Commercial Law Review

Dean Eduardo Abella

DOCUMENT OF TITLE (DT) 1. Negotiable IF it contains words of negotiability, i.e., to order, to

bearer, or those with equivalent words or phrases (e.g., holder,
possessor)
Governing Laws: 2. Non-negotiable
NCC (Sales)
Code of Commerce What if it contains “deliver to bearer” with a red stamp in big
Warehouse Receipts Act font of “NON-NEGOTIABLE”?: It is negotiable even if the bailee
intends it to be non-negotiable, as long as it contains words of
Definition negotiability. The Holder has the option to treat it as negotiable.
It is an instrument or document where the bailee acknowledges
goods and contains an undertaking to deliver the goods. How to Negotiate Documents of Title:
1. To Order Instruments: holder needs to indorse (blank or
Difference with Instrument under the Negotiable Instruments special) and deliver
Law (NIL): 2. To Bearer: Delivery
- Coverage: NCC covers GOODS to be transported or safely If originally To Bearer, then specially endorsed and delivered, the
kept. NIL covers sums certain in money, except other transferee must also negotiate by endorsement and delivery.
properties that may also be covered. NOTE: Once it has been especially endorsed, negotiate by
- Modes of Endorsement: endorsement and delivery all the time thereafter. EXCEPT IF the
a. In DTs, endorsements must be IN BLANK or ESPECIALLY last endorsement is in blank, then just deliver it subsequently.
b. In Nis, it may be in blank, especially, conditionally, qualified, DIFFERENCE WITH NI: Endorsement in a bearer NI has no effect.
or restrictive
Rights acquired by negotiation are better than those acquired by
Examples of Documents of Title: assignment.
• Bill of Lading, issued by common carriers (Code of Commerce)
• Warehouse Receipt, issued by warehousemen (under the
Warehouse Receipts Act and the General Bonded Warehouse
Act) BILL OF LADING (B/L)
• Quedan, a warehouse receipt that covers rice, sugar, or
tobacco Governing Law: Code of Commerce

Who issues DTS? Kinds:

• Common carriers • Bill of Lading – Common carrier of goods by water
• Warehousemen • Waybill – by trucks on land
• Airwaybill – by aircrafts, airlines
Forms of DTs – to facilitate trade

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Formal Requirements
1. It must be printed
2. It must contain the complete name and address of the printer
3. It must contain the telephone number of the printer (for
convenience)
4. It must contain the TIN number of the printer
Content of B/L (Code of Commerce)
1. Complete name and address of consighnor/shipper
2. Complete name and address of consignee
3. Complete name and address of the carrier/shippee (NCC)
4. Complete description of goods including marks and markings,
e.g., numbers on crates, names in pomelo crate from Davao
5. Amount of fare
6. Stipulations on limited liability
- Nature: Contract of Adhesion but it is not prohibited; it is
only interpreted against thep arty who caused the
ambiguity
Are printed stipulation on Bill of Lading binding on the shipper
even if the shipper does not sign?
GR: Yes, a contract is perfected by mere consent. Here, consent is
implied even if it is signed only by the carrier’s representative.
EXCEPTION: There is no consent if print is too small that the
shipper could not have read it, as in the Shewaram Case.
Effect of Issuance of a B/L: Disputable presumption that the
carrier received the goods. It is not conclusive.
Purposes of Documents of Title and Bill of Lading (including
Warehouse Receipt)
1. As a Receipt
2. As a Written Contract between parties because of printed
stipulations
3. As a Symbol, standing for the goods mentioned therein
WAREHOUSE RECEIPT
Governing Law: GENERAL BONDED WAREHOUSE ACT
governs the conduct and business of warehousing
Who issues WR: Warehouseman (has possessory lien over
goods)
Requirements for Issuance
1. Annual license from DTI Director
2. Bond must be posted before issuance of a license, to answer
for damages to goods suffered while the goods are in storage.
The bond is co-terminous with the license
3. Insurance against fire over all the goods stored in the
warehouse.
Is there a prescribed minimum area for warehouse? NONE.
What is its difference from a Customs-Bonded Warehouse?
WH is licensed and bonded, while a customs-bonded WH is a
facility for importers of raw materials.
What if a warehouseman issues more copies of WH receipts?
He must indicate that it is only a copy and not the original.
Otherwise, he is liable to a TP who receives it in good faith (GF)
and for value.
If a warehouseman issues more than one copy of a warehouse
receipt, he should indicate on copies that they are merely copies
and not the original. If he fails to indicate it as a copy and a person
in good faith received the receipt for value, he would be entitled to
the goods as if his warehouse receipt were original.
Negotiability of WH Receipts
A warehouse receipt is negotiable or non-negotiable (look for words
of negotiability)
Effect of Negotiation: Transferee acquires the direct right to
receive goods from the warehouseman. However, the right is
conditioned upon the following:
1. Person claiming the goods must first satisfy the liens of the
warehouseman.
2. He must surrender the original WH Receipt to the
warehouseman.
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3. He must express his willingness to sign the receipt upon
delivery of the goods to him.

Liens of the Warehouseman

Nature: Possessory and Waivable by parting with the goods
1. Storage fees (if not paid, warehouseman is not obliged to
deliver goods)
2. Other arrangements with the depositor, e.g. premium and
interest for additional insurance coverage (including advances
made by warehouseman)
3. Cost of packaging and repackaging (though the latter is illegal)

What should warehouseman do with the original receipt?

Cancel it. If he fails to cancel it and the receipt falls into the hands
of someone in good faith and who got it for value, the
warehouseman is liable to the person.

May goods covered by a document of title be levied upon on

attachment for exection? YES.

Effect of Loss of Original Receipt

• The claimant must file an action in court to prove his ownership
or right over the goods. In practice, the claimant merely posts a
bond with the warehouseman.
• It would be the claimant’s problem because he cannot oblige
the warehouseman to deliver the goods without the original
receipt.
• To protect the warehouseman, the claimant must post a bond
for the value of the goods.

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 TRUTH IN LENDING ACT
Purpose of the law: To enable persons borrowing money or
buying goods on instalment or credit to know the actual cost in
money of the credit.
History: When cost of money had gone beyond a profitable rate
and the interest was also subject to the usury law, banks thought of
other ways to make money. Banks started charging different fees to
avoid the usury law. In effect, every move by the bank had a price
(processing fee, application fee, appraisal fee). Thus, the law
obliges lenders to fully disclose all charges before the
consummation of the transaction.
How: Disclosure Statement
Prior to the consummation, person lending money or selling on
credit/installment should deliver to the debtor a written statement
showing the breakdown of the charges. Note that this is already
after a meeting of the minds. (Section 4)
NOTE: Although penalty charges are not stated in the Disclosure
Statement, reference to penalty charges in promissory note
constitutes substantial compliance with disclosure requirement of
TLA.
Case: Solidbank extended a credit line of P200k to a client, not just
as an ordinary loan, but also as a standby source of funds which
earns no interest unless it is drawn. When the borrower draws
money, the credit diminishes and he pays only what is actually
received. But, there were accumulated service fees which were not
made available to the borrower.
NOTE: Credit line – when bank sets aside a certain
amount for client that client may draw on at any time.
SC did not allow Solidbank to collect amount because the
additional charges were not indicated in the promissory notes.
In 2009, there was another case where the fees included in the
promissory notes, but there was no delivery of disclosure
statements, collection still not allowed.
NOTE: The imposition of interest and finance charges is VOID if not
disclosed in the Disclosure Statement.
Subsequent compliance with disclosure requirement IS NOT
substantial compliance.
TLA is violated if agreement provides an escalation clause on
interest, which is dependent on the will of the bank.

Even if discloses, exorbitant interest rate may be declared

unconscionable.

Content of Disclosure Statement

1. Cash Price less downpayment = amount to be financed
2. Payable in XX installment
3. Total amount to be paid in installments
4. Total Cost
5. Other charges

Regulating Body: Monetary Board of the BSP is the body that

oversees the implementation of the law. Violation of the Act is a
crime; penalty is fine of P100 to P2,000 and imprisonment of at
least 1 month but not more than 5 years ((as of 2013).
Prescription: one (1) year from the date of demand made and not
from the date of execution of promissory note.

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 BULK SALES LAW 4. Presence of written waiver by the creditors
5. Sale of a foundry shop (horseshoe maker/metal fabricator) –
according to SC
Purpose of the law: To protect creditors from fraudulent schemes
of their debtors

Acts covered and regulated:

1. Sale, assignment, mortgage, or other forms of transfer of all or
substantially all of the stocks of goods, wares or merchandise
other than in the ordinary course of business
2. Sale, assignment, mortgage, or other forms of transfer of all or
substantially all of the businesses of a person, the business/es
themselves
3. Sale, assignment, mortgage or other forms of transfer of all or
substantially all of fixtures and equipment used in the conduct
of business

Why all or substantially all? Because these are extraordinary

transfers

NOTE: Not every sale is covered. Sales in the ordinary course of

business is not covered, e.g. if all goods were sold while engaged
in the wholesale business.

Requirements: Must be strictly complied with; OTHERWISE, Void

sale
1. Notify the creditors in writing of the intended transfer at least 10
days before the intended transaction
2. Deliver to the prospective transferees a sworn statement
(affidavit) stating the full names and addresses of creditors and
the amounts due them
3. Furnish a copy to the DTI a copy of the sworn statement

NOTE: Transfer without compliance with requirements is void even

if the buyer acted in GF. In such case, the buyer is considered a
trustee.

Exempted transactions from requirements:

1. Judicial sales (execution, assignee in insolvency) – acting
under judicial process
2. Sales or transfers of property exempt from execution
3. Sale by manufacturer of his own products

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 SECRECY OF BANK DEPOSITS
(R.A. No. 1405)
Purpose of the law: To encourage people to deposit their money
in banks for the purpose of promoting the national economy.
Scope: Includes investments in government securities.
Reserve Requirements
Percentage of deposit received by the bank is to be deposited with
the BSP or invest in government liabilities.
Purpose:
1. To service withdrawals
2. Manage money supply
3. Source of funds for rediscounting facility of BSP
Percentage depends on the deposit liabilities:
1. Highest – Checking
2. Medium – Savings
3. Low – Time Deposit (withdrawable anytime with penalty)
How does BSP use reserve requirements to manage money
supply? Why is there a need to manage money supply?
If there were a lot of money in circulation, prices would go up. The
reserve requirement is also there in order for the BSP to have
money to lend to banks.
REDISCOUNTING FACILITY – promissory notes are used as
security.
NOTE:
• Bank deposits may not be examined, inquired or looked into by
any person, government official, bureau or office (GR)
• It is illegal for a bank officer or employee to disclose any
information regarding bank deposits and investments in
government securities, savings, checking, time deposit (SCT)
accounts. Penalty for violation is P30k or 5 years imprisonment
or both, at court’s discretion.
Exceptions:
1. Written authority from depositor himself
2. In case of impeachment (e.g. testimony of Clarissa
Ocampo in impeachment case of CJ Corona)
3. Court order in case of bribery, dereliction of duty of public
officer, violation of Anti-Graft and Corruption Practices Act,
extending to spouses and relatives, close friends, and
associates in cases of AGCPA
4. Where deposit is the subject matter of litigation – must be
read literally, e.g. settlement of estate
5. By order of the CA in relation to the Anti-Money Laundering
Act
6. Examination of books of banks by the BSP (as part of their
mandate)
7. Independent auditors who are not bank employees/officers
NOTE: Nos. 5-7 are covered by other laws
• Foreign Currency Deposit Act expressly and absolutely
prohibits disclosure of foreign currency accounts. However, SC
may rule otherwise.
• Garnishment: Bank accounts may be garnished by creditors of
the depositors. There is no violation under the Secrecy of Bank
Deposits Law. The amount is actually not disclosed and the
intent of the Legislature does not cover garnishment.
GENERAL BANKING ACT OF 2000
BANK
A stock corporation authorized by the Monetary Board to accept
deposits from the public and to grant loans.
GR: 100% of outstanding capital can be acquired by foreign banks.
Kinds of Banks (based on paid-up capital)
1. Universal Banks
2. Commercial Banks
3. Thrift Banks
a. Savings and Mortgage Bank
b. Private Development Bank
c. Stock Savings and Loan Associations
4. Cooperative Bank
5. Rural Bank
6. Islamic Bank
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7. Other banks determined by MB
Prohibited acts:
1. Engage in insurance business as insurer
2. Outsourcing of functions, e.g. cannot hire another to accept
deposits
Commercial Bank
Powers and Functions:
1. To accept deposits in checking/current accounts subject to
withdrawal by check. (GR: only commercial and universal
banks can do this) however, the BSP may license other
banks to accept similar deposits
2. To open letters of credit. MB may license other savings
banks to do the same, e.g. Ph Business Bank
3. To engage in allied enterprises only
4. To exercise the powers of a corporation
5. Basic banking functions
NOTE: first 2 functions are inherent functions of a commercial bank
(CB)
As a matter of right, only commercial banks should accept deposits
in checking accounts / current accounts / commercial accounts /
demand deposit without separate authority from MB
1. May issue letters of credit
2. Lend money
3. Trading of government securities
4. Foreign transactions
5. Safety deposit box
Demand Deposits: These are liabilities of banks denominated in
Philippine currency and are subject to payment in legal tender upon
demand by presentation of checks.
Negotiable Order of Withdrawal (NOW) Accounts: interest-
bearing deposit accounts that combine the payable on demand
feature of checks and investment feature of savings accounts.
Anonymous Accounts: PROHIBITED. Except Foreign Currency
deposits, which may be a numbered account.
Joint Accounts: Subject of survivorship agreement whereby co-
depositors agree to permit either of them to withdraw the whole
deposit during their lifetime and transfer balance to the survivor
upon death of one of them.
Ownership of Other Banks
Commercial Banks can own 100% of just one other commercial
bank. There is no limit on the number of smaller banks it can own.
This is to encourage merger or consolidation.
Commercial bank limit is 35% of equity, but still with a maximum of
25% per industry.
A Commercial Bank cannot acquire a Universal Bank because the
latter is bigger than the former.
Universal Bank
Nature: Actually a commercial bank, but also authorized by
Monetary Board to engage in the business of an investment house.
Thus, as a CB, it can create and accept demand deposits without
separate authority from MB.
Functions and Powers:
1. To accept deposits subject to withdrawal by check.
2. To open letters of credit.
3. To engage in business of investment house (exclusive power/
function)
4. To engage in allied or non-allied enterprises. NOTE: Non-allied
enterprises have nothing to do with banking.
5. To sell life or non-life insurance policies – cross-selling with
insurance companies where bank owns 5% of outstanding
shares (Bancassurance)
Investment House
A quasi-bank with two major functions:
1. Rediscounting of receivables – one entity goes to an
Investment House and as collateral, pledges its receivables
from own borrowers (e.g. business sells on credit and needs
capital again, so it borrows from an Investment House).
2. Underwriting for securities – where a corporation offers to the
market securities for sale with certain commitments (e.g. in
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 corporation that needs more capital that cannot be raised from
stockholders – securities only if 20 or more persons). Get SEC
approval first, then have them sold by securities underwriters
(NOTE: check Securities Act). Also includes committing on firm
basis / best effort to raise money needed by client.
Example: State Investment House, Inc.
stock (ACS). If stock, may accept deposits from general public.
If non-stock, only from a restricted group of persons, e.g.
AFPSLAI restricted only to AFP, PNP and family members;
MESALA restricted only to Meralco employees including the
Lopez Group). Many corporations have savings and loans
associations and credit unions.

Quasi-Bank: entities engaged in the borrowing of funds through

the issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of relending or
Cooperative Bank
purchasing of receivables and other obligations. (only UB and CB)
It is one set up and owned by various cooperatives. There are no
individual stockholders, all are cooperatives. Under cooperative
Rediscounting: When a bank needs money to extend loans, it will
office, but bank under the BSP. Primarily provides financial, banking
go to BSP to obtain a loan secured by the bank’s receivables.
and credit services to cooperative organization and their members.
Ownership of Other Banks:
UB can own 100% of just one other UB (merge into one bank) or
CB. There is no limit on the number of smaller banks it can own. Rural Bank
If Universal Bank invests allied or non-allied, what is the limit? It is organized to provide banking services in rural communities, to
Equivalent to 50% of net worth, but only up to 25% in a single farmers/tenants or, simply stated, in rural areas. It is recognizable
enterprise. by “Rural” in its corporate name.

Purpose: to promote comprehensive rural development.

Thrift Bank
It is the only bank where public officers can be directors.
Can be acquired by UB
It must be wholly owned by Filipinos, but can be owned up to 40%
by foreigners.
Kinds:
1. Savings and Mortgage Bank – retail banks catering small
deposits; accepts deposits of small depositors and lens money
for home-building purposes (amount is small than those of the Islamic Banks
universal bank’s, e.g. P500 in BPI Family Bank). Banks prefer
big depositors as maintenance costs are the same. There is only one, owned by the Government and with DBP as a
2. Private Development Bank – organized for development of controlling shareholder. It is primarily in Muslim-dominated areas
community. It accepts deposits and grants loans. If it needs because interest is prohibited in Islam given that it is considered
additional capital, it may invite DBP to invest in it. DBP would immoral. However, there may be profit-sharing.
require membership in the PDB’s BOD. To recognize it, check
corporate name, it always has “development” in its corporate
name.
3. Stock Savings and Loan Associations – can also be non-stock LENDING MONEY
but not considered a bank. If non-stock, no authorized capital

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Is the bank allowed to lend any amount?
No. the amount of money lent must be secured by titled real
properties and it must be subject to the Single Borrower’s Limit
(SBL), which is the maximum amount which any borrower may
borrow. Directors, Officers, Stockholders, and Related Interests on
borrowing and security arrangements (DOSRI) may borrow from
banks on the condition that it is approved by the BOD in a meeting
of the BOD with a quorum, without counting the officer involved in
the quorum and approval votes, unless the loan is part of a
package, e.g. fringe benefits, assets considered as non-risk items,
extended by coop bank to coop shareholder.
If secured by real property: Loans may be secured by real property,
however, according to section 37, the maximum amount that may
be lent is 75% of the appraised value of the land. If it has
improvements, the value lent is not to exceed 60% of the appraised
value of improvements. Improvements must be insured.
NOTE: If secured by personal property, 75% of the appraised value
of the chattel.
Conservatorship: MB finds bank/quasi-bank in a state of
continuing inability/unwillingness to maintain condition of liquidity
and deems adequate to protect interest of depositors/creditors.

Restrictions imposed on DOSRI to borrow:

1. Waiver of secrecy of his deposit
REGULATION OF BANKS
2. Accounts are subject to examination in connection with
Under the law, only corporations under supervision of the Monetary
supervisory and examination responsibility or by BSP in a legal
Board may use “Bank” or “Banking” in corporate name.
action initiated involving the deposit account
Banks are prohibited from directly engaging in the business of
Related Interest: two (2) or more corporations owned/controlled by
insurance as an insurer BUT UB can sell insurance policies of
the same family group or same group of persons. Must be fully
insurance companies which it may own.
disclosed in all transactions by such corporation or related groups
of person with the bank. Stockholdings of individuals related to
All banks should be organized as a stock corporation and comply
each other within the 4th degree of consanguinity or affinity,
with the requirements of the Monetary Board for licensing. Before a
legitimate/common-law, shall be considered family groups / related
corporation can be organized, it must go through bank
interests and must be fully disclosed in all transactions by such an
requirements. After requirements submitted to the Monetary Board
individual with the bank.
and completed, endorsement by Monetary Board to SEC, which
then has a ministerial duty to register it.
What is the amount of the SBL?
25% (BSP Circular 425) of net worth of the bank, but may be
There is paid-up capital required by the Monetary Board. There is a
increased by 10% of its net worth, provided that the additional
periodic increase in paid-up capital in order for banks to be more
liabilities of any borrower are adequately secured by trust receipts,
stable.
shipping documents, warehouse receipts, or other similar
documents transferring or securing title covering readily
For banks to open branches and install ATMs, it must first obtain a
marketable, non-perishable goods which must be fully covered by
permit from the MB. This includes any transfer of location of the
insurance.
branch and/or ATM.
Do the SBL and DOSRI include legitimate interests only? No, it
Banks should have employees on a permanent basis. How many
includes illegitimate interests.
directors may a bank have?
5 to 15, odd or even, no law obliges the BOD number to be odd. If
What is the remedy for SBL?
consolidated, it may have a maximum of 21 directors.
Syndicated Loans where loans from several banks are obtained.

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There must be two independent directors who are neither officers Clearing house is where banks swap checks they received drawn
nor employees of the bank, its subsidiaries or affiliates or related on other banks. Physically there is no cash involved, but
interests. transactions recorded.

NOTE: The law does not prohibit ownership of stock by the same Under present rules, if within 24 hours, a bank dishonors a check, it
members of the family or related interests. should be returned or else considered cleared.

Directors and officers – not just anybody may be a director or Bank cannot declare dividends if clearing house account are
officer. There is the Fit and Proper rule. overdrawn. There is only movement of cash if clearing house
account is overdrawn.
Fit and Proper Rule: the Monetary Board came out with
qualifications for bank directors and officers, aside from being Modes of Entry of Foreign Banks:
college graduates. To determine whether an individual is fit and 1. By acquiring, purchasing or owning up to 100% voting stock of
proper to be a director or officer of a bank, regard shall be given to an existing bank;
his: integrity, experience, education, training, and competence. 2. By investing up to 100% of the voting stocks of a new banking
subsidiary incorporated under Philippine laws;
NOTE: Appointive/elective public official, whether full-time or part- 3. By establishing branches with full banking authority. 

time, cannot serve as officer of any private bank during his term or
tenure as public officer (GR). Except, if service is incidental to
financial assistance provided by Government or GOCC to the bank
or unless otherwise provided by law, e.g. rural banks.
Quorum in BOD meetings – the law allows meeting via tele- or
video-conferencing

Banks should NOT acquire treasury shares of its own. If a bank

acquires treasury shares, they should be gotten rid of in 6 months.
Treasury Shares – shares already issued by a corporation but
which shares a corporation reacquires in its own name.

Subscribed and Issued Shares – no difference between them in

terms of rights.

Under the General Banking Act (GBA), bank should cause to be

published at least every quarter their financial statements.

Clearing House – Bangko Sentral lending facility for purpose of

collecting checks drawn on one bank but deposited in another. E.g.,
BPI Katipunan depositor deposited checks from other banks such
as Metrobank and Allied Bank.

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 PHILIPPINE DEPOSIT
INSURANCE CODE
History
In the 1960s to the 70s, there were so many bank closures leading
to the loss of the public’s confidence. To restore faith in banking
that is vital to the economy, the Uniform Currency Act was repealed
and the PDIC was created.
What is insured: all deposit liabilities (savings, current, time
deposits (creditor-debtor relationship)). The PDIC insures only
deposits in savings, current or time accounts, not any other
investments, even if made with or through the bank. It excludes
money market transactions, and marginal deposits (amount
required to open a letter of credit).
The liability of PDIC for insured deposits rests upon the existence
of deposits with insured bank, not on negotiability/non-negotiability
of the certificates evidencing these deposits.
Insurance coverage may be terminated if bank does not comply
with cease and desist order issued within 30 days from receipt.
Why are money market placements not insured in PDIC?
They are not deposits but investments. There is no debtor-creditor
relationship.
Money Market Placements: transactions through bank but bank is
not borrower. Borrowers are other corporations that need to borrow
for a short time. Reason for Money Market Placements is that
normal loans take time. Bank is an intermediary between the
borrower and lender in the Money Market Placement. It is lending
to another person. Advanced is that in case of bank closure, you
may get promissory note from borrower.
What is the maximum indemnity?
P500k per person per bank in the Philippines, whether in Philippine
or foreign currency. If it is in foreign currency deposit unit, indemnity
amount in Pesos on the day the bank is ordered closed.
If depositor has two or more accounts with the same bank,
maximum coverage pertains to the sum of all such accounts.
Depositor must file claim within two (2) years from actual takeover
by the receiver.
Unclaimed Deposits: include credits/deposits of money, bullion,
security or other evidence of indebtedness of any kind, and interest
thereon with banks, buildings and loan associations, and trust
corporations, as hereinafter defined, in favor of any person known
to be dead or who has not made further deposits/withdrawals
during the preceeding 10 years or more.
Can the maximum amount be adjusted?
Yes, provided the following are complied with:
1. MB has determined that there is a condition that threatens the
monetary and financial stability of the banking system that may
have systemic consequences;
2. The adjustments are approved by a unanimous vote of the
BOD of the PDIC in a meeting called for the purpose and
chaired by the Secretary of Finance;
3. The adjustments are approved by the President of the
Philippines.
Joint Accounts: It is insured separately and independently.
Before, when a bank is ordered closed, all deposits of a person in
different accounts in different banks will be collated. In the present
law, joint accounts are insured separately. So it is P500k per sole
bank account per bank, and a total of P500k for all joint accounts
combined per bank.
Definition: A joint account is an account in the name of two
or more persons. It is indicated by the words “and/
or” (survivorship account, each can withdraw on his own)
and “and” (all depositors required to sign withdrawal slip).
Kinds of Joint Accounts:
1. And – all depositors must sign the withdrawal slip
2. And/or or survivorship accounts – withdrawal may be
made through the signature of one or all
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Under the law, deposits in joint account are presumed co-owned in
equal parts unless the contrary is proved.
Example 1:
Sir
Sir + Wife Joint Account
Sir + GF Joint Account
Amount Recoverably by Sir
Example 2:
Sir
Sir + Wife Joint Account
Sir + GF1 Joint Account
Sir + GF2 Joint Account
Amount Recoverably by Sir
Purpose of law: Because of the bankruptcy of the Central Bank,
the Bangko Sentral was created, having a corporate existence and
is controlled by a board, the Monetary Board.
Composition of MB (7 members)
490k
1. BSP Governor. The BSP Governor has a term of 6 years,
500k except when it is to fill a vacancy for an unexpired term. He
may be re-appointed once for a total term of 12 years.
500k 2. Cabinet Member – depends on the President wo to send.
3. Five (5) full-time members from the private sector – so that the
990k BSP will not become a dumping ground of political lame ducks.
Private sector representatives need not necessarily be from
privately-owned private corporations. They may come from
GOCCs such as the DBP, SSS, GSIS but the appointment is
staggered for a 6-year term. They may be re-appointed once
490k for a total term of 12 years, as long as not a public officer.
500k Prohibition to join private banks – within the period of 2 years
500k from separation from the Monetary Board, neither the governor nor
the full time directors may serve in any capacity in corporations
500k under supervision of the Monetary Board (banks, quasi-banks and
investment houses), except if he would be representing the interest
990k of the Philippine Government.

Business: The Monetary Board is obliged to meet every other

week because it has to closely monitor the prices and take action.
Splitting of Deposit: Deposit account with outstanding balance of
In every meeting, there should be a quorum of at least 4. To pass a
more than 500k under the name of persons broken down or
resolution, at least 4 members should concur. If the Governor
transferred to two or more accounts in name of persons or entities
cannot attend, he should send a Deputy Governor. If the Secretary
who have no beneficial ownership in the transferred deposits in
cannot attend, he should send an Undersecretary.
their names within 120 days immediately preceeding or during a
bank-declared holiday/immediately preceeding closure order by
Functions of the BSP
MB.
1. Supervision of the banking system (including issuance of rules
and regulations)
2. Manages currency and money supply
3. Gold purchasing (including other precious metals)
4. Represent Philippine Government in international financial
dealings

What is MONEY? Any medium of exchange, anything could be

NEW CENTRAL BANK ACT money.

!12
Money vs Currency A Monetary Board Circular changed the amount of what may be
Currency is defined by law as notes and coins issued by the BSP legal tender for coins. All centavo coins are legal tender up to P100
and are in circulation. It has two qualifications: while all one peso coins are legal tender up to P1000.
1. Issued by the BSP
2. In circulation, meaning out of the BSP vaults Close Now-Investigate Later Rule
When BSP receives numerous complaints about a bank, BSP can
A note contains 2 sets of serial numbers; they are located at the
lower left and upper right. They also have 2 signatures on them, TRIVIA
one belongs to the Philippine President and the other belongs to BSP prints the notes and mints the coins. Production is local but
the BSP Governor. materials are imported. Notes are not paper; they are cloth. The
cost of materials is very high.
The life of a note is estimated to be 5 years, but in Metro Manila, it
is merely 1 year. If the estimated life is over, it is withdrawn and The currency is called Peso. Its symbol is the capital letter P.
demonetized, i.e. it loses the character of money. There are 2 other countries that use Peso; they are Argentina
and Mexico. Part of Peso is called a Centavo. The sign for a
May a damaged note be replaced or accepted for deposit? Centavo is the small letter c.
Yes, it may, but it must fulfill the following requirements:
1. if damaged, there must be at least 3/5 of the note present close bank first then investigate later. This is a valid exercise of
2. it must have at least one set of complete serial numbers police power because banking is imbued with public interest.
3. it must have at least one signature present
4. there must be no intentional defacement (this is a crime).
BSP issued a circular for banks not to accept for deposit or
replacement notes showing intentional defacement.
LETTER OF CREDIT
Governing law: Code of Commerce, which deals with merchants
Coins have a much longer existence. Damaged coins may also be
replaced if there is no sign of filing, clipping, or perforation because
Definition: L/C
metal content would be diminished. Ideally, the amount stated is the
• It is a letter addressed by a merchant to another merchant to
total cost of making coins; however, Philippine coins are worth
enable the person names in the letter to attend to a commercial
more than their stated value.
transaction.
• A form of bank facility or accommodation to enable persons to
In case of possession of damaged coins, the possessor is
have a commercial transaction where the buyer is assured of the
presumed to have caused the damage.
delivery of the goods he is buying and the seller is assured of
payment (Bank Letter of Credit).
The year in front of a coin is the year it was minted.
What is a COMMERCIAL TRANSACTION?
LEGAL TENDER
It is buy and sell.
Currency in such quantity prescribed by law or regulation to be
accepted in payment of all obligations.
Who is a MERCHANT?
He is a person, natural or juridical, having the capacity to engage in
All Philippine notes are legal tender for all obligations. However,
commerce and regularly engages in it.
coins are legal tender only up to a certain amount.

!13
 “Regularly engages” means habitual, not necessarily a big
volume of transaction.
If a natural person:
1. At least 18 years of age (age of majority)
2. With the capacity to enter into contracts of sale
If a juridical person - partnerships and stock corporations
1. Organized according to law
2. SEC Certificate of Registration (for corporations)
3. Regularly engaged in commerce
Persons involved:
1. The sender or maker, who is a merchant - becomes obliged to
addressee
2. The addressee, who is also a merchant, and
3. The beneficiary or person named in the letter, who may or may
not be a merchant - becomes obliged to maker
Requirements for a Letter of Credit
1. The person to whom credit is extended is stated. It must not be a
bearer instrument.
2. The amount or maximum amount of credit to be extended to that
person shall be stated. It must not be an open L/C. Addressee
must not have the discretion as to how much is to be given under
the L/C.
If the requirements are not met, it is called a Letter of
Recommendation (maker incurs no liability). A letter of credit
cannot be in negotiable form. It must be non-negotiable because
the maker incurs liability.
Why is there a need to specify the beneficiary? Why not just
bearer or order?
Because of obligations to each other.
Kinds:
1. Domestic - all parties in the same country; good for 6 months
(must be transacted within said period or 180 days). It involves 3
independent contracts: buyer-seller, buyer-bank. Bank-seller
2. Foreign - different countries; good for 12 months. Involves 4
independent contracts: same as domestic plus domestic bank-
foreign bank. Requires correspondent bank of foreign bank
(NOTE: all domestic commercial banks have tie ups with foreign
commercial banks)
Who issues L/Cs: Commercial banks as a general rule are
allowed to issue letters of credit, but Monetary Board may allow
other banks to issue Letters of Credit.
How do L/Cs work:
1. Buyer and seller are insecure
2. Buyer goes to the full service branch of a bank to open a L/C in
favor of the seller
3. Bank requires a marginal deposit, the amount required by
banks to be deposited to it for the purpose of opening L/C
4. Bank remits the amount to the seller only after the seller presents
proof of delivery
Example
BPI QC requests BPI Cebu to open a L/C in favor of a seller in
Cebu.
BPI Cebu communicates to the Cebuano seller to ship the goods
and upon proof of such delivery, BPI Cebu will pay him. Shipper
thus ships the goods and the shipping company issues a bill of
lading. If the goods are delivered to the common carrier and it
issues a B/L, it is considered as delivery to the buyer.
BPI Cebu gets the B/L from the seller, pays the seller, forwards the
B/L to BPI Manila.
Buyer pays BPI Manila, claims the B/L, and receives the goods
under the B/L from the carrier.
What is the benefit of L/Cs to banks?
Service fees and interest on advance.
Example: Purchase price is P200k. The marginal deposit required
is P120k, from which the bank advances P80k to the seller. Interest
on the P80k advanced by the bank is payable by the buyer to the
bank.
What is a Letter of Credit - Trust Receipt Line?
A trust receipt is a receipt with undertakings. In lieu of a 100%
marginal deposit, the buyer has the option to execute a Trust
Receipt in addition to the marginal deposit. Under the Trust
Receipt, the bank releases the B/L to enable the buyer to acquire
!14
the goods which he would sell and either (a) use the proceeds
thereof in paying the bank within a stipulated period, and/or (b)
return the goods unsold.
TRUST RECEIPTS
• A receipt with undertakings
• In a trust receipt transaction, the entruster, entrusts those goods
to the entrustee so that the entrustee may sell those goods and
remit the proceeds of the sale to the extent of the amount owed
within the stipulated period. If the amount owing to the entruster
has not been met within the period, the entrustee is to return the
goods not sold.
• Trust receipts are issued to guarantee debts due to failure to pay
the amount bank advanced in the Letter of Credit.
Undertakings of the Entrustee
1. To sell the goods and from the proceeds of the sale, remit the
amount owing to the entruster within the period stipulated. The
proceeds mentioned include the profits as long as there is still an
amount owing to the entrustee.
2. If the amount owed cannot be remitted, to return the goods within
the period.
Parties to a T/R
• Entrustee
• Entruster, who has security interests over the goods, instruments,
and/or documents e.g. holder of a B/L which is a document of
title.
SC: In a TR, the entruster is the theoretical owner of the
goods as he advanced the full payment of the goods.
Why is there a need for the Trust Receipts Law?
The bankruptcy of banks became rampant from their failure to
collect from borrowing importers who did not remit any amount to
the banks after they have claimed the goods. The P.D. regulating
trust receipts was made to protect the banking system. The P.D.
requires the entrustee to insure the goods against all risks.
Consequence of the Entrustee’s Failure:
The TR Law explicitly provides for criminal liability and requires the
entrustee to insure the goods against all risks. If a corporation, the
person who signed the TR is liable.
When a document has the same stipulations as a promissory note
along with undertakings present in a trust receipt, then it is still
considered a trust receipt.
In banks, the transaction is often called an L/C-T/R line because of
the interrelation of the two transactions.
CREDIT INSTALLMENT SALES
It is the use of TR but is not a trust receipt by provision of law
because the buyer did not intend to sell the goods sold, but to use
it. Entrustee incurs civil liability only. 


NOTE: Trust receipts may be between individuals.

Effect of Returning Goods to Entruster

• The entrustee has the option of returning all of the goods to the
entruster if the due date is near and he has not sold the goods to
avoid a prosecution for estafa. In this event, the bank would be
the one to sell the goods and deduct the proceeds from the debt
of the entrustee.
• Returning the goods does not extinguish the obligation to pay the
amount advanced by thebank.

!15
 COMMON CARRIERS
Definition: A common carrier is a person, natural or juridical, who
is regularly engaged in the transportation of goods, passengers, or
both, offering its services to the public for a fee.
Elements
1. Transporting goods, passengers, or both
2. Offering service to the public
3. For a fee
The common carrier is at liberty to transport what they want.
What is the “public”?
It is not necessarily the general public; it may merely be a narrow
segment of the public, e.g. school bus operator is a common
carrier; pipeline is also considered a common carrier, transporting
fuel, and its clients are Shell and Caltex.
Do you need a motor vehicle? NO.
Importance of Classification: The diligence required of a
common carrier is extraordinary diligence (ED)
CARRIAGE OF GOODS
When to exercise ED:
GR: Extraordinary diligence is to be exercised when the goods are
unconditionally placed at the disposal of the common carrier, until
the goods shall have been delivered to the consignee or until
consignee has been informed of arrival of the goods and given a
reasonable opportunity to claim the goods.
NOTE: Reasonable opportunity is dependent upon the
circumstances.
Exception: When the shipper exercises the right of stoppage in
transitu.
In case of stoppage in transit, what is the relationship of the
common carrier to the shipper?
The common carrier is merely a bailee, where the diligence
required is only that of a good father of a family.
Exception to the exception: Extraordinary Diligence if the shipper
asks for delivery back to himself.
NOTE: If transported gratuitously, stipulation of no liability is valid
(considered a private carrier)
Is the common carrier an insurer of the goods?
No, the common carrier is not an insurer against all risks related to
transportation.
When may the CC avoid liability for loss or damage to goods?
1. When the proximate and only cause is a storm, earthquake,
lightning, or other natural calamity.
2. When the proximate and only cause is an act of a public enemy
in times of war, whether civil or International.
3. When the proximate and only cause is the character of goods or
a defect in the container or packaging.
4. When the proximate and only cause is the act or omission of the
shipper himself.
5. When the proximate and only cause is the order of a competent
public authority.
REQUIRED: There must be no unnecessary delay in the
prosecution of the voyage. The carrier should not have committed
an improper deviation. The diligence required is still extraordinary
diligence. (BUT, according to NCC 1739, it is only Due Diligence)
Deviation: it is only proper when it is to save human life. Improper
deviation occurs when used to save goods.
If not one of these five occurred, might the carrier excuse itself
from liability?
Yes it may, but it is the obligation of the common carrier to prove
that under the circumstances, it exercised extraordinary diligence.
The burden of proof is on the common carrier.
May a common carrier and shipper validly stipulate on a
standard of care less than extraordinary?
Yes, but it must conform to the following requirements:
!16
1. Must be in writing and signed by both parties
2. It must be supported by consideration other than to transport
(e.g. discount or promise of carrier to provide discount in fare)
3. The stipulated standard of care must not be less than that of a
good father of a family
4. If there are other stipulations, they must be fair and reasonable
There are two presentations in a bilateral contract to transport. With
respect to the carrier, its presentation is the promise of the shipper
to pay the fare. With respect to the shipper, it is the promise of the
carrier to transport the goods.
Standards of Care:
1. Utmost diligence of a very cautious person (transportation of
person)
2. Extraordinary diligence (transportation of goods)
3. Good father of a family
NOTE: There is no name for the standard of care in between
extraordinary diligence and that of a good father of a family.
The shipper also has the obligation to minimize damage to itself.
CARRIAGE OF PASSENGERS
When should diligence start?
When the carrier agrees to take in the person as a passenger.
May the passenger and the carrier stipulate a lower standard
of care? NO.
Is a common carrier insurer against all risks?
No, it is not, BUT in case of mechanical defects or when a common
carrier violates a traffic rule, the common carrier is always liable.
Employees’ Negligence: The common carrier shall be
liable for acts or omission of its employees although said
employees may have acted without or in excess of their
authority (Vicarious Liability)
Stranger’s Negligence: For acts or omissions of other
passengers or third persons, if the common carrier could
have prevented death or injury by merely exercising the
diligence of a good father of a family and it failed to do so,
the carrier is liable.
When may a common carrier be liable for moral damages?
In the following instances:
1. Death of passengers - in favor of the compulsory heirs (excluding
siblings)
2. When passenger suffers physical injuries (awarded only to the
injured)
3. When the common carrier acts in bad faith
4. When employees of common carrier were discourteous to
passengers
5. When common carrier has discriminated against passengers
A common carrier is liable for moral damages against a waitlisted
passenger whose number is called, given a boarding pass, allowed
to proceed to the pre-departure area but not allowed to board.
CARRIAGE OF GOODS BY SEA ACT
Background
The COGSA is a law of American origin; it was made part of our
laws during the American occupation.
In case of conflict between the Code of Commerce and the
COGSA, the former prevails due to specific provision in the
COGSA.
Scope of COGSA (imported goods)
It covers the shipment of goods by sea coming from another
country into the Philippines. The shipment of goods must be
covered by a B/L.
It is not applicable to:
1. Inter-island or coast-wise shipping (Code of Commerce)
2. Shipment of livestock
3. Those not covered by B/L
!17
4. Before, COGSA does not apply also to shipment of goods on
deck. But NOW, there is no more transportation on deck because
goods are transported only via containers.
Salient Features
• Time of filing claims with carrier
❖ Apparent loss or damage: File it right away, immediately with
the carrier
❖Not apparent: within 3 days from delivery
NOTE: Under general law (Civil Code and Code of Commerce), the
claim must be filed right away if the damage is apparent; if it is not
apparent, it must be field within 24 hours from delivery (Code of
Commerce).
• Actions of the Carrier on the Claim
❖Settle it right away
❖Not to act on it
❖Reject the claim
What is the remedy of the consignee in case of rejection?
If the claim is denied, the claim should be filed in court within 1 year
from the delivery of the goods by the common carrier to the arrastre
operator. This is because the transfer of the goods from the carrier
to the arrastre is documented in a tally sheet after an ocular
inspection by the arrastre operator. When the arrastre receives the
goods, it inspects the goods and lists the defects in the tally sheet.
If there are defects found, they are formalized in the Bad Order
Form.
Is the filing of a claim with the common carrier a condition
precedent to recover from the carrier by complaint in court?
Under COGSA, no, it is not required. But under the Code of
Commerce, it is a condition precedent and thus constitutes the
cause of action.
When goods are insured and turned over to the arrastre
operator and loss or damage is determined, where and when
should the claim by the insurer be filed?
Claim of the consignee must be filed with the insurer also within
one year from delivery to the arrastre operator. The insurer merely
surrogates and steps into the rights of the insured. Claim can be
filed in court without filing claim with carrier.
If the insurer did not act on the claim of the insured until after
1 year, can it involve prescription?
No. Prescription between the insurer and the insured is as stated in
the insurance policy or Insurance Code.
What if the goods are not annotated as damaged in the tally
sheet or bad order form upon turnover to the arrastre, but the
goods are damaged upon turnover by the arrastre to the
consignee?
The suit should be against the arrastre on the basis of quasi-quasi-
delist because there is no pre-existing contractual relation between
the arrastre and the consignee.
If the goods are insured but no claim is made by the insured
against the insurer within 1 year from delivery of goods, is the
claim against the insurer barred after one year?
NO.
What if there is no damage annotation on the tally sheet, and
the customs broker received the goods from the arrastre, but
upon delivery by the customs broker to the consignee, there is
damage which is not annotated on the delivery receipt?
Sue the broker on the basis of breach of contract of carriage,
because the customs broker is a common carrier. The ruling is that
a customs broker who offers to transport goods to client as part of
services qualifies as a common carrier.
In case of missing goods, or if the vessel arrives but the
goods are not off-loaded, when should the claim be filed?
Within one year from the last day when the carrier had the last
chance to deliver the goods to the arrastre operator, e.g. before the
ship sails to another port.
If the prescriptive period is about to expire, can the consignee
extend it by sending a Demand Letter to the carrier?
NO.
Law of the country where goods are shipped shall govern liability of
the carrier.
!18

Clean tally sheet: no annotation that anything was lost or
damaged.
NOTE: A case against arrastre operator is not a maritime case. The
Arrastre operator must exercise extraordinary diligence with
respect to the goods in his possession.
ADMIRALTY
Qualifications to be a Vessel: Not every watercraft is a vessel; it
has to have the following qualifications:
1. It must not be a mere accessory to another watercraft, e.g.
lifeboat
2. It must be registered with the MARINA
3. It must be used to transport goods, passengers or both
4. It is seagoing
Who may own a vessel?
Anybody. If a vessel is owned by more than one person, there is a
disputable presumption that a partnership exists.
Hypothecary Rule
The limited liability of a shipowner.
It is the value of the vessel, plus earned freightage plus insurance,
if any.
Who participates in admiralty?
Those involved in navigation (crew) and housekeeping
(compliment)
Crew of a Vessel:
1. Captain - refers to the commanding officer of a ship that goes
abroad. The title master is used to refer to the commanding
officer of a ship that is engaged in local/inter-island travel.
A ship captain has three roles:
a. Represent the owner of the vessel
b. Be the technical director of the vessel
c. Represent the country where the vessel is registered
2. Mates (1st, 2nd, 3rd, etc.)
3. Engineers.
Contracts in Admiralty:
1. Charter party
2. Bottomry
3. Respondentia
4. Marine Insurance
Charter Party - a contract of lease over a vessel
Kinds:
1. Bareboat/demise, where the lessor provides only the vessel,
without crew, stores (things you eat), provisions (water and fuel).
2. Affreightment
3. Time-charter, or a lease for a specific term of the vessel, with
stores and provisions.
4. Voyage-charter, or a lease of a vessel for a voyage or series of
voyages, with stores and provisions.
According to the Supreme Court, the true charter is the bareboat
charter. The time and voyager charter are merely subtypes of
affreightment, which is a contract of carriage.
Ship Agent: Corporation representing the owner in every port
where the vessel may make a call or stop. The ship agent is in
charge of provisioning the vessel.
What will be the liability of a ship agent for procurement of
provisions?
A ship agent is solidarily liable with the ship owner for contracts
entered into for provisions of the vessel. This liability is different
from that of a mere agent, who is not liable if he discloses his
principal and acts within the authority given him.
Husbanding Agent: Agent in charge of freightage and settlement
of averages.
AVERAGES: in admiralty, they refer to damages suffered during
voyage.
Type of Averages:
!19
1. Gross/General Average, or damages suffered by the vessel or Examples:
owners of cargo that shall benefit not only the ship-owner but a. Natural calamity along route
also the owners of the other cargo. b. Avoidance of pirates
2. Specific/Particular Average or those that do not benefit anyone. c. Loss of provisions
d. Accident that renders the vessel incapable of
Procedure for General Average: prosecuting the voyage
1. Captain calls a meeting with the representatives of the owners of
cargo. 3. Shipwreck
2. They make a decision to throw away certain cargo.
3. If the decision is urgent, the captain may choose from the largest Is the owner of a barge a party to a contract of carriage?
and of least value proceeding to the smallest of the most value. No. Unless barge has own propeller or is self-propelled. Owner of
towing vessel is party to the contract.
Supercargoes: representatives of owners of cargoes. They sell
cargo for the owner. generally, they are only able to use profits to Three zones of time in Collision:
buy goods. If they have a special power of attorney, they may use 1. First time - anytime the danger of collision appears.
capital to buy goods. 2. Second time - from the time the danger appears until it becomes
a practical certainty.
Bottomry: Loan taken by the ship-ship-owner secured by the 3. Third time - from the time it becomes a practical certainty to
vessel. If the vessel sinks, the creditor loses the right to collect and impact.
the obligation to pay is extinguished. If loan exceeds the value of
the vessel, the excess is an ordinary loan. DOCTRINE OF INSCRUTABLE FAULT
If there is a collision of two vessels and it cannot be determined
Respondentia: Loan taken by the cargo owner and secured by the who is at fault, each bears his own loss. However, both ship-
cargo. If loan exceeds the value of the cargo, the excess is an owners are solidarily liable for the damage to all cargoes.
ordinary loan.

Marine Insurance: Insurance over the vessel or freightage,

cargoes or profits expected from cargo.

Accidents in Admiralty:
1. Collision, or the impact of two or more moving vessels.
As opposed to Allision, the impact of one stationary and one
moving vessel.

2. Arrival under stress or when a vessel is forced to sail to the

nearest port.

What is the obligation of a ship captain in arrival under

stress?
The captain must execute a MARITIME PROTEST, a sworn
statement where the captain relates what transpired.

!20
 WARSAW CONVENTION Why are liabilities fixed?
Because of the different ways to assess damages for injuries or
loss of goods.
It is an agreement among sovereign nations for:
1. Having uniform documents in international air transportation, What to do to claim the full amount?
2. Fixing the liabilities for international air carriers because of 1. Declare the value
different currencies and laws. 2. Pay fare according to the value
Who are the parties?
The signatories are referred to as HIGH CONTRACTING PARTIES
(sovereign nations that participated). The Philippines was not an
original party because at the time, it was not yet a state and it had
no aircraft. Philippines was a party by accession to the US.

INTERNATIONAL AIR TRANSPORTATION:

• One where the port of origin is in one country and the port of
destination is in another.
• One where the port of origin is in one country and the port of
destination is in the same country but the agreed stopping place
is in another country. This often occurred when there were
multiple colonies, e.g. LA (US) - Tokyo (Japan) - Guam (US). The
stopover must be part of itinerary.
• Movement of goods by land or water to the aircraft.

What documents must be uniform:

1. Passenger Ticket, issued by the carrier
2. Baggage Check, the white strip of long sticker with a bar code
3. Airwaybill, it is a B/L

Currency of Indemnity: US dollars, as decided at Guatemala

Protocol (NOTE: Guatemala Protocol has not yet been ratified by
Philippine Senate as of 2018)

What are the fixed liabilities of the carrier?

1. Death of a passenger: $100k (fixed), no questions asked
2. Physical injuries: $100k maximum, depending on the severity of
the injury
3. Checked-in articles: $1k maximum per kilo, regardless of weight
and value
4. Hand-carried articles: $1k maximum, regardless of weight and
actual value

!21
 PUBLIC SERVICE
Who may render public service?
Only Filipino citizens or corporations with at least 60% ownership
by Filipino citizens
Grandfather Rule: Control test where the citizenship of the
corporation owning another is taken into consideration in
determining the 60% Filipino ownership
Who regulates public service?
Different government agencies: DoTr, LTFRB, Civil Aviation Board
(CAB), Maritime Industry Authority (MARINA), LGUs
Example: Boundary System where the driver pays an amount to
the operator of a jeep for use of the motor vehicle for an agreed
period.
NOTE: According to the SC, there is an employer-employee
relationship between the driver and the operator by reason fo the
control test.
OLD OPERATOR RULE: If someone is already rendering the
service, it must first be allowed to offer to add the same service.
(NOTE: No longer applicable)

How to engage in public service:

1. Application by petition
2. Hearing
3. Issuance of a CERTIFICATE OF PUBLIC CONVENIENCE, a
written authority issued by the government regulator to enable
persons to engage in public service.

Difference with CERTIFICATE OF PUBLIC CONVENIENCE AND

NECESSITY: Latter authorizes public service for which service a
legislative franchise is required because franchises are no longer
exclusively legislative.

Requirements or Qualifications to engage in PS

1. Filipino citizenship
2. Willingness to engage in PS
3. Financial capacity - why:
a. Acquiring equipment to engage in PS
b. Settling damage claims (payment of liabilities)

KABIT SYSTEM - it is an illegal manner of engaging PS by doing it

through others where it does not itself possess of the qualifications.

PRIOR APPLICANT RULE: If two or more persons apply to render

the same public service, the one who first filed the application
should be granted authority. (NOTE: this rule is no longer
applicable)

!22
 FOREIGN INVESTMENTS ACT
Purpose of law: to encourage and entice foreign investments to
bring in more foreign currency. It was formerly illegal for
transactions to be paid in foreign currency or in relation to foreign
currency.

Salient Features
• Foreigners can own 100% of any enterprise related to exports so
long as it is not covered by Negative List A & B
• Negative List A. Activities reserved by the Constitution or other
special laws to Filipinos, e.g. advertising, public service
• Negative List B. Activities that are exclusively for Filipinos, e.g.
those relating to ammunition and firearms (unless the Secretary
of National Defense consents), pyrotechnics, nightclubs,
beerhouses, steambaths, and massage parlors.
• Inward Remittance: A foreigner may also own 100% of a
domestic market enterprise if the foreigner remits and makes an
investment worth $200k or equivalent, but not in areas where
there are health-related risks, e.g. bars, beer houses, massage
parlors, sauna baths, dancing halls.
EXCEPTION TO $200K REMITTANCE:
• If the enterprise advances technology, as determined by the
DOST and hires more than 50 Filipino employees; the
investment must also be no less than $100k; or
• If the alien is a former natural-born Filipino, then he is allowed
to own urban properties with an area of 500 sq.m., or rural
properties up to 3 hectares. If both spouses are formerly
natural-born Filipinos, their total lands must not exceed the
above-stated land areas, and the land acquired must be in
different locations.

Filipino Corporations
a. Domestic corporations must be at least 60% owned by Filipinos
b. Foreign corporations must be 100% Filipino owned

!23
 INTELLECTUAL PROPERTY CODE
Governing Law: Intellectual Property Code. It is a compilation of
old laws on patent, copyright, trademarks, trade names, service
names, service marks. The Code is administered by the Intellectual
Property Office. The head is the Director-General, who must be at
least 40 years of age and a lawyer. The term of the Director-
General is 5 years, eligible for a single re-appointment. however,
the first Director-General appointed has a term of 7 years without
re-appointment.
Kinds of Intellectual Properties:
1. Patents
2. Copyrights
3. Industrial Designs
4. Layout or Topography of Integrated Circuits
5. Trademarks and Tradenames
6. Geographic indication
7. Trade-related Aspects of Intellectual Property Rights (TRIPS)
PATENTS
Definition: It is issued upon an invention, granting the exclusive
right to mass produce or license the mass production of the
invention.
e.g.: X tripped and fell on carabao grass, face first and discovered
its magical effect on pimples. This cannot be patented because it is
merely discovered without any inventive step. BUT IF X first tried
guava leaves, then malunggay leaves, then garlic, then chili, and
then flour to make a paste to cure pimples, then such involved an
inventive step and is thus patentable.
EXCEPTION: Microorganisms, e.g. those which improve the
digestive process or eat garbage.
What is INDUSTRIAL APPLICATION?
The invention develops a new industry or an existing one for mass
production of the invention. It could lead to development of new or
existing industry.
What are not patentable inventions?
1. Those contrary to law, e.g. substitutes for shabby or prohibited
ingredients
2. Those contrary to morals or public order or public health,
e.g. vibrator which moves back and forth at different speeds.
HOWEVER, though these may not be patentable, they may be
mass produced because their mass production is not prohibited
by law.
3. Mere concepts or ideas, e.g. sound makes people move
4. Mathematical solutions (including scientific formula and theory)
5. Surgical procedures, e.g. horizontal cut for caesarian birth.
HOWEVER, the gadgets used are patentable.

What are patentable inventions? To whom are patents issued? (NOTE: entitled to patent as soon
1. New as invention is made)
2. Involves an inventive step 1. Inventor
3. Capable of industrial application 2. Co-owners, if two or more invented it together UNLESS there is
an agreement to the contrary
What is NEW? 3. One who first files an application IF the invention was arrived at
It is new if it is not part of prior art and if it is a different technology, by two or more persons individually and independently (First to
e.g. heat-operated microphone File Rule)
4. Employer if the employee-inventor was hired to work on the
What is an INVENTIVE STEP? invention, UNLESS there is an agreement to the contrary. e.g,
GR: It involves an inventive step if it is not just newly discovered chemist is hired by AVON to work on makeup products.
but involved a process of trying this and that until one finds what 5. Employee-inventor IF he was hired to do something else, though
works. he made the invention during his working hours and used

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 resources of employer, e.g. security guard invented something ✓Or its current mass production cannot meet the demand for the
while on duty. product.

What is the advantage in patenting one’s invention? Is any unauthorized copying of a patented article an
It is only the patent holder who gets the exclusive right to mass infringement?
produce the invention or to license the same. NO. The following do not constitute infringement:
✓Personal and exclusive use (copied for instruction or research)
How do you know if an invention is already patented? ✓Use by the government, BUT it must pay royalties
The patent symbol “P” and number are already in the invention ✓Research and development
itself.
INFRINGEMENT UNFAIR COMPETITION
How long is the duration of a patent?
20 years from the filing of the application. Unauthorized copying Copying a product of another
How soon does the applicant get the patent? Only God knows and passing them off as one’s
own. This is a felony under the
What are the KINDS OF LICENSING? RPC.
1. VOLUNTARY, or by agreement between the patent holder and
the licensee. Patent must be registered. Product may not be patented.
Can the holder just impose anything? No, there are prohibited
stipulations and the list is not exclusive. The list includes the
number of products produced; prohibition on export; limit on the
price of sale; source of raw materials, which must be a person What are the remedies of a patent holder against
nominated by holder; hiring of employees which must be infringement?
recommended by the holder; any other. These are prohibited 1. Civil: injunction and Actual Damages (Royalties)
because of the great moral ascendancy of the holder over the a. Prove actual damages. This is not easy, so just ask for
applicant. royalties.
b. Ask for royalties.
What is the right of a patent holder in the license? 2. Criminal: ONLY IF the infringement is repeated
ROYALTIES. These are not in any amount because the IPO
prescribes the amount and computation. NOTE: Patent can be sold separately from finished product
(patented product). Sale of finished product will not make buyer
NOTE: Patent and the patented article are two different co-owner of patent.
properties that must be dealt with separately.

2. COMPULSORY
How: A person applies with the IPO for a license to mass INDUSTRIAL DESIGN
produce a patented article. Proceedings are then held before the
IPO. The licensee would still be liable for royalties. Definition: It is a compilation of lines, or of colors, or of lines and
colors. Lines need not be straight.
When:
✓When the patented article is food or medicine e.g., shirts with stripes; floral designs; Burberry and Louis Vuitton
✓And it is not being mass produced despite demand for it

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Duration of protection: 5 years, renewable twice for 5 years
each. Total of 15 years.
LAYOUT OR TOPOGRAPHY OF
INTEGRATED CIRCUITS
What: The pattern of a mother board is intellectual property.
Includes the way circuits are linked and electronic marks in
electronic products.
GEOGRAPHICAL INDICATION
Identified by place of origin, e.g. bangus from Dagupan.
TRADE NAMES
Definition: the name that a person gives to his products to identify
them and to distinguish them from the products of others. It may
be a trademark at the same time.
Duration of protection: 10 years, with limitless renewals. But
after five years, the owner must file an affidavit of use (Declaration
of Actual Use) of the Trademark or Trade name with the IPO over
the past period.
How is it different from a BUSINESS NAME: A business name
is the name that a person uses to identify his place of business. It
is governed by the Business Names Law. If using a business
name different from true name, you register with the DTI, Bureau
of Domestic Trade. There is a need for a public record of who
owns businesses in order to know who to sue. This is needed for
signs or printed documents, e.g. ORs, etc. Registration is for 5
years (renewable).
TRADEMARK
It is a sign, emblem, or mark that a person uses to identify and
distinguish his products from that of others.
SERVICE NAME / SERVICE MARK
It is the name, sign, emblem, or mark that is used to identify
service (e.g. Good Year Servitek, Rapide). It covers both things
and services.
Why do you need to register trademarks or trade names?
To enjoin the use by others or to file a suit for infringement.
Certain Rules
• Exclusivity: Once a TM or TN is registered in the name of a
person, no other person may use a similar or confusingly
similar name or mark in connection with a similar or closely-
related product. e.g., You can’t use Del Monte in connection
with foodstuff but you can use it for underwear.
• Trade names may be trademarks at the same time, but both
must be registered to be protected. e.g., Selecta is a trade name
and how it is packaged is a trademark.
• Trade names and marks include service name and mark
• Taste is NOT protected
• First to File System; prior use is not required EXCEPT in certain
cases.
DOCTRINE OF COLORABLE IMITATION
Under this doctrine, there is colorable imitation when a person
gives his product an appearance that is similar or confusingly
similar in appearance to the product of another calculated to
make the ordinary buyer believe that his product is the same as
the product of another.
Mj: under jurisprudence, it is such a close or ingenious
imitation as to be calculated to deceive ordinary persons or
such a resemblance to the original as to deceive an
ordinary purchaser giving such attention as a purchaser
usually gives, as to cause him to purchase the one
supposing it to be the other.
Who is an ordinary buyer?
Buyer relying on the general appearance, images, and color
combinations of products.
Examples:
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1. Bottles of Del Monte are patented. One case involved the
Sunshine brand of ketchup that used the bottles of Del Monte Why do we have this doctrine: Because not all names are
because the owner of Sunshine could not afford to make his registrable.
own bottles. The manufacturer replaced the labels of the bottles • Geographic word or names
but the labels had the same color combination. Add to this the • Generic words
fact that the bottles had markings that they were products of Del • Merely descriptive
Monte. It was not ordinary buyers that were misled but also • names, signs, or portrait of past Presidents, UNLESS the widow
those that read the labels. consents
• Flags and simulations
2. Beer na Beer Case. In the 70s, Asia Brewery created Beer na • Coat of arms and simulations
Beer (Beer housen) that had the same taste as San Miguel • Immoral words
(pale Pilsen), but Asia Brewery also used the same shape of
bottles. The Supreme Court held that there was no unfair
competition, applying the holistic test. The beer of AB could not
be mistaken for san Miguel because the prices of the former are
COPYRIGHT
cheaper.
Scope: Other intellectual creations, such as books, musical
compositions, adaptations, song lyrics, melodies, photos,
TWO TESTS TO DETERMINE INFRINGEMENT:
computer programs, and slogans.
1. Dominancy Test - when the prevalent features are likely to
confuse one product with another. To determine whether there
NOTE:
is possible confusion between products, look into the dominant
• Copyright is one property and the copyrighted work is another
features.
property
2. Holistic Test - consider not just the prevalent features, but also
• There is copyright for the lyrics and another for the melody in
other factors. Even if there is similarity, there is likelihood that
songs
they will not be confused with each other.
• Adaptation of musical compositions are works patterned after
the works of others
Example of Dominancy Test
• Patterns of TV and radio programs are not copyrightable
1. Converse vs Custom-built - both shoes use the same star logo
2. Alaska All Purpose Milk vs Alacta infant Preparation - not likely
Who owns copyright
to be confused with each other because each is used for
1. Intellectual creator
different purposes. One if infant formula, the other is cow’s milk.
2. Co-creators IF 2 or more persons created the same, UNLESS
there is an agreement to the contrary. There is no first to file
Examples of NOT CLOSELY-RELATED PRODUCTS
doctrine due to impossibility of making the same intellectual
Del monte in shoes.
creation.
Esso in cigarettes.
3. Employer IF the person is hired to do intellectual creation,
UNLESS there is an agreement to the contrary.
DOCTRINE OF SECONDARY MEANING
4. Employee IF he is hired to do another thing, even though done
When a name is used so long and so exclusively to identify a
during work hours and using employer’s resources
product, that whenever the name is mentioned, reference is
5. Commissioned person: if a person is commissioned to create
readily made to said product, although the name is not registered
intellectual property, the work belongs to the commissioner
because it is not registrable, no other person may use that name
while the person commissioned owns the copyright, UNLESS
in connection with a similar or closely related product.
there is an agreement to the contrary.

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Is registration required for protection? NO. it follows the first-
to-use system, not the first-to-file rule.
DURATION OF COPYRIGHT: Copyright is protected from creation
and lasts until the lifetime of the copyright holder and 50 years
from his death (which is counted from the first day of the year
following his death). If a person wants copyright protected, within
30 days of becoming public, register the work.
NOTE: Copyright registration is purely for recording the date of
registration and deposit of the work shall not be conclusive as to
copyright ownership or the term of copyrights or the rights of
copyright owner, including neighboring rights.
Advantage of Copyright: Copyright cannot be attached while it
belongs to the intellectual creator. however, when transferred to
another, it may be levied. This is different from patent, which can
be attached even if owned by the intellectual creator.
RIGHTS OF COPYRIGHT HOLDER
1. A copyright is an economic right. Duration is lifetime of
copyright holder plus 50 years from his death. Economic rights
include:
a. The right to mass produce the work or to license it;
b. The right to make other versions of the work.
2. A copyright includes moral rights or the right of the owner to
demand that his authorship be acknowledged and in a certain
manner of presentation. If there are errors, he can demand
rectification of the errors. Duration is perpetual.
REMEDIES AGAINST INFRINGEMENT
• Civil action for injunction and actual damages. If proven,
damages are royalties
• Criminal prosecution. Repetition of infringement is not required.
The very first act of infringement is already criminal. But for the
prosecution of privacy, the original is required. The law provides
for the destruction of printed materials, plates and stencils.
Are there acts of copying that are not infringing? YES
1. Personal use, one copy only
2. Quotations of portions from books, with acknowledgment
3. Fair use of legitimate computer programs, e.g. one computer,
one program (Fair Use Rule)
4. Libraries with old books may reproduce these books so long as
they are no longer being published. however, this is only for the
library use and not for resale.
5. Rebroadcasting, which is only a simultaneous broadcasting.
Whom do our intellectual property laws protect?
The following:
1. Citizens, nationals
2. Residents with an effective establishment
3. Residents of a c country that participated in an international
convention where the Philippines also participated
4. Citizens of countries that offer reciprocal rights to Filipinos
May foreign corporation, not registered with the SEC as a
foreign corporation, sue in our courts for the protection of
intellectual property rights?
Yes, Philippines is part of Paris Convention for Protection of
Intellectual Property Rights (NOTE: as long as there is reciprocity)
CONCEPTUAL SEPARABILITY:
It is a test to determine if a design is a useful article can be
protected by copyright. If the design can be perceived
independently and separately from the useful art, the design can
be protected by copyright.
DENICOLA TEST
If design elements of an article reflect a merger of aesthetic and
functional considerations, the artistic aspects of the work cannot
be conceptually separable from utilitarian aspect; thus the article
cannot be copyrighted.
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 INSURANCE LAW
Definition
Insurance is a contract whereby one person, known as the
insurer, agrees to indemnify another person, known as the
insured, against loss, damage or liability arising from an unknown
or contingent event.
ASSURANCE: It is a life insurance initiated by the beneficiary
himself.
PARTIES TO AN INSURANCE:
1. Insured
2. Insurer
3. Assured (beneficiary)
CHARACTERISTICS of an insurance:
1. Aleatory contract. It involves the assumption of risks
2. Indemnity contract. It is not a wagering contract where one
invests and hopes to profit. In insurance, one invests to be
restored to the same status prior to the risk happening. The
insured does not expect to profit.
3. Risk-distributing. It is not a risk-shifting device as guarantees or
suretyships.
Insured does not expect to profit:
Example: A new car is insured against theft so that in case of loss,
the insurer gives the insured money to acquire another car.
In life, the money is given not to buy another person but to divert
and assuage the feeling of loss.
REINSURANCE
The insurer insures the same risk with another, e.g. your life is
insured with A for P10M. Then A finds out that you are entering
politics, and thus the chances of dying increased. A thus goes to B
to reinsure your life for P6M. Thus, when you die, A pays only P4M
from his own funds, while B pays for P6M.
If the insurance company is bankrupt, can the beneficiary
claim from the reinsurer?
It cannot, because there was no privity of contract. However, the
beneficiary may still file with the bankruptcy court because the
claims against the reinsurer are part of the receivables of the
corporation. The reinsurance will be part of the bulk of assets of
the insurance and be distributed according to the Civil Code
provisions on preference of credits.
Who may be an INSURER?
1. GR: Only CORPORATIONS may be insurers, NOT individuals
or partnerships.
E: Insular Life - previously a limited partnership but now a
mutual benefit company (members of which are the insured)
Why: In cases of individuals or partnerships, they may
predecease the insured.
2. Certificate of Authority (a yearly license) must be obtained from
the Insurance Commissioner (IC). The insurer must first obtain
a clearance from the IC, who will issue a formal endorsement of
incorporation papers to SEC. the Insurance Commission
prescribes a minimum paid-up capital for insurers. By 2016, the
minimum paid-up capital required for both life and non-life
insurance is P1B. (NOTE: Certificate of Authority is also issued
to insurance salesperson)
Who may be INSURED?
Anyone with an insurable interest in the thing or life insured.
What is INSURABLE INTEREST?
A person who has such a relationship to the thing or life insured
that he will benefit from its preservation or damnified by its loss or
destruction.
Kinds of Insurance
• Property or non-life, insurance over a thing
• Life, over a human life
Insurable Interest in Property Insurance
1. Existing right, e.g. mortgageee
2. Expectancy founded on an existing interest, e.g. purchaser of
crops
3. Inchoate right founded on an existing right, e.g. shareholders of
a corporation
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When must insurable interest exist in Property Insurance?
At the time of taking the insurance and at the time of loss. EVEN
IF in the interim, it does not exist.
Insurable Interest in Life Insurance
1. One’s self
2. Spouse
3. Descendants
4. Another upon whom one depends for support (including
ascendants)
5. One who is obliged to pay him a sum of money or whose death
may delay the performance of an obligation, e.g. debtors,
obligators
6. Another upon whose life an estate depends, e.g. usufructuary
who sells his usufruct to another; reservist in reserva troncal.
When must insurable interest exist in Life Insurance?
At the time the insurance is taken; thereafter, it need no longer
exist.
If one is insuring a debtor, for how long is the
insurance effective?
Theoretically, there is no limit. Insurance is effective even
after payment because insurable interest in life insurance
should exist only when it is taken. however, in practice, it is
only up to the end of the obligation.
What is meant by “upon whose life an estate
depends”?
An example is when the assignee insures the life of an
assignor. Another example is in case of reserva troncal, the
life of the reservista is insured.
How does one get to be insured?
One must file an application for insurance coverage with the
insurer. The application form asks basic information and
representations.
What are REPRESENTATIONS?
These are matters truthfully stated by the application in the
application form, which information may influence the insurer in
acting on the application.
What are MISREPRESENTATIONS?
Untruthful statements on matters which may influence the insurer
in acting on the application.
What is CONCEALMENT?
It is the omission or neglect to communicate what one knows and
ought to communicate.
What is the CONSEQUENCE OF MISREPRESENTATION?
The misrepresentation [or concealment] of a material fact entitles
the insurer to rescind the policy.
Who determines materiality: It is the insurer (indirectly)
because materiality is determined by the influence which
the misrepresentation or concealment has on the insurer in
assessing the risk it is to assume.
Case of Sun Life Canada: The person applied for
insurance coverage. In the application form, there was a
question on whether or not the applicant had any
consultation or treatment with a doctor for the past two
years. It was not answered, and the policy was issued. The
insured then died from a plane crash. It was discovered by
the insurer that the insured had been previously
hospitalized for a heart condition. The policy was therefore
rescinded and refused to be paid because of concealment
of a material fact. The SC affirmed the insurer. What is
concealed or misrepresented need not be the
proximate cause of death. HOWEVER, the insurer must
refund the premiums paid.
Can the insurer rescind the policy at any time? NO. it
must be rescinded within 2 years.
What is the CONTESTABILITY PERIOD?
• As a general rule, the insurer is entitled to rescind the policy
only within two years from the last reinstatement or the
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 issuance of the life insurance policy. OTHERWISE, after
the two-year period, the insurer can no longer contest the
insurability of the insured.
• EXCEPT: in cases of FRAUD OF THE VICIOUS TYPE, the
policy may be contested beyond two years; e.g. when the
applicant for the life insurance substitutes his urine sample.
• For property insurance, the contest ability period is only during
the period for which the property is insured because the
coverage is only one year.
PROPERTY INSURANCE
What is OVER-INSURANCE?
In PROPERTY insurance, the property is insured for a value over
the value of the insurable interest. It is a void insurance as to the
excess; e.g. property is P800k worth but is insured for P1M.
Why only in property insurance: Life is incapable of
pecuniary estimation. BUT IN PRACTICE, earning capacity
is taken into consideration in determining the policies.
What is the VALUE OF THE PROPERTY? Acquisition
cost and replacement costs, estimated at the value of the
property at present.
What is UNDER-INSURANCE?
In PROPERTY INSURANCE, a person insures his property for an
amount less than the value of his insurable interest. This is valid.
The insured becomes a co-insurer, e.g. property is worth P1M but
the fire insurance taken is only for P400k. The remaining value is
self-insured by the insured, hence he is a co-insurer.
What is the effect in case of loss:
• In case of total loss, the insurer pays the amount
insured in full.
• In case of partial loss, the insurer only pays the
amount insured in proportion to the total value of the
thing insured.
EXAMPLE: Property is worth P1M and is insured for
P400k. If the loss is estimated at P200k, the amount of the
indemnity is only 40% (P400k / 1M) of P200k, which is
P80k.
What is CO-INSURANCE?
It is similar to co-ownership and exists only in practice. It can arise
in two situations: in double insurance and in under insurance (full
and partial loss).
DOUBLE INSURANCE: When the same thing and the
same interest are insured against the same risk with more
than one insurer. There are thus two or more insurers who
apportions the indemnity to the extent of the amount
agreed upon under the policy. It is valid as long as the total
insurance coverage is within the insurable interest.
(NOTE: it does not necessarily result in over insurance
because insurers shoulder the risk pro-rata)
UNDER-INSURANCE: In case of partial losses.
EXAMPLE 1: Property is worth P1M. It is insured with A for
P500k, B for P300k, and C for P200k. if there is a loss
estimated at P400k, who pays the loss? Is it A because he
insured the property for P500k? NO. the indemnity is
shared proportionally as follows:
Amount insured
x Amount of Loss
Total amount insured
THUS, the liability of:
A is (500k/1M) (400k) or P200k
B is (300k/1M) (400k) or P120k
C is (200k/1M) (400k) or P80k
EXAMPLE 2: If the property worth P1M is insured only for
P600k (under-insurance), the owner becomes a self-
insurer to the extent P400k and bears the risk of loss alone
like someone who did not insure his property. In this case,
the property owner is considered as a co-insurer.
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 EXAMPLE 3: In case of partial loss in under-insurance
where the value of the property is P1M and the loss is
P200k, the loss is apportioned accordingly:
Insurer is (600k/1M) (200k) or P120k
Owner is (400k/1M) (200k) or P80k
What are POLICIES?
A policy is the instrument embodying the insurance.
• It must be printed. What is not printed is the personal
information of the insured.
• Policies of insurers contain almost identical provisions
because drafts are pre-approved by the Insurance
Commissioner to avoid ambiguity.
• Any variation must be in writing and signed by the insurer to
be valid (endorsement).
What are the KINDS OF POLICIES IN PROPERTY INSURANCE
1. OPEN, where parties agree on the maximum amount of
insurance coverage and the premium is paid on such amount,
BUT the value of the thing insured is determined at the time of
loss. This is availed of when the prices of the object fluctuate.
2. VALUED, or when, at the start, the parties have already agreed
on the value of the thing insured; e.g. Car is valued at P1M. In
case of loss, the indemnity shall be that agreed upon.
3. RUNNING, which contemplates successive insurance contracts
where the insurance coverage over goods sold are transferred
to goods which serve as replenishment. Insurance coverage on
some things, after they have been disposed of, shall also apply
to the replacements; e.g. merchant on his inventory and
structure; grocery.
LIFE INSURANCE
What is Life Insurance: It is the policy where the insurer agrees
to pay the indemnity in case the insured dies. It includes casualty
insurance, which also insures against death, whether natural or
accidental.
What are the KINDS OF POLICIES IN LIFE INSURANCE?
1. TERM, or when the insurance coverage is for a definite period
agreed upon at the beginning. The parties agree on a period of
insurance coverage. The premium is low because it does not
have non-forfeiture values.
a. If the insured survives, the policy expires.
b. As a general rule, the surviving insured does not get
anything.
c. The exception is a contract of ENDOWMENT,
where the insured will receive the face value of the
policy if he survives the expiration of the term but he
is no longer insured. If he dies within the term, the
amount will be paid to his beneficiary.
2. ORDINARY, or when there is no term and the insured remains
insured as long as he pays the premium. The duration depends
on the contract or policy. Premiums are thus payable for as long
as the insured is alive.
a. BUT THE NORMAL LIMIT IN POLICIES IS 100
YEARS OLD! Upon reaching such age, the amount of
the policy is paid because the contract of insurance
had lapsed. As to the insurer, the insured already died.
b. There are variations of life insurance. 20 pay life is
when the insured pays for the full premiums for 20
years while pay life at 65 is when the insured pays the
premiums until the age of 65.
What are NON-FORFEITURE VALUES IN ORDINARY LIFE
INSURANCE
These are living benefits. These do not exist in term insurance
where the insured only gets the face value of the policy.
a. CASH VALUE
When: From the third year of premium payment, part of every
premium payment made by the insured is set aside by insurer for
the insured. Every year, the rate of cash value increases.
EXAMPLE: In Year 1, the premium of P20k is paid and the insured
survives. In Y2, P20k is paid and the insured survives. At this
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point, the P40k paid goes down the drain if the insured survives
because of the overriding commissions of salesmen. The case
value begins to accumulate on the third year. thus, in Y3, from the
premium of P20k, the cash value is P1k and the rest goes down
the drain. In Y4, the cash value is now P2k, and so on. The longer
you pay premium, the more goes to the cash value, such that in
Y20, 80% of the premium paid is cash value.
What is its advantage: If you need money but you want to remain
insured, you can first surrender the policy and borrow the cash
value. If you are unable to pay, interests are charged.
What is CASH SURRENDER VALUE
If the policy is returned and the premium is no longer to be paid.
The insurance ceases.
b. PAID-UP INSURANCE
When: The insured, without having to pay additional premium, is
insured for the rest of his life at an amount corresponding to the
cash value, and no longer at the original amount. The insured is
fully paid for the rest of his/her life but for a lower amount of
insurance.
EXAMPLE: Insurance is originally for P1M, but now, he is insured
only for P600k to be paid from his cash value.
c. EXTENDED TERM INSURANCE
When: When the insured is no longer paying an additional amount
but is still insured at the same price, but only for a specified
duration.
EXAMPLE: The insured is originally insured for P1M, for 21y5m. If
he dies, the beneficiaries get the amount in full. If he survives, the
policy lapses.
What is the nature of these non-forfeiture values? They are
alternative. Normally, the policy stipulated that upon failure to pay
the premium, the insurance would be converted into paid-up or
extended.
NOTE: Many insurers now offer participatory plans. The insured,
although not a stockholder, receives a portion of the net profits of
the insurer.
What are PREMIUMS
These are the amounts the insured has promised to pay the
insurer to keep the policy active and for the latter to assume the
risk.
How is it computed in Property Insurance
• As a general rule, they are computed on an annual basis and
fully paid in advance.
How are premiums paid: CASH ON DELIVERY (COD) of
policy. In the policy, there is a printed acknowledgment of
premium payment. Policies thus serve as receipts as well.
May premiums be paid on credit and in the meantime, be
insured already? These days, premiums may also be paid by
credit card, which is as good as cash. According to the SC, it
is not prohibited by law. THUS, when the risk happens when
the premium is not yet paid, the insurer is obliged to pay as
long as the premium is paid within the credit term. The insured
must thus pay the premium first before he files his claim.
UCPB vs. Masagana: Masagan procured fire insurance from
an agent. It was not able to pay immediately because of the
internal processing time of the check. The policy was
delivered to Masagana, but before its check was released to
the agent, fire broke and damaged the properties. Masagana
tried to pay the insurer and the insurer accepted. The following
day, it filed a claim, but the claim was rejected because
premium had not been paid. The SC considered the insurer in
estoppel because it was regular procedure for the insured and
insurer to pay at a date later than the effectivity of the policy.
There was a customary date of payment.
• Exceptions:
✴ SHORT-TERM RATES, where the insurance is for a
period less than 1y, thus the rate is on a short-term
rate.
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 ✴ HEIRS BOND, where the premium is computed and
paid on an annual basis but for two-year’s worth. This
is in line with the requirement in the Rules of Court to
answer for the claims of creditors and excluded heirs in
extrajudicial settlements.
How is it computed in Life Insurance?
It is computed annually but the frequency of payment depends on
the agreement of the parties.
Annual payment is cheapest; Semi-annual or semestral is
higher than the annual; Quarterly; Monthly; Daily (for
industrial life insurance taken by a group of persons) which
is the most expensive premium payment.
NOTE: The more premiums are paid, the higher the
amounts because of high administrative costs.
When do you pay the premiums? (1) Upon delivery of
policy; (2) according to manner or dates agreed upon by
the parties. Every time a premium is due in a life insurance
policy, there is a ONE-MONTH GRACE PERIOD. If the
same is not paid, the amount is deducted from the
insurance or the policy may lapse.
Why is there a grace period? Insurers do not want
their policies to lapse.
What if the insured fails to pay after 1 month?
1. IF there is an AUTOMATIC PREMIUM LOAN CLAUSE, the
accumulated cash value would cover the unpaid premium as a
loan.
EXAMPLE: Premium is due on Dec. 15, 2012. It remains
outstanding until January 22. The policy could have lapsed
already but the accumulated cash value was used as a loan to
pay for the premium. If the insured dies, the insurer pays the
policy less the amount of the loan and the interests.
2. IF there is no such clause, the policy lapses.
What are the options of the insured when the policy lapses?
• He can apply for a new policy BUT with higher rates because
the insured is now older
• He can apply for a reinstatement of his policy, where the
premium is at the original rate, BUT he must first pay all
accrued premium and interests due in lump sum. There is no
limit as to the number of times the insured reinstates his
insurance. He must either undergo the same process for
application of a new policy, or merely issue a Health
Statement. HOWEVER, it is best not to reinstate because the
contestability period is renewed.
NOTE: Reinstatement is not a matter of right, but discretionary
on the part of the insurer.
————————————————————————————-
What are LOSSES in Property Insurance?
1. PARTIAL, or when only a part of the thing insured is lost. There
is partial loss only in property insurance.
2. TOTAL, or when the thing is lost in its entirety.
BUT in Marine Insurance, total loss can either be:
a. ACTUAL
b. CONSTRUCTIVE
- When more than 3/4 of the thing insured is
lost or damaged, or
- When the damage is not big but to put the
thing back to its original condition, more than
3/4 of its value will have to be spent.
When is the insurer obliged to pay?
If the proximate cause of the loss or damage is the risk insured
against, although the direct and immediate cause is not the risk
insured against.
e.g., House is insured against fire. During a storm, a
lightning hit the electric post near the house. The firemen
directed the water against the post and as a result, the
post fell and collapsed on the roof. The damage is covered
by the insurance. Though the house was not directly
damaged by the fire, it was the burning of the electric post
that caused the damage.
What must the insured do in case of loss or damage?
He must file with the insurer a claim for indemnity and a
preliminary proof of loss or damage.
e.g, Pictures are sufficient proof. They need not be in the same
degree as required by courts.
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In practice, the insurer refers the claim to an INSURANCE
ADJUSTER, an independent third party who is licensed by the
Insurance Commissioner and paid by the insurer to determine the
extent of the loss or damage and to inform the insurers who acts
on his recommendation.
—————————————————————————————
Who may be a BENEFICIARY?
GR: The insured may designate anyone. Beneficiary need not
have insurable interest in the life of the insured.
EXCEPTION:
• Those disqualified by law from making or receiving donations
inter vivos
• Guilty of adultery or concubinage. BUT one may designate his
kabit who is single and who he sees only during lunch
because there is no adultery and no cohabitation.
• Public officers, his spouse, ascendant, descendant, in
consideration of his office.
How many beneficiaries may be designated?
1. PRIMARY, one whom the insured wants the proceeds ahead of
the others.
2. CONTINGENT or SECONDARY, in case the primary can no
longer receive the value.
NOTE: In the absence of a qualified beneficiary, it pertains to the
estate of the insured.
How may beneficiaries be designated?
1. IRREVOCABLE. This is the general rule. The written consent of
the beneficiary is required in case of revocation and change.
Why require written consent? Because in effect, all
rights under the policy have already transferred to the
beneficiary.
EXCEPTION TO WRITTEN CONSENT: Legal separation
where the innocent spouse may revoke without it.
2. REVOCABLE, where the beneficiary may be changed at any
time. There is a small box in the application form if the insured
wishes that the designation be revocable.
In case of death, what are required to be filed with the
insurer?
1. Death Certificate
2. Birth Certificate, to ascertain the true statement of age when the
insured applied for insurance.
If there is a misrepresentation on age: This is a material
misrepresentation. BUT if the two-year contestability period
has lapsed, the insurer is allowed by equity to adjust the
amount of insurance indemnity based on the true age of
the insured. The premium that the insured paid will be
used to pay for an amount of insurance coverage
corresponding to your true age. If the insured is younger,
this has no effect. This applies only if the insured is actually
older than his stated age.
3. Sworn Affidavit from two persons that they know the insured
and that he is already dead.
How to settle claims in property insurance
1. Pay the cash value
2. Replace the thing with another property of the same kind and
quality
NOTE: This is common in motor vehicle insurance, where other
insured abandoned the insured thing to the insurer. Insurer
salvages parts from the vehicles left to replace those needed in
the currently insured vehicle. However, replacement needs to be
in good condition.
FIRE INSURANCE
Scope of Insurance: Strictly speaking, fire insurance includes
earthquake insurance, but in practice, the fire insurance excludes
earthquake as a risk. The insured and insurer negotiate as to its
inclusion where the insurer checks the plans and foundation of the
property.
NOTE: This does not cover intentional fire or arson.
If you want to vary the policy, how do you vary it?
On the policy, the insurer adds a rider.
What is a RIDER?
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In a policy, the rider is a strip of paper containing a stipulation indemnity shall only be 1/2. If you lose one arm and one leg, the
varying what is printed. The rider is glued to the policy. An indemnity is still 1/2.
authorised representative of the insurer signs it. In the Philippines, we do not have insurance for individual body
parts.
What are the Kinds of Fire
1. Friendly fire, used for beneficial purposes
2. Hostile fire, damages property. When friendly fire goes out of
control, it becomes hostile.
MARINE INSURANCE
What is Marine Insurance: It is insurance over a vessel, its
What is the amount of insurance: If you are going to insure your
freightage, its cargoes, and its expected profits from cargoes
house or structure, the insurer will normally insure it for acquisition
against loss, damage, or liability arising from the perils of the sea
or replacement cost. Higher premiums are paid for the
(NOT perils of the ship).
replacement cost.
TIP: Do not insure the foundation because it would not be
What is the extent of insurable interest?
destroyed by fire.
• OF THE SHIP OWNER: Value of the vessel, LESS the
amount of loan on bottomry
When is the insurer not liable: In fire insurance, the insurer will
• OF THE CARGO OWNER: Value of the cargo, LESS the
not be liable to pay the indemnity if there was a breach of a
amount of loan on respondentia
warranty.
• Affirmative warranty - representations
Why deduct the amount of the loans: The borrower loses his
• Promissory warranty - undertakings, e.g. you will not bring
interest equal to the amount loaned because if the thing is
into your house two tanks of LPG.
destroyed, it need not pay.
What if the house burns because of the insured’s
What is the difference between fire and marine insurance?
negligence?
In fire insurance, the obligation of the insurer to pay continues to
The insured may still recover. It is only when the insured breaches
exist even if the house is burned.
a promissory warranty or intentionally acts to cause damage that
In marine insurance, the obligation to pay the loan, in case there
he may not recover.
are loans on bottomry and respondentia, is extinguished if the
vessel is destroyed or sinks or when the cargo is lost. The value of
the owner’s interest is already paid.
CASUALTY OR ACCIDENT INSURANCE
NOTE: There is an implied warranty that ship is seaworthy.
What is casualty insurance? Where the insurer pays indemnity
upon the death of the insured or upon the loss of certain body What are the PERILS OF THE SEA?
parts due to an accident. It is generally used only for loss of body These are the danger and risks related to the action of the wind
parts but it now includes accidental death. and water. These are risks related to navigation.
What is the scope of protection: Indemnities are added
with additional premium. What are PERILS OF THE SHIP?
These relate to the physical condition of the vessel, to the
What are compensable body parts? Either eye; either arm; incompetence of the crew, or both.
either leg. The full amount of insurance coverage is given for loss NOTE: Marine insurance does not cover perils of the ship
of both eyes, both arms, or both legs. If you lose only one of each, BECAUSE in every contract of marine insurance (either

!36
 over the vessel or the cargo), there is an implied warranty
that the vessel is seaworthy. NOTE:
• In marine insurance, the adjustment company and insurer
What is SEAWORTHINESS: Seaworthiness is a relative must have absolutely no interest in each other.
term in relation to cargoes. A vessel may be brand new but • Authority of Insurance Commissioner is broadened, now it
absent any refrigerating facilities, then it would not be also has supervision of pre-need contracts. PRE-NEED
seaworthy for raw meat. It would, however, be seaworthy CONTRACTS are those where the corporation, in
for livestock. consideration of the promise of a person to pay an agreed
amount of money in cash or in installments, agrees to deliver
Why does the warranty apply to cargo owners: to the latter an agreed amount of money or to render a
Because he can choose the shipping company to be used. particular service upon arrival of a period or upon the
happening of an event.
What happens when the insurer pays the insured? When the
insurer pays the indemnity, he is surrogated to the rights of the
insured and can run after the person/s who cause the loss or
SURETYSHIP
damage.
Definition: As a general rule, it is not a contract of insurance but a
TIP: If you are counsel for the insurer and you file a claim
risk-shifting device. EXCEPT: Suretyship is part of the insurance
based on the subrogation, present a DEED OF
business IF it is carried out by an insurer.
SUBROGATION and a COPY OF THE INSURANCE
EXAMPLES: bail bonds, performance bonds, surety bond,
POLICY. The deed of subrogation proves the subrogation
fidelity bond.
but not the contract of insurance. Thus, prove the latter
with the best proof: policy.
In case of court bonds, must have accreditation from the Supreme
Court, renewed on a monthly basis.
What are the KINDS OF LOSSES in Marine Insurance?
Losses may be partial or total. Total loss may be actual or
constructive. There is CONSTRUCTIVE TOTAL LOSS when loss
or damage is more than 3/4 or even though not more than 3/4,
more than 3/4 of the value shall be spent to restore it.

In constructive total loss, the insured entitled to recover as if there

was actual total loss. However, the insured has to abandon the
property insured to the insurer. Abandonment may be total or
unconditional.

What is the effect of deviation on the liability of the insurer?

If the deviation is proper, then there is no effect. Insurer still liable.
If improper, the insurer shall be relieved from liability.

When is deviation proper?

1. To avoid natural calamity
2. To avoid pirates
3. To save human lives

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 NEGOTIABLE INSTRUMENTS LAW
Applicability of the Law:
It is an obsolete law but there are still provisions which are still in
practice. thus, it must be read with the Civil Code.
What are INSTRUMENTS
These are instruments of credit which involve money except when
the instrument gives the holder the right to deliver another thing.
They could be either a promissory note or a bill of exchange,
known as money substitutes. They can be assigned or negotiated.
Modes of Transfer:
When negotiated: If the instrument qualifies as negotiable
under Section 1.
When assigned: If it does not qualify under Sec. 1.
(Governed by Law on Sales) NOTE: right of holder is
subject to defence of assignor
What are PROMISSORY NOTES
These instruments of credit where the obligor who borrows money
from another or incurs the obligation to another, binds himself to
pay.
What is a BILL OF EXCHANGE
It involves obligations but instead of the obligor binding himself to
pay, he orders another person to pay.
What are the REQUIREMENTS FOR NEGOTIABILITY (Sec. 1,
NIL)
a. PROMISSORY NOTE
1. It must be in writing and signed by the maker
2. It must contain an unconditional promise to pay a sum certain in
money
3. It must be payable on demand, or at a fixed, or determinable
future time
4. It must be payable to order or bearer
b. BILLS OF EXCHANGE
1. It must be in writing and signed by the drawer
2. It must contain an unconditional order to pay a sum certain in
money
3. It must be payable on demand, or at a fixed, or determinable
future time
4. It must be payable to order or bearer
5. The drawee must be named or indicated therein with reasonable
certainty
Who are the parties in a Promissory Note?
1. MAKER of the promise
2. PAYEE, to whom the promise is made
Who are the parties in a B/E: There are two original parties
1. DRAWER, who signs the B/E
2. PAYEE
3. DRAWEE, who is ordered to pay the instrument BUT who does
not become a party EVEN IF his name appears on the
instrument UNTIL he accepts the B/E and becomes a party as
ACCEPTOR.
1st Requirement:
IN WRITING AND SIGNED
2nd: A. UNCONDITIONAL PROMISE OR ORDER
What is a CONDITION?
Under the Civil Code, it is a future or uncertain event, or past event
unknown to the parties. It may either be Suspensive or Resolutory,
which are valid, or Potestative, which is void.
SUSPENSIVE CONDITION: It holds in abeyance the
demandability of the obligation. As long as it is not fulfilled,
the creditor cannot demand the fulfilment of the obligation.
RESOLUTORY CONDITION: One which puts an end to an
obligation.
What is required in the NIL:
• There must be no suspensive or resolutory condition
• It is also invalid to stipulate that the amount would be paid from
a particular fund. BUT in a B/E ONLY, IF payment is not from a
particular fund, but its reimbursement is from a particular fund,
the instrument is still negotiable. (NOTE: When the payment
!38
 will come from a particular fund, the promise or order to pay
becomes conditional)
Why is it required to be unconditional?
To serve the purpose of negotiable instruments, which is to
facilitate commercial transactions where one can transact without
having cash on hand.
If the instrument does not meet the requirements of Sec.1, or it
is non-negotiable, is it valid?
YES. Negotiability is different from validity. It is also transferrable
but by assignment.
2nd: B. PAY A SUM CERTAIN IN MONEY
What does it mean: What is to be paid is sure to be money.
GR: Instruments involve money
E: The instrument is still negotiable if it gives the holder the right to
demand the delivery of another ting. The right must be given to the
holder and NOT the drawer, maker or drawee. otherwise, the
instrument is only non-negotiable, but still valid. e.g., “i promise to
pay P20k on or before April 2, 1992, or at the option of the holder, I
agree to deliver a pig instead.”
EXAMPLE: Promise to pay bearer one thousand is INVALID
because it stated no currency.
EXAMPLE: A provision for payment of interest at an agreed rate is
valid. “i promise to pay bearer P30k on or before December 31,
2012, together with interest of 2% per month.” This is valid. If the
date of reckoning of the interest does not appear, then it is the date
of issue. If the date of issue is not stated, then the holder may
insert the true date of issue.
DATE OF ISSUE is not required in Sec. 1 but it is not totally
irrelevant. It is merely not required for negotiability but it is
important in relation to the obligation to pay interests.
POSTDATED: Date of issue is stated in the future
ANTEDATED: Date of issue is stated in the past
NOTE: Ante- and post-dating do not affect negotiability but
could affect rights of holder and liabilities of maker or
drawer.
EXAMPLE: “i promise to pay bearer P30k on or before April 2,
2012, with interest.” This is valid because the interest rate would
then be the legal rate of 6% per annum, if no rate is stated.
EXAMPLE: “I promise to pay bearer P30k on or before April 2,
2012, with interest of 30%.” This is valid even if there is no
indication as to the frequency of interest payment. In such case,
payment would only be once.
What if the instrument is payable in installments?
In case of stated installments, there must be certainty in the
amount of every instalment and date of payment or when every
instalment is payable.
EXAMPLE: “I promise to pay B, P10k in two equal monthly
instalments.” This is NOT NEGOTIABLE. Though the amount is
determinable, there is no indication as to when it is payable.
What is a DIVISIBLE OBLIGATION: When the amount of the
obligation is payable in stated installments, it is a divisible
obligation that may be performed in parts.
What is the Effect of a Divisible Obligation: If the obligor
defaults on the first installment, the creditor cannot sue yet
for the entire obligation because the period had not yet
lapsed, as provided under the Civil Code. The creditor’s
remedy is to put an acceleration clause.
NOTE: It is also a sum certain even if there is a proviso for
compounded interests, the payment of attorney’s fees, costs of suit
and expenses of litigation. Negotiability is also not affected by a
statement of the transaction that gave rise to the issuance of an
instrument.
3rd: PAYABLE ON DEMAND, AT A FIXED TIME,
OR AT A DETERMINABLE FUTURE TIME
!39
When is the instrument PAYABLE ON DEMAND
When it is so stated to be payable on demand or
When no date is mentioned as to payment (pure obligation), or
When it is payable on sight.
EXAMPLE: When the creditor demands payment, literally, and no
period is involved. The creditor, upon handing the money to the
debtor, collects the same two minutes later.
When is it PAYABLE AT A FIXED TIME?
When the obligor is to pay ON a particular date or ON OR BEFORE
a particular date.
“On or before” is construed favourably to the debtor. Under
the Civil Code, when the period is fixed, the creditor cannot
demand payment, and neither can the debtor demand
acceptance earlier than the period. But under the NIL, the
creditor must accept the amount even if it is tendered before
the expiration of the period.
When is it PAYABLE AT A DETERMINABLE FUTURE TIME?
If, for example, it is payable within 15 days from the proclamation of
the 2013 elected senators. It is not valid if the period states “on or
after April 12, 2012” because it is not determinable.
What is the remedy in case of uncertainty in period?
Ask the court to fix the period.
4th: PAYABLE TO ORDER OR TO BEARER
What is “payable to order or to bearer”
These are the WORDS OR PHRASES OF NEGOTIABILITY. The
instrument can also use “holder” or “possessor.” It is important to
know the presence of these words to determine the manner of
negotiation.
When is it an ORDER INSTRUMENT?
A stipulation that an instrument is “NON-NEGOTIABLE” is
immaterial because it is always payable to order in the following
cases:
• Pay to Jose Cruz or order
• Pay to the order of Jose Cruz
• Pay to the order of Jose Cruz and Pedro (joint where there are
two payees)
• Pay to the order of Jose Cruz or Pedro Cruz (several)
• Pay to the order of the holder of office for the time being
How is an order instrument negotiated?
By Indorsement of the holder, followed by delivery. Otherwise, the
negotiation would be ineffective.
When is it a BEARER INSTRUMENT
• Pay to bearer
• Pay to Jose Cruz or bearer (NOT “to bearer Jose Cruz” where
the designation of “bearer” is only descriptive and thus the
instrument is non-negotiable)
• Pay to order of Batman (to the order of a fictitious person and
such fact must be known to the person making it so payable)
• Pay to the order of Adolf Hitler (to the order of a non-existing
person and such fact must be known to the person making it so
payable)
• Pay to the order of cash (to the order of a payee who does not
purport to be a name of any person)
• When the last endorsement is in blank
How is a bearer instrument negotiated?
By mere delivery. Any endorsement is a mere surplusage.
What are the EFFECTS OF DELIVERY
1. If the instrument is signed and delivered but there are blanks
therein, then the holder-deliveree has the implied authority to fill
in the blanks according to the true agreement of the parties
2. If the instrument is not yet delivered, then it cannot be enforced
against the maker or drawer. It is unenforceable.
3. If the instrument is already completed but not yet delivered, and
it falls into the hands of a holder in due course, then the HDC is
protected and his rights are not subject to personal defenses
EXCEPT Forgery.
Who are LIABLE UNDER A NEGOTIABLE INSTRUMENT
1. PROMISSORY NOTE: Maker (by signing is obliged to pay
instrument according to its tenor)
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2. BILL OF EXCHANGE: Drawer (by signing, warrants existence of
payee and to payee that drawee shall pay and upon notice of
dishonor, drawer shall pay) and the Drawee Who Accepts
(Acceptor - bound by terms of his acceptance)
3. PN/BE: Endorsers (signature of holder with intention to transfer.
Warrants genuineness of instrument and capacity to contract of
maker/drawer; and in case instrument is dishonored, endorser
shall be the one to pay)
4. Forgers
Who are Endorsers?
Endorsers are persons who sign the instrument. Only those whose
signature appears in the instrument are liable thereon. In cases of
negotiation by delivery, they are liable only to the immediate
transferee.
What is the liability of Endorsers?
Their liability may either be general or irregular, as when they sign
the instrument but they have no concern therein.
May they sign through agents? YES, as long as the agent
discloses the principal and acts within the scope of his authority.
NOTE: An instrument may be negotiable but invalid (absolutely
simulated) or non-negotiable but valid.
What is NEGOTIATION
Negotiation is the transfer of an instrument as to constitute the
transferee the holder thereof.
What are the MODES OF NEGOTIATING AN INSTRUMENT
1. ORDER: Indorsement and Deliver
2. BEARER: Delivery
What is an INDORSEMENT
It is negotiation through the signature of the person who has the
right over the instrument or document.
Where is the indorsement placed? The law is silent.
• It is customary to be made at the back so as not to
confuse the endorser’s signature with that of the maker
or drawer, especially in cases of PNs stating “I promise
to pay” and there are two signatures that appear, the
result being the two signatures treated as co-makers.
• It may also be made in an ALLONGE, or a separate
sheet of paper attached to the instrument where the
indorsements can be made.
Are there limits on the number of indorsements?
Under the NIL, there are none. BUT under a Circular of the
Monetary Board, banks are prohibited from accepting any
check with more than one endorsement to avoid forgeries
against banks.
What are the KINDS OF INDORSEMENT
1. IN BLANK, when the holder merely signs his name
2. SPECIAL, when the transferee is named and the holder
sings the same. The indorsement need not contain the
words of negotiability, e.g. “Pay to Jose Cruz.” Such
words are required only on the face of the instrument
and not on specific endorsements. e.g., “Pay to order of
Jose Cruz only” is a special and restrictive
endorsement.
3. CONDITIONAL, as when it states “Pay to X, only if he
graduates on March 2013.” This is also a special
indorsement and which does not affect negotiability.
4. QUALIFIED, if the holder adds “without recourse” to his
signature. There is no recourse to him if the instrument
is dishonored.
5. RESTRICTIVE, as when the endorser states “Pay to
Jose Cruz only” or “Pay to trustee only for the purpose
of collection without authority to enter into subsequent
contracts.” This affects and ends the negotiability of the
instrument. It restricts further endorsement.
What is the EFFECT OF THE SEQUENCE OF
ENDORSEMENTS
The first in the list is presumed to be the first endorser. As
such, subsequent transferees can run after prior endorsers
(they are solidarily liable). thus, in practice, endorsers first
sign at the bottom or sign with a date.
!41
 e.g. Pedro Cruz first signed the instrument. Jose Santos
then endorsed it to Juan Reyes. Juan Reyes can then run
after Pedro and Jose should the instrument be dishonored.
What is the EFFECT OF A MARKED-OFF
ENDORSEMENT
When a name is stricken off, the holder cannot run after the
stricken off endorser and all the endorsers subsequent to
such name because they are relieved from liability as there
are no more endorsements in their favor.
NOTE:
GR: Person is liable on an instrument only if his signature appears
on it. Maker is primarily liable. Drawer is secondarily liable, and
acceptor is primarily liable but only to the extent of the term of his
acceptance.
E: Endorser negotiating by mere delivery is liable to immediate
transferee.
—————————————————————————————
Who are the HOLDERS OF AN INSTRUMENT?
1. Holder for value
2. Holder in due course
Who is a HOLDER IN DUE COURSE
A holder in due course is one who acquired the instrument under
the following conditions (Sec. 52):
a. That it is complete and regular upon its face;
b. That he took it in good faith and for value;
c. That he became the holder of it before it was overdue, and
without notice that it has been previously dishonored, if such
was the fact;
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.
1st: COMPLETE AND REGULAR
When is an instrument complete? No blanks
When is it NOT REGULAR?
RE: CROSSED CHECKS: Crossing of checks, or the placing of
two parallel lines on the upper left corner of a check, makes the
instrument no longer regular on its face (SIHI Case). This is
because such crossing indicates that the check is not intended for
encashment but only for deposit to the bank account of the payee.
It may thus be endorsed only once, i.e. for deposit to the payee’s
account.
La Suerte Cigarette Company vs. SIHI: The cigarette company
sold its products through agents. The clients deposited post-dated
checks with the agents who rediscounted the same with SIHI but
appropriated the proceeds. The clients refused to pay the checks
because the products were not delivered to them. SIHI thus failed
to collect. It was not considered as an HDC.
If there are alterations it might not appear regular upon its face, it
might be considered irregular.
2nd: IN GOOD FAITH AND FOR VALUE
When is it acquired IN GOOD FAITH:
When the transaction is above fraud.
When it is acquired FOR VALUE
• When the acquisitions is for a valuable consideration under the
law on contracts, and
• When the consideration is not contrary to law, morals, good
customs, public order and public policy.
EXAMPLE: Lawyer endorses the check he obtained from his client
to a prostitute. The prostitute is not a holder in due course because
her services do not constitute a valuable consideration under the
contract law. BUT IF the check is endorsed to a massage lady or
house cleaner, then the latter is an HDC because the check was
acquired legitimately.
3rd: BEFORE OVERDUE
When is an instrument overdue
When the date of payment has passed.
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EXAMPLE: If a PN shows that it is payable today and it is
negotiated to you today, you are an HDC because the date of
payment, which is today, has not yet passed.
EXAMPLE: If a check is dated 25 December 2012, but it is
negotiated to you only today, 3 February 2013, you are still an
HDC. CHECKS NEVER BECOME OVERDUE AS THEY ARE
ALWAYS PAYABLE ON DEMAND. But under jurisprudence, the
demand for payment must be made within a reasonable period
determined on a case-to-case basis, e.g. six months.
REMEDY OF THE HOLDER: Ask the drawer to re-date it
with his counter-signature.
4th: NO NOTICE OF INFIRMITY OR DEFECT OF TITLE
Can the PAYEE be an HDC
• GR: NO, because the fourth requirement contemplates a
transfer, “at the time it was negotiated to him.” And between
immediate and direct parties (payee and maker/drawer),
personal defenses are available. The purpose of the principle
of HDC is to build confidence in instruments of credit as a
money substitute.
• E: provided by the SC where the payee is treated as an HDC
because of the peculiar circumstances of the case. A owed B,
and B owed C. B requested A to make A’s check payable
directly to C. C thus sued A for collection, and C was treated as
an HDC.
What are the advantages of being an HDC?
1. He is not subject to personal defenses, EXCEPT forgery,
EXCEPT EXCEPT the maker can still be liable if the forgery is
ratified or due to estoppel.
2. Prior parties are liable to him
3. Subsequent transferees acquire the rights of an HDC
NOTE: While a person does not qualify as an HDC but derives his
right from an HDC, then he will have the same rights as the HDC.
EXAMPLE: Client issued a check to his lawyer. Lawyer indorsed it
to the store owner in payment of his overdue account. The store
owner is thus an HDC. If the store owner indorses it to a prostitute,
the latter is not an HDC but acquires the rights of the store owner
who is an HDC.
Who are the PARTIES IN AN NI?
A person is liable on an instrument only if his/her signature appears
on it (maker, drawer, acceptor, general indorser, irregular indorser,
forger).
Irregular indorser: Person is not a party to the instrument but
indorses the instrument.
Per Procuration: Signing authority but with limitation.
EXCEPTIONS:
a. Person negotiating by mere delivery. The person who negotiated
by mere delivery is liable to the person to whom he negotiated
the instrument (the immediate transferee).
b. Person who was duly represented by his/her agent, subject to
two conditions: that the agent discloses his principal and the
agent acts within his authority.
What are the OBLIGATIONS OF THE PARTIES IN AN NI:
1. MAKER: To pay and to warrant the existence and capacity of the
payee because he borrowed from the payee himself.
2. DRAWER: To warrant the existence and capacity of the payee;
that upon presentment, the drawee shall honour the check; if it is
dishonored, then he will pay after notice.
What are the STAGES OF LIFE OF A PN?
1. Making
2. Negotiation
3. Payment
In case of promissory notes, do they need to be presented for
acceptance?
No, they are presented for payment.
What are the STAGES OF LIFE OF B/E?
1. Drawing / issue
2. Presentment for Acceptance by the Drawee
Two possibilities:
• Drawee accepts
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 • Drawee dishonours the check by non-acceptance
REMEMBER: The drawee is not an original party and only
becomes a party as an acceptor upon his acceptance. And in
case he accepts, he is bound only by the terms of his
acceptance, and not by the terms of the B/E.
NOTE: Holder goes to the drawee, bringing the bill of exchange.
There must be presentment of instrument for acceptance.
When the drawee refuses to return or destroys the bill of
exchange when presented for acceptance, it is deemed
accepted.
If the bill is dishonoured, the holder should give notice of
dishonour to all prior parties within a reasonable period. A party
not notified shall be discharged.
3. Negotiation
4. Presentment for Payment
Why: Presentment of acceptance is not an assurance of
payment. Thus, there are also two possibilities here:
• Payment by the drawee
• Dishonour by non-payment
5. Payment/Discharge
How is PAYMENT OR DISCHARGE EFFECTED?
1. Payment in due course by the person primarily liable, to the
person entitled to receive the payment, at the place agreed
upon.
What is PAYMENT IN DUE COURSE
When it is made at or after the maturity date. If payment is made
before the maturity date, then there is no discharge yet because
the payor can still further negotiate the instrument. But in
practice, a fresh PN is requested after payment is already made.
Who is the person primarily liable?
For PN, maker. For B/E, acceptor. The accommodated party is
also primarily liable.
Who is an ACCOMMODATION PARTY?
He who signs the instrument as a maker, drawer, acceptor, or
endorser but without receiving anything of value therefor and
only for the purpose of lending his name. He is liable under the
instrument even if the payee knows that he is signing only as an
accommodation party.
NOTE: For one to be an accommodation party, he must
have CLEAR INTENTION TO SIGN AND TO BE BOUND
AS AN ACCOMMODATION PARTY.
Who is the ACCOMMODATED PARTY?
Person in whose favour is signed.
What if the accommodation party pays the instrument?
It is not yet discharged because he can still run after the
accommodated party.
2. Intentional cancellation of the instrument by the holder
Effect: The obligation is NOT extinguished. Condonation of a
debt requires the acceptance of the debtor.
3. Any other mode of existing an obligation to pay a sum of
money
Example: Compensation, confusion of the rights of the debtor
and creditor, merger of rights of creditor and debtor.
4. Discharge of the primary party
5. Condonation/remission of debt (NOTE: obligation is not
extinguished if no acceptance from debtor)
How may a party secondarily liable be relieved from liability?
1. Payment in due course by the person primarily liable
2. By discharge of a prior party
3. By striking out indorsement (this relieves not only the person
whose name was stricken out but all those after him/her)
4. Valid tender of payment by a prior party
How to Discharge of Foreign Bills of Exchange
• A domestic bill of exchange is also called an inland bill of
exchange
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• A bill of exchange is foreign when the parties are in different
countries. If a foreign bill of exchange is dishonoured you make
a protest.
Who makes a protest?
It is made either by a notary public or a reputable member of the
community in the presence of 2 or more persons.
What are BILLS IN SET?
They are usually used in importation to facilitate payment of
obligations between persons in distant places.
How do they work?
The drawer prepares the B/E in two copies, the original and the
duplicate indicated as such. He makes an instruction as follows:
Pay this bill (Bill 1) if the other bill (Bill 2) is not paid. The contents
are the same. The payee then presents both bills to the drawee.
If the payee negotiates both bills to different persons with different
interests, the drawer is liable only to the one whose bill is first
accepted by the drawee. The remedy of the other holder is against
the payee.
—————————————————————————————
What are CERTIFIED CHECKS?
These are checks certified by banks to be credit-worthy, where the
debtor is certified as having enough money for the same. It is no
longer used today because of the inconvenience to the banks.
Now, banks issues manager’s checks. The advantages are its
convenience and the fact that the obligation of the bank to pay is
not affected by any garnishment of the drawer’s account. Its
disadvantage is the effect of the bank’s insolvency, making the
holder an unsecured creditor of the bank.
—————————————————————————————
Certified Check
It is an ordinary check that has already been accepted by a bank
with money set aside for it.
Eventually, banks stopped the practice of certifying checks and just
issued manager ’s checks. The managers check is
disadvantageous because in case of insolvency of the bank, the
holder is considered an unsecured creditor.
Bills in Set
A bill of exchange prepared with more than one copy. It facilitates
payment between persons on distant places. When one bill isl ost,
the other bills may take its place.
24-Hour Clearing Process
A clearing house is a facility of the BSP for the convenient
collection of checks drawn on different banks but deposited in
another bank.
At an agreed time, representatives of banks convene in a particular
place in order to swap checks. The banks process the checks.
Within 24 hours from receipt, the drawee bank must return these
checks to clearing house if it intends to dishonour them.
A BSP Circular provides that when a check is received from the
clearing house and the check should be returned due to
insufficiency of funds, the banks should dishonour the checks. This
is the reason why overdrafts no longer occur.
—————————————————————————————
SUPREME COURT RULINGS ON FORGERY
1. As a general rule, the bank suffers the loss ultimately if what is
forged is the drawer’s signature, and the check is presented for
over-the-counter encasement or deposit with the drawee or
collecting bank who pays.
EXCEPTIONS: The drawer is made solely or solidarily liable in
some cases.
Why is the bank ultimately liable:
• The bank ought to know the genuine signature of its
depositors, and
• There is breach of contract by the bank, i.e. the specimen
signature card, where it undertook to pay only on the basis of
any of the signatures therein.
2. If what is forged is the payee’s signature:
!45
 a. Drawee ultimately suffers the loss if the check is
presented for over-the-counter encasement because it
failed to properly identify the payee and thus the drawee
bank paid the wrong person due to negligence.
b. Collecting bank ultimately suffers the loss if the check
(of another bank) is presented for deposit because of its
failure to properly identify the payee and because of its
breach of warranty, that “All prior endorsers guaranteed”,
before it presented the check in the clearing house.

What is a CLEARING HOUSE

It is a facility of the BSP for convenient collection by banks of the
checks drawn on other banks but deposited with them.

What is the TWENTY-FOUR HOUR CLEARING RULE

Within 24 hours from receiving checks from the clearing house, a
bank must return the checks uncleared. Otherwise, they would be
cleared.

When are checks not cleared:

DAIF: Drawn against insufficient funds
DAUD: Drawn against uncollected deposits

Are banks required to accept any check

NO. There is an MB Rule that banks should not accept checks
presented for deposit or encasement by anyone other than the
payee.

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 SECURITIES REGULATION CODE
What is the governing law: Securities Regulation Code
What are securities:
• These are promissory notes, bonds, and debentures
• It involves money
• They are broadly defined as instruments evidencing an
investment in a commercial enterprise, i.e. stock corporations
When are they used: When companies expand to address the
higher demand of its operations, they raise money by securing
funds by reclassifying the original or the organiser’s common
shares as founder’s shares and issuing common shares for new
investors (which requires SEC approval).
Founders Shares: Exclusive right to be elected in the BOD for a
maximum period of five years from approval. After said period, they
become regular common shares and the Articles of Incorporation
(AOI) is amended.
What if a corporation needs more working capital and is to be
sourced from the public?
There are rules on the solicitation of investments.
PUBLIC: More than 19 persons, natural or juridical
What are these RULES ON SOLICITATION OF INVESTMENTS
1. Before printing the brochures and other marketing documents,
the corporation should apply for the registration of its securities
with the SEC. (NOTE: It is a crime to offer securities not
registered (BOILER ROOM OPERATION))
2. There are two forms of investments in a commercial enterprise
a. By lending money
b. By becoming a part owner of an enterprise
What is a COMMERCIAL ENTERPRISE: One
engaged in commerce, or in buying and selling
(stock corporations)
Are non-stock corporations covered by the
securities law: It is still pending determination. Non-
stock corporations engage in limited commercial
transactions and only for the benefit of its members.
Investment in form of a loan / Lending money: When a
corporation borrows money and signs a promissory note.
What is a PROMISSORY NOTE: It is a form of securities
(where the maker promises to pay back the amount
borrowed), as when a corporation borrows money and
promises to pay it back.
What is a BOND: It is a promissory note with a term
exceed five years, as when a corporation promise to pay on
the PN at least until after 5 years. (NOTE: earnings in
interest)
What are DEBENTURES: It is a bond secured by
properties, as when a corporation secured its investments
with a real estate mortgage.
Investment by being a part owner: Raising capital via stock
ownership
How does one make an investment, not as a loan but, as a co-
investor?
One can invest in shares. It can be preferred shares where there is
a regular return of income, or in redeemable and convertible
preferred shares.
PREFERRED SHARES: Shares with the usual preferences
on profits and assets, e.g. those guaranteed with a 10% per
annum income or dividends. (THUS, they are payable only
if the corporation has surplus profits). (NOTE: earnings in
dividends)
PREFERRED REDEEMABLE SHARES: Those where the
corporation reserves the right to buy it back within a certain
period.
PREFERRED REDEEMABLE AND CONVERTIBLE: Those
with an added feature that if the corporation fails to redeem
!47
 the shares, the stockholder has the option to convert the
preferred shares into common shares.
PREFERRED PARTICIPATING: Those which join the
common stockholders in receiving additional dividends.
There are none in the Philippines.
If there are no profits this year and thus no dividend,
what happens if there are earnings next year?
Shares could either be CUMULATIVE or NON-
CUMULATIVE
CUMULATIVE PREFERRED SHARES: Those which
receive what is not received in prior years due to absence of
surplus.
NON-CUMULATIVE PREFERRED SHARES: Prior profits
cannot be received in the future. It must be expressly
stipulated.
What is SUFFICIENT SURPLUS: e.g. Corporation has
P50k dividends payable, but it has P49,999. There is
surplus but no one gets any dividends because surplus is
not sufficient.
What if investors come in as stockholders or part owners?
Issue certificates of stock
If investments in form of stock, what shares?
Shares can be common or preferred, but preferred has variations;
e.g. redeemable, convertible, cumulative, non-cumulative,
participating, non-participating.
When redeemable, corporation reserves the right to buy back
shares after a certain period: Option is with the corporation. It
cannot be forced to buy back shares. Redemption is a right and not
a duty.
CONVERTIBLE: preferred shares becomes common after a certain
period.
Can a corporation redeem if it has no surplus profits?
Yes, it is not in violation of the trust fund doctrine. However, the
corporation should not redeem shares if as a consequence of
redemption, it will not be able to carry out its primary purpose.
How do corporations entice the public?
The corporation makes FINANCIAL PROJECTS:
1. A commercial enterprise must first apply its securities for
registration with the SEC before it can cause the printing of its
marketing materials. It must file a REGISTRATION STATEMENT
with SEC. it is a document where the SEC requirements are
attached.
a. Why: To protect the public from being defrauded by
allowing them to determine whether the corporation is in
a sound condition
b. What is an AUDITED FINANCIAL STATEMENT: It is a
schedule or breakdown of the corporation’s receivables.
Do not take it on its face value.
2. The form of investment can either be a promissory note, bond,
debentures, certificate of preferred or common shares. Preferred
shares can be redeemable or convertible.
3. If the corporation intends to raise capital via stock ownership, it
must apply for listing of its shares in the Philippine Stock
Exchange (PSE) after registering the securities with SEC. if
investments are in the form of shares or equity participation, after
SEC registration, corporation applies for listing with the PSE.
What is the PHILIPPINE STOCKS EXCHANGE: It is the
Philippine stock market
Why are shares listed therein?
• To raise capital, by making an Initial Public Offering (IPO)
• To have a convenient facility for shareholders to buy and sell
shares of stock through the exchange or LISTING BY
INTRODUCTION. This is listing without the intent to raise
capital.
THUS, if you want to buy or sell shares, you can transact in a
matter of seconds. Where there is no market and you need
eggs, you would have to look for people who sell eggs.
BUYING AND SELLING: trading
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 EXCHANGE: In Securities Law, it is a stock corporation or to render a particular service upon the arrival of a period or the
organised and licensed by the SEC to put up and operate happening of an event; e.g. educational plans, memorial plans
facilities for the purpose of trading securities. It is barter or (which includes internment fee plans)
market or palengke in civil law. EXAMPLE: B anticipates the death and internment expenses of his
(NOTE: There used to be a PSE in Makati and Manila. They mother-in-law. Thus, he buys a burial lot at present. Is it a pre-need
were merged) contract? NO, even if it is in anticipation of a future need. There is
no particular service or delivery of money to be rendered by the
NOTE: Registration in the SEC is not a guarantee or assurance of corporation. Here, the contract is a sale on installments.
listing in the PSE. According to the SEC (Puerto Azul Case), SEC
cannot force PSE to list shares. While SEC has supervision, it may What are EXEMPT TRANSACTIONS: May require prior
not impose on the exchange. registration, but may apply for exemption. Its types are Certificated
or Uncertificated.
NOTE: Not all securities are required to be registered in SEC.
UNCERTIFICATED CERTIFICATED
What are EXEMPT SECURITIES
1. Those issued by the Philippine Government or any of its • When securities bought are • When securities are
political subdivisions, e.g. Treasury Bills sold as soon as the prices bought or sold to build
Why: Because the government will never defraud its citizens. go up up stock ownership; it is
• These are paperless a long-term plan
2. Those issued by Foreign Governments with diplomatic ties securities, where • Stock ownership is
with the Philippines ownership is evidenced by covered by certificates
electronic records only. of stock
3. Those issued by receivers in insolvency Records are also kept by • It takes longer to sell
Why: Because it undergoes judicial scrutiny (NOTE: based on the PSE, the broker, and because certificated
Finance Rehabilitation Insolvency Act (FRIA) - when insolvent, the salesman, thus, it is not stock ownership cannot
prohibited from liquidating assets) entirely paperless. be sold right away as
• The broker prepares a the broker must have
4. Those issued by corporations under the supervision of the BIR, P U R C H A S E these certificates
Insurance Commission, or HLURB CONFIRMATION or SALE validated first (which
NOTE: Pre-need contracts are included in the jurisdiction of the CONFIRMATION, showing takes 5 days)
IC the number of shares
bought or sold, the price,
5. Those issued by banks other than its own shares of stock and from/to what company
Why: Because banks engage in daily transactions with the it was purchased/sold, and
people. If they are required to list securities, then it will never the commission.
accept time deposits. • Easier to sell
EXCEPT: if bank increases paid-up capital and issues new
shares to the public.

PRE-NEED CONTRACTS: Contracts wherein a corporation, in How to Trade Stocks

consideration of a promise of another to deliver an agreed amount
in lump sum or in installments, agrees to deliver an agreed amount 1. Engage the services of a broker

!49

What is a BROKER: stock corporations licensed by SEC to buy
and sell securities for their clients or on their behalf.
How much commission do brokers receive: It depends
but the maximum is 2% of the volume. They are paid
because they do the legwork in the SEC and BIR.
Who are PERSONS ASSOCIATED WITH BROKERS: A
corporation acts through its agents or officers known as persons
associated with brokers. They are also licensed.
NOTE: does not include those performing clerical functions
NOTE: Only corporations can be licensed as brokers because
individuals and partnerships can die.
Who are DEALERS: Corporations licensed by the SEC to buy
and sell securities for its own account. (NOTE: they do not
represent any clients)
PERSONS ASSOCIATED DEALER
WITH BROKER
Acts for clients always Acts for its own account, for
Earns commissions itself
Does not invest its own Males profits and suffers loss
money Invests its own money
Who are SALESMEN: Persons representing stockbrokers inside
the trading floor of the PSE and accepting orders for buying or
selling from clients of the broker. They also get a license, but a
license is issued to salesmen is also only for a specific broker.
NOTE: they keep record of transactions and act like account
executives (clerical function)
NOTE: All transactions in the PSE are conducted through
the telephone
NOTE: The trading hours of the PSE is from 0930-1200,
1300-1530. It is the time when you can buy or sell shares
through the exchange.
NOTE: Where do you find brokers? In their offices.
NOTE: All participants except investors are licensed.
Licensing is annual.
2. The salesman, who has a cubicle in the PSE, then makes a post
of the shares that a client wants to buy or sell, in the computer of
the PSE. Orders to buy are then matched with orders to sell.
Once they are matched, the orders are removed in the computer.
If shares are listed in the PSE, can you still sell directly to the
buyer or buy directly from the seller?
YES, OVER-THE-COUNTER TRANSACTIONS are allowed. It is
the buying or selling of shares listed in the PSE but made directly
between the parties and no longer coursed through the exchange.
ADVANTAGE:
• The buyer does not have to pay the broker’s
commission and stock transfer tax (1.6% under TRAIN),
and the seller only pays CGT (if there is gain) and DST
(1.2%). (NOTE: buyer will have to be the one to create
a Deed of Sale and have it notarised)
NOTE: Tax avoidance scheme is to sell shares
worth P100,000 today and then the rest tomorrow
so that the tax rate applicable is only 5%.
• Hassle-free because the broker does all the work.
DISADVANTAGES:
• Buyer might be buying shares covered by fictitious
certificates of stock. In the PSE, certificated stock
ownership cannot be sold right away because the
broker must have these certificates validated first (which
takes 5 days). (THUS, uncertificated SS are easier to
sell)
• Parties themselves do the legwork
There are 3 participants in a market:
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1. Producer
2. Buyer
3. seller/intermediary
What are the different financial markets?
1. Money market
2. Capital market
3. Bond market
4. Stock market
Money Market - a source of funds, payment period not more than
a year.
Capital Market - payment period is over a year but less than 5
years
Bond Market - payment period is more than 5 years
Stock Market - Source of funds for equity participation
Money market placements are made through a bank. A bank finds
funds through time depositors (usually) and after getting their
consent, the amount is loaned to the borrower. The bank is a mere
intermediary.
Licensing - persons associated with broker may only use the
license with a particular broker. If you move between brokers, you
must get a new license.
What is MARGIN TRADING: Trading is buy and sell. It is an
arrangement with the broker where the investor has not much
money and the broker advances part of the purchase price in the
form of a loan.
NOTE: Broker does not use his own money, but money of the
client. eventually, the buyer may ask the broker to advance money.
This is margin trading: the broker pays part of the purchase price.
What are SHORT SALES: It occurs when a person sells shares he
does not own while the prices are up, but he later on buys back
such same shares when the prices are down, so he can return and
deliver such shares which he had earlier sold. In other words, the
seller sells shares he borrowed and does not own, but later he has
to buy the same shares. This is legal.
What are WASH SALES: These are illegal when it is a stock price
manipulation. There is a sale and purchase of shares but no
change in beneficial ownership. (NOTE: there is stock price
manipulation when there is conspiracy)
EXAMPLE: Case of BW Resources, Corp. It is a bingo
company, whose shares has a par value of P1. Over the
years, the market value of its shares rose to P2. Through
manipulation, its market value very quickly became P107
each. The next day, it fell to P7. THUS, those who bought
the shares at P107 suffered loss of P100 per share. It is
because of this that the PSE became very strict.
PSE RULE: When there is an unusual increase or decrease
in the prices of shares, the PSE suspends the trading of
the shares of such corporation to investigate the cause of
the increase or decrease. There is unusual increase or
decrease when the value of the shares increases or
decreases by 10% in a day’s transaction.
What is a TENDER OFFER: When a person or group of persons
representing the same interests wants to acquire: (a) at least 15%
of a listed company or (b) at least 15% of a company that is not
listed but with assets worth P50M or more and with no less than
200 stockholders, each owning no less than 100 shares, (c) at least
30% of any of said companies, within a period of 12 months, makes
a formal offer with the SEC, stating the price they are willing to pay,
the terms of payment, and number of shares to acquire. Upon
approval by the SEC, such person or group persons can make
announcements in newspapers.
Securities Regulations Code: SEC. 19. Tender Offers - 19.1
(a) Any person or group of persons acting in concert who
intends to acquire at least fifteen per cent (15%) of any
class of any equity security of a listed corporation or of any
class of any equity security of a corporation with assets of at
least Fifty Million Pesos (P50,000,000) and having two
hundred (200) or more stockholders with at least one
hundred (100) shares each or who intends to acquire at
least thirty per cent (30%) of such equity over a period of
twelve (12) months shall make a tender offer to
stockholders by filling with the Commission a declaration to
!51
 that effect; and furnish the issuer, a statement containing
such of the information required in Section 17 of this Code
as the Commission may prescribe. Such person or group of
persons shall publish all requests or invitations for tender, or
materials making a tender offer or requesting or inviting
letters of such a security. Copies of any additional material
soliciting or requesting such tender offers subsequent to the
initial solicitation or request shall contain such information
as the Commission may prescribe, and shall be filed with
the Commission and sent to the issuer not later than the
time copies of such materials are first published or sent or
given to security holders.
OPEN: The price paid for the very first transaction of the day
CLOSE: The price paid for the last transaction of the day
LOW: The lowest price in between the trading hours
HIGH: The highest price of the day
VOLUME: All shares of the corporation traded for the day
What are CLASS A and CLASS B SHARES: Class Shares are
more expensive BUT they are exactly the same and identical
shares. They are classified to comply with the citizenship
requirement of the Constitution and only for the purpose of
monitoring stock ownership. (NOTE: Class B shares are sold to
aliens)
EXAMPLE: MERALCO, which is engaged in public service,
classified its shares into Class A and B. Class A shares
comprise 60% and are allowed only for Filipinos. Class B
shares comprise 40% and are sold to aliens. Class B
shares are more expensive because there are less of it and
thus the law of supply and demand.
STRADDLE, PUT and CALL
PUT: A contract which gives the holder the right to buy a specified
number of shares for a specified price for a particular (definite)
period
CALL: A contract which gives the holder the right to sell a specified
number of shares for a specified price for a particular (definite)
period
STRADDLE: Combination of both
What is BACKDOOR LISTING: It is a legal scheme where a
corporation which wants to avoid the hassle of listing instead,
acquires the controlling interest of a corporation (2/3 of OCS)
whose shares are already listed in the PSE but which corporation is
no longer operating (DOORMAN CORPORATIONS). It then
merges with the doorman corporation and in the merger, it is the
doorman corporation that survives.
EXAMPLE: Case of Urban Development Bank and EI Bank.
Urban Bank was a universal bank whose shares are listed.
UB, however, could no longer comply with the increased
paid up capital requirement of the BSP and it thus
downgraded to a commercial bank. The result was a bank
run and holiday; it never reopened until the EI Bank wanted
its own shares to be listed and thus acquired and merged
with UDB. UDB was the surviving corporation but its name
was changed to Export and Industry Bank.
BLUE-SKY LAW - any law relating to investments
INSIDER - Could be a stockholder, officer, director or employee
who because of relation with corporation has information not
available to public which information could influence the price of
shares of the corporation. An insider need not necessarily be a
member of a corporation but one who derives information from
another.
Insider Trading - illegal (uses information not available to public)
NOTE: Original and exclusive jurisdiction over intra-corporate
controversies is no longer with SEC but with the RTC having
jurisdiction over the principal place of business.
BLUE CHIPS - shares that regularly pay dividends.
!52
 MORTGAGE CM* REM

Introduction Registration RD of mortgagor’s Registry of Deeds of

Under the NCC (Book V), there are accessory contracts securing residence + location of location of property
principal obligations (special contracts). These include pledge, property + LTO (motor
mortgage, antichresis, guaranty, and suretyship. vehicles)

Return of Not required Required

Definition
• A mortgage is a contract where the property is recorded (in the Excess
Registry of Deeds of the city and/or province) to secure a Claim for - No recovery under the
principal obligation. deficiency Recto Law
EXAMPLE: If a mortgaged property is in Batangas City, it must - (NCC 1484 on
be registered in both the City and Province of Batangas.
• An accessory contract, collateral or security for an obligation. instalment sale of
• They are valid only if there is a principal contract. personal property
where the mortgage is
constituted over the
Basic Principles object of sale to secure
1. Accessory Contract - only exists if there is a principal contract the payment of the
2. Mortagor is the owner of thing mortgaged purchase price). For
3. Mortgage is extinguished if the principal obligation is Recto Law to be
extinguished applied, mortgage must
be constituted over the
Scope: It may be constituted over: object of the instalment
1. Personal Property (Chattel Mortgage) sale.
2. Real Property (Real Estate Mortgage) - Recovery if not under
Recto Law is from
CM* REM Principal Debtor
(EXCEPT if obligation is
Object Personal property Real property solitary with Mortgagor)

Scope Existing and valid Includes future *prior to R.A. 11057 (2018)
obligations obligations
REAL ESTATE MORTGAGE
Includes voidable, unenforceable, rescissible and
natural obligations Governing Law: ACT 3135
It is a special law creating the right of the mortgagee to foreclose
Foreclosure Extrajudicial only EJ or judicial the REM extrajudicially.

How to extrajudicially foreclose a REM

3135 refers to Rule 39 of the Rules of Court:

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1. The Mortgagor must expressly authorise the mortgagee to sell
the mortgaged property in case of default, either in the deed of
mortgage or in a separate instrument.
EXAMPLE: In case of default, the bank shall be authorised the
sell, as it is hereby authorised to sell.
• INSUFFICIENT: Banks use printed deeds of REM with the
following provision: “In case of default, the Bank can
extrajudicially foreclose pursuant to Act No. 3135.” According
to an SC Circular, mere reference to Act No. 3135 is not
enough.
• Now, in case of default, the bank must be expressly
authorised to sell the property mortgaged.
• NOTE: Just copy the wording/form of the law.
2. The mortgagee must execute a verified petition
How is it initiated?
Prepare a verified petition to foreclose the REM. The sheriff or a
notary public may handle this. The mortgagee himself may do it,
but it is often the sheriff or notary public.
Where filed: Sheriff or Notary Public
• Court-approved Foreclosure Sale (CAFS) is not required
• NOTE: It is ironic that the remedy is supposed to be extra-
judicial or out of court and yet sheriff is not allowed to accept
the petition unless the court fees required are paid (SC
Circular March 2000).
3. Referral and Payment of Fees
4. Notice of Auction Sale
• By Whom Issued: Sheriff, NP
• Where: Where the property is situated
• How:
a. Notice in at least three public places in City or Province
where the property is located
b. Publication in a newspaper of general circulation, once
a week for two consecutive weeks.
NOTE: Publisher must be accredited by the court and
assigned the publication by raffle.
Should notice be furnished to the mortgagor?
No because publication is constructive notice to all.
• R E Q U I R E M E N T: C O R R E C T D E S C R I P T I O N O F
PROPERTY, otherwise the notice would be void.
• How to prove: ask for Certificate of Notice or Affidavit of
Publication and a copy of issue of the newspaper.
5. Scrutiny of the Title of the Property
• If the property is wrongly described in the publication, then
the entire proceeding would be void.
• REMEDY: Inform the publisher and correct the issue
6. Auction Sale
• If there is a written agreement between the mortgagor
and mortgagee to postpone the auction sale, is it valid?
YES, because it is not contrary to law, morals, good
customs, public order or policy. however, in case of
postponement, the notice requirements should be complied
with again as in the case of Nepomuceno Productions vs.
PNB.
• Three possible results of an auction sale:
a. Bid exceeds the amount of the obligation: the excess is
returned to the mortgagor
b. Bid is less than the amount of the obligation: the
deficiency is recoverable
c. Mortgagor himself is the highest bidder: There is no
need for the amount of the bid to be delivered to the
sheriff or NP.
NOTE: There is no longer any requirement of having at least two
(2) bidders.
7. Certificate of Sale
• By whom issued: Sheriff or NP
• What to do: Register ASAP with RD because the one-year
Right of Redemption commences within one year from the
date of registration.
8. Redemption
• Nature: Right, not a duty; it may not be forced on the
mortgagor. It is a property right arising from property. It is real
property and is a real right.
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• Who exercises Right of Redemption:
• Mortgagor
• His successors-in-interest
• Judgment creditor of mortgagor
• How is it exercised: There must be a valid tender of the
redemption price within the redemption period.
• When is tender valid: If there is tender of the full amount of
in legal tender
• What is the redemption price:
• If there is a special law that created the mortgage and
there is an indication of redemption price, then follow
that
• If it is a bank, it depends on the law
• If another person:
• Bid price
• 1% interest per month on the bid price
• Taxes and charges paid by the highest bidder
• 1% interest per month on the taxes and charges
paid
NOTE: The SC construed this as 12% per annum
• To whom must the amount be tendered: highest bidder or
Sheriff/NP conducting the auction, whoever is less
intimidating.
• If tender refused: the remedy is specific performance. The
amount may not be consignated because for consignation to
be allowed, there must be a debt due.
• NOTE: Present the Certificate of Title from the Register of
Deeds with the annotations of the Certificate of Sale.
• What is the Certificate of Redemption: It cancels the
certificate of sale.
• When is the Redemption Period:
GR: 1 year from registration of certificate of sale (NOT 12
months)
E: 90 days or before the registration of title over the
property, whichever comes first IF the mortgagor is a
juridical person and the mortgagee is a bank (General
Banking Act)
• Is the right of redemption waivable? NO. Express waivers
within the period of redemption is not allowed because it is
contrary to public policy. HOWEVER, waiver may be done by
not exercising the right.
• Is it transferable? YES, either onerously or
gratuitously. Redemption is a real right over real
property. The right may be inherited by succession.
9. Acquisition of Title
• When to obtain title to the property: When the period of
redemption expired without anyone redeeming the property.
• How: 2 ways
• Have the sheriff/NP issue a Final Certificate of Sale
• Execute an Affidavit of Non-Redemption, which is less
expensive than the first.
• Pay BIR the taxes upon the expiration of the redemption
period
• Why do it: The BIR requires: (1) certificate authorising
registration and (2) the tax clearance certificate
• DST - within five days from the month following the
expiry of the redemption period
• CGT / Withholding Taxes - 30 days from expiration of
the redemption period
• VAT
• Transfer Taxes of LGUs
• pay the amount of taxes to the LGU
• Update all realty taxes
• Obtain a Clearance from the local treasurer
• Go to the RD for the issuance of a TCT
• What is the tax base: by reason of a BIR Circular
dated July 2012, the tax base is now the highest of:
• Bid price or
• Market value in the tax declaration or
• BIR valuation
10. Possession of the Property
• How: Ex parte petition for the issuance of a Writ of
Possession. (it is in the nature of a motion)
• Nature:
• GR: Ministerial duty of the court BUT if filed before the
end of the redemption period, a bond is required.
• E: Not ministerial if there is another person with a better
right, e.g. lessee
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 • Required: good faith of applicant. Thus, the applicant must
inquire into the (a) TCT and (b) rights of the current
possessor to qualify as a buyer in good faith; otherwise, he
will have no right of possession.
New buyer in good faith doctrine: Looking at certificate of title is
no longer enough you must look at the right of the person in actual
possession of the property. Failure to do so does not qualify one as
a buyer in good faith.
Note from Author:
This is an update on the unofficial Abella Notes SY
2012-2013, made based on Commercial Law Review
Lectures under Dean Abella on SY 2018-2019.
Law on Chattel Mortgage and Corporation Code are not
included because of the amendments of Chattel Mortgage
Law in 2018 and repeal of the Corporation Code in 2019.

Case: Person borrowed from bank. Parents executed a Real Read at your own risk.
Estate Mortgage. borrower issued post-dated checks. The checks
were dishonored. The bank sued the borrower for B.P. 22.

Remedies for bank:

1. Civil collection
2. B.P. 22
3. Foreclosure

Filing of B.P. 22 is an abandonment of the mortgage.

If the buyer of mortgaged land already owns the land and the prior
owner does not want to leave, file an ex parte Petition for Issuance
of a Writ of Possession.

Practical Matters:
• Attach all certified true copies of documents in the petition -
title, deed of mortgage, final certificate of sale, BIR clearance
(tax clearance, certificate authorising registration)
• When Register of Deeds issues Certificate of Title, he issues at
least 2, the original and the owner’s copy. There are at least 2
because co-owners may each want a copy of the certificate of
title. In which case, the co-owners duplicate should be
prepared with the original. If you are buying from co-owners,
you must get all other copies so that they may be annotated.
• Remedy or the issuance of a writ of possession is the same in
extrajudicial foreclosure, judicial foreclosure and execution
sale. There is no remedy if a third party has a better right.

Can PDCs be used as chattel mortgaged property?

Legally, YES.

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