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The UST GOLDEN NOTES is the annual student-edited bar review
material of the University of Santo Tomas, Faculty of Civil Law.
Communications regarding the NOTES should be addressed to
the Academics Committee of the Team: Bar-Ops.

ADDRESS: Academics Committee

Team Bar-Ops
Faculty of Civil Law
University of Santo Tomas
Espaa, Manila 1008

TEL. NO.: (02) 731-4027

(02) 4061611 loc. 8578

Academics Committee
Faculty of Civil Law
University of Santo Tomas
Espaa, Manila 1008

All Rights Reserved by the Academics Committee of the Faculty of Civil Law of the
Pontifical and Royal University of Santo Tomas, the Catholic University of the

2013 Edition

No portion of this material may be copied or reproduced in books, pamphlets, outlines

or notes, whether printed, mimeographed, typewritten, copied in different electronic
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No. 01

Printed in the Philippines, April 2013.
























For being our guideposts in understanding the intricate

sphere of Mercantile Law.
- Academics Committee 2013



LETTERS OF CREDIT 4. Shipping of goods by the seller

5. Execution of draft and tender of documents by
6. Redemption of draft (payment) and obtaining of
Q: What is a Letter of Credit (L/C)? documents by the issuing bank
7. Reimbursement to the bank and obtaining of
A: It is any arrangement, however named or documents by the buyer
described, whereby a bank (issuing bank), acting at
the request and on the instructions of a customer Q: What are the essential conditions of L/C?
(applicant) or on its own behalf, binds itself to: PAN
1. Pay to the order of, or accept and pay drafts 1. Issued in favor of a definite person
drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and Note: The Uniform Commercial Practice for
pay such drafts, or Documentary Credits allows letters of credit to be
3. Authorizes another bank to Negotiate, against payable to the order of a person.
stipulated documents,
2. Limited to a fixed or specified amount, or to one
Provided, the terms and conditions of the credit are or more amounts, but with a maximum stated
complied with (Art. 2, Uniform Customs & Practice for limit (Art. 568, Ibid.).
Documentary Credits.)
Note: If any of these essential conditions is not present,
the instrument is merely considered as a letter of
Q: What is the nature and purpose of L/C? recommendation.

A: To ensure certainty of payment. The seller is Q: Letters of Credit are financial devices in
assured of payment because the bank intervenes and commercial transactions which will ensure that the
makes the commitment to pay. This addresses seller of the goods is sure to be paid when he parts
problems arising from sellers refusal to part with his with the goods and the buyer of the goods gets
goods before being paid and the buyers refusal to control of the goods upon payment. Which
part with his money before acquiring the goods, thus, statement is most accurate? (2012 Bar Question)
facilitating commercial transactions.
a) The use of the Letter of Credit serves to reduce
Q: What is the law governing letters of credit? the risk of nonpayment of the purchase price in
a sale transaction.
A: It is the Uniform Customs and Practice (UCP) for b) The Letters of Credit can only be used
documentary Credits for International Chamber of exclusively in a sales transaction.
Commerce which governs the L/C (Metropolitan c) The Letters of Credit are issued for the benefit
Waterworks vs. Daway, G.R. No. 160723, July 21, of the seller only.
2004.). d) (a), (b) and (c) are all correct
Q: What is the duration of L/C? A: A. The use of the Letter of Credit serves to reduce
the risk of nonpayment of the purchase price in a sale
A: transaction
1. Upon the period fixed by the parties; or
2. If none is fixed: Q: What are the kinds of L/C?
a. 6 months from its date if used in the
Philippines; A:
b. 12 months if used abroad (Art 572, Code of
Involves the payment of
Involves non-sale
money under a contract
Q: What are the incidents in the life of an L/C? transactions.
of sale.
Payable upon the Payable upon
presentation by the certification by the
1. Contract of Sale between the buyer and seller
seller-beneficiary of beneficiary of the
2. Application for L/C by the buyer with the bank
documents that show he applicants non-
3. Issuance of L/C by the bank
has taken affirmative performance of the



steps to comply with the agreement. The

sales agreement documents that A:
accompany the 1. Applicant/Buyer/Importer procures the letter of
beneficiary's draft must credit, purchases the goods and obliges himself to
show that the applicant reimburse the issuing bank upon receipt of the
has not performed the documents title.
undertaking (Transfield
Phils., Inc. v. Luzon Hydro 2. Issuing Bank One which, whether a paying bank
Corp., G.R. No. 146717, or not, Issues the letter of credit and undertakes
Nov. 22, 2004). to pay the seller upon receipt of the draft and
proper documents of title from the seller and to
Q: Distinguish an irrevocable L/C from a confirmed surrender them to the buyer upon
L/C. reimbursement.

A: In an irrevocable L/C, the issuing bank may not, 3. Beneficiary/Seller/Exporter In whose favor the
without the consent of the beneficiary and the instrument is executed. One who delivers the
applicant, revoke its undertaking under the letter, documents of title and draft to the issuing bank to
whereas, in a confirmed L/C, the correspondent bank recover payment.
gives an absolute assurance to the beneficiary that it
will undertake the issuing banks obligation as its own Note: The number of parties may be increased. The
according to the terms and condition of the credit following additional parties may be:
(Prudential Bank and Trust Company v. IAC, G.R. No.
a. Advising/notifying bank The correspondent
74886, Dec. 8, 1992).
bank (agent) of the issuing bank through which it
advises the beneficiary of the L/C.
Q: Can a court order the release to the applicant the
proceeds of an irrevocable letter of credit without b. Confirming bank bank which, upon the request
the consent of the beneficiary? of the beneficiary, confirms the L/C issued.

A: No, such order violates the irrevocable nature of c. Paying bank bank on which the drafts are to be
the L/C. The terms of an irrevocable letter of credit drawn, which may be the issuing bank or another
cannot be changed without the consent of the bank not in the city of the beneficiary.
parties, particularly the beneficiary thereof (Phil.
d. Negotiating bank bank in the city of the
Virginia Tobacco Administration v. De Los Angeles,
beneficiary which buys or discounts the drafts
G.R. No. L-27829, Aug. 19, 1988). contemplated by the L/C, if such draft is to be
drawn on the opening bank not in the city of the
Q: In case the buyer was not able to pay its beneficiary.
obligation under the letter of credit, can the bank
take possession over the goods covered by the said RIGHTS AND OBLIGATIONS OF PARTIES
Q: What are the three (3) distinct but intertwined
A: No. The opening of a L/C does not vest ownership contracts in a letter of credit transaction?
of the goods in the bank in the absence of a trust
receipt agreement. A letter of credit is a mere A:
financial device developed by merchants as a 1. Between the applicant/buyer/importer and the
convenient and relatively safe mode of dealing with beneficiary/seller/exporter - The applicant is the
the sales of goods to satisfy the seemingly one who procures the letter of credit while the
irreconcilable interests of a seller, who refuses to part beneficiary is the one who in compliance with the
with his goods before he is paid, and a buyer, who contract of sale ships the goods to the buyer and
wants to have control of the goods before paying delivers the documents of title and draft to the
(Transfield Philippines, Inc. v. Luzon Hydro issuing bank to recover payment for the goods.
Corporation, G.R. No. 146717, Nov. 22, 2004) Their relationship is governed by the contract of
2. Between the issuing bank and the
Q: Who are the parties to a Letter of Credit beneficiary/seller/exporter - The issuing bank is
transaction? the one that issues the letter of credit and



undertakes to pay the seller upon receipt of the bank in the place of the
draft and proper documents of title. On the other beneficiary.
hand, the beneficiary surrenders document of title
to the bank in compliance with the terms of the Q: Is an issuing bank a guarantor?
L/C. Their relationship is governed by the terms of
the L/C. A: No, the concept of guarantee vis-a-vis the concept
of irrevocable L/C is inconsistent with each other.
3. Between the issuing bank and the L/Cs are primary obligations and not security
applicant/buyer/importer - The applicant obliges contracts and while they are security arrangements,
himself to reimburse the issuing bank upon they are not converted thereby into contracts of
receipt of the documents of title. Their guaranty (MWSS v. Hon. Daway, G.R. No. 160732,
relationship is governed by the terms of the June 21, 2004).
application for the issuance of the L/C by the
bank. Q: When is the bank entitled to reimbursement?

Q: What are the different roles and liabilities of the A: Once the issuing bank shall have paid the
banks involved in L/C transactions? beneficiary after the latters compliance with the
terms of the L/C. Presentment for acceptance to the
A: customer/applicant is not a condition sine qua non
ROLE LIABILITY for reimbursement (Prudential Bank v. IAC, G.R. No.
Notifying/Advising bank 74886, Dec. 8, 1992).
Serves as an agent of the Does not incur any
issuing bank; obligation more than Q: What is the consequence of payment upon an
just notifying the expired L/C?
Warrants the apparent seller/beneficiary of the
(Appearance to unaided opening of the L/C after A: An issuing bank which paid the beneficiary upon an
senses) authenticity of it has determined its expired L/C can recover the payment from the
the L/C. (Bank of apparent authority. applicant which obtained the goods from the
America NT & SA v. CA, (Bank of America NT & beneficiary to prevent unjust enrichment (Rodzssen
G.R. No. 105395, Dec. SA v. CA, G.R. No. Supply Co. v. Far East Bank and Trust Co, G.R. No.
10, 1993) 105395, Dec. 10, 1993) 109087, May 9, 2001).


unless the document on
its face is manifestly Q: Are L/Cs considered as negotiable instruments?
Confirming bank A: No. A L/C is not considered a negotiable
Lends credence to the Direct obligation, as if it instrument. However, drafts issued in connection
L/C issued by a lesser- is the one which issued with L/Cs can be considered negotiable instruments.
known bank. the L/C. The presumption that the drafts drawn in connection
Negotiating bank with the L/Cs have sufficient consideration applies
Buys the sellers draft Depends on the stage of (Lee v. CA, G.R. No. 117913, Feb. 1, 2002).
and later on sells the negotiation, thus:
draft to the issuing bank. DOCTRINE OF INDEPENDENCE
1. Before negotiation
No liability with respect Q: What is the Doctrine of Independence/
to the seller. Merely Independence Principle?
suggests its willingness
to negotiate. A: The relationship of the buyer and the bank is
2. After negotiation A separate and distinct from the relationship of the
contractual relationship buyer and seller in the main contract; the bank is not
will then arise, making required to investigate if the contract underlying the
the bank liable. L/C has been fulfilled or not because in transactions
Paying bank involving L/C, banks deal only with documents and
May either be the Direct obligation. not goods (BPI v. De Reny Fabric Industries, Inc., L-
issuing bank or any other



2481, Oct. 16, 1970.). In effect, the buyer has no a) No, because under the "Independence
course of action against the issuing bank. Principle", conditions for the drawdown on the
Letters of Credit are based only on documents,
Q: What is the two-fold nature of the Independence like shipping documents, and not with the
Principle? condition of the goods subject of the
1. Independence in toto where the credit is b) Yes, because the acceptance by the importer of
independent from the justification aspect and is a the goods subject of importation is material for
separate obligation from the underlying the drawdown of the Letter of Credit.
agreement. This principle is illustrated by standby c) Yes, because under the "Independence
L/C; or Principle", the seller or the beneficiary is always
assured of prompt payment if there is no breach
2. Independence only as to the justification aspect in the contract between the seller and the
which is identical with the same obligations under buyer.
the underlying agreement. This principle is d) No, because what was opened was an
illustrated by a commercial L/C or repayment irrevocable letter of credit and not a confirmed
standby (Transfield v. Luzon Hydro, G.R. No. letter of credit.
146717, Nov. 22, 2004)
A: A. Under the "Independence Principle", conditions
Q: What is the effect of the buyers failure to for the drawdown on the Letters of Credit are based
procure an L/C to the main contract? only on documents, like shipping documents, and not
with the condition of the goods subject of the
A: The L/C is independent from the contract of sale. importation
Failure of the buyer to open the L/C does not prevent
the birth of the contract of sale. The opening of the FRAUD EXCEPTION PRINCIPLE
LC is only a mode of payment. The LC is not an
essential requisite to the contract of sale (Reliance Q: What is the exception to the independence
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. principle?
No. 100831, Dec. 17, 1993).
A: The Fraud Exception Principle. It provides that
Q: Can the partial payments made on the loan be the untruthfulness of a certificate accompanying a
added in computing the issuing banks liability under demand for payment under a standby letter of credit
its own standby letter of credit? may qualify as fraud sufficient to support an
injunction against payment.
A: No, although these payments could result in the
reduction of the actual amount, which could This principle refers to fraud in relation with the
ultimately be collected from the issuing bank, the independent purpose or character of the L/C and not
latters separate undertaking under its letters of only fraud in the performance of the obligation or
credit remain. The letter of credit is an absolute and contract supporting the letter of credit (Transfield v.
primary undertaking which is separate and distinct Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
from the contract underlying it (Insular Bank of Asia
& America v. IAC, Nov. 17, 1988). Q: What is the remedy for such fraudulent abuse
under this principle?
Q: AAA Carmakers opened an irrevocable Letter of
Credit with BBB Banking Corporation with CCC Cars A: Injunction against payment is the remedy;
Corporation as beneficiary. The irrevocable Letter of provided the requisites enumerated immediately
Credit was opened to pay for the importation of ten below this item are present.
(10) units of Mercedes Benz S class. Upon arrival of
the cars, AAA Carmakers found out that the cars Q: What are the requisites in order to enjoin the
were all not in running condition and some parts beneficiary from drawing or collecting under the
were missing. As a consequence, AAA Carmakers letter of credit on the basis of fraud?
instructed BBB Banking Corporation not to allow
drawdown on the Letter of Credit. Is this legally A: PAI
possible? (2012 Bar Question) 1. Clear Proof of fraud;



2. Fraud constitutes fraudulent Abuse of the certain documents including a copy of the Bill of
independent purpose of the letter of credit and Lading of the importation for the bank to release the
not only fraud under the main agreement; and funds. BBB Corporation could not find the original
3. Irreparable Injury might follow if injunction is not copy of the Bill of Lading so it instead presented to
granted or the recovery of damages would be the bank a xerox copy of the Bill of Lading. Would
seriously damaged (Ibid.) you advise the bank to allow the drawdown on the
Letter of Credit? (2012 Bar Question)
a) No, because the rule of strict compliance in
Q: What is the doctrine of strict compliance? commercial transactions involving letters of
credit, requiring documents set as conditions for
A: The documents tendered by the seller/beneficiary the release of the fund, has to be strictly
must strictly conform to the terms of the L/C. The complied with or else funds will not be released.
tender of documents must include all documents b) Yes, because an irrevocable letter of credit
required by the letter. Thus, a correspondent bank means that the issuing bank undertakes to
which departs from what has been stipulated under release the fund anytime when claimed by the
the L/C acts on its own risk and may not thereafter be beneficiary,regardless of the kind of document
able to recover from the buyer or the issuing bank, as presented.
the case may be, the money thus paid to the c) Yes, because the issuing bank can always justify
beneficiary (Feati Bank and Trust Company v. CA, G.R. to CCC Corporation that xerox copies are
No. 940209, Apr. 30, 1991). considered as faithful reproduction of the
original copies.
Q: Distinguish the Doctrine of Strict Compliance d) Yes, because the issuing bank really has no
from the Independence Principle discretion to determine whether the documents
presented by the beneficiary are sufficient or
A: not.
COMPLIANCE INDEPENDENCE A: The rule of strict compliance in commercial
Principle transactions involving letters of credit, requiring
Relationship of the buyer documents set as conditions for the release of the
Documents tendered by fund, has to be strictly complied with or else funds
and the bank is separate
the seller or beneficiary will not be released.
and distinct from the
must strictly conform to
relationship of the buyer
the terms of the letter of
and seller in the main
Consequence of the doctrine
A correspondent bank
The bank is not required
which departs from what
to investigate whether
has been stipulated and
the contract underlying
acts on its own risk may
the L/C has been fulfilled
not thereafter be able to
or not.
Payment of the beneficiary
Fraud Exception
Principle can enjoin
Beneficiary cannot draw beneficiary from drawing
on the letter of credit if or collecting under the
he did not comply with L/C if there is fraud in
its terms and conditions. relation with the
independent purpose of
the L/C.

Q: At the instance of CCC Corporation, AAA Bank

issued an irrevocable Letter of Credit in favor of BBB
Corporation. The terms of the irrevocable Letter of
Credit state that the beneficiary must present



TRUST RECEIPTS LAW (P.D. 115) Q: Who is an entrustee?

DEFINITION/CONCEPT OF A TRUST RECEIPT A: A borrower, buyer, importer or debtor. He is the

TRANSACTION person to whom the goods are delivered for sale or
processing in trust, with the obligation to return the
Q: What is a trust receipt (TR) transaction? proceeds of sale of the goods or the goods
themselves to the entruster (Sec. 3[b], PD 115).
A: It is any transaction between the entruster and
entrustee: Q: What is NOT considered a trust receipt
1. Whereby the entruster who owns or holds title or
security interests over certain specified goods, A:
documents or instrument (GDI), releases the same 1. A sale by a person in the business of selling for
to the possession of entrustee upon the latters profit who retains general property rights in the
execution of a TR agreement. GDI.
2. Where the seller retains title or other interest as
2. Wherein the entrustee binds himself to hold the security for the payment of the purchase price
GDI in trust for the entruster and, in case of (Sec. 4, P.D. 115).
a. to sell or otherwise dispose such GDI with the Q: What are the two views regarding TR?
obligation to turn over to the entruster the
proceeds to the extent of the amount owing A:
to it or 1. As a commercial document - the entrustee binds
b. to turn over the GDI itself if not sold or himself to hold the designated GDI in trust for the
otherwise disposed of in accordance with the entruster and to sell or otherwise dispose of GDI
terms and conditions specified in the TR. with the obligation to turn over to the entruster
the proceeds if they are unsold or not otherwise
Q: What are the subjects of a TR transaction? disposed of, in accordance with the terms and
conditions specified in the TR (Sec. 4, P.D. 115).
1. Goods shall include chattels and personal 2. As a commercial transaction It is a separate and
property other than: money, things in action, or independent security transaction intended to aid
things so affixed to land as to become a part in financing importers and retail dealers who do
thereof (Sec. 3 [d], PD 115.) Goods must be not have sufficient funds (Nacu v. CA, G.R. No.
object of lawful commerce. 108638, Mar. 11, 1994).

2. Documents written or printed evidence of title Q: Can a TR be considered a negotiable instrument?

to goods (Sec. 3 [a], PD 115). E.g. are L/Cs.
A: No. Like L/Cs, TRs are not negotiable instruments.
3. Instruments negotiable instruments; The presumption of consideration under the
certificates of stock, or bod or debenture for the negotiable instrument law may not necessarily be
payment of money issued by a corporation, or applicable to trust receipts (Lee v. CA, supra).
certificates of deposit, participation certificates
or receipts, credit or investment instruments of a LOAN/SECURITY FEATURE
sort marketed in the ordinary course of business
or finance (Sec. 3 [e], PD 115). E.g. are checks, Q: What are the two features of a TR transaction?
drafts, promissory notes, bills of exchange.
Q: Who is an entruster? 1. Loan feature - is brought about by the fact that
the entruster financed the importation or
A: A lender, financer or creditor. Person holding title purchase of the goods under TR (Sps. Vintola vs.
over the GDI subject of a TR transaction; releases Insular Bank of Asia and America, G.R. No. 73271,
possession of the goods upon execution of TR (Sec. May 29, 1987).
3[c], PD 115).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the



entrustee or of some third persons to the transaction would be to disregard the loan feature
entruster (Rosario Textile Mills Corp. v. Home thereof (Rosario Textile Mills Corp. v. Home Bankers
Bankers Savings and Trust Company, G.R. No. Savings and Trust Company, G.R. No. 137232. June
137232, June 29, 2005). 29, 2005).

Q: What are the effects of the dual features of a RIGHTS OF THE ENTRUSTER
trust receipt?
The entruster has the following rights: PRC
1. The entrustee cannot absolutely be relieved of the 1. To be entitled to the Proceeds from the sale of the
obligation to pay his loan just because he GDI to the extent of the amount owing to him.
surrendered the goods to the entruster and
subsequently deposited them in the custody of 2. To the Return of the GDI in case of non-sale and
the court (Sps. Vintola vs. Insular Bank of Asia and enforcement of all other rights conferred to him in
America, ibid). the TR.

2. The entrustee cannot be relieved of his obligation 3. May Cancel the trust and take possession of the
to pay the loan in favor of the entruster bank in goods, upon default or failure of the entrustee to
case of loss or destruction of the GDI (Rosario comply with any of the terms and conditions of
Textile Mills Corp. v. Home Bankers Savings and the TR (Sec. 7, P.D. 115).
Trust Company, ibid).
3. Where the proceeds of the sale are insufficient to THE CREDITORS OF THE ENTRUSTEE/INNOCENT
satisfy the loan executed by the entrustee, the PURCHASERS FOR VALUE
entruster bank can institute an action to collect
the deficiency (Landl Co. v Metropolitan Bank and Q: As between the entruster and the creditors of the
Trus Co. G.R. No. 159622, July 30, 2004). entrustee, who has a better right over the goods?

4. Repossession by the entruster of the GDI does not A: The entruster. His security interest in goods,
amount to dacion en pago. The repossession of documents, or instruments pursuant to the written
the goods by the entrustee was merely to secure terms of a TR shall be valid as against all creditors of
the payment of its obligation to the entrustor and the entrustee for the duration of the TR agreement.
not for the purpose of transferring ownership in (Sec. 12, P.D. 115)
satisfaction of the obligation (PNB vs. Pineda, G.R.
No. L-46658 May 13, 1991). Q: Who can defeat the rights of the entruster over
the goods?
INSTRUMENTS UNDER A TRUST RECEIPT A: A purchaser in good faith. He acquires goods,
documents or instruments free from the entruster's
Q: Who is the real owner of the articles subject of security interest (Sec. 11, P.D. 115).
the TR?
A: The entrustee who binds himself to hold the
designated GDI. Q: What are the obligations and liabilitites of the
Q: What title does the entruster hold?
A: Entruster merely holds a security interest. If under
the trust receipt, the bank is made to appear as the 1. To Hold GDI in trust for the entruster and to
owner, it was but an artificial expedient, more of legal dispose of them strictly in accordance with the
fiction than fact, for if it were really so, it could terms of TR;
dispose of the goods in any manner it wants, which it 2. To Receive the proceeds of the sale for the
cannot do, just to give consistency with purpose of entruster and to turn over the same to the
the trust receipt of giving a stronger security for the entruster to the extent of amount owing to the
loan obtained by the importer. To consider the bank latter;
as the true owner from the inception of the 3. To Insure GDI against loss from fire, theft,



pilferage or other casualties; Q: Is the principle of res perit domino a valid defense
4. To Keep GDI or the proceeds thereof, whether in against an entrustee in cases of loss or destruction
money or whatever form, separate and capable of of the GDI secured by a TR?
identification as property of the entruster;
5. To Return GDI to the entruster in case they could A: No. For the principle of res perit domino to apply
not be sold or upon demand of the entruster; and the entrustee must be the owner of the goods at the
6. To Observe all other conditions of the TR. (Sec. 9, time of the loss. A trust receipt is a security
P.D. 115) agreement, pursuant to which a bank acquires a
security interest in the goods. It secures an
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR indebtedness and there can be no such thing as
DISPOSITION OF GOODS, DOCUMENTS OR security interest that secures no obligation. If under
INSTRUMENTS a trust receipt transaction, the entruster is made to
appear as the owner, it was but an artificial
Q: Where will the proceeds of the sale of GDI be expedient, more of legal fiction than fact, for if it
applied? were really so, it could dispose of the goods in any
manner it wants. Thus, the ownership of the goods
A: SDP remaining with the entrustee, he cannot be relieved
1. Expenses of the Sale; of the obligation to pay his/her loan in case of loss or
2. Expenses Derived from re-taking, keeping and destruction (Rosario Textile Mills vs. Home Bankers
storing the GDI; and Association, supra).
3. Principal obligation (Sec. 7, PD 115).
Q: Is the entrustee liable for the deficiency?
Q: What are the elements to be established in order
A: Yes, but any excess shall belong to him (ibid). to validly prosecute the entrustee for estafa?

RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS A: In order that the entrustee may be validly
IN CASE OF NON-SALE prosecuted for estafa under Art. 315, paragraph 1(b)
of the RPC, in relation with Sec. 13 of PD 115, the
Q: What is the obligation of the entrustee in case following elements must be established:R-MAD
the GDI were not sold?
1. The entrustee Received the subject goods in trust
A: The entrustee should return the GDI to the or under the obligation to sell the same and to
entruster (Sec. 4, P.D. 115). remit the proceeds thereof to the entruster, or
to return the goods if not sold;
Q: In case the entrustee fails to return the GDI, what 2. The entrustee Misappropriated or converted the
is he liable for? goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse of
A: The failure to turn over goods or proceeds realized confidence to the damage and prejudice of
from sale thereof, as a criminal offense under Art. entruster; and
315(l)(b) of RPC (estafa). 4. A Demand was made on the entrustee by
entruster for the remittance of the proceeds or
LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR the return of the unsold goods (Land Bank of the
INSTRUMENTS Philippines vs. Perez, GR No. 166884, June 13,
Q: Who shall bear the loss of GDI which are the
subject of TR? Note: If proof as regards the delivery of GDI to the accused
(entrustee) is insufficient, estafa cannot lie (Ramos v. CA,
A: The entrustee. Loss of the GDI which is the subject G.R. No. L-3992-25, Aug. 21, 1987)
of a TR, pending their disposition, irrespective of
whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof (Sec. 10, P.D. 115).



Q: What will happen to the criminal action if the equally applicable to domestic
entrustee complied with his obligation under the TR transactions. Regardless of whether the transaction is
agreement? foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts
A: mainly involved sales. (G.R. No. 173905, April 23,
1. If compliance occurred before the criminal 2010)
charge- there is no criminal liability.
2. If compliance occurred after the charge even Q: What is the penal sanction if offender is a
before conviction- the criminal action will not be corporation?
A: Though the entrustee is a corporation,
Q: Does P.D. 115 violate the prohibition in the nevertheless, the law specifically makes the officers,
Constitution against imprisonment for non-payment employees or other officers or persons responsible
of a debt? for the offense, without prejudice to the civil
liabilities of such corporation and/or board of
A: No. What is being punished is the dishonesty and directors, officers, or other officials or employees
abuse of confidence in the handling of money or responsible for the offense.
goods to the prejudice of another regardless of
whether the latter is the owner or not. It does not If the crime is committed by a corporation or other
seek to enforce payment of the loan. Thus, there can juridical entity, the directors, officers, employees or
be no violation of a right against imprisonment for other officers thereof responsible for the offense
non-payment of a debt (People v. Nitafan, G.R. No. shall be charged and penalized for the crime,
81559, Apr 6, 1992). precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested
Q: Is lack of intent to defraud a bar to the and imprisoned; hence, cannot be penalized for a
prosecution of these acts or omissions? (2006 Bar crime punishable by imprisonment. However, a
Question) corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the
A: No. The mere failure to account or return gives rise statute prescribes both fine and imprisonment as
to the crime which is malum prohibitum. There is no penalty, a corporation may be prosecuted and, if
requirement to prove intent to defraud (Ching v. found guilty, may be fined (Ching vs. Secretary of
Secretary of Justice, G.R. No. 164317, Feb. 6, 2006). Justice, GR No. 164317, Feb. 6, 2006).

Q: Is the penal sanction available if the goods are Q: What is the rationale behind the accountability of
not intended for sale or resale? the officers of the corporation?

A: No. To be a TR transaction, the goods must be A: The rationale is that such officers or employees are
intended for sale or resale. vested with the authority and responsibility to devise
means necessary to ensure compliance with the law
In Ng v. People, the Supreme Court held that the trial and, if they fail to do so, are held criminally
court erred in ruling that the agreement in the case accountable; thus, they have a responsible share in
was a TR transaction because the goods involved the violations of the law (ibid).
were intended to be used in the fabrication of steel
communication towers. Note: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate personality
The Court further ruled that, [T]he true nature of a of the corporation, where he is the actual, present and
trust receipt transaction can be found in the efficient actor. Corporate officers or employees, through
whereas clause of PD 115 which states that a trust whose act, default or omission the corporation commits a
receipt is to be utilized as a convenient business crime, are themselves individually guilty of the crime. The
device to assist importers and merchants solve their principle applies whether or not the crime requires the
financing problems. Obviously, the State, in enacting consciousness of wrongdoing (Ching vs. Secretary of Justice,
the law, sought to find a way to assist importers and supra).
merchants in their financing in order to encourage
commerce in the Philippines.

The principle is of course not limited in its application

to financing importations, since the principle is



Q: In the event of default by the entrustee on his
Q: What are the defenses available to negate obligation under the TR agreement, is it absolutely
CRIMINAL liability of the entrustee? necessary for the entruster to cancel the trust and
take possession of the goods to be able to enforce
A: CoCo CaCo No LP his right thereunder?

1. Compliance with the terms of the TR either by A: The law uses the word "may" in granting to the
payment, return of the proceeds or return of the entruster the right to cancel the trust and take
goods (Sec. 13, PD 115.) possession of the goods. Consequently, the entrustee
has the discretion to avail of such right or seek any
2. Consignment. alternative action, such as a third party claim or a
separate civil action which it deems best to protect its
3. Cancellation of the TR agreement and taking into right, at any time upon default or failure of the
possession of the goods by the entruster. entrustee to comply with any of the terms and
conditions of the trust agreement (South City Homes,
Note: Repossession of the goods will extinguish only the Inc. v. BA Finance Corporation, G.R. No. 135462, Dec.
criminal liability. 7, 2001).

4. Compromise by parties before filing of information Q: BBB Banking Corporation issued a Letter of Credit
in court. Compromise of estafa case arising from in the amount of P5Million, for the purchase of five
TR transaction, after the case has been filed in (5) tons of corn by X. Upon arrival of the goods, the
court does not amount to novation and does not goods were delivered to the warehouse of X.
erase the criminal liability of the accused. (Ong v. Thereafter he was asked to sign a Trust Receipt
CA, 124 SCRA 578 [1983].) covering the goods. When the goods were sold, X
did not deliver the proceeds to BBB Banking
5. Non-receipt of the goods by the entrustee or Corporation, arguing that he will need the fund for
where proof of delivery of goods to the accused is the subsequent importation. Is there sufficient basis
insufficient. (Ramos v. CA, G.R. No. L-3992-25, to sue for criminal action? (2012 Bar Question)
Aug. 21, 1987)
a) Yes, because X's failure to turn over the proceeds
6. Loss of goods without fault of the entrustee. to the bank is a violation of the Trust Receipt
7. The transaction does not fall under PD 115. b) No, because the trust receipt was signed only
(Colinares v. CA, G.R. No. 90828, Sept. 5, 2000, after the delivery of the goods. When the trust
Consolidated v. CA, G.R. No. 114286, Apr. 19, receipt was signed, the ownership of the goods
2001) was already with X.
c) Yes, because violation of Trust Receipt Law is
Note: In these cases, the execution of a TR was mala prohibita, intention is irrelevant.
made after the goods covered by it had been
d) No, because X has a valid reason not to deliver
purchased, making the buyer the owner thereof.
The transaction does not involve a TR but a simple
the proceeds to BBB Banking Corporation.
loan even though the parties denominate the
transaction as one of a TR. A: B. When the trust receipt was signed, the
ownership of the goods was already with X.
Q: Can the repossession of the goods by the
entruster be considered as payment? Q. Dennis failed to comply with his undertaking
under the TR he issued in favor of ABC bank. The
A: No, payment would legally result only after the bank filed both criminal and civil cases against
entruster has foreclosed on the securities, sold the Dennis. The court proceeded with the civil case
same and applied the proceeds thereof to the independently from the criminal case. Is the court
entrustees obligation. Since the TR is a mere security correct in proceeding independently although a
arrangement, the repossession by the entruster criminal case is also instituted?
cannot be considered payment of the loan/advances
given to the entrustee under the letter of credit/trust A: Yes, the complaint against Dennis is based on the
receipt (PNB v. Pineda, G.R. No. 46658, May 13, failure of the latter to comply with his obligation as
1991). spelled out in the TR. This breach of obligation is



separate and distinct from any criminal liability for

"misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents
or instruments released under trust receipts",
punishable under Sec. 13 of the PD 115. Being based
on an obligation ex contractu and not ex delicto, the
civil action may proceed independently of the
criminal proceedings instituted against petitioners
regardless of the result of the latter (Sarmiento vs.
CA, G.R. No. 122502, Dec. 27, 2002).

Q. What is the effect of novation of a trust


A. Where the entruster and entrustee entered into an

agreement which provides for conditions
incompatible with the TR agreement, the obligation
under the trust receipt is extinguished. Hence, the
breach in the subsequent agreement does not give
rise to a criminal liability under P.D. 115 but only civil
liability (Philippine Bank v. Ong, G.R. No. 133176, Aug.
8, 2002).

Q: Can deposits in a savings account opened by the

buyer subsequent to the TR transaction be applied
to outstanding obligations under the TR account?

A: No, the receipt of the bank of a sum of money

without reference to the TR obligation does not
obligate the bank to apply the money received
against the trust receipt obligation. Neither does
compensation arise because compensation is not
proper when one of the debts consists in civil liability
arising from criminal (Metropolitan Bank and Trust
Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

Q: E received goods from T for display and sale in E's

store. E was to turn over to T the proceeds of any
sale and return the ones unsold. To document their
agreement, E executed a trust receipt in Ts favor
covering the goods. When E failed to turn over the
proceeds from his sale of the goods or return the
ones unsold despite demand, he was charged in
court for estafa. E moved to dismiss on the ground
that his liability is only civil. Is he correct? (2011 Bar

A: No, since his breach of the trust receipt agreement

subjects him to both civil and criminal liability for




(ACT 2137 AS AMENDED) 6. If the receipt is issued for goods of which the
Warehouseman is the owner, either solely or
Q: What is a warehouse receipt (WHR)? jointly or in common with others, the fact of such
ownership; and
A: A written acknowledgment by the warehouseman 7. Description of the goods
that he has received and holds certain goods therein 8. A statement of the amount of advances made and
described in his warehouse for the person to whom of liabilities incurred for which the warehouseman
the document is issued. The warehouse receipt has claims a Lien.
two-fold functions, that is, it is a contract and a 9. Fees (Sec. 2, WH Law.)
receipt (Telengtan Bros. & Sons v. CA, G.R. No. L-
110581, Sept 21, 1994.) Q: What are the effects of omission of any of the
essential terms?
Q: Distinguish WHR Law from Documents Of Title
under Civil Code. A: CIV-N

A: 1. Conversion of the contract to ordinary deposit.

WAREHOUSE DOCUMENTS OF TITLE 2. Injured person can hold WHM liable for all
RECEIPTS LAW UNDER CIVIL CODE damages caused by the omission
Warehouse receipts Other receipts of 3. Validity of receipt not affected
issued by warehouses, documents issued in 4. Negotiability of receipts not affected (Gonzales v.
whether public or bailment contracts other Go Fiong & Luzon Surety Co., G.R. No. 91776, Aug.
private, bonded or than warehouse receipts 30, 1958)
not. (Art.1507-1520 NCC)
Q: What CANNOT be inserted in a WR?
Q: Who is a warehouseman (WHM)?
A: A warehouseman may insert in a receipt issued by
A: A person, natural or juridical, lawfully engaged in him, any other terms and conditions provided that
the business of storing of goods for profit (Sec. 58, such terms and conditions shall not be: C2-RMN
1. Contrary to the Warehouse Receipts Law. (Sec. 3)
Q: What is a warehouse (WH)? 2. Contrary to law, morals, good customs, public
order or public policy.
A: The building or place where goods are deposited 3. Terms Reducing the required diligence of the
and stored for profit. warehouseman (Ibid)
4. Those exempting the warehouseman from liability
Q: Who may issue WHR? for Misdelivery or for not giving statutory notice in
case of sale of goods.
A: 5. Those exempting the warehouseman from liability
1. WHM, whether public or private, bonded or not. for Negligence.
(Sec. 1, WHR Law)
Q: What is the effect when the goods deposited are
2. A person authorized by a WHM. incorrectly described?

Q: What is the form of a WHR and what are its A: GR: Warehouseman shall be liable for damages for
essential terms? non-existence or misdescription of goods at the time
of its issue.
A: It need not be in particular form but must embody
within its written or printed terms: LCD-DSWD-LF XPN: When the goods are described based on:
1. Series or labels upon them
1. Location of the WH 2. Statement that the goods are of certain kind.
2. Consecutive number of the receipt
3. Date of the issue
4. A statement whether the goods received will be
Delivered to bearer, to a specified person or to a
specified person or his order



Q: To whom should the goods be delivered?

Q: In case the signature of an owner of a negotiable
A:PDO receipt was forged and the forger who now holds
1. To the person lawfully entitled to the Possession the negotiable receipt was able to withdraw the
of the goods, or his agent; goods from the WHM. What are the rights of the
2. To the person entitled to Delivery under a non- owner of the negotiable receipt?
negotiable instrument or with written authority;
or A:
3. To the lawful Order of a negotiable receipt. 1. If under WHR, the goods are deliverable to the
(person in possession of a negotiable receipt) (Sec. depositor or to his order, the owner of the said
9, WHR Law.) negotiable receipt may proceed against the WHM
and/or the holder.
2. Without the valid indorsement of the owner to
Q: What are the kinds of WHR? the holder or in blank, the WHM is liable to the
owner for conversion in the misdelivery.
1. Negotiable warehouse receipt 3. If the goods are deliverable to bearer, the owner
2. Non-negotiable warehouse receipt may only proceed against the holder. The WHM is
not liable for conversion where the goods are
Q: What is a negotiable WHR? delivered to a person in possession of a bearer
negotiable instrument.
A: It is a receipt in which it states that the goods
received will be delivered to the bearer or to the Q: What is the rule when more than one negotiable
order of any person named in such receipt (Sec. 5, receipt is issued for the same goods?
WHR Law). It is negotiated by delivery or
indorsement plus delivery. A: A WHM shall be liable for all damages caused by
his failure to do so to anyone who purchased the
Note: No provision shall be inserted in a negotiable receipt subsequent receipt for value supposing it to be an
that it is non-negotiable. Such provision, if inserted, shall be original, even though the purchase be after the
void, and the receipt shall remain negotiable. A negotiable delivery of the goods by the WHM to the holder of
warehouse receipt cannot be converted into non- the original receipt (Sec. 6, WHR Law).
negotiable (Sec. 5, WHR Law).
Note: The word duplicate shall be plainly placed upon the
Q: Who may negotiate a negotiable WR? face of every such receipt, except the first one issued (ibid.).

A: Q: What is a non-negotiable WHR?

1. The owner
2. Any person to whom the possession or custody of A: It is a receipt in which it is stated that the goods
the receipt has been entrusted by the owner, if, received will be delivered to the depositor or to any
by the terms of the receipt, the goods are other specified person (Sec. 4, WHR Law).
deliverable to the order of the person to whom
the possession or custody of receipt has been Q: What is needed to be indicated in the face of a
entrusted or in such form that it may be WHR to make it non-negotiable?
negotiated by delivery (Sec. 40, WHR Law).
A: It shall have plainly placed upon its face by the
Q: What happens if the indorsement is necessary warehouseman issuing it non-negotiable, or not
but the negotiable receipt was only delivered? negotiable (Sec.7, WHR Law).

A: AC - DC Q: What is the effect of failure to place an indication

1. The transferee ACquires title against the of non-negotiability in the WHR?
2. There is no Direct obligation of the WHM; and A: Failure to mark the WR as non-negotiable shall
3. The transferee can Compel the transferor to entitle the holder, who purchased it for value
complete the negotiation by indorsing the supposing it to be negotiable, to treat such receipt
instrument. Negotiation takes effect as of the time negotiable (ibid).
when the indorsement is actually made.



of value.
Q: How is a non-negotiable WHR transferred? Intermediate parties are
Intermediate parties
not liable for the
become secondarily
A: A non-negotiable warehouse receipt may be warehouse mans failure
transferred by its delivery to the transferee to deliver the goods.
accompanied by a deed of assignment, donation or
other form of transfer. Q: Distinguish the rights of a holder of a negotiable
warehouse receipt from the rights of a transferee of
Q: What is the effect of indorsement of a non- a non-negotiable warehouse receipt.
negotiable WHR?
A: Even if the receipt is indorsed, the transferee NEGOTIABLE WAREHOUSE NON-NEGOTIABLE
acquires no additional right (Sec. 39, WHR Law). RECEIPT WAREHOUSE RECEIPT
May be acquired through May be acquired through
Q: What are the warranties on a WHR? negotiation transfer or assignment
Rights of the holder of the Rights of transferee:
A: A person who, for value, negotiates or transfers a receipt:
receipt by indorsement or delivery, including one 1. Acquires title to the
who assigns for value a claim secured by a receipt, 1. If indorsed: goods subject to the
unless a contrary intention appears warrants: GRIT terms of any
agreement with the
a. Acquires title to
1. Receipt is Genuine transferor (Sec. 42,
the goods as the WHR Law).
2. Legal Right to negotiate or transfer it person
3. No knowledge of defects that may Impair the negotiating (Sec. 2. Acquires the right to
validity or worth of the receipt 41, WHR Law). notify the
4. That he has a right to Transfer title to the goods b. Acquires the warehouseman of
and that the goods are merchantable or fit for a direct obligation the transfer and
particular purpose whenever such warranties of the thereby acquires the
would have been to transfer without a receipt of warehouseman to direct obligation of
goods represented thereby (Sec. 44, WHR Law). the warehouseman
hold possession of
to hold possession of
the goods for him the goods for him
Note: The indorsee does NOT guarantee that the WHM will as if the
comply with his duties (Sec. 45, WHR Law). (ibid).
Q: Do the warranties mentioned above apply to a
directly Note: Prior to notice, the
WHR given as collateral?
contracted with title of the transferee may
him (ibid). be defeated by the levy of
A: No. A creditor receiving the WHR given as an attachment or execution
collateral makes no warranty (Sec. 46, WHR Law) upon the goods by a creditor
2. If not indorsed:
of the transferor or by a
He may compel
indorsement; other- warehouseman by the
wise, he would transferor or a subsequent
acquire title as that purchaser from the
Q: Distinguish negotiable instrument from a
of an assignee (Sec. transferor of a subsequent
negotiable WHR?
43, WHR Law.). sale of the goods by the
transferor. (ibid.)
Defeats the lien of the
NEGOTIABLE WHR seller of the goods covered Acquires the title as that of
INSTRUMENT his transferor.
thereby. (Sec. 49, WHR
Contains an Does not contain an Law.)
unconditional promise unconditional promise to Pending notification to the
Good covered cannot be
to pay a sum certain in pay a sum certain in warehouseman, goods can
garnished, attached or
money. money. be garnished, attached or
levied on execution by
The subject is levied on execution
The subject is money. unless:
merchandise. Reason: Absent such notice,
The negotiable The warehouse receipt is both the warehouseman and
1. Receipt is the sheriff have a right to
instrument is the object not the object of value.
surrendered. assume that the goods are



2. Its negotiation is still owned by the person and fees and other charges.
enjoined by the whose name appears in the
court. receipt. Q: What is the proper recourse of the
3. The goods are warehouseman if he is uncertain as to who is
impounded by the entitled to the goods? Explain. (2005 Bar Question)
court. (Sec. 25, WHR
Law.) A: Since there is a conflicting claim of ownership or
title, the warehouseman should file a complaint in
Note: This shall not apply if interpleader requiring the claimants to interplead.
the person depositing is The matter involves a judicial question as to whose
not the owner of the goods claim is valid.
or one who has no right to
convey title to the goods
Q: What is the rule where a warehouse receipt is
binding upon the owner.
transferred to secure payment of a loan by way of
The assignee only steps
Protects the purchaser in pledge or mortgage?
into the shoes of the
good faith and for value.
A: The pledgee or mortgagee does not automatically
become the owner of the goods but merely retains
Q: Will breach of duty on the part of the person
the right to keep, and with the consent of the owner
making the negotiation or fraud, mistake or duress
to sell them so as to satisfy the obligation from the
on the owner of the receipt to entrust possession or
proceeds for the simple reason that the transaction is
custody, impair the validity of negotiation of a
not a sale but only a mortgage or pledge. Likewise, if
the property is lost without the fault or negligence of
the mortgagee or pledgee, then said goods are to be
A: No, provided the person to whom the receipt was
regarded as lost on account of the real owner,
negotiated or a person to whom the receipt was
mortgagor or pledgor (PNB v. Sayo, Jr., G.R. No.
subsequently negotiated paid value therefor, without
129198, July 9, 1998).
notice of the breach of duty, or fraud, mistake or
duress (Sec. 47, WHR Law).
Q: Does the non-payment by the original depositors
of the purchase price render the further negotiation
Q: Coco was issued by a WHM a negotiable receipt
of the receipt invalid?
for safekeeping by the latter of his goods. Can the
judgment creditor of Coco levy by execution the
A: No, the negotiation of the warehouse receipt by
goods covered by the negotiable receipt?
the buyer of goods purchased from and deposited to
the warehouseman is valid even if the
A: The goods cannot, while in the possession of the
warehouseman who issued the negotiable warehouse
WHM, be attached by garnishment or otherwise, or
receipt was not paid by the buyer. The validity of the
be levied upon under an execution unless the receipt
negotiation cannot be impaired by the fact that the
be first surrendered to the WHM, or its negotiation
owner/warehouseman was deprived of the
enjoined. The warehouseman cannot be compelled to
possession of the same by fraud, mistake or
deliver the actual possession of the goods until the
conversion (PNB v. Noahs Ark Sugar Refinery, G.R.
receipt is surrendered to it or impounded by the
No. 107243, Sept. 1, 1993).
Q: T delivers two refrigerators to the warehouse of
Q: Assuming that prior to the levy, the receipt was
W who then issues a negotiable receipt undertaking
sold to Yoyo on the basis of which he filed a claim
the delivery of the refrigerators to T or bearer. T
with the sheriff. Would Yoyo have better rights to
entrusted the receipt to B for safekeeping only. B
the goods than the creditor? Explain your answer.
negotiated it, however, to F who bought it in good
(1999 Bar Question)
faith and for value. Who is entitled to the delivery of
the refrigerators? (2011 Bar Question)
A: Yes. Yoyo, as a holder for value of the receipt, has
a better right to the goods than the creditor. It is
A: F, since he is a purchaser in good faith and for
Yoyo that can surrender the receipt which is in its
possession and can comply with the other require-
ments which will oblige the warehouseman to deliver
the goods, namely, to sign a receipt for the delivery
of the goods, and to pay the warehouseman's liens



5. The failure was not due to any Fault on the
Q: What are the obligations of a warehouseman? part of the warehouseman:
a. Upon request by or on behalf of the person
A: To: T D(sasusi) K lawfully Entitled (Sec. 10, WHR Law).
b. If the goods are Lost, due to a fortuitous
1. Take care of the goods entrusted to his event exclusively.
safekeeping c. If the warehouseman needs reasonable
time to ascertain the Validity of the claim if
2. Deliver them to the holder of the receipt or someone other than the depositor claims
the depositor provided there is demand by the title to the goods (Sec. 18, WHR Law).
depositor accompanied by either: d. If he had Information that the delivery
a. An offer to satisfy the warehousemans lien about to be made was to one not lawfully
b. An offer to surrender the receipt, if negotiable entitled (Sec. 10, WHR Law)
with such indorsements as would be e. If Several persons claim the goods. (Sec. 17,
necessary for the negotiation of the receipts WHR Law.)
c. A readiness and willingness to sign, when
the goods are delivered, an Q: The warehouseman, by issuing the warehouse
acknowledgement that they have been receipt, acknowledges that the goods are in his
delivered, if such signature is requested by possession, but he can refuse to deliver the goods to
the warehouseman (Sec. 8, WHR Law) the holder of the warehouse receipt covering the
goods if --- (2012 Bar Question)
3. Keep the goods separate from the goods of other
depositors, except if authorized by agreement or a) the warehouse receipt covering the goods is not
by custom, fungible goods may be mingled with presented.
other goods of the same kind and grade. b) the lien of the warehouseman is not satisfied.
c) the said holder presents a materially altered
Q: When is the need for a demand by the depositor warehouse receipt.
not necessary? d) All of the above.

A: When the warehouseman has rendered it beyond A: D. A WHM is bound to deliver the goods upon a
his power to deliver the goods. demand made if such is accompanied with (1) an
offer to satisfy the WHMs lien; (2) offer to surrender
Q: When is refusal to deliver by the warehouseman the receipt if negotiable; and (3) readiness to sign an
justified? acknowledgment receipt when the goods are
delivered. (Sec. 8, WHR Law.)
A:Sa S.B. Co(nfa) F(elvis)
HOWEVER, Sec. 31 of the said Law expressly provides
1. If the warehousemans lien is not SAtisfied by that a WHM having a lien valid against the person
the claimants (Sec. 31, WHR Law) demanding the goods may refuse to deliver the goods
to him until the lien is satisfied.
2. Where the goods have already been Sold to
satisfy the warehousemans lien or because of Further, Sec. 13 provided that the alteration of a
their perishable or hazardous nature (Sec. 34, receipt shall not excuse the WHM who issued it from
WHR Law) any liability if such alteration was: (1) immaterial,
(2) authorized, or (3) made without fraudulent intent.
3. If the warehouse receipt is negotiated Back to
him. Q: What is the remedy if the WHR is lost or
4. When the holder does not satisfy the
COnditions prescribed in Sec. 8, WHR Law: A: A court of competent jurisdiction may order the
a. Non-satisfaction of warehousemans lien. delivery of the goods only:
b. Failure to surrender warehouse receipt.
c. Refusal to sign the Acknowledgement a. Upon satisfactory proof of the loss or destruction
receipt, acknowledging the receipt of the of the receipt; and
goods from the warehouse.



b. Upon the giving of a bond with sufficient sureties 4. Material alteration fraudulently made
to be approved by the court. (Sec. 14, WHR Law.) warehouseman is liable according to the
original tenor of the receipt to a purchaser of
Note: The delivery of the goods under an order of the court the receipt for value without notice, and even to
shall NOT relieve the WHM from liability to a person to the alterer and subsequent purchasers with
whom the negotiable receipt has been or shall be notice except that as regards to the last
negotiated for value without notice of the proceedings or
two, the warehousemans liability is limited only
of the delivery of the goods (ibid.).
to delivery as he is excused from any liability
Q: When does the duty to insure the goods arise?
Q: What are the instances where a WHM is
criminally liable for his acts?
1. Where the warehouse receipt contains a
Representation to that effect.
1. Issuance of warehouse receipts for Good not
2. Where it was an Inducement for the depositor to
received. (Sec. 50, WHR Law)
enter into the contract;
2. Issuance of receipt containing False
3. Established practice; or
statement.(Sec. 51, WHR Law)
4. Where the Law provides
3. Issuance of Duplicate negotiable warehouse
receipt not marked as such. (Sec. 52, WHR Law)
Q: What is conversion?
4. Issuance of a negotiable warehouse receipt of
which he is an Owner without stating such fact of
A: An unathorized assumption and exercise of the
ownership. (Sec. 53, WHR Law)
right of ownership over goods belonging to another
5. Delivery of goods without Obtaining negotiable
through the alteration of their condition or the
warehouse receipt. (Sec. 54, WHR Law)
exclusion of the owners right (Bouviers Law
6. Negotiation of receipt for Mortgaged goods. (Sec.
55, WHR Law)
7. Commingling of goods. (Sec. 24, WHR Law)
Q: What are the instances where a WHM is liable for
Q: What are the other acts for which WHM is liable?
1. Where the delivery is made to person other than
those authorized
1. Failure to stamp Duplicate on copies of
2. Even if delivered to persons entitled, he may still
negotiable receipt (Sec.6, WHR Law)
be liable for conversion if prior to delivery:
2. Misdelivery of goods (Sec. 10, WHR Law)
a. He had been requested not to make such
3. Failure to Place non-negotiable or not-
delivery; or
negotiable on a non-negotiable receipt (Sec. 7,
b. He had received notice of the adverse claim
WHR Law)
or title of a third person.
4. Failure to give notice in case of Sale of goods to
satisfy lien (Sec. 33, WHR Law) or because the
Q: Give the effects of alteration of the receipt on the
goods are perishable or hazardous (Sec. 34, WHR
liability of the warehouseman.
5. Issuing receipt for non-existing goods or
misdescribed goods (Sec.20, WHR Law)
1. Alteration immaterial whether fraudulent or
6. Failure to take Care of the goods (Sec. 21, WHR
not, whether authorized or not, the
warehouseman is liable on the altered receipt
7. Failure to effect Cancellation of a negotiable
according to its original tenor
receipt upon delivery of the goods (Sec. 11, WHR
2. Authorized material alteration the
warehouseman is liable according to the terms
of the receipt as altered

3. Material alteration innocently made the

warehouseman is liable on the altered receipt
according to its original receipt



WAREHOUSEMANS LIEN Q: What is the effect of sale made to satisfy a

WHMs lien or in case when the goods are
Q: What charges are covered by a WHMs lien? perishable or hazardous in nature?

A: PMA A: The WHM shall not thereafter be liable for failure

1. Charges for storage and Preservation of the goods to deliver the goods to the depositor or owner of the
(insurance and others may be included as long as goods or to a holder of the receipt given for the
it is stipulated) goods when they were deposited, even if such receipt
2. Money advanced, interest, insurance, be negotiable (Sec. 36, WHR Law).
transportation, labor, weighing, coopering and
other charges and expenses in relation to such Q: How will the execution sale to satisfy the WHMs
goods lien be conducted?
3. Charges and expenses for notice, and
Advertisements of sale, and for sale of the goods A:
where default had been made in satisfying the 1. Notice of the sale
WHMs lien (Sec. 27, WHR Law) a. published once a week for two consecutive
weeks in a newspaper published in the place
Q: What are the remedies available to a WHM to where such sale is to be held; or
enforce his WHMs lien? b. If there is no newspaper published in such
place, the advertisement shall be posted at
A: REC least ten days before such sale in not less than
1. By Refusing to deliver the goods until the lien is six conspicuous places therein.
2. By causing the Extrajudicial sale of the property Which notice shall indicate the following:
and applying the proceeds of the value of the lien i. Description of the goods to be sold;
3. By filing a civil action for Collection of the unpaid ii. Name of the owner or person on whose
charges or by way of counterclaim in an action to account the goods are held; and
recover the property from him or such other iii. Time and place of the sale
remedies allowed by law for the enforcement of a
lien against personal property or to a creditor 2. Sale shall be held not less than fifteen days from
against his debtor, for the collection from the the time of the first publication.
depositor of all the charges which the depositor
has bound himself to pay. 3. In the place where the lien was acquired.

Q: Does the lien over the goods preclude the WHM Note: The balance, if any, of the proceeds of the execution
to avail all other remedies? sale shall be held by the WHM and delivered on demand to
the person to whom he would have been bound to deliver
or justified in delivering goods (Sec.31, WHR Law).
A: No.Whether a warehouseman has or has not a lien
upon the goods, he is entitled to all remedies allowed
Q: What is the effect of the non-publication of the
by law to a creditor against a debtor for the collection
from the depositor of all charges and advances which notice of sale?
the depositor has expressly or impliedly contracted
A: Where the sale was made without the publication
with the warehouseman to pay (Sec 32, WHR Law).
required and before the time provided by law, such
Q: Against whose goods may the lien be enforced? sale is void and the purchases of the goods acquires
no title to them.
Q: Can a person claiming right over the property
1. Goods belonging to the person who is liable as
debtor; and stop the execution sale of the goods?
2. Goods belonging to others which have been
A: Yes, at any time before the goods are so sold, any
deposited at any time by the debtor with
authority to make a valid pledge (Sec. 28, WHR person claiming a right of property or possession
Law) therein may pay the WHM the amount necessary to
satisfy his lien and to pay the reasonable expenses
and liabilities incurred inserving notices and
advertising and preparing for the sale up to the time
of such payment (Sec.33, WHR Law).



Q: How may the WHM lose his lien?

1. By surrendering possession thereof, or
2. By refusing to deliver the goods when a demand is
made with which he is bound to comply. (Sec. 29)

Note: Where a negotiable receipt is issued, with the

exception of the charges for the storage or preservation
of goods for which a negotiable receipt has been
issued, the lien exists only for other charges expressly
enumerated in the receipt so far as they are written
although the amount of the said charge isnt stated.




A: B. When negotiated, NIs can be used to pay
Q: What is a negotiable instrument (NI)? indebtedness

A: It is a written contract for the payment of money Q. What are the Characteristics or features of
which is intended as a substitute for money and Negotiable instrument?
passes from one person to another as money, in such
a manner as to give a holder in due course the right A: The characteristics of a negotiable instrument are:
to hold the instrument free from defenses available 1) Negotiability the note may pass from hand to
to prior parties. The instrument must comply with hand similar to money so as to give the holder in
Sec. 1 of the NIL (Sundiang & Aquino, Reviewer on due course (HIDC) the right to hold the
Commercial Law, 2009 Edition, pg. 5). instrument and collect the sum payable for
himself free from any infirmity in the instrument
Q: What are the laws which govern a negotiable or defect in the title of any of the prior parties or
instrument? defenses available to them among themselves.

A: 2) Accumulation of secondary contracts a

1. NIL-For instruments which meet the requisites of characteristic of NI where additional parties
negotiability. become involve as they are transferred from one
2. New Civil Code (NCC) Applies suppletorily in person to another.
cases of assignment and demand for payment of (De Leon, The Philippine Negotiable Instruments
an NIL . Law, 2004 Ed., pg. 4-5.)
3. Code of Commerce Applies suppletorily to NIL in
cases of crossed checks. FORMS AND INTERPRETATION

Q: Are NIs considered legal tender? Q: What are the rules of construction in case of
ambiguities in a negotiable instrument?
A: No. NIs are not money but mere substitutes for
money. Nor are they legal tender (Sec. 60, New A:
Central bank Act [NCBA], RA 7653). 1. Words prevail over figures
2. Interest runs from the date of the instrument, if
GR: Their delivery does not by itself produce the date from which interest is to run is unspecified; if
effect of payment (Roman Catholic Bishop of undated, from the issue thereof
Malolos vs. Intermediate Appellate Court, 191 3. If undated, instrument is considered dated as of
SCRA 411 [1990].) the time it was issued
4. Written provisions prevail over printed
XPNs: NI shall produce the effect of payment when: 5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election
1. When a check has been cashed, or when through 6. When not clear in what capacity it was signed,
the fault of the creditor they have been impaired deemed signed as an indorser
(Art. 1249, Civil Code). 7. "I promise to pay" when signed by two or more
2. If a check representing demand deposit has been persons is deemed to be jointly and severally
cleared and credited to the account of the liable. (Sec. 17, NIL.)
creditor, such shall be equivalent to delivery to
the creditor of cash. (Sec. 60, NCBA.) Q: 29. A promissory note which is undated is
presumed to be--- (2012 Bar Question)
Q: Negotiable instruments are used as substitutes
for money, which means--- (2012 Bar Qustion) a) dated as of the date of issue;
b) dated as of the date of the first indorsement;
a) that they can be considered legal tender. c) promissory note is invalid because there is no
b) that when negotiated, they can be used to pay date;
indebtedness. d) dated on due date.
c) that at all times the delivery of the instrument is
equivalent to delivery of the cash. A: A. An undated promissory note is deemed to have
d) that at all times negotiation of the instruments been dated as of the date of issue
requires proper indorsement.




2. Non-specification of Value given or that any
Q: What are the factors to determine the value had been given
negotiability of the instrument? 3. Non-specification of place where it is drawn or
A: FRI 4. Bears a Seal
1. Words that appear on the Face of negotiable 5. Designation of particular kind of Currency in
instrument which payment is to be made. (Sec. 6, NIL.)
2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole Additional provisions which:
of the instruments 6. Authorizes the sale of collateral Securities on
Q: What are the incidents in the life of a negotiable default
instrument? 7. Gives the holder an Election to require
something to be done in lieu of payment of
A: The following are the incidents in the life of a NI: money.
1. Issue 8. Authorizes Confession of judgment on default
2. Negotiation 9. Waives the benefit of the Law intended for the
3. Presentment for acceptance (in certain kinds protection of the obligor (Sec. 5, NIL).
4. Acceptance Q: When is a promise to pay deemed to be
5. Dishonor by non-acceptance unconditional?
6. Presentment for payment
7. Dishonor by non-payment A: The promise or order to pay must NOT be subject
8. Notice of dishonor to any condition or contingency. An instrument
9. Protest in case of foreign bill payable upon a contingency is NOT negotiable even if
10. Discharge the condition thereon has been fulfilled.

Q: What are the elements of a NI? An unqualified order or promise to pay is

unconditional though coupled with:
1. It must be in writing and Signed by the maker or a. An indication of particular fund out of which
drawer reimbursement is to be made or a particular
2. Must contains an Unconditional promise or order account to be debited with the amount; or
to pay a sum certain in money
3. Must be payable on Demand, or at a fixed or b. A statement of the transaction which gave rise to
determinable future time the instrument. But an order or promise to pay
4. Must be payable to Order or to bearer (so called out of a particular fund is conditional (Sec 3, NIL).
badges of negotiability)
5. If Addressed to a drawee, he must be named or Q: B borrowed Php1 million from L and offered to
otherwise indicated with reasonable certainty. him his BMW car worth Php 1 Million as collateral. B
(Sec. 1, NIL.) then executed a promissory note that reads: I, B,
promise to pay L or bearer the amount of Php1
Note: A negotiable instrument need not follow the exact Million and to keep my BMW car (loan collateral)
language of NIL, as long as the terms are sufficient which free from any other encumbrance. Signed, B. Is this
clearly indicate an intention to conform to the note negotiable? (2011 Bar Question)
requirements of the law (Sec. 10, NIL).
A: No, since it contains a promise to do an act in
The requirements stated in Sec. 1 must appear on the face
of the instrument otherwise the instrument would not be addition to the payment of money.
Note: What will not affect the negotiability of the
instrument is an additional provision which gives an
Q: What are the provisions that do not affect the
election to require something to be done in lieu of payment
negotiability of an instrument? of money.

A: The following do NOT affect the negotiability of an Q: A writes a promissory note in favor of his
instrument: DVNo S. CurSECo Law creditor, B. It says: Subject to my option, I promise



to pay B Php1 Million or his order or give Php1

Million worth of cement or to authorize him to sell Q: Is it required that the NI be payable in Philippine
my house worth Php1 Million. Signed, A. Is the Peso?
note negotiable? (2011 Bar Question)
A: No. The money referred into may be our legal
A: No, because the exercise of the option to pay lies tender or foreign currency. An instrument is still
with A, the maker and debtor. negotiable although the amount to be paid is
expressed in currency that is not legal tender so long
Note: In order not to affect the negotiability of the as it is expressed in money (PNB v Zulueta, 101 Phil
instrument, the option must be with the holder/creditor. 1071.)

Q: What are the rules governing the use of phrases Q: What would be the effect if a bill or note is
in the NIs? payable other than in money?

A: A: GR: The note or bill must be payable in money. If

a. As to promissory note payable in goods, wares, or merchandise, or
in property, the same is NOT negotiable.
1. The word promise need not be used. Any
expression equivalent to a promise is sufficient XPNs: Negotiability is NOT affected if the note
2. Mere acknowledgment of a debt is not a contains an additional provision which: SECo Law
promissory note.
3. Language used must indicate a written 1. Authorizes the sale of collateral Securities in
undertaking to pay case the instrument be not paid at maturity; or
2. Gives the holder an Election to require
b. As to bill of exchange something to be done in lieu of payment of
money; or
1. It must contain an order for payment as 3. Authorizes a Confession of judgment if the
distinguished from a mere request. instrument be not paid at maturity; or
2. The order is not invalidated because it contains 4. Waives the benefit of any Law intended for the
words of civility. Thus, insertion of polite words advantage or protection of the obligor. (Sec. 5,
like please does not alter the character of NIL.)
the instrument; as long as the language
expresses the drawers will that the money be Q: When is payment by installment certain?
A: Payment by installment is certain if the dates of
Note: An instrument which mentions a particular fund out each installment is fixed AND the amount to be paid
of which reimbursement is to be made is negotiable. But an
for each installment is stated (Sec. 2, NIL; Sundiang,
instrument payable out of a particular fund is non-
negotiable. In this latter case, the fund specified is the
2009, supra, pg. 19).
direct source of payment; therefore, it is subject to the
availability of fund, hence conditional. Q: What are the rules as to interest in the NI?

Q: What constitutes certainty as to sum? A: In the absence of a date as to which interest is to

run, it shall be from the date of instrument, or in the
A: The sum payable is a sum certain within the absence thereof, at the date of issue. In the absence
meaning of this Act, although it is to be paid:ISDEA of interest rate, it shall be the legal rate which is 12%.
a. with Interest; or
b. by Stated installments; or Q: When is a NI payable on demand or at a fixed or
c. by stated installments, with a provision upon determinable future time?
Default in payment of any installment or of
interest, the whole shall become due ( A:
acceleration clause); 1. Payable on demand The holder may call for
d. with Exchange, whether at a fixed rate or at the payment any time, likewise, the maker may also pay
current rate; or any time and the refusal of the holder to accept
e. with cost of collection or an Attorneys fees, in payment shall stop the running of interest should
case payment shall not be made at maturity (Sec. there be any, but obligation to pay the note subsist.
2, NIL).



An instrument is payable on demand:

XPN: Where a note with a fixed maturity
a. When it is so expressed to be payable on provides that the maker has the option to extend
demand, or at sight, or on presentation; or time of payment until the happening of a
b. In which no time for payment is expressed. contingency, the date is uncertain and the
(Sec 7, NIL.) instrument is non-negotiable.
c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the Q: When is an instrument payable to order?
person so issuing, accepting, or indorsing it,
payable on demand (ibid). A: The instrument is payable to order where it is
drawn payable to the order of a specified person or to
2. At a fixed time a term or time instrument is him or to his order. It may be drawn payable to the
payable only upon the arrival of the time for order of:
payment. PaDD JoinSH

3. At a determinable future time -An instrument is a. A Payee who is not a maker, drawer, or drawee;
payable at a determinable future time which is b. The Drawer or maker; or
expressed to be payable: c. The Drawee; or
d. Two or more payees Jointly; or
a. At a fixed period after date or sight; or e. One or some of Several payees; or
b. On or before a fixed or determinable future f. The Holder of an office for the time being (Sec. 8,
time specified therein; or NIL).
c. On or at a fixed period after the occurrence of
a specified event which is certain to happen, Q: When must the drawee of a NI be named with
though the time of happening be uncertain. reasonable certainty?
(Sec. 4, NIL).
Q: What is an acceleration clause? Discuss its 1. In a BOE, the drawee must be named or otherwise
effects. designated with reasonable certainty. (Sec. 1, NIL.)

A: Acceleration Clause is a provision, that upon 2. A bill may be addressed to two or more drawees
default in payment of any installment or interest, the jointly, but not to two or more drawees in the
whole shall become due (Sec.2[c], NIL). alternative or in succession. (Sec. 127, NIL.)Eg. An
instrument may be addressed to A and B but not
Q: What are the rules governing the negotiability of to A or B.
instruments with an acceleration clause?
3. An instrument payable to the order of the
A: bearer has been held to be an instrument
1. If the option to accelerate the maturity is on the payable to order (10 C.J.S. 575-576).
maker, whether such option is absolute or
conditional, it is negotiable. Q: When is an instrument payable to bearer?
2. Where acceleration is at the option of the holder
and can only be exercised upon the happening of A: ENaF PaLa
the specified event, still negotiable.
3. But where the holders right to accelerate is a. When it is Expressed to be so payable; (e.g. I
unconditional, the time of payment is rendered promise to pay to bearer P10,000.00)
uncertain, the instrument would NOT be
negotiable. b. When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
Q: What is an extension clause? Discuss its effects.
c. When it is payable to the order of a Fictitious
A: Extension Clauses are provisions extending the person or non-existing person, and such fact was
time of payment. known to the person making it so payable; (e.g. Pay
to John Doe or order)
GR: An extension clause does NOT affect the
negotiability of the instrument. d. When the name of the Payee does not purport to



be the name of any person; (Pay to cash.) absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious
e. When the only or the Last indorsement is an payee, it is treated as a bearer instrument that can be
indorsement in blank. (Sec 9, NIL.) negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
Illustration: check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
BACK of NI (indorsement) intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of
Pay to A Sgd. P the check will bear the loss (Ibid).
Pay to B Sgd. A
Sgd. B Q: Is there an exception to the fictitious-payee rule?

Q: What is the Fictitious-Payee rule? A: Yes. There is a commercial bad faith exception to
the fictitious-payee rule. A showing of commercial
A: A check is a bill of exchange drawn on a bank bad faith on the part of the drawee or any transferee
payable on demand. It is either an order or a bearer of the check for that matter, will work to strip it of
instrument but when the payee is fictitious or not this defense (Ibid)
intended to be the true recipient of the proceeds of
the check, the check is considered as a bearer Q: A promissory note which does not have the
instrument and as such it does not require words "or order" or "or bearer" will render the
indorsement to be validly negotiated. It is negotiable promissory note non-negotiable, and therefore ---
by mere delivery (Divina, Handbook on Philippine (2012 Bar Question)
Commercial Law, 2 Edition, pg. 9, citing PNB v. a) it will render the maker not liable
Rodriguez, 566 SCRA 513). b) the note can still be assigned and the maker
made liable;
Q: What is the difference of having a check payable c) the holder can become holder in due course;
to a fictitious payee from that payable to a specified d) the promissory note can just be delivered and
payee? the maker will still be liable

A: If a check is payable to a specified payee, it is an A: B. The note can still be assigned and the maker
order instrument, which requires indorsement from made liable
the payee or holder before it may be validly
negotiated; but it may nevertheless be considered as KINDS OF NEGOTIABLE INTRUMENTS
a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is Q: What are the two kinds of negotiable instruments
known to the person making it so payable. Thus, under the law?
checks issued to Prinsipe Abante or Si Malakas at
si Maganda, who are well-known characters in A:
Philippine mythology, are bearer instruments 1. Promissory notes (PN) An unconditional
because the named payees are fictitious and non- promise in writing made by one person to
existent (ibid., pg. 9-10). another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future
Q: Is the application of the fictitious-payee rule time, a sum certain in money to order or to
limited to those are fictitious and non-existent? bearer (Sec. 184, NIL).

A: No. A fictitious payee is NOT limited to person 2. Bill of exchange (BOE) An unconditional order
having no real existence. An actual, existing, and in writing addressed by one person to another
living payee may also be fictitious if the maker of signed by the person giving it, requiring the
the check did not intend for the payee to in fact person to whom it is addressed to pay on
receive the proceeds of the check (Ibid., pg. 10, PNB demand or at a fixed or determinable future time
case citing Sec. 9[c], NIL). a sum certain in money to order or to bearer
(Sec. 126, NIL).
Q: Who bears the loss in a fictitious-payee situation?
Note: A check is a bill of exchange drawn on a bank payable
on demand (Sec 185, NIL).
A: In a fictitious-payee situation, the drawee bank is



Q: Distinguish PN from a BOE. may treat it as either at his election (Sec. 17[e],
PROMISSORY Q: Who are the parties to a NI? Discuss their
NOTE liabilities.
Promise to
Undertaking Order to pay
pay A:
3 parties (upon
number of 1. Maker One who makes Primarily
2 parties acceptance of the
original PN the promise and liable
parties signs the
As to Maker is instrument.
Drawer is
liability of primarily 2. Payee The party to
secondarily liable
parties liable whom
2 presentments payment is
As to Only 1
(for acceptance originally
number of presentment
and for payment) payable.
presentmen (for payment)
are generally
ts needed is needed
Drawer The person who Secondarily
Q: Is a BOE considered an assignment of funds in the issues and draws liable, except
hands of the drawee? the bill. when
A: No, a bill of itself does not operate as an BOE refused to
assignment of the funds in the hands of the drawee accept
available for the payment thereof, and the drawee is Drawee The party upon Not liable
not liable on the bill unless and until he accepts the whom the bill is until he
same (Sec. 127, NIL). drawn. becomes
Q: Can a BOE be addressed to more than one
drawee? Payee The party to whom The party to
payment is whom
A: Yes, it may be addressed to two or more drawees originally payable. payment is
jointly, whether partners or not; but not to two or originally
more drawees in the alternative or in succession. payable.
(Sec. 128, NIL). Acceptor The acceptor is the Primarily
drawee who liable
Q: Distinguish an Inland BOE from a Foreign BOE. accepts the bill

A: An Inland BOE is one which is, or on its face Q: Who is a Referee in case of need?
purports to be, both drawn and payable within the
Philippines and any other bill is a foreign bill. A: Referee in case of need is the person named by the
drawer or indorser in the NI as the one to whom the
Note: Unless the contrary appears on the face of the bill, holder may resort in case the BOE is dishonored by
the holder may treat it as an inland bill (Sec. 109, NIL).
non-acceptance or non-payment.
Q: When may a BOE be treated as PN? Note: It is the option of the holder to refer to the referee in
case of need or not as he may see fit (Sec. 131, NIL.)
1. Where in a bill the drawer and the drawee are the Q: Is the acceptance of the BOE by the drawee an
same person (Sec. 130, NIL) important requisite for the NIs negotiability?
2. The drawee is a fictitious person (Sec. 130, NIL)
3. The drawee does not have the capacity to A: No. The acceptance of a bill of exchange is not
contract (Sec. 130, NIL) important in the determination of its negotiability.
4. Where the instrument is so ambiguous that there The nature of acceptance is important only in the
is doubt whether it is a bill or a note, the holder determination of the kind of liabilities of the parties



involved (PBCOM v Aruego, 102 SCRA 530) Q: What is the rule when an instrument is complete
and delivered?
Q: Distinguish a drawer from a maker.
A: Without forgery and alteration, all parties are
A: bound.
Issues a BOE Issues a PN Q: What are the liabilities of the parties to a NI
Only secondarily liable Primarily liable where an indorsement is forged?
Can limit his liability by
putting without Cannot limit liability A:
Prior parties are not Prior parties are not
Q: What are the steps in the issuance of NI? bound. Forged signature bound. Forged signature
is wholly inoperative is wholly inoperative
A: unless estoppel sets in unless estoppel sets in
1. The mechanical act of writing the instrument with regard prior parties with regard prior parties
completely and in accordance with Sec. 1 of NIL. (cut-off rule). (cut-off rule).

2. Delivery of the complete instrument by the maker

or the drawer to the payee or holder with the Subsequent parties to Subsequent parties to
intention of giving effect to it. the forgery is bound the forgery is bound

Note: A Drawers account

Q: What is delivery?
cannot be charged by the
A: Delivery refers to the transfer of possession, actual
or constructive, from one person to another (Sec. The Drawer is not liable to
191, NIL), with the intent to transfer title to payee the collecting bank, since
and recognize him as holder thereof. the duty of the latter is
only to payee. Collecting
Q: When is an instrument incomplete? bank bears loss.

The Payee can recover

A: When it is wanting in any material particular. (Sec.
from either the Drawer or
14, NIL.) Collecting bank, but not
from the Drawee unless he
Q: What are the various situations involving accepts the bill.
negotiable instruments? BEARER INSTRUMENTS
1. Incomplete instrument Prior parties liable. Prior parties liable
a. Delivered
i. With forgery and alteration However, the forged However, the forged
ii. Without forgery and alteration signatory is not liable to signatory is not liable to
b. Not delivered a party who is not a a party who is not a
i. With forgery and alteration holder in due course. holder in due course.
ii. Without forgery and alteration
2. Complete instrument INSERTION OF DATE
a. Delivered
i. With forgery and alteration Q: Is the date essential to make an instrument
ii. Without forgery and alteration negotiable?
b. Not delivered
i. With forgery and alteration A: GR: The date is not essential to the negotiability of
ii. Without forgery and alteration the instrument (not one of the requirements
under sec. 1).



A: The holder has a prima facie authority to complete

Note: If the NI is dated, such date is deemed a prima it (Sec. 14, NIL).
facie proof that it is the true date of the making,
drawing, acceptance or indorsement of the Q: What is meant by material particular?
instrument (Sec. 11, NIL).
A: Any particular proper to be inserted in a NI to
XPN: Date is important to determine maturity, as make it complete.
Q: What serves as a prima facie authority to fill up
1. Where the instrument is payable within a the blanks?
specified period after date, or after sight.
2. When the instrument is payable on demand, A: A signature on a blank paper delivered by the
date is necessary to determine whether the person making the signature in order that the paper
instrument was presented within a reasonable may be converted into a NI operates as a prima facie
time from issue, or from the last negotiation. authority to fill it up as such for any amount (ibid).
3. When the instrument is an interest-bearing
one, to determine when the interest starts to Note: In order, however, that any such instrument when
run. completed may be enforced against any person who
became a party thereto prior to its completion, it must be
Q: When may a holder insert the date in an filled up strictly in accordance with the authority given and
instrument? within a reasonable time (ibid).

A: Q: What is the effect if such completed instrument

1. Where an instrument expressed to be payable at a was negotiated to a HIDC?
fixed period after date is issued undated, or
A: After completion, the completed instrument which
2. Where the acceptance of an instrument payable was subsequently negotiated to a HIDC, is valid and
at a fixed period after sight is undated (Sec. 13, effectual for all purposes in his hands, and he may
NIL). enforce it as if it had been filled up strictly in
accordance with the authority given and within a
Q: What is the effect of insertion of wrong date? reasonable time (ibid).

A: The insertion of a wrong date does NOT avoid the Note: Hence, the defense that the blanks were filled up
instrument in the hands of a subsequent holder in beyond the authority given and/ or beyond the reasonable
time, is not available as against a HIDC. This defense is
due course, but as to a HIDC, the date so inserted is
merely a personal one.
to be regarded as the true date (ibid.).
Q: Distinguish Sec. 14, 15 and 16, NIL from one
Note: With respect to the person who inserted the wrong
date, however, the instrument is avoided (Bank of Houston another.
v. Day, 145 Mo. Appl. 410, 122 SW 756)
Q: What is the effect of ante-dating or post-dating SEC 14 SEC 15 SEC 16
of an instrument? Incomplete Incomplete and Complete
instrument which undelivered instrument but
A: The instrument is NOT invalid by that fact alone, has been instrument. undelivered.
provided it is not done for illegal or fraudulent delivered by the
purpose (Sec. 12, NIL). maker or the
drawer to the
COMPLETION OF BLANKS payee or holder.
1. Where Instrument will 1. If instrument
INCOMPLETE BUT DELIVERED INSTRUMENTS (Sec. instrument is not be a valid is not in
14) wanting in any contract in the possession of
material hands of any party who
Q: Who has the authority to fill up the blanks in an particular, the holder, if signed, a valid
incomplete but delivered instrument? person in completed and and intentional
possession has negotiated delivery by him
prima facie without is prima facie



authority to authority. presumed. INCOMPLETE AND UNDELIVERED INSTRUMENTS

complete it by (Sec. 15)
filing up blanks 2. If holder is
therein. HIDC, valid Q: What is the rule when an instrument is
delivery by all incomplete and undelivered?
2. When the parties prior to
instrument is him so as to A: Where an incomplete instrument has not been
merely a make them delivered, the holder, whether HIDC or not, cannot
signature on liable to him is validly enforce such instrument against the party
blank paper conclusively whose signature was placed BEFORE delivery (Sec. 15,
delivered by presumed. NIL).
person making
the signature in Q: What about the party whose signature was
order that the placed after delivery?
paper may be
converted into a A: The instrument can be validly enforced against the
NI, the person in party whose signature was placed AFTER delivery like
possession has an indorser because the indorser warrants the
prima facie instrument to be genuine and in all respect what it
authority to fill purports to be.
up as such for
any amount. Q: Can a HIDC hold liable a maker for instruments
which are incomplete and undelivered supposing
Note: The holder that the note was stolen, filled-up, and was
must only act in subsequently negotiated?
accordance with
the authority A: No. The law is specific that the instrument is not a
granted him,
valid contract in the hands of any holder. The phrase
otherwise it may
be used as a any holder includes a HIDC.
defense against
him. Note: Non-delivery of an incomplete instrument is a real
defense (ibid.)

Q: Lorenzo signed several blank checks instructing COMPLETE BUT UNDELIVERED (Sec. 16)
Nicky, his secretary, to fill them as payment for his
obligations. Nicky filled one check with her name as Q: What is the effect if an instrument is
payee, placed P30,000.00 thereon, endorsed and undelivered?
delivered it to Evelyn as payment for goods the
latter delivered to the former. When Lorenzo found A: It is incomplete and revocable until delivery of the
out about the transaction, he directed the drawee instrument for the purpose of giving it effect (Sec. 16,
bank to dishonor the check. When Evelyn encashed NIL). Delivery is essential to the validity of any
the check, it was dishonored. Is Lorenzo liable to negotiable instrument (Sundiang, 2009, supra, pg.
Evelyn? (2006 Bar Question) 47).

A: Yes. This covers the delivery of an incomplete Note: The defense of want of delivery of a complete
instrument, under Section 14 of the Negotiable instrument is only a personal defense which means that it
is only available against a holder NOT in due course.
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
Q: When is an instrument issued?
any of the material particulars thereof. Having done
so, and when it is first completed before it is
A: The instrument is deemed issued upon the first
negotiated to a holder in due course like Evelyn, it is
delivery of the instrument, complete in form, to a
valid for all purposes, and she may enforce it within a
person who takes it as holder (Sec. 191, NIL).
reasonable time, as if it had been filled up strictly in
accordance with the authority given.



Q: When is delivery made conditional or for a special A: GR: Only persons whose signatures appear on an
purpose? instrument are liable thereon (Sec. 18, NIL).

A: The delivery is made conditional or for a special XPNs: Notwithstanding the absence of their
purpose if it was made not for the purpose of signatures in their own names, the following
transferring the property (title) to the instrument. In persons are deemed liable: TraP FAP
such case, if the instrument lands in the hands of a
HIDC (one who does not know of the conditional 1. Person who signs in Trade or assumed name
delivery or of its special purpose), the instrument is (Sec. 18, NIL.) Party who signed must have
treated as if there is no condition. intended to be bound by his signature.

If such delivery was made to a holder NOT in due 2. Principal who signs through a duly authorized
course, prior parties are not bound by the instrument agent and such agent discloses the name of his
(Sec. 16, NIL). principal and adding words to show he is merely
signing in a representative capacity (Sec. 19, 20,
Note: The law contemplates that the condition is orally or NIL).
verbally conveyed to the holder upon delivery, because of
the rule that the negotiability is determined only upon the 3. Forger (Sec. 23, NIL)
face of the instrument.
4. Acceptor, who makes his acceptance of a bill on
Q: What is the effect if the instrument is in the a separate paper (Sec. 134, NIL)
possession of a HIDC?
5. Person, who makes a written Promise to accept
A: Valid delivery is conclusively presumed (ibid) the bill before it is drawn (Sec. 135, NIL)

Q: What if the instrument is in the possession of a Note: Where a signature is so placed upon the instrument
party other than a HIDC? that it is not clear in what capacity the person signed, he is
deemed to be an indorser(Sec. 17[f]), NIL), not a maker or
A: Possession of such party constitutes only prima drawer.
facie presumption of delivery.
Q: Juan borrowed P10,000 from Joe as evidenced by
Q: Who are immediate parties? a promissory note executed by X as a maker. All
other requisites of negotiability are present except
A: Persons having knowledge of the conditions or that Juan did not affix his usual signature thereon as
limitations placed upon the delivery of an instrument. he was ailing at that time and was only able to put
It means privity, and NOT proximity. X in the blank space meant for the signature of the
maker. Is the requisite that the instrument must be
Q: Who are remote parties? signed by the maker complied with?

A: Persons without knowledge as to the conditions or A: Yes. The letter X is sufficient to comply with the
limitations placed upon the delivery of an instrument, requirement. It appears from the problem that such
even if he is the next party physically. letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
SIGNATURE the signature is the usual signature of the maker.

Q: What constitutes as a valid signature in a NI? SIGNING IN TRADE NAME

A: A party may use his full name, surname, initials or Q: Is a person signing in a trade name liable?
even any mark in signing a NI to indicate his intention
to bind himself. A: Yes. As a general rule, only persons whose
signatures appear on an instrument are liable
Note: A signature maybe made in any manner as long as thereon. But one who signs in a trade or assumed
the person signing has the INTENTION TO BE BOUND. name is liable as if he signed his own name (Sec. 18,
NIL.). It is necessary, however, that the party who
Q: Who are the persons liable on an instrument? signed intended to be bound by his signature.



SIGNATURE OF AGENT 3. Corporation - Issuance or indorsement of an

instrument by a corporation acting beyond its powers
Q: What are the requisites to exempt an agent from is a REAL defense.
Q: Can a minor transfer his rights to an instrument?
1. He is duly authorized A: Yes. While a minor is not bound by his
2. He adds words to his signature indicating that he indorsement for lack of capacity, he is however not
signs as an agent/representative and incapacitated to transfer his rights.
3. He discloses the name of his principal (Sec. 20,
NIL) Q: Can a minor be bound by his representation that
he is of legal age?
Q: What are the legal effects of an agents signature
in a NI? A: Yes. where he committed actual fraud by
specifically stating that he is of legal age, a minor can
A: Provided that the above requisites are complied be bound by his signature in an instrument (PNB v.
with, the legal effects of an agents signature in a NI CA, G.R. No. L-34404, June 25, 1980).
Q: A executed a promissory note in favor of M which
1. His signature will bind his principal and reads:
2. He will be exempt from personal liability.
I promise to pay P (16 years old) or order
Q: What is meant by procuration? P10,000.
Sgd. M
A: Procuration is the act by which a principal gives
power to another to act in his place as he could P indorsed it to A.
himself (Fink v. Scott, 143 S.E. 305)
1) May A collect from M notwithstanding that P,
Q: What is the effect of a signature by procuration? the indorser is a minor?
2) In case that A cannot collect from M, can he
A: It operates as notice or a warning that the agent collect from P?
has but a limited authority to sign and the principal is
bound only in case the agent in so signing acted A:
within the actual limits of his authority (Sec. 21, NIL). 1. Yes, A can collect from M. Notwithstanding the
fact that A is a minor, the indorsement of P (the
INDORSEMENT BY MINOR OR CORPORATION minor) passes title to A (the holder). M cannot
invoke the defense of minority because such
Q: What are the effects of an infant or corporations defense would only be available to P.
indorsement? 2. No, A cannot collect from P, as he has a real
defense of minority on his part.
1. MinorA contract entered into by a minor is FORGERY
voidable, at the option of the minor. It is a REAL
defense that can be invoked by a minor. However, it Q: What is forgery?
is not a defense which may be setup by parties other
than a minor. A: Forgery is the counterfeit making or fraudulent
alteration of any writing.
2. Incapacitated person An incapacitated person
may also use as a real defense his incapacity to enter Q: When is there forgery?
into a contract. Contract entered into by the
incapacitated are voidable. Incapacitated persons A: When a signature is affixed by one who does not
include a) insane or demented persons and b) deaf claim to act as an agent and who has no authority to
and blind who does not know how to write. bind the person whose signature he has forged (Sec.
23, NIL).



Q: Who has the burden of proof in proving forgery?

Q: What is the effect when there is forgery?
A: Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of A: GR: It DOES NOT avoid the instrument but only the
proof lies on the party alleging forgery (Chiang Yia forged signature. The signature is wholly inoperative.
Min v. CA, G.R. No. 137932, Mar. 28, 2001). In other words, rights may still exist and be enforced
by virtue of such instrument as to those signatures
Q: What is the extent and effect of forgery? thereto are found to be genuine.

A: However, a forged indorsement prevents any

1. Only the signature forged or made without subsequent parties from acquiring any right against
authority is the one inoperative, the instrument any party prior to the forgery. Such forged
itself and the genuine signatures are valid. indorsement cuts off the rights against prior parties
to the forgery. (Cut-off rule)
2. An instrument indorsed which on its face is
payable to bearer may be enforced by the holder XPNs:
to whose title over the instrument the forged 1. If the party against whom it is sought to
signature is not necessary. enforce such right is precluded from setting up
forgery or want of authority. (Sec. 23, NIL.)
3. The instrument can be enforced against those
who are precluded from setting up forgery. 2. Where the forged signature is not necessary to
the holders title, in which case, the forgery
Illustration: may be disregarded (Sec. 48, NIL.)

Pay to P or order P10,000 30 days after sight. Q: Who are precluded from setting up the defense
of forgery?
(Sgd)D, (forged by P)
To X A:
1. Those who admit/warrant the genuineness of the
P presented the instrument for acceptance. X signature such as indorsers, persons negotiating
accepted the instrument without detecting the by delivery and acceptor; (Sec 56, NIL.)
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the 2. Those who by their acts, silence, or negligence,
holder presented the instrument to X for payment are estopped from claiming forgery;
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of 3. A holder of a bearer instrument who subsequently
the drawers signature (See Sec. 62, NIL) negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary
Q: Can a payee sue the collecting bank for the to his title it being a bearer instrument).
amount of the checks it paid under a forged
indorsement even when the instrument has not Q: Discuss the legal consequences when an
been delivered to him? indorsement is forged.

A: Yes. The collecting bank is liable to the payee and A:

must bear the loss because it is its legal duty to INSTRUMENT EFFECT OF FORGED
ascertain that the payees indorsement (signature), INDORSEMENT
its customer, was genuine before cashing the check. Instrument is Only the forger and the
That there was no delivery yet and therefore he payable to order subsequent parties thereto are
never became the owner of the check is immaterial the ones liable.
since the payee merely used one action to reach, by instrument is The forgery of the indorser is
desirable shortcut, the person who ought in any payable to bearer immaterial.
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings.
(Westmont Bank v. Ong, G.R. No. 132560, Jan. 30,



2. Drawee bank versus collecting bank When the
signature of the drawer is forged, as between the
drawee-bank and collecting bank, the drawee-
bank sustains the loss, since the collecting bank
does not guarantee the signature of the drawer.
The payment of the check by the drawee bank
constitutes the proximate negligence since it has
the duty to know the signature of its client-
drawer. (Philippine National Bank v. CA, G.R. No.
L-26001, Oct. 29, 1968).
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged. C can 3. Forged payee's signature When drawee-bank
enforce the note against X and B but not against M, P pays the forged check, it must be considered as
or A, because were it not for the forgery of X the paying out of its funds and cannot charge the
instrument will not reach the possession of C. amount so paid to the account of the depositor.
In such case, the bank becomes liable since its
b. If the instrument is payable to bearer, the primary duty is to verify the authenticity of the
indorsement of X is not necessary to vest title to C payee's signature (Traders Royal Bank v. Radio
because negotiation on bearer instrument requires Philippines Network, G.R. No. 138510, Oct. 10,
only delivery. 2002; Westmont Bank v. Ong, G.R. No. 132560,
Jan. 30, 2002).
Q: Discuss the legal consequences when a bank
honors a forged check. 4. Forged indorsement Drawer's account cannot
be charged, and if charged, he can recover from
A: the drawee-bank (Associated Bank v. CA, G.R. No.
1. When drawer's signature is forged Drawee- 107382, Jan. 31,1996).
bank by accepting the check cannot set up the
defense of forgery, because by accepting the a. The Drawer has no cause of action against
instrument, the drawee bank admits the collecting bank, since the duty of collecting
genuineness of signature of drawer (BPI Family bank is only to the payee (Manila Lighter
Bank v. Buenaventura, G.R. No. 148196, Sept. 30, Transportation, Inc. v. CA,G.R. No. L-50373
2005; Sec. 23, NIL). Feb. 15, 1990).
b. Drawee-bank can recover from the collecting
Unless a forgery is attributable to the fault or bank because even if the indorsement on the
negligence of the drawer himself, the remedy of check deposited by the bank's client is forged,
the drawee-bank is against the party responsible collecting bank is bound by its warranties as
for the forgery. Otherwise, drawee-bank bears an indorser and cannot set up defense of
the loss. A drawee-bank paying on a forged check forgery as against drawee bank (Associated
must be considered as paying out of its funds and Bank v. CA, G.R. No. 107382, Jan. 31, 1996,
cannot charge the amount to the drawer Great Eastern Life Ins. Co. v. Hongkong &
(Samsung Construction Co. Phils, v. Far East Bank, Shanghai Bank, G.R. No. 18657, Aug. 23,
G.R. No. 129015, Aug. 13, 2004). If the drawee- 1922).
bank has charged drawer's account, the latter
can recover such amount from the drawee-bank Q: X fraudulently obtained possession of the check
(Associated Bank v. CA, G.R. No. 107382, Jan. 31, and forged Ps signature and then indorsed and
1996; BPI v. Case Montessori Internationale, G.R. deposited the check with XYZ bank which honored
No. 149454, May 28, 2004). the check and placed the amount thereof to his
credit. Thereafter, XYZ Bank indorsed the check to
However, the drawer may be precluded or the drawee bank-ABC bank which paid it and
estopped from setting up the defense of forgery charged the account of the drawer. lllustrate the
as against the drawee-bank, when it is shown liability of a drawer and a drawee-bank in an 1)
that the drawer himself had been guilty of gross instrument payable to order and in an 2) instrument
negligence as to have facilitated the forgery payable to bearer in case of a forgery on payees
(Metropolitan Waterworks v. CA, G.R. No. L- signature.
62943, July 14, 1986).



Pay to P or order P10,000. forger and, of course, to the forger himself, if

available. If the forgery is that of the payee's or
(Sgd)D holder's indorsement, the collecting bank is held
To: ABC Bank liable, without prejudice to the latter proceeding
against the forger.
1.If the instrument is payable to order, Since a forged indorsement is inoperative, the
a. The drawee bank is liable to the drawer for the collecting bank had no right to be paid by the drawee
amount of the check and his account cannot be bank. The former must necessarily return the money
charged because the indorsement of the payee paid by the latter because it was paid wrongfully
is a forgery. Hence, it is wholly inoperative and (Associated Bank v. CA, G.R. No. 107382, Jan. 31,
therefore, ABC Bank has no right to ask the 1996).
drawer for its payment.
b. XYZ Bank is however, liable to the drawee bank Q: What is the liability of the drawee bank and the
because of his warranty as an indorser. (See drawer for the amount paid on checks with forged
Sec.66) indorsements, if the same was due to the negligence
c. D, the drawer, is not liable on the check because of both the drawee bank and the drawer?
its order is to pay P or his order and not to any
other person. A: The loss occasioned by such negligence should be
divided equally between the drawer/depositor and
2. If the instrument is payable to bearer: the drawee.
a. ABC Bank, the drawee-bank, may charge the
amount thereof to the account of the drawer. Q: X entrusted his check books, credit cards,
Because the forged indorsement did not passbooks, bank statements and cancelled checks to
prevent the transfer of title. The remedy of the his secretary. He also introduced the secretary to
drawer is against the forger. the bank for purposes of reconciliation of his
b. Drawer has no cause of action against collecting accounts. Subsequently, Xs secretary forged his
bank, since the duty of collecting bank is only to signature on the checks and was able to withdraw
the payee (Manila Lighter Transportation, Inc. v. his money. Is the drawee bank liable for the
CA,G.R. No. L-50373 Feb. 15, 1990). Drawee- amounts withdrawn by the secretary?
bank can recover from the collecting bank
because even if the indorsement on the check A: No, he is precluded from setting up the forgery
deposited by the bank's client is forged, due to his own negligence in entrusting to his
collecting bank is bound by its warranties as an secretary his credit cards and check book including
indorser and cannot set up defense of forgery the verification of his statements of account (Ilusorio
as against drawee bank (Associated Bank v. CA, v. CA, G.R. No. 139130, Nov. 27, 2002).
G.R. No. 107382, Jan. 31, 1996).
Q: The drawers signature was forged. There is,
Q: P sold to M 10 grams of shabu worth however, a provision in the monthly bank statement
Php5,000.00. As he had no money at the time of the that if the drawers signature was forged, the
sale, M wrote a promissory note promising to pay P drawer should report it within 10 days from receipt
or his order Php5,000. P then indorsed the note to X of the statement to the drawee. The drawer,
(who did not know about the shabu), and X to Y. however failed to do so. What will be its effect
Unable to collect from P, Y then sued X on the note. insofar as the drawers right is concerned?
X set up the defense of illegality of consideration. Is
he correct? (2011 Bar Question) A: The failure of the drawer to report the forgery
within ten days from receipt of the monthly bank
A: No, since X, a general indorser, warrants that the statement from the drawee bank does not preclude
note is valid and subsisting. the drawer from questioning the mistake of the
drawee bank despite the provision (BPI v. CASA
Q: What is the remedy of the drawee bank in case of Montessor, G.R. No. 149454, May 28, 2004).
a forged indorsement?
Q: If forgery was committed by an employee of the
A: The drawee bank may not debit the account of the drawer whose signature was forged, does the
drawer but may generally pass liability back through relationship amount to estoppel such that the
the collection chain to the party who took from the



drawer is precluded in recovering from the drawee person not a holder in due course, thus, a PERSONAL
bank? defense (Sec. 28, NIL).

A: The bare fact that the forgery was committed by Q: What is the effect of partial failure of
an employee of the party whose signature was forged consideration?
can not necessarily imply that such partys negligence
was the cause of the forgery in the absence of some A: Partial failure of consideration is a defense pro
circumstances raising estoppel against the drawer tanto, whether the failure is an ascertained and
(Samsung Construction Co. v. Far East Bank and Trust liquidated amount or otherwise (ibid.).
Company, G.R. No. 129015, Aug. 13, 2004).
Q: Will inadequacy of consideration invalidate the

Q: What is consideration? A: GR: No. Inadequacy of consideration does not

invalidate the instrument.
A: It is an inducement to a contract that is the cause,
price or impelling influence, which induces a party to XPN: There has been fraud, mistake or undue
enter into a contract. influence (Art. 1355, NCC).

Note: Every negotiable instrument is deemed prima facie to Note: However, knowledge of inadequacy of consideration
have been issued for a valuable consideration (Sec. 24, NIL). would render the holder not HIDC liable (Sec. 53, NIL).

Q: Who is a holder for value? Q: X borrowed money from Y in the amount of

Php1Million and as payment, issued a check. Y
A: A holder for value is one who has given a valuable then indorsed the check to his sister Z for no
consideration for the instrument. A holder for value is consideration. When Z deposited the check to her
deemed as such not only as regards the party to account, the check was dishonored for insufficiency
whom the value has been given to by him but also in of funds. Is Z a holder in due course? Explain your
respect to all those who became parties prior to the answer (2012 Bar Question)
time when value was given.
A: No. Z is NOT a HIDC. Under Sec. 52 (c), NIL, it is
Note: Where the holder has a lien on the instrument arising expressly provided that the instrument must be
either from contract or by implication of law, he is deemed acquired in good faith and for value to consider him a
a holder for value to the extent of his lien (Sec. 27, NIL). HIDC.

Q: What constitutes value? ACCOMODATION PARTY

A: It is any consideration sufficient to support a An accommodation party is one who has signed the
simple contract. instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
Note: An antecedent or pre-existing debt constitutes value
of lending his name to some other person (Sec. 29,
and is deemed such whether the instrument is payable on
demand or at a future time (Sec. 25, NIL).

Q: What is the difference between want or absence Q: What are the requisites to be an accommodation
of consideration and failure of consideration? party?

A: Absence of consideration means a total lack of any A:

valid consideration for the contract while failure of 1. Accommodation party must sign as maker,
consideration means the failure or refusal of one of drawer, acceptor or indorser
the parties to do, perform or comply with the 2. No value is received by the accommodation party
consideration agreed upon. from the accommodated party; and
3. The purpose is to lend the name.
Q: What is the effect of want of consideration?
Note: It does NOT mean, however, that one cannot be an
accommodation party merely because he has received
A: It becomes a matter of defense as against any some consideration for the use of his name. The phrase
without receiving value therefor only means that no value


has been received for the instrument and not for lending thus became liable for the debt even if he had no
his name. direct personal interest in the obligation or did not
receive any benefit therefrom (Dela Rama v. Admiral
Q: What are the distinctions between an United Savings Bank, G.R. No. 154740, Apr. 16, 2008).
accommodation party and a regular party?
Q: Can a corporation be an accommodation party,
A: and if so, does the liability of an accommodation
ACCOMMODATION PARTY REGULAR PARTY party attach to a corporation?
Signs an instrument
Signs the instrument for
without receiving value A: No. The issue or indorsement of a negotiable
value (Sec. 24, NIL.)
therefor (Sec. 29, NIL.) paper by a corporation without consideration and for
Purpose of signing is to the accommodation of another is ultra vires. Hence,
lend his name to one who has taken the instrument with knowledge of
Not for that purpose
another person (Sec. 29, the accommodation nature thereof cannot recover
NIL) against a corporation where it is only an
May always show, by Cannot disclaim accommodation party (Crisologo-Jose v. CA, G.R. No.
parol evidence, that he personal liability by 80599, Sept. 15, 1989).
is only such parol evidence
Cannot avail of the Q: May a holder for value recover from an
defense of accommodation party notwithstanding his
absence/failure of May avail knowledge of such fact?
consideration against a
holder not in due course A: Yes, a holder for value may recover. This is so
May sue reimbursement because an accommodation party is liable on the
after paying the instrument to a holder for value, notwithstanding
May not sue
holder/subsequent that such holder at the time of taking the instrument
party knew him to be only an accommodation party. The
accommodation party is liable to a holder for value as
Q: Up to what extent is an accommodation party if the contract was not for accommodation. It is not a
liable? valid defense that the accommodation party did not
receive any valuable consideration when he executed
A: the instrument. Nor is it correct to say that the holder
1. Right to revoke accommodation before the for value is not a holder in due course merely because
instrument has been negotiated for value. at the time he acquired the instrument, he knew that
the indorser was only an accommodation party (Ang
2. Right to reimbursement from the accommodated Tiong v. Ting, G.R. No. L-26767, Feb. 22, 1968).
party the accommodated party is the real
debtor. Hence, the cause of action is not on the NEGOTIATION
instrument but on an implied contract of
reimbursement. Q: Define Negotiation.

3. Right to contribution from other solidary A: Negotiation is the transfer of an instrument from
accommodation maker (Sadaya v. Sevilla, G.R. No. one person to another so as to constitute the
L-17845, Apr. 27, 1967) transferee the holder thereof (Sec. 30).

Q: Can a party who signed on the note as an Note: A holder is the payee or indorsee of a bill or note,
accommodation party raise the defense of absence who is in possession of it, or the bearer thereof (Sec. 191,
or want of consideration? NIL).

A: No. An accommodation party who lends his name Q: What are the methods of transferring an
to enable the accommodated party to obtain credit instrument?
or raise money is liable on the instrument to a holder
for value even if he receives no part of the
1. Issuance first delivery of the instrument
consideration. He assumes the obligation to the other
complete in form to a person who takes it as a
party and binds himself to pay the note on its due
date. By signing the note, the accommodation party



2. Negotiation through his indorsement (once a bearer instrument,

always a bearer instrument) (Sec. 40, NIL).
3. Assignment transfer of the title to the
instrument, with the assignee generally taking Note: This rule applies only to instruments originally
only such title as his assignor has, subject to all payable to bearer. It does NOT apply to instruments
defenses available against the assignor. originally payable to order converted to bearer because the
only or last indorsement is in blank.
Q: A makes a promissory note payable to bearer and
delivers the same to B. B, however, endorses it to C
in this manner:
instrument may be
Only a negotiable "Payable to C. Signed: B."
assigned absent any
instrument may be
prohibition against
negotiated. Later, C, without indorsing the promissory note, C
assignment written on
its face. transfers and delivers the same to D. The note is
The transferee can subsequently dishonored by A. May Dennis proceed
The transferee, if he is against A for the note? (1998 Bar Question)
have no better right
a HIDC may acquire
than his transferor; he
better rights than his A: Yes. D may collect from A. The note made by A is a
merely steps into the
transferor. bearer instrument. Where an instrument, payable to
shoes of the assignor
The holder can hold bearer, is indorsed, it may nevertheless be further
The transferee has no negotiated by delivery. Despite the special
the drawer and the
right of recourse for indorsement made by Henesty, the note remained a
indorsers liable if the
payment against bearer instrument and can be negotiated by mere
party primarily liable
immediate parties. delivery. When C delivered and transferred the note
does not pay.
to D, the latter became a holder thereof. As such, D
can proceed against A.
Q: X executed a promissory note with a face value of
The following are the modes of negotiation:
Php50,000.00, payable to the order of Y. Y indorsed
the note to Z, to whom Y owed Php30,000.00. If X
1. If payable to bearer- it is negotiated by mere
has no defense at all against Y, for how much may Z
collect from X? (2011 Bar Question)
2. If payable to order- it is negotiated by the
A: Php 50,000.00, but with the obligation to hold
indorsement of the holder completed by delivery
Php20,000.00 for Y's benefit.
(Sec. 30, NIL).
Q: What is the effect when an order instrument was
Q: What is Delivery?
delivered without indorsement?
A: Delivery means transfer of possession, actual or
A: The transfer operates as an ordinary assignment
constructive, from one person or another (Sec. 191,
(Sec. 49, NIL). The transfer vests in the transferee
such title as the transferor had therein and the
Note: Where the instrument is no longer in the possession
transferee acquires in addition the right to have the
of the party whose signature appears thereon, there is a indorsement of the transfereror.
prima facie presumption of a valid and intentional delivery
by him (Sec. 16, NIL). Note: For the purpose of determining whether the
transferee is a HIDC, the negotiation takes effect at the
Q: What is the effect, if any, if a BEARER instrument time when the indorsement is actually made.
is negotiated by indorsement and delivery?
Q: What is the effect when a negotiable instrument
A: A bearer instrument, even when indorsed is merely assigned?
specially, may nevertheless be further negotiated by
delivery, but the person indorsing specially shall be A: The transferee does NOT become a holder and he
liable as indorser to only such holders as make title merely steps into the shoes of the transferor. Any
defense available against the transferor is available



against the transferee (Salas v. CA, G.R. No. 76788 Party required to pay may disregard the
Jan. 22, 1990). conditions (Sec. 39, NIL.)

KINDS OF INDORSEMENTS Note: The condition refers to the indorsement not on

the instrument itself.
Q: What is an indorsement?
5. Restrictive (Sec. 36, NIL.)When the instrument:
A: Indorsement is the signing of the name of the a. Prohibits further negotiation of the instrument
indorser on the instrument with the intent to transfer (it destroys the negotiability of the
title to the same. instrument);
b. Constitutes the indorsee the agent of the
Q: Where indorsement should be placed? indorser; (Sec. 36, NIL.)
c. Vests the title in the indorsee in trust for or to
A: the use of some persons.
1. On the instrument itself; or
2. On a separate piece of paper attached to the Note: But mere absence of words implying power to
negotiate does not make an instrument restrictive.
instrument called allonge (Sec. 31, NIL.)

Q: Can there be partial indorsement? 6. Qualified (Sec. 38, NIL.) constitutes the indorser
a mere assignor of the title to the instrument
A: GR: No. Indorsement must be of the entire made by adding to the indorsers signature words
instrument. (Sec. 32, NIL.) like, without recourse, sans recourse or at the
indorsees own risk. (this serves as an ordinary
XPN: When the instrument has been paid in part. equitable assignment). (Sec. 38, NIL.)

Note: Indorsement to two or more indorsees severally does 7. Jointindorsement made payable to 2 or more
NOT operate as a negotiation of the instrument. persons who are not partners (Sec. 41, NIL.)

Q: What are the different kinds of Indorsement? Note: All of them must indorse unless the one indorsing
has authority to indorse for the others.
1. Special (Sec. 34, NIL.)Specifies the person to 8. Irregular(Sec. 64, NIL.) A person who, not
whom or to whose order the instrument is to be otherwise a party to an instrument, places
payable. Also known as specific indorsement or thereon his signature in blank before delivery.
indorsement in full.
9. Facultative Indorser waives presentment and
Note: An instrument payable to bearer indorsed notice of dishonor, enlarging his liability and his
specially may nevertheless be negotiated by delivery. indorsement.
(Sec. 40, NIL) (once a bearer always a bearer)
10. Successive indorsement to two persons or more
2. Blank (Sec. 34, NIL.) Specifies no indorsee. in succession.

a. Instrument is payable to bearer and may be Note: Any of them can indorse to effect negotiation of
negotiated by delivery; the instrument.
b. May be converted to special indorsement by
writing over the signature of the indorser in Q: What are the rights of an indorsee in a restrictive
blank any contract consistent with the indorsement?
character of indorsement (Sec. 35, NIL.).
3. AbsoluteThe indorser binds himself to pay: 1. To receive payment of the instrument;
2. To bring any action thereon that the indorser
a. upon no other condition than failure of prior could bring; and
parties to do so 3. To transfer his rights as such indorsee, where the
b. upon due notice to him of such failure form of the indorsement authorizes him to do so
(Sec. 37, NIL).
4. Conditional Right of the indorsee is made to
depend on the happening of a contingent event.



Q: What do subsequent indorsees acquire under the against any intervening party to whom he was
restrictive indorsement? personally liable (Sec. 50).

A: All subsequent indorsees acquire only the title of Q: What are the limitations to renegotiation?
the 1 indorsee (Sec. 37, NIL).
A: In the following cases, a prior party cannot further
Q: What is the effect of a qualified indorsement? negotiate the instrument:
1. Where it is payable to the order of a third person,
A: A qualified indorsement does NOT destroy the and it has been paid by the drawer (Sec. 121[a],
negotiability of the instrument. It only means that the NIL)
qualified indorser is NOT liable when the maker is 2. Where it was made or accepted for
insolvent. A qualified indorser is liable only if the accommodation and has been paid by the party
instrument is dishonored by non-acceptance or non- accommodated (Sec. 121[b], NIL)
payment due to: 3. In other cases, where the instrument is discharged
1. Forgery; when acquired by a prior party (Sec. 119[e], NIL)
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the prior Q: What is the effect of an instrument indorsed to a
parties; or person as cashier or other officers of a corporation?
4. The fact that at the time of the indorsement, the
instrument was valueless or not valid at the time A: Said NI is deemed prima facie payable to the
of the indorsement which fact was known to him. corporation of which said person is such an officer. It
may be negotiated further by either indorsement of
Q: What are the instances when the indorsements the corporation or indorsement of the officer (Sec.
served only as equitable assignment? 42)

A: Q: What is the time of indorsement?

1. Indorsement of only a part of the amount of the
instrument (Sec. 32, NIL) A: Except where an indorsement bears date after the
2. In cases of qualified indorsement (Sec. 38, NIL) maturity of the instrument, every negotiation is
3. Transfer of an instrument payable to order by deemed prima facie to have been effected before the
mere delivery (Sec. 49, NIL) instrument was overdue (Sec. 45)

Q: When there is a joint indorsement, who must Q: What is the period of negotiability of a NI?
A: GR: An instrument negotiable in origin is always
A: GR: All must indorse in order for the transaction to negotiable until paid, which is still true even if the NI
operate as a negotiation (Sec. 41, NIL) was dishonored or is already overdue.

XPN: Only one of them may indorse in case the XPNs:

1. Payees or indorsees are partners; and 1. When the instrument has been restrictively
2. Payee or indorsee indorsing has authority to indorsed;
indorse for the others. 2. When discharged by payment or otherwise
(Sec. 47, NIL)
Q: When can an indorsement be stricken out?
A: The holder may, at any time, strike out any
indorsement which is not necessary to his title. Q: Who is a holder?
Indorser whose indorsement is struck out, and all
indorsers subsequent to him, are relieved from A: The payee or indorsee of a bill or note who is in
liability on the instrument (Sec. 48) possession of it or the bearer thereof (Sec. 191, NIL).

Q: When can a prior party negotiate an instrument? Q: What are the classes of holders?

A: Where an instrument is negotiated back to him. A:

But, he is not entitled to enforce payment thereof 1. Holders in general (Simple Holders). (Sec. 51, NIL.)
2. Holders for value. (Sec. 26, NIL.)



3. Holders in due course. (Secs. 52, 57, NIL.) XPN: When it is shown that the title of any person
who has negotiated the instrument was defective.
Q: What are the rights of a holder in general? But this is only as regards a party who became
such after the acquisition of the defective title
A: (Sec.59, NIL)
1. Right to sue
2. Right to receive payment (Sec. 51, NIL.) Q: What constitutes payment in due course?
A: When made:
Note: If the payment is in due course, the instrument is 1. At or after the maturity of the instrument
discharged. 2. To the holder thereof, in good faith and without
notice that his title is defective (Sec. 88, NIL).
Q: What rights are available to a party who derives
To be considered as a HIDC, the requisites under Sec. his title from a HIDC?
52 of the NIL must be complied with. A HIDC takes a
NI under the following conditions: COFI A: A holder who derives his title through a HIDC, and
who is not himself a party to any fraud or illegality
1. That is Complete and regular upon its face; affecting the instrument has all the rights of such
former holder in respect to all parties prior to the
Note: Absence of the required documentary stamp latter (Sec. 58, NIL)
will not make the instrument incomplete. (It is not a
requisite of negotiability under Sec. 1, NIL and it is
Specifically, a holder is entitled to the following
not a material particular under Sec. 125, NIL)
2. Became the holder before it was Overdue, and
without notice that it has been previously 1. Hold the instrument free from defenses available
dishonored, if such was the fact; to parties among themselves;
2. Hold the instrument free from any defect of title
Note: If the instrument is payable on demand, the of prior parties;
date of maturity is determined by the date of 3. Receive payment;
presentment, which must be made within a 4. Enforce payment of the instrument for the full
reasonable time after its issue, if it is a note, or after amount thereof against all parties liable; and
the last negotiation thereof, if it is a bill of exchange 5. Sue
(Secs. 71 and 143[a], NIL).
Q: How does the shelter principle embodied in the
Where the transferee receives notice of any infirmity
NIL operate to give the rights of a HIDC to a holder
in the instrument of defect in the title of the person
who does not have the status of a HIDC? Briefly
negotiating the same before he had paid the full
amount agreed to be paid, he will be deemed a explain. (2008 Bar Question)
holder in due course only to the extent of the amount
paid by him (Sec. 54, NIL). A: Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not a HIDC,
3. Took it in good Faith and for value; transfers all his rights as such holder to the latter and
acquires the right to enforce the instrument as if he
4. At the time it was negotiated to him, he had no was a holder in due course. The principle applies to a
notice of any Infirmity in the instrument or "sheltered" holder who is not a party to any fraud or
defect in the title of the person negotiating it. illegality impairing the validity of the instrument.
(Sec. 52, NIL)
Q: When is an instrument complete and regular
Note: Knowledge of the agent is constructive knowledge to upon its face?
the principal.
A: An instrument is complete when it is not wanting
Q: Is a holder presumed to be a HIDC? in any material particular and regular when there is
no alteration apparent on the face of the instrument.
A: GR: Every holder is deemed prima facie to be a



Q: Define good faith. by the agent to pay the medical bills of his wife in a
clinic. The projected purchase did not materialize. Is
A: Good faith is the holders well founded or honest the clinic considered a holder in due course?
belief that the person from whom he received the
instrument was the owner thereof, with the right to A: No, the rule that a possessor of the instrument is
transfer it (Duran v IAC, 138 SCRA 489). prima facie a HIDC does not apply to the clinic
because he cannot be said to have acquired the
Q: What constitutes value in an instrument? negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
A: Value may be some right, interest, profit or benefit instrument was not payable to the agent or to
to the party who makes the contract or some bearer; also the drawer had no account with the
forbearance, detriment, loan, responsibility, etc. to Clinic, the agent did not show or tell the payee why
the other (BPI v. Roxas, G.R. No. 157833, October 15, he had the check in his possession and why he was
2007). using it for the payment of his own account.

Q: Define infirmity. How does it differ from defect? As holders title was defective or suspicious, it cannot
be stated that the payee acquired the check without
A: Infirmity refers to those that vitiate the instrument knowledge of said defect in holders title, the
itself while defect in the title of the person presumption that the clinic is a HIDC does not exist
negotiating the instrument refers to how he obtained (De Ocampo& Co. v. Gatchalian, G.R. No. L-
the instrument or the signature thereto, as by fraud, 15126, Nov. 30, 1961)
duress, or force and fear, or other unlawful means, or
for an illegal consideration or when he negotiates it in Q: What is the effect of possession of a NI after
breach of faith, or under any other circumstances as presentment and dishonor?
amount to a fraud. (Sec. 55, NIL.)
A: It does not make the possessor a holder for value
Q: When is the title of a person (transferor) within the meaning of the law. It gives rise to no
defective? liability on the part of the maker or drawer or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
A: 96160, June 17, 1992).
1. In its acquisition When he obtained the
instrument, or any signature thereto, by fraud, Q: Is a corporation to which four crossed checks
duress, or force and fear, or other unlawful were indorsed by the payee corporation a holder in
means, or for an illegal consideration. due course and hence entitled to recover the
2. In the negotiation When he negotiates it in amount of the checks when the same had been
breach of faith, or under such circumstances as dishonored for the reason of payment stopped?
amount to a fraud (Sec. 55, NIL)
A: The checks were crossed checks and specifically
Q: What constitutes notice of defect (on the indorsed for deposit to payees account only. From
transferee)? the beginning, the corporation was aware of the fact
that the checks were all for deposit only to payees
A: The person to whom it is negotiated must have account. Clearly then, it could not be considered a
had actual knowledge of such facts or knowledge of HIDC. (Atrium Management Corp. v. CA, G.R. No.
other facts that his action in taking the instrument 109491, Feb. 28, 2001)
amounted to bad faith (Sec. 56, NIL)
Note: Presence or absence of defect or infirmity must be
Q: What is the effect of notice before the full determined at the time the instrument was negotiated to
amount is paid? the holder.

A: Transferee will be deemed a HIDC only to the Q: Can a payee be a HIDC?

extent of the amount therefore paid by him (Sec. 54,
NIL). A: Yes. There can be no doubt that a proper
interpretation of NIL as a whole leads to the
Q: A drawer issued a check for the payment of a car, conclusion that a payee may be a holder in due
which check was delivered to the agent of the owner course under the circumstances in which he meets
of the car for safekeeping. The check was then used



the requirements of Sec. 52 (De Ocampo v. The defenses available against the holder are
Gatchalian, supra). classified as follows:

Q: Can a drawee be a HIDC? 1. Real or Absolute Defenses those that are

attached to the instrument itself and are
A: A drawee does NOT become a HIDC by simply by available against all parties, both immediate
paying a bill. A holder refers to one who has taken the and remote, including holders in due course.
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance and 2. Personal or Equitable Defenses defenses
payment, strips the instrument of negotiability and which are only available against a holder NOT
reduces it to a mere voucher or proof of payment. in due course. Those which grow out of the
agreement or conduct of a particular person
Q: When is a person deemed NOT a holder in due which renders it inequitable for him, though
course? holding the legal title, to enforce it against the
party sought to be made liable.
1. A holder who acquires the instrument after its Q: What are the real defenses available against a
date of maturity. holder?

2. Where an instrument payable on demand is A: IM In Ultra. AFForD PODIF.

negotiated for an unreasonable length of time 1. Incomplete and undelivered instrument
after its issue (Sec. 53, NIL). 2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
Note: A note payable on demand is due when payment is concerned
demanded. A check becomes overdue when it is not 4. Ultra vires acts of a corporation
presented for payment within a reasonable time, usually 5. Want of Authority, apparent and real
6 months from date the thereof, afterewards, it becomes
6. Fraudulent alteration
a stale check.
7. Forgery
3. Where the instrument contains an acceleration 8. Duress amounting to Forgery
clause, knowledge of the holder at the time of 9. Prescription
acquisition thereof that one installment or 10. Other infirmities appearing on the face of the
interest, or both, is unpaid is a notice that it is instrument
overdue. 11. Discharge in insolvency
12. Illegal Contract
Note: Where indorsement is not dated, it is deemed 13. Fraud in Factum or Esse Contractus
prima facie to have been negotiated before the
instrument was overdue (Sec. 45, NIL). An overdue Q: What are the personal defenses available against
instrument is still negotiable but it is subject to the a holder?
defenses existing at the time of the transfer.
Q: What are the rights of a holder, who is NOT a 2
A: InnocentS ADD FUn In Fraud
HIDC? 1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by discharge
A: The rights of a holder not a HIDC are similar to an of prior party.
assignee. The other rights are: 3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
1. He may receive payment and if the payment is in Authority given
due course, the instrument is discharged 5. Acquisition of instrument by Duress or force and
2. He is entitled to the instrument but holds it fear; unlawful means or for an illegal
subject to the same defenses as if it were non- consideration
negotiable 6. Discharge by payment or renunciation or release
3. He may sue on the instrument in his own name before maturity
(Sec. 51, NIL.) 7. Failure or absence of consideration.
8. Undelivered complete instrument
DEFENSES AGAINST THE HOLDER 9. Insertion of a wrong date
10. Fraud in inducement or simple fraud


Note: Fraud in factum exists in those cases in which a 1. Maker of a promissory note;
person, withour negligence, has signed an instrument, but 2. Acceptor of a bill of exchange; and
was deceived as to the character of the instrument and 3. Certifier of a check
without knowledge of it, as where a note was signed by one
under the belief that he was signing as a witness to a deed.
This kind of fraud is a real defense because there is no
Q: Who are secondarily liable?
contract since the person did not know what he was
signing. Fraud in inducement relates to the quality, A:
quantity, value or character of the consideration of the 1. Drawer of a bill; and
instrument. Here, deceit is not in the character of the 2. Indorser of a note or a bill
instrument but in its amount or terms. This exists when a
person is induced to sign a note for the price of a worthless
stock which was fraudulently represented by the payee as
Q: To whom should the NI be presented?
to its value. Such type of fraud is only a personal defense
because it does not prevent a contract (De Leon, The A: NI should be presented for payment to the party
Philippine Negotiable Instruments Law, Annotated, 2010 primarily liable (Sec. 72[d], NIL.):
1. Promissory note maker
Q: A bill of exchange has T for its drawee, U as 2. Bill of exchange drawee/acceptor
drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years old. F Q: Is the drawee liable for payment of a BOE?
wants to recover from U but the latter insists that a
notice of dishonor must first be made, the A: No. The mere issuance of a bill does not operate as
instrument being a bill of exchange. Is he correct? an assignment of the funds in the hands of a drawee.
(2011 Bar Question) The drawee must accept the instrument (thus,
becomes an acceptor) in order that he may be
A: No, since F can treat U as maker due to the primarily liable for the payment of a BOE.
minority of T, the drawee.
Q: What are the warranties and liabilities of parties
Note: Where the drawee does not have the capacity to
who are secondarily liable?
contract, the holder may treat the bill as a PN (Sec. 130,
Drawer of a BOE Qualified Indorser
Q: Distinguish between a party primarily liable from Warrants: Warrants that the:
a party secondarily liable under the NIL. a. The existence of a. Instrument is
payee and his then genuine;
A: capacity to indorse b. he has good
PRIMARILY LIABLE SECONDARILY LIABLE b. That the instrument title to it;
Unconditionally will be accepted or c. capacity to
Conditionally bound paid upon due contract of all
Undertakes to pay only after presentment by the prior parties;
the ff. conditions have been party primarily and
fulfilled: liable according to d. no knowledge
1. due presentment for its tenor; and of any fact
payment or acceptance c. That if dishonored, which would
Absolutely required he will pay the party impair the
to primary party
to pay the instrument entitled to be paid. validity of the
(Sec.143, NIL);
upon maturity (Sec. 61, NIL.) instrument.
2. dishonor by such party
(Sec.70, NIL); (Sec.65, NIL.)
3. taking of proceedings
required by law Note: He is liable to all
parties who derive
(Sec.152, NIL)
their title through his
Q: Who are primarily liable? General indorser Person negotiating by
A: a. Warrants that: Same warranties as a



i. Instrument is qualified indorser. But treasurer above their printed names with the phrase
genuine unlike a qualified and in his personal capacity. The corporation
ii. He had good title indorser, a person failed to pay its obligation. Are the officers liable?
to it negotiating by mere
iii. All prior parties delivery is liable only to A: Yes, persons who sign their names on the face of
had capacity to his immediate promissory notes are makers and liable as such. The
contract transferee. (par. 2, Sec. officers are co-makers and as such, they cannot
iv. Instrument, at 65, NIL.) escape liability arising therefrom (Republic Planters
the time of Bank v. CA, G.R. No. 93073, Dec. 21, 1992).
indorsement, Note: Person negotiating
was valid and by mere delivery and a DRAWER
subsisting; qualified indorsers
secondary liability is The drawer, by drawing the instrument
limited, namely, to their
b. On due presentment, it
shall be accepted or paid, 1. admits the existence of the payee and his then
or both according to its capacity to indorse; and
tenor 2. engages that on due presentment the instrument
will be accepted or dishonored, and
c. if the instrument is 3. that if the necessary proceedings on dishonor be
dishonored and the duly taken, he will pay the amount thereof to the
necessary proceedings on holder, or to any subsequent indorser who may
dishonor be duly taken, be compelled to pay it (Sec. 61, NIL).
he will pay the holder.
(Sec. 66, NIL.) Q: To whom is the drawer secondarily liable?
Irregular indorser
a. In an order A:
instrument, liable to 1. The holder or
the payee and all 2. To any subsequent indorser who may be
subsequent parties compelled to pay it (ibid.)
b. If bearer instrument
or payable to order Q: Can the drawer limit his liability to the holder?
of maker or drawer,
liable to all parties A: Yes. The drawer may insert in the NI an express
subsequent to the stipulation negativing or limiting his own liability to
maker or drawer the holder (ibid.)
c. If he signs for
accommodation of Q: D draws a bill of exchange that states: One
the payee, liable to month from date, pay to B or his order
all parties Php100,000.00. Signed, D. The drawee named in
subsequent to payee. the bill is E. B negotiated the bill to M, M to N, N to
(Sec. 64, NIL.) O, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to
MAKER pay, which O did. From whom may O recover?(2011
Bar Question)
The maker of a NI, by making it,
A: D, being the drawer.
1. engages that he will pay it according to its tenor,
2. admits the existence of the payee and his then
capacity to indorse (Sec. 60, NIL). The acceptor, by accepting the instrument,

Note: The maker is liable the moment he makes the NI. His 1. engages that he will pay the NI accordingto the
liability is primary and unconditional. tenor of his acceptance; and
2. admits the existence of the drawer, the
Q: On the right bottom margin of a PN appeared the genuineness of his signature and his capacity and
signature of the corporations president and authority to draw the instrument



3. admits the existence of the payee and his then

capacity to indorse. (Sec. 62, NIL.) Q: Distinguish an irregular indorser from a general
indorser (2005 Bar Question)
Q: Who can accept the BOE?
A: 1. A general indorser makes either a blank or
GR: Only the drawee may accept. A stranger or special indorsement, while an irregular indorser
volunteer is not bound by acceptance. always makes a blank indorsement;
2. A general indorser indorses the instrument after
XPN: In case of a bill which is accepted for honor its delivery to the payee, while an irregular
supra protest (Sec. 161, NIL.) indorser indorses before its delivery to the
payee; and
Note: Drawee does not become liable until he accepts the 3. A general indorser is liable only to parties
instrument in which case he becomes an acceptor. An subsequent to him, while an irregular indorser is
acceptor engages to pay according to the tenor of his liable to the payee and subsequent parties unless
acceptance, which may not be the same as the tenor of the
he signs for the accommodation of the payee in
bill itself because the acceptance may be qualified.
which case he is liable only to all parties
subsequent to the payee (Sec. 64, 66, NIL; De
Q: What is the difference between the liability of an
Leon, supra, pg. 236-237)
acceptor/ drawee-acceptor and a maker?
Q: Who is a qualified indorser?
A: While both are primarily liable, the acceptor
engages to pay the NI according to the tenor of his
A: A qualified indorser is a person who indorses
acceptance. On the other hand, the maker engages to
without recourse (Sec. 65, NIL).
pay the NI according to the tenor of the bill itself.
Q: What are the differences between an indorser
Q: X draws a check against his current account with
and a drawer?
Bonifacio Bank in favor of B. Although X does not
have sufficient funds, the bank honors the check
when it is presented for payment. Apparently, X has
conspired with the bank's bookkeeper so that his INDORSER DRAWER
ledger card would show that he still has sufficient Party to either a Only to a bill
funds. bill or a note
No such Makes admission as to the
The bank files an action for recovery of the amount admission existence of the payee and
paid to B because the check presented has no his capacity to indorse
sufficient funds. Decide the case (1998 Bar Question) Has warranties Makes no warranties, but
engages to pay after certain
A: The bank cannot recover the amount paid to B for conditions are complied with
the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became Q: What is the order of liability among the
primarily and directly liable to the payee/holder B. indorsers?

The recourse of the bank should be against X and its A:

bookkeeper who conspired to make X's ledger show 1. Among themselves Liable prima facie in the
that he has sufficient funds. order in which they indorse (Sec. 68)
2. To the holder In any order
Note: Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to him
A person placing his signature upon an instrument
(Sec. 68, NIL)
otherwise than as maker or acceptor is deemed to be
an indorser, unless he clearly indicates by appropriate
Q: What is the liability of an agent or broker who
words his intention to be bound in some other
negotiates an instrument without indorsement?
capacity (Sec. 63, NIL.)
A: He incurs all the liabilities prescribed to a general
Note: A person who places his indorsement on an bearer
instrument incurs all liabilities of an indorser. (Sec. 67, NIL.) indorser unless he discloses the name of his principal



and the fact that he is acting only as an agent (Sec. WARRANTIES

69, NIL)
The following are the warranties a person provides in
Note: Parol evidence is NOT admissible to relieve an agent negotiating an instrument:
or broker whose endorsement brings him within the above
liability. 1. That the instrument is genuine and in all respects
what it purports to be
Q: Can a collecting bank debit the account of the 2. That he has good title to it
depositor when the checks indorsed to it (bank) 3. That all prior parties had capacity to contract
were forged? 4. That he has no knowledge of any fact which
would impair the validity of the instrument or
A: Yes, because the depositor of a check as indorser render it useless.
warrants that it is genuine and in all respect what it
purports to be. Thus, when the checks deposited had Note: Indorsers liability as warrantor is distinct from his
forged indorsements and the collecting bank, as a liability to pay the instrument. Even a qualified indorser
consequence of such forgery, was made to pay the may incur liability for breach of implied warranties. As
drawee bank, the collecting bank can debit the warrantor, his liability is unconditional.
account of the depositor for his breach of warranty
(Jai-Alai Corporation Of The Philippines v. BPI, G.R. PRESENTMENT FOR PAYMENT (PP)
No. L-29432, Aug. 6, 1975).
Q: What is presentment for payment (PP)?
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When A: The presentation of an instrument to the person
Trude is about to encash the check, the drawee primarily liable for the purpose of demanding and
Union Bank refused to encash it due to insufficiency receiving payment.
of funds. Trude sued James for payment of money.
James alleged that the suit should be dismissed Q: How should presentment be made?
because Phebean is an indispensable party. Does
James argument hold water? A: GR: Instrument must be exhibited to the person
from whom payment is demanded; when paid, it
A: No. There is no privity between the drawer and must be delivered to the person paying it (Sec. 74,
the holder. The drawer is merely secondarily liable. NIL).
As indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid, XPN: When exhibition is excused:
or both, according to their tenor, and that in case 1. Debtor does not demand to see the
they were dishonored, she would pay the instrument and refuses payment on some
corresponding amount. After an instrument is other grounds; or
dishonored by non-payment, indorsers cease to be 2. Instrument is lost or destroyed.
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of Q: What is the liability of a bank paying a certificate
the original obligor (Tuazon v. Heirs of Bartolome of deposit payable to bearer without requiring its
Ramos, G.R. No. 156262, July 14, 2005). surrender?

Q: X is the holder of an instrument payable to him A: The bank remains liable to the holder if it paid the
(X) or his order, with Y as maker. X then indorsed it certificate of deposit payable to bearer without
as follows: Subject to no recourse, pay to Z. Signed, requiring its surrender (Far East Bank & Trust
X. When Z went to collect from Y, it turned out that Company v. Querimit, G.R. No. 148582, Jan. 16,
Y's signature was forged. Z now sues X for collection. 2002).
Will it prosper? (2011 Bar Question)
Q: Can a payee claim payment for a promissory note
A: Yes, because X, as a qualified indorser, warrants which was stolen and as such is not in his
that the note is genuine. possession?

A: No, because he is not a holder of the promissory

note. To make presentment for payment, it is
necessary to exhibit the instrument, which he cannot
do because he is not in possession thereof.



Q: When must presentment for payment be made?

GR: On the day it falls due (Sec.
A: PP is only necessary to charge persons secondarily 85, NIL)
liabledrawer and indorsers (Sec. 70, NIL).
XPN: If the due date falls on a
Note: PP is not necessary in order to charge the person Payable at a Saturday, presentment must be
primarily liable on the instrument. fixed or made on the next Monday
Q: When is PP not necessary to charge persons future time Note: If presentment for
secondarily liable? payment is made before
maturity; it will not result to a
A: PP is NOT necessary in the following instances: discharge of the instrument (Sec.
1. As to drawer, where he has no right to expect or 50, NIL).
require that the drawee or acceptor will pay the Promissory
instrument (Sec. 79, NIL). Within a reasonable time after
note payable
its issue.
on demand
2. As to indorser where the instrument was made Within a reasonable time after
or accepted for his accommodation and he has the last negotiation thereof (Sec.
no reason to expect that the instrument will be 71, NIL).
paid if presented (Sec. 80, NIL).
Note: Last negotiation means the
3. When dispensed with under Sec. 82, NIL such as: Bill of last transfer for value. Subsequent
a. Where, after the exercise of reasonable exchange transfers between banks for
diligence, presentment cannot be made payable on purposes of collection are not
b. Where the drawee is a fictitious person negotiations within Sec. 71.
c. By waiver of presentment, express or
implied Note: Reasonable time means not
more than 6 months from the date
of issue. Beyond said period, the
Q: What is the rule if the instrument is, by its terms, check becomes stale and valueless
payable at a special place? and thus, should not be paid.

A: If the instrument is, by its terms, payable at a Every NI is payable at the time fixed therein without
special place, and the person primarily liable is able grace. The following table states the rules on PP
and willing to pay it there at maturity, such ability and when maturity date is fixed:
willingness are equivalent to a tender of payment
upon his part (Sec. 70, NIL). TIME OF MATURITY WHEN TO PRESENT
Q: What are the requisites for a sufficient PP? On a Sunday or On the next
holiday succeeding business
A: Presentment for payment, to be sufficient, must day
be made:
On a Saturday On the next
1. By the holder, or his agent authorized to receive
succeeding business
payment on his behalf; day
2. At a reasonable hour on a business day;
If instrument which Before 12:00 noon on
3. At a proper place;
falls due on a Saturday Saturday, or on
4. To the person primarily liable, or if he is absent or
is payable on demand Monday, at the option
inaccessible, to any person found at the place
of the holder
where the presentment is made (Sec. 72, NIL).
Q: When is delay in making presentment excused?

1. When caused by circumstances beyond the
control of the holder; and



2. Not imputable to his default, misconduct, or PARTIES TO WHOM PRESENTMENT FOR PAYMENT
negligence (Sec. 81, NIL). SHOULD BE MADE

Note: Only the delay in presentment is excused and not the Q: Who are the parties to whom PP should be
presentment itself. Hence, as soon as the cause of delay made?
ceases to operate, presentment must be made with
reasonable diligence (ibid.).
A: GR: PP must be made to the primary party; to the:
Q: Is the bank liable to the payee for depositing and 1. The maker in case of a promissory note, or
encashing the crossed checks to an unauthorized 2. The acceptor in case of an accepted bill. If the bill
person? of exchange or check is payable on demand, the
A: Yes. The effects of crossing a check relate to the presentment must be made to the drawee
mode of its presentment for payment. Under Sec. 72 although he is not automatically liable on the bill.
of the NIL, presentment for payment, to be sufficient,
must be made by the holder or by some person XPNs: Where the person/s primarily liable is/are:
authorized to receive on his behalf. The checks here
had been crossed and issued for payees account 1. Dead payment must be made to his personal
only. This only signifies that the drawer had representative (Sec. 76, NIL.)
intended the same for deposit only by the person
indicated (Associated Bank v. CA, G.R. No. 89802, 2. Liable as partners and no place of payment
May 7, 1992). specified payment may be made to any of them
though there has been a dissolution of the firm
Q: What is the order of preference with regard to (Sec. 77, NIL.)
the place of presentment?
3. Several persons, not partners, and no place of
A: payment is specified payment must be made to
1. Specified place in the instrument all of them (Sec. 78, NIL.)
2. Address of the person to make the payment if
given in the instrument 4. If the person primarily liable is absent or
3. Usual place of business or residence of the inaccessible, then presentment must be made to
person to make the payment any person of sufficient discretion at the proper
4. Wherever he can be found; or place of presentment (Sec. 72[d], NIL).
5. At his Last known place of business or residence
(Sec. 73, NIL)
Q: When must presentment be made where the Q: What is the effect when presentment is not
instrument is payable at a bank? made?
A: Must be made during banking hours, unless the A: GR: Drawer and the indorsers are discharged from
person to make payment has no funds there to meet their secondary liability
it at any time during the day, in which case
presentment at any hour before the bank is closed on XPN:
that day is sufficient. (Sec. 75, NIL.) 1. Presentment for payment is not required to
charge drawer and indorser when:
Q: What are the requisites of payment in due a. Drawer- when he has no right to expect or
course? require that the drawee or acceptor will pay
the instrument (Sec. 79, NIL).
A: Payment is made in due course when b. Indorser When the NI was made or accepted
MHG for his accommodation and he has no reason
a. it is made at or after the date of Maturity; to expect that the instrument will be paid if
b. to the Holder thereof; presented (Sec. 80, NIL).
c. in Good faith and without notice that holders
title is defective. (Sec. 88, NIL.) 2. When presentment for payment is dispensed
with under Sec. 82, NIL
Note: in good faith refers to the maker or acceptor, &and
not to the holder.



3. When the BOE has been dishonored by non-

acceptance, since no PP for is necessary (Sec. Q: Notice of dishonor is not required to be made in
151, NIL). all cases. One instance where such notice is not
necessary is when the indorser is the one to whom
Q: When may PP be dispensed with? the instrument is supposed to be presented for
payment. The rationale here is that the indorser
A: (2011 Bar Question)
1. Where, after the exercise of reasonable
diligence, presentment cannot be made; A: already knows of the dishonor and it makes no
2. Where the drawee is a fictitious person; or sense to notify him of it.
3. By waiver of presentment, express or implied.
(Sec. 82, NIL.) Q: When is a NI considered dishonored?

For BOE,
Q: When is an instrument dishonored by non- 1. if not accepted when presented for acceptance;
payment? or
2. if presentment for acceptance is excused and the
A: bill is not accepted (Sec. 149, NIL)
PRESENTATION 1. Not paid when presented for payment at
The instrument is duly Presentment is maturity; or
presented for excused and the 2. Where presentment is excused or waived and
payment to party instrument is overdue the instrument is overdue and unpaid (Sec. 83,
primarily liable and it and unpaid (Sec. 83, NIL)
is either refused or NIL)
cannot be obtained Q: What is the liability of a person secondarily liable
when the instrument dishonored?
Q: What is the effect of dishonor by non-payment?
A: After the necessary proceedings for dishonor had
A: When the instrument is dishonored by non- been duly taken, an immediate right of recourse to all
payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the
parties secondarily liable thereon accrues to the holder (Sec. 84)
holder (Sec. 84, NIL).
Q: When and where should the notice be given?
A notice of dishonor is a notice given by the holder to 1. GR: As soon as instrument was dishonored (Sec.
the parties secondarily liable, drawer and each 102, NIL.)Party is allowed one entire day for
indorser, that the instrument was dishonored by non- the purpose of giving notice.
payment or non-acceptance by the drawee/maker.
XPN: Delay is excused (Sec. 113, NIL.)
Note: Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored the Note: An instrument cannot be dishonored by
instrument. non-payment until afterthe maturity.

Q: What are the purposes for requiring notice of 2. Parties reside in the same place
a. Place of business Before close of business
A: hours on the day following
1. To inform parties secondarily liable that the b. Residence Before the usual hours of rest
maker or acceptor has failed to meet his on the day following
engagement. c. By mail Deposited in the post office in time
2. To advise them that they are required to make to reach him in the usual course on the day
payment. following (Sec. 103, NIL)



2. To his principal The principal must give notice

3. Parties reside in different places to parties secondarily liable as if his agent were
an independent holder (Sec. 94, NIL).
a. By mail Deposited in the post office in time
to go by mail (actual departure in the course Note: A party who receives notice of dishonor is entitled to
of mail from the post office in which the give notice of such dishonor to prior parties within the
notice was deposited) the day following the same period of time that the holder has after the dishonor
as if he were the said holder (Sec. 107, NIL).
day of dishonor.
b. If no mail At a convenient hour (of the
sender) on that day, by the next mail PARTIES WHO MAY GIVE NOTICE OF DISHONOR
c. Other than by post office (e.g. personal Q: Who gives the notice?
messenger) Within the time that notice
would have been received in due course of A:
mail, if it has been deposited in the post 1. Holder
office within the time specified in (a) (Sec. 2. Another in behalf of the holder
104, NIL.) 3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
4. Time of notice to antecedent parties Same time would have a right to reimbursement from the
for giving notice that the holder has after the party to whom notice is given (Sec. 90, NIL)
dishonor (Sec. 107, NIL.)
Note: Actual receipt of the party within the time specified
by law is sufficient though not sent in the places specified Q: What is the effect of notice of dishonor if given by
above (Sec. 108, NIL). or on behalf of the holder?

PARTIES TO BE NOTIFIED A: Notice of dishonor inures to the benefit of:

Q: To whom must notice be given? 1. All holders subsequent to the holder who has
given notice; and
A: Notice of dishonor should be given to: 2. All parties prior to the holder but subsequent to
1. The drawer; or the party to whom notice has been given and
2. Indorser; or against whom they may have a right of recourse
3. His agent (Sec. 97, NIL) (Sec. 92, NIL)
4. Where party is dead to a personal
representative or sent to the last residence or Q: What is the effect of notice of dishonor if given by
last place of business of the deceased (Sec. 98, party entitled thereto?
5. When the parties to be notified are partners A: Notice of dishonor inures to the benefit of:
notice to any one partner though there has been
a dissolution (Sec. 99, NIL) 1. The holder; and
6. Notice to joint parties who are not partners must 2. All parties subsequent to the party to whom
be given to each of them (Sec. 100, NIL) notice is given (Sec. 93, NIL).
7. Where a party has been adjudged a bankrupt
to the party himself or to his trustee or assignee Q: What is the effect of failure to give notice of
(Sec. 101, NIL) dishonor?

Q: The instrument was dishonored in the hands of A: Any drawer or indorser to whom such notice is not
the agent. To whom and when may he give notice? given is discharged (Sec. 89, NIL)

A: Note: Holder is not required to notify all indorsers, he may

1. To the parties secondarily liable Within the select to hold only one or more indorsers. Indorsers who
are discharged from liability by reason that no notice of
time fixed by Secs. 102-104, and 107, otherwise,
dishonor was given to them is still liable for breach of
they are discharged warranties as to the NI.



Q: What is a waiver of protest?
Q: What is the form and contents of a notice of
dishonor? A: It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
A: steps necessary to fix the liability of the drawee and
1. Oral; or the indorsers have been taken. Thus, it is deemed to
2. In writing be a waiver not only of a formal protest but also of
3. It may be given by personal delivery, or by mail presentment and notice of dishonor (Sec. 111, NIL).
(Sec. 96, NIL)
4. Must contain the following: DISPENSATION WITH NOTICE
a. Description of the instrument;
b. Statement that it has been presented for Q: When is notice of dishonor not necessary?
payment or for acceptance and that it has
been dishonored (If protest is necessary, notice A:
must also contain a statement that it has been 1. Waiver of notice (Sec. 109, NIL)
protested). 2. Waiver of protest (Sec. 111, NIL)
c. Statement that the party giving the notice 3. When notice is dispensed with when after
intends to look for the party addressed for exercise of reasonable diligence, notice cannot be
payment. given or does not reach the parties sought to be
charged (Sec. 112, NIL)
Note: A written notice need not be signed, and an 4. Drawer in cases under Sec. 114, NIL.
insufficient notice may be supplemented or validated by 5. Indorser in cases under Sec. 115, NIL.; and
verbal communication. A misdescription of the instrument 6. Where due notice of dishonor by non-acceptance
does not vitiate the notice unless the party to whom the has been given (notice of dishonor by non-
notice is given is in fact misled thereby (Sec. 95, NIL).
payment not necessary). (Sec. 116, NIL.)
Q: With regard to the drawer, when can a notice of
dishonor be dispensed with?
Q: What is meant by waiver of notice?
A: It is the willingness on the part of the drawer or
1. When drawer and drawee is the same person
indorser to be bound as such even without due notice
2. Drawee is fictitious or does not have the capacity
of dishonor.
to contract
3. Drawer is the person to whom the instrument is
Q: When may waiver of notice be given?
presented for payment (he is the one who
dishonored the instrument)
4. Drawer has no right to expect or require that the
1. Before the time of giving notice has arrived; or
drawee or acceptor will honor the instrument.
2. After the omission to give due notice (Sec. 109,
5. Drawer has countermanded the payment (e.g.
stop payment order) (Sec. 114, NIL.)
Q: What are the ways to give a waiver of notice?
Q: P authorized A to sign a negotiable instrument in
his (Ps) name. It reads: Pay to B or order the sum
A: It can either be:
of Php1 million. Signed, A (for and in behalf of P).
1. Express; or
The instrument shows that it was drawn on P. B
2. Implied (e.g. Payment by an indorser after he
then indorsed to C, C to D, and D to E. E then treated
learns of the default of the maker; admission of
it as a bill of exchange. Is presentment for
liability after dishonor) (Sec. 109, NIL).
acceptance necessary in this case? (2011 Bar
Q: Who are affected by the waiver of notice?
A: No, since the drawer and drawee are the same
1. All parties (if embodied on the face of the
instrument); or
Q: Juben issued to Y two post-dated checks as
2. Particular indorser (if written above the signature
security for pieces of jewelry to be sold. Y
of such indorser) (Sec. 110, NIL)



negotiated the check to S. When Juben failed to sell discharge drawers and indorsers as to succeeding
the jewelry, he withdrew all his funds from the installments.
drawee bank. After dishonor, Juben contends that
the holder failed to give him a notice of dishonor. Is 2. With acceleration clause It depends upon
notice of dishonor necessary? whether the clause is automatic or optional.

A: No. He was responsible for the dishonor of his a. Automatic failure to give notice of dishonor
checks, hence, there was no need to serve him notice as to a previous installment will discharge the
of dishonor. (State Investment House, Inc. v. CA, G.R. persons secondarily liable as to the succeeding
No. 101163, Jan. 11, 1993) installments;
b. Optional if not exercised, the rule would be
Q: When is it not necessary to give a notice of the same as if there is no acceleration clause. If
dishonor to the indorser? exercised, the rule would be the same as if the
installment contains an automatic acceleration
A: clause (Town Savings Bank v. CA, G.R. No.
1. Drawee is fictitious or has no capacity to contract, 106011, June 17, 1993).
and indorser was aware of these facts at the time
he indorsed the instrument; DISCHARGE OF NEGOTIABLE INSTRUMENT
2. Indorser is person to whom the instrument is
presented for payment; or Q: What is meant by discharge of an instrument?
3. Instrument was made or accepted for his
accommodation (Sec. 115, NIL.) A: It is the release of all parties, whether primary or
secondary, from the obligations arising thereunder. It
EFFECT OF FAILURE TO GIVE NOTICE renders the instrument without force and effect, and
consequently, it can no longer be negotiated.
Q: What is the effect of omission of a previous
holder to give notice of dishonor by non- DISCHARGE OF NEGOTIABLE INSTRUMENT
Q: What are the methods for discharge of
A: It does not prejudice the rights of a holder in due instrument?
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify A:
the drawer and indorsers if acceptance is refused. 1. Payment by principal debtor:
(Sec. 117, NIL) a. By or on behalf of principal debtor
b. At or after its maturity
Q: What is the effect of failure to give notice of c. To the holder thereof
dishonor? d. In good faith and without notice that the
holders title is defective
A: GR: Any person to whom such notice is not given is 2. Payment by accommodated party
discharged, but he will still be liable for 3. Intentional cancellation of instrument by the
breach of warranties pertaining to the holder (by expressly stating it in the instrument
instrument. or when the instrument is torn up, burned or
XPNs: 4. Any act which discharges a simple contract for
1. Waiver (Sec. 109, NIL) the payment of money under Art. 1231 of the
2. Notice is dispensed with (Sec. 112, NIL) NCC specifically remission, novation, and merger.
3. Not necessary to drawer (Sec. 114, NIL)
4. Not necessary to indorser (Sec. 115, NIL) Note: Loss of the negotiable instrument will not
extinguish liability; compensation is not available so
Q: What is the effect of lack of notice of dishonor on long as an obligation is evidenced by a negotiable
instrument (Commercial Law Review, Villanueva, 2009
the instrument which is payable in installments?
5. Reacquisition by principal debtor in his own right.
1. No acceleration clause Failure to give notice of
Reacquisition must be:
dishonor on a previous installment does not
a. By the principal debtor
b. In his own right



c. At or after date of maturity (instrument is

discharged; if made before, it may be RIGHTS OF A PARTY WHO DISCHARGED
renegotiated) (Sec. 119, NIL). INSTRUMENT

DISCHARGE OF PARTIES SECONDARILY LIABLE Q: What are the rights of a party who discharged the
Q: What are the methods of discharge of secondary
parties? A: GR: The party so discharging the instrument is
remitted to his former rights as regards all prior
A: ACS TReE parties, and he may strike out his own and all
1. Any Act which discharges the instrument; subsequent indorsements, and again negotiate the
2. Intentional Cancellation of his signature by the instrument.
3. Discharge of prior party which may be made XPNs:
when signature is Stricken out 1. Where it is payable to the order of a third
4. Valid Tender of payment by a prior party; person, and has been paid by the drawee;
5. Release of the principal debtor, unless holder and
expressly reserves his right of recourse against 2. It was made or accepted for
the said subsequent parties accommodation, and has been paid by the
6. Extension of time of payment, unless: party accommodated.
a. Extension is consented to by such party
b. Holder expressly reserves his right of recourse RENUNCIATION BY HOLDER
against such party (Sec. 120, NIL)
Q: What is renunciation?
Q: The rule is that the intentional cancellation of a
person secondarily liable results in the discharge of A: The act of surrendering a claim or right with or
the latter. With respect to an indorser, the holder's without recompense (a PERSONAL defense).
right to cancel his signature is: (2011 Bar Question)
Q: How is renunciation by holder made?
A: limited to the case where the indorsement is not
necessary to his title. A:
1. Must be written
Q: What are the effects of payment by persons 2. If oral, the instrument must be surrendered to
secondarily liable? the person primarily liable (Sec. 122, NIL).

A: Q: What are the effects of renunciation?

1. Instrument is not discharged
2. It only cancels his own liability and that of the 1. Made in favor of principal debtor made at or
parties subsequent to him after the maturity (made absolutely and
unconditionally) of the instrument discharges
3. GR: Instrument may be renegotiated the instrument (Sec. 122, NIL.)

XPN: 2. Made in favor of a secondary party may be made

a. Where it is payable to the order of a third by the holder before, at or after maturity
person, and has been paid by the drawer; discharges only the secondary parties and all
and subsequent to him (Sec. 122, NIL)
b. Where it is paid by the accommodated party
3. Renunciation does not affect the rights of a
Note: (a) and (b) has the same effect as payment by the holder in due course without notice (Sec. 120,
party primarily liable. NIL)

4. Person paying is remitted to his former rights (as Q: What is the rule regarding cancellation of an
regards prior parties) and he may strike out his instrument?
own and all subsequent indorsements (Sec. 121,
NIL) A: It is presumed intentional. It is inoperative if



unintentional, or under a mistake or without the party responsible for the alteration for the altered
authority of the holder. But where an instrument or amount.
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the 3. If negotiated to a holder not a HIDC, he cannot
cancellation was made unintentionally, or under a enforce payment against the person not a party
mistake or without authority (Sec. 123, NIL) prior to the alteration. He may, however enforce
payment according to the altered tenor from the
MATERIAL ALTERATION person who caused the alteration and from the
indorsers (Sec. 124 NIL)
Q: Can a drawee who accepts a materially altered
Q: What is a material alteration? check recover from the holder and the drawer?
(2011 Bar Question)
A: Any change in the instrument which affects or
changes the liability of the parties in any way. A: No, he cannot recover from either of them.

Q: What constitutes a material alteration? Q: Is there material alteration when the serial
number of a check had been altered?
A: Any alteration which changes:
1. Date A: No. An alteration is said to be material if it alters
2. Sum payable, either for principal or interest the effect of the instrument. It means an
3. The time or place of payment unauthorized change in an instrument that purports
4. Number or the relations of the parties to modify in any respect the obligation of a party or
5. Currency in which payment is to be made an unauthorized addition of words or numbers or
6. Adds a place of payment where no place is other change to an incomplete instrument relating to
specified the obligation of a party. The alteration of the serial
7. Any other change or addition which alters the number of a check did not change the relations
effect of the instrument (Sec. 125, NIL.) between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check
Note: The change in the date of indorsement is not is not a material alteration (International Corporate
material where the date is not necessary to fix the Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).
maturity of the instrument.
Q: A material alteration of an instrument without
Q: What is spoliation? the assent of all parties liable thereon results in its
avoidance, EXCEPT against a: (2011 Bar Question)
A: It refers to material alteration of an instrument
done by a stranger. It has the same effect as A: Party who has made, authorized or assented to the
alteration. alteration and subsequent indorser.


Q: What is the effect of material alteration of a NI DEFINITION

without the assent of all parties liable thereon?
Q: What is acceptance of a bill?
1. Avoids the instrument except against: A: A signification by the drawee of his assent to the
a. A party who has made the alteration; order of the drawer (Sec. 132, NIL).
b. A party who authorized or assented to the
alteration; or Q: What are the requisites for acceptance?
c. The indorsers who indorsed subsequent to
the alteration (because of their warranties). A:
1. In writing, except constructive acceptance and to
2. If negotiated to a HIDC, he may enforce the a foreign bill payable in another state (unless the
payment thereof according to its original tenor other state requires for written acceptance);
against the person not a party to the alteration. 2. Signed by the drawee (without it, he is not
He may also enforce payment thereof against the liable);



3. Must express a promise to pay money (not ii. Bill shall be drawn within a reasonable time
goods); after such promise is written; and
4. Delivered to the holder (before delivery or iii. The holder shall take the bill upon the credit
notification, acceptor may revoke or cancel his of the promise.
Q: What are the kinds of acceptance?
Q: What is the effect of acceptance?
A: Either general or qualified.
A: Upon acceptance, the bill, in effect becomes a
note. The drawee who thereby becomes an acceptor Q: What is general acceptance?
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser. A: It assents without qualification to the order of the
drawer (Sec. 139, NIL).
Q: A bill of exchange states on its face: One (1)
month after sight, pay to the order of Mr. R the Q: What is qualified acceptance?
amount of Php50,000.00, chargeable to the account
of Mr. S. Signed, Mr. T. Mr. S, the drawee, accepted A: An acceptance which in express terms varies the
the bill upon presentment by writing on it the words effect of the bill as drawn (ibid.).
I shall pay Php30,000.00 three (3) months after
sight. May he accept under such terms, which Note: A holder may refuse to accept a qualified acceptance
varies the command in the bill of exchange? (2011 and if he does not obtain an unqualified acceptance, he
Bar Question) may treat the bill as dishonored by non-acceptance. (Sec.
142, NIL.)
A: Yes, since a drawee is allowed to effect a qualified
acceptance in which case he shall be liable according Q: What are the kinds of qualified acceptance?
to the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the words: 1. Conditional makes payment by the acceptor
Accepted, with promise to make payment within dependent on the fulfillment of a condition
two days. Signed, X. The drawer questioned the therein stated.
acceptance as invalid. Is the acceptance valid? 2. Partial an acceptance to pay part only of the
amount for which the bill is drawn.
A: Yes, because the acceptance is in reality a clear 3. Local an acceptance to pay only at a particular
assent to the order of the drawer to pay. Qualified place.
acceptance as to time is allowed (Sec. 141 [d], NIL). 4. Qualified as to time a bill is accepted to be paid
on or after a specified date.
MANNER 5. As to drawee - acceptance of some one or more of
the drawees but not of all. (Sec. 141, NIL.)
Q: Where should acceptance be made?
Q: What are the other kinds of acceptance?
Acceptance may be made A:
1. Constructive/implied (Sec. 137, NIL.)
1. On the bill itself, Drawee to whom the bill is delivered for
2. On a separate paper; and if on a separate paper acceptance destroys it; or
a. it may be acceptance as to an existing bill; or Drawee refuses, within 24 hours after such
b. it may be acceptance as to a non-existing delivery, or within such time as is given him,
bill. to return the bill accepted or non-accepted

If the bill is non-existent, the acceptance on a 2. Extrinsic the acceptance is written on a paper
separate paper must comply with following other than the bill itself. To be binding upon the
requirements: acceptor:
Acceptance must be shown to the person
i. The contemplated drawee shall describe the to whom the instrument is negotiated;
bill to be drawn and promise to accept it. and



Such person must take the bill for value on Q: What is the effect of the certification by the
the faith of such acceptance (Sec. 134, drawee bank?
A: Certification implies that the check is drawn upon
3. Virtual sufficient funds in the hands of the drawee, that they
Unconditional promise in writing to accept have been set apart for its satisfaction and that they
a bill shall be so applied whenever the check is presented
Promise made before it is drawn for payment. Where a check is certified by the bank
Any person who, upon faith thereof, on which it is drawn, the certification is equivalent to
receives the bill for value (Sec. 135, NIL). acceptance (Secs. 187, 189, NIL; New Pacific Timber v.
Seneris, G.R. No. L-41764, Dec. 19, 1980).
Q: What is the time allowed for the drawee to make
the acceptance? Q: What is presentment for acceptance (PA)?

A: The drawer has 24 hours after presentment to A: Production or exhibition of a bill of exchange to
decide whether or not he will accept the bill. The the drawee for his acceptance or payment (also
acceptance, if given, dates as of the day of includes presentment for payment).
presentation (Sec. 136, NIL).
Q: Is presentment for acceptance necessary?
Note: Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is presented for A: GR: It is not necessary to render any party to the
payment, not acceptance. bill liable. (par. 2, Sec. 143, NIL)


1. Where bill is payable after sight, or when it is
Q: What is the effect of accepting an instrument necessary in order to fix the maturity of the
with a qualified acceptance? instrument
2. When bill expressly stipulates that it shall be
A: GR: When the holder takes a qualified acceptance presented for acceptance; or
the drawer and indorsers are discharged from 3. Where the bill is drawn payable elsewhere
liability on the bill. than at the residence or place of business of
the drawee (par. 1, Sec. 143, NIL.)
1. When they have expressly or impliedly Note: The holder must either present it for acceptance or
authorized the holder to take a qualified negotiate it within a reasonable time, otherwise, the
acceptance, or drawer and all indorsers are discharged (Sec. 144, NIL).
2. Subsequently assent thereto
3. Implied assent (when they did not express TIME/PLACE/MANNER OF PRESENTMENT
their dissent to the holder within a
reasonable time when they received a notice Q: What constitutes proper presentment for
of qualified acceptance) (Sec. 142, NIL) acceptance?

Q: When may an incomplete bill be accepted? A: It must be made:

1. By or on behalf of the holder
A: Acceptance may be made before the bill has been 2. At a reasonable hour on a business day
signed by the drawer or while otherwise incomplete, 3. Before the bill is overdue; and
or after it is overdue, or even after it has been 4. To the drawee or some person authorized to
dishonored by non-acceptance or non-payment (Sec. accept or refuse to accept on his behalf. (Sec.
138, NIL) 145, NIL); and




Bill addressed to Them all unless one has Q: When is a bill dishonored by non-acceptance?
2 or more authority to accept or refuse
drawees who are acceptance for all, in which case A:
not partners presentment may be made to 1. When it is duly presented for acceptance and
him only. (Sec. 145, [a], NIL.) such an acceptance is refused or cannot be
Drawee is dead Drawee's personal obtained; or
representative. (Sec. 145, [b], 2. When presentment for acceptance is excused,
NIL.) and the bill is not accepted. (Sec. 149, NIL.)
Note: Presentment is merely
permissive since it is excused by Note: It is not sufficient that presentment for acceptance is
Sec.148a) excused, it is also necessary that the bill remains not
Drawee is To drawee or his accepted.
adjudged a trustee/assignee (Sec 145, [c],
bankrupt or NIL.) Q: What is the duty of the holder where bill is not
insolvent or has accepted?
made an
assignment for A: If within 24 hours after due presentment, the bill is
the benefit of not accepted, the person presenting it must treat the
creditors bill as dishonored by non-acceptance otherwise he
will lose the right of recourse against the drawer and

Q: What is the effect of failure to make PP of a check Q: What are the rules when a bill is dishonored by
within a reasonable time? non-acceptance?

A: Failure to make such presentment will discharge A:

the drawer from liability or to the extent of the loss 1. Right of recourse against all secondary party
caused by the delay (Sec. 186, NIL; Republic of the accrues to the holder.
Philippines vs. PNB, G.R. No. L-16106, December 30, 2. No presentment for payment is necessary since
1961) dishonor of the instrument by non-payment is to
be expected.
Q: When may delay in presentment be excused? 3. If the instrument is accepted after it has been
dishonored by non-acceptance presentment for
A: Where the holder of a bill drawn payable payment is necessary upon maturity.
elsewhere than at the place of business or the 4. In case of non-payment, holder must give the
residence of the drawee has no time with the corresponding notice of dishonor; otherwise,
exercise of reasonable diligence, to present the bill secondary parties are discharged.
for acceptance before presenting it for payment on
the day that it falls due. (Sec. 147, NIL.) Q: What are the rights of a holder when bill is not
Q: When is presentment excused?
A: When a bill is dishonored by non-acceptance, an
A: immediate right of recourse against the drawer and
1. Drawee is dead, or has absconded, or is a fictitious indorsers accrues to the holder, and no presentment
person not having capacity to contract bybill; for payment is necessary (Sec. 151, NIL).
2. After exercise of reasonable diligence,
presentment cannot be made; or Q: What is acceptance for honor?
3. Although presentment has been irregular,
acceptance has been refused on some other A: It is an undertaking by a stranger to a bill after
ground. (Sec. 148, NIL.) protest for the benefit of any party liable thereon or
for the honor of the person for whose account the bill
is drawn which acceptance inures to the benefit of all
parties subsequent to the person for whose honor it
is accepted, and conditioned to pay the bill when it



becomes due if the original drawee does not pay it 8. Title-retaining Note an instrument used to
(Sec. 161, NIL). secure the purchase price of goods. It ordinarily
provides that title to the goods shall remain in
Q: What are the requisites of acceptance for honor? payees name until the note is paid in full.

A: WIS 9. Collateral Note it is used when the maker

1. Must be in Writing pledges securities to the payee to secure the
2. Must Indicate that it is an acceptance for honor payment of the amount of the note
3. Must be Signed by the acceptor for honor (Sec.
162, NIL) 10. Judgment Note this is a note to which a power
of attorney is added enabling the payee to take
PROMISSORY NOTES judgment against the maker without the
formality of a trial if the note is not paid on its
Q: What is a promissory note? due date.(De Leon, supra, pg. 375.)

A: An unconditional promise in writing made by one CHECKS

person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future DEFINITION
time, a sum certain in money to order or to bearer
(Sec. 184, NIL). Q: What is a check?
Q: What are the special types of promissory notes? A: It is a bill of exchange drawn on a bank and
payable on demand (Sec. 185, NIL)
1. Certificate of deposit a written
Q: What are the essential characteristics of checks?
acknowledgment by a bank of the receipt of
money on deposit on which the bank promises to
A: There are 2 essential distinct characteristics of
pay to the depositor or to him or his order or to
some other person or to him or his order, or to a
specified person or bearer, on demand or on a
1. they are drawn on a bank; and
fixed date, often with interest.
2. payable instantly on demand.
2. Bonds an evidence of indebtedness issued by a
Q: Distinguish between a Check and a BOE.
public or private corporation which constitutes a
promise, under seal, to pay money. It runs for a
longer period of time than a PN.
Checks BOE
3. Registered bond one payable only to the Drawee Always drawn on May or may not
person whose name appears on the face of the a bank or banker be drawn on a
certificate. against a bank and need
previous deposit not be drawn
4. Coupon bond one to which are attached of funds against a deposit
coupons which entitle the holder to interest Payability Always payable Either payable
when due. on demand on demand or at
a fixed or
5. Bank Note instrument issued by a bank for determinable
circulation as money payable to bearer on future time
demand. (Sec.4)
Function Ordinarily Intended for
6. Due Bill - PN which shows on its face that one intended for circulation as
person acknowledges his indebtedness to immediate instrument of
another. The word due is commonly used. payment credit
Presentment Must be Must be
7. Mortgage Note an instrument secured by for Payment presented for presented for
either a real (REM) or personal property payment within a payment within
(Chattel). reasonable time a reasonable
after its time after its last



issue(Sec.186, negotiation
NIL) (Sec. 171, NIL) 4. Crossed Check Done by writing 2 parallel lines
on the left top portion of the check. The marking
signifies that the bank should pay only with the
intervention of the company only.
Discharge of When a check is They remain
Liability accepted or liable despite 5. Memorandum Check A check with
certified, the acceptance Memorandum written on its face. The writing
drawer & (Sec. 84, NIL) signifies that the drawer engages to pay the bona
indorsers are fide holder absolutely, without any condition
discharged from concerning its presentment
liability thereon
(Sec. 188, NIL) 6. Travelers Checks Instruments purchased from
banks or express companies which can be used
Effect of the Death of the Death of the
like cash upon the second signature by the
Death of the drawer of a check drawer of an
purchaser (De Leon, supra, pg. 380-385.)
Drawer with the ordinary bill
knowledge of the does not revoke
Q: What is a crossed check? What are the effects of
bank revokes the the authority of
crossing a check? Explain. (2005 Bar Question)
authority of the the drawee to
bank to pay. pay.
A: A crossed check is a check with two (2) parallel
Presentment Need not be Must be
lines, written diagonally on the upper right corner
for presented for presented for
thereof. It is a warning to the drawee bank that
Acceptance acceptance (Sec. acceptance in
payment must be made to the right party; otherwise
185, NIL.) certain cases
the bank has no authority to use the drawer's funds
(Sec. 143, NIL.)
deposited with the bank.
Q: A check was dishonored due to material
To be assured that it will avoid any mistake in paying
alteration. The creditor then filed an action against
to the wrong party, banks adopted the policy that
drawee bank for the amount. Will the action
crossed checks must be deposited in the payee's
account. When withdrawal is made, the banks can be
sure that they are paying to the right party. The
A: No. If a bank refuses to pay a check
crossing becomes a warning also to whoever deals
(notwithstanding the sufficiency of funds), the payee-
with the said instrument to inquire as to the purpose
holder cannot, as provided under Sections 185 and
of its issuance. Otherwise, if something wrong
189 of the NIL, sue the bank. The payee should
happens to the payment thereof, that person cannot
instead sue the drawer who might in turn sue the
claim to be a holder in due course. Hence, he is
bank. This is so because no privity of contract exists
subject to the personal defense on the part of the
between the drawee-bank and the payee (Villanueva
drawer that there is breach of trust committed by the
v. Nite, G.R. No. 148211, July 25, 2006).
payee in not complying with the drawer's instruction.
Hence, the effects of crossing a check are:
Q: What are the special types of checks?
1. That the check may not be encashed but only
deposited in the bank;
2. That the check may be negotiated only once- to
1. 1.Cashiers Check a BOE drawn by the bank
one who has an account with a bank;
upon itself and is accepted at its issuance. It is
3. That the act of crossing the check serves as a
usually signed by the cashier of the bank.
warning to the holder that the check has been
issued for definite purpose so that he must inquire
2. Managers Check a BOE drawn by the bank
if he has received the check pursuant to the
upon itself and is accepted at its issuance and
purpose. Otherwise, he is not a HIDC (State
signed by a manager on behalf of a bank.
Investment House v. IAC, 175 SCRA 310).
3. Certified Check Drawn by a depositor upon
funds to his credit in a bank which an officer of a
bank certifies will be paid on presentation.



Q: What is the purpose of crossing a check? Q: When will the delivery of a check produce the
effect of payment even if the same had not been
A: To insure payment to the payee. It can only be encashed?
deposited but may not be converted into cash by the
drawer. Crossing a check does not destroy its A: If the debtor was prejudiced by the creditor's
negotiability but the check may be negotiated only unreasonable delay in presentment. Acceptance of a
once to one who has an account with the bank (De check implies an undertaking of due diligence in
Ocampo v. Gatchalian, 3 SCRA 596) presenting it for payment. If no such presentment
was made, the drawer cannot be held liable
Q: What is a stale check? irrespective of loss or injury sustained by the payee.
Payment will be deemed effected and the obligation
A: A check which has not been presented for for which the check was given as conditional payment
payment within a reasonable time after its issue. It is will be discharged (Pio Barretto Realty Corp. v. CA,
valueless and thus, should not be paid. A check supra.).
becomes stale 6 months from date of issue.

Q: What is the effect of a stale check?

A: The drawer and all indorsers are discharged from

liability thereon (Sec. 186, NIL)

Q: What is a memorandum check?

A: A memorandum check is an evidence of debt

against the drawer and although may not be intended
to be presented, has the same effect as an ordinary
check and if passed on to a third person, will be valid
in his hands like any other check (People v. Nitafan,
G.R. No. 75954, Oct. 22, 1992).



A check must be presented for payment within a

reasonable time after its issue. (Sec. 186, NIL.)


The following are the effects of the delay in PP:

1. The drawer will be discharged from liability

thereon to the extent of the loss caused by the
delay. (ibid.)

2. The indorser shall be discharged from liability.

(PNB vs. Seeto, G.R. No. L-4388, August 13,

Note: PP is not dispensed with by Sec. 186 of the NIL.

Hence, if there is no PP, the drawer cannot be held
irrespective of the loss or injury suffered by the payee. (Pio
Barretto Realty Corp. v. CA, G.R. No. 132362, June 28,



INSURANCE CODE Q: What is a contract of insurance as an Uberrimae

Fidei Contract?
The laws governing contracts of insurance in the
Philippines are the following: A. The contract of insurance is one of perfect good
1. Insurance Code of the Philippines 1978 faith (uberrimae fidei) not for the insured alone, but
2. New Civil Code equally so for the insurer; in fact, it is more so for the
3. Special Laws latter, since its dominant bargaining position carries
with it stricter responsibility (Qua Chee Gan vs. Law
CONCEPT OF INSURANCE Union and Rock Insurance, Co. Ltd., GR No. L-4611,
December 17, 1955).
Q: What is a contract of insurance?
It requires the parties to the contract to
A: It is an agreement whereby one undertakes for a communicate that which a party knows and ought to
consideration to indemnify another against the loss, communicate, that is, the duty to disclose in good
damage or liability arising from an unknown or faith all facts material to the contract.
contingent event (Sec. 2[1], Insurance Code).
Q: Why are insurance contracts called contracts of
Note: A contract of insurance, to be binding from the date adhesion?
of application, must have been a completed contract (Perez
vs. CA, GR No. 112329, January 28, 2000.). Thus, it must A: While generally, stipulations in a contract come
have all the essential elements of a valid contract as about after deliberate drafting by the parties thereto,
enumerated in Art. 1318 of the New Civil Code
there are certain contracts almost all the provisions
1. Subject matter in which the insured has an insurable of which have been drafted only by one party, usually
interest; a corporation. Such contracts are called contracts of
2. Consideration, which is the premium paid by the adhesion, because the only participation of the party
insured, for the insurers promise to indemnify is the signing of his signature or his 'adhesion'
the former upon the happening of the event or thereto. Insurance contracts fall into this category
peril insured against; (Sweet Lines, Inc. vs. Teves, GR No. L-37750, May 19,
3. Meeting of minds of the parties. 1978)

Q: What is meant by doing an insurance business An illustration of a contract of adhesion is when the
or transacting an insurance business? insurer used fine print letters in conditions stated in
a contract of insurance (Ibid).
A: It is: (ISRA)
1. making or proposing to make, as Insurer, any Q: What are the rules in the construction/
insurance contract; interpretation of insurance contracts?
2. making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as A: By reason of the exclusive control of the insurance
merely incidental to any other legitimate company over the terms and phraseology of the
business or activity of the surety; contract, the ambiguity must be held strictly against
3. doing any kind of business, including a the insurer and liberally in favor of the insured (Qua
reinsurance business, specifically Recognized as Chee Gan v Law Union and Rock Insurance, supr.).
constituting the doing of an insurance business.
4. doing or proposing to do any business in However, if the terms, which the parties themselves
substance equivalent to Any of the foregoing in a have used, are clear and unambiguous, they must be
manner designed to evade the provisions of the taken and understood in their plain, ordinary and
Insurance Code. (Sec. 2[2], ibid.) popular sense (Sun Life Office, Ltd. vs. CA, 195 SCRA
Note: In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the making of Q: Who are parties in an insurance contract?
the insurance contracts, agreements or transactions or that
no separate or direct consideration is received therefor,
shall NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an 1. Insurer party who assumes or accepts the risk
insurance business. (Ibid.) of loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event.



Q: What is the event or peril insured against?

2. Insured person in whose favor the contract is
operative and is indemnified against. A: It is any contingent or unknown event, whether
past or future, which may damnify a person having an
Note: The insured is not always the person to whom insurable interest, or create a liability against him
the proceeds are paid. subject to the provisions of Chapter I of the Insurance
Code. (Sec. 3, Insurance Code.)
3. Assured/Beneficiary- a person designated by the
terms of the policy to receive the proceeds of the Q: Can a minor enter into an insurance contract?
insurance. He may be the insured or a third party
in the contract for whose benefit the policy is A: No. Minors can no longer enter into insurance
issued and to whom the loss is payable. contracts. The exception under the (Sec. 3) Insurance
Code is no longer controlling because the age of
Q: Who may be an insurer? majority is now 18 years (RA No. 6809). (Sundiang
A: Every person, partnership, association, or and Aquino, Reviewer on Commercial Law, 2009 Ed.,
corporation duly authorized (by the Insurance pg. 90.)
Commission) to transact insurance business may be
an insurer (Sec. 6, Insurance Code.).
Q: Can games of chances be insured?
Q: Who may be insured?
A: No. An insurance for or against the drawing of any
A: Anyone except a public enemy may be insured lottery, or for or against any chance or ticket in a
(Sec. 7, Insurance Code.). lottery drawing a prize is not authorized (Sec. 4,
Insurance Code).
Note: A public enemy is a nation at war with the Philippines
and every citizen or subject of such nation. It does not ELEMENTS OF CONTRACT OF INSURANCE
include mobs, thieves or robbers (Bouviers Law Dictionary).
Q: What are the elements of a contract of
Note: If majority of the stockholders of the respondent insurance?
corporation were German subjects who became an enemy
corporation upon the outbreak of the war between the A:SPEAR
United States and Germany, it stands to reason that an
1. Scheme to distribute losses Such assumption of
insurance policy ceases to be allowable as soon as an
insured becomes a public enemy. The respondent having risk is part of a general scheme to distribute actual
become an enemy corporation on December 10, 1941, the losses among a large group or substantial number
insurance policy issued in its favor on October 1, 1941, by a of persons bearing a similar risk.
Philippine corporation had ceased to be valid and
enforceable, and since the insured goods were burned after 2. Payment of premium As consideration for the
December 10, 1941, and during the war, the respondent insurers promise, the insured makes a ratable
was not entitled to any indemnity under said policy from contribution called premium, to a general
the petitioner. However, elementary rules of justice (in the insurance fund.
absence of specific provision in the Insurance Law) require
that the premium paid by the respondent for the period
covered by its policy from December 11, 1941, should be 3. Existence of insurable interestThe insured
returned by the petitioner (Filipinas Compana de Seguros v. possesses an interest of some kind susceptible of
Christern, Huenfeld and Co., Inc., G.R. No. L-2294 May 25, pecuniary estimation, known as insurable
1951). interest.

Q: What is the subject matter of a contract of Note: In general (except in life insurance policies), a
insurance? person is deemed to have an insurable interest in the
subject matter insured where he has a relation or
connection with or concern in it that he will derive
A: Anything having an appreciable pecuniary value,
pecuniary benefit or advantage from its preservation and
which is subject to loss or deterioration or of which will suffer pecuniary loss from its destruction or injury by
one may be deprived so that his pecuniary interest is the happening of the event insured against.
or may be prejudiced.
Note: A life insurance policy may be taken by the creditor
on the life of the debtor to the extent of the debt owed
by the debtor



4. Assumption of Risk The insurer assumes that risk to give or do something upon the happening of an
of loss for a consideration. event which is uncertain, or which is to occur at an
indeterminate time (Art. 2010, NCC).
5. Risk of loss The insured is subject to a risk of loss
through the destruction or impairment of that 4. Unilateral It imposes legal duties only on
interest by the happening of designated peril. insurer who promises to indemnify in case of
Note: The inherent uncertainty of events is normally
described in terms of risk. A contract possessing only the Note: It is executed as to the insured after the
last three elements enumerated above is a risk-shifting payment of the premium, and executory on the part
device, but NOT a contract of insurance which is a risk- of the insurer in the sense that it is not executed
distributing device (De Leon, The Insurance Code of the until payment for a loss.
Philippines Annotated, 2006 Ed., pg. 22.).
5. Conditional It is subject to conditions the
Consequently, however, the existence of insurance could principal one of which is the happening of the
have the perverse effect of increasing the probability of event insured against.
loss. This is when the insured, having in mind the
indemnification for loss or damage caused by the
6. Contract of indemnity Recovery is
happening of the event insured against, would have
reduced incentive to take steps to protect himself or his
commensurate with the amount of the loss
property, subject of insurance. This phenomenon is suffered.
called moral hazard (ibid, pg. 28.).
GR: The insurer promises to make good only
XPN: The principle is not applicable to life and
Q: What are the characteristics of an insurance accident insurance where the result is death
contract? because life is not capable of pecuniary
estimation. The only situation where the
A: principle of indemnity is applicable to life
1. Consensual It is perfected by the meeting of insurance is when the interest of a person
the minds of the parties as to the object, cause insured is capable of exact pecuniary
and consideration of the insurance contract. measurement. An example would be in a case
There should be acceptance of the application where a creditor insures the life of his debtor
for insurance. to the extent of the latters debt to the
2. Voluntary The parties may incorporate such
terms and conditions as they may deem 7. Personal Each party having in view the
convenient: Provided they do not contravene character, credit and conduct of the other.
any provision of law and are not opposed to
public policy, law morals, good customs, or 8. Property Since insurance is a contract, it is
public order. property in legal contemplation.

GR: The taking out of an insurance contract is 9. Risk-distributing device Insurance serves to
not compulsory. distribute the risk of economic loss among as
XPN: Liability insurance may be required by law many as possible of those who are subject to
in certain instances (E.g. compulsory the same kind of loss.
motor vehicle liability insurance, or
employees under Labor Code, or as a 10. Onerous there is a valuable consideration
condition to granting a license to called the premium.
conduct a business or calling affecting
the public safety or welfare). CLASSES OF INSURANCE

3. Aleatory Liability of the insurer depends 1. Life insurance

upon some contingent event. a. Individual life (Secs. 179-183, 227.)
b. Group life (Sec. 50, last par., 228.)
Note: An aleatory contract is a contract where one c. Industrial life (Secs. 229-231.)
or both of the parties reciprocally bind themselves



2. Non-Life Insurance transportation, including dry docks and

a. Marine (Secs. 99-166.) marine railways, dams and appurtenant
b. Fire (Secs. 167- 173.) facilities for the control of waterways.
c. Casualty (Sec. 174.)
2. Marine protection and indemnity insurance. (Sec.
3. Contracts of suretyship or bonding. (Secs. 175- 99, Insurance Code.)
178) (De Leon, supra).
Note: From the foregoing enumeration, marine insurance
4. Compulsory Motor Vehicle Liability Insurance now includes, not only risks connected with marine
navigation, but which are otherwise connected therewith
such as insurance of aircraft, goods while being packed or
assembled, injury to passengers, precious stones, jewels,
jewelry whether in the course of transportation or not.
Q: What does marine insurance include? (Perez, Quizzer and Reviewer on Commercial Laws, Vol. 1,
2010 ed.).
A: It includes:
Cargo can be the subject of marine insurance, and once it is
1. Insurance against loss or damage to: entered into, the implied warranty of seaworthiness
immediately attaches to whoever is insuring the cargo,
a. Vessels, craft, aircraft, vehicles, goods, freights, whether he be the ship owner or not (Roque v. IAC, GR No.
L-66935, Nov. 11, 1985).
cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
Q: What is meant by Marine protection and
choses in action, evidences of debts,
indemnity insurance?
valuable papers, bottomry, and
respondentia interests and all other kinds of
A: Insurance against legal liability of the insured for
property and intersts therein, in respect to,
loss, damage, or expense incident to ownership,
appertaining to or in connection with any
operation, chartering, maintenance, use, repair, or
and all risks or perils of navigation, transit or
construction of any vessel, craft or instrumentality in
transportation, or while being assembled,
use of ocean or inland waterways, including liability
packed, crated, baled, compressed or
of the insured for personal injury, illness or death or
similarly prepared for shipment or while
for loss of or damage to the property of another
awaiting shipment, or during any delays,
person (Sec. 99, [2], Insurance Code).
storage, transshipment, or reshipment
incident thereto, including war risks, marine
Q: What are the two major divisions of Marine
builders risks and all personal property
floater risks;
b. Person or property in connection with or
appertaining to a marine, inland marine,
1. Ocean marine insurance covers primarily sea
transit or transportation insurance, including
perils of ships and cargoes. Scope: GELS
liability for loss of or damage arising out of
or in connection with the construction,
a. Goods or cargoes
repair, operation, maintenance or use of the
b. Earnings such as freight, passage money
subject matter of such insurance (but not
c. Liability incurred by reason of maritime
including life insurance or surety bonds nor
insurance against loss by reason of bodily
d. Ships or hulls
injury to any person arising out of
ownership, maintenance or use of
Note: The insurer is liable only for such losses or
automobiles); damages proximately caused by the perils insured
c. Precious stones, jewels, jewelry, precious against (De Leon, supra, pg. 312.).
metals, whether in course of transportation
or otherwise; 2. Inland marine insurance covers primarily the
d. Bridges, tunnels and other instrumentalities land or over the land transportation perils of
of transportation and communication property shipped by railroads, motor trucks,
(excluding buildings, their furniture and airplanes, and other means of transportation. It
furnishings, fixed contents and supplies held also covers risks of lake, river, or the other inland
in storage); piers, wharves, docks and slips, waterway transportation and other waterborne
and other aids to navigation and perils outside of those risks that fall definitely



within the ocean marine category. Classes: Pit-

BaFF Q: What does perils of the ship mean?

a. Property In Transit Provides protection to A: It is a loss which, in the ordinary course of events,
the property frequently exposed to loss results from the: NON
while it is being transported from one 1. Natural and inevitable action of the sea;
location to another. 2. Ordinary wear and tear of the ship;
3. Negligent failure of the ships owner to provide
b. Bailee liability Provides protection to the vessel with proper equipment to convey the
persons who have temporary custody of the cargo under ordinary conditions.
goods or personal property of others, such
as carriers, laundrymen, warehousemen, and Q: A marine insurance policy on a cargo states that
garagekeepers. the insurer shall be liable for losses incident to
perils of the sea. During the voyage, seawater
c. Fixed transportation property Covers entered the compartment where the cargo was
bridges, tunnels and other instrumentalities stored due to the defective drainpipe of the ship.
of transportation and communication, The insured filed an action on the policy for recovery
although as a matter of fact they are fixed of the damages caused to the cargo. May the
property. They are so insured because they insured recover damages? (1998 Bar Question)
are held to be an essential part of
transportation system. A: No. The proximate cause of the damage to the
cargo insured was the defective drainpipe of the ship.
d. Floater Provides insurance to follow the This is peril of the ship, and not peril of the sea. The
insured property wherever it may be located defect in the drainpipe was the result of the ordinary
subject always to the territorial limits of the use of the ship. To recover under a marine insurance
contract. (De Leon, supra, pg.317.) policy, the proximate cause of the loss or damage
must be peril of the sea.
Q: What is the risk insured against in marine
insurance? Q: What is an all risks marine insurance policy?

A: GR: In the usual form of a marine policy, the risks A: GR: It is that which insures against allcauses of
insured against are only perils of the sea. conceivable loss or damage.

Note: The insured is bound to prove that the XPN:

cause of the loss is a peril of the sea. 1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the
XPN:When the insurance is an all risk policy and part of the insured. (Choa Tiek Seng v. CA.)
thus covers even perils of the ship.
Note: An all risks policy grants greater protection than
XPN to XPN: When the risks are expressly excepted by that afforded by the perils clause (De Leon, supra, pg.
the all risk policy. 313).

Note: The burden rests on the insurer to prove that The insured under an "all risks insurance policy" has the
the loss is caused by a risk that is excluded (Sundiang, initial burden of proving that the cargo was in good
supra. Pg. 136, citing Go Tiaco Y Hermanos vs. Union condition when the policy attached and that the cargo was
Insurance Society of Canton, 40 Phil. 40;Filipino damaged when unloaded from the vessel; thereafter, the
Merchants Ins. Co. vs. CA, 179 SCRA 638; and Choa burden then shifts to the insurer to show the exception to
Tiek Seng vs. CA, 183 SCRA 223 [1990].). the coverage (Filipino Merchants Insurance Co. vs. CA, 179
SCRA 638).
Q: What does the phrase perils of the sea or perils
of navigation mean? Q: What is the extent of the insurable interest of the
A: It includes only those casualties due to the: WiN
1. Unusual violence or extraordinary action of WInd A:
and wave, or 1. Ship owner
2. Other extraordinary causes connected with a. Over the value of the vessel, even when it
Navigation. (De Leon, supra, pg.310.) has been chartered by one who covenants to



pay him its value in case of loss. In such a Q: When is insurable interest in expected freightage
case, the insurer shall be liable for only that if there is no charter party?
part of the loss which the insured cannot
recover from the charterer. (Sec. 100, A: When there is no charter party and the price is to
Insurance Code.) be paid for the carriage of goods, from the time said
b. If hypothecated by a bottomry loan, the goods are actually on board the vessel, or if there is
insurable interest is only the excess of the some contract for putting them on board, from the
value of the vessel over the amount secured time both ship and goods are ready for the specified
by bottomry. (Sec. 101, Insurance Code.) voyage (ibid)
c. He also has an insurable interest on
expected freightage. (Sec. 103, Insurance Q: What are the instances when there is no
Code.) insurable interest in freight?

2. Cargo owner over the cargo and expected A:

profits. (Sec. 105, Insurance Code.) 1. When there is no contract and no part of the
goods expected to be carried are on board,
3. Charterer over the vessel, to the extent that he although there are goods ready for shipment or
is liable to be damnified by its loss. (Sec. 106, the master is provided with funds for the
Insurance Code.) purpose of purchasing a cargo.
2. Where the vessel is a mere seeking ship, the
4. Creditor/lender over the amount of the loan. owner has no insurable interest in freight to be
earned on goods not loaded.
Q: What is a loan on bottomry or respondentia?
Note: A seeking ship is a vessel looking for cargo to
A: A loan in which under any condition whatever, the be transported (De Leon, supra, pg. 323.)
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of Q: When does insurable interest in expected profits
the goods on which it is made or of the price they exist?
may receive in case of accident. (Art. 719, Code of
Commerce.) A:
1. When the interest in the thing involved is based
Q: What is difference between a loan on bottomry on a legal right.
and respondentia? 2. When the interest in thing involved is based on
valuable consideration.
A: They are basically the same. The only distinction is,
a loan on bottomry involves a vessel as a security, Q: What are the special marine insurance contracts
while a respondentia has cargo as its security. (Perez, and clauses?
supra, pg. 153.)
Q: What is freightage? 1. All-risks policy

A: It signifies all the benefits derived by the owner, 2. Barratry clause a clause which provides that
either from the chartering of the ship or its there can be no recovery on the policy in case
employment for the carriage of his own goods or of any willful misconduct on the part of the
those of others. (Sec. 102, Insurance Code.) master or crew in pursuance of some unlawful
or fraudulent purpose without the consent of
Q: When does insurable interest in expected the owner and to the prejudice of owners
freightage in a charter party exist? interest. It requires an intentional and willful
act in its commission. No honest error or
A: It exists from the time the vessel has broken judgment or mere negligence, unless criminally
ground on the chartered voyage (Sec. 104, Insurance gross, can be barratry. (Roque v. IAC, G.R. No.
Code). L- 66935, Nov. 11, 1985.)

3. Inchmaree clause a clause which makes the

insurer liable for loss or damage to the hull or
machinery arising from the:



a. Negligence of the captain, engineers, 5. The use of false and simulated papers. (Sec. 110)
b. Explosion, breakage of shafts; and Q: What are the distinctions on concealment in
c. Latent defect of machinery or hull. marine insurance and other property insurance?
(Thames and Mersey Marine Insurance
Co v. Hamilton Fraser and Co [1887] 12 A:
4. Sue and labor clause a clause which makes The information or belief
the insurer liable for The information or the
of a 3 party is not
a. all the expenses attendant upon a loss belief or expectation of 3
material and need not be
which forces the ship into port to be persons in reference to a communicated, unless it
repaired; and material fact is material proceeds from an agent
b. expenses incurred, where it is stipulated in and must be of the insured whose
the policy that the insured shall labor for communicated. duty is to give
the recovery of the property. (Sec. 163, information.
Insurance Code.)
The concealment of any
fact in relation to any of Concealment of any
Note: Insurer is liable for such expense, in either
the matters stated in Sec. material fact will vitiate
case, being in addition to a total loss, if that
afterwards occurs (ibid.) 110 does not vitiate the the entire contract,
entire contract but merely whether or not the loss
Q: What is concealment in marine insurance? exonerates the insurer results from the risk
from a risk resulting from concealed.
A: It is the failure to disclose any material fact or the fact concealed.
circumstance which in fact or law is within, or which
ought to be within the knowledge of one party and of Q: What is the effect of falsity of a representation by
which the other has no actual or presumptive the insured?
knowledge. (De Leon, supra, pg. 328.)
A: It depends:
Note: Information of the belief or expectation of a third
person, in reference to a material fact, is material. (Sec. 1. Promissory Representation: If a representation by
108, Insurance Code.) the insured is intentionally false in any material
respect or in respect of any fact on which the
Q: When is the insured presumed to have character and nature of the risk depends, the
knowledge of a prior loss in marine insurance? insurer may rescind the entire contract. (Sec. 111,
Insurance Code.)
A: The insured is presumed to have knowledge of a
prior loss at the time of insuring,if the information 2. Representation of Expectation: The eventual
might possibly have reached him in the usual mode of falsity of a representation as to expectation does
transmission and at the usual rate of communication. not, in the absence of fraud, avoid a contract of
(Sec. 109) marine insurance. (Sec. 112, Insurance Code.)

Note: Presumption is rebuttable. Q: What are the implied warranties in marine

Q: What matters, when concealed, do not vitiate
the entire insurance contract, but merely exonerates A: SINAI
the insurer from a loss resulting from the risk 1. Seaworthiness. (Sec. 113 to 119)
2. Non-engagement from Illegal venture.
1. National character of the insured; 3. Warranty of Neutrality The ship will carry the
2. The liability of the thing insured to capture and requisite documents too show the nationality or
detention; neutrality of the ship or its cargo and will not
3. The liability to seizure from breach of foreign carry any documents that cast reasonable
laws of trade; suspicion on it if the nationality or neutrality of
4. The want of necessary documents; and



the ship or its cargo is expressly warranted. (Sec. Q: What is the effect of the admission of
120) seaworthiness by the insurer?

4. Non-deviation from the Agreed voyage. (Secs. A: If the policy provides that the seaworthiness of the
123, 124, 125) vessel as between insured and insurer is admitted,
the issue of seaworthiness cannot be raised by the
5. Presence of Insurable interest insurer without showing concealment or
misrepresentation by the insured (Phil. American
Q: When is a ship seaworthy? General Insurance Co. v. CA, G.R. No. 116940, June 11,
A: A ship is seaworthy when reasonably fit to perform
the service and to encounter the ordinary perils of Q: When is seaworthiness admitted by the insurer?
the voyage contemplated by the parties to the policy.
(Sec. 114, Insurance Code.) A: It is when:
1. The warranty of seaworthiness is to be taken as
Q: What is the scope of the seaworthiness of a fulfilled; or
vessel? 2. The risk of unseaworthiness is assumed by the
insurer. (ibid.)
A: A warranty of seaworthiness extends not only to
the condition of the structure of the ship itself, but Q: What is the effect if unseaworthiness is unknown
requires that it be properly laden, and provided with to the owner of the cargo?
a competent master, a sufficient number of
competent officers and seamen, and the requisite A: It is immaterial in ordinary marine insurance and
appurtenances and equipment, such as ballasts, may not be used by him as a defense in order to
cables and anchors, cordage and sails, food, water, recover on the marine insurance policy. It becomes
fuel and lights, and other necessary or proper stores the obligation of a cargo owner to look for a reliable
and implements for the voyage. (Sec. 116, Insurance common carrier, which keeps its vessels in seaworthy
Code.) conditions. The shipper may have no control over the
vessel but he has control in the choice of the
Q: When is the warranty of seaworthiness complied common carrier that will transport his goods (Roque
with? v. IAC, G.R. No. L- 66935, Nov. 11, 1985)

A: GR: It is complied with if the ship is seaworthy at Q: What is the effect when the ship becomes
the time of the commencement of the risk. (Sec. 115, unseaworthy during the voyage?
Insurance Code.)
A: An unreasonable delay in repairing the defect
XPN: exonerates the insurer on ship or shipowner's
1. In the case of time policy- the ship must be interest from liability from any loss arising therefrom.
seaworthy at the commencement of every (Sec. 118., Insurance Code.)
voyage she may undertake. (Sec. 115, [a])
Q: What is the express warranty as to nationality
2. In the case of cargo policy- each vessel upon and neutrality?
which cargo is shipped or transshipped must
be seaworthy at the commencement of each A:
particular voyage. (Sec. 115, [b]) 1. As to nationality imports that the vessel
belongs to the subject of a particular country.
3. In the case of voyage policy contemplating a 2. As to neutrality imports that the property
voyage in different stages- the ship must be insured is neutral in fact, that is it belongs to
seaworthy at the commencement of each neutrals and that no act of insured or his agent
portion of the voyage. (Sec. 117, Insurance shall be done which can legally compromise its
Code.) neutrality.



Q: What is the rule regarding voyage in marine

insurance? Q: What are the distinctions between actual and
constructive loss?
A: When the voyage contemplated by a marine
insurance policy is described by the places of A:
beginning and ending, the voyage insured in one CONSTRUCTIVE TOTAL
which conforms to the course of sailing fixed by ACTUAL TOTAL LOSS
mercantile usage between those places. (Sec. 121, It exists when the It is one which the loss,
Insurance Code.) subject matter of the although not actually total,
insurance is wholly is of such a character that
Note: If the course of sailing is not fixed by mercantile
destroyed or lost or the insured is entitled, if he
usage, the voyage insured is that way between the places
specified, which to a master of ordinary skill and discretion, when it is so damaged thinks fit, to treat it as total
would mean the most natural, direct and advantageous. as no longer to exist in by abandonment. (Sec. 131,
(Sec. 122, Insurance Code.) its original character. Insurance Code.)
Abandonment by the
The insured has the
Q: What is deviation? insured is necessary in
right to claim the whole
order to recover for a total
insurance without
A: It is a departure from the course of the voyage loss (Sec. 138, Insurance
notice of abandonment.
insured, mentioned in Sec. 121 and Sec. 122, or an Code.) in the absence of
(Sec. 135, Insurance
unreasonable delay in pursuing the voyage or the any provision to the
commencement of an entirely different voyage. (Sec. contrary in the policy.
123, Insurance Code.)
Q: What constitutes actual total loss?
Q: When is a deviation proper?
A: A deviation is proper: 1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by
1. When caused by circumstances over which being broken up;
neither the master nor the owner of the ship has 3. Any damage to the thing which renders it
any control; valueless to the owner for the purpose for which
2. When necessary to comply with a warranty, or to he held it; or
avoid a peril, whether or not peril is insured 4. Any other event which effectively deprives the
against; owner of the possession, at the port of
3. When made in good faith, and upon reasonable destination, of the thing insured. (Sec. 130,
grounds of belief in its necessity to avoid a peril; Insurance Code.)
4. When made in good faith, for the purpose of Note: Complete physical destruction is not essential to
saving human life or relieving another vessel in constitute actual total loss.
distress. (Sec. 124, Insurance Code.)
An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss, which
Q: When is deviation improper? necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
A: Every deviation not specified in Sec. 124 is insured. (Sec. 137, Insurance Code.)
improper. (Sec. 125, Insurance Code.)
Q: What is constructive total loss?
Note: In improper deviation, an insurer is not liable for any
loss happening to the thing insured subsequent to an A: Constructive total loss is when
improper deviation. (Sec. 126, Insurance Code.)
1. More than thereof in value is actually lost, or
Q: What are the kinds of losses?
would have to be expended to recover it from
the peril
2. The thing insured is injured to such extent as to
1. Total, which may be:
reduce its value more than
a. Actual total loss
3. The thing insured is a ship, and the contemplated
b. Constructive total loss
voyage cannot be lawfully performed without
2. Partial



incurring either an expense to the insured of

more than the value of the thing abandoned or Q: What are kinds of average?
a risk which a prudent man would not take under
the circumstances; or A:
4. The thing insured, being cargo or freightage, and 1. Gross or general averages damages or
the voyage cannot be performed, nor another expenses which are deliberately caused by the
ship procured by the master, within a reasonable master of the vessel or upon his authority, in
time and with reasonable diligence, to forward order to save the vessel, her cargo or both at the
the cargo, without incurring the like expense or same time from a real and known risk. (Art. 811,
risk mentioned in no. (3). But freightage cannot ibid.); and
in any case be abandoned (and thus declared
constructively lost) unless the ship is also Note: This kind of average must be borne equally by all
abandoned. (Sec. 131 and 139, Insurance Code.) of the interests concerned in the venture. (De Leon,
supra, pg. 351.)
Q: When is actual loss presumed?
2. Simple or particular averages they include all
A: It may be presumed from the continued absence damages and expenses caused to the vessel or to
of a ship without being heard of. The length of time her cargo which have not inured to the common
which is sufficient to raise his presumption depends benefit and profit of all the persons interested in
on the circumstances of the case (Sec. 132, Insurance the vessel and her cargo. (Art. 809, ibid.).
Note: This kind of average is suffered by and borne
alone by the owner of the cargo or of the vessel, as the
Q: In case of reshipment, what happens the liability
case may be. (De Leon, supra, pg. 351.)
of the insurer as regards the cargo?
Q: What is the liability of the insurer as to averages?
A: When a ship is prevented, at an intermediate port,
from completing the voyage, by the perils insured
A: GR: The marine insurer is liable both for general
against, the liability of a marine insurer on the cargo
average and particular average loss.
continues after they are thus reshipped. The insurer
may, however, require additional premium if the
XPN: When there is Free From Particular
hazard be increased by his extension of liability (Sec.
Average Clause in the policy making the insurer
133, Insurance Code).
liable only for general average.
Q: What are the additional liabilities of the insurer
XPN to XPN: When particular average loss has
of goods referred to in the reshipment of cargo?
the effect of depriving the insured of the
A: The marine insurer is bound for: possession at the port of destination of the
whole of the thing insured. (Sec. 136, Insurance
1. Damages;
2. Expenses of discharging;
3. Storage;
Q: What is Free From Particular Average Clause
4. Reshipment;
5. Extra freightage; and (FFPA Clause)?
6. All other expenses incurred in saving cargo A: A clause agreed upon in a policy of marine
reshipped. (Sec. 134, Insurance Code.)
insurance in which it is stated that the insurer shall
not be liable for a particular average.
Note: Nothing in Sec. 134 and Sec. 133 shall render a
marine insurer liable for any amount in excess of the
insured value or, if there be none, of the insurable value. Q: What is abandonment?

Q: What is average? A: It is the act of the insured by which, after a

constructive total loss he declared the relinquishment
A: It is any extraordinary or accidental expense to the insurer of his interest in the thing insured (Sec.
incurred during the voyage for the preservation of 138, ibid.).
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. (Art. 806, Code of Commerce.)



Q: What is the effect of a valid abandonment? 3. Mere silence of the insurer for unreasonable
length of time after notice. (Sec. 150, Insurance
A: It is equivalent to a transfer by the insured of his Code.)
interest, to the insurer, with all the chances of
recovery and indemnity (Sec. 146, ibid.) Q: What are the effects of acceptance of
Q: What are the requisites for the validity of
abandonment? A:
1. The insurer becomes at once liable for the whole
A: amount of the insurance and also becomes
1. There must be an actual relinquishment by the entitled to all rights which insured possessed in
person insured of his interest in the thing the thing insured. (Sec. 146, ibid.)
insured. (Sec. 138, ibid.) 2. It fixes the rights of the parties; whether express
2. There must be a constructive total loss. (Sec. 139, or implied, is conclusive upon them, (Sec. 151,
ibid.) ibid.) and irrevocable. (Sec. 152, ibid.)
3. The abandonment must neither be partial nor 3. It stops the insurer to rely on any insufficiency in
conditional. (Sec. 140, ibid.) the form, time, or right, of abandonment.(Sec.
4. It must be made within a reasonable time after 143, 141, 139, ibid.) Whether the insured has a
receipt of reliable information of the loss (Sec. right to abandon is immaterial where the
141, ibid.) abandonment is accepted and there is no fraud.
5. It must be factual. (Sec. 142, ibid.) (New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US]
6. It must be made by giving notice thereof to the 378.)
insurer which may be done orally or in writing; 4. On accepted abandonment of a ship, the
Provided, that if the notice be done orally, a freightage earned subsequent to the loss belongs
written notice of such abandonment shall be to the insurer of the ship; but freightage earned
submitted within 7 days from such oral notice. previously belongs to the insurer of said
(Sec. 143, ibid.) freightage who is subrogated to the rights of the
7. The notice of abandonment must be explicit and insured up to the time of the loss. (Sec. 153, ibid.)
must specify the particular cause of
abandonment. (Sec. 144, ibid.) XPN: Where the ground upon which it was made
proves to be unfounded. (Sec. 152, ibid.) Under Sec.
Note: Such notice must state only enough to show that 145, abandonment can be sustained only upon the
there is probable cause for abandonment, but need not be ground specified in the notice thereof.
accompanied with proof of interest or of loss.
Q: What is the effect of the insurers refusal to
Q: Who may make notice of abandonment? accept a valid abandonment?

A: The abandonment need not necessarily be made A: If the insurer refuses to accept a valid
by the insured but may be made by an authorized abandonment, he is liable as upon an actual total
agent, and an agent having an authority to insure has loss, deducting from the amount any proceeds of the
prima facie an authority to abandon (De Leon, supra, thing insured which may have come to the hands of
pg. 361.) the insured. (Sec. 154, ibid.)

Q: To whom may notice of abandonment be made? Note: However, if the abandonment was improper, the
insured may nevertheless recover to the extent of the
A: To the insurer or his authorized agent or the damage proved (De Leon, supra, pg. 366).
broker who is the agent for both parties (ibid.)
Q: What is the effect of insureds failure to make
Q: What are the forms of acceptance of abandonment?
A: The insured has an election to abandon or not, and
A: cannot be compelled to abandon although
1. Express abandonment is proper. If the insured fails to
2. Implied from the conduct of the insurer abandon, he may nevertheless recover his actual loss
(Sec. 155, Insurance Code.).



Q: What is the measure of indemnity? Q: What is the difference between co-insurance in

Marine Insurance and in Fire Insurance?
1. Valued policy the parties are bound by the A: In Marine Insurance, there is co-insurance by
valuation, if the insured had some interest at risk and virtue of Section 157 of the Insurance Code, as long
there is no fraud (Sec. 156, ibid.) as the above-enumerated requisites are present.
Meanwhile, in fire insurance, there has to be an
2. Open policy the following rules shall apply in express stipulation to that effect. (ibid.)
estimating a loss:
Q: What is the Formula to determine the amount
i. Value of the ship- value at the beginning of the recoverable in co-insurance?
ii. Value of the cargo- actual cost to the insured, (Partial) Loss X Amount of Insurance = Amount of recovery
when laden on board, or where that cost (Insurers Liability)
cannot be ascertained, its market value at the Value of thing
time and place of shipment. The expected Insured
profits from the cargo are not considered since
they can be covered by a separate insurance.
iii. Value of freightage- gross freightage exclusive
If a vessel valued at P1M is insured for only P800, 000
of primage, which is a small compensation paid
and is damaged to the extent of P400, 000, the
by a shipper to the master of the vessel for his
insurer will be required to pay only 80% of the loss
care and trouble bestowed on the shippers
suffered, or P320,000; the other 20% or P80,000
goods and which the master is entitled to
being borne by the insured himself.
retain in the absence of an agreement to the
contrary with the owners of the vessels.
P400,000 or 2/5 X P800,000 = P320, 000
iv. Cost of insurance the cost of insurance is
always added in calculating the value of the
The insured is considered a co-insurer as to the
ship, cargo, or freightage or other subject
uninsured portion of P200,000. (1M 800,000).
matter in an open policy. (De Leon, supra, pg.
Note: If the loss is total, the insurer is liable for the full
amount of P800,000. On the other hand, if the property is
Q: What is co-insurance? insured to its full value, the insured is entitled to recover
the full amount of the partial loss of P400,000.
A: Co-insurance is a form of insurance in which the
person who insures his property for less than the Q: In case of loss, how much is the insured entitled
entire value is understood to be his own insurer for to recover if profits to be realized are separately
the difference which exists between the true value of insured?
the property and the amount of insurance.
A: Where profits are separately insured in a contract
In such a case, a marine insurer is liable upon a partial of marine insurance, the insured is entitled to
loss only for such proportion of the amount insured recover, in case of loss, a proportion of such profits
by him as the loss bears to the value of the whole equivalent to the proportion which the value of the
interest of the insured in the property insured. (Sec. property lost bears to the value of the whole. (Sec.
157, Insurance Code.). 158, Insurance Code.)

Q: What are the requisites for co-insurance? Q: When is the loss of profits conclusively
A: There is co-insurance when the following requisites
concur: A: When profits are valued and insured by a contract
1. The loss is partial; and of marine insurance, a loss of them is conclusively
2. The amount of insurance is less than the value of presumed from a loss of the property out of which
the property insured. (Sundiang, supra, pg. 140.) they were expected to arise, and the valuation fixes
their amount. (Sec. 160, Insurance Code.)



insures materials in a
Q: What does the phrase port of refuge expenses shipyard for use in
mean? constructing vessels.

A: These are the additional expenses incurred in Also where a policy

repairing the damages suffered by a vessel because of insures against fire, a
the perils insured against as well as those incurred for vessel while moored and
saving the vessel from such perils, such as the in use as a hospital.
expense of launching or raising the vessel or of (De Leon, supra, pg. 380)
towing or navigating it into port for her safety. These
are items to be borne by the insurer in addition to a Q: Why is the distinction between marine and fire
total loss if that afterwards takes place. (Sec. 163, insurance important?
Insurance Code.)
FIRE INSURANCE 1. In marine insurance, the rules on constructive
total loss (Secs. 13.1, 139, Insurance Code) and
Q: What is fire insurance? abandonment (Sec. 138, ibid.) apply but not in
fire insurance;
A: It is a contract of indemnity by which the insurer,
for a consideration, agrees to indemnify the insured 2. In case of partial loss of a thing insured for less
against loss of or damage by fire, lightning, than its actual value, the insured in a marine
windstorm, tornado or earthquake and other allied policy is a co-insurer of the uninsured portion
risks, when such risks are covered by extension to fire (Sec. 157, ibid.), while the insured may only
insurance policies or under separate policies. (Sec. become a co-insurer in fire insurance if expressly
167, ibid.) agreed upon by the parties. (Sec. 172, ibid.). (De
Leon, supra, pg. 380.)
Note: The liability of an insurer is to pay for direct loss only.
The insurer may be liable to pay for consequential or Q: What are the requisites in order that the insurer
indirect losses if covered by extension to such fire policies may rescind a fire insurance policy on the ground of
or insured under separate policy (De Leon, supra, pg. 379)
alteration made in the use or condition of the thing
Q: What are indirect losses?
1. The use or condition of the thing is specially
1. Physical damage caused to other property.
limited or stipulated in the policy;
2. Loss of earnings due to the interruption of
2. Such use or condition is altered;
business by damage to the insureds property.
3. The alteration is made without the consent of the
3. Additional expenses incurred by the insurer
following the damage to the property or
4. The alteration is made by means within the
contents by an insured peril (ibid., pg. 379-380.)
control of the insured; and
5. The alteration increases the risk. (Sec. 168,
Q: What are the distinctions of ocean marine and
Insurance Code.)
fire policies? 6. There must be a violation of a material policy
provision. (Sundiang, supra, pg. 147.)
OCEAN MARINE FIRE INSURANCE Note: A contract of fire insurance is not affected by
A policy of insurance on Where the hazard is fire any act of the insured subsequent to the execution of
a vessel engaged in alone and the subject is the policy, which does not violate its provisions even
navigationis a contract an unfinished vessel, though it increases the risk and is the cause of the
of marine insurance never afloat for a voyage, loss. (Sec. 170, Insurance Code.)
although it insures the contract to insure is a
against fire risks only. fire risk, especially in the Q: What is the effect when the insured has no
absence of an express control or knowledge of the alteration?
agreement that it shall
have the incidents of A: GR: The insurer is not relieved from liability if the
marine policy, or where it acts or circumstances by which the risk is increased



are occasioned by accident, or a cause over which the stipulation, within a reasonable time. The choice by the
insured has no control. insurer shall produce no effect except from the time it has
been communicated to the insured. (Article 1201, Civil
1. Actually known to the insured or Unless the policy has limited the cost of rebuilding to the
2. Insured is presumed to know of the alteration amount of the insurance, the insurer, after electing to
when the acts or circumstances permanently and rebuild, can be compelled to perform his undertaking, even
substantially affects the conditions of the property though the cost may exceed the original amount of
so as to constitute an increase in risk. (De Leon, insurance. (De Leon, supra, pg. 390.)
supra, pg. 383-384.)
Q: Can the insured pledge, hypothecate, or transfer
Q: What is the measure of indemnity in open and a fire insurance policy or rights thereunder?
valued policies in fire insurance?
A: Yes. He may do so after a loss has occurred and
A: even without the consent of, or notice to, the insurer.
OPEN POLICIES VALUED POLICIES (Secs. 21 and 83, Insurance Code.) In such a case, it is
The expense it would be to the The parties are not the personal contract which is being assigned, but
insured at the time of the bound by the a claim under or a right of action on the policy against
the insurer. (De Leon, supra, pg. 390.)
commencement of the fire to valuation, in the
preplace the thing lost or absence of fraud. Q: Is this right of the insured subject to any
injured in the condition in limitation?
which it was at the time of the
injury. A: Yes. Section 173 of the Insurance Code prohibits
the exercise of this right in the case where the
Q: What is the reason for a co-insurance clause in pledging, hypothecating, or transferring is made to
fire policies? any person, firm or company who acts as agent for or
otherwise represents the insurer.
A: The co-insurance clause is a clause requiring the
Note: Any such pledge, etc. shall be void and of no effect
insured to maintain insurance to an amount equal to
insofar as it may affect other creditors of the insured. (ibid.)
the value or specified percentage of the value of the
insured property under penalty of becoming co-
insurer to the extent of such deficiency. This is to
prevent the property owners from taking out such
Q: What is casualty insurance?
small amount of insurance, and thereby reducing the
premium payments and thereby increasing the rates
A: It is an insurance covering loss or liability arising
of premium for all. (De Leon, supra, pg. 388-389.)
from accident or mishap, excluding certain types of
loss which by law or custom are considered as falling
Q: Can a co-insurance exist in fire insurance even if
exclusively within the scope of other types of
without stipulation to that effect?
insurance such as fire or marine. (Sec. 174, Insurance
A: No. The insured is not a co-insurer under fire
policies in the absence of stipulation.
Q: What does a casualty insurance cover?
Q: What is an option to rebuild clause?
A: It gives the insurer the option to rebuild the 1. Employer's liability insurance
destroyed property instead of paying the amount of 2. Workmens compensation insurance
the loss or damage, notwithstanding a fixed valuation 3. Public liability insurance
in the policy. (Sec. 172, Insurance Code.) This clause 4. Motor vehicle liability insurance
serves to protect the insurer against unfairness in the 5. Plate glass insurance
appraisal and award rendered by a packed board of 6. Burglary and theft insurance
arbitrators, or in the proof of loss. 7. Personal accident and health insurance as written
by non-life insurance companies, and
Note: The insurer must exercise his option to rebuild within 8. other substantially similar kinds of insurance
the time stipulated in the policy, or in the absence of (ibid.)



occurrence of the injury or event upon which

Q: What are the two divisions of casualty insurance? the liability depends.

A: The purpose is to protect the injured person

1. Accident or health insurance Insurance against against the insolvency of the insured who
specified perils which may affect the person causes such injury and to give him a certain
and/or property of the insured. (E.g. personal beneficial interest in the proceeds of the
accident, robbery/theft insurance) policy. It is as if the injured person were
especially named in the policy. (Shafer vs. RTC
2. Third party liability insurance (TPL) Insurance Judge, 167 SCRA 386 [1986].)
against specified perils which may give rise to .
liability on the part of the insured of claims for
injuries or damage to property of others. (De b. Indemnity against actual loss or payment The
Leon, supra, pg. 392.) third persons cannot proceed against the
insurer, the contract being solely to reimburse
Q: What are some rules on TPL? the insured for liability actually discharged by
him through payment to third persons, said
A: third persons recourse being thus limited to
1. Insurable interest is based on the interest of the the insured alone. (Guingon vs. Del Monte, 20
insured in the safety of the persons, and their SCRA 1043 [1967].) Prior payment by the
property, who may maintain an action against him insured is necessary to give rise to the
in case of their injury or destruction respectively. obligation of the insurer.
(ibid, pg. 394.)
Q: What is the source of liability of TPL insurance?
2. In a TPL insurance contract, the insurer assumes
the obligation by paying the injured third party to A: The insurers liability is based on contract; that of
whom the insured is liable. Prior payment by the the insured is based on tort. (Malayan Insurance Co.
insured to the injured third person is not necessary vs. CA, 165 SCRA 136 [1988].)
in order that the obligation of the insurer may
arise. The moment the insured becomes liable to Q: Lawrence, a boxer, is a holder of an accident
third persons, the insured acquires an interest in insurance policy. In a boxing match, he died after
the insurance contract which may be garnished like being knocked out by the opponent. Can his father
any other credit. (Perla Compania de Seguros, Inc. who is a beneficiary under said insurance policy
vs. Ramolete, 203 SCRA 487 [1991].) successfully claim indemnity from the insurance
company? (1990 Bar Question)
3. In burglary, robbery and theft insurance, the
opportunity to defraud the insurer (moral hazard) A: Yes. Clearly, the proximate cause of death was the
is so great that insurer have found it necessary to boxing contest. Death sustained in a boxing contest is
fill up the policies with many restrictions designed an accident. (De la Cruz v. Capital Insurance & Surety
to reduce the hazard. The purpose of the exception Co.,G.R. No. L-21574, June 30, 1966)
is to guard against liability should theft be
committed by one having unrestricted access to Q: Distinguish between the liability of the insurer
the property. (Fortune Insurance & Surety Co. vs. and that of the insured in case for indemnity in TPL?
CA, 244 SCRA 308 [1995].)
4. The right of the person injured to sue the insurer of INSURER INSURED
the party at fault (insured), depends on whether The liability is direct but Liability is direct and can
the contract of insurance is intended to benefit the insurer cannot be be held liable with all the
third persons also or only the insured. (Eulogio vs.
held solidarily liable with parties at fault.
Del Monte, GR No. L-22042, August 17, 1967.) If the
contract provides for: the insured and other
parties at fault.
a. Indemnity against third party liability The Liability is based on Liability is based on tort.
third persons to whom the insured is liable, contract
can sue directly the insurer upon the The third-party liability The liability extends to



is only up to the extent the amount of actual and accidental character of whatever followed from
of the insurance policy other damages. (Heirs Poe the known danger. (De Leon, supra, pg. 400-401.)
and that required by law v. Malayan Insurance,
3. The insureds beneficiary has the burden of proof
G.R. No. 156302, Apr. 7,
in demonstrating that the cause of death is due
2009) to the covered peril. Once that fact is
established, the burden shifts to the insurer to
Q: While driving his car along EDSA, Cesar show any excepted peril that may have been
sideswiped Roberto, causing injuries to the latter, stipulated by the parties. (Vda. De Gabriel vs. CA,
Roberto sued Cesar and the third party liability 264 SCRA 137 [1996].)
insurer for damages and/or insurance proceeds. The
insurance company moved to dismiss the complaint, SURETYSHIP
contending that the liability of Cesar has not yet
been determined with finality. Is the contention of Q: What is a contract of suretyship?
the insurer correct? (1996 Bar Question)
A: It is an agreement whereby a party called the
A: No, the contention of the insurer is not correct. surety guarantees the performance by another party
There is no need to wait for the decision of the court called the principal or obligor of an obligation or
determining Cesars liability with finality before the undertaking in favor of a third party called the
third party liability insurer could be sued. The obligee. It includes official recognizances, stipulations
occurrence of the injury to Roberto immediately gave bonds or undertakings issued by any company by
rise to the liability of the insurer under its policy. virtue and under the provisions of Act No. 536, as
Where an insurance policy insures directly against amended by Act No. 2206. (Sec. 175, Insurance Code.)
liability, the insurers liability accrues immediately
upon the occurrence of the injury or event upon Q: What is the nature of liability of surety?
which the liability depends. (Shafer vs. RTC Judge,
supra.) A: The liability of the surety or sureties shall be:

Q: What is a no action clause? 1. Solidary Joint and several with the obligor and

A: It is a requirement in a policy of liability insurance 2. Limited or fixed Limited to the amount of the
which provides that suit and final judgment be first bond (It cannot be extended by implication.).
obtained against the insured, that only thereafter can
the person injured recover on the policy. It expressly 3. Contractual It is determined strictly by the
disallows suing the insurer as co-defendant. (Guingon terms of the contract of suretyship in relation to
v. Del Monte, G.R. No. L-21806, Aug. 17, 1967) the principal contract between the obligor and
the obligee. (Sec. 176, ibid.)
Note: A no action clause must yield to the provisions of
the Rules of Court regarding multiplicity of suits. (Shafer v.
Q: What are the distinctions between suretyship and
RTC Judge, supra.)
property insurance?
Q: What are some rules in accident insurance?
1. For death or injury to be covered by the policy, INSURANCE
such should not be the natural or probable result It is an accessory contract. The principal contract
of the insureds voluntary act, or if something itself.
unforeseen occurs in the doing of the act which There are three parties: the There are only two
produces the injury, which may result to death. surety, obligor/debtor, and parties: insurer and
(Dela Cruz vs. Capitol Insurance & Surety Co., the obligee/creditor. insured
supra.) More of a credit Generally a contract of
accommodation with the indemnity
2. Suicide and willful exposure to needless peril are surety assuming primary
in pari matere because they both signify a liability
disregard for ones life. Voluntary exposure to a Surety is entitled to No right of recovery
known danger is generally held to negate the reimbursement from the for the loss the insurer
principal and his guarantors may sustain except



for the loss it may suffer when the insurer is protection of the owner against a possible default
under the contract. entitled to by the contractor or his possible failure to pay
subrogation. material, men, laborers and sub-contractors.
A bond may be cancelled by May be cancelled
or with the consent of the unilaterally either by The position of surety, therefore, is to answer for
obligee or by the the insured or by the a failure of the principal to perform in
commissioner or by the insurer on grounds accordance with the terms and specifications of
court. provided by law. the contract.
Requires acceptance of the Does not need
obligee before it becomes acceptance of any There may be two bonds:
valid and enforceable. third party.
A risk-shifting device, the A risk-distributing a. Performance bond One covering the faithful
premium paid being in the device, the premium performance of the contract; and
nature of a service fee. paid being considered
a ratable contribution b. Payment bond One covering the payment of
to a common fund. (De laborers and material men.
Leon, supra, pg. 409.)
2. Fidelity bonds They pay an employer for loss
Q: What are the rules of payment of premiums in growing out of a dishonest act of his employee.
For the purposes of underwriting, they are
A: classified as:
1. The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and a. Industrial bond One required by private
delivered to the obligor (Sec. 77, ibid.) employers to cover loss through dishonesty of
employees; and
2. The contract of suretyship or bonding shall not be
valid and binding unless and until the premium b. Public official bond One required of public
therefore has been paid. officers for the faithful performances of their
duties and as a condition of entering upon the
3. Where the obligee has accepted the bond, it shall duties of their offices.
be valid and enforceable notwithstanding that the
premium has not been paid; (Philippine Pryce 3. Judicial bonds They are those which are required
Assurance Corp. v. CA, G.R.No. 107062, February in connection with judicial proceedings. (ibid pg.
21, 1994.) 413-414.)

4. If the contract of suretyship or bond is not LIFE INSURANCE

accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount; Q: What is life insurance?

5. If the non-acceptance of the bond be due to the A: It is insurance on human lives and insurance
fault or negligence of the surety, no service fee, appertaining thereto or connected therewith. (Sec.
stamps, or taxes imposed shall be collected by the 179, Insurance Code.) It is made payable on the death
surety; and of the person, or on his surviving a specified period,
or otherwise contingently on the continuance or
6. In the case of continuing bond (for a term longer cessation of life. (Sec. 180, ibid.)
than one year or with no fixed expiration date), the
obligor shall pay the subsequent annual premium Q: Is a life insurance also a contract of indemnity?
as it falls due until the contract is cancelled. (Sec.
177, Insurance Code.) (De Leon, supra, pg. 411.) A: No. This is because of the following reasons:

Q: What are the types of surety bonds? 1. The liability in life insurance is absolutely certain
2. Amount of life insurance generally is without
A: limit
1. Contract bonds These are connected with 3. The policy is a valued policy
construction and supply contracts. They are for the



4. There is no direct pecuniary loss required. (De

Leon, supra, 417-418.) 3. The suicide is committed in the state of insanity
regardless of the date of commission, unless
Q: What are the kinds of life insurance policies? suicide is an excepted risk. (Sec. 180-A, ibid.)

A: Q: Sun Insurance Co. issued to Tan a life policy

1. Ordinary life, general life or old line policy Insured having this provision: the company shall not be
pays a premium every year until he dies. Surrender liable in respect of bodily injury consequent upon
value after 3 years. the insured person who willfully exposes himself to
needless peril except in an attempt to save human
2. Limited payment Insured pays premium for a life". Tan designated his wife, Beverly as beneficiary.
limited period. If he dies within the period, his
beneficiary is paid; if he outlives the period, he One evening, Tan, while playing with his hand gun,
does not get anything. suddenly stood in front of his secretary and pointed
the gun at her. Startled, she pushed the gun aside
3. Endowment insured pays premium for specified and said that it may be loaded. Thus, Tan, to assure
period. If he outlives the period, the face value of her that it was not loaded, pointed it at his temple.
the policy is paid to him; if not, his beneficiaries The next moment, there was an explosion and Tan
receive the benefit. slumped to the floor lifeless.

4. Term insurance insured pays premium only once, Beverly, then claimed the proceeds from Sun
and he is insured for a specified period. If he dies Insurance, but the latter rejected her claim on the
within the period, his beneficiaries benefit. If he ground that the death of Henry was not accidental.
outlives the period, no person benefits from the Beverly sued the insurer. Will Beverlys claim
insurance. prosper?

5. Industrial life entitles the insured to pay A: Beverly can recover the proceeds of the policy
premiums weekly, or where premiums are payable from the insurer. The death of the insured was not
monthly or oftener (Sundiang, supra, pg. 156-157). due to suicide or willful exposure to needless peril
which are excepted risks. The insureds act was purely
Q: What is the contract of life annuity? an act of negligence which is covered by the policy
and for which the insured got the insurance for his
A: It is a contract to pay the insured, or a named protection. In fact, he removed the magazine from
person or persons, a sum or sums periodically during the gun and when he pointed the gun to his temple
life or certain period (Perez, supra, pg. 185). he did so because he thought that it was safe for him
to do so. He did so to assure his sister that the gun
Q: What is themeasure of indemnity under a policy was harmless. There is none in the policy that would
of insurance upon life or health? relieve the insurer of liability for the death of the
insured since the death was an accident (Sun
A: GR: The measure of indemnity under a policy of Insurance v CA, G.R. Nos. 79937-38, February 13,
insurance upon life or health is the sum fixed in the 1989)
Q: X, in January 30, 2009, or two (2) years before
XPN: The interest of a person insured is susceptible reaching the age of 65, insured his life for
of exact pecuniary measurement (Sec. 183, Php20Million. For reason unknown to his family, he
Insurance Code) took his own life two (2) days after his 65th
birthday. The policy contains no excepted risk.
Q: When is the insurer liable in case of suicide? Which statement is most accurate? (2012 Bar
A: a. The insurer will be liable.
1. The suicide is committed after the policy has b. The insurer will not be liable.
been in force for a period of 2 years from the c. The state of sanity of the insured is relevant in
date of its issue or of its last reinstatement. cases of suicide in order to hold the insurer
2. The suicide is committed within a shorter period
provided in the policy.



d. The state of sanity of the insured is irrelevant in value.

cases of suicide in order to hold the insurer
The beneficiary is under no
The insured is required to
A: A. The insurer will be liable under Sec. 180-A of the obligation to prove actual
submit proof of his actual
Insurance Code. The suicide is committed after the financial loss as a result of
pecuniary loss as a
policy has been in force for a period of 2 years from the death of the insured in
condition precedent to
the date of its issue. order to collect the
collecting the insurance.
Q: What are the distinctions between life insurance
LIFE INSURANCE FIRE/MARINE INSURANCE Q: What is motor vehicle liability insurance?
It is a contract of
It is a contract of A: It is a protection coverage that will answer for legal
investment not contract of
indemnity. liability for losses and damages for bodily injuries or
property damage that may be sustained by another
Always regarded as valued
May be open or valued. arising from the use and operation of a motor vehicle
by its owner. (Compulsory Motor Vehicle Liability
May be transferred or The transferee or assignee
Insurance, pg.3, prepared and distributed by the
assigned to any person must have an insurable
Insurance Commission).
even if he has no insurable interest in the thing
interest. insured.
Q: What is the purpose of motor vehicle liability
The consent of the insurer
Consent, in the absence of insurance?
is not essential to the
waiver by the insurer, is
validity of the assignment
essential in the A: To give immediate financial assistance to victims of
of a life policy unless
assignment of the policy. motor vehicle accidents and/or their dependents,
expressly required.
especially if they are poor regardless of financial
Insurable interest in the life Insurable interest in the
capability of motor vehicle owners of operators
or health of the person property insured must
responsible for the accident sustained. (First
insured need not exist after exist not only when the Integrated Bonding Insurance Co., Inc. v. Hernando,
the insurance takes effect insurance takes effect but
G.R. No. L-51221, July 31, 1991.
or when loss occurs. also when the loss occurs.
Insurable interest need not Insurable interest must Note: The insurers liability accrues immediately upon the
have any legal basis. have a legal basis. occurrence of the injury or event upon which the liability
Contingency that is depends, and does not depend on the recovery of
contemplated is a certain The contingency insured judgment by the injured party against the insured (Shafer v.
event, the only uncertainty against may or may not Judge, RTC, 167 SCRA 386)
being the time when it will occur.
take place. Q: What is a motor vehicle?
The liability of the insurer
Liability is uncertain A: Any vehicle propelled by any power other than
to make payment is
because the happening of muscular power using the public highways, but
certain, the only uncertain
the peril insured against is excepting road rollers, trolleys cars, street sweepers,
element being when such
uncertain. sprinklers, lawn mowers, bulldozers, graders, forklifts,
payment must be made.
May be terminated by the amphibian trucks, and cranes if not used in public
insured but cannot be May be cancelled by highways, vehicles which run only on rails or tracks,
cancelled by the insurer either party and is usually and tractors, trailers and traction engines of all kinds
and is usually a long term for a term of one year used exclusively for agricultural purposes (Sec. 3[a] of
contract. RA 4136).
The loss to the
The reverse is generally Note: Trailers having any number of wheels, when
beneficiary caused by the
true of the loss of propelled or intended to be propelled by attachment to a
death of the insured can
property, i.e., it is capable motor vehicle shall be classified as separate motor vehicle
seldom be measured with no power rating (ibid.)
of pecuniary estimation.
accurately in terms of cash



Q: Who is a passenger? for death or bodily injuries. (Ins. Memo. Cir. No.
A: Any fare-paying person being transported and
conveyed in and by a motor vehicle for transportation Q: Are there any substitutes for a compulsory motor
of passengers for compensation, including persons vehicle liability insurance policy?
expressly authorized by law or by the vehicles
operator or his agents to ride without fare (Sec. 373, A: Instead of a CMVLI policy, MVOs or LTOs may
[b], Insurance Code). either:

Q: Who is a third-party? 1. Post a surety bond with the Insurance

Commissioner who shall be made the obligee or
A: Any person other than a passenger as defined in creditor in the bond in such amount or amounts
this section (ibid.) and shall also exclude a member of required as limits of indemnity to answer for the
the household, or a member of the family within the same losses sought to be covered by a CMLVI
second degree of consanguinity or affinity, of a motor policy; or
vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of 2. Make a cash deposit with the Insurance
death, bodily injury, or damage to property arising Commission in such amount or amounts required
out of and in the course of employment. (Sec. 373, as limits of indemnity for the same purpose.(Sec.
[c], ibid.) 377, ibid.)

Q: Who are required to maintain a compulsory Note: After the cash deposit or surety bond has been
motor vehicle liability insurance (CMVLI) policy to proceeded against by the Insurance Commissioner, such
operate motor vehicle/s in public highways? cash deposit shall be replenished or such surety bond shall
be restored by the MVO or LTO in the right amount/s
required as limit of liability within 60 days after impairment
or expiry, otherwise, he shall secure a CMLVI required.
1. Motor vehicle owner (MVO) (ibid.)
2. Land transportation operator (LTO) (Sec. 374,
ibid.) Q: What are the duties of MVO or LTO in
contemplation of the cancellation of the policy?
Q: Who is an owner or motor vehicle owner
(MVO)? A: Contemplating the cancellation of the policy, the
MVO or LTO shall:
A: Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land 1. Give to the insurance or surety company
Transportation Office (Sec. 373, [d], ibid). concerned a written notice of his intention to
Q: Who is a land transportation operator (LTO)? 2. Secure, before the insurance policy or surety
bond ceases to be effective, another similar
A: The owner or owners of motor vehicles for policy or bond to replace that one cancelled;
transportation of a passenger for compensation, 3. Without making any replacement, make a cash
including school buses (Sec. 373, [e], ibid). deposit in sufficient amount with the Insurance
Commissioner and secure a certification from the
Q: What is the scope of coverage required for Insurance Commissioner regarding the deposit
CMVLI? made for presentation to and filing with the Land
Transportation Office. (CMVLI, supra pg. 12) (Sec.
A: 380-381, Insurance Code.)
1. For MVOs, the coverage must be comprehensive
against third party liability for death or bodily Q: What are the effects of the cancellation of the
injuries. If the private motor vehicle is being used policy?
to transport passengers for compensation, the
coverage shall include passenger liability. A: GR: Upon receipt of the notice of such
cancellation, the Land Transportation Office shall
2. For LTOs, coverage must be comprehensive order the immediate confiscation of the plates of the
against both passenger and third-party liabilities motor vehicle concerned.



XPN: No confiscation will be ordered if said Office Note: The claimant is not free to choose from which insurer
receives any of the following: he will claim the "no fault indemnity," as the law, by using
the word "shall, makes it mandatory that the claim be
made against the insurer of the vehicle in which the
1. An evidence or proof of a new and valid CMVLI
occupant is riding, mounting or dismounting from. That
cover which may be either an insurance policy or
said vehicle might not be the one that caused the accident
guaranty in cash or surety bond; is of no moment since the law itself provides that the party
2. A signed duplicate of an endorsement or paying may recover against the owner of the vehicle
addendum issued by the insurance company responsible for the accident. (Perla Compania de Seguros,
concerned showing revival or continuance of the Inc. v. Ancheta, G.R. No. L-49599, Aug. 8, 1988.).
CMVLI cover; or
3. A certification issued by the Insurance This no-fault claim does NOTapply to property damage. If
Commissioner to the effect that a cash deposit in the total indemnity claim exceeds P15, 000 and there is
controversy in respect thereto, the finding of fault may be
the amount required as limit of indemnity has
availed of by the insurer only as to the excess. The first P15,
been made with him by the MVO or LTO. (CMVLI,
000 shall be paid without regard to the fault. (CMVLI, supra,
supra, p. 12, Sec. 380, Insurance Code.) pg.13)

Q: What is a no fault indemnity clause? (1994 Bar Q: X is a passenger of a jeepney for hire being driven
Question) by Y. The jeepney collided with another passenger
jeepney being driven by Z who was driving
A: It is a clause where the insurer is required to pay a recklessly. As a result of the collision, X suffered
third party injured or killed in an accident without the injuries. Both passenger jeepneys are covered by
necessity of proving fault or negligence on the part of Comprehensive Motor Vehicular Insurance
the insured. There is a stipulated maximum amount Coverage. If X wants to claim under the "no fault
to be recovered. indemnity clause", his claim will lie (2012 Bar
Q: What are the rules under the no fault indemnity
clause? A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. Article 378
A: (iii) of the Insurance Code states that in the case of an
1. The total indemnity in respect of any one person occupant of a vehicle, the claim shall lie against the
shall not exceed P15,000 for all motor vehicles (Ins. insurer of the vehicle in which the occupant is riding,
Memo. Circ. No. 4-2006) mounting or dismounting from.

2. Proof of loss: Q: What is the authorized driver clause?

a. Police report of accident
b. Death certificate and evidence sufficient to A: It indemnifies the insured owner against loss or
establish proper payee damage to the car but limits the use of the insured
c. Medical report and evidence of medical or vehicle to:
hospital disbursement. (Sec. 378 [ii], Insurance 1. The insured himself; or
Code.) 2. Any person who drives on his order or with his
permission; provided, that the person driving is
3. Claim may be made against one motor vehicle only. permitted to drive the motor vehicle in
(Sec. 378 [iii], ibid.) accordance with the law, and is not disqualified.
(Villacorta v. Insurance Commissioner, G.R. No.
4. In case of an occupant of a vehicle,the claim shall 54171, October 28, 1980.)
lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from. Note: The main purpose of this clause is to require a person
(ibid.) other than the insured, who drives the car on the insureds
order or with his permission, to be duly licensed drivers and
5. In any other case, claim shall lie against the insurer have no disqualification to drive a motor vehicle. (Villacorta
of the directly offending vehicle. (ibid.) v. Insurance Commission, G.R. No. L-54171, Oct. 28, 1980)

6. In all cases, the right of the party paying the claim Q: What is the theft clause?
to recover against the owner of the vehicle
responsible for the accident shall be maintained. A: It is that which includes theft as among the risks
(ibid.) insured against. Where a car is unlawfully and



wrongfully taken without the knowledge and consent

of the owner, such taking constitutes theft and it is Note: The existence of insurable interest is a matter of
the theft clause, not the authorized driver clause public policy and is not susceptible to the principle of
which should apply (Perla Compania de Seguros, Inc. estoppel. The existence of an insurable interest gives a
person the legal right to insure the subject matter of the
v. CA, 208 SCRA 487 [1992]).
policy of insurance (ibid.)

Q: What are the limitations with respect to CMVLI

Q: When is the insured deemed to have insurable
cover solicitation?
interest over something?
A: GR: A person is deemed to have an insurable
1. No government office or agency having the
interest in the subject matter insured where he has a
duty of implementing the provisions of the
relation or connection with or concern in it that he
Insurance Code on CMVLI shall act as agent
will derive pecuniary benefit or advantage from its
in procuring the insurance policy or surety
preservation and will suffer pecuniary loss from its
bond required;
destruction or injury by the happening of the event
insured against.
2. No official or employee of such office or
agency shall similarly act as such agent; and
XPN: To have an insurable interest in the life of a
person, the expectation of benefit from the
3. The commission of an agent procuring the
continued life of that person need not necessarily
corresponding insurance policy or surety
be of pecuniary nature. (De Leon, supra, pg. 83.)
bond shall in no case exceed 10% of the
amount of premiums therefore. (Sec. 387,
Q: Differentiate insurable interest in life insurance
Insurance Code).
and insurable interest in property insurance.
Q: When a passenger jeepney, insured but with an
authorized drivers clause and was driven by a
driver who only holds a Traffic Violation Report
(TVR) because his license was confiscated, met an
accident, may the owner of the jeepney claim from
As to extent GR: Every Limited to the
the insurance company? (2003 Bar Question)
person has an actual value of the
unlimited property
A: Yes. The fact that the driver was merely holding a
TVR does not violate the condition that the driver
interest in his
should have a valid and existing drivers license.
own life. (De
Besides, such a condition should be disregarded
Leon, supra, pg.
because what is involved is a passenger jeepney, and
what is involved here is not own damage insurance
XPN: Where life
but third party liability where the injured party is a
insurance is
third party not privy to the contract of insurance.
taken out by a
creditor on the
life of the
Q: What is insurable interest?
interest is
A: An insurable interest is that interest which a
limited to the
person is deemed to have in the subject matter
amount of debt
insured, where he has a relation or connection with
or concern in it, such that the person will derive When must Must exist at the GR:Must exist both
pecuniary benefit or advantage from the preservation insurable time the policy at the time the
of the subject matter insured and will suffer interest exist takes effect and policy takes effect
pecuniary loss or damage from its destruction, need not exist and the time of
termination, or injury by the happening of the event thereafter. (Sec. loss, but need not
insured against. (Violeta R. Lalican vs. The Insular Life 19, Insurance exist in the period
Assurance Company Limited, G.R. No. 183526, August Code.) in between. (Sec.
25, 2009) 19, ibid.)



liability (Perez, supra, pg. 43, citing Florea vs. Iowa

XPN: Secs. 21-24; State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).
25, ibid.
As to the The beneficiary The beneficiary Q: Is mere hope or expectancy insurable?
beneficiarys need not have must have
interest insurable insurable interest A: No. A mere contingent or expectant interest in
interest over the over the thing order to be insurable must be founded on an actual
life of the insured. (Sundiang, right to the thing, or upon any valid contract for it.
insured if the supra, pg. 97.) (Sec. 16, ibid.)
insured himself
secured the Q: Does the insured have the right to change the
policy. However, beneficiary he designated?
if the life
insurance was A: GR: Yes. The insured shall have the right to change
obtained by the the beneficiary he designated in the policy
beneficiary, the
latter must have XPN: If the insured expressly waived this right in
insurable the said policy.
interest over the
life of the Note: Under Sec. 64 of the Family Code, the innocent
insured. spouse is allowed to revoke the designation of the other
(Sundiang, spouse as irrevocable beneficiary after legal separation.
supra, pg. 97.)
Q: What is the effect of the irrevocability of the
designation of the beneficiary to the assignment of
Q: For both the Life Insurance and Property
the policy?
Insurance, the insurable interest is required to be
(2012 Bar Question)
A: The insured cannot assign the policy if the
designation of the beneficiary is irrevocable. The
A: Existing at the time of perfection and at the time of
irrevocable beneficiary has a vested right (Sundiang,
loss for property insurance but only at the time of
supra, pg. 91).
perfection for life insurance (Sec. 19, ibid.)
Q: X owned a house and lot. X insured the house.
The house got burned. Then he sold the partially Q: What are the two general classes of life policies?
burnt house and the lot to Y. Which statement is
most accurate? (2012 Bar Question) A:
a. X is not anymore entitled to the proceeds of the 1. Insurance upon ones life are those taken out
insurance policy because he already sold the by the insured upon his own life (Section 10[a],
partially burnt house and lot. Insurance Code.) for the benefit of himself, or of
b. X is still entitled to the proceeds of the his estate, in case it matures only at his death,
insurance policy because what is material is that for the benefit of third person who may be
at the time of the loss, X is the owner of the designated as beneficiary.
house and lot.
c. No one is entitled to the proceeds because The question of insurable interest is immaterial
ownership over the house and lot was already where the policy is procured by the person
transferred. whose life is insured. A person who insures his
d. Y will be the one entitled to the proceeds own life can designate any person as his
because he now owns the partially burnt house beneficiary, whether or not the beneficiary has
and lot. an insurable interest in the life of the insured
subject to the limits under Article 739 and 2012
A: B. X is still entitled to the proceeds of the of the New Civil Code. (De Leon, supra, pg. 84.)
insurance policy because what is material is that at
the time of the loss, X is the owner of the house and 2. Insurance upon life of another are those taken
lot. After the loss occurs, the right of the insured out by the insured upon the life of another.
under the policy becomes fixed and a subsequent Where a person names himself beneficiary in a
conveyance by the insured cannot affect the insurers policy he takes on the life of another, he must



have insurable interest in the life of the latter. Q: What is the effect if the beneficiary willfully
(De Leon, supra, pg. 84.) This class includes the brought about the death of the insured?
a. His spouse and of his children. A:
b. Any person on whom he depends wholly or GR: The interest of a beneficiary in a life insurance
in part for education or support, or in whom policy shall be forfeited when the beneficiary is
he has a pecuniary interest. the principal, accomplice; accessory in willfully
c. Of any person under a legal obligation to him bringing about the death of the insured, in which
for the payment of money, or respecting event, the nearest relative of the insured shall
property or services, of which death or receive the proceeds of said insurance, if not
illness might delay or prevent the otherwise disqualified (Sec. 12, ibid).
d. Of any person upon whose life any estate or XPN:
interest vested in him depends. (Sec. 10, 1. The beneficiary acted in self-defense;
Insurance Code.).
2. The insureds death was not intentionally
Note: In paragraph (a) of Section 10 of the Insurance Code, caused (e.g., thru accident);
mere relationship is sufficient while the rest (pars. b, c, and
d) requires pecuniary interest. Thus, the interest of the 3. Insanity of the beneficiary at the time he
creditor over the life of the debtor ceases upon full killed the insured.
payment. (Sundiang, supra, pg. 93.)
Q: X is the common law wife of Y. Y loves X so much
Q: Who are prohibited from being designated as
that he took out a life insurance on his own life and
made her the sole beneficiary. Y did this to ensure
that X will be financially comfortable when he is
A: Under the Article 739 of the Civil Code, the
gone. Upon the death of Y, - (2012 Bar Question)
following are prohibited designation of beneficiaries:
1. Those made between persons who were guilty
A: Despite the designation of X as the sole
(finding of guilt in a civil case is sufficient) of
beneficiary, the proceeds of the life insurance will go
adultery or concubinage at the time of donation
to the estate of Y. Common-law spouses are,
2. Those made between persons found guilty of the
definitely, barred from receiving donations from each
same criminal offense, in consideration thereof
other. In essence, a life insurance policy is no
3. Those made to a public officer or his wife,
different from a civil donation insofar as the
descendants or ascendants by reason of his
beneficiary is concerned. Both are founded upon the
same consideration: liberality. A beneficiary is like a
donee, because from the premiums of the policy
Note: The designation of the above-enumerated persons is
void but the policy is binding. The estate will get the which the insured pays out of liberality, the
proceeds. (Sundiang, supra, pg. 91.) beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in
Q: What is the extent of the creditors recovery from Article 739 of the new Civil Code should equally
the insurance he procured upon the life of the operate in life insurance contracts. The mandate of
debtor, if the latter dies? Article 2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as
A: It is limited only to the extent of the amount of the beneficiary in the life insurance policy of the person
debt at the time of debtors death and the cost of who cannot make the donation (Insular Life
carrying the insurance on the debtors life. Assurance, Co. vs. Ebrado, GR No. L-44059, October
28, 1977).
Q: Is the consent of the person insured essential to
the validity of the policy? IN PROPERTY

A: No. So long as it could be proved that the insured Q: What is insurable interest in property?
has an insurable interest at the inception of the policy,
the insurance is valid even without such consent. A: Every interest in property, whether real or
(Sec. 10, Insurance Code.) personal, or any relation thereto, or liability in
respect thereof, of such nature that contemplated



peril might directly damnify the insured, is insurable Insurance Company of North America, G.R. No.
interest. (Sec. 13, Insurance Code.) 147839, June 8, 2006.)

Q: What consists an insurable interest in property? Q:What is the extent of insurable interest of a
common carrier or depository in a thing held by
A: him?
1. An existing interest The existing interest in the
property may be legal or equitable title or A: To the extent of his liability but not to exceed the
value thereof (Sec. 15, Insurance Code) because the
Examples of insurable interest arising from legal title: loss of the thing by the carrier or depository may
a. Trustee, as in the case of the seller of cause liability against him to the extent of its value.
property not yet delivered;
b. Mortgagor of the property mortgaged; Q: What is the change of interest that suspends an
c. Lessor of the property leased (De Leon, supra, insurance contract?
pg. 107-108.)
A: The change of interest contemplated by law is an
Examples of insurable interest arising from equitable absolute one.
a. Purchaser of property before delivery or Q: What is the effect of change of interest in any
before he has performed the conditions of part of a thing insured unaccompanied by a
the sale corresponding change of interest in the insurance?
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the A: GR: A change of interest in any part of a thing
expiration of the period within which insured unaccompanied by a corresponding change in
redemption is allowed (De Leon, supra, pg. interest in the insurance suspends the insurance to an
108.) equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same
2. An inchoate interest founded on an existing person. (Sec. 20 &Sec.58, ibid.)
interest or
Note: Change of interest contemplated by law is an
Example: A stockholder has an inchoate interest in the absolute transfer of the insureds entire interest in the
property of the corporation of which he is a property insured to one not previously interested or
insured. (Perez, supra, pg. 41.)
stockholder, which is founded on an existing
interest arising from his ownership of shares in the
corporation. (De Leon, supra, pg. 108.) XPNs:

3. An expectancy coupled with an existing interest in 1. When there is a prohibition against alienation or
that out of which the expectancy arises. change of interest without the consent of the
insurer in which case the policy is not merely
Q: What is the measure of insurable interest in suspended but avoided. (ibid., citing Curtis vs.
property? Girard Fire and Marine Ins., 11 SE 3, 190 Ga.
A: The extent to which the insured might be
damnified by loss or injury thereof. (Sec. 17). 2. In life, accident, and health insurance. (Sec. 20,
Insurable interest in property does not necessarily Insurance Code.)
imply a property interest in, or lien upon, or
possession of, the subject matter of the insurance, 3. A change of interest in a thing insured, after the
and neither title nor a beneficial interest is requisite occurrence of an injury which results in a loss
to the existence thereof. It is sufficient that the does NOT affect the right of the insured to
insured is so situated with reference to the property indemnity for loss. (Sec. 21, ibid.)
that he would be liable to loss should it be injured or
destroyed by the peril against which it is insured. 4. A change of interest in one or more distinct
Anyone has an insurable interest in property who things, separately insured by one policy does
derives a benefit from its existence or would suffer NOT avoid the insurance as to the others. (Sec.
loss from its destruction. (Gaisano Cagayan, Inc. v. 22, ibid.)



5. A change of interest by will or succession, on the Note: A provision in the policy that prohibits double
death of the insured, does NOT avoid an insurance is valid. However, in the absence of such
insurance; and his interest in the insurance prohibition, double insurance is allowed. (ibid.)
passes to the person taking his interest in the
thing insured. (Sec. 23, ibid.) Q: What is the nature of the liability of the several
insurers in double insurance? Explain. (2005 Bar
6. A transfer of interest by one of several partners, Question)
joint owners, or owners in common, who are
jointly insured, to the othersdoes NOT avoid an A: In double insurance, the insurers are considered as
insurance even though it has been agreed that co-insurers. Each one is bound to contribute ratably
the insurance shall cease upon an alienation of to the loss in proportion to the amount for which he
the thing insured. (Sec. 24, ibid.) is liable under his contract. This is known as the
principle of contribution or contribution clause
7. When the policy is so framed that it will inure to (Sec. 94 [e], ibid).
the benefit of whomsoever, during the
continuance of the risk, may become the owner Q: What is over-insurance?
of the interest insured. (Sec. 57, ibid.)
A: There is over-insurance whenever the insured
Q: What are other void stipulations in an insurance obtains a policy in an amount exceeding the value of
contract? his insurable interest (Perez, supra, pg. 133).

A: Every stipulation in an insurance contract: Q: What are the distinctions between double
1. For the payment of loss whether the person insurance and over insurance?
insured has or does not have any insurable
interest in the subject-matter of insurance, or A:
2. That the policy shall be received as proof of such DOUBLE INSURANCE OVER INSURANCE
interest, and There may be no over
When the amount of
3. Every policy executed by way of gaming or insurance as when the sum
the insurance is beyond
wagering is VOID. (Sec. 25, ibid.) total of the amounts of the
the value of the
policies issued does not
insureds insurable
interest of the insured.
Q: When does double insurance exist? There may be only one
insurer, with whom the
A: Double insurance exists where the same person is Two or more insurers. insured takes insurance
insured by several insurers separately, in respect to beyond the value of his
the same subject and interest. (Sec. 93, ibid.) insurable interest.

Q: Give the requisites of double insurance. Q: What are the rules governing double insurance?

1. Subject matter is the same 1. The insured, unless the policy otherwise
2. Two or more insurers insuring separately provides, may claim payment from the insurers
3. Risk or peril insured against is the same in such order as he may select, up to the amount
4. Interest insured is the same which the insurers are severally liable under their
5. Person insured is the same respective contracts.

Q: Is double insurance prohibited by law? 2. Where the policy under which the insured claims
is a valued policy, the insured must give credit as
A: No. It is not contrary to law and hence, in case of against the valuation for any sum received by
double insurance, the insurers may still be made him under any other policy without regard to the
liable up to the extent of the value of the thing actual value of the subject matter insured.
insured but not to exceed the amount of the policies
issued (Perez, supra, pg. 130). 3. Where the policy under which the insured claims
is an unvalued policyhe must give credit, as



against the full insurable value, for any sum 2. In a corporation, both the corporation and its
received by him under any policy. stockholders have insurable interest over the
4. Where the insured receives any sum in excess of 3. In partnership both the firm and partners have
the valuation in the case of valued policies, or of insurable interest over its assets.
the insurable value in the case of unvalued 4. In assignment both the assignor and assignee
policies, he must hold such sum in trust for the have insurable interest over the property
insurers, according to their right of contribution assigned.
among themselves. 5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
5. Each insurer and the other insurers, to contribute 6. In mortgage, both the mortgagor and mortgagee
ratably to the loss in proportion to the amount have insurable interest over the property
for which he is liable under his contract. (Sec. 94, mortgaged.
Q: Is the insurable interest of mortgagor and
Q: What is additional or other insurance clause? mortgagee in case of a mortgaged property the
A: A clause in the policy that provides that the policy
shall be void if the insured procures additional A: Each has an insurable interest in the property
insurance without the consent of the insurer (Pioneer mortgaged and this interest is separate and distinct
Insurance and Surety Corp vs. Yap, 61 SCRA 426). from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure to
Q: Can an insurer provide that the insured may not the benefit of the other. The same is not open to
procure additional insurance? objection that there is double insurance (RCBC vs. CA,
289 SCRA 292 [1989], Sec. 8, Insurance Code).
A: Yes, the insurer may insert an other insurance
clause which will prohibit double insurance. The Q: What is the extent of insurable interest of
rationale is to prevent the danger that the insured mortgagor and mortgagee?
will over insure his property and thus avert the
possibility of perpetration of fraud (ibid). It is lawful A:
and specifically allowed under Sec. 75 of the 1. Mortgagor The mortgagor of property, as
insurance Code which provides that a policy may owner, has an insurable interest to the extent of
declare that a violation or a specified provision its value even though the mortgage debt equals
thereof shall avoid it, otherwise the breach of an such value.
immaterial provision does not avoid it.
2. Mortgagee The mortgagee as such has an
Q: What is the effect of non-disclosure of the insurable interest in the mortgaged property to
existence of other insurances covering the subject the extent of the debt secured; such interest
matter of the insurance being applied for, if the continues until the mortgage debt is extinguished
applicant is required to do so? (Sundiang, supra, pg. 100-101).

A: The insured cannot recover from the insurance Note: In case of an insurance taken by the mortgagee alone
because he is guilty of violation of warranty/ and for his benefit, the mortgagee, after recovery from the
condition. insurer, is not allowed to retain his claim against the
mortgagor but it passes by subrogation to the insurer to the
extent of the insurance money paid (De Leon, supra, pg. 74-
Q: How can the mortgagee be made a beneficial
Q: What are the instances where more than one
insurable interest may exist in the same property?
A: Through any of the following:
1. He may become the assignee of the policy with
1. In trust, both trustor and trustee have insurable
the consent of the insurer
interest over the property in trust.
2. He may be the mere pledgee without such



3. A rider making the policy payable to the PERFECTION OF A CONTRACT

mortgagee as his interest may appear may be
attached Q: What is a policy of insurance?
4. A standard mortgage clause containing a
collateral independent contract between the A: It is the written instrument in which the contract of
mortgagee and the insurer may be attached insurance is set forth (Sec. 49, Insurance Code.). It is
5. The policy, though, by its terms payable the written document embodying the terms and
absolutely to the mortgagor; may have been stipulations of the contract of insurance between the
procured by a mortgagor under a contract duty insured and insurer.
to insure for the mortgagees benefit, in which
the mortgagee acquires an equitable lien upon Q: What is the form of an insurance contract?
the proceeds (ibid., pg. 75).
A: May be verbal or in writing, or partly in writing and
Q: What are the effects of insurance by mortgagor partly verbal. However, the law provides that no
for benefit of mortgagee, or policy assigned to policy of insurance shall be issued or delivered unless
mortgagee? in the form previously approved by the Insurance
1. The contract is deemed to be upon the interest OFFER AND ACCEPTANCE/CONSENSUAL
of the mortgagor; hence he does not cease to be
party to the contract Q: When is the insurance contract perfected?
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the A: When the assent or consent is manifested by the
mortgagee even if the property is in the hands of meeting of the offer and the acceptance upon the
the mortgagee; thing and the cause which are to constitute the
3. Any act which under the contract of insurance is contract. Mere offer or proposal is not contemplated.
to be performed by the mortgagor may be (De Lim v. Sun Life Assurance Co., G.R. No. L-15774,
performed by the mortgagee with the same Nov. 29, 1920)
4. In case of loss, the mortgagee is entitled to the Note: Mere submission of the application without the
proceeds to the extent of his credit at the time of corresponding approval of the policy does not result in the
loss and perfection of the contract of insurance.
5. Upon recovery by the mortgagee to the extent of
Insurance contracts through correspondence follow the
his credit, the debt is extinguished. (ibid., pg. 76,
cognition theory wherein an acceptance made by letter
citing Sec. 8, Insurance Code shall not bind the person making the offer except from the
time it came to his knowledge (Enriquez v. Sun Life
Note: The rule on subrogation by the insurer to the Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920.).
right of the mortgagee does not apply in this case.
Q: On June 1, 2011, X mailed to Y Insurance Co. his
Q: What is a standard or union mortgage clause? application for life insurance. On July 21, 2011, the
insurance company accepted the application and
A: It is a clause that states that the acts of the mailed, on the same day, its acceptance plus the
mortgagor do not affect the mortgagee. The purpose cover note. It reached X's residence on August 11.
of the clause is to make a separate and distinct On August 4, 2011, X figured in a car accident. He
contract of insurance on the interest of the died a day later. May X's heirs recover on the
mortgagee (De Leon, supra, pg. 77). insurance policy? (2011 Bar Question)

Q: What is an open or loss-payable mortgage A. No, since X had no knowledge of the insurer's
clause? acceptance of his application before he died. What is
being followed in insurance contracts is what is
A: It is a clause which provides for the payment of known as the cognition theory.
loss, if any, to the mortgagee as his interest may
appear and under it, the acts of the mortgagor affect Q. How offer is made in property and liability
the mortgagee (ibid). insurance?



A. It is the insured who makes an offer to the insurer, b. By agent If delivered to the agent of the
who accepts the offer, rejects it, or makes a counter- insurer, whose duty is ministerial, or delivered
offer. The offer is usually accepted by an insurance to the agent of the insured, the policy is
agent on behalf of the insurer. (De Leon, supra, pg. considered constructively delivered. (De Leon,
174.) supra, pg. 175.)

Q. How offer is made in Life and Health Insurance? Q: What is the importance of delivery?

A. It depends upon whether the insured pays the A:

premium at the time he applies for insurance. 1. It becomes the evidence of the making of a
contract and of its terms;
1. If he does not pay the premium, his application is 2. It is considered as communication of the insurers
considered an invitation to the insurer to make acceptance of the insureds offer;
an offer, which he must then accept before the 3. It becomes the determination of policy period;
contract goes into effect. 4. It marks the end of insurers opportunity to
2. If he pays the premium with his application, his decline coverage. (ibid.)
application will be considered an offer. (ibid., pg.

DELAY IN ACCEPTANCE Q: What is premium?

Q. What kind of acceptance must be given? A: It is an agreed price for assuming and carrying the
risk that is, the consideration paid an insurer for
A. The acceptance of an insurance policy must be undertaking to indemnify the insured against a
unconditional, but it need not be by a formal act (De specified peril. (ibid., pg. 232.)
Leon, supra, pg. 173)
Q: What is the difference between premium and
Q. What is the effect of delay? assessment?

A. Unreasonable delay in returning the premium A: Premium is levied and paid to meet anticipated
raises the presumption of acceptance of the losses, while assessment are collected to meet actual
insurance application (Gloria v. Philippine American losses. Also, while premium is not a debt, assessment
Life Ins. Co., [CA}73 O.G. [No.37] 8660.) properly levied, unless otherwise expressly agreed, is
a debt. (ibid., pg. 233.)
Q: When does payment of premium become a debt
Q: Is delivery necessary in the formation of the or obligation?
contract of insurance?
A: No. The mere delivery of an insurance policy to 1. In fire, casualty and marine insurance, the
someone does not give rise to the formation of a premium payable becomes a debt as soon as the
contract in the absence of proof that he had agreed risk attaches.
to be insured. 2. In life insurance, the premium becomes a debt
only when, in the case of the first premium, the
Q: What are the 2 types of delivery? contract has become binding, and in the case of
subsequent premiums, when the insurer has
A: continued the insurance after maturity of the
1. Actual delivery to the person of the insured. premium, in consideration of the insureds
express or implied promise to pay. (ibid., pg. 233-
2. Constructive 240.)
a. By mail If policy was mailed already and
premium was paid and nothing is left to be Q: Does non-payment of balance of premiums
done by the insured, the policy is considered cancel the policy?
constructively delivered if insured died before
receiving the policy. A: No, a contrary rule would place exclusively in the
hands of the insured the right to decide whether the



contract should stand or not. (Philippine Phoenix Q: Can fortuitous event excuse the insured from not
Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R. paying the premiums?
No. L-22684, Aug. 31, 1967)
A: GR: No, non-payment of premiums does not
Q: What are the effects of non-payment of merely suspend but put an end to an insurance
premiums? contract since the time of the payment is peculiarly of
the essence of the contract. (De Leon, supra, pg. 241)
A: Non-payment of the first premium unless waived,
prevents the contract from becoming binding XPN:
notwithstanding the acceptance of the application or 1. The insurer has become insolvent and has
the issuance of the policy. But nonpayment of the suspended business, or has refused without
balance of the premium due does not produce the justification a valid tender of premiums.
cancellation of the contract. (Gonzales v. Asia Life Ins. Co., G.R. No. L-5188,
Oct. 29, 1952)
Non-payment of the subsequent premiums does not 2. Failure to pay was due to the wrongful
affect the validity of the contracts unless, by express conduct of the insurer.
stipulation, it is provided that the policy shall in that 3. The insurer has waived his right to demand
event be suspended or shall lapse. (De Leon, supra, payment. (De Leon, supra pg. 242.)
pg. 241.)
Note: But the insurer will not be deemed to have
Note: in case of individual life or endowment insurance and waived his privilege of forfeiture by mere inaction or silence
group life insurance, the policyholder is eneitled to a grace if the ground be default in the payment of premiums, going
period of either 30 days or 1 month within which the as it does to the whole consideration inducing the insurer
payment of any premium after the first may be made. to enter into the contract. (ibid pg. 242)
(Secs. 227[a], 228[a], Insurance Code.)
While the insured has the privilege of continuing the policy
In case of industrial life insurance, the grace period is 4 in force by making premium payments, the insurer cannot
weeks, where premiums are payable monthly, either 30 ordinarily force the insured to make these payments. (Ibid,
days or 1 month. (Sec. 230 [a], Insurance Code.) pg. 242)

Q: If the applicant failed to pay premium and Q: What is the effect of acceptance of premium?
instead execute a promissory note in favor of the
insurer payable within 30 days which was accepted A: Acceptance of premium within the stipulated
by the latter, is the insurer liable in case of loss? period for payment thereof, including the agreed
grace period, merely assures continued effectivity of
A: Yes, the insurer is liable because there has been a the insurance policy in accordance with its terms.
perfected insurance contract. The insurer accepted (Stoke v. Malayan Insurance Co., Inc., G.R. No. L-
the promise of the applicant to pay the insurance 34768, Feb. 28, 1984)
premium within thirty 30 days from the effective date
of policy. By so doing, it has implicitly agreed to Payment of the premium to agent of the insurance
modify the tenor of the insurance policy and in effect, company is binding on it (Malayan Insurance v.
waived any provision therein that it would only pay Arnalo 154 SCRA 672 and areola v. CA 236 SCRA 643).
for the loss or damage in case the same occurs after If an insurance company delivers a policy to an
the payment of the premium. insurance broker, it is deemed to have authorized
him to receive the payment of the premium. (Sec.
Considering that the insurance policy is silent as to 306, South Sea v. CA 244 SCRA 744; American Home
the mode of payment, insurer is deemed to have Assurance v. Chua 309 SCRA 250)
accepted the promissory note in payment of the
premium. This rendered the policy immediately An acknowledgment in a policy of the receipt of the
operative on the date it was delivered. (Capital premium is conclusive evidence of its payment for
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R. the purpose of making the policy binding despite a
No. L-22375, July 18, 1975) stipulation that it will not be binding until the
premium is actually paid. (Sec. 78; American Home v.
Chua, supra)



Q: What is the effect of payment of premium by to be conclusive evidence of payment, even if

post-dated check? there is stipulation therein that it shall not be
binding until the premium is actually paid.
A: Delivery of a promissory note or a check will not be This is without prejudice however to right of
sufficient to make the policy binding until the said insurer to collect corresponding premium.
note or check has been converted into cash. This is (Sec. 77)
consistent with Article 1249 of the Civil Code.
3. When there is an agreement allowing the
Note: Payment by means of a check or note, accepted by insured to pay the premium in installments
the insurer, bearing a date prior to the loss, assuming and partial payment has been made at the
availability of the funds thereof, would be sufficient even if time of loss (Makati Tuscany Condominium
it remains unencashed at the time of the loss. The
Corp. v. CA, G.R. No. 95546, Nov. 6, 1992).
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor.
4. When there is an agreement to grant the
Q: What if there was no premium paid, may the insured credit extension for the payment of
insurer recover the unpaid premium from the the premium. (Art. 1306, NCC), and loss
insured? occurs before the expiration of the credit
term. (UCPB General Insurance v. Masagana
A: No, the continuance of the insurers obligation is Telemart, G.R. No. 137172, Apr. 4, 2001).
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy, the 5. When estoppel bars the insurer to invoke
contractual relation between the parties having non-recovery on the policy.
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against 6. When the public interest so requires, as
recovery under the policy. determined by the Insurance Commissioner

Q: Is the insurance company liable when a car, E.g.: In compulsory motor vehicle insurance, if
bought on installment basis, met an accident but the the policy was issued without payment of
car is not yet fully paid? (2006 Bar Question) premium by the vehicle owner, the insurer
will still be held liable. To rule otherwise
A: Yes, when insured and insurer have agreed to the would prejudice the 3 party victim.
payment of premium by installments and partial
payment has been made at the time of loss, then the Q: What is the effect of acknowledgment of receipt
insurer becomes liable. When the car loss happened of premium in policy?
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may A: Conclusive evidence of its payment, in so far as to
recover from Peninsula Insurance Company, but the make the policy binding, notwithstanding any
latter has the right to deduct the amount of unpaid stipulation therein that it shall not be binding until
premium from the insurance proceeds. the premium is actually paid (Sec. 78).

Q: What is the cash and carry rule? (2003 Bar When the policy contains such written
Question) acknowledgment, it is presumed that the insurer has
waived the condition of prepayment. It hereby
A: GR: No policy or contract of insurance issued by creates a legal fiction of payment. The presumption is
an insurance company is valid and binding unless and however, extended only to the question of the
until the premium thereof has been paid. Any binding effect of the policy.
agreement to the contrary is void.
As far as the payment of the premium itself is
XPN: A policy is valid and binding even when there concerned, the acknowledgment is only a prima facie
is non-payment of premium: evidence of the fact of such payment. The insurer
may still dispute its acknowledgment but only for the
1. In case of life or industrial life policy whenever purpose of recovering the premium due and unpaid.
the grace period provision applies. Whether payment was indeed made is a question of
2. When there is acknowledgment in a policy of
a receipt of premium, which the law declares




Q: What are the devices used to prevent the INSURANCE
forfeiture of a life insurance after the payment of
the first premium? Q. What is purpose of the Reinstatement Provision?

A: A. The purpose of the provision is to clarify the

1. Grace period After the payment of the first requirements for restoring a policy to premium-
premium, the insured is entitled to a grace paying status after it has been permitted to lapsed.
period of 30 days within which to pay the
succeeding premiums. (Sec. 227,(a)). Q. Within what period shall the holder of the policy
be entitled to reinstatement of the contract?
2. Cash surrender value The amount the insurer
agrees to pay to the holder of the policy if he A. The law requires that the policy owner be
surrenders it and releases his claim upon it. permitted to reinstate the policy, subject to the
(Cyclopedia Law Dictionary, 3 ed., 1077) violations specified, any time within three (3) years
from the date of default of premium payment. A
3. Extended insurance It is where the insured is longer period, being more favorable to the insured,
given a right, upon default, after payment of at may be used.
least three full annual premiums (see Sec. 227 [f])
to have the policy continued in force from the Q. Is reinstatement of a lapsed policy an absolute
date of default for a time either stated or equal right of the insured?
to the amount as the net value of the policy
taken as a single premium, will purchase. (De A. Reinstatement is not an absolute right of the
Leon, The Insurance Code of the Philippines insured, but discretionary on the part of the insurer,
Annotated, 2006) which has the right to deny reinstatement if it were
not satisfied as to the insurability of the insured, and
4. Paid up Insurance The insured is given a right, if the latter did not pay all overdue premiums and
upon default, after the payment of at least three other indebtedness to the insurer. (McGuire vs.
annual premiums to have the policy continued in Manufacturers Life Ins. Co., 87 Phil. 370).
force from the date of default for the whole
period of the insurance without further payment Q. What does Evidence of Insurability includes?
of premiums.(ibid.) It results to a reduction of
the original amount of insurance, but for the A. Evidence of Insurability is broader phrase than
same period originally stipulated.(6 Couch 2d., Evidence of Good Health and includes such other
355; 37 C.J.S. 364) factors as the insureds occupation, habits, financial
condition, and other risk selection factors.
5. Automatic Loan Clause A stipulation in the
policy providing that upon default in payment of Q. A life insurance policy lapsed. The insured
premium, the same shall be paid from the loan applied for reinstatement of the policy and paid
value of the policy until that value is consumed. only a part of the overdue premiums. Subsequently,
In such a case, the policy is continued in force as the insured died. Was the insurer liable?
fully and effectively as though the premiums had
been paid by the insured from funds derived A. The insurer is not liable as the policy was not
from other sources.(6 Couch 2d., 383) reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
6. Reinstatement Provision that the holder of the recovery of the face value of the policy (Andres vs.
policy shall be entitled to reinstatement of the Crown Life Ins. Co., 55 O.G. 3483).
contract at anytime within 3 years from the date
of default in the payment of premium, unless the Q: Eulogio took out a life insurance policy which
cash surrender value has been paid, or the contained a provision which allows for
extension period expired, upon production of reinstatement any time within three years after it
evidence of insurability satisfactory to the lapsed. Eulogio paid the premiums due on the first
company and the payment of all overdue two months. However, he failed to pay subsequent
premiums and any indebtedness to the company premiums.
upon said policy. (Sec. 227, (j)).



One month after the policy lapsed, he filed an d. When the insurer never incurred any liability
application for the reinstatement of his policy. He under the policy because of the default of
deposited the overdue premiums and signed a the insured other than actual fraud (Sec. 81).
reinstatement policy stating that the payment e. When rescission is granted due to insurers
deposit only and shall not bind the Company until breach of contract (Sec. 74).
this application is finally approved. Hours later,
Eulogio died of electrocution. 2. Pro rata:
a. When the insurance is for a definite period
The insurance company denied the claim of his and the insured surrenders his policy
beneficiaries stating that the policy was never beforethe termination thereof; (Sec. 79 [b]);
approved. Is the contention of the insurance except:
company valid? i. Policy not made for a definite period of
A: Yes. The stipulation in a life insurance policy giving ii. Short period rate is agreed upon;
the insured the privilege to reinstate it upon written iii. Life insurance policy.
application does not give the insured absolute right
to such reinstatement by the mere filing of an b. When there is over-insurance. The premiums
application. The insurer has the right to deny the to be returned shall be proportioned to the
reinstatement if it is not satisfied as to the amount by which the aggregate sum insured
insurability of the insured and if the latter does not in all the policies exceeds the insurable value
pay all overdue premium and all other indebtedness of the thing at risk. (Sec. 82)
to the insurer. After the death of the insured the
insurance Company cannot be compelled to i. In case of over-insurance by double
entertain an application for reinstatement of the insurance, the insurer is not liable for the
policy because the conditions precedent to total amount of the insurance taken, his
reinstatement can no longer be determined and liability being limited to the property
satisfied. insured. Hence, the insurer is not entitled
to that portion of the premium
Eulogios death, just hours after filing his Application corresponding to the excess of the
for Reinstatement and depositing his payment for insurance over the insurable interest of
overdue premiums and interests does not constitute the insured.
a special circumstance that can persuade to consider ii. In case of over-insurance by several
the policy reinstated. Said circumstance cannot insurers, the insured is entitled to a
override the clear and express provisions of the ratable return of the premium,
Policy Contract and Application for Reinstatement, proportioned to the amount by which the
and operate to remove the prerogative of Insular Life aggregate sum insured in all the policies
thereunder to approve or disapprove the Application exceeds the insurable value of the thing
for Reinstatement. (Violeta R. Lalican vs. The Insular insured (Sec. 82).
Life Assurance Company Limited, supra)
Where there is a total over insurance of P500,000.00
Q: When is the insured entitled to recover premiums in an aggregate P2,000,000.00 policy (P1,500,000.00
already paid or a portion thereof? is only the insurable value), 25% (proportion of P500k
to P2M) of the premiums paid to the several insurers
A: should be returned.
1. Whole:
a. When no part of the thing insured has been Q: When insured not entitledto return of premiums
exposed to any of the perils insured against paid?
(Sec. 79)
b. When the contract is voidable because of the A:
fraud or misrepresentations of the insurer of 1. The risk has already attached and the risk is
his agent (Sec.81). entire and indivisible;
c. When the insurance is voidable because of 2. In life policies;
the existence of facts of which the insured 3. If contract is void ab initio because of fraud by
was ignorant without his fault (Sec.81). the insured;



4. If contract is illegal and the parties are in pari concealment in a marine insurance in any of the
delicto. following matters enumerated under Section 110,
(Sec. 108). Insurance Code does not vitiate the entire
RESCISSION OF INSURANCE CONTRACTS contract, but merely exonerates the insurer from a
loss resulting from the risk concealed.
Q. What are the instances wherein a contract of
insurance may be rescinded? Q: What is the test in ascertaining the existence of
1. Concealment A: If the applicant is aware of the existence of some
2. Misrepresentation/ omission circumstances which he knows would probably
3. Breach of warranties influence the insurer in acting upon his application,
good faith requires him to disclose that circumstance,
CONCEALMENT though unasked.

Q: What is concealment? Q: What are the matters that need not be disclosed?

A: Concealment is a neglect to communicate that A: GR: The parties are not bound to communicate
which a party knows and ought to communicate. information of the following matters:
(Sec. 26) 1. Those which the other knows
2. Those which, in the exercise of ordinary care, the
Q: What are the requisites in concealment? other ought to know and of which, the former
has no reason to suppose him ignorant
A: 3. Those of which the other waives communication
1. A party knows a fact which he neglects to 4. Those which prove or tend to prove the
communicate or disclose to the other party existence of a risk excluded by a warranty, and
2. Such party concealing is duty bound to disclose which are not otherwise material
such fact to the other 5. Those which relate to a risk excepted from the
3. Such party concealing makes no warranty as to policy and which are not otherwise material;
the fact concealed 6. The nature or amount of the interest of one
4. The other party has no means of ascertaining the insured (except if he is not the owner of the
fact concealed property insured, Sec. 34).
5. The fact must be material
XPN: In answer to inquiries of the other. (Sec. 30)
Q: What is the test of materiality?
Note: Neither party is bound to communicate, even
A: It is determined not by the event, but solely by the upon inquiry, information of his own judgment, because
probable and reasonable influence of the facts upon such would add nothing to the appraisal of the
the party to whom the communication is due, in application. (Sec.35)
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (Sec. The parties are bound to know all the general causes
31) which are open to his inquiry, equally with the other,
and all general usages of trade. (Sec.32)
Note: As long as the facts concealed are material,
concealment, whether intentional or not, entitles the Q: What are the matters that must be disclosed
injured party to rescind (Sec.27). even in the absence of inquiry?

Q: How does it differ from materiality in marine A:

insurance? 1. Those material to the contract
2. Those which the other has no means of
A: Rules on concealment are stricter since the insurer ascertaining
would have to depend almost entirely on the matters 3. Those as to which the party with the duty to
communicated by the insured. Thus, in addition to communicate makes no warranty
material facts, each party must disclose all the
information he possesses which are material or the Note: Matters relating to the health of the insured are
information of the belief or expectation of a third material and relevant to the approval of the issuance of the
life insurance policy as these definitely affect the insurers
person, in reference to a material fact. But a


action to the application. It is well-settled that the insured information acquired after the effectivity of the policy
need not die of the disease he had failed to disclose to the will not be a ground to rescind the contract.
insurer, as it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed
Reason: Information is no longer material as it will no
insurance policy or in making inquiries (Sunlife Assurance
longer influence the other party to enter into such
Company of Canada v. CA, G.R. No. 105135, June 22, 1995).
Information as to the nature of interest need not be
disclosed except In property insurance, if the insured is not Q: Joanna applied for a non-medical life insurance.
the owner. If somebody is insuring properties of which he is Joanna did not inform the insurer that one week
not the owner, he must disclose why he has insurable prior to her application for insurance, she was
interest that would entitle him to ensure it, and the extent examined and confined at St. Lukes Hospital where
thereof. [Sec.34 & Sec.51(e)] she was diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable
Q: May the right to information of material facts be considering that the fact concealed had no bearing
waived? with the cause of death of the insured? Why? (2001
Bar Question)
A: Yes.
1. By the terms of the contract A: No. The concealed fact is material to the approval
2. By the failure to make an inquiry as to such facts, and issuance of the insurance policy. It is well settled
where they are distinctly implied in other facts that the insured need not die of the disease she failed
from which information is communicated. (Sec. to disclose to the insurer. It is sufficient that his
33) nondisclosure misled the insurer in forming his
estimate of the risks of the proposed insurance policy
Q: What are the effects of concealment? or in making inquiries (Sun Life v. CA, supra.).

A: Q: What are the instances whereby concealment

1. If there is concealment under Section 27, the made by an agent procuring the insurance binds the
remedy of the insurer is rescission since principal?
concealment vitiates the contract of insurance.
2. The party claiming the existence of concealment A.
must prove that there was knowledge of the fact 1. Where it was the duty of the agent to acquire
concealed on the part of the party charged with and communicate information of the facts in
concealment. question;
3. Good faith is not a defense in concealment. 2. Where it was possible for the agent, in the
Concealment, whether intentional or exercise of reasonable diligence to have made
unintentional entitles the injured party to rescind such communication before the making of the
the contract of insurance. (Sec. 27) insurance contract.
4. The matter concealed need not be the cause of
loss. (Sec.31) Note: Failure on the part of the insured to disclose
5. To be guilty of concealment, a party must have such facts known to his agent, or wholly due to the
knowledge of the fact concealed at the time of fault of the agent, will avoid the policy, despite the
the effectivity of the policy. good faith of the insured.

Q: When should concealment take place in order MISREPRESENTATION/OMMISSIONS

that the policy may be avoided?
Q: What is representation?
A: At the time the contract is entered into and not
afterwards. The duty of disclosure ends with the A: An oral or written statement of a fact or condition
completion of the contract. Waiver of medical affecting the risk made by the insured to the
examination in a non-medical insurance contract insurance company, tending to induce the insurer to
renders even more material the information required assume the risk.
of the applicant concerning previous condition of
health and diseases suffered, for such information Q: What are the kinds of representation?
necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether A:
to issue the policy or not. Failure to communicate 1. Oral or written; (Sec. 36)



2. Affirmative; (Sec. 42) or Note: A representation cannot qualify an express provision

3. Promissory. (Sec. 39) in a contract of insurance but it may qualify an implied
warranty. (Sec.40)
Q: What is an affirmative representation?
Q: How is a representation as to a future
A: Any allegation as to the existence or non-existence undertaking treated?
of a fact when the contract begins. (e.g. the
statement of the insured that the house to be insured A: A representation as to the future is to be deemed
is used only for residential purposes is an affirmative a promise unless it appears that it was merely a
representation). statement of belief or an expectation that is
susceptible to present, actual knowledge. (Sec.39)
Q: What is a promissory representation?
Q: Will an erroneous opinion or belief avoid the
A: Any promise to be fulfilled after the contract has insurance policy?
come into existence or any statement concerning
what is to happen during the existence of the A: No. The statement of an erroneous opinion, belief
insurance. or information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
Q: When should representation be made, altered or fraudulent.
Q: What is the test of materiality?
A: It may be made at the time of, or before, issuance
of the policy. (Sec. 37). It may be altered or A: It is to be determined not by the event, but solely
withdrawn before the insurance is effected. (Sec.41) by the probable and reasonable influence of the facts
upon the party to whom the representation is made,
Q: What is misrepresentation? in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (similar
A: It is an affirmative defense. To avoid liability, the with concealment). (Sec. 46)
insurer has the duty to establish such a defense by
satisfactory and convincing evidence. (Ng Gan Zee v. Q: What are the effects of misrepresentation?
Asian Crusader Life Assn. Corp., G.R. No. L- 30685,
May 30, 1983. [See also sec.44 (when the facts fail to A:
correspond to the assertions or stipulations.)] 1. It renders the insurance contract voidable at the
option of the insurer, although the policy is not
Note: In the absence of evidence that the insured has thereby rendered void ab initio. The injured party
sufficient medical knowledge to enable him to do entitled to rescind from the time when the
distinguish between peptic ulcer and tumor, the representation becomes false;
statement of deceased that said tumor was associated 2. When the insurer accepted the payment of
with ulcer of the stomach should be considered an premium with the knowledge of the ground for
expression in good faith. Fraudulent intent of insured must rescission, there is waiver of such right;
be established to entitle insurer to rescind the insurance
3. There is no waiver of the right of rescission if the
contract. Misrepresentation, as a defense of insurer, is an
insurer had no knowledge of the ground therefor
affirmative defense which must be proved. (Ng Gan Zee v.
Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30, at the time of acceptance of premium payment.
Q: What is the effect of collusion between the
Q: What are the requisites misrepresentation? insurers agent and the insured?

A: A: It vitiates the policy even though the agent is

1. The insured stated a fact which is untrue; acting within the apparent scope of his authority. The
2. Such fact was stated with knowledge that it is agent ceases to represent his principal. He, thus,
untrue and with intent to deceive or which he represents himself; so the insurer is not estopped
states positively as true without knowing it to be from avoiding the policy.
true and which has a tendency to mislead;
3. Such fact in either case is material to the risk.



Q: What are the characteristics of representation?

1. Non-payment of premiums. (Secs. 77, 22 [b],
A: 228 [b], 203 [b])
1. Not a part of the contract but merely a collateral 2. Violation of condition. (Secs. 227 [b], 228 [b])
inducement to it 3. No insurable interest
2. Oral or written 4. Cause of death was excepted or not covered
3. Made at the time of, or before issuing the policy 5. Fraud of a vicious type
and not after 6. Proof of death was not given. (Sec. 242)
4. Altered or withdrawn before the insurance is 7. That the conditions of the policy relating to
effected but not afterwards military or naval service. (Secs. 227 [b], 228 [b])
5. Must be presumed to refer to the date the 8. That the action was not brought within the time
contract goes into effect. (Sec. 42) specified. (Sec. 63)

Q: What are the similarities of concealment and Q: What is the remedy of the injured party in case of
representation? misrepresentation?

A: A: If there is misrepresentation, the injured party is

1. Both refer to the same subject matter and both entitled to rescind from the time when the
take place before the contract is entered. representation becomes false.
2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is Q: When should the right to rescind the contract be
rescission or cancellation. exercised?
3. The test of materiality is the same. (Secs. 31, 46)
4. The rules of concealment and representation are A: The right to rescind must be exercised previous to
the same with life and non-life insurance. the commencement of an action on the contract. (the
5. Whether intentional or not, the injured party is action referred to is that to collect a claim on the
entitled to rescind a contract of insurance on contract). (Sec.48, par.1)
ground of concealment or false representation.
6. Since the contract of insurance is said to be one Q. What is Omission?
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and A. The failure to communicate information of matters
representation apply likewise to the insurer. proving or tending to prove the falsity of warranty.

Q: How does concealment differ from Q. What is the effect of Omission?

A. The contract of insurance may be rescinded.
A: In concealment, the insured withholds the
information of material facts from the insurer, BREACH OF WARRANTIES
whereas in misrepresentation, the insured makes
erroneous statements of facts with the intent of Q: What are warranties?
inducing the insurer to enter into the insurance
contract. A: Statements or promises by the insured set forth in
the policy itself or incorporated in it by proper
Q: How is concealment and misrepresentation reference, the untruth or non-fulfillment of which in
applied in case of loss or death? any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or non-
A: GR: If the concealment or misrepresentation is fulfillment render the policy voidable by the insurer.
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or Q: What is the purpose of warranties?
death, the insurer can refuse to pay.
A: To eliminate potentially increasing moral or
XPN: The incontestability clause under paragraph 2 of physical hazards which may either be due to the acts
Section 48. of the insured or to the change of the condition of
the property.
XPN to XPN: (i.e., when the contract may be
rescinded evev beyond the incontestability period)



Q: What is the basis of warranties? Q: What are the effects of breach of warranty?

A: The insurer took into consideration the condition A:

of the property at the time of effectivity of the policy. 1. Material

Q: What are the kinds of warranties? GR: Violation of material warranty or of material
provision of a policy will entitle the other party to
A: rescind the contract.
1. Express an agreement contained in the policy or
clearly incorporated therein as part thereof XPN:(with regard to promissory warranties)
whereby the insured stipulates that certain facts a. Loss occurs before the time of
relating to the risk are or shall be true, or certain performance of the warranty;
acts relating to the same subject have been or shall b. The performance becomes unlawful at the
be done. place of the contract; and
c. Performance becomes impossible. (Sec.73)
2. Implied It is deemed included in the contract
although not expressly mentioned. 2. Immaterial

Peculiar only to marine insurance, and therefore GR: It will not avoid the policy.
is deemed included in the contract, although not
expressly mentioned: XPN: When the policy expressly provides or
declares that a violation thereof will avoid it.
a. That the ship will not deviate from the agreed
voyage unless deviation is proper For instance, an Other Insurance Clause which
b. That the ship will not engage in illegal venture is a condition in the policy requiring the insured
c. Warranty of neutrality, that the ship will carry to inform the insurer of any other insurance
the requisite documents of nationality or coverage of the property. A violation of the
neutrality where such nationality or neutrality is clause by the insured will not constitute a breach
warranted unless there is an additional provision stating
d. Presence of insurable interest that the violation thereof will avoid the policy.
e. That the ship is seaworthy at the time of the (Sec. 75)
commencement of the insurance contract.
Q: What is the effect of a breach of warranty
Q: What are the distinctions between warranty and without fraud?
A: The policy is avoided only from the time of breach
A: (Sec. 76)and the insured is entitled:
WARRANTY REPRESENTATION 1. To the return of the premium paid at a pro rata
Considered parts of Collateral inducement to the from the time of breach or if it occurs after the
the contract. contract. inception of the contract; or
Always written on the 2. To all premiums if it is broken during the
May be written in a totally inception of the contract.
face of the policy,
disconnected paper or may
actually or by
Must be strictly Only substantial proof is
complied with. required. NOTICE AND PROOF OF LOSS
Its falsity or non-
Its falsity renders the policy Q: What is loss in insurance?
fulfillment operates as
void on the ground of fraud.
a breach of contract.
Insurer must show its A: The injury, damage or liability sustained by the
Presumed material. insured in consequence of the happening of one or
materiality in order to defeat
an action on the policy. more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive in Marine Insurance.



Q: What is notice of loss? Q: When is delay in the presentation of notice or

proof of loss deemed waived?
A: It is the more or less formal notice given the
insurer by the insured or claimant under a policy of A: If caused by:
the occurrence of the loss insured against.
1. Any act of the insurer; and
Q: What are the conditions before the insured may 2. By failure to take objection promptly and
recover on the policy after the loss? specifically upon that ground. (Sec. 91)

A: Q: What is proof of loss?

1. The insured or some person entitled to the
benefit of the insurance, without unnecessary A: It is the more or less formal evidence given the
delay, must give notice to the insurer; (Sec. 88) company by the insured or claimant under a policy of
2. When required by the policy, insured must the occurrence of the loss, the particulars thereof and
present a preliminary proof loss which is the best the data necessary to enable the company to
evidence he has in his power at the time. (Sec. determine its liability and the amount thereof.
Q: What is the time for payment of claims?
Q: What are the purposes of notice of loss?
1. To give insurer information by which he may 1. Maturing upon the
determine the extent of his liability; expiration of the term
2. To afford the insurer a means of detecting any the proceeds are
fraud that may have been practiced upon him; immediately payable to
and the insured, except if
3. To operate as a check upon extravagant claims. proceeds are payable The proceeds shall be paid
in installments or within 30 days after the
Q: What is the effect of failure to give notice of annuities which shall receipt by the insurer of
loss? be paid as they become proof of loss and
due ascertainment of the loss or
A: damage by agreement of
FIRE INSURANCE OTHER TYPES OF INSURANCE 2. Maturing at the the parties or by arbitration
Failure to give notice will not death of the insured, but not later than 90 days
Failure to give occurring prior to the from such receipt of proof of
exonerate the insurer, unless
notice defeats the expiration of the term loss, whether or not
there is a stipulation in the
right of the insured stipulated the ascertainment is had or
policy requiring the insured to
to recover. proceeds are payable made. (Sec. 243)
do so.
to the beneficiaries
Q: What are the instances when the defects in the within 60 days after
notice or proof of loss are considered waived? presentation of claim
and filing of proof of
A: When the insurer: MaJoR-DeW death (Sec. 242)

1. Writes to the insured that he considers the policy GUIDELINES ON CLAIMS SETTLEMENT
null and void as the furnishing of notice or proof
of loss would be useless;
Q. What is Claim Settlement?
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy A. Claim settlement is the indemnification of the
4. Joins in the proceedings for determining the suffered by the insured. The claimant may be the
amount of the loss by arbitration, making no insured or reinsured, the insurer who is entitled to
objections on account of notice and preliminary subrogation, or a third party who has a claim against
proof; or the insured.
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.



Q. What is the purpose of the rule? Q. What is the obligation of the insurer with regard
to the insureds decision to compromise third party
A. To eliminate unfair claim settlement practices. claim?
Q. What are the rules in Claim Settlement? A. Where a policy gives the insurer a control of the
decision to settle claim or to litigate it, the insurer
A. nevertheless is required to observe a certain measure
1. No insurance company doing business in the of consideration for the interest of the insured.
Philippines shall refuse, without justifiable cause,
to pay or settle claims arising under coverages The rule has come to be generally accepted that
provided by its policies, nor shall any such while the express terms of the policy do not impose
company engage in unfair claim settlement of the insurer the duty to claim settle the claim at all
practices. costs, there is an implied duty on his part to give due
2. Evidence as to numbers and types of valid and consideration to the interest of the insured in its
justifiable complaints to the Commissioner exercise of the option to reject a compromise
against an insurance company, and the settlement and proceed with litigation. In insurance
Commissioners complaint experience with other contracts, the law requires strict observance of the
insurance companies writing similar lines of standards of good faith and fair dealing on the part of
insurance shall be admissible in evidence in an the insurer.
administrative or judicial proceeding brought
under this section (Sec. 241) Q: What is the effect of refusal or failure to pay the
claim within the time prescribed?
A: The insurer shall be liable to pay interest twice the
Q. What constitutes unfair settlement practices? ceiling prescribed by the Monetary Board (12% per
annum CB No. 416) or 24% per annum interest on the
A: MAI-GL proceeds of the insurance from the date following
1. Knowingly misrepresenting to claimants pertinent the time prescribed in Secs. 242 or 243 until the claim
facts or policy provisions relating to coverage at is fully satisfied (Prudential Guarantee and Assurance,
issue; Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No.
151890, June 20, 2006)
2. Failing to acknowledge with reasonable
promptness pertinent communications with Note: Refusal or failure to pay the loss or damage will
respect to claims arising under its policies; entitle the assured to collect interest UNLESS such refusal
or failure to pay is based on the ground that the claim is
3. Failing to adopt and implement reasonable fraudulent.
standards for the prompt investigation of claims
arising under its policies; PRESCRIPTION OF ACTIONS

4. Not attempting in good faith to effectuate prompt, Q: What are the rules on the prescriptive for filing
fair and equitable settlement of claims submitted an insurance claim?
in which liability has become reasonably clear; or
5. Compelling policyholders to institute suits to 1. The parties to a contract of insurance may validly
recover amounts due under its policies by offering agree that an action on the policy should be
without justifiable reason substantially less than brought within a limited period of time, provided
the amounts ultimately recovered in suits brought such period is not less than 1 year from the time
by them. the cause of action accrues. If the period agreed
upon is less than 1 year from the time the cause of
Q. What is the sanction for the insurance companies action accrues, such agreement is void. (Sec. 63)
which engaged to unfair settlement practices?
a. The stipulated prescriptive period shall begin to
A. The suspension or revocation of an insurance run from the date of the insurers rejection of the
companys certificate of authority. (Sec 241) claim filed by the insured or beneficiary and not
from the time of loss.
b. In case the claim was denied by the insurer but
the insured filed a petition for reconsideration,



the prescriptive period should be counted from Q: Should there be a contract before the insurer be
the date the claim was denied at the first subrogated?
instance and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. CA, GR. A: The principle of subrogation inures to the insurer
No. 89741, Mar 13, 1991) without any formal assignment or any express
stipulation to that effect in the policy. Said right is not
2. If there is no stipulation or the stipulation is void, dependent upon nor does it grow out of any private
the insured may bring the action within 10 years in contract. Payment to the insured makes the insurer a
case the contract is written. subrogee in equity. (Malayan Insurance Co., Inc. v. CA,
G.R. No. L-36413, Sept. 26, 1988)
3. In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim must Note: Incapacity of the insured will not affect the capacity
be filed within 6 months from the date of the of the subrogee because capacity is personal to the holder
accident; otherwise, the claim is deemed waived (Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724,
June 8, 2004).
even if the same is brought within 1 year from its
rejection. (Vda. De Gabriel vs. CA, GR No. 103883,
Nov 14, 1996) Q: What are the rules on indemnity?

4. The suit for damages, either with the proper court A:

or with the Insurance Commissioner, should be 1. Applies only to property insurance except when the
filed within 1 year from the date of the denial of creditor insures the life of his debtor
the claim by the insurer, otherwise, claimants right 2. Insurance contracts are not wagering contracts or
of action shall prescribe. (Sec. 384) gambling contracts.

Q. From what time shall the period of prescription Q: What are the purposes of subrogation?
be computed in case the insured asked for
reconsideration of the denial of claim? (1996 Bar A:
Question) 1. To make the person who caused the loss legally
responsible for it
A: In case the claim was denied by the insurer but the 2. To prevent the insured from receiving double
insured file a petition for reconsideration, the recovery from the wrongdoer and the insurer
prescriptive period should be counted from the date 3. To prevent the tortfeasors from being free from
the claim was denied at the first instance and not liability and is thus founded on consideration of
from the denial of the reconsideration. To rule public policy
otherwise would give the insured a scheme or devise
to waste time until any evidence which may be Q: What are the rules on subrogation?
considered against him is destroyed (Sun life Office,
Ltd. vs. CA, 195 SCRA 193; Asked, V [a}). A:
1. Applicable only to property insurance the value
Q. What is the prescriptive period of prescription in of human life is regarded as unlimited and
motor vehicle insurance? therefore, no recovery from a third party can be
A. It is one year from denial of the claim and not from deemed adequate to compensate the insureds
the date of the accident. beneficiary.
2. The right of insurer against a third party is limited
to the amount recoverable from latter by the
Q. What is the Principle of Subrogation?
Q: What if the amount paid by the insurance
company does not fully cover the injury or loss?
A. If the plaintiffs property has been insured, and he
A: The aggrieved party shall be entitled to recover the
has received indemnity from the insurance company
deficiency from the person causing the loss or injury.
for the injury or loss arising out of wrong or breach of
(Art. 2207, NCC)
contract complained of, the insurance company shall
be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the
contract. (Art. 2207, NCC)



Q: What are the instances where the right of

subrogation does not apply?

1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
2. The insurer loses his rights against the wrongdoer
since the insurer can only be subrogated to only
such rights as the insured may have
3. Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or
risk not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance



TRANSPORTATION LAW services on a an occasional, episodic or unscheduled

basis. Neither does Article 1732 distinguish between
a carrier offering its services to the general public,
Q: What laws govern contracts of transportation? i.e., the general community or population, and one
who offers services or solicits business only from a
A: Contracts of transportation, whether by land, sea narrow segment of the general population. Article
or air, if WITHIN THE PHILIPPINES or if the 1733 deliberately refrained from making such
transportation of goods be FROM A FOREIGN distinctions. (Perez, Quizzer and Reviewer on
COUNTRY TO THE PHILIPPINES shall be governed by Commercial Laws Vol. IV, 2009 ed., citing Caltex
the following laws, arranged by order of application: [Phils.] vs. CA, GR No. 131166, September 30, 1999.)

1. Provisions of the New Civil Code on Common Q: What is a private carrier?

2. Code of Commerce; and A: A carrier which does not qualify under the
3. Special laws such as Carriage of Goods by the Sea requisites of a common carrier is deemed a private
(COGSA); Salvage Law; Public Service Act; Land carrier. (National Steel Corporation v CA, G.R. No.
Transportation and Traffic Code; Tariff and 112287. December 12, 1997.)
Customs Code; and Civil Aeronautics Act.
(Articles 1735 and 1766, New Civil Code; A private carrier is one who, without making the
American President Lines, Ltd. Vs. Klepper, GR activity a vocation, or without holding himself or itself
No. L-15671, November 29, 1960.) out to the public as ready to act for all who may
desire his or its services, undertakes, by special
Note: In the case of international carriage in Air agreement in a particular instance only, to transport
Transportation, Warsaw Convention applies. (ibid.) goods or persons from one place to another either
gratuitously or for hire. (Spouses Perena vs. Spouses
If the goods are to be transported of goods FROM
PHILIPPINES TO FOREIGN COUNTRY, the law of the latter Zarate, GR No. 157917, August 29, 2012.)
country shall govern the transportation contract. (ibid.)


Q: What are the requisites for an entity to be

classified as a common carrier?

1. Must be a Person, corporation, firm or
2. Must be engaged in the Business of carrying
or transporting passengers or goods or both
3. The carriage or transport must either be by
Land, water or air
4. The service is for aFee
5. The service is offered to the Public. (Article
1732, New Civil Code [NCC].)

Q: To be a common carrier, is it required that the

carriers principal activity is carriage of persons or

A: No. Article 1732 makes no distinction between one

whose principal business activity is the carrying of
persons or goods or both, and one who does such
carrying only as an ancillary activity (in local idiom, as
a sideline). Article 1732 also carefully avoids
making any distinction between a person or
enterprise offering transportation service on
a regular or scheduled basis and one offering such



Q: What are the distinctions between a common carrier from a private carrier?

To whom does Undertakes to carry passengers or goods for the Carriage is generally undertaken by special
the carrier public. (First Philippine Industrial Pipeline vs. CA, agreement and it does not hold itself out to
cater its 300 SCRA 661.) carry goods for the general public.
service (Loadmasters Customs Services, Inc. vs.
Glodel Brokerage G.R. No. 179446, January
10, 2011)
Governing Civil Provisions on Common Carriers, Public Service Civil Code provisions on Ordinary Contracts
laws Act, and other special laws relating to (ibid.)
transportation. (Spouses Perena vs. Spouses
Zarate, supra.)
Degree of Extraordinary diligence (Art. 1733, NCC.) Ordinary diligence or diligence of a good
Diligence father of the family (Spouses Perena vs.
required Spouses Zarate, supra.)
Presumption 1. If the goods are lost, destroyed or No presumption as to negligence (Planters
of Negligence deteriorated. Products vs. CA, GR No. 101503, Sept. 15,
2. In case of death of or injuries to passengers. 1993.)
(Art. 1735 and 1756, NCC.)
Whether Subject to regulation by a regulatory agency NOT subject to regulation by a regulatory
subject to agency
regulation or

Q: What is a public utility?

Q: What is a Certificate of Public Convenience (CPC)?
A: A business or service engaged in supplying the
public with some commodity or service of public A: An authorization issued for the operation of public
consequence, or essential to the general public. services for which no franchise, either municipal or
(Perez, supra, pg. 280, citing Albano vs. Reyes, 175 legislative, is required by law, such as a common
SCRA 264; KMU Labor Center vs. Garcia, 239 SCRA carrier.
Under the PSA, a CPC can be sold by the holder
Q: What is a public service? thereof because it has considerable material value
and is considered a valuable asset (Raymundo v.
A: Every person that may own, operate, manage, Luneta Motor Co., G.R. No. 39902, November 29,
control in the Philippines, for hire/compensation, 1933).
with general/limited clientele whether permanent,
occasional or accidental, and done for general Q: What is the difference between CPC and
business purposes, any common carrier, with or Certificate of Public Convenience and Necessity
without fixed route and whatever may be its [CPCN]?
classification, engaged in the transportation of
passengers or freight or both, canal, irrigation system, A:
gas, electric light, heat and power, water supply CPC CPCN
power, petroleum, sewerage system, wire or wireless Issued whenever the Issued upon approval of
communication systems, wire or wireless Public Service any franchise or privilege
broadcasting stations and stations and other similar Commission granted by any political
public services. (Sec. 13 [b], Public Service Act [PSA].) (Commission) finds that subdivision of the
the operation of the Philippines when in the
Note: The terms public utility and public service are proposed public service judgment of the political
used interchangeably. (Perez, supra, pg. 281.) will promote the public subdivision of the



interests in a proper and Philippines when in the On the other hand, under the Third Operator
suitable manner, for judgment of the Rule, where two operators are more than serving
which a municipal or Commission such the public there is no reason to permit a third
legislative franchise is franchise or privilege will operator to engage in competition with them.
NOT necessary. (Sec. 16 properly conserve the The fact that it is only one trip and of little
[a], PSA.) public interest. (Sec. 16 consequence is not sufficient reason to grant the
[b], PSA.) application. (Yangco v. Esteban, G.R. No. 38586,
Aug. 18, 1933)
Q: What are the requirements for the grant of CPC?
2. Where there are various applicants for a public
A: COPS utility over the same territory, all conditions
1. Applicant must be a Citizen of the Philippines. If being equal, priority in the filing of the
the applicant is a Corporation, 60% of its capital application for CPC becomes a factor prior
must be owned by Filipinos applicant rule.

2. Applicant must prove the Operation of proposed 3. Interpose an objection stating that the grant of
public service will promote public interest in a the application would result to a ruinous
proper and suitable manner competition. (Halili vs. Ice and Cold Storage
Industries, Inc., 77 Phil. 823.) One of the purposes
3. Applicant must prove Public necessity of PSA is to protect and conserve the
investments which have already been made for
4. Applicant must have Sufficient financial that purpose by public service operators
capability to undertake proposed services and Protection of Investment rule. (Batangas Trans.
meeting responsibilities incidental to its Co. vs. Orlanes, 52 Phil. 455.)
operation.(KMU Labor Center vs. Garcia, supra)
Note: Mere possibility of reduction in the income of an
Q: May a 100% foreign corporation own facilities existing operator holding a public service permit does
and equipment of a public utility such as EDSA LRT not, of itself, establish that issuing a permit to another
to operate within the same territory will result in
ruinous competition. To prove the latter, it should be
shown that the oppositor will not obtain sufficient
A: Yes. While the Constitution requires that a profits to pay a dividend or reasonable interest upon
franchise is needed for the operation of public utility invested capital. (Halili vs. Ice and Cold Storage
and that no franchise shall be granted to corporation Industries, Inc., supra.)
without at least 60% of its capital owned by Filipinos,
it does not require however, a franchise before one 4. Attack the citizenship of the applicant (Sec. 11,
can own the facilities needed to a public utility. The Art. XII of the 1987 Constitution prohibits the
right to operate a public utility may exist granting of franchise or certificate for the
independently and separately from the ownership of operation of public utility in favor of non-Filipino
the facilities thereof. One can own facilities without citizens); or
operating them as a public utility, or conversely one
may operate a public utility without owning the 5. The applicant does NOT have the necessary
facilities. (Tatad et al. v Sec. Garcia and EDSA LRT financial capacity. (KMU Labor Center vs. Garcia,
Corp Ltd., April 16, 1995.) supra.)

Q: What are the grounds that oppositors may raise Q: Does the CPC confer upon the holder any
to the application for a CPC? proprietary right or interest in the route covered
1. The area has already a well-established operator A: No. (Luque v. Villegas, G.R. No. L-22545, November
prior operator rule.(Mandbusco, Inc. vs. 28, 1969.) However, with respect to other persons
Francisco, 32 SCRA 405.) and other public utilities, a CPC as property, which
represents the right and authority to operate its
Note: The prior operator must first be given the facilities for public service, cannot be taken or
opportunity to extend its service in order to meet interfered with without due process of law.
public needs in the matter of transportation. (ibid.) Appropriate actions may be maintained in courts by
the holder of the certificate against those who have



not been authorized to operate in competition with Q: Cite instances where a certificate of public
the former and those who invade the rights which the convenience is NOT necessary?
former has pursuant to the authority granted by the
Commission (A.L. Animen Transportation Co. v. A: WAR-PIPA
Golingco, G.R. No. 17151, April 6, 1922.)
1. Warehouses
Q: What are the exceptions to the application of 2. Animal-drawn vehicles or banca powered by oar
prior operator rule or protection of investment or by sail; tug boats and lighters
rule? 3. Radio companies, except as to fixing of rates
4. Public market
A: 5. Ice plants
1. Where public interest would be better served by 7. Public utilities operated by the national
the new operator. (Intestate Estate of Teofilo government or Political subdivision except as to
Tiongson vs. Commission, 36 SCRA 241.) rates.
8. Airships except as to fixing rates
2. Where the old operator has failed to make an
offer to meet the increase in traffic. (Manila Q: Is the approval by the Commission of the sale,
Yellow Taxicab Co., Inc. vs. Castelo, GR No. L- encumbrance or lease of property a condition
131910, May 30, 1960.) precedent to the validity of a contract?

3. Where the certificate of public convenience A: No.While in the old law the sale without the
granted to the new operator is a maiden approval of the Public Utility Commission was
certificate, which does not overlap with the declared null and void, under PSA, the new law, the
entire route of the old operator but only a short sale may not only be negotiated but completed
portion thereof as a convergence point. before said approval.
(Mandbusco, Co. vs. Francisco, supra.)
In other words, the approval by the Commission is
4. If the application of the rule will be conducive to not a condition precedent to the validity of the
monopoly of the service, and contrary to the contract. The approval is only necessary to protect
principle that promotes healthy competition. public interest (Darang vs. Belizar, G.R. No. L-19487,
(Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc., January 31, 1967.)
5 SCRA 234.)
Q: Is Certificate of Public Convenience (CPC)
5. If the old operator unjustifiably abandoned his necessary before a carrier can be considered a
service for two or three years by not registering common carrier?
the necessary equipment forfeits his right to said
equipment and the service authorized to him. A: No. A person or entity is a common carrier even if
(Farias vs. Estate of Florencio Buan, GR No. he did not secure CPC. Its liability as a common
12306-7, November 29, 1961.) carrier arises as soon as it acted as a common carrier,
without regard as to whether or not such carrier has
6. The service of the prior operator is inefficient complied with the requirements of the applicable
regulatory statute and implementing regulations and
7. The prior operator denies that there is a need to has been granted a certificate of public convenience
expand his service or other franchise. (De Guzman v CA. 168 SCRA 612
8. The prior operator has abandoned his service
9. The prior operation is operating less units than
he was authorized. Q: What is the diligence required of common
10. The prior operator was given the opportunity to
expand his service and failed to do so. A: Extraordinary diligence. (Art. 1733, NCC.) The
nature of the business of common carriers and the
exigencies of public policy demand that they observe
extraordinary diligence. (Martin, Commentaries and



Jurisprudence on the Phil. Commercial Laws, 1989 Ed., its horn as a warning to all the vehicles that might
pg. 3.) be crossing the railway tract, but there was really
nobody manning the crossing. X was listening to his
Q: What is meant by extraordinary diligence? lpod touch, hence, he did not hear the sound of the
horn of the train and so his car was hit by the train.
A: It is that extreme measure of care and caution As a result of the accident, X suffered some injuries
which persons of unusual prudence and and his car was totally destroyed as a result of the
circumspection use for securing and preserving their impact. Is PNR liable? (2012 Bar Question)
own property or rights. The law requires common
carriers to render service with the greatest skill and A: PNR is liable because Railroad companies owe to
utmost foresight. (Loadmasters Services vs. Glodel the public a duty of exercising a reasonable degree of
Brokerage, supra.) care to avoid injury to person and property at railroad
crossings which means a flagman or a watchman
Q: When does the duty to observe extraordinary should have been posted to warn the public at all
diligence by the common carrier commence and times.
cease in connection to the transfer of goods?
A: It lasts from the time the goods are unconditionally
placed in the possession of, and received by the Q: When is the common carrier presumed to be
carrier for transportation until the same are negligent in the carriage of goods?
delivered, actually or constructively, by the carrier to
the consignee, or to the person who has a right to A: In all cases other than those mentioned in Nos. 1,
receive them. (Art. 1736, NCC.) 2, 3, 4, and 5 of Article 1734 of the NCC, if the goods
are lost, destroyed or deteriorated, common carriers
Note: Thus, this duty remains in full force and effect even are presumed to have been at fault or to have acted
when they are temporarily unloaded or stored in transit, negligently.(Art. 1735, NCC.)
unless the shipper or owner had made use of the right or
stoppage in transit.(Art. 1737, NCC.)
Q: When is the common carrier presumed to be
However, this extraordinary liability continues to be
negligent in the transportation of passengers?
operative even during the time the goods are stored in a
warehouse of the carrier at the place of destination, until A: In case of death of or injuries to passengers,
the consignee has been advised of the arrival of the goods common carriers are presumed to have been at fault
and has been reasonable opportunity thereafter to remove or to have acted negligently. (Art. 1756, NCC.)
them or otherwise dispose of them. (Art. 1738, NCC.)
Q: In the above instances, is the presumption of
Q: When does the duty to exercise extraordinary negligence rebuttable?
diligence commence and cease with respect to
transport of passengers? A: Yes. Both articles 1735 and 1756 of the NCC
provides that such presumption may be refuted by
A: The duty of the common carrier commence from proving observance of extraordinary diligence as
the moment the person who purchases the ticket prescribed by article 1733 of the NCC.
from the carrier presents himself at the proper place
and in a proper manner to be transported.The Q: May moral damages be recovered in breach of
relation of carrier and passenger continues until the contract of transportation?
passenger has been landed at the port of destination
and has left the vessel owner's dock or premises. A: GR: No. Moral damages are not recoverable in
Once created, the relationship will not ordinarily breach of contract of transportation because such
terminate until the passenger has, after reaching his contract cannot be considered included in the
destination, safely alighted from the carrier's analogous cases used in Article 2219 of the NCC.
conveyance or had a reasonable opportunity to leave This is likewise to consider that Art. 2176 of the NCC
the carrier's premises. (Aboitiz Shipping Corp. v. CA, expressly excludes the cases where there is a pre-
G.R. No. 84458, Nov. 6, 1989) existing contractual relation between the parties.
(Versoza vs. Baytan, et al., 107 Phil. 1010.)
Q: X, while driving his Toyota Altis, tried to cross the
railway tract of Philippine (xxx line 2 unread text
xxx) approached Blumentritt Avenida Ext., applied



XPN: Moral damages may be recovered even in exempt from liability. (Hernandez vs. Dolor, 435 SCRA
case of breach of contract of transportation in 668, July 30, 2004.)
the following cases:
Q: What is the so-called kabit system?
1. Where the mishap results in the death of the
passenger (M. Ruiz Highway Transit, Inc. vs. A: The kabit system is an arrangement whereby a
CA, 11 SCRA 98.) person who has been granted a CPC allows other
persons who own motor vehicles to operate them
2. Where it is proved that the carrier was guilty under his license, sometimes for a fee or percentage
of fraud or bad faith, even if death does not of the earnings (Lim v CA, G.R. No. 125817. January
result. (Rex Taxicab Co. vs. Bautista, GR No. 16, 2002).
L-15392, September 30, 1960.)
Note: Although not outrightly penalized as a criminal
Note: Although the relation of passenger and offense, the kabit system is invariably recognized as being
carrier is "contractual both in origin and nature" contrary to public policy and therefore, void and inexistent
nevertheless the act that breaks the contract under Art. 1409 of the New Civil Code. It is a fundamental
may be also a tort"when said act is done with principle that the court will not aid either party to enforce
gross negligence or with bad faith. (Air France v an illegal contract, but will leave them both where it finds
Carrascoso, G.R. No. L-21438, September 28, them. (Lita Enterprises, Inc. v. IAC, G.R. No. 64693, April 27,
1966.) 1984.)

Q: What is the so-called boundary system? Q: May the registered owner of the vehicle be
allowed to prove that there is already a transfer of
A: Under this system the driver is engaged to drive ownership to another person under the kabit
the owner/operators unit and pays the latter a fee system?
commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his A: No. One of the primary factors considered in the
income. (Paguio Transport Corp. v. NLRC, G.R. No. granting of a CPC for the business of public
119500, August 28, 1998). The gasoline consumed by transportation is the financial capacity of the holder
the jeep is for the account of the driver (National of the license, so that liabilities arising from accidents
Labor Union v. Dinglasan, G.R. No. L-14183, Nov. 4, may be duly compensated. The kabit system renders
1993) illusory such purpose and, worse, may still be availed
of by the grantee to escape civil liability caused by a
Q: What kind of relationship exists between the negligent use of a vehicle owned by another and
owner of the vehicle and the driver under a operated under his license.
"boundary system" arrangement?
If a registered owner is allowed to escape liability by
A: The relationship between jeepney owners/ proving who the supposed owner of the vehicle is, it
operators on one hand and jeepney drivers on the would be easy for him to transfer the subject vehicle
other under the boundary system is that of employer- to another who possesses no property with which to
employee and not of lessor-lessee. (Martinez v. NLRC, respond financially for the damage done. (Lim v. CA,
G.R. No. 117495, May 29, 1997). supra.)

Q: Is the owner of the public vehicle operating under Q: Can the grantee of CPC engaged in a kabit
the boundary system exempt from liability in a system be held liable for damages arising from the
case of injury to or death of passengers? crime of reckless imprudence resulting to the death
and injuries to third persons, to which the driver
A: No. To exempt from liability the owner of a public was convicted?
vehicle who operates it under the boundary system
on the ground that he is a mere lessor would be not A: Yes. The driver, the operator, and the real owner
only to abet flagrant violations of the PSA, but also to of the vehicle are jointly and severally liable for
place the riding public at the mercy of reckless and damages. However, the registered owner or operator
irresponsible drivers. Moreover, due care in the has the right to be indemnified by the real or actual
selection of employees is called for by Article 2180 of of the amount that he may be required to pay as
the Civil Code. Failing on this, the owner of the damage for the injury caused. Recovery by the
vehicle, who is likewise the employer, shall not be registered owner or operator may be made in any
formeither by a cross-claim, third party complaint,



or an independent action, and the result is the same. calamity). Provided, the following conditions
(Perez, supra, pg. 310-311, citing Jereos vs. CA, 117 are present:
SCRA 395l Zamboanga Trans. Co. vs. CA, 30 SCRA a. Natural disaster was the proximate and
718.) only cause;
b. Carrier exercised due diligence to prevent
Q: X owns a passenger jeepney covered by or minimize loss before, during and after
Certificate of Public Convenience. He allowed Y to the occurrence of the natural disaster;
use its Certificate of Convenience for a and
consideration. Y therefore was operating the c. The common carrier has not negligently
passenger jeepney under the same Certificate of incurred delay in transporting the goods.
Public Convenience (Kabit System) under the name (Art. 1739-1740, NCC)
of X. The passenger jeepney met an accident. Who d. The common carrier exercised due
will be liable? (2012 Bar) diligence to prevent or minimize the loss
A: X and Y will be jointly and severally liable before, during or after its occurence

Q: X owns a fleet of taxicabs. He operates it through 2. Act of the public enemy in war, whether
what is known as boundary system. Y drives one of international or civil, provided:
such taxicabs and pays X a fixed amount of Php1 a. Act was the proximate and only cause;
,000 daily under the boundary system. This means and
that anything above Php1 ,000 would be the b. Carrier exercised due diligence to prevent
earnings of Y. Y, driving recklessly, hit an old lady or minimize loss before, during and after
crossing the street. Which statement is most the act (Art. 1739-1740, NCC)
accurate? (2012 Bar Question)
3. Act or omission of the shipper or owner of the
a. X as the owner is exempt from liability because goods, provided:
he was not the one driving. a. If proximate and only cause exempting
b. X as the owner is exempt from liability because b. If contributory negligence mitigating
precisely the arrangement is one under the
"boundary system". 4. The Character of the goods or defects in the
c. X will not be exempt from liability because he packing or in the containers; provided, carrier
remains to be the registered owner and the exercised due diligence to forestall or prevent
boundary system will not allow the loss (Art 1742).
circumvention of the law to avoid liability.
d. Y is the only one liable because he drove Note: If the fact of improper packing is known to
the carrier or its servants, or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not relieved
A: C. X will not be exempt from liability because he from responsibility for loss or injury resulting
remains to be the registered owner and the boundary therefrom. (Southern Lines Inc., v. CA, GR No. L-
system will not allow the circumvention of the law to 16629, January 31, 1962.)
avoid liability
5. Order or act of competent authority;
VIGILANCE OVER GOODS provided, the authority is with power to issue
EXEMPTING CAUSES the order (Art. 1743). If the officer acts
without legal process, the common carrier
Q: What is the presumption on the loss, destruction, will be held liable. (Ganzon vs. CA, GR No. L-
or deterioration of goods? 48757, May 30, 1988).

A: GR: The common carrier is presumed to have been Note: In all cases other than those enumerated above,
at fault or to have acted negligently when the there is presumption of negligence even if there is an
goods transported are lost, destroyed or agreement limiting the liability of the common carrier in
the vigilance over the goods.
deteriorated. (Art. 1735, NCC.)

XPN: When the same is due to any of the

following causes only: F A C O
1. Fortuitous events (Flood, storm, earthquake,
lightning or other natural disaster or



REQUIREMENT OF ABSENCE OF NEGLIGENCE account the surrounding circumstances of the

case. Thus, the common carrier will still be liable.
Q: What are the requisites of a fortuitous event? (Arada v. CA, G.R. No. 98243, July 1, 1992)

A: FEU - I Q: Is fire considered a natural disaster?

1. The debtor must be Free from any
participation in or aggravation of the injury A: No. This must be so as it arises almost invariably
to the creditor. from some act of man or by human means. It does
2. The Event must be such as to render it not fall within the category of an act of God UNLESS
impossible for the debtor to fulfill his caused by lightning or by other natural disaster or
obligation in a normal manner. calamity. It may even be caused by the actual fault or
3. The event must be Unforeseen or privity of the carrier (Eastern Shipping Lines v. IAC, GR
unavoidable. No. L-69044, May 29, 1987).
4. The cause of the breach of obligation must
be Independent of the will of the debtor. Note: In case that the goods have been already deposited
(Real vs. Belo, GR No. 146224, January 26, in the warehouse of Bureau of Customs then the goods was
2007.) destroyed by fire, the carrier is not anymore liable
(Servando vs. Philippine Steam Navigation, GR No. L-36481-
2, October 23, 1982).
Q: Are mechanical defects considered fortuitous
events? Give illustrations.
Q: Is a common carrier liable for the acts of
strangers or criminals?
A: No. Mechanical defects in the carrier are NOT
considered a caso fortuito that exempts the carrier
from responsibility. (Sweet Lines, Inc. v. CA, GR No. L-
GR: A common carrier is liable even for acts of
46340, Apr. 29, 1983). Other SC decisions on the
strangers like thieves or robbers.
matter are:
XPN: Where such thieves or robbers acted "with
1. Tire blowout of a jeep is not a fortuitous event
grave or irresistible threat, violence or force." The
where there exists a specific act of negligence by
common carrier is not liable for the value of the
the carrier consisting of the fact that the jeepney
undelivered merchandise which was lost because of
was overloaded and speeding at the time of the
an event that is beyond his control. (De Guzman v.
incident. (Juntilla v. Fontanar, GR No. L-45637, May
CA, supra.)
31, 1985)
2. Defective brakes cannot be considered fortuitous in
character. (Vergara v. CA, G.R. No. 77679,
Q: What are the rules regarding the time of delivery
September 30, 1987)
of goods and delay?
Q: Is the occurrence of a typhoon a fortuitous
1. If there is an agreement as to time of delivery
delivery must be within the time stipulated in the
A: GR: Yes, if all the elements of a natural disaster or
contract or bill of lading.
calamity concur and there was no contributory
2. If there is no agreement delivery must be
negligence or delay. This holds true especially if the
within a reasonable time. (Saludo, Jr. v. CA, G.R.
vessel was seaworthy at the time it undertook that
No. 95536, March 23, 1992)
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would permit
Q: If there is delay in the delivery of goods, what is
safe travel of the vessel to its destination.(Philippine
the liability of the carrier?
American General Insurance Co., Inc. v. MGG Marine
Services, Inc., G.R. No. 135645, March 8, 2002)
A: The carrier shall be liable for damages immediately
and proximately resulting from such neglect of duty.
XPN: If a vessel sank due to a typhoon, and there
(ibid.; Art. 1170, NCC.)
was failure to ascertain the direction of the storm
and the weather condition of the path they would
be traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into



Q: What is the effect to the limited liability of an would use under the circumstances. (Martin, supra,
unjust delay in the transportation or goods or a pg. 14, citing Rakes vs. Atlantic Gulf Co., 7 Phil. 359.)
deviation from stipulated or usual route?
Q: What is the rule if there is contributory
A: If the common carrier, without just cause, delays negligence on the part of the shipper?
the transportation of the goods or changes the
stipulated or usual route, the contract limiting the A: If the shipper or owner merely contributed to the
common carriers liability cannot be availed of in case loss, destruction or deterioration of the goods, the
of the loss, destruction, or deterioration of the goods; proximate cause thereof being the negligence of the
(Art. 1747, NCC.) common carrier, the latter shall be liable for
damages, which however, shall be equitably reduced.
Q: Is a stipulation limiting the common carriers (Art. 1741, NCC.)
liability for delay on account of riots valid?
A: Yes. An agreement limiting the common carriers DELIVERY OF GOODS TO A COMMON CARRIER
liability for delay on account of strikes or riots is valid.
(Art. 1748, NCC.) Q: When does the extraordinary responsibility of the
common carrier begin and when does it end?
A: It lasts from the time the goods are unconditionally
Q: What is the duty of the common carrier before, placed in the possession of, and received by the
during and after the natural disaster or acts of a carrier for transportation until the same are
public enemy as contemplated under Article 1734 of delivered, actually or constructively, by the carrier to
the NCC? the consignee or to the person who has a right to
receive them. (Art. 1736, NCC.)
A: The common carrier must exercise due diligence to
prevent or minimize loss before, during and after the Q: What does the law mean with unconditionally
occurrence of flood, storm or other natural disaster placed in the possession of, and received by the
or an act of a public enemy in order that the common carrier for transportation?
carrier may be exempted from liability for the loss,
destruction or deterioration of the goods. (Art. 1739, A: It is the delivery of the goods to the carrier for
NCC.) immediate transportation, that is, as soon as the
delivery is complete so as to place on the carrier the
Note: This exemption from liability also requires that the exclusive duty of seeing after their safety (Perez,
common carrier must prove that the natural disaster or the supra, pg. 38, citing Charles J. Webb & Sons vs.
act of the public enemy is the proximate and only cause of Central R. Co. of NJ, 36 F. 2d 702.)
the loss. (ibid.). Further, if the common carrier negligently Note: When the goods are unconditionally placed in the
incurs delay in transporting the goods, a natural disaster possession and control of the common carrier, and upon
shall not free such carrier from responsibility. (Art. 1740, their receipt by the carrier for transportation, the contract
NCC.) of carriage was deemed perfected. The fact that part of the
shipment had not been loaded on board the lighter did not
Q: If the loss, destruction, or deterioration of the impair the said contract of transportation as the goods
goods was caused by the character of the goods, or remained in the custody and control of the carrier, albeit
the faulty nature of the packing or the containers, still unloaded (Ganzon vs. CA, supra).
what is duty of the common carrier?
Q: Is the execution of a receipt or bill of lading
A: The common carrier must exercise due diligence to required to commence the responsibility to observe
forestall or lessen the loss. extraordinary diligence?

CONTRIBUTORY NEGLIGENCE A: No. The requirement to observe extraordinary

diligence begins with the actual delivery of the goods
Q: What is contributory negligence? for transportation, and not merely with the formal
execution of a receipt or bill of lading; the issuance of
A: Contributory negligence is the failure of a person a bill of lading is not necessary to complete delivery
who has been exposed to injury by the fault or and acceptance by the carrier. (Compania Maritima v.
negligence of another, to use such degree of care for Insurance Co. of North America, G.R. No. L-18965,
his safety and protection an ordinarily prudent man October 30, 1964)



ACTUAL OR CONSTRUCTIVE DELIVERY Q: What is the rule as to unloading, storage and

stoppage in transitu?
Q: To whom should delivery be made?
A: GR: The common carriers duty to observe
A: It must be delivered, actually or constructively, to extraordinary diligence in the vigilance over the
the consignee or to the person who has a right to goods remains in full force and effect even when they
receive them.(Art.1736, NCC.) are temporarily unloaded or stored in transit.

Note: Delivery of the cargo to the customs authorities is not XPN: When the shipper or owner has made use of
delivery to the consignee, or to the person who has a right the right of stoppage in transitu.(Art. 1737, NCC.)
to receive them. (Lu Do & Lu Ym Corp. v. Binamira, GR No.
L-9840, April 22, 1957.)
Q: What is the diligence required in exercising the
right of stoppage in transitu?
Q: What is constructive delivery?
A: Ordinary diligence because of the following:
A: There is constructive delivery when delivery is
effected not by actually transferring the possession of a. It is holding the goods in the capacity of an
thing to the vendee (in this case, the other party, ordinary bailee or warehouseman and not as a
either the carrier or the consignee) but by legal carrier
formalities or by symbolic tradition. (Pineda, Sales b. There is a change of contract from a contract of
and Other Special Contracts, pg. 56.) carriage to a contract of deposit. (Art. 1737,
Q: Who is liable for the misdelivery by a carrier who
was chosen by the buyer? Q: What further obligation is required of the
common carrier in case of stoppage in transitu?
A: Misdelivery of the goods is attributable to the
carrier and not to the seller. And, since the carrier A: When notice of stoppage in transitu is given by the
was chosen and authorized to make the delivery by seller to the carrier, he must redeliver the goods to,
the buyer itself, the seller cannot be held responsible or according to the directions of, the seller. The
for such misdelivery. (Smith, Bell & Co. [Phils.] vs. expenses of such delivery must be borne by the
Gimenez, 8 SCRA 407 [1963].) seller. (Art. 1532, NCC.)

TEMPORARY UNLOADING OR STORAGE Note: If the seller instructs to deliver it somewhere else, a
new contract of carriage is formed and the carrier must be
Q: What is the right of stoppage in transitu? paid accordingly.

A: It is the right exercised by the seller by stopping STIPULATION FOR LIMITATION OF LIABILITY
the delivery of the goods to a certain buyer or
consignee (because of insolvency) when such goods Q: What are the valid stipulations that a common
are already in transit. (Art. 1530, NCC.) carrier of goods may indicate in a contract in order
to escape liability?
Q: How is this right exercised?
A: The seller may exercise this right either by 1. A stipulation limiting the liability of the common
obtaining actual possession of the goods or by giving carrier for the loss, destruction, or deterioration
notice of his claim to the carrier or other bailee in of the goods to a degree less that extraordinary
whose possession the goods are. Such notice may be diligence, provided it be:
given either to the person in actual possession of the
goods or to his principal. In the latter case, the notice, a. In writing, signed by the shipper or owner,
to be effectual, must be given at such time and under b. Supported by a valuable consideration other
such circumstances that the principal, by the exercise than the service rendered by the common
of reasonable diligence, may prevent a delivery to the carrier, and
buyer. (Art. 1532, NCC.) c. Reasonable, just and not contrary to public



2. An agreement limiting the common carrier's

liability for delay on account of strikes or riots. 3. That the common carriers liability for acts
(Art. 1748, NCC.) committed by thieves, or of Robbers who do not
act with grave or irresistible threat, violence or
3. A stipulation that the common carrier's liability is force, is dispensed with or diminished
limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner 4. Any similar stipulation that is Unreasonable,
declares a greater value. (Art. 1749, NCC.) unjust and contrary to public policy.

4. A contract fixing the sum that may be recovered 5. That the common carrier shall Exercise a degree
by the owner or shipper for the loss, destruction, of diligence less than that of a good father of a
or deterioration of the goods (Art. 1750, NCC.) family, or a man of ordinary prudence in the
vigilance over the movables transported
Q: Notwithstanding these valid stipulations, can
common carriers be held liable for the loss, or 6. That the common carrier will not be liable for any
destruction or deterioration of the goods? Loss, destruction, or deterioration of the goods

A: Yes. If the common carrier, without just cause, 7. That the common carrier shall not be responsible
delays the transportation of the goods or changes the for the acts or omissions of his or its Employees.
stipulated or usual route, the contract limiting the
common carrier's liability cannot be availed of in case 8. That the common carrier is not responsible for
of the loss, destruction, or deterioration of the the loss, destruction or deterioration of goods on
goods.(Art. 1747, NCC.) account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used
Q: May a stipulation limiting the common carriers in the contract of carriage. (Art. 1745, NCC.)
liability be annulled by the shipper or owner?
A: Yes, if the common carrier refused to carry the
goods unless the shipper or owner agreed to such Q: What are the requirements in order that a
stipulation. (Art. 1746, NCC.)However, under this stipulation limiting the liability of common carriers
provision, annulment of the agreement limiting the in the carriage of goods be valid?
carriers liability is still necessary (Martin, supra., pg.
18). A: A contract fixing the sum that may be recovered
for the loss, destruction, and deterioration of goods is
Q: What is the effect of the agreement on limiting binding provided that it is:
the liability to the presumption of negligence of the
carrier? a. just and reasonable under the circumstances and
b. it has been fairly and freely agreed upon. (Art.
A: Even if there is an agreement limiting the liability 1750, NCC.)
of the common carrier in the vigilance over the
goods, the common carrier is still disputably LIMITATION OF LIABILITY IN ABSENCE OF
presumed to have been negligent in case of its loss, DECLARATION OF GREATER VALUE
destruction or deterioration.(Art. 1752, NCC.)
Q: What is the extent of the liability of the common
VOID STIPULATIONS carrier in case there is a stipulation fixingspecified
Q: What are the void stipulations in a contract of
carriage of goods? A: GR: Theliability of the common carrier shall not
exceed thestipulation in a contract of carriage even if
A:CR UELED the loss or damage results from the carrier's
negligence (Eastern and Australian Shipping Co. v
1. That the common carrier need not observe any Great American Insurance Co., GR No. L-37604,
diligence in the Custody of the goods October 23, 1981)

2. That the goods are transported at the Risk of the XPN: Where the shipper or owner of the goods
owner or shipper.



declares a greater value and pays corresponding arises from the character of the things brought
freight. (Art. 1749, NCC.). into the carrier. (Art. 2002, NCC)

Q: What are the requirements in order that a 5. The common carrier cannot free himself from
common carriers extent of liability be increased? responsibility by posting notices to the effect
that he is not liable for the articles brought by
A: The common carriers liability may be extended the passenger. Any stipulation between the
beyond the specified amount mentioned if; common carrier and the shipper whereby the
responsibility of the former as set forth in
1. the shipper or owner of the goods declares a Articles 1998 to 2001 is suppressed or diminished
greater value and shall be void. (Art. 2003, NCC)
2. pays corresponding freight. (Art. 1749, NCC).
Q: Can a common carrier be held liable for the loss
LIABILITY FOR BAGGAGE OF PASSENGERS of a valuable item stolen by other passenger when
CHECKED-IN BAGGAGE the victim told the driver that he has valuable item?
(1997 Bar Question)
Q: What rule will apply on checked-in baggage of
passengers? A: Yes. Ordinarily, the common carrier is not liable for
acts of other passengers. But the common carrier
A: The provisions of Articles 1733 to 1753 of the NCC cannot relieve itself from liability if the common
shall apply (Art. 1754, NCC) carriers employees could have prevented the act or
omission by exercising due diligence. In this case, the
BAGGAGE IN POSSESSION OF PASSENGERS passenger asked the driver to keep an eye on the bag
which was placed beside the drivers seat. If the
Q: What rule will apply when the baggage is in the driver exercised due diligence, he could have
personal custody of the passengers of their prevented the loss of the bag.
A: The rules in articles 1998 and 200 to 2003
concerning the responsibility of hotel-keepers for Q: What is the extent of the extraordinary diligence
necessary deposit shall be applicable. (ibid.): of common carrier to passengers?

1. The common carrier shall be responsible for A: A common carrier is bound to carry the passengers
shippers baggage as depositaries, provided that safely as far as human care and foresight can provide,
notice was given to them, or to their employees, using the utmost diligence of very cautious persons,
of the effects brought by the guests and that, on with a due regard for all the circumstances.(Art 1755,
the part of the shipper, they take the precautions NCC.)
which said common carriers or their substitutes
advised relative to the care and vigilance of their Q: Who are not considered passengers?
effects. (Art. 1998, NCC)
2. The responsibility shall include the loss of, or 1. One who has boarded a Wrong vehicle, has been
injury to the personal property of the shipper properly informed of such fact, and on alighting,
caused by the employees of the common carrier is injured by the carrier
as well as strangers; but not that which may
proceed from any force majeure. (Art. 2000, 2. Invited guests and Accommodation passengers
3. One who attempts to board a Moving vehicle,
3. The act of a thief or robber, who has entered the although he has a ticket, unless the attempt be
carrier is not deemed force majeure, unless it is with the knowledge and consent of the carrier
done with the use of arms or through an
irresistible force. (Art. 2001, NCC) 4. One who remains on a carrier for an
Unreasonable length of time after he has been
4. The common carrier is not liable for afforded every safe opportunity to alight
compensation if the loss is due to the acts of the
shipper, his family, or servants, or if the loss


Note: The carrier is thus NOT obliged to exercise WAITING FOR CARRIER OR BOARDING OF CARRIER
extraordinary diligence but only ordinary diligence in these
instances. Q: What is the duty of the common carriers in
boarding of passengers?
A: It is the duty of common carriers of passengers,
Q: Are stipulations limiting the liability of common including common carriers by railroad train, streetcar,
carrier in case of injury or death valid? or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an
A: GR: The responsibility of a common carrier for the opportunity to board and enter, and they are liable
safety of passengers cannot be dispensed with or for injuries suffered by boarding passengers resulting
lessened by stipulation, by posting of notices, by from the sudden starting up or jerking of their
statements on tickets, or otherwise. (Art. 1757, NCC.) conveyances while they are doing so (Dangwa vs.
CA,G.R. No. 95582, October 7, 1991.).
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carriers liability for Q: When a Public Utility Vehicle is not in motion, is
negligence is valid. (Art. 1758, NCC.) there a necessity for a person who wants to ride the
same to signal his intention to board?
Note: The passenger must be carried gratuitously. If it is
only a reduction of fare, then any limitation of the A: No. When the bus is not in motion there is no
common carriers liability is not justified (ibid.).
necessity for a person who wants to ride the same to
signal his intention to board. A public utility bus, once
XPN to the XPN: Notwithstanding the exception,
it stops, is in effect making a continuous offer to bus
common carriers will be liable nevertheless forwillful
riders. Hence, it becomes the duty of the driver and
acts or gross negligence. (ibid.)
the conductor, every time the bus stops, to do no act
that would have the effect of increasing the peril to a
Q: What is assumption of risk on the part of
passenger while he was attempting to board the
same. The premature acceleration of the bus in this
case was a breach of such duty. (ibid.)
A: Passengers must take such risks incident to the
mode of travel. The passenger must observe the
Q: May a common carrier be held liable to a
diligence of a good father of a family to avoid injury
passenger who died while trying to board their
to himself. (Art. 1761, NCC.)
Note: Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to perform
A: Yes. It is the duty of common carriers of
certain duties to the public as the law imposes, and holds passengers to afford passengers an opportunity to
itself liable for any breach thereof. (Pilapil v. CA, G.R. No. board and enter, and they are liable for injuries
52159, Dec. 22, 1989) suffered by boarding passengers resulting from the
sudden starting up or jerking of their conveyances
DURATION OF LIABILITY while they are doing so. The victim, by stepping and
standing on the platform of the bus, is already
Q: When does the duty of the common carrier to considered a passenger and is entitled all the rights
observe extraordinary diligence over passengers and protection pertaining to such a contractual
exist? relation. (ibid.)

A: The duty exists from the moment the person offers Q: Is a person mere stepping on the platform of a
to be transported places himself in the care and bus already considered a passenger?
control of the common carrier who accepts him as
such passenger.The duty continues until the A: Yes. The person, by stepping and standing on the
passenger has, after reaching his destination, safely platform of the bus, is already considered a
alighted from the carriers conveyance or has had a passenger and is entitled all the rights and protection
reasonable opportunity to leave the carriers pertaining to such a contractual relation. Hence, it
premises and to look after his baggage and prepare has been held that the duty which the carrier owes to
for his departure. (La Mallorca vs. CA, GR No. L- its patrons extends to persons boarding cars as well
20761, July 27, 1966; Aboitiz Shipping, supra.) as to those alighting therefrom (Dangwa vs. CA,G.R.
No. 95582, October 7, 1991).



Q: If the bus started moving slowly when the Q: Robert De Alban and his family rode a bus owned
passenger is boarding the same, is the passenger by Joeben Bus Company. Upon reaching their
negligent? desired destination, they alighted from the bus but
Robert returned to get their baggage. However, his
A: No. Further, even assuming that the bus had "just youngest daughter followed him without his
started" and "was still in slow motion" at the point knowledge. When he stepped into the bus again, the
where the victim had boarded and was on its bus accelerated that resulting to Roberts daughter
platform, the victim cannot be considered negligent death. The bus ran over her. Is the bus company
under the said circumstances.. (Dangwa vs. CA, G.R. liable?
No. 95582, October 7, 1991)
A: Yes. The relation of carrier and passenger does not
Q: P, a sales girl in a flower shop at the Ayala Station cease at the moment the passenger alights from the
of the Metro Rail Transit (MRT) bought two tokens carriers vehicle at a place selected by the carrier at
or tickets, one for her ride to work and another for the point of destination, but continues until the
her ride home. She got to her flower shop where she passenger has had a reasonable time or reasonable
usually worked from 8 a.m. to 5 p.m. At about 3 opportunity to leave the current premises (La
p.m., while P was attending to her duties at the Mallorca vs. CA,GR L-20761, 27 July 1966).
flower shop, two crews of the MRT got into a fight
near the flower shop, causing injuries to P in the LIABILITY FOR ACTS OF OTHERS
process. Can P sue the MRT for contractual breach
as she was within the MRT premises where she EMPLOYEES
would shortly take her ride home? (2011 Bar
Question)( Q: Are common carriers liable for acts of its
A: No, since P had no intention to board an MRT train
coach when the incident occurred. A: Common carriers are liable for the death of or
injuries to passengers through the negligence or
ARRIVAL AT DESTINATION willful acts of the formers employees, although such
employees may have acted beyond the scope of their
Q: To what extent is the common carrier liable for authority or in violation of the orders of the common
death or injury to passengers upon arrival at carriers. The liability of the common carriers does not
destination? cease upon proof that they exercised all the diligence
of a good father of a family in the selection and
A: Once created, the relationship will not ordinarily supervision of their employees. (Art. 1759, NCC.)
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's Note: The liability of the common carrier to the personal
conveyance or had a reasonable opportunity to leave violence of its employees or agents upon its passengers
the carrier's premises. All persons who remain on the extends only to those acts which the carrier could foresee
or avoid through the exercise of the diligence required.
premises a reasonable time after leaving the
conveyance are to be deemed passengers, and what
Q: Can this liability as regards acts of employees be
is a reasonable time or a reasonable delay within this
limited by stipulation?
rule is to be determined from all the circumstances,
and includes a reasonable time to see after his
A: No. The common carriers responsibility prescribed
baggage and prepare for his departure. (La Mallorca v
in the preceding article cannot be eliminated or
CA,G.R. No. L-21486, May 14, 1966)
limited by stipulation, by the posting of notices, by
statements on the tickets or otherwise. (Art. 1760,
Q: Is the victims presence in a vessel after 1 hour
from his disembarkation enough in order to absolve
the carrier from liability in his death?
Q: What is the rationale behind this principle?
A: No. Carrier-passenger relationship continues until
A: The basis of the carrier's liability for assaults on
the passenger has been landed at the port of
passengers committed by its drivers rests on the
destination and has left the vessel-owners premises
principle that it is the carrier's implied dutyto
(Aboitiz Shipping Corporation vs. CA, GR No. 84458,
transport the passenger safely. As between the
November 6, 1989.)



carrier and the passenger, the former must bear the the contents of packages or bags, particularly those
risk of wrongful acts or negligence of the carrier's handcarried by passengers. (Nocum v. Laguna
employees against passengers, since it, and not the Tayabas Bus Company, G.R. No. L-23733, October 31,
passengers, has power to select and remove them. 1969.)
(Maranan v. Perez, GR No. L-22272, June 26, 1967.)
Q: In the question above, if it were an airline
Q: The AAA Bus Company picks up passengers along company involved, would your answer be the same?
EDSA. X, the conductor, while on board the bus, (1992 Bar Question)
drew his gun and randomly shot the passengers
inside. As a result, Y, a passenger, was shot and died A: No. The common carrier should be made liable. In
instantly. Is AAA Bus Company liable? (2012 Bar case of air carriers, it is unlawful to carry flammable
Question) materials in passenger aircrafts, and airline
companies may open and investigate suspicious
A: Yes. The bus company is liable because common packages and cargoes pursuant to R.A. 6235.
carriers are liable for the negligence or willful act of
its employees even though they acted beyond the Q: A passenger was injured because a bystander
scope of their responsibility. outside the bus hurled a stone. Is the bus company
liable? (1994 Bar Question)
A: No. There is no showing that any such incident
Q: What is the extent of liability of common carriers previously happened so as to impose an obligation on
for acts of co-passengers or strangers? the part of the personnel of the bus company to warn
the passengers and to take the necessary precaution.
A: A common carrier is responsible for injuries Such hurling of a stone constitutes fortuitous event in
suffered by a passenger on account of the willful acts this case. The bus company is not an insurer of the
or negligence of other passengers or of strangers, if absolute safety of its passengers (Pilapil v. CA, G.R.
the carriers employees through the exercise of the No. 52159, Dec. 22, 1989).
diligence of a good father of a family would have
prevented or stopped the act or omission. (Art. 1763, Q: May the registered owner of the vehicle be held
NCC.) liable for damages suffered by a third person in the
course of the operation of the vehicle?
Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, the bus driver, the A: Yes. The registered owner of a public service
conductor, and the passengers disembarked for vehicle is responsible for damages that may arise
lunch. P decided, however, to remain in the bus, the from consequences incident to its operation or that
door of which was not locked. At this point, V, a may be caused to any of the passengers therein
vendor, sneaked into the bus and offered P some (Gelisan v. Alday, G.R. No. L-30212, Sept 30, 1987).
refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and Also, the liability of the registered owner of a public
contusions. Does he have cause to sue Sentinel service vehicle for damages arising from the tortious
Liner? (2011 Bar Question) acts of the driver is primary, direct, and joint and
several or solidary with the driver. (Philtranco Service
A: Yes, since the carrier's crew did nothing to protect Enterprises, Inc. v. CA, G.R. No. 120553)June
a passenger who remained in the bus during the stop-

Q: In a jeepney, Angela, a passenger, was injured Q: What are the kinds of damages that may be
because of the flammable material brought by recovered in case of death of a passenger?
Antonette, another passenger. Antonette denied her
baggage to be inspected invoking her right to A: DEMEx-AI
privacy. Should the jeepney operator be held liable 1. An indemnity for the death of the victim
for damages? 2. An indemnity for loss of earning capacity of the
A: No. The operator is not liable for damages. In 3. Moral damages
overland transportation, the common carrier is not 4. Exemplary damages
bound nor empowered to make an examination on 5. Attorney's fees and expenses of litigation



6. Interest in proper cases. (Brias v. People,G.R.

No. L-30309, Nov. 25, 1983) Q: What are the defenses available in culpa
7. Hospital and funeral expenses contractual?

Note: Carrier is not liable for exemplary damages where A: FEC

there is no proof that it acted in a wanton, fraudulent, 1. Exercise of extraordinary due diligence
reckless, oppressive or malevolent manner. 2. Fortuitous event
3. Contributory negligence of passengers it does
Q: How much is the jurisprudential indemnity of a not bar recovery of damages for death or injury if
common carrier in case of death of a passenger? the proximate cause is the negligence of the
common carrier but the amount of damages shall
A: In case of death of a passenger, the Common be equitably reduced. (Art. 1762)
Carrier is liable to pay 50,000 pesos as indemnity for
the life of a passenger. (Victory Liner v Gammad, G.R. Q: Should the diligence of the passenger be
No. 159636, November 25, 2004) considered in determining liability in case of injury?

Q: What is the formula for computing the indemnity A: Yes. The passenger must observe the diligence of a
for lost earnings in case of death of a victim? good father of a family or ordinary diligence to avoid
injury to himself (Art. 1761, NCC.). This means that if
A: The formula for the computation of unearned the proximate cause of the passengers injury is his
income is: negligence, the common carrier is not liable.

1. Net Earning Capacity = Life Expectancy x (Gross Q: What are the options available to recover
annual income - Reasonable and necessary living damages in case of death or injuries to persons,
expenses). which resulted from a collision?

2. Life expectancy is determined in accordance with A:

the formula: 2 /3 x (80 age of deceased at the time BASIS OF DEFENDANT OF THE
of death). (Heirs of Ochoa v VS.G & S Transport CIVIL CASE
Corporation, G.R. No. 170071, March 09, 2011 ) LIABILITY
Note: When there is no showing that the living expenses
1. Culpa Contract of Filed against the
constituted the smaller percentage of the gross income, the
Court fixes the living expenses at half of the gross income. contractual carriage common carrier
wherein he is a
Q: What is the liability with regard to moral passenger. (Art. 1733,
damages? 1755-1764, NCC.)
2. Culpa Quasi- May be filed by third
A: GR: Moral damages are not recoverable for breach aquiliana delict persons or the
of contract of carriage in view of Art. 2219-20 of the passenger against the
Civil Code. drivers (may also be the
owners) of both
XPN: vehicles and the owners
1. Where the mishap results in the death of the thereof.
2. Where it is proved that the common carrier If the owner is an
was guilty of fraud or bad faith, even if death employer of the driver,
does not result. still the former has a
primary liability for an
Q: How much is are the heirs of a deceased action brought on the
passenger entitled to recover by way of moral ground of quasi delict
damages? under Art. 2180, NCC.
(Carpio vs. Doroja, GR
A: The current jurisprudential award for the loss of No. 84516, December 5,
life of a passenger is 100,0000 pesos by way of moral 1989.)
damages (Victory Liner v Gammad, Ibid, Heirs of 3. Culpa Crime May be filed by the
Ochoa v VS.G & S Transport Corporation, Ibid) criminal third persons or the



passengers against the specific responsibilities and assume stipulated

driver (may also be the obligations; and
owner) at fault if his act 3. It is a symbol of the goods.
amounts to a crime.
If the owner is an
employer of the driver, Q: What is the three-fold character of a bill of
then the former has a lading?
subsidiary liability (Art.
103, Revised Penal Code A: It is a receipt for the goods shipped and a contract
[RPC].) for an action to transport and deliver the same as therein
brought on the ground stipulated.
of civil liability arising
from crime under Art. 1. As a receipt, it recites the date and place of
100 of the RPC. (Carpio shipment, describes the goods as to quantity,
vs. Doroja, supra.) weight, dimensions, identification marks and
condition, quality, and value.
Q: What are the distinctions between an action to
enforce liability of the employer of the negligent 2. As a contract, it names the contracting parties,
driver under Art. 103 of the RPC, and an action which include the consignee, fixes the route,
based on quasi-delict? destination, and freight rate or charges, and
stipulates the rights and obligations assumed by
A: the parties. (Phoenix Assurance Co., Ltd. v. United
ART. 103, RPC ART. 2180, NCC (QUASI- States Lines, G.R. No. L-24033, Feb. 22, 1968)
Employer is only Liability is primary and 3. As a documentof title it regulates the relations
subsidiarily liable. direct. between a carrier and a holder of the same.
There must be a Action may proceed
judgment of conviction independently from the Note: In the absence of a bill of lading, their respective
claims may be determined by legal proofs which each of
against the negligent criminal action.
the contracting parties may present in conformity with law.
driver otherwise the
action against the
Q: What are the two types of bill of lading?
employer would be
The defense of due The defense of due
1. Negotiable If issued to the bearer or to the
diligence in selection and diligence in selection
order of any person named in such bill.
supervision of employees and supervision of
2. Non-negotiable If issued to a specific person
cannot be invoked. employees may be
named in such bill.

BILL OF LADING Q: X is a trader of school supplies in Calapan,

Oriental Mindoro. To bring the school supplies to
Q: What is a bill of lading? Calapan, it has to be transported by a vessel.
Because there were so many passengers, the two (2)
A: It is a written acknowledgement of receipt of boxes of school supplies were loaded but the
goods and agreement to transport them to a specific shipping company was not able to issue the Bill of
place and to a named person or to his order. Lading. So, on board, the Ship Captain issued instead
a "shipping receipt" to X indicating the two (2) boxes
Q: What are the three functions of Bill of Lading? of school supplies being part of the cargo of the
vessel. Which phrase therefore, is the most
A: REC accurate? (2012 Bar Question)

1. It is a Receipt for the goods shipped a. the owner of the vessel is not liable because no
2. It is a Contract by which the three parties namely bill of lading was issued to X hence, no contract
the shipper, carrier and consignee undertake of carriage was perfected.



b. it is possible to have a contract of carriage of damages occasioned by the delay shall be suffered by
cargo even without a bill of lading, and the him (Art. 358,Code of Commerce).
"shipping receipt" would be sufficient.
c. the only acceptable document of title is a Bill of Q: When could a consignee refuse to take delivery of
Lading. goods?
d. None of the above.
A: B. Although Article 359 of the Code of Commerce 1. When a Part of the goods transported are
provides that the shipper as well as the carrier of delivered and the consignee is able to prove that
merchandise or goods may mutually demand that a he cannot make use of the part without the
bill of lading be made, still, said bill of lading is not others; (Art. 365, Code of Commerce)
indispensable. For as long as there is a meeting of the 2. If the cargo consists of Liquids and they have
minds of the parties, a contract of carriage exists leaked out, nothing remaining in the containers
even in the absence of a bill of lading (Perez, supra, but one-fourth () of their contents, on account
pg. 112, citing Robles vs. Santos, 44 OG 2268; of inherent defect of cargo. (Art. 687, Code of
Compania Maritima vs. Insurance Co. of NA, 12 SCRA Commerce)
213.) 3. If the goods are Damaged and such damage
renders the goods useless for the particular
DELIVERY OF GOODS purpose for which there are to be used; (Art.
365, Code of Commerce)
Q: Is the surrender of the bill of lading necessary 4. When there is Delay on account of the fault of
upon delivery of the goods? the carrier; (Art. 371, Code of Commerce)

Note: In all cases, the shipper may exercise the right of

A: Yes. If the carrier fails to require such surrender:
abandonment by notifying the carrier. Ownership over
damaged goods passes to the carrier and carrier must pay
1. If non-negotiable Action against the carrier shipper the market value of the goods at point of
does not lie. destination.

2. If negotiable Action by the shipper may lie PERIOD FOR FILING CLAIMS
against the carrier
Q: What is the period for filling claims?
Q: What is the period of delivery of goods?
A: If a period has been fixed for the delivery of the 1. Immediately after delivery if the damage is
goods, it must be made within such time, and, for apparent; or
failure to do so, the carrier shall pay the indemnity 2. Within 24 hours from delivery If the damage is
stipulated in the bill of lading, neither the shipper nor not apparent. (Art. 366, Code of Commerce)
the consignee being entitled to anything else (Art.
370, Code of Commerce). Q: When does Article 366 of the Code of Commerce
Q: If indemnity is not stipulated, how will it be
determined? A: It applies in case of domestic transportation (inter-
island) where there is damage to the goods
A: If no indemnity has been stipulated and the delay transported.
exceeds the time fixed in the bill of lading, the carrier
shall be liable for the damages which the delay may Q: What are the requisites before claim for damages
have caused. (Art. 370, Code of Commerce) under Art. 366 may be demanded?

Q: What is the duty of the carrier if there is no A:

period of time fixed for the delivery of goods? 1. Consignment of goods through a common
carrier, by a consignor in one place to a
A: The carrier shall be under the obligation to forward consignee in another place; and
them with the first shipment of the same or similar 2. The delivery of the merchandise by the carrier to
merchandise he may make to the point where he the consignee at the place of destination (New
must deliver them, and should he not do so, the Zealand Ins. Co., Ltd. v. Choa Joy, G.R. No. L-7311,
Sept. 30, 1955).



4. Supercargoes (Sundiang, p 437, Commecial Law

Q: What is the effect of paying the transportation Reviewer, 2011)
charges in the filing of an action on account of
damages to goods? Q: Who are Supercargoes?

A: A: Persons especially employed by the owner of a

1. If paid before checking the goods The right to cargo to take charge of and sell to the best advantage
file a claim is not waived. merchandise which has been shipped, and to
purchase returning cargoes and to receive freight, as
2. If paid after the goods were checked The right he may be authorized.
to file a claim is alreadywaived (Southern Lines,
Inc. v. CA, G.R. No. L-16629, Jan. 31, 1962). CHARTER PARTIES

Note: The filing of claim is a condition precedent for Q: What is a charter party contract?
recovery of damages.
A: A contract whereby the whole or part of the ship is
Q: What is the doctrine of Combined or Connecting let by the owner to a merchant or other person for a
Services? specified time or use for the conveyance of goods, in
consideration of the payment of freight. (Caltex v.
A: The carrier which delivered the goods to the Sulpicio Lines, G.R. No. 131166, Sept. 30, 1999)
consignee shall assume the obligations, rights and
actions of those who preceded him in the conveyance Q: What are the classes of charter party?
of the goods.
The shipper or consignee should proceed against the 1. Bareboat or demise the ship owner gives
one who executed the contract or against the others possession of the entire vessel to the charterer.
who received the goods without reservation. But In turn, the charterer supplies, equips, and mans
even if there is reservation, they are not exempted the vessel. The charterer is the owner pro hac
from liabilities that they may have incurred by reason vice.
of their own acts (Art. 373, Code of Commerce).
2. Contract of affreightment the owner of the
The carrier may then file a third-party complaint vessel leases a part or all of its space to haul
against the one who is really responsible. The carrier goods for others. It can either be:
is an indispensable party. But the shipper or
consignee may sue all of them as alternative a. Time charter Vessel is chartered for a
defendants. particular time or duration. While the ship
owner still retains possession and control of
PERIOD FOR FILING ACTIONS the vessel, the charterer has the right to use all
vessels facilities. The charterer may likewise
Q: What is the period for filing actions? designate vessels destination.

A: For coastwise or carriage within the Philippines, b. Voyage charter Vessel is chartered for a
Within 6 years if no bill of lading has been issued or carriage of goods from one or more ports of
within 10 years if a bill of has been issued. For loading to one or more ports of unloading.
international carriage from foreign port to the
Philippines within 1 year from delivery of goods or Q: What is a voyage charter?
the date when the goods have been delivered.
A: A voyage charter is a contract wherein the ship
MARITIME COMMERCE was leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight.The
Q: Who are the Agents of Maritime Commerce? shipowner retains the possession, command and
navigation of the ship, the charterer merely having
A: use of the space in the vessel in return for his
1. Ship-owners and ship agents payment of freight.
2. Captains and masters of the vessel
3. Officers and Crews of the vessel



An owner who retains possession of the ship remains b. SAle by the owner of the vessel before
liable as carrier and must answer for loss or non- loading by the charterer.
delivery of the goods received for transportation.
(Cebu Salvage Corp. vs. Philippine Home Assurance 3. Due to fortuitous event: WEB-Pro-N
Corp., G.R. No. 150403, Jan. 25, 2007)
a. War There is a governmental prohibition of
Note: The same concept applies to a time charter. commercial intercourse, intended to bring
about an entire cessation for the time being
Q: What are the distinctions between a bareboat or of all trade whatever.
demise charter party from contracts of
affreightment? b. Embargo A proclamation or order of State,
usually issued in times of war or threatened
A: hostilities, prohibiting the departure of ships
BAREBOAT/DEMISE CONTRACT OF or goods from some or all the ports of such
CHARTER CONTRACT AFFREIGHTMENT State until further order; or
Ship owner remains
Negligence of the c. Blockade A sort of circumvallation around
liable and carrier must
charterer gives rise to its a place by which all foreign connection and
answer for any breach of
liability to others. correspondence is, as far as human power
Charterer is not can effect it, to be cut off.
Charterer is regarded as
regarded as owner. Ship
owner pro hac vice. Ship d. PROhibition to receive cargo at port of
owner retains ownership
owner temporarily destination.
over the vessel.
relinquishes possession
(Coastwise Lighterage v.
and ownership of the e. Inability of the vessel to Navigate.(Art. 640)
CA, G.R. No. 114167, July
12, 1995)
Q: What is meant by owner pro hac vice?
Q: What is the three-fold character of the captain?
A: The charterer is considered the owner of the
vessel for the voyage or service stipulated. The A: GVG
charterer and not the owner of the vessel is liable for 1. General agent of the ship owner
vessels expenses, including seamans wages. 2. Vessels technical director
3. Government representative of the flag he
Q: What are the instances when a charter party may navigates under
be rescinded?
Q: What are the inherent powers of the ship
A: captain?
1. At the request of the charterer by: (FARER)
A: A2-C3-O
a. Failure to place vessel at charterers disposal
b. Abandoning the charter and paying half the 1. To Appoint or make contracts with the crew in
price the ship agents absence, and to propose said
c. Return the vessel due to pirates, enemies, crew, should said agent be present; but the ship
and bad weather agent may not employ any member against the
d. Error in tonnage or flag captain's express refusal
e. Arrival at port for Repairs - if repairs take
less than 30 days, pay full freightage; if more 2. To Command the crew and direct the vessel to
than, freightage in proportion to the the port of its destination, in accordance with the
distance covered. instructions he may have received from the ship
2. At the request of the ship owner: (Sa-Te)
3. To impose Correctional punishment:
a. If extra lay days TErminate without the cargo a. Upon those who fail to comply with orders;
being placed alongside vessel; and or
b. Those wanting in discipline



4. To make Contracts for the charter of the vessel in 3. Losses, fines, and confiscations imposed an
the absence of the ship agent or of its consignee account of violation of customs, police, health,
and navigation laws and regulations;
5. To Adopt all proper measures to keep the vessel
well supplied and equipped, purchasing all that 4. Losses and damages caused by mutinies on
may be necessary for the purpose, provided board the vessel or by reason of faults
there is no time to request instruction from the committed by the crew in the service and
ship agent defense of the same, if he does not prove that he
made timely use of all his authority to prevent or
6. To Order, in similar urgent cases while on a avoid them;
voyage, the repairs on the hull and engines of the
vessel and in its rigging and equipment, which 5. Those caused by the Misuse of the powers;
are absolutely necessary to enable it to continue
and finish its voyage. (Art. 610) 6. For those arising by reason of his going out of his
course or taking a course which he should not
Q: What are the obligationsof the captain? have taken without Sufficient cause, in the
opinion of the officers of the vessel, at a meeting
A: with the shippers or supercargoes who may be
1. Inventory of equipment on board. No exceptions whatsoever shall
2. Keep a copy of Code of Commerce on board exempt him from this obligation;
3. Have a log Book, freight book, accounting book
4. Conduct a marine survey of vessel before loading 7. For those arising by reason of his Voluntarily
5. Remain on board while loading entering a port other than that of his destination,
6. Demand pilot on departure and on arrival at each outside of the cases or without the formalities
port referred to in Article 612; and
7. Be on deck when sighting land
8. Arrivals under stress: to file marine protest in 24 8. For those arising by reason of non-observance of
hours the Provisions contained in the regulations on
9. Record bottomry loan with Bureau of Customs situation of lights and manoeuvres for the
10. Keep papers and properties of crew members purpose of preventing collisions (Art. 618, Code
who might die of Commerce).
11. Conduct himself according to the instuctions of
the ship agent Note: Ship owner/agent is not liable for the obligations
12. Report to ship agent on arrival contracted by the captain if the latter exceeds his powers
13. Observe rules on the situation of lights and and privileges inherent in his position of those which may
have been conferred upon him by the former. However, if
maneuvers to prevent collisions
the amount claimed were used for the benefit of the vessel,
14. Remain on board until the last hope to save the
the ship owner or ship agent is liable.
vessel is lost and to abide by the decision of the
majority whether to abandon or not EXCEPTIONS TO THE RULE
15. In case of shipwreck: file marine protest, within
24 hours Q: In what causes shall the captain be not liable for
16. Comply with rules and regulation on navigation. loss or injury to persons or cargo?
(Art. 612, Code of Commerce)
2. Obligations contracted for the vessels benefit,
Q: In what cases shall the ship owner/agent be liable except when the captain expressly agrees to be
to the damages caused by the captain? liable.
A: Q: May the captain have himself substituted by
1. Damages suffered by the vessel and its cargo by another?
reason of want of skill or negligence on his part
A: No, in the absence of consent from the ship agent,
2. Thefts committed by the crew, reserving his right and should he do so he shall be liable for all the acts
of action against the guilty parties; of the substitute. (Art. 615, Code of Commerce)



Q: What are the powers, functions, and liabilities of

Q: T, the captain of MV Don Alan, while asleep in his ship agents?
cabin, dreamt of an Intensity 8.0 earthquake along
the path of his ship. On waking up, he immediately A: ID
ordered the ship to return to port. True enough, the 1. Indemnity for expenses incurred for ships
earthquake and tsunami struck three days later and benefit.
his ship was saved. Was the deviation proper? (2011 2. Discharge of captain and/or crew members.
Bar Bar Question)
The following are the rules observed by the ship
A: No, because no reasonable ground for avoiding a agent:
peril existed at the time of the deviation a. Captain and/or crew members contract not
for a definite period or voyage:
Q: When may the captain and crew members
rescind their contractual employment? i. Before vessel sets out to sea: Ship agent at
his discretion may discharge the captain
A: In case of: WOND and members of the crew. Ship agent
1. War must pay captain and/or crew members
2. Outbreak of disease salaries earned according to their
3. New owner of vessel contracts, and without any indemnity
4. Change of Destination. (Art. 647) whatsoever, unless there is an expressed
Q: Who is the shipowner of a vessel?
ii. During voyage: Captain and/or crew
A: The person in possession, management, control member shall receive salary until return to
over the vessel, and the right to direct her navigation. the port where contract was made. Article
While in their possession, the ship owners also 637 of the Code of Commerce enumerates
receive freight earned and paid. the just causes for discharge.

Q: Who is a ship agent? b. Where captain and members of the crews

contracts with ship agent be for a definite
A: The person entrusted with provisioning or period or voyage:
representing the vessel in the port in which it may be
found. Hence, whether acting as agent of the i. Captain and/or crew members may not be
ownerof the vessel or as agent of the charterer, he discharged until after the fulfillment of
will be considered as the ship agentand may be held their contracts, except by reason of
liable as such, as long as he is the one that provisions insubordination in serious matters,
or represents the vessel. (Macondray & Co., Inc. v. robbery, theft, habitual drunkenness, or
Provident Insurance Corp, G.R. No. 154305, Dec. 9, damage caused to the vessel or to its
2004) cargo through malice or manifest or
proven negligence. (Art. 605, Code of
Q: What are the civil liabilities of ship owners and Commerce)
ii. If the captain should be the vessels co-
A: owner, he may not be discharged unless
1. Damages suffered by a 3 person for tort ship agent returns his amount of interest
committed by the captain; therein. In the absence of agreement
2. Contracts entered for provisioning and repair of between the parties, interest shall be
vessel; appraised by experts appointed in the
3. Indemnities in favor of 3 persons arising from manner established by civil procedure.
the conduct of the captain from the care of
goods; and Q: What is the doctrine of inscrutable fault? (1997
4. Damages in case of collision due to fault or Bar Question)
negligence or want of skill of the captain.
5. Damages for the acts of the captain. A: Under this doctrine, where fault is established but
ita cannot be determined which of the two vessels



wre at fault, both shall be deemed to have been at 4. Extinction of civil liability incurred by the
fault. shipowner or agent in cases of maritime
collisions. (Art. 837, Code of Commerce)
Q: What is the Doctrine of Limited Liability? (1997
Bar Question) Q: What are the exceptions to the doctrine of
limited liability?
A: Also called the no vessel, no liability doctrine, it
provides that liability of ship owner is limited to ship A:
owners interest over the vessel. Consequently, in 1. Repairs and provisioning of the vessel before the
case of loss, the ship owners liability is also loss of the vessel; (Art. 586)
extinguished. Limited liability likewise extends to 2. Insurance proceeds. If the vessel is insured, the
ships appurtenances, equipment, freightage, and proceeds will go to the persons entitled to claim
insurance proceeds. The ship owners or agents from the shipowner; (Vasquez v. CA, G.R. No. L-
liability is merely co-extensive with his interest in the 42926, Sept. 13, 1985)
vessel, such that a total loss of the vessel results in 3. When the shipowner is guilty of fault or
the liabilitys extinction. The vessels total destruction negligence;
extinguishes maritime liens because there is no
longer any res to which they can attach. (Monarch Note: But if the captain is the one who is guilty,
Insurance v. CA, G.R. No. 92735, June 8, 200.) doctrine may still be invoked, hence, abandonment is
still an option.
Q: What is the rationale of the doctrine?
4. Private carrier; or
A: To offset against innumerable hazards and perils in 5. Voyage is not maritime in character.
sea voyage and to encourage ship building and
maritime commerce. By abandonment, the ship Q: A cargo ship of X Shipping, Co. ran aground off
owner and ship agent exempt themselves from the coast of Cebu during a storm and lost all its
liability, thus avoiding the possibility of risking his cargo amounting to Php50 Million. The ship itself
whole fortune in the business (Real and hypothecary suffered damages estimated at Php80 Million.
nature of Maritime Law)
The cargo owners filed a suit against X Shipping but
Q: Who can invoke the limited liability rule? it invoked the doctrine of limited liability since its
vessel suffered an Php80 Million damage, more than
A: The only persons who could avail of this are the the collective value of all lost cargo. Is X Shipping
shipowner and the shipping agent. He is the very correct? (2011 Bar Question)
person whom the Limited Liability Rule has been
conceived to protect. The petitioners cannot invoke A: No, since X Shipping neither incurred a total loss
this as a defense. (Philippine Trigon Shipyard nor abandoned its ship.
Corporation, et al. v. Crisostomo G. Concepcion, et al.,
Q: What are the cases in which the doctrine of
limited liability is allowed? Q: What are the accidents in maritime commerce?

1. Civil liability of the Ship agent or shipowner for 1. Collision
the indemnities in favor of third persons; (Art. 2. Averages
587, Code of Commerce) 3. Shipwreck
2. Civil liability of the co-Owners of the vessel for 4. Arrival under stress
the results of the acts of the captain; (Art. 590,
Code of Commerce) GENERAL AVERAGE
3. If the vessel and her cargo be totally Lost, by
reason of capture or shipwreck, all the rights Q: What are averages?
shall be extinguished, both as regards the right of
the crew to demand wages and the right of the A: All extraordinary or accidental expenses which
ship agent to recover the advances made; (Art. may be incurred during the voyage for the
643, Code of Commerce) or preservation of the vessel or cargo or both.



All those who have Only the owner of the

Q: What are the kinds of averages? benefited shall satisfy goods benefiting from the
the average. damage shall bear the
A: expense of average.
1. General average Damages or expenses
deliberately caused in order to save the vessel, its Q: What are goods not covered by general average
cargo or both from real and known risk. even if not sacrificed?

2. Particular average Damages or expenses caused A:

to the vessel or cargo that did not inure to the 1. Goods not recorded in the books or records of
common benefit, and borne by respective the vessel (Art. 855[2], Code of Commerce)
2. Fuel for the vessel if there is more than sufficient
fuel for the voyage (Rule IX, York-Antwerp Rule)
Q: What are the requisites for general average?
Q: What is jettison?
1. Common danger present; A: Act of throwing overboard part of a vessels cargo
2. Deliberate sacrifice of part of the vessel or cargo; or hull in hopes of saving a ship from sinking.
3. Successful saving of vessel and/or cargo; and
4. Proper procedure and legal steps. Q: What is the orderof goods to be cast overboard in
case of jettison?
Q: Who shall be liable for the amount of the general
averages? A:
1. Those on deck, preferring the bigger bulk with
A: All persons having an interest in the vessel and least value.
cargo therein at the time of the occurrence of the 2. Those below upper deck, beginning with the
average shall contribute. (Art. 812, Code of heaviest with least utility.
Q: Distinguish between overseas and inter-island
Q: Who shall be liable for the amount of the trade regarding reimbursement and payment of
particular averages? general averages on jettisoned deck cargo.

A: The owner of the things which gave rise to the A:

expenses or suffered the damage shall bear the 1. In case of overseas trade, the York-Antwerp
simple or particular averages (Art. 810, Code of Rules prohibit the loading of cargo on deck. In
Commerce). case such cargo is jettisoned, the owner will not
be entitled to reimbursement in view of the
Q: What are the distinctions between general violation. If the cargo were saved, the owner
average and particular average? must contribute to general average.

A: 2. In case of interisland trade, the York-Antwerp

GENERAL AVERAGE PARTICULAR AVERAGE Rules allow deck cargo. If the cargo loaded on
deck is jettisoned as a result of which the vessel
Both the ship and cargo No common danger to was saved, the cargo owner is entitled to
are subject to the same both the vessel and the reimbursement. If the cargo is saved, the cargo
danger cargo owner must contribute to the general average.
There is a deliberate Expenses and damages
sacrifice of part of the are not deliberately made Reason: In interisland trade, voyages are usually short and
vessel, cargo, or both there are intervening islands and the seas are generally not
Damage or expenses Did not inure to common rough. In overseas trade, the vessel is exposed for many
days to the peril of the sea making deck cargo is dangerous
incurred to the vessel, its benefit and profit of all
to navigation.
cargo, or both, persons interested in the
redounded to the vessel and her cargo.
benefit of the respective



COLLISIONS Note: In this zone, the conduct of the vessels are

primordial. It is in this zone that vessels must observe
Q: What is a collision? nautical rules, unless a departure therefrom becomes
necessary to avoid imminent danger. The vessel which
does not make such strict observance is liable.
A: It is the impact of two movingvessels.
3. Third Zone time when collision is certain and up
Q: What is allision?
to the time of impact.
A: It is the impact between a moving vessel and a
Note: An error at this point no longer bears any
stationary one. consequence.

Q: What is an error in extremis? Q: What is the role of a protest with respect to

A: The sudden movement made by a faultless vessel
during the third zone of collision with another vessel A: The action for recovery of damages arising from
which is at fault under the second zone. Even if collisions cannot be admitted if a protest or
sudden movement is wrong, no responsibility will fall declaration is not presented within twenty-four hours
on the faultless vessel. before the competent authority of the point where
the collision took place, or that of the first port of
Q: What are the rules governing liabilities of parties arrival of the vessel, if in Philippine territory, and to
in case of collision? the Filipino consul if it occurred in a foreign country
(Art. 835).
1. One vessel at fault The ship owner of such Note: Failure to make a protest is not an impediment to the
vessel shall be liable for all resulting damages. maintenance of a civil action based on quasi-delict.

2. Both vessels at fault Each vessel shall suffer Q: When is a protest required?
their respective losses but as regards the owners
of the cargoes, both vessels shall be jointly and A:
severally liable. 1. Arrival under stress; (Art. 612 [8], Code of
3. Vessel at fault not known Each vessel shall 2. Shipwreck; (Arts. 601 [15], 843, Code of
suffer its own losses and both shall be solidarily Commerce)
liable for loses or damages on the cargo. 3. If the vessel has gone through a hurricane or
(Doctrine of Inscrutable Fault). where the captain believes that the cargo has
suffered damages or averages; (Art. 642, Code of
4. Fortuitous event Each shall bear its own Commerce) and
damage. 4. Maritime collision. (Art. 835, Code of Commerce)

5. Third vessel at fault The third vessel shall be Q: Who can file a maritime protest?
liable for losses and damages sustained.
Q: What are the zones of time in the collision of 1. In case of maritime collision, the passenger or
vessel? other persons interested who may be on board
the vessel or who were in a condition who can
A: make known their wishes (Arts. 835-836) or the
1. First zone all time up to the moment when risk captain himself. (Verzosa and Ruiz v. Lim, G.R.
of collision begins. No. 20145, Nov. 15, 1923)

Note: One vessel is a privileged vessel and the other is 2. The captain in cases of:
a vessel required to take action to avoid collision. a. Arrival under stress
b. Shipwreck; or
2. Second zone time between moment when risk c. If the vessel has gone through a hurricane or
of collision begins and moment it becomes where the captain believes that the cargo
practically a certainty. has suffered damages or averages.



Q: Two vessels figured in a collision resulting in Q: When is arrival under stress unlawful?
considerable loss of cargo. The damaged vessels
were safely conducted to a port. Kim, a passenger A: LR-DM
and Ruby, a shipper who suffered damage to his 1. Lack of provisions is due to negligence to carry
cargo, did not file maritime protest. Can Kim and according to usage and customs
Ruby successfully maintain an action to recover 2. Risk of enemy not well known of manifest
losses and damages arising from the collision? (2007 3. Defect of vessel is due to improper repair; or
Bar Question) 4. Malice, negligence, lack of foresight or skill of
captain. (Art. 820)
A: Ruby, the shipper can successfully maintain an
action to recover losses and damages arising from the CARRIAGE OF GOODS BY SEA ACT (COGSA)
collision notwithstanding his failure to file a maritime
protest since the filing thereof is required only on the Q: When will COGSA apply?
part of Kim, who, being a passenger of the vessel at
the time of the collision, was expected to know the A: It will only be applied in terms of loss or damage of
circumstances of the collision. Kim's failure to file a goods transported to and from Philippine ports in
maritime protest will therefore prevent him from foreign trade. It may also apply to domestic trade
successfully maintaining an action to recover his when there is a paramount clause in the contract.
losses and damages (Art 836, Code of Commerce).
Q: What cases are covered under the COGSA?
Q: What is a shipwreck?
A: It applies only in case of non-delivery or damage,
A: The loss of the vessel at sea as a consequence of and not to misdelivery or conversion of goods. (Ang v.
its grounding, or running against an object in sea or American Steamship Agencies, Inc., G.R. No. L-22491,
on the coast. If the wreck was due to malice, Jan. 27, 1967)
negligence, or lack of skill of the captain, the owner of
the vessel may demand indemnity from said captain. Also, the deterioration of goods due to delay in their
transportation is not covered by Sec.6 of
Q: Who shall bear the losses in shipwreck? COGSA.(Mitsui O.S.K. Lines Ltd. v. CA, G.R. No.
119571, Mar. 11, 1998)
A: GR: The loss of a ship and her cargo shall fall upon
their respective owners. (Art. 840, Code of Q: Is notice required to be filed in case of damage to
Commerce) goods under the COGSA?

XPN: If the wreck was due to malice, negligence, A: No. There is no consequence on the right to bring
or lack of skill of the captain, or because the vessel suit if no notice is filed unlike under the Code of
put to sea was insufficiently repaired and Commerce. It only gives rise to a presumption that
equipped, the ship agent or the shippers may the goods are delivered in the same condition as they
demand indemnity from the captain for the are shipped.
damage caused to the vessel or to the cargo by
the accident. (Art. 841, Code of Commerce) There is also no consequence if the transportation
charges and expenses are paid unlike under the Code
Q: What is arrival under stress? of Commerce.

A: It is the arrival of a vessel at the nearest and most Q: When should suits for loss or damage of cargo be
convenient port, if during the voyage the vessel brought?
cannot continue the trip to the port of destination on
account of the lack of provisions, well-founded fear of A: The suit should be brought within one year from:
seizure, privateers or pirates, or by reason of any 1. Delivery of the goods, in case of damage; or
accident of the sea disabling it to navigate. (Art. 819, 2. The date when the goods should have been
Code of Commerce) delivered, in case of loss.

Note: In arrival under stress, the captain must file a Protest

which is merely a disclaimer for the shipowner not to be



Q: To whom should such delivery be made as basis Note: The ruling in the above-cited case should apply only
of the computation of the one-year period? to suits against the carrier filed either by the shipper, the
consignee or the insurer, not to suits by the insured against
the insurer. The basis of the insurers liability is the
A: The one-year period is computed from the delivery
insurance contract and such claim prescribes in 10 years, in
of goods to the operator and not to the consignee. accordance with Art. 1144 of the Civil Code. (Mayer Steel
Pipe Corporation v. CA, G.R. No. 124050, June 19, 1997)
Q: What instances do the one-year period apply?
Q: What is the prescriptive period in case of
A: AFLS misdelivery and conversion of goods?
1. Amendment of pleadings for suing the wrong
party A: In case of misdelivery or conversion, the proper
2. Filing of third party complaint periods are:
3. Loss or damage to cargo, excluding delay or
misdelivery 1. If there is a written contract 10 years (Art.
4. Subrogation. (Art 2207, NCC) 1144, Civil Code)
2. Oral contract 6 years (Art. 1145)
Q: When is the one year period in the COGSA 3. For quasi-delict 4 years (Art. 1146)
Q: What is the amount of the carriers liability under
A: the COGSA?
1. When an action is filed in court; or
2. When there is an agreement between the parties A:
to extend it. 1. The liability limit is set at $500 per package or
customary freight unless the nature and value of
Q: Is Art. 1155 of the Civil Code providing that the such goods is declared by the shipper.
prescription of actions is interrupted by the making 2. Shipper and carrier may agree on another
of an extrajudicial written demand by the creditor maximum amount, but not more than amount of
applicable also to actions brought under the COGSA? damage actually sustained.

A: No, written claims do not toll the running of the Note: When the packages are shipped in a container
one-year prescriptive period under the COGSA. (Dole supplied by carrier and the number of such units is stated in
Philippines, Inc. v. Maritime Company of the the bill of lading, each unit and not the container constitute
Philippines, G.R. No. L-61352, Feb. 27, 1987) the package.

Q: Who are the persons who can give notice to, and Q: What are the instances where there is no liability
bring suit against the carrier? under COGSA?

1. The shipper 1. if the nature or value of goods knowingly and
2. The consignee; or Fraudulently misstated by shipper
3. Any legal holder of the bill of lading like the 2. if damage resulted from Dangerous nature of
indorsee, subrogee, or the insurer of the goods. shipment loaded without consent of carrier
(Kuy v. Everett Steamship Corporation, G.R. No. L- 3. if Unseaworthiness not due to negligence
5554, May 27, 1953) 4. if Deviation was to save life or property at sea.

Q: Does the one-year prescriptive period within Q: Clause 18 of the bill of lading provides that the
which to file a case against the carrier also apply to a owner should not be liable for loss or damage of
claim filed by an insurer who stands as a subrogee to cargo unless written notice thereof was given to the
the insured? carrier within 30 days after receipt of the goods.
However, Section 3 of the COGSA provides that even
A: Yes, it includes the insurer of goods. Also, whether if a notice of loss or damage is not given, "that fact
the insurer files a third party complaint or maintains shall not affect or prejudice the right of the shipper
an independent action is of no moment (Filipino to bring suit within one year after the delivery of the
Merchants Insurance Co., Inc. v. Alejandro, G.R. No. L- goods." Which of these two provisions should
54140,Oct. 14, 1986). prevail?



A: Section 3 will prevail. Any clause, Sec. 3 of the air carriers is deemed, for the purposes of WC to be
COGSA provides that any covenant, or agreement in a one undivided carriage, if it has been regarded by the
contract of carriage relieving the carrier or the ship parties as a single operation, whether it had been
from liability for loss or damage to or in connection agreed upon under the form of a single contract or of
with the goods or lessening such liability otherwise a series of contracts. (Art. 1 [3], WC)
than as provided , shall be null and void and of no
effect." (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov. Note: Such carriage does not lose its international character
29, 1954) merely because one contract or a series of contracts is to
be performed entirely within a territory subject to the
sovereignty, suzerainty, mandate or authority of same High
Contracting Party. (Ibid.)

Q: What is the Warsaw Convention (WC)?

Q: Where should an action for violation of a contract
of international carriage be brought?
A: Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air
A: An action for damage must be brought at the
provides for rules applicable to international
option of the plaintiff, in the territory of one of the
transportation by air. The Philippines is one of the
High Contracting Parties, either before the court:
signatories to WC. (Santos III vs. Northwest Orient
1. of the domicile of the carrier or
Airlines, 210 SCRA 256.) Hence, this has the force and
2. of his principal place of business, or
effect of a law in the Philippines. (Cathay Pacific
3. where the ticket was purchased, or
Airways, Ltd. Vs. CA, 219 SCRA 520.)
4. at the place of destination. (Art. 28 [1], WC.)
Q: What are the documents of carriage issued under
Q: When is the Warsaw convention applicable?
A: The following are the documents of carriage:
A: This Convention applies to all international
1. Passenger Ticket
carriage of persons, luggage or goods performed by
2. Luggage Ticket
aircraft for reward. It applies equally to gratuitous
3. Air Consignment Note
carriage by aircraft performed by an air transport
undertaking. (Art. 1[1], Warsaw Convention)
Q: What is the function of the air consignment note?
Q: What is an international carriage?
A: It is prima facie evidence of
1. the conclusion of the contract
A: Any carriage in which, according to the contract
2. receipt of the goods
made by the parties, the place of departure and the
3. conditions of carriage. (Art. 11 [1], WC.)
place of destination, whether or not there be a break
in the carriage or a transshipment, are situated
Q: How will the consignor exercise its right to
dispose of the goods?
1. Within the territories of two High Contracting
Parties; or
2. Within the territory of a single High Contracting
1. by withdrawing them at the aerodrome of
Party, if there is an agreed stopping place within
departure or destination, or
a territory subject to the sovereignty, suzerainty,
2. by stopping them in the course of the journey on
mandate or authority of another Power, even
any landing, or
though that Power is not a party to the
3. by calling for them to be delivered at the place of
Convention. (Art. 1[2], WC)
destination or in the course of the journey to a
Note: High Contracting Parties are the signatories to the
person other than the consignee named in the
WC and those which subsequently adhered to it. (Mapa vs. air consignment note, or
CA, 275 SCRA 286.) 4. by requiring them to be returned to the
aerodrome of departure. (Art. 12, WC.)
Q: How should carriage performed by several
successive air carriers be treated under WC? Note: In the exercise of this right, the carrier or other
consignors must not be prejudiced. For the carrier to obey
the orders for disposition, the carrier must require the
A: A carriage to be performed by several successive


production of the part of the air consignment note
delivered to the consignor. (ibid.) Q: When will ones right to damages be
Q: When does this right to disposition ceases to
continue? A: The right to damages shall be extinguished if an
action is not brought within two years, reckoned
A: It ceases as soon as the consignee, on arrival of the from the date of arrival at the destination, or from
goods at the place of destination, require the carrier the date on which the aircraft ought to have arrived,
to hand over to him the air consignment note and to or from the date on which the carriage stopped.
deliver the goods to him, on payment of charge due
and on complying with the conditions of carriage set Note: Despite the express mandate that an action for
out in the air consignment note (Art. 13, WC) damages should be filed within 2 years from the arrival at
the place of destination, such rule shall not be applied
LIMITATION OF LIABILITY where delaying tactics were employed by airline itself in a
case where a passenger wishes to settle his complaint out-
of-court but the airline gave him the runaround, answering
Q: What are the limitations to the liability of air
the passengers letters but not giving in to his demands,
carriers? hence, giving the passenger no time to institute the
complaint within the reglementary period. (United Airlines
A: v. Uy, G.R. No. 127768, Nov. 19, 1999)
1. In the carriage of persons 250,000 francs for
each passenger. Nevertheless, by special Q: Can a person recover a claim covered by Warsaw
contract, the carrier and the passenger may Convention after the lapse two years?
agree to a higher limit of liability.
A: No. A claim covered by the Warsaw Convention
2. In the carriage of registered baggage and of can no longer be recovered under local law, if the
cargo Two hundred and fifty (250) francs per statute of limitations of two years has already lapsed.
kilogramme, unless the passenger or consignor (PAL. v. Savillo, 557 SCRA 66)
has made, at the time when the package was
handed over to the carrier, a special declaration WILLFULL MISCONDUCT
of interest in delivery at destination and has paid
a supplementary sum if the case so requires. Q: What constitutes willful misconduct?

3. As regards objects of which the passenger takes A: The definition of "willful misconduct" depends in
charge himself Five thousand (5,000) francs per some measure on which court is deciding the issue.
passenger. (Art. 22, WC) Some common factors that courts will consider are:

Note: Carrier is not entitled to the foregoing limit if the 1. Knowledge that an action will probably result in
damage is caused by willful misconduct or default on injury or damage
its part (Art. 25, WC)
2. Reckless disregard of the consequences of an
action, or
Q: Is a stipulation relieving the carrier from or
3. Deliberately failing to discharge a duty related to
limiting its liability valid?
Courts may also consider other factors.
A: No. Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is laid Q: Is the failure of the carrier to deliver the
down in this Convention shall be null and void but passengers luggage at the designated time and
the nullity of such provision does not involve the place ipso facto constitutes willful misconduct?
nullity of the whole contract. (Art. 23[1])
A: No.There must be a showing that the acts
Q: What are the exceptions to these limitations? complained of were impelled by an intention to
violate the law, or were in persistent disregard of
A: WD-PG one's rights. It must be evidenced by a flagrantly or
1. Willful misconduct shamefully wrong or improper conduct (Luna vs. CA,
2. Default amounting to willful misconduct GR No. 100374-75, November 27, 1992).
3. Accepting passengers without ticket
4. Accepting goods without airway bill or baggage
without baggage check



Q: Is the carriers guessing of which luggage

contained the firearms constitutes willful

A: Yes. The guessing of which luggage contained the

firearms amounted to willful misconduct under
Section 25(1) of the Warsaw Convention.(Northwest
Airlines vs. CA, GR No. 120334, January 20, 1998)

Q: Is the allegation of willful misconduct resulting in

a tort is insufficient to exclude the case from the
realm of Warsaw Convention?

A: Yes. A cause of action based on tort did not bring

the case outside the sphere of the Warsaw
Convention. (Lhuiller vs. British Airways, GR No.
171092, March 15, 2010.)



THE CORPORATION CODE (CC) Q: Is the conferment by law always required for a
corporation to exist?
A: GR: A legislative grant or authority is necessary for
DEFINITION the creation of a corporation.

A corporation is an artificial being created by XPN: For corporations by prescription, such authority
operation of law, having the right of succession and is not necessary (De Leon, pg. 44.)
the powers, attributes and properties expressly
authorized by law or incident to its existence. (Sec. 2, A corporation by prescription is one which has
CC) exercised powers for an indefinite period without
interference on the part of the sovereign power
ATTRIBUTES and which by fiction of law, is given the status of
a corporation (De Leon, pg. 62).
The attributes of a corporation are the following:
ALS PAPI Q: Can Congress create a private corporation by
enactment of a special law?
1. It is anArtificial being
2. It iscreated by operation of Law A: No. Congress shall not, except by general law,
3. It enjoys the right of Succession provide for the formation, organization, or regulation
4. It has the Powers, Attributes and Properties of private corporations (Sec 16, Art XII, Constitution).
expressly authorized by law or Incident to its
existence. Q: What is a franchise?

Q: What is the Doctrine of Separate Juridical A: A franchise includes any special privilege or right
Personality? affected with public interest, conferred by the State
on corporations or persons and which does not
A: A corporation is a juridical entity with legal belong to the citizens of the country, generally as a
personality separate and distinct from those acting matter of common right (De Leon, pg. 117, citing JRS
for and in behalf and, in general, from the people Business Corp. vs. Imperial Insurance, Inc., 11 SCRA
comprising it. (Francisco vs. Mallen, Jr. GR No. 634).
173169, Sept. 22, 2010.)
Q: What are the two kinds of franchise?
*Please refer to page 142 for an extensive discussion.
A: The kinds of franchise are the following:
Q: How is a corporation created by operation of
law? 1. Primary/ Corporate/ General Franchise the right
to exist as a corporation.
A: No corporation can exist without the consent or
grant of the sovereign, and that the power to create 2. Secondary/ Special Franchise the franchise to
corporations is one of the attributes of sovereignty. exercise powers and privileges granted to such
Corporations cannot come into existence by mere corporation to the business for which it was
agreement of the parties.(De Leon, The Corporation created, including those conferred for purposes of
Code of the Philippines Annotated, 2010 Edition, pg. public benefit such as the power of eminent
43-44) domain and other powers and privileges enjoyed
by public utilities. (De Leon, pg. 117-118.)
Note: The Philippine jurisprudence adopted the Concession
or fiat theory, which states that a corporation is conceived Q: Is the power to institute expropriation
as an artificial person owing existence through creation by a proceedings granted to all corporations?
foreign power. Further, a corporation has without any
existence until it has received the imprimatur of the State
acting according to law, through the SEC. (Tayag v. Benguet
A: No. Only quasi-public corporations or those
Consolidated, Inc., GR No. L-23145, Nov. 29, 1968.) affected with public interest are given the power to
institute condemnation proceedings against
owners of private property. To grant the right of
eminent domain to purely private entities
exercising functions, which are not public in nature,



would be using the right to take property for Q: How is the right to succession of a corporation
private use (De Leon, pg. 118, citing SEC Opinion, exercised?
Oct. 28, 1968).
A: A corporation has a capacity of continuous
Q: Distinguish between a primary and secondary existence irrespective of the death, withdrawal,
franchise. insolvency, or incapacity of the individual
stockholders or members and regardless of the
A: transfer of their interest or shares of stock (De Leon,
PRIMARY FRANCHISE SECONDARY FRANCHISE supra, pg. 44-45). A corporation may exist up to the
Special authority given period stated in the articles of incorporation as long
to a corporation to as not exceeding 50 years from the date of
engage in a specialized incorporation, unless sooner dissolved or unless said
business. (e.g. banks, period is extended (Sec. 11, CC).
insurance companies,
right to use the streets Q: What powers can the corporation exercise?
of a municipality to lay
pipes of tracks, erect A: Only those which are granted by the law of its
The franchise or
poles, or string wires.) creation. All powers which may be implied from those
authority to exist as a
expressly provided by law and those which are
corporation incidental or essential to the corporations existence
Certain rights and
privileges conferred may also be exercised (Sec. 36, CC).
upon existing
corporations Q: May a corporation enter into a contract of
(J.R.S.Business Corp. v. partnership or a joint venture?
Imperial Insurance,
supra.) A: GR: Corporations have no power to enter into
GR: Granted by the partnership.
Corporation Code, Granted by a
XPN: In GOCCs with a Government Agency, or XPN: The SEC allowed corporations to enter into
special charter, a special a Municipal Corporation partnerships with other corporations and
law grants the franchise individuals provided:
Secondary franchises of
a corporation may 1. The authority to enter into partnership relation
ordinarily be conveyed is expressly conferred by the Charter or the
or mortgaged under a Articles of Incorporation (AOI) and the nature
general power granted of the business venture to be undertaken by
to a corporation to the partnership is in line with the business
dispose of its property authorized by the charter or the AOI. (SEC
Cannot be transferred (i.e. Through board Opinions, Feb. 29, 1980, Dec. 1, 1993, and Feb.
without the approval of resolution or approval of 23, 1994.)
Congress (Sundiang, stockholders) (Villarey
RevieweronCommercial vs. Ferrer G.R. No. L- 2. The partnership must be a limited partnership
Law, 2011 Edition, pg. 23893, October 29, and the corporation must be a limited partner
179,) 1968.)
3. If it is a foreign corporation, it must obtain a
A secondary franchise license to transact business in the country.
can be subject to levy
and sale on execution
together with corporate
property (Sundiang,
2011, pg. 179.)



Q: Distinguish a corporation from a partnership.

As to creation and governing Law
Created by mere agreement of the parties and governed by Created by operation of law and governed by the
the Civil Code Corporation Code

Commencement of juridical personality and term of existence

From the moment of meeting of /minds of the partners Existence of the corporation commences from the
date of issuance of the Certificate of Incorporation by
the Securities and Exchange Commission (SEC).
The term of a partnership may be established for any
period of time stipulated by the partners Existence canNOT be for a term in excess of 50 years.
The term of a corporation may be extended to not
more than 50 years at any single instance.

Number of incorporators
GR: Requires at least 5 incorporators but not more
than 15.
May be organized by at least 2 persons
XPN: Corporation sole
GR: May exercise any power authorized by the partners.
May exercise only suchpowers as may be granted by
law and its articles of incorporation, implied therefrom
XPN: Acts which are contrary to: law, morals, good
or incidental thereto.
customs, public order, public policy
GR: Power to do business and manage its affairs is
vested in the Board of Directors (BOD) / Board of
Trustees (BOT).

When management is not agreed upon, every partner is an
1) Executive Committee (Sec 35, CC)
agent of the partnership
2) Management Contract (Sec 44, CC)
3) The AOI of a close corporation may provide that the
business of the corporation shall be managed by the
stockholders of the corporation rather than by a
board of directors (Sec 97, CC)
Effect of mismanagement

The suit against a member of the BOD or BOT who

A partner as such can sue a co-partner who mismanages. mismanages must be broughtin the name of the
corporation. (Derivative suit)

Extent of liability to third persons

GR: Partners are liable personally and
subsidiarily(sometimes solidarily) for partnership debts to Stockholders are liable only to the extent of the shares
third persons subscribed by them whether paid or not.
XPN: Limited partner
Right of Succession



No right of succession Has right of succession

Transferability of Share Holders interest
Stockholder has the right to transfer his shares
Partner cannot transfer his interest in the partnership without prior consent of the other stockholders unless
without the consent of all the other existing partners. the right of first refusal is embodied in the articles of
May be dissolved any time by the will of any or all of the
Can only be dissolved with the consent of the State.
Death or insolvency of shareholders cant dissolve the
Death, civil interdiction and insolvency of a partner
dissolve the partnership.

Q: Does a defective incorporation result into a CLASSES OF CORPORATION

The following are the classes of corporation:
A: The answer depends on whether or not there is a
clear intent to participate in the management of the 1. As to whether their membership is represented
business affairs on the part of the investor. by shares of stock or not:

Parties who intends to participate or has actually a. Stock one which have capital stock divided
participated in the business affairs of the proposed into shares and are authorized to distribute
corporation would be considered as partners under a to the holders of such shares dividends or
de facto partnership. allotments or the surplus profits on the basis
of the shares held. (Sec. 3, CC.)
On the other hand, parties who took no part b. Non-Stock is one which do not issue shares
notwithstanding their subscriptions do NOT become and are created not for profit but for public
partners with other subscribers. (Pioneer Insurance good and welfare and where no part of its
vs. CA, GR No. 84197, July 28, 1989.) income is distributable as dividends to its
members, trustees, or officers. (Sec. 87, CC.)
Q: Distinguish between a Joint Account and a
Partnership. 2. As to the number of persons who compose them:

A: a. Corporation aggregate corporation

JOINT ACCOUNT PARTNERSHIP consisting of more than one member or
Has no firm name and is Has a firm name. corporator. The CC requires that these
conducted In the name corporations must be formed by not less
of the ostensible than 5 persons (Sec. 10, CC.);
partner. b. Corporation Sole religious corporation
Has no juridical Has juridical personality which consists of one member or corporator
personality and can sue and may sue or be sued only and his successor.
or be sued only in the under its firm name
name of the ostensible 3. As to whether they are for religious purpose or
partner. not:
Has no common fund. Has a common fund.
The ostensible partner All general partners have a. Ecclesiastical corporation one organized for
manages its business the right of religious purpose.
operations. management. b. Lay corporation one organized for a purpose
Liquidation thereof can Liquidation may, by other than for religion.
only be done by the agreement, be entrusted
ostensible partner. to a partner or partners. 4. As to whether they are for charitable purpose or

a. Eleemosynary one established for religious

b. Civil one established for business or profit.



precluded from asserting that it is not a

5. As to state or country under or by whose laws corporation. (Sec. 21, CC.)
they have been created:
10. As to whether they are for public (government)
a. Domestic one incorporated under the laws or private purpose:
of the Philippines
b. Foreign one formed, organized, or existing a. Public one formed or organized for the
under any laws other than those of the government of a portion of the State
Philippines and whose laws allow Filipino b. Private- one formed for some private
citizens and corporations to do business in purpose, benefit or end
its own country or state. (Sec 123, CC.)
Q: What are the requisites of a stock corporation?
6. As to their legal right to corporate existence:
A: For a stock corporation to exist, two requisites
a. De jure one existing both in fact and in law must be complied with, to wit:
b. De facto one existing in fact but not in law
1. A capital stock divided into shares and
7. As to whether they are open to the public or not:
2. An authority to distribute to the holders of such
a. Close one which is limited to selected shares, dividends or allotments of the surplus
persons or members of the family. (Sec 96 profits on the basis of the shares held (Sec. 3, CC;
105, CC.) Collector of Internal Revenue vs Club Filipino de
b. Open one which is open to any person who Cebu 5 SCRA 321,)
may wish to become a stockholder or
member thereto Q: What are the requisites of a de facto corporation?

8. As to their relation to another corporation: A: LAP

a. Parent or Holding one which is related to 1. Organized under a valid Law.
another corporation that it has the power
either, directly or indirectly to, elect the 2. Attempt in good faith to form a corporation
majority of the director of such other according to the requirements of the law.
b. Subsidiary one which is so related to Note: Issuance of Certificate of Incorporation by SEC is a
another corporation that the majority of its minimum requirement for the formation of the
directors can be elected either, directly or Corporation in good faith.(Sundiang,supra, 2009, pg.
indirectly, by such other corporation 180.)

9. As to whether they are corporations in a true 3. Use of corporate Powers - The corporation must
sense or only in a limited sense: have performed the acts which are peculiar to a
corporation like entering into a subscription
a. True one which exists by statutory authority agreement, adopting by-laws, and electing
b. Quasi one which exist without formal directors.
legislative grant.
i. Corporation by prescription one which Q: Can the existence of a de facto corporation be
has exercised corporate powers for an collaterally attacked?
indefinite period without interference on
the part of the sovereign power and A: GR:No. The existence of a de facto corporation
which by fiction of law, is given the status shall not be inquired into collaterally in any private
of a corporation; suit to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a quo
ii. Corporation by estoppel one which in
reality is not a corporation, either de jure warranto proceeding. (Sec. 20, CC.)
or de facto, because it is so defectively
XPN: Collateral attack will be permitted, however,
formed, but is considered a corporation
in relation to those only who, by reason when the lack of right or the wrong doing of the
of theirs acts or admissions, are corporation is in issue because in violation of public
policy or of express or implied statutory requirement,



such as denial of its right to enforce contracts entered or stockholders are liable as partners.(De Leon, supra,
into without compliance with prohibitions of express pg. 107-108.)
or implied statutory or public policy.
Q: What are the rules governing a corporation by
Thus, the defendant may question the personality of estoppel?
a foreign corporation transacting business in the
Philippines to maintain a suit on the ground that it is A:
not duly licensed to do business in our country. (De 1. All persons who assume to act as a corporation
Leon, supra, pg. 204 citing 18 Am. Jur. 2d 606 and knowing it to be without authority to do so shall be
Sec. 133 of the CC.) liable as general partners for all debts, liabilities and
damages incurred or arising as a result.
Q: Distinguish between a de facto corporation and a
de jure corporation. 2. When any such ostensible corporation is sued on
any transaction entered by it as a corporation or on
A: any tort committed by it as such, it shall not be
DE FACTO DE JURE allowed to use as a defense its lack of corporate
One which actually One created in strict or personality.
exists for all practical substantial conformity
purposes as a with the mandatory 3. One who assumes an obligation to an ostensible
corporation but which statutory requirements corporation as such, cannot resist performance
has no legal right to for incorporation. thereof on the ground that there was in fact no
corporate existence as corporation.(Sec 21, CC.)
against the State.
There is a colorable There is substantial Note: Where there is no third person involved and the
compliance with the compliance with the conflict arises only among those assuming the form of a
corporation who know that the corporation has not been
requirements of the law requirements of the law
registered, there is NO corporation by estoppel.(Lozano v
creating the corporation. creating the corporation. Judge Delos Santos G. R. No. 125221.
Can be attacked directly Its right to exist as a
but not collaterally. corporation cannot be Q: Distinguish de facto corporation from corporation
successfully attacked or by estoppel.
questioned by any party
even in direct proceeding A:
for that purpose by the DE FACTO CORPORATION BY
State. (De Leon, supra, CORPORATION ESTOPPEL
There is no existence in
There is existence in law
Q: What are the liabilities of officers and directors/
The dealings among the The dealings among the
trustees of a de facto corporation?
parties on a corporate parties on a corporate
basis is not required basis is required
A: The liabilities and penalties attending to officers
The State reserves the
and directors/ trustees of a de jure corporation shall Quo warranto
right to question its
be the same as those of a de facto corporation. This proceeding is not
existence through a quo
includes the liability under the criminal law. applicable
warranto proceeding
Stockholders in a de
Q: Can the members of a de facto corporation be Stockholders are liable
facto corporation are
held liable as partners by third persons? as general partners for
liable as a de jure
all debts, liabilities and
A: The members of a de facto corporation cannot be damages incurred
held liable as partners by third persons who deal with
them in their supposed corporate capacity, merely on
Q: University Publishing Company (UPC), through its
account of a technical defect in the formation of the
president, entered into a contract with Albert to
publish the commentaries on the Revised Penal
Code. UPC published the commentaries but it did
On the other hand, where an attempt to organize a
not remit the amount due to Albert. This prompted
corporation fails by omission of some substantial
Albert to file a collection suit.
step or proceeding required by the law, its members



Q: What is the nationality of a corporation sole?

The RTC decided against UPC. When the Sheriff were
about to implement the writ of execution against A: A corporation sole does not have any nationality
the company, he discovered that UPC is not but for purposes of applying nationalization laws,
registered corporation. Consequently, the president nationality is determined not by the nationality of its
of UPC was substituted in the writ of execution. presiding elder but by the nationality of its members,
constituting the sect in the Philippines. Thus, the
The president invoked the separate legal personality Roman Catholic Church can acquire lands in the
of the corporation as his defense. 1) Is UPC a de Philippines even if it is headed by the Pope. (Roman
facto corporation? 2) Can the defense that UPC is a Catholic Apostolic Church v. Land Registration
corporation by estoppel be invoked by the Commission, G.R. No. L-8451, Dec. 20, 1957)
president? 3) Who is liable for the debts of the
corporation? Q: May a corporation sole acquire property?

A: A: Yes, a corporation sole may acquire property even

1. No. UPC cannot be a considered a de facto without court intervention by purchase, donation and
corporation because it was not registered with the other lawful means. (Ibid.)
Q: Father X, an American priest who came from New
2. No. One who has induced another to act upon his York, registered the Diocese of Bacolod of the
willful misrepresentation that a corporation was duly Roman Catholic Church which was incorporated as a
organized and existing under the law, cannot corporation sole. There were years when the head
thereafter set up against his victim the principle of of the Diocese was a Filipino, but there were more
corporation by estoppel. years when the heads were foreigners. Today, the
head is an American again. Y donated a piece of land
3. The president, who negotiated with Albert is liable. located in Bacolod City for use as a school. Which
A person acting or purporting to act on behalf of a statement is most accurate? (2012 Bar Question)
corporation which has no valid existence assumes a. The Register of Deeds of Bacolod City can refuse
such privileges and obligations and becomes to register and transfer the title because the
personally liable for contracts entered into or for present head of the corporation sole is not a
other acts performed as such agent (Albert v Filipino.
University Publishing Co. G.R. No. L-19118, January b. The nationality of a corporation sole depends
30, 1965). upon the nationality of the head at any given
Q: Does a religious corporation have to be registered c. A corporation sole, regardless of the nationality
as a corporation? of the head, can acquire real property either by
sale or donation.
A: No, the Corporation Code does not require any d. A corporation sole is not legally allowed to own
religious groups to be registered as a corporation but real property.
if it wants to acquire legal personality, its members
should incorporate under the Code.
A: C. Any corporation sole may purchase and hold
Q: How is a corporation sole organized? real estate and personal property for its church,
charitable, benevolent or educational purposes, and
A: By the mere filing of a verified articles of may receive bequests or gifts for such purposes.
incorporation by the head of any religious (Sec. 113, Corporation Code.)
denomination, sect or church with the SEC without
the need of an issuance of a certificate of Being a mere administrator of the temporalities or
incorporation. Once filed, a separate juridical properties titled in his name, constitutional provisions
character is acquired which is separate and distinct requiring 60 (or 100) per centum Filipino ownership
from his natural character. are not applicable to the corporation sole. The
ownership thereof devolves upon the church or
Note: A corporation sole is not required to file by-laws, it is congregation acquiring the same. To own the
governed by the rules, regulations and discipline of its property, compliance with the constitutionally
religious denomination, sect or church. required 60 (or 100) per centum Filipino capital is
determined by the nationality of the constituents of



the diocese (church or congregation), and not the 3. Grandfather rule Nationality is attributed to the
nationality of the actual incumbent of the parish (the percentage of equity in the corporation used in
Corporation Sole or the head of the church or nationalized or partly nationalized area. This test
congregation) (De Leon, supra, pg. 733-734, citing SEC is an exception to the Control Test and was
Opinions, Nov. 6, 1990 and Sept. 21, 1993). applied by the SEC in several cases.
4. Domiciliary test Determined by the principal
Q: How may a corporation sole alienate property? place of business of the corporation.


1. By obtaining an order from the RTC of the province
where the property is situated after notice of the In using the Place of Incorporation test, the
application for leave to sell or mortgage has been nationality of a corporation is determined by the
given by publication or otherwise and by showing state of incorporation, regardless of the nationality of
that it is for the interest of the corporation that the stockholders.
leave to sell or mortgage should be granted.
XPN: A corporation organized/incorporated abroad
2. In cases where the rules, regulations and discipline and registered as doing business in the Philippines
of the religious denomination, sect or church, under the Corporation Code, of which 100% of the
religious society or order concerned represented by capital stock outstading and entitled to vote is wholly
such corporation sole regulate the method of owned by Filipinos, may be considered a Philippine
acquiring, holding, selling and mortgaging real National under the Foreign Investments Act of 1991.
estate and personal property, such rules, This is the only exception to the place of
regulations and discipline shall control, and the incorporation test (SEC Opinion No. 04-14, March 3,
intervention of the courts shall not be necessary. 2004; De Leon, The Corporation Code of the
(Sec. 113, CC.) Philippines Annotated, 2010 ed.)

Q: If a corporation sole wants to become a CONTROL TEST

corporation aggregate, does it need to be dissolved
first? In determining the nationality of a corporation, the
control test uses the nationality of the controlling
A: No. There is no point to dissolving the corporation stockholders or members of the corporation.
sole of one member to enable the corporation
aggregate to emerge from it. The Corporation Code This test was adopted by the Foreign Investment Act
provides no specific mechanism for amending the of 1991 (R.A. 7042) as a general guideline in
articles of incorporation of a corporation sole but determining the nationality of corporations engaged
Section 109 of the Corporation Code allows the in a nationalized activity (Sec Opinion No. 07-20, Nov
application to religious corporations of the general 20, 2007).
provisions governing non-stock corporations.
Q: What are the requisites of the control test?
In non-stock corporations, the amendment needs the
concurrence of at least two-thirds of its membership. A: C F C
If such approval mechanism is made to operate in a 1. Control, not mere majority or complete stock
corporation sole, its one member in whom all the control, but Complete domination, not only of
powers of the corporation technically belongs, needs finances but of policy and business practice in
to get the concurrence of two-thirds of its respect to the transaction attacked such that the
membership (Iglesia Evangelica Metodista v. Bishop corporate entity as to this transaction had at that
Lazaro. GR. 184088 July 6, 2010). time no separate mind, will or existence of its
2. Such control must have been used by the
Q: What are the tests in determining the nationality defendant to commit Fraud or wrong, to
of corporations? perpetuate the violation of a statutory or other
positive legal duty, or dishonest or unjust act in
A: contravention of plaintiffs legal right; and
1. Place of Incorporation test
2. Control test



3. The control and breach of duty must corporation is in turn owned to some extent by
proximatelyCause the injury or unjust loss another investing corporation, the same process
complained of. (Velarde v. Lopez, Inc., G.R. No. must be observed. (Redmont Consolidated Mines
153886, Jan. 14, 2004; Heirs of Ramon Durano, Corporation vs. McArthur Mining Corporation, SEC En
Sr. v. Uy, G.R. No. 136456, Oct. 24, 2000) Banc Case No. 09-09-177, March 25, 2010).

Q: How is the control testapplied in determining the Reason: One must not stop until the citizenships of
nationality of a corporation? the individual or natural stockholders of layer after
layer of investing corporations have been established,
A: Under RA 7042, the following are considered the very essence of the Grandfather Rule. (ibid.)
Philippine Nationals:
Q: What are the rules governing the application of
1. Corporations organized under Philippine laws of the Grandfather Rule?
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino A:
citizens. 1. The grandfather rule should be used in determining
the nationality of a corporation engaged in a partly
Note: R.A 7042 provides that where a corporation and nationalized activity. (SEC-OGC Opinion No. 10-31,
its non-Filipino stockholders own stocks in a SEC- December 9, 2010) This applies in cases where the
registered enterprise, at least 60% of the capital stock stocks of a corporation are owned by another
outstanding and entitled to vote of both corporations
corporation with foreign stockholders exceeding 40%
and at least 60% of the members of the board of
of the capital stock of the corporation.
directors of both corporations must be Filipino citizens
2. The Grandfather Rule will not apply in cases where
2. Corporations organized abroad and registered as the 60-40 Filipino-alien equity ownership in a
doing business in the Philippines under the particular natural resource corporation is not in
Corporation Code of which 100% of the capital doubt. (DOJ Opinion No. 19, s. 1989). If the
stock entitled to vote belong to Filipinos. stockholder corporation is 60% or more owned by
Filipinos, all the stock held by the stockholder
Q: What is the nationality of a corporation organized corporation is deemed to be held by Filipinos.
and incorporated under the laws of a foreign
country, but owned 100% by Filipinos? (1998 Bar 3) When there is doubt as to the actual extent of
Question) Filipino equity in the investee corporation, the SEC is
not precluded from using the Grandfather Rule. (SEC-
A: Under the control test of corporate nationality, a OGC Opinion No. 22-07 dated December 7, 2007).
corporation organized and incorporated under the
laws of a foreign country, but owned 100% by Q: Several American doctors wanted to set up a
Filipinos is classified as a Philippine National. Where group clinic in the Philippines so they could render
there are grounds for piercing the veil of corporate modern medical services. If the clinic is to be
entity, the corporation will follow the nationality of incorporated under our laws, what is the required
the controlling members or stockholders, since the foreign equity participation in such a corporation?
corporation will then be considered as one and the (2011 Bar Question)
A: 0%

Q: How do you apply the Grandfather Rule in

determining the nationality of a corporation?

A: To ensure compliance with the constitutional

limitation(s) of corporations engaging in nationalized
activities, the nationality of a corporation must be
determined by ascertaining if 60% of the investing
corporations outstanding capital stock is owned by
Filipino citizens, or as interpreted, by natural or
individual Filipino citizens. If such investing



Q: What are the nationalized activities reserved for Filipinos under the Constitution and special laws?

100% Filipino Owned
(Zero percent (0%) foreign equity)
(CODE: CoFi AMMaN Co. ProMiSe- US$2.5M)

a. COoperatives(Ch. III, Art. 26, R.A. 6938);

b. Manufacture of FIrecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183).
c. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological
weapons and Anti-personnel mines (Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines).
d. Mass media except recording
e. Utilization of MArine resources (Art. XII, Sec. 2, Constitution);
f. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Art. II, Sec. 8,
g. COckpits (Sec. 5, P.D. 449);
h. Practice of all PROfessions
i. Law
ii. Medicine and allied professions
iii. Accountancy, etc.
i. Small-scale MIning (Sec. 3, R.A. 7076);
j. Private SEcurity agencies (Sec. 4, R.A. 5487);
k. Retail trade enterprises with paid-up capital of less than US$2.5 M(Sec. 5, R.A. 8762);

80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
(Code: Prc)
a. Private Radio Communications network (R.A. 3846).

75 % Filipino Owned
(Up to twenty-five percent (25%) foreign equity)
(Code: LoRD F)

a. Contracts for the construction and repair of LOcally-funded public works (Sec. 1, CA 541, LOI 630)
i. infrastructure/development projects covered in R.A. 7718; and
ii. projects which are foreign funded or assisted and required to undergo international
competitive bidding (Sec. 2[a] , R.A. 7718);
b. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442);
c. Contracts for the construction of Defense-related structures (Sec. 1, CA 541).
d. Under the Flag Law, in the purchase of articles for the Government, preference shall be
given to materials and supplies produced, made, or manufactured in the Philippines, and to
domestic entites. Domestic entites means any citizen of the Philippines or commercial company
at least 75% of the capital of which is owned by citizens of the Philippines (Sec. 1, C.A. 138)

70 % Filipino Owned
(Up to thirty percent (30%) foreign equity)
(Code: AdPawn)



a. Advertising (Art. XVI, Constitution)

b. Corporations engaged in pawnshop business (Sec. 8, P.D. 114)

60 % Filipino Owned
(Up to forty percent (40%) foreign equity)

a. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183)
b. Ownership of private Lands (Art. XII, Sec. 7, Constitution; Ch. 5, Sec. 22, CA 141; Sec. 4, R.A.
c. Ownership/establishment and administration of Educational institutions (Art. XIV, Sec. 4,
d. Adjustment Companies (Sec. 323, P.D. 613)
e. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5,
P.D. 194;
f. Exploration, development and utilization of Natural resources (Art. XII, Sec. 2 , Constitution);
g. Ownership of Condominium units where the common areas in the condominium project are
co-owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726).
h. Operation and management of public Utilities (Art. XII, Sec. 11, Const.; Sec. 16 of CA 146);
i. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise
(Art. XII, Sec. 11, Constitution; Sec. 2a, R.A. 7718);
j. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP
clearance (R.A. 7042 as amended by R.A. 8179)
k. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550)
l. Corporations engaged in Coastwise shipping (Sec. 806, P.D. 1464)

40 % Filipino Owned
(Up to sixty percent (60%) foreign equity)
(Code: FI [SEC] )

a.Financing companies regulated by the SEC(Sec. 6, R.A. 5980 as amended by R.A. 8556);
b. Investment houses regulated by the SEC(Sec. 5, P.D. 129 as amended by R.A. 8366).


1. Liability for acts or contracts As a general rule,
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY the obligation of the corporation is not the
liability of the stockholders, officers or directors
The doctrine of corporate juridical personality states (Remo vs. IAC, G.R. No. L-67626, April 18, 1989).
that a corporation is a juridical entity with legal
personality separate and distinct from those acting A corporation may not, generally, be made to
for and in its behalf and, in general, from the people answer for acts or liabilities of its stockholders or
comprising it. (Francisco v Mallen Jr. G.R. No. 173169, those of the legal entities to which it may be
September 22, 2010) connected, and vice versa.(Cease vs. CA,G.R. No.
L-33172, Oct. 18, 1979)
Q: What are the significances of the doctrine of
separate personality?



2. Right to bring actions may bring civil and rules governing the liability of a principal or master for a
criminal actions in its own name in the same tort committed by an agent or servant are the same,
manner as natural persons. (Art. 46, Civil Code) whether the servant or agent be a natural or artificial
person. (ibid.)
3. Right to acquire and possess property property
conveyed to or acquired by the corporation is in Q: Is a corporation liable for crimes?
law the property of the corporation itself as a
distinct legal entity and not that of the A:
stockholders or members. (Art. 44[3], Civil Code) GR: No. Since a corporation is a mere creation of
legal fiction, it cannot be held liable for a crime
4. Acquisition of jurisdiction service of summons committed by its officers, since it does not have the
may be made on the president, general manager, essential element of malice; in such case the
corporate secretary, treasurer or in-house responsible officers would be criminally liable.
counsel. (Sec. 11, Rule 14, Rules of Court). (People v. Tan Boon Kong, G.R. No. L-32066. Mar.
15, 1930)
5. Changes in individual membership corporation
remains unchanged and unaffected in its identity XPN: If the penalty of the crime is only fine or
by changes in its individual membership or forfeiture of license or franchise. (Ching v Secretary
ownership of its stocks. of Justice, G. R. No. 164317, Feb. 6, 2006.)


Q: Are stockholders entitled to possess the property
of the corporation?
Q: Are corporations entitled to moral damages?
A: No.The interest of the shareholder in the
properties of the corporation is inchoate only. The A: GR: A corporation is not entitled to moral damages
interest of the shareholder on a particular property because it has no feelings, no emotions, no senses.
becomes actual, direct and existing only upon the (ABS-CBN Broadcasting Corporation v. CA, G.R. No.
liquidation of the assets of the corporation and the 128690 Jan 21, 1999 and Phillip Brothers Oceanic, Inc,
provided that the same property is assigned to the G.R. No. 126204, Nov. 20, 2001)
shareholder concerned.
Q: Are corporations entitled to constitutional rights? 1. The corporation may recover moral damages
under item 7 of Article 2219 of the New Civil
A: Corporations are entitled to the following rights Code because said provision expressly
authorizes the recovery of moral damages in
under the constitution;