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MERCHANTILE LAW

A. Letters of Credit 1. A letter of credit is basically an open letter of request whereby one person requests another to advance money or give credit to a third person for a certain amount and promises to repay the person advancing the money. 1.1 They are intended generally to facilitate the purchase and sale of goods by providing assurance to the seller of prompt payment upon compliance with specified conditions or presentation of stipulated documents without the seller having to rely upon the solvency and good faith of the buyer. This is known as the rule of strict compliance in a letter of credit transaction means that the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e., they must include all documents required by the letter of credit such as: (a) a draft which is also called a bill of exchange, is an order written by an exporter/seller instructing an importer/buyer or its agent to pay a specified amount of money at a specified time (b) a bill of lading, which is a document issued to the exporter by a common carrier transporting the merchandise, and (c) invoices. 1.2 The issuing bank in determining compliance with the terms of the letter of credit is required to examine only the shipping documents presented by the seller and is precluded from determining whether the main contract is actually accomplished or not. This arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. This known as the independence principle in a letter of credit transaction. 2. The primary purpose of a letter of credit is to substitute for, and therefore support, the agreement of the buyer-importer to pay money under a contract or other arrangement.This instrument is basically a credit security through availment of credit facilities of the participating banks. 3. The parties to a letter of credit are: (a) The Buyer- he is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title (b) The Issuing Bank- is the bank from whom the letter of credit is procured and which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement, and (c) The seller- who in compliance with the contract of sale ships the goods to the buyer and deliver the documents of title and draft to the issuing bank to recover payment. 3.1. In an international credit transaction carried through a letter of credit, the parties are: (a) The Customer- who is the party who applies to a bank in one country for the opening of a letter of credit in favor of the seller in another country (b) The Issuing Bank- is the bank in the country of the customer to which the customer applies for the issuance of a letter of credit (c) The Beneficiary- who is the party in another country who is the creditor of the customer. Usually, he is the one selling goods to the customer (d) The Advising Bank is the bank in the country of the beneficiary which communicates to the beneficiary the notice of the credit issued by the issuing bank (e) The Confirming/Correspondent Bank- is the bank that undertakes that the letter of credit will be fully paid. Usually the confirming bank is also the advising bank, otherwise it is utilized to lend credence to the letter of credit issued by a lesser known issuing bank and is directly liable to the beneficiary. 3.2 The relationships of the parties are to be governed as follows: (a)Issuing bank and applicant/buyer/importer Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank. Unless the contrary is provided for, the liability of the issuing bank is solidary with the buyer (b) Issuing bank and beneficiary/seller/exporter Their relationship is governed by the terms of the letter of credit

issued by the bank, and (c) Applicant and beneficiary Their relationship is governed by the sales contract. 3.3 It is clearly settled in law that there are thus three contracts which make up the letter of credit transaction: The contract between buyer and seller, buyer and issuing bank, and the letter of credit proper. These transactions are to be maintained in a state of perpetual separation. 4. The essential conditions of a letter of credit are: (a) That it be issued in favor of a definite person and not to order; and (b) That it be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly. 4.1 Hence, a letter of credit is not a negotiable instrument because it is required to be drawn in favor of a definite person. 4.2 Those which do not have any of the essential conditions shall be considered merely as a letter of recommendation. 4.3 The bank or drawer of a letter of credit shall be liable to the person on whom it was issued for the amount paid by virtue thereof, within the maximum fixed therein, while a notifying bank does not incur any liability except to notify the beneficiary of the letter of credit. Before paying, it shall have the right to demand the proof of the identity of the person in whose favor the letter of credit is issued. 4.4 The drawer of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of such revocation. The waiver of the right to annul makes the letter of credit irrevocable 4.5 The bearer of a letter of credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and current exchange in the place where payment was made on the place where it is repaid. 4.6 A letter of credit becomes void if the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within 6 months counted from its date, in any point in the Philippines, and within 12 months anywhere outside thereof, it shall be void in fact and in law. 5. A standby letter of credit is a bank-issued option on a loan involving three parties: the bank issuing the credit, the party requesting for such issuance (otherwise known as the account party) and the beneficiary. Under the terms of standby letter of credit (SLC), the beneficiary has the right to trigger the loan option (referred to as taking down the loan) if the account party fails to meet its commitment, in which case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. SLCs may support nonfinancial obligations such as those of bidders, or financial obligations such as those of borrowers. In the latter case, the borrower purchases an SLC and names the lender as beneficiary. Should the borrower default, the beneficiary has the right to take down the SLC and receive the principal balance from the issuing. 5.1 Another definition is that it is a bank-issued option on a loan involving three parties: the bank issuing the credit, the party requesting for such issuance (account party) and the beneficiary. Under its terms, the beneficiary has the right to trigger the loan option if the account party fails to meet its commitment, in which the case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. 6. The common types of letters of credit are: (a) Irrevocable vs. revocable An

irrevocable letter of credit obligates the issuing bank to honor drafts drawn in compliance with the credit and can be neither cancelled nor modified without the consent of all parties, including in particular the beneficiary/exporter. A revocable letter of credit can be cancelled or amended at any time before payment; it is intended to serve as a means of arranging payment but not as a guarantee of payment (b) Confirmed vs. unconfirmed A letter of credit issued by one bank can be confirmed by another, in which case both banks are obligated to honor drafts drawn in compliance with the credit. An unconfirmed letter of credit is the obligation only of the issuing bank. Why would an exporter want a foreign banks letter of credit confirmed by a domestic bank? One reason could be if he has doubts 6. Other types: (a) Revolving Letter of Credit-one that provides for renewed credit to become available as soon as the opening bank has advised the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer (b) Back to Back Letter of Credit- a credit with identical documentary requirements and covering the same merchandise as another letter of credit, except for the difference in price of the merchandise as shown by the invoice and draft. The second letter of credit can only be negotiated after the first is negotiated. 7. Basic Principles of Letter of Credits a.Doctrine of Independence - Letters of credit deal in documents, not goods. L/Cs are purely documentary transactions, separate and independent from the underlying contract between the Buyer and the Seller. The bank honoring the L/C is concerned only to see that the documents conform with the requirements in the L/C. If the documents conform, the bank will pay, and obtain reimbursement from the Buyer/Applicant. The bank need not look past the documents to examine the underlying sale of merchandise or the product itself. The letter of credit is independent from the underlying transaction and, except in rare cases of fraud or forgery, the issuing bank must honor conforming documents. Thus, Sellers are given protections that the issuing bank must honor its demand for payment (which complies with the terms of the L/C) regardless of whether the goods conform with the underlying sale contract. b. Fraud Exception Principle-The strict obligation of banks under the concept of the autonomy of the credit - banksmust pay - is to some extent counter-balanced by the rights of banks to refuse payment where the documentation tendered in support of an application for payment under a credit is not strictly in compliance with the requirements of the credit.But provided the documents are, on their face in conformity, the bank has anobligation to pay. However, there is an exception to the doctrine of strict compliance. Notwithstanding the fact that the documents tendered are on the face in strict compliance with the terms of the credit, payment can be refused under the fraud exception where: (1) there is clear evidence of fraud, and (2) the bank has clear notice of this evidence of fraud, and (3) the banks awareness of the fraud was timely. Bearing in mind that, where fraud is alleged, the procedural machinery likely to be used is the injunction, there is a fourth element involved where what is sought is a pre-trial injunction: the balance of convenience c. Strict Compliance Doctrine -The bank may insist upon strict compliance with the requirements of the L/C. In the absence of conformity with the L/C, the Seller cannot force payment and the bank pays at its own risk. Sellers should be careful and remember that the bank may insist upon strict compliance with all documentary requirements in the LC. If the documents do not conform, the bank should give the seller prompt, detailed notice, specifying all discrepancies and shortfalls.

TRUST RECEIPTS 1. A trust receipt is a commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of the liability to the bank. 1.1 It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchases of merchandise, and who may not be able to acquire credit, except through utilization, as collaterals, of the merchandise imported or purchased. 1.2 The subject matter of a trust receipt is always chattel. It will not apply to chattel so attached to land so as to become part thereof. 2. A trust receipt transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or hold absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified gods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of. 2.1 A Security Interest means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. 2.2 A trust receipt transaction distinguished from:(a) A pledge-in a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed (b) A conditional sale-in a conditional sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee (c) A chattel mortgage-a chattel mortgage involves the creation of a lien upon the property; a trust receipt does not involve the creation of a lien (d) A consignmentin a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster, not to the entrustee 2.3 When a debtor has received the goods from a supplier thereby acquiring title and will after borrow money from a bank to pay for the same, the transaction is a loan even he signs a trust receipt agreement. It is essential for a trust receipt transaction for the bank to first acquire ownership and possession. 2.4 When a Memorandum of Agreement is entered between a debtor corporation and a creditor bank is entered into rescheduling the payments due from the former, the trust receipt transaction is novated and transformed into a simple loan. 3. The parties to a trust receipt transaction are: (a) The entruster- is the person holding title over the goods, documents or instruments subject to a trust receipt transaction, and any successor in interest of such person, and (b) The entrustee is the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt 4. The rights of the entruster are: (a) to be entitled to receive the proceeds of the sale of

the goods released under a trust receipt to the entrustee to the extent of the amount owing to the entruster (b) to the return of the said goods, in case they could not be sold; and (c) to cancel the trust in case the entrustee defaults, take possession of the goods, and sell the same at public or private sale. 4.1 The process of taking possession and selling the goods is as follows: (a) the entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee (b) The entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. Notice of the sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last known business address (c) the proceeds of any such sale, whether public or private, shall be applied (1) to the payment of the expenses thereof; (2) to the payment of the expenses of retaking, keeping and storing the goods, documents or instruments; (3) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. 4.2 Cancellation of the trust receipt and repossession is not essential for the entruster to have a cause of action against the entrustee. They are options available to the entruster and do not prejudice resort to other remedies. 5. The obligations of the entrustee are as follows: (a) to hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; This includes the authority to manufacture or process the goods with the purpose of ultimate sale. Provided, however, that the entruster retains title over the goods whether in its original or processed form until the entrustee has complied with the obligation under the receipt. It also includes authority to load, unload, ship or transship or otherwise deal with the goods in a manner preliminary or necessary to their sale (b) To receive the proceeds of the sale of the goods in trust for the entruster and to turn over the same to the entruster to the extent of the amount owing to the entruster (c) to insure the goods for their total value against loss from fire, theft, pilferage or other casualties (d) to keep the goods or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; and (e) to return the goods,to the entruster in case they could not be sold or upon demand of the entruster. 5.1 Notwithstanding the security interest of the entruster, the entrustee shall be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Hence, although the entrustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor) anyone who acquires the goods from the entrustee acquires good title (ownership) over the goods. Note that it runs counter to the provisions of Article 1505 of the Civil Code, where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected. 5.2 Risk of loss shall aslso be borne by the entrustee. Hence, the loss of goods, documents, or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. This is not in accordance with the civil law principle that it is generally the owner who must bear the risk of loss of the object 6. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. The law warrants the validity of the trust receipt agreement. Consequently, the goods covered by the trust receipt cannot be levied upon by the creditors of the entrustee. The validity of entrusters security interest as against creditors-the entrusters

security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. 7. The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315, Section 1(b) of the Revised Penal Code are: (a) The failure to comply with the provision referring to the obligation involving the duty to deliver (entregaria) the money received to the owner of the merchandise sold, or(b)The failure to comply with the provision referring to the obligation involving the duty to return (devolvera) the goods to the owner if not disposed of in accordance with the terms of the trust receipt. 7.1 There is no need to prove intent to defraud as the offense is malum prohibitum.

7.2 There is also no need to prove damage to the entrustor because the nature of a trust receipt transaction and the damage caused to trade circles and the banking community in case of a violation thereof is the basis for the criminal offense. 7. Consequently, the law has consistently been declared as not violating the constitutional proscription against imprisonment for non-payment of debt. It is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by the receipt or to return the goods if not sold is a public nuisance to be abated by penal sanctions. B. Warehouse Receipts Law 1. The purpose of the Warehouse Receipts Law is to regulate the status, rights and liabilities of parties. In particular, it prescribes the rights and duties of a warehouseman and to regulate his relationship with (a) the depositor of the goods, or (b) the holder of a warehouse receipt, or (c) the person lawfully entitled to the possession of the goods, or (d) other persons. It also covers all warehouses, whether bonded or not. 1.2 As far as the effect of the New Civil Code provisions on documents of title to goods which include quedans or warehouse receipts, there is no conflict between the two. The Warehouse Receipts Law refers to and will apply to warehouse receipts issued by warehouseman, while the New Civil Code refers to and will apply to receipts that are not issued by warehouseman. 2. The purpose of the General Bonded Warehouse Act is to regulate the business of receiving commodities for storage in order to protect persons who may want to avail themselves of warehouse facilities and to encourage the establishment of more warehouses. 2.1 Distinguishing between the 2 laws, the Warehouse Receipts Law refers to the rights and obligations of parties in a warehousing contract, while the General Bonded Warehouse Act refers to state regulation and supervision of warehouses 3. A warehouse receipt is a written acknowledgment by a warehouseman that he holds certain goods in store for the person to whom the document is issued. This is also known as warehouse-keepers receipt or storage receipt. 3.1 While no particular form is required, it should however include the necessary terms stating: (a) Location of the warehouse (b) Date of issue (c) Number of receipt (d) Description of the goods (e) Advances made (f) Rate of charges (g) Ownership of the goods by language indicating if the warehouseman is an owner, solely or jointly with others, of the goods deposited (h) Signature of the warehouseman, and (i) Person to whom goods should be delivered by language indicating whether the receipt is negotiable or non-negotiable, that is whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order

3.2 A negotiable warehouse receipt is not a negotiable instrument as the same does not comply with the requisites of Section 1, Act 2031. However, ownership thereof may be transferred by delivery if it states that it is deliverable to bearer or a named person or bearer. If it is deliverable to a named person or order, ownership may be transferred by special endorsement and delivery. The endorsement can be to bearer or to a specified person. 3.3 A negotiable warehouse receipt is not convertible to a non-negotiable receipt. The insertion of a provision making it non-negotiable is void. To make a warehouse receipt nonnegotiable, it must be written out as such and to prevent any person from supposing it to be negotiable, the words non-negotiable should be placed plainly on its face. A non-negotiable receipt may only be assigned. 3.4 The advantages of a negotiable warehouse receipt over one which is non-negotiable are: (a) goods cannot be garnished or levied upon under execution unless receipt is surrendered, or impounded or its negotiation enjoined (Section 25, Warehouse Receipts Law) (b) In case of negotiation, holder acquires the direct obligation of the warehouseman to hold possession of the goods for him (Section 41, Warehouse Receipts Law), and (c) Goods are not subject to vendors lien or stoppage in transitu (Section 49, Warehouse Receipts Law) 3.5 Other terms may be included in a warehouse receipt, except: (a) terms that are contrary to the provisions of this Act, or (b) terms which will in anyway impair the obligation to exercise due care in the safekeeping of the goods entrusted to the warehouseman. 4. A warehouseman defined - is a person lawfully engaged in the business of storing goods for profit. Under the General Bonded Warehouse Act he is defined as a person lawfully engaged in the business of storing goods for profit. In other words, he is one who receives and stores goods owned by others and collects fees for so doing. 4.1 Included in the phrase the business of receiving commodity for storage includes any contract or transaction wherein: (a) the warehouseman is to return same commodity deposited or pay its value (b) the commodity is to be milled for the owner thereof, or (c) the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or pay its value. 5. The Primary Obligations of the Warehouseman are:(a) he must issue a receipt for any commodity that he receives for storage (b) he must exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonable careful man would exercise in regard to similar goods of his own. However, in the absence of an agreement to the contrary, he shall not be liable for any loss or injury to the goods which could not have been avoided by the exercise of such care (c) In the absence of any lawful excuse, he is bound to deliver the goods upon a demand by: (1) holder of a receipt for the goods, or (2) by the depositor, provided that the demand be accompanied by (a) an offer to satisfy the warehousemans lien (b) an offer to surrender the receipt if it is negotiable, and (c) a readiness and willingness to sign acknowledgment of delivery of the goods if requested by the warehouseman. 5.1 A warehouseman is obliged to deliver goods to: (a) person lawfully entitled to it. Examples: person determined by the court to be entitled to it in an interpleader case, person who purchases the goods at an auction to satisfy a warehousemans lien or because the goods are hazardous or of a perishable nature (b) the person who is himself entitled to delivery by the terms of the receipt. If receipt is non-negotiable, delivery will be to the person entitled to it under its terms or by written authority clearly indicated therein or another document. If receipt is negotiable, to the person named or the last indorsee. 5.2 A warehouseman may thus legally refuse to deliver goods covered by a warehouse receipt under the following instances: (a)When the demand is not accompanied by the three requirements provided in Section 8 (b)When he has a lien valid against the person demanding the

goods, he can refuse to deliver the goods until the lien is satisfied and, (c) In cases when there are several adverse claimants to the title or possession of the goods. The warehouseman can refuse to deliver to any of the claimants until he has had a reasonable to ascertain the validity of the claims. 5.3 A misdelivery or conversion occurs when (a) delivery is made to one not lawfully entitled to it, or (b) even if delivery is made to a person holding a non-negotiable or negotiable receipt, if prior to delivery, he had either been requested not to make delivery by the person lawfully entitled to a right of property or possession in the goods or had information that delivery about to be made was to one not lawfully entitled to possession of the goods. 5.4 A warehouseman can protect against a misdelivery by: (a) availing of a the reasonable time that he is entitled to within which to ascertain the validity of an adverse claim or to bring legal proceedings to force the claimants to interplead or may actually require the claimants to interplead. 5.5 A warehouseman cannot commingle as he is bound to keep the goods of a depositor separate from the goods of other depositors or from the goods of the same depositor for which a separate receipt has been issued. The purpose of the prohibition is to permit inspection and redelivery at all times.Exceptions are: (a) the goods are fungible, as when any unit of the good is from its nature or mercantile usage, treated as an equivalent of any other unit (Section 58, Warehouse Receipts Law) or (b) it is authorized by agreement or custom. 6. For failure to take up and cancel a negotiable receipt, or one the negotiation of which would transfer the right to the possession of the goods when goods are delivered(Section 11, Warehouse Receipts Law) or for the failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when goods are partly delivered (Section 12, Warehouse Receipts Law). The warehouseman shall be liable for failure to deliver the goods to any one who purchases for value in good faith such receipt whether such purchaser acquired title to the receipt before or after the delivery of the goods by warehouseman 6.1 Exception: The warehouseman shall not be liable for failure to deliver the goods covered by the receipt or be guilty of a crime where the goods (a) have been lawfully sold to satisfy the warehousemans lien, or (b) have been lawfully sold or disposed of because of their perishable or hazardous nature (Section 36, Warehouse Receipts Law) 7. An alteration in a warehouse receipt is said to be:(a)Immaterial if it does not change the tenor of the warehouse receipt (b)Material if it substantially changes the tenor of the receipt (c) Authorized if it is made with the authority of the holder and the warehouseman (d)Unauthorized if it is made without the authority of the holder and warehouseman. This may be material or immaterial (e) Fraudulent if it is made with malice or bad faith by the holder with intent to defraud subsequent holders (f) Without fraudulent intent if its is made without malice or bad faith 7.1 The effects of an alteration in a warehouse receipt are: (a)Where the alteration is immaterial, the warehouseman shall be liable according to the terms of the receipt as originally issued (b)Where the alteration is immaterial, whether fraudulent or not, authorized or not, the warehouseman is liable according to the terms of the receipt as originally issued (c) Where the alteration is material and is authorized, the warehouseman shall be liable according to the terms of the receipts as altered (d) Where the alteration is material, unauthorized but without fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as they were before the alteration (e) Where the alteration is material, unauthorized and with fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as originally issued even (1) to a purchaser of the receipt for value without notice of the alteration, or (2) to the person who made the alteration and to any person who took it with notice of the alteration. However, in the latter case, such material and fraudulent alteration shall excuse the warehouseman from any other liability to the said persons. except as regards the alterer and

subsequent holders with notices. 8. For the non-existence or misdescription of goods, a warehouseman shall be liable to the holder of a receipt for damages caused by the non-existence of the goods or by the failure of the goods to correspond with the description thereof in the receipt at the time of its issue. 8.1 Exception: No such liability shall attach to the warehouseman if the goods are described in the receipt merely (a) by a statement of the marks or labels upon them or upon the packages containing them, or (b) by a statement that the goods are of a certain kind or that the packages containing the goods contain goods of a certain kind or by words of similar import. 9. The warehousemans lien refers to the lien of that a warehouseman has on the goods deposited with him or on the proceeds thereof in his hands for all lawful charges for storage and preservation of the goods, money advanced by him in relation to such goods such as the expenses of transportation or labor, or other related expenses. 9.1 The basis for the lien is the obligation of the depositor to pay the warehouseman for (a) Storage and preservation charges (b) Money advanced (c) Interest (d) Insurance (e) Transportation (f) Labor (g) Weighing, and (h)Coopering and other similar charges (Section 27, Warehouse Receipts Law) 9.2 With the exception of storage and preservation charges, the other claims must be expressly specified in the warehouse receipt for it to serve as basis for the lien (Section 30, Warehouse Receipts Law) 9.3 The lien may be enforced against all goods belonging to the person liable for the charges, as well as against all goods belonging to the others deposited by the person liable for the charges who has been entrusted with the possession of the goods and could have validly pledged the same (Section 28, Warehouse Receipts Law). Hence, it is enforceable against the depositors goods and the goods of other persons stored by depositor, if pledge of such goods by him are valid but not against the true owner if the depositor has neither title nor right of possession to the goods (Section 31, Warehouse Receipts Law; Young v. Colyear, 201 Pac. 623) 9.4 The warehouseman can enforce his lien by the sale of the goods (Section 33, Warehouse Receipts Law) or by an action in court (Section 35, Warehouse Receipts Law). Provided, however, that notice of sale of goods in order to satisfy the warehousemans lien is given. 9.5 The lien can be lost if a warehouseman surrenders possession of the goods, or by refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of the Act (Section 29, Warehouse Receipts Law) 9.6 The effect of the sale of goods to satisfy the warehousemans lien or on account of the goods perishable or hazardous nature under Section 36 shall not make the warehouseman, after the sale, liable for failure to deliver the goods to the depositor, or owner of the goods, or to the holder of a receipt given for the goods when they were deposited, even if such receipt were negotiable. 10. A negotiable receipt is negotiated by delivery when: (a) the goods are deliverable to bearer, or (b) the goods are deliverable to a specified person and the latter has indorsed it in blank or to bearer. If endorsed as deliverable to a person, the bearer receipt is transformed into a an order receipt. 10.1 A negotiable receipt is negotiated by indorsement when the goods are, by the terms of the receipt, deliverable to a specified person (Section 38, Warehouse Receipts Law) 10.2 The negotiation may be made by the: (a) owner or (b) the person to whom possession of the receipt was entrusted by the owner (Section 40, Warehouse Receipts Law)

10.3 The rights acquired by one to whom a negotiable warehouse receipt has been duly negotiated are: (a) Such title to the goods as the one negotiating could convey to a purchaser in good faith for value (b) Such title to the goods as the depositor or one to whose order the goods were to be delivered could convey to a purchaser in good faith for value, and (c) Direct obligation of the warehouseman to hold the goods for him as if the warehouseman contracted with him directly. Hence, a person to whom a warehouse receipt has been negotiated by one who has stolen the goods stated in the receipt cannot claim a misdelivery if the warehouseman delivers the goods to the rightful owner, who is the person lawfully entitled to it. 10.4 Mortgagee or pledgee of a warehouse receipt to whom a negotiable warehouse receipt has been indorsed does not acquire title over the goods. He only acquires the rights of a pledgee or mortgagee, namely to foreclose the pledge or mortgage. The intent in this case is not the negotiation of the receipt with its consequent transfer of title, but merely as security (Martinez v. P.N.B., 93 Phil. 765); P.N.B. v. Atendido, 94 Phil. 254) 11. A non-negotiable receipt is transferred by delivery accompanied with a deed of assignment or transfer. If this is indorsed, the indorsement will not give the transferee any right whatsoever (Section 39, Warehouse Receipts Law) 11. Rights acquired by a person to whom a warehouse receipt has been transferred but not negotiated are: (a) Title to the goods subject to the terms of any agreement with the transferor, and (b)The right to notify the warehouseman of the transfer in his favor and thereby acquire the direct obligation of the warehouseman to hold the goods for him (Section 42, Warehouse Receipts Law). Note that pending notification, his rights can still be defeated by a subsequent attaching creditor, or levy on execution, a vendors lien or right of stoppage in transitu. C. Trust Receipt Law

1. A trust receipt is a commercial document whereby the bank releases the goods in the
possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of the liability to the bank.

Definition of terms. As used in this Decree, unless the context otherwise requires, the term (a) "Document" shall mean written or printed evidence of title to goods. (b) "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement. (c) "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person. (d) "Goods" shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof. (e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law; any certificate of stock, or bond or debenture for the payment of money issued by a public or private corporation, or any certificate of deposit, participation certificate or receipt, any credit or investment instrument of a sort marketed in the ordinary course of business or finance, whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession and the face of the instrument to be the owner. "Instrument" shall not include a document as defined in this Decree.

(f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or equitable. (g) "Purchaser" means any person taking by purchase. (h) "Security Interest" means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. (i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary, partnership, corporation, business trust or other association, and two more persons having a joint or common interest. (j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of this Decree. No further formality of execution or authentication shall be necessary to the validity of a trust receipt. (k) "Value" means any consideration sufficient to support a simple contract. 1.1 It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchases of merchandise, and who may not be able to acquire credit, except through utilization, as collaterals, of the merchandise imported or purchased. 1.2 The subject matter of a trust receipt is always chattel. It will not apply to chattel so attached to land so as to become part thereof. 2. A trust receipt transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or hold absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified gods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of. 2.1 A Security Interest means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. 2.2 A trust receipt transaction distinguished from:(a) A pledge-in a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed (b) A conditional sale-in a conditional sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee (c) A chattel mortgage-a chattel mortgage involves the creation of a lien upon the property; a trust receipt does not involve the creation of a lien (d) A consignmentin a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster, not to the entrustee 2.3 When a debtor has received the goods from a supplier thereby acquiring title and will after borrow money from a bank to pay for the same, the transaction is a loan even he signs a trust receipt agreement. It is essential for a trust receipt transaction for the bank to first acquire ownership and possession.

2.4 When a Memorandum of Agreement is entered between a debtor corporation and a creditor bank is entered into rescheduling the payments due from the former, the trust receipt transaction is novated and transformed into a simple loan. 3. The parties to a trust receipt transaction are: (a) The entruster- is the person holding title over the goods, documents or instruments subject to a trust receipt transaction, and any successor in interest of such person, and (b) The entrustee is the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt 4. The rights of the entruster are: (a) to be entitled to receive the proceeds of the sale of the goods released under a trust receipt to the entrustee to the extent of the amount owing to the entruster (b) to the return of the said goods, in case they could not be sold; and (c) to cancel the trust in case the entrustee defaults, take possession of the goods, and sell the same at public or private sale. 4.1 The process of taking possession and selling the goods is as follows: (a) the entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee (b) The entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. Notice of the sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last known business address (c) the proceeds of any such sale, whether public or private, shall be applied (1) to the payment of the expenses thereof; (2) to the payment of the expenses of retaking, keeping and storing the goods, documents or instruments; (3) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. 4.2 Cancellation of the trust receipt and repossession is not essential for the entruster to have a cause of action against the entrustee. They are options available to the entruster and do not prejudice resort to other remedies. 5. The obligations of the entrustee are as follows: (a) to hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; This includes the authority to manufacture or process the goods with the purpose of ultimate sale. Provided, however, that the entruster retains title over the goods whether in its original or processed form until the entrustee has complied with the obligation under the receipt. It also includes authority to load, unload, ship or transship or otherwise deal with the goods in a manner preliminary or necessary to their sale (b) To receive the proceeds of the sale of the goods in trust for the entruster and to turn over the same to the entruster to the extent of the amount owing to the entruster (c) to insure the goods for their total value against loss from fire, theft, pilferage or other casualties (d) to keep the goods or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; and (e) to return the goods,to the entruster in case they could not be sold or upon demand of the entruster. 5.1 Notwithstanding the security interest of the entruster, the entrustee shall be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Hence, although the entrustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor) anyone who acquires the goods from the entrustee acquires good title (ownership) over the goods. Note that it runs counter to the provisions of Article 1505 of the Civil Code, where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected.

5.2 Risk of loss shall aslso be borne by the entrustee. Hence, the loss of goods, documents, or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. This is not in accordance with the civil law principle that it is generally the owner who must bear the risk of loss of the object 6. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. The law warrants the validity of the trust receipt agreement. Consequently, the goods covered by the trust receipt cannot be levied upon by the creditors of the entrustee. The validity of entrusters security interest as against creditors-the entrusters security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. 7. The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315, Section 1(b) of the Revised Penal Code are: (a) The failure to comply with the provision referring to the obligation involving the duty to deliver (entregaria) the money received to the owner of the merchandise sold, or(b)The failure to comply with the provision referring to the obligation involving the duty to return (devolvera) the goods to the owner if not disposed of in accordance with the terms of the trust receipt. 7.1 There is no need to prove intent to defraud as the offense is malum prohibitum.

7.2 There is also no need to prove damage to the entrustor because the nature of a trust receipt transaction and the damage caused to trade circles and the banking community in case of a violation thereof is the basis for the criminal offense. 7. Consequently, the law has consistently been declared as not violating the constitutional proscription against imprisonment for non-payment of debt. It is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by the receipt or to return the goods if not sold is a public nuisance to be abated by penal sanctions. PD 115 Provides: Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the e ntruster's security interest. Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

8. If the violation or offense is committed by a corporation, partnership, association or other


juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code). No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. xPeople v. Concepcion, 44 Phil. 129 (1922). 9. Remedies Available

D. Negotiable Instruments Law BRIEF HISTORY OF THE LAW Act No. 2031, the Negotiable Instruments Law, took effect on June 2, 1911, and is patterned after the U.S. Uniform Negotiable Instruments Law, which in turn is copied from the English Bill of Exchange Act of 1882. The Negotiable Instruments Law was enacted for purposes facilitating, not hindering hampering, transactions in commercial paper. ( Osmena vs. Citibank, 426 SCRA 159) WHAT IS NEGOTIABLE INSTRUMENT? It is a transferable instrument containing an unconditional promise or order of a holder upon issue, possession, demand or at a specified time. It is a written contract for the payment of money which by its form and on its face is intended as a substitute for money and passes from hand as money, so as to give the holder in due course the right to hold the instrument and collect the sum himself. I. FORMS AND INTERPRETATION

A. Requisites of Negotiability A negotiable instrument is primarily a contractual obligation to pay money, whose negotiability depends on its form and contents as dictated by Sec. 1 which provides for the formal requisites of a negotiable instrument. These requisites are as follows: 1. 2. 3. It must be in writing; It must be signed by maker or drawer; It must contain an unconditional promise or order to pay a sum certain in money;

4. 5.

It must be payable on demand, or at a fixed or determinable future time; It must be payable to order or to bearer; and

6. Where it is a bill of exchange, drawee must be named or otherwise indicated therein with reasonable certainty.

Section 10 of the NIL states that the instrument need not follow the language of the law, but the terms must be sufficient to clearly indicate an intention to conform to the requirements of the law. Hence, the use of a foreign language or grammatical errors does not destroy negotiability. Except what is stated in section 8 where the instrument is payable to order, where literal compliance with the law is necessary.

REQUISITES OF A NEGOTIABLE BILL 1.It must be in writing and signed by the maker; 2. It must contain an unconditional order to pay a sum certain in money; 3. It must be payable on demand, or at a fixed or determinable future time; 4. It must be payable to order or to bearer; 5. The drawee must reasonable certainty. be named or otherwise indicated therein with

BRIEF EXPLANATION ON THE REQUISITES THE INSTRUMENT MUST BE IN WRITING There must be a writing of some kind, for if the instrument were not in writing, there would be nothing to be negotiated or passed from hand to hand.

1. Physical integrity of Whole Instrument the negotiability of an instrument must be determined only from the face of the document itself and not elsewhere. (Des Moines Savings Bank v. Arthur, 163 la. 205, 143 NW 556) 2. A commercial transaction may be verbal unless the law requires a written document for its validity. Writing is required for negotiable instruments. Hence, there can be no verbal promissory note nor a verbal bill of exchange. The requisites for the validity of a negotiable instrument are: (a) consent, (b) consideration, (c) subject matter, and (d) form. 3. As a general rule, bills, notes and other instruments of similar nature are not subject to

be varied or contradicted by parol or extrinsic evidence pursuant to the rule that long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them BUT if there is an allegation of fraud in the execution of promissory note, such as when the note having a face value of P50,000.00 was alleged to have been signed by the makers at only P5,000.00, where parol contemporaneous agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence; but it must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. (Inciong v. Court of Appeals, 257 SCRA 578)

THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER 1. Any inscription or even stamping will suffice provided that it is meant to function as the signature of the party. 2. Persons who write their names on the face of a note are makers and are liable as such, and their solidary liability is made certain by the presence of the phrase joint and several. (Republic Planters Bank v. CA, 216 SCRA 738) Full name must be written. At least the surname should appear and generally, the signature usually is by writing the signers name But, where the name is not signed, the holder must prove that what is written is intended as a signature of the person sought to be charged Commonly, it is found in the lower part of the instrument. It could also be signed anywhere as long as the maker or drawer acknowledges the signature to be his own. C. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY 1. An unconditional promise or order to pay is required because the purpose of a negotiable instrument is to take the place of money. Hence, if the instrument may or may not mature, no one will have faith on negotiable instrument embodying it. Thus, the promise or order must be ABSOLUTE. 2. Any word equivalent to an order would suffice, and words of courtesy would not be inconsistent with the order; however, a mere request or authorization would not be enough. 3. The promise must be found in the instrument itself; the mere existence of a debt does not amount to a promise. The use of the word order is deemed equivalent to promise. 4. An acknowledgment of debt becomes a promise to pay by addition of words implying a promise of payment, such as payable on a given day, payable on demand, paid when called for, I.O.U. (Jimenez v. Bucoy, 103 Phil. 40 [1958]). 5. Nature of Condition (Art. 1179, Civil Code) A distinction must be made between a condition (a future and uncertain event which may or may not happen) and a period (one that is certain to happen though the time when it will happen is not known). An instrument embodying

an obligation that is subject to a condition is non-negotiable; whereas, that with an obligation subject to a period is negotiable.

IF A BILL, IT MUST CONTAIN AN ORDER TO PAY It is an instrument demanding right Any words which are equivalent to order or which show the drawers will that the money should be paid, are sufficient to make the instrument a bill of exchange AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY * It is not negotiable because it is not an order to pay. I hereby authorize you to pay P1000 to Pedro Cruz EFFECT OF MERE REQUEST TO PAY * The instrument is not negotiable as it is not an order to pay but a mere request to pay > Please to let the bearer have P70 and place to my account and you will oblige EFFECT OF MERE WORDS OF CIVILITY * The mere fact that it contains words of civility or courtesy doesnt make it nonnegotiable D. TO PAY A SUM CERTAIN IN MONEY: 1. The sum is certain when what is to be paid is a fixed amount of money or alternatively, if from the face of the instrument it can be mathematically computed. Under Section 2, the sum is still certain even when it is (a) With interest stipulated THOUGH Usury Law now ineffective. (Liam Law v. Olympic Sawmill Co., 129 SCRA 439 [1984]; CB Circular No. 905, s. 1982, 78 OG 7336). (b) By stated installments, though the installments must not only be stated, but the maturity of each installment must be fixed or determinable. (c) By stated installments, with Acceleration Clause (d) With either fixed or current rate of exchange, or payable in foreign exchange (Uniform Currency Law, R.A. 529, repealed by R.A. 8183). (e) With costs of collection or attorneys fees, in cases where payment is not made at maturity NOTE THOUGH that at maturity, the instrument is no longer fully negotiable since any transferee acquiring it would not be a holder in due course under Sections 52 and 58. 2. Section 2 illustrates instances where the sum payable is still a sum certain. This must be correlated with Section 5 which provides that an instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. Thus, in the following illustration, the instrument is not negotiable, to wit:

Pay A or order P500 or 5 sacks of rice. (Sgd.) B


However, under Sec. 5(d), the instrument is not rendered non-negotiable if it is the holder who is given an election to require something to be done in lieu of payment of money. Thus, in the following illustration, the instrument if negotiable because the obligation of the maker/acceptor to pay in a sum certain, if the holder so chooses, is still absolute, to wit:

Pay A or order P500 but the holder may demand delivery of 5 sacks of rice. (Sgd.) B
The paragraph of Section 2 on foreign exchange is deemed to have been amended by Rep. Acts

529 and 4100. The instrument is valid but what is void is the obligation to pay in foreign currency. (Arrieta v. NARIC, 10 SCRA 79 [1964]). While the agreement to pay in foreign exchange is declared null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender; it does not defeat a creditors claim for payment, but to be made in lawful Philippine legal tender. ( Ponce v. Court of Appeals) Where the parties stipulate payment in foreign currency, the rate of exchange is determined not at the time of making of the instrument but at the time of payment, and not the rate at the time the obligation was incurred. ( Kalalo v. Luz) SUM PAYABLE MUST BE DEFINITE AND CERTAIN > The amount of money to be paid must be determinable by inspection and must be stated plainly on the face of the instrument, and like the denomination of money, must be started in the body of the instrument. SUM MUST BE PAYABLE IN MONEY ONLY Money is the one standard of value in actual business or more stable standard of value. Legal tenderthat kind of money which the law compels the creditor to accept in payment of his debt when tendered by the debtor in the right amount. But, if authorized by law or consent of creditor, cash may be substituted by other means, or may be check, instrument need not be payable in legal tender. INSTRUMENT MUST SPECIFY DENOMINATION Instruments should express the specific denomination of money when it is payable in the money of a foreign country in order that the courts may be able to ascertain its equivalent value; otherwise, it is non-negotiable. E. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME 1. Under Section 7, an instrument is payable on demand (a) when expressed to be payable on demand, or at sight, or on presentation (b) when no time for payment is expressed (c) Special Rule: When an instrument is issued, accepted, or endorsed when overdue, it is, as regards the person so issuing, accepting or indorsing it, payable on demand. 2. Illustrations on payable on demand : (a) On demand pay to A or order P500. (b) At sight pay to A or order P500. (This applies only to a bill of exchange.) (c) On presentation pay to A or order P500. (This applies only to a bill of exchange.) (d) Pay to A or order. (No date expressed.) (e) 10 days after date (16 April 2002) pay to A or order P500. (Provided, That this instrument is issued, accepted or endorsed when overdue, as far as the person issuing, accepting or indorsing is concerned, the instrument is payable on demand.) 3. A DETERMINABLE FUTURE TIME as provided by Section 4 is: (a) At a fixed period after date or sight. (b) On or before a fixed or determinable future time specified therein. (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. The specification before a specified event, would render the instrument non-negotiable because the date of maturity can be determined only after the note has become overdue. A stipulation that the instrument shall be paid when my means permit me to do so although by law would constitute a period would still render the instrument non-negotiable because the instrument is not deemed payable at a fixed or determinable future since the term of the

period would have to be set by the courts under Articles 1180 and 1197, Civil Code. (d) Instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (West Point Banking Co. v. Gaunt, 34 ALR 862). F. IT MUST BE PAYABLE TO ORDER OR TO BEARER: 1. An instrument is payable to order under Section 8 when: (a) Drawn payable to the order of a specified person or to him or his order. The payee is not the maker, drawer or drawee. (b) Drawn payable to the drawee as payee. Here being both the drawee and the payee, the drawee can pay himself upon maturity from the funds belonging to the drawer in his possession: once accepted is equivalent to a promissory note in favor of the drawer. (c) Maker as payee. Here the maker promises as follows I promise to pay to the order of myself, 10,000 : the instrument is not complete until the maker endorses under Section 184. (d) Drawer as payee: this authorizes the drawee to pay himself/drawer. (e) Two or more payees jointly, or one or more several payees. (f) The holder of an office for the time being. In case the instrument is endorsed, then it will be like this:

City Treasurer of Baguio City By:__________


(g) When the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. This requirement is imposed as if there is no payee, there is NOBODY WHO COULD GIVE THE ORDER OR AUTHORITY TO COLLECT. THERE IS NO ONE WHO CAN ENDORSE THE DOCUMENT AND CAN THUS BE SAID TO BE NOT NEGOTIABLE. It would seem in Equitable Banking Corp. v. IAC, 161 SCRA 518 (1988), the contravention of this rule (such as when the check is payable to Equitable Banking Corporation order of A/C of Cavilled Enterprises, Inc.) would not render the instrument non-negotiable but would merely place the burden of ambiguity to the person who caused it under Art. 1377 of the Civil Code. 2. Subject to the rules in Sections 13, 14 and 15 on incomplete instruments, leaving the payee blank may make the instrument non-negotiable. This is because an instrument payable to order may be negotiated only by endorsement and delivery. 3. There are only two ways to make an instrument payable to order, as provided under Sec. 8

Pay to A or order. (Sgd.) B Pay to the order of A. (Sgd.) B


4. (a) Under Section 9, a negotiable instrument is payable to bearer: When it is expressed to be so payable to bearer:

Pay to bearer P1,500.00.


(b) When it is payable to a person named therein or bearer:

(Sgd.) B

Pay to A or bearer P1,500.00. (Sgd.) B

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable:

Pay to John Doe or order P500. (Sgd.) B


The clause and such fact is known to the person making it so payable, does not require that it should be the maker himself who is chargeable with the notice. Otherwise, the whole provisions would be ineffective in practically every case where the purpose of the person drawing the check was fraudulent. (Mueller & Martin v. Liberty Ins. Bank, 219 S.W. 465, 187 Ky 44 [1920]). (d) When the name of the payee does not purport to be name of any person.

Pay to cash or order P500. (Sgd.) B


There is no need to use order or equivalent word to qualify the instrument. A check payable to the order of cash is payable to bearer and the bank may pay it to the person presenting it for payment without the drawers endorsement. (Ang Tek Lian v. CA, 87 Phil. 383 [1950]). (e) When the only or last endorsement is an endorsement in blank.

Pay to A or order P500. (Sgd.) B (And the only or last endorsement at the back is a blank.)
5. Bearer means the person in possession of a bill or a note which is payable to bearer. (Sec. 191). A person who steals an instrument payable to bearer is a bearer. (Mass. Nat. Bank v. Marshall, 25 Pac. 214). (a) Words equivalent to bearer are: Assignee, holder (Wilson County v. Third Nat. Bank of Nashville, 103 US 770); Possessor; on return of this certificate properly endorsed (Felton v. Commercial Nat. Bank, 177 NE 52);Order of the bearer (American National Bank v. Kerley, 220 Pac 116, 32 ALR 262). (b) Words unaccepted as equivalent to bearer: To X or his collector; To X or his agent; To bearer B. (Weaver v. Scott, 32 Iowa 22) 6. A bearer instrument may be negotiated by mere delivery. When a bearer instrument is not delivered for purposes of negotiation but physically delivered merely as security for another obligation, there is no negotiation in the sense of transfer of legal title to the instrument and would constitute the subsequent holder merely as a holder for value and not a holder in due course. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. SEE: Caltex (Phils.) v. Court of Appeals 212 SCRA 448 (1992) G. IN BILLS OF EXCHANGE, DRAWEE MUST BE NAMED OR OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY 1. The purpose of this requirement is to enable the payee or the holder to know upon whom

he has to call for acceptance or payment. 2. Note however, that under Section 14, the omission of drawee may be filled in later on. DETERMINATION OF NEGOTIABILITY > > > By the provisions of the NIL, particularly Section 1 thereof By considering the whole of the instrument By what appears on the face of the instrument and not elsewhere

The TEST: The test of negotiability is whether or not the promise would given rise to a cause of action for breach of contract if the additional act is not done. If is does, the instrument is rendered non-negotiable. II.KINDS OF NEGOTIABLE INSTRUMENT COMMON KINDS OF NEGOTIABLE INSTRUMENTS 1. Promissory notes 2. Bills of exchange 3. Checks, which are also bills of exchange, but of a special kind PROMISSORY NOTE, SECTION 184 A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing by one person to another, signed by the maker (1), engaging to pay on demand or at a fixed or determinable future time (2), a sum certain in money (3) to order or to bearer (4). Where a note is drawn to the makers own order, it is not complete until indorsed by them. Essentially a promise in writing to pay a sum certain in money The promise is to pay on demand or on a fixed or determinable future time General characteristics: amount; place where contract to pay is executed; due date; absolute promise to pay something; payable to order/bearer; payee; maker of the note BILL OF EXCHANGE, SECTION 126 A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it (1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time (2) a sum certain in money (3) to order or to bearer General characteristics: the order or command to pay; drawer/maker; drawee

CHECK A bill of exchange drawn on a bank payable on demand

2. COMPLETION AND DELIVERY A. INSERTION OF DATE Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. WHEN DATE NECESSARY Under Section 6, the insertion of date is unnecessary. However, it may be necessary to determine the date of maturity. In the following cases,the date is also necessary: 1. Where interest is stipulated, to determine when interest is to run, but not to make the instrumentnegotiable 2. To determine where a party has acted within a reasonable time, but not make the instrumentnegotiable GENERAL RULE: Holder is authorized to insert the proper date of acceptance. But if he inserts wrong date, acceptor shall be liable on this wrong date as a penalty for his neglect in leaving his acceptance undated. The RATIONALE for the rule is that if the true date is not allowed to be inserted, one will not know when the instrument will be due. EFFECT OF INSERTION OF WRONG DATE Knowingly inserting the wrong date in an undated instrument will avoid it as to the party so inserting the wrong date. It is implied that the instrument date . Also, under Section 12, it purposes. To a holder in due course, indorsed to him. The insertion of the holder in due course. B. Completion in blanks void as to the person who knowingly inserted the wrong is void for ante-dating an instrument for fraudulent the instrument is not void, after the instrument is wrong date doesnt avoid the instrument in the hands of a

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. SCOPE OF SECTION 14 There are 2 steps in the execution of a negotiable instrument o The act of writing the instrument completely and in accordance with Section 1 of the Negotiable Instruments Law o The delivery of the instrument with the intention of giving effect to it

THE MATERIAL PARTICULAR REFERRED TO IN THIS PROVISION MAY BE 1. 2. A particular the omission of which will render the instrument non-negotiable A particular the omission of which will not render the instrument non-negotiable

FACTS FROM WHICH PRIMA FACIE AUTHORITY PRESUMED 1. 2. 3. Want of a material particular in the instrument Possession thereof by a person, a third fact That such person had authority to fill up the blank

THE LAW PRESUMES THE EXISTENCE OF AUTHORITY TO FILL THE INSTRUMENT UP TO ANY AMOUNT FROM THE FOLLOWING FACTS 1. A signature on blank paper

2. That the person signing in blank delivers it in order that the paper may be converted into a negotiable instrument REQUISITES TO HOLD PRIOR PARTIES LIABLE 1. 2. The blank must be filled strictly in accordance with the authority given It must be filled up within a reasonable time

RIGHT OF HOLDER OF DUE COURSE WHERE BLANK WRONGFULLY FILLED First view: One who is not a holder in due course cannot enforce the instrument if the same

is not filled up strictly in accordance with the authority given or within reasonable time Second view: the holder can enforce the instrument accordance with the authorized tenor According to Agbayani, the better view is the first view is the better view to have. The law provides that in order be one who is not a holder in due course may enforce mechanically incomplete but delivered instrument, the two requisites must exist. The implication is that one or both are not present, the instrument may not be enforced. DELIVERY: Delivery means transfer of possession of instrument by the maker or drawer, with intent to transfer title to the payee and recognize him as holder thereof. Therefore, where checks have not yet been delivered to payee, they do not belong to him and cannot be the subject of garnishment by payees creditors. SEE: De la Victoria v. Burgos 62 SCAD 112, 245 SCRA 374 (1995)

INCOMPLETE AND UNDELIVERED INSTRUMENTS INCOMPLETE INSTRUMENT NOT DELIVERED Section 15 applies to an instrument that is incomplete and undelivered. 1. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. 2. With regards parties whose signature appeared prior to delivery, the non-delivery of an incomplete instrument is a valid defense, not only between the original parties but also against a holder in due course. It is therefore a real defense, available even against a holder in due course. 3. With regards parties whose signature appeared after delivery, the instrument is valid and enforceable. 4. The maker or drawer may however be estopped from claiming the above defense if there should be negligence on his part. 5. It was ruled that while drawer of a check owed a duty to the bank on which the check was drawn to guard against the escape of a check signed in blank which had been stolen, he owed no such duty to the purchaser of the check and therefore, the drawer cannot be held liable to such purchaser provided that the incomplete instrument was not yet delivered. (Linicks v. Nuttwig & Co., 140 App. Div. 265).

NEGOTIABLE INSTRUMENT THAT IS INCOMPLETE WHICH HAS BEEN DELIVERED

Section 14 applies to an incomplete instrument which has been delivered by the maker or drawer to the payee or the holder, the rules related thereto are: 1. Where the instrument is lacking in any material particular, person in possession thereof has prima facie authority to complete it by filling-up the blanks therein. A MATERIAL PARTICULAR is any particular proper to be inserted in a negotiable instrument to make it complete, like blanks for date, due date, name of the payee, amount, or rate of interest 2. The signature on a blank paper delivered by person making the signature in order that paper may be converted into a negotiable instrument operates as prima facie authority to fill it up as such for any amount. It MUST BE SHOWN that the purpose of delivery was to convert the said blank paper into a negotiable instrument. If such purpose is absent, the person whose signature appears thereon will not be liable, even to a holder in due course.

3. In order that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be: (a) filled-up strictly in accordance with the authority given; and (b) within a reasonable time IN THIS CASE, ONE MUST DISTINGUSH BETWEEN ONE WHO IS NOT A HOLDER IN DUE COURSE AND ONE WHO IS A HOLDER IN DUE COURSE. Note that if not a holder in due course, there can be enforcement only if both (a) and (b) are present. If a holder in due course, the defense that it was filled contrary to the authorization is not available. It is thus only a PERSONAL DEFENSE.

MECHANICALLY COMPLETE BUT UNDELIVERED (Sec. 16): Section 16 applies to an instrument that is mechanically complete but is not delivered: 1. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. 2. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be. (The term immediate parties refers to persons who know or are presumed to know the conditions or limitations placed upon the delivery of the instrument, excluding a holder in due course.) 3. The delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property (title) in the instrument. 4. Where instrument is in the hands of holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. 5. Where the instrument is no longer in possession of the party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

NOTE: Delivery of an instrument need not be actual; it may be constructive. Thus, is has been held that depositing a note by mail with intent to transmit it to payee in the usual way is a delivery in contemplation of law.

RULES OF INTERPRETATION The NIL is an adopted statute. As already noted, the NIL was virtually copied from the uniform Negotiable Instruments Law of the United States and the latter in turn was based on Englands Bill of Exchange Act of 1882. As a consequence of the NIL being an adopted statute, the following rules are applicable with respect to problems relating to the application of the NIL: a. Interpretation in courts in the United States of the provisions of the Uniform NIL can be applied in this jurisdiction. For instance, the supreme Court used decisions of foreign courts in Abubakar vs. Auditor General when it ruled that the government warrants for the payment of money are not negotiable instruments. b. If there is no provision in the NIL or the Code of Commerce, the provisions of the Uniform Negotiable Instruments Law or Bill of Exchange Act may be applied. For instance, in PNB v. Jose Zulueta, the Supreme Court used the provisions of the Bill of Exchange Act of 1882 on crossed checks because the NIL and the Code of Commerce are deficient on this point. c. Opinions and comments of authorities or legal writers on the provisions of the Uniform Negotiable Instruments Law or the Bill of Exchange Act of 1882 may also be applied in this jurisdiction. Example of these comments are those cited by the Supreme Court in Ang Tek Lian v. The Court of Appeals. RULES THAT APPLY IN CASE OF AMBIGUITY Rules on interpretation of ambiguous and incomplete instruments are set forth in section 17 of the NIL which provides:

Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

(d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

SIGNATURE

SIGNATURES AND FORGERY

The rules to determine liability as far as signatories and in cases of forgery are as follows: 1. The GENERAL RULE: Under Section 18, no person is liable upon an instrument whose signature does not appear thereon. The EXCEPTIONS ARE: a. Trade Name One who signs using a trade or assumed name will be liable to the extent as if he had signed in his own name under Section 18 b. Rules on Signature of Agent Signature of any party may be made by a duly authorized agent. No special form of agency is required under Section 19. The rule is if the instrument contains or a person adds to his signature that he signs for or in behalf of a principal, or in a representative capacity, HE IS NOT LIABLE IF HE WAS DULY AUTHORIZED BUT THE MERE ADDITION OF SUCH WORDS OR INDICATION OF SUCH DOES NOT EXEMPT HIM FROM PERSONAL LIABILITY IF THE PRINCIPAL IS NOT DISCLOSED. Note: That a signature by procuration (e.g., Juan de la Cruz, per procuration: Pedro de la Cruz) operates as notice that the agent has but limited authority to sign, and principal is bound only in case agent in so signing acted within the actual limits of his authority under Section 21. B by X Principal is disclosed. So long as agent X signed within the scope of his authority, he is not personally liable on the instrument.

INDORSEMENT BY MINOR OR CORPORATION If a minor or corporation indorses an instrument, the indorsee acquires title

to it and can enforce it against the maker or acceptor or other parties prior to the minor. Such prior parties cannot escape liability by setting a defense the incapacity of the indorser Section 22 states that, an indorsement or assignment of instrument by corporation or by infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. The contract of endorsement of an infant is not void, and that his endorse has the right to enforce payment from all parties prior to the infant endorser; the incapacity of the infant cannot be availed of by prior parties. However, it does not destroy the right of such an infant endorser to disaffirm under rules of infancy. (Murray v. Thompson, LRA 1917B 1172, 188 SW 578).

FORGERY KINDS OF FORGERGERIES THAT CAN TAKE PLACE IN A NEGOTIABLE INSTRUMENT 1. IN A PROMISSORY NOTE: forgery of the makers signature and forgery of an indorsement. 2. IN A BILL OF EXCHANGE: forgery of the drawers signature, either with acceptance by the drawee or without acceptance but is paid by the drawee and forgery of an indorsement in the bill

THE EFFECTS ARE: 1. The instrument is not declared totally void nor are the genuine signatures thereon rendered inoperative. IT IS ONLY THE FORGED SIGNATURE THAT IS DECLARED INOPERATIVE. Hence: rights still exist and may be enforced by virtue of the instrument as between parties whose signatures were not forged. 2. A forged instrument just prevents any subsequent party from acquiring any rights as against any party whose name appears prior to the forgery. Rights will exist and may be enforced as between subsequent parties BUT no one can acquire a right as against parties prior to the forgery, who also have rights and may enforce them as against each other. The rights of the parties in cases of forged indorsements are: a. Where note payable to order. Where the note is payable to order, the party whose indorsement is forged is not liable to any holder even a holder in due course. The indorsement being forged, it is inoperative. The other parties, including the maker, prior to the party whose signature is forged are not also liable to any holder. The instrument being payable to order, it can be negotiated only by indorsement completed by delivery. But since the indorsement is forged, it is inoperative and,

therefore, it cannot operate to transfer any right or title over the instrument. b. Where note payable to bearer. Where the note, mechanically complete, is originally payable to bearer, the party whose indorsement is forged is liable to a holder in due course, but not to one who is not a holder in due course. The other parties, including the maker, prior to the party whose signature is forged, may also be held liable by one who is not a holder in due course. The reason is that the instrument being originally payable to bearer, it can be negotiated by mere delivery. (Section 30.). In other words, indorsement is not necessary to the title of the holder. Hence, even if the indorsement is forged, the forgery may be disregarded. The forged indorsement does not prevent the transfer of title since the holder may just strike out the forged indorsement. (Sec. 48). The only defense available is want of delivery but this defense can be raised only against a holder not in due course. (Sec. 16). c. Where bill payable to order. Where the bill is payable to order, the party whose indorsement is forged, is not liable to any holder even a holder in due course. The forged indorsement is wholly inoperative. Where the signature of the payee was forged, the collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payees endorsement was genuine before cashing the check. If the drawee pays under a forged indorsement, the drawer is not liable on the bill and the drawee may not debit the drawers account. If it does, it shall have to recredit the amount of the check to the account of the drawer. A bank is bound to know the signature of its customers (drawers), and if it pays a forged check it must be considerd as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the depositor (see Sec. 189). Where, however, the checks are received merely for collection and deposit, the bank, as agent, cannot be expected to know or ascertain the genuineness of al prior indorsements. (Jai-Alai Corp vs. Bank of P.I., 66 SCRA 29 [1975].) But by stamping on checks accepted by it for deposit its guarantee that all prior endorsements and/or lack of endorsements guaranteed, a collecting/presenting bank thereby makes the assurance that it has ascertained the genuineness of all prior indorsements. (Associated Bank vs. Court of Appeals, supra.) So even if the indorsement on the check deposited by the collecting banks client is forged, the collecting bank is bound by its warranties as an indorser and cannot set up the defense of forgery as against the drawee-bank. (Associated Bank vs. Court of Appeals, supra.) Apropos, the matter of forgery in indorsements, the collecting bank, or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements. ( Philippine National Bank vs National City Bank, 63 Phil. 711) Where the drawer of a check delivers it to an impostor mistakenly believing him to be the payee named in the check, the indorsement of the check by the impostor is not a forgery, and the drawer is liable to a bona fide holder or any subsequent indorser who may be compelled to pay it. (Burrows vs. Wester Union Tel. Co., 86 Minn. 499, 90 N.W. 1111; Sec. 61)

d. Where bill payable to bearer. In case the bill is originally payable to bearer, the drawee may debit the drawers account in spite of the forged indorsement. The reason is that the forged indorsement is not necessary to the title of the holder. The drawee cannot recover from the holder. e. The endorser is liable on the instrument although the signature of the payee is forged because the endorser by his endorsement guaranteed that the instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise, there would be nothing for the endorser to guarantee. ( Republic Bank v. Ebrada 65 SCRA 680)

5. CONSIDERATION CONSIDERATION FOR THE ISSUANCE OF A NEGOTIABLE INSTRUMENT 1. Under Section 24, every negotiable instrument is deemed prima facie to have been issued for valuable consideration, and every person whose signature appears thereon to have become a party thereto for value. 2. Under Section 25, value is any consideration sufficient to support a simple contract. An anteceded or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. 3. Under Section 27, where a holder has a lien on the instrument, arising from a contract or by implication of law, he is deemed a holder for value to the extent of his lien. HE IS ONE WHO HAS TAKEN A NEGOTIABLE INSTRUMENT AS COLLATERAL SECURITY FOR A DEBT The effects are: 1. If the amount of the instrument is more than the debt secured by such instrument, the pledge is a holder for value to the extent of his lien. He can collect the full value of the instrument, and apply the same to the payment of the debt but he must deliver the surplus to the pledgor. ( Art. 2118, Civil Code.) 2. If, between the pledgor and the party liable on the instrument, there are existing defenses, then the pledgee can collect on the instrument only to the extent of the amount of the debt. 3. If the amount of the instrument is less than or the same as the debt secured by such instrument, the pledge is a holder for value for the full amount and may, therefore, recover all. 4. If the defenses of the party liable on the instrument are real defenses, then the pledgee can recover nothing upon the instrument. WHAT IS THE EFFECT OF WANT OF CONSIDERATION The absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Meaning of absence or want of consideration. Absence of consideration means a total lack of any valid consideration for the contract, in consequence of which the alleged contract must fall. (Klein v. Roteman, 6 Ohio App. 145.) Meaning of failure of consideration. Failure of consideration means the failure or refusal of one of the parties to do, perform or comply with the consideration agreed upon. In other words, something was agreed upon as

consideration but for some cause, such agreed consideration failed to materialize. 6. ACCOMODATION PARTY WHO IS AN ACCOMODATION PARTY Section 29 provides that an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. 1. Accommodation bill or note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it, and is expected to pay it. (Brown Carriage Co. v. Dowd, 71 S.E. 721.) In other words, it is a loan of ones credit. (Burr vs. Beckler, 106 N.E. 206) An accommodation paper creates no obligation upon delivery to the accommodated party and is of no legal efficacy and creates no obligation until delivered or negotiated to a holder for value. 2. Accommodated party is one in whose favor a person, without receiving value therefor, signs an instrument for the purpose of lending his credit and enabling said party to raise money upon it. (Sec. 29) He impliedly agrees to take up the instrument at maturity and to indemnify the accommodation party against the consequences of non-payment. KINDS OF ACCOMODATION PARTIES An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser. (Sec. 29) Examples: 1. Accommodation maker M, as accommodation party, issues a promissory note payable to P who may then negotiate it to A. 2. Accommodation drawer M, as accommodation party, signs a bill of exchange with P as payee, and P may indorse the same to A. 3. Accommodation acceptor M, as accommodation party, accepts a bill drawn on him by P in favor of himself and P may indorse the same to A. 4. Accommodation indorser M, as a accommodation party, simply signs as an indorser in blank, the bill or note made by P in favor of A, before it is delivered to A. (see Sec. 63) Liability of accommodation party to a holder. 1. Absence of consideration not a defense . Section 29, by clear mandate makes the accommodation party liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him (the signatory) to be only an accommodation party, in whatever capacity he signed the instrument, whether primarily or secondarily. This means that absence of consideration between the accommodation party and the accommodated party does not of itself constitute a valid defense against a holder for value even though he knew of it when he became a holder. (see Ang Tiong vs. Lorenzo Ting, 22 SCRA 713 [1968]; Republic Bank vs. Ebrada, 65 SCRA 680 [1975] 2. Accommodation party in effect a surety. In lending his name to an accommodated party, the accommodation party is, in effect, a surety. (Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 [1981]). However, unlike in a contract of suretyship, the liability of the

accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation an such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor. (Prudencio vs. Court of Appeals, 103 SCRA 7 [1986]; see People vs. Maniego, 148 SCRA 30 [1987].) It will then be noted that Section 29 is an exception to Section 28. But Section 29 should not be construed as to allow a holder for value, not otherwise a holder in due course, to recover against an accommodation party in the light of other sections (Secs. 16, 55, 58) of the Negotiable Instruments Law. In other words, except the defense of absence of consideration between the accommodation party and the accommodated party, the accommodation party is liable to a holder in due course. Rights of accommodation party 1. Right to revoke accommodation since a signature for accommodation is gratuitous, it may be revoked or rescinded by cancellation or by notice to those interested at any time before the instrument ha been negotiated for value. But once the instrument has been negotiated for value, the accommodation party is liable according to the face of his undertaking, the same as if he were financially interested in the transaction. 2. Right to reimbursement from accommodated party after making payment to the holder, the accommodation party has a right to obtain reimbursement from the accommodated party. The relation between them is, in effect, that of principal and surety, the accommodation party being the surety. (Phil. National Bank vs. Maza and Macenas, 48 Phil. 207 [1915]; People vs. Maniego, 148 SCRA 31 [1987]; Caneda Jr. vs. Court of Appeals, 181 SCRA 762 [1990]. As between the accommodation party and the accommodated party, the latter is expected to pay the instrument directly to the holder. The accommodated party is the real debtor. Hence, the cause of action is not on the instrument but on an implied contract of reimbursement. 3. Right to contribution from other solidary accommodation maker where the solidary accommodation maker paid to the bank, the balance due on a promissory note, he may seek contribution from the other solidary accommodation makers in the absence of a contrary agreement between them, and subject to the conditions imposed by law. This right springs from an implied promise between the accommodation makers to share equally the burden resulting from the execution of the note. They are joint guarantors of the principal debtor. (Sadaya vs. Sevilla, supra; see Art. 2073, Civil Code; Sec. 196.) ACCOMMODATION PARTY AND REGULAR PARTY DISTINGUISHED The following are the differences: 1. An accommodation party signs an instrument without receiving value therefor, while a regular party signs the instrument for value (Sec. 24); 2. An accommodation party signs an instrument for the purpose of lending his name to some other person (Sec. 29), while a regular party does not sign for that purpose; 3. An accommodation party may always show by parol evidence that he is only such, while a regular party cannot disclaim or limit his personal liability as appearing on the instrument by parol evidence (see Maulini vs. Serrano, 28 Phil. 640 [1914]; Velasco vs. Liuan & Co., 43 Phil. 195 [1922]); 4. An accommodation party cannot avail of the defense of absence or failure of consideration against a holder not in due course, while a regular party may avail of said defense against a holder not in due course; and 5. An accommodation party, after paying the holder, may sue for reimbursement the accommodated party, although a subsequent party, while a regular party may not sue any subsequent party for reimbursement. (Phil. National Bank vs. Maza & Macenas, 48 Phil. 207 [1925])

7. NEGOTIATION CONCEPT OF NEGOTIATION Under Section 30 an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the instrument. A holder means the payee or endorsee of a bill or note who is in possession of it or the bearer thereof. MANNER OF TRANSFER OF INSTRUMENTS 1. By Assignment Generally for non-negotiable instruments. In assignment, the assignee is merely placed in the position of the assignors and acquires the instrument subject to all the defenses that might have been set up against original payee. 2. By Operation of Law Such as by succession, by insolvency. Upon the death of a joint payee or indorsee, in which case the general rule is that title vests at once in the surviving payee or indorsee. 3. By Negotiatio

METHODS OF NEGOTIATION Negotiable Instruments may be negotiated by: 1. 2. By indorsement and delivery if payable to order By delivery if payable to bearer

WHAT IS AN INDORSEMENT It is the writing of the name of the indorser on the instrument with the intent to transfer title to the same. Indorsement is not only a mode of transfer, it is also a contract. Every indorser is a new drawer and the terms are found on the face of the bill or note, with the additional obligation that if the instrument is dishonored by non-payment or non-acceptance, and notice is given to the endorser, the latter will pay for it.

WHERE IS SHOULD AN INDORSEMENT BE CONTAINED

1. Under Section 31, the indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. 2. An indorsement is usually written at back of instrument and may be made any form (eg. print, typewritten, rubber stamp) as long as meant to be an endorsement. 3. Under Section 32, the indorsement must be of the entire instrument. Otherwise, the indorsement is not valid, but would only constitute a valid assignment binding between the parties. The REASON is that the instrument must be delivered and there cannot be partial delivery of an instrument. Also, when an indorsement purports to transfer the instrument to two or more indorsees severally (instead of jointly), the same is not valid endorsement. The REASON is that the cause of action on the instrument will be split or divided. THE EXCEPTION is when an instrument has already been paid in part, it may be endorsed to the residue. NOTE: That an indorsement which purports to transfer to the indorsee a part only of the amount payable does not operate as a negotiation of the instrument; it operates merely as an assignment. SEE: Montinola v. PNB, 88 Phil. 178 [1951]

KINDS OF INDORSEMENTS 1. SPECIAL INDORSEMENT it qualifies the person to whom or to whose order the instrument is payable, and the indorsement of such endorsee is necessary to the further negotiation of the instrument (Section 34) a. If the endorsee wants to further negotiate the instrument, he must sign it at the back.

b. However, when the instrument is originally payable to bearer, it can further be negotiated by mere delivery, even if the original bearer negotiated it by special endorsement but the person indorsing specially shall be liable as endorser to only such holders as make title through his endorsement (Section 40). This rule does not apply to instruments originally payable to order, but because the only or last indorsement is an indorsement in blank. Section 40, when read with Section 9, shows that of the five (5) kinds of bearer instruments discussed under Sec. 9, Section 40 applies only to the first four types, those that are payable to bearer on their face. These four types of bearer instrument, even if endorsed specially, they

retain their character as bearer instrument and may still be negotiated by mere delivery; the special endorsement may be ignored. NOTE: Under Sec. 67, where an instrument payable to bearer is negotiated by indorsement and delivery, the person signing (through his signature was not necessary for negotiation) is liable as a special endorser.

2. BLANK INDORSEMENT it specifies no endorsee, and the instrument so endorsed is payable to bearer and may be negotiated by mere delivery. (Section 34) a. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the endorser in blank any contract consistent with the character of the endorsement. 3. ABSOLUTE INDORSEMENT one by which the endorser binds himself to pay, upon no other condition than the failure of prior parties to do so and of due notice to him of such failure. 4. CONDITIONAL INDORSEMENT the party required to pay the instrument may disregard the condition and make payment to the endorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so endorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. (Section 39) RIGHTS OF THE HOLDER RIGHTS OF HOLDER IN DUE COURSE (a) He may sue on the instrument (b) to receive payment on the instrument and payment in due course will discharge the instrument (c) Under Section 57, he holds the instrument free from any defect in title of prior parties (d) he holds the instrument free from defenses available to prior parties among themselves (e) enforce payment on the instrument to the full amount against all parties liable thereon. RIGHTS OF A HOLDER NOT IN DUE COURSE 1. He may sue on his own name 2. He may receive payment and if the payment is in due course, the instrument is discharged 3. He holds the instrument subject to the same defenses as if it were non-negotiable 4. But a holder not in due course who derives his title from a holder in due course and who isnt a party himself to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of parties prior to the latter THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER IN DUE COURSE a) HOLDER IN DUE COURSE A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. WHO IS DEEMED HOLDER IN DUE COURSE - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. MAY A PAYEE BE A HOLDER IN DUE COURSE? Yes, if he satisfies the requirements as set forth in Section 52 MAY A DRAWEE BE A HOLDER IN DUE COURSE? A holder refers to one who has taken the instrument as it passes along in the course of negotiation towards the drawee and not the drawee, who, on the acceptance and payment of the instrument, thereby strips the instrument of all negotiability and reduces it to a mere voucher or proof of payment PRESUMPTION HOLDER IN DUE COURSE Generally, every holder is prima facie a holder in due course Any one, therefore, who claims otherwise must prove that the holder in question acquired the instrument with one or more of the conditions lacking Any holder proved to have taken an instrument with one of the conditions enumerated lacking is not a holder in due course ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE The holder of the instrument must have become the holder before the instrument has become overdue Illustrations: o One who has purchased 2 promissory notes without the necessary indorsement on the part of the holder after payment thereof had already been one year overdue and without having made inquiries about the solvency of the makers cannot be considered as a holder in due course o One taking past due paper is chargeable with notice of all equities between the original parties but not with equities between intermediate indorsers o If the instrument is overdue, it is also a notice that it has been dishonored WHEN INSTRUMENT IS OVERDUE When it after the date of maturity On the date of maturity, the instrument is not overdue and a holder who acquires the instrument on that date is a holder in due course If the instrument is overdue, there might be something wrong with the instrument AS TO ACCELERATED INSTRUMENTS When the instrument contains an acceleration clause, knowledge of the holder at the time of acquisition thereof that one installment or interest, or both, as the case may be, is unpaid, is notice that the instrument is overdue

AS TO INTEREST One who purchases in good faith an instrument upon which the interest is overdue is a holder in due course But where by the terms of the instrument, the principal was to become due upon default of the payment of instrument, then one who takes the instrument upon which the interest is overdue is not a holder in due course EFFECT OF FAILURE TO MAKE INQUIRY Ordinarily, failure to inquire after notice merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and defect in the holders title, is not evidence of purchasers bad faith so as to bar him from recovery TEST OF HONESTYwhether or not his purpose is dishonest? WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH? Failure to make inquiry when circumstances strongly indicate defect, renders the holder not a holder in due course ACQUISITION FOR VALUE Where the holder gave no valuable consideration for the transfer of the instrument to him, he cannot be a holder in due course Discounting of a negotiable instrument is still considered to be taking for value EFFECT OF INADEQUACY OF INSTRUMENT Generally, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence It may be an evidence of fraud An amount paid for an instrument if a trifling sum should be a red flag and may by itself establish notice ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY The following may be chargeable with noticeone taking an instrument which is overdue; and one acquiring an instrument for a grossly inadequate consideration GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY b) DEFENSES OF HOLDER There are two basic kinds of defenses that may be interposed, they are: REAL DEFENSES- They are those available against all parties, both immediate or remote, including holders in due course. They are such because they attach to the instrument itself. Real defenses are as follows; (AVAILABLE AGAINST A HOLDER IN DUE COURSE) a) Incapacity as far as incapacitated persons are concerned b) Illegality of contract when declared by law; except when the maker or drawer is himself a party to the illegality c) Want of delivery of incomplete instrument d) Forgery e) Want of authority, apparent and real f) Duress amounting to forgery as where one takes the hands of another and forces him to sign his name g) Fraudulent alteration by holder

h) Prescription i) Other infirmities appearing on the face of the instrument j) Discharge at or after maturity, and k) Fraud infactum or fraud in esse contractus This fraud exists in those cases which a person without negligence has signed an instrument which was in fact a negotiable instrument but was deceived as to the character of the instrument and without knowledge of it Essential element is that the maker or indorser, as the case may be, must have exercised ordinary diligence and in no manner contributed negligently to the imposition MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSUING ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN BY A HOLDER IN DUE COURSE WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE. PERSONAL DEFENSES- are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it against the party sought to be made liable but which are not available against a holder in due course. They are called personal defenses because they are available only against that person or subsequent holder who stands in privity with him. In other words, they can used only between original parties or immediate parties or against one who is not a holder in due course. ( THIS IS NOT AVAILABLE IN A HOLDER IN DUE COURSE) Examples of personal defenses: a) Filling of wrong date; b) Filling up of blanks not in blanks not in accordance with the authority given and within reasonable time; c) Want of delivery of complete instrument d) Absence of failure of consideration e) Simple fraud or fraud in inducement f) Acquisition of instrument by duress, or force and fear g) Acquisition of instrument by unlawful means h) Acquisition of instrument for an illegal consideration i) Negotiation of breach of faith j) Negotiation under circumstances that amounts to fraud k) Innocent alteration or spoliation. Spoliation is an alteration made by a stranger to an instrument. If the original meaning can be ascertained, the holder in due course may recover according to its original tenor

l) Set-off between immediate parties m) Discharge by payment or renunciation or release before maturity n) Discharge of party secondarily liable by discharge of prior party o) Usury- because the contract of loan itself is not void but only the agreed interest, and p) Want of authority but agent has apparent authority. LIABILITIES OF PARTIES a. Maker The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. MAKER PRIMARILY LIABLE Engagement of the maker is to pay absolutely for the note according to its tenor His liability is primarily and unconditional One who has signed an instrument as a maker is presumed to have acted with care and to have signed the instrument with full knowledge of its contents, unless of course, if fraud is proved MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE The maker bound himself to pay personally. He cannot shift the obligation without the consent of the payee. He cannot allege that he spend the money on expenses which should be charged to a trust administered by a creditor because it is not the payees concern to know how the proceeds should be spent. That is the sole concern of the maker. The payees interest is merely to see that the note is paid according to its term. LIABILITY OF 2 OR MORE MAKERS When 2 or more makers sign jointly or severally, each of them is individually liable for the payment of the full amount of their obligation even if one of them didnt receive part of the value given therefor, as he would be considered as an accommodation party PAYEES EXISTENCE, ETC. The maker also admits of the existence of the payee and his then capacity to indrose He is precluded from setting up the following defenses: o That the payee is a fictitious person because by making the note, he admits that the payee exists PAYEES CAPACITY TO INDORSE o The Maker is PRECLUDED from setting up the defense that the payee is fictitious that the payee was insane, a minor, or a corporation acting ultra- vires because by making the note, he admits the then capacity of the payee to indorse. b. Drawer By signing his name on the bill as a DRAWER, he admits that (1) existence of the payee (2) his capacity to indorse; (3) engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and (4) that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.

DRAWER SECONDARILY LIABLE He engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when 1. It is dishonored 2. And the necessary proceedings of dishonor are duly taken The liability of the drawer is subject to the two conditions and attaches only upon their fulfillment The drawer, by merely drawing the bill and signing his name in the bill as such drawer, without more, impliedly engages to be so secondarily liable, as if he has incorporated the provisions of Section 61 in thebill If the bill is not paid, accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given TO WHOM DRAWER IS SECONDARILY LIABLE 1. The holder 2. Or if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer, will be liable to that indorser so compelled to pay IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE? Yes It was held that until the bill has been accepted, the drawer is the principal debtor and after acceptance, the drawee or acceptor is the principal debtor and the drawer becomes secondarily liable c. Acceptor ACCEPTOR PRIMARILY LIABLE Acceptor engages to pay absolutely according to the tenor of its acceptance not the tenor of the instrument but if the tenor of the acceptance is General under section 139 and 140, the tenor of the bill is the same as acceptance His liability is not subject to any condition The acceptor is the drawee who accepts the bill and he admits the existence of the drawer, genuineness of the drawers signature, capacity and authority of the drawer to draw the instrument and existence and capacity to endorse of payee. His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any other defense which he has to the liability Admits the existence of the drawer, genuineness of the signature of the drawer, capacity and authority of the drawer to draw the instrument, and the existence and capacity to endorse of the payee. CONSEQUENTLY, he is precluded from setting up the defenses that the drawer is non-existent or fictitious, that drawers signature is a forgery, and want of consideration between him and the drawer In case of an alteration before acceptance, the prevailing view is that he is(liable only up to the oryginal tenor of the bill prior to acceptance. The basis is Section 132. The nature of the liability of the acceptor is primary EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR Where being unable to pay certain bills of exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise is sold and the integrity thereof while the sale is not effected, the execution of said mortgage doesnt constitute a Novation of the obligation represented by said accepted bills unless it is expressly stated in the mortgage ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE

While the maker of a note engages to pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of the bill he accepts Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may accept thebill with qualifications If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his acceptance WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE Suppose the bill is originally for P1000. Before the drawee X accepts it, it is altered by the payee B to P4000. Then X accepts it. How much is X liable to a holder in due course? According to one view, X is liable for P4000 and not P1000. The reason is that the tenor of Xs acceptance is for P4000. EFFECT OF SECTION 124 Under the first view, what is the effect of Section 124 which provides that a holder in due course canrecover only the original tenor of the instrument? It seems that this refers to the original tenor of instrument taken from the standpoint of the person primarily liable, in Xs standpoint. In other words, the original tenor of the instrument is P4000, which is the tenor of Xs acceptance. If after his acceptance, a subsequent indorsee alters the bill to read P9000, then X could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due course. d. Indorser An indorser is one who has placed his signature upon an instrument other than as the maker, drawer or acceptor UNLESS he clearly indicates by appropriate words his intention to be bound in some other capacity. KINDS OF INDORSER An IRREGULAR INDORSER ( one who places his signature in blank before delivery) is liable as follows: (a) in an order instrument, he is liable to the payee and to all subsequent parties (b) in a bearer instrument, or payable to order of the maker or drawer, he is liable to all parties subsequent to the maker or drawer (c) if he signs for accommodation of the payee, he is liable to all parties subsequent to the payee (Section 64) A QUALIFIED INDORSER (one who endorses without recourse), warrants that: (a) That the instrument is genuine (does not guaranty payment). (b) That he had good title to it (c) That all prior parties had capacity to contract (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. NOTE: The liabilities of a qualified endorser are the same as those of a person who negotiates an instrument payable to bearer by delivery alone. But when the negotiation, is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. GENERAL INDORSER (one who endorses without qualification, warrants to all subsequent holders in due course: (a) That the instrument is genuine and in all respects what it purports to be (b) That he has a good title to it (c) That all prior parties had capacity to contract (d) That the instrument is at the time of his endorsement valid and subsisting. This warranty does not run in favor of holders who are parties of the illegal transaction. (Burke v. Smith, 75 Atr. 114) (e) He engages that on due presentment, the instrument shall be accepted or paid, or both, as he case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it. Where a person places his endorsement on an instrument negotiable by delivery he incurs all liabilities of an endorser. (Sec. 67) ORDER IN WHICH INDORSERS ARE LIABLE as respect one another, indorsers are liable prima facie in the order in which they endorse; but evidence is admissible to show that as between or

among themselves they have agreed otherwise. Joint-payees or joint-endorsees who indorse are deemed to endorse jointly and severally. (Sec. 68) (a) The foregoing rules does not apply to a holder in due course, to whom the indorsers are liable in any order (b) Every indorser is liable to all endorsers subsequent to him, but not those indorsers prior to him. LIABILITY OF GENERAL INDORSER 1. That the instrument is genuine and in all respects what it purports to be 2. That he has a good title to it 3. That all prior parties had capacity to contract 4. And that the instrument is, at the time of his indorsement, valid and subsisting 5. He engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount to the holder, or to any subsequent indorser who may be compelled to pay it WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER, DISTINGUISHED While the qualified indorser or person negotiating by delivery warrants that he is ignorant of any fact that will render the instrument valueless or impair its validity, the general indorser warrants that the instrument he is indorsing is valid and subsisting regardless of whether he is ignorant of that fact or not THE 1. 2. 3. WARRANTIES OF A GENERAL INDORSER EXTEND TO THE FOLLOWING Holders in due course Persons who derive their title from holders in due course Immediate transferees even if they are not holders in due course

WARRANTIES DONT EXTEND TO DRAWEE The indorser of a check doesnt warrant the genuineness of the drawers signature to the drawee who pays it since the drawee is not a holder in due course The warranties provided do not run in favor of the drawee in respect to the genuineness of the drawers signature but only in favor of subsequent holders in due course GENERAL INDORSER IS SECONDARILY LIABLE Secondary liability not confined to the four warranties He is liable if for any reason, the person primarily liable cannot pay, as distinguished from the limited secondary liability of the qualified indorser or of the person negotiating by mere delivery The reason for dishonor need not be established. As long as there was dishonor, this is sufficient. LIABILITY OF ASSIGNOR The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale unless it should have been sold as doubtful but not for the solvency of the debtor unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge PRESENTMENT FOR PAYMENT a. Necessity of presentment for payment It is necessary to charge the drawer and endorsers. (Section 70) Without presentment, the persons secondarily liable are discharged. 1. For Promissory notes: it is necessary that Presentment for payment must be made to the person primarily liable. (Section 71). If note is dishonored by non-payment, notice of dishonor by non-payment must be given to the person secondarily liable, unless excused. (Section 80)

Place Of Presentment Of Negotiable Instruments Place of presentment. - Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. GENERAL RULE: Presentment for payment must be made on due date of instrument.

EXCEPTION: If the due date falls on a Saturday, present instrument on Monday next. REASON: Obligor is entitled to the full day to make payment. But since Saturday is half day work and the banks would be closed in the afternoon, and the following day is a Sunday, he should have until Monday to pay. The law wants to give the person primarily liable one whole day to look for money. EXCEPTION TO EXCEPTION: If the instrument is payable on demand, the instrument can be presented on a Saturday. The reason is that the holder could have presented it on any day. 2. Instrument Payable on Demand: In case of note, it must be presented for payment within a reasonable time from issue; In case of a bill of exchange, it must be presented for payment within a reasonable time from last negotiation. TIME WITHIN WHICH NOTICE GIVEN: 1. Notice may not be given before the maturity of the instrument. Notice may be given on the date of maturity, provided that instrument has been presented for payment and it has been dishonored. 2. Where Parties Reside in Same Place: Where the person given and the person to receive notice reside in the same place, notice must be given within the following periods: If given at the place of business of the person to receive notice, it msut be given before the close of business hours on the day following; If given by mail it must be deposited in the post office in time to reach him in usual course on the day following. (Sec. 103). ( Same place refers to the corporate limits of a town or city where the presentment is made or where the holder resides. 3. Where Parties Reside in Different Place: Where the person giving and the person to receive notice reside in different place, the notice must be given within the following periods: If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of the dishonor, or if there be no mail at a convenient hour or that day, by the next mail thereafter; If given otherwise than through post office, then within the time that notice would have been received in due course of mail, if it had been deposited in post office within the time specified. (Sec. 104). NOTE: These provisions are similar to Art. 54 of the Code of Commerce which provides: Contracts entered into through correspondence shall be perfected from the time an answer is

made accepting the propositions by which the latter may be modified. 4. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. (Sec. 107). FAR EAST REALTY INVESTMENT V. CA 166 SCRA 256 FACTS: Private respondents approached petitioner and asked the latter to extend to them an accommodation loan. They proposed to pay with interest. They even gave a check, signed by Tat, drawn against Chinabank, and signed at the back by the private respondents. They said that they will change the check with cash after one month and if not, the check could be presented for payment and it would be paid. The loan was actually extended but when the check was presented for payment, it was dishonoredthe account on which it is drawn has long been closed. The trial courts held in favor of petitioner but this was reversed by the appellate court by ruling that the check has passed through other hands before reaching the petitioner and the said check wasnt presented within reasonable time and after its issuance. HELD: Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after issue, except that in case of a bill of exchange, presentment for payment is sufficient if made within reasonable time after the last negotiation thereof. Notice may be given as soon as instrument has been dishonored and unless delay is excused must be given within the time fixed by law. In this case, presentment and notice of dishonor were not made within reasonable time. September 1960date when the check was drawn March 1964presented to drawee bank April 1968notice of dishonor NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS OF EXCHANGE 1. In the three steps required by law, presentment for acceptance to the drawee or negotiation within reasonable time after acquisition unless excused 2. If the bill is dishonored by non-acceptance, notice of dishonor by non-acceptance must be given to persons secondarily liable unless excused and in case of foreign bills, protest for dishonor by non-acceptance must be made unless excused 3. But if the bill is accepted, or if the bill isnt required to be presented for acceptance, it must be presented for payment to the persons primarily liable unless excused 4. If the bill is dishonored by non-payment, notice of dishonor by non-payment must be also be given to person secondarily liable unless excused, and in case of foreign bills, protest for dishonor by non-pay7ment must be made unless excused c. Dispensation with presentment for payment When presentment not required to charge the drawer. - Presentment for payment is not

required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. APPLICATION OF SECTION 79 AND 80 These provisions give exceptions to the general rule that if no presentment for payment is made, the persons primarily liable are discharged WHERE DRAWER NEED NOT BE GIVEN NOTICE Where A withdraws his funds from X, drawee bank, so that they are not sufficient to pay the bill, he has no right to expect or require that the drawee or acceptor would pay the instrument Accordingly, where F holder doesnt make a presentment to X, A drawer would not be discharged by such failure PRESENTMENT IS NOT REQUIRED TO CHARGE THE DRAWER IN THE FOLLOWING CASES 1. In case the check upon which payment has been stopped 2. Where the drawers balance is less than the amount of the check. The mere fact however that the drawer has no funds with drawee at the time he draws, doesnt render presentment unnecessary if he still has reasonable grounds to believe that the instrument will be paid, particularly when provision has been made for payment of any bill drawn by the drawer on the drawee 3. Where the drawer of a bill containing the words Pay from balance had no money on deposit with the drawee but expected to arrange with the broker to cover drafts d. Dishonor by non-payment DISHONOR BY NON-PAYMENT Where the instrument is presented for payment and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid NOTICE OF DISHONOR MEANING OF NOTICE OF DISHONOR By notice of dishonor is meant bringing either verbally or by writing, to the knowledge of the drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted or hasnt been paid, and that the party notified is expected to pay it. Great Asian Sales Center v. Court of Appeals 381 SCRA 557 (2002) Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. Great Asian Sales Center v. Court of Appeals 381 SCRA 557 (2002) Delay in notice of dishonor, where such notice is required, discharges the drawer only to the extent of the loss caused by the delay.

NECESSITY AND PURPOSE OF NOTICE When an instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT, notice of such dishonor must be given to persons secondarily liable, as the case may be. Otherwise, such parties are discharged a. Parties to be notified When a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Notice of dishonor may be given either to the party himself or to his agent in that behalf. (Sec. 97). 1. When notice is given to an agent, he must be duly authorized to receive notice of dishonor; otherwise, the notice is not valid. 2. Notice to Party Dead: When a party is dead, and his death is known to the party giving notice, notice must be given to personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of deceased. (Sec.98). 3. Notice to Partners: Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been dissolution. (Sec. 9;). 4. Notice of Persons Jointly Liable: Notice to joint parties who arm not partners must be given to each of them, unless one of them has authority to receive notice for the others. (Sec. 100). 5. Notice of Bankrupt: Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. (Sec. 101). H & BC v. Peoples Bank 35 SCRA 140 (1970) The period within which to clear checks at the clearing house of the Central Bank was 24 hours (i.e., any forgery must be discovered and reported within 24 hours). Hongkong and Shanghai Banks representative whether the check was in fact genuine. Shanghai Bank said yes. This had to be done within 24 hours. Two months later, the forgery was discovered and Hongkong and Shanghai Bank sought to recover, but this was denied by the court. Because the period of clearing has been extended to 180 days, but once any alteration is discovered, the same must be reported within 24 hours after discovery.

b. Parties who may give notice of dishonor NOTICE MAY BE GIVEN BY

1. The notice may be given (a) by or on behalf of the holder, or (b) by or on behalf of any

party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is

given (Sec. 90). On the last person, he can give notice only to another party against whom he has a right of reimbursement. a. Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not. (Sec. 91). Notice may be given by the agent and it is not necessary that the agent be authorized by the principal He may give the notice in his name or in the name of his principal A collecting bank may give notice, and where it has done so, no notice from the owner is necessary And where the cashier of the drawee bank which had refused to pay a check gave the check to a notary to protest, which was done, it was held that the possession of the check by the cashier was evidence of his agency of the holder to present it for protest b. Where notice is given by or on behalf of the holder, it inures for the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. (Sec. 92). c. Where notice is given by or on behalf of a party entitled to give notice, it inures for the benefit of the holder and all parties subsequent to the party to whom notice is given. (Sec. 93). d. Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal upon the receipt of such notice has himself the same time for giving notice as if the agent had been an independent holder. (Sec. 94).

TIME WITHIN WHICH NOTICE GIVEN: 1. Notice may not be given before the maturity of the instrument. Notice may be given on the date of maturity, provided that instrument has been presented for payment and it has been dishonored. 2. Where Parties Reside in Same Place: Where the person given and the person to receive notice reside in the same place, notice must be given within the following periods: If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following; If given by mail it must be deposited in the post office in time to reach him in usual course on the day following. (Sec. 103). ( Same place refers to the corporate limits of a town or city where the presentment is made or where the holder resides. 3. Where Parties Reside in Different Place: Where the person giving and the person to receive notice reside in different place, the notice must be given within the following periods: If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of the dishonor, or if there be no mail at a convenient hour or that day, by the next mail thereafter; If given otherwise than through post office, then within the time that notice would have been received in due course of mail, if it had been deposited in post office within the time specified. (Sec. 104).

NOTE: These provisions are similar to Art. 54 of the Code of Commerce which provides: Contracts entered into through correspondence shall be perfected from the time an answer is made accepting the propositions by which the latter may be modified. 4. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. (Sec. 107).

c. Effect of notice Effect of notice given on behalf of holder- Where notice is given by or on behalf of the holder, it inures for the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures for the benefit of the holder and all parties subsequent to the party to whom notice is given. d. Form of notice FORM AND CONTENTS OF NOTICE It may be oral or in writing Whether oral or in writing, it must contain 1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT, and 2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND FOR ACCEPTANCE, AND THAT IT HAS BEEN DISHONORED, and 3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO LOOK FOR THE PARTY ADDRESSED FOR PAYMENT e. Waiver WHEN WAIVER MAY BE MADE 1. Notice of dishonor may be waive, either before the time of giving notice has arrived or after the omission to given due notice, and the waiver may be expressed or implied. (Sec. 109). 2. Waiver of Protest: A waiver of protest, whether in the case of foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. (Sec. 111). 3. When Notice is Dispensed With: Notice of dishonor is dispensed with when, after exercise or reasonable diligence, it can not be given to or does not reach parties sought to be charged. (Sec. 112). 4. When Delay in Notice Allowed: Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. (Sec. 113). 5. Where due notice of dishonor by non-acceptance has been given, notice of subsequent

dishonor by nonpayment is not necessary unless in the meantime instrument has been accepted. (Sec. 116). IMPLIED WAIVER Waiver may be implied from acts, declarations, or silence Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only. WHOM AFFECTED BY WAIVER IN GENERAL The persons affected by waiver depends upon whether the waiver is in the instrument itself or is written above the signature of the indorser If the waiver is embodied in the instrument itself, it is binding upon all parties If the waiver is written above the signature of an indorser, it binds him only f. Dispensation with notice EXCEPTIONS TO REQUIREMENT OF NOTICE The law provides for exceptions on failure to give notice would discharge drawer or indorsers WHEN NOTICE EXCUSED When political disturbances interrupt and obstruct the ordinary negotiations of trade, they constitute a sufficient excuse for want of presentment or notice, upon the same principle that controls in cases of military operations or interdictions of commerce Prevalence of a malignant, contagious, infectious disease Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. When notice need not be given to drawer - Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment. When notice need not be given to indorser- Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is

presented for payment; (c) Where the instrument was made or accepted for his accommodation. WHEN NOTICE RELATIVELY EXCUSED 1. Where he has knowledge of the dishonor by means other than through a formal notice, as when he is both the drawee and drawer or when presentment is made to him 2. Where he has no reason to expect that the instrument will be honored, as when he has countermanded payment or where the drawee is fictitious or without capacity to contract g. Effect of failure to give noticeAn omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. h. Protest 1. Where any negotiable instrument has been dishonored, it may be protested for nonacceptance or nonpayment, as the case may be. (Sec. 118). 2. But protest is not required except in the case of foreign bills of exchange. (Sec. 118). 3. Distinctions Between Inland Bill and Foreign Bill: An inland bill of exchange is a bill which is or on its face, purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill which is one which is, or on its face purports to be drawn or payable outside the Philippines. (Sec. 129). A foreign bill of exchange is one: Drawn in the Philippines but payable outside the Philippines. Payable in the Philippines but drawn outside the Philippines. NOTE: Unless the contrary appears on the face of the bill of exchange, the holder may treat it as an inland bill of exchange. 4. Under Sec. 118, verbal notice of dishonor is sufficient in case of promissory note and inland bill of exchange. But with respect to a foreign bill of exchange, a protest is needed. DISCHARGE OF NEGOTIABLE INSTRUMENT a. Discharge of negotiable instrument DEFINITION: It is the release of all parties, whether primary or secondary, from the obligation on the instrument; discharge renders the instrument non-negotiable. HOW NEGOTIABLE INSTRUMENTS DISCHARGED. (Sec. 119). A negotiable instrument is discharged: 1. By payment in due course by or behalf of the principal debtor; 2. By payment in due course by the party accommodated, where the instrument is made or accepted for accommodation; 3. By the intentional cancellation of the instrument by the holder thereof;

4. By any other act which will discharge a simple contract for the payment of money: (a) remission; (b) novation; (c) confusion or merger. As to the other modes: payment is already in (a) and (b); loss of a negotiable instrument will not extinguish(liability; compensation is not available so long as an obligation is evidenced by a negotiable instrument. PRESSUMPTION: When the principal debtor becomes the holder of the instrument at or after maturity0in his own right. If a private document evidencing an obligation is in the possession of the debtor, the presumption is that the debtor has paid such an obligation. State Investment House v. CA 217 SCRA 32 (1993) The fact that postdated checks were issued merely as security is not a ground for the discharge of the check as against a holder in due course. The intentional cancellation contemplated under sec. 119 of the NIL for the discharge of an instrument is the cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the work cancelled on the instrument, and certainly requires the element in the holder in intentionally canceling it. Cancellation cannot be presumed by failure to recover the instrument. The discharge of the instrument would necessarily carry with it the discharge of the persons primarily liable thereon. Velasquez v. Solidbank Corp. 550 SCRA 119 (2008) A person cannot be both the primary debtor and the guarantor of his own debt - this is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the debtor defaults in his obligation. b. Discharge of parties secondarily liable A party secondarily liable is discharged

(1) by an act that discharges the instrument;

(2) by intentional cancellation of his signature by the holder, (No consideration is necessary to support a discharge by intentional cancellation of an endorser's signature by holder).

(3) by a valid tender of payment by a prior party;

(4) by release of the principal debtor without express reservation of right against party secondarily liable;

(5) by extension of time of payment without reserving right against the party secondarily liable, except; (a) When made with the consent of other party secondarily liable (b) Unless the right of

recourse against such party is expressly reserved.

(6) by failure of the holder to take the proper steps to hold him.

A party secondarily liable is discharged by a failure of a holder, as we have seen, to take the proper steps to fix his liability. In such a case the instrument itself is not discharged; it still continues as a bill, note or check as the case may be, and the parties primarily liable may be sued upon it. PAYMENT BY PARTY SECONDARILY LIABLE Where the instrument is paid by a party secondarily liable thereon, the instrument is not discharged. However, the party so paying is remitted to his former rights as regards all prior parties, and he may strike out his own and, subsequent endorsements, and again negotiate the instrument. EXCEPT: (a) Where it is payable to the order of a third person, and had been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. (Sec.121). 1. The party secondarily liable who pays will have the effect of discharging the party paying. 2. The party paying is remitted to his former rights against parties prior to him; if he was formerly a holder in due course, even if at the time of payment he already had notice of the defects of Title, he can enforce his rights against any of the prior parties free from defenses. c. Right of party who discharged instrument Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent indorsements, and again negotiate the instrument, except:

1. Where it is payable to the order of a third person, and has been paid by the drawer; and

2. Where it was made or accepted for accommodation, and has been paid by the party accommodated. d. Renunciation by holder Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument, before, at or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument, discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing, unless the instrument is delivered up to the person primarily liable thereon. MATERIAL ALTERATION

a. Concept - What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. b. Effect of material alteration (1) Alteration by a party. The effect of a material alteration by the holder is to discharge the instrument and all prior parties thereto who did not give their consent to such alteration. Since no distinction is made, it does not matter whether it is favorable or unfavorable to the party making the alteration. The law however makes certain exceptions as to the effect of material alteration. It does not discharge the instrument as against: (a) a party who has made the alteration, and (b) a party who authorized or assented to the alteration, and (c) indorsers who indorsed subsequent to the alteration. (2) Alteration by a stranger. When the material alteration of the instrument is made by a stranger, it is called spoliation. (3) Right of holder in due course. A material alteration avoids the instrument in the hands of one who is not a holder in due course as against any prior party who has not assented to the alteration. But if an altered instrument is negotiated to a holder in due course, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. (see Sec. 62.) ACCEPTANCE a. Definition The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Upon acceptance, a bill of exchange becomes in effect a promissory note, the acceptor standing in the place of the maker, and becoming primarily liable. b. Manner No formal requirements are prescribed by law and all that is required is that it is in writing. The law does not require any formal way of signifying the acceptance of the drawer. Normally acceptance is made by placing a stamp accepted accompanied by the signature of the drawee or his authorized representative on the bill. Section 136 provides that the drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill. On the other hand, Section 137 provides that where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within

twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. c. Time for acceptance The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; but the acceptance, if given, dates as the day of presentation. d. Rules governing acceptance A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill payable accepted as of the date of the first presentment. An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only, and not elsewhere. An acceptance is qualified which is:

1. Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated.

2. Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn.

3. Local; that is to say, an acceptance to pay only at a particular place.

4. Qualified as to time.

5. The acceptance of some one or more of the drawees, but not of all.

But the holder may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or indorser receives notice of a qualified acceptance, he must within a reasonable time express his dissent to the holder, or he will be deemed to have assented thereto.

PRESENTMENT FOR ACCEPTANCE

a. Time/place/manner of presentment 1) Presentment for acceptance must be made:

a. Where the bill is payable after sight, or in any other case where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

b. Where the bill expressly stipulates that it shall be presented for acceptance; or

c. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

2) Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day, and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and:

a. Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all, unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only.

b. Where the drawee is dead, presentment may be made to his personal representative.

3) Where the drawee has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

On what days may presentment be made

A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of sections seventy-two and eighty-five of this act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. b. When Presentment Excused: Presentment for acceptance is excused, and a bill may be treated, as dishonored for non-acceptance, in either of the following cases: (a) Where drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill; (b) Where, after exercise of reasonable diligence, presentment cannot be made; (c) Where, although presentment has been irregular, acceptance has been refused on some other ground. (Sec. 148).

c. Dishonor by non-acceptance (a) When it is duly presented for acceptance and such an acceptance is refused or cannot be obtained; or (b) When presentment for acceptance is excused, and the bill is not accepted. (Sec. 149). Where bill is duly presented for acceptance and is not accepted within the prescribed time , the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers. (Sec. 150). When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawers and endorsers accrues to the holder and no presentment for payment is necessary. (Sec. 151). A bill is dishonored by non-acceptance:

1. When it is duly presented for acceptance and such an acceptance as is prescribed by this act is refused or cannot be obtained; or

2. When a presentment for acceptance is excused and the bill is not accepted.

When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawers and indorsers accrues to the holders, and no presentment for payment is necessary BILL OF EXCHANGE A negotiable bill of exchange within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. Phil. Bank of Commerce v. Aruego 102 SCRA 530 (1981) As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange and the nature of acceptance is important only in the determination of the kind of liability of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. ILLUSTRATION: Pay to A or order P500.00 To: C (sgd.) B

B can order this from C because B either has money or credit with C. Even so, until C accepts, he is not liable as acceptor because under Sec. 18, drawee is never liable because his signature does not appear on the face of the instrument. Hence, instrument bill above does not operate as an assignment of funds until drawee accepts. Types of Bills of Exchange:

(a) Draft - this is the common term of a bill of exchange and used synonymously. A bank draft

(b) (c) (d) (e)

(f)

is a bill of exchange drawn by a bank, issued at the solicitation of a stranger who purchases and pays therefore. It is also defined as an "order of payment of money." In such a case, the drawee bank acting as the payor bank is liable for the acts not done in accordance with the instructions of the drawee bank or of the purchaser. Trade Acceptance - A draft or bill of exchange drawn by the seller on the buyer of goods sold and accepted by such purchaser of goods. It is payable to order and with certain maturity. Bankers Acceptance - A draft or bill of exchange of which the acceptor is a bank or banker engaged generally in the business of granting bankers' acceptance credit. Chiefly used for international trade financing. Treasury Warrants - A treasury warrant bears on its face an order for payment out of a particular fund and is not unconditional. It is not a negotiable instrument. Money Order - A species of draft drawn by one post office upon another post office for an amount of money deposited at the first office by the person purchasing the money order, and payable at the second office to the payee named in the order. The restrictions and limitations which are inconsistent with the character of negotiable instruments make postal money orders not negotiable. Certificate of Deposit - A written acknowledgment by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or order to some other person or order. It is negotiable when it conforms to the requisites of Sec. 1 of NIL.

(g) Bonds - A promise, under seal, to pay money; they are a series of instruments

representing units of indebtedness regarded as parts of one entire debt under a supplemental agreement known as trust indenture or bond indenture. Bonds are negotiable when they conform to the requisites of Sec. 1 of the NIL. (h) Bank Notes - promissory notes of issuing bank payable to bearer on demand and intended to circulate as money. They are regarded as cash and pass from hand to hand without any evidence of title in the holder than that which arises from possession.

(i) Due Bills - It is an instrument by one person acknowledging his indebtedness to another.
When Bill of Exchange May Be Treated As Promissory Note: (a) If the drawer and the drawee are the same. (b) If the drawee is a minor or incapacitated person since here presentment would be useless. (c) If the drawee is a fictitious person. (1) PRACTICAL EFFECT OF SEC. 130:

Under Sec. 118, if a foreign bill of exchange is dishonored, instead of a simple notice of dishonor, there must be a protest executed before a notary public. Assume that the drawee of said bill is minor and the holder merely makes a simple notice of dishonor and forgot to make a protest, thereby discharging the drawer and endorser. The holder's remedy is to consider such bill as a promissory note.

CERTIFICATE OF DEPOSIT Written acknowledgment by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or to some other person or order BONDS A promise, under seal to pay money > More formal in character > Runs for a longer period of time > Issued under different legal circumstances CLASSES OF BONDS 1. Mortgage bonds 2. Equipment bonds 3. Collateral trust bonds 4. Guaranteed bonds 5. Debentures 6. Income bonds 7. Convertible 8. Redeemable 9. Registered bonds 10. Coupon bonds CHECKS A.) A check is defined as "a bill of exchange drawn on a bank and payable on demand.

It is a written order on a bank, purporting to be drawn against a deposit of funds for the payment of all events, of a sum of money to a certain person therein named or to his order or to cash and payable on demand. Unlike a promissory note, a check is not a mere undertaking to pay an amount of money. It is an order addressed to a bank and partakes of a representation that the drawer has funds on deposit against which the check is drawn, sufficient to ensure payment upon its presentation to the bank. There is therefore an element of certainty or assurance that the instrument will be paid upon presentation. For this reason, checks have become widely accepted as a medium of payment in trade and commerce. Although not legal tender, checks have come to be perceived as convenient substitutes for currency in commercial and financial transactions. The basis or foundation of such perception is confidence. If such confidence is shaken the usefulness of checks as currency substitutes would be greatly diminished or may become nil. Any practice therefore tending to destroy that confidence should be deterred for the proliferation of worthless checks can only create havoc in trade circles and the banking community. This is the reason for the enactment of the Bouncing Checks Law.

Moran v. Court of Appeals

A check is a written order addressed to a bank or persons carrying on the business of banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum of money.

Tan v. Villapza 476 SCRA 720 (2005) A check, the entries of which are no doubt in writing, could be proved as a loan transaction.

Go v. Bacaron 472 SCRA 229 (2005) Checks have the character of negotiability, but at the same time, they may constitute evidence of indebtedness in the amounts stated on the faces of those instruments. WHEN DATE MAY BE INSERTED Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. EFFECT OF INSERTION OF WRONG DATE - Knowingly inserting the wrong date in an undated instrument will avoid it as to the party so inserting the wrong date - It is implied that the instrument void as to the person who knowingly inserted the wrong date - Also, under Section 12, it is void for ante-dating an instrument for fraudulent purposes - To a holder in due course, the instrument is not void, after the instrument is indorsed to him. - The insertion of the wrong date doesnt avoid the instrument in the hands of a holder in due course. WHEN DATE NECESSARY - Under Section 6, the insertion of date is unnecessary - However, it may be necessary to determine the date of maturity - In the following cases, the date is also necessary: - Where interest is stipulated, to determine when interest is to run, but not to make the instrument negotiable - To determine where a party has acted within a reasonable time, but not make the instrument negotiable The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

Concepts/ Rationale:

a. Check Does By Itself Set a Separate Fund for Drawer - A check of itself does not
operate as an assignment of any part of the funds to the credit of drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check. (Sec. 189).

People v. Tugbang 196 SCRA 341 (1991) The amount written on a check is not a narration of facts made by the drawer representing that he has money in the bank but rather a check is an order in writing addressed to the drawee bank to pay the holder of the check the amount written thereon.

PNB v. National City Bank of New York 63 Phil. 711 (1936) Before acceptance or certification, the bank is not liable, and the holder has no right to sue the drawee bank on the check.

b. Presumptions on Issuance of Check:

Travel-On, Inc. v. Court of Appeals 210 SCRA 351 (1992) A check which is regular on its face is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon is deemed to have become a party therefore for value; therefore, mere introduction of a check is the best evidence of the obligation or indebtedness equivalent to face value of the check.

Firestone Tire v. Ines Chaves & Co. 18 SCRA 356 (1966) A check is payable on demand even when not so stated on its face. By its issuance, the drawer in effect represents that there are funds in the bank for its payment. c. A check is supposed to be drawn against a previous deposit of funds, while an ordinary bill need not be drawn against a deposit.

d. A check need not be presented for acceptance. (Sec. 185).


e. Death of drawer with the knowledge of the bank revokes the authority of the bank to pay on the check; while the death of the drawer of an ordinary bill does not revoke the authority of the drawee to pay.

f. One who comes into the possession of a check after it had been deposited and

dishonored does not make the possessor a holder for value and gives rise to no liability on the part of the maker or drawer or endorsers. Such possessor does not meet the essential requisites of holder for value required by law, since he did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and he did not take the check in good faith and for value.

g. Bank Not Obliged to Make Partial Payment on a Check

Moran v. Court of Appeals 230 SCRA 799 (1994) A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's funds, where the check is drawn for an amount larger than what the drawer has on deposit. There has never been a practice of partial payment of checks since the check holder could not under such circumstance be called upon to surrender the check, and the bank would be without a voucher affording a certain means of showing the payment. The rule is based on commercial convenience, and any rule that would work such manifest inconvenience should not be recognized. A check is intended not only to transfer a right to the amount named in it, but to serve the further purpose of affording evidence for the bank of the payment of such amount when the check is taken up. B.) Kinds of Checks Memorandum Check - A check on which is written the word memorandum, memo and mem signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and nonpayment should be given. It is a check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word memorandum, memo or mem on the check. Crossed check - A crossed check is one where two parallel lines are drawn across its face or across a corner thereof. The usual practice in crossing a check is to place two parallel lines diagonally on the left top portion of the check. The check may be crossed generally or specially. The crossing is considered "special" when the name of a bank or a business institution is written between the two parallel lines. In this instance, the drawee -- the bank, in most instances -- should pay only with the intervention of that bank or company. On the other hand, the crossing is considered general when the words "and Co.", "and company" or none at all are written between the two parallel diagonal lines, and

in this instance, the drawee should not encash the same but merely accept the same for deposit.

Associated Bank v. Court of Appeals 208 SCRA 465 (1992) Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of that company.

Metropolitan Bank v. Phil. Bank of Communications 536 SCRA 556 (2007) While the Negotiable Instruments Law is silent with respect to crossed checks, the Supreme Court nonetheless has taken judicial cognizance of the practice that a check with two parallel lines on the upper left corner means that it could only be deposited and not converted into cash. The crossing of a check with the phrase Payee's Account Only is a warning that the check should be deposited in the account of the payee.

The crossing of a check affects the mode of its presentment for payment. A crossed check has the following effects. (1) the check may not be encashed but only deposited in the bank; (2) the check may be negotiated only once to one who has an account with a bank; and (3) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. De Ocampo v. Gatchalian 3 SCRA 596 (1961) Gatchalian went to a car trader to shop for a used car. He did not like the cars on display since he was looking for a particular car. The owner told him that if he gives P2,000 down payment, the owner can get the car for him. So he gave the owner a crossed check for P2.000. In the meantime however, the owner's wife gave birth and the check was used to pay for the hospital expense. When the drawer returned to get the check, he was informed that it had been used to pay the bill. It was held that the hospital is not a holder in due course. It should have investigated why the check was crossed. Since the purpose of the crossed check was the purchase of a car, the hospital is not a holder in due course. Seeing that the check was crossed, it should have first conducted an investigation.

Associated Bank v. Court of Appeals 208 SCRA 465 (1992) The payee of a crossed check which was issued for payee's account only can recover from the collecting bank which allowed the encashment of crossed checks by an unauthorized third-person.

Certified Check - A certification is an agreement whereby the bank against whom a check is drawn undertakes to pay it any future time when presented for payment. (Sec. 187). New Pacific Timber v. Seneris 101 SCRA 686 (1980) Certification is equivalent to acceptance and operates as assignment of a part of the funds to the creditors. Cashier's Check - a check written by a financial institution on its own funds. It is then signed by a representative of the financial institution and made payable to a third party. A customers who purchases a cashier's check pays for the full face value of the check and usually also pays a small premium for the service. These checks are secured by the funds of the issuer - usually a bank - and include the name of a payee (the entity to which the check is payable), and the name of the remitter (the entity that paid for the check). Tan v. Court of Appeals 239 SCRA 310 (1994) A cashier's check is a primary obligation of the issuing bank and accepted in advance by its mere issuance. By its very nature, a cashier's check is the bank's order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind the check. A cashier's check by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents. Bank of P.I. v. Roxas 536 SCRA 168 (2007) It bears emphasis that the disputed check is a cashier's check. In International Corporate Bank v. Spouses Gueco, 351 SCRA 516 (2001), this Court held that a cashier's check is really the bank's own check and may be treated as a promissory note with the bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. In New Pacific Timber & Supply Co., Inc. v. Seneris, 101 SCRA 686 (1980), this Court took judicial notice of the "well-known as accepted practice in the business sector that a cashier's check is deemed as a cash." This is because the mere

issuance of a cashier's check is considered acceptance thereof. Manager's Check - A check drawn by the manager of a bank in the name of the bank against the bank itself payable to a third person. It is similar to the cashier's check as to the effect and use.

International Corporate Bank v. Gueco 351 SCRA 516 (2001) A manager's check is one drawn by the bank's manager upon the bank itself; and it is similar to a cashier's check both as to effect and use. Even assuming that presentment is needed for a manager's check, failure to present for payment within a reasonable period will result to the discharge of the drawer only to the extent of the loss caused by the delay.

BPl Family Savings Bank v. Manikan 395 SCRA 373 (2003) A manager's check, like a cashier's check, is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance. By its peculiar character and general use in commerce, a manager's check or a cashier's check is regarded substantially to be as good as the money it represents. Consequently, when a bank allows the delivery of a manager's check to a person who is not directly charged with the collection of its tax liabilities, such bank must be deemed to have assumed the risk of a possible misuse thereof even as if appears to have fallen short of the diligence ordinarily expected of it. The bank, of course, is not precluded from pursuing a right of action against those who could have been responsible for the wrongdoing or who might have been unjustly benefited thereby. c.) Presentment for payment

1. Within What Time Check Presented - A check must be presented for payment within a
reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186).
a. Stale Check - One which is not presented for payment within a reasonable time

after its issue. When a check is not presented for payment within a reasonable time after its issue, the drawer is discharged but only to the extent of the loss caused by the delay. Hence, if no loss or injury is shown, the drawer is not discharged. Wong v. Court of Appeals 351 SCRA 100 (2001) By current banking practice a check becomes stale after more than six (6)

months or 180 days.

International Corporate Bank v. Gueco 351 SCRA 516 (2001) A stale check is one which has not been presented for payment within a reasonable time after its issue. In determining reasonable time, regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instrument, and the facts of the particular case.

Republic Bank v. CA 196 SCRA 100 (1991) When drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.

Far East Realty v. Court of Appeals 166 SCRA 256 (1988) Where check is presented for payment after three and a half years from the date of its maturity, such period is unreasonable delay and discharged the endorsers. PNB v. Seeto 91 Phil. 756 (1952) Although drawer of a check is discharged from liability only to the extent of the loss caused by unreasonable delay in presenting the check for payment, an endorser is wholly discharged thereby irrespective of any question of loss or injury.

Vermohal v. Estacio 8 SCRA 550 (1965) If check is not paid either because it is dishonored or not presented, the original obligation to pay is not erased, for the check is a written promise to pay or a written acknowledgment of an obligation to pay, hence, the obligation lapses only upon the expiration of the ordinary prescriptive period governing written obligations.

2. Effects of Failure to Present Check:


Pio Barretto Realty v. Court of Appeals 360 SCRA127 (2001) While delivery of a check produces the effect of payment only when it is encashed, the rule is otherwise if the debtor was prejudiced by the creditor's unreasonable delay in presentment. Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. Papa v. A.U. Valencia 284 SCRA 643 (1998) While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. Therefore, the acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom is it received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. Papa v. A.U. Valencia and Co. 284 SCRA 643 (1998) If the check is not presented at all, drawer cannot be held liable irrespective of loss or injury, unless presentment is otherwise excused. This is in harmony with Art. 1249 of Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its non-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. When no evidence is presented to the contrary, then after more than ten (10) years from the payment of the purchase price partly in cash and in part by check, the presumption is that the check had been encashed.

3. Consequences of Unlawful Negotiation and Payments:


PCI Bank v. Court of Appeals 350 SCRA 446 (2001) As to the unlawful negotiation of the check the applicable law is Sec. 55 of NIL, under which it is vital to show that negotiation is made by perpetrator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by principal. If the principal could prove that there was no negligence in

the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who, through their own negligence, allowed the commission of the crime. Security Bank v. Court of Appeals 291 SCRA 33 (1998) When drawee bank paid a check negligently overlooking the stop-payment order of the drawer, it cannot recover the payment made since the bank was subrogated to the rights of the drawer and the payee could raise against drawee bank defense it had against the drawer.

E. Insurance Code 1. CONCEPT OF INSURANCE Purpose 1. For indemnity of life; 2. Investment of life, it becomes indemnity if secured by creditor for the life of the debtor. Laws that govern insurance in the order of priority The laws governing insurance in the order of priority are (1) The Insurance Code [PD 1460-whose effectivity date is June 11, 1978] (2) In the absence of applicable provisions, the Civil Code (3) In the absence of applicable provisions in the Insurance Code and Civil Code, the general principles on the subject in the United States (Constantino vs. Asia Life Insurance, 87 Phil 248) What is a contract of insurance? A Contract of Insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. A Contract of Suretyship shall also be deemed an insurance contract if made by a surety who or which is doing an insurance business. Doing an insurance business or transacting an insurance business is: a) making or proposing to make as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; c) doing any business including a reinsurance business, specifically recognized as doing an insurance business within the meaning of the Code; d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Code. (Section 2) NOTE the fact that no profit is derived from making of insurance contracts, agreements or transactions or that no separate or direct consideration is received shall not be deemed CONCLUSIVE to show that the making thereof does not constitute the doing or transacting of an insurance business. What is essential in the validity of insurance contract? An insurable interest, because the object of insurance is to indemnify a person for loss or injury in case the event insured against happen. A contract of suretyship shall be deemed to be an insurance contract if made by a surety who or which, as such, is doing an insurance business.

"Doing an insurance business" or "transacting an insurance business" is: a) making or proposing to make, as insurer, any insurance contract; (b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. Note: Article 2011 of the Civil Code states that the contract of insurance is governed by special laws and that matters not expressly provided for in the special laws shall be regulated by the Civil Code. WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY Whether one will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction. (Section 17) MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST ON THE PROPERTY INSURED YES, as no contract or policy of insurance on property shall be enforceable EXCEPT for the benefit of some person having insurable interest in the property insured. EXAMPLE: The owner insures his building against fire naming his nephew as beneficiary. In case of loss only the owner can recover what is not enforceable is the designation of beneficiary not the entire policy itself. WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST Must exist at the time the insurance takes effect and when the loss occurs but need not exist in the meantime (Section 19) EXAMPLES: 1. If A insures his house on May 2002 for 1 yr and without assigning the policy, he sold it to B if a fire occurs after it is sold to B A cannot recover. B cannot recover also as he has no insurable interest at the time the insurance was procured. 2. An unsecured creditor secures insurance over the house of his debtor, A. The house is burned. The creditor cannot recover as he has no insurable interest at the time the insurance was obtained. What if A sold the house to the creditor before the loss? Still no recovery as there was no insurable interest at the time it took effect. 3. If A re-acquires the property from B before the fire A can recover on the policy. WHAT MAY BE INSURED AGAINST ANY UNKNOWN OR CONTINGENT EVENT, WHETHER PAST OR FUTURE, WHICH MAY DAMNIFY A PERSON HAVING INSURABLE INTEREST OR CREATE A LIABILITY AGAINST HIM, MAY BE INSURED AGAINST (Section 3) Example: Insurance against damage, liability,unknown past event ( in marine insurance insurance over the vessel against perils of the sea, lost or not lost), or future event like loss or theft of the object BUT WHAT IS THE EFFECT OF THE DEATH OF THE ORIGINAL OWNER OF A POLICY WHICH COVERS THE LIFE OF A MINOR, AHEAD OF THE MINOR- all rights, title and interest in the policy shall automatically vest in the minor unless otherwise provided in the policy.

WHAT CANNOT BE INSURED An insurance for or against the drawing of any lottery or for or against any chance or ticket in a lottery drawing a prize. BECAUSE GAMBLING RESULTS IN PROFIT AND INSURANCE ONLY SEEKS TO INDEMNIFY THE INSURED AGAINST LOSS (Section 4). PRINCIPLES: I. CONTRACT OF ADHESION OR FINE PRINT RULE Insurance is a contract of adhesion considering that the most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured may adhere if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the accused. However, if the terms of the contract are clear, there is no room for interpretation and the courts are bound to adhere to the insurance contract although the contract maybe rather onerous. Courts cannot make a new contract for the parties where they themselves have employed clear and unambiguous words. II. UBERRIMA FIDES CONTRACT Contract of insurance is one of perfect good faith not for the insured alone, but equally so for the insurer; in fact it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility. It requires the parties to the contract of insurance to disclose any material fact, which the applicant knows, or which he ought to know. III. RIGHT OF SUBROGATION Insurer who pays shall be subrogated to the rights of insured against wrongdoer or person who has violated contract. The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer an assignee in equity (Article 2207, NCC). However, the insurer can only recover from the third person what the insured could have recovered. Exceptions: there can be no subrogation if: 1. The insured by his own act releases the wrongdoer/third person liable for the loss. (Manila Mahogany Manufacturing Corporation vs. CA) 2. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company vs. CA, 184 SCRA 54)

INDEMNITY The contract of insurance is a contract of indemnity. It is the basis of all property insurance. It simply means that the insured that has insurable interest over a property is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss. Any contract of property insurance that gives to the insured more than indemnity against his actual loss that may be suffered by reason of designated perils is

wagering policy. 2. ELEMENTS OF AN INSURANCE CONTRACT 1. Like any other contract, an insurance contract must have consent of the parties, object and cause or consideration. The parties who give their consent in this contract are the insurer and insured. 2. The insured is subject to risk of loss through the destruction or impairment of that interest by the happening of the designated risks. 3. The Insurer assumes the risk of loss 4. Such assertion is part of a general scheme to distributed actual loss among a large group of persons bearing somewhat similar risks 5. As a consideration for the insurers promise, the insured makes a ratable contribution called a premium to the general insurance fund. WHAT MAY BE INSURED AGAINST ANY UNKNOWN OR CONTINGENT EVENT, WHETHER PAST OR FUTURE, WHICH MAY DAMNIFY A PERSON HAVING INSURABLE INTEREST OR CREATE A LIABILITY AGAINST HIM, MAY BE INSURED AGAINST (Section 3) WHAT CANNOT BE INSURED An insurance for or against the drawing of any lottery or for or against any chance or ticket in a lottery drawing a prize. BECAUSE GAMBLING RESULTS IN PROFIT AND INSURANCE ONLY SEEKS TO INDEMNIFY THE INSURED AGAINST LOSS (Section 4). PARTIES TO INSURANCE CONTRACT: INSURER - Every person, partnership, association or corporation duly authorized to transact insurance business as provided in the Code may be an insurer. It is the party who agrees to indemnify another upon the happening of specified contingency (Section 6). INSURED Party to be indemnified in case of a loss (Section 7). Anyone except a public enemy (is a nation at war with the Philippines and every citizen or subject of such nation. WHY the purpose of war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent to destroy its resources then pay it the value of what has been destroyed) may be insured. BENEFICIARY person designated to receive proceeds of policy when risk attaches. i. Beneficiary of one who insures his own life as a general rule, may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured. Exception: Art. 739 of the Civil Code ii. Beneficiary of life insurance on the life of another person person who procured the insurance on the life of another must have an insurable interest. iii. Beneficiary of property insurance must have an insurable interest. CAN THE BENEFICIARY BE CHANGED The insured shall have the right to change the beneficiary he designated unless he has expressly waived the right in the policy (Section 11) If he has waived the right, the effect is to make the designation as irrevocable. Note though that the designation of the guilty spouse as irrevocable beneficiary is revocable at the instance of the innocent spouse in cases of termination of (1) a subsequent marriage (2) nullification of marriage (3) annulment of marriage, and (4) legal separation (Article 43 (4) Family Code) WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT

The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434). Note where the wife and minor children were named irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority (Philamlife vs. Pineda, 170 SCRA 416). EFFECTS OF IRREVOCABLE DESIGNATION OF BENEFICIARY: Insured cannot: 1. assign the policy 2. take the cash surrender value of the policy 3. allow his creditors to attach or execute on the policy; 4. add new beneficiary; or 5. change the irrevocable designation to revocable, even though the change is just and reasonable. 3.CHARACTERISTICS/NATURE OF INSURANCE CONTRACTS Nature and characteristics of contract of insurance: 1. IT IS AN ALEATORY CONTRACT - the liability of the Insurer depends upon the happening of a contingent event. It is not a wagering contract. 2. IT IS A CONTRACT OF INDEMNITY FOR NON-LIFE recovery is commensurate to the loss. IT IS AN INVESTMENT IN LIFE INSURANCE secured by the insured as a measure of economic security for him during his lifetime and for his beneficiary upon his death EXCEPT one secured by the creditor on the life of the debtor. 3. IT IS A PERSONAL CONTRACT - an insurer contracts with reference to the character of the insured and vice versa. 4. IT IS EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER - because upon happening of the event or peril insured against, the conditions having been met, it has the obligation to execute the contract by paying the insured. IT IS EXECUTED ON THE PART OF THE INSURED after the payment of the premium 5. IT IS ONE OF PERFECT GOOD FAITH for both Insurer and Insured, but more so for the INSURER, since its dominant bargaining position imposes a stricter liability/responsibility. 6. IT IS A CONTRACT OF ADHESION Insurance companies manage to impose upon the insured prepared contracts which the insured cannot change. Consequently, they are construed as follows: a. In case there is no doubt as to the terms of the insurance contract, it is to be construed in its PLAIN, ORDINARY, AND POPULAR SENSE. b. If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be construed strictly against the insurer and liberally in favor of the insured because the latter has no voice in the selection of the words used, and the language used is selected by the lawyers of the Insurer. (QUA CHEE GAN v. LAW UNION ROCK INS. CO. LTD 98 Phil. 85) 4.CLASSES A. Marine A marine insurance is insurance against loss or damage to a. Vessel, craft, aircraft, vehicles; b. goods, freight, cargoes merchandise, effects, disbursement, profits, money, securities, chooses in action, evidence of debt, valuable papers, bottomry or respondentia interest and all kinds of property and interest therein, in respect to, appertaining to or in connection with any and all risk or perils of navigation, transit or transportation or while being assembled, packed, crafted, baled, compressed or similarly prepared for shipment or while awaiting shipment or during any delays, storage, transhipment or refreshment incident thereto, including war risk, marine builder risk, and all personal property floater risk c. Person or property in connection with those appertaining to marine, island

marine, transit or transportation insurance, including liability for loss or in connection with the construction, repair, operation, maintenance, use of the subject matter of the insurance. d. Precious stones, jewels, jewelry, precious metals whether in the course of transportation or otherwise. e. Bridges instrumentalities of transportation and communication, piers, wharves, docks, slip sand other aids to navigation and transportation, including dry docks, marine railways, dams and appurtenant facilities f. for the control of waterways. What risks are insured against? The basis of risk insured against is commonly known as perils of the sea. All kinds of marine casualties and damages done to the ship or goods at sea by the violent action of the wind and waves, one that could not be foreseen and is not suitable to the fault of nobody. What are not covered in marine insurance? Perils of the ship are not covered usually losses or damages that result from 1. Natural and inevitable action of the sea 2. Ordinary wear or tear of the ship 3. Negligent failure of the ship owner to provide the vessel the proper equipment to convey the cargo under ordinary condition. Under an all-risks policy, it is sufficient to show that there was damage occasioned by some accidental cause of any kind, and there is no necessity to point to any particular cause. An all-risks coverage extends all damages/ losses suffered by the insured cargo except a.) loss or damage or expense proximately caused by delay; b) loss or damage or expense proximately caused by the inherent vice or nature of the subject matter insured. Also it covers all losses except such as arising from the fraud of the insured. (FILIPINO MERCHANTS INSURANCE CO. vs. CA, 179 SCRA 638) Implied warranty of sea worthiness In every voyage policy of marine insurance, there is an implied warranty that the vessel is in all respect seaworthy, and such warranty can be excluded only by clear provisions of the policy. (PHILIPPINE AMERICAN GENERAL INSURANCE CO. vs. CA 273 SCRA 262) Who must check the sea worthiness of the vessel In implied warranty of sea worthiness, it becomes the owner of the cargo owner or the insured to look for a reliable common carrier which keeps the vessel sea worthy. The fact that the unseaworthiness of the ship was unknown to the insured is immaterial in ordinary marine insurance and may not be used as a defense to recover on the policy. The cargo owner is required to look for a common carrier that keeps its vessels seaworthy. In the absence of stipulation that the insurer answers for perils of the ship, insurance cannot be recovered on losses from perils of the ship. (ROQUE vs. IAC, 139SCRA 597) PERILS OF THE SEA extend only to losses caused by sea damage, or violence of the elements, and does not embrace all losses happening at sea. Include only such losses as are extraordinary in nature, or arise from overwhelming power, which cannot be guarded against by ordinary exertion of human skill and prudence (Sec. 99). PERILS OF THE SEA VS. PERILS OF THE SHIP Perils of the sea or perils of navigation includes only those casualties due to the unusual violence or extra ordinary causes connected with navigation. It has been said to include only such losses as are of extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being unseaworthy.

Perils of the ship is a loss which in the ordinary course of events, results: 1. from the natural and inevitable action of the sea 2. from the wear and tear of the ship 3. from the negligent failure of the ships owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions. BARRATRY willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without consent of owners, and to the prejudice of owners interest. INSURANCE AGAINST ALL RISKS insurance against all causes of conceivable loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured. The insurer can avoid coverage upon demonstrating that a specific provision excludes the loss from the coverage. (Choa Tiek Seng vs CA, 183 SCRA 223). INCHAMAREE CLAUSE covers loss or damage to the hull or machinery through: 1. negligence of the captain, engineers, etc. 2. explosions, breakage of shafts; and 3. latent defect of machinery or hull. What constitute insurable interest in ocean marine insurance? 1. the owner of the vessel has insurable interest in the vessel, and such continue even if the vessel has been chartered by the one who covenants to pay the owner the value upon lost and incase of loss, the insurer is liable only for the loss which the insured cannot recover from the charterer. 2. The insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry. Bottomry is a loan if the vessel is given as security for said loan arrives safely at port from contemplated voyage. Respondetia is a loan payable only upon the safe arrival in port or the goods given as security. Bottomry and respondetia are in the nature of contract of mortgage as the owner barrow money the use, equipment, or repair of the vessel for a definite term with the ship as the security with maritime or security with maritime or extraordinary interest on account of the risk borne by the lender, it being stipulated that if the ship is lost during the voyage or within a limited period, the lender also losses his money. 3. The owner of a vessel also has insurable interest in expected freightage, which according to the ordinary course of the things he would have earned but the intervention of a peril insured against or other peril incident to the voyage. Freightage define are the benefits derived by the owner from chartering of the ship and its employment for the carriage of his own goods or those of others The fact that the subject matter insured was loaded on two different barges did not make the contract several and divisible as to the items insured, where it was shown that the items insured were not separately valued or separately insured and only one premium was paid for the entire shipment. (ORIENTAL ASSURANCE CORP. vs. CA 200 SCRA459) Person or parties other than the owner who has insurable interest 1. One who has interest in the thing from, which profit are expected to proceed, has insurable interest on the profits 2. The charter of the ship has insurable interest to the extent that he is liable to be damnified by its loss. Concealment in marine insurance A party is bound to communicate

1. facts within his knowledge, material to the contract, other party has not the means of ascertaining, as to which party with a duty to communicate makes no warranty. 2. Information that he posses that are material to the risk 3. Exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose except those that the insurer knows or those in the exercise of ordinary care, the other ought to know, and which the former has no reason to suppose him be ignorant. 4. The belief or expectation of a third person, in reference to material fact, is material. When is insurer entitled to rescind If the representation is intentionally false in any material respect or in respect of any fact on which the character and nature of the risk depends. But the eventual falsity of a representation as to an expectation does not in the absence of fraud, avoid the contract. Implied warranties in a marine insurance 1. The ship is sea worthy in every contract of marine insurance upon a ship or freight, freightage or upon anything which is the subject of marine insurance. A ship is sea worthy when it is reasonably fir to perform the service and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy. The sea worthy of the ship is at the time of the commencement of the risk, except when the insurance is made for a specified length of time, it must be sea worthy at the commencement of every voyage it undertakes at that time and when the insurance is upon cargo, which by the term of the policy, description of the voyage, or established custom or trade is required to be transshipped at an immediate port, in which case, each vessel upon which the cargo is shipped or transshipped must be sea worthy at the commencement of every voyage. Another one is where the different portions of the voyage contemplated in the policy differ in respect to the things requisite to make the ship to be sea worthy, in each case it must be sea worthy at the commencement of each portion. 2. It shall carry the requisite documents to show its nationality or neutrality and that it shall not carry any document that will cast reasonable suspicion on the vessel. This warranty arises only when the nationality or neutrality of the vessel is expressly warranted. 3. That the vessel shall not make any improper deviation from the intended voyage. 4. That the vessel does not or will not engage in any illegal venture. What does the warranty of sea worthiness extend to: The warranty of seaworthiness extends not only to the condition of the structure of the ship, but it requires that it: a. It be properly laden or loaded with cargo b. Provided with a competent master, sufficient number of officers and seamen c. It must have the requisite equipment and appurtenances. Determination of the voyage intended are: a. When it is described by places of beginning and ending, the voyage is the course of sailing fixed by mercantile usage between those places. b. When it is not fixed by mercantile usage, the voyage is between the places specified which to a master of ordinary skill and discretion would seem the most natural, direct and advantageous. What is deviation? Deviation is a departure from the course of voyage or an unreasonable delay in pursuing the voyage or the commencement of an entirely different section. When is a deviation proper a. When it is caused by the circumstances over which neither the master nor the owner of the ship has any control. b. When necessary to comply with a warranty, to avoid a peril, whether or not the peril is insured against. c. When made in good faith, for the purpose of saving human life or relieving another vessel distress. Kinds of total losses 1. Actual total loss may be caused by:

a. Total destruction of the thing insured b. The irretrievable loss of the thing by sinking or by being broken up c. Any damage to the thing which renders it valueless to the owner for the purpose that it be held. d. Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. 2. Constructive total loss when the person insured is given the right to abandon. Abandonment is the act of the insured by which, after a constructive total loss, he declares to the insurer the relinquishment in its favor of his interest in the thing insured. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured and recover a total loss when the cause of loss is a peril insured against if: a. More than thereof in value is actually lost or would have to be expended to recover it from the peril b. If it is injured to such extent as to reduce its value by more than c. If the thing injured is a ship and more than of the value of the thing is abandon or a risk which a prudent man would not take under the circumstances d. If the insured is freightage or cargo and the voyage cannot performed nor another ship procured by the master within a reasonable time with reasonable diligence to forward the cargo without incurring the like expense or risk mentioned in item ABANDONMENT is the act of the insured by which, after a constructive total loss, he declared the relinquishment to the insurer of his interest in the thing insured (Sec. 138). REQUISITES FOR VALID ABANDONMENT : 1. There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec. 138); 2. There must be a constructive total loss (Sec. 139); 3. The abandonment be neither partial nor conditional (Sec. 140); 4. It must be made within a reasonable time after receipt of reliable information of the loss (Sec. 141); 5. It must be factual (Sec. 142); 6. It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec. 143); and 7. The notice of abandonment must be explicit and must specify the particular cause of the abandonment (Sec. 144). How notice of abandonment is made By giving notice or a written notice to the insurer but if orally is given a written notice of such must be submitted within seven days from givingoral notice. The notice must be explicit and specify the particular cause of the abandonment but need state only enough to show that the nature is probable cause therefore and need not be accompanied by proof of interest or of loss. Effect of abandonment 1. It is equivalent to transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnify. If the insurer pays for the pays for the loss as if it were an actual total loss, he is entitled to whatever remain of the thing insured, or its proceeds or salvage as if there has been a formal abandonment. Here the insurer has opted to pay for a total actual loss notwithstanding the absence on actual abandonment 2. Acts done in good faith by those who were agents of the insured I respect to the thing

insured subsequent to the loss, are at the risk of the insurer and for and his benefits. The agent of the insured becomes the agent of the insurer. This retroact to the date of the loss when abandonment is effectively made. Effectivity of abandonment 1. Abandonment becomes effective upon the acceptance of the insurer. Acceptance may either be express or implied from the conduct of insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as acceptance. Once accepted, it is also irrevocable upon acceptance and upon its being made unless the ground upon which it is made proves to be unfounded. Thus, if the insurer accepts the abandonment, it cannot raise any question as to insufficiency of the form. 2. On an accepted abandonment involving a ship, freightage earned previous to the loss belongs to the insurer of the freightage, that subsequently earned belong to the insurer of the ship. 3. If abandonment is not accepted despite its validity, the insurer is liable upon an actual total loss, deducting from the amount any proceeds of the thing insured that may come to the hands of the insured. Average is any extraordinary or accidental expenses incurred during the voyage for the preservation of the vessel, cargo, or both and all damages to the vessel or cargo from the time it is located and the voyage commenced until it ends and the cargo commenced until it ends and the cargo is unloaded. Kinds of average 1. Particular or simple average is a damage of expense caused to the vessel or cargo which has not injured to the common benefit and profit of all persons interested in the cargo or the vessel. This damage or expense is borne ordinarily by the owner of the vessel or cargo that gives rise to the expenses or suffered the damages 2. General or gross average is an expense or damage suffered deliberately in order to save the vessel or its cargo or both real or known risk. Thus all person having an interest in the vessel and cargo or both at the occurrence of the average shall contribute. As a rule, when it has been agreed that an insurance upon a particular thing or class of things shall be free from particular average, a marine insurer is not liable for a particular average loss not depriving the insured of the possession, at the port of destination, of the whole such thing, or class of things, even though it becomes entirely worthless, but such insurer is not liable for his proportion of all average loss assessed upon the thing insured. B. FIRE In fire insurance, there must be a combustion 1. Friendly fire burning in a place it should burn. 2. Hostile burn burning in a place which it should not burn or initially a friendly fire but escapes from the place where it is intended to burn and becomes uncontrollable. Alteration is a change in the use of condition of a thing insured from that to which it is limited by the policy, made without the consent of the insurer, by means within the control of the insured, and increasing the risk, which entitles the insurer to rescind the contract of insurance. Requisites of alteration: 1. The use of condition of the thing is specifically or stipulated in the policy but the contract of insurance is not affected by an act of the insured subsequent to the execution of the policy, which does not violate its provision, even though it increases the risk and is the cause of the loss. 2. There is an alteration in the said use or condition. 3. The alteration is without the consent of the insurer. 4. The alteration is made by means within the insureds control. 5. The alteration increases the risk of loss but any alteration in the use or condition of the thing insured from that to which is limited by the policy, which does not increase the risk does not affect the contract.

WHEN ALTERATION IN THING INSURED ENTITLES INSURER TO RESCIND: 1. The use or condition of the thing is specifically limited or stipulated in the policy; 2. Such use or condition as limited by the policy is altered; 3. The alteration is made without the consent of the insurer; 4. The alteration is made by means within the control of the insured; and 5. The alteration increases the risk. ALTERATION NOT RESULTING IN RESCISSION: 1. Alteration not increasing the risk; and 2. Alterations increasing the risk but not violating the contract. FALL-OF-BUILDING CLAUSE clause in fire insurance policy that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.

C. CASUALTY Insurance covering loss or liability arising from accident of mishap, excluding those falling under other types of insurance as fire or marine (Sec. 174). It is the one that covers or liability arising from an accident or mishap excluding those that fall exclusively within other types of insurance like fire or marine. It includes employers liability. Workmens liability, public liability, motor vehicle liability, plate glass liability, burglar and theft, personal accident and health insurance as written by non life companies and other substantially similar insurance. Where the contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable, can sue directly the insurer upon the occurrence of the injury or event upon which the liability depends. The purpose is to protect the injured person against the insolvency of the insured who causes such injury and to give him a certain beneficial interest in the proceeds of the policy. It is as if such injured person were especially named in person. (SHAFER vs. JUDGE, RTC, 167 SCRA 386) D. SURETYSHIP An agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. Liability of the surety It is joint and several with the obligor but limited to the amount of the bond and determined strictly by the terms of the contract in relation to the principal. FIDELITY BOND contract of insurance against loss from misconduct. FIDELITY GUARANTY INSURANCE a contract whereby one, for a consideration, agrees to indemnify the assured against loss arising from the want of integrity, fidelity or honesty of employees or other persons holding positions of trusts. E. LIFE Life insurance

Is insurance on human lives and insurance appertaining thereto or connected therewith. The purpose of this is to compensate the beneficiaries of the insured. It is paid upon the death or his surviving a special period or contingently on the continuance or cessation of life. All causes of death except those excluded by law, by the policy itself or by public policy. Kinds of life insurance Whole life or ordinary life or straight life premiums are payable for life and the insurer agrees to pay the face of the value upon the death of the insured Limited payment life insured pays premiums for a limited period after which he stops with a guarantee by the insurer that upon death the face amount to be paid, and if death occurs while payment is not complete, beneficiary receives the amount. Term policy insurer is liable upon the death of the insured within the term agreed upon. If Insured survives the insurer is not liable. Endowment protection is for a limited period, if the insured is still alive at the end of the period, the value of the policy is paid to him. If he dies before at the end of the period, it is paid for the beneficiaries. Annuity where the insured or a named person is paid of sums periodically during life or a certain period. Life insurance is transferable and assignable by transfer, will or succession to any person, whether he has insurable interest or not. The effect is the person to whom it is transferred may recovers upon it whatever the insured might have recovered.

F. COMPULSARY MOTOR VEHICLE LIABILITY INSURANCE It is to provide to coverage to answer for bodily injured or property damage that mey be sustained by another arising from the use of a motor vehicle. The compulsory is death or bodily injury arising from motor vehicle accident. COMPULSORY MOTOR VEHICLE LIABILITY (Sec. 373): METHOD OF COVERAGE: 1. 2. 3. Insurance Policy; Surety Bond; and Cash Bond.

NON-FAULT CLAUSE any claim for death or injury shall be paid up to PHP 5,000.00 without necessity of proving fault or negligence, provided the following proofs of loss under oath are submitted (Sec. 378): 1. death certificate and evidence sufficient to establish proper payee; 2. police report; and 3. medical report and evidence of medical or hospital disbursement. Claim is collected from insurer of vehicle where claimant is riding, mounting, or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. AUTHORIZED DRIVER CLAUSE The clause means that it indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission (Villacorta vs. Insurance Commissioner; Perla Compania de Seguro vs. CA) The requirement that the person driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle. It is applicable only if the

person driving is other than the insured. COOPERATION CLAUSE clause in an automobile insurance policy which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings. THIRD PARTY LIABILITY INSURANCE insurance secured by the assured to protect third parties up to the limit stated in the policy, but third party victim is not at all affected by the limitation in the schedule of indemnity which binds only the contracting party [Sec. 378, (iii)]. THIRD PARTY is any person other than the passenger as defined in 373 of CMVLI and shall also exclude a member of the household or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death or bodily injury arising out of and in the course of employment (Sec. 373{c}, CMVLI). PASSENGER, (CMVLI)any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passenger for compensation, including persons expressly authorized by law or by the vehicles operator or his agents to ride without faire (Sec. 373{b}, CMVLI) A. LIFE Insurable interest in Life Every person has insurable interest in the life and health of 1. Himself, his spouse and of his children. 2. Any person on whom he depends wholly in facet for education or support, or in whom he has a pecuniary interest 3. Any person under a legal obligation to him for the payment of money, respecting property or services, of which death or illness might delay or prevent performance 4. Any person whose life, any estate or interest vested in him depends. GENERAL RULE: In life insurance, there is no limit in the amount the insured can insure his life. Exception: in creditor-debtor relationship where the creditor insures the debtor, the limit of insurable interest is equal to the amount of the debt. NOTE: Insurable interest in the life of another need exist only at the time of perfection of the contract and need not exist thereafter.

Incontestability clause:

Section 48 of the Insurance Code precludes the insurer from raising the defense of false representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least 2 years during the insureds lifetime. The phrase during the lifetime in section 48 means that the policy is no longer considered in force after the insured has died. The key phrase in section 48 is for a period of 2 years. The insurer has 2 years from the date of the issuance of the contract or its last reinstatement within which to contest the policy whether or not the insured still lives within such period. (TAN vs. CA 174 SCRA 403)

Requisites for incontestability clause: 1. It is payable on the death of the insured 2. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement (Sec. 48, ICP) NOTE: The period of 2 years may be shortened but it cannot be extended by stipulation.

DEFENSES NOT BARRED BY INCONTESTABILITY CLAUSE: 1. That the person taking the insurance lacked insurable interest as required by law; 2. That the cause of the death of the insured is an excepted risk; 3. That the premiums have not been paid (Secs. 77,227[b], 228[b], 230[b].); 4. That the conditions of the policy relating to military or naval service have been violated (Secs. 227[b], 228[b].); 5. That the fraud is of a particularly vicious type; 6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or 7. That the action was not brought within the time specified. WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE It exists when there is reasonable ground founded on the relation of the parties, either pecuniary or contractual or by blood, or by affinity to expect some benefit from the continuance of life of the insured. WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONES LIFE He has unlimited interest in his own life or that of another person regardless of whether or not the latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there is no force or bad faith. BUT, if he takes out a policy on the life of another and names himself as the beneficiary, he must have an insurable interest in the life of the insured. IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN The law does not require the consent of the person insured and such has been considered as not essential to the validity of the contract as long as there is insurable interest at the beginning. b. Any person has insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured is an insurable interest (Section 13). It may consist of (1) An existing interest ( Example: By means of a conditional deed of sale, A sold his house to B for PHP 2,000,000.00. B pays a down payment of PHP 500,000.00. Prior to full payment and execution of an absolute sale, A has insurable interest in the house equivalent to the balance due him, while B has insurable interest to the extent of the down payment because loss of the house will mean that he suffers a loss of PHP 500,000.00 (2) An inchoate interest founded on an existing interest (Defined: interest in real estate which is not a present interest but which may ripen into a vested interest if not barred, extinguished, or divested. Example: Interest in Corporate property arising from stockholdings but limited to its value (3) An expectancy, coupled with an existing interest in that out of which the expectancy arises. (Example: A ship owner has insurable interest in expected freight charges. Future crops that a farmer will grow on land belonging to him at the time of the issuance of the policy) Note that the expectancy must be founded on an actual right to the thing or a valid contract for it. Note also that a carrier or depository of any kind has insurable interest in the thing held by him as such to the extent of his liability but not to exceed the value thereof (Sections 13, 14, 15).

But, a mere contingent or expectant interest in anything, not founded on contract or actual right to the thing is not INSURABLE as there is no insurable interest (Section 16). Examples: (1) a son has no insurable interest on a building owned by father despite being designated as an heir in the will as the will does not produce any effect before the testators death (2) the owner of land on expected crops has insurable interest as he owns the land WHO MAY BE A BENEFICIARY IN LIFE INSURANCE Anyone, except those who are prohibited by law to receive donations from the insured. Note Article 739 of the Civil Code, hence the following cannot be designated as beneficiaries are; (1)Those made between persons guilty of adultery or concubinage at the time of the designation (2)Those found guilty of the same criminal offense in consideration thereof (3) Those made to a public officer or his wife, descendants / ascendants by reason of his office. MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED It is recognized that the insured may name anyone he chooses, except those disqualified to receive donations, as a beneficiary in his life insurance, even if he is a stranger and has no insurable interest in the life of the insured. The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR INTENT TO ENTER INTO A WAGERING CONTRACT. (Example: Jose obtains several life insurance policies that he cannot afford. Named as beneficiary is Juan, the spouse or children of Jose are not named as beneficiaries. The premiums are paid by Juan, who did not have insurable interest in the life of Jose. In this case the policies are void because they were entered into as wagering contracts) CAN THE BENEFICIARY BE CHANGED The insured shall have the right to change the beneficiary he designated unless he has expressly waived the right in the policy (Section 11) If he has waived the right, the effect is to make the designation as irrevocable. Note though that the designation of the guilty spouse as irrevocable beneficiary is revocable at the instance of the innocent spouse in cases of termination of (1) a subsequent marriage (2) nullification of marriage (3) annulment of marriage, and (4) legal separation (Article 43 (4) Family Code)

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434). Note where the wife and minor children were named irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority (Philamlife vs. Pineda, 170 SCRA 416). WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY His interest is contingent as benefits are to be paid him only if the assured dies before the specified period. If the insured outlives the period, the benefits are paid to the insured. WHAT IS THE EFFECT OF THE FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED The benefits of the policy shall accrue to the estate of the insured. WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED IF DESIGNATION IS IRREVOCABLE, the legal representatives of the beneficiary may recover unless it was stipulated that the benefits are payable only IF LIVING. IF DESIGNATION IS REVOCABLE, and no change is made, the benefits passes to the estate of the insured. The rule holds also if

benefits were payable only if living or if surviving and the beneficiary dies before the insured. WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE WILLFULLY KILLS THE INSURED If the killing is WILLFUL, the interest is forfeited if he is the principal, an accomplice, or an accessory. The NEAREST RELATIVE OF INSURED GETS THE PROCEEDS IF NOT OTHERWISE DISQUALIFIED (Section 12). If not willful or felonious, the provision does not apply. INTENTIONAL VS. ACCIDENTAL AS USED IN INSURANCE: INTENTIONAL as used in an accident policy excepting intentional injuries inflicted by the insured or any other person implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieve from liability as stipulated (Biagtan vs. the Insular Life Assurance Co. Ltd. 44 SCRA 58, 1972) ACCIDENTAL - The terms accident and accidental as used in insurance contract, have not acquired any technical meaning. They are construed by the courts in the ordinary and common acceptation. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. The terms do not without qualification, exclude events resulting in damage or loss due to fault, recklessness or negligence of third parties. The concept is not necessarily synonymous with no fault. It maybe utilized simply to distinguish intentional or malicious acts from negligent or careless acts (Pan Malayan Insurance Corp. vs. CA, 184 SCRA 54). INSURANCE AS A RISK DISTRIBUTING DEVICE: The devices of insurance serve to distribute the risk of economic loss among as many as possible of those who are subject to same kind of risk. By paying a pre-determine amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. This broad sharing of economic risk is the principle of risk-distribution. LIABILITY OF INSURER IF INSURED WAS COMMITTING A FELONY Liabilities arising out of acts of negligence, which are also criminal, are also insurable on. Effect of death of insured through suicide: The insurer in a life insurance contract shall be liable in case of suicide by the insured committed after the policy has been in force for a period of two years from the date of its issue or its last reinstatement, unless the policy provides a shorter period: provided, however, that suicide committed in a state of insanity shall make the insurer liable regardless of the date of the commission of the suicide (Sec. 180-A) Where a life insurance policy is made payable to one of the heirs of the person whose life is insured, the proceeds of the policy on the death of the insured belong exclusively to the beneficiary and not to the estate of the person whose life was insured and such proceeds are his individual property and not the property of the heirs of the person whose life was insured . ( DEL VAL vs. DEL VAL, 29 PHIL 534) The proceeds of a life insurance policy payable to the insured persons estate, on which

the premiums were paid by the conjugal partnership, constitute community property and belong one-half to the husband exclusively, and the other half to the wife. If the premiums were paid partly with paraphernal and partly conjugal funds, the proceeds are in like proportion, paraphernal in part and conjugal in part. (BPI vs. POSADAS , 56 PHIL 215) According to the Article 2012 of the New Civil Code that any person who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the person who cannot make a donation to him. Both are founded upon the same consideration which is liberality. (INSULAR LIFE vs. EBRADO 80 SCRA 181) B.PROPERTY 1. An existing interest 2. An inchoate interest founded on an existing interest i. An example is the right to inherit 3. An expectancy interest with an existing interest in that out of which the expectancy arises. When can you insured an inherited property? When you already have it, because it is already an existing interest. Contract of Surety shall also be deemed an insurance contract if made by a surety who or which is doing an insurance business, Doing an insurance business or transacting insurance business is: 1. Making or proposing to makes an insurer, any insurance contract. 2. Making or proposing to make, as surety, any contract of suretyship as a vocation and not as making incidental to any other legitimate business or activity of the surety; 3. Doing any business including reinsurance business, specifically recognized as doing an insurance business; 4. Doing or proposing to do any business in substance equivalent to any of the forgoing in a manner designed to evade the provisions of the insurance code. Nature and characteristics of contract of insurance: 1. It is an aleatory contract the liability of the insurer depends upon the happening of a contingent event. 2. It is a contract of indemnity for non-life recovery is commensurate to loss because it is a contract of indemnity in non-life. Event insured against must be the proximate cause of loss, damage, or injury 3. It is a personal contract - an insurer contracts with reference to the character of the insured and vice versa. 4. It is executory and conditional on the part of the insurer because upon the happening of the event or peril insured, the conditions having been met, it has the obligation to execute the contract by paying the insured. It is executed on the part of the insured after the payment of the premium. 5. It is one of perfect in good faith for both insurer and insured, but more so for the insurer, since its dominant bargaining position imposes a stricter liability or responsibility. 6. It is a contract of adhession insurance companies manage to impose upon the insured prepared contracts which the insured cannot change. Consequently, they are : a. In case there is no doubt as to the terms of the insurance contract, it is to be construed in its plain, ordinary, and popular sense. b. If doubtful, ambiguous, or uncertain, it is to be construed strictky against the insurer and liberally in favor of the insured because the latter has no voice in the selection of the words used and the language used is selected by the lawyers of the insurer. Insurable interest When no insurance interest the contract is void, because without interest then insured have not suffered loss or damage to be indemnified. NOTE: Expectancy is not insurable unless coupled with an interest in the thing from which it shall arise.

Example: an owner of a business can insure against a contingency which may cause loss of profits resulting from the cessation or interruption of his business. (See Sec. 14, ICP) NOTE: Insurable interest must exist in the same person both at the perfection of the contract as well as the time of loss. In between, the effect of loss of insurable interest is merely to suspend the policy. (Sec. 20, ICP) Exceptions: 1. in case of life, health and accident insurance (Sec. 20); 2. 3. 4. 5. 6. change in interest results after occurrence of an injury which results in a loss (Sec. 21) change in interest in one or more several distinct things separately insured by one policy (Sec. 22); change in interest by will or succession on death of insured (Sec. 23); transfer of interest by one of several partners, joint partners, or owners in common who are jointly insured, to others (Sec. 24). when a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57);

7. when is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided (Art. 1306, NCC). Must the beneficiary have an insurable interest in the property insured? YES, as no contract or policy of insurance on property shall be enforceable EXCEPT for the benefit of some person having insurable interest in the property insured. EXAMPLE: The owner insures his building against fire naming his nephew as beneficiary. In case of loss only the owner can recover what is not enforceable is the designation of beneficiary not the entire policy itself.

DISTINCTIONS:

INSURABLE INTEREST IN LIFE Must exist only at the time the policy takes effect and need not exist at the time of loss

INSURABLE INTEREST IN PROPERTY Must exist at the time the policy takes effect and when the loss occurs but need not exist in the mean time.

Unlimited except in life insurance taken Limited to actual value of interest in by the creditor on life of debtor. property insured The expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient The beneficiary need not have an insurable interest over the life of the insured if the insured himself secured the policy. If the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured. An expectation of a benefit to be derived from the continued existence of the property insured must have a legal basis The beneficiary must have insurable interest over the thing insured

IN RELATION TO THE NEED FOR THE EXISTENCE OF INSURABLE INTEREST, NOTE HOWEVER: That a change of interest in any port of a thing insured in accompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent until interest in the thing and interest in the insurance is vested in the same person. Example: A buyer of a property insured by the previous owner who has not obtained a transfer of the insurance policy in his name cannot recover. RELATED QUERY How about the seller NO no insurable interest at the time of loss (Sec 19) WHAT CHANGE IS CONTEMPLATED An absolute transfer of the property NOT LIFE A LEASE / MORTGAGE EXCEPTIONS 1. Life, Health or accident insurance because they are not contracts of indemnity and insurable interest is not required at the time of loss. 2. A change of interest after occurrence of an injury and results in loss does not affect the right of the insured to indemnity (Sec 21) - after loss the liability of the insurer is fixed 3. a change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others. (Sec 22) 4. a change of interest by will or succession on the death of the insured does not avoid the insurance his interest passes on the thing insured (Sec 23) 5. a transfer of interest by one or several partners, joint owners, or owners in common, who are jointly insured to the others, does not avoid insurance even though it has been agreed that insurance shall lease upon an allocation of the thing insured. NOTE - there must be not stipulation against it otherwise it is avoided. - transfer to strangers avoid the policy 6. when notwithstanding a prohibition, the consent of the insurer is obtained 7. when the policy is so fraud that it will insure to the benefit of whomsoever may become the owner during the continuance of the risk.

The following are void stipulations in property insurance A. a stipulation for the payment of the loss whether the person insured has or has not interest in the property insured because it is a contract of indemnity. B. Stipulation that the policy shall be received as proof of such interest existence of insurable interest does not depend on the policy C. every policy issued by way of gaining or wagering shall be void. Those insured without insurable interest as they do not suffer a damage from the occurrence of the event insured against they vested profit. CONTINUATION OF ELEMENTS 2. The insured is subject to risk of loss through the destruction or impairment of that interest by the happening of the designated risks. 3. The Insurer assumes the risk of loss 4. Such assertion is part of a general scheme to distributed actual loss among a large group of persons bearing somewhat similar risks 5. As a consideration for the insurers promise, the insured makes a ratable contribution called a premium to the general insurance fund. WHO MAY INSURE A MORTGAGED PROPERTY Both the Mortgagor and Mortgagee may take out separate policies with the same or different companies. The mortgagor to the extent of the value of his property, the mortgagee to the extent of his credit (Section 8). WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAKES THE LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM. UNLESS THE POLICY PROVIDES OTHERWISE a. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. HENCE, if the policy is cancelled, notice must be given to the mortgagor. b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance, will have the same effect, although the property is in the hands of the mortgagee. HENCE, if there is a violation of the policy by the mortgagor , the mortgagee cannot recover. c. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect as if it has been performed by the mortgagor. Example: if notice of loss is required, the mortgagee may give it. d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit, and the balance, if any, is to be paid to the mortgagor, since such is for both their benefits. e. Upon recovery by the mortgagee, his credit is extinguished. IF ON THE OTHER HAND, (Section 9), the Insurer assents to the transfer of the insurance from the mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on the assignee, making a new contract with him, the acts of the MORTGAGOR cannot affect the rights of the assignee NOTE UNION MORTGAGE CLAUSE Creates the relation of insured and insurer between the mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee the insurance contract is now independent of that with the mortgagor. WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR; a. The mortgagee may collect from the insurer upon occurrence of the loss to the extent of his credit.

b. Unless, otherwise stated, the mortgagor cannot collect the balance of the proceeds, after the mortgagee is paid. c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee. d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is unable to collect in full from the insurer, he can recover from the mortgagor. e. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee.

C. DOUBLE INSURANCE AND OVER INSURANCE DOUBLE INSURANCE exists where same person is insured by several insurers separately in respect to same subject and interest (Sec. 93). REQUISITES OF DOUBLE INSURANCE: 1. 2. 3. 4. 5. The person insured is the same; Two or more insurers insuring separately; The subject matter is the same; The interest insured is also the same; The risk or peril insured against is likewise the same.

EFFECTS OF DOUBLE INSURANCE: Where double insurance is allowed, but over insurance results, he can claim in case of loss only up to the agreed valuation or up to the full insurable value from any, some or all insurers, without prejudice to the insurers ratably apportioning the payments. Insured can also recover before or after the loss, from both insurers the excess premium he has paid (Sec. 94).

OVER-INSURANCE When the amount of the insurance is beyond the value of the insureds insurable interest

DOUBLE INSURANCE There may be no over insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured.

There may only be one insurer involved There are always several insurer

Multiple or Several Interests on Same Property Both the mortgagor and the mortgagee may take out separate policies with the same property or with different companies. Only in this situation can there be a multiple parties who has an interest on the same party, the mortgagor to the extent of the value of the property and the mortgagee to the extent of his credit. What are the consequences where the mortgagor insures the property mortgaged in his own name but makes the loss payable to the mortgagee or assigns the policy to him? 1. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be to the original contract. Hence, if the policy is cancelled, notice must be

2. By any act of the mortgagor, prior to loss, which would otherwise avoid the policy or

given to the mortgagor.

insurance, will have the same effect, although the property is in the hands of the mortgagee. Hence, if there is a violation of the policy by the mortgagor, the mortgagee cannot recover. 3. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect as if it has been performed by the mortgagor. 4. Upon the occurrence of the los, the mortgagee is entitled to recover to the extent of his credit, and the balance, if any, is to be paid to the mortgagor, since such is for both their benefits. 5. Upon the recovery of the mortgagee, his credit is extinguished. If on the other hand, the insurer assents to the transfer of the insurance from the mortgagor to the mortgagee, and at the time of his assent, imposes further qualification on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of the assignee. Note however the union mortgage clause where it creates the relation of insured and the insurer between the mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee, the insurance contract is now independent of with the mortgagor. What is the effect of insurance procured by the mortgagee without reference to the right of the mortgagor? 1. The mortgagee may collect from the insurer upon occurence of the loss to the extent of his credit. 2. Unless, otherwise stated, the mortgagor cannot collect the balance of the proceeds, after the mortgagee has paid. 3. The insurer, after the payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee. 4. The mortgagee after payment cannot collect anymore from the mortgagor but if he is unable to collect in full from the insurer, he can recover from the mortgagor. 5. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee. Consensualty The consent of the husband is not necessary for the validity of an insurance policy taken out by a married woman on her life or that of her children.

Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the insurance is taken on his own life and the beneficiary appointed is the minor's estate or the minor's father, mother, husband, wife, child, brother or sister.

The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges of an owner under a policy.

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy. 7. PREMIUM PREMIUM consideration paid an insurer for undertaking to indemnify the insured against a

specified peril (Sec. 77). Basis on the right of the insurer to collect premiums: ASSUMPTION OF RISK GENERAL RULE: No policy issued by an insurance company is valid and binding until actual payment of premium, Any agreement to the contrary is void. (Sec. 77) EXCEPTIONS 1. In case of life or industrial life insurance, when the grace peiod applies (Sec.77) 2. When the insurer makes a written acknowledgement of the receipt premium (Sec.78) 3. Section 77 may not apply if the parties have agreedbto the payments of the premium in installments and partial payments has been made at the time of the loss. (Makati Tuscany Condominium Corp. v CA 215 SCRA 462) 4. Where a credit term has been agreed upon. (UCPB vs Masagana Telemart 308 SCRA 259) 5. Where the parties are barred by estoppel. (UCPB vs Masagana Telemart 356 SCRA 307) Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. (Makati Tuscany Condominium Corp. vs CA 215 SCRA 462) NOTE: Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. Effect of Acknowledgement of Receipt of Premium Policy Conclusive of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid (Sec.78) REASON: When the policy contains such written acknowledgement, it is presumed that the insurer has waived the condition of prepayment NOTE: The conclusive presumption extends only to the question on the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgement is only a prima facie evidence of the fact of such payment. The insurer may still dispute its acknowledgement but only for the purpose of receiving the premium due and paid. Effect of Acceptance of Premium Acceptance of premium within the stipulated period for payment thereof, including the agreed period of grace, merely assures continued effectivity of the insurance policy in accordance with its terms. INSURED ENTITLED TO RETURN OF PREMIUMS PAID: A. WHOLE The insured is entitled to return of premium when 1. To the whole premium when no part of the interest in the thing insured is exposed to any perils insured against 2. Where the insurance is made in a definite period of time ad the insured surrenders his policy before the expiration of the period. Hence the insured

2. 3. 4. 5.

B. PRO RATA 1. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof; Exceptions: a. Policy not made for a definite period of time b. Short period rate is agreed upon c. Life insurance policy 7. RECISSION OF INSURANCE CONTRACTS

recovers only a portion of the policy premiums corresponding with the unexpired time, but it does not apply to: a. The policy is not for a definite period. b. A short period rate where the insurance is for a less than period of a year and a rate has been agreed to if the policy is surrendered. c. The policy is a life insurance policy because it is indivisible but he has a cash surrender value When the contract is voidable on account of fraud or misrepresentation of the insurer or his agent. When the contract is voidable on account of facts, existence of which the insured was ignorant without his fault. When by any default of the insured other that actual fraud, the insurer never incurred any liability under the policy. In case of over insurance, because there is a excess of the amount of the insurable interest of the insured and it is insured several times, the insured is entitled to a ratable return of premium, proportional to the amount by which the aggregate sum insured in all the policies exceeds the insurable value.

A. Concealment Concealment is a neglect to communicate that which a party knows and ought to communicate. The effect of concealment whether intentional or not, it entitles the injured party to rescind the contract of insurance. The party claiming the existence of concealment must prove that there was knowledge on the part of the party charged with the concealment. What time must the party charged with the concealment have knowledge of the fact concealed? Generally a party must have the knowledge of the fact concealed at the time of the effectivity of the policy. Information acquired after the effectivity is not concealment and does not constitute ground to rescind the policy, as after the policy is issued, information subsequently acquired is no longer materials it will not affect or influence the party to enter into the contract. However, incase of the reinstatement of a lapsed policy, facts known after the effectivity but before reinstatement must be disclosed. Materiality is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due in forming his estimate of the disadvantages of the proposed contract or in the making his inquiries. The test of materiality is whether the knowledge of the true facts could have influence a prudent insurer in determining whether to accept risk or in fixing the premium. What is the test of materiality? The test of materiality is whether knowledge of the true facts could have influenced a prudent insurer in determining whether to accept the risk or in fixing the premiums Must there be a causal connection between the fact concealed and the cause of the loss? Concealment need not, in order to be material, be of facts which bring about or contribute to, or are connected of the insureds loss. It is immaterial that there is no causal relationship between the fact concealed and the loss sustained. It is sufficient that the non revelation has misled the insurer in forming its estimate of disadvantage or fixing the premium

. Examples: Insured concealed kidney disease and enlarged liver Later he died of thrombosis, is the insurer liable? NO, since the fact concealed was material though the insured did not die therefrom. Henson v. Philam 50 OG 73428. Insured had concealed that he had kidney disease. He dies in plane crash. The INSURER not liable What facts then must be communicated? 1. Such facts that must be within his knowledge as concealment requires knowledge of the fact concealed by the party charged with the concealment. 2. Facts must be material to the contract, it must be of such nature that had insurer known of it, it would not have accepted the risk or demanded a higher premium. 3. That the other party had no means of ascertaining such facts. 4. That the party with a duty to communicate makes no warranty, as the existence of a warranty makes the requirement to disclose superfluous. But an intentional and fraudulent omission on the part of the one insured to communicate information on a matter proving or tending to prove the falsity of a warranty entitles the insurer to rescind. B. Representation The purpose of representation is to induce the insurer to the issue of the contract of insurance. And when a representation that is false at the time of the effectivity of the policy constitutes misrepresentation or there is a representation when the representation is not substantially true. A representation is said to be false when the facts fail to correspond with its assertions or stipulation. A representation can be withdrawn as long as the insurance has not yet been effected and the insured has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can b rescinded as the insurer has already been led to issue the policy. Representation is not part of a contract of insurance

When may a representation be made? Since it is an inducement to entering a contract it must be made at the same time as or before the issuance of the policy (Section 37). Note that it can also be made after the issuance of the policy when the purpose thereof is to induce the insurer to modify an existing insurance contract as the provisions also apply to a modification (same with concealment) How should be a representation be construed? The language of a representation is to be interpreted by the same rules as the language of contracts in general (Section 38). HENCE , it need not be literally true and correct / accurate in every respect, rather, it is sufficient if it is substantially or materially true. In case of a promissory representation, it is sufficient if it is substantially complied with. Examples: (1) X bought a car for PHP 1,700.00 and spent PHP 400.00 for repairs X gave it to Y as a gift. Y secures insurance and says the price is around PHP 3,000.00, though the present actual value is about PHP 2,000.00. Is Y guilty of misrepresentation because she did not pay for the car? NO, because the literal truth is not necessary. The insurer can value the car independently. KINDS (Sec.39): 1. AFFIRMATIVE affirmation of a fact when the contract begins; and 2. PROMISSORY promise to be performed after policy was issued. Warranties: are statements or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment. The same may be expressed, implied, affirmative or promissory.

Condition: The insurer must also protect himself against fraudulent claims of loss and this he attempts to do by inserting in the policy various conditions which take the form of conditions precedent. For instance, there are conditions requiring immediate notice of loss or injury and detailed proofs of loss within a limited period.

Exceptions: It makes more definite the coverage indicated by the general description of the risk by excluding certain specified risk that otherwise would be included under the general language describing the risks assumed. Is representation part of a contract? No, it cannot qualify as an express provision in a contract ( it is a collateral inducement to the contract) but it may qualify an implied warranty( Section 40). Example: Under Section 113 it is implied that a ship is seaworthy. A representation by the insured that its communication system is defective will qualify the warranty. Hence, insured can still recover in case of loss. May a representation be withdrawn or altered? Yes, as long as the insurance has not yet been effected and the insured has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as the insurer has already been led to issue the policy (Section 41). To what date does a representation refer to? It must be presumed to refer to the date on which the contract goes into effect (Section 42). NOTE: there is no false representation if it is true at the time the contract takes effect although false at the time it is made. Example: Insured states at application that vessel is in Tokyo but is really in Hongkong , there is no false representation if at issuance vessel is already inTokyo. Conversely, there is a false representation, if it is true at the time it is made but false at the time the contract takes effect. Example: Insured states that he has never been affected with pneumonia at application, but if in the meantime, he is afflicted with pneumonia before the policy takes effect, and he does not disclose , there is a false representation. When is a representation considered false When the facts fail to correspond with its assertions or stipulations (Section 44) Must the insured communicate information of which he has no personal knowledge but merely receives the same from others? When a person has no personal knowledge of facts He may or may not communicate such information to the insurer. If he does communicate, he is not responsible for its truth (Section 43). Hence, there can be no misrepresentation When is the insured required to disclose information from a third person? When the information material to the transaction was acquired by an agent of the insured, as knowledge of the agent is also knowledge of the principal. Example: If a ship captain is aware of a defect that affects the seaworthiness, that defect must be communicated as the ship captain is under obligation to disclose it to the owner. Policy it is the written instrument in which a contract of insurance is set forth. How is it construed? Generally in favor of the insured and against the insurer. The burden of proving that the terms of the policy have been explained is upon the party seeking to enforce it. The claim of the beneficiary that since the insured was illiterate and spoke Chinese only, she could not be held guilty of concealment because the application and policy was in English (Tang vs. CA, 90 SCRA

236) Form of the Policy It shall be printed and may contain blank spaces and any word, phrase, clause or mark, sign, symbol, signature, or number necessary to complete it shall be written in the blank spaces (Section 50). IF there are riders, clauses, warranties or endorsements purporting to be part of the contract of insurance and which are pasted or attached to the policy is not binding on the insured unless the descriptive title of the same is also mentioned and written on the blank spaces provided in the policy. NOTE if pasted or attached to the original policy at the time it was issued the signature of the insured is not necessary to make it binding. if after the original policy is issued, it must be counter-signed by the insured UNLESS applied for by the insured. No rider, clauses, or warranties, or endorsements shall be attached, printed or stamped on the policy unless the form of such application has been approved by the Insurance Commissioner. Riders are forms attached to the policy when the company finds it necessary to alter or amend the applicants answer to any question in the application. Clauses are forms containing additional stipulations. Warranties are written statement / stipulations inserted on the face of the contract or incorporated by proper words of reference where the insured contracts as to the existence of facts, circumstances or conditions the truth of which are essential to the validity of the contract. Endorsements are agreements not contained but may be written or attached to policy to change or modify a part thereof. What must a policy specify A policy must specify (1) The parties between whom the contract is made (2) The amount to be insured except in open or running policies (3) The premium, or if the premium is to be determined at the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined (4)The property or life insured (5) The interest of the insured in the property insured, if not the absolute owner (6) The risks insured against (7) The period during which the insurance is to continue (Section 51) What are cover notes? It is a written memorandum of the most important terms of a preliminary contract of insurance intended to give protection pending investigation by the insurer of the risk or until the issuance of the formal policy (Section 52). It is also known as binding slip or receipt binder Effectivity of a cover note The effectivity of a cover note is 60 DAYS as within such period, a policy shall be issued including in its terms the identical assurance found under the cover rate and the premium therefore. It may however, be extended beyond 60 days and with the written approval of the Insurance Commissioner if he determines that it does not violate the Insurance Code. NOTE: The following rules have been promulgated by the Insurance Commissioner- (1) A cover note is valid for 60 days whether or not a premium is paid but it may be cancelled by either party upon at least 7 day notice to the other party (2) if the cover note is not cancelled, a regular policy must be issued within 60 days from the date of issue of the cover note,including within its terms the identical insurance (3) It may be extended with the written approval of the commissioner but may be dispensed with by a certification of the Pres. VP or GM of the insurer that the risks involved and the extension do not violate the code (4) Insurance companies may impose a deposit premium equivalent to at least 25% of the estimated premium but in no case less than PHP 500.00. When will a cover note give adequate insurance protection? It gives adequate insurance protection when it is a preliminary contract of PRESENT INSURANCE and not a mere agreement to insure at a future time, AS on acceptance of the application or issuance / delivery of the policy. (44 CJS 958). Example: (1) Agent issued a provisional policy

acknowledging receipt of premiums and stating that the insurance shall be effective upon approval and issuance of the policy by the head office. There is no protection as it is a mere acknowledgment of the payment of premiums as the effectivity of the insurance is expressly provided (LIM vs. SUNLIFE 41 PHIL 265) (2) In life insurance, a binding slip does not insure by itself as it was stated that it was subject to the approval of the insurer and the same was subsequently disapproved (GREPALIFE vs. CA, 89 SCRA 543). Is payment of a premium payment for the cover note necessary to be protected against the risk insured against? Cover note held to be binding despite the absence of a premium payment for its issuance. No separate premiums are intended or required to be paid on a cover note because they DO NOT CONTAIN THE PARTICULARS OF THE PROPERTY INSURED THAT WOULD SERVE AS THE BASIS FOR THE COMPUTATION OF PREMIUMS such being the case no premium can be fixed. The COVER NOTES should not be treated as a separate policy but should be integrated in the regular policy subsequently issued so that premiums on the regular policy should include that for the cover note( PACIFIC TIMBER vs. CA, 112 SCRA 199). Kinds of policies The kinds of policies are: (1) Open (2) Valued, or (3) Running (Section 59). An open policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss (Section 60). What is mentioned as the amount is not the value of the property but merely the maximum limit of the insurers liability. In case of loss, the insurer only pays the actual cash value at the time of loss. Example: FIRE INSURANCE, where the loss is to be determined but payment is limited to the amount stated in the policy. A valued policy is one which expresses on it face that the thing insured shall be valued at a specified sum (Section 61). The valuation of the property insured is conclusive between the parties. In the absence of fraud or mistake, such value will be paid in case of a total loss. Distinctions of open and valued policy (1) In a valued policy, proof of value of the thing after the loss is not necessary. In an open policy, the insured must prove the value of the thing insured (2) In a valued policy, the parties have conclusively stipulated that that property insured is valued at a specified sum. In an open policy, the value is not agreed but left to be ascertained upon loss (NOTE: this does not violate the principle that a contract of insurance is a contract of indemnity as long as the valuation is reasonable and is bonafide). A running policy is one which contemplates successive insurances and which provides that the object of the policy may be from time to time defined especially as to the subjects of insurance, by additional statements or indorsements (Section 62). This is ALSO KNOWN AS a Floating policy usually issued to provide indemnity for property which cannot be covered by specific insurance because of a frequent change in location and quantity. Example: Insurance procured by a retail establishment to cover its inventory that fluctuates in quantity, or is located in several areas. Cancellation of the policy No policy other than life shall be cancelled by the insurer except upon prior notice thereof to the insured. No notice of cancellation shall be effective if not based on the occurrence, after effective date of one or more grounds. (1) non-payment of premium (2) conviction of a crime arising out of acts increasing the hazard insured against. Example: insured has been convicted of arson or car theft (3) discovery of fraud or material misrepresentation. Example: insured represents himself as the owner but is not actually the owner (4) discovery of willful or reckless acts or omissions increasing the hazard insured against. Example: storage of hazardous materials in the premises

(5) physical changes in the property insured which result in the property being uninsurable. Example: private vehicle being converted into a racing vehicle (6) determination by the insurance commissioner that a continuation of the policy would place the insurer in violation of the code. Example: policy was issued absent insurable interest (Section 64). Form of notice of cancellation It must be in writing, mailed or delivered to the name insured at the address shown in the policy which shall state (1) The grounds relied upon as per Section 64, and (2) that upon written request of the named insured, the insurer will furnish the facts on which cancellation is based (Section 65). NOTES: (1) a fire insurance policy is cancelled on October 15, 1981. The insurers clerk allegedly sent notice of cancellation by mail but there was no proof that it was actually mailed and received. Insurer relies on the presumption of regularity. HELD: Considering the strict language of the law that no policy can be cancelled without prior notice it behooved on the insurer to make sure that cancellation was actually sent and received by the insured (Malayan vs. Arnaldo, 156 SCRA 672). (2) A insured his building against fire and made the loss payable to mortgagee. Upon cancellation notice was sent to the mortgagee.HELD: There was no valid notice of cancellation. The notice is personal to the insured and not to any unauthorized person (Saura Import Export vs. Philippine International Surety Co, Inc., 8 SCRA 143) Does the insured has the right to renew his policy? Yes, in insurance other than life, the named insured, may renew the policy upon payment of the premium due on the effective date of the renewal, IF, he has not been given notice by the insure of the intention not to renew or to continue reduction upon renewal of limits or enumeration of coverage by mail or delivery at least 45 days in advance of the end of the policy(Section 66).

8.CLAIMS SETTLEMENT 1. Life insurance a. The proceeds shall be paid immediately upon the maturity of the policy if there is such a maturity date b. If the policy matures by the death of the insured within 60 days after the presentation of the claim and filing of the proof of the death of the insured 2. Property insurance a. Proceeds shall be paid within 30 days after proof of loss is received by the insurer and ascertainment of the loss or damage is made by either agreement or by arbitration b. If no ascertainment is made within 69 days receipt of proof of loss, the loss shall be paid within 90 days Effects of delay of insurer If the prescribed period for both life and property insurance are not complied with, the beneficiary is entitled to the payment of: 1. Interest for the duration of the delay at the rate of twice the legal interest 2. Attorneys fees and other litigation expenses 3. Appropriate damages under the Civil Code like moral and exemplary damages when requisites are present Subrogation When a person insured in marine insurance has a demand against the others for contribution, he may claim the whole loss from his insurer subrogating the latter to his own right to contribution but no such claim can be made upon the insurer if:

1. There is a separation of interest liable for contribution 2. When the insured having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of right. Informing that the insured has a choice of recovery on the happening of a general average loss. They are: a. Enforcing the contribution against interested parties. b. Claiming the insurer, if be the latter subrogating takes place.

Notice of loss What are the rules to determine whether the insurer is liable for the loss of the thing insured. 1. Loss of which a peril insured against is the proximate cause, although a peril not contemplated by the contract may have been remote cause but the insurer is not liable for a loss of which the peril insured against was a remote cause. When must notice of loss be given and by whom Notice of loss must be given without the necessary delay by the insured or some person entitled to the benefit of the insurance. Without unnecessary delay is within a reasonable time, depending on circumstance of a peculiar case, although the courts have construed the requirement liberally in favor of the insured. Notice of loss in fire insurance, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay. When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time. All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground. If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified

F. Transportation Law Simply, it refers to the movement of persons or things from one place to another, and is immaterial whether the carrying be over land, water or air. It includes waiting time, loading or unloading, stopping in transit, and all other accessorial services in connection with the loaded movement. (See 87 C.J.S. Transportation) As a contract, it is one whereby a certain person or association of persons obligate themselves to transport persons, things or news from one place to another for a fixed price. (See 1 Blanco 640) HISTORICAL ORIGIN OF THE LAW ON TRANSPORTATION If commerce has for its object the bringing of commodities to the consumer, it follows that the merchant must transport his merchandise to the place where it is in demand. In fact, he must even transport them to other countries. This requirement has thus made transportation indispensable. LAWS ON TRANSPORTATION

Law on Common Carriers (Articles 1732 to 1766, NCC), Commercial Contracts for Transportation Overland (Articles 349 to 379, Code of Commerce), Maritime Commerce ( Articles 673 to 736, Articles 580-584 as superseded by RA 6106, Articles 806 to 845 of the Code of Commerce, Paragraph 6 of Section 3 of the Carriage of Goods by Sea Act (Commerce Act 65), Public Service Act (Commerce Act No. 146, as amended, and the Warsaw Convention of 1929 as to Carriers Liability. COMMON CARRIERS (Arts. 1732-1766, New Civil Code) 1. COMMON CARRIERS are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. 1.1 The elements of a common carrier are: (a) persons, corporation firms or associations (b) engaged in the business of carrying or transporting passengers, goods or both (c) the means of carriage is by land, water or air (d) the carrying of passengers, goods or both is for compensation (e) the service is offered to the public without distinction. Transportation defined. A contract of transportation is one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one place to another for a fixed price Classification: 1. as to object: (1) things; (2) persons; (3) news 2. as to place of travel: (1) land; (2) water; (3) air Parties to contract of transportation: (1) shipper or consignor.-- person to be transported; one who gives rise to the contract of transportation by agreeing to deliver the things or news to be transported, or to present his own person or those of other or others in the case of transportation of passengers (2) Carrier or conductor. -- One who binds himself to transport persons, things, or news as the case may be; one employed in or engaged in the business of carrying goods for other for hire (3) Consignee. -- The party to whom the carrier is to deliver the things being transported; one to whom the carrier may lawfully make delivery in accordance with its contract of carriage (but the shipper and the consignee may be one person) Common carriers vs. Private carriers: Common Carrier

Private Carrier As to Availability people Contracts with particular individuals or groups only

Holds himself out indiscriminately Extraordinary Diligence

for

all

As to require Diligence Ordinary Diligence As to regulation

Subject to state regulation

Not subject to state regulation Stipulation limiting liability Parties may agree on limiting the Parties may limit the carriers liability, carriers liability except when provided provided it is not contrary to morals or by law good customs Exempting circumstances

Prove extraordinary Art.1734,NCC

diligence

and Caso forfuito, art. 1174 NCC

Presumption of Negligence There is a presumption of fault or No presumption of fault or Negligence negligence Law on Common Carriers Governing law Law on obligations and contracts

Test for a common carrier: (1) He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for persons generally as a business, and not a casual occupation. (2) He must undertake to carry goods of the kind to which his business is confined. (3) He must undertake to carry by the methods by which his business is conducted, and over his established roads. (4) The transportation must be for hire. The true test is whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business actually transacted, or the no. and character of the conveyances used in the employment (the test is therefore the character of the business actually carried on by the carrier.) Case: an airplane owner is a common carrier where he undertakes for hire to carry all persons who apply for passage indiscriminately as long as there is room and no legal excuse for refusing; airlines engaged in the passenger service on regular schedules on definite routes, who solicit patronage of the traveling public, advertise schedules for routes, times of leaving and rates of fare, and make the usual stipulation as to baggage are common carriers Characteristics of common carriers: (1) The common carrier undertakes to carry for all people indifferently; he holds himself out as ready to engage in the transportation of goods for hire as a public employment and not as a casual occupation, and he undertakes to carry for all persons indifferently, within the limits of his capacity and the sphere of the business required of him, so that he is bound to serve all who apply and is liable for refusal, without sufficient reason, to do so (2) The common carrier cannot lawfully decline to accept a particular class of goods for carriage to the prejudice of the traffic in those goods Exception: for some sufficient reason, where the discrimination in such goods is reasonable and necessary (substantial grounds) (3) No monopoly is favored - the Commission has the power to say what a reasonable compensation to the utility and to make reasonable rules and regulations for the convenience of the traveling public and to enforce them (4) Public convenience - for the best interests of the public. Meaning of Public use. It is not confined to privileged individuals, but is open to the indefinite public; there must be a right which the law compels the owner to give to the general public. Public use is not synonymous with public interest. The true criterion is whether the public may enjoy it by right or only by permission The law prohibits unreasonable discrimination by common carriers. The law requires common carriers to carry for all persons, either passengers or property, for exactly the same charge for a like or contemporaneous service in the transportation of like kind of traffic under substantially similar circumstances or conditions. The law prohibits common carriers (CC) from subjecting any person, etc. or locality, or any kind of traffic, to any undue or unreasonable prejudice or discrimination whatsoever. Exception: When the actual cost of handling and transporting is different, then different rates may be charged Cases: (1) merchandise of like quantity may not be considered alike - the quantity, kind and

quality may be exactly the same, and yet not be alike, so far as the cost of transportation is concerned (2) Shipments may be alike although composed of different classes of merchandise difference in the charge for handling and transporting may only be made when the difference is based upon actual cost. Determination of justifiable refusal: This involves a consideration of the following: (1) Suitability of the vessels of the company for the transportation of such products; (2) Reasonable possibility of danger or disaster, resulting from their transportation in the form and under the conditions in which they are offered for carriage; (3) The general nature of the business done by the carrier; (4) All the attendant circumstances which might affect the question of the reasonable necessity for the refusal by the carrier to undertake the transportation of this class of merchandise Case: The mere fact that the carriage of dynamites may lead to destructive explosions is not sufficient to justify refusal if it can be proven that in the condition in which it is offered for carriage there is no real danger to the carrier nor reasonable ground to fear that the vessel and those on board will be exposed to unnecessary or unreasonable risks. a. Diligence Required of Common Carriers Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. The requirement is such because of the nature of the business and by reason of public policy. The failure to exercise the required degree of diligence is a breach of the contract. If loss, destruction or deterioration of the goods occurs or a death or physical injury is suffered by a passenger, there is a presumption of negligence that arises. Reasons for requiring extra-ordinary diligence. The nature of the business of common carriers and the exigencies of public policy demand that they observe extra-ordinary diligence; the business of CC is impressed with a special public duty and therefore subject to control and regulation by the state. The public must of necessity rely on the care and skill of CC in the vigilance over the goods and safety of the passengers. b. Liabilities of Common Carriers The common carrier is at all times, required to observe extraordinary diligence with respect to transport of goods. 1. To bring passengers safely to his place of destination. He is obliged to carry passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person with due regard for all circumstances. In case of death or injury, the common carriers are presumed to have been at fault or negligent in transporting the passengers unless they prove that they observed extraordinary diligence. 2. To transport the goods/ cargoes safely to the point of destination if there is loss or damage to the goods/cargoes, immediately a presumption of negligence arises that the loss/ damage to the goods/ cargoes was due to the negligence of the common carrier. The shipper may only prove that the goods arrived in a damaged condition or that they did not arrive at all. LOADSTAR SHIPPING CO., INC VS. PIONEER ASIA INSURANCE CORP. Jan 24, 2006 A common carrier is required to observe extraordinary diligence in the vigilance over the goods it transports.

2. VIGILANCE OVER THE GOODS RULES governing common carriers LIABILITY over Goods: General RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods, UNLESS the same is due to any of the following causes only: 1) 2) 3) 4) 5) Flood, storm, earthquake, lightning, or other natural disaster or calamity; Act of the public enemy in war, whether international or civil; Act or omission of the shipper or owner of the goods; The character of the goods or defects in the packing or in the containers; Order or act of competent public authority. (Art. 1734)

a. Exempting Causes (1) Requirement of absence of negligence (Art. 1735) In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the preceding article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required in article 1733. RULE: The common carrier (CC for brevity), is at all times, required to observe extraordinary diligence with respect to transport of goods. Hence, in case of damages to cargo, the CC is presumed not to have observed the extraordinary diligence required. (2) Absence of delay However, the CC may absolve itself from liability by proving any of the following DEFENSES: A. That the CC encountered: a. An act of God; There must have been no delay on the part of the common carrier. Otherwise, if delayed and not for good reason, then it shall be held liable notwithstanding the fact that all the subsequent requisites were present. Must be an unforeseen event or an event which cannot be avoided. The carrier must have exercised extraordinary diligence before, during, and after the time of the accident. The proximate cause must not be committed by the carrier. If the proximate cause of the event is caused by the carrier, then he cannot invoke the act of God defense. Under the rule on Contributory Negligence, if the negligence attributable to carrier is not proximate in character, the carrier shall be responsible, although such liability shall be mitigated. b. c. d. e. Act of public enemy in war; Act by a competent public authority; Acts/omissions of the shipper or his agent; The goods or the packaging is inherently defective.

(3) Due diligence to prevent or lessen the loss Even if the loss, destruction, or deterioration of the goods should be caused by the character of the goods, or the faulty nature of the packing or of the containers, the common carrier must exercise due diligence to forestall or lessen the loss.

REQUISITES for natural disaster or calamity 1. The natural disaster must have been the proximate cause of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before , during and after the natural disaster 4. The common carrier has not negligently incurred delay in transporting the goods REQUISITES for act of public enemy 1. The act of public enemy must have been the proximate of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before, during and after the act of public enemy in war. REQUSITE for act or omission of Shipper 1. That the act or omission of the shipper /owner of the goods must have been the proximate cause of the loss 2. That it must have been the only cause of the loss. REQUSITES for character of goods, fault in packing or containers1. That the loss, destruction or deterioration was caused by the character of the goods; or the faulty nature of the packing /containers 2. That the common carrier had exercised due diligence to forestall or lessen the loss. REQUISTES for the act of public authority 1. The common carrier must prove that the public authority had the power to issue the order for the destruction / seizure of the goods. Defensive strategy to escape liability is to invoke that it exercised extraordinary diligence to prevent or minimize the loss at the time the accident occurred. b. Contributory Negligence is the failure to observe due diligence that an ordinary or prudent man undertakes in relation to the negligence of another. Negligence is the failure to observe due diligence with respect to the circumstances at hand.

c. Duration of liability (1) Delivery of goods to Common Carrier (2) Actual or constructive delivery In a contract for carriage of goods- it commences from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same shall have been delivered actually or constructively by the carrier to the consignee who shall have the right to received them. Under maritime laws, the responsibility of the carrier ends when the goods were transmitted by the carrier to the customs arrastre operator. Recall that before the goods are delivered to the consignee, the state has the responsibility to ensure that the goods being brought in are in accordance with the law. EFFECT: The carrier would no longer be liable. The succeeding relationship would be between the consignee and the arrastre operator, the relationship governing them would be akin to a contract of Deposit. There is already an existing Contract of carriage when the carrier took possession of the cargo by placing it on a lighter or barge manned by its authorized employees. (COMPANIA

MARITIMA vs. INSURANCE COMP) A bill of lading that was issued covering certain shipment which contained a provision that the carrier does not assume liability for any loss /damage to the goods once they have been under the custody of the custom or other authorities or when they have been delivered at ships tackle have been considered valid, because it was held that it is not contrary to morals and public policy; said stipulation is clear and have been adopted to mitigate the responsibility of the common carrier. (LU DO vs. BINAMIRA) (3) Temporary unloading or storage Under Art. 1737, the temporary unloading or storage of the goods during the time that they are being transported does not interrupt the extra-ordinary responsibility of the CC. Exception: Where the shipper or owner exercises its right of stoppage in transitu (the act by which the unpaid vendor of goods stops their progress and resumes possession of them, while they are in the course of transit from him to the purchaser, and not yet actually delivered to the latter. This is exercised when the buyer is or becomes insolvent. Requisites of Stoppage in Transitu 1. Seller must be an unpaid seller; 2. Goods must be in transit; 3. Buyer must be in a state of insolvency; EFFECT: Once the right is exercised, the common carrier becomes a mere warehouseman. In the event that the UNPAID Seller exercises its right of stoppage in transitu, the carrier thereafter holds the goods in the capacity of an ordinary bailee or warehouseman and shall be liable only as such , upon the theory that the exercise of the right by the unpaid seller , such terminates the contract of carriage. d. Stipulation for limitation of liability A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: 1. In writing, signed by the shipper or owner; 2. Supported by a valuable consideration other than the service rendered by the common carrier; and 3. Reasonable, just and not contrary to public policy. Art. 1744 SOME VALID STIPULATIONS LIMITING CARRIER'S LIABILITY: 1. account of strikes or riot; 2. value of the goods appearing in bill of lading UNLESS shipper declares a greater value; 3. Contract fixing the sum that may be recovered. (1) Void stipulation (Art. 1745) Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: 1. That the goods are transported at the risk of the owner or shipper; 2. That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; 3. That the common carrier needs not observe any diligence in the custody of the goods; 4. That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; 5. That the common carrier shall not be responsible for the acts or omission of his or its employees; 6. That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; and

7. That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. Art. 1745 (2) Limitation of liability to fixed amount A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. Art. 1748 (3) Limitation of liability in absence of declaration of greater value A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if reasonable and just under the circumstances, and has been fairly and freely agreed upon. Art.1749 The law of the country to which the goods are to be transported governs the liability of the common carrier in case of loss, destruction or deterioration. If to be transported in the Phil, the liability shall be governed primarily by the Civil Code. In matter not regulated by the Civil Code, the rights and obligations shall be governed by the Code of Commerce and by Special laws. Hence, the Carriage of Goods by Sea act is suppletory to the provisions of the Civil Code. e. Liability for baggage of passengers The provisions of articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable. Art. 1754 (1) Checked- in baggage If in the custody of the carrier, it will be required to exercise extra- ordinary diligence. The carrier cannot be said to be remiss in the exercise of the required degree of diligence when it does not cause to opened the luggage or baggage of its passengers, who upon an inquiry have disclosed the contents to the satisfaction of the carrier. (2) Baggage in possession of passengers Liability for baggage in custody of passenger. -- Art. 1754 refers to Arts. 1998, 20002003 concerning the responsibility of hotel keepers. Under 1998, the baggage of passengers in their personal custody or in that of their EEs while being transported shall be regarded as necessary deposits. The CC shall be responsible for such baggage as depositaries, provided that (1) notice was given to them or to their EEs, of the baggage brought by their passengers, and that (2) the passengers take the precautions which said CCs advised relative to the care and vigilance of their baggage. Responsibility for acts of EEs, thieves. Under Art. 2000, a CC is responsible as a depositary for the loss of or injury to the baggage in the personal custody of passengers, caused by the CC's servants or EEs but not those caused by force majeure. Under Art. 2001, the act of a thief or robber, who has entered the CC's vehicle is not deemed force majeure, unless it is done with the use of arms or through irresistible force. Under Art. 2002, the CC is not liable if the loss of the baggage in the personal custody of the passenger is due to the acts of the passengers, his family, servants or visitors, OR if the loss arises from the character of the baggage. Stipulations limiting liability. -- Under Art. 2003, a CC cannot free himself from responsibility by posting notices to the effect that he is not liable for the baggage brought by the passengers. Any stipulation diminishing the responsibility required under 1998 to 2001 shall be void.

Fire may not be considered as a natural disaster or calamity. It does not fall within the category of act of God UNLESS caused by lighting or by natural disaster or calamity. It may even be caused by actual privy or fault of the carrier. (EASTERN SHIPPING VS. IAC) The Civil Code provisions on Common carrier shall not be applied when the carrier is not acting as such but as a private carrier. The stipulation in the charter party absolving the owner from liability for loss due to the negligence of its agent would be void only if strict public policy governing common carriers are applied. Such policy has no force when the public at large is not involved, as in the case of a ship totally chartered for the use of a single party (HOME INSURANCE vs. AMERICAN STEAMSHIP) In case where the Common carrier w/o just cause1. Delays the transportation of goods 2. Changes the stipulated route / usual route The annulment of the agreement limiting the carriers liability is no longer necessary; the carrier cannot simply avail of the benefit /defense of limited liability. When the conditions printed in the back of the ticket stub are in letters so small that they are hard to read, this would not warrant the presumption that the passenger were aware of those conditions such that he had fairly and freely agreed to them. The passenger therefore is not bound by such stipulations. (SHEWARAN vs. PAL) 3. SAFETY OF PASSENGERS DUTY: A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. The presumption in case of death of or injuries to passengers is the same with loss or damage to goods: Common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in articles 1733 and 1755. (a) Void stipulations RULE: The responsibility of a common carrier for the safety of passengers as required in articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. EXCEPTION: When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for willful acts or gross negligence. A reduction of fare does not justify any limitation of the common carrier's liability.

(b) Duration of liability In a contract for the carriage of passengers- it commences the moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported. Such person must have a bona fide intention to use the facilities of the carrier, possess sufficient fair with which to pay for his passage, and present himself to the carrier for transportation in the place and manner provided. If he does not do so, he will not be considered a passenger and the carrier does not owe him extraordinary diligence. (1) Waiting for carrier or Boarding of carrier It is the duty of carriers of passengers to stop their conveyances for a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for

injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances. A public utility bus, once it stops, is in effect making a continuous offer to bus riders. The carrier was liable for breach of the contract when a drunk Nicanor Navidad died after he fell on the LRT tracks and was struck by a moving train. (2) Arrival at destination The relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carriers conveyance or has had a reasonable opportunity to leave the carriers premises. A person, who, after alighting from a train, walks along the station platform or has returned to retrieve a piece of baggage he had left is still considered a passenger. (c) Liability of the Common carrier for acts of others: (1) Employees Is the carrier liable for death of or injuries to the passengers due to the negligence or willful acts of ITS EMPLOYEES? YES, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. Art. 1759 Illustrative rule: Two passengers engage in a fist-fight inside a bus terminal. An on-duty driver attempts to pacify them but instead kills one. The carrier is liable! But, if the killing of the passenger occurred while the driver is off-duty, the carrier is not liable. (Recall the case of Gillaco v. Manila Railroad, the carrier was held not liable when its employee, a security guard who harbored a grudge against a fellow passenger, shot and killed the latter. The guard committed the killing while he was off-duty.) The Common carrier is held liable because 1. The driver, although stopping the bus, nevertheless did not put off the engine. 2. He started to run the bus even before the conductor gave him the signal to go and while the passenger was still unloading part of the baggage. ( LA MALLORCA vs. CA) In the case of LACAM vs. SMITH, the Court held that an accident caused by defects in the automobile is not a caso fortuito. The rationale of the carriers liability is the fact that the passenger has neither the choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. (2) Other passengers and strangers Is the carrier liable for death of or injuries to the passengers due to the willful acts or negligence of OTHER PASSENGERS OR OF STRANGERS? YES, a common carrier is responsible for injuries suffered by a passenger if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. Art. 1763 This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees, as this defense is only available in actions culpa aquiliana. The DUTY of the PASSENGER is to observe the diligence of a good father of a family to avoid injury to himself. The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced. In case of injury as a result of a factory defect of the appliance purchased from the

manufacturer whenever it appears that the defect could have been discovered by the carrier if it exercised the degree of care under the circumstances, the manufacture is considered as agent or servant of the carrier, as far as regards the work constructing the appliance. Accdg. To this theory, the good repute of the manufacturer will not relieve the carrier from liability. Condition printed on the back of a passenger ticket commonly known as CONTRACT OF ADHESION, being drafted only by one party, usually the corporation, and the only participation of the other party (passenger) is the signing of his signature his adhesion thereto calls for greater strictness and vigilance on the part of the court of justice with the view of protecting the weaker party from abuses. Such contract if enforced will be subversive of public good, thus placing the common carrier at a decided advantage over those who may have legitimate claims against it. The said condition is therefore unenforceable, as contrary to public policy- to make the court accessible to all those who have need of their services. d. Extent of liability for damages Moral damages are not recoverable on breach of contract of carriage in view of ART.2219-20 NCC. EXCEPTIONS: 1. Where the mishap results in the death of a passenger; because the common carrier becomes subject to the rule in ART.2206 NCC entitles the spouse, descendants, and ascendants to moral damages for mental anguish as a result of the death of the deceased. 2. Where it is proved that carrier was guilty of fraud or bad faith EVEN if death does not result. Mere carelessness does not per se justify an inference of malice or bad faith on the part of the common carrier; must be GROSS negligence. In addition, the carrier may also be liable for: (a) loss of earning capacity of the deceased unless the deceased on account of a permanent physical disability not caused by the defendant had no earning capacity at the time of his death. (b) if the deceased was obliged to give support according to Article 291, Civil Code, the recipient who is not an heir, may demand support from the person causing death for a period not exceeding 5 years, the exact period to be fixed by the court. Prevailing jurisprudence has fixed indemnity for death at 50,000.00 Generally exemplary damages will be adjudged against a common carrier when: (a) he authorized the wrongful act s of his agent, or (b) he ratifies the same thereafter. Concurring causes of action arising from negligent act of the common carrier: 1. Culpa Contractual/breach of contract Only the carrier is primarily liable not the driver, because there is no privity between the driver and the passenger. (Art 1759, NCC.) No defense of due diligence in the selection and supervision of the employees. 2. Culpa aquiliana (quasi delict) The carrier and the driver are solidarily liable as joint torfeasors. (Art 2180 NCC) Defense of due diligence in the selection and supervision of employees is available. Exception: maritime tort resulting in collision Although the relation of passenger and carrier is contractual both in origin and nature, nevertheless, the act that breaks the contract may also be a tort . (Air france vs. Carrascoso 18 SCRA 155) In the case of injury to a passenger due to the negligence of the driver of the bus on which the passenger was riding on and of the driver of another vehicle, the drivers as well as the owners of the two vehicles are jointly and severally liable for damages. It should not make any difference that the liability of the bus owner springs from a contract

while that of the driver springs from a quasi delict. (tiu vs. arriesgado) 3. Culpa criminal( Criminal Negligence) The driver is primarily liable. The carrier is subsidiarilly liable only if the driver is convicted and declared insolvent. (Art 100 RPC) The principle of last clear chance would call for application in a suit between the owners and drivers of the two colliding vehicles. It does not arise where a passenger demands responsibility from the carrier to enforce its contractual obligations. (Phil. Rabbit Bus Lines vs. CA) 4. Bill of Lading What is a bill of lading? A bill of lading is a written acknowledgement of receipt of goods and agreement to transport them to a specific place to a person named or to his order or bearer. It comprehends all methods of transportation. A bill of lading delivered and accepted constitutes the contract of carriage even though not signed, because the acceptance of a paper containing the terms of a proposed contact generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice (keng hua paper Products Inc. vs. CA, feb 1998)

Note: Ambiguity is construed against the carrier, the contract being one of adhesion. A. ThreeFold Nature of Bills of Lading (CoReSy) 1. A contract in itself and the parties are bound by its terms; 2. A receipt; and 3. A symbol of the covered by it They are also documents of title, and if negotiable in form they can constitute negotiable documents of title. A document of title is any document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of goods, or authorizing the possessor of the document to transfer or receive, either by endorsement or delivery, goods represented by such document. Sample MCQ The following are the three-fold characteristic of a bill of lading except, a. A contract in itself and the parties are bound by its terms; b. A receipt; c. A symbol of the covered by it; d. Always negotiable; ANS. d B. Delivery of Goods General rule: The merchandize shall be transported at the risk and venture of the shipper, if the contrary has not been stipulated.

(1) Period of delivery Time for delivery of goods Stipulated in the contract of Bill of Lading: The carrier shall be bound to forward them in the first shipment of the same or similar goods, which he makes to the points where he must deliver them. Should he not do so, the damages caused by the delay shall be for his account. No Stipulation The carrier must deliver the goods within the time fixed. For failure to do so, the carriers shall pay the indemnity stipulated in the bill of lading. Also, damages shall be paid if the carrier refuses to pay the stipulated indemnity or is guilty of fraud in the fulfillment of his obligation. Note: Judicial deposit can be made if the consignee cannot be found. (2) Delivery without surrender of bill of lading Where the bill of lading is issued to the order of the shipper, the carrier is under no obligation to deliver the merchandize mentioned in the bill of lading except upon the presentation of the bill of lading duly indorsed by the shipper. Obligation to return the Bill of Lading 1. The obligation to return the bill of lading arises after the contract has been complied with. a. The bill of lading shall be returned to the carrier who may have issued it, and by virtue of the exchange of this title for the article transported, the respective obligations and actions shall be considered cancelled, unless in the same act the claims which the parties may wish to reserve are reduced to writing, with the exception of that provided by article 366. b. The claims referred to are those for damages that can be ascertained from the outside of the packages at the time of the receipt. 2. In case the consignee, upon receiving the goods, cannot return the bill of lading because of its loss or of any other cause, he must give the latter a receipt for the goods delivered, this receipt shall produce the same effect as the return of the bill of lading. (3) Refusal of the consignee to take delivery 1. In case of partial delivery, consignee may refuse to receive those delivered if they cannot be used independently of those not delivered. 2. If the goods delivered were rendered useless for sale or consumption, consignee may refuse to receive. 3. If the goods are damaged to such an extent that their value id diminished, carrier must pay the difference in value a judged by experts. Note: In the first 2 cases, consignee may exercise abandonment and be entitled to the full value of the goods. When responsibility of carrier begins The responsibility of carrier commences from the moment he receives the merchandise.

The Delivery to him must be made either to him personally, or through his duly authorized agent.

Right to refuse packages Gen. Rule: a common carrier cannot ordinarily refuse to carry a particular class of goods to the prejudice of the traffic in those goods. Exception: However, under Art. 365, carriers are authorized to refuse packages if they are unfit for transportation. When may a consignee of goods abandon the goods and recover the value thereof from the carrier? In any of the following cases: (1) Under Art. 363, in case of partial non-delivery, where the consignee proves that he cannot make use of the goods capable of delivery independently of those not delivered. (2) Under Art. 365, where the goods are rendered useless for sale and consumption for the purpose for which they are properly destined; or (3) Under Art. 371, where there is delay through the fault of the carrier. Keywords: (PaU-D) Right of the shipper or the consignee 1. A right to the payment of damages when the goods are lost or mislaid; and 2. Right to abandon in cases of delay on account of fault of the carrier as the consignee may leave the goods transported in the hands of the carrier, informing him thereof in writing before the arrival of the same at the point of the destination. Keywords: (Aban-Dam) C. Period for filing claims Applicable laws on period to file claims: Article 366 of the Code of Commerce and the Carriage of Goods by the Sea Act (COGSA) cover the steps that the shipper or consignee must take to recover damages from carrier in the event carrier refuses to pay. A distinction must be made between inter-island (coastwise) and overseas trade. Interisland trade is covered by Art. 366, while overseas trade is covered by COGSA. (1) Inter-island if goods arrived in damaged condition: a. If damage is apparent, the shipper must file a claim immediately. b. If damage is not apparent he should file a claim within 24 hours from delivery. Note: The filing of claim is a condition precedent for recovery. (2) Overseas Where goods arrived in a damaged condition from a foreign port to a Philippine Port of Entry: a. Upon discharge of goods, if the damage is apparent claim should be filed immediately; b. If damage is not apparent, claim should be filed within 3 days from delivery. D. Period for filing actions If the claim is filed, but the carrier refuses to pay carriers liability can be enforce in court by filing a case: a. Within 6 years, if no bill of lading has been issued, or

b. Within 10 years, if a bill of lading has been issued. Unlike in Art. 366 of Code of Commerce, under COGSA, such a claim is not a condition precedent, but an action must be filed against carrier within a period of one (1) year from discharge. If there is no delivery, the one-year period starts to run from the day the vessel left port (in case of undelivered or lost cargo), or from delivery to the arrastre (in case of damaged cargo).

For suits not predicated upon loss or damage but on alleged misdelivery or conversion of the goods, the applicable rule on prescription is that found in the New Civil Code; either ten years for breach of a written contract or four years for quasi-delict, and not the rule on prescription in the COGSA. (ANG VS. AMERICAN STEAMSHIP AGENCIES INC.)

5. MARITIME COMMERCE Special contract of maritime commerce: 1.charter party 2.Bill fo lading 3. loan ofbottomry/respondentia 4.contract of transportationos passengers 5.Marine insurance A. CHARTER PARTY Contract by virtue of which the owner or agent binds himself to transport merchandise or persons of a fixed price. It may either be contract of affreightment (time and Voyage Charter) and bareboat or demise charter. FORMAILITIES REQUIRED FOR A CHARTER PARTY: 1. in writing 2. drawn in duplicate 3. signed by the parties 4. contain stipulation Note : Not all requisites are essential for the validity of charter party Definition of terms: (1) Bareboat/ Demise Charterinvolves the transfer of full possession and control of the vessel to the charterer. The entire control and management of the vessel is given up to the charterer. The charterer mans the vessel with his own people. (2003 Bar exams) The owner of the vessel has no more insurable interest on the vessel. In case of loss of the vessel, the shipowner can recover the value of the vessel from the charterer .(Caltex vs. sulpicio line, 1999) (2) Time Charter b. until a fixed day/ for a determined number of days and months c. It is a contract to use the vessel for a particular period of time, the charterer obtaining the right to direct the movements of the vessel during the chartering period, although the owner retains possession. It is considered a contract of affreightment. (acts as a Common Carrier) (3) Voyage/ Trip Charter

a. outgoing/return/roundtrip b. It is a contract for the hire of a vessel for one or series of voyages usually for the purpose of transporting goods for the charterer. The voyage charter is a contract of affreightment and is considered a private carriage. Sample MCQ What type of charter is the one that involves the transfer of full possession and control of the vessel to the charterer? a. Time charter b. Voyage charter c. Trip charter d. Demise Charter ANS. d

B. Liability of ship owners and ship agents

Definition of Terms: Ship owner - A person who has possession or control in the management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues. Ship agent A person entrusted with provisioning and representing the vessel in the port in which it may be found; also includes the ship owner LIABILITY OF SHIP OWNER AND SHIP AGENT: 1. For the acts of the captain 2. Contracts entered into by the captain to repair, equip, and provision the vessel PROVIDED that the amount claimed was invested for the benefit of the vessel 3. Indemnities in favor of third person that may arise from the conduct of the captain in the care of goods and safety of passengers transported. 4. Tort or quasi-delict committed by captain EXCEPT collision with another vessel. 5. Damages in case of collision due to the fault, negligence or want of skill of captain, sailing mate or by other member of the complement. SHIP AGENT'S AND OWNERS LIABILITY LIMITED: By abandoning the vessel with all her equipment and the freight it may have earned during the voyage(by NECESSARY IMPLICATION); limited to the value of the vessel or its insurance in view of the so-called REAL AND HYPOTHECARY nature of maritime law. Effect: cessation of the responsibility of the owner POWER AND FUNCTIONS AND LIABILITIES OF SHIP AGENT: 1. Capacity to trade; 2. Discharge duties of the captain in case of the latter's absence; 3. Contract in the name of the owners with respect to repairs, details of equipment, armament, and all that relate to the requirements of navigation; 4. Order of new voyage and make a new charter or insure the vessel after obtaining

authorization from the ship owners. DUTY OF SHIP AGENT TO DISCHARGE THE CAPTAIN AND MEMBERS OF THE CREW: - If the seamen contract is not for a definite period or voyage, he may discharge them at his discretion - If for a definite period, he may not discharge them until after the fulfillment of their contracts EXCEPT on the ff. grounds: . insubordination in serious matters . robbery . theft . habitual drunkenness . damage caused to the vessel or to its cargo through malice, manifest or proven negligence

EFFECT/LOSS/DESTRUCTION OF VESSEL:

1. Extinguishes liability arising from the conduct of the captain in the vigilance of the goods and for the safety of the passengers and for any liability arising from negligent acts of the captain 2. Extinguishes liability for the wages of the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture 3. Liability for collision CAPTAINS AND MASTERS OF THE VESSEL Difinition of Terms: Captain- who govern vessels that navigate the high seas or ships of large dimensions and importance, although engaged in the coastwise trade Masters- who command smaller ships engaged exclusively in the coastwise trade (1.) LIABILITIES OF THE SHIP AGENT/SHIP OWNER FOR ACTS DONE BY THE CAPTAIN TOWARDS PASSENGERS AND CARGOES MAKING THEM SOLIDARILY LIABLE TO THE LATTER: 1. damages to vessel and to cargo due to lack of skill and negligence 2. theft and robbery of the crew 3. losses and fines in violation of laws 4. damages due to mutinies 5. damages due to misuse of power 6. deviations 7. arrival under stress 8. damages due to non-observance of marine regulations DOCTRINE OF LIMITED LIABILITY (HYPOTHECARY NATURE OF MARITIME COMMERCE) ART. 587, CODE OF COMMERCE 1994, 1997,1999 and 2000 bar exams

1.

The liability of the ship owner is limited to the value of the vessel. The limited liability of the owner is confined to the vessel, equipment and freight or insurance, if any. If the shipowner has abandoned the ship, equipment and freight, his liability is extinguished.

2.

If the vessel sinks the liability of the owner is extinguished, although he may have other properties.

3.

If the vessel does not sink, the owner may exercise the right of abandonment and the liability of the shipowner is limited to the value of the vessel.

(2). EXCEPTIONS TO LIMITED LIABILITY RULE: 1. When the vessel is not abandoned by the owner or ship agent

2.

When the vessel is covered by insurance

3.

Expenses for repair of the vessel before it sails

4.

Claims of employees under the labor laws

5.

When shipowner/ship captain is at fault or guilty of negligence. a. lack of proper and adequate equipment(insufficient lifevests) b. lack of proper technical training of the offices and of the vessel

Monarch Ins Co.vs. Ca; Allied guarantee insurance Co vs CA & Equitable Insurance vs. CA, June 8, 2000 As a general rule, a ship owner's liability is merely co-extensive with his interest in the vessel, except where actual fault is attributable to the shipowner. Thus, as an exception to the limited liability doctrine, a shipowner or ship agent may be held liable for damages when the sinking of the vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure the seaworthiness of the vessel. The instant petitions cannot be spared from the application of the exception to the doctrine of limited liability in view of the unanimous findings of the courts below that both Aboitiz and the crew failed to ensure the seaworthiness of the M/V P. Aboitiz.( Aboitiz Shipping Corp vs CA, October 17,2008)

C. Accidents and Damages in Maritime Commerce 1. Averages 2. Arrival Under stress 3. Collision 4. Shipwreck Average

An extraordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both, and all damages or deterioration suffered by the vessel from departure to the port of loading to the consignment (art 806 Code of commerce) The person whose property has been saved must contribute to reimburse the damage caused or expense incurred if the situation constitutes general average. It is classified into: (1) general or gross average or (2) simple or particular. Distinctions Between Particular and General Average Particular/ simple Gross/ general definition Damages or Damages or expenses caused to expenses the vessel or cargo deliberately that did not inure caused in order to to the common save the vessel, its benefit, and borne cargo orboth from by respective real and known owner.( art 809) risk.(811) Liability The owner of the All persons having goods which gave an interest in the rise to the expense vessel and the or suffered the cargo therein at damage shall bear the time of the this average.(810) average shall contribute to satisfy this average(812) The insurers and lenders on bottomry and respondentia shall likewise contribute Numbers of interests involved Only one interest Several interests is involved involved Share in the damage/expense 100% share In proportion to the value of the owners property saved Right to recover No reimbursement There may be reimbursement Requisites of Gross or General average 1. Common danger that both the ship and the cargo, after has been loaded, are subject to the voyage, or in the port of loading or unloading that the danger arises from the accidents of the sea, dispositions of the authority or faults of men, provided that the circumstances producing the peril should be

ascertained and imminent or may rationally be said to be certain and imminent. 2.Deliberate Sacrifice Gen. rule: sacrifice is made through the jettison of the cargo or part of the shipis thrown overboard DURING THE VOYAGE. Exceptions: a. where the sinking of a vessel is necessary to extinguish a fire in a port, roadsteads, creek or bay b. where cargo is transferred to lighten the ship on account of a storm to facilitate entry into a port. 3. Sucess Pupose: to be able to demand general contribution 4. Proper formalities and legal steps a. procedure for recovery b. assembly and deliberation c. resolution of the caption d. entry of the resolution in the logbook e. detailed minutes f. delivery of the minutes to the maritime judicial authority of the first port, within 24hours from arrival Ratification by the captain under oath. Goods Not Covered By General Average Even if sacrificed: Goods carried on deck 1.goods not recorded in the books or records of vessel 2.fuel for the vessel if there is more than sufficient fuel for the voyage. JETTISON It is the act of throwing cargo overboard in order to lighten the vessel ORDER OF GOODS TO BE CAST OVERBOARD IN CASE OF JETTISON: 1. those which are on the deck, preferring the heaviest one with the least utility of value 2. those which are below the upper deck beginning with the one with greatest weight and smallest value jettisoned goods are not res nullius nor deemed abandoned within the meaning of civil law so as to be the object of occupation by salvage. (2.) Collision defined: Strictly speaking, collision refers to the contract of two moving vessels. If one vessel is moving while the other is stationary, the same is more appropriately called allision. Nevertheless, for purposes of applying the provisions of the Code, collision includes collision per se and allusion. Cases of collision: 1. due to the fault, negligence or lack of skill of the captain, sailing mate or the complement of the vessel--under 826, the shipowner shall be liable for the losses and damages 2. due to the fault of both vessels --> under 827, each vessel shall suffer its own losses, but as regards the owners of the cargoes, both vessels shall be jointly and severally liable 3. where it cannot be determined which of the 2 vessels is at fault --> under 828, each vessel shall suffer its own losses, and both shall also be solidarily responsible for the losses and damages caused to their cargoes 4. collision due to fortuitous event or force majeure --> under 830, each vessel shall bear its own damages 5. where two vessels collide with each other without their fault but by reason of the fault of a third vessel --> under 831, the owner of the third vessel causing the collision shall be liable for the losses and damages 6. a vessel which is properly anchored and moored may collide with those nearby by reason of a storm or other cause of force majeure --> under 832, the vessel run

into shall suffer its own damages and expenses Nautical Rules to determine negligence: 1. When 2 vessels are about to enter a port, the farther one must allow the nearer to enter first; if they collide, the fault is presumed to be imputable to the one who arrived later, unless it can be proved that there was no fault on its part. 2. When 2 vessels meet, the smaller should give the right of way to the larger one. 3. A vessel leaving port should leave the way clear for another which may be entering the same port. 4. The vessel which leaves later is presumed to have collided against one who has left earlier. 5. There is also a presumption against the vessel which sets sail at night. 6. The presumption also works against the vessel with spread sails which collides with another which is at anchor, and cannot move, even when the crew of the latter has received word to lift anchor, when there was not sufficient time to do so or there was fear of a greater damage or other legitimate reason. 7. The vessel which is not properly moored or does not observe the proper distances, has the presumption against itself. 8. The vessel which is moored at a place not used for the purpose, or which is improperly moored or does not have sufficient cables, or which has been left without watch, has also against itself the presumption. 9. The same rule applies to those vessels which do not have buoys to indicate the location of its anchors to prevent damage to these vessels which may approach it. Zones in time of collisions (3 time zones): 1. all the time up to the moment when the risk of collision may have said to have begun --> within this zone, no rule is applicable because none is necessary. Each vessel is free to direct its course as it deems best with reference to the movements of the other vessel. 2. the time between the moment when the risk of collision begins and the moment when it has become a practical necessity. 3. the time between the moment when collision has become a practical certainty and the moment of actual contact

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

1. one vessel at fault- such vessel is liable for damage caused to innocent vessel as well as damages suffered by owners of cargo of both vessels 2. both vessels at fault- each vessel must bear its own loss but the shippers of both vessel may go against the ship owner who will be solidarily liable 3. vessel at fault not known- same as rule 2 4. third vessel at fault- same rule 1 5. fortuitous event- no liability, each bear its own loss Rules governing LIABILITIES of parties in case of COLLISION: (1995, 1997,1998, &2007 bar exams) 1. Where collision is due to the negligence or malice of the captain and/or other ship officers of one vessel, the ship owner of such vessel shall be liable for all resulting damages. 2. Where collision is due to the fault of both vessels, each vessel shall suffer their respective losses but as regards to the owners of the cargoes, both vessels shall be jointly and severally liable. 3. If it cannot be determined which vessel is at fault, each vessel shall suffer its own loses and both shall be solidarily liable for loses or damages on the cargo. (DOCTRINE OF INSCRUTABLE FAULT) 4. The vessels may collide with each other through fortuitous event or force majeure. In which case, each shall bear its own damage. 5. Two vessels may collide without their fault but by reason of a third vessel . The third vessel shall be liable for losses and damages sustained. Requisite for RECOVERY arising from collision: 1. Protest must be made within 24 hours before: a) Competent authority at the point of collision or b) At the first port of arrival, if in the Philippines and to the Philippine Consul, if the collision took place abroad. Injuries to persons and damage to cargo of owners not on board on time of collision need not be protested. Article 835, Code of Commerce: In case of collision, there must be a marine protest to recover collision damage; in such a case, the marine protest is a condition sine qua non and not merely a disclaimer unlike in the case of arrival under stress and shipwreck. D. Carriage of Goods by Sea Act (1.) Application: Applicable to all transportation of goods by sea in foreign trade to and from Philippine ports AND does not apply to purely domestic transport. (2.) NOTICE of LOSS or DAMAGE to the goods? (1992, 1995, 20000 & 2005 bar exams) If the damage is apparent, then notice must be immediately given. The notice may either be in writing or orally. If the damage is not apparent, notice must be given within three days from such delivery. Failure to give notice is not a bar to the action to file provided the filing of the suit is made within one year from delivery to consignee. Notice requirements: COGSA: Sec. 3(6) If loss or damage is apparent - protest as soon as receipt of goods If not apparent -> within 3 days of delivery Rationale behind the 3-day notice and relatively short prescriptive period: - to provide carrier an opportunity to look for the lost goods

- to discover who was at fault -in case of transshipment, to determine, when and where damage occurred. Code of Commerce: Art. 366 apparent - protest at time of receipt non-apparent - within 24 hours after receipt WARSAW: Art. 26 in case of damage of: baggage - within 3 days from receipt goods - within 7 days in case of delay: within 14 days from receipt (3.) Prescriptive period the carrier and the agent shall be discharged form liability in respect of loss or damage unless suit is brought within 1 year from: (1) in case of damaged goods: from the time delivery of the goods was made (2) in case of non-delivery (i.e., lost goods): from the date the goods should have been delivered Loss or damage as applied to the COGSA contemplates a situation where no delivery at all times was made by the shipper of the goods because the same had perished, gone out of commerce, or disappeared in such a way that their existence is unknown or they cannot be recovered. It does not include a situation where there was indeed a delivery but to the wrong person or a misdelivery (Ang vs. American steamship Agencies 19 scra123) and damage arising from delay or late delivery( Mitsui O.S.K line ltd vs CA 287 scra 366) in such instance the civil code rules on prescription shall apply. Hence, in case of misdelivery (delivery to wrong person) or conversion of the goods, the rules on prescription found in the Civil Code shall apply (10 years for contracts; 4 years for tortuous obligations) The one year period is suspended by: a.the express agreement of the parties(Universal Shipping Lines Inc vs. IAC 1990) b.the filing of an action in court until it is dismissed the 1yr period shall run from delivery of the last package and is not suspended by extrajudicial demand. the one year period shall run from delivery to the arrasstre operator and not to the consignee 4. Limitation of Liability [sec. 4 (5)] Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package of lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. This declaration, if embodied in the bill of lading, shall be prima facie evidence, but shall not be conclusive on the carrier.

By agreement between the carrier, master or agent of the carrier, and the shipper another maximum amount than that mentioned in this paragraph may be fixed: Provided, that such maximum shall not be less than the figure above named. In no event shall the carrier be liable for more than the amount of damage actually sustained.

Neither the carrier nor the ship shall be responsible in any event for loss damage to or in connection with the transportation of the goods if the nature or value thereof has been knowingly and fraudulently misstated by the shipper in the bill of lading.

Note:

The package/ container contemplated by the law to limit the liability of the carrier should be sensibly related to the unit in which the shipper packed the goods and described therein. Such container must be given the same meaning and classification as a package and customary freight unit (Aboitiz Shipping Corp. vs. CA, 188 SCRA 387) (6.) Public service Law Act ORDINARY AND PRIMARY PURPOSE OF THE PUBLIC SERVICE LAW ORDINARY PURPOSE: To subject public services to state control and regulation. SPECIFIC PURPOSES: 1. To secure adequate, sustained service for the public at the least possible cost, and protect the public against unreasonable charges and poor inefficient service. 2. To protect and conserve investments which have already been made for public service, and prevent ruinous competition.

BASIS OF THE LEGISLATIVE POWER TO REGULATE PUBLIC SERVICES: POLICE POWER, for the protection of the public as well as the utilities themselves. (Pantranco v. P.S.C., 70 Phil 221) CONSTITUTIONAL BASIS: 1. ARTICLE XII, SECTION 11: > A franchise, certificate, or any other form of authorization for the operation of public utility shall be granted to: > Filipino Citizens Corporations or associations organized under Philippine Laws where at least 60% of the capital is owned by Filipino Citizens. 100% Filipino Management

Mass media and commercial telecommunications shall be: - 100% Filipino Capital, and - 100% Filipino management

2. ARTICLE XII, SEC 17: In times of national emergency, when the public interest so requires, the State may during the emergency and under reasonable terms, temporarily take over or direct the operation of any private owned public utility or business affected with public interests.

3. ARTICLE XII, SECTION 18

The state may, in the interest of national welfare or defense, establish and operate vital industries and upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the government. 4. ARTICLE XII, SECTION 19 The state shall regulate or prohibit monopolies when the public interest so requires; no combination in restraint of trade or unfair competition shall be allowed A. Definition of public utility A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Apart from statutes which define the public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public. (Am. Jur. 2d V. 64, p.549.) (Albano vs Reyes) Certificate of public convenience defined: A Certificate of public convenience as far as the interest of the State is concerned , constitutes neither a franchise nor a contract, confers no property right, and is a mere license or a privilege. The holder of said certificate does not acquire a property right in the route covered thereby. Nor does it confer upon the holder any proprietary right or interests or franchise in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens alteration of the certificate, or even revocation or annulment thereof is reserved to the State (Lugue v. Villegas, G.R. No. L-22545, 28 November 1969). B. Distinctions between Certificate of Public Convenience and Certificate of Public Convenience and Necessity A cpc is issued whenever the Commission finds that the operation of a proposed public service will promote the public interest in a proper and suitable manner, for which a municipal or legislative franchise is not necessary. On the other hand, a cpcn is issued upon approval of any franchise or privilege granted by a political subdivision of the Philippines when in the judgment of the Commission, such franchise or privilege will properly conserve the public interest. ( Perez, Transportation Laws and Public service Act) (1) Requisites of CPC/ CPCN Citizenship: a. The granter must be a citizen of the Philippines or entity sixty percent of which is owned by such citizens. Financial Capability: b. The grantee must have sufficient financial capability to undertake the service an Promotion of Public Interest: c. The service will promote public interests and convenience in a proper and suitable manner. Grounds for Revocation of Certificate 1. The holder violates or contumaciously refuses to comply with any order, rule or regulation of the commission (Sec.16(n)of Public Service Act) 2. The holder is a mere dummy 3. The operator ceased operation and placed his buses on storage; or 4. The operator abandons totally the service (Manzanal v. Ausejo, No. L-31056, August 4, 1988).

(2) Prior Old Operator Rule a. Before permitting a new operator to invade the territory of another already established with a cpc, the prior operator must first be given the opportunity to extend its service in order to meet public needs in the matter of transportation. It means that a public utility operator should be shielded from ruinous competition by affording him the opportunity to improve his equipment and service before allowing a new operator to serve in the same territory he covers(Mandaluyong Bus Co. v. Francisco). The law contemplates that the first licensee will be protected in his investment and will not be subjected to a ruinous competition. It is not therefore the policy of the law to issue a CPC to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service, and who in all things and respects is complying with the rules and regulations of the commission. The old operator must be given the opportunity to improve and extend his lines. (Batangas Trans Co. v Orlanes, 52 Phil 455)

b. EXCEPTIONS TO THE PRIOR OPERATOR RULE: 1. Operator fails/ neglects to make improvement, or effect the increase in service when given the opportunity. 2. When Prior operator offers to meet increases in demand only when another operator offered to render additional service 3. Abandonment of operation 4. Prior operators did not oppose application 5. Prior operator cannot satisfy needs of the public 6. When opportunity to improve service is raised by prior operator only on appeal. 7. CPC granted to the applicant is a maiden franchise covering a new route, albeit overlapping with that of the old operator 8. Expiration of corporate existence of prior operator. 9. Monopoly 10. Passage through private subdivision which granted permit to another Prior Applicant Rule Where there are various applicants for a public utility over the same authority, all conditions being equal, priority in the filing of the application for a certificate of public convenience becomes an important factor in granting or refusal of a certificate of convenience and the Commission is authorized to determine which of the applicants can best meet the requirements of public convenience (delos Santos v. Pasay Trans. Co.). d. Ruinous Competition It is what the Public service Law Act sought to be prevented so that interest of public will be preserved C. Fixing of Rate Rate is defined as charge, in payment, or price fixed according to a ratio, scale, or an amount paid or charged for a good or service. Rates are fixed on the basis of the investment amount or property value that the public utility is allowed to earn an amount value otherwise called rate base. Property valuation is dependent on the particular circumstances and relevant facts affecting each utility. After all, rate fixing calls for a technical examination and a

specialized review of specific details primarily entrusted to the administrative or regulating authority. ( NAPOCOR Vs. Philippine Electric, 486 SCRA 577) Meaning of Just and reasonable Rate: A just and reasonable rate is one which yields to the carrier a fair rate upon the value of the property employed in performing the service and which, at the same time is fair to the public for the service rendered. Bar Question: Public Utility: What are the elements to be considered in determining whether or not a rate in public utility is just and reasonable? ANS: The elements to be considered are the following: 1. Fair return on the value of property employed by the operator; and 2. Fairness to the public for the service rendered. (1) Rate of Return: A judgment percentage which, if multiplied with the rate base, provides a fair return on the public utility for the use of its property for service to the public. The rate of return of a public utility is not prescribed by statute but by administrative and judicial pronouncements. (2) Exclusion of income tax as expense The National Internal Revenue Code under Sec. 32 B miscellaneous (b) provides that income derived by National Government or its political subdivisions are not included in the gross income and to be exempt from tax. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.(sec 32 B (b)) D. Unlawful Arrangements It shall be unlawful for any public service to provide or maintain any service that is unsafe, improper, or inadequate, or withhold, or refuse any service which can reasonably be demanded and furnished, as founded and determined by the Commission in a final order which shall be conclusive and shall effect in accordance with the Public service Law , upon appeal or otherwise. (Sec. 19 PSA) a. Boundary System 1. The driver does not receive a fixed wage but gets only the excess of the receipt of the fares collected by him over the amount he pays to the jeep owner. 2. The gasoline consumed by the jeep is for the account of the driver. These two features are not sufficient to withdraw the relationship between the owner and the driver from that of employer and employee. The jeepney owner is subsidiarily liable as employer in accordance with Art.103 of RPC (Magboo v. Bernardo, 30 April 1963). Indeed to exempt from liability the owner of public vehicle who operates it under the boundary system on the ground that he is a mere lessor would be not only to abet flagrant violations of the public service law, but also to take place the riding public at the mercy of reckless and irresponsible drivers (Spouses Henandez v. Spouses Dolor, 30 July 2004) the Civil Aeronautics Board is expressly authorized by R.A. No. 776 to issue a temporary operating permit of certificate of Public Convenience and Necessity (PAL v. CAB 26 March 1997) NTC exercises regulatory power over CATTV operators to the exclusion of other bodies. However the physical realities of the constructing CATV system- the use of public streets, rights

of ways, the founding of structures, and the parcelling of large of regulation over CATV operators. But since a general law mandates that the regulation of CATV operations shall be exercised by NTC, an LGU cannot enact an ordinace or approve a resolution in violation of the said law matters concerning CATV operation are within the exclusive regulatory power of the NTC (Batangas CATV v. C.A 29 September 2004). The Legislature has delegated to the defunct Public Service Commission and presently the LTFRB, the power of fixing rates of public services. But nowhere under the provisions of law are the regulatory bodies, the PSC and LTFRB alike, authorized to delegate that power to a common carrier like transport operator, or other public service (KMU Labor v. Garcia, 23 December 1984). A public Utility is entitled to reasonable compensation in return for the service it provides and that it may exact reasonable charges in accordance with the service provided of the rates established therefore. In computing the just and reasonable rates to be charged by a public utility, three major factors are to be considered: 1). Rate of Return; 20. The rate base, 3) the return itself or the computed revenue to be earned by the public utility based on the rate of return and base rate (Davao Light and Power Company, Inc., 3 April 2003) A rate is just and reasonable if it conforms to the following requirements: 1. One which yields to the carrier a fair return upon the value of the property employed in performing the service; and 2. One which is fair to the public for the service rendered. b. Kabit System( 2005 bar Exams) It is an arrangement whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings. Although the parties to such agreement are not out rightly penalized by law,the kabit system is invariably recognized as being contrary to public policy and therefore void and inexistent under Art.1409, New Civil Code ( Lim v. C.A. G.R.No. 125817, 16 January 2002) Effects of Kabit system 1. The transfer, sale, lease or assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons (Gelisan v. Alday No.L- 30212, 30 September 1987)

2. The registered owner is primarily liable for all the consequences flowing from the
operations of the carrier. The public has the right to assume that the registered owner is the actual or lawful owner thereof. It would be very difficult and often impossible, as a particular matter, for the public to enforce their rights of action for injuries inflicted by the vehicle if they should be required to prove who the actual owner is ( Benedicto v. IAC G.R No. 70876, 19 July 1990). responsibility may be fixed with the end in view of protecting the riding public.(Lim v. C.A. G.R. No 125817, 16 January 2002)

3. The thrust of the law in enjoining the Kabit system is to identify the person upon whom

4. Application of Article 1412 of the NCC or in pari delicto rule. The registered ownercannot
recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself,both being in pari delicto. (Teja Marketing Vs. IAC)

5. For the better protection of the public, both the registered owner and the actual owner
are jointly and severally liable with the driver (Zamboanga Transporatation Co. v. C.A, 29 November 1969)

6. The determining factor which negates the existence of Kabit system is the possession of

the franchise to operate and not the issuance of one SS I.D. Number for both bus line (Baliwag Transit V. C.A, 7 January 1987) Requisites for the Inapplicability of the Kabit System 1. When neither of the parties to the pernicious Kabit system is being held liable for damages. 2. When the case arose from the negligence of another vehicle using the public road to which no representation or misrepresentation as regards the ownership and operation of passenger jeepney was made.

3. When the riding public was not bothered of inconvenienced at the very least by the
illegal arrangement (Lim v. C.A. 16 January 2002)

E. Approval of sale, encumbrance or lease of property Section 20(g) of the PUBLIC SERVICE LAW It shall be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had -To sell, alienate, mortgage, encumber or lease its property, franchises, certificates, privileges, or rights or any part thereof; or merge or consolidate its property, franchises privileges or rights, or any part thereof, with those of any other public service. The approval herein required shall be given, after notice to the public and hearing the persons interested at a public hearing, if it be shown that there are just and reasonable grounds for making the mortgaged or encumbrance, for liabilities of more than one year maturity, or the sale, alienation, lease, merger, or consolidation to be approved, and that the same are not detrimental to the public interest, and in case of a sale, the date on which the same is to be consummated shall be fixed in the order of approval: Provided, however, that nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its business. 1. 2. 3. 4. 5. 6. Acts requiring prior approval of the Commission. They are: Establish and maintain individual or joint rates; Establish and operate new units; Issue free tickets; Issue any stock or stock certificates representing an increase of capital; Capitalize any franchise in excess of the amount actually paid to the Government; Sell, alienate, mortgage or lease property, certificates or franchise.

Kabit system The transfer, sale, lease or assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons (Gelisan v. Alday No.L- 30212, 30 September 1987) Registered Owner had Recourse against Vendee/ Transferee A registered owner who has already sold or transferred a vehicle has a recourse to a third-party complaint, in the same action brought against him to recover for the damage or injury done, against the vendee or transferee of the vehicle (Villanueva v. Domingo, 438 Scra

485,2004). 7.Warsaw Convention An agreement among sovereign countries concerning the regulation in a uniform manner of the conditions of international transportation by air in respect of the document used for such transportation and of the liability of the carrier. It was signed on October 12, 1929 in Warsaw, Poland. A. Applicability Applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking. International Carriage: Means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to this Convention. The Warsaw Convention to which the Republic of the Philippines is a party and which has the force and effect of law in this country applies to all international transportation of persons, baggage or goods performed by an aircraft gratuitously or for hire. When a contract of carriage is a contract of international transportation, provisions of the Convention automatically apply and exclusively govern the rights and liabilities of the airline and its passengers. (American Airlines vs. CA, G.R. No. 116044-45 March 9, 2000)

Two categories of International Transportation covered: 1.) that where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and

2.) that where the place of departure and the place of destination are within the
territory of a single High Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though the power is not a party of the Convention. (Mapa vs. CA, G.R. No. 122308 July 8, 1997) (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010) When the airline tickets evidencing the contract of transportation between Mapa and TWA, which were purchased in Bangkok, show the place of departure and the place of destination to be within the United States, the contract cannot come within the purview of the first category of International Transportation. The linkage of the contract to the Manila-Los Angeles travel tickets obtained by the Mapas from PAL cannot bring the arrangements within the second category, where the same were filled-up only by the Mapas in response to the query Your Complete Intinerary at the time they claimed for their lost pieces of baggage. (Mapa vs. CA, G.R. No. 122308 July 8, 1997)

It does not however preclude operation of the Civil Code or other pertinent laws: Although the Warsaw Convention has the force and effect of law in this country, being a treaty commitment assumed by the Philippine government, said convention does not operate as an exclusive enumeration of the instances for declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of that liability. The Warsaw Convention declares the carrier liable in the enumerated cases and under certain limitations. However, it must not be construed to preclude the operation of the Civil Code and pertinent laws. (PAL vs. CA, G.R. No. 119641 May 17, 1996) A. Liability to passengers Article 17 of the Warsaw Convention The carrier is liable for damage sustained in the event of the death or wounding of a passenger or any other bodily injury suffered by a passenger, if the accident which caused the damage so sustained took place on board the aircraft or in the course of any of the operations of embarking or disembarking. Article 18 of the Warsaw Convention 1. The carrier is liable for damage sustained in the event of the destruction or loss of, or of damage to, any registered luggage or any goods, if the occurrence which caused the damage so sustained took place during the carriage by air. 2. The carriage by air within the meaning of the preceding paragraph comprises the period during which the luggage or goods are in charge of the carrier, whether in an aerodrome or on board an aircraft, or, in the case of a landing outside an aerodrome, in any place whatsoever. 3. The period of the carriage by air does not extend to any carriage by land, by sea or by river performed outside an aerodrome. If, however, such a carriage takes place in the performance of a contract for carriage by air, for the purpose of loading, delivery or transshipment, any damage is presumed, subject to proof to the contrary, to have been the result of an event which took place during the carriage by air.

Article 19 of the Warsaw Convention The carrier is liable for damage occasioned by delay in the carriage by air of passengers, luggage or goods. 2. Liability for checked Baggage Article 18 par 1. of the Warsaw Convention The carrier is liable for damage sustained in the event of the destruction or loss of, or of damage to, any registered luggage or any goods, if the occurrence which caused the damage so sustained took place during the carriage by air.

Article 22 par 2 of the Warsaw Convention In the carriage of registered luggage and of goods, the liability of the carrier is limited to a sum of 250 francs per kilogram, unless the consignor has made, at the time when the package was handed over to the carrier, a special declaration of the value at delivery and has paid a supplementary sum if the case so requires. In that case the carrier will be liable to pay a sum not exceeding the declared sum, unless he proves that that sum is greater than the actual value to the consignor at delivery.

3. Liability for Hand carried Baggage

Article 22 par 3. of the Warsaw Convention As regards objects of which the passenger takes charge himself the liability of the carrier is limited to 5,000 francs per passenger. C. Willful Misconduct Varying views as regards misconduct: 1st View Outside WC Coverage The Warsaw Convention denies to the carrier availment of the provisions which exclude or limit his liability, if the damage is caused by his wilful misconduct or by such default on his part as, in accordance with the law of the court seized of the case, is considered to be equivalent to wilful misconduct, or if the damage is similarly caused by any agent of the carrier acting within the scope of his employment. Under domestic law and jurisprudence (the Philippines being the country of destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonably attributed, although unforeseen, to the non-performance of the obligation, including moral and exemplary damages. (Sabena Beligian World Airways vs. CA, G.R. No. 104685 March 14, 1996) 2nd View - Tortious conduct as ground for the petitioners complaint is within the purview of the Warsaw Convention (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010) Relevant to this particular issue is the case of Carey v. United Airlines (255 F.3d 1044), where the passenger filed an action against the airline arising from an incident involving the former and the airlines flight attendant during an international flight resulting to a heated exchange which included insults and profanity. The United States Court of Appeals (9th Circuit) held that the "passenger's action against the airline carrier arising from alleged confrontational incident between passenger and flight attendant on international flight was governed exclusively by the Warsaw Convention, even though the incident allegedly involved intentional misconduct by the flight attendant."

In Bloom v. Alaska Airlines (36 Fed. Appx. 278, 2002 WL 1136727 (C.A. 9)), the passenger brought nine causes of action against the airline in the state court, arising from a confrontation with the flight attendant during an international flight to Mexico. The United States Court of Appeals (9th Circuit) held that the "Warsaw Convention governs actions arising from international air travel and provides the exclusive remedy for conduct which falls within its provisions." It further held that the said Convention "created no exception for an injury suffered as a result of intentional conduct" which in that case involved a claim for intentional infliction of emotional distress. It is thus settled that allegations of tortious conduct committed against an airline passenger during the course of the international carriage do not bring the case outside the ambit of the Warsaw Convention. G. Corporation Law When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion corporation in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933). The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to the changing times. The Corporation Code The present Corporation Code, or Batas Pambansa Blg. 68, became effective on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world. 1. Definition: Corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. [Sec. 2. BP 68] ( See also Section 2; Articles 44(3), 45, 46, and 1775, Civil Code. ) 2. Tri-Level Existence of Corporation (a) Aggregation of Assets and Resources (b) Business Enterprise or Economic Unit

(c) Juridical Entity 3. Relationships Involved in Corporate Setting (a) Juridical Entity Level, which views the State-corporations relationship (b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual relationship on four (4) levels: - Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency; - Between the corporation and its shareholders or members; - Between and among the shareholders in a common venture; and - Between the corporation and third-parties or outsiders, which is essentially governed by Contract Law. 4. Theories on Formation of Corporation: (a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968]) To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]). Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997). (b) Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343 [1947]) Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988). A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997). 5. Four Attributes of Corporation from Statutory Definition: (a) A corporation is an artificial being (b) Created by operation of law (c) With right of succession (d) Only has powers, attributes and properties expressly authorized by law or

incident to its existence A. Classification of Corporation In Relation to the State 1. Public and Private Corporations (Distinctions: 2004 Bar Examination) Private Public formed for some formed for the private purpose, government of a benefit or end portion of the State for the general good or welfare created by special Must be organized legislation or act under the of Congress Corporation Code. NOTE: The true test is for the purpose of the corporation. If the corporation is created for political or public purpose connected with the administration of government, then it is a public corporation. If not, it is a private corporation although the whole or substantially the whole interest in the corporation belongs to the State. 2. Quasi-Public Corporations As to Place of Incorporation 1. Domestic Corporations 2. Foreign Corporations Test To Determine Nationality Of Corporation i. Incorporation Test determined by the state of incorporation, regardless of the nationality of its stockholders

ii.

Domicile Test determined by the state where it is domiciled.

iii. Control Test determined by the nationality of the controlling stockholders or members. This test is applied in times of war. Also known as the WARTIME TEST. As to Legal Status 1. De Jure Corporation 2. Corporation de Facto (2004 Bar Examination) A de facto corporation is one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. It is essential to the existence of a de facto corporation that there be (1) a valid law under which a corporation might be incorporated, (2) a bona fide attempt to organize as a corporation under such law, and (3) actual use or exercise in good faith of corporate powers conferred upon it by law.

3. Corporation by Estoppel (2004 Bar Examination)


It exists when persons assume to act as a corporation knowing it to be without authority to do so. In this case, those persons will be liable as general partners for all debts, liabilities and damages incurred or arising as a result of their actions.

4. Corporation by Prescription A body not lawfully organized as a corporation but has been recognized by immemorial usage as a corporation with rights and duties maintainable by law As to Existence of Shares of Stocks l) Stock Corporations m) Non-Stock Corporations Nationality of Corporation: Country Under Whose Laws Incorporated (Sec. 123). Exceptions: The Test of Controlling Ownership Applies In: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]). The donation of land to an unincorporated religious organization, whose trustees are foreigners, cannot be allowed registration for being violation of the constitutional prohibition and it would not be violation of the freedom of religion clause. The fact that the religious association has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955) (b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93 Phil. 333 [1953]). The primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. But the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. xJ.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964). The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility; however, it does not requires a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. In law there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995) A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of continuity or perpetual succession Corporation Code, Sec. 2). Philippine Long Distance Telephone Co. v. National Telecommunications Commission, 190 SCRA 717, 732 (1990). (c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution) Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982; Section 2, P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4December, 1991), at p. 31. Cable Industry

The National Telecommunications Commission (NTC), which regulates and supervises the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that Cable TV operations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity. Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV as a form of mass media which must, theefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution. (d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution) (e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. China Banking Corp., 80 Phil. 604 [1948]). (f) Investment Test as to "Philippine Nationals" (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992) (g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6 November 1989, XXIV SEC Quarterly Bulletin (No. 1- March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin (No. 2 -June 1990) Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]). (h) Special Classifications (Sec. 140) Doctrine of Separate Juridical Personality (a) Liablity for torts and crimes A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978). Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty. When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financial reverses; consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997). As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment, even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated.

Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413, 29 January 2001. Recovery of Damages No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. xPeople v. Concepcion, 44 Phil. 129 (1922). A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages. xMambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968). Even when the corporation's reputation and goodwill have been prejudiced, "there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation." xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103, 113-114 (1993). Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of lifeall of which cannot be suffered by respondent bank as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997). In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to have gone back to the original doctrine that [u]nder Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer. The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. . . The possible basis of recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. xCometa v. Court of Appeals, 301 SCRA 459 (1999). Doctrine of piercing the corporate veil
1. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY (2006 Bar Examination)

Under the doctrine of piercing the veil of corporate entity, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded and the corporation will be considered as a mere associations of persons, such that liability will attach directly to the officers and the stockholders (Umali v. Court of Appeals, 189 SCRA 529, 542 [1990]). It is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes a. To what circumstances will the doctrine apply? (2006 Bar Examination) The doctrine of piercing the veil of corporate entity will apply when the corporations separate juridical personality is used: 1. to defeat public convenience; 2. to justify wrong, protect fraud, or defend crime; 3. as a shield to confuse the legitimate issue; 4. where the corporation is the mere alter ego or business conduit of a person; or 5. Where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation (Umali v. Court of Appeals, 189 SCRA 529, 542 [1990]). b. Tests in determining whether to pierce veil of corporate personality. 1. Control, not mere majority or complete stock control, but complete domination, not only of the finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; 3. The aforesaid control and breach of duty must proximately prevent piercing the corporate veil. 4. The wrong-doing must be clearly and convincingly established. It cannot be presumed. (Lim v. Court of Appeals, et al., G.R. No. 124715, prom. January 24, 2000)

CAPITAL STRUCTURE of Stock Corporations CAPITAL STOCK / LEGAL STOCK / STATED CAPITAL is the amount fixed in the corporate charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation. CAPITAL is the value of the actual property or estate of the corporation whether in money or property. Its net worth or stockholder's equity is its assets less liabilities. AUTHORIZED CAPITAL STOCK is the capital stock divided into shares with par values. Par value stocks are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter, which may be raised by the corporation for its operations. SUBSCRIBED CAPITAL STOCK is the total amount of the capital stock subscribed whether fully paid or not.

OUTSTANDING CAPITAL STOCK is the portion of the capital stock issued to subscribers except treasury stocks. STATED CAPITAL is the capital stock divided into no par value shares. PAID-UP CAPITAL is the amount paid by the stockholders on subscriptions from unissued shares of the corporation. What are the ways of increasing capital stock? 1) by increasing the number of shares and retaining the par value; 2) by increasing the number of shares and increasing the par value; 3) by increasing the par value of existing shares w/o increasing the number of shares; or 4) by reinvesting retained earnings to the capital and issuing stock dividends What are the available methods to replenish capital? 1) Additional subscription to shares of stock of the corporation by stockholders or by investors; 2) Advances by the stockholders to the corporation; or 3) Payment of unpaid subscription by the stockholders PREREQUISITES TO INCORPORATION 1. Compliance with MINIMUM CAPITAL STOCK RULE: No minimum required for capital stock under the Corporation Code (Sec.12). However, under the Code, a minimum paid-up capital of P5,000.00 is required. (Sec. 13) EXCEPTIONS: a) Domestic Insurance Corporations require P500T capital stock, of which 50% must be subscribed and the balance payable in 12 months. b) Private Development Banks - P4M for class A - P2M for class B - P1M for class C c) Investment Companies need a paid up of at least P500T d) Savings and Loan Corporation is fixed by the Monetary Board, but not less than P100T e) Financing Companies Paid upP2M for Metro Manila P1M for cities P500T for others 2. Compliance with MINIMUM SUBSCRIBED CAPITAL STOCK whereby at least 25% of authorized capital stock must be subscribed to. (Sec. 13) 3. Compliance with MINIMUM PAID-UP CAPITAL whereby at least 25% of the total subscription must be paid upon subscription but must not be less than P5,000.00, the minimum capital stock requirement. (Sec. 13) Non-resident aliens should pay their subscriptions in full unless the balance unpaid is assumed by a resident. The subscription payments of the non-resident aliens shall not be included in the computation of the 25% minimum paid-up capital requirement.

RULES ON CONVERSION
From Stock to Non-stock corporation Conversion may be made by mere amendment of the articles of incorporation. From Non-stock to Stock corporation The corporation must first be dissolved. Mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to one for monetary gain. GENERAL RULES ON CLASSSIFICATION OF SHARES

1. Shares have rights, privileges , or restrictions stated in the AOI. 2. Each share has the same rights unless otherwise provided in the AOI DOCTRINE OF EQUALITY OF SHARES Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are likewise subject to the same liabilities. (Sec. 6) How are shares CLASSIFIED? COMMON SHARES are the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a)assets after dissolution (PREFERRED SHARES AS TO ASSETS) , b)distribution of dividends( PREFERRED SHARES AS TO DIVIDENDS), c)or both, and other preferences. Preferred or Redeemable shares may be deprived of voting rights (Sec. 6). [See discussion of NON-VOTING shares below]

KINDS OF PREFERRED SHARES AS TO DIVIDENDS


1.Cumululative preferred share - a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears. 2.Non cumulative preferred share- a share which allows the holder thereof to the payment of current dividends only without regards to dividends in arrears. 3.Participating preferred share- a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate. 4.Non participating preferred share- a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares.. Preferred share holders are not guaranteed dividends by the corporation , such is subject to the availability of surplus profits or unrestricted retained earning plus dividend declaration. They do not have a lien on the property of the corporation nor are creditors of the corporation. REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares. LIMITATIONS: a) Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b) Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; a) Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities.

KINDS OF REDEEMABLE SHARES


1.Compulsory redeemable shares shares which the issuing corporation must redeem after a stated period or when demanded by the holder.

2. Optional redeemable shares shares which may or may not be redeemed by the issuing corporation. TREASURY SHARES are shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means. (Sec. 9) If purchased from stockholdersthe transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital. If acquired by donation from the stockholdersthe act would amount to a surrender of their stock without getting back their investments which are instead, voluntarily given to the corporation. When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares. RULE ON THE REACQUISITION BY CORPORATION OF ITS OWN STOCK: A stock corporation may acquire or purchase its own shares for legitimate corporate purposes PROVIDED it has unrestricted retained earnings . 1. To eliminate fractional shares arising out of stock dividends ; 2. To collect or compromise an indebtedness to the corporation arising out of unpaid subscription , in a delinquency sale , and to purchase delinquent shares sold during said sale. 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. FOUNDERS' SHARES are shares issued to organizers and promoters of a corporation in consideration of some supposed right or property. These shares, when classified as such in the articles of incorporation may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. VOTING SHARES are shares with a right to vote. NON-VOTING SHARES are shares without right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. When such voting rights are denied, these redeemable and preferred shares shall nevertheless be entitled to vote on the following fundamental matters: a) Amendment of Articles of Incorporation; b) Adoption and amendment of by-laws; c) Sale or disposition of all or substantially all of corporate property; d) Incurring, creating or increasing bonded indebtedness; e) Increase or decrease of capital stock; f) Merger or consolidation of corporation; g) Investments of corporate funds in another corporation or another business purpose; and h) Corporate Dissolution (Sec. 6) f. Incorporation and organization (1) Promoter (a) Liability of promoter (b) Liability of corporation for promoters contracts (2) Subscription contract (3) Pre-incorporation subscription agreements (4) Consideration for stocks

(5) Articles of Incorporation (a) Contents (b) Non-amendable items Corporate name The incorporators constitute a body politic and corporate under the name stated in the certificate. A corporation has the power of succession by its corporate name. The name of a corporation is therefore essential to its existence; it cannot change its name except in the manner provided by the statute; by that name alone is authorized to transact business; and it is by that name that a corporation can sue and be sued, and perform all other legal acts. Change of Corporate Name Although a corporation has the power to change its name by the following the procedure laid down by law, the change of name of a corporation does not result in its dissolution. In Philippine First Insurance Co. v. Hartigan 34 SCRA 252, held that the changing of the name of a corporation is no more than creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. The act, in both cases, would seem to be what the language which we use to designate it imports a change of name and not a change of being. A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation or on its property, rights or liabilities. The corporation, upon such change in its name, is in no sense a new corporation, or the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed.- P.C Javier & Sons, Inc. v. Court of Appeals 462 SCRA 36 The amendment of the corporate name in the articles of incorporation and its approval by the SEC no longer requires another amendment to the old corporate names appearing in the by-laws of the corporation. (7) Registration and issuance of Certificate of Incorporation Election of directors or trustees Under Section 24 of the Corporation Code, at all elections of directors or trustees, there must be present, either in person or by representatives authorized to act by written proxy, the owners of the majority of the outstanding capital stock, a majority of the members entitled to vote. 1. Cumulative Voting is a voting procedure wherein a stockholder is allowed to concentrate his votes and give one candidate as many votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. a. Classic Formula (the Cole Formula) b. Glasser Iterative Procedure c. DHondt Remainders Table 2. Election of Board of Trustees Under Section 92 of the Corporation Code, unless otherwise provided in the articles of incorporation or the by-laws, the Board of Trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized , so classify themselves that the term of the office of 1/3 of their number shall expire every year and subsequent elections of trustees shall be held annually and trustees so elected shall have a term of THREE (3) years. Trustees

thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for unexpired period. 3. Alien Membership in Board of Directors Commonwealth Act No. 48 , otherwise known as the Anti-Dummy Law, penalizes the intervention of aliens in the management, operation, administration or control of a nationalized enterprise or activity. *** Election of aliens as members of the Board of Directors of governing body of corporations or associations engaging in partially nationalized activity shall be allowed in proportion t their allowable participation or share in the capital of such entities. PD No. 715 *** Non-Filipino citizens may become members of the Board of Directors of a bank to the extent of the foreign participation in the equity of the said bank. Sec 15 of the General Banking Law of 2000

Adoption of By-Laws

Under Section 46 of the Corporation Code, every corporation must, within ONE month after
receipt of official notice of the issuance of its certificate of incorporation by the SEC , adopt a code of by-laws for its government not inconsistent with the Code.

By-laws may also be adopted and filed prior to incorporation; in such case, such by-laws

shall be approved and signed by all the incorporators and submitted to the SEC, together with the articles of incorporation.

For the adoption of by-laws, the affirmative vote of stockholders representing at least a majority of the outstanding capital stock, or at least a majority of the members in the case of non-stock corporations, shall be necessary

The failures to adopt and file the by-laws do not automatically operate to dissolve a

corporation, but are considered grounds for which the SEC may seek the corporations dissolution. Under Section 6(1) (5) of Pres. Decree 902- A, the SEC may suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation for its failure to file by laws within the period required by law.

Requisites of valid by-laws By-Law Provisions Cannot Contravene the Law By- Law Provisions Cannot Contravene the Charter By-Laws Must Be Reasonable and Non- Discriminatory

Amendments Under Section 48 of the Corporation Code, the Board of Directors or Trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting called for the purpose, may amend or repeal any by-laws. It is clear therefore that it is within the power of any corporation to junk entirely its existing by-laws and adopt an entirely new set. The owner of the 2/3 of the outstanding capital stock, or 2/3 of the members in a nonstock corporation, may delegate to the Board of Directors of Trustees the power to amend or repeal any by-laws; provided, that any power delegated to the BoD or Trustees to amend or repeal any by-laws or adopt new by-laws shall be considered revoked whenever stockholders

owning or representing a majority of the members in non-stock corporation, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of directors and trustees, shall be filed with the SEC the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the SEC of a certification that the same are not consistent with this Code.

Powers of the Corporation 1) Corporate powers 2) Power to extend or shorten corporate term 3) Power in increase or decrease capital stock, incur, create or increase indebtedness 4) Power to deny pre-emptive right 5) Sale or other disposition of assets 6) Power to acquire shares 7) Power to invest corporate funds in another corporation or business or for any other purpose 8) Power to declare dividends 9) Power to enter into management contract 10) Ultra Vires Act of the Corporation

Classification of Corporate Powers Expressed by law or by the Corporation Code and its articles of incorporation (AOI) Those necessary to the exercise of the express or incidental powers Those incidental to its existence

Distinguishing express powers from implied powers Express and Implied powers can further be distinguished as follows: (a) Express powers deal with main business, object or purposes of the corporation, while Implied powers deal with the means and methods of attaining the object or purpose (b) Express powers are determined by the language of the law and its charter while implied powers may change according to time, place and circumstances. The Test of Express Powers is whether they are found in the words of the law / charter while the Test of Implied Powers is whether they are purely incidental to its express powers and is reasonably necessary to their being carried out. CORPORATE POWERS 1. Sue and be sued ACTUALLY incidental

Corporations de facto may sue or be sued Dissolved corporation after the expiration of the three-year winding up period ceases to be de jure or de facto hence cannot sue or be sued Foreign corporation without license from SEC cannot sue in Philippine courts

A corporation may have good reputation, if besmirched, may be a ground for the
award of moral damages (The Law on Partnerships and Private Corporations, 2005 Ed.) 2. Succession

a. NOT incidental or inherent, just like other powers that go into the very nature/extent of a corporations juridical entity 3. Adopt/use seal 4. Acquire and convey property -Incident power 5. Amend articles of incorporation 6. Adopt/amend by-laws consistent with law/PP a. ACTUALLY incidental 7. STOCK: issue/sell stocks and sell treasury stocks; NON-STOCK: admit members 8. Transact with real/personal property including securities/bonds of other corps as lawful business of corp. requires 9. Merge/consolidate with other corporations

10. Make reasonable non-political donations

Requisites: Amount is reasonable Must not aid political party or candidate or for purposes of partisan political activity (The Law on Partnerships and Private Corporations, 2005 Ed.)

11. Establish pension/retirement plans Elaboration of the Corporate Powers (Read thoroughly)

CORPORATE POWERS 12. Sue and be sued ACTUALLY incidental Corporations de facto may sue or be sued

Dissolved corporation after the expiration of the three-year winding up period ceases to be de jure or de facto hence cannot sue or be sued Foreign corporation without license from SEC cannot sue in Philippine courts

A corporation may have good reputation, if besmirched, may be a ground for the
award of moral damages (The Law on Partnerships and Private Corporations, 2005 Ed.) 13. Succession

a. NOT incidental or inherent, just like other powers that go into the very nature/extent of a corporations juridical entity 14. Adopt/use seal 15. Acquire and convey property -Incident power 16. Amend articles of incorporation 17. Adopt/amend by-laws consistent with law/PP a. ACTUALLY incidental 18. STOCK: issue/sell stocks and sell treasury stocks; NON-STOCK: admit members 19. Transact with real/personal property including securities/bonds of other corps as lawful business of corp. requires 20. Merge/consolidate with other corporations

21. Make reasonable non-political donations

Requisites: Amount is reasonable Must not aid political party or candidate or for purposes of partisan political activity (The Law on Partnerships and Private Corporations, 2005 Ed.)

22. Establish pension/retirement plans POWER TO EXTEND/SHORTEN CORPORATE TERM (2000 Bar Examination) Majority of BOD, 2/3rds of capital stock Extension Sec 37: right of appraisal for dissenting stockholders Shortening Sec 81 allows for right of appraisal, but technically there shouldnt be, because investors are also in it for the short-term (there is no novation) POWER TO INCREASE/DECREASE CAPITAL STOCK Majority of BOD, 2/3rds of capital stock Needs SEC approval

Increase there must be certification of subscription to at least 25% of increased stock, and at least 25% of that amount paid-up Decrease wont approve if it prejudices corporate creditors

Since this is not an inherent power, there must be strict compliance with requirements in Sec 38 and Amendment provisions in Sec 16 No right of appraisal o o Increase would defeat very purpose of raising capital Decrease there already is return of part of investments anyway

ALSO, investing into a corporation comes with expectation of possible increase/decrease of shares

Ways of Increasing/Decreasing Capital Stock 1. By increasing (decreasing) the no. of shares authorized to be issued without increasing/decreasing the par value thereof 2. By increasing (decreasing) the par value of each share without increasing (decreasing) the no. thereof

3. By increasing (decreasing) both the no. of shares authorized to be issued and the par value thereof (The Corporation Code of the Phil. Annotated by Hector De Leon, 2006 Ed Page 315-316) What are the available methods to replenish capital? 4) Additional subscription to shares of stock of the vestors; 5) Advances by the stockholders to the corporation; or 6) Payment of unpaid subscription by the stockholders corporation by stockholders or by in-

2001 Bar Examination: Suppose X Corporation has an authorized capital stock of P1M divided into 100,000 shares of stock par value of P10 each. a. Give two ways whereby said authorized capital stock may be increased to about 1.5 M. Two ways of increasing the authorize capital stock of X Corporation to 1.5 M are : 1. Increase the number of shares from 100,000 to 150,000 shares with the same par value of P10 each. 2. Increase par value of the 100,000 shares to 15 pesos each.

b. Give three practical reasons for a corporation to increase its capital stock.
The three practical reasons for a corporation to increase its capital stock are: (1) to

generate more working capital; (2) to have more shares with which to pay for the acquisition of more assets like acquisitions of company car, stocks, house, machinery or business; and (3) to have extra share with which to cover or meet the requirement for declaration of stock dividend. POWER TO INCUR/CREATE/INCREASE BONDED INDEBTEDNESS Corporate Bond: an obligation to pay a definite sum of money at a future time at a fixed rate of interest SEC Opinion (1987): only covers indebtedness of corporation secured by M over real/personal property Majority of BOD, 2/3rds of capital stock Needs SEC approval o Corp must have minimum net worth of P25 M and must have been operating for at least 3 years

UNLIKE NORMAL INDEBTEDNESS, which does not require 2/3rds approval: o o o Usually very large amount Usually with first lien on important assets Usually long period of time

No right of appraisal: o o Would drain financial resources Regardless, corporation's creditors always have priority over assets anyway

RIGHT TO SELL/DISPOSE/LEASE/ENCUMBER SUBSTANTIALL ALL assets Majority of BOD, 2/3rds of capital stock Enterprise-level transaction: ALTHOUGH there is no effect in relationship between State and corporation - its just as if there is resetting to starting point of business life Compare: o o Usual and regular course of business (business judgment doctrine) Proceeds of sale for conduct of remaining business

The test: it just has to be ordinary: so the sale of all business of a corporation in light of using proceeds to set-up anew STILL NEEDS ratification substantially all: if the business will be incapable of o o Continuing the business Accomplishing its purpose for incorporation

Although technically, through sale, a corporations can always pursue the business again so the test is intent

Qualitative test (for all: quantitative)

When no ratificatory vote from the stockholders/ members needed: a. If it is necessary in the usual and regular course of business

b. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business

There is right of appraisal: because unlike shortening of corporate life, where there is automatic dissolution, here there is none so SH may be stuck in a non-performing venture POWER TO DENY PRE-EMPTIVE RIGHT

The pre-emptive right is the option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before same can be disposed of in favor of the others. Extent and limitations of pre-emptive right under the Code Law includes all issues or dispositions of shares of any class Where the shares are issued in exchange for prop needed for corporate purposes, or for a debt previously contracted, the SH cannot demand his pre-emptive right for right may prejudice corporate interest Where the shares are issued by one corporation in exchange for shares in another corporation in pursuance of a merger, the pre-emptive right does not exist, provided that the issue is made with approval of 2/3 of the holders of outstanding stock and is not made in bad faith Code allows waiver or denial of the pre-emptive right provided it is made in the Articles of Incorporation either as an original provision or an amendment

Waiver of Pre-emptive Right Any prior waiver or denial of the pre-emptive right should appear in the Articles of Incorporation and not merely in an ordinary waiver agreement A waiver through an amendment to the Articles of Incorporation would need only 2/3 who may have dissented but also all subsequent SHS If all the existing SHS unanimously agree to a waiver, although for some reason no amendment of the Articles of Incorporation is made no one among them can later complain since they are all bound by their private agreement. But it would not bind future SHS SHS must be given reasonable time in which to exercise their pre-emptive rights.

2001 Bar Examination: Suppose that X Corporation has already issued the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase Xs authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. a.) Assume that stockholder A presently holds 200 out of the 1000 original shares.

Would A have a pre-emptive right to 200 of the new issue of 1000 shares? Why? Yes, A would have a pre-emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corporation. According to the Corporation Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation b.) When should stockholder A exercise the pre-emptive right? Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When Articles of Incorporation or the By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right. POWER TO PURCHASE OWN SHARES The conditions under which a stock corporation can acquire its own share are: (2005 Bar Examination) (a) That it be for a legitimate and proper corporate purpose; and (b) that there shall be unrestricted retained earnings to purchase the same and its capital is not thereby impaired. (Sec. 41, Corporation Code) Instances when power may be exercised: 1. To eliminate fractional shares 2. To collect/compromise an indebtedness to the corporation arising from unpaid subscription, in a delinquency sale, and to purchase the shares sold during said sale 3. To pay dissenting/withdrawing stockholders entitled to payment for their shares when exercising appraisal right 4. To decrease cost of doing business, by decreasing amount of dividends to be paid in the future

5. Other similar situations, since this is non-exclusive


POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION/BUSINESS May invest in corporation/business organized for any purpose apart from the primary purpose from which the investing business was organized Majority of BOD + 2/3rds vote of stockholders Sec 42: When investment is reasonably necessary to accomplish primary purpose: approval of stockholders not necessary o Lies under business judgment doctrine

o THUS whatever the primary purpose of a corporation, it has a choice of placing funds
in deposit accounts, money market, treasury bills, or even stocks of other corporations (fit into power, discretion, and purpose to obtain best returns for the corporation)

So in section 42, investment requiring ratificatory vote: when there is management involved of the other company, and not just investment per se

o If there is no ratificatory vote: ultra vires where those entering into the contract
have no authority

POWER TO DECLARE DIVIDENDS DIVIDENDS: corporate profits set aside, declared and ordered to be paid by the directors for distribution among shareholders at a fixed time. Forms: a. Cash b. Property c. Stock Requisites: 1. Existence of unrestricted retained earnings out of which the dividends may be de clared and paid (2009 Bar Examination: True or False Q; 2005 Bar Examination) 2. A corporate resolution of the board of directors declaring the payment of a portion or all such earnings to the stockholders (The Corporation Code of the Phil. Annotated by Hector De Leon, 2006 Ed Page 315-316) Out of unrestricted retained earnings, payable in cash, property, or stocks o To all stockholders, based on outstanding capital stock held HOWEVER, cash dividends due on delinquent stock: Apply first to unpaid balance on subscription Plus costs and expenses Stock dividends withheld until unpaid subscription is fully paid

o No stock dividend issued without approval of 2/3rds shares at regular/special meeting o Nielson v Lepanto: corporation cannot issue stock dividends to pay for a non-stockholder o Report to SEC within 15 days from declaration

GENERAL RULE: Stock corporations cannot retain surplus profits in excess of 100% of paidup capital stock (2001 Bar Examination), except: 1. Justified by definite corporate expansion projects/programs approved by BOD 2. Loan agreement, where creditor has to first consent before corporation can declare dividends 3. Special circumstances 2005 Bar Examination: Distinguish dividend from profit; cash dividend from stock dividend.

Profits belong to the corporation, while dividends belong to the stockholders when dividend is declared. A cash dividend involves disbursement of earnings to stockholders, while stock dividend does not involve any disbursement. A cash dividend affects the fractional interest in property which each share represents, while a stock dividend decreases the fractional interest in corporate property which each share represents. A cash dividend does not increase the legal capital, while a stock dividend does, as there is no cash outlay involved. Cash dividends are subject to income tax, while stock dividends are not. Declaration of stock dividend requires the approval of both the majority of the members of the board of directors will suffice. 2001 Bar Examination: Are there instances when a corporation shall not be held liable for not declaring dividends? The instances when a corporation shall not be held liable for not declaring dividends are: 1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its or his consent, and such consent has not been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. POWER TO ENTER INTO MANAGEMENT CONTRACT MANAGEMENT CONTRACT: is an agreement whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec 44) GENERAL RULE: There shall be no management contract with another corporation unless: Majority of BOD

Stockholders owning majority shares, in BOTH managing and managed corporation

o EXCEPT, where 2/3 votes needed: if a stockholder/s in both managing and managed
corporation owns more than 1/3 of total outstanding voting capital stock of managing corporation OR majority of BOD in managing corp. is also majority of BOD in managed corporation The management contract must not be longer than 5 years

ULTRA VIRES (beyond powers) ACT 2009 Bar Examination An act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon by law. (Republic vs. Acoje Mining Co., Inc. 7 SCRA 361) Types: (Philippine Corporate Law, Villanueva, 2001 ed.) 1. Acts done beyond the powers of the corporation as provided in the laws or its AoI;

2.

Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority (ultra vires of officers and NOT the corporation) 3. Acts or contracts, which are per se illegal as being contrary to law.

Doctrine of Individual Subscription Under the Doctrine of Individuality of Subscription, subscription is one, entire, indivisible, and whole contract which cannot be divided into portions. Thus, no certificate of stock shall be issued until the full amount of the subscription is paid. Doctrine of Equality of Shares Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are likewise subject to the same liabilities. (Sec. 6) How are shares CLASSIFIED?

1. COMMON SHARES are the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. 2. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a)assets after dissolution (PREFERRED SHARES AS TO ASSETS) b)distribution of dividends( PREFERRED SHARES AS TO DIVIDENDS), c) or both, and other preferences. Preferred or Redeemable shares may be deprived of voting rights (Sec. 6). KINDS OF PREFERRED SHARES AS TO DIVIDENDS 1. Cumulative preferred share - a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears. 2. Non cumulative preferred share- a share which allows the holder thereof to the payment of current dividends only without regards to dividends in arrears. 3. Participating preferred share- a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate. 4. Non participating preferred share- a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares. REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares. Limitations: i. Redeemable shares may be issued only when expressly provided for in the articles of incorporation; ii. Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; iii. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. iv. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities. TREASURY SHARES are shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means. (Sec. 9) When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares.

PAR VALUE SHARES are shares with a value fixed in the certificates of stock and the articles of incorporation. NO PAR VALUE SHARES are shares having no par value but have an issued value stated in the certificate or articles of incorporation. LIMITATIONS: 1. No par value shares can have an issued price of less than P5.00; 2. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; 3. They cannot be issued as preferred stocks; 4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; 5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; 6. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

Trust Fund Doctrine(2007 Bar Examination)

The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporations may not dissipate this and the creditors may sue the stockholders directly for their unpaid subscriptions Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor do the corporation buy its own shares using the subscribed capital as the consideration therefore. (National Telecommunications Commission v. Court of Appeals, et al., G.R. No. 127937, prom. July 28, 1999) Instances where the Doctrine was applied: 2. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 3. Where it had released the subscribers to the capital stock from their subscriptions; 4. Where it has transferred corporate property in fraud of its creditors; and 5. Where the corporation is insolvent.

6. If the corporation is solvent, the TFD extends to the

capital stock represented by the corporation's legal capital. 7. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and all of its property and assets. Exceptions to the Trust Fund Doctrine 1. Redemption of redeemable shares (Sec. 8) 2. In a close corporation, when there is a deadlock and the SEC orders the payment of the appraised value of the stockholder's share. (Sec. 104) Other Doctrines in Corporate Law (Not included in the SC Syllabus) DOCTRINE OF CORPORATE OPPORTUNITY (2005 Bar Examination)

A director is made to account to his corporation, gains and profits from transactions entered into by him/another competing corporation in which he has substantial interest, which should have been a transaction undertaken by the corporation. This is a breach of fiduciary relationship. BUSINESS JUDGEMENT RULE Business judgment rule exists to protect and promote the full and free exercise of managerial power granted to directors. The rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. (Smith v Van Gorkam) Board of Directors, Trustees, Officers Powers of Board of Directors or Trustees 1. Exercise corporate powers of all corporations under Corporation Code 2. Conduct all business 3. Control and hold all property Term of Directors For 1 year, or Until their successors are elected and qualified [Hold-Over Principle] Requirements for Directors a) Must own at least 1 share of capital stock of corporation, which shall stand in HIS name on the corporate books b) Any director who ceases to own at least 1 share shall cease to be a director c) Majority of Directors in BoD must be RESIDENTS RULE: The Board of Directors/Trustees is the repository of corporate powers. Hence, all powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the Board of Directors or Trustees. (Sec. 23) EXCEPTIONS: 1. Executive Committee duly authorized in the by-laws; 2. Contracted manager which may be an individual, a partnership or another corporation. 3. Close corporations, the stockholders may manage the business of the corporation instead of a board of directors, if the articles of incorporation so provide. Compensation Directors are not entitled to compensation as such directors except that they are allowed reasonable per diems. However, directors may be given compensation when 1. There is a provision in the by-laws authorizing payment of compensation; or 2. By a vote of the Stockholders representing at least majority of the outstanding capital stock at a regular or special meeting. LIMIT: In either case, the total yearly compensation of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year. Requirements for Trustees a) Must be a member of the non-stock corporation b) Majority of Trustees in BoT must be RESIDENTS Causes of Directors Liability:

1. Knowing authorization of wrongful acts; 2. Negligence; and 3. Conflict of interest.

When? For a director to be held liable for the acts of corporate officers, the following conditions must be present :( LOWELL HOIT & CO. V. DETIG ET. AL) The director must have participated in the act complained of; He must be guilty of lack of ordinary and reasonable supervision; and He must be guilty of lack of ordinary care in the selection of such officer. INDEPENDENT DIRECTOR Is a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. He must not have any personal, financial, or professional ties with the corporation, its affiliates, and subsidiaries that may adversely affect his ability to act objectively. Other qualifications are ownership of at least one share, college graduate or has been engaged or exposed to the business of the corporation for not less than 5 years, be a person of integrity, probity and hardworking Under Section 38 of RA 8799, when the corporation (a) has a class of equity securities listed for trading on an Exchange or (b) is a company with assets of at least 50 million and having 200 or more holders who hold at least 100 shares of a class of stocks or (c) which has sold a class of equity securities to the public pursuant to an effective registration statement must have at least 2 independent directors or at least 20% of board. Under Section 15 of RA 8791, a bank must have 2 independent directors. ELECTION OF DIRECTORS OR TRUSTEES A. Quorum in Meeting for Election Majority of the outstanding capital stock or members entitled to vote Present either in person or by representative BY WRITTEN PROXY B. How Viva Voce, or By Ballot if requested by any voting stockholder or member C. Stock Corporations Methods Of Voting On The Election Of Directors:

STRAIGHT VOTING- Every stockholder through this method, may vote such number of

shares for as many persons as there are directors. CUMULATIVE VOTING1. Every stockholder is entitled to such number of votes that his number of shares multiplied by the total number of directors to be elected will bring. He may give all such votes to one candidate (CUMULATIVE VOTING FOR ONE CANDIDATE) or he may distribute them among as many candidates as he sees fit (CUMULATIVE VOTING BY DISTRIBUTION). (Sec. 24) 2. A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28) 3. A PROXY is a written instrument, signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former.

What is the period of validity of proxy? Unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time. (Sec. 58)

Instances whereby Right to vote by proxy may be exercised: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in its by-laws. Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); But directors cannot do so. Directors must always act in person (Sec. 25). A VOTING TRUST is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement. D. Non-Stock Corporations Members may cast as many votes as there are trustees to be elected [seats] But may not cast more than one vote for a single candidate EXCEPT when the AoI or By-laws provide otherwise E. Adjournment of Meeting for Elections May adjourn from day to day or from time to time But NOT Sine Die or Indefinitely if quorum is not met [majority of stockholders or members are not present] NOTE: Proposed amendment to by-laws stipulating permanent director even without election is contrary to law. (Grace Christian High School v CA) CORPORATE OFFICERS, QUORUM A. Corporate Officers President must be a director Treasurer may or may not be a director Secretary shall be a resident and a citizen of the Philippines Other officers provided in the By-Laws B. Any 2 or more positions may be held concurrently except president and secretary or president and treasurer. C. When Elected Immediately after election of directors D. Duties to be Performed by Officers Enjoined on them by law Enjoined by corporate By-Laws E. Quorum Board Must Act as a Body For transaction of corporate business majority of number of directors or trustees as fixed in AoI. For corporate act to be valid there must be a quorum and the act must be approved by majority of directors or trustees PRESENT. For election of Officers majority of ALL members of the board of directors or board of trustees, whether all members are present or not. F. Directors or Trustees cannot ATTEND or VOTE by proxy at board meetings. POWERS OF CORPORATE OFFICERS A. Rule on Corporate Officers Power to Bind the Corporation An officers power as an agent of the corporation must be sought from the statute, charter, by-laws or in a delegation of authority from such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business.

B.

When Corporation Bound by the Act of Its President In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. A party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy.

Distinction between a Corporate Officer and Corporate Employee CORPORATE OFFICER CORPORATE EMPLOYEE Position is provided Employed by the for in the by-laws or action of the under the Corporation managing officer of Code the corporation RTC has jurisdiction in NLRC has jurisdiction case of LABOR in case of labor DISPUTE dispute NOTE: RTC has jurisdiction over cases involving removal of corporate officers. Disqualification of Directors, Trustees or Officers 1. Conviction by final judgment of offense punishable by imprisonment for excess of 6years, or 2. Violation of Code committed within 5years prior to date of his election or appointment Removal of Directors or Trustees A. How may be removed 1. 2/3 vote of stockholders or members entitled to vote 2. During a regular meeting or a special meeting called by the secretary upon Order from the president Written demand from Majority of stockholders or members entitled to vote 3. Upon Previous Notice to stockholders or members Of the intention to propose such removal at the meeting Of the time and place of meeting Must be given by publication or by written notice prescribed in the Code B. If secretary refuses/fails to call for the special meeting or give the notice, or there is no secretary 1. Call may be directly addressed to stockholders or members by demanding stockholder or member C. Causes for Removal 1. May be with or without case Cause is usually related to the 3 Duties of an Officer/Director a) Loyalty b) Obedience c) Diligence 2. Provided that removal without cause may not be used to deprive minority stockholders or members of their right of representation under sec24. NOTE: Removal of Board of Director/ Trustee is different from removal of a corporate officer. Stockholders approval is necessary only for the removal of the members of the Board. For the removal of a corporate officer or employee, the vote of the Board of Directors is sufficient for the purpose. (2001 Bar Examination)

Vacancies in the office of director or trustee A. Grounds for Removal 1. Removal by the stockholder or members or upon expiration of term Vacancy shall be filled by the stockholders in a regular or special meeting called for that purpose. 2. Other Causes than expiration or removal by SH/Ms If remaining Directors constitute Quorum - May be filled by the MAJORITY vote of the remaining directors If no quorum - filled by the stockholders in a regular or special meeting called for that purpose. 3. Proposed amendment of AoI resulting in increase in number of directors/trustees Vacancy shall be filled by the stockholders in a regular or special meeting called for that purpose. Or in the same meeting authorizing increase of directors or trustees if so stated in notice of the meeting B. Director or Trustee so elected shall serve only unexpired portion of the term Liability of Directors, Trustees or Officers DUTY OF DILIGENCE A. Violations of Duty of Diligence 1. Wilfully and knowingly vote for or assent to patently unlawful acts of the corporation 2. Guilty of gross negligence or bad faith in directing the affairs of the corporation 3. Acquire any personal or pecuniary interest in conflict with their duty as director or trustee 4. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (Tramat Mercantile Inc. v CA) 5. He agrees to hold himself personally and solidarily liable with the corporation ; or (Tramat Mercantile Inc. v CA) 6. He is made, by a specific provision of law, to personally answer for his corporate action. (Tramat Mercantile Inc. v CA) B. Liability for Violation of Duty of Diligence Shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons DUTY OF OBEDIENCE A corporation, through its BoD, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Since the Code still adheres to the ultra vires doctrine, then the BoD or Trustees of a corporation is bound to observe the duty of obedience, which means that they will direct the affairs of the corporation only in accordance with the PURPOSES for which it was organized. DUTY OF LOYALTY A. To act according to the corporations best interest DOCTRINE OF DISLOYALTY OF A CORPORATE DIRECTOR OPPORTUNITY Cover same subject Cover same subject which is business which is business opportunity opportunity

Applicable to directors, trustees and officers. Does not cover Ratification. Even if 99% of the SHs affirm the transactions, the remaining minority SHs can still oppose such a self-dealing transaction and file a derivative suit. Applies to both stock and non-stock corporations.

Only applicable to DIRECTORS and not to officers Allows RATIFICATION of a transaction by a self-dealing director by the vote of a SHs representing 2/3 of the OCS

Applies only to stock corporations

DUTY TO CREDITORS AND OUTSIDERS A. Upon the insolvency of the corporation, the BoD are duty bound to hold the assets of the corporation primarily for the payment of the corporations liabilities [under the Trust Fund Doctrine] B. Under Sec65 on Liability of Directors for Watered Stocks, if director or officer: consents to issuance of stocks for a consideration less than its par or issued value consents to payment in consideration other than cash, which is valued in excess of its fair market value having knowledge thereof does not object in writing and file the same with the corporate secretary. C. Such director or officer shall be SOLIDARILY LIABLE with the stockholder concerned [buyer] and its creditors for the DIFFERENCE between the fair value received at time of issuance of the stock and its par or issued value. Dealings of Directors, Trustees or Officers with the Corporation SELF-DEALINGS Contract between the corporation and one or more of its directors or trustees or officers ARE VOIDABLE at the option of the corporation BUT VALID IF THE FOLLOWING ARE PRESENT: 1. Presence of director/trustee in the board meeting which approved contract was not necessary to constitute a quorum 2. Vote of director or trustee not necessary for approval of contract 3. Contract is fair and reasonable under the circumstances 4. In case of an officer, contract has been previously authorized by board of directors NOTE: If directors presence was required to meet the quorum [1st requisite] and if his vote was necessary for approval of the contract [2 nd requisite], the contract may still be valid if it is RATIFIED by 2/3 of stockholders or members in a meeting called for the purpose. CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS Contract between 2 or more corporations with a common director/s may be valid. However, to be valid, it must be fair and reasonable. A contract between the corporations with interlocking directors is VOID if there is FRAUD. If the interest of the interlocking director in one corporation is SUBSTANTIAL [meaning stockholdings exceed 20% of the outstanding capital stock] and his interest is merely NOMINAL, contract shall be treated as under provisions of Self-Dealings [voidable but may be ratified], insofar as the corporation where he has a nominal interest is concerned. Note: Corporate officers are not permitted to use their position of trust and confidence to further their private interests. The doctrine of "CORPORATE OPPORTUNITY" is precisely

recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. (Gokongwei Jr. v SEC) EXECUTIVE COMMITTEE May be created by the By-Laws 1) Composition 3 or more members of the Board of Directors Appointed by the Board 2) Scope of Powers Those specific matters within the competence of the BoD that the latter may delegate to the committee via: By-laws Majority vote of the Board 3) Valid Action by the Executive Committee Requires majority vote of all the members of the committee 4) However, Committee CANNOT act in the following instances: 1. Approval of action where shareholders approval is required 2. Filling of vacancies in the board of directors 3. Amendment or repeal of by-laws or adoption of new by-laws 4. Amendment or repeal of any board resolution which by express terms is not amendable or repealable 5. Distribution of cash dividends to shareholders MEETINGS B. Kinds of meetings 1. 2. Regular Meetings Held monthly Unless By-laws provide for other time Special Meetings May be held anytime: Upon call of president, or As provided in the by-laws

C. Where Anywhere Unless by-laws provide for specific place

D. Notice of Date, Time and Place of Meeting Sent at least 1 day prior to scheduled meeting Unless By-Laws provide for other time Director or Trustee may waive notice requirement Expressly or Impliedly General Rule BoD must comply with the manner and formalities prescribed in its charter or by general law Exception action by BoD in a meeting which is illegal for lack of notice may be ratified either expressly or impliedly Valid Board Meeting Directors or Trustees duly assembled as a board at a place, time and manner provided in the by-laws 3. Required quorum a. Majority of members or 2.

4.

b. As provided in by-laws Decision of majority of quorum Or when required, by majority of ALL members, even those not present. 2005 Bar Examination: A Korean national joined a corporation which is engaged in the furniture manufacturing business. He was elected to the Board of Directors. To complement its furniture manufacturing business, the corporation also engaged in the logging business. With the additional logging activity, can the Korean national still be a member of the Board of Directors? Explain. A: Yes. The Korean national can still be a member of the Board of Directors, if he has sufficient equity to entitle him to a seat. Since the corporation is only required to be at least 60% owned by Filipino citizens, foreigners can be members of the board of directors in proportion to their equity which cannot exceed 40% (Sec.1 P.D. No. 715, amending C.A. No. Sec. 2-A of C.A. No. 108, The Anti-Dummy Law) 2001 Bar Examination: a by-law provision of X Corporation rendering ineligible or if elected, subject to removal, a director if he is also a director in a corporation whose business is in competition with or is antagonistic to said corporation valid and legal? State your reasons. A: Yes, the by-law provision is valid. It is the right of a corporation to protect itself against possible harm and prejudice that may be caused by its competitors. The position of director is highly sensitive and confidential. To say the least, to allow a person, who is a director in a corporation whose business is in competition with or is antagonistic to X Corporation, to become also a director in X Corporation would be harboring a conflict of WAYS TO BECOME A STOCKHOLDER OF A CORPORATION. 1. Subscription contract with the corporation 2. Purchase or acquisition of shares from existing stockholder; and 3. Purchase of treasury shares from the corporation SUBSCRIPTION PURCHASE OF SHARES refers to unissued shares refers to issued shares Corporation still to be form or already in Can only be made when the corporation is existence already in existence The subscriber can exercise all his right as The purchaser can only exercise his right a stockholder even before full payment of upon full payment of the purchase price. the subscription. Corporate creditors may proceed against Corporate creditor cannot proceed against the subscriber for his unpaid subscription in the purchaser for the balance of the case the corporate asset are not sufficient purchase price , because of the lack of to satisfy their claims. privity of contact between them. Subscriber may not be legally released The corporation can rescind or cancel the from the payment of his unpaid contract in case of non fulfillment by the subscription UNLESS no creditors would be buyer. prejudiced and all the stockholders agree thereto. Subscription may be in any form , not Purchase of shares is covered by the covered by the statute of frauds. statute of frauds in cases of purchases amounting to more than P500. Consequently the subscribers are not real parties in interest in a case for rescission of the subscription contract of another subscriber because they are not parties thereto. (Ong Yong v. Tiu, April 6, 2003) Kinds of subscription contract: 1. Pre-incorporation subscription One entered into before incorporation. Pre-incorporation subscription constitutes a binding

contract among the subscribers. Note: It shall be irrevocable for a period of at least 6 years from the date of subscription unless: All of the other subscribers consent to the revocation, or The incorporation fails to materialize. It shall likewise be irrevocable after the submission of the articles of incorporations to the SEC. 2. Post incorporation subscription 3. Conditional subscription 4. Absolute subscription 5. Subscription with a special term. UNDERWRITING AGREEMENT An underwriting agreement between a corporation and a third person, termed the underwriter, by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not purchased by those to whom they are first offered. CONSIDERATION OF STOCKS Valid considerations in subscription agreement: 1. Cash actually received; 2. Property, tangible or intangible necessary or convenient for its use and lawful purpose; 3. Labor or services actually rendered to the corporation; 4. Previously incurred corporate indebtedness; (Note: the indebtedness involved must be one that is acknowledge by the board.) 5. Amounts transferred from unrestricted retained earnings to stated capital; 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion. CERTIFICATE OF STOCK AND TRANSFER OF SHARES. CAPITAL STOCK SHARES OF STOCK Is the amount paid in Is the interest or right or secured to be paid which the in by the stockholders stockholder has in the upon which the management of the corporation is to corporation, its conduct its operation. surplus profits, and It is the property of upon dissolution, in all the corporation itself. of its assets remaining after payment of corporate debts. WHEN do stocks become DELINQUENT? If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise. If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. (Sec. 67)

CERTIFICATE OF STOCKS It is the paper representation or tangible evidence of the stock itself and of the various interest therein. It is not essential to the ownership and/ or existence of the share of stock. Issuance of Certificate Of Stock Under the Doctrine of Individuality of Subscription, subscription is one, entire, indivisible, and whole contract which cannot be divided into portions. Thus, no certificate of stock shall be issued until the full amount of the subscription is paid. MODES OF STOCK TRANSFER 1. Indorsement and delivery of stock certificate and to issue a new certificate unless the original certificate is surrendered for cancellation or is clearly shown to have been lost or stolen, or destroyed. 2. Transfer made in a separate instrument- while an assignment may be valid and binding between parties despite non-compliance with the requisite endorsement and delivery, it does not necessarily make the transfer effective for the assignee cannot enjoy the status of a stockholder until and unless the issue of ownership is resolved with finality. 3. Judicial or extra judicial settlement of estate- upon the death of the stockholder, his administrator or executor becomes vested with the legal title of the stock until the settlement and division of the estate is made. WHAT ARE THE RIGHTS OF STOCKHOLDERS? 1. Managerial Rights 2. Proprietary Rights 3. Pre-emptive Right 4. Remedial Rights 5. Appraisal Rights 6. Inspection Rights MANAGERIAL RIGHTS 1. Voting rights; and 2. Right to remove directors What are the LIMITATIONS on the stockholders RIGHT TO VOTE? 1. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6; 2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code; 3. Fractional shares of stock cannot be voted; 4. Treasury shares have no voting rights as long as they remain in the treasury; 5. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or to a representation at any stockholder's meeting; and 6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.

PROPRIETARY RIGHTS 1. Right to dividends; 2. Right to issuance of stock certificate for fully paid shares; 3. Proportionate participation in the distribution of assets in liquidation; 4. Right to transfer of stocks in corporate books;

5. 6. 7. 8.

Preemptive right; Right to inspect books and records; Right to be furnished of the most recent financial statement/financial report; Right to recover stocks unlawfully sold for delinquent payment of subscription.

PREEMPTIVE RIGHT OF STOCKHOLDER It is the shareholders' preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings. GENERAL RULE: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which the corporation is authorized to issue. EXCEPTION: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion offered for subscription. REMEDIAL RIGHTS 1. Individual suita suit instituted by a shareholder for his own behalf against the corporation; 2. Representative suita suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation; and 3. Derivative suit (2009, 2006, 2005 2004 Bar examination)a suit filed in behalf of the corporation by its shareholders upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation. Creditors do not file derivative suits, but rather have remedies which are merely subsidiary such as accion subrogatoria and accion pauliana. Requisites for a valid derivative suit (2004 Bar Examination): 1. Existing cause of action in favor of the corporation; 2. Stockholder/member must first make a demand upon the corporation or the management to sue unless such a demand would be futile; 3. Stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious; and 4. Action must be brought in the name of the corporation which must be alleged. NOTE: The stockholder is only a nominal party in a derivative suit. The real party in interest is the corporation. APPRAISAL RIGHTS (2007 Bar Examination) Appraisal right is the right of a stockholder, who dissents from a fundamental or extraordinary corporate action, to demand payment of the fair value of his shares. It is the right of a stockholder to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in the corporate structure namely: (ASIM) 1. An amendment to the Articles of incorporation that has the effect of

2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets

3. Merger or consolidation; 4. Investment of corporate funds in another corporation or in a purpose other than the primary purpose (Sec 42)

GENERAL RULE: a dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision; EXCEPT WHEN: 1. The corporation consents to the withdrawal 2. The proposed corporate action is abandoned or rescinded by the corporation 3. The proposed corporate action is disapproved by the SEC where its approval is necessary; 4. The Commission determines that such stockholder is not entitled to appraisal right What is an intra-corporate controversy? (2006 Bar Examination) An intra-corporate controversy is a dispute between a stockholder and the corporation of which he is a stockholder, or between a stockholder and another stockholder of the same corporation, where the subject of the dispute or controversy arose out of such relationship (Sunset View Condominium Corp. v. Campos, Jr., 104 SCRA 303 [1981]). An intra-corporate dispute is a civil case involving the following: (a) devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/ or of the stockholders, partners, or members of any corporation, partnership, or association; (b) controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; (c) controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; (d) derivative suits; and (e) inspection of corporate books (SC Adm. Memo. No. 01-2-04 [2001]). INSPECTION RIGHTS Corporate Books and Financial Records The following corporate books and records must be kept and preserved at its principal office (1) record of all business transactions (2) minutes of stockholders or Board meetings, setting forth: time and place, how authorized, notice given, whether regular or special, those present/absent, every act done or ordered. Upon demand, the time that the a director, trustee or officer entered or left, the yeas and the nay, and any protest may be recorded in full (3) stock and transfer book which should contain a record of all stocks, names of stockholders, installments paid/unpaid, statement of alienation, date thereof and other matters prescribed by the ByLaws. These records are subject to the inspection rights of the Stockholders. LIMITATIONS of the Inspection rights: 1. Right must be exercised during reasonable hours on business days; 2. Person demanding the right has not improperly used 3. any information obtained through any previous examination of the books and records of the corporation; and 4. Demand is made in good faith or for a legitimate purpose. (Sec. 74) STOCKHOLDER PROTECTION DEVICES 1. Tender Offers is a public offer to purchase a specified number of shares from shareholders usually at a premium in an attempt to gain control of the issuing company. Note that in some instances, the premium is payable only if the offeror is able to obtain the required number of shares.

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

I. Merger, Consolidation, and Dissolution MERGER One or more existing corporations are absorbed by another corporation which survives (A+B =A or B) CONSOLIDATION Union of 2 or more corporations to form a new corporation called a consolidated corporation (A+B =C) called Same

Parties constituent corporations Absorbed corporation All constituent dissolved without corporation are liquidation of assets dissolved without liquidation of assets; consolidated corporation survives Absorbing corporation Consolidated acquires all assets and corporation assumes liabilities of acquires all assets the absorbed and assumes corporation regardless liabilities of of WON creditors constituent corps. consented regardless of WON creditors consented SHS of absorbed SHS of constituent corporation become SHS corps. becomes of absorbing corp. SHs of consolidated corp. DISSOLUTION When the corporation ceases to be a juridical person. METHODS: (Sec 117, BP 68) 1. Voluntary

2.

Involuntary A corporation may be dissolved by the SEC upon filing of verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulation. (Sec 121, BP 68) Take note of the following Involuntary Mode of Dissolution a. By expiration of corporate term b. failure to organize and commence business within two (2) years from incorporation c. legislative dissolution d. dissolution by the SEC on grounds under existing laws

The three (3) methods by which a stock corporation may be voluntarily dissolved are: (2002 Bar Examination)

1.

Voluntary dissolution where no creditors is affected. This is done by a majority vote of the directors, and resolution vote of at least 2/3 vote of the stockholders, submitted to the Securities and Exchange Commission.

2.

Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must be filed with the Securities and Exchange Commission, signed by a majority of the members of the board of directors, verified by the president or the secretary, and upon affirmative vote of stockholders representing 2/3 of the outstanding capital stock.

3.

Dissolution by shortening of the corporate term. This is done by amendment of the articles of incorporation. EFFECTS OF DISSOLUTION The effects of dissolution are: (a) legal title to corporate property is vested in stockholders or members (b) corporation ceases as a body politic to continue the business for which it was organized (c) it cannot be revived (d) dissolution does not by itself imply the diminution or extinguishment of rights (e) upon expiration of the winding up period of 3 years, the corporation ceases, it can no longer sue or be sued CORPORATE LIQUIDATION Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for 3 years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, BUT NOT for the purpose of continuing the business for which it was established. At any time during said 3 years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of : stockholders, members, creditors, and other persons in interest. BAR QUESTION: 2001 Bar Examination X Corporation shortened its corporate life by amending its articles in corporation. It has no debt but owns a prime property located in Quezon City. How would the property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation. A: The prime property of X Corporation can be liquidated among the five stockholders after

the property has been conveyed by the Corporation to the five stockholders, by dividing or partitioning it among themselves in any of the following ways: (1) by physical division or partition based on the proportion of the values of their stockholdings; or (2) selling the property to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or (3) after the determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of the said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each. x-----------------------------------------------------------x II. Special Corporations Educational Corporations are stock or non-stock corporations organized to provide facilities for teaching or instruction and are governed by special laws and by general provisions of the Corporation Code. Prior to its incorporation, a favorable recommendation must be obtained from the Department of Education. Religious Corporations are corporations incorporated by one or more persons classified as corporation sole or religious society. They are composed of entirely spiritual persons and which is organized for the furtherance of a religion or for perpetrating the rights of the church or for the administration of church or religious work or property x-----------------------------------------------------------x III. Foreign Corporations A foreign corporation is one formed, organized or existing under any law other than those of the Philippines and whose law allow Filipino citizens and corporation to do business in its own country or state (sec 123)

It is NOT permitted to transact or do business in the Philippines until it has secured a li


cense for that purpose from SEC and a certificate of authority from the appropriate government agency. Who is a RESIDENT AGENT? An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Sec. 127-128)

What is the test of DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES? The Corporation Code does not define the phrase "doing or transacting business." (2002 Bar Examination) A. JURISPRUDENTIAL TESTS: 1. TWIN CHARACTERIZATION TEST a. Substance TestWhether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another); and b. Continuity TestWhether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization 2. CONTRACT TEST Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. B. STATUTORY TESTS: Under the Foreign Investment Act of 1991 (R.A. No. 7042) the following acts constitute "doing business":

i. Soliciting orders, service contract opening offices, whether called liaison offices or branches; ii. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; iii. Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; and iv. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of, the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose of the business organization. x-----------------------------------------------------------x IV. Corporate Rehabilitation Who can file? Filing of the VERIFIED POSITION with the appropriate RTC by: a. Corporate debtor which foresees the impossibility of meeting its debts when they respectively fall due; or b. Creditors holding at least 25% of the debtors total liabilities Upon filing and subsequent determination by the court that the petition is sufficient in form and substance, a stay order may be issued. A stay order will, among others, contain the following: (a)Appointment of a rehabilitation receiver or a management committee, who as long is acting in good faith is immune from suit (b) Stay of enforcement of all claims, whether for money or otherwise, and whether such enforcement is by court action or otherwise against the debtor, its guarantors, and sureties not solidarily liable with the debtor (c) Prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties, except in the ordinary course of business (d) Prohibiting the debtor from making any payment of its outstanding liabilities as of the date of the filing of the petition (e)Prohibiting the debtors supplies of goods and services from withholding supplies and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order Proceedings may be terminated in case of (a) failure of the debtor to submit the rehabilitation plan (b) disapproval of the plan by the court (c) failure of rehabilitation due to failure to achieve desired targets or goal (d) failure of debtor to perform his obligations (e) determination that the plan may no longer be implemented with its terms, conditions or assumptions (f) upon successful implementation of the plan. 2006 Bar Examination: What is the rationale for the Stay Order? The stay order is a recognition that all assets of a corporation under rehabilitation are held in trust for the equal benefit of all creditors under the doctrine of equality is equity . As all creditors ought to stand on equal footing, not any one of them should be paid ahead of others (Ruby Industrial Corp. v. Court of Appeals, 284 SCRA 445, 4460 [1998]). Furthermore, the stay order will enable the management committee or rehabilitation receiver to effectively exercise its or his powers free from judicial or extrajudicial interference that might unduly hinder or prevent rehabilitation of the corporation or hinder or prevent the rescue of the distressed company, rather than to waste its/his time, effort and resources in defending claims against the corporation (Rubberworld( Phils.), Inc. v. NLRC, 305 SCRA 721 [2000]). V. Other Matters SEC Jurisdiction: original and exclusive jurisdiction (1) fraudulent devices and schemes employed by directors detrimental to public interest (2) intra-corporate disputes and with the state in relation to their franchise and right to exist as such (3) Controversies in the election, appointment of directors, trustees, etc.

(4) petition to be declared in a state of suspension of payments NOTE: Actions involving intra-corporate controversies are cognizable by the Regional Trial Court NOT by the Securities and Exchange Commission, designated by the Supreme Court under SC Adm. Memo No. 00-11-03, which has jurisdiction over the principal office of the corporation, partnership or association concerned (Sec. 5, Rule 1, SC Adm. Memo. No. 02-2-4). (2006 Bar Examination)

INTRA-CORPORATE DISPUTES 1. For an intra-corporate dispute to exist, there must be an intra-corporate relationship and the controversy must arise from the said relationship. The controversy must be intrinsically connected with the regulation of the internal affairs of the corporation. (Arranza vs. BF Homes, 333 SCRA 799) 2. RA 8799, which became effective on August 8, 2000, transferred the SECs jurisdiction over intra-corporate disputes to courts of general jurisdiction or regional trial courts. 3. A court that is not designated as a special commercial court is not vested with jurisdiction over cases previously cognizable by the SEC and does not have the requisite power to order the transfer of cases erroneously filed with it to another branch of the RTC, the only action it could take on the matter is to dismiss the petition for lack of jurisdiction ( Calleja vs. Panday, 483 SCRA 680) SECURITIES AND THEIR REGULATION 1. In general, securities are Shares, Participation or Interest (SPI) in a Corporation or in a Commercial enterprise or Profit-making venture (CCP) and evidenced by a Certificate, Contract; Instrument, whether written or electronic in character (CCI). 2. Securities Registration is mandated to accomplish its objective of disclosure to potential investors.The reasons for mandating registration are (a) To give adequate protection and reliable information to the investing public (b) To ensure compliance with the law by the issuer (c)To allow only an issuer who is solvent, of good repute and character, and whose business is based on sound business principles. 3. Commodity Futures Contracts and Pre-Need Plans are also required to the registered. 3.1 A Commodity Futures Contract is a present right to receive at a future date a specific quantity of a given commodity for a fixed price. They are commitments to buy or sell commodities at a specified time and place in the future. The object is to realize profits in anticipation of a favorable change in price. 3.2 A pre-need plan is a contract that provides for the performance of future services or the payment of future monetary considerations at the time of actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverages and includes life, pension, education, internment, and other plans which SEC shall approve. SECURITIES MANIPULATION 1. Manipulation is an artificial control of security prices; it is an attempt to force securities to sell at prices either above or below those which would exist as a result of the normal operations of supply and demand. The manipulator hopes to profit by creating fictitious prices at the expense of the general trading public. INSIDER TRADING 1. Insider Trading occurs when an insider sells or buys a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) the insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or sale of a security of the issuer make by an insider defined in Subsection 3.8, or such insiders spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for

the market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material nonpublic information at the time of the purchase or sale. 2. An Insider shall include: (a) the Issuer (b) a director or officer of, or a person controlling, controlled by, or under common control with Issuer (c)a person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available (d) a government employee, or directors, or officer of an exchange, clearing agency and/or SRO who has access to material information about an Issuer or a security that is not generally available to the public (e) a person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is an insider. 3. Information is considered material non-public if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.