 1. Flood, storm, earthquake,
have acted negligently, unless they prove lighting, or other natural disaster or
that they exercise extraordinary calamity.
diligence. 2. Act of the public enemy in war,
whether international or civil
Proof required: 3. Act or omission of the shipper or
 mere proof of delivery of goods in the owner of goods
good order to a carrier and the 4. The character of the goods or
subsequent arrival of the same goods defects in the packing or in the
at the place of destination in bad containers.
order makes for a prima facie case 5. Order or act of competent
against the carrier. (Coastwise authority (Art. 1734)
Lighterage Corp. v. CA, 245 SCRA
796) 1. Natural Disaster
 the court need not make an express Requisites: (PDN)
finding of fault or negligence of a. must be the proximate and only
common carriers, the law imposes cause of the loss
liability upon common carriers, as b. carrier must exercise due
long as it is shown that: diligence to prevent or minimize the
1. there exist a contract between loss before, during or after the
the shipper and the common occurrence of the disaster (Art. 1739)
carrier c. carrier had not negligently
2. that the loss or deterioration incurred in delay in transporting the
took place during the existence goods (Art. 1740)
of the contract
Acts of the Public Enemy
 Duration of liability: Requisites:
Commencement: when the goods are a. the act must be the proximate
unconditionally placed in the and only cause of the loss
possession of, and received by the b. carrier must exercise due
carrier for transportation diligence to prevent or minimize the
loss before, during or after the act
Termination: when the same are delivered, causing the loss, deterioration or
actually or constructively, by destruction of the goods (Art. 1739)
the carrier to the consignee or
to the person who has the right 2. Contributory Negligence of the
Shipper
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 If the shipper or owner merely reasonable, just and in consonance with


contributed to the loss, destruction public policy (Art. 1751)
or deterioration of the goods, the
proximate cause thereof being the Valid stipulations:
negligence of the carrier, the carrier  A stipulation that the common carrier's
shall still be liable for damages, but liability is limited to the value of the
such shall be equitably reduced. (Art. goods appearing in the bill of lading,
1741) unless the shipper or owner declares a
greater value, is binding. (Art. 1749)
3. Character of the Goods or Defects  A contract fixing the sum to be
in the Packing or in the Container recovered by the owner or shipper for
 Even if the damage should be the loss, destruction or deterioration of
caused by the inherent the goods, if it is reasonable and just
defect/character of the goods, the under the circumstances and has been
common carrier must exercise due fairly and freely agreed upon. (Art. 1750)
diligence to forestall or lessen the  An agreement limiting the common
loss. (Art. 1742) carrier’s liability for delay on account of
 The carrier who knowing the fact strikes or riots (Art. 1748)
of improper packing of the goods
upon ordinary observation, still Invalid stipulations: (RNNLNTD)
accepts the goods notwithstanding a. the goods are transported at the risk
such condition is not relieved of of the owner or shipper;
liability or loss or injury resulting b. the carrier will not be liable for any
there from. (Southern Lines, Inc. v. loss, destruction or deterioration of the
CA, 4 SCRA 258) goods;
c. the carrier need not observe any
4. Order or Act of Public Authority diligence in the custody of the goods;
 Said public authority must have d. the carrier shall exercise a degree of
the power to issue the order (Art. diligence less than that of a good father
1743). Consequently, where the of a family over the movable
officer acts without legal process, the transported;
common carrier will be held liable. e. the carrier shall not be responsible
for the acts or omissions of his or its
Stipulation limiting liability of carrier employees;
Requisites: (WVR) f. the carrier’s liability for acts
1. The common carrier and the shipper committed by thieves or robbers who do
may agree on the carriers observance of not act with grave or irresistible threat,
diligence to a degree less than violence or force is dispensed with or
extraordinary, provided it be: diminished;
a. in writing, signed by the g. the carrier is not responsible for the
shipper or owner; loss, destruction or deterioration of the
b. supported by a valuable goods on account of the defective
consideration other than the condition of the car, vehicle, ship or
service rendered by the carriers; other equipment used in the contract of
and carriage. (Art. 1745)
c. reasonable, just and not
contrary to public policy. (Art. Effect of delay:
1744)  If the common carrier, without just
cause, delays the transportation of the
2. The fact that the common carrier has no goods or changes the stipulated or usual
competitor along the line or route, or a route, the contract limiting the common
part thereof, to which the contract refers carrier's liability cannot be availed of in
shall be taken into consideration on the case of the loss, destruction, or
question of whether or not a stipulation deterioration of the goods. (Art. 1747)
limiting the common carrier's liability is
Rule on presumption despite stipulation:

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Even when there is an agreement case of the loss, destruction, or


limiting the liability of the common deterioration of the goods. (Art. 1747)
carrier in the vigilance over the goods,  Excusable delays in carriage suspend,
the common carrier is disputably but do not generally terminate, the
presumed to have been negligent in case contract of carriage, and when the cause
of their loss, destruction or is removed, the master must proceed
deterioration.( Art. 1752) with the voyage and make delivery.
 During detention or delay the vessel
B. Other Obligations: continues to be liable as a common
carrier, not as a warehouseman, and
Duty to accept goods - without any remains duty bound to exercise
discrimination extraordinary diligence
 payment of the indemnity:
Grounds for valid refusal to accept goods:  stipulated in the bill of lading, or
(DUO-CIELSF)  If no indemnity is stipulated, then
1. when the goods sought to be the carrier shall be liable for the
transported are dangerous objects or damages incurred due to the delay.
substances including dynamites and
 the consignee may:
other explosives
1. leave the goods
2. goods are unfit for transportation
transported in the hands of the
3. acceptance would result in
former (abandonment) advising him
overloading
thereof in writing before their arrival
4. the goods are considered
at the point of destination.
contrabands or illegal goods
Effect: The carrier shall pay the full
5. goods are injurious to health
value of the goods as if they had been
6. goods will be exposed to untoward
lost or mislaid.
danger like flood, capture by enemies
2. If no abandonment was
and the like
made
7. goods like livestock will be exposed
to diseases  indemnification shall not
8. strike exceed the current price of the
9. failure to tender goods in time goods at the time it should have
been delivered.
Duty to deliver goods
Where and to whom delivered:
Time of delivery a. To the consignee in the place agreed
 OFT-REPEATED RULE: In the
upon by the parties.
absence of a special contract, a carrier is b. To the consignee or any other
NOT an insurer against delay in person to whom the bill of lading
transportation of goods was validly transferred or
negotiated.
 when a common carrier undertakes to
convey goods, the law implies a contract
(See: Liability of Air Carriers regarding
that they shall be delivered at
liabilities in the transport of goods by air)
destination within a reasonable time.
 in determining if the delivery is made IV. OBLIGATIONS OF THE COMMON
within a reasonable time: CARRIER IN A CONTRACT OF
i. the expected date of arrival CARRIAGE OF PASSENGERS
reflected in the bill of lading may
be considered A. Safety of Passengers
ii. depend upon the nature of goods
 Duty to observe utmost diligence
Consequences of delay:
 A common carrier is bound to carry the
 A natural disaster shall not free such
passengers safely as far as human care
carrier from responsibility. (Art. 1740)
and foresight can provide, using the
 The contract limiting the common utmost diligence of very cautious
carrier's liability cannot be availed of in

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

persons, with a due regard for all the of or injuries to passengers through the
circumstances. (Art. 1755) negligence or willful acts of the former’s
employees, although such employees
 Duration of liability may have acted beyond the scope of
Commencement: from the moment the  This responsibility cannot be
person who purchases the ticket eliminated or limited by stipulation,
from the carrier presents himself at by the posting of notices, by
the proper place and in a proper statements on the tickets or
manner to be transported with a otherwise. (Art. 1760)
bona fide intent to ride the coach  The liability of the carrier for the
Termination: until the passenger has, after personal violence of its employees or
reaching his destination, safely agents upon its passengers extends only
alighted from the carrier’s to those acts that the carrier could
conveyance or had a reasonable foresee or avoid through the exercise of
opportunity to leave the carrier’s the degree of diligence required.
premises
Note: Diligence in the selection and
 Once created, the relationship will not supervision of employees under Articles
ordinarily terminate until the passenger 2180 NCC, cannot be interposed by the
has, after reaching his destination, safely common carrier to prevent damages
alighted from the carrier’s conveyance or because the liability of the carriers arises
had a reasonable opportunity to leave from the breach of the contract of
the carrier’s premises, including the carriage. The defense under said articles
time upon which the passenger looks for is applicable to negligence in quasi-
his baggage and claim them. delicts (Del Prado v. Manila Electric Co.,
 All persons who remain on the premises 52 Phil 900).
within a reasonable time after leaving
the conveyance are to be deemed  Liability for acts of strangers or other
passengers, and what is a reasonable passengers
time or a reasonable delay within this  A common carrier is responsible for
rule is to be determined from all the injuries suffered by a passenger on
circumstances, and includes a account of the willful acts or negligence
reasonable time to see after his baggage of other passengers or of strangers, if the
and prepare for his departure (La common carrier’s employees, through
Mallorca v. CA, July 27 1966; Abiotiz the exercise of the diligence of a good
Shipping Corporation v. CA, November father of a family could have prevented
6, 1989). or stopped the act or omission. (Art.
1763)
 Presumption of negligence - the same  The carrier is liable when its personnel
presumption as in the carriage of goods allowed a passenger to drive the vehicle
applies. causing it to collide with another vehicle
 The courts need not make an express resulting to the injuries suffered by the
finding of fault or negligence of other passengers. (MRR v. Ballesteros,
common carriers, the law imposes 16 SCRA 641)
upon common carriers strict
liability, as long as it is shown that  Effect of stipulation on liability
there exists a relationship between General Rule: liability cannot be
the passenger and the common dispensed with or lessened by stipulation,
carrier and that injury or death took by posting of notices, by statements on
place during the existence of the tickets or otherwise. (Art. 1757)
contract. Exception: When a passenger is carried
 The doctrine of res ipsa loquitur gratuitously, a stipulation limiting the
applies. common carrier’s liability for negligence is
valid,
 Liability for acts of employees Exception to the exception: Not for
 Common carriers are liable for the death willful acts on gross negligence. (Art. 1758)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Notes: Note: The Hague Protocol amended the


 The diligence required in the carriage of Warsaw Convention by removing the provision
the goods may be reduced by only one that if the airline took all necessary steps to
degree, from extraordinary to ordinary avoid the damage, it could exculpate itself
diligence or diligence of a good father of completely (Art. 20(1)). (Alitalia v. IAC, 192
a family. (Art. 1744, Art. 1745, no. 4) SCRA 9)
 In the transport of passengers, the
diligence required may be reduced by Special Rules on Liabilities of Airline
two degrees from extraordinary to Carriers:
ordinary diligence or even to simple 1. In case of flight diversion due to bad
negligence but not to gross negligence. weather or other circumstances beyond the
(Art. 1758) pilot’s control, the relation between the
carrier and the passenger continues until
B. Passenger’s Baggages the latter has been landed at the port of
1. in the custody of the passengers or their destination and has left the carrier’s
employees premises. The carrier should necessarily
a. The common carrier shall be responsible exercise extraordinary diligence in
for the baggage as depositaries, provided safeguarding the comfort, convenience and
that: safety of its stranded passengers until they
 notice was given to them or its have reached their final destination
employees and (Philippine Airlines v. CA, 226 SCRA 423).
2. Even where overbooking of passengers is
 the passenger took the necessary
precautions which the carrier has allowed as a commercial practice, the airline
advised them relative to the care and company would still be guilty of bad faith
vigilance of their baggage. and still be liable for damages if it did not
properly inform passenger that it could
b. In case of loss due to the fault of the breach the contract of carriage even if they
passenger, the carrier will not be liable. were confirmed passengers. (Zalamea v.
CA, 228 SCRA 23)
 The act of thief will not be
3. An open-dated ticket constitutes a complete
force majeure unless the same is
contract between the carrier and passenger.
committed by armed men and
Hence, the airline company is liable if it
through irresistible force (Arts. 1998,
refused to confirm a passenger’s flight
2000-2003).
reservation (Singson v. CA, 282 SCRA 149).
4. An airline company which issued a
2. not in such custody, but in that of the
confirmed ticket to a passenger covering
carrier
successive trips on different airlines can be
 The carrier is required to observe held liable for damages occasioned by
extraordinary diligence. In case of loss “bumping off” by one of the successive
or damage the carrier is presumed airlines (Lufthansa German Airlines v. CA,
negligent. (Arts. 1733-1753) 238 SCRA 290).
5. An airline ticket providing that carriage by
successive air carriers is to be regarded as a
C. Liability of Air Carriers – Warsaw “single operation” is to make the issuing
Convention carrier liable for the tortuous conduct of the
other carrier. A printed provision in the
Liability for damages: ticket limiting liability only to its own
1. Death or injury of a passenger if the conduct is not enough to rebut that liability
accident causing it took place on board (KLM Royal Dutch Airlines v. CA, 65 SCRA
the aircraft or in the course of its 237)
operations; (Art. 17)
2. Destruction, loss or damage to any V. OBLIGATIONS OF THE SHIPPER,
luggage or goods, if it took place during CONSIGNEE AND PASSENGER
the carriage; (Art. 18) and
3. Delay in the transportation of A. Effects of negligence of shipper or
passengers, luggage or goods. (Art. 19) passenger

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 If the shipper or owner merely the goods transported in an amount


contributed to the loss, destruction or necessary to cover the cost of
deterioration of the goods, the transportation and the expenses
proximate cause thereof being the incurred.
negligence of the common carrier, the
latter shall be liable in damages, which C. Liability for demurrage
however, shall be equitably reduced
(Art. 1741) Demurrage - the compensation provided
 The passenger must observe the for in the contract of affreightment for the
diligence of a good father of a family to detention of the vessel beyond the time
avoid injury to himself (Art. 1761) agreed on for loading and unloading. It is a
 The contributory negligence of the claim for damages for failure to accept
passenger does not bar recovery of delivery.
damages for his death or injuries, if the  Liability for demurrage exists only when
proximate cause thereof is the expressly stipulated in the contract.
negligence of the common carrier, but
the amount of damages shall be VI. EXTRAORDINARY DILIGENCE
equitably reduced. (Art. 1762.)
 If the negligence of the shipper or the  Common carriers, from the nature of their
passenger may be the proximate and business and for reasons of public policy,
only cause of the loss, the carrier should are bound to observe extraordinary
not be held liable. diligence in the vigilance over goods and for
 However, even if the carrier is the safety of the passengers transported by
responsible for the loss or injury, the them according to all the circumstances of
passenger is also required to lessen the each case (Art. 1733, in relation to Art. 1755)
damage or injury under what is known
as the Doctrine of Avoidable (See notes on stipulations on liability)
Consequences.
Extraordinary Diligence in Carriage by Sea
B. Payment of freight 1. Seaworthiness (Implied warranty)
Who will pay:  extends not only to the condition of
 Shipper the structure of the ship itself, but
 before or at the time he delivers the requires that it be: (PCSAO)
goods to the carrier for shipment. a. properly laden, and
 Consignee b. provided with a competent
 if agreed upon by the parties at the master,
c. sufficient number of
point of destination is bound by such
stipulation the moment he accepts competent officers and
the goods. seamen, and the
d. requisite appurtenances and
 Passengers
equipment and
 they are contractually bound to pay e. other necessary or proper
the fare within such time as stores and implements for
prescribed by regulations or by the the voyage (sec. 116,
carrier. Insurance Code).
 ship itself must not only be
Time to pay:
seaworthy to undertake the voyage
 Tickets are purchased in advance but it must also be cargo worthy (sec.
from ticket outlets. 119, ICP).
 Consignees to whom the  carrier is bound before and at the
shipment was made may not defer the beginning of the voyage to exercise
payment of the expenses and due diligence to:
transportation charges of the goods they a. make the ship seaworthy,
receive after the lapse of 24 hours b. property man, equip and
following their delivery. supply the ship (sec. 3,
 In case of delay in payment, the COGSA).
carrier may demand the judicial sale of
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 shippers are not required to inquire 2. Overloading


into the seaworthiness, genuineness  duty to exercise due diligence
of licensees and compliance with all likewise includes the duty to take
maritime laws. passengers or cargoes that are within
 vessel must be adequately equipped the carrying capacity of the vessel
and manned. (Negros Navigation v. CA).

Qualifications of captains, masters or patrons 3. Negligence of Captain and Crew


of vessels:  if captain and crew were negligent,
a. Filipino limited liability rule may apply. If
b. Have legal capacity to contract the captain and crew’s negligence is
c. With qualifications necessary to due to their inherent incompetence,
command and direct the vessel as ship-owner is deemed incompetent;
established by marine or navigation limited liability rule does not apply.
laws, ordinances or regulations
d. Must not be disqualified under the 4. Deviation and Transshipment
same laws a. Deviation
e. If ship owner desires to be captain  if route is stipulated upon by
without having the necessary the shipper and carrier, carrier
qualifications, shall limit him to the can’t change unless due to force
financial administration of the vessel, majeure.
and shall in trust the navigation to a  Carrier shall be liable for all
person possessing the qualifications losses suffered from any other
required (Art. 609, Code of cause, beside the sum stipulated
Commerce). for such case.
 If due to said force majeure
 The payment made by the insurer for the he took another route and
insured value of the lost cargo operates incurred expenses by reason
as waiver of its (insurer) right to enforce thereof, he shall be reimbursed
the term of the implied warranty against for such increase upon formal
the insured under the marine insurance proof thereof (Art. 359, Code of
policy. However, the same cannot be Commerce).
validly interpreted as an automatic b. Transshipment
admission of the vessel’s seaworthiness  the act of taking cargo out of
by the insurer as to foreclose recourse one ship and loading it in
against the carrier for any liability under another.
its contractual obligation as a common  When done without legal
carrier. The fact of payment grants the excuse, however competent and
insurer subrogatory right which enables safe the vessel into which the
it to exercise legal remedies that would transfer is made, is a violation of
otherwise be available to the insured as the contract and an infringement
owner of the lost cargo against the of the right of the shipper and
petitioner common carrier. (Delsan subjects the carrier to liability if
Transport Lines vs. CA GR No. 128797) the freight is lost even by a cause
otherwise excepted (Magellan
 It becomes the obligation of a cargo Manufacturing Corp. v. CA).
owner to look for a reliable common
carrier which keeps its vessels in Extraordinary Diligence in Carriage by Land
seaworthy conditions. The shipper may 1. Condition of vehicle - duty to exercise
have no control over the vessel but he extraordinary diligence requires the
has control in the choice of the common carriers to purchase and use vehicle
carrier that will transport his goods parts that aren’t defective.
(Roque v. IAC, 139 SCRA 596)
2. Traffic rules - unless there is a proof to
the contrary, it is presumed that a
person driving a motor vehicle has been

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

negligent if at the time of the mishap, he  becomes effective upon its delivery to and
was violating traffic rules (Art. 2185, acceptance by the shipper.
New Civil Code). In case of breach of  4 copies, all signed by the captain and the
contract of carriage, proof of violation of shipper. Shipper shall keep one and shall
traffic rules confirms that the carrier send one to the consignee; captain shall take
failed to exercise extraordinary 2, 1 for himself and the other for the ship
diligence. agent.
 legitimate holder of a bill who fails to
3. Duty to inspect - in overland present the captain of the vessel before the
transportation, common carrier is not unloading obliging the latter thereby to
bound nor empowered to make an unload it and place it in deposit, shall be
examination of the contents of packages responsible for the expenses of warehousing
or bags particularly those hand carried. and other expenses arising therefrom (Art.
Airline companies are e\required to 711, Code of Commerce).
inspect each and every cargo brought
into the aircraft (RA 6235). Limitations as to Carriers’ Liability:
Extraordinary Diligence in Carriage by Air 1. No liability - the carrier will not be liable at
1. Airworthiness - an aircraft, its engines, all for the negligent acts of its crew and
propellers and other components and employees. This is null and void for being
accessories are of proper design and contrary to public policy;
construction, and are safe for air
navigation purposes, such design and 2. Limited liability - regardless of the value of
construction being consistent with the cargo, the maximum liability of the
accepted engineering practice and in carrier will be, for example, P500. This is
accordance with aerodynamic laws and void for being contrary to public policy;
aircraft science (RA 779).
2. Competent and well trained crew 3. Qualified liability - A stipulation in the bill
3. To take the required and prescribed of lading limiting the liability of the carrier
route to an agreed valuation unless the shipper
4. Adverse weather conditions or extreme declares a higher value and pays a higher
climatic changes are some of the perils rate of freight is valid (Org. v. CA and PAL,
involved in air travel consequence of 91 SCRA 223).
which the passenger must assume or
expect. Note: However, the carrier cannot limit its
5. RA 6235 (An Act Prohibiting Certain liability for injury to, or loss of, goods shipped
Acts Inimical to Civil Aviation and for where such injury or loss was caused by its own
Other Purposes) - acts punishable: negligence (Shewaram v. PAL, 17 SCRA 606).
a. to compel a change in the course
or destination of an aircraft of Kinds:
Philippine registry; or 1. Negotiable
b. to seize or usurp control of the 2. Non-Negotiable
aircraft while in flight. 3. Clean Bill of Lading - does not contain any
notation indicating any defect in the goods
VII. BILL OF LADING AND OTHER 4. Foul Bill of Lading - one that contains a
FORMALITIES notation indicating defect in the goods
5. On Board Bill of Lading - issued when the
Bill of Lading - written acknowledgment of goods have been actually placed aboard the
receipt of goods and agreement to transport ship with very reasonable expectation that
them to a specific place to a person named or to the shipment is as good as on its way
his order. 6. Received bill of lading - one in which it is
 It is not indispensable for the stated that the goods have been received for
creation of a contract of carriage (Compania shipment with or without specifying the
Maritima v. Insurance Company of North vessel by which the goods are to be shipped.
America, 12 SCRA 213) 7. Spent Bill of Lading - goods were already
 ambiguity is construed against the carrier, delivered but the bill of lading was not
the contract being one of adhesion. returned

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

8. Through Bill of Lading - issued by the CONTRACT OF CARRIAGE


carrier who is obliged to use the facilities of
other carriers as well as his own facilities for A. Causes of Action:
the purpose of transporting the goods from 1. Culpa Contractual
the city of the buyer, which bill of lading is  Passengers and shippers who suffered
honored by the 2nd and other interested damages because of the breach of the
carriers who do not issued their own lading contractual obligation of the carrier may sue
(Agbayani, Comments and Jurisprudence the latter for damages.
on the Commercial Laws of the Philippines).  Here, the vinculum exists independently of
9. Custody Bill of lading - goods are already the breach of the voluntary duty assumed by
received by the carrier but the vessel the parties when entering into the
indicated therein has not yet arrived in the contractual relation.
port (Agbayani). 2. Culpa Aquiliana
10. Port Bill of Lading - vessel indicated in the  The damage was caused by reason of
bill of lading that will transport the goods is negligence or fault whereby the parties have
already at the port. no pre-existing contractual relation between
them.
Nature of Bill of Lading (the 3-Fold nature  it is the wrongful or negligent act or
of a bill of lading applies only to carriage of omission itself, which creates the vinculum
goods): juris.
1. a receipt;
2. a contract - contains the following: 3. Culpa Delictual
a. name, surname and residence of
shipper; Note: The same act that breaches the contract
b. name, surname and residence of may also be tort. A negligent act that breaches
carrier; the contract may give rise to a liability based on
c. name, surname and residence of contract and quasi-delict.
person to whom or to whose order
the goods are to be sent or whether Liability:
they are to be delivered to the bearer 1. Negligence of driver alone:
of the said bill;  The driver may be held liable for culpa
d. description of the goods; delictual or culpa aquiliana. He is not liable
e. cost of transportation; based on contract because there is no
f. date on which shipment is made; privity of contract between him and the
g. place of delivery of the carrier; passenger or shipper.
h. place and time at which delivery
to the consignee shall be made; 2. Negligence of 3rd persons concurs with the
i. indemnity to be paid by the breach:
carrier in case of delay, if there  The 3rd person and/or his employer may be
should be any agreement on this held liable for quasi delict. The driver alone
matter may be held criminally or civilly liable based
3. a document of title on delict. The employer is subsidiarily
liable.
Functions:
1. best evidence of the existence of the contract 3. In case of injury to a passenger due to
of carriage of cargo; negligence of driver of both colliding
2. commercial document whereby, if vehicles:
negotiable, ownership may be transferred by
 The drivers and owners of the two vehicles
negotiation; and
are jointly and severally liable for damages.
3. receipt of cargo (Magellan Manufacturing v.
If the owner and driver of the other vehicle
CA, 201 SCRA 2021).
are not impleaded, the carrier may implead
them by filing a 3rd party complaint.
(See: notes on Air Carriers below for the limits
of liability of air carriers with respect to
B. Prescriptive Period and Conditions
transport of goods)
Precedent:
1. Inter-island - if goods arrived in damaged
VIII. ACTIONS IN CASE OF BREACH OF

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

condition (Art. 366): SCRA 432)


a. If damage is apparent, the  Damages arising from delay or late
shipper must file a claim delivery are not the damage or loss
immediately (it may be oral or contemplated under the COGSA. The
written); goods are not actually lost or damaged.
b. If damage is not apparent, he The applicable period is 10 years.
should file a claim within 24 hours (Mitsui vs. CA 287 SCRA 366)
from delivery.  If there is no delivery in case of
undelivered or lost cargo the one-year
 The filing of claim under either (1) or (2) period starts to run from the day the
is a condition precedent for recovery. vessel left port
 If the claim is filed, but the carrier  Where there was delivery to the wrong
refuses to pay: enforce carrier’s liability person, the prescriptive period is 10
in court by filing a case: years because there is a violation of
i. within 6 year, if no bill of contract, and the carriage of goods by
lading has been issued; or sea act does not apply to misdelivery.
ii. within 10 years, if a bill of (Ang v. American SS Agencies (19 SCRA
lading has been issued. 631)

2. Overseas –where goods arrived in a 3. Air Carriers - Warsaw Convention


damaged condition from a foreign port to a
Philippine port of entry: (COGSA applied) Action for Damages:
a. upon discharge of goods, if the damage 1. Condition precedent
is apparent, claim should be filled  A written complaint must me made
immediately; within:
b. if damage is not apparent, claim should - 3 days from receipt of baggage
be filled within 3 days from delivery. - 7 days from receipt of goods
- in case of delay, 14 days from
 Filing of claim is not a condition receipt of baggage / goods
precedent, but an action must be filed  otherwise the action is barred except
against the carrier within a period of 1 in case of fraud on the part of the
year from discharge. carrier. (Art. 26)
 The prescriptive period of 1 year starts
after the delivery of the goods or the 2. Jurisdiction - governed by domestic law
date the goods should have been
delivered (sec. 3 COGSA) It starts from 3. Venue – at the option of the plaintiff:
the delivery to the arrastre operator, not a. court of domicile of the carrier;
the consignee b. court of its principal place of
 A stipulation reducing the 1 year period business;
is null and void, but a written agreement c. court where it has a place of business
to suspend it is valid through which the contract has been
 In cases of collision the period starts made;
from the date the goods should have d. court of the place of destination.
been delivered, had the cargoes been (Art. 28)
saved (Maritime Company of the The places enumerated by Article 28 of
Philippines vs. CA, 164 SCRA 593) the Warsaw Convention where an action
 An extra-judicial demand does not for damages may be bought are not
suspend the period matters of venue which can be waived,
 An insurer who is exercising its right of but are jurisdictional in nature. (Santos
subrogation is also bound by the 1 year III vs. Northwest Orient Airlines 210
period (Fil. Merchants vs. Alejandro 145 SCRA 256)
SCRA 42). It does not apply to a claim
against the insurer for the insurance 4. Prescriptive period – 2 years from:
proceeds. The claim against the insurer a. date of arrival at the destination
is based on contract that expires in 10 b. date of expected arrival
years (Mayer Steel Pipe Corp. vs. CA 274 c. date on which the transportation

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

stopped. (Art. 29)  the


natural and
5. Rule in case of various successive probable
carriers, consequences of
a. In case of transportation of the breach of
passengers – the action is filed only the obligation,
against the carrier in which the  and
accident or delay occurred unless which the
there is an agreement whereby the parties have
first carrier assumed liability for the foreseen or
whole journey. could have
b. In case of transportation of baggage reasonably
or goods foreseen at the
i. the consignor can file an action time the
against the first carrier and the obligation was
carrier in which the damage constituted.
occurred
ii. the consignee can file an action
against the last carrier and the Kinds of Damages:
carrier in which the damage 1. Actual (damnum
occurred. These carriers are emergente) or compensatory (lucro
jointly and severally liable. (Art. cessante)
30) a. In case of Goods:
 Plaintiff is entitled to their value at
the time of destruction.
Limit of Liability: (Art. 22 as amended by
Guatemala Protocol, 1971; Alitalia v. IAC) b. In case of Passengers:
1. passengers - $10,000 to  Personal Injury:
$100,000  The claimant is entitled to all
except: agreement to a higher limit medical expenses and other
2. checked-in baggage - $20 / kg reasonable expenses the he
except: consigner declared its value incurred to treat the injuries. It
and paid a supplementary sum, may include plastic surgery.
carrier liable to not more than the
 Also entitled to the amount of
declared sum unless it proves the
loss of earning capacity from the
sum is greater than its actual value.
time of the accident up to the
3. hand-carry baggage - $400 to
time he has fully recovered.
$1000 / passenger
 Death:
 an agreement relieving the  The claimant is entitled to all
carrier from liability or fixing a lower medical expenses and other
limit is null and void. (Art. 23) reasonable expenses the he
incurred to treat the injuries.
 Carrier not entitled to the
foregoing limit if the damage is caused  Also entitled to the amount spent
by willful misconduct or default on its during the wake and funeral of
part. (Art. 25) the deceased, but expenses
incurred after the burial is not
RECOVERABLE DAMAGES compensable.
 The relatives of the deceased are
Extent of Liability: entitled to the amount of loss of
earning capacity as determined
Carrier in good Carrier in bad according to Art. 2206 of the
faith faith NCC.
liable only to pay liable for all
for the damages damages whether 2. Moral
that are the same can be  Generally, no moral damages may be
foreseen or not. awarded where the breach of contract is

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

malicious. However if contractual matter of right, their determination


negligence is considered gross depending upon the amount of
negligence, moral damages may be compensatory damages that may be
awarded. awarded to the claimant,
 Conditions in order that moral damages c. the act must be accompanied by
may be awarded: (ICPC) bad faith or done in wanton,
a. there must be an injury, whether fraudulent, oppressive or malevolent
physical, mental or psychological, manner.
clearly sustained by the claimant,
b. there must be a culpable act or Note: The rule on the award of interest on
omission factually established, damages is that, when an obligation, not
c. the wrongful act or omission of the constituting a loan or forebearance of money, is
defendant is the proximate cause of breached, an interest on the amount of damages
the injury sustained by the claimant, awarded may be imposed at the discretion of
and the court at the rate of 6% per annum.
d. the award of damages is predicated
on any of the cases stated in Art. IX. MARITIME LAW
2219 of the NCC in relation to Art.
2220. A. Concept of Maritime Law

3. Nominal Maritime Law - system of laws which


 The assessment of nominal damages is particularly relates to the affairs and business of
left to the discretion of the court the sea, to ships, their crews and navigation and
according to the circumstances of the to marine conveyance of persons and property
case. The award of such damages is
justified in the absence of proof of the Merchant vessel
specific amounts of actual damages  vessel engaged in maritime commerce,
suffered. whether foreign or otherwise.
 constitutes property which may be acquired
4. Temperate or and transferred by any of the means
moderate recognized by law. They shall continue to be
 Temperate or moderate damages are considered as personal property. (Arts. 573,
awarded when the court finds that some 585)
pecuniary loss has been suffered but its
amount can not, from the nature of the Characteristics of Maritime Law:
case, be provided with certainty. 1. Real
 similar to transactions over real
5. Liquidated property with respect to effectively
 Liquidated damages are those agreed against third persons which is done
upon by the parties to a contract, to be through registration. The evidence of
paid in case of breach thereof. Generally real nature is shown by (1) the limitation
the court cannot change the amount of the liability of the agents to the actual
agreed upon except when the indemnity value of the vessel and the freight money
or penalty is iniquitous or and (2) the right to retain the cargo and
unconscionable. embargo and detention of the vessel
(Luzon Stevedoring Corp v. CA, 156
6. Exemplary or SCRA 169);
corrective 2. Hypothecary
 Requisites in order that exemplary  the liability of the owner of the value of
damages may be awarded: (ECB) the vessel is limited to the vessel itself
a. they may be imposed by way of (Doctrine of Limited Liability).
example in addition to 3. Preference of Credits
compensatory damages, and only  Mortgage of a vessel properly registered
after the claimant’s right to them has becomes of preferred mortgage lien
been established, which shall have priority over all claims
b. they cannot be recovered as a against the vessel in an extrajudicial

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

foreclosure for:  If the amount of the demand or claim is less


a. credit in favor of the public than the jurisdictional amount of the RTC,
treasury; the jurisdiction over the admiralty and
b. judicial costs of the proceedings; maritime cases are with the Metropolitan
c. pilotage and tonnage charges Trial Court, Municipal Trial Court or
and other sea and port charges; Municipal Circuit Trial Court as the case
d. salaries of depositaries and may be. (Section 19(3) BP 129)
keepers of the vessel
e. captain and crew’s wages; C. Vessels
f. general average;
g. salvage, including contract Ownership of Vessels:
salvage; 1. Acquisition
h. maritime liens arising prior in a. Prescription - acquisition of the vessel
time to the recording of the must appear in a written instrument,
preferred mortgage; which shall not produce any effect with
i. damages arising out of tort; and respect to third persons if not inscribed in
j. preferred mortgage registered the registry of the vessels and shall be
prior in time. acquired by possession in good faith,
continued for 3 years, with a just title duly
B. Limited liability rule (Art. 587, 590, 643, recorded. In the absence of any of these,
837, CC) continuous possession for 10 years shall
be necessary in order to acquire
Doctrine of Limited Liability – “No vessel, ownership.
no liability”
General Rule: The liability of ship owners is b. Sale - includes the rigging, masts, stores
limited to the amount of interest in said vessel and engine of a streamer appurtenant
such that where vessel is entirely lost, the thereto, which at the time belongs to the
obligation is extinguished. (Luzon Stevedoring vendor
v. Escano, 156 SCRA 169)  if sale is made while it is on voyage,
the freightage which it earns from the
The interest extends to: time it receives its last cargo shall
a. the vessel itself, pertain entirely to the purchaser, and
b. equipments, the payment of the crew and other
c. freightage and persons who make up its complement
d. insurance proceeds. (Chua v. IAC, shall be for his account
166 SCRA 183)  if the sale is made after the vessel has
arrived at the port of its destination,
Exceptions: (WINES) the freightage shall pertain to the
1. claims under Workmen’s Compensation; vendor, and the payment of the crew
2. injury or damage due to ship owner’s fault; and other individuals who make up its
3. the vessel is insured. complement shall be fore his account,
4. expenses for repair on vessel before loss; unless the contrary is stipulated in
5. the vessel is not abandoned; either case.

Note: Abandonment of the vessel, its 2. Registration - must be made through the
appurtenances and the freightage is an Maritime Industry Authority (MARINA)
indispensable requirement before the
shipowner or ship agent can enjoy the benefits Ship’s Manifest -is a declaration of the entire
of the limited liability principle. The only cargo. The object of a manifest is to furnish
instance where such abandonment is dispensed customs officers with a list to check against, to
with is when the vessel was entirely lost. inform the revenue officers what goods are
Admiralty Jurisdiction - in all actions in being brought into a port of the country on a
admiralty and maritime jurisdiction where the vessel. Hence, the requirement that a vessel
demand or claim exceeds P300, 000.00 or in must carry a manifest is not complied with even
Metro Manila, where such demand or claim if a bill of lading can be presented.
exceeds P400, 000.00 the RTC has jurisdiction.  A bill of lading is just a declaration of a
specific cargo rather than the entire cargo. It
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

is issued as a matter of convenience by Ship Agents:


virtue of a contract. 1. Capacity to trade;
D. Persons who take part in Maritime 2. Discharge duties of the captain,
Commerce in case of the latter’s absence;
3. Contract in the name of the
Participants in Maritime Commerce: owners with respect to repairs, details of
a. ship-owners and ship agents equipment, armament, and all that
b. captains and masters of the vessel relate to the requirements of navigation;
c. officers and crew of the vessel 4. Order a new voyage, make a new
d. supercargoes charter or insure the vessel after
obtaining authorization from the ship-
Complement of the vessel owners.
 all persons on board, from the captain to the
cabin boy, necessary for the management, Duty of Ship Agent to Discharge the
maneuvers, and service, thus, include the Captain and the Members of the Crew:
crew, the sailing mates, engineers, stokers  If the seamen contract is not for
and other employees on board not having a definite period or voyage, he may
specific designations. discharge them at his discretion (Art.
 does not include the passengers or the 603).
persons whom the vessel is transporting.  If for a definite period, he may
not discharge them until after the
1. Shipowners and ship fulfillment of their contracts, except on
agents (Art. 586-588, CC) the following grounds:
a. insubordination in serious
Ship-owner - person who has possession, matters;
control in management of the vessel and the b. robbery;
consequent right to direct her navigation and c. theft;
receive freight earned and paid, while his d. habitual drunkenness;
possession continues. e. damage caused to the vessel or to
its cargo through malice or manifest
Ship agent - person entrusted with or proven negligence (Art. 605).
provisioning and representing the vessel in the
port in which it may be found; also includes the 2. Captains and masters of
ship-owner. vessels

Civil Liabilities of the Shipowner and the Nature of Position:


Ship Agents: 1. general agent of the ship-owner;
1. All contracts of the captain, 2. technical director of the vessel;
whether authorized or not, to repair, 3. representative of the government
equip and provision the vessel; (Art. of the country under whose flag he
586) navigates.
2. Loss and damage to the goods
loaded on the vessel without prejudice to Qualifications:
their right to free themselves from 1. Filipino citizen;
liability by abandoning the vessel to the 2. legal capacity to contract;
creditors. (Art. 587) 3. must have passed the required
physical and mental examinations
 Both are liable jointly and severally in required for licensing him as such (Art.
case of breach of contract and extra- 609).
contractual obligation such as tort.
 Neither of them will be liable for an Inherent Powers of the Captain: (ACICSR)
obligation contracted by the captain in 1. appoint crew in the absence of
excess of the latter’s powers and ship agent;
privileges pertaining to him. 2. command and direct crew;
3. impose correctional punishment
Powers, Functions and Liabilities of the on those who, while on board vessel, fail

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

to comply with his orders or are wanting Effect: ship agent or ship owner solidarily
in discipline; liable to the passengers and owners of the
4. make contracts for the charter of cargo
vessel in the absence of ship agent. No Liability for the Following:
5. supply, equip, and provision the 1. damages caused to the vessel or
vessel; and to the cargo by force majeure;
6. order repair of vessel to enable it 2. obligations contracted for the
to continue its voyage (Art. 610). repair, equipment, and provisioning of
the vessel unless he has expressly bound
Sources of Funds to Comply with the himself personally or has signed a bill of
Inherent Powers of the Captain: (in exchange or promissory note in his
successive order) name. (Art. 620)
1. from the consignee of the vessel;
2. from the consignee of the cargo; 3. Pilot
3. by drawing on the ship agent;
4. by a loan on bottomry; Pilot
5. by sale of part of the cargo. (Art.  a person duly qualified and licensed to
611) conduct a vessel into or out of ports, or in
certain waters. In a broad sense, the term
Duties of the Captain: includes:
1. bring on board the proper 1. those whose duty it is to guide vessels
certificate and documents and a copy of into or out of ports, or in particular
the Code of Commerce; waters, and
2. keep a Log Book, Accounting 2. those entrusted with the navigation of
Book and Freight Book; vessels on the high seas.
3. examine the ship before the  however, the term ‘pilot’ is more generally
voyage; understood as a person taken on board at a
4. say on board during the loading particular place for the purpose of
and unloading of the cargo; conducting a ship through a river, road or
5. be on deck while leaving or channel, or from a port.
entering the port;
6. protest arrivals under stress and Compulsory Pilotage
in case of shipwreck;  states possessing harbors have enacted laws
7. follow instructions of and render or promulgated rules requiring vessels
an accounting to the ship agent; approaching their ports to take on board
8. eave the vessel last in case of pilots licensed under the local law.
wreck;  pilot supersedes the master for the time
9. hold in custody properties left by being in the navigation of the ship,
deceased passengers and crew members; considered as a master pro hac vice but a
10. comply with the requirements of master is still in command of the vessel that
customs, health, etc. at the port of did not deal with navigation
arrival. (Art. 612)
Duties and Liabilities:
Liabilities of the Ship Agent / Ship Owner 1. Responsible for the direction of a vessel
for Acts Done By the Captain towards from the time he assumes control
Passengers and Cargoes: thereof until he leaves it anchored or
1. damages to vessel and to cargo berthed safely.
due to lack of skill and negligence; 2. Shall properly and safely secure or
2. thefts and robberies of the crew; anchor vessels under their control when
3. losses and fines for violation of requested to do so by the master of such
laws; vessels.
4. damages due to mutinies; 3. Personally liable for damages caused by
5. damages due to misuse of power; his own negligence or default to the
6. for deviations; owners of the vessel and to third parties
7. for arrivals under stress; for damages sustained in a collision.
8. damages due to non-observance
of marine regulations. (Art. 618)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Cases where the master is allowed to 6. desertion. (Art. 637)


displace a compulsory pilot:
1. obvious incompetence Causes of Revocation of Voyage:
2. intoxicated pilot 1. war;
3. in all cases of great necessity 2. blockade;
4. in cases of danger where the pilot 3. prohibition to receive cargo at
does not foresee destination;
4. Officers and crew of the 4. embargo;
vessel 5. inability of the vessel to navigate.
(Art. 640)
Officers and crew of the vessel:
1. Sailing Mate / First Mate No Liability under the following
2. Second Mate circumstances:
3. Engineers 1. if, before beginning voyage,
4. Members of the Crew captain attempts to change it, or a naval
war with the power to which the vessel
1. Sailing Mate / First Mate was destined occurs;
 second chief of the vessel who takes 2. if a disease breaks out and be
the place of the captain in case of officially declared an epidemic in the
absence, sickness, or death and shall port of destination;
assume all of his duties, powers and 3. if the vessel should change owner
responsibilities. (Art. 627) or captain. (Art. 647)
2. Second Mate
 takes command of the vessel in case Supercargoes
of the inability or disqualification of  persons who discharge administrative
the captain and the sailing mate, duties assigned to him by ship agent or
assuming in such case their powers shippers, keeping an account and record of
and responsibilities. transaction as required in the accounting
book of the captain. (Art. 649)
3. Engineers
 officers of the vessel but have no E. Charter Parties
authority except in matters referring
to the motor apparatus. When two or Charter Party
more are hired, one of them shall be  Contract by which an entire ship, or some
the chief engineer. principal part thereof is let by the owner to
4. Members of the Crew another person for a specified time or use
 hired by the ship agent, where he is for the conveyance of goods, in
present and in his absence, the consideration of the payment of freight.
captain hires them, preferring (Caltex Phil., Inc. vs. Sulpicio Lines, Inc.,
Filipinos, and in their absence, he etc., 315 SCRA 709)
may take in foreigners, but not
exceeding 1/5 of the crew. (Art. 634) LEASE CHARTER
PARTY
Classes of Seaman’s Contracts: 1. If for a definite 1. Charterer may
1. by the voyage; period, lessee rescind charter
2. by the month; and cannot give up party by paying
3. by share of profits or freightage. lease by paying half of the
a portion of the freightage agreed
Just Causes for Discharge: amount agreed upon
1. perpetration of a crime; upon
2. repeated insubordination, want 2. If the leased 2. The new owner is
of discipline; property is sold not compelled to
3. repeated incapacity and to one who respect the
negligence; knows of the charter party so
4. habitual drunkenness; existence of the long as he can
5. physical incapacity; lease, the new load the vessel

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

owner must with his own CONTRACT OF


respect the cargo BAREBOAT OR AFFREIGHTME
lease DEMISE NT (TIME OR
CHARTER VOYAGE
Classes of Charter Party: CHARTER)
1. Bareboat or Demise 1. Charterer 1. Owner remains
 charterer provides crew, food becomes liable liable as carrier
and fuel. The charterer is liable as if to others and must answer
he were the owner, except when such caused by its for any breach of
arises from the unworthiness of the negligence duty
vessel. 2. Charterer 2. Charterer is not
regarded as regarded as
Owner pro hac vice - means that a owner pro hac owner.
charterer, in spite of the fact that vice for the
somebody else is the owner of the vessel, voyage
is treated as the owner of the chartered 3. Owner of vessel 3. The vessel owner
vessel, just for that one particular relinquishes retains
purpose only. possession, possession,
 This situation exists in “demise” or command and command and
“bareboat” charter, wherein the ship- navigation to navigation of the
owner turns over possession of the charterer ship
vessel to the charterer who then
undertakes to provide a crew and Who may contract:
victuals and supplies and fuel for the 1. Bottomry - by the ship owner or
vessel for the duration of the charter. ship agent. Outside of the residence of
 Because the charterer is treated as the owners, the captain.
owner pro hac vice, the charterer 2. Respondentia - only the owner of
assumes the customary rights and the cargo.
liabilities of the ship-owner to third
persons and is held liable for the Requisites of a valid charter: (CEC)
expense of the voyage and the wages 1. consent of the contracting parties
of the seamen. 2. an existing vessel which should be
placed at the disposition of the shipper
2. Contract of Affreightment 3. the freight
 owner leases the boat or part of it 4. compliance with the requirements of
for the carriage of goods. (Planters Art. 652 of the Code of Commerce:
Products Inc. v. CA, 226 SCRA 476)
It may either be time charter or  A charter party must be drawn in
voyage charter. duplicate and signed by the contracting
parties and when either does not know how
a. Time charter or is not able too do so, by two witnesses at
 vessel is chartered for a his request.
period of time or duration of  The charter party shall contain, besides
voyage; owner retains possession the conditions freely stipulated, the
and control of the vessel; following circumstances:
charterer acquires the right to a. the kind, name, tonnage of the vessel
use the carrying capacity, b. her flag and port of registry
facilities of the vessel and could c. the name, surname and domicile of
designate destinations. the captain
d. the name, surname and domicile of
b. Voyage or trip charter the ship agent, if the latter should
 contract for hire of vessel make the charter party
for one or series of voyages e. the name, surname, and domicile of
usually for purposes of the charterer and if he states that he
transporting goods for charterer. is acting by commission, that of the
person for whose account he makes

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

the contract Party:


f. the port of loading and unloading
g. the capacity, number of tons or  Of the ship owner or ship agent:
weight, or measurement which they 1. Bound to observe the capacity of the
respectively bind themselves to load vessel
and transport or whether the charter 2. Any loss incurred by a shipper whose
party is total cargo is refused on account of the
h. the freight to be paid, stating receipt by the shipowner of a greater
whether it is to be a fixed amount for amount of cargo belonging to other
the voyage or so much per month, or persons shall be for the account of the
for the space to be occupied, or for shipowner in the form of indemnity.
the weight or measurement of the 3. May effect a substitution in respect of
goods making up the cargo, or in any the vessel, which had been initially
other manner whatsoever agreed chartered with that of another.
upon 4. After 3/5 of the vessel is loaded, the
i. the amount of primage to be paid the vessel cannot be substituted with
captain another, unless he procures the consent
j. the days agreed upon for loading of the shipper or charterer.
and unloading 5. May be held generally liable for
k. the lay days and extra lay days to be damages incurred by the charterer due
allowed and the demurrage for each to voluntary delay.
of them to be paid. 6. May unload cargo clandestinely placed
on board, or transport them
Freight 7. To leave the port if the charterer does
 The parties may fix the manner or form not bring the cargo within the lay days
in which the charter price or money shall be and extra lay days allowed;
satisfied. It shall accrue to the conditions 8. To place in a vessel in a condition to
stipulated in the contract. In the absence of navigate;
stipulations, the rules are as follows: 9. To bring cargo to nearest neutral port in
a. the freight shall begin to run from the case of war or blockade.(Arts. 669-678)
day of loading on the vessel
b. in charters with a fixed period, the  Of the charterer:
freight shall begin upon that very day, 1. May subcharter the vessel to a 3rd
and person only if he is authorized by the
c. if the freight is charged according to shipowner
weight, the payment thereof shall be 2. To load goods that were contracted
made according to the gross weight, upon, otherwise he will be held liable to
including the weight of the containers. indemnify the parties injured thereby.
3. If illicit cargo is loaded with the
Lay days - period when vessel will be delayed knowledge of the shipowner or captain,
in the port for loading and unloading. charterer is jointly liable for damages.
4. To pay the agreed charter price;
Primage - bonus to be paid to the captain after 5. To pay freightage on unboarded cargo;
the successful voyage. 6. To pay for the full freightage, the
expenses of the arrival made at his
Deadfreight - where the charterer failed to request and the losses and damages
occupy the leased portion of the vessel, he may caused to the other shippers if any of the
thereby be made liable by the ship-owner shipper unloads his goods before
arriving at the port, unless in cases of
Demurrage - sum due, by express contract, for force majeure.
the detention of the vessel, in loading and 7. To wait if the vessel needs repair;
unloading, beyond the time allowed in the 8. To pay expenses for deviation. (Arts.
contract of affreightment, and to any other 679-687)
improper detention or delay beyond the time
set for loading. Rescission of a Charter Party:
A. At charterer’s request: (Art 688)
Rights and Obligations of a Charter
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

1. by abandoning the charter and 2. Obligation of the debtor


paying half of the freightage; conditioned only upon safe arrival of the
2. error in tonnage or flag; security at the point of destination.
3. failure to place the vessel at the
charterer’s disposal; Exceptions to the Hypothecary Nature of
4. return of the vessel due to pirates, Bottomry and Respondentia:
enemies or bad weather; 1. loss due to inherent defect;
5. arrival at a port for repairs. 2. loss due to the barratry on the
part of the captain;
B. At ship owner’s request: (Art. 689) 3. loss due to the fault of malice of
1. if the extra lay days terminate the borrower;
without the cargo being placed 4. that the vessel was engaged in
alongside the vessel; contraband; and
2. sale by the owner of the vessel before 5. that the cargo loaded on the
loading by the charterer; vessel be different in form that agreed
upon..
C. Fortuitous causes: (Art. 690)
1. war; BOTTOMRY/ ORDINARY
2. blockade; RESPONDENTIA LOAN
3. prohibition to receive cargo; 1. Liability of the 1. Not subject to
4. embargo; and borrower is any
5. inability of the vessel to navigate. contingent on contingency
the safe arrival of
Usual forms of Consummating Contracts: the vessel or
1. C.I.F - cost, insurance and freight; cargo at
2. F.O.B. - free on board; destination
3. F.A.S. - free alongside ship; and 2. The last lender is 2. The first lender
4. C. and F. - cost and freight. a preferred is a preferred
creditor creditor
Transshipment of Goods
 the act of taking cargo from one ship and Note: Under existing laws, the parties to a loan,
loading it in another, whether ordinary or maritime, may agree on
 if done without legal excuse, however any rate of interest. (CB Circular 905).
competent and safe the vessel into which the
transfer is made is a violation of contract Who may contract:
and infringement of right of shipper and 1. Bottomry - by the ship owner or ship
subjects carrier to liability if freight s lost agent. Outside of the residence of the
event by cause otherwise excepted owners, the captain.
(Magellan Manufacturing vs. CA, 201 SCRA 2. Respondentia - only the owner of the
102). cargo.

F. Loans on Bottomry and Respondentia Formalities:


May be executed by means of:
Loan on Bottomry - loan made by ship- 1. public instrument
owner or ship agent guaranteed by vessel itself 2. policy signed by the contracting
and repayable upon arrival of vessel at parties and the broker taking part
destination. (Art. 719) therein
3. private instrument (Art. 720)
Loan on Respondentia - loan, taken on
security of the cargo laden on a vessel, and Contents:
repayable upon safe arrival of cargo at 1. kind, name and registry of the
destination. (Art. 719) vessel;
2. name, surname and domicile of
Common Elements: the captain;
1. Exposure of security to marine 3. names, surnames and domiciles
peril; of the borrower and the lender;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. amount of the loan and the the vessel and the cargo therein at the
premium stipulated; time of the occurrence of the average
5. time for repayment; shall contribute to satisfy this average.
6. goods pledged to secure (Art. 812)
repayment;
7. voyage during which the risk is Requisites: (CDSA)
run (Art.721) 1. There must be a common
danger;
G. Accidents in Maritime Commerce 2. That for the common safety, part
of the vessel or of the cargo or both is
Accidents in Maritime Commerce: deliberately sacrificed;
1. Averages 3. That from the expenses or
2. Collision damage caused follows the successful
3. Arrival Under Stress saving of the vessel and the cargo, and;
4. Shipwreck 4. That the expenses or damages
should have been incurred or inflicted
Protest - the written statement by the master after taking proper legal steps and
of a vessel or any authorized officer, authority
attested by proper officer or a notary, to the
effect that damages has been suffered by Who is entitled to indemnity:
the ship. Protest is required in the following  The owner of the goods, which were
instances: sacrificed, is entitled to receive general
1. when the vessel makes an arrival under average contribution.
stress  However, the following goods are
2. where the vessel is shipwrecked not covered:
3. where the vessel has gone through the 1. Goods carried on deck unless the
hurricane or the captain has suffered rule, special law or customs of the
damages or averages place allow the same,
4. maritime collisions 2. Goods that are not recorded in
the books or records of the vessel,
1. Averages and
 an extra-ordinary or accidental expense 3. Fuel for the vessel if there is
incurred during the voyage in order to more than sufficient fuel for the
preserve the cargo, vessel or both; and all voyage.
damages or deterioration suffered by the
vessel from departure to the port of Procedure for recovery: (Art. 813-814)
destination, and to the cargo from the port 1. There must be a resolution of the
of loading to the port consignment. (Art. captain, adopted after a deliberation with
806) the other officers of the vessel and after
hearing all persons interested in the
Classes of Averages: cargoes. If the latter disagree, the
A. Particular or Simple Average decision of the captain should prevail but
 Damage or expenses caused to the vessel they shall register their objections.
or cargo that did not inure to common 2. The resolution must be entered
benefit, and borne by respective owners. in the logbook, stating the reasons and
(Art. 809) motives for the dissent, and the
 The owner of the goods which gave rise irresistible and urgent causes if he acted
to the expense or suffered the damage in his own accord. It must be signed, in
shall bear this average. (Art. 810) the first case, by all persons present in
the hearing. In the second case, by the
B. Gross or General Average captain and all the officers of the vessel.
 Damage or expenses deliberately 3. The minutes must also contain a
caused in order to save the vessel, its detail of all the goods jettisoned and
cargo or both from real and known risk. those injuries caused to those on board.
(Art. 811) 4. The captain shall deliver it to the
 All the persons having an interest in maritime judicial authority of the first
port he may make, within 24 hours after
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

his arrival, and to ratify it immediately of Commerce:


under oath. 1. The collision may be due to the fault,
negligence or lack of skill of the captain,
Order of goods to be cast overboard in case of sailing mate, or any other member of the
jettison: complement of the vessel. The owner of
1. those which are on the deck, preferring the vessel at fault is liable for losses or
the heaviest one with the least utility damage. (Art. 826)
and value; 2. The collision may be due to the fault of
2. those which are below the upper deck, both vessels. Each vessel shall suffer its
beginning with the one with greatest own losses, but as regards the owner of
weight and smallest value. (Art. 815) cargoes both vessels shall be jointly and
severally liable. (Art. 827)
York-Antwerp Rules on determining liability 3. If it cannot be determined which vessel
for contribution on averages: is at fault. Each vessel shall also suffer
 Under the rule, deck cargo is permitted its own losses and both shall be
in coastwise shipping but prohibited in solidarily liable for losses o damages on
overseas shipping. the cargoes. (Art. 828)
1. If deck cargo is located with the consent 4. The vessels may collide with each other
of the shipper on overseas trade, it must through fortuitous event or force
always contribute to general average, majeure. In this case each shall bear its
but should the same be jettisoned, it own damage. (Art. 830)
would not be entitled to reimbursement 5. Two vessels may collide with each other
because there is violation of the Y-A without their fault by reason of a third
Rules. vessel. The third vessel will be liable for
2. If deck cargo is loaded with the consent losses and damages. (Art. 831)
of the shipper on coastwise shipping, it 6. A vessel which is properly anchored and
must always contribute to general moored may collide with those nearby,
average and if jettisoned would be reasons of storm or other cause of force
entitled to reimbursement. majeure. The vessel run into shall suffer
its own damage and expense. (Art. 832)
2. Collision
 impact of 2 vessels both of which are Cases covered by collision and allision:
moving. 1. One vessel at fault - such vessel is liable
for damage caused to innocent vessel as
Allision well as damages suffered by the owners
 impact between a moving vessel and a of cargo of both vessels.
stationary one. 2. Both vessels at fault - each vessel must
bear its own loss, but the shippers of
Zones of Time in the Collision of vessels: both vessels may go against the ship
1. First zone - all time up to the moment owners who will be solidarily liable.
when risk of collision begins; 3. Vessel at fault not known - same as rule
2. Second zone - time between moment as (2).
when risk of collision begins and 4. Third vessel at fault - same rule as (1).
moment it becomes a practical certainty; 5. Fortuitous event - no liability. Each
3. Third zone - time when collision is bears its own loss.
certain and time of impact.
Prerequisite to recovery:
Error in Extremis - sudden movement made by  Protest should be made within 24 hours
a faultless vessel during the 3rd zone of collision before the competent authority at the point
with another vessel which is at fault during the of collision or at the first port of arrival, if in
2nd zone. Even if such sudden movement is the Philippines and to the Philippine consul,
wrong, no responsibility will fall on said if the collision took place abroad. (Art. 835)
faultless vessel. (Urrutia and Co. v. Baco River  Injuries to persons and damage to cargo of
Plantation Co., 26 PHIL 632). owners not on board on collision time need
not be protested. (Art. 836)
Rules on Collision of Vessels under Code
Doctrine of “Inscrutable Fault”
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 In case of collision where it cannot be examining the circumstances. The


determined which between the two vessels captain shall have the deciding vote
was at fault, both vessels bear their 5. the agreement shall be drafted and the
respective damage, but both should be proper minutes shall be signed and
solidarily liable for damage to the cargo of entered in the log book
both vessels. 6. objections and protests shall likewise
entered in the minutes
Note: The Doctrine of Limited Liability applies
in case of collisions, but it shall be limited only 4. Shipwreck
to the value of the vessel with all its  loss of the vessel at sea as a consequence of
appurtenances and freightage earned during the its grounding, or running against an object
voyage. When the latter is not sufficient to cover in sea or on the coast.
all the liabilities, the indemnity due by reason of
the death or injury of persons shall have Rules pertaining to Shipwrecks:
preference. (Arts. 837 and 838) 1. Losses and deteriorations suffered by a
vessel and her cargo shall be
3. Arrival Under Stress individually for the account of the
 arrival of a vessel at a port of destination on owners. (Art. 840)
account of lack of provision, well founded 2. If the wreck was due to malice,
fear of seizure, pirates, or accidents of sea negligence or lack of skill of the captain,
disabling navigation. (Art. 819) the owner of the vessel may demand
indemnity from said captain.(Art. 841)
When not lawful: 3. Goods saved shall be specially bound for
1. lack of provisions due to negligence to the payment of the expenses of the
carry according to usage and customs; respective salvage and must be paid
2. risk of enemy not well known or before they are delivered, with
manifest preference over any other obligation if
3. defect of vessel due to improper repair; the merchandise should be sold. (Art.
and 842)
4. malice, negligence, lack of foresight or 4. If several vessels sail under convoy, and
skill of captain. (Art. 820) any of them should be wrecked, the
cargo saved shall be distributed among
Who bears expenses: the rest in proportion to the amount
 The ship-owner or ship agent shall be with each one is able to take. (Art. 843)
liable but they shall not be liable for the 5. Any goods taken on board saved from
damages caused by the shippers by reason the wreck shall continue his course and
of a lawful arrival. (Art. 821) upon arrival shall deposit the same. (Art.
 The captain shall be liable for damages 844)
caused by his delay, if after the cause of the 6. If there is no person interested in the
arrival under stress has ceased, he continues cargo who can pay the expenses and
the voyage. (Art. 825) freightage corresponding to the salvage,
it may be sold to cover the same. (Art.
Steps to be Taken in the Determination of the 845)
Propriety of Arrival Under Stress:
1. the captain should be determine during H. Salvage
the voyage if there is well founded fear  services one person render to the owner of a
of seizure, privateers and other valid ship or goods, by his own labor, preserving
grounds the goods or the ship which the owner or
2. the captain shall then assemble the those entrusted with the care of them have
officers either abandoned in distress at sea, or are
3. the captain shall summon the persons unable to protect or secure.
interested in the cargo who may be
present and who may attempt but
without right to vote Kinds of Salvage Services:
4. the offices shall determine and agree if 1. voluntary - wherein the compensation is
there is well founded reason after dependent upon success

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. rendered under a contract for a per diem or government (Secs. 11-12).


per horam voyage, payable at all events 3. If a vessel is the
3. under a contract for a compensation payable salvor, the reward shall be distributed as
only in case of success follows:
a. 50% to the
Contract of Towage - contract whereby one ship-owner;
vessel, usually motorized, pulls another, b. 25% to the
whether loaded or not with merchandise, from captain; and
one place to another, for compensation. It is a c. 25% to the
contract for services rather than a contract of officers and crew in proportion to
carriage. their salaries (Sec. 13)

SALVAGE TOWAGE Rights Obligations of Salvors and Owners


1. governed by 1. governed by Civil Salvors:
special law (Act Code on contract 1. Entitled to compensation for services
No. 2616) of lease rendered.
2. requires success, 2. success not 2. Acquires a lien upon the property
otherwise no required salvaged until he is compensated.
payment 3. To all intents and purposes, he is a joint
3. must be done 3. only the consent owner and if the property is lost he must
with the consent of the tugboat bear his share.
of the owner is needed 4. Acquires the right of possession of
captain/crewme derelict for purposes of a salvage claim.
n 5. Entitled to half of the deposit of the
4. vessel must be 4. vessel need not derelict sold, if after the lapse of 3 years
involved in an be involved in an no claim was made.
accident accident
5. fees distributed 5. fees belong to the Owners:
among crewmen tugboat owner 1. He does not renounce his right to the
derelict.
Requisites for Salvage Award: 2. Has a right to the delivery of the vessel
1. Valid object of salvage or things saved after the salvage is
2. Object must have been exposed accomplished, provided he pays or gives
to marine peril a bond.
3. Salvage services rendered 3. Should make a claim within 3 months
voluntarily after the publication of a salvage report,
4. Salvage services are successful otherwise the thing saved shall be sold.
4. Entitled to the salvage reward for the
Derelict – a ship or her cargo, which is use of his vessel in rendering salvage
abandoned and deserted at sea by those who services.
were in charge of it, without any hope of
recovering it, or without any intention of
returning to it. THE CORPORATION CODE OF THE
PHILIPPINES
Rules on Salvage Award: Batas Pambansa Bilang 68 (May 1, 1980)
1. The reward is
fixed by the RTC judge in the absence of TITLE I
agreement or where the latter is excessive GENERAL PROVISIONS
(Sec. 9).
2. If sold (no claim Definitions and Classifications
being made within 3 months from
publication), the proceeds, after deducting Sec. 2. Corporation defined.
expenses and the salvage claim, shall go to  A corporation is an artificial being created
the owner; if the latter does not claim it by operation of law, having the right of
within 3 years, 50% of the said proceeds succession and the powers, attributes and
shall go to the salvors, who shall divide it
equitably, and the other half to the
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

properties expressly authorized by law or house counsel (Sec 11, Rule 14, Rules
incident to its existence. of Court)
5. Changes in individual membership -
Attributes of a Corporation: (CARP) Remains unchanged and unaffected
1. It is an artificial being. in its identity by changes in its
2. It is created by operation of law. individual membership
3. It enjoys the right of succession. 6. Entitlement to constitutional
4. It has the powers, attribute and guarantees:
properties expressly authorized by law • Due Process
or incident to its existence. • Equal protection of the law
• Protection against
THEORIES on the Formation of a unreasonable searches and
Corporation: seizures
1. Concession Theory – a corporation is an
NOTE: A corporation is not entitled
artificial creature without any existence to invoke the right against self-
until it has received the imprimatur of the incrimination (Bataan Shipyard vs
state acting according to law, through the PCGG)
SEC. 7. Liability for torts – a corporation is
liable whenever a tortuous act is
2. Theory of corporate enterprise or committed by an officer or agent
economic unit – the corporation is not under the express direction or
merely an artificial being, but more of an authority of the stockholders or
aggregation of persons doing business, or an members acting as a body or
underlying business unit. generally, from the directors as the
governing body (PNB vs CA)
3. Genossenschall Theory – treats the 8. A corporation is not entitled to
corporation as the reality of the group as a moral damages because it has no
social and legal entity independent of state feelings, no emotions, no senses
recognition and “concession” (ABS-CBN vs CA)
9. Liability for crimes – since a
Doctrine of Separate Personality corporation is a mere legal fiction, it
 A corporation has a juridical personality cannot be held liable for a crime
separate and distinct from that of its committed by its officers, since it
stockholders or members. does not have the essential element
of malice; in such case the
 Consequences: responsible officers would be
1. Liability for acts or contracts- criminally liable (People vs Tan
obligations incurred by a Boon Kong, 54 Phil 607)
corporation, acting through its
authorized agents are sole its sole Doctrine of Piercing the Veil of
liabilities (Creese vs CA, 93 SCRA Corporate Entity
483)  Requires the court to see through the
2. Right to bring actions – may bring protective shroud which exempts its
civil and criminal actions in is own stockholders from liabilities that they
name in the same manner as natural ordinarily would be subject to, or
persons (Art 46, NCC) distinguishes a corporation from a
3. Right to acquire and possess seemingly separate one, were it not for the
property – property conveyed to or existing corporate fiction (Lim vs CA, 323
acquired by the corporation is in law SCRA 102)
the property of the corporation itself
as a distinct legal entity and not that Extent: The application of the doctrine to a
of the stockholders or members (Art particular case does not deny the
44(3), NCC) corporation of legal personality for any and
4. Acquisition of court of jurisdiction – all purposes, but only for the particular
service of summons may be mad on transaction or instance for which the
the president, general manager,
corporate secretary, treasure or in-
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

doctrine was applied (Koppel v. Yatco 77 2. Numbers of incorporators


Phil. 496) 2. Requires at least 5 2. Requires at least 2
Rules: incorporators; partners;
1. has only a res judicata effect
2. to prevent wrong or fraud and not 3. Commencement of juridical
available for other purposes personality
3. judicial prerogative only Acquires juridical Acquires juridical
4. must be with necessary and factual personality from the personality form the
basis date of issuance of moment of execution
3 Classes of Piercing: the certificate of of the contract of
1. Fraud Cases – when a corporation is incorporation by the partnership
used as a cloak to cover fraud, or to do Securities and
wrong. Exchange
2. Alter Ego Cases – when the corporate Commission
entity is merely a farce since the corporation 4. Powers
is an alter ego, business conduit or Corporation can Partnership may
instrumentality of a person or another exercise only the exercise any power
corporation powers expressly authorized by the
3. Equity cases – when piercing the granted by law or partners (provided it
corporate fiction is necessary to achieve implied from those is not contrary to
justice or equity. granted or incident law, morals, good
to its existence customs, public
Instrumentality / Alter Ego Rule order, public policy)
 where one corporation is so organized and
controlled and its affairs are conducted so 5. Management
that it is, in fact, a mere instrumentality or The power to do the When management
adjunct of the other, the fiction of the business and is not agreed upon,
corporate entity of the “instrumentality” manage its affairs every partner is an
may be disregarded. is vested in the agent of the
board of directors partnership
Requisites: and trustees
1. There must be control, not mere 6. Effect of mismanagement
majority or complete stock control, but The suit against a A partner as such
complete domination, not only of member of the board can sue a co-partner
finances, but of policy, and business of directors or who mismanages
practice in respect to the transaction trustees who
attacked so that the corporate entity as mismanages must be
to this transaction had, at that time, no in the name of the
separate mind, will or existence of its corporation
own (control); 7. Right of succession
2. Such control must have been used by the Has right of Has nor right of
defendant to commit fraud or wrong, to succession succession
perpetrate the violation of a statutory or
other positive duty, or dishonest and 8. Extent of liability to third persons
unjust act in contravention of plaintiff’s
Stockholders are Partners are liable
legal rights (breach of duty); and
liable only to the personally and
3. Such control and breach of duty must
extent of the shares subsidiarily
proximately cause the injury to the
subscribed by them (sometimes
plaintiff. (proximate cause)
solidarily) for
partnership debts to
CORPORATION PARTNERSHIP third persons
1. Creation
Created by Created by 9. Transferability of interests
operation of law; agreement of the
parties;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Stockholder has Partner cannot 2. Vested in the 2. Vested in the


generally the right to transfer his interest individuals who corporation after
transfer his shares in the partnership so compose the its incorporation
without prior as to make the corporation and not upon the
consent of the other transferee a partner individuals who
stockholders because without the compose it
a corporation is not unanimous consent 3. It cannot be sold 3. It may be sold or
based on this of all existing or transferred transferred;
principle partners because the because it is subject to sale on
partnership is based inseparable from execution, subject
on the principle of the corporation to levy
delectus itself.
personarum
Basic Advantages of Corporate
10. Term of existence Organizations:
May not be formed May be established 1. Separate juridical personality
for a term in excess for any period of 2. Limited liability of investors
of 50 years time stipulated by 3. Free transferability of units of
extendible to no the partners ownership
more than 50 years 4. Centralized management
in any one instance
Circumstance rendering the Subsidiary in
11. Firm name a Parent-Subsidiary Relationship an
May adopt any name Limited partnership instrumentality:
provided it is not the is required by law to a. The parent corporation owns all or most
same as or similar to add the word “Ltd” of the capital stock of the subsidiary.
any registered firm to its name b. The parent and subsidiary corporations
name have common directors or officers.
12. Dissolution c. The parent corporation finances the
Can only be May be dissolved at subsidiary.
dissolved with the any time by or all of d. The parent corporation subscribes to all
consent of the State the partners the capital stock of the subsidiary or
13. Governing Law otherwise causes its incorporation.
Governed by the Governed by the e. The subsidiary has grossly inadequate
Corporation Code Civil Code capital.
f. The subsidiary has substantially no
Franchises of Corporations: business except with the parent
1. Primary or corporate franchise corporation or no assets except those
 The right or privilege granted by the conveyed to or by the parent
State to individuals to exist and act as a corporation.
corporation after its incorporation. g. In the papers of the parent corporation
2. Secondary or special franchise or in the statements of its officers, the
subsidiary is described as a department
 The special right or privilege conferred
or division of the parent corporation, or
upon an existing corporation to the
its business or financial responsibility is
business for which it was created.
referred to as the parent corporation's
Example, use of the streets of a
own.
municipality to lay pipes or tracks, or
h. The parent corporation uses the
operation of a messenger and express
property of the subsidiary as its own.
delivery service.
i. The directors or executives of the
subsidiary do not act independently in
PRIMARY SECONDARY
the interest of the subsidiary but take
1. Refers to the 1. Refers to the their orders from the parent
franchise of being exercise of rights. corporation.
or existing as a Example: right of j. The formal legal requirements of the
corporation eminent domain subsidiary are not observed.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

The mere fact that a corporation owns resist a suit by a state brought to
all of the stocks of another challenge its existence; a de facto
corporation, taken alone is not corporation cannot sustain its
sufficient to justify their being treated right to exist
as one entity. If used to perform c. Corporation by estoppel – group of
legitimate functions, a subsidiary's separate persons that assumes to act as a
existence may be respected, and the liability corporation knowing it to be without
of the parent corporation as well as the authority to do so, and enters into a
subsidiary will be confined to those arising transaction with a third person on the
in their respective business. (PNB vs strength of such appearance. It cannot
Ritratto Group Inc. GR No. 142616) be permitted to deny its existence in an
action under said transaction. (Sec. 21)
SEC. 3. CLASSES OF CORPORATIONS. It is neither de jure nor de facto.
1. AS TO ORGANIZERS: d. Corporation by prescription – one which
a. Public – by State only; and has exercised corporate powers for an
b. Private – by private persons alone or indefinite period without interference on
with the State. the part of the sovereign power, e.g.
2. AS TO FUNCTIONS: Roman Catholic Church.
a. Public – government of a portion of the 5. AS TO EXISTENCE OF SHARES OF
territory; and STOCK:
b. Private – usually for profit-making a. Stock corporation – a corporation:
c. Quasi-public – those private corps. 1. whose capital stock is divided
which have accepted from the state the into shares and
grant of a franchise or contact involving the 2. which is authorized to
performance of public duties. distribute to shareholders
3. AS TO GOVERNING LAW: dividends or allotments of
a. Public – Special Laws; and the surplus profits on the
b. Private – Law on Private Corporations basis of the shares held. (Sec.
4. AS TO LEGAL STATUS: 3)
a. De jure corporation – organized in b. Non-stock Corporation – does not issue
accordance with the requirements of stocks nor distribute dividends to their
law. members.
b. De facto corporation – organized with a 6. AS TO RELATIONSHIP OF
colorable compliance with the MANAGEMENT AND CONTROL:
requirements of a valid law. Its existence a. Holding corporation - it is one which
cannot be inquired collaterally. Such controls another as a subsidiary by the
inquiry may be made by the Solicitor power to elect management.
General in a quo warranto proceeding. b. Subsidiary corporation
(Sec. 20) 1. Majority-owned subsidiary – where
 Requisites: one corporation owns 51% to 94% of
1. The existence of a valid law the capital stock of another
under which it may be corporation.
incorporated; 2. Wholly-owned subsidiary – where
2. A bona fide attempt in good one corporation holds 95% to 100%
faith to incorporate under of the capital stock of another
such law; corporation.
3. Actual use or exercise in c. Affiliates - company that is subject to
good faith of corporate common control of a mother holding
powers; and company and operated as part of the
4. Issuance of certificate of system.
incorporation by the SEC as d. Parent and Subsidiary Corporation -
a minimum requirement of separate entities with power to contract
continued good faith with each other.
NOTE: The only difference between a  The board of directors of the parent
de facto corporation and a de company determines its
jure corporation is that a de representatives to attend and vote in
jure corporation can successfully
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

the stockholder’s meeting of its portion thereof.


subsidiary.
 The stockholders of the parent QUASI- QUASI-PUBLIC
company demand representation in CORPORATION CORPORATION
the board meetings of its subsidiary. 1. Not a full corp.; 1. A full corp.;
7. AS TO PLACE OF INCORPORATION:
a. Domestic corporation - a corporation 2. An 2. An
formed, organized, or existing under instrumentality of instrumentality of
Philippine laws. the state. private individuals.
b. Foreign corporation – a corporation
formed, organized, or existing under any SEC. 4. CORPORATIONS CREATED BY
laws other than those of the Philippines. SPECIAL LAWS OR CHARTERS.
(see sec. 123)  Governed primarily by the provisions of the
special law or charter creating them or
Government-owned or controlled applicable to them, supplemented by the
corporations (GOCC): provisions of this Code insofar as they are
 They are not immune from suits; applicable.
 Employees of GOCCs are governed by Civil
Service if created by special law and by Charter – refers to the law under which it is
Labor Code if created under corporation created which may be either the general law (i.e.
law; B.P. Blg. 68.) or a special law.
 While public services operated by  It includes the articles of
government entities and GOCCs, are again incorporation and by-laws of the
placed under the jurisdiction of the Public corporation and all laws including the
Service Commission, they are not required Constitution applicable thereto.
to secure certificates of public convenience
before commencing operations; SEC. 5. CORPORATORS AND
INCORPORATORS, STOCKHOLDERS
Quasi-Corporations: AND MEMBERS.
 Public bodies which are not corporations in
the full sense but only resemble them in that Components of a Corporation:
they have some of the attributes of 1. Promoter;
corporation, and 2. Incorporators;
 which are created or authorized by the 3. Corporators
legislature as public agencies to aid the State a. stockholders
in, or take charge of, some public or state b. members;
work other than community government, 4. Governing body (absolute control and
for the general welfare. direction)
a. board of directors (stock); or
 They are created for narrow or limited
b. board of trustees (non-stock).
purpose;
5. Managing and administrative body (limited
 They do not have the power and liabilities of
to the general corporate business)
self-governing corporations.
a. executive committee; and
 Example: MMDA, LLDA b. contracted managers.
6. Corporate officers
QUASI- PUBLIC
CORPORATION CORPORATION Promoter - a person who brings about the
1. Possesses only 1. A full corporation; incorporation and organization of a
some corporate corporation.
powers, therefore,  He brings together the persons
not a full corp. who become interested in the enterprise,
2. Organized for the aids in procuring subscriptions and sets in
2. Organized to aid government of a motion the machinery which leads to the
the state in some portion of the state. formation of the corporation itself.
public or state work
other than the
government of a

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Corporators – those who compose a The owners thereof are entitled to a



corporation, whether as stockholders or as pro rata share in the profits of the
members. corporation and in its assets upon
 Corporators in a stock dissolution and, likewise, in the
corporation are called stockholders or management of its affairs without
shareholders. preference or advantage whatsoever
 Corporators in a non-stock 2. PREFERRED SHARES
corporation are called members.  Those issued with par value, and
preferences either with respect to:
Incorporators - those stockholders or a. Assets after dissolution,
members mentioned in the articles of b. Distribution of dividends, or
incorporation as originally forming and both, and
composing the corporation and who are c. Other preferences.
signatories thereof.  Limitations:
a. If deprived of voting rights, it shall
INCORPORATORS CORPORATORS still be entitled to vote on matters
1. Signatory to the 1. Stockholder enumerated in Sec 6, paragraph 6
Articles of (stock b. Preference must not be violative of
Incorporation corporation) or the Code
member (non- c. May be issued only with a stated par
stock value
corporation) d. The board of directors may fix the
2. Fait accompli; 2. They may cease terms and conditions only when so
accomplished fact to be such if they authorized by the articles of
(the Articles of subsequently lose incorporation and such terms and
Incorporation their conditions shall be effective upon
cannot be amended qualifications filing a certificate thereof with the
to replace them) SEC
4. Number is limited 3. No restriction as  Kinds:
to 5-15 to number a. Cumulative preferred share
4. Must have 4. May be such b. Non-cumulative preferred share
contractual capacity through a c. Participating preferred share
guardian d. Non-participating preferred share
e. Cumulative-participating preferred
SEC. 6. CLASSIFICATION OF SHARES. share
Limitations: 3. REDEEMABLE SHARES
 No share may be deprived of voting  Those which permit the issuing
rights except those classified and issued corporation to redeem or purchase its
as “preferred” or “redeemable” shares. own shares
 There shall always be a class or series of  Limitations:
shares that have complete voting rights. a. Issued only when expressly provided
 Any or all of the shares or series of for in the articles of incorporation;
shares may have a par value or have no b. The terms and conditions affecting
par value as may be provided for in the said shares must be stated both in
articles of incorporation, except that the articles of incorporation and in
banks, trust companies, insurance the certificates of stock representing
companies, public utilities, and building such shares;
and loan associations shall not be c. May be deprived of voting rights in
permitted to issue no-par value shares of the articles of incorporation, unless
stock. otherwise provided in the Code
 May be redeemed, regardless of the
1. COMMON SHARES existence of unrestricted retained
 The basic class of stock ordinarily earnings (Sec. 8), provided that the
and usually issued without corporation has, after such redemption,
extraordinary rights and privileges, sufficient assets in its books to cover
and

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

debts and liabilities inclusive of capital the following fundamental matters:


stock (AASIIMID)
4. TREASURY SHARES a. Amendment of Articles of
 Shares that have been earlier issued as Incorporation;
fully paid, and have thereafter been b. Adoption and amendment of by-
acquired by the corporation by laws;
purchase, donation, and redemption or c. Sale or disposition of all or
through some lawful means. (Sec. 9) substantially all of corporate
 If purchased from stockholders: It is in property;
effect a return to the stockholders of the d. Incurring, creating or increasing
value of their investment in the bonded indebtedness;
company and a reversion of the shares e. Increase or decrease of capital
to the corporation. stock;
 The corporation must have surplus f. Merger or consolidation of
profits with which to buy the shares corporation;
so that the transaction will not cause g. Investments of corporate funds
an impairment of the capital. in another corporation or another
 If acquired by donation from the business purpose; and
stockholders: Amounts to a surrender of h. Corporate dissolution. (Sec. 6)
their stock without getting back their 8. ESCROW STOCK
investments that are instead, voluntarily  Deposited with a third person to be
given to the corporation. delivered to a stockholder or his assign
 Need not be sold at par or issued value after complying with certain conditions,
but may be sold at the best price usually payment of full subscription
obtainable, provided it is reasonable. price.
 When treasury shares are sold below its 9. OVER-ISSUED STOCK
par or issued value, there can be no  Stock issued in excess of the authorized
watering of stock because such watering capital stock.
contemplates an original issuance of  It is also known as spurious stock.
shares.  Its issuance is considered null and void.
 Not entitled to dividends and may not be 10. WATERED STOCK
voted  A stock issued not in exchange for its
5. FOUNDERS' SHARE equivalent either in cash, property,
 Shares issued to organizers and share, stock dividends, or services.
promoters of a corporation in  “Water” in the stock represents the
consideration of some supposed right or difference between the fair market value
property. at the time of the issuance of the stock
 May be given special preference and the par or issued value of said stock
in voting rights and dividend payments.  It includes stocks:
 But if an exclusive right to vote a. Issued without consideration
and be voted for as director is granted, b. Issues as fully paid when in the
this privilege is subject to approval by corporation has received a lesser
the SEC, and cannot exceed 5 years from sum of money than its par value
the date of approval. c. Issued for a consideration other than
6. VOTING SHARES actual cash, the fair valuation of
 Shares with a right to vote. which is less than its par or issued
7. NON-VOTING SHARES value
 Shares without right to vote. d. Issues s stock dividend when there
 The law only authorizes the denial of are no sufficient retained earnings to
voting rights in the case of redeemable justify it
shares and preferred shares, 11. PAR VALUE SHARES
provided that there shall always be a  Shares with a value fixed in the
class or series of shares which have certificates of stock and the articles of
complete voting rights. incorporation.
 When such voting rights are denied, it 12. NO PAR VALUE SHARES
shall nevertheless be entitled to vote on

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Shares having no par value but have  In the absence thereof, by the
issued value stated in the certificate or stockholders representing at least a
articles of incorporation. majority of the outstanding capital stock
 Limitations: at a meeting duly called for the purpose.
a. No par value shares cannot have (Sec. 62)
an issued price of less than P5.00; 13. STREET CERTIFICATE
b. The entire consideration for its  A stock certificate endorsed by the
issuance constitutes capital so that registered holder in blank and transferee
no part of it should be distributed as can command its transfer to his name
dividends; from the issuing corporation.
c. They cannot be issued as 14. CONVERTIBLE SHARE
preferred stocks;  A share a share that is changeable by the
d. They cannot be issued by banks, stockholder from one class to another at
trust companies, insurance a certain price and within a certain
companies, public utilities and period.
building and loan association; 15. FRACTIONAL SHARE
e. The articles of incorporation  A share with a value of less than one full
must state the fact that it issued no share.
par value shares as well as the
number of said shares; DOCTRINE OF EQUALITY OF SHARES
f. Once issued, they are deemed  Where the articles of incorporation do not
fully paid and non-assessable. (Sec. provide for any distinction of the shares of
6) stock, all shares issued by the corporation
 Advantages of no-par shares: are presumed to be equal and enjoy the
1. Does not pretend to place a definite same rights and privileges and are also
money value on the share, and subject to the same liabilities. (Sec. 6)
therefore, is less likely to mislead
naïve investors who may take e par CORPORATE INDEBTEDNESS AND
value printed on the certificate as a BONDS:
representation of the present actual
value of the share. I. Promissory Note – complete in itself and
2. Allow flexibility of price. which is ordinarily used for short-term
3. On the part of the shareholder, the loans;
disappearance of personal liability II. Bond – for long-term obligations and which
for unpaid stock subscription as they is usually issued as a series under a single
are deemed fully paid and non- instrument known as trust indenture.
assessable.  The bonds are the
4. Afford a possible remedy for, or at instruments representing the contract of
least a means of relief from, the evil the corporation to pay the holder or
of over-capitalization and stock owner a definite sum of money at a
watering. definite time, together with periodic
 Disadvantages: payments of interest.
1. They legalize instead of restrict large
issues of stock property; a. Mortgage Bond – secured by a
2. They conceal what money or mortgage constituted on
property a share represents; corporate physical property.
3. They permit the issuance of a  The property is conveyed to a
maximum of watered stock at a trustee for the benefit of the
minimum risk. bondholder in case the
interest or principal is
The issued price of no-par value shares may be defaulted;
fixed:
 In the articles of incorporation b. Equipment Bond – secured by a
 By the board of directors pursuant to mortgage or pledge of corporate
authority conferred upon it by the movable equipments.
articles of incorporation or the by-laws

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

c. Collateral Trust Bond – not b. The solicitation of pre-incorporation


secure by a lien on physical subscriptions, subject to the
property of the corporation but by requirement of the Securities Act,
a lien on securities deposited with such as the registration and/or
a trustee as collateral. licensing of securities.
 Such securities may consist of
shares or bonds issued by the 2. Incorporation – the act or process of
subsidiaries of the corporation forming or creating a corporation.
and it may also consist of  It refers to the performance of
bonds of a small operating conditions, act, deeds and writings
company which the by the incorporator and the official
corporation controls; acts and certification of record,
which give the corporations its
d. Guaranteed Bond – secured by a existence.
guaranty of a corporation other
then the one issuing it; 3. Organization and commencement of
business operations.
e. Debentures – not secured by any
specific mortgage, lien or pledge SEC. 10. NUMBER AND
on specific corporate property but QUALIFICATIONS OF
by the general credit of the INCORPORATORS.
corporation and restrictive
agreements; Incorporators
 They are those mentioned in the Articles of
f. Income Bond – one the principal Incorporation as originally forming and
of which may or may not be composing the corporation, having signed
secured by a mortgage, but the the Articles and acknowledged the same
interest is payable only out of net before a notary public.
profits;  Qualifications:
g. Coupon Bond – those to which 1. Natural person;
are attached a sheet of dated, 2. Not less than 5 but not more
numbered and similarly printed than 15;
coupons which the bondholders 3. Of legal age;
may cut off when due or 4. Majority must be residents of the
thereafter. Philippines; and
 Such coupons may be served 5. Each must own or subscribe to at
and deposited in a bank, least one share.
negotiated before the maturity  Effect of lack of qualifications: Failure
of the interest they represent, to comply with them substantially will
and transferred just like any prevent the formation of a de jure corp. But
commercial paper. the lack of requisite qualifications cannot be
collaterally raised, and the corporation has a
TITLE II de facto existence.
INCORPORATION AND ORGANIZATION  General Rule: Only natural persons can
OF PRIVATE CORPORATIONS be incorporators.
Exception: When otherwise allowed by law,
STEPS IN THE CREATION OF e.g., Rural Banks Act of 1992, where
CORPORATIONS: incorporated cooperatives are allowed to be
1. Promotion –the act of getting it upon incorporators of rural banks. Note:
organizing it, and procuring of subscriptions However, it is undeniable that
to its capital stock. It includes: corporations can be Corporators.
a. The taking of preliminary options
and the making of promotion and SEC. 11. CORPORATE TERM.
financing arrangement by the  Limitations:
organizers or promoters with the aid a. The term shall not exceed 50 years in
of competent legal advisers; any one instance

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

b. The extension cannot be made  The amount paid by the stockholders on


earlier than 5 years prior to the subscriptions from unissued shares of
expiration date unless there are the corporation.
justifiable reasons as determined by the
SEC Minimum Capital Stock (MCS):
c. The amendment shall be effected
before the expiration of the corporate GENERAL RULE: No minimum required for
term, for after dissolution by expiration capital stock under the Corporation Code (Sec.
of the corporate term there is no more 12). However, the MCS, in effect, is P5,000
corporate life to extend because the minimum paid-up capital required
EXCEPTION: Doctrine of Relation - under the Code is P5,000 (Sec. 13).
extension was not achieved due to EXCEPTIONS:
insurmountable intervening event, A. As provided by special law:
which the corporation cannot avoid even 1. Domestic Insurance
with the exercise of prudence. Corporations - P500T capital stock; 50%
subscribed and the balance payable in 12
SEC. 12. MINIMUM CAPITAL STOCK months.
REQUIRED OF STOCK CORPORATIONS. 2. Private Development Banks
- P4M for class A
DEFINITION OF TERMS: - P2M for class B
1. CAPITAL STOCK OR LEGAL STOCK OR - P1M for class C
STATED CAPITAL 3. Investment Companies – paid up
 Amount fixed in the corporate charter to at least P500T
be subscribed and paid in cash, kind or 4. Savings and Loan Corporation –
property at the organization of the to be fixed by the Monetary Board, but
corporation or afterwards and upon not less than P100T
which the corporation is to conduct its 5. Financing Companies 1
operation. Paid up: - P2M for Metro Manila
2. CAPITAL - P1M for Cities
 The value of the actual property or estate - P500T for others
of the corporation whether in money or B. Provided that at least 25% of the
property. Its net worth (or stockholder’s authorized capital stock has been subscribed
equity) is its assets less liabilities. and at least 25% of the total subscription
3. AUTHORIZED CAPITAL STOCK must be paid up
 The capital stock divided into shares
with par values. Sec. 13. AMOUNT OF CAPITAL STOCK
 Par value stocks are required in the case TO BE SUBSCRIBED AND PAID FOR
of corporations issuing preferred shares, THE PURPOSES OF INCORPORATION.
as well as in the case of banks, trust
companies, insurance companies, MINIMUM SUBSCRIBED CAPITAL STOCK
building and loan associations, and  25% of authorized capital stock
public utilities. It is the total amount in
the charter, which may be raised by the MINIMUM PAID-UP CAPITAL
corporation for its operations.  25% of total subscription must be paid upon
4. SUBSCRIBED CAPITAL STOCK subscription but must not be less than
 The total amount of the capital stock P5,000.
subscribed whether fully paid or not.
5. OUTSTANDING CAPITAL STOCK NOTE: Non-resident aliens should pay their
 The portion of the capital stock issued to subscriptions in full unless a resident assumes
subscribers except treasury stocks. the balance. The subscription payments of the
6. STATED CAPITAL non-resident aliens shall not be included in the
 The capital stock divided into no par computation of the 25% minimum paid-up
value shares. capital requirement.
7. PAID-UP CAPITAL
Ways of increasing the capital stock:
1. By increasing the number of
shares and retaining the par value;
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. By increasing the par value of SEC. 14. CONTENTS OF THE ARTICLES


existing shares without increasing the OF INCORPORATION.
number of shares;
3. By increasing the number of ARTICLES OF INCORPORATION
shares and increasing the par value.  The document prepared by the persons
4. By reinvesting retained establishing a corporation and filed with the
earnings to the capital and issuing stock SEC containing the matters required by the
dividends Code.
 Significance:
Tools available to a stockholder to 1. Its issuance signals the birth of the
replenish capital: corporation’s juridical personality;
1. Additional subscription to shares of 2. It is an essential requirement for the
stock of the corporation by stockholders existence of a de facto corporation.
or by investors;
2. Advances by the stockholders to the  Contents:
corporation; 1. Name of corporation;
3. Payment of unpaid subscription by the 2. Purpose/s, indicating the
stockholders. primary and secondary purposes;
3. Place of principal office;
Trust Fund Doctrine (TFD) 4. Term of existence;
 The subscribed capital stock of the 5. Names, citizenship and
corporation is a trust fund for the payment residences of incorporators;
of debts of the corporation which the 6. Number, names, citizenship and
creditors have the right to look up to satisfy residences of directors or trustees;
their credits, and which the corporation may 7. Names, nationalities, and
not dissipate. residences of the persons who shall act
 The creditors may sue the stockholders as directors or trustees until the first
directly for the latter’s unpaid subscription. regular ones are elected and qualified;
8. If a stock corporation, the
Application of the TFD: amount of its authorized capital stock,
1. Where the corporation has distributed its number of shares and in case the shares
capital among the stockholders without are par value shares, the par value of
providing for the payment of creditors; each share;
2. Where it had released the subscribers to the 9. Names, residences, number of
capital stock from their subscriptions; shares, and the amounts subscribed and
3. Where it has transferred the corporate paid by each of the original subscribers
property in fraud of its creditors; and which shall not be less than 25% of
4. Where the corporation is insolvent. authorized capital stock;
10. If non-stock, the amount of
capital, the names, residences, and
Coverage of the TFD: amount paid by each contributor, which
1. If the corporation is solvent, the TFD shall not be less than 25% of total
extends to the capital stock represented by subscription;
the corporation’s legal capital. 11. Name of treasurer elected by
2. If the corporation is insolvent, the TFD subscribers; and
extends to the capital stock of the 12. If the corporation engages in a
corporation as well as all of its property and nationalized industry, a statement that
assets. no transfer of stock will be allowed if it
will reduce the stock ownership of
Exceptions to the TFD: Filipinos to a percentage below the
Redemption of redeemable shares (Sec. 8) required legal minimum.
1. In close corporation, when there should be a
deadlock and the SEC orders the payment of  The articles of incorporation of any stock
the appraised value of the stockholder’s corporation must be accompanied by a
share. (Sec. 104) Treasurer’s Affidavit showing that:

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 At least 25% percent of the Note:


authorized capital stock of the  appraisal right of dissenting
corporation has been subscribed, stockholders is available
and  meeting of stockholders is not necessary
 At least 25% of the total subscription
has been fully paid to him in actual Effectivity of amendment:
cash and/or in property the fair  upon their approval by the SEC; or
valuation of which is equal to at least  from the date of filing with the said
25% percent of the said subscription, Commission if not acted upon within six (6)
such paid-up capital being not less months from the date of filing for a cause
than P5,000.00. not attributable to the corporation.

SEC. 16. AMENDMENT OF ARTICLES OF Sec. 17. Grounds when articles of


INCORPORATION incorporation or amendment may be
rejected or disapproved.
Limitations: 1. the articles or its amendment is not
1. The amendment of any provision or substantially in accordance with the
matters stated in the articles pf form prescribed
incorporation is not allowed when it will 2. The purposes of the corporation are
be contrary to the provisions or patently unconstitutional, illegal,
requirement prescribed by the Code or immoral, or contrary to government
by special law or changes any provision rules and regulations
in the articles of incorporation stating an 3. The Treasurer’s Affidavit concerning the
accomplished fact amount of capital stock subscribed
2. It must be legitimate purposes and/or paid is false
3. It must be approved by the required vote 4. The required percentage of ownership of
of the board of directors or trustees and the capital stock to be owned by Filipino
the stockholders or members citizens ahs not been complied with
4. The original articles and amended
articles must contain all provisions Note: The SEC shall give the incorporators a
required by law to be set out in the reasonable time within which to correct or
articles on incorporation modify the objectionable portions of the articles
5. Such articles, as amended, must be or amendment.
indicated by underscoring the changes
made, and a copy thereof duly certified Grounds for suspension or revocation of
under oath by the corporate secretary Certificate of Incorporation (Pres.
and a majority of the directors or Decree No. 902-A)
trustees stating that the amendments 1. Fraud in procuring its certificate of
have been duly approved by the required incorporation
vote of the stockholders or members 2. Serious misrepresentation as to what the
must be submitted to the SEC corporation can do or is doing to the
6. If the corporation is governed by special great prejudice of, or damage to, the
law, the amendments must be general public
accompanied by a favorable 3. Refusal to comply with or defiance of a
recommendation of the appropriate lawful order of the SEC restraining the
government agency commission of acts which would amount
to a grave violation of its franchise
Vote requirement: 4. Continuous inoperation for a period of
 majority vote of the board of directors or at least 5 years
trustees and 5. Failure to file the by-laws within the
 the vote or written assent of the required period
stockholders representing at least 2/3 of the 6. Failure to file required reports
outstanding capital stock or the vote or
written assent of at least 2/3 of the Non-amendable facts in the articles on
members if it be a non-stock corporation. incorporation

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Those matters referring to facts existing


as of the date of the incorporation such Note: The doctrine of secondary meaning
as: originated in the field of trademark law. Its
1. Names of incorporators; application has, however, been extended to
2. Names of original subscribers to corporate names since the right to use a
the capital stock of the corporate name to the exclusion of others is
corporation and their subscribed based upon the same principle which underlies
and paid up capital; the right to use a particular trademark or trade
3. Treasurer elected by the original name. (Lyceum of the Phil vs. CA, G.R. No.
subscribers; 101897)
4. Members who contributed to the
initial capital of non-stock Sec. 19. Commencement of corporate
corporation; existence.
5. Date and place of execution of  From the date the SEC issues a certificate of
the articles of incorporation; incorporation under its official seal
6. Witnesses to the signing and
acknowledgment of the article Sec. 20. De facto corporations.
 A corporation has a de facto existence where
A certificate of authority is required for the there is a bona fide attempt to incorporate,
following: colorable compliance with the statute and
1. banks, building and loan associations, user of corporate powers
finance companies – Monetary Board  Its existence cannot be inquired
2. insurance companies – Insurance collaterally. Such inquiry may be made by
Commission the Solicitor General in a quo warranto
3. educational institutions – Secretary of proceeding
Education  The only entity that can attack the de facto
4. Public utilities – Land Transportation existence of a corporation is the State and
Commission, Civil Aeronautics Board, only by a direct proceeding called quo
National Telecommunications warranto specifically sought for the purpose
Commission, etc. of ousting the corporators from their right
to exist as a corporation.
Sec. 18. Corporate name.
Requisites of De Facto Corporation:
Prohibitions: 1. The existence of a valid law under which
1. Proposed name is identical or it may be incorporated;
deceptively or confusingly similar to that 2. A bona fide attempt in good faith to
of any existing corporation or to any incorporate under such law;
other name already protected by law or 3. Actual use or exercise in good faith of
2. Patently deceptive, confusing or corporate powers; and
contrary to existing laws. 4. Issuance of a certificate of incorporation
by the SEC as a minimum requirement
Note: When a change in the corporate name is of continued good faith.
approved, the Commission shall issue an
amended certificate of incorporation under the Difference between a de facto corporation and
amended name. a de jure corporation

Doctrine of Secondary Meaning A de jure corporation can successfully resist a


 a word or phrase originally incapable of suit by a state brought to challenge its existence;
exclusive appropriation with reference to an while a de facto corporation cannot sustain its
article on the market, because right to exist.
geographically or otherwise descriptive,
might nevertheless have been used so long Sec. 21. Corporation by estoppel
and so exclusively by one producer with Definition
reference to his article that, in that trade  group of persons that assumes to act as a
and to that branch of the purchasing public, corporation knowing it to be without
the word or phrase has come to mean that authority to do so, and
the article was his product.
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 enters into a transaction with a third person cease and the corporation shall be
on the strength of such appearance. deemed dissolved (automatic).
 It cannot be permitted to deny its existence
in an action under said transaction. It is Non-User for 5 Years
neither de jure nor de facto.  When a corporation has commenced the
transaction of its business but
Estoppel to deny corporate existence against subsequently becomes continuously
a. persons who assume to act as a inoperative for a period of at least 5
corporation knowing it to be without years, the same shall be a ground for the
authority to do so suspension or revocation of its corporate
Effect: liable as general partners for all franchise or certificate of incorporation
debts, liabilities and damages incurred (not automatic).
or arising as a result thereof
b. persons who assume an Note: This principle does not apply if the
obligation to an ostensible corporation causes are beyond the control of the
as such corporation as may be determined by the
SEC.
Note: A third party who, knowing an
association to be unincorporated, nonetheless “Formal Organization” and “Commencement
treated it as a corporation and received of the Transaction of Business”
benefits from it, may be barred from denying  Conditions subsequent, which may be
its corporate existence in a suit brought satisfied by substantial compliance in order
against the alleged corporation. In such case, that a corporation may legally continue as
all those who benefited from the transaction such.
made by the ostensible corporation, despite  Formal Organization:
knowledge of its legal defects, may be held liable 1. Adoption of By-Laws and filing of the
for contracts they impliedly assented to or took same with the SEC;
advantage of. (Lim Tong Lim vs. CA, 317 SCRA 2. Election of board of directors/trustees,
728) and officers;
3. Establishment of principal office;
4. Providing for subscription and payment
DE FACTO CORPORATION of capital stock.
CORPORATION BY ESTOPPEL
1. Has a real 1. No real existence TITLE III
existence in law; in law but it is a BOARD OF
mere fiction existing DIRECTORS/TRUSTEES/OFFICERS
only for a particular
case; Sec. 23. The board of directors or
trustees.
2. May exist even if 2. Cannot exist
there are no dealings unless there are A. Qualifications
between the parties dealings between the 1. For a stock corporation, ownership of at
on a corporate basis. parties on a least (1) share of capital stock of the
corporate basis. corporation in his own name and IF he
ceases to own at least one share in his own
name, he automatically ceases to be a
Sec. 22. Effects on non-use of corporate director.
charter and continuous inoperation of a
corporation. For Non-stock Corporation, only members
of the corporation can be elected to seat in
Non-User for 2 Years the Board of Trustees.
 When a corporation does not formally Exception: Trustee in a voting trust may
organize and commence the transaction be elected director/trustee
of its business or the construction of its
works within 2 years from the date of its Note: In order to be eligible as a director,
incorporation, its corporate powers what is material is legal title thereto
(stocks), not beneficial ownership of the
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

stocks appearing in the books of the


corporation CORPORATE CORPORATE
OFFICER EMPLOYEE
2. A majority of the directors/trustees must be Position is provided Employed by the
residents of the Philippines. for in the by-laws or action of the
under the managing officer of
3. He must not have been convicted by final Corporation Code the corporation
judgment of an offense punishable by RTC has jurisdiction NLRC has
imprisonment for a period exceeding 6 in case of labor jurisdiction in case
years or a violation of the Corporation Code, dispute of labor disputes
committed within 5 years from the date of
his election. (Sec. 27) D. Board of Directors/Trustees as
Repository of Corporate Powers
4. Only natural persons can be elected General Rule: The corporate powers of the
directors/trustees. corporation shall be exercised, all business
conducted and all property of such corporation
5. Other qualifications as may be prescribed in controlled and held by the board of directors or
the by-laws of the corporation. trustees.

B. Additional qualifications for directors Exceptions:


of particular corporations 1. In case of an Executive Committee duly
a. For banks and banking institutions authorized in the by-laws;
and financing corporations, at least 2/3 2. In case of a contracted manager which
of the members of the BODs shall be may be an individual, a partnership, or
citizens of the Philippines; another corporation.
b. For rural banks and registered Note: In case the contracted manager is
investment companies, every member of another corporation, the special rule in
the BODs shall be citizen of the Sec. 44 applies.
Philippines; 3. In case of close corporations, the
stockholders may manage the business
c. For domestic air carriers, the of the corporation instead by the board
directing head and 2/3 or more of the of directors, if the articles of
BODs and other managing officers shall incorporation so provide.
be Filipino citizens.; Note: The power to purchase real property is
d. The management of mass media vested in the board of directors or trustees.
shall be limited to Filipino citizens or to While a corporation may appoint agents to
corporations and/or associations wholly negotiate for the purchase of real property
owned and managed by Filipino citizens; needed by the corporation, the final say will
e. The governing body of every entity have to be with the board, whose approval will
engaged in commercial finalize the transaction. A corporation can only
telecommunications shall be in all cases exercise its powers and transact its business
be controlled by Filipino citizens; through its officers and agents when authorized
f. The control and administration of by a board resolution or by its by-laws (Spouses
education institutions shall be vested to Constantine Firme vs. Bukal Enterprises and
Filipino citizens. Development Corporation, G.R. No. 146608,
Oct 23, 2003)
C. Corporate Officers
1. President – must be a director; E. Limitation on powers of board of
2. treasurer – may or may not be a Directors/Trustees
director; as a matter of sound corporate 1. Limitations imposed by the Constitution,
practice, must be a resident statues, articles of incorporation or by-laws
3. Secretary – need not be a director unless 2. Cannot perform constituent or those
required by the by-laws; must be a involving fundamental changes in the
resident and citizen of the Philippines, corporation requiring the approval of the
and stockholders or members
4. Such other officers as may be provided 3. Cannot exercise powers not possessed by the
in the by-laws corporation.
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Exceptions:
F. Nature of Powers of Board of 1. When the directors
Directors / Trustees are themselves the only
 Under the Theory of Original Power, the shareholders;
powers of the board of directors or trustees 2. Ratification by vote or
are ORIGINAL and UNDELEGATED. acquiescence, upon full disclosure of
 The stockholders or members do not the circumstances, is generally held
confer, nor can they revoke, those effective to validate irregular or
powers. voidable acts of the directors;
 They are DERIVATIVE only in the 3. A transaction carried
sense of being received from the State in out in the name of the corporation
the act of incorporation. and with the approval of all of its
shareholders.
G. Business Judgment Rule
Definition H. RIGHTS OF STOCKHOLDERS:
1. Managerial Rights
 A resolution or transaction pursued within
a. Voting rights; and
the corporate powers and business
b. Right to remove directors
operations of the corporation, and passed in
good faith by the board of directors, is valid
2. Proprietary Rights
and binding, and generally the courts have
a. Right to dividends;
no authority to review the same and
b. Right to issuance of stock certificate for
substitute their own judgment, even when
fully paid shares;
the exercise of such power may cause losses
c. Proportionate participation in the
to the corporation or decrease the profits of a
distribution of assets in liquidation;
department
d. Right to transfer of stocks in corporate
Consequences
books;
 Resolutions and transactions entered into e. Preemptive right;
by the board within the powers of the f. Right to inspect books and records;
corporation cannot be reversed by the g. Right to be furnished of the most recent
courts not even on the behest of the financial statement/financial report;
stockholders h. Right to recover stocks unlawfully sold
 Directors and duly authorized officers for delinquent payment of subscription.
acting within such business judgment
cannot be held personally liable for acts or 3. Remedial Rights
contracts a. Individual suit – a suit instituted by a
Exceptions: shareholder for his own behalf against
a. when the Code expressly provides the corporation;
otherwise b. Representative suit – a suit filed by a
b. when the directors or officers acted shareholder in his behalf and in behalf
with fraud, gross negligence or in likewise of other stockholders similarly
bad faith situated and with a common cause
c. when the director or officers act against the corporation; and
against the corporation in conflict- c. Derivative suit – a suit filed in behalf of
of-interest situation the corporation by its shareholders (not
creditors whose remedies are merely
Remedies in case of Mismanagement subsidiary such as accion subrogatoria
1. receivership; and accion pauliana) upon a cause of
2. injunction, if the act has not yet been done; action belonging to the corporation, but
3. dissolution if the abuse amounts to a ground not duly pursued by it, against any
for quo warranto but the Solicitor General person or against the directors, officers
refuses to act; and and/or controlling shareholders of the
4. derivative suit or complaint filed with SEC corporation.
Requisite for filing a DERIVATIVE SUIT Requisites:
General Rule: The Board must act as a body to a. the party bringing suit should be a
bind the corporation shareholder as of the time of the act

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

or transaction complained of, the 3. Cumulative Voting by Distribution – a


number of his shares not being stockholder may cumulate his shares by
material; multiplying the number of his shares by
b. he has tried to exhaust intra- the number of directors to be elected
corporate remedies, i.e., has made a and distribute the same among as many
demand on the board of directors for candidates as he shall see fit his shares
the appropriate relief but the latter
has failed or refused to heed his plea; Time to determine voting right:
and a. shares standing in one’s name at the
c. the cause of action actually devolves time fixed in the by-laws
on the corporation, the wrongdoing b. where by-laws silent, at the time of
or harm having been, or being election
caused to the corporation and not to
the particular stockholder bringing Sec. 25. Corporate officers, quorum.
the suit. 1. president - must be a director
2. treasurer - may or may not be a director
4. Appraisal Rights 3. secretary - must be a resident and
 (see sec. 81) citizen of the Philippines
4. other officers as may be provided for in
5. Inspection Rights the by-laws
 (see sec. 74)
Notes:
 Any 2 or more positions may be held
Sec. 24. Election of directors or trustees. concurrently by the same person, except
Limitations / conditions that no one shall act as president and
1. At any meeting of stockholder or secretary or as president and treasurer at
members called for the election of the same time.
directors or trustees, there must be  Corporate officers are subject to the
present, either in person or by business judgment discretion of the board to
representative authorized to act by terminate
written proxy, the owners of a majority
of the outstanding capital stock, or Quorum – such number of the membership of
2. If there be no capital stock, a majority of a collective body as is competent to transact its
the members entitled to vote. business or do any other corporate act.
3. The election must be by ballot if
requested by any voting stockholder or General Rule: a majority of the number of
member. directors or trustees as fixed in the articles of
4. No delinquent stock shall be voted. incorporation
5. Candidates receiving the highest Exceptions:
number of votes shall be declared  unless the articles of incorporation or
elected provided there is quorum. the by-laws provide for a greater
6. In case of failure to hold an election for majority
any reason, the meeting may be  election of officers which shall require
adjourned from day to day or from time the vote of a majority of all the members
to time but not sine die or indefinitely. of the board.

Methods of voting Note: Every decision of at least a majority of the


1. Straight Voting – every stockholder may directors or trustees present at a meeting at
vote such number of shares for as many which there is a quorum shall be valid as a
persons as there are directors to be corporate act. Directors or trustees cannot
elected attend or vote by proxy at board meetings.
2. Cumulative Voting for one candidate – a
stockholder is allowed to concentrate his Sec. 26. Report of election of directors,
votes and give one candidate, as many trustees and officers.
votes as the number of directors to be  Report of election of directors, trustees and
elected multiplied by the number of his officers shall be made to the SEC within 30
shares shall equal
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

days after the election, their names, 1. if still constituting a quorum, any
nationalities and residences vacancy occurring in the board other
 IF any one dies, resigns or in any manner than by removal by the stockholders or
ceases to hold office, his heirs in case of his members or by expiration of term
death, the secretary, or any other officer of
the corporation, or the director, trustee or Note: A director or trustee so elected to fill a
officer himself, shall immediately report vacancy shall be elected only for the unexpired
such fact to the SEC term of his predecessor in office.

Sec. 27. Disqualification of directors, Sec. 30. Compensation of directors.


trustees or officers.
1. Convicted by final judgment of an offense General Rule: They shall be entitled to
punishable by imprisonment of 6 years; or reasonable per diems only
2. Violation of the Corporation Code Exceptions:
committed within 5 years prior to the date 1. When their compensation is fixed by the by-
of his election or appointment laws
2. When granted by the vote of stockholders
Note: If the disqualification is based on a representing at least a majority of the
violation of the Code, the duration of the outstanding capital stock at a regular or special
imprisonment is immaterial. (see sec. 23) meeting
3. When they are also officers of the corporation
Sec. 28. Removal of directors or
trustees. Where the compensation of a director is for
Requisites: services rendered other than as such, and the
1. Vote of at least 2/3 of the stockholders board fixes the compensation, all the conditions
representing at least 2/3 of the outstanding required under Sec. 32 must be present.
capital stock or 2/3 of the members entitled to
vote Sec. 31. Liability of directors, trustees or
2. at a regular or special meeting after proper officers.
notice is given Three-Fold Duties of Directors:
3. Removal may be with or without cause 1. Duty of Obedience
4. A minority director elected through • to direct the affairs of the corporation in
cumulative voting cannot be removed without accordance with the purposes for which
just case it was organized
• Legal Basis: The directors or trustees
Extent: Removal may be with or without cause. and officers to be elected shall perform
Limitation: Removal without cause may not be the duties enjoined on them by law and
used to deprive minority stockholders or the by-laws
members of the right of representation. 2. Duty of Diligence
• Legal Basis: Directors or trustees who
Sec. 29. Vacancies in the office of willfully and knowingly vote for or
director or trustee. assent to patently unlawful acts of the
The following vacancies shall be filled by corporation who are guilty of gross
stockholders / members in a regular or special negligence or bad faith in directing the
meeting: affairs of the corporation shall be liable
1. removal by the stockholders or members jointly and severally for all damages
or by expiration of term resulting therefrom suffered by the
2. other than by removal by the corporation, its stockholders or
stockholders or members or by members and other persons (Sec. 31)
expiration of term, if the remaining 3. Duty of Loyalty
directors or trustees do not constitute a
• Legal Basis: Directors or trustees who
quorum
acquire any pecuniary or personal
3. by reason of an increase in the number
interest in conflict with their duty as
of directors or trustees
such directors or trustees shall be liable
jointly and severally for all damages
The following vacancies shall be filled by the
resulting therefrom (Sec 31)
members of the board:

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

5. Agreeing or stipulating in a contract to hold


himself liable with the corporation; or
6. By virtue of a specific provision of law
Note: Special Fact Doctrine
When a director or He shall be liable as  Director takes advantage of information
trustee attempts to trustee and must by virtue of his office to the
acquire or acquires account for all the disadvantage of the corporation.
in violation of his profits which
duty, any interest otherwise would DOCTRINE OF DOCTRINE OF
adverse to the have accrued to the LIMITED IMMUNITY
corporation in corporation (Sec 31, LIABILITY
respect of any matter par 2) Shields the Protects a person
which has been corporators from acting for and in
reposed in him in corporate liability behalf of the
confidence as to beyond their agreed corporation from
which equity contribution to the being himself
imposes upon him to capital or personally liable for
deal in his own shareholding in the his authorized
behalf corporation actions
Where a director, by He must account to
virtue of his office, the latter for all such Sec. 32. Dealings of directors, trustees
acquires for himself profits by refunding or officers with the corporation.
a business the same (Sec 34) Special rules on contracts entered into by
opportunity which directors/trustees or officers:
should belong to the 1. Doctrine of Corporate Opportunity
corporation, thereby  Unless his act is ratified, a director shall
obtaining profits refund to the corporation all the profits
which belong to the he realizes on a business opportunity
corporation which:
1. The corporation is financially
PERSONAL liability of Directors able to undertake;
1. Willfully and knowingly voting for and 2. From its nature, is in line with
assenting to patently unlawful acts of the corporation business and is of
corporation; practical advantage to it; and
2. Gross negligence or bad faith in directing 3. The corporation has an interest
the affairs of the corporation; or a reasonable expectancy
 jointly and severally liable for all  The rule shall be applied
damages suffered by the corporation, its notwithstanding the fact that the
stockholders or members and other director risked his own funds in the
persons; (sec. 31) venture
3. Acquiring any personal or pecuniary 2. Contracts of self-dealing directors
interest in conflict of duty;  Contracts which are entered into
 liable as a trustee for the corporation by the corporation with one or more of
and must account for the profits which its own directors/trustees, or officers
otherwise would have accrued to the  They are voidable unless:
corporation (sec. 31) 1. The presence of such
4. Consenting to the issuance of watered director/trustee in the board
stocks, or, having knowledge thereof, failing meeting approving the contract
to file objections with the secretary; was not necessary to constitute a
 solidarily, liable with the stockholder quorum for such meeting;
concerned to the corporation and its 2. The vote of such
creditors for the difference between the director/trustee in the board
fair value received at the time of meeting approving the contract
issuance of the stock and the par or was not necessary for the
issued value of the same; (sec. 65) approval of the contract;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

3. The contract is fair and 3. The corporation has an interest or a


reasonable under the reasonable expectancy
circumstances;  The rule shall be applied notwithstanding
4. In the case of an officer, the fact that the director risked his own
there was previous authorization funds in the venture.
by the board of directors
 Although not all Sec. 35. Executive committee
said conditions are present, the Definition
corporation may elect not to attack or  A body created by the by-laws and
question the validity of the contract, composed of some members of the board
without prejudice, however, to the which, subject to the statutory limitations,
liability of the director/trustee for has all the authority of the board to the
damages under Sec. 31 extent provided in the board resolution or
 Where any of the by-laws
two conditions is absent, said contract  Must be provided for in the by-laws and
must be ratified by the vote of the composed of not less than 3 members of the
stockholders representing at least 2/3 of board appointed by the board
the outstanding capital stock or 2/3 of  May act by a majority vote of all of its
the members in a meeting called for the members
purpose, provided that full disclosure of
the adverse interest of the Limitations on the powers of the Executive
director/trustee involved is made at Committee:
such meeting It cannot act on the following:
Matters needing stockholder approval;
Sec. 33. Contracts between corporations Filling up board vacancies;
with interlocking directors. 3. Amendment, repeal, adoption of
 Contracts entered into between by-laws;
corporations with interlocking directors 4. Amendment or repeal of any
(interest of said directors is “substantial”, resolution of the Board which by its
i.e. exceeding 20% of the outstanding capital express terms is not amendable or
stock) repealable; and
 They are valid, provided that: Cash dividend declaration
1. The contract is not fraudulent; and
2. The contract is fair and TITLE IV
reasonable under the circumstances POWERS OF CORPORATIONS

IF the interlocking All the conditions Sec. 36. Corporate powers and capacity.
director’s interest in prescribed in Sec. 32 1. Express Powers - granted by law,
one corporation or on self-dealing Corporation Code, and its Articles of
corporations is directors must be Incorporation or Charter
“nominal” (not present with respect 2. Inherent / Incidental Powers – not
exceeding 20% of to the corporation in expressly stated but are deemed to be within
the outstanding which he has the capacity of corporate entities
capital stock) nominal interest 3. Implied / Necessary Powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
Sec. 34. Disloyalty of a director. pursuit of its purposes as provided for in the
Doctrine of Corporate Opportunity Charter
 Unless his act is ratified, a director shall Classification:
refund to the corporation all the profits he a. Acts in the usual course of business
realizes on a business opportunity which: b. Acts to protect debts owing to the
1. the corporation is financially able to corporation
undertake; c. Acts which involve embarking in a
2. from its nature, is in line with different business usually to collect
corporations business and is of debts out of profits
practical advantage to it; and d. Acts to protect or aid employees

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

e. Acts to increase business 6. Invest corporate funds in another


Note: The corporate powers of the corporation corporation or business for other purpose
shall be exercised, all business conducted and other than primary purpose;
all property of such corporation controlled and 7. Power to declare dividends out of
held by the board of directors or trustees. unrestricted retained earnings;
8. Enter into management contract with
A. Theory of General Capacity another corporation (not with an individual
 A corporation is said to hold such powers as or a partnership-within general powers)
are not prohibited or withheld from it by whereby one corporation undertakes to
general law (everything is allowed except manage all or substantially all of the
when prohibited). business of the other corporation for a
period not longer than 5 years for any one
General Powers and Capacity: term.
1. To sue and be sued;
2. Of succession; Sec. 37. Power to extend or shorten
3. To adopt and use a corporate seal; corporate term
4. To amend its Articles of Incorporation; Vote requirement
5. To adopt its by-laws; 1. majority vote of the board and
6. For stock corporations: issue and sell stocks 2. ratified at a meeting by the stockholders
to subscribers and treasury stocks; for non- representing at least 2/3 of the
stock corporations: admit members; outstanding capital stock or by at least
7. To purchase, receive, take or grant, hold, 2/3 of the members in case of non-stock
convey, sell, lease, pledge, mortgage and corporations.
deal with real and personal property,
securities and bonds Notice requirement
8. To enter into merger or consolidation; Written notice of the proposed action and of
9. To make reasonable donations for public the time and place of the meeting shall be
welfare, hospital, charitable, cultural, addressed to each stockholder or member at his
scientific, civic or similar purposes, place of residence as shown on the books of the
provided that no donation is given to any (i) corporation and deposited to the addressee in
political party, (ii) candidate and (iii) the post office with postage prepaid, or served
partisan political activity. personally
10. To establish pension, retirement, and other
plans for the benefit of its directors, Note: in case of extension of corporate term,
trustees, officers and employees. any dissenting stockholder may exercise his
11. To exercise other powers essential or appraisal right
necessary to carry out its purposes.
Sec. 38. Power to increase or decrease
B. Theory of Special Capacity capital stock; incur, create or increase
 A corporation cannot exercise powers except bonded indebtedness
those expressly or impliedly given Ways of increasing/decreasing the capital
(everything is prohibited except when stock
allowed). 1. By increasing/decreasing the number of
shares and retaining the par value;
Special Powers: (Secs. 37-44) 2. By increasing/decreasing the par value of
1. Power to extend or shorten corporate term; existing shares without increasing/decreasing
2. Increase or decrease corporate stock; the number of shares;
3. Incur, create, or increase bonded 3. By increasing/decreasing the number of
indebtedness; shares and increasing/decreasing the par value
4. Sell, dispose, lease, encumber all or
substantially all of corporate assets; Requirements:
5. Purchase or acquire own shares provided: 1. prior approval of the SEC is required
i. there is an unrestricted retained 2. compliance with Sec. 12 and 13 is
earnings, and required
ii. it is for a legitimate purpose. 3. no decrease of the capital stock shall be
approved by the SEC if its effect shall
prejudice the rights of corporate creditor

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. majority vote of the board of directors c. the right is denied by the


and articles of incorporation
5. ratified at a stockholder’s meeting duly d. shares that are being
called for the purpose, 2/3 of the reoffered by the corporation after they
outstanding capital stock were initially offered together with all
the shares (Benito vs SEC 123 SCRA
Note: non-stock corporations may incur or 722)
create bonded indebtedness, or increase the
same, with the approval by a majority vote of Note: In close corporations, the pre-emptive
the board of trustees and of at least 2/3 of the right is subject to no exceptions unless denied
members in a meeting duly called for the in the articles.
purpose.
Sec. 40. Sale or other disposition of
Notice requirement: assets
Written notice of the proposed action and of the  Sale or disposition of all or substantially all
time and place of the stockholder’s meeting of corporate property and assets – if the
must be addressed to each stockholder at his corporation would be rendered incapable of
place of residence as shown on the books of the continuing the business or accomplishing
corporation and deposited to the addressee in the purpose for which it was incorporated.
the post office with postage prepaid, or served
personally Vote requirement
Stockholders representing at least 2/3 of the
Tools available to the stockholders to replenish outstanding capital stock, or in case of non-
capital stock corporation, by the vote of at least to 2/3
1. Additional subscription to shares of stock of of the members, in a stockholder’s or member’s
the corporation by stockholders or investors; meeting duly called for the purpose
2. Advances by the stockholders ot the  However, no ratificatory vote is needed
corporation; in the following instances:
3. Payment of unpaid subscription by the a. If it is necessary in the usual and
stockholders; and regular course of business
4. Loans from third persons b. If the proceeds of such property and
assets be appropriated for the
Sec. 39. Power to deny pre-emptive right conduct of the remaining shares

Pre-emptive Right – right to subscribe to all Notice requirement


issues or disposition of shares of any class in Written notice of the proposed action and of the
proportion to his present stockholdings time and place of the meeting shall be
 the purpose being to enable the addressed to each stockholder or member at his
shareholder to retain his proportionate place of residence as shown on the books of the
control in the corporation and to retain his corporation and deposited to the addressee in
equity in the surplus. the post office with postage prepaid, or served
personally
General Rule: Applies to all issues or
disposition of shares of any class Note: dissenting stockholder may exercise his
Exceptions: appraisal right
a. shares issued in compliance
with laws requiring stock offerings or Sec. 41. Power to acquire own shares
minimum stock ownership by the public
b. shares issued in good faith General Rule: A stock corporation shall have
with the approval of the stockholders the power to purchase or acquire its own shares
representing 2/3 of the outstanding for a legitimate corporate purpose
capital stock, in exchange for: Limitation: existence of unrestricted retained
i. property needed for corporate earnings in its books
purposes, or
ii. in payment of a previously Instances:
contracted debt 1. To eliminate fractional shares arising
out of stock dividends;
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. To collect or compromise an stockholders or members shall not be


indebtedness to the corporation, arising necessary
out of unpaid subscription, in a iii. the other purposes for which the funds
delinquency sale, and to purchase may be invested must be among those
delinquent shares sold during said sale; enumerated as secondary purposes and
and must further comply with the
3. To pay dissenting or withdrawing requirements of Sec 42
stockholders entitled to payment for
their shares under the provisions of this Sec. 43. Power to declare dividends
Code Definitions
4. To acquire treasury shares 1. RETAINED EARNINGS = ASSETS,
5. Redeemable shares regardless of LIABILITIES AND LEGAL CAPITAL
existence of retained earnings 2. UNRESTRICTED – if the retained
6. To effect a decrease of capital stock earnings have not been reserved or set
7. in close corporations, when there is a aside by the board of directors for some
deadlock in the management of the corporate purpose
business 3. DIVIDENDS - corporate profits set
aside, declared, and ordered to be paid
Notes: by the directors for distribution among
i. Redeemable shares may be shareholders at a fixed time.
redeemed, regardless of the existence of
unrestricted retained earnings (Sec. 8), Kinds of dividends
provided that the corporation has, after 1. Cash
such redemption, sufficient assets in its  cash dividends due on delinquent stock
books to cover debts and liabilities shall first be applied to the unpaid
inclusive of capital stock balance on the subscription plus costs
ii. In numbers 1-3, there must be and expenses
unrestricted retained earnings 2. Property
3. Stock
Sec. 42. Power to invest corporate funds  stock dividends shall be withheld from
in another corporation or business or the delinquent stockholder until his
for any other purpose unpaid subscription is fully paid
Vote requirements:  no stock dividend shall be issued
1. majority of the board of directors or without the approval of stockholders
trustees and representing not less than 2/3 of the
2. ratified by the stockholders representing outstanding capital stock at a regular or
at least 2/3 of the outstanding capital special meeting duly called for the
stock, or by at least 2/3 of the members purpose
in the case of non-stock corporations, at  cannot be issued to non-stockholders
a stockholder’s or member’s meeting (Nielson vs Lepanto Consolidated Mines
duly called for the purpose 26 SCRA 540)
Notice requirement Cash Dividend Stock Dividend
Written notice of the proposed investment and
Involves a Does not involve any
the time and place of the meeting shall be
disbursement of the disbursement
addressed to each stockholder or member at his
SH of accumulated
place of residence as shown on the books of the
earnings
corporation and deposited to the addressee in
Cash dividend May be reached by
the post office with postage prepaid, or served
declared and paid corporate creditors
personally
becomes the absolute being still part o
property of the SH corporate property
Notes:
and cannot be
i. any dissenting stockholder can exercise
reached by the
his appraisal right
creditors of the
ii. where the investment by the corporation
corporation in the
is reasonably necessary to accomplish its
absence of fraud
primary purpose, the approval of the

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Declared only by the Declared by the board for special reserve for probable
board of directors at with the concurrence of contingencies
its discretion the SH representing at
least 2/3 of the Sources of dividends:
outstanding capital General Rule: Dividends can only be declared
Does not increase the Increases corporate and paid out of actual and bona fide
corporate capital capital unrestricted retained earnings.
Declaration creates a No debt is created
debt from the Special Rules:
corporation in favor 1. Where a corporation sold its real property,
of its SH which is not being used for business, at a
Taxable as income to Not subject to income gain, the income derived therefrom may be
the SH tax availed of for dividend distribution.
Cash dividends due Stock dividends cannot 2. Increase in the value of a fixed asset as a
on delinquent shares be applied as payment result of its revaluation is not retained
can be applied to the dividends for unpaid earning. However, increase in the value of
payment of the subscription fixed assets as a result of revaluation
unpaid balance (“Revaluation surplus”) may be declared as
cash or stock dividends provided that the
Note: The right to dividends is based on duly company:
recorded stockholdings; accordingly, the a. has sufficient income from
corporation is prohibited from entitling thereto operations from which the
anyone else depreciation on the appraisal
increase was charged
Other kinds of dividends: b. has no deficit at the time the
1. Optional dividend – gives an option to depreciation on the appraisal
receive cash or stock dividend increase was charged to operations;
2. Composite dividend – dividend partly in and
cash partly in stocks c. such depreciation on appraisal
3. Scrip dividend – issued to a stockholder increase previously charged to
entitling him to the payment of money or operations has not been impaired by
the like at some future time, similar to a losses.
promissory note 3. Dividends can be declared out of the
4. Bond dividend – dividends distributed in amount received in excess of the par value
bonds of the corporation to the stockholders of shares (“paid-in surplus”) when:
5. Liquidating dividends – distributions of the a. That they be declared only as
assets of the corporation upon dissolution stock dividends and not cash;
or winding up o the same b. No creditors are prejudiced; and
c. There is no impairment of
General Rule: Stock corporations are capital.
prohibited from retaining surplus profits in Note: unlike par value shares, when no par
excess of 100% of their paid-up stock capital value shares are sold at a premium, the
Except: entire consideration paid is considered
1. When justified by definite corporate capital, hence the same cannot be declared
expansion projects approved by the as dividends.
board of directors 4. Reduction surplus can be a source of
2. When the corporation is prohibited dividends. Rule on paid-in surplus is
under any loan agreement with any applicable.
financial institution or creditor, whether 5. No dividends can be declared out of capital
local or foreign, from declaring except only in two instances: 1) liquidating
dividends without its/his consent, and dividends; and 2) dividends from
such consent has not yet been secured; investments in wasting asset corporation.
or  It permits corporations solely or
3. When it can be clearly shown that such principally engaged in the exploitation
retention is necessary under special of “wasting assets” to distribute the net
circumstances obtaining in the proceeds derived from exploitation of
corporation, such as when there is need their holdings such as mines, oil wells,
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

patents and leaseholds, without corporation owning at least 2/3 of the total
allowance or deduction for depletion. outstanding capital stock entitled to vote, or by
 Wasting Assets Corporation is one sole at least 2/3 of the members in the case of a non-
purpose of which is to invest its capital stock corporation
in a specific property and afterward to
consume that property or extract its Term: maximum of 5 years
value at a profit, such as mining.
6. Profits realized from sale of treasury shares Sec. 45. Ultra vires acts of corporations.
are part of capital and cannot be declared as
cash or stock dividend as purchase and sale TYPES OF ULTRA VIRES CASES:
of such shares are regarded as contractions 1. Acts done beyond the powers of the
and expansions of paid-in capital. corporation as provided in the law or its
7. Money cannot be borrowed for the payment articles of incorporation;
of dividends because an indebtedness is not 2. Acts or contracts entered into in behalf of a
a retained earning of the corporation. corporation by persons who have no
8. Corporate earnings which have not yet been corporate authority (Note: This is
received even though they consist in money technically ultra vires acts of officers and
which is due, cannot be included in the not of the corporation); and
profits out of which dividends may be paid. 3. Acts or contracts, which are per se illegal as
being contrary to law.
Sec. 44. Power to enter into
management contract Note: An ultra vires act may be that of:
a. The corporation;
Management contract - any contract b. The Board of Directors; and
whereby a corporation undertakes to manage or c. The corporate officers.
operate all or substantially all of the business of
another corporation, whether such contracts are Ultra Vires Acts and Illegal Acts:
called service contracts, operating agreements  Ultra vires (“beyond powers”) refers only to
or otherwise an act outside or beyond corporate powers,
including those that may ostensibly be
Vote requirement: within such powers but are, by general or
1. approved by the board of directors and special laws, either prohibited or declared
2. by stockholders owning at least the illegal. It is in this context that the Code has
majority of the outstanding capital used the term.
stock, or by at least a majority of the
members in the case of a non-stock  TEST whether or not a corporation may
corporation, of both the managing and perform an act:
the managed corporation, at a meeting consider the logical and necessary
duly called for the purpose relation between the act questioned and
the corporate purpose expressed by law
Exceptions: or in the charter. If the act is lawful in
1. where stockholders representing the same itself and not prohibited, and is done for
interest of both the managing and the the purpose of serving corporate ends,
managed corporations own or control more and reasonably contributes to the
than one-third 1/3 of the total outstanding promotion of those ends in a substantial
capital stock entitled to vote of the and not in a remote and fanciful sense
managing corporation (interlocking (Montelibano Doctrine).
stockholders); or
2. where a majority of the members of the  An illegal corporate act is an act which is
board of directors of the managing contrary to law, morals, good customs,
corporation also constitute a majority of the public order, or public policy (Art. 1306
members of the board of directors of the NCC)
managed corporation (interlocking
directors) Effects of Ultra Vires Act on:
1. executed contract – courts will not set aside
Note:the management contract must be or interfere with such contracts;
approved by the stockholders of the managed
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. executory contracts – no enforcement even 1. It is a condition 1. It is a condition


at the suit of either party (void and precedent in the subsequent; its
unenforceable); acquisition of absence merely
3. part executed and part executory – corporate existence; furnishes a ground
principle of “no unjust enrichment at for the revocation of
expense of another” shall apply; and the franchise
4. executory contracts apparently authorized 2. It is essentially a 2. It is for the internal
but ultra vires – the principle of estoppel contract between the government of the
shall apply. corporation and the corporation but has
stockholders/ the force of a contract
Requisites for valid ratification of ultra members; between the between the
vires act: stockholders/ member corporation and the
a. act or contract must be inter se, and between stockholders/
consummated, not merely executory; the corporation and members, and
b. the creditors are not prejudiced, or all the State; between the
of them have given their consent stockholders and
c. the rights of the public or the State members;
are not involved; and 3. It is executed before 3. It may be executed
d. all the stockholders must give their incorporation after incorporation.
consent (Pirovano vs Dela Rama Sec. 46 allows the
Steamship 96 Phil. 335) filing of the by-laws
simultaneously with
Doctrine of Ratification the Articles of
 When corporate officers exceed their Incorporation
authority, their actions cannot bind the 4. It is amended by a 4. It may be amended
corporation, unless it has ratified such acts majority of the by a majority vote of
or is estopped from disclaiming them. Such directors/ trustees and the BOD and majority
ratification can come only from the act or stockholders vote of outstanding
omission of the Board of Directors. (San representing 2/3 of capital stock or a
Juan Structural vs CA 296 SCRA 631) the outstanding majority of the
capital stock, or 2/3 of member in non-stock
Doctrine of Apparent Authority the members in case of corporation
 If a corporation knowingly permits one of its non-stock
officers, or any other agent, to act within the corporations
scope of an apparent authority, it holds him 5. Power to 5. Power to amend or
out to the public possessing the power so to amend/repeal articles repeal by-laws or
do those acts; and thus, the corporation will, cannot be delegated by adopt new by-laws
as against anyone who has in good faith the stockholders/ may be delegated by
dealt with it through such agent, be members to the board the 2/3 of the
estopped from denying the agent’s of directors/ trustees. outstanding capital
authority. stock or 2/3 of the
members in the case
TITLE V of non-stock
BY LAWS corporation.

Sec. 46. Adoption of by-laws. Time and procedure of adoption:


 filed after incorporation
By-laws – rules of action adopted by the  1 month after receipt of official notice of
corporation for its internal regulations and for the issuance of its certificate of
the government of its officers and of its incorporation by the SEC
stockholders or members.  affirmative vote of the stockholders
representing at least a majority of the
ARTICLES OF BY-LAWS outstanding capital stock, or of at least a
INCORPORATION majority of the members in case of non-
stock corporations, shall be necessary

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 filed prior to incorporation 3. The required quorum in meetings of


 approved and signed by all the stockholders or members and the
incorporators and submitted to the SEC, manner of voting therein;
together with the articles of  the by-laws cannot provide that a
incorporation. lesser number shall constitute a
quorum in those cases in which the
Where kept: principal office of the corporation, law requires for the validity of
subject to the inspection of the stockholders or certain corporate acts
members during office hours 4. The form for proxies of stockholders and
members and the manner of voting
Effectivity: only upon the issuance by the SEC them;
of a certification that the by-laws are not 5. The qualifications, duties and
inconsistent with this Code compensation of directors or trustees,
officers and employees;
A certificate of the appropriate government  cannot dispense with the minimum
agency to the effect that such by-laws or legal requirements provided for in
amendments are in accordance with law is Sec. 23
required for the following: 6. The time for holding the annual election
 bank or any banking institution, of directors of trustees and the mode or
 building and loan association, manner of giving notice thereof;
 trust company, 7. The manner of election or appointment
 insurance company, and the term of office of all officers other
than directors or trustees;
 public utility,
 cannot provide for manner of
 educational institution or
election and term of office of
 other special corporations governed by directors or trustees which are
special laws already regulated by law (Secs. 23 &
24)
Note: Third persons are not bound by the by- 8. The penalties for violation of the by-
laws of a corporation except when they have laws;
knowledge of its provisions either actually or 9. In the case of stock corporations, the
constructively. manner of issuing stock certificates; and
10. Such other matters as may be necessary
Section 46 reveals the legislative intent to attach for the proper or convenient transaction
a directory, and not mandatory, meaning for the of its corporate business and affairs.
word "must" in the first sentence thereof. Note (21a)
should be taken of the second paragraph of the
law which allows the filing of the by-laws even Limitations: contents are subject to the
prior to incorporation. Therefore, the failure to provisions of the Constitution, the Corporation
file the by-laws within that period does not Code, other special laws
imply “demise” of the corporation, but merely
constitute a ground by which the SEC may seek Sec. 48. Amendments to by-laws.
forfeiture of the franchise of the corporation as Vote requirement:
provided in PD 902-A. (Loyola Grand Villas vs
 majority of the board of directors or trustees
CA, 276 SCRA 681)
and
Sec. 47. Contents of by-laws.  the owners of at least a majority of the
A private corporation may provide in its by-laws outstanding capital stock, or at least a
for: majority of the members of a non-stock
1. The time, place and manner of calling corporation, at a regular or special meeting
and conducting regular or special duly called for the purpose
meetings of the directors or trustees;
Delegation to the board: owners of 2/3 of the
 with respect to stockholders or
outstanding capital stock or 2/3 of the members
members, see Sec. 51 and Sec. 93.
in a non-stock corporation
2. The time and manner of calling and
conducting regular or special meetings
of the stockholders or members;

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Limitation: the power to adopt the 1 originalst


1. Held at the proper place
by-laws cannot be delegated to the board; only 2. Held at the stated date at the appointed
the power to adopt new by-laws that will time or at a reasonable time thereafter
supplant the old by-laws 3. Called by the proper person
4. Previous notice
Revocation: stockholders representing a 5. Quorum
majority of the outstanding capital stock or a
majority of the members in non-stock Remedy if there is no person authorized to call
corporations a stockholder’s (S/H) meeting: SEC upon
petition of a S/H, may order the petitioning S/H
Effectivity: upon the issuance by the SEC of a to call a meeting by giving the required notice to
certification that the same are not inconsistent the other S/H.
with this Code.
Sec. 51. Place and time of meetings of
TITLE VI stockholders or members.
MEETINGS Place: city or municipality where the principal
office of the corporation is located, and if
Sec. 49. Kinds of meetings. practicable in the principal office of the
Meetings of stockholders or members: corporation provided, that Metro Manila shall,
 regular for purposes of this section, be considered a city
 special (sec. 50) or municipality.

Meetings of directors Improperly Held or Called Meetings:


 regular General Rule: all proceedings had and any
 special (secs. 50-53) business transacted shall be invalid

Sec. 50. Regular and special meetings of Exception: valid if:


stockholders or members. a. business transacted is within the
powers or authority of the
Regular meetings of stockholders or members: corporation
b. all the stockholders or members of
 annually on a date fixed in the by-
the corporation are present or duly
laws, or
represented at the meeting
 if not so fixed, on any date in April of
every year as determined by the Sec. 52. Quorum in meetings.
board of directors or trustees General Rule: consist of the stockholders
representing a majority of the outstanding
Notice Requirement: written notice capital stock or a majority of the members in
shall be sent to all stockholders or the case of non-stock corporations.
members of record at least 2 weeks prior
to the meeting, unless a different period Exception: unless otherwise provided for in this
is required by the by-laws. Code or in the by-laws
Special meetings of stockholders and members: Sec. 53. Regular and special meetings of
 any time deemed necessary or as directors or trustees.
provided in the by-laws
Regular meetings of the board of directors or
Notice requirement: at least 1 week trustees:
written notice shall be sent to all  held monthly, unless the by-laws
stockholders or members, unless provide otherwise.
otherwise provided in the by-laws.
 held anywhere in or outside of the
Philippines, unless the by-laws provide
Note: Notice of any meeting may be waived,
otherwise.
expressly or impliedly, by any stockholder or
member.  notice stating the date, time and
place of the meeting must be sent at
Requisites for a valid meeting: least 1 day prior to the scheduled

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

meeting, unless otherwise provided by  no voting right as long as such shares


the by-laws. remain in the Treasury.

Special meetings of the board of directors or Sec. 58. Proxies.


trustees:
 may be held at any time upon the Proxy - a written instrument, signed by the
call of the president or as provided in stockholder or member (as principal) and filed
the by-laws. before the scheduled meeting with the
 held anywhere in or outside of the corporate secretary, and given to another
Philippines, unless the by-laws provide person (as agent) authorizing such person to
otherwise. exercise the voting rights of the former
 notice stating the date, time and
place of the meeting must be sent at  Period of validity: unless otherwise
least 1 day prior to the scheduled provided in the proxy, it should be valid
meeting, unless otherwise provided by only for the meeting for which it is intended.
the by-laws. No proxy shall be valid and effective for a
Note: a director or trustee may waive the notice longer period than five years at any one
requirement, either expressly or impliedly. time.
 The right to vote by proxy may be exercised
Sec. 54. Who shall preside at meetings. in any of the following instances:
 President shall preside at all meetings 1. election of the board of directors
unless the by-laws provide otherwise. or trustees;
 see Sec. 50, last par. 2. voting in case of joint ownership
of stock;
Sec. 55. Right to vote of pledgors, 3. voting by trustee under voting
mortgagors, and administrators. trust agreement;
4. pledge or mortgage of shares;
General Rule: the pledgor or mortgagor shall 5. as provided for in its by-laws.
have the right to attend and vote at meetings of
stockholders Note: Stockholders or members may attend and
Exception: the pledgee or mortgagee is vote in their meetings by proxy; directors
expressly given by the pledgor or mortgagor cannot do so. Directors must always act in
such right in writing which is recorded on the person (Sec. 25).
appropriate corporate books.
Sec. 59. Voting trusts.
 Executors, administrators, receivers, and  An agreement whereby one or more
other legal representatives duly appointed stockholders transfer their shares of stocks
by the court may attend and vote in behalf to a trustee, who thereby acquires for a
of the stockholders or members without period of time the voting rights (and/or any
need of any written proxy. other rights) over such shares;
 and in return, trust certificates are given to
Sec. 56. Voting in case of joint the stockholder/s, which are transferable
ownership of stock. like stock certificates, subject, however, to
the trust agreement.
General Rule: the consent of all the co-owners  Limitations on voting trust agreement:
shall be necessary 1. No voting trust agreement shall
Exceptions: be entered into:
 there is a written proxy, signed by all the a. for a period not exceeding
co-owners, authorizing one or some of 5 years at any time except if the
them or any other person to vote voting trust is required as a
 the shares are owned in an “and/or” condition in a loan agreement, it
capacity by the holders thereof may be for a period exceeding 5
 any one of the joint owners can vote years but shall automatically
said shares or appoint a proxy expire upon full payment of the
loan
Sec. 57. Voting right for treasury shares.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

b. for the purpose of even when the stock


circumventing the law against latter is present
monopolies and illegal
combinations in restraint of 8. An agreement 8. A proxy is usually
trade or used for purposes of must not exceed 5 of shorter
fraud years at any one duration although
2. in writing and notarized, and time except when under Sec. 58 it
shall specify the terms and conditions the same is made cannot exceed 5
thereof a condition of a years at any one
3. A certified copy of such loan. time
agreement shall be filed with the
corporation and with the SEC. 9. The voting right 9. The right to vote
Otherwise, it is ineffective and is divorced from is inherent in or
unenforceable the ownership of inseparable from
4. shall be subject to examination stocks the right to
by any stockholder of the corporation in ownership of
the same manner as any other corporate stock
book or record
5. Unless expressly renewed, all TITLE VII
rights granted in the agreement shall STOCKS AND STOCKHOLDERS
automatically expire at the end of the
agreed period Sec. 60. Subscription contract.
6. The voting trustee or trustees  any contract for the acquisition of unissued
may vote by proxy unless the agreement stock in an existing corporation or in one
provides otherwise still to be formed, irrespective of how the
parties refer to the agreement
VOTING TRUSTS PROXY
1. The trustee votes 1. The proxy holder Issue - the initial disposition (for consideration
as owner rather votes as agent not less than par or stated value) of unissued
than as mere shares, such as by subscriptions, stock
agent dividends, and sale of, or payment of obligation
2. The trust may 2. The proxy must with, shares from the unsubscribed capital
vote in person or vote in person stock.
by proxy unless
the agreement How person may become shareholder:
provides 1. by subscription contract;
otherwise 2. by purchase from the corporation of
3. Trustee acquires 3. Proxy has no treasury shares;
legal title to the legal title to the 3. by the transfer from a shareholder of
shares of the shares of the outstanding shares, by which transfer he is
transferring principal substituted in the place of the transferor.
stockholder
4. The agreement 4. Proxy need not be The rescission of the Pre-Subscription
must be notarized notarized Agreement will effectively result in the
5. The agreement is 5. Revocable unauthorized distribution of the capital assets
irrevocable anytime except and property of the corporation, thereby
one with interest violating the Trust Fund Doctrine and the
6. Trustee is not 6. Proxy can only act Corporation Code, since rescission of a
limited to act at at a specified subscription agreement is not one of the
any particular stockholder’s instances when distribution of capital assets
meeting meeting (if not and property of the corporation is allowed. (Ong
continuing) Yong vs Tiu, G.R. No. 144476)
7. A trustee can 7. A proxy can only
vote and exercise vote in the Sec. 61. Pre-incorporation subscription.
all the rights of absence of the
the stockholder owners of the PRE-INCORPORATION SUBSCRIPTION
AGREEMENTS (PISA)
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Subscription of shares of stock of a majority of the outstanding capital


corporation still to be formed stock at a meeting duly called for the
 irrevocable for a period of at least 6 months purpose.
from date of subscription, unless:
1. all of the other subscribers Sec. 63. Certificate of stock and transfer
consent to the revocation; of shares.
2. the incorporation of said
corporation fails to materialize with Certificate of Stock - the document
said period or within a longer period evidencing the ownership of shares of stocks by
as may be stipulated in the contract a stockholder and the full payment of its issue
of subscription; provided that no or subscription price.
pre-incorporation subscription may
be revoked after the submission of  It is not essential to the ownership and/or
the articles of incorporation to the existence of the share of stock.
SEC.  Where the certificate of stock reflects a
greater volume of shares than the actual
Sec. 62. Consideration for stocks. number of shares issued or to be issued, the
 Consideration may be any or a combination following rules may be considered:
of any two or more of the following: 1. To the extent that there is an
1. Actual cash paid to the corporation; overissue, the excess issuance (over
2. Property, tangible or intangible, actually the authorized capital stock or the
received by the corporation and stated capital) shall be void as being
necessary or convenient for its use and ultra vires.
lawful purposes at a fair valuation equal Remedy of purchaser: to recover
to the par or issued value of the stock damages for misrepresentation.
issued;
3. Labor performed for or services actually 2. If there is no overissue, but no
rendered to the corporation; payment has been made to cover the
4. Previously incurred indebtedness of the par or stated value of the excess
corporation; shares, the latter would constitute
5. Amounts transferred from unrestricted “watered” stocks.
retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks 3. If there is no overissue and
in the event of reclassification or watering of stocks, the corporation
conversion. may be bound to honor the
certificate (if duly signed and
Limitations: released by its authorized officers) in
 Stocks shall not be issued for a the hands of a holder in good faith,
consideration less than the par or issued reserving a right of recourse that an
price thereof except treasury shares (sec. 9) aggrieved party may pursue against
 Shares shall not be issued in exchange for the culpable or unjustly enriched
promissory notes or future service party.
 Where the consideration is other than actual
cash, or consists of intangible property such Requisites for issuance of certificates of
as patents of copyrights, the valuation stock:
thereof shall initially be determined by the 1. Must be signed by the president
incorporators or the board of directors, or vice-president; countersigned by the
subject to approval by the SEC secretary or clerk, and sealed with the
 The issued price of no-par value shares may seal of the corporation;
be fixed in the (a) articles of incorporation 2. Generally, delivery of a
or by the (b) board of directors pursuant to certificate is essential. Except when the
authority conferred upon it by: shareholder has control over the books
a. the articles of incorporation or of the company.
b. the by-laws, or 3. The par value or the full
c. in the absence thereof, by the subscription must first be fully paid.
stockholders representing at least a

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

4. In case of transfer of shares, the its principal place


original certificate must be surrendered of business.
to the corporation. c. For purposes of
execution, it is the
Capital stock Shares of stock domicile of the
- the amount paid - the interest or right corporation.
in or secured to which the
be paid in by the stockholder has in TRANSFER OF SHARES
stockholders the management of  A stockholder has an absolute right to
upon which the the corporation, dispose of his shares except if there is a
corporation is to and its surplus reasonably restriction in the articles of
conduct its profits, and upon a incorporation and in the certificates of
operation. It is dissolution, in all stock.
the property of of its assets  Kinds:
the corporation remaining after a. Absolute transfers/transfer of
itself (monetary payment of ownership
value). corporate debts.  No transfer shall be valid, except as
between the parties, until the transfer
is recorded in the books of the
corporation showing the names of the
parties to the transaction, the date of
the transfer, the number of the
certificate or certificates and the
SHARES OF CERTIFICATE number of shares transferred.
STOCK OF STOCK  No shares of stock against which the
1. Unit of interest in 1. Evidence of the corporation holds any unpaid claim
a corporation holder’s ownership shall be transferable in the books of
of the stock and of the corporation.
his right as a  any unpaid claims arising from
shareholder unpaid subscription, and not to
2. It is an 2. It is concrete and any indebtedness which a
incorporeal or tangible subscriber or stockholder may
intangible property owe the corporation arising from
3. It may be issued 3. It may be issued any other transaction
by the corporation only if the  Modes:
even if the subscription is fully  By indorsement and delivery
subscription is not paid. when there is a certificate of
fully paid. stock (presupposes that the
4. Situs is the state 4. The situs may be subscription is already fully
where the the place where it is paid); and
corporation has its located or at the  By deed of assignment when
domicile domicile of the there is no certificate of stock,
a. For taxation owner, except when but the transfer shall be valid
purposes, situs is corporation is only between the parties and
inconsistent with dominated void as to others until its
an express elsewhere. recording in the stock and
provision of the transfer book.
statute or it is
unjust. b. Limited transfers/transfer of
b. To register the juridical possession only, e.g., pledge
chattel mortgages and mortgage.
over the shares of
stock, the status is PLEDGE OR MORTGAGE OF SHARES:
the duty/promise  The pledge or mortgage itself
in which the need not be recorded in the stock
corporation has and transfer book, but a chattel

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

mortgage must comply with the 1. Majority view: No certificate of stock shall
Chattel Mortgage Law, and a pledge be issued to a subscriber until the full
would require the certificate to be amount of his subscription has been paid.
placed in the possession of the Basis: Doctrine of Individuality of
creditor/pledgee. The agreement Subscription that espouses that the
must appear in a public instrument subscription is one, entire, indivisible, and
to take effect against third persons. whole contract which cannot be divided into
• portions.
• When mandamus will lie to compel
corporation to register transfer: 2. Justice Vitug’s View: “The doctrine in the
1. That due application therefore has been Baltazar v. Lingayen Gulf case (14 SCRA
made by the registered owner or by one who 522) is still authoritative, not only because
holds a power of attorney from the Sec. 64, in essence, is a reiteration of the old
registered owner authorizing the transfer in law, but more importantly, the ruling is not
the books of the corporation; really opposed to Sec. 64 which speaks of
2. That said application has been denied; ‘subscription’ obviously referring to the
3. That there are no unpaid claims against the shares rather than to the instrument of
stock by the corporation; subscription.”
4. That an ordinary action against the
corporation for damages would be “The Baltazar doctrine itself recognizes that
inadequate; a certificate of stock may not be issued on
5. That an action in the nature of a suit in unpaid subscription even to the extent of
equity to secure a decree ordering the the paid-up, but that payments (subsequent
transfer would also be inadequate. to the subscription) may specifically be so
applied by the stockholder to certain shares
Underwriting Agreement- an agreement thereof as to make them fully paid for
between a corporation and a third person, which, and to the extent of full payment,
termed the “underwriter”, by which the latter certificates may be issued as long as such
agrees, for a certain compensation, to take a application of payment is permitted by a
stipulated amount of stocks or bonds, specified board resolution indiscriminately applicable
in the underwriting agreement, if such to all shareholders.”
securities are not taken by those to whom they
are first offered. Issuance of forged certificates:
 As a rule, a corporation will be held
UNDERWRITING STOCK responsible:
AGREEMENT SUBSCRIPTION a. where the forgery is committed
AGREEMENT by an officer having charge of the
1. The signers 1. The obligation of transfer and stock books and having
obligate the signer to the authority to issue certificates, and
themselves to purchasers and to b. the certificate is apparently
take the shares of the public is genuine.
stock which absolute.
cannot be sold.  On the other hand, the company is not
2. Underwriters are 2. There is no responsible where a necessary signature is
given commission. forged by an officer or employee who is not
commission. charged with the duty of issuing certificates.
3. The signer can 3. He becomes a
refuse to become stockholder of the Sec. 65. Liability of directors for
a stockholder/ company and is watered stocks.
member of the liable to pay the  solidarily liable with the stockholder
company. amount due on concerned to the corporation and its
the stock. creditors for the difference between the fair
value received at the time of issuance of the
Sec. 64. Issuance of stock certificates. stock and the par or issued value of the
same (water)

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 for consenting to the issuance of the stocks of call, and subject to sale, unless the
or who, having knowledge thereof, does not board declares otherwise.
forthwith express his objection in writing
and file the same with the corporate Sec. 68. Delinquency sale.
secretary
Procedure for the Sale of Delinquent Stocks:
Watered Stock – stock issued for no value at 1. Call by resolution demanding payment of
all or for a value less than its equivalent either the balance. However, if the contract of
in cash, property, stock dividends or sevices. subscription prescribes the date of payment,
no call is necessary. In addition, when the
Sec. 66. Interest on unpaid corporation becomes insolvent, with
subscriptions. proceedings instituted by creditors to wind
 from the date of subscription, if so required up and distribute its assets, no call or
by the by-laws assessment is necessary before the
 at the rate fixed in the by-laws and if no rate institution of suits to collect unpaid balance
is fixed, the legal rate (12%) on the subscriptions.
2. Notice of the board resolution given to the
Sec. 67. Payment of balance of stockholders by the corporate secretary,
subscription. either personally or by registered mail.
Publication of notice of call is not required.
Collection of Unpaid Subscription 3. Failure of the stockholder to pay within a
1. Voluntary payment grace period of 30 days from the date
a. upon the date specified in the specified in the contract of subscription or
subscription contract in the call, the stocks shall be declared
b. upon call by the Board of Directors delinquent and shall be subject to sale.
4. Notice of delinquency served on the
2. Involuntary payment subscribers either personally or registered
a. extrajudicial mail and publication in a newspaper of
i. delinquency sale general circulation in the province or the
ii. application of dividends city where principal office is located for once
b. judicial action a week for 2 consecutive weeks. Notice shall
state the amount due on each subscription
Call – a declaration officially made by a plus accrued interest, and the date, time and
corporation usually expressed in the form of a place of the sale which shall not be less than
resolution of the board of directors requiring 30 days nor more than 60 days from the
the payment of all or a certain prescribed date the stocks become delinquent.
portion of a subscriber’s stock subscription 5. Sale of the delinquent shares at public
auction.
When Stocks become delinquent:
1. If the subscription contract fixes HIGHEST BIDDER
the date for payment, failure to pay on The person participating in the delinquency sale
such date shall render the entire balance who offers to pay the full amount of the
due and payable with interest. Thirty balance of the subscription together with
(30) days therefrom, if still unpaid, the the accrued interest, costs of advertisement
shares become delinquent, as of the due and expenses of sale, for the smallest
date, and subject to sale, unless the number of shares. In other words, the
board declares otherwise. amount of the bid does not vary but only
2. If no date is fixed in the the number of shares to be bought changes
subscription contract, the board of and determines the highest bidder.
directors can make the call for payment,
and specify the due date. The notice of Notes:
call is mandatory. The failure to pay on  The remaining shares, if any, shall be
such date shall render the entire balance credited in favor of the delinquent
due and payable with interest. Thirty stockholder who shall be entitled to the
days (30) therefrom, if still unpaid, the issuance of a certificate of stock covering
shares become delinquent, as of the date such shares.

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

 Should there be no HIGHEST BIDDER the b. stock dividends shall be


corporation may, subject to the provisions withheld until the unpaid
of the Code, bid for the same, and the total subscription is fully paid.
amount due shall be credited as paid in full
in the books of the corporation. The stocks Upon the director owning delinquent
shall then be considered as treasury shares. shares:
1. He can continue serving in that
Sec. 69. When sale may be questioned. capacity unless and until said shares
are totally bidded away, he continues
Grounds for recovery of stock unlawfully sold: to be the owner thereof and in the
 irregularity or defect in the notice of sale interim he is not disqualified.
 irregularity or defect in the sale itself of the 2. A delinquent stockholder seeking
delinquent stock to be elected as director may not be a
candidate for, nor be duly elected to,
Conditions: the board.
 the party seeking to maintain such action
first pays or tenders to the party holding the Sec. 72. Rights of unpaid shares.
stock the sum for which the same was sold,  all the rights of a stockholder as long as the
with interest from the date of sale at the stocks are not delinquent
legal rate
 a complaint must be filed within 6 months Sec. 73. Lost or destroyed certificates.
from the date of sale.
PROCEDURE FOR ISSUANCE OF NEW
Sec. 70. Court action to recover unpaid CERTIFICATE OF STOCK IN LIEU OF LOST,
subscription. STOLEN OR DESTROYED ONES:
 A call may be required before a corporation 1. Filing with the corporation an affidavit in
can maintain a suit for the enforcement of triplicate by the registered owner setting
unpaid subscription (sec. 67) forth the circumstances as to how the
certificate was lost, stolen or destroyed, the
 The judicial remedy is limited to the amount
number of shares, serial number of the
due on any unpaid subscription, with
certificate and the name of the corporation
accrued interest, costs and expenses
that issued the same.
2. Publication of notice of loss by the
Sec. 71. Effects of delinquency.
corporation in a newspaper of general
1. Accelerates the entire amount of the unpaid
circulation in the place of the principal
subscription;
office, once a week for 3 consecutive weeks.
2. Subject the shares to interest, expenses and
3. After the lapse of 1 year from the date of the
costs;
last publication, if no contest has been
3. Disenfranchise the shares from any right
presented, the corporation shall cancel in its
that inheres to a shareholder, except the
books the certificate of stock, which has
right to dividends (but which shall be
been lost, stolen or destroyed, and issue in
applied to any amount due on said shares
lieu thereof a new certificate of stock.
or, in the case of stock dividends, to be
withheld by the corporation until full
However, if the registered owner files a bond or
payment of the delinquent shares. (Sec. 43)
other securities as may be necessary to the
board, the new certificate of stock may be issued
Upon the rights of stockholders:
even before the expiration of 1 year period.
1. The delinquent stock is not entitled to
vote or to be represented at any  The prescribed procedure does not apply to
stockholders’ meeting; a case where the certificates are in the
2. The holder of delinquent stock is not company’s possession when mislaid which
entitled to any of the rights of a thereby obligates the corporation, not the
stockholder except the right to receive stockholder, to suffer the consequences.
dividends subject to the rule in Sec. 43: (SEC Opinion)
a. cash dividends shall first be  Except in case of fraud, bad faith, or
applied to the unpaid balance negligence on the part of the corporation
plus costs and expenses; and its officers, no action may be brought

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

against any corporation which shall have 3. Stock and transfer book, in case
issued certificate of stock in lieu of those of stock corporations.
lost, stolen or destroyed pursuant to the  Corporate records required by the SEC to be
procedure above-described. (R. A. 201a) kept and/or registered:
1. Books of Account;
TITLE VIII 2. List of Stockholders or Members; and
CORPORATE BOOKS AND RECORDS 3. Financial Records.
 A stockholder has the power to inspect the
Sec. 74. Books to be kept; stock transfer corporate books of a controlled subsidiary of
agent. the mother corporation of which he is the
stockholder provided. (Gokongwei vs SEC,
Inspection Rights 89 SCRA 36)
Limitations:
a. The right must be exercised Sec. 75. Right to financial statements.
during reasonable hours on business The financial statement shall include:
days; 1. a balance sheet as of the end of the last
b. The person demanding the right taxable year
has not improperly used nay 2. a profit or loss statement for said taxable
information obtained through any year, showing in reasonable detail its assets
previous examination of the books and and liabilities and the result of its
records of the corporation; and operations.
c. The demand is made in good
faith or for a legitimate purpose.  The board of directors or trustees shall
present to such stockholders or members a
Remedies: financial report of the operations of the
a. Action for mandamus corporation for the preceding year at the
b. Civil (damages) or criminal liability regular meeting of stockholders or members
under par. 3 and sec. 144 – imposed on which shall include financial statements,
the guilty officer or agent of the
corporation. Form: duly signed and certified by an
Extent: if the refusal is made pursuant independent CPA
to a resolution or order of the board, Exception: if the paid-up capital of the
liability shall be imposed upon those corporation is less than P50,000.00, it may
who voted for such refusal. be certified under oath by the treasurer or
any responsible officer of the corporation
Note: it shall be a defense to any action
under this section that the person TITLE IX
demanding to examine the corporation’s MERGER AND CONSOLIDATION
records and minutes has improperly
used any information secured through Procedure for effecting a merger or
any prior examination of the records or consolidation: ( Secs. 76 to 80.)
minutes of such corporation or of any 1. The BOD or trustees of each
other corporation, or was not acting in corporation, party to the merger or
good faith or for a legitimate purpose in consolidation, shall approve a plan of
making his demand. merger or consolidation.
2. Approval by the stockholders or
 The right extends, in consonance with members of the constituent corporations
equity, good faith, and fair dealing, to a by a vote of at least 2/3 of the voting
foreign subsidiary wholly-owned by the power of the corporations.
corporation. 3. Articles of merger or articles of
 Books required to be kept: consolidation shall be executed, to be
1. Book of Minutes signed by the president or vice-president
a. minutes of stockholder or members and certified by the secretary or
meetings; and assistant secretary of each corporation.
b. minutes of board meetings. 4. Submittal to the SEC and issuance of a
2. Book of all business transactions; certificate of merger or consolidation, at

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

which time the merger or consolidation articles of incorporation for corporations


shall be effective. organized under this Code; and
4. Such other provisions with respect to the
Sec. 76. Plan of merger or consolidation. proposed merger or consolidation as are
deemed necessary or desirable.
Modes of corporate combination: Vote requirement: approval by majority vote of
1. by the sale of all or part of the assets of each of the board of directors or trustees of the
one corporation to another; constituent corporations (sec. 77)
2. by the transfer of the assets of one
corporation to another by lease; Sec. 77. Stockholder’s or member’s
3. by consolidation or merger; approval.
4. by the use of the holding company.
Vote requirement: affirmative vote of
Merger stockholders representing at least 2/3 of the
 A union whereby one or more existing outstanding capital stock of each corporation in
corporations are absorbed by another the case of stock corporations or at least 2/3 of
corporation which survives and continues the members in the case of non-stock
the combined business. corporations

Consolidation Notice requirement: given to all stockholders or


 The union of two or more existing members of the respective corporations, at least
corporations to form a new corporation 2 weeks prior to the date of the meeting, either
called the consolidated corporation. personally or by registered mail.

SALE OF ASSETS MERGER/ Contents: purpose of the meeting and


CONSOLIDATION shall include a copy or a summary of the
1. Merger or 1. A sale of assets is plan of merger or consolidation.
consolidation is not always involved;
always involved; Amendment to Plan of Merger or
Consolidation:
2. Ordinarily, the 2. Involves an Vote requirement:
purchasing corp. assumption of the  approved by majority vote of the respective
does not assume the debts and liabilities boards of directors or trustees of all the
liabilities of the of the absorbed constituent corporations and
selling corp; corp.;  ratified by the affirmative vote of
stockholders representing at least 2/3 of the
3. Does not 3. Involves the outstanding capital stock or of 2/3 of the
constitute a dissolution of the members of each of the constituent
dissolution or absorbed companies. corporations
liquidation of the
seller. Note: any dissenting stockholder in stock
corporations may exercise his appraisal right
Contents of Plan of Merger or except that if the board of directors decides to
Consolidation: abandon the plan, the appraisal right shall be
1. The names of the corporations extinguished.
proposing to merge or consolidate,
hereinafter referred to as the constituent Sec. 78. Articles of merger or
corporations; consolidation.
2. The terms of the merger or  executed by each of the constituent
consolidation and the mode of carrying corporations, to be signed by the president
the same into effect; or vice-president and certified by the
3. A statement of the changes, if any, in the secretary or assistant secretary of each
articles of incorporation of the surviving corporation
corporation in case of merger; and, with  Contents:
respect to the consolidated corporation 1. The plan of the merger or the plan of
in case of consolidation, all the consolidation;
statements required to be set forth in the
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

2. As to stock corporations, the number of liabilities of a corporation organized under


shares outstanding, or in the case of this Code;
non-stock corporations, the number of
members; and 4. The surviving or the consolidated
3. As to each corporation, the number of corporation shall thereupon and thereafter
shares or members voting for and possess all the rights, privileges, immunities
against such plan, respectively. and franchises of each of the constituent
corporations; and all property, real or
Sec. 79. Effectivity of merger or personal, and all receivables due on
consolidation. whatever account, including subscriptions
 upon the issuance of a certificate of merger to shares and other choses in action, and all
or of consolidation by the SEC and every other interest of, or belonging to,
Conditions precedent: or due to each constituent corporation, shall
 submission of articles of merger or be deemed transferred to and vested in such
of consolidation, signed and certified surviving or consolidated corporation
to the SEC without further act or deed; and
 favorable recommendation of the
appropriate government agency in 5. The surviving or consolidated corporation
case of merger or consolidation of shall be responsible and liable for all the
banks or banking institutions, liabilities and obligations of each of the
building and loan associations, trust constituent corporations in the same
companies, insurance companies, manner as if such surviving or consolidated
public utilities, educational corporation had itself incurred such
institutions and other special liabilities or obligations; and any pending
corporations governed by special claim, action or proceeding brought by or
laws against any of such constituent corporations
may be prosecuted by or against the
Note: If, upon investigation, the SEC has reason surviving or consolidated corporation. The
to believe that the proposed merger or rights of creditors or liens upon the property
consolidation is contrary to or inconsistent with of any of such constituent corporations shall
the provisions of this Code or existing laws, it not be impaired by such merger or
shall set a hearing to give the corporations consolidation.
concerned the opportunity to be heard. Written
notice of the date, time and place of hearing General Rule: When one corporation buys all
shall be given to each constituent corporation at the shares of another corporation, this will not
least 2 weeks before said hearing. operate to dissolve the other corporation and as
the two corporations still maintaining their
Sec. 80. Effects of merger or separate corporate entities, one will not answer
consolidation. for the debts of the other.
1. The constituent corporations shall become a Exceptions to Non-assumption of Liabilities:
single corporation which, in case of 1. If there is an express assumption
merger, shall be the surviving corporation of liabilities;
designated in the plan of merger; and, in 2. If there is a consolidation or
case of consolidation, shall be the merger;
consolidated corporation designated in the 3. If the purchase was in fraud of
plan of consolidation; creditors; and
4. If the purchaser is merely a
2. The separate existence of the constituent continuation of the seller.
corporations shall cease, except that of the
surviving or the consolidated corporation; TITLE X
APPRAISAL RIGHT
3. The surviving or the consolidated
corporation shall possess all the rights, Sec. 81. Instances of appraisal right.
privileges, immunities and powers
and shall be subject to all the duties and APPRAISAL RIGHTS
 The right to withdraw from the corporation
and demand payment of the fair value of his
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

shares after dissenting from certain and appraised by 3 disinterested persons,


corporate acts involving fundamental one of whom shall be named by the
changes in corporate structure, namely: stockholder, another by the corporation,
1. An amendment to the articles and the third by the two thus chosen. The
that has the effect of findings of the majority of the appraisers
a. changing or restricting shall be final, and their award shall be paid
the rights of shareholders or of by the corporation within 30 days after such
authorizing preferences over award is made
those of outstanding shares, or
b. extending the term of Limitation: no payment shall be made to any
corporate existence; dissenting stockholder unless the corporation
2. Sale, encumbrance or other has unrestricted retained earnings in its books
dispositions of all or substantially all of to cover such payment
the corporate property or assets.
3. Merger or consolidations; and Sec. 83. Effect of demand and
4. Investment of corporate funds in termination of right.
another corporation or in a purpose Effect of demand of right:
other than the primary purpose; (Sec.  all rights accruing to such shares, including
42) voting and dividend rights, shall be
5. A stockholder of a close suspended
corporation may, for any reason, compel
said corporation to purchase his shares Period: from the time of demand for payment
at their fair value (Sec. 105) of the fair value of a stockholder’s shares until
 It is essential that the dissenting either the abandonment of the corporate action
shareholder must have been present, either involved or the purchase of the said shares by
in person or by proxy, in the stockholders’ the corporation
meeting and had his dissenting vote
recorded. Limitation: if the dissenting stockholder is not
paid the value of his shares within 30 days after
Sec. 82. How right is exercised. the award, his voting and dividend rights shall
 by making a written demand for payment of immediately be restored.
the fair value of his shares on the
corporation within 30 days after the date on Sec. 84. When right to payment ceases.
which the vote was taken  demand for payment is withdrawn with the
 failure to make the demand within consent of the corporation
such period shall be deemed a  proposed corporate action is abandoned or
waiver of the appraisal right rescinded by the corporation
 upon surrender of the certificate(s) of stock  proposed corporate action disapproved by
(which must be within 10 days from the date the SEC where such approval is necessary
of demand) representing his shares the  if the SEC determines that such stockholder
corporation shall pay to such stockholder is not entitled to the appraisal right
the fair value thereof
 upon payment by the corporation of the Effect: his status as a stockholder shall
agreed or awarded price, the stockholder thereupon be restored, and all dividend
shall transfer his shares to the corporation distributions which would have accrued on his
shares shall be paid to him
Determination of fair value of the shares:
 the fair value as of the day prior to the date Sec. 85. Who bears costs of appraisal.
on which the vote was taken, excluding any General Rule: the corporation
appreciation or depreciation in anticipation Exception: the stockholder if the fair value
of such corporate action. ascertained by the appraisers is approximately
 if within a period of 60 days from the date the same as the price which the corporation
the corporate action was approved by the may have offered to pay the stockholder
stockholders, the withdrawing stockholder
and the corporation cannot agree on the fair Who bears costs and expenses in an action to
value of the shares, it shall be determined recover fair value:

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

General Rule: the corporation election of available unless


Exception: the stockholder if refusal of the directors otherwise
stockholder to receive payment was unjustified provided in the
articles or by-laws
Sec. 86. Notation on certificates; rights 4. Directors cannot • 4. Trustees may
of transferee. exceed 15 in exceed 15 in
 within 10 days after demanding payment for number number
his shares, a dissenting stockholder shall 5. The term of a • 5. The term of a
submit the certificates of stock for notation director is 1 year trustee is 3 years;
that they are dissenting shares 1/3 of the Board
shall be elected
Transfer of dissenting shares: annually
 rights of the transferor as a dissenting 6. Stockholders may • 6. Members may
stockholder to be paid the fair value of the vote by proxy be deprived of the
shares shall cease right to vote by
 the transferee shall have all the rights of a proxy in the
regular stockholder; articles or by-laws
 all dividend distributions which would have 7. Officers are • 7. Officers may
accrued on such shares shall be paid to him elected by the be directly elected
Board of by the members
TITLE XI Directors unless otherwise
NON-STOCK CORPORATIONS provided in the
articles or by-laws
Sec. 87. Definition. 8. Stockholders and • 8. Members may
Non-stock corporation - one where no part directors must act
of its income is distributable as dividends to its be allowed by the
in a meeting, by-laws to vote by
members, trustees, or officers except where a mail or other
mere written similar means
Limitation: any profit which a non-stock assent is
corporation may obtain as an incident to its sufficient or a
operations shall, whenever necessary or proper, formal meeting
be used for the furtherance of the purpose or unnecessary
purposes for which the corporation was
organized Rules on Conversion: (SEC Opinion)
1. Stock to non-stock corporation:
Governing Law: governed by the same rules
 Conversion may be made by mere
established for stock corporations, whenever
amendment of the articles of
pertinent, subject, however, to a number of
incorporation.
special features.
2. Non-stock to stock corporation:
STOCK NON-STOCK
 The corporation must first be dissolved;
1. Has capital stock • 1. Does not have
mere amendment of the articles of
divided into shares and may incorporation would not suffice because
shares and with not distribute the conversion would change the
authority to profits to its corporate nature from non-profit to
distribute members monetary gain.
dividends to its
stockholders  The conversion without dissolving it first
2. Stockholders may • 2. would be tantamount to distribution of
Members
transfer their its assets or income to its members
cannot transfer inasmuch as after its conversion, the
shares their membership asset of the non-stock corporation would
unless allowed by now be treated as payment to the
the articles or by- subscriptions of the members who will
laws now become stockholders of the
3. Cumulative voting • 3. Cumulative corporation.
is available in the voting not

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

Sec. 88. Purposes. Exception: as soon as organized, the term of


Non-stock corporations may be formed or office of 1/3 of the number of the board shall
organized for expire every year
a. charitable,  elections of trustees comprising 1/3 of the
b. religious, board of trustees shall be held annually
c. educational,
d. professional, Notes:
e. cultural,  only a member of the corporation shall be
f. fraternal, elected as a trustee
g. literary,  officers of a non-stock corporation may be
h. scientific, directly elected by the members unless
i. social, otherwise provided in the articles of
j. civic service, or incorporation or the by-laws
k. similar purposes, like trade, industry,
agricultural and like chambers, or any Sec. 93. Place of meetings.
combination thereof General Rule: city or municipality where the
principal office of the corporation is located
Chapter I - MEMBERS (sec. 51)
Exception: any place within the Philippines
Sec. 89. Right to vote. (regular or special meetings), which the by-laws
General Rule: each member, regardless of class, may provide
shall be entitled to one vote
Extent: it may be limited, broadened or denied Notice requirement: proper notice is sent to all
to the extent specified in the articles of members indicating the date, time and place of
incorporation or the by-laws the meeting

 a member may vote by proxy unless Chapter III - DISTRIBUTION OF ASSETS


otherwise provided in the articles of IN
incorporation or the by-laws NON-STOCK CORPORATIONS
 voting by mail or other similar means may
be authorized by the by-laws with the Sec. 94. Rules of distribution.
approval of the SEC
Distribution of Assets of Non-Stock Corporation
Sec. 90. Non-transferability of upon Dissolution:
membership. 1. All its creditors shall be paid;
General Rule: membership and all rights 2. Assets held subject to return
arising from it are personal and non- upon dissolution shall be delivered back
transferable to their respective transferors;
Exception: the articles of incorporation or the 3. Assets held for charitable,
by-laws otherwise provide religious, etc., without a condition for
their return on dissolution, shall be
Sec. 91. Termination of membership. conveyed to one or more organizations
 in the manner and for the causes provided engaged in similar activities as the
in the articles of incorporation or the by- dissolved corporation;
laws 4. Other assets shall be distributed
to members, as provided for in the
Effect: extinguish all rights in the corporation articles or by-laws; and
or in its property, unless otherwise provided in 5. In any other case, assets may be
the articles of incorporation or the by-laws. distributed as specified in a plan of
Chapter II - TRUSTEES AND OFFICERS distribution.

Sec. 92. Election and term of trustees. Sec. 95. Plan of distribution of assets.
 trustees elected shall have a term of three 3 Procedure:
years a. The board of trustees shall, by majority vote,
adopt a resolution recommending a plan of
distribution and directing the submission

C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
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CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W

thereof to a vote at a regular or special h. other corporations declared to be vested


meeting of members having voting rights. with public interest.
b. Written notice setting forth the proposed
plan of distribution or a summary thereof Governing Law: the provisions of this Title
and the date, time and place of such meeting shall primarily govern close corporations
shall be given to each member entitled to provided, that the provisions of other Titles of
vote, within the time and in the manner this Code shall apply suppletorily except insofar
provided in the Code for the giving of notice as this Title otherwise provides.
of meetings to members.
c. Such plan of distribution shall be adopted Characteristics of Close Corporations:
upon approval of at least 2/3 of the 1. Stockholders may act as
members having voting rights present or directors without need of election and
represented by proxy at such meeting. therefore are liable as directors;
2. Stockholders who are involved in
TITLE XII the management of the corporation are
CLOSE CORPORATIONS liable in the same manner as directors
are.
Sec. 96. Definition and applicability of 3. Quorum may be greater than
Title. mere majority;
4. Transfers of stocks to others,
Close corporation - a special kind of stock which would increase the number of
corporation: stockholders to more than the maximum
1. whose articles of incorporation should are invalid;
provide that: 5. Corporate actuations may be
a. the number of stockholders shall not binding even without a formal board
exceed 20; meeting, if the stockholder had
b. issued stocks are subject to transfer knowledge or ratified the informal
restrictions, with a right of preemption action of the others;
in favor of the stockholders or the 6. Preemptive right extends to all
corporation; and stock issues;
c. the corporation shall not be listed in the 7. Deadlocks in board are settled by
stock exchange or its stocks should not the SEC, on the written petition by any
be publicly offered; AND stockholder; and
8. Stockholder may withdraw and
2. whose 2/3 of the voting stocks or voting avail of his right of appraisal.
rights is owned or controlled by another
corporation which is not a close corporation. ORDINARY CLOSE
STOCK CORPORATION
 The mere ownership by a single CORPORATION
stockholder or by another corporation of all 1. Its articles of 1. Its articles must
or nearly all of the capital stock of a incorporation need contain the special
corporation is not itself sufficient ground for only contain the matters prescribed
disregarding the separate corporate general matters by Sec. 97, aside
personalities. So, too, a narrow enumerated in Sec. from the general
distribution of ownership does not, by 14 of the Code. matters in Sec. 14.
itself, make a close corporation (San Failure to do so
Juan Structural vs CA 296 SCRA 631 1998) precludes a de jure
close corporation
The following cannot be a close corporation: