Commercial Law - Lex Cerbus

L e x Ce r vu s/Au gu sti n i an a
COMMERCIAL LAW
CORPORATION LAW
1. In what ways may the corporation recover the unpaid balance on the subscription?
o The corporation may recover the unpaid balance of subscription in the following ways:
By voluntary payment which could either be: (a) upon the date specified in the
subscription contract; or (b) upon call by the Board of Directors; and
By involuntary payment which could either be: (a) judicial; or (b) extra-judicial action
such as delinquency sale or application of dividends. (Refer to Section 67 and 68 of
the Corporation Code)
2. Give the distinctions between subscription of shares and purchase.

o The distinction between subscription and purchase of shares are as follows:
In subscription, the subscriber, from the moment of subscription, has all the rights and
obligations of a stockholder even though he has not fully paid the subscription; while
in purchase, the purchaser becomes a stockholder only when he has fully paid the
purchase price;
Subscription does not fall under the Statute of Frauds, while a purchase may fall
under the Statute of Frauds;
Subscription refers to stocks issued prior to incorporation and to additional stocks
issued after incorporation, while purchase refers only to shares of stocks issued after
incorporation. (Refer to pp. 164 to 165 of Comments on Corporation Code by Celso
Hilbero)
3. What are the limitations on the power to dispose of all of corporate property?
o The limitations on the power to dispose of all of corporate property are as follows:
It must be subject to the provisions of existing laws on illegal combination and
monopolies;
It must be approved by the board of directors or trustees;
The action of the board of directors or trustees must be authorized by the vote of the
stockholders representing at least two-third (2/3) of the outstanding capital stock or its
members in a meeting duly called for the purpose;
A written notice must be addressed to the stockholders or members at his place of
residence or served personally; and
The consideration for such disposition which may be money, stock, bonds, or other
instruments for the payment of money or other property or consideration as the board
of directors or trustees may deem proper and adequate. (Refer to Section 40 of the
Corporation Code)
4. Distinguish between stock and cash dividends.

o A cash dividend is differentiated from stock dividend as follows:
Cash dividends withdraw assets from the corporation, while stock dividends do not;
In cash dividend, money is received by the stockholder, while in stock dividend, stock
instead of money is received;
Cash dividend is a taxable income, while a stock dividend is not; and
A cash dividend may be declared by the board alone, while a stock dividend is
declared by the board, and the declaration is approved by stockholders holding at
least 2/3 of capital stock outstanding and entitled to vote. (Refer to p. 615 of
Commercial Law Reviewer by Miravite 12th edition)
5. What are the limitations to the power of the corporation to classify its shares?
o The limitations to the power of the corporation to classify its shares are as follows:
No shares may be deprived of voting rights except those classified and issued as
preferred or redeemable shares, unless otherwise provided in this Code;
There shall always be a class or series of shares which have complete voting rights;
Banks, trust companies, public utilities, and building and loan associations shall not
be permitted to issue no-par value shares of stock;
Preferred shares of stock may be issued only with a stated par value;
The shares of stock without par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share; and
The entire consideration received by the corporation for its no par value shares shall
be treated as capital and shall not be available for distribution as dividends. (Refer to
Section 6 of the Corporation Code)
6. Mr. X acquired 500 no par value shares from XYZ Corporation. After sometime, the Board of
Directors issued a call to subscribers declaring the due date on the balance of their
subscriptions. Mr. X refuses to pay. Is there a legal basis for his refusal? Why?
o There is no legal basis for Mr. Xs refusal to pay.
o Even if the no par value shares are deemed fully paid, that presumption may still be defeated
by sufficient proof. The unpaid balance of the subscribed no par value shares may still be
THE CREW: MELVIN RECONGCO, BUDDY AGUILAR, JONATHAN NICOLAS, ULY CARINO
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collected through a call made by the Board of Directors. But the corporate officers responsible
for the issuance of no par value shares despite the fact that it is not yet fully shall be held liable
by the corporation.
o In this case, the unpaid balance of the 500 no par value shares of Mr. X from XYZ Corporation
may still be collected through a call made by the Board of Directors.
o Hence, there is no legal basis for Mr. Xs refusal to pay. (Refer to Section 6 and 67 of the
Corporation Code)
7. (a) Give five (5) instances when a stockholder may exercise his appraisal right. (b) Give five
(5) instances when holders of non-voting shares may be allowed to vote.
a) The five (5) instances when a stockholder may exercise his appraisal right are as follows:
When the articles of incorporation are amended to extend the duration of
existence of the corporation;
When the articles of incorporation are amended to change the rights of
stockholders, authorize preferences superior to those of existing stockholders,
or restrict the rights of any stockholder;
When the stockholders authorize the board to invest the corporate funds in
another corporation;
When the stockholders authorize the board to engage in a purpose other than
the main purpose(s) stated in the articles; and
When the corporation decides to sell or dispose of all or substantially all of the
assets of the corporation. (Refer to Section 42, 81 and 82 of the Corporation
Code)
b) The five (5) instances when holders of non-voting shares may be allowed to vote are as
follows:
Amendment of the articles of incorporation;
Adoption and amendment of by-laws;
Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
Incurring, creating or increasing bonded indebtedness; and
Increase or decrease of capital stock. (Refer to Section 6 of the Corporation
Code)
8. You are the legal counsel of ABC Corporation and you were requested by the Board to give
your opinion on certain matters. State your opinion briefly on:
(a) The taxability of stock dividends

o Stock dividends, strictly speaking, represent capital and do not constitute income to
its recipient. So that the mere issuance thereof is not yet subject to income tax as
they are nothing but an enrichment through increase in value of capital investment.
As capital, the stock dividends postpone the realization of profits because the fund
represented by the new stock has been transferred from surplus to capital and no
longer available for actual distribution. In other words, stock dividends issued by the
corporation, are considered unrealized gain, and cannot be subject to income tax until
that gain has been realized. (Refer to Commissioner vs CA, 301 SCRA 152)
(b) On whether or not stockholder X has the right to the amendment of the corporate
name
o Stockholder X has no right to the amendment of corporate name. The change of
corporate name can be made by amending the articles of incorporation. Such
amendment still requires the majority vote of the board of directors approving the
amendment and the vote and written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock. Hence, stockholder X has no right to
amend the corporate name. (Refer to Section 16 and 18 of the Corporation Code)
(c) On whether or not Director A may contract with ABC Corporation for the lease by
the latter of the formers warehouse.
o Director A may contract with ABC Corporation for the lease by the latter of the
formers warehouse.
o Under the law, a contract entered into by a corporation with one or more of its
directors is voidable, at the option of such corporation, unless all the following
conditions are present:
That the presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for
such meeting;
That the vote of such director or trustee was not necessary for the approval
of the contract;
That the contract is fair and reasonable under the circumstances; and
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That in the case of an officer, the contract has been previously authorized
by the board of directors.
o In this case, the lease contract entered into by Director A with ABC Corporation is
voidable at the option of ABC Corporation. However, if all the conditions provided for
by law has been complied with, then such lease contract shall be considered as
valid.
o Hence, Director A may contract with ABC Corporation. (Refer to Section 32 of the
Corporation Code)
9. (a) On March 12, 2000, XYZ Corporation was issued a certificate of incorporation. On
January 25, 2003, the SEC discovered that XYZ had never organized and operated. Does the
government have to institute a quo warranto proceeding against XYZ Corporation? Why? (b)
Mr. X subscribed to 200 shares of stocks with ABC Corporation paying 25% of the total
amount. After five (5) years of operations, the corporation became insolvent. When sued by
the corporate creditors, Mr. X and other stockholders similarly situated refused to pay the
balance on the subscription contending that as investors there would be no more
corporation to invest with. Decide.
a) The government no longer needs to institute a quo warranto proceeding against XYZ
Corporation. Under the law, if a corporation does not formally organize and commence the
transaction of its works within two (2) years from the date of its incorporation, its corporate
powers cease and the corporation shall be deemed dissolved. From March 12, 2000 until
January 25, 2003, XYZ Corporation never formally organized and operated for a period of
more than two (2) years. In such case, the requirement of the law in order to consider the
corporation dissolved is more than satisfied. Hence, the government does not have to
institute a quo warranto proceeding against XYZ Corporation. (Refer to Section 22 of the
Corporation Code)
b) Mr. X and the other stockholders are not correct when they refused to pay the balance of
their subscription. Under the Trust Fund Doctrine, the unpaid subscription is a trust fund to
which creditors of a corporation may look up to for the payment of their credits especially
when a corporation becomes insolvent. A stockholder may be sued directly by the
creditors of the corporation to the extent of their unpaid subscription to the corporation. In
this case, the creditors of ABC Corporation may sue Mr. X and the other stockholders in
order to pay the balance of their subscription. Hence, Mr. X and the other stockholders are
not correct when they refused to pay the balance of their subscription. (Refer to PNB vs
Bitulok, 23 SCRA 1366 and pp. 520, 552 of Commercial Law Reviewer by Miravite)
10. (a) ABC Corporation has an authorized capital stock of P1 million, all subscribed and
outstanding. The Corporation has unrestricted retained earnings of P800,000. How may the
stock dividends be declared and implemented under the circumstances? (b) X orally
expressed to the board in one of its regular sessions, his desire to exercise his appraisal
right because of his vehement objection to a board and stockholders resolution taken 30
days ago, increasing the number of directors from 10 to 15 through an amendment of the
articles. Are there reasons to deny the exercise of the right? Why?
a) The declaration and implementation of stock dividends under the circumstances may be
made subject to the following rules:
o The declaration may be made out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of outstanding
stock held by them;
o Stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid; and
o Stock dividends shall be issued only upon the approval of the stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose. (Refer to Section 43 of the Corporation
Code)
b) There is a reason to deny the exercise of the appraisal right. It is clearly provided under
the law that the appraisal right may be exercised by any stockholder who shall have voted
against the proposed corporate action, by making a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment of the value
of his shares. In this case, even if X was able to exercise his appraisal right within thirty
(30) day period, he did not make a written demand on the corporation for the exercise of
such right but he merely made it orally. Hence, there is a reason to deny Xs appraisal
right. (Refer to Section 82 of the Corporation Code)
11. (a) In 2000, the two buildings of the corporation were assessed with a fair market value of
P20 million. In January 2004, they were assessed at P30 million. May dividends be declared
on the P10 million re-appraisal surplus? Why? (b) What are the effects of a declaration of
delinquency on the rights of a stockholder?
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a) Dividends may not be declared on the P10 million re-appraisal surplus. It is a well settled
rule that dividends can only be declared from unrestricted retained earnings. The increase
in the assets due to re-assessment is not an earning of the corporation, and therefore,
cannot become the basis for a dividend declaration. The dividend declaration from re-
assessment of assets is in effect, a declaration of capital, not of earnings, as dividend.
This is not allowed by law. In this case, the re-appraisal surplus cannot be considered as
an earning of the corporation. Hence, dividends may not be declared on the P10 million
re-appraisal surplus. (Refer to Section 43 of the Corporation Code and p.615 of
Commercial Law Reviewer by Miravite)
b) The effects of a declaration of delinquency on the rights of a stockholder are as follows:

o A delinquent stockholder shall be disqualified to be voted or be entitled to vote or to
representation at any stockholders meeting; and
o A delinquent stockholder shall be disqualified to exercise any rights of a stockholder
except the right to dividends, until and unless he pays the amount due on his
subscription with accrued interest and the costs and expenses of advertisement, if
any. (Refer to Section 71 of the Corporation Code)
12. Director X knows that the corporate president and the other members of the board have
authorized the issuance of shares at 20% less than par. In a meeting, he had orally
expressed his dissent on the practice but had been outvoted. Later, the corporation became
insolvent. The corporate creditors now want to hold the directors liable for the difference
between the issued value and the par value of the shares previously issued. May Director X
be also held liable? Why?
o Director X may not also be held liable.
o The law provides, in part, that directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation, shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its stockholders or members
and other persons.
o In this case, X neither vote nor assent to the act of the corporate president and other
members of the board in issuing shares at 20% less than par. During the meeting, he had
orally expressed his dissent on the practice but had been outvoted.
o Hence, Director X may not also be held liable. (Refer to Section 31 of the Corporation
Code)
13. Mr. X, a mid-level employee of ABC Corporation was dismissed by direct act of the Board of
Directors. The NLRC, in a final judgment declared the dismissal illegal. Does Mr. X have a
cause of action for damages against the members of the Board? Explain.
o Mr. X does not have a cause of action for damages against the members of the Board.
o A corporation is clothed with a personality separate and distinct from that of the persons
composing it. Being a juridical person, a corporation can only act through its board of
directors. Unless the board of directors acted with malice or bad faith in issuing their
resolution, the act of the board of directors can be considered as the act of the
corporation.
o In this case, the dismissal of Mr. X by the direct act of the Board of Directors can be
considered as an act of ABC Corporation. If the dismissal was found illegal by the NLRC,
then his cause of action should be against ABC Corporation and not against the members
of the board.
o Hence, Mr. X does not have a cause of action for damages against the members of the
board. (Refer to AHS vs CA, 257 SCRA 319 and Laperal vs CA, 223 SCRA 261 and
Section 2 of the Corporation Code)
14. ABC Corporation sent an offer sheet to XYZ Corporation, a realty, firm for the sale of two
parcels of land 20% lower than their market value. The offer was received by X, corporate
secretary and member of the Board of XYZ Corporation who instead of referring the offer to
the Board negotiated for the purchase of the offered parcels of land for his own behalf. ABC
Corporation sold the land to X who sold it to a developer and realized substantial profits
from the transactions.
a) May X keep the profits for himself if the Board by a unanimous vote ratifies his
acts? Why?
o X may not keep profits for himself even if the Board by a unanimous vote ratifies his
acts.
o Where a director, by virtue of his office acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such profits by refunding the
same, unless his act has been ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the outstanding capital stock.
o In this case, X may not keep the profits for himself even if there is a unanimous
consent by the Board of Directors. But instead, X may only keep the profits for himself
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if it is consented by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. Since X is guilty of disloyalty as a director,
then X shall be liable to XYZ Corporation for the profit he made.
o Hence, X may not keep profits for himself even if the Board by a unanimous vote
ratifies his acts. (Refer to Section 34 of the Corporation Code)
b) Assume for the purpose of this question only that XYZ Corporation needed five
trucks for its operations. X offered to supply the corporation with the trucks. If a
contract is entered into between XYZ Corporation and X, under what circumstances
will the contract be deemed valid?
o The contract between XYZ Corporation and its Director X shall be valid if the
following conditions are present:
The presence of X in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting;
That the vote of X was not necessary for the approval of the contract;
That the contract between XYZ Corporation and Director X is fair and
reasonable; and
Since Director X is also a corporate officer, the contract has been previously
authorized by the board of directors. (Refer to Section 32 of the Corporation
Code)
15. A group of fifteen (15) persons, all aliens and seven (7) of whom are residents of the
Philippines, organized themselves to form Sunrise Corporations, a stock corporation.
Within a month from filing the articles of incorporation, the SEC issued it a certificate of
incorporation. It then formally organized and commenced operations. What kind of
corporation was formed? Why?
o A de facto corporation was formed.
o To constitute a de facto corporation, the following elements must be present: (a) a valid
law under which a corporation may be formed; (b) a bona fide attempt to incorporate
according to the requirements of such valid law; (c) actual use of corporate powers or the
transaction of business as if it were a corporation; and (d) good faith in claiming to be, and
doing business, as a corporation.
o In this case, Sunrise Corporation can be considered as de facto corporation. It started to
have a juridical personality from the time it was issued a certificate of incorporation.
However, it fails to comply with the requirement of the law regarding the qualification of its
incorporators. Out of its fifteen (15) incorporators, only seven (7) are residents of the
Philippines. The law requires that majority of the incoporators must be residents of the
Philippines.
o Hence, a de facto corporation was formed. (Refer to Section 20 of the Corporation Code
and Cagayan Fishing Dev. Co. vs Sandico, 65 Phil 223)
16. A group of fifteen (15) persons who intend to form a banking corporation seeks your advice
on the following matters: (a) whether or not it could issue both par value and no par value
shares; (b) whether or not it could have a president who is an alien; (c) whether or not it
can have a treasurer who at the same time would be a secretary; and (d) whether or not it
could deprive common shares of voting rights. What would your advice be?
a) We must distinguish. As to the issuance of a par value shares, a banking corporation

is authorized by law to issue it. But with respect to the issuance of a no par value
shares, a banking corporation is not permitted to issue it. (Refer to Section 6 of the
Corporation Code)
b) A banking corporation may have a president who is an alien provided that he is also a
director. (Refer to Section 25 of the Corporation Code)
c) A banking corporation can have a treasurer who at the same time would be a
secretary. Under the law, any two (2) or more positions may be held concurrently by
the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time. Hence, a banking corporation can have a
treasurer who at the same time would be a secretary. (Refer to Section 25 of the
Corporation Code)
d) A banking corporation cannot be deprived its common shares of voting rights. It is

clearly provided under the law that no share may deprived of voting rights except
those classified and issued as preferred or redeemable shares. In such case, a
common share does not even fall under the exceptions. Hence, a banking corporation
cannot deprive common shares of voting rights. (Refer to Section 6 of the Corporation
Code)
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TRANSPORTATION LAW
1. Alexander is an employee of a bank located in Makati. He drives an FX Tamaraw to his

office everyday. Because he spends a substantial sum for gasoline traveling from Malolos,
Bulacan to Ayala Avenue he decided to take the offer of eight people from his hometown,
all employees in Makati to allow them to take his vehicle to and from Makati five days a
week. His passengers would give him eighty (80) pesos each day for the trip. His
calculations show that he does not actually earn profits in the arrangement because of the
high cost of maintenance. One morning, the vehicle figured in an accident when it rear-
ended a car in front of it. One issue in a subsequent suit filed by one of his passengers was
whether or not Alexander was a common carrier. Alexander denies this. Rule on the issue
with reasons.
o Alexander can be considered as a common carrier.
o Under the law, common carriers are persons, corporations, firms or associations engaged
in the business of carrying or transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public. The law does not make any
distinction between one whose principal business activity is the carrying of persons or
goods or both, and the one who does such carrying only as an ancillary activity or in the
local idiom, as a sideline.
o In this case, Alexander cannot be excluded from the definition of a common carrier for the
reason that he has a limited clientele and the carrying of passengers is not his principal
business.
o Hence, Alexander can be considered as a common carrier. (Refer to Article 1732 of the
Civil Code and First Philippine vs CA, 300 SCRA 661)
2. Mario and Maria, spouses boarded Dangwa Bus from Benguet to Manila. With them was
their five (5) year old daughter. After a long trip, they finally reached the bus terminal in
Sampaloc, Manila. They got off the bus and lingered for a little while waiting for the
conductor to unload their baggage perched on the bus roof. When they received their
baggage, they proceeded towards the exit but one Dangwa bus run over and killed their
child while they were still within the terminal. Is there a basis for a culpa contractual suit
against the bus company considering that the family had already disembarked and
received their belongings from the company? Explain.
o There is a basis for a culpa contractual suit against the bus company even if the family
had already disembarked and received their belongings from the bus company.
o Well settled is the rule that common carriers are bound to observe extraordinary diligence
in the carriage of their passengers. The duty of a common carrier to observe extraordinary
diligence begins from the moment the passenger steps on the platform of the bus. This
duty ends when the passenger after reaching destination safely alighted and had the
reasonable opportunity to leave the common carriers premises, which includes the time to
look for his baggage and claim them.
o In this case, the fact that Mario and his family have already disembarked and received
their belongings from the bus conductor does not relieve the bus company from liability
because their duty to observe extraordinary diligence has not yet ended. The bus
company should still observe extraordinary diligence until Mario and his family was able to
leave the carriers premises.
o Hence, there is a basis for a culpa contractual suit against the bus company. (Refer to
Dangwa vs CA, 202 SCRA 574 and Aboitiz vs CA, 179 SCRA 95)
3. Jose is a paying passenger in Bus No. 1 of Road Queen Bus Company. He was going to
Dagupan from Cubao for a business purpose. Tired and weary from his daily provincial
sorties, he fell asleep. When he woke up, his attach case containing P50,000 and some
personal documents were missing, obviously taken by his seatmate in the bus who
alighted somewhere after a stop over in the Tarlac terminal. Is the carrier liable for the
loss? Explain.
o The carrier is not liable for the loss of attach case containing P50,000 and some personal
documents.
o When Jose boarded Bus No. 1 of Road Queen Bus Company, the contract of carriage
between them does not include his attach case. If Jose wanted his attach case to be
under the responsibility of the bus company, he should have turned it over to the bus
company. In such case, the liability of Road Queen Bus Company shall be that of a hotel-
keeper under the contract of deposit under the Civil Code.
o Hence, the carrier is not liable for the loss of attach case. (Refer to pp. 314 and 318 of
Commercial Law Reviewer by Miravite and Article 1754 of the Civil Code)
4. How much may be recovered by the shipper from the loss of the goods worth P50,000
under the following stipulations and facts?
a) The carriers liability is limited to P5,000.00
o The shipper may recover P50,000.00 for the loss of the goods. A stipulation limiting
the liability of a carrier to P5,000.00 only and without giving the shipper the option to
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declare a higher value, is null and void. (Refer to Ong vs CA, 91 SCRA 223 and
Article 1749 of the Civil Code)
b) The carriers liability shall be limited to a maximum of P5,000 for goods declared or
undeclared.
o The shipper may recover P50,000.00 because a stipulation limiting the carriers
liability to a certain amount regardless of the value of the cargoes is void for being
contrary to public policy. (same legal basis)
c) The carrier will not be liable for loss of the goods through the negligence of the crew.
o The shipper may recover P50,000.00 because a stipulation that a common carrier
shall not be responsible for the acts or omissions of his or its employees shall be void
for being unreasonable, unjust and contrary to public policy. (Refer to Section 1745
par.5 of the Civil Code)
d) The carrier shall be liable only for P5,000 unless the shipper declares a higher value and
pays a higher freight. The shipper does not declare a higher value after reading the
provision. When his goods were lost, he assailed the validity of the stipulation for being a
contract of adhesion.
o The shipper may recover only P5,000.00 if he did not declare a higher value and pay
a higher freight. A stipulation in the bill of lading limiting the liability of the carrier to an
agreed valuation unless the shipper declares a higher value and pays a higher rate of
freight is valid. (Refer to Ong vs CA, 91 SCRA 223 and Article 1749 of the Civil Code)
NEGOTIABLE INSTRUMENTS LAW
1. An instrument was indorsed, thus: To X, Sgd. B. The next indorsement reads: To Z only,
Sgd. X. The last indorsement reads: To Y, Sgd. Z. Does Y acquire title to the instrument?
Why?
o Y acquires the title of a mere assignee.
o When an order instrument has been transferred to another without indorsement, the
transferee of such instrument is merely an assignee and not a holder.
o In this case, the last holder of the order instrument was Z and the instrument was
restrictively indorsed to him. But despite the restrictive indorsement, Z still indorsed it to Y.
Since Z is prohibited from further negotiating the instrument, then his indorsement to Y
has no legal effect and it is merely an ordinary transfer.
o Hence, Y acquires the title of a mere assignee. (Refer to Section and 36-a and 49 of the
Negotiable Instruments Law)
2. An instrument was indorsed: To X, Sgd. B. X indorsed the instrument, thus: To Z, Sgd.

X. How may Z negotiate the instrument received from X. Why?
o We must distinguish.
o If it is an originally order instrument, then Z may negotiate the instrument received from X
by indorsement completed by delivery.
o On the other hand if it is an originally bearer instrument, then Z may negotiate it by mere
delivery even if the instrument was specially indorsed to him. (Refer to Section 30 and 40
of the Negotiable Instruments Law)
3. An instrument payable to Jose, was transferred by Jose to Maria. Is Maria a holder? Why?
o Maria cannot be considered a holder.
o The mere transfer of an instrument is not sufficient to constitute the transferee a holder
thereof. In order for the transferee to be considered a holder, such instrument must be
negotiated to him either by mere delivery or by indorsement completed by delivery, as the
case may be.
o Maria does not acquire the title of a holder by mere transfer of the instrument to her.
o Hence, Maria cannot be considered a holder. (Refer to Section 30 of the Negotiable
Instruments Law)
4. An instrument reads: I promise to pay to the order of Maria Santos P100,000 on August 24,
2004, or deliver a TV set to her. Sgd. Jose Martinez. Is this instrument negotiable? Why?
o The instrument is not negotiable.
o Under the law, the negotiable character of an instrument shall not be affected by a
provision which gives the holder an option to require something to be done in lieu of
payment of money. Such option must be expressly given to the holder. If it is not expressly
given to the holder, then it is presumed that the option belongs to the maker or the debtor
as provided by the Civil Code on alternative obligations.
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o In this case, the option on whether to be paid by P100,000.00 or to be paid by the delivery
of a TV set was not expressly given to the holder Maria Santos. It is presumed that the
option belongs to the maker Jose Martinez.
o Hence, the instrument is not negotiable. (Refer to Section 5-d of the Negotiable
Instruments Law and Article 1200 of the Civil Code)
5. An instrument reads: Pay to X or his order P50,000 with interests on August 20, 2004. Sgd.
D. What part of this instrument renders it non-negotiable? Why?
o There is no part of the instrument which can render it non-negotiable.
o To be considered as a negotiable instrument, the instrument must comply with all the
requisites of negotiability such as: (a) it must be in writing and signed by the maker or
drawer; (b) it must contain an unconditional promise or order to pay a sum certain in
money; (c) it must be payable on demand, or at a fixed or determinable future time; and
(d) it must be payable to order or bearer.
o In this case, the instrument has complied with the requisites of negotiability. The fact that
the sum payable is to be paid with interest will not affect the negotiability of the instrument
because it can still be considered as a sum certain in money.
o Hence, no part of the instrument can render it non-negotiable. (Refer to Section 1 and 2 of
the Negotiable Instruments Law)
6. Which of the following are not negotiable instruments? Why? (a) Treasury Warrants; and
(b) Postal Money Orders.
o Both instruments are not negotiable for the following reasons:
Treasury Warrants are non-negotiable instruments because it is payable out of a
particular fund of the government treasury; and
Postal Money Orders are non-negotiable instruments because of the numerous
restrictions and limitations in the postal laws and regulations which are entirely
inconsistent with negotiability. (Refer to Abubakar vs Auditor General, July 31, 1948
and Philippine Education Co., vs Soriano, June 30, 1971)
7. (a) What instruments are payable to bearer? (b) What is an accommodation transaction?
a) The instruments payable to bearer are as follows:
o When it is expressed to be so payable;
o When it is payable to a person named therein or bearer;
o When it is payable to the order of a fictitious or non-existing person, and such fact
was known to the person making it so payable;
o When the name of the payee does not purport to be the name of any person; and
o When the only or last indorsement is an indorsement in blank. (Refer to Section 9 of
b) An accommodation transaction is a legal arrangement under which a person called the

accommodation party, lends his name and credit to another called the accommodated
party, without any consideration. (Refer to Section 29 of the Negotiable Instruments Law)
8. Mario issued a blank note and left it in the glove compartment of his car. Bernardo, a friend
of Mario got hold of the note, filled it up for P100,000 and negotiated it to Carlos.
a) May Carlos recover from Mario? Why?
o Carlos may not recover from Mario.
o The non-delivery of an incomplete instrument constitutes a real defense which can be
invoked against all holders, including a holder in due course.
o In this case, there was a non-delivery of an incomplete instrument because Bernardo
took the blank note without even asking the permission of Mario. Being a real
defense, Mario can invoke it against Carlos even if he is a holder in due course.
o Hence, Carlos may not recover from Mario. (Refer to Section 15 of the Negotiable
Instruments Law)
b) May Carlos recover from Bernardo? Why?

o Carlos may recover from Bernardo
o The one who negotiates an instrument, either by delivery or indorsement completed
by delivery, is bound by his warranty under the law.
o In this case, when Bernardo negotiates a blank note which is not even delivered to
him by the maker, he is liable to Carlos for breach of warranty that the instrument is
genuine and in all respects what it purports to be and that he has good title to the
instrument.
o Hence, Carlos may recover from Bernardo. (Refer to Section 65 and 66 of the
9. Mario bought merchandise from Patricio. The agreement was for Mario to pay within 30
days from the delivery of the goods. On the 28th day, Mario issued a check for P200,000
payable to Patricio or his order with Action Bank as drawee. The check found its way into
the hands of Quirino who forged the signature of Patricio making it appear that the latter
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negotiated it to him. Quirino deposited the check in his account with Bono Bank. The check
was indorsed by Bono Bank for clearing. When the check was cleared, the amount was
credited to the account of Quirino who withdrew the P200,000.00 closed his account and
disappeared. May Patricio recover from Mario under the check? Why?
o Patricio may not recover from Mario under the check.
o Since the check was lost and is already in the hands of the forger Quirino, then the
obligation of Mario arising from the check was already extinguished. In such case, the
obligation of Mario to pay Patricio no longer arises from the check but it shall arise
from law which is also known as a civil obligation.
o Hence, Patricio may not recover from Mario under the check. (Refer to Article 1157 of
the Civil Code)
10. In no. 9, can Patricio recover from Quirino? Why?

o Patricio cannot recover from Quirino.
o There is no privity of contract between the forger and the payee whose signature was
forged. If the payee would want to recover from the forger of his signature, then the
basis of his cause of action should not be the check, but on the criminal act
committed by the forger.
o In this case, it is not proper for Patricio to recover from Quirino based on the check
because there is no existing contractual relationship between them.
o Hence, Patricio cannot recover from Quirino. (Refer to the Revised Penal Code)
11. In no. 9, can Action Bank recover from Bono Bank? Why?
o Action Bank can recover from Bono Bank.
o There is privity of contract between the drawee bank and the collecting bank. The
collecting bank is an indorser while the drawee bank is an indorsee. Being an
indorser, the collecting bank is bound by its warranty that all prior indorsements are
genuine. So if there was forgery, it shall be liable to the drawee bank for breach of
warranty.
o In this case, the collecting bank Bono Bank is bound by its warranty to the drawee
Action Bank that all prior indorsements are genuine. Since the payees signature was
forged, Bono Bank is liable for its breach of warranty.
o Hence, Action Bank may recover from Bono Bank. (Refer to p.80 of the Negotiable
Instruments by Nolledo and Section 66 of the Negotiable Instruments Law)
12. In no. 9, may Mario recover from Action Bank? Why?

o Mario may recover from Action Bank.
o There is a privity of contract between the drawee bank and the drawer. When the
payees signature was forged, the drawee bank has no right to charge against the
account of the drawer. If the drawee bank will debit the account of the drawer, then
such drawee bank should re-credit the amount back to the drawers account.
o In this case, Action Bank has no right to debit from the account of the drawer Mario
because the payees signature was forged and it is wholly inoperative. Action Bank is
obliged to re-credit the amount back to Marios account.
o Hence, Mario may recover from Action Bank. (Refer to Section 23 of the Negotiable
Instruments Law and p. 80 of Negotiable Instruments by Nolledo)
13. M issued a promissory note payable to the order of P. P negotiated the note to A. B
fraudulently took hold of the note and forged the indorsement of A making it appear it was
indorsed to him. From B, the note went to C and to D.
a) May D recover from M? Why?
o D may not recover from M.
o It is a well-settled rule that the party whose indorsement is forged and parties prior to
him, including the maker are not liable to any holder, even a holder in due course.
Since the indorsement is forged, it is inoperative and it cannot operate to transfer any
right or title over the instrument.
o In this case, M is not only the maker but he is also a party prior to the forgery of As
signature. He is therefore not liable to D, even if he is a holder in due course.
o Hence, D may not recover from M. (Refer to Section 23 of the Negotiable Instruments
Law and Commercial Law Reviewer by Villanueva)
b) May D recover from P? Why?

o D may not recover from P.
o In this case, P is a party prior to the forgery of As signature. He is therefore not liable
to D, even if he is a holder in due course.
o Hence, D may recover from P. (Refer to Section 23 of the Negotiable Instruments
Law and Commercial Law Reviewer by Villanueva)
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c) May D recover from C? Why?

o D may recover from C for breach of warranty.
o All indorsers subsequent to the forged indorsement shall be liable to all subsequent
holders in due course for breach of warranty as general indorsers.
o Being an indorser who is subsequent to the forged indorsement, C is liable to D for
breach of warranty that the instrument is genuine and in all respects what it purports
to be. In this case, D is deemed prima facie to be a holder in due course.
o Hence, D may recover from C. (Refer to Section 59 and 66 of the Negotiable
Instruments Law)
14. Mr. D went to PNB with his trusted friend, Mr. F who was left in the parking lot to watch the
car of Mr. D. While alone, Mr. F rummaged through the glove compartment of the car and
found a check book belonging to Mr. D. He tore one leaf, filled it up for P50,000.00, put his
name as payee, forged the signature of Mr. D as drawer and went to the bank the following
day to have it encashed. The bank encashed the check. Later, Mr. D discovered the forgery
when he noticed that P50,000 was debited from his account. The bank refused to credit the
amount back to Mr. D. Decide.
o The bank cannot refuse to credit the amount back to Mr. D.
o When the signature of the drawer was forged, the drawee bank cannot charge the
drawers account for said check because a bank is supposed to know the signatures of its
customers, and bears damage in case it pays under a forged signature of its drawer-
customer.
o In this case, Mr. T was able to forge the signature of the drawer Mr. D and encashed it
before the drawee bank.
o Hence, the bank cannot refused to credit the amount back to Mr. D. (Refer to PNB vs CA,
25 SCRA 693 and PNB vs Quimpo, 158 SCRA 582 and Commercial Reviewer by
Miravite)
15. Mr. D issued a check for P50,000.00 payable to the order of Mr. P. The check was issued in
payment of an obligation incurred by Mr. D in favor of Mr. P. The check fell into the hands
of Mr. F without anyones fault. Mr. F made it appear that the check was indorsed to him by
Mr. P. He deposited the check with Asian Bank where he maintains an account. Asian Bank
indorsed the check for clearing. Without hearing anything from the drawee- All State Bank,
Asian Bank credited the amount to the account of Mr. F who closed his account after
withdrawing the money. Later, the loss and subsequent payment of the check was
discovered.
a) May Mr. P still demand payment of the obligation of P50,000.00 from Mr. D? Why?
o Mr. P may still demand payment from Mr. D.
o An obligation which has been paid by a check or other mercantile document shall not
produce the effect of payment unless it has been encashed.
o In this case, the check has not been encashed because it has been lost. The
obligation of Mr. D to Mr. P has not yet been extinguished.
o Hence, Mr. P may still demand payment from Mr. D. (Refer to Article 1249 of the Civil
Code)
b) Is the recovery of P50,000.00 by Mr. P from Mr. D based on the check? Why?
o The recovery of P50,000 by Mr. P from Mr. D is no longer based on the check.
o Since the check was already lost, then the obligation of Mr. P arising from the check
was already extinguished. However, his obligation to pay the P50,000 shall arise from
law which is also known as a civil obligation.
o Hence, the recovery by Mr. P is no longer based on the check. (Refer to Article 1157
of the Civil Code)
c) May Mr. P recover from Mr. F based on the check? Why?

o Mr. P cannot recover from Mr. F based on the check.
o The recovery of money based on the check presupposes the existence of a valid
contract. There is no privity of contract between the forger and the payee whose
signature was forged. The recovery of money based on the check will not be a valid
cause of action on the part of the payee. If the payee wanted to recover from the
forger, his cause of action should be a criminal case.
o In this case, it is not proper for Mr. P to recover from Mr. D based on the check
because there is no existing contractual relationship between them.
o Hence, Mr. P cannot recover from Mr. F based on the check. (Refer to the Revised
Penal Code)
d) May Mr. P recover from All State Bank?

o Mr. P may not recover from All State Bank.
o There is no privity of contract between the payee of the check and the drawee bank. If
the forged check is to be deposited with the drawee bank, then the drawers account
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is the one to be charged against and not the payees account. The drawee bank will
not in any way prejudice the payee of the check.
o In this case, the payee Mr. P has no existing contractual relations with All State
Bank. Mr. P can never be prejudiced by All State Bank because it is not his account
which is to be charged against but the account of the drawer.
o Hence, Mr. P cannot recover from All Asian Bank. (same rule)
e) May Mr. P recover from Asian Bank?

o Mr. P cannot also recover from Asian Bank.
o There is no privity of contract between the collecting bank and the payee whose
signature was forged. The one who has an existing contractual relation with the
collecting bank is the forger of the payees signature.
o In this case, Mr. P has no relations whatsoever with the Asian Bank.
o Hence, Mr. P may not recover from Asian Bank. (same rule)
f) If All State Bank debited P50,000.00 from the account of Mr. D, may Mr. D recover
from All State Bank? Why?
o Mr. D may recover from All State Bank.
o There is a privity of contract between the drawee bank and the drawer. When the
payees signature was forged, the drawee bank has no right to charge against the
account of the drawer. If the drawee bank will debit the account of the drawer, then
such drawee bank should re-credit the amount back to the drawers account.
o In this case, All State Bank has no right to debit the P50,000 from the account of the
drawer Mr. D because the payees signature was forged and it is wholly inoperative.
All State Bank is obliged to re-credit the amount debited back to Mr. Ds account.
o Hence, Mr. D may recover from All State Bank. (Refer to Section 23 of the Negotiable
Instruments Law and p. 80 of Negotiable Instruments by Nolledo)
g) May All State Bank recover from Asian Bank?

o All State Bank may recover from Asian Bank.
o There is privity of contract between the drawee bank and the collecting bank. The
collecting bank is an indorser while the drawee bank is an indorsee. Being an
indorser, the collecting bank is bound by its warranty that all prior indorsements are
genuine. If there was forgery, it shall be liable to the drawee bank for breach of
warranty.
o In this case, the collecting bank Asian Bank is bound by its warranty to the drawee
bank All State Bank that all prior indorsements are genuine. Since the payees
signature was forged, Asian Bank is liable for its breach of warranty.
o Hence, All State Bank may recover from Asian Bank. (Refer to p.80 of the Negotiable
Instruments by Nolledo and Section 66 of the Negotiable Instruments Law)
h) May Asian Bank recover from Mr. F? Why?

o Asian Bank may recover from Mr. F.
o There is a privity of contract between the collecting bank and the forger of the payees
signature. When the signature of the payee was forged, it is the collecting bank who
should bear the loss but it can proceed against the forger who is also criminally liable.
o In this case, the collecting bank Asian Bank shall bear the loss but it can proceed
against the forger Mr. F and file a criminal case against him.
o Hence, Asian Bank may recover from Mr. F .(Refer to p. 80 of Negotiable Instruments
by Nolledo and Jai Alai vs BPI, 66 SCRA 29)
16. Mr. D issued a check for P50,000.00 to the order of Mr. P drawn against PNB. Mr. P goes to
the bank to have the check certified. The bank refused.
a) What is the liability of the bank?

o The bank has no liability.
o It is a well-settled rule that the drawee-bank can only be hold liable from the moment
it accepted the check by way of certification.
o In this case, the refusal of the bank to certify the check is equivalent to its non-
acceptance.
o Hence, the bank has no liability. (Refer to Section 62 and 187 of the Negotiable
Instruments Law)
b) Assume the bank certifies the check. Later when the check was presented to the
bank for payment, the bank refused to pay alleging forgery of the drawers
signature. May Mr. P hold the bank liable? Why?
o Mr. P may hold the bank liable.
o Where a check is certified by a bank on which it s drawn, the certification is equivalent
to an acceptance. The bank shall now be bound by its warranty of the existence of
the drawer and the genuineness of his signature.
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o In this case, the certification of the check makes the bank liable as an acceptor. By
reason of his warranty as an acceptor, the bank can no longer invoke the defense of
forgery of the drawers signature.
o Hence, Mr. P may hold the bank liable. (Refer to Section 62 and 187 of the
17. Mr. D issues a check payable to the order of Mr. P who goes to the bank to encash the
check. The check was not paid although the same was fully funded.
a) Does Mr. D have a cause of action against the bank under the check? Why?
o Mr. D have a cause of action against the bank under the check.
o There is a privity of contract between the drawee bank and the drawer of the check.
The fact that the check was not paid although the same was fully funded gives rise to
a cause of action on the part of the drawer.
o Hence, Mr. D have a cause of action against the bank under the check.
b) Does Mr. P have a cause of action against the bank based on the check? Why?
o Mr. P does not have a cause of action against the bank based on the check.
o There is no privity of contract between the drawee bank and the payee of the check.
The payee of the check will only be paid by the drawee bank if there is an order
coming from the drawer because the money to be paid will come from the drawers
account.
o Hence, Mr. P does not have a cause of action against the bank based on the check.
18. Mr. D made a note for P50,000.00 payable to the order of Mr. P who altered the amount to
P150,000.00. The note was negotiated to Mr. A, a holder in due course. May Mr. A recover
from Mr. D? How much?
o Mr. A may recover from Mr. D the amount of P50,000.00.
o When an instrument has been materially altered and it is in the hands of a holder in due
course who is not a party to the alteration, he may enforce payment thereof according to
its original tenor.
o In this case, there was a material alteration of the note with respect to the sum payable.
From P50,000.00, it was altered by Mr. P to P150,000.00 and indorsed it to Mr. D. Since
Mr. D is a holder in due course, he may enforce payment against Mr. D according to the
original tenor of the promissory note.
o Hence, Mr. A may recover from Mr. D the amount of P50,000.00. (Refer to Section 124
and 125 of the Negotiable Instruments Law)
19. On the pretext that he needed the signature of Mr. M, as a specimen signature, Mr. P
convinced Mr. M to affix his signature in a blank sheet of paper. Later, Mr. P converted the
paper into a negotiable instrument with himself as payee. The note was negotiated to Mr. A
then to Mr. B, Mr. C and Mr. D. When presented for payment, Mr. M dishonored the
instrument. Assuming that he is a holder in due course, may Mr. D insist on being paid by
Mr. M?
o Mr. D may not insist on being paid by Mr. M by reason of fraud in factum.
o Fraud in factum is equivalent to forgery because one signed without any intention to issue
a negotiable instrument. An example of this is the giving of a signature as souvenir or for
autograph purposes and the paper was converted into a negotiable instrument. It is a real
defense which can be invoked against any holder including a holder in due course.
o In this case, fraud in factum was employed by Mr. P because after Mr. M affixed his
signature on a blank sheet of paper for the purpose of giving it as a specimen signature,
Mr. P converted it into a negotiable instrument. Being a real defense, fraud in factum can
be used by Mr. M against Mr. D, even if he is a holder in due course.
o Hence, Mr. D may not insist on being paid by Mr. M. (Refer to p. 80 of Negotiable
Instruments Law by Nolledo)
20. (a) In no. 20, what should be done if Mr. D wants to sue Mr. C? (b) May Mr. C successfully
defend that he had no knowledge of the circumstances under which the instrument was
issued/made? Why? (c) Assuming that the indorsement to Mr. D by Mr. C is without
recourse, may Mr. D recover from Mr. C? Why?
a) If Mr. D wants to sue Mr. C, then he has to give him a notice of dishonor. Under the law,
when a negotiable instrument has been dishonored by non-payment or non-acceptance, a
notice of dishonor must be given to the indorser or drawer, as the case may be, otherwise
such parties are discharged from liability on the instrument. In this case, the indorser Mr.
C can only be sued by Mr. D if he was given a notice of dishonor. Hence, Mr. D must give
Mr. C a notice of dishonor if he wanted to sue him. (Refer to Section 89 of the Negotiable
Instruments Law)
b) Mr. C may not successfully defend that he had no knowledge of the circumstances under
which the instrument was issued or made. The absence of knowledge of any fact which
would impair the validity of the instrument or render it valueless does not fall under the
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warranties of a general indorser. But instead, it falls under the warranties of a qualified
indorser or persons negotiating by mere delivery. In this case, Mr. C is a general indorser.
Hence, Mr. C cannot invoke the said defense. (Refer to Section 65 and 66 of the
c) If the indorsement by Mr. C to Mr. D is without recourse, then Mr. D may not recover from
Mr. C. When it comes to a qualified indorsement, the indorser does not warrant the
solvency of prior parties. So if the maker of the instrument cannot pay by reason of
insolvency, then the qualified indorser shall not be liable to the indorsee unless he
commits a violation of his warranty such as the knowledge that the maker is insolvent at
the time of his qualified indorsement. In this case, Mr. C is a qualified indorser because he
indorsed the instrument to Mr. D without recourse. Hence, Mr. D may not recover from Mr.
C, unless the latter commits a violation of his warranty. (Refer to Section 38 and 65 of the
21. Mr. P offered to sell to Mr. M a purportedly genuine diamond ring, in truth, the ring was not
a genuine diamond but exactly looked like one. Believing it was genuine, Mr. M agreed to
buy the same and issued a negotiable promissory note Mr. P as payee. The note was
negotiated to Mr. A, Mr. B, Mr. C and then Mr. D.
a) May Mr. D recover from Mr. M, assuming he is a holder in due course? Why?
o Mr. D may recover from Mr. M, provided that Mr. D is a holder in due course.
o Fraud in inducement is a personal defense but is not a defense against a holder in
due course.
o In this case, there was fraud in inducement on the part of Mr. P when he induced Mr.
M to issue a promissory note by offering to sell him a genuine diamond ring, which in
truth is not a genuine diamond. Being a personal defense, Mr. M cannot invoke that
defense against Mr. D, a holder in due course.
o Hence, Mr. D may recover from Mr. M. (Refer to p.80 of Negotiable Instruments Law
by Nolledo)
b) Would your answer be the same if it can be established that Mr. D knew what Mr. P did to
induce Mr. M to issue the note? Why?
o If Mr. D knew what Mr. P did to induce Mr. M to issue the note, then the answer will
not be the same.
o A holder can no longer be considered a holder in due course if at the time the
instrument was negotiated to him, he has notice of any infirmity in the instrument or
defect in the title of the person negotiating it. In such case, personal defenses such as
fraud in inducement can be used against such holder.
o The fact that Mr. D knew what Mr. P did to induce Mr. M to issue the note will not
make him a holder in due course and he shall be subject to personal defense of fraud
in inducement. This will preclude Mr. D from recovering from Mr. M.
o Hence, the answer will not be the same. (Refer to Section 52 of the Negotiable
Instruments Law and p. 80 of Negotiable Instruments Law by Nolledo)
22. Pointing a loaded pistol to the temple of Mr. M, Mr. P ordered Mr. M to issue a note payable
to the order of Mr. P who negotiated the same to Mr. A, Mr. B, Mr. C and Mr. D, a holder in
due course. May Mr. D recover from Mr. M? Why?
o Mr. D may not recover from Mr. M.
o When the signature of the maker was obtained by duress, then it is considered as a
duress amounting to forgery. No matter how genuine the signature is, it is considered as a
forgery. Duress amounting to forgery is a real defense which can be invoked against all
holders, including a holder in due course.
o In this case, there was a duress amounting to forgery because Mr. P was able to order Mr.
M to issue a note by pointing a pistol to his temple. The defense of duress amounting to
forgery, being a real defense, can be invoke by Mr. M to Mr. D, even if he is a holder in
due course.
o Hence, Mr. D may not recover from Mr. M. (Refer to p.204 of the Negotiable Instruments
Law by Nolledo)
23. In no. 23, may Mr. D recover from Mr. C who has no knowledge of the intimidation
employed by Mr. P against Mr. M? Why?
o Mr. D may recover from Mr. C who has no knowledge of the intimidation employed by Mr.
P against Mr. M.
o Well settled is the rule that a general indorser does not warrant the absence of knowledge
of fact that would impair the validity or worth of the instrument.
o So whether or not Mr. C has knowledge of the intimidation employed by Mr. P against Mr.
M is immaterial because Mr. C is a general indorser. Since the instrument was acquired
by Mr. P from Mr. M through duress amounting to forgery, Mr. C has committed a breach
of his warranty as to the genuineness of the instrument as well as his good title to it.
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o Hence, Mr. D may still recover from Mr. C. (Refer to Section 65 and 66 par a and b of the
24. Seeing a blank check duly signed and filled up payable to the order of cash, Mr. P
grabbed the check from the drawer by pointing a pistol at him. He delivered the check to
Mr. A for value. From Mr. A, the check went to Mr. B, Mr. C and Mr. D through negotiations
by mere delivery. If for some reason, the bank dishonors the check and after a notice of
dishonor given to the drawer, may the latter refuse to pay Mr. D, a holder in due course?
Why?
o The drawee may not refuse to pay Mr. D, a holder in due course.
o An instrument which has been acquired by force or duress constitutes a personal defense
which can only be invoked against holders not in due course.
o In this case, what was obtained by duress is the instrument and not the signature. The
duress employed by Mr. P is not equivalent to forgery and it is therefore a personal
defense which cannot be invoked against Mr. D, a holder in due course.
o Hence, the drawee may not refuse to pay Mr. D. (Refer to p.204 of Negotiable Instrument
Law by Nolledo)
25. Mr. P made a promissory note payable to the order of himself as payee by forging the
signature of Mr. M as maker. What is the liability of Mr. M under the note? Why?
o Mr. M has no liability under the note.
o When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right whatsoever can be acquired through or
under such signature.
o In this case, the forgery by Mr. P of the signature of Mr. M is wholly inoperative. Mr. P
does not acquire any right by virtue of that signature.
o Hence, Mr. M has no liability under the note. (Refer to Section 23 of the Negotiable
Instruments Law)
26. Mr. M issued a promissory note payable to Mr. P or his order who negotiated it to Mr. A.
Without the negligence or fault of Mr. A, the note was found by Mr. B who indorsed the note
to himself by forging the signature of Mr. A. Mr. B negotiated the note to Mr. C then to Mr. D
and finally to Mr. E.
a) May Mr. M refuse payment invoking forgery? Why?

o Mr. M may refuse payment invoking forgery.
o In this case, Mr. M is not only the maker but he is also a party prior to the forgery of
Mr. As signature. He is therefore not liable to Mr. E, even if he is a holder in due
course.
o Hence, Mr. M may refuse payment invoking forgery. (Refer to Section 23 of the
Negotiable Instruments Law and Commercial Law Reviewer by Villanueva)
b) May Mr. E recover from Mr. P? Why?

o Mr. E may not also recover from Mr. P.
o All parties prior to the forged indorsement are not liable to any holder, even a holder
in due course.
o Since Mr. P is party prior to the forgery of Mr. As signature, he shall not be liable to
Mr. E, whether or not he is a holder in due course.
o Hence, Mr. E may not also recover from Mr. P. (same legal basis)
c) May Mr. E recover from Mr. A? Why?

o Mr. E may not also recover from Mr. A.
o The party whose indorsement is forged and parties prior to him including the maker,
are not liable to any holder, even a holder in due course because a forged
indorsement is inoperative and cannot operate to transfer any right or title over the
instrument.
o Since it is Mr. As signature which was forged, then it is with more reason that Mr. A
can invoke the defense of forgery and shall be free from any liability against all
holders, including a holder in due course.
o Hence, Mr. E may not also recover from Mr. A. (same legal basis)
d) May Mr. E recover from Mr. D? Why?

o Mr. E may recover from Mr. D for breach of warranty.
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o Being an indorser who is subsequent to the forged indorsement, Mr. D is liable to Mr.
E for breach of warranty that the instrument is genuine and in all respects what it
purports to be. In this case, Mr. E is deemed prima facie to be a holder in due course.
o Hence, Mr. E may recover from Mr. D. (Refer to Section 59 and 66 of the Negotiable
Instruments Law)
e) How about from Mr. C? Why?

o Mr. E may also recover from Mr. C for breach of warranty.
o Being an indorser who is subsequent to the forged indorsement, Mr. C is liable to Mr.
E for breach of warranty that the instrument is genuine and in all respects what it
purports to be. In this case, Mr. E is deemed prima facie to be a holder in due course.
o Hence, Mr. E may recover from Mr. C. (Refer to Section 59 and 66 of the Negotiable
Instruments Law)
27. Mr. M issues a promissory note payable to Mr. P or bearer. Mr. P lost the note without his
fault and Mr. A finds the same. Mr. A indorses the note to Mr. B by forging the signature of
Mr. P.
a) May Mr. B hold Mr. M liable under the note if Mr. M invokes the forgery of the
signature of Mr. P? Why?
o Mr. B may hold Mr. M liable even if the latter invokes the forgery of the signature of
the bearer Mr. P.
o An instrument which is originally payable to bearer may nevertheless be further
negotiated by mere delivery even if it is specially indorsed. Whether or not there was
forgery in the special indorsement is immaterial because special indorsement is not
even necessary to the title of the holder of a bearer instrument.
o In this case, the promissory note is an originally bearer instrument. Even if the special
indorsement of Mr. P is forged, Mr. B still acquires his title as a holder because in a
bearer instrument, indorsement is not even necessary.
o Hence, Mr. B may hold Mr. M liable even if there was forgery. (Refer to Section 40 of
b) What possible defense can Mr. M invoke? Why?

o Mr. M can possibly invoke the defense of non-delivery of a complete instrument.
o The non-delivery of a complete instrument is a personal defense which can only be
invoked against non-holders in due course. Since every holder is prima facie
presumed to be a holder in due course, then such presumption may be defeated by a
competent proof.
o In this case, Mr. M can invoke the defense of non-delivery of a complete instrument
against Mr. Mr. B, provided that he can prove that Mr. B is not a holder in due course.
o Hence, Mr. M can possibly invoke the defense of non-delivery of a complete
instrument. (Refer to Section 16 and 59 of the Negotiable Instruments Law)
WAREHOUSE RECEIPTS ACT
1. Mr. D deposited three thousand (3,000) bags of cement with the warehouse of Mr. W who
issued to Mr. D a receipt which among others state: The goods represented by this receipt
are deliverable to the order of Mr. D On March 1, 2005, Mr. D wanted you to tell him how
to negotiate the receipt to Mr. T.
a) What advice would you give him?

o I would advise Mr. D that he can negotiate the receipt to Mr. T by indorsement.
o A negotiable receipt may be negotiated by the indorsement of the person to whose
order the goods are, by the terms of the receipt, deliverable.
o In this case, it is stated in the warehouse receipt that the goods shall be delivered to
the order of Mr. D.
o Hence, Mr. D can negotiate the receipt to Mr. T by indorsement. (Refer to Section 38
of the Warehouse Receipts Law)
b) Suppose the warehouse receipt was indorsed thus, To bearer, Sgd. Mr. D. How
would Mr. T negotiate the warehouse receipt to Mr. R?
o Mr. T may further negotiate the receipt to Mr. R by mere delivery.
o A negotiable receipt may be negotiated by delivery where, by the terms of the receipt,
the warehouseman undertakes to deliver the goods to the order of a specified person,
and such person or a subsequent indorsee of the receipt has indorsed it in blank or to
bearer.
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o In this case, the warehouseman Mr. W issued an order receipt in favor of Mr. D. By
making an indorsement to bearer, Mr. D converted the receipt into a bearer receipt
and transferred it to Mr. T.
o Hence, the holder Mr. T may negotiate the receipt to Mr. R by mere delivery. (Refer
to Section 37-b of the Warehouse Receipts Law)
c) Suppose Mr. T indorsed thus, Sgd. Mr. T. How would the recipient negotiate the
same to Mr. S?
o The recipient may further negotiate the receipt to Mr. S
o A negotiable receipt may be negotiated by delivery where, by the terms of the receipt,
the warehouseman undertakes to deliver the goods to the order of a specified person,
and such person or a subsequent indorsee of the receipt has indorsed it in blank or to
bearer.
o In this case, the warehouseman Mr. W issued an order receipt in favor of Mr. D,
who in turn indorsed it to Mr. T. However, Mr. T indorsed the receipt in blank.
o Hence, the recipient may further negotiate the receipt to Mr. S by mere delivery.
(Refer to Section 37-b of the Warehouse Receipts Law)
d) Suppose the indorsement of Mr. D states: To Mr. R. Sgd. Mr. D. How would the
receipt be negotiated by Mr. R?
o Mr. R can further negotiate the receipt by indorsement.
o If the negotiable receipt is indorsed to a specified person, it may again be negotiated
by the indorsement of such person in blank, to bearer or to another specified person.
o In this case, the negotiable receipt was indorsed by Mr. D to a specified person, who
is Mr. R.
o Hence, Mr. R can further negotiate the receipt by indorsement. (Refer to Section 38 of
the Warehouse Receipts Law)
2. A warehouse receipt reads: The goods described herein are deliverable to bearer The
warehouseman stamped the words: NON-NEGOTIABLE. How may the receipt be
negotiated? Why?
o The receipt may still be negotiated by delivery.
o No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such
provision, if inserted shall be void.
o In this case, the provision inserted by the warehouseman that the receipt is non-
negotiable shall be void and the negotiable character of the warehouse receipt as
deliverable to bearer, will not be affected.
o Hence, the receipt may still be negotiated by delivery. (Refer to Section 5 of the
Warehouse Receipts Law)
3. A warehouse receipt with goods deliverable to the order of Pedro Reyes was issued in
favor of Pedro Reyes. The goods deposited were bales of cotton purchased by Pedro
Reyes on credit from Mr. Juan Santos. Pedro Reyes negotiates the warehouse receipt to
Mr. Jose Campos for value and in good faith. Because the goods were not paid, Mr. Juan
Santos seeks to enforce his sellers lien on the bales of cotton. The contract of sale gives
the seller the right to recover the goods if they are not paid in accordance with the
agreement.
a) May Mr. Jose Campos successfully oppose the same? (Sec. 49)
o Mr. Jose Campos may successfully oppose Mr. Juan Santos in enforcing his sellers
lien on the bales of cotton.
o Where a negotiable receipt has been issued for goods, no sellers lien or right of
stoppage in transits shall defeat the rights of any purchaser for value in good faith to
whom such receipt has been negotiated.
o In this case, the receipt was negotiated to Mr. Jose Campos. The rights of Mr. Jose
Campos over the bales of cotton cannot be defeated by the seller Mr. Juan Santos.
o Hence, Mr. Jose Campos may successfully oppose Mr. Juan Santos in enforcing his
sellers lien on the bales of cotton. (Refer to Section 49 of the Warehouse Receipts
Law)
b) May Mr. Jose Campos successfully oppose Mr. Juan Santos had the receipt stated
that the goods are deliverable to Pedro Reyes? Why?
o Mr. Jose Campos may not successfully oppose Mr. Juan Santos in enforcing his
sellers lien on the bales of cotton.
o A receipt in which it is stated that the goods received will be delivered to the depositor
or to any other specified person, is a non-negotiable receipt. The rights of the
transferee of a non-negotiable receipt can be defeated by the vendors lien over the
goods.
o In this case, the warehouse receipts is non-negotiable. Being a transferee of a non-
negotiable receipt, the rights of Jose Campos over the bales of cotton may be
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defeated by Mr. Juan Santos, who can enforce his sellers lien over the bales of
cotton.
o Hence, Mr. Jose Campos may not successfully oppose Mr. Juan Santos in enforcing
his sellers lien on the bales of cotton. (Refer to Section 49 of the Warehouse
Receipts Law)
4. Mr. D deposited 500 sacks of rice in the warehouse of Mr. W who issued a receipt stating
deliver the goods described herein to Mr. D. The depositor, Mr. D transferred the receipt to
Mr. T for value and in good faith on August 27, 2004.
a) On August 27, 2004, is Mr. W deemed to be holding the goods for Mr. T? Why? (Sec.
42)
o Mr. W is not deemed to be holding the goods for Mr. T.
o Where a non-negotiable receipt is transferred to another, then the transferee will only
acquire the direct obligation of the warehouseman to hold possession of the goods for
him according to the terms of the receipt if he notified the warehouseman of the
transfer.
o In this case, the receipt issued by the warehouseman Mr. W is non-negotiable. The
depositor Mr. D transferred the said receipt to Mr. T. However, the warehouseman
has not yet been notified by Mr. T of the transfer of the receipt made to him by Mr. D.
o Hence, Mr. W is not deemed to be holding the goods for Mr. T. (Refer to Section 42 of
the Warehouse Receipts Law)
b) Suppose the goods are deliverable to bearer, would your answer be the same as
in letter a? Why?
o If the goods are deliverable to bearer, the answer will not be the same.
o A person to whom a negotiable receipt has been duly negotiated acquires thereby the
direct obligation of the warehouseman to hold possession of the goods for him
according to the terms of the receipt as fully as if the warehouseman had contracted
directly with him.
o In this case, a warehouse receipt which states that the goods are deliverable to
bearer can be considered negotiable. If such receipt will be negotiated to Mr. T, then
Mr. T acquires the direct obligation of the warehouseman to hold the goods in trust for
him, even without notifying such warehouseman of the transfer made by Mr. D.
o Hence, the answer will not be the same. (Refer to Section 41-b of the Warehouse
Receipts Law)
5. On February 25, 2004, Desiderio deposited 500 sacks of rice in the warehouse of Wilfredo
who issued to Desiderio a non-negotiable warehouse receipt. The receipt was transferred
to Tirso in good faith and for value on March 15, 2004. Crisanto meanwhile, obtained a
judgment against Desiderio in an action for a sum of money against the latter. On April 25,
2004, the sheriff sought to levy upon the goods deposited by Desiderio in the warehouse.
The warehouseman, Wilfredo delivered the goods to the sheriff. On April 27, 2004, Tirso
went to the warehouseman to notify him of the transfer of the receipt to him by Desiderio
on March 15, 2004 and sought for the delivery of the goods to him. Since the goods were
already delivered to the sheriff, may Tirso hold Wilfredo liable? Why?
o Tirso may not hold the warehouseman Wilfredo liable.
o Where a non-negotiable receipt is transferred to another, then the transferee will only
acquire the direct obligation of the warehouseman to hold possession of the goods for
him according to the terms of the receipt if he notified the warehouseman of the
transfer.
o In this case, the goods were only levied on execution on April 25, 2004. However,
Tirso only notified the warehouseman on April 27, 2004 regarding the transfer of the
receipt to him by Desiderio. The warehouseman Wilfredo cannot be considered as
holding the goods in trust for Tirso and such goods prior to such notice may be levied
on execution.
o Hence, Tirso may not hold Wilfredo liable. (Refer to Section 42 of the Warehouse
Receipts Law)
6. In no. 5, if the receipt was a negotiable receipt, may the warehouseman refuse to deliver the
goods to the sheriff? Why?
o If the receipt was a negotiable receipt, the warehouseman may refuse to deliver the
goods to the sheriff.
o The warehouseman can only be compelled by the sheriff to deliver the goods which is
levied on execution if the sheriff can surrender the negotiable receipt to the
warehouseman, or the court issues an order enjoining the negotiation of such receipt.
o In this case, the warehouseman man cannot be compelled by the sheriff to deliver the
goods covered by the negotiable receipt.
o Hence, the warehouseman may refuse to deliver the goods to the sheriff. (Refer to
Section 25 of the Warehouse Receipts Law)
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7. DD deposited 1,000 sacks of copra with WW who issued a warehouse receipt
deliverable to the order of DD. It turned out that the copra was owned by OO and was
obtained by DD through hijacking of the trucks delivering the copra to its supposed
destination. The receipt was duly negotiated to TT. When OO learned that the goods
were in the warehouse of WW, he demanded from the latter that the goods be delivered
to him. At the same time TT arrived claiming the goods. To whom should WW deliver
the copra? Why?
o The warehouseman shall not deliver to goods to any of them.
o In case there are more than one adverse claimants, there is no provision in the
Warehouse Receipts Law with respect to the person having a better rights over the
goods. The law merely provides a remedy for the warehouseman which is to file an
action for interpleader in order to compel the adverse claimants to litigate among
themselves as to who has the better rights over the goods.
o In this case, the warehouseman WW may file an interpleader to compel TT and DD
to litigate among themselves as to who has the better rights to the 1000 sacks of
copra.
o Hence, the warehouseman shall not deliver the goods to any of them. (Refer to
Section 17 of the Warehouse Receipts Law)
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TRANSPORTATION LAW LECTURE
The bar questions in transportation laws usually consists of the Law on Common Carriers
which is governed by the Civil Code and Maritime Law which is governed by the Code of
Commerce.
SITUATIONAL PROBLEM: Let us suppose that due to the negligence of the captain of
M/V Taurus ship, it accidentally damaged the wharf and the goods that it carries.
o What is the basis of the liability of the ship owner in favor of the owner of the
wharf ? ---- The basis of the liability of the ship owner in favor of the owner of
the wharf is quasi delict. For a quasi delict to arise, the negligence of the
defendant must have caused damage to the plaintiff and there is no existing
contractual relation between the plaintiff and the defendant. In this case, the
owner of the wharf has no contractual relationship to the ship owner. But by
reason of the negligence of the captain, the owner of the wharf suffered
damages. He can therefore sue the ship owner as an employer of a negligent
captain pursuant to the doctrine of vicarious liability. Hence, the liability of the
ship owner in favor of the owner of the wharf is based on quasi delict. (Article
2176 and 2180 of the Civil Code)
o What is the basis of liability of the ship owner in favor of the owner of the cargo?
----- The basis of liability of the ship owner in favor of the owner of the cargo is
the breach of contract of carriage. A carrier can be held liable for breach of
contract provided that he has an existing contractual relations with the plaintiff
and he committed breach of that contractual relations by its failure to observe
extraordinary diligence in carrying the goods up to the point of destination. In
this case, there is an existing contractual relations between the cargo owners
and the ship owner. The ship owner has breached the contract of carriage when
the goods are damaged and once the goods are damaged, the negligence of the
carrier is always presumed. (Article 1735 of the Civil Code)
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o Can the ship owner invoke the defense that it exercised the diligence of a good
father of a family in order to be relieved from liability? ----- With respect to the
owner of the wharf, the ship owner can invoke the defense of due diligence in
order to be relieved from liability because in a suit for quasi delict negligence is
the main cause of action. But with respect to the owner of the cargoes, the ship
owner cannot invoke the defense of due diligence in order to be relieved from
liability because in a suit based on breach of contract, the negligence of the
defendant is not even a part of the cause of action.
o Can the ship owner invoke due dligence in the selection of its employees if it is
sued under quasi delict? YES.
Quasi Delict distinguished from Torts
o Torts is a much broader term than quasi delict because quasi delict is merely one
of the kinds of torts.
o The kinds of torts are: (a) intentional; (b) unintentional; and (c) strict liability.
o Quasi delict falls under the concept of unintentional torts. In negligence, the
defendant is acting voluntarily but the damage that he caused is unintentional.
The concept of negligence can be found under Article 1173 of the Civil Code.
o The expanded concept of quasi delict which includes intentional torts has already
been superseded since it has been the subject of many criticisms. So according
to Justice Davide, the concept of quasi delict should only be confined to acts
which are unintentional.
Elements needed to prove Breach of Contract of Carriage
o The existence of a contract; and

o The fact that there is breach of contract for the reason that the goods or
passengers or both were not brought safely to the point of destination.
Doctrine of Imputed Negligence
o It is also known as the Doctrine of Vicarious Liability under Article 2180 of the
Civil Code. (e.g. the parents shall be liable for the injury caused the minor
children in their custody)
SITUATIONAL PROBLEM: Let us suppose that by reason of the negligence of the bus
driver of Rapid Bus lines, Inc who is Ibarra, Rapid Bus collided with the bus of Squirrel
Lines, Inc. Out of the accident, the injured persons are the (a) pedestrian; (b) the
passenger of Rapid Bus Lines; and (c) the passenger of Squirrel Bus Lines.
o If the carrier was sued under breach of contract, can there be a liability even if
there is no finding of negligence on the part of the common carrier?
YES, because the negligence of the common carrier is always presumed
and in a suit for a breach of contract, the negligence of a common
carrier is not even a part of the cause of action.
NOTE: Even if the defendant is merely a private carrier, there is no need
to prove its negligence once it is sued based on breach of contract.
o Can Ibarra, the driver, be sued under (a) quasi delict; or (b) culpa criminal?
Ibarra can be sued under quasi delict pursuant to Article 2176 of the
Civil Code.
Ibarra can also be sued under culpa criminal because a single act of
negligence may be a crime aside from being a quasi delict. The liability
under culpa criminal shall be separate and distinct from the liability
under quasi delict. So there is no more need to reserve the civil action
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for quasi delict because it is a separate source of obligation just like
culpa criminal.
The case for quasi delict may proceed independently of the criminal
action. There is no need to make the reservation because the civil action
for quasi delict is an independent civil action which has an existence of
its own.
o Can the injured pedestrian sue both Rapid Lines and Squirrel Lines?
YES, as an alternative defendants but only under a suit for quasi delict
and not culpa contractual.
o Can the passenger of Rapid Lines Bus sue Rapid Lines Bus, Inc. under quasi
delict?
YES. The act that breaks the contract may be considered as tort even if
there is an existing contract between the passenger and Rapid Lines,
Inc.
If Rapid Lines Bus, Inc. will be sued under quasi delict, then it is being
sued as an employer of negligent employees pursuant to the doctrine of
vicarious liability under Article 2180 of the Civil Code.
o Can the passenger of Squirrel Lines sue Squirrel Lines, Inc.?

YES. It could either be a suit for breach of contract or quasi delict.
The remedy is to file a suit under alternative causes of action.
o Can the passenger of Squirrel Lines sue Rapid Lines, Inc. ?

YES. But only under quasi delict.
In bar problems involving common carriers, it is important to remember that a bar

candidate should not side with the common carrier, unless the defense of extraordinary
diligence is clearly supported by the facts.
Requirements for the applicability of the Doctrine of Res Ipsa Loquitur (the thing speaks
for itself)
o Negligence is a part of the cause of action; and
o There is no way of determining the liability of the defendant or it can be shown
by the circumstances that the event does not normally occur, unless there is
negligence. (NOTE: So if the suit is based on breach of contract, then the
doctrine of res ipsa loquitur can not be applied.)
Doctrine of Contributory Negligence (Article 2179, 1741 and 1762 of the Civil Code) and
Doctrine of Last Clear Chance
o The plaintiff himself is negligent but only to a small degree. The proximate cause
of the injury is the still the negligence of the defendant. In such case, the liability
of the defendant can only be mitigated.
o The Doctrine of Contributory Negligence does not apply Maritime Collisions.
When both vessels are negligent, it is a rule that both vessels shall suffer their
own damages and they shall be solidarily liable to the owners of the cargo.
o The Doctrine of Last Clear Chance does not also apply in Maritime Collisions.
Doctrine of Subsidiary Liability
o It will only apply if the suit is based on culpa criminal and not quasi delict. Like
for example, the employer cannot be held subsidiarily liable if the driver was
sued under quasi delict.
o If the suit is based on quasi delict, then it is still necessary for the plaintiff to file
an independent action against the defendant.
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o An employer shall be held subsidiarily liable for the damage caused by his
employee provided that: (a) the employee must be convicted; (b) the employee
must be insolvent; and (c) the employee has committed the act during the
performance of his duty.
o Once the said requisites have been met, then the plaintiff can file a motion for
subsidiary execution before the court.
Kinds of Damages the Carrier is liable for
o Moral Damages
The grounds for moral damages can be found under Article 2217 of the CC.
Breach of contract is not one of those instances mentioned under Article
2219 of the CC where moral damages can be recovered. So if the plaintiff
would like to recover moral damages, then he should sue the common
carrier under quasi delict.
However, there are certain exceptions. Even if it the suit against the carrier
is for breach of contract, moral damages may still be recovered (a) if the
breach of contract is attended with fraud or bad faith; and (b) when the
passenger is dead. (Refer to Article 2206 par. 3 in re. Article 1764)
In a suit for quasi delict as well as culpa criminal, the basis for the recovery
of moral damages is the existence of physical injuries. If there is no physical
injuries, moral damages cannot be recovered even if the plaintiff in a quasi
delict or culpa criminal has suffered from mental anguish, fright, serious
anxiety, and etc. (Refer to Article 2217 in re Article 2219 par. 1 and 3 of the
Civil Code)
o Actual Damages
It is the normal form of damages that the plaintiff is awarded. This includes
loss of profit, loss of earning capacity, loss of commercial credit, etc.
o Liquidated Damages
This will depend on what is mentioned in the ticket or those previously
agreed upon by the parties.
o Attorneys Fees and Exemplary Damages
As a general rule, attorneys fees are not recoverable, unless there is a
stipulation. The reason for this is that it is improper to put a price or
premium on ones right to litigate.
But even if there is no stipulation, attorneys fees may still be recovered
under the instances mentioned in Article 2208 of the Civil Code. One of the
instances whereby attorneys fees may be recovered in the absence of a
stipulation, is when exemplary damages are awarded.
When exemplary damages are awarded in a suit for quasi delict and a suit
for a criminal case, then the plaintiff shall be entitled to the award of
attorneys fees.
In a suit for quasi delict, exemplary damages may be awarded if the
defendant acted with gross negligence.
But in a suit for culpa criminal, exemplary damages may be awarded
if the crime was committed with one or more aggravating
circumstances.
o Nominal Damages
o Temperate Damages
Common Carrier
o By legal definition, an airplane, bus, or vessel are not common carriers but they
are merely instruments of the common carrier.
o The legal definition of a common carrier avoids to make a distinction between a
person whose business of carrying goods or passengers or both is on a regular
basis and one whose business of carrying goods or passengers or both is merely
on episodic basis.
o A lighterage as well as a pipeline operator are common carriers.
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o A travel agency is not a common carrier because it merely facilitates the
schedule of ones travel.
o Private Carrier
Once an injury or damage has been caused to passengers or goods or both,
a private carrier is not presumed to be negligent.
But if a private carrier is sued under a breach of contract, then negligence is
not required to be proved because in a suit for breach of contract negligence
is not even a part of a cause of action.
If a common carrier is sued under a breach of contract, there are two
reasons why negligence is not required to be proved:
Once injury or damage has been caused to goods or passengers or both,
the negligence of a common carrier is always presumed; and
In a suit for a breach of contract, negligence is not even a part of the
cause of action.
o Elements to prove that there is a breach of contract of carriage

A person must prove that he is a passenger or a shipper; and
Then he shall prove that he or his goods or both was not brought safely to
the point of destination.
o The void stipulations mentioned under Article 1745 of the CC applies only to a
common carrier and not to a private carrier.
o A common carrier becomes a private carrier when it transports special cargoes
for a special person.
o The presumption of negligence against a common carrier is not conclusive
because (a) a common carrier is allowed to invoke certain defenses; and (b) a
common carrier is not an insurer of all risks.
o Carrying of Goods vs Carrying of Persons
In both cases, the common carrier must always observe extraordinary
diligence.
In the carrying of goods, a stipulation limiting the liability of the carrier to a
degree less than that of extraordinary diligence shall be allowed provided
that: (a) it is in writing, signed by the shipper or owner; (b) supported by a
valuable consideration other than the service rendered by a common carrier;
and (c) the stipulation must be reasonable, just and not contrary to public
policy. But in the carrying of passengers, it is a general rule that the duty to
observe extraordinary diligence can never be lessened by stipulation. (Refer
to Article 1744 and 1757 of the Civil Code)
The only instance when a stipulation limiting the liability of the carrier to a
degree less than extraordinary diligence may be allowed is when the
passengers are carried gratuitously. If the passengers are carried
gratuitously but there is no stipulation, then the common carrier must
observe extraordinary diligence. (Refer to Article 1758 of the Civil Code)
The mere reduction of passengers fare does not justify the limiting of the
common carriers liability to a degree less than extraordinary diligence.
(same)
Only passengers can recover damages from the carrier. A stow away cannot
be considered as a passenger.
o Different Degrees of Diligence

Extraordinary Diligence --- the highest degree of diligence to be observed
Ordinary Diligence --- otherwise known as the diligence of a good father of a
family or the diligence of a reasonable or prudent man.
While the degree of diligence to be observed may be reduced in certain
instances, that degree of diligence cannot be reduced to a diligence
lower than that of a good father of a family.
Hence, the stipulation to observe slight diligence or no diligence at all
are void stipulations for being unreasonable, unjust and contrary to
public policy. (Refer to Article 1745 par. 3 and 4 of the Civil Code)
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However, the stipulation to observe slight diligence or no diligence at all
could be a valid stipulation in private carrier situation.
In a bar problem where an examinee is asked to determine the validity
of the stipulation and the facts are not clear whether the carrier involved
is a common or a private carrier, then the examinee must qualify his
answer. For instance, the examinee may answer this way: If it is a
common carrier, then the stipulation shall be void On the other
hand if it is a private carrier, then the stipulation shall be valid.
Slight Diligence
No diligence at all
Defenses of Common Carriers
o The observance of extraordinary diligence

This is a defense which is difficult to sustain. So in the bar exams, the
examinee must not side with the carrier unless the defense of
extraordinary diligence is clearly supported by the facts.
Whether the suit is based on breach of contract or quasi delict, the
defense of extraordinary diligence is still difficult to sustain.
o The fact of being a private carrier

There is no presumption of negligence and there is no duty to observe
extraordinary diligence
o Fortuitous event
This is the most common defense.
In order to be invoked as a defense, the fortuitous event must be the
proximate and the only cause of the loss. There must be total absence of
negligence on the part of the common carrier or the damage must be
totally independent of the will of the common carrier. (Article 1739 of the
Civil Code)
The contributory negligence on the part of the plaintiff does not bar
recovery if the proximate cause of his injury is the negligence of the
shipper. However, the liability of the common carrier may be mitigated.
It is a general rule that no one shall be liable for a fortuitous event,
except: (a) if there is a contrary stipulation of the parties; (b) the law
otherwise provides; and (c) when the nature of the obligation requires
the assumption of risks.
Hijacking or Robbing can only be considered as a fortuitous event if: (a)
it is attended by a grave or irresistible threat or force or violence.
Example: robbery made by heavily armed men; and (b) it should also be
proven that there is no fault or negligence on the part of the plaintiff. If
these requisites did not concur, then hijacking cannot be invoked as a
fortuitous event.
o Stipulations of the parties
Different Stipulations Limiting the liability of the Carrier for Damages

The liability of the carrier shall be limited to P500.00 per cargo. ---
VOID
The liability of the carrier shall be limited to P500.00 regardless of
the value of the cargo. ---- VOID
The liability of the carrier shall be limited to P500.00, unless the
shipper declares a higher value. --- VALID. (Note: What makes the
stipulation valid is giving the shipper the right to declare a higher
value)
Even if the ticket gives the carrier the right to declare a higher value, the
stipulation in the ticket may be considered as void if the letters in the
ticket is so small or it is very hard to read. If the letters are very hard to
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read, the other party cannot exercise his right to accept or reject a
contract of adhesion.
Maritime Commerce
o It is governed by the Code of Commerce.

o Just like any property, a maritime vessel can also be acquired by occupation
pursuant to Article 712 of the Civil Code.
o The doctrine of limited liability is a maritime rule which states that the liability of the
ship owner extends only to the value of the vessel, the equipment and the
freightage, except: (a) under the exceptions provided by law; (b) when the voyage is
not maritime; and (c) when the vessel is not acting as a common carrier but as a
private carrier.
o Charter Party Agreements
Bareboat or Demise Charter --- it is a charter party whereby the charterer mans
the vessel with his own people and becomes, in effect, the owner of the ship for
the voyage or service (pro hac vice), subject to liability for damages caused by
negligence.
Contract of Affreightment --- it is a charter party whereby a the ship owner
leases the whole or part of her to a merchant or other person for the conveyance
of the goods, on a particular voyage, in consideration of the payment of freight.
o The delivery of the bill of lading to the consignee is equivalent to the delivery of the
goods.
o Kinds of Maritime Loans
Loan on Bottomry --- it is a maritime loan whose payment is conditioned upon
the safe arrival of the vessel to the port of destination. It can be entered into by
the ship owner or in certain instances, the captain.
Loan on Respondentia --- it is a martime loan whose payment is conditioned
upon the safe arrival of the cargoes to the port of destination. It can be entered
into by the owner of the cargoes.
o A captain cannot enter into a loan on bottomry, except: (a) if the ship owner is
nowhere to be found; and (b) if the ship captain is partly the owner of the ship in
which case he can enter into a loan on bottomry only with respect to that portion of
the ship.
o Special Discussion on Loan on Bottomry

There are two parties involved who are: (a) the ship owner who is also the
borrower; and (b) the lender on bottomry who is also acting as an insurer.
The ship owner insures the vessel and pay the corresponding premium to the
lender insurer. However, his insurable interest over the vessel is only in excess
of the vessels value over the amount of the bottomry loan.
For instance, if the value of the ship is P500,000.00 and the value of his loan is
P100,000.00, then the insurable interest of the ship owner is only P400,000.00.
If the ship would be lost, he can only recover up to P400,000.00. The reason for
this is that when the vessel is lost, the ship owner does not have to pay his loan
of P100,000.00. This is a clear case of compensation which is a mode of
extinguishing an obligation under the Civil Code. The bottomry loan of
P100,000.00 is merely compensated with P100,000.00 which is the difference
between the actual value of the vessel and the amount of the bottomry loan.
o Collision is the impact between two moving vessels, while allision is the impact
between a moving vessel and a stationary vessel.
o Different Rules on Collision --- it does not apply to non-maritime voyages
Vessel A (fault) and Vessel B (no fault)
Vessel B shall be liable
Vessel A (fault) and Vessel B (fault)
Vessel A and Vessel B shall bear their own damage and each of them shall
be solidarily liable to the owner of the cargoes.
Vessel A (fault unknown) and Vessel B (fault unknown)
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We apply the doctrine of inscrutable fault which states that when it cannot
be determined which of the vessel is at fault, then both vessels shall be
presumed to be at fault. Both shall bear their own damages and each of
them shall be solidarily liable to the cargoes.
Vessel A and Vessel B collided because of the fault of the third vessel
The third vessel shall be held liable.
Vessel A and Vessel B collided because of a fortuitous event
Each vessel shall bear their own damages but they shall not be liable to the
cargoes because of the rule that no liability in case of fortuitous event.
o Stages of Collision
FIRST STAGE --- the time when the risk of collision begins
SECOND STAGE --- from the time when the risk of collision begins up to the
point when collision becomes a certainty. This is actually the stage where we can
determine which of the vessel is at fault.
THIRD STAGE --- from the time collision becomes a certainty up to the point of
the actual impact. This is the stage where we can determine which of the vessel
committed an error in extremis. An error in extremis is immaterial.
o Arrival of the Vessel Under Stress

This is a condition whereby the vessel cannot continue its voyage up to the point
of destination due to lack of provisioning or well founded fear of privateers or
pirates.
This is unlawful: (a) if it is due to the fault of the captain or the ship owner; or
(b) there is merely a suspicion of privateers or pirates.
o In case of shipwreck, the ship captain must file a maritime protest before the nearest
port of authority for the accrual of his cause of action.
Carriage of Goods by Sea Act and the Civil Code
o The Civil Code prevails over the COGSA. This is an exception to the rule on statutory
construction which provides that a special law shall always prevail with the general
law. (Article 1766 of the Civil Code)
o It governs the carriage of goods from foreign ports to the Philippine ports and not
from the Philippine ports to foreign ports. (Article 1753 of the Civil Code)
o In COGSA, the notice of claim or protest before the port authority is not a necessary
requirement before one can file an action before the regular courts for the recovery
of damages. One can file an action for damages before the regular courts even
without filing a notice of claim or protest before the ports authority. The action for
recovery of damages before the regular courts can be filed within a period of one(1)
year from the date of the delivery of the goods or the date the goods are supposed
to be delivered in case of non-delivery. NOTE: The defendant must be a carrier in
order for COGSA to apply. The COGSA will not apply if the defendant is merely an
arrastre operator or an insurer.
o The notice of claim or protest before the ports authority can be filed: (a)
immediately, if the damage is apparent; or (b) within three(3) days from the receipt
of the goods, if the damage is not apparent.
o SITUATIONAL PROBLEM: If the goods coming from Hongkong were delivered to the
consignee in Cebu on April 15, 2000. However, on June 15, 2000, the insurance
company was subrogated to the rights of the consignee and on the same day, the
insurance company found out that the goods were in a damaged condition. Can the
action for damages before the courts be filed on May 15, 2001? ---- NO. The
reckoning point of the one(1) year period to file the action is still April 15, 2000, the
date when the goods were delivered to the consignee because the insurance
company merely stepped into the shoes of the consignee. Since May 15, 2001 is
already beyond the one (1) year period from April 15, 2000, then the action for
damages before the regular courts can no longer be filed.
o SITUATIONAL PROBLEM: If the goods were to be shipped from New York to Cebu.
But upon reaching Manila, there was a transshipment of the goods. When the goods
arrived in Cebu, the goods were found to be damaged. Do we still apply the one (1)
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year period under the COGSA despite the transshipment? ----- YES. The fact of
transshipment is immaterial because it is still a continuation of the original contract
which is the shipment of New York to Cebu.
o The COGSA cannot be applied in case of misdelivery and interisland shipping. In
misdelivery, what we apply is the Civil Code, but in inter-island shipping, what we
apply is the Code of Commerce.
o Inter-island Shipping.
This is shipment of goods within Philippine Islands.
Unlike in COGSA, the notice of claim or protest is a necessary requisite before
one can institute an action for damages before the regular courts. Without the
notice of claim or protest, the action can be dismissed on the ground of failure to
comply with the condition precedent.
The filing of a notice of claim or protest may be made: (a) immediately, if the
damage is apparent; or (b) within 24 hours, if the damage is not apparent.
CODE OF COMMERCE
a. Merchants and Commercial Transactions, Articles 1-63
1. The Civil Code adopts the theory of cognition, while the Code of Commerce
generally recognizes the theory of manifestation, in the perfection of contracts.
How do these two theories differ?
o Under the theory of cognition, the acceptance is considered to

effectively bind the offeror only from the time it came to his
knowledge. Under the theory of manifestation, the contract is
declared or made by the offeree.
b. Bulk Sales Law
1. The Board of Directors of Union Corporation, with the unanimous authority of its
stockholders in a meeting duly called for the purpose, sold to Victory Corporation
for P800 million substantially all of the companys assets consisting of pieces of
machinery, fixtures, and equipment used in the alcoholic beverage business of
the company. Acme, Bottlers, Inc., creditor-supplier of the bottle requirements of
union Corporation, now questions the sale as fraudulent and therefore null and
void, contending that it learned of the sale only from the column of Leticia Locsin
at the Daily Globe. Is Acme bottlers, Inc. correct in alleging that the said is null
and void? What are the rights and liabilities of Victory Corporation?
o Acme Bottlers, Inc is correct in alleging that the sale is null

and void. Since the transaction is a sale of all or substantially
all of the companys assets, it falls under the Bulk Sales Act.
The company has not complied with the requirements of
notifying the creditors and furnishing the buyer under oath a
list of the sellers creditors. Hence, the transaction is
fraudulent and void irrespective of the good or bad faith of the
buyer.
o Victory Corporation has acquired rights as lawful buyer in the

sale of Unions corporate assets. If, as alleged by Acme
Bottlers, the sale is fraudulent and it is rescinded on that
ground, the recission would only be to the extent that there is
prejudice to the creditors. Assuming further, that the
recission, in fact, takes place, Victory Corporation may go
after the seller for breach of sale or warranty as the ultimate
facts would warrant.
2. Without complying with the requirements of the Bulk Sales Law, a merchant sells
all or substantially all of his machineries and equipment to an innocent purchaser
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for value. Discuss the validity of the transfer as between the purchaser and the
seller? Discuss the validity of the transfer as between the purchaser and the
creditors of the seller, specifying the remedies of the credits, if any.
o The Bulk Sales Law does not in any way affect the validity of
the transfer between the immediate parties thereto. A sale
not in compliance with the bulk sales law is valid as against all
persons other than the creditors of the seller.
o A purchaser in violation of the BSL acquired no rights in the

property purchased as against the creditors of the seller. His
status is that of trustee or receiver for the benefit of all
creditors may subject the said goods to the payment of their
credits, such as execution, attachment or garnishment. As
remedies.
3. In an annual meeting of the XYZ Corporation, the stockholders unanimously

adopted a resolution proposed by the Board of Directors to sell substantially all
the fixtures and equipment used in and about its business. The President of the
corporation approached you and ask you for legal assistance to effect the sale.
What steps should you take so that the sale may be valid? What are the two
instances when the sale, transfer, mortgage or assignment of stock of goods,
wares, merchandise, provision, or materials otherwise than in the ordinary
course of trade and the regular prosecution of the business of the vendor are not
deemed to be a sale or transfer in bulk?
o The requirements of the Bulk Sales Law must be complied

with. The seller delivers to the purchaser a list of his creditors
and the purchaser in turn notifies such creditors of the
proposed sale at a stipulated time in advance.
o Of the sale and transfer is made (1) by vendor, mortgagor,

transferor or assignor who produces and delivers a written
waiver of the provisions of the BSL from his creditors as
shown by verified statement; and (2) by a vendor, mortgagor,
transferor or assignor who is an executor, administrator,
receiver, assignee in insolvency, or public officer acting under
judicial process, the sale or transfer is not coverd by the Bulk
sales Law.
4. Stanrus, Inc., a department store w/ outlets in Makati, Madaluyong and Quezon

City, is contemplating to refurbish and renovate its Makati store in order to
introduce the most modern and state of an art equipment in merchandise
display. To carry out its plan, it intends to sell all of the existing fixtures and
equipment to crossroads Department Store. Thereafter, it will buy and install
new fixtures and equipment and continue operations. Crossroads wants to know
from you, as counsel: whether the intended sale is bulk sale. How can it protect
itself from future claims of creditors of Stanrus.
o The sale involves all fixtures and equipment, not in the

ordinary course of trade and the regular prosecution of
business of Stanrus, Inc.
o Crossroads should require from Stanrus, submission of a

written waiver of the Bulk Sales Law by the Creditors as
shown by verified statements or to comply with the
requirements of the Bulk Sales Law, that is, the seller must
notify his creditors of the terms and Conditions of the sale,
and also, before receiving from the vendee any part of the
purchase price, deliver to such vendee a written sworn
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statement of the names and addresses of all his creditors
together with the amount of indebtedness due to each.
5. The sole proprietor of a medium-size grocery shop, engaged in both wholesale

and retail transactions, sells the entire business lock, stork and barrel because
of his plan to emigrate abroad with his family. Is he covered by the provisions of
the Bulk Sales Law? What must be done by the parties so as to comply with the
law?
o Yes, This is a sale of all the stock of goods, fixtures and entire
business, not in the ordinary course of business or trade of the
vendor. Before receiving from the vendee any part of the
purchase price, the vendor must deliver to such vendee of all
creditors to whom said vendor may be indebted, together with
the amount of indebtedness due or owing on account of the
goods, fixtures or business subject matter of the bulk sale.
Warehouse receipts Law
1. Juan delivered six crates of goods to A warehousing Co. and received a non-
negotiable warehouse receipt. Two weeks later, Juan transferred for the value
the receipt to Manuel. In the meanwhile, Jose Obtained a judgment against Juan
for an unpaid debt. A writ of execution followed, by virtue of which the sherrif
levied on the six crates of goods covered by the above receipt. What are the
obligations of A Warehousing Co. under the circumstances? Would your answer
be the same if Juan had instead received a negotiable warehouse receipt which
he indorsed to Manuel?
o The A warehousing Co. shall respect the levy made by the

sheriff on the 6 crates of goods procured by Jose by virtue of
a writ of execution against Juan, although the non-
negotiable warehouse receipt warehouse receipt of Juan on
said goods was already transferred by him for value to
Manuel, who did not, however, notify the A Warehousing Co.
of said transfer, the receipt being a non negotiable one.
o If the receipt was a negotiable one, A Warehousing Co. may

disregard said levy, since it cannot be compelled to deliver
the actual possession of the goods unless the negotiable
receipt is surrendered to him. Under the law, the warehouse
man has the direct obligation to hold possession of the
goods in favor of Manuel, even without notification.
2. A stole 5 bales of hemp from the pier and stored them in X warehouse, The
latter issued a negotiable warehouse receipt under the terms of which the hemp
is deliverable to A or order. A indorsed the receipt in blank to B, who paid value
for it without knowing about the theft. In the meantime, M, the owner of the
Hemp, with the help of the police, was able to trace the hemp to X Warehouse
and demanded delivery of the same. X Warehouse, after being satisfied that M
was the real owner of the hemp, delivered the same to him despite the fact that
the negotiable warehouse receipt was outstanding and was not in Ms
possession, and therefore could not be surrendered or cancelled. Subsequently,
B demanded delivery of the hemp and since he could not obtain it, now claim
damages from X warehouse on the ground that he, B, was the only one entitled
to the delivery because he was the holder for value in good faith of the
negotiable warehouse receipt covering the hemp. Is X warehouse liable to B for
damages? Explain?
o No, X warehouse is not liable for such damages. Under sec. 41

of the warehouse receipts law, a person to whom a negotiable
receipt has been negotiated acquires only such title of the
goods as the person negotiating the receipt to him had or had
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ability to convey to a purchaser in good faith for value. Since A
who negotiated the receipt to B was a thief and thus had no
title which he could transfer to B. Therefore, B has no right to
delivery as against the true owner, M, and X Warehouse
cannot be held liable to him for failure to deliver.
3. To guarantee the payment of a loan obtained from a bank, Raoul pledged 500
bales of tabacco deposited in a warehouse to said bak and endorsed in blank the
warehouse receipt. Before Raoul could pay for the loan, the tobacco disappeared
from the warehouse. Who should bear the loss the pledgor or the bank?Why?
o The pledgor should bear the loss. In the pledge of a warehouse

receipt the ownership of the goods remain with depositor or
his transferee. Any contract or real security, among them a
pledge, does not amount to or result in an assumption of risk
of loss by the creditor. The Warehouse Receipts Law did not
deviate from this rule.
4. Last July 20, 1982, A sold to B his negotiable warehouse receipt covering 100
sacks of rice stored in X warehouse, Inc. In payment thereof, B issued a check
for P10,00.00 dated July 22, 1982, in favor of A. On the same date, the check
was dishonored by the bank for lack of funds. A immediately instructed x
warehouse in writing not to deliver the 100 sacks of rice to anyone. On July 23,
1982, an employee of X Warehouse, unaware of the written instruction received,
delivered the 100 sacks of rice to B. State the cause of action, if any which a
may have against X warehouse and B.
o Since A is an unpaid seller and he had already instructed in

writing X warehouse not to deliver th rice to B, the X
Warehouse should refuse to make delivery and instead file
interpleading proceedings against A and B. but since the rice
was also delivered, then A can make both the X warehouse
and B liable for damages, w/o prejudice to Bs liability for
estafa.
Trust Receipts
1. Mr. Noble, as President of ABC Trading Inc. executed a trust receipt in favor of BPI Bank
to secure the importation by his company of certain goods. After release and sale of
imported goods the proceeds from the sale were not turned over to BPI. Would BPI be
justified in filing a case for estafa against Noble?
o BPI would be justified in filing a case for estafa under PD 115 against
Noble. The fact that the trust receipt issued in favor of a bank, instead
of a seller, to secure the importation of the goods did not preclude the
application of the Trust Receipt Law (PD 115) Under the law, any
officer or employee of a corporation responsible for the violation of a
trust receipt is subject to the penal liability thereunder.
2. A buys goods from a foreign supplier using his credit line w/ a bank to pay for the goods.
Upon arrival of the goods at the pier, the bank requires A to sign a trust receipt before A
is allowed to take delivery of the goods. The trust receipt contains usual language. A
disposes of the goods and receives payment but does not pay the bank. The bank files a
criminal action against A for violation of the Trust receipts Law. A asserts that the trust
receipt is only to secure his debt and that a criminal action cannot lie against him
because that would be violative of his constitutional right against imprisonment for non-
payment of debt. Is he correct?
o No, Violation of a trust receipt is criminal as it is punished as estafa

under Art. 315 of the Revised Penal Code. There is a public policy
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involved which is to assure the entruster with the reimbursement of
the amount advanced or the balance thereof for the goods subject of
the trust receipt. The execution of the trust receipt or the use therof
promotes the smooth flow of commerce as it helps the importer or
buyer of the goods covered thereby.
NEGOTIABLE INSTRUMENTS LAW
1. What are the requisites of a negotiable instrument?
(a) It must be in writing and signed by the maker or drawer

(b) It must contain an unconditional promise or order to pay a
sum certain in money
(c) It muse be payable on demand or at fixed determinable
future time
(d) It must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable
certainty.
2. When is notice of dishonor not required to be given to the drawer?
o Notice of dishonor not required to be given to the drawer in

any of the following cases:
(a) Where the drawer and drawee are the same person
(b) When the drawee is a fictitious person
(c) When the drawer is the person to whom the instrument is
presented for payment
(d) Where the drawer has no right to expect or require that the
drawee will honor the instrument
(e) Where the drawer has countermanded payment.
3. What constitutes a holder in due course?
o A holder in due course is one who has taken the instrument

under the following conditions:
(a) That it is incomplete and regular upon its face

(b) That he became holder of it before it was overdue and
without notice that it had been previously dishonored
(c) That he took it in good faith and for value
(d) That at the time it was negotiated to him, he had no notice
of any infirmity in the instrument or defect in the title of the
person negotiating it.
4. What are the effects of crossing a check?
(a) The check may not be encashed but only deposited in a bank
(b) The check may be negotiated only once to one who has an
account w/ a bank.
(c) Serves as a warning to the holder thereof that the check has
been issued for a definite purpose so that the holder must
inquire if he has received the check pursuant to that
purpose, otherwise he is not a holder in due course.
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5. An insolvent debtor, after a lawful discharge following an adjudication of
insolvency, is released from, generally, all debts, claims, liabilities and demands
which are or have been proved against his estate. Give five obligations of the
insolvent debtor that survive.
(1) Taxes and assessments due the government,

national or local
(2) Obligations arising from embezzlement or fraud
(3) Obligation of any person liable w/ the insolvent
debtor for the same debt, either as a solidary co-
debtor, surety, guarantor, partner, indorser or
otherwise.
(4) Debts not provable against the estate or not
included in the schedule submitted by, the
insolvent debtor.
6. Juan makes a promissory note payable to the order of Pedro, who indorses it to
Jose. Somehow, Roberto obtains possession of the note and, forging the
signature of Jose, indorses to Amado, the latter indorses the note to Nilo, the
holder. State the rights and liabilities of the parties.
o Juan is liable as the maker of the promissory note; Pedro is

liable as a general indorser; Jose is not liable as a general
indorser, unless he is precluded from setting up the forgery of
his signature by Roberto; Amado is liable as a general
indorser; and Nilo, the holder, presumed to be a holder in due
course, can enforce the instrument against Juan as maker, but
if Juan would dishonor the instrument, Nilo may give due
notice of dishonor to Pedro, Jose and Amado, in order to make
them liable. However, Jose may make claim, for whatever loss
he may sustain, against Roberto, who forged his signature.
7. A issued a promissory note to B in the following tenor: I promise to pay to the

order of B P1,000 sixty days after date. (sgd.) A the note was subsequently
negotiated w/ proper indorsement by B to C, C to D, and D to E, the holder.
When E presented the note for payment to A, the latter refused to pay. E then
gave a notice of dishonor to C only. May E immediately proceed against B,C or
D? what should C do to protect his rights, if any, against A, B, and D>
o E may not proceed immediately against B or D, since they were

not given by E notice of Dishonor, after the promissory note
was duly presented for payment to due after sixty days after
date; but E may proceed against C, the latter having been
notified accordingly.
o C, to protect his rights against B, may give due notice of

dishonor to B, but he may not give notice of dishonor to D,
because he is a subsequent party to him, and so D is
discharged already. However, A being the makera party
primarily liable, does not need any notice to be liable.
8. Jose signed a blank check, and in his haste to attend a party, left a blank check
on top of his executive desk in his office. Kater, Nazareno forced open the door
to Joses office, and stole the blank check. Nazareno immediately filled in the
amount of P50,000.00 and a fictitious name as payee on the said check.
Nazareno then endorsed the check in the name and passed it to roldan.
Thereafter, roldan endorsed the check to Dantes. Can dantes enforce the check
against Jose? If Dantes is a holder in due course, will your answer be the same?
Can Dantes enforce the check against Roldan?
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o Dantes cannot enforce the check against Jose, who can raise
the defense that the check was incomplete and not delivered
when only stolen and filled up by Nazareno. If Dantes is a
holder in due course, my answer will be the same, because
such check being incomplete and not delivered originally,
although later completer and negotiated w/o authority, cannot
be valid contract in the hands of any holder even a holder in
due course. Dantes may enforce the check against Roldan,
provided there would be presentment of the check to the
dravee bank, dishonor by the bank, and notice of dishonor
given to Roldan.
9. A promissory note reads as follows: I promise to pay Ulyssis Cario P100,000.00

three years after the unconditional withdrawal of the US of its military bases in
the Philippines. Discuss the negotiability or non-negotiability of the above note;
Discuss the effect of each of the following upon the notes negotiability: no date
is given; the places where drawn and where payable are not stated.
o The promissory note is not a negotiable instrument, Section 1

of the Negotiable Instruments Law requires, among other
things, for an instrument to be negotiable, that it must be
payable to order or to bearer. Without being so payable, the
note is not a negotiable instrument.
o The phrase unconditional withdrawal.. may not be

considered as being opposed to the requirement that the
instrument must contain an unconditional promise or order to
pay since the presence in the country of the bases is merely
temporary and their ultimate removal from the Philippines is
just a matter of time.
10. What is the test to determine whether an instrument is negotiable or not?
o The sole test is whether or not the requisites of negotiability

expressed in Section 1 of the Negotiable Instruments Law are
met on the face of the instrument itself. The intrinsic validity
of the instrument is of no moment. Even the acceptance or
non-acceptance would be irrelevant.
11. Gemma drew a check on September 13, 1990. The holder presented the check
to the drawee bank only on March 5, 1994. The bank dishonored the check on
the same date. After dishonor by the drawee bank, the holder gave a formal
notice of dishonor to Gemma through a letter dated April 27, 1994. What is
meant by unreasonable time as applied to presentment? Is Gemma liable to
the holder?
o As applied to presentment for payment reasonable time: is

meant not more than six months from the date of issue.
Beyond said period, it is unreasonable time and the check
becomes stale. Gemma is not liable, aside from the chech
being already stale, She is also discharged from the liability
under the check being the drawer and a person whose liability
is secondary, this is due to the giving of the notice of dishonor
beyond the period allowed by the law. The giving of notice of
dishonor on April 27 is more than one month from March 5
when the check was dishonored. Since it is not shown that
Gemma and the holder resided in the same place, the period
within which to give notice of dishonor must be the same time
that the notice would reach Gemma if sent by mail.
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12. Nora applied for a loan of P100,000.00 w/ ULC Bank. By way of accommodation,
Noras sister, Vilma, executed a promissory note in favor of ULC Bank. When
Nora defaulted, ULC Bank sued Vilma, despite its knowledge that vilma received
no part of the loan. May vilma be held liable? Explain.
o Vilma may be held liable. Vilma is an accommodation party,

she is liable on the instrument to a holder for the value such as
ULC Bank. This is true even if ULC Bank was aware at the time
it took the instrument that Vilma is merely an accommodation
party and received no part of the loan.
13. Can a bill of exchange or a promissory note qualify as a negotiable instrument if

(a) it is not dated: or (b) the day and month, but not the year of its maturity,
is given: or (c) it is payable to cash or (d) it names two alternative drawees.
(a) Yes. Date is not a material particular required by Sec.1 NIL.

(b) No. The time for payment is not determinable in this case,
the year is not stated.
(c) Yes. Sec.9(d)NIL, makes the instrument payable to bearer
because the name of the payee does not purport to be the
name of any person.
(d) A bill may not be addressed to two or more drawees in the
alternative or in succession to be negotiable.
14. How do you treat a negotiable instrument that is so ambiguous that there is
doubt whether it is a bill or a note?
o The holder may treat it either as a bill f exchange or a

promissory note at his election.
15. ULC Manufacturing co. (ULC) is engaged in the manufacture of electrical

equipment. Its general manager is Otto, a german engineer. 50% of the Capital
stock of uLC is owned by Filipino individuals and the remaining 50% by
Corporation CLU, whose stock is in turn 60% Filipino-owned and 40% German-
owned. Is ULC eligible to engage in retail business? If ULC sells some of the
electrical equipment produced by it to industrial and manufacturing firms which
would use the same in their establishments, would there be a violation of the
Retail Trade Nationalization Law? From the legal standpoint, would it be
necessary to replace Otto w/ a Filipino general manager if Corporation CLU sells
its shares to a wholly-owned Filipino company?
o ULC is not eligible to engage in the retail business. it appears

that it is not wholly owned by Filipino citizens as required by
the law; this is so because 50% of the capital of the ULC is
owned by Corporation CLU whose stock is 60% Filipino and
40% German-owned; hence practically ULC is owned 20%
Germans. There is no violation being not within the scope of
Retail Trade Act.
INSURANCE CODE
1. Juan procured a non-medical life insurance from Good Life insurance. He

designated his wife, Petra, as the beneficiary. Earlier, in his application in
response to the question as to whether or not he had ever been hospitalized, he
answered in the negative. He forgot to mention his confinement at the Kidney
Hospital. After Juan died in a plane crash. Petra filed a claim w/ Good Life.
Discovering Juans previous hospitalization. GoodLife rejected her claim on the
ground of concealment and misrepresentation. Petra sued Goodlife invoking
good faith on the part of Juan. Will Petras suit prosper? Explain.
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COMMERCIAL LAW
o Petras suit will not prosper. The matters which Juan failed to
disclose was material and relevant to the approval and
issuance of the insurance policy. They would have affected
Good Lifes action on his application, either by approving it w/
the corresponding adjustment for a higher premium or
rejecting the same. A disclosure may have warranted a
medical examination of Juan by Good Life in order for it to
reasonably assess the risk involved in accepting the
application. In any case, good faith is no defense in
concealment. The waiver of a medical examination in a non
medical life insurance from Good Life makes it even more
necessary that Juan supply complete information about his
previous hospitalization for such information constitutes an
important factor which Good Life takes into consideration in
deciding whether to issue the policy or not.
2. Pabaya paid for a fire insurance policy on his multi-storey building. At the time
he applied for the insurance, he told the representative of the insurance
company that he planned to assign a security guard on every floor of the
building right away. Except for the Ground Floor, no security guards were
assigned. 11 months after the policy was issued, the building was gutted by fire
which started on the 3rd floor. Unknown to Pabaya, the insurance company had
incorporated his planned undertaking in the policy. Can Pabaya recover on the
fire insurance policy? Explain.
o Pabaya can recover under the insurance policy. The statement

of Pabaya that he panned to assign a security guard on every
floor of an insured building whether incorporated in the policy
or not, did not amount to firm commitment so as to constitue
an express warranty or representation, The facts indicate that
it was a simply a planned, not obligatory or promissory,
undertaking.
3. A piece of machinery was shipped to Mr. Uly on the basis of C & F Manila. Mr.
Uly insured said machinery w/ the Talaga Merchants Insurance Corp. [TAMIC]
for loss or damage during the voyage. The vessel sank en route to Manila. Mr.
Uly then filed a claim w/ TAMIC which was denied for the reason that prior to
delivery, Mr. Uly had no insurable interest. Decide the case.
o Mr. Uly had an existing insurable interest on the piece of

machinery he bought. The purchase of goods under a
perfected contract of sale already vests equitable interest on
the poverty in favor of the buyer even while it is pending
delivery.
4. R took out a life insurance policy from the Dana Insurance Corp [DIC] on
September 1989. On August 31, 1990. R died. DIC refused to pay his
beneficiaries because it was discovered the He had misrepresented certain
material facts in his application. The beneficiaries sued on the basis that DIC can
contest the validity of the policy only within 2 years from the date of the issue
and during the lifetime of the insured. Decide the case.
o I would rule in favor of the Insurance Company. The

incontestality clause, applies only if the policy had been in
effect for at least 2 years. The 2-year period is counted from
the rime the Insurance becomes effective until the death of
the insured and not thereafter.
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COMMERCIAL LAW
5. An insurance company issued a marine insurance policy covering a shipment by
sea from Mindoro to Batangas of 1,000 pieces of Mindoro Garden Stones against
total loss only. The stones were loaded in two lighters, the first w/ 600 pieces
and the second w/ 400 pieces. Because of rough seas, damage was caused the
second lighter resulting in the loss of 325 out of the 400 pieces. The owner of
the shipment filed claims against the insurance company on the ground of
constructive total loss inasmuch as more than three-fourths of the value of the
stones had been lost in one of the lighters. Is the insurance company liable
under its policy?
o The insurance company is not liable under its policy covering

against total loss only the shipment of 1,00 pieces of
Mindoro garden stones. There is no constructive total loss that
can be claimed since the rule to be computed on the total
1,000 pieces of stones covered by the single policy.
6. What is a no Fault indemnity clause found in an insurance policy?

o Any claim for death or injury of any passenger or 3 rd party
shall be paid w/o the necessity of proving fault or negligence
of any kind. The indemnity in respect of any one person shall
not exceed P5,000.00 provided they are under oath, the
following proofs shall be sufficient:
Police report of the accident
Death certificate and evidence sufficient to
establish the proper payee;
Medical report and evidence of medical or
hospital disbursement in respect of which refund
is claimed
Claim may be made against one motor vehicle only.
7. Distinguish Co-Insurance from Re-insurance.
o Co-Insurance is the percentage in the value of the insured

property which the insured himself assumes or undertakes to
act as insurer to the extent of the deficiency in the insurance
and the insured property. In case of loss or damage as the
amount of the insurance bears to the designated percentage of
the full value of the property insured; while,
o Re-insurance is where the insurer procures a third party,
called the reinsurer, to insure him against liability by reason of
such original insurance. Basically, a reinsurance is an
insurance against liability which the original insurer may incur
in favor of the original insured.
8. In letters of credit in banking transactions, distinguish the liability of a confirming

bank from a notifying bank.
o In case anything wrong happens to the letter of credit, a

confirming bank incurs liability for the amount of the letter of
credit, while a notifying bank does not incur any liability.
9. While driving his car along EDSA, Buddy sideswiped Stephen, causing injuries to
the latter, Stephen sued Cesar and the third party liability insurer for damages
and/or insurance proceeds. The insurance company moved to dismiss the
complaint, contending that the liability of Buddy has not yet been determined
with finality. Is the contention of the insurer correct? Explain. May the insurer be
held liable with Buddy?
o The contention of the insurer is not correct. There is no need

to wait for the decision of the court determining Buddys
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COMMERCIAL LAW
liability with finality before the third party liability insurer
could be sued. The occurrence of the injury to Stephen
immediately gave rise to the liability of the insurer under its
policy. In other words, where an insurance policy insures
directly against liability, the insurers liability accrues
immediately upon the occurrence of the injury or event upon
which the liability depends. The insurer cannot be held liable
with Buddy. The liability of the insurer is based on the contract
while that of Buddy is based on tort. If the insurer were
solidary liable with Buddy, it could be made to pay more than
the amount stated in the policy. This would, however, be
contrary to the principles underlying insurance contracts. On
the other hand, if the insurer were solidarily liable with Buddy
and it is made to pay only up to the amount stated in the
insurance policy, the principles underlying solidary obligations
would be violated.
10. A obtains a fire insurance on his house and as a generous gesture names his
neighbor as the beneficy. If As House is destroyed by fire, can B successively
claim against the policy?
o No, in property insurance, the beneficiary must have insurable

interest in the property insured. B does not have insurable
interest in the house insured.
11. A obtains insurance over his life and names his neighbor B the beneficiary
because of As secret love for b. If A dies can B successively claim against the
policy?
o Yes, in life insurance it is not required that the beneficiary

must have insurable interest in the life of the insured. It was
the insured himself who took the policy on his own life.
12. What is the distinction between infringement and unfair competition?
Infringement of trademark is unauthorized use of

trademark, whereas unfair competition is the passing off of
ones goods as those of another
Fraudulent intent is unnecessary in infringement of
trademark, whereas fraudulent intent is essential in unfair
competition;
The prior registration of the trademark is a prerequisite to
an action for infringement of trademark, wheras registration
of the trademark is not necessary in unfair competition.
13. What is the Test Of Dominancy?
o It requires that if the competing trademark contains the main

or essential features of another and confusion and deception is
likely to result, infringement takes place. Duplication or
imitation is not necessary; nor is it necessary that the
infringing label should suggest an effort to imitate. Similarly in
size, form, color, while relevant is not conclusive.
TRANSPORTATION LAWS
1. X shipped several boxes of goods from Manila to Cebu on Board a vessel owned
by Mabuhay lines, inc. When the boxes were delivered to Y dry goods, inc., the
consignee, several boxes externally appeared to have been damaged. The
proprietor of Y Dry Goods inc. paid the freight charges upon receipt of the
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COMMERCIAL LAW
goods. However, when the boxes were opened 2 days later, it was discovered
that the contents of all the boxes had been damaged. The proprietor of Y Dry
Goods, Inc. seeks your advice on whether he may proceed against the carrier for
damages. State your reasons.
o No. Y dry goods Inc. cannot proceed against the mabuhay
Lines, Inc. for damages. Under the facts of the case, the claim
for damages should have been made by Y Dry Goods Inc. at
the time of payment of freight charges, or at the time of
delivery of the goods, several boxes being externally
appearing to have been damaged already, or at most, within
24 hours from delivery of the goods, if signs of damage be not
known from the exterior part of the packages, but no such
claim, in accordance with law, had been made, in order that
the carrier may be sued in court for damages.
2. Mabuhay Lines, Inc. a common carrier, entered into a contract with Company X,
whereby it agreed to furnish Company X, for a fixed amount, a bus for a
company excursion on its anniversary day. It was agreed that Company X would
have the use of the bus and its driver from 7:00 am 7:00 pm on the stipulated
date, and that the bus driver would be obliged to follow the instructions of the
Companys general manager as to the places to be visited. Company X agreed to
bear the cost of the gasoline consumed. The transportation contract signed by
Company X contained a stipulation that Mabuhay Lines, Inc. would be exempt
from liability on account of acts or omissions of its employees. On the return trip
from the excursion site, the bus had an accident and several employees of
Company X were injured. State The liability, if any, of Mabuhay Lines Inc.
o Liable is the Mabuhay Lines, Inc. for the injuries of several

employees of Company X, which it carried for a fixed amount.
Its responsibility, as a common carrier for the safety of
passengers, cannot be dispensed with or lessened by
stipulation.
3. Juan, a paying passenger, noted the stipulation at the back of the bus ticket
stating that the liability of the bus company is limited to P1,000 in case of
injuries to its passengers and P500 in case of loss or damage to baggage caused
by the negligence or willful acts of its employees. Upon arrival at its his
destination, Juan got into an altercation w/ the ticket conductor, who pulled out
a knife and inflicted several wounds on Juan. The bus driver intervened, heaping
abusive language on Juan and completely destroying Juans baggage which
contained expensive goods worth P3,000.The hospital expenses for Juan would
probably amount to at least P6,000.00 Give the extent of the liability of the bus
company, w/ reasons.
o The bus company, being a common carrier, Is liable to Juan, a

paying passenger, for damages in the amount of P3000 for
goods and P6000 for hospital expenses. The stipulation at the
back of the bus ticket stating that its liability is limited to
P1000 in case of injuries to its passenger is void since the
responsibility of a common carrier for the safety of passengers
cannot be dispensed w/ or lessened by stipulation. As to
stipulation in the ticket to be liable only to P500 in case of loss
to a baggage is likewise void, for being unreasonable, unjust
and contrary to public policy.
4. What is the limited liability rule in maritime law, otherwise known as the real
or hypothecary nature of maritime law Explain.
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COMMERCIAL LAW
o It means that the liability of the shipowner or ship agent
arising from the operation of a ship is confined to the vessel,
equipment, and freight, or insurance, if any, so that the ship
owner abandons the ship, equipment and freight, his liability
would be extinguished, just as well if the vessel would totally
sink or be a total loss, and there is no insurance.
5. What are the exceptions to the said rule?

o in case the voyage is not maritime, but only in river, bay, gulf;
o In case of the expenses for equipping, repairing, or
provisioning the vessel;
o In case the vessel is not a common, but special carrier;
o In case the vessel would totally sink or be a total loss, due to
ship owners own fault.
6. Archipelago Lines, inc. a carrier, accepted for shipment from Iloilo to Manila a
cargo consisting of 800 sacks of rice, knowing that some sacks had big holes and
others had their openings just loosely tied w/ strings. Due to spillage of the rice
during the trip, there was a shortage in the rice delivered by the carrier to the
consignee. When sued, Archipelago Lines, interposed the defense that the carrier
was not liable because the spillage was due to the defective condition of the
sacks. As a judge, how would you rule on the liability of the carrier? Reasons.
o As a judge, I would rule that Archipelago lines is liable for the

shortage in the rice delivered to the consignee. If in fact of
improper packing is known to the carrier or its servants, or
apparent upon ordinary observants, but carrier accepts the
goods notwithstanding such conditions, it is not relieved of
liabilities for loss or injury resulting therefrom.
7. There was a severe typhoon when the vessel M/V Fortuna collided w/ M/V
Suerte. It conceded that the typhoon was a major cause of the collision,
although there was a strong possibility that it could have been avoided if the
captain of M/V Fortuna was not drunk and the Captain of M/V Suerte was not
asleep at the time of the collision. Who should bear the damages to the vessels
and their cargoes?
o Under the doctrine of inscrutable fault, neither of the carriers

may go after the other. The shippers may claim damages
against the shipowners and the captains of both vessels,
having been both negligent. Their liability is solidary.
8. Captain Hook, captain of M/V Peter Pan, overloaded the said ship, as a
consequence of which the vessel sank in the middle of Sulu Sea, and nothing
whatsoever was recovered . The owners of the cargo and the heirs of the 3
passengers of the vessel filed an action for damages in the amount of
P500,000.00 against Mr. Wendy, the owner. Will the action prosper?
o The total loss or the lawful abandonment of the vessel

precludes further liability on the part of the shipowner, except
to the extent of earned freightage or proceeds of insurance , if
any for the loss of cargo arising from the conduct of the
captain in the care of the goods. The right of abandonment
likewise applies to collisions and shipwreck but in the latter
case only for unpaid wages.
9. Explain a Maritime protest. When and where should it be filed?
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COMMERCIAL LAW
o It is a sworn statement stating the circumstances of collision
which must be presented within 24 hours before the
competent authority of the port nearest to where the collision
had taken place. An action to recover losses and damges
cannot be admitted if such protest is not made. The lack of
protest however will not prejudice such action by owners of
cargo who were not on board the vessel or who were not in a
condition to make known their wishes.
10. The goods imported from The U.S. were overloaded by the carrier in Manila.
While in the custody of the arrastre operator, part of the shipment worth
1,000.00 was lost. Does the case involve admiralty and maritime commerce so
that the action for short delivery has to be filed in the Court of First Instance
regardless of the Amount?
o No, the matter does not involve admiralty which relate only to
incidents occurring during the sea voyage. Even assuming that
the case involves ad admiralty case, jurisdiction now lies w/
the MTCs if the amount involved does not exceed to 20,000.00
11. If it cannot be determined which of the 2 vessels was at fault resulting in the
collision, which party should bear the damage caused to the vessels and the
cargoes? Explain.
o Each of them should bear their respective damages. Since it

cannot be determined as to which vessel is at fault. This is
under the doctrine of INSCRUTABLE FAULT.
12. What is the prescriptive period for actions involving lost or damaged cargo under
the Carriage of Goods by Sea Act?
o One (1) year after delivery of the goods or the date when the
goods should have been delivered.
13. Define a Common Carrier?

o A person, corporation, firm or association engaged in the
business of carrying or transporting passengers or goods or
both, by land, water, or air for compensation, offering its
services to the public.
14. What is the test for determining whether or not one is a common carrier?
o Whether the person or entity, for some business purpose and

w/ general or limited clientele, offers the service of carrying or
transporting passengers or goods or both for compensation.
15. What is the Doctrine of Inscrutable Fault
o Where fault is established but it cannot be determined which

of the 2 vessels were at fault, both shall be deemed to have
been at fault.
16. what is the Doctrine of Limited Liability
o The exclusively real and hypothecary nature of maritime law

operates to limit the liability of the shipowner to the value of
the vessel, earned freightage and proceeds of the insurance. It
does not apply when the captain is guilty of negligence.
17. What is a Bill of Lading?
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COMMERCIAL LAW
o A written acknowledgement of the receipt of goods and an
agreement to transport and to deliver them at a specified
place to a person named therein or on his order.
18. Explain the two-fold character of The Bill of Lading?
o it is receipt of the goods to be transported; (b) it constitutes a

contract of carriage of the goods.
CORPORATION LAW
THE CORPORATION CODE.
1. Juan Sy purchased from A Appliance Center one generator set on installment w/

chattel mortgage in favor of the vendor. After getting hold of the generator set,
He immediately sold it w/o consent of the vendor. Juan Sy was criminally
charged of estafa. To settle the cases extra-judicially, Juan Sy paid the sum of
P20,000.00 and for the balance of P5,000.00 he executed a pronmissory note for
said amount w/ Ben Lopez as an accommodation party. Juan Sy failed to pay the
balance. What is the liability of Ben Lopez as an accommodation party? Explain.
o Ben Lopez is liable as maker to the holder up to the sum of
P5,000.00 even if he did not received any consideration for the
promissory note. This is the nature of accommodation, but he
can ask for reimbursement from Juan Sy.
2. What is the liability of Juan Sy?
o He is liable to the extent of P5,000.00 in the hands of a holder

in due course. If Ben Lopez paid the promissory note, Juan has
the obligation to reimburse Ben Lopez for the amount paid. If
Juan pays directly to the holder of the promissory note the
instrument is discharged.
3. What is a voting trust? What are its legal limitations?
o It Is an agreement in writing and notarized whereby the

stockholders or a portion of them, transfer their shares of
stock to a trustee, who thereby acquires the right to vote and
other rights pertaining to the shares, for a period not
exceeding 5 years at any one time, in return trusty certificates,
are given to the shareholders, these certificates are given to
the shareholders, these certificates being transferable, like
stock certificates are, subject, however to trust agreement.
o Limitations:
(1) for the purpose of circumventing the law against

monopolies and illegal combinations in restraint of trade
(2) for purposes of fraud.
4. What is the doctrine of Piercing the veil of Corporation entity and in what cases
did the Supreme Court apply the said doctrine?
o It means that a corporation may not generally be made to

answer for acts or liabilities of its stockholders or members, or
those of the legal entities to which it may be connected and
vise versa; but if the corporation is used as an alter ego,
dummy, business conduct or shield to commit any act of
illegality, fraud or wrong or to confuse legitimate issues, then
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COMMERCIAL LAW
it would otherwise and the corpoaration fiction wll be
disregarded.
o SC applied it in the following cases:
Where the corporation is used as a dummy to commit

illegality, fraud, or wrong by the said stockholders of
said corporation.
Where the Corp. is an agency for parent corporation to
commit illegality, fraud, or wrong.
Where a person owned all, or controls, the stocks of a
corporation, and the latter is used by him to commit
illegality, fraud, or wrong, confuse legitimate issues.
5. May a corporation recover Moral Damages?
o Yes, when a juridical person has a good reputation that is

debased, resulting in social humiliation, moral damages may
be awarded. Moreover goodwill can be considered an asset of
the Corp.
6. Distinguish between a corporation that is going public and a corporation that is

going private
o A corporation is deemed to be going public when it decides to

list its shares in the stock exchanges. The term can also be
used to convey the fact that a corp. would initially go into a
public offering of its shares or to otherwise invite equity
investments from the public. A Corp is said to be going private
when it would restrict equity investment in the corp within the
organization itself or its existing subject structure.
7. Distinguish between cash dividend and stock dividend. When may the
declarations of dividends be revoked?
o Any dividends other than form the unissued shares of the

corporation is, in contemplation of law, a cash dividend. A
stock dividend is one that is declared and paid out from the
unissued shares of corporation. Declaration of the stock
dividends, unlike cash dividends, need the concurrence of the
stockholders.
o A declaration of dividends may be revoked if the same was

irregularly declared such as when the same is violative of the
trust fund doctrine; otherwise It can no longer be revoked
once the right thereto has already vested in the stockholders.
8. Mercy subscriber to 1,00 shares of stock of Rosario Corporation. She paid 25%
of said subscription. During the stockholders meeting, can Mercy vote all her
subscribed shares? Explain.
o Mercy can vote all her subscribed shares. Sec.72 of the Corp
Code states that holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of the
stockholder.
9. Under what condition is a stock is a stock corporation empowered to acquire its

own shares?
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COMMERCIAL LAW
o It may only acquire its own shares of stock if the trust fund
doctrine is not impaired. This is to say for instance that it may
purchase its own shares of stock by utilizing merely its surplus
profits over and above the subscribed capital of the
Corporation.
10. Stikki Cement Corp (STIKKI) was organized primarily for cement manufacturing.
Anticipating substantial profits, its president proposed that STIKKI invest in (a) a
power plant project (b) a concrete road project, (c) quarry operations for
limestone used in the manufacture of cement. What corporate approvals or votes
are needed for the proposed investments? Explain.
o Unless the power plant and the concrete road proj. are
reasonably necessary to the manufacture of cement by
STIKKI, then the approval of the said projects by a majority of
the Board of Directors and the ratification of such approval by
the stockholders representing at least 2/3 of the outstanding
capital stock would be necessary.
11. May a corporation enter into a joint venture?
o A corporation may enter into a joint venture. However,

inasmuch as the term has no precise legal definition. It may
take various forms. It could take the form of a simple pooling
of resources between 2 or more corporations for a specific
project or for a limited time.
12. What are the rights of a stockholder?
The right to vote, including the right to appoint proxy

Right to share in the profits of the corporation, including the
right to declare stock dividends
The right to a proportionate share of assets
The right to appraisal
The preemptive right to shares
The right to inspect corporate books and records
The right to elect directors
13. What is a joint account?
o A transaction of merchants where other merchants agree to

contribute the amount of capital agreed upon and
participating in the favorable or unfavorable results thereof in
the proportion they may determine.
14. Distinguish Joint Account from Partnership
A partnership has a firm name while a join account has none

and is conducted in the name of the ostensible partner.
Partnership has juridical personality may be sued under its
name while a joint account has no juridical name and can be
sued only in the name of the ostensible partner.
A partnership has a common fund a joint account has none.
In partnership all general partners have the right of
management, in Joint account the ostensible partner
manages its business operations.
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COMMERCIAL LAW
SECURITIES REGULATION CODE
1. Define Securities
o Stocks, bond, notes, convertible debentures, warrants or other
documents that represent a share in a company or a debt
owned by a company or government entity. Instruments
giving to their legal holders rights to money or other property;
they are therefore instruments which have intrinsic value and
are recognized and used as such in the regular channels of
commerce.
2. What is meant by over the counter markets?

o A transaction between the broker and customer without
passing thru the stock exchange.
3. Give a case where a person who is not an issuing corporation, director or officer
thereof, or a person controlling, controlled by or under common control / the
issuing corporation, is also considered as an insider?
o It may be the case when a person, whose relationship or

former relationship to the issuer gives or gave him access to a
fact of special significance about the issuer or the security that
is not generally available.
4. What is shortswing transaction?
o Where a person buys securities and sells or disposes of the

same within a period of 6 months.
5. What does the term insider mean?
o The issuer, a director or officer of or a person controlling,

controlled by or under common control with , the issuer, a
person whose relationship to the issuer give or gave him
access to a fact of special significance about the issuer or the
security that is not generally available.
6. When is a fact considered to be of special significane under the same act?
o One which in addition to being material would be likely to

affect the market price of a security to a significant extent on
being made generally available, or one which a reasonable
person would consider especially important under the
circumstances in determining his course of action in the light
of such factors as the degree of its specificity.
7. What are the liabilities of a person who violates the pertinent provisions of RSA
regarding the unfair use of inside information?
o The person may be liable to fine of not less than P5,000.00 nor
more than 500,000.00 or imprisonment of not less than 7
years not more than 21 years, both such fine and
imprisonment in the discretion of the court.
BANKING LAWS
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COMMERCIAL LAW
1. Give the basic requirements to be complied with by the BSP before the monetary
board can declare a bank insolvent, order it closed and forbid it from doing
business in the Phils.
There must be an examination by the head of the Dept of

Supervision or his examiners or agents into the condition
of the bank.
The examination discloses that the condition of the bak
is one of insolvency, or that its continuance in business
would involve probable loss to creditors.
The head of the said Dept shall inform in writing the
Monetary Board of such facts.
Within 60 days, the board shall determine and confirm if
the bank is insolvent and public interest requires, to
order the liquidation of the bank.
2. An employee of a large manufacturing firm earns a salary which is just a bit more
than what he needs for a comfortable living. He is thus able and still maintain a
P10,000 savings account, P20,000 checking account and P30,000 money market
placement and a trust fund of P40,000 in a medium sized commercial bank.
State which of the four accounts are deemed insured by the Phil Deposit
Insurance Corp? state which of the above accounts are covered by the Law on
Secrecy Of Bank deposits.
o The P10,000 savings account and the P20,000 checking

account are deemed insured by the Phil Deposit Insurance
Corp. The 10,000 savings account and the 20,000 checking
account are covered by the Law on Secrecy of Bank Accounts.
INTELLECTUAL PROPERTY CODE
1. What is the objective of the law in protecting trademarks?

o To protect the owners in his property and to protect the public
from being deceived by reason of a misleading claim.
2. What are the territorial limits of a trademark?
o It acknowledges no territorial boundaries of states or nations,

but extends to every market where the traders goods have
become known and identified by his use of the mark.
3. May a home registration of a foreign trademark entitle to registration in the

Philippines even without proof of use in the Philippines?
o No, the basis of registration is actual use in commerce in the

Phils before an application for its registration can be filed in
the Patent Office, except when the Phils is a party to a
trademark treaty.
4. Does the owner of a landmark have a right of property to prevent others from
manufacturing, producing, or selling the same article to which it is attached?
o No. The owner of a trademark has no right of property to

prevent others from manufacturing, producing or selling the
same article to which it is attached. In other words, the
trademark confers no exclusive rights in the goods to which
2NETTE CRUZ
Page44
COMMERCIAL LAW
the marks have been applied.
5. In an action for infringement of patent, the alleged infringer defended himself by

stating (i) that the patent issued by the Patent Office was not really an invention
which was patentable; (ii) that he had no intent to infringe so that there was no
actionable case for infringement; and (iii) that there was no exact duplication of
the patentees existing patent but only a minor improvement. With those
defenses, would you exempt the alleged violator from liability? Why?
o I would not exempt the alleged violator from liability for the
following reasons:
i. A patent once issued by the Patent Office raises a
presumption that the article is patentable; it can
however be shown otherwise. A mere statement or
allegation is not enough to destroy that presumption.
ii. An intention to infringe is not necessary nor an
element in a case for infringement of a patent; and
iii. There is no need of exact duplication of the
patentees existing patent such as when the
improvement made by another is merely minor. To be
independently patentable, an improvement of an
existing patented invention must be a major
improvement.
6. Laberge, Inc., manufactures and markets after shave lotion, shaving cream,
deodorant, talcum powder using the trademark PRUT, which is registered with
the Patent Office. Laberge does not manuftacture briefs and underwear and
these items are not specified in the certificate of registration. JG, who
manufactures briefs and underwear, wants to know whether, under our laws, he
can use and register the trademark PRUTE for his merchandise. What is your
advice?
o Yes. The trademark registered in the name of Laberge, Inc.

covers only after-shave lotion, shaving cream, deodorant,
talcum powder and toilet soap. It does not cover briefs and
underwear.
7. What intellectual property rights are protected by copyright? Section 5 of PD 49

provides that Copyright shall consist the exclusive right:
o To print, reprint, publish, copy, distribute, multiply, sell and
make photographs, photo-engravings, and pictorial
illustrations of works;
o To make any translation or other version or extracts or
arrangements or a adaptation thereof; to dramatize if it be a
non-dramatic work; to convert it into a non-dramatic work if it
be a drama; to complete or execute it if it be a model or
design;
o To exhibit, perform, represent, produce, or reproduce the work
in any manner or by any method whatever for profit or
otherwise; if not reproduced in copies for sale, to sell any
manuscripts or any record whatsoever thereof;
o To make any other use or disposition of the work consistent
with the laws of the land.
8. Solid Investment House(SOLID) commissioned Blance and his son Steve, both
noted artists, to paint a mural for the Main Lobby of the new building of SOLID
for a contract price of P2-M. Who owns the mural? Explain. Who owns the
copyright of the mural? Explain.
2NETTE CRUZ
Page45
COMMERCIAL LAW
o SOLID owns mural. SOLID was the one who commissioned the
artists to do the work and paid for the work in the sum of P2-
M.
o Unless there is a stipulation to the contrary in the contract, the

copyright shall belong in joint ownership to SOLID and Mon
Blanco and his son Steve.
9. What is the distinction between infringement and unfair competition? What is the
test of dominancy?
o The distinctions between infringement and unfair competition

are as follows:
i. Infringement of trademark is the unauthorized use of
a trademark, whereas unfair competition is the
passing off of ones goods as those of another;
ii. Fraudulent intent is unnecessary in infringement of
trademark, whereas fraudulent intent is essential in
unfair competition; and
iii. The prior registration of the trademark is a pre-
requisite to an action for infringement of trademark,
whereas registration of the trademark is not
necessary in unfair competition.
o The test of dominancy requires that if the competing

trademark contains the main or essential features of another
and confusion and deception is likely to result, infringement
takes place; Duplication or imitation is not necessary; nor is it
necessary that the infringing label should suggest an effort to
imitate. Similarity in size, form and color, while relevant, is not
conclusive.
10. Juan wrote and published a story similar to an unpublished copyrighted story of
Santiago. It was however, conclusively proven that Juan was not aware that the
story of Santiago was protected by copyright. Santiago sued Juan for
infiringement of copyright. Is Juan liable?
o Yes. Juan Xavier is liable is liable for infringement of copyright.

It is not necessary that Juan Xavier is aware that the story of
Manoling Santiago was protected by copyright. The work of
Manoling Santiago was protected from the time of its creation
11. May a person have photocopies of some pages of the book of Prof. Rosario made
without violating copyright law?
o Yes. The private reproduction of a published work in a single

copy, where the reproduction is made by a natural person
exclusively for research and private study is permitted,
without the authorization of the owner of the copyright work.
2NETTE CRUZ
Page46

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2. Give the distinctions between subscription of shares and purchase.

4. Distinguish between stock and cash dividends.

(a) The taxability of stock dividends

b) The effects of a declaration of delinquency on the rights of a stockholder are as follows:

a) We must distinguish. As to the issuance of a par value shares, a banking corporation

d) A banking corporation cannot be deprived its common shares of voting rights. It is

1. Alexander is an employee of a bank located in Makati. He drives an FX Tamaraw to his

NEGOTIABLE INSTRUMENTS LAW

2. An instrument was indorsed: To X, Sgd. B. X indorsed the instrument, thus: To Z, Sgd.

b) An accommodation transaction is a legal arrangement under which a person called the

b) May Carlos recover from Bernardo? Why?

10. In no. 9, can Patricio recover from Quirino? Why?

12. In no. 9, may Mario recover from Action Bank? Why?

b) May D recover from P? Why?

c) May D recover from C? Why?

c) May Mr. P recover from Mr. F based on the check? Why?

d) May Mr. P recover from All State Bank?

e) May Mr. P recover from Asian Bank?

g) May All State Bank recover from Asian Bank?

h) May Asian Bank recover from Mr. F? Why?

a) What is the liability of the bank?

a) May Mr. M refuse payment invoking forgery? Why?

b) May Mr. E recover from Mr. P? Why?

c) May Mr. E recover from Mr. A? Why?

d) May Mr. E recover from Mr. D? Why?

e) How about from Mr. C? Why?

b) What possible defense can Mr. M invoke? Why?

WAREHOUSE RECEIPTS ACT

a) What advice would you give him?

TRANSPORTATION LAW LECTURE

Quasi Delict distinguished from Torts

Elements needed to prove Breach of Contract of Carriage

o The existence of a contract; and

Doctrine of Imputed Negligence

o Can the passenger of Squirrel Lines sue Squirrel Lines, Inc.?

o Can the passenger of Squirrel Lines sue Rapid Lines, Inc. ?

In bar problems involving common carriers, it is important to remember that a bar

Doctrine of Subsidiary Liability

Kinds of Damages the Carrier is liable for

o Elements to prove that there is a breach of contract of carriage

o Different Degrees of Diligence

Defenses of Common Carriers

o The observance of extraordinary diligence

o The fact of being a private carrier

o Stipulations of the parties

Different Stipulations Limiting the liability of the Carrier for Damages

o It is governed by the Code of Commerce.

o Special Discussion on Loan on Bottomry

o Arrival of the Vessel Under Stress

Carriage of Goods by Sea Act and the Civil Code

a. Merchants and Commercial Transactions, Articles 1-63

o Under the theory of cognition, the acceptance is considered to

b. Bulk Sales Law

o Acme Bottlers, Inc is correct in alleging that the sale is null

o Victory Corporation has acquired rights as lawful buyer in the

o A purchaser in violation of the BSL acquired no rights in the

3. In an annual meeting of the XYZ Corporation, the stockholders unanimously

o The requirements of the Bulk Sales Law must be complied

o Of the sale and transfer is made (1) by vendor, mortgagor,

4. Stanrus, Inc., a department store w/ outlets in Makati, Madaluyong and Quezon

o The sale involves all fixtures and equipment, not in the

o Crossroads should require from Stanrus, submission of a

5. The sole proprietor of a medium-size grocery shop, engaged in both wholesale