MERCANTILE LAW
2019 GOLDEN NOTES
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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Academics Committee
Faculty of Civil Law
University of Santo Tomas
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2019 Edition.
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No. ____________
Printed in the Philippines, August 2019.
ACADEMIC YEAR 2019-2020
CIVIL LAW STUDENT COUNCIL
LYODYCHIE Q. CAMARAO
MARIA FRANCES FAYE R. GUTIERREZ
KRYSTAL GAYLE R. DIGAY
PRESIDENT
INTERNAL VICE PRESIDENT
SECRETARY
TEAM: BAR-OPS
NICOLE MARIE A. CORTES
MARYLOU RENZI M. OLOTEO
CHRISTINE JOYCE P. ANDRES
KRIZA NIÑA B. MALALUAN
ELOUISA ANN DC. CARREON
CIARI T. MENDOZA
ELISHA ELAINE D. BAYOT
JOSEPHINE GRACE W. ANG
PATRICIA MAE D. GUILLERMO
RAFAEL JEROME M. MENDOZA
KHYNA MATHEA N. CANLAS
MARSHAN DEINN S. GUALBERTO
KIER JOHN V. UY
GLENN MATTHEW C. MANLAPID
VAN ANGELO K. RESPICIO
JAMES ROSS L. TAN
LOUELL JUDE B. QUE
MON FRANCIS A. TOLENTINO
CLARA LOUISSE J. YUMANG
JOCHRIS DANIEL Z. GUADES
JERREMIAH KRIZIAH B. BATALLER
CHAIRPERSON
VICE-CHAIRPERSON
SECRETARY
ASST. SECRETARY
HEAD, PUBLIC RELATIONS OFFICER
ASST. HEAD, PUBLIC RELATIONS OFFICER
HEAD, FINANCE COMMITTEE
HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS, COMMITTEE
ASST. HEAD, HOTEL ACCOMODATIONS, COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
LOGISTICS COMMITTEE
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
SENIOR MEMBER
ATTY. AL CONRAD B. ESPALDON
ADVISER
ACADEMICS COMMITTEE
EDREA JEAN V. RAMIREZ
AYA DOMINIQUE S. CAPARAS
ARIANNA LAINE T. SARMIENTO
BELLE COLLEEN T. DE LEON
PAMELA NICOLE S. MANALO
RUTH MAE G. SANVICTORES
LAURISSE MARIE T. PERIANES
CIARI T. MENDOZA
SECRETARY GENERAL
ASST. SECRETARY GENERAL
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTEE
EXECUTIVE COMMITTE
EXECUTIVE COMMITTEE
LAYOUT ARTIST
COVER DESIGN ARTIST
MERCANTILE LAW COMMITTEE
NATHAN ISAAC M. PUZON
MERCANTILE LAW COMMITTEE HEAD
JONATHAN SANTOS
FLOREE FAYE PINZON
EDREA JEAN RAMIREZ
JETT CHUAQUICO
ASST. HEAD, INSURANCE LAW
ASST. HEAD, NEGOTIABLE INSTRUMENTS LAW
ASST. HEAD, CORPORATION LAW
ASST. HEAD, INTELLECTUAL PROPERTY LAW
MEMBERS
JACOB SAMSON
JANICE BELLE BUZON
CLAUDELLE BUTALID
KIM ASCOTIA
MARY VILLANUEVA
NYEL LEANDER
PAOLO TAMAYO
STEF PERALTA
JUDGE MARIA ELLA CECILIA D. ESCALANTE
Adviser
FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA
REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN
REGENT
ATTY. ARTHUR B. CAPILI
FACULTY SECRETARY
ATTY. ELGIN MICHAEL C. PEREZ
LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC
JUDGE PHILIP A. AGUINALDO
SWDB COORDINATOR
LENY G. GADANIA, R.G.C.
GUIDANCE COUNSELOR
OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION
DEAN NILO T. DIVINA
DEAN AMADO L. DIMAYUGA
ATTY. JACINTO D. JIMENEZ
ATTY. ALBERT R. PALACIOS
ATTY. AMADO T. TAYAG
ATTY. TEOFILO R. RAGADIO
ATTY. ALLAN B. GEPTY
JUSTICE GABRIEL T. ROBENIOL
JUSTICE JAPAR B. DIMAAMPAO
JUDGE MARIA ELLA CECILIA D. ESCALANTE
ATTY. MARIAN JOANNE K. CO-PUA
ATTY. FE T. BECINA – MACALINO
For being our guideposts in understanding the intricate sphere of Mercantile Law.
-Academics Committee 2019
TABLE OF CONTENTS
I.
Letters Of Credit ...................................................................................................................... 1
II.
Trust Receipts Law ................................................................................................ 10
III.
Negotiable Instruments Law ................................................................................. 24
A. Definition and Nature of Letter of Credit ........................................................................................................ 1
B. Parties to a Letter of Credit .................................................................................................................................... 3
1. Rights and Obligations of Parties ................................................................................................................ 5
C. Basic Principles of Letter of Credit ..................................................................................................................... 5
1. Doctrine of Indpendence ............................................................................................................................ 6
2. Fraud Exception Principle .......................................................................................................................... 7
3. Doctrine of Strict Compliance .................................................................................................................. 8
A. Definition/Concept of a Trust Receipt Transaction ................................................................................ 10
1. Loan/Security Feature ................................................................................................................................. 11
2. Ownership of the Goods, Documents and Instruments under a Trust ................................ 12
B. Rights of the Entruster .......................................................................................................................................... 12
1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent
Purchaser for Value ................................................................................................................................................. 12
C. Obligation and Liability of the Entrustee ...................................................................................................... 12
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or Return of
Gooods, Documents or Instruments in Case of Sale ....................................................................... 13
2. Liability for Loss of Goods, Documents or Instruments .............................................................. 14
3. Penal Sanction if Offender is a corporation ........................................................................................ 15
D. Remedies Available ................................................................................................................................................. 15
E. Warehouseman’s Lien............................................................................................................................................. 23
A. Forms and Interpretation ..................................................................................................................................... 25
1. Requisite of Negotiability ......................................................................................................................... 25
2. Kinds of Negotiable Instruments .......................................................................................................... 32
B. Completion and Delivery....................................................................................................................................... 33
1. Insertion of Date ............................................................................................................................................... 34
2. Completion of Blanks ..................................................................................................................................... 34
3. Incomplete and Undelivered Instruments .......................................................................................... 34
4. Complete but Undelivered Instruments................................................................................................ 34
C. Signature ....................................................................................................................................................................... 36
1. Signing in Trade Name .................................................................................................................................. 37
2. Signature of Agent ........................................................................................................................................... 37
3. Indoresement by Minor or Corporation .............................................................................................. 37
4. Forgery .................................................................................................................................................................. 38
D. Consideration ............................................................................................................................................................. 42
E. Accomodation Party ............................................................................................................................................... 43
F. Negotiation .................................................................................................................................................................. 45
1. Distinguished from Assignment ............................................................................................................... 46
2. Modes of Negotiation ..................................................................................................................................... 46
3. Kinds of Indorsements .................................................................................................................................. 47
G. Rights of Holder ........................................................................................................................................................ 49
1. Holder in Due Course ...................................................................................................................................... 49
2. Defense Against the Holder ........................................................................................................................ 52
H. Liabilities of Parties .................................................................................................................................................54
1. Maker ......................................................................................................................................................................54
2. Drawer ...................................................................................................................................................................55
3. Acceptor ................................................................................................................................................................56
4. Indorser .................................................................................................................................................................56
5. Warranties ...........................................................................................................................................................59
I. Presentment for Payment ....................................................................................................................................59
1. Necessity of Present for Payment ............................................................................................................60
2. Parties to Whom Presentment for Payment Should be Made ....................................................61
3. Dispensation with Presentment for Payment ....................................................................................62
4. Dishonor by Non-Payment ..........................................................................................................................62
J. Notice of Dishonor.....................................................................................................................................................63
1. Parties to be Notified ...................................................................................................................................63
2. Parties Who May Give Notice and Dishonor....................................................................................64
3. Effect of Notice ...............................................................................................................................................64
4. Form of Notice ...............................................................................................................................................64
5. Waiver ................................................................................................................................................................64
6. Dispensation with Notice .........................................................................................................................65
7. Effect of Failure to Give Notice ..............................................................................................................65
K. Discharge of Negotiable Instrument ...............................................................................................................66
1. Discharge of Negotiable Instrument....................................................................................................66
2. Discharge of Parties Secondarily Liable ...........................................................................................67
3. Right of Party Who Discharged Instrument ...................................................................................67
4. Renunciation by Holder ............................................................................................................................67
L. Material Alteration ...................................................................................................................................................68
1. Concept ...............................................................................................................................................................68
2. Effect of Material Alteration ...................................................................................................................68
M. Acceptance ..................................................................................................................................................................69
1. Definition ..........................................................................................................................................................69
2. Manner ..............................................................................................................................................................69
3. Time for Acceptance ...................................................................................................................................70
4. Rules Governing Acceptance ..................................................................................................................70
N. Presentment for Acceptance ...............................................................................................................................70
1. Time/Place/Manner of Presentment .................................................................................................71
2. Effect of Failure to Make Presentment ..............................................................................................71
3. Dishonor by Non-Acceptance .................................................................................................................71
O. Promissory Notes ......................................................................................................................................................72
P. Checks .............................................................................................................................................................................72
1. Definition ..........................................................................................................................................................72
2. Kinds ...................................................................................................................................................................74
3. Presentment for Payment ........................................................................................................................77
4. Time .....................................................................................................................................................................77
5. Effect of Delay .................................................................................................................................................78
IV.
Insurance Code ....................................................................................................... 78
A. Concept of Insurance................................................................................................................................................78
B. Elements of an Insurance Contract ..................................................................................................................81
1. Casualty ..............................................................................................................................................................81
2. Suretyship .........................................................................................................................................................84
3. Life ........................................................................................................................................................................86
4. Compulsory Motor Vehicle Liability Insurance ............................................................................88
C. Insurable Interest .....................................................................................................................................................92
1. In Life/Health ................................................................................................................................................93
2. In Property ..................................................................................................................................................... 95
3. Double Insurance and Over Insurance ............................................................................................. 97
4. Multiple or Several Interests on Same Property ......................................................................... 99
D. Perfection of the Contract of Insurance ......................................................................................................100
1. Offer and Acceptance/Consensual .....................................................................................................101
2. Premium Payment ...................................................................................................................................102
3. Non-Default Options in Life Insurance ..........................................................................................107
4. Reinstatement of Lapsed Policy of Life Insurance ..................................................................107
5. Refund of Premiums .................................................................................................................................108
E. Rescission of Insurance Contracts .................................................................................................................109
1. Concealtment ..............................................................................................................................................109
2. Misrepresentation/Omissions ...........................................................................................................112
3. Breach of Warranties ...............................................................................................................................115
F. Claims Settlement and Subrogation .............................................................................................................116
1. Notice and Proof of Loss ........................................................................................................................116
2. Guidelines on Claims Settlement .......................................................................................................117
a. Unfair Claims Settelement; Sanctions ...................................................................................118
b. Prescription of Action ...................................................................................................................119
c. Subrogation .........................................................................................................................................119
V.
Transportation Laws ........................................................................................... 121
A. Common Carriers ...................................................................................................................................................121
1. Diligence Required of Common Carriers ......................................................................................123
2. Liabilities of Common Carrier ............................................................................................................125
B. Vigilance over Goods ............................................................................................................................................127
1. Exempting Causes ......................................................................................................................................127
a. Requirement of Absence of Negligence ................................................................................128
b. Absence of Delay ..............................................................................................................................130
c. Due Diligence to Prevent or Lessen the Loss .....................................................................130
2. Contributory Negligence ........................................................................................................................131
3. Duration of Liability .................................................................................................................................132
a. Delivery of Goods to Common Carrier ..................................................................................132
b. Actual or Constructive Delivery ...............................................................................................132
c. Temporary Unloading or Storage ............................................................................................132
4. Stipulation for Limitation of Liability ..............................................................................................133
a. Void Stipulations ..............................................................................................................................133
b. Limitation of Liability to Fixed Amount ...............................................................................134
c. Limitation of Liability in Absence of Declaration of Greater Value ......................134
5. Liability for Baggage of Passengers ..................................................................................................135
a. Checked-in Baggage ........................................................................................................................135
b. Baggage in Possession of Passengers ....................................................................................135
C. Safety of Passengers .............................................................................................................................................136
1. Void Stipulations ......................................................................................................................................136
2. Duration of Liability ................................................................................................................................137
a. Waiting for Carrier or Boarding of Carrier .........................................................................137
b. Arrival of Destination ....................................................................................................................138
3. Liability for Acts of Others .....................................................................................................................138
a. Employees ...........................................................................................................................................138
b. Other Passengers and Strangers ..............................................................................................139
4. Extent of Liability for Damages ..........................................................................................................140
D. Bill of Lading ..............................................................................................................................................................144
1. Three-Fold Character ..............................................................................................................................144
2. Delivery of Goods ......................................................................................................................................145
a. Period of Delivery ............................................................................................................................ 145
b. Delivery Without Surrender of Bill of Lading ................................................................... 145
c. Refusal of Consignee to Take Delivery ................................................................................ 145
3. Period for Filing Claims ........................................................................................................................... 145
4. Period for Filing Actions ........................................................................................................................ 146
E. Maritime Commerce .............................................................................................................................................. 147
1. Charter Parties ............................................................................................................................................ 147
a. Bareboat/Demise Charter ........................................................................................................... 147
b. Time Charter ...................................................................................................................................... 147
c. Voyage/Trip Charter ...................................................................................................................... 147
2. Liability of Ship Owners and Shipping Agents ........................................................................... 148
a. Liability for Acts of Captain ....................................................................................................... 149
b. Limited Liability Rule .................................................................................................................... 151
c. Exceptions to the Limited Liability Rule ............................................................................. 152
3. Accidents and Damages in Maritime Commerce........................................................................ 153
a. General and Particular Averages ............................................................................................. 153
b. Collissions ........................................................................................................................................... 154
4. Carriage of Goods by Sea Act ............................................................................................................... 156
a. Application .......................................................................................................................................... 156
b. Notice of Loss or Damage ............................................................................................................ 156
c. Period of Prescription .................................................................................................................. 157
d. Limitation of Liability ................................................................................................................... 158
F. The Warsaw Convention ..................................................................................................................................... 158
1. Applicability ................................................................................................................................................. 159
2. Limitation of Liability ............................................................................................................................. 160
a. Liability to Passengers .................................................................................................................. 160
b. Liability for Checked Baggage.................................................................................................... 160
c. Liability for Handcarried Baggage ......................................................................................... 160
3. Willful Misconduct .................................................................................................................................... 161
VI.
The Corporation Code .......................................................................................... 162
A. Corporation ............................................................................................................................................................... 162
1. Definition ....................................................................................................................................................... 162
2. Attributes of the Corporation .............................................................................................................. 162
B. Classes of Corporations ....................................................................................................................................... 167
C. Nationality of Corporations .............................................................................................................................. 173
1. Place of Incorporation Test .................................................................................................................. 173
2. Control Test .................................................................................................................................................. 173
3. Grandfather Rule ....................................................................................................................................... 173
D. Corporate Juridical Personality ...................................................................................................................... 176
1. Doctrine of Separte Judicial Personality ........................................................................................ 176
a. Liability for Torts and Crimes .................................................................................................. 179
b. Recovery of Moral Damages ...................................................................................................... 180
2. Doctrine of Piercing the Corporate Veil ......................................................................................... 181
a. Grounds for Application of Doctrine .................................................................................... 181
b. Test in Determining Applicabilty .......................................................................................... 184
E. Incorporation and Organization .................................................................................................................... 186
1. Number and Qualifications of Incorporators .............................................................................. 186
2. Corporate Name – Limitation on Use of Corporate Name ................................................... 188
3. Corporate Term .......................................................................................................................................... 191
4. Minimum Capital Stock and Subscription Requirements ..................................................... 191
5. Articles of Incorporation ....................................................................................................................... 192
a. Nature and Function Articles .................................................................................................... 192
b. Contents ................................................................................................................................................192
c. Amendment .......................................................................................................................................193
d. Non-Amenable Items ....................................................................................................................194
6. Registration and Issuance of Certificate of Incorporation ..................................................195
7. Adoption of By-Laws ................................................................................................................................195
a. Nature and Functions of By-Laws ...........................................................................................195
b. Requisites of Valid By-Laws .......................................................................................................196
c. Binding Effects ...................................................................................................................................197
d. Amendment or Revision .............................................................................................................198
F. Corporate Powers ..................................................................................................................................................198
1. General Powers, Theory of General Capacity ..............................................................................199
2. Specific Powers, Theory of Specific Capacity .............................................................................201
a. Power to Extend and Shorten Corporate Term ...............................................................201
b. Power to Increase or Decrease Capital Stock or Incurm Create, Increase Bonded
Indebtedness ............................................................................................................................................202
c. Power to Deny Pre-Emptive Rights .......................................................................................204
d. Power to Sell or Dispose of Corporate Assets ..................................................................206
e. Power to Acquire Own Shares .................................................................................................207
f. Power to Invest Corporate Funds in Another Corporation or Business .............208
g. Power to Declare Dividends .......................................................................................................209
h. Power to Enter Into Management Contract ......................................................................212
i. Ultra Vires Acts .................................................................................................................................213
i.
Applicability of Ultra Vires Doctrine .................................................................213
ii.
Consequences of Ultra Vires Act ..........................................................................216
3. How Exercised .............................................................................................................................................217
a. By the Shareholders .......................................................................................................................217
b. By the Directors ................................................................................................................................217
c. By the Officers ....................................................................................................................................218
4. Trust Fund Doctrine .................................................................................................................................220
G. Board of Directors and Trustees ....................................................................................................................222
1. Doctrine of Centralized Management .............................................................................................222
2. Business Judgment Rule .........................................................................................................................223
3. Tenure, Qualifications and Disqualifications of Directors or Trustees ..........................223
4. Elections .........................................................................................................................................................226
a. Cumulative Voting/Straight Voting ........................................................................................227
b. Quorum .................................................................................................................................................228
5. Removal ..........................................................................................................................................................228
6. Filing of Vacancies .....................................................................................................................................229
7. Compensation ..............................................................................................................................................230
8. Fiduciaries Duties and Liability Rules ............................................................................................231
9. Responsibility for Crimes .......................................................................................................................235
10. Inside Information .....................................................................................................................................236
11. Contracts ........................................................................................................................................................236
a. By Self-Dealing with the Corporation ....................................................................................236
b. Between Corporations with Interlocking Directors ......................................................237
12. Executive Committee ...............................................................................................................................237
13. Meetings .........................................................................................................................................................238
a. Regular or Special ............................................................................................................................238
i.
When and Where .........................................................................................................238
ii.
Notice ..................................................................................................................................238
b. Who Presides .....................................................................................................................................240
c. Quorum .................................................................................................................................................240
d. Rule on Abstention .........................................................................................................................241
H. Stockholders and Members ............................................................................................................................... 241
1. Rights of a Stockholder and Member ............................................................................................... 241
a. Doctrine of Equality of Shares .................................................................................................. 242
2. Participation in Management .............................................................................................................. 242
a. Proxy ...................................................................................................................................................... 242
b. Voting Trust ....................................................................................................................................... 244
c. Cases When Stockholdrs’ Action is Required .................................................................... 246
3. Proprietary Rights ................................................................................................................................... 249
a. Right to Dividends ........................................................................................................................... 249
b. Right of Appraisal ............................................................................................................................ 249
c. Right to Inspect ................................................................................................................................ 251
d. Pre-Emptive Right .......................................................................................................................... 254
e. Right to Vote ..................................................................................................................................... 254
f. Right of First Refusal ..................................................................................................................... 255
4. Remedial Rights ......................................................................................................................................... 255
a. Individual Suit ................................................................................................................................... 256
b. Representative Suit ........................................................................................................................ 256
c. Derivative Suit ................................................................................................................................... 256
5. Obligations of a Stockholder ................................................................................................................ 260
6. Meetings ......................................................................................................................................................... 260
a. Regular or Special .......................................................................................................................... 260
i.
When and Where ......................................................................................................... 260
ii.
Notice................................................................................................................................... 260
b. Who Calls the Meetings ................................................................................................................ 262
c. Quorum ................................................................................................................................................ 262
d. Minutes of Meetings ....................................................................................................................... 262
I. Capital Structure .................................................................................................................................................... 262
1. Subscription Agreements ...................................................................................................................... 262
2. Consideration for Stocks ........................................................................................................................ 264
3. Shares of Stock ........................................................................................................................................... 265
a. Nature of Stock ................................................................................................................................. 266
b. Watered Stock .................................................................................................................................. 266
i. Definition ......................................................................................................................... 266
ii. Liability of Directors for Watered Stocks ......................................................... 267
iii. Trust Fund Doctrine for Liability for Watered Stocks .............................. 267
d. Situs of the Shares of Stock ........................................................................................................ 267
e. Classes of Shares of Stock ........................................................................................................... 268
4. Payment of Balance of Subscription ................................................................................................ 271
a. Call by Board of Directors ........................................................................................................... 272
b. Notice Requirement ....................................................................................................................... 272
c. Sale of Delinquent Shares ............................................................................................................ 272
i.
Effect of Delinquency ............................................................................................. 272
ii.
Call by Resolution of the Board of Directors .............................................. 273
iii.
Notice of Sale .............................................................................................................. 273
iv.
Auction Sale and the Highest Bidder .............................................................. 274
5. Certificate of Stock ................................................................................................................................... 274
a. Nature of the Certificate ............................................................................................................... 274
b. Uncertifcated Shares ..................................................................................................................... 275
c. Negotiability ...................................................................................................................................... 275
i.
Requirements for Valid Transfer of Stocks ................................................. 275
d. Issuance ................................................................................................................................................ 278
i.
Full Payment .............................................................................................................. 278
ii.
Payment Pro-Rata ..................................................................................................... 278
e. Lost or Destroyed Certificates ...................................................................................................278
6. Stock and Transfer Book .......................................................................................................................280
a. Contents ................................................................................................................................................280
b. Who may make Valid Entries ....................................................................................................280
7. Disposition and Encumbrance of Shares ......................................................................................280
a. Sale of Shares .....................................................................................................................................280
b. Allowable Restrictions on the Sale of Shares ...................................................................280
c. Requisites of a Valid Transfer ..................................................................................................281
d. Involuntary Dealings with Shares ...........................................................................................282
J. Dissolution and Liquidation .............................................................................................................................282
1. Modes of Dissolution.................................................................................................................................283
a. Voluntary .............................................................................................................................................284
i.
Where No Creditors Are Affected ....................................................................284
ii.
Where Creditors Are Affected ............................................................................285
iii.
By Shortening of Corporate Term ....................................................................285
b. Involuntary .........................................................................................................................................286
i.
By Expiration of Corporate Term .....................................................................286
ii.
Failure to Organize and Commence Business Within 2 Years From
Incorporation .............................................................................................................287
iii.
Legislative Dissolution ...........................................................................................287
iv.
Dissolution by the SEC on Ground under Existing Laws ....................288
2. Methods of Liquidation .........................................................................................................................288
a. By the Corporation Itself ..............................................................................................................290
b. Conveyance to a Trustee within a Three-Year Period ................................................290
c. By Management Committee or Rehabilitation Receiver ............................................291
d. Liquidation After Three Years ..................................................................................................297
K. Other Corporations ...............................................................................................................................................297
1. Non-Stock Corporations .........................................................................................................................297
a. Definition .............................................................................................................................................297
b. Purposes ..............................................................................................................................................300
c. Treatment of Profits ......................................................................................................................300
d. Distribution of Assets upon Dissolution ..............................................................................300
2. Foreign Corporations................................................................................................................................301
a. Bases of Authority over Foreign Corporations .................................................................301
i. Consent ..............................................................................................................................301
ii. Doctrine of “Doing Business” (related to definition under the Foreign
Investments Act, R.A. No. 7042) ............................................................................302
b. Necessity of License to Do Business ......................................................................................303
i. Requisites for Issuance of a License ....................................................................304
ii. Resident Agent ...............................................................................................................305
c. Personality to Sue ...........................................................................................................................306
d. Suability of Foreign Corporations ..........................................................................................306
e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue .....307
f. Grounds for Revocation of License ..........................................................................................308
L. Mergers and Consolidations .............................................................................................................................308
1. Definition and Concept ...........................................................................................................................308
2. Plan of Merger or Consolidation ........................................................................................................312
3. Articles of Merger or Consolidation ................................................................................................312
4. Procedure ......................................................................................................................................................313
5. Effectivity .......................................................................................................................................................313
6. Effects and Limitations ...........................................................................................................................315
VII.
Securities Regulation Code (R.A. No. 8799) ................................................................318
A. State Policy, Purpose .......................................................................................................................................... 318
B. Definition of Securities....................................................................................................................................... 318
C. Kinds of Securities ............................................................................................................................................... 318
1. Exempt Securities ...................................................................................................................................... 321
2. Exempt Transactions ............................................................................................................................... 322
3. Non Exempt .................................................................................................................................................. 323
D. Procedure for Registration of Securities ................................................................................................... 323
E. Prohibitions on Fraud, Manipulation and Insider Trading ............................................................. 325
1. Manipulation of Security Prices ............................................................................................................. 325
2. Fraudulent Transactions............................................................................................................................ 326
3. Insider Trading .............................................................................................................................................. 326
F. Protection of Investors ........................................................................................................................................ 328
1. Tender Offer Rule ......................................................................................................................................... 328
2. Rules on Proxy Solicitation ....................................................................................................................... 331
3. Disclosure Rule .............................................................................................................................................. 331
G. Civil Liability ............................................................................................................................................................. 332
VIII.
Banking Laws ........................................................................................................ 334
A. The New Central Bank Act (R.A. No. 7653) ............................................................ 334
State Policies ................................................................................................................................................ 334
Responsibility and Primary Objective of the BSP ...................................................................... 334
Monetary Board – Powers and Functions...................................................................................... 335
How the BSP Handles Banks in Distress......................................................................................... 336
a. Conservatorship ............................................................................................................................... 336
b. Closure ................................................................................................................................................. 337
c. Receivership ...................................................................................................................................... 338
d. Liquidation .......................................................................................................................................... 339
5. Legal Tender Power ................................................................................................................................. 342
6. Foreign Exchange Operations ............................................................................................................. 342
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended) ............................................... 343
1. Purpose .......................................................................................................................................................... 343
2. Prohibited Acts ........................................................................................................................................... 343
3. Deposits Covered ...................................................................................................................................... 344
4. Exceptions ..................................................................................................................................................... 344
5. Garnishment of Deposits, including Foreign Deposits ........................................................... 349
C. General Banking Law of 2000 (R.A. No. 8791) ..................................................................................... 349
1. Definition and Classification of Banks ............................................................................................ 350
2. Distinction of Banks from Quasi-Banks and Trust Entitites ................................................ 351
3. Bank Powers and Liabilities ................................................................................................................ 352
a. Corporate Powers ........................................................................................................................... 352
b. Banking and Incidental Powers .............................................................................................. 352
4. Diligence Required of Banks ................................................................................................................ 354
5. Nature of Bank Funds and Bank Deposits .................................................................................... 355
6. Stipulation of Interests ........................................................................................................................... 357
7. Grant of Loans and Security Requirements ................................................................................. 358
a. Ratio of Net Worth to Total Risk Assets .............................................................................. 358
b. Single Borrower’s Limit ............................................................................................................... 358
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and
their Related Interests) ..................................................................................................................... 359
1.
2.
3.
4.
IX.
Intellectual Property Code ................................................................................... 360
A. Intellectual Property Rights in General ................................................................................. 360
1. Intellectual Property Rights ................................................................................................................. 360
B. Patents
1.
2.
3.
.............................................................................................................................................................................367
Patentable Inventions ...........................................................................................................................367
Non-Patentable Inventions .................................................................................................................370
Ownership of a Patent ..........................................................................................................................371
a. Right to a Patent ...............................................................................................................................371
b. First-to-File Rule ..............................................................................................................................371
c. Inventions Created Pursuant to a Commission ...............................................................371
d. Right to Priority .................................................................................................................................371
4. Grounds for Cancellation of a Patent ............................................................................................373
5. Remedy of the True and Actual Inventor ...................................................................................373
6. Rights Conferred by a Patent ............................................................................................................374
7. Limitations of Patent Rights .............................................................................................................374
a. Prior User .............................................................................................................................................375
b. Use by the Government ................................................................................................................375
8. Patent Infringement ..............................................................................................................................376
a. Tests in Patent Infringement .....................................................................................................376
i.
Literal Infringement ................................................................................................376
ii.
Doctrine of Equivalents .........................................................................................376
b. Defenses in Action for Infringement .....................................................................................378
9. Licensing .....................................................................................................................................................378
a. Voluntary .............................................................................................................................................378
b. Compulsory ........................................................................................................................................379
10. Assignment and Transmission of Rights ..................................................................................381
C. Trademarks .................................................................................................................................................................382
1. Definition of Marks, Collective Marks, Trade Names .........................................................382
2. Acquisition of Ownership Mark ....................................................................................................384
3. Acquisition of Ownership of Trade Name ...............................................................................387
4. Non-Registrable Marks .......................................................................................................................388
5. Tests to Determine Confusing Similarity between Marks ................................................390
a. Dominancy Test ..............................................................................................................................390
b. Holistic Test ......................................................................................................................................393
6. Well-Known Marks .............................................................................................................................396
7. Rights Conferred by Registration ................................................................................................398
8. Infringement and Remedies ..........................................................................................................399
a. Trademark Infringement ...........................................................................................................399
9. Unfair Competition .............................................................................................................................402
10. Damages ..................................................................................................................................................404
D. Copyright ........................................................................................................................................................................404
1. Basic Principles, Sections 172.2, 175 and 181 ............................................................................404
2. Copyrightable Works ...............................................................................................................................405
a. Original Works ................................................................................................................................405
b. Derivative Works ...........................................................................................................................406
3. Non-Copyrightable Works ....................................................................................................................406
4. Rights of Copyright Owner ...................................................................................................................407
5. Rules on Ownership of Copyright .....................................................................................................411
6. Limitations on Copyright .......................................................................................................................413
a. Doctrine of Fair Use ......................................................................................................................416
7. Copyright Infringement ..........................................................................................................................417
E. Differences between Copyright, Trademark and Patent .......................................................................422
X.
Special Laws .......................................................................................................... 427
A. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194) ..427
1. Policy of the Law .......................................................................................................................................427
2. Covered Institutions ................................................................................................................................ 427
3. Obligations of Covered Institutions ................................................................................................. 428
4. Covered Transactions ............................................................................................................................ 428
5. Suspicious Transactions ........................................................................................................................ 429
6. When is Money Laundering Committed ........................................................................................ 429
7. Unlawful Activities or Predicate Crimes ........................................................................................ 429
8. Anti-Money Laundering Council ....................................................................................................... 430
9. Functions ....................................................................................................................................................... 430
10. Freezing of Monetary Instrument or Property .......................................................................... 431
11. Authority to Inquire into Bank Deposits ....................................................................................... 433
B. Foreign Investment Act (R.A. No. 7042) ................................................................................................. 435
1. Policy of the Law ...................................................................................................................................... 435
2. Definition of Terms ................................................................................................................................ 436
a. Foreign Investment ...................................................................................................................... 436
b. “Doing Business” in the Philippines ................................................................................... 436
c. Export Enterprise ......................................................................................................................... 437
d. Domestic Market Enterprise .................................................................................................. 437
C. Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142) .......................... 476
1. Types of Rehabilitation Proceedings ........................................................................................... 477
a. Court Supervised ........................................................................................................................... 477
i.
Voluntary Proceedings .......................................................................................... 477
ii.
Involuntary Proceedings ...................................................................................... 477
b. Pre-Negotiated ............................................................................................................................... 477
c. Out of Control or Informal ........................................................................................................ 479
2. Commencement Order .......................................................................................................................... 480
3. Rehabilitation Receiver ......................................................................................................................... 483
4. Management Committee....................................................................................................................... 484
5. Rehabilitation Plan ................................................................................................................................. 485
6. Cram Down Effect .................................................................................................................................... 486
7. Stay or Suspension Order ................................................................................................................... 486
8. Liquidation ................................................................................................................................................. 487
a. Kinds of Debtors ............................................................................................................................ 487
i.
Juridical Debtors ....................................................................................................... 487
1) Voluntary Liquidation .................................................................................... 487
2) Involuntary Liquidation ................................................................................ 487
ii.
Individual Debtors ................................................................................................... 488
1) Suspension of Payments............................................................................... 488
2) Voluntary Liquidation ................................................................................... 488
3) Involuntary Liquidation ............................................................................... 488
b. Procedure .......................................................................................................................................... 492
i.
Conversion of Rehabilitation Proceedings to Liquidation .................. 492
ii.
Liquidation Order .................................................................................................... 492
iii.
Effects of the Liquidation Order ....................................................................... 492
iv.
Rights of Secured Creditors ................................................................................ 493
v.
Powers, Duties, and Responsibilities of the Liquidator ....................... 493
vi.
Determination of Claims ....................................................................................... 494
vii.
Liquidation Plan ........................................................................................................ 494
DISCLAIMER
THE RISK OF USE OF THIS BAR
REVIEW MATERIAL SHALL BE
BORNE BY THE USER
Mercantile Law
device developed by merchants as a convenient and
relatively safe mode of dealing with the sales of
goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to
have control of the goods before paying (Transfield
Philippines, Inc. v. Luzon Hydro Corp., supra).
LETTERS OF CREDIT
DEFINITION AND NATURE OF LETTER OF
CREDIT (L/C)
LAWS GOVERNING LETTERS OF CREDIT
Letter of credit is governed by the Uniform
Customs and Practice for documentary
Creditsissued by the International Chamber of
Commerce. Letters of credit are in effect absolute
undertakings to pay the money advanced or the
amount for which credit is given on the faith of the
instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby into
contracts of guaranty (Metropolitan Waterworks vs.
Daway, G.R. No. 160723, July 21, 2004).
Letter of Credit (L/C) (2016 Bar)
It is any arrangement, however named or described,
whereby the issuing bank acting at the request and
on the instructions of a customer (applicant) or on
its own behalf, binds itself to: (PAN)
1.
2.
3.
Pay to the order of, or accept and pay drafts
drawn by a third party (Beneficiary);
Authorize another bank to pay or to accept and
pay such drafts; or
Authorize another bank to Negotiate, against
stipulated documents.
NOTE: The law on contracts and damages shall also
apply to provide remedies to the party aggrieved by
the breach of the main contract although such
breach will not affect the obligation of the bank to
pay the beneficiary or its right to obtain
reimbursement from the applicant of the letter of
credit if the terms of the letters of credit have been
complied with.
Provided, the terms and conditions of the credit are
complied with (Art. 2, Uniform Customs & Practice
for Documentary Credits).
It is an instrument issued by a bank that guarantees
its client’s ability to pay for imported goods or
services, by authorizing a person to draw drafts on
the bank or its correspondents for the bank’s
account, under conditions specified in the L/C.
(Prudential Bank V. IAC, 216 SCRA 257)
DURATION OF LETTERS OF CREDIT
1.
2.
PURPOSE OF LETTER OF CREDIT
Upon the period fixed by the parties; or
If none is fixed, one year from the date of
issuance.
NOTE: An issuing bank which paid the beneficiary
upon an expired LC can recover the payment from
the applicant which obtained the goods from the
beneficiary to prevent unjust enrichment (Rodzssen
Supply Co. v. FEBTC, G.R. No. 109087, May 9, 2001).
A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode
of dealing with sales of goods to satisy the seemingly
irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer,
who wants to have in control of the goods before
paying. The use of credits in commercial
transactions serves to reduce the risk of
nonpayment of the purchase price under the
contract of sale of the goods and to reduce the risk
of non-performance of an obligation in a non-sale
setting. (Transfield Philippines, Inc. vs. Luzon Hydro
Corp., GR. No. 146717, November 22, 2004).
Incidents in the life of a Letter of Credit
(CAppIsSExReRe)
1.
2.
3.
4.
5.
Non-payment of the buyer of its obligation
under the Letter of Credit does not give the bank
the right to take possession of the goods covered
by the Letter of Credit
6.
7.
Contract of Sale between the buyer and seller
Application for L/C by the buyer with the bank
Issuance of L/C by the bank
Shipping of goods by the seller
Execution of draft and tender of documents by
the seller
Redemption of draft (payment) and obtaining
of documents by the issuing bank
Reimbursement to the bank and obtaining of
documents by the buyer
The opening of a L/C does not vest ownership of the
goods in the bank in the absence of a trust receipt
agreement. A letter of credit is a mere financial
1
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Letters of Credit
ESSENTIAL CONDITIONS OF A LETTER OF
CREDIT
under
letter.
(DeLi)
1.
2.
It must be issued in favor of a definite person;
and
Limited to a fixed or specified amount, or to one
or more indeterminate amounts, but all within
a maximum sum the limit of which must be
exactly stated.
Other Kinds of L/C
KINDS OF LETTER OF CREDIT
Payable upon the
presentation by the
seller-beneficiary
of
documents that show
he
has
taken
affirmative steps to
comply with the sales
agreement
Revocable L/C can be cancelled or amended at any
time by either the buyer or the issuing bank without
any formal notification
STANDBY L/C
Involves
non-sale
transactions.
Irrevocable L/C- issuing bank may not without the
consent of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter.
The issuing bank is precluded from revoking the
credit.
Payable
upon
certification by the
beneficiary of the
applicant’s
nonperformance of the
agreement.
The
documents
that
accompany
the
beneficiary's
draft
must show that the
applicant has not
performed
the
undertaking
(Transfield Philippines,
Inc. v. Luzon Hydro
Corp., supra).
Revolving L/C- it provides for renewed credit to
become available as soon as the opening bank has
advised the negotiating or paying bank that the
draft drawn by the beneficiary have already been
reimbursed to the opening bank by the buyer.
Back-to-back L/C- a credit with identical
documentary requirements and covering the same
merchandise as another letter of credit, except for a
difference in the price of the merchandise as shown
by the invoice and the draft. The second L/C can
only be negotiated ONLY after the first is negotiated.
Confirmed L/C- the correspondent bank gives an
absolute assurance to the beneficiary that it will
undertake the issuing bank’s obligation as its own
according to the terms and conditions of the credit.
An Unconfirmed L/C is the other way around.
IRREVOCABLE LETTER OF CREDIT vs.
CONFIRMED LETTER OF CREDIT
BASIS
IRREVOCABLE
L/C
What it
pertains
to
Duration of the
L/C.
What it
means
The
issuing
bank may not,
without
the
consent of the
beneficiary and
the applicant,
revoke
its
undertaking
CONFIRMED L/C
Q: When does an Irrevocable Letter of Credit
become a consummated contract?
Kind of obligation
assumed by the
correspondent
bank.
The
correspondent
bank gives an
absolute
assurance to the
beneficiary that it
will undertake the
issuing
bank’s
obligation as its
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
own according to
the terms and
condition of the
credit
(FEATI
Bank and Trust Co.
v. CA, G.R. No.
94209, April 30,
1991).
Hence, the mere fact that a letter of credit is
irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of
the issuing bank has also confirmed the letter of
credit.
NOTE: If any of these essential conditions is not
present, the instrument is merely considered as a
letters of recommendation (Art. 568, Code of
Commerce).
COMMERCIAL L/C
Involves the payment
of money under a
contract of sale.
the
A: An irrevocable letter of credit becomes a
consummated contract when the agent or
correspondent bank or any bank in the country of
the creditor pays or delivers to the latter the amount
in foreign currency, as authorized by the bank in the
country of the debtor in compliance with the letter
of credit granted by it. It is the date of the payment
of the amount in foreign currency to the creditor in
his country by the agent or correspondent bank of
the bank in the country of the debtor that turns from
2
Mercantile Law
executory to executed or consummated contract. It
is not the date of payment by the debtor to the bank
in his country of the amount of foreign exchange
sold that makes the contract executed or
consummated, because the bank may grant the
debtor extension of time to pay such debt (Belman
Inc. v. Central Bank, G.R. No. L-10195, November 29,
1958 .).
customer/applicant is not a condition sine qua
non for reimbursement.
3.
Courts cannot order the release to the applicant
of the proceeds of an Irrevocable Letter of Credit
without the consent of the Beneficiary
NOTE: Failure of the beneficiary to fulfill his
obligation under the main contract does not
negate his right to payment from the issuing
bank as long as he is able to submit the required
documents and comply with the terms of the
credit. This is without prejudice to his liability
against the account party under the law on
contracts and damages (DOCTRINE OF
INDEPENDENCE).
Such order violates the irrevocable nature of the L/C.
The terms of an irrevocable letter of credit cannot
be changed without the consent of the parties,
particularly the beneficiary thereof (Phil. Virginia
Tobacco Administration v. De Los Angeles, G.R. No. L27829, August 19, 1988).
In commercial transactions involving letters of
credit, the functions assumed by a correspondent
bank are classified according to the obligations
taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a
confirming bank
PARTIES TO A LETTER OF CREDIT
Parties to a Letter of Credit transaction (ABaBe)
1.
Beneficiary/Seller/Exporter – is the one in
whose favor the instrument is executed. One
who delivers the documents of title and draft to
the issuing bank to recover payment. He has a
prestation to do under the main contract.
Applicant/Buyer/Importer/Account Party –
procures the letter of credit and purchases the
goods and obliges himself to reimburse the
issuing bank upon receipt of the documents of
title.
GR: The applicant has no obligation to
reimburse the issuing bank if the latter pays
without the stipulated documents or in case of
discrepant documents
XPN: The applicant waives the discrepancy.
He has the right to have the marginal deposit
deducted from the principal obligation under
the L/C and to have the interest computed only
on the balance and not on the face value thereof.
2.
Issuing Bank – one which, whether a paying
bank or not, issues the L/C and undertakes to
pay the seller upon receipt of the draft and
proper documents of title from the seller and to
surrender them to the buyer upon
reimbursement. After due payment, issuing
bank is entitled to reimbursement as a matter
of right. Reimbursement includes debiting the
bank account of the applicant, if any.
NOTE: The failure of the beneficiary to present
the draft to the applicant does not affect the
right of the issuing bank to reimbursement.
Presentment
for
acceptance
to
the
3
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Letters of Credit
DIFFERENT ROLES AND LIABILITIES OF THE BANKS INVOLVED IN LETTER OF CREDIT TRANSACTIONS
The number of parties may be increased. The following additional parties may be:
KIND OF BANK
ROLE
LIABILITY
Serves as an agent of the issuing
bank;
Notifying/
Advising Bank
Warrants
the
apparent
(Appearance to unaided senses)
authenticity of the L/C
Lends credence to the L/C issued
by a lesser-known bank.
Confirming Bank
Paying Bank
The confirming bank collects fees
for such engagement and obtains
reimbursement from the issuing
bank.
May either be the issuing bank or
any other bank in the place of the
issuing bank
to
facilitate
payment to the beneficiary.
Does not incur any obligation more than just
notifying the seller/beneficiary of the opening
of the L/C after it has determined its apparent
authority.
It does not guarantee the genuineness or due
execution of the L/C. It is not liable for damages
even if the L/C turns out to be spurious
provided the spurious character is not
apparent on the face of the instrument.
Direct obligation, as if it is the one which issued
the L/C.
Its obligation is similar to the issuing banks.
Thus, beneficiary may tender documents to the
confirming bank and collect payment.
Direct obligation.
Depends on the stage of negotiation, thus:
Negotiating Bank
Buys the seller’s draft and later on
sells the draft to the issuing bank.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
4
1. Before negotiation – No liability with
respect to the seller. Merely suggests its
willingness to negotiate.
2. After negotiation – A contractual
relationship will then arise, making the bank
liable. As holder, it has the right to payment
from the bank primarily liable on the draft
(either the issuing or confirming bank). If the
party primarily liable on the L/C refuses to
honor the draft, the negotiating bank has the
right to proceed against the drawer thereof.
Mercantile Law
RIGHTS AND OBLIGATIONS OF PARTIES
(MWSS v. Hon. Daway, G.R. No.160732, June 21,
2004).
Three (3) distinct but intertwined contracts in a
Letter of Credit transaction (2002, 2008 Bar)
1.
The liability of issuing bank is primary and solidary.
Neither is the issuing bank entitled to the benefit of
excussion.
Between the applicant/buyer/importer/account
party and the beneficiary/seller/exporter
The applicant is the one who procures the letter
of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of
title while the beneficiary is the one who in
compliance with the contract of sale ships the
goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover
payment for the goods. The relationship
between them is governed by the law on sales
if it is a commercial L/C but if it is a stand-by
letter of credit it is governed by the law on
obligations and contract.
2.
3.
BASIC PRINCIPLES OF LETTER OF CREDIT
Letters of Credit are not considered as
Negotiable Instruments
A L/C is not considered a negotiable instrument.
However, drafts issued in connection with L/C’s can
be considered negotiable instruments. The
presumption that the drafts drawn in connection
with the L/C’s have sufficient consideration applies.
(Lee v. CA, G.R. No. 117913, February 1, 2002)
Between the issuing bank and the beneficiary/
seller/exporter
Distuinguished from Trust
The issuing bank is the one that issues the letter
of credit and undertakes to pay the beneficiary
upon strict compliance of the latter to the
requirements set forth in the letter of credit. On
the other hand, the beneficiary surrenders
document of title to the bank in compliance
with the terms of the L/C. Their relationship is
governed by the terms of the L/C.
The concept of a trust presupposes the existence of
a specific property which has been conferred upon
the person for the benefit of another. In order
therefore for the trust theory of the private
respondent to be sustained, the petitioner should
have had in its possession a sum of money as
specific fund advanced to it by the issuing bank and
to be held in trust by it in favor of the private
respondent. This does not obtain in this case.
Between the issuing bank and the applicant/
buyer/importer
The mere opening of a letter of credit, it is to be
noted, does not involve a specific appropriation of a
sum of money in favor of the beneficiary. It only
signifies that the beneficiary may be able to draw
funds upon the letter of credit up to the designated
amount specified in the letter. It does not convey the
notion that a particular sum of money has been
specifically reserved or has been held in trust
(FEATI Bank and Trust Co. v. CA, G.R. No. 94209,
April 30, 1991).
The applicant obliges himself to reimburse the
issuing bank upon receipt of the documents of
title. Their relationship is governed by the
terms of the application and agreement for
the issuance of the L/C by the bank.
XPN: When a L/C specifically stipulates
otherwise, the obligation of the banks issuing
L/Cs is solidary with that of the person or entity
requesting for its issuance, the same being
direct, primary, absolute and definite
undertaking to pay the beneficiary upon the
presentation of the set of documents required
therein(MWSS v. Hon. Daway, G.R. No.160732,
June 21, 2004).
Q: ABC Company filed a Petition for
Rehabilitation with the Court. An order was
issued by the Court, (1) staying enforcement of
all claims, whether money or otherwise against
ABC Company, its guarantors and sureties not
solidarily liable with the company; and (2)
prohibiting ABC Company from making
payments of the liabilities, outstanding as of the
date of the filing of the Petition. XYC Company is
a holder of an irrevocable Standby Letter of
Credit which was previously procured by ABC
Company in favor of XYC Company to secure
performance of certain obligations. In the light
of the Order issued by the Court, can XYC
An Issuing Bank is not a guarantor
The concept of guarantee vis-a-vis the concept of
irrevocable L/C is inconsistent with each other. L/Cs
are primary obligations and not security contracts
and while they are security arrangements, they are
not converted thereby into contracts of guaranty
5
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Letters of Credit
Company still be able to draw on their
Irrevovable Standby Letter of Credit when due?
Explain your answer. (2012 Bar)
The independence principle doctrine works to the
benefit of both the issuing bank and the
beneficiary. (Transfield Philippines v. Luzon Hydro
Corpo, 443 SCRA 307) Note: They are the ones
entitled to invoke the principle.
A: YES. XYC Company, the beneficiary of the standby
letter of credit, can draw on the letter of credit
despite filing of petition for corporate
rehabilitation. The liability of the bank that issued
the letter of credit is primary and solidary. Being
solidary, the claims against them can be pursued
separately from and independently of the
rehabilitation case (MWSS v. Daway, G.R. No.160732,
June 21, 2004).
Two-Fold nature of the Independence Principle
1.
2.
DOCTRINE OF INDEPENDENCE/ INDEPENDENCE
PRINCIPLE
The relationship of the buyer and the bank is
separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying
the L/C has been fulfilled or not because in
transactions involving L/C, banks deal only with
documents and not goods (BPI v. De Reny Fabric
Industries, Inc., L-2481, October 16, 1970).
Effect of the buyer’s failure to procure a Letter of
Credit to the main contract
The L/C is independent from the contract of sale. The
failure of the buyer to open, the appropriate L/C did
not prevent the birth of that contract, and neither
did such failure extinguish that contract. The
opening of the L/C in favor of the seller was an
obligation of the buyer and the performance of that
obligation by buyer was a condition of enforcement
of the reciprocal obligation of seller to ship the
subject matter of the contract to buyer. But the
contract itself between the buyer and the seller had
already sprung into legal existence and was
enforceable.
In effect, the buyer has no course of action against
the issuing bank.
As the principle's nomenclature clearly suggests,
the obligation under the letter of credit is
independent of the related and originating contract.
In brief, the letter of credit is separate and distinct
from the underlying transaction (PNB vs SMC, GR No.
186063, January 15, 2014).
Signifiance and role of banks
The failure of a buyer seasonably to furnish an
agreed L/C is a breach of the contract between
buyer and seller. Where the buyer fails to open a
letter of credit as stipulated, the seller or exporter is
entitled to claim damages for such breach. Damages
for failure to open a commercial credit may, in
appropriate cases, include the loss of profit which
the seller would reasonably have made had the
transaction been carried out (Reliance Commodities,
Inc. v. Daewoo Industrial Co. Ltd., G.R. No. L-100831,
December 17, 1993).
The independence principle assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not.
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume any
liability or responsibility for the description,
quantity, weight, quality, condition, packing,
delivery, value or existence of the goods
represented by any documents, or for the good faith
or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
whomsoever.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Independence in toto - the credit is
independent from the justification aspect and is
a separate obligation from the underlying
agreement. This principle is illustrated by
standby L/C.
Independence only as to the justification
aspect - which is identical with the same
obligations under the underlying agreement.
This principle is illustrated by a commercial L/C
or repayment standby (Transfield v. Luzon
Hydro Corp., supra).
Partial payments on the loan cannot be added in
computing the issuing bank’s liability under its
own Standby Letter of Credit
Although these payments could result in the
reduction of the actual amount, which could
ultimately be collected from the issuing bank, the
latter’s separate undertaking under its letters of
credit remain. The letter of credit is an absolute and
primary undertaking which is separate and distinct
6
Mercantile Law
from the contract underlying it (Insular Bank of Asia
& America v. IAC, G.R. No. 74834, November 17, 1988).
(Transfield Philippines, Inc. v. Luzon Hydro Corp.,
supra).
In a standby letter of credit securing a loan
obligation, any payment of the debtor to the creditor
should not be deducted from the total obligation of
the issuing bank to the beneficiary. The issuing
bank, after payment of the full amount, is entitled to
full reimbursement from the debtor. But the debtor
may recover excess payment from the creditor to
prevent unjust enrichment.
Q: PJ Corporation (PJ) obtained a loan from ABC
Bank (ABC) in the amount of P10 million for the
purchase of 100 pieces of ecodoors. Thereafter,
a Letter of Credit was obtained by PJ against
such loan. The beneficiary of the Letter of Credit
is Scrap Metal Corp. (Scrap Metal) in Beijing,
China. Upon arrival of 100 pieces of ecodoors, PJ
executed a Trust Receipt in favor of ABC to cover
for the value of the ecodoors for its release to PJ.
The terms of the Trust Receipt is that any
proceeds from the sale of the ecodoors will be
delivered to ABC as payment. After the ecodoors
were sold, PJ, instead of paying ABC, used the
proceeds of the sale to order from Scrap Metal
another 100 pieces of ecodoors but using
another bank to issue a new Letter of Credit fully
covered by such proceeds.
Q: X Corporation entered into a contract with PT
Construction Corporation for the latter to
construct and build a sugar mill within six (6)
months. They agreed that in case of delay, PT
Construction
Corporation
will
pay
X
Corporation P100,000.00 for everyday of the
delay. To ensure payment of the agreed amount
of damages, PT Construction Corporation
secured from Atlantic Bank a confirmed and
irrevocable letter of credit which was accepted
by X Corporation in due time. One week before
the expiration of the six (6) month period, PT
Construction Corp. requested for an extension of
time to deliver claiming that the delay was due
to the fault of X Corporation. A controversy as to
the cause of delay which involved the
worksmanship of the building ensued. The
controversy remained unsolved. Despite the
controversy, X corporation presented a claim
against Atlantic Bank by executing a draft
against the letter of credit.
PJ refused to pay the proceeds of the sale of the
first set of ecodoors to ABC, claiming that the
ecodoors that were delivered were defective. It
then instructed ABC not to negotiate the Letter
of Credit that was issued in favor of Scrap Metal.
As counsel of ABC, you are asked for advice on
whether or not to grant the instruction of PJ.
What will be your advice? (2016 Bar)
A: I will not grant the instruction of PJ. Under the
independence principle, the obligation of the bank
to pay the Scrap Metal Corporation is not dependent
upon the fulfillment or non-fulfillment of the main
contract underlying the letter of credit but
conditioned only on its submission of the stipulated
documents to ABC Bank.
a.
Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain.
b. Can X Corporation claim directly from PT
Construction Corp.? Explain. (2008 Bar)
A:
a. NO. Atlantic Bank cannot refuse to pay X
Corporation. This is because of the Doctrine of
Independence which provides that the
obligation of the issuing bank to pay the
beneficiary does not depend on the fulfillment
or non-fulfillment of the contract supporting
the letter of credit. The only instance where
Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply
with the letter of credit.
b. YES. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by
itself does not come into operation without a
contract supporting it. It is not a contract that
can stand on its own, it needs a supporting
contract. It is merely an alternative course and
does not in any way prevent the beneficiary
from directly claiming from the applicant
FRAUD EXCEPTION PRINCIPLE
The Exception to the Independence Principle
(2010 Bar)
The “Fraud Exception Principle” is the exception to
the Independence Principle. It provides that the
untruthfulness of a certificate accompanying a
demand for payment under a standby letter of credit
may qualify as fraud sufficient to support an
injunction against payment.
Under the fraud exception principle, the beneficiary
may be enjoined from collecting on the letter of
credit if the beneficiary committed fraud by
substituting fraudulent documents even if on their
face the documents complied with the
requirements.
7
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Letters of Credit
This principle refers to fraud in relation with the
independent purpose or character of the L/C and
not only fraud in the performance of the obligation
or contract supporting the letter of credit
(Transfield vs. Luzon Hydro Corp., supra).
Note: Fraud pertains to the accompanying
documents and certificate and NOT to the main
transaction itself
On the arrangement made upon instruction of
the consignee, H&T Corporation of LA,
California, the SP Bank of LA issued an
irrevocable letter of credit available at sight in
favor for the total purchase price of the logs. The
letter of credit was mailed to FE Bank with the
instruction "to forward it to the beneficiary".
The letter of credit provided that the draft to be
drawn is on SP Bank and that it be accompanied
by, among other things, a certification from AC,
stating that the logs have been approved prior
shipment in accordance with the terms and
conditions of the purchase order.
Remedy for fraudulent abuse
Injunction against payment is the remedy; provided
the requisites enumerated immediately below this
item are present.
Before loading of the vessel chartered by AC, the
logs were inspected by custom inspectors and
representatives of the Bureau of Forestry, who
certified to the good condition and exportability
of the logs. After loading was completed, the
Chief Mate of the vessel issued a mate receipt of
the cargo which stated that the logs are in good
condition. However, AC refused to issue
required certification in the letter of credit.
Because of the absence of certification, FE Bank
refused to advance payment on the letter of
credit.
Requisites in order to enjoin the Beneficiary
from drawing or collecting under the Letter of
Credit on the basis of fraud (PAI)
1.
2.
3.
Clear Proof of fraud;
Fraud constitutes fraudulent Abuse of the
independent purpose of the letter of credit and
not only fraud under the main agreement; and
Irreparable Injury might follow if injunction is
not granted or the recovery of damages would
be seriously damaged (Ibid).
DOCTRINE OF STRICT COMPLIANCE
a.
May FE Bank be held liable under the Letter
of Credit? Explain.
b. Under the facts above, the seller, BV, argued
that FE Bank, by accepting the obligation to
notify him that the irrevocable letter of
credit has been transmitted to it on his
behalf, has confirmed the letter of credit.
Consequently, FE Bank is liable under the
letter of credit. Is the argument tenable?
Explain. (1993 Bar)
The documents tendered by the seller/beneficiary
must strictly conform to the terms of the L/C. The
tender of documents must include all documents
required by the letter. It is not a question of whether
or not it is fair or equitable to require submission of
documents but whether or not the documents were
agreed upon. Thus, a correspondent bank which
departs from what has been stipulated under the
L/C acts on its own risk and may not thereafter be
able to recover from the buyer or the issuing bank,
as the case may be, the money thus paid to the
beneficiary. (Feati Bank and Trust Company v. CA,
Supra)
A.
a. FE Bank cannot be held liable under the letter
of credit since the certificate is not issued by BV.
It is a settled rule in commercial transactions
involving letters of credit that the documents
tendered must strictly conform to the terms of
the letter of credit. The tender of documents by
the beneficiary (seller) must include all
documents required by the letter. A
correspondent bank which departs from what
has been stipulated under the letter of credit, as
when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance
(Feati Bank and Trust Company v. CA, Supra).
Since the bank principally deals only with
documents, the absence of any document required
in the documentary credit justifies the refusal by the
correspondent bank to negotiate, accept or pay the
beneficiary, as it is not its obligation to look beyond
the documents. It merely has to rely on the
completeness of the documents tendered by the
beneficiary. (Feati Bank and Trust Company v. CA,
Supra)
Q: BV agreed to sell to AC, a Ship and
Merchandise Broker, 2500 cubic meters of logs
at $27 per cubic meter FOB. After inspecting the
logs, CD issued a purchase order.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
b.
8
The argument made by BV is untenable. The FE
Bank in this case is only a notifying bank and
Mercantile Law
not a confirming bank. It is tasked only to notify
and/or transmit the required documents and
its obligation ends there. It is not privy to the
contract between the parties, its relationship is
only with that of the issuing bank and not with
the beneficiary to whom he assumes no liability.
To sustain the argument that the marginal deposit
should be considered only after computing the
principal plus accrued interests and other charges
would be to countenance a clear case of unjust
enrichment, for while a marginal deposit earns no
interest in favor of the debtor-depositor, the bank is
not only able to use the same for its own purposes,
interest-free, but is also able to earn interest on the
money loaned to respondent Corporation. Indeed, it
would be onerous to compute interest and other
charges on the face value of the letter of credit which
the petitioner issued, without first crediting or
setting off the marginal deposit which the
respondent Corporation paid to it. Compensation is
proper and should take effect by operation of law
because the requisites in Article 1279 of the Civil
Code are present and should extinguish both debts
to the concurrent amount. (The Consolidated Bank
And Trust Corporation [Solidbank], vs. CA, G.R. No.
114286. April 19, 2001)
Q: At the instance of CCC Corporation, AAA Bank
issued an irrevocable Letter of Credit in favor of
BBB Corporation. The terms of the irrevocable
L/C state that the beneficiary must present
certain documents including a copy of the Bill of
Lading of the importation for the bank to release
the funds, BBB Corporation could not find the
original copy of the Bill of Lading so it instead
presented to the bank a Xerox copy of the Bill of
Lading. Would you advice the bank to allow the
drawdown on the Letter of Credit? (2012 Bar)
A: NO, because the rule of strict compliance in
commercial transactions involving letters of credit,
requiring documents set as conditions for the
release of the fund has to be strictly complied with
or else funds will not be released.
The marginal deposit requirement is a Central Bank
measure to cut off excess currency liquidity which
would create inflationary pressure. It is a collateral
security given by the debtor, and is supposed to be
returned to him upon his compliance with his
secured obligation. Consequently, the bank pays no
interest on the marginal deposit, unlike an ordinary
bank deposit which earns interest in the bank. As a
matter of fact, the marginal deposit requirement for
letters of credit has been discontinued, except in
those cases where the applicant for a letter of credit
is not known to the bank or does not maintain a
good credit standing therein (Bankers Associations
of the Philippines Policy, Rules 6 and 7)
RULE ON MARGINAL DEPOSIT
Marginal deposit- It is the collateral security given
by Applicant, who is entitled to have it first
deducted from the principal obligation under the
L/C, for interest to accrue only on the balance, and
such deposit is to be returned upon Applicant’s
compliance
with
this
obligation,
since
compensation takes effect by operation of law.
(Villanueva, 2018)
DOCTRINE OF STRICT COMPLIANCE vs. INDEPENDENCE PRINCIPLE
Basis
Principle
Consequence of the
Doctrine
Payment of
Beneficiary
the
Doctrine of Strict Compliance
Doctrine of Independence
Documents tendered by the seller or
beneficiary must strictly conform to the
terms of the letter of credit.
A correspondent bank which departs
from what has been stipulated and acts
on its own risk may not thereafter be
able to recover.
Beneficiary cannot draw on the letter of
credit if he did not comply with its terms
and conditions.
Relationship of the buyer and the bank is
separate and distinct from the relationship
of the buyer and seller in the main contract.
The bank is not required to investigate
whether the contract underlying the L/C
has been fulfilled or not.
9
Fraud Exception Principle can enjoin
beneficiary from drawing or collecting
under the L/C if there is fraud in relation
with the independent purpose of the L/C.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Trust Receipts Law
TRUST RECEIPT
(Presidential Decree No. 115)
2.
DEFINITION/CONCEPT OF A
TRUST RECEIPT TRANSACTION
Trust Receipt (TR) transaction
Two possible situations in a trust receipt
transaction:
It is any transaction between the entruster and
entrustee:
1.
2.
1.
Whereby the entruster who owns or holds title
or security interests over certain specified
goods, documents or instrument (GDI), releases
the same to the possession of entrustee upon
the latter’s execution of a TR agreement.
2.
Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of
default:
a. to sell or otherwise dispose such GDI with
the obligation to turn over to the entruster
the proceeds to the extent of the amount
owing to it; or
b. to turn over the GDI itself if not sold or
otherwise disposed of in accordance with
the terms and conditions specified in the
TR.
Like L/C’s, TR’s are not negotiable instruments. The
presumption of consideration under the negotiable
instrument law may not necessarily be applicable to
trust receipts (Lee v. CA, supra).
Subjects of a trust receipt transaction (GDI)
1.
2.
3.
It is a document which expresses a security
transaction where the lender, having no prior title
to the goods on which the lien is to be constituted,
and not having possession over the same since
possession thereof remains in the borrower, lends
him money to the borrower on security of the goods
which borrower is privileged to sell, clear of the lien,
and with an agreement to pay all or part of the sale
proceeds to the lender (Metropolitan Bank vs. Go,
G.R. No. 155647, November 23, 2007).
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. [Sec. 3 (d), P.D. 115] Goods must be
object of lawful commerce.
Documents – written or printed evidence of title
to goods. [Sec. 3 (a), P.D. 115] e.g. L/C.
Instruments
–
negotiable
instruments;
certificates of stock, or bond or debenture for
the payment of money issued by a corporation,
or certificates of deposit, participation
certificates or receipts, credit or investment
instruments of a sort marketed in the ordinary
course of business or finance. [Sec. 3 (e), P.D.
115] e.g. checks, drafts, promissory notes, bills
of exchange.
Parties to a trust receipt transaction
1.
Two views regarding Trust Receipts
2.
As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for
the entruster and to sell or otherwise dispose of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Entregarla- Covered by a provision which
refers to money received under the obligation
involving the duty to deliver it to the owner of
the merchandise sold
Devolvera- Covered by a provision which
referes to merchandise received under the
obligation to “return” it to owner.
(Colinares v CA, 339 SCRA 609)
A Trust Receipt is not a negotiable instrument
A TR 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 his liability with the bank. It is a
security arragement to which a bank acquires
ownership of the imported personal property
(Garcia vs. CA G.R. No. 119845, July 5, 1996).
1.
GDI with the obligation to turn over to the
entruster the proceeds if they are unsold or not
otherwise disposed of, in accordance with the
terms and conditions specified in the TR (Sec. 4,
P.D. 115).
As a commercial transaction – It is a separate
and independent security transaction intended
to aid in financing importers and retail dealers
who do not have sufficient funds (Nacu v. CA,
G.R. No. 108638, March 11, 1994).
10
Entruster - A lender, financer or creditor. It is
the person holding title over the GDI subject of
a TR transaction; it releases possession of the
goods upon execution of TR [Sec. 3 (c), P.D. 115].
Entrustee - A borrower, buyer, importer or
debtor. He is the person to whom the goods are
delivered for sale or processing in trust, with
the obligation to return the proceeds of sale of
Mercantile Law
the goods or the goods to the entruster [Sec. 3
(b), P.D. 115].
manufacture of items to be sold is sufficient to prove
that the transaction was a simple loan and not a
trust receipts transaction.
Transactions not considered as a trust receipt
1.
2.
3.
When both parties enter into an agreement
knowing fully well that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not
a trust receipt transaction penalized under Sec. 13
of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the
parties would be the return of the proceeds of the
sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase
of the goods (Hur Tin Yang vs. People, supra).
A sale by a person in the business of selling for
profit who retains general property rights in the
GDI.
Where the seller retains title or other interest
as security for the payment of the purchase
price (Sec. 4, P.D. 115).
If the entrustee is already the owner or in
possession of the goods before delivery of the
loan and execution of the trust receipt
transaction, the transaction shall be considered
a simple loan even though the parties may have
denominated the agreement as one of TR. To be
in the nature of TR, the entruster should have
financed the acquisition or importation of the
goods. The funds should have been delivered
before or simultaneously with delivery of the
goods (Colinares v. CA, G.R. No. 90828,
September 5, 2000; Consolidated Bank and Trust
Corporation v. CA, G.R. No. 114286, April 19,
2001).
LOAN/SECURITY FEATURE
Two features of a trust receipt transaction
1.
2.
4.
Where the entruster bank knew even before the
execution of the trust receipt agreements that
the construction materials covered were never
intended by the entrustee for resale or for the
manufacture of items to be sold. (2007 Bar)
Loan feature - is brought about by the fact that
the entruster financed the importation or
purchase of the goods under TR (Sps. Vintola vs.
IBAA, G.R. No. 73271, May 29, 1987).
Security feature - property interest in the GDI to
secure performance of some obligation of the
entrustee or of some third persons to the
entruster (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, G.R. No.
137232, June 29, 2005).
Effects of the dual features of a trust receipt
Q: Supermax is a domestic corporation engaged
in the construction business. On various
occasions,
Metrobank
extended
several
commercial letters of credit to Supermax. These
commercial credits were used by Supermax to
pay for delivery of several construction
materials to be used in their construction
business. Thereafter, Metrobank required Hur
Tin Yang, as representative and Vice President
for Internal Affairs of Supermax, to sign 24 trust
receipts as security for the construction
materials. When 24 TRs fell due and despite the
receipt of demand letter, Supermax failed to pay
or deliver the goods or proceeds to Metrobank.
As the demands fell on deaf ears, Metrobank
filed a complaint for estafa against Hur Tin Yang.
1.
2.
3.
Is Hur Tin Yang guilty of estafa?
4.
A: NO. The dealing between Hur Tin Yang and
Metrobank was not a TR transaction but one of
simple loan. The Court, in Ng vs. People, and Land
Bank of the Philippines v. Perez, ruled that the fact
that the entruster bank knew even before the
execution of the trust receipt agreements that the
construction materials covered were never
intended by the entrustee for resale or for the
11
The entrustee cannot absolutely be relieved of
the obligation to pay his loan just because he
surrendered the goods to the entruster if the
entruster refuses to accept and subsequently
deposited them in the custody of the court (Sps.
Vintola vs. IBAA, supra).
The entrustee cannot be relieved of his
obligation to pay the loan in favor of the
entruster bank in case of loss or destruction of
the GDI (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, supra).
Where the proceeds of the sale are insufficient
to satisfy the loan executed by the entrustee, the
entruster bank can institute an action to collect
the deficiency (Landl Co. vs. Metropolitan Bank
and Trust Co. G.R. No. 159622, July 30, 2004).
Repossession by the entruster of the GDI does
not amount to dacion en pago. The repossession
of the goods by the entrustee was merely to
secure the payment of its obligation to the
entrustor and not for the purpose of
transferring ownership in satisfaction of the
obligation (PNB vs. Pineda, G.R. No. L-46658 May
13, 1991).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Trust Receipts Law
Letter of credit-trust receipt arrangement
A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a
loan covered by the letter of credit, with the trust
receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by
the letter of credit, and a security feature which is in
the covering trust receipt. A trust receipt, therefore,
is a security agreement, pursuant to which a bank
acquires a "security interest" in the goods. It secures
an indebtedness and there can be no such thing as
security interest that secures no obligation (Vintola
vs. Insular Bank of Asia and America, 150 SCRA 578).
4.
VALIDITY OF THE SECURITY INTEREST AS
AGAINST THE CREDITORS OF THE ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE
Entruster has a better right over the goods than
that of the creditors of the entrustee
The entruster’s security interest in goods,
documents, or instruments pursuant to the written
terms of a TR shall be valid as against all creditors
of the entrustee for the duration of the TR agreement
(Sec. 12, P.D. 115).
OWNERSHIP OF THE GOODS, DOCUMENTS, AND
INSTRUMENTS UNDER A TRUST RECEIPT
Real owner of the articles subject of the Trust
Receipt transaction
The security interest of the entruster over the goods
under the trust receipt is superior to the monetary
claims of the laborers of the entrustee.
The real owner of the articles subject of the TR is the
entrustee who binds himself to hold the designated
GDI. The entruster merely holds a security interest.
If under the trust receipt, the bank is made to appear
as the owner, it was but an artificial expedient, more
of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with
purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To
consider the bank as the true owner from the
inception of the transaction would be to disregard
the loan feature thereof (Rosario Textile Mills Corp.
vs. Home Bankers Savings and Trust Company,
supra).
NOTE: A purchaser in good faithcan defeat the rights
of the entruster over the goodsand acquires the
goods, documents or instruments free from the
entruster's security interest (Sec. 11, P.D. 115).
OBLIGATION AND LIABILITY
OF THE ENTRUSTEE
Obligations and Liabilitites of the Entrustee
(HoRe-InK-TuROb)
NOTE: The entrustee cannot mortgage the goods
because one of the requisites of a valid mortgage is
that the mortgagor must be the absolute owner of
the property mortgaged or must have free disposal
thereof. Entrustee is not the absolute owner of the
goods under trust receipt nor has free disposal
thereof.
1.
2.
3.
RIGHTS OF THE ENTRUSTER (PRe-CaSe)
1.
2.
3.
4.
To be entitled to the Proceeds from the sale of
the GDI to the extent of the amount owing to
him.
To the Return of the GDI in case of non-sale and
enforcement of all other rights conferred to him
in the TR.
May Cancel the trust and take possession of the
goods, upon default or failure of the entrustee
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
to comply with any of the terms and conditions
of the TR.
To Sell the goods and apply the proceeds
thereof in payment of the obligation, provided,
entrustee is notified at least five (5) days prior
to the date of sale. Entrustee shall be liable to
pay deficiency, if any (Sec 7, P.D. 115).
5.
6.
7.
12
To Hold GDI in trust for the entruster and to
dispose of them strictly in accordance with the
terms of TR.
To Receive the proceeds of the sale for the
entruster and to turn over the same to the
entruster to the extent of amount owing to the
latter.
To Insure GDI against loss from fire, theft,
pilferage or other casualties.
To Keep GDI or the proceeds thereof, whether
in money or whatever form, separate and
capable of identification as property of the
entruster.
To Turn over to the entruster the proceeds to
the extent of the amount owing to the tnruster
or as appears in the trust receipt
To Return GDI to the entruster in case they
could not be sold or upon demand of the
entruster.
To Observe all other conditions of the TR (Sec.
9, P.D. 115)
Mercantile Law
NOTE: Not all obligations of the entrustee are
criminal in nature. The gravamen of the criminal
offense under the trust receipts law is the failure of
the entrustee to deliver the proceeds of the sale to
the entruster up to the extent of the entrutee's
obligations or the return of the same in case of nonsale.
(10) units of Mercedes Benx S class vehicles
after which, the vehicles were all delivered to
the Car display room of CCC Car, Inc. Sale of the
vehicles were slow, and it took a month to
dispose of the ten (10) units. CCC Car, Inc.
wanted to be in business and to save on various
documentations required by the bank, decided
that instead of turning over the proceeds of the
sales, CCC Car Inc. used the proceeds to buy
another ten (10) units of BMW 3 series.
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
DISPOSITION OF GOODS, DOCUMENTS OR
INSTRUMENTS
a.
Is the action of CCC Car, Inc. legally justified?
Explain your answer.
b. Will the corporate officers of CCC Car, Inc. be
held liable under the circumstances?
Explain your answer. (2012 Bar)
The proceeds of the sale of GDI shall be applied in
the following (SaDeP):
1.
2.
3.
Expenses of the Sale;
Expenses Derived from re-taking, keeping and
storing the GDI; and
Principal obligation (Sec. 7, P.D. 115).
A:
NOTE: Full payment of the loan or delivery of the
proceeds of the sale equivalent to the full amount of
the obligation extinguishes both criminal and civil
liabilities of the entrustee. In case of deficiency, the
entrustee shall be liable thereon. However, any
excess shall belong to him.
RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE
In case the goods, documents or instruments were
not sold the entrustee should return the GDI to the
entruster (Sec. 4, P.D. 115).
NOTE: In case they are unsold, or not otherwise
disposed of In accordance with terms and condition
specified in tr or for other purposes substantially
equivalent
a.
NO. It is the obligation of the entrustee, CCC
Car, Inc. to receive the proceeds of the sale
of the goods covered by the trust receipts in
trust for the entruster and to turn over the
same to him the extent of the obligation
(Sec. 4, P.D. 115).
B. YES. Failure of the entrustee to turn over
the proceeds of the sale of the goods shall
constitute the crime of estafa. If the
violation is committed by a juridical entity,
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.
Hence, the corporate officers are criminally
liable for the violation of the law being he
human agent responsible for the same (Sec.
13, P.D. 115).
Elements estafa in trust receipt transactions
The return of the GDI in case of non-sale
extinguishes only the criminal liability of the
entrustee unless he pays in full his loan obligation.
The consequent acquittal of the entrustee in the
criminal case does not bar the filing of a separate
civil action to enforce the civil liability of the
entrustee.
In order that the entrustee may be validly
prosecuted for estafa under Art. 315, paragraph
1(b) of the RPC, in relation with Sec. 13 of PD 115,
the following elements must be established
(MADRe):
1.
The failure to turn over goods or proceeds realized
from the sale thereof is a criminal offense under Art.
315(l) (b) of RPC (estafa) except if he disposed of
the goods in accordance with the terms.
2.
3.
Q: CCC Car, Inc. obtained a loan from BBB Bank,
which fund was used to import ten (10) units of
Mercedes Benz S class vehicles. Upon arrival of
the vehicles and before release of said vehicles
to CCC Car, Inc. X and Y, the President and
Treasurer, respectively, of CCC Car, Inc. signed
the Trust Receipt to cover tha value of the ten
4.
13
The entrustee Misappropriated or converted
the goods and/or the proceeds of the sale;
The entrustee performed such acts with Abuse
of confidence to the damage and prejudice of
entruster; and
A Demand was made on the entrustee by
entruster for the remittance of the proceeds or
the return of the unsold goods
The entrustee Received the subject goods in
trust or under the obligation to sell the same
and to remit the proceeds thereof to the
entruster, or to return the goods if not sold;
(Land Bank of the Philippines vs. Perez, GR No.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Trust Receipts Law
166884, June 13, 2012).
transaction can be found in the ‘whereas’ clause of
PD 115 which states that a trust receipt is to be
utilized ‘as a convenient business device to assist
importers and merchants solve their financing
problems.’ The State, in enacting the law, sought to
find a way to assist importers and merchants in
their financing in order to encourage commerce in
the Philippines.
NOTE: If proof as regards the delivery of GDI to the
accused (entrustee) is insufficient, estafa will not lie
(Ramos vs. CA, G.R. No. L-399225, August 21, 1987).
Compliance with the obligation under the Trust
Receipt agreement vis-a-vis criminal liability
If compliance occurred:
1.
2.
The principle is of course not limited in its
application to financing importations, since the
principle is equally applicable to domestic
transactions. Regardless of whether the transaction
is foreign or domestic, it is important to note that
the transactions discussed in relation to trust
receipts mainly involved sales (Ng vs. People,
supra).
Before the criminal charge - there is no criminal
liability.
After the charge even before conviction - the
criminal action will not be extinguished.
Q: TRUE or FALSE. Explain briefly your answer.
(a) A conviction under the Trust Receipts Law
shall bar a prosecution for estafa under the
Revised Penal Code. (2017 Bar)
When both parties enter into an agreement
knowing that the return of the goods subject of the
trust receipt is not possible even without any fault
on the part of the entrustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115;
the only obligation actually agreed upon by the
parties would be the return of the proceeds of the
sale transaction. The transaction becomes a mere
loan, where the borrower is obligated to pay the
bank the amount spent for the purchase of the goods
(Land Bank of the Philippines vs. Perez, supra).
A: FALSE. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent
of the amount owing to the entruster, or to return
said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of
estafa (Sec. 13, PD 115).
When the debtor receives the goods subject of the
trust receipt before the the trust receipt itself was
entered into, the transaction is a simple loan and not
a trust receipt agreement (Colinares v. Court of
Appeals G.R No. 90828, September 5, 2000)
P.D. 115 does not violate the prohibition in the
Constitution against imprisonment for nonpayment of a debt
What is being punished is the dishonesty and abuse
of confidence in the handling of money or goods to
the prejudice of another regardless of whether the
latter is the owner or not. It does not seek to enforce
payment of the loan. Thus, there can be no violation
of a right against imprisonment for non-payment of
a debt (People vs. Nitafan, G.R. No. 81559, April 6,
1992).
LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
Entrustee shall bear the loss of the goods,
documents, or instruments which are the subject of
a TR.
NOTE: Loss of the GDI which is the subject of a TR,
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 (Sec. 10, P.D. 115).
Q: Is lack of intent to defraud a bar to the
prosecution of these acts or omissions? (2006
Bar)
A: NO. The mere failure to account or return gives
rise to the crime which is malum prohibitum. There
is no requirement to prove intent to defraud (Ching
vs. Secretary of Justice, G.R. No. 164317, February 6,
2006).
Res perit domino in trust receipt
Principle of Res Perit Domino is not a valid defense
against an Entrustee in cases of loss or destruction
of the goods, documents, or instruments secured by
a Trust Receipt.For the principle of res perit domino
to apply the entrustee must be the owner of the
goods at the time of the loss. A TR is a security
agreement, pursuant to which a bank acquires a
‘security interest’ in the goods. If under a trust
Penal sanction is not available if the goods are
not intended for sale or resale
To be a TR transaction, the goods must be intended
for sale or resale. The true nature of a trust receipt
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
14
Mercantile Law
receipt transaction, the entruster is made to appear
as the owner, it was but an artificial expedient, more
of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants.
Thus, the ownership of the goods remaining with
the entrustee, he cannot be relieved of the
obligation to pay his/her loan in case of loss or
destruction (Rosario Textile Mills vs. Home Bankers
Association, supra).
the Trust Receipts Law provides that if the violation
or offense is committed by a corporation,
partnership, association, or other juridical entity,
the penalty provided for in the law 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.
PENAL SANCTION IF OFFENDER IS A
CORPORATION
REMEDIES AVAILABLE
If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penal sanction shall be
imposed upon the directors, officers, employees or
other officials or persons therein responsible for the
offense (Sec. 13, P.D. 115).
Defenses available to negate criminal liability if
the entrustee (No CoCa CoLA Co)
1.
2.
3.
Rationale behind the accountability of the
officers of the corporation
The rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law (Ching v. Secretary of Justice,
supra).
4.
Non-receipt of the goods by the entrustee or
where proof of delivery of goods to the accused
is insufficient (Ramos vs. CA, supra).
Compliance with the terms of the TR either by
payment, return of the proceeds or return of the
goods (Sec. 13, P.D. 115).
Cancellation of the TR agreement and taking
into possession of the goods by the entruster.
NOTE: In the event of default by the Entrustee
on his obligation under the Trust Receipt
agreement, it is NOT absolutely necessary for
the Entruster to cancel the trust and take
possession of the goods to be able to enforce his
right thereunder.The entrustee has the
discretion to avail of such right or seek any
alternative action at any time upon default or
failure of the entrustee to comply with any of
the terms and conditions of the trust agreement
(South City Homes, Inc. vs. BA Finance Corp., G.R.
No. 135462, December 7, 2001).
NOTE: An officer of a corporation who signed a TR
cannot hide behind the cloak of the separate
corporate personality of the corporation, where “he
is the actual, present and efficient actor.” Corporate
officers or employees, through whose act, default or
omission the corporation commits a crime, are
individually guilty of the crime.
Q: CCC Car, Inc. obtained a loan from BBB Bank,
which fund was used to import 10 units of
Mercedes Benz S Class vehicles. Upon arrival of
the vehicles and before the release of said
vehicles to CCC Car, Inc., X and Y, the president
and treasurer, respectively, of CCC signed the
Trust Receipt to cover the value of the 10 units
of Mercedes Benz S class vehicles, after which,
the vehicles were all delivered to the car display
room of CCC. Sales of the vehicles were slow, and
it took a month to dispose the 10 units. CCC
wanted to be in business and to save on various
documentations required by the bank. It
decided that instead of turning over the
proceeds of the sales, CCC used the proceeds to
buy another 10 units of BMW 3 series. Will the
corporate officers of CCC be held liable under
the circumstances? (2012 Bar)
A: YES, particularly the president and treasurer of
CCC who both signed the trust receipt. Section 13 of
NOTE: Repossession of the goods
extinguish only the criminal liability.
5.
15
will
Repossession of the goods by the Entruster
cannot be considered as payment. Payment
would legally result only after the entruster has
foreclosed on the securities, sold the same and
applied the proceeds thereof to the entrustee’s
obligation. Since the TR is a mere security
arrangement, the repossession by the entruster
cannot be considered payment of the
loan/advances given to the entrustee under the
letter of credit/trust receipt (PNB v. Pineda,
supra).
Compromise by parties before filing of
information in court. Compromise of estafa case
arising from TR transaction, after the case has
been filed in court does not amount to novation
and does not erase the criminal liability of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Trust Receipts Law
6.
7.
accused (Ong vs. CA, G.R. No. L-58476, September
2, 1983).
Loss of goods without fault of the entrustee.
b. AC Bank can also foreclose the mortgage over
the fishpond if Ricardo fails to pay the loan of
P1M.
NOTE: Such loss will not extinguish entrustee’s
liability for the value of the goods. (Sec. 10, P.D.
115)
Failure of the entrustee to deliver the proceeds
of sale will give the entruster the right to file a
civil action and a criminal action for estafa
(1991, 1997, 2006 Bar)
The transaction does not fall under the ambit
PD 115
Sec. 13 of P.D. 115, Trust Receipts Law, provides
that the failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent
of the amount owing to the entruster or as appears
in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa.
e.g. TR was made after the goods covered by it
had been purchased, making the buyer the
owner thereof. The transaction does not involve
a TR but a simple loan (Colinares vs. CA, G.R. No.
90828, September 5, 2000, Consolidated Bank
and Trust Corporation vs. CA, G.R. No. 114286,
April 19, 2001).
8.
Consignment.
The civil action may be instituted in the criminal
action or separately filed independently of the
criminal action. The criminal action is based on exdelictu for violation of the law while the civil action
is based on ex-contractu for violation of the trust
receipt arrangement.
Q: BBB Banking Corporation issued a Letter of
Credit in the amount of P5Million, for the
purchase of five (5) tons of corn by X. Upon
arrival of the goods, the goods were delivered to
the warehouse of X. Thereafter he was asked to
sign a Trust Receipt covering the goods. When
the goods were sold, X did not deliver the
proceeds to BBB Banking Corporation, arguing
that he will need the fund for the subsequent
importation. Is there sufficient basis to sue for
criminal action? (2012 Bar)
Q. Dennis failed to comply with his undertaking
under the TR he issued in favor of ABC bank. The
bank filed both criminal and civil cases against
Dennis. The court proceeded with the civil case
independently from the criminal case. Is the
court correct in proceeding independently
although a criminal case is also instituted?
A: There is no sufficient basis for a criminal action
because when the trust receipt was signed, the
ownership of the goods was already with X, hence
there is no TR agreement to speak of.
A: YES, the complaint against Dennis is based on the
failure of the latter to comply with his obligation as
spelled out in the TR. This breach of obligation is
separate and distinct from any criminal liability for
"misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents
or instruments released under trust receipts",
punishable under Sec. 13 of the PD 115. Being based
on an obligation ex contractu and not ex delicto, the
civil action may proceed independently of the
criminal proceedings instituted against petitioners
regardless of the result of the latter (Sarmiento vs.
CA, G.R. No. 122502, December 27, 2002).
Q: Ricardo mortgaged his fishpond to AC Bank to
secure a P1M loan. In a separate transaction, he
opened a letter of credit with the same bank for
$500,000 in his favor of HS Bank, a foreign bank,
to purchase outboard motors. Likewise, Ricardo
executed a Surety Agreement in favor of AC
Bank.
a.
Can AC Bank take possession of the
outboard motors? Why?
b. Can AC Bank also foreclose the mortgage
over the fishpond? (2005 Bar)
Effect of novation of a Trust Agreement
Where the entruster and entrustee entered into an
agreement which provides for conditions
incompatible with the TR agreement, the obligation
under the trust receipt is extinguished. Hence, the
breach in the subsequent agreement does not give
rise to a criminal liability under P.D. 115 but only
civil liability (Philippine Bank vs. Ong, G.R. No.
133176, August 8, 2002).
A:
a. If what Ricardo executed is a trust receopt, AC
Bank can take possession of the outboard
motors so that it can exercise its lien and sell
them. If what Ricardo executed is a Surety
Agreement, AC Bank cannot take possession of
the outboard motors because it has no lien on
them.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
16
Mercantile Law
Deposits in a savings account opened by the buyer
subsequent to the Trust Receipt transaction cannot
be automatically applied to outstanding obligations
under the Trust Receipt account. The receipt of the
bank of a sum of money without reference to the TR
obligation does not obligate the bank to apply the
money received against the trust receipt obligation.
Neither does compensation arise because
compensation is not proper when one of the debts
consists in civil liability arising from criminal
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No.
134436, Aug. 16, 2000).
FORM AND ESSENTIAL TERMS OF A
WAREHOUSE RECEIPT
It need not be in particular form but must embody
within its written or printed terms (LCD-DSWDLF):
1.
2.
3.
4.
Q: E received goods from T for display and sale
in E's store. E was to turn over to T the proceeds
of any sale and return the ones unsold. To
document their agreement, E executed a trust
receipt in T’s favor covering the goods. When E
failed to turn over the proceeds from his sale of
the goods or return the ones unsold despite
demand, he was charged in court for estafa. E
moved to dismiss on the ground that his liability
is only civil. Is he correct? (2011 Bar)
5.
6.
7.
8.
9.
A: NO, since his breach of the trust receipt
agreement subjects him to both civil and criminal
liability for estafa.
Location of the warehouse
Consecutive number of the receipt
Date of the issue
A statement whether the goods received will be
Delivered to bearer, to a specified person or to
a specified person or his order
Signature of the warehouseman
If the receipt is issued for goods of which the
Warehouseman is the owner, either solely or
jointly or in common with others, the fact of
such ownership; and
Description of the goods
A statement of the amount of advances made
and of liabilities incurred for which the
warehouseman claims a Lien.
Fees (WHR Law, Sec. 2)
EFFECTS OF OMISSION OF ANY OF THE
ESSENTIAL TERMS (CIV-N)
1.
2.
WAREHOUSE RECEIPTS LAW
(ACT 2137, AS AMENDED)
3.
4.
(Note: Act 2137 or Warehouse Receipts Law is not
included in the 2019 Bar Syllabus. Focus on
Warehouseman’s Lien )
Conversion of the contract to ordinary deposit.
Injured person can hold warehouseman liable
for all damages caused by the omission.
Validity of receipt not affected.
Negotiability of receipts not affected (Gonzales
vs. Go Fiong & Luzon Surety Co., G.R. No. 91776,
August 30, 1958).
PROHIBITED TERMS IN A WAREHOUSE RECEIPT
Warehouse Receipt
A warehouseman may insert in a receipt issued by
him, any other terms and conditions provided that
such terms and conditions shall not be (C2-RMN):
It is a written acknowledgment by the
warehouseman that he has received and holds
certain goods therein described in his warehouse
for the person to whom the document is issued.
(NCC, Art.1507-1520)
1.
2.
Warehouseman
3.
A person, natural or juridical, lawfully engaged in
the business of storing of goods for profit (WHR
Law, Sec. 58).
4.
Warehouse
Contrary to the Warehouse Receipts Law (Sec.
3).
Contrary to law, morals, good customs, public
order or public policy.
Terms Reducing the required diligence of the
warehouseman (Ibid).
Those exempting the warehouseman from
liability for Misdelivery or for not giving
statutory notice in case of sale of goods. Those
exempting the warehouseman from liability for
Negligence.
The building or place where goods are deposited
and stored for profit.PERSONS WHO MAY ISSUE
Effect when the goods deposited are incorrectly
described
1.
GR: Warehouseman shall be liable for damages for
non-existence or misdescription of goods at the
time of its issue.
A WAREHOUSE RECE
2.
Warehouseman, whether public or private,
bonded or not (WHR Law, Sec. 1).
A person authorized by a Warehouseman.
17
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Warehouse Receipts Law
XPN: When the goods are described based on:
1.
1.
2.
2.
Series or labels upon them
Statement that the goods are of certain kind.
3.
Person to whom the goods should be delivered
(PDO)
1.
2.
3.
To the person lawfully entitled to the
Possession of the goods, or his agent;
To the person entitled to Delivery under a nonnegotiable instrument or with written
authority; or
To the lawful Order of a negotiable receipt
(person in possession of a negotiable receipt)
(WHR Law, Sec. 9).
Forged signature of the owner
In case the signature of an owner was forged and the
forger was able to withdraw the goods from the
Warehouseman, the owner has the following rights:
1.
KINDS
2.
Kinds of Warehouse Receipt
1.
2.
Negotiable warehouse receipt
Non-negotiable warehouse receipt
3.
NEGOTIABLE WAREHOUSE RECEIPT
Negotiable Warehouse Receipt
Breach of duty on the part of the person making the
negotiation or fraud, mistake or duress on the
owner of the receipt to entrust possession or
custody DOES NOT impair the validity of
negotiation of a warehouse receipt. The same is true
provided that the person to whom the receipt was
negotiated or a person to whom the receipt was
subsequently negotiated paid value therefor,
without notice of the breach of duty, or fraud,
mistake or duress (WHR Law, Sec. 47).
NOTE: No provision shall be inserted in a negotiable
receipt that it is non-negotiable. Such provision, if
inserted, shall be void, and the receipt shall remain
negotiable. A negotiable warehouse receipt cannot
be converted into non-negotiable (WHR Law, Sec. 5).
1.
2.
a
Negotiable
Non-payment by the original depositors of the
purchase price will NOT render the further
negotiation of the receipt invalid
The owner;
Any person to whom the possession or custody
of the receipt has been entrusted by the owner,
if, by the terms of the receipt, the goods are
deliverable to the order of the person to whom
the possession or custody of receipt has been
entrusted or in such form that it may be
negotiated by delivery (WHR Law, Sec. 40).
The negotiation of the warehouse receipt by the
buyer of goods purchased from and deposited to the
warehouseman is valid even if the warehouseman
who issued the negotiable warehouse receipt was
not paid by the buyer. The validity of the negotiation
cannot be impaired by the fact that the
owner/warehouseman was deprived of the
possession of the same by fraud, mistake or
conversion (PNB vs. Noah’s Ark Sugar Refinery, G.R.
No. 107243, September 1, 1993).
Effect when a Negotiable Warehouse Receipt
was
delivered
without
the
necessary
indorsement (Ac - DC)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If under warehouse receipt, the goods are
deliverable to the depositor or to his order, the
owner of the said negotiable receipt may
proceed against the warehouseman and/or the
holder.
Without the valid indorsement of the owner to
the holder or in blank, the warehouseman is
liable to the owner for conversion in the
misdelivery.
If the goods are deliverable to bearer, the owner
may only proceed against the holder. The
warehouseman is not liable for conversion
where the goods are delivered to a person in
possession of a bearer negotiable instrument.
Validity of the negotiation of a receipt is not
impaired by fraud, mistake or duress
It is a receipt in which it states that the goods
received will be delivered to the bearer or to the
order of any person named in such receipt (WHR
Law, Sec. 5). It is negotiated by delivery or
indorsement plus delivery.
Person who may negotiate
Warehouse Receipt
The transferee Acquires title against the
transferor
There is no Direct obligation of the
warehouseman; and
The transferee can Compel the transferor to
complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the
time when the indorsement is actually made.
18
Mercantile Law
Duplicate receipts must be so marked in case
one negotiable receipt is issued for the same
goods
Even if the receipt is indorsed, the transferee
acquires no additional right (WHR Law, Sec. 39).
WARRANTIES ON A WAREHOUSE RECEIPT
A warehouseman shall be liable for all damages
caused by his failure to do so to anyone who
purchased the subsequent receipt for value
supposing it to be an original, even though the
purchase be after the delivery of the goods by the
holder of the original receipt (WHR Law, Sec. 6).
A person who, for value, negotiates or transfers a
receipt by indorsement or delivery, including one
who assigns for value a claim secured by a receipt,
unless a contrary intention appears warrants
(GRIT):
The word “duplicate” shall be plainly placed upon
the face of every such receipt, except the first one
issued (ibid.).
1.
2.
3.
NON-NEGOTIABLE WAREHOUSE RECEIPT
4.
It is a receipt in which it is stated that the goods
received will be delivered to the depositor or to any
other specified person (WHR Law, Sec. 4).
NOTE: To make it non-negotiable, it is needed to be
indicated in the face of the warehouse receipt by the
warehouseman issuing it that the same is “nonnegotiable,” or “not negotiable” (WHR Law, Sec.7).
NOTE: The indorsee does not guarantee that the
warehouseman will comply with his duties (WHR
Law, Sec. 45).
Failure to mark the warehouse receipt as “nonnegotiable” shall entitle the holder, who purchased
it for value supposing it to be negotiable, to treat
such receipt negotiable (ibid).
Transfer
Receipt
of
a
Non-Negotiable
Receipt is Genuine
Legal Right to negotiate or transfer it
No knowledge of defects that may Impair the
validity or worth of the receipt
That he has a right to Transfer title to the goods
and that the goods are merchantable or fit for a
particular purpose whenever such warranties
would have been to transfer without a receipt
of goods represented thereby (WHR Law, Sec.
44).
When no warranty implied
A mortgagee, pledgee, or holder for security of a
receipt who, in good faith, demands or receives
payment of the debt for which such receipt is
security, whether from a party to a draft drawn for
such debt or from any other person, shall not, by so
doing, be deemed to represent or to warrant the
genuineness of such receipt or the quantity or
quality of the goods therein described. In short, a
creditor receiving the WHR given as collateral
makes no warranty (WHR Law, Sec. 46).
Warehouse
A non-negotiable warehouse receipt may be
transferred by its delivery to the transferee
accompanied by a deed of assignment, donation or
other form of transfer.
Effect of indorsement of a Non-Negotiable
Warehouse Receipt
DISTINCTION BETWEEN NEGOTIABLE INSTRUMENT AND NEGOTIABLE WAREHOUSE RECEIPT
NEGOTIABLE INSTRUMENT
Contains an unconditional promise to pay a sum
certain in money.
The subject is money.
The negotiable instrument is the object of value.
Intermediate parties become secondarily liable.
The general endorsers warrant that the instrument
after due presentment shall be paid and in case of
dishonor and notice of dishonor given, the endorser
shall pay the holder.
19
NEGOTIABLE WAREHOUSE RECEIPT
Does not contain an unconditional promise to pay a
sum certain in money. The obligation is to deliver
goods.
The subject is merchandise.
The warehouse receipt is not the object of value.
Intermediate parties are not liable for the warehouse
man’s failure to deliver the goods.
Although endorsers or intermediate parties are not
liable for any failure on the part of the warehouseman
or previous endorsers of the receipt to fulfill their
obligations they may be held liable for breach of
warranties such as: (1) receipt is genuine and in
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Warehouse Receipts Law
respect what it purports to be (2) they have legal title
to the instrument (3) goods are fit for consumption
and merchantable (4) they are not aware of any
information that will make the instrument worthless
RIGHTS OF A HOLDER OF A NEGOTIABLE WAREHOUSE RECEIPT VS.
THE RIGHTS OF A TRANSFEREE OF A NON-NEGOTIABLE WAREHOUSE RECEIPT
NEGOTIABLE WAREHOUSE RECEIPT
May be acquired through negotiation
Rights of the holder of the receipt:
NON-NEGOTIABLE WAREHOUSE RECEIPT
May be acquired through transfer or assignment
Rights of transferee:
1. If indorsed:
1. Acquires title to the goods subject to the terms of
any agreement with the transferor (WHR Law, Sec.
42).
a. Acquires title to the goods as the person
negotiating (WHR Law, Sec. 41).
b. Acquires the direct obligation of the
warehouseman to hold possession of the goods for
him as if the warehouseman directly contracted
with him (ibid).
2. If not indorsed:
He may compel indorsement; other-wise, he would
acquire title as that of an assignee (WHR Law, Sec. 43).
Defeats the lien of the seller of the goods covered
thereby (WHR Law, Sec. 49).
Good covered cannot be garnished, attached or levied
on execution by unless:
1. Receipt is surrendered.
2. Acquires the right to notify the warehouseman of
the transfer and thereby acquires the direct obligation
of the warehouseman to hold possession of the goods
for him (ibid).
NOTE: Prior to notice, the title of the transferee may
be defeated by the levy of an attachment or execution
upon the goods by a creditor of the transferor or by a
notification to the warehouseman by the transferor or
a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor (ibid.).
Acquires the title as that of his transferor.
Pending notification to the warehouseman, goods can
be garnished, attached or levied on execution
2. Its negotiation is enjoined by the court.
3. The goods are impounded by the court (WHR Law,
Sec. 25).
NOTE: This shall not apply if the person depositing is
not the owner of the goods or one who has no right to
convey title to the goods binding upon the owner.
Protects the purchaser in good faith and for value.
Reason: Absent such notice, both the warehouseman
and the sheriff have a right to assume that the goods
are still owned by the person whose name appears in
the receipt.
The assignee only steps into the shoes of the assignor.
Q: Coco was issued by a Warehouseman a
negotiable receipt for safekeeping by the latter
of his goods. Can the judgment creditor of Coco
levy by execution the goods covered by the
negotiable receipt?
Q: Assuming that prior to the levy, the receipt
was sold to Yoyo on the basis of which he filed a
claim with the sheriff. Would Yoyo have better
rights to the goods than the creditor? Explain
your answer. (1999 Bar)
A: The goods cannot, while in the possession of the
warehouseman, be attached by garnishment or
otherwise, or be levied upon under an execution
unless the receipt is first surrendered to the
warehouseman, or its negotiation enjoined. The
warehouseman cannot be compelled to deliver the
actual possession of the goods until the receipt is
surrendered to it or impounded by the court.
A: YES. Yoyo, as a holder for value of the receipt, has
a better right to the goods than the creditor. It is
Yoyo that can surrender the receipt which is in its
possession and can comply with the other
requirements which will oblige the warehouseman
to deliver the goods, namely, to sign a receipt for the
delivery of the goods, and to pay the
warehouseman's liens and fees and other charges.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
20
Mercantile Law
Q: What is the proper recourse of the
warehouseman if he is uncertain as to who is
entitled to the goods? Explain. (2005 Bar)
Q: Jojo deposited several cartons of goods with
SN
Warehouse
Corporation.
The
correseponding warehouse receipt was issued
to the order of Jojo. He endorsed the warehouse
receipt to EJ who paid the value of the goods
deposited. Before EJ could withdraw the goods,
Melchor informed SN Warehouse Corporation
that the goods belonged to him and were taken
by Jojo without his consent. Melchor wants to get
the goods, but EJ also wants to withdraw the
same.
A: Since there is a conflicting claim of ownership or
title, the warehouseman should file a complaint in
interpleader requiring the claimants to interplead.
The matter involves a judicial question as to whose
claim is valid.
Rule where a warehouse receipt is transferred
to secure payment of a loan by way of pledge or
mortgage
a. Who has a better right to the goods? Why?
b. If SN Warehouse Corporation is uncertain as
to who is entitled to the property, what is the
proper recourse of the corporation? Explain
(2005 Bar)
A:
a. Ej has better right to the goods. The goods are
covered by a negotiable warehouse receipt
which was indorsed to EJ for value. The
negotiation to EJ was not impaired by the fact
that Jojo took the goods without the consent of
Melchor, as EJ had no notice of such fact.
Moreover, EJ is in possession of the warehouse
receipt and only he can surrender it to the
warehouseman (Sec. 8, WHL).
b. Under the Sec. 17 of Act 2137, Warehouse
Receipts Law, SN Warehouse Corporation may
file an action for interpleader and implead EJ
and Melchor to determine who is entitled to the
said goods.
The pledgee or mortgagee does not automatically
become the owner of the goods but merely retains
the right to keep, and with the consent of the owner
to sell them so as to satisfy the obligation from the
proceeds for the simple reason that the transaction
is not a sale but only a mortgage or pledge. Likewise,
if the property is lost without the fault or negligence
of the mortgagee or pledgee, then said goods are to
be regarded as lost on account of the real owner,
mortgagor or pledgor (PNB vs. Sayo, Jr., G.R. No.
129198, July 9, 1998).
Q: Alex deposited goods for which Billy,
warehouseman, issued a negotiable warehouse
receipt wherein the goods were deliverable to
Alex or order. Alex negotiated the receipt to
Caloy. Thereafter, Dario, a creditor secured
judgment against Alex and served notice of levy
over the goods on the warehouseman.
Q: T delivers two refrigerators to the warehouse
of W who then issues a negotiable receipt
undertaking the delivery of the refrigerators to
“T or bearer.” T entrusted the receipt to B for
safekeeping only. B negotiated it, however, to F
who bought it in good faith and for value. Who is
entitled to the delivery of the refrigerators?
(2011 Bar)
a.
To whom should the warehouseman deliver
goods upon demand?
b. Would your answer be the same if the
warehouseman issued a non-negotiable
werehouse receipt? (2007 Bar)
A:
a. Billy should deliver the goods to Caloy. Under
the Warehouse Receipts Act, the goods covered
by the negotiable receipt cannot be attached or
levied upon directly by the creditor. The
creditor must resort to attaching or levying the
receipt itself, not the goods, while in the
possession of the debtor, Alex. Since Alex has
already negotiated it to Caloy, Dario cannot
anymore attach or levy the goods under the
warehouse receipt.
b. A non-negotiable warehouse receipt is
transferred thru simple assignment. Since Alex
negotiated it instead of having it assigned, the
conveyance of the warehouse receipt to Caloy is
not valid. Hence, Alex is still the owner of the
said goods. Dario could now attach or levy the
goods.
A: F, since he is a purchaser in good faith and for
value.
Between the real owner of the goods and an
innocent purchaser for value acquiring the
Warehouse Receipt from a thief, the former
prevails
If the goods were stolen from the owner and
deposited to the warehouseman who subsequently
issued a warehouse receipt which in turn was duly
negotiated to an innocent purchaser for value, the
owner has the better right than the holder of the
negotiable warehouse receipt. This is because a
thief transfers no title.
21
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Warehouse Receipts Law
b.
DUTIES OF A WAREHOUSEMAN
c.
OBLIGATIONS OF A WAREHOUSEMAN
(TD [sasusi] K)
1.
2.
d.
Take care of the goods entrusted to his
safekeeping with the same care as a reasonably
careful owner of similar goods would exercise.
Deliver them to the holder of the receipt or the
depositor provided there is demand by the
depositor accompanied by either:
a. An offer to satisfy the warehouseman’s lien
b. An offer to surrender the receipt, if
negotiable with such indorsements as
would be necessary for the negotiation of
the receipts
c. A readiness and willingness to sign, when
the
goods
are
delivered,
an
acknowledgment that they have been
delivered, if such signature is requested by
the warehouseman (WHR Law, Sec. 8).
e.
Q: The warehouseman, by issuing the
warehouse receipt, acknowledges that the
goods are in his possession, but he can refuse to
deliver the goods to the holder of the warehouse
receipt covering the goods if - (2012 Bar)
A: A warehouseman is bound to deliver the goods
upon a demand made if such is accompanied with
(1) an offer to satisfy the warehouseman’s lien; (2)
offer to surrender the receipt if negotiable; and (3)
readiness to sign an acknowledgment receipt when
the goods are delivered (WHR Law, Sec. 8).
3. Keep the goods separate from the goods of other
depositors, except if authorized by agreement or
by custom, fungible goods may be mingled with
other goods of the same kind and grade.
HOWEVER, Sec. 31 of the said Law expressly
provides that a warehouseman having a lien valid
against the person demanding the goods may refuse
to deliver the goods to him until the lien is satisfied.
Instance when the need for a demand by the
depositor is not necessary
Further, Sec. 13 provided that the alteration of a
receipt shall not excuse the warehouseman who
issued it from any liability if such alteration was: (1)
immaterial, (2) authorized, or (3) made without
fraudulent intent.
A demand by the depositor is not necessary when the
warehouseman has rendered it beyond his power to
deliver the goods.
NOTE: Warehouseman has no cause of action for
repossession and damages on the basis of a falsified
delivery permit. Warehouseman has no cause of
action against the person to whom it delivered
deposited articles where the real parties interested
in the questioned articles have not yet sued the
warehouseman for damages on account of wrongful
delivery (Consolidated Terminals Inc. vs. Artex
Development Co. Inc. G.R. No. L-25748, March 10,
1975).
Justified refusal to deliver by the warehouseman
1.
2.
3.
4.
5.
If the warehouseman’s lien is not satisfied by the
claimants (WHR Law, Sec. 31);
Where the goods have already been sold to
satisfy the warehouseman’s lien or because of
their perishable or hazardous nature (WHR
Law, Sec. 34);
If the warehouse receipt is negotiated back to
him;
When the holder does not satisfy the conditions
prescribed in Sec. 8, WHR Law:
a. Non-satisfaction of warehouseman’s lien.
b. Failure to surrender warehouse receipt.
c. Refusal to sign the Acknowledgement
receipt, acknowledging the receipt of the
goods from the warehouse;
REMEDY IF THE WAREHOUSE RECEIPT IS LOST
OR DESTROYED
A court of competent jurisdiction may order the
delivery of the goods only:
a.
The failure was not due to any Fault on the part
of the warehouseman:
a. Upon request by or on behalf of the person
lawfully entitled (WHR Law, Sec. 10).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If the goods are lost, due to a fortuitous
event exclusively.
If the warehouseman needs reasonable
time to ascertain the validity of the claim if
someone other than the depositor claims
title to the goods (WHR Law, Sec. 18).
If he had information that the delivery
about to be made was to one not lawfully
entitled (WHR Law, Sec. 10)
If several persons claim the goods (WHR
Law, Sec. 17).
b.
22
Upon satisfactory proof of the loss or
destruction of the receipt; and
Upon the giving of a bond with sufficient
sureties to be approved by the court (WHR Law,
Sec. 14).
Mercantile Law
The delivery of the goods under an order of the
court shall NOT relieve the warehouseman from
liability to a person to whom the negotiable receipt
has been or shall be negotiated for value without
notice of the proceedings or of the delivery of the
goods (ibid.).
INSTANCES WHERE A WAREHOUSE MAN IS
CRIMINALLY LIABLE FOR HIS ACTS
(GF-DOOM-C)
1.
2.
Instances when the duty to insure the goods
arise (RIEL)
3.
1.
4.
2.
3.
4.
Where the warehouse receipt contains a
Representation to that effect.
Where it was an Inducement for the depositor
to enter into the contract;
Established practice; or
Where the Law provides
5.
6.
Issuance of warehouse receipts for Good not
received (WHR Law, Sec. 50).
Issuance of receipt containing False statement
(WHR Law, Sec. 51).
Issuance of Duplicate negotiable warehouse
receipt not marked as such (WHR Law, Sec. 52).
Issuance of a negotiable warehouse receipt of
which he is an Owner without stating such fact
of ownership (WHR Law, Sec. 53).
Delivery of goods without Obtaining negotiable
warehouse receipt (WHR Law, Sec. 54).
Negotiation of receipt for Mortgaged goods
(WHR Law, Sec. 55).
Commingling of goods (WHR Law, Sec. 24).
Conversion
7.
It is an unauthorized assumption and exercise of the
right of ownership over goods belonging to another
through the alteration of their condition or the
exclusion of the owner’s right (Bouvier’s Law
Dictionary).
Other acts for which Warehouse Man is liable
(DuMP-SICC)
1.
Failure to stamp “Duplicate” on copies of
negotiable receipt (WHR Law, Sec.6).
2. Misdelivery of goods (WHR Law, Sec. 10).
3. Failure to Place “non-negotiable” or “notnegotiable” on a non-negotiable receipt (WHR
Law, Sec. 7).
4. Failure to give notice in case of Sale of goods to
satisfy lien (WHR Law, Sec. 33) or because the
goods are perishable or hazardous (WHR Law,
Sec. 34).
5. Issuing receipt for non-existing goods or
misdescribed goods (WHR Law, Sec.20).
6. Failure to take Care of the goods (Sec. 21, WHR
Law).
7. Failure to effect Cancellation of a negotiable
receipt upon delivery of the goods (WHR Law,
Sec. 11).
Instances where a Warehouseman is liable for
conversion
1.
2.
Where the delivery is made to person other
than those authorized;
Even if delivered to persons entitled, he may
still be liable for conversion if prior to delivery:
a. He had been requested not to make such
delivery; or
b. He had received notice of the adverse claim
or title of a third person.
EFFECTS OF ALTERATION OF THE RECEIPT ON
THE LIABILITY OF THE WAREHOUSEMAN
1.
2.
3.
4.
Alteration immaterial – whether fraudulent or
not, whether authorized or not, the
warehouseman is liable on the altered receipt
according to its original tenor
Authorized material alteration – the
warehouseman is liable according to the terms
of the receipt as altered
Material alteration innocently made – the
warehouseman is liable on the altered receipt
according to its original receipt
Material alteration fraudulently made –
warehouseman is liable according to the
original tenor of the receipt to a purchaser of
the receipt for value without notice, and even to
the alterer and subsequent purchasers with
notice except that as regards to the last two, the
warehouseman’s liability is limited only to
delivery as he is excused from any liability
WAREHOUSEMAN’S LIEN
Warehouse Receipt
It is a written acknowledgment by the
warehouseman that he has received and holds
certain goods therein described in his warehouse
for the person to whom the document is issued
(NCC, Art.1507-1520).
CHARGES COVERED BY A WAREHOUSEMAN’S
LIEN
(PMA)
23
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
1.
2.
3.
Charges for storage and Preservation of the
goods (insurance and others may be included as
long as it is stipulated)
Money
advanced,
interest,
insurance,
transportation, labor, weighing, coopering and
other charges and expenses in relation to such
goods; and
Charges and expenses for notice, and
Advertisements of sale, and for sale of the goods
where default had been made in satisfying the
warehouseman’s lien (WHR Law, Sec. 27).
Instances when a warehouseman may lose his
lien
1.
2.
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
REMEDIES AVAILABLE TO A WAREHOUSEMAN
TO ENFORCE HIS WAREHOUSEMAN’S LIEN
Negotiable Instrument
It is a written contract for the payment of money
which is intended as a substitute for money and It
passes from one person to another as money, in
such a manner as to give a holder in due course the
right to hold the instrument free from defenses
available to prior parties (Sundiang Sr. & Aquino,
2011).
(REC)
1.
2.
3.
By Refusing to deliver the goods until the lien is
satisfied;
By causing the Extrajudicial sale of the property
and applying the proceeds of the value of the
lien; or
By filing a civil action for Collection of the
unpaid charges or by way of counterclaim in an
action to recover the property from him or such
other remedies allowed by law for the
enforcement of a lien against personal property
or to a creditor against his debtor, for the
collection from the depositor of all the charges
which the depositor has bound himself to pay.
Laws governing Negotiable Instruments
1.
2.
3.
Lien over the goods does not preclude the
warehouseman to avail all other remedies
Whether a warehouseman has or has not a lien upon
the goods, he is entitled to all remedies allowed by
law to a creditor against a debtor for the collection
from the depositor of all charges and advances
which the depositor has expressly or impliedly
contracted with the warehouseman to pay (WHR
Law, Sec 32).
Characteristics or Features of a negotiable
instrument (NAccu)
1. Negotiability – The note may pass from hand to
hand similar to money so as to give the holder
in due course (HIDC) the right to hold the
instrument and collect the sum payable for
himself free from any infirmity in the
instrument or defect in the title of any of the
prior parties or defenses available to them
among themselves.
2. Accumulation of secondary contracts– A
characteristic of a negotiable instrument where
additional parties become involved as they are
transferred from one person to another (De
Leon, 2010).
The lien may be enforced against the goods of the
following:
2.
Goods belonging to the person who is liable as
debtor; and
Goods belonging to others which have been
deposited at any time by the debtor with
authority to make a valid pledge (WHR Law, Sec.
28).
The warehouseman shall not thereafter be liable for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the receipt
given for the goods when they were deposited, even
if such receipt be negotiable (WHR Law, Sec. 36).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Negotiable Instruments Law (NIL) - For
instruments which meet the requisites of
negotiability.
New Civil Code (NCC) – Applies suppletorily in
cases of assignment and demand for payment of
a NI.
Code of Commerce (CC) – Applies suppletorily to
NIL in cases of crossed checks as no provision
in the NIL deals with crossed checks.
NOTE: When the instrument is not negotiable the
pertinent provision of the civil code, and other
pertinent special laws shall apply (GSIS v. CA 17SCRA 533, 1989)
Enforcement of a Lien
1.
By surrendering possession thereof, or
By refusing to deliver the goods when a demand
is made with which he is bound to comply (WHR
Law Sec. 29).
Incidents in the life of a negotiable instrument
1.
24
Issue – first delivery of the instrument to the
payee;
Mercantile Law
2.
Negotiation – transfer from one person to
another so as to constitute the transferee a
holder;
3. Presentment for acceptance (in certain kinds of
Bills of Exchange) (Sec. 143, NIL)
4. Acceptance – written assent of the drawee to
the order;
5. Dishonor by non-acceptance – refusal to accept
by the drawee;
6. Presentment for payment – the instrument is
shown to the maker or drawee/ acceptor for
him to pay;
7. Dishonor by non-payment – refusal to pay by
the maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons
secondarily liable that the maker or the
drawee/ acceptor refused to pay or to accept
instrument;
9. Protest
10. Discharge
a.
b.
c.
2.
1.
2.
Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (Sec.
60, NCBA).
3.
GR: The delivery of a negotiable instrument does
not by itself produce the effect of payment (Roman
Catholic Bishop of Malolos vs. IAC, G.R. No. 72110,
November 16, 1990).
4.
5.
XPNs: Negotiable instruments shall produce the
effect of payment when: (CaFaC)
7.
3.
As to bill of exchange
a. It must contain an order for payment as
distinguished from a mere request.
b. The order is not invalidated just because it
contains words of civility. Thus, insertion of
polite words like “please” does not alter the
character of the instrument; as long as the
language expresses the drawer’s will that
the money be paid.
Rules of construction in case of ambiguities in a
Negotiable Instrument
Negotiable Instruments are not legal tender
1.
2.
The word “promise” need not be used. Any
expression equivalent to a promise is
sufficient.
Mere acknowledgment of a debt is not a
promissory note.
Language used must indicate a written
undertaking to pay.
6.
They have been cashed (Art. 1249, NCC);
Through the fault of the creditor they have
been impaired (ibid); or
A check representing demand deposit has been
cleared and credited to the account of the
creditor (Sec. 60, NCBA).
Words prevail over figures.
If date from which interest is to run is
unspecified, interest runs from the date of the
instrument; if undated, from the issue thereof.
If undated, instrument is considered dated as of
the time it was issued.
Written provisions prevail over printed.
If there is doubt whether it is a bill or note, the
holder may treat it as either at his election.
When not clear in what capacity it was signed,
deemed signed as an indorser.
When two or more persons signed a negotiable
instrument stating "promise to pay,"in case of
liability, they shall be deemed to be jointly and
severally liable (Sec. 17, NIL).
REQUISITES OF NEGOTIABILITY
Factors to determine the negotiability (FRI)
1.
Q: Negotiable instruments are used as
substitutes for money, which means - (2012 Bar)
2.
3.
A: When negotiated, negotiable instruments can be
used to pay indebtedness. It is a medium of
exchange. It is a credit instrument that increases
credit circulation. It increases purchasing power in
circulation and is a proof of transaction (AQUINO)
Words that appear on the Face of negotiable
instrument
Requirements enumerated in Section 1 of NIL
Intention of the parties by considering the
whole of the instrument
Negotiable Instrument
Instrument
BASIS
FORMS AND INTERPRETATIONS
Governing
Law
Rules governing the use of phrases in the
Negotiable Instruments
1.
As to promissory note
25
vs.
NEGOTIABLE
INSTRUMENT
Negotiable
Instruments
Law
Non-negotiable
NONNEGOTIABLE
INSTRUMENT
The Civil Code
or
pertinent
special
laws
should
apply
(GSIS v. CA,
G.R. No. L-40824,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Manner of
Transfer
Status
of
Transferee
Defenses
Available
Warranties
Right
of
Recourse
Can
be
transferred by
negotiation or
by assignment.
The transferee
can be a holder
in due course if
all
the
requirements
of Section 52 of
the NIL are
complied with.
NOTE: If the
transferee is a
HIDC, he/ she
may
have
better rights
than
the
transferor.
A holder in due
course of a
negotiable
instrument
may enforce
payment of the
full
amount
thereof against
all the parties
liable thereon
(NIL, Sec. 57).
Prior parties
warrant
payment
Transferee has
right
of
recourse
against
intermediate
parties.
NOTE: The requirements stated in Sec. 1 must
appear on the face of the instrument otherwise the
instrument would not be negotiable.
The law prohibits relying on extrinsic evidence.
February
23,
1989).
Can
be
transferred only
by assignment.
A NI need not follow the exact language of NIL, as
long as the terms are sufficient which clearly
indicate an intention to conform to the
requirements of the law (Sec. 10, NIL).
The transferee
can never be a
holder in due
course
but
remains to be an
assignee
and
acquires
only
the
rights
pertaining
to
the transferor.
Assignee merely
steps into the
shoes of the
assignor.
1. The instrument must be in writing
It must be reduced in writing or in tangible form.
The negotiability or non-negotiability of an
instrument is determined from the writing on the
face of the instrument itself (De Leon, 2010).
The instrument must be signed by the maker or
drawer
It is placed at the lower right-hand corner of the
instrument. Nonetheless, it may appear in any part
of the instrument whether at the top, middle or
bottom or at the margin (De Leon, 2010).
All
defenses
available
to
prior
parties
may be raised
against the last
transferee
(Sundiang Sr. &
Aquino, 2014).
NOTE: 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 [Sec. 17 (f), NIL].
The signature is valid and binding as long as it
appears that a person intended to make the
instrument his own. The signature is prima facie
evidence of a person’s intention to be bound as
either maker or drawer.
Prior
parties
warrant legality
of title
Transferee has
no
right
of
recourse.
2. Unconditional promise or order to pay
An unqualified order or promise to pay is
unconditional though coupled with:
1.
Requisites of Negotiability
2.
An instrument to be negotiable must conform to the
following requirements: (WU-DOrA)
1.
2.
3.
4.
5.
It must be in Writing and signed by the maker or
drawer;
Must contain an Unconditional promise or order
to pay a sum certain in money;
Must be payable on demand, or at a fixed or
determinable future time;
Must be payable to Order or to bearer; and
Where the instrument is Addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty (Sec.1, NIL).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
An indication of particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
A statement of the transaction which gave rise
to the instrument. But an order or promise to
pay out of a particular fund is conditional (Sec 3,
NIL).
Indication of particular fund for reimbursement
vs. Indication of particular fund for payment
FUND FOR
REIMBURSEMENT
The drawee pays the
payee from his own
funds.
The drawee then pays
26
FUND FOR PAYMENT
There is only one
the
drawee
directly
from
particular
indicated.
act pays
the
fund
Mercantile Law
himself
from
the
particular
fund
indicated.
Particular
fund
indicated is not the
direct
source
of
payment.
Instrument
is
negotiable.
is to run, it shall be from the date of instrument, or
in the absence thereof, at the date of issue. In the
absence of interest rate, it shall be the legal rate [Sec.
17 (b), NIL].
Particular
fund
indicated is the direct
source of payment.
Payment by installment
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for
each installment is stated (Sundiang Sr. & Aquino,
2009).
Instrument is nonnegotiable. The fund
specified is the direct
source of payment;
therefore, it is subject
to the availability of
fund, hence conditional
(Sundiang Sr. & Aquino,
2014).
Q: Discuss the negotiability or non-negotiability:
Manila, June 3, 1993
P10,000.00
For value received, I promise to pay Sergio Dee
or order the sum of P10,000.00 in five (5)
installments, with the first installment payable
on October 5, 1993 and the other installments
on or before the fifth day of the succeeding
month or thereafter.
NOTE: The word “promise” or “order” need not
appear in the instrument to satisfy the
requirements of Section 1(b) of the NIL (Sundiang
Sr. & Aquino, 2014).
The promise or order to pay must not be subject
to any condition or contingency.
(Sgd.) Lito Villa (1993 Bar)
An instrument payable upon a contingency is not
negotiable even if the condition thereon has been
fulfilled.
A: The instrument is negotiable because it complied
with the requirements provided by Section 1 of the
NIL. The fact that it is payable in installments does
not make the instrument non-negotiable as long as
the dates of each installment is fixed or at least
determinable and the amount to be paid for each
installment is stated (NIL, Sec. 2[b]).
Certainty as to sum
The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(ISDA-E)
1.
2.
3.
4.
5.
Payment with an acceleration clause
With Interest;
By Stated installments;
By stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due
(acceleration clause);
With cost of collection or an Attorney’s fees, in
case payment shall not be made at maturity; or
With Exchange, whether at a fixed rate or at the
current rate. (Sec. 2, NIL)
Acceleration clause is a provision, that upon default
in payment of any installment or interest, the whole
shall become due [Sec. 2(c), NIL].
NOTE: Negotiability of an instrument with an
acceleration clause, depends on who has the option
to exercise the same.
1.
NOTE: A sum is certain within the contemplation of
Section 1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it
requires mathematical computation (Sundiang Sr. &
Aquino, 2014).
2.
3.
Payment with interest
Interest at fixed rate or at increased or reduced rate
will not destroy negotiability because the presence
of such interest does not make uncertain the sum
payable. In the absence of a date as to which interest
If the option to accelerate the maturity is on
the maker, whether such option is absolute
or conditional – NEGOTIABLE
Where acceleration is at the option of the
holder and can only be exercised upon the
happening of the specified event –
NEGOTIABLE
Insecurity Clause- Where the holder’s
right to accelerate is unconditional, the
time of payment is rendered uncertain –
NON-NEGOTIABLE
Extension Clause
Extension Clauses are provisions extending the time
27
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
of payment.
when the instrument ceases to be negotiable in the
full commercial sense [Sec. 2 (e), NIL; De Leon 2010].
GR: An extension clause does not affect the
negotiability of the instrument.
Effect if a bill or note is payable other than in
money
XPN: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of a contingency, the
date is uncertain and the instrument is nonnegotiable. The time for payment may never come
at all.
GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in
property, the same is not negotiable.
XPNs: Negotiability is not affected if the note
contains an additional provision which: (SECo Law)
NOTE: If the right is given to the holder, the time of
payment need not contain a new fixed maturity date
or the length of extension does not have to be
specified.
1.
2.
The reason is that the holder is free to demand
payment at maturity date or any time after said
date. On the other hand, if the obligor is the one
given the right to extend payment, the interest of the
extension must be specified to keep the instrument
negotiable, for of the right to extend is without limit,
it cannot be determined with absolute certainty
when the holder will have the absolute right to be
paid. Thus, where the maker of the note is given the
right to extend the time of payment “for no longer
than a reasonable time” after maturity date, the note
is non-negotiable because the definite time
requirement is not met (De Leon, 2010).
3.
4.
3. Payable on demand or at a fixed or
determinable future time
1.
Sum to be paid with exchange
The exchange is the charge for the expense of
providing funds at the place where the instrument
is payable to cover such instrument which is issued
at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De
Leon, 2010).
Payable on demand – The holder may call for
payment any time, likewise, the maker may also
pay any time and the refusal of the holder to
accept payment shall stop the running of
interest should there be any, but obligation to
pay the note subsist.
An instrument is payable on demand: (ENO)
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed
c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand (Sec. 7, NIL).
Payable in Philippine Peso
The “money” referred into may be our legal tender
or foreign currency. An instrument is still negotiable
although the amount to be paid is expressed in
currency that is not legal tender so long as it is
expressed in money [Sec. 2(d); PNB v Zulueta, G.R.
No., L-7271, August 30, 1957).
2.
3.
NOTE: Under RA 8183, an agreement to pay in
foreign currency is valid.
Sum to be paid with costs of collection and/or
attorney’s fees
It does not affect the certainty of the amount
payable at maturity since the increase in the amount
due, even if uncertain, takes place after maturity
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity;
Gives the holder an Election to require
something to be done in lieu of payment of
money;
Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
Waives the benefit of any Law intended for the
advantage or protection of the obligor (Sec. 5,
NIL).
At a fixed time – A term or time instrument is
payable only upon the arrival of the time for
payment.
At a determinable future time-An instrument is
payable at a determinable future time which is
expressed to be payable: (ATiS)
a. At a fixed period after date or sight;
b. On or before a fixed or determinable future
time specified therein; or
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 (Sec. 4, NIL).
Q: Will an overdue instrument lose its negotiability?
A: NO. It retains its negotiable character even if
28
Mercantile Law
overdue. An instrument negotiable in its origin
continues to be negotiable until it has been
restrictively indorsed or discharged by payment or
otherwise. (Sec. 47, NIL). It only loses its
negotiability in its strict and full commercial
sense (Sec. 52(b), NIL).
―8/1/00 next to it, indicating the date of the
promissory note. When JR presented MP‘s note
to KR, the latter said it was not a negotiable
instrument under the law and so could not be a
valid substitute for cash. JR took the opposite
view, insisting on the note‘s negotiability. You
are asked to referee. Which of the opposing
views is correct? (2000 Bar)
4. Payable to order
The instrument is payable to order where it is
drawn payable to the order of a specified person or
to him or to his order. It may be drawn payable to
the order of:
1. A Payee who is not a maker, drawer, or drawee;
2. The Drawer or maker;
3. The Drawee;
4. Two or more payees Jointly;
5. One or some of Several payees; or
6. The Holder of an office for the time being (Sec.
8, NIL)
A: The view of KR is correct. The note is payable to
a specific person hence it is not negotiable. The law
provides that for an instrument to be negotiable, it
must comply with the requirements of section 1 of
the NIL pertaining to the part that a note must be
payable to order or bearer. In the given case, there
were no words of negotiability and it is silent as to
whether it is payable to order or bearer. Hence, the
instrument is non-negotiable.
Difference between having a check payable to a
fictitious payee and payable to a specified payee
Payable to bearer (ENaF PaLa)
1.
2.
3.
4.
5.
1. If a check is payable to a specified payee – it as an
order instrument, which requires indorsment
from the payee or holder before it may be validly
negotiated.
When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
When it is payable to a person Named therein
or bearer; (e.g. Pay to P or bearer P10,000.00)
When it is payable to the order of a Fictitious
person or non-existing person, and such fact
was known to the person making it so payable;
(e.g. Pay to John Doe or order)
When the name of the Payee does not purport
to be the name of any person; (e.g. Pay to cash)
When the only or the Last indorsement is an
indorsement in blank (Sec 9,NIL).
2. If a check is payable to the order of fictitious or nonexisting person – it shall be considered as a bearer
instrument, provided such fact is known to the
person making it so payable. Thus, checks issued to
“Prinsipe Abante” or “Si Malakas at si Maganda”, who
are well-known characters in Philippine mythology,
are bearer instruments (De Leon, 2010).
Fictitious-Payee rule
Note: An instrument which is a bearer in its
origin,
remains
a
bearer
instrument.
Indorsement of instrument payable to bearer. Where an instrument, payable to bearer, is indorsed
specially, it may nevertheless be further negotiated
by delivery; but the person indorsing specially is
liable as indorser to only such holders as make title
through his indorsement. (Sec. 40)
The fictitious-payee rule contemplates that the
payee is fictitious or not intended to be true recipient
of the proceeds. The check is considered a bearer
instrument negotiable by delivery alone. The
underlying theory is that the maker of the check
knew that the fictitious payee cannot indorse the
instrument so that he must have intended for it to
be negotiated by mere delivery (PNB v. Rodriguez,
G.R. No. 170325, September 26, 2008).
A promissory note which does not have the words
"or order" or "or bearer" will render the promissory
note non-negotiable, and therefore the note can still
be assigned and the maker made liable. (2012 Bar)
GR: In case of controversy, the drawer is liable and
the drawee bank is absolved from liability.
Q: MP bought a used cell phone from JR. JR
preferred cash but MP is a friend so JR accepted
MR‘s promissory note for P10,000. JR thought of
converting the note into cash by endorsing it to
his brother KR. The promissory note is a piece of
paper with the following hand-printed notation:
― MP WILL PAY JR TEN THOUSAND PESOS IN
PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
TODAY. Below this notation MP‘s signature with
XPN: When there is commercial bad faith,
whereby the drawee bank acts dishonestly and is a
party to the fraudulent scheme. The check is
deemed payable to order, and consequently, the
drawee bank bears the loss (Ibid).
When drawee must be named with reasonable
certainty (BJ-Pa)
29
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
1.
2.
3.
In a bill of exchange, the drawee must be named
or otherwise designated with reasonable
certainty (Sec. 1, NIL).
A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession (Sec. 127, NIL). Eg.
An instrument may be addressed “to A and B”
but not “to A or B”.
An instrument payable “to the order of the
bearer” has been held to be an instrument
payable to “order”(10 C.J.S. 575-576).
Sixty days after date, I promise to pay Bobby or
his designated representative the sum of ONE
HUNDRED THOUSAND PESOS (P100,000.00)
from my BPI Acct. No. 1234 if, by this due date,
the sun still sets in the west to usher in the
evening and rises in the east the following
morning to welcome the day.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability
present or absent in the instrument. (2013 Bar)
Q: Indicate and explain whether the promissory
note is negotiable or non-negotiable.
A: The instrument contains a promise to pay and
was signed by the maker, Antonio Reyes; the
promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east in the morning are
concerned, these are certain to happen; the
instrument contains a promise to pay a sum certain
in money, P100,000.00; the money is payable at a
determinable future time, sixty days after August
10, 2013; the instrument is not payable to order or
to bearer; the promise to pay is conditional, because
the money will be taken from a particular fund, the
BPI Account No. 1234.
a.
I promise to pay A or bearer Php100,000.00
from my inheritance which I will get after
the death of my father.
b. I promise to pay A or bearer Php100,000
plus the interest rate of ninety (90) – day
treasury bills.
c. I promise to pay A or bearer the sum of
Php100,000 if A passes the 2012 bar exams.
d. I promise to pay A or bearer the sum of
Php100.000 on or before December 30,
2012.
e. I promise to pay A or bearer the sum of
Php100,000. (2012 Bar)
Provisions that do not affect the negotiability of
an instrument (DaCS-VP)
A:
a. NON-NEGOTIABLE. It is based on a
contingency and not an unconditional promise
or order to pay sum certain in money [Sec. 1 (b),
NIL].
b. NEGOTIABLE. The instrument is negotiable
despite the inclusion of interest since the sum
to be paid with said interest is still certain [Sec.
2 (a), NIL].
c. NON-NEGOTIABLE. The instrument is not an
unconditional promise or order to pay a sum
certain in money since payment depends upon
the happening of an event [Sec. 1 (b), NIL].
d. NEGOTIABLE. There is certainty in payment
since it is payable on or before a fixed or
determinable future time specified [Sec. 4 (b),
NIL].
Note: The inclusion of the phrase “on or before”
simply means that the maker may choose when
he would pay. ie. either on Dec. 30 2019, or
before such period.
e. NEGOTIABLE. It is a bearer instrument that is
payable upon demand [Sec. 7 (b) and 9 (b), NIL].
1.
2.
3.
4.
5.
6.
Q: TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER
400 PESOS. The note has no date, no place of
payment and no consideration mentioned. It
was signed by MK and written under his
letterhead specifying the address, which
happens to be his residence. TH accepted the
promissory note as payment for services
rendered to SH, who in turn received the note
from Juan Tan as payment for a prepaid cell
phone card worth 450 pesos. The payee
acknowledged having received the note on
August 1, 2000. A Bar reviewee had told TH, who
happens to be your friend, that TH is not a
holder in due course under Article 52 of the
Negotiable Instruments Law (Act 2031) and
therefore does not enjoy the rights
and
protection under the statute. TH asks for our
advice specifically in connection with the note
Q: Antonio issued the following instrument:
August 10, 2013
Makati City
P100,000.00
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Omission of Date
Designation of particular kind of Currency in
which payment is to be made
Bears a seal
Non-specification of Value given or that any
value had been given
Non-specification of Place where it is drawn or
payable
(Sec. 6, NIL.).
30
Mercantile Law
being undated and not mentioning a place of
payment and any consideration. What would
your advice be? (2000 Bar)
b.
A: The place and date are not essential to the
negotiability of the instrument except in certain
cases when [a] the date is necessary say to
determine when the note is due; or [b] the
interest is to run when the payment of interest
has been stipulated or whether the holder is barred
by the statute of limitations from enforcing the note.
The fact that there is no mention of consideration is
not essential because it is presumed.
c.
d.
NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is
negotiable. The law provides under section 2a
of the NIL, a sum is still considered as certain
although it is to be paid with interest. It does not
make the promise unconditional
AFFECTED. An option given to the maker
makes the promise conditional
NOT AFFECTED. An option given to the holder
does not make the promise conditional
Q: B borrowed Php1 million from L and offered
to him his BMW car worth Php 1 Million as
collateral. B then executed a promissory note
that reads: “I, B, promise to pay L or bearer the
amount of Php1 Million and to keep my BMW car
(loan collateral) free from any other
encumbrance. Signed, B.” Is this note
negotiable? (2011 Bar)
Q: Which of the following stipulations or
features of a promissory note (PN) affect or do
not affect its negotiability, assuming that the PN
is otherwise negotiable? Indicate your answer
by writing the paragraph number of the
stipulation or feature of the PN as shown below
and your corresponding answer, either
―Affected or ―Not affected. Explain.
A: NO, since it contains a promise to do an act in
addition to the payment of money.
a. The date of the PN is ―February 30, 2002.
b. The PN bears interest payable on the last
day of each calendar quarter at a rate equal
to five percent (5%) above the then
prevailing 91-day Treasury Bill rate as
published at the beginning of such calendar
quarter.
c. The PN gives the maker the option to make
payment either in money or in quantity of
palay or equivalent value.
d. The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort of
the holder for 30 days. (2002 Bar)
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of
payment of money.
Q: A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I
promise to pay B Php1 Million or his order or
give Php1 Million worth of cement or to
authorize him to sell my house worth Php1
Million. Signed, A.” Is the note negotiable? (2011
Bar)
A: NO, because the exercise of the option to pay lies
with A, the maker and debtor.
A:
a. NOT AFFECTED. Date is not one of the
requirements for negotiability therefore it is
not essential except when the date is necessary
to determine when the note is due
NOTE: In order not to affect the negotiability of the
instrument, the option must be with the
holder/creditor.
Q: Distinguish a negotiable document from a negotiable instrument (2005 Bar)
BASIS
Substitute for money
Forms
Subject Matter
Capability
of
Accumulating
Secondary Contracts
NEGOTIABLE INSTRUMENT
A written contract which is intended as
a substitute for money like promissory
notes and bill of exchange.
It may either be a bill of exchange or a
promissory note.
The subject matter is a sum certain in
money.
Capable of accumulating secondary
contracts resulting from indorsements
at the back thereof.
31
NEGOTIABLE DOCUMENT
Held to be non-negotiable in the technical
sense because they do not have the
requisites under the NIL.
It has various forms such as but not limited
to bill of lading, stock certificates,
warehouse receipts and pawn tickets.
It actually stands for the goods it covers.
Not capable of accumulating secondary
contracts resulting from indorsements at
the back thereof.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
KINDS OF NEGOTIABLE INSTRUMENTS
face purports to be, both drawn and payable within
the Philippines. Any other bill is a foreign bill.
Kinds of negotiable instruments
1.
2.
3.
Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (Sec. 109,
NIL).
Promissory notes (PN) – 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 (NIL, Sec. 184).
When a bill of exchange may be treated as
promissory note (2015 Bar) (FACS)
1.
2.
Bill of exchange (BOE) – An unconditional order
in writing addressed by one person to another
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer (NIL, Sec. 126).
3.
4.
Check – A bill of exchange drawn on a bank
payable on demand (NIL, Sec. 185).
The drawee is a fictitious person.
When the instrument is so ambiguous that
there is doubt whether it is a bill or a note, the
holder may treat it either at his election
The drawee does not have the capacity to
contract
Where in a bill the drawer and the drawee are
the same person. (Sec. 130; Sec. 17(e), NIL).
Q: State and explain whether the following are
negotiable instruments under the Negotiable
Instruments Law:
Promissory note vs. Bill of exchange
BASIS
Undertaking
PROMISSORY
NOTE
Promise to
pay
As to number
of
original
parties
2 parties
As to liability
of parties
Maker
primarily
liable
As to number
of
presentments
needed
Only
1
presentment
(for
payment) is
needed
is
a. Postal Money Order
b. A certificate of time deposit which states
“This is to certify that bearer has deposited
in this bank the sum of FOUR THOUSAND
PESOS (P4,000) only, repayable to the
depositor 200 days after date.”
c. Letters of Credit
d. Warehouse Receipts
e. Treasury warrants payable from a specific
fund
f. Certificate of Indebtedness
g. Electronic messages
BILL OF
EXCHANGE
Order to pay
3 parties (upon
acceptance of
the
drawee
Sec. 127)
Drawer
is
secondarily
liable
2
presentments
(for
acceptance
and
for
payment) are
generally
needed
A:
a. Postal money order is not a negotiable
instrument because, as held in Phil. Education
Co. vs Soriano, there are many restrictions
which make them incompatible with concepts
of negotiable instruments, thereby making the
order conditional, in contrast to Sec. 1 of the
NIL. Furthermore, such is governed by postal
rules and regulation and it may only be
negotiated once.
b. The certificate of time deposit is a negotiable
instrument because it is an acknowledgement
in writing by the bank of the amount of deposit
with a promise to repay the same to the
depositor or bearer thereof at a specific time
(Caltex (Philippines), Inc. vs. Court of Appeals
and Security Bank and Trust Company, G.R. No.
97753, August 10, 1992).
c. A letter of credit is not negotiable because it is
generally conditional and has limited
negotiability - it is issued in favor of a specific
person. But the Supreme Court held in Lee vs.
Court of Appeals, that the drafts issued in
A bill of exchange itself does not operate as an
assignment of the funds in the hands of the drawee
available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the
same (Sec. 127, NIL).
A bill of exchange may be addressed to two or more
drawees jointly, whether partners or not; but not to
two or more drawees in the alternative or in
succession (Sec. 128, NIL).
Inland Bill of Exchange vs. Foreign Bill of
Exchange
An inland bill of exchange is one which is, or on its
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
32
Mercantile Law
d.
e.
f.
connection with the letters of credit are
negotiable instruments.
A warehouse receipt is not a negotiable
instrument because the obligation of a
warehouseman is not to pay but to deliver the
goods under the warehouse receipt which fails
to comply with the requirements set forth
under Sec. 1 of the NIL. It is merely considered
as a negotiable document that does not result in
the accumulation of contracts.
A treasury warrant requires appropriations
from the national government which means
that the particular fund may or may not exists
which renders it conditional, thereby nonnegotiable.
Not negotiable. A certificate of indebtedness
merely acknowledges to pay a sum of money to
a specified persons or entity. Since a certificate
of indebtedness which is not payable to order
or bearer but is payable to a specific person is
not negotiable, the assignee takes it subject to
g.
the defect in the title of the assignor. Thus,
when the person who signed the deed of
assignment was not authorized by the board of
directors, the assignor had no title to convey to
the assignee (Traders Royal Bank vs. Court of
Appeals,
Filriters
Guaranty
Assurance
Corporation and Central Bank of the
Philippines, G.R. No. 93397, March 3, 1997).
The electronic messages are not signed by the
investor-clients as supposed drawers of a bill
of exchange; they do not contain an
unconditional order to pay a sum certain in
money as the payment is supposed to come
from a specific fund or account of the investorclients; and, they are not payable to order or
bearer but to a specifically designated third
party. Thus, the electronic messages are not
bills of exchange (Hongkong & Shanghai
Banking Corp. v. CIR, G.R. Nos. 166018 &
167728, 04 June 2014).
Parties to a negotiable instrument and their liabilities
BASIS
PARTIES
Maker
PN
Payee
Drawer
BOE
Drawee
Payee
Acceptor
FUNCTION
One who makes the promise and signs
the instrument.
The party to whom payment is
originally payable.
The person who issues and draws the
bill.
The party upon whom the bill is
drawn.
The party to whom payment is
originally payable.
The acceptor is the drawee who
accepts the bill.
Primarily
liability.
LIABILITY
liable; cannot limit his
Secondarily liable, except when
drawee refused to accept; may insert
in the instrument an express
stipulation negativing or limiting his
own liability to the holder/ (Sec. 61)
Not liable until he becomes acceptor.
The party to whom payment is
originally payable.
Primarily liable.
Note: Drawee does not assume automatic liability
unless he “accepts” the command of the drawer.
Acceptance signifies the assent by writing the word
“accepted” and signing his name on the face of the
instrument.
determination of its negotiability. The nature of
acceptance is important only in the determination
of the kind of liabilities of the parties involved
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L25836-37, Jan. 31, 1981).
Q: What is the remedy in case the drawee does not
accept?
COMPLETION AND DELIVERY
A: Payee cannot file a suit against the drawee. The
remedy is to go after the drawer. Payee has no cause
of action against the drawee if no acceptance has
been made.
Steps in the issuance of a negotiable instrument
1.
Importance of acceptance of the bill of exchange
by the drawee
2.
The acceptance of a BOE is not important in the
33
The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of
NIL.
Delivery - The transfer of possession, actual or
constructive, from one person to another (NIL,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Sec. 191), with the intent to transfer title to
payee and recognize him as holder thereof.
c.
INSERTION OF DATE
GR: The date is not essential to the negotiability of
the instrument (not one of the requirements under
Sec. 1).
d.
XPNs: Date is important to determine maturity:
(FiDeI)
1.
2.
3.
Holder may insert the date in an instrument in
the following instances (EA)
Where the instrument payable within a fixed
period after date is issued undated, or the
acceptance of the instrument payable at a fixed
period after sight is undated (Sec. 13, NIL).
When the instrument is payable on demand,
date is necessary to determine whether the
instrument was presented within a reasonable
time from issue, or from the last negotiation.
[NIL, Secs. 71 and 143 (a)]
When the instrument is an interest-bearing
one, to determine when the interest starts to
run.
1.
2.
Where an instrument expressed to be payable
at a fixed period after date is issued undated
Where the acceptance of an instrument payable
at a fixed period after sight is undated (NIL, Sec.
13).
COMPLETION OF BLANKS
Meaning of a “Material particular”
It is any particular that may be properly to be
inserted in a negotiable instrument to make it
complete.
Insertion of a wrong date
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date. With respect to the
person who inserted the wrong date, however, the
instrument is avoided (Bank of Houston v. Day, 145
Mo. Appl. 410, 122 SW 756).
Various
situations
instruments
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided
it is not done for illegal or fraudulent purpose (NIL,
Sec. 12).
Q: Can a bill of exchange or a promissory note
qualify as a negotiable instrument if:
a. it is not dated;
b. or the day and the month, but not the year of
its maturity, is given; or
c. it is payable to ―cash
d. it names two alternative drawees (1997
Bar)
involving
negotiable
1.
Incomplete instrument
a. Delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
b. Not delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
2.
Complete instrument
a. Delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
b. Not delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
Ante-dating or post-dating an instrument
NOTE: If an instrument is complete and delivered
without forgery and alteration, all parties are
bound.
INCOMPLETE BUT
DELIVERED INSTRUMENTS Sec. 14
A:
a. YES. Date is not an essential requirement for
the negotiability of an instrument as provided
for in section 1 of the NIL XPN: (FiDeI)
b. NO. Since the year is not determined, the time
for payment is not determinable.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
YES. When the name of the payee does not
purport to be the name of any person, the law
provides in section 9d of the NIL that the maker
or drawer intends the same to be payable to
bearer, hence the instrument qualifies as a
negotiable instrument.
NO. When the bill is addressed to two or more
payees in the alternative, the law provides in
section 128 of the NIL that it is conditional and
therefore non-negotiable.
Prima facie authority to fill up the blanks
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
34
Mercantile Law
operates as a prima facie authority to fill it up as
such for any amount.
check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it
to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found
out about the transaction, he directed the
drawee bank to dishonor the check. When
Evelyn encashed the check, it was dishonored. Is
Lorenzo liable to Evelyn? (2004, 2006 Bar)
A: YES. This covers the delivery of an incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
any of the material particulars thereof. Having done
so, and when it is first completed before it is
negotiated to an HIDC like Evelyn, it is valid for all
purposes, and she may enforce it within a
reasonable time, as if it had been filled up strictly in
accordance with the authority given.
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 (NIL,
Sec. 14).
NOTE: While under the law, the one in possession
had a prima facie authority to complete the check,
such prima facie authority does not extend to its
use (i.e., subsequent transfer or negotiation) once
the check is completed (Patrimonio v. Gutierrez,
G.R. No. 187769, June 4, 2014).
Q: To secure certain advances from the bank, X
and Y executed several promissory notes. When
the obligation became due, X and Y failed to pay
the same despite repeated demands. To evade
their liability, they claimed that they signed the
promissory notes in blank and they had not
received the value of said notes. Is their defense
tenable? (2006 Bar)
INCOMPLETE
AND UNDELIVERED INSTRUMENTS Sec. 15
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 (NIL,
Sec. 15).
A: NO. It is no defense that the promissory notes
were signed in blank as Section 14 of the Negotiable
Instruments
Law
concedes
the prima
facie authority of the person in possession of
negotiable instruments to fill in the blanks (Quirino
Gonzales Logging Concessionaire vs. CA, G.R. No.
126568, April 30, 2003).
NOTE: Non-delivery of an incomplete instrument is
a real defense which may be set up even against a
holder in due course.
Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank
checks. He instructed Ruth, his secretary, to fill
them as payment for his obligations. Ruth filled
one check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it
to Marie. She accepted the check in good faith as
payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and
apologized to Jun. Immediately he directed the
drawee bank to dishonor the check. When
Marie encashed the check it was dishonored.
Enforcement of an incomplete but delivered
instrument; effect if a completed instrument
was negotiated to a holder in due course
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
filled up strictly in accordance with the authority
given and within reasonable time.
However, if 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
reasonable time. Hence, the defense that the blanks
were filled up beyond the authority given and/ or
beyond the reasonable time, is not available as
against a HIDC
NOTE: Non-delivery of complete instrument is a
personal defense.
Supposing the check was stolen while in Ruth's
possession and a thief filled the blank check,
endorsed and delivered it to Marie in payment
for the goods he purchased from her, is Jun
liable to Marie if the check is dishonored?
(2006 Bar)
A: NO. The check is an incomplete instrument not
delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in
the hands of any holder as against any person
whose signature was placed thereon before
delivery. As such, Jun is not liable to Marie since he
does not assume any responsibility whatsoever
Q: Lorenzo signed several blank checks
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one
35
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
upon the said check. He is a party prior to the
unauthorized completion and delivery (NIL, Sec.
15).
Wei, G.R. No. 85419, March 9, 1993).
NOTE: The defense of want of delivery of a complete
instrument is only a personal defense which
means that it is only available against a holder NOT
in due course.
Note: delivery is not conclusively presumed where
the instrument is incomplete
Q: PN makes a promissory note for P5,000.00,
but leaves the name of the payee in blank
because he wanted to verify its correct spelling
first. He mindlessly left the note on top of his
desk at the end of the workday. When he
returned the following morning, the note was
missing. It turned up later when X presented it
to PN for payment. Before X, T who turned out to
have filched the note from PN’s office, had
endorsed the note after inserting his own name
in the blank space as the payee. PN dishonored
the note, contending that he did not authorize its
completion and delivery. But X said he had no
participation in, or knowledge about the
pilferage and alteration of the note and
therefore he enjoys the rights of a holder in due
course under the Negotiable Instruments Law.
Who is correct and why? (2000 Bar)
Note: Delivery with the intent to transfer is a prerequisite to liability.
Issuance of an instrument
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
person who takes it as holder (NIL, Sec. 191).
Conditional delivery or delivery for a special
purpose
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
transferring the property (title) to the instrument.
In such case, if the instrument lands in the hands of
an HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument is
treated as if there is no condition. If such delivery
was made to a holder not in due course, prior
parties are not bound by the instrument (NIL, Sec.
16).
A: PN is correct. Since the negotiable instrument is
still incomplete and has not yet been delivered, PN
is correct in dishonoring the said instrument. Sec.
15 provides that 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. Thus, under this section, it is a real
defense that can even be interposed against a
holder in due course.
NOTE: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
delivery, because of the rule that the negotiability is
determined only upon the face of the instrument.
Imposing a verbal condition is a personal defense.
Presumption as to delivery
Note: Personal defense can only be interposed by
parties prior to completion. Those parties after
completion cannot assert the personal defense.
If the instrument is in the possession of an HIDC,
valid delivery is conclusively presumed.
COMPLETE
BUT UNDELIVERED INSTRUMENTS Sec. 16
If the instrument is in the possession of a party
other than an HIDC, possession of such party
constitutes only prima facie presumption of
delivery.
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL,
Sec. 16). Delivery is essential to the validity of any
negotiable instrument (Sundiang Sr. & Aquino,
2009).
Immediate Parties
Immediate parties are persons having knowledge of
the conditions or limitations placed upon the
delivery of an instrument. It means privity, and not
proximity.
Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the
payee acquires no interest in the check until its
delivery to him (Development Bank of Rizal v. Sim
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A payee who is a holder in due course is not an
immediate party in the sense of Section 16 (Liberty
Trust Co. v. Tilton, 105 N.E. 05.).
Remote Parties
36
Mercantile Law
the instrument must be signed by the maker
complied with?
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an
instrument, even if he is the next party physically or
parties who are not in direct contractual relation to
each other, but if they are chargeable, for example,
with knowledge or notice of any infirmities in the
instrument or defect in the title of the person
negotiating the same, they will be considered as
immediate parties for purposes of Section16.
A: YES. The letter “X” is sufficient to comply with the
requirement. It appears from the problem that such
letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
SIGNING IN TRADE NAME
As a general rule, only persons whose signatures
appear on an instrument are liable thereon. But one
who signs in a trade or assumed name is liable as if
he signed his own name (NIL, Sec. 18).
SIGNATURE
Validity of signature in a negotiable instrument
NOTE: It is necessary that the party who signs in a
trade name intended to be bound by his signature.
A party may use his full name, surname, initials or
even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from
liability (DADi)
NOTE: A signature may be made in any manner as
long as the person signing has the intention to be
bound.
1.
2.
Persons liable on an instrument
He is Duly Authorized
He Adds words to his signature indicating that
he signs as an agent/representative and
He Discloses the name of his principal (NIL, Sec.
20).
GR: Only persons whose signatures appear on an
instrument are liable thereon (NIL, Sec. 18).
3.
XPNs: Notwithstanding the absence of their
signatures in their own names, the following
persons are deemed liable: (TraP FAP)
Legal effects of an agent’s signature
1.
2.
3.
4.
5.
The agent’s signature, provided that the above
requisites are complied with, will bind his principal
and he will be exempt from personal liability.
Person who signs in Trade or assumed name
(NIL, Sec. 18)
Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is
merely signing in a representative capacity
(NIL, Sec. 19, 20)
Forger (NIL, Sec. 23)
Acceptor, who makes his acceptance of a bill on
a separate paper (NIL, Sec. 134)
Person, who makes a written Promise to accept
the bill before it is drawn (NIL, Sec. 135)
Procuration
It is the act by which a principal gives power to
another to act in his place as he could himself (Fink
v. Scott, 143 S.E. 305).
It operates as notice or a warning that the agent has
but a limited authority to sign and the principal is
bound only in case the agent in so signing acted
within the actual limits of his authority (NIL, Sec. 21).
INDORSEMENT BY MINOR OR A CORPORATION
Where a signature is so placed upon the instrument
that it is not clear in what capacity the person
signed, he is deemed to be an indorser, not a maker
or drawer. [NIL, Sec. 17(f)]
1.
Q: Juan borrowed P10,000.00 from Joe as
evidenced by a promissory note. All other
requisites of negotiability are present except
that Juan did not affix his usual signature
thereon as he was ailing at that time and was
only able to put “X” in the blank space meant for
the signature of the maker. Is the requisite that
Minor
GR: A contract entered into by a minor is
voidable, at the option of the minor. It is a real
defense that can be invoked only by the minor,
even against a holder in due course, and cannot
be invoked by the other parties.
XPN: Where a minor committed actual fraud
by specifically stating that he is of legal age, a
minor can be bound by his signature in an
37
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
instrument. (PNB v. CA, G.R. No. L-34404, June
25, 1980)
Note: Section 23 applies only to forged signatures or
signatures made without authority.
NOTE: While a minor is not bound by his
indorsement for lack of capacity, he is however
not incapacitated to transfer his rights.
Burden of proof in proving forgery
Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery (Chiang Yia
Min v. CA, G.R. No. 137932, March 28, 2001).
Illustration
Q: A executed a promissory note in favor of M
which reads:
I promise to pay P (16 years old) or order
P10,000.
Sgd. M
Pay to P or order P10,000 30 days after sight.
(Sgd)D, (forged by P)
To X
P indorsed it to A.
a.
May A collect from M notwithstanding that P,
the indorser is a minor?
b. In case that A cannot collect from M, can he
collect from P?
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawer’s signature (NIL, Sec. 62).
A:
a. YES. A can collect from M. Notwithstanding the
fact that P is a minor, the indorsement of P (the
minor) passes title to A. The holder. M cannot
invoke the defense of minority because such
defense would only be available to P.
b. NO. A cannot collect from P, as he has a real
defense of minority on his part.
2.
Note: Forged signature of a maker or drawer is
different and has a different effects from/against
forged indorsements.
A payee may sue the collecting bank for the
amount of the checks it paid under a forged
indorsement even when the instrument has not
been delivered to the payee
Incapacitated person – An incapacitated person
may also use as a real defense his incapacity to
enter into a contract. Contract entered into by
the incapacitated are voidable.
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v. Ong, 373 SCRA 212).
Incapacitated persons include:
a) insane or demented persons; and
b) deaf and blind who does not know how to
write.
3.
Corporation- Issuance or indorsement of an
instrument by a corporation acting beyond its
powers (ultra vires) is a real defense.
General rule: Infants and corporations (ultra vires)
incur no liability by their indorsement or
assignment of an instrument. (Sec. 22 NIL)
Effects of forgery
Effects: No liability attached to the infant or the
corporation. The instrument is still valid and the
indorsee acquires title
It does not avoid the instrument but only the forged
signature. In other words, rights may still exist and
be enforced by virtue of such instrument as to those
signatures thereto are found to be genuine.
FORGERY
It is the counterfeit making or fraudulent alteration
of any writing. It happens when a signature is
affixed by one who does not claim to act as an agent
and who has no authority to bind the person whose
signature he has forged (NIL, Sec. 23).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
GR: As regard the signature that is forged, the same
shall be wholly inoperative.
XPNs:
38
Mercantile Law
1.
2.
If the party against whom it is sought to enforce
such right is precluded from setting up forgery
or want of authority (NIL, Sec. 23);
Where the forged signature is not necessary to
the holder’s title, in which case, the forgery may
be disregarded (NIL, Sec. 48).
that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty
promptly to report such fact to the drawee bank. For
his negligence or failure either to discover or to
report promptly the fact of such forgery to the
drawee, the drawer loses his right against the
drawee who has debited his account under a forged
indorsement. In other words, he is precluded from
using forgery as a basis for his claim for re-crediting
of his account. (Gempesaw v CA G.R. No. 92244
February 9, 1993)
Persons precluded from setting up the defense
of forgery (2010 Bar) (SEA) E - asin
1.
2.
3.
Those who Admit or warrant the genuineness
of the signature such as indorsers, persons
negotiating by delivery and acceptor
Those who by their acts, silence, or negligence
(asin), are Estopped from claiming forgery
A holder of a bearer instrument who
Subsequently negotiates such instrument with
a prior forged indorsement, because in bearer
instrument, the forged signature is not
necessary to the holder’s title it being
negotiably by mere delivery.
Rules on liabilities of parties on a forged
instrument
In a Promissory Note:


Cut-off Principle
Although rights may exist between and among
parties subsequent to the forged indorsement, not
one of them can acquire rights against parties prior
to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties
prior to the forgery. However, the law makes an
exception to these rules where a party is precluded
from setting up forgery as a defense [SEA].

A party whose indorsement is forged on a note
payable to order and all parties prior to him
including the maker cannot be held liable by
any holder.
A party whose indorsement is forged on a note
originally payable to bearer and all parties prior
to him including the maker may be held liable
by a holder in due course provided that it was
mechanically complete before the forgery.
A maker whose signature was forged cannot be
held liable by any holder.
In a Bill of Exchange:

Problems arising from forged indorsements of
checks


As a matter of practical significance, problems
arising from forged indorsements of checks may
generally be broken into two types of cases:


1. Where forgery was accomplished by a person not
associated with the drawer — for example a mail
robbery; and
2. Where the indorsement was forged by an agent of
the drawer.




This difference in situations would determine the
effect of the drawer's negligence with respect to
forged indorsements.

While there is no duty resting on the depositor to
look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to
look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a
business procedure as are reasonably calculated to
prevent or render difficult the forgery of
indorsements, particularly by the depositor's own
employees. And if the drawer (depositor) learns
The drawer’s account cannot be charged by the
drawee where the drawee paid.
The drawer has no right to recover from the
collecting bank
The drawee bank can recover from the
collecting bank
The payee can recover from the drawer
The payee can recover from the recipient of the
payment, such as the collecting bank
The payee cannot collect from the drawee bank
The collecting bank bears the loss but can
recover from the person to whom it paid
If payable to bearer, the rules are the same as in
PN.
If the drawee has accepted the bill, the drawee
bears the loss and his remedy is to go after the
forger
If the drawee has not accepted the bill but has
paid it, the drawee cannot recover from the
drawer or the recipient of the proceeds,
absence any act of negligence on their part.
Liabilities of the parties to a negotiable
instrument where an indorsement is forged
Illustration
39
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual
duty to pay the check only to the person to
whom it is made payable. Drawee bank, in such
case, should credit back and restore to drawer’s
account the value of the check wrongfully
encashed.
3.
When the indorser’s signature is forged
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged, C can
enforce the note against X and B but not against M,
P or A, because were it not for the forgery of X the
instrument will not reach the possession of C (Cut
Off Rule).
Drawee bank bears the loss as it is under
strict liability to pay the check to the order of
the payee. Payment under forged indorsement
is not to the drawer’s order. Ensuingly, if the
drawee bank pays a check bearing forged
signature of indorser, it does so at its own peril.
b. If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title to C
because negotiation on bearer instrument requires
only delivery.
However, the drawee bank may pass the
liability to the collecting bank who cannot
interpose the defense of forgery. Under Sec. 16
of NIL the collecting bank is an indorser who
warrants that the instrument is genuine and in
all respect what it purports to be. The collecting
bank had no right to be paid by the drawee bank
since the forged indorsement is inoperative.
The collecting bank may ultimately recover
from the forger.
Q: After securing a Pl million loan from B, A drew
in B's favor a bill of exchange with C as drawee.
The bill reads: "October 1, 2016. Pay to the order
of B the sum of P1 million. To: C (drawee).
Signed,”A." A then delivered the bill to B who,
however, lost it. It turned out that it was stolen
by D’ B's brother. D lost no time in forging B's
signature and negotiated it to E who acquired it
for value and in good faith.
NOTE: In all three cases, when the drawer is guilty
of negligence, he should bear the loss. He is
precluded from setting up forgery because the
proximate cause of the loss is his own negligence
(Pre-Week Reviewer in Commercial Law,
Dimaampao and Escalante).
May E recover on the bill from C, the drawee?
Explain. (2016 Bar)
Responsibility of Drawee Bank
If Forged Signature
A: NO, E cannot recover from C, the drawee. The
forged endorsement of B did not result in transfer
of title in favor of E as no right can be acquired
under such forged endorsement.
GR: Bank assumes the responsibility of seeing that
the money gets to the party authorized to receive it.
Hence, if it pays money out on forged signature, the
depositor being free from blame/negligence, it must
bear the loss.
Legal consequences when a bank honors a
forged check
1.
When drawer's signature is forged
XPN: Payee was not a client of the bank (did not
maintain an account in the said bank) and latter
therefore had no way of ascertaining the
authenticity of payee’s indorsements on all checks
which were deposited in the account. The bank
cannot be held negligent where it caused checks to
pass thru the clearing house before proceeds were
withdrawn.
Drawee bank is liable because the bank is
bound to know the signature of its customers
and if it pays a forged check, it must be
considered as making the payment out of its
own funds and cannot ordinarily charge the
amount so paid to the account of the depositor
whose name was forged. It is also in a superior
position to detect the forgery because it has a
specimen of the signature of the maker. Lastly,
by accepting the instrument, it becomes an
acceptor who admits the genuineness of the
drawer’s signature.
2.
If Forged Indorsement
GR: The Drawee bank who has paid the check on
which an indorsement has been forged cannot debit
or charge upon drawer’s account for the amount of
said check. It is not entitled to indemnification from
When the payee’s signature is forged
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
40
Mercantile Law
the drawer. Risk of loss falls on the drawee bank
b.
XPN: If drawer is guilty of negligence which causes
the bank to honor such checks, he shall bear the loss.
c.
Q: X Corporation opened an account with Y Bank
with its President and Secretary/Treasurer as
signatories. While they are abroad, several
checks bearing their signatures were presented
to and approved by the bank. The amount of
these checks were then debited against the
account of corporation. Upon noticing the
deductions in their account, they requested the
bank to credit back the same amount, claiming
that the deductions were unauthorized and
fraudulently made. The bank refused to restore
the amount. Who should bear the loss?
2.
b.
ABC Bank, the drawee-bank, may charge
the amount thereof to the account of the
drawer because the forged indorsement
did not prevent the transfer of title. The
remedy of the drawer is against the forger.
Drawer has no cause of action against
collecting bank, since the duty of
collecting bank is only to the payee
(Manila Lighter Transportation, Inc. v. CA,
G.R. No. L-50373 February 15, 1990). The
drawee-bank can recover from the
collecting bank because even if the
indorsement on the check deposited by the
bank's client is forged, collecting bank is
bound by its warranties as an indorser and
cannot set up defense of forgery as against
drawee bank (Associated Bank v. CA, G.R. No.
107382).
Q: X entrusted his check books, credit cards,
passbooks, bank statements and cancelled
checks to his secretary. He also introduced the
secretary to the bank for purposes of
reconciliation of his accounts. Subsequently, X’s
secretary forged his signature on the checks and
was able to withdraw his money. Is the drawee
bank liable for the amounts withdrawn by the
secretary?
Q: X fraudulently obtained possession of the
check and forged P’s signature and then
indorsed and deposited the check with XYZ bank
which honored the check and placed the amount
thereof to his credit. Thereafter, XYZ Bank
indorsed the check to the drawee bank-ABC
bank which paid it and charged the account of
the drawer.
A: Yes. However, there is contributory
negligence on the part of X in clothing his
secretary with such authority, consequently
making him partly liable. Furthermore, he is
precluded from setting up the forgery due to his
own negligence in entrusting to his secretary his
credit cards and check book including the
verification of his statements of account. (Ilusorio v.
CA, G.R. No. 139130, November 27, 2002).
Illustrate the liability of a drawer and a draweebank in an 1) instrument payable to order and
in an 2) instrument payable to bearer in case of
a forgery on payee’s signature.
A:
1. If the instrument is payable to order:
a.
If the instrument is payable to bearer:
a.
A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
and the depositor is guilty of contributory
negligence, the greater proportion of the loss shall
be borne by the bank. The bank was negligent
because it did not properly verify the genuineness
of the signatures in the applications for manager’s
checks while the depositor was negligent because it
clothed its accountant/bookkeeper with apparent
authority to transact business with the Bank and it
did not examine its monthly statement of account
and report the discrepancy to the Bank (PNB vs. FF
Cruz and Company, G.R. No. 173259, July 25, 2011).
XYZ Bank is however, liable to the drawee
bank because of its warranty as an
indorser. (NIL, Sec. 66)
D, the drawer, is not liable on the check
because his order is to pay P or his order
and not to any other person.
Q: The drawer’s signature was forged. There is,
however, a provision in the monthly bank
statement that if the drawer’s signature was
forged, the drawer should report it within 10
days from receipt of the statement to the
drawee. The drawer, however, failed to do so.
What will be its effect insofar as the drawer’s
right is concerned?
The drawee bank is liable to the drawer for
the amount of the check and his account
cannot
be
charged
because
the
indorsement of the payee is a forgery.
Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the
drawer for its payment.
41
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
A: The failure of the drawer to report the forgery
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
the drawer from questioning the mistake of the
drawee bank despite the provision (BPI v. CASA
Montessori Internationale, G.R. No. 149454 ).
A: NO, the illicit cause or consideration does not
adversely affect the negotiability of the bill,
especially in the hands of a holder in due course.
Under Sec. 1 of the Negotiable Instruments Law, the
bill of exchange is a negotiable instrument. Every
negotiable instrument 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 thereto for value (Sec. 24,
NIL).
Q: If forgery was committed by an employee of
the drawer whose signature was forged, does
the relationship amount to estoppel such that
the drawer is precluded in recovering from the
drawee bank?
Q: R issued a check for P1M which he used to pay
S for killing his political enemy. Can the check be
considered a negotiable instrument? (2007 Bar)
A: The bare fact that the forgery was committed by
an employee of the party whose signature was
forged can not necessarily imply that such party’s
negligence was the cause of the forgery in the
absence of some circumstances raising estoppel
against the drawer (Samsung Construction Co. v.
FEBTC, G.R. No. 129015, August 13, 2004).
A: YES. The check can be considered as a negotiable
instrument since it complied with the requirements
of negotiability under Sec. 1 of the Negotiable
Instruments Law. The unlawful consideration for
the issuance of the check is of no moment and will
not affect the negotiability of the check as it merely
constitutes a defect of title under Sec. 55 of the NIL.
CONSIDERATION
Holder for value
A holder for value is one who has given a valuable
consideration for the instrument. A holder for value
is deemed as such not only as regards the party to
whom the value has been given to by him but also in
respect to all those who became parties prior to the
time when value was given. (NIL, Sec.26)
NOTE: Where the holder has a lien on the
instrument arising either from contract or by
implication of law, he is deemed a holder for value
to the extent of his lien (NIL, Sec. 27).
It is an inducement to a contract that is the cause,
price or impelling influence, which induces a party
to enter into a contract.
NOTE: Every negotiable instrument is deemed
prima facie to have been issued for a valuable
consideration (NIL, Sec. 24).
Effect: Every person whose signature appears
thereon is party for value. (Sec.24) This
presumption is disputable.
Value
A check constitutes an evidence of indebtedness and
is a veritable proof of an obligation. Thus, based on
Sec. 24 of the NIL, checks complete and delivered to
a person by another are sufficient by themselves to
prove the existence of the loan obligation obtained
by the latter from the former (Ting Ting Pua v.
Spouses Tiong and Caroline Teng, G.R. No. 198660,
October 23, 2013, in Divina, 2014).
It is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt
constitutes value and is deemed such whether the
instrument is payable on demand or at a future time
(NIL, Sec. 25).
Note: Liberality can be considered as valuable
consideration.
Q: Lorenzo drew a bill of exchange in the amount
of P100,000.00 payable to Barbara or order,
with his wife, Diana, as drawee. At the time the
bill was drawn, Diana was unaware that Barbara
is Lorenzo’s paramour. Barbara then negotiated
the bill to her sister, Elena, who paid for it for
value, and who did not know who Lorenzo was.
On due date, Elena presented the bill to Diana
for payment, but the latter promptly dishonored
the instrument because, by then, Diana had
already learned of her husband’s dalliance. Does
the illicit cause or consideration adversely affect
the negotiability of the bill? Explain. (2009 Bar)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Want or absence of consideration vs. Failure of
consideration (1996, 2007 Bar)
WANT OR ABSENCE
OF CONSIDERATION
Total lack of any valid
consideration for the
contract
FAILURE OF
CONSIDERATION
Failure or refusal of one
of the parties to do,
perform or comply with
the consideration agreed
upon
Effect of want of consideration
42
Mercantile Law
It is a matter of defense as against any person not a
holder in due course, thus, a personal defense (NIL,
Sec. 28).
Q: Susan Kawada borrowed P500,000 from XYZ
Bank which required her, together with Rose
Reyes who did not receive any amount from the
bank, to execute a promissory note payable to
the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
liability was incurred by Rose, that of an
accommodation party or that of a solidary
debtor? Explain. (2003 Bar)
Partial failure of consideration
Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise (Ibid.).
Inadequacy of consideration
A: Rose incurs the liability of an accommodation
party since she executed the promissory without
receiving value therefor and for the purpose of
lending his name to Susan Kawada, the
accommodated party.
Nonetheless, as an
accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to a
holder for value, regardless of whether she stands
as a surety or solidary co-debtor since such
distinction would be entirely immaterial and
inconsequential as far as a holder for value is
concerned.
GR: Inadequacy of consideration does not invalidate
the instrument.
XPN: There has been fraud, mistake or undue
influence (NCC, Art. 1355).
Note:




Absence of consideration is where no
consideration was intended to pass.
Failure of consideration implies that
consideration was intended by that it failed
to pass.
The defense of want of consideration is
ineffective against a holder in due course.
A drawee who accepts the bill cannot allege
want of consideration against the drawer.
Q: Juan Sy purchased from “A” Appliance Center
one generator set on installment with chattel
mortgage in favor of the vendor. After getting
hold of the generator set, Juan Sy immediately
sold it without consent of the vendor. Juan Sy
was criminally charged with estafa. To settle the
case extra judicially, Juan Sy paid the sum of
P20,000 and for the balance of P5,000.00 he
executed a promissory note for said amount
with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.
ACCOMODATION PARTY
An accommodation party is one who has signed the
instrument as maker, acceptor, indorser or drawer,
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. (NIL, Sec. 29).
a.
What is the liability of Ben Lopez as an
accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 Bar)
A:
a. Section 29 of the Negotiable Instruments Law
provides that an accommodation party is liable
on the instrument to a holder for value,
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. As an accommodation
party, Ben Lopez is primarily and
unconditionally liable on the promissory note
to a holder for value as if the contract was not
for accommodation.
b. Under Section 14 of the NIL, Juan Sy is primarily
liable to the extent of P5,000 in the hands of a
holder in due course. However, if Ben Lopez
paid the note, Juan Sy has the obligation to
reimburse the former to the extent of the
amount paid.
Requisites to be an accommodation party
(SiNoLe)
1.
2.
3.
Accommodation party must Sign as maker,
acceptor, indorser or drawer
No value is received by the accommodation
party from the accommodated party
The purpose is to Lend the name
NOTE: It does not mean, however, that one cannot
be an accommodation party merely because he has
received some consideration for the use of his name.
The phrase “without receiving value therefor” only
means that no value has been received “for the
instrument” and not “for lending his name.”
Q: Dagul has a business arrangement with
Facundo. The latter would lend money to
43
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
another, through Dagul, whose name would
appear in the promissory note as the lender.
Dagul would then immediately indorse the note
to Facundo. Is Dagul an accommodation party?
Explain. (2005 Bar)
proceeds of his FCD as well as damages for the
unjust dishonor of the check. Was it proper for
PCIB to dishonor the check issued by Gonzales
against the credit line under the COHLA?
A: NO. While a maker who signed a promissory note
for the benefit of his co-maker (who received the
loan proceeds) is considered as an accommodation
party, he is, nevertheless, entitled to a written notice
on the default and the outstanding obligation of the
party accommodated. There being no such written
notice, the Bank is grossly negligent in terminating
the credit line of the accommodation party for the
unpaid interest dues from the loans of the party
accommodated and in dishonoring a check drawn
against such credit line (Eusebio Gonzales v.
Philippine Commercial and International Bank, Edna
Ocampo, and Roberto Noceda, G.R. No. 180257,
February 23, 2011).
A: NO. An accommodation 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. The accommodation is not one to the person
who takes the note — that is, the payee or indorsee,
but one to the maker or indorser of the note. In this
case, the indorser, Dagul, in making the
indorsement to the lender, Facundo, was merely
acting as agent for the latter or, as a mere vehicle for
the transference of the naked title from the
borrower or maker of the note and was not acting
as an accommodation party.
Accommodation party vs. Regular party
ACCOMMODATION
PARTY
Signs an instrument
without
receiving
value therefor
Purpose of signing is
to lend his name to
another person
May always show, by
parol evidence, that he
is only such
Cannot avail of the
defense
of
absence/failure
of
consideration against
a holder not in due
course
May
sue
reimbursement after
paying
the
holder/subsequent
party
Extent of liability of an accommodation party
(Re2Con)
REGULAR PARTY
1.
Signs the instrument
for value (NIL, Sec.
24)
2.
Not for that purpose
3.
Cannot
disclaim
personal liability by
parol evidence
Note: Since the relationship of the accommodation
party and the accommodated party is considered as
that of a surety – principal debtor, they are solidarily
liable. Hence, the payee can run after surety for
entire amount.
May avail of such
defense
Surety can seek reimbursement from principal
debtor.
May not sue
Accommodation party cannot raise the defense
of absence or want of consideration
Q: PCIB granted a credit line to Gonzales through
the execution of the COHLA. Gonzales drew from
said credit line through the issuance of check.
Gonzales issued a check in favor of Rene Unson,
drawn against the credit line. However, upon
presentment for payment by Unson of said
check, it was dishonored by PCIB due to the
termination by PCIB of the credit line under
COHLA for the unpaid periodic interest dues
from the loans of Gonzales and the spouses
Panlilio. Gonzales, through counsel, wrote PCIB
insisting that the check he issued had been fully
funded, and demanded the return of the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Right to Revoke accommodation – before the
instrument has been negotiated for value.
Right
to
Reimbursement
from
the
accommodated party – the accommodated
party is the real debtor. Hence, the cause of
action is not on the instrument but on an
implied contract of reimbursement.
Right to Contribution from other solidary
accommodation maker (Sadaya v. Sevilla, G.R.
No. L-17845, April 27, 1967).
An accommodation party who lends his name to
enable the accommodated party to obtain credit or
raise money is liable on the instrument to a holder
for value even if he receives no part of the
consideration. He assumes the obligation to the
other party and binds himself to pay the note on its
due date. By signing the note, the accommodation
party thus became liable for the debt even if he had
no direct personal interest in the obligation or did
not receive any benefit therefrom (Dela Rama v.
Admiral United Savings Bank, G.R. No. 154740, April
16, 2008).
44
Mercantile Law
Holder for value may recover from an
accommodation party notwithstanding his
knowledge that the accommodation party is
only signing as such
Q: On June 1, 1990, A obtained a loan of
₱100,000 from B, payable not later than
December 20, 1990. B required A to issue him a
check for that amount to be dated December 20,
1990. Since he does not have any checking
account, A, with the knowledge of B, requested
his friend, C, President of Saad Banking
Corporation (Saad) to accommodate him. C
agreed, he signed a check for the aforesaid
amount dated December 20, 1990, drawn
against Saad’s account with the ABC Commercial
Banking Co. The By-laws of Saad requires that
checks issued by it must be signed by the
President and the Treasurer or the VicePresident. Since the Treasurer was absent, C
requested the Vice-President to co-sign the
check, which the latter reluctantly did. The
check was delivered to B. The check was
dishonoured upon presentment on due date for
insufficiency of funds.
Q: For the purpose of lending his name without
receiving value therefor, Pedro makes a note for
P20,000 payable to the order of X, who in turn
negotiates it to Y, the latter knowing that Pedro
is not a party for value.
a. May Y recover from Pedro if the latter
interposes the absence of consideration?
b. Supposing under the same facts, Pedro pays
the said Php20,000.00 may he recover the
same amount from X? (1990, 1996, 1998
Bar)
A:
a. YES, Y may recover from Pedro. Section 29 of
the NIL provides that a person 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 is liable on the instrument to a
holder for value, notwithstanding the fact that
such holder at the time of taking the instrument
knew him to be only an accommodation party.
Pedro, being an accommodation maker of a
note, may thus be held primarily and
unconditionally liable therefor.
b. YES, Pedro may recover from X. When the
accommodation party makes payment to the
holder of the note, he has the right to sue the
accommodated party for reimbursement, since
the relation between them is in effect that of
principal and surety, the accommodation
party being the surety. Thus, after paying the
holder, Pedro may seek reimbursement from X,
the accommodated party.
a.
Is Saad liable on the check as an
accommodation party?
b. If it is not, who then, under the above facts,
is/are liable? (1991 Bar)
A:
a. NO, Saad is not liable as an accommodation
party. This is because the issue or indorsement
of negotiable paper by a corporation without
consideration and for the accommodation of
another is ultra vires. Hence, one who has taken
the instrument with knowledge of the
accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party. While it may be legally
possible for a corporation whose business is to
provide financial accommodations in the
ordinary course of business, such as one given
by a financing company, to be an
accommodation party, this situation, however,
is not the case at bar.
b. Considering that both the President and the
Vice-President were signatories to the
accommodation, they themselves can be
subject to the liabilities of accommodation
parties to the instrument in their personal
capacity (Crisologo-Jose v. CA, G.R. No. 80499,
September 15, 1989).
Q: As a rule under the NIL, a subsequent party
may hold a prior party liable but not vice-versa.
Give 2 instances where a prior party may hold a
subsequent party liable. (2008 Bar)
A: A party may hold a subsequent party liable in the
following instances: (1) in case of an accommodated
party; and (2) in case of an acceptor for honor. An
accommodation party may hold the party
accommodated liable to him, even if the party
accommodated is a subsequent party. The relation
between them is that of principal and surety. For the
same reason, an acceptor for honor may hold the
party for whose honor he accepted a bill of exchange
liable to him. A payer for honor is subrogated to the
rights of the holder as regards the party for whose
honor he paid and all parties liable to the latter.
NEGOTIATION
Negotiation is the transfer of an instrument from
one person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 30).
Accommodation made by a corporation
45
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
NOTE: A holder is the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof
(NIL, Sec. 191).
The indorser warrants
the solvency of the
maker or drawer as
the case may be.
Methods of transferring an instrument (INA)
1.
2.
3.
MODES OF NEGOTIATION
Issuance – first delivery of the instrument
complete in form to a person who takes it as a
holder.
Negotiation
Assignment – transfer of the title to the
instrument, with the assignee generally taking
only such title as his assignor has, subject to all
defenses available against the assignor.
Modes of negotiation (NIL, Sec. 30)
If Payable to bearer
If Payable to order
DISTINGUISHED FROM ASSIGNMENT
NEGOTIATION
As to governing law
Negotiated by mere
delivery
Negotiated by the
indorsement of the
holder, completed by
delivery
Q: Ligaray charged Wagas with estafa, alleging
that Wagas placed an order of 200 bags of rice
over the telephone with a post-dated check
payable to cash as payment. The seller Ligaray
delivered the rice to Cañada, brother-in-law of
Wagas. In turn Ligaray received a post-dated
check issued by Wagas, which was later on
dishonored due to insufficiency of funds.
ASSIGNMENT
Assignment
is
governed by the law
Negotiation
is
on assignment of
governed by the NIL
credit under the Civil
Code
As to the subject instrument
Non-negotiable
instrument may be
Only a negotiable
assigned absent any
instrument may be
prohibition
against
negotiated.
assignment written on
its face.
As to right acquired
The transferee does
The transferee, if he is not become a holder
a HIDC may acquire and can have no better
better rights than his right
than
his
transferor.
transferor; he merely
steps into the shoes of
the assignor.
As to liability and right of recourse
The holder can hold
The transferee has no
the drawer and the
right of recourse for
indorsers liable if the
payment
against
party primarily liable
immediate parties.
does not pay.
As to defenses available
Any defense available
A personal defense is
against the transferor
not available against
is available against the
an HIDC.
transferee
As to the notice requirement
Notice of negotiation
is not necessary. The
Notice of assignment is
maker or drawer need
required.
not be informed of the
negotiation.
As to warranty
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The assignor does not
warrant the solvency
of the obligor.
During trial, Wagas averred that he issued the
check to Cañada, and that it was the latter who
had transacted with Ligaray. While admitting
that he signed a letter acknowledging his debt to
Ligaray, Wagas insisted that he signed the same
just to accommodate the pleas of his sister and
her husband Cañada.
Is Wagas guilty of estafa?
A: NO. Under the NIL (Sec. 9 and Sec. 30), a check
made payable to cash is payable to the bearer and
could be negotiated by mere delivery without the
need of indorsement. This rendered it highly
probable that Wagas had issued the check not to
Ligaray, but to somebody else like Cañada, his
brother-in-law, who then negotiated it to Ligaray.
It bears stressing that the accused, to be guilty of
estafa as charged, must have used the check in order
to defraud the complainant. What the law punishes
is the fraud or deceit, not the mere issuance of the
worthless check. The proof of guilt must still clearly
show that it had been Wagas as the drawer who had
defrauded Ligaray by means of the check (People v.
Gilbert Wagas, G.R. No. 157943, September 4, 2013).
Delivery of negotiable instrument
Delivery means transfer of possession, actual or
constructive, from one person or another (NIL, Sec.
191).
46
Mercantile Law
NOTE: Where the instrument is no longer in the
possession of the party whose signature appears
thereon, there is a prima facie presumption of a
valid and intentional delivery by him (NIL, Sec. 16).
only at the time of indorsement that negotiation
takes effect and the transferee acquires the rights of
a holder (NIL, Sec. 49).
Negotiation by a prior party
Bearer instrument is negotiated by indorsement
and delivery (“Once a bearer, always a bearer”
rule)
Where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate
the same. However, he is not entitled to enforce
payment thereof against any intervening party to
whom he was personally liable (NIL, Sec. 50).
A bearer instrument, when indorsed specially, may
nevertheless be further negotiated by delivery; but
the person indorsing specially is liable as indorser
only to such holders who acquired title through his
indorsement (NIL, Sec. 40). This spawns the rule
that A BEARER INSTRUMENT IS ALWAYS A
BEARER INSTRUMENT.
NOTE: Notwithstanding the limitation under Sec.
50, a prior party may strike out the intervening
indorsements not necessary for his title. The
indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
from liability on the instrument (NIL, Sec. 48).
Q: A makes a promissory note payable to bearer
and delivers the same to B. B, however, endorses
it to C in this manner:
e.g.“A”, the payee indorsed the instrument to B, then
B indorsed it to C, C to D, then D to B. B can further
negotiate the instrument. He may also strike out the
indorsement of C and D (Sundiang Sr. & Aquino,
2014).
“Payable to C.
Signed: B.”
Later, C, without indorsing the promissory note,
transfers and delivers the same to D. The note is
subsequently dishonored by A. May D proceed
against A for the note? (1998 Bar)
Limitations on re-negotiation
A: YES. D may collect from A. The note made by A is
a bearer instrument. Where an instrument, payable
to bearer is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special
indorsement made by B, the note remained a bearer
instrument and can be negotiated by mere delivery.
When C delivered and transferred the note to D, the
latter became a holder thereof. As such, D can
proceed against A.
1.
In the following cases, a prior party cannot further
negotiate the instrument: (TAP)
2.
3.
Where it is payable to the order of a third
person, and it has been paid by the drawer. [NIL,
Sec. 121 (a)]
Where it was made or accepted for
accommodation and has been paid by the party
accommodated. [NIL, Sec. 121 (b)]
In other cases, where the instrument is
discharged when acquired by a prior party.
[NIL, Sec. 119 (e)]
KINDS OF INDORSEMENT
NOTE: Once a bearer instrument, always a bearer
instrument.
Indorsement
Q: X executed a promissory note with a face
value of Php 50,000.00 payable to the order of Y.
Y indorsed the note to Z, to whom Y owed Php
30,000.00. If X has no defense at all against Y, for
how much may Z collect from X? (2011 Bar)
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the
same.
A: Php 50,000.00, but with the obligation to hold
Php 20,000.00 for Y's benefit.
GR: Indorsement must be of the entire instrument.
It must be in the instrument itself or in a paper
attached to the instrument called allonge. (NIL, Sec.
32).
Delivery of an order instrument without
indorsement
XPN: When the instrument has been paid in part.
Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the
instrument.
If an order instrument is not indorsed, the
negotiation is incomplete and the instrument is in
effect merely assigned. The transferee acquires the
right to have the indorsement of the transferor. It is
47
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Indorsement should be placed:
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called “allonge” (NIL, Sec. 31)
NOTE: Mere absence of words implying power
to negotiate does not make an instrument
restrictive (NIL, Sec. 36).
4.
Kinds of indorsement (SB-ReQuACo-JIFS)
1.
Special – Specifies the person to whom or to
whose order the instrument is to be payable. It
is also known as specific indorsement, or
indorsement in full. (NIL, Sec. 34).
NOTE: Qualified indorsement does not impair
the negotiable character of an instrument (NIL,
Sec. 38).
NOTE: An instrument payable to bearer
indorsed specially may nevertheless be
negotiated by delivery (once a bearer always a
bearer) (NIL, Sec. 40).
5.
Absolute – The indorser binds himself to pay:
(FaNot)
a. Upon no other condition than failure of
prior parties to do so;
b. Upon due notice to him of such failure.
6.
Conditional - Right of the indorsee is made to
depend on the happening of a contingent event.
The party required to pay may disregard the
conditions (NIL, Sec. 39).
GR: An order instrument needs indorsement for
further negotiation.
XPN: Sec. 40, NIL. If the instrument is originally a
bearer and it was indorsed specially, it may further
be negotiated by mere delivery.
2.
Blank – Specifies no indorsee. (BS)
a. Instrument is payable to bearer and may
be negotiated by delivery (NIL, Sec. 34)
b. May be converted to special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of indorsement (NIL,
Sec. 35)
NOTE: The condition refers to the indorsement
not on the instrument itself.
The condition is only between the conditional
indorser and conditional indorsee.
NOTE: The indorsement need not follow the
words of negotiability. What should follow the
words of negotiability is the promissory note or
the bill of exchange but not the indorsmement.
Example: The indorsement may simply be
written as “Pay to X” with the payee’s signature
instead of “Pay to the order of A”.
3.
Restrictive - When the instrument: (PAT)
a. Prohibits further negotiation of the
instrument (it destroys the negotiability of
the instrument);
c.
7.
Joint – Indorsement made payable to two or
more persons who are not partners.
8.
Irregular – A person who, not otherwise a party
to an instrument, places thereon his signature
in blank before delivery (NIL, Sec. 64).
9.
Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and his
indorsement.
10. Successive – Indorsement to two persons or
more in succession. Any of them can indorse to
effect negotiation of the instrument.
Example: Pay to Z only. Sgd P.
b.
Restrictive Indorsement
Constitutes the indorsee the agent of the
indorser; or
Indorsee has the following rights in a restrictive
indorsement: (RATS)
Example: Pay to K for collection only. Sgd
P.
1.
2.
Vests the title in the indorsee in trust for
or to the use of some persons.
3.
Example: Pay to A in trust for X.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Qualified– Constitutes the indorser a mere
assignor of the title to the instrument made by
adding to the indorser’s signature words like,
“without recourse”, “sans recourse” or “at the
indorsee’s own risk”. The indoresement serves
as an ordinary equitable assignment.
48
To receive payment of the instrument;
To bring any action thereon that the indorser
could bring; and
To transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so
Mercantile Law
4.
All subsequent indorsees acquire only the title
of the 1st indorsee under the restrictive
indorsement (NIL, Sec. 37)
Indorsing an instrument as cashier or other
officers of a corporation
The negotiable instrument is deemed prima facie
payable to the corporation of which said person is
such an officer. It may be negotiated further by
either indorsement of the corporation or
indorsement of the officer (NIL, Sec. 42).
An instrument negotiable in origin is always
negotiable until paid, which is still true even if the
NI was dishonored or is already overdue, unless the
instrument has been restrictively indorsed or when
discharged by payment or otherwise (NIL, Sec. 47).
Date of indorsement
Qualified indorsement
GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
XPN: Except where an indorsement bears date after
the maturity of the instrument (NIL, Sec. 45).
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that
the qualified indorser is NOT liable when reason for
dishonor are those not provided under Sec. 65. A
qualified indorser is liable only if the instrument is
dishonored by non-acceptance or non-payment due
to: (ForGo-CaVa)
1.
2.
3.
4.
Striking out of an indorsement
The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out and all
indorsers subsequent to him are relieved from
liability on the instrument (NIL, Sec. 48).
Forgery;
Lack of good title on the part of the indorser;
Lack of capacity to indorse on the part of the
prior parties; or
The fact that at the time of the indorsement, the
instrument was valueless or not valid at the
time of the indorsement which fact was known
to him.
RIGHTS OF A HOLDER
Holder
Note: Always consider first the reason behind non –
payment:
A holder is the payee or indorsee of a bill or note
who is in possession of it or the bearer thereof (NIL,
Sec. 191).
If the ground is bankruptcy or insolvency, the
holder has no recourse, hence, the indorser is not
liable.
In general, a holder has the right to sue and to
receive payment (NIL, Sec. 51).
If the ground is breach of warranties under Sec. 65,
NIL, the indorser can be held liable.
Classes of holders
(G-VaD)
Instances when the indorsement is considered
only as equitable assignment (Pa-QT)
1.
2.
3.
1.
Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32)
In cases of qualified indorsement (NIL, Sec. 38)
Transfer of an instrument payable to order by
mere delivery (NIL, Sec. 49)
2.
3.
Holders in general (Simple Holders) (NIL, Sec.
51)
Holders for value (NIL, Sec. 26)
Holders in due course (NIL, Secs. 52, 57)
HOLDER IN DUE COURSE (HIDC)
Joint indorsement
To be considered as a HIDC, the holder must have
taken the instrument: (COFI)
GR: All must indorse in order for the transaction to
operate as a negotiation (NIL, Sec. 41).
1.
2.
XPN: Only one of them may indorse in case the:
(PaA)
1.
2.
3.
4.
Payees or indorsees are partners; and
Payee or indorsee indorsing has authority to
indorse for the others.
49
That is Complete and regular upon its face;
Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
Took it in good Faith and for value; and
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
(NIL, Sec. 52).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Q: Does a pledgee qualify as a holder in due
course?
enforceable to the full extent. The defense of filingup contrary to authorization is a mere personal or
equitable defense (Villanueva, 2009).
A: NO. A pledgee is only a holder for value to the
extent of his lien. His rights as a pledgee will be
governed by the provisions under the Civil Code.
The right of the pledgee is to foreclose the pledge in
case of non-payment, but not all the rights of a
holder in due course under Sec. 52. (Caltex v. CA, G.R.
No. 97753 August 10, 1992)
2. That he became the holder before it was
overdue
An overdue instrument is still negotiable although it
is subject to defenses existing at the time of transfer.
A negotiable instrument in circulation past its
maturity date carries strong indication that it has
been dishonored. An overdue instrument puts all
persons on notice that it might not have been paid
because of a valid defense to such payment (De Leon,
2010).
1. Complete and regular on its face
An instrument is complete when it is not wanting in
any material particular and regular when there is no
alteration apparent on the face of the instrument.
3. That he took it in good faith and for value
Q: R issued a check for P1M which he used to pay
S for killing his political enemy.
Good faith is the holder’s well founded or honest
belief that the person from whom he received the
instrument was the owner thereof, with the right to
transfer it (Duran v IAC, G.R. No. L-64159, September
10, 1985).
a.
Does S have a cause of action against R in
case of dishonor by the drawee bank?
b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
secondarily liable by T? (2007 Bar)
Value may be some right, interest, profit or benefit
to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
2007).
A:
a. NO. S does not have a cause of action against R
in case of dishonor by the drawee bank. S is not
a holder in due course, thus, R can raise the
defense that the check was issued for an illegal
consideration.
b. YES. R may be held liable by T since T is a holder
in due course of the instrument. The unlawful
consideration of the check is only a personal
defense that cannot be interposed to a holder in
due course who receives the check free from the
defect of title of S.
Q: X borrowed money from Y in the amount of
Php 1 Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
consideration. When Z deposited the check to
her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due
course? Explain your answer. (2012 Bar)
A: NO. A holder in due course is a holder who has
taken the instrument under the following
conditions: xxx ; (c) That he took it in good faith and
for value; xxx. All of the four conditions must concur
in order for a holder to qualify as a holder in due
course. In the case at hand, Z did not acquire the
instrument for value. As such she cannot be
considered as a holder in due course.
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
sum of P1,000. However, Evelyn inserted P5,000
in violation of the instruction. She negotiated
the note to Julie who had no knowledge of the
infirmity. Julie in turn negotiated said note to
Devi for value and who had no knowledge of the
infirmity. Can Devi enforce the note against
Larry and if she can, for how much? Explain.
(1993 Bar)
4. 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
A: YES, Devi can enforce the note against Larry since
she is a holder in due course. Since the document
delivered to Evelyn is in blank and she was
authorized to fill up the amount in the promissory
note, Devi can enforce against Larry the amount of
P5,000.00 as this case falls squarely under Sec 14 of
the Negotiable Instruments Law. As against a holder
in due course, the instrument is always valid and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The person to whom it is negotiated must have had
actual knowledge of such facts or knowledge of
other facts that his action in taking the instrument
amounted to bad faith (NIL, Sec. 56).
Presence or absence of defect or infirmity must be
determined at the time the instrument was
negotiated to the holder.
50
Mercantile Law
NOTE: Where the transferee receives notice of any
infirmity in the instrument or defect in the title of
the person negotiating the same before he had paid
the full amount agreed to be paid, he will be deemed
a holder in due course only to the extent of the
amount paid by him (NIL, Sec. 54).
the presumption that the clinic is a HIDC does not
exist (De Ocampo & Co. v. Gatchalian, G.R. No. L15126, November 30, 1961).
Infirmity vs. Defect
GR: Every holder is deemed prima facie to be an
HIDC.
INFIRMITY
Refers to those that
vitiate the instrument
itself
A holder is presumed to be an HIDC (1993, 2007
Bar)
DEFECT
Refers to how he
obtained
the
instrument or the
signature thereto, as
by fraud, duress, or
force and fear, or other
unlawful means, or for
an
illegal
consideration or when
he negotiates it in
breach of faith, or
under
any
other
circumstances
as
amount to a fraud.
(NIL, Sec. 55)
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective.
But this is only as regards a party who became such
after the acquisition of the defective title (NIL,
Sec.59).
Specifically, a HIDC is entitled to the following
rights:(1998, 2007, 2009 Bar)
(Ho2RSE)
1.
2.
3.
4.
5.
Defect of title:
1.
In its acquisition – When he obtained the
instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration.
Hold the instrument free from defenses
available to parties among themselves;
Hold the instrument free from any defect of title
of prior parties;
Receive payment;
Sue; and
Enforce payment of the instrument for the full
amount thereof against all parties liable;
Possession of a negotiable instrument after
presentment and dishonor
In the negotiation – When he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud (NIL, Sec. 55)
It does not make the possessor a holder for value
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992).
Q: A drawer issued a check for the payment of a
car, which check was delivered to the agent of
the owner of the car for safekeeping. The check
was then used by the agent to pay the medical
bills of his wife in a clinic. The projected
purchase did not materialize. Is the clinic
considered a holder in due course?
Q: Is a corporation to which four crossed checks
were indorsed by the payee corporation a
holder in due course and hence entitled to
recover the amount of the checks when the same
had been dishonored for the reason of “payment
stopped”?
2.
A: NO. The checks were crossed checks and
specifically indorsed for deposit to payee’s account
only. From the beginning, the corporation was
aware of the fact that the checks were all for deposit
only to payee’s account. Clearly then, it could not be
considered an HIDC (Atrium Management Corp. v.
CA, G.R. No. 109491, February 28, 2001).
A: NO, the rule that a possessor of the instrument is
prima facie a HIDC does not apply to the clinic
because it cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable “to the agent or to
bearer;” also the drawer had no account with the
clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
Payee as holder in due course
Every holder of a negotiable instrument is
deemed prima facie a holder in due course.
However, this presumption arises only in favor of a
person who is a “holder” as defined in Section 191
As the holder’s title was defective or suspicious, it
cannot be stated that the payee acquired the check
without knowledge of said defect in holder’s title,
51
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
of the NIL, meaning a payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof
(Yang v. CA, G.R. No. 138074, August 15, 2003).
Note: Even if the holder is not HIDC, he/she can still
collect or receive payment.
Shelter principle or Holder in Due Course by
Subrogation
There can be no doubt that a proper interpretation
of Negotiable Instruments Law as a whole, leads to
the conclusion that a payee may be a holder in due
course under the circumstances in which he meets
the requirements of Sec. 52 (De Ocampo v.
Gatchalian, supra).
Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not an HIDC,
transfers all his rights as such holder to the latter
and acquires the right to enforce the instrument as
if he was an HIDC. The principle applies to a
"sheltered" holder who is not a party to any fraud or
illegality impairing the validity of the instrument.
Drawee as holder in due course
A drawee does not become a HIDC by simply paying
a bill. A holder refers to one who has taken the
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance
and payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
payment.
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
sum of P1,000. However, Evelyn inserted P5,000
in violation of the instruction. She negotiated
the note to Julie who had no knowledge of the
infirmity. Julie in turn negotiated said note to
Devi for value and who had no knowledge of the
infirmity. Supposing Devi endorses the note to
Baby for value but who has knowledge of the
infirmity, can the latter enforce the note against
Larry? (1993 Bar)
Persons not deemed a holder in due course
(MUA)
1.
A holder who acquires the instrument after its
date of maturity.
2.
Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue (NIL, Sec. 53).
A: Baby cannot enforce the note against Larry since
she is not a holder in due course because Larry
could interpose the real and personal defenses to
defeat the claim of Baby. However, because of the
shelter principle in Negotiable Instruments Law,
Baby could be elevated to a status of a holder in due
course since a person not holder in due course steps
in the shoes of the prior party. Therefore, Baby
could enforce the note against Larry the same way
as Devi could enforce it.
NOTE: A note payable on demand is due when
payment is demanded. A check becomes
overdue when it is not presented for payment
within a reasonable time, usually 6 months
from date the thereof, afterwards, it becomes a
stale check.
3.
Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
DEFENSES AGAINST THE HOLDER
Defenses against the holder
The defenses available against the holder are
classified as follows:
Rights of a holder not a holder in due course
1.
Real or Absolute Defenses – those that are
attached to the instrument itself and are
available against all parties, both immediate
and remote, including holders in due course.
2.
Personal or Equitable Defenses –defenses which
are only available against a holder not in due
course. Those which grow out of the agreement
or conduct of a particular person which renders
it inequitable for him, though holding the legal
title, to enforce it against the party sought to be
made liable.
The rights of a holder not an HIDC are similar to an
assignee. The other rights are: (ReDS)
1.
2.
3.
He may receive payment and if the payment is
in due course, the instrument is discharged;
He is entitled to the instrument but holds it
subject to the same defenses as if it were nonnegotiable;
He may sue on the instrument in his own name
(NIL, Sec. 51).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
52
Mercantile Law
Real defenses available against a holder vs. Personal defenses
REAL DEFENSES
(IM In Ultra. AFForD PODIF)
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
concerned
4. Ultra –vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
PERSONAL DEFENSES
(InnocentS2 ADD FUn In Fraud)
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge
of prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal consideration
6. Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
NOTE: Fraud in factum exists in those cases in which
a person, without negligence, has signed an
instrument, but was deceived as to the character of
the instrument and without knowledge of it, as where
a note was signed by one under the belief that he was
signing as a witness to a deed. This kind of fraud is a
real defense because there is no contract, since the
person did not know what he was signing. (De Leon,
2010)
NOTE: Fraud in inducement relates to the quality,
quantity, value or character of the consideration of
the instrument. Here, deceit is not in the character of
the instrument but in its amount or terms. This exists
when a person is induced to sign a note for the price
of a worthless stock which was fraudulently
represented by the payee as to its value. Such type of
fraud is only a personal defense because it does not
prevent a contract. (De Leon, 2010)
Q: Eva issued to Imelda a check in the amount of
P50,000 post-dated Sept. 30, 1995, as security
for a diamond ring to be sold on commission. On
Sept. 15, 1995, Imelda negotiated the check to
MT investment which paid the amount of
P40,000 to her.
holder in due course that it was issued merely as
security. The only grounds for the discharge of a
negotiable instrument is enumerated in the
Negotiable Instruments Law and none of those
grounds are available to Eva. The latter may not
unilaterally discharge herself from her liability by
mere expediency of withdrawing her funds from the
drawee bank.
Eva failed to sell the ring, so she returned it to
Imelda on Sept. 19, 1995. Unable to retrieve her
check, Eva withdrew her funds from the drawee
bank. Thus, when MT Investment presented the
check for payment, the drawee bank dishonored
it. Later on, when MT Investment sued her, Eva
raised the defense of absence of consideration,
the check having been issued merely as security
for the ring that she could not sell. Does Eva have
a valid defense? Explain. (1996 Bar)
Q: Brad was in desperate need of money to pay
his debt to Pete, a loan shark. Pete threatened to
take Brad’s life if he failed to pay. Brad and Pete
went to see Señorita Isobel, Brad’s rich cousin,
and asked her if she could sign a promissory
note in his favor in the amount of P10,000.00 to
pay Pete. Fearing that Pete would kill Brad,
Señorita Isobel acceded to the request. She
affixed her signature on a piece of paper with the
assurance of Brad that he will just fill it up later.
Brad then filled up the blank paper, making a
promissory note for the amount of P100,000.00.
He then indorsed and delivered the same to Pete
who accepted the note as payment of the debt.
A: NO, Eva does not have a valid defense. First, MT
Investment is a holder in due course and, as such,
holds the post-dated check free from any defect of
title of prior parties and from defenses available to
prior parties among themselves. Eva can invoke the
defense of absence of consideration against MT only
if the latter was a privy to the purpose for which the
checks were issued and, therefore, not a holder in
due course. Second, it is not a ground for the
discharge of the post-dated check as against a
What defense or defenses can Señorita Isobel set
up against Pete? Explain. (2005 Bar)
A: Señorita Isobel may set up the defenses of:
53
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
a. Incomplete but delivered instrument. The
authority she gave Brad was to fill up the note for
P10,000.00 only and not P100,000.00. This is a
personal defense that may be raised against Pete
who is clearly not a holder in due course.
b. Force and intimidation. Señorita Isobel was
forced and intimidated into writing and issuing the
note as she was threatened that Pete would kill
Brad, her cousin if the debt is not paid.
Q: X makes a promissory note for P10,000
payable to A, a minor, to help him buy school
books. A endorses the note to B for value, who in
turn endorses the note to C. C knows A is a
minor. If C sues X on the note, can X set up the
defenses of minority and lack of consideration?
(1998 Bar)
MAKER
The maker of a negotiable instrument, by making
such instrument: (TEP)
1.
2.
3.
A: NO, since F can treat U as maker due to the
minority of T, the drawee.
Engages that he will pay it according to its
tenor, and
Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 60; 1995, 2001
Bar).
The maker is liable the moment he makes the
NI. His liability is primary and unconditional.
Q: A issued a promissory note payable to B or
bearer. A delivered the note to B. B indorsed the
note to C. C placed the note in his drawer, which
was stolen by the janitor X. X indorsed the note
to D by forging C’s signature. D indorsed the note
to E who in turn delivered the note to F, a holder
in due course, without indorsement. Discuss the
individual liabilities to F of A, B and C. (2001,
1997 Bar)
LIABILITIES OF PARTIES
Parties primarily liable (MAC)
Maker – of a promissory note;
Acceptor – of a bill of exchange; and
Certifier of a check
A: A is primarily and unconditionally liable to F as
the maker of the promissory note. Section 60
provides that, by making the instrument, the maker
obliges himself to pay according to the tenor of the
instrument. He is liable to both payee and
subsequent holder in due course. Despite the
presence of the special indorsements on the note,
these do not detract from the fact that a bearer
instrument, like the promissory note in question, is
Parties secondarily liable (DraIn)
1. Drawer of a bill
2. Indorser of a note or a bill
Negotiable instrument should be presented for
payment to the party primarily liable (NIL, Sec.
72[d]).
SECONDARILY LIABLE
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Absolutely required
to pay the instrument
upon maturity
Undertakes to pay only
after the ff. conditions
have been fulfilled:
(Pre-DiD)
1. Due presentment
for
payment
or
acceptance to primary
party; (NIL, Sec. 143)
2. Dishonor by such
party; (NIL, Sec.184,
151)
3. Send notice of
dishonor. (NIL, Sec. 89)
The mere issuance of a bill of exchange does not
operate as an assignment of the funds in the hands
of a drawee. The drawee must accept the
instrument (thus, becomes an acceptor) in order
that he may be primarily liable for the payment of a
bill of exchange.
Q: A bill of exchange has T for its drawee, U as
drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years
old. F wants to recover from U but the latter
insists that a notice of dishonor must first be
made, the instrument being a bill of exchange. Is
he correct? (2011 Bar)
PRIMARILY LIABLE
Conditionally bound
The drawee is not liable for payment of a bill of
exchange
A: No. X cannot set up the defense of the minority of
A. Defense of minority is available to the minor only.
Such defense is not available to X. Also, X cannot set
up the defense of lack of consideration against C,
because lack of consideration is a personal defense
which is only available between the immediate
parties or against parties who are not holders in due
course. C’s knowledge that A is a minor does not
prevent C from being a holder in course. C took the
promissory note from a holder for value.
1.
2.
3.
Unconditionally
bound
54
Mercantile Law
always negotiable by mere delivery, until it is
indorsed restrictively “For Deposit Only.”
the existence of the payee and his then capacity to
indorse. The liability of the maker is primary which
means he is absolutely and unconditionally
required to pay. He engages to pay the instrument
according to its terms without any condition. He is
not only liable to the payee but also to the
subsequent holder in due course. Since the
instrument is a bearer instrument (which nature
was not changed even if it was specially indorsed by
Aurora), Napoleon became a legal holder thereof by
mere delivery from X to him. Thus, as a legal holder
of the promissory note, he is entitled to proceed
against the maker thereof, Richard Clinton.
B as a general indorser is secondarily liable to F. By
placing his signature on the bearer instrument, he
warrants that the instrument is genuine and in all
respects what it purports to be; that he has good
title to it; that all prior parties had capacity to
contract; that he has no knowledge of any fact which
would impair the validity of the instrument or
render it valueless; that at the time of indorsement,
the instrument is valid and subsisting; and that on
due presentment, it shall be accepted or paid, or
both, according to its tenor, and that if it be
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser
who may be compelled to pay.
DRAWER
The drawer, by drawing the instrument: (EDPa)
1.
C, however, cannot be held liable because the
signature purporting to be his is a product of
forgery. C can raise the defense of forgery since it his
signature that was forged.
2.
3.
Q: On the right bottom margin of a PN appeared
the signature of the corporation’s president and
treasurer above their printed names with the
phrase “and in his personal capacity.” The
corporation failed to pay its obligation. Are the
officers liable?
Admits the existence of the payee and his then
capacity to indorse;
Engages that on due presentment the
instrument will be accepted or dishonored; and
That if 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. (Sec. 61, NIL; 1991
Bar)
The drawer is secondarily liable to the holder or to
any subsequent indorser who may be compelled to
pay. But the drawer may insert in the NI an express
stipulation negating or limiting his own liability to
the holder (NIL, Sec. 61).
A: YES, persons who sign their names on the face of
promissory notes are makers and liable as such. As
the promissory notes are stereotype ones issued by
the bank in printed form with blank spaces filled up
as per agreed terms of the loan, following customary
procedures, leaving the debtors to do nothing but
read the terms and conditions therein and to sign as
makers or co-makers. The officers are co-makers
and as such, they cannot escape liability arising
therefrom (Republic Planters Bank v. CA, G.R. No.
93073, December 21, 1992).
Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it
in blank to D. E steals the instrument from D and,
forging the instrument of D, succeeds in
"negotiating" it to F who acquires the
instrument in good faith and for value.
a. If for any reason, the drawee bank refuses to
honor the check, can F enforce the
instrument against the drawer?
b. In case of the dishonor of the check by both
the drawee and the drawer, can F hold any
of B, C and D liable secondarily on the
instrument? (1997 Bar)
Q: Richard Clinton makes a promissory note
payable to bearer and delivers the same to
Aurora Page. Aurora Page, however, endorses it
to X in this manner: "Payable to X. Signed:
Aurora Page."
A:
a. YES, F can proceed against the drawer, A, in
case of dishonor by the drawee bank. Section 61
of the NIL provides that by drawing the
instrument, the drawer engages that the
instrument will be accepted or paid or both
according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to
the holder, but he shall likewise be liable to the
subsequent indorser who was compelled to pay
it. The forged signature is unnecessary to
Later, X, without endorsing the promissory note,
transfers and delivers the same to Napoleon.
The note is subsequently dishonored by Richard
Clinton. May Napoleon proceed against Richard
Clinton for the note? (1998 Bar)
A: YES, Richard Clinton is liable for the promissory
note. Under Section 60 of the NIL, the maker of a
negotiable instrument, by making the same, engages
that he will pay according to its tenor, and admits
55
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
presume the juridical relation between or
among the parties prior to the forgery and the
parties after the forgery. Moreover, the only
party who can raise the defense of forgery
against a holder in due course is the person
whose signature is forged.
b.
inures also to the benefit of all parties
subsequent to the person for whose honor it is
accepted, and conditioned to pay the bill when
it becomes due if the original drawee does not
pay it (De Leon, 2010).
NOTE: Drawee does not become liable until he
accepts the instrument in which case he becomes an
acceptor. An acceptor engages to pay according to
the tenor of his acceptance, which may not be the
same as the tenor of the bill itself because the
acceptance may be qualified.
Only B and C can be held liable by F. According
to Section 67, when a person puts his signature
on a bearer instrument as a form of
indorsement, he becomes subject to all
liabilities of an indorser. D cannot be held liable
as an indorser because his signature is forged
by E, hence, there was no consent from D. The
forged signature is deemed inoperative and no
right can arise out of it. However, the effect of
being inoperative affects only the signature
which is the product of forgery. It will not deem
to affect other signatures subscribed with
knowledge and voluntariness. Therefore, B and
C are liable as indorsers.
Difference between the liability of an acceptor
or drawee-acceptor and a maker
While both are primarily liable, the acceptor
engages to pay the negotiable instrument according
to the tenor of his acceptance. On the other hand, the
maker engages to pay the negotiable instrument
according to the tenor of the bill itself.
Q: D draws a bill of exchange that states: “One
month from date, pay to B or his order
Php100,000.00. Signed, D.” The drawee named
in the bill is E. B negotiated the bill to M, M to N,
N to O, and O to P. Due to non-acceptance and
after proceedings for dishonor were made, P
asked O to pay, which O did. From whom may O
recover? (2011 Bar)
Q: X draws a check against his current account
with Bonifacio Bank in favor of B. Although X
does not have sufficient funds, the bank honors
the check when it is presented for payment.
Apparently, X has conspired with the bank's
bookkeeper so that his ledger card would show
that he still has sufficient funds. The bank files
an action for recovery of the amount paid to B
because the check presented has no sufficient
funds. Decide the case (1998 Bar).
A: D, being the drawer.
ACCEPTOR
A: The bank cannot recover the amount paid to B for
the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.
The acceptor, by accepting the instrument: (AGE)
1.
2.
3.
Engages that he will pay the NI according to the
tenor of his acceptance;
Admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument; and
Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 62, 1992; 1998
Bar).
The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show
that he has sufficient funds.
INDORSER
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to
be an indorser, unless he clearly indicates by
appropriate words his intention to be bound in
some other capacity (NIL, Sec. 63).
Party who can accept the bill of exchange
GR: Only the drawee may accept. A stranger or
volunteer is not bound by the acceptance.
NOTE: A person who places his indorsement on a
bearer instrument incurs all liabilities of an
indorser (NIL, Sec. 67).
XPN: In case of a bill which is accepted for honor
supra protest (NIL, Sec. 161).
Honor supra protest or acceptance for honor is
an undertaking by a stranger to a bill after
protest for the benefit of any party liable
thereon or for the honor of the person for whose
account the bill is drawn which acceptance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Drawer vs. Indorser
DRAWER
Party only to a bill
56
INDORSER
Party either a bill or
note
Mercantile Law
Makes admission as to
the existence of the
payee and his capacity
to indorse
Makes no warranties,
but engages to pay
after
certain
conditions
are
complied with
Order of liability among the indorsers
No such admission
1.
2.
Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to
him (NIL, Sec. 68).
Has warranties
Liability of an agent or broker who negotiates an
instrument without indorsement
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of
the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
indorsed the note to X (who did not know about
the shabu), and X to Y. Unable to collect from P,
Y then sued X on the note. X set up the defense of
illegality of consideration. Is he correct? (2011
Bar)
He incurs all the liabilities prescribed to a general
indorser unless he discloses the name of his
principal and the fact that he is acting only as an
agent (NIL, Sec. 69).
NOTE: Parol evidence is NOT admissible to relieve
an agent or broker whose endorsement brings him
within the above liability.
A: NO, since X, a general indorser, warrants that the
note is valid and subsisting.
Q: Can a collecting bank debit the account of the
depositor when the checks indorsed to it (bank)
were forged?
General indorser vs. Irregular indorser (2005
Bar)
GENERAL INDORSER
A regular party to the
instrument and signs
upon delivery of the
document.
Makes either a blank or
special indorsement
Indorses the instrument
after its delivery to the
payee
Liable only to parties
subsequent to him
Among themselves – Liable prima facie in the
order in which they indorse (NIL, Sec. 68)
To the holder – In any order
A: YES, because the depositor of a check as indorser
warrants that it is genuine and in all respects what
it purports to be. Thus, when the checks deposited
had forged indorsements and the collecting bank, as
a consequence of such forgery, was made to pay the
drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
(Jai-Alai Corporation of The Philippines v. BPI, G.R.
No. L-29432, August 6, 1975).
IRREGULAR
INDORSER
Not a party to the
instrument
but
he
becomes one because of
his signature in the
instrument.
Always makes a blank
indorsement
Indorses before its
delivery to the payee
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When
Trude is about to encash the check, the drawee
Union Bank refused to encash it due to
insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
should be dismissed because Phebean is an
indispensable party. Does James’ argument hold
water?
Liable to the payee and
subsequent
parties
unless he signs for the
accommodation of the
payee in which case he is
liable only to all parties
subsequent to the payee
(NIL, Secs. 64, 66; De Leon, supra)
A: NO, there is no privity between the drawer and
the holder. The drawer is merely secondarily liable.
As indorser, he warranted that upon due
presentment, the checks were to be accepted or
paid, or both, according to their tenor, and that in
case they were dishonored, she would pay the
corresponding amount. After an instrument is
dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of
the original obligor (Tuazon v. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005).
NOTE: The holder or subsequent indorser who tries
to claim under the instrument which had been
dishonored for "irregular indorsement" must not be
the irregular indorser himself who gave cause for
the dishonor (Gonzales v. Rizal Commercial Banking
Corporation, G.R. No. 156294, November 29, 2006).
Qualified indorser
A qualified indorser is a person who indorses
without recourse (NIL, Sec. 65).
57
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Q: X is the holder of an instrument payable to
him (X) or his order, with Y as maker. X then
indorsed it as follows: “Subject to no recourse,
pay to Z. Signed, X.” When Z went to collect from
Y, it turned out that Y's signature was forged. Z
now sues X for collection. Will it prosper? (2011
Bar)
A: YES, because X, irrespective of his qualified
indorsement, is an indorser who warrants that the
note is genuine.
Warranties and liabilities of parties who are secondarily liable
ABSOLUTE LIABILITY
Drawerof a BOE
Warrants: (EDPa)
a. The existence of payee and his then capacity to
indorse;
b. That the instrument will be accepted or paid
upon due presentment by the party primarily
liable according to its tenor; and
c. That if dishonored, he will pay the party
entitled to be paid. (NIL, Sec. 61.)
LIMITED LIABILITY
Qualified Indorser
Warrants that the: (GeGoCK)
a. Instrument is genuine;
b. He has good title to it;
c. Capacity to contract of all prior parties; and
d. No knowledge of any fact which would impair
the validity of the instrument (NIL, Sec.65).
General indorser
a. Warrants that: (GeGoCaVs)
i. Instrument is genuine
ii. He had good title to it
iii. All prior parties had capacity to contract
iv. Instrument, at the time of indorsement, was
valid and subsisting;
b.
On due presentment, it shall be accepted or paid,
or both according to its tenor
c. If the instrument is dishonored and the necessary
proceedings on dishonor be duly taken, he will
pay the holder (NIL, Sec. 66).
Irregular indorser
a. In an order instrument, liable to the payee and all
subsequent parties
b. If bearer instrument or payable to order of maker
or drawer, liable to all parties subsequent to the
maker or drawer
c. If he signs for accommodation of the payee, liable
to all parties subsequent to payee (NIL, Sec. 64).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
58
NOTE: He is liable to all parties who derive their title
through his indorsement.
Person negotiating by delivery
Same warranties as a qualified indorser. But unlike a
qualified indorser, a person negotiating by mere
delivery is liable only to his immediate transferee (NIL,
par. 2, Sec. 65).
NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary liability is limited,
namely, to their warranties
Mercantile Law
It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment.
WARRANTIES
Warranties are affirmations of fact on the part of
ythe parties that impose no direct obligation to pay
in the absence of breach thereof. Liability for breach
of warranty is not conditioned on presentment and
notice of dishonor. Action for breach of warranty,
occurring as it does at the time of the transfer may
be brought at anytime. The party who committed
the breach may held liable or barred from asserting
a particular defense (AQUINO supra at 183).
(i.e., Promissory note or Accepted bill)
Manner of presentment
GR: Instrument must be exhibited to the person
from whom payment is demanded; when paid, it
must be delivered to the person paying it (NIL, Sec.
74).
Qualified indorser and persons negotiating by
delivery: (GeGoCK)
1.
2.
3.
4.
NOTE: It requires personal or face to face demand
at the proper place, exhibiting the instrument to the
maker or acceptor from whom payment is
demanded (Grese vs. Le Monte, 162 NYS 982)
That the instrument is genuine and in all
respects what it purports to be;
That he has good title to it;
That all prior parties had capacity to contract;
and
That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
Exhibition is MANDATORY – If the instrument is not
exhibited, the presentment would be INEFFECTUAL
as the debtor is entitled to see the instrument and
demand its surrender upon payment (E.G., Demand
from telephone NOT sufficient because exhibition is
NOT possible. Robinson vs. Loncaster 138 ATL. 58)
But when the negotiation is by delivery only, the
warranty extends to the immediate transferee only.
(NIL, Sec 65).
XPNs: When exhibition is excused: (DeDe)
NOTE: In case of qualified indorsers, their warranty
extends to all parties who derive their title through
his indorsement.
2.
1.
The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without
requiring its surrender (FEBTC v. Querimit, G.R. No.
148582, January 16, 2002).
General Indorser: (GeGoCaVs)
1.
2.
3.
4.
Debtor does not demand to see the instrument
and refuses payment on some other grounds; or
Instrument is lost or destroyed.
That the instrument is genuine and in all
respects what it purports to be;
That he has good title to it;
That all prior parties had capacity to contract;
and
That the instrument is at the time of his
indorsement, valid and subsisting.
Payee cannot claim payment for a promissory note
which was stolen and as such is not in his
possession. To make presentment for payment, it is
necessary to exhibit the instrument, which he
cannot do because he is not in possession thereof.
Q: AB issued a promissory note for P1,000
payable to CD or his order on September 15,
2002. CD indorsed the note in blank and
delivered the same to EF. GH stole the note from
EF and on September 14, 2002 presented it to AB
for payment. When asked by AB, GH said CD gave
him the note in payment for two cavans of rice.
AB therefore paid GH P1,000 on the same date.
On September 15, 2002, EF discovered that the
note of AB was not in his possession and he went
to AB. It was then that EF found out that AB had
already made payment on the note.
In addition, general indorser engages that on due
presentment, it shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it
be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser
who may be compelled to pay it (Sec. 66, NIL).
NOTE: Indorser’s liability as warrantor is distinct
from his liability to pay the instrument. Even a
qualified indorser may incur liability for breach of
implied warranties. As warrantor, his liability is
unconditional.
a. Can EF still claim payment from AB? Why?
b. As a sequel to the same facts narrated above,
EF, out of pity for AB who had already paid
P1,000 to GH, decided to forgive AB and
PRESENTMENT FOR PAYMENT
59
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
instead go after CD who indorsed the note in
blank to him. Is CD still liable to EF by virtue
of the indorsement in blank? Why? (2002
Bar)
4.
To the person primarily liable, or if he is absent
or inaccessible, to any person found at the place
where the presentment is made (NIL, Sec. 72).
NOTE: Demand for payment must first be made
upon the person primarily liable, if the instrument
is not presented to the person primarily liable, the
drawer or the indorsers are discharged from their
secondary liability unless such presentment is
excused or dispensed with. (NIL., sec 79, 80)
A:
a. Since the instrument became a bearer
instrument, EF could no longer claim payment
from AB. EF is not a holder of the promissory
note. To make the presentment for payment, it
is necessary to exhibit the instrument, which EF
cannot do because he is not in possession
thereof.
b. NO, because CD negotiated the instrument by
delivery.
Time for presentment for payment
INSTRUMENT
NECESSITY OF PRESENTMENT FOR
PAYMENT
Payable at a
fixed
or
determinable
future time
Presentment for payment is not necessary in order
to charge the person primarily liable on the
instrument. It is only necessary to charge persons
secondarily liable—drawer and indorsers (NIL, Sec.
70).
Presentation for payment to person primarily liable
NOT necessary:
1.
2.
3.
4.
Promissory
note payable
on demand
Liability absolute on date for payment –
maker or the acceptor may be sued by the
holder even without demand from the
latter as soon as date of payment has
passed without the instrument being paid.
Where the instrument is payable at a
special place (e.g., at a bank, at an office but
not at an UNSPECIFIED PLACE e.g., like CITY
OF MANILA
Not necessary even if it is required
according to the terms of the instrument
Presentment for payment is not necessary
to charge the person primarily liable is
applicable to notes payable on demand, and
suit thereon may be maintained though no
demand has been made (NIL, Sec. 70)
Bill
exchange
payable
demand
Within a reasonable time
after its issue.
of
on
NOTE: “Last negotiation”
means the last transfer for
value. Subsequent transfers
between banks for purposes
of collection are not
negotiations within the
meaning of Sec. 71.
NOTE: Every NI is payable at the time fixed therein
without grace.
Presentment for payment, to be sufficient, must be
made: (HoRe-PP)
Rules on presentment for payment when
maturity date is fixed
By the holder, or his agent authorized to receive
payment on his behalf;
At a reasonable hour on a business day;
At a proper place; and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
NOTE: If presentment for
payment is made before
maturity, it will not result to
a
discharge
of
the
instrument. (NIL, Sec. 50)
“Reasonable time” means
not more than 6 months
from the date of issue.
Beyond said period, the
check becomes stale and
valueless and thus, should
not be paid.
Requisites for a sufficient presentment for
payment (1994, 2002 Bar)
2.
3.
XPN: If the due date falls on
a Saturday, presentment
must be made on the next
Monday.
Within a reasonable time
after the last negotiation
thereof (NIL, Sec. 71).
Note: Ability and willingness on the part of
the primary party to pay at maturity are
equivalent to a tender or offer of payment.
1.
TIME FOR PRESENTMENT
GR: On the day it falls due
(NIL, Sec. 85)
TIME OF MATURITY
OF INSTRUMENT
60
WHEN TO PRESENT
FOR PAYMENT
Mercantile Law
On the next succeeding
business day
On the next succeeding
business day
Before 12:00 noon on
Saturday,
or
on
Monday, at the option of
the holder
case presentment at any hour before the bank is
closed on that day is sufficient, and where a note is
payable at a DESIGNATED BRANCH, presentment at
title principal office or at any other branch of the
company is NOT sufficient. (NIL, Sec. 75). And (NIL,
Sec. 87)
Delay in making presentment is excused (CoDe)
In order for payment to constitute payment in due
course, it must be made:
On a Sunday or holiday
On a Saturday
If instrument which
falls due on a Saturday
is payable on demand
1.
2.
Payment in due course (H&M)
When caused by circumstances beyond the
control of the holder; and
It is not imputable to his default, misconduct, or
negligence.
1.
2.
Only the delay in presentment is excused and not
the presentment itself. Hence, as soon as the cause
of delay ceases to operate, presentment must be
made with reasonable diligence (NIL, Sec. 81).
PARTIES TO WHOM PRESENTMENT FOR
PAYMENT SHOULD BE MADE
GR: Presentment for payment must be made to the:
(MAD)
Circumstances beyond the control of the holder are
events which could not be foreseen or even if
foreseen are inevitable. See sec. 147 (e.g extreme
weather conditions)
1.
2.
3.
Q: Is the bank liable to the payee for depositing
and encashing the crossed checks to an
unauthorized person?
1.
2.
Order of preference with regard to the place of
presentment (SAU-FoK)
3.
4.
5.
The maker in case of a promissory note, or
The acceptor in case of an accepted bill.
If the bill of exchange or check is payable on
demand, the presentment must be made to the
drawee although he is not automatically liable
on the bill.
XPNs: Where the person/s primarily liable is/are:
A: YES, the effects of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72
of the NIL, presentment for payment, to be
sufficient, must be made by the holder or by some
person authorized to receive on his behalf. The
checks here had been crossed and issued “for
payee’s account only.” This only signifies that the
drawer had intended the same for deposit only by
the person indicated (Associated Bank v. CA, G.R. No.
89802, May 7, 1992).
1.
2.
At or after the maturity of the instrument
To the holder thereof, in good faith and
without notice that his title is defective
(NIL, Sec. 88).
3.
Specified place in the instrument
Address of the person to make the payment
if given in the instrument
Usual place of business or residence of the
person to make the payment
Wherever he can be found; or
At his last known place of business or
residence (NIL, Sec. 73).
4.
Dead – presentment for payment must be
made to his personal representative (NIL,
Sec. 76).
Liable as partners and no place of payment
specified – presentment for payment may be
made to any of them though there has been
dissolution of the firm (NIL, Sec. 77).
(If a party dies before the maturity of a
partnership note, a demand on the surviving
partner will be sufficient)
Several persons, not partners, and no place
of payment is specified – presentment for
payment must be made to all of them (NIL,
Sec. 78).
If the person primarily liable is absent or
inaccessible - presentment for payment
must be made to any person of sufficient
discretion at the proper place of
presentment (NIL, Sec. 72[d]).
Q: While GSIS remitted to PGAI the reinsurance
premiums for the first three quarters, it,
however, failed to pay the fourth and last
reinsurance premium due despite demands.
PGAI to file a complaint for sum of money
against GSIS. PGAI alleged that the first three
reinsurance premiums were paid to PGAI by
Instrument is payable at a bank
When the instrument is payable at bank,
presentment must be made during banking hours,
unless the person to make payment has no funds
there to meet it at any time during the day, in which
61
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
GSIS and, in the same vein, NEA paid the first
three reinsurance premiums due to GSIS.
Further, that GSIS failed to pay PGAI the fourth
and last reinsurance premium. On the other
hand, GSIS admitted that it remitted to PGAI the
first three reinsurance premiums which were
paid by NEA but it failed to remit the fourth and
last reinsurance premium to PGAI. GSIS,
however, denied that it had acknowledged its
obligation to pay the last quarter’s reinsurance
premium to PGAI. Further, GSIS avers that the
complaint states no cause of action against it
because the non-payment of the last
reinsurance premium only renders the
reinsurance contract ineffective, and does not
give PGAI a right of action to collect. Does GSIS
have to pay PGAI the amount of the fourth and
last reinsurance premium?
When presentment for payment is dispensed
with (Sec. 82, NIL) (WaRF)
a. Where, after the exercise of reasonable
diligence, presentment for payment
cannot be made;
b. Where the drawee is fictitious person; or
c. By waiver of presentment, express or
implied.
3.
When the BOE has been dishonored by nonacceptance, since no Presentment for Payment
for is necessary (NIL, Sec. 151).
Q: Gemma drew a check on September 13, 2010.
The holder presented the check to the drawee
bank only on March 5, 2012. The bank
dishonored the check on the same date. After
dishonor by the drawee bank, the holder gave a
formal notice of dishonor.
A: YES. While the import of Section 77 is that
prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not
prepared to rule that the request to make
installment payments duly approved by the insurer,
would prevent the entire contract of insurance from
going into effect despite payment and acceptance of
the initial premium or first installment . Section 78
of the Insurance Code in effect allows waiver by the
insurer of the condition of prepayment by making
an acknowledgment in the insurance policy of
receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite
the fact that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that
the policy is valid even if premiums are not paid, but
does not expressly prohibit an agreement granting
credit extension, and such an agreement is not
contrary to morals, good customs, public order or
public policy. (GSIS V PRUDENTIAL GUARANTEE
G.R. No.165585, November 20, 2013)
a.
What is meant by reasonable time as applied
to presentment?
b. Is Gemma still liable to the holder?
A:
a. Reasonable time is relative. Regard is to be had
to the facts of each case, usage of business and
trade, and the nature of the instrument (FUN).
b. With respect to checks, current banking
practice dictates that the check becomes stale if
it is not presented for payment within 6 months
from issuance.
c. NO. Gemma is discharged from secondary
liability under the check because presentment
and notice of dishonor were made after an
unreasonable length of time. The check was
already stale at the time of presentment.
DISHONOR BY NON-PAYMENT
Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties
secondarily liable thereon accrues to the holder
(NIL, Sec. 84).
DISPENSATION WITH PRESENTMENT FOR
PAYMENT
GR: Drawer and the indorsers are discharged from
their secondary liability when presentment is not
made.
Instances when an instrument is dishonored by
non-payment
XPNs:
1. Presentment for payment is not required to
charge drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will
pay the instrument (NIL, Sec. 79).
b. Indorser – When the NI was made or
accepted for his accommodation and he has
no reason to expect that the instrument will
be paid if presented (NIL, Sec. 80).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
2.
NON-PAYMENT UPON
DUE PRESENTATION
The instrument is duly
presented for payment
to party primarily
liable and it is either
refused or cannot be
obtained
(NIL, Sec 83)
62
NON-PAYMENT
W/OUT
PRESENTATION
Presentment is excused
and the instrument is
overdue and unpaid
(NIL, Sec 83)
Mercantile Law
a.
b.
c.
NOTICE OF DISHONOR
2.
Parties reside in different places
a. By mail – Deposited in the post office in
time to go by mail (actual departure in the
course of mail from the post office in which
the notice was deposited) the day following
the day of dishonor.
b. If no mail – At a convenient hour (of the
sender) on that day, by the next mail
thereafter
c. Other than by post office (e.g. personal
messenger) – Within the time that notice
would have been received in due course of
mail, if it has been deposited in the post
office within the time specified in Sec.
104(a) (NIL, Sec. 104).
3.
Time of notice to antecedent parties – Same
time for giving notice that the holder has after
the dishonor (NIL, Sec. 107).
It is a notice given by the holder to the parties
secondarily liable, drawer and each indorser, that
the instrument was dishonored by non-payment or
non-acceptance by the drawee/maker.
NOTE: Immediate right of recourse against
secondary parties will accrue only AFTER THE
GIVING OF DUE NOTICE OF DISHONOR.
Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored
the instrument.
NOTE: After an instrument is dishonored by
nonpayment, the persons secondarily liable become
the principal debtors.
Purposes for requiring notice of dishonor
1.
2.
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the
places specified above (NIL, Sec. 108).
To inform parties secondarily liable that the
maker or acceptor has failed to meet his
engagement; and
To advise them that they are required to make
payment.
Instances when a negotiable instrument is
considered dishonored
For BOE:
Q: Notice of dishonor is not required to be made
in all cases. One instance where such notice is
not necessary is when the indorser is the one to
whom the instrument is supposed to be
presented for payment. (2011 Bar)
1.
If not accepted when presented for acceptance;
or
2. If presentment for acceptance is excused and
the bill is not accepted (NIL, Sec. 149).
For PN:
A: The rationale here is that the indorser already
knows of the dishonor and it makes no sense to
notify him of it.
1.
Time of giving the notice of dishonor
2.
GR: As soon as instrument was dishonored (NIL, Sec.
102)
Not paid (that is, payment is refused or not
obtained) when presented for payment at
maturity; or
Where presentment is excused or waived and
the instrument is overdue and unpaid (NIL, Sec.
83).
Liability of a person secondarily liable when the
instrument is dishonored
XPN: Delay is excused (NIL, Sec. 113)
NOTE: An instrument cannot be dishonored by nonpayment until after the maturity.
After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to
all parties secondarily liable thereon accrues to the
holder (NIL, Sec. 84).
Place of giving the notice of dishonor
1.
Place of business – Before close of business
hours on the day following
Residence – Before the usual hours of rest
on the day following
By mail – Deposited in the post office in
time to reach him in the usual course on the
day following (NIL, Sec. 103)
Parties reside in the same place
PARTIES TO BE NOTIFIED
63
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Parties to whom notice must be given
against whom they may have a right of recourse
(NIL, Sec. 92).
Notice of dishonor should be given to: (DIA-RePJoB)
1.
2.
3.
4.
5.
6.
7.
Notice of dishonor if given by party entitled thereto,
inures to the benefit of:
The drawer
Indorser
His agent (NIL, Sec. 97)
Where party is dead – to a personal
representative or sent to the last residence or
last place of business of the deceased (NIL, Sec.
98)
When the parties to be notified are partners –
notice to any one partner though there has been
a dissolution (NIL, Sec. 99)
Notice to joint parties who are not partners
must be given to each of them (NIL, Sec. 100)
Where a party has been adjudged a bankrupt –
to the party himself or to his trustee or assignee
(NIL, Sec. 101)
1.
2.
FORM OF NOTICE
Form and contents of a notice of dishonor
(OWPeC-DiPLo)
1.
2.
3.
2.
4.
To the parties secondarily liable – Within
the time fixed by Secs. 102-104, and 107,
otherwise, they are discharged.
To his principal – The principal must give
notice to parties secondarily liable as if his
agent were an independent holder (NIL,
Sec. 94).
A party who receives notice of dishonor is entitled
to give notice of such dishonor to prior parties
within the same period of time that the holder has
after the dishonor, as if he were the said holder (NIL,
Sec. 107).
Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary,
notice must also contain a statement that it
has been protested); and
c. Statement that the party giving the notice
intends to look for the party addressed for
payment.
NOTE: A written notice need not be signed, and an
insufficient notice may be supplemented or
validated
by
verbal
communication.
A
misdescription of the instrument does not vitiate
the notice unless the party to whom the notice is
given is in fact misled thereby (NIL, Sec. 95).
How notice is given:
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
The parties who may give notice of dishonor (HARe)
1.
2.
3.
Oral
In writing
It may be given by personal delivery, or by mail
(NIL, Sec. 96)
(Note: Thus notice may be given by telephone or
telegraph)
In case the instrument was dishonored in the hands
of the agent, notice of dishonor should be given:
1.
The holder; and
All parties subsequent to the party to whom
notice is given (NIL, Sec. 93).
Holder
Another in behalf of the holder (Agent)
Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
would have a right to reimbursement from the
party to whom notice is given (NIL, Sec. 90).
1) By Personal Delivery; or
2) Mail
Note: As provided under section 96, the word “may”
is construed to mean “must”.
WAIVER
EFFECTS OF NOTICE OF DISHONOR
Notice of dishonor, if given by or on behalf of the
holder, inures to the benefit of:
It is the willingness on the part of the drawer or
indorser to be bound as such even without due
notice of dishonor.
1.
Waiver of notice maybe given:
2.
All holders subsequent to the holder who has
given notice; and
All parties prior to the holder but subsequent to
the party to whom notice has been given and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
2.
64
Before the time of giving notice has arrived; or
After the omission to give due notice (NIL, Sec.
109).
Mercantile Law
Ways to give a waiver of notice
1.
2.
the drawer had no right to expect that the drawee
bank would honor the checks (SIHI vs. CA, G.R. No.
101163, January 11, 1993).
Express; or
Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission of
liability after dishonor) (NIL, Sec. 109)
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to B
or order the sum of Php1 million. Signed, A (for
and in behalf of P).” The instrument shows that
it was drawn on P. B then indorsed to C, C to D,
and D to E. E then treated it as a bill of exchange.
Is presentment for acceptance necessary in this
case? (2011 Bar)
Parties affected by the waiver of notice
1.
2.
All parties - if embodied on the face of the
instrument
Particular indorser - if written above the
signature of such indorser (NIL, Sec. 110)
A: NO, since the drawer and drawee are the same
person.
Waiver of protest
It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee and
the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
presentment and notice of dishonor (NIL, Sec. 111).
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to
sell the jewelry, he withdrew all his funds from
the drawee bank. After dishonor, Juben
contends that the holder failed to give him a
notice of dishonor. Is notice of dishonor
necessary?
DISPENSATION WITH NOTICE
Instances when notice of dishonor is not
necessary (WaWa-ReDIG)
1.
2.
3.
4.
5.
6.
A: NO, Juben was responsible for the dishonor of his
checks, hence, there was no need to serve him notice
of dishonor (SIHI v. CA, supra.).
Waiver of notice (NIL, Sec. 109)
Waiver of protest (NIL, Sec. 111)
When notice is dispensed with when after
exercise of reasonable diligence, notice cannot
be given or does not reach the parties sought to
be charged (NIL, Sec. 112)
Drawer in cases under Sec. 114, NIL.
Indorser in cases under Sec. 115, NIL.; and
Where due notice of dishonor by nonacceptance has been given (notice of dishonor
by non-payment not necessary) (NIL, Sec. 116.)
Instances when it is not necessary to give a
notice of dishonor to the Indorser (FiPA)
1.
2.
3.
Instances when a notice of dishonor to the
Drawer may be dispensed with (SaF-PEC)
1.
2.
3.
4.
5.
Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts
at the time he indorsed the instrument
Indorser is person to whom the instrument is
presented for payment
Instrument was made or accepted for his
accommodation (NIL, Sec. 115).
EFFECT OF FAILURE TO GIVE NOTICE
GR: Any person to whom such notice is not given is
discharged, but he will still be liable for breach of
warranties pertaining to the instrument.
When drawer and drawee is the same person
Drawee is fictitious or does not have the
capacity to contract
Drawer is the person to whom the instrument
is presented for payment (he is the one who
dishonored the instrument)
Drawer has no right to expect or require that
the drawee or acceptor will honor the
instrument.
Drawer has countermanded the payment (e.g.
stop payment order) (NIL, Sec. 114.)
XPNs:
1. Waiver (NIL, Sec. 109)
2. Notice is dispensed with (NIL, Sec. 112)
3. Notice not necessary to drawer (NIL, Sec. 114)
4. Notice not necessary to indorser (NIL, Sec. 115)
NOTE: Holder is not required to notify all indorsers,
he may select to hold only one or more indorsers.
Indorsers who are discharged from liability by
reason that no notice of dishonor was given to them
is still liable for breach of warranties as to the NI.
NOTE: The holder of two checks which were
dishonored because the drawer withdrew her funds
from the bank can hold the drawer liable even if no
notice of dishonor was given to the drawer, since
65
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Effect of the omission of a previous holder to
give notice of dishonor by non-acceptance
NOTE: Loss of the negotiable instrument will not
extinguish liability; compensation is not available so
long as an obligation is evidenced by a negotiable
instrument (Villanueva, 2009).
It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify
the drawer and indorsers if acceptance is refused
(NIL, Sec. 117).
5.
Effect of lack of notice of dishonor on the
instrument which is payable in installments
1.
2.
NOTE: If reaquisition is made before maturity, the
instrument is not discharge as it may be
renegotiated (NIL, Sec. 119).
No acceleration clause – Failure to give notice of
dishonor on a previous installment does not
discharge drawers and indorsers as to
succeeding installments.
With acceleration clause – It depends upon
whether the clause is automatic or optional.
a. Automatic – failure to give notice of
dishonor as to a previous installment will
discharge the persons secondarily liable as
to the succeeding installments;
b. Optional – if not exercised, the rule would
be the same as if there is no acceleration
clause. If exercised, the rule would be the
same as if the installment contains an
automatic acceleration clause (Town
Savings Bank v. CA, G.R. No. 106011, June 17,
1993).
Q: Bong bought 300 bags of rice from Ben for
P300,000. As payment, Bong indorsed to Ben a
BPI check issued by Baby in the amount of
P300,000. Upon presentment for payment, the
BPI check was dishonored because Baby’s
account from which it was drawn has been
closed. To replace the dishonored check, Bong
indorsed a crossed DBP check issued also by
Baby for P300,000. Again, the check was
dishonored because of insufficient funds. Ben
sued Bong and Baby on the dishonored BPI
check. Bong interposed the defense that the BPI
check was discharged by novation when Ben
accepted the crossed DBP check as replacement
for the BPI check. Bong cited Section 119 of the
NIL which provides that a negotiable instrument
is discharged “by any other act which will
discharge a simple contract for the payment of
money.” Is Bong correct? (2014 Bar)
DISCHARGE OF NEGOTIABLE INSTRUMENT
DISCHARGE OF NEGOTIABLE INSTRUMENT
A: NO. Bong is not correct. While Section 119 of the
NIL in relation to Article 1231 of the Civil Code
provides that one of the modes of discharging a
negotiable instrument is by any other act which will
discharge a simple contract for the payment of
money, such as novation, the acceptance by the
holder of another check which replaced the
dishonored bank check did not result to novation.
It is the release of all parties, whether primary or
secondary, from the obligations arising thereunder.
It renders the instrument without force and effect,
and consequently, it can no longer be negotiated.
Methods for discharge of instrument (PACARe)
1.
Payment by principal debtor:
a. By or on behalf of principal debtor;
b. At or after its maturity;
c. To the holder thereof; and
d. In good faith and without notice that the
holder’s title is defective
2.
3.
Payment by accommodated party
Intentional cancellation of instrument by the
holder (by expressly stating it in the instrument
or when the instrument is torn up, burned or
destroyed)
Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
NCC, specifically remission, novation, and
merger.
4.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Reacquisition by principal debtor in his own
right. Reacquisition must be:
a. By the principal debtor;
b. In his own right; and
c. At or after date of maturity
There are only 2 ways which indicate the presence
of novation and thereby produce the effect of
extinguishing an obligation by another which
substitutes the same. First, novation must be
explicitly stated and declared in unequivocal terms as
novation is never presumed. Secondly, the old and
the new obligation must be incompatible on every
point.
In the instant case, there was no express agreement
that the holder’s acceptance of the replacement
check will discharge the drawer and endorser from
liability. Neither is there incompatibility because
both checks were given precisely to terminate a
single obligation arising from the same transaction
66
Mercantile Law
(Anamer Salazar v. J.Y. Brothers Marketing Corp., G.R.
No. 171998, October 20, 2010, in Divina 2014).
DISCHARGE OF PARTIES SECONDARILIY LIABLE
Methods of discharge of secondary parties (ACS
TReE)
Q: Is a manager’s check as good as cash? Why or
why not? (2015 Bar)
1.
2.
A: YES, the Supreme Court held in various decisions
that a manager’s check is good as cash. A manager’s
check is a check drawn by the bank against itself. It
is deemed preaccepted by the bank from the
moment of issuance. The check becomes the
primary obligation of the bank which issues it and
constitutes its written promise to pay. By issuing it,
the bank in effect commits its total resources,
integrity and honor behind the check (Tan v. CA, 239
SCRA 310; International Corporate Bank v. Gueco,
351 SCRA 516; Metrobank v. Chiok, GR No. 172652,
Nov. 26, 2014).
3.
4.
5.
6.
A manager's check as a check drawn by the bank's
manager upon the bank itself and accepted in
advance by the bank by the act of its issuance. It is
really the bank's own check and may be treated as a
promissory note with the bank as its maker.
Consequently, upon its purchase, the check
becomes the primary obligation of the bank and
constitutes its written promise to pay the holder
upon demand. It is similar to a cashier's check both
as to effect and use in that the bank represents that
the check is drawn against sufficient funds. The
drawee bank of a manager's check may interpose
personal defenses of the purchaser of the manager's
check if the holder is not a holder in due course. In
short, the purchaser of a manager's check may
validly countermand payment to a holder who is not
a holder in due course. Accordingly, the drawee
bank may refuse to pay the manager's check by
interposing a personal defense of the purchaser.
(G.R. No. 219037, October 19, 2016 RCBC v. Odrada)
Any Act which discharges the instrument;
Intentional Cancellation of his signature by the
holder
Discharge of prior party which may be made
when signature is Stricken out
Valid Tender of payment by a prior party;
Release of the principal debtor, unless holder
expressly reserves his right of recourse against
the said subsequent parties
Extension of time of payment, unless:
a. Extension is consented to by such party
b. Holder expressly reserves his right of
recourse against such party (NIL, Sec. 120)
Q: The rule is that the intentional cancellation of
a person secondarily liable results in the
discharge of the latter. With respect to an
indorser, the holder's right to cancel his
signature is: (2011 Bar)
A: Limited to the case where the indorsement is not
necessary to his title.
Effects of payment by persons secondarily liable
DiCReF
1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3. Instrument may be renegotiated
4. Person paying is remitted to his former rights
(as regards prior parties) and he may strike out
his own and all subsequent indorsements. (NIL,
Sec. 121)
RIGHT OF THE PARTY WHO DISCHARGED
INSTRUMENT
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. While manager’s
and cashier’s checks are still subject to clearing,
they cannot be countermanded for being drawn
against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check.
Long standing and accepted banking practices do
not countenance the countermanding of manager’s
and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its
obligations towards the purchaser. (Metrobank v.
Chiok, GR No. 172652, Nov. 26, 2014)
GR: The party (secondarily liable) so discharging
the instrument 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.
XPNs:
1.
2.
Where it is payable to the order of a third
person, and has been paid by the drawee; and
It was made or accepted for accommodation,
and has been paid by the party accommodated.
NOTE: The above exceptions have the same effect as
payment by the party primarily liable.
RENUNCIATION BY THE HOLDER
67
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Renunciation
NOTE: The change in the date of indorsement is
not material where the date is not necessary to
fix the maturity of the instrument.
It is the act of surrendering a claim or right with or
without recompense (De Leon, 2014).
2.
3.
4.
5.
6.
Manner of making renunciation by the holder
1.
2.
Must be written
If oral, the instrument must be surrendered to
the person primarily liable (NIL, Sec. 122).
7.
Effects of renunciation
1.
2.
3.
Made in favor of principal debtor made at or
after the maturity (made absolutely and
unconditionally) of the instrument – discharges
the instrument (NIL, Sec. 122).
Made in favor of a secondary party may be made
by the holder before, at or after maturity –
discharges only the secondary parties and all
subsequent to him (NIL, Sec. 122).
Renunciation does not affect the rights of a
holder in due course without notice (NIL, Sec.
120).
Rule regarding
instrument
the
cancellation
of
Sum payable, either for principal or interest
The time or place of payment
Number or the relations of the parties
Currency in which payment is to be made
Adds a place of payment where no place is
specified
Any other change or addition which alters the
effect of the instrument (NIL, Sec. 125)
NOTE: There is no material alteration when the
serial number of a check had been altered. The
alteration of the serial number of a check did not
change the relations between the parties nor the
effect of the instrument. Hence, the alteration on the
serial number of a check is not a material alteration
(International Corporate Bank v. CA, G.R. No. 141968,
February 12, 2001).
Spoliation
It refers to material alteration of an instrument
done by a stranger. It has the same effect as
alteration.
an
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an instrument or
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the
cancellation was made unintentionally, or under a
mistake or without authority (NIL, Sec. 123).
EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument,
without the assent of all parties liable thereon, has
the following effects:
1.
Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to
the alteration because of their warranties
(2001 Bar)
Material alteration
2.
It is any change in the instrument which affects or
changes the liability of the parties in any way. It
means an unauthorized change in an instrument
that purports to modify in any respect the obligation
of a party or an unauthorized addition of words or
numbers or other change to an incomplete
instrument relating to the obligation of a party.
If negotiated to an HIDC:
a. He may enforce the payment thereof
according to its original tenor against the
person not a party to the alteration.
b. He may also enforce payment thereof
against the party responsible for the
alteration for the altered amount.
3.
If negotiated to a holder not an HIDC:
a. He cannot enforce payment against the
person not a party prior to the alteration.
b. He may, however enforce payment
according to the altered tenor from the
person who caused the alteration and from
the indorsers (NIL, Sec. 12).
MATERIAL ALTERATION
CONCEPT
Instances that constitute material alteration
Any alteration which changes:
1.
Date
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
68
Mercantile Law
A drawee who accepts a materially altered check
cannot recover from the holder and the drawer.
(2011 Bar)
1.
2.
A material alteration avoids an instrument except as
against an assenting party and subsequent
indorsers, but a holder in due course may enforce
payment according to its original tenor. Thus, when
the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty
tocharge its client’s account only for bona fide
disbursements he had made. If the drawee did not
pay according to the original tenor of the
instrument, as directed by the drawer, then it has no
right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous
payment it made from the drawer’s account which
it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its
loss. It may pass the liability back to the collecting
bank which is what the drawee bank exactly did in
this case. It debited the account of Equitable-PCI
Bank for the altered amount of the checks. (G.R. No.
176697 September 10, 2014 AREZA v. EXPRESS
SAVINGS BANK)
NOTE: If the bill is non-existent, the acceptance on a
separate paper must comply with following
requirements: (DReC)
1.
2.
3.
1.
2.
General Acceptance -It assents without
qualification to the order of the drawer. (NIL,
Sec. 139)
Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as
drawn (ibid.).
NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by
non-acceptance (NIL, Sec. 142).
DEFINITION
Acceptance of a bill
Kinds of qualified acceptance (CoPaL-QuaD)
It is a signification by the drawee of his assent to the
order of the drawer. (NIL, Sec. 132)
1.
Requisites for acceptance (WESH)
2.
3.
4.
The contemplated drawee shall describe the bill
to be drawn and promise to accept it;
Bill shall be drawn within a reasonable time
after such promise is written; and
The holder shall take the bill upon the credit of
the promise.
Kinds of acceptance
ACCEPTANCE
1.
On the bill itself
On a separate paper:
a. It may be acceptance as to an existing bill;
or
b. It may be acceptance as to a non-existing
bill.
2.
It must be in writing, except constructive
acceptance and to a foreign bill payable in
another state (unless the other state requires
for written acceptance)
Must express a promise to pay money
Signed by the drawee
Delivered to the holder.
3.
4.
5.
NOTE: Before delivery or notification, acceptor
may revoke or cancel his acceptance.
Conditional – makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated.
Partial – an acceptance to pay part only of the
amount for which the bill is drawn.
Local – an acceptance to pay only at a particular
place.
Qualified as to time– a bill is accepted to be paid
on or after a specified date.
As to drawee - acceptance of some one or more
of the drawees but not of all (NIL, Sec. 141).
Q: A bill of exchange states on its face: “One (1)
month after sight, pay to the order of Mr. R the
amount of Php 50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T.” Mr. S, the
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay Php
30,000.00 three (3) months after sight.” May he
accept under such terms, which varies the
command in the bill of exchange? (2011 Bar)
Upon acceptance, the bill, in effect becomes a note.
The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser.
MANNER
Manner of making an acceptance
A: YES, since a drawee is allowed to effect a
qualified acceptance in which case he shall be liable
according to the tenor of his acceptance.
Acceptance may be made
69
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Q: X, drawee of a bill of exchange, wrote the
words: “Accepted, with promise to make
payment within two days. Signed, X.” The
drawer questioned the acceptance as invalid. Is
the acceptance valid?
2.
3.
A: YES, because the acceptance is in reality a clear
assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed [NIL, Sec. 141 (d)].
NOTE: 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 (NIL, Sec. 142).
Other kinds of acceptance
1.
Subsequently assent thereto; or
Implied assent - when they did not express their
dissent to the holder within a reasonable time
when they received a notice of qualified
acceptance.
Acceptance of an incomplete bill
Constructive/implied
a. Drawee to whom the bill is delivered for
acceptance destroys it
b. Drawee refuses, within 24 hours after such
delivery, or within such time as is given
him, to return the bill accepted or nonaccepted (NIL, Sec. 137)
Acceptance may be made before the bill has been
signed by the drawer or while otherwise
incomplete, or after it is overdue, or even after it has
been dishonored by non-acceptance or nonpayment (NIL, Sec. 138).
Effect of the certification by the drawee bank
2.
Extrinsic
The acceptance is written on a paper other than
the bill itself. To be binding upon the acceptor:
a. Acceptance must be shown to the person to
whom the instrument is negotiated; and
b. Such person must take the bill for value on
the faith of such acceptance (NIL, Sec. 134).
3.
Virtual
a. Unconditional promise in writing to accept
a bill
b. Promise made before it is drawn
c. Any person who, upon faith thereof,
receives the bill for value (NIL, Sec. 135).
Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction and that they
shall be so applied whenever the check is presented
for payment. Where a check is certified by the bank
on which it is drawn, the certification is equivalent
to acceptance (NIL, Secs. 187, 189; New Pacific
Timber v. Seneris, G.R. No. L-41764, December. 19,
1980).
PRESENTMENT FOR ACCEPTANCE
TIME FOR ACCEPTANCE
Presentment for acceptance is necessary only in
the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL). In no
other case is presentment
for
acceptance necessary in order to render any party
to the bill liable. Obviously then, sight drafts do not
require presentment for acceptance.
The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation (NIL, Sec. 136).
NOTE: Drawee bank is not entitled to 24 hours to
decide whether or not to pay a check since a check
is presented for payment, not acceptance.
It is the production or exhibition of a bill of exchange
to the drawee for his acceptance or payment. A
presentment for acceptance includes presentment
for payment.
RULES GOVERNING ACCEPTANCE
Effect of accepting an instrument with a
qualified acceptance
GR: Acceptance is not necessary to render any party
to the bill liable (NIL, Sec. 143, par. 2).
GR: When the holder takes a qualified acceptance
the drawer and indorsers are discharged from
liability on the bill.
XPNs: (SEXE)
1.
XPNs: (AsAR)
1. When they have expressly or impliedly
authorized the holder to take a qualified
acceptance;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
2.
70
Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument
When bill expressly stipulates that it shall be
presented for acceptance
Mercantile Law
3.
Where the bill is drawn payable elsewhere than
at the residence or place of business of the
drawee (NIL, Sec. 143, par. 1).
presenting it for payment on the day that it falls due
(NIL, Sec. 147).
Instances when presentment is excused (DafRI)
In said exceptions, the holder must either present it
for acceptance or negotiate it within a reasonable
time, otherwise, the drawer and all indorsers are
discharged (NIL, Sec. 144).
1.
2.
TIME/PLACE/MANNER OF ACCEPTANCE
3.
Proper presentment for acceptance
It must be made: (BRO-D)
1.
2.
3.
4.
By or on behalf of the holder;
At a reasonable hour on a business day;
Before the bill is overdue; and
To the drawee or some person authorized to
accept or refuse to accept on his behalf (NIL, Sec.
145).
WHEN
Bill addressed to 2
or more drawees
who
are
not
partners
Drawee is dead
Drawee
is
adjudged
a
bankrupt
or
insolvent or has
made
an
assignment for the
benefit of creditors
Where the drawee is dead, or has absconded, or
is a fictitious person not having capacity to
contract by bill
Where, after exercise of reasonable diligence,
presentment cannot be made
Where, although presentment has been
irregular, acceptance has been refused on some
other ground (NIL, Sec. 148).
DISHONOR BY NON-ACCEPTANCE
Instances when a bill is dishonored by nonacceptance
1.
PRESENTMENT MUST BE
MADE TO
All of them unless one has
authority to accept or
refuse acceptance for all,
in which case presentment
may be made to him only.
[NIL, Sec. 145(a)]
Drawee's
personal
representative [NIL, Sec.
145(b)]
2.
When it is duly presented for acceptance and
such an acceptance is refused or cannot be
obtained
When presentment for acceptance is excused,
and the bill is not accepted (NIL, Sec. 149).
It is not sufficient that presentment for acceptance
is excused, it is also necessary that the bill remains
not accepted.
Duty of the holder where bill is not accepted
If within 24 hours after due presentment, the bill is
not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
will lose the right of recourse against the drawer
and indorsers (NIL, Sec. 150).
NOTE: Presentment is
merely permissive since it
is excused by. [NIL, Sec.
148(a)]
To drawee or his trustee/
assignee. [NIL, Sec. 145(c)]
Rules when a bill is dishonored by nonacceptance
1.
2.
3.
EFFECT OF FAILURE TO MAKE PRESENTMENT
Failure to make such presentment will discharge the
drawer from liability or to the extent of the loss
caused by the delay (NIL, Sec. 186; Republic of the
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961).
4.
Right of recourse against all secondary party
accrues to the holder.
No presentment for payment is necessary since
dishonor of the instrument by non-payment is
to be expected.
If the instrument is accepted after it has been
dishonored by non-acceptance, presentment
for payment is necessary upon maturity.
In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.
Rights of a holder when bill is not accepted
However, delay in presentment may be excused
where the holder of a bill drawn payable elsewhere
than at the place of business or the residence of the
drawee has no time with the exercise of reasonable
diligence, to present the bill for acceptance before
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment
for payment is necessary (NIL, Sec. 151).
71
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Acceptance for honor
4.
Coupon Bond – one to which are attached
coupons which entitle the holder to interest
when due.
5. Bank Note – instrument issued by a bank for
circulation as money payable to bearer on
demand.
6. Due Bill - PN which shows on its face that one
person acknowledges his indebtedness to
another. The word “due” is commonly used.
7. Mortgage Note – an instrument secured by
either a real (REM) or personal property
(Chattel).
8. Title-Retaining Note – an instrument used to
secure the purchase price of goods. It ordinarily
provides that title to the goods shall remain in
payee’s name until the note is paid in full.
9. Collateral Note – it is used when the maker
pledges securities to the payee to secure the
payment of the amount of the note.
10. Judgment Note – this is a note to which a power
of attorney is added enabling the payee to take
judgment against the maker without the
formality of a trial if the note is not paid on its
due date (De Leon, supra).
It is an undertaking by a stranger to a bill after
protest for the benefit of any party liable thereon or
for the honor of the person for whose account the
bill is drawn which acceptance inures to the benefit
of all parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the bill
when it becomes due if the original drawee does not
pay it (NIL, Sec. 161).
Requisites of acceptance for honor (WISh)
1.
2.
3.
Must be in Writing
Must Indicate that it is an acceptance for honor
Must be Signed by the acceptor for honor (NIL,
Sec. 162)
PROMISSORY NOTE
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
(NIL, Sec. 184).
Instances when a bill of exchange may be treated
as a promissory note (2015 Bar)
Special types of promissory notes
1.
1.
2.
3.
4.
Certificate
of
deposit
–
a
written
acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the
bank or banker promises to pay to the
depositor, to the order of the depositor, or to
some other person or his order, whereby the
relation of debtor and creditor between the
bank and the depositor is created.
CHECK
NOTE: A document to be considered a
certificate of deposit need not be in a specific
form. Thus, a passbook issued by a bank
qualifies as a certificate of deposit drawing
interest because it is considered a written
acknowledgement by a bank that it has
accepted a deposit of a sum of money from a
depositor. Thus, it is subject to documentary
stamp tax (Prudential Bank v. CIR, G.R. No.
180390, July 27, 2011, in Divina, 2014).
2.
3.
DEFINITION
It is a bill of exchange drawn on a bank and payable
on demand. (NIL, Sec. 185)
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.
Bonds – an evidence of indebtedness issued by
a public or private corporation which
constitutes a promise, under seal, to pay money.
It runs for a longer period of time than a PN.
Registered Bond – one payable only to the
person whose name appears on the face of the
certificate.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The drawer and the drawee are the same
person
The drawee is a fictitious person
The drawee has no capacity to contract
The instrument is so ambiguous that there is
doubt whether it is a bill or a note (Sundiang Sr.
& Aquino, 2014, citing NIL, Secs. 17[e] and 130).
Essential characteristics of checks
1.
2.
They are drawn on a bank
Payable instantly on demand
Checks, completed and delivered, are sufficient by
themselves to prove the existence of loan obligation.
The Court has expressly recognized that a check
constitutes an evidence of indebtedness and is a
72
Mercantile Law
veritable proof of an obligation. This is the very
same principle underpin Section 24 of the NIL which
provides that “every negotiable instrument is
deemed prima facie to have been issued for a
valuable consideration; and every person whose
signature appears thereon to have become a party
for value.” (2014 Bar; Pacheco v. CA G.R. No. 126670
December 2, 1999)
Function
Presentment
for Payment
Q: Tan maintained a current and savings
account with PCIB, now EPCIB, with a balance of
P35,147.59. He issued a post-dated PCIB check
in favor of SLI in the amount of P34,588.72. After
clearing, the amount of the check was
immediately debited by EPCIB from Tan’s
account thereby leaving him with a balance of
only P558.87. He thereafter issued three (3)
checks payable to ASELCO, ANECO, and the other
payable in cash. When the latter were presented
for payment, the three (3) checks were
dishonored for being drawn against insufficient
funds. As a result, the electric power supply for
the two mini-sawmills owned and operated by
Tan, was cut off and it was restored only after
sometime. After trial, the RTC ruled in favor of
EPCIB and dismissed the complaint. On appeal
the CA reversed the decision of the RTC. Is EPCIB
liable due to its premature debiting of the postdated check, thereby affecting Tan’s business
operations?
Discharge
Liability
Effect of the
Death of the
Drawer
A: YES. The premature debiting of the postdated
check by the bank which resulted to insufficiency of
funds that brought about the dishonor of two checks
causing the electric supply to be cut-off and affected
business operations indicates the negligence of the
bank. For its failure to exercise extra-ordinary
diligence, it should be made liable in the case
(Equitable PCI Bank v. Arcelito B. Tan, G.R. No.
165339, August 23, 2010, in Divina, 2014).
Presentment
for Acceptance
Check vs. Bill of Exchange
BASIS
Drawee
Payability
CHECKS
Always
drawn on a
bank
or
banker
against
a
previous
deposit of
funds
Always
payable on
demand
of
Ordinarily
intended for
immediate
payment
Must
be
presented
for payment
within
a
reasonable
time after its
issue(NIL,
Sec.186)
When
a
check
is
accepted or
certified, the
drawer
&
indorsers
are
discharged
from
liability
thereon
(NIL,
Sec.
188)
Death of the
drawer of a
check with
the
knowledge
of the bank
revokes the
authority of
the bank to
pay.
Need not be
presented
for
acceptance
(NIL,
Sec.
185)
Intended
for
circulation
as
instrument
of
credit
Must
be
presented
for
payment within a
reasonable time
after
its
last
negotiation
(NIL, Sec. 171)
They
remain
liable
despite
acceptance
(NIL, Sec. 84)
Death
of
the
drawer of an
ordinary bill does
not revoke the
authority of the
drawee to pay.
Must
be
presented
for
acceptance
in
certain cases (NIL,
Sec. 143)
Stopping payment
BOE
May or may not be
drawn on a bank
and need not be
drawn against a
deposit
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule
that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a
check after it has been notified to stop payment, it
pays in its own responsibility and will not be
permitted to charge the account. The drawer may
countermand payment if he has a valid defense
against the holder of the check. Thus,
countermanding of a check is proper where the
payee failed to deliver the goods that he was
supposed to deliver (Sundiang Sr. & Aquino, 2014,
citing Bataan Cigar and Cigarette Factory v. CA, GR.
No. 93048, March 3, 1994).
Either payable on
demand or at a
fixed
or
determinable
future time (NIL,
Sec.4)
73
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Q: A check was dishonored due to material
alteration. The creditor then filed an action
against drawee bank for the amount. Will the
action prosper?
company's taxes for the third quarter of 1997.
The check was deposited with Bank B, the
collecting bank with which the BIR has an
account. The check was subsequently cleared
and the amount of P500,000.00 was deducted
from the company's balance. Thereafter,
Company X was notified by the BIR of its nonpayment of its unpaid taxes despite the
P500,000.00 debit from its account. This
prompted the company to seek assistance from
the proper authorities to investigate on the
matter.
A: NO. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections
185 and 189 of the NIL, sue the bank. The payee
should instead sue the drawer who might in turn
sue the bank. This is so because no privity of
contract exists between the drawee-bank and the
payee (Villanueva v. Nite, G.R. No. 148211, July 25,
2006).
The results of the investigation disclosed that
unknown then to Company X, its chief
accountant Bonifacio Santos is part of a
syndicate that devised a scheme to syphon its
funds. It was discovered that though deposited,
the check was never paid to the BIR but was
passed on by Santos to Winston Reyes, Bank B's
branch manager and Santos' co-conspirator.
Instead of bringing the check to the clearing
house, Reyes replaced Check No. 12345 with a
worthless check bearing the same amount, and
tampered documents to cover his tracks. No
amount was then credited to the BIR.
Meanwhile, Check No. 12345 was subsequently
cleared and the amount therein credited into
the accounts of fictitious persons, to be later
withdrawn by Santos and Reyes.
NOTE: A check by itself does not operate as an
assignment of any part of the funds to the credit of
the drawer with the bank, and the bank is not liable
to the holder, unless and until it accepts or certifies
the check (NIL, Sec. 189).
Mere issuance of a worthless check holds the
person liable under BP 22 irrespective of intent
(2014 Bar)
The rule is that every act or omission punishable by
law has its accompanying civil liability. If the
accused however, is not found to be criminally
liable, it does not necessarily mean that he/she will
not likewise be held civilly liable because extinction
of the penal action does not carry with it extinction
of civil action. In cases of violation of BP 22, a special
law, the intent in issuing a check is immaterial. Thus,
regardless of intent, the accused remains civilly
liable because the act or omission, the making and
issuing of the subject check, from which his/her civil
liability arises.
Company X then sued Bank B for the amount of
P500,000.00 representing the amount deducted
from its account. Bank B interposed the defense
that Company X was guilty of contributory
negligence since its confidential employee
Santos was an integral part of the scheme to
divert the proceeds of Check No. 12345. Is
Company X entitled to reimbursement from
Bank B, the collecting bank? Explain. (2016,
BAR)
Effect of erasure or alteration on checks
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January
4, 2016, the following shall no longer be eligible or
acceptable for clearing:
a.
b.
A: Yes, Company X is entitled to reimbursement
from the collecting bank. In a similar case, the
Supreme Court ruled that the drawer could recover
the amount deducted from its account because it
failed to ensure that the check be paid to the
designated payee while the collecting bank should
share ½ of the loss because its branch manager
conspired in the fraud (PCIB v. CA, 350 SCRA 446
[2001]).
Any check that shows or indicates on its face
erasure or alteration regardless of any
signature or initials that appear to indicate
authorization of the alteration or erasure; or
Does not indicate the date, payee, amount
payable in figures, amount payable in words, or
signature of the drawer
KINDS
Effect of contributory negligence between the
drawer and collecting bank
Special types of checks
Q: Company X issued a Bank A Check No. 12345
in the amount of P500,000.00 payable to the
Bureau of Internal Revenue (BIR) for the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
74
Cashier’s Check – a BOE drawn by the bank upon
itself and is accepted at its issuance. It is usually
signed by the cashier of the bank.
Mercantile Law
2.
Manager’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance and
signed by a manager on behalf of a bank.
2.
3.
NOTE: A manager’s check is as good as cash. It
is a check drawn by the bank against itself. It is
deemed pre-accepted by the bank from the
moment of issuance. The check becomes the
primary obligation of the bank which issues it
and constitutes its written promise to pay. By
issuing it, the bank in effect commits its total
resources, integrity and honor behind the check
(Metrobank and Trust Company vs Chiok, GR No.
172652, November 26, 2014). (2015 Bar)
NOTE: Differentiate cashier’s from manager’s
check in the headoffice, it is the cashier who
signs it because it is where the cashier holds
office, however, in branches, it is the manager
who signs the check. The process for both is the
same.
3.
4.
5.
6.
Q: Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint which
Jose promised to deliver. Jose sold and
negotiated the check to Excel Inc. at a discount.
Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the
newsprint, Po ordered the drawee bank to stop
payment on the check. Efforts of Excel to collect
from Po failed. Excel wants to know from you as
counsel:
a.
Whether as second indorser and holder of
the crossed check, is it a holder in due
course?
b. Whether Po’s defense of lack of
consideration as against Jose is also
available as against Excel? (1994, 1995,
2005 Bar)
Certified Check – Drawn by a depositor upon
funds to his credit in a bank which an officer of
a bank certifies will be paid on presentation.
Crossed Check – Done by writing 2 parallel lines
on the left top portion of the check. The
marking signifies that the bank should pay only
with the intervention of the company only.
Memorandum Check – A check with
“Memorandum” written on its face. The writing
signifies that the drawer engages to pay the
bona fide holder absolutely, without any
condition concerning its presentment.
Traveler’s Checks – Instruments purchased from
banks or express companies which can be used
like cash upon the second signature by the
purchaser (De Leon, supra).
A:
a. Excel Inc. is not a holder in due course. The act
of crossing the check imposes upon the holder
thereof the duty to ascertain the indorser’s, title
to the check or the nature of his possession or
the purpose for which it was issued. Excel is
guilty of gross negligence amounting to legal
absence of good faith for its failure to inquire
from Jose the purpose for which the three
checks were crossed despite such warning,
hence, it is not deemed a holder in due course.
b. YES, the defense of lack of consideration as
against Jose is also available as against Excel.
For not being a holder in due course, Excel is
subject to personal defenses as if the check
were non-negotiable, such as lack of
consideration between Po Press and Jose. In
this case, Jose’s failure to deliver the newsprint
resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press
cannot be made liable to pay the face value of
the check.
Crossed check
A crossed check is a check with two (2) parallel
lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
payment must be made to the right party; otherwise
the bank has no authority to use the drawer's funds
deposited with the bank.
The purpose is to insure payment to the payee. It
can only be deposited but may not be converted into
cash by the drawer. Crossing a check does not
destroy its negotiability but the check may be
negotiated only once – to one who has an account
with the bank (De Ocampo v. Gatchalian, G.R. No. L15126, November 30, 1961).
Q: PCIB filed an action against Balmaceda, it
alleging that between 1991 and 1993, by taking
advantage of his position as branch manager, he
fraudulently obtained and encashed 31
Managers checks in the P10,782,150.00. PCIB
moved to be allowed to file an amended
complaint to implead Rolando Ramos as one of
the recipients of a portion of the proceeds from
The effects of crossing a check are: (DOW)
1.
That the check may be negotiated only once- to
one who has an account with a bank; and
That the act of crossing the check serves as a
warning to the holder that the check has been
issued for definite purpose so that he must
inquire if he has received the check pursuant to
the purpose. Otherwise, he is not an HIDC (SIHI
v. IAC, G.R. No. 72764, July 13, 1989).
That the check may not be encashed but only
deposited in the bank;
75
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Negotiable Instruments Law
Balmacedas alleged fraud. Since Balmaceda did
not file an Answer, he was declared in default.
On the other hand, Ramos filed an Answer
denying any knowledge of Balmacedas scheme.
The RTC issued a decision in favor of PCIB. On
appeal, the CA dismissed the complaint against
Ramos. According to the CA, the mere fact that
Balmaceda made Ramos the payee in some of
the Managers checks does not suffice to prove
that Ramos was complicit in Balmacedas
fraudulent scheme. Is PCIB itself at fault as
employer?
failed to realize. Equitable moved for the
dismissal of the complaint for lack of cause of
action. It argued that SSPI cannot assert a right
against the bank based on the undelivered
checks because a payee, who did not receive the
check, cannot require the drawee bank to pay it
the sum stated on the checks.
a. Does SSPI has a cause of action against
Equitable?
b. Is Equitable guilty of gross negligence?
A:
a. YES. SSPI’s cause of action is not based on the
three checks. SSPI does not ask Equitable or Uy to
deliver to it the proceeds of the checks as the
rightful payee. SSPI does not assert a right based on
the undelivered checks or for breach of
contract. Instead, it asserts a cause of action based
on quasi-delict. SSPI claims damages in the form of
interest income from the parties who willfully or
negligently withheld its money from it.
A: YES. While its manager forged the signature of
the authorized signatories of clients in the
application for manager’s checks and forged the
signatures of the payees thereof, the drawee bank
also failed to exercise the highest degree of diligence
required of banks in the case at bar. It allowed its
manager to encash the manager’s checks that were
plainly crossed checks. A crossed check is one
where two parallel lines are drawn across its face or
across its corner. Based on jurisprudence, the
crossing of a check has the following effects: (a) the
check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once —
to the one who has an account with the bank; and
(c) the act of crossing the check serves as a warning
to the holder that the check has been issued for a
definite purpose and he must inquire if he received
the check pursuant to this purpose; otherwise, he is
not a holder in due course. In other words, the
crossing of a check is a warning that the check
should be deposited only in the account of the
payee. When a check is crossed, it is the duty of the
collecting bank to ascertain that the check is only
deposited to the payee’s account. In complete
disregard of this duty, PCIB’s systems allowed
Balmaceda to encash 26 manager’s checks which
were all crossed checks, or checks payable to the
“payee’s account only” (PCIB v. Balmaceda and
Ramos, G.R. No. 158143 September 21, 2011, in
Divina, 2014).
b. YES. The checks that Interco issued in favor of
SSPI were all crossed, made payable to SSPI’s order,
and contained the notation account payee only. This
creates a reasonable expectation that the payee
alone would receive the proceeds of the checks and
that diversion of the checks would be averted. At
the very least, the nature of crossed checks should
place a bank on notice that it should exercise more
caution or expend more than a cursory inquiry, to
ascertain whether the payee on the check has
authorized the holder to deposit the same in a
different account. Since the banking business is
impressed with public interest, the trust and
confidence of the public in it is of paramount
importance. Consequently, the highest degree of
diligence is expected, and high standards of
integrity and performance are required of it.
Equitable did not observe the required degree of
diligence expected of a banking institution under
the existing factual circumstances. The fact that a
person, other than the named payee of the crossed
check, was presenting it for deposit should have put
the bank on guard. Misplaced reliance on empty
words is tantamount to gross negligence, which is
the absence of or failure to exercise even slight care
or diligence, or the entire absence of care, evincing
a thoughtless disregard of consequences without
exerting any effort to avoid them (Equitable Banking
Corporation v. Special Steel Products, Inc. and
Augusto Pardo, G.R. No. 175350, June 13, 2012, Del
Castillo, J.).
Crossed check with notation “Account Payee
Only”
Q: Three crossed checks payable to the order of
SPPI were issued by Interco as payment for the
welding electrodes bought by the latter from the
former.Each check was crossed with the
notation “account payee only” and was drawn
against Equitable. Due to Uy’s, fraudulent
representations and Equitable’s reliance on Uy’s
words that he had good title thereto, the three
checks were deposited in Uy’s account.
Hence, SSPI filed a complaint for damages
against Uy and Equitable for payment of
damages in the form of interest incomewhich it
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Q: Distinguish clearly crossed checks from
cancelled checks (2004 Bar)
A: A crossed check is one with two parallel lines
drawn diagonally on the left portion of the check. On
76
Mercantile Law
the other hand, a cancelled check is one marked or
stamped "paid" and/or "cancelled" by or on behalf
of a drawee bank to indicate payment thereof. A
crossed check may not be encashed but only
deposited in the bank. While the payee or bearer of
a cancelled check may be refused encashment.
in the absence of due presentment, as in this case
where the check was not presented by the payee
(CD Bytes) or the proper party authorized to make
presentment of the checks, the drawer (Pentium
Company) cannot be held liable. However, Fund
House may recover from the immediate indorser, if
the latter has no valid excuse for refusing payment.
Q: On Oct 12, 1993, Chelsea Straights, a
corporation engaged in the manufacture of
cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed
checks postdated 15 Mar 94 and 15 Apr 94 in full
payment therefor. On 19 Jan 94 Moises sold to
Dragon Investment House at a discount the two
checks drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco as agreed
despite Chelsea’s demand. Consequently, on 1
Mar 94 Chelsea issued a “stop payment” order
on the 2 checks issued to Moises. Dragon,
claiming to be a holder in due course, filed a
complaint for collection against Chelsea for the
value of the checks. Rule on the complaint of
Dragon. Give your legal basis. (1995 Bar)
Stale check
A check which has not been presented for payment
within a reasonable time after its issue. It is
valueless and thus, should not be paid. A check
becomes stale 6 months from date of issue.
Memorandum check
A memorandum check is an evidence of debt against
the drawer and although may not be intended to be
presented, has the same effect as an ordinary check
and if passed on to a third person, will be valid in his
hands like any other check (People v. Nitafan, G.R.
No. 75954, October 22, 1992).
A: The complaint should be dismissed. The act of
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, in this case
Moises’ title to the check or the nature of his
possession. Failing in this respect, Dragon cannot be
deemed a holder in due course and as such, Moises
is subject to personal defenses as if the check were
non-negotiable, such as lack of consideration
between Chelsea and Moises for Moises’ failure to
deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea
cannot thus be made liable to pay the face value of
the check and this constitutes a defense not only
against Moises but even against Dragon who is not a
holder in due course.
When drawer of check discharged from liability
(ReSA)
1. The check is not presented within a reasonable
time after its issue;
2. The drawer suffers loss; and
3. The loss suffered by the drawer is attributable
to the delay (De Leon, 2010).
PRESENTMENT FOR PAYMENT
TIME
A check must be presented for payment within a
reasonable time after its issue. (NIL, Sec. 186).
Effect when a bank allows the withdrawal of the
value of a check prior to its clearing
Q: On March 1, 1996, Pentium Company ordered
a computer from CD Bytes, and issued a crossed
check in the amount of P30,000 post-dated Mar
31, 1996. Upon receipt of the check, CD Bytes
discounted the check with Fund House. On April
1, 1996, Pentium stopped payment of the check
for failure of CD Bytes to deliver the computer.
Thus, when Fund House deposited the check, the
drawee bank dishonored it. If Fund House files a
complaint against Pentium and CD Bytes for the
payment of the dishonored check, will the
complaint prosper? Explain (1996 Bar)
Q: Ofelia Camacho Cheah accommodated a
friend’s friend to deposit and encash a check
issued by the Bank of America. The check was
deposited to Ofelia’s account in PNB. A US dollar
denominated check is normally subject to a 15day clearing period. However, 12 days after the
check’s deposit, the bank informed Ofelia that
the check was cleared and credited to her
account. Hence, Ofelia immediately withdrew
the check’s amount and the accommodated
friend was able to take entire amount. It was
only days after said withdrawal that PNB was
informed by its correspondent bank of the
insufficiency of funds to which the check was
drawn. At that time, it was too late to recover the
A: The case will prosper as against the CD Bytes, the
immediate indorser but not as against Pentium
Company. The effect of crossing a check relates to
the mode of its presentment for payment which
must be made by the holder, or by some person
authorized to receive payment on his behalf. Thus,
77
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
money withdrawn. Is PNB liable for the money
lost on the said transaction?
purchased products on credit and issued to SMC,
two (2) BPI checks to cover the said transaction.
During one of his visits to the SMC Paranaque
Sales Office, he allegedly requested to see BPI
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a
bond paper together with BPI Check No. 17657,
he allegedly immediately left the office with his
accountant, bringing the checks with them. SMC
sent a letter to Puzon, demanding the return of
the said checks. Puzon ignored the demand
hence SMC filed a complaint against him for
theft.
The
investigating
prosecutor
recommended the dismissal of the case for lack
of evidence. On appeal, the CA agreed with the
prosecutor. Were the prosecutor and the DOJ
correct in finding no probable cause for theft?
A: Yes. The payment of the amounts of checks
without previously clearing them with the drawee
bank especially so where the drawee bank is a
foreign bank and the amounts involved were large
is contrary to normal or ordinary banking practice.
Jurisprudence provides that when the bank allowed
the withdrawal of the value of a check prior to its
clearing, before the check shall have been cleared
for deposit, the collecting bank can only ‘assume’ at
its own risk that the check would be cleared and
paid out (PNB v. Spouses Cheah, G.R. No. 170895 &
170892, April 25, 2012, Del Castillo, J.).
EFFECT OF DELAY
1.
2.
A: Yes. If the subject check was given by Puzon to
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
instrument, then ownership of the check was not
transferred to SMC (SMC v. Puzon, G.R. No. 167567,
September 22, 2011).
The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay (Ibid.).
The indorser shall be discharged from liability
(PNB vs. Seeto, G.R. No. L-4388, August 13, 1952)
Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
compromise agreement by which they agreed to
have the property in dispute be sold. X bought
the property and delivered a manager’s check to
Y. Y refused to accept the same, hence it was
consigned with the court. Y later accepted the
check and three years after acceptance, he filed
an action alleging that the check payment did
not amount to legal tender and that he never
even encashed the check. Is the contention of Y
tenable?
INSURANCE CODE
Laws governing contracts of insurance in the
Philippines
1.
2.
3.
A: NO. It is true that a check is not a legal tender and
while delivery of a check produces the effect of
payment only when it is encashed, the rule is
otherwise if the debtor (X) was prejudiced by the
creditor’s (Y) 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 (Pio
Barretto Realty Development Corp. vs. CA, G.R. No.
132362, June 28, 2001).
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event [IC, Sec. 2(a)].
A contract of insurance, to be binding from the date
of application, must have been a completed contract
(Perez vs. CA, GR No. 112329, January 28, 2000).
Thus, it must have all the essential elements of a
valid contract as enumerated in Art. 1318 of the New
Civil Code: (Sm-CoMe)
Q: To ensure payment and as a business
practice, SMC required Puzon to issue postdated
checks equivalent to the value of the products
purchased on credit before the same were
released to him. Said checks were returned to
Puzon when the transactions covered by these
checks were paid or settled in full. Puzon
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
R.A. 10607 (July 23, 2012)
New Civil Code
Special Laws
1.
78
Subject matter in which the insured has an
insurable interest;
Mercantile Law
2.
3.
Consideration, which is the premium paid by the
insured, for the insurer’s promise to indemnify
the former upon the happening of the event or
peril insured against; and
Meeting of minds of the parties.
parties must be determined in accordance with the
general principles of insurance law. Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their
dependents but only up to the extent of the
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the
insured from recovering greater than the loss
(Mitsubishi Motors Philippines Salaried Employees
Union vs. Mitsubishi Motors Corp, G.R. No. 175773,
June 17, 2013, in Divina 2014).
“Doing an insurance business” or “transacting
an insurance business” (ISRA)
The term “doing an insurance business” or
“transacting an insurance business” means:
1.
2.
3.
4.
Making or proposing to make, as Insurer, any
insurance contract;
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;
Doing any kind of business, including a
Reinsurance business, specifically recognized
as constituting the doing of an insurance
business.
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 Insurance Code.
Insurance as an Uberrimae Fides contract (1993
Bar)
The contract of insurance is one of perfect good
faith (uberrimae fidei) 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 (Qua Chee Gan
vs. Law Union and Rock Insurance, Co. Ltd., GR No. L4611, December 17, 1955). It requires the parties to
the contract to communicate that which a party
knows and ought to communicate, that is, the duty
to disclose in good faith all facts material to the
contract. This doctrine is essential on account of the
fact that the full circumstances of the subject matter
of insurance are, as a rule, known to the insured only
and the insurer, in deciding whether or not to accept
a risk, must rely primarily upon the information
supplied to him by the applicant (Sundiang Sr. &
Aquino, 2014).
In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the
making of the insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall NOT be
deemed conclusive to show that the making
thereof does not constitute the doing or transacting
of an insurance business [IC, Sec. 2 (b)].
Insurance as contracts of adhesion (Fine Print
Rule)
Q: The parties’ CBA contains the following
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
under a self-insurance basis hospitalization for
the dependents of regular employees”.
Eventually, three members of Mitsubishi Motors
Philippines
Salaried
Employees
Union
(MMPSEU), namely, Ernesto Calida, Hermie Juan
Oabel and Jocelyn Martin, filed claims for
reimbursement of hospitalization expenses of
their dependents. In turn, Mitsubishi Motors
Philippines Corporation (MMPC) paid only a
portion of their hospitalization insurance
claims, not the full amount. However, MMPSEU
insists that MMPC is also liable for the amounts
covered under other insurance policies;
otherwise, MMPC will unjustly profit from the
premiums the employees contribute through
monthly salary deductions. Is MMPSEU’s
contention correct?
While generally, stipulations in a contract come
about after deliberate drafting by the parties
thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts
are called contracts of adhesion, because the only
participation of the other party is the signing of his
signature or his 'adhesion' thereto. Insurance
contracts fall into this category (Sweet Lines, Inc. vs.
Teves, GR No. L-37750, May 19, 1978). An illustration
of a contract of adhesion is when the insurer used
“fine print” letters in conditions stated in a contract
of insurance (Ibid).
Rules in the construction or interpretation of
insurance contracts
GR: If the terms of the contract clearly show the
intention of the parties, there shall be no room for
interpretation.
A: NO. Since the subject CBA provision is an
insurance contract, the rights and obligations of the
79
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
XPN: If there are ambiguities in the terms of an
insurance contract, they have to be resolved in favor
of the insured and strictly against the insurer
because an insurance contract being a contact of
adhesion, most of its terms is not a product of
mutual negotiation between the parties as they are
prepared by the insurance company in final printed
forms (De Leon, 2014).
b.
Q: Philippine Health Care Providers, Inc. is
engaged in operating a prepaid group practice
health care delivery system or a health
maintenance organization (HMO) to take care of
the sick and disabled persons enrolled in the
health care plan. Individuals enrolled in its
health care programs pay an annual
membership fee and are entitled to various
medical services provided by its duly licensed
physicians, specialists and other professional
technical staff participating in the group
practice health delivery system at a hospital or
clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. a health
maintenance organization or an insurance
company?
Parties to the contract of insurance
1.
Insurer – party who assumes or accepts the risk
of loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event.
2.
Insured – person in whose favor the contract is
operative and is indemnified.
NOTE: The insured is not always the person to
whom the proceeds are paid.
3.
Assured/Beneficiary- a person designated by
the terms of the policy to receive the proceeds
of the insurance. He may be the insured or a
third party in the contract for whose benefit the
policy is issued and to whom the loss is payable.
A: HMOs are not insurance businesses. One test that
they have applied is whether the assumption of risk
and indemnification of loss (which are elements of
an insurance business) are the principal object and
purpose of the organization or whether they are
merely incidental to its business. If these are the
principal objectives, the business is that of
insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
Insurer
Every corporation, partnership, or association duly
authorized by the Insurance Commission to transact
insurance business may be an insurer (IC, as
amended by RA 10607, Sec. 6).
The term “insurer” no longer includes “individuals”
under RA 10607. Hence, an individual natural
person is no longer allowed to be an insurer.
Philippine Health Care Providers appears to provide
insurance-type benefits to its members (with
respect to its curative medical services), but these
are incidental to the principal activity of providing
them medical care. The "insurance-like" aspect of
Philippine Health Care Providers’ business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health
care services rather than insurance services, it
cannot be considered as being in the insurance
business (Philippine Health Care Providers, Inc., v.
CIR, G.R. No. 167330, September 18, 2009).
However, it includes the following:
1.
2.
3.
Professional reinsurer - any person, partnership,
association or corporation that transacts solely
and exclusively reinsurance business in the
Philippines.
Mutual Insurance Companies - The law also
provides for the procedure for mutualization of
domestic stock life insurance companies. A new
provision on RA 10607 is on demutualization or
conversion of mutual insurance companies into
stock corporations (IC, as amended by RA 10607,
Sec. 280).
Cooperatives are now expressly included in the
term “insurer” or “insurance company.”
However, the cooperative must: (Su-Ca)
a.
Persons who may be insured (2000 Bar)
Anyone except a public enemy may be insured (IC,
Sec. 7).
A public enemy is a nation at war with the
Philippines and every citizen or subject of such
nation. It does not include mobs, thieves or robbers
(Bouvier’s Law Dictionary).
Have a sufficient capital and asset required
under the Insurance Code and the pertinent
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
regulations issued by the Commission (IC,
as amended, Sec. 192).
Have a certificate of authority to operate
issued by the Commission which should be
renewed every year (IC, as amended, Sec.
193, Sundiang Sr. & Aquino, 2014).
80
Mercantile Law
If majority of the stockholders of the corporation
were subjects who became an enemy corporation
upon the outbreak of the war between two states, it
stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public
enemy. Hence, any contingency which may occur
during or after said war cannot be indemnified
under a policy issued before said war. However,
elementary rules of justice and in the absence of
specific provision in the Insurance Law, require that
the premium paid by the insured for the period
covered by its policy should be returned. The
NOTE: Prior to the effectivity of the Insurance Code
of 2013, the term used was “minor” instead of “the
person insured.” A minor cannot enter into any
contract of insurance with any insurance company.
Games of chances 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 is not authorized (IC, Sec. 4).
Void stipulations in an insurance contract
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its
enemy's property and repay in insurance the
value of what has been so destroyed. (Filipinas
Stipulations in an insurance contract which
provides:
1. For the payment of loss whether the person
insured has or does not have any insurable
interest in the subject-matter of insurance;
2. That the policy shall be received as proof of
such interest;
3. Every policy executed by way of gaming or
wagering (ICC, Sec. 25).
Compaña de Seguros v. Christern, Huenefeld and Co.,
Inc., G.R. No. L- 2294 May 25, 1951).
Subject matter of a contract of insurance
Anything having an appreciable pecuniary value,
which is subject to loss or deterioration, or of which
one may be deprived so that his pecuniary interest
is or may be prejudiced.
NOTE: The Insurance Code provides that a policy
may declare that a violation of specified provisions
thereof shall avoid it. Thus, in fire insurance policies,
which contain provisions that if the claim be in any
respect fraudulent or if any false declaration be
made or used in support thereof, all the benefits
under the policy, shall be forfeited, a fraudulent
discrepancy between the actual loss and that
claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the
insurer (United Merchants Corp. vs. Country Bankers
Insurance Corp, G.R. No. 198588, July 11, 2012).
Event or peril insured against
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
insurable interest, or create a liability against him
subject to the provisions of Chapter I of the
Insurance Code (IC, Sec. 3).
Consent of spouse not necessary
ELEMENTS OF AN INSURANCE CONTRACT
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a
married person on his or her life or that of his or her
children (IC, Sec. 3).
SPEAR:
1. Scheme to distribute losses – Such assumption of
risk is part of a general scheme to distribute
actual losses among a large group or substantial
number of persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible
of pecuniary estimation, known as “insurable
interest.”
4. Assumption of Risk – The insurer assumes that
risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of
loss through the destruction or impairment of
that interest by the happening of designated
peril.
Consent of the person insured is not essential to
the validity of the policy.
So long as it could be proved that the insured has an
insurable interest at the inception of the policy, the
insurance is valid even without such consent (IC,
Sec. 10).
Effect of death of policy’s original owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health
of the person insured shall automatically vest in the
latter upon the death of the original owner, unless
otherwise provided for in the policy (IC, Sec. 3).
81
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Aside from compulsory motor vehicle liability
insurance, the Insurance Code contains no
other provisions applicable to casualty
insurance. Therefore, such casualty insurance
are governed by the general provisions
applicable to all types of insurance, and
outside of such statutory provisions, the rights
and obligations
of the parties must
be determined by their contract, taking
into consideration its purpose and always
in accordance with the general principles of
insurance law
NOTE: The inherent uncertainty of events is
normally described in terms of risk. A contract
possessing only the last three elements enumerated
above is a risk-shifting device, but NOT a contract
of insurance which is a risk-distributing device (De
Leon, 2006).
Moral Hazard Phenomenon
Consequently, however, the existence of insurance
could have the perverse effect of increasing the
probability of loss. This is when the insured, having
in mind the indemnification for loss or damage
caused by the happening of the event insured
against, would have reduced incentive to take steps
to protect himself or his property, subject of
insurance. (Ibid).
6.
7.
CASUALTY INSURANCE
Health and accident insurance are either covered
under life (Sec. 180) or casualty insurance. (Sec.
174)
It is an insurance covering loss or liability arising
from accident or mishap, excluding certain types of
loss which by law or custom are considered as
falling exclusively within the scope of other types of
insurance such as fire or marine (IC, Sec. 176).
8.
2.
3.
4.
5.
Personal accident insurance – a form of
insurance which undertakes to indemnify the
assured against the expense, loss of time, and
suffering resulting from accidents causing him
physical injury, usually by payment at a fixed
rate per week while the consequent disability
lasts, and sometimes including the payment of a
fixed sum to his heirs in case of his death by
accident within the term of the policy.
Public utility insurance – indemnifies against
liability on account of injuries to the person or
property of another. It may extend to
automobiles, elevators, fly wheels, libel,
theaters, and vessels.
Plate glass insurance – an insurance against loss
from accidental breaking of plate-glass
windows, doors, showcases, etc.
Employer's liability and workmen’s insurance –
the risk insured against is the liability of the
assured to make compensation or pay damages
for an accident, injury, or death, occurring to a
servant or other employee, in the course of his
employment under statutes imposing such
liability on employers.
Motor vehicle liability insurance – is a contract
of insurance against passenger and third-party
liability for death or bodily injuries and damage
to property arising from, motor vehicle
accidents.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Other substantially similar kinds of insurance
(Perez, 2006).
Two divisions of casualty insurance (AH-3rd
Party)
Coverage of casualty insurance (P3-EMo-BuHO)
1.
Burglary and theft insurance – an insurance
against loss of property by the depredations of
burglars and thieves.
Health insurance – an indemnity to persons for
expense and loss of time occasioned by disease.
1.
2.
Accident or health insurance – Insurance
against specified perils which may affect
the person and/or property of the insured.
(E.g. personal accident, robbery/theft
insurance)
Third party liability insurance– Insurance
against specified perils which may give rise
to liability on the part of the insured of
claims for injuries or damage to property of
others (De Leon, 2010).
“Accidental”
insurance
82
vs.
“Intentional”
as
used
ACCIACCIDENTD
INTENTIONAL
The terms “accident”
and “accidental” have
been taken to mean
that which happens
by
chance
or
fortuitously, without
intention or design,
which is unexpected,
unusual
or
unforeseen. The term
does not, without
qualification, exclude
events resulting in
damage or loss due to
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
in
Mercantile Law
fault, recklessness or
negligence of third
parties (Sundiang Sr.
& Aquino, 2014 citing
Pan
Malayan
Insurance Corp. V. CA,
G.R. No. 81026, April 3,
1990).
person inflicting the
injury
that
is
controlling. If the
injuries suffered by
the insured clearly
resulted from the
intentional act of a
third person, the
insurer is relieved
from
liability
as
stipulated (Sundiang
Sr. & Aquino, 2014
citing Biagtan v. The
Insular Life Assurance
Co. Ltd, G.R. No. L25579, March 29,
1972).
b.
Rules on Third party liability insurance
1.
2.
3.
4.
a.
Insurable interest is based on the interest
of the insured in the safety of the persons,
and their property, who may maintain an
action against him in case of their injury or
destruction respectively (De Leon, 2010).
In a TPL insurance contract, the insurer
assumes the obligation by paying the
injured third party to whom the insured is
liable. Prior payment by the insured to the
injured third person is not necessary in
order that the obligation of the insurer may
arise. The moment the insured becomes
liable to third persons, the insured acquires
an interest in the insurance contract which
may be garnished like any other credit
(Perla Compania de Seguros, Inc. vs.
Ramolete, G.R. No. L-60887, November 13,
1991).
In burglary, robbery and theft insurance,
the opportunity to defraud the insurer
(moral hazard) is so great that insurer
have found it necessary to fill up the
policies with many restrictions designed to
reduce the hazard. The purpose of the
exception is to guard against liability
should theft be committed by one having
unrestricted access to the property
(Fortune Insurance & Surety Co. vs. CA, G.R.
No. 115278, May 23, 1995).
The right of the person injured to sue the
insurer of the party at fault (insured),
depends on whether the contract of
insurance is intended to benefit third
persons also or only the insured (Eulogio vs.
Del Monte, GR No. L-22042, August 17,
1967). If the contract provides for:
Indemnity against third party liability – The
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 the injured person were especially named
in the policy (Shafer vs. RTC Judge, G.R. No.
78848, November 14, 1988, 1996 Bar).
Indemnity against actual loss or payment –
The third persons cannot proceed against
the insurer, the contract being solely to
reimburse the insured for liability actually
discharged by him through payment to
third persons, said third person’s recourse
being thus limited to the insured alone.
(Guingon vs. Del Monte, G.R. No. L-22042,
August 17, 1967) Prior payment by the
insured is necessary to give rise to the
obligation of the insurer.
Source of liability of third party liability
insurance (1996, 2000 Bar)
The direct liability of the insurer under indemnity
contract against third party liability does not mean
that the insurer can be held solidarily liable with the
insured. The insurer’s liability is based on contract;
that of the insured is based on tort (Figuracion vda.
De Maglana, et. al. v. Hon. Francisco Consolacion, G.R.
No. 60506, August 6, 1992).
Q: Lawrence, a boxer, is a holder of an accident
insurance policy. In a boxing match, he died after
being knocked out by the opponent. Can his
father who is a beneficiary under said insurance
policy successfully claim indemnity from the
insurance company?(1990 Bar)
A: YES. Clearly, the proximate cause of death was
the boxing contest. Death sustained in a boxing
contest is an accident (De la Cruz v. Capital Insurance
& Surety Co., G.R. No. L-21574, June 30, 1966).
Liability of the insurer vs. Liability of the insured
INSURER
The liability is direct but
the insurer cannot be
held solidarily liable
with the insured and
other parties at fault.
Liability is based on
contract.
The third-party liability
is only up to the extent
of the insurance policy
and that required by
law.
83
INSURED
Liability is direct and
can be held liable with
all the parties at fault.
Liability is based on
tort.
The liability extends to
the amount of actual
and other damages
(Heirs Poe v. Malayan
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Insurance, G.R. No.
156302, April 7, 2009).
2.
Q: While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the
latter, Roberto sued Cesar and the third-party
liability insurer for damages and/or insurance
proceeds. The insurance company moved to
dismiss the complaint, contending that the
liability of Cesar has not yet been determined
with finality. Is the contention of the insurer
correct? (1996 Bar)
3.
A: NO, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
determining Cesar’s liability with finality before the
third-party liability insurer could be sued. The
occurrence of the injury to Roberto immediately
gave rise to the liability of the insurer under its
policy. Where an insurance policy insures directly
against liability, the insurer’s liability accrues
immediately upon the occurrence of the injury or
event upon which the liability depends (Shafer vs.
RTC Judge, supra).
Liability of insurer
committing a felony
if
the
insured
SURETYSHIP
Contract of suretyship
It is 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”. It is essentially a credit
accommodation
which
includes
official
recognizances, stipulations bonds or undertakings
issued by any company by virtue and under the
provisions of Act No. 536, as amended by Act No.
2206 (IC, Sec. 177).
was
Liabilities arising out of acts of negligence, which
are also criminal, are also insurable on the ground
that such acts are accidental. Thus, a motor
insurance policy covering the insured’s liability for
accidental injury caused by his negligence, even
though gross and attended by criminal
consequences such as homicide through reckless
imprudence, will not be void as against public
policy. But liability consequences of deliberate
criminal acts are not insurable (Sundiang Sr. &
Aquino, 2014).
The extent of surety’s liability is determined by the
language of the suretyship contract or bond itself. It
cannot be extended by implications beyond the
terms of the contract. Having accepted the bond, the
creditor is bound by the recital in the surety bond
that the terms and conditions of distributorship
contract be reduced in writing or at the very least
communicated in writing to the surety. Such noncompliance by the creditor impacts not on the
validity or legality of the surety-contract but on the
creditor’s right to demand performance (First
Lepanto–Taisho Insurance Corporation vs. Chevron
Philippines, G.R. No. 177839, January 18, 2012).
Nature of liability of surety
“No action” clause
It is a requirement in a policy of liability insurance
which provides that suit and final judgment be first
obtained against the insured, that only thereafter
can the person injured recover on the policy. It
expressly disallows suing the insurer as codefendant (Guingon v. Del Monte, supra).
The liability of the surety or sureties shall be:
1.
2.
A “no action” clause must yield to the provisions of
the Rules of Court regarding multiplicity of suits
(Shafer v. RTC Judge, supra).
3.
Rules in accident insurance
1.
For death or injury to be covered by the policy,
such should not be the natural or probable
result of the insured’s voluntary act, or if
something unforeseen occurs in the doing of the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
act which produces the injury, which may result
to death (Dela Cruz v. Capitol Insurance & Surety
Co., supra).
Suicide and willful exposure to needless peril
are in pari matere because they both signify a
disregard for one’s life. Voluntary exposure to a
known danger is generally held to negate the
accidental character of whatever followed from
the known danger (De Leon, 2010).
The insured’s beneficiary has the burden of
proof in demonstrating that the cause of death
is due to the covered peril. Once that fact is
established, the burden shifts to the insurer to
show any excepted peril that may have been
stipulated by the parties (Vda. De Gabriel v. CA,
G.R. No. 103883, November 14, 1996).
Solidary – Joint and several with the obligor and
Limited or fixed – Limited to the amount of the
bond (It cannot be extended by implication).
Contractual – It is determined strictly by the
terms of the contract of suretyship in relation to
the principal contract between the obligor and
the obligee (IC, Sec. 178).
Suretyship vs. Property Insurance
84
Mercantile Law
SURETYSHIP
It is an accessory
contract.
There
are
three
parties: the surety,
obligor/debtor,
and
the obligee/creditor.
More of a credit
accommodation with
the surety assuming
primary liability
Surety is entitled to
reimbursement from
the principal and his
guarantors for the loss
it may suffer under the
contract.
A bond may be
cancelled by or with
the consent of the
obligee or by the
commissioner or by
the court.
Requires acceptance of
the obligee before it
becomes valid and
enforceable.
A risk-shifting device,
the premium paid
being in the nature of a
service fee.
b.
PROPERTY
INSURANCE
The principal contract
itself.
There are only two
parties: insurer and
insured
3.
2.
Judicial bonds – required in connection with
judicial proceedings (Ibid).
Rules of payment of premiums in suretyship
Generally a contract of
indemnity
1.
No right of recovery for
the loss the insurer
may sustain except
when the insurer is
entitled to subrogation.
2.
3.
May
be
cancelled
unilaterally either by
the insured or by the
insurer on grounds
provided by law.
4.
Does
not
need
acceptance of any third
party.
5.
A
risk-distributing
device, the premium
paid being considered a
ratable contribution to
a common fund. (De
Leon, 2010)
6.
The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and
delivered to the obligor (IC, Sec. 77);
The contract of suretyship or bonding shall not
be valid and binding unless and until the
premium therefor has been paid;
Where the obligee has accepted the bond, it
shall be valid and enforceable notwithstanding
that the premium has not been paid (Philippine
Pryce Assurance Corp. v. CA, G.R.No. 107062,
February 21, 1994);
If the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount;
If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by
the surety; and
In the case of continuing bond (for a term longer
than one year or with no fixed expiration date),
the obligor shall pay the subsequent annual
premium as it falls due until the contract is
canceled (IC, Sec. 179) (De Leon, 2010).
By law and by the specific contract involved in this
case, the effectivity of the bond required for the
obtention of a license to engage in the business of
receiving rice for storage is determined not alone by
the payment of premiums but principally by the
Administrator of the NFA. A continuing bond, as in
this case where, there is no fixed expiration date,
may be cancelled only by the obligee, which is the
NFA, by the Insurance Commissioner, and by the
court (Country Bankers Insurance Corporation vs.
Lagman, G.R. No. 165487, July 13, 2011, in Divina,
2014).
Types of surety bonds (CoFiJud)
1.
Public official bond – required of public
officers for the faithful performance of their
duties and as a condition of entering upon
the duties of their offices.
Contract bonds – These are connected with
construction and supply contracts. It protects
the owner against a possible default by the
contractor or his possible failure to pay
materials, men, laborers and sub-contractors.
The position of surety, therefore, is to answer
for a failure of the principal to perform in
accordance with the terms and specifications of
the contract. There may be two bonds:
a. Performance bond – covers the faithful
performance of the contract; and
b. Payment bond – covers the payment of
laborers and material men.
Q: Fumitechniks Corporation, represented by
Ma. Lourdes Apostol, had applied for and was
issued a surety bond by First Lepanto-Taisho
Insurance Corporation (First Lepanto-Taisho)
for the amount of P15,700,000.00. As stated in
the attached rider, the bond was in compliance
with the requirement for the grant of a credit
line with the Chevron Philippines, Inc.
(Chevron) to guarantee payment of the cost of
fuel products withdrawn within the stipulated
time in accordance with the terms and
conditions of agreement between Chevron and
Fidelity bonds –They pay an employer for loss
growing out of a dishonest act of his employee.
For the purposes of underwriting, they are
classified as:
a. Industrial bond – required by private
employers to cover loss through dishonesty
of employees; and
85
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Fumitechniks. When Fumitechniks defaulted on
its obligation, Chevron notified First LepantoTaisho of Fumitechniks’ unpaid purchases. First
Lepanto-Taisho thereafter demanded to
Fumitechniks the submission of a copy of the
agreement secured by the bond, together with
copies of documents such as delivery receipts.
Fumitechniks, however, denied that it executed
such an agreement with Chevron, thus no copy
of such agreement could be submitted. Because
of this, Chevron Philippines, Inc. sued First
Lepanto-Taisho for the payment of unpaid oil
and
petroleum
purchases
made
by
Fumitechniks. Is the surety liable to the creditor
in absence of a written contract with the
principal?
life insurance contract under the Insurance Code
(IC, Sec. 182).
Who may exercise any right under the policy
In the absence of a judicial guardian, the father, or in
the latter’s absence or incapacity, the mother, of any
minor, who is an insured or a beneficiary under a
contract of life, health, or accident insurance, may
exercise, in behalf of said minor, any right under the
policy, without necessity of court authority or the
giving of a bond, where the interest of the minor in
the particular act involved does not exceed Five
hundred thousand pesos (P500,000.00) or in
such reasonable amount as may be determined
by the Commissioner. Such right may include, but
shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of
the Policy, and giving the minor’s consent to any
transaction on the minor’s consent to any
transaction on the policy.
A: NO. Section 176 of the Insurance Code is clear
that a surety contract should be read and
interpreted together with the contract entered into
between the creditor and the principal. A surety
contract is merely a collateral one, its basis is the
principal contract or undertaking which it secures.
Necessarily, the stipulations in such principal
agreement must at least be communicated or made
known to the surety. Having accepted the bond,
Chevron as creditor must be held bound by the
recital in the surety bond that the terms and
conditions of its distributorship contract be reduced
in writing or at the very least communicated in
writing to the surety. Such non-compliance by the
Chevron impacts not on the validity or legality of the
surety contract but on the creditor’s right to
demand performance (First Lepanto-Taisho
Insurance v. Chevron Philippines, Inc., G.R. No.
177839, January 18, 2012).
In the absence or in case of the incapacity of the
father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of age,
or any relative who has actual custody of the minor
insured or beneficiary, shall act as a guardian
without need of a court order or judicial
appointment as such guardian, as long as such
person is not otherwise disqualified or
incapacitated. Payment made by the insurer
pursuant to this section shall relieve such insurer of
any liability under the contract (IC, Sec. 182).
Reasons why a Life insurance is also a contract
of indemnity
LIFE INSURANCE
This is because of the following reasons:
It is insurance on human lives and insurance
appertaining thereto or connected therewith (Sec.
181, Insurance Code). It includes every contract or
pledge for the payment of endowments or annuities.
It is made payable on the death of the person, or on
his surviving a specified period, or otherwise
contingently on the continuance or cessation of life
(IC, Sec. 182).
1.
2.
3.
4.
Kinds of life insurance policies (GO LITE)
NOTE: Every contract or undertaking for the
payment of annuities including contracts for the
payment of lump sums under a retirement program
where a life insurance company manages or acts as
a trustee for such retirement program shall be
considered a life insurance contract for purposes of
the Insurance Code (IC, Sec. 181).
1.
2.
Every contract or pledge for the payment of
endowments or annuities shall also be considered a
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The liability in life insurance is absolutely
certain
Amount of life insurance generally is without
limit
The policy is a valued policy
There is no direct pecuniary loss required (De
Leon, 2010).
3.
86
Group Life - Essentially a single insurance
contract that provides coverage for many
individuals. Example: In favor of employees;
mortgage redemption insurance.
Ordinary life, general life or old-line policy –
Insured pays a premium every year until he
dies.
Limited payment – Insured pays premium for a
limited period. If he dies within the period, his
Mercantile Law
4.
5.
6.
beneficiary is paid; if he outlives the period, he
does not get anything.
Industrial life – entitles the insured to pay
premiums weekly, or where premiums are
payable monthly or oftener
Term insurance – insured pays premium only
once, and he is insured for a specified period. If
he dies within the period, his beneficiaries
benefit. If he outlives the period, no person
benefits from the insurance.
Endowment – insured pays premium for
specified period. If he outlives the period, the
face value of the policy is paid to him; if not, his
beneficiaries receive the benefit. (Sundiang Sr.
& Aquino, 2014).
pointed the gun at her. Startled, she pushed the
gun aside and said that it may be loaded. Thus,
Tan, to assure her that it was not loaded, pointed
it at his temple. The next moment, there was an
explosion and Tan slumped to the floor lifeless.
Beverly, then claimed the proceeds from Sun
Insurance, but the latter rejected her claim on
the ground that the death of Tan was not
accidental. Beverly sued the insurer. Will
Beverly’s claim prosper? (1993, 1994 Bar)
A: Beverly can recover the proceeds of the policy
from the insurer. The death of the insured was not
due to suicide or willful exposure to needless peril
which are excepted risks. The insured’s act was
purely an act of negligence which is covered by the
policy and for which the insured got the insurance
for his protection. In fact, he removed the magazine
from the gun and when he pointed the gun to his
temple he did so because he thought that it was safe
for him to do so. He did so to assure his sister that
the gun was harmless. There is none in the policy
that would relieve the insurer of liability for the
death of the insured since the death was an accident
(Sun Insurance v CA, G.R. Nos. 79937-38, February 13,
1989).
Contract of life annuity
It is a contract to pay the insured, or a named person
or persons, a sum or sums periodically during life or
certain period (Perez, 2006).
Measure of indemnity under a policy of
insurance upon life or health
GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
policy.
Life insurance vs. Fire/Marine insurance
XPN: The interest of a person insured is susceptible
of exact pecuniary measurement (IC, Sec. 186).
LIFE INSURANCE
Liability of the insurer in case of suicide
It is a contract of
investment not contract
of indemnity.
Always regarded as
valued policy.
May be transferred or
assigned to any person
even if he has no
insurable interest.
The consent of the
insurer is not essential
to the validity of the
assignment of a life
policy unless expressly
required.
Insurable interest in the
life or health of the
person insured need not
exist after the insurance
takes effect or when loss
occurs.
The insurer shall be liable in case of suicide by the
insured if: (FISh)
1.
2.
3.
The suicide is committed after the policy has
been in force for a period of 2 years from the
date of its issue or of its last reinstatement.
The suicide is committed within a shorter
period as provided in the policy.
The suicide is committed in the state of insanity
regardless of the date of commission (IC, Sec.
183).
NOTE: Any stipulation extending the 2-year
period is null and void.
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: “the company shall not be
liable in respect of ‘bodily injury’ consequent
upon the insured person who willfully exposes
himself to needless peril except in an attempt to
save human life". Tan designated his wife,
Beverly as beneficiary.
Insurable interest need
not have any legal basis.
Contingency that is
contemplated
is
a
certain event, the only
One evening, Tan, while playing with his hand
gun, suddenly stood in front of his secretary and
87
FIRE/MARINE
INSURANCE
It is a contract of
indemnity.
May be open or
valued.
The transferee or
assignee must have an
insurable interest in
the thing insured.
Consent,
in
the
absence of waiver by
the
insurer,
is
essential
in
the
assignment of the
policy.
Insurable interest in
the property insured
must exist not only
when the insurance
takes effect but also
when the loss occurs.
Insurable
interest
must have a legal
basis.
The
contingency
insured against may
or may not occur.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
uncertainty being the
time when it will take
place.
The liability of the
insurer
to
make
payment is certain, the
only uncertain element
being
when
such
payment must be made.
May be terminated by
the insured but cannot
be cancelled by the
insurer and is usually a
long-term contract.
The “loss” to the
beneficiary caused by
the death of the insured
can
seldom
be
measured accurately in
terms of cash value.
The beneficiary is under
no obligation to prove
actual financial loss as a
result of the death of the
insured in order to
collect the insurance.
responsible for the accident sustained (First
Integrated Bonding Insurance Co., Inc. v. Hernando,
G.R. No. L-51221, July 31, 1991).
Liability is uncertain
because
the
happening of the peril
insured against is
uncertain.
NOTE: The insurer’s liability accrues immediately
upon the occurrence of the injury or event upon
which the liability depends, and does not depend on
the recovery of judgment by the injured party
against the insured (Shafer v. Judge, RTC, supra).
May be cancelled by
either party and is
usually for a term of
one year
Definitions
1.
Any vehicle propelled by any power other than
muscular power using the public highways, but
excepting road rollers, trolleys cars, street
sweepers, sprinklers, lawn mowers, bulldozers,
graders, forklifts, amphibian trucks, and cranes if
not used in public highways, vehicles which run
only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for
agricultural purposes (Sec. 3[a] of RA 4136).
The
reverse
is
generally true of the
loss of property, i.e., it
is
capable
of
pecuniary estimation.
The
insured
is
required to submit
proof of his actual
pecuniary loss as a
condition precedent
to
collecting
the
insurance.
NOTE: Trailers having any number of wheels, when
propelled or intended to be propelled by
attachment to a motor vehicle shall be classified as
separate motor vehicle with no power rating (Ibid).
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
2.
Passenger
Any fare-paying person being transported and
conveyed in and by a motor vehicle for
transportation of passengers for compensation,
including persons expressly authorized by law or by
the vehicle’s operator or his agents to ride without
fare (IC, Sec. 386, [b]).
Motor vehicle liability insurance
It is a protection coverage that will answer for legal
liability for losses and damages for bodily injuries or
property damage that may be sustained by another
arising from the use and operation of a motor
vehicle by its owner (Compulsory Motor Vehicle
Liability Insurance, prepared and distributed by the
Insurance Commission).
3.
Third-party
Any person other than a passenger as defined in this
section (Ibid) 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, bodily injury, or
damage to property arising out of and in the course
of employment (Sec. 386, [c], Ibid).
Note: It is the only compulsory insurance coverage
under the Insurance Code.
The Insurance Code makes it unlawful for any land
transportation operator or owner of a motor vehicle
to operate the same in public highways unless there
is an insurance or guaranty to indemnify the death
or bodily injury of a third party or passenger arising
from the use thereof (IC, Sec. 387). Registration of
any vehicle will not be made or renewed without
complying with the requirement (IC, Sec. 389).
4.
Owner or Motor vehicle owner (MVO)
Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land
Transportation Office (Sec. 386, [d], Ibid).
Purpose of motor vehicle liability insurance
To give immediate financial assistance to victims of
motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial
capability of motor vehicle owners or operators
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Motor vehicle
5.
88
Land transportation operator (LTO)
Mercantile Law
The owner or owners of motor vehicles for
transportation of passengers for compensation,
including school buses (Sec. 386, [e], Ibid).
2.
3.
Persons required to maintain a compulsory
motor vehicle liability insurance (CMVLI) policy
to operate motor vehicle/s in public highways
1.
2.
Motor vehicle owner (MVO)
Land transportation operator (LTO) (Sec.
387, Ibid).
Limitations with respect to compulsory motor
vehicle liability insurance over solicitation
Scope of coverage required for compulsory
motor vehicle liability insurance
1.
2.
1.
For MVOs, the coverage must be comprehensive
against third party liability for death or bodily
injuries. If the private motor vehicle is being
used to transport passengers for compensation,
the coverage shall include passenger liability.
For LTOs, coverage must be comprehensive
against both passenger and third-party
liabilities for death or bodily injuries (Ins.
Memo. Cir. No. 3-81).
2.
3.
Substitutes for a compulsory motor vehicle
liability insurance policy
2.
No government office or agency having the duty
of implementing the provisions of the Insurance
Code on CMVLI shall act as agent in procuring
the insurance policy or surety bond required;
No official or employee of such office or agency
shall similarly act as such agent; and
The commission of an agent procuring the
corresponding insurance policy or surety bond
shall in no case exceed 10% of the amount of
premiums therefore (IC, Sec. 400).
Effects of the cancellation of the policy
GR: Upon receipt of the notice of such cancellation,
the Land Transportation Office shall order the
immediate confiscation of the plates of the motor
vehicle concerned.
Instead of a CMVLI policy, MVOs or LTOs may either:
1.
Secure, before the insurance policy or surety
bond ceases to be effective, another similar
policy or bond to replace that one canceled;
Without making any replacement, make a cash
deposit in sufficient amount with the Insurance
Commissioner and secure a certification from
the Insurance Commissioner regarding the
deposit made for presentation to and filing with
the Land Transportation Office (CMVLI, supra)
(IC, Sec. 393-394).
Post a surety bond with the Insurance
Commissioner who shall be made the obligee or
creditor in the bond in such amount or amounts
required as limits of indemnity to answer for
the same losses sought to be covered by a
CMLVI policy; or
Make a cash deposit with the Insurance
Commission in such amount or amounts
required as limits of indemnity for the same
purpose (Sec. 390, Ibid)
XPNs: No confiscation will be ordered if said Office
receives any of the following:
1.
2.
After the cash deposit or surety bond has been
proceeded against by the Insurance Commissioner,
such cash deposit shall be replenished or such
surety bond shall be restored by the MVO or LTO in
the right amount/s required as limit of liability
within 60 days after impairment or expiry,
otherwise, he shall secure a CMLVI required (Ibid).
3.
An evidence or proof of a new and valid CMVLI
cover which may be either an insurance policy
or guaranty in cash or surety bond;
A signed duplicate of an endorsement or
addendum issued by the insurance company
concerned showing revival or continuance of
the CMVLI cover; or
A certification issued by the Insurance
Commissioner to the effect that a cash deposit
in the amount required as limit of indemnity
has been made with him by the MVO or LTO
(CMVLI, supra, IC, Sec. 393).
“Own damage” coverage
Duties of motor vehicle owner or land
transportation operator in contemplation of the
cancellation of the policy
It simply meant that the insurer had assumed to
reimburse the costs for repairing the damage to the
insured vehicle, as opposed to damage to third party
vehicle/property. The phrase “own damage” does
not mean damage to the insured car caused by the
assured itself, instead, of third parties (Pan Malayan
Insurance Corporation v. Court of Appeals, supra).
Contemplating the cancellation of the policy, the
MVO or LTO shall:
1.
Give to the insurance or surety company
concerned a written notice of his intention to
cancel;
No fault indemnity clause (1994 Bar)
89
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without
the necessity of proving fault or negligence on
the part of the insured. There is a stipulated
maximum amount to be recovered.
Q: X is a passenger of a jeepney for hire being
driven by Y. The jeepney collided with another
passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
covered by Comprehensive Motor Vehicular
Insurance Coverage. If X wants to claim under
the "no fault indemnity clause", his claim will lie
(2012 Bar)
It is a clause that gives the victim (injured person or
heirs of the deceased) an option to file a claim for
death or injury without the necessity of proving
fault or negligence of any kind to guarantee
compensation or indemnity to injured persons in
motor vehicle accidents.
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
Insurance Code states that in the case of an occupant
of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
mounting or dismounting from.
Rules under the “no fault indemnity clause”
1.
2.
3.
4.
5.
6.
The total indemnity in respect of any one
person shall not exceed P15,000 for all motor
vehicles (Ins. Memo. Circ. No. 4-2006).
Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
c. Medical report and evidence of medical or
hospital disbursement (IC, Sec. 391 [3]).
Authorized driver clause
It indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to:
1.
Claim may be made against one motor vehicle
only (Sec. 391 [c], Ibid).
In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or
dismounting from (Ibid).
In any other case (not an occupant), claim shall
lie against the insurer of the directly offending
vehicle (Ibid).
In all cases, the right of the party paying the
claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained (Ibid).
2.
The insured need not prove that he has a
driver’s license at the time of the accident if he
was the driver (Sundiang Sr. & Aquino, 2014).
Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in
accordance with the law, and is not disqualified
(Villacorta v. Insurance Commissioner, G.R. No.
54171, October 28, 1980).
The main purpose of this clause is to require a
person other than the insured, who drives the
car on the insured’s order or with his
permission, to be duly licensed drivers and
have no disqualification to drive a motor
vehicle.
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
law, by using the word "shall”, makes it mandatory
that the claim be made against the insurer of the
vehicle in which the occupant is riding, mounting or
dismounting from. That said vehicle might not be
the one that caused the accident is of no moment
since the law itself provides that the party paying
may recover against the owner of the vehicle
responsible for the accident (Perla Compania de
Seguros, Inc. v. Ancheta, G.R. No. L-49599, August 8,
1988).
An Irish citizen whose 90-day tourist visa had
expired, cannot recover on his car insurance policy,
not being authorized to drive a motor vehicle
without a Philippine driver’s license (Stokes v.
Malayan Insurance Co., Inc. G.R. No. L-34768,
February 24, 1984).
A driver with an expired Traffic Violation Receipt or
expired Temporary Operator’s permit is not
considered an authorized driver within the meaning
of the insurance policy. The Traffic Violation Receipt
is coterminous with a confiscated license under the
Motor Vehicle Law (Gutierrez v. Capital Insurance &
Surety Co., Inc., G.R. No. L-26287, June 29, 1984).
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds P15,
000 and there is controversy in respect thereto, the
finding of fault may be availed of by the insurer only
as to the excess. The first P15, 000 shall be paid
without regard to the fault (CMVLI, supra).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The insured himself; or
Theft clause
90
Mercantile Law
It is that which includes theft as among the risks
insured against. Where a car is unlawfully and
wrongfully taken without the knowledge and
consent of the owner, such taking constitutes “theft”
and it is the theft clause, not the authorized driver
clause which should apply (Perla Compania de
Seguros, Inc. v. CA, supra).
A: NO, Jack Insurance is not correct. Ric Silat was
merely given physical possession of the car. He did
not have juridical possession over the same. It is
also apparent that the taking by Silat of the car of
Jess is without the consent or authority of the latter.
Thus, the act of Silat in depriving Jess of his car, soon
after the transfer of physical possession of the same
to him, constitutes theft under the insurance policy
that is compensable (Paramount Insurance v.
Spouses Remonduelaz, G.R. No. 173773, November 8,
2012).
The “Theft Clause” of a comprehensive motor
vehicle insurance policy has been interpreted by the
Court in several cases to cover situations like (1)
when one takes the motor vehicle of another
without the latter’s consent even if the motor
vehicle is later returned, there is theft- there being
intent to gain as the use of the thing unlawfully
taken constitutes gain or (2) when there is taking of
a vehicle by another person without the permission
or authority from the owner thereof (Paramount
Insurance vs. Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012).
Q: On February 21, 2013, Barrack entered into a
contract of insurance with Matino Insurance
Company (Matino) involving a motor vehicle.
The policy obligates Matino to pay Barrack the
amount of P600,000 in case of loss or damage to
said vehicle during the period covered, which is
from February 26,2013 to February 26,2014.
On April 16,2013, at about 9:00 am, Barrack
instructed his driver, JJ, to bring the motor
vehicle to a nearby auto shop for tune-up.
However, JJ no longer despite and diligent
efforts to locate the said vehicle, the efforts
proved futile. Resultantly, Barrack promptly
notified Matino of the said loss and demanded
payment of the insurance proceeds of P600,000.
In a letter dated July 5,2013, Matino denied the
claim, reasoning as stated in the contract that
“the company shall not be liable for any
malicious damage caused by the insured, any
member of his family or by a person in the
insured’s service. Is Matino correct in denying
the claim? (2014 Bar)
Theft
There is theft if the vehicle is taken with intent to
gain without the consent of the insured-owner.
Thus, there is theft even if:
1.
2.
3.
The vehicle is returned;
The vehicle was stolen by the driver of the
insured (Alpha Insurance and Surety Company v.
Castor, G.R. 198174, September 2, 2013);
The vehicle was taken to the owner of a repair
shop for the purpose of repair and in order to
attach accessories (Paramount Insurance v.
Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012) (Sundiang Sr. & Aquino,
2014).
A: Matino Insurance is not correct in denying the
claim. The loss of the motor vehicle is not excluded
under the insurance policy as the loss was due to
theft, not malicious damage.
The “malicious
damage” clause under the policy is not applicable
but rather the “theft” clause. Thus, the provision
under the policy that "the company shall not be
liable for any malicious damage caused by the
insured, any member of his family or by a person in
the insured’s service” is not applicable (Alpha
Insurance and Surety Co. v. Castor, G.R. No. 198174,
September 2,2003).
Q: On May 26, 2014, Jess insured with Jack
Insurance (Jack) his 2014 Toyota Corolla sedan
under a comprehensive motor vehicle insurance
policy for one year. On July 1, 2014, Jess’ car was
unlawfully taken.
Hence, he immediately
reported the theft to the traffic Management
Command (TMC) of the Philippine National
Police (PNP), which made Jess accomplish a
complaint sheet as part of its procedure. In the
complaint sheet, Jess alleged that a certain Ric
Silat (Silat) took possession of the subject
vehicle to add accessories and improvements
thereon. However, Silat failed to return the
subject vehicle within the agreed three- day
period. As a result, Jess notified Jack of his claim
for reimbursement of the value of the lost
vehicle under the insurance policy. Jack refused
to pay claiming that there is no theft as Jess gave
Silat lawful possession of the car. Is Jack
correct? (2014 Bar)
Q: When a passenger jeepney, insured but with
an authorized driver’s clause and was driven by
a driver who only holds a Traffic Violation
Report (TVR) because his license was
confiscated, met an accident, may the owner of
the jeepney claim from the insurance company?
(2003 Bar)
A: YES. The fact that the driver was merely holding
a TVR does not violate the condition that the driver
91
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
should have a valid and existing driver’s license.
Besides, such a condition should be disregarded
because what is involved is a passenger jeepney, and
what is involved here is not own damage insurance
but third party liability where the injured party is a
third party not privy to the contract of insurance.
him as sole beneficiary, given that he did not
have a steady source of income and he always
depended on Bianca both emotionally and
financially. During the term of the insurance,
Bianca died of what appeared to be a mysterious
cause so that which led Carlo to immediately
requested for an autopsy to be conducted. It was
established that Bianca was transgender all
along – a fact unknown to Carlo. Can Carlo claim
the insurance benefit? (2014 Bar)
INSURABLE INTEREST
An insurable interest is that interest which a person
is deemed to have in the subject matter insured,
where he has a relation or connection with or
concern in it, such that the person will derive
pecuniary benefit or advantage from the
preservation of the subject matter insured and will
suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening
of the event insured against.
A: YES, Carlo can claim the insurance benefit. He
had insurable interest on Bianca’s life under Section
10(b) of the Insurance Code as the problem states
that Carlo “always depended on Bianca both
emotionally and financially.” The insurable interest
upon the life of another under the aforesaid
provision need not be based on kinship or legal
obligation to give support. The fact that their
marriage may be void is irrelevant.
NOTE: The existence of insurable interest is a
matter of public policy and is not susceptible to the
principle of estoppel. The existence of an insurable
interest gives a person the legal right to insure the
subject matter of the policy of insurance (Violeta R.
Lalican vs. The Insular Life Assurance Co. Ltd., G.R. No.
183526, August 25, 2009).
Insurable interest in life insurance vs. Insurable
interest in property insurance (2002 Bar)
LIFE
As to extent
GR: Every person has
an unlimited insurable
interest in his own life
Mere hope or expectancy is not insurable
Limited to the actual
value of the property
XPN:
Where
life
insurance is taken out
by a creditor on the life
of the debtor, insurable
interest is limited to
the amount of debt
When must insurable interest exist
GR: Must exist twice,
i.e, both at the time the
policy takes effect and
the time of loss, but
need not exist in the
period in between (IC,
Sec. 19).
A mere contingent or expectant interest in anything,
not founded on an actual right to the thing, nor upon
any valid contract for it, is not insurable (ICC, Sec.
16).
When does a person have insurable interest?
GR: A person is deemed to have an insurable
interest in the subject matter insured when a person
has a relation or connection with or concern in the
subject matter, such that he will derive pecuniary
benefit or advantage from its preservation and will
suffer pecuniary loss from its destruction or injury
by the happening of the event insured against.
However, in some cases, expectation of benefit from
the continued life of that person need not
necessarily be of pecuniary nature to have an
insurable interest in the life of a person (De Leon,
2010).
Must exist at the time
the policy takes effect
and need not exist
thereafter (IC, Sec. 19).
Q: Carlo and Bianca met in the La Boracay
festivities. Immediately, they fell in love with
each other and got married soon after. They
have been cohabiting blissfully as husband and
wife, but they did not have any offspring. As the
years passed by, Carlo decided to take out
insurance on Bianca’s life for P1 million with
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
PROPERTY
XPN: IC, Secs. 21-24;
25, 57.
1. A change in interest
in a thing insured, after
the occurrence of an
injury which results in
a loss, does not affect
the right of the insured
to indemnity for the
loss (IC, Sec. 21).
2. A change of interest
in one or more several
92
Mercantile Law
distinct
things,
separately insured by
one policy, does not
avoid the insurance as
to the others (IC, Sec.
22).
interest over the life of
the insured.
(De Leon, 2010; Sundiang Sr. & Aquino, 2014)
3. A change on interest,
by will or succession,
on the death of the
insured, does not avoid
an insurance; and his
interest
in
the
insurance passes to the
person taking his
interest in the thing
insured (IC, Sec. 23).
For both life and property insurance, the insurable
interest is required to exist at the time of perfection
of the policy. For property insurance, the insurable
interest must also exist at the time of loss, however,
in case of life insurance, the insurable interest need
to exist only at the time of perfection and not
thereafter (IC, Sec. 19).
Existence of insurable interest in life and
property insurance
Change of beneficiary
GR: The insured shall have the right to change the
beneficiary he designated in the policy
4. A transfer of interest
by one of several
partners, joint owners,
or owners in common,
who
are
jointly
insured, to the others,
does not avoid an
insurance even though
it has been agreed that
the insurance shall
cease
upon
an
alienation of the thing
insured (IC, Sec. 24).
XPN: If the insured expressly waived this right in
the said policy.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable (IC, Sec. 11).
NOTE: Under Sec. 64 of the Family Code, the
innocent spouse is allowed to revoke the
designation of the other spouse as irrevocable
beneficiary after legal separation.
5. Every stipulation in a
policy of insurance for
the payment of loss
whether the person
insured has or has not
any interest in the
property insured, or
that the policy shall be
received as proof of
such interest, and
every policy executed
by way of gaming or
wagering, is void (IC,
Sec. 25).
As to the beneficiary’s interest
GR: The beneficiary The beneficiary must
need
not
have have insurable interest
insurable interest over over the thing insured.
the life of the insured if
the insured himself NOTE:
Insurable
secured the policy.
interest
is
an
indispensable
XPN: However, if the requirement.
life insurance was
obtained
by
the
beneficiary, the latter
must have insurable
Effects of Irrevocable
Beneficiary:
a.
b.
c.
d.
e.
Designation
a
The insured cannot assign the policy if the
designation of the beneficiary is irrevocable.
The irrevocable beneficiary has a vested right
(2005 Bar; Sundiang Sr. & Aquino, 2014).
The beneficiary designated in a life insurance
contract cannot be changed without the consent
of the beneficiary (Gercio v. Sun Life Assurance
of Canada, 48 Phil. 53, 28 September 1925).
A new beneficiary cannot be added to the
irrevocably designated beneficiary for this
would in effect reduce the latter’s vested rights
(Go v. Redfern, 72 Phil. 71, 25 April 1941).
The irrevocably designated beneficiary may
obtain a policy loan to the extent stated in the
schedule of values attached to the policy (Gercio
v. Sun Life Assurance of Canada, 48 Phl. 53, 28
September 1925).
The insured cannot take the cash surrender
value assign or even borrow on said policy
without the consent of the beneficiary.
IN LIFE/ HEALTH
93
of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Two general classes of life policies
1.
Sotero validly designate
beneficiary? (2014 Bar)
Insurance upon one’s life – are those taken out
by the insured upon his own life for the benefit:
(HET)
a. Of himself;
b. Of his estate, in case it matures only at his
death;
c. Of third person who may be designated as
beneficiary.
a.
b.
c.
d.
Persons prohibited from being designated as
beneficiaries (1998 Bar)
Under the Article 739 in relation to Art. 2012 of the
New Civil Code, the following are prohibited
designation of beneficiaries:
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
5.
1.
Sotero did not personally apply for
insurance coverage, as she was illiterate.
Sotero was sickly since 1990.
Sotero did not have the financial capability
to pay the premium on the policy.
Sotero did not sign the application for
insurance
Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
Those made between persons who were guilty
of adultery or concubinage at the time of
donation.
NOTE: The guilt of the donor and done may be
proved by preponderance of evidence in the
same civil action. Criminal conviction is not
necessary.
2.
3.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
His spouse and of his children.
Any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest.
Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent
the performance.
Of any person upon whose life any estate
or interest vested in him depends (IC, Sec.
10).
NOTE: In paragraph (a) of Section 10 of the
Insurance Code, mere relationship is sufficient
while the rest (pars. b, c, and d) requires pecuniary
interest. Thus, the interest of the creditor over the
life of the debtor ceases upon full payment
(Sundiang Sr. & Aquino, 2009).
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on August 30,1993, after the requisite medical
examination and payment of the premium.
4.
as
2. Insurance upon life of another – are those taken
out by the insured upon the life of another. Where a
person names himself beneficiary in a policy he
takes on the life of another, he must have insurable
interest in the life of the latter. This class includes
the following: (SELD)
Q: X is the common-law wife of Y. Y loves X so
much that he took out a life insurance on his own
life and made her the sole beneficiary. Y did this
to ensure that X will be financially comfortable
when he is gone. Upon the death of Y, who should
be entitled to the proceeds? (2012 Bar)
A: X as sole beneficiary under the life insurance
policy on the life of Y will be entitled to the proceeds
of the life insurance.
2.
3.
niece
A: YES. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws pertinent to the
problem.
The question of insurable interest is immaterial
where the policy is procured by the person whose
life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Article
2012 in relation to Article 739 of the New Civil Code
(De Leon, 2010).
1.
her
94
Those made between persons found guilty of
the same criminal offense, in consideration
thereof.
Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
Mercantile Law
The designation of the above-enumerated persons
is void but the policy is binding. The estate will get
the proceeds (Sundiang Sr. & Aquino, 2009).
A: The estate is entitled to claim for the proceeds of
the insurance policy. As a general rule, the insured
may designate anyone he wishes to be his/her
beneficiary. However, Art. 2012 of the Civil Code,
which applies suppletorily to the Insurance Code,
provides 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 any donation to him,
according to said article. Art. 739 specifically bars
the donations as between persons who were guilty
of adultery or concubinage. Since Purita is a
common-law wife of Juan, she falls squarely in to
this category therefore she is disqualified to receive
insurance proceeds and when this happens, the
estate of the deceased is the one entitled to the
proceeds (Insular Life Assurance Company, Ltd. vs.
Capronia Ebrado, supra).
Art. 2012. 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 any donation to him,
according to said article.
NOTE: A beneficiary in a life insurance policy is no
different from a donee. Both are recipients of pure
beneficence. So long as marriage remains the
threshold of family laws, reason and morality
dictate that the impediments imposed upon
married couple should likewise be imposed upon
extra-marital relationship. If legitimate relationship
is circumscribed by these legal disabilities, with
more reason should an illicit relationship be
restricted by these disabilities. (Insular Life v.
Ebrado G.R. No. L-44059 October 28, 1977)
Q: Loreto designated Eva, his common-law wife,
and illegitimate children as beneficiaries in his
life insurance policies. Loreto was killed and
Eva was the prime suspect in his death. The
legitimate wife and children of Loreto asked for
the insurance proceeds contending that
illegitimate family is disqualified from being
beneficiaries and that the insurance benefits
must redound to the benefit of the estate of
Loreto. Will the claim of the legitimate family
prosper?
Beneficiary willfully brought about the death of
the insured (2008 Bar)
GR: The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully
bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid
to the estate of the insured (IC, Sec. 12).
A: NO. The insurance proceeds shall be applied
exclusively to the proper interest of the person in
whose name or for whose benefit it is made unless
otherwise specified in the policy.
XPNs: (IUD)
1. Insanity of the beneficiary at the time he killed
the insured
2. The insured’s death was unintentionally caused
(e.g., thru accident);
3. The beneficiary acted in self-defense;
While the share of Eva must be forfeited, the
designation of the illegitimate children as
beneficiaries remains valid. There is no proscription
in naming illegitimate children as beneficiaries. It is
only in cases where the insured has not designated
beneficiary or when the designated beneficiary is
disqualified by law to receive the proceeds, that the
policy proceeds shall redound to the benefit of the
estate of the insured. Thus, the proceeds of the
policy must be awarded to the illegitimate children,
to the exclusion of the legitimate family (Heirs of
Loreto Maramag vs. Maramag, G.R. No. 181132, June
5, 2009).
Q: Juan de la Cruz was issued Policy No. 8888 of
the Midland Life Insurance Co. on a whole life
plan for P20,000 on August 19, 1989. Juan is
married to Cynthia with whom he has three
legitimate children. He, however, designated
Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three
(3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also
filed a claim as the legal wife. To whom should
the proceeds of the insurance policy be
awarded? (1998 Bar)
IN PROPERTY
Every interest in property, whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that contemplated
peril might directly damnify the insured, is
insurable interest (IC, Sec. 13).
95
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Insurable interest in property may consist of the
following (1991 Bar): (ExInEx)
A common carrier or depository’s extent of
insurable interest in a thing held by him
1.
A carrier or depositary has an insurable interest in
a thing held by him as such, to the extent of his
liability but not to exceed the value thereof, because
the loss of the thing by the carrier or depository may
cause liability against him to the extent of its value
(IC, Sec. 15).
An existing interest – The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from
legal title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged; or
c. Lessor of the property leased (De Leon,
supra).
Change of interest in any part of a thing insured
“Change of interest” contemplated by law is an
absolute transfer of the insured’s entire interest in
the property insured to one not previously
interested or insured (Perez, 2006).
Examples of insurable interest arising from
equitable title:
a. Purchaser of property before delivery or
before he has performed the conditions of
the sale;
b. Mortgagee of property mortgaged; or
c. Mortgagor, after foreclosure but before the
expiration of the redemption period. (De
Leon, 2010).
2.
GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change
in interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person (IC, Sec. 20; Sec.58).
An inchoate interest founded on an existing
interest.
XPNs: (PLADS-JOF)
1. When there is a prohibition against alienation
or change of interest without the consent of the
insurer in which case the policy is not merely
suspended but avoided (Sundiang & Aquino,
2014., citing Curtis vs. Girard Fire and Marine
Ins., 11 SE 3, 190 Ga. 954).
2. In life, accident, and health insurance. (IC, Sec.
20)
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss
does NOT affect the right of the insured to
indemnity for loss (IC, Sec. 21).
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation (De Leon, 2014).
3.
An expectancy coupled with an existing interest
in that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel
cannot be invoked (Sundiang Sr. & Aquino, 2014).
NOTE: After the occurrence of the peril insured
against, the insured acquired a vested right over
the proceeds of the policy.
Measure of insurable interest in property (2000
Bar)
4.
Under Sec. 17, the measure of insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof. Insurable
interest in property does not necessarily imply a
property interest in, or lien upon, or possession of,
the subject matter of the insurance, and neither title
nor a beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
2006).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
5.
6.
7.
96
A change of interest in one or more distinct
things, separately insured by one policy does
NOT avoid the insurance as to the others (IC,
Sec. 22).
A change of interest by will or succession, on
the death of the insured, does NOT avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured (IC, Sec. 23).
A transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an
insurance even though it has been agreed that
the insurance shall cease upon an alienation of
the thing insured (IC, Sec. 24).
When the policy is so framed that it will inure to
the benefit of whomsoever, during the
Mercantile Law
continuance of the risk, may become the owner
of the interest insured (IC, Sec. 57).
DOUBLE INSURANCE AND OVER INSURANCE
Double insurance
Double insurance exists where the same person is
insured by several insurers separately, in respect to
the same subject and interest (IC, Sec. 95).
Requisites of double insurance (STRIP)
1.
2.
3.
4.
5.
Subject matter is the same
Two or more insurers insuring separately
Risk or peril insured against is the same
Interest insured is the same
Person insured is the same
When the amount of
the
insurance
is
beyond the value of the
insured’s
insurable
interest.
There are two or more
insurers insuring the
same subject matter.
There may be only one
insurer, with whom the
insured
takes
insurance beyond the
value of his insurable
interest.
Rules when the insured in a policy other than
life is over insured by double insurance
1. The insured, unless the policy otherwise
provides, may claim payment from the insurers
in such order as he may select, up to the amount
which the insurers are severally liable under
their respective contracts.
2. Where the policy under which the insured
claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the policy without regard to
the actual value of the subject matter insured.
3. Where the policy under which the insured
claims is an unvalued policy, any sum received
by him under any policy shall be deducted
against the full insurable value, for any sum
received by him under any policy.
4. Where the insured receives any sum in excess
of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
insurers, according to their right of
contribution among themselves.
5. Each insurer and the other insurers, to
contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract (IC, Sec. 96).
There is no double insurance even though two
policies were both issued over the same subject
matter and both covered the same peril insured
against if the two policies were issued to two
different entities (Malayan Insurance Co. vs.
Philippine First Insurance Co., G.R. No. 184300, July
11, 2012).
Double insurance is not prohibited by law
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up
to the extent of the value of the thing insured but not
to exceed the amount of the policies issued.
A provision in the policy that prohibits double
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed (Perez,
2006).
Nature of the liability of the several insurers in
double insurance (2005 Bar)
In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he
is liable under his contract. This is known as the
“principle of contribution” or “contribution clause”
[IC, Sec. 96(e)].
Additional or other insurance clause (2008 Bar)
A clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer
(Pioneer Insurance and Surety Corp vs. Yap, G.R. No.
L-36232, December 19, 1974).
Over insurance
The insurer may insert an “other insurance clause”
to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud. It is lawful and specifically
allowed under Sec. 75 of the Insurance Code which
provides that “a policy may declare that a violation
or a specified provision thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid it.”
There is over insurance whenever the insured
obtains a policy in an amount exceeding the value of
his insurable interest (Perez, 2006).
Double Insurance vs. Over Insurance
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.
OVER INSURANCE
97
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Waiver of violation
Absence of notice of existence of other insurance
constitutes fraud
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
G.R. No. L-33131, December 13, 1930).
When the insurance policy specifically requires that
notice should be given by the insured of the
existence of other insurance policies upon the same
property, the total absence of such notice nullifies
the policy. Such failure to give notice of the
existence of other insurance on the same property
when required to do so constitutes deception and it
could be inferred that had the insurer known that
there were many other insurance policies on the
same property, it could have hesitated or plainly
desisted from entering into such contract (Perez,
2006).
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance
Co., Inc. (PFIC) to secure its interest over its own
products while the same were being
transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services,
Inc. (Reputable). Under the contract, Reputable
undertook to answer for all risks with respect to
the goods and shall be liable to Wyeth, for the
loss, destruction, or damage of the
goods/products due to any and all causes
whatsoever, including theft, robbery, flood,
storm, earthquakes, lightning, and other force
majeure while the goods/products are in transit
and until actual delivery to the customers,
salesmen, and dealers. The contract also
required Reputable to secure an insurance
policy on Wyeth’s goods. Thus, Reputable signed
a Special Risk Insurance Policy (SR Policy) with
Malayan Insurance Co., Inc., (Malayan) for the
amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR
policy between Malayan and Reputable) so as to
preclude PFIC from claiming indemnity from
Malayan?
No policy of insurance shall be cancelled except
upon notice thereof to the insured
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of P1 Million for 1 year. The policy was
issued with the premium fixed at P60,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
A: YES. As a general rule, no policy is binding unless
the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
allowing the insured to pay the premium in
installments and partial payment has been made at
the time of loss. In the case at hand Francis already
paid two installments at the time of the loss and as
such may recover on the policy (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6,
1992). Furthermore, the contention of the insurer
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
notice thereof to the insured (IC, Sec. 64).
A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
policy issued by PFIC was in consideration of the
legal and/or equitable interest of Wyeth over its
own goods. On the other hand, what was issued by
Malayan to Reputable was over the latter’s
insurable interest over the safety of the goods,
which may become the basis of the latter’s liability
in case of loss or damage to the property and falls
within the contemplation of Section 15 of the IC.
Therefore, even though the two concerned
insurance policies were issued over the same goods
and cover the same risk, there arises no double
insurance since they were issued to two different
persons/entities having distinct insurable interests.
Necessarily, over insurance by double insurance
cannot likewise exist (Malayan Insurance Co., Inc., v.
Philippine First Insurance Co., Inc. and Reputable
Forwarder Services, Inc., G.R. No. 184300, July 11,
2012).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Cancellation of policy of insurance by reason of
over insurance
Sec. 64 of the IC provides that upon discovery of
other insurance coverage that makes the total
insurance in excess of the value of the property
insured, the insurer may cancel such policy of
insurance; provided there is prior notice and such
98
Mercantile Law
circumstance occurred after the effective date of the
policy.
Q: To secure a loan of P10 million, Mario
mortgaged his building to Armando. In
accordance with the loan arrangements, Mario
had the building insured with First Insurance
Com for P10 million, designating Armando as
the beneficiary.
Armando also took an
insurance on the building upon his own interest
with Second Insurance Company for P5 million.
The building was totally destroyed by fire, a
peril insured against under both insurance
policies. It was subsequently determined that
the fire had been intentionally started by Mario
and that in violation of the loan agreement, he
had been storing inflammable materials in the
building.
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY
Instances where more than one insurable
interest may exist in the same property
1.
2.
3.
4.
5.
6.
Trust - both trust or and trustee have insurable
interest over the property in trust.
Corporation - both the corporation and its
stockholders have insurable interest over the
assets.
Partnership - both the firm and partners have
insurable interest over its assets.
Assignment - both the assignor and assignee
have insurable interest over the property
assigned.
Lease - the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
Mortgage - both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
a.
How much, if any, can Armando recover
from either or both insurance companies?
b. What happens to the P10 million debt of
Mario to Armando? Explain. (2010 Bar)
A:
a. Armando can receive P5 million from Second
Insurance Company. As mortgagee, he had an
insurable interest in the building. Armando
cannot collect anything from First Insurance
Co., since the latter is not liable for the loss of
the building. First, it was due to a willful act of
Mario, who committed arson. Second, fire
insurance policies contain a warranty that the
insured will not store hazardous materials
within the insured premises. Mario breached
this warranty when he stored inflammable
materials in the building. These two factors
exonerate First Insurance Co. from liability to
Armando as mortgagee even though it was
Mario who committed them (IC, Sec. 8; Sec. 87).
b. Since Armando would have collected P5 million
from Second Insurance Company, this amount
should be considered as partial payment of the
loan. Armando can only collect the balance of P5
million. Second Insurance Co. can recover from
Mario the amount of P5 million it paid, because
it became subrogated to the rights of Armando.
Insurable interest of mortgagor and mortgagee
in case of a mortgaged property are NOT the
same (1999, 2010 Bar)
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure
to the benefit of the other. The same is not open to
objection that there is double insurance (RCBC vs.
CA, 289 G.R. Nos. 128833-34, 128866, April 20, 1998;
IC, Sec. 8).
Extent of insurable interest of mortgagor and
mortgagee (1999 Bar)
1.
2.
Mortgagor – The mortgagor of property, as
owner, has an insurable interest to the
extent of its value even though the
mortgage debt equals such value.
Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged
property to the extent of the debt secured;
such interest continues until the mortgage
debt is extinguished (Sundiang Sr. & Aquino,
2014).
Standard or union mortgage clause
It is a clause that states that the acts of the
mortgagor do not affect the mortgagee. The purpose
of the clause is to make a separate and distinct
contract of insurance on the interest of the
mortgagee (De Leon, 2010).
NOTE: In case of an insurance taken by the
mortgagee alone and for his benefit, the mortgagee,
after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes
by subrogation to the insurer to the extent of the
insurance money paid (De Leon, 2010).
Open or loss-payable mortgage clause
It is a clause which provides for the payment of loss,
if any, to the mortgagee as his interest may appear
and under it, the acts of the mortgagor affect the
mortgagee (De Leon, 2010).
99
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
In a policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as
such by the insurer but not made a party to the
contract itself. This kind of policy covers only such
interest as the mortgagee has at the issuance of the
policy (Sundiang Sr. & Aquino, 2014, Geagonia v. CA,
supra).
The assignment is merely to afford the mortgagee a
greater security for the settlement of the
mortgagor’s obligation and should not be construed
as payment in just the same way that delivery of
negotiable instruments does not constitute
payment until the proceeds are realized or collected
(Perez, 2006).
Note: The exception of this rule is the “Mortgage
Redemption Insurance”
The mortgagee may be made a beneficial payee
through any of the following:
Effects of “mortgage redemption” insurance
procured by the mortgagor
1.
A “mortgage redemption insurance” is simply a kind
of life insurance procured by the mortgagor, with
the mortgagee as beneficiary, up to the extent of the
mortgage indebtedness. Its rationale is to give
protection to both the mortgagee and the
mortgagor. In case the mortgagor-insured dies, the
proceeds of such insurance will be applied to the
payment of the mortgage debt to the mortgagee,
thereby relieving the heirs of the mortgagor of the
burden of paying the debt (Great Pacific Assur. Corp.
v. CA, et. al., G.R. No. 113899, October 13, 1999).
2.
3.
4.
He may become the assignee of the policy with
the consent of the insurer;
He may be the pledgee without such consent of
the insurer;
A rider making the policy payable to the
mortgagee “as his interest may appear” may be
attached; or
A “standard mortgage clause” containing a
collateral independent contract between the
mortgagee and the insurer may be attached.
The policy, though, by its terms payable absolutely
to the mortgagor; may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee’s benefit, in which case the mortgagee
acquires an equitable lien upon the proceeds (Ibid.).
PERFECTION OF THE
CONTRACT OF INSURANCE
Effects if the insurance is procured by
mortgagor for benefit of mortgagee, or policy
assigned to mortgagee
1.
2.
3.
4.
5.
Policy of insurance
It is the written instrument in which the contract of
insurance is set forth (IC, Sec. 49). It is the written
document embodying the terms and stipulations of
the contract of insurance between the insured and
insurer.
The contract is deemed to be upon the interest
of the mortgagor; hence he does not cease to be
party to the contract.
Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands
of the mortgagee.
Any act which under the contract of insurance
is to be performed by the mortgagor may be
performed by the mortgagee with the same
effect.
In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time
of loss and.
The debt is extinguished upon recovery by the
mortgagee to the extent of his credit (Sundiang
Sr. & Aquino, 2014, citing IC, Sec. 8).
The policy is not necessary for the perfection of the
contract (Sundiang Sr. & Aquino, 2014).
Form of an insurance contract
1.
2.
NOTE: The rule on subrogation by the insurer to the
right of the mortgagee does not apply in this case.
3.
Assignment of policy to mortgagee is not a
payment
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
100
The policy shall be in printed form which may
contain blank spaces to be filled in.
Any rider, clause, warranty or endorsement
purporting to be part of the contract of
insurance and which is pasted or attached to
said policy is not binding on the insured, unless
the descriptive title or name of the rider, clause,
warranty or endorsement is also mentioned
and written on the blank spaces provided in the
policy.
Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned
by the insured or owner.
Mercantile Law
NOTE: Notwithstanding the foregoing, the policy
may be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to such
rules and regulations as may be prescribed by the
Commissioner (IC, Sec. 50).
contemplated under Section 1(1) of the Insurance
Code subject to the following rules:
1.
2.
Types of policy of insurance (OVaR)
1.
2.
3.
Open – one in which the value of the thing
insured is not agreed upon, and the amount of
the insurance merely represents the insurer’s
maximum liability. The value of such thing
insured shall be ascertained at the time of the
loss (IC, Sec. 60).
Valued – is one which expresses on its face an
agreement that the thing insured shall be
valued at a specific sum (IC, Sec. 61).
Running – 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 (IC, Sec.
62).
3.
4.
5.
6.
7.
Basic contents of a policy (P3AIR2)
1.
2.
3.
4.
5.
6.
7.
Parties
Period during which the insurance is to
continue
Property or life insured
Amount of insurance, except in open or running
policies
Interest of the insured in the property if he is
not the absolute owner
Risk insured against
Rate of premium (IC, Sec. 51)
The cover note shall be issued or renewed only
upon prior approval of the Insurance
Commission;
The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
issuance;
No separate premium (separate from the policy
or main contract) is required for the cover note;
The cover note may be canceled by either party
upon prior notice to the other of at least seven
(7) days;
The policy should be issued within sixty (60)
days after the issuance of the cover note;
The sixty (60)-day period may be extended
upon written approval of the Insurance
Commission; and
The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president or
general manager of the insurer that the risk
involved, the values of such risks and premium
therefor, have not as yet been determined or
established and the extension or renewal is not
contrary to or is not for the purpose of violating
the Insurance Code or any rule
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an insurance contract
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, November 29,
1920).
Rider
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
restricting its benefits or excluding certain
conditions from the coverage (Black’s Law
Dictionary).
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result
in the perfection of the contract of insurance.
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy.
It should be countersigned by the insured or owner
unless he was the one who applied for the same (IC,
Sec. 50).
Insurance contracts through correspondence follow
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer
except from the time it came to his knowledge
(Enriquez v. Sun Life Assurance Co., GR No. L-15774,
Nov. 29, 1920).
Cover notes
Q: On June 1, 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21,
2011, the insurance company accepted the
application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
Persons who wish to be insured may get protection
before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
insurer shall be deemed an insurance contract as
101
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
residence on August 11. On August 4, 2011, X
figured in a car accident. He died a day later. May
X's heirs recover on the insurance policy? (2011
Bar)
2.
If he pays the premium with his application, his
application will be considered an offer (De Leon,
2010).
DELAY IN ISSUANCE OF POLICY
A: NO, since X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the “cognition theory”. Where the
applicant died before he received notice of the
acceptance of his application for the insurance,
there is no perfected contract (Perez v. Court of
Appeals, G.R. No. 112329, January 28, 2000).
Delivery of policy
Delivery is not necessary in the formation of the
contract of insurance since the contract of insurance
is consensual (Sundiang Sr. & Aquino, 2014).
The mere delivery of an insurance policy to
someone does not give rise to the formation of a
contract in the absence of proof that he had agreed
to be insured.
Q: Jason is the proud owner of a newly-built
house worth PS million. As a protection against
any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on
October 11, 2016 and paid the premium in cash.
It took the company a week to approve Jason's
application. On October 18, 2016, Shure mailed
the approved policy to Jason which the latter
received five (5) days later. However, Jason's
house had been razed by fire which transpired a
day before his receipt of the approved policy.
Jason filed a written claim with Shure under the
insurance policy. Shure prays for the denial of
the claim on the ground that the theory of
cognition applies to contracts of insurance.
Decide Jason's claim with reasons. (2016 Bar)
The contract may be completed prior to delivery of
the policy or even without the delivery of the policy
depending upon the intention of the parties. The
policy may contain a provision that states that the
insurance is not effective until the delivery of the
policy. (De Leon, 2010)
Two types of delivery
1.
2.
A: Jason’s claim should be denied. What governs
insurance contract is the cognition theory whereby
the insurance contract is perfected only from the
time the applicant came to know of the acceptance
of the offer by the insurer. In this case, the loss
occurred a day prior to Jason’s knowledge of the
acceptance by Shure of Janson’s application. There
being no perfected insurance contact, Jason is not
entitled to recover from Shure.
Actual – delivery to the person of the insured.
Constructive
a. By mail –If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is
considered constructively delivered if
insured died before receiving the policy.
b. By agent –If delivered to the agent of the
insurer, whose duty is ministerial, or
delivered to the agent of the insured, the
policy is considered constructively
delivered (De Leon, 2010).
PREMIUM PAYMENT
Premium
Offer in property and liability insurance
It is an agreed price for assuming and carrying the
risk – that is, the consideration paid to an insurer for
undertaking to indemnify the insured against a
specified peril (De Leon, 2010).
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counteroffer. The offer is usually accepted by an insurance
agent on behalf of the insurer (De Leon, 2010).
The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured
from allowing a policy to elapse through a failure to
make premium payments. The continuance of the
insurer's obligation is conditional upon the
payment of premiums, so that no recovery can be
had upon a lapsed policy, the contractual relation
between the parties having ceased (Philippine
Phoenix Surety & Insurance Company vs.Woodworks,
Inc. G.R. No. L-25317 August 6, 1979).
Offer in life and health insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1.
If he does not pay the premium, his application is
considered an invitation to the insurer to make
an offer, which he must then accept before the
contract goes into effect.
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Mercantile Law
Premium vs. Assessment
PREMIUM
Levied and paid to
meet
anticipated
losses
Premium is not a debt
ASSESSMENT
Collected to
actual losses
meet
5.
Assessment
when
properly levied is a
debt, unless otherwise
expressly agreed
6.
Acceptance of premium
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms (Stoke
v. Malayan Insurance Co., Inc., G.R. No. L-34768,
February 28, 1984).
Example: In compulsory motor vehicle
insurance, if the policy was issued without
payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
otherwise would prejudice the 3rd party victim.
1. Payment in installments
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v.
Arnaldo G.R. No. L-67835, October 12, 1987 and
Areola v. CA G.R. No. 95641, September 22, 1994).
Q: American Home Assurance Co. (AHAC) ,
issued
in
favor
of
Makati
Tuscany
Condominium Corporation insurance policies
for 2 years. The premiums were paid by Tuscany
on installments. The policy was again renewed,
however, Tuscany thereafter refused to pay the
balance of the premium. AHAC filed an action to
recover the unpaid balance. Tuscany contended
that payment by installment of the premiums
due on an insurance policy invalidates the
contract of insurance and no risk attached to the
policy. The policy was never binding and valid,
and no risk attached to the policy. Is the
contention of Tuscany valid?
NOTE: An insurance company which delivers a
policy to an insurance broker, is deemed to have
authorized the latter to receive the payment of the
premium (IC, Sec. 306).
“Cash and carry” rule (2003 Bar)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
A: NO. The subject policies are valid even if the
premiums were paid on installments. The records
clearly show that Tuscany and AHAC intended the
subject insurance policies to be binding and
effective notwithstanding the staggered payment of
the premiums. For 3 years, the insurer accepted all
the installment payments. Such acceptance of
payments speaks loudly of the insurer’s intention to
honor the policies it issued to Tuscany.
XPN: (ICE GAP)
A policy is valid and binding even when there is nonpayment of premium:
1.
2.
3.
4.
duly licensed intermediaries, a ninety (90)-day
credit extension is given. No credit extension to
a duly licensed intermediary should exceed
ninety (90) days from date of issuance of the
policy (IC, Sec. 77).
When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding
until the premium is actually paid. This is
without prejudice however to right of insurer to
collect corresponding premium (IC, Sec. 77).
When the public interest so requires, as
determined by the Insurance Commissioner
When there is an agreement allowing the
insured to pay the premium in installments and
partial payment has been made at the time of
loss (Makati Tuscany Condominium Corp. v. CA,
G.R. No. 95546, Nov. 6, 1992).
When there is an agreement to grant the
insured credit extension for the payment of the
premium and loss occurs before the expiration
of the credit term (2007 Bar; NCC, Art. 1306;
UCPB General Insurance v. Masagana Telemart,
G.R. No. 137172, Apr. 4, 2001).
When estoppel bars the insurer to invoke nonrecovery on the policy.
In case of life or industrial life policy whenever
the grace period provision applies, or whenever
under the broker and agency agreements with
While the import of Section 77 is that
prepayment of premiums is strictly required as
a condition to the validity of the contract, Section
78 of the Insurance Code in effect allows waiver
by the insurer of the condition prepayment by
making an acknowledgment in the insurance
policy of receipt of premium as conclusive
evidence of payment so far as to make the policy
binding despite the fact that premium is actually
unpaid (Makati Tuscany Condominium Corp. vs. CA
G.R. No. 95546, November 6, 1992).
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Q:The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of PI Million for 1 year. The policy was
issued with the premium fixed at 160,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 Bar)
of the premiums SPMC had paid, and denied
SPMC's claim on the ground that under the "cash
and carry" principle governing fire insurance,
no coverage existed at the time the fire occurred
because the insurance premium had not been
paid. Is SPMC entitled to recover for the loss
from SIC? (2003, 2013 Bar)
A: YES. St. Peter Manufacturing Company is entitled
to recover for the loss from Stable Insurance
Company. Stable Insurance Company granted a
credit term to pay the premiums. This is not against
the law, because the standing business practice of
allowing St. Peter Manufacturing Company to pay
the premiums after 60 or 90 days, was relied upon
in good faith by SPMC. Stable Insurance Company is
in estoppel (UCPB General Insurance Company, Inc.
v. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001).
A: YES, when insured and insurer have agreed to the
payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
3. Estoppel
Q: Maxilite and Marques entered into a trust
receipt transaction with FEBTC for the shipment
of various high-technology equipment. FEBIBI,
upon the advice of FEBTC, facilitated the
procurement and processing from Makati
Insurance Company of four separate and
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would
debit Maxilite’s account for the premium
payments. However, said premiums were not
paid. A fire gutted Maxilite’s office and
warehouse. As a result, Maxilite suffered losses
amounting to at least P2.1 million, which
Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati
Insurance Company denied the fire loss claim on
the ground of non-payment of premium. FEBTC
and FEBIBI disclaimed any responsibility for the
denial of the claim. Will the claim of Maxilite
prosper?
2. Credit Extension
Under Sec. 77 as amended by RA 10607, a ninety
(90)-day credit extension may be given whenever
credit extension is given under the broker and
agency
agreements
with
duly
licensed
intermediaries. The requisites are as follows:
1.
2.
The credit extension must be provided for
under the broker and agency agreements; and
The credit extension to a duly licensed
intermediary should not exceed ninety (90)
days from date of issuance of the policy
(Sundiang Sr. & Aquino, 2014).
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a longstanding insurance relationship with each
other; SPMC secures the comprehensive fire
insurance on its plant and facilities from SIC.
The standing business practice between them
has been to allow SPMC a credit period of 90
days from the renewal of the policy within which
to pay the premium.
A: YES. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium
has been unpaid. That FEBTC induced Maxilite to
believe that the insurance premium has in fact been
debited from Maxilite’s account is grounded on the
following facts: (1) FEBTC represented and
committed to handle Maxilite’s financing and capital
requirements, including the insurance of the trust
receipted merchandise; (2)the premiums of prior
insurance policies had been paid through automatic
debit arrangement; (3) FEBIBI sent FEBTC, not
Maxilite, to debit Maxilite’s account; (4) there was
no written demand from FEBTC or Makati
Insurance Company for Maxilite to pay the
insurance premium; (5) the subject insurance policy
remained uncancelled despite the alleged non-
Soon after the new policy was issued and before
premium payments could be made, a fire gutted
the covered plant and facilities to the ground.
The day after the fire, SPMC issued a manager's
check to SIC for the fire insurance premium, for
which it was issued a receipt; a week later SPMC
issued its notice of loss. SIC responded by
issuing its own manager's check for the amount
UNIVERSITY OF SANTO TOMAS
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Mercantile Law
payment of the premium, making it appear that the
insurance policy remained in force and binding.
Thus, Maxilite can still claim from FEBTC (Jose
Marques and Maxilite Technologies, Inc. vs FEBTC, GR
No. 171379, January 10, 2011).
collect such reasonable fee for its services (IC, Sec.
78).
Payment of premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Article 1249 of the New Civil Code.
4. Grace Period
In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled
to a grace period of either 30 days or 1 month within
which the payment of any premium after the first
may be made [IC, Secs. 233 (a) and 234 (a)].
Note: Payment by means of a check or note,
accepted by the insurer, bearing a date prior to the
loss, assuming availability of the funds thereof,
would be sufficient even if it remains unencashed at
the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor
(2007 Bar).
In case of industrial life insurance, the grace period
is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month [IC, Secs. 236 (a)].
5. Acknowledgment of receipt of premium
NOTE: This is not applicable in case of Post dated
checks, The payment of a promissory note or
postdated check at a stated maturity subsequent to
the loss, is insufficient to put the insurance into
effect (Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250).
Acknowledgment of receipt of premium is
conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid (IC, Sec. 79).
Q: If the applicant failed to pay premium and
instead executed a promissory note in favor of
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in
case of loss?
When the policy contains such written
acknowledgment, it is presumed that the insurer
has waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption
is however, extended only to the question of the
binding effect of the policy.
A: YES, the insurer is liable because there has been
a perfected insurance contract. The insurer
accepted the promise of the applicant to pay the
insurance premium within thirty 30 days from the
effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy
and in effect, waived any provision therein that it
would only pay for the loss or damage in case the
same occurs after the payment of the premium.
As far as the payment of the premium itself is
concerned, the acknowledgment is only a prima
facie evidence of the fact of such payment. The
insurer may still dispute its acknowledgment but
only for the purpose of recovering the premium due
and unpaid. Whether payment was indeed made is
a question of fact.
Payment through salary deduction
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
No. L-22375, July 18, 1975).
Employees of the Republic of the Philippines,
including
its
political
subdivisions
and
instrumentalities, and government-owned or
controlled corporations, may pay their insurance
premiums and loan obligations through salary
deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government
employee
is
authorized,
notwithstanding the provisions of any existing law,
rules and regulations to the contrary, to make
deductions from the salary, wage or income of the
latter pursuant to the agreement between the
insurer and the government employee and to remit
such deductions to the insurer concerned, and
Q: On September 25, 2013, Danny Marcial
(Danny) procured an insurance on his life with a
face value of P5 million from RN Insurance
Company (RN), with his wife Tina Marcial (Tina)
as sole beneficiary. On the same day, Danny
issued an undated check to RN for the full
amount of the premium. On October 1, 2013, RN
issued the policy covering Danny’s life
insurance. On October 5, 2013, Danny met a
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tragic accident and died. Tina claimed the
insurance benefit, but RN was quick to deny the
claim because at the time of Danny’s death, the
check was not yet encashed and therefore the
premium remained unpaid.
a date prior to the loss, would be sufficient. The
subsequent effects of encashment retroact to the
date of the check (UCPB General Insurance Co., Inc. v.
Masagana Telamart, Inc., 356 SCRA 307 [2001]).
Non-payment of premiums
a. Is RN correct?
b. Will your answer be the same if the check is
dated October 15, 2013? (2014 Bar)
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
A:
a. NO. RN Insurance is not correct. The facts of the
case show that Danny procured insurance on
his life on September 25, 2013, with his wife
Tina as beneficiary, and on that same day, he
issued an undated check to RN for the full
amount of the premium. Since the undated
check was issued to RN on September 25, 2013,
it will be considered dated as of the same day.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
the policy, unless waived. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
RN Insurance denied the claim of Tina because
at the time of Danny’s death, the check was not
yet encashed, therefore, the premium remained
unpaid. The payment by means of a check or
note, accepted by the insurer, bearing a date
prior to the loss, assuming the availability of the
funds thereof, would be sufficient even if it
remains unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the mercantile
instrument.
b.
With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse (De
Leon, 2010).
Non-payment of premiums by reason of the
circumstances or conduct of the insurer
The answer would not be the same if the check
were dated October 15, 2013. The payment of
a promissory note or postdated check at a
stated maturity subsequent to the loss, is
insufficient to put the insurance into effect
(Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250).
GR: Non-payment of premiums does not merely
suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the
essence of the contract (De Leon, 2010).
XPN: (IWW)
1. The insurer has become insolvent and has
suspended business, or has refused without
justification a valid tender of premiums
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct.
29, 1952).
2. Failure to pay was due to the wrongful conduct
of the insurer.
3. The insurer has waived his right to demand
payment
If it were RN Insurance who dated the check
October 15, 2013, then my answer would be the
same as my answer to the first question.
Q: Alfredo took out a policy to insure his
commercial building from fire. The broker for
the insurance company agreed to give a 15-day
credit within which to pay the insurance
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable
on May 30, 2006. On May 28, 2006, a fire broke
out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance
policy? (2007 Bar)
Fortuitous events will not prevent forfeiture of the
policy when the premium remains unpaid. Hence,
non-payment of premium by reason of a fortuitous
event is not an excuse.
Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence,
war does not excuse non-payment (Constantino vs.
Asia Life Isurance Company 1950).
A: YES. Alfredo may recover on the policy. It is valid
to stipulate that the insured will be granted credit
term for payment of premium. Payment by means of
a check which was accepted by the insurer, bearing
UNIVERSITY OF SANTO TOMAS
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Mercantile Law
Instances when payment of premium becomes a
debt or obligation
1.
2.
In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as the
risk attaches.
In life insurance, the premium becomes a debt
only when, in the case of the first premium, the
contract has become binding, and in the case of
subsequent premiums, when the insurer has
continued the insurance after maturity of the
premium, in consideration of the insured’s
express or implied promise to pay (De Leon,
2010).
6.
Payments in addition to regular premium
An insurer may contract and accept payments, in
addition to regular premium, for the purpose of
paying future premiums on the policy or to increase
the benefits thereof (IC, Sec. 84).
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Purpose of the reinstatement provision
NON-DEFAULT OPTIONS IN LIFE INSURANCE
The purpose of the provision is to clarify the
requirements for restoring a policy to premiumpaying status after it has been permitted to lapse.
Devices used to prevent the forfeiture of a life
insurance after the payment of the first
premium (C-PAGER)
1.
2.
3.
4.
5.
least three full annual premiums [IC, Sec. 233
(f)] to have the policy continued in force from
the date of default for a time either stated or
equal to the amount as the net value of the
policy taken as a single premium, will purchase
(De Leon, 2010).
Reinstatement – Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at any time within 3 years from the
date of default in the payment of premium,
unless the cash surrender value has been paid,
or the extension period expired, upon
production of evidence of insurability
satisfactory to the company and the payment of
all overdue premiums and any indebtedness to
the company upon said policy [IC, Sec. 233 (j)].
The law requires that the policy owner be
permitted to reinstate the policy, subject to the
violations specified, any time within three (3)
years from the date of default of premium
payment. A longer period, being more favorable to
the insured, may be used.
Cash surrender value – The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it.
(Cyclopedia Law Dictionary, 3rd ed.). Note: the
policyholder is entitled to the CSV in the event of
default in a premium payment after three full
annual premiums shall have been paid.
Paid up Insurance – The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued
in force from the date of default for the whole
period of the insurance without further
payment of premiums. It results to a reduction
of the original amount of insurance, but for the
same period originally stipulated (6 Couch 2d.,
355; 37 C.J.S. 364).
Automatic Loan Clause – A stipulation in the
policy providing that upon default in payment
of premium, the same shall be paid from the
loan value of the policy until that value is
consumed. In such a case, the policy is
continued in force as fully and effectively as
though the premiums had been paid by the
insured from funds derived from other sources
(6 Couch 2d., 383).
Grace period – After the payment of the first
premium, the insured is entitled to a grace
period of 30 days within which to pay the
succeeding premiums [IC, Sec. 233 (a)].
Extended insurance – It is where the insured is
given a right, upon default, after payment of at
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the
insurer, which has the right to deny reinstatement
if it were not satisfied as to the insurability of the
insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer
(McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L3581, September 21, 1950).
Q: A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums.
Subsequently, the insured died. Was the insurer
liable?
A: The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy (Andres vs.
Crown Life Ins. Co., 55 O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after
it lapsed. Eulogio paid the premiums due on the
first two months. However, he failed to pay
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
subsequent premiums. One month after the
policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the
overdue premiums and signed a reinstatement
policy stating that the payment deposit only
and shall not bind the Company until this
application is finally approved. Hours later,
Eulogio died of electrocution. The insurance
company denied the claim of his beneficiaries
stating that the policy was never approved. Is
the contention of the insurance company valid?
2.
b.
A: YES. The stipulation in a life insurance policy
giving the insured the privilege to reinstate it upon
written application does not give the insured
absolute right to such reinstatement by the mere
filing of an application. The insurer has the right to
deny the reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the Insurance Company cannot be
compelled to entertain an application for
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be
determined and satisfied (Violeta R. Lalican vs. The
Insular Life Assurance Company Limited, supra).
REFUND OF PREMIUMS
Instances when the insured entitled to recover
premiums already paid or a portion thereof
(2000 Bar)
1. Whole (EFIDe)
a. When no part of the thing insured has been
exposed to any of the perils insured against
(IC, Sec. 80).
b. When the contract is voidable because of
the fraud or misrepresentations of the
insurer of his agent (IC, Sec. 82).
c. When the insurance is voidable because of
the existence of facts of which the insured
was ignorant without his fault (IC, Sec. 82).
d. When the insurer never incurred any
liability under the policy because of the
default of the insured other than actual
fraud (IC, Sec. 82).
e. When rescission is granted due to insurer’s
breach of contract (IC, Sec. 74).
NOTE: When the contract is voidable, a person
insured is entitled to a return of the premium
when such contract is subsequently annulled
under the provisions of the New Civil Code.
When there is over-insurance. The
premiums to be returned shall be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk (IC, Sec. 83).
i.
In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to
the property insured. Hence, the
insurer is not entitled to that portion
of the premium corresponding to the
excess of the insurance over the
insurable interest of the insured.
(1990 Bar)
ii.
In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by
which the aggregate sum insured in
all the policies exceeds the insurable
value of the thing insured (IC, Sec.
83).
Illustration:
Where there is a total over insurance of
P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
value), 25% (proportion of P500k to P2M)
of the premiums paid to the several
insurers should be returned.
When the insured is not entitled to return of
premiums paid (LI2FE)
1.
2.
3.
4.
A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a
claim is denied by reason of fraud (IC, Sec. 82).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Pro rata:
a. When the insurance is for a definite period
and the insured surrenders his policy
before the termination thereof; except:
i.
Policy not made for a definite period
of time;
ii.
Short period rate is agreed upon; or
iii.
In life insurance policy.
In life insurance policies (IC, Sec. 80 [b])
If contract is illegal and the parties are in pari
delicto.
If the policy is annulled, rescinded or if a claim
is denied by reason of fraud (IC, Sec. 82)
If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81)
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
Corporation (Great Pacific). His application,
with the requisite medical examination, was
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Mercantile Law
accepted and approved by the Great Pacific and
in due course, an endowment policy was issued
in his name. Thereafter, Great Pacific advised
Cortez that the policy was not in force. To make
it enforceable and operative, Cortez was asked
to remit the balance to complete his initial
annual premium and to see Dr. Felipe V. Remollo
for another full medical examination at his own
expense. Because of this, Cortez informed that it
that he was cancelling the policy and he
demanded the return of his premium plus
damages. Great Pacific ignored his demand. Is
Cortez entitled to a refund of his premium?
7.
Discovery of willful or omissions or reckless
acts increasing the hazard insured against (IC,
Sec. 64)
A: YES. Great Pacific should have informed Cortez of
the deadline for paying the first premium before or
at least upon delivery of the policy to him, so he
could have complied with what was needful and
would not have been misled into believing that his
life and his family were protected by the policy,
when actually they were not. And, if the premium
paid by Cortez was unacceptable for being late, it
was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the
beginning, the company was never at risk, hence, it
is not entitled to keep the premium (Great Pacific
Life Insurance Corp. v. CA, et al., G.R. No. L-57308,
April 23, 1990).
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
broker is authorized in writing by the policy owner
to receive the notice of cancellation on his behalf,
and shall state:
No policy of insurance other than life shall be
canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
shall be effective unless it is based on the
occurrence, after the effective date of the policy, of
one or more of the abovementioned instances (Sec.
64, Ibid).
Notice of cancellation of the contract
1. Which of the grounds set forth in Section 64 is
relied upon; and
2. That, upon written request of the named
insured, the insurer will furnish the facts on
which the cancellation is based (IC, Sec. 65).
CONCEALMENT
Concealment
RESCISSION OF INSURANCE CONTRACTS
Concealment is a neglect to communicate that which
a party knows and ought to communicate (IC, Sec.
26).
Instances wherein a contract of insurance may
be rescinded (1991, 1994, 1996 - 1998 Bar)
1.
2.
3.
Under Section 27 of the Insurance Code, “a
concealment entitles the injured party to rescind a
contract of insurance.” Moreover, under Section 168
of the Insurance Code, the insurer is entitled to
rescind the insurance contract in case of an
alteration in the use or condition of the thing
insured (Malayan Insurance Company vs. PAP Co.,
G.R. No. 200784, August 7, 2013, in Divina 2014).
Concealment
Misrepresentation/ omission
Breach of warranties
Instances wherein a contract of insurance may
be canceled by the insurer
(NCDP - Discovery of FraME WOR)
1.
2.
3.
4.
5.
6.
Requisites: (NeD-NoW-NomMa)
1. A party knows a fact which he neglects to
communicate or disclose to the other party;
2. Such party concealing is duty bound to disclose
such fact to the other;
3. Such party concealing makes no warranty as to
the fact concealed;
4. The other party has no means of ascertaining
the fact concealed; and
5. The fact must be material.
Nonpayment of premium
Conviction of a crime arising out of acts
increasing the hazard insured against
A determination by the Commissioner that the
continuation of the policy would violate or
would place the insurer in violation of the
Insurance Code
Physical changes in the property insured which
result in the property becoming uninsurable
Discovery
of
fraud
or
material
misrepresentation
Discovery of other insurance coverage that
makes the total insurance in excess of the value
of the property insured
Test of materiality (2000 Bar)
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon
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Insurance Code
the party to whom the communication is due, in
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries (IC,
Sec. 31).
XPN: In answer to inquiries of the other (IC, Sec. 30)
NOTE: Neither party is bound to communicate, even
upon inquiry, information of his own judgment,
because such would add nothing to the appraisal of
the application (IC, Sec. 35).
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles
the injured party to rescind (IC, Sec. 27).
Matters that must be disclosed even in the
absence of inquiry
Facts not conveyed to the insurer raises
presumption that the failure of the insured to
communicate must have been intentional rather
than inadvertent. Goodfaith is not a defense because
of the Uberrimae Fidei Doctrine.
1.
2.
3.
Those material to the contract
Those which the other has no means of
ascertaining
Those as to which the party with the duty to
communicate makes no warranty
Concealment in marine insurance
NOTE: Matters relating to the health of the insured
are material and relevant to the approval of the
issuance of the life insurance policy as these
definitely affect the insurer’s action to the
application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Co. of Canada v. CA, G.R.
No. 105135, June 22, 1995).
Rules on concealment are stricter in marine
insurance since the insurer would have to depend
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each
party must disclose all the information he possesses
which are material or the information of the belief
or expectation of a third person, in reference to a
material fact. But concealment in a marine
insurance in any of the following matters
enumerated under Section 112 Insurance Code does
not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from
the risk concealed.
Test in ascertaining
concealment
the
existence
Information as to the nature of interest need not be
disclosed except in property insurance, if the
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
disclose why he has insurable interest that would
entitle him to ensure it, and the extent thereof [IC,
Secs. 34 and 51 (e)].
of
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that
circumstance, though unasked.
Q: X insured his life for P20 million. X, plays golf
and regularly exercises everyday, hence is
considered in good health. He did not know,
however, that his frequent headache is really
caused by his being hypertensive. In his
application form for a life insurance for himself,
he did not put a check to the question if he is
suffering from hypertension, believing that
because of his active lifestyle, being
hypertensive is a remote possibility. While
playing golf one day, X collapsed at the fairway
and was declared dead on arrival at the
hospital. His death certificate stated that X
suffered a massive heart attack. (2016, BAR)
(a) Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure that
he is hypertensive at the time of application?
(b) If X died in an accident instead of a heart
attack, would the fact of X's failure to disclose
that he is hypertensive be considered as
material information?
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters: (OWKERI)
1. Those which, in the exercise of ordinary care,
the other ought to know and of which, the
former has no reason to suppose him ignorant;
2. Those
of which the other
waives
communication;
3. Those which the other knows;
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty, and
which are not otherwise material;
5. Those which relate to a risk excepted from the
policy and which are not otherwise material;
and
6. The nature or amount of the interest of one
insured, except if he is not the owner of the
property insured (IC, Sec. 34).
UNIVERSITY OF SANTO TOMAS
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Mercantile Law
A:
(a) No, the beneficiary of X is not entitled to the
proceeds of the life insurance. The hypertension of
X is a material fact that should have been disclosed
to the insurer. The concealment of such material
fact entitles the insurer to rescind the insurance
policy.
application and issued an insurance policy
effective Nov. 6, 2008. Benny named his children
as his beneficiaries. On April 6, 2010, Benny died
of hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his
application two previous consultations with his
doctors for diabetes and hypertension, and that
he had been diagnosed to be suffering from
hepatoma. The insurance company also
rescinded the policy and refunded the
premiums paid.
(b) It is still a material information. It is settled that
the insured cannot recover even though the
material fact not disclosed is not the cause of the
loss.
Evidence of insurability
Evidence of Insurability is a broader phrase than
“Evidence of Good Health” and includes such other
factors as the insured’s occupation, habits, financial
condition, and other risk selection factors.
Was the insurance company correct? (2013 Bar)
A: YES. The insurance company correctly rescinded
the policy because of concealment. Benny did not
disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is
material, because these are serious ailments. Also,
Benny died less than two years from the date of the
issuance of the policy, hence rescission is still
possible (IC, Sec. 26; Sec. 48).
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endowment policy on the life of
his one-year old daughter Helen Go. Ngo Hing
supplied the essential data and filed the
application to Mondragon, the branch manager.
After sometime, Helen Go died of influenza with
complication
of
bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of
the same. Did Ngo Hing conceal the state of
health and physical condition of Helen Go, which
rendered void the binding receipt?
Right to information of material facts may be
waived
1.
2.
A: YES. Ngo Hing intentionally concealed the state
of health of his daughter Helen Go. He was fully
aware that his child was a typical mongoloid child
upon filling out the application form. It is evident
that he withheld a fact material to the risk to be
assumed by the insurance company had the plan be
approved.
Expressly by the terms of the contract
Impliedly the failure to make an inquiry as to
such facts, where they are distinctly implied in
other facts from which information is
communicated (IC, Sec. 33).
Rules on concealment
1.
2.
The contract of insurance is one of perfect good
faith, uberrima fides, absolute and perfect candor;
the absence of any concealment or demotion.
Concealment is a neglect to communicate that which
needs to be communicated whether intentional or
unintentional. In case of concealment, the insurer is
entitled to rescind the contract of insurance. In the
case at bar, the respondent is guilty of such
concealment. Ultimately, there was no perfected
contract of insurance since the conditions in the
binding receipt were not complied with by the
applicant (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, April 30, 1979).
3.
4.
5.
If there is concealment under Section 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
(1996 Bar)
The party claiming the existence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.
Good faith is not a defense in concealment.
Concealment,
whether
intentional
or
unintentional entitles the injured party to
rescind the contract of insurance (IC, Sec. 27).
The matter concealed need not be the cause of
loss (IC, Sec. 31).
To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
In order for concealment to produce the effect of
avoiding the policy, it should take place at the
time the contract is entered into
Q: Benny applied for life insurance for Php 1.5
Million. The insurance company approved his
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Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the
policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
a ground to rescind the contract.
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
Under Sec. 37, representation should be made,
altered or withdrawn at the time of or before the
issuance of the policy. It may be altered or
withdrawn before the insurance is effected, but not
afterwards (IC, Sec. 34).
Characteristics of representation
(COW-DAW-BA)
NOTE: The rationale for this rule is that if
concealment should take place after the contract is
entered into, the information concealed is no longer
material as it will no longer influence the other
party to enter into such contract.
1.
2.
3.
Q: Joanna applied for a non-medical life
insurance. Joanna did not inform the insurer
that one week prior to her application for
insurance, she was examined and confined at St.
Luke’s Hospital where she was diagnosed for
lung cancer. The insured soon thereafter died in
a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
cause of death of the insured? Why? (2001 Bar)
4.
5.
Similarities of concealment and representation
1.
2.
A: NO. The insurer is not liable. The concealed fact
is material to the approval and issuance of the
insurance policy. It is well settled that the insured
need not die of the disease she failed to disclose to
the insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimate of the
risks of the proposed insurance policy or in making
inquiries (Sun Life v. CA, supra).
3.
4.
5.
Instances whereby concealment made by an
agent procuring the insurance binds the
principal
1.
2.
6.
Where it was the duty of the agent to acquire
and communicate information of the facts in
question.
Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
Both refer to the same subject matter and both
take place before the contract is entered.
Concealment or representation prior to loss or
death gives rise to the same remedy; that is
rescission or cancellation.
The test of materiality is the same (IC, Secs. 31,
46).
The rules of concealment and representation
are the same with life and non-life insurance.
Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on
ground of concealment or false representation.
Since the contract of insurance is said to be one
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and
representation apply likewise to the insurer.
Kinds of representation
1. Oral or written (Sec. 36, Ibid)
2. Affirmative (Sec. 42, Ibid)
3. Promissory (Sec. 39, Ibid)
Affirmative representation
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g. the statement
of the insured that the house to be insured is used
only for residential purposes is an affirmative
representation).
MISREPRESENTATION/OMISSION
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Not a part of the contract but merely a collateral
inducement to it
Oral or written
Must be presumed to refer to the date the
contract goes into effect
Altered or withdrawn before the insurance is
effected but not afterwards
Made before or at the time of issuing the policy
and not after (IC, Sec. 42).
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Mercantile Law
Promissory representation
A representation cannot qualify an express
provision in a contract of insurance but it may
qualify an implied warranty (IC, Sec. 40).
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Test of materiality
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (IC,
Sec. 46).
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge (IC, Sec.
39).
Effects of misrepresentation
An erroneous opinion or belief will not avoid the
insurance policy
1.
The statement of an erroneous opinion, belief or
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
2.
To avoid liability, the insurer must prove both
materiality of the insured’s opinion and the latter’s
intention to deceive.
Effect of collusion between the insurer’s agent
and the insured
Misrepresentation
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so, the insurer is not estopped
from avoiding the policy.
Concealment vs. Misrepresentation
It occurs when the facts fail to correspond with
its assertions or stipulations. Misrepresentation
is an affirmative defense. To avoid liability, the
insurer has the duty to establish such a defense by
satisfactory and convincing evidence (IC, Sec. 44; Ng
Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L30685, May 30, 1983).
Concealment
The insured withholds
the information of
material facts from the
insurer
NOTE: In the absence of evidence that the insured
has sufficient medical knowledge to enable him to
distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was
“associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an
affirmative defense which must be proved (Ng Gan
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L30685, May 30, 1983).
3.
Misrepresentation
The insured makes
erroneous statements
of facts with the intent
of inducing the insurer
to enter into the
insurance contract
Application
of
concealment
misrepresentation in case of loss or death
and
GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or
death, the insurer can refuse to pay.
Requisites of misrepresentation (UKMa)
1.
2.
It renders the insurance contract voidable at
the option of the insurer, although the policy is
not thereby rendered void ab initio. The injured
party entitled to rescind from the time when the
representation becomes false.
When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of right of rescission.
XPN: The incontestability clause under paragraph 2
of Section 48.
The insured stated a fact which is untrue;
Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead;
and
Such fact in either case is material to the risk.
Incontestability clause (1991, 1994, 1996, 1998
Bar)
After the policy of life insurance made payable on
the death of the insured shall have been in force
during the lifetime of the insured for a period of two
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Insurance Code
(2) years from the date of its issue or its last
reinstatement, the insurer cannot prove that the
policy is void ab initio (construed as voidable) or is
rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent
(Sundiang Sr. & Aquino, 2014, citing IC, Sec. 48;
Florendo v. Philam Plans, G.R. No. 186983, February
22, 2012).
insurance. It gives insurers enough time to inquire
whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered. Legitimate policy holders are absolutely
protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds
occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may
no longer be set up after the two-year period
expires.
The “Incontestability Clause” under Section 48 of the
Insurance Code regulates both the actions of the
insurers and prospective takers of life insurance. It
gives insurers enough time to inquire whether the
policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it
forewarns scheming individuals that their attempts
at insurance fraud would be timely uncovered –
thus deterring them from venturing into such
nefarious enterprise (Manila Bankers Life Insurance
Corporation vs. Cresencia-Aban, G.R. No. 175666, July
29, 2013).
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy
on specious claims of fraudulent concealment or
misrepresentation (Manila Bankers Life Insurance
Corp. v. Aban, G.R. No. 175666, July 29, 2013).
Q: The life insurance policy has been in force for
more than three years, when Sotero, the
insured, died. Thereafter, Aban, as the
beneficiary designated in the policy, filed a
claim for the insurance proceeds. However,
Bankers Life denied the claim and refunded the
premiums paid based on their findings that
Sotero did not personally apply for the policy as
she was illiterate and it was Aban who filed the
insurance application and designated herself as
the beneficiary. Can Bankers Life validly deny
said claim on the ground of fraud, concealment
and/or misrepresentation?
Note: The period of two years may be shortened but
it cannot be extended by stipulation.
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Creencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100, 000, in Sotero’s favor
on August 30, 1993, after the requisite medical
examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1.
2.
3.
4.
5.
A: NO. Under Sec. 48 of the IC or the Incontestability
Clause, an insurer is precluded from raising the
defenses 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 two years during the insured’s
lifetime. Considering that the insured died after the
two-year period, the Bankers Life is, therefore,
barred from proving that the policy is void ab initio
by reason of the insured’s fraudulent concealment
or misrepresentation or want of insurable interest
on the part of the beneficiary Aban (Manila Bankers
Life Insurance Corp. v. Aban, G.R. No. 175666, July 29,
2013, Del Castillo, J.).
Sotero did not personally apply for
insurance coverage, as she was illiterate.
Sotero was sickly since 1990.
Sotero did not have the financial capability
to pay the premium on the policy.
Sotero did not sign the application for
insurance
Alban was the one who filed the insurance
application and designated herself as the
beneficiary.
Q. Felipe applied for the reinstatement of his life
insurance policy. Insular Life advised Felipe that
his application for reinstatement may only be
considered if he agreed to certain conditions.
Felipe agreed and paid additional premium on
December 27, 1999 and as a result, the Letter of
Acceptance was given to him which indicated
that the reinstated policy will be effective on
June 22, 1999. On January 7, 2000, Insular Life
issued an Endorsement regarding the policy.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
the incontestability period set in even in cases of
fraud as alleged in this case? (2014, Bar)
A: YES. The incontestability period applies even in
cases of fraud. Section 48 regulates both the actions
of the insurers and prospective takers of the life
UNIVERSITY OF SANTO TOMAS
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114
Mercantile Law
On September 22, 2001, Felipe died.
Subsequently, Felipe’s beneficiaries filed with
Insular Life a claim for benefit under the
reinstated policy. This claim was denied.
Instead,
Insular
Life
advised
Felipe’s
beneficiaries that it had decided to rescind the
reinstated policy on the grounds of concealment
and misrepresentation by Felipe. However, the
respondents contend that policy cannot be
rescinded as it is already incontestable. Is
Felipe’s reinstated life insurance policy already
incontestable at the time of his death?
In non-life insurance policy, it must be exercised
previous to the commencement of an action on the
contract, -the action referred to is that to collect a
claim on the contract (IC, Sec.48, par.1).
In life insurance policy, the defenses mentioned in
the second paragraph of section 48 of the IC are
available only within the 2-year incontestability
period (De Leon, 2014).
BREACH OF WARRANTIES
Warranties (1993 Bar)
A: YES. Under Sec. 48 of the Insurance Code, after a
policy of life insurance made payable on the death
of the insured shall have been in force during the
lifetime of the insured for a period of two years from
the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio
or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or
his agent. The reinstatement of the insured’s policy
is to be reckoned from the date when the application
was processed and approved by the insurer. To
reinstate a policy means to restore the same to
premium-paying status after it has been permitted
to lapse (The Insular Life Assurance Company, Ltd. v.
Khu, G.R. No. 195176, April 18, 2016, Del Castillo, J.).
Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in
any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or
non-fulfillment render the policy voidable by the
insurer.
Purpose of warranties
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
Defenses that are not barred by incontestability
clause (PIPE-TFC)
Basis of warranties
The insurer took into consideration the condition of
the property at the time of effectivity of the policy.
The following defenses are not barred by the
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 (IC, Secs.
77, 233[b], 236[b]);
4. That the conditions of the policy relating to
military or naval service have been violated (IC,
Secs. 233[b], 234[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 (Sundiang Sr. & Aquino, 2014).
Kinds of warranties (APIE)
1.
2.
3.
4.
Remedy of the injured party in case of
misrepresentation
Affirmative warranty – one which relates to
matters which exist at or before the issuance of
the policy.
Promissory warranty – one in which the insured
undertakes that something shall be done or
omitted after the policy takes effect and during
its continuance.
Express warranty – a statement in a policy, of a
matter relating to the person or thing insured,
or to the risk, as a fact.
Implied warranty – an agreement or stipulation
not expressed in the policy but the existence of
which is admitted or presumed from the fact
that the contract of insurance has been
executed.
Warranty vs. Representation
If there is misrepresentation, the injured party is
entitled to rescind from the time when the
representation becomes false.
WARRANTY
Considered parts of the
contract.
Exercise of the right to rescind the contract
115
REPRESENTATION
Collateral inducement
to the contract.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Always written on the
face of the policy,
actually
or
by
reference.
Must
be
strictly
complied with.
Its falsity or nonfulfillment operates as
a breach of contract.
Presumed material.
fire broke out at the Pace Factory which totally
burned the insured properties.
May be written in a
totally disconnected
paper or may be oral.
The policy forbade the removal of the insured
properties unless sanctioned by Ilocano.
Condition 9 (c) of the policy provides that “the
insurance ceases to attach as regards the
property affected unless the insured, before the
occurrence of any loss or damage, obtains the
sanction of the company signified by
endorsement upon the policy… (c) if the
property insured is removed to any building or
place other than in which is herein stated to be
insured.” PAM claims that it has substantially
complied with notifying Ilocano through its
sister company, the RBC which in fact, referred
PAM to Ilocano for the insurance coverage. Is
Ilocano liable under the policy? (2014 Bar)
Only substantial proof
is required.
Its falsity renders the
policy void on the
ground of fraud.
Insurer must show its
materiality in order to
defeat an action on the
policy.
Effects of breach of warranty
1.
Material
GR: Violation of material warranty or of
material provision of a policy will entitle the
other party to rescind the contract.
A: NO. Ilocano Insurance is not liable under the
policy. By the clear and express condition in the
renewal policy, the removal of the insured property
to any building or place required the consent of
Ilocano. Any transfer effected by PAM, Inc. without
Ilocano’s consent would free the latter from any
liability (Malayan Insurance Company, Inc v. PAPCO,
Ltd., G.R. No. 200784, August 7, 2013).
XPN: (with regard to “promissory” warranties)
a. Loss occurs before the time of performance
of the warranty;
b. The performance becomes unlawful at the
place of the contract; or
c. Performance becomes impossible (IC, Sec.
73).
2.
Effect of a breach of warranty without fraud
The policy is avoided only from the time of breach
and the insured is entitled:
Immaterial
GR: It will not avoid the policy.
1.
XPN: When the policy expressly provides, or
declares that a violation thereof will avoid it.
2.
For instance, an “Other Insurance Clause” which
is a condition in the policy requiring the insured
to inform the insurer of any other insurance
coverage of the property. A violation of the
clause by the insured will not constitute a
breach unless there is an additional provision
stating that the violation thereof will avoid the
policy (IC, Sec. 75).
Effect of breach of warranty with fraud:
1.
2.
Policy is avoided ab initio and never
became binding.
Insured is not entitled to the return of the
premium
Omission
Q: On May 13, 1996 PAM Inc. obtained a P15
million fire insurance policy from Ilocano
Insurance covering its machineries and
equipment effective for one year or until May 14,
1997. The policy expressly stated that the
insured properties were located at “Sanyo
Precision Phils. Building Phase III Lots 4 and 6
Block 15 PEZA, Rosario, Cavite.” Before its
expiration, the policy was renewed on “as is”
basis for another year or until May 13 1998. The
subject properties were later transferred to
Pace Factory also in PEZA. On October 12, 1997
during the effectivity of the renewed policy, a
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
To the return of the premium paid at a pro rata
from the time of breach or if it occurs after the
inception of the contract; or
To all premiums if it is broken during the
inception of the contract.
The failure to communicate information on matters
proving or tending to prove the falsity of warranty.
In case of omission, the aggrieved party may rescind
the contract of insurance.
CLAIMS SETTLEMENT AND SUBROGATION
NOTICE AND PROOF OF LOSS
116
Mercantile Law
Loss in insurance
Instances when the defects in the notice or proof
of loss are considered waived (MaJoR-DeW)
The injury, damage or liability sustained by the
insured in consequence of the happening of one or
more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive, in case of marine insurance.
When the insurer:
1. Writes to the insured that he considers the
policy null and void as the furnishing of notice
or proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
objections on account of notice and preliminary
proof; or
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.
Conditions before the insured may recover on
the policy after the loss
1.
The insured or some person entitled to the
benefit of the insurance, without unnecessary
delay, must give written notice to the insurer
(IC, Sec. 90).
2. When required by the policy, insured must
present a preliminary proof loss which is the
best evidence he has in his power at the time
(IC, Sec. 91).
NOTE: For other non-life insurance, the
Commissioner may specify the period for the
submission of the notice of loss (IC, Sec. 90).
Instances when delay in the presentation of
notice or proof of loss deemed waived
If caused by:
1. Any act of the insurer; or
2. By failure to take objection promptly and
specifically upon that ground (IC, Sec. 93).
In some life and accident policies, a provision
included, requiring certificate of the attending
physician of the insured, be furnished as part of the
proof of death. (de Leon, de Leon jr., 2017)
Proof of loss
It is the more or less formal evidence given the
company by the insured or claimant under a policy
of the occurrence of the loss, the particulars thereof
and the data necessary to enable the company to
determine its liability and the amount thereof.
Notice of loss
It is the more or less formal notice given to the
insurer by the insured or claimant under a policy, of
the occurrence of the loss insured against.
Time for payment of claims
LIFE POLICIES
1. Maturing upon the
expiration of the term–
the
proceeds
are
immediately payable to
the insured, except if
proceeds are payable in
installments
or
annuities which shall be
paid as they become
due.
Purposes of notice of loss (InDEx)
1.
2.
3.
To give insurer Information by which he may
determine the extent of his liability
To afford the insurer a means of detecting any
Fraud that may have been practiced upon him
To operate as a Check upon extravagant claims
Effect of failure to give notice of loss
FIRE INSURANCE
Failure to give notice
defeats the right of the
insured to recover.
OTHER TYPES OF
INSURANCE
Failure to give notice
will not exonerate the
insurer, unless there is a
stipulation in the policy
requiring the insured to
do so.
2. Maturing at the death
of the insured, occurring
prior to the expiration of
the term stipulated – the
proceeds are payable to
the beneficiaries within
60
days
after
presentation of claim
and filing of proof of
death (IC, Sec. 248).
The law does not require any form in which the
notice of loss must be given. In absence of any
stipulation in the policy, notice may be given orally
or in writing. (de Leon, de Leon jr., 2017)
NON-LIFE POLICIES
The proceeds shall be
paid within 30 days
after the receipt by the
insurer of proof of loss
and ascertainment of
the loss or damage by
agreement
of
the
parties or by arbitration
but not later than 90
days from such receipt
of proof of loss, whether
or not ascertainment is
had or made (IC, Sec.
249).
GUIDELINES ON CLAIMS SETTLEMENT
117
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Claim Settlement
The following constitutes unfair settlement
practices:
1. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear.
2. Knowingly misrepresenting to claimant’s
pertinent facts or policy provisions relating to
coverage at issue;
3. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
4. Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.
Claim settlement is the indemnification of that
suffered by the insured.
The claimant may be the:
1. Insured;
2. Reinsured, the insurer who is entitled to
subrogation; or
3. A third party who has a claim against the
insured.
Purpose of the rule
To eliminate unfair claim settlement practices.
Rules in claim settlement
1.
2.
No insurance company doing business in the
Philippines shall refuse, without justifiable
cause, to pay or settle claims arising under
coverage provided by its policies, nor shall any
such company engage in unfair claim
settlement practices.
Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioner’s complaint experience with
other insurance companies writing similar lines
of insurance shall be admissible in evidence in
an administrative or judicial proceeding
brought under this section [IC, Sec. 247(b)].
Sanction for the insurance companies which
engaged to unfair settlement practices
The sanction for insurance companies engaged in
unfair settlement practices can either be [a]
suspension; or [b] revocation of an insurance
company’s certificate of authority (IC, Sec 247).
Effect of refusal or failure to pay the claim within
the time prescribed
The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board on the
proceeds of the insurance from the date following
the time prescribed under the Insurance Code, until
the claim is fully satisfied (Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R.
No. 151890, June 20, 2006).
Claims settlement in life insurance
1.
2.
The proceeds shall be paid immediately upon
the maturity of the policy if there is such a
maturity date.
If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
claim and filing of the proof of the death of the
insured (Sundiang Sr. & Aquino, 2014; IC, Section
248).
NOTE: Refusal or failure to pay the loss or damage
will entitle the assured to collect interest UNLESS
such refusal or failure to pay is based on the ground
that the claim is fraudulent.
Claims settlement in property insurance
1.
2.
Where the mortgagor and the mortgagee were, both
claiming the proceeds of a fire insurance policy and
the creditors of the mortgagor also attached the
proceeds, the insurance company cannot be held
liable for damages for withholding payment since
the delay was not malevolent (RCBC v. CA, supra).
Proceeds shall be paid within thirty (30) days
after proof of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement or by arbitration.
If no ascertainment is made within sixty (60)
days after receipt of proof of loss, it shall be paid
within ninety (90) days after such receipt
(Sundiang Sr. & Aquino, 2014; IC, Sec. 249).
A prima facie evidence of unreasonable delay in
payment of the claim is created by the failure of the
insurer to pay the claim within the time fixed in the
Insurance Code. (Tio Khe Chio v. Court of Appeals,
202 SCRA 119, 1991)
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Unfair settlement practices (GMAIL)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
118
Mercantile Law
PRESCRIPTION OF ACTIONS
Right of Subrogation
Rules on the prescriptive period for filing an
insurance claim
1.
2.
3.
4.
A process of legal substitution; the insurer, after
paying the amount covered by the insurance policy,
stepping into the shoes of the insured, as it were,
and availing himself of the latter’s rights that exist
against the wrongdoer at the time of the loss.
The parties to a contract of insurance may
validly agree that an action on the policy should
be brought within a limited period of time,
provided such period is not less than 1 year from
the time the cause of action accrues. If the period
agreed upon is less than 1 year from the time
the cause of action accrues, such agreement is
void (IC, Sec. 63, 1996 Bar).
a. The stipulated prescriptive period shall
begin to run from the date of the insurer’s
rejection of the claim filed by the insured
or beneficiary and not from the time of
loss.
b. In case the claim was denied by the insurer
but the insured filed a petition for
reconsideration, the prescriptive period
should be counted from the date the claim
was denied at the first instance and not
from the denial of the reconsideration. To
rule otherwise would give the insured a
scheme or devise to waste time until any
evidence which may be considered against
him is destroyed (1996 Bar; Sun Life
Office, Ltd. vs. CA, supra).
Principle of Subrogation
If the plaintiff’s property has been insured, and he
has received indemnity from the insurance
company for the injury or loss arising out of wrong
or breach of contract complained of, the insurance
company shall be subrogated to the rights of the
insured against the wrongdoer or the person who
has violated the contract (NCC, Art. 2207).
The payment by the insurer to the insured operates
as an equitable assignment to the insurer of all the
remedies that the insured may have against the
third party whose negligence or wrongful act
caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity
of contract. It accrues simply upon payment by the
insurance company of the insurance claim (Malayan
Insurance Co., Inc., vs. Alberto, et al., G.R. No. 194320,
February 1, 2012).
NOTE: Incapacity of the insured will not affect the
capacity of the subrogee because capacity is
personal to the holder (Lorenzo Shipping v. Chub and
Sons, Inc., G.R. No. 147724, June 8, 2004).
If there is no stipulation or the stipulation is
void, the insured may bring the action within 10
years in case the contract is written.
In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim
must be filed within 6 months from the date of
the accident; otherwise, the claim is deemed
waived even if the same is brought within 1
year from its rejection (Vda. De Gabriel vs. CA,
GR No. 103883, Nov 14, 1996).
The suit for damages, either with the proper
court or with the Insurance Commissioner,
should be filed within 1 year from the date of
the denial of the claim by the insurer, otherwise,
claimant’s right of action shall prescribe (IC, Sec.
397).
Q: Under a Marine Risk Note, Malayan Insurance
Co., Inc. insured 60, 000 plastic bags of soda ash
dense which were shipped on a vessel of Asian
Terminals, Inc. (ATI) from China to Manila.
When the bags were unloaded in the
warehouses of the consignee, a total of 2,881
bags were in bad order. Malayan Insurance paid
the value of the lost/damaged cargoes to the
consignee and as subrogee of the consignee,
filed before the RTC a Complaint for damages
When the case reached the Supreme Court, ATI
raised for the first time the issue that Malayan
Insurance is not entitled to the relief granted as
it failed to establish its cause of action since, as
the alleged subrogee, it never presented any
valid, existing, enforceable insurance policy or
any copy thereof in court. Can Malayan
Insurance, as subrogee, recover from ATI even
though it never presented the insurance
contract or policy covering the subject
shipment?
NOTE: Notwithstanding the fact that the case was
filed beyond the one-year prescriptive period
provided for under COGSA, the suit will not be
dismissed if the delay was not due to the claimant’s
fault. The insurer therefore should bear the loss
with interest on account of such delay (New World
International Development Phils. Inc. vs. NYKFILJAPAN Shipping Corp., G.R. No. 171468, August 24,
2011, in Divina, 2014).
A:
YES.
Non-presentation of the insurance
contract or policy is not necessarily fatal. As an
exception to the general rule, Court ruled in Delsan
SUBROGATION
119
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Insurance Code
Transport Lines, Inc. v. CA that the presentation in
evidence of the marine insurance policy is not
indispensable before the insurer may recover from
the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The
right of subrogation accrues simply upon payment
by the insurance company of the insurance claim.
Moreover, since there was no issue regarding the
validity of the insurance contract or policy, or any
provision thereof by reason of ATI’s failure to
dispute the coverage of the insurance contract or
policy, Malayan Insurance had no reason to present
the insurance contract or policy as evidence during
the trial (Asian Terminals, Inc. v. Malayan Insurance
Co., Inc., G.R. No. 171406, April 4, 2011, Del Castillo,
J.).
insurance company for the injury or loss arising out
of the wrong or breach of the contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer.
Since ELP Insurance is subrogated to the rights of
FCL Corp. to the extent of the amount it paid, it has
the right to seek reimbursement from CGM, Inc.
(Loadmaster Customs Services Inc. v. Glodel
Brokerage Corporation and R&B Insurance
Corporation, G.R. No. 179446, January 10, 2011).
Q: ELP Insurance, Inc. issued Marine Policy No.
888 in favor of FCL Corp. to insure the shipment
of 132 bundles of electronic copper cathodes
against all risks. Subsequently, the cargoes
were shipped on board the vessel “M/V Menchu”
from Leyte to Pier 1, North Harbor, Manila.
3.
Purposes of subrogation
1.
2.
Rules on subrogation
1.
Upon arrival, FCL Corp. engaged the services of
CGM Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent
delivery to its warehouse or plants in
Valenzuela City. The goods were loaded on
board twelve trucks owned by CGM, Inc. driven
by its employed drivers and accompanied by its
employed truck helpers. Of the twelve trucks en
route to Valenzuela City, only eleven reached the
destination. One truck loaded with eleven
bundles of copper cathodes, failed to deliver its
cargo.
2.
Applicable only to property insurance – the value
of human life is regarded as unlimited and
therefore, no recovery from a third party can be
deemed adequate to compensate the insured’s
beneficiary.
The right of insurer against a third party is
limited to the amount recoverable from latter
by the insured.
Rules on indemnity
1.
Because of this incident, FCL Corp. filed with ELP
Insurance, Inc. a claim for insurance indemnity
in the amount of P1.5 million. After the requisite
investigation and adjustment, ELP Insurance,
Inc. paid FCL Corp. the amount of P1,350,000 as
insurance indemnity.
2.
Applies only to property insurance
except when the creditor insures the life
of his debtor.
Insurance contracts are not wagering
contracts or gambling contracts.
NOTE: Under the collateral source rule, if an
injured person receives compensation for his
injuries from a source wholly independent of the
tortfeasor, the payment should not be deducted
from the damages which he would otherwise collect
from the tortfeasor. It finds no application to cases
involving no-fault insurances under which the
insured is indemnified for losses by insurance
companies, regardless of who was at fault in the
incident generating the losses. Here, it is clear that
MMPC is a no-fault insurer. Hence, it cannot be
obliged to pay hospitalization expenses of the
dependents of its employees which had already
been paid by separate health insurance providers of
said dependents (Mitsubishi Motors Philippines
Salaried Employees Union vs. Mitsubishi Motors Corp
G.R. No. 175773, June 17, 2013, in Divina, 2014).
ELP Insurance, Inc. thereafter filed a complaint
for damages against CGM, Inc. before the RTC,
seeking reimbursement of the amount it had
paid to FCL Corp. for the loss of the subject cargo.
CGM, Inc. denied the claim on the basis that it is
not privy to the contract entered into by and
between FCL Corp. and ELP Insurance, Inc., and
hence, it is not liable thereof. If you are the
judge, how will you decide the case? (2014 Bar)
A: I will decide the case in favor of ELP Insurance.
Even if CGM, Inc. is not privy to the contract between
FCL Corp. and ELP Insurance, it is still liable for the
loss of the cargo. If the plaintiff’s property has been
insured and he has received indemnity from the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
To make the person who caused the loss legally
responsible for it.
To prevent the insured from receiving double
recovery from the wrongdoer and the insurer.
To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy.
120
Mercantile Law
When amount paid by the insurance company
does not fully cover the injury or loss
(Ci-Co-Spec)
NOTE: In case of international carriage in air
transportation, (i) the Montreal Convention as
ratified by the Philippines in 2015; (ii) the Warsaw
Convention (iii) Civil Aviation Authority Act, may be
applicable.
The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury
(NCC, Art. 2207).
Instances where the right of subrogation does
not apply (RRL-No LoCo)
1.
2.
3.
4.
5.
6.
If the goods are to be transported from the
Philippines to a foreign country, the law of the latter
country shall govern the transportation contract
(CC, Art. 1753; NDC. v. CA, G.R. No. L-49407, August
19, 1988).
Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
The insurer loses his rights against the
wrongdoer since the insurer can only be
subrogated to only such rights as the insured
may have
Where the insurer pays the insured the value of
the loss without notifying the carrier who has
in good faith settled the insured claim for loss
Where the insurer pays the insured for a loss or
risk not covered by the policy
Life insurance
For recovery of loss in excess of insurance
coverage
COMMON CARRIER
Requisites for an entity to be classified as a
common carrier (1996, 1997, 2000, 2002 Bar)
(PecofaB-LAW-FP)
1.
2.
NOTE: Since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such
a case, the insurer will be entitled to recover from
the insured whatever it has paid to the latter, unless
the release was made with the consent of the
insurer (Manila Mahogany Manufacturing Corp. v.
CA, G.R. No. L-52756, October 12, 1987).
3.
4.
5.
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes/pipelines is a
common carrier. The law does not distinguish as to
the means by which transportation is carried out, as
long as it is by land, water, or air. Neither does the
law require that transportation be through a motor
vehicle (First Phil. Industrial Corp. v. CA, G.R. No.
125948, December 29, 1998).
TRANSPORTATION LAW
Q: The Pereñas were engaged in the business of
transporting students from their respective
residences in Parañaque City to Don Bosco in
Pasong Tamo, Makati City and back. They
employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
students in the rear, including Aaron, out of the
van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea, or
air, [i] if within the Philippines; or [ii] if the
transportation of goods be from a foreign country to
the Philippines, shall be governed by the following
laws, arranged by order of application:
1.
2.
3.
Must be a Person, corporation, firm or
association;
Engaged in the Business of carrying or
transporting passengers or goods or both;
The carriage or transport must either be by
Land, water or air;
The service is for a Fee; and
The service is offered to the Public (Art. 1732,
NCC)
Provisions of the New Civil Code on Common
Carriers;
Code of Commerce; and
Special laws such as Carriage of Goods by the
Sea (COGSA); Salvage Law; Public Service Act;
Land Transportation and Traffic Code; Tariff
and Customs Code; and Civil Aeronautics Act
(Art. 1735 and 1766, NCC; American President
Lines, Ltd. v. Klepper, G.R. No. L-15671, November
29, 1960).
The Zarates commenced an action for damages
against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on
121
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
quasi-delict under Article 2176, Civil Code
against PNR.
ancillary activity (De Guzman v. CA, G.R. No.
L-4782, December 22, 1988).
b. Art. 1732 also carefully avoids making any
distinction between a person or enterprise
offering transportation service on a regular
or scheduled basis and one offering suhc
service on an occasional, episodic or
unscheduled basis (Ibid.).
c. Art. 1732 does not distinguish between a
carrier offering its services to the “general
public,” and one who offers services or
solicits its business only from a narrow
segment of the general population (Ibid.).
d. A person or entity is a common carrier and
has the obligations of the common carrier
under the Civil Code even if he did not
secure a Certificate of Public Convenience
(Ibid.).
e. The Civil Code makes no distinction as to
the means of transporting, as long as it is by
land, water or air (First Philippine Industrial
Corporation v. CA, G.R. no. 125948,
December 29, 1998).
f. The Civil Code does not provide that the
transportation should be by motor vehicle
(Ibid.).
g. A person or entity may be a common
carrier even if he has no fixed and publicly
known route, maintains no terminals, and
issues no tickets (Asia Lighterage and
Shipping, Inc. v. CA, G.R. No. 147246, August
19, 2003).
h. A person or entity need not be engaged in
the business of public transportation for
the provisions of the Civil Code on common
carriers to apply to them (Fabre, Jr. v. CA,
G.R. No. 111127, July 26, 1996).
i. The carrier can also be a common carrier
even if the operator does not own the
vehicle or vessel that he or she operates
(Cebu Salvage Corporation v. Philippine
Home Assurance Corp., G.R. No. 150403,
January 25, 2007).
(Aquino and Hernando, 2016)
The Pereñas argued that they exercised the
diligence of a good father of the family in the
selection and supervision of Alfaro by making
sure that Alfaro had been issued a driver’s
license and had not been involved in any
vehicular accident prior to the collision.
Is the operation of a school bus service
considered as a private carrier?
A: NO. The Pereñas, as the operators of a school bus
service, were:
a) engaged in transporting passengers
generally as a business, not just as a
casual occupation;
b) undertaking to carry passengers over
established roads by the method by
which the business was conducted; and
c) transporting students for a fee.
Despite catering to a limited clientèle, the Pereñas
operated as a common carrier because they held
themselves out as a ready transportation
indiscriminately to the students of a particular
school living within or near where they operated
the service and for a fee (Sps. Pereña v. Sps. Zarate,
G.R. No. 157917, August 29, 2012).
Test for determining whether one is a common
carrier (1996 Bar)
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of the
conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by
the carrier that he has held out to the general public
as his business or occupation. The question must be
determined by the character of the business actually
carried on by the carrier, not by any secret intention
or mental reservation it may entertain or assert
when charged with the duties and obligations that
the law imposes (Sps. Pereña v. Sps. Zarate, supra).
Q: Alejandro Camaling is engaged in buying
copra, charcoal, firewood, and used bottles and
in reselling them in Cebu City. He uses two (2)
big Isuzu trucks for the purpose; however, he
has no certificate of public convenience or
franchise to do business as a common carrier.
On the return trips to Alegria, he loads his trucks
with various merchandise of other merchants in
Alegria and in the two neighboring
municipalities. He charges them freight rates
much lower than the regular rates. In one of the
return trips, one cargo truck was loaded with
several boxes of sardines, owned by Pedro
Rabor. While passing the zigzag road between
The concept of common carriers contemplated
under Article 1732 of the Civil Code and the fact that
the said concept corresponds to the concept of
“public service” under the Public Service Act results
in the application of the following rules or
principles:
a.
Art. 1732 makes no distinction between
one whose principal business activity is the
carrying of persons or goods or both, and
one who does such carrying only as an
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
122
Mercantile Law
Carcar and Barili, the truck was hijacked by
three (3) armed men who took all the boxes of
sardines and kidnapped the driver and his
helper, releasing them only two (2) days later.
general public or to a limited few (De Guzman v. CA,
G.R. No. 47822, December 27, 1988).
Rabor sought to recover from Alejandro the
value of the sardines. The latter argued that he
is not a common carrier. If you were the judge,
would you sustain the contention of Alejandro?
(1991 Bar)
A private carrier is one who, without making the
activity a vocation, or without holding himself or
itself out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire (Sps Pereña v. Sps Zarate,
supra).
Private carrier
A: NO. If I were the judge, I would rule that
Alejandro is a common carrier. A person who offers
his services to carry passengers or goods for a fee is
a common carrier, regardless of whether he has a
certificate of public convenience or not, whether it
is his main business or is incidental to such
business, whether it is scheduled or unscheduled
service, and whether he offers his services to the
A carrier which does not qualify under the
requisites of a common carrier is deemed a private
carrier (National Steel Corporation v. CA, G.R. No.
112287, December 12, 1997).
Common carrier v.Private carrier (2002 Bar)
To whom the
carrier caters its
services
COMMON CARRIER
Undertakes to carry passengers or goods
for the public
Civil Code Provisions on Common Carriers,
Public Service Act, and other special laws
relating to transportation
Governing laws
PRIVATE CARRIER
Carriage is generally undertaken by special
agreement and it does not hold itself out to
carry goods for the general public
Civil Code
contracts
provisions
on
ordinary
(CICOCA-PSA-SPEC)
Degree
Diligence
required
of
Presumption
Negligence
of
Extraordinary diligence
Ordinary diligence or diligence of a good
father of the family
1. If the goods are lost, destroyed or
deteriorated.
2. In case of death of or injuries to
passengers
No presumption as to negligence
Whether subject
to regulation or
not
Subject to regulation by a regulatory
agency
NOT subject to regulation by a regulatory
agency
Exemption from
liability
A common carrier cannot stipulate that it
is exempt from liability for negligence of its
agents or employees. Such stipulation is
void as it is against public policy
A private carrier may validly enter into a
stipulation exempting it from liability.
DILIGENCE REQUIRED OF COMMON CARRIERS
Reasons for the requirement of extraordinary
diligence:
The diligence required of common carriers is
extraordinary diligence (NCC, Art. 1733).
1.
It is that extreme measure of care and caution which
persons of unusual prudence and circumspection
use for securing and preserving their own property
or rights. The law requires common carriers to
render service with the greatest skill and utmost
foresight (Loadmasters Services v. Glodel Brokerage,
G.R. 179446, January 10, 2011).
2.
Because of the nature of the business of
common carrier which is public service; and
For public policy consideration - the common
carriers are supposed to serve the public
interest and therefore, they have to exercise
extraordinary diligence (Martin, 1989).
Q: Why is the defense of due diligence in the
selection and supervision of an employee not
available to a common carrier? (2002 Bar)
123
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
A: The defense of due diligence in the selection and
supervision of an employee is not available to a
common carrier because the degree of diligence
required of a common carrier is not the diligence
of a good father of a family but extraordinary
diligence, i.e., diligence of the greatest skill and
utmost foresight.
carrier at the place of
destination until the
consignee has been
advised of the arrival of
the goods and has been
given a reasonable
opportunity thereafter
to remove them or
otherwise dispose of
them.
Q: Are common carriers liable for injuries to
passengers even if they have observed ordinary
diligence and care? Explain. (2015 Bar)
The requirement to observe extraordinary diligence
begins with the actual delivery of the goods for
transportation, and not merely with the formal
execution of a receipt or bill of lading; the issuance
of a bill of lading is not necessary to complete
delivery and acceptance by the carrier (Compania
Maritima v. Insurance Co. of North America, G.R. No.
L-18965, October 30, 1964).
A: YES, common carriers are liable to injuries to
passengers even if the carriers observed ordinary
diligence and care because the obligation imposed
upon them by law is to exercise extraordinary
diligence. Common carriers are 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.
Q: In cases where the cargoes are damaged when
it is being unloaded from the vessel, is the vessel
owner relieved of its responsibility to observe
extraordinary diligence from the moment the
cargoes were delivered to the arrastre
operator?
Exercise of extraordinary diligence in the
carriage of goods and transport of passengers
EXTRAORDINARY DILIGENCE
Carriage of Goods
Transport of
Passengers
Commencement
Commences from the
Commences from the moment the person
time the goods are who purchases the
unconditionally placed ticket from the carrier
in the possession of and presents himself at the
received by the carrier proper place and in a
for transportation
proper manner to be
transported
Duration
1. GR: Continues until
the goods are delivered,
actually
or
constructively, by the
carrier to the consignee
or to the person who
has a right to receive
them, and even when
Continues until the
they are temporarily
passenger has been
unloaded or stored in
landed at the port of
transit
destination and has
left the vessel owner’s
XPN:The shipper or
dock or premises
owner had made use of
the right or stoppage in
transit.
A: NO. Under the Civil Code, other pertinent laws
and jurisprudence, the extraordinary responsibility
of common carriers lasts until the time the goods
are actually or constructively delivered by the
carrier to the consignee or the person who has the
right to receive. There is actual delivery in contracts
for the transport of goods when possession has
been turned over to the consignee or to his duly
authorized agent and a reasonable time is given him
to remove the goods. In this case, since the
discharging of the containers had not yet been
completed at the time the damage occurred, there
was still no delivery, actual or constructive, of the
cargoes (Westwind Shipping Corp v. UCPB General
Insurance Co., G.R. No. 200289 November 25, 2013).
Q: X, while driving his Toyota Altis, tried to cross
the railway tract of PNR along Blumentritt
Avenida Ext., Manila. The train, as it approached
Blumentritt Avenida Ext., applied its horn as a
warning to all the vehicles that might be
crossing the railway tract, but there was really
nobody manning the crossing. X was listening to
his lpod Touch, hence, he did not hear the sound
of the horn of the train and so his car was hit by
the train. As a result of the accident, X suffered
some injuries and his car was totally destroyed
as a result of the impact. Is PNR liable? (2012
Bar)
2.
Continues
even
during the time the
goods are stored in a
warehouse
of
the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A: NO. PNR is not liable because X should have
known that he was crossing a place designated as
124
Mercantile Law
crossing for train, and therefore should have been
more careful.
Q: Fil-Asia Air Flight 9I6 was on a scheduled
passenger flight from Manila when it crashed as
it landed at the Cagayan de Oro airport. The pilot
miscalculated the plane's approach and
undershot the runway. Ten passengers died at
the crash scene.
Causes of action for failure to observe diligence
required
PERSON WHO HAS
CAUSE OF ACTION
Third person who
suffered damages
Shipper of the
goods damaged
Heir/s
of
the
deceased
passengers or the
passenger himself
for the injuries
sustained by him
CAUSE OF ACTION
OF THE INJURED
PASSENGER OR HIS
HEIRS, IF THE
PASSENGER DIES:
BASIS OF CAUSE OF
ACTION AGAINST THE
COMMON CARRIER
Tort
(extra-contractual
negligence)
Breach of the contract of
carriage
(Culpa
Contractual)
One of them managed to leave the plane but was
run over by an ambulance coming to the rescue.
Another was an airline employee who hitched a
free ride to Cagayan de Oro and who was not in
the passenger manifest.
The Civil Aeronautics Authority investigation
showed that the co-pilot who had control of the
plane's landing had less than the required flying
and landing time experience, and should not
have been in control of the plane at the time. He
was allowed to fly as a co-pilot because of the
scarcity of pilots - Philippine pilots have been
recruited by foreign airlines under vastly
improved flying terms and wages so that newer
and less trained pilots are being locally
deployed. The main pilot, on the other hand, had
a very high level of blood alcohol at the time of
the crash.
Breach of the contract of
carriage
(Culpa
Contractual)
BASIS OF CAUSE OF
ACTION
Culpa criminal
Against
the
negligent driver
Against the carrier
and driver operating
the other vehicle at
fault
You are part of the team that the victims hired to
handle the case for them as a group. In your case
conference, the following questions came up:
If the driver is convicted
and it turns out that he
is insolvent, the heirs/
passengers may run
after the employer of
the driver, pursuant to
the
employer’s
subsidiary
liability
under Article 103, in
relation to Arts. 100 and
102, RPC.
Tort
a.
Explain the causes of action legally possible
under the given facts against the airline and
the pilots; whom will you specifically
implead in these causes of action?
b. How will you handle the cases of the
passenger run over by the ambulance and
the airline employee allowed to hitch a free
ride to Cagayan de Oro? (2013 Bar)
A:
a. A complaint for breach of contract of carriage
can be filed against Fil-Asia Air for failure to
exercise
extraordinary
diligence
in
transporting the passengers safely from their
point of embarkation to their destination (Art.
1755, NCC).
Culpa Contractual;
Direct and primary
Against the common
carrier at fault
The liability of the
common carrier and his
driver as well as the
operator of the other
vehicle and his driver is
joint and several (J.
Dimaampao, citing Tiu v.
Arriesgado, G.R. No.
138060, September 1,
2004).
A complaint based on a quasi-delict can be filed
against the pilots because of their fault and
negligence (Art. 2176, NCC). Fil-Asia Air can be
included for negligence in the selection and
supervision of the pilots (Art. 2180, NCC).
A third cause of action may be a criminal
prosecution for the reckless imprudence
resulting in homicide against two pilots. The
airline will be subsidiary liable for the civil
125
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
liability, only after the pilots are convicted and
found to be insolvent.
b.
lost, destroyed, or deteriorated, and that the
common carrier must prove that it exercised
extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the
burden is shifted to the defendant, prove that the
subject shipment suffered actual shortage. This can
only be done if the weight of the shipment at the
port of origin and its subsequent weight at the port
of arrival have been proven by a preponderance of
evidence, and it can be seen that the former weight
is considerably greater than the latter weight, taking
into consideration the exceptions provided in
Article 1734 of the Civil Code (Asian Terminals, Inc.
v. Simon Enterprises, Inc., G.R. No. 177116, February
27, 2013).
It is the driver of the ambulance and his
employer who should be held liable for
damages because a passenger was run over.
This is in accordance with Articles 2176 and
2180 of the Civil Code. There could also be a
criminal prosecution for reckless imprudence
resulting in homicide against the ambulance
driver and his consequent civil liability.
Since the airline employee was being
transported gratuitously, Fil-Asia Air was not
required to exercise extraordinary diligence for
his safety and only ordinary care (Lara v.
Valencia, G.R. No. L-9907, June 30, 1958).
Q: Peter hailed a taxicab owned and operated by
Jimmy Cheng and driven by Hermie Cortez. On
the way to Malate, the taxicab collided with a
passenger jeepney, as a result of which Peter’s
left leg was fractured. Peter sued Jimmy for
damages, based on contract of carriage, and
Peter won. Jimmy wanted to challenge the
decision before the SC on the ground that the
trial court erred in not making an express
finding as to whether or not Jimmy was
responsible for the collision and, hence, civilly
liable to Peter. He went to see you for advice.
What will you tell him? Explain (1990 Bar).
LIABILITIES OF COMMON CARRIER
Presumption of negligence in the carriage of
goods (1997, 2001, 2008 Bar)
GR: There is a presumption of negligence if the
goods are lost, destroyed, or deteriorated.
XPNs: (Dica-WA-COa-Ed)
1. Natural disaster or calamity which is the
proximate cause of the loss (flood, storm,
earthquake, lightning);
2. Acts of public enemy in war, whether
international or civil;
3. Act of omission of the shipper or passenger;
4. Character of the goods or defects in the packing
or container;
5. Order or act of competent public authority (Art.
1734, NCC); or
6. Exercise of extraordinary diligence (Art. 1735,
NCC).
A: I will advise Jimmy to desist from challenging the
decision. The action of Peter being based on culpa
contractual, the carrier’s negligence is presumed
upon the breach of contract. The burden of proof
instead would lie on Jimmy to establish that despite
an exercise of utmost diligence, the collision could
not have been avoided.
Q: In a court case involving claims for damages
arising from death and injury of bus
passengers, counsel for the bus operator filed a
demurrer to evidence arguing that the
complaint should be dismissed because the
plaintiffs did not submit any evidence that the
operator or its employees were negligent. If
you were the judge, would you dismiss the
complaint? (1997 Bar)
Presumption of negligence in the transportation
of passengers (1990, 1994 Bar)
In case of death of or injuries to passengers,
common carriers are presumed to have been at fault
or to have acted negligently (NCC, Art. 1756).
However, such presumption may be refuted by
proving observance of extraordinary diligence as
prescribed by Article 1733 of the NCC.
A: NO. In the carriage of passengers, the failure of
the common carrier to bring the passengers safely
to their destination immediately raises the
presumption that such failure is attributable to the
carrier‘s fault or negligence, the plaintiff need not
adduce proof of specific acts of negligence committed
by the carrier. It is for the carrier to rebut such
presumption.
Q: Is it important that the plaintiff still prove
that the subject shipment suffered actual
shortage before the burden is shifted to the
defendant common carrier to prove that it
exercised extraordinary diligence?
A: YES. Though it is true that common carriers are
presumed to have been at fault or to have acted
negligently if the goods transported by them are
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Presumption of negligence
126
Mercantile Law
The court need not make an express finding of fault
or negligence of common carriers, the law imposes
liability upon common carriers, as long as it shown
that: (Con-LoDID)
1.
2.
PAL from any liability (British Airways v. CA, G.R. No.
121824, January 29, 1998).
VIGILANCE OVER GOODS
There exist a contract between the passenger
or the shipper and the common carrier; and
That the loss, deterioration, injury or death
took place during the existence of the contract
(Air France v. Gillego, G.R. No. 165266, December
15, 2010).
EXEMPTING CAUSES
Presumption on the loss, destruction, or
deterioration of goods
Effect of Acquittal
GR: The common carrier is presumed to have been
at fault or to have acted negligently when the goods
transported are lost, destroyed, or deteriorated
(Art. 1735, NCC).
The acquittal of the employee of the common carrier
in the criminal case is immaterial to the case for
breach of contract (Heirs of Marcial K. Ochoa v. G&S
Transport Corp., G.R. Nos. 170071 and 170125, March
9, 2011).
XPNs: When the same is due to any of the following
causes only: (FA2 – C O)
Q: Vivian Martin was booked by PAL, which
acted as ticketing agent of Far East Airlines, for
a round trip flight on the latter’s aircraft, from
Manila–Hong Kong- Manila. The ticket was cut
by an employee of PAL. The ticket showed that
Vivian was scheduled to leave Manila at
5:30p.m. Vivian arrived at NAIA an hour before
the time scheduled in her ticket, but was told her
flight had left at 12:10p.m. It turned out that the
ticket was inadvertently cut and wrongly
worded. PAL employees nevertheless scheduled
her to fly two hours later aboard their plane. She
agreed and arrived in Hong Kong safely. The
aircraft used by Far East Airlines had an engine
trouble, and did not make it to HK but returned
to Manila. Vivian sued both PAL and Far East.
Could either or both airlines be held liable to
Vivian? Why? (2003 Bar)
1.
Fortuitous events (flood, storm, earthquake,
lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
a. Natural disaster was the proximate and
only cause;
b. Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the occurrence of the natural disaster; and
c. The common carrier has not negligently
incurred delay in transporting the goods
(Art. 1739-1740, NCC).
2.
Act of the public enemy in war, whether
international or civil, provided:
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the act (Art. 1739-1740, NCC).
A: Only Far East Airline is liable. The instant
petition was based on breach of contract of carriage;
therefore, Vivian can only sue Far East Airlines
alone, and not PAL, since the latter was not a party
to the contract. However, this is not to say that PAL
is relieved from any liability due to any of its
negligent acts. In China Air Lines, Ltd. v. CA, while
not exactly in point, however, illustrates the
principle which governs this particular situation. In
that case, the carrier (PAL), acting as an agent of
another carrier, was also liable for its own negligent
acts or omission in the performance of its duties. Far
East Airlines may also file a third-party complaint
against PAL for the purpose of determining who was
primarily at fault between them. It is but logical, fair,
and equitable to allow Far East Airlines to sue PAL
for indemnification, if it is proven that the latter’s
negligence was the proximate cause of Vivian’s
unfortunate experience, instead of totally absolving
3.
Act or omission of the shipper or owner of the
goods, provided:
a. If proximate and only cause – exempting
b. If contributory negligence – mitigating
4.
The Character of the goods or defects in the
packing or in the containers; provided, carrier
exercised due diligence to forestall or prevent
loss (Art 1742, NCC).
NOTE: If the fact of improper packing is known
to the carrier or its servants, or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not
relieved from responsibility for loss or injury
resulting therefrom (Southern Lines Inc., v. CA,
GR No. L-16629, January 31, 1962).
127
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
5.
Order or act of competent authority; provided,
the authority is with power to issue the order
(Art. 1743, NCC).
XPN: If the fire is caused by lightning or by other
natural disaster or calamity. (Eastern Shipping Lines
v. IAC, G.R. No. L-69044, May 29, 1987)
NOTE: There must be an order or act of
competent public authority through which the
goods are seized or destroyed (Art. 1734, NCC).
NOTE: In case that the goods have already been
deposited in the warehouse of the Bureau of
Customs and the goods were then destroyed by fire,
the carrier is not anymore liable. (Servando v.
Philippine Steam Navigation, G.R. No. L-36481-2,
October 23, 1982)
If the officer acts without legal process, the
common carrier will be held liable (Ganzon v.
CA, GR No. L-48757, May 30, 1988).
Typhoon as a fortuitous event
In all cases other than those enumerated above,
there is presumption of negligence even if there is
an agreement limiting the liability of the common
carrier in the vigilance over the goods.
GR: If all the elements of a natural disaster or
calamity concur and there was no contributory
negligence or delay, the occurrence of a typhoon is
a fortuitous event. This holds true especially if the
vessel was seaworthy at the time it undertook that
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would
permit safe travel of the vessel to its destination
(PhilAm Gen. v. MGG Marine Services, Inc., G.R. No.
135645, March 8, 2002).
FORTUITOUS EVENT
REQUIREMENT OF ABSENCE OF NEGLIGENCE
Requisites of a fortuitous event (FEU-I)
1.
2.
3.
4.
The common carrier must be Free from any
participation in or aggravation of the injury to
the creditor.
The Event must be such as to render it
impossible for the common carrier to fulfill his
obligation in a normal manner.
The event must be Unforeseen or unavoidable.
The cause of the breach of obligation must be
Independent of the will of the common carrier
(Real v. Belo, G.R. No. 146224, January 26, 2007).
The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure
(PhilAm Gen. v. PKS Shipping Company, G.R. 149038,
April 9, 2003).
XPN: If a vessel sank due to a typhoon, and there
was failure to ascertain the direction of the storm
and the weather condition of the path they would be
traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into
account the surrounding circumstances of the case.
Thus, the common carrier will still be liable (Arada
v. CA, G.R. No. 98243, July 1, 1992).
A mechanical defect is not fortuitous event
Mechanical defects in the carrier are NOT
considered a caso fortuito that exempts the carrier
from responsibility (Sweet Lines, Inc. v. CA, G.R. No.
L-46340, April 29, 1983).
Where a vessel encountered stormy weather and
the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the
damage was not due to a fortuitous event, because
heavy rains are foreseeable and rain would not have
entered the hatch if it was closed properly (Eastern
Shipping Lines v. CA, G.R. No. 97412, July 12, 1994).
Tire blowout of a jeep is not a fortuitous event
where there exists a specific act of negligence by the
carrier consisting of the fact that the jeepney was
overloaded and speeding at the time of the incident
(Juntilla v. Fontanar, GR No. L-45637, May 31, 1985).
Defective brakes cannot be considered fortuitous in
character (Vergara v. CA, G.R. No. 77679, September
30, 1987).
Q: On a clear weather, M/V Sundo, carrying
insured cargo, left the port of Manila bound for
Cebu. While at sea, the vessel encountered a
strong typhoon forcing the captain to steer the
vessel to the nearest island where it stayed for
seven days. The vessel ran out of provisions for
its passengers. Consequently, the vessel
proceeded to Leyte to replenish its supplies.
Fire is not considered a natural disaster
GR: Fire arises almost invariably from some act of
man or by human means. It does not fall within the
category of an act of God.
Assuming that the cargo was damaged because
of such deviation, who between the insurance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
128
Mercantile Law
company and the owner of the cargo bears the
loss? Explain. (2005 Bar)
XPN: Where such thieves or robbers acted "with
grave or irresistible threat, violence or force." The
common carrier is not liable for the value of the
undelivered merchandise which was lost because of
an event that is beyond his control (De Guzman v. CA,
supra).
A: The insurance company is liable. It is an instance
of a valid deviation because the strong typhoon is a
fortuitous event over which neither the master nor
the owner has any control. Deviation is likewise
proper in order to avoid a peril. Common carriers
are responsible for the loss, destruction,
deterioration of the goods unless the same is due to
any of the causes provided by law – which includes,
among others, is when there is flood, storm,
earthquake, lightning, or other natural disaster or
calamities. Moreover, even in cases where a natural
disaster is the proximate and only cause of the loss,
a common carrier is still required to exercise due
diligence to prevent or minimize loss before, during
and after the occurrence of the natural disaster, for
it to be exempt from liability under the law for the
loss of the goods. Such deviation is just proper in its
exercise of extraordinary diligence (The Philippine
American General Insurance Co., Inc. v. MCG Marine
Services, Inc. and Gaerland, G.R. No. 135645, March
28, 2005).
Q: M. Dizon Trucking entered into hauling
contract with Fairgoods Co. whereby the former
bound itself to haul the latter’s 2000 sacks of
soya bean meal from Manila Port Area to
Calamba, Laguna. To carry out faithfully its
obligation, Dizon subcontracted with Enrico
Reyes the delivery of 400 sacks of the soya bean
meal. Aside from the driver, three male
employees of Reyes rode on the truck with the
cargo. While the truck was on its way to Laguna,
two strangers suddenly stopped the truck and
hijacked the cargo. Investigation by the police
disclosed that one of the hijackers was armed
with a bladed weapon while the other was
unarmed. For failure to deliver the 400 sacks,
Fairgoods sued Dizon for damages. Dizon in turn
set up a third party complaint against Reyes
which the latter registered on the ground that
the loss was due to force majeure. Did the
hijacking constitute force majeure to exculpate
Reyes from any liability? (1995 Bar)
Q: Philip Mauricio shipped a box of cigarettes to
a dealer in Naga City through Bicol Bus Company
(BBC). When the bus reached Lucena City, the
bus developed engine trouble. The driver
brought the bus to a repair shop in Lucena
where he was informed by the mechanic that an
extensive repair was necessary, which would
take at least 2 days. While the bus was in the
repair shop, Typhoon Coring lashed Quezon
Province. The cargoes inside the bus, including
Mauricio’s cigarettes, got wet and were totally
spoiled. Mauricio sued BBC for damage to his
cargoes. Decide. (1987 Bar)
A: NO. The hijacking in this case cannot be
considered as force majeure. Only one of the two
hijackers was armed with a bladed weapon. As
against four male employees of Reyes, two (2)
hijackers, with only one of them being armed with a
bladed weapon, cannot be considered force
majeure. In De Guzman vs. Court of Appeals, the
Supreme Court held that hijacking, not being
included in the provisions of Article 1734, must be
dealt with under the provisions of Article 1735 and
thus, the common carrier is presumed to have been
at fault or negligent. To exculpate the carrier from
liability arising from hijacking, he must prove that
the robbers or the hijackers acted with grave or
irresistible threat, violence, or force (Bascos v. CA,
G.R. No. 101089, April 7, 1993)
A: BBC is liable for damages to the cargoes lost by
Mauricio. A natural disaster would relieve liability if
it is the proximate and only cause of the damage.
The carrier itself, in this case, had been negligent.
The presumption of negligence in culpa contractual
is not overcome by invoking the defense that there
has been engine trouble, for such defense does not
preclude its having been due to the fault of the
common carrier. The fact that an extensive repair
work was necessary which, in fact, took 2 days to
complete, somehow justifies an impression that the
engine trouble could have been detected, if not
already known, well before the actual breakdown.
When an airline company was not authorized to
search passengers for firearms, the loss of the
jewelry and cash of a passenger because of an
armed robbery committed by other passengers is a
force majeure, for which the airline company is not
liable (Quisumbing v. CA, G.R. No L-50076, September
14, 1990).
Common carrier’s liability for the acts of
strangers or criminals
NOTE: With increased concern over airplane
hijacking and terrorism has come increased security
at the nation’s airports. Passengers attempting to
board an aircraft routinely pass through metal
detectors; their carry-on baggages as well as
GR: A common carrier is liable even for acts of
strangers like thieves or robbers.
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UNIVERSITY OF SANTO TOMAS
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Transportation Laws
checked luggage are routinely subjected to x-ray
scans. Should these procedures suggest the
presence of suspicious objects, physical searches
are conducted to determine what the objects
are. There is little question that such searches are
reasonable, given their minimal intrusiveness, the
gravity of the safety interests involved, and the
reduced privacy expectations associated with
airline travel. Indeed, travelers are often notified
through airport public address systems, signs and
notices in their airline tickets that they are subject
to search and, if any prohibited materials or
substances are found, such would be subject to
seizure. These announcements place passengers on
notice that ordinary constitutional protections
against warrantless searches and seizures do not
apply to routine airport procedures (People
v. Suzuki, G.R. No. 120670, October 23, 2003).
Delay in the delivery of goods
The carrier shall be liable for damages immediately
and proximately resulting from such neglect of duty
(Ibid; Art. 1170, NCC).
In the absence of a special contract, a carrier is not
an insurer against delay in the transportation of
goods. The effects of delay are as follows:
a.
NOTE: An agreement limiting the common
carrier’s liability for delay on account of strikes
or riots is valid (Art. 1748, NCC).
Other invalid defenses
Explosion. Damage to cargo from explosion of
another cargo is not ordinarily attributable to peril
of the sea or accidents of navigation particularly
where it occurs after the vessel has ended its voyage
and is finally moored to unload.
b.
c.
Worms and Rats. Whenever the ship is damaged by
worms resulting in damage to the cargo, the carrier
cannot cite the same as an excuse. The same is true
with respect to damage of the cargo by rats whether
the cargo was directly damaged by the rats or by the
water let in through holes gnawed by rats in the ship
or her fixtures.
d.
e.
Barratry. The ship owner cannot escape liability to
third persons if the cause of damage is barratry. It is
an act committed by the master or crew of the ship
for some unlawful or fraudulent purpose, contrary
to their duty to the owner. (Aquino and Hernando,
2016)
Although the delivery of the suitcase of a passenger
was delayed by eleven days, an airline company
cannot be held liable for moral damages, exemplary
damages, and attorney’s fees, where the airline
company was not guilty of bad faith and exerted
efforts in tracing the suitcase (Philippine Air Lines v.
Miano, G.R. No. 106664, March 8, 1995).
ABSENCE OF DELAY
Rules regarding the time of delivery of goods
and delay
2.
DUE DILIGENCE TO PREVENT OR LESSEN LOSS
To free the common carrier from liability in case
of flood, storm or other natural disaster or an act
of a public enemy
If there is an agreement as to time of delivery –
delivery must be within the time stipulated in
the contract or bill of lading.
If there is no agreement – delivery must be
within a reasonable time (Saludo, Jr. v. CA, G.R.
No. 95536, March 23, 1992).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Excusable delay in carriage merely suspends
and generally does not terminate the contract of
carriage;
The carrier shall be made liable when vessel or
vehicle is unreasonably delayed;
Carrier remains duty bound to exercise
extraordinary diligence; and
Natural disaster shall not free the carrier from
responsibility
(Dimaampao
&
DumlaoEscalante, 2014).
However, where the delay in the transportation of
the remains of a deceased person was due to the
fault of the mortuary service, who erroneously
switched the casket with that of another deceased
person, the airline company cannot be held liable
for damages because of the delay (Saludo v. CA,
supra).
Water Damage. Damage by seawater is not a valid
excuse where the water gains entrance through a
port that had been left open or insufficiently
fastened on sailing.
1.
If the common carrier, without just cause,
delays the transportation of the goods or
changes the stipulated or usual route, the
contract limiting the common carrier’s liability
cannot be availed of in case of the loss,
destruction, or deterioration of the goods (Art.
1747, NCC).
1.
130
The common carrier must exercise due
diligence to prevent or minimize loss
before, during, and after the occurrence
(NCC Art., 1739).
Mercantile Law
2.
The natural disaster or the act of the public
enemy is the proximate and only cause of
the loss (NCC, Art. 1740).
the building. It smashed a taxicab which at that
time had gone off-road and onto the sidewalk in
order to avoid the traffic. The taxicab
passengers died as a result.
NOTE: If the common carrier negligently incurs
delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.
a.
If you were the counsel for Sonnel
Construction, how would you defend your
client? What would be your theory?
b. Could the heirs hold the taxicab owner and
driver liable? Explain. (2008 Bar)
Loss due to character of the goods or the faulty
nature of its containers
If the loss, destruction, or deterioration of the goods
was caused by the character of the goods, or the
faulty nature of the packing or the containers, the
common carrier must exercise due diligence to
forestall or lessen the loss.
A:
a. I shall raise the affirmative defense of
contributory negligence. The proximate cause
of death is the violation of the taxi driver of
traffic rules and regulations when it drove offroad to avoid heavy traffic. The lumber that fell
from the building was only the immediatecause
ofdeath of the victims. Further, Sonnel
Construction, exercised due diligence in the
selection and supervision of its employees.
Q: Because of spillage of the rice during the trip
from Davao to Manila due to the bad condition of
the sacks, there was a shortage in the rice
delivered by the Provident Lines Inc. to the
consignee XYZ Import and Export Corporation.
The carrier accepted the shipment, knowing
that the sacks had holes and some had broken
strings. When sued, Provident Lines, Inc. alleged
that the loss was caused by the spillage of the
rice on account of the defective condition of the
sacks, at the time it received the shipment, and
therefore, it cannot be held liable. Decide. Give
reasons. (1978 Bar)
b.
A: The maritime carrier is liable. Where the fact of
improper packing is known to the carrier or its
servants, or apparent upon ordinary observations,
but the carrier accepts the goods notwithstanding
such conditions, it is not relieved of liability for loss
or injury resulting therefrom (Southern Lines, Inc. v.
CA, 4 SCRA 259).
YES. Both taxicab owner and driver may be held
liable based on breach of contract of carriage
and negligence in the selection and supervision
of employees for quasi-delict. The driver can be
held criminally liable for reckless imprudence
resulting to homicide and for damages under
quasi-delict as provided in Article 2180— an
employer may be held solidarily liable for the
negligent act of his employee. Hence, in this
case, the taxicab owner is exempted from
liability while the taxi cab driver is liable solely
and personally for criminal prosecution.
Q: A and his classmates took a bus from UP to
Quiapo. On the way, another Quiapo-bound bus
tries to overtake them. A and his classmates
dared the bus driver to run faster and race with
the other bus. The driver takes their dare, to the
delight of A and his friends who cheered him. On
rounding the curve, the bus driver fails to slow
down and the bus turns turtle, resulting in the
death of A and injuries to the other passengers.
CONTRIBUTORY NEGLIGENCE
Contributory negligence is the failure of a person
who has been exposed to injury by the fault or
negligence of another, to use such degree of care for
his safety and protection an ordinarily prudent man
would use under the circumstances (Martin, 1989,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719,
January 23, 1907).
NOTE: Contributory negligence on the part of the
passenger does not justify the common carrier’s
exemption from liability (Martin, 1989).
The bus carried the following sign: “Do not talk
to driver while bus is on motion, otherwise the
company will not assume liability for any
accident.”
Explain briefly the extent of the liability, if any,
of the bus company, giving the legal provisions
and principles involved. (1983 Bar)
Q: Nelson owned and controlled the Sonnel
Construction Company. Acting for the company,
Nelson contracted the construction of a building.
Without first installing a protective net atop the
sidewalks adjoining the construction site, the
company proceeded with the construction
work. One day, a heavy piece of lumber fell from
A: The bus company is liable for damages to A’s
heirs and to all the injured passengers. Under the
Civil Code, a common carrier is duty bound to
exercise extraordinary diligence in carrying its
passengers through the negligence or willful acts of
131
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
its employees even if the latter have acted beyond
the scope of their authority or in violation of their
orders. This liability cannot be eliminated or limited
by stipulation or by posting notices. Although it may
be argued that A was guilty of contributory
negligence, such an argument loses its force in the
face of the driver’s recklessness in taking the dare.
And even if such argument would be accepted, at
most it can only mitigate the amount of damages,
since the proximate cause of the accident was the
driver’s willful and reckless act in running a race
with the other bus.
When the carrier has thus accepted such delivery,
the liability of the carrier commences eo instant
(Saludo, Jr. v. CA, G.R. No. 95536, March 23, 1992,
citing 13 Am. Jur. 2d, Carriers, 763-764).
Rule if there is contributory negligence on the
part of the shipper
Delivery of the cargo to the customs authorities is
not delivery to the consignee, or to the person who
has a right to receive them (Lu Do & Lu Ym Corp. vs.
Binamira, G.R. No. L-9840, April 22, 1957).
ACTUAL OR CONSTRUCTIVE DELIVERY
Party to whom delivery should be made
It must be delivered, actually or constructively, to
the consignee or to the person who has a right to
receive them (Art.1736, NCC).
If the shipper or owner merely contributed to the
loss, destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
common carrier, the latter shall be liable for
damages, which however, shall be equitably
reduced (Art. 1741, NCC).
Constructive delivery
There is constructive delivery when delivery is
effected not by actually transferring the possession
of thing to the vendee (in this case, the other party,
either the carrier or the consignee) but by legal
formalities or by symbolic tradition (Pineda, 2010).
DURATION OF LIABILITY
The New Civil Code is explicit when it comes to the
duration of extraordinary responsibility with
respect to goods. Such responsibility lasts from the
time the goods are unconditionally placed in the
possession of, and received by the carrier for
transportation. Until the same are delivered,
actually or constructively, by the carrier to the
consignee, or to the person who was a right to
receive them (Art. 1736, NCC).
NOTE: Delivery of the cargo to the customs
authorities is not delivery of the cargo to the
consignee, or to the person who has a right to
receive them", contemplated in Article 1736,
because in such case the goods are still in the hands
of the Government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier considering
that the goods have still to through the inspection of
the customs authorities before they are actually
turned over to the consignee. It is a situation where
the carrier losses control of the goods because of a
custom regulation and it is unfair that it be made
responsible for what may happen during the
interregnum. This stipulation is not contrary to
morals or public policy (Lu Do v. Binamira, G.R. No.
L-9840, April 22, 1957).
The carrier’s responsibility terminates in any of the
following cases:
1. When the goods are delivered actually or
constructively by the carrier to the consignee or to
the person who was a right to receive them (Art.
1736, NCC);
2. When the goods are temporarily unloaded or
stored in transit by reason of the exercise of the
shipper or owner of his right of stoppage in transit;
Misdelivery by a carrier who was chosen by the
buyer
3. When the consignee has been advised of the
arrival of the goods at the plce of destination and
has had reasonable opportunity to remove them or
dispose of them from the warehouse of the carrier
at the place of destination (Art. 1738, NCC).
Misdelivery of the goods is attributable to the
carrier and not to the seller. And, since the carrier
was chosen and authorized to make the delivery by
the buyer itself, the seller cannot be held
responsible for such misdelivery (Smith, Bell & Co.
[Phils.] vs. Gimenez, G.R. No. L-17617, June 29, 1963).
DELIVERY OF GOODS TO COMMON CARRIER
The goods are deemed delivered to the carrier when
the goods are ready for and have been placed in the
exclusive possession, custody and control of the
carrier for the purpose of their immediate
transportation and the carrier has accepted them.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
TEMPORARY UNLOADING OR STORAGE
Right of stoppage in transitu
132
Mercantile Law
It is the right exercised by the seller by stopping the
delivery of the goods, in case of insolvency of the
buyer or consignee, when such goods are already in
transit (NCC, Art. 1530).
b.
The seller may exercise this right either:
1. By obtaining actual possession of the goods; or
2. By giving notice of his claim to the carrier or
other bailee in whose possession the goods are.
2.
c.
3.
NOTE: Notice may be given either to the person
in actual possession of the goods or to his
principal. In the latter case, the notice, to be
effectual, must be given at such time and under
such circumstances that the principal, by the
exercise of reasonable diligence, may prevent a
delivery to the buyer (NCC, Art. 1532).
4.
GR: The common carrier’s duty to observe
extraordinary diligence in the vigilance over the
goods remains in full force and effect even when they
are temporarily unloaded or stored in transit.
NOTE: The contract limiting the common carrier's
liability cannot be availed of in case of loss,
destruction, or deterioration of the goods, if the
common carrier, without just cause:
XPN: When the shipper or owner has made use of
the right of stoppage in transit (Art. 1737, NCC).
1.
2.
The diligence required is merely ordinary diligence
because of the following:
1.
2.
Annulment of a stipulation limiting the common
carrier’s liability by the shipper or owner
Obligation required of the common carrier in
case of stoppage in transitu
A stipulation limiting the common carrier’s liability
may be annulled by the shipper or owner if the
common carrier refused to carry the goods unless
the shipper or owner agreed to such stipulation
(Art. 1746, NCC).
When notice of stoppage in transitu is given by the
seller to the carrier, he must redeliver the goods to,
or according to the directions of, the seller. The
expenses of such delivery must be borne by the
seller (Art. 1532, NCC).
NOTE: If the seller instructs to deliver it somewhere
else, a new contract of carriage is formed and the
carrier must be paid accordingly.
VOID STIPULATIONS
Void stipulations in a contract of carriage of
goods (CR2UELED)
1.
STIPULATIONS LIMITING LIABILITY
2.
Valid stipulations that a common carrier of
goods may indicate in a contract in order to
escape liability
a.
delays the transportation of the goods; or
changes the stipulated or usual route (Art.
1747, NCC).
Even if there is an agreement limiting the liability of
the common carrier in the vigilance over the goods,
the common carrier is still disputably presumed to
have been negligent in case of its loss, destruction or
deterioration (Art. 1752, NCC).
It is holding the goods in the capacity of an
ordinary bailee or warehouseman and not as a
carrier.
There is a change of contract from a contract of
carriage to a contract of deposit (Art. 1737,
NCC).
1.
Supported by a valuable consideration
other than the service rendered by the
common carrier, and
Reasonable, just and not contrary to public
policy.
An agreement limiting the common
carrier's liability for delay on account of
strikes or riots (Art. 1748, NCC).
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
(Art. 1749, NCC; 1998, 2002 Bar).
A contract fixing the sum that may be
recovered by the owner or shipper for the
loss, destruction, or deterioration of the
goods (Art. 1750, NCC).
3.
A stipulation limiting the liability of the
common carrier for the loss, destruction, or
deterioration of the goods to a degree less
than extraordinary diligence, provided it be:
In writing, signed by the shipper or owner;
4.
5.
133
That the common carrier need not observe any
diligence in the Custody of the goods
That the goods are transported at the Risk of
the owner or shipper
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
Any similar stipulation that is Unreasonable,
unjust and contrary to public policy
That the common carrier shall Exercise a
degree of diligence less than that of a good
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
6.
7.
8.
father of a family, or a man of ordinary
prudence in the vigilance over the movables
transported
That the common carrier will not be liable for
any Loss, destruction, or deterioration of the
goods
That the common carrier shall not be
responsible for the acts or omissions of his or
its Employees
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, NCC).
must be in writing and signed by the shipper or
owner of the goods, besides the other requirements
of the law (Shewaran v. PAL, G.R. No. L-20099, July 7,
1966).
Q: Martin Nove shipped an expensive video
equipment to a friend in Cebu. Martin had
bought the equipment from Hong Kong for U.S.
$5,000. The equipment was shipped through
M/S Lapu-Lapu under a bill of lading which
contained the following provision in big bold
letters: “The limit of the carrier’s liability for any
loss or damage to cargo shall be P200 regardless
of the actual value of such cargo, whether
declared by shipper or otherwise.”
The cargo was totally damaged before reaching
Cebu. Martin Nove claimed for the value of his
cargo ($5,000 or about P100,000) instead of just
P200 as per the limitation on the bill of lading.
Is there any legal basis for Nove’s claim?(1987
Bar)
Q: Discuss whether the following stipulations in
a contract of carriage of a common carrier are
valid:
1. A stipulation limiting the sum that may be
recovered by the shipper or owner to 90%
of the value of the goods in case of loss due
to theft.
2. A stipulation that in the event of loss,
destruction, or deterioration of goods on
account of the defective condition of the
vehicle used in the contract of carriage, the
carrier’s liability is limited to the value of
the goods appearing in the bill of lading
unless the shipper or owner declares a
higher value (2002 Bar).
A: YES, there is legal basis for the claim of Martin
Nove. The stipulation limiting the carrier’s liability
up to a certain amount “regardless of the actual
value of such cargo, whether declared by its shipper
or otherwise,” is violative of the requirement of Art.
1750 of Civil Code, which provides that stipulations
limiting liability should be fairly and freely agreed
upon. A stipulation that denies to the shipper the
right to declare the actual value of his cargoes and
to recover, in case of loss or damage, on the basis of
such stipulation would be invalid.
A:
1.
2.
Invalid. Article 1745 provides that a
stipulation which dispenses or diminishes
the common carrier’s liability for acts
committed by thieves or robbers who do
not act with grave and irresistible force,
threat or violence is unreasonable, unjust,
and contrary to public policy.
LIMITATION OF LIABILITY IN THE ABSENCE OF
DECLARATION OF GREATER VALUE
GR: The liability of the common carrier shall not
exceed the stipulation in a contract of carriage, even
if the loss or damage results from the carrier's
negligence (Eastern and Australian Shipping Co. v.
Great American Insurance Co., GR No. L-37604,
October 23, 1981).
Valid. Article 1749 provides that a
stipulation limiting the carrier’s liability to
the value of the goods appearing in the bill
of lading unless the shipper or owner
declares a higher value, is binding.
XPN: Common carrier’s liability may be extended
beyond the specified amount mentioned if the
shipper or owner of the goods:
1. Declares a greater value and;
2. Pays corresponding freight (Art. 1749, NCC)
LIMITATION OF LIABILITY TO FIXED AMOUNT
A contract fixing the sum that may be recovered for
the loss, destruction, and deterioration of goods is
binding provided that it is:
1. Just and reasonable under the circumstances;
and
2. Has been fairly and freely agreed upon (Art.
1750, NCC).
The liability of an airline company for lost baggage
is limited to the amount stated in the ticket unless
the passenger declared a higher valuation and paid
additional fare (Pan American World Airways, Inc. v.
IAC, G.R. No. 70462, August 11, 1988).
Q: X took a plane from Manila bound for Davao
via Cebu where there was a change of planes. X
arrived in Davao safely but to his dismay, his two
The liability of a common carrier may, by contract,
be limited to a fixed amount, but the agreement
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
134
Mercantile Law
suitcases were left behind in Cebu. The airline
company assured X that the suitcases would
come in the next flight but they never did. X
claimed P2,000.00 for the loss of both suitcases,
but the airline was willing to pay only P500.00
because the airline ticket stipulated that unless
a higher value was declared, any claim for loss
cannot exceed P250 for each piece of luggage. X
reasoned out that he did not sign the stipulation
and in fact had not even read it. X did not declare
a greater value despite the fact that the clerk had
called the attention to the stipulation in the
ticket. (1998 Bar)
boorishly (Pan American World Airways v. IAC, G.R.
No. 68988, June 21, 1990).
In one case, the Court held that the cause of the loss
was the negligence of the carrier in not ensuring
that the doors of the baggage compartment of the
bus were securely fastened (Sarkies Tours
Philippines, Inc. v. CA, G.R. No. 108897, October 2,
1997).
BAGGAGE IN POSSESSION OF PASSENGERS
The rules in Articles 1998 and 2000 to 2003, NCC
concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable.
A: X is bound by the stipulation written in the ticket
because he consented to the terms and conditions
thereof from the moment he availed the services of
the carrier. The fact that he did not sign the ticket
and he was not able to declare the true value of his
luggage is not a valid claim in order for the carrier
to pay for the value of the lost luggage. As a general
rule, the liability of the common carrier shall not
exceed the stipulation in a contract of carriage even
if the loss or damage results from the carrier’s
negligence However, it is subject to an exception
provided under Art. 1749 of NCC, as when the
shipper or owner of the goods declares a greater
value and pays corresponding freight. X, therefore is
only entitled to P500 for the two pieces of luggage
lost (Eastern and Australian Shipping Co., v. Great
American Insurance Co., G.R. No. L-37604, October 23,
1981).
But when the goods being shipped are packed in
cartons placed in containers supplied by the carrier
and the number of cartons is disclosed in the
shipping documents, it is the number of cartons and
not of the containers that should be used in
computing the liability of the carrier for the loss of
the goods, as it is the cartons that constitute the
packages (Eastern Shipping Lines, Inc. s. IAC, G.R. No.
L-71478, May 29, 1987).
1.
The common carrier shall be responsible for
shipper’s baggage as depositaries, provided
that:
a. notice was given to them, or to their
employees, of the effects brought by
the guests; and
b. on the part of the shipper, they take the
precautions which said common
carriers or their substitutes advised
relative to the care and vigilance of
their effects (Art. 1998, NCC).
2.
The responsibility shall include the loss of, or
injury to the personal property of the shipper
caused by the employees of the common carrier
as well as strangers; but not that which may
proceed from any force majeure (Art. 2000,
NCC).
The act of a thief or robber, who has entered the
carrier, is not deemed force majeure, unless it is
done with the use of arms or through an
irresistible force (Art. 2001, NCC).
The common carrier is not liable for
compensation if the loss is due to the acts of the
shipper, his family, or servants, or if the loss
arises from the character of the things brought
into the carrier (Art. 2002, NCC).
The common carrier cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the passenger. Any stipulation between the
common carrier and the shipper whereby the
responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or
diminished shall be void (Art. 2003, NCC).
3.
4.
LIABILITY FOR BAGGAGE OF PASSENGERS
5.
Baggage is any personal property carried by the
passenger, either check-in or hand-carry (Sec. 2.1,
Air Passenger Bill of Rights).
CHECKED-IN BAGGAGE
The provisions of Articles 1733 to 1753, NCC shall
apply (Art. 1754, NCC).
Q: Pasahero, a paying passenger, boarded a
Victory Liner bus bound for Olongapo. He chose
a seat at the front near the bus driver. Pasahero
told the bus driver that he had valuable items in
his bag which was placed near his feet. Since he
had not slept for 24 hours, he requested the
An airline company is liable for moral damages
where it left behind the luggage of a passenger, and
its employees did not assist the passenger in
locating his luggage but instead treated him
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
driver to keep an eye on the bag should he doze
off during the trip.
Q: Wisconsin Transportation Co., Inc. (WTC)
owned and operated an inter-island de luxe bus
service plying the Manila-Batangas-Mindoro
route. Three friends, namely: Aurelio, Jerome
and Florencio rode on the same WTC bus from
Manila bound for Mindoro. Aurelio purchased a
ticket for himself. Jerome, being a boyhood
friend of the bus driver, was allowed a free ride
by agreeing to sit during the trip on a stool
placed in the aisle. Florencio, already penniless
after spending all of his money on beer the night
before, just stole a ride in the bus by hiding in
the on-board toilet of the bus.
While Pasahero was asleep, another passenger
took the bag away and alighted at Guagua,
Pampanga. Is Victory Liner liable to Pasahero?
Explain. (1987 Bar)
A: YES. The responsibility of common carriers in the
case of loss or damage to hand-carried baggage is
governed by the rule on necessary deposits. The
common carrier is thus liable for the loss of the
personal property caused by its employees or by
strangers. In this case, the passenger told the driver
that he had valuable item placed beside the driver’s
seat. If the driver exercised due diligence, he could
have prevented the loss of the bag.
During the trip, the bus collided with another
bus coming from the opposite direction. The
three friends all suffered serious physical
injuries.
What are WTC's liabilities, if any, in favor of
Aurelio, Jerome and Florencio? Explain your
answer. (2017 Bar)
SAFETY OF PASSENGERS
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
(Art. 1755, NCC).
A: As a common carrier, WTC is liable to Aurelio for
breach of contract of carriage, the latter being a
passenger who purchased a ticket for himself. WTC
is also liable to Jerome for breach of contract of
carriage because he was a passenger although he
was being transported gratuitously. However, WTC
has no liability in favor of Florencio for breach of
contract of carriage. A stowaway like Florencio, who
secures passage by fraud, is not a passenger.
Who are not considered passengers (WAMU)
1.
2.
3.
4.
One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting,
is injured by the carrier.
Invited guests and Accommodation passengers.
One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be
with the knowledge and consent of the carrier.
One who remains on a carrier for an
Unreasonable length of time after he has been
afforded every safe opportunity to alight.
NOTE: As accommodation passengers or invited
guests, defendant as owner and driver of the pickup owes to them merely the duty to exercise
reasonable care so that they may be transported
safely to their destination. The rule is established by
the weight of authority that the owner or operator
of an automobile owes the duty to an invited guest to
exercise reasonable care in its operation, and not
unreasonably to expose him to danger and injury by
increasing the hazard of travel (Articles 1755 and
1756, NCC, Lara v. Valencia, G.R. No. L-9907, June 30,
1958).
The carrier is thus NOT obliged to exercise
extraordinary diligence but only ordinary diligence
in these instances.
Assumption of risk on the part of passengers
VOID STIPULATIONS
Passengers must take such risks incident to the
mode of travel. The passenger must observe the
diligence of a good father of a family to avoid injury
to himself (Art. 1761, NCC).
Stipulations limiting the liability of common
carrier in case of injury or death
GR: The responsibility of a common carrier for the
safety of passengers cannot be dispensed with or
lessened by stipulation, by posting of notices, by
statements on tickets, or otherwise (Art. 1757, NCC).
Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to
perform certain duties to the public as the law
imposes, and holds itself liable for any breach
thereof (Pilapil v. CA, G.R. No. 52159, Dec. 22, 1989).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carrier’s liability
for negligence is valid (Art. 1758, NCC).
136
Mercantile Law
NOTE: The passenger must be carried gratuitously.
If it is only a reduction of fare, then any limitation
of the common carrier’s liability is not justified
(2001, 2009 Bar).
A: The contention of CRI must fail. The duty of a
common carrier to provide safety to its passengers
is not only during the course of the trip but for so
long as the passengers are within its premises and
where they ought to be in pursuance to the contract
of carriage. Furthermore, the common carrier will
still be liable even though its employees acted
beyond the scope of their work (LRTA vs. Navidad,
G.R. No. 145804 February 6, 2003).
XPN to the XPN: Notwithstanding the exception,
common carriers will be liable nevertheless for
willful acts or gross negligence.
DURATION OF LIABILITY
Q: P, a sales girl in a flower shop at the Ayala
Station of the MRT bought two (2) tokens or
tickets, one for her ride to work and another for
her ride home. She got to her flower shop where
she usually worked. While P was attending to
her duties at the flower shop, two (2) crews of
the MRT got into a fight near the flower shop,
causing injuries to P in the process. Can P sue the
MRT for contractual breach as she was within
the MRT premises where she would shortly take
her ride home? (2011 Bar)
Observance of extraordinary diligence in
transportation of goods commences from 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, and continues
until the passenger has been landed at the port of
destination and has left the vessel owner’s dock or
premises.
WAITING FOR CARRIER OR
BOARDING OF CARRIER
A: NO, P had no intention to board an MRT train
coach when the incident occurred.
A proper person whom the carrier would be bound
to accept who enters upon the carrier’s premises
such as a station, ticket office, or waiting room, with
the intention of becoming a passenger, will
ordinarily be viewed as assuming the status of a
passenger (LRTA v. Navidad, G.R. No. 145804,
February 6, 2003, citing 10 Am. Jur. 30).
Carriage by sea
The duty of the carrier commences as soon as a
person with bona fide intention of taking passage
places himself in the care of the carrier or its
employees and is accepted as passenger (Aquino
and Hernando, 2016, citing 80 C.J.S. 1085).
Trains
The carrier is supposed to exercise extraordinary
diligence although the passenger is still waiting for
a coach on the platform of the train station (LRTA v.
Navidad, G.R. No. 145804, February 6, 2003).
Land transportation
The act of the driver in stopping their conveyances
is a continuous offer to riders (continuing offer
rule). The passenger is deemed to be accepting the
offer if he is already attempting to board the
conveyances and the contract of carriage is
perfected from that point.
However, there is no obligation on the part of a
street railway company to stop its cars to let on
intending passengers at other points than those
appointed for stoppage (De Prado v. Manila Electric
Co., G.R. No. 29462, March 7, 1929).
It is the duty of common carriers of passengers,
including common carriers by railroad train,
streetcar, or motorbus, to stop their conveyances 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 while they are doing so
(Dangwa vs. CA, G.R. No. 95582, October 7, 1991).
Q: City Railways, Inc. (CRI) provides train
service, for a fee, to commuters from Manila to
Calamba, Laguna. Commuters are required to
purchase tickets and then proceed to designated
loading and unloading facilities to board the
train. Ricardo Santos purchased the ticket for
Calamba and entered the station. While waiting,
he had an altercation with the security guard of
CRI leading to a fistfight. Ricardo Santos fell on
the railway just as a train was entering the
station. Ricardo Santos was run over by the
train. He died. CRI contented that the mishap
occurred before Ricardo Santos boarded the
train and that it was not guilty of negligence.
Decide. (2008 Bar)
Q: A bus of GL Transit on its way to Davao
stopped to enable a passenger to alight. At that
moment, Santiago who had been waiting for a
ride, boarded the bus. However, the bus driver
failed to notice Santiago who was still standing
on the bus platform, and stepped on the
accelerator. Because of the sudden motion,
137
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
Santiago slipped and fell down suffering serious
injuries. Is GL Transit liable? (1996 Bar)
includes a reasonable time to see after his baggage
and prepare for his departure (La Mallorca v. CA,
G.R. No. L-21486, May 14, 1966).
A: YES. Santiago may hold GL Transit liable for
breach of contract of carriage. It was the duty of the
driver, when he stopped the bus, to do no act that
would have the effect of increasing the peril to a
passenger such as Santiago while he was attempting
to board the same. When a bus is not in motion there
is no necessity for a person who wants to ride the
same to signal his intention to board. A public utility
bus, once it stops, is in effect making continuous
offer to bus riders. It is the duty of common carriers
of passengers to stop heir conveyances while they
are doing so. Santiago, by stepping and standing on
the platform of the bus is already considered as a
passenger and is entitled to all the rights and
protection pertaining to a contract of carriage
(Dangwa Trans. Co. v. CA, G.R. No. 95582, October 7,
1991).
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination
and has left the vessel-owner’s premises. The
victim’s presence in a vessel after one (1) hour from
his disembarkation is not enough in order to
absolve the carrier from liability in his death
(Aboitiz Shipping Corporation v. CA, G.R. No. 84458,
November 6, 1989).
Q: Robert De Alban and his family rode a bus
owned by Joeben Bus Company. Upon reaching
their desired destination, they alighted from the
bus but Robert returned to get their baggage.
However, his youngest daughter followed him
without his knowledge. When he stepped into
the bus again, the bus accelerated that resulting
to Robert’s daughter death. The bus ran over
her. Is the bus company liable?
When a Public Utility Vehicle is not in motion, it
is not necessary for a person who wants to ride
the same to signal his intention to board
A: YES. The relation of carrier and passenger does
not cease at the moment the passenger alights from
the carrier’s vehicle at a place selected by the carrier
at the point of destination, but continues until the
passenger has had a reasonable time or reasonable
opportunity to leave the current premises (La
Mallorca v. CA, GR L-20761, July 27 1966).
When the bus is not in motion, there is no necessity
for a person who wants to ride the same to signal his
intention to board. A public utility bus, once it stops,
is in effect making a continuous offer to bus riders.
Hence, it becomes the duty of the driver and the
conductor, every time the bus stops, to do no act
that would have the effect of increasing the peril to
a passenger while he was attempting to board the
same. The premature acceleration of the bus in this
case was a breach of such duty.
LIABILITY FOR ACTS OF OTHERS
EMPLOYEES
Common carriers are liable for the acts of their
employees
A person, by stepping and standing on the platform
of the bus, is already considered a passenger and is
entitled all the rights and protection pertaining to
such a contractual relation. Hence, it has been held
that the duty which the carrier owes to its patrons
extends to persons boarding cars as well as to those
alighting therefrom (Dangwa Trans. Co. v. CA, supra).
Liability for death or injury to passengers upon
arrival at destination
Common carriers are liable for the death of or
injuries to passengers through the negligence or
willful acts of the former’s employees, although
such employees may have acted beyond the scope of
their authority or in violation of the orders of the
common carriers. The 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 (NCC, Art. 1759).
Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to
leave the carrier's premises. All persons who
remain on the premises a reasonable time after
leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a
reasonable delay within this rule is to be
determined from all the circumstances, and
NOTE: By express provision of Article 1759, it is no
defense that the employee acted beyond the scope
of his authority because the riding public is not
expected to inquire from time to time before they
board the carrier whether or not the driver or any
other employee is authorized to drive the vehicle or
that said driver is acting within the scope of his
authority and observing the existing rules and
regulations required of him by management
(Aquino and Hernando, 2016).
ARRIVAL AT DESTINATION
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
138
Mercantile Law
Q:At around 8:45 in the morning, A, after having
alighted from a passenger bus in front of
Robinsons Galleria along the north-bound lane
of EDSA, was hit and run over by a bus driven by
B, who was then employed by C Transport
Company. A was immediately rushed to the
hospital where she was pronounced dead on
arrival. By reason of the quasi-delict, who
should be held liable for the death of A? B, the
bus driver, C Transport Company, or both?
Q: The AAA Bus Company picks up passengers
along EDSA. X, the conductor, while on board the
bus, drew his gun and randomly shot the
passengers inside. As a result, Y, a passenger,
was shot and died instantly. Is AAA Bus
Company liable? (2012 Bar)
A: YES. The bus company is liable because common
carriers are liable for the negligence or willful act of
its employees even though they acted beyond the
scope of their responsibility.
A: Both B and C Transport Company should be held
solidarily liable as joint tortfeasors. Under Article
2180 of the New Civil Code, employers are liable for
the damages caused by their employees acting
within the scope of their assigned tasks. Once
negligence on the part of the employee is
established, a presumption instantly arises that the
employer was remiss in the selection and/or
supervision of the negligent employee. It is
incumbent upon the employer to rebut this
presumption by presenting adequate and
convincing proof that it exercised the care and
diligence of a good father of a family in the selection
and supervision of its employees. Failing to do this,
a common carrier cannot avoid liability for the
quasi-delict committed by its negligent employee.
The responsibility of two or more persons who are
liable for a quasi-delict is solidary (R Transport
Corporation vs. Luisito G. Yu, G.R. No. 174161,
February 18, 2015).
NOTE: Willful acts of the employees include theft. It
should be pointed out that the Code of Commerce
expressly provides that the captain shall be civilly
liable to the naviero and the latter to third persons
for all thefts committed by the crew, reserving the
right of action against the guilty party (Aquino and
Hernando, 2016).
OTHER PASSESNGERS AND STRANGERS
The registered owner of the vehicle may be held
liable for damages suffered by a third person in
the course of the operation of the vehicle
The registered owner of a public service vehicle is
responsible for damages that may arise from
consequences incident to its operation or that may
be caused to any of the passengers therein (Gelisan
vs. Alday, G.R. No. L-30212, September 30, 1987).
NOTE: The carrier, unlike in suits for quasi-delict,
may not escape liability by proving that it has
exercised due diligence in the selection and
supervision of its employees (Art. 1759, NCC; see
Cangco vs. Manila Railroad Co., supra; Prado vs.
Manila Electric Co., 51 Phil., 900)
Extent of liability of common carriers for acts of
co-passengers or strangers (1997, 2005 Bar)
A common carrier is responsible for injuries
suffered by a passenger on account of the willful
acts or negligence of other passengers or of
strangers, if the carrier’s employees through the
exercise of the diligence of a good father of a family
would have prevented or stopped the act or
omission (Art. 1763, NCC).
Liability of the common carrier as regard the
acts of employees may not be limited by
stipulation
Q: P rode a Sentinel Liner bus going to Baguio
from Manila. At a stop-over in Tarlac, the bus
driver, the conductor, and the passengers
disembarked for lunch. P decided, however, to
remain in the bus, the door of which was not
locked. At this point, V, a vendor, sneaked into
the bus and offered P some refreshments. When
P rudely declined, V attacked him, resulting in P
suffering from bruises and contusions. Does he
have cause to sue Sentinel Liner? (2011 Bar)
The common carrier’s responsibility cannot be
eliminated or limited by stipulation, by the posting
of notices, by statements on the tickets or otherwise
(Art. 1760, NCC).
Rationale: The basis of the carrier's liability for
assaults on passengers committed by its drivers
rests on the principle that it is the carrier's implied
duty to transport the passengers safely. As between
the carrier and the passenger, the former must bear
the risk of wrongful acts or negligence of the
carrier's employees against passengers, since it, and
not the passengers, has power to select and remove
them(Maranan vs. Perez, GR No. L-22272, June 26,
1967).
A: YES, since the carrier's crew did nothing to
protect a passenger who remained in the bus during
the stop-over.
139
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied
her baggage to be inspected invoking her right
to privacy.
arrival. Can the common carrier, B, and C be
held liable for the death of A?
A: NO. It is imperative for a party claiming against a
common carrier to show that the injury or death of
the passenger/s arose from the negligence of the
common carrier and/or its employees in providing
safe transport to its passengers.In this case, A’s
death was neither caused by any defect in the means
of transport or in the method of transporting, or the
negligent or willful acts of the bus driver or
conductor.Instead, the case involves the death of A
wholly caused by the surreptitious act of a copassenger, who after committing such crime,
hurriedly alighted from the vehicle (G.V. Florida
Transport, Inc. vs. Heirs of Romeo Battung, Jr.,
represented by Romeo Battung, Sr.; G.R. No. 208802;
October 14, 2015).
a.
Should the jeepney operator be held
liable for damages?
b. If it were an airline company involved,
would your answer be the same? (1992
Bar)
A:
a.
b.
NO. The operator is not liable for damages.
In overland transportation, the common
carrier is not bound nor empowered to
make an examination on the contents of
packages or bags, particularly those hand
carried by passengers (Nocum vs. Laguna
Tayabas Bus Company, G.R. No. L-23733,
October 31, 1969).
NO. The common carrier should be made
liable. In case of air carriers, it is unlawful
to carry flammable materials in passenger
aircrafts, and airline companies may open
and investigate suspicious packages and
cargoes pursuant to Republic Act No. 6235.
EXTENT OF LIABILITY FOR DAMAGES
Kinds of damages that may be recovered in case
of death of a passenger (DeLo-MEAtIH)
1.
2.
3.
4.
Q: Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at the bus by
an unidentified bystander as the bus was
speeding through the National Highway. The bus
owner’s personnel lost no time in bringing
Marites to the provincial hospital where she was
confined and treated. Marites wants to sue the
bus company for damages and seeks your advice
whether she can legally hold the bus company
liable. What will you advise her? (1994 Bar)
NOTE: Carrier is not liable for exemplary
damages where there is no proof that it acted in
a wanton, fraudulent, reckless, oppressive or
malevolent manner.
5.
6.
7.
A: I will advise Marites that she cannot legally hold
the bus company liable if the stone throwing was
entirely unforeseeable and the carrier exercised
utmost diligence. However, I will also inform her
that the burden is on the carrier to prove such
exercise of due diligence. If she decides to file a case
in court, all that she will prove is that she was a
passenger and she was inhured while on board the
bus.
Attorney's fees and expenses of litigation
Interest in proper cases (Briñas v. People,
G.R. No. L-30309, Nov. 25, 1983)
Hospital and funeral expenses
NOTE: In case of death, the plaintiff is entitled
to the amount he spent during the wake and
funeral of the deceased. However, it has been
ruled that expenses after the burial are not
compensable (Victory Liner, Inc. v. Heirs of
Andres Malecdan, G.R. No. 154278).
Damages in Personal Injury Cases
Personal injury and even death entitles claimant to
all medical expenses as well as other reasonable
expenses that he incurred to treat his or his
relative’s injuries. Medical expenses may even
include the amount spent for plastic surgery of the
plaintiff or any procedure to restore the part of the
body that was affected (Sps. Ong v. CA, G.R. No.
117103, January 21, 1999).
Q: A was seated at the first row behind the driver
and slept during the ride. When the bus reached
the Philippine Carabao Center in Muñoz, Nueva
Ecija, the bus driver, B, stopped the bus and
alighted to check the tires. At this point, a man
who was seated at the fourth row of the bus
stood up, shot A at his head and then left with a
companion. The bus conductor, C, notified B of
the incident and thereafter, brought A to the
hospital but the latter was pronounced dead on
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
An indemnity for the death of the victim
An indemnity for loss of earning capacity of
the deceased
Moral damages
Exemplary damages
Loss of earning capacity
140
Mercantile Law
The formula for the computation of unearned
income is:
their medical and hospitalization expenses.
Nonetheless, Judith and Joyce filed a complaint
against Eduardo and Rolando for breach of
contract of carriage caused by Rolando’s
reckless and negligent driving. As relief, they
prayed for moral and exemplary damages.
Eduardo and Rolando refused to pay moral
damages on the ground that there was neither
proof nor allegation that they acted fraudulently
or in bad faith. Are Eduardo and Rolando liable
for moral damages?
1. Net Earning Capacity = Life Expectancy x
(Gross annual income - Reasonable and
necessary living expenses).
2. Life expectancy is determined in accordance
with the formula: 2/3 x (80 – age of
deceased at the time of death). (Heirs of
Ochoa vs. VS.G & S Transport Corporation,
G.R. No. 170071, March 09, 2011)
When there is no showing that the living expenses
constituted the smaller percentage of the gross
income, the Court fixes the living expenses at half of
the gross income.
A: NO. In an action for breach of contract, moral
damages may be recovered only when a) death of a
passenger results; or b) the carrier was guilty of
fraud and bad faith even if death does not result. In
the case, Judith and Joyce impute negligence when
the bus collided with another vehicle. While they
propounded on negligence, they did not discuss or
impute fraud or bad faith, or such gross negligence
which would amount to bad faith. There being
neither allegation nor proof that respondents acted
in fraud or in bad faith in performing their duties
arising from their contract of carriage, they are not
liable for moral damages. Since moral damages
cannot be awarded, it follows that the award of
exemplary damages is also not available, since this
kind of damages may only be awarded in addition to
moral, temperate, liquidated, or compensatory
damages (Darnes v. Quiñones, G.R. No. 206468,
August 2, 2017, Del Castillo, J.).
Moral damages
GR: Moral damages are not recoverable for breach
of contract of carriage, because such contract cannot
be considered included in the “analogous cases”
used in Article 2219 of the NCC. Also, Art. 2176 of
the NCC, which is the provision on quasi-delict,
expressly excludes the cases where there is a “preexisting contractual relation between the parties”
from recovering damages (Versoza v. Baytan, et al.,
G.R. L-14092, April 29, 1960).
XPNs: (DeFraG)
1. Where the mishap results in the Death of the
passenger (Art. 1764, NCC); or
2. Where it is proved that the common carrier
was guilty of Fraud or bad faith, even if
death does not result (Art. 2220, NCC).
3. Where the negligence of the carrier is so
Gross and reckless as to virtually amount to
bad faith (PAL vs. CA et al., GR NO. 123238,
Sept. 22, 2008)
Defenses available
(FECoLD)
1.
2.
3.
Although the relation of passenger and carrier is
"contractual both in origin and nature"
nevertheless, “the act that breaks the contract may
be also a tort" when said act is done with gross
negligence or with bad faith (Air France v.
Carrascoso, G.R. No. L-21438, September 28, 1966).
4.
5.
to
a
Common
Carrer
Exercise of extraordinary due diligence
Fortuitous event
Contributory negligence of passengers – it does
not bar recovery of damages for death or injury
if the proximate cause is the negligence of the
common carrier but the amount of damages
shall be equitably reduced (NCC, Art. 1762).
Doctrine of Last Clear Chance
Due Diligence in the selection and supervision
of employees.
The diligence of the passenger may be
considered in determining liability in case of
injury
NOTE: The current jurisprudential award for the
loss of life of a passenger is P100,0000 pesos by way
of moral damages (Victory Liner vs. Gammad; supra;
Heirs of Ochoa vs. VS.G & S Transport Corp., supra).
The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid
injury to himself (NCC, Art. 1761). This means that if
the proximate cause of the passenger’s injury is his
negligence, the common carrier is not liable.
Q: Judith and Joyce were on board a passenger
bus operated by Eduardo. The bus was driven at
a fast speed by the driver, Rolando, when it
crashed into a truck parked on the shoulder of
the Kennon Road. As a result, Judith and Joyce
suffered injuries. Eduardo and Rolando paid for
DOCTRINE OF LAST CLEAR CHANCE
141
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
The doctrine of last clear chance provides that
where both parties are negligent but the negligent
act of one is appreciably later in point of time than
that of the other, or where it is impossible to
determine whose fault or negligence brought about
the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm
but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently,
the rule is that the antecedent negligence of a
person does not preclude recovery of damages
caused by the supervening negligence of the latter,
who had the last fair chance to prevent the
impending harm by the exercise of due diligence.
a. Negligence of the plaintiff is concurrent with that
of the defendant (in pari delicto);
b. Party charged is required to act instantaneously;
c. Injury cannot be avoided despite the application
at all times of all the means to avoid the injury (after
the peril is or should have been discovered), at least
in all instances where the previous negligence of the
party charged cannot be said to have contributed to
the injury at all. (O'Mally vs. Eagan, 77 ALR 582)
It goes without saying that the plaintiff himself was
not free from fault, for he was guilty of antecedent
negligence in planting himself in the wrong side of
the road. But as we have already stated, the
defendant was also negligent; and in such case the
problem always is to discover which agent is
immediately and directly responsible. It will be
noted that the negligent acts of the two parties were
not contemporaneous, since the negligence of the
defendant succeeded the negligence of the plaintiff
by an appreciable interval. Under these
circumstances, the law is that a person who has the
last clear chance to avoid the impending harm and
fails to do so is chargeable with the consequences,
without reference to the prior negligence of the
other party. (Picart vs. Smith, 37 Phil., 809)
Q: B Traversing EDSA swerved then collision
took place with B barely encroaching on C’s lane.
Prior to and at the time of collision, C did not
take any defensive maneuver to prevent the
accident and minimize the impending damage to
life and property, which resulted in the collision
in the middle of the highway, where a vehicle
would normally be traversing. Is C liable for his
lack of care in driving?
A: Yes. The collision was certainly foreseen and
avoidable but C took no measures to avoid it. Rather
than exhibit concern for the welfare of his
passengers and the driver of the oncoming vehicle,
who might have fallen asleep or suddenly fallen ill
at the wheel, C coldly and uncaringly stood his
ground closed his eyes, and left everything to fate,
without due regard for the consequences. Such a
suicidal mindset cannot be tolerated, for the grave
danger it poses to the public and passengers
availing of petitioners' services. Where both parties
are negligent but the negligent act of one is
appreciably later in point of time than that of the
other, or where it is impossible to determine whose
fault or negligence brought about the occurrence of
the incident, the one who had the last clear
opportunity to avoid the impending harm but failed
to do so, is chargeable with the consequences
arising therefrom. In this case C, clearly had the Last
Clear Chance, thus he is should be the one liable for
having failed to avert the clearly imminent danger.
(Greenstar v Universal Robina G.R. No. 205090,
October 17, 2016)
The last clear chance doctrine of the common law
was imported into our jurisdiction by Picart vs.
Smith but it is a matter for debate whether, or to
what extent, it has found its way into the Civil Code
of the Philippines. The historical function of that
doctrine in the common law was to mitigate the
harshness of another common law doctrine or
rule—that of contributory negligence. The
common law rule of contributory negligence
prevented any recovery at all by a plaintiff who was
also negligent, even if the plaintiff’s negligence was
relatively minor as compared with the wrongful act
or omission of the defendant. The common law
notion of last clear chance permitted courts to grant
recovery to a plaintiff who had also been negligent
provided that the defendant had the last clear
chance to avoid the casualty and failed to do so.
Accordingly, it is difficult to see what role, if any, the
common law last clear chance doctrine has to play
in a jurisdiction where the common law concept of
contributory negligence as an absolute bar to
recovery by the plaintiff, has itself been rejected, as
it has been in Article 2179 of the Civil Code of the
Philippines.
(PHOENIX
CONSTRUCTION, INC.
and CARBONEL Mar 10, 1987)
The doctrine of “last clear chance” cannot apply
if the: (iCOIN)
Options available to recover damages in case of death or injuries to persons, which resulted from a
collision
BASIS OF
CIVIL
LIABILITY
PLAINTIFF
DEFENDANT
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
LIABILITY OF THE
EMPLOYER
142
DEFENSE OF DUE
DILIGENCE IN THE
SELECTION AND
Mercantile Law
(Damages)
SUPERVISION OF
EMPLOYEE
Culpa contractual
Contract of Passenger
Carriage
Culpa aquiliana
Quasi-delict
1. Passenger; or
2. Third person
Common
carrier
1. Driver;
2. Owner or
employer;
3. Both
Direct and Primary
Not an available defense. (Art.
1759, NCC)
Direct and primary under
Art. 2180, NCC.
This is a complete and proper
defense. (Art. 2180, last par.,
NCC)
NOTE:
Action
may
proceed independently of
the criminal action.
Culpa criminal
Subsidiary liability under
Art. 103, RPC.
Crime
1. Passenger; or
2. Third person
Driver
NOTE: There must be a
judgment of conviction
against the negligent
driver and a finding of
insolvency.
The defense is not available.
The judgment in the criminal
action
pronouncing
the
employee to be also civilly
liable is conclusive on the
employer not only as to the
actuality of that liability but
aslo as to the amount. (Ozoa v.
Madula, 156 SCRA 779;
Philippine Rabbit Bus Lines,
Inc. v. People, 427 SCRA 456)
Distinctions between culpa contractual and culpa aquiliana
Source of Obligation
Liability of Employee
Availability of Defense
In What Capacity Liable
CULPA CONTRACTUAL
Contract
No liability there being no privity
of contract
Due diligence in the selection and
supervision of the employee is not
a defense
Liable as a contracting party
143
CULPA -AQUILIANA
Quasi - Delict
Solidarily liable with the employer
Due diligence in the selection and
supervision of the employee is a
defense
Liable as an employer
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
1.
BILL OF LADING
2.
It is a written acknowledgment of receipt of goods
and agreement to transport them to a specific place
and to a named person or to his order (Unsworth
Transport International [Phils] vs. CA, G.R. No.
166520, 26 July 2010; 1992, 1998 Bar).
Q: X is a trader of school supplies in Calapan,
Oriental Mindoro. To bring the school supplies
to Calapan, it has to be transported by a vessel.
Because there were so many passengers, the two
(2) boxes of school supplies were loaded but the
shipping company was not able to issue the Bill
of Lading. So, on board, the Ship Captain issued
instead a "shipping receipt" to X indicating the 2
boxes of school supplies being part of the cargo
of the vessel. Is there a contract of carriage?
THREE-FOLD CHARACTER
1.
2.
3.
As a receipt, it recites the date and place of
shipment, describes the goods as to quantity,
weight, dimensions, identification marks and
condition, quality, and value.
As a contract, it names the contracting parties,
which include the consignee, fixes the route,
destination, and freight rate or charges, and
stipulates the rights and obligations assumed
by the parties (Phoenix Assurance Co., Ltd. vs.
United States Lines, G.R. No. L-24033, Feb. 22,
1968).
As a document of title, it regulates the relations
between a carrier and a holder of the same.
(2015 Bar)
A: It is possible to have a contract of carriage bill of
lading even without a bill of lading. The shipping
receipt would be sufficient. A bill of lading is not
indispensable. For as long as there is a meeting of
the minds of the parties, a contract of carriage exists
even in the absence of a bill of lading (Compania
Maritima vs. Insurance Co. of NA, G.R. No. L-18965,
October 30, 1964).
Technical jargons
1.
In the absence of a bill of lading, their respective
claims may be determined by legal proofs that each
of the contracting parties may present in conformity
with law.
Parties to a bill of lading
2.
1. Shipper
2. Carrier
NOTE: A consignee, although not a signatory to the
contract of carriage between the shipper and the
carrier, becomes a party to the contract by reason of
either:
3.
4.
a)
The relationship of agency between the
consignee and the shipper/ consignor;
b) The unequivocal acceptance of the bill of lading
delivered to the consignee, with full knowledge
of its contents; or
c) Availment of the stipulation pour autrui, i.e.,
when the consignee, a third person, demands
before the carrier the fulfillment of the
stipulation made by the consignor/shipper in
the consignee’s favor, specifically the delivery
of the goods/cargoes shipped.
(MOF Company, Inc., v. Shin Yang Brokerage Corporation,
G.R. No. 172822, December 18, 2009, Del Castillo, J.)
5.
6.
7.
8.
Two types of bill of lading
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Negotiable – If issued to the bearer or to the
order of any person named in such bill.
Non-negotiable – If issued to a specific person
named in such bill.
144
On Board –states that the goods have been
received on board the vessel which is to carry
the goods and is issued when goods have been
placed aboard a ship with every reasonable
expectation that the shipment is as good as on
its way.
Received for Shipment Bill– states that the
goods have been received for shipment with or
without specifying the vessel by which the
goods are to be shipped and are issued
whenever conditions are not normal and that
there is insufficiency of shipping space.
Clean – does not contain any notation
indicating defect in the goods.
Foul – contains a notation indicating a defect in
the goods.
Spent – if the goods were already delivered but
the bill of lading was not returned.
Through- issued by a carrier who is obliged to
use the facilities of other carriers as well as his
own facilities for the purpose of transporting
the goods from the city of the seller to the city
of the buyer, which bill of lading is honored by
the second and other interested carriers who do
not issue their own lading.
Custody – the goods are already received by the
carrier but the vessel indicated has not yet
arrived in the port.
Port- the vessel indicated in the bill of lading
that will transport the goods is already in the
port.
Mercantile Law
Q: A bill of lading indicated that the contract of
carriage was under a "said to weigh" clause.
What are the responsibilities of the shipper and
the carrier?
2.
XPN: Surrender of the bill of lading is not necessary:
A: This means that the shipper was solely
responsible for the loading of the container while
the carrier was oblivious to the contents of the
shipment. The arrastre operator was, like any
ordinary depositary, duty-bound to take good care
of the goods received from the vessel and to turn the
same over to the party entitled to their
possession, subject to such qualifications as may
have validly been imposed in the contract between
the parties. The arrastre operator was not required
to verify the contents of the container received and
to compare them with those declared by the shipper
because, as earlier stated, the cargo was at the
shipper’s load and count (Asian Terminals Inc. vs.
Simon Enterprises, Inc., G.R. No. 177116, February 27,
2013).
1.
2.
If period has been fixed – It must be made within
such time, failure to do so, the carrier shall pay
the indemnity stipulated in the bill of lading,
neither the shipper nor the consignee being
entitled to anything else (Code of Commerce
[CC], Art. 370).
REFUSAL OF CONSIGNEE TO TAKE DELIVERY
Grounds for the refusal of a consignee to take
delivery of the goods (PLD2)
1.
If no period of time fixed- thecarrier shall be
under the obligation to forward them with the
first shipment of the same or similar
merchandise he may make to the point where
he must deliver them, and should he not do so,
the damages occasioned by the delay shall be
suffered by him (CC, Art. 358).
2.
3.
Determination of indemnity if the same is not
stipulated
4.
If no indemnity has been stipulated and the delay
exceeds the time fixed in the bill of lading, the
carrier shall be liable for the damages which the
delay may have caused (CC, Art. 370).
When a Part of the goods transported are
delivered and the consignee is able to prove
that he cannot make use of the part without the
others (CC, Art. 365);
If the cargo consists of Liquids and they have
leaked out, nothing remaining in the containers
but one-fourth (¼) of their contents, on account
of inherent defect of cargo (CC, Art. 687);
If the goods are Damaged and such damage
renders the goods useless for the particular
purpose for which there are to be used (CC, Art.
365);
When there is Delay on account of the fault of
the carrier (CC, Art. 371).
In all cases, the shipper may exercise the right of
abandonment by notifying the carrier. Ownership
over damaged goods passes to the carrier and
carrier must pay shipper the market value of the
goods at point of destination.
DELIVERY WITHOUT SURRENDER OF
BILL OF LADING
GR: The surrender of the bill of lading is necessary
upon delivery of the goods.If the carrier fails to
require such surrender:
1.
If surrender of the original bill of lading is
not possible.
Acknowledgment of the delivery by signing
the delivery receipt suffices to discharge
the common carrier of its contractual
obligation
(National
Trucking
and
Forwarding Corporation vs. Lorenzo
Shipping Corporation, G.R. No. 153563,
February 27, 2005).
PERIOD OF DELIVERY
2.
If the seller instructed the shipping
company to deliver the cargoes to the
buyer
without
requiring
the
presentation of the bill of lading;
The shipping company is shall not be liable
for releasing the cargoes to the buyer
(Macam vs. CA, G.R. No. 125524, August 25,
1999)
DELIVERY OF GOODS
1.
If negotiable – Action by the shipper may lie
against the carrier
PERIOD FOR FILING CLAIMS
1.
If non-negotiable – Action against the
carrier does not lie
2.
145
If the damage is apparent – Immediately after
delivery; or
If the damage is not apparent – within 24 hours
from delivery (CC, Art. 366)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
Claim for damages under Art. 366 of Code of
Commerce
goods or the date when the goods have been
delivered.
It applies in case of domestic transportation (interisland) where there is damage to the goods
transported.
NOTE: The 1 year period of prescription is not
applicable to misdelivery or conversion of goods.
The compliance with a requirement in the bill of
lading that the consignee must file a claim for loss or
damage to the goods shipped within thirty days
from delivery is a condition precedent to the accrual
of a right of action against the carrier (Philippine
American General Insurance Co. v. Sweet Lines, Inc.,
G.R. No. 87434, August 5, 1992).
The filing of claim is a condition precedent for
recovery of damages.
Requisites:
1.
2.
Consignment of goods through a common
carrier, by a consignor in one place to a
consignee in another place; and
The delivery of the merchandise by the carrier
to the consignee at the place of destination
(New Zealand Ins. Co., Ltd. vs. Choa Joy, G.R. No.
L-7311, Sept. 30, 1955).
Q: Akiro of Tokyo, Japan sent various goods to
his friend Juan in Cebu City, Philippines, through
one of the vessels of Worth Well Shippers, Inc.,
an American corporation. En route to Cebu City,
the vessel had two stops, first in Hong Kong, and
second, in Manila. While travelling from Tokyo
to Hong Kong, the goods were damaged. What
law will govern? (2013 Bar)
Effect of paying the transportation charges in
the filing of an action on account of damages to
goods
1.
2.
A: D. Philippine Law
If paid before checking the goods – The right to
file a claim is not waived.
If paid after the goods were checked – The
right to file a claim is already waived (Southern
Lines, Inc. v. CA, G.R. No. L-16629, Jan. 31, 1962).
Q: Assuming Philippine law to be applicable and
Juan fails to file a claim with the carrier, may he
still commence an action to recover damages
with the court? (2013 Bar)
Doctrine of combined or connecting services
A: B. Yes, provided he files the complaint within 10
years from delivery.
The carrier which delivered the goods to the
consignee shall assume the obligations, rights and
actions of those who preceded him in the
conveyance of the goods.
Commencement of action if delivery was made
to arrastre operator
The shipper or consignee should proceed against
the one who executed the contract or against the
others who received the goods without reservation.
But even if there is reservation, they are not
exempted from liabilities that they may have
incurred by reason of their own acts (CC, Art. 373).
Commencement of action should be computed from
the time of delivery to the arrastre operator. To use
as basis for computing the one year period, the
delivery to the consignee would be unrealistic and
might generate confusion between the loss or
damage sustained by the goods while in the carrier’s
custody and those occurring while in the arrastre
operator’s possession (Martin, 1989).
The carrier may then file a third-party complaint
against the one who is really responsible. The
carrier is an indispensable party. But the shipper or
consignee may sue all of them as alternative
defendants.
A claim against the arrastre operator must be filed
within fifteen days from the delivery of goods
(International Container Terminal Services, Inc. vs.
Prudential Guarantee and Assurance Company, Inc.
G.R. No. L-134514, December 8, 1999).
PERIOD FOR FILING ACTIONS
1.
2.
The filing of a provisional claim is substantial
compliance with the provision in the management
contract of the arrastre operator that a formal claim
for the loss of goods must be filed within thirty days
from the filing of the entry (Metro Port Service Inc.
vs. IAC, G.R. No. 66253, August 31, 1992).
For coastwise or carriage within the Philippines,
within 6 years if no bill of lading has been
issued or within 10 years if a bill of has been
issued.
For international carriage from foreign port to
the Philippines, within 1 year from delivery of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
146
Mercantile Law
equips, and mans the vessel. The charterer is the
owner pro hac vice (2004 Bar).
MARITIME COMMERCE
Ship owner of a vessel
As owner pro hac vice of the vessel, the charterer
assumes the rights and liabilities of the owner to
third parties who deal with the vessel, it is the
charterer and its agent who are liable for the wages
of seamen hired by the master of the vessel, as the
master of the vessel is acting in behalf of the
charterer (Litonjua Shipping Co., Inc. vs. National
Seamen Board, G.R. No. L-51910, August 10, 1989,
1991 Bar).
The person in possession, management, control
over the vessel, and the right to direct her
navigation. While in their possession, the ship
owners also receive freight earned and paid.
The charterer is considered the owner of the vessel
for the voyage or service stipulated. The charterer,
not the owner of the vessel, is liable for vessel’s
expenses, including seaman’s wages.
Agents of maritime commerce
1.
2.
3.
4.
Ship-owners and ship agents
Captains and masters of the vessel
Officers and Crews of the vessel
Supercargoes (Sundiang, Sr. & Aquino, 2011)
CONTRACT OF AFFREIGHTMENT
Ship agent
The owner of the vessel leases a part or all of its
space to haul goods for others. It can either be:
The person entrusted with provisioning or
representing the vessel in the port in which it may
be found. Hence, whether acting as agent of the
owner of the vessel or as agent of the charterer, he
will be considered as the ship agent and may be held
liable as such, as long as he is the one that provisions
or represents the vessel (Macondray & Co., Inc. v.
Provident Insurance Corp, G.R. No. 154305, Dec. 9,
2004).
1.
2.
NOTE: A written contract of affreightmentmay be
amended by oral agreement and since in such a case
the terms of the contract shall be those embodied in
the bill of lading, no demurrage charges can be
collected where this was not stipulated in the bill of
lading (Market Developers, Inc. vs. IAC, G.R. No. L47978, September 8, 1989).
Supercargoes
Persons especially employed by the owner of a
cargo to take charge of and sell to the best advantage
merchandise which has been shipped, and to
purchase returning cargoes and to receive freight,
as he may be authorized.
Time charter
A vessel is chartered for a particular time or
duration. While the ship owner still retains
possession and control of the vessel, the charterer
has the right to use all vessel’s facilities. The
charterer may likewise designate vessel’s
destination.
CHARTER PARTIES
Charter party contract
A charter party is a contract by which an entire ship,
or some principal part thereof, is let by the owner to
another person for a specified time or use in
consideration of the payment of freight (Caltex vs.
Sulpicio Lines, G.R. No. 131166, September. 30, 1999).
Voyage/ trip charter
Vessel is chartered for a carriage of goods from one
or more ports of loading to one or more ports of
unloading.
Classes of charter party
1.
2.
Time charter; or
Voyage/ trip charter.
A voyage charter is a contract wherein the ship was
leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. An
owner who retains possession of the ship remains
liable as carrier and must answer for loss or nondelivery of the goods received for transportation
(Cebu Salvage Corp. vs. Philippine Home Assurance
Corp., G.R. No. 150403, Jan. 25, 2007).
Bareboat or demise
Contract of affreightment
a. Time charter
b. Voyage charter
BAREBOAT / DEMISE CHARTER
The ship owner gives possession of the entire vessel
to the charterer. In turn, the charterer supplies,
147
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
Bareboat or demise charter party vs. Contract of
affreightment
BAREBOAT/DEMISE
CHARTER CONTRACT
Negligence of the
charterer gives rise to
its liability to others.
Charterer is regarded
as owner pro hac vice.
Ship
owner
temporarily
relinquishes
possession
and
ownership
of
the
vessel.
b.
3.
CONTRACT OF
AFFREIGHTMENT
Ship owner remains
liable and carrier must
answer for any breach
of duty.
Charterer
is
not
regarded as owner.
Ship owner retains
ownership over the
vessel
(Coastwise
Lighterage vs. CA, G.R.
No. 114167, July 12,
1995).
Q: For the transportation of its cargo from the
Port of Manila to the Port of Kobe, Japan, Osawa
&Co., c hartered bareboat M/V Ilog of Karagatan
Corporation. M/V Ilog met a sea accident
resulting in the loss of the cargo and the death
of some of the seamen manning the vessel. Who
should bear the loss of the cargo and the death
of the seamen? Why?
A: The Jason clause derives its name from The Jason
225 US 32 (1912) decided by the US Supreme Court
under the Harter Act. By the Jason clause, a
shipowner (provided he had exercised due
diligence to make the ship seaworthy and properly
manned, equipped and supplied) could claim a
general average contribution from cargo, even
where the damage was caused by faulty navigation
of the vessel, provided that the bill of lading
excluded liability for such faults.
LIABILITY OF SHIPOWNERS AND SHIPPING
AGENTS
Three-fold character of the Captain (GVG)
Instances when a charter party may be
rescinded
2.
1.
2.
3.
At the request of the charterer by: (FARER)
a. Failure to place vessel at charterer’s
disposal
b. Abandoning the charter and paying half the
price
c. Return the vessel due to pirates, enemies,
and bad weather
d. Error in tonnage or flag
e. Arrival at port for Repairs - if repairs take
less than 30 days, pay full freightage; if
more than, freightage in proportion to the
distance covered.
At the request of the ship owner: (Sa-Te)
a. If extra lay days TErminate without the
cargo being placed alongside vessel; and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Due to fortuitous event: (WEB-Pro-N)
a. War – there is a governmental prohibition
of commercial intercourse, intended to
bring about an entire cessation for the time
being of all trade whatever.
b. Embargo – A proclamation or order of
State, usually issued in times of war or
threatened hostilities, prohibiting the
departure of ships or goods from some or
all the ports of such State until further
order; or
c. Blockade – A sort of circumvallation
around a place by which all foreign
connection and correspondence is, as far as
human power can effect it, to be cut off.
d. PROhibition to receive cargo at port of
destination.
e. Inability of the vessel to Navigate (CC, Art.
640)
Q: What is a “Jason clause” in a charter party?
(2015 Bar)
A: Osawa & Co. should bear the loss because it
chartered bareboat M/V Ilog which, in effect, gave
it exclusive control over the vessel. In a demise, in
contrast to other charters, the charterer is
considered the owner pro hac vice. The charterer is
accordingly liable in personam for all liabilities
arising out of the operation of the vessel; he is
responsible for the actions of the master and crew
(Litonjua Shipping Company, Inc. v. National
Seamen Board and Gregorio P. Candongo, G.R. No.
51910, August 10, 1989).
1.
SAle by the owner of the vessel before
loading by the charterer.
General agent of the ship owner
Vessel’s technical director
Government representative of the flag he
navigates under
Inherent powers of the Ship Captain (A2-C3-D)
1.
2.
3.
148
To Appoint or make contracts with the crew in
the ship agent’s absence, and to propose said
crew, should said agent be present; but the ship
agent may not employ any member against the
captain's express refusal
To Command the crew and direct the vessel to
the port of its destination, in accordance with
the instructions he may have received from the
ship agent
To impose Correctional punishment:
Mercantile Law
a.
Upon those who fail to comply with orders;
or
Those wanting in discipline
1.
To make Contracts for the charter of the vessel
in the absence of the ship agent or of its
consignee
To Adopt all proper measures to keep the vessel
well supplied and equipped, purchasing all that
may be necessary for the purpose, provided
there is no time to request instruction from the
ship agent
To make Disposition, in similar urgent cases
while on a voyage, the repairs on the hull and
engines of the vessel and in its rigging and
equipment, which are absolutely necessary to
enable it to continue and finish its voyage (Code
of Commerce, Art. 610).
3.
b.
4.
5.
6.
2.
4.
5.
6.
Obligations of the Captain
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Inventory of equipment
Keep a copy of Code of Commerce on board
Have a log book, freight book, accounting book
Conduct a marine survey of vessel before
loading
Remain on board while loading
Demand pilot on departure and on arrival at
each port
Be on deck when sighting land
Arrivals under stress: to file marine protest in
24 hours
Record bottomry loan with Bureau of Customs
Keep papers and properties of crew members
who might die
Conduct himself according to the instructions of
the ship agent
Report to ship agent on arrival
Observe rules on the situation of lights and
maneuvers to prevent collisions
Remain on board until the last hope to save the
vessel is lost and to abide by the decision of the
majority whether to abandon or not
In case of shipwreck: file marine protest, within
24 hours
Comply with rules and regulation on navigation
(CC, Art. 612).
7.
8.
Damages suffered by the vessel and its cargo by
reason of want of skill or negligence on his part;
Thefts committed by the crew, reserving his
right of action against the guilty parties;
Losses, fines, and confiscations imposed on
account of violation of customs, police, health,
and navigation laws and regulations;
Losses and damages caused by mutinies on
board the vessel or by reason of faults
committed by the crew in the service and
defense of the same, if he does not prove that he
made timely use of all his authority to prevent
or avoid them;
Those caused by the misuse of the powers;
For those arising by reason of his going out of
his course or taking a course which he should
not have taken without sufficient cause, in the
opinion of the officers of the vessel, at a meeting
with the shippers or supercargoes who may be
on board. No exceptions whatsoever shall
exempt him from this obligation;
For those arising by reason of his voluntarily
entering a port other than that of his
destination, outside of the cases or without the
formalities referred to in Article 612; and
For those arising by reason of non-observance
of the provisions contained in the regulations
on situation of lights and maneuvers for the
purpose of preventing collisions (CC, Art. 618).
Ship owner/agent is not liable for the obligations
contracted by the captain if the latter exceeds his
powers and privileges inherent in his position of
those which may have been conferred upon him by
the former. However, if the amount claimed were
used for the benefit of the vessel, the ship owner or
ship agent is liable.
Q: X chartered the ship of Y to transport his logs
from Zamboanga to Manila. In the course of their
voyage, the ship met a storm and had to dock in
Cebu for 3 days. Z, the captain of the ship,
borrowed P20,000 from X on the pretext that he
would need the money for the repair of the ship.
Z misappropriated the money and converted it
to his own benefit. What is the liability of Y, if
any? (1989 Bar)
Failure of the Ship Captain to ascertain beforehand
direction of reported storm and weather conditions
along his route constitutes negligent lack of
foresight (Alejandro Arada vs. CA and SMC, G.R. No.
98243, July 1, 1992).
A: A ship-owner would only be liable for contracts
made by the captain (a) when duly authorized or (b)
even when unauthorized, for ship repairs, or for
equipping or provisioning the vessel when the
proceeds are invested therein. Since the loan by the
captain from X does not fall under any of the
foregoing cases, the amount borrowed shall be
considered a personal liability of Z, the captain, and
Y, the ship-owner, cannot thus be held liable.
LIABILITY FOR THE ACTS OF THE CAPTAIN
Cases where the ship owner/agent shall be
liable to the damages caused by the captain
149
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
Q: Under a charter party, XXO Trading Company
shipped sugar to Coca-Cola Company through
SS Negros Shipping Corp., insured by Capitol
Insurance Company. The cargo arrived but with
shortages. Coca-Cola demanded from Capitol
Insurance Co. P500.000 in settlement for XXO
Trading. The MM Regional Trial Court, where
the civil suit was filed, "absolved the insurance
company, declaring that under the Code of
Commerce, the shipping agent is civilly liable
for damages in favor of third persons due to the
conduct of the carrier's captain, and the
stipulation in the charter party exempting the
owner from liability is not against public policy.
Coca-Cola appealed. Will its appeal prosper?
Reason briefly. (2004 Bar)
C. The defense of exercise of the diligence of a good
father of a family will lie in case of tort but not in
case of contract. In the latter, such defense is not
available because the contract was to carry the
goods safely and unless loss is due to caso fortuito
or force majeure, there is a breach of contract. The
due diligence of the shipowner is against his
employee, the master.
Civil liabilities of ship owners and agents
1.
2.
3.
A: NO. The appeal of Coca-Cola will not prosper.
Under Article 587 of the Code of Commerce, the
shipping agent is civilly liable for damages in favor
of third persons due to the conduct of the carrier's
captain, and the shipping agent can exempt himself
therefrom only by abandoning the vessel with all his
equipment and the freight he may have earned
during the voyage. On the other hand, assuming
there is bareboat charter, the stipulation in the
charter party exempting the owner from liability is
not against public policy because the public at large
is not involved (Home Insurance Co. vs. American
Steamship Agencies, Inc., G.R. No. L-25599, April 4,
1968).
4.
5.
Instances when the captain and crew members
may rescind their contractual employment
1.
2.
3.
4.
War
Outbreak of disease
New owner of vessel
Change of Destination (CC, Art. 647)
Powers, functions, and liabilities of ship agents
(ID)
Q: While docking his vessel, “Taurus”, the
master, thru negligence, damaged the wharf and
the merchandise loaded on the deck. The owner
of the wharf and the damaged merchandise sued
the owner of the vessel and the master of the
vessel for the damage.
1.
2.
A. What is the basis of the liability of the owner
of the vessel with respect to the damage to the
wharf?
B. With respect to the damage to the
merchandise?
C. Does the defense of exercise of diligence of a
good father of a family lie?
Reason.
Indemnity for expenses incurred for ship’s
benefit.
Discharge of captain and/or crew members
The following are the rules observed by the ship
agent:
a.
A:
A. The basis of the liability of the shipowner with
respect to the damaged wharf is tort. There was
damage due to negligence without any preexisting
contractual relations between the parties.
B. The basis of the liability with respect to the
merchandise on deck is the contract of carriage.
There was a breach of contract because the goods
were not carried safely to their destination due to
the negligence of the master.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Damages suffered by a 3rd person for tort
committed by the captain;
Contracts entered for provisioning and repair of
vessel;
Indemnities in favor of 3rd persons arising from
the conduct of the captain from the care of
goods;
Damages in case of collision due to fault or
negligence or want of skill of the captain; and
Damages for the acts of the captain.
150
Captain and/or crew member’s contract
not for a definite period or voyage:
i.
Before vessel sets out to sea: Ship agent
at his discretion may discharge the
captain and members of the crew.
Ship agent must pay captain and/or
crew members salaries earned
according to their contracts, and
without any indemnity whatsoever,
unless there is an expressed
agreement;
ii.
During voyage: Captain and/or crew
member shall receive salary until
return to the port where contract was
made. Article 637 of the Code of
Commerce enumerates the just
causes for discharge.
Mercantile Law
b.
Where captain and members of the crew’s
contracts with ship agent be for a definite
period or voyage:
i.
Captain and/or crew members may
not be discharged until after the
fulfillment of their contracts, except by
reason of insubordination in serious
matters, robbery, theft, habitual
drunkenness, or damage caused to the
vessel or to its cargo through malice
or manifest or proven negligence (CC,
Art. 605).
ii.
If the captain should be the vessel’s
co-owner, he may not be discharged
unless ship agent returns his amount
of interest therein. In the absence of
agreement between the parties,
interest shall be appraised by experts
appointed in the manner established
by civil procedure.
insurance proceeds. The ship owner’s or agent’s
liability is merely co-extensive with his interest in
the vessel, such that a total loss of the vessel results
in the liability’s extinction. The vessel’s total
destruction extinguishes maritime liens because
there is no longer any res to which they can attach
(Monarch Insurance vs. CA, G.R. No. 92735, June 8,
2000).
By necessary implication, the ship agent’s or ship
owner’s liability is confined to that which he is
entitled as of right to abandon—the vessel with all
her equipment and the freight it may have earned
during the voyage and to the insurance thereof, if
any (Yango vs. Laserna, 73 Phil. 330, 1941).
Rationale of the doctrine: The Real and
Hypothecary nature of Maritime Law
To offset against innumerable hazards and perils in
sea voyage and to encourage ship building and
maritime commerce. By abandonment, the ship
owner and ship agent exempt themselves from
liability, thus, avoiding the possibility of risking his
whole fortune in the business.
Exception to the rule
The captain shall not be liable for the loss or injury
to persons or cargo if the loss or the injury is based
on the following causes:
1.
2.
Person/s who can invoke the limited liability
rule
Force majeure
Obligations contracted for the vessel’s benefit,
except when the captain expressly agrees to be
liable.
1.
2.
Ship owner; and
Shipping agent.
A captain may not have himself substituted in the
absence of consent from the ship agent, and should
he do so he shall be liable for all the acts of the
substitute (CC, Art. 615).
He is (they are) the very person(s) whom the
Limited Liability Rule has been conceived to protect
(Philippine Trigon Shipyard Corp., et al. v.
Concepcion, et al., G.R. No. 160088, July 13, 2011).
Q: T, the captain of MV Don Alan, while asleep in
his cabin, dreamt of an Intensity 8.0 earthquake
along the path of his ship. On waking up, he
immediately ordered the ship to return to port.
True enough, the earthquake and tsunami
struck three days later and his ship was saved.
Was the deviation proper? (2011 Bar)
Cases in which the Doctrine of Limited Liability
is allowed (1994, 2004 Bar) (SOLE)
1.
2.
A: No, because no reasonable ground for avoiding a
peril existed at the time of the deviation.
3.
LIMITED LIABILITY RULE
Doctrine of limited liability (1991, 1994, 1997,
2000, 2008 Bar)
4.
Also called the “no vessel, no liability doctrine”, it
provides that liability of ship owner is limited to
ship owner’s interest over the vessel. Consequently,
in case of loss, the ship owner’s liability is also
extinguished. Limited liability likewise extends to
ship’s appurtenances, equipment, freightage, and
Civil liability of the Ship agent or ship owner for
the indemnities in favor of third persons (CC,
Art. 587);
Civil liability of the co-Owners of the vessel for
the results of the acts of the captain (CC, Art.
590);
If the vessel and her cargo be totally Lost, by
reason of capture or shipwreck, all the rights
shall be extinguished, both as regards the right
of the crew to demand wages and the right of
the ship agent to recover the advances made
(CC, Art. 643);
Extinction of civil liability incurred by the ship
owner or agent in cases of maritime collisions
(CC, Art. 837)
Stipulations which may be inserted in the bill of
lading to limit liability and their effects:
151
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
1.
2.
3.
No liability - The carrier will not be liable at all
for the negligent acts of its crew and employees.
This is void for being contrary to public policy.
Limited liability - regardless of the value of
the cargo, the maximum liability of the carrier
will be, for example, P500. This is also void for
being public policy.
Qualified Liability - this is the only stipulation
in a bill of lading which can validly limit liability.
NOTE: Under Qualified Liability, carrier fixes a
maximum kiability in the event the shipper
does not declare any value or a value up to a
certain amount. Should a shipper declare a
higher value, and wiulling to pay higher
freightage, the carrier shall accordingly be
liable for greater damage. In effect, carrier
becomes an insurer for higher insurance.
empire? What principle of maritime law is
applicable? Explain.
b. Assume the vessel was not seaworthy as in
fact its hull had leaked, causing flooding in
the vessel, will your answer be the same?
Explain.
c. Assume the facts in question (b). Can the
heirs of the three (3) crew members who
perished recover from CSC? Explain fully.
(2008 Bar)
A:
a. NO. The principle of limited liability will apply
because the exclusively real and hypothecary
nature of maritime law operates to limit the
liability of the ship owner to the value of the
vessel, earned freightage and proceeds of the
insurance, if any “No vessel, No liability,”
expresses in a nutshell the limited liability rule
(Monarch Insurance v. CA, G.R No. 92735, June 8,
2000). The total destruction of the vessel
extinguishes maritime lien as there is no longer
any res to which it can attach. In this case, the
ship was seaworthy. It exercised extraordinary
diligence when it changed its course to avoid
the typhoon but unfortunately, it was hit by
huge waves and sank. Since the vessel sank at
no fault by CSC, it cannot be held liable by virtue
of “No vessel, no liability rule.”
b. NO. While as a rule, a ship owner’s liability is
limited to the value of the vessel, the same rule
has no application when the carrier failed to
overcome the presumption of negligence. Such
presumption is only rebutted when the carrier
establishes that the vessel is seaworthy. The
vessel is this case is not seaworthy, thus,
doctrine of limited liability is inapplicable.
c. YES. The heirs of the 3 crew members who
perished can recover. This is because the heirs
may file a claim under the Workmen’s
Compensation Claims. The Limited Liability
Rule does not apply.
EXCEPTIONS TO THE LIMITED LIABILITY RULE
Instances where Doctrine of Limited Liability
shall not apply
1.
2.
3.
4.
5.
6.
Repairs and provisioning of the vessel before
the loss of the vessel (CC, Art. 586)
Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim
from the ship owner (Vasquez v. CA, G.R. No. L42926, Sept. 13, 1985)
Claims of the crew under the Workmen’s
Compensation Act
When the ship owner is guilty of fault or
negligence
When the vessel is not abandoned
When vessel is not seaworthy
Q: On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping
Company (CSC), sank on her voyage from Hong
Kong to Manila. Empire Assurance Company
(Empire) is the insurer of the lost cargoes
loaded on board the vessel which were
consigned to Debenhams’ company. After it
indemnified Debenhams, Empire as subrogee
filed an action for damages against CSC.
a.
Q: A cargo ship of X Shipping, Co. ran aground off
the coast of Cebu during a storm and lost all its
cargo amounting to Php50 Million. The ship
itself suffered damages estimated at Php80
Million.
Assume that the vessel was seaworthy.
Before departing, the vessel was advised by
the Japanese Meteorological Center that it
was safe to travel to its destination. But
while at sea, the vessel received a report of a
typhoon moving within its general path. To
avoid the typhoon, the vessel changed its
course. However, it was still at the fringe of
the typhoon when it was repeatedly hit by
huge waves, foundered and eventually sank.
The captain and the crew were saved except
three (3) who perished. Is CSC liable to
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The cargo owners filed a suit against X Shipping
but it invoked the doctrine of limited liability
since its vessel suffered an Php80 Million
damage, more than the collective value of all lost
cargo. Is X Shipping correct? (2011 Bar)
A: NO, since X Shipping neither incurred a total loss
nor abandoned its ship.
152
Mercantile Law
Q: CARDIAC shipped 165,200 bags of cement
from China Port to Manila Port to HEINDRICH,
the consignee. The shipment was insured by the
insurers FGU AND PIONEER. When the shipment
arrived, it was inspected by the consignee and
ACENAV, the agent of CARDIAc and it was found
that 43,905 bags were on a bad condition. The
shipper was not able to collect from the shipper
and charterer so it proceeded to the insurers
who paid the claim. FGU AND PIONEER
INSURANCE CO., who subrogated the consignee
HIENDRICH, filed a claim against the charterer
and ACENAV who is a mere agent of CARDIAC
The trial court dismissed the complaint but on
appeal, the appellate court reversed the
decision and held ACENAV liable for 30% of the
claim of the respondents.
GENERAL AND PARTICULAR AVERAGES
Averages
All extraordinary or accidental expenses which may
be incurred during the voyage for the preservation
of the vessel or cargo or both. Average may either be
general or particular
General average vs. Particular average
GENERAL AVERAGE
Damages or expenses
deliberately caused in
order to save the vessel,
its cargo, or both from
real and known risk
Is the appellate court correct?
Both the ship and cargo
are subject to the same
danger
There is a deliberate
sacrifice of part of the
vessel, cargo, or both
Damage or expenses
incurred to the vessel,
its cargo, or both,
redounded
to
the
benefit of the respective
owners
All those who have
benefited shall satisfy
the average
A: NO, Article 586 of the Code of Commerce
provides:
x x x
By ship agent is understood the person entrusted with
the provisioning of a vessel, or who represents her in
the port in which she may be found.
Records show that the obligation of ACENAV was
limited to informing the consignee HEINDRICH of
the arrival of the vessel in order for the latter to
immediately take possession of the goods. No
evidence was offered to establish that ACENAV had
a hand in the provisioning of the vessel or that it
represented the carrier, its charterers, or the vessel
at any time during the unloading of the goods.
Clearly, ACENAV's participation was simply to
assume responsibility over the cargo when they
were unloaded from the vessel. Hence, no reversible
error was committed by the courts a quo in holding
that ACENAV was not a ship agent within the
meaning and context of Article 586 of the Code of
Commerce, but a mere agent of CARDIA, the shipper.
(ACE NAVIGATION CO., INC. v FGU INSURANCE
CORPORATION and PIONEER INSURANCE AND
SURETY CORPORATION G.R. No. 171591, June 25,
2012)
Only the owner of the
goods benefiting from
the damage shall bear
the expense of average
Persons liable for the amount of loss
In general average: All persons having an interest in
the vessel and cargo therein at the time of the
occurrence of the average shall contribute (Art. 812,
CC).
In particular average: The owner of the things which
gave rise to the expenses or suffered the damage
shall bear the simple or particular averages (Art.
810, CC).
ACCIDENTS AND DAMAGES IN MARITIME
COMMERCE
Requisites of general average (CD-PS)
1.
2.
Accidents in maritime commerce (CASA)
1.
2.
3.
4.
PARTICULAR
AVERAGE
Damages or expenses
caused to the vessel or
cargo that did not inure
to the common benefit
and
borne
by
respective owners
No common danger to
both the vessel and the
cargo
Expenses and damages
are not deliberately
made
Did not inure to
common benefit and
profit of all persons
interested in the vessel
and her cargo
Collision
Averages
Shipwreck
Arrival under stress
3.
4.
153
Common danger present;
Deliberate sacrifice of part of the vessel or
cargo;
Successful saving of vessel and/or cargo; and
Proper procedure and legal steps.
a. Assembly to be called by captain of all the
cargo owners and other officers of the
vessel
b. Deliberation
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
c.
d.
e.
f.
Resolution of the captain
Entry of resolution in the logbook
Delivery of the minutes of the meeting to
the maritime judicial authority of the first
port of arrival within 24 hours from arrival;
Ratification by captain under oath
(Dimaampao & Dumlao-Escalante, 2014)
Jettison (2000, 2009 Bar)
Act of throwing overboard part of a vessel’s cargo or
hull in hopes of saving a ship from sinking.
Goods jettisoned for the common safety, shall not
pay freight; but its latter amount (freight lost) shall
be considered as general average, computing the
same in proportion to the distance covered when
they were jettisoned (Art. 660, Code of Commerce).
Goods not covered by general average even if
not sacrificed
1.
2.
Goods not recorded in the books or records of
the vessel (Art. 855[2], CC)
Fuel for the vessel if there is more than
sufficient fuel for the voyage (Rule IX, YorkAntwerp Rule)
Q: Distinguish between overseas and interisland trade regarding reimbursement and
payment of general averages on jettisoned deck
cargo.
A:
1. In case of overseas trade, the York-Antwerp
Rules prohibit the loading of cargo on deck. In
case such cargo is jettisoned, the owner will not
be entitled to reimbursement in view of the
violation. If the cargo were saved, the owner
must contribute to general average.
2. In case of interisland trade, the York-Antwerp
Rules allow deck cargo. If the cargo loaded on
deck is jettisoned as a result of which the vessel
was saved, the cargo owner is entitled to
reimbursement. If the cargo is saved, the cargo
owner must contribute to the general average.
Q. Global Transport Services, Inc (GTSI)
operates a fleet of cargo vessels plying
interisland routes. One of its vessels, MV Donna
Juana, left the port of Manila for Cebu laden with,
among other goods, 10,000 television sets
consigned to Romualdo, a TV retailer in Cebu.
When the vessel was about 10 nautical miles
away from Manila, the ship captain heard on the
radio that a typhoon which, as announced by
PAG-ASA, was on its way out of the country, had
suddenly veered back into Philippine territory.
The captain realized that MV Dona Juana would
traverse the storm’s path, but decided to
proceed with the voyage. True enough, the
vessel sailed into the storm. The captain
ordered the jettison of the 10,000 television
sets, along with some other cargo, in order to
lighten the vessel and make it easier to steer the
vessel out of the path of the typhoon. Eventually,
the vessel, with its crew intact, arrived safely in
Cebu. (2009 bar)
Reason: In interisland trade, voyages are usually
short and there are intervening islands and the seas
are generally not rough. In overseas trade, the
vessel is exposed for many days to the peril of the
sea, making deck cargo is dangerous to navigation.
COLLISION
Collision is impact of two moving vessels. It is an
impact or sudden contact of a vessel with another
whether both are in motion or one stationary
(Aquino and Hernando, 2016).
a)
Will you characterize the jettison of
Romualdo’s TV sets as an average? If so, what
kind of an average, and why? If not, why not?
Allision is impact between a moving vessel and a
stationary one.
b)
Against whom does Romualdo have a
cause of action for indemnity of his lost TV sets?
Explain.
Error in extremis isthe sudden movement made by
a faultless vessel during the third zone of collision
with another vessel which is at fault under the
second zone. Even if sudden movement is wrong, no
responsibility will fall on the faultless vessel.
A:
a. The jettison of Romualdo’s TV sets resulted in a
general average loss, which entitles him
compensation or indemnification from the ship
owner and the owners of the cargoes saved by the
jettison.
b. Romualdo has a cause of action for his lost TV sets
against the ship owner and the owners of the
cargoes saved by the jettison. The jettison of the TV
sets resulted in a general average loss, entitling
Romualdo to indemnity for the lost TV sets.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Rules governing liabilities of parties in case of
collision
1.
One vessel at fault – The ship owner of such
vessel shall be liable for all resulting damages.
2. Both vessels at fault – Each vessel shall suffer
their respective losses but as regards the
154
Mercantile Law
owners of the cargoes, both vessels shall be
jointly and severally liable (1991, 1995, 1998
Bar).
3. Vessel at fault not known – Each vessel shall
suffer its own losses and both shall be solidarily
liable for loses or damages on the cargo
(Doctrine of Inscrutable Fault).
If the collision is imputable to both vessels, each one
shall suffer her own damage, and both shall be
solidarily liable for the damages occasioned to their
cargoes (CC, Art. 827).
Protest in collision (2007 Bar)
The action for recovery of damages arising from
collisions cannot be admitted if a protest or
declaration is not presented within twenty-four
hours before the competent authority of the point
where the collision took place, or that of the first
port of arrival of the vessel, if in Philippine territory,
and to the Filipino consul if it occurred in a foreign
country (Art. 835, CC).
Doctrine of inscrutable fault (1995, 1997
Bar)
Under this doctrine, where fault is established
but it cannot be determined which of the two
vessels were at fault, both shall be deemed to
have been at fault.
4.
5.
Fortuitous event – Each shall bear its own
damage (1995 Bar).
Third vessel at fault – The third vessel shall be
liable for losses and damages sustained.
Failure to make a protest is not an impediment to
the maintenance of a civil action based on quasidelict.
Instances when a protest is required (AS-HM)
Zones of time in the collision of vessel
1.
2.
First zone – all time up to the moment when risk
of collision begins.
1.
2.
3.
One vessel is a privileged vessel and the other is
a vessel required to take action to avoid
collision.
4.
Second zone – time between moment when risk
of collision begins and moment it becomes
practically a certainty.
Persons who can file a maritime protest
In this zone, the conduct of the vessels is
primordial. It is in this zone that vessels must
observe nautical rules, unless a departure
therefrom becomes necessary to avoid
imminent danger. The vessel which does not
make such strict observance is liable.
3.
Arrival under stress (CC, Art. 612 [8]);
Shipwreck (CC, Arts. 601 [15], 843);
If the vessel has gone through a Hurricane or
where the captain believes that the cargo has
suffered damages or averages (CC, Art. 642);
and
Maritime collision (CC, Art. 835)
Third Zone – time when collision is certain and
up to the time of impact.
An error at this point no longer bears any
consequence. Even if a collision which resulted
in the damage to the cargoes of a vessel was due
to the fault of the other vessel, the ship owner is
still liable where the vessel did not exercise due
diligence to avoid collision (Maritime Company
of the Philippines vs. CA, G.R. No 47004, March 8,
1989).
1.
In case of maritime collision, the passenger or
other persons interested who may be on board
the vessel or who were in a condition who can
make known their wishes (CC, Arts. 835-836) or
the captain himself (Verzosa and Ruiz vs. Lim,
G.R. No. 20145, Nov. 15, 1923).
2.
The captain in cases of:
a. Arrival under stress
b. Shipwreck; or
c. If the vessel has gone through a hurricane
or where the captain believes that the cargo
has suffered damages or averages.
Q: Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels
were safely conducted to a port. Kim, a
passenger and Ruby, a shipper who suffered
damage to his cargo, did not file maritime
protest. Can Kim and Ruby successfully
maintain an action to recover losses and
damages arising from the collision? (2007 Bar)
A vessel is guilty of negligence even if it correctly
navigated to the right to avoid the collision where it
did not make such maneuver at an early stage and
allowed the two vessels to come to close quarters
(Mecenas vs. CA, G.R. No. 88052, December 14, 1989).
A: Ruby, the shipper can successfully maintain an
action to recover losses and damages arising from
the collision notwithstanding his failure to file a
maritime protest since the filing thereof is required
155
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
only on the part of Kim, who, being a passenger of
the vessel at the time of the collision, was expected
to know the circumstances of the collision. Kim’s
failure to file a maritime protest will therefore
prevent him from successfully maintaining an
action to recover his losses and damages (CC, Art
836).
APPLICATION
It will only be applied in terms of loss or damage of
goods transported to and from Philippine ports in
foreign trade.
It may also apply to domestic trade when there is a
paramount clause in the contract. Paramount
Clause is a stipulation or clause either on the bill of
lading or charter party stipulating the laws that the
parties agreed to be used of that particular
transport. In the event that there will be a breach,
the parties shall follow the law stipulated in the
paramount clause (Martin, 1989).
Shipwreck
The loss of the vessel at sea as a consequence of its
grounding, or running against an object in sea or on
the coast. If the wreck was due to malice, negligence,
or lack of skill of the captain, the owner of the vessel
may demand indemnity from said captain.
The Carriage of Goods by Sea Act applies up to the
final port of destination even if the transshipment
was made on an inter-island vessel (Sea Land
Service Inc. vs. IAC, G.R. No. 75118, August 31, 1987).
Person who shall bear the losses in shipwreck
GR: The loss of a ship and her cargo shall fall upon
their respective owners (CC, Art. 840).
Cases covered under the COGSA
XPN: The ship agent or the shippers may demand
indemnity from the captain for the damage caused
to the vessel or to the cargo by the accident.
1.
2.
It applies only in case of non-delivery or damage,
and not to misdelivery or conversion of goods (Ang
vs. American Steamship Agencies, Inc., G.R. No. L22491, Jan. 27, 1967).
The wreck was due to malice, negligence, or
lack of skill of the captain; or
The vessel put to sea was insufficiently repaired
and equipped (Art. 841, CC).
Also, the deterioration of goods due to delay in their
transportation is not covered by Sec. 6 of COGSA
(Mitsui O.S.K. Lines Ltd. vs. CA, G.R. No. 119571, March
11, 1998).
Arrival under stress
It is the arrival of a vessel at the nearest and most
convenient port, if during the voyage the vessel
cannot continue the trip to the port of destination
on account of:
1.
2.
3.
Q: The goods imported from the United States
were unloaded by the carrier in Manila. While in
the custody of the arrastre operator, part of the
shipment worth P1,000 was lost. Does the case
involve admiralty and maritime commerce so
that the action for short delivery has to be files
in the Court of First Instance regardless of the
amount? Reasons. (2013 Bar)
Lack of provisions;
Well-founded fear of seizure, privateers or
pirates; or
Any accident of the sea disabling it to navigate
(art. 819, cc).
A: NO. The matter does not involve admiralty or
maritime commerce which relate only to incidents
occurring during the sea voyage.
NOTE: In arrival under stress, the captain must file
a protest which is merely a disclaimer for the ship
owner not to be liable.
NOTICE OF LOSS AND DAMAGES
Instances when arrival under stress is unlawful
(LR-DM)
Notice of claim
1.
1.
2.
3.
4.
Lack of provisions is due to negligence to carry
according to usage and customs
Risk of enemy not well known of manifest
Defect of vessel is due to improper repair; or
Malice, negligence, lack of foresight or skill of
captain (Art. 820, CC).
2.
NOTE: The period is not mandatory. However, the
prescriptive period of one year from delivery for
the filing of the case is a condition precedent or
mandatory.
CARRAIGE OF GOODS BY SEA ACTS (COGSA)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If the damage is not apparent – within three (3)
days from delivery; or
If the damage is apparent – immediately.
156
Mercantile Law
Failure to file notice of loss does not bar an action
against the carrier if the action was filed within one
year (Belgian Overseas Chartering & Shipping N.V. vs.
Philippine First Insurance Company, Inc, G.R. No.
143133, June 5, 2002). There is no consequence on
the right to bring suit if no notice is filed unlike
under the Code of Commerce. It only gives rise to a
presumption that the goods are delivered in the
same condition as they are shipped.
Transshipment – is the act of taking out cargo out
of one ship and laoding it in another, or the transfer
of goods from the vessel stipulated in the contract of
affreightment to another vessel before the place of
destination named in the contract has been reached.
Instances when the one-year period applies
(AFLS)
1.
There is also no consequence if the transportation
charges and expenses are paid unlike under the
Code of Commerce.
2.
3.
Q. RC imported computer motherboards from
the USA and had them shipped to Manila aboard
an oceangoing cargo ship owned by BC Shipping
Company. When the cargo arrived at the Manila
seaport and delivered to RC, the crate appeared
intact; but upon inspection of the contents, RC
discovered that the items inside had all been
badly damaged. He did not file any notice of
damage or anything with anyone, least of all
with BC Shipping Company. What he did was to
proceed directly to your office to consult you
about whether he should have given a notice of
damage and how long a time he had to initiate a
suit under the provisions of the COGSA. What
would your advise be? (2000 Bar)
4.
NOTE: Art. 1155 of the Civil Code, providing that the
prescription of actions is interrupted by the making
of an extrajudicial written demand by the creditor,
is not applicable to actions brought under the
COGSA.Written claims do not toll the running of the
one-year prescriptive period under the COGSA since
matters affecting the transportation of goods by sea
must be decided as soon as possible (Dole
Philippines, Inc. vs. Maritime Company of the
Philippines, G.R. No. L-61352, February 27, 1987).
The one-year prescriptive period within which to
file a case against the carrier also applies to a claim
filed by an insurer who stands as a subrogee to the
insured. Also, whether the insurer files a third party
complaint or maintains an independent action is of
no moment (Filipino Merchants Insurance Co., Inc. vs.
Alejandro, G.R. No. L-54140, Oct. 14, 1986).
NOTE: The ruling in the above-cited case should
apply only to suits against the carrier filed either by
the shipper, the consignee or the insurer, not to
suits by the insured against the insurer. The basis of
the insurer’s liability is the insurance contract and
such claim prescribes in 10 years, in accordance
with Art. 1144 of the Civil Code (Mayer Steel Pipe
Corporation vs. CA, G.R. No. 124050, June 19, 1997).
A. My advice would be that RC should give notice of
the damage sustained by the cargo within 3 days
and that he has to file the suit to recover the damage
sustained by the cargo within 1 year from the date
of the delivery of the cargo to him.
PERIOD OF PRESCRIPTION
The suit for loss or damage should be brought within
one year from:
1.
2.
Amendment of pleadings for suing the wrong
party
Filing of third party complaint
Loss or damage to cargo, excluding delay or
misdelivery
Subrogation (Art 2207, NCC)
Delivery of the goods, in case of damage; or
The date when the goods should have been
delivered, in case of loss.
The prescriptive period for an action against a
broker is ten years and not one year under the
COGSA, since the broker is not a carrier, charterer or
holder of the bill of lading (Reyma Brokerage Inc. vs.
Philippine Home Assurance Corporation, G.R. No.
93464, October 7, 1991).
The one-year period is computed from the delivery
of goods to the operator and not to the consignee.
The parties may agree to extend the one-year period
to file a case under the Carriage of Goods by Sea
(Universal Shipping Lines, Inc. vs. Intermediate
Appellate Court, G.R. No. 74125, July 31, 1990).
The one year period in COGSA is interrupted:
1. When an action is filed in court; or
2. When there is an agreement between the parties
to extend it.
The term carriage of goods in the COGSA covers the
period from the time the goods are loaded to the
vessel to the time they are discharged therefrom.
Persons who can give notice to, and bring suit
against the carrier (SCA)
NOTE: Delivery to another vessel is not the delivery
contemplated if it constitures transschipment.
157
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
1.
2.
3.
The Shipper
The Consignee; or
Any legal holder of the bill of lading like the
indorsee, subrogee, or the insurer of the goods
(Kuy vs. Everett Steamship Corporation, G.R. No.
L-5554, May 27, 1953).
Prescriptive period in case of misdelivery and
conversion of goods
1.
2.
3.
Q: On December 1, 2010, Kore A Corporation
shipped from South Korea to LT Corporation in
Manila some 300,000 sheets of high-grade
special steel. The shipment was insured against
all risk by NA Insurance (NA). The carrying
vessel arrived at the Port of Manila on January
10, 2011. When the shipment was discharged, it
was noted that 25,000 sheets were damaged and
in bad order. The entire shipment was turned
over to the custody of ATI, the arrastre operator,
on January 21, 2011 for storage and
safekeeping, pending its withdrawal by the
consignee’s authorized customs broker, RVM.
On January 26 and 29, 2011, the subject
shipment was withdrawn by RVM from the
custody of ATI.
LIMITATION OF LIABILITY
Amount of the carrier’s liability under the
COGSA
1.
2.
The liability limit is set at $500 per package or
customary freight unless the nature and value
of such goods is declared by the shipper.
Shipper and carrier may agree on another
maximum amount, but not more than amount of
damage actually sustained.
NOTE: When the packages are shipped in a
container supplied by carrier and the number of
such units is stated in the bill of lading, each unit,
and not the container, constitute the “package.”
On January 29, 2011, prior to the withdrawal of
the last batch of the shipment, a joint inspection
of the cargo was conducted per the Request for
bad Order Survey (RBO) dated January 28, 2011.
The examination report showed that 30,000
sheets of steel were damaged and in bad order.
NA Insurance paid LT Corporation the amount of
P30 M for the 30,000 sheets that were damaged,
as shown in the Subrogation Receipt dated
January 13, 2013. Thereafter, NA Insurance
demanded reparation against ATI for the goods
damaged in its custody, in the amount of P5 M.
ATI alleged that the COGSA applies in this case
since the goods were shipped from a foreign
port to the Philippines.
Instances where there is no liability under
COGSA (FDUD)
1.
2.
3.
4.
If the nature or value of goods knowingly and
fraudulently misstated by shipper
If damage resulted from Dangerous nature of
shipment loaded without consent of carrier
If Unseaworthiness not due to negligence
If Deviation was to save life or property at sea.
Q: Clause 18 of the bill of lading provides that the
owner should not be liable for loss or damage of
cargo unless written notice thereof was given to
the carrier within 30 days after receipt of the
goods. However, Section 3 of the COGSA
provides that even if a notice of loss or damage
is not given, "that fact shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods."
Which of these two provisions should prevail?
NA Insurance claims that the COGSA does not
apply, since ATI is not a shipper or carrier. Who
is correct? (2014 Bar)
A: NA Insurance is correct. ATI should be ordered
to pay NA Insurance notwithstanding the lapse of
the one year prescriptive period for filing a suit
under the COGSA. The term “carriage of goods”
under Section 1 in COGSA, covers the period from
the time when the goods are loaded to the time
when they are discharged from the ship infer that
the period of time when the goods have been
discharged from the ship and given to the custody of
the arrastre operator is not covered by the COGSA.
The COGSA does not mention that an arrastre
operator may invoke the prescriptive period of one
year; hence, it does not cover the arrastre operator.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
If there is a written contract – 10 years (NCC,
Art. 1144)
Oral contract – 6 years (NCC, Art. 1145)
For quasi-delict – 4 years (NCC, Art. 1146)
A: Section 3 will prevail. Sec. 3 of the COGSA
provides that any clause, covenant, or agreement in
a contract of carriage relieving the carrier or the
ship from liability for loss or damage to or in
connection with the goods or lessening such liability
otherwise than as provided, shall be null and void
and of no effect (E. E. Elser, Inc. vs. CA, G.R. No. L-6517,
November 29, 1954).
THE WARSAW CONVENTION
158
Mercantile Law
The Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air (WC)
provides for rules applicable to international
transportation by air. The Philippines is one of the
signatories to the Warsaw Convention (Santos III vs.
Northwest Orient Airlines, G.R. No. 101538, June 23,
1992). Hence, this has the force and effect of law in
the Philippines (Cathay Pacific Airways, Ltd. vs. CA,
G.R. No. 60501, March 5, 1993).
1.
2.
High Contracting Parties are the signatories to the
Warsaw Convention and those which subsequently
adhered to it (Mapa vs. CA, G.R. No. 122308, July 8,
1997).
Montreal Convention
On 10 August 2015, the Philippine Senate ratified the
Convention for the Unification of Certain Rules for
International Carriage by Air, Montreal, 28 May
1999.
With the Montreal Convention, airline liability
caps have been increased substantially such that a
passenger is entitled to claim damages up
to $170,000.00 even without proof of negligence or
fault by the airline. Furthermore, in excess of this
amount, the burden of proof is on the shoulders of
the carrier to show that it was not negligent.
1.
2.
3.
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
the Convention (WC, Art. 1[2]).
Q: How should carriage performed by several
successive air carriers be treated under Warsaw
Convention?
A: A carriage to be performed by several successive
air carriers is deemed, for the purposes of Warsaw
Convention to be one undivided carriage, if it has
been regarded by the parties as a single operation,
whether it had been agreed upon under the form of
a single contract or of a series of contracts (WC, Art.
1 [3]).
Passenger death or bodily injury – no financial
limits, however, the carrier shall not be liable
for damages exceeding 100,000 Special
Drawing Rights (Approximately EUR 123,000)
if it proves that it was not negligent or at fault
or such damages is solely attributable to the
negligence or fault of third parties. The air
carrier may make an advance payment to meet
the immediate economic needs of the person
entitled to claim compensation.
Such carriage does not lose its international
character merely because one contract or a series of
contracts is to be performed entirely within a
territory subject to the sovereignty, suzerainty,
mandate or authority of same High Contracting
Party (Ibid).
Documents of carriage issued under the Warsaw
Convention
Destruction, loss of, or damage or delay to
baggage – 1,000 Special Drawing Rights
(approximately EUR 1,230) per passenger.
The following are the documents of carriage:
1.
Passenger Ticket
2.
Luggage Ticket
3.
Air Consignment note
Damage caused by delay in the carriage by air of
passengers– 4,150 Special Drawing Rights.
(approximately EUR 5,100)
Function of the air consignment note
APPLICABILITY
It is prima facie evidence of:
1. The conclusion of the contract
2. Receipt of the goods
3. Conditions of carriage (WC, Art. 11 [1])
The Warsaw Convention 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 (WC, Art. 1[1]).
Right to dispose by consignor
The consignor may exercise its right to dispose of
the goods by:
International carriage
Any carriage in which, according to the contract
made by the parties, the place of departure and the
place of destination, whether or not there be a break
in the carriage or a transshipment, are situated
either:
1.
2.
3.
159
Withdrawing them at the aerodrome of
departure or destination, or
Stopping them in the course of the journey on
any landing, or
Calling for them to be delivered at the place of
destination or in the course of the journey to a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Transportation Laws
4.
person other than the consignee named in the
air consignment note, or
Requiring them to be returned to the
aerodrome of departure (WC, Art. 12).
GR: The carrier shall be liable for 250,000 francs for
each passenger.
XPN: By special contract, the carrier and the
passenger may agree to a higher limit of liability
(Art. 22, WC).
In the exercise of this right, the carrier or other
consignors must not be prejudiced. For the carrier
to obey the orders for disposition, the carrier must
require the production of the part of the air
consignment note delivered to the consignor (Ibid).
A passenger of an airline is bound by the terms of a
passenger ticket declaring that the limitations of
liability zet forth in the Warsaw Convention in case
of loss, damage or destruction to a registered
luggage of the passenger. The Warsaw Convention
governs the availment of the liabitlity limitations
where the baggebe checked is combined with or
incorporated in the passesnger ticket. (Pan-am v
Rapadas. 209 scra 67)
Right to dispose ceases as soon as the consignee, on
arrival of the goods at the place of destination,
require the carrier to hand over to him the air
consignment note and to deliver the goods to him,
on payment of charge due and on complying with
the conditions of carriage set out in the air
consignment note (WC, Art. 13).
LIABILITY FOR CHECKED BAGGAGE
Where the supervisor of the consignee signed the
delivery receipt for the goods shipped, the
consignee cannot sue the shipping company for
non-delivery of the goods (Republic vs. Lorenzo
Shipping Corporation, G.R. No. 153563, Februry 7,
2005).
GR: Two hundred and fifty (250) francs per
kilogram,
XPN: The passenger or consignor has made, at the
time when the package was handed over to the
carrier, a special declaration of interest in delivery
at destination and has paid a supplementary sum if
the case so requires (Ibid.).
Liabilities under the Warsaw Convention
The carrier is liable under the following instances:
1.
2.
3.
LIABILITY FOR HANDCARRIED BAGGAGE
Damage sustained in the event of the death
or wounding of a passenger taking place on
board the aircraft or in the course of any of
the operations of
embarking or
disembarking;
Loss or damage to any check baggage or
goods sustained during the transport by
air;
Delay in the transport by air of passengers,
baggage or goods.
Five thousand (5,000) francs per passenger (Ibid.).
NOTE: The above figures have been amended by the
Guatemala Protocol, viz:
1.
2.
3.
Thelist is not exclusive.
Carriage of persons – One hundred thousand
dollars ($100, 000)
Checked-in articles – One thousand dollars
($1,000)
Hand-carried baggage - One thousand dollars
($1,000)
According to Dean Eduardo Abella, the Guatemala
Protocol has not yet been ratified, so either of the
two currencies is still correct.
Venue in the filing of an action for violation of a
contract of international carriage
An action for damage must be brought at the option
of the plaintiff, in the territory of one of the High
Contracting Parties, either before the court:
Defenses against limit of liability
1.
2.
3.
4.
Of the domicile of the carrier or
Of his principal place of business, or
Where the ticket was purchased, or
At the place of destination (WC, Art. 28 [1]).
1.
2.
3.
4.
LIMITATION OF LIABILITY (1993 Bar)
5.
The limit of liability is not applicable in case of:
LIABILITY TO PASSENGERS
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
160
Willful misconduct;
Gross negligence;
Absence of baggage check;
If there was waiver on the part of the carrier;
and
If the carrier is estopped from invoking the
provision on limit of liability (Aquino and
Hernando, 2016)
Mercantile Law
Carrier is not entitled to the foregoing limit if the
damage is caused by willful misconduct or default
on its part (WC, Art. 25). Where the loss of the
baggage of a passenger was due to the fault or
recklessness of an airline company, the limitation
on the liability of airline companies under the
Warsaw Convention is not applicable (Alitalia v. IAC,
G.R. No. 71929, December 4, 1990).
Warsaw Convention, where the passenger
immediately made a demand upon the airline
company and the action was delayed because of the
evasion of the airline company (United Air Lines, Inc.
v. CA, G.R. No. 124110, April 20, 2001).
Where an airline company failed to deliver the
baggage of a passenger on time, a passenger may
maintain an action for damages under the Civil Code
even if he did not file a claim with the airline
company within fourteen days as required by the
Warsaw Convention, for he may still sue under the
Civil Code (Luna v. CA, G.R. No. 100374-75, November
27, 1992).
Stipulation relieving the carrier from or limiting
its liability is not valid
Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is laid
down in this Convention shall be null and void but
the nullity of such provision does not involve the
nullity of the whole contract (WC, Art. 23).
WILLFUL MISCONDUCT
Carrier is not entitled to the limitation of liability if
the damage is caused by willful misconduct or
default on its part (WC, Art. 25). The definition of
"willful misconduct" depends in some measure on
which court is deciding the issue. Some common
factors that courts will consider are:
Notice of Claim
Under the Warsaw Convention, complaint must be
filed within the following period:
1. Three days from receipt of baggage;
2. Seven days from receipt of goods; or
3. Fourteen days, in case of delay, counted from the
time the baggage was placed at the disposal of the
passenger (Aquino and Hernando, 2016).
1.
2.
3.
Prescriptive period
Claim for damages must be brought within two
years reckoned [a] from the date of arrival at the
destination; or [b] from the date on which the
aircraft ought to have arrived; or [c] from the date
on which the carriage stopped, otherwise, right to
damages shall be extinguished.
Knowledge that an action will probably result in
injury or damage
Reckless disregard of the consequences of an
action, or
Deliberately failing to discharge a duty related
to safety.
NOTE: Courts may also consider other factors.
The failure of the carrier to deliver the passenger’s
luggage at the designated time and place does not
ipso facto constitute willful misconduct.There must
be a showing that the acts complained of were
impelled by an intention to violate the law, or were
in persistent disregard of one's rights. It must be
evidenced by a flagrantly or shamefully wrong or
improper conduct. (Luna vs. CA, GR No. 100374-75,
November 27, 1992.
Despite the express mandate that an action for
damages should be filed within 2 years from the
arrival at the place of destination, such rule shall
not be applied where delaying tactics were
employed by airline itself in a case where a
passenger wishes to settle his complaint out-ofcourt but the airline gave him the runaround,
answering the passenger’s letters but not giving in
to his demands, hence, giving the passenger no time
to institute the complaint within the reglementary
period (United Airlines vs. Uy, G.R. No. 127768, Nov.
19, 1999).
The act of the carrier in guessing which luggage
contained the firearm constitutes willful
misconduct.The
guessing of
which
luggage
contained the firearms amounted to willful
misconduct under Section 25(1) of the Warsaw
Convention. (Northwest Airlines vs. CA, GR No.
120334, January 20, 1998)
A claim covered by the Warsaw Convention can no
longer be recovered under local law, if the statute of
limitations of two years has already lapsed (PAL. v.
Savillo, G.R. No. 149547, July 4, 2008).
The allegation of willful misconduct resulting in a
tort is insufficient to exclude the case from the realm
of Warsaw Convention.A cause of action based on
tort did not bring the case outside the sphere of the
Warsaw Convention. (Lhuiller vs. British Airways, GR
No. 171092, March 15, 2010)
However, the action filed by a passenger of an
airline company for loss of his luggage is not barred
by the two-year prescriptive period under the
161
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
NOTE: There is no willful misconduct if the airplane
was lost without a trace. In such case, no willful
misconduct can be proved because if the airplane is
lost without a trace, there is no proof of the act or
omission or the proximate cause of the accident.
(Wyman and Barlett v. Pan American Airways, Inc.,
CCH 1 AVI 1093 (1943)
incorporation law or charter or by means of general
corporation law.
XPN: For corporations by prescription, such
authority is not necessary (De Leon, 2010).
NOTE: A corporation by prescription is one which
has exercised powers for an indefinite period
without interference on the part of the sovereign
power and which by fiction of law, is given the status
of a corporation (De Leon, 2010).
THE CORPORATION CODE (CC)
The creation of a corporation is by operation of
law
CORPORATION
NOTE: The Philippine jurisprudence adopted the
Concession or fiat theory, which states that a
corporation is conceived as an artificial person
owing existence through creation by a foreign
power. Further, a corporation has without any
existence until it has received the imprimatur of the
State acting according to law, through the SEC
(Tayag v. Benguet Consolidated, Inc., GR No. L-23145,
November 29, 1968).
(Note: Those which are affected by the Revised
Corporation Code is not included in the 2019 Bar
Syllabus. The reader must be guided accordingly.)
DEFINITION
A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes and properties expressly
authorized by law or incident to its existence (CC,
Sec. 2).
Q: Since February 8, 1935, the legislature has
not passed even a single law creating a private
corporation. What provision of the constitution
precludes the passage of such law? (2008 Bar)
ATTRIBUTES OF A CORPORATION
A: Article XII, Section 16 of the 1987 Constitution
provides that Congress shall not, except by general
law, provide for the formation, organization, or
regulation of private corporations. Governmentowned and controlled corporations may be created
or established by special charters in the interest of
the common good and subject to the test of
economic viability.
[ALS– PAPI]
1.
2.
3.
4.
It is an Artificial being
It is created by operation of Law
It enjoys the right of Succession
It has the Powers, Attributes and Properties
expressly authorized by law or Incident to its
existence.
Private corporations owned or controlled by the
government can only be created by special law often
referred to as “Charters”.
1. Artificial Personality
A corporation is a legal or juridical person with a
personality separate and apart from individual
stockholders or members and from any other legal
entity into which it may be connected or related.
Q: A corporation was created by a special law.
Later, the law creating it was declared invalid.
May such corporation claim to be a de facto
corporation?
2. Corporation as a Creation of Law or By
Operation of Law
A: NO. A private corporation may be created only
under the Corporation Code. Only public
corporations may be created under a special law.
Where a private corporation is created under a
special law, there is no attempt at a valid
incorporation and it cannot claim a de facto status.
No corporation can exist without the consent or
grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty.
Corporations cannot come into existence by mere
agreement of the parties (De Leon, 2010).
Q: A Special Audit Team from COA audited the
accounts of Leyte Metropolitan Water District
(LMWD). Subsequently, LMWD and received a
requested for payment of auditing fees from
GR: A legislative grant or authority is required for
the creation of a corporation, either by a special
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
162
Mercantile Law
COA. As LMWD GM Feliciano sent a reply
informing COA that the water district could not
pay the auditing fees, citing as basis for his
action Presidential Decree 198 (PD 198) as well
as Republic Act No. 6758 (RA 6758). Thereafter,
Feliciano asked COA for refund of all auditing
fees LMWD previously paid to COA. The COA
Chairman denied LMWD’s request. Feliciano
maintains that LWDs are not GOCCs with
original charters. He argues that LWDs are
private corporations, and thus not subject to
COA’s jurisdiction. Is a Local Water District
created under PD 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
government assets and does not receive any
appropriation from the Philippine Congress. It is a
non-profit, donor-funded, voluntary organization,
whose mission is to bring timely, effective and
compassionate humanitarian assistance for the
most vulnerable without consideration of
nationality, race, religion, gender, social status or
political affiliation. This does not mean however
that the charter of PNRC is unconstitutional. PNRC
is sui generis. Although it is neither a subdivision,
agency or instrumentality of the government nor a
GOCC or a subsidiary thereof, so much so that
Gordon was correctly allowed to hold his position as
Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
that the PNRC is a private corporation within the
contemplation of the provision of the Constitution
that must be organized under the Corporation Code.
The PNRC enjoys a special status as an important
ally and auxiliary of the government in the
humanitarian field in accordance with its
commitments under international law (Liban, et al.,
v. Gordon, G. R. No. 175352, January 18, 2011, in
Divina, 2014).
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
laws mandate COA to audit all government agencies,
including GOCCs with original charters. An LWD is a
GOCC with an original charter. The Constitution
recognizes two classes of corporations. The first
refers to private corporations created under a
general law. The second refers to GOCCs created by
special charters. Congress cannot enact a law
creating a private corporation with a special
charter. Such
legislation
would
be
unconstitutional. Private corporations may exist
only under a general law. The Constitution
authorizes Congress to create GOCCs through
special charters. Since private corporations cannot
have special charters, it follows that Congress can
create corporations with special charters only if
such corporations are government-owned or
controlled. Obviously, LWDs are not private
corporations because they are not created under the
Corporation Code (Engr. Ranulfo C. Feliciano v. COA,
et al., G.R. No. 147402, January 14, 2004).
Q: Dennis A.B. Funa requested the COA for a copy
of the latest financial and audit report of the
Manila Economic and Cultural Office (MECO).
The MECO was organized as a non-stock, nonprofit corporation under the Corporation Code,
in view of the desire of the Philippines and
Taiwan to maintain an unofficial relationship in
lieu of official diplomatic ties severed by the
One-China policy. Upon receipt of COA’s reply
that it does not audit MECO, Funa filed a petition
for mandamus to compel COA to audit MECO as
the latter was a GOCC as it performs functions
relating to public needs and is controlled by the
government through the appointment of its
board of directors. Is Funa correct?
Q: In Liban, et al. v. Gordon (July 15, 2009) the
Court held that Richard Gordon did not forfeit
his seat in the Senate when he accepted the
chairmanship of the Philippine National Red
Cross Board of Governors, as the office of the
PNRC Chairman is neither a government office
nor an office in a government-owned or
controlled corporation for purposes of the
prohibition in Section 13, Article VI of the 1987
Constitution. However, the decision declared
void the PNRC Charter as it creates the PNRC as
a private corporation and ruled that the PNRC
should incorporate under the Corporation Code
and register with the SEC if it wants to be a
private corporation. Is PNRC a private
corporation?
A: NO. The MECO is not owned or controlled by the
government, hence it is not a GOCC or a government
instrumentality. GOCCs are "stock or non-stock"
corporations "vested with functions relating to
public needs" that are "owned by the Government
directly or through its instrumentalities." By
definition, three attributes thus make an entity a
GOCC:
a.
b.
c.
A: NO. Although the PNRC was created by a special
charter, it cannot be considered as a GOCC in
absence of the essential elements of ownership and
control by the government. It does not have
First, its organization as stock or nonstock corporation;
Second, the public character of its
function; and
Third, government ownership over the
same.
Possession of all three attributes is necessary to
deem an entity a GOCC. In this case, there is not
163
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
much dispute that the MECO possesses the first and
second attributes. It is the third attribute, which the
MECO lacks.
its non-governmental character, the MECO handles
government funds in the form of the "verification
fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Section 2(6) of EO
No. 15, s. 2001. Hence, under existing laws, the
accounts of the MECO pertaining to its collection of
such "verification fees" and "consular fees" should
be audited by the COA (Funa v. Manila Economic and
Cultural Office and COA, G.R. No. 193462, February,
2014).
The MECO is not owned or controlled by the
government. Organization as a non-stock
corporation and the mere performance of functions
with a public aspect, however, are not by
themselves sufficient to consider the MECO as a
GOCC. In order to qualify as a GOCC, a corporation
must also, if not more importantly, be owned by the
government.
Franchise
The government owns a stock or non-stock
corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling
interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the
corporate capital stock. In a non-stock corporation,
like the MECO, jurisprudence teaches that the
controlling interest of the government is affirmed
when "at least majority of the members are
government officials holding such membership by
appointment or designation" or there is otherwise
"substantial participation of the government in the
selection" of the corporation’s governing board.
A franchise includes any special privilege or right
affected with public interest, conferred by the State
on corporations or persons and which does not
belong to the citizens of the country, generally as a
matter of common right (De Leon, 2010, citing JRS
Business Corp. v. Imperial Insurance, Inc., G.R. No. L19891, July 31, 1964)
Kinds of franchise
Primary vs. Secondary Franchise
PRIMARY
FRANCHISE
The fact of the incorporation of the MECO under the
Corporation Code is the key. The MECO was correct
in postulating that, as a corporation organized
under the Corporation Code, it is governed by the
appropriate provisions of the said code, its articles
of incorporation and its by-laws. In this case, it is the
by-laws of the MECO that stipulates that its
directors are elected by its members; its officers are
elected by its directors; and its members, other than
the original incorporators, are admitted by way of a
unanimous board resolution.
Special authority given to a
corporation to engage in a
specialized business (e.g.
banks, insurance companies,
right to use the streets of a
municipality to lay pipes of
tracks, erect poles, or string
wires).
The franchise
or authority to
exist
as
a
corporation
It is significant to note that none of the original
incorporators of the MECO were shown to be
government officials at the time of the corporation’s
organization. Indeed, none of the members, officers
or board of directors of the MECO, from its
incorporation up to the present day, were
established as government appointees or public
officers designated by reason of their office. There
is, in fact, no law or executive order that authorizes
such an appointment or designation. Hence, from a
strictly legal perspective, it appears that the
presidential "desire letters" pointed out by Funa
are, no matter how strong its persuasive effect may
be, merely recommendatory.
GR: Granted by
the
Corporation
Code
XPN: In GOCC’s
with a special
It is a sui generis private entity especially entrusted
by the government with the facilitation of unofficial
relations with the people in Taiwan without
jeopardizing the country’s faithful commitment to
the One China policy of the PROC. However, despite
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
SECONDARY FRANCHISE
164
Certain rights and privileges
conferred
upon
existing
corporations (J.R.S. Business
Corp. v. Imperial Insurance,
supra).
The franchise to exercise
powers and privileges granted
to such corporation to the
business for which it was
created,
including
those
conferred for purposes of
public benefit such as the
power of eminent domain and
other powers and privileges
enjoyed by public utilities (De
Leon, 2010).
Granted by a Government
Agency, or a Municipal
Corporation
Mercantile Law
charter,
special
grants
franchise
using the right to take property for private use (De
Leon, 2010, citing SEC Opinion, October 28, 1968).
a
law
the
Cannot
be
transferred
without
the
approval
of
Congress
(Sundiang Sr. &
Aquino, 2011)
Rule on whether a defective incorporation
result into a partnership
It may ordinarily be conveyed
or mortgaged under a general
power
granted
to
a
corporation to dispose of its
property (i.e. Through board
resolution or approval of
stockholders (Villarey v. Ferrer
G.R. No. L-23893, October 29,
1968).
The answer depends on whether or not there is a
clear intent to participate in the management of the
business affairs on the part of the investor. Parties
who intend to participate or has actually
participated in the business affairs of the proposed
corporation would be considered as partners under
a de facto partnership. On the other hand, parties
who took no part notwithstanding their
subscriptions do not become partners with other
subscribers (Pioneer Insurance vs. CA, GR No. 84197,
July 28, 1989).
It can be subject to levy and
sale on execution together with
corporate property (Sundiang
Sr. & Aquino, 2011).
Engagement into a contract of partnership or a
joint venture
3. Right to succession
GR: Corporations have no power to enter into
partnership.
A corporation has a capacity of continuous existence
irrespective of the death, withdrawal, insolvency, or
incapacity of the individual stockholders or
members and regardless of the transfer of their
interest or shares of stock (De Leon, 2010).
XPN: The SEC allowed corporations to enter into
partnerships with other corporations and
individuals provided: (ENLiT)
A corporation may exist up to the period stated in
the articles of incorporation not exceeding 50 years
from the date of incorporation, unless sooner
dissolved or unless said period is extended (CC, Sec.
11). Note: The Revised Corporation Code now allows
corpotations to have perpetual existence.
1.
2.
4. Powers, attributes and properties of a
Corporation
3.
The powers that a corporation can exercise are only
those which are granted by the law of its creation.
All powers which may be implied from those
expressly provided by law and those which are
incidental or essential to the corporation’s existence
may also be exercised (CC, Sec. 36).
4.
The authority to enter into partnership relation
is expressly conferred by the Charter or the
Articles of Incorporation (AOI)
The nature of the business venture to be
undertaken by the partnership is in line with
the business authorized by the charter or the
AOI (SEC Opinions, Feb. 29, 1980, December 1,
1993, and February 23, 1994).
The partnership must be a limited partnership
and the corporation must be a limited partner.
If it is a foreign corporation, it must obtain a
license to transact business in the country.
Q: May a corporation enter into a joint venture?
(1996 Bar)
TEST: Whether the act of the corporation is in direct
and immediate furtherance of its business, fairly
incidental to the express powers and reasonably
necessary to their exercise.
A: YES. A corporation may enter into a joint venture
with another where the nature is in line with the
business authorized by its charter. (Tuason v.
Bolanos, G.R. L-4935, May 28, 1954).
The power
to institute expropriation
proceedings is not granted to all corporations
However, in as much as the term “joint venture” has
no precise legal definition, it may take various
forms. It could take the form of a simple pooling of
resources (not involving incorporation) between
two or more corporations for a specific project,
purpose or undertaking, or for a limited time. It may
involve the creation of a more formal structure, and,
hence, the formation of a corporation. What is
prohibited by law is the creation of partnership
Only quasi-public corporations or those affected
with public interest are given the power to institute
condemnation proceedings against owners of
private property. To grant the right of eminent
domain to purely private entities exercising
functions, which are not public in nature, would be
165
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
between corporations but not the creation of joint
venture.
Advantages vs. Disadvantages of a Corporation
ADVANTAGES
The capacity to act as a
legal unit
Limitation
of,
or
exemption
from
liability
of
shareholders
Continuity of Existence
Transferability
shares
of
Centralized
management of BOD
Standardized method
of organization and
finance
DISADVANTAGES
More complicated in
formation
and
management
Higher
cost
formation
operation
of
and
Commenceme
nt of juridical
personality
and term of
existence
Lack
of
personal
element
Greater government
control and regulation
Management
and
control are separate
from ownership
Stockholders
have
little voice in the
conduct of business
From
moment
meeting
minds of
partners
the
of
of
the
The term of a
partnership
may
be
established
for
any
period
of
time
stipulated by
the partners
Joint Account vs. Partnership
JOINT ACCOUNT
Has no firm name and is
conducted in the name
of
the
ostensible
partner.
Has
no
juridical
personality and can sue
or be sued only in the
name of the ostensible
partner.
Has no common fund.
The ostensible partner
manages its business
operations.
Liquidation thereof can
only be done by the
ostensible partner.
PARTNERSHIP
Has a firm name.
Number
of
incorporators
Has
juridical
personality and may
sue or be sued under
its firm name
Has a common fund.
All general partners
have the right of
management.
Liquidation may, by
agreement,
be
entrusted to a partner
or partners.
GR:
May
exercise any
power
authorized
by
the
partners.
Powers
Corporation vs. Partnership
BASIS
As to creation
and
governing law
PARTNERS
HIP
Created by
mere
agreement of
the parties
and
governed by
the
Civil
Code
CORPORATIO
N
Created
by
operation of
law
and
governed by
the
Corporation
Code
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
May
be
organized by
at least 2
persons
Management
166
XPN:
Acts
which
are
contrary to
law, morals,
good
customs,
public order,
public policy
When
management
is not agreed
upon, every
partner is an
agent of the
partnership
Existence of
the
corporation
commences
from the date
of issuance of
the Certificate
of
Incorporation
by
the
Securities and
Exchange
Commission
(SEC).
Existence
CANNOT be
for a term in
excess of 50
years.
The
term of a
corporation
may
be
extended to
not more than
50 years at
any
single
instance.
GR: Requires
at least 5
incorporators
but not more
than 15
XPN:
Corporation
sole
May exercise
only
such
powers as may
be granted by
law and its
articles
of
incorporation,
implied
therefrom or
incidental
thereto.
GR: Power to
do business
and manage
its affairs is
vested in the
Board
of
Directors
Mercantile Law
(BOD) / Board
of
Trustees
(BOT)
Effect
of
mismanagem
ent
Extent
of
liability
to
third persons
A partner as
such can sue
a co-partner
who
mismanages.
GR: Partners
are
liable
personally
and
subsidiarily
(sometimes
solidarily)
for
partnership
debts to third
persons
XPNs:
1. Executive
Committe
e (Sec. 35,
CC)
2. Managem
ent
Contract
(Sec. 44,
CC)
3. The AOI of
a
close
corporati
on
may
provide
that the
business
of
the
corporati
on shall be
managed
by
the
stockhold
ers of the
corporati
on rather
than by a
board of
directors.
(Sec. 97,
CC)
The
suit
against
a
member of the
BOD or BOT
who
mismanages
must
be
brought in the
name of the
corporation;
this
is
commonly
known
as
“derivative
suit”.
Right
of
Succession
Transferabilit
y
of
Shareholder’s
interest
XPN: Limited
partner
No right of
succession
(ie.
a
partnership
dissolves
upon death
of a partner)
Partner
cannot
transfer his
interest
in
the
partnership
without the
consent of all
the
other
existing
partners.
May
be
dissolved
any time by
the will of
any or all of
the partners.
Dissolution
Death, civil
interdiction
and
insolvency of
a
partner
dissolve the
partnership.
Has right of
succession
Stockholder
has the right
to transfer his
shares
without prior
consent of the
other
stockholders
unless
the
right of first
refusal
is
embodied in
the articles of
incorporation.
Can only be
dissolved with
the consent of
the State.
Death
or
insolvency of
shareholders
cannot
dissolve the
corporation.
CLASSES OF CORPORATION
The following are the classes of corporation:
1. As to whether their membership is represented
by shares of stock or not:
a. Stock –one which has:
1. Capital stock divided into shares;
and
2. Are authorized to distribute to the
holders of such shares dividends
or allotments or the surplus profits
on the basis of the shares held (Sec.
3, CC).
Stockholders
are liable only
to the extent of
the
shares
subscribed by
them whether
paid or not.
167
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
b.
2.
Non-Stock – is one which does - not
issue shares and is - created not for
profit but for public good and welfare
and where no part of its income is
distributable as dividends to its
members, trustees, or officers. (Sec. 87,
CC)
As to the number of persons who compose
them:
a. Corporation Aggregate
- corporation consisting of more
than one member or corporator.
The CC requires that these
corporations must be formed by
“not less than 5 persons” (Sec. 10,
CC).
b. Corporation Sole
‐ Religious corporation which
consists of one member which is
the head of the religious sect or
corporator only and his successor.
3.
As to whether they are for religious purpose or
not:
a. Ecclesiastical Corporation ‐ one
organized for religious purpose.
b. Lay Corporation ‐ one organized
for a purpose other than for
religion.
4.
As to whether they are for charitable purpose
or not:
a. Eleemosynary ‐ one established
for charitable purposes.
b. Civil ‐ one established for business
or profit.
5.
b.
As to their legal right to corporate existence:
a. De jure ‐existing both in fact and in law.
b. De facto ‐existing in fact but not in law.
7.
As to whether they are open to the public or not:
a. Close ‐limited to selected persons
or members of the family (Sec. 96‐
105, CC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
8.
As to their relation to another corporation:
a. Parent or Holding ‐ related to another
corporation that it has the power
either, directly or indirectly to, elect
the majority of the director of such
other corporation.
b. Subsidiary ‐ so related to another
corporation that the majority of its
directors can be elected either, directly
or indirectly, by such other corporation
9.
As to whether they are corporations in a true
sense or only in a limited sense:
a. True ‐ exists by statutory authority
b. Quasi ‐ exist without formal legislative
grant:
i. Corporation by prescription ‐ has
exercised corporate powers for an
indefinite period without interference
on the part of the sovereign power and
which by fiction of law, is given the
status of a corporation;
ii. Corporation by estoppel ‐ in reality is
not a corporation, either de jure or de
facto, because it is so defectively
formed, but is considered a corporation
in relation to those only who, by reason
of theirs acts or admissions, are
precluded from asserting that it is not a
corporation (Sec. 21, CC).
10. As to whether they are for public (government)
or private purpose: (2001, 2004 Bar)
a) Public - formed or organized for the
government of a portion of the State (like
cities and municipalities) for the purpose of
serving the general good and welfare.
(Aquino, 2014)
b) Private - one formed for some private
purpose, benefit or end. It may either be a
stock or non-stock (Aquino, 2014).
As to state or country under or by whose laws
they have been created:
a. Domestic ‐ incorporated under the
laws of the Philippines.
b. Foreign ‐ formed, organized, or
existing under any laws other than
those of the Philippines and whose
laws allow Filipino citizens and
corporations to do business in its
own country or state (Sec. 123, CC).
6.
Open ‐open to any person who
may wish to become a stockholder
or member thereto.
The fact that a certain juridical entity is impressed
with public interest does not, by that circumstance
alone, make the entity a public corporation,
inasmuch as a corporation may be private although
its charter contains provisions of a public character,
incorporated solely for the public good. This class of
corporations may be considered quasi-public
corporations, which are private corporations that
render public service, supply public wants, or
pursue other eleemosynary objectives. While
purposely organized for the gain or benefit of its
members, they are required by law to discharge
functions for the public benefit. Examples of these
168
Mercantile Law
corporations are utility, railroad, warehouse,
telegraph, telephone, water supply corporations
and transportation companies. It must be stressed
that a quasi-public corporation is a species of
private corporations, but the qualifying factor is
the type of service the former renders to the public:
if it performs a public service, then it becomes a
quasi-public corporation (Philippine Society for the
Prevention of Cruelty to Animals v. COA, G.R. No.
169752, September 25, 2007).
3.
4.
5.
6.
Requisites for the formation of a stock
corporation
7.
For a stock corporation to exist, two requisites must
be complied with, to wit:
1. A capital stock divided into shares and
2. An authority to distribute to the holders of such
shares, dividends or allotments of the surplus
profits on the basis of the shares held (Sec. 3, CC;
CIR v. Club Filipino de Ceb, G.R. No. L-12719, May
31, 1962).
Defects precluding creation of corporation
1.
2.
3.
Q: University Publishing Company (UPC),
through its president, entered into a contract
with Albert to publish the commentaries on the
Revised Penal Code. UPC published the
commentaries but it did not remit the amount
due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When
the Sheriff were about to implement the writ of
execution against the company, he discovered
that UPC is not a registered corporation.
Consequently, the president of UPC was
substituted in the writ of execution. The
president
invoked
the
separate
legal
personality of the corporation as his defense.
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 (8 Fletcher, pp. 62-63).
Requisites of a de facto corporation (LAP)
Organized under a valid Law.
Colorable Compliance - Attempt in good faith to
form a corporation according to the
requirements of the law.
NOTE: Issuance of Certificate of Incorporation
by SEC is a minimum requirement for the
formation of the corporation in good
faith.(Sundiang Sr. & Aquino, 2009)
3.
a. Is UPC a de facto corporation?
b. Can the defense that UPC is a corporation by
estoppel be invoked by the president?
c. Who is liable for the debts of the
corporation?
Actual User - Use of corporate Powers; The
corporation must have performed the acts
which are peculiar to a corporation like
entering into a subscription agreement,
adopting by-laws, and electing directors.
A:
a. NO. UPC cannot be a considered a de facto
corporation because it was not registered with
the SEC.
b. NO. One who has induced another to act upon
his willful misrepresentation that a corporation
was duly organized and existing under the law,
cannot thereafter set up against his victim the
principle of corporation by estoppel.
c. The president who negotiated with Albert is
liable. A person acting or purporting to act on
behalf of a corporation which has no valid
existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts
Defects resulting in creation of de facto
corporation: (IM-CRAPS)
1.
2.
Absence of articles of incorporation;
Failure to file articles of incorporation with SEC;
Lack of certificate of incorporation from SEC.
NOTE: In this case, neither a de jure nor a de facto
corporation is created.
DE FACTO CORPORATION
1.
2.
Name of the corporation closely resembles that
of a pre-existing corporation that will tend to
deceive the public;
Incorporators or a certain number of them are
not residents of the Philippines;
Acknowledgment
of
the
articles
of
incorporation or certificate of incorporation is
insufficient or defective in form, or it was
acknowledged before the wrong officer;
Percentage of Filipino ownership of the capital
stock required for the business is less than that
prescribed by law; or
Failure to submit by-laws on time.
Articles of incorporation fails to state all the
matters required by the Code to be stated, or
state some of them incorrectly;
Minimum paid-up capital stock has not been
paid to and received by the corporate treasurer
contrary to his affidavit;
169
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
performed as such agent (Albert v. University
Publishing Co., G.R. No. L-19118, January 30,
1965).
corporate existence as
against the State.
There is a colorable
compliance with the
requirements of the
law
creating
the
corporation.
requirements
for
incorporation.
There is substantial
compliance with the
requirements of the
law
creating
the
corporation.
Its right to exist as a
corporation cannot be
successfully attacked
Can
be
attacked
or questioned by any
directly
but
not
party even in direct
collaterally.
proceeding for that
purpose by the State.
(De Leon, 2010)
Stockholders enjoy exemption from personal
liability for corporate obligations
Liabilities of officers and directors/trustees of a
de facto corporation
The liabilities and penalties attending to officers
and directors/ trustees of a de jure corporation shall
be the same as those of a de facto corporation. This
includes the liability under the criminal law.
Members of a de facto corporation cannot be
held liable as partners by third persons
The members of a de facto corporation cannot be
held liable as partners by third persons who deal
with them in their supposed corporate capacity,
merely on account of a technical defect in the
formation of the corporation.
CORPORATION BY ESTOPPEL
A corporation by estoppel has no real existence in
law. It is neither a de jure nor de facto corporation,
but is a “mere fiction existing for the particular case,
and vanishing where the element of estoppels is
absent” (8 Fletcher, p. 219).
On the other hand, where an attempt to organize a
corporation fails by omission of some substantial
step or proceeding required by the law, its members
or stockholders are liable as partners (De Leon,
2010).
Rules governing a corporation by estoppel
The existence of a de facto corporation cannot be
collaterally attacked
1.
GR: The existence of a de facto corporation shall not
be inquired into collaterally in any private suit to
which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a
quo warranto proceeding (Sec. 20, CC).
2.
XPN: Collateral attack can be permitted when the
lack of right or the wrong doing of the corporation
is in issue because it is in violation of public policy
or of express or implied statutory requirement, such
as denial of its right to enforce contracts entered
into without compliance with prohibitions of
express or implied statutory or public policy.
3.
NOTE: Where there is no third person involved and
the conflict arises only among those assuming the
form of a corporation who know that the
corporation has not been registered, there is NO
corporation by estoppel (Lozano v. Santos, G. R. No.
125221, June 19, 1997).
Thus, the defendant may question the personality of
a foreign corporation transacting business in the
Philippines to maintain a suit on the ground that it
is not duly licensed to do business in our country
(De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133
of the CC).
Q: On behalf of Ocean Quest Fishing Corporation,
Antonio Chua and Peter Yao entered into a
contract for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear
Industries, Inc. They claimed that they were
engaged in a business venture with Lim Tong
Lim, who however was not a signatory to the
agreement. The buyers failed to pay for the
fishing nets and the floats; hence, Philippine
De facto Corporation vs. De jure Corporation
DE FACTO
One which actually
exists for all practical
purposes
as
a
corporation but which
has no legal right to
DE JURE
One created in strict or
substantial conformity
with the mandatory
statutory
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
All persons who assume to act as a corporation
knowing it to be without authority to do so shall
be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result.
When any such ostensible corporation is sued
on any transaction entered by it as a
corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense
its lack of corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation (CC, Sec. 21).
170
Mercantile Law
Fishing Gear filed a collection suit against Chua,
Yao and Lim Tong Lim. The suit was brought
against the three in their capacities as general
partners, on the allegation that Ocean Quest
Fishing Corporation was a nonexistent
corporation. The trial court ruled in favor of
Philippine Fishing Gear and that Chua, Yao and
Lim are liable as general partners. Lim contends
that the doctrine of corporation by estoppel
applies only to Yao and Chua. Lim insists that
only those who dealt in the name of the
ostensible corporation should be held
liable. Since his name does not appear on any of
the contracts and since he never directly
transacted with the Ocean Quest Fishing
Corporation, he cannot be held liable. Is Lim
jointly liable with Chua and Yao?
Abante Tonite as a party defendant despite its
lack of juridical personality?
A: YES. In rejecting the contention, the CA
categorized Abante Tonite as a corporation by
estoppel as the result of its having represented itself
to the reading public as a corporation despite its not
being incorporated. The non-incorporation of
Abante Tonite with the SEC was of no consequence,
for, otherwise, whoever of the public who would
suffer any damage from the publication of articles in
the pages of its tabloids would be left without
recourse. The SC cannot disagree with the CA,
considering that the editorial box of the daily tabloid
disclosed that although Monica Publishing
Corporation had published the tabloid on a daily
basis, nothing in the box indicated that Monica
Publishing Corporation had owned Abante Tonite
(Macasaet, et al.v. Co, G.R. No. 156759, June 5, 2013).
A: YES. Lim should be held liable jointly with Chua
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed
for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to
be without valid existence, are held liable as general
partners. Technically, it is true that Lim did
not directly act on
behalf
of
the
corporation. However, having reaped the benefits
of the contract entered into by persons with whom
he previously had an existing relationship, he is
deemed to be part of said association and is covered
by the scope of the doctrine of corporation by
estoppel (Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., G.R. No. 136448, November 3, 1999).
De facto corporation vs. Corporation by estoppel
DE FACTO
CORPORATION
There is existence in
law
The dealings among
the parties on a
corporate basis is not
required
The State reserves the
right to question its
existence through a
quo
warranto
proceeding
Stockholders in a de
facto corporation are
liable as a de jure
corporation
Q: Francisco Co, Jr. sued Abante Tonite, a daily
tabloid of general circulation, and its publisher
and staffs - claiming damages because of an
allegedly libelous article they published in an
issue. Macasaet, et al moved, among others, to
drop Abante Tonite as a defendant by virtue of
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil
action.
CORPORATION BY
ESTOPPEL (2004
Bar)
There is no existence in
law
The dealings among
the parties on a
corporate basis is
required
Quo
proceeding
applicable
warranto
is
not
Stockholders are liable
as general partners for
all debts, liabilities and
damages incurred
SPECIAL CORPORATIONS
A religious group is not required to be registered
as a corporation
The Corporation Code does not require any religious
groups to be registered as a corporation but if it
wants to acquire legal personality, its members
should incorporate under the Code.
The RTC denied the staffs’motion, holding that
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a corporation by estoppel
considering that it possesses attributes of a
juridical person, otherwise it cannot be held
liable for damages and injuries it may inflict to
other persons. The CA affirmed the RTC ruling.
Was the CA correct in upholding the inclusion of
Organization of a corporation sole
A corporation sole is organized by the mere filing of
the verified articles of incorporation by the head of
any religious denomination, sect or church with the
SEC without the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical
171
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
character is acquired which is separate and distinct
from his natural character.
NOTE: A corporation sole is not required to file bylaws. It is governed by the rules, regulations and
discipline of its religious denomination, sect or
church.
nationality of the actual incumbent of the parish
(the Corporation Sole or the head of the church or
congregation) (De Leon, 2010, citing SEC Opinions,
Nov. 6, 1990 and Sept. 21, 1993).
Nationality of a corporation sole
A corporation sole may alienate properties by:
Alienation of properties by a corporation sole
A corporation sole does not have any nationality but
for purposes of applying nationalization laws,
nationality is determined not by the nationality of
its presiding elder but by the nationality of its
members, constituting the sect in the Philippines.
Thus, the Roman Catholic Church can acquire lands
in the Philippines even if it is headed by the Pope
(Roman Catholic Apostolic Church v. Land
Registration Commission, G.R. No. L-8451, December
20, 1957).
1.
2.
Acquisition of property by a corporation sole
A corporation sole may acquire property even
without court intervention by purchase, donation
and other lawful means (Ibid).
The minority of Filipinos Catholic congregation who
separated and refused to recognize the authority of
the Roman Catholic Church has no right to claim the
property, because they committed schism. (Canelo
vs. CA 171 SCRA 13)
In a case, the Canons of the Iglesia Filipino
Independiente provide that all real properties of the
church can be disposed of only with the approval
and conformity of the laymen’s committee, the
parish priest, the Diocesan Bishop, with sanction of
the Supreme Council, and finally with the approval
of the Supreme Bishop, as administrator of all the
temporalities of the Church, yet the Supreme Bishop
sold motu propio a parcel of land of the IFI despite
the objection of the laymen, the sale is void and the
land must be reconveyed to IFI (Iglesia Filipina
Independiente v. Heirs of Bernardino Tazea, G.R. No.
179597, February 3, 2014).
Q: Father X, an American priest who came from
New York, registered the Diocese of Bacolod of
the Roman Catholic Church which was
incorporated as a corporation sole. There were
years when the head of the Diocese was a
Filipino, but there were more years when the
heads were foreigners. Today, the head is an
American again. Y donated a piece of land
located in Bacolod City for use as a school. Which
statement is most accurate? (2012 Bar)
Dissolution of a corporation sole is not
necessary for it to become a corporation
aggregate
A: C. “Any corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes”
(Sec. 113, CC).
There is no point in dissolving the corporation sole
of one member to enable the corporation aggregate
to emerge from it. The Corporation Code provides
no specific mechanism for amending the articles of
incorporation of a corporation sole but Section 109
of the Corporation Code allows the application to
religious corporations of the general provisions
governing non-stock corporations.
Being a mere administrator of the temporalities or
properties titled in his name, the constitutional
provisions requiring 60% (or 100%) Filipino
ownership are not applicable to the corporation
sole. The ownership thereof devolves upon the
church or congregation acquiring the same. To own
the property, compliance with the constitutionally
required 60% (or 100%) Filipino capital is
determined by the nationality of the constituents of
the diocese (church or congregation), and not the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Obtaining an order from the RTC of the
province where the property is situated after
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise and by showing that it is for the
interest of the corporation that leave to sell or
mortgage should be granted;
In cases where the rules, regulations and
discipline of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole regulate
the method of acquiring, holding, selling and
mortgaging real estate and personal property,
such rules, regulations and discipline shall
control, and the intervention of the courts shall
not be necessary (Sec. 113, CC).
In non-stock corporations, the amendment needs
the concurrence of at least two-thirds of its
membership. If such approval mechanism is made
to operate in a corporation sole, its one member in
whom all the powers of the corporation technically
belongs, needs to get the concurrence of two-thirds
172
Mercantile Law
of its membership (Iglesia Evangelica Metodista v.
Bishop Lazaro, GR. 184088, July 6, 2010).
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least
60% of the members of the board of directors of
both corporations must be Filipino citizens
(DOUBLE 60% RULE).
NATIONALITY OF CORPORATIONS
Tests in determining
corporations
1.
2.
3.
4.
the
nationality
2.
of
Place of Incorporation test
Control test
Grandfather rule – Nationality is attributed to
the percentage of equity in the corporation used
in nationalized or partly nationalized area. This
test is an exception to the Control Test and was
applied by the SEC in several cases.
Domiciliary test – Determined by the principal
place of business of the corporation.
Q: What is the nationality of a corporation
organized and incorporated under the laws of a
foreign country, but owned 100% by Filipinos?
(1998 Bar)
A: Under the control test of corporate nationality, a
corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
Filipinos is classified as a Philippine National.
Where the grounds for piercing the veil of corporate
entity are present, the corporation will follow the
nationality of the controlling members or
stockholders, since the corporation will then be
considered as one and the same.
PLACE OF INCORPORATION TEST
In using the Place of Incorporation test, the
nationality of a corporation is determined by the
state of incorporation, regardless of the nationality
of the stockholders.
NOTE: The fact that the religious organization 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 60% 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 (Register of Deeds vs.
Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955).
CONTROL TEST
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
A corporation organized/incorporated abroad and
registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3,
2004; De Leon, 2010). This test was adopted by the
said law as a general guideline in determining the
nationality of corporations engaged in a
nationalized activity (Sec Opinion No. 07-20,
November 20, 2007).
GRANDFATHER RULE
To ensure compliance with the constitutional
limitation(s) of corporations engaging in
nationalized activities, the nationality of a
corporation must be determined by ascertaining if
60% of the investing corporation’s outstanding
capital stock is owned by “Filipino citizens”, or as
interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn
owned to some extent by another investing
corporation, the same process must be observed.
Who are considered as Philippine Nationals
Under RA 7042 (Foreign Investment Act of 1991),
the following are considered Philippine Nationals:
1.
Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.
Corporations organized under Philippine laws
of which 60% of the capital stock outstanding
and entitled to vote is owned and held by
Filipino citizens.
Reason: One must not stop until the citizenships of
the individual or natural stockholders of layer after
layer of investing corporations have been
established, for this is the very essence of the
Grandfather Rule (Redmont Consolidated Mines
NOTE: RA 7042 provides that where a
corporation and its non-Filipino stockholders
173
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
Corp. vs. McArthur Mining Corp., SEC En Banc Case
No. 09-09-177, March 25, 2010).
Rules governing
Grandfather Rule
1.
2.
3.
the
application
of
owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the
shares of PLMDC (which owns majority shares of
Narra), 40% of the shares of MMC (which owns
majority shares of McArthur) and 40% of the
shares of SMMC (which, in turn, owns majority
shares of Tesoro), the shares of MBMI will not
make it the owner of at least 60% of the capital
stock of each of petitioners. They added that the
best tool used in determining the nationality of
a corporation is the “control test,” embodied in
Sec. 3 of RA 7042 or the Foreign Investments Act
of 1991.
the
The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation (SEC-OGC
Opinion No. 10-31, December 9, 2010).
The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt. If the stockholder
corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder
corporation is deemed to be held by Filipinos
(DOJ Opinion No. 19, s. 1989).
When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule (SEC-OGC Opinion No. 22-07
dated December 7, 2007).
The controversy reached the CA, which used the
grandfather rule to hold that MBMI in effect
owned majority of the common stocks of Narra,
et al., and thus the latter were foreign
corporations.
a.
Was the CA wrong in applying the
Grandfather Rule instead of the Control
Test?
b. Will the Grandfather Rule apply only when
less than 60% of the capital stock are
Filipino-owned? (2016 Bar)
A:
a. NO. Basically, there are two acknowledged tests
in determining the nationality of a corporation:
the control test and the grandfather rule. The
"control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipinoequity ownership in the corporation, then it
may apply the "grandfather rule".
b. NO. The assertion of Narra, et al. that “doubt”
only exists when the stockholdings are less than
60% fails to convince this Court. It would be
ludicrous to limit the application of the said
word only to the instances where the
stockholdings of non-Filipino stockholders are
more than 40% of the total stockholdings in a
corporation. The corporations interested in
circumventing our laws would clearly strive to
have “60% Filipino Ownership” at face value. It
would be senseless for these applying
corporations to state in their respective articles
of incorporation that they have less than 60%
Filipino stockholders since the applications will
be denied instantly. Thus, various corporate
schemes and layerings are utilized to
circumvent the application of the Constitution.
As further defined by Dean Cesar Villanueva, the
Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized
areas of activities, provided for under the
Constitution and other nationalization laws, is
computed, in cases where corporate shareholders
are present, by attributing the nationality of the
second or even subsequent tier of ownership to
determine the nationality of the corporate
shareholder." (Villanueva, Cesar Lapuz, Philippine
Corporate Law (2001), p. 54.)
Note: To arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.
Q: Redmont, a mining company, sought to
invalidate the Mining Production and Sharing
Agreement applications of three domestic
mining companies, namely: Narra, Tesoro and
McArthur, on the ground that at least 60% of the
capital stock of Narra, et al. are owned and
controlled by MBMI, a 100% Canadian
corporation; thus they were disqualified to
engage in mining activities though MPSAs, which
are reserved only for Filipino Citizens.
Narra, et al. claimed that the issue on nationality
should not be raised since they are in fact
Philippine Nationals as 60% of their capital is
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
174
Mercantile Law
A corporation that complies with the 60-40 Filipino
to foreign equity requirement can be considered a
Filipino corporation if there is no doubt as to who
has the “beneficial ownership” and “control” of the
corporation. In this case, a further investigation as
to the nationality of the personalities with the
beneficial ownership and control of the corporate
shareholders in both the investing and investee
corporations is necessary. “Doubt” refers to various
indicia that the “beneficial ownership” and “control”
of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. Even if at
first glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the
present case that gives rise to a reasonable
suspicion that the Filipino shareholders do not
actually have the requisite number of control and
beneficial ownership in petitioners Narra, Tesoro,
and McArthur.
100% Filipino Owned
(Zero percent (0%) foreign equity)
Code: CoFi AMMaN Co. – MiSe- US$2.5M
1.
2.
COoperatives(Art. 26, Ch. III, R.A. 6938)
Manufacture of FIrecrackers and other
pyrotechnic devices. (Sec. 5, R.A. 7183)
3. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and Anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
4. Mass media except recording
5. Utilization of MArine resources (Sec. 2, Art. XII,
Constitution)
6. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons (Sec. 8, Art. II,
Constitution)
7. COckpits (Sec. 5, P.D. 449)
8. Small-scale MIning (Sec. 3, R.A. 7076)
9. Private SEcurity agencies (Sec. 4, R.A. 5487)
10. Retail trade enterprises with paid-up capital of
less than US$2.5 M(Sec. 5, R.A. 8762)
Moreover, the ultimate Filipino ownership of the
shares must first be traced to the level of the
Investing Corporation and added to the shares
directly owned in the Investee Corporation x x x.
Concluding from the above-stated facts, it is quite
safe to say that petitioners McArthur, Tesoro and
Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity
interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners,
namely: MMI, SMMI and PLMDC. Going further and
adding to the picture, Noticeably, the ownership of
the "layered" corporations boils down to MBMI,
Olympic or corporations under the "Alpha" group
wherein MBMI has joint venture agreements with,
practically exercising majority control over the
corporations mentioned. In effect, whether looking
at the capital structure or the underlying
relationships between and among the corporations,
petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their
capital stocks or equity interests are owned by
MBMI
80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
Code: Prc
1.
Private Radio Communications network (R.A.
3846)
75 % Filipino Owned
(Up to twenty percent (25%) foreign equity)
Code: LoRD F
Hence, the Court is correct in using the Grandfather
Rule in determining the nationality of the
petitioners (Narra Nickel Mining and Development
Corp., et al. v. Redmont Consolidated Mines, G.R. No.
195580, January 28, 2015).
1.
Contracts for the construction and repair of
LOcally-funded public works (Sec. 1, CA 541, LOI
630) except:
a) infrastructure/development projects
covered in R.A. 7718; and
b) projects which are foreign funded or
assisted and required to undergo
international competitive bidding (Sec.
2[a], R.A. 7718)
2.
Private Recruitment, whether for local or
overseas employment (Art. 27, P.D. 442)
Contracts for the construction of Defenserelated structures; (Sec. 1, CA 541)
Under the Flag Law, in the purchase of articles
for the Government, preference shall be given
to materials and supplies produced, made, or
manufactured in the Philippines, and to
domestic entities. Domestic entities means any
citizen of the Philippines or commercial
company at least 75% of the capital of which is
owned by citizens of the Philippines (Sec. 1, CA
138)
3.
Note: "Corporate layering" is admittedly allowed
by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes
illegal.
4.
NATIONALIZED ACTIVITIES RESERVED FOR
FILIPINOS UNDER THE CONSTITUTION
AND SPECIAL LAWS
175
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
70 % Filipino Owned
(Up to twenty percent (30%) foreign equity)
Code: AdPawn
1.
2.
registered with the SEC. Its authorized capital
stock consists of voting common shares and
non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
and outstanding capital stock of BellPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
with 40%.
Advertising (Art. XVI, Constitution)
Corporations engaged in pawnshop business
(Sec. 8, P.D. 114)
60 % Filipino Owned
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo
To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
equivalent to the currently outstanding
common shares. A suit was filed questioning the
corporation action on the ground that the
foreign equity holdings in the company would
now exceed 40% foreign equity limit allowed
under the Constitution for public utilities.
1.
Contracts for the supply of materials, goods and
commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183)
2. Ownership of private Lands (Sec. 7, Art. XII,
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A.
9182)
3. Ownership/establishment and administration
of Educational institutions (Sec. 4, Art. XIV,
Constitution)
4. Adjustment Companies (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
Rice and corn and the by-products thereof (Sec.
5, P.D. 194)
6. Exploration, development and utilization of
Natural resources (Sec. 2, Art. XII, Constitution)
7. Ownership of Condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units
or owned by a corporation (Sec. 5, R.A. 4726)
8. Operation and management of public Utilities
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146)
9. Project Proponent and Facility Operator of a
BOT project requiring a public utilities
franchise (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. 7718)
10. Manufacture, repair, storage and/ or
distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A.
8179)
11. Operation of Deep sea commercial fishing
vessel (Sec. 27, R.A. 8550)
12. Corporations engaged in Coastwise shipping
(Sec. 806, P.D. 1464)
Rule on the legality of Bernard Fleet’s current
holdings. (2013 Bar)
A: The holding of Bernard Fleet equivalent to the
outstanding common shares is illegal. His holdings
of preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino
ownership of the capital of public utilities applies
not only to voting control but also to beneficial
ownership of the corporation, it should also apply to
the preferred shares. Preferred shares are also
entitled to vote in certain corporate matters. The
state shall develop a self-reliant and independent
national economy effectively controlled by Filipinos
The effective control here should be mirrored
across the board on all kinds of shares (Gamboa v.
Teves, G.R. No. 176579, June 28, 2011; 1987
Constitution, Art. II, Sec. 19).
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
The doctrine of corporate juridical personality
states that a corporation is a juridical entity with
legal personality separate and distinct from those
acting for and in its behalf and, in general, from the
people comprising it (Francisco v. Mallen Jr. G.R. No.
173169, September 22, 2010).
40 % Filipino Owned
(Up to twenty percent (60%) foreign equity)
Code: FI [SEC]
1.
2.
Financing companies regulated by the SEC (Sec.
6, R.A. 5980 as amended by R.A. 8556)
Investment houses regulated by the SEC (Sec. 5,
P.D. 129 as amended by R.A. 8366)
Q: The Olongapo City filed a complaint for sum
of money and damages against Olongapo City
Water District (OCWD). It alleged that OCWD
failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
pursuant to OCWD’s acquisition of Olongapo
City’s water system. In the interim, OCWD
Q: Bell Philippines, Inc. (BellPhil.) is a public
utility company, duly incorporated and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
176
Mercantile Law
entered into a Joint Venture Agreement with
SBMA, Biwater and DMCI. Pursuant to this
agreement, Subic Water – a new corporate entity
– was incorporated, with the following equity
participation from its shareholders: SBMA
19.99% or 20%; OCWD 9.99% or 10%; Biwater
29.99% or 30%; and DMCI 39.99% or 40%.
Subic Water was granted the franchise to
operate and to carry on the business of
providing water and sewerage services in the
Subic Bay Free Port Zone, as well as in Olongapo
City. Hence, Subic Water took over OCWD’s
water operations in Olongapo City. To finally
settle their money claims against each other,
Olongapo City and OCWD entered into a
compromise agreement.
Note between Puyat and NSI, represented by
Nuccio. It was agreed that Puyat would extend a
credit line with a limit of P500,000.00 to NSI, to
be paid within 30 days from the time of the
signing of the document. The loan carried an
interest rate of 17% per annum, or at an
adjusted rate of 25% per annum if payment is
beyond the stipulated period. NSI and Nuccio
received a total amount of P300,000.00 and
certain machineries intended for their business.
The proposed business, however, failed to
materialize. When the petitioners defaulted in
the payment of the loan, Puyat filed a collection
suit alleging mainly that the NSI and Nuccio still
owe him the value of the machineries.The RTC
ordered them, jointly and severally, to pay the
balance. CA also affirmed the RTC ruling that
they are one and the same. Did CA commit a
reversible error in affirming the RTC’s decision
holding them jointly and severally liable for the
amount claimed?
To enforce the compromise agreement,
Olongapo City filed a motion for the issuance of
a writ of execution with the RTC. OCWD’s former
counsel filed a manifestation alleging that
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because
of this assertion, Subic Water also filed a
manifestation informing the RTC that as borne
out by the articles of incorporation and general
information sheet of Subic Water, OCWD is not
Subic Water. The manifestation also indicated
that OCWD was only a ten percent (10%)
shareholder of Subic Water; and that its 10%
share was already in the process of being
transferred to Olongapo City pursuant to a Deed
of Assignment.
A: YES. Piercing the veil of corporate fiction is not
justified. The NSI and Nuccio are not one and the
same. The records of the case, however, do not show
that Nuccio had control or domination over NSI’s
finances. The mere fact that it was Nuccio who, in
behalf of the corporation, signed the MOA is not
sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a
board resolution authorizing him to contract the
loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among
others, may point the proof required to justify the
piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof
required to support the desired conclusion. It
should be noted in this regard that while Nuccio was
the signatory of the loan and the money was
delivered to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed
business plan. That the business did not materialize
is not also sufficient proof to justify a piercing, in the
absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the
respondent for the petitioners’ undisclosed goals.
NSI’s liability should not attach to Nuccio (Saverio v.
Puyat, G.R. No. 186433, November 27, 2013).
Can Subic Water be made liable under the writ
of execution issued by RTC in favor of Olongapo
City?
A: NO. OCWD and Subic Water are two separate and
different entities. Subic Water clearly demonstrated
that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Subic Water. As a mere shareholder, OCWD’s
juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in
Corporation Law that a corporation is a juridical
entity vested with a legal personality separate and
distinct from those acting for and in its behalf and,
in general, from the people comprising it. Under this
corporate reality, Subic Water cannot be held liable
for OCWD’s corporate obligations in the same
manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate
entity (Olongapo City v. Subic Water and Sewerage
Co., Inc., G.R. No. 171626, August 6, 2014).
Q: Richard owns 90% of the shares of the capital
stock of GOM Co. On one occasion, GOM
represented by Richard as President and
General Manager executed a contract to sell a
subdivision lot in favor of Tomas. For failure of
GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
and Richard. Will the action prosper? Explain
(1996 Bar)
Q: Puyat granted a loan to NS International, Inc.
(NSI). The loan was made pursuant to the
Memorandum of Agreement and Promissory
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
A: The action will prosper against GOM Corporation
but it shall not be the same with regard to the action
against Richard. Such is the case because Richard
has a separate and distinct personality from the
corporation. His mere ownership of 90% of the
shares of the capital stock of GOM does not make
him as one with the corporation. Mere ownership by
a single stockholder, or by another corporation, of
all or nearly all of the capital stock of a corporation
is not itself a sufficient ground for disregarding the
separate corporate personality (Secosa v. Heirs of
Erwin Suarez Francisco, G.R. No. 160039, June 29,
2004).
Significance
personality
1.
of
the
doctrine
of
5.
Q: As a result of perennial business losses, a
corporation's net worth has been wiped out. In
fact, it is now in negative territory. Nonetheless,
the stockholders did not like to give up.
Creditor-banks, however, do not share the
confidence of the stockholders and refuse to
grant more loans.
a.
What tools are available to the stockholders
to replenish capital?
b. Assuming that the corporation continues to
operate even with depleted capital, would
the stockholders or the managers be
solidarily liable for the obligations incurred
by the corporations? (1999 Bar)
separate
Liability for acts or contracts – As a general rule,
the obligation of the corporation is not the
liability of the stockholders, officers or
directors (1992, 1996, 2010 Bar).
A:
a. In the case where the creditor-banks refused to
grant more loans to the stockholders, the
stockholders can publicly sell their shares and
assets. They can also demand payment from
stockholders of their unpaid subscriptions
where there is no due date inscribed in the
subscription contract.
b. No, the stockholders or managers cannot be
held solidarily liable for the obligations
incurred by the corporation. They cannot be
held personally liable for as long as their acts
are for and in behalf of the corporation, within
the scope of their authority and in good faith.
Also, a corporation has a personality separate
and distinct from its individual stockholders
(Consolidated Bank and Trust Corp. v. CA, G.R.
No. 114286, April 19, 2001).
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected, and vice versa (Cease vs. CA, G.R. No.
L-33172, October 18, 1979). Note: XPN to this is
the reverse piercing of the corporate veil.
2.
Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons (Art. 46, Civil Code).
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter owns
substantial majority of the shares of the shares
in that corporation and rights of the
stockholders, directors and officers cannot be
invoked by the corporation (Stonehill vs.
Diokno, G.R. 19550, June 19, 1967).
3.
Stockholders are not the owners of corporate
properties and assets
Right to acquire and possess property – property
conveyed to or acquired by the corporation is in
law the property of the corporation itself as a
distinct legal entity and not that of the
stockholders or members (Art. 44[3], Civil
Code).
The interest of the shareholder in the properties of
the corporation is inchoate only. The interest of the
shareholder on a particular property becomes
actual, direct and existing only upon the liquidation
of the assets of the corporation and provided that
the same property is assigned to the shareholder
concerned.
NOTE: The interest of the stockholders over the
properties are merely inchoate (Saw vs. CA, G.R.
No. 90580, April 8, 1991; 1996, 2000 Bar).
4.
Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
Acquisition of jurisdiction – service of summons
may be made only on the president, general
manager, corporate secretary, treasurer or inhouse counsel (Rules of Court, Rule 14, Sec. 11).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Changes in individual membership – corporation
remains unchanged and unaffected in its
identity by changes in its individual
membership or ownership of its stocks.
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Mercantile Law
the corporation unless the indispensable conditions
and procedures for the protection of corporate
creditors are followed (Yamamoto v. Nishino
Leather Industries, Inc., G.R. No. 150283, April 16,
2008).
Dick Seldon issued a check for P50,000 in favor
of Shamron. A week later, Turtle sold the tractor
to Briccio Industries (Briccio) for P 60,000.
Briccio discovered that the engine of the tractor
was reconditioned so he refused to pay Turtle.
As a result, Dick Seldon ordered “Stop Payment”
of the check issued to Shamron. Shamron sued
Turtle and Dick Seldon. Shamron obtained a
favourable judgment holding co-defendants
Turtle and Dick Seldon jointly and severally
liable. Comment on the decision of the trial
court. Discuss fully. (1995 Bar)
Q: RISCO ceased operation due to business
reverses. Due Aznar et. al’s desire to rehabilitate
RISCO, they contributed a total amount of
P212,720.00 which was used in the purchase of
the three (3) parcels of land located in various
areas in the Cebu Province. Pursuant to the
Minutes of the Special Meeting of the Board of
Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the
titles of the said lots. Such annotation was made.
Thereafter, various subsequent annotations
were made on the same titles in favor of PNB. As
a result, a Certificate of Sale was issued in favor
of PNB, being the lone and highest bidder of the
three (3) parcels of land and was also issued
Transfer Certificate of Title over the said parcels
of land. Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
properties. They alleged that the subsequent
annotations on the titles are subject to the prior
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere
stockholders of RISCO, they do not have any
legal or equitable right over the properties of
the corporation. Do the defendants herein
(Aznar et. al.) have the legal or equitable rights
over the subject properties?
A: I disagree with the trial court’s ruling. Dick
Seldon should not be solidarily liable with Turtle
because of his position as President and Manager of
the corporation. Turtle Corporation has a separate
juridical personality from its officers. Corporate
officers cannot be personally liable for the
consequences of their acts, for as long as these are
for and behalf of the corporation, within the scope
of their authority and in good faith (Consolidated
Bank and Trust Corp. v. CA, G.R. No. 114286, April 19,
2001).
Entitlement of corporations to Constitutional
rights
Corporations are entitled to the following rights
under the constitution:
1.
2.
A: NO. Stockholders cannot claim ownership over
corporate properties by virtue of the Minutes of a
Stockholder’s Meeting which merely evidence a
loan agreement between the stockholders and the
corporation. As such, their interest over the
properties is merely inchoate (PNB v. Merelo B.
Aznar, et al, G.R. No. 171805, May 30, 2014).
Stockholders are not real parties in interest to
claim damages and recover compensation
Right to Due Process (Sec. 1, Art. III,
Constitution)
Right against unreasonable searches and
seizures (Sec. 2, ibid)
NOTE: Corporations are not entitled to the right
against self-incrimination, being a mere creature of
law (Bataan Shipyard & Engineering v. PCGG, G.R. No.
75885, May 27, 1987).
It cannot refuse to produce the books and papers if
lawfully required by the appropriate government
agency. It is presumed that they are incorporated
for the benefit of the public thereby making its
power limited.
The personality of a corporation is distinct and
separate from the personalities of its stockholders.
Hence, its stockholders are not themselves the real
parties in interest to claim and recover
compensation for the damages arising from the
wrongful attachment of corporate assets. Only the
corporation is the real party in interest for that
purpose (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, March 6, 2013).
LIABILITY FOR TORTS AND CRIMES
A corporation may be held liable for torts
The corporation is liable for every tort which it
expressly directs or authorizes (PNB v. CA, G.R. No.
L-27155, May 18, 1978).
Q: Ronald Sham doing business under the name
of SHAMRON Machineries (Shamron) sold to
Turtle Mercantile (Turtle) a diesel farm tractor.
In payment, Turtle’s President and Manager
Reason for liability in cases of torts
A corporation is civilly liable in the same manner as
natural persons for torts, because generally
179
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
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 servant or
agent is a natural or artificial person (Ibid)
NOTE: While the court may allow the grant of moral
damages to corporation, it is not automatically
granted; there must still be proof of the existence of
the factual basis of the damage and its causal
relation to the defendant’s acts. Moral damages is
designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
wrongdoer (Crystal vs. BPI, G.R. No. 172428,
November 28, 2008)
Corporations incapable of intent
Corporations are incapable of intent, hence they
cannot commit felonies that are punishable under
the Revised Penal Code. They cannot commit crimes
that are punishable under special laws because
crimes are personal in nature. In addition, the
penalty of imprisonment cannot be imposed.
However, the corporation may be dissolved for
violations of the Corporation Code (CC, Sec. 144).
Q: "Exposé" is a radio documentary program
hosted by Rima and Alegre. It is aired every
morning over DZRC-AM which is owned by FBNI.
One morning, Rima and Alegre exposed various
alleged complaints from students, teachers and
parents against AMEC and its administrators.
Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
Medicine, filed a complaint for damages against
FBNI, Rima and Alegre. As a defense, FBNI claims
that AMEC is not entitled to moral damages
because it is a corporation. Is AMEC is entitled to
moral damages?
Liability of a corporation in cases of crimes
GR: Since a corporation is a mere creation of legal
fiction, it cannot be held liable for crimes committed
by its officers; in such case the responsible officers
would be criminally liable (People v. Tan Boon Kong,
G.R. No. L-32066, March 15, 1930).
XPN: If the penalty of the crime is only fine or
forfeiture of license or franchise (Ching v Secretary
of Justice, supra).
A: YES. AMEC is entitled to moral damages. A
juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish
or moral shock. Nevertheless, AMEC’s claim for
moral damages falls under item 7 of Article 2219 of
the Civil Code. This provision expressly authorizes
the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
for libel or any other form of defamation and claim
for moral damages (Filipinas Broadcasting Network,
Inc., v. AMEC-BCCM, supra).
RECOVERY OF MORAL DAMAGES
Recovery of moral damages
GR: A corporation is not entitled to moral damages
because it has no feelings, no emotions, no senses
(ABS-CBN Broadcasting Corp. v. CA, G.R. No. 128690
January 21, 1999).
XPNs:
1. The corporation may recover moral damages
under item 7 of Article 2219 of the New Civil
Code because said provision expressly
authorizes the recovery of moral damages in
cases of libel, slander, or any other form of
defamation.
Q: Meralco and T.E.A.M. Electronics Corporation
(TEC) were parties to two separate contracts for
the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
electric power. One day, Meralco conducted a
surprise inspection of the electric meters
installed at the DCIM building. Two meters
were found to be allegedly tampered with and
did not register the actual power consumption
in the building. Meralco informed TEC of the
results of the inspection and demanded from the
latter the payment of its unregistered
consumption. TEC failed to pay the same.
NOTE: Article 2219(7) does not qualify
whether the injured party is a natural or
juridical person. Therefore, a corporation, as a
juridical person, can validly complain for libel
or any other form of defamation and claim for
moral damages (Filipinas Broadcasting
Network, Inc. v. AMEC-BCCM, G.R. No. 141994,
January 17, 2005).
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm (MERALCO v. T.E.A.M. Electronics Corp., et. al.,
G.R. No. 131723, December 13, 2007).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
For failure to pay, Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to
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Mercantile Law
do with the alleged tampering but the latter
refused to heed the demand. The ERB
immediately ordered the reconnection of the
service but Meralco did not immediately
comply. TEC filed a complaint for damages
against Meralco before the RTC. The RTC ruled
in favor of TEC and it awarded, among others,
moral damages. Is TEC entitled to moral
damages?
2.
NOTE: Notwithstanding that the corporate veil has
been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
necessarily abrogated (Reynoso IV vs. CA, G.R. Nos.
116124-25, November 22, 2000).
A: NO. TEC is not entitled to moral damages. TEC’s
claim was premised allegedly on the damage to its
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a
natural person, it cannot experience physical
suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business realm.
But in such a case, it is imperative for the claimant
to present proof to justify the award. It is essential
to prove the existence of the factual basis of the
damage and its causal relation to Meralco’s acts. In
the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC
has been debased as a result of Meralco’s acts
(MERALCO v. T.E.A.M. Electronics Corpet al., supra).
GROUNDS FOR APPLICATION OF DOCTRINE
It applies upon the following circumstances: (FACO)
a.
b.
c.
d.
DOCTRINE OF PIERCING THE CORPORATE VEIL
if the fiction is used to perpetrate fraud (Fraud
Test)
if the complete control of one corporate entity
to another which perpetuated the wrong is the
proximate cause of the injury (Control Test)
if a certain corporation is only an adjunct or an
extension of the personality of the corporation
(Alter ego or Instrumentality Test)
if the fiction is pierced to make the stockholders
liable for the obligation of the corporation
(Objective Test)
Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System, informing
her that she cannot avail of their retirement
benefits since per their record she has only paid
16 months. Aggrieved, Lorezo then filed her
Amended Petition before the SSC, alleging that
she was employed as laborer in. Cataywa
managed by Jose Marie Villanueva in 1970 but
was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her
wages from 1970 to 1995, but not all were
remitted to the SSS which, subsequently, caused
the rejection of her claim. She also impleaded
Talisay Farms, Inc. by virtue of its Investment
Agreement with Mancy and Sons Enterprises.
She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and
Sons Enterprises and Manuel and Jose Marie
Villanueva are one and the same. Should Mancy
and Sons Enterprises’ veil of corporate fiction be
pierced?
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard, for
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct
from the persons composing it.
Where it appears that business enterprises are
owned, conducted and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to
protect the rights of third persons (Vicmar
Development Corporation v. Elarcos, et al., G.R. No.
202215, December 09, 2015, Del Castillo, J.).
In order to justify the piercing of the corporate veil,
allegation or proof of fraud or other public policy
considerations is needed (Hacienda Luisita
Incorporated vs. Presidential Agrarian Reform
Council, G.R. No. 171101, November 22, 2011).
A: NO. The Court has expressed the language of
piercing doctrine when applied to alter ego cases, as
follows: Where the stock of a corporation is owned
by one person whereby the corporation functions
only for the benefit of such individual owner, the
corporation and the individual should be deemed
the same.
NOTE: This is an exception to the Doctrine of
Separate Corporate Entity.
Effect of piercing the corporate veil
1.
and the liability will attach directly to the
officers and stocholders.
Where there are two (2) corporations, they will
be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit or adjunct of the other.
The corporation will be treated merely as an
association of persons -undertaking a business
181
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
This Court agrees with the petitioners that there is
no need to pierce the corporate veil. Lorezo failed to
substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie
Villanueva are one and the same. She based her
claim on the SSS form wherein Manuel Villanueva
appeared as employer. However, this does not
prove, in any way, that the corporation is used to
defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield
to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Also,
it was not alleged nor proven that Mancy and Sons
Enterprises, Inc. functions only for the benefit of
Manuel Villanueva, thus, one cannot be an alter ego
of the other (Hacienda Cataywa/Manuel Villanueva,
et al. v. Rosario Lorezo, G.R. No. 179640, March 18,
2015).
Kukan International Corporation (KIC) filed a
third-party complaint, alleging that it was the
owner of the levied properties. Morales prayed
that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
the judgment debt of Kukan. The RTC granted
the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
affirmed the RTC. Did the RTC properly apply the
doctrine?
A: NO. The principle of piercing the veil of
corporate fiction, and the resulting treatment of
two related corporations as one and the same
juridical person with respect to a given transaction,
is basically applied only to determine established
liability; it is not available to confer on the court a
jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its
property would infringe on its right to due process.
Aguedo Agbayani, a recognized authority on
Commercial Law, stated that piercing the veil of
corporate entity applies to determination of liability
not of jurisdiction because the doctrine of piercing
the veil of corporate fiction comes to play only
during the trial of the case after the court has
already acquired jurisdiction over the corporation.
Hence, before this doctrine can be applied, based
on the evidence presented, it is imperative that the
court must first have jurisdiction over the
corporation.
Q: Mr. Pablo, a rich merchant in his early forties,
was a defendant in a lawful suit which could
subject him to substantial damages. A year
before the court rendered judgment, Pablo
sought his lawyer’s advice on how to plan his
estate to avoid taxes. He suggested that he
should form a corporation with himself, his wife,
and his children (all students and still
unemployed) as stockholders and then transfer
all his assets and liabilities to this corporation.
Mr. Pablo followed the recommendation of his
lawyer. 1 year later, the court rendered
judgment against Pablo and the plaintiff sought
to enforce this judgment. The sheriff, however,
could not locate any property in the name of
Pablo and therefore returned the writ of
execution unsatisfied. What remedy, if any, is
available to the plaintiff? (1994 Bar)
Two-fold Implication:
1. The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and
2. The doctrine of piercing the veil of corporate
entity can only be raised during a full-blown
trial over a cause of action duly commenced
involving parties duly brought under the
authority of the court by way of service of
summons or what passes as such service
(Kukan International Corp v. Reyes, G.R. No.
182729, September 29, 2010).
A: The plaintiff can avail himself of the doctrine of
piercing the veil of corporate fiction which can be
invoked when a corporation is formed or used in
avoiding a just obligation. While it is true that a
family corporation may be organized to pursue an
estate tax planning of which is not per se illegal or
unlawful (Delpher Trades Corp. v. IAC, G.R. No L69259, January 26, 1988). The factual settings,
however, indicate the existence of a lawful suit that
could subject Pablo to a substantial amount of
damages. It would thus be difficult for Pablo to
convincingly assert that the incorporation of the
family corporation was intended merely as a case of
“estate tax planning” (Tan Boon Bee v. Jarencio, G.R.
No. 41337, June 30, 1988).
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
with a passenger jeepney, which resulted to her
instant death. The Heirs of Concepcion instituted
a suit in the RTC for damages due to breach of
contract, with the complaint set against “Travel &
Tours Advisers, Inc. (Goldline)” and the bus driver.
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc.
With the judgment attaining finality, the sheriff
levied on execution various personal properties
found at what was supposed to be Kukan’s office.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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Mercantile Law
The RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A
writ of execution was served upon TTAI and
Cheng, operator of the Goldline bus. Cheng failed
to settle the judgment, thus a tourist bus was
levied.
alter ego or that CBB and Binswanger are one and
the same corporation. There are also indications of
badges of fraud in Binswanger’s incorporation. It
was a business strategy to evade CBB’s financial
liabilities, including its outstanding obligation to
Livesey (Livesey v. Binswanger Philippines, Inc. and
Keith Elliot, G.R. No. 177493, March 19, 2014).
Gold Line filed a third-party claim, claiming that
the levied tourist bus be returned to it because it
was its owner and that it had not been made a
party to the case, and it was a corporation
entirely different from TTAI. Is Gold Line’s
contention correct?
NOTE: There appears to be a lack of conclusive
yardstick as to when the court may pierce the veil
of corporate fiction of a corporation which has not
been brought to its jurisdiction by summons,
voluntary appearance, or other recognized modes
of acquiring jurisdiction. To be safe, any bar
question should be answered based on similarity
with the facts of each case (Divina, 2014).
A: NO. There is sufficient factual basis to find that
Goldline and TTAI were one and the same entity,
specifically: (a) documents submitted showing that
Cheng, who claimed to be the operator of TTAI,is also
the President/Manager and an incorporator of Gold
Line; and (b) Travel and Tours Advisers, Inc. had
been known in Sorsogon as Goldline (Gold Line Tours,
Inc. v. Heirs of Maria Concepcion Lacsa, G.R. No.
159108, June 18, 2012).
Circumstances which do not warrant the
piercing of the corporate veil
The mere fact that: (FiCoS)
1.
Q: Eric Livesey filed a complaint for illegal
dismissal with money claims against CBB
Philippines Strategic Property Services, Inc.
(CBB) and Paul Dwyer, its president. Livesey and
CBB entered into a compromise agreement
Unless and until the agreement is fully satisfied,
CBB shall not sell, alienate, or otherwise dispose
of all or substantially all of its assets or business;
suspend its business operations; substantially
change the nature of its business; and declare
bankruptcy or insolvency.
2.
3.
CBB failed to pay the rest of the amount as the
company ceased operations. Livesey moved for
the issuance of an alias writ of execution,
alleging that CBB and Keith Elliot have
organized another corporation, “Binswanger
Philippines, Inc.” He claimed that there was
evidence showing that CBB and Binswanger
Philippines, Inc. are one and the same
corporation, pointing out that CBB stands for
Chesterton
Blumenauer
Binswanger.
A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
ownership of the stocks of a corporation is not
per se a cause for piercing the veil.
Two corporations have Common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is
not in itself sufficient ground to disregard
separate corporate entities.
There is a Substantial identity of the
incorporators of the 2 corporations does not
necessarily imply fraud and does not warrant
piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended
a series of credit accommodations to ECO using
the trust funds of PVTA. The proceeds of the
credit accommodations were received on behalf
of ECO by Emmanuel Oñate. Upon maturity of
the loans, ECO failed to pay the same. ECO then
submitted a Plan of Payment to LBP, however,
the latter rejected the same. LBP filed a
complaint for collection of sum of money against
ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
treated as one holding Oñate liable for the loans
incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
loans incurred from LBP?
Is the doctrine of piercing the veil of corporate
fiction applicable?
A: YES. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB
ceased to exist only in name; it re–emerged — to
avoid payment by CBB of the last two installments
of its monetary obligation to Livesey, as well as its
other financial liabilities. A reasonable mind would
arrive at the conclusion that Binswanger is CBB’s
A: NO. Oñate should not be held jointly and
severally liable with ECO. A corporation, upon
coming into existence, is invested by law with a
personality separate and distinct from those
persons composing it as well as from any other legal
entity to which it may be related. By this attribute, a
stockholder may not, generally, be made to answer
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
for acts or liabilities of the said corporation, and vice
versa. The mere fact that Oñate owned the majority
of the shares of ECO is not a ground to conclude that
Oñate and ECO are one and the same. Mere
ownership by a single stockholder of all or nearly all
of the capital stock of a corporation is not by itself
sufficient reason for disregarding the fiction of
separate corporate personalities. Neither is the fact
that the name “ECO” represents the first three
letters of Oñate’s name sufficient reason to pierce
the veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation
acquiring the name or as in this case, the initials of
one of its shareholders (Land Bank ofthe Philippines
v. CA, et al., G.R. No. 127181, September 4, 2001).
2.
3.
1. Instrumentality or Control Test
This test requires that the subsidiary be completely
under the control and domination of the parent. It
examines the parent corporation’s relationship with
the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation
such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no
autonomy and the parent corporation, though
acting through the subsidiary in form and
appearance, “is operating the business directly for
itself.
TEST IN DETERMINING APPLICABILITY
The following are the tests in determining the
applicability of the doctrine of piercing the
corporate veil (ECAO)
1.
2.
3.
4.
When the corporation is used to defeat public
convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing
obligation (Equity Cases)
In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend
a crime (Control Test)
In Alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and
its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct
of another corporation (Sarona vs. NLRC, Royale
Security Agency, et al., G.R. No. 185280, January
18, 2012).
The Objective test where the end result in
piercing the veil of corporate fiction is to make
the stockholders liable for debts and
obligations of the Corporation not to make the
Corporation liable for the debts and obligations
of the stockholders (Umali v CA, G.R. No. 89561,
September 13, 1990).
2. Fraud Test
This test requires that the parent corporation’s
conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
3. Harm Test
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it would have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
Three-pronged
test
to
determine
the
application of the alter ego/ instrumentality
theory:
1.
Control, not mere majority or complete stock
control, but complete domination, not only of
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 (Instrumentality or Control test);
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right (Fraud
test); and
The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of (Harm test).
NOTE: Piercing the corporate veil based on the alter
ego theory requires the concurrence of the three
elements – control(1), fraud or fundamental
unfairness(2), and harm or damage(3). The absence
of any of these elements prevents piercing the
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Mercantile Law
corporate veil (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, March 13,
2013).
11. The formal legal requirements of the subsidiary
are not observed (PNB v. Ritratto Group, G.R. No.
142616, July 31, 2001).
Piercing the veil of corporate fiction on the basis
of equity
Piercing the Corporate Veil may Apply to
Natural Persons
Equity cases applying the piercing doctrine are
what are termed the "dumping ground", where no
fraud or alter ego circumstances can be culled by the
Court to warrant piercing.
1. When the Corporation is the Alter Ego of a
Natural Person. The piercing of the corporate veil
may apply to corporations as well as natural
persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego
of a person or of another corporation."
The main feature of equity cases is the need to
render justice in the situation at hand or to brush
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types
of piercing (Villanueva, 2010).
2. Reverse Piercing of the Corporate Veil. From
American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership,
50 "in a traditional veil-piercing action, a court
disregards the existence of the corporate entity so a
claimant can reach the assets of a corporate insider.
In a reverse piercing action, however, the plaintiff
seeks to reach the assets of a corporation to satisfy
claims against a corporate insider." "Reversepiercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders."
Specifically, the equity test can be applied when:
1.
2.
3.
The corporate personality would be
inconsistent with the business purpose of the
legal fiction;
The piercing the corporate fiction is necessary
to achieve justice or equity for those who deal
in good faith with the corporation; or
When the use of the separate juridical
personality is used to confuse legitimate issues.
Indications that a subsidiary corporation is a
mere instrumentality of its parent corporation
It has two (2) types:
a. Outsider reverse piercing occurs when a party with
a claim against an individual or corporation
attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant.
b. Insider reverse piercing, the controlling members
will attempt to ignore the corporate fiction in order
to take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or
protection of personal assets. (IAM/Es vs. Litton and
Company Inc. December 13, 2017, G.R. No. 191525)
1.
The parent corporation owns all or most of the
capital stock of the subsidiary.
2. The parent and subsidiary corporations have
common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation, or its business or financial
responsibility is referred to as the parent
corporation’s own.
9. The parent corporation uses the property of the
subsidiary as its own.
10. The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation.
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's
decision, X Corporation was found to be without
assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two
corporations have the same board of directors
and Y Corporation financed the operations of X
corporation. May Y Corporation be held liable
for the debts of X Corporation? Why? (2001 Bar)
A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
veil of corporation fiction applies to this case. The
two corporations have the same board of directors
and Y Corporation owned substantially all of the
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
stocks of X Corporation, which facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. Added to this is the
fact that Y Corporation controls the finances of X
Corporation which is merely an adjunct, business
conduit or alter ego of Y Corporation (CIR v. Norton
& Harrison Company, G.R. No. L‐17618, August 31,
1964).
8.
9.
Subscribers – persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be formed.
Underwriter – a person who guarantees on a
firm commitment and/or declared best effort
basis the distribution and sale of securities of
any kind by another (Securities and Regulation
Code [SRC], Sec. 3.15).
Kinds of Underwriting Agreement
a.
INCORPORATION
AND ORGANIZATION
b.
Incorporation
It is the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts,
certification or records, which give the corporation
its existence.
English – the underwriter sells what the
corporation cannot sell.
Firm Commitment – the underwriter purchases
outright the securities and then resells the
same.
Best Efforts – the underwriter merely sells for
commission.
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Steps in the creation of a corporation
Number and the qualifications of incorporators
in a stock corporation (NILaRO)
1.
2.
3.
1.
Promotion
Incorporation (Sec. 10, CC)
Formal organization and commencement of
business operations (Sec. 22, CC)
XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to be
incorporators of rural banks.
Components of a corporation (DUMP-ISCO)
1.
2.
3.
4.
5.
6.
7.
Note: Under the Revised Corporation Code,
partnership, association or corporation, singly or
jointly with others may now form a corporation
Corporators – Those who compose a
corporation, whether as stockholders or
members
Incorporators –Those mentioned in the Articles
of Incorporation as originally forming and
composing the corporation and who are
signatories thereof.
Directors and trustees – The Board of Directors
is the governing body in a stock corporation
while the Board of Trustees is the governing
body in a non-stock corporation.
Corporate Officers – Officers who are identified
as such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the
corporation.
Stockholders – Owners of shares of stock in a
stock corporation.
Members – Corporators of a non-stock
corporation. They are not owners of shares of
stocks, and their membership depends on
terms provided in the articles of incorporation
or by-laws (CC, Sec. 91,CC).
Promoter – A person who, acting alone or with
others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor
(Securites and Regulation Code [SRC], Sec. 3.10).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
GR: Natural person
2.
GR: Incorporators must not be less than 5 but
not more than 15
XPNS: (SEC)
1.
2.
3.
Corporation sole
Educational institutions
Close corporations
Note: The Revised Corporation Code is silent as to
the minimum number of incorporators. However, it
retained the maximum number of incorporators
which must not be more than 15.
3.
4.
5.
An incorporator must be of Legal age
Majority of the incorporators must be
Residents of the Philippines (2006 Bar)
Each must own or subscribe to at least one
share (Sec.10, CC)
Note:
Q: What is the minimum and maximum number
of incorporators required to incorporate a stock
186
Mercantile Law
corporation? Is this also the same minimum and
maximum number of directors required in a
stock corporation? (2006, 2010 Bar)
number of directors shall not be more than 15 while
the number of trustees may be more than 15
Q: Must all incorporators and directors be
residents of the Philippines? (2006 Bar)
A: Any number of natural persons not less than five
(5) but not more than fifteen (15) may form a
private corporation (CC, Section 10). Likewise, the
number of directors must not be less than five (5)
nor more than fifteen (15) as indicated in the AOI
(CC, Sec. 14).
A: NO. The Corporation Code only provides that
majority of incorporators and directors of a
corporation must be residents of the Philippines
(CC, Secs. 10 and 23).
Note: No required minimum number of
incorporators under the RCC. Under the RCC, the
Corporator vs. Incorporator
BASIS
Signatory of the AOI
INCORPORATOR
Those stockholders or members
mentioned in the AOI as originally
forming and composing the corporation
and who are signatories thereof.
A signatory of the AOI
Effect upon the sale of
his shares
Does not cease to be an incorporator
upon sale of his shares
Who are they
GR: 5 to 15
XPN: Corporation sole – only 1
incorporator
Number
ofincorporators/
corproator
CORPORATOR
Those who compose a corporation,
whether as stockholders or as
members.
May or may not be signatory of the AOI
Ceases to be a corporator by sale of his
shares in case of stock corporation.
In case of non-stock corporation, the
corporator ceases to be a member.
GR: No limit
XPN: Close corporations – not more
than a specified number of persons,
usually not exceeding 20 (CC, Sec. 96)
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks.
corporator.
GR: Filipino citizenship is not a requirement.
Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be citizens.
Incorporator vs. Subscriber (2012 Bar)
BASIS
Who are they
Signatory of the AOI
Number
incorporators/
subscriber
of
INCORPORATORS
Those stockholders or members
mentioned in the AOI as originally
forming
and
composing
the
corporation.
A signatory of the AOI
GR: 5 to 15
SUBSCRIBER
They are persons who have agreed to
take and pay for original, unissued
shares of a corporation formed or to be
formed.
May or may not be signatory of the AOI
GR: No limit
XPN: Corporation sole – only 1
incorporator
XPN: Close corporations – not more
than a specified number of persons,
usually not exceeding 20 (CC, Sec. 96)
NOTE: An incorporator must be a
natural person, except in case of rural
banks.
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NOTE: A juridical person may be a
corporator
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
GR: Filipino citizenship is not a requirement.
Filipino Citizenship
Residence
requirement
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be Filipino citizens.
Majority of the incorporators must be Residency
requirement
is
not
residents of the Philippines.
applicable.
NOTE: Non-residents may be incorporators
because the law only requires that the majority of
incorporators be residents of the Philippines.
that already reserved or registered for the use of
another corporation, or if such name is already
protected by law, or when its use is contrary to
existing law, rules and regulations.
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in
Quezon City, Philippines. Z is a resident alien
residing in Makati City. GGG Corporation is a
domestic corporation – 40% owned by
foreigners and 60% owned by Filipinos, with T
as authorized representative. CCC Corporation
is a foreign corporation registered with the
Philippine
Securities
and
Exchange
Commission. KKK Corporation is a domestic
corporation (100%) Filipino owned. S is a
Filipino, 16 years of age, and the daughter of Y.
Who can be incorporators? Who can be
subscribers?
A name is not distinguishable even if it contains
one or more of the following:
(a) The word “corporation”, “company”,
“incorporated”,“limited”, “limited liability”,
or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase.
3.
A: X, Y, and Z can be incorporators. Sec. 10 of the CC
merely requires majority of the incorporators to be
residents (not necessarily citizens) of the
Philippines. Further, said incorporators must be
natural persons, of legal age and must own or
subscribe to at least 1 share.
Meanwhile, X, Y, Z, GGG, CCC, KKK can be
subscribers. Residency requirement is immaterial in
subscription contracts. However, the citizenship
requirement is material in subscription contracts
if the corporation is engaged in nationalized
activities requiring at least majority Filipino
citizenship as a requirement.
4.
CORPORATE NAME; LIMITATION ON USE OF
CORPORATE NAME
1.
No corporate name may be allowed by the SEC
if the proposed name is identical or deceptively
or confusingly similar to that of any existing
corporation or to any other name already
protected by law (CC, Sec. 18).
2.
The proposed name is patently deceptive,
confusing or contrary to existing laws (Sec. 18,
CC).
5.
Note: Sec. 17 of the Revised Corporation Code
provides that no corporate name shall be allowed by
the Commission if it is not distinguishable from
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
6.
188
If the name applied for is similar to the name of
a registered firm, the applicant shall at least
contain one or more distinctive words to the
proposed name to remove the similarity or
differentiate it from the registered name.
However, the addition of these distinctive
words shall not be allowed if the registered
name is coined or unique unless the board of
directors of the subject corporation gives its
consent to the applied name (De Leon, 2010,
citing SEC Memo, Cir. No. 5, Series of 2008).
The corporate name shall contain the word
“Corporation” or its abbreviation “Corp.” or
Incorporated”, or “Inc.”.“The corporate name of
a foundation shall use the word “Foundation”.
This is to distinguish the corporation from a
partnership and other business organizations
(SEC Memo. Circ. No. 5, Series of 2008).
A person’s full name or surname may be used in
a corporate name:
a. If he is a stockholder of the corporation and
has consented to such use;
b. If the person is already deceased, the
consent shall be given by his estate;
c. The Commission may require a registrant
to explain to its satisfaction the reason for
the use of a person’s name;
d. The meaning of initials used in a name shall
be stated by the registration the articles of
incorporation in a separate document
signed by an incorporator or director (SEC
Memo. Circ. No. 5, Series of 2008).
The name of a dissolved firm shall not be
allowed to be used by other firms within 3 years
Mercantile Law
7.
8.
9.
after the approval of the dissolution of the
corporation by SEC, unless allowed by the last
stockholders representing at least majority of
the outstanding capital stock of the dissolved
firm (SEC Memo. Circ. 14, Series of 2000).
For as long as a corporation is existing
regardless of whether or not it is in operation,
its corporate name cannot be used by any other
group or corporation (SEC Opinion, Sept. 2,
1993).
The practice of a profession regulated by
special law which among others provides for
the permissible use of the profession’s name in
a firm, partnership or association shall govern
the use of the name e.g. “Engineer” or
“Engineering”. (RA 1582)
Unless otherwise authorized by the Commision,
the following words and phrases can only be
used by the entities mentioned:
a. “Investment
or
Capital”
–
investment houses, investment or
holding company
b. “Asset/Fund/Financial/Financial
Management or Adviser” –
licensed by BSP to hold investment
management activities
c. “National, Bureau, Commision,
State and other words acronyms
that have gained wide acceptance
in the Philippines” – by entities
performing
governmental
functions.
Note: These names are already
preserved for governmental use.
corporate name, the corporate names must be
evaluated in their entirety (Lyceum of the
Philippines v. CA, G.R. No. 101897, March 5, 1993).
Q: Refractories Corporation of the Philippines
(RCP) is a corporation engaged in the business
of manufacturing, producing, selling, exporting
and otherwise dealing in any and all refractory
bricks, its by-products and derivatives. On June
22, 1977, it registered its corporate and
business name with the Bureau of Domestic
Trade. On the other hand, Synclaire
Manufacturing Corporation amended its AOI on
August 23, 1985 to change its corporate name to
Industrial Refractories Corp. of the Philippines
(IRCP). Both companies are the only local
suppliers
of
monolithic
gunning
mix.
Discovering that IRCP was using such corporate
name, RCP filed with SEC a petition to compel
IRCP to change its corporate name on the
ground that its corporate name is confusingly
similar with that of RCP’s such that the public
may be confused or deceived into believing that
they are one and the same corporation. Is
Industrial Refractories Corporation of the
Philippines
confusingly
similar
with
Refractories Corporation of the Philippines?
A: YES. To fall within the prohibition of the law, two
requisites must be proven, to wit: (1) that the
complainant corporation acquired a prior right over
the use of such corporate name; and (2) the
proposed name is either: (a) identical, or (b)
deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or (c) patently deceptive,
confusing or contrary to existing law. In this case,
RCP was incorporated on October 13, 1976 and
since then has been using the corporate name
“Refractories Corp. of the Philippines”. Meanwhile,
IRCP was incorporated on August 23, 1979
originally under the name “Synclaire Manufacturing
Corporation”. It only started using the name
“Industrial Refractories Corp. of the Philippines”
when it amended its Articles of Incorporation on
August 23, 1985, or nine (9) years after respondent
RCP started using its name. Thus, being the prior
registrant, respondent RCP has acquired the right to
use the word “Refractories” as part of its corporate
name (Industrial Refractories Corporation of the
Philippines v. CA, et al., G.R. No. 122174, October 3,
2002).
XPNs: IF there is a Vested Right,
(i.e. National Bookstore) or IF
Authorized by the Commission.
d.
e.
Association, Organization – non
stock corporations.
“Stock/Futures/Derivatives
Exchange or Broker, Plans,
Securities/Stock Clearing Agency
or any similar words or phrases –
by entities organized as an
exchange,
broker
dealer,
commodity
futures
broker,
clearing agency, or pre-need
company under RA 8799 or
Securities and Regulation Code.
(SEC Memo Circ. No. 21, Dec. 4,
2013)
Doctrine of Secondary Meaning
NOTE: Priority of adoption determines the right to
the exclusive use of a corporate name with freedom
from infringement. Further, to determine whether a
given corporate name is “identical” or “confusingly
or deceptively similar” with another entity’s
It is the doctrine which states that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
189
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
nevertheless have been used so long and so
exclusively by one producer with reference to his
article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to
mean that the article was his product (Philippine
Nut Industry, Inc. vs. Standard Brands. Inc. G.R. No.L23035, July 31, 1975).
and delineated the different modes of dissolving a
corporation, and amendment of the articles of
incorporation was not one of such modes. The effect
of the change of name was not a change of the
corporate being. In short, Zeta and Zuellig remained
one and the same corporation. The change of name
did not give Zuelligthe license to terminate
employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to
that of an enterprise buying the business of another
company where the purchasing company had no
obligation to rehire terminated employees of the
latter. Zuellig, despite its new name, was the mere
continuation of Zeta's corporate being, and still held
the obligation to honor all of Zeta's obligations, one
of which was to respect San Miguel's security of
tenure. The dismissal of San Miguel from
employment on the pretext that Zuellig, being a
different corporation, had no obligation to accept
him as its employee was illegal and ineffectual
(Zuellig Freight and Cargo Systems vs. NLRC, et al.,
G.R. No. 157900, July 22, 2013).
The doctrine of secondary meaning requires that
the word or phrase used in the corporate name has
been for such length of time with such exclusivity as
to have associated or identified the corporation in
the mind of the general public (or at least that
portion of the general public to do with the
corporation’s market) (Lyceum of the Philippines vs.
CA, supra).
NOTE: The application of this Trademark Law
doctrine has been extended to corporate names
since the right to use a corporate name to the
exclusion of others is based upon the same principle
which underlies the right to use a particular
trademark or trade name (De Leon, 2010).
Q: P.C. Javier and Sons Services, Inc., (PC) applied
with First Summa Savings and Mortgage Bank,
later on renamed as PAIC Savings and Mortgage
Bank (The Bank) for a loan accommodation
under the Industrial Guarantee Loan Fund
(IGLF). Upon maturity, PC failed to pay, hence,
the Bank initiated an extrajudicial foreclosure
of the real estate mortgage. The instant
complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land mortgaged by
PC in favor of PAIC Savings and Mortgage Bank,
Inc. PC argues that they are legally justified to
withhold their amortized payments to the bank
until such time they would have been properly
notified of the change in the corporate
name. They claim that they have never received
any formal notice of the alleged change of
corporate name of First Summa Savings and
Mortgage Bank to PAIC Savings & Mortgage
Bank, Inc. Is the Bank required to notify PC
Javier & Sons, Inc., of the change in its corporate
name?
A corporation that changes its corporate name is
not considered as a new corporation
A corporation that changes its corporate name is
not considered as a new corporation. It is the same
corporation with a different name, and its character
is in no respect changed (Republic Planters Bank v.
CA, G.R. No. 93073, December 21, 1992).
Q: San Miguel brought a complaint for unfair
labor practice, illegal dismissal, non-payment of
salaries and moral damages against Zuellig
Freight and Cargo Systems, formerly known as
Zeta. He alleged that he had been a
checker/customs representative of Zeta since
December 16, 1985; that in January 1994, he and
other employees of Zeta were informed that
Zeta would cease operations, and that all
affected employees, including him, would be
separated.
San Miguel contended that the amendments of
the articles of incorporation of Zeta were for the
purpose of changing the corporate name,
broadening the primary functions, and
increasing the capital stock; and that such
amendments could not mean that Zeta had been
thereby dissolved. Did the change of corporate
name result in the dissolution of the
corporation?
A: NO. Supreme Court held that the bank is not
required to notify PC of its change of name as it is
not required under the Corporation Code and
Banking Laws. Therefore, the Court cannot impose
on a bank that changes its corporate name to notify
a debtor of such change absent any law, circular or
regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
discretionary on the bank and remains to be a mere
internal policy that banks may or may not adopt.
The corporation, upon such change in its name, is in
no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with
A: NO. The amendments of the articles of
incorporation of Zeta to change the corporate name
to Zuellig Freight and Cargo Systems, Inc. did not
produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
190
Mercantile Law
a different name, and its character is in no respect
changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No.
129552, June 29, 2005).
GR: The filing and recording of a certificate of
extension after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the corporation.
CORPORATE TERM
XPNs: The doctrine of relation applies if the failure
to file the application for extension within the term
of the corporation is due to:
1. The neglect of the SEC officer with whom the
certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
(Aquino, 2006)
Term of corporate existence
GR: The period stated in the AOI, provided it does
not exceed 50 years.
XPN: Unless sooner dissolved or unless said period
is extended (CC, Sec. 11)
Q: The term of GGG Corporation in accordance
with its Articles of Incorporation ended last
January 30, 2012. The term was not extended.
What will happen to the corporation? (2012
Bar)
NOTE: Extension may be made for periods not
exceeding 50 years in any single instance by an
amendment of the articles of incorporation.
However, extension must be made within 5 years
before the expiry date of the corporate term, unless
there are justifiable reasons for an earlier extension
as may be determined by the SEC (CC, Sec. 11).
A: The corporation ceases to exist and is dissolved
ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
the legal requisites of extension of period (PNB vs.
CFI, G.R. No. 63201, May 27, 1992).
NOTE: The Revised Corporation Code introduced
substantial changes with respect to the term of
corporate existence. Sec. 11 provides that a
corporation shall have perpetual existence unless
its Articles of Incorporation provides otherwise.
Also, the Code mandates that corporations with
certificates of incorporation issued prior to this
code and which continue to exist shall likewise have
perpetual existence unless the corporation elects to
retain its specific corporate term.
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENTS
Capital stock requirements
GR: There is no minimum authorized capital stock
as long as the paid-up capital is not less than
P5,000.00.
Under the RCC, if a corporation wishes to change its
corporate term, it may amend its AOI at least 3 years
prior to the expiration of its term. Previously, such
change should be made at least 5 years prior to the
expiration.
XPN: As provided by special law
Minimum stock subscription and paid-up
capital requirements
If the term has already expired, the corporation may
now ask the SEC to revive their corporate existence,
which option was not present in the old code. Upon
approval by the SEC, it will then issue a certificate of
revival giving it perpetual existence, unless it
requests for a limited term.
At least 25% of the authorized capital stock as
stated in the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription (Sec
13, CC).
NOTE: It is not required that each subscriber pay
25% of each subscribed share. It is only required
that at least 25% of the total subscribed capital
must be paid.
XPN: No revival is allowed for companies under the
supervision of other government agencies, such as
banks, insurance and trust companies.
Note: Sec. 13 has no counterpart in the RCC
XPN to XPN: Unless, Revival is first approved by the
appropriate government agency.
Paid-up capital
Extension must also comply with procedural
requirements for amendment of AOI.
Paid-up capital forms part of the authorized capital
stock of the corporation, subscribed and then
actually paid for. The assets transferred and the
loans extended to a corporation should not be
considered in computing the paid-up capital of the
Doctrine of Relation or Relating Back Doctrine
191
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
corporation (MISCI-NACUSIP Local Chapter v. NWPC,
G.R. No. 125198, March 3, 1997).
1.
2.
NOTE: The term “capital” in Section 11, Article XII
of the Constitution refers only to shares of stock that
can vote in the election of directors. To construe
broadly the term “capital” as the total outstanding
capital stock, including both common and nonvoting preferred shares, grossly contravenes the
intent and letter of the Constitution. A broad
definition unjustifiably disregards who owns the allimportant voting stock, which necessarily equates
to control of the public utility (Wilson Gamboa vs.
Finance Secretary Margarito Teves, et. al., G.R. No.
176579, October 9, 2012).
3.
4.
5.
6.
NAme of corporation;
Purpose/s, indicating the primary and
secondary purposes (Purpose Clause);
PLAce of principal office;
Term of existence;
Names, nationalities and residences of
Incorporators;
NUMber of directors or trustees, which shall
not be less than 5 nor more than 15, except for
corporation sole;
Note: Under the Revised Corporation Code, the
number of directors shall not be more than
fifteen (15) while the number of trustees which
may be more than fifteen (15) and the term of
existence is generally perpetual;
Time when the unpaid subscription is payable
7.
Names, nationalities, and residences of the
persons who shall Act as directors or trustees
until the first regular ones are elected and
qualified;
8. If a Stock corporation, the amount of its
authorized capital stock, number of shares and
in case the shares are par value shares, the par
value of each share;
9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the
Original subscribers which shall not be less
than 25% of authorized capital stock;
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each
contributor, which shall not be less than 25% of
total subscription; name of treasurer elected by
subscribers; and
11. Other matters as are not inconsistent with law
and which the incorporators may deem
necessary and convenient (Sec. 14, CC).
The balance or the unpaid subscription shall be
payable:
1.
2.
On a date or dates fixed in the contract of
subscription without need of call; or
In the absence of a fixed date or dates, upon call
for payment by the BOD (Sec. 13, CC).
ARTICLES OF INCORPORATION (AOI)
NATURE AND FUNCTION OF ARTICLES
Articles of Incorporation
The Articles of Incorporation (AOI) is one that
defines the charter of the corporation and the
contractual relationships between the State and the
corporation, the stockholders and the State, and
between the corporation and its stockholders
(Government of the Philippine Islands v. Manila
Railroad Co., G.R. No. L-30646, January 30, 1929).
Note: An arbitration agreement may be provided in
the articles of incorporation pursuant to Section
181 of the RCC.
Three-fold nature of AOI
An AOI, which stands as the corporate charter, is a
contract of three-fold nature because it is a contract
between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
Incorporator may delegate the signing of the AOI
An incorporator may delegate to an attorney-in-fact
the signing of the AOI in a special power of attorney
to such effect. However, the acknowledgment
required under Sec. 15 of the CC must reflect this
fact (De Leon, 2010, citing SEC Opinion, Dec. 26,
1972).
CONTENTS
All corporations organized under the Code shall file
with the SEC an AOI in any of the official languages
duly signed and acknowledged by all of the
incorporators, containing substantially the
following matters, except as otherwise prescribed
by the Code or by special law: (NaP- PlaTINumASONO)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Reason for the statement of the purpose clause
in the AOI
The purpose clause determines whether the acts
performed by the corporation are authorized or
beyond its powers. Acts beyond the corporation’s
powers are called ultra vires acts.
192
Mercantile Law
Rules in the statement of the purpose clause
1.
The SEC’s discretion can only be exercised on
matters of form and does not extend to the merits of
an application for incorporation.
If there is more than one stated purpose, specify
which the is main or primary purpose and
which is or are the secondary or subsidiary
purpose/s.
NOTE: If the SEC refuses to file the AOI, which
substantially complied with the statute, the
remedy of the applicant is to file a petition for
mandamus.
NOTE: This specification is important in the
application of the prohibition under Sec. 42 CC
which states that the corporation is prohibited
from investing corporate funds “for any
purpose other than the primary purpose for
which it was organized” unless such investment
is approved by both majority of the BOD or BOT
and ratified by the stockholders representing at
least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in the case of a nonstock corporation.
2.
3.
XPN: However, SEC has authority to pass upon the
lawfulness of the object or purpose of the
corporation as expressed in the AOI. Such
determination is an exercise of judgment, that is,
judicial function on a question of law.
NOTE: If the SEC errs in the determination of
the lawfulness of the purpose of the corporation
stated in the AOI and refuses to file the said AOI,
its decision is subject to review and correction
by the court (Asuncion vs. De Yriarte, GR No.
9321, Sepember 24, 1914).
The purposes must be capable of being lawfully
combined.
A non-stock corporation may not include a
purpose which would change or contradict its
nature as such (Sec. 14[2], CC).
AMENDMENT
Limitations in the amendment of AOI (LAVProCSA)
Requirements of the SEC as regards the address
specification of the corporation in the AOI
1.
SEC requires that the applicant corporation must
state in its AOI the:
1. Specific address of their principal office, which
shall include, if feasible, the street name,
barangay, city or municipality; and
2. Specific residence address of each incorporator,
stockholder, director, trustee, or partner.
2.
3.
4.
NOTE: SEC likewise prohibits the use of
“Metro Manila” as address of the principal office.
Residence of the corporation
5.
The corporation is “in a metaphysical sense a
resident of the place where its principal office is
located as stated in the AOI” (Golden Arches Dev’t
Corp. vs. St. Francis Square Holdings, Inc., GR 183843,
January 19, 2011).
This ruling regarding the residence of the
corporation holds true even though the corporation
has closed its office therein and relocated to another
place (Hyatt Elevators and Escalators Corp. vs.
Goldstar Elevators Phils., Inc., GR 161026, Oct. 24,
2005).
6.
7.
Duty of the SEC to file the AOI and to issue a
certificate of incorporation
GR: The duty of the SEC to file the AOI and to issue a
certificate of incorporation is ministerial provided
that the AOI substantially comply with the statute.
193
The amendment must be for legitimate
purposes and must not be contrary to other
provisions of the CC and special laws
Approved by majority of BOD/BOT
Vote or written assent of stockholders
representing 2/3 of the outstanding capital
stock or 2/3 of members
The original and amended articles together
shall contain all provisions required by law to
be set out in the AOI. Such articles, as amended,
shall be indicated by underscoring the change/s
made
Certification under oath by corporate secretary
and a majority of the BOD/BOT stating the fact
that said amendment/s have been duly
approved by the required vote of the
stockholders or members, shall be submitted to
the SEC
Must be approved by SEC (Sec. 16, CC)
Must be accompanied by a favorable
recommendation
of
the
appropriate
government agency in cases of:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies and other financial
intermediaries
e. Insurance companies
f. Public utilities
g. Educational institutions
h. Other corporations governed by special
laws (Sec. 17 [2], CC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
Time when the amendment of the AOI takes
effect
1.
2.
The amendment of the AOI takes effect either:
1. Upon approval by the SEC, that is, upon
issuance
of
amended
certificate
of
incorporation; or
2. From the date of filing with the SEC:
a. If not acted upon within 6 months from the
date of filing; and
b. For a cause not attributable to the
corporation.
3.
4.
If such is not substantially in accordance with
the form prescribed by the CC.
The purpose/s of the corporation is/are
patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations.
The treasurer’s affidavit concerning the amount
of capital stock subscribed and/or paid is false.
The required percentage of ownership of the
capital stock to be owned by Filipino citizens
has not been complied with (CC, Sec. 17).
NOTE: The above grounds are not exclusive.
NOTE: The provision on automatic approval in Sec.
16 does not apply to the dissolution of the
corporations in light of Sec. 120, CC (SEC Opinion,
March 30, 1982).
Other grounds as provided by PD No. 902‐A are:
1.
2.
Conversion of a stock corporation into a nonstock corporation (2001 Bar)
A stock corporation may be converted into a nonstock corporation by mere amendment, provided all
the requirements are complied with. Its rights and
liabilities will remain (CC, Sec. 16).
3.
NOTE: A non-stock corporation cannot be
converted into a stock corporation through mere
amendment of its Articles of Incorporation. This
would violate Section 87 CC, which prohibits
distribution of income as dividends to members.
Giving the members shares, is tantamount to
distribution of its assets or income (SEC Opinion,
March 20, 1995).
4.
5.
6.
Fraud in procuring its certificate of
incorporation;
Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of, or damage to, the general
public;
Refusal to comply with, or defiance or a
lawful order of the SEC restraining the
commission of acts which would amount to
a grave violation of its franchise;
Continuous inoperation for a period of at
least five (5) years after commencing the
transaction of its business (CC, Sec. 22);
Failure to file the by‐laws within the
required period; or
Failure to file required reports.
No automatic rejection of the AOI or any
amendment thereto
Under Section 122 of the Corporation Code, the nonstock corporation must be dissolved first.
Non-amendable items in the AOI
There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
AOI or amendment (Sec. 17[1], CC).
Those matters referring to accomplished facts,
except to correct mistakes, such as:
Effect of non-use of corporate charter and
continuous inoperation of a corporation
NON-AMENDABLE ITEMS
1.
2.
3.
4.
5.
6.
Names of incorporators;
Names of original subscribers to the capital
stock of the corporation and their
subscribed and paid up capital;
Names of the original directors;
Treasurer elected by the original
subscribers;
Members who contributed to the initial
capital of the non‐stock corporation; or
Witnesses to and acknowledgment with
AOI.
1.
Note: The 2 year period is now modified by the RCC
Under such law, the failure of a corporation to
organize and commence its business should be
within five (5) years from the date of its
incorporation. In effect, its certificate of
incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.
Grounds for the rejection or disapproval of the
AOI or amendment thereto
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Failure to organize and commence business
within 2 years from incorporation – its corporate
powers ceases and the corporation shall be
deemed dissolved.
2.
194
Continuous inoperation for at least 5 years –
ground for the suspension or revocation of
Mercantile Law
corporate franchise or
incorporation (Sec. 22, CC).
certificate
of
a.
b.
c.
Note: Sec. 21 of the Revised Corporation Code
provides that continuous inoperation for at least 5
years allows the Commission, after due notice and
hearing, to place the corporation under delinquent
status
d.
e.
NOTE: The above shall not be applicable if it is due
to causes beyond the control of the corporation as
determined by SEC.
f.
g.
Suspension or revocation of the certificate of
registration due to failure to operate or
continuous inoperation is not automatic
h.
Under PD No. 902-A, SEC should afford due process
or proper notice and hearing before the suspension
or revocation of certificate of registration. The
suspension or revocation of the certificate of
registration due to failure to operate or continuous
inoperation is not automatic.
i.
Doctrine of corporate entity
GR: A corporation comes into existence upon the
issuance of the certificate of incorporation by the
SEC under its official seal. Then and only then will it
acquire a juridical personality (CC, Sec. 19).
REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
Basic requirements for the registration and
issuance of a certificate of incorporation of a
stock corporation
1.
2.
3.
Articles of Incorporation
Treasurer’s Affidavit
Certificate of Authority by the Monetary Board
of BSP
Verification slip from the records of the SEC
whether or not the proposed name has already
been registered under a different entity
An undertaking stating the proposed name
shall be changed in case another entity has been
registered under the proposed name
Registration sheet
Bank certificate of deposit covering the paid-up
capital
Letter containing authorization to the SEC or
Monetary Board or any of its duly authorized
representative to inspect bank records
concerning the paid-up capital
Favorable
endorsement
from
proper
government agency in case of special
corporations
XPN: In case of a corporation sole, the corporation
sole commences existence upon the filing of the
articles of incorporation.
Name verification slip
AOI and by-laws
Treasurer’s affidavit
ADOPTION OF BY-LAWS
By-laws are rules and regulations or private laws
enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of
its stockholders or members and directors and
officers in relation thereto and among themselves in
their relation to it (Valley Golf & Country Club, Inc. vs.
Vda. De Caram, GR 158805, April 16, 2009).
Note; The articles of incorporation and applications
for amendments thereto may be filed with the
Commission in the form of an electronic document,
in accordance with the Commission’s rules and
regulations on electronic filing.
Contents of a treasurer’s affidavit
By-laws are relatively permanent and continuing
rules of action adopted by the corporation for its for
its own government and that of individuals
composing of it and those having the direction,
management, and control of its affairs, in whole or
in part, in the management and control of its
affairs and activities (China Banking Corporation v.
CA, G.R. No. 117604, March 26, 1997).
That at least 25% of the authorized capital stock of
the corporation has been subscribed, and at least
25% of the total subscription has been fully paid in
actual cash and/or property; such paid-up capital
being not less than P5,000 (Sec. 14, 15, CC).
Q: You are asked to incorporate a new company
to be called FSB Savings & Mortgage Bank, Inc.
List the documents that you must submit to the
Securities and Exchange Commission(SEC) to
obtain a Certificate of Incorporation for FSB
Savings & Mortgage Bank, Inc. (2002 Bar)
NATURE AND FUNCTIONS OF BY-LAWS
The corporate power to adopt by-laws is inherent in
every corporation. To give emphasis to such
necessary corporate incident, said power is
expressed in Sec. 36(5) and Sec. 46 of the CC.
A: The documents to be submitted for the issuance
of a certificate of incorporation in favor of FSB
Savings & Mortgage Bank, Inc. are the following:
195
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
The by-laws supplement the AOI. The function of
by-laws is to define the rights and duties of
corporate officers and directors or trustees, and of
stockholders or members towards the corporation
and among themselves with reference to the
management of corporate affairs and to regulate
transaction of the business of the corporation in a
particular way (De Leon, 2010).
7.
Manner of election or appointment and the
term of office of all officers other than
directors or trustees.
8. Penalties for violation of the by-laws.
9. In case of stock corporations, the manner of
issuing certificates.
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs for the
promotion of good governance and antigraft and corruption measures. (CC, Sec.
47).
A corporation sole is not governed by by-laws
A corporation sole is not governed by by-laws. It is
instead governed by Rules, Regulations and
Discipline of its religious denomination which
already contain the provisions embodied in the bylaws of ordinary corporations.
Note: There are additional contents mentioned
under the Revised Corporation Code:
1. The modes by which a stockholder, member,
director, or trustee may attend meetings and cast
their votes;
2. The directors’ or trustees’ qualifications, duties
and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers,
and the maximum number of other board
representations that an independent director or
trustee may have which shall, in no case, be more
than the number prescribed by the Commission;
REQUISITES OF VALID BY-LAWS
(2000, 2001 BAR)
The following are the requisites for the validity of
by-laws: (CoMorO-RAG)
1.
2.
3.
4.
5.
Must be consistent with the COrporation Code,
other pertinent laws and regulations;
Must not be contrary to MORals and public
policy;
Must not impair Obligations and contracts or
property rights of stockholders;
Must be Reasonable;
Must be consistent with the charter or AOI; and
Also, an arbitration agreement may be provided in
the bylaws pursuant to Section 181 of this Code.
Adoption of the Original By-laws
NOTE: In case of conflict between the by-laws
and the AOI, the AOI prevails because the bylaws are intended merely to supplement the
former.
6.
GR: It must be filed within one (1) month from
notice of issuance of certificate of incorporation.
XPN: By- laws may be adopted and filed prior to the
incorporation. Such shall be approved and signed by
all the incorporators and submitted to the SEC
together with the AOI.
Must be of General application and not directed
against a particular individual.
Contents of by-laws
1.
2.
3.
4.
5.
6.
Note: The one month period to adopt by-laws was
deleted in RCC.
Time, place and manner of calling and
conducting regular or special meetings of
directors or trustees.
Time and manner of calling and conducting
regular or special meetings of the
stockholder or members.
The required quorum in meeting of
stockholders or members and the manner
of voting therein.
The form for proxies of stockholders and
members and the manner of voting them.
The qualification, duties and compensation
of directors or trustees, officers and
employees.
Time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Procedures in adopting by-laws
The by-laws may be adopted before or after
incorporation. In all cases, the by-laws shall be
effective only upon the issuance by the SEC of a
certification that the by-laws are not inconsistent
with the AOI.
1.
2.
a.
196
Pre - incorporation – It shall be approved
and signed by all the incorporators and
submitted to the SEC, together with AOI.
Post – incorporation:
Vote of the majority of the stockholders
representing the outstanding capital stock
or members;
Mercantile Law
b.
c.
d.
By-laws shall be signed by the
stockholders or members voting for them
It shall be kept in the principal office of the
corporation and subject to the inspection of
the stockholders or members during office
hours.
Copy thereof, duly certified by the BOD or
BOT countersigned by the secretary of the
corporation, shall be filed with the SEC and
shall be attached with the original AOI (Sec.
46, CC).
succeeding rendition of services. Despite
repeated demands, PMI failed to pay and hence,
Galvan filed a complaint seeking payment for
salaries earned. PMI sought to avoid liability on
the ground that under PMI’s by-laws only the
Chairman is authorized to sign any contract.
Hence, according to PMI, the employment
contract of Galman, which was not signed by the
Chairman, is not binding upon PMI.
Is the employment contract invalid because it
violated PMI’s by-laws stating that the Chairman
of the BOD should be the signatory thereon?
BINDING EFFECTS
The following are the binding effects of by-laws:
A: NO. The employment contract is not invalidated
by the failure of the Chairman to sign such. Since bylaws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they
have knowledge of the same. No proof appears on
record that Galvan ever knew anything about the
provisions of said by-laws (PMI Colleges v. NLRC, et
al., supra)
1.
As to members/ stockholders, officers,
trustees/ directors and corporation
They are bound by and must comply with it.
They are presumed to know the provisions of
the by-laws.
2. As to third persons
GR: They are not bound.
Effect of non-filing of the by-laws within the
required period
XPN: They have knowledge or notice of the bylaws at the time the contract was executed
(China Banking Corp. v. CA, G.R. No. 117604,
March 26, 1997).
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and
hearing, under Section 6(I) of PD 902-A. The
corporation is, at the very least, a de facto
corporation whose existence may not be collaterally
attacked (Sawadjaan v. CA, G.R. No. 142284, June 8,
2005).
Q: PMI Colleges (PMI) an educational institution,
it
hiredGalvan
as
contractual
instructor. Initially,
Galvan
and
other
instructors were compensated for services
rendered. However, for unknown reasons,
Galvan stopped receiving payment for the
Articles of incorporation vs. By-laws
BASIS
AOI
Requirement
for
corporate existence
Condition
precedent
in
the
acquisition of corporate existence
Essence
Essentially a contract between the:
1. corporation and SH/M;
2. SH/M inter se; and
3. corporation and the State;
Time of execution
Executed before incorporation
Manner
amendment
Amended by a majority of the
directors/ trustees and stockholders
representing 2/3 of the outstanding
capital stock, or 2/3 of the members
in case of non-stock corporations
of
197
BY-LAWS
Condition subsequent; its absence merely
furnishes a ground for the revocation of the
franchise
For the internal government of the
corporation but has the force of a contract
between the:
1. corporation and the SH/M and
2. between the SH/M inter se;
May be executed after incorporation. Sec. 46
allows the filing of the by-laws
simultaneously with the Articles of
Incorporation
May be amended by a majority vote of the
BOD and majority vote of outstanding
capital stock or a majority of the member in
non-stock corporation
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
AMENDMENT OR REVISION
Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
of discretion in not renewing its contract for
stevedoring
services
for
coal-handling
operations at NPC's plant, and in taking over its
stevedoring services.NPC seeks to annul the
order of the RTC in issuing a writ of preliminary
injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
in its pier and directing it either to enter into a
contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does
NPC have the power to undertake stevedoring
and arrastre services in its pier?
Ways of amending, repealing or adopting new
by-laws:
1.
2.
Amendment may be made by stockholders
together with the Board – by majority vote
of directors and owners of at least a
majority of the outstanding capital
stock/members; or
By the board only after due delegation by the
stockholders owning 2/3 of the outstanding
capital stock/members. Provided, that such
power delegated to the board shall be
considered as revoked whenever stockholders
owning at least majority of the outstanding
capital stock or members, shall vote at a regular
or special meeting (CC, Sec. 48)
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
accomplish said purpose. If that act is one which is
lawful in itself and not otherwise prohibited, and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those
ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the
corporation's charter powers. The rule is that a
corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter,
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. The stevedoring services
which involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the
operation of the plant (NPC, v. Vera, et al., G.R. No.
83558, February 17, 1989).
CORPORATE POWERS
1.
2.
3.
Express powers – granted by law, the
Corporation Code, and its Articles of
Incorporation or Charter, and administrative
regulations;
Inherent/incidental powers – not expressly
stated but are deemed to be within the capacity
of corporate entities;
Implied/necessary powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter.
Q: The board of directors of Lopez Realty, Inc.
passed a resolution providing gratuity pay for
its employees in a special meeting called for the
purpose. At the time, however, Asuncion Lopez
Gonzales (a member of the board), was still out
of the country. Asuncion assailed the validity of
the said board resolution contending that the
same was ultra vires on the ground that she was
not duly notified of the special meeting in which
it was passed. Is the disputed board resolution
ultra vires as urged by Asuncion?
Exercise of corporate powers
A: NO. The assailed resolution covers a subject
which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity
pay for its employees is one of the express powers of
the corporation under the Corporation Code, hence,
Asuncion cannot invoke the doctrine of ultra vires to
avoid any liability arising from the issuance of the
subject resolution (Lopez Realty, Inc. v. Fontecha,
G.R. No. 76801, August 11, 1995).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
The Corporation Code of the Philippines vests in the
board of directors the exercise of the corporate
powers of a (stock) corporation, save in those
instances where the Code requires stockholders’
approval for certain specific acts (Great Asian Sales
Center Corp. v CA, G.R. No. 105774, April 25, 2002).
Note: The CC vestes in the Board of Trustees the
exercise of the corporate powers of a Non-stock
Corporation.
198
Mercantile Law
Q: Eliodoro C. Cruz was the former president of
Filport. During the general stockholders’
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
creation of certain positions and their
corresponding monthly renumeration. Because
his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he
describes as a derivative suit against the the
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to
the interest of the corporation and its
shareholders at large. Did Filport’s BOD act
within its powers in creating the executive
committee and the positions of AVPs for
Corporate Planning, Operations, Finance and
Administration, and those of the Special
Assistants to the President and the Board
Chairman,
each
with
corresponding
remuneration?
3.
GENERAL POWERS, THEORY OF
GENERAL CAPACITY
Theory of General Capacity
The general powers of a corporation also called
Theory of General Capacity are the following:
(SuSuCo-ABS-PEDRO)
1.
2.
To Sue and be sued;
Of Succession (To have perpetual existence
unless the certificate of incorporation provides
otherwise;);
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds subject to the Constitution and existing
laws;
8. To Enter into merger or consolidation, (To
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons);
9. To make reasonable Donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes, provided that no
donation is given to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers and employees – basis of which is the
Labor code; and
11. To exercise Other powers essential or
necessary to carry out its purposes (CC, Sec. 36)
A: YES. The governing body of a corporation is its
board of directors. Section 23 of the Corporation
Code explicitly provides that unless otherwise
provided therein, the corporate powers of all
corporations formed under the Code shall be
exercised, all business conducted and all property of
the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of
some powers expressly granted by law to
stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole
authority to determine policies, enter into contracts,
and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board
of directors is restricted to the management of the
regular business affairs of the corporation, unless
more extensive power is expressly conferred. In the
present case, the board’s creation of the subject
positions was in accordance with the regular
business operations of Filport as it is authorized to
do so by the corporation’s by-laws, pursuant to the
Corporation Code (Filipinas Port Services, Inc., v. Go,
et al., G.R. No. 161886, March 16, 2007).
Three levels of control in the corporate
hierarchy
1.
2.
often have wide latitude in determining the
course of business operations;
The stockholders - have the residual power
over fundamental corporate changes, like
amendments of the articles of incorporation
(City Bank NA vs. Chua, G.R. No. 102300, March
17, 1993).
Commencement of the power to sue and be sued
The board of directors - responsible for
corporate policies and the general
management of the business affairs of the
corporation;
The officers of the corporation - execution of the
policies laid down by the board, but in practice
The power to sue and be sued commences upon
issuance by SEC of Certificate of Incorporation.
The power of the corporation to sue and be sued
is exercised by the board of directors.
199
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical
acts of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate bylaws or by a specific act of the board.
Absent the said board resolution, a petition may not
be given due course (Ligaya Esguerra, et al. vs
Holcim Philippines, Inc., G.R. No. 182571, September
2, 2013).
Limitations of the corporation in dealing with
property
1.
2.
With regard to private land, 60% of the
corporation must be owned by the Filipinos,
same with the acquisition of a condominium
unit.
If the real party in interest is a corporate body, an
officer of the corporation can sign the verification
against forum shopping so long as he has been duly
authorized by a resolution of its board of directors.
The court did not commit grave abuse of discretion
in dismissing the petition for lack of authority of the
officer who signed the certification of forum
shopping in representation of corporation (San
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al, G.R. No. 153653, October 2, 2009;
Republic of the Philippines v. Coalbrine International
Philippines, et al, G.R. No. 161838, April 7, 2010).
NOTE: No law disqualifies a person from
purchasing shares in a landholding corporation
even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the corporation
from owning land (JG Summit Holdings, Inc. vs. CA,
G.R. No. 124293, January 31, 2005).
3.
GR: The verification and certification against forum
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution.
1.
2.
3.
Chairperson of the Board of Directors;
President;
General Manager;
Personnel Officer; or
Employment Specialist in labor case.
4.
These officers are in the position to verify the
truthfulness and correctness of the allegations in
the petition (Mid Pasig Land and Development
Corporation v. Tablante, G.R. No. 162924, February 4,
2010; Skyway Traffic Management and Security
Division Workers Organization v. PNCC Skyway Corp.,
G.R. No. 171231, February 17, 2010).
Donation must be Reasonable.
Must be for valid Purposes including public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes.
Must not be an Aid in any:
a. Political party;
b. Candidate; or
c. Partisan political activity.
Donation must bear a reasonable relation to the
corporation’s Interest and not be so remote and
fanciful.
Corporation as surety or guarantor
GR: A corporation cannot act as a surety or
guarantor because it will be contrary to the primary
purpose for which the corporation was created.
An unregistered corporation has no right to sue
or be sued for want of corporate personality.
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the particular
transaction is reasonably necessary or proper in the
conduct of its business.
“Lideco Corporation” had no personality to
intervene since it had not been duly registered as a
coporation. If petitioner “Laureano Investment &
Devlopment Corporation” legally and truly wanted
to intervene, it should have used its corporate name
as the law requires and not another name which it
had not registered (Laureano Investment &
Development Corp. v. CA., GR No. 100468, May 6,
1997).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Special law – subject to the provisions of the
Bulk Sales Law and law against monopoly,
illegal combination or restraint of trade.
Requisites for a valid donation (RPAI)
XPN: The following officers may sign even in the
absence of a board resolution:
a.
b.
c.
d.
e.
It must be in the furtherance of the purpose for
which the corporation was organized.
Constitutional limitations – cannot acquire
public lands except by lease.
Implied powers of a corporation
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation (NAPOCOR v. Vera, G.R.
No. 83558, February 27, 1989).
200
Mercantile Law
SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY
7.
POWER TO EXTEND OR SHORTEN
CORPORATE TERM
Theory of Specific Capacity
The specific powers of a corporation, also called
Theory of Specific Capacity, are the following:
(ESB-PA-SIDE-A)
Procedural requirements
shortening corporate term
1.
2.
1.
Power to Extend or shorten corporate term (CC,
Sec. 37)
2. Increase or decrease corporate Stock (CC, Sec.
38)
Note: Now, Section 36 RCC, in addition to the
provision, ALLOWANCE OF SENDING OF
NOTICE OF MEETING REGARDING PROPOSED
ACTION THRU ELECTRONIC MEANS SUCH AS
ELECTRONIC DATA MESSAGES IF ALLOWED
BY THE BY-LAWS IN ACCORDANCE WITH ECOMMERCE ACT)
3. Incur, create, or increase Bonded indebtedness
(CC, Sec. 38)
4. Deny Pre-emptive right (CC, Sec. 39)
5. Sell, dispose, lease, encumber all or
substantially all of corporate Assets (CC, Sec. 40)
6. Purchase or acquire Shares (CC, Sec. 41)
7. Invest corporate funds in another corporation
or business for other purpose other than
primary purpose (CC, Sec. 42)
8. Declare Dividends out of unrestricted retained
earnings (CC, Sec. 43)
9. Enter into management contract with another
corporation (not with an individual or a
partnership – within general powers) whereby
one corporation undertakes to manage all or
substantially all of the business of the other
corporation for a period not longer than five (5)
years for any one term (CC, Sec. 44)
10. Amend Articles of Incorporation (CC, Sec. 16)
3.
4.
5.
6.
The Board of Directors or Trustees must act
together as a body in order to bind the corporation
by their acts (Yao KaSinTrading v. CA, et. al. G.R. No.
53820, June 15, 1992).
6.
extending/
Majority vote of the BOD or BOT
Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3 of
the members in case of non-stock corporation.
Written notice of the proposed action and of the
time and place of the meeting shall be
addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally or when allowed in the bylaws or
done with the consent of the stockholder, sent
electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data messages.
Copy of the amended AOI shall be submitted to
the SEC for its approval;
In case of Special Corporation, a favorable
recommendation of appropriate government
agency (CC, Sec. 37)
The extension must be done during the lifetime
of the corporation not earlier than 5 years prior
to the expiry date unless exempted. The
extension must not exceed 50 years (CC, Sec 16).
Q: T Corp. has a corporate term of 20 years
under its Articles of Incorporation or from June
1, 1980 to June 1, 2000. On June 1, 1991 it
amended its AOI to extend its life by 15 years
from June 1, 1980 to June 1, 2015. On June 1,
2011, however, T Corp decided to shorten its
term by 1 year or until June 1, 2014. Both the
1991 and 2011 amendments were approved by
majority vote of its Board of Directors and
ratified in a special meeting by its stockholders
representing at least 2/3 of its outstanding
capital stock. The SEC, however, disapproved
the 2011 amendment on the ground that it
cannot be made earlier than 5 years prior to the
expiration date of the corporate term, which is
June 1, 2014. Is this SEC disapproval correct?
(2011 Bar)
Corporate powers which are exercised by the
BOD and stockholders jointly (ASIA-FuSE)
5.
in
NOTE: After the term had expired without
extension, the corporation is deemed ipso facto
dissolved. The remedy of the stockholders is
reincorporation. Any dissenting stockholder may
exercise his appraisal right in case of shortening or
extending corporate term (CC, Sec. 37). (THERE IS A
NEW PROVISION REGARDING THE REVIVAL OF
THE CORPORATION)
Authority to enter into contract (1996 Bar)
1.
2.
3.
4.
Entering into management contract
Amendments to by-laws
Extending or Shortening the corporate term
Increase or decrease of capital stock
The sale or other disposition of All or
substantially all of the corporate assets
Investment of corporate funds in another
corporation or business or for any other
purpose;
Issuance of stock dividends
201
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
A: NO. The 5-year rule on amendment of corporate
term applies only to extension, not to shortening, of
term.
incurring, creating or increasing of any
bonded indebtedness.
NOTE: The increase or decrease in the capital stock
or the incurring, creating or increasing bonded
indebtedness shall require prior approval of the SEC.
POWER TO INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS
Prior to the approval of the SEC of the increase in
the authorized capital stock, such payments cannot
yet be deemed part of the corporation’s paid-up
capital, technically speaking, because its capital
stock has not yet been legally increased. Such
payments
constitute
deposits
on
future
subscriptions, money which the corporation will
hold in trust for the subscribers until it files a
petition to increase its capitalization and a
certificate of filing of increase of capital stock is
approved and issued by the SEC (Central Textile
Mills, Inc. v. NWPC, et al., GR No. 104102, August 7,
1996).
Procedural requirements in increasing or
decreasing capital stock
1.
2.
3.
4.
Majority vote of the BOD
Ratification by stockholders representing 2/3
of the outstanding capital stock
Written notice of the proposed increase or
diminution of the capital stock and of the time
and place of the stockholder’s meeting at which
the proposed increase or diminution of the
capital stock must be addressed to each
stockholder at his place of residence as shown
on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally or through
electronic
means
recognized
in
the
corporation’s bylaws and/or the Commission’s
rules as a valid mode for service of notices.
A certificate in duplicate must be signed by a
majority vote of the directors of the corporation
and
countersigned
by
the
chairman(chairperson) and the secretary of the
stockholder’s meeting, setting forth:
a. That the foregoing requirements have been
complied with;
b. The amount of increase or diminution of
the capital stock;
c. If an increase of the capital stock, the
amount of capital stock or number of
shares of no par stock actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no par stock
subscribed by each, and the amount paid by
each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized (and the amount paid by each
on the subscription in cash or property, or
the amount of capital stock or number of
shares of no-par stock allotted to each
stockholder if such increase is for the
purpose of making effective stock dividend
therefor authorized);
d. The amount of stock represented at the
meeting; and
e. The vote authorizing the increase or
diminution of the capital stock, or the
Additional requirement with respect to increase
of capital stock – Treasurer’s Affidavit
The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was
subscribed and 25% of the said amount has been
paid either in actual cash to the corporation or that
there has been transferred to the corporation
property the valuation of which is equal to 25% of
the subscription.
NOTE: A corporation is not prohibited from
increasing its authorized capital stock even if the
same has not yet been fully subscribed. Once an
increase in authorized capital stock is effected, it
may be necessarily accompanied by an actual
increase in the assets and additional subscriptions
in order to comply with the 25% subscription
requirement. However, if such increase is for the
purpose of effecting a stock dividend previously
authorized, then additional subscriptions are NOT
urgent.
Reason: The actual capital is increased by
accumulated profits and such profits are distributed
to the stockholders in the form of stock dividends,
the capital stock is increased, for the profits are
reinvested in the corporation by transferring the
same from surplus account to a capital account. The
amount corresponding to the stock dividends
declared may be used to cover the required 25%
subscription to increase the authorized capital stock
and, if sufficient, will obviate the necessity of taking
in new subscription (De Leon, supra).
Basis of the required 25% subscription
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
202
Mercantile Law
The 25% subscription shall be based on the
additional amount by which the capital stock
increased and not on the total capital stock as
increased.
NOTE: The distribution stated above is not
mandatory, notwithstanding the authority granted
by the CC for the same under Sec. 122, last par.
Over-issue of shares is not allowed
NOTE: Treasurer’s affidavit is required in
increasing capital stock, NOT in decreasing capital
stock.
An issue of stock by a corporation in excess of the
amount prescribed or limited by its AOI is ultra vires
and the stock so issued is void even in the hands of
a bona fide purchaser for value.
Additional requirement with respect to the
decrease of capital stock
An over-issued stock is a spurious stock (De Leon,
2010).
In case of decrease in capital stock, the same must
not prejudice the right of the creditors.
NOTE: Over-issue of stock does not avoid the
original issue
Ways of increasing or decreasing the capital
stock
There is no over-issue in the case of shares, which
were surrendered and new shares issued in their
stead. The new issue in such case merely takes the
place of the shares surrendered.
By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the
number of shares;
3. Number of shares and increasing or decreasing
the par value.
Effects of an attempted unauthorized increase of
capital stock
NOTE: In decreasing the capital stock, resorting to
reduction of number of shares may also be done
through:
1.
2.
3.
4.
5.
6.
7.
8.
An attempted unauthorized increase of capital stock
amounts to an over-issue and such stock is,
therefore, absolutely void and cannot be validated
by application of the doctrine of estoppel.
Redeeming redeemable shares (CC, Sec. 8);
Purchasing of own shares (CC, Sec. 41);
Cancelling or retiring the shares, including the
treasury shares (CC, Sec. 9);
The corporation may accept a surrender of
shares and give the holders in exchange
therefor a proportionate amount of its assets,
provided no rights of creditors are involved;
Issue bonds for that purpose;
Exchange another class of stock for that retired;
Exchange the corporation’s outstanding shares
for a smaller number of shares; or
Cancelling shares which have not yet been
issued (De Leon, 2010).
Thus, the following are the effects of such
unauthorized increase:
1. Subscriptions for such stock are likewise void
both on the ground of illegality and for want of
consideration;
2. Subscribers for or purchasers of such stock
acquire none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do
not become liable to creditors of the
corporation or on a winding up as stockholders
for unpaid subscriptions, and are not subject to
a statutory liability to creditors imposed upon
stockholders; and
4. Subscribers for or purchasers of such shares
from the corporation may recover from it,
money paid to it under their subscription or
purchase as upon a failure of consideration, or
breach of warranty for the existence of the thing
sold, unless they are precluded from such relief
as parties in pari delicto.
Q: Can there be a distribution of surplus on
reduction?
A: It depends whether there is an impairment of
capital.
1.
2.
If there is no impairment of capital - the surplus
may be equitably distributed by the directors or
so much thereof as may not be required in
carrying on the business for the best interests
of the stockholders: Provided the rights of
creditors will not be affected nor the capital
impaired.
If there is reduction to meet an impairment –
there will be no distribution.
The board of directors may issue additional
issuances of shares of stock without approval of
the stockholders.
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
stockholder’s meeting is required to consider it
203
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
because additional issuance of stock (unlike
increase in capital stock) does not need approval of
the stockholders. What is only required is the board
resolution approving the additional issuance of the
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC (Majority
Stockholders of Ruby Industrial Corp v. Lim &
MinorityStockholders of Ruby Industrial Corp, supra).
persons, or for a short
time.
Bonded indebtedness
It is a long-term indebtedness secured by real or
personal property (corporate assets).
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
same with the power to increase or decrease capital
stock.
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special
stockholders' meeting:
Registration of the bonds issued by the
corporation
1. Resolution increasing the authorized capital
stock of PPI; and
2. Resolution authorizing the Board of
Directors to issue, for cash payment, the new
shares from the proposed capital stock
increase in favor of outside investors who
are non‐stockholders.
Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to
determine the sufficiency of the terms thereof (CC,
Sec. 38).
Stockholders’ approval is not required for all
borrowings of the corporation
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter
was Jimmy Morato who owned 1% of the stock.
Not all borrowings of the corporation need
stockholders’ approval. Only bonded indebtedness
requires such approval.
a. Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting stockholder?
b. What remedies, if any, are available to
Morato? (1998 Bar)
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right
It is the preferential right of shareholders to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings
(CC, Sec. 39). (now sec. 38)
A:
a. NO. The resolutions are not binding on the
corporation and its stockholders including
Jimmy Morato. While these resolutions were
approved by the stockholders, the directors'
approval, which is required by law in such case,
does not exist.
b. Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken
by the Board of Directors thereunder, null and
void.
NOTE: The stockholder must exercise his preemptive right within the time fixed in the resolution
authorizing the increase of capital stock.
Purpose of pre-emptive right
The purpose of pre-emptive right is to enable the
shareholder to retain his proportionate control in
the corporation and to retain his equity in the
surplus.
Exercise of pre-emptive right
Evidence of the corporation’s indebtedness
When a corporation borrows money, its
indebtedness may be evidenced by notes or bonds
as its primary security (De Leon, 2010).
Pre-emptive right must be exercised within the
period stated in the AOI or the By-Laws. When the
AOI and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
exercise the right.
Difference between a note and a bond
NOTE
Amount borrowed is
small and it is
borrowed in a single
sum, or from a few
BOND
Amount is large and
obtained
from
a
number of people and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
extends over a period
of years.
NOTE: Pre-emptive right can only be exercised to
the same class of shares issued or disposed with that
owned by the stockholder (Share-a-like basis).
204
1.
2.
3.
Mercantile Law
Pre-emptive right is available on the re-issuance
of treasury shares
The corporation can deny pre-emptive right if the
AOI or any amendment thereto denies such right
(Sec. 39, CC).
When a corporation reacquires its own shares
which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when preemptive right does not exist.
NOTE: A stockholder whose pre-emptive right is
violated may maintain an action to compel the
corporation to give him that right. If the denial is by
amendment to the AOI, he may exercise his
appraisal right under Sec. 81(1).
Instances when pre-emptive right is not
available
Pre-emptive right may be waived
Preemptive right may be waived by the stockholder.
However, the waiver should be given individually
by the stockholder concerned or by another by way
of Special Power of Attorney. Being a personal right,
the waiver cannot be waived by the corporation
itself through a stockholders’ resolution (SEC
Opinion, Dec. 12, 1994).
1.
2.
3.
A stockholder cannot be forced to waive the right
even if the majority of the stockholders opt to waive
it (SEC Opinion No. 08-08, March 31, 2008).
4.
5.
Shares to be issued to comply with laws
requiring stock offering or minimum stock
ownership by the public.
Shares issued in good faith with the approval of
the stockholders representing 2/3 of the
outstanding capital stock in exchange for
property needed for corporate purposes.
Shares issued in payment of previously
contracted debts.
In case the right is denied in the AOI.
Waiver of the right by the stockholder.
NOTE: Pre-emptive right may be waived impliedly
as when the stockholder fails to exercise his preemptive right after being notified and given an
opportunity to avail of such right.
The validity of issuance of additional shares may
be questioned if done in breach of trust by the
controlling stockholders notwithstanding the
non-existence of the pre-emptive right.
Transferability of pre-emptive right of a
stockholder
Even if pre-emptive right does not exist either
because the issue comes within the exceptions in
Sec. 39 of the CC or because it is denied in the AOI,
an issue of shares may still be objectionable if the
directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
The issuance of unissued shares out of the original
authorized capital stock pursuant to a rehabilitation
plan the propriety or validity of which was on
question by the minority stockholders and
subsequently disapproved by the Supreme Court
amounts to unlawful dilution of the minority
shareholdings (Majority Stockholders of Ruby
Industrial Corp. vs. Miguel Lim and Minority
Stockholders of Ruby Industrial Corp., G.R. Nos.
165887 & 165929, June 6, 2011, in Divina, 2014).
The pre-emptive right of a stockholder is
transferable unless there is an express restriction in
the AOI.
Q: X Corporation has already issued the 1000
originally authorized shares of the corporation
so that its Board of Directors and stockholders
wish to increase X's 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.
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?
Pre-emptive right vs. Right of first refusal
A: 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.
BASIS
Description
Denial by the corporation of pre-emptive right
205
PRE-EMPTIVE
RIGHT
Right
to
subscribe to all
issuance
or
dispositions of
shares of the
corporation
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
RIGHT OF
FIRST
REFUSAL
Right
to
purchase
shares of a
stockholder.
The Corporation Code
as shown on the books of the corporation and
deposited to the addressee in the post office
with postage prepaid, or served personally
(ALLOWANCE OF ELECTRONIC NOTICE IN
ACCORDANCE WITH E-COMMERCE AND
WHEN ALLOWED BY THE BY-LAWS)
even to the
subsequent sale
of
treasury
stocks.
To
what
does
it
pertain
Pertains
to
unsubscribed
portion of the
authorized
capital stock.
Against
who is it
exercised
Right exercised
against
the
corporation.
Effect of the
absence of
express
provision
in the AOI
May
be
exercised even
when there is no
express
provision in the
AOI
or
amendment
thereto.
Treasury
shares
It
includes
treasury shares.
Pertains
to
the sale of the
stocks
by
another
stockholder
Right
exercised
against a costockholder.
Can only be
exercised
when
so
provided in
the AOI, bylaws
and
printed in the
stock
certificate.
Does
not
include
treasury
shares
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
and monopolies.
Further, in case of non-stock corporations, where
there are no members with voting rights, the vote of
at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter
into any transaction authorized by this section (Sec.
40, CC).
Instances when the corporation may forego the
ratification by stockholders / members:
1.
2.
3.
POWER TO SELL OR DISPOSE OF CORPORATE
ASSETS (SLEMPAD)
If sale is necessary in the usual and regular
course of business;
If the proceeds of the sale or other disposition
of such property and assets are to be
appropriated for the conduct of the remaining
business; or
If the transaction does not cover all or
substantially all of the assets.
Remedy of a stockholder who disagrees with the
plan of SLEMPAD of all or substantially all of
corporate assets
Substantially all of corporate assets
There is a sale, lease, exchange, mortgage, pledge,
and any other disposition (SLEMPAD) of
substantially all of corporate asset if in the
SLEMPAD thereof, the corporation would be
rendered:
Any dissenting stockholder shall have the option to
exercise his appraisal right.
1.
2.
The BOD, in its discretion, may abandon the plan for
SLEMPAD even after such authorization or approval
by the stockholders, subject to the rights of third
parties under any contract relating thereto, without
further action or approval by the stockholders or
members (Sec. 40, CC).
Abandonment of the plan for SLEMPAD even
after the vote of the stockholders or members
Incapable of continuing the business; or
Incapable of accomplishing the purpose for
which it was incorporated (Sec 40, CC). (now
Sec, 39)
Note: This is subject to the provisions of Republic
Act No. 10667, otherwise known as the “Philippine
Competition Act.”
Effect of sale of all or substantially all of assets of
one corporation to another corporation (1996,
2005 Bar)
Procedural requirements for SLEMPAD of all or
substantially all of corporate assets
1.
2.
3.
GR: The corporation who acquired all or
substantially all of the assets of the selling
corporation shall not be liable for the debts of the
latter.
Majority vote of the BOD or BOT
Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non-stock
corporation
Written notice of the proposed action and of the
time and place of the meeting addressed to each
stockholder or member at his place of residence
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
206
Mercantile Law
3.
4.
5.
If the purchase was in fraud of creditors;
If the purchaser becomes a continuation of the
seller;
If there is violation of the Bulk Sales Law
Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or
disposition of all the corporate property and assets
of the corporation falling squarely within the
contemplation of Sec. 40 of the Corporation Code.
Hence, for the sale to be valid, the majority vote of
the legitimate Board of Trustees, concurred in by
the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
117897, May 14, 1997).
Q: Divine Corporation, engaged in the
manufacture of garments for export, was able to
obtain loans from individuals and financing
institutions. However, due to the drop in the
demand for garments in the international
market, Divine Corporation could not meet its
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines,
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials
to Top Grade Fashion Corporation, its
competitor.
POWER TO ACQUIRE OWN SHARES
Instances when a corporation may acquire its
own shares (1991, 1992, 2005 Bar)
1.
a. How would you classify the transaction?
b. Can Divine Corporation sell aforesaid items
to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items? Explain. (Bar 2005)
2.
A:
a. The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
because the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
b. YES. The law does not prohibit sale of all or
substantially all of corporate assets to
competitor-company provided said sale is
subject to laws against illegal combination,
monopoly, or restraint of trade and Bulk Sales
Law. Nowhere in the facts state that the
competitor-company
lies
within
the
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote
of its board of directors and stockholder’s
approval representing at least 2/3 of
outstanding capital stock. Further, since bulk
sales apply to sale of all or substantially all of
corporate assets, it also requires the following:
a.
b.
c.
3.
4.
5.
6.
7.
To eliminate fractional shares out of stock
dividends (CC, Sec. 41)
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 (Ibid.)
To pay dissenting or withdrawing stockholders
(in the exercise of the stockholder’s appraisal
right) (Ibid.)
To acquire treasury shares (CC, Sec. 9)
To acquire Redeemable shares regardless of
existence of retained earnings (CC, Sec 8)
To effect a decrease of capital stock (CC, Sec. 38)
In close corporations, when there is a deadlock
in the management of the business, the SEC may
order the purchase at their fair value of the
shares of any stockholder by a corporation
regardless of the availability of unrestricted
retained earnings (URE’s) in its books (CC, Sec.
104, par. 1 [4]).
NOTE: Where a corporation reacquires its own
shares, it does not thereby become a subscriber
thereof.
Rule in order that a corporation may acquire its
own shares
GR: The corporation may only acquire its own
stocks in the presence of unrestricted retained
earnings (URE).
list of creditors under oath must be given
by the seller to the buyer 10 days before
the sale containing the lists of their
respective names, addresses, due dates
and amount owing each;
inventory of goods or properties to be
sold, cost price and the amount for which
it has been sold; and
the list of inventory is filed with the DTI,
otherwise, it will be null and void for being
in fraud of creditors.
XPNs: (RDC)
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks
in payment of a Debt
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
207
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
as long as it will not result to the insolvency of
the corporation.
XPN: The purpose will be amended to include the
desired business activity among its secondary
purpose.
Unrestricted retained earnings (URE)
NOTE: However, in the case of pawnshops
organized as corporations and partnerships, they
may be allowed to engage in ancillary activity of
directly purchasing or selling goods or articles. The
Pawnshop Regulation Act contains no prohibition to
engage in ancillary activities. Hence, by implication,
their scope may be extended to other unrelated
business unless clearly prohibited by the said Act.
It represents the surplus profits of the corporation.
It is determined by subtracting the liabilities (L), the
Capital Stock (CS) and the Restricted Retained
Earnings (RRE) from the assets (A) of the
corporation (URE = A – (L + CS+ RRE)).
Unrestricted Retained Earnings shall include
accumulated profits and gains realized out of the
normal and continuous operations of the company
after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts. It does NOT include:
The only requirement is that the person or entity
engaged at the same time in other business not
directly related or not incidental to pawnshop
business, shall keep such business distinct and
separate from his pawnshop operations (De Leon,
2010 citing SEC Opinion, March 28, 1985).
1. Funds appropriated by its BOD for corporate
expansion projects or programs;
2. Funds covered by a restriction for dividend
declaration under a loan agreement; and
3. Funds required to be retained under special
circumstances obtaining in the corporation such
as when there is a need for a special reserve for
probable circumstances.
Rule in case a corporation wants to invest in an
undertaking
GR: Investment of a corporation in a business which
is in line with its primary purpose requires only the
approval of the board.
Guidelines for the acquisition of its own shares
1.
2.
3.
4.
5.
XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose
other than a primary purpose, it has to comply with
the statutory requirements before it can do so (Sec.
42, CC).
The capital of the corporation must not be
impaired. There shall be URE’s to purchase the
shares.
Legitimate or proper corporate objective is
advanced.
Condition of the corporate affairs warrants it.
Transaction is designed and carried out in good
faith.
Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine
(Sec. 41, SEC Opinions, October. 12, 1992,
September 11, 1985, and April 11, 1994).
Statutory requirements that the corporation
needs to comply with to invest in another
corporation or business or for any purpose
other than a primary purpose (1995, 1996 Bar)
1.
2.
The requirement of unrestricted retained earnings
to cover the share is based on the trust fund doctrine
which means that the capital stock, property and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
of corporate assets (Boman Environmental
Development Corp v. CA, GR No. 77860, November 22,
1988).
3.
4.
NOTE: Investment of a corporation in a business
which is in line with its primary purpose requires
only the approval of the board. Any dissenting
stockholder shall have appraisal right.
POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
GR: The corporation is not allowed to engage in a
business different from those enumerated in its AOI.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Approval by the majority vote of the BOD or
BOT
Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non-stock
corporations
Ratification must be made at a meeting duly
called for the purposes
Prior written notice of the proposed investment
and the time and place of the meeting shall be
made addressed to each stockholder or
member by mail or by personal service
Q: Stikki Cement Co. was organized primarily for
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest
208
Mercantile Law
in: a) a powerplant project; b) a concrete road
project; and c) quarry operations for limestone
in the manufacture of cement.
stock dividends, a ratification of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock.
a.
Q: At least 2/3 of the stockholders of Solar
Corporation, upon the recommendation of the
BOD, declared a 50% stock dividend during
their annual meeting. The notice of the annual
stockholders’ meeting did not mention anything
about a stock dividend declaration. The matter
was taken up only under the item “other
business” in the agenda of the meeting. C.K.
Senwa, a stockholder, who received his copy of
the notice but did not attend the meeting,
subsequently learned about the 50% stock
dividend declaration. He desires to have the
stock dividend declaration cancelled and set
aside, and wishes to retain your services as a
lawyer for the purpose. Will you accept the case?
Discuss with reasons. (1990 Bar)
What corporate approvals or votes are
needed for the proposed investments?
Explain.
b. Describe the procedure in securing these
approvals (1992 Bar)
A:
a. Since a powerplant project and a concrete road
project are neither primary purposes nor
reasonably necessary for the accomplishment
thereof, majority votes of the board of directors
plus the ratification of the stockholders
representing 2/3 of the outstanding capital
stock are needed.
On the other hand, quarry operations for
limestone are reasonably necessary or
incidental to attain the primary purpose of the
corporation, i.e. the manufacture of cement.
Hence, only the majority approval of the board
of directors is needed. The ratification by the
stockholders is no longer necessary.
b.
A: NO, I will not accept the case. Sec 43 of the CC
states that no stock dividend shall be issued without
the approval of the stockholders representing not
less than 2/3 of the outstanding capital stock at a
regular or special meeting duly called for that
purpose. Conformably with Sec 50 of the CC, a
written notice of the holding of the regular meeting
sent to the shareholders will suffice. The notice
itself specified the said subject matter.
To secure the aforementioned approvals, there
must be a written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each stockholder
or member at his place of residence as shown
on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally (CC, Sec. 42).
Alternative answer:
YES, I will accept the case. The problem does not
indicate that there is action by the BOD which is also
necessary for the declaration of 50% stock dividend.
POWER TO DECLARE DIVIDENDS
Q: During the annual stockholders meeting,
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
capitalized and stock dividends be distributed
to the stockholders, arguing that as owners of
the company, the stockholders, by a majority
vote, can do anything. As chairman of the
meeting, how would you rule on the motion to
declare stock dividends? (1991, 2001 Bar)
Requirements for the declaration of dividends
1.
2.
Existence of URE’s. (Unrestricted Retained
Earnings)
Resolution of the board.
NOTE: In case stock dividend is to be declared, an
additional requirement of:
a.
b.
A vote representing 2/3 of outstanding
capital. (Sec. 43, CC)
A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders.
A: As the chairman of the meeting, I would rule
against the motion considering that a declaration of
stock dividends should initially be taken by the BOD
and thereafter to be concurred in by a 2/3 vote of
the stockholders (CC, Sec. 43). There is no
prohibition, however, against the stockholders’
resolving to recommend to the BOD that it consider
a declaration of stock dividends for concurrence
thereafter by the stockholders. A stockholder
cannot compel the corporation to declare either
cash or stock dividends as it rests with the sound
discretion of the board.
Q: Under what circumstances may a corporation
declare dividends? (2005 Bar)
A: A corporation may declare dividends when there
are unrestricted retained earnings, a resolution of
the Board of Directors and in case of declaration of
209
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
Forms of dividends
1.
Note: The declaration of cash dividends cannot be
recalled, because it can affect the market for the
shares of stock. Stock Dividends can be revoked
before their issuance, because they do not give
any additional assets to the stockholders.
(Ballante p. 559)
Cash
Cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus cost and expenses (Sec. 43,
CC).
2.
Q: From what funds are cash and stock
dividends sourced? Explain why (Bar 2005)
Stock
A: Dividends either cash or stock dividend must be
declared out of unrestricted retained earnings
because of the Trust Fund Doctrine. The Trust Fund
Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
creditors have the right to look for the satisfaction
of their claims (Ong v. Tiu, G.R. No. 144476, April 8,
2003). Thus, dividends must never impair the
subscribed capital stock.
Stock dividends are withheld from the
delinquent stockholder until his unpaid
subscription is fully paid(Ibid).
3.
Property
Stockholders are entitled to dividends PRO‐
RATA based on the total number of shares and
not on the amount paid on shares.
Scrip dividend
Cash dividends vs. Stock dividends
CASH DIVIDENDS
Part of general fund
Results in cash outlay
Not subject to levy by
corporate creditors
Declared only by the
board of directors at
its discretion
(majority of the
quorum only, not
majority of all the
board)
Does not increase the
corporate capital
Its
declaration
creates a debt from
the corporation to
each
of
its
stockholders
If
received
by
individual: subject to
tax;
If
received
by
corporation:
not
subject to tax
Cannot be revoked
after announcement
Applied to the unpaid
balance
of
delinquent shares
A scrip dividend is dividend issued by the
corporation when the obligation to pay becomes
absolute. Thus, it becomes a debt absolutely due to
the stockholders although payment is postponed to
a future date (De Leon, supra).
STOCK DIVIDENDS
Part of capital
No cash outlay
Once issued, can be
levied by corporate
creditors because they’re
part of corporate capital
Declared by the board
with the concurrence of
the
stockholders
representing at least 2/3
of
the
outstanding
capital stock at a
regular/special meeting
Corporate capital is
increased
Stock split
It is merely a dividing up of the outstanding shares
of a corporation into a greater number of units,
without disturbing the stockholder’s original
proportional participating interest in the
corporation.
STOCK SPLIT
A mere increase in the
number of shares
which
evidence
ownership
without
altering the amount of
the capital, surplus, or
segregated earnings.
No debt is created by its
declaration
Sources of retained earnings
Not subject to tax either
received by individual or
a corporation
1.
Can be revoked despite
announcement
but
before issuance
Can be withheld until
payment
of
unpaid
balance of delinquent
shares
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
STOCK DIVIDENDS
Capitalization
of
earnings or profits,
together
with
a
distribution of the
added shares which
evidence the assets
transferred to capital
Paid-in surplus – It is the difference between the
par value and the issued value or selling price of
the shares. It cannot be declared as dividend
because it is a part of the capital.
Exception: The SEC allows the distribution of paidin surplus in exceptional cases when the following
are present:
a. that they be declared only as
stock dividends and not as
cash dividends
210
Mercantile Law
b. no creditor shall be prejudiced
therefrom
c. there
is
no
resulting
impairment of capital
2.
3.
Planters Bank v. Agana, G.R. No. 51765. March 3,
1997).
Prohibition imposed by law on URE's of a stock
corporation
Operational Income - The amount of profit
realized from a business's operations after
taking out operating expenses. It is available for
both cash and stock dividends
Revaluation surplus – Increase in the value of a
fixed asset as a result of its appreciation. They
are by nature subject to fluctuations.
GR: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock.
XPNs: (2001 Bar)
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
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/his consent,
and such consent has not yet 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 (CC, Sec. 43).
GR: It cannot be declared as dividends because
there is no actual gain.
XPN: It can be used in the declaration of
dividends provided the following conditions
exist:
a.
b.
c.
4.
5.
6.
The corporation has sufficient income from
operations from which the depreciation on
the appraisal increase was charged;
It has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
Such depreciation on appraisal increase
previously charged to operations has not
been erased or impaired by subsequent
losses; otherwise, only that portion not
impaired by subsequent losses is available
for dividend (SEC Opinions, Oct. 2, 1981 and
March 19, 1992).
Q: For the past three years of its commercial
operation, X, an oil company, has been earning
tremendously in excess of 100% of the
corporation’s paid-in capital. All of the
stockholders have been claiming that they share
in the profits of the corporation by way of
dividends but the Board of Directors failed to lift
its finger. Is Corporation X guilty of violating a
law? If in the affirmative, state the basis. (2001
Bar)
A: YES. Corporation X is guilty of violating Section
43 of the CC. This provision prohibits stock
corporations from retaining surplus profits in
excess of 100% of their paid-in capital.
Reduction surplus – the surplus arises from the
reduction of the par value of the issued shares
of stocks. It cannot be declared as cash dividend
but can be declared only as stock dividend
provided that:
a. No creditor is prejudiced
b. There is no resulting impairment of
capital
Penalty in case of unjustifiable retention of
surplus profits
Gain from Sale of Real Property - Available as
dividends.
Treasury Shares – Gain realized from reissuance
of treasury shares. It cannot be declared as
stock or cash dividends but it may be declared
as property dividend.
The penalty in case a corporation unjustifiably
retains surplus profits in excess of one hundred
(100%) percent of the paid-in accumulated capital
is the payment of Improperly Accumulated
Earnings Tax equal to 10% of the improperly
accumulated taxable income (NIRC OF 1997, Sec.
29 [A]).
Q: Can the board be compelled to declare
dividends every year?
Sources of dividends
A: NO. Declaration of dividends is discretionary
upon the board. Dividends are payable only when
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine
whether or not dividends are declared (Republic
GR: Dividends can only be declared out of actual and
bona fide unrestricted retained earnings
XPN: Dividends can be declared out of capital in the
following instances:
211
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
1.
2.
3.
Dividends from investments wasting assets
corporation or engage in “wasting business”
(e.g. timber cutting or mining); or
Liquidating a business.
Utilization of lease or patent.
distribution may properly be treated as incomplete
or partial liquidation and as payment by the
corporation to the stockholder for his stock or as
return of the capital invested by him(Wise & Co., Inc.
v. Meer,G.R. No. 48231, June 30, 1947).
Wrongful or illegal declaration of dividends
POWER TO ENTER INTO
MANAGEMENT CONTRACT
The Board of Director is liable in case of wrongful or
illegal declaration of dividends. The stockholders
should return the dividends to the corporation
based on the principle of solution indebiti.
Management Contract is any contract 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 (CC, Sec. 44).
Persons entitled to receive dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record. (Cojuanco and Prime Holdings,
Inc., v. Sandiganbayan G.R. No. 183278, April 24,
2009).
NOTE: Sec. 44 refers only to a management contract
with another corporation. Hence, it does not apply
to management contracts entered into by a
corporation with natural persons. Corollary to this,
management contract with a natural person need
not comply with the requisites of Sec. 44.
Rule on transfer of shares which is not recorded
in the books of the corporation
Requirements for a management contract to be
valid
Such transfer is valid only as between the parties
(CC, Sec. 63); hence, the transferor has the right to
dividends as against the corporation without notice
of the transfer but he is the trustee of the real owner
of the dividends subject to the contract between the
transferor and transferee as to who is entitled to
receive the dividends (De Leon, supra).
1.
2.
Rule on the receipt of dividends in case of
mortgaged or pledged shares
GR: The mortgagor or the pledgor has the right to
receive the dividends.
3.
XPN: When the mortgagor or pledgor defaults and
the mortgagee or pledgee acquires the pledged
stocks and the transfer is recorded in the books of
the corporation, the mortgagee or pledgee is
entitled to receive the dividends.
Q: May stock dividends be issued to a person
who is not a stockholder in payment of services
rendered?
A: NO. Only stockholders are entitled to payment of
stock dividends (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. 21763, December
17, 1966).
Q: ABC Management Inc. presented to the DEF
Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF
may declare during the lifetime of the
Management Contract. Would you approve of
Distinction between distribution in liquidation
and ordinary dividend
If the distribution is in the nature of a recurring
return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Contract must be approved by the majority of
the BOD or BOT of both managing and managed
corporation.
Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or
members in case of a non-stock corporation, of
both the managing and the managed
corporation, at a meeting duly called for the
purpose.
Contract must be approved by the stockholders
of the managed corporation owning at least 2/3
of the outstanding capital stock entitled to vote
or 2/3 of the members when:
a. Stockholders representing the same
interest in both of the managing and the
managed corporation own or control more
than 1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking stockholders);
b. Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation. (Interlocking Directors)(CC,
Sec. 44)
212
Mercantile Law
such provision? If not, what would you suggest
as an alternative? (1991 Bar)
or public duty, and are void, ultra vires acts are not
illegal but not merely within the scope of the articles
of incorporation and the by-laws. They are merely
voidable and may become binding and enforceable
when ratified by the stockholders (Maria Clara
Pirovana, et al. v. the De La Rama Steamship Co., G.R.
No. L-5377, December 29, 1954).
A: NO. I would not approve a proposed stipulation
in the management contract that the managing
corporation, as an additional compensation to it,
should be entitled to 10% of any stock dividend that
may be declared. Stockholders are the only ones
entitled to receive stock dividends. (Nielson & Co v.
Lepanto Mining G.R. No. L-21601, December 17,
1966).
Types of UVA
1. Acts done beyond the powers of the corporation
(through BOD)
2. Ultra vires acts by corporate officers
3. Acts or contracts which are per se illegal as being
contrary to law
I would add that the unsubscribed capital stock of a
corporation may only be issued for cash or property
or for services already rendered constituting a
demandable debt. (CC, Sec. 62) As an alternative, I
would suggest that the managing corporation
should instead be given a net profit participation
and, if it later so desires, to then convert the amount
that may be due thereby to equity or shares of stock
at no less than the par value thereof.
Ultra vires acts by reason of lack of authority vs.
Ultra vires acts by reason of illegality (illegal
acts)
BASIS
Period for every management contract entered
into by the corporation
Lawfulness
GR: Management contract shall be entered into for
a period not longer than 5 years for any one term.
XPN: In cases of service contracts or operating
agreements which relate to the exploitation,
development, exploration or utilization of natural
resources, it may be entered for such periods as may
be provided by the pertinent laws or regulations.
Enforceability
ULTRA VIRES ACTS (UVA)
Ratification
No corporation shall possess or exercise any
corporate powers except those conferred by this
Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of
the powers so conferred (CC, Sec. 45).
Binding effect
An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers.
The concept also includes those acts that may
ostensibly be within such powers but are, by
general or special laws, either proscribed or
declared illegal. (Rural Bank of Milaor v. Ocefemia,
G.R. No. 137686, February 8, 2000).
ULTRA
VIRES ACT
Not
necessarily
unlawful, but
outside the
powers of the
corporation
Merely
voidable and
may
be
enforced by
performance,
ratification or
estoppel
Can
be
ratified
Can bind the
parties
if
wholly
or
partly
executed
ILLEGAL
ACTS
Unlawful;
against
law,
morals, public
policy,
and
public order
Cannot
validated.
VOID
be
Cannot
ratified
be
Cannot bind
the parties
Distinguished from acts that do not comply with
formalities and unauthorized acts
ACTS THAT DO NOT
COMPLY WITH
FORMALITIES
If certain procedures
or formalities are
prescribed in the AOI
or BL and the same
are not complied
with, the resulting act
is not an ultra vires
act
of
the
corporation.
It is one committed outside the object for which a
corporation is created as defined by the law of its
organization and therefore beyond the power
conferred upon it by law. (Atrium Management
Corporation vs. CA, G.R. No. 109491, February 28,
2001).
Unlike illegal acts which contemplate the doing of an
act that is contrary to law, morals, or public policy
213
UNAUTHORIZED ACTS
The act may be within
the powers of the
corporation but not
within the powers of the
particular officer. The
latter is sometimes
referred to as ultra vires
act of the officer. The law
on agency applies.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
Instances when the acts of the officers bind the
corporation(PRADa)
1.
2.
3.
4.
Where the practice of the corporation has been to
allow its general manager to negotiate and execute
contracts in its copra trading activities for and in
behalf of the corporation without board approval,
the board itself, by its acts through acquiescence,
practically laid aside the by-law requirement of
prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
matter of general practice, custom, and policy, the
general manager may bind the company without
formal authorization from the board of
directors(The Board of Liquidators, representing the
Government of the Philippines v. Heirs of Maximo M.
Kalaw, et al., G.R. No. L-18805, August 14, 1967).
If it is provided in the by-laws
When the act was ratified
If authorized by the board
Under the doctrine of apparent authority
Doctrine of apparent authority
If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the
public possessing the power to do those acts; and
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority.
A corporation cannot deny the authority of a lawyer
when they clothed him with apparent authority to
act in their behalf such as when he entered his
appearance accompanied by the corporation’s
general manager and the corporation never
questioned his acts and even took time and effort to
forward all the court’s documents to him. The
lawyer may not have been armed with a board
resolution but the doctrine of apparent authority
imposes liability not as a result of contractual
relationship but rather because of the actions of the
principal or an employer in somehow misleading
the public that the relationship or authority exists
(Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
NO. 170352, June 1, 2011).
Its existence may be ascertained through:
1.
2.
The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it clothes
him; or
The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation (Advance Paper Corp. v. Arma Traders
Corp., GR No. 176897, December 11, 2013).
Q: May the board of directors of a rural banking
corporation be compelled to confirm a deed of
absolute sale of real property owned by the
corporation which deed of sale was executed by
the bank manager without prior authority of the
board of directors of the rural banking
corporation?
Instances when the corporation is estopped to
deny ratification of contracts or acts entered by
its officers or agents
A: YES, the corporation may be compelled. A bank is
liable to innocent third persons where
representation is made in the course of its normal
business by an agent like the bank manager, even
though such agent is abusing her authority. Clearly,
persons dealing with her could not be blamed for
believing that she was authorized to transact
business for and on behalf of the bank. The bank is
estopped from questioning the authority of the bank
manager to enter into the contract of sale. If a
corporation knowingly permits one of its officers or
any other agent to act within the scope of an
apparent authority, it holds the agent out to the
public as possessing the power to do those acts;
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped
from
denying
the
agent’s
authority. Unquestionably, the bank has authorized
its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, April 14,
2004).
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom (MWSS v. CA, G.R. No. 126000, Oct. 7,
1998).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
214
Mercantile Law
board resolution sought by. Having authorized her
to sell the property, it behooves the bank to confirm
the Deed of Sale so that the buyers may enjoy its full
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No.
137686, February 8, 2000).
thereon owned by the Sps. Cortel. Sps.
Magsalang and Sps. Cortel asked permission
from PCRB to sell the subject properties.
Mondigo, Branch Manager of PCRB, verbally
agreed to their request but first required full
payment of the loan. The subject properties
were later sold to Banate. The title issued to
Banate, however, carried over the mortgage lien
in PCRB’s favor. PCRB refused to release the
property from the lien.
Q: Associated Bank (the Bank) purchased in a
foreclosure sale the real properties of Sps. Vaca
mortgaged in its favor. The Sps. Vaca, however,
prayed for the nullification of the mortgage and
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and
the Sps. Pronstroller offered to buy the same.
The offer was made through Atty. Soluta, the
Bank’s Vice-President, Corporate Secretary and
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer.
Did the purported agreement between Banate
and Mondigo novate the mortgage contract over
the subject properties and is thus binding upon
PCRB?
A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
consider the power to undo or nullify solemn
agreements validly entered into as within the
doctrine’s ambit. Although a branch manager,
within his field and as to third persons, is the
general agent and is in general charge of the
corporation,
with
apparent
authority
commensurate with the ordinary business
entrusted him and the usual course and conduct
thereof, yet the power to modify or nullify corporate
contracts remains generally in the board of
directors. Being a mere branch manager alone is
insufficient to support the conclusion that Mondigo
has been clothed with “apparent authority” to
verbally alter terms of written contracts, especially
when viewed against the telling circumstances of
this case: the unequivocal provision in the mortgage
contract; PCRB’s vigorous denial that any
agreement to release the mortgage was ever
entered into by it; and, the fact that the purported
agreement was not even reduced into writing
considering its legal effects on the parties’
interests. To put it simply, the burden of proving
the authority of Mondigo to alter or novate the
mortgage contract has not been established
(Banate,et al., v. Philippine Countryside Rural Bank,
Inc., et al., G.R. No. 163825, July 13, 2010).
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a
final order from the Supreme Court in the Vaca
case and the delivery of the property to the Sps.
Pronstroller free from occupants.
The Bank was later on reorganized, and Atty.
Soluta was relieved from his duties. The Bank,
through its Assistant Vice-President, Atty.
Dayday, informed Sps. Pronstroller that their
request for extension was disapproved and, in
view of their breach of the contract, the Bank
was rescinding the same and forfeiting their
deposit.
Is the Associated Bank bound by the LetterAgreement signed by Atty. Soluta under the
doctrine of apparent authority?
A: YES. The authority of a corporate officer or agent
in dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and
to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution
expressly authorizing him; thus, it had clothed him
with apparent authority to modify the same via the
second letter-agreement. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation. (Associated Bank v.
SpousesPronstroller, G.R. No. 148444, July 14, 2008).
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery
of fertilizers to her, payable from the proceeds
of the loan that UCPB extended to her. Layson
executed a document called “pagares,” written
on the dorsal side of a UCPB promissory
note. The pagares stated that Layson had an
approved loan with UCPB-Iloilo Branch. The
second portion of the pagares, signed by that
branch’s manager Gregory Grey, stated that the
assignment has been duly accepted and
payment duly guaranteed within 60 days from
PPI’s Invoice. But contrary to her undertakings,
Layson withdrew with branch manager Grey’s
Q: Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB),
secured by a real estate mortgage over their
property, including the house constructed
215
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
connivance, the loan that UCPB granted her. On
the strength of the three documents, PPI
delivered
quantities
of
fertilizers
to
Layson. When PPI presented the documents of
the financed transactions to UCPB for collection,
the bank denied the claim on the ground that it
neither authorized the transactions nor the
execution of the documents which were not part
of its usual banking transactions. UCPB claimed
that branch manager Grey exceeded his
authority in guaranteeing payment of Layson’s
purchases on credit. UCPB contends that the
pagares were illegal and void since banking laws
prohibit bank officers from guaranteeing loans
of bank clients. Is UCPB bound by Grey’s
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment of the
fertilizers Laysonbought?
A. YES. Apparent authority is derived not merely
from practice. Its existence may be ascertained
through (1) the general manner in which the
corporation holds out an officer or agent as having
the power to act or, in other words the apparent
authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of
his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor
or in favor of other parties. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation.
The Court held that Arma Traders is liable to pay the
loans. To begin with, Arma Traders’ Articles of
Incorporation provides that the corporation may
borrow or raise money to meet the financial
requirements of its business by the issuance of
bonds, promissory notes and other evidence of
indebtedness. Likewise, it states that Tan and Uy are
not just ordinary corporate officers and authorized
bank signatories because they are also Arma
Traders’ incorporators.
Furthermore,
Arma
Traders, et al., through Ng who is Arma Traders’
corporate secretary, incorporator, stockholder and
director, testified that the sole management of Arma
Traders was left to Tan and Uy and that he and the
other officers never dealt with the business and
management of Arma Traders for 14 years
A: NO, UCPB is not bound. A corporation like UCPB
is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to
perform acts within the scope of his general or
apparent authority, holding him out to the public as
possessing power to do those acts. But, here, it is
plain from the guarantee Grey executed that he was
acting for himself, not in representation of UCPB.
The latter cannot be bound by Grey’s above
undertaking since he appears to have made it in his
personal capacity. He signed it under his own name,
not in UCPB’s name or as its branch
manager. Indeed, the wordings of the undertaking
do not at all make any allusion to UCPB(UCPB v.
Planters Products, Inc., et al., G.R. No. 179015, June
13, 2012).
Thus, Arma Traders bestowed upon Tan and Uy
broad powers by allowing them to transact with
third persons without the necessary written
authority from its non-performing board of
directors. Arma Traders failed to take precautions
to prevent its own corporate officers from abusing
their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped
from denying Tan and Uy’s authority to obtain loan
from Advance Paper. (Advance Paper Corporation vs.
Arma Traders Corporation, G.R. No 176897,
December 11, 2013).
Q:. Tan was formerly the President of Arma
Traders while Uy is the Treasurer. They
represented Arma Traders when dealing with
its supplier, Advance Paper, for about 14 years.
Upon the representation of Tan and Uy, Arma
Traders was able to obtain a loan from Advance
Paper, which the latter granted due to its good
business relations with Arma Traders.
Arma Traders issued postdated checks signed
by Tan and Yu, who were its authorized bank
signatories. Thechecks were dishonored due to
insufficient balance. Arma Traders failed to
settle the loan despite several demands,
claiming thatthe purchase on credit and the loan
were spurious as the Board of Arma Traders did
not issue a resolution authorizing the same.
Is the Doctrine
applicable?
of
Apparent
Consequences of Ultra Vires Acts
Ultra vires acts entered into by the board of
directors bind the corporation, and the courts will
not interfere unless terms are oppressive and
unconscionable. (Gamboa vs. Victoriano, G.R. No. L43324. May 5, 1979).
These are the effects for the specific acts:
Authority
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
1.
216
Executed contract – courts will not set aside or
interfere with such contracts;
Mercantile Law
2.
3.
4.
Executory contracts – no enforcement even at
the suit of either party (void and
unenforceable);
Partly executed and partly executory –
principle of “no unjust enrichment at expense of
another” shall apply;
Executory contracts apparently authorized
but ultra vires – the principle of estoppel shall
apply.
b.
Remedies in case of ultra vires act
c.
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3.
Creditors- Nullification of contract in fraud of
creditors.
Q: X Corp., whose business purpose is to
manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a
resolution of its Board of Directors. The
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so,
what is the status of the investment? (2011 Bar)
corporation(CC, Sec. 32). Such contract can be
ratified by the vote of the stockholders
representing at least two-thirds of the
outstanding capital stock in a meeting called for
the purpose: Provided, that full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and
reasonable under the circumstances.
Valid – Approval of the stockholders is not
required in declaring cash dividends
Void – This is an ultra vires act on part of XL
Foods Corporation, and is not one of the powers
provided for in Sec. 36 of the Corporation Code.
It can be ratified provided it is not illegal per se
but merely beyond the powers of the
corporation by the approval of the majority of
the board and vote of the stockholders
representing at least two thirds of the
outstanding capital stock. Where the contract
or act is not illegal per se but merely beyond the
power of the corporation, the same is merely
voidable and may be enforced by performance,
ratification, or estoppels, or on equitable
grounds (Republic v. Acoje Mining Co., Inc.)
especially if no creditors are prejudiced thereby
and no rights of the state or the public are
involved(Flecher, p.585).
HOW EXERCISED
BY THE SHAREHOLDERS
The shareholders participate in controlling the
affairs of the corporation by exercising their right to
vote. They can elect the directors who will actually
govern the corporation and they can also vote on
important matters that are still reserved to them by
the Corporation Code(Aquino, 2006).
A: YES, it is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders’
ratification.
Q: Which of the following corporate acts is valid,
void or voidabe?
BY THE BOARD OF DIRECTORS
a.
XL Food Corporation, which is engaged in
the fast-food business, entered into a
contract with its President, Jose Cruz,
whereby the latter would supply the
corporation with its meat and poultry
requirements.
b. The Board of Drectors of XL Foods
Corporation declared and paid cash
dividends without approval of the
stockholders.
c. XL Foods Corporation guaranteed the loan
of its sister company XL Meat Products, Inc.
(2002 Bar)
The Board of Directors is primarily responsible for
the governance of the corporation. Their primary
duty is to set the policies for the accomplishment of
the corporate objectives. (Revised Code of Corporate
Governance, Art. 3).
They elect the officers who carry out the policies
that they have established.
The general rule is that a corporation, through its
Board of Directors, should act in a manner and
within the formalities, if any, prescribed by its
charter or by the general law. Directors must act as
a body in a meeting called for the pursuant to the
law or the corporation’s by laws, otherwise, any
action taken therein may be questioned by any
objecting director or shareholder; but an action of
A:
a. Voidable – A contract of the corporation with
one or more of its directors or trustees or
officers is voidable, at the option of such
217
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
the Board of Directors during a meeting, which was
illegal for lack of notice, may be ratified expressly,
by the action of directors in a subsequent legal
meeting, or impliedly, by the corporation’s
subsequent course of conduct(Lopez Realty, Inc., v.
Fontecha, et al., GR No. 76801, August 11, 1995).
NOTE: Court has recognized the authority of some
corporate officers to sign the verification and
certification against forum shopping. In sum, the
following officials or employees of the company can
sign the verification and certification without need
of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting
General Manager, (4) Personnel Officer, and (5) an
Employment Specialist in a labor case. The rationale
applied in the foregoing cases is to justify the
authority of corporate officers or representatives of
the corporation to sign the verification or certificate
against forum shopping, being in a position to verify
the truthfulness and correctness of the allegations
in
the
petition.
(Mid-Pasig
Land
DevelopmentCorporation v. Tablante, G.R. No.
162924, February 4, 2010).
Q: Sheryl Oabel was initially hired by Maranaw
Hotel as an extra beverage attendant. Oabel
worked in Century Park Hotel, an establishment
owned by the Maranaw Hotels. The latter
contracted with Manila Resource Development
Corporation (MANRED). Subsequently, Oabel
was transferred to MANRED, with the latter
deporting itself as her employer. After
sometime, Oabel filed before the Labor Arbiter a
petition for regularization of employment
against the Maranaw Hotels. However, Oabel
was dismissed from employment. Oabel
converted her petition for regularization into a
complaint for illegal dismissal. The NLRC found
that Oabel was illegally dismissed. Maranaw
Hotels subsequently appealed before the CA.
The CA dismissed the petition on account of the
failure of the Maranaw Hotels to append the
board resolution authorizing the counsel for
Maranaw Hotels to file the petition before the
CA. Maranaw Hotels invokes substantial justice
as justification for a reversal of the resolution of
the CA. It contends that the filing of a motion for
reconsideration with the certificate of nonforum
shopping
attached
constitutes
substantial compliance with the requirement.
Did the petition before the CA comply with the
procedural requirements under the law and the
rules?
Power of directors or trustees to delegate
authority
GR: The board may validly delegate, either
expressly or impliedly, some of its powers and
functions to other officers or agents of the
corporation appointed by it. (Yu Chuck v. Kong Li Po,
G.R. No. L-22450, December 3, 1924).
XPNS:
1. Discretionary powers which, by provisions of
law or the by-laws or by the vote of the
stockholders, are vested exclusively in the
board of directors. (Bliss v. Kaweah Canal, etc.,
65 Cal. 502, August 18, 1884);
2. They cannot delegate entire supervision and
control of the corporation to others for this is
not only unnecessary and contrary to usage, but
it is inconsistent with Section 23 of the
Corporation Code; and
3. Neither can the board delegate special powers
especially conferred upon it by a resolution of
the stockholders or members of the
corporation.
A: NO. Well-settled is the rule that the certificate of
non-forum shopping is a mandatory requirement.
Substantial compliance applies only with respect to
the contents of the certificate but not as to its
presence in the pleading wherein it is required.
Furthermore, the lawyer acting for the corporation
must be specifically authorized to sign pleadings for
the corporation. Specific authorization, the Court
held, could only come in the form of a board
resolution issued by the Board of Directors that
specifically authorizes the counsel to institute the
petition and execute the certification, to make his
actions binding on his principal, i.e., the corporation.
The SC has not wavered in stressing the need for
strict adherence to procedural requirements. The
rules of procedure exist to ensure the orderly
administration of justice. They are not to be trifled
with lightly. (Maranaw Hotels and Resort
Corporation v. CA, et al., G.R. No. 149660, January 20,
2009).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
BY THE OFFICERS
After the election of directors, the latter must
formally organize by electing the corporate officers.
(Sec. 25, CC).
The corporate officers are tasked to carry out the
policies laid down by the Board, the AOI and the bylaws.
Corporate officer’s position
1. An “office” that is created by the charter of the
corporation; and
218
Mercantile Law
2. The officer is elected by the directors or
stockholders (Easycall Communications Phils.,
Inc. v. King, G.R. No.145901, December 15, 2005).
B. Who can be appointed Corporate Secretary?
(Bar 2012)
A: A. The Corporation Code does not impose any
nationality or residency requirement in respect of
the Treasurer. Any such requirement or any other
reasonable requirement may be adopted by the
corporation and reflected in its by-laws, or required
by the law(s) governing the business of the
corporation or a law of general application (e.g., the
AntiDummy Law which applies to all nationalized
businesses). Accordingly, anybody with the
qualifications required under the by-laws of the
corporation or under the law(s) governing the
business of the corporation, could be elected
Treasurer by the Board of Directors. However, the
Treasurer could not be President at the same time.
Limitations on the holding of a corporate
officer’s position
Any two or more positions may be held
concurrently by the same person, except that no one
shall act as president and secretary or as president
and treasurer at the same time. (CC, Sec. 25).
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing
Quezon City. Z is a resident alien residing in
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y.
NOTE: the treasurer must be a resident of the
Philippines (section 24 of the Revised Corporation
Code)
B. The Secretary is required to be both a resident
and a citizen of the Philippines.
A. Who are qualified to act as Treasurer of the
company?
Positions of corporate officers to be filled up by the Directors
CORP. OFFICER
Secretary
MEMBERSHIP REQUIREMENT
1. Must be a director at the time he
assumes office
2. Must be the stockholder on record
of at least 1 share of stock
May or may not be a director, unless
required by the by-laws
Treasurer
May or may not be a director
Such
other
officers as may
be provided in
the by-laws
Qualifications may be provided for in the by-laws
President
CITIZENSHIP
Need NOT be
Filipino Citizen
RESIDENCY
a
Need NOT be a Philippine
Resident
Must be a Filipino
Citizen
Need NOT be a
Filipino Citizen
Must be a Philippine
Resident
Must be a Philippine
Resident
Corporate officer vs.Corporate employee
CORPORATE OFFICER
Position is provided for in the by-laws or under the
Corporation Code.
RTC acting as a special commercial court has
jurisdiction over intra-corporate controversies.
Power to amend/repeal articles cannot be delegated
by the stockholders/ members to the board of
directors/ trustees
A party in a suit against a corporation cannot
compel the latter’s officers to appear as
witnesses without first serving written
CORPORATE EMPLOYEE
Employed by the action of the managing officer of
the corporation.
Labor Arbiter has jurisdiction in case of labor
disputes.
Power to amend or repeal by-laws or adopt new bylaws may be delegated by the 2/3 of the outstanding
capital stock or 2/3 of the members in the case of
non-stock corporation
interrogatories upon the latter, as said officers
are also considered as adverse parties
219
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
In a complaint for nullification of mortgage and
foreclosure with damages against the mortgageebank, the plaintiff cannot compel the officers of the
bank to appear and testify as plaintiff’s initial
witnesses unless written interrogatories are first
served upon the bank officers. This is in line with
d.
Settled jurisprudence, however, qualifies that when
the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
disputes and claims for damages arising from
employer-employee relations as provided in Article
217 of the Labor Code. Consistent with this
jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time
the subject controversy developed failed to
necessarily make the case an intra-corporate
dispute. Applying the case of Matling Industrial and
Commercial Corporation v. Coros, to the present
case, the LA had the original jurisdiction over the
complaint for illegal dismissal because Cosare,
although an officer of Broadcom for being its AVP
for Sales, was not a “corporate officer” as the term is
defined by law(Raul C. Cosare v. Broadcom Asia, Inc.,
et al., G.R. No. 201298, February 5, 2014).
the Rules of Court provision that calling the adverse
party to the witness stand is not allowed unless
written interrogatories are first served upon the
latter. This is because the officers of a corporation
are considered adverse parties as well in a case
against the corporation itself based on the principle
that corporations act only through their officers and
duly authorized agents (Spouses Afulugencia v.
Metropolitan Bank and Trust Co., G.R. No. 185145,
February 5, 2014, in Divina, 2014).
Q: Arevalo set up Broadcom with Cosare, his
former employee, as an incorporator. Cosare
was later promoted to the position of Assistant
Vice-President for Sales and Head of the
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became
Cosare’s immediate superior. Later, Cosare sent
a confidential memo to Arevalo to inform him of
the anomalies which were allegedly being
committed by Abiog against the company.
Subsequently, Cosare was totally barred from
entering the company premises. Cosare
attempted to furnish the company with a memo
by which he addressed and denied the
accusations cited in Arevalo’s memo. Soon after,
Cosare filed a labor complaint, claiming that he
was constructively dismissed from employment
by Broadcom and Arevalo. CA ruled that the case
is an intra-corporate controversy and is under
the RTC’s jurisdiction.
Q: Respondents filed a motion to dismiss the
complaint filed against them where some of the
issues include whether the withdrawals and
disbursements are in accordance with the ByLaws and whether there was a complete, audited
report and accounting of all the corporate funds.
The RTC dismissed the case. Is the RTC correct?
A: No. Based on Section 8, Rule 1 of the Interim
Rules
of
Procedure
for
Intra-Corporate
Controversies, in cases involving an intra-corporate
dispute, a motion to dismiss is a prohibited
pleading. (ALDERSGATE v. JUNIFEN GR No. 192951
Nov 14, 2012)
Awards for damages
Controversies
Is the CA correct?
A: NO. The Court has determined that contrary to
the ruling of the CA, it is the LA, and not the regular
courts, which has the original jurisdiction over the
subject
controversy.
An
intra-corporate
controversy, which falls within the jurisdiction of
regular courts, has been regarded in its broad sense
to pertain to disputes that involve any of the
following relationships:
a.
b.
c.
in
Intra-Corporate
As can be gleaned from the title of A.M. No. 01-2-04SC, the amendment of Section 4, Rule 1 of the
Interim Rules of Procedure Governing IntraCorporate Controversies was crafted precisely to
clarify the previous rule that decisions on intracorporate disputes are immediately executory, by
specifically providing for an exception. Thus, the
prevailing rule now categorically provides that
awards for moral damages, exemplary damages,
and attorney’s fees in intra-corporate controversies
are not immediately executor. (Heirs of Santiago
Divinagracia, v. Ruiz, G.R. No. 172508, Janaury 12,
2011).
Between the corporation, partnership or
association and the public;
Between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned;
Between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Among the stockholders, partners or associates,
themselves.
TRUST FUND DOCTRINE
The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
220
Mercantile Law
corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latter’s unpaid
subscription. (2015 Bar)
The Code allows distribution of corporate capital
only in instances of:
1.
2.
Effects of the trust fund doctrine
1.
2.
3.
Dividends must never impair the subscribed
capital stock and must only be declared out of
unrestricted retained earnings (URE).
Subscription commitments cannot be condoned
or remitted
GR: The corporation cannot buy its own shares
using the subscribed capital as the
consideration therefore (NTC v. CA, G.R. No.
127937. July 28, 1999).
3.
Proper scope of the Trust Fund doctrine
Solvent Corporation
Encompasses only the
capital stock of the
corporation. It does
NOT
cover
unrestricted retained
earnings (Villanueva,
2018)
XPN: (ReDeC)
a.
b.
c.
4.
Amendment of the AOI to reduce authorized
capital stock;
Purchase of redeemable shares by the
corporation regardless of existence of
unrestricted retained earnings; or
Dissolution and eventual liquidation of the
corporation.
Redeemable shares may be acquired even
without surplus profit for as long as it will
not result to the insolvency of the
Corporation;
In cases that the corporation conveys its
stocks in payment of a Debt; or
In a Close corporation, a stockholder may
demand the payment of the fair value of
shares regardless of existence of retained
earnings for as long as it will not result to
the insolvency of the corporation
Insolvent
Corporation
Encompasses not only
the capital stock, but
also other property
and assets (Divina,
2015)
The trust fund doctrine covers not only capital
stock but also unpaid subscriptions, and other
corporate property and assets.
The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock,
but also other property and assets generally
regarded in equity as a trust fund for the payment of
corporate debts. The creditor is allowed to maintain
an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for
the satisfaction of the debt. Subscriptions to the
capital stock of a corporation constitute a fund to
which creditors have the right to look for
satisfaction of their claims (Halley v. Printwell, Inc.,
G.R. No. 157549, May 30, 2011, in Divina, 2014).
Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation (Ong v Tiu, ibid)
NOTE: Rescission of a subscription agreement is not
one of the instances when distribution of capital
assets and property of the corporation is allowed
(Ibid).
Q: A corporation executed a promissory note
binding itself to pay its President/ Director, who
had tendered his resignation, a certain sum in
payment of the latter’s shares and interests in
the company. The corporation defaulted in
paying the full amount so that the said former
President filed suit for collection of the balance
before the SEC. Is the arrangement between the
corporation and its President covered by the
trust fund doctrine? (Bar 1992)
When negotiations ensued in the light of a planned
takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may
take the machineries he brought to the corporation
out with him for his own use and sale, the previous
stockholder cannot recover said machineries and
equipment because these properties remained part
of the capital property of the corporation. Under the
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets (Yamamoto v.
Nishino Leather Industries, Inc., G.R. No. 150283,
April 16, 2008).
A: The arrangement between the corporation and
its President to the extent that it calls for the
payment of the latter’s shares is covered by the trust
fund doctrine. The only exceptions from the trust
fund doctrine are the redemption of redeemable
shares and, in the case of close corporation, when
there should be a deadlock and the SEC orders the
Exceptions to the trust fund doctrine
221
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
payment of the appraised value of a stockholder’s
share.
The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-BO)
BOARD OF DIRECTORS
AND TRUSTEES
1. Corporations whose: (Re-Li-Ass)
a. Securities are registered with the
Commission
b. Corporations listed with an exchange
c. Corporations with:
c.1. assets of at least 50 Million Pesos;
c.2. having 200 or more shareholders;
c.3. each shareholder holding at least 100
shares of a class of its equity shares
DOCTRINE OF CENTRALIZED MANAGEMENT
GR: The Doctrine of Centralized Management states
that all corporate powers are exercised by the BOD
or BOT. (CC, Sec. 23)
The Board is the body which: (ExBuCo)
2. (B-PIN-PEF): Banks, quasi-banks, preneed,
insurance and trust companies, nonstock savings
and loan associations, pawnshops, corporations
engaged in money service business and other
financial intermediaries; and
(1) Exercises all powers provided for under the
Corporation Code;
(2) Conducts all Business of the corporation; and (3)
Controls and holds all the properties od the
corporation (CC, Sec 23 [RCC, Sec 22])
3. Other corporations engaged in business vested
with public interest similar to the above, as may be
determined by the Commission, after taking into
account relevant factors which are germane to the
objective and purpose of requiring the election of
independent director
XPN: The doctrine is not applicable to the following
instances:
1.
2.
3.
In case of delegation to the Executive
Committee duly authorized in the by-laws;
Authorization pursuant to a contracted
manager which may be an individual, a
partnership, or another corporation; and
In case of close corporations, the stockholders
may manage the business of the corporation
instead of a board of directors, if the articles of
incorporation so provide.
[New provision in RCC]
Factors to consider by the Commission in
determining a coporation engaged in business with
public interest: ExTyPO
1. Extent of minority ownership
2. Type of financial products or securities issued or
offered to investors
3. Public interest involved in the nature of business
operations
4. Other analogous factors
Independent director
An independent director is a person who apart from
shareholdings and fees received from the
corporation, is independent of management and
free from any business or other relationship which
could, or could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director. (RCC, Sec 22)
Required number of independent directors for
the corporations covered by the Revised Code of
Corporate Governance (RCCG)
are
At least two (2) or such number of independent
directors that constitute 20% of the members of the
board, whichever is lesser, but in no case less than
two (2) (RCCG, Art. 3 [A]).
At least two (2) independent directors are required
in the following companies:
Q: May the composition of the board of directors
of the National Power Corporation be validly
reduced to three (3)? (2008 Bar)
Cases where
required
1.
2.
3.
independent
directors
A: YES. NPC is a government owned and controlled
corporation created by a special charter. Its charter
allows composition of its board of directors to be
reduced. As clearly enunciated in Section 16, Article
XII, 1987 Constitution: Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private corporations.
Any corporation with a class of equity securities
listed for trading on an Exchange (Publicly
traded companies);
Banks; and
Corporations with secondary franchise.
[New provision in RCC:]
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
222
Mercantile Law
The prohibition under the Corporation Code only
applies to private corporations. Since NPC is not
governed by the Corporation Code, the standard
number of directors is not required.
BUSINESS JUDGMENT RULE
6.
Questions of policy or management are left solely to
the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the
board of directors; the board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts or the SEC. (Montelibano v. Bacolod-Murica
Milling Co., G.R. No. L-15092, May 18, 1962; Phil.
Stock Exchange, Inc. v. Ca, G.R. No. 125469, October
27, 1997).
Requirement for the Business Judgment Rule to
apply:
1. Presence of a business decision including
decisions
on
policy
management
and
administration;
2. The decision must be intra vires and must comply
with the procedural and substantive requirements
of law;
3. Good faith
4. Due care in making the decision;
5. The director must not have personal interest or
nor self-dealing or otherwise on breach of the duty
of loyalty. (Villanueva, 2018)
GR: Contracts intra vires entered into by the board
of directors are binding upon the corporation
beyond the interference of courts. The courts are
barred from intruding into business judgments of
corporations, when the same are made in good faith
(Ong v Tiu, G.R. No. 144476. April 8, 2003).
XPNs: Courts can inquire unto contracts which are:
1.
2.
Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority
(Ong v Tiu, ibid); or
When there is bad faith or gross negligence by
the directors (Republic Communications Inc v
CA, G.R. No. 135074, January 29, 1999).
Q: PALI sought to offer its shares to the public in
order to raise funds for development of
properties and pay its loans with several banks.
To facilitate the trading of its shares, PALI
applied for a listing in the Philippine Stock
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
of PALI are owned by Marcos. Consequently, PSE
rejected PALI’s application. The SEC reversed
the ruling of the PSE. Is the SEC correct?
Consequences of Business Judgment Rule
1.
2.
3.
4.
5.
become liable, whether civilly or otherwise, for
the consequences of their acts, which are
properly attributed to the corporation alone
(Benguet Electric Cooperative, Inc. v. NLRC,GR
89070, May 18, 1992).
The power to elect corporate officers was a
discretionary power that the law exclusively
vested in the Board of Directors and could not
be delegated to subordinate officers or agents
(Matling
Industrial
and
Commercial
Corporation, et al. v. Coros, G.R. No. 157802,
October 13, 2010).
Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders.
Directors and officers acting within such
business judgment cannot be held personally
liable for such acts.
If the cause of the losses is merely error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable (Filipinas Port Services v. Go, G.R. No.
161886, March 16, 2007).
The Board of Directors has the power to create
positions not provided for in the corporation's
by-laws since the board is the corporation’s
governing body, clearly upholding the power of
its board to exercise its prerogatives in
managing the business affairs of the
corporation (Filipinas Port Services v. Go, supra).
Directors and officers who purport to act for the
corporation, keep within the lawful scope of
their authority and act in good faith, do not
A: NO. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing
(PSE v. CA, G.R. No. 125469, October 27, 1997).
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR
TRUSTEES
Term of office of BOD/BOT
223
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
GR: The regular director shall hold office for 1 year.
1.
[Amendment in RCC, Sec 22: a trustee may be
elected for a period not exceeding 3 years
2.
For a director, the rule remains the same {1 year}].
XPN: If no election is held, the directors and officers
will continue to occupy position even after the lapse
of 1 year under a hold-over capacity until their
successors are elected and qualified.
3.
4.
NOTE: This is applicable to a going concern where
there is no break in the exercise of the duties of the
officers and directors (SEC Opinion, Dec. 15, 1989).
A director cannot be elected without owning any
stock in the corporation
Term, Tenure, and Holdover Period
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before
assuming the duties of his office (SEC Opinions,
November 9, 1987 & April 5, 1990).
Term – time during which the officer may claim to
hold the office as a matter of right, and fixes the
interval after which the several incumbents shall
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and
does not change simply because the office may have
become vacant, nor because the incumbent holds
office beyond his term when a successor has not
been elected.
Sec. 30 of the Corporation Code requires directors
to own the shares of stock in their own right.. To be
eligible to be a director, it is not required that he
owns legal title to the share of stock. It suffices that
he posseses a beneficial ownership in the books
of the corporation. A trustee is a stockholder of
record. (Lee v. CA, G.R. No. 93695, February 4, 1992).
Consequently, The omission of the phrase “in his
own right” in Section 23 of the Revised
Corporation Code means that in order to be
eligible to be elected to the Board and to remain a
member thereof, what is material is lega title
thereto, beneficial ownership being insufficient.
(RCC Annotated Aquino, Cruz 2019)
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.
Holdover Period – the time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor
is it a new term; the holdover period, however,
constitutes part of his tenure (Valle Verde Country
Club v. Africa, G.R. No. 151969, September 4, 2009).
Both under the old and the new Corporation Codes,
there is no dispute as to the most immediate effect
of a Voting Trust Agreement (VTA) on the status of
a stockholder who is a party to its execution - from
legal titleholder or owner of shares subject of the
VTA, he becomes equitable or beneficial owner. Any
director who executes a VTA over all his shares
ceases to be a stockholder of record in the books of
the corporation and therefore ceases to be a
director (Lee v. CA, G.R. No. 93695, February 4, 1992)
Duties of Directors/Trustees: (OLD)
1) Duty of Obedience – the directors should direct
the affairs of the corporations only in
accordance with the purposes for which it was
organized.
2) Duty of Diligence – The directors should not
willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act
in bad faith or with gross negligence in directing
the affairs of the corporation.
3) Duty of Loyalty – The directors should not
acquire any personal or pecuniary interest in
conflict with their duty as directors
Q: Grace Christian High School is an educational
institution at the Grace Village in Quezon City
while Grace Village Association, Inc., is an
organization of lot and/or building owners,
lessees and residents at Grace Village. From
1975 up to 1990, Grace Christian High School
was given a permanent seat in the board of
directors of the association. After some time,
the association’s committee on election
informed James Tan, the principal of the school
that all directors should be elected by members
Common qualifications of a director and trustee
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Majority of the directors/trustees must be
residents of the Philippines (CC, Sec. 23).
He must not have been convicted by final
judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
violation of the Corporation Code, committed
within 5 years prior to the date of his election
(CC, Sec. 27).
He must be of legal age
Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation.
224
Mercantile Law
of the association. Tan was told that the
proposal to make the Grace Christian High
School representative as a permanent director
of the association, although previously tolerated
in the past elections should be reexamined.
Grace Christian High School argues that it had
acquired a vested right to a permanent seat in
the board of directors. Did Grace Christian High
School acquire vested right to a permanent seat
in the board of directors?
the decision of the SEC is final and executory unless
appealed in CA and a TRO is obtained
[Amendment in RCC, Sec 26:]
A person shall be disqualified from being a director,
trustee or officer of any corporation if, within 5
years prior to election or appointment of such, the
person was: (ConFoFo)
(a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a
period exceeding 6 years;
(2) violation of the Corporation Code;
(3) Violation of RA 8799 (SRC)
A: NO. The board of directors of corporations must
be elected from among the stockholders or
members. Sec 23 of the CC [Sec 22, RCC] provides
that unless otherwise provided, the corporate
powers of all corporations formed under this Act
shall be exercised, all business conducted and all
property of such corporations controlled and held
by a board of not less than five nor more than eleven
directors to be elected from among the holders of
stock or, where there is no stock, from the members
of the corporation
(b) Found administratively liable for any offense
involving fraudulent acts; and
(c) By a foreign court or equivalent foreign
regulatory authority for acts, violations or
misconduct similar to those enumerated in
paragraphs (a) and (b) above
Since the provision in question is contrary to law,
the fact that for fifteen years it has not been
questioned or challenged but, on the contrary,
appears to have been implemented by the members
of the association cannot forestall a later challenge
to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is
beyond the power of the members of the association
to waive its invalidity (Grace Christian High School v.
CA, et al., G.R. No. 108905, October 23, 1997).
Q: John Gokongwei Jr., as stockholder of San
Miguel Corporation, filed with SEC a petition for
declaration of nullity of amended by-laws
against the majority of the members of the
Board of Directors and San Miguel Corporation.
Gokongwei claimed that prior to the questioned
amendment, he had all the qualifications to be a
director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired
rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
election of directors, and that in amending the
by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
of his vested right as aforementioned, hence the
amended by-laws are null and void. Is a
provision on the by-laws disqualifying a person
for a position in the board of directors on the
ground that he is engaged in a business which
competes with that of the Corporation valid?
Additional qualifications provided by the
Revised Code of Corporate Governance
A director should have the following:
1.
2.
3.
4.
College education or equivalent academic
degree;
Practical understanding of the business of the
corporation;
Membership in good standing in relevant
industry,
business
or
professional
organizations; and
Previous business experience (RCCG, Art. 3 [D])
Grounds
for
director/trustee
disqualification
of
A: YES. A corporation is authorized to prescribe the
qualifications of its directors. A provision in the bylaws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
board of directors if he is engaged in any business
which compete with that of the Corporation is valid;
provided, however, that before such nominee is
disqualified, he should be given due process to show
that he is covered by the disqualification. A director
stands in fiduciary relation to the corporation and
its stockholders. The disqualification of a
competitor from being elected to the board of
directors is a reasonable exercise of corporate
authority. Sound principles of corporate
management counsel against sharing sensitive
a
1.
Conviction by final judgment of an offense
punishable by imprisonment exceeding 6
years;or
2. Violation of the Corporation Code committed
within 5 years prior to his election or
appointment (CC, Sec. 27).
NOTE: Disqualification by reason of violation of the
CC does not require conviction for the reason that
225
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
information with a director whose fiduciary duty to
loyalty may well require that he discloses this
information to a competitive rival. When a person
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a
majority of the stockholders (Gokongwei v. SEC, et
al., G.R. No. L-45911, April 11, 1979).
of age, and daughter of Y. Who are qualified to
become members of the board of directors of the
corporation? (2012 Bar)
A: X, Y, Z and T could be directors (subject to the
residency requirement mentioned in (a) above and
any nationality requirement under the law
governing the business of the corporation) but not
GGG Corporation, CCC Corporation, and KKK
Corporation as they are not natural persons.
However, the aforementioned corporations could
have their respective representatives nominated
and possibly elected as directors by the
stockholders. Each director must own at least one
share of the capital stock of the corporation.
Foreigners are not disqualified from being
elected/ appointed as members of the BOD
While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly
or partially nationalized business activities, they are
allowed representation in the BOD or governing
body of said entities in proportion to their
shareholding (Anti-Dummy Law, Sec. 2-A;
1987Constitution, Art. XII, Sec. 11).
ELECTIONS
Requirements and limitations for the election of
directors or trustees
REASON: The BOD/ governing body performs
specific duties as a “body”. Unlike corporate officers,
each member of the BOD/ governing body has no
individual power or authority to perform
management functions (De Leon, supra).
1.
Q: A Korean national joined a corporation and
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
(2005 Bar)
[New ways to vote in RCC, Sec 24]:
Through remote communication or in absentia
GR: it must be provided in the by-laws
XPN: the right to vote through such modes may
be exercised in corporations vested with public
interest notwithstanding the absence of a
provision in the bylaws of such corporations
A: YES. The Korean national can still be a member
of the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos.
Corporations that are sixty percent (60%) owned by
Filipinos can engage in the business of exploration,
development and utilization of natural resources
(1987 Constitution, Art. XII, Sec. 2). The election of
aliens as members of the Board of Directors
engaging in partially-nationalized activities is
allowed in proportion to their allowable
participation or share in the capital of such entities
(Anti-Dummy Law, Sec. 2-A). Nothing in the facts
shows that more than forty percent (40%) of the
Board of Directors are foreigners.
2.
The election must be by ballot, if requested by
any voting stockholder or member.
3. The total number of votes cast by him must not
exceed the number of shares owned by him as
shown in the books of the corporation
multiplied by the whole number of directors to
be elected.
4. No delinquent stock shall vote or be voted for.
5. A stockholder cannot be deprived in the articles
of incorporation or in the by-laws of his statutory
right to use any of the methods of voting in the
election of directors.
6. The candidates receiving the highest number of
votes shall be declared elected (CC, Sec. 24 [RCC, Sec
23]).
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in
Quezon City. Z is a resident alien residing in
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
Presence of Stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy.
Reportorial requirement
Within 30 days after the election of directors,
trustees and officers of the corporation, the
secretary or any other officer of the corporation,
shall submit to the Commission, the names,
shareholdings, and residence addresses of the
directors, trustees and officers elected.
226
Mercantile Law
Permanent representation is not allowed in the
BOD
The board of directors of corporations must be
elected from among the stockholders or
members directors every year. Estoppel does not set
in to legitimize what is wrongful (Grace Christian
High School v. CA, G.R. No. 108905, October 23, 1997).
elected as a director at the stockholders’ meeting.
Only the candidates receiving the highest number of
votes shall be declared elected.
Jurisdiction over election contests in stock and
non-stock corporations
1.
As amended by R.A. 8799 (The Securities Regulation
Code), the jurisdiction of the SEC under Sec. 5 P.D.
No. 902‐A (SEC Reorganization Act) is now
transferred to Courts of General Jurisdiction
(Regional Trial Court). Thus, RTC now has
jurisdiction over election contest.
2.
METHODS OF VOTING
Different methods of voting
3.
Q: In case where there are 2 lists of BOD
submitted to SEC, which one is controlling?
A: It is the list of directors in the latest general
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA,
G.R. No. 96551, Nov. 4, 1996).
Straight voting – every stockholdermay vote
such number of shares for as many persons as
there are directors to be elected.
Cumulative voting for one candidate – a
stockholder is allowed to concentrate his 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.
Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit.
Cumulative voting in stock v nonstock
Cumulative voting in case of non-stock corporations
is allowed only if it is provided in the AOI. The
members of non-stock corporations may cast as
many votes as there are trustees to be elected but
may cast not more than one vote for one candidate.
Cumulative voting is mandatory in stock
corporations to protect the rights of minority
stockholders
Q: At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G
were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed
elected. F received ten votes less than E.
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation
Code provides that directors “shall hold office
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that
since he would have been elected as a director
had it not been for E’s nomination and election,
then he (F) should now be considered a director
as he had acquired all the shares of E. Decide
with reasons. (1984 Bar)
NON-HOLDING OF ELECTIONS
Report
Within 30 days from the date of the scheduled of
election. The report shall specify a new date for the
election, which shall not be later than 60 days from
the scheduled date (Sec 25, RCC)
Summary order of Commission
If:
(1) No new date has been designated; or
(2) If the rescheduled election is likewise not
held;
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
transfer of all his shares to F in the books of the
corporation. Every director must own at least one
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least 1 share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s
claims are without merit since he was not duly
The Commission, may, upon the application of the
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the
election, summarily order that an election be held.
The Commission shall have power the power to
issue orders as may be appropriate , including:
(1) Orders directing the issuance of a notice
stating the time and place of election;
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
(2) The designated presiding officer; and
(3) The record date or dates for the
determination fo stockholders or members
entitled to vote (Sec 25, RCC).
1.
A special meeting for the purpose of removing
directors or trustees may be called by:
QUORUM
Quorum required in a stock or non-stock
corporation
(1) The secretary, on order of the president; or
(2) The secretary, upon written demand of the
stockholders representing or holding at
least a MAJORITY of the capital stock or
MAJORITY of the members entitled to vote;
Unless otherwise provided for in the by-laws, a
quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock entitled to vote or a majority of the members
in the case of non-stock corporations (CC, Sec. 52).
2.
3.
When the stock and transfer book is inaccurate
and deficient, it cannot be the sole basis of the
quorum. The AOI may be used as the basis of the
quorum.
Previous notice to the stockholders or members
of the intention to remove a director;and
A vote of the stockholders representing 2/3 of
outstanding capital stock or 2/3 of members.
Remedy for refusal to call a meeting
If there is:
(1) No secretary; or
(2) If the secretary, despite demand, fails or
refuses to call the special meeting or to give
notice thereof
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the
issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the
owners and/or successors in interest of the said
shares. This case is one instance where resort to
documents other than the stock and transfer books
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as
compared to that listed in the stock and transfer
book (Lanuza, et al. v. CA, et al., G.R. No. 131394,
March 28, 2005).
The stockholder or member signing the demand
may call for the meeting by directly addressing the
stockholders or members
New Power of SEC under
Corporation Code (Sec 27, RCC)
the
Revised
The Commission shall, motu propio or upon verified
complaint, and after due notice and hearing, order
the removal of a director or trustee elected despited
the disqualification or whose disqualification arose
is discovered subsequent to an election.
REMOVAL
NOTE: The removal of a disqualified director shall
be without prejudice to other sanctions that the
Commission may impose on the board of directors
or trustees who, with knowledge of the
disqualification, failed to remove such director or
trustee.
Power to remove directors or trustees
The power to remove belongs to the stockholders
exclusively (Sec. 28, CC).
GR: Removal may be with or without cause
Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
of the directors want him removed and his
shares be sold at auction, so he can no longer
participate even in the stockholder’s meetings.
Henry approaches you for advice on whether he
can be removed as board of director and
stockholder without cause. What is your advice?
Explain “amotion” and the procedure in
removing a director. (2016 Bar)
XPN: If the director was elected by the minority,
there must be cause for removal because the
minority may not be deprived of the right to
representation to which they may be entitled under
Sec. 24 of the Code (Sec. 28, CC).
NOTE: The right of representation referred to is the
right to cumulative voting for one candidate under
Sec. 24 of the Code.
A: Henry cannot be removed by his fellow directors.
The power to remove belongs to the stocjholders.
Requisites for removal of directors or trustees
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
It must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose;
228
Mercantile Law
He can only be removed by the stockholders owning
at least 2/3 of the outstanding capital stock in a
meeting called for that purpose. The removal may
be with or without cause except that in this case, the
removal must be with cause because it is intended
to deprive the minority of the right of
representation.
the remaining directors constituting a quorum is
merely permissive. Corporations may choose how
vacancies in their boards may be filled up, either by
the remaining directors or trustees constituting a
quorum or by all stockholders or members.
However, if the by-laws prescribe the specific mode
of filling up existing vacancies, the provisions of the
by-laws should be followed (De Leon, supra).
Amotion is the premature ousting of a director or
officer from his post in the corporation.
Duration of the term of a replacement director
Q: In 1999, Corporation A passed a board
resolution removing X from his position as
manager of said corporation. The by‐laws of A
corporation provide that the officers are the
president, vice‐president, treasurer and
secretary. Upon complaint filed with the SEC, it
held that a manager could be removed by mere
resolution of the board of directors. On motion
for reconsideration, X alleged that he could only
be removed by the affirmative vote of the
stockholders representing 2/3 of the
outstanding capital stock. Is X's contention
legally tenable. Why? (2001 Bar)
A director elected to fill vacancy shall serve the
unexpired term of the predecessor in office (CC, Sec.
29).
Filling-up a vacancy caused by resignation of a
director in a hold-over position
The vacancy caused by resignation of a director in a
hold-over position can only be filled up by the
stockholders or members, for the cause of vacancy
is not resignation but by expiration of term because
the hold-over period is not a part of the director’s
original term of office, nor is it a new term (De Leon,
supra).
A: N0. 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.
Emergency Board (Sec 28, RCC)
When to call for an Emergency Board
When the vancacy prevents the remaining directors
from constituting a quorum and emergency action
is required to prevent grave, substantial, and
irreparable loss or damage to the corporation
FILLING OF VACANCIES
Ways of filling up the vacancies in the board
1.
2.
Vacancies to be filled up by stockholders or
members: (ERORI)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration
of term, where the remaining directors do
not constitute a quorum for the purpose of
filling the vacancy;
d. If the vacancy may be filled by the
remaining directors or trustees but the
board Refers the matter to stockholders or
members; or
e. Increase in the number of directors results
to vacancy.
Who who fill the vacancy
It may be temporarily filled from among the officers
of the corporation
Voting requirement
He will be elected by a UNANIMOUS vote of the
remaining directors or trustees
Limitations and Cessation
It shall be limited to the emergency action necessary
and term shall cease within:
(a) Reasonable time from the termination of
the emergency action; or
(b) Upon election of the replacement director
or trustee,
Whichever comes earlier
Vacancies filled up by members of the board
-If still constituting a quorum, at least a majority
of the members are empowered to fill any
vacancy occurring in the board other than by
removal by the stockholders or members or by
expiration of term (CC, Sec. 29. RCC, Sec 28).
Reportorial requirement
The corporation must notify the Commission within
3 DAYS from the creation of the emergency board,
stating therein the reason for its creation
NOTE: The phrase “may be filled” in Sec. 29
indicates that the filling of vacancies in the board by
Period of election to fill a vacancy
229
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
Grounds:
(1) Tem expiration- No later than the day of such
expiration at a meeting called for the purpose;
(2) Result of removal by the stockholders or
members – on the same day the meeting authorizing
the removal and this fact must be stated in the
agenda and motice of said meeting
(3) In all other cases -45 days from the time the
vacancy arose (Sec 28, RCC)
not change the nature of the vacancy; the vacancy
due to the expiration of Makalintal’s term had been
created long before his resignation (Valle Verde
Country Club, Inc., et al., v. Africa, G.R. No. 151969,
September 4, 2009; 2013 Bar).
The derivative suit was improper. In a derivative
suit, the corporation, not the individual stockholder,
must be the aggrieved party and that the
stockholder is suing on behalf of the corporation.
What stockholder X is asserting is his individual
right as a stockholder to elect the two directors. The
case partake more of an election contest under the
rules on intra-corporate controversy (Legaspi
Towers 300, Inc. v. Muer, G.R. No. 170783, June 18,
2012).
Q: Dinglasan and Makalintal were elected as
new members of the board of directors of Valle
Verde Country Club, Inc. (VVCC). In the
succeeding years however, the requisite
quorum for the holding of the stockholders’
meeting could not be obtained. Consequently,
Dinglasan and Makalintal continued to serve in
the VVCC Board in a hold-over capacity.
Subsequently, Dinglasan resigned from his
position as member of the VVCC Board. In a
meeting, the remaining directors, still
constituting a quorum of VVCC’s nine-member
board, elected Eric Roxas to fill in the vacancy
created by the resignation of Dinglasan. A year
later, Makalintal also resigned as member of the
VVCC Board. He was replaced by Jose Ramirez,
who was elected by the remaining members of
the VVCC Board. Victor Africa, a member of
VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the
SEC and the RTC. May the remaining directors of
the corporation’s Board, still constituting a
quorum, elect another director to fill in a
vacancy caused by the resignation of a hold-over
director?
COMPENSATION
Compensation of directors/trustees
GR: Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
NOTE: Directors or trustees shall not participate in
the determination of their own per dierms or
compensation (Sec 29, RCC)
XPNs:
1. When their compensation is fixed in the bylaws;
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or special
meeting; or
3. If they perform services other than as directors
of the corporation (i.e. where directors are also
corporate officers or employees of the
corporation) (Sec. 30, CC).
A: NO. The remaining directors of the corporation’s
Board, even if still constituting a quorum, cannot
elect another director to fill in a vacancy caused by
the resignation of a hold-over director. Section 23 of
the CC means that the term of the members of the
board of directors shall be only for one year; their
term expires one year after election to the
office. The holdover period – that time from the
lapse of one year from a member’s election to the
Board and until his successor’s election and
qualification – is not part of the director’s
original term of office, nor is it a new term; the
holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a
holdover capacity, it implies that the office has a
fixed term, which has expired, and the incumbent is
holding the succeeding term. With the expiration of
Makalintal’s term of office, a vacancy resulted
which, by the terms of Section 29 of the Corporation
Code, must be filled by the stockholders of VVCC in
a regular or special meeting called for the
purpose. His resignation as a hold-over director did
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
NOTE: Per diems are paid attendance in board
meetings. Other benefits and emoluments of
directors fall within the term “compensation.”
BOD is not prohibited from securing an
insurance policy for the life of its members and
making the directors the beneficiaries instead of
the corporation
The Insurance Code does not contain any
prohibition as to such. However, the premium paid
thereon is analogous to a continuing bonus and gift
and thus falls within the context of additional
compensation. A corporation may not be used by its
officers or stockholders as a means of diverting
profits or proceeds to the payment of premium on
insurance policies to the enrichment of its
230
Mercantile Law
beneficiaries at the expense of, or to the detriment
of, its creditors (SEC Opinion, December 8, 1987).
compensation in favor of the board members of
WIT. They maintain that this grant of
compensation is proscribed under Section 30 of
the Corporation Code. Is the resolution granting
Salas, et al., compensation for services rendered
as officers of WIT valid?
Limitation on the amount of compensation to be
received by the directors
In no case shall the total yearly compensation of
directors exceed 10% of the net income before
income tax of the corporation during the preceding
year (CC, Sec. 30).
A: YES. The resolution is valid. There is no argument
that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they
perform nothing more than the usual and ordinary
duties of their office. This rule is founded upon a
presumption that directors /trustees render service
gratuitously and that the return upon their shares
adequately furnishes the motives for service,
without compensation. Under Section 30, there are
only two (2) ways by which members of the board
can be granted compensation apart from reasonable
per diems: (1) when there is a provision in the bylaws fixing their compensation; and (2) when the
stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them. This
proscription,
however,
against
granting
compensation to directors/trustees of a
corporation is not a sweeping rule. Section 30 states
that the directors shall not receive any
compensation, as such directors. The phrase “as
such directors” is not without significance for it
delimits the scope of the prohibition to
compensation given to them for services performed
purely in their capacity as directors or trustees. The
unambiguous implication is that members of the
board may receive compensation, in addition to
reasonable per diems, when they render services to
the corporation in a capacity other than as
directors/trustees. In the case at bench, the
resolution granted monthly compensation to Salas,
et al., not in their capacity as members of the board,
but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology
(Western Institute of Technology, Inc., v. Salas, et al.,
G.R. No. 113032, August 21, 1997).
Remedy of the stockholders if there was no
proper authorization for the grant of
compensation to the directors
Compensation to the directors of a corporation
without proper authorization in the by-laws or by
the vote of the stockholders may be recovered in a
stockholders’ suit (De Leon, supra).
Reportorial requirement for corporations
vested with public interest
Corporations vested with public interest shall
submit to their shareholders and the Commission,
an annual report of the total compensation of each
of their directors or trustees (RCC, Sec 29)
Q: Is the general rule that directors are not
entitled to compensation applicable to
corporate officers, who are not directors?
A: NO. Such officers, not being directors and having
no control over the funds and property of the
corporation, even though they may be stockholders,
do not occupy the relation of trustees to the
corporation (De Leon, supra, citing Cheeney vs.
Lafayette, BOR Co., 61 III. 570).
For Services other than as directors/Trustees:
Illustrative case:
Q: Ricardo T. Salas, et al., are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT), a
stock corporation engaged in the operation of an
educational institution. According to Homero
Villasis, et al., the minority stockholders of WIT,
a special board meeting was held whereby the
the Board of Trustees passed resolution
granting monthly compensation to Salas, et al.,
as corporate officers. Villasis, et al., filed an
affidavit-complaint against Salas, et al., for
falsification of a public document and
estafa. Villasis, et al., would like to hold Salas, et
al., civilly liable despite their acquittal in the
criminal cases. They base their claim on the
alleged illegal issuance by Salas, et al., of the
resolution ordering the disbursement of
corporate funds representing the retroactive
FIDUCIARY DUTIES AND LIABILITY RULES
Nature of the obligation of the directors to the
corporation
The directors’ character is that of a fiduciary insofar
as the corporation and the stockholders as a body
are concerned. As agents entrusted with the
management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust.
The ordinary trust relationship of directors of a
corporation and stockholders springs from the fact
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
The Corporation Code
that directors have the control and guidance of
corporate affairs and property and hence of the
property int