Category Archives: Commercial Law

Commercial Law – Negotiable Instruments Law

1.       Negotiable Instruments – written contracts for the payment of money; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due.

2.       Characteristics of Negotiable Instruments:

a.       negotiability – right of transferee to hold the instrument and collect the sum due

b.       accumulation of secondary contracts – instrument is negotiated from person to person

3.       Difference between Negotiable Instruments from Non-Negotiable Instruments:

Negotiable Instruments Non-negotiable Instruments 
Contains all the requisites of Sec. 1 of the NIL does not contain all the requisites of Sec. 1 of the NIL
Transferred by negotiation transferred by assignment
Holder in due course may have better rights than transferor transferee acquires rights only of his transferor 
Prior parties warrant payment prior parties merely warrant legality of title
Transferee has right of recourse against intermediate parties transferee has no right of recourse 

4.       Difference between Negotiable Instruments and Negotiable Documents of Title

Negotiable Instruments Negotiable Documents of Title 
Have requisites of Sec. 1 of the NIL does not contain requisites of Sec. 1 of NIL
Have right of recourse against intermediate parties who are secondarily liable no secondary liability of intermediate parties
Holder in due course may have rights better than transferor transferee merely steps into the shoes of the transferor
Subject is money subject is goods
Instrument itself is property of value instrument is merely evidence of title; thing of value are the goods mentioned in the document

5.       Promissory Note – unconditional promise to pay in writing made by one person to anther, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL)


  1. maker
  2. payee

6.       Bill of Exchange – unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126 NIL)


  1. drawer
  2. payee
  3. drawee/ acceptor

7.       Check – bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)

8.       Difference between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange 
Unconditional promise unconditional order
Involves 2 parties involves 3 parties
Maker primarily liable drawer only secondarily liable
only 1 presentment – for payment generally 2 presentments – for acceptance and for payment

9.       Distinctions between a Check and Bill of Exchange

– always drawn upon a bank or banker – may or may not be drawn against a bank
– always payable on demand – may be payable on demand or at a fixed or determinable future time
– not necessary that it be presented for acceptance – necessary that it be presented for acceptance
– drawn on a deposit – not drawn on a deposit
– the death of a drawer of a check, with knowledge by the banks, revokes the authority of the banker pay – the death of the drawer of the ordinary bill of exchange does not
– must be presented for payment within a reasonable time after its issue   (6 months) – may be presented for payment within a reasonable time after its last negotiation.

10.   Distinctions between a Promissory Note and Check

– there are two (2) parties, the maker and the payee – there are three (3) parties, the drawer, the drawee bank and the payee
– may be drawn against any person, not necessarily a bank – always drawn against a bank
– may be payable on demand or at a fixed or determinable future time -always payable on demand
– a promise to pay – an order to pay

11.   Other Forms of Negotiable Instruments:

a.       certificates of deposits

b.       trade acceptances

c.       bonds in the nature of promissory notes

d.       drafts which are bills of exchange drawn by 1 bank to another

e.       letters of credit

12.   Trust Receipt – a security transaction intended to aid in the financing of importers and retailers who do not have sufficient funds to finance their transaction and acquire credit except to use as collateral the merchandise imported

13.   Requisites of a Negotiable Note (PN): (SUDO)

It must:

a.       be in writing signed by the drawer

b.       contains an unconditional promise or order to pay a sum certain in money

c.       be payable on demand or at a fixed determinable future time

d.       be payable to order or to bearer (Sec. 1 NIL)

14.   Requisites of a Negotiable Bill (BOE): (SUDOC)

It must:

  1. be in writing signed by the drawer
  2. contains an unconditional promise or order to pay a sum certain in money
  3. be payable on demand or at a fixed determinable future time
  4. be payable to order or to bearer
  5. the drawee must be named or otherwise indicated with reasonable certainty (Sec. 1 NIL)

Notes on Section 1:

–          In order to be negotiable, there must be a writing of some kind, else there would be nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil. It may be upon parchment, cloth, leather or any other substitute of paper.

–          It must be signed by the maker or drawer. It may consist of mere initials or even numbers, but the holder must prove that what is written is intended as a signature of the person sought to be charged.

–          The Bill must contain an order, something more than the mere asking of a favor.

–          Sum payable must be in money only. It cannot be made payable in goods, wares, or merchandise or in property.

–          A drawee’s name may be filled in under Section 14 of the NIL

15.   Determination of negotiability

  1. by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof
  2. by considering the whole instrument
  3. by what appears on the face of the instrument and not elsewhere

*In determining is the instrument is negotiable, only the instrument itself and no other, must be examined and compared with the requirements stated in Sec. 1. If it appears on the instrument that it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not govern the instrument. The requirement lacking cannot be supplied by using a separate instrument in which that requirement which is lacking appears.

16.   Sum is certain even if it is to be paid with:

a.       interest

b.       in installments

c.       in installments with acceleration clause

d.       with exchange

e.       costs of collection or attorney’s fees (Sec. 2 NIL)

17.   General Rule: The promise or order should not depend on a contingent event. If it is conditional, it is non-negotiable.


a.       indication of particular fund from which the acceptor disburses himself after payment

b.       statement of the transaction which gives rise to the instrument. (Sec. 3 NIL)

But an order or promise to pay out of a particular fund is not unconditional

Notes on Section 3

–          The particular fund indicated should not be the direct source of payment, else it becomes unconditional and therefore non-negotiable. The fund should only be the source of reimbursement.

–          A statement of the transaction does not destroy the negotiability of the instrument. Exception: Where the promise to pay or order is made subject to the terms and conditions of the transaction stated.

18.   Instrument is payable upon a determinable future time if:

a.       there is a fixed period after sight/date

b.       on or before a specified date/fixed determinable future time

c.       on or at a fixed date after the occurrence of an event certain to happen though the exact date is not certain (Sec. 4 NIL)

Notes on Section 4

–          If the instrument is payable upon a contingency, the happening of the event does not cure the defect (still non-negotiable)

19.   General Rule: If some other act is required other than the payment of money, it is non-negotiable.


a.       sale of collateral securities

b.       confession of judgment

c.       waives benefit of law

d.       gives option to the holder to require something to be done in lieu of money (Sec. 5 NIL)

Notes of Section 5

–          Limitation on the provision, it cannot require something illegal.

–          There are two kinds of judgements by confession: a) cognovit actionem b) relicta verificatione

–          Confessions of judgement in the Philippines are void as against public policy.

–          If the choice lies with the debtor, the instrument is rendered non-negotiable.

20.   The validity and negotiability of an instrument is not affected by the fact that:

  1. it is not dated
  2. does not specify the value given or that any had been given
  3. does not specify the place where it is drawn or payable
  4. bears a seal
  5. designates the kind of current money in which payment is to be made (Sec. 6 NIL)

21.   Instrument is payable upon demand if:

a.       it is expressed to be so payable on sight or upon presentation

b.       no period of payment is stipulated

c.       issued, accepted, or endorsed after maturity (Sec. 7 NIL)

Where an instrument is issued, accepted or indorsed when overdue, it is, as regards to the person so issuing, accepting, or indorsing it, payable on demand.

Notes on Section 7

– if the time for payment is left blank (as opposed to being omitted), it may properly be considered as an incomplete instrument and fall under the provisions of Sec. 14, 15, or 16 depending on how the instrument is delivered.

22.   Instrument is payable to order:

–          where it is drawn payable to the order of a specified person or

–          to a specified person or 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
  6. the holder of an office for the time being       (Sec. 8 NIL)

Notes on Section 8

–          The payee must be named or otherwise indicated therein with reasonable certainty.

–          If there is no payee, there would be no one to indorse the instrument payable to order. Therefore useless to be considered negotiable.

–          Joint payees in indicated by the conjunction “and”. To negotiate, all must indorse.

–          Being several payees is indicated by the conjunction “or”.

23.   Instrument is payable to bearer :

a.       when it is expressed to be so payable

b.       when payable to the person named or bearer

c.       payable to order of fictitious or non-existent person and this fact was known to drawer

d.       name of payee not name of any person

e.       only and last indorsement is an indorsement in blank (Sec. 9 NIL)

Notes on Section 9

–          “fictitious person” is not limited to persons having no legal existence. An existing person may be considered fictitious depending on the intention of the maker or the drawer.

–          “fictitious person” means a person who has no right to the instrument because the maker or drawer of it so intended. He was not intended to be the payee.

–          where the instrument is drawn, made or prepared by an agent, the knowledge or intent of the signer of the instrument is controlling.

–          Where the agent has no authority to execute the instrument, the intent of the principal is controlling

24.   The date may be inserted in an instrument when:

  1. an instrument expressed to be payable at a fixed period after date is issued undated
  2. where acceptance of an instrument payable at a fixed period after sight is undated (Sec. 13 NIL)


–          any holder may insert the true date of issuance or acceptance

–          the insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course

–          as to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the true date.

25.   Subsequent Holder in Due Course not affected by the following deficiencies:

a.       incomplete but delivered instrument (Sec. 14 NIL)

b.       complete but undelivered (Sec. 16 NIL)

c.       complete and delivered issued without consideration or a consideration consisting of a promise which was not fulfilled (Sec 28 NIL)

26.   Holder in Due Course Affected by Abnormality/Deficiency:

a.       incomplete and undelivered instrument (Sec. 15 NIL)

b.       maker/drawer’s signature forged (Sec. 23 NIL)

27.   Incomplete but Delivered Instrument:

1. Where an instrument is wanting in any material particular:

a.       Holder has prima facie authority to fill up the blanks therein.

b.       It must be filled up strictly in accordance with the authority given and within a reasonable time.

c.       If negotiated to a holder in due course, it is valid and effectual for all purpose as though it was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14 NIL)

2. Where only a signature on a blank paper was delivered:

  1. It was delivered by the person making it in order that it may be converted into a negotiable instrument
  2. The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)

Notes on Section 14

–          if the instrument is wanting in material particular, mere possession of the instrument is enough to presume prima facie authority to fill it up.

–          material particular may be an omission which will render the instrument non-negotiable (e.g. name of payee), an omission which will not render the instrument non-negotiable (e.g. date)

–          in the case of the signature in blank, delivery with intent to convert it into a negotiable instrument is required. Mere possession is not enough.

28.   Incomplete and Undelivered Instrument:

General Rule: 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 against any person who signed before delivery. (Sec. 15 NIL)

Notes on Section 15

–          it is a real defense. It can be interposed against a holder in due course.

–          delivery is not conclusively presumed where the instrument is incomplete

–          defense of the maker is to prove non-delivery of the incomplete instrument.

29.   Complete but Undelivered:

General Rule: Every contract on a negotiable instrument is incomplete and revocable until delivery for the purpose of giving effect thereto.

a.       If between immediate parties and remote parties not holder in due course, to be effectual there must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery may be shown to be conditional or for a special purpose only

b.       If the holder is a holder in due course, all prior deliveries conclusively presumed valid

c.       If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until the contrary is proven (Sec. 16 NIL)

Rules on delivery of negotiable instruments:

1)    delivery is essential to the validity of any negotiable instrument

2)    as between immediate parties or those is like cases, delivery must be with intention of passing title

3)    an instrument signed but not completed by the drawer or maker and retained by him is invalid as to him for want of delivery even in the hands of a holder in due course

4)    but there is prima facie presumption of delivery of an instrument signed but not completed by the drawer or maker and retained by him if it is in the hands of a holder in due course. This may be rebutted by proof of non-delivery.

5)    an instrument entrusted to another who wrongfully completes it and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or drawer.

6)    If an instrument is completed and is found in the possession of another, there is prima facie evidence of delivery and if it be a holder in due course, there is conclusive presumption of delivery.

7)    delivery may be conditional or for a special purpose but such do not affect the rights of a holder in due course.

30.   General rule: a person whose signature does not appear on the instrument in not liable.


  1. one who signs in a trade or assumed name (Sec. 18)
  2. a duly authorized agent (Sec. 19)
  3. a forger (Sec. 23)


31.   General rule: an agent is not liable on the instrument if he were duly authorized to sign for or on behalf of a principal.


  1. he must be duly authorized
  2. he must add words to his signature indicating that he signs as an agent
  3. he must disclose his principal (Sec. 20 NIL)

Notes on Section 20

–          if an agent does not disclose his principal, the agent is personally liable on the instrument.

32.   Per Procuration – operates as notice that the agent has a limited authority to sign.


–          the principal in only bound if the agent acted within the limits of the authority given

–          the person who takes the instrument is bound to inquire into the extent and nature of the authority given. (Sec. 21 NIL)


33.   General rule: Infants and corporations incur no liability by their indorsement or assignment of an instrument. (Sec. 22 NIL)


–          no liability attached to the infant or the corporation

–          the instrument is still valid and the indorsee acquires title


34.   General rule: a signature which is forged or made without authority is wholly inoperative.


  1. no right to retain
  2. no right to give a discharge
  3. no right to enforce payment can be acquired.       (Sec. 23 NIL)


–          the party against whom it is sought to be enforced is precluded from setting up the forgery or want of authority.

Notes on Section 23

–          Section 23 applies only to forged signatures or signatures made without authority

–          Alterations such as to amounts or like fall under section 124

–          Forms of forgery are a) fraud in factum b) duress amounting to fraud c) fraudulent impersonation

–          Only the signature forged or made without authority is inoperative, the instrument or other signatures which are genuine are affected

–          The instrument can be enforced by holders to whose title the forged signature is not necessary

–          Persons who are precluded from setting up the forgery are a) those who warrant or admit the genuineness of the signature b) those who are estopped.

–          Persons who are precluded by warranting are a) indorsers b) persons negotiating by delivery c) acceptors.

–          drawee bank is conclusively presumed to know the signature of its drawer

–          if endorser’s signature is forged, loss will be borne by the forger and parties subsequent thereto

–          drawee bank is not conclusively presumed to know the signature of the indorser. The responsibility falls on the bank which last guaranteed the indorsement and not the drawee bank.

–          Where the payee’s signature is forged, payments made by the drawee bank to collecting bank is ineffective. No debtor/creditor relationship is created. An agency to collect is created between the person depositing and the collecting bank. Drawee bank may recover from collecting bank who may in turn recover from the person depositing.

Rules on liabilities of parties on a forged instrument

In a PN

–          a party whose indorsement is forged on a note payable to order and all parties prior to him including the maker cannot be held liable by any holder

–          a party whose indorsement is forged on a note originally payable to bearer and all parties prior to him including the maker may be held liable by a holder in due course provided that it was mechanically complete before the forgery

–          a maker whose signature was forged cannot be held liable by any holder


In a BOE

–          the drawer’s account cannot be charged by the drawee where the drawee paid

–          the drawer has no right to recover from the collecting bank

–          the drawee bank can recover from the collecting bank

–          the payee can recover from the drawer

–          the payee can recover from the recipient of the payment, such as the collecting bank

–          the payee cannot collect from the drawee bank

–          the collecting bank bears the loss but can recover from the person to whom it paid

–          if payable to bearer, the rules are the same as in PN.

–          if the drawee has accepted the bill, the drawee bears the loss and his remedy is to go after the forger

–          if the drawee has not accepted the bill but has paid it, the drawee cannot recover from the drawer or the recipient of the proceeds, absence any act of negligence on their part.


35.   Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. (Sec. 24 NIL)


–          every person whose signature appears thereon is a party for value

–          presumption is disputable


36.   Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (Sec. 26 NIL)


37.   Effect of want of consideration:

  1. Absence or failure of consideration may be set up against a holder not a holder in due course (personal defense)
  2. Partial failure of consideration is a defense pro tanto (Sec 28 NIL)


Notes on Section 28


–          absence of consideration is where no consideration was intended to pass.

–          failure of consideration implies that consideration was intended by that it failed to pass

–          the defense of want of consideration is ineffective against a holder in due course

–          a drawee who accepts the bill cannot allege want of consideration against the drawer


38.   An accommodation party is one who signs the instrument as maker, drawer, acceptor, or indorser without receiving value therefor and for the purpose of lending his name to some other person.


–          an accommodation party is liable to the holder for value notwithstanding that such holder knew that of the accommodation. (Sec. 28 NIL)


Notes on Section 28

–          the accommodated party cannot recover from the accommodation party

–          want of consideration cannot be interposed by the accommodation party

–          an accommodation maker may seek reimbursement from a co-maker even in the absence of any provision in the NIL; the deficiency is supplied by the New Civil Code.

–          he may do this even without first proceeding against the debtor provided:

a.       he paid by virtue of judicial demand

b.       principal debtor is insolvent


39.   An instrument is negotiated when:

  1. it is transferred from one person to another
  2. that the transfer must be in a manner as to constitute the transferee a holder

For a bearer instrument – by delivery

For payable to order – by indorsement and delivery (Sec. 30 NIL)


40.   Indorsement to be must be:

  1. written
  2. on the instrument itself or upon a piece of paper attached (Sec. 31 NIL)

Notes on Section 31

–          the paper attached with the indorsement is an allonge

–          an allonge must be attached so that it becomes a part of the instrument, it cannot be simply pinned or clipped to it.

41.   Kinds of Indorsements:

  1. Special (Sec. 34)
  2. Blank (Sec. 35)
  3. Restrictive (Sec. 36)
  4. Qualified (Sec. 38)
  5. Conditional (Sec. 39 NIL)

42.   Effects of indorsing an instrument originally payable to bearer:

–          it may further be negotiated by delivery

–          the person indorsing is liable as indorser to such persons as to make title through his indorsement (Sec. 40 NIL)

Notes on Section 40

–          Section 40 applies only to instruments originally payable to bearer

–          It cannot apply where the instrument is payable to bearer because the only or last indorsement is in blank.

43.   A holder may strike out any indorsement which is not necessary to his title.


–          An indorser whose indorsement is struck out is discharged

–          All indorsers subsequent to such indorser who has been discharged are likewise relieved. (Sec. 48 NIL)

44.   Effects of a transfer without endorsement:

–          the transferee acquires such title as the transferor had

–          the transferee acquires the right to have the indorsement of the transferor

–          negotiation takes effect as of the time the indorsement is actually made (Sec. 49 NIL)

45.   Rights of a holder:

–          a holder may sue in his own name

–          a holder may receive payment.


–          if in due course it discharges the instrument (Sec. 51 NIL)

46.   Requisites for a Holder in Due Course (HDC):

a.       receives the instrument complete and regular on its face

b.       became a holder before it was overdue and had no notice that it had been previously dishonored if such was the fact

c.       takes the instrument for value and in good faith

d.       at time he took the instrument, no notice of infirmity in instrument or defect in the title of the person negotiating it (Sec. 52 NIL)

Notes on Section 52

–          every holder is presumed to be a HDC (Sec. 59)

–          the person who questions such has the burden of proof to prove otherwise

–          if one of the requisites are lacking, the holder is not HDC

–          an instrument is considered complete and regular on its face if a) the omission is immaterial b) the alteration on the instrument was not apparent on its face

–          an instrument is overdue after the date of maturity.

–          on the date of maturity, the instrument is not overdue and the holder is a HDC

–          acquisition of the transferee or indorsee must be in good faith

–          good faith means lack of knowledge or notice of defect or infirmity


47.   A holder is not a HDC where an instrument payable on demand is negotiated at an unreasonable length of time after its issue (Sec. 53 NIL)

48.   Rights of a HDC:

–          holds the instrument free from any defect of title of prior parties

–          free from defenses available to prior parties among themselves (personal/ equitable defenses)

–          may enforce payment of the instrument for the full amount against all parties liable(Sec. 57 NIL)

Notes on Section 57

–          Personal or equitable defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him through legal title to enforce it. Can be set up against holders not HDC

–          Legal or real defenses are those which attach to the instrument itself and can be set up against the whole world, including a HDC.

Personal Defenses Real Defenses
1. absence or failure of consideration Alteration
2. want of delivery of complete instrument Want of delivery of incomplete instrument
3. insertion of wrong date where payable at a fixed period after date and issued undated; or at a fixed period after sight and acceptance is undated Duress amounting to forgery
4. filling up the blanks contrary to authority given or not within reasonable time Fraud in factum or in esse contractus
5. fraud in inducement Minority
6. acquisition of the instrument by force, duress or fear Marriage in case of a wife
7. acquisition of the instrument by unlawful means Insanity where the insane person has a guardian appointed by the court
8. acquisition of the instrument for an illegal consideration Ultra vires acts of a corporation where its charter or by statue, it is prohibited from issuing commercial paper
9. negotiation in breach of faith Want of authority of agent
10. negotiation under circumstances amounting to fraud Execution of instrument   between public enemies
  1. Mistake
Illegality of contract made by statue
12. intoxication Forgery
13. ultra vires acts of corporations
14. want of authority of the agent where he has apparent authority
15. illegality of contract where form or consideration is illegal
16. insanity where there is no notice of insanity


49.   A instrument not in the hands of a HDC is subject to the same defenses as if it were non-negotiable.


–          a holder who derives his title through a HDC and is not a party to any fraud or illegality affecting the instrument, has all the rights of such HDC in respect to all parties prior. (Sec. 58 NIL)


Rights of a holder not a HDC

–          may sue in his own name

–          may receive payment and if it is in due course, the instrument is discharged

–          holds the instrument subject to the same defenses as if it were non-negotiable

–          if he derives his title through a HDC and is not a party to any fraud or illegality thereto, has all the rights of such HDC


50.   General rule: every holder is deemed prima facie to be a holder in due course.


–          where it is shown that the title of any person who has negotiated the instrument is defective, the burden is on the holder to prove that he is a HDC or that a person under whom he claims is a HDC (Sec. 59 NIL)


51.   A maker is primarily liable:

Effects of making the instrument, the maker:

a.       engages to pay according to tenor of instrument

b.       admits existence of payee and his capacity to indorse (Sec. 60 NIL)

Notes on Section 60

–          a maker’s liability is primarily and unconditional

–          one who has signed as such is presumed to have acted with care and to have signed with full knowledge of its contents, unless fraud is proved

–          the payee’s interest is only to see to it that the note is paid according to its terms

–          when two or more makers sign jointly, each is individually liable for the full amount even if one did not receive the value given

–          the maker is precluded from setting up the defense of a) the payee is fictional, b) that the payee was insane, a minor or a corporation acting ultra vires


52.   A drawer is secondarily liable

Effects of drawing the instrument, the drawer:

  1. admits the existence of the payee,
  2. the capacity of such payee to indorse
  3. engages that on due presentment, the instrument will be accepted or paid or both according to its tenor.

If the instrument is dishonored, and the necessary proceedings on dishonor duly taken

  1. the drawer will pay the amount thereof to the holder
  2. will pay to any subsequent indorser who may be compelled to pay it. (Sec. 61 NIL)

Notes on Section 61

–          a drawer may insert an express stipulation to negative or limit his liability

53.   An acceptor is primarily liable

By accepting the instrument, an acceptor:

–          engages that he will pay according to the tenor of his acceptance

–          admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument

–          the existence of the payee and his then capacity indorse

54.   Irregular Indorser – a person not otherwise a party to an instrument places his signature in blank before delivery is liable as an indorser in the following manner:

  1. if payable to order of a third person – liable to the payee and to all subsequent parties
  2. if payable to order of the maker or drawer – liable to all parties subsequent to the maker or drawer
  3. if payable to bearer – liable to all parties subsequent to the maker or drawer
  4. if signs for an accommodation party – liable to all parties subsequent to the payee (Sec. 64 NIL)

55.   Warranties where negotiating by delivery or qualified endorsement:

  1. the instrument is genuine and in all respect what it purports to be
  2. the indorser has good title to it
  3. all prior parties had the capacity to contract
  4. indorser has no knowledge of any fact that would impair the validity or the value of the instrument.

Limitations of warranties:

-if by delivery – extends only to immediate transferee

-warranty of capacity to contract does not apply to persons negotiating public or corporate securities (Sec. 65 NIL)

Notes on Section 65

–          a qualified indorser is one who indorses without recourse or sans recourse

–          recourse – resort to a person secondarily liable after default of person primarily liable

–          a qualified indorser cannot raise the defense of a) forgery b) defect of his title or that it is void c) the incapacity of the maker, drawer or previous indorsers.

–          a qualified Indorsement makes the indorser mere assignor of title of instrument, relieves him of general obligation to pay if instrument is dishonored, but he is still liable for the warranties arising from instrument only up to warranties of general indorser

–          the warranty is to the capacity of prior parties at the time the instrument was negotiated. Subsequent incapacity does not breach the warranty.

–          lack of knowledge of the indorser as to any fact that would impair the validity or the value of the instrument must be subsisting all throughout.

–          a person Negotiating by Delivery warrants same as those of qualified indorser and extends to immediate transferees only

56.   Warranties of a general indorser:

  1. the instrument is genuine and in all respect what it purports to be
  2. the he has good title to it
  3. all prior parties had the capacity to contract
  4. that the instrument at the time of his indorsement was valid and subsisting (Sec. 66 NIL)

In addition:

–          engages that the instrument will be accepted or paid or both according to its tenor on due presentment

–          engages to pay the amount thereof if it be dishonored and the necessary proceedings on dishonor are taken

Notes on Section 66

–          the indorser under Section 66 warrants the solvency of a prior party

–          the indorser warrants that the instrument is valid and subsisting regardless of whether he is ignorant of that fact or not.

–          warranties extend in favor of a) a HDC b) persons who derive their title from HDC c) immediate transferees even if not HDC

–          the indorser does not warrant the genuineness of the drawer’s signature

–          general indorser is only secondarily liable

57.   General rule: Presentment for payment is not necessary to charge persons primarily liable on the instrument. Presentment for payment is necessary to charge the drawer and indorsers. (Sec 70 NIL)

Notes on Section 70

–          presentation for payment – production of a BOE to the drawee for his acceptance, or to a drawee or acceptor for payment. Also presentment of a PN to the party liable for payment of the same.

–          consists of a) a personal demand for payment at a proper place b) the bill or note must be ready to be exhibited if required and surrendered upon payment.

–          parties primarily liable – persons by the terms of the instrument are absolutely required to pay the same. E.g maker and acceptors. They can be sued directly.

–          if payable at the special place, and the person liable is willing to pay there at maturity, such willingness and ability is equivalent to tender of payment.

–          presentment is necessary to charge persons secondarily liable otherwise they are discharged

–          Acts needed to charge persons secondarily liable: a) presentment for payment/acceptance b) dishonor by non-payment/non-acceptance c) notice of dishonor to secondary parties

–          Acts needed to charge persons secondarily liable in other cases: a) Protest for non-payment by the drawee b) protest for non-payment by the acceptor for honor

58.   Proper presentment:

  1. by the holder or an authorized person
  2. at a reasonable hour on a business day
  3. at a proper place
  4. to the person primarily liable or if absent to any person found at the place where presentment is made (sec. 72 NIL)

Notes on Section 72

–          only the holder or one authorized by him has the right to make presentment for payment

–          presentment cannot be made on a Sunday or holiday

–          presentment for payment is made to the maker, or acceptor. Not to the person secondarily liable.

–          if the instrument is payable on demand – a) if it is a note – presentment must be made within reasonable time after issue b) if it is a bill – presentment must be made within reasonable time after last negotiation.

59.   Presentment not required to charge the drawer:

  1. he has no right to expect
  2. he has no right to require

that the drawee or acceptor will pay (Sec 79 NIL)

60.   Presentment not required to charge the indorser where:

  1. the instrument was made or accepted for his accommodation
  2. he has no reason to expect that the instrument will be paid if presented (Sec. 80 NIL)


61.   General rule: Presentment for payment necessary to charge persons secondarily liable otherwise they are discharged:


–          Section 79 and 80

Notes on Section 79 and 80

–          only the drawer or indorser are not discharged. All other parties secondarily liable are discharged.

62.   Presentment for payment excused if:

a.       after due diligence, presentment cannot be made

b.       presentment is waived

c.       the drawee is a fictitious person (Sec 82 NIL)

Notes on Section 82

–          what is excused is the failure to make presentment. There is no need to make any presentment versus under section 81 (delay in presentment) presentment for payment is still required after the cause of delay has ceased.


63.   Summary of rules as to presentment for payment:

  1. presentment not necessary to charge persons primarily liable
  2. necessary to charge persons secondarily liable except:

–          the drawer under Sec. 79

–          the indorser under Sec. 80

–          when excused under Sec. 82

–          when the instrument has been dishonored by non-acceptance under Sec. 83


64.   How dishonored by non-acceptance:

–          the instrument was duly presented but payment is refused or cannot be obtained

–          presentment is excused and the instrument is overdue and unpaid (Sec. 83 NIL)


65.   Effects of dishonor by non-payment:

–          an immediate right of recourse to all parties secondarily liable accrues to the holder. (Sec. 84 NIL)

Notes on Section 84

–          parties cease to be secondarily liable and become principal debtors.

–          Liability becomes the same as that of the original obligors.

66.   Requisites for payment in due course:

  1. made at or after the maturity of the instrument
  2. to the holder
  3. in good faith
  4. without notice of any defect in the holder’s title (sec. 88 NIL)

Notes on Section 88

–          payment must be made to the possessor of the instrument

–          possession of the note by the maker is presumptive evidence that it has been paid

67.   Notice of Dishonor may be given:

  1. by or on behalf or the holder
  2. by or on behalf of any party who:

–          is a party to the instrument and might be compelled to pay the instrument

–          to a holder who having taken it up would have a right of reimbursement from the party to whom notice is given. (Sec. 90 NIL)

68.   Notice:

  1. may be written or oral (Sec. 96)
  2. written notice need not be signed or may be supplemented by verbal communication (Sec. 95)
  3. may be by personal delivery or by mail (Sec. 96)

69.   Notice may be waived either expressly or implied:

  1. before the time of giving notice has arrived
  2. after the omission to give due notice (Sec. 109 NIL)

70.   Protest may be waived:


–          deemed a waiver of presentment and notice of dishonor as well (Sec. 111 NIL)

Notes on Section 111

–          Where notice is waived, presentment is not waived

–          Where presentment is waived, notice is also waived

–          Where protest is waived, notice and presentment is waived

71.   Notice of Dishonor – given by the holder to the parties secondarily liable, drawer and each indorser, that the instrument was dishonored by non-acceptance or non-payment by the drawee/maker

General rule: Any drawer or indorser to whom such notice is not given is discharged.


  1. Waiver (Sec. 109)
  2. Notice is dispensed (Sec. 112)
  3. Not necessary to Drawer (Sec. 114)
  4. Not necessary to Indorser (Sec. 115)

– if notice is delayed, delay may be excused (Sec. 113)

72.   Instances when Notice of Dishonor Not Necessary to Drawer

a.       drawer and drawee same person

b.       drawee is a fictitious/incapacitated person

c.       drawer is the person to whom presentment for payment is made

d.       drawer has no right to expect that the drawee will accept/pay the instrument (Sec. 114 NIL)

73.   Instances when Notice Not Required to Indorser

a.       drawee was a fictitious/incapacitated person and the indorser was aware of such at the time of indorsement

b.       indorser is the person to whom instrument was presented for payment

c.       instrument made/accepted for his accommodation (Sec. 115 NIL)

74.   Omission to give notice of dishonor by non-acceptance doe not prejudice a HDC (Sec. 117 NIL)

75.   Protest only necessary for a foreign bill of exchange. Protest for other negotiable instruments is optional. (Sec. 118 NIL)

76.   Causes of Discharge of the Instrument

a.       payment by the debtor

b.       payment by accommodated party

c.       intentional cancellation by holder of instrument

d.       any other act discharging a simple monetary obligation

e.       debtor becomes holder of the instrument at/after maturity in his own right ( Sec 119 NIL)

Notes on Section 119

–          discharge of the instrument discharges all the parties thereto

–          payment must be in due course, and by the principal debtor or on his behalf

–          if payment is not made by the principal debtor, payment only cancels the liability of the payor and those obligated after him but does not discharge the instrument.

–          payment by an accommodation party does not discharge the instrument.

77.   Discharge of Secondary Parties:

a.       any act discharging the instrument

b.       cancellation of indorser’s signature by indorsers

c.       discharge of prior party

d.       tender of payment by prior party

e.       release of principal debtor

f.         extension of payment by the holder/postponement of right to enforce without assent of secondary parties and without reservation of right of recourse against secondary parties (Sec 120 NIL)

78.   Rights of a party secondarily liable who pays:

–          the instrument is not discharge

–          the party is remitted to his former rights as to all prior parties

–          the party may strike out his own and all subsequent indorsements

–          the party may negotiate the instrument again


–          an instrument cannot be renegotiated where it is payable to order of a 3rd person and has been paid by the drawer

–          and instrument cannot be renegotiated where is was made or accepted for accommodation and it has been paid by the party accommodated.

78. Renunciation by a holder discharges an instrument when:

  1. it is absolute and unconditional
  2. made in favor of a person primarily liable
  3. made at or after maturity of the instrument
  4. in writing or the instrument is delivered up to the person primarily liable (Sec. 122 NIL)

Notes on Section 122

–          if renounced in favor of a party secondarily liable, only he is exonerated from liability and all parties subsequent to him

–          discharge by novation is allowed

79.   General rule: When materially altered, without the consent of all parties liable, the instrument is avoided except as against:

  1. the party who has made the alteration
  2. the party who authorized or assented to the alteration.
  3. subsequent indorsers


–          if in the hands of a HDC, may be enforced according to its original tenor

Notes on Section 124

–          there is no distinction between fraudulent and innocent alteration

80.   Material Alteration – an alternation is said to be material if it alters the effect of the instrument.

Under Section 125 the following changes are considered material alterations:

  1. dates
  2. the sum payable
  3. time and place of payment
  4. number or relations of the parties
  5. medium or currency for payment
  6. adding a place of payment where no place is specified
  7. any other which alters the affect of the instrument

81.   Instances where a BOE may be treated as a PN:

  1. where the drawer and the drawee are one and the same
  2. where the drawee is a fictitious person
  3. where the drawee has no capacity to contract (Sec. 130 NIL)

The holder has the option to treat it as a BOE or a PN


82.   Acceptance is the signification by the drawee of his assent to the order of the drawer. It is an act by which a person on whom the BOE is drawn assents to the request of the drawer to pay it. (Sec. 132 NIL)

Acceptance may be:

  1. actual
  2. constructive
  3. general (Sec. 140)
  4. qualified (Sec. 141)

Requisites of actual acceptance:

–          in writing

–          signed by the drawee

–          must not express the drawee will perform his promise by any other means than payment of money

–          communicated or delivered to the holder

  1. A holder has the right:
  1. require that acceptance be written on the bill and if refused, treat it as if dishonored (Sec. 133)
  2. refuse to accept a qualified acceptance and may treat it as dishonored (Sec. 142)
  1. Constructive Acceptance:
  1. where the drawee to whom the bill has been delivered destroys it
  2. the drawee refuses within 24 hrs after such delivery or within such time as is given, to return the bill accepted or not.       (Sec. 137 NIL)

Notes on Section 137

–          drawee becomes primarily liable as an acceptor.

–          mere retention is equivalent to acceptance

  1. When presentment for acceptance is necessary:
  1. if necessary to fix the maturity of the bill
  2. if it is expressly stipulated that it shall be presented for acceptance
  3. if the bill is drawn payable elsewhere than the residence or place of business of the drawee (Sec. 143 NIL)

Notes on Section 143

–          Presentment is the production of a BOE to the drawee for his acceptance

–          in on order case is presentment necessary to make parties liable.

90. Summary on presentment for acceptance of Bills of Exchange:

a.       to make the drawee primarily liable and for the accrual of secondary liability (Sec. 144)

b.       necessary to fix maturity date, where bill expressly stipulates presentment, bill payable other than place of drawee (Sec. 143)

c.       when presentment is excused: drawee is dead, hides, is fictitious, incapacitated person, after due diligence presentment cannot be made, presentment is refused on another ground although presentment is irregular (Sec. 148)

  1. General rule: Protest is required only for foreign bills


–          inland bills and notes may also be protested if desired

Protest is required:

  1. where the foreign bill is dishonored by non acceptance
  2. where the foreign bill is dishonored by non-payment
  3. where the bill has been accepted for honor, it must be protested for non-payment before it is presented for payment to the acceptor for honor
  4. where the bill contains a referee in case of need, it must be protested for non payment before presentment for payment to the referee in case of need (Sec. 152)

Notes on Section 152

–          Protest – formal statement in writing made by a notary under his seal of office at the request of the holder, in which it is declare that the some was presented for payment or acceptance (as the case may be) and such was refused.

–          it means all steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser

–          required when the instrument is a foreign bill of exchange.

–          it must be made on the same date of dishonor, by a notary/respectable citizen of the place in the presence of 2 credible witnesses so recourse to secondary parties

  1. Acceptance for Honor   (Sec. 161 NIL)– an acceptance of a bill made by a stranger to it before maturirty, where the drawee of the bill has:
  1. refused to accept it
  2. and the bill has been protested for non-acceptance
  3. or where the bill has been protested for better security

Requisites for acceptance for honor:

–          the bill must have been previously protested a) for non-acceptance b) or for better security

–          the bill is not overdue at the time of the acceptance for honor

–          the acceptor for honor must be a stranger to the bill

–          the holder must give his consent

Notes on Acceptance for Honor

–          Purpose: to save the credit of the parties to the instrument or some party to it as the drawer, drawee, or indorser or somebody else.

–          Acceptor for honor is liable to the holder and to all the parties to the bill subsequent to the party for whose honor he has accepted (Sec. 164)

  1. How acceptance for honor is made:
  1. in writing and indicated that it is an acceptance for honor
  2. signed by the person making the acceptance (Sec. 162 NIL)


  1. Payment for Honor – payment made through a notarial act of honor of a party liable/stranger to the bill after bill has been dishonored by non-payment by the acceptor and protested for non-payment by the holder


a.       protest for non-payment

b.       any person may pay supra protest

Form for payment of honor:

  1. payment must be attested by notarial act appended to the protest, or form an extension to it.
  2. notarial act of honor must be based on a declaration by the payer for honor


  1. Bills in Set – bill of exchange drawn in several parts, each part of the set being numbered and containing a reference to the other parts, the whole of the parts just constituting one bill (Sec 178 NIL)



Commercial Law Memory Aid

Negotiable Instruments Law

Ateneo Central Bar Operations 2001


Commercial Law Reviewer – Ateneo


COMMERCE – branch of human activity; purpose is to bring products to the consumer through operations habitually and with intent of gain

COMMERCIAL LAW – branch of private law which regulates the juridical relations arising from commercial acts


  1. 1.       universal
  2. 2.       uniform
  3. 3.       equitable
  4. 4.       customary
  5. 5.       progressive



  1. 1.       merchants; book of merchants and general provision of contracts
  2. 2.       joint account association
  3. 3.       commercial barter
  4. 4.       transfers of non-negotiable credits
  5. 5.       commercial contracts of overland transportation
  6. 6.       letters of credit
  7. 7.       maritime commerce


  1. 1.       Commerce – bringing products from the manufacturers to the consumers
  1. 2.       Characteristics of Commerce:
    1. a.       habituality
    2. b.       rapidity – if period is fixed, debtor in delay without need of demand; if contract does not fix period, 10 days
    3. c.       intent to join
  1. 3.       Merchant:
    1. a.       Individuals – legal capacity, 21 years, or subject to parental authority, habitually engaged in commerce
    2. b.       Juridical Persons – commercial and industrial company organized in accordance with law, habitually engaged in business
  1. 4.       General Rule:  Minors cannot engage in commerce


  1. a.       to continue business of deceased parents through guardian
  2. b.       court authorizes guardian to place minor and property in business
  3. c.       minor is an alien and his national law allows him to be a merchant
  1. 5.       Which persons are not allowed to engage in commerce?
    1. a.       suffering accessory penalty of civil interdiction (reclusion perpetua and reclusion temporal)
    2. b.       those judicially declared insolvent until they can obtain their discharge
    3. c.       prohibited by Constitution and special laws
  1. 6.       Aliens
    1. a.       capacitated under his national law to engage in business
    2. b.       engaged in the business in the Philippines not reserved for the Filipinos
    3. c.       after securing license and BOI certificate
  1. 7.       Family Code:  Either spouse may engage in business; when objected to by the other, court will look into valid grounds, i.e. serious and moral grounds
  1. 8.       BOI Certificate must be obtained by:
    1. a.       alien
    2. b.       foreign firm
  1. 9.       Meaning of Philippine National
    1. a.       citizen
    2. b.       domestic corporation wholly owned and organized by Filipinos in the Philippines
    3. c.       Filipino corporation where Filipino capital entitled to vote is at least 60%
  1. 10.   Query:  If a corporation is a shareholder of another corporation, how do you determine whether the latter corporation is a Filipino national?

Answer:  The following must concur –

  1. a.       At least  60% of the outstanding capital stock and entitled to vote of both corporations are held by citizens of the Philippines
  2. b.       At least 60% of the Board of Directors of both corporations are Filipinos
  1. 11.   Tenor of BOI Certificate
    1. a.       Business or activity to be engaged is consistent with the Investment Priorities Plan
    2. b.       Business will contribute to the sound and balanced development of the national economy in a self-sustaining basis
    3. c.       Business will not conflict with the Constitution and local laws
    4. d.       Business is not adequately exploited by Filipino nationals
    5. e.       No danger of monopolies/combinations in restraint of trade
  1. 12.   Basic Principles/Conditions laid down by BOI
    1. a.       resident agent of foreign firm is a Filipino citizen
    2. b.       establishment of office in the Philippines
    3. c.       bringing assets tot he Philippine office as capital
    4. d.       complete set of accounting records
  1. 13.   Merger and Consolidation subject to BOI requirements for the issuance of certificate:

When merger and consolidation result in ownership and control of non-Filipino nationals over more than 40% of the capital of a consolidated corporation.

  1. 14.   SEC License issued upon compliance with the following requirements:
    1. a.       proof of compliance with principle of reciprocity
    2. b.       BOI certificate
    3. c.       Applicant for license gives required information

n  articles of incorporation

n  by-laws

n  names and addresses of resident agents

n  principal place of business in the Philippines

  1. d.       proof of solvency
  2. e.       deposit acceptable securities to protect future creditors


(Note: Material on the Retail Trade Liberalization Law will not be included in this reviewer.  Supplement to follow)

  1. 1.       Retail Trade – any act, occupation, or calling of habitually selling direct to the general public, merchandise, commodities, or goods for consumption

Jurisprudence has held that the term “retail” should be associated with and limited to goods for personal, family or household use, consumption and utilization.  The Retail Trade Nationalization Law refers to “consumption goods” or “consumer goods” which directly satisfy human wants and desires and are needed for home and daily life.  Excluded from the law are those goods which are considered generally raw material used in the manufacture of other goods, or if not, as one of the component raw material, or at least as elements utilized in the process of production and manufacturing.

  1. 2.       Elements of What Constitutes Retail Trade:
    1. a.       The seller habitually engages in selling;
    2. b.       The sale is direct to the general public; and
    3. c.       The object of the sale is limited to merchandise, commodities or goods for consumption.
  1. 3.       General Rule: After 1964, only Filipinos or corporations whose capital is 100% Filipino may engage in retail trade.
  1. 4.       Exceptions, that is, instances when aliens may engage in retail trade in the Philippines:
    1. a.       manufacturer or processor if capital does not exceed P5,000.00;
    2. b.       farmer or agriculturist when selling his products;
    3. c.       manufacturer or processor selling to industrial or commercial users or consumers who use the produce to render service to the general public or to produce or manufacture goods which are sold by them to the public;
    4. d.       hotel owners or keepers of restaurants included or incidental to the hotel business;
    5. e.       sale by a manufacturer or processor to the Government or its agencies, including government owned and controlled corporations.
  1. 5.       Query:   How to determine citizenship of shares of the corporation when they are not held directly by individuals, but in turn held by another entity?

Answer:  apply the GRANDFATHER RULE, to wit:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.  Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital respectively, of which belong to Filipino citizens, all of the said shares shall be recorded as owned by Filipinos.  But, if let’s say, 50% of the capital stock belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens.

However, while a corporation with 60% Filipino and 40% foreign equity ownership is considered a Philippine national for purposes of investment, it is not qualified to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or ownership of which under the Constitution or other special laws are limited to Filipino citizens only.  Hence, for purposes of the law, whatever the percentage of Filipino  ownership in the owning corporation, the foreign ownership would always render a portion of its holding in the company as foreign equity and would disqualify the corporation to engage in retail trade.


  1. 1.       The Act penalizes Filipinos who permit aliens to use them as nominees or dummies to enjoy privileges reserved for Filipinos or Filipino corporations.  Criminal sanctions are imposed on the president, manager, board member or persons in charge of the violating entity and causing the latter to forfeit its privileges, rights and franchises.
  1. 2.       Disqualified aliens cannot intervene in the management, operation, administration or control of the business reserved to Filipinos whether as an officer, employee or laborer, with or without remuneration, except when:
    1. a.       alien takes part in technical aspects;
    2. b.       provided that no Filipino can do such technical work; and
    3. c.       with express authority from the President, upon the recommendation of the department head concerned.
  1. 3.       By way of exception, the following may participate in management:
    1. a.       Aliens may be elected to the Board of Directors to the extent of their allowable share in the capital of the corporation (in partially nationalized industries).
    2. b.       A registered enterprise may employ foreign nationals in supervisory, technical, and advisory positions for a period of 5 years subject to extension.
    3. c.       Where majority of stocks of a pioneer enterprise is owned by foreign investors, the following positions may be held by foreign nationals:

n  president

n  treasurer

n  general manager

n  equivalent positions

  1. 4.       A Filipino common-law wife of an alien is not barred from engaging in the retail business provided she uses capital exclusively derived from her paraphernal properties; however, allowing her common-law alien husband to take part in the management of the retail business would be a violation of the law.
  1. 5.       What doing business means:
    1. a.       soliciting orders, purchases, service contracts;
    2. b.       opening offices whether called liaison offices or branches;
    3. c.       appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the country for a period totaling 180 days or more;
    4. d.       participating in the management or supervision or control of any domestic firm, entity or corporation in the Philippines;
    5. e.       any other act or acts that imply continuity in commercial dealings
  1. 6.       When commissioned merchants/investors or commercial brokers act in their own name in selling foreign products, the foreign firm manufacturing these products is not doing business in the Philippines.
  1. 7.       When a local corporation or person acts in the name of a foreign firm, the latter is doing business in the Philippines.
  1. 8.       The following are NOT doing business:
    1. a.       mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business;
    2. b.       exercise of rights as such investor;
    3. c.       having a nominee director or officer to represent interests in such corporation;
    4. d.       appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own accounts.
  2. 1.       Purpose:
    1. a.       to encourage use of and to promote transactions based on trust receipts;
    2. b.       to regulate the use of trust receipts


  1. 2.       Definition:

A written/printed document signed by the ENTRUSTEE in favor of the ENTRUSTER whereby the latter releases the goods, documents or instruments tot he possession of the former upon the ENTRUSTEE’S promise to hold said goods in trust for the ENTRUSTER, and to sell the goods, etc. WITH THE OBLIGATION TO TURN OVER THE PROCEEDS THEREOF TO THE EXTENT OF WHAT IS OWING TO THE ENTRUSTER; or to return the goods if UNSOLD, or for other purposes.

  1. 3.       Trust receipts are denominated in Philippine currency or acceptable and eligible foreign currency.
  1. 4.       ENTRUSTER is not liable as principal or vendor under any sale or contract to sell made by the ENTRUSTEE.
  1. 5.       Risk of loss is borne by the ENTRUSTEE.
  1. 6.       Pending the duration of the trust agreement, the ENTRUSTER’S security interest cannot be prejudiced by claims of creditors of the ENTRUSTEE.
  1. 7.       Loss of goods pending the dispossession shall not extinguish the obligation to the ENTRUSTER  for the value thereof.


  1. 1.       Kinds:
    1. a.       Commercial Letters of Credit
    2. b.       Traveler’s Letters of Credit
  1. 2.       No protest required in case of dishonor.
  1. 3.       Issued to definite persons and not to order, thus, non-negotiable.
  1. 4.       Limited to a fixed account.


  1. 1.       It requires articles of commerce sold at retail to bear prices.


  1. 1.       It exists when a merchant interests himself in the transaction of another merchant, contributing thereto the amount of capital they may agree upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine.
  1. 2.       Joint accounts do not adopt a firm name.
  1. 3.       No suit may be maintained – investor and third persons dealing with the merchant conducting business.
  1. 4.       It is not subject to any formal requirement for validity; it may be oral.


  1. 1.       Purpose: meant to protect creditors of businessmen against preferential or fraudulent transfers
  1. 2.       The law covers all transactions, whether done in good faith or not, or whether or not the seller is in a state of insolvency, that fall within the description of what is a “bulk sale.”
  1. 3.       Types of transactions which are treated as “bulk sales”:
    1. a.       Sale, transfer, mortgage or assignments of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade;
    2. b.       Sale transfer, mortgage or assignments of all, or substantially all, of the business of the vendor, mortgagor, transferor, or assignor;
    3. c.       Sale, transfer, mortgage, or assignment of all, or substantially all, of the fixtures and equipment used in the business of the vendor, mortgagor, transferor, or assignor.
  1. 4.       Only creditors at the time of the sale in violation of the law are within the protection of the laws and creditors subsequent to the sale are not covered.
  1. 5.       Even if the transaction falls within the definition of “bulk sale”, the following are not deemed covered by the law:
    1. a.       If the vendor, mortgagor, transferor or assignor produces and delivers a written waiver of the provisions of the law from his creditors as shown by verified statements;
    2. b.       The law does not apply to executors, administrators, receivers, assignees in insolvency, or public officers, acting under process.
  1. 6.       Obligations when transaction is a bulk sale:
    1. a.       The vendor must deliver to such vendee a written statement of:

n  names and addresses of all creditors to whom said vendor or mortgagor may be indebted;

n  amount of indebtedness due or owing to each of said creditors

  1. b.       The vendor must apply the purchase money to the pro-rata payment of bona fide claims of the creditors as shown in the verified statement.
  2. c.       The seller, at least 10 days before the sale, shall:

n  make a full detailed inventory of the goods, merchandise, etc., cost price of each article to be included in the sale

n  notify every creditor at least 10 days before transferring possession of the goods, of the price, terms and conditions of the sale

  1. 7.       Consequences of Violation of Requirements under #6 above stated:
    1. a.       When 6(a) above is not complied with, the sale itself is void; the seller will be criminally liable.
    2. b.       When 6(b) above is not complied with, the sale itself is also void; seller is also criminally liable.
    3. c.       When 6(c) is not complied with, the sale is not void; no criminal liability on the seller.


  1. 1.       Laws applicable to insurance in the order of priority:
    1. a.       Insurance Code
    2. b.       Civil Code
    3. c.       General Principles prevailing on the subject in the US
  1. 2.       Contract of Insurance – an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown contingent event.
  1. 3.       Contract of Suretyship – deemed to be an insurance contract within the meaning of the Insurance Code, only if made by a surety who or which, as such, is doing an insurance business
  1. 4.       Definition of “doing an insurance business”:
    1. a.       making or proposing to make, as insurer, any insurance contract;
    2. b.       making or proposing to make as a surety, any contract of suretyship as a vocation and not merely incidental to any other legitimate business or activity of the surety;
    3. c.       doing reinsurance business;
    4. d.       doing or proposing to do any business in the substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Insurance Code.
  1. 5.       Requisites of Insurance:
    1. a.       existence of an insurable interest;
    2. b.       risk of loss;
    3. c.       assumption of risk;
    4. d.       scheme to distribute losses; and
    5. e.       payment of premiums
  • Note:  If only a, b, and c are present, it is not a contract of insurance but a risk shifting device.
  1. 6.       Characteristics of an insurance contract:
    1. a.       consensual
    2. b.       voluntary
    3. c.       aleatory – depends upon some contingent event; however, it is not a wagering nor a gambling contract
    4. d.       executed as to the insured after payment of the premium
    5. e.       executory as to insurer – not executed until payment for a loss
    6. f.         personal – each party takes into account the character, credit and the conduct of the other
    7. g.       conditional – liability is based on the happening of the event insured against
  1. 7.       Parties to a contract of Insurance:
    1. a.       insurer – party who assumes the risk or undertakes to indemnify the insured or to pay a certain sum on the happening  of a specified contingency
    2. b.       insured – person in whose favor the contract is operative, and who is indemnified against, or is to receive a certain sum upon the happening of a specified contingency
    3. c.       beneficiary – may or may not be the same as the insured


  • What perils may be insured?

(a)    any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest; or

(b)    any contingent or unknown event, whether past or future, which may create a liability against the person insured.

  1. 8.       Every person has an insurable interest in the life and health of:
    1. a.       himself, his spouse and his children
    2. b.       any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest
    3. c.       any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might prevent the performance or delay it
    4. d.       any person upon whose life any estate or any interest vested in him depends
  1. 9.       Insurable Interest in Property may consist of:
    1. a.       an existing interest
    2. b.       an inchoate interest, founded on an existing interest
    3. c.       an expectancy, coupled with an existing interest out of which the expectancy arises
  • Definition of Insurable Interest in Property: Interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured.


  1. 10.   Instances when Insurable Interest must exist:
    1. a.       Interest in Property insured must exist when the insurance takes effect and when the loss occurs, but need not exist in the meantime.
    2. b.       Interest in the Life or Health of a Person Insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.
    3. c.       Beneficiaries of Life Insurance need not have insurable interest in the life of the insured.
    4. d.       Beneficiaries of Property Insurance must have insurable interest in the property insured.


Insurable Interest in Life Insurance

Insurable Interest in Property

1.  basis may be based on pecuniary interest, affinity, or consanguinity based purely on pecuniary interest
2.  when interest must exist at the time the policy takes effect EXCEPT:  life insurance taken by the creditor on the life of the debtor wherein interest must also exist at the time of the loss at the time the policy takes effect and at the time of the loss
3.  amount of insurable interest no limit EXCEPT:  if insurable interest is based on creditor-debtor relationship (only to the extent of the credit or debt) limited to the actual value of damage/injury/loss
  1. 11.   General Rule:  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.

  Exceptions:  a.  In case of life, health, and accident insurance

  1. b.       when the change in interest results after the occurrence of an injury which results in a loss
  2. c.       a change of interest in one or more several distinct things, separately insured by one policy
  3. d.       a change in the interest by will or succession on the death of the insured (interest passes to the heirs)
  4. e.       a transfer of interest by one of several partners, joint owners in common who are jointly insured to the others (even though it has been agreed that the insurance shall seize upon the alienation of the thing insured)
  1. 12.   Revocation of Beneficiaries
  • General Rule:  Insurance contracts are revocable.
  • Exception:  Any person who is forbidden to receive any donation under Article 739 of the Civil Code cannot be named beneficiary of a life insurance policy by the person who cannot make the donation to him.
  • The following donations shall be void:
  1. a.       those made between persons who were guilty of adultery or concubinage at the time of the donation;
  2. b.       those made by persons found guilty of the same criminal offense, in consideration thereof;
  3. c.       those made to a public officer or his wife, descendants, ascendants, by reason of his office.
  • Other Pertinent Provisions on Revocation:

(a)    The termination of a subsequent marriage shall allow the innocent spouse to revoke the designation of the other spouse who acted in bad faith as beneficiary in any insurance policy, even if such designation be stipulated as irrevocable.

(b)    After the finality of the decree of legal separation, the innocent spouse may revoke the donations as well as the designation of the latter as a beneficiary in any insurance policy, even if such designation is irrevocable.  The revocation of or change in the designation shall take effect upon written notification thereof to the insured.  The action to revoke the donation under this article must be brought within 5 years from the time the decree of legal separation has become final.

(c)     The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured, in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

  1. 13.   Suspension – a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent until the interest in the thing and the interest in the insurance are vested in the same person.
  1. 14.   Concealment – a neglect to communicate that which the party knows or ought to communicate
  • General Rule:  The insured is not required to communicate the nature (or kind) or the amount of his insurable interest in the life or property insured to the insurer.
  • Exception:  a.  When the insurer makes inquiry from the insured of the nature or amount of the latter’s insurable interest, whether in life or property insurance;
  1. b.       insurance policy must specify the interest of the insured in the property insured, if he is not the absolute owner thereof.
  • A concealment, whether intentional or not, entitles the injured party to rescind a contract of insurance.
  • Requisites:

(a)    the party concealing must have knowledge of the facts concealed;

(b)    the facts concealed must be material to the risk;

(c)     the party is duty bound to disclose such fact to the other;

(d)    the party concealing makes no warranty as to the facts concealed;

(e)    the other party has no other means of ascertaining the facts concealed.

  • Note:  An insured need not die of the very disease he failed to reveal to the insurer.  It is sufficient that the non-revelation has misled the insurer in forming his estimate of the disadvantages of the proposed policy or in making his inquiries in order to entitle the insurance company to avoid the contract.
  • Note:  The insured is under an obligation to disclose not only such material facts as are known to him, but also those known to his agent where:
  1. a.       it was the duty of the agent to acquire and communicate information of the facts in question;
  2. b.       it was possible for the agent, in the exercise of reasonable diligence, to have made the communication before the making of the insurance contract.

n  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.

  1. 15.   Neither party to the insurance contract is bound to communicate information on the following matters except in answer to the inquiries of the other:
    1. a.       those of which the other knows;
    2. b.       that which, in the exercise of ordinary care, the other ought to know and of which the former has no reason to suppose his ignorance, i.e. political situation, general usages of trade;
    3. c.       those of which the other waives communication;
    4. d.       those which prove or tend to prove the existence of the risk excluded by a warranty and which are not otherwise material;
    5. e.       those which relate to a risk excepted from the policy and which are not otherwise material.
  • Neither party is bound to communicate his mere opinion, even upon inquiry, because such opinion would add nothing to the appraisal of the application.
  • Waiver of material facts may be:

(a)    by the terms of the insurance; or

(b)    by the neglect to make inquiry as to such facts, where they are distinctly implied in other facts which information is communicated

  • Materiality is to be determined not by the events but solely upon the probable and reasonable influence of the facts on the party to whom the communication is due in forming his estimate of the disadvantages of the proposed contract or in making his inquiries.
  • Concealment, whether intentional or not, entitles the other party to rescind the contract.
  1. 16.   Representation

It is a factual statement made by the insured at the time of, or prior to, the issuance of the policy, to give information to the insurer and otherwise induce him to enter into the insurance contract.

  • It may be made orally or in writing.
  • It may be made 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.
  • A representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty.
  • 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.  (must be susceptible of present, actual knowledge)
  • The statement of an erroneous opinion, belief or information, or of an unfulfilled intention, will not avoid the contract of insurance, unless fraudulent.
  • Right to rescind because of false representation:
  1. a.       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)
  2. b.       misrepresentation, whether intentional or not, gives the right to rescind
  • Incontestable Clause:  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 2 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 rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
  • Exceptions:  (a)  absence of insurable risk

(b)    cause of loss is an unexpected risk

(c)     fraud

(d)    non-payment of premium

(e)    violation of conditions relating to naval or military services

(f)      failure to comply with conditions subsequent to the occurrence of the loss

  1. 17.   Warranties:
  • General Rule: Non-performance of a promissory warranty avoids a contract of insurance.
  • Exceptions:
  1. a.       when before the time for performance of the promissory warranty, a loss insured against occurs;
  2. b.       when before the time of the performance of the warranty, the act becomes unlawful;
  3. c.       when before the time of the performance of the warranty, said performance becomes impossible.
  • A statement or a promise set forth in the policy or by reference incorporated therein, the non-fulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such non-fulfillment, renders the policy voidable by the insurer, wholly irrespective of the materiality of such statement or promise.



part of the insurance contract collateral inducement
always written on the policy maybe oral or written
conclusively presumed material materiality must be proved
must be strictly complied with requires substantial truth
made by the insured may be made by insurer or insured
  • Note:  If there is a breach of warranty, even if the cause of the loss is a different risk, the insurer is entitled to rescind the contract of insurance.
  • Breach must refer to a material warranty, whether intentional or not.
  1. 18.   Policy
  • What is a Rider?  It is an additional provision in a policy not part of the body of the printed form.
  • Cover Note: written memorandum of the most important terms of a preliminary contract of insurance, intended to give temporary protection pending the investigation of the risk by the insurer, or until the issuance of a formal policy.
  • General Rule: Cover notes bind insurer temporarily pending the issuance of the policy.
  • Exception:  Where it is merely an acknowledgment on behalf of the company that the latter’s branch office had received from the applicant the insurance premium and accepted the application subject for processing by the insurance company and that the latter will either approve or reject the same.
  • Kinds of Policies:
  1. a.       Open – the value of the thing insured is not agreed upon, but is left to be ascertained at the time of the loss
  2. b.       Valued – expresses on its face an agreement that the thing insured shall be valued at a specific sum
  3. c.       Running – contemplates successive insurance which provides that the object of the policy may be from time to time defined especially as to the subject of insurance by additional statements or endorsements

n  Note:  If an amount is written on the face of an open policy, it is merely a determination of the maximum limit of recovery and not as the value of the policy.


Open Policy

Valued Policy

what needs to be proven in order to be able to claim value of property upon loss no need for proof of value of property upon loss
determining value of loss value of property is to be ascertained upon loss value of property upon loss is conclusively stipulated to a specified amount
  • Period for commencing an action against the policy:  Within 1 year from the time the cause of action accrues, i.e., from the time of rejection of the claim by the insurer.  Any condition, stipulation, or agreement limiting the time to less than 1 year is void.
  • Grounds for Cancellation of a Policy by the Insurer:

For Policies Other than Life:

(1)    prior notice of the cancellation to insured

(2)    notice must be based on the ff. occurrences after effective date of the policy

(a)    non-payment of premiums

(b)    conviction of a crime arising out of acts increasing the hazard insured against

(c)     discovery of fraud or material misrepresentation

(d)    discovery of willful or reckless acts or omissions increasing the hazard insured against

(e)    physical changes in the property insured which results in the property becoming uninsurable

(f)      determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of the Insurance Code

(3)    notice must be in writing

(4)    it must be mailed or delivered to the insured at the address shown in the policy

(5)    notice must state the ground relied upon and that upon written request of the insured, the insurer will furnish facts on which the cancellation is based

  • Renewal of the Policies Other than Life:

Insurer must mail or deliver to the insured notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages within 45 days before the policy ends.  Otherwise, insured entitled to renew the policy upon payment of the premium due on the effective date of the renewal.

  1. 19.   Premium
  • General Rule: No policy is binding until the premium thereof has been paid.
  • Exceptions:  (a)  in case of life or industrial life policy, whenever the grace period applies

(b)    in case of estoppel

  • Insurer is entitled to payment of premiums as soon as the thing insured is exposed to the perils insured against.
  • When insurer entitled to Return of Premiums
  1. a.       when the contract is voidable on account of fraud or misrepresentation of the insurer;
  2. b.       when on account of facts, the existence of which the insured was ignorant without his fault
  3. c.       when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy
  4. d.       when the insured has become a public enemy and the policy automatically canceled (on the ground of equity)
  5. e.       in case of over-insurance by several insurers (ratable return of premiums, proportioned to the amount by which the aggregate sum insured in all policies exceed the insurable value of the thing at risk)
  1. 20.   Loss
  • When Insurer is Liable:
  1. a.       where the peril insured against was the proximate cause, although a peril not contemplated by the contract may have been the remote cause or even the immediate cause of the loss
  2. b.       where the thing insured is rescued from the peril insured against that would otherwise have caused a loss, if, in the course of such rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession in whole or in part
  3. c.       where loss is caused by efforts to rescue the thing insured from a peril insured against
  4. d.       insurer is not exonerated by a loss caused by simple negligence of the insured if the proximate cause of the loss is a peril insured against
  5. e.       loss, the immediate cause of which is a peril insured against except when the proximate cause is an excepted peril
  • When Insurer Not Liable:
  1. a.       where the peril insured against was only a remote cause
  2. b.       where the peril is specifically excepted, a loss which would not have occurred but for such peril is thereby excepted
  3. c.       loss caused by the connivance of the insured
  4. d.       loss caused by the willful act of insured
  5. e.       loss caused by insured’s negligence, if it amounts to bad faith
  • General Rule: The insurer is not liable for a loss caused by the willful act of the insured.
  • Exception:  Suicide Clause in Life Insurance: Insurer liable in case insured committed suicide after the policy has been in force for a period of 2 years from the date of its issue or last reinstatement.  If insured kills himself within a period of 2 years, insurer is not liable.
  • Exception to Exception:  If suicide is committed in a state of insanity, regardless of the time of commission, the insurer is liable.
  1. 21.   Double Insurance – exists where the same person is insured by several insurers separately in respect to the same subject and interest
  • Requisites:  a.    person insured must be the same
  1. b.       existence of several insurers
  2. c.       subject matter insured must be the same
  3. d.       interest the same
  4. e.       risk insured against also the same

Over Insurance

Double Insurance

may be only one insurer must be 2 or more insurers
insurance covers more than the value of insurable interest insurance may or may not exceed the value of insurable interest
  • The Code prohibits double insurance without the consent of the insurer.
  • Liability of Insurer:

Insurance taken

from each insurer

———————————-   x      value of property received      =   liability of insurer total insurance

  1. 22.   Reinsurance:  A process by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.

The original insured cannot recover from this insurance unless there is a specific grant, or assignment of, the reinsurance contract in favor of the insured, or a manifest intention of the contracting parties to the reinsurance contract to favor the insured.

  • General Rule:  The insurer who obtains reinsurance must communicate:
  1. a.       all the representations of the original insured; and
  2. b.       all the knowledge and information he possesses, whether previously or subsequently acquired which are material to the risk
  • Exception:  under automatic reinsurance treaties


Double Insurance

  1. 1.       insurer becomes the insured
  2. 2.       subject matter is the insured risk or liability
  3. 3.       different risks and interests of insured
  4. 4.       there must be consent of original
  5. 5.       one who is original insured has no interest in the contract of reinsurance which is independent of the original contract of insurance
  6. 1.       insurer remains the insurer
  7. 2.       subject matter is property
  8. 3.       the same interest and risk are insured
  9. 4.       insured has to give his consent
  10. 5.       insured is the party in interest in all contracts
  1. 23.   Marine Insurance:  insures against perils of the sea, not of the ship

Perils of the Sea

Perils of the Ship

covered by marine insurance not covered by marine insurance
denote nature accidents peculiar to the sea which do not happen by intervention of man nor are to be prevented by human prudence damage or losses resulting from:

  1. 1.       natural and inevitable action of the sea
  2. 2.       ordinary wear and tear of a ship, or
  3. 3.       negligent failure of the ship owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions
  • Owner of the Ship has Insurable Interest:
  1. a.       in the ship even if it has been chartered by one who promises to pay him in value in case of loss (insurer is liable for what insured cannot recover from the charterer), even when hypothecated by bottomry (only the excess of its value over the amount secured by bottomry) and
  2. b.       in the freightage, which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage
  • Charterer has insurable interest in the ship to the extent that he is liable to be damnified by its loss.
  • Barratry:  Any willful misconduct on the part of the masters or crew, in pursuance of some unlawful or fraudulent purpose, without the consent of the owners and to the prejudice of the owner’s interest.
  • Jettison:  Intentional casting overboard of any part of a venture exposed to a peril, whether it be of the cargo, or the ship’s furniture or tackle, in the hope of saving the rest of the venture.
  • Insurable Interest in Marine Insurance:  Determined when one will sustain loss from the destruction of the subject matter or derive benefit from its preservation.
  • Charter Party:  Contract by virtue of which the owner or the agent of a vessel binds himself to transport merchandise or persons for a fixed price.  It has also been defined as a contract by virtue of which the owner or the agent of the vessel for the transportation of goods or persons from one port to another.
  • Loan on Bottomry:  Contract in the nature of a mortgage whereby the owner of a ship borrows money for the use, equipment or repair of the vessel for a definite term, and pledges the ship as a security for repayment, with maritime or extraordinary interest on the account of the maritime risks to be borne by the lender.  It is stipulated in such a contract that if the ship be lost in the course of the specific voyage or during a specified limited time caused by any of the perils enumerated in the contract, the lender shall resolutely lose his money.
  • Loan on Respondentia:  Contract akin to that of mortgage made on the goods on board the ship, and which are to be sold or exchanged in the course of the voyage.  The goods serve as the principal security.
  • Freightage:  Signifies all the benefits derived by the owner, carriage of his own goods, or those of others.
  • Concealment:  In marine insurance, information or the belief or expectation of a 3rd person, in reference to a material fact is material.

n  Concealment of the following merely exonerates the insurer from the resulting loss therefrom:

  1. a.       national character of the insured
  2. b.       liability of the thing insured to capture and detention
  3. c.       liability to seizure from breach of foreign laws of trade
  4. d.       want of necessary documents
  5. e.       use of false and simulated papers
  • Implied Warranties:
  1. a.       that the ship is seaworthy – complied with if the ship is seaworthy at the time of commencement of risk, except:  (a)  insurance for a specified length of time – at the commencement of every voyage it undertakes during that time; (b) cargo to be transshipped at indeterminate port – each vessel upon which cargo is shipped is seaworthy at the commencement of each particular voyage
  2. b.       that the vessel shall not engage in illegal venture
  3. c.       that the vessel shall not deviate from the course of the voyage insured
  4. d.       where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which may cast reasonable suspicion thereon
  • Seaworthiness depends on:
  1. a.       nature of the ship
  2. b.       nature of the voyage
  3. c.       nature of the service

n  Seaworthiness of the vessel is required only at the commencement of the risk

n  Exceptions:

  1. a.       in a Time Policy – commencement of every voyage that must be undertaken
  2. b.       in a Cargo Policy – commencement of each particular voyage
  3. c.       in a Voyage Policy – commencement of each portion of the voyage
  • Deviation
  1. a.       a departure from the course of the voyage insured
  2. b.       unreasonable delay in pursuing the voyage
  3. c.       commencement of an entirely different voyage
  • When is Deviation proper?
  1. a.       when caused by circumstances over which neither the master not the owner of the ship has any control
  2. b.       when necessary to comply with a warranty or to avoid a peril whether it is insured against or not
  3. c.       when made in good faith for the purpose of saving human life or relieving another vessel in distress
  4. d.       when made in good faith and upon reasonable grounds of belief in its necessity to avoid a peril
  • Loss
  1. a.       Actual Total Loss

n  a total destruction of the thing insured

n  the irretrievable loss of the thing by sinking or by being broken up

n  any damage to the thing which renders it valueless tot he owner for which he held it

n  any other event which effectively deprives the owner of possession, at the port of destination, of the thing insured

  1. b.       Constructive Total Loss – gives to the person insured the right to abandon
  • Average – any extraordinary or additional expense incurred during the voyage for the preservation of the vessel, cargo, or both and all damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo unloaded
  • General Average – an expense or damage suffered deliberately in order to save the vessel, its cargo, or both from the real or known risk
  • Abandonment – act of the insured by which, after a constructive total loss, he declares the relinquishment to the insured of his interest in the thing insured (where the cause of loss is a peril insured against)

(a)    more than ¾ thereof in value is actually lost or would have been expended to recover it from the peril

(b)    it is injured to such an extent as to reduce its value by more than ¾

(c)     if the thing insured is the ship and the voyage cannot be lawfully performed without incurring an expense of more than ¾ of the whole, or a risk which a prudent man would not undertake under the circumstances

(d)    if the thing insured is cargo or freightage, and the voyage cannot be performed on another ship procured by the master within a reasonable time and with reasonable diligence to forward the cargo without incurring an expense or a risk as stated above

  • Freightage cannot be abandoned unless ship is also abandoned.
  • Requisites of a Valid Abandonment:
  1. a.       must be total and conditional
  2. b.       made within a reasonable time
  3. c.       explicit notice
  4. d.       coupled with actual abandonment
  • Requisites for Valid Valuation in the Valued Marine Policy:
  1. a.       insured must have interest at risk
  2. b.       there must be no fraud on the insured’s part
  • Notice of Abandonment:
  1. a.       may be oral or in writing (if oral, written notice must be submitted within 7 days from oral notice)
  2. b.       must be explicit
  3. c.       must specify the particular cause for abandonment
  4. d.       need not be accompanied by proof of interest or loss
  • Acceptance of Abandonment
  1. a.       may be express or implied (i.e. silence for unreasonable length of time)
  2. b.       conclusive upon the parties and admits the loss and sufficiency of abandonment
  3. c.       irrevocable, unless the ground on which it is made is proved to be unfounded
  • If insurer refuses to accept a valid abandonment – liable as upon actual total loss
  • Upon actual abandonment
  1. a.       freightage earned before loss – belongs to the insurer of freightage
  2. b.       freightage earned after loss – belongs to insurer of ship
  • Co-insurance:  form of insurance in which the person who insures his property for less than the entire value is understood to be his own insurer for the difference which exists between the true value of the property and the amount of insurance
  • Co-insurance applies only where the:
  1. a.       insurance taken is less than the actual value of the thing insured
  2. b.       loss is partial
  • Primage – increase in freightage
  1. 24.   Fire Insurance

Insurer is liable for loss or damage caused by hostile fire (fire that escapes from the place where it was intended to burn and ought to be in) and not that caused by friendly fire (fire which burns in a place where it is intended to burn).

  • Scope of Fire Insurance:
  1. a.       fire
  2. b.       lightning
  3. c.       windstorms
  4. d.       tornado
  5. e.       earthquake
  6. f.         other allied risks
  • When does alteration in the use or condition entitle the insurer to rescind the contract?
  1. a.       such alteration violates a provision in the policy
  2. b.       it was made without the insurer’s consent
  3. c.       it is done within the insured’s control, and it increases the risk of loss or damage
  • Rules:
  1. a.       policy shall not protect the insured from injury consequent upon his negligent use or management of fire, so long as it is confined to the place where it ought to be
  2. b.       if it escapes, even though the insured was negligent, the insurer is liable
  3. c.       even though a fire may remain in its proper place, it may become hostile if it by accident, becomes so extensive as to be beyond control
  • Options of the Insurer
  1. a.       purchase the property at appraised valuation
  2. b.       restore the property damaged – contract of insurance is discharged and parties enter into a new contract of insurance
  1. 25.   Casualty Insurance:  Any injury that is intended, unexpected and unusual, even though it results from an act or even which was intelligently done.
  • Insurer is Liable for death/injury to insured:
  1. a.       by his own hand while insane
  2. b.       by taking poison by mistake
  3. c.       by overdoes of drugs administered or taken by mistake, by ignorance or material pathological conditions
  4. d.       by unexpected bacterial infection consequent upon doing acts, even though such acts were intentionally done
  5. e.       by unprovoked violence of others
  • Compulsory Motor Vehicle Liability Insurance

Persons subject to CMVLI:

  1. a.       motor vehicle owner or one who is the actual legal owner of a motor vehicle in whose name such vehicle is registered with the LTO
  2. b.       land transport operator or one who is the owner of a motor vehicle or vehicles being used for conveying passengers for compensation (including school buses)
  • No Fault Indemnity Clause:  The insurance company shall pay any claim for death or bodily injuries sustained by a passenger or 3rd party without the necessity of proving fault or negligence of any kind subject to certain conditions.  This does not apply to property damage.
  1. 26.   Suretyship – an agreement whereby the surety guarantees the performance of the principal or obligor of an obligation or undertaking in favor of a 3rd party called the obligee
  1. 27.   Life Insurance:  an insurance in human life and insurance appertaining thereto or connected therewith may be payable:
    1. a.       on the death of the insured
    2. b.       on his surviving a specified period
    3. c.       otherwise, contingently on the continuance or cessation of life

(b and c refer to endowment or annuities)

  • Uses and Common Kinds of Life Insurance:
  1. a.       Whole Life or Ordinary Policies – here, the insured agrees to pay annual, semi-annual or quarterly premiums while he lives.  The insurer agrees to pay the face value of the policy upon the death of the insured.
  2. b.       Limited Payment Life Policy – premiums paid only for a specified period of years.
  3. c.       Term Policy – insurer’s liability arises only upon the death of the insured within the agreed term as period.  If the latter survives the period, the contract terminates and the insurer is not liable
  4. d.       Endowment Policy – insurer agrees to pay a certain sum to the insured if the latter outlives a designated period; if he dies before that time, the proceeds are paid to the beneficiary
  5. e.       Life Annuity – debtor binds himself to pay an annual pension or income during the life of one or more persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him with the burden of income
  1. 28.   The Business of Insurance
    1. a.       Life or Endowment Policies

Grace Period – 30 days for the payment of any premium due after the first premium has been paid

Period of Incontestability – after the lapse of 2 years from the date of issue or date of approval of last reinstatement

Reinstatement of Policy – within 3 years from the date of default of premium, upon:

  1. a.       production of evidence of insurability, and
  2. b.       payment of all overdue premiums and any indebtedness to the company upon said policy


  1. a.       if cash surrender value has been paid
  2. b.       if period of extension has expired
  1. b.       Claims Settlement

Unfair Claims Settlement Practices:

(a)    knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue

(b)    failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies

(c)     failing to adopt or implement reasonable standards for the prompt investigation of claims arising under its policies

(d)    no attempt in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear

(e)    compelling policy holders to institute suits to recover the amount due under its policies by offering with no justifiable reason an amount substantially less than that ultimately recovered in suits brought by them

Proceeds of Life Insurance – payable within 60 days after:

(a)    presentation of claims, and

(b)    filing of proof of death (upon failure to pay interest, at the rate of 2 times the ceiling prescribed by the Monetary Board unless based on the ground that the rate is fraudulent)

Proceeds of Policies other than Life – payable:

(a)    upon proof of loss

(b)    upon ascertainment of loss or damage (if not made within 60 days of proof of loss, payable in 90 days)

  1. c.       Power of Commissioner to Suspend/Revoke License

(a)    if insurance contract is in unsound condition

(b)    if it has failed to comply with the provisions of law or regulations obligatory upon it

(c)     its conditions or methods of business s such as to render its proceedings hazardous to the public or to its policy holders

(d)    that its paid up capital stock, or its available cash assets, or its security deposits, as the case may be, is impaired or deficient

(e)    that the margin of solvency required of each company is deficient

Insurance Agent – any person who for compensation solicits or obtains insurance on behalf of any insurance company or transacts for a person other than himself an application for a policy or contract of insurance to or from such company or offers or assumes to act in negotiating of such insurance.  He must be first licensed as such before doing any acts as insurance agent.

Insurance Broker – any person for any compensation, commission or any other thing of value, acts, or aids in any manner in soliciting, negotiating or procuring the making of any insurance contract or in placing risk or taking out insurance, on behalf of an insured other than himself.  A license is required.


  1. 1.       Warehouse – a building or place where goods are deposited and stored for profit.
  1. 2.       Warehouseman – person lawfully engaged in the business of storing goods for profit.
  • Only  a warehouseman may issue warehouse receipts.
  1. 3.       Warehouse Receipt – written acknowledgment by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued.
  1. 4.       Non-negotiable Receipt – receipt deliverable to a specified person.
  1. 5.       Negotiable Receipt – receipt deliverable to order or to bearer.
  1. 6.       Essential Terms which MUST be embodied in a Warehouse Receipt:
    1. a.       location of the warehouse
    2. b.       date of the issue of the receipt
    3. c.       consecutive number of the receipt
    4. d.       statement whether the goods received will be delivered to bearer, or a specified person, or his order
    5. e.       rate of storage charges
    6. f.         description of the goods or packages containing them for identification purposes
    7. g.       signature of the warehouseman
    8. h.       statement of the amount of advances made and of liabilities incurred for which the warehouseman claims as lien
  1. 7.       Effect of omission of any of the essential terms:
    1. a.       The validity of the warehouse receipt is not affected.
    2. b.       The warehouseman shall be held liable for damages to those injured by his omission.
    3. c.       The negotiability of the warehouse receipt is not affected.
    4. d.       The issuance of a warehouse receipt in the form provided by the law is merely permissive and directory and not mandatory in the sense that if the requirements are not observed, then the goods delivered for storage become ordinary deposits.
  1. 8.       Terms which may be inserted in a Warehouse Receipt:  Any other terms except (a) those contrary to the provisions of this Act; (b) those that would impair a warehouseman’s obligation to exercise that degree of care in the safekeeping of the goods entrusted to him
  1. 9.       Marks to be made on a warehouse receipt:
    1. a.       A non-negotiable receipt must be clearly marked non-negotiable or not negotiable, otherwise, the holder of the receipt who purchased it for value and who supposed it to be negotiable, may treat it as negotiable.
    2. b.       Duplicate receipts must be so marked, otherwise, the warehouseman is held liable for all damages suffered by a holder believing the same to be the original.
  1. 10.   Warranties of a warehouseman as to duplicate receipts:
    1. a.       The duplicate is an accurate copy of the original receipt.
    2. b.       Such original receipt is uncancelled at the date of the issue of the duplicate.
  1. 11.   Effects of alteration on the liability of the warehouseman:
    1. a.       If the alteration is IMMATERIAL (the tenor of the receipt is not changed), whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor.
    2. b.       If the alteration is MATERIAL but AUTHORIZED, the warehouseman is liable according to the terms of the altered receipt.
    3. c.       If the alteration is MATERIAL, UNAUTHORIZED but INNOCENTLY MADE, the warehouseman is liable on the altered receipt according to its original tenor.
    4. d.       If the alteration is MATERIAL and FRAUDULENTLY MADE, the warehouseman is liable:

(1)    to the purchaser of the receipt for value and without notice of the alteration according to the tenor of the altered receipt

(2)    to the alterer, according to the terms of the original receipt

(3)    to subsequent purchasers with notice of the alteration, according to the terms of the original receipt

  1. 12.   Effects of misdescription of goods:
    1. a.       A warehouseman is under the obligation to deliver the identical property stored with him and if he fails to do so, he is liable directly to the owner.
    2. b.       As against a bona fide purchaser of a warehouse receipt, the warehouseman is estopped from denying that he has received the goods described in the receipt.
    3. c.       If the description consists merely of marks or label upon the goods or upon the packages containing them, the warehouseman is not liable even if the goods are not of the kind as indicated in the marks or labels.
  1. 13.   Principal Obligations of a Warehouseman:
    1. a.       To take care of the goods entrusted to his safekeeping
  • General Rule:  A warehouseman is required to exercise such degree of care which a reasonable careful owner would exercise over similar goods of his own.  He shall be liable for any loss or injury to the goods caused by his failure to exercise such care.
  • Exception:  He shall not be liable for any loss or injury which could not have been avoided by the exercise of such care.
  • Exception to the Exception:  He may limit his liability to an agreed value of the property received in case of loss. He cannot stipulate that he will not be responsible for any loss caused by his negligence.
  1. b.       To deliver the goods to the holder of the receipt or the depositor upon demand, provided demand is accompanied with:

(1)    an offer to satisfy the warehouseman’s lien;

(2)    an offer to surrender the negotiable receipt properly endorsed.  If the receipt is non-negotiable, any person lawfully entitled to the possession of the goods may be entitled to delivery without surrender of the receipt.

(3)    a readiness and willingness to sign an acknowledgment that the goods have been delivered if such is requested by the warehouseman.

  1. 14.   Persons to whom goods must be delivered:
    1. A.      Persons lawfully entitled to the possession of the goods or his agent:

a.  persons to whom a competent court has ordered the delivery of the goods

(1)    where a negotiable instrument has been lost or destroyed, the court may order delivery to a person upon satisfactory proof of such loss or destruction and upon proper posting of a bond to protect the warehouseman from any liability or expense which he may incur by reason of the original receipt remaining outstanding.

(2)    where more than one person claims title or possession of the goods the warehouseman may require all claimants to interplead.  The court will then order delivery to the person having a better right.

  1. b.       an attaching creditor – Goods, while in the possession of the warehouseman and covered by a negotiable receipt, cannot be attached or levied upon under an execution unless:

(I)      the negotiable receipt is first surrendered to the warehouseman, or

(ii)     its negotiation is enjoined, or

(iii)   the receipt is impounded by the court

c.  to the purchaser in case of sale of the goods by the warehouseman to enforce his lien

  1. d.       to the purchaser where perishable or hazardous goods are sold at private or public sale
  1. B.      If goods are covered by a non-negotiable receipt:
    1. a.       a person entitled to the delivery by the terms of the receipt, or
    2. b.       one who has written authority from letter a
  1. C.      If goods are covered by a negotiable receipt, a person in possession of the receipt, the terms of which the goods are deliverable:
    1. a.       to him or order
    2. b.       to bearer
    3. c.       indorsed to him
    4. d.       indorsed in blank by the person whom delivery was promised
  1. 15.   When is there Misdelivery?

When the warehouseman delivers the goods to a person who is not in fact lawfully entitled to the possession of the goods because:

  1. a.       the person does not fall under letter B or C above; or
  2. b.       the person falls under letter B or C but prior to delivery, the warehouseman had either:

(1)    been requested by the person lawfully entitled to the delivery not to make such delivery, or

(2)    had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods

  1. 16.   Effects of Misdelivery:

The warehouseman shall be liable for conversion to all having a right to property or possession of the goods.

  1. 17.   What happens if there is proper delivery or partial delivery but the warehouseman fails to cancel the receipt or record on the receipt of such partial delivery?
    1. a.       If goods covered by a negotiable warehouse receipt are delivered by a warehouseman but he fails to take the receipt and cancel it, then he is still liable to one who purchases for value and in good faith such receipt.
    2. b.       If he makes partial delivery of the goods but fails to record the partial delivery on the receipt then he may still be held liable for the entire receipt to one who purchases for value and in good faith such receipt.
  1. 18.   Lawful excuses for refusal to deliver goods:
    1. a.       The warehouseman can refuse to deliver the goods if he has acquired title or right to the possession of the goods:

(1)    directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; or

(2)    from the warehouseman’s lien

  1. b.       If someone other than the depositor or person claiming under the depositor has a claim to the title or possession of the goods and the warehouseman has information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods either to the depositor or person claiming under him until he has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel all claimants to interplead.
  1. c.       The warehouseman will not be required to deliver the goods if such had been lost.  But this is without prejudice to liabilities which may be incurred by him due to such loss.
  1. d.       The warehouseman having a valid lien against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
  1. e.       If goods have been lawfully sold or disposed of because of their perishable or hazardous nature, the warehouseman shall not be liable for failure to deliver the goods.
  1. 19.   A warehouseman cannot refuse to deliver goods to the depositor or to a person claiming under him on the ground that adverse title to the goods belongs to a third person.
  1. 20.   Rules as regards Co-mingling of Deposited Goods:
  • General Rule:  A warehouseman may not co-mingle goods belonging to different depositors or belonging to the same depositor for which separate receipts had been issued.
  • Exception:  A warehouseman may co-mingle fungible goods of the same kind and grade provided he is authorized by agreement or by custom.
  1. 21.   Effect of Co-mingling of Goods:
    1. a.       The different owners become co-owners of the whole mass.
    2. b.       The warehouseman shall be severally liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had been kept separate.
  1. 22.   Remedies of a Creditor:  (the debtor being the owner of the negotiable receipt)

Creditors of the depositors, before negotiation, may protect themselves by obtaining a writ of preliminary injunction and serve the same on the depositor before he has a chance to negotiate the receipt.  Once enjoined, there will be no longer a danger that a 3rd person will be prejudiced so the goods may now be attached, levied upon, or that the vendor’s lien or the right of stoppage in transit be exercised.

  1. 23.   Warehouseman’s Lien
  • Extent of Warehouseman’s Lien:

A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands for:

  1. a.       all lawful charges for storage and preservation of the goods
  2. b.       all lawful claims for money advances, interest, insurance, transportation, labor, weighing, cooperating and other charges and expenses in relation to such goods
  3. c.       all reasonable charges and expenses for notice and advertisements of sale and for sale of the goods where default has been made in satisfying the warehouse lien
  • Goods Subject to lien:
  1. a.       goods belonging to the depositor who is liable to the warehouseman as debtor whenever such goods are deposited and
  2. b.       goods belonging to other persons stored by the depositor who is liable to the warehouseman as debtor with authority to make a valid pledge
  • How is a lien enforced?
  1. a.       by refusing to deliver the goods until the lien is satisfied
  2. b.       by causing the extrajudicial sale of the property and applying the proceeds to the value of the lien
  3. c.       by filing a civil action for unpaid charges or by way of counterclaim in an action to recover the property from him
  • How is a lien lost?
  1. a.       when the warehouseman voluntarily surrenders possession of the goods without requiring payment of his lien; or
  2. b.       when the warehouseman wrongfully refuses to deliver the goods when a demand is made with which he is bound to comply
  1. 24.   Negotiation and Transfer of Receipts
  • How do we negotiate a receipt deliverable to order?
  1. a.       by indorsing it in blank thereby making it deliverable to bearer or
  2. b.       by special indorsement – which would require further indorsements for further negotiations.

In both cases, the indorsements must be coupled with delivery.

  • How do we negotiate a receipt deliverable to bearer?

There is no need to indorse for negotiation.  Physical delivery of the instrument will suffice.  But if the instrument is indorsed specially, the bearer character of the receipt is destroyed and for further negotiation, there will be a need for indorsement.

  • Who may negotiate warehouse receipts?
  1. a.       the owner of the receipt, or
  2. b.       the person to whom possession of the receipt was entrusted to by the owner
  • Rights acquired by a person to whom the receipt has been negotiated:
  1. a.       the title of the person negotiating the receipt over the goods covered by the receipt
  2. b.       the title of the person (depositor or owner) to whose order by the terms of the receipt the goods were to be delivered
  3. c.       the direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly contracted with him
  • May non negotiable receipts be negotiated?

No, even if the receipt is indorsed, the transferee acquires no additional right.  That is why they are called non negotiable receipts.  But they may be transferred or assigned by delivery.

  • Rights of a person to whom a non negotiable receipt has been transferred:
  1. a.       the title to the goods as against the transferor
  2. b.       the right to notify the warehouseman of the transfer thereof and
  3. c.       the right thereafter to acquire the obligation of the warehouseman to hold the goods for him
  • Distinction between a non negotiable receipt from a negotiable receipt with regard to attachment or execution upon goods:

Non-negotiable Receipt

Negotiable Receipt

Prior to notification of the warehouseman by the transferor or transferee, the warehouseman is not bound to the transferee whose right may be defeated by a levy of an attachment or execution upon the goods by the creditor of the transferor or by a notification to such warehouseman of the subsequent sale of the goods. The goods cannot be attached or levied under an execution unless the receipt be first surrendered to the warehouseman or its negotiation enjoined.
  • Rights of a person to whom a negotiable receipt has been transferred, not indorsed:
  1. a.       the right to the goods as against the transferor
  2. b.       the right to compel the transferor to indorse the receipt.  But if the intention of the parties is that the receipt should merely be transferred, the transferee has no right to require the transferor to indorse the receipt.

Note:  Negotiation takes effect as of the time when the indorsement is actually made.

  • Warranties of a person negotiating or transferring a receipt:
  1. a.       the receipt is genuine
  2. b.       he has a legal right to negotiate or transfer it
  3. c.       he has knowledge that would impair the validity or worth of the receipt and
  4. d.       he has a right to transfer the title to the goods and that the goods are merchantable
  • A holder for security of a receipt (mortgagee or pledgee) who in good faith accepts payment of the debt from a person does not warrant the genuineness of the receipt not the quality or quantity of the goods therein described.
  • It is the duty of the purchaser, mortgagee or pledgee of goods for which a negotiable receipt has been issued to require the negotiation of the receipt to him, otherwise his failure will have the same effect as an express authorization on his part to the seller, mortgagor, or pledgor in possession of such receipt to make any subsequent negotiation.  The subsequent purchaser must have taken the receipt in good faith and for value.
  • A bona fide purchaser of a negotiable warehouse receipt acquires title to the goods where he purchases from the owner’s agent within the actual or apparent scope of his authority.  In sum, negotiation is valid despite having been made in breach of trust.
  • Distinctions between a negotiable instrument and a negotiable warehouse receipt:

Negotiable Instrument

Negotiable Warehouse Receipt

When a negotiable instrument is altered deliberately, it becomes null and void. When a warehouse receipt is altered, it is still valid but it may be enforced only in accordance with its original tenor.
If a negotiable instrument is originally payable to bearer, it will always remain so payable regardless of the way it is indorsed, whether specially or in blank. If a warehouse receipt, payable to bearer, is indorsed specially, it will be converted into a receipt deliverable to order and can only be negotiated further by indorsement and delivery.
A holder in due course may be able to obtain a title better than that which the party who negotiated the instrument to him had. An indorsee even if a holder in due course obtains only such title as the person negotiating has over the goods.
The indorsement of a negotiable instrument has a double effect.  It is at the same time a conveyance of the instrument and a contract the indorser has with the indorsee that on certain conditions, the indorser will pay the instrument if the party primarily liable fails to do so. The indorsement of a warehouse receipt amounts merely to a conveyance by the indorser.  Accordingly, an indorser of a receipt shall not be liable to the holder if, for example, the warehouseman fails to deliver the goods because they were lost due to his fault or negligence.


  • Any warehouseman receiving commodities for (a)  storage; (b) milling; (c) co-mingling must:
  1. a.       obtain prior license from the Bureau of Commerce
  2. b.       file a bond in an amount equivalent to 33 1/3 % of the capacity of the warehouse against which bond depositors may sue directly
  3. c.       open to the public, no discrimination allowed
  4. d.       liable for double market value should he accept goods in excess of the capacity of warehouse if goods are damaged or destroyed
  • Note:  for palay and corn license, a bond with the National Grains Authority is required; also an insurance cover is required.

 Uniform Currency Law

  1. 1.       Obligations Null and Void
    1. a.       obligations payable in gold/foreign currency
    2. b.       obligations payable in Philippine currency but measured in gold/foreign currency
  1. 2.       Exempt Transactions
    1. a.       government to government transactions or with international banking institutions
    2. b.       transactions affecting high priority economic projects
    3. c.       forward exchange transactions between banks
    4. d.       import and export and other international banking, financial, investment and industrial transactions
  1. 3.       Merchants and Commercial Transactions
  • Classes of Investments:
  1. a.       Permitted – one allowed without need of prior authority from the Philippine Government.  If registered status, invest up to extent as not to affect its registered status.  If enterprise not registered, investment not to exceed 40%.
  2. b.       Permissible – invest in excess of 40% in unregistered enterprise but with prior approval of BOI
  3. c.       Pioneer Area – (a)  involves manufacturing, processing, production of product not produced at all/produced in non-commercial scale; (b)  uses a design, scheme, formula that is new and untried in the Phils.; (c) agricultural activities/services essential to the attainment of food sufficiency; (d) produces non-conventional fuels/utilizes non-conventional sources of energy (all others are non-pioneer)
  1. 4.       Absolutely Disqualified to become Merchants
    1. a.       serving penalty of civil interdiction
    2. b.       insolvent
    3. c.       absolutely disqualified by special laws
  1. 5.       Relatively Disqualified
    1. a.       judicial and prosecuting officials in active service
    2. b.       administrative, economic, military chiefs
    3. c.       government collection agents and custodian of funds
    4. d.       stock and commercial brokers
    5. e.       by special laws cannot trade in specified territories
  1. 6.       Books a Merchant must keep
    1. a.       book of inventories and balances, statement of assets, liabilities and capital
    2. b.       journal of day to day operations
    3. c.       ledger for classifying accounts
    4. d.       copying book for letters and telegrams; if juridical person, include book of minutes and stock and transfer book
  1. 7.       Probative Value of Merchant’s Book
    1. a.       evidence against merchants themselves
    2. b.       in case of conflicts between 2 books – that which s properly kept prevails
    3. c.       if one keeps books and the other does not and cannot explain why, the former prevails
    4. d.       if both books are properly kept and there is a conflict, other proofs can be resorted to
  1. 8.       Commercial Contracts by Correspondence are perfected from the moment the offeree accepts the offer, even before knowledge of said acceptance by the offeror.  This does not apply to deposit, guaranty, sales, loan, agency, partnership.
  1. 9.       Joint Account Partnership – business arrangement whereby 2 or more persons interest themselves in the business of another by making contributions thereto and participating in the results thereof
    1. a.       only one member is ostensible, others are silent
    2. b.       no common name
    3. c.       only ostensible partners can sue/be sued
    4. d.       no juridical personality

Transportation Law

  1. 1.       Contract of Transportation – contract whereby a certain person or association of persons obligate themselves to transport persons, things, news, from one place to another for a fixed price
  1. 2.       Parties to the Contract of Transportation:
    1. a.       Shipper – one who gives rise to the contract of transportation by agreeing to deliver the things or news to be transported, or to present his own person or those of other or others in the case of transportation of passengers
    2. b.       Carrier/Conductor – one who binds himself to transport persons, things, or news, as the case may be, or one employed in or engaged in the business of carrying goods for others for hire
  1. 3.       Common Carrier – person, corporation, firm, association engaged in the business of carrying or transporting passengers, goods or both, by land, water, air, for compensation, offering services to the public; must exercise extraordinary diligence

Private Carrier – not engaged in the business of carrying; no public employment; undertakes to deliver goods/passengers for compensation; requires only ordinary diligence

4.  Requisites of Caso Fortuito

  1. a.       event independent of human will
  2. b.       occurrence makes it impossible for debtor to perform in normal manner
  3. c.       debtor free from aggravation/participation
  4. d.       impossible to foresee or avoid
  1. 5.       Contributory negligence does not entitle passengers to recover moral/exemplary damages.
  1. 6.       Bill of Lading – written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or his carrier

It is not indispensable to the creation of a contract of carriage.  The contract itself arises from the moment goods are delivered by shipper to carrier and the carrier agrees to carry them.

The function of the Bill of Lading:  the legal basis of the contract between the shipper and carrier shall be the bills of lading, by the contents of which all disputes which may arise with regard to their execution and fulfillment shall be decided, no exceptions being admissible other than forgery or material errors in the drafting thereof.

Carrier’s responsibility starts from the moment he receives unconditionally the merchandise personally or through an agent and lasts until he delivers them actually or constructively to the consignee or his agent.

Mere delay in the delivery of goods to consignee does not give right to refuse goods – only breach of contract, ergo damages.  If delay is unreasonable, then he may refuse to accept and make carrier liable for conversion.

  1. 7.       Vessels – those engaged in navigation, whether coastwise or on the high seas, including floating docks, pontoons, dredges, scows and any other floating apparatus destined for the services of the industry or maritime commerce
  1. 8.       Persons Participating in Maritime Commerce:
    1. a.       ship owner and/or ship agent
    2. b.       captain or master
    3. c.       other officers of the vessel
    4. d.       supercargo
  1. 9.       Liability of Ship owners and Ship agents:
    1. a.       civil liability for the acts of the captain
    2. b.       civil liability for contracts entered into by the captain to repair, equip and provision the vessel, provided that the amount claimed was invested for the benefit of the vessel
    3. c.       civil liability for indemnities in favor of 3rd persons which may arise from the conduct of the captain in the care of the goods which the vessel carried, as well as for the safety of the passengers transported
  • Ship owner/ship agent 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 made use of for the benefit of the vessel, the ship owner or ship agent is liable.
  1. 10.   Doctrine of Limited Liability – liability of shipowners is limited to amount of interest in said vessel because of the real and hypothecary nature of maritime law such that where the vessel is entirely lost, the obligation is extinguished.

Exceptions:  (1)  vessel is not abandoned

(2)    claims under workmen’s compensation

(3)    injury/damage due to shipowner’s fault

(4)    vessel is insured

  • The doctrine also applies for claims due to death or injuries to passengers, aside from claims for goods.
  • In abandoning the vessel, there is no procedure to be followed.  There is neither a prescriptive period within which the ship owner can make the abandonment.  He may do so for so long as he is not estopped from invoking the same or do acts inconsistent with abandonment.
  1. 11.   Roles of the Captain:
    1. a.       general agent of the ship owner
    2. b.       technical director of the vessels
    3. c.       represents the government of the country under whose flag he navigates
  1. 12.   Loan on Bottomry – made by shipowner/ship agent guaranteed by vessel itself, repayable upon arrival at destination
  1. 13.   Loan In Respondentia – taken on security of the cargo repayable upon the safe arrival at cargo destination
  1. 14.   Accidents and Damages in Maritime Commerce:
    1. a.       Averages
    2. b.       Arrivals Under Stress
    3. c.       Collisions
    4. d.       Shipwrecks
  1. 15.   Average:
    1. a.       all extraordinary or accidental expenses which may be incurred during the voyage for the preservation of the vessel or cargo or both
    2. b.       all damages or deterioration which the vessel may suffer from the time it puts to sea at the port of departure until it casts anchor at the port of destination, and those suffered by the merchandise from the time they are loaded in the port of shipment until they are unloaded in the port of their consignment
  1. 16.   Simple Average – expenses/damages caused to the vessel/cargo not inured to common benefit and profit of all the persons interested in the vessel and her cargo; borne by respective owners
  1. 17.   General Average – expenses/damages deliberately caused in order to save the vessel, its cargo or both from a real and known risk


  1. a.       deliberately incurred
  2. b.       intended to save vessel and cargo or both
  3. c.       from real and known risk
  4. d.       there is success
  1. 18.   Formalities for Incurring Gross Average:
    1. a.       there must be an assembly of the sailing mate and other officers with the captain including those with interests in the cargo
    2. b.       there must be a resolution of the captain
    3. c.       the resolution shall be entered in the log book, with the reasons and motives and the votes for and against the resolution
    4. d.       the minutes shall be signed by the parties
    5. e.       within 24 hours upon arrival at the first port the captain makes, he shall deliver one copy of these minutes to the maritime judicial authority thereat
  1. 19.   Arrivals under Stress – arrival of the vessel at a port not of destination on account of (a) lack of provisions; (b) well-founded fear of seizure; (c) by reason of accident of the sea disabling it to navigate

When Not Lawful:

  1. a.       lack of provisions due to negligence to carry according to usage and customs
  2. b.       risk of enemy not well known or manifest
  3. c.       defect of vessel due to improper repair
  4. d.       malice, negligence, lack of foresight or skill of captain
  1. 20.   Collision – impact of 2 vessels both of which are moving
  1. 21.   Allision – striking of a moving vessel against one that is stationary
  1. 22.   Cases of Collision:
    1. a.       due to the fault, negligence or lack of skill of the captain, sailing mate or the complement of the vessel – ship owner liable for the losses and damages (Culpable Fault)
    2. b.       due to fortuitous event or force majeure – each vessel and its cargo shall bear its own damages (Fortuitous)
    3. c.       it cannot be determined which of the 2 vessels caused the collision – each vessel shall suffer its own damages, and both shall be solidarily responsible for the losses and damages occasioned to their cargoes (Inscrutable Fault)
  1. 23.   Error in Extremis – sudden movement made by a faultless vessel during the 3rd zone of collision with another vessel which is at fault, even if the said movement is wrong, no responsibility will fall on said vessel
  1. 24.   Shipwreck – denotes all types of loss/ wreck of a vessel at sea either by being swallowed up by the waves, by running against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation
  1. 25.   Salvage – the compensation allowed to persons by whose voluntary assistance a ship at sea or her cargo or both have been saved in whole or in part from an impending peril, or such property recovered from actual peril or loss, in cases of shipwrecks, derelict or recapture; a service which one person renders to the owner of a ship or goods by his own labor, preserving the goods or ship which the owner or those entrusted with the care of them either abandoned in distress at sea or are unable to protect and secure; a permit is required to engage in the salvage business
  1. 26.   Derelict – a ship or cargo which is abandoned and deserted at sea by those who are in charge of it, without any hope of recovering it, or without any intention of returning it
  1. 27.   Elements of a Valid Salvage:
    1. a.       a marine peril
    2. b.       service voluntarily rendered when not required as an existing duty or from special contract
    3. c.       success, in whole or in part, or that the services rendered contributed to such success
  1. 28.   Contract of Towage – contract whereby a vessel usually motorized pulls another from one place to another for compensation.  It is a contract of services.
  1. 29.   Difference between Towage and Salvage:



crew of salvaging ship is entitled to salvage, and can look to the salvaged vessel for its share crew of the towing ship does not have any interest or rights with the remuneration pursuant to the contract
salvor takes possession and may retain possession until he is paid tower has no possessory lien; only an action for recovery of sum of money
court has power to reduce the amount of remuneration if unconscionable court has no power to change amount in towage even if unconscionable

 Carriage of Goods by Sea Act

  1. 1.       When Applicable:
    1. a.       contracts for the carriage of goods
    2. b.       by sea
    3. c.       to and from Philippine ports
    4. d.       in foreign trade
  1. 2.       Notice of Loss or damage must be given in writing to the carrier or his agent at the port of discharge or at the time of the removal of the goods into the custody of the person entitled to delivery.  If the loss or damage is not apparent, the notice must be given within 3 days of delivery.  However, the carrier shall be discharged from all liability in respect of loss or damage of goods unless suit is brought within 1 year after delivery of the goods or the date when the goods should have been delivered.  Notice of loss, if not given, that fact shall not affect or prejudice the right of the shipper to bring suit within the 1 year prescriptive period.

 Warsaw Convention

  1. 1.       When Applicable:
    1. a.       international transport by air
    2. b.       transport of persons, baggage, or goods
  1. 2.       Liabilities under the Convention:
    1. a.       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
    2. b.       loss or damage to any check baggage or goods sustained during the transport by air
    3. c.       delay in the transport by air of passengers, baggage, or goods
  • Enumeration of causes of action as above stated is not an exclusive list. (Northwest Airlines vs. Cancer)
  1. 3.       Meaning of Transport by Air – period during which the baggage or goods are in charge of the carrier, whether in an airport or on board an aircraft, or in the case of landing outside an airport, in any place whatsoever
  1. 4.       Action for damages must be brought at the option of the plaintiff, either:
    1. a.       before the court of the domicile of the carrier;
    2. b.       court of principal place of business of carrier;
    3. c.       court where he has a place of business through which the contract has been made;
    4. d.       before the court at the place of destination
  1. 5.       Convention provides for a limitation of liability:
    1. a.       for each passenger – limited to 125,000 francs
    2. b.       for goods and checked in baggage – limited to 250 francs per kilogram
    3. c.       for hand carry – limited to 5,000 francs per passenger
  • When can you not avail of this limitation?

(1)    willful misconduct

(2)    default amounting to willful misconduct

(3)    accepting passengers without ticket

(4)    accepting goods without airway bill or baggage without baggage chec

  1. 6.       The right to damages shall be extinguished if an action is not brought within 2 years from the date of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the transportation stopped.
  1. 7.       Notice requirement:  damage to baggage :  within 3 days from receipt

damage to goods:  within 7 days from receipt

delay:  within 21 days from receipt

  • Failure to file written notice, no action shall lie against the carrier, save in the case of fraud on his part.
  1. 8.       Notice Requirements:



Code of Commerce

Warsaw Convention

loss/damage apparent protest at time of receipt of goods protest at time of receipt of goods  
loss/damage not apparent protest within 3 days from delivery protest within 24 hours after receipt  
damage of baggage     protest within 3 days from receipt
damage of goods     within 7 days from receipt
delay     within 21 days from receipt

 Public Service Act

  1. 1.       Every person that may own, operate, manage, control in the Philippines, for hire/compensation with general/limited clientele whether permanent, occasional, accidental, and done for a general business purpose any common carrier, shipyard, electric light, heat and power and public utility.
  1. 2.       Public Utility – business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service.
  1. 3.       Prior Operator Rule – before permitting a new operator to invade the territory of another already established, the prior operator must be given an opportunity to extend its service to meet the public needs in the matter of transportation.
  1. 4.       Prior Applicant Rule – presupposes a situation where two interested persons apply for a CPC in the same community over which no person has yet been granted a CPC to operate.  If both applicants equal, then the applicant who applied first will be given the CPC.
  1. 5.       Distinctions between CPCs and CPCNs

Certificate of Public Convenience

Certificate of Public Convenience and Necessity

any authorization to operate a public service issued by the appropriate government agency issued by the appropriate government agency to a  public service to which any political subdivision has granted a franchise
an authorization issued by the proper government agency for the operation of public services for which no franchise, either municipal or legislative is required by law an authorization issued by the proper government agency for the operation of public services for which a franchise is required by law
  1. 6.       Requirements of CPC and franchise:
    1. a.       Filipino citizenship
    2. b.       financial capacity
    3. c.       public convenience

 Corporation Law

  1. 1.       Doctrine of Corporate Opportunity – a director is made to account to his corporation, gains and profits from transactions entered into by him/another competing corporation in which he has substantial interest, which should have been a transaction undertaken by the corporation.  This s a breach of fiduciary relationship.
  1. 2.       Doctrine of Piercing the Veil of Corporate Entity – it is to disregard for justifiable reasons by the state the fiction of juridical personality of the corporation separate and distinct from the persons composing it
  1. 3.       De Jure Corporation – corporation formed with all the requirements of law
  1. 4.       De Facto Corporation – corporation defectively formed from a bona fide attempt to incorporate under the existing law and exercises corporate powers
  1. 5.       Corporation by Estoppel – a group of persons which holds itself out as a corporation and enters into a contract with 3rd persons on the strength of such appearance cannot be permitted to deny its existence in an action under said contract
  1. 6.       Corporation by Prescription – body not lawfully organized as a corporation but has been recognized by immemorial usage as a corporation with rights and duties maintainable by law (ex. Roman Catholic)
  1. 7.       Trust Fund Doctrine – the subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits.  Corporations may not dissipate this and the creditors may sue the stockholders directly for their unpaid subscriptions
  1. 8.       Voting Shares
    1. a.       Founders Shares – given rights and privileges not enjoyed by owners of other stocks; right to vote/be voted in the election of directors shall not exceed 5 years

Non-Voting Shares

  1. a.       Preferred Shares – issued only with par value; given preference in distribution of assets in liquidation and in payment of dividends and other preferences stated in the articles of incorporation
  2. b.       Redeemable Shares – expressly provided in articles; have to be purchased/taken up upon expiration of period of said shares purchased whether or not there is unrestricted retained earnings
  3. c.       Treasury Stocks – stocks previously issued and fully paid for and reacquired by the corporation through lawful means (purchase, donation, etc.)
  1. 9.       Exceptions where holders of non-voting shares may vote:
    1. a.       amendments of articles of incorporation
    2. b.       adoption/amendment of by-laws
    3. c.       increase/decrease of bonded indebtedness
    4. d.       increase/decrease of capital stock
    5. e.       sale/disposition of all/substantially all corporate property
    6. f.         merger/consolidation of corporation
    7. g.       investment of funds in another corporation/another business purpose
    8. h.       corporate dissolution
  1. 10.   Preferred Cumulative Participating Share of Stock – share entitling its holder to preference in the payment of dividends ahead of common stockholders and to be paid the dividends ahead of common stockholders and to be paid the dividends due for prior years and to participate further with common stockholders in dividend declarations
  1. 11.   Promotion Stock for Services Rendered Prior to Incorporation Escrow Stock – stock deposited with a 3rd person to be delivered to stockholder/assignor after complying with certain conditions – usually payment of full subscription price
  1. 12.   Over-issued Stock – stock issued in excess of authorized capital stock; null and void
  1. 13.   Watered Stock – stock issued gratuitously, money/property less than par value, services less than par value, dividends where no surplus profits exist
  1. 14.   Certificate of Stock – written acknowledgment by the corporation of the stockholder’s interest in the corporation.  It is the personal property and may be mortgaged/pledged.  Transfer binds the corporation when it is recorded in the corporate books.  A stockholder who does not pay his subscription is not entitled to the issue of a stock certificate.  The total par value of the stocks subscribed by him should first be paid.
  1. 15.   Chattel mortgage of shares registered with the Registrar of Deeds need not be registered in corporate books to bind third parties because corporate books only cover absolute transfers.  But the pledgee/mortgagee may not have voting rights unless stated in the contract and registered in the corporate name.
  1. 16.   Methods of Collection of Unpaid Subscription
    1. a.       call, delinquency and sale at public auction of delinquent shares
    2. b.       ordinary civil action
    3. c.       collection from cash dividends and other amounts due to stockholders if allowed by by-laws/agreed to by him
  1. 17.   A corporation can reacquire stocks in the following cases:
    1. a.       eliminate fractional shares
    2. b.       corporate indebtedness arising from unpaid subscriptions
    3. c.       purchase delinquent shares
    4. d.       exercise of appraisal right
  1. 18.   Right of Appraisal
    1. a.       amending articles, changing, restricting, enlarging stockholder’s rights/extending, shortening corporate life
    2. b.       sale/disposition of all/substantially all of corporate assets
    3. c.       merger and consolidation
    4. d.       investment of funds in another corporation/for a different purpose
  1. 19.   Grounds for Rejection of Registration
    1. a.       not in prescribed form
    2. b.       purpose illegal, inimical
    3. c.       treasurer’s affidavit false
    4. d.       non-compliance with required Filipino stock ownership
  1. 20.   Corporation must organize within 2 years from issuance of certificate of incorporation.

     How to organize?

  1. a.       adoption of by-laws
  2. b.       election of Board of Directors
  3. c.       election of officers

But from issuance of certificate, it acquires juridical personality

  1. 21.   Merger – one corporation absorbs the other and remains in existence while the other is dissolved
  1. 22.   Consolidation – a new corporation is created and the consolidating corporations are extinguished
  1. 23.   Theory of General Capacity – a corporation is said to hold such powers as are not prohibited/withheld from it by general law
  1. 24.   Theory of Special Capacity – the corporation cannot exercise powers except those expressly/impliedly given
  1. 25.   Concession Theory – a group of persons wanting to create a corporation will have to execute documents and comply with requirements set by the state before being given corporate personality; merely a privilege; state may provide causes for which the privilege may be withdrawn
  1. 26.   Acts requiring majority vote of stockholder:
    1. a.       filing of issue value of no par value share
    2. b.       adoption, amendment, repeal of by-laws
    3. c.       compensation and other per diems for directors
  1. 27.   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 even without formal authorization of the board of directors
  1. 28.   Powers of stockholders:
    1. a.       a direct participation in management – where his vote is needed to approve certain corporate actions
    2. b.       indirect participation in management to vote or remove directors
    3. c.       proprietary rights
    4. d.       remedial rights
  1. 29.   Voting Trust Agreement – an agreement between a group of stockholders and trustee for a term not exceeding 5 years in which control over the stocks is lodged in the trustee.  The purpose is for controlling the voting.
    1. a.       in writing, notarized and filed with the SEC and the corporation
    2. b.       period not exceeding 5 years
    3. c.       cannot be entered into to circumvent the laws against monopolies, illegal combinations in restraint of trade in fraud
  1. 30.   Cumulative Voting – the number of votes that a shareholder’s number of shares multiplied by the number of directors may give all said votes to one candidate or he may distribute them as he may deem fit.  Cumulative voting is a matter of right in a stock corporation.  In a non-stock corporation, it cannot be utilized unless allowed by the by-laws/articles
  1. 31.   The power of removal of directors that may be exercised with or without cause cannot apply to the director representing the minority shareholders.  He may only be removed with cause.
  1. 32.   General Rule:  If surplus profits exceed the requirements the corporation shall declare dividends.  This is compulsory if the surplus is equal/or more than the paid-up capital.


  1. a.       justified by approved expansion projects
  2. b.       prohibited by creditor to declare dividends
  3. c.       retention is necessary under existing circumstances
  1. 33.   Business Judgment Rule – decisions made by a corporation’s management body shall not be interfered with even by the courts unless such acts are oppressive/unconscionable as to violate the rights of the minority
  1. 34.   Individual Suit – one brought to assert a right of a stockholder peculiar to himself
  1. 35.   Representative Suit – brought by the stockholder in his own behalf and in behalf of other stockholders similarly situated, having common cause against the corporation
  1. 36.   Derivative Suit – brought by a stockholder for and in behalf of the corporation to protect/vindicate corporate rights after he has exhausted intra-corporate remedies


  1. a.       cause of action in favor of the corporation
  2. b.       refusal of corporation to sue
  3. c.       injury to the corporation
  • Although corporations dissolved have 3 years to wind up, they can convey their properties to a trustee who can continue the suit beyond the 3 year period.  The lawyer who handled the case in the trial court may be considered as trustee for the dissolved corporation with respect to the matter in litigation only even if no appointment was extended to him. (Selano vs. CA)
  • In a case filed before dissolution, it may continue even beyond the 3 year period until final determination of litigation.  Otherwise, the corporation in liquidation would lose what justly belongs to them/be exempt from payment of obligations because of a technicality.
  1. 37.   Foreign Corporations
    1. a.       Doing Business – continuity of commercial dealings incident to prosecution of purpose and object of the organization. Isolated, occasional or casual transactions do not amount to engaging in business.  But where the isolated act is not incidental/casual but indicates the foreign corporation’s intention to do other business, said single act constitutes engaging in business in the Philippines
    2. b.       Instances when unlicensed foreign corporations can sue:

(1)    isolated transactions

(2)    action to protect good name, goodwill, and reputation of a foreign corporation

(3)    contracts provide that Phil. Courts will be venue to controversies

(4)    license subsequently granted enables foreign corporation to sue on contracts executed before the grant of the license

(5)    recovery of misdelivered property

(6)    where the unlicensed foreign corporation has a domestic corporation

  1. 38.   Religious Corporations
    1. a.       Corporation Sole – special form of corporation; associated with the clergy and consists of 1 person only and his successors; incorporated by law giving them legal capacity and advantage
    2. b.       Close Corporations – one whose articles provide that its shares shall not be held by more than 20 persons; its issued stock shall be subject to one or more restrictions on transfer and shall not be listed in any stock exchange/make public offering
    3. c.       Non-stock Corporation – one where no part of its income is distributable to its members and shall be used in furtherance of the purpose of which it was organized
  1. 39.   SEC Jurisdiction
    1. a.       original and exclusive jurisdiction

(1)    fraudulent devices and schemes employed by directors detrimental to public interest

(2)    intra-corporate disputes and with the state in relation to their franchise and right to exist as such

(3)    controversies in the election, appointment of directors, trustees, etc.

(4)    petition to be declared in a state of suspension of payments

  1. b.       Grounds for Suspension/Revocation of Certificate of Registration

(1)    fraud in procuring registration

(2)    serious misrepresentation as to objectives of corporation

(3)    refusal to comply with lawful order of SEC

(4)    continuous inoperation for at least 5 years

(5)    failure to file by-laws within the required period

(6)    failure to file reports

(7)    other similar grounds

Revised Securities Act

(Material on the Securities Regulation Code of 2000 to follow)

  1. 1.       General Rule:  All securities before being offered for sale/actual sale to the public must first be registered and have the proper permit.


  1. a.       exempt securities
  2. b.       securities emanating from exempt transactions
  1. 2.       Exempt Securities
    1. a.       issued by the government subdivisions/instrumentalities
    2. b.       issued by foreign government which the Philippines has diplomatic relations
    3. c.       issued by receiver/trustee of an insolvent approved by the court
    4. d.       issued by building and loan association
    5. e.       issued by receiver/trustee of an insolvent approved by the court
    6. f.         policy of insurance issued by insurance corporation supervised by the insurance commission
    7. g.       security/right/interest in real property including subdivision lot/condominium supervised by the Ministry of Human Settlements
    8. h.       pension plans regulated by BIR/Insurance Commission
  1. 3.       Exempt Transactions
    1. a.       judicial sale by execution, etc. in insolvency
    2. b.       sale of pledged property/foreclosed property to liquidate an obligation
    3. c.       isolated transactions on securities done by owner/agent
    4. d.       stock transfers emanating from mergers and consolidations
    5. e.       pre-incorporation subscription
    6. f.         securities issued by public service operator to broaden equity base
  1. 4.       Grounds for Rejection of Registration
    1. a.       application incomplete/untruthful/omits to state a material fact
    2. b.       issuer/registrant insolvent, violated code/ SEC rules, engages in fraudulent transactions
    3. c.       issuer’s business not sound
    4. d.       officer, director, stockholders of issuers is disqualified
    5. e.       issue would prejudice the public
  1. 5.       Grounds for Revocation
    1. a.       issuer insolvent
    2. b.       violated of Code/SEC rules
    3. c.       fraudulent transaction
    4. d.       dishonesty by issuer/misrepresented prospectus
    5. e.       does not conduct business in accordance with law
  1. 6.       Acts Prohibited
    1. a.       manipulation of security prices
    2. b.       manipulation of deceptive devices
    3. c.       artificial measures of price control
    4. d.       fraudulent transactions
    5. e.       insider trading
    6. f.         false prospectus, communications, reports

 Secrecy if Back Deposits

  1. 1.       Deposits in banks, including government banks, may not be inquired into by any person, except:
    1. a.       if depositor agrees in writing
    2. b.       impeachment cases
    3. c.       by court order in cases of bribery and dereliction of duty against public officials
    4. d.       deposit is subject of litigation
    5. e.       anti-graft cases
    6. f.         general and special examination of bank order of the Monetary Board of bank fraud or serious irregularity
    7. g.       re-examination made by an independent auditor hired by a bank to conduct its regular trust

Laws on Intellectual Creation


  1. 1.       What Works are not Protected:
    1. a.       any idea, procedure, system, method or operation, concept, principle, discovery, or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; news of the day or other miscellaneous facts, having the character of mere items of press information, or any official text of a legislative, administrative or legal nature as well as any official translation thereof
    2. b.       works of the government
    3. c.       statutes, rules, and regulations of government agencies and offices
    4. d.       speeches, lectures, sermons, addresses and dissertations, pronounced or rendered in courts of justices or nay administrative agencies in deliberative assemblies and meetings of public character
  1. 2.       Fair Use of a Copyrighted Work is not Infringement
    1. a.       for criticism, comment, news reporting, teaching, research, scholarship, and similar purposes
    2. b.       decompilation:  the reproduction of the code and translation of the forms of the computer program with other programs
  1. 3.       Factors to Consider in Determining Fair Use:
    1. a.       purpose and character of the use, including whether such  use is of a commercial nature or for no profit or educational purposes
    2. b.       nature of the copyrighted work
    3. c.       amount and substantiality of the portion used in relation to the copyrighted work as a whole
    4. d.       effect of use upon the potential market for a value of the copyrighted work
  1. 4.       Terms of the Protection
    1. a.       copyrighted work:  lifetime of creator plus 50 years after death (to be computed on the 1st day of January of the year following the death)
    2. b.       performances not incorporated in recordings:  50 years from end of year in which the performance took place
    3. c.       sound or image and sound recordings and performances incorporated therein:  50 years from end of the year in which the recording took place
    4. d.       broadcasts:  20 years from the date the broadcast took place
  1. 5.       Remedies for Infringement
    1. a.       injunction
    2. b.       actual damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement
    3. c.       impounding of articles during pendency of the action
    4. d.       destruction of all infringing copies and/or devices
    5. e.       moral and exemplary damages
  1. 6.       Criminal Penalties
    1. a.       imprisonment of 1 to 3 years plus fine of P50,000 to P150,000 for the first offense
    2. b.       imprisonment of 3 years and 1 day to 6 years plus fine ranging from P150,000 to P500,000 for the 2nd offense
    3. c.       imprisonment of 6 years and 1 day to 9 years plus fine of P500,000 to P1,000,000 for the 3rd/subsequent offenses

IN ALL CASES, subsidiary imprisonment in cases of insolvency

  1. 7.       Presumptions:
    1. a.       Presumption of copyright in the work of other subject matter to which the action related
    2. b.       Plaintiff is presumed to be the owner of the copyright
    3. c.       The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of proof to the contrary, be presumed to be the author of the work.  This is applicable even if the name is a pseudonym, where the pseudonym leaves no doubt as to the identity of the author.
  1. 8.       Prescription:  No damages may be recovered after 4 years from time the cause of action arose.


  1. 1.       Patentable Inventions – any technical solution of a problem in any field o human activity that is new, involve an inventive step and is industrially applicable shall be patentable.  It may be or may relate to as product, or process or an improvement of any of the foregoing.
  1. 2.       Non-Patentable Inventions
    1. a.       discoveries, scientific theories and mathematical methods
    2. b.       schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers
    3. c.       methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body

Exception:  products and composition for use in any of these methods

  1. d.       plant varieties or animal breeds or essentially biological process for the production of plants and animals

Exception:  micro-organisms and non-biological and micro-biological processes

  1. e.       aesthetic creations
  2. f.         contrary to public order or morality
  1. 3.       Requisites of Patentability
    1. a.       new, novelty
    2. b.       involves an inventive step;
    3. c.       is industrially applicable
  1. 4.       Novelty

The novelty requirement in the Code is absolute.  Thus, an invention is not considered new if it forms part of a prior art.  A prior art consists of:

  1. a.       anything which has been made available to the public anywhere in the world before the filing date or the priority date of the application, or
  2. b.       the whole contents of an application for a patent, utility model, or industrial design registration, published in the IPO gazette, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application, provided that the application which has validly claimed the filing date of an earlier application (priority date) is prior art with effect as of the filing date of such earlier application, and provided further, that the applicant and the inventor identified in both applications are not one and the same
  1. 5.       Inventive Step – an invention involves an inventive step, if having regard to the prior art, it is not obvious to a person skilled in the art at the time of the filing date of priority date of the application claiming the invention
  1. 6.       Industrial Applicability – an invention is considered industrially applicable if it can be produced and used in the industry
  1. 7.       The First-to-File System – if 2 or more persons have made the invention separately and independently of each other, the right to the patent belongs to the person who filed an application for such invention, or where 2 or more applications are filed for the same invention, the right of the patent belongs to the person who has the earliest filing date or the earliest priority date

Under this system, the patent is granted to the inventor who filed his patent application earlier than others thus simplifying the determination of who is entitled to own the patent.

The First-to-File System increases the rights of the inventor by:

  1. a.       guaranteeing the confidentiality of the application prior to its publication
  2. b.       giving the inventor inchoate rights against an infringer after the publication of the application and before the grant of the patent and
  3. c.       expanding the rights of the inventor to institute cancellation proceedings for the duration of the term of the patent.  Cancellation proceedings may be filed at any time during the term of the patent.

Under this system, the applicant declared by final court order as having the right to the patent may:

  1. a.       prosecute the application as his own application in place of the original applicant
  2. b.       file a new patent application in respect of the same invention
  3. c.       request that the application be refused or
  4. d.       seek the cancellation of the patent, if one has already been issued
  1. 8.       What is the difference between novelty in patents and originality in copyright?

Novelty in Patents – even if you do not know of any previous creation, as long as a patent on the same creation has already been published anywhere in the world, you cannot claim novelty.  No access tot he other creation is no defense.

Originality in Copyright – even if there is same creation, as long as you do not copy your own creation, it is still considered an original creation.  No access to the previous creation is a defense.

  1. 9.       Non-Prejudicial Disclosure

The disclosure of information contained in the application during the 12 months preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was made by (a) inventor; (b) a patent office and the information was contained

  1. 10.   Term of Patent – 20 years from the filing date of the application
  1. 11.   Grounds for Compulsory Licensing:
    1. a.       national emergency or other circumstances of extreme urgency
    2. b.       where public interest, national security, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the government so requires
    3. c.       where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive
    4. d.       in case of public non-commercial use of the patent by the patentee, without satisfactory reason
    5. e.       if not being worked in the Philippines on a commercial scale
  1. 12.   In case of Compulsory Licensing of Patents involving Semi-conductor Technology, the license may be granted only in case of public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive
  1. 13.   Utility Models – an invention qualifies for registration as a utility model if it is new and industrially applicable

– no inventive step required for registration

– no search and examination required

  1. 14.   Term Protection – 7 years after the filing date of application without possibility of renewal
  1. 15.   Industrial Design – any composition of lines or colors or any 3 dimensional form, whether or not associated with lines or colors

Industrial Designs essentially dictated by technical or functional considerations to obtain a technical result or those that are contrary to public order, health or morals shall not be protected

  1. 16.   Term of Protection – 5 years from filing date of application, renewable for not more than 2 consecutive periods of 5 years each

 Insolvency Law

  1. 1.       Distinguish Suspension of Payment and Insolvency

Suspension of Payment


debtor has enough assets to meet liabilities but cannot meet them as they fall due debtor has more liabilities than assets
always initiated by debtor initiated by creditors/other persons if involuntary; initiated by debtor if voluntary
  1. 2.       Fraudulent Preference – any act of insolvent which gives rise/has tendency to give preference to a creditor to the assets of the insolvent prejudicial to the right of other creditors of said insolvent
  1. 3.       Effect on Actions Upon Adjudication of Insolvency
    1. a.       suits pending in court

(1)    secured obligations suspended until assignee appointed

(2)    unsecured obligations terminated except to fix amount of obligation

(3)    foreclosure suits pending continue

  1. b.       suit not yet filed – cannot be filed anymore, but claims may be presented to assignee
  1. 4.       Debts and Obligations not Affected by Discharge of Insolvent
    1. a.       assessments due to national and local government
    2. b.       debts due to fraud/embezzlement
    3. c.       debts in which he is bound solidarily
    4. d.       alimony
    5. e.       corporate debts
    6. f.         debts not included in the schedule submitted by debtor

Chattel Mortgage Law

  1. 1.       The law primarily governs chattel mortgage.  Provisions on pledge of NCC in so far as not in conflict with CML also govern chattel mortgages.
  1. 2.       Chattel Mortgage may be rescinded for being in fraud of creditors.
  1. 3.       Growing fruits are covered by chattel mortgage but they may not be pledged.
  1. 4.       Machinery placed on plant or building owned by another can be the object of chattel mortgage.
  1. 5.       General Rule:  Chattel Mortgage cannot cover debts subsequently contracted.
  1. 6.       Rules:  Chattel Mortgage cannot cover debts subsequently contracted
    1. a.       registered in place where mortgagor resides and where property (chattel) is located.  If mortgagor resides abroad, register in place where property is located.
    2. b.       Motor Vehicles:  register also in Land Transportation Office
    3. c.       Shares of Stock:  place of domicile of corporation and shareholder.  No need for notation in books of corporation
    4. d.       Vessels:  Phil. Coastguard
  1. 7.       To be valid against 3rdpersons:
    1. a.       affidavit of good faith
    2. b.       contract must be registered
  1. 8.       General Rule:  In Chattel Mortgage, there is recovery of deficiency judgment.

  Exception:  when Recto Law applies

  1. 9.       Requisites of CML:
    1. a.       constituted to secure the fulfillment of principal obligation
    2. b.       mortgagor is absolute owner of the thing mortgaged
    3. c.       persons constituting the mortgage have the free disposal of the property and in the absence thereof, they be legally authorized for the purpose
    4. d.       recorded to bind 3rd persons
  1. 10.   Formal Requisites of CM:
    1. a.       substantial compliance with form in Sec. 5 of CML
    2. b.       signed by at least 2 witnesses
    3. c.       must contain an affidavit of good faith
    4. d.       certificate of oath (notarial acknowledgment)
  1. 11.   Affidavit of Good Faith – where the parties severally swear that the mortgage is made for the purpose of securing the obligation specified and for no other purpose and that the same is a just and valid obligation and not one entered into for fraud

– property given in CM must be described to enable the parties or any other person after reasonable inquiry and investigation to identify it

  1. 12.   Future property may not be covered by CM but when such property is a:
    1. a.       renewal of, or in substitution for goods on hand when the mortgage was executed, or
    2. b.       purchased with proceeds (not of your own money) of said goods, said property may be covered by CM
  1. 13.   Criminal Acts – removal of chattel to another city or province without written consent of mortgagee, selling property already pledged, or mortgaged without written consent of mortgagee
  1. 14.   A chattel mortgage may be foreclosed judicially or extra-judicially, in the latter case, before a notary or sheriff, or creditor or mortgagee when stipulated, even without need of notice (when mortgagee forecloses)

15.  Pactum Commissorium applies to Chattel Mortgage.



Commercial Law Memory Aid

Ateneo Central Bar Operations 2001

Addendum to Sectrans



PLEDGE (definition) – A contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Essential Requisites to Contracts of Pledge and Mortgage

  1. constituted to secure the fulfillment of a principal obligation
  2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
  3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose
  4. cannot exist without a valid obligation
  5. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor.
    • third persons not parties to the principal obligation may secure the latter  by pledging or mortgaging their own property
    • but may be constituted to secure fulfillment of a voidable or unenforceable or natural obligation
    • in case of pledge, the thing pledged must be delivered to the creditor or to a third person by common agreement
    • in case of mortgage, as a general rule, the mortgagor retains he possession of the property mortgaged

Kinds of Pledge:

  1. Voluntary or conventional – created by agreement of the parties
  2. Legal –  created by operation of law

Characteristics of Pledge:

  1. real  – perfected   by delivery
  2. accessory  – has no independent existence of its own
  3. unilateral – creates obligation solely on the part of the creditor to return the thing subject upon the fulfillment of the principal obligation
  4. subsidiary – obligation incurred does not arise until the fulfillment of the principal obligation

Cause or Consideration in Pledge

  1. principal obligation – in so far as the pledgor is concerned
  2. compensation stipulated for the pledge or mere liberality of the pledgor – if pledgor is not the debtor

Important Points:

  1. future property cannot be pledged or mortgaged
  2. pledge or mortgage executed by one  who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it.
  3. mortgage of a conjugal property by one of the spouses is valid only as to ½ of the entire property
  4. in case of property covered by Torrens title a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further.
  5. pledgor or mortgagor has free disposal of property
  6. thing pledged or mortgaged  may be alienated.
  7. creditor not required to sue to enforce his credit
  8. pledgor or mortgagor may be third person



Constituted on movables Constituted on immovables
Property is delivered to the pledgee, or by common consent to a 3rd person Delivery not necessay
Not valid against 3rd persons unless a description of the thing pledged and  the date of the pledge appear in a  public instrument Not valid against 3rd persons if not registered

Right of Creditor where Debtor fails to Comply with his Obligation

  1. creditor is merely entitled to move for the sale of the thing pledged or mortgaged with the formalities required by law in order to collect
  1. creditor cannot appropriate to himself the thing nor can he dispose of the same as owner.

Prohibition against pactum commissorium

  1. stipulation is null and void –  stipulation where thing  or mortgaged shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed
  2. Requisites of pactum commissorium:
    1. there should be a pledge or mortgage
    2. there should be a stipulation for an automatic appropriation by the creditor of the property in the event of nonpayment
  3. Effect on Security Contract

-nullity of the stipulation does not affect validity and efficacy of the principal  contract.

Permissible Stipulations with regard to pactum commissorium:

  1. subsequent modification of original contract by agreement of parties
  2. subsequent voluntary act of the debtor making cession of property in payment of the debt
  3. promise to assign or sell said property in payment of the obligation if, upon its maturity, it is not paid
  4. authorizing the mortgagee to take possession of the mortgaged premises upon the foreclosure of a mortgage
  5. if after the first and second auctions, the thing is not sold

Important Points:

  1. debtor-owner bears the risk of loss of the property
  2. pledge or mortgage is indivisible:
    1. every portion of the property is answerable for the whole obligation
    2. when several things are pledged or mortgaged, all of them are liable for the totality of the debt. Creditor does not have to divide his action by distributing the debt, among the various things pledged or mortgaged
    3. the debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinction of the pledge or mortgage nor can the creditor’s heir who has received his share of the debt return the pledge or cancel the mortgages if the debt is not yet completely satisfied
    4. EXCEPTIONS  to the rule of INDIVISIBILITY:
  1. where  each one of several things guarantees determinate portion of credit
  2. where only portion of loan was released
  3. where there was failure of consideration
  1. rule that real property, consisting of several lots should be sold separately, applies to sales in execution, and not to foreclosure of mortgages
  2. the mere embodiment of a real estate mortgage and a chattel mortgage in one document does not have the effect of fusing both securities into an indivisible whole
  3. contract of pledge or mortgage may secure all kinds of obligation, be they pure or subject to a suspensive or resolutory condition
  4. a promise to constitute pledge or mortgage creates no real right, only a personal right biding upon the parties, only right of action to compel the fulfillment of the promise but there is no pledge or mortgage yet
  5. under RPC, estafa is committed  by a person  who, pretending to be the owner of any real property, shall convey, sell, encumber or mortgage the same knowing that the real property is encumbered shall dispose of the same as unencumbered. It is essential that fraud or deceit be practiced upon the vendee at the time of the sale.

Provisions Applicable Only to Pledge

  1. transfer of possession to the creditor or to third person by common agreement is essential in pledge

– ACTUAL DELIVERY is important

– CONSTRUCTIVE delivery or symbolic delivery of the key to the warehouse is sufficient to show that the depositary appointed by common  consent of the parties was legally placed in possession.

  1. all movables within commerce of men may be pledged as long as susceptible of possession
  2. incorporeal right, evidenced by:
    1. negotiable instruments;
    2. bills of lading;
    3. shares of stock;
    4. bonds;
    5. warehouse receipts ;and
    6. similar documents

may be pledged. The instruments pledged shall be delivered to the creditor and if negotiable, must be indorsed.

  1. pledge shall take effect against 3rd persons only if the ff appears in a public instrument:
  1. description of the thing pledged
  2. date of the pledge
  3. shall take care of the thing pledged with the diligence of a good father of a family.
  4. has the right to the reimbursement of the expenses made for its preservation is liable  for its loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract, and not due to fortuitous event
  5. may bring the actions which pertain to the owner of the thing in order to recover it from, or defend it against a 3rd person
  6. cannot use the thing without the authority of the owner, and if he should do so, or misuse the thing, the owner may ask that it be judicially or extra-judicially deposited.
  7. may use the thing if it is necessary for the preservation of the thing
  8. may either claim another thing in pledge or demand immediate payment of the principal obligation if he is deceived on the substance or quality of the thing.
  9. cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so
  10. is responsible for the acts of his agents or employees with respect to the thing pledged.
  11. has  no right to use the thing or to appropriate the fruits without the authority of the owner can apply the  fruits, income , dividends or interest earned or produced by the thing pledged to the payment of the interest, and thereafter to the principal of his credit. Unless there is stipulation to the contrary, the interest and earnings of the right pledged and in case of animals, their offsprings are included in the pledge.
  12. may cause public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment or diminution in value of the thing. The proceeds of the auction shall be a security for the principal obligation.
  13. has the responsibility for flaws of the thing pledged.
  14. cannot ask for the return of the thing against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case
  15. is allowed to substitute  the thing which is in danger of destruction or impairment without any fault on the part of the pledgee, with another thing of the same kind and quality
  16. may require that  the thing be deposited with a 3rd person if through the negligence or willful act of the pledgee the thing is in danger of being lost or impaired
  1. thing pledged may be alienated by the pledgor or owner only if with the consent of the pledgee. Ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, butt he latter shall continue in possession
  2. contract of pledge gives right to the creditor to retain the thing in his possession or in that of a third person to whim it has been delivered, until the debt is paid
  3. creditor :
  1. pledgee:
  1. pledgor :

Extinguishment of Pledge

  • If the thing pledged is returned by the pledgee to the pledgor or owner, pledge is extinguished
  • A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish. For t his purpose, neither the acceptance by the pledgor o owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary.
  • If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is prima facie presumption that the thing has been returned by the pledgee
  • If the thing is in the possession of 3rd person who has received it from the pledgor or owner after the constitution of the pledge, there is prima facie presumption that the thing has been returned by the pledgee.

Formalities required Sale by a Creditor if credit not paid in due time:

  1. the debt is due and unpaid
  2. the sale must be at a public auction
  3. there must be notice to the pledgor and owner, stating the amount due, and
  4. the sale must be made with the intervention of a notary public the th
    • The pledgee may appropriate the thing if  after the first and second auctions, the thing is not sold.
    • At the public auction, the pledgor or owner may bid.
    • Pledgor or owner  shall have a better right if he should offer the same terms as the highest bidder
    • Pledgee may also bid, but his offer shall not be valid if he is the only bidder. All bids at the public auction shall ofer to pay the purchase price at once.  BIDS MUST BE FOR CASH. If any other bid is accepted, the pledgee is deemed to have received the purchase price, as far as the pledgor or owner is concerned.

Effect of the Sale of the Thing Pledged

  1. extinguishes the principal obligation whether the price of the sale is more or less than the amount due
  2. if  the price is more than  amount due, the debtor is not entitled to the excess unless the contrary is provided
  3. if the price of the sale is less, neither is the creditor entitled to recover the deficiency. Contrary stipulation is void.
  • After public auction, the pledgee shall promptly advise the pledgor or owner of the result.
  • Any third person who has any right in the thing may satisfy the principal obligation as soon as the latter becomes due and demandable.
  • The right of choice given to the pledgee as to which of the things pledged he shall cause to be sold is limited only by stipulation. After sufficient property has been sold to satisfy the obligation plus interest and expenses, no more shall be sold.
  • A 3rd person who is not a party to the principal obligation may secure the latter by pledging his own property. He has the same as a guarantor and he cannot be prejudiced by any waiver of defense by the principal obligor

Legal Pledges:

  1. Necessary  expenses shall be refunded to every possessor, but only possessor in good faith may retain the thing until he has been reimbursed.

Useful expenses shall be refunded only to the possessor I n good faith with the same right  of retention, the person who has defeated him in the possession having the option of refunding  the amount of the expenses or of paying the increase in value which the thing may have acquired and by reason thereof (art 546)

  1. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.  (art 1731)
  2. The agent may retain the things which are the objects of agency until the principal effects the reimbursement and pays the indemnity. (art 1914)
  3. The laborer’s wages shall be a lien on the goods manufactured or the work done (art 1707).

Special Laws apply to pawnshops and establishment which are engaged in making loans secured by pledges. Provisions of the Civil Code shall apply subsidiarily.

REAL MORTGAGE (Arts. 2124-2131) – It is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated.

Objects of Real Mortgage

  1. immovables
  2. alienable real rights in accordance with the laws, imposed upon immovables

* future property cannot be object of mortgage.

Important Points:

  1. As a general rule, the mortgagor retains possession of the property he may deliver said property to the mortgagee without altering the nature of the contract of mortgage.
  2. It is not an essential requisite that the principal of the credit bears interest, or that the interest as compensation for the use of the principal and the enjoyment of its fruits be in the form of a certain percent thereof.

Kinds of Mortgage:

  1. voluntary
  2. legal
  3. equitable – one which, although it lacks the proper formalities of a mortgage shows the intention of the parties to make the property as a security for a debt

(provisions governing equitable mortgage – arts 1365, 1450, 1454, 1602, 1603, 1604 and 1607).

Essential Requisites of Mortgage

  1. constituted to secure the fulfillment of a principal obligation
  2. pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
  3. the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose
  4. cannot exist without a valid obligation
  5. when the principal obligation becomes due, the thing in which the pledge or mortgage consists may be alienated for the payment to the creditor.
  6. appears in a public document duly recorded in the Registry of Property to be validly constituted

*legal mortgage – the persons in whose favor the law establishes a mortgage have on other right than to demand the execution and the recording of the document in which the mortgage is formalized.

Incidents of Registration of Mortgage

  1. Mortgagee entitled to registration of mortgage as a matter of right
  2. Proceedings for registration do not determine validity of mortgage or its effect
  3. Registration is without prejudice to better right of third parties
  4. Mortgage deed once duly registered forms part of the records for the registration of the property mortgaged
  5. Mortgage by surviving spouse of his/her undivided share of conjugal property can be registered.

Effect of Invalidity of Mortgage on principal obligation:

  1. principal obligation remains valid
  2. mortgage deed remains as evidence of a personal obligation

Effect of Mortgage:

  1. creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world
  2. creates merely an encumbrance

Extent of Mortgage

a. the natural accessions the improvements,

  1. c.    growing fruits
  2. the rents or income not yet received when the obligation becomes due,

e. to the amount of the indemnity granted or owing to the proprietor from the insurers of the property,

  1. f.    in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of  a third person.

Important Points:

  1. Stipulation in mortgage contract including after-acquired properties is valid.
  2. Attachment of lien is retroactive
  3. Stipulation is necessary for mortgage to secure future advancements

Mortgage is a continuing security until the full amount of advances are paid.

  1. Mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law.

a. Alienation or assignment is valid even if not registered. Registration is necessary only to affect 3rd persons.

  1. Creditor may claim from a 3rd person in possession of the property the payment of the part of the credit secured by the property
  2. Stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

Laws governing Mortgage:

  1. New Civil Code
  2. PD 1952
  3. Revised Administrative Code
  4. RA 4882 , as regards aliens becoming mortgages

Foreclosure of Mortgage –    It is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given.

Kinds of Foreclosure

  1. judicial
  2. extrajudicial
  • both should be distinguished from execution sale which is governed by Rule 39 of the Rules of Court

Judicial Foreclosure (governed by Rule 68 of Rules of Court)

  1. May be availed of by bringing an action in the proper court which has jurisdiction over the area wherein the real property involved or  apportion thereof is situated
  2. If the  court finds the complaint to be well-founded, it shall order the mortgagor to pay the amount due with interest and other charges within a period of not less than 90 days nor more than 120 days from the entry of judgment.
  3. If the mortgagor fails to pay at time directed, the court, upon motion, shall order the property to be sold to the highest bidder at a public auction.
  4. Upon confirmation of the sale by the  court, also upon motion, it shall operates to divest the rights of all parties to the action and to vest their rights to the purchaser subject to such rights of redemption as may be allowed by law
  5. Before the confirmation, the court retains control of the proceedings.
  6. The proceeds of the sale shall be applied to the payment of the:

a. Costs of the sale;

b.Amount due the mortgagee;

  1. c.    Claims  of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and
  2. the balance, if any shall be paid to the mortgagor
  1. Sheriff’s certificate is executed, acknowledged and recorded to complete the foreclosure

Nature of Judicial Foreclosure Proceedings:

  1. quasi in rem action
  2. foreclosure is only the result or incident of the failure to pay debt
  3. survives death of mortgagor

Extrajudicial Foreclosure (governed by Act No, 3135, as amended)

  1. express authority to sell is given to the mortgagee.
  2. authority is not extinguished by death of mortgagor or mortgagee
  3. public sale should be made after proper notice
  4. surplus proceeds of foreclosure sale belong to the mortgagor
  5. debtor has the right to redeem the property sold within 1 year from and after the date of sale
  6. remedy of party aggrieved by foreclosure is a petition to set aside sale and cancellation of writ of possession.

Right of Mortgage to Recover Deficiency

  1. Mortgagee is entitled to recover deficiency
  2. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment.
  3. Action for recovery of deficiency may be filed even during redemption period.
  4. Action to recover prescribes after 10 years from the time the right of action accrues.

Nature of Power of Foreclosure by Extrajudicial Sale

  1. conferred for mortgagee’s protection
  2. an ancillary stipulation
  3. a prerogative of the mortgagee

Note: Stipulation of upset price in mortgage contract is void.

Effect of Inadequacy of Price in Foreclosure Sale

  1. Where there is right to redeem

a. GR: Inadequacy of price is immaterial because the judgment debtor may redeem the property

b.EXCEPTION: the price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstances

  1. Property may be sold for less than its fair market value upon the theory that the lesser the price the easier for the owner to redeem.
  2. The value of the mortgaged property has no bearing on the bid price at the public auction, provided that the public auction was regularly and honestly conducted.

Waiver of Security by Creditor

  1. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of theindebetness.
  2. Mortgagee cannot have both remedies

Note: Foreclosure retroacts to the date of registration of mortgage

Redemption – It is a transaction by which the mortgagor reacquires the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created.

Kinds of Redemption

  1. equity of redemption

–    right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of sale

  1. right of redemption

–    right of the mortgagor to redeem the property within a certain period after it was sold for the satisfaction of the debt.

Equity of Redemption

  1. exercised before confirmation of sale
  2. second mortgagee acquires only the equity of redemption vested in the mortgagor
  3. taking physical possession not necessary for levy

can be levied upon by means of writ of execution.

  1. remedy of mortgagee to obtain possession is to bring a civil action either to recover possession as a preliminary step to the sale or to obtain judicial foreclosure.

Right of Redemption

  1. may be exercised within 1 year from and after the date of registration of the certificate of sale with the appropriate Registry of Deeds.
  2. if no redemption is made within prescribed period, the purchaser has the absolute right to a writ of possession which is the final process to consummate extrajudicial foreclosure
  3. effect of seasonable redemption is not to recover ownership which was never lost  but the elimination from his title the lien created by the levy or attachment.
  4. sale by the mortgagor to a 3rd person during redemption period transfers only the right to redeem the property and the right to possess, use and enjoy the same during said period.
  5. if sale to a 3rd person is not registered and made without the consent of the mortagee, buyer was not validly substituted as a debtor thus has no right to redeem
  6. if extrajudicial foreclosure if effected with fraud, it is null nad void ab initio.

CHATTEL MORTGAGE (Arts. 2140-2141) – It is a contract by virtue of which a  personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation.

Note: If the movable, instead of being recorded is delivered to the creditor, it is pledge and not chattel mortgage.

Involves movable property Involves movable property
Delivery of the personal property is NOT necessary Delivery of the personal property is necessary
Registration is necessary for validity Registration is NOT necessary for validity
Procedure : Sec 14 of Act no 1508, as amended Procedure: Art 2112 of Civil Code
If the property is foreclosed, the excess over the amount due goes to the debtor If the property is sold, the debtor is not entitled to the to the excess UNLESS it is otherwise  agreed or in case of legal pledge
Creditor is entitled to deficiency from the debtor EXCEPT if it is a security for the purchase of personal property in installments Creditor is not entitled to recover deficiency notwithstanding any stipulation to the contrary

Laws governing Chattel Mortgage:

  1. Chattel Mortgage Law, Act No. 1508, as amended
  2. Civil Code
  3. Revised Administrative Code
  4. Revised Penal Code
  5. Ship Mortgage Decree of 1978 (PD 1521) governs mortgage of vessels of domestic ownership

Important points:

The provisions of Civil Code on pledge shall be applicable to chattel mortgage only insofar as they are not in conflict with the Chattel Mortgage Law


Subject matter of Chattel mortgage must be described and identified.

Extent of Chattel Mortgage – It is deemed to cover only the property described and not like or substituted property thereafter acquired by the mortgagor and placed in the same depositary as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.

Effect of Registration

  1. creates real rights
  2. adds nothing to mortgage

Note: Registration of assignment of mortgage is not required

Right of Redemption

  1. when the condition of a chattel mortgage is broken, the ff may redeem:

a. mortgagor;

b.person holding a subsequent mortgage;

  1. c.    subsequent attaching creditor.
  1. an attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it
  2. the redemption is made by paying or delivering o the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale.

Foreclosure of Chattel Mortgage

  1. public sale
  2. private sale – there is nothing illegal, immoral or against public order in an agreement for the private sale of the personal properties covered by chattel mortgage.

Period to Foreclosure

  1. After 30 days from the time of the condition is broken
  2. The 30-day period is the minimum period after violation of the mortgage condition for the creditor to cause the sale at public auction with at least 10 days notice to the mortgagor and posting of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the obligation.
  3. After the sale at public auction, the right of redemption is no longer available to the mortgagor.

Civil Action to Recover Credit

  1. independent action not required
  2. mortgage lien deemed abandoned by obtaining a personal judgment

Right of Mortgage to Recover Deficiency

  1. where mortgage foreclosed

– Creditor may maintain action for deficiency although Chattel Mortgage Law is silent on this point. Reason is chattel mortgage is only given as a security and not as payment of the debt.

  1. where mortgage constituted as security for purchase of personal property payable in installments

– No deficiency judgment can be asked and any agreement to the contrary shall be void

  1. where mortgaged property subsequently attached and sold

– Mortgagee is entitle to deficiency judgment in an action for specific performance.

Application of Proceeds of Sale

  1. costs and expenses of keeping and sale
  2. payment of the obligation
  3. claims of persons holding subsequent mortgages in their order
  4. balance, if any, shall be paid to the mortgagor, or person holding under him.


Concurrence of credit – It implies possession by two or more creditors of equal right or privileges over the same property or all of the property of a debtor.

Preference of Credit – It is the right held by a creditor to be preferred in the payment of his claim above other out of the debtor’s assets.

General Provisions:

  1. the debtor is liable with all his property, present and future, for the fulfillment of his obligations, subjects to exemptions provided by law

–    exempt property:

  1. present property
  2. family home (Arts 152, 153 & 155, NCC)
  3. right to receive support as well as money or property obtained by such support shall not be levied  upon on attachment or execution (Art 205, NCC)
  4. Sec 13, Rule 39, Rules of Court
  5. Sec 118, the public Land Act,( CA No. 141, as amended)
    1. future property

– a debtor who obtains a discharge from his debts on account of insolvency, is not liable for the unsatisfied claims of his creditors with said property (Secs. 68 & 69, Insolvency Law, Act No. 1956

  1. property in custodia legis and of public dominion
  1. insolvency shall be governed by the Insolvency Lae (Act No. 1956, as amended)
  2. Exemption of conjugal property or absolute community or property provided that:

a. Partnership or community subsists

b.Obligations of the insolvent spouse have not redounded to the benefit of the family

  1. if there is co-ownership, and one of the co-owners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings because it is part of his assets
  2. property held by the insolvent debtor as a trustee of an express or implied trust, shall be excluded from the insolvency proceedings.

Classification of Credits

1. Special preferred credits (Arts 2241 & 2242 of NCC)

a. considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency

b.taxes due to the State shall first be satisfied

2. Ordinary preferred credits (Art 2244)

– preferred in the order given by law

3. Common credits (Art 2245)

–    credits of any other kind or class, or by any other right or title not comprised in Arts 2241-2244 shall enjoy  no preference.

Order of Preference of Credit

  1. Credits which enjoy preference with respect to specific movables, exclude all others to the extent of the value of the personal property to which the preference refers.
  2. If there are 2 or more credits with respect to the same specific movable property, they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or any subdivision thereof
  3. Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers.
  4. If there are 2 or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessment of the taxes and assessments upon the immovable property or real right.
  5. The excess, if any, after the payment of the credits which enjoy preference with respect to specific property, real or personal, shall be added to the free property which the debtor may have, for the payment of other credits.
  6. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:

–    order established by Art 2244

–    common credits referred to in Art 2245 shall be paid pro rata regardless of dates.


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