MERCANTILE LAW

2017 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
 The UST GOLDEN NOTES is the annual student-edited bar review
material of the University of Santo Tomas, Faculty of Civil Law.
Communications regarding the Notes should be addressed to the
Academics Committee of the UST Bar Operations.

Address: Academics Committee

UST Bar Operations
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008

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(02) 406-1611 loc. 8578

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

All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical
and Royal University of Santo Tomas, the Catholic University of the Philippines.

2017 Edition.

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

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No. ____________

Printed in the Philippines June 2017.

 ACADEMIC YEAR 2017-2018
CIVIL LAW STUDENT COUNCIL
JONATHAN SANTOS PRESIDENT
MA. JASMIN A. LABACO INTERNAL VICE PRESIDENT
NIÑO JOSEPH B. PIO RODA EXTERNAL VICE PRESIDENT
KARIZZA KAMILLE M. CRUZ SECRETARY

UST BAR OPERATIONS

NIKKI MEI Q. KO CHAIRPERSON

RHOSE AZCELLE L. MAGAOAY VICE-CHAIRPERSON
JANN PATRICIA M. TORRES SECRETARY
JERREMIAH KRIZIAH B. BATALLER ASST. SECRETARY
NELLE FRANCESE DELA PAZ ASST. SECRETARY
ALEXANDER MARA J. VINLUAN HEAD, PUBLIC RELATIONS OFFICER
DENZ CHRISTIAN A. RESENTES ASST. HEAD PUBLIC RELATIONS OFFICER
CLARICE ANGELINE V. QUESTIN HEAD, FINANCE COMMITTEE
KAIRA MARIE B. CARLOS ASST. HEAD, FINANCE COMMITTEE
CLARA LOUISSE J. YUMANG HEAD, HOTEL ACCOMMODATIONS COMMITTEE
EMMANUEL A. LANDAYAN ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
JOHN AL-NAIR SIMONE L. JUMAMIL ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
PATRICIA MAE D. GUILLERMO ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
NIÑO JOSEPH B. PIO RODA LOGISTICS COMMITTEE
JOCHRIS DANIEL Z. GUADES LOGISTICS COMMITTEE
BERYLL ANDRÉ Y. BARCENAS LOGISTICS COMMITTEE
MON FRANCIS A. TOLENTINO LOGISTICS COMMITTEE
MICHAEL EARVIN R. SABADO LOGISTICS COMMITTEE

ATTY. AL CONRAD B. ESPALDON

ADVISER
 ACADEMICS COMMITTEE

CAMILLE ANGELICA B. GONZALES SECRETARY GENERAL

EMNIE VALERIE B. DURAN DEPUTY SECRETARY GENERAL
IRVIN L. PALANCA EXECUTIVE COMMITTEE
MARIELLA A. MARASIGAN EXECUTIVE COMMITTEE
LARA NICOLE T. GONZALES EXECUTIVE COMMITTEE

CAMILLE ANGELICA B. GONZALES LAYOUT ARTIST

CIARI T. MENDOZA COVER DESIGN ARTIST

MERCANTILE LAW COMMITTEE

JOSEPH NELSON A. HERNANDEZ
MERCANTILE LAW COMMITTEE HEAD

FLORRENCE FAYE S. FRANCO ASST. HEAD, CORPORATION LAW

KELLY ANN RUBIN ASST. HEAD, TRANSPORTATION LAW
MAICA A. PRUDENTE ASST. HEAD, INTELLECTUAL PROPERTY LAW
JANINE AIRA A. ARENAS ASST. HEAD, INSURANCE LAW
JACKIELYN KRYSTYL C. BANA ASST. HEAD, SPECIAL COMMERCIAL LAWS

MEMBERS
NEREN O. NIEVA
GERALD L. NACPIL
CAMILLE ANNE P. DE ASIS
STEFFI NICOLE P. FLORES
CLAIRE MARGARETTE M. BONA
ZARA JANELLA M. CACHA
DIVINE CARLOS

ATTY. MARY GRACE L. JAVIER

Adviser
 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS

ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.

DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADANIA, R.G.C.

GUIDANCE COUNSELOR
 OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION

DEAN NILO T. DIVINA

DEAN AMADO L. DIMAYUGA

ATTY. JACINTO D. JIMENEZ

ATTY. ALBERT R. PALACIOS

ATTY. AMADO T. TAYAG

ATTY. TEOFILO R. RAGADIO

ATTY. ALLAN B. GEPTY

JUSTICE GABRIEL T. ROBENIOL

JUSTICE JAPAR B. DIMAAMPAO

JUDGE MARIA ELLA CECILIA D. ESCALANTE

ATTY. MARIAN JOANNE K. CO-PUA

For being our guideposts in understanding the intricate sphere of Mercantile Law.
-Academics Committee 2017
 Foreword for 2017 Golden Notes
Dean Nilo T. Divina

It is with pleasure that I introduce to you the 2017 Golden Notes - a product of the concerted
and dedicated efforts of our students, faculty and staff to ensure that our Bar candidates are
armed with the most comprehensive, updated and easy to digest reviewer as their companion
in the review process. This will provide key concepts, updated jurisprudence, relevant
comparisons and notable changes in the law, if any, right at your fingertips.

With the aid of selected lawyers, Golden Notes remains at the forefront of providing legal
insights raised from past bar questions and current events that could be part of the discussion
in the bar examinations.

Notably, the editors of this book signified their intention to serve in assisting our aspiring
lawyers to develop the kind of mentality needed in justifying answers supported by facts and
relevant provisions of laws during the Bar examinations, through the publication’s logical
sequence and meticulous presentation of even the most difficult legal concepts.

With the aim of increasing the candidate’s confidence and ensuring the efficient use of his/her
time in pouring through all eight (8) Bar subjects, we have enlisted the expertise of some of
the most senior practitioners in the different fields of law, including noted jurists and
esteemed bar reviewers. The diversity of the publication's roster of consultants and editors
ensures that it remains relevant and essential. Indeed, with contributions from different
people mentioned above, this issue of the Golden Notes marks an important new step in the
direction of the UST Faculty of Civil Law.

Let these notes, however, not detract you from the true goal. There is no substitute for hard
work, and there is no shortcut to excellence. Persevere. Strive. Keep the faith. You will make
it.

“Courage and perseverance have a magical talisman, before which difficulties disappear and
obstacles vanish into air.”
- John Quincy Adams
 TABLE OF CONTENTS
*BASED ON 2017 BAR SYLLABUS

I. LETTERS OF CREDIT…………………………………………………………………………………………………………………1
A. Definition and Nature of Letter of Credit………………………………………………..…….…………...……….1
B. Parties to a Letter of Credit………………………………………..…………………………………..………………….3
1. Rights and Obligations of Parties…………………………..……………………………………....………3
C. Basic Principles of Letter of Credit……………………………………………………………………………..……...5
1. Doctrine of Independence…………………………………………………………………………………….5
2. Fraud Exception Principle……………………………………………………….……………………………7
3. Doctrine of strict Compliance……………………………………………..…………………………………7

II. TRUST RECEIPTS LAW……………………………………………………………………………………..………………………9

A. Definition/Concept of a Trust Receipt Transaction………...…………………………..………………………9
1. Loan/Security Feature……………………………………………………………………..…………………11
2. Ownership of the Goods, Documents and Instruments under a Trust
Receipt……………………………………………………………………………………………………..…………...11
B. Rights of the Entruster……………………………………………………………………………………………………11
1. Validity of the Security Interest as Against the Creditors of the Entrustee/ Innocent
Purchasers for Value..............................................................................................................................…..12
C. Obligation and Liability of the Entrustee……………..……………………………….…………………………..12
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or
Instruments………………………………………………………………………………………..……………...….12
2. Return of Goods, Documents or Instruments in Case of Sale...............................…………..12
3. Liability for Loss of Goods, Documents or Instruments…………………………...……………13
4. Penal Sanction if Offender is a Corporation………………………..………………………….…….13
D. Remedies Available……………………………………………………………………………………………..………….15
E. Warehouseman’s Lien…………..…………………………………………………………………………………………23

III. NEGOTIABLE INSTRUMENTS LAW………………………………………………………………………………..………25

A. Forms and Interpretation……………………………….…………………………….……………………..………….25
1. Requisites of Negotiability…………………………………….…………………………………..………..26
2. Kinds of Negotiable Instruments……………………………….…………………..……………………32
B. Completion and Delivery……………………………………………………………..………………………………….34
1. Insertion of Date…………………………………………………..…………………………………………….34
2. Completion of Blanks…………………………………………………….……………………………………35
3. Incomplete and Undelivered Instruments……………………………...……………………...…….36
4. Complete but Undelivered Instruments…………………………………………………………..…..37
C. Signature……………………...………………………………………………………….……………………………………..37
1. Signing in Trade Name……………………………………………..………………………………………...38
2. Signature of Agent……………………………………………………….……………………………………..38
3. Indorsement by Minor or Corporation……………………………….……………………..………...38
4. Forgery……………………………………………………...………………………………………………………39
D. Consideration………………………………………………………………..……………………………………………….41
E. Accommodation Party………………………………………………….…………………………………………………43
F. Negotiation……………………………………………………………………………………………………………………..46
1. Distinguished from Assignment………………………….……………..………………………………..46
2. Modes of Negotiation………………………………………………………………...……………………….46
3. Kinds of Indorsements……………………………………………………………………………………….48
G. Rights of the Holder………………………………………………………………………………………………………..49
1. Holder in Due Course………………………………………………………………………………………….49
2. Defenses Against the Holder……….………………………………………………………………………52
H. Liabilities of Parties……………………………….……………………………………………………………………….54
1. Maker………………………………………………………………………………………………………………..54
2. Drawer………………………………………………………………………………………………………………55
3. Acceptor………………………………………………………………….…………………………………………56
4. Indorser………………………………………………………………..…………………………………………...56
5. Warranties………………………………………………….……………………………………………………..58
I. Presentment for Payment…………………………………………..…………………………………………………….59
 1. Necessity of Presentment for Payment………………………………….…………………….………59
2. Parties to Whom Presentment for Payment Should Be Made…………………..………...….60
3. Dispensation with Presentment for Payment…………………………………….…….…………..61
4. Dishonor by Non-Payment………………………………………………………………….………………61
J. Notice of Dishonor……………………...…………………………………………………………………………..………..61
1. Parties to Be Notified………………………….……………………………………………..……………….62
2. Parties Who May Give Notice and Dishonor…………………………………………………...……62
3. Effect of Notice……………………………………………………………..……………………………………63
4. Form of Notice……………………………………………………………..…………………….......................63
5. Waiver…………………………………………………………………………………….....................................63
6. Dispensation with Notice………………………………………………………………………….……......63
7. Effect of Failure to Give Notice………………………………………………………….………………...64
K. Discharge of Negotiable Instrument……………………………………………………………...…………………64
1. Discharge of Negotiable Instrument…………………………………..………………………………..64
2. Discharge of Parties Secondarily Liable…………………………….…………………………………65
3. Right of Party Who Discharged Instrument………………………..………………………………..66
4. Renunciation by Holder………………………………………………………..…………………………….66
L. Material Alteration……………………………………………………………………………………..............................66
1. Concept………………………………………………………………………..…………….................................66
2. Effect of Material Alteration…………………………………………….………………………………….66
M. Acceptance……………………………………………………….....................................................................................67
1. Definition……………………………………………………………………..…………….................................67
2. Manner……………………………………………………………………………………………………………...67
3. Time for Acceptance………………………………………………………….……………………………….68
4. Rules Governing Acceptance……………………………………………………………………………….68
N. Presentment for Acceptance……………………………………………………………………………………………68
1. Time/Place/Manner of Presentment………………………………….……………………………….69
2. Effect of Failure to Make Presentment…………………………….…………………………………..69
3. Dishonor by Non-Acceptance……………………………………………...………………………………69
O. Promissory Notes…………………………………………………………...………………………………………………70
P. Checks……………………………………………………………………………………………..……………………………..71
1. Definition ………………………………………………………………………..………………………………...71
2. Kinds………………………………………………………………………...……………………………………….72
3. Presentment for Payment…………………………………………..……………………………………….74
a. Time……………………………………………………………...……………………………………...74
b. Effect of Delay………………………………………………..……………………………………...74

IV. INSURANCE CODE……………………………………………………………………….………………………………………...75

A. Concept of Insurance………………………………………………………………...…………………………………….75
B. Elements of an Insurance Contract…………………………………………………………………………………..78
C. Characteristics/Nature of Insurance Contracts………………………………………………………………...79
D. Classes…………………………………………………………………………………………………………………………..80
1. Marine………………………………………………………………….……..…………………………………...108
2. Fire…………………………………………………….………………………..…………………………………..118
3. Casualty…………………………………………………………………………………………………………...120
4. Suretyship………………………………………………………………….…………………………………….123
5. Life…………………………………………………………………………………………………………………..124
6. Compulsory Motor Vehicle Liability Insurance…………………………………………………..126
E. Insurable Interest……………………………………………………………………...……………………………………80
1. In Life/ Health……………………………………………………………………………………………………82
2. In Property…………………………………………………………………………….…………………………..84
3. Double Insurance and Over Insurance…………………………………..…………………………….85
4. Multiple or Several Interests on Same Property…………………………………………………...87
F. Perfection of the Contract of Insurance…………………………………………………………………………….88
1. Offer and Acceptance/Consensual……………………………………………………...……………….89
a. Delay in Acceptance…………………………………………………..…………………………..90
b. Delay of Policy……………………………………………………………….……………………...90
2. Premium Payment……………………………………………………………………………………………...90
3. Non-Default Options in Life Insurance………………………………………………………………...95
 4. Reinstatement of Lapsed Policy of Life Insurance………………………………..……………….95
5. Refund of Premiums……………………………………………………………………..……………………96
G. Rescission of Insurance Contracts……………………………………………………………………………………97
1. Concealment………………………………………………………………………………………………….......97
2. Misrepresentation/Omissions…………………………………………………………………………..100
3. Breach of Warranties…………………………………………………..……………………………...........102
H. Claims Settlement and Subrogation……………………………………………………………………………….104
1. Notice and Proof of Loss……………………………………………..…………………………………….104
2. Guidelines on Claims Settlement……………………………...………………………………………..105
a. Unfair Claims Settlement; Sanctions……………………………………………………..105
b. Prescription of Action………………………………………………………………………….105
c. Subrogation…………………………………………………………………………………………106

V. TRANSPORTATION LAWS…………………………………...………………………………………………………….……130
A. Common Carriers………………………………………………………………………….………………………………130
1. Diligence Required of Common Carriers……….……………………………………….…………..133
2. Liabilities of Common Carriers…………………………………...………………………….…………136
B. Vigilance over Goods…………………………………………………………………………………….………………138
1. Exempting Causes………………………………………………………………………….…………………138
a. Requirement of Absence of Negligence…………………………………………...…….139
b. Absence of Delay…………..……………………………………………………..………………141
c. Due Diligence to Prevent or Lessen the Loss……………………..………………..…142
2. Contributory Negligence……………………………......................................………………………….142
3. Duration of Liability…………………………………………………………………………………………147
a. Delivery of Goods to Common Carrier……………………………….....……………….147
b. Actual or Constructive Delivery……….……………………………...……………………142
c. Temporary Unloading or Storage……………………………....…………………………143
4. Stipulation for Limitation of Liability……………………………………….………..………………143
a. Void Stipulations…………………………………………………………..……………………..144
b. Limitation of Liability to Fixed Amount………………………………….……………..145
c. Limitation of Liability in Absence of Declaration of Greater
Value……………………………………………………………………………………………………...145
5. Liability for Baggage of Passengers……………………………………………………..…………….145
a. Checked-in Baggage………………………………………………………………..……...……145
b. Baggage in Possession of Passengers………………………………..…………………..146
C. Safety of Passengers……………………………………………………………………………………….……………..146
1. Void Stipulations…………………………………………………………………………..………………….147
2. Duration of Liability…………………………………………………………………………………………147
a. Waiting for Carrier or Boarding of Carrier…………………….………………………147
b. Arrival of Destination…………………………………………………………………………..148
3. Liability for Acts of Others……………………………………………………………..…………………149
a. Employees…………………………………………………………………………..………………149
b. Other Passengers and Strangers…………………………………………………..………150
4. Extent of Liability for Damages……………………………………………………………..…………..151
D. Bill of Lading……………………………………………………………………………………………….………………..153
1. Three-Fold Character………………………………………………………………..……………………...153
2. Delivery of Goods……………………………………………………………………………………………..154
a. Period of Delivery…………………………………………………………..……………………154
b. Delivery Without Surrender of Bill of
Lading…………………………………………………………………………………………………….154
c. Refusal of Consignee to Take Delivery………………………….……………………….154
3. Period for Filing Claims…………………………………………………………………………………….155
4. Period for Filing Actions……………………………………………………...……………………………155
E. Maritime Commerce……………………………………………………………………………….……………………..156
1. Charter Parties…………………………………………………………………………………………………156
a. Bareboat/Demise Charter…………………………………….……………………………...156
b. Time Charter……………………………………………………………………………………….156
c. Voyage/Trip Charter………………………………………………..…………………………..156
2. Liability of Ship Owners and Shipping Agents…………………….……………………………...157
 a. Liability for Acts of Captain………………………………………….……………………….158
b. Limited Liability Rule…………………………………………………...……………………...160
c. Exceptions to the Limited Liability Rule……………………….……………………….160
3. Accidents and Damages in Maritime Commerce………………………….……………………..161
a. General and Particular Averages…………………………………….…………………….161
b. Collisions………………………………………………………………………….…………………162
4. Carriage of Goods by Sea Act…………………………………………………………………………….164
a. Application…………………………………………………………………...……………………..164
b. Notice of Loss or Damage……………………………………………..….……….………… 164
c. Period of Prescription……………………………………………………………….…………165
d. Limitation of Liability……………………………………………………..…………………...167
F. The Warsaw Convention………………………………………………………………………….……………………167
1. Applicability…………………………………………………………………………….………………………168
2. Limitation of Liability…………………………………………………………...…………………………..169
a. Liability to Passengers……………………………………………………..…………………..169
b. Liability for Checked Baggage…………………………………..…………………………..169
c. Liability for Handcarried Baggage…………………………...………………..…………..169
3. Willful Misconduct………………………………………………………………….………………………..170

VI. THE CORPORATION CODE…………………………………………………………………………………………………..175

A. Corporation…………..………………………………………………………………………...……………………………175
1. Definition……………………………………………………………………….…………….………………….175
2. Attributes of the Corporation……………………………………………………………………………175
B. Classes of Corporations…………………………………………………………..…………………….………………181
C. Nationality of Corporations…………………………………………………..………………………….……………187
1. Place of Incorporation Test………………………………….……………………………………………187
2. Control Test………………………………………………………….……….…………………………………187
3. Grandfather Rule…………………………………………………….……………………………..…………188
D. Corporate Juridical Personality…………………………………………………………………………..…………190
1. Doctrine of Separate Juridical
Personality…………………………………………………………….……………………………………………190
a. Liability for Torts and Crimes…………………...………………………………….………196
b. Recovery of Moral Damages…………………………………..………..………………...…196
2. Doctrine of Piercing the Corporate Veil………………………………..……………………………198
a. Grounds for Application of Doctrine……………………....…………….……………… 198
b. Test in Determining Applicability…………………………………………………………203
E. Incorporation and
Organization……………………………………………………………………………………...………………..……………206
1. Number and Qualifications of
Incorporators……………………………………………………….…………………………………...…...……208
2. Corporate Name - Limitations on Use of Corporate Name……………………………..……210
3. Corporate Term……………………………………………………………………………………………..…213
4. Minimum Capital Stock and Subscription Requirements………………………….…………213
5. Articles of Incorporation……………………………………….……………………………….…………214
a. Nature and Function of Articles………………………………………...……………….…214
b. Contents……………………………………………………………………………...………………214
c.Amendment……………………….…………………………………………………………………215
d. Non-Amenable Items………………………………………………...…………………………216
6. Registration and Issuance of Certificate of Incorporation……………………...……………216
7. Adoption of By-Laws…………………………………………….……………………………..……………217
a. Nature and Functions of By-Laws………………………..………………………………..217
b. Requisites of Valid By-Laws……………………………..…………………………………..217
c. Binding Effects…………………………………………………………………………………….218
d. Amendment or Revision………………………………………………….…………………...220
F. Corporate Powers………………………………………………………………………………………………………... 220
1. General Powers, Theory of General Capacity………………………………….………………….221
2. Specific Powers, Theory of Specific Capacity……………………………………….……………..223
a. Power to Extend or Shorten Corporate Term…………………….………………….223
 b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded
Indebtedness…………………………………………………………………….………..224
c. Power to Deny Pre-Emptive Rights………………………………….……………………226
d. Power to Sell or Dispose of Corporate Assets………………….…………………….228
e. Power to Acquire Own Shares………………………………………………………………229
f. Power to Invest Corporate Funds in Another Corporation or
Business…………………………………………………………………………….…………………...230
g. Power to Declare Dividends…………………………………………………………………231
h. Power to Enter Into Management Contract………………………….………………..234
i. Ultra Vires Acts…………………………………………………………………..………………...235
i. Applicability of Ultra Vires Doctrine………………………..………………..235
ii. Consequences of Ultra Vires Act…………………………….………………..239
3. How Exercised…………………………………………………………………………………………………240
a. By the Shareholders…………………………………………………………..…….…………..240
b. By the Board of Directors…………………………………………………………….………240
c. By the Officers…………………………………………………………………………..…………242
4. Trust Fund Doctrine…………………………………………………………………….…….……………..244
G. Board of Directors and Trustees……………………………………………………..……………………………..245
1. Doctrine of Centralized Management………………………………………………………………...245
2. Business Judgment Rule………………………………………………………………….………………..246
3. Tenure, Qualifications and Disqualifications of Directors or Trustees……………...….246
4. Elections………………………………………………………………………………………………..………...249
a. Cumulative Voting/Straight Voting…………………………………….………………...250
b. Quorum…………………………………………………………………………………………...….250
5. Removal………………………………………………………………………………………………...………...250
6. Filing of Vacancies……………………………………………………………………………………………251
7. Compensation……………………………………………………………………………………………..…...252
8. Fiduciaries Duties and Liability Rules……………………………..…………………………………253
9. Responsibility for Crimes…………………………………………………..……………………………..258
10. Inside Information…………………………………………………………….……………………………258
11. Contracts……………………………………………………………………………..………………………...259
a. By Self-Dealing with the Corporation……………………………………………………259
b. Between Corporations with Interlocking Directors…………………..…………...259
12. Executive Committee……………………………………………………………………...………………260
13. Meetings…………………………………………………………………………………………..……………261
a. Regular or Special…………………………………………………………….………………….261
i. When and Where………………………………………..…………………………...261
ii. Notice……………………………………………………..……………………………...262
b. Who Presides…………………………………………………………………………...………... 263
c. Quorum……………………………………………………………………………………………….264
d. Rule on Abstention………………………………………………………………..…………….264
H. Stockholders and Members……………………………………………….………………………………..…………264
1. Rights of a Stockholder and
Members……………………………………………………………………………………………..………………264
a. Doctrine of Equality of Shares………………………………...……………………….……265
2. Participation in Management……………………………………………….…………………...………265
a. Proxy……………………………………………………………………...…………...………………265
b. Voting Trust ……………………………………………………...………………………………..267
c. Cases When Stockholders’ Action is Required…………………...…………………..269
i. By a Majority Vote…………………………………………………….……………..270
ii. By a Two-Thirds Vote……………………………………….…………………….270
iii. By Cumulative Voting…………………………………………………………….270
3. Proprietary Rights………………………………………………………………………….………………...270
a. Right to Dividends…………………………………………………………...…………………..270
b. Right of Appraisal………………………………………………………...……………………...271
c. Right to Inspect……………………………………………………………………………………273
d. Pre-Emptive Right………………………………………………………….……………………275
e. Right to Vote………………………………………………………………………..………………276
f. Right of First Refusal…………………………………………………………………………….277
 4. Remedial Rights……………………………………………………………………………………………….278
a. Individual Suit……………………………………………………………………………………..278
b. Representative Suit………………………………………..……………………………………278
c. Derivative Suit……………………………………………………………………………………..278
5. Obligation of a Stockholder………………………………………….…………………………………...282
6. Meetings……………………………………………………………………...…………………………………..283
a. Regular or Special………………………………………………………………………………..283
i. When and Where……………………………..……………………………………...283
ii. Notice…………………………….………………….…………………………………...283
b. Who Calls the Meetings………………………………..……………………………………... 284
c. Quorum……………………………………………………………………………………………….284
d. Minutes of the Meetings………………………………….…………………………………...285
I. Capital Structure…………………………………………………………………………….……………………………...285
1. Subscription Agreements…………………………………………….……………………………………285
2. Consideration for Stocks…………………………………………………………………………………..287
3. Shares of Stock………………………………………………………………………………………………...287
a. Nature of Stock……………………………………………………………………………………288
b. Consideration for Shares of Stock…………………….…………………………………..288
c. Watered Stock…………………………………………………….……………………………….289
i. Definition…………………………………………...…………………………………...289
ii. Liability of Directors for Watered Stocks………………………………….289
iii. Trust Fund Doctrine for Liability for Watered Stocks………………290
d. Situs of the Shares of Stock…………………………………………………………………..290
e. Classes of Shares of Stock…………………………………………….……………………....290
4. Payment of Balance of Subscription………………………………………………..………………...294
a. Call by Board of Directors……………………………………………….……………………294
b. Notice Requirement…………………………………………………………………….………295
c. Sale of Delinquent Shares………………………………………………………..……………295
i. Effect of Delinquency……………………………………………………..………...295
ii. Call by Resolution of the Board of Directors…………………….……….296
iii. Notice of Sake……………………………………………………...………………...296
iv. Auction Sale and the Highest Bidder……………………………………….296
5. Certificate of Stock…………………………………………………………………………………………...297
a. Nature of the Certificate………………………………………..……………………………..297
b. Uncertificated Shares………………………………………………………………..…………297
c. Negotiability…………………………………………………………………………….………….297
i. Requirements for Valid Transfer of Stocks………………………...……...298
d. Issuance………………………………………………………………………………………..…….302
i. Full Payment………………………………………………………………...…………302
ii. Payments Pro-Rata…………………………………………………….…………...302
e. Lost or Destroyed Certificates………………………………………………...…………….302
6. Stock and Transfer Book…………………………………………………………………………………..304
a. Contents…………………………………………………………………………...…………………304
b. Who may make Valid Entries……………………………………...………………………..304
7. Disposition and Encumbrance of Shares……………………………………………………………304
a. Sale of shares…………………………………………………………….………………………...304
b. Allowable Restrictions on the Sale of Shares……………………………..…………..305
c. Requisites of a Valid Transfer…………………………………………………..…………...305
d. Involuntary Dealings with Shares…………………………………………………………306
J. Dissolution and Liquidation……………………………………………………………………………………………306
1. Modes of Dissolution…………………………………………………………………….………………….308
a. Voluntary…………………………………………………………………….……………………...309
i. Where No Creditors Are Affected……………………….…………………….309
ii. Where Creditors Are Affected…………………………..……………………..309
iii. By Shortening of Corporate Term…………………..………………………310
b. Involuntary…………………………………………………………………………………………310
i. By Expiration of Corporate Term………………...……………………………310
ii. Failure to Organize And Commence Business Within 2 Years From
Incorporation………………………………………………………………..…………...311
 iii. Legislative Dissolution………………………………….…………....................311
iv. Dissolution by the SEC on Grounds under Existing Laws………....311
2. Methods of Liquidation………………………………………………………………………….…………312
a. By the Corporation Itself……………………………………………………………………...313
b. Conveyance to a Trustee within a Three-Year Period…………………………….314
c. By Management Committee or Rehabilitation Receiver………………………....315
d. Liquidation After Three Years…………………………………………………….………..320
K. Other Corporations……………………………………………………………………………………………………….320
1. Non-Stock Corporations…………………………………………………………….……………………..326
a. Definition………………………………………………………………………….………………...326
b. Purposes…………………………………………………………………………..…………………329
c. Treatment of Profits…………………………………………………………………………….329
d. Distribution of Assets upon Dissolution………………………………………………..329
2. Foreign Corporations……………………………………………………………………….………………329
a. Bases of Authority over Foreign Corporations………………………………………330
i. Consent……………………………………………………………………..…………….330
ii. Doctrine of “Doing Business” (related to definition under the Foreign
Investments Act, R.A. No. 7042)………………..…………………….330
b. Necessity of a License to Do Business…………………………………………………...332
i. Requisites for Issuance of a License………………………………………….333
ii. Resident Agent………………………………………………………………...……..334
c. Personality to Sue………………………………………………………………………..………335
d. Suability of Foreign Corporations………………………………………………………...335
e. Instances When Unlicensed Foreign Corporations May Be Allowed to
Sue……………………………………………………………………………………………………..…..336
f. Grounds for Revocation of License……………………………………..…………………337
L. Mergers and Consolidations……………………………………………………………………………….………….337
1. Definition and Concept……………………………………………………………………………………..337
2. Plan of Merger or Consolidation……………………………………………………...………………...342
3. Articles of Merger or Consolidation……………………………………………….………………….343
4. Procedure………………………………………………………………………………………..………………343
5. Effectivity…………………………………………………………………………………….…………………..343
6. Effects and Limitations………………………………………………………….………………………….344

VII. SECURITIES REGULATION CODE (R.A. No. 8799)…………………..…………………...………………………345

A. State Policy, Purpose………………………………………………………………………………………….…………346
B. Definition of Securities…………………………………………………………………………………….……………346
C. Kinds of Securities………………………………………………………………………………………...………………349
1. Exempt Securities…………………………………………………………………………..…………...……349
2. Exempt Transactions………………………………………………………………….……….……………350
3. Non Exempt…………………………………………………………………………………….…………….…350
D. Procedure for Registration of Securities………………………………………………...………………………350
E. Prohibitions on Fraud, Manipulation and Insider Trading……………...………………………….……352
1. Manipulation of Security Prices…………………………………………………..………….…………352
2. Fraudulent Transactions……………………………………...………………………………...…………353
3. Insider Trading…………………………………………………………………………………...……………354
F. Protection of Investors………………………………………………………………………………….………………355
1. Tender Offer Rule……………………………………………………………………..………………...……355
2. Rules on Proxy Solicitation……………………………..................................…………………………358
3. Disclosure Rule………………………………………………………………………...………………………358
G. Civil Liability………………………………………………………………………………………….……………..………359

VIII. BANKING LAWS………………………………………………………………………………..…………………………….. 361

A. The New Central Bank Act (R.A. No. 7653) ………………………………………………………………361
1. State Policies………………………………………………………………………….………………………...361
2. Responsibility and Primary Objective of the BSP………………………………………...……..361
3. Monetary Board - Powers and Functions………………………...………………………...………361
4. How the BSP Handles Banks in Distress…………………………………………………….………362
a. Conservatorship………………………………………..…………………………………………362
 b. Closure……………………………………………………………………………………….....……363
c. Receivership…………………………………………….…………………………….……………364
d. Liquidation……………………………………………………………………….…………………364
5. Legal Tender Power…………………………………………………..………………………………..……367
6. Foreign Exchange Operations………………………………………………………….……………..…368
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)…………………………………368
1. Purpose………………………………………………….……………………………………………..…………368
2. Prohibited Acts………………………………………………………………………………...………………369
3. Deposits Covered…………………………………………………………………………………………..…369
4. Exceptions………………………………………………………………………….……………………………369
5. Garnishment of Deposits, including Foreign Deposits………………………..……….………374
C. General Banking Law of 2000 (R.A. No. 8791) …………………………………………...……………...375
1. Definition and Classification of Banks…………………………………………………………..……375
2. Distinction of Banks from Quasi-Banks and Trust Entities……………………….…………376
3. Bank Powers and Liabilities………………………………………………………………………...……377
a. Corporate Powers………………………………………………..………………………………377
b. Banking and Incidental Powers………………………………………………..…..………377
4. Diligence Required of Banks……………………………………………………………………..………378
5. Nature of Bank Funds and Bank Deposits………….……………………………....………………380
6. Stipulation of Interests……………………………………………………………………..………………382
7. Grant of Loans and Security Requirements ………………………………………...…..…………382
a. Ratio of Net Worth to Total Risk Assets……………………………….………………..382
b. Single Borrower’s Limit……………………...……………………………..…………………382
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their
Related Interests) ……..…………………………………………………….……… 383

IX. INTELLECTUAL PROPERTY CODE …………………………...……………………………………………………….…384

A. Intellectual Property Rights in General……………………………………….……………………….…………384
1. Intellectual Property Rights……………………………………………..……………………….………384
2. Differences between Copyrights, Trademarks and Patent…………………………..………440
B. Patents…………………………………………………………………………………………………………………………386
1. Patentable Inventions……………………………………………………………………..……………..…386
2. Non-Patentable Inventions…………………………………………………………………….…………389
3. Ownership of a Patent……………………………………………………………………...….……………389
a. Right to a Patent…………………………………………………………….………….…………389
b. First- to- File Rule…………………………………………………………………………..……390
c. Inventions Created Pursuant to a Commission……………….……..………………390
d. Right of Priority………………………………………………………………….…….…………390
4. Grounds for Cancellation of a Patent………………………………………………...……….………381
5. Remedy of the True and Actual Inventor…………………………………….…………..…………392
6. Rights Conferred by a Parent…………………………………………………………….………………393
7. Limitations of Patent Rights……………………….…………………………………..…………………394
a. Prior User……………………………………………………………………………………………394
b. Use by the Government………………...…………………………..…………………………394
8. Patent Infringement………………………………………………………………..……………………..…395
a. Tests in Patent Infringement……………………………….……………….………………396
i. Liberal Infringement…………………………………………………..……………396
ii. Doctrine of Equivalents………………………..…………………………………396
b. Defenses in Action for Infringement……………………………………………..………397
9. Licensing……………………………………………………………………………..…………………..………397
a. Voluntary……………………………………………………………..……………………..………397
b. Compulsory……………………………………………………….……………………..…………398
10. Assignment and Transmission of
Rights…………………………………………………………………………………………………….……………400
C. Trademarks……………………………………………………………………………….…………………………………401
1. Definition of Marks, Collective Marks, Trade Names……...………….………………..………401
2. Acquisition of Ownership of Mark……………………………………….…………………….………402
3. Acquisition of Ownership of Trade Name……………………………………………………..……404
4. Non-Registrable Marks……………………………………….………………………………….…………405
 5. Tests to Determine Confusing Similarity between Marks……………………………………407
a. Dominancy Test………………………………………………..…………………………………407
b. Holistic Test………………………………………………………………………………...………410
6. Well-Known Marks…………………………………….……………………………………………….……413
7. Rights Conferred by Registration ……………………………….………………………….…………415
8. Infringement and Remedies………………………………..………………………………….…………417
a. Trademark Infringement………………………………………………………………...……417
b. Damages……………………………………………...........................................…………………418
c. Requirement of Notice……………………...………………………………………….………418
9. Unfair Competition……………………………………………………………..……………………………419
D. Copyrights………………………………………………………………………………………………....…………………422
1. Basic Principles, Sections 172.2, 175 and 181……………………………………………………422
2. Copyrightable Works……………………………………………………………………..…………………423
a. Original Works………………………………………………………………...……………..……423
b. Derivative Works……………………………………………………………..……….…………423
3. Non-Copyrightable Works………………………………..…………………………….…………………424
4. Rights of Copyright Owner…………………………………………………………….…………….……425
5. Rules on Ownership of Copyright………………………………………………..……….……………429
6. Limitations on Copyright…………………………………..………………………………...……………431
a. Doctrine of Fair Use………………………………………………………………..……………433
7. Copyright Infringement………………………………………………………………………….…………435

X. SPECIAL LAWS……………………………………………………………………………………………………………………..445
A. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)……………………..445
1. Policy of the Law
2. Covered Institutions
3. Obligations of Covered Institutions
4. Covered Transactions
5. Suspicious Transactions
6. When is Money Laundering Committed
7. Unlawful Activities or Predicate Crimes
8. Anti-Money Laundering Council
9. Functions
10. Freezing of Monetary Instrument or Property
11. Authority to Inquire into Bank Deposits
B. Foreign Investment Act (R.A. No. 7042) ………………………………………...………………………………457
1. Policy of the Law………………………………………………………………………………………………457
2. Definition of Terms…………………………………………………….………………………….…………457
a. Foreign Investment………………………………………………………………..…….………457
b. “Doing Business” in the Philippines………………………………………...……………457
c. Export Enterprise……………………………………………..……………………….…………458
d. Domestic Market Enterprise…………………………………………………...……………458
C. Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142) ………………..………..…461
1. Types of Rehabilitation Proceedings…………………………………………………………....……462
a. Court Supervised
i. Voluntary Proceedings
ii. Involuntary Proceedings
b. Pre-Negotiated
c. Out of Court or Informal
2. Commencement Order………………………………………………………………….…….……………464
3. Rehabilitation Receiver…………………………………………………………….………………………467
4. Management Committee…………………………………………………………………..………………468
5. Rehabilitation Plan…………………………………………………………………..………………………469
6. Cram Down Effect……………………………………………………………………….……………………471
7. Stay or Suspension Order…………………………………………………………………………….……471
8. Liquidation……………………………………………………………………………….………...……………471
a. Kinds of Debtors……………………………………………………...……………..……………471
i. Juridical Debtors…………………………………….………….……….……………471
1) Voluntary Liquidation
 2) Involuntary Liquidation
ii. Individual Debtors………….………………………………………………………472
1) Suspension of Payments
2) Voluntary Liquidation
3) Involuntary Liquidation
b. Procedure…………………………………………………………………………………….…………475
i. Conversion of Rehabilitation Proceedings to Liquidation
Proceedings………………………………………………………….……………………475
ii. Liquidation Order……………………………………………...……………………475
iii. Effects of the Liquidation Order……………………………………………...475
iv. Rights of Secured Creditors……………………………….………………...…476
v. Powers, Duties, and Responsibilities of the Liquidator…………...…476
vi. Determination of Claims…………………………………………………...……476
vii. Liquidation Plan……………………………………………………………...……477
 DISCLAIMER

THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
 LETTERS OF CREDIT

LETTERS OF CREDIT parts with the goods and the buyer of the goods
gets control of the goods upon payment. Which
statement is most accurate? (2012 Bar)

A: The use of the Letter of Credit serves to reduce

DEFINITION AND NATURE OF the risk of nonpayment of the purchase price in a
LETTER OF CREDIT sale transaction.

Non-payment of the buyer of its obligation

under the Letter of Credit does not give the bank
Letter of Credit (L/C) the right to take possession of the goods covered
by the Letter of Credit
It is any arrangement, however named or described,
whereby the issuing bank acting at the request and The opening of a L/C does not vest ownership of the
on the instructions of a customer (applicant) or on goods in the bank in the absence of a trust receipt
its own behalf, binds itself to: (PAN) agreement. A letter of credit is a mere financial
device developed by merchants as a convenient and
1. Pay to the order of, or accept and pay drafts relatively safe mode of dealing with the sales of
drawn by a third party (Beneficiary), or goods to satisfy the seemingly irreconcilable
2. Authorize another bank to pay or to accept and interests of a seller, who refuses to part with his
pay such drafts, or goods before he is paid, and a buyer, who wants to
3. Authorizes another bank to Negotiate, against have control of the goods before paying (Transfield
stipulated documents. Philippines, Inc. v. Luzon Hydro Corporation, G.R. No.
146717, November 22, 2004).
Provided, the terms and conditions of the credit are
complied with (Uniform Customs & Practice for LAWS GOVERNING LETTERS OF CREDIT
Documentary Credits, Art. 2).
Letter of credit is governed by the Uniform
PURPOSE OF LETTER OF CREDIT Customs and Practice for documentary Credits
issued by the International Chamber of Commerce
The use of credits in commercial transactions serve (Metropolitan Waterworks vs. Daway, G.R. No.
to reduce the risk of non-payment of the purchase 160723, July 21, 2004).
price under the contract for the sale of goods.
However, letters of credit are also used in non-sale NOTE: The law on contracts and damages shall also
settings where they serve to reduce the risk of non- apply to provide remedies to the party aggrieved by
performance. Generally, credits in the non-sale the breach of the main contract although such
settings have come to be known as “standard breach will not affect the obligation of the bank to
credits” (Transfield Philippines, Inc. vs. Luzon Hydro pay the beneficiary or its right to obtain
Corp., GR. No. 146717, November 22,2004). reimbursement from the applicant of the letter of
credit if the terms of the letters of credit have been
Nature of Letters of Credit as a Financial Device complied with.

A letter of credit is a financial device developed by DURATION OF LETTERS OF CREDIT

merchants as a convenient a relatively safe mode of
dealing with sales of goods to satisy the seemingly 1. Upon the period fixed by the parties; or
irreconcilable interests of a seller, who refuses to 2. If none is fixed, one year from the date of
part with his goods before he is paid, and a buyer, issuance.
who wants to have in control of the goods before
paying. The use of credits in commercial Q: Rodzssen Supply, Inc. (Rodzssen) applied for
transactions serves to reduce the risk of and obtained an irrevocable 30-day domestic
nonpayment of the purchase price under the Letter of Credit from Far East Bank and Trust
contract of sale of the goods and to reduce the risk Company Inc. (FEBTC) on January 15, 1979, in
of non-performance of an obligation in a non-sale favor of Ekman and Company Inc. (Ekman), in
setting (Transfield Philippines, Inc. vs. Luzon Hydro order to finance the purchase of five units of
Corp., GR. No. 146717, November 22,2004). hydraulic loaders in the amount of P190,000.
Originally set to expire on February 15, 1979,
Q: Letters of Credit are financial devices in the subject Letter of Credit was amended several
commercial transactions which will ensure that times to extend its validity until October 16,
the seller of the goods is sure to be paid when he 1979. Three units of the hydraulic loaders were

1
 MERCANTILE LAW
delivered to Rodzssen for which FEBTC on show that the applicant
March 26, 1979, paid Ekman the sum of has not performed the
P114,000.00, which amount Rodzssen paid undertaking (Transfield
FEBTC before the expiry date of the LC. FEBTC Philippines, Inc. v. Luzon
paid Ekman for the last two hydraulic loaders on Hydro Corp., supra).
March 14, 1980 or five months after the
expiration of the Letter of Credit. Was FEBTC
justified in paying Ekman? IRREVOCABLE LETTER OF CREDIT VS.
CONFIRMED LETTER OF CREDIT
A: NO. Clearly, the bank paid Ekman when the
former was no longer bound to do so under the BASIS IRREVOCABLE
subject Letter of Credit. The subject Letter of Credit CONFIRMED L/C
L/C
had become invalid upon the lapse of the period Kind of obligation
fixed therein. Thus, respondent should not have What it
Duration of the assumed by the
paid Ekman; it was not obliged to do so. (Rodzssen pertains
L/C correspondent
Supply Co. Inc. v. Far East Bank & Trust Co., G.R. No. to
bank.
109087. May 9, 2001) The
correspondent
Incidents in the life of a Letter of Credit (CAIS- bank gives an
ERR) absolute
The issuing
assurance to the
1. Contract of Sale between the buyer and seller bank may not,
beneficiary that it
2. Application for L/C by the buyer with the bank without the
will undertake the
3. Issuance of L/C by the bank consent of the
issuing bank’s
4. Shipping of goods by the seller What it beneficiary and
obligation as its
5. Execution of draft and tender of documents by means the applicant,
own according to
the seller revoke its
the terms and
6. Redemption of draft (payment) and obtaining undertaking
condition of the
of documents by the issuing bank under the
credit. (FEATI
7. Reimbursement to the bank and obtaining of letter.
Bank and Trust
documents by the buyer Company v. CA,
G.R. No. 94209,
ESSENTIAL CONDITIONS OF A LETTER OF April 30, 1991).
CREDIT
An irrevocable letter of credit is granted by a bank
1. Issued in favor of a definite person. which authorizes a creditor in a foreign country to
2. Limited to a fixed or specified amount, or to one draw upon a debtor of another and to negotiate the
or more amounts, but with a maximum stated draft through the agent or correspondent bank or
limit (Code of Commerce, Art. 568). any bank in the country of the creditor (Belman Inc.
v. Central Bank, G.R. No. L-10195, November 29,
NOTE: If any of these essential conditions is not 1958)
present, the instrument is merely considered as a
letter of recommendation. Q: When does an Irrevocable Letter of Credit
become a consummated contract?
KINDS OF LETTER OF CREDIT
A: An irrevocable letter of credit becomes a
COMMERCIAL L/C STANDBY L/C consummated contract when the agent or
Involves the payment of correspondent bank or any bank in the country of
Involves non-sale
money under a contract the creditor pays or delivers to the latter the amount
transactions.
of sale. in foreign currency, as authorized by the bank in the
Payable upon country of the debtor in compliance with the letter
Payable upon the certification by the of credit granted by it. It is the date of the payment
presentation by the beneficiary of the of the amount in foreign currency to the creditor in
seller-beneficiary of applicant’s non- his country by the agent or correspondent bank of
documents that show performance of the the bank in the country of the debtor that turns from
he has taken affirmative agreement. The executory to executed or consummated contract. It
steps to comply with the documents that is not the date of payment by the debtor to the bank
sales agreement accompany the in his country of the amount of foreign exchange
beneficiary's draft must sold that makes the contract executed or

2
 LETTERS OF CREDIT
consummated, because the bank may grant the against the account party under the law on
debtor extension of time to pay such debt. (Belman contracts and damages.
Inc. v. Central Bank, supra.)
The number of parties may be increased. The
Courts cannot order the release to the applicant following additional parties may be:
of the proceeds of an Irrevocable Letter of Credit
without the consent of the Beneficiary 1. Advising/notifying bank – the correspondent
bank (agent) of the issuing bank and
Such order violates the irrevocable nature of the L/C. determines the apparent authenticity of the
The terms of an irrevocable letter of credit cannot L/C. it assumes no liability except to notify
be changed without the consent of the parties, and/or transmit to the beneficiary the existence
particularly the beneficiary thereof (Phil. Virginia of the L/C (FEATI Bank and Trust Company v. CA,
Tobacco Administration v. De Los Angeles, G.R. No. L- G.R. No. 94209).
27829, August 19, 1988).
2. Confirming bank –lends credence to the L/C
issued by a lesser known bank as if it were the
PARTIES TO A LETTER OF CREDIT one that issued the letter of credit. Its obligation
is similar to the issuing bank. Thus, beneficiary
may tender documents to the confirming bank
Parties to a Letter of Credit transaction and collect payment. It collects fees for such
engagement and obtains reimbursement from
1. Applicant/Buyer/Importer/Account Party – the issuing bank (ibid).
procures the letter of credit, purchases the
goods and obliges himself to reimburse the 3. Paying bank – bank on which the drafts are to
issuing bank upon receipt of the documents of be drawn, which may be the issuing bank, the
title. The applicant has no obligation to advising bank or another bank not in the city of
reimburse the issuing bank if the latter pays the beneficiary (ibid).
without the stipulated documents or in case of
discrepant documents, unless the applicant 4. Negotiating bank – buys or discounts a draft
waives the discrepancy. He has the right to have under the letter of credit. Its liability is
the marginal deposit deducted from the dependent upon the stage of the negotiation. If
principal obligation under the L/C and to have before negotiation, it has no liability with
the interest computed only on the balance and respect to the seller but after negotiation, a
not on the face value thereof. contractual relationship will then prevail
between the negotiating bank and the
2. Issuing Bank – one which, whether a paying beneficiary (ibid).
bank or not, issues the L/C and undertakes to
pay the seller upon receipt of the draft and
proper documents of title from the seller and to
surrender them to the buyer upon
reimbursement. After due payment, issuing RIGHTS AND OBLIGATIONS OF PARTIES
bank is entitled to reimbursement as a matter
of right. Reimbursement includes debiting the
bank account of the applicant, if any. The failure
of the beneficiary to present the draft to the Three (3) distinct but intertwined contracts in a
applicant does not affect the right of the issuing Letter of Credit transaction (2002, 2008 Bar)
bank to reimbursement.
1. Between the applicant/buyer/importer/account
3. Beneficiary/Seller/Exporter – in whose favor party and the beneficiary/seller/exporter - The
the instrument is executed. One who delivers applicant is the one who procures the letter of
the documents of title and draft to the issuing credit and obliges himself to reimburse the
bank to recover payment. He has a prestation issuing bank upon receipt of the documents of
to do under the main contract but his failure to title while the beneficiary is the one who in
fulfill his obligation under the main contract compliance with the contract of sale ships the
does not negate his right to payment from the goods to the buyer and delivers the documents
issuing bank as long as he is able to submit the of title and draft to the issuing bank to recover
required documents and comply with the terms payment for the goods. The relationship
of the credit, without prejudice to his liability between them is governed by the law on sales if

3
 MERCANTILE LAW
it is a commercial L/C but if it is a stand-by letter The concept of guarantee vis-a-vis the concept of
of credit it is governed by the law on obligations irrevocable L/C is inconsistent with each other. L/Cs
and contract. are primary obligations and not security contracts
and while they are security arrangements, they are
2. Between the issuing bank and the beneficiary/ not converted thereby into contracts of guaranty
seller/exporter - The issuing bank is the one that (MWSS v. Hon. Daway, G.R. No.160732, June 21,
issues the letter of credit and undertakes to pay 2004).
the beneficiary upon strict compliance of the
latter to the requirements set forth in the letter The liability of issuing bank is primary and solidary.
of credit. On the other hand, the beneficiary Neither is the issuing bank entitled to the benefit of
surrenders document of title to the bank in excussion.
compliance with the terms of the L/C. Their
relationship is governed by the terms of the Entitlement of a bank to reimbursement
L/C.
Once the issuing bank shall have paid the
3. Between the issuing bank and the applicant/ beneficiary after the latter’s compliance with the
buyer/importer - The applicant obliges himself terms of the L/C, the bank is entitled to
to reimburse the issuing bank upon receipt of reimbursment. Presentment for acceptance to the
the documents of title. Their relationship is customer/applicant is not a condition sine qua non
governed by the terms of the application and for reimbursement (Prudential Bank v. IAC, G.R. No.
agreement for the issuance of the L/C by the 74886, December 8, 1992).
bank.
Consequence of payment upon an expired Letter
NOTE: By the Doctrine of Independence, the of Credit
relationship among: a) the issuing bank and the
beneficiary; b) the issuing bank and the applicant; An issuing bank which paid the beneficiary upon an
and c) the beneficiary and the applicant while expired L/C can recover the payment from the
interrelated are separate, distinct and independent applicant which obtained the goods from the
of one another. beneficiary to prevent unjust enrichment (Rodzssen
Supply Co. v. Far East Bank and Trust Co, G.R. No.
An Issuing Bank is not a guarantor 109087, May 9, 2001).

DIFFERENT ROLES AND LIABILITIES OF THE BANKS INVOLVED IN LETTER OF CREDIT TRANSACTIONS

KIND OF BANK ROLE LIABILITY

Notifying/ Serves as an agent of the issuing Does not incur any obligation more than just
Advising Bank bank; notifying the seller/beneficiary of the opening
of the L/C after it has determined its apparent
Warrants the apparent authority. (Bank of America NT & SA v. CA, G.R.
(Appearance to unaided senses) No. 105395, December 10, 1993)
authenticity of the L/C (Bank of
America NT & SA v. CA, G.R. No. It does not guarantee the genuineness or due
105395, December 10, 1993). execution of the L/C. It is not liable for damages
even if the L/C turns out to be spurious
provided the spurious character is not
apparent on the face of the instrument.

Confirming Bank Lends credence to the L/C issued

by a lesser-known bank. Direct obligation, as if it is the one which issued
the L/C.
The confirming bank collects fees
for such engagement and obtains Its obligation is similar to the issuing banks.
reimbursement from the issuing Thus, beneficiary may tender documents to the
bank. confirming bank and collect payment.

Negotiating Bank Buys the seller’s draft and later on Depends on the stage of negotiation, thus:
sells the draft to the issuing bank.

4
 LETTERS OF CREDIT
1. Before negotiation – No liability with respect
to the seller. Merely suggests its willingness to
negotiate.

2. After negotiation – A contractual relationship

will then arise, making the bank liable. As
holder, it has the right to payment from the
bank primarily liable on the draft (either the
issuing or confirming bank). If the party
primarily liable on the L/C refuses to honor the
draft, the negotiating bank has the right to
proceed against the drawer thereof.
Paying Bank May either be the issuing bank or Direct obligation.
any other bank in the place of the
issuing bank to facilitate payment
to the beneficiary.

BASIC PRINCIPLES OF LETTER OF CREDIT DOCTRINE OF INDEPENDENCE

Letters of Credit are not considered as DOCTRINE OF INDEPENDENCE/ INDEPENDENCE

Negotiable Instruments PRINCIPLE

A L/C is not considered a negotiable instrument. The relationship of the buyer and the bank is
However, drafts issued in connection with L/C’s can separate and distinct from the relationship of the
be considered negotiable instruments. The buyer and seller in the main contract; the bank is not
presumption that the drafts drawn in connection required to investigate if the contract underlying
with the L/C’s have sufficient consideration applies the L/C has been fulfilled or not because in
(Lee v. CA, G.R. No. 117913, February 1, 2002). transactions involving L/C, banks deal only with
documents and not goods (BPI v. De Reny Fabric
Q: ABC Company filed a Petition for Industries, Inc., L-2481, October 16, 1970). In effect,
Rehabilitation with the Court. An order was the buyer has no course of action against the issuing
issued by the Court, (1) staying enforcement of bank.
all claims, whether money or otherwise against
ABC Company, its guarantors and sureties not Two-Fold nature of the Independence Principle
solidarily liable with the company; and (2)
prohibiting ABC Company from making 1. Independence in toto where the credit is
payments of the liabilities, outstanding as of the independent from the justification aspect and is
date of the filing of the Petition. XYC Company is a separate obligation from the underlying
a holder of an irrevocable Standby Letter of agreement. This principle is illustrated by
Credit which was previously procured by ABC standby L/C; or
Company in favor of XYC Company to secure 2. Independence only as to the justification aspect
performance of certain obligations. In the light which is identical with the same obligations
of the Order issued by the Court, can XYC under the underlying agreement. This principle
Company still be able to draw on their is illustrated by a commercial L/C or repayment
Irrevovable Standby Letter of Credit when due? standby (Transfield v. Luzon Hydro Corp., supra).
Explain your answer. (2012 Bar)
Effect of the buyer’s failure to procure a Letter of
A: XYC Company, the beneficiary of the standby Credit to the main contract
letter of credit, can draw on the letter of credit
despite filing of petition for corporate The L/C is independent from the contract of sale. The
rehabilitation. The liability of the bank that issued failure of Reliance to open, the appropriate L/C did
the letter of credit is primary and solidary. Being not prevent the birth of that contract, and neither
solidary, the claims against them can be pursued did such failure extinguish that contract. The
separately from and independently of the opening of the L/C in favor of Daewoo was an
rehabilitation case (MWSS v. Daway, supra). obligation of the buyer and the performance of that

5
 MERCANTILE LAW
obligation by buyer was a condition of enforcement become delinquent with his accounts. Demands
of the reciprocal obligation of seller to ship the were made by the SMC against Goroza and PNB
subject matter of the contract to buyer. But the but neither of them paid. SMC filed a Complaint
contract itself between the buyer and the seller had for collection of sum of money against PNB and
already sprung into legal existence and was Goroza. RTC rendered a decision in favor of the
enforceable. plaintiff ordering Goroza to pay. In the
meantime, trial continued with respect to PNB.
The failure of a buyer seasonably to furnish an
agreed L/C is a breach of the contract between PNB moved to terminate the proceedings on the
buyer and seller. Where the buyer fails to open a ground that a decision was already rendered
letter of credit as stipulated, the seller or exporter is finding Goroza solely liable. The RTC denied the
entitled to claim damages for such breach. Damages PNB's motion and issued a Supplemental
for failure to open a commercial credit may, in Judgment which stated that the RTC omitted by
appropriate cases, include the loss of profit which inadvertence to insert in its decision the phrase
the seller would reasonably have made had the "without prejudice to the decision that will be
transaction been carried out (Reliance Commodities, made against the other co-defendant, PNB,
Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, which was not declared in default." The CA
December 17, 1993). affirmed the Resolution of RTC.

Partial payments on the loan cannot be added in Was the CA incorrect in affirming the RTC
computing the issuing bank’s liability under its despite complete adjudication of relief to SMC
own Standby Letter of Credit and the perfection of appeal by Goroza?

Although these payments could result in the A: NO. It is clear from the proceedings held before
reduction of the actual amount, which could and the orders issued by the RTC that the intention
ultimately be collected from the issuing bank, the of the trial court is to conduct separate proceedings
latter’s separate undertaking under its letters of to determine the respective liabilities of Goroza and
credit remain. The letter of credit is an absolute and PNB, and thereafter, to render several and separate
primary undertaking which is separate and distinct judgments for or against them.
from the contract underlying it (Insular Bank of Asia
& America v. IAC, G.R. No. 74834, November 17, 1988). The propriety of a several judgment is borne by the
fact that SMC's cause of action against PNB stems
In a standby letter of credit securing a loan from the latter's alleged liability under the letters of
obligation, any payment of the debtor to the creditor credit which it issued. On the other hand, SMC's
should not be deducted from the total obligation of cause of action against Goroza is the latter's failure
the issuing bank to the beneficiary. The issuing to pay his obligation to the former. As to the
bank, after payment of the full amount, is entitled to separate judgment, PNB has a counterclaim against
full reimbursement from the debtor. But the debtor SMC which is yet to be resolved by the RTC. The so-
may recover excess payment from the creditor to called "independence principle" assures the seller
prevent unjust enrichment. or the beneficiary of prompt payment independent
of any breach of the main contract and precludes the
Q: SMC entered into an Exclusive Dealership issuing bank from determining whether the main
Agreement with Goroza wherein the latter was contract is actually accomplished or not. As the
given by SMC the right to trade, deal and market principle's nomenclature clearly suggests, the
or otherwise sell its various beer products. obligation under the letter of credit is independent
of the related and originating contract. In brief, the
Goroza applied for a credit line with SMC, but letter of credit is separate and distinct from the
one of the requirements for the credit line was a underlying transaction.
letter of credit. Thus, Goroza applied for and was
granted a letter of credit by the PNB in the In other words, PNB cannot evade responsibility on
amount of P2,000,000.00 and subsequently an the sole ground that the RTC judgment found
additional credit line of P2,400,000.00 which Goroza liable and ordered him to pay the amount
the latter approved. Under the credit sought to be recovered by SMC. PNB's liability, if
agreement, the PNB has the obligation to release any, under the letter of credit is yet to be
the proceeds of Goroza's credit line to SMC upon determined (Philippine National Bank vs San Miguel
presentation of the invoices and official receipts Corporation, GR No. 186063, January 15, 2014).
of Goroza's purchases of SMC beer products to
PNB. Initially, Goroza was able to pay his credit Q: AAA Carmakers opened an Irrevocable Letter
purchases with SMC. However, Goroza started to of Credit with BBB Banking Corporation with

6
 LETTERS OF CREDIT
CCC Cars Corporation as beneficiary. The can stand on its own, it needs a supporting
irrevocable Letter of Credit was opened to pay contract. It is merely an alternative course and
for the importation of ten (10) units of Mercedes does not in any way prevent the beneficiary
Benz S class. Upon arrival of the cars, AAA from directly claiming from the applicant
Carmakers found out that the cars were all not (Transfield Philippines, Inc. v. Luzon Hydro
in running condition and some parts were Corporation, supra)
missing. As a consequence, AAA Carmakers
instructed BBB Banking Corporation not to
allow drawdown on the Letter of Credit. Is this FRAUD EXCEPTION PRINCIPLE
legally possible? (2012 Bar)

A: NO, because under the "Independence Principle", The Exception to the Independence Principle
conditions for the drawdown on the Letters of (2010 Bar)
Credit are based only on documents, like shipping
documents, and not with the condition of the goods The “Fraud Exception Principle” is the exception to
subject of the importation. the Independence Principle. It provides that the
untruthfulness of a certificate accompanying a
Q: X Corporation entered into a contract with PT demand for payment under a standby letter of credit
Construction Corporation for the latter to may qualify as fraud sufficient to support an
construct and build a sugar mill within six (6) injunction against payment.
months. They agreed that in case of delay, PT
Construction Corporation will pay X Under the fraud exception principle, the beneficiary
Corporation P100,000.00 for everyday of the may be enjoined from collecting on the letter of
delay. To ensure payment of the agreed amount credit if the beneficiary committed fraud by
of damages, PT Construction Corporation substituting fraudulent documents even if on their
secured from Atlantic Bank a confirmed and face the documents complied with the
irrevocable letter of credit which was accepted requirements.
by X Corporation in due time. One week before
the expiration of the six (6) month period, PT This principle refers to fraud in relation with the
Construction Corp. requested for an extension of independent purpose or character of the L/C and
time to deliver claiming that the delay was due not only fraud in the performance of the obligation
to the fault of X Corporation. A controversy as to or contract supporting the letter of credit
the cause of delay which involved the (Transfield vs. Luzon Hydro Corp., supra).
worksmanship of the building ensued. The
controversy remained unsolved. Despite the Remedy for fraudulent abuse
controversy, X corporation presented a claim
against Atlantic Bank by executing a draft Injunction against payment is the remedy; provided
against the letter of credit. the requisites enumerated immediately below this
item are present.
a. Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain. Requisites in order to enjoin the Beneficiary
b. Can X Corporation claim directly from PT from drawing or collecting under the Letter of
Construction Corp.? Explain. (2008 Bar) Credit on the basis of fraud (PAI)

A: 1. Clear Proof of fraud;

a. NO. Atlantic Bank cannot refuse to pay X 2. Fraud constitutes fraudulent Abuse of the
Corporation. This is because of the Doctrine of independent purpose of the letter of credit and
Independence which provides that the not only fraud under the main agreement; and
obligation of the issuing bank to pay the 3. Irreparable Injury might follow if injunction is
beneficiary does not depend on the fulfillment not granted or the recovery of damages would
or non-fulfillment of the contract supporting be seriously damaged (Ibid.)
the letter of credit. The only instance where
Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply
with the letter of credit. DOCTRINE OF STRICT COMPLIANCE
b. YES. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by
itself does not come into operation without a
contract supporting it. It is no a contract that

7
 MERCANTILE LAW
The documents tendered by the seller/beneficiary credit has been transmitted to it on his
must strictly conform to the terms of the L/C. The behalf, has confirmed the letter of credit.
tender of documents must include all documents Consequently, FE Bank is liable under the
required by the letter. It is not a question of whether letter of credit. Is the argument tenable?
or not it is fair or equitable to require submission of Explain. (1993 Bar)
documents but whether or not the documents were
agreed upon. Thus, a correspondent bank which A.
departs from what has been stipulated under the a. FE Bank cannot be held liable under the letter
L/C acts on its own risk and may not thereafter be of credit since the certificate is not issued by BV.
able to recover from the buyer or the issuing bank, It is a settled rule in commercial transactions
as the case may be, the money thus paid to the involving letters of credit that the documents
beneficiary (Feati Bank and Trust Company v. CA, tendered must strictly conform to the terms of
supra). the letter of credit. The tender of documents by
the beneficiary (seller) must include all
Q: BV agreed to sell to AC, a Ship and documents required by the letter. A
Merchandise Broker, 2500 cubic meters of logs correspondent bank which departs from what
at $27 per cubic meter FOB. After inspecting the has been stipulated under the letter of credit, as
logs, CD issued a purchase order. when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to
On the arrangement made upon instruction of recover from the buyer or the issuing bank, as
the consignee, H&T Corporation of LA, the case may be, the money thus paid to the
California, the SP Bank of LA issued an beneficiary. Thus the rule of strict compliance.
irrevocable letter of credit available at sight in (Feati Bank and Trust Company v. CA, supra).
favor for the total purchase price of the logs. The b. The argument made by BV is untenable. The FE
letter of credit was mailed to FE Bank with the Bank in this case is only a notifying bank and
instruction "to forward it to the beneficiary". not a confirming bank. It is tasked only to notify
The letter of credit provided that the draft to be and/or transmit the required documents and
drawn is on SP Bank and that it be accompanied its obligation ends there. It is not privy to the
by, among other things, a certification from AC, contract between the parties, its relationship is
stating that the logs have been approved prior only with that of the issuing bank and not with
shipment in accordance with the terms and the beneficiary to whom he assumes no liability.
conditions of the purchase order.
Q: At the instance of CCC Corporation, AAA Bank
Before loading of the vessel chartered by AC, the issued an irrevocable Letter of Credit in favor of
logs were inspected by custom inspectors and BBB Corporation. The terms of the irrevocable
representatives of the Bureau of Forestry, who L/C state that the beneficiary must present
certified to the good condition and exportability certain documents including a copy of the Bill of
of the logs. After loading was completed, the Lading of the importation for the bank to release
Chief Mate of the vessel issued a mate receipt of the funds, BBB Corporation could not find the
the cargo which stated that the logs are in good original copy of the Bill of Lading so it instead
condition. However, AC refused to issue presented to the bank a Xerox copy of the Bill of
required certification in the letter of credit. Lading. Would you advice the bank to allow the
Because of the absence of certification, FE Bank drawdown on the Letter of Credit? (2012 Bar)
refused to advance payment on the letter of
credit. A: NO, because the rule of strict compliance in
commercial transactions involving letters of credit,
a. May FE Bank be held liable under the Letter requiring documents set as conditions for the
of Credit? Explain. release of the fund has to be strictly complied with
b. Under the facts above, the seller, BV, argued or else funds will not be released.
that FE Bank, by accepting the obligation to
notify him that the irrevocable letter of

DOCTRINE OF STRICT COMPLIANCE VS. INDEPENDENCE PRINCIPLE

Basis Doctrine of Strict Compliance Doctrine of Independence

8
 LETTERS OF CREDIT
Principle Documents tendered by the seller or Relationship of the buyer and the bank is
beneficiary must strictly conform to the separate and distinct from the relationship
terms of the letter of credit. of the buyer and seller in the main contract.
Consequence of the A correspondent bank which departs The bank is not required to investigate
Doctrine from what has been stipulated and acts whether the contract underlying the L/C
on its own risk may not thereafter be has been fulfilled or not.
able to recover.
Payment of the Beneficiary cannot draw on the letter of Fraud Exception Principle can enjoin
Beneficiary credit if he did not comply with its terms beneficiary from drawing or collecting
and conditions. under the L/C if there is fraud in relation
with the independent purpose of the L/C.

TRUST RECEIPT proceeds to the lender (Metropolitan Bank vs. Go,

G.R. No. 155647, November 23, 2007).

Two views regarding Trust Receipts

DEFINITION/CONCEPT OF A
TRUST RECEIPT TRANSACTION 1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for
the entruster and to sell or otherwise dispose of
Trust Receipt (TR) transaction GDI with the obligation to turn over to the
entruster the proceeds if they are unsold or not
It is any transaction between the entruster and otherwise disposed of, in accordance with the
entrustee: terms and conditions specified in the TR (P.D.
115, Sec. 4).
1. Whereby the entruster who owns or holds title 2. As a commercial transaction – It is a separate
or security interests over certain specified and independent security transaction intended
goods, documents or instrument (GDI), releases to aid in financing importers and retail dealers
the same to the possession of entrustee upon who do not have sufficient funds (Nacu v. CA,
the latter’s execution of a TR agreement. G.R. No. 108638, March 11, 1994).
2. Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of A Trust Receipt is not a negotiable instrument
default:
a. to sell or otherwise dispose such GDI with Like L/C’s, TR’s are not negotiable instruments. The
the obligation to turn over to the entruster presumption of consideration under the negotiable
the proceeds to the extent of the amount instrument law may not necessarily be applicable to
owing to it or trust receipts (Lee v. CA, supra).
b. to turn over the GDI itself if not sold or
otherwise disposed of in accordance with SUBJECTS OF A TRUST RECEIPT TRANSACTION
the terms and conditions specified in the (GDI)
TR.
1. Goods – shall include chattels and personal
A TR is a commercial document whereby the bank property other than money, things in action, or
releases the goods in the possession of the entrustee things so affixed to land as to become a part
but retains ownership thereof while the entrustee thereof (P.D. 115, Sec. 3 [d]). Goods must be
shall sell the goods and apply the proceeds for the object of lawful commerce.
full payment of his liability with the bank. It is a 2. Documents – written or printed evidence of title
security arragement to which a bank acquires to goods (P.D. 115, Sec. 3 [a]). E.g. L/C.
ownership of the imported personal property 3. Instruments – negotiable instruments;
(Garcia vs. Court of Appeals, G.R. No. 119845, July 5, certificates of stock, or bond or debenture for
1996). It is a document which expresses a security the payment of money issued by a corporation,
transaction where the lender, having no prior title or certificates of deposit, participation
to the goods on which the lien is to be constituted, certificates or receipts, credit or investment
and not having possession over the same since instruments of a sort marketed in the ordinary
possession thereof remains in the borrower, lends course of business or finance (P.D. 115, Sec. 3
him money to the borrower on security of the goods [e]). E.g. checks, drafts, promissory notes, bills
which borrower is privileged to sell, clear of the lien, of exchange.
and with an agreement to pay all or part of the sale

9
 MERCANTILE LAW
PARTIES TO A TRUST RECEIPT TRANSACTION day, C went to F Bank to apply for a loan to pay
the construction materials. As security for the
1. Entruster - A lender, financer or creditor. loan, C was made to execute a trust receipt. One
Person holding title over the GDI subject of a TR year later, after C failed to pay the balance on the
transaction; releases possession of the goods loan, F Bank was charged with violation of the
upon execution of TR (P.D. 115, Sec. 3[c]). Trust Receipts Law. Will the case against C
2. Entrustee - A borrower, buyer, importer or prosper? Reason briefly. (2007 Bar)
debtor. He is the person to whom the goods are
delivered for sale or processing in trust, with A: The case of estafa against C will not prosper. PD
the obligation to return the proceeds of sale of 115 does not apply in this case because the proceeds
the goods or the goods to the entruster (P.D. of the loan are used to renovate C's commercial
115, Sec. 3[b]). building. TR transactions are intended to aid in
financial importers and retail dealers who do not
TRANSACTIONS NOT CONSIDERED AS A TRUST have sufficient funds or resources to finance the
RECEIPT importation or purchase of merchandise and who
may not be able to acquire credit except through
1. A sale by a person in the business of selling for utilization, as collateral, of the merchandise
profit who retains general property rights in the imported or purchased. The transactions
GDI. contemplated under the Trust Receipts Law mainly
2. Where the seller retains title or other interest involved acquisition of goods for the sale thereof.
as security for the payment of the purchase The transaction is properly called a simple loan with
price (P.D. 115, Sec. 4). the trust receipt as merely a collateral or security
for the loan (Ng vs. People, supra).
The sale of goods by a person in the business of
selling goods, for profit, who at the outset of the Q: Supermax is a domestic corporation engaged
transaction, has as against the buyer, general in the construction business. On various
property rights in such goods, or who sells occasions, Metrobank extended several
goods to the buyer on credit, retaining title or commercial letters of credit to Supermax. These
other interest as security for the payment of the commercial credits were used by Supermax to
purchase price, does not constitute as trust pay for delivery of several construction
receipt transaction. There is no trust receipt, materials to be used in their construction
notwithstanding the label, if goods offered as business. Thereafter, Metrobank required Hur
security for a loan accommodation are goods Tin Yang, as representative and Vice- President
sold to the debtor unde a supposed trust receipt for Internal Affairs of Supermax, to sign 24 trust
transaction (Sps. Dela Cruz vs. Planters Products, receipts as security for the construction
Inc., G.R. No. 158649, February 18, 2013, in materials. When 24 TRs fell due and despite the
Divina, 2014). receipt of demand letter, Supermax failed to pay
or deliver the goods or proceeds to Metrobank.
3. If the entrustee is already the owner or in As the demands fell on deaf ears, Metrobank
possession of the goods before delivery of the filed a complaint for estafa against Hur Tin Yang.
loan and execution of the trust receipt
transaction, the transaction shall be considered Hur Tin Yang, while admitting signing the trust
a simple loan even though the parties may have receipts, argued that said trust receipts were
denominated the agreement as one of TR. To be demanded by Metrobank as additional security
in the nature of TR, the entruster should have for the loans extended to Supermax for the
financed the acquisition or importation of the purchase of construction equipments and
goods. The funds should have been delivered materials, and that Metrobank knew all along
before or simultaneously with delivery of the that the construction materials subject of the
goods. TRs were not intended for resale but for
4. Where the entruster bank knew even before the personal use of Supermax relating to its
execution of the trust receipt agreements that construction business.
the construction materials covered were never
intended by the entrustee for resale or for the Is Hur Tin Yang not guilty of estafa?
manufacture of items to be sold (Hur Tin Yang
v. People, supra). A: YES. In the instant case, the factual findings of the
trial and appellate courts reveal that the dealing
Q: C contracted D to renovate his commercial between Hur Tin Yang and Metrobank was not a TR
building. D ordered construction materials from transaction but one of simple loan. His admission –
E and received delivery thereof. The following that he signed the TRs on behalf on Supermax,

10
 TRUST RECEIPTS LAW
which failed to pay the loan or turn over the 2. The entrustee cannot be relieved of his
proceeds of the sale or the goods to Metrobank upon obligation to pay the loan in favor of the
demand – does not conclusively prove that the entruster bank in case of loss or destruction of
transaction was, indeed, a trust receipts transaction. the GDI (Rosario Textile Mills Corp. vs. Home
In contract to the nomenclature of the transaction, Bankers Savings and Trust Company, supra).
the parties really intended a contract of loan. The 3. Where the proceeds of the sale are insufficient
Court, in Ng vs. People, and Land Bank of the to satisfy the loan executed by the entrustee, the
Philippines v. Perez ,cases which are in all four entruster bank can institute an action to collect
corners the same as the instant case, ruled that the the deficiency (Landl Co. vs. Metropolitan Bank
fact that the entruster bank knew even before the and Trust Co. G.R. No. 159622, July 30, 2004).
execution of the trust receipt agreements that the 4. Repossession by the entruster of the GDI does
construction materials covered were never not amount to dacion en pago. The repossession
intended by the entrustee for resale or for the of the goods by the entrustee was merely to
manufacture of items to be sold is sufficient to prove secure the payment of its obligation to the
that the transaction was a simple loan and not a entrustor and not for the purpose of
trust receipts transaction. transferring ownership in satisfaction of the
obligation (PNB vs. Pineda, G.R. No. L-46658 May
When both parties enter into an agreement 13, 1991).
knowing fully well that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not OWNERSHIP OF THE GOODS, DOCUMENTS, AND
a trust receipt transaction penalized under Sec. 13 INSTRUMENTS UNDER A TRUST RECEIPT
of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the
parties would be the return of the proceeds of the Real owner of the articles subject of the Trust
sale transaction. This transaction becomes a Receipt transaction
mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase The real owner of the articles subject of the TR is the
of the goods (Hur Tin Yang vs. People, supra). entrustee who binds himself to hold the designated
GDI. The entruster merely holds a security interest.
If under the trust receipt, the bank is made to appear
LOAN/SECURITY FEATURE as the owner, it was but an artificial expedient, more
of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants,
TWO FEATURES OF A TRUST RECEIPT which it cannot do, just to give consistency with
TRANSACTION purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To
1. Loan feature - is brought about by the fact that consider the bank as the true owner from the
the entruster financed the importation or inception of the transaction would be to disregard
purchase of the goods under TR (Sps. Vintola vs. the loan feature thereof (Rosario Textile Mills Corp.
Insular Bank of Asia and America, G.R. No. 73271, vs. Home Bankers Savings and Trust Company,
May 29, 1987). supra).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the The entrustee, however, cannot mortgage the goods
entrustee or of some third persons to the because one of the requisites of a valid mortgage is
entruster (Rosario Textile Mills Corp. v. Home that the mortgagor must be the absolute owner of
Bankers Savings and Trust Company, G.R. No. the property mortgaged or must have free disposal
137232, June 29, 2005). thereof. Entrustee is not the absolute owner of the
goods under trust receipt nor has free disposal
EFFECTS OF THE DUAL FEATURES OF A TRUST thereof.
RECEIPT
The entruster is not responsible as principal or
1. The entrustee cannot absolutely be relieved of vendor under any sale or contract to sell made by
the obligation to pay his loan just because he the entrustee.
surrendered the goods to the entruster if the
entruster refuses to accept and subsequently
deposited them in the custody of the court (Sps. RIGHTS OF THE ENTRUSTER
Vintola vs. Insular Bank of Asia and America,
supra).

11
 MERCANTILE LAW
1. To be entitled to the Proceeds from the sale of 4. To Keep GDI or the proceeds thereof, whether
the GDI to the extent of the amount owing to in money or whatever form, separate and
him. capable of identification as property of the
2. To the Return of the GDI in case of non-sale and entruster;
enforcement of all other rights conferred to him 5. To Return GDI to the entruster in case they
in the TR. could not be sold or upon demand of the
3. May Cancel the trust and take possession of the entruster; and
goods, upon default or failure of the entrustee 6. To Observe all other conditions of the TR (P.D.
to comply with any of the terms and conditions 115, Sec. 9).
of the TR (P.D. 115, Sec. 7).
4. To Sell the goods with at least five day notice to NOTE: Not all obligations of the entrustee are
the entrustee and apply the proceeds in criminal in nature. The gravamen of the criminal
payment of the obligation. Entrustee liable to offense under the trust receipts law is the failure of
pay deficiency, if any. the entrustee to deliver the proceeds of the sale to
the entruster up to the extent of the entrutee's
obligations or the return of the same in case of non-
VALIDITY OF THE SECURITY INTEREST AS sale.
AGAINST THE CREDITORS OF THE ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
DISPOSITION OF GOODS, DOCUMENTS OR
Entruster has a better right over the goods than INSTRUMENTS
that of the creditors of the entrustee

The entruster’s security interest in goods, Disposition of the proceeds of the sale of the
documents, or instruments pursuant to the written goods, documents or instruments
terms of a TR shall be valid as against all creditors
of the entrustee for the duration of the TR agreement The proceeds of the sale of GDI shall be applied in
(P.D. 115, Sec. 12). the following (SDP):

The security interest of the entruster over the goods 1. Expenses of the Sale;
under the trust receipt is superior to the monetary 2. Expenses Derived from re-taking, keeping and
claims of the laborers of the entrustee. storing the GDI; and
3. Principal obligation (P.D. 115, Sec. 7).
Purchaser in good faith can defeat the rights of
the entruster over the goods NOTE: Full payment of the loan or delivery of the
sale proceeds equivalent to the full amount of the
A purchaser in good faith acquires the goods, obligation extinguishes both criminal and civil
documents or instruments free from the entruster's liabilities of the entrustee. In case of deficiency, the
security interest (P.D. 115, Sec. 11). entrustee shall be liable thereon. However, any
excess shall belong to him.

OBLIGATION AND LIABILITY

OF THE ENTRUSTEE RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE

Obligations and Liabilitites of the Entrustee

(HR-IKRO) Obligation of the Entrustee in case the goods,
documents or instruments were not sold
1. To Hold GDI in trust for the entruster and to
dispose of them strictly in accordance with the The entrustee should return the GDI to the entruster
terms of TR; (P.D. 115, Sec. 4).
2. To Receive the proceeds of the sale for the
entruster and to turn over the same to the The return of the GDI in case of non-sale
entruster to the extent of amount owing to the extinguishes only the criminal liability of the
latter; entrustee unless he pays in full his loan obligation.
3. To Insure GDI against loss from fire, theft, The consequent acquittal of the entrustee in the
pilferage or other casualties; criminal case does not bar the filing of a separate

12
 TRUST RECEIPTS LAW
civil action to enforce the civil liability of the
entrustee. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
The failure to turn over goods or proceeds realized
from the sale thereof is a criminal offense under Art.
315(l) (b) of RPC (estafa) except if he disposed of Entrustee shall bear the loss of the goods,
the goods in accordance with the terms. documents, or instruments which are the
subject of a Trust Receipt
Q: CCC Car, Inc. obtained a loan from BBB Bank,
which fund was used to import ten (10) units of Loss of the GDI which is the subject of a TR, pending
Mercedes Benz S class vehicles. Upon arrival of their disposition, irrespective of whether or not it
the vehicles and before release of said vehicles was due to the fault or negligence of the entrustee,
to CCC Car, Inc. X and Y, the President and shall not extinguish his obligation to the entruster
Treasurer, respectively, of CCC Car, Inc. signed for the value thereof (P.D. 115, Sec. 10).
the Trust Receipt to cover tha value of the ten
(10) units of Mercedes Benx S class vehicles RES PERIT DOMINO IN TRUST RECEIPT
after which, the vehicles were all delivered to
the Car display room of CCC Car, Inc. Sale of the Principle of Res Perit Domino is not a valid defense
vehicles were slow, and it took a month to against an Entrustee in cases of loss or destruction
dispose of the ten (10) units. CCC Car, Inc. of the goods, documents, or instruments secured by
wanted to be in business and to save on various a Trust Receipt. For the principle of res perit domino
documentations required by the bank, decided to apply the entrustee must be the owner of the
that instead of turning over the proceeds of the goods at the time of the loss. A TR is a security
sales, CCC Car Inc. used the proceeds to buy agreement, pursuant to which a bank acquires a
another ten (10) units of BMW 3 series. ‘security interest’ in the goods. It secures an
indebtedness and there can be no such thing as
a. Is the action of CCC Car, Inc. legally justified? security interest that secures no obligation. If under
Explain your answer. a trust receipt transaction, the entruster is made to
b. Will the corporate officers of CCC Car, Inc. be appear as the owner, it was but an artificial
held liable under the circumstances? expedient, more of legal fiction than fact, for if it
Explain your answer. (2012 Bar) were really so, it could dispose of the goods in any
A: manner it wants. Thus, the ownership of the goods
a. NO. It is the obligation of the entrustee, CCC Car, remaining with the entrustee, he cannot be relieved
Inc. to receive the proceeds of the sale of the of the obligation to pay his/her loan in case of loss
goods covered by the trust receipts in trust for or destruction (Rosario Textile Mills vs. Home
the entruster and to turn over the same to him Bankers Association, supra).
th extent of the obligation (P.D. 115, Sec. 4)
B. YES. Failure of the entrustee to turn over the
proceeds of the sale of the goods shall PENAL SANCTION IF OFFENDER IS A
constitute the crime of estafa. If the violation is CORPORATION
committed by a juridical entity, the penalty
shall be imposed upon the directors, officers,
employees or other officials or persons therein
ELEMENTS ESTAFA IN TRUST RECEIPT
responsible for the offense, without prejudice
to the civil liabilities arising from the criminal
In order that the entrustee may be validly
offense. Hence, the corporate officers are
prosecuted for estafa under Art. 315, paragraph
criminally liable for the violation of the law
1(b) of the RPC, in relation with Sec. 13 of PD 115,
being he human agent responsible for the same
the following elements must be established (R-
(P.D. 115, Sec. 13).
MAD):

1. The entrustee Received the subject goods in

trust or under the obligation to sell the same
and to remit the proceeds thereof to the
entruster, or to return the goods if not sold;
2. The entrustee Misappropriated or converted
the goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse
of confidence to the damage and prejudice of

13
 MERCANTILE LAW
entruster; and enacting the law, sought to find a way to assist
4. A Demand was made on the entrustee by importers and merchants in their financing in order
entruster for the remittance of the proceeds or to encourage commerce in the Philippines.”
the return of the unsold goods (Land Bank of the
Philippines vs. Perez, GR No. 166884, June 13, The principle is of course not limited in its
2012). application to financing importations, since the
principle is equally applicable to domestic
NOTE: If proof as regards the delivery of GDI to the transactions. Regardless of whether the transaction
accused (entrustee) is insufficient, estafa cannot lie is foreign or domestic, it is important to note that
(Ramos vs. CA, G.R. No. L-3992-25, August 21, 1987). the transactions discussed in relation to trust
receipts mainly involved sales (Ng vs. People, G.R.
Compliance with the obligation under the Trust No. 173905, April 23, 2010).
Receipt agreement vis-a-vis criminal liability
In another case it was held that when both parties
1. If compliance occurred before the criminal enter into an agreement knowing that the return of
charge- there is no criminal liability. the goods subject of the trust receipt is not possible
2. If compliance occurred after the charge even even without any fault on the part of the entrustee,
before conviction- the criminal action will not be it is not a trust receipt transaction penalized under
extinguished. Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of
P.D. 115 does not violate the prohibition in the the proceeds of the sale transaction. The transaction
Constitution against imprisonment for non- becomes a mere loan, where the borrower is
payment of a debt obligated to pay the bank the amount spent for the
purchase of the goods (LBP vs. Perez, supra).
What is being punished is the dishonesty and abuse
of confidence in the handling of money or goods to PENAL SANCTION WHEN THE OFFENDER IS A
the prejudice of another regardless of whether the CORPORATION
latter is the owner or not. It does not seek to enforce
payment of the loan. Thus, there can be no violation Though the entrustee is a corporation, nevertheless,
of a right against imprisonment for non-payment of the law specifically makes the officers, employees or
a debt (People vs. Nitafan, G.R. No. 81559, April 6, other officers or persons responsible for the offense,
1992). without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or
Q: Is lack of intent to defraud a bar to the other officials or employees responsible for the
prosecution of these acts or omissions? (2006 offense.
Bar)
If the crime is committed by a corporation or other
A: NO. The mere failure to account or return gives juridical entity, the directors, officers, employees or
rise to the crime which is malum prohibitum. There other officers thereof responsible for the offense
is no requirement to prove intent to defraud (Ching rshall be charged and penalized for the crime,
vs. Secretary of Justice, G.R. No. 164317, February 6, precisely because of the nature of the crime and the
2006). penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a
Penal sanction is not available if the goods are crime punishable by imprisonment (Ching vs.
not intended for sale or resale Secretary of Justice, supra).

To be a TR transaction, the goods must be intended Rationale behind the accountability of the
for sale or resale. The Supreme Court, in one case, officers of the corporation
held that the trial court erred in ruling that the
agreement in the case was a TR transaction because The rationale is that such officers or employees are
the goods involved were intended to be used in the vested with the authority and responsibility to
fabrication of steel communication towers. devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
The Court further ruled that, “the true nature of a accountable; thus, they have a responsible share in
trust receipt transaction can be found in the the violations of the law (ibid).
‘whereas’ clause of PD 115 which states that a trust
receipt is to be utilized ‘as a convenient business NOTE: An officer of a corporation who signed a TR
device to assist importers and merchants solve their cannot hide behind the cloak of the separate
financing problems.’ Obviously, the State, in corporate personality of the corporation, where “he

14
 TRUST RECEIPTS LAW
is the actual, present and efficient actor.” Corporate they represent, EXCEPT if they contractually
officers or employees, through whose act, default or agree/stipulate or assume to be personally liable for
omission the corporation commits a crime, are the corporate’s debts, as in this case. The RTC and
individually guilty of the crime. The principle CA correctly adjudged petitioner personally and
applies whether or not the crime requires the solidarily liable with Novachem for the obligations
consciousness of wrongdoing (Ching vs. Secretary of secured by the subject trust receipts based on the
Justice, supra). finding that he signed the guarantee clauses therein
in his personal capacity an even waived the benefit
Q: The President of Novachem, Crisologo, of excussion (Crisologo vs. People of the Philippines,
applied for commercial letters of credits from G.R. No. 199481, December 3, 2012).
private respondent Chinabank to finance the
purchase of 1,600 kgs. of amoxicillin trihydrite
micronized from Hyundai Chemical Company in
South Korea and glass containers from San REMEDIES AVAILABLE
Miguel Corporation. Subsequently, Chinabank
issued Letters of Credit. After petitioner
received the goods, he executed for and in behalf DEFENSES AVAILABLE TO NEGATE CRIMINAL
of Novachem the corresponding trust receipt LIABILITY OF THE ENTRUSTEE
agreements in favour of Chinabank. (CoCo CaCo No LP)

On January 2004, Chinabank, through its staff 1. Compliance with the terms of the TR either by
assistant, filed before the City Prosecutor’s payment, return of the proceeds or return of the
Office a Complaint-Affidavit charging Crisologo goods (P.D. 115, Sec. 13).
for violation of P.D. No. 115 in relation to Article 2. Consignment.
315 of RPC for his purported failure to turn-over 3. Cancellation of the TR agreement and taking
the goods or the proceeds from the sale thereof. into possession of the goods by the entruster.
RTC rendered a Decision acquitting Crisologo of
criminal charges. It however adjudged him NOTE: Repossession of the goods will
civilly liable to Chinabank. On appeal of the civil extinguish only the criminal liability.
aspect, the CA affirmed the RTC Decision. It
noted that the Crisologo signed the “Guarantee 4. Compromise by parties before filing of
Clause” of the trust receipt agreements in his information in court. Compromise of estafa case
personal capacity and even waived the benefit of arising from TR transaction, after the case has
excussion against Novachem. As such, he is been filed in court does not amount to novation
personally and solidarily liable with Novachem. and does not erase the criminal liability of the
Is the decision of CA correct? accused (Ong vs. CA, G.R. No. L-58476, September
2, 1983).
A: YES. Section 13 of the Trust Receipts Law 5. Non-receipt of the goods by the entrustee or
explicitly provides that if the violation or offense is where proof of delivery of goods to the accused
committed by a corporation, as in this case, the is insufficient. (Ramos vs. CA, supra).
penalty provided for under the law shall be imposed 6. Loss of goods without fault of the entrustee.
upon the directors, officers, employees or other 7. The transaction does not fall under PD 115
officials or person responsible for the offense, (Colinares vs. CA, G.R. No. 90828, September 5,
without prejudice to the civil liabilities arising from 2000, Consolidated Bank and Trust Corporation
the criminal offense. vs. CA, G.R. No. 114286, April 19, 2001).

In this case, Crisologo was acquitted of the charge NOTE: In these cases, the execution of a TR was
for violation of the Trust Receipts Law in relation to made after the goods covered by it had been
Article 315 of the RPC. As such, he is relieved of the purchased, making the buyer the owner thereof.
corporate criminal liability as well as the The transaction does not involve a TR but a simple
corresponding civil liability arising therefrom. loan even though the parties denominate the
However, as correctly found by the RTC and CA, he transaction as one of a TR.
may still be held liable for the trust receipts and L/C
transactions he had entered into in behalf of Q: Ricardo mortgaged his fishpond to AC Bank to
Novachem. secure a P1M loan. In a separate transaction, he
opened a letter of credit with the same bank for
Settled is the rule that debts incurred by directors, $500,000 in his favor of HS Bank, a foreign bank,
officers, and employees acting as corporate agents to purchase outboard motors. Likewise, Ricardo
are not the direct liability but of the corporation

15
 MERCANTILE LAW
executed a Surety Agreement in favor of AC cancel the trust and take possession of the goods to
Bank. be able to enforce his right thereunder. The law uses
the word "may" in granting to the entruster the right
a. Can AC Bank take possession of the to cancel the trust and take possession of the goods.
outboard motors? Why? Consequently, the entrustee has the discretion to
b. Can AC Bank also foreclose the mortgage avail of such right or seek any alternative action,
over the fishpond? (2005 Bar) such as a third party claim or a separate civil action
which it deems best to protect its right, at any time
A: upon default or failure of the entrustee to comply
a. If what Ricardo executed is a trust receopt, AC with any of the terms and conditions of the trust
Bank can take possession of the outboard agreement (South City Homes, Inc. vs. BA Finance
motors so that it can exercise its lien and sell Corporation, G.R. No. 135462, December 7, 2001).
them. If what Ricardo executed is a Surety
Agreement, AC Bank cannot take possession of Q: BBB Banking Corporation issued a Letter of
the outboard motors because it has no lien on Credit in the amount of P5Million, for the
them. purchase of five (5) tons of corn by X. Upon
b. AC Bank can also foreclose the mortgage over arrival of the goods, the goods were delivered to
the fishpond if Ricardo fails to pay the loan of the warehouse of X. Thereafter he was asked to
P1M. sign a Trust Receipt covering the goods. When
the goods were sold, X did not deliver the
Failure of the entrustee to deliver the proceeds proceeds to BBB Banking Corporation, arguing
of sale will give the entruster the right to file a that he will need the fund for the subsequent
civil action and a criminal action for estafa importation. Is there sufficient basis to sue for
(1991, 1997, 2006 Bar) criminal action? (2012 Bar)

Sec. 13 of P.D. 115, Trust Receipts Law, provides A: There is no sufficient basis for a criminal action
that the failure of an entrustee to turn over the because when the trust receipt was signed, the
proceeds of the sale of the goods, documents or ownership of the goods was already with X.
instruments covered by a trust receipt to the extent
of the amount owing to the entruster or as appears Q. Dennis failed to comply with his undertaking
in the trust receipt or to return said goods, under the TR he issued in favor of ABC bank. The
documents or instruments if they were not sold or bank filed both criminal and civil cases against
disposed of in accordance with the terms of the trust Dennis. The court proceeded with the civil case
receipt shall constitute the crime of estafa. independently from the criminal case. Is the
court correct in proceeding independently
The civil action may be instituted in the criminal although a criminal case is also instituted?
action or separately filed independently of the
criminal action. The criminal action is based on ex- A: YES, the complaint against Dennis is based on the
delictu for violation of the law while the civil action failure of the latter to comply with his obligation as
is based on ex-contractu for violation of the trust spelled out in the TR. This breach of obligation is
receipt arrangement. separate and distinct from any criminal liability for
"misuse and/or misappropriation of goods or
Repossession of goods proceeds realized from the sale of goods, documents
or instruments released under trust receipts",
Repossession of the goods by the Entruster cannot punishable under Sec. 13 of the PD 115. Being based
be considered as payment. Payment would legally on an obligation ex contractu and not ex delicto, the
result only after the entruster has foreclosed on the civil action may proceed independently of the
securities, sold the same and applied the proceeds criminal proceedings instituted against petitioners
thereof to the entrustee’s obligation. Since the TR is regardless of the result of the latter (Sarmiento vs.
a mere security arrangement, the repossession by CA, G.R. No. 122502, December 27, 2002).
the entruster cannot be considered payment of the
loan/advances given to the entrustee under the Effect of novation of a Trust Agreement
letter of credit/trust receipt (PNB v. Pineda, supra).
Where the entruster and entrustee entered into an
Cancellation of Trust Receipt in case of default agreement which provides for conditions
incompatible with the TR agreement, the obligation
In the event of default by the Entrustee on his under the trust receipt is extinguished. Hence, the
obligation under the Trust Receipt agreement, it is breach in the subsequent agreement does not give
NOT absolutely necessary for the Entruster to rise to a criminal liability under P.D. 115 but only

16
 WAREHOUSE RECEIPTS LAW
civil liability (Philippine Bank vs. Ong, G.R. No. 2. A person authorized by a Warehouseman.
133176, August 8, 2002).
FORM AND ESSENTIAL TERMS OF A
Deposits in a savings account opened by the buyer WAREHOUSE RECEIPT
subsequent to the Trust Receipt transaction cannot
be automatically applied to outstanding obligations It need not be in particular form but must embody
under the Trust Receipt account. The receipt of the within its written or printed terms (LCD-DSWD-
bank of a sum of money without reference to the TR LF):
obligation does not obligate the bank to apply the
money received against the trust receipt obligation. 1. Location of the warehouse
Neither does compensation arise because 2. Consecutive number of the receipt
compensation is not proper when one of the debts 3. Date of the issue
consists in civil liability arising from criminal 4. A statement whether the goods received will be
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. Delivered to bearer, to a specified person or to
134436, Aug. 16, 2000). a specified person or his order
5. Signature of the warehouseman
Q: E received goods from T for display and sale 6. If the receipt is issued for goods of which the
in E's store. E was to turn over to T the proceeds Warehouseman is the owner, either solely or
of any sale and return the ones unsold. To jointly or in common with others, the fact of
document their agreement, E executed a trust such ownership; and
receipt in T’s favor covering the goods. When E 7. Description of the goods
failed to turn over the proceeds from his sale of 8. A statement of the amount of advances made
the goods or return the ones unsold despite and of liabilities incurred for which the
demand, he was charged in court for estafa. E warehouseman claims a Lien.
moved to dismiss on the ground that his liability 9. Fees (WHR Law, Sec. 2)
is only civil. Is he correct? (2011 Bar)
EFFECTS OF OMISSION OF ANY OF THE
A: NO, since his breach of the trust receipt ESSENTIAL TERMS (CIV-N)
agreement subjects him to both civil and criminal
liability for estafa. 1. Conversion of the contract to ordinary deposit.
2. Injured person can hold warehouseman liable
for all damages caused by the omission.
WAREHOUSE RECEIPTS LAW 3. Validity of receipt not affected.
(ACT 2137, AS AMENDED) 4. Negotiability of receipts not affected (Gonzales
vs. Go Fiong & Luzon Surety Co., G.R. No. 91776,
Warehouse Receipt August 30, 1958).

It is a written acknowledgment by the PROHIBITED TERMS IN A WAREHOUSE

warehouseman that he has received and holds RECEIPT
certain goods therein described in his warehouse
for the person to whom the document is issued. A warehouseman may insert in a receipt issued by
(NCC, Art.1507-1520) him, any other terms and conditions provided that
such terms and conditions shall not be (C2-RMN):
Warehouseman
1. Contrary to the Warehouse Receipts Law (Sec.
A person, natural or juridical, lawfully engaged in 3).
the business of storing of goods for profit (WHR 2. Contrary to law, morals, good customs, public
Law, Sec. 58). order or public policy.
3. Terms Reducing the required diligence of the
Warehouse warehouseman (Ibid).
4. Those exempting the warehouseman from
The building or place where goods are deposited liability for Misdelivery or for not giving
and stored for profit. statutory notice in case of sale of goods. Those
exempting the warehouseman from liability for
PERSONS WHO MAY ISSUE A WAREHOUSE Negligence.
RECEIPT
Effect when the goods deposited are incorrectly
1. Warehouseman, whether public or private, described
bonded or not (WHR Law, Sec. 1).

17
 MERCANTILE LAW
GR: Warehouseman shall be liable for damages for Effect when a Negotiable Warehouse Receipt
non-existence or misdescription of goods at the was delivered without the necessary
time of its issue. indorsement (Ac - DC)

XPN: When the goods are described based on: 1. The transferee Acquires title against the
1. Series or labels upon them transferor
2. Statement that the goods are of certain kind. 2. There is no Direct obligation of the
warehouseman; and
Person to whom the goods should be delivered 3. The transferee can Compel the transferor to
(PDO) complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the
1. To the person lawfully entitled to the time when the indorsement is actually made.
Possession of the goods, or his agent;
2. To the person entitled to Delivery under a non- Forged signature of the owner
negotiable instrument or with written
authority; or In case the signature of an owner was forged and the
3. To the lawful Order of a negotiable receipt forger was able to withdraw the goods from the
(person in possession of a negotiable receipt) Warehouseman, the owner has the following rights:
(WHR Law, Sec. 9).
1. If under warehouse receipt, the goods are
deliverable to the depositor or to his order, the
owner of the said negotiable receipt may
KINDS proceed against the warehouseman and/or the
holder.
2. Without the valid indorsement of the owner to
Kinds of Warehouse Receipt the holder or in blank, the warehouseman is
liable to the owner for conversion in the
1. Negotiable warehouse receipt misdelivery.
2. Non-negotiable warehouse receipt 3. If the goods are deliverable to bearer, the owner
may only proceed against the holder. The
NEGOTIABLE WAREHOUSE RECEIPT warehouseman is not liable for conversion
where the goods are delivered to a person in
Negotiable Warehouse Receipt possession of a bearer negotiable instrument.

It is a receipt in which it states that the goods Validity of the negotiation of a receipt is not
received will be delivered to the bearer or to the impaired by fraud, mistake or duress
order of any person named in such receipt (WHR
Law, Sec. 5). It is negotiated by delivery or Breach of duty on the part of the person making the
indorsement plus delivery. negotiation or fraud, mistake or duress on the
owner of the receipt to entrust possession or
NOTE: No provision shall be inserted in a negotiable custody DOES NOT impair the validity of
receipt that it is non-negotiable. Such provision, if negotiation of a warehouse receipt. The same is true
inserted, shall be void, and the receipt shall remain provided that the person to whom the receipt was
negotiable. A negotiable warehouse receipt cannot negotiated or a person to whom the receipt was
be converted into non-negotiable (WHR Law, Sec. 5). subsequently negotiated paid value therefor,
without notice of the breach of duty, or fraud,
Person who may negotiate a Negotiable mistake or duress (WHR Law, Sec. 47).
Warehouse Receipt
Non-payment by the original depositors of the
1. The owner; purchase price will NOT render the further
2. Any person to whom the possession or custody negotiation of the receipt invalid
of the receipt has been entrusted by the owner,
if, by the terms of the receipt, the goods are The negotiation of the warehouse receipt by the
deliverable to the order of the person to whom buyer of goods purchased from and deposited to the
the possession or custody of receipt has been warehouseman is valid even if the warehouseman
entrusted or in such form that it may be who issued the negotiable warehouse receipt was
negotiated by delivery (WHR Law, Sec. 40). not paid by the buyer. The validity of the negotiation
cannot be impaired by the fact that the
owner/warehouseman was deprived of the

18
 WAREHOUSE RECEIPTS LAW
possession of the same by fraud, mistake or Effect of indorsement of a Non-Negotiable
conversion (PNB vs. Noah’s Ark Sugar Refinery, G.R. Warehouse Receipt
No. 107243, September 1, 1993).
Even if the receipt is indorsed, the transferee
Duplicate receipts must be so marked in case acquires no additional right (WHR Law, Sec. 39).
one negotiable receipt is issued for the same
goods WARRANTIES ON A WAREHOUSE RECEIPT

A warehouseman shall be liable for all damages A person who, for value, negotiates or transfers a
caused by his failure to do so to anyone who receipt by indorsement or delivery, including one
purchased the subsequent receipt for value who assigns for value a claim secured by a receipt,
supposing it to be an original, even though the unless a contrary intention appears
purchase be after the delivery of the goods by the to warrants(GRIT):
the holder of the original receipt (WHR Law, Sec. 6).
1. Receipt is Genuine
The word “duplicate” shall be plainly placed upon 2. Legal Right to negotiate or transfer it
the face of every such receipt, except the first one 3. No knowledge of defects that may Impair the
issued (ibid.). validity or worth of the receipt
4. That he has a right to Transfer title to the goods
NON-NEGOTIABLE WAREHOUSE RECEIPT and that the goods are merchantable or fit for a
particular purpose whenever such warranties
It is a receipt in which it is stated that the goods would have been to transfer without a receipt
received will be delivered to the depositor or to any of goods represented thereby (WHR Law, Sec.
other specified person (WHR Law, Sec. 4). 44).

NOTE: To make it non-negotiable, it is needed to be NOTE: The indorsee does not guarantee that the
indicated in the face of the warehouse receipt by the warehouseman will comply with his duties (WHR
warehouseman issuing it that the same is “non- Law, Sec. 45).
negotiable,” or “not negotiable” (WHR Law, Sec.7).
When no warranty implied
Failure to mark the warehouse receipt as “non-
negotiable” shall entitle the holder, who purchased A mortgagee, pledgee, or holder for security of a
it for value supposing it to be negotiable, to treat receipt who, in good faith, demands or receives
such receipt negotiable (ibid). payment of the debt for which such receipt is
security, whether from a party to a draft drawn for
Transfer of a Non-Negotiable Warehouse such debt or from any other person, shall not, by so
Receipt doing, be deemed to represent or to warrant the
genuineness of such receipt or the quantity or
A non-negotiable warehouse receipt may be quality of the goods therein described. In short, a
transferred by its delivery to the transferee creditor receiving the WHR given as collateral
accompanied by a deed of assignment, donation or makes no warranty (WHR Law, Sec. 46).
other form of transfer.

DISTINCTION BETWEEN NEGOTIABLE INSTRUMENT AND NEGOTIABLE WAREHOUSE RECEIPT

NEGOTIABLE INSTRUMENT NEGOTIABLE WAREHOUSE RECEIPT

Does not contain an unconditional promise to pay a
Contains an unconditional promise to pay a sum
sum certain in money. The obligation is to deliver
certain in money.
goods.
The subject is money. The subject is merchandise.
The negotiable instrument is the object of value. The warehouse receipt is not the object of value.
Intermediate parties are not liable for the warehouse
Intermediate parties become secondarily liable. man’s failure to deliver the goods.

Although endorsers or intermediate parties are not

The general endorsers warrant that the instrument
liable for any failure on the part of the warehouseman
after due presentment shall be paid and in case of
or previous endorsers of the receipt to fulfill their

19
 MERCANTILE LAW
dishonor and notice of dishonor given, the endorser obligations they may be held liable for breach of
shall pay the holder. warranties such as: (1) receipt is genuine and in
respect what it purports to be (2) they have legal title
to the instrument (3) goods are fit for consumption
and merchantable (4) they are not aware of any
information that will make the instrument worthless

RIGHTS OF A HOLDER OF A NEGOTIABLE WAREHOUSE RECEIPT VS.

THE RIGHTS OF A TRANSFEREE OF A NON-NEGOTIABLE WAREHOUSE RECEIPT

NEGOTIABLE WAREHOUSE RECEIPT NON-NEGOTIABLE WAREHOUSE RECEIPT

May be acquired through negotiation May be acquired through transfer or assignment
Rights of the holder of the receipt: Rights of transferee:

1. If indorsed: 1. Acquires title to the goods subject to the terms of

any agreement with the transferor (WHR Law, Sec.
a. Acquires title to the goods as the person 42).
negotiating (WHR Law, Sec. 41).
2. Acquires the right to notify the warehouseman of
b. Acquires the direct obligation of the the transfer and thereby acquires the direct obligation
warehouseman to hold possession of the goods for of the warehouseman to hold possession of the goods
him as if the warehouseman directly contracted for him (ibid).
with him (ibid).
NOTE: Prior to notice, the title of the transferee may
2. If not indorsed: be defeated by the levy of an attachment or execution
upon the goods by a creditor of the transferor or by a
He may compel indorsement; other-wise, he would notification to the warehouseman by the transferor or
acquire title as that of an assignee (WHR Law, Sec. 43). a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor (ibid.).
Defeats the lien of the seller of the goods covered
Acquires the title as that of his transferor.
thereby (WHR Law, Sec. 49).
Good covered cannot be garnished, attached or levied
on execution by unless:

1. Receipt is surrendered. Pending notification to the warehouseman, goods can

be garnished, attached or levied on execution
2. Its negotiation is enjoined by the court.
Reason: Absent such notice, both the warehouseman
3. The goods are impounded by the court (WHR Law, and the sheriff have a right to assume that the goods
Sec. 25). are still owned by the person whose name appears in
the receipt.
NOTE: This shall not apply if the person depositing is
not the owner of the goods or one who has no right to
convey title to the goods binding upon the owner.
Protects the purchaser in good faith and for value. The assignee only steps into the shoes of the assignor.

warehouseman cannot be compelled to deliver the

Q: Coco was issued by a Warehouseman a actual possession of the goods until the receipt is
negotiable receipt for safekeeping by the latter surrendered to it or impounded by the court.
of his goods. Can the judgment creditor of Coco
levy by execution the goods covered by the Q: Assuming that prior to the levy, the receipt
negotiable receipt? was sold to Yoyo on the basis of which he filed a
claim with the sheriff. Would Yoyo have better
A: The goods cannot, while in the possession of the rights to the goods than the creditor? Explain
warehouseman, be attached by garnishment or your answer. (1999 Bar)
otherwise, or be levied upon under an execution
unless the receipt is first surrendered to the A: YES. Yoyo, as a holder for value of the receipt, has
warehouseman, or its negotiation enjoined. The a better right to the goods than the creditor. It is

20
 WAREHOUSE RECEIPTS LAW
Yoyo that can surrender the receipt which is in its b. A non-negotiable warehouse receipt is
possession and can comply with the other transferred thru simple assignment. Since Alex
requirements which will oblige the warehouseman negotiated it instead of having it assigned, the
to deliver the goods, namely, to sign a receipt for the conveyance of the warehouse receipt to Caloy is
delivery of the goods, and to pay the not valid. Hence, Alex is still the owner of the
warehouseman's liens and fees and other charges. said goods. Dario could now attach or levy the
goods.
Q: What is the proper recourse of the
warehouseman if he is uncertain as to who is Q: Jojo deposited several cartons of goods with
entitled to the goods? Explain. (2005 Bar) SN Warehouse Corporation. The
correseponding warehouse receipt was issued
A: Since there is a conflicting claim of ownership or to the order of Jojo. He endorsed the warehouse
title, the warehouseman should file a complaint in receipt to EJ who paid the value of the goods
interpleader requiring the claimants to interplead. deposited. Before EJ could withdraw the goods,
The matter involves a judicial question as to whose Melchor informed SN Warehouse Corporation
claim is valid. that the goods belonged to him and were taken
by Jojo without his consent. Melchor wants to get
Rule where a warehouse receipt is transferred the goods, but EJ also wants to withdraw the
to secure payment of a loan by way of pledge or same.
mortgage
a. Who has a better right to the goods? Why?
The pledgee or mortgagee does not automatically b. If SN Warehouse Corporation is uncertain as
become the owner of the goods but merely retains to who is entitled to the property, what is the
the right to keep, and with the consent of the owner proper recourse of the corporation? Explain
to sell them so as to satisfy the obligation from the (2005 Bar)
proceeds for the simple reason that the transaction A:
is not a sale but only a mortgage or pledge. Likewise, a. Ej has better right to the goods. The goods are
if the property is lost without the fault or negligence covered by a negotiable warehouse receipt
of the mortgagee or pledgee, then said goods are to which was indorsed to EJ for value. The
be regarded as lost on account of the real owner, negotiation to EJ was not impaired by the fact
mortgagor or pledgor (PNB vs. Sayo, Jr., G.R. No. that Jojo took the goods without the consent of
129198, July 9, 1998). Melchor, as EJ had no notice of such fact.
Moreover, EJ is in possession of the warehouse
Q: Alex deposited goods for which Billy, receipt and only he can surrender it to the
warehouseman, issued a negotiable warehouse warehouseman (Sec. 8, WHL).
receipt wherein the goods were deliverable to b. Under the Sec. 17 of Act 2137, Warehouse
Alex or order. Alex negotiated the receipt to Receipts Law, SN Warehouse Corporation may
Caloy. Thereafter, Dario, a creditor secured file an action for interpleader and implead EJ
judgment against Alex and served notice of levy and Melchor to determine who is entitled to the
over the goods on the warehouseman. said goods.

a. To whom should the warehouseman deliver Q: T delivers two refrigerators to the warehouse
goods upon demand? of W who then issues a negotiable receipt
b. Would your answer be the same if the undertaking the delivery of the refrigerators to
warehouseman issued a non-negotiable “T or bearer.” T entrusted the receipt to B for
werehouse receipt? (2007 Bar) safekeeping only. B negotiated it, however, to F
who bought it in good faith and for value. Who is
A: entitled to the delivery of the refrigerators?
a. Billy should deliver the goods to Caloy. Under (2011 Bar)
the Warehouse Receipts Act, the goods covered
by the negotiable receipt cannot be attached or A: F, since he is a purchaser in good faith and for
levied upon directly by the creditor. The value.
creditor must resort to attaching or levying the
receipt itself, not the goods, while in the Between the real owner of the goods and an
possession of the debtor, Alex. Since Alex has innocent purchaser for value acquiring the
already negotiated it to Caloy, Dario cannot Warehouse Receipt from a thief, the former
anymore attach or levy the goods under the prevails
warehouse receipt.

21
 MERCANTILE LAW
If the goods were stolen from the owner and c. Refusal to sign the Acknowledgement
deposited to the warehouseman who subsequently receipt, acknowledging the receipt of the
issued a warehouse receipt which in turn was duly goods from the warehouse;
negotiated to an innocent purchaser for value, the
owner has the better right than the holder of the 5. The failure was not due to any Fault on the part
negotiable warehouse receipt. This is because a of the warehouseman:
thief transfers no title. a. Upon request by or on behalf of the person
lawfully entitled (WHR Law, Sec. 10).
b. If the goods are lost, due to a fortuitous
event exclusively.
DUTIES OF A WAREHOUSEMAN c. If the warehouseman needs reasonable
time to ascertain the validity of the claim if
someone other than the depositor claims
OBLIGATIONS OF A WAREHOUSEMAN title to the goods (WHR Law, Sec. 18).
(TD [sasusi] K) d. If he had information that the delivery
about to be made was to one not lawfully
1. Take care of the goods entrusted to his entitled (WHR Law, Sec. 10)
safekeeping with the same care as a reasonably e. If several persons claim the goods (WHR
careful owner of similar goods would exercise. Law, Sec. 17).
2. Deliver them to the holder of the receipt or the
depositor provided there is demand by the Q: The warehouseman, by issuing the
depositor accompanied by either: warehouse receipt, acknowledges that the
a. An offer to satisfy the warehouseman’s lien goods are in his possession, but he can refuse to
b. An offer to surrender the receipt, if deliver the goods to the holder of the warehouse
negotiable with such indorsements as receipt covering the goods if - (2012 Bar)
would be necessary for the negotiation of
the receipts A: A warehouseman is bound to deliver the goods
c. A readiness and willingness to sign, when upon a demand made if such is accompanied with
the goods are delivered, an (1) an offer to satisfy the warehouseman’s lien; (2)
acknowledgment that they have been offer to surrender the receipt if negotiable; and (3)
delivered, if such signature is requested by readiness to sign an acknowledgment receipt when
the warehouseman (WHR Law, Sec. 8). the goods are delivered (WHR Law, Sec. 8).

3. Keep the goods separate from the goods of other HOWEVER, Sec. 31 of the said Law expressly
depositors, except if authorized by agreement or provides that a warehouseman having a lien valid
by custom, fungible goods may be mingled with against the person demanding the goods may refuse
other goods of the same kind and grade. to deliver the goods to him until the lien is satisfied.

Instance when the need for a demand by the Further, Sec. 13 provided that the alteration of a
depositor is not necessary receipt shall not excuse the warehouseman who
issued it from any liability if such alteration was: (1)
A demand by the depositor is not necessary when the immaterial, (2) authorized, or (3) made without
warehouseman has rendered it beyond his power to fraudulent intent.
deliver the goods.
NOTE: Warehouseman has no cause of action for
Justified refusal to deliver by the warehouseman repossession and damages on the basis of a falsified
delivery permit. Warehouseman has no cause of
1. If the warehouseman’s lien is not satisfied by the action against the person to whom it delivered
claimants (WHR Law, Sec. 31); deposited articles where the real parties interested
2. Where the goods have already been sold to in the questioned articles have not yet sued the
satisfy the warehouseman’s lien or because of warehouseman for damages on account of wrongful
their perishable or hazardous nature (WHR delivery (Consolidated Terminals Inc. vs. Artex
Law, Sec. 34); Development Co. Inc. G.R. No. L-25748, March 10,
3. If the warehouse receipt is negotiated back to 1975).
him;
4. When the holder does not satisfy the conditions REMEDY IF THE WAREHOUSE RECEIPT IS LOST
prescribed in Sec. 8, WHR Law: OR DESTROYED
a. Non-satisfaction of warehouseman’s lien.
b. Failure to surrender warehouse receipt.

22
 WAREHOUSE RECEIPTS LAW
A court of competent jurisdiction may order the 4. Material alteration fraudulently made –
delivery of the goods only: warehouseman is liable according to the
original tenor of the receipt to a purchaser of
a. Upon satisfactory proof of the loss or the receipt for value without notice, and even to
destruction of the receipt; and the alterer and subsequent purchasers with
b. Upon the giving of a bond with sufficient notice except that as regards to the last two, the
sureties to be approved by the court (WHR Law, warehouseman’s liability is limited only to
Sec. 14). delivery as he is excused from any liability

The delivery of the goods under an order of the INSTANCES WHERE A WAREHOUSE MAN IS
court shall NOT relieve the warehouseman from CRIMINALLY LIABLE FOR HIS ACTS
liability to a person to whom the negotiable receipt (GF-DOOM-C)
has been or shall be negotiated for value without
notice of the proceedings or of the delivery of the 1. Issuance of warehouse receipts for Good not
goods (ibid.). received (WHR Law, Sec. 50).
2. Issuance of receipt containing False statement
Instances when the duty to insure the goods (WHR Law, Sec. 51).
arise (RIEL) 3. Issuance of Duplicate negotiable warehouse
receipt not marked as such (WHR Law, Sec. 52).
1. Where the warehouse receipt contains a 4. Issuance of a negotiable warehouse receipt of
Representation to that effect. which he is an Owner without stating such fact
2. Where it was an Inducement for the depositor of ownership (WHR Law, Sec. 53).
to enter into the contract; 5. Delivery of goods without Obtaining negotiable
3. Established practice; or warehouse receipt (WHR Law, Sec. 54).
4. Where the Law provides 6. Negotiation of receipt for Mortgaged goods
(WHR Law, Sec. 55).
Conversion 7. Commingling of goods (WHR Law, Sec. 24).

It is an unauthorized assumption and exercise of the Other acts for which Warehouse Man is liable
right of ownership over goods belonging to another (DuMP-SICC)
through the alteration of their condition or the
exclusion of the owner’s right (Bouvier’s Law 1. Failure to stamp “Duplicate” on copies of
Dictionary). negotiable receipt (WHR Law, Sec.6).
2. Misdelivery of goods (WHR Law, Sec. 10).
Instances where a Warehouseman is liable for 3. Failure to Place “non-negotiable” or “not-
conversion negotiable” on a non-negotiable receipt (WHR
Law, Sec. 7).
1. Where the delivery is made to person other 4. Failure to give notice in case of Sale of goods to
than those authorized; satisfy lien (WHR Law, Sec. 33) or because the
2. Even if delivered to persons entitled, he may goods are perishable or hazardous (WHR Law,
still be liable for conversion if prior to delivery: Sec. 34).
a. He had been requested not to make such 5. Issuing receipt for non-existing goods or
delivery; or misdescribed goods (WHR Law, Sec.20).
b. He had received notice of the adverse claim 6. Failure to take Care of the goods (Sec. 21, WHR
or title of a third person. Law).
7. Failure to effect Cancellation of a negotiable
EFFECTS OF ALTERATION OF THE RECEIPT ON receipt upon delivery of the goods (WHR Law,
THE LIABILITY OF THE WAREHOUSEMAN Sec. 11).

1. Alteration immaterial – whether fraudulent or

not, whether authorized or not, the
warehouseman is liable on the altered receipt WAREHOUSEMAN’S LIEN
according to its original tenor
2. Authorized material alteration – the
warehouseman is liable according to the terms CHARGES COVERED BY A WAREHOUSEMAN’S
of the receipt as altered LIEN
3. Material alteration innocently made – the (PMA)
warehouseman is liable on the altered receipt
according to its original receipt

23
 MERCANTILE LAW
1. Charges for storage and Preservation of the Manner of conducting the execution sale to
goods (insurance and others may be included as satisfy the warehouseman’s lien
long as it is stipulated)
2. Money advanced, interest, insurance, 1. Notice of the sale
transportation, labor, weighing, coopering and a. published once a week for two consecutive
other charges and expenses in relation to such weeks in a newspaper published in the
goods place where such sale is to be held; or
3. Charges and expenses for notice, and b. If there is no newspaper published in such
Advertisements of sale, and for sale of the goods place, the advertisement shall be posted at
where default had been made in satisfying the least ten days before such sale in not less
warehouseman’s lien (WHR Law, Sec. 27). than six conspicuous places therein.

REMEDIES AVAILABLE TO A WAREHOUSEMAN NOTE: The notice shall indicate the following:
TO ENFORCE HIS WAREHOUSEMAN’S LIEN a. Description of the goods to be sold;
(REC) b. Name of the owner or person on whose
account the goods are held; and
1. By Refusing to deliver the goods until the lien is c. Time and place of the sale
satisfied;
2. By causing the Extrajudicial sale of the property 2. Sale shall be held not less than fifteen days from
and applying the proceeds of the value of the the time of the first publication.
lien; 3. In the place where the lien was acquired.
3. By filing a civil action for Collection of the
unpaid charges or by way of counterclaim in an NOTE: The balance, if any, of the proceeds of the
action to recover the property from him or such execution sale shall be held by thewarehouseman
other remedies allowed by law for the and delivered on demand to the person to whom he
enforcement of a lien against personal property would have been bound to deliver or justified in
or to a creditor against his debtor, for the delivering goods (WHR Law, Sec.31).
collection from the depositor of all the charges
which the depositor has bound himself to pay. Effect of the non-publication of the notice of sale

Lien over the goods does not preclude the Where the sale was made without the publication
warehouseman to avail all other remedies required and before the time provided by law, such
sale is void and the purchases of the goods acquires
Whether a warehouseman has or has not a lien upon no title to them.
the goods, he is entitled to all remedies allowed by
law to a creditor against a debtor for the collection A person claiming right over the property may
from the depositor of all charges and advances stop the execution sale of the goods
which the depositor has expressly or impliedly
contracted with the warehouseman to pay (WHR At any time before the goods are so sold, any person
Law, Sec 32). claiming a right of property or possession therein
may pay the warehouseman the amount necessary
Enforcement of a Lien to satisfy his lien and to pay the reasonable
expenses and liabilities incurred inserving notices
The lien may be enforced against the goods of the and advertising and preparing for the sale up to the
following: time of such payment (WHR Law, Sec.33).

1. Goods belonging to the person who is liable as Instances when a warehouseman may lose his
debtor; and lien
2. Goods belonging to others which have been
deposited at any time by the debtor with 1. By surrendering possession thereof, or
authority to make a valid pledge (WHR Law, Sec. 2. By refusing to deliver the goods when a
28). demand is made with which he is bound to
comply (WHR Law Sec. 29).
The warehouseman shall not thereafter be liable for
failure to deliver the goods to the depositor or NOTE: Where a negotiable receipt is issued, with
owner of the goods or to a holder of the receipt the exception of the charges for the storage or
given for the goods when they were deposited, even preservation of goods for which a negotiable receipt
if such receipt be negotiable (WHR Law, Sec. 36). has been issued, the lien exists only for other
charges expressly enumerated inthe receipt so far

24
 NEGOTIABLE INSTRUMENTS LAW
as they are written although the amount of the said 2. Negotiation – transfer from one person to
charge is not stated. another so as to constitute the transferee a
holder;
3. Presentment for acceptance (in certain kinds of
When Warehouseman fees and charges cease to Bills of Exchange) (NIL., Sec. 143)
accrue 4. Acceptance – written assent of the drawee to
the order;
The warehouseman fees and charges cease to 5. Dishonor by non-acceptance – refusal to accept
accrue from the date of rejection by the by the drawee;
warehouseman to heed the lawful demand by the 6. Presentment for payment – the instrument is
endorsee of the quedan for the release of the goods shown to the maker or drawee/ acceptor for
(PNB v. Sayo, Jr., Supra) him to pay;
7. Dishonor by non-payment – refusal to pay by
the maker or drawee/ acceptor
NEGOTIABLE INSTRUMENTS LAW
8. Notice of dishonor – notice to the persons
Negotiable Instrument secondarily liable that the maker or the
drawee/ acceptor refused to pay or to accept
It is a written contract for the payment of money instrument;
which is intended as a substitute for money and 9. Protest
passes from one person to another as money, in 10. Discharge
such a manner as to give a holder in due course the
right to hold the instrument free from defenses Negotiable Instruments are not legal tender
available to prior parties (Sundiang Sr. & Aquino,
2011). Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA,
Laws governing Negotiable Instruments Sec. 60).

1. NIL - For instruments which meet the requisites GR: The delivery of a negotiable instrument does
of negotiability. not by itself produce the effect of payment (Roman
2. New Civil Code (NCC) – Applies suppletorily in Catholic Bishop of Malolos vs. Intermediate Appellate
cases of assignment and demand for payment of Court, G.R. No. 72110, November 16, 1990).
an NIL.
3. Code of Commerce (CC) – Applies suppletorily to XPNs: Negotiable instruments shall produce the
NIL in cases of crossed checks. effect of payment when:

1. When they have been cashed, or when through

Characteristics or features of a negotiable
the fault of the creditor they have been
instrument
impaired (NCC, Art. 1249).
1. Negotiability – The note may pass from hand to 2. If a check representing demand deposit has
hand similar to money so as to give the holder been cleared and credited to the account of the
in due course (HIDC) the right to hold the creditor, such shall be equivalent to delivery to
instrument and collect the sum payable for the creditor of cash (NCBA, Sec. 60).
himself free from any infirmity in the
Q: Negotiable instruments are used as
instrument or defect in the title of any of the
substitutes for money, which means - (2012 Bar)
prior parties or defenses available to them
among themselves. A: When negotiated, negotiable instruments can be
2. Accumulation of secondary contracts– A used to pay indebtedness.
characteristic of a negotiable instrument where
additional parties become involved as they are FORMS AND INTERPRETATIONS
transferred from one person to another. Once
an instrument is issued, additional parties can Rules governing the use of phrases in the
become involved (De Leon, 2010). Negotiable Instruments

Incidents in the life of a negotiable instrument 1. As to promissory note

a. The word “promise” need not be used. Any
1. Issue – first delivery of the instrument to the expression equivalent to a promise is
payee; sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.

25
 MERCANTILE LAW
c. Language used must indicate a written Manner of Can be Can be
undertaking to pay. Transfer transferred by transferred only
negotiation or by assignment.
2. As to bill of exchange by assignment.
a. It must contain an order for payment as
distinguished from a mere request. Status of The transferee The transferee
b. The order is not invalidated because it Transferee can be a holder can never be a
contains words of civility. Thus, insertion of in due course holder in due
polite words like “please” does not alter the if all the course but
character of the instrument; as long as the requirements remains to be
language expresses the drawer’s will that of Section 52 an assignee.
the money be paid. of the NIL are
complied with.
Rules of construction in case of ambiguities in a
Negotiable Instrument Defenses All defenses
Available available to
1. Words prevail over figures. prior parties
2. If date from which interest is to run is may be raised
unspecified, interest runs from the date of the against the last
instrument; if undated, from the issue thereof. transferee.
3. If undated, instrument is considered dated as of (Sundiang Sr. &
the time it was issued. Aquino, 2014).
4. Written provisions prevail over printed.
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election. Requisites of Negotiability
6. When not clear in what capacity it was signed,
deemed signed as an indorser. An instrument to be negotiable must conform to the
7. When two or more persons signed a negotiable following requirements: (WU-POA)
instrument stating "I promise to pay,"in case of
liability, they shall be deemed to be jointly and 1. It must be in Writing and signed by the maker or
severally liable (NIL, Sec. 17). drawer;
2. Must contain an Unconditional promise or order
REQUISITES OF NEGOTIABILITY to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
Factors to determine the negotiability (FRI) determinable future time;
4. Must be payable to Order or to bearer; and
1. Words that appear on the Face of negotiable 5. Where the instrument is Addressed to a drawee,
instrument he must be named or otherwise indicated therein
2. Requirements enumerated in Section 1 of NIL with reasonable certainty (NIL, Sec.1).
3. Intention of the parties by considering the
whole of the instrument. NOTE: The requirements stated in Sec. 1 must
appear on the face of the instrument otherwise the
Negotiable Instrument vs. Non-negotiable instrument would not be negotiable.
Instrument
A NI need not follow the exact language of NIL, as
NON- long as the terms are sufficient which clearly
NEGOTIABLE indicate an intention to conform to the
BASIS NEGOTIABLE
INSTRUMENT requirements of the law (NIL, Sec. 10).
INSTRUMENT
Governing NIL. The Civil Code
Law or pertinent The instrument must be in writing
special laws
It must be reduced in writing or in tangible form.
should apply
The negotiability or non-negotiability of an
(GSIS v. CA,
instrument is determined from the writing on the
G.R. No. L-
face of the instrument itself (De Leon, 2010).
40824, February
23, 1989). The instrument must be signed by the maker or
drawer

It is placed at the lower right hand corner of the

26
 NEGOTIABLE INSTRUMENTS LAW
instrument. Nonetheless, it may appear in any part requires mathematical computation (Sundiang Sr. &
of the instrument whether at the top, middle or Aquino, 2014).
bottom or at the margin (De Leon, 2010).
Payment with interest
However, where a signature is so placed upon the
instrument that it is not clear in what capacity the Interest at fixed rate or at increased or reduced rate
person making the same intended to sign, he is to be will not destroy negotiability because the presence
deemed an indorser (NIL, Sec. 17 [f]). of such interest does not make uncertain the sum
payable. In the absence of a date as to which interest
NOTE: The signature is valid and binding as long as is to run, it shall be from the date of instrument, or
it appears that a person intended to make the in the absence thereof, at the date of issue. In the
instrument his own. The signature is prima facie absence of interest rate, it shall be the legal rate.
evidence of a person’s intention to be bound as
either maker or drawer. Payment by installment
Unconditional promise or order to pay
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for
An unqualified order or promise to pay is
each installment is stated (NIL, Sec. 2; Sundiang Sr. &
unconditional though coupled with:
Aquino, 2009).
1. An indication of particular fund out of which
Q: Discuss the negotiability or non-negotiability:
reimbursement is to be made or a particular
account to be debited with the amount; or
Manila, June 3, 1993
2. A statement of the transaction which gave rise
P10,000.00
to the instrument. But an order or promise to
pay out of a particular fund is conditional (NIL,
For value received, I promise to pay Sergio Dee
Sec 3).
or order the sum of P10,000.00 in five (5)
The word “promise” or “order” need not appear in installments, with the first installment payable
the instrument to satisfy the requirements of on October 5, 1993 and the other installments
Section 1(b) of the NIL (Sundiang Sr. & Aquino, on or before the fifth day of the succeeding
2014). The promise or order to pay must not be month or thereafter.
subject to any condition or contingency. An
instrument payable upon a contingency is not (Sgd.) Lito Villa (1993 Bar)
negotiable even if the condition thereon has been
fulfilled. A: The instrument is negotiable because it complied
with the requirements provided by section 1 of the
Certainty as to sum NIL. The fact that it is payable in installments does
not make the instrument non-negotiable as long as
The sum payable is a sum certain within the the dates of each installment is fixed or at least
meaning of this Act, although it is to be paid: determinable and the amount to be paid for each
(ISDEA) installment is stated (NIL, Sec. 2[b]).

1. With Interest; or Payment with an acceleration clause

2. By Stated installments; or
3. By stated installments, with a provision upon Acceleration clause is a provision, that upon default
Default in payment of any installment or of in payment of any installment or interest, the whole
interest, the whole shall become due ( shall become due (NIL, Sec.2[c]).
acceleration clause); 1. Negotiable – If the option to accelerate the
4. With Exchange, whether at a fixed rate or at the maturity is on the maker, whether such option
current rate; or is absolute or conditional.
5. With cost of collection or an Attorney’s fees, in 2. Negotiable – Where acceleration is at the option
case payment shall not be made at maturity of the holder and can only be exercised upon the
(NIL, Sec. 2). happening of the specified event.
3. Not negotiable – Where the holder’s right to
A sum is certain within the contemplation of Section accelerate is unconditional, the time of payment
1(b) of the NIL if the amount that is to be is rendered uncertain.
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it Extension Clause

27
 MERCANTILE LAW
Extension Clauses are provisions extending the time Payable in Philippine Peso
of payment.
The “money” referred into may be our legal tender
GR: An extension clause does not affect the or foreign currency. An instrument is still negotiable
negotiability of the instrument. although the amount to be paid is expressed in
currency that is not legal tender so long as it is
XPN: Where a note with a fixed maturity provides expressed in money (PNB v Zulueta, G.R. No., L-7271,
that the maker has the option to extend time of August 30, 1957).
payment until the happening of a contingency, the
date is uncertain and the instrument is non- NOTE: An agreement to pay in foreign currency is
negotiable. The time for payment may never come valid (RA 8183).
at all.
Effect if a bill or note is payable other than in
NOTE: If the right is given to the holder, the time of money
payment need not contain a new fixed maturity date
or the length of extension does not have to be GR: The note or bill must be payable in money. If
specified. The reason is that the holder is free to payable in goods, wares, or merchandise, or in
demand payment at maturity date or any time after property, the same is not negotiable.
said date. On the other hand, if the obligor is the one
given the right to extend payment, the interest of the XPNs: Negotiability is not affected if the note
extension must be specified to keep the instrument contains an additional provision which: (SECo Law)
negotiable, for of the right to extend is without limit,
it cannot be determined with absolute certainty 1. Authorizes the sale of collateral Securities in
when the holder will have the absolute right to be case the instrument be not paid at maturity; or
paid. Thus, where the maker of the note is given the 2. Gives the holder an Election to require
right to extend the time of payment “for no longer something to be done in lieu of payment of
than a reasonable time” after maturity date, the note money; or
is non-negotiable because the definite time 3. Authorizes a Confession of judgment if the
requirement is not met (De Leon, 2010) instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for the
Sum to be paid with exchange advantage or protection of the obligor (NIL, Sec.
5).
The exchange is the charge for the expense of
providing funds at the place where the instrument Payable on demand or at a fixed or determinable
is payable to cover such instrument which is issued future time
at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De 1. Payable on demand – The holder may call for
Leon, 2010). payment any time, likewise, the maker may also
pay any time and the refusal of the holder to
Inland Bill of Exchange vs. Foreign Bill of accept payment shall stop the running of
Exchange interest should there be any, but obligation to
pay the note subsist.
An inland bill of exchange is one which is, or on its
face purports to be, both drawn and payable within An instrument is payable on demand:
the Philippines. Any other bill is a foreign bill. a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
Unless the contrary appears on the face of the bill, b. In which no time for payment is expressed
the holder may treat it as an inland bill (NIL, Sec. (NIL, Sec 7).
109). c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
Sum to be paid with costs of collection and/or person so issuing, accepting, or indorsing it,
attorney’s fees payable on demand (ibid).

It does not affect the certainty of the amount 2. At a fixed time – A term or time instrument is
payable at maturity since the increase in the amount payable only upon the arrival of the time for
due, even if uncertain, takes place after maturity payment.
when the instrument ceases to be negotiable in the 3. At a determinable future time-An instrument is
full commercial sense (De Leon, 2010). payable at a determinable future time which is
expressed to be payable:

28
 NEGOTIABLE INSTRUMENTS LAW
a. At a fixed period after date or sight; or was known to the person making it so payable;
b. On or before a fixed or determinable future (e.g. Pay to John Doe or order)
time specified therein; or 4. When the name of the Payee does not purport
c. On or at a fixed period after the occurrence to be the name of any person; (Pay to cash)
of a specified event which is certain to 5. When the only or the Last indorsement is an
happen, though the time of happening be indorsement in blank (NIL, Sec 9).
uncertain (NIL, Sec. 4).
Illustration:
Indication of particular fund for reimbursement
vs. Indication of particular fund for payment Back of NI (indorsement)

FUND FOR FUND FOR PAYMENT Pay to A Sgd. P

REIMBURSEMENT
Pay to B Sgd. A
The drawee pays the There is only one act -
payee from his own the drawee pays Sgd. B
funds. directly from the
The drawee pays particular fund A promissory note which does not have the words
himself from the indicated. "or order" or "or bearer" will render the promissory
particular fund note non-negotiable, and therefore the note can still
indicated. be assigned and the maker made liable. (2012 Bar)
Particular fund Particular fund
indicated is not the indicated is the direct Q:
direct source of source of payment. A. MP bought a used cell phone from JR. JR
payment. preferred cash but MP is a friend so JR accepted
Instrument is Instrument is non- MR‘s promissory note for P10,000. JR thought of
negotiable. negotiable. The fund converting the note into cash by endorsing it to
specified is the direct his brother KR. The promissory note is a piece of
source of payment; paper with the following hand-printed notation:
therefore, it is subject ― MP WILL PAY JR TEN THOUSAND PESOS IN
to the availability of PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
fund, hence conditional. TODAY. Below this notation MP‘s signature with
(Sundiang Sr. & Aquino, ―8/1/00 next to it, indicating the date of the
2014). promissory note. When JR presented MP‘s note
to KR, the latter said it was not a negotiable
instrument under the law and so could not be a
Payable to order valid substitute for cash. JR took the opposite
view, insisting on the note‘s negotiability. You
The instrument is payable to order where it is are asked to referee. Which of the opposing
drawn payable to the order of a specified person or views is correct?
to him or to his order. It may be drawn payable to
the order of: B. TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER
1. A Payee who is not a maker, drawer, or drawee;
400 PESOS. The note has no date, no place of
2. The Drawer or maker; or payment and no consideration mentioned. It
3. The Drawee; or
was signed by MK and written under his
4. Two or more payees Jointly; or
letterhead specifying the address, which
5. One or some of Several payees; or happens to be his residence. TH accepted the
6. The Holder of an office for the time being (Sec.
promissory note as payment for services
8, NIL).
rendered to SH, who in turn received the note
from Juan Tan as payment for a prepaid cell
Payable to bearer (ENaF PaLa) phone card worth 450 pesos. The payee
acknowledged having received the note on
1. When it is Expressed to be so payable; (e.g. I
August 1, 2000. A Bar reviewee had told TH, who
promise to pay to bearer P10,000.00) happens to be your friend, that TH is not a
2. When it is payable to a person Named therein
holder in due course under Article 52 of the
or bearer; (e.g. Pay to P or bearer P10,000.00)
Negotiable Instruments Law (Act 2031) and
3. When it is payable to the order of a Fictitious therefore does not enjoy the rights and
person or non-existing person, and such fact
protection under the statute. TH asks for our

29
 MERCANTILE LAW
advice specifically in connection with the note whereby the drawee bank acts dishonestly and is a
being undated and not mentioning a place of party to the fraudulent scheme. The check is
payment and any consideration. What would deemed payable to order, and consequently, the
your advice be? (2000 Bar) drawee bank bears the loss (Ibid).

A: When drawee must be named with reasonable

a. The view of KR is correct. The note is payable to certainty
a specific person hence it is not negotiable. The
law provides that for an instrument to be 1. In a bill of exchange, the drawee must be named
negotiable, it must comply with the or otherwise designated with reasonable
requirements of section 1 of the NIL pertaining certainty (NIL, Sec. 1).
to the part that a note must be payable to order 2. A bill may be addressed to two or more drawees
or bearer. In the given case, there were no jointly, but not to two or more drawees in the
words of negotiability and it is silent as to alternative or in succession (NIL, Sec. 127). Eg.
whether it is payable to order or bearer. Hence, An instrument may be addressed “to A and B”
the instrument is non-negotiable. but not “to A or B”.
b. The place and date are not essential to the 3. An instrument payable “to the order of the
negotiability of the instrument except in certain bearer” has been held to be an instrument
cases when [a] the date is necessary say to payable to “order” (10 C.J.S. 575-576).
determine when the note is due; or [b] the
interest is to run when the payment of interest Q: Indicate and explain whether the promissory
has been stipulated or whether the holder is note is negotiable or non-negotiable.
barred by the statute of limitations from
enforcing the note. The fact that there is no a. I promise to pay A or bearer Php100,000.00
mention of consideration is not essential from my inheritance which I will get after
because it is presumed. the death of my father.
b. I promise to pay A or bearer Php100,000
Difference between having a check payable to a plus the interest rate of ninety (90) – day
fictitious payee and payable to a specified payee treasury bills.
c. I promise to pay A or bearer the sum of
If a check is payable to a specified payee, it is an Php100,000 if A passes the 2012 bar exams.
order instrument, which requires indorsement d. I promise to pay A or bearer the sum of
from the payee or holder before it may be validly Php100.000 on or before December 30,
negotiated; but it may nevertheless be considered 2012.
as a bearer instrument if it is payable to the order of e. I promise to pay A or bearer the sum of
a fictitious or non-existing person, and such fact is Php100,000. (2012 Bar)
known to the person making it so payable. Thus,
checks issued to “Prinsipe Abante” or “Si Malakas at A:
si Maganda,” who are well-known characters in a. NON-NEGOTIABLE. It is based on a
Philippine mythology, are bearer instruments contingency and not an unconditional promise
because the named payees are fictitious and non- or order to pay sum certain in money. (NIL, Sec.
existent (De Leon, 2010). 1 [b])
b. NEGOTIABLE. The instrument is negotiable
Fictitious-Payee rule despite the inclusion of interest since the sum
to be paid with said interest is still certain. (NIL,
The fictitious-payee rule contemplates that the Sec. 2 [a])
payee is fictitious or not intended to be true c. NON-NEGOTIABLE. The instrument is not an
recipient of the proceeds. The check is considered a unconditional promise or order to pay a sum
bearer instrument negotiable by delivery alone. The certain in money since payment depends upon
underlying theory is that the maker of the check the happening of an event. (NIL, Sec. 1 (b])
knew that the fictitious payee cannot indorse the d. NEGOTIABLE. There is certainty in payment
instrument so that he must have intended for it to since it is payable on or before a fixed or
be negotiated by mere delivery. (PNB v. Rodriguez, determinable future time specified. (NIL, Sec.
G.R. No. 170325, September 26, 2008) 4(b])
e. NEGOTIABLE. It is a bearer instrument that is
GR: In case of controversy, the drawer is liable and payable upon demand. (NIL, Sec. 7 [b] and Sec. 9
the drawee bank is absolved from liability. [b]).

XPN: When there is commercial bad faith, Q: Antonio issued the following instrument:

30
 NEGOTIABLE INSTRUMENTS LAW
August 10, 2013 prevailing 91-day Treasury Bill rate as
Makati City published at the beginning of such calendar
quarter.
P100,000.00 c. The PN gives the maker the option to make
payment either in money or in quantity of
Sixty days after date, I promise to pay Bobby or palay or equivalent value.
his designated representative the sum of ONE d. The PN gives the holder the option either to
HUNDRED THOUSAND PESOS (P100,000.00) require payment in money or to require the
from my BPI Acct. No. 1234 if, by this due date, maker to serve as the bodyguard or escort of
the sun still sets in the west to usher in the the holder for 30 days. (2002 Bar)
evening and rises in the east the following
morning to welcome the day. A:
a. NOT AFFECTED. Date is not one of the
(Sgd.) Antonio Reyes requirements for negotiability therefore it is
not essential except when the date is necessary
Explain each requirement of negotiability to determine when the note is due
present or absent in the instrument. (2013 Bar) b. NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is
A: The instrument contains a promise to pay and negotiable. The law provides under section 2a
was signed by the maker, Antonio Reyes (NIL, Sec. of the NIL, a sum is still considered as certain
1[a]). although it is to be paid within interest. It does
not make the promise unconditional
The promise to pay is unconditional insofar as the c. AFFECTED. An option given to the maker
reference to the setting of the sun in the west in the makes the promise conditional
evening and its rising in the east in the morning are d. NOT AFFECTED. An option given to the holder
concerned. These are certain to happen (NIL, Sec. does not make the promise conditional
4[c). The promise to pay is conditional, because the
money will be taken from a particular fund, the BPI Q: B borrowed Php1 million from L and offered
Account No. 1234. The instrument contains a to him his BMW car worth Php 1 Million as
promise to pay a sum certain in money, P100,000.00 collateral. B then executed a promissory note
. The money is payable at a determinable future that reads: “I, B, promise to pay L or bearer the
time, sixty days after August 10, 2013. The amount of Php1 Million and to keep my BMW car
instrument is not payable to order or to bearer (loan collateral) free from any other
encumbrance. Signed, B.” Is this note
Provisions that do not affect the negotiability of negotiable? (2011 Bar)
an instrument
A: NO, since it contains a promise to do an act in
1. Omission of date addition to the payment of money.
2. Non-specification of value given or that any
value had been given NOTE: What will not affect the negotiability of the
3. Non-specification of place where it is drawn or instrument is an additional provision which gives an
payable election to require something to be done in lieu of
4. Bears a seal payment of money.
5. Designation of particular kind of currency in
which payment is to be made. (Sec. 6, NIL.) Q: A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I
Q: Which of the following stipulations or promise to pay B Php1 Million or his order or
features of a promissory note (PN) affect or do give Php1 Million worth of cement or to
not affect its negotiability, assuming that the PN authorize him to sell my house worth Php1
is otherwise negotiable? Indicate your answer Million. Signed, A.” Is the note negotiable? (2011
by writing the paragraph number of the Bar)
stipulation or feature of the PN as shown below
and your corresponding answer, either A: NO, because the exercise of the option to pay lies
―Affected or ―Not affected. Explain. with A, the maker and debtor.

a. The date of the PN is ―February 30, 2002. NOTE: In order not to affect the negotiability of the
b. The PN bears interest payable on the last instrument, the option must be with the
day of each calendar quarter at a rate equal holder/creditor.
to five percent (5%) above the then

31
 MERCANTILE LAW

Q: Distinguish a negotiable document from a negotiable instrument (2005 Bar)

BASIS NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT

A written contract which is intended as Held to be non-negotiable in the technical
Substitute for
a substitute for money like promissory sense because they do not have the
money
notes and bill of exchange. requisites under the NIL.
It has various forms such as but not limited
It may either be a bill of exchange or a
Forms to bill of lading, stock certificates,
promissory note.
warehouse receipts and pawn tickets.
The subject matter is a sum certain in
Subject Matter Actually stands for the goods it covers.
money.
Capability of Capable of accumulating secondary Not capable of accumulating secondary
Accumulating contracts resulting from indorsements contracts resulting from indorsements at
Secondary Contracts at the back thereof. the back thereof.

KINDS OF NEGOTIABLE INSTRUMENTS A bill of exchange itself does not operate as an

assignment of the funds in the hands of the drawee
Kinds of negotiable instruments available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the
1. Promissory notes (PN) – An unconditional same (NIL, Sec. 127).
promise in writing made by one person to
another, signed by the maker, engaging to pay A bill of exchange may be addressed to two or more
on demand, or at a fixed or determinable future drawees jointly, whether partners or not; but not to
time, a sum certain in money to order or to two or more drawees in the alternative or in
bearer (NIL, Sec. 184). succession (NIL, Sec. 128).

2. Bill of exchange (BOE) – An unconditional order When a bill of exchange may be treated as
in writing addressed by one person to another promissory note (2015 Bar)
signed by the person giving it, requiring the
person to whom it is addressed to pay on 1. Where in a bill the drawer and the drawee are
demand or at a fixed or determinable future the same person (NIL, Sec. 130)
time a sum certain in money to order or to 2. The drawee is a fictitious person (NIL, Sec. 130)
bearer (NIL, Sec. 126). 3. The drawee does not have the capacity to
contract (NIL, Sec. 130)
3. Check – A bill of exchange drawn on a bank 4. When the instrument is so ambiguous that
payable on demand (NIL, Sec. 185). there is doubt whether it is a bill or a note, the
holder may treat it either at his election (NIL,
Promissory note vs. Bill of exchange Sec. 17[e])

PROMISSORY BILL OF Q: State and explain whether the following are

BASIS NOTE EXCHANGE negotiable instruments under the Negotiable
Undertaking Promise to pay Order to pay Instruments Law:
3 parties (upon
As to number of a. Postal Money Order
2 parties acceptance of the
original parties b. A certificate of time deposit which states
drawee)
Drawer is “This is to certify that bearer has deposited
As to liability of Maker is in this bank the sum of FOUR THOUSAND
secondarily
parties primarily liable PESOS (P4,000) only, repayable to the
liable
2 presentments depositor 200 days after date.”
Only 1 c. Letters of Credit
As to number of (for acceptance
presentment d. Warehouse Receipts
presentments and for payment)
(for payment) is e. Treasury warrants payable from a specific
needed are generally
needed fund
needed

32
 NEGOTIABLE INSTRUMENTS LAW
f. Certificate of Indebtedness under Sec. 1 of the NIL. It is merely considered
g. Electronic messages as a negotiable document that does not result in
the accumulation of contracts.
e. A treasury warrant require appropriations
A:
from the national government which means
a. Postal money order is not a negotiable
that the particular fund may or may not exists
instrument because, as held in Phil. Education
which renders it conditional, thereby non-
Co. vs Soriano, there are many restrictions
negotiable.
which make them incompatible with concepts
f. Not negotiable. A certificate of indebtedness
of negotiable instruments, thereby making the
merely acknowledges to pay a sum of money to
order conditional, in contrast to Sec. 1 of the
a specified persons or entity. Since a certificate
NIL. Furthermore, such is governed by postal
of indebtedness which is not payable to order
rules and regulation and it may only be
or bearer but is payable to a specific person is
negotiated once.
not negotiable, the assignee takes it subject to
b. The certificate of time deposit is a negotiable
the defect in the title of the assignor. Thus,
instrument because it is an acknowledgement
when the person who signed the deed of
in writing by the bank of the amount of deposit
assignment was not authorized by the board of
with a promise to repay the same to the
directors, the assignor had no title to convey to
depositor or bearer thereof at a specific time
the assignee (Traders Royal Bank vs. Court of
(Caltex (Philippines), Inc. vs. Court of Appeals
Appeals, Filriters Guaranty Assurance
and Security Bank and Trust Company, G.R. No.
Corporation and Central Bank of the
97753, August 10, 1992).
Philippines, G.R. No. 93397, March 3, 1997).
c. A letter of credit is not negotiable because it is
g. The electronic messages are not signed by the
generally conditional and has limited
investor-clients as supposed drawers of a bill
negotiability - it is issued in favor of a specific
of exchange; they do not contain an
person. But the Supreme Court held in Lee vs.
unconditional order to pay a sum certain in
Court of Appeals, that the drafts issued in
money as the payment is supposed to come
connection with the letters of credit are
from a specific fund or account of the investor-
negotiable instruments.
clients; and, they are not payable to order or
d. A warehouse receipt is not a negotiable
bearer but to a specifically designated third
instrument because the obligation of a
party. Thus, the electronic messages are not
warehouseman is not to pay but to deliver the
bills of exchange (Hongkong & Shanghai
goods under the warehouse receipt which fails
Banking Corporation v. CIR, G.R. Nos. 166018 &
to comply with the requirements set forth
167728, 04 June 2014).

Parties to a negotiable instrument and their liabilities

BASIS PARTIES FUNCTION LIABILITY

One who makes the promise and signs Primarily liable; cannot limit his
Maker
the instrument. liability.
PN
The party to whom payment is
Payee
originally payable.
Secondarily liable, except when
The person who issues and draws drawee refused to accept; can limit
Drawer
the bill. his liability by putting “without
recourse.”
The party upon whom the bill is
BOE Drawee Not liable until he becomes acceptor.
drawn.
The party to whom payment is The party to whom payment is
Payee
originally payable. originally payable.
The acceptor is the drawee who
Acceptor Primarily liable.
accepts the bill.

Referee in case of need BOE is dishonored by non-acceptance or non-

payment. It is the option of the holder to refer to the
Referee in case of need is the person named by the referee in case of need or not as he may see fit (NIL,
drawer or indorser in the Negotiable Instrument as Sec. 131).
the one to whom the holder may resort in case the

33
 MERCANTILE LAW
Acceptance of the bill of exchange by the drawee Jun is liable to Marie, being a holder in due
is not an important requisite for the course, for the incomplete instrument which he
instrument’s negotiability delivered to Ruth.
b. NO. The check is an incomplete instrument not
The acceptance of a BOE is not important in the delivered in contemplation of law. An
determination of its negotiability. The nature of incomplete instrument not delivered is not a
acceptance is important only in the determination valid contract in the hands of any holder as
of the kind of liabilities of the parties involved against any person whose signature was placed
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L- thereon before delivery. As such, Jun is not
25836-37, Jan. 31, 1981). liable to Marie since he does not assume any
responsibility whatsoever upon the said check
COMPLETION AND DELIVERY (NIL, Sec. 15)

Steps in the issuance of a negotiable instrument Various situations involving negotiable

instruments
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of 1. Incomplete instrument
NIL. a. Delivered
2. Delivery - The transfer of possession, actual or i. With forgery and alteration
constructive, from one person to another (NIL, ii. Without forgery and alteration
Sec. 191), with the intent to transfer title to b. Not delivered
payee and recognize him as holder thereof. i. With forgery and alteration
ii. Without forgery and alteration
Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank 2. Complete instrument
checks. He instructed Ruth, his secretary, to fill a. Delivered
them as payment for his obligations. Ruth filled i. With forgery and alteration
one check with her name as payee, placed ii. Without forgery and alteration
P30,000.00 thereon, endorsed and delivered it b. Not delivered
to Marie. She accepted the check in good faith as i. With forgery and alteration
payment for goods she delivered to Ruth. ii. Without forgery and alteration
Eventually, Ruth regretted what she did and
apologized to Jun. Immediately he directed the NOTE: If an instrument is complete and delivered
drawee bank to dishonor the check. When without forgery and alteration, all parties are
Marie encashed the check it was dishonored. bound.

a. Is Jun liable to Marie? INSERTION OF DATE

b. Supposing the check was stolen while in
Ruth's possession and a thief filled the blank GR: The date is not essential to the negotiability of
check, endorsed and delivered it to Marie in the instrument (not one of the requirements under
payment for the goods he purchased from Sec. 1).
her, is Jun liable to Marie if the check is
dishonored? (2006 Bar) XPNs: Date is important to determine maturity:

A: 1. Where the instrument is payable within a

a. YES. When a delivered instrument is wanting in specified period after date, or after sight.
any material particular (NIL, Sec. 14), the 2. When the instrument is payable on demand,
person in possession thereof has prima facie date is necessary to determine whether the
authority to complete it by filling up the blanks. instrument was presented within a reasonable
But if it was not filled up strictly in accordance time from issue, or from the last negotiation.
with the authority given, it cannot be enforced 3. When the instrument is an interest-bearing one,
against any person who became party thereto to determine when the interest starts to run.
prior to its completion. However, if it is
negotiated to a holder in due course, then it is Insertion of a wrong date
valid and effective for all purpose in his hands
because the defense of not filling it up in The insertion of a wrong date does not avoid the
accordance with the authority given is only a instrument in the hands of a subsequent holder in
personal defense that cannot be raised against due course, but as to a HIDC, the date so inserted is
a holder in due course. Based on the foregoing, to be regarded as the true date (ibid.).

34
 NEGOTIABLE INSTRUMENTS LAW
With respect to the person who inserted the wrong A signature on a blank paper delivered by the
date, however, the instrument is avoided (Bank of person making the signature in order that the paper
Houston v. Day, 145 Mo. Appl. 410, 122 SW 756). may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as
Ante-dating or post-dating an instrument such for any amount. In order, however, that any
such instrument when completed may be enforced
If the instrument is ante-dated or post-dated, the against any person who became a party thereto
instrument is not invalid by that fact alone, provided prior to its completion, it must be filled up strictly in
it is not done for illegal or fraudulent purpose (NIL, accordance with the authority given and within a
Sec. 12). reasonable time (NIL, Sec. 14).

Q: Can a bill of exchange or a promissory note NOTE: While under the law, the one in possession
qualify as a negotiable instrument if: had a prima facie authority to complete the check,
such prima facie authority does not extend to its
a. it is not dated; use (i.e., subsequent transfer or negotiation) once
b. or the day and the month, but not the year of the check is completed (Patrimonio v. Gutierrez,
its maturity, is given; or G.R. No. 187769, June 4, 2014).
c. it is payable to ―cash
d. it names two alternative drawees (1997 Q: To secure certain advances from the bank, X
Bar) and Y executed several promissory notes. When
the obligation became due, X and Y failed to pay
A: the same despite repeated demands. To evade
a. YES. Date is not an essential requirement for their liability, they claimed that they signed the
the negotiability of an instrument as provided promissory notes in blank and they had not
for in section 1 of the NIL. received the value of said notes. Is their defense
b. NO. Since the year is not determined, the time tenable?
for payment is not determinable.
c. YES. When the name of the payee does not A: NO. It is no defense that the promissory notes
purport to be the name of any person, the law were signed in blank as Section 14 of the Negotiable
provides in section 9d of the NIL that the maker Instruments Law concedes the prima facie authority
or drawer intends the same to be payable to of the person in possession of negotiable
bearer, hence the instrument qualifies as a instruments to fill in the blanks (Quirino Gonzales
negotiable instrument. Logging Concessionaire vs. Court of Appeals, G.R. No.
d. NO. When the bill is addressed to two or more 126568, April 30, 2003).
payees in the alternative, the law provides in
section 128 of the NIL that it is conditional and Effect if a completed instrument was negotiated
therefore non-negotiable. to a holder in due course

Holder may insert the date in an instrument in After completion, the completed instrument which
the following instances was subsequently negotiated to an HIDC, is valid
and effectual for all purposes in his hands, and he
1. Where an instrument expressed to be payable may enforce it as if it had been filled up strictly in
at a fixed period after date is issued undated; or accordance with the authority given and within a
2. Where the acceptance of an instrument payable reasonable time (ibid).
at a fixed period after sight is undated (NIL, Sec.
13). NOTE: Hence, the defense that the blanks were
filled up beyond the authority given and/ or beyond
COMPLETION OF BLANKS the reasonable time, is not available as against a
HIDC. This defense is merely a personal one.
Meaning of a material particular
Enforcement of an incomplete but delivered
It is any particular proper to be inserted in a instrument
negotiable instrument to make it complete.
In order that any such instrument when completed
INCOMPLETE BUT DELIVERED INSTRUMENTS may be enforced against any person who became a
(NIL, SEC. 14) party thereto prior to its completion, it must be
filled up strictly in accordance with the authority
Prima facie authority to fill up the blanks given and within reasonable time.

35
 MERCANTILE LAW
If such instrument, after completion, is negotiated to Where an incomplete instrument has not been
a holder in due course, it is valid and effectual for all delivered, it will not, if completed and negotiated
purposes in his hands, and he may enforce it as if it without authority, be a valid contract in the hands
had been filled up strictly in accordance with the of any holder, as against any person whose
authority given and within reasonable time (Ibid). signature was placed thereon before delivery (NIL,
Sec. 15).
Non-delivery of complete instrument is a personal
defense. Non-delivery of an incomplete instrument is a real
defense which may be set up even against a holder
Q: Lorenzo signed several blank checks in due course.
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one Enforcement of the instrument against the party
check with her name as payee, placed whose signature was placed after delivery
P30,000.00 thereon, endorsed and delivered it
to Evelyn as payment for goods the latter The instrument can be validly enforced against the
delivered to the former. When Lorenzo found party whose signature was placed after delivery like
out about the transaction, he directed the an indorser because the indorser warrants the
drawee bank to dishonor the check. When instrument to be genuine and in all respect what it
Evelyn encashed the check, it was dishonored. Is purports to be.
Lorenzo liable to Evelyn? (2006 Bar)
Q:
A: YES. This covers the delivery of an incomplete A. PN makes a promissory note for P5,000.00,
instrument, under Section 14 of the Negotiable but leaves the name of the payee in blank
Instruments Law, which provides that there was because he wanted to verify its correct
prima facie authority on the part of Nicky to fill-up spelling first. He mindlessly left the note on
any of the material particulars thereof. Having done top of his desk at the end of the workday.
so, and when it is first completed before it is When he returned the following morning,
negotiated to an HIDC like Evelyn, it is valid for all the note was missing. It turned up later
purposes, and she may enforce it within a when X presented it to PN for payment.
reasonable time, as if it had been filled up strictly in Before X, T who turned out to have filched
accordance with the authority given. the note from PN’s office, had endorsed the
note after inserting his own name in the
Q: AX, a businessman, was preparing for a blank space as the payee. PN dishonored the
business trip abroad. As he usually did in the note, contending that he did not authorize
past, he signed several checks in blank and its completion and delivery. But X said he
entrusted them to his secretary with instruction had no participation in, or knowledge about
to safeguard them and fill them out only when the pilferage and alteration of the note and
required to pay accounts during his absence. OB, therefore he enjoys the rights of a holder in
his secretary, filled out one of the checks by due course under the Negotiable
placing her name as the payee. She filled out the Instruments Law. Who is correct and why?
amount, endorsed and delivered the check to
KC, who accepted it in good faith for payment of B. Can the payee in a promissory note be a
gems that KC sold to OB. Later, OB told AX of “holder in due course” within the meaning of
what she did with regrets. AX timely directed the the Negotiable Instruments Law (Act 2031)?
bank to dishonor the check. Could AX be held Explain your answer (2000 Bar)
liable to KC? Answer and reason briefly. (2004
Bar) A:
A. Since the negotiable instrument is still
A: YES. AX could be held liable to KC. This is a case incomplete and has not yet been delivered, PN
of an incomplete check, which has been delivered. is correct in dishonoring the said instrument.
Under Section 14 of the NIL, KC, as a holder in due Sec. 15 of Act 2031 provides that where an
course, can enforce payment of the check as if it had incomplete instrument has not been delivered,
been filled up strictly in accordance with the it will not, if completed and negotiated without
authority given by AX to OB and within a reasonable authority, be a valid contract in the hands of any
time. holder, as against any person whose signature
was placed thereon before delivery. Thus,
INCOMPLETE AND UNDELIVERED under this section, it is a real defense that can
INSTRUMENTS even be interposed against a holder in due
(NIL, SEC. 15) course.

36
 NEGOTIABLE INSTRUMENTS LAW
B. A payee in a promissory note cannot be a delivery or of its special purpose), the instrument is
“holder in due course” within the meaning of treated as if there is no condition if such delivery
the Negotiable Instrument Law, because a was made to a holder not in due course, prior
payee is an immediate party in relation to the parties are not bound by the instrument (NIL, Sec.
maker. The payee is subject to whatever 16).
defenses, real or personal, available to the
maker of the promissory note. NOTE: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
COMPLETE BUT UNDELIVERED delivery, because of the rule that the negotiability is
INSTRUMENTS determined only upon the face of the instrument.
(SEC. 16)
Presumption as to delivery
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, If the instrument is in the possession of an HIDC,
Sec. 16). Delivery is essential to the validity of any valid delivery is conclusively presumed.
negotiable instrument (Sundiang Sr. & Aquino,
2009). If the instrument is in the possession of a party
other than an HIDC, possession of such party
Where a debtor who drew two checks payable to his constitutes only prima facie presumption of
creditor never delivered the checks to his creditor delivery.
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the Immediate Parties
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the Immediate parties are persons having knowledge of
payee acquires no interest in the check until its the conditions or limitations placed upon the
delivery to him (Development Bank of Rizal v. Sim delivery of an instrument. It means privity, and not
Wei, G.R. No. 85419, March 9, 1993). proximity.

However, in another case, the payee’s was forged to A payee who is a holder in due course is not an
make it appear that he had made an indorsement in immediate party in the sense of Section 16. (Liberty
favor of the forger. Such signature should be Trust Co. v. Tilton, 105 N.E. 05.)
deemed as inoperative and ineffectual. The
collecting bank, grossly erred in making payment by Remote Parties
virtue of said forged signature. The payee should
Persons without knowledge as to the conditions or
therefore be allowed to recover from the collecting
limitations placed upon the delivery of an
bank even if the check was not delivered to the
instrument, even if he is the next party physically or
payee (Westmont Bank v. Ong, G.R 132560, January parties who are not in direct contractual relation to
30, 2002). each other, but if they are chargeable, for example,
with knowledge or notice of any infirmities in the
NOTE: The defense of want of delivery of a complete
instrument or defect in the title of the person
instrument is only a personal defense which means
negotiating the same, they will be considered as
that it is only available against a holder NOT in due
immediate parties for purposes of Section16.
course.
SIGNATURE
Issuance of an instrument
Validity of signature in a negotiable instrument
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
A party may use his full name, surname, initials or
person who takes it as holder (NIL, Sec. 191).
even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
Conditional delivery or delivery for a special
purpose
A signature may be made in any manner as long as
the person signing has the intention to be bound.
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
Persons liable on an instrument
transferring the property (title) to the instrument.
In such case, if the instrument lands in the hands of
GR: Only persons whose signatures appear on an
an HIDC (one who does not know of the conditional
instrument are liable thereon (NIL, Sec. 18).

37
 MERCANTILE LAW
XPNs: Notwithstanding the absence of their Legal effects of an agent’s signature
signatures in their own names, the following
persons are deemed liable: (TraP FAP) The agent’s signature, provided that the above
requisites are complied with, will bind his principal
1. Person who signs in Trade or assumed name and he will be exempt from personal liability.
(NIL, Sec. 18) – Party who signed must have
intended to be bound by his signature. Procuration
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his It is the act by which a principal gives power to
principal and adding words to show he is another to act in his place as he could himself (Fink
merely signing in a representative capacity v. Scott, 143 S.E. 305).
(NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23) It operates as notice or a warning that the agent has
4. Acceptor, who makes his acceptance of a bill on but a limited authority to sign and the principal is
a separate paper (NIL, Sec. 134) bound only in case the agent in so signing acted
5. Person, who makes a written Promise to accept within the actual limits of his authority (NIL, Sec.
the bill before it is drawn (NIL, Sec. 135) 21).

Where a signature is so placed upon the instrument INDORSEMENT OF A MINOR OR A

that it is not clear in what capacity the person CORPORATION
signed, he is deemed to be an indorser (NIL, Sec.
17[f]), not a maker or drawer. Indorsement made by an infant or a corporation

Q: Juan borrowed P10,000.00 from Joe as 1. Minor – A contract entered into by a minor is
evidenced by a promissory note. All other voidable, at the option of the minor. It is a real
requisites of negotiability are present except defense that can be invoked only by the minor.
that Juan did not affix his usual signature
thereon as he was ailing at that time and was
only able to put “X” in the blank space meant for While a minor is not bound by his indorsement
the signature of the maker. Is the requisite that for lack of capacity, he is however not
the instrument must be signed by the maker incapacitated to transfer his rights.
complied with?
Where a minor committed actual fraud by
A: YES. The letter “X” is sufficient to comply with the specifically stating that he is of legal age, a
requirement. It appears from the problem that such minor can be bound by his signature in an
letter was adopted by Juan with the intent to instrument (PNB v. CA, G.R. No. L-34404, June 25,
authenticate the instrument. It is not necessary that 1980).
the signature is the usual signature of the maker.
2. Incapacitated person – An incapacitated person
SIGNING IN TRADE NAME may also use as a real defense his incapacity to
enter into a contract. Contract entered into by
As a general rule, only persons whose signatures the incapacitated are voidable. Incapacitated
appear on an instrument are liable thereon. But one persons include: a) insane or demented persons
who signs in a trade or assumed name is liable as if and b) deaf and blind who does not know how
he signed his own name (NIL, Sec. 18). It is to write.
necessary, however, that the party who signed 3. Corporation- Issuance or indorsement of an
intended to be bound by his signature. instrument by a corporation acting beyond its
powers (ultra vires) is a real defense.
SIGNATURE OF AGENT
Q: A executed a promissory note in favor of M
Requisites for an agent to be exempt from which reads:
liability
I promise to pay P (16 years old) or order
1. He is duly Authorized P10,000.
2. He adds Words to his signature indicating that Sgd. M
he signs as an agent/representative and
3. He Discloses the name of his principal (NIL, Sec. P indorsed it to A.
20).

38
 NEGOTIABLE INSTRUMENTS LAW
a. May A collect from M notwithstanding that P, persons. The payee is allowed to directly recover
the indorser is a minor? from the collecting bank to simplify proceedings
b. In case that A cannot collect from M, can he (Westmont Bank v. Ong, supra).
collect from P?
Effects of forgery
A:
a. YES. A can collect from M. Notwithstanding the GR: It does not avoid the instrument but only the
fact that A is a minor, the indorsement of P (the forged signature. The signature is wholly
minor) passes title to A (the holder. M cannot inoperative. In other words, rights may still exist
invoke the defense of minority because such and be enforced by virtue of such instrument as to
defense would only be available to P. those signatures thereto are found to be genuine.
b. NO. A cannot collect from P, as he has a real
defense of minority on his part. XPNs:
1. If the party against whom it is sought to enforce
FORGERY such right is precluded from setting up forgery
or want of authority (NIL, Sec. 23).
It is the counterfeit making or fraudulent alteration 2. Where the forged signature is not necessary to
of any writing. It happens when a signature is the holder’s title, in which case, the forgery may
affixed by one who does not claim to act as an agent be disregarded (NIL, Sec. 48)
and who has no authority to bind the person whose .
signature he has forged (NIL, Sec. 23). Persons precluded from setting up the defense
of forgery (2010 Bar)
Burden of proof in proving forgery
1. Those who admit orwarrant the genuineness of
Forgery, as any other mechanism of fraud must be the signature such as indorsers, persons
proven clearly and convincingly, and the burden of negotiating by delivery and acceptor; (NIL, Sec
proof lies on the party alleging forgery (Chiang Yia 56).
Min v. CA, G.R. No. 137932, Mar. 28, 2001). 2. Those who by their acts, silence, or negligence,
are estopped from claiming forgery;
Illustration 3. A holder of a bearer instrument who
subsequently negotiates such instrument with a
Pay to P or order P10,000 30 days after sight. prior forged indorsement (forged indorsement
is not necessary to his title it being a bearer
(Sgd)D, (forged by P) instrument).
To X
Cut-off Principle
P presented the instrument for acceptance. X
accepted the instrument without detecting the In order instruments, parties prior to forgery are
forgery. P then indorses the bill to A, A to B, B to C, relieved or cut-off of liability. They cannot be held
the present holder. In this case, if after 30 days the liable by any holder, including a holder in due
holder presented the instrument to X for payment course.
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of Liabilities of the parties to a negotiable
the drawer’s signature (NIL, Sec. 62) instrument where an indorsement is forged

A payee may sue the collecting bank for the

amount of the checks it paid under a forged Illustration
indorsement even when the instrument has not
been delivered to the payee

The collecting bank is liable to the payee and must

bear the loss because it is its legal duty to ascertain
that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by a. If the instrument is payable to order and the
desirable shortcut, the person who ought in any indorsement of one of the indorsers is forged, C can
event to be ultimately liable as among the innocent enforce the note against X and B but not against M,

39
 MERCANTILE LAW
P or A, because were it not for the forgery of X the bank is an indorser who warrants that the
instrument will not reach the possession of C. instrument is genuine and in all respect what it
purports to be (NIL, Sec. 16). The collecting
b. If the instrument is payable to bearer, the bank had no right to be paid by the drawee bank
indorsement of X is not necessary to vest title to C since the forged indorsement is inoperative.
because negotiation on bearer instrument requires The collecting bank my ultimately recover from
only delivery. the forger (Pre-Week Reviewer in Commercial
Law, Dimaampao and Escalante).
Legal consequences when a bank honors a
forged check XPN: When the drawee bank is guilty of
negligence, he must bear the loss (Ibid).
1. When drawer's signature is forged
Q: X Corporation opened an account with Y Bank
GR: Drawee bank is liable because the bank is with its President and Secretary/Treasurer as
bound to know the signature of its customers signatories. While they are abroad, several
and if it pays a forged check, it must be checks bearing their signatures were presented
considered as making the payment out of its to and approved by the bank. The amount of
own funds and cannot ordinarily charge the these checks were then debited against the
amount so paid to the account of the depositor account of corporation. Upon noticing the
whose name was forged. It is also in a superior deductions in their account, they requested the
position to detect the forgery because it has a bank to credit back the same amount, claiming
specimen of the signature of the maker. Lastly, that the deductions were unauthorized and
by accepting the instrument, it becomes an fraudulently made. The bank refused to restore
acceptor who admits the genuineness of the the amount. Who should bear the loss?
drawer’s signature (Pre-Week Reviewer in
Commercial Law, Dimaampao and Escalante). A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
XPN: When the drawer is guilty of negligence, and the depositor is guilty of contributory
he should bear the loss. He is precluded from negligence, the greater proportion of the loss shall
setting up forgery because the proximate cause be borne by the bank. The bank was negligent
of the loss is his own negligence (Ibid). because it did not properly verify the genuineness
of the signatures in the applications for manager’s
2. When the payee’s signature is forged checks while the depositor was negligent because it
clothed its accountant/bookkeeper with apparent
GR: Drawee bank is liable because it owes to the authority to transact business with the Bank and it
drawer-depositor an absolute and contractual did not examine its monthly statement of account
duty to pay the check only to the person to and report the discrepancy to the Bank (Philippine
whom it is made payable. Drawee bank, in such National Bank vs. FF Cruz and Company, G.R. No.
case, should credit back and restore to drawer’s 173259, July 25, 2011).
account the value of the check wrongfully
encashed (Ibid). Q: X fraudulently obtained possession of the
check and forged P’s signature and then
XPN: When the drawer is guilty of negligence, indorsed and deposited the check with XYZ bank
he should bear the loss. He is precluded from which honored the check and placed the amount
setting up forgery because the proximate cause thereof to his credit. Thereafter, XYZ Bank
of the loss is his own negligence (Ibid). indorsed the check to the drawee bank-ABC
bank which paid it and charged the account of
3. When the indorser’s signature is forged the drawer.
GR: Drawee bank bears the loss as it is under Illustrate the liability of a drawer and a drawee-
strict liability to pay the check to the order of bank in an 1) instrument payable to order and
the payee. Payment under forged indorsement in an 2) instrument payable to bearer in case of
is not to the drawer’s order. Ensuingly, if the a forgery on payee’s signature.
drawee bank pays a check bearing forged
signature of indorser, it does so at its own peril.
Pay to P or order P10,000.
However, the drawee bank may pass the
(Sgd)D
liability to the collecting bank who cannot
To: ABC Bank
interpose the defense of forgery. The collecting

40
 NEGOTIABLE INSTRUMENTS LAW
bank liable for the amounts withdrawn by the
A: secretary?
1. If the instrument is payable to order:
A: NO, he is precluded from setting up the forgery
a. The drawee bank is liable to the drawer for due to his own negligence in entrusting to his
the amount of the check and his account secretary his credit cards and check book including
cannot be charged because the the verification of his statements of account
indorsement of the payee is a forgery. (Ilusorio v. CA, G.R. No. 139130, November 27, 2002).
Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the Q: The drawer’s signature was forged. There is,
drawer for its payment. however, a provision in the monthly bank
b. XYZ Bank is however, liable to the drawee statement that if the drawer’s signature was
bank because of his warranty as an forged, the drawer should report it within 10
indorser. (NIL, Sec. 66) days from receipt of the statement to the
c. D, the drawer, is not liable on the check drawee. The drawer, however, failed to do so.
because its order is to pay P or his order What will be its effect insofar as the drawer’s
and not to any other person. right is concerned?

A: The failure of the drawer to report the forgery

2. If the instrument is payable to bearer:
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
a. ABC Bank, the drawee-bank, may charge
the drawer from questioning the mistake of the
the amount thereof to the account of the
drawee bank despite the provision (BPI v. CASA
drawer because the forged indorsement
Montessori Internationale, supra).
did not prevent the transfer of title. The
remedy of the drawer is against the forger.
Q: If forgery was committed by an employee of
b. Drawer has no cause of action against
the drawer whose signature was forged, does
collecting bank, since the duty of collecting
the relationship amount to estoppel such that
bank is only to the payee (Manila Lighter
the drawer is precluded in recovering from the
Transportation, Inc. v. CA, G.R. No. L-50373
drawee bank?
February 15, 1990). The drawee-bank can
recover from the collecting bank because
A: The bare fact that the forgery was committed by
even if the indorsement on the check
an employee of the party whose signature was
deposited by the bank's client is forged,
forged can not necessarily imply that such party’s
collecting bank is bound by its warranties
negligence was the cause of the forgery in the
as an indorser and cannot set up defense of
absence of some circumstances raising estoppel
forgery as against drawee bank (Associated
against the drawer (Samsung Construction Co. v. Far
Bank v. CA, supra).
East Bank and Trust Company, G.R. No. 129015,
August 13, 2004).
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of
CONSIDERATION
the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
Consideration
indorsed the note to X (who did not know about
the shabu), and X to Y. Unable to collect from P,
It is an inducement to a contract that is the cause,
Y then sued X on the note. X set up the defense of
price or impelling influence, which induces a party
illegality of consideration. Is he correct? (2011
to enter into a contract.
Bar)
NOTE: Every negotiable instrument is deemed
A: NO, since X, a general indorser, warrants that the
prima facie to have been issued for a valuable
note is valid and subsisting.
consideration (NIL, Sec. 24).
Q: X entrusted his check books, credit cards,
A check constitutes an evidence of indebtedness and
passbooks, bank statements and cancelled
is a veritable proof of an obligation. Thus, based on
checks to his secretary. He also introduced the
Sec. 24 of the NIL, checks complete and delivered to
secretary to the bank for purposes of
a person by another are sufficient by themselves to
reconciliation of his accounts. Subsequently, X’s
prove the existence of the loan obligation obtained
secretary forged his signature on the checks and
by the latter from the former. (Ting Ting Pua v.
was able to withdraw his money. Is the drawee

41
 MERCANTILE LAW
Spouses Tiong and Caroline Teng, G.R. No. 198660, Cayanan with violation of the Bouncing Checks
October 23, 2013, in Divina, 2014) Law. Engr. Cayanan insists that the US$85,000
sent to View Sea Ventures was not sent for the
Q: Lorenzo drew a bill of exchange in the amount account of North Star but for the account of
of P100,000.00 payable to Barbara or order, Virginia as her investment. Engr. Cayanan
with his wife, Diana, as drawee. At the time the claims that North Star did not give any valuable
bill was drawn, Diana was unaware that Barbara consideration for the checks since the
is Lorenzo’s paramour. Barbara then negotiated US$85,000 was taken from the personal dollar
the bill to her sister, Elena, who paid for it for account of Virginia and not the corporate funds
value, and who did not know who Lorenzo was. of North Star.
On due date, Elena presented the bill to Diana
for payment, but the latter promptly dishonored A: Upon issuance of a negotiable check, in the
the instrument because, by then, Diana had absence of evidence to the contrary, it is presumed
already learned of her husband’s dalliance. Does that the same was issued for valuable consideration
the illicit cause or consideration adversely affect which may consist either in some right, interest,
the negotiability of the bill? Explain. (2009 Bar) profit or benefit accruing to the party who makes
the contract, or some forbearance, detriment, loss
A: NO, the bill of exchange is negotiable or some responsibility, to act, or labor, or service
notwithstanding the illegality of consideration, given, suffered or undertaken by the other side.
provided all the requisites under Sec. 1 of NIL are Under the Negotiable Instruments Law, it is
complied with. The fact that Barbara, the payee, was presumed that every party to an instrument
the paramour of Lorenzo does not militate against acquires the same for a consideration or for value.
negotiability. The requisites of negotiability are not As Engr. Cayanan alleged that there was no
concerned with the validity of consideration. consideration for the issuance of the subject checks,
Validity is an issue distinct and separate from the it devolved upon him to present convincing
question of negotiability. The negotiability of the bill evidence to overthrow the presumption and prove
of exchange is determined by ascertaining whether that the checks were in fact issued without valuable
the requisites of Sec. 1 of NIL appear on the face of consideration. Engr. Cayanan, however, has not
the instrument (Dimaampao and Escalante, 2014). presented any credible evidence to rebut the
presumption, as well as North Star’s assertion, that
Q: R issued a check for P1M which he used to pay the checks were issued as payment for the
S for killing his political enemy. Can the check be US$85,000 Engr. Cayanan owed to the corporation
considered a negotiable instrument? (2007 Bar) and not to the manager who facilitate the fund
transfer. (Engr. Cayanan v. North Star International
A: YES. The check can be considered as a negotiable
Travel Inc., G.R. No. 172954, October 5, 2011).
instrument since it complied with the requirements
of negotiability under Sec. 1 of the Negotiable
Holder for value
Instruments Law. The unlawful consideration for
the issuance of the check is of no moment and will
A holder for value is one who has given a valuable
not affect the negotiability of the check as it merely
consideration for the instrument. A holder for value
constitutes a defect of title under Sec. 55 of the NIL.
is deemed as such not only as regards the party to
whom the value has been given to by him but also in
Q: Virginia, the General Manager of North Star,
respect to all those who became parties prior to the
in accommodation and upon the instruction of
time when value was given.
its client, Engr. Cayanan, sent the amount of
US$60,000 to View Sea Ventures Ltd., in Nigeria
NOTE: Where the holder has a lien on the
from her personal account in Citibank Makati.
instrument arising either from contract or by
Virginia again sent US$40,000 to View Sea
implication of law, he is deemed a holder for value
Ventures by telegraphic transfer, with
to the extent of his lien (NIL, Sec. 27).
US$15,000 coming from Engr. Cayanan. To cover
payment of the foregoing obligations, Engr.
Value
Cayanan issued five checks to North Star. When
presented for payment, two of the checks were
It is any consideration sufficient to support a simple
dishonored for insufficiency of funds while the
contract. An antecedent or pre-existing debt
other three checks were dishonored because of
constitutes value and is deemed such whether the
a stop payment order from Engr. Cayanan. North
instrument is payable on demand or at a future time
Star demanded payment, but Engr. Cayanan
(NIL, Sec. 25).
failed to settle his obligations. Hence, North Star
instituted a criminal case, charging Engr.

42
 NEGOTIABLE INSTRUMENTS LAW
Want or absence of consideration vs. Failure of 1. Accommodation party must sign as maker,
consideration (1996, 2007 Bar) drawer, acceptor or indorser;
2. No value is received by the accommodation
WANT OR ABSENCE FAILURE OF party from the accommodated party; and
OF CONSIDERATION CONSIDERATION 3. The purpose is to lend the name.
Total lack of any valid Failure or refusal of one
consideration for the of the parties to do, NOTE: It does not mean, however, that one cannot
contract perform or comply with be an accommodation party merely because he has
the consideration agreed received some consideration for the use of his name.
upon The phrase “without receiving value therefor” only
means that no value has been received “for the
Effect of want of consideration instrument” and not “for lending his name.”

It becomes a matter of defense as against any person Q: Susan Kawada borrowed P500,000 from XYZ
not a holder in due course, thus, a personal defense Bank which required her, together with Rose
(NIL, Sec. 28). Reyes who did not receive any amount from the
bank, to execute a promissory note payable to
Partial failure of consideration the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
Partial failure of consideration is a defense pro liability was incurred by Rose, that of an
tanto, whether the failure is an ascertained and accommodation party or that of a solidary
liquidated amount or otherwise (ibid.). debtor? Explain. (2003 Bar)

Inadequacy of consideration A: Rose incurs the liability of an accommodation

party since she executed the promissory without
GR: Inadequacy of consideration does not invalidate receiving value therefor and for the purpose of
the instrument. lending his name to Susan Kawada, the
accommodated party. Nonetheless, as an
XPN: There has been fraud, mistake or undue accommodation maker, Rose is primarily and
influence (NCC, Art. 1355). unconditionally liable on the promissory note to a
holder for value, regardless of whether she stands
NOTE: However, knowledge of inadequacy of as a surety or solidary co-debtor since such
consideration would render the holder not HIDC distinction would be entirely immaterial and
liable (NIL, Sec. 53). inconsequential as far as a holder for value is
concerned.
Q: X borrowed money from Y in the amount
of Php 1Million and as payment, issued a check. Q: Juan Sy purchased from “A” Appliance Center
Y then indorsed the check to his sister Z for no one generator set on installment with chattel
consideration. When Z deposited the check to mortgage in favor of the vendor. After getting
her account, the check was dishonored for hold of the generator set, Juan Sy immediately
insufficiency of funds. Is Z a holder in due sold it without consent of the vendor. Juan Sy
course? Explain your answer (2012 Bar) was criminally charged with estafa. To settle the
case extra judicially, Juan Sy paid the sum of
A: NO, Z is not an HIDC. Under Sec. 52 (c), NIL, it is P20,000 and for the balance of P5,000.00 he
expressly provided that the instrument must be executed a promissory note for said amount
acquired in good faith and for value to consider him with Ben Lopez as an accommodation party.
a HIDC. Juan Sy failed to pay the balance.

ACCOMMODATION PARTY a. What is the liability of Ben Lopez as an

accommodation party? Explain.
Accommodation party b. What is the liability of Juan Sy? (2003 Bar)

An accommodation party is one who has signed the A:

instrument as maker, drawer, acceptor, or indorser, a. Section 29 of the Negotiable Instruments Law
without receiving value therefor, and for the provides that an accommodation party is liable
purpose of lending his name to some other person on the instrument to a holder for value,
(NIL, Sec. 29). notwithstanding that such holder at the time of
taking the instrument knew him to be only an
Requisites to be an accommodation party accommodation party. As an accommodation

43
 MERCANTILE LAW
party, Ben Lopez is primarily and said credit line through the issuance of check.
unconditionally liable on the promissory note Gonzales issued a check in favor of Rene Unson,
to a holder for value as if the contract was not drawn against the credit line. However, upon
for accommodation. presentment for payment by Unson of said
b. Under Section 14 of the NIL, Juan Sy is primarily check, it was dishonored by PCIB due to the
liable to the extent of P5,000 in the hands of a termination by PCIB of the credit line under
holder in due course. However, if Ben Lopez COHLA for the unpaid periodic interest dues
paid the note, Juan Sy has the obligation to from the loans of Gonzales and the spouses
reimburse the former to the extent of the Panlilio. Gonzales, through counsel, wrote PCIB
amount paid. insisting that the check he issued had been fully
funded, and demanded the return of the
Q: Dagul has a business arrangement with proceeds of his FCD as well as damages for the
Facundo. The latter would lend money to unjust dishonor of the check. Was it proper for
another, through Dagul, whose name would PCIB to dishonor the check issued by Gonzales
appear in the promissory note as the lender. against the credit line under the COHLA?
Dagul would then immediately indorse the note
to Facundo. Is Dagul an accommodation party? A: NO. While a maker who signed a promissory note
Explain. (2005 Bar) for the benefit of his co-maker (who received the
loan proceeds) is considered as an accommodation
A: NO. An accommodation note is one to which the party, he is, nevertheless, entitled to a written notice
accommodation party has put his name, without on the default and the outstanding obligation of the
consideration, for the purpose of accommodating party accommodated. There being no such written
some other party who is to use it and is expected to notice, the Bank is grossly negligent in terminating
pay it. The accommodation is not one to the person the credit line of the accommodation party for the
who takes the note — that is, the payee or indorsee, unpaid interest dues from the loans of the party
but one to the maker or indorser of the note. In this accommodated and in dishonoring a check drawn
case, the indorser, Dagul, in making the against such credit line (Eusebio Gonzales v.
indorsement to the lender, Facundo, was merely Philippine Commercial and International Bank, Edna
acting as agent for the latter or, as a mere vehicle for Ocampo, and Roberto Noceda, G.R. No. 180257,
the transference of the naked title from the February 23, 2011).
borrower or maker of the note and was not acting
as an accommodation party. Extent of liability of an accommodation party

Accommodation party vs. Regular party 1. Right to revoke accommodation – before the
instrument has been negotiated for value.
ACCOMMODATION 2. Right to reimbursement from the accommodated
REGULAR PARTY
PARTY party – the accommodated party is the real
Signs an instrument debtor. Hence, the cause of action is not on the
Signs the instrument for instrument but on an implied contract of
without receiving value
value (NIL, Sec. 24) reimbursement.
therefor (NIL, Sec. 29)
Purpose of signing is to 3. Right to contribution from other solidary
lend his name to another Not for that purpose accommodation maker (Sadaya v. Sevilla, G.R.
person (NIL, Sec. 29) No. L-17845, April 27, 1967).
May always show, by Cannot disclaim
parol evidence, that he is personal liability by Accommodation party cannot raise the defense
only such parol evidence of absence or want of consideration
Cannot avail of the
defense of An accommodation party who lends his name to
May avail of such enable the accommodated party to obtain credit or
absence/failure of
defense raise money is liable on the instrument to a holder
consideration against a
holder not in due course for value even if he receives no part of the
May sue reimbursement consideration. He assumes the obligation to the
after paying the other party and binds himself to pay the note on its
May not sue due date. By signing the note, the accommodation
holder/subsequent
party party thus became liable for the debt even if he had
no direct personal interest in the obligation or did
Q: PCIB granted a credit line to Gonzales through not receive any benefit therefrom (Dela Rama v.
the execution of the COHLA. Gonzales drew from Admiral United Savings Bank, G.R. No. 154740, April
16, 2008).

44
 NEGOTIABLE INSTRUMENTS LAW
Holder for value may recover from an a. YES, Y may recover from Pedro. Section 29 of
accommodation party notwithstanding his the NIL provides that a person who has signed
knowledge that the accommodation party is the instrument as maker, drawer, acceptor, or
only signing as such indorser, without receiving value therefor, and
for the purpose of lending his name to some
This is so because an accommodation party is liable other person is liable on the instrument to a
on the instrument to a holder for value, holder for value, notwithstanding the fact that
notwithstanding that such holder at the time of such holder at the time of taking the instrument
taking the instrument knew him to be only an knew him to be only an accommodation party.
accommodation party. The accommodation party is Pedro, being an accommodation maker of a
liable to a holder for value as if the contract was not note, may thus be held primarily and
for accommodation. It is not a valid defense that the unconditionally liable therefor.
accommodation party did not receive any valuable b. YES, Pedro may recover from X. When the
consideration when he executed the instrument. accommodation party makes payment to the
Nor is it correct to say that the holder for value is not holder of the note, he has the right to sue the
a holder in due course merely because at the time he accommodated party for reimbursement, since
acquired the instrument, he knew that the indorser the relation between them is in effect that of
was only an accommodation party (Ang Tiong v. principal and surety, the accommodation party
Ting, G.R. No. L-26767, February 22, 1968). being the surety. Thus, after paying the holder,
Pedro may seek reimbursement from X, the
Q: To accommodate Carmen, maker of a accommodated party.
promissory note, Jorge signed as indorser
thereon, and the instrument was negotiated to Q: As a rule under the NIL, a subsequent party
Raffy, a holder for value. At the time Raffy took may hold a prior party liable but not vice-versa.
the instrument, he knew Jorge to be an Give 2 instances where a prior party may hold a
accommodation party only. When the subsequent party liable. (2008 Bar)
promissory note was not paid, and Raffy
discovered that Carmen had no funds, he sued A: A party may hold a subsequent party liable in the
Jorge. Jorge pleads in defense the fact that he following instances: (1) in case of an accommodated
had endorsed the instrument without receiving party; and (2) in case of an acceptor for honor. An
value therefor, and the further fact that Raffy accommodation party may hold the party
knew that at the time he took the instrument accommodated liable to him, even if the party
Jorge had not received any value or accommodated is a subsequent party. The relation
consideration of any kind for his indorsement. between them is that of principal and surety. For the
Is Jorge liable? Discuss. (1990, 1996 Bar) same reason, an acceptor for honor may hold the
party for whose honor he accepted a bill of exchange
A: YES, Jorge is liable. By the clear mandate of liable to him. A payer for honor is subrogated to the
section 29 of the Negotiable Instruments Law, an rights of the holder as regards the party for whose
accommodation party is "liable on the instrument to honor he paid and all parties liable to the latter.
a holder for value, notwithstanding that such holder
at the time of taking the instrument knew him to be Accommodation made by a corporation
only an accommodation party." It is not a valid
defense that the accommodation party did not The issue or indorsement of a negotiable paper by a
receive any valuable consideration when he corporation without consideration and for the
executed the instrument (Ang Tiong vs Ting, supra). accommodation of another is ultra vires. Hence, one
who has taken the instrument with knowledge of
Q: For the purpose of lending his name without the accommodation nature thereof cannot recover
receiving value therefor, Pedro makes a note for against a corporation where it is only an
P20,000 payable to the order of X, who in turn accommodation party (Crisologo-Jose v. CA, G.R. No.
negotiates it to Y, the latter knowing that Pedro 80599, September 15, 1989).
is not a party for value.
Q: On June 1, 1990, A obtained a loan of
a. May Y recover from Pedro if the latter
₱100,000 from B, payable not later than
interposes the absence of consideration?
December 20, 1990. B required A to issue him a
b. Supposing under the same facts, Pedro pays
check for that amount to be dated December 20,
the said Php20,000.00 may he recover the
1990. Since he does not have any checking
same amount from X? (1998 Bar)
account, A, with the knowledge of B, requested
his friend, C, President of Saad Banking
A: Corporation (Saad) to accommodate him. C

45
 MERCANTILE LAW
agreed, he signed a check for the aforesaid 2. Negotiation
amount dated December 20, 1990, drawn 3. Assignment – transfer of the title to the
against Saad’s account with the ABC Commercial instrument, with the assignee generally taking
Banking Co. The By-laws of Saad requires that only such title as his assignor has, subject to all
checks issued by it must be signed by the defenses available against the assignor.
President and the Treasurer or the Vice-
President. Since the Treasurer was absent, C DISTINGUISHED FROM ASSIGNMENT
requested the Vice-President to co-sign the
check, which the latter reluctantly did. The NEGOTIATION ASSIGNMENT
check was delivered to B. The check was Non-negotiable
dishonoured upon presentment on due date for instrument may be
insufficiency of funds. Only a negotiable
assigned absent any
instrument may be
prohibition against
a. Is Saad liable on the check as an negotiated.
assignment written on
accommodation party?
its face.
b. If it is not, who then, under the above facts,
is/are liable? (1991 Bar) The transferee can
The transferee, if he is
have no better right
A: a HIDC may acquire
than his transferor; he
a. NO, Saad is not liable as an accommodation better rights than his
merely steps into the
party. This is because the issue or indorsement transferor.
shoes of the assignor.
of negotiable paper by a corporation without
consideration and for the accommodation of The holder can hold
another is ultra vires. Hence, one who has taken The transferee has no
the drawer and the
the instrument with knowledge of the right of recourse for
indorsers liable if the
accommodation nature thereof cannot recover payment against
party primarily liable
against a corporation where it is only an immediate parties.
does not pay.
accommodation party. While it may be legally
possible for a corporation whose business is to
provide financial accommodations in the MODES OF NEGOTIATION
ordinary course of business, such as one given
by a financing company, to be an Modes of negotiation
accommodation party, this situation, however,
is not the case at bar. 1. If payable to bearer- it is negotiated by mere
b. Considering that both the President and the delivery
Vice-President were signatories to the 2. If payable to order- it is negotiated by the
accommodation, they themselves can be indorsement of the holder completed by
subject to the liabilities of accommodation delivery (NIL, Sec. 30).
parties to the instrument in their personal
capacity (Crisologo-Jose v. CA, G.R. No. 80499, Q: Ligaray charged Wagas with estafa, alleging
September 15, 1989). that Wagas placed an order of 200 bags of rice
over the telephone with a post-dated check
NEGOTIATION payable to cash as payment. The seller Ligaray
delivered the rice to Cañada, brother-in-law of
Negotiation Wagas. In turn Ligaray received a post-dated
check issued by Wagas, which was later on
Negotiation is the transfer of an instrument from dishonored due to insufficiency of funds.
one person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 30). During trial, Wagas averred that he issued the
check to Cañada, and that it was the latter who
NOTE: A holder is the payee or indorsee of a bill or had transacted with Ligaray. While admitting
note, who is in possession of it, or the bearer thereof that he signed a letter acknowledging his debt to
(NIL, Sec. 191). Ligaray, Wagas insisted that he signed the same
just to accommodate the please of his sister and
Methods of transferring an instrument her husband Cañada.

1. Issuance – first delivery of the instrument Is Wagas guilty of estafa?

complete in form to a person who takes it as a
holder.

46
 NEGOTIABLE INSTRUMENTS LAW
A: NO. In order to constitute estafa under Article the rule that A BEARER INSTRUMENT IS ALWAYS A
315, paragraph 2(d) of the RPC, as amended, the act BEARER INSTRUMENT.
of postdating or issuing a check in payment of an
obligation must be the efficient cause of the Q: A makes a promissory note payable to bearer
defraudation. This means that the offender must be and delivers the same to B. B, however, endorses
able to obtain money or property from the offended it to C in this manner:
party by reason of the issuance of the check,
whether dated or postdated. In other words, the "Payable to C. Signed: B."
Prosecution must show that the person to whom the
check was delivered would not have parted with his Later, C, without indorsing the promissory note,
money or property were it not for the issuance of transfers and delivers the same to D. The note is
the check by the offender. subsequently dishonored by A. May D proceed
against A for the note? (1998 Bar)
Under the NIL (Sec. 9 and Sec. 30), a check made
payable to cash is payable to the bearer and could A: YES. D may collect from A. The note made by A is
be negotiated by mere delivery without the need of a bearer instrument. Where an instrument, payable
indorsement. to bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special
This rendered it highly probable that Wagas had indorsement made by B, the note remained a bearer
issued the check not to Ligaray, but to somebody instrument and can be negotiated by mere delivery.
else like Cañada, his brother-in-law, who then When C delivered and transferred the note to D, the
negotiated it to Ligaray. Relevantly, Ligaray latter became a holder thereof. As such, D can
confirmed that he did not himself see or meet Wagas proceed against A.
at the time of the transaction and thereafter, and
expressly stated that the person who signed for and Q: X executed a promissory note with a face
received the stocks of rice was Cañada. value of Php50,000.00, payable to the order of Y.
Y indorsed the note to Z, to whom Y owed
It bears stressing that the accused, to be guilty of Php30,000.00. If X has no defense at all against
estafa as charged, must have used the check in order Y, for how much may Z collect from X? (2011
to defraud the complainant. What the law punishes Bar)
is the fraud or deceit, not the mere issuance of the
worthless check. Wagas could not be held guilty of A: Php 50,000.00, but with the obligation to hold
estafa simply because he had issued the check used Php20,000.00 for Y's benefit.
to defraud Ligaray. The proof of guilt must still
clearly show that it had been Wagas as the drawer Assignment of a negotiable instrument
who had defrauded Ligaray by means of the check
(People v. Gilbert Wagas, G.R. No. 157943, September The transferee does not become a holder and he
4, 2013). merely steps into the shoes of the transferor. Any
defense available against the transferor is available
Delivery of negotiable instrument against the transferee (Salas v. CA, G.R. No. 76788,
January 22, 1990).
Delivery means transfer of possession, actual or
constructive, from one person or another (NIL, Sec. Delivery of an order instrument without
191). indorsement

NOTE: Where the instrument is no longer in the If an order instrument is not indorsed, the
possession of the party whose signature appears negotiation is incomplete and the instrument is in
thereon, there is a prima facie presumption of a effect merely assigned. The transferee acquires the
valid and intentional delivery by him (NIL, Sec. 16). right to have the indorsement of the transferor. It is
only at the time of indorsement that negotiation
Bearer instrument is negotiated by indorsement takes effect and the transferee acquires the rights of
and delivery a holder (NIL, Sec. 49).

A bearer instrument, even when indorsed specially, Negotiation by a prior party

may nevertheless be further negotiated by delivery,
but the person indorsing specially is liable as Where an instrument is negotiated back to a prior
indorser to only such holders who acquired title party, such party may reissue and further negotiate
through his indorsement (NIL, Sec. 40). This spawns the same. But, he is not entitled to enforce payment
thereof against any intervening party to whom he

47
 MERCANTILE LAW
was personally liable (NIL, Sec. 50). However, he delivery (once a bearer always a bearer) (NIL,
may strike out the intervening indorsements Sec. 40).
because they are not necessary for his title and he is
liable to them because of his initial indorsement 2. Blank (NIL, Sec. 34) –Specifies no indorsee.
(NIL, Sec. 48). a. Instrument is payable to bearer and may
be negotiated by delivery;
e.g. “A” payee indorsed the instrument to B, then B b. May be converted to special indorsement
indorsed it to C, C to D, then D to B. B can further by writing over the signature of the
negotiate the instrument. He may also strike out the indorser in blank any contract consistent
indorsement of C and D (Sundiang Sr. & Aquino, with the character of indorsement (NIL,
2014). Sec. 35).

Limitations on re-negotiation 3. Restrictive (NIL, Sec. 36)–When the instrument:

a. Prohibits further negotiation of the
In the following cases, a prior party cannot further instrument (it destroys the negotiability of
negotiate the instrument: the instrument);
b. Constitutes the indorsee the agent of the
1. Where it is payable to the order of a third indorser;
person, and it has been paid by the drawer (NIL, c. Vests the title in the indorsee in trust for
Sec. 121[a]). or to the use of some persons.
2. Where it was made or accepted for
accommodation and has been paid by the party But mere absence of words implying power to
accommodated (NIL, Sec. 121[b]). negotiate does not make an instrument
3. In other cases, where the instrument is restrictive.
discharged when acquired by a prior party (NIL,
Sec. 119[e]). 4. Qualified (NIL, Sec. 38) – Constitutes the
indorser a mere assignor of the title to the
KINDS OF INDORSEMENT instrument made by adding to the indorser’s
signature words like, without recourse, sans
Indorsement recourse or at the indorsee’s own risk (this
serves as an ordinary equitable assignment).
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the 5. Absolute – The indorser binds himself to pay:
same. a. Upon no other condition than failure of
prior parties to do so;
GR: Indorsement must be of the entire instrument b. Upon due notice to him of such failure
(NIL, Sec. 32).
6. Conditional (NIL, Sec. 39)–Right of the indorsee
XPN: When the instrument has been paid in part. is made to depend on the happening of a
contingent event. The party required to pay
Indorsement to two or more indorsees severally may disregard the conditions.
does NOT operate as a negotiation of the
instrument. NOTE: The condition refers to the indorsement
not on the instrument itself.
Indorsement should be placed:
1. On the instrument itself; or 7. Joint (NIL, Sec. 41) – Indorsement made payable
2. On a separate piece of paper attached to the to 2 or more persons who are not partners.
instrument called “allonge” (NIL, Sec. 31)
All of them must indorse unless the one
Kinds of indorsement indorsing has authority to indorse for the
others.
1. Special (NIL, Sec. 34) – Specifies the person to
whom or to whose order the instrument is to be 8. Irregular (NIL, Sec. 64) – A person who, not
payable. It is also known as specific otherwise a party to an instrument, places
indorsement, or indorsement in full. thereon his signature in blank before delivery.

An instrument payable to bearer indorsed 9. Facultative –Indorser waives presentment and

specially may nevertheless be negotiated by notice of dishonor, enlarging his liability and his
indorsement.

48
 NEGOTIABLE INSTRUMENTS LAW
10. Successive – Indorsement to two persons or GR: All must indorse in order for the transaction to
more in succession. operate as a negotiation (NIL, Sec. 41).

Any of them can indorse to effect negotiation of XPN: Only one of them may indorse in case the:
the instrument.
1. Payees or indorsees are partners; and
Restrictive Indorsement 2. Payee or indorsee indorsing has authority to
indorse for the others.
Indorsee has the following rights in a restrictive
indorsement: Indorsing an instrument as cashier or other
officers of a corporation
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser The negotiable instrument is deemed prima facie
could bring; and payable to the corporation of which said person is
3. To transfer his rights as such indorsee, where such an officer. It may be negotiated further by
the form of the indorsement authorizes him to either indorsement of the corporation or
do so (NIL, Sec. 37,). indorsement of the officer (NIL, Sec. 42).

All subsequent indorsees acquire only the title of Date of indorsement

the 1st indorsee under the restrictive indorsement
(NIL, Sec. 37). GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
An instrument negotiable in origin is always
negotiable until paid, which is still true even if the XPN: Except where an indorsement bears date after
NI was dishonored or is already overdue, unless the the maturity of the instrument (NIL, Sec. 45).
instrument has been restrictively indorsed or when
discharged by payment or otherwise (NIL, Sec. 47) Striking out of an indorsement

Qualified indorsement The holder may, at any time, strike out any
indorsement which is not necessary to his title.
A qualified indorsement does NOT destroy the Indorser whose indorsement is struck out, and all
negotiability of the instrument. It only means that indorsers subsequent to him are relieved from
the qualified indorser is NOT liable when the maker liability on the instrument (NIL, Sec. 48).
is insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or RIGHTS OF A HOLDER
non-payment due to:
Holder
1. Forgery;
2. Lack of good title on the part of the indorser; The payee or indorsee of a bill or note who is in
3. Lack of capacity to indorse on the part of the possession of it or the bearer thereof (NIL, Sec. 191).
prior parties; or
4. The fact that at the time of the indorsement, the In general, a holder has the right to sue and to
instrument was valueless or not valid at the receive payment (NIL, Sec. 51).
time of the indorsement which fact was known
Classes of holders
to him.
1. Holders in general (Simple Holders) (NIL, Sec.
Instances when the indorsement is considered 51).
only as equitable assignment 2. Holders for value (NIL, Sec. 26).
3. Holders in due course (NIL, Secs. 52, 57).
1. Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32) HOLDER IN DUE COURSE (HIDC)
2. In cases of qualified indorsement (NIL, Sec. 38)
3. Transfer of an instrument payable to order by To be considered as a HIDC, the requisites under
mere delivery (NIL, Sec. 49). Sec. 52 of the NIL must be complied with: (COFI)

Joint indorsement 1. That is Complete and regular upon its face;

49
 MERCANTILE LAW
2. Became the holder before it was Overdue, and a. Can Devi enforce the note against Larry and
without notice that it has been previously if she can, for how much? Explain.
dishonored, if such was the fact; b. Supposing Devi endorses the note to Baby
3. Took it in good Faith and for value; for value but who has knowledge of the
4. At the time it was negotiated to him, he had no infirmity, can the latter enforce the note
notice of any Infirmity in the instrument or against Larry? (1993 Bar)
defect in the title of the person negotiating it.
(NIL, Sec. 52) A:
a. Devi can enforce the note against Larry since
An instrument is complete when it is not wanting in she is a holder in due course. Since the
any material particular and regular when there is no document delivered to Evelyn is in blank and
alteration apparent on the face of the instrument. she was authorized to fill up the amount in the
promissory note, Devi can enforce against Larry
If the instrument is payable on demand, the date of the amount of P5,000.00 as this case falls
maturity is determined by the date of presentment, squarely under Sec 14 of the Negotiable
which must be made within a reasonable time after Instruments Law. As against a holder in due
its issue, if it is a note, or after the last negotiation course, the instrument is always valid and
thereof, if it is a bill of exchange (NIL, Secs. 71 and enforceable to the full extent. The defense of
143[a]) filing-up contrary to authorization is a mere
personal or equitable defense (Villanueva,
Where the transferee receives notice of any 2009).
infirmity in the instrument or defect in the title of b. Baby cannot enforce the note against Larry
the person negotiating the same before he had paid since she is not a holder in due course because
the full amount agreed to be paid, he will be deemed Larry could interpose the real and personal
a holder in due course only to the extent of the defenses to defeat the claim of Baby. However,
amount paid by him (NIL, Sec. 54). because of the shelter principle in Negotiable
Instruments Law, Baby could be elevated to a
Q: R issued a check for P1M which he used to pay status of a holder in due course since a person
S for killing his political enemy. not holder in due course steps in the shoes of
the prior party. Therefore, Baby could enforce
a. Does S have a cause of action against R in
the note against Larry the same way as Devi
case of dishonor by the drawee bank?
could enforce it.
b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
Q: X borrowed money from Y in the amount of
secondarily liable by T? (2007 Bar)
Php 1 Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
A:
consideration. When Z deposited the check to
a. NO. S does not have a cause of action against R
her account, the check was dishonored for
in case of dishonor by the drawee bank. S is not
insufficiency of funds. Is Z a holder in due
a holder in due course, thus, R can raise the
course? Explain your answer. (2012 Bar)
defense that the check was issued for an illegal
consideration.
A: NO. A holder in due course is a holder who has
b. YES. R may be held liable by T since T is a holder
taken the instrument under the following
in due course of the instrument. The unlawful
conditions: (a)That it is complete and regular upon
consideration of the check is only a personal
its face; (b) That he became the holder of it before it
defense that cannot be interposed to a holder in
was overdue, and without notice that it had been
due course who receives the check free from the
previously dishonored, if such was the fact; (c) That
defect of title of S.
he took it in good faith and for value; (d) That at the
time it was negotiated to him he had no notice of any
Q: Larry issued a negotiable promissory note to
infirmity in the instrument or defect in the title of
Evelyn and authorized the latter to fill up the
the person negotiating it. All of the four conditions
amount in blank with his loan account in the
must concur in order for a holder to qualify as a
sum of P1,000. However, Evelyn inserted P5,000
holder in due course. In the case at hand, Z did not
in violation of the instruction. She negotiated
acquire the instrument for value. As such she cannot
the note to Julie who had no knowledge of the
be considered as a holder in due course.
infirmity. Julie in turn negotiated said note to
Devi for value and who had no knowledge of the
A holder is presumed to be an HIDC (1993, 2007
infirmity.
Bar)

50
 NEGOTIABLE INSTRUMENTS LAW
GR: Every holder is deemed prima facie to be an 2. Non-payment
HIDC.
That he took it in good faith and for value
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective. Good faith is the holder’s well founded or honest
But this is only as regards a party who became such belief that the person from whom he received the
after the acquisition of the defective title (NIL, instrument was the owner thereof, with the right to
Sec.59). transfer it (Duran v IAC, G.R. No. L-64159, September
10, 1985).
Payment in due course
Value may be some right, interest, profit or benefit
In order for payment to constitute payment in due to the party who makes the contract or some
course, it must be made: forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
1. At or after the maturity of the instrument 2007).
2. To the holder thereof, in good faith and without
notice that his title is defective (NIL, Sec. 88). At the time it was negotiated to him, he had no
notice of any infirmity in the instrument or
Shelter principle or Holder in Due Course by defect in the title of the person negotiating it
Subrogration
The person to whom it is negotiated must have had
Under the "shelter principle," the HIDC, by actual knowledge of such facts or knowledge of
negotiating the instrument, to a party not an HIDC, other facts that his action in taking the instrument
transfers all his rights as such holder to the latter amounted to bad faith (NIL, Sec. 56).
and acquires the right to enforce the instrument as
if he was an HIDC. The principle applies to a Presence or absence of defect or infirmity must be
"sheltered" holder who is not a party to any fraud or determined at the time the instrument was
illegality impairing the validity of the instrument. negotiated to the holder.

Specifically, a holder is entitled to the following Infirmity vs. Defect

rights: (1998, 2007, 2009 Bar)
INFIRMITY DEFECT
1. Hold the instrument free from defenses Refers to those that Refers to how he
available to parties among themselves; vitiate the instrument obtained the
2. Hold the instrument free from any defect of title itself instrument or the
of prior parties; signature thereto, as
3. Receive payment; by fraud, duress, or
4. Enforce payment of the instrument for the full force and fear, or other
amount thereof against all parties liable; and unlawful means, or for
5. Sue an illegal
consideration or when
That he became the holder before it was he negotiates it in
overdue breach of faith, or
under any other
An overdue instrument is still negotiable although it circumstances as
is subject to defenses existing at the time of transfer. amount to a fraud.
A negotiable instrument in circulation past its (NIL, Sec. 55)
maturity date carries strong indication that it has
been dishonored. An overdue instrument puts all Instances when the title of a transferor is
person on notice that it might not have been paid defective
because of a valid defense to such payment (De Leon,
2010). 1. In its acquisition – When he obtained the
instrument, or any signature thereto, by fraud,
Without notice that it has been previously duress, or force and fear, or other unlawful
dishonored, if such was the fact means, or for an illegal consideration.
2. In the negotiation – When he negotiates it in
An instrument may be dishonored either by: breach of faith, or under such circumstances as
amount to a fraud (NIL, Sec. 55).
1. Non-acceptance (refers to a bill of exchange) or

51
 MERCANTILE LAW
Q: A drawer issued a check for the payment of a Drawee as holder in due course
car, which check was delivered to the agent of
the owner of the car for safekeeping. The check A drawee does not become a HIDC by simply paying
was then used by the agent to pay the medical a bill. A holder refers to one who has taken the
bills of his wife in a clinic. The projected instrument as it passes along in the course of
purchase did not materialize. Is the clinic negotiation; whereas a drawee, upon acceptance
considered a holder in due course? and payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
A: NO, the rule that a possessor of the instrument is payment.
prima facie a HIDC does not apply to the clinic
because it cannot be said to have acquired the Person is deemed not a holder in due course
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the 1. A holder who acquires the instrument after its
instrument was not payable “to the agent or to date of maturity.
bearer;” also the drawer had no account with the 2. Where an instrument payable on demand is
clinic, the agent did not show or tell the payee why negotiated for an unreasonable length of time
he had the check in his possession and why he was after its issue (NIL, Sec. 53).
using it for the payment of his own account.
NOTE: A note payable on demand is due when
As the holder’s title was defective or suspicious, it payment is demanded. A check becomes
cannot be stated that the payee acquired the check overdue when it is not presented for payment
without knowledge of said defect in holder’s title, within a reasonable time, usually 6 months
the presumption that the clinic is a HIDC does not from date the thereof, afterwards, it becomes a
exist (De Ocampo & Co. v. Gatchalian, G.R. No. L- stale check.
15126, November 30, 1961).
3. Where the instrument contains an acceleration
Possession of a negotiable instrument after clause, knowledge of the holder at the time of
presentment and dishonor acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
It does not make the possessor a holder for value overdue.
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or Rights of a holder who is not a holder in due
indorsers (STELCO Marketing Corp. vs. CA, G.R. No. course
96160, June 17, 1992).
The rights of a holder not an HIDC are similar to an
Q: Is a corporation to which four crossed checks assignee. The other rights are:
were indorsed by the payee corporation a
holder in due course and hence entitled to 1. He may receive payment and if the payment is
recover the amount of the checks when the same in due course, the instrument is discharged;
had been dishonored for the reason of “payment 2. He is entitled to the instrument but holds it
stopped”? subject to the same defenses as if it were non-
negotiable;
A: NO. The checks were crossed checks and 3. He may sue on the instrument in his own name
specifically indorsed for deposit to payee’s account (NIL, Sec. 51).
only. From the beginning, the corporation was
aware of the fact that the checks were all for deposit DEFENSES AGAINST THE HOLDER
only to payee’s account. Clearly then, it could not be
considered an HIDC (Atrium Management Corp. v. Defenses against the holder
CA, G.R. No. 109491, February 28, 2001).
The defenses available against the holder are
Payee as holder in due course classified as follows:

There can be no doubt that a proper interpretation 1. Real or Absolute Defenses – those that are
of Negotiable Instruments Law as a whole leads to attached to the instrument itself and are
the conclusion that a payee may be a holder in due available against all parties, both immediate
course under the circumstances in which he meets and remote, including holders in due course.
the requirements of Sec. 52 (De Ocampo v. 2. Personal or Equitable Defenses –defenses which
Gatchalian, supra). are only available against a holder not in due
course. Those which grow out of the agreement

52
 NEGOTIABLE INSTRUMENTS LAW
or conduct of a particular person which renders title, to enforce it against the party sought to be
it inequitable for him, though holding the legal made liable.

Real defenses available against a holder vs. Personal defenses

REAL DEFENSES PERSONAL DEFENSES

(IM In Ultra. AFForD PODIF) (InnocentS2 ADD FUn In Fraud)
1. Incomplete and undelivered instrument 1. Innocent alteration or spoliation
2. Minority (available only to the minor) 2. Discharge of party Secondarily liable by discharge
3. Incapacity as far as incapacitated persons are of prior party.
concerned 3. Set-off between immediate parties
4. Ultra –vires acts of a corporation 4. Filling up of blanks not in accordance with the
5. Want of Authority, apparent and real Authority given
6. Fraudulent alteration 5. Acquisition of instrument by Duress or force and
7. Forgery fear; unlawful means or for an illegal consideration
8. Duress amounting to Forgery 6. Discharge by payment or renunciation or release
9. Prescription before maturity
10. Other infirmities appearing on the face of the 7. Failure or absence of consideration.
instrument 8. Undelivered complete instrument
11. Discharge in insolvency 9. Insertion of a wrong date
12. Illegal Contract 10. Fraud in inducement or simple fraud
13. Fraud in Factum or Esse Contractus

NOTE: Fraud in factum exists in those cases in which NOTE: Fraud in inducement relates to the quality,
a person, without negligence, has signed an quantity, value or character of the consideration of
instrument, but was deceived as to the character of the instrument. Here, deceit is not in the character of
the instrument and without knowledge of it, as where the instrument but in its amount or terms. This exists
a note was signed by one under the belief that he was when a person is induced to sign a note for the price
signing as a witness to a deed. This kind of fraud is a of a worthless stock which was fraudulently
real defense because there is no contract, since the represented by the payee as to its value. Such type of
person did not know what he was signing (De Leon, fraud is only a personal defense because it does not
2010). prevent a contract (De Leon, 2010).

Q: Eva issued to Imelda a check in the amount of prior parties among themselves. Eva can invoke the
P50,000 post-dated Sept. 30, 1995, as security defense of absence of consideration against MT only
for a diamond ring to be sold on commission. On if the latter was a privy to the purpose for which the
Sept. 15, 1995, Imelda negotiated the check to checks were issued and, therefore, not a holder in
MT investment which paid the amount of due course. Second, it is not a ground for the
P40,000 to her. discharge of the post-dated check as against a
holder in due course that it was issued merely as
Eva failed to sell the ring, so she returned it to security. The only grounds for the discharge of a
Imelda on Sept. 19, 1995. Unable to retrieve her negotiable instrument is enumerated in the
check, Eva withdrew her funds from the drawee Negotiable Instruments Law and none of those
bank. Thus, when MT Investment presented the grounds are available to Eva. The latter may not
check for payment, the drawee bank dishonored unilaterally discharge herself from her liability by
it. Later on, when MT Investment sued her, Eva mere expediency of withdrawing her funds from the
raised the defense of absence of consideration, drawee bank.
the check having been issued merely as security
for the ring that she could not sell. Does Eva have Q: X makes a promissory note for P10,000
a valid defense? Explain. (1996 Bar) payable to A, a minor, to help him buy school
books. A endorses the note to B for value, who in
A: NO, Eva does not have a valid defense. First, MT turn endorses the note to C. C knows A is a
Investment is a holder in due course and, as such, minor. If C sues X on the note, can X set up the
holds the post-dated check free from any defect of defenses of minority and lack of consideration?
title of prior parties and from defenses available to (1998 Bar)

53
 MERCANTILE LAW
A: X cannot set-up the defense of minority to defeat 1. Drawer of a bill; and
the claim of C since only A, the minor could invoke 2. Indorser of a note or a bill
minority as a defense. X cannot set up the defense
against C. Lack of consideration is a personal Negotiable instrument should be presented for
defense which is only available between immediate payment to the party primarily liable (NIL, Sec.
parties who are not holders in due course. C’s 72[d]):
knowledge that A is a minor does not prevent C from
being a holder of due course. C took the promissory PRIMARILY LIABLE SECONDARILY LIABLE
from a holder for value B. Unconditionally
Conditionally bound
bound
Q: A bill of exchange has T for its drawee, U as Undertakes to pay only
drawer, and F as holder. When F went to T for after the ff. conditions
presentment, F learned that T is only 15 years have been fulfilled:
old. F wants to recover from U but the latter 1. Due presentment for
insists that a notice of dishonor must first be Absolutely required payment or acceptance
made, the instrument being a bill of exchange. Is to pay the to primary party (NIL,
he correct? (2011 Bar) instrument upon Sec. 143);
maturity 2. Dishonor by such
A: NO, since F can treat U as maker due to the party (NIL, Sec.70);
minority of T, the drawee. 3. Taking of
proceedings required
Q: Brad was in desperate need of money to pay by law (NIL, Sec.152)
his debt to Pete, a loan shark. Pete threatened to
take Brad’s life if he failed to pay. Brad and Pete The drawee is not liable for payment of a bill of
went to see Señorita Isobel, Brad’s rich cousin, exchange
and asked her if she could sign a promissory
note in his favor in the amount of P10,000.00 to The mere issuance of a bill of exchange does not
pay Pete. Fearing that Pete would kill Brad, operate as an assignment of the funds in the hands
Señorita Isobel acceded to the request. She of a drawee. The drawee must accept the
affixed her signature on a piece of paper with the instrument (thus, becomes an acceptor) in order
assurance of Brad that he will just fill it up later. that he may be primarily liable for the payment of a
Brad then filled up the blank paper, making a bill of exchange.
promissory note for the amount of P100,000.00.
He then indorsed and delivered the same to Pete MAKER
who accepted the note as payment of the debt.
Maker
What defense or defenses can Señorita Isobel set
up against Pete? Explain. (2005 Bar) The maker of a negotiable instrument, by making
such instrument:
A: Señorita Isobel may set up the defenses of:
a. Incomplete but delivered instrument. The 1. Engages that he will pay it according to its
authority she gave Brad was to fill up the note tenor, and
for P10,000.00 only and not P100,000.00. This 2. Admits the existence of the payee and his then
is a personal defense that may be raised against capacity to indorse (NIL, Sec. 60; 1995, 2001
Pete who is clearly not a holder in due course. Bar).
b. Force and intimidation. Señorita Isobel was
forced and intimidated into writing and issuing The maker is liable the moment he makes the NI. His
the note as she was threatened that Pete would liability is primary and unconditional.
kill Brad, her cousin if the debt is not paid.
Q: A issued a promissory note payable to B or
LIABILITIES OF PARTIES bearer. A delivered the note to B. B indorsed the
note to C. C placed the note in his drawer, which
Parties primarily liable was stolen by the janitor X. X indorsed the note
to D by forging C's signature. D indorsed the note
1. Maker – of a promissory note; to E who in turn delivered the note to F, a holder
2. Acceptor – of a bill of exchange; and in due course, without indorsement. Discuss the
3. Certifier of a check individual liabilities to F of A, B and C. (2001,
1997 Bar)
Parties secondarily liable

54
 NEGOTIABLE INSTRUMENTS LAW
A: A is primarily and unconditionally liable to F as Later, X, without endorsing the promissory note,
the maker of the promissory note. Section 60 transfers and delivers the same to Napoleon.
provides that, by making the instrument, the maker The note is subsequently dishonored by Richard
obliges himself to pay according to the tenor of the Clinton. May Napoleon proceed against Richard
instrument. He is liable to both payee and Clinton for the note? (1998 Bar)
subsequent holder in due course. Despite the
presence of the special indorsements on the note, A: YES, Richard Clinton is liable for the promissory
these do not detract from the fact that a bearer note. Under Section 60 of the NIL, the maker of a
instrument, like the promissory note in question, is negotiable instrument, by making the same, engages
always negotiable by mere delivery, until it is that he will pay according to its tenor, and admits
indorsed restrictively “For Deposit Only.” the existence of the payee and his then capacity to
indorse. The liability of the maker is primary which
B as a general indorser is secondarily liable to F. By means he is absolutely and unconditionally
placing his signature on the bearer instrument, he required to pay. He engages to pay the instrument
warrants that the instrument is genuine and in all according to its terms without any condition. He is
respects what it purports to be; that he has good not only liable to the payee but also to the
title to it; that all prior parties had capacity to subsequent holder in due course. Since the
contract; that he has no knowledge of any fact which instrument is a bearer instrument (which nature
would impair the validity of the instrument or was not changed even if it was specially indorsed by
render it valueless; that at the time of indorsement, Aurora), Napoleon became a legal holder thereof by
the instrument is valid and subsisting; and that on mere delivery from X to him. Thus, as a legal holder
due presentment, it shall be accepted or paid, or of the promissory note, he is entitled to proceed
both, according to its tenor, and that if it be against the maker thereof, Richard Clinton.
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount DRAWER
thereof to the holder, or to any subsequent indorser
who may be compelled to pay. Drawer

C, however, cannot be held liable because the The drawer, by drawing the instrument:
signature purporting to be his is a product of 1. Admits the existence of the payee and his then
forgery. C can raise the defense of forgery since it his capacity to indorse; and
signature that was forged. 2. Engages that on due presentment the
instrument will be accepted or dishonored; and
Q: On the right bottom margin of a PN appeared 3. That if the necessary proceedings on dishonor
the signature of the corporation’s president and be duly taken, he will pay the amount thereof to
treasurer above their printed names with the the holder, or to any subsequent indorser who
phrase “and in his personal capacity.” The may be compelled to pay it (Sec. 61, NIL; 1991
corporation failed to pay its obligation. Are the Bar).
officers liable?
The drawer is secondarily liable to the holder or to
A: YES, persons who sign their names on the face of any subsequent indorser who may be compelled to
promissory notes are makers and liable as such. As pay. But the drawer may insert in the NI an express
the promissory notes are stereotype ones issued by stipulation negating or limiting his own liability to
the bank in printed form with blank spaces filled up the holder (NIL, Sec. 61).
as per agreed terms of the loan, following customary
procedures, leaving the debtors to do nothing but Q: A delivers a bearer instrument to B. B then
read the terms and conditions therein and to sign as specially indorses it to C and C later indorses it
makers or co-makers. The officers are co-makers in blank to D. E steals the instrument from D and,
and as such, they cannot escape liability arising forging the instrument of D, succeeds in
therefrom (Republic Planters Bank v. CA, G.R. No. "negotiating" it to F who acquires the
93073, December 21, 1992). instrument in good faith and for value.
a. If for any reason, the drawee bank refuses to
Q: Richard Clinton makes a promissory note
honor the check, can F enforce the
payable to bearer and delivers the same to
instrument against the drawer?
Aurora Page. Aurora Page, however, endorses it
b. In case of the dishonor of the check by both
to X in this manner: "Payable to X. Signed:
the drawee and the drawer, can F hold any
Aurora Page."
of B, C and D liable secondarily on the
instrument? (1997 Bar)

55
 MERCANTILE LAW
Party who can accept the bill of exchange
A:
a. YES, F can proceed against the drawer, A, in GR: Only the drawee may accept. A stranger or
case of dishonor by the drawee bank. Section 61 volunteer is not bound by acceptance.
of the NIL provides that by drawing the
instrument, the drawer engages that the XPN: In case of a bill which is accepted for honor
instrument will be accepted or paid or both supra protest (NIL, Sec. 161).
according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to NOTE: Honor supra protest or acceptance for honor
the holder, but he shall likewise be liable to the is an undertaking by a stranger to a bill after protest
subsequent indorser who was compelled to pay for the benefit of any party liable thereon or for the
it. The forged signature is unnecessary to honor of the person for whose account the bill is
presume the juridical relation between or drawn which acceptance inures also to the benefit
among the parties prior to the forgery and the of all parties subsequent to the person for whose
parties after the forgery. Moreover, the only honor it is accepted, and conditioned to pay the bill
party who can raise the defense of forgery when it becomes due if the original drawee does not
against a holder in due course is the person pay it. (De Leon, 2010)
whose signature is forged.
b. Only B and C can be held liable by F. According NOTE: Drawee does not become liable until he
to Section 67, when a person puts his signature accepts the instrument in which case he becomes an
on a bearer instrument as a form of acceptor. An acceptor engages to pay according to
indorsement, he becomes subject to all the tenor of his acceptance, which may not be the
liabilities of an indorser. D cannot be held liable same as the tenor of the bill itself because the
as an indorser because his signature is forged acceptance may be qualified.
by E--hence, there was no consent from D. The
forged signature is deemed inoperative and no Difference between the liability of an acceptor
right can arise out of it. However, the effect of or drawee-acceptor and a maker
being inoperative affects only the signature
which is the product of forgery. It will not deem While both are primarily liable, the acceptor
to affect other signatures subscribed with engages to pay the negotiable instrument according
knowledge and voluntariness. Therefore, B and to the tenor of his acceptance. On the other hand, the
C are liable as indorsers. maker engages to pay the negotiable instrument
according to the tenor of the bill itself.
Q: D draws a bill of exchange that states: “One
month from date, pay to B or his order Q: X draws a check against his current account
Php100,000.00. Signed, D.” The drawee named with Bonifacio Bank in favor of B. Although X
in the bill is E. B negotiated the bill to M, M to N, does not have sufficient funds, the bank honors
N to O, and O to P. Due to non-acceptance and the check when it is presented for payment.
after proceedings for dishonor were made, P Apparently, X has conspired with the bank's
asked O to pay, which O did. From whom may O bookkeeper so that his ledger card would show
recover? (2011 Bar) that he still has sufficient funds.The bank files an
action for recovery of the amount paid to B
A: D, being the drawer. because the check presented has no sufficient
funds. Decide the case (1998 Bar).
ACCEPTOR
A: The bank cannot recover the amount paid to B for
Acceptor the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
The acceptor, by accepting the instrument: primarily and directly liable to the payee/holder B.

1. Engages that he will pay the NI according to the The recourse of the bank should be against X and its
tenor of his acceptance; and bookkeeper who conspired to make X's ledger show
2. Admits the existence of the drawer, the that he has sufficient funds.
genuineness of his signature and his capacity
and authority to draw the instrument; INDORSER
3. Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 62, 1992; 1998 Indorser
Bar).

56
 NEGOTIABLE INSTRUMENTS LAW
A person placing his signature upon an instrument Order of liability among the indorsers
otherwise than as maker or acceptor is deemed to
be an indorser, unless he clearly indicates by 1. Among themselves – Liable prima facie in the
appropriate words his intention to be bound in order in which they indorse (NIL, Sec. 68)
some other capacity (NIL, Sec. 63). 2. To the holder – In any order

NOTE: A person who places his indorsement on a Every indorser is liable prima facie to all indorsers
bearer instrument incurs all liabilities of an subsequent to him, but not those indorsers prior to
indorser (NIL, Sec. 67). him (NIL, Sec. 68)

General indorser vs. Irregular indorser (2005 Liability of an agent or broker who negotiates an
Bar) instrument without indorsement

GENERAL INDORSER IRREGULAR He incurs all the liabilities prescribed to a general

INDORSER indorser unless he discloses the name of his
Makes either a blank or Always makes a principal and the fact that he is acting only as an
special indorsement blank indorsement agent (NIL, Sec. 69)
Indorses the Indorses before its
instrument after its delivery to the payee NOTE: Parol evidence is NOT admissible to relieve
delivery to the payee an agent or broker whose endorsement brings him
Liable only to parties Liable to the payee within the above liability.
subsequent to him and subsequent
parties unless he Q: Can a collecting bank debit the account of the
signs for the depositor when the checks indorsed to it (bank)
accommodation of were forged?
the payee in which
case he is liable only A: YES, because the depositor of a check as indorser
to all parties warrants that it is genuine and in all respects what
subsequent to the it purports to be. Thus, when the checks deposited
payee had forged indorsements and the collecting bank, as
a consequence of such forgery, was made to pay the
(NIL, Secs. 64, 66; De Leon, supra) drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
NOTE: The holder or subsequent indorser who tries (Jai-Alai Corporation of The Philippines v. BPI, G.R.
to claim under the instrument which had been No. L-29432, August 6, 1975).
dishonored for "irregular indorsement" must not be
the irregular indorser himself who gave cause for Q: Phebean, the drawer issued a check to James.
the dishonor. (Gonzales v. Rizal Commercial Banking James, subsequently indorsed it to Trude. When
Corporation, G.R. No. 156294, Novembber 29, 2006) Trude is about to encash the check, the drawee
Union Bank refused to encash it due to
Qualified indorser insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
A qualified indorser is a person who indorses should be dismissed because Phebean is an
without recourse (NIL, Sec. 65). indispensable party. Does James’ argument hold
water?
Drawer vs. Indorser
A: NO, there is no privity between the drawer and
DRAWER INDORSER the holder. The drawer is merely secondarily liable.
Party only to a bill Party either a bill or As indorser, the buyer warranted that upon due
note presentment, the checks were to be accepted or
Makes admission as to No such admission paid, or both, according to their tenor, and that in
the existence of the case they were dishonored, she would pay the
payee and his capacity corresponding amount. After an instrument is
to indorse dishonored by non-payment, indorsers cease to be
Makes no warranties, Has warranties merely secondarily liable; they become principal
but engages to pay debtors whose liability becomes identical to that of
after certain the original obligor (Tuazon v. Heirs of Bartolome
conditions are Ramos, G.R. No. 156262, July 14, 2005).
complied with

57
 MERCANTILE LAW
Q: X is the holder of an instrument payable to now sues X for collection. Will it prosper? (2011
him (X) or his order, with Y as maker. X then Bar)
indorsed it as follows: “Subject to no recourse,
pay to Z. Signed, X.” When Z went to collect from A: YES, because X, as a qualified indorser, warrants
Y, it turned out that Y's signature was forged. Z that the note is genuine.

Warranties and liabilities of parties who are secondarily liable

ABSOLUTE LIABILITY LIMITED LIABILITY

Drawer of a BOE Qualified Indorser
Warrants: Warrants that the:
a. The existence of payee and his then capacity to a. Instrument is genuine;
indorse; b. He has good title to it;
b. That the instrument will be accepted or paid c. Capacity to contract of all prior parties; and;
upon due presentment by the party primarily d. No knowledge of any fact which would impair
liable according to its tenor; and the validity of the instrument. (NIL, Sec.65)
c. That if dishonored, he will pay the party
entitled to be paid. (NIL, Sec. 61.) NOTE: He is liable to all parties who derive their title
through his indorsement.
General indorser Person negotiating by delivery
a. Warrants that: Same warranties as a qualified indorser. But unlike a
i. Instrument is genuine qualified indorser, a person negotiating by mere
ii. He had good title to it delivery is liable only to his immediate transferee.
iii. All prior parties had capacity to contract (NIL, par. 2, Sec. 65)
iv. Instrument, at the time of indorse- ment, was
valid and subsisting; NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary liability is limited,
b. On due presentment, it shall be accepted or paid, namely, to their warranties
or both according to its tenor
c. If the instrument is dishonored and the ne-
cessary proceedings on dishonor be duly taken,
he will pay the holder. (NIL, Sec. 66.)
Irregular indorser
a. In an order instrument, liable to the payee and all
subsequent parties

b. If bearer instrument or payable to order of maker

or drawer, liable to all parties subsequent to the
maker or drawer
c. If he signs for accommodation of the payee, liable
to all parties subsequent to payee. (NIL, Sec. 64.)

WARRANTIES qualified indorser may incur liability for breach of

implied warranties. As warrantor, his liability is
The following are the warranties a person provides unconditional.
in negotiating an instrument:
Q: Distinguish an irregular indorser from a
1. That the instrument is genuine and in all general indorser (2005 Bar)
respects what it purports to be;
2. That he has good title to it; A: Irregular Indorser is not a party to the instrument
3. That all prior parties had capacity to contract; but he places his signature in blank before delivery.
4. That he has no knowledge of any fact which He is not a party but he becomes one because of his
would impair the validity of the instrument or signature in the instrument. Because his signature
render it useless. he is considered an indorser and he is liable to the
parties in the instrument.
NOTE: Indorser’s liability as warrantor is distinct
from his liability to pay the instrument. Even a

58
 NEGOTIABLE INSTRUMENTS LAW
A General Indorser warrants that the instrument is blank to him. Is CD still liable to EF by virtue
genuine, that he has a good title to it, that all prior of the indorsement in blank? Why? (2002
parties had capacity to contract; that the instrument Bar)
at the time of the indorsement is valid and
subsisting; and that on due presentment, the A:
instrument will be accepted or paid or both a. Since the instrument became a bearer
accepted and paid according to its tenor, and that if instrument, EF could no longer claim payment
it is dishonored, he will pay if the necessary from AB. EF is not a holder of the promissory
proceedings for dishonor are made. note. To make the presentment for payment, it
is necessary to exhibit the instrument, which EF
PRESENTMENT FOR PAYMENT cannot do because he is not in possession
thereof.
It is the presentation of an instrument to the person b. NO, because CD negotiated the instrument by
primarily liable for the purpose of demanding and delivery.
receiving payment.
NECESSITY OF PRESENTMENT FOR
Manner of presentment PAYMENT

GR: Instrument must be exhibited to the person Presentment for payment is not necessary in order
from whom payment is demanded; when paid, it to charge the person primarily liable on the
must be delivered to the person paying it (NIL, Sec. instrument. It is only necessary to charge persons
74). secondarily liable—drawer and indorsers (NIL, Sec.
70).
XPNs: When exhibition is excused: 1. As to drawer, where he has no right to expect or
require that the drawee or acceptor will pay the
1. Debtor does not demand to see the instrument instrument (Sec. 79, NIL).
and refuses payment on some other grounds; or 2. As to indorser where the instrument was made
2. Instrument is lost or destroyed. or accepted for his accommodation and he has
no reason to expect that the instrument will be
The bank remains liable to the holder if it paid the paid if presented (NIL, Sec. 80).
certificate of deposit payable to bearer without 3. When dispensed with under Sec. 82, NIL such
requiring its surrender (Far East Bank & Trust as:
Company v. Querimit, G.R. No. 148582, January 16, a. Where, after the exercise of reasonable
2002). diligence, presentment cannot be made;
b. Where the drawee is a fictitious person;
Payee cannot claim payment for a promissory note c. By waiver of presentment, express or
which was stolen and as such is not in his implied.
possession. To make presentment for payment, it is
necessary to exhibit the instrument, which he Requisites for a sufficient presentment for
cannot do because he is not in possession thereof. payment (1994, 2002 Bar)

Q: AB issued a promissory note for P1,000 Presentment for payment, to be sufficient, must be
payable to CD or his order on September 15, made:
2002. CD indorsed the note in blank and 1. By the holder, or his agent authorized to receive
delivered the same to EF. GH stole the note from payment on his behalf;
EF and on September 14, 2002 presented it to AB 2. At a reasonable hour on a business day;
for payment. When asked by AB, GH said CD gave 3. At a proper place;
him the note in payment for two cavans of rice. 4. To the person primarily liable, or if he is absent
AB therefore paid GH P1,000 on the same date. or inaccessible, to any person found at the place
On September 15, 2002, EF discovered that the where the presentment is made (NIL, Sec. 72).
note of AB was not in his possession and he went
to AB. It was then that EF found out that AB had If the instrument is, by its terms, payable at a special
already made payment on the note. place, and the person primarily liable is able and
willing to pay it there at maturity, such ability and
a. Can EF still claim payment from AB? Why? willingness are equivalent to a tender of payment
b. As a sequel to the same facts narrated above, upon his part (Sec. 70, NIL).
EF, out of pity for AB who had already paid
P1,000 to GH, decided to forgive AB and Time for presentment for payment
instead go after CD who indorsed the note in

59
 MERCANTILE LAW
INSTRUMENT TIME FOR PRESENTMENT Only the delay in presentment is excused and not
GR: On the day it falls due (NIL, the presentment itself. Hence, as soon as the cause
Sec. 85) of delay ceases to operate, presentment must be
made with reasonable diligence (ibid.).
XPN: If the due date falls on a
Payable at a Saturday, presentment must be Q: Is the bank liable to the payee for depositing
fixed or made on the next Monday. and encashing the crossed checks to an
determinable unauthorized person?
future time NOTE: If presentment for
payment is made before A: YES, the effects of crossing a check relate to the
maturity, it will not result to a mode of its presentment for payment. Under Sec. 72
discharge of the instrument (NIL, of the NIL, presentment for payment, to be
Sec. 50). sufficient, must be made by the holder or by some
Promissory person authorized to receive on his behalf. The
Within a reasonable time after its checks here had been crossed and issued “for
note payable
issue. payee’s account only.” This only signifies that the
on demand
Within a reasonable time after drawer had intended the same for deposit only by
the last negotiation thereof (NIL, the person indicated (Associated Bank v. CA, G.R. No.
Sec. 71). 89802, May 7, 1992).

NOTE: “Last negotiation” means Order of preference with regard to the place of
the last transfer for value. presentment
Subsequent transfers between
Bill of 1. Specified place in the instrument
banks for purposes of collection
exchange
are not negotiations within Sec. 2. Address of the person to make the payment if
payable on
71. given in the instrument
demand
3. Usual place of business or residence of the
“Reasonable time” means not person to make the payment
more than 6 months from the 4. Wherever he can be found; or
date of issue. Beyond said period, 5. At his last known place of business or residence
the check becomes stale and (NIL, Sec. 73).
valueless and thus, should not be
paid. Instrument is payable at a bank

NOTE: Every NI is payable at the time fixed therein When the instrument is payable at bank,
without grace. presentment must be made during banking hours,
unless the person to make payment has no funds
Rules on presentment for payment when there to meet it at any time during the day, in which
maturity date is fixed case presentment at any hour before the bank is
closed on that day is sufficient (NIL, Sec. 75).
TIME OF MATURITY WHEN TO PRESENT
OF INSTRUMENT FOR PAYMENT Requisites of payment in due course
On a Sunday or holiday On the next succeeding
business day Payment is made in due course when (MHG):
On a Saturday On the next succeeding
business day 1. It is made at or after the date of Maturity;
If instrument which Before 12:00 noon on 2. To the Holder thereof;
falls due on a Saturday Saturday, or on 3. In Good faith and without notice that holder’s
is payable on demand Monday, at the option of title is defective (NIL, Sec. 88).
the holder
The term “in good faith” refers to the maker or
Delay in making presentment is excused acceptor and not to the holder.

PARTIES TO WHOM PRESENTMENT FOR

1. When caused by circumstances beyond the
control of the holder; and PAYMENT SHOULD BE MADE
2. Not imputable to his default, misconduct, or
GR: Presentment for payment must be made to the:
negligence (NIL, Sec. 81).
1. The maker in case of a promissory note, or

60
 NEGOTIABLE INSTRUMENTS LAW
2. The acceptor in case of an accepted bill. If the a. Reasonable time is relative. Regard is to be had
bill of exchange or check is payable on demand, to the facts of each case, usage of business and
the presentment must be made to the drawee trade, and the nature of the instrument. With
although he is not automatically liable on the respect to checks, current banking practice
bill. dictates that the check becomes stale if it is not
presented for payment within 6 months from
XPNs: Where the person/s primarily liable is/are: issuance.
b. NO. Gemma is discharged from secondary
1. Dead – presentment for payment must be made liability under the check because presentment
to his personal representative (NIL, Sec. 76). and notice of dishonor were made after an
2. Liable as partners and no place of payment unreasonable length of time. The check was
specified – presentment for payment may be already stale at the time of presentment.
made to any of them though there has been
dissolution of the firm (NIL, Sec. 77). DISHONOR BY NON-PAYMENT
3. Several persons, not partners, and no place of
payment is specified – presentment for payment Subject to the provisions of the law, when the
must be made to all of them (NIL, Sec. 78). instrument is dishonored by non-payment, an
4. If the person primarily liable is absent or immediate right of recourse to all parties
inaccessible, then presentment for payment secondarily liable thereon accrues to the holder
must be made to any person of sufficient (NIL, Sec. 84).
discretion at the proper place of presentment
(NIL, Sec. 72[d]). Instances when an instrument is dishonored by
non-payment
DISPENSATION WITH PRESENTMENT FOR
PAYMENT NON-PAYMENT UPON NON-PAYMENT
DUE PRESENTATION W/OUT
GR: Drawer and the indorsers are discharged from PRESENTATION
their secondary liability when presentment is not The instrument is duly Presentment is excused
made. presented for payment and the instrument is
to party primarily overdue and unpaid
XPNs: liable and it is either
1. Presentment for payment is not required to refused or cannot be
charge drawer and indorser when: obtained
a. Drawer- when he has no right to expect or (NIL, Sec. 83).
require that the drawee or acceptor will
pay the instrument (NIL, Sec. 79). NOTICE OF DISHONOR
b. Indorser – When the NI was made or
accepted for his accommodation and he has It is a notice given by the holder to the parties
no reason to expect that the instrument will secondarily liable, drawer and each indorser, that
be paid if presented (NIL, Sec. 80). the instrument was dishonored by non-payment or
2. When presentment for payment is dispensed non-acceptance by the drawee/maker.
with under Sec. 82, NIL
3. When the BOE has been dishonored by non- Persons primarily liable need not be given notice of
acceptance, since no Presentment for Payment dishonor because they are the ones who dishonored
for is necessary (NIL, Sec. 151). the instrument.

Q: Gemma drew a check on September 13, 2010. Purposes for requiring notice of dishonor
The holder presented the check to the drawee
bank only on March 5, 2012. The bank 1. To inform parties secondarily liable that the
dishonored the check on the same date. After maker or acceptor has failed to meet his
dishonor by the drawee bank, the holder gave a engagement; and
formal notice of dishonor. 2. To advise them that they are required to make
payment.
a. What is meant by reasonable time as applied
to presentment? Q: Notice of dishonor is not required to be made
b. Is Gemma still liable to the holder? in all cases. One instance where such notice is
not necessary is when the indorser is the one to
A: whom the instrument is supposed to be

61
 MERCANTILE LAW
presented for payment. The rationale here is 1. Not paid (that is, payment is refused or not
that the indorser (2011 Bar) obtained) when presented for payment at
maturity; or
A: Already knows of the dishonor and it makes no 2. Where presentment is excused or waived and
sense to notify him of it. the instrument is overdue and unpaid (NIL, Sec.
83).
Time and place of giving the notice of dishonor
Liability of a person secondarily liable when the
1. GR: As soon as instrument was dishonored instrument is dishonored
(NIL, Sec. 10.)–Party is allowed one entire day
for the purpose of giving notice. After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to
XPN: Delay is excused (NIL, Sec. 113,). all parties secondarily liable thereon accrues to the
holder (NIL, Sec. 84).
NOTE: An instrument cannot be dishonored by
non-payment until after the maturity. PARTIES TO BE NOTIFIED

2. Parties reside in the same place Parties to whom notice must be given
a. Place of business – Before close of business
hours on the day following Notice of dishonor should be given to:
b. Residence – Before the usual hours of rest 1. The drawer; or
on the day following 2. Indorser; or
c. By mail – Deposited in the post office in 3. His agent (NIL, Sec. 97)
time to reach him in the usual course on the 4. Where party is dead – to a personal
day following (NIL, Sec. 103) representative or sent to the last residence or
3. Parties reside in different places last place of business of the deceased (NIL, Sec.
a. By mail – Deposited in the post office in 98)
time to go by mail (actual departure in the 5. When the parties to be notified are partners –
course of mail from the post office in which notice to any one partner though there has been
the notice was deposited) the day following a dissolution (NIL, Sec. 99)
the day of dishonor. 6. Notice to joint parties who are not partners
b. If no mail – At a convenient hour (of the must be given to each of them (NIL, Sec. 100)
sender) on that day, by the next mail 7. Where a party has been adjudged a bankrupt –
thereafter to the party himself or to his trustee or assignee
c. Other than by post office (e.g. personal (NIL, Sec. 101)
messenger) – Within the time that notice
would have been received in due course of In case the instrument was dishonored in the hands
mail, if it has been deposited in the post of the agent, notice of dishonor should be given:
office within the time specified in (a) (NIL, 1. To the parties secondarily liable – Within the
Sec. 104). time fixed by Secs. 102-104, and 107, otherwise,
4. Time of notice to antecedent parties – Same they are discharged.
time for giving notice that the holder has after 2. To his principal – The principal must give notice
the dishonor (NIL, Sec. 107). to parties secondarily liable as if his agent were
an independent holder (NIL, Sec. 94).
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the A party who receives notice of dishonor is entitled
places specified above (NIL, Sec. 108). to give notice of such dishonor to prior parties
within the same period of time that the holder has
Instances when a negotiable instrument is after the dishonor, as if he were the said holder (NIL,
considered dishonored Sec. 107).

For BOE: PARTIES WHO MAY GIVE NOTICE OF DISHONOR

1. If not accepted when presented for acceptance; The parties who may give notice of dishonor are
or 1. Holder;
2. If presentment for acceptance is excused and 2. Another in behalf of the holder
the bill is not accepted (NIL, Sec. 149). 3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
For PN,

62
 NEGOTIABLE INSTRUMENTS LAW
would have a right to reimbursement from the
party to whom notice is given (NIL, Sec. 90). 1. Express; or
2. Implied (e.g. Payment by an indorser after he
EFFECTS OF NOTICE OF DISHONOR learns of the default of the maker; admission of
liability after dishonor) (NIL, Sec. 109).
Notice of dishonor, if given by or on behalf of the
holder, inures to the benefit of: Parties affected by the waiver of notice
1. All holders subsequent to the holder who has
given notice; and 1. All parties (if embodied on the face of the
2. All parties prior to the holder but subsequent to instrument); or
the party to whom notice has been given and 2. Particular indorser (if written above the
against whom they may have a right of recourse signature of such indorser) (NIL, Sec. 110).
(NIL, Sec. 92)
Waiver of protest
Notice of dishonor if given by party entitled thereto,
inures to the benefit of: It is the waiver of the formal instrument executed
1. The holder; and usually by a notary public certifying that the legal
2. All parties subsequent to the party to whom steps necessary to fix the liability of the drawee and
notice is given (NIL, Sec. 93). the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
FORM OF NOTICE presentment and notice of dishonor (NIL, Sec. 111).

Form and contents of a notice of dishonor DISPENSATION WITH NOTICE

1. Oral; or Instances when notice of dishonor is not

2. In writing; necessary
3. It may be given by personal delivery, or by mail
(NIL, Sec. 96) 1. Waiver of notice (NIL, Sec. 109)
4. Must contain the following: 2. Waiver of protest (NIL, Sec. 111)
a. Description of the instrument; 3. When notice is dispensed with when after
b. Statement that it has been presented for exercise of reasonable diligence, notice cannot
payment or for acceptance and that it has be given or does not reach the parties sought to
been dishonored (If protest is necessary, be charged (NIL, Sec. 112)
notice must also contain a statement that it 4. Drawer in cases under Sec. 114, NIL.
has been protested); and 5. Indorser in cases under Sec. 115, NIL.; and
c. Statement that the party giving the notice 6. Where due notice of dishonor by non-
intends to look for the party addressed for acceptance has been given (notice of dishonor
payment. by non-payment not necessary). (NIL, Sec. 116.)

NOTE: A written notice need not be signed, and an Instances when a notice of dishonor to the
insufficient notice may be supplemented or drawer may be dispensed with
validated by verbal communication. A
misdescription of the instrument does not vitiate 1. When drawer and drawee is the same person
the notice unless the party to whom the notice is 2. Drawee is fictitious or does not have the
given is in fact misled thereby (NIL, Sec. 95). capacity to contract
3. Drawer is the person to whom the instrument is
WAIVER presented for payment (he is the one who
dishonored the instrument)
It is the willingness on the part of the drawer or 4. Drawer has no right to expect or require that
indorser to be bound as such even without due the drawee or acceptor will honor the
notice of dishonor. instrument.
5. Drawer has countermanded the payment (e.g.
Waiver of notice maybe given: stop payment order) (NIL, Sec. 114.)

1. Before the time of giving notice has arrived; or NOTE: The holder of two checks which were
2. After the omission to give due notice (NIL, Sec. dishonored because the drawer withdrew her funds
109). from the bank can hold the drawer liable even if no
notice of dishonor was given to the drawer, since
Ways to give a waiver of notice the drawer had no right to expect that the drawee

63
 MERCANTILE LAW
bank would honor the checks. (State Investment 1. Waiver (NIL, Sec. 109)
House, Inc. vs. Court of Appeals, G.R. No. 101163, 2. Notice is dispensed with (NIL, Sec. 112)
January 11, 1993) 3. Notice not necessary to drawer (NIL, Sec. 114)
4. Notice not necessary to indorser (NIL, Sec. 115)
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to B NOTE: Holder is not required to notify all indorsers,
or order the sum of Php1 million. Signed, A (for he may select to hold only one or more indorsers.
and in behalf of P).” The instrument shows that Indorsers who are discharged from liability by
it was drawn on P. B then indorsed to C, C to D, reason that no notice of dishonor was given to them
and D to E. E then treated it as a bill of exchange. is still liable for breach of warranties as to the NI.
Is presentment for acceptance necessary in this
case? (2011 Bar) Effect of lack of notice of dishonor on the
instrument which is payable in installments
A: NO, since the drawer and drawee are the same
person. 1. No acceleration clause – Failure to give notice of
dishonor on a previous installment does not
Q: Juben issued to Y two post-dated checks as discharge drawers and indorsers as to
security for pieces of jewelry to be sold. Y succeeding installments.
negotiated the check to S. When Juben failed to 2. With acceleration clause – It depends upon
sell the jewelry, he withdrew all his funds from whether the clause is automatic or optional.
the drawee bank. After dishonor, Juben a. Automatic – failure to give notice of
contends that the holder failed to give him a dishonor as to a previous installment will
notice of dishonor. Is notice of dishonor discharge the persons secondarily liable as
necessary? to the succeeding installments;
b. Optional – if not exercised, the rule would
A: NO, Juben was responsible for the dishonor of his be the same as if there is no acceleration
checks, hence, there was no need to serve him notice clause. If exercised, the rule would be the
of dishonor (State Investment House, Inc. v. CA, same as if the installment contains an
supra.). automatic acceleration clause (Town
Savings Bank v. CA, G.R. No. 106011, June 17,
Instances when it is not necessary to give a 1993).
notice of dishonor to the indorser
DISCHARGE OF NEGOTIABLE INSTRUMENT
1. Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts It is the release of all parties, whether primary or
at the time he indorsed the instrument; secondary, from the obligations arising thereunder.
2. Indorser is person to whom the instrument is It renders the instrument without force and effect,
presented for payment; or and consequently, it can no longer be negotiated.
3. Instrument was made or accepted for his
accommodation (NIL, Sec. 115). Methods for discharge of instrument

EFFECT OF FAILURE TO GIVE NOTICE 1. Payment by principal debtor:

a. By or on behalf of principal debtor
Effect of the omission of a previous holder to b. At or after its maturity
give notice of dishonor by non-acceptance c. To the holder thereof
d. In good faith and without notice that the
It does not prejudice the rights of a holder in due holder’s title is defective
course subsequent to the omission to present the 2. Payment by accommodated party
instrument to the drawee for acceptance and notify 3. Intentional cancellation of instrument by the
the drawer and indorsers if acceptance is refused holder (by expressly stating it in the instrument
(NIL, Sec. 117). or when the instrument is torn up, burned or
destroyed)
Effect of failure to give notice of dishonor 4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
GR: Any person to whom such notice is not given is NCC specifically remission, novation, and
discharged, but he will still be liable for breach of merger.
warranties pertaining to the instrument.
NOTE: Loss of the negotiable instrument will not
XPNs: extinguish liability; compensation is not available so

64
 NEGOTIABLE INSTRUMENTS LAW
long as an obligation is evidenced by a negotiable In this case, J.Y. Bros.’s acceptance of the Solid Bank
instrument (Villanueva, 2009). check, which replaced the dishonored Prudential
Bank check, did not result to novation as there was
5. Reacquisition by principal debtor in his own no express agreement to establish that Salazar was
right. Reacquisition must be: already discharged from his liability. Neither was
a. By the principal debtor there any incompatibility, since both checks were
b. In his own right given to terminate a single obligation arising from
c. At or after date of maturity (instrument is the same transaction (Anamer Salazar v. J.Y.
discharged; if made before, it may be Brothers Marketing Corporation, G.R. No. 171998,
renegotiated) (NIL, Sec. 119). October 20, 2010, in Divina 2014).

Q: Salazar with Calleja and Kallos procured from DISCHARGE OF SECONDARY PARTIES
J. Y. Bros. 300 cavans of rice. As payment, Salazar
negotiated and indorsed to J.Y. Bros. Prudential Methods of discharge of secondary parties (ACS
Bank Check issued by Timario with the TReE)
assurance that the check is good as cash. On that
assurance, J.Y. Bros. parted with 300 cavans of 1. Any Act which discharges the instrument;
rice to Salazar. However, upon presentment, the 2. Intentional Cancellation of his signature by the
check was dishonored due to "closed account." holder
Calleja, Kallos and Salazar delivered to J.Y. Bros. 3. Discharge of prior party which may be made
a replacement cross Solid Bank Check again when signature is Stricken out
issued which bounced due to insufficient funds. 4. Valid Tender of payment by a prior party;
Despite demands, Salazar failed to settle the 5. Release of the principal debtor, unless holder
amount due. J.Y. Bros., charged Salazar and expressly reserves his right of recourse against
Timario with the estafa. the said subsequent parties
6. Extension of time of payment, unless:
Salazar contends that the issuance of the Solid a. Extension is consented to by such party
Bank check and the acceptance thereof by J.Y. b. Holder expressly reserves his right of
Bros, in replacement of the dishonored recourse against such party (NIL, Sec. 120)
Prudential Bank check, amounted to novation
that discharged the latter check; that Q: The rule is that the intentional cancellation of
respondent's acceptance of the Solid Bank a person secondarily liable results in the
check, notwithstanding its eventual dishonor by discharge of the latter. With respect to an
the drawee bank, had the effect of erasing indorser, the holder's right to cancel his
whatever criminal responsibility, under Article signature is: (2011 Bar)
315 of the RPC, the drawer or indorser of the
Prudential Bank check would have incurred in A: Limited to the case where the indorsement is not
the issuance thereof; and that a check is a necessary to his title.
contract which is susceptible to a novation just
like any other contract. Is Salazar correct? Effects of payment by persons secondarily liable

A: NO. While Section 119 of the NIL in relation to 1. Instrument is not discharged
Article 1231 of the Civil Code provides that one of 2. It only cancels his own liability and that of the
the modes of discharging a negotiable instrument is parties subsequent to him
by any other act which will discharge a simple 3. GR: Instrument may be renegotiated
contract for the payment of money, such as
novation, the acceptance by the holder of another XPNs:
check which replaced the dishonored bank check a. Where it is payable to the order of a third
did not result to novation. person, and has been paid by the drawer;
and
There are only two ways which indicate the b. Where it is paid by the accommodated
presence of novation and thereby produce the effect party.
of extinguishing an obligation by another which
substitutes the same. First, novation must be NOTE: (a) and (b) has the same effect as payment
explicitly stated and declared in unequivocal terms by the party primarily liable.
as novation is never presumed. Secondly, the old
and the new obligations must be incompatible on 4. Person paying is remitted to his former rights
every point. (as regards prior parties) and he may strike out

65
 MERCANTILE LAW
his own and all subsequent indorsements (NIL, CONCEPT
Sec. 121).
Material alteration
RIGHTS OF THE PARTY WHO DISCHARGED THE
INSTRUMENT It is any change in the instrument which affects or
changes the liability of the parties in any way. It
GR: The party so discharging the instrument is means an unauthorized change in an instrument
remitted to his former rights as regards all prior that purports to modify in any respect the obligation
parties, and he may strike out his own and all of a party or an unauthorized addition of words or
subsequent indorsements, and again negotiate the numbers or other change to an incomplete
instrument. instrument relating to the obligation of a party.

XPNs: Instances that constitute material alteration

1. Where it is payable to the order of a third Any alteration which changes:

person, and has been paid by the drawee; and
2. It was made or accepted for accommodation, 1. Date
and has been paid by the party accommodated. 2. Sum payable, either for principal or interest
3. The time or place of payment
RENUNCIATION BY THE HOLDER 4. Number or the relations of the parties
5. Currency in which payment is to be made
Renunciation 6. Adds a place of payment where no place is
specified
It is the act of surrendering a claim or right with or 7. Any other change or addition which alters the
without recompense (a PERSONAL defense). effect of the instrument (NIL, Sec. 125.)

Manner of making renunciation by the holder The change in the date of indorsement is not material
where the date is not necessary to fix the maturity
1. Must be written of the instrument.
2. If oral, the instrument must be surrendered to
the person primarily liable (NIL, Sec. 122). There is no material alteration when the serial
number of a check had been altered. The alteration
Effects of renunciation of the serial number of a check did not change the
relations between the parties nor the effect of the
1. Made in favor of principal debtor made at or instrument. Hence, the alteration on the serial
after the maturity (made absolutely and number of a check is not a material alteration
unconditionally) of the instrument – discharges (International Corporate Bank v. CA, G.R. No. 141968,
the instrument (NIL, Sec. 122). February 12, 2001).
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity – Spoliation
discharges only the secondary parties and all
subsequent to him (NIL, Sec. 122). It refers to material alteration of an instrument
3. Renunciation does not affect the rights of a done by a stranger. It has the same effect as
holder in due course without notice (NIL, Sec. alteration.
120).
EFFECT OF MATERIAL ALTERATION
Rule regarding the cancellation of an
instrument Material alteration of a negotiable instrument,
without the assent of all parties liable thereon, has
It is presumed intentional. It is inoperative if the following effects:
unintentional, or under a mistake or without the 1. Avoids the instrument except against:
authority of the holder. But where an instrument or a. A party who has made the alteration;
any signature appears to have been cancelled, the b. A party who authorized or assented to the
burden of proof lies on the party alleging that the alteration; or
cancellation was made unintentionally, or under a c. The indorsers who indorsed subsequent to
mistake or without authority (NIL, Sec. 123). the alteration (because of their
warranties).
MATERIAL ALTERATION 2. If negotiated to an HIDC, he may enforce the
payment thereof according to its original tenor

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 NEGOTIABLE INSTRUMENTS LAW
against the person not a party to the alteration. A: YES, since a drawee is allowed to effect a
He may also enforce payment thereof against qualified acceptance in which case he shall be liable
the party responsible for the alteration for the according to the tenor of his acceptance.
altered amount.
3. If negotiated to a holder not an HIDC, he cannot Q: X, drawee of a bill of exchange, wrote the
enforce payment against the person not a party words: “Accepted, with promise to make
prior to the alteration. He may, however payment within two days. Signed, X.” The
enforce payment according to the altered tenor drawer questioned the acceptance as invalid. Is
from the person who caused the alteration and the acceptance valid?
from the indorsers (NIL, Sec. 12).
A: YES, because the acceptance is in reality a clear
A drawee who accepts a materially altered check assent to the order of the drawer to pay. Qualified
cannot recover from the holder and the drawer acceptance as to time is allowed (NIL, Sec. 141 [d]).
(2011 Bar).
MANNER
A material alteration of an instrument without the
assent of all parties liable thereon results in its Manner of making an acceptance
avoidance, except against a party who has made,
authorized or assented to the alteration and Acceptance may be made
subsequent indorser. (2011 Bar)
1. On the bill itself,
ACCEPTANCE 2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill;
DEFINITION or
b. It may be acceptance as to a non-existing
Acceptance of a bill bill.

It is a signification by the drawee of his assent to the If the bill is non-existent, the acceptance on a
order of the drawer (NIL, Sec. 132). separate paper must comply with following
requirements:
Requisites for acceptance
1. The contemplated drawee shall describe the bill
1. In writing, except constructive acceptance and to be drawn and promise to accept it;
to a foreign bill payable in another state (unless 2. Bill shall be drawn within a reasonable time
the other state requires for written after such promise is written; and
acceptance); 3. The holder shall take the bill upon the credit of
2. Signed by the drawee (without it, he is not the promise.
liable);
3. Must express a promise to pay money (not Kinds of acceptance
goods);
4. Delivered to the holder (before delivery or 1. General Acceptance -It assents without
notification, acceptor may revoke or cancel his qualification to the order of the drawer (NIL,
acceptance). Sec. 139).
2. Qualified Acceptance - An acceptance which in
Upon acceptance, the bill, in effect becomes a note. express terms varies the effect of the bill as
The drawee who thereby becomes an acceptor drawn (ibid.).
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser. NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an unqualified
Q: A bill of exchange states on its face: “One (1) acceptance, he may treat the bill as dishonored by
month after sight, pay to the order of Mr. R the non-acceptance (NIL, Sec. 142).
amount of Php50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T.” Mr. S, the Kinds of qualified acceptance
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay 1. Conditional – makes payment by the acceptor
Php30,000.00 three (3) months after sight.” May dependent on the fulfillment of a condition
he accept under such terms, which varies the therein stated.
command in the bill of exchange? (2011 Bar) 2. Partial – an acceptance to pay part only of the
amount for which the bill is drawn.

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 MERCANTILE LAW
3. Local – an acceptance to pay only at a particular 1. When they have expressly or impliedly
place. authorized the holder to take a qualified
4. Qualified as to time– a bill is accepted to be paid acceptance; or
on or after a specified date. 2. Subsequently assent thereto;
5. As to drawee - acceptance of some one or more 3. Implied assent (when they did not express their
of the drawees but not of all (NIL, Sec. 141). dissent to the holder within a reasonable time
when they received a notice of qualified
Other kinds of acceptance acceptance) (NIL, Sec. 142).

1. Constructive/implied (NIL, Sec. 137). When the drawer or indorser receives notice of a
a. Drawee to whom the bill is delivered for qualified acceptance, he must, within a reasonable
acceptance destroys it; or time, express his dissent to the holder or he will be
b. Drawee refuses, within 24 hours after such deemed to have assented thereto (Sundiang Sr. &
delivery, or within such time as is given Aquino, 2014).
him, to return the bill accepted or non-
accepted Acceptance of an incomplete bill

2. Extrinsic– the acceptance is written on a paper Acceptance may be made before the bill has been
other than the bill itself. To be binding upon the signed by the drawer or while otherwise
acceptor: incomplete, or after it is overdue, or even after it has
a. Acceptance must be shown to the person to been dishonored by non-acceptance or non-
whom the instrument is negotiated; and payment (NIL, Sec. 138).
b. Such person must take the bill for value on
the faith of such acceptance (NIL, Sec. 134). Effect of the certification by the drawee bank

3. Virtual Certification implies that the check is drawn upon

a. Unconditional promise in writing to accept sufficient funds in the hands of the drawee, that they
a bill have been set apart for its satisfaction and that they
b. Promise made before it is drawn shall be so applied whenever the check is presented
c. Any person who, upon faith thereof, for payment. Where a check is certified by the bank
receives the bill for value (NIL, Sec. 135). on which it is drawn, the certification is equivalent
to acceptance (NIL, Secs. 187, 189; New Pacific
TIME FOR ACCEPTANCE Timber v. Seneris, G.R. No. L-41764, December. 19,
1980).
The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The PRESENTMENT FOR ACCEPTANCE
acceptance, if given, dates as of the day of
presentation (NIL, Sec. 136). Presentment for acceptance

Drawee bank is not entitled to 24 hours to decide It is the production or exhibition of a bill of exchange
whether or not to pay a check since a check is to the drawee for his acceptance or payment (also
presented for payment, not acceptance. includes presentment for payment).

RULES GOVERNING ACCEPTANCE GR: Acceptance is not necessary to render any party
to the bill liable (NIL, Sec. 143, par. 2).
Effect of accepting an instrument with a
qualified acceptance XPNs:

GR: When the holder takes a qualified acceptance 1. Where bill is payable after sight, or when it is
the drawer and indorsers are discharged from necessary in order to fix the maturity of the
liability on the bill. instrument;
2. When bill expressly stipulates that it shall be
The holder may refuse to take a qualified acceptance presented for acceptance; or
and if he does not obtain an unqualified acceptance, 3. Where the bill is drawn payable elsewhere than
he may treat the bill as dishonored by non- at the residence or place of business of the
acceptance (Sundiang Sr. & Aquino, 2014). drawee (NIL, Sec. 143, par. 1).

XPNs: The holder must either present it for acceptance or

negotiate it within a reasonable time, otherwise, the

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 NEGOTIABLE INSTRUMENTS LAW
drawer and all indorsers are discharged (NIL, Sec. 1. Where the drawee is dead, or has absconded, or
144). is a fictitious person not having capacity to
contract by bill;
TIME/PLACE/MANNER OF ACCEPTANCE 2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
Proper presentment for acceptance 3. Where, although presentment has been
irregular, acceptance has been refused on some
It must be made: other ground (NIL, Sec. 148).

1. By or on behalf of the holder DISHONOR BY NON-ACCEPTANCE

2. At a reasonable hour on a business day
3. Before the bill is overdue; and Instances when a bill is dishonored by non-
4. To the drawee or some person authorized to acceptance
accept or refuse to accept on his behalf (NIL, Sec.
145). 1. When it is duly presented for acceptance and
such an acceptance is refused or cannot be
WHEN PRESENTMENT MUST BE obtained; or
MADE TO 2. When presentment for acceptance is excused,
Bill addressed to 2 All of them unless one has and the bill is not accepted (NIL, Sec. 149).
or more drawees authority to accept or
who are not refuse acceptance for all, in It is not sufficient that presentment for acceptance
partners which case presentment is excused, it is also necessary that the bill remains
may be made to him only not accepted.
(NIL, Sec. 145, [a]).
Duty of the holder where bill is not accepted
Drawee is dead Drawee's personal
representative (NIL, Sec. If within 24 hours after due presentment, the bill is
145, [b]). not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
NOTE: Presentment is will lose the right of recourse against the drawer
merely permissive since it is and indorsers (NIL, Sec. 150).
excused by (NIL, Sec.148
[a]). Rules when a bill is dishonored by non-
acceptance
Drawee is adjudged To drawee or his trustee/
a bankrupt or assignee (NIL, Sec 145, [c]). 1. Right of recourse against all secondary party
insolvent or has accrues to the holder.
made an 2. No presentment for payment is necessary since
assignment for the dishonor of the instrument by non-payment is
benefit of creditors to be expected.
3. If the instrument is accepted after it has been
PRESENTMENT FOR ACCEPTANCE dishonored by non-acceptance, presentment
for payment is necessary upon maturity.
Failure to make such presentment will discharge the 4. In case of non-payment, holder must give the
drawer from liability or to the extent of the loss corresponding notice of dishonor; otherwise,
caused by the delay (NIL, Sec. 186; Republic of the secondary parties are discharged.
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961). Rights of a holder when bill is not accepted

However, delay in presentment may be excused When a bill is dishonored by non-acceptance, an

where the holder of a bill drawn payable elsewhere immediate right of recourse against the drawer and
than at the place of business or the residence of the indorsers accrues to the holder, and no presentment
drawee has no time with the exercise of reasonable for payment is necessary (NIL, Sec. 151).
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due Acceptance for honor
(NIL, Sec. 147).
It is an undertaking by a stranger to a bill after
Instances when presentment is excused protest for the benefit of any party liable thereon or

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 MERCANTILE LAW
for the honor of the person for whose account the 10. Judgment Note – this is a note to which a power
bill is drawn which acceptance inures to the benefit of attorney is added enabling the payee to take
of all parties subsequent to the person for whose judgment against the maker without the
honor it is accepted, and conditioned to pay the bill formality of a trial if the note is not paid on its
when it becomes due if the original drawee does not due date (De Leon, supra).
pay it (NIL, Sec. 161).
Q: Prudential Bank received from the CIR a Final
Requisites of acceptance for honor (WIS) Assessment Notice and a Demand Letter for
deficiency Documentary Stamp Tax for the
1. Must be in Writing taxable year 1995 on its Repurchase Agreement
2. Must Indicate that it is an acceptance for honor; with the BSP, Purchase of Treasury Bills from
3. Must be Signed by the acceptor for honor (NIL, the BSP, and on its SAP product. Prudential Bank
Sec. 162) protested the assessment on the ground that the
documents subject matter of the assessment are
PROMISSORY NOTE not subject to DST. It contends that its SAP is not
subject to DST because it is not included in the
Promissory note list of documents under Section 180 of the old
NIRC, as amended. Prudential Bank insists that
An unconditional promise in writing made by one unlike a time deposit, its SAP is evidenced by a
person to another, signed by the maker, engaging to passbook and not by a deposit certificate. In
pay on demand, or at a fixed or determinable future addition, its SAP is payable on demand and not
time, a sum certain in money to order or to bearer on a fixed determinable future. To support its
(NIL, Sec. 184). position, petitioner relies on the legislative
intent of the law prior to Republic Act (RA) No.
Special types of promissory notes 9243 and the historical background of the
taxability of certificates of deposit.
1. Certificate of deposit – a written
acknowledgment by a bank of the receipt of Prudential Bank further contends that even
money on deposit on which the bank promises assuming that its SAP is subject to DST, the CTA
to pay to the depositor or to him or his order or En Banc nonetheless erred in denying
to some other person or to him or his order, or Prudential Bank’s withdrawal of its petition
to a specified person or bearer, on demand or considering that it has paid under the IVAP,
on a fixed date, often with interest. which it claims is 100% of the basic tax of the
2. Bonds – an evidence of indebtedness issued by original assessment BIR. Prudential Bank insists
a public or private corporation which that the payment it made should be deemed
constitutes a promise, under seal, to pay money. substantial compliance considering the refusal
It runs for a longer period of time than a PN. of the CIR to issue the letter of termination and
3. Registered Bond – one payable only to the authority to cancel assessment. Is Prudential
person whose name appears on the face of the Bank’s contention tenable?
certificate.
4. Coupon Bond – one to which are attached A: NO. A certificate of deposit is defined as a written
coupons which entitle the holder to interest acknowledgment by a bank or banker of the receipt
when due. of a sum of money on deposit which the bank or
5. Bank Note – instrument issued by a bank for banker promises to pay to the depositor, to the
circulation as money payable to bearer on order of the depositor, or to some other person or
demand. his order, whereby the relation of debtor and
6. Due Bill - PN which shows on its face that one creditor between the bank and the depositor is
person acknowledges his indebtedness to created. A document to be considered a certificate
another. The word “due” is commonly used. of deposit need not be in a specific form. Thus, a
7. Mortgage Note – an instrument secured by passbook issued by a bank qualifies as a certificate
either a real (REM) or personal property of deposit drawing interest because it is considered
(Chattel). a written acknowledgement by a bank that it has
8. Title-Retaining Note – an instrument used to accepted a deposit of a sum of money from a
secure the purchase price of goods. It ordinarily depositor. Thus, it is subject to documentary stamp
provides that title to the goods shall remain in tax (Prudential Bank v. Commissioner of Internal
payee’s name until the note is paid in full. Revenue, G.R. No. 180390, July 27, 2011, in Divina,
9. Collateral Note – it is used when the maker 2014).
pledges securities to the payee to secure the
payment of the amount of the note.

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 NEGOTIABLE INSTRUMENTS LAW
Instances when a bill of exchange may be treated P35,147.59. He issued a post-dated PCIB check
as a promissory note (2015 Bar) in favor of SLI in the amount of P34,588.72. After
clearing, the amount of the check was
1. The drawer and the drawee are the same immediately debited by EPCIB from Tan’s
person; account thereby leaving him with a balance of
2. The drawee is a fictitious person; only P558.87. He thereafter issued three (3)
3. The drawee has no capacity to contract; checks payable to ASELCO, ANECO, and the other
4. The instrument is so ambiguous that there is payable in cash. When the latter were presented
doubt whether it is a bill or a note (Sundiang Sr. for payment, the three (3) checks were
& Aquino, 2014, citing NIL, Secs. 17[e] and 130). dishonored for being drawn against insufficient
funds. As a result, the electric power supply for
CHECK the two mini-sawmills owned and operated by
Tan, was cut off and it was restored only after
DEFINITION sometime. After trial, the RTC ruled in favor of
EPCIB and dismissed the complaint. On appeal
It is a bill of exchange drawn on a bank and payable the CA reversed the decision of the RTC. Is EPCIB
on demand (NIL, Sec. 185). liable due to its premature debiting of the post-
dated check, thereby affecting Tan’s business
A check must be presented for payment within a operations?
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the A: YES. The premature debiting of the postdated
loss caused by the delay. check by the bank which resulted to insufficiency of
funds that brought about the dishonor of two checks
Essential characteristics of checks causing the electric supply to be cut-off and affected
business operations indicates the negligence of the
1. They are drawn on a bank; and bank. For its failure to exercise extra-ordinary
2. Payable instantly on demand. diligence, it should be made liable in the case
(Equitable PCI Bank v. Arcelito B. Tan, G.R. No.
Q: Tan maintained a current and savings 165339, August 23, 2010, in Divina, 2014).
account with PCIB, now EPCIB, with a balance of

Check vs. Bill of Exchange

BASIS CHECKS BOE

Drawee Always drawn on a bank or banker May or may not be drawn on a bank and
against a previous deposit of funds need not be drawn against a deposit
Payability Always payable on demand Either payable on demand or at a fixed or
determinable future time (NIL, Sec.4)
Function Ordinarily intended for immediate Intended for circulation as instrument of
payment credit
Presentment for Must be presented for payment within a Must be presented for payment within a
Payment reasonable time after its issue(NIL, reasonable time after its last negotiation
Sec.186) (NIL, Sec. 171)
Discharge of When a check is accepted or certified, the They remain liable despiteacceptance
Liability drawer & indorsers are discharged from (NIL, Sec. 84)
liability thereon (NIL, Sec. 188)
Effect of the Death Death of the drawer of a check with the Death of the drawer of an ordinary bill
of the Drawer knowledge of the bank revokes the does not revoke the authority of the
authority of the bank to pay. drawee to pay.
Presentment Need not be presented for acceptance Must be presented for acceptance in
for Acceptance (NIL, Sec. 185) certain cases (NIL, Sec. 143)

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 MERCANTILE LAW
Q: A check was dishonored due to material 1. Cashier’s Check – a BOE drawn by the bank upon
alteration. The creditor then filed an action itself and is accepted at its issuance. It is usually
against drawee bank for the amount. Will the signed by the cashier of the bank.
action prosper? 2. Manager’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance and
A: NO. If a bank refuses to pay a check signed by a manager on behalf of a bank.
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections A manager’s check is as good as cash. It is a
185 and 189 of the NIL, sue the bank. The payee check drawn by the bank against itself. It is
should instead sue the drawer who might in turn deemed pre-accepted by the bank from the
sue the bank. This is so because no privity of moment of issuance. The check becomes the
contract exists between the drawee-bank and the primary obligation of the bank which issues it
payee (Villanueva v. Nite, G.R. No. 148211, July 25, and constitutes its written promise to pay. By
2006). issuing it, the bank in effect commits its total
resources, integrity and honor behind the check
NOTE: A check of itself does not operate as an (Metrobank and Trust Company vs Chiok, GR No.
assignment of any part of the funds to the credit of 172652, November 26, 2014). (2015 Bar)
the drawer with the bank, and the bank is not liable
to the holder, unless and until it accepts or certifies 3. Certified Check – Drawn by a depositor upon
the check (NIL, Sec. 189). funds to his credit in a bank which an officer of
a bank certifies will be paid on presentation.
Stopping payment 4. Crossed Check – Done by writing 2 parallel lines
on the left top portion of the check. The
The drawer has the right to order the drawee to stop marking signifies that the bank should pay only
payment of a check and this right flows from the rule with the intervention of the company only.
that the issuance of a check by itself is not an 5. Memorandum Check – A check with
assignment of funds by the drawee. If a bank pays a “Memorandum” written on its face. The writing
check after it has been notified to stop payment, it signifies that the drawer engages to pay the
pays in its own responsibility and will not be bona fide holder absolutely, without any
permitted to charge the account. The drawer may condition concerning its presentment.
countermand payment if he has a valid defense 6. Traveler’s Checks – Instruments purchased from
against the holder of the check. Thus, banks or express companies which can be used
countermanding of a check is proper where the like cash upon the second signature by the
payee failed to deliver the goods that he was purchaser (De Leon, supra).
supposed to deliver (Sundiang Sr. & Aquino, 2014,
citing Bataan Cigar and Cigarette Factory v. CA, GR. Crossed check
No. 93048, March 3, 1994).
A crossed check is a check with two (2) parallel
Effect of erasure or alteration on checks lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
Pursuant to Philippine Clearing House Corporation payment must be made to the right party; otherwise
Memorandum Circular No. 15-460A effective January the bank has no authority to use the drawer's funds
4, 2016, the following shall no longer be eligible or deposited with the bank.
acceptable for clearing:
The purpose is to insure payment to the payee. It
a. Any check that shows or indicates on its face can only be deposited but may not be converted into
erasure or alteration regardless of any cash by the drawer. Crossing a check does not
signature or initials that appear to indicate destroy its negotiability but the check may be
authorization of the alteration or erasure; or negotiated only once – to one who has an account
b. Does not indicate the date, payee, amount with the bank (De Ocampo v. Gatchalian, G.R. No. L-
payable in figures, amount payable in words, or 15126, November 30, 1961).
signature of the drawer
The effects of crossing a check are:
KINDS 1. That the check may not be encashed but only
deposited in the bank;
Special types of checks 2. That the check may be negotiated only once- to
one who has an account with a bank;
3. That the act of crossing the check serves as a
warning to the holder that the check has been

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 NEGOTIABLE INSTRUMENTS LAW
issued for definite purpose so that he must On the other hand, Ramos filed an Answer
inquire if he has received the check pursuant to denying any knowledge of Balmacedas scheme.
the purpose. Otherwise, he is not an HIDC (State The RTC issued a decision in favor of PCIB. On
Investment House v. IAC, G.R. No. 72764, July 13, appeal, the CA dismissed the complaint against
1989). Ramos. According to the CA, the mere fact that
Balmaceda made Ramos the payee in some of
Q: Po Press issued in favor of Jose a postdated the Managers checks does not suffice to prove
crossed check, in payment of newsprint which that Ramos was complicit in Balmacedas
Jose promised to deliver. Jose sold and fraudulent scheme. Is PCIB itself at fault as
negotiated the check to Excel Inc. at a discount. employer?
Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the A: YES. While its manager forged the signature of
newsprint, Po ordered the drawee bank to stop the authorized signatories of clients in the
payment on the check. Efforts of Excel to collect application for manager’s checks and forged the
from Po failed. Excel wants to know from you as signatures of the payees thereof, the drawee bank
counsel: also failed to exercise the highest degree of diligence
required of banks in the case at bar. It allowed its
a. Whether as second indorser and holder of manager to encash the manager’s checks that were
the crossed check, is it a holder in due plainly crossed checks. A crossed check is one
course? where two parallel lines are drawn across its face or
b. Whether Po’s defense of lack of across its corner. Based on jurisprudence, the
consideration as against Jose is also crossing of a check has the following effects: (a) the
available as against Excel? (1994, 1995, check may not be encashed but only deposited in the
2005 Bar) bank; (b) the check may be negotiated only once —
to the one who has an account with the bank; and
A: (c) the act of crossing the check serves as a warning
a. Excel Inc. is not a holder in due course. The act to the holder that the check has been issued for a
of crossing the check imposes upon the holder definite purpose and he must inquire if he received
thereof the duty to ascertain the indorser’s, title the check pursuant to this purpose; otherwise, he is
to the check or the nature of his possession or not a holder in due course. In other words, the
the purpose for which it was issued. Excel is crossing of a check is a warning that the check
guilty of gross negligence amounting to legal should be deposited only in the account of the
absence of good faith for its failure to inquire payee. When a check is crossed, it is the duty of the
from Jose the purpose for which the three collecting bank to ascertain that the check is only
checks were crossed despite the warning of the deposited to the payee’s account. In complete
crossing, hence, it is not deemed a holder in due disregard of this duty, PCIB’s systems allowed
course. Balmaceda to encash 26 manager’s checks which
b. YES, the defense of lack of consideration as were all crossed checks, or checks payable to the
against Jose is also available as against Excel. “payee’s account only.” (PCIB v. Balmaceda and
For not being a holder in due course, Excel is Ramos, G.R. No. 158143 September 21, 2011, in
subject to personal defenses as if the check DIvina, 2014).
were non-negotiable, such as lack of
consideration between Po Press and Jose. In Crossed check with notation “Account Payee
this case, Jose’s failure to deliver the newsprint Only”
resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press A crossed check with the notation account payee
cannot be made liable to pay the face value of only can only be deposited in the named payees
the check. account. It is gross negligence for a bank to ignore
this rule solely on the basis of a third partys’ oral
Q: PCIB filed an action against Balmaceda, it representations of having a good title thereto.
alleging that between 1991 and 1993, by taking
advantage of his position as branch manager, he The fact that a person, other than the named payee
fraudulently obtained and encashed 31 of the crossed check, was presenting it for deposit
Managers checks in the P10,782,150.00. PCIB should have put the bank on guard. It should have
moved to be allowed to file an amended verified if the payee authorized the holder to
complaint to implead Rolando Ramos as one of present the same in its behalf or indorsed it to him.
the recipients of a portion of the proceeds from The bank’s reliance on the holder’s assurance that
Balmacedas alleged fraud. Since Balmaceda did he had good title to the three checks constitutes
not file an Answer, he was declared in default. gross negligence even though the holder was

73
 MERCANTILE LAW
related to the majority stockholder of the payee. a complaint against Pentium and CD Bytes for
While the check was not delivered to the payee, the the payment of the dishonored check, will the
suite may still prosper because the payee did not complaint prosper? Explain (1996 Bar)
assert a right based on the undelivered check but on
quasi-delict (Equitable Banking Corporation v. A: The case will prosper as against the CD Bytes, the
Special Steel Products, G.R. No. 175350, June 13, 2012, immediate indorser but not as against Pentium
in Divina, 2014). Company. The effect of crossing a check relates to
the mode of its presentment for payment which
Q: Distinguish clearly crossed checks from must be made by the holder, or by some person
cancelled checks (2004 Bar) authorized to receive payment on his behalf. Thus,
in the absence of due presentment, as in this case
A: A crossed check is one with two parallel lines where the check was not presented by the payee
drawn diagonally on the left portion of the check. On (CD Bytes) or the proper party authorized to make
the other hand, a cancelled check is one marked or presentment of the checks, the drawer (Pentium
stamped "paid" and/or "cancelled" by or on behalf Company) cannot be held liable. However, Fund
of a drawee bank to indicate payment thereof. House may recover from the immediate indorser, if
the latter has no valid excuse for refusing payment.
Q: On Oct 12, 1993, Chelsea Straights, a
corporation engaged in the manufacture of Stale check
cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed A check which has not been presented for payment
checks postdated 15 Mar 94 and 15 Apr 94 in full within a reasonable time after its issue. It is
payment therefor. On 19 Jan 94 Moises sold to valueless and thus, should not be paid. A check
Dragon Investment House at a discount the two becomes stale 6 months from date of issue.
checks drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco as agreed Memorandum check
despite Chelsea’s demand. Consequently, on 1
Mar 94 Chelsea issued a “stop payment” order A memorandum check is an evidence of debt against
on the 2 checks issued to Moises. Dragon, the drawer and although may not be intended to be
claiming to be a holder in due course, filed a presented, has the same effect as an ordinary check
complaint for collection against Chelsea for the and if passed on to a third person, will be valid in his
value of the checks. Rule on the complaint of hands like any other check (People v. Nitafan, G.R.
Dragon. Give your legal basis. (1995 Bar) No. 75954, October 22, 1992).

A: The complaint should be dismissed. The act of When drawer of check discharged from liability
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, in this case 1. The check is not presented within a reasonable
Moises’ title to the check or the nature of his time after its issue;
possession. Failing in this respect, Dragon cannot be 2. The drawer suffers loss; and
deemed a holder in due course and as such, Moises 3. The loss suffered by the drawer is attributable
is subject to personal defenses as if the check were to the delay (De Leon, 2010).
non-negotiable, such as lack of consideration
between Chelsea and Moises for Moises’ failure to PRESENTMENT FOR PAYMENT
deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea TIME
cannot thus be made liable to pay the face value of
the check and this constitutes a defense not only A check must be presented for payment within a
against Moises but even against Dragon who is not a reasonable time after its issue (NIL, Sec. 186).
holder in due course.
EFFECTS OF DELAY
Q: On March 1, 1996, Pentium Company ordered
a computer from CD Bytes, and issued a crossed Effects of delay
check in the amount of P30,000 post-dated Mar
31, 1996. Upon receipt of the check, CD Bytes 1. The drawer will be discharged from liability
discounted the check with Fund House. On April thereon to the extent of the loss caused by the
1, 1996, Pentium stopped payment of the check delay. (ibid.)
for failure of CD Bytes to deliver the computer. 2. The indorser shall be discharged from liability
Thus, when Fund House deposited the check, the (PNB vs. Seeto, G.R. No. L-4388, August 13, 1952).
drawee bank dishonored it. If Fund House files

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 INSURANCE CODE
Q: X and Y are disputing over a property. To instrument, then ownership of the check was not
settle the dispute, they entered into a transferred to SMC.
compromise agreement by which they agreed to
have the property in dispute be sold. X bought The evidence of SMC failed to establish that the
the property and delivered a manager’s check to check was given in payment of the obligation of
Y. Y refused to accept the same, hence it was Puzon. There was no provisional receipt or official
consigned with the court. Y later accepted the receipt issued for the amount of the check. What
check and three years after acceptance, he filed was issued was a receipt for the document, a
an action alleging that the check payment did POSTDATED CHECK SLIP.
not amount to legal tender and that he never
even encashed the check. Is the contention of Y Furthermore, SMC’s demand letter sent to Puzon
tenable? states: “As per company policies on receivables, all
issuances are to be covered by post-dated checks.
A: NO. It is true that a check is not a legal tender and However, you have deviated from this policy by
while delivery of a check produces the effect of forcibly taking away the check you have issued to us
payment only when it is encashed, the rule is to cover the December issuance. Notably, the term
otherwise if the debtor (X) was prejudiced by the payment was not used instead the terms covered
creditor’s (Y) unreasonable delay in presentment. and cover were used” (San Miguel Corporation v.
Acceptance of a check implies an undertaking of due Bartolome Puzon, Jr., G.R. No. 167567, September 22,
diligence in presenting it for payment. If no such 2011).
presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the INSURANCE CODE
payee. Payment will be deemed effected and the
obligation for which the check was given as
conditional payment will be discharged (Pio Laws governing contracts of insurance in the
Barretto Realty Development Corp. vs. Court of Philippines
Appeals, G.R. No. 132362, June 28, 2001).
1. R.A. 10607
Q: To ensure payment and as a business 2. New Civil Code
practice, SMC required Puzon to issue postdated 3. Special Laws
checks equivalent to the value of the products
purchased on credit before the same were CONCEPT OF INSURANCE
released to him. Said checks were returned to
Puzon when the transactions covered by these Contract of insurance
checks were paid or settled in full. Puzon
purchased products on credit and issued to SMC, It is an agreement whereby one undertakes for a
two (2) BPI checks to cover the said transaction. consideration to indemnify another against the loss,
During on of his visits to the SMC Paranaque damage or liability arising from an unknown or
Sales Office, he allegedly requested to see BPI contingent event. (IC, Sec. 2[a])
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a A contract of insurance, to be binding from the date
bond paper together with BPI Check No. 17657, of application, must have been a completed contract
he allegedly immediately left the office with his (Perez vs. CA, GR No. 112329, January 28, 2000).
accountant, bringing the checks with them. SMC Thus, it must have all the essential elements of a
sent a letter to Puzon, demanding the return of valid contract as enumerated in Art. 1318 of the New
the said checks. Puzon ignored the demand Civil Code:
hence SMC filed a complaint against him for
theft. The investigating prosecutor 1. Subject matter in which the insured has an
recommended the dismissal of the case for lack insurable interest;
of evidence. On appeal, the CA agreed with the 2. Consideration, which is the premium paid by
prosecutor. Were the prosecutor and the DOJ the insured, for the insurer’s promise to
correct in finding no probable cause for theft? indemnify the former upon the happening of
the event or peril insured against;
A: Yes. If the subject check was given by Puzon to 3. Meeting of minds of the parties.
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title “Doing an insurance business” or “transacting
to or ownership of the check was transferred upon an insurance business” (ISRA)
delivery. However, if the check was not given as
payment, there being no intent to give effect to the

75
 MERCANTILE LAW
The term “doing an insurance business” or insured from recovering greater than the loss.
“transacting an insurance business” means: (Mitsubishi Motors Philippines Salaried Employees
Union vs. Mitsubishi Motors Corporation, G.R. No.
1. Making or proposing to make, as Insurer, any 175773, June 17, 2013, in Divina 2014)
insurance contract;
2. Making or proposing to make, as Surety, any Insurance as an Uberrimae Fides contract (1993
contract of suretyship as a vocation and not as Bar)
merely incidental to any other legitimate
business or activity of the surety; The contract of insurance is one of perfect good
3. Doing any kind of business, including a faith (uberrimae fidei) not for the insured alone, but
Reinsurance business, specifically recognized equally so for the insurer; in fact, it is more so for
as constituting the doing of an insurance the latter, since its dominant bargaining position
business. carries with it stricter responsibility (Qua Chee Gan
4. Doing or proposing to do Any business in vs. Law Union and Rock Insurance, Co. Ltd., GR No. L-
substance equivalent to any of the foregoing in 4611, December 17, 1955). It requires the parties to
a manner designed to evade the provisions of the contract to communicate that which a party
the Insurance Code. (Sec. 2[b], ibid) knows and ought to communicate, that is, the duty
to disclose in good faith all facts material to the
In the application of the provisions of the Insurance contract. This doctrine is essential on account of the
Code, the fact that no profit is derived from the fact that the full circumstances of the subject matter
making of the insurance contracts, agreements or of insurance are, as a rule, known to the insured only
transactions or that no separate or direct and the insurer, in deciding whether or not to accept
consideration is received therefor, shall NOT be a risk, must rely primarily upon the information
deemed conclusive to show that the making supplied to him by the applicant. (Sundiang Sr. &
thereof does not constitute the doing or transacting Aquino, 2014)
of an insurance business.
Insurance as contracts of adhesion (Fine Print
Q: The parties’ CBA contains the following Rule)
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume While generally, stipulations in a contract come
under a self-insurance basis hospitalization for about after deliberate drafting by the parties
the dependents of regular employees”. thereto, there are certain contracts in which almost
Eventually, three members of Mitsubishi Motors all the provisions of which have been drafted only
Philippines Salaried Employees Union by one party, usually a corporation. Such contracts
(MMPSEU), namely, Ernesto Calida, Hermie Juan are called contracts of adhesion, because the only
Oabel and Jocelyn Martin, filed claims for participation of the other party is the signing of his
reimbursement of hospitalization expenses of signature or his 'adhesion' thereto. Insurance
their dependents. In turn, Mitsubishi Motors contracts fall into this category (Sweet Lines, Inc. vs.
Philippines Corporation (MMPC) paid only a Teves, GR No. L-37750, May 19, 1978). An illustration
portion of their hospitalization insurance of a contract of adhesion is when the insurer used
claims, not the full amount. However, MMPSEU “fine print” letters in conditions stated in a contract
insists that MMPC is also liable for the amounts of insurance (Ibid).
covered under other insurance policies;
otherwise, MMPC will unjustly profit from the Rules in the construction or interpretation of
premiums the employees contribute through insurance contracts
monthly salary deductions. Is MMPSEU’s
contention correct? By reason of the exclusive control of the insurance
company over the terms and phraseology of the
A: NO. Since the subject CBA provision is an contract, the ambiguity must be held strictly against
insurance contract, the rights and obligations of the the insurer and liberally in favor of the insured (Qua
parties must be determined in accordance with the Chee Gan v Law Union and Rock Insurance, supra).
general principles of insurance law Being in the However, if the terms, which the parties themselves
nature of a non-life insurance contract and have used, are clear and unambiguous, they must be
essentially a contract of indemnity, the CBA taken and understood in their plain, ordinary and
provision obligates MMPC to indemnify the covered popular sense. (Sun Life Office, Ltd. vs. CA, G.R. No.
employees’ medical expenses incurred by their 92383, July 17, 1992)
dependents but only up to the extent of the
expenses actually incurred. This is consistent with The phraseology used in medical or hospital service
the principle of indemnity which proscribes the contracts, such as “standard charges”, must be

76
 INSURANCE CODE
liberally construed in favor of the subscriber, and if 3. Cooperatives are now expressly included in the
doubtful or reasonably susceptible of two term “insurer” or “insurance company.”
interpretations, the construction conferring However, the cooperative must:
coverage is to be adopted, and exclusionary clauses a. Have a sufficient capital and asset required
of doubtful import should be strictly construed under the Insurance Code and the pertinent
against the provider. (Fortune Medicare Inc. vs. regulations issued by the Commission. (IC,
Amorin, G.R. No. 195872, March 12, 2014) as amended, Sec. 192)
b. Have a certificate of authority to operate
When the terms of the insurance contract contain issued by the Commission which should be
limitations on liability, courts should construe them renewed every year. (IC, as amended, Sec.
in such a way as to preclude the insurer from non- 193, Sundiang Sr. & Aquino, 2014)
compliance with his obligation. (Alpha Insurance
and Surety Co. vs. Castor, GR No. 198174, September ---
2, 2013)
Q: Philippine Health Care Providers, Inc. is
Parties to the contract of insurance engaged in operating a prepaid group practice
health care delivery system or a health
1. Insurer – party who assumes or accepts the risk maintenance organization (HMO) to take care of
of loss and undertakes for a consideration to the sick and disabled persons enrolled in the
indemnify the insured on the happening of a health care plan. Individuals enrolled in its
specified contingency or event. health care programs pay an annual
membership fee and are entitled to various
2. Insured – person in whose favor the contract is medical services provided by its duly licensed
operative and is indemnified. physicians, specialists and other professional
technical staff participating in the group
The insured is not always the person to whom practice health delivery system at a hospital or
the proceeds are paid. clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. a health
3. Assured/Beneficiary- a person designated by maintenance organization or an insurance
the terms of the policy to receive the proceeds company?
of the insurance. He may be the insured or a
third party in the contract for whose benefit the A: HMOs are not insurance business. One test that
policy is issued and to whom the loss is payable. they have applied is whether the assumption of risk
and indemnification of loss (which are elements of
Insurer an insurance business) are the principal object and
purpose of the organization or whether they are
Every corporation, partnership, or association duly merely incidental to its business. If these are the
authorized (by the Insurance Commission) to principal objectives, the business is that of
transact insurance business may be an insurer. (IC, insurance. But if they are merely incidental and
as amended by RA 10607, Sec. 6) service is the principal purpose, then the business is
not insurance.
The term “insurer” no longer includes “individuals”
under RA 10607. Hence, an individual natural Philippine Health Care Providers appears to provide
person is no longer allowed to be an insurer. insurance-type benefits to its members (with
However, it includes the following: respect to its curative medical services), but these
are incidental to the principal activity of providing
1. “Professional reinsurer” as any person,
them medical care. The "insurance-like" aspect of
partnership, association or corporation that
Philippine Health Care Providers’ business is
transacts solely and exclusively reinsurance
miniscule compared to its noninsurance activities.
business in the Philippines.
Therefore, since it substantially provides health
2. “Mutual Insurance Companies”. The law also
care services rather than insurance services, it
provides for the procedure for mutualization of
cannot be considered as being in the insurance
domestic stock life insurance companies. A new
business. (Philippine Health Care Providers, Inc., v.
provision on RA 10607 is on demutualization or
Commissioner of Internal Revenue, G.R. No. 167330,
conversion of mutual insurance companies into
September 18, 2009)
stock corporations. (IC, as amended by RA
10607, Sec. 280)
Persons who may be insured (2000 Bar)

77
 MERCANTILE LAW
Anyone except a public enemy may be insured. (IC, insurance is valid even without such consent. (IC,
Sec. 7) Sec. 10)

A public enemy is a nation at war with the Effect of death of policy’s original owner
Philippines and every citizen or subject of such
nation. It does not include mobs, thieves or robbers. All rights, title and interest in the policy of insurance
(Bouvier’s Law Dictionary) taken out by an original owner on the life or health
of the person insured shall automatically vest in the
NOTE: If majority of the stockholders of the latter upon the death of the original owner, unless
respondent corporation Christern, Huenefeld and otherwise provided for in the policy. (IC, Sec. 3)
Co., Inc. (CHCI) were German subjects who became
an enemy corporation upon the outbreak of the war NOTE: Prior to the effectivity of the Insurance Code
between the United States and Germany, it stands to of 2013, the term used was “minor” instead of “the
reason means that an insurance policy ceases to be person insured.” A minor cannot enter into any
allowable as soon as an insured becomes a public contract of insurance with any insurance company.
enemy. The respondent CHCI having become an
enemy corporation on December 10, 1941, the Games of chances cannot be insured
insurance policy issued in its favor on October 1,
1941, by a Philippine corporation had ceased to be An insurance for or against the drawing of any
valid and enforceable, and since the insured goods lottery, or for or against any chance or ticket in a
were burned after December 10, 1941, and during lottery drawing a prize is not authorized. (IC, Sec. 4)
the war, the respondent CHCI was not entitled to
any indemnity under said policy from Filipinas Void stipulations in an insurance contract
Compaña de Seguros (FCS). However, elementary
rules of justice (in the absence of specific provision Every stipulation in an insurance contract:
in the Insurance Law) require that the premium 1. For the payment of loss whether the person
paid by the respondent CHCI for the period covered insured has or does not have any insurable
by its policy from December 11, 1941, should be interest in the subject-matter of insurance, or
returned by FCS. (Filipinas Compaña de Seguros v. 2. That the policy shall be received as proof of
Christern, Huenefeld and Co., Inc., G.R. No. L- such interest, and
2294 May 25, 1951) 3. Every policy executed by way of gaming or
wagering. (ICC, Sec. 25)
Subject matter of a contract of insurance
NOTE: The Insurance Code provides that a policy
Anything having an appreciable pecuniary value, may declare that a violation of specified provisions
which is subject to loss or deterioration or of which thereof shall avoid it. Thus, in fire insurance policies,
one may be deprived so that his pecuniary interest which contain provisions that if the claim be in any
is or may be prejudiced. respect fraudulent or if any false declaration be
made or used in support thereof, all the benefits
Event or peril insured against under the policy, shall be forfeited, a fraudulent
discrepancy between the actual loss and that
It is any contingent or unknown event, whether past claimed in the proof of loss voids the insurance
or future, which may damnify a person having an policy. Mere filing of such a claim will exonerate the
insurable interest, or create a liability against him insurer. (United Merchants Corporation vs. Country
subject to the provisions of Chapter I of the Bankers Insurance Corporation, G.R. No. 198588, July
Insurance Code. (IC, Sec. 3) 11, 2012)

Consent of spouse not necessary ELEMENTS OF CONTRACT OF INSURANCE

The consent of the spouse is not necessary for the SPEAR:

validity of an insurance policy taken out by a 1. Scheme to distribute losses – Such assumption of
married person on his or her life or that of his or her risk is part of a general scheme to distribute
children. (IC, Sec. 3) actual losses among a large group or substantial
number of persons bearing a similar risk.
Consent of the person insured is not essential to 2. Payment of premium – As consideration for the
the validity of the policy. insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
So long as it could be proved that the insured has an insurance fund.
insurable interest at the inception of the policy, the

78
 INSURANCE CODE
3. Existence of insurable interest – The insured An aleatory contract is a contract where one or
possesses an interest of some kind susceptible both of the parties reciprocally bind themselves
of pecuniary estimation, known as “insurable to give or do something upon the happening of
interest.” an event which is uncertain, or which is to occur
4. Assumption of Risk – The insurer assumes that at an indeterminate time. (NCC, Art. 2010)
risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of 4. Unilateral – It imposes legal duties only on the
loss through the destruction or impairment of insurer who promises to indemnify in case of
that interest by the happening of designated loss.
peril.
It is executed as to the insured after the payment
NOTE: The inherent uncertainty of events is of the premium, and executory on the part of the
normally described in terms of risk. A contract insurer in the sense that it is not executed until
possessing only the last three elements enumerated payment for a loss.
above is a risk-shifting device, but NOT a contract of
insurance which is a risk-distributing device. (De 5. Conditional – It is subject to conditions, the
Leon, 2006) principal one of which is the happening of the
event insured against.
Consequently, however, the existence of insurance
could have the perverse effect of increasing the 6. Contract of indemnity – Recovery is
probability of loss. This is when the insured, having commensurate with the amount of the loss
in mind the indemnification for loss or damage suffered.
caused by the happening of the event insured
against, would have reduced incentive to take steps GR: The insurer promises to make good only
to protect himself or his property, subject of the loss of the insured.
insurance. This phenomenon is called moral hazard
(ibid). XPN: The principle is not applicable to life and
accident insurance where the result is death
CHARACTERISTICS AND NATURE OF because life is not capable of pecuniary
AN INSURANCE CONTRACT estimation. The only situation where the
principle of indemnity is applicable to life
Characteristics of an insurance contract insurance is when the interest of a person
insured is capable of exact pecuniary
1. Consensual – It is perfected by the meeting of the measurement. An example would be in a case
minds of the parties as to the object, cause and where a creditor insures the life of his debtor to
consideration of the insurance contract. There the extent of the latter’s debt to the former.
should be acceptance of the application for
insurance. 7. Personal – Each party having in view the
character, credit and conduct of the other. The
2. Voluntary – The parties may incorporate such law presumes that the insurer considered the
terms and conditions as they may deem personal qualifications of the insured in
convenient: Provided they do not contravene approving the insurance application. (Sundiang
any provision of law and are not opposed to Sr. & Aquino, 2014)
public policy, law, morals, good customs, or
public order. 8. Property – Since insurance is a contract, it is
property in legal contemplation.
GR: The taking out of an insurance contract is
not compulsory. 9. Risk-distributing device – Insurance serves to
distribute the risk of economic loss among as
XPN: Liability insurance may be required by law many as possible of those who are subject to the
in certain instances (E.g. compulsory motor same kind of loss. By paying a pre-determined
vehicle liability insurance, or employees under amount into a general fund out of which
Labor Code, or as a condition to granting a payment will be made for an economic loss of a
license to conduct a business or calling affecting defined type, each member contributes to a
the public safety or welfare). small degree toward compensation for losses
suffered by any member of the group. This
3. Aleatory – The liability of the insurer depends broad sharing of economic risk is the principle
upon some contingent event. of risk-distribution. (Sundiang Sr. & Aquino,
2014)

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 MERCANTILE LAW
10. Onerous – There is a valuable consideration Q: Carlo and Bianca met in the La Boracay
called the premium. festivities. Immediately, they fell in love with
each other and got married soon after. They
CLASSES OF INSURANCE have been cohabiting blissfully as husband and
wife, but they did not have any offspring. As the
1. Life insurance years passed by, Carlo decided to take out an
a. Individual life insurance on Bianca’s life for P1 million with
b. Group life him as sole beneficiary, given that he did not
c. Industrial life have a steady source of income and he always
2. Non-Life Insurance depended on Bianca both emotionally and
a. Marine financially. During the term of the insurance,
b. Fire Bianca died of what appeared to be a mysterious
c. Casualty cause so that which led Carlo to immediately
3. Contracts of suretyship or bonding. requested for an autopsy to be conducted. It was
4. Compulsory Motor Vehicle Liability Insurance established that Bianca was transgender all
5. Microinsurance along – a fact unknown to Carlo. Can Carlo claim
the insurance benefit? (2014 Bar)
INSURABLE INTEREST
A: YES, Carlo can claim the insurance benefit. He
An insurable interest is that interest which a person had insurable interest on Bianca’s life under Section
is deemed to have in the subject matter insured, 10(b) of the Insurance Code as the problem states
where he has a relation or connection with or that Carlo “always depended on Bianca both
concern in it, such that the person will derive emotionally and financially.” The insurable interest
pecuniary benefit or advantage from the upon the life of another under the aforesaid
preservation of the subject matter insured and will provision need not be based on kinship or legal
suffer pecuniary loss or damage from its obligation to give support. The fact that their
destruction, termination, or injury by the happening marriage may be void is irrelevant.
of the event insured against. (Violeta R. Lalican vs.
The Insular Life Assurance Company Limited, G.R. No. Insurable interest in life insurance vs. Insurable
183526, August 25, 2009) interest in property insurance (2002 Bar)

NOTE: The existence of insurable interest is a LIFE PROPERTY

matter of public policy and is not susceptible to the GR: Every Limited to the
principle of estoppel. The existence of an insurable person has an actual value of
interest gives a person the legal right to insure the unlimited the property
subject matter of the policy of insurance (ibid). insurable
interest in his
Mere hope or expectancy is not insurable own life

A mere contingent or expectant interest in anything, XPN: Where life

not founded on an actual right to the thing, nor upon As to extent insurance is
any valid contract for it, is not insurable. (ICC, Sec. taken out by a
16) creditor on the
life of the
When does a person have insurable interest? debtor,
insurable
GR: A person is deemed to have an insurable interest is
interest in the subject matter insured when a person limited to the
has a relation or connection with or concern in the amount of debt
subject matter, such that he will derive pecuniary Must exist at the GR: Must exist
benefit or advantage from its preservation and will time the policy both at the time
suffer pecuniary loss from its destruction or injury takes effect and the policy takes
by the happening of the event insured against. When must
need not exist effect and the
insurable
thereafter. (IC, time of loss, but
XPN: To have an insurable interest in the life of a interest
Sec. 19) need not exist in
person, the expectation of benefit from the exist
the period in
continued life of that person need not necessarily be between. (Sec. 19,
of pecuniary nature. (De Leon, 2010) ibid)

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 INSURANCE CODE
an alienation of
XPN: Secs. 21-24; the thing insured.
25, ibid. (Sec. 24, ibid)

1. A change in 5. Every
interest in a thing stipulation in a
insured, after the policy of
occurrence of an insurance for the
injury which payment of loss
results in a loss, whether the
does not affect person insured
the right of the has or has not
insured to any interest in
indemnity for the the property
loss. (Sec. 21, insured, or that
ibid) the policy shall
be received as
2. A change of proof of such
interest in one or interest, and
more several every policy
distinct things, executed by way
separately of gaming or
insured by one wagering, is void.
policy, does not (Sec. 25, ibid)
avoid the The beneficiary The beneficiary
insurance as to need not have must have
the others. (Sec. insurable insurable
22, ibid) interest over the interest over the
life of the thing insured.
3. A change on insured if the
interest, by will insured himself
or succession, on secured the
the death of the As to the policy.
insured, does not beneficiary’
avoid an s interest However, if the
insurance; and life insurance
his interest in the was obtained by
insurance passes the beneficiary,
to the person the latter must
taking his have insurable
interest in the interest over the
thing insured. life of the
(Sec. 23, ibid) insured.
(De Leon, 2010; Sundiang Sr. & Aquino, 2014)
4. A transfer of
interest by one of Existence of insurable interest in life and
several partners, property insurance
joint owners, or
owners in For both life and property insurance, the insurable
common, who interest is required to exist at the time of perfection
are jointly of the policy. For property insurance, the insurable
insured, to the interest must also exist at the time of loss, however,
others, does not in case of life insurance, the insurable interest need
avoid an to exist only at the time of perfection and not
insurance even thereafter. (IC, Sec. 19)
though it has
been agreed that Change of beneficiary
the insurance
shall cease upon

81
 MERCANTILE LAW
GR: The insured shall have the right to change the beneficiary, whether or not the beneficiary has
beneficiary he designated in the policy an insurable interest in the life of the insured
subject to the limits under Articles 739 and
XPN: If the insured expressly waived this right in 2012 of the New Civil Code. (De Leon, 2010)
the said policy.
Q: X is the common-law wife of Y. Y loves X so
Notwithstanding the foregoing, in the event the much that he took out a life insurance on his own
insured does not change the beneficiary during his life and made her the sole beneficiary. Y did this
lifetime, the designation shall be deemed to ensure that X will be financially comfortable
irrevocable. (IC, Sec. 11) when he is gone. Upon the death of Y, who should
be entitled to the proceeds? (2012 Bar)
NOTE: Under Sec. 64 of the Family Code, the
innocent spouse is allowed to revoke the A: X as sole beneficiary under the life insurance
designation of the other spouse as irrevocable policy on the life of Y will be entitled to the proceeds
beneficiary after legal separation. of the life insurance.

Irrevocable designation of the beneficiary to the Q: On July 3, 1993, Delia Sotero (Sotero) took out
assignment of the policy (2005 Bar) a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
The insured cannot assign the policy if the Creencia Aban (Aban) her niece, as her
designation of the beneficiary is irrevocable. The beneficiary. Ilocos Life issued Policy No. 747,
irrevocable beneficiary has a vested right. with a face value of P100,000, in Sotero’s favor
(Sundiang Sr. & Aquino, 2014) on August 30,1993, after the requisite medical
examination and payment of the premium.
Effects of Irrevocable Designation of a
Beneficiary: On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996,
a. The beneficiary designated in a life insurance Ilocos Life conducted an investigation into the
contract cannot be changed without the consent claim and came out with the following findings:
of the beneficiary. (Gercio v. Sun Life Assurance
of Canada, 48 Phil. 53, 28 September 1925) 1. Sotero did not personally apply for
b. A new beneficiary cannot be added to the insurance coverage, as she was illiterate.
irrevocably designated beneficiary for this 2. Sotero was sickly since 1990.
would in effect reduce the latter’s vested rights. 3. Sotero did not have the financial capability
(Go v. Redfern, 72 Phil. 71, 25 April 1941) to pay the premium on the policy.
c. The irrevocably designated beneficiary may 4. Sotero did not sign the application for
obtain a policy loan to the extent stated in the insurance
schedule of values attached to the policy. 5. Alban was the one who filed the insurance
(Gercio v. Sun Life Assurance of Canada, 48 Phl. application and designated herself as the
53, 28 September 1925) beneficiary.
d. The insured cannot take the cash surrender
value assign or even borrow on said policy For the above reasons and claiming fraud, Ilocos
without the consent of the beneficiary. Life denied Aban’s claim on April 16, 1997 but
refunded the premium paid on the policy. May
IN LIFE/ HEALTH Sotero validly designate her niece as
beneficiary? (2014 Bar)
Two general classes of life policies
A: YES. Sotero may validly designate her niece as
1. Insurance upon one’s life – are those taken out beneficiary. The same is not prohibited under the
by the insured upon his own life (IC, Section Insurance Code or any other laws.
10[a]) for the benefit of himself, or of his estate,
in case it matures only at his death, for the 2. Insurance upon life of another – are those taken
benefit of third person who may be designated out by the insured upon the life of another.
as beneficiary. Where a person names himself beneficiary in a
policy he takes on the life of another, he must
The question of insurable interest is immaterial have insurable interest in the life of the latter
where the policy is procured by the person (De Leon, 2010). This class includes the
whose life is insured. A person who insures his following:
own life can designate any person as his a. His spouse and of his children.

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 INSURANCE CODE
b. Any person on whom he depends wholly or 3. Insanity of the beneficiary at the time he killed
in part for education or support, or in the insured.
whom he has a pecuniary interest.
c. Of any person under a legal obligation to Q: Juan de la Cruz was issued Policy No. 8888 of
him for the payment of money, or the Midland Life Insurance Co. on a whole life
respecting property or services, of which plan for P20,000 on August 19, 1989. Juan is
death or illness might delay or prevent the married to Cynthia with whom he has three
performance. legitimate children. He, however, designated
d. Of any person upon whose life any estate or Purita, his common-law wife, as the revocable
interest vested in him depends (IC, Sec. 10). beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three
NOTE: In paragraph (a) of Section 10 of the (3) years later, Juan died. Purita filed her claim
Insurance Code, mere relationship is sufficient for the proceeds of the policy as the designated
while the rest (pars. b, c, and d) requires pecuniary beneficiary therein. The widow, Cynthia, also
interest. Thus, the interest of the creditor over the filed a claim as the legal wife. To whom should
life of the debtor ceases upon full payment. the proceeds of the insurance policy be
(Sundiang Sr. & Aquino, 2009) awarded? (1998 Bar)

Persons prohibited from being designated as A: The estate is entitled to claim for the proceeds of
beneficiaries (1998 Bar) the insurance policy. As a general rule, the insured
may designate anyone he wishes to be his/her
Under the Article 739 of the New Civil Code, the beneficiary. However, Art. 2012 of the Civil Code,
following are prohibited designation of which applies suppletorily to the Insurance Code,
beneficiaries: provides that any person who is forbidden from
receiving any donation under Art. 739 cannot be
1. Those made between persons who were guilty named beneficiary of a life insurance policy by the
of adultery or concubinage at the time of person who cannot make any donation to him,
donation. Finding of guilt in a civil case is according to said article. Art. 739 specifically bars
sufficient. the donations as between persons who were guilty
2. Those made between persons found guilty of of adultery or concubinage. Since Purita is a
the same criminal offense, in consideration common-law wife of Juan, she falls squarely in to
thereof. this category therefore she is disqualified to receive
3. Those made to a public officer or his wife, insurance proceeds and when this happens, the
descendants or ascendants by reason of his estate of the deceased is the one entitled to the
office. proceeds (Insular Life Assurance Company, Ltd. vs.
Capronia Ebrado, supra).
The designation of the above-enumerated persons
is void but the policy is binding. The estate will get Q: Loreto designated Eva, his common-law wife,
the proceeds. (Sundiang Sr. & Aquino, 2009) and illegitimate children as beneficiaries in his
life insurance policies. Loreto was killed and
Beneficiary willfully brought about the death of Eva was the prime suspect in his death. The
the insured (2008 Bar) legitimate wife and children of Loreto asked for
the insurance proceeds contending that
GR: The interest of a beneficiary in a life insurance illegitimate family is disqualified from being
policy shall be forfeited when the beneficiary is the beneficiaries and that the insurance benefits
principal, accomplice, or accessory in willfully must redound to the benefit of the estate of
bringing about the death of the insured. In such a Loreto. Will the claim of the legitimate family
case, the share forfeited shall pass on to the other prosper?
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be A: NO. The insurance proceeds shall be applied
paid in accordance with the policy contract. If the exclusively to the proper interest of the person in
policy contract is silent, the proceeds shall be paid whose name or for whose benefit it is made unless
to the estate of the insured. (Sec. 12, ibid) otherwise specified in the policy.

XPNs: While the share of Eva must be forfeited, the

1. The beneficiary acted in self-defense; designation of the illegitimate children as
2. The insured’s death was not intentionally beneficiaries remains valid. There is no
caused (e.g., thru accident); proscription in naming illegitimate children as
beneficiaries. It is only in cases where the insured

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 MERCANTILE LAW
has not designated beneficiary or when the a stockholder, which is founded on an existing
designated beneficiary is disqualified by law to interest arising from his ownership of shares in
receive the proceeds, that the policy proceeds shall the corporation. (De Leon, 2014)
redound to the benefit of the estate of the insured.
Thus, the proceeds of the policy must be awarded to 3. An expectancy coupled with an existing interest
the illegitimate children, to the exclusion of the in that out of which the expectancy arises.
legitimate family. (Heirs of Loreto Maramag vs.
Maramag, G.R. No. 181132, June 5, 2009) NOTE: Existence of insurable interest is a
matter of public policy. Hence, the principle of
Because no legal proscription exists in naming as estoppel cannot be invoked. (Sundiang Sr. &
beneficiaries, children of illicit relationships by the Aquino, 2014)
insured, the shares of the common-law spouse in
the insurance proceeds, whether forfeited by the Measure of insurable interest in property (2000
Court in view of the prohibition on donation under Bar)
Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance The measure of insurable interest in property is the
contracts, must be awarded to the said illegitimate extent to which the insured might be damnified by
children, the designated beneficiaries, to the loss or injury thereof (IC, Sec. 17). Insurable interest
exclusion of the legitimate heirs. (Heirs of Loreto in property does not necessarily imply a property
Maramag vs. Maramag, G.R. No. 181132, June 5, interest in, or lien upon, or possession of, the subject
2009) matter of the insurance, and neither title nor a
beneficial interest is requisite to the existence
IN PROPERTY thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
Every interest in property, whether real or liable to loss should it be injured or destroyed by the
personal, or any relation thereto, or liability in peril against which it is insured. Anyone has an
respect thereof, of such nature that contemplated insurable interest in property who derives a benefit
peril might directly damnify the insured, is from its existence or would suffer loss from its
insurable interest (IC, Sec. 13). destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
Insurable interest in property may consist of the 2006)
following (1991 Bar):
A common carrier or depository’s extent of
1. An existing interest – The existing interest in the insurable interest in a thing held by him
property may be legal or equitable title.
A carrier or depositary has an insurable interest in
Examples of insurable interest arising from a thing held by him as such, to the extent of his
legal title: liability but not to exceed the value thereof (IC, Sec.
a. Trustee, as in the case of the seller of 15) because the loss of the thing by the carrier or
property not yet delivered; depository may cause liability against him to the
b. Mortgagor of the property mortgaged; extent of its value.
c. Lessor of the property leased (De Leon,
supra). Change of interest in any part of a thing insured

Examples of insurable interest arising from “Change of interest” contemplated by law is an

equitable title: absolute transfer of the insured’s entire interest in
a. Purchaser of property before delivery or the property insured to one not previously
before he has performed the conditions of interested or insured. (Perez, 2006)
the sale;
b. Mortgagee of property mortgaged; GR: A change of interest in any part of a thing
c. Mortgagor, after foreclosure but before the insured unaccompanied by a corresponding change
expiration of the period within which in interest in the insurance suspends the insurance
redemption is allowed (De Leon, 2010). to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
2. An inchoate interest founded on an existing same person. (Sec. 20; Sec.58, ibid)
interest.
XPNs:
Example: A stockholder has an inchoate interest 1. When there is a prohibition against alienation
in the property of the corporation of which he is or change of interest without the consent of the

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 INSURANCE CODE
insurer in which case the policy is not merely to exceed the amount of the policies issued. (Perez,
suspended but avoided. (Sundiang & Aquino, 2006)
2014., citing Curtis vs. Girard Fire and Marine
Ins., 11 SE 3, 190 Ga. 954) A provision in the policy that prohibits double
2. In life, accident, and health insurance. (IC, Sec. insurance is valid. However, in the absence of such
20) prohibition, double insurance is allowed. (ibid)
3. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss Nature of the liability of the several insurers in
does NOT affect the right of the insured to double insurance (2005 Bar)
indemnity for loss. (IC, Sec. 21)
4. A change of interest in one or more distinct A: In double insurance, the insurers are considered
things, separately insured by one policy does as co-insurers. Each one is bound to contribute
NOT avoid the insurance as to the others. (IC, ratably to the loss in proportion to the amount for
Sec. 22) which he is liable under his contract. This is known
5. A change of interest by will or succession, on the as the “principle of contribution” or “contribution
death of the insured, does NOT avoid an clause”. (IC, Sec. 96 [e])
insurance; and his interest in the insurance
passes to the person taking his interest in the Over insurance
thing insured. (IC, Sec. 23)
6. A transfer of interest by one of several partners, There is over insurance whenever the insured
joint owners, or owners in common, who are obtains a policy in an amount exceeding the value of
jointly insured, to the others does NOT avoid an his insurable interest. (Perez, 2006)
insurance even though it has been agreed that
the insurance shall cease upon an alienation of Double Insurance vs. Over Insurance
the thing insured. (IC, Sec. 24)
7. When the policy is so framed that it will inure to DOUBLE INSURANCE OVER INSURANCE
the benefit of whomsoever, during the There may be no over When the amount of
continuance of the risk, may become the owner insurance as when the the insurance is
of the interest insured. (IC, Sec. 57) sum total of the beyond the value of the
amounts of the policies insured’s insurable
DOUBLE INSURANCE AND OVER INSURANCE issued does not exceed interest.
the insurable interest
Double insurance of the insured.

Double insurance exists where the same person is There are two or more There may be only one
insured by several insurers separately, in respect to insurers insuring the insurer, with whom the
the same subject and interest. (Sec. 95, ibid) same subject matter. insured takes
insurance beyond the
Requisites of double insurance (STRIP) value of his insurable
interest.
1. Subject matter is the same
2. Two or more insurers insuring separately Rules when the insured in a policy other than
3. Risk or peril insured against is the same life is over insured by double insurance
4. Interest insured is the same
5. Person insured is the same 1. The insured, unless the policy otherwise
provides, may claim payment from the insurers
There is no double insurance even though two in such order as he may select, up to the amount
policies were both issued over the same subject which the insurers are severally liable under
matter and both covered the same peril insured their respective contracts;
against if the two policies were issued to two 2. Where the policy under which the insured
different entities. (Malayan Insurance Co. vs. claims is a valued policy, any sum received by
Philippine First Insurance Co., G.R. No. 184300, July him under any other policy shall be deducted
11, 2012) from the value of the policy without regard to
the actual value of the subject matter insured;
Double insurance is not prohibited by law 3. Where the policy under which the insured
claims is an unvalued policy, any sum received
It is not contrary to law and hence, in case of double by him under any policy shall be deducted
insurance, the insurers may still be made liable up against the full insurable value, for any sum
to the extent of the value of the thing insured but not received by him under any policy;

85
 MERCANTILE LAW
4. Where the insured receives any sum in excess a Special Risk Insurance Policy (SR Policy) with
of the valuation in the case of valued policies, or Malayan Insurance Co., Inc., (Malayan) for the
of the insurable value in the case of unvalued amount of P1,000,000.00. Is there is double
policies, he must hold such sum in trust for the insurance (as prohibited in Section 5 of the SR
insurers, according to their right of policy between Malayan and Reputable) so as to
contribution among themselves. preclude Philippine First from claiming
5. Each insurer and the other insurers, to indemnity from Malayan?
contribute ratably to the loss in proportion to
the amount for which he is liable under his A: NO. The interest of Wyeth over the property
contract. (Sec. 96, ibid) subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
Additional or other insurance clause (2008 Bar) policy issued by Philippines First was in
consideration of the legal and/or equitable interest
A clause in the policy that provides that the policy of Wyeth over its own goods. On the other hand,
shall be void if the insured procures additional what was issued by Malayan to Reputable was over
insurance without the consent of the insurer. the latter’s insurable interest over the safety of the
(Pioneer Insurance and Surety Corp vs. Yap, G.R. No. goods, which may become the basis of the latter’s
L-36232, December 19, 1974) liability in case of loss or damage to the property
and falls within the contemplation of Section 15 of
The insurer may insert an “other insurance clause” the Insurance Code. Therefore, even though the two
which will prohibit double insurance. The rationale concerned insurance policies were issued over the
is to prevent the danger that the insured will over same goods and cover the same risk, there arises no
insure his property and thus avert the possibility of double insurance since they were issued to two
perpetration of fraud (ibid). It is lawful and different persons/entities having distinct insurable
specifically allowed under Sec. 75 of the Insurance interests. Necessarily, over insurance by double
Code which provides that “a policy may declare that insurance cannot likewise exist. (Malayan Insurance
a violation or a specified provision thereof shall Co., Inc., v. Philippine First Insurance Co., Inc. and
avoid it, otherwise the breach of an immaterial Reputable Forwarder Services, Inc., G.R. No. 184300,
provision does not avoid it.” July 11, 2012)

Waiver of violation Absence of notice of existence of other insurance

constitutes fraud
When the insurer, with the knowledge of the
existence of other insurances, which the insurer When the insurance policy specifically requires that
deemed a violation of the contract, preferred to notice should be given by the insured of the
continue the policy, its action amounted to a waiver existence of other insurance policies upon the same
of annulment of the contract. (Perez, 2006 citing property, the total absence of such notice nullifies
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co., the policy. Such failure to give notice of the
G.R. No. L-33131, December 13, 1930) existence of other insurance on the same property
when required to do so constitutes deception and it
Q: Wyeth Philippines, Inc. (Wyeth) procured a could be inferred that had the insurer known that
marine policy from Philippines First Insurance there were many other insurance policies on the
Co., Inc. (Philippines First) to secure its interest same property, it could have hesitated or plainly
over its own products while the same were desisted from entering into such contract. (Perez,
being transported or shipped in the Philippines. 2006)
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services, Cancellation of policy of insurance by reason of
Inc. (Reputable). Under the contract, Reputable over insurance
undertook to answer for all risks with respect to
the goods and shall be liable to Wyeth, for the Sec. 64 of the Insurance Code of 2013 provides that
loss, destruction, or damage of the upon discovery of other insurance coverage that
goods/products due to any and all causes makes the total insurance in excess of the value of
whatsoever, including theft, robbery, flood, the property insured, the insurer may cancel such
storm, earthquakes, lightning, and other force policy of insurance; provided there is prior notice
majeure while the goods/products are in transit and such circumstance occurred after the effective
and until actual delivery to the customers, date of the policy.
salesmen, and dealers. The contract also
required Reputable to secure an insurance Q: The Peninsula Insurance Company offered to
policy on Wyeth’s goods. Thus, Reputable signed insure Francis' brand new car against all risks in

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 INSURANCE CODE
the sum of P1 Million for 1 year. The policy was to the benefit of the other. The same is not open to
issued with the premium fixed at P60,000.00 objection that there is double insurance (RCBC vs.
payable in 6 months. Francis only paid the first CA, 289 G.R. Nos. 128833-34, 128866, April 20, 1998;
two months installments. Despite demands, he IC, Sec. 8).
failed to pay the subsequent installments. Five
months after the issuance of the policy, the Extent of insurable interest of mortgagor and
vehicle was carnapped. Francis filed with the mortgagee (1999 Bar)
insurance company a claim for its value.
However, the company denied his claim on the 1. Mortgagor – The mortgagor of property, as
ground that he failed to pay the premium owner, has an insurable interest to the extent of
resulting in the cancellation of the policy. Can its value even though the mortgage debt equals
Francis recover from the Peninsula Insurance such value.
Company? (2006 Bar) 2. Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged property to
A: YES. As a general rule, no policy is binding unless the extent of the debt secured; such interest
the premiums thereof have been paid. However, one continues until the mortgage debt is
of the exceptions is when there is an agreement extinguished. (Sundiang Sr. & Aquino, 2014)
allowing the insured to pay the premium in
installments and partial payment has been made at NOTE: In case of an insurance taken by the
the time of loss. In the case at hand Francis already mortgagee alone and for his benefit, the mortgagee,
paid two installments at the time of the loss and as after recovery from the insurer, is not allowed to
such may recover on the policy (Makati Tuscany retain his claim against the mortgagor but it passes
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, by subrogation to the insurer to the extent of the
1992). Furthermore, the contention of the insurer insurance money paid. (De Leon, 2010)
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no Q: To secure a loan of P10 million, Mario
policy of insurance shall be cancelled except upon mortgaged his building to Armando. In
notice thereof to the insured. (IC, Sec. 64) accordance with the loan arrangements, Mario
had the building insured with First Insurance
MULTIPLE OR SEVERAL INTERESTS Company for P10 million, designating Armando
ON SAME PROPERTY as the beneficiary. Armando also took an
insurance on the building upon his own interest
Instances where more than one insurable with Second Insurance Company for P5 million.
interest may exist in the same property The building was totally destroyed by fire, a
peril insured against under both insurance
1. In trust, both trust or and trustee have policies. It was subsequently determined that
insurable interest over the property in trust. the fire had been intentionally started by Mario
2. In a corporation, both the corporation and its and that in violation of the loan agreement, he
stockholders have insurable interest over the had been storing inflammable materials in the
assets. building.
3. In partnership both the firm and partners have
insurable interest over its assets. a. How much, if any, can Armando recover
4. In assignment both the assignor and assignee from either or both insurance companies?
have insurable interest over the property b. What happens to the P10 million debt of
assigned. Mario to Armando? Explain. (2010 Bar)
5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease. A:
6. In mortgage, both the mortgagor and a. Armando can receive P5 million from Second
mortgagee have insurable interest over the Insurance Company. As mortgagee, he had an
property mortgaged. insurable interest in the building (Panlileo v.
Cosio, 97 Phil. 919 (1955). Armando cannot
Insurable interest of mortgagor and mortgagee collect anything from First Insurance Company.
in case of a mortgaged property are NOT the First Insurance Company since the latter is not
same (1999, 2010 Bar) liable for the loss of the building. First, it was
due to a willful act of Mario, who committed
Each has an insurable interest in the property arson (Section 87 of the Insurance Code; East
mortgaged and this interest is separate and distinct Furnitures, Inc. v. Globe & Rutgers Fire Insurance
from the other. Therefore, insurance taken by one in Company, 57 Phil. 576 (1932)). Second, fire
his name only and in his favor alone does not inure insurance policies contain a warranty that the

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 MERCANTILE LAW
insured will not store hazardous materials mortgagor under a contract duty to insure for the
within the insured premises. Mario breached mortgagee’s benefit, in which the mortgagee
this warranty when he stored inflammable acquires an equitable lien upon the proceeds (ibid.).
materials in the building (Young v. Midland
Textile Insurance Company, 30 Phil. 617 (1915). The following are the effects if the insurance is
These two factors exonerate First Insurance procured by mortgagor for benefit of mortgagee, or
Company from liability to Armando as policy assigned to mortgagee:
mortgagee even though it was Mario who
committed them. (Sec. 8 of the Insurance Code) 1. The contract is deemed to be upon the interest
b. Since Armando would have collected P5 million of the mortgagor; hence he does not cease to be
from Second Insurance Company, this amount party to the contract;
should be considered as partial payment of the 2. Any act of the mortgagor prior to the loss, which
loan. Armando can only collect the balance of P5 would otherwise avoid the insurance affects the
million. Second Insurance Company can recover mortgagee even if the property is in the hands
from Mario the amount of P5 million it paid, of the mortgagee;
because it became subrogated to the rights of 3. Any act which under the contract of insurance
Armando. is to be performed by the mortgagor may be
performed by the mortgagee with the same
Standard or union mortgage clause effect;
4. In case of loss, the mortgagee is entitled to the
It is a clause that states that the acts of the proceeds to the extent of his credit at the time
mortgagor do not affect the mortgagee. The purpose of loss and
of the clause is to make a separate and distinct 5. Upon recovery by the mortgagee to the extent
contract of insurance on the interest of the of his credit, the debt is extinguished. (ibid.,
mortgagee. (De Leon, 2010) citing IC, Sec. 8)

Open or loss-payable mortgage clause NOTE: The rule on subrogation by the insurer to the
right of the mortgagee does not apply in this case.
It is a clause which provides for the payment of loss,
if any, to the mortgagee as his interest may appear Assignment of policy to mortgagee is not a
and under it, the acts of the mortgagor affect the payment
mortgagee (ibid).
The assignment is merely to afford the mortgagee a
In a policy obtained by the mortgagor with loss greater security for the settlement of the
payable clause in favor of the mortgagee as his mortgagor’s obligation and should not be construed
interest may appear, the mortgagee is only a as payment in just the same way that delivery of
beneficiary under the contract, and recognized as negotiable instruments does not constitute
such by the insurer but not made a party to the payment until the proceeds are realized or
contract itself. This kind of policy covers only such collected. (Perez, 2006)
interest as the mortgagee has at the issuance of the
policy. (Sundiang Sr. & Aquino, 2014, Geagonia v. CA, Effects of “mortgage redemption” insurance
supra) procured by the mortgagor

The mortgagee may be made a beneficial payee A “mortgage redemption insurance” is simply a kind
through any of the following: of life insurance procured by the mortgagor, with
the mortgagee as beneficiary, up to the extent of the
1. He may become the assignee of the policy with mortgage indebtedness. Its rationale is to give
the consent of the insurer protection to both the mortgagee and the
2. He may be the mere pledgee without such mortgagor. In case the mortgagor-insured dies, the
consent proceeds of such insurance will be applied to the
3. A rider making the policy payable to the payment of the mortgage debt to the mortgagee,
mortgagee “as his interest may appear” may be thereby relieving the heirs of the mortgagor of the
attached burden of paying the debt. (Great Pacific Assur. Corp.
4. A “standard mortgage clause” containing a v. Court of Appeals, et. al., G.R. No. 113899, October
collateral independent contract between the 13, 1999)
mortgagee and the insurer may be attached
PERFECTION OF THE INSURANCE CONTRACT
The policy, though, by its terms payable absolutely
to the mortgagor; may have been procured by a Policy of insurance

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 INSURANCE CODE
It is the written instrument in which the contract of 5. Interest of the insured in the property if he is
insurance is set forth (IC, Sec. 49.). It is the written not the absolute owner;
document embodying the terms and stipulations of 6. Risk insured against; and
the contract of insurance between the insured and 7. The period during which the insurance is to
insurer. continue. (IC, Sec. 51)

The policy is not necessary for the perfection of the Rider

contract. (Sundiang Sr. & Aquino, 2014)
An attachment to an insurance policy that modifies
Form of an insurance contract the conditions of the policy by expanding or
restricting its benefits or excluding certain
1. The policy shall be in printed form which may conditions from the coverage. (Black’s Law
contain blank spaces to be filled in; Dictionary)
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of Riders are not binding on the insured unless the
insurance and which is pasted or attached to descriptive title or name thereof is mentioned and
said policy is not binding on the insured, unless written on the blank spaces provided in the policy.
the descriptive title or name of the rider, clause, It should be countersigned by the insured or owner
warranty or endorsement is also mentioned unless he was the one who applied for the same. (IC,
and written on the blank spaces provided in the Sec. 50)
policy.
3. Unless applied for by the insured or owner, any Cover notes
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned Persons who wish to be insured may get protection
by the insured or owner. before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
NOTE: Notwithstanding the foregoing, the policy insurer shall be deemed an insurance contract as
may be in electronic form subject to the pertinent contemplated under Section 1(1) of the Insurance
provisions of Republic Act No. 8792, otherwise Code subject to the following rules:
known as the ‘Electronic Commerce Act’ and to such
rules and regulations as may be prescribed by the 1. The cover note shall be issued or renewed only
Commissioner. (IC, Sec. 50) upon prior approval of the Insurance
Commission;
Types of policy of insurance 2. The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
1. Open – one in which the value of the thing issuance;
insured is not agreed upon, and the amount of 3. No separate premium (separate from the policy
the insurance merely represents the insurer’s or main contract) is required for the cover note;
maximum liability. The value of such thing 4. The cover note may be canceled by either party
insured shall be ascertained at the time of the upon prior notice to the other of at least seven
loss. (IC, Sec. 60) (7) days;
2. Valued – is one which expresses on its face an 5. The policy should be issued within sixty (60)
agreement that the thing insured shall be days after the issuance of the cover note;
valued at a specific sum. (IC, Sec. 61) 6. The sixty (60)-day period may be extended
3. Running – one which contemplates successive upon written approval of the Insurance
insurances, and which provides that the object Commission; and
of the policy may be from time to time defined, 7. The written approval of the Insurance
especially as to the subjects of insurance, by Commission is dispensed with upon the
additional statements or indorsements. (IC, Sec. certification of the president, vice-president or
62) general manager of the insurer that the risk
involved, the values of such risks and premium
Basic contents of a policy therefor, have not as yet been determined or
established and the extension or renewal is not
1. Parties; contrary to or is not for the purpose of violating
2. Amount of insurance, except in open or running the Insurance Code or any rule
policies;
3. Rate of premium; OFFER AND ACCEPTANCE/CONSENSUAL
4. Property or life insured;
Perfection of an insurance contract

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 MERCANTILE LAW
The contract of insurance is perfected when the 2. If he pays the premium with his application, his
assent or consent is manifested by the meeting of application will be considered an offer (De Leon,
the offer and the acceptance upon the thing and the 2010).
cause which are to constitute the contract. Mere
offer or proposal is not contemplated (De Lim v. Sun DELAY IN ACCEPTANCE
Life Assurance Co., G.R. No. L-15774, November 29,
1920) The acceptance of an insurance policy must be
unconditional, but it need not be by a formal act. (De
Cognition Theory Leon, 2010)

Mere submission of the application without the Delay in acceptance of the insurance application will
corresponding approval of the policy does not result not result in a binding contract. Court cannot
in the perfection of the contract of insurance. impose upon the parties a contract if they did not
consent. However, in proper cases, the insurer may
Insurance contracts through correspondence follow be liable for tort. (Sundiang Sr. & Aquino, 2014)
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer Unreasonable delay in returning the premium
except from the time it came to his knowledge. raises the presumption of acceptance of the
(Enriquez v. Sun Life Assurance Co. of Canada, GR No. insurance application. (Gloria v. Philippine American
L-15774, Nov. 29, 1920) Life Ins. Co., CA 73 O.G. [No.37] 8660)

Where the applicant died before he received notice DELIVERY OF POLICY

of the acceptance of his application for the
insurance, there is no perfected contract. (Perez v. Delivery is not necessary in the formation of the
Court of Appeals, G.R. No. 112329, January 28, 2000) contract of insurance since the contract of insurance
is consensual. (Sundiang Sr. & Aquino, 2014).
Q: On June 1, 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21, The mere delivery of an insurance policy to
2011, the insurance company accepted the someone does not give rise to the formation of a
application and mailed, on the same day, its contract in the absence of proof that he had agreed
acceptance plus the cover note. It reached X's to be insured.
residence on August 11. On August 4, 2011, X
figured in a car accident. He died a day later. May Two types of delivery
X's heirs recover on the insurance policy? (2011
Bar) 1. Actual – delivery to the person of the insured.
2. Constructive
A: NO, since X had no knowledge of the insurer's a. By mail –If policy was mailed already and
acceptance of his application before he died. What is premium was paid and nothing is left to be
being followed in insurance contracts is what is done by the insured, the policy is
known as the “cognition theory”. considered constructively delivered if
insured died before receiving the policy.
Offer in property and liability insurance b. By agent –If delivered to the agent of the
insurer, whose duty is ministerial, or
It is the insured who makes an offer to the insurer, delivered to the agent of the insured, the
who accepts the offer, rejects it, or makes a counter- policy is considered constructively
offer. The offer is usually accepted by an insurance delivered. (De Leon, 2010)
agent on behalf of the insurer. (De Leon, 2010)
PREMIUM PAYMENT
Offer in life and health insurance
Premium
It depends upon whether the insured pays the
premium at the time he applies for insurance. It is an agreed price for assuming and carrying the
risk – that is, the consideration paid to an insurer for
1. If he does not pay the premium, his application undertaking to indemnify the insured against a
is considered an invitation to the insurer to specified peril. (De Leon, 2010)
make an offer, which he must then accept
before the contract goes into effect. The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured

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 INSURANCE CODE
from allowing a policy to elapse through a failure to 2. When there is acknowledgment in a policy of a
make premium payments. The continuance of the receipt of premium, which the law declares to be
insurer's obligation is conditional upon the conclusive evidence of payment, even if there is
payment of premiums, so that no recovery can be stipulation therein that it shall not be binding
had upon a lapsed policy, the contractual relation until the premium is actually paid. This is
between the parties having ceased. (Philippine without prejudice however to right of insurer to
Phoenix Surety & Insurance Company Vs. collect corresponding premium. (Sec. 77, ibid)
Woodworks, Inc. G.R. No. L-25317 August 6, 1979) 3. When there is an agreement allowing the
insured to pay the premium in installments and
Premium vs. Assessment partial payment has been made at the time of
loss. (Makati Tuscany Condominium Corp. v. CA,
PREMIUM ASSESSMENT G.R. No. 95546, Nov. 6, 1992)
Levied and paid to Collected to meet 4. When there is an agreement to grant the
meet anticipated actual losses insured credit extension for the payment of the
losses premium. (Art. 1306, NCC), and loss occurs
Premium is not a debt Assessment when before the expiration of the credit term. (UCPB
properly levied, unless General Insurance v. Masagana Telemart, G.R.
otherwise expressly No. 137172, Apr. 4, 20012006, 2007 Bar)
agreed, is a debt 5. When estoppel bars the insurer to invoke non-
recovery on the policy.
Acceptance of premium 6. When the public interest so requires, as
determined by the Insurance Commissioner
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace Example: In compulsory motor vehicle
period, merely assures continued effectivity of the insurance, if the policy was issued without
insurance policy in accordance with its terms. payment of premium by the vehicle owner, the
(Stoke v. Malayan Insurance Co., Inc., G.R. No. L- insurer will still be held liable. To rule
34768, February 28, 1984) otherwise would prejudice the 3rd party victim.

Payment of the premium to agent of the insurance Grace Period

company is binding on it (Malayan Insurance v.
Arnaldo G.R. No. L-67835, October 12, 1987 and In case of individual life or endowment insurance
Areola v. CA G.R. No. 95641, September 22, 1994). If and group life insurance, the policyholder is entitled
an insurance company delivers a policy to an to a grace period of either 30 days or 1 month within
insurance broker, it is deemed to have authorized which the payment of any premium after the first
him to receive the payment of the premium. (Sec. may be made. (IC, Secs. 233[a], 234[a])
306, South Sea v. CA G.R. No. 102253, June 2, 1995;
American Home Assurance v. Chua, G.R. No. 130421, In case of industrial life insurance, the grace period
June 28, 1999) is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month. (IC, Sec. 236 [a])
“Cash and carry” rule (2003 Bar)
Acknowledgment of receipt of premium
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and Acknowledgment of receipt of premium is
until the premium thereof has been paid. Any conclusive evidence of its payment, in so far as to
agreement to the contrary is void. make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
XPN: A policy is valid and binding even when there the premium is actually paid. (IC, Sec. 79)
is non-payment of premium:
When the policy contains such written
1. In case of life or industrial life policy whenever acknowledgment, it is presumed that the insurer
the grace period provision applies, or whenever has waived the condition of prepayment. It hereby
under the broker and agency agreements with creates a legal fiction of payment. The presumption
duly licensed intermediaries, a ninety (90)-day is however, extended only to the question of the
credit extension is given. No credit extension to binding effect of the policy.
a duly licensed intermediary should exceed
ninety (90) days from date of issuance of the As far as the payment of the premium itself is
policy. (IC, Sec. 77) concerned, the acknowledgment is only a prima
facie evidence of the fact of such payment. The

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 MERCANTILE LAW
insurer may still dispute its acknowledgment but Q: American Home Assurance Co. (AHAC) ,
only for the purpose of recovering the premium due issued in favor of Makati Tuscany
and unpaid. Whether payment was indeed made is Condominium Corporation insurance policies
a question of fact. for 2 years. The premiums were paid by Tuscany
on installments. The policy was again renewed,
Credit Extension however, Tuscany thereafter refused to pay the
balance of the premium. AHAC filed an action to
Under Sec. 77 as amended by RA 10607, a ninety recover the unpaid balance. Tuscany contended
(90)-day credit extension may be given whenever that payment by installment of the premiums
credit extension is given under the broker and due on an insurance policy invalidates the
agency agreements with duly licensed contract of insurance and no risk attached to the
intermediaries. The requisites are as follows: policy. The policy was never binding and valid,
and no risk attached to the policy. Is the
1. The credit extension must be provided for contention of Tuscany valid?
under the broker and agency agreements;
2. The credit extension to a duly licensed A: NO. The subject policies are valid even if the
intermediary should not exceed ninety (90) premiums were paid on installments. The records
days from date of issuance of the policy. clearly show that Tuscany and AHAC intended the
(Sundiang Sr. & Aquino, 2014) subject insurance policies to be binding and
effective notwithstanding the staggered payment of
Q: Stable Insurance Co. (SIC) and St. Peter the premiums. For 3 years, the insurer accepted all
Manufacturing Co. (SPMC) have had a long- the installment payments. Such acceptance of
standing insurance relationship with each payments speaks loudly of the insurer's intention to
other; SPMC secures the comprehensive fire honor the policies it issued to Tuscany.
insurance on its plant and facilities from SIC.
The standing business practice between them While the import of Section 77 is that
has been to allow SPMC a credit period of 90 prepayment of premiums is strictly required as
days from the renewal of the policy within which a condition to the validity of the contract, Section
to pay the premium. 78 of the Insurance Code in effect allows waiver
by the insurer of the condition prepayment by
Soon after the new policy was issued and before making an acknowledgment in the insurance
premium payments could be made, a fire gutted policy of receipt of premium as conclusive
the covered plant and facilities to the ground. evidence of payment so far as to make the policy
The day after the fire, SPMC issued a manager's binding despite the fact that premium is actually
check to SIC for the fire insurance premium, for unpaid. (Makati Tuscany Condominium Corp. vs.
which it was issued a receipt; a week later SPMC Court of Appeals G.R. No. 95546, November 6, 1992)
issued its notice of loss. SIC responded by
issuing its own manager's check for the amount Q: The Peninsula Insurance Company offered to
of the premiums SPMC had paid, and denied insure Francis' brand new car against all risks in
SPMC's claim on the ground that under the "cash the sum of PI Million for 1 year. The policy was
and carry" principle governing fire insurance, issued with the premium fixed at 160,000.00
no coverage existed at the time the fire occurred payable in 6 months. Francis only paid the first
because the insurance premium had not been two months installments. Despite demands, he
paid. Is SPMC entitled to recover for the loss failed to pay the subsequent installments. Five
from SIC? (2003, 2013 Bar) months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
A: YES. St. Peter Manufacturing Company is entitled insurance company a claim for its value.
to recover for the loss from Stable Insurance However, the company denied his claim on the
Company. Stable Insurance Company granted a ground that he failed to pay the premium
credit term to pay the premiums. This is not against resulting in the cancellation of the policy. Can
the law, because the standing business practice of Francis recover from the Peninsula Insurance
allowing St. Peter Manufacturing Company to pay Company? (2006 Bar)
the premiums after 60 or 90 days, was relied upon
in good faith by SPMC. Stable Insurance Company is A: YES, when insured and insurer have agreed to the
in estoppels. (UCPB General Insurance Company, Inc. payment of premium by installments and partial
v. Masagana Telemart, Inc., G.R. No. 137172, April 4, payment has been made at the time of loss, then the
2001) insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
Payment in installments payment had not yet elapsed. The owner may

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 INSURANCE CODE
recover from Peninsula Insurance Company, but the insurance premium within thirty 30 days from the
latter has the right to deduct the amount of unpaid effective date of policy. By so doing, it has implicitly
premium from the insurance proceeds. agreed to modify the tenor of the insurance policy
and in effect, waived any provision therein that it
Estoppel would only pay for the loss or damage in case the
same occurs after the payment of the premium.
Q: Maxilite and Marques entered into a trust
receipt transaction with FEBTC for the shipment Considering that the insurance policy is silent as to
of various high-technology equipment. FEBIBI, the mode of payment, insurer is deemed to have
upon the advice of FEBTC, facilitated the accepted the promissory note in payment of the
procurement and processing from Makati premium. This rendered the policy immediately
Insurance Company of four separate and operative on the date it was delivered. (Capital
independent fire insurance policies over the Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
merchandise. Maxilite agreed that FEBTC would No. L-22375, July 18, 1975)
debit Maxilite’s account for the premium
payments. However, said premiums were not Payment through salary deduction
paid. A fire gutted Maxilite’s office and
warehouse. As a result, Maxilite suffered losses Employees of the Republic of the Philippines,
amounting to at least P2.1 million, which including its political subdivisions and
Maxilite claimed against the fire insurance instrumentalities, and government-owned or
policy with Makati Insurance Company. Makati controlled corporations, may pay their insurance
Insurance Company denied the fire loss claim on premiums and loan obligations through salary
the ground of non-payment of premium. FEBTC deduction: Provided, That the treasurer, cashier,
and FEBIBI disclaimed any responsibility for the paymaster or official of the entity employing the
denial of the claim. Will the claim of Maxilite government employee is authorized,
prosper? notwithstanding the provisions of any existing law,
rules and regulations to the contrary, to make
A: YES. The claim of Maxilite will prosper. FEBTC is deductions from the salary, wage or income of the
estopped from claiming that the insurance premium latter pursuant to the agreement between the
has been unpaid. That FEBTC induced Maxilite to insurer and the government employee and to remit
believe that the insurance premium has in fact been such deductions to the insurer concerned, and
debited from Maxilite’s account is grounded on the collect such reasonable fee for its services (IC, Sec.
the following facts: (1) FEBTC represented and 78). This is a new provision.
committed to handle Maxilite’s financing and capital
requirements, including the insurance of the trust Payment of premium by post-dated check
receipted merchandise; (2)the premiums of prior
insurance policies had been paid through automatic Delivery of a promissory note or a check will not be
debit arrangement; (3) FEBIBI sent FEBTC, not sufficient to make the policy binding until the said
Maxilite, to debit Maxilite’s account; (4) there was note or check has been converted into cash. This is
no written demand from FEBTC or Makati consistent with Article 1249 of the New Civil Code.
Insurance Company for Maxilite to pay the
insurance premium; (5) the subject insurance policy NOTE: Payment by means of a check or note,
remained uncancelled despite the alleged non- accepted by the insurer, bearing a date prior to the
payment of the premium, making it appear that the loss, assuming availability of the funds thereof,
insurance policy remained in force and binding. would be sufficient even if it remains unencashed at
Thus, Maxilite can still claim from FEBTC. (Jose the time of the loss. The subsequent effects of
Marques and Maxilite Technologies, Inc. vs Far East encashment would retroact to the date of the
Bank and Trust Company, etc GR No. 171379, January instrument and its acceptance by the creditor (2007
10, 2011) Bar).

Q: If the applicant failed to pay premium and Q: On September 25, 2013, Danny Marcial
instead executed a promissory note in favor of (Danny) procured an insurance on his life with a
the insurer payable within 30 days which was face value of P5 million from RN Insurance
accepted by the latter, is the insurer liable in Company (RN), with his wife Tina Marcial (Tina)
case of loss? as sole beneficiary. On the same day, Danny
issued an undated check to RN for the full
A: YES, the insurer is liable because there has been amount of the premium. On October 1, 2013, RN
a perfected insurance contract. The insurer issued the policy covering Danny’s life
accepted the promise of the applicant to pay the insurance. On October 5, 2013, Danny met a

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 MERCANTILE LAW
tragic accident and died. Tina claimed the subsequent effects of encashment retroact to the
insurance benefit, but RN was quick to deny the date of the check. (UCPB General Insurance Co., Inc.
claim because at the time of Danny’s death, the v. Masagana Telamart, Inc., 356 SCRA 307 [2001])
check was not yet encashed and therefore the
premium remained unpaid. Non-payment of premiums
a. Is RN correct?
b. Will your answer be the same if the check is Non-payment of the premium will not entitle the
dated October 15, 2013? (2014 Bar) insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
A: conditioned upon the payment of the premium, so
a. NO. RN Insurance is not correct. The facts of the that no recovery can be had upon a lapsed policy,
case show that Danny procured insurance on the contractual relation between the parties having
his life on September 25, 2013, with his wife ceased. If the peril insured against had occurred, the
Tina as beneficiary, and on that same day, he insurer would have had a valid defense against
issued an undated check to RN for the full recovery under the policy.
amount of the premium. Since the undated
check was issued to RN on September 25, 2013, Non-payment of the first premium prevents the
it will be considered dated as of the same day. contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
RN Insurance denied the claim of Tina because the policy, unless waived. But nonpayment of the
at the time of Danny’s death, the check was not balance of the premium due does not produce the
yet encashed, therefore, the premium remained cancellation of the contract.
unpaid. The payment by means of a check or
note, accepted by the insurer, bearing a date With respect to subsequent premiums, non-payment
prior to the loss, assuming the availability of the does not affect the validity of the contracts unless,
funds thereof, would be sufficient even if it by express stipulation, it is provided that the policy
remains unencashed at the time of the loss. The shall in that event be suspended or shall lapse. (De
subsequent effects of encashment would Leon, 2010)
retroact to the date of the mercantile
instrument. Non-payment of premiums by reason of the
circumstances or conduct of the insurer
b. The answer would not be the same if the check
were dated October 15, 2013. The payment of GR: Non-payment of premiums does not merely
a promissory note or postdated check at a suspend but put an end to an insurance contract
stated maturity subsequent to the loss, is since the time of the payment is peculiarly of the
insufficient to put the insurance into effect. essence of the contract. (De Leon, 2010)
(Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250) XPN:
1. The insurer has become insolvent and has
If it were RN Insurance who dated the check suspended business, or has refused without
October 15, 2013, then my answer would be the justification a valid tender of premiums.
same as my answer to the first question. (Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct.
29, 1952)
Q: Alfredo took out a policy to insure this 2. Failure to pay was due to the wrongful conduct
commercial building from fire. The broker for of the insurer.
the insurance company agreed to give a 15-day 3. The insurer has waived his right to demand
credit within which to pay the insurance payment
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable Instances when payment of premium becomes a
on May 30, 2006. On May 28, 2006, a fire broke debt or obligation
out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance 1. In fire, casualty and marine insurance, the
policy? (2007 Bar) premium payable becomes a debt as soon as the
risk attaches.
A: YES. Alfredo may recover on the policy. It is valid 2. In life insurance, the premium becomes a debt
to stipulate that the insured will be granted credit only when, in the case of the first premium, the
term for payment of premium. Payment by means of contract has become binding, and in the case of
a check which was accepted by the insurer, bearing subsequent premiums, when the insurer has
a date prior to the loss, would be sufficient. The continued the insurance after maturity of the

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 INSURANCE CODE
premium, in consideration of the insured’s all overdue premiums and any indebtedness to
express or implied promise to pay. (De Leon, the company upon said policy. (IC, Sec. 233 [j])
2010)
REINSTATEMENT OF A LAPSED POLICY
Payments in addition to regular premium OF LIFE INSURANCE

An insurer may contract and accept payments, in Purpose of the reinstatement provision
addition to regular premium, for the purpose of
paying future premiums on the policy or to increase The purpose of the provision is to clarify the
the benefits thereof. (IC, Sec. 84) requirements for restoring a policy to premium-
paying status after it has been permitted to lapse.
NON-DEFAULT OPTIONS IN LIFE INSURANCE
The law requires that the policy owner be
Devices used to prevent the forfeiture of a life permitted to reinstate the policy, subject to the
insurance after the payment of the first violations specified, any time within three (3)
premium years from the date of default of premium
payment. A longer period, being more favorable to
1. Grace period – After the payment of the first the insured, may be used.
premium, the insured is entitled to a grace
period of 30 days within which to pay the Reinstatement is not an absolute right of the
succeeding premiums. (Sec. 233 [a], ibid) insured, but discretionary on the part of the
2. Cash surrender value – The amount the insurer insurer, which has the right to deny reinstatement
agrees to pay to the holder of the policy if he if it were not satisfied as to the insurability of the
surrenders it and releases his claim upon it. insured, and if the latter did not pay all overdue
(Cyclopedia Law Dictionary, 3rd ed.) premiums and other indebtedness to the insurer.
3. Extended insurance – It is where the insured is (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No. L-
given a right, upon default, after payment of at 3581, September 21, 1950)
least three full annual premiums (IC, Sec. 233
[f]) to have the policy continued in force from Q: A life insurance policy lapsed. The insured
the date of default for a time either stated or applied for reinstatement of the policy and paid
equal to the amount as the net value of the only a part of the overdue premiums.
policy taken as a single premium, will purchase. Subsequently, the insured died. Was the insurer
(De Leon, 2010) liable?
4. Paid up Insurance – The insured is given a right,
upon default, after the payment of at least three A: The insurer is not liable as the policy was not
annual premiums to have the policy continued reinstated. The failure to pay the balance of the
in force from the date of default for the whole overdue premiums prevented reinstatement and
period of the insurance without further recovery of the face value of the policy. (Andres vs.
payment of premiums. It results to a reduction Crown Life Ins. Co., 55 O.G. 3483)
of the original amount of insurance, but for the
same period originally stipulated. (6 Couch 2d., Q: Eulogio took out a life insurance policy which
355; 37 C.J.S. 364) contained a provision which allows for
5. Automatic Loan Clause – A stipulation in the reinstatement any time within three years after
policy providing that upon default in payment it lapsed. Eulogio paid the premiums due on the
of premium, the same shall be paid from the first two months. However, he failed to pay
loan value of the policy until that value is subsequent premiums. One month after the
consumed. In such a case, the policy is policy lapsed, he filed an application for the
continued in force as fully and effectively as reinstatement of his policy. He deposited the
though the premiums had been paid by the overdue premiums and signed a reinstatement
insured from funds derived from other sources. policy stating that the payment deposit only
(6 Couch 2d., 383) and shall not bind the Company until this
6. Reinstatement – Provision that the holder of the application is finally approved. Hours later,
policy shall be entitled to reinstatement of the Eulogio died of electrocution. The insurance
contract at any time within 3 years from the company denied the claim of his beneficiaries
date of default in the payment of premium, stating that the policy was never approved. Is
unless the cash surrender value has been paid, the contention of the insurance company valid?
or the extension period expired, upon
production of evidence of insurability A: YES. The stipulation in a life insurance policy
satisfactory to the company and the payment of giving the insured the privilege to reinstate it upon

95
 MERCANTILE LAW
written application does not give the insured 2. Pro rata:
absolute right to such reinstatement by the mere a. When the insurance is for a definite period
filing of an application. The insurer has the right to and the insured surrenders his policy
deny the reinstatement if it is not satisfied as to the before the termination thereof; (IC, Sec. 80
insurability of the insured and if the latter does not [b]); except:
pay all overdue premium and all other i. Policy not made for a definite period
indebtedness to the insurer. After the death of the of time;
insured, the Insurance Company cannot be ii. Short period rate is agreed upon;
compelled to entertain an application for iii. Life insurance policy.
reinstatement of the policy because the conditions b. When there is over-insurance. The
precedent to reinstatement can no longer be premiums to be returned shall be
determined and satisfied. proportioned to the amount by which the
aggregate sum insured in all the policies
Eulogio’s death, just hours after filing his exceeds the insurable value of the thing at
Application for Reinstatement and depositing his risk. (IC, Sec. 83)
payment for overdue premiums and interests does i. In case of over-insurance by double
not constitute a special circumstance that can insurance, the insurer is not liable for
persuade to consider the policy reinstated. Said the total amount of the insurance
circumstance cannot override the clear and express taken, his liability being limited to
provisions of the Policy Contract and Application the property insured. Hence, the
for Reinstatement, and operate to remove the insurer is not entitled to that portion
prerogative of Insular Life thereunder to approve of the premium corresponding to the
or disapprove the Application for Reinstatement. excess of the insurance over the
(Violeta R. Lalican vs. The Insular Life Assurance insurable interest of the insured.
Company Limited, supra) (1990 Bar)
ii. In case of over-insurance by several
REFUND OF PREMIUMS insurers, the insured is entitled to a
ratable return of the premium,
Instances when the insured entitled to recover proportioned to the amount by
premiums already paid or a portion thereof which the aggregate sum insured in
(2000 Bar) all the policies exceeds the insurable
value of the thing insured. (IC, Sec.
1. Whole: 83)
a. When no part of the thing insured has been
exposed to any of the perils insured against. Illustration:
(IC, Sec. 80)
b. When the contract is voidable because of Where there is a total over insurance of
the fraud or misrepresentations of the P500,000.00 in an aggregate P2,000,000.00
insurer of his agent. (IC, Sec. 82) policy (P1,500,000.00 is only the insurable
c. When the insurance is voidable because of value), 25% (proportion of P500k to P2M)
the existence of facts of which the insured of the premiums paid to the several
was ignorant without his fault. (IC, Sec. 82) insurers should be returned.
d. When the insurer never incurred any
liability under the policy because of the Insured is not entitled to return of premiums
default of the insured other than actual paid
fraud. (IC, Sec. 82)
e. When rescission is granted due to insurer’s 1. If the peril insured against has existed, and the
breach of contract. (IC, Sec. 74) insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81);
NOTE: When the contract is voidable, a person 2. In life insurance policies (IC, Sec. 80 [b]);
insured is entitled to a return of the premium 3. If the policy is annulled, rescinded or if a claim
when such contract is subsequently annulled is denied by reason of fraud (IC, Sec. 82);
under the provisions of the New Civil Code. 4. If contract is illegal and the parties are in pari
delicto.
A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a Q: Teodoro Cortez, applied for a 20-year
claim is denied by reason of fraud. (IC, Sec. 82) endowment policy with Great Pacific Insurance
Corporation (Great Pacific). His application,
with the requisite medical examination, was

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 INSURANCE CODE
accepted and approved by the Great Pacific and No policy of insurance other than life shall be
in due course, an endowment policy was issued canceled by the insurer except upon prior notice
in his name. Thereafter, Great Pacific advised thereof to the insured, and no notice of cancellation
Cortez that the policy was not in force. To make shall be effective unless it is based on the
it enforceable and operative, Cortez was asked occurrence, after the effective date of the policy, of
to remit the balance to complete his initial one or more of the abovementioned instances. (Sec.
annual premium and to see Dr. Felipe V. Remollo 64, ibid)
for another full medical examination at his own
expense. Because of this, Cortez informed that it Notice of cancellation of the contract
that he was cancelling the policy and he
demanded the return of his premium plus All notices of cancellation shall be in writing, mailed
damages. Great Pacific ignored his demand. Is or delivered to the named insured at the address
Cortez is entitled to a refund of his premium? shown in the policy, or to his broker provided the
broker is authorized in writing by the policy owner
A: YES. Great Pacific should have informed Cortez of to receive the notice of cancellation on his behalf,
the deadline for paying the first premium before or and shall state:
at least upon delivery of the policy to him, so he
could have complied with what was needful and 1. Which of the grounds set forth in Section 64 is
would not have been misled into believing that his relied upon; and
life and his family were protected by the policy, 2. That, upon written request of the named insured,
when actually they were not. And, if the premium the insurer will furnish the facts on which the
paid by Cortez was unacceptable for being late, it cancellation is based. (Sec. 65, ibid)
was the company's duty to return it. Since his policy
was in fact inoperative or ineffectual from the CONCEALMENT
beginning, the company was never at risk, hence, it
is not entitled to keep the premium (Great Pacific Concealment
Life Insurance Corporation v. CA, et al., G.R. No. L-
57308, April 23, 1990). Concealment is a neglect to communicate that which
a party knows and ought to communicate. (IC, Sec.
RESCISSION OF INSURANCE CONTRACTS 26)

Instances wherein a contract of insurance may Under Section 27 of the Insurance Code, “a
be rescinded (1991, 1994, 1996 - 1998 Bar) concealment entitles the injured party to rescind a
contract of insurance.” Moreover, under Section 168
1. Concealment of the Insurance Code, the insurer is entitled to
2. Misrepresentation/ omission rescind the insurance contract in case of an
3. Breach of warranties alteration in the use or condition of the thing
insured. (Malayan Insurance Company vs. PAP Co.
Instances wherein a contract of insurance may (Phil. Branch), G.R. No. 200784, August 7, 2013, in
be canceled by the insurer Divina 2014)

1. Nonpayment of premium; Requisites

2. Conviction of a crime arising out of acts
increasing the hazard insured against; 1. A party knows a fact which he neglects to
3. Discovery of fraud or material communicate or disclose to the other party
misrepresentation; 2. Such party concealing is duty bound to disclose
4. Discovery of willful or reckless acts or such fact to the other
omissions increasing the hazard insured 3. Such party concealing makes no warranty as to
against; the fact concealed
5. Physical changes in the property insured which 4. The other party has no means of ascertaining
result in the property becoming uninsurable; the fact concealed
6. Discovery of other insurance coverage that 5. The fact must be material
makes the total insurance in excess of the value
of the property insured; or Test of materiality (2000 Bar)
7. A determination by the Commissioner that the
continuation of the policy would violate or It is determined not by the event, but solely by the
would place the insurer in violation of the probable and reasonable influence of the facts upon
Insurance Code. (IC, Sec. 64) the party to whom the communication is due, in
forming his estimate of the disadvantages of the

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 MERCANTILE LAW
proposed contract, or in making his inquiries. (IC, 3. The parties are bound to know all the general
Sec. 31) causes which are open to his inquiry, equally with
the other, and all general usages of trade. (IC, Sec.
NOTE: As long as the facts concealed are material, 32)
concealment, whether intentional or not, entitles
the injured party to rescind. (IC, Sec.27) Matters that must be disclosed even in the
absence of inquiry
Concealment in marine insurance
1. Those material to the contract
Rules on concealment are stricter in marine 2. Those which the other has no means of
insurance since the insurer would have to depend ascertaining
almost entirely on the matters communicated by the 3. Those as to which the party with the duty to
insured. Thus, in addition to material facts, each communicate makes no warranty
party must disclose all the information he possesses
which are material or the information of the belief NOTE: Matters relating to the health of the insured
or expectation of a third person, in reference to a are material and relevant to the approval of the
material fact. But concealment in a marine issuance of the life insurance policy as these
insurance in any of the following matters definitely affect the insurer’s action to the
enumerated under Section 112 Insurance Code does application. It is well-settled that the insured need
not vitiate the entire contract, but merely not die of the disease he had failed to disclose to the
exonerates the insurer from a loss resulting from insurer, as it is sufficient that his non-disclosure
the risk concealed. misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
Test in ascertaining the existence of inquiries. (Sunlife Assurance Company of Canada v.
concealment CA, G.R. No. 105135, June 22, 1995)

If the applicant is aware of the existence of some Information as to the nature of interest need not be
circumstances which he knows would probably disclosed except in property insurance, if the
influence the insurer in acting upon his application, insured is not the owner. If somebody is insuring
good faith requires him to disclose that properties of which he is not the owner, he must
circumstance, though unasked. disclose why he has insurable interest that would
entitle him to ensure it, and the extent thereof. (IC,
Matters that need not be disclosed Secs. 34 & 51 [e])

GR: The parties are not bound to communicate Evidence of insurability

information of the following matters:
1. Those which the other knows Evidence of Insurability is a broader phrase than
2. Those which, in the exercise of ordinary care, “Evidence of Good Health” and includes such other
the other ought to know and of which, the factors as the insured’s occupation, habits, financial
former has no reason to suppose him ignorant condition, and other risk selection factors.
3. Those of which the other waives
communication Q: Ngo Hing filed an application with the Great
4. Those which prove or tend to prove the Pacific Life Assurance Company (Pacific Life) for
existence of a risk excluded by a warranty, and a twenty-year endownment policy on the life of
which are not otherwise material his one-year old daughter Helen Go. Ngo Hing
5. Those which relate to a risk excepted from the supplied the essential data and filed the
policy and which are not otherwise material; application to Mondragon, the branch manager.
6. The nature or amount of the interest of one After sometime, Helen Go died of influenza with
insured (except if he is not the owner of the complication of bronchopneumonia.
property insured). (IC, Sec. 34) Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
XPNs: his effort, he filed the action for the recovery of
the same. Did Ngo Hing concealed the state of
1. In answer to inquiries of the other. (IC, Sec. 30) health and physical condition of Helen Go, which
2. Neither party is bound to communicate, even rendered void the binding receipt?
upon inquiry, information of his own judgment,
because such would add nothing to the A: YES. Ngo Hing intentionally concealed the state
appraisal of the application. (IC, Sec. 35) of health of his daughter Helen Go. He was fully
aware that his child was a typical mongoloid child

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 INSURANCE CODE
upon filling out the application form. It is evident 1. If there is concealment under Section 27, the
that he withheld a fact material to the risk to be remedy of the insurer is rescission since
assumed by the insurance company had the plan be concealment vitiates the contract of insurance.
approved. (1996 Bar)
2. The party claiming the existence of
The contract of insurance is one of perfect good concealment must prove that there was
faith, uberrima fides, absolute and perfect candor; knowledge of the fact concealed on the part of
the absence of any concealment or demotion. the party charged with concealment.
Concealment is a neglect to communicate that which 3. Good faith is not a defense in concealment.
needs to be communicated whether intentional or Concealment, whether intentional or
unintentional. In case of concealment, the insurer is unintentional entitles the injured party to
entitled to rescind the contract of insurance. In the rescind the contract of insurance. (IC, Sec. 27)
case at bar, the respondent is guilty of such 4. The matter concealed need not be the cause of
concealment. Ultimately, there was no perfected loss. (IC, Sec. 31)
contract of insurance since the conditions in the 5. To be guilty of concealment, a party must have
binding receipt were not complied with by the knowledge of the fact concealed at the time of
applicant. (Great Pacific Life Assurance Company v. the effectivity of the policy.
CA, G.R. No. L-31845, April 30, 1979)
In order for concealment to produce the effect of
Q: Benny applied for life insurance for Php 1.5 avoiding the policy, it should take place at the
Million. The insurance company approved his time the contract is entered into
application and issued an insurance policy
effective Nov. 6, 2008. Benny named his children Concealment should take place at the time the
as his beneficiaries. On April 6, 2010, Benny died contract is entered into and not afterwards in order
of hepatoma, a liver ailment. that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
The insurance company denied the children's Waiver of medical examination in a non-medical
claim for the proceeds of the insurance policy on insurance contract renders even more material the
the ground that Benny failed to disclose in his information required of the applicant concerning
application two previous consultations with his previous condition of health and diseases suffered,
doctors for diabetes and hypertension, and that for such information necessarily constitutes an
he had been diagnosed to be suffering from important factor which the insurer takes into
hepatoma. The insurance company also consideration in deciding whether to issue the
rescinded the policy and refunded the policy or not. Failure to communicate information
premiums paid. acquired after the effectivity of the policy will not be
a ground to rescind the contract.
Was the insurance company correct? (2013 Bar)
NOTE: The reason for this is that if concealment
A: The insurance company correctly rescinded the should take place after the contract is entered into,
policy because of concealment (Section 27 of the information concealed is no longer material as it
Insurance Code). Benny did not disclose that he was will no longer influence the other party to enter into
suffering from diabetes, hypertension, and such contract.
hepatoma. The concealment is material, because
these are serious ailments. (Florendo v. Philam Q: Joanna applied for a non-medical life
Plans, Inc., G.R. No. 186983, February 22, 2012). insurance. Joanna did not inform the insurer
Benny died less than two years from the date of the that one week prior to her application for
issuance of the policy. (IC, Sec. 48) insurance, she was examined and confined at St.
Luke’s Hospital where she was diagnosed for
Right to information of material facts may be lung cancer. The insured soon thereafter died in
waived a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
1. By the terms of the contract cause of death of the insured? Why? (2001 Bar)
2. By the failure to make an inquiry as to such
facts, where they are distinctly implied in other A: NO. The concealed fact is material to the approval
facts from which information is communicated. and issuance of the insurance policy. It is well
(IC, Sec. 33) settled that the insured need not die of the disease
she failed to disclose to the insurer. It is sufficient
Rules on concealment that his nondisclosure misled the insurer in forming

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 MERCANTILE LAW
his estimate of the risks of the proposed insurance 5. Whether intentional or not, the injured party is
policy or in making inquiries. (Sun Life v. CA, supra) entitled to rescind a contract of insurance on
ground of concealment or false representation.
Instances whereby concealment made by an 6. Since the contract of insurance is said to be one
agent procuring the insurance binds the of utmost good faith on the part of both parties
principal to the agreement, the rules on concealment and
representation apply likewise to the insurer.
1. Where it was the duty of the agent to acquire
and communicate information of the facts in Kinds of representation
question;
2. Where it was possible for the agent, in the 1. Oral or written (Sec. 36, ibid);
exercise of reasonable diligence to have made 2. Affirmative (Sec. 42, ibid); or
such communication before the making of the 3. Promissory (Sec. 39, ibid).
insurance contract.
Affirmative representation
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the Any allegation as to the existence or non-existence
fault of the agent, will avoid the policy, despite the of a fact when the contract begins (e.g. the statement
good faith of the insured. of the insured that the house to be insured is used
only for residential purposes is an affirmative
MISREPRESENTATION/OMISSION representation).

Representation Promissory representation

An oral or written statement of a fact or condition Any promise to be fulfilled after the contract has
affecting the risk made by the insured to the come into existence or any statement concerning
insurance company, tending to induce the insurer to what is to happen during the existence of the
assume the risk. insurance.

Representation should be made, altered or Representation as to a future undertaking

withdrawn at the time of or before the issuance of
the policy. (Sec. 37, Insurance Code). It may be A representation as to the future is to be deemed a
altered or withdrawn before the insurance is promise unless it appears that it was merely a
effected, but not afterwards. (Sec.41, ibid) statement of belief or an expectation that is
susceptible to present, actual knowledge. (IC, Sec.
Characteristics of representation 39)

1. Not a part of the contract but merely a collateral An erroneous opinion or belief will not avoid the
inducement to it insurance policy
2. Oral or written
3. Made at the time of, or before issuing the policy The statement of an erroneous opinion, belief or
and not after information, or of an unfulfilled intention, per se,
4. Altered or withdrawn before the insurance is will not avoid the contract of insurance, unless
effected but not afterwards fraudulent.
5. Must be presumed to refer to the date the
contract goes into effect. (IC, Sec. 42) Misrepresentation

Similarities of concealment and representation Misrepresentation is an affirmative defense. To

avoid liability, the insurer has the duty to establish
1. Both refer to the same subject matter and both such a defense by satisfactory and convincing
take place before the contract is entered. evidence. (Ng Gan Zee v. Asian Crusader Life Assn.
2. Concealment or representation prior to loss or Corp., G.R. No. L- 30685, May 30, 1983). [See also Sec.
death gives rise to the same remedy; that is 44 (when the facts fail to correspond to the assertions
rescission or cancellation. or stipulations), Insurance Code]
3. The test of materiality is the same. (IC, Secs. 31,
46) NOTE: In the absence of evidence that the insured
4. The rules of concealment and representation has sufficient medical knowledge to enable him to
are the same with life and non-life insurance. distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was

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 INSURANCE CODE
“associated with ulcer of the stomach” should be The insured withholds The insured makes
considered an expression in good faith. Fraudulent the information of erroneous statements
intent of insured must be established to entitle material facts from the of facts with the intent
insurer to rescind the insurance contract. insurer of inducing the insurer
Misrepresentation, as a defense of insurer, is an to enter into the
affirmative defense which must be proved. (Ng Gan insurance contract
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L-
30685, May 30, 1983) Application of concealment and
misrepresentation in case of loss or death
Requisites of misrepresentation
GR: If the concealment or misrepresentation is
1. The insured stated a fact which is untrue; discovered before loss or death, the insurer can
2. Such fact was stated with knowledge that it is cancel the policy. If the discovery is after loss or
untrue and with intent to deceive or which he death, the insurer can refuse to pay.
states positively as true without knowing it to
be true and which has a tendency to mislead; XPN: The incontestability clause under paragraph 2
3. Such fact in either case is material to the risk. of Section 48.

A representation cannot qualify an express XPN to XPN: (i.e., when the contract may be
provision in a contract of insurance but it may rescinded even beyond the incontestability period)
qualify an implied warranty. (IC, Sec. 40)
1. Non-payment of premiums.
Test of materiality 2. Violation of condition. (IC, Secs. 233 [b], 234 [b])
3. No insurable interest
It is to be determined not by the event, but solely by 4. Cause of death was excepted or not covered
the probable and reasonable influence of the facts 5. Fraud of a vicious type
upon the party to whom the representation is made, 6. Proof of death was not given. (IC, Sec. 248)
in forming his estimates of the disadvantages of the 7. That the conditions of the policy relating to
proposed contract or in making his inquiries military or naval service. (IC, Secs. 233 [b], 234
(similar with concealment). (IC, Sec. 46) [b])
8. That the action was not brought within the time
Effects of misrepresentation specified. (IC, Sec. 63)

1. It renders the insurance contract voidable at Incontestability clause (1991, 1994, 1996 –
the option of the insurer, although the policy is 1998 Bar)
not thereby rendered void ab initio. The injured
party entitled to rescind from the time when the After the policy of life insurance made payable on
representation becomes false; the death of the insured shall have been in force
2. When the insurer accepted the payment of during the lifetime of the insured for a period of two
premium with the knowledge of the ground for (2) years from the date of its issue or its last
rescission, there is waiver of such right; reinstatement, the insurer cannot prove that the
3. There is no waiver of the right of rescission if policy is void ab initio or is rescindible by reason of
the insurer had no knowledge of the ground the fraudulent concealment or misrepresentation of
therefor at the time of acceptance of premium the insured or his agent. (Sundiang Sr. & Aquino,
payment. 2014, citing IC, Sec. 48; Florendo v. Philam Plans, G.R.
No. 186983, February 22, 2012)
Effect of collusion between the insurer’s agent
and the insured The “Incontestability Clause” under Section 48 of
the Insurance Code regulates both the actions of the
It vitiates the policy even though the agent is acting insurers and prospective takers of life insurance. It
within the apparent scope of his authority. The gives insurers enough time to inquire whether the
agent ceases to represent his principal. He, thus, policy was obtained by fraud, concealment, or
represents himself; so, the insurer is not estopped misrepresentation; on the other hand, it forewarns
from avoiding the policy. scheming individuals that their attempts at
insurance fraud would be timely uncovered – thus
Concealment vs. Misrepresentation deterring them from venturing into such nefarious
enterprise. (Manila Bankers Life Insurance
Concealment Misrepresentation Corporation vs. Cresencia-Aban, G.R. No. 175666, July
29, 2013)

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 MERCANTILE LAW
Q: On July 3, 1993, Delia Sotero (Sotero) took out 1. That the person taking the insurance lacked
a life insurance policy from Ilocos Bankers Life insurable interest as required by law;
Insurance Corporation (Ilocos Life) designating 2. That the cause of the death of the insured is an
Creencia Aban (Aban) her niece, as her excepted risk;
beneficiary. Ilocos Life issued Policy No. 747, 3. That the premiums have not been paid (IC, Secs.
with a face value of P100, 000, in Sotero’s favor 77, 233[b], 236[b]);
on August 30, 1993, after the requisite medical 4. That the conditions of the policy relating to
examination and payment of the premium. military or naval service have been violated (IC,
Secs. 233[b], 234[b]);
On April 10, 1996, Sotero died. Aban filed a 5. That the fraud is of a particularly vicious type;
claim for the insurance proceeds on July 9, 1996, 6. That the beneficiary failed to furnish proof of
Ilocos Life conducted an investigation into the death or to comply with any condition imposed
claim and came out with the following findings: by the policy after the loss has happened; or
7. That the action was not brought within the time
1. Sotero did not personally apply for specified. (Sundiang Sr. & Aquino, 2014)
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990. Remedy of the injured party in case of
3. Sotero did not have the financial capability misrepresentation
to pay the premium on the policy.
4. Sotero did not sign the application for If there is misrepresentation, The injured party is
insurance entitled to rescind from the time when the
5. Alban was the one who filed the insurance representation becomes false.
application and designated herself as the
beneficiary. Exercise of the right to rescind the contract

For the above reasons and claiming fraud, Ilocos It must be exercised previous to the commencement
Life denied Aban’s claim on April 16, 1997 but of an action on the contract (the action referred to is
refunded the premium paid on the policy. May that to collect a claim on the contract). (IC, Sec.48,
the incontestability period set in even in cases of par.1)
fraud as alleged in this case? (2014, Bar)
BREACH OF WARRANTIES
A: YES. The incontestability period applies even in
cases of fraud. Section 48 regulates both the actions Warranties (1993 Bar)
of the insurers and prospective takers of the life
insurance. It gives insurers enough time to inquire Statements or promises by the insured set forth in
whether the policy was obtained by fraud, the policy itself or incorporated in it by proper
concealment, or misrepresentation; on the other reference, the untruth or non-fulfillment of which in
hand, it forewarns scheming individuals that their any respect, and without reference to whether the
attempts at insurance fraud would be timely insurer was in fact prejudiced by such untruth or
uncovered. Legitimate policy holders are absolutely non-fulfillment render the policy voidable by the
protected from unwarranted denial of their claims insurer.
or delay in the collection of insurance proceeds
occasioned by allegations of fraud, concealment, or Purpose of warranties
misrepresentation by insurers, claims which may
no longer be set up after the two-year period To eliminate potentially increasing moral or
expires. physical hazards which may either be due to the acts
of the insured or to the change of the condition of
Section 48 prevents a situation where the insurer the property.
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy Basis of warranties
on specious claims of fraudulent concealment or
misrepresentation. (Manila Bankers Life Insurance The insurer took into consideration the condition of
Corp. v. Aban, G.R. No. 175666, July 29, 2013) the property at the time of effectivity of the policy.

Defenses that are not barred by incontestability Kinds of warranties

clause
1. Affirmative warranty – one which relates to
The following defenses are not barred by the matters which exist at or before the issuance of
incontestability clause: the policy.

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 INSURANCE CODE
2. Promissory warranty – one in which the insured to inform the insurer of any other insurance
undertakes that something shall be done or coverage of the property. A violation of the
omitted after the policy takes effect and during clause by the insured will not constitute a
its continuance. breach unless there is an additional provision
3. Express warranty – a statement in a policy, of a stating that the violation thereof will avoid the
matter relating to the person or thing insured, policy. (IC, Sec. 75)
or to the risk, as a fact.
4. Implied warranty – an agreement or stipulation Q: On May 13, 1996 PAM Inc. obtained a P15
not expressed in the policy but the existence of million fire insurance policy from Ilocano
which is admitted or presumed from the fact Insurance covering its machineries and
that the contract of insurance has been equipment effective for one year or until May 14,
executed. 1997. The policy expressly stated that the
insured properties were located at “Sanyo
Warranty vs. Representation Precision Phils. Building Phase III Lots 4 and 6
Block 15 PEZA, Rosario, Cavite.” Before its
WARRANTY REPRESENTATION expiration, the policy was renewed on “as is”
Considered parts of Collateral inducement to the basis for another year or until May 13 1998. The
the contract. contract. subject properties were later transferred to
Always written on Pace Factory also in PEZA. On October 12, 1997
May be written in a totally during the effectivity of the renewed policy, a
the face of the policy,
disconnected paper or may fire broke out at the Pace Factory which totally
actually or by
be oral. burned the insured properties.
reference.
Must be strictly Only substantial proof is
complied with. required. The policy forbade the removal of the insured
Its falsity or non- properties unless sanctioned by Ilocano.
fulfillment operates Its falsity renders the policy Condition 9 (c) of the policy provides that “the
as a breach of void on the ground of fraud. insurance ceases to attach as regards the
contract. property affected unless the insured, before the
Insurer must show its occurrence of any loss or damage, obtains the
Presumed material. materiality in order to sanction of the company signified by
defeat an action on the endorsement upon the policy… (c) if the
policy. property insured is removed to any building or
place other than in which is herein stated to be
Effects of breach of warranty insured.” PAM claims that it has substantially
complied with notifying Ilocano through its
sister company, the RBC which in fact, referred
1. Material
PAM to Ilocano for the insurance coverage. Is
Ilocano liable under the policy? (2014 Bar)
GR: Violation of material warranty or of
material provision of a policy will entitle the
other party to rescind the contract. A: NO. Ilocano Insurance is not liable under the
policy. By the clear and express condition in the
XPN: (with regard to “promissory” warranties) renewal policy, the removal of the insured property
a. Loss occurs before the time of performance to any building or place required the consent of
of the warranty; Ilocano. Any transfer effected by PAM, Inc. without
b. The performance becomes unlawful at the Ilocano’s consent would free the latter from any
place of the contract; and liability. (Malayan Insurance Company, Inc v. PAPCO,
c. Performance becomes impossible (IC, Sec. Ltd., G.R. No. 200784, August 7,2013)
73).
Effect of a breach of warranty without fraud
2. Immaterial
The policy is avoided only from the time of breach
GR: It will not avoid the policy. (IC, Sec. 76) and the insured is entitled:
1. To the return of the premium paid at a pro rata
XPN: When the policy expressly provides, or from the time of breach or if it occurs after the
declares that a violation thereof will avoid it. inception of the contract; or
2. To all premiums if it is broken during the
For instance, an “Other Insurance Clause” which inception of the contract.
is a condition in the policy requiring the insured
Omission

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 MERCANTILE LAW
The failure to communicate information on matters Instances when the defects in the notice or proof
proving or tending to prove the falsity of warranty. of loss are considered waived (MaJoR-DeW)
In case of omission, the aggrieved party may rescind
the contract of insurance. When the insurer:
1. Writes to the insured that he considers the
CLAIMS SETTLEMENT AND SUBROGATION policy null and void as the furnishing of notice
or proof of loss would be useless;
NOTICE AND PROOF OF LOSS 2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
Loss in insurance 4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
The injury, damage or liability sustained by the objections on account of notice and preliminary
insured in consequence of the happening of one or proof; or
more of the perils against which the insurer, in 5. Makes Objection on any ground other than the
consideration of the premium, has undertaken to formal defect in the preliminary proof.
indemnify the insured. It may be total, partial, or
constructive in marine insurance. Instances when delay in the presentation of
notice or proof of loss deemed waived
Conditions before the insured may recover on
the policy after the loss If caused by:
1. Any act of the insurer; and
1. The insured or some person entitled to the 2. By failure to take objection promptly and
benefit of the insurance, without unnecessary specifically upon that ground. (IC, Sec. 93)
delay, must give written notice to the insurer
(IC, Sec. 90); Proof of loss
2. When required by the policy, insured must
present a preliminary proof loss which is the It is the more or less formal evidence given the
best evidence he has in his power at the time company by the insured or claimant under a policy
(IC, Sec. 91). of the occurrence of the loss, the particulars thereof
and the data necessary to enable the company to
NOTE: For other non-life insurance, the determine its liability and the amount thereof.
Commissioner may specify the period for the
submission of the notice of loss. (IC, Sec. 90) Time for payment of claims

Notice of loss LIFE POLICIES NON-LIFE POLICIES

1. Maturing upon the The proceeds shall be
It is the more or less formal notice given the insurer expiration of the term– paid within 30 days
by the insured or claimant under a policy of the the proceeds are after the receipt by the
occurrence of the loss insured against. immediately payable to insurer of proof of loss
the insured, except if and ascertainment of
Purposes of notice of loss (IFC) proceeds are payable in the loss or damage by
installments or agreement of the
1. To give insurer Information by which he may annuities which shall be parties or by
determine the extent of his liability; paid as they become arbitration but not
2. To afford the insurer a means of detecting any due. later than 90 days from
Fraud that may have been practiced upon him; such receipt of proof of
and 2. Maturing at the death loss, whether or not
3. To operate as a Check upon extravagant claims. of the insured, occurring ascertainment is had or
prior to the expiration of made (IC, Sec. 249).
Effect of failure to give notice of loss the term stipulated – the
proceeds are payable to
OTHER TYPES OF the beneficiaries within
FIRE INSURANCE
INSURANCE 60 days after
Failure to give notice will not presentation of claim
Failure to give
exonerate the insurer, unless and filing of proof of
notice defeats the
there is a stipulation in the death (IC, Sec. 248).
right of the insured
policy requiring the insured
to recover.
to do so.

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GUIDELINES ON CLAIMS SETTLEMENT The following constitutes unfair settlement
practices:
Claim Settlement 1. Knowingly misrepresenting to claimant’s
pertinent facts or policy provisions relating to
Claim settlement is the indemnification of the coverage at issue;
suffered by the insured. The claimant may be the 2. Failing to acknowledge with reasonable
insured or reinsured, the insurer who is entitled to promptness pertinent communications with
subrogation, or a third party who has a claim against respect to claims arising under its policies;
the insured. 3. Failing to adopt and implement reasonable
standards for the prompt investigation of
Purpose of the rule claims arising under its policies;
4. Not attempting in good faith to effectuate
To eliminate unfair claim settlement practices. prompt, fair and equitable settlement of claims
submitted in which liability has become
Rules in claim settlement reasonably clear; or
5. Compelling policyholders to institute suits to
1. No insurance company doing business in the recover amounts due under its policies by
Philippines shall refuse, without justifiable offering without justifiable reason substantially
cause, to pay or settle claims arising under less than the amounts ultimately recovered in
coverage provided by its policies, nor shall any suits brought by them.
such company engage in unfair claim
settlement practices. Sanction for the insurance companies which
2. Evidence as to numbers and types of valid and engaged to unfair settlement practices
justifiable complaints to the Commissioner
against an insurance company, and the The sanction for insurance companies engaged in
Commissioner’s complaint experience with unfair settlement practices can either be [a]
other insurance companies writing similar lines suspension; or [b] revocation of an insurance
of insurance shall be admissible in evidence in company’s certificate of authority. (IC, Sec 247)
an administrative or judicial proceeding
brought under this section. (IC, Sec. 247 [b]) Effect of refusal or failure to pay the claim within
the time prescribed
Claims settlement in life insurance
The insurer shall be liable to pay interest twice the
1. The proceeds shall be paid immediately upon ceiling prescribed by the Monetary Board on the
the maturity of the policy if there is such a proceeds of the insurance from the date following
maturity date. the time prescribed under the Insurance Code, until
the claim is fully satisfied. (Prudential Guarantee
2. If the policy matures by the death of the insured, and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.
within sixty (60) days after presentation of the G. R. No. 151890, June 20, 2006)
claim and filing of the proof of the death of the
insured. (Sundiang Sr. & Aquino, 2014; IC, NOTE: Refusal or failure to pay the loss or damage
Section 248) will entitle the assured to collect interest UNLESS
such refusal or failure to pay is based on the ground
Claims settlement in property insurance that the claim is fraudulent.

1. Proceeds shall be paid within thirty (30) days Where the mortgagor and the mortgagee were, both
after proof of loss is received by the insurer and claiming the proceeds of a fire insurance policy and
ascertainment of the loss or damage is made the creditors of the mortgagor also attached the
either by agreement or by arbitration. proceeds, the insurance company cannot be held
2. If no ascertainment is made within sixty (60) liable for damages for withholding payment since
days after receipt of proof of loss, it shall be paid the delay was not malevolent. (Rizal Commercial
within ninety (90) days after such receipt. Bank Corporation v. Court of Appeals, supra)
(Sundiang Sr. & Aquino, 2014; IC, Sec. 249).
PRESCRIPTION OF ACTIONS
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Rules on the prescriptive period for filing an
Unfair settlement practices (MAI-GL) insurance claim

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 MERCANTILE LAW
1. The parties to a contract of insurance may be considered against him is destroyed. (Sun life
validly agree that an action on the policy should Office, Ltd. vs. CA, supra)
be brought within a limited period of time,
provided such period is not less than 1 year Prescriptive period in motor vehicle insurance
from the time the cause of action accrues. If the
period agreed upon is less than 1 year from the It is one (1) year from denial of the claim and not
time the cause of action accrues, such from the date of the accident.
agreement is void. (IC, Sec. 63, 1996 Bar)
a. The stipulated prescriptive period shall SUBROGATION
begin to run from the date of the insurer’s
rejection of the claim filed by the insured Principle of Subrogation
or beneficiary and not from the time of
loss. If the plaintiff’s property has been insured, and he
b. In case the claim was denied by the insurer has received indemnity from the insurance
but the insured filed a petition for company for the injury or loss arising out of wrong
reconsideration, the prescriptive period or breach of contract complained of, the insurance
should be counted from the date the claim company shall be subrogated to the rights of the
was denied at the first instance and not insured against the wrongdoer or the person who
from the denial of the reconsideration. has violated the contract. (NCC, Art. 2207)
(Sun Life Office, Ltd. vs. CA, supra)
2. If there is no stipulation or the stipulation is The insurer, upon happening of the risk insured
void, the insured may bring the action within 10 against and after payment to the insured is
years in case the contract is written. subrogated to the rights and cause of action of the
3. In a comprehensive motor vehicle liability latter. As such, the insurer has the right to seek
insurance (CMVLI), the written notice of claim reimbursement for all the expenses paid. (Eastern
must be filed within 6 months from the date of Shipping Lines vs. Prudential Guarantee and
the accident; otherwise, the claim is deemed Assurance, Inc., G.R. No. 174116, September 1, 2009)
waived even if the same is brought within 1
year from its rejection. (Vda. De Gabriel vs. CA, NOTE: The principle of subrogation inures to the
GR No. 103883, Nov 14, 1996) insurer without any formal assignment or any
4. The suit for damages, either with the proper express stipulation to that effect in the policy. Said
court or with the Insurance Commissioner, right is not dependent upon nor does it grow out of
should be filed within 1 year from the date of any private contract. Payment to the insured makes
the denial of the claim by the insurer, otherwise, the insurer a subrogee in equity. (Malayan
claimant’s right of action shall prescribe. (IC, Insurance Co., Inc. v. CA, G.R. No. L-36413, Sept. 26,
Sec. 397) 1988)

NOTE: Notwithstanding the fact that the case was Incapacity of the insured will not affect the capacity
filed beyond the one-year prescriptive period of the subrogee because capacity is personal to the
provided for under COGSA, the suit will not be holder. (Lorenzo Shipping v. Chub and Sons, Inc., G.R.
dismissed if the delay was not due to the claimant’s No. 147724, June 8, 2004)
fault. The insurer therefore should bear the loss
with interest on account of such delay. (New World Q: ELP Insurance, Inc. issued Marine Policy No.
International Development Phils. Inc. vs. NYK- 888 in faor of FCL Corp. to insure the shipment
FILJAPAN Shipping Corp., G.R. No. 171468, August 24, of 132 bundles of electronic copper cathodes
2011, in Divina, 2014) against all risks. Subsequently, the cargoes
were shipped on board the vessel “M/V Menchu”
Q. From what time shall the period of from Leyte to Pier 1, North Harbor, Manila.
prescription be computed in case the insured
asked for reconsideration of the denial of claim? Upon arrival, FCL Corp. engaged the services of
(1996 Bar) CGM Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent
A: In case the claim was denied by the insurer but delivery to its warehouse or plants in
the insured file a petition for reconsideration, the Valenzuela City. The goods were loaded on
prescriptive period should be counted from the date board twelvetrucks owned by CGM, Inc. driven
the claim was denied at the first instance and not by its employed drivers and accompanied by its
from the denial of the reconsideration. To rule employed truck helpers. Of the twelve trucks en
otherwise would give the insured a scheme or route to Valenzuela City, only eleven reached the
devise to waste time until any evidence which may destination. One truck loaded with eleven

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 INSURANCE CODE
bundles of copper cathodes, failed to deliver its 1. Applies only to property insurance except when
cargo. the creditor insures the life of his debtor.
2. Insurance contracts are not wagering contracts
Because of this incident, FCL Corp. filed with ELP or gambling contracts.
Insurance, Inc. a claim for insurance indemnity
in the amount of P1.5 million. After the requisite NOTE: Under the collateral source rule, if an
investigation and adjustment, ELP Insurance, injured person receives compensation for his
Inc. paid FCL Corp. the amount of P1,350,000 as injuries from a source wholly independent of the
insurance indedmnity. tortfeasor, the payment should not be deducted
from the damages which he would otherwise collect
ELP Insurance, Inc. thereafter filed a complaint from the tortfeasor. It finds no application to cases
for damages against CGM, Inc. before the RTC, involving no-fault insurances under which the
seeking reimbursement of the amount it had insured is indemnified for losses by insurance
paid to FCL Corp. for the loss of the subject cargo. companies, regardless of who was at fault in the
CGM, Inc. denied the claim on the basis that it is incident generating the losses. Here, it is clear that
not privy to the contract entered into by and MMPC is a no-fault insurer. Hence, it cannot be
between FCL Corp. and ELP Insurance, Inc., and obliged to pay hospitalization expenses of the
hence, it is not liable thereof. If you are the dependents of its employees which had already
judge, how will you decide the case? (2014 Bar) been paid by separate health insurance providers of
said dependents. (Mitsubishi Motors Philippines
A: I will decide the case in favor of ELP Insurance. Salaried Employees Union vs. Mitsubishi Motors
Even if CGM, Inc. is not privy to the contract between Corporation G.R. No. 175773, June 17, 2013, in Divina,
FCL Corp. and ELP Insurance, it is still liable for the 2014)
loss of the cargo. If the plaintiff’s property has been
insured and he has received indemnity from the When amount paid by the insurance company
insurance company for the injury or loss arising out does not fully cover the injury or loss
of the wrong or breach of the contract complained
of, the insurance company shall be subrogated to The aggrieved party shall be entitled to recover the
the rights of the insured against the wrong-doer. deficiency from the person causing the loss or
Since ELP Insurance is subrogated to the rights of injury. (NCC, Art. 2207)
FCL Corp. to the extent of the amount it paid, it has
the right to seek reimbursement from CGM, Inc. Instances where the right of subrogation does
(Loadmaster Customs Serices Inc. Glodel Brokerage not apply
Corporation and R&B Insurance Corporation, G.R. No.
179446, January 10, 2011) 1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
Purposes of subrogation damage from liability
2. The insurer loses his rights against the
1. To make the person who caused the loss legally wrongdoer since the insurer can only be
responsible for it. subrogated to only such rights as the insured
2. To prevent the insured from receiving double may have
recovery from the wrongdoer and the insurer. 3. Where the insurer pays the insured the value of
3. To prevent the tortfeasors from being free from the loss without notifying the carrier who has in
liability and is thus founded on consideration of good faith settled the insured claim for loss
public policy. 4. Where the insurer pays the insured for a loss or
risk not covered by the policy
Rules on subrogation 5. Life insurance
6. For recovery of loss in excess of insurance
1. Applicable only to property insurance – the value coverage
of human life is regarded as unlimited and
therefore, no recovery from a third party can be NOTE: Since the insurer can be subrogated to only
deemed adequate to compensate the insured’s such rights as the insured may have, should the
beneficiary. insured, after receiving payment from the insurer,
2. The right of insurer against a third party is release the wrongdoer who caused the loss, the
limited to the amount recoverable from latter insurer loses his rights against the latter. But in such
by the insured. a case, the insurer will be entitled to recover from
the insured whatever it has paid to the latter, unless
Rules on indemnity the release was made with the consent of the
insurer. (Manila Mahogany Manufacturing

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 MERCANTILE LAW
Corporation v. Court of Appeals, G.R. No. L-52756, disbursements, profits, moneys, securities,
October 12, 1987) choses in action, instruments of debts,
valuable papers, bottomry, and
--- respondentia interests and all other kinds of
property and interests therein, in respect
Q: Malayan Insurance Company issued a car to, appertaining to or in connection with
insurance policy in favor of First Malayan any and all risks or perils of navigation,
Leasing and Finance Corporation (First transit or transportation, or while being
Malayan), insuring a Mitsubishi Galant against assembled, packed, crated, baled,
third party liability, own damage and theft, compressed or similarly prepared for
among others. Unfortunately, the Galant shipment or while awaiting shipment, or
encountered a vehicular accident at the corner during any delays, storage, transshipment,
of EDSA and Ayala Avenue, Makati. The accident or reshipment incident thereto, including
involves a Nissan Bus operated by Aladdin war risks, marine builder’s risks, and all
Transit, an Isuzu Tanker, and a Fuzo Cargo personal property floater risks;
Truck. Because of this, Malayan Insurance was 2. Person or property in connection with or
constrained to pay First Malayan of the damages appertaining to a marine, inland marine,
sustained by it. Maintaining that it has been transit or transportation insurance,
subrogated to the rights and interests of the including liability for loss of or damage
assured, Malayan Insurance sent several arising out of or in connection with the
demand letters to Rodelio Alberto (Alberto) and construction, repair, operation,
Enrico Alberto Reyes (Reyes), the registered maintenance or use of the subject matter of
owner and the driver, respectively, of the Fuzo such insurance (but not including life
Cargo Truck, requiring them to pay the amount insurance or surety bonds nor insurance
it had paid to the assured. No settlement of against loss by reason of bodily injury to
liability was made, thus, Malayan Insurance any person arising out of ownership,
filed a complaint for damages for gross maintenance, or use of automobiles);
negligence against Alberto, et al. Is Malayan 3. Precious stones, jewels, jewelry, precious
Insurance entitled to the right of subrogation? metals, whether in course of transportation
or otherwise; and
A: YES. The payment by the insurer to the insured 4. Bridges, tunnels and other
operates as an equitable assignment to the insurer instrumentalities of transportation and
of all the remedies that the insured may have communication (excluding buildings, their
against the third party whose negligence or furniture and furnishings, fixed contents
wrongful act caused the loss. The right of and supplies held in storage); piers,
subrogation is not dependent upon, nor does it grow wharves, docks and slips, and other aids to
out of, any privity of contract. It accrues simply upon navigation and transportation, including
payment by the insurance company of the insurance dry docks and marine railways, dams and
claim. When it is not disputed that the insurance appurtenant facilities for the control of
company indeed paid, then there is valid waterways.
subrogation in its favor. (Malayan Insurance Co., Inc.,
vs. Rodelio Alberto, et al., G.R. No. 194320, February B. Marine protection and indemnity insurance.
1, 2012) (IC, Sec. 101)

MARINE INSURANCE From the foregoing enumeration, marine insurance

now includes, not only risks connected with marine
Traditionally, marine insurance it includes policies navigation, but which are otherwise connected
that cover risk connected with navigation to which therewith such as insurance of aircraft, goods while
a ship, cargo, freightage, profits or other insurable being packed or assembled, injury to passengers,
interest in movable property may be exposed precious stones, jewels, jewelry whether in the
during a certain voyage or a fixed period of time. course of transportation or not. (Perez, 2010)
However, under the present laws, it also covers
inland marine insurance. (Sundiang Sr. & Aquino, Cargo can be the subject of marine insurance, and
2014) once it is entered into, the implied warranty of
seaworthiness immediately attaches to whoever is
Marine insurance includes: insuring the cargo, whether he be the ship owner or
A. Insurance against loss or damage to: not. (Roque v. IAC, GR No. L-66935, Nov. 11, 1985)
1. Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,

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 INSURANCE CODE
As a general rule, the marine insurance policy needs insured because they are held to be an
to be presented in evidence before the trial court or essential part of transportation system.
even belatedly before the appellate court. However, d. Floater– Provides insurance to follow the
as a general rule, there are admitted exceptions. The insured property wherever it may be
policy can still be considered in court as long as it located subject always to the territorial
has been properly identified by testimony duly limits of the contract (De Leon, 2010).
recorded and has been incorporated in the records
of the case. (Asian Terminal vs. CIR, G.R. No. 171406, Risk insured against in marine insurance
April 4, 2011, in Divina 2014)
GR: In the usual form of a marine policy, the risks
Marine protection and indemnity insurance insured against are only “perils of the sea”.

It is an insurance against, or against legal liability of XPN: When the insurance is an “all risk policy” and
the insured for loss, damage, or expense incident to thus covers even “perils of the ship”.
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or XPN to XPN: When the risks are expressly
instrumentality in use of ocean or inland excepted by the “all risk policy”.
waterways, including liability of the insured for
personal injury, illness or death or for loss of or The insured is bound to prove that the cause of the
damage to the property of another person. (IC, Sec. loss is a peril of the sea. The burden rests on the
101, [b]) insurer to prove that the loss is caused by a risk that
is excluded
Major divisions of marine insurance
“Perils of the sea or perils of navigation” (1998
1. Ocean marine insurance –covers primarily sea Bar)
perils of ships and cargoes. Scope: (GELS)
a. Goods or cargoes It includes only those casualties due to the (WiN):
b. Earnings such as freight, passage money 1. Unusual violence or extraordinary action of
c. Liability incurred by reason of maritime WInd and wave, or
perils 2. Other extraordinary causes connected with
d. Ships or hulls Navigation. (De Leon, 2010)

NOTE: The insurer is liable only for such losses or “Perils of the ship”
damages proximately caused by the perils insured
against. (De Leon, supra) It is a loss which, in the ordinary course of events,
results from the (NON):
2. Inland marine insurance – Covers primarily the 1. Natural and inevitable action of the sea;
land or over the land transportation perils of 2. Ordinary wear and tear of the ship;
property shipped by railroads, motor trucks, 3. Negligent failure of the ship’s owner to provide
airplanes, and other means of transportation. It the vessel with proper equipment to convey the
also covers risks of lake, river, or the other cargo under ordinary conditions.
inland waterway transportation and other
waterborne perils outside of those risks that fall Q: Remington Industrial Sales Corporation
definitely within the ocean marine category. (Remington) shipped on board a vessel,
Classes: (Pit-BaFF) seamless steel pipes from Japan to the
a. Property In Transit – Provides protection Philippines and insured the shipment with
to the property frequently exposed to loss Cathay Insurance Co. (Cathay). Upon receipt of
while it is being transported from one said shipment, losses and damages were
location to another. discovered. Upon demand under the insurance
b. Bailee liability – Provides protection to contract, it was denied by Cathay. Remington
persons who have temporary custody of contends that the rust on the seamless steel
the goods or personal property of others, pipes is not an inherent vice of the shipment,
such as carriers, laundrymen, thus the same is considered as a peril of the sea.
warehousemen, and garage keepers. Cathay, on the other hand claims that the loss
c. Fixed transportation property – Covers was occasioned by an inherent defect or vice in
bridges, tunnels and other the insured article. Is the “rusting” of the
instrumentalities of transportation and seamless steel pipes considered as a “peril of the
communication, although as a matter of sea”?
fact they are fixed property. They are so

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 MERCANTILE LAW
A: YES. The rusting of steel pipes in the course of a b. If hypothecated by a bottomry loan, the
voyage is a “peril of the sea” in view of the toll on the insurable interest is only the excess of the
cargo of wind, water, and salt conditions. Moreover, value of the vessel over the amount secured
it is a cardinal rule in the interpretation of contracts by bottomry. (IC, Sec. 103)
that any ambiguity therein should be construed c. He also has an insurable interest on
against the maker/issuer/drafter thereof, namely, expected freightage. (IC, Sec. 104)
the insurer. Besides the precise purpose of insuring
cargo during a voyage would be rendered fruitless. 2. Cargo owner – over the cargo and expected
(Cathay Insurance Co., v. CA, et. al., G.R. No. L-76145, profits. (IC, Sec. 107)
June 30, 1987)
3. Charterer
Q: A marine insurance policy on a cargo states a. Over the vessel, to the extent of the amount
that “the insurer shall be liable for losses he is liable to the shipowner, if the ship is
incident to perils of the sea.” During the voyage, lost or dameged during the voyage. (IC, Sec.
seawater entered the compartment where the 108)
cargo was stored due to the defective drainpipe b. Over his expected profits or freightage if
of the ship. The insured filed an action on the he accepts cargoes from other persons for
policy for recovery of the damages caused to the a fee. (Sundiang Sr. & Aquino, 2014)
cargo. May the insured recover damages? (1998 c. Over his own cargo or his client’s cargo.
Bar) (Sundiang Sr. & Aquino, 2014)

A: NO. The proximate cause of the damage to the 4. Creditor/lender – over the amount of the loan.
cargo insured was the defective drainpipe of the
ship. This is peril of the ship, and not peril of the sea. Loan on bottomry or respondentia
The defect in the drainpipe was the result of the
ordinary use of the ship. To recover under a marine A loan in which under any condition whatever, the
insurance policy, the proximate cause of the loss or repayment of the sum loaned, and of the premium
damage must be peril of the sea. stipulated, depends upon the safe arrival in port of
the goods on which it is made or of the price they
“All risks” marine insurance policy may receive in case of accident. (Code of Commerce,
Art. 719)
GR: It is that which insures against all causes of
conceivable loss or damage. Loan on bottomry vs. Loan on respondentia

XPNs: They are basically the same. The only distinction is,
1. As otherwise excluded in the policy; or a loan on bottomry involves a vessel as a security,
2. Due to fraud or intentional misconduct on the while a respondentia has cargo as its security.
part of the insured. (Choa Tiek Seng v. CA, (Perez, 2010)
supra)
Freightage
An “all risks” policy grants greater protection than
that afforded by the “perils clause” (De Leon, supra). It signifies all the benefits derived by the owner,
The insured under an "all risks insurance policy" either from the chartering of the ship or its
has the initial burden of proving that the cargo was employment for the carriage of his own goods or
in good condition when the policy attached and that those of others. (IC, Sec. 104)
the cargo was damaged when unloaded from the
vessel; thereafter, the burden then shifts to the Insurable interest in expected freightage
insurer to show the exception to the coverage.
(Filipino Merchants Insurance Co. vs. CA, supra) 1. In a charter party - exists from the time the
vessel has broken ground on the chartered
Extent of the insurable interest voyage. (IC, Sec. 106)
2. No charter party - If a price is to be paid for the
1. Ship owner carriage of goods, insurable interest in expected
a. Over the value of the vessel, even when it freightage exists when they are actually on
has been chartered by one who covenants board, or there is some contract for putting
to pay him its value in case of loss. In such a them on board, and both ship and goods are
case, the insurer shall be liable for only that ready for the specified voyage (ibid).
part of the loss which the insured cannot
recover from the charterer. (IC, Sec. 102)

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 INSURANCE CODE
Instances when there is no insurable interest in Concealment in marine insurance
freight
It is the failure to disclose any material fact or
1. When there is no contract and no part of the circumstance which in fact or law is within, or which
goods expected to be carried are on board, ought to be within the knowledge of one party and
although there are goods ready for shipment or of which the other has no actual or presumptive
the master is provided with funds for the knowledge. (De Leon, 2010)
purpose of purchasing a cargo.
2. Where the vessel is a mere “seeking ship”, the NOTE: Information of the belief or expectation of a
owner has no insurable interest in freight to be third person, in reference to a material fact, is
earned on goods not loaded. material. (IC, Sec. 110)

A “seeking ship” is a vessel looking for cargo to Presumption of knowledge of prior loss in
be transported. (De Leon, 2010) marine insurance

Existence of Insurable interest in expected A person insured by a contract of marine insurance

profits is presumed to have knowledge, at the time of
insuring, of a prior loss, if the information might
Insurable interest in expected profits exists: possibly have reached him in the usual mode of
1. When the interest in the thing involved is based transmission and at the usual rate of
on a legal right. communication (IC, Sec. 111). The presumption,
2. When the interest in thing involved is based on however, is rebuttable.
valuable consideration.
Concealment in respect to any of the following
Special marine insurance contracts and clauses matters does not vitiate the entire contract but
merely exonerates the insurer from a loss
1. All-risks policy resulting from the risk concealed
2. Barratry clause – a clause which provides that
there can be no recovery on the policy in case of 1. National character of the insured;
any willful misconduct on the part of the master 2. The liability of the thing insured to capture and
or crew in pursuance of some unlawful or detention;
fraudulent purpose without the consent of the 3. The liability to seizure from breach of foreign
owner and to the prejudice of owner’s interest. laws of trade;
It requires an intentional and willful act in its 4. The want of necessary documents; and
commission. No honest error or judgment or 5. The use of false and simulated papers. (IC, Sec.
mere negligence, unless criminally gross, can be 112)
barratry. (Roque v. IAC, G.R. No. L- 66935, Nov.
11, 1985) NOTE: Ordinarily, the matters concealed need not
3. Inchmaree clause – a clause which makes the be the cause of the loss. In marine insurance, the
insurer liable for loss or damage to the hull or above-mentioned matters, although concealed, will
machinery arising from the: not vitiate the contract except when they caused the
a. Negligence of the captain, engineers, etc. loss.
b. Explosion, breakage of shafts; and
c. Latent defect of machinery or hull. Concealment in marine insurance vs.
(Thames and Mersey Marine Insurance Co v. Concealment in other property insurance
Hamilton Fraser and Co [1887] 12 AC 484)
4. “Sue and labor” clause – a clause which makes
OTHER PROPERTY
the insurer liable for MARINE INSURANCE
INSURANCE
a. all the expenses attendant upon a loss
The information or
which forces the ship into port to be
The information or the belief of a 3rd party is
repaired; and
belief or expectation of not material and need
b. expenses incurred, where it is stipulated in
3rd persons in reference not be communicated,
the policy that the insured shall labor for
to a material fact is unless it proceeds from
the recovery of the property. (IC, Sec. 165)
material and must be an agent of the insured
Insurer is liable for such expense, in either case, communicated. whose duty is to give
being in addition to a total loss, if that afterwards information.
occurs (ibid). The concealment of any Concealment of any
fact in relation to any of material fact will vitiate

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 MERCANTILE LAW
the matters stated in Sec. the entire contract, GR: It is complied with if the ship is seaworthy at the
112 does not vitiate the whether or not the loss time of the commencement of the risk. (IC, Sec. 117)
entire contract but results from the risk
merely exonerates the concealed. XPNs:
insurer from a risk 1. In the case of time policy- the ship must be
resulting from the fact seaworthy at the commencement of every
concealed. voyage it undertakes during that time. (IC, Sec.
117, [a])
Effect of falsity of a representation by the 2. In the case of cargo policy- each vessel upon
insured which cargo is shipped or transshipped must be
seaworthy at the commencement of each
1. Promissory Representation - If a representation particular voyage. (IC, Sec. 117, [b])
by the insured is intentionally false in any 3. In the case of voyage policy contemplating a
material respect or in respect of any fact on voyage in different stages – the ship must be
which the character and nature of the risk seaworthy at the commencement of each
depends, the insurer may rescind the entire portion of the voyage. (IC, Sec. 119)
contract. (IC, Sec. 113)
2. Representation of Expectation - The eventual Admission of seaworthiness by the insurer
falsity of a representation as to expectation
does not, in the absence of fraud, avoid a Seaworthiness is admitted by the insurer when:
contract of marine insurance. (IC, Sec. 114) 1. The warranty of seaworthiness is to be taken as
fulfilled; or
Implied warranties in marine insurance (SINAI) 2. The risk of unseaworthiness is assumed by the
(2000 Bar) insurer (ibid).

1. Seaworthiness (IC, Sec. 115 to 121); Effect of the admission of seaworthiness by the
2. Non-engagement from Illegal venture; insurer
3. Warranty of Neutrality – The ship will carry the
requisite documents to show the nationality or If the policy provides that the seaworthiness of the
neutrality of the ship or its cargo and will not vessel as between insured and insurer is admitted,
carry any documents that cast reasonable the issue of seaworthiness cannot be raised by the
suspicion on it if the nationality or neutrality of insurer without showing concealment or
the ship or its cargo is expressly warranted (IC, misrepresentation by the insured. (Phil. American
Sec. 122); General Insurance Co. v. CA, G.R. No. 116940, June 11,
4. Non-deviation from the Agreed voyage (IC, Secs. 1997)
125, 126, 127);
5. Presence of Insurable interest. Unseaworthiness is unknown to the owner of
the cargo
Seaworthiness
It is immaterial in ordinary marine insurance and
It is when a ship is reasonably fit to perform the may not be used by him as a defense in order to
service and to encounter the ordinary perils of the recover on the marine insurance policy. It becomes
voyage contemplated by the parties to the policy. the obligation of a cargo owner to look for a reliable
(IC, Sec. 116) common carrier, which keeps its vessels in
seaworthy conditions. The shipper may have no
Scope of the seaworthiness of a vessel control over the vessel but he has control in the
choice of the common carrier that will transport his
A warranty of seaworthiness extends not only to the goods. (Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985)
condition of the structure of the ship itself, but
requires that it be properly laden, and provided Payment made by the insurer to the insured for
with a competent master, a sufficient number of the latter’s lost cargo in case the ship is
competent officers and seamen, and the requisite unseaworthy
appurtenances and equipment, such as ballasts,
cables and anchors, cordage and sails, food, water, Payment made by the insurer to the insured for the
fuel and lights, and other necessary or proper stores latter’s lost cargo It operates as waiver of the
and implements for the voyage. (IC, Sec. 118) insurer’s right to enforce the implied warranty of
seaworthiness. However, this waiver extends only
Compliance with the warranty of seaworthiness in favor of the insured. There is no waiver in favor
of the carrier that transported the cargo. The

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 INSURANCE CODE
insurer can still claim payment against the carrier 4. When made in good faith, for the purpose of
for breach of contract based on the insurer’s right of saving human life or relieving another vessel in
subrogation. (Sundiang Sr. & Aquino, 2014 citing distress. (IC, Sec. 126)
Delsan Transport Lines, Inc. v. CA, G.R. No. 127897,
Nov. 15, 2001) Improper deviation

Ship becomes unseaworthy during the voyage Every deviation not specified under Sec. 126. (IC,
Sec. 127)
An unreasonable delay in repairing the defect
exonerates the insurer on ship or shipowner's In improper deviation, an insurer is not liable for
interest from liability from any loss arising any loss happening to the thing insured subsequent
therefrom. (IC, Sec. 120) to an improper deviation. (IC, Sec. 128, 2005 Bar)

Express warranty as to nationality and Kinds of losses

neutrality
1. Total, which may be (1992 Bar):
1. As to nationality – imports that the vessel a. Actual total loss
belongs to the subject of a particular country. b. Constructive total loss
2. As to neutrality – imports that the property 2. Partial
insured is neutral in fact, that is it belongs to
neutrals and that no act of insured or his agent Actual vs. Constructive loss
shall be done which can legally compromise its
neutrality. CONSTRUCTIVE
ACTUAL TOTAL LOSS
TOTAL LOSS
Rule regarding voyage in marine insurance It is one which the loss,
It exists when the
although not actually
When the voyage contemplated by a marine subject matter of the
total, is of such a
insurance policy is described by the places of insurance is wholly
character that the
beginning and ending, the voyage insured is one destroyed or lost or
insured is entitled, if he
which conforms to the course of sailing fixed by when it is so damaged
thinks fit, to treat it as
mercantile usage between those places. (IC, Sec. as no longer to exist in
total by abandonment.
123) its original character.
(IC, Sec. 133)
Abandonment by the
NOTE: If the course of sailing is not fixed by The insured has the insured is necessary in
mercantile usage, the voyage insured is that way right to claim the whole order to recover for a
between the places specified, which to a master of insurance without total loss (IC, Sec. 141) in
ordinary skill and discretion, would mean the most notice of abandonment. the absence of any
natural, direct and advantageous. (IC, Sec. 124) (IC, Sec. 137) provision to the
contrary in the policy.
Deviation
Actual total loss (1996 Bar)
It is a departure from the course of the voyage
insured, mentioned in Sec. 123 and Sec. 124, or an The following constitutes actual total loss: (DIVE)
unreasonable delay in pursuing the voyage or the 1. A total destruction of the thing insured;
commencement of an entirely different voyage. (IC, 2. The irretrievable loss of the thing by sinking,
Sec. 125) or by being broken up;
3. Any damage to the thing which renders it
Instances when deviation is proper (2000, 2005 valueless to the owner for the purpose for
Bar) which he held it; or
4. Any other event which effectively deprives the
1. When caused by circumstances over which owner of the possession, at the port of
neither the master nor the owner of the ship has destination, of the thing insured. (IC, Sec. 132)
any control;
2. When necessary to comply with a warranty, or NOTE: Complete physical destruction is not
to avoid a peril, whether or not peril is insured essential to constitute actual total loss.
against;
3. When made in good faith, and upon reasonable An insurance confined in terms to an actual loss
grounds of belief in its necessity to avoid a peril; does not cover a constructive total loss, but covers
or

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 MERCANTILE LAW
any loss, which necessarily results in depriving the loss claimed by the ship owner pertains to the
insured of the possession, at the port of destination, vessel. The expenses for refloating and
of the entire thing insured. (IC, Sec. 139) estimated repairs did not amount to three-
fourths of the value of the vessel, hence, there is
Constructive total loss no constructive total loss to speak of.
b. No. The case did not qualify as one for total
There is constructive total loss when: constructive loss. Deduced from the facts of the
1. More than ¾ thereof in value is actually lost, or case, the loss incurred during the peril did not
would have to be expended to recover it from amount to three-fourths of its value. As
the peril; provided in Sec. 139, abandonment may be
2. The thing insured is injured to such extent as to availed of if the loss is more than three-fourths
reduce its value more than ¾; of its value or the expense to recover it from
3. The thing insured is a ship, and the peril.
contemplated voyage cannot be lawfully c. Sec. 93 of the Insurance Code provides that
performed without incurring either an expense double insurance exists where the same person
to the insured of more than ¾ the value of the is insured by several insurers separately, in
thing abandoned or a risk which a prudent man respect to the same subject and interest.
would not take under the circumstances; or d. In double insurance, the insurers are
4. The thing insured, being cargo or freightage, considered as co-insurers. Each one is bound to
and the voyage cannot be performed, nor contribute ratably to the loss in proportion to
another ship procured by the master, within a the amount for which he is liable under his
reasonable time and with reasonable diligence, contract. This is known as the “principle of
to forward the cargo, without incurring the like contribution” or “contribution clause.” (IC, Sec.
expense or risk mentioned in no. (3). But 94 [e])
freightage cannot in any case be abandoned
(and thus declared constructively lost) unless Presumption of actual loss
the ship is also abandoned. (IC, Sec. 141)
It may be presumed from the continued absence of
Q: M/V Pearly Shells, passenger and cargo a ship without being heard of. The length of time
vessel, was insured for P40,000,000.00 against which is sufficient to raise his presumption depends
“constructive total loss.” Due to a typhoon, it on the circumstances of the case. (IC, Sec. 134)
sank near Palawan. Luckily, there was no
casualties, only injured passengers. The Liability of the insurer as regards the cargo in
shipowner sent a notice of abandonment of his case of reshipment
interest over the vessel to the insurance
company which then hired professionals to When a ship is prevented, at an intermediate port,
afloat the vessel for P900,000.00. When re- from completing the voyage, by the perils insured
floated, the vessel needed repairs estimated at against, the liability of a marine insurer on the cargo
P2,000,000.00. The insurance company refused continues after they are thus reshipped. The insurer
to pay the claim of the shipowner, stating that may, however, require additional premium if the
there was “no constructive total loss.” hazard be increased by his extension of liability. (IC,
Sec. 135)
a. Was there “constructive total loss” to entitle
the shipowner to recover from the Additional liabilities of the insurer of goods
insurance company? Explain. referred to in the reshipment of cargo
b. Was it proper for the shipowner to send a
notice of abandonment to the insurance The marine insurer is bound for:
company? Explain 1. Damages;
c. When does double insurance exist? 2. Expenses of discharging;
d. What is the nature of liability of the several 3. Storage;
insurers in double insurance? (2005 Bar) 4. Reshipment;
5. Extra freightage; and
A: 6. All other expenses incurred in saving cargo
a. NO. A constructive total loss is one which gives reshipped, up to the amount insured. (IC, Sec.
the insured the right to abandon. (Sec 131, IC) 136)
Abandonment of the thing insured may be
availed of if the loss is more than three-fourths NOTE: Nothing in Sec. 136 and Sec. 135 shall render
of its value or the expense to recover it from a marine insurer liable for any amount in excess of
peril (Sec 139, IC). In this case, the constructive

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 INSURANCE CODE
the insured value or, if there be none, of the XPN: When there is “Free From Particular Average”
insurable value. Clause in the policy making the insurer liable only
for general average.
Average
Free From Particular Average Clause (FFPA Clause) -
It is any extraordinary or accidental expense A clause agreed upon in a policy of marine insurance
incurred during the voyage for the preservation of in which it is stated that the insurer shall not be
the vessel, cargo, or both and all damages to the liable for a particular average.
vessel and cargo from the time it is loaded and the
voyage commenced until it ends and the cargo XPN to XPN: When particular average loss has the
unloaded. (Code of Commerce, Art. 806) effect of depriving the insured of the possession at
the port of destination of the whole of the thing
Kinds of average insured. (IC, Sec. 138)

1. Gross or general averages – damages or Abandonment

expenses which are deliberately caused by the
master of the vessel or upon his authority, in It is the act of the insured by which, after a
order to save the vessel, her cargo or both at the constructive total loss he declared the
same time from a real and known risk. (Code of relinquishment to the insurer of his interest in the
Commerce, Art. 811) thing insured. (Sec. 140, ibid)

This kind of average must be borne equally by Effect of a valid abandonment

all of the interests concerned in the venture. (De
Leon, 2010) It is equivalent to a transfer by the insured of his
interest, to the insurer, with all the chances of
2. Simple or particular averages – they include all recovery and indemnity (Sec. 148, ibid).
damages and expenses caused to the vessel or
to her cargo which have not inured to the Requisites of valid abandonment
common benefit and profit of all the persons
interested in the vessel and her cargo. (Code of 1. There must be an actual relinquishment by the
Commerce, Art. 809) person insured of his interest in the thing
insured. (Sec. 140, ibid)
This kind of average is suffered by and borne 2. There must be a constructive total loss. (Sec.
alone by the owner of the cargo or of the vessel, 141, ibid)
as the case may be. (De Leon, 2010) 3. The abandonment must neither be partial nor
conditional. (Sec. 142, ibid)
Requisites to the right to claim general average 4. It must be made within a reasonable time after
contribution (DaP-SaM-SuN) receipt of reliable information of the loss. (Sec.
143, ibid)
1. There must be a common danger to the vessel 5. It must be factual. (Sec. 144, ibid)
or cargo; 6. It must be made by giving notice thereof to the
2. Part of the vessel or cargo was sacrificed insurer which may be done orally or in writing;
deliberately; Provided, that if the notice be done orally, a
3. The sacrifice must be for the common safety or written notice of such abandonment shall be
for the benefit of all; submitted within 7 days from such oral notice.
4. It must be made by the master or upon his (Sec. 145, ibid)
authority; 7. The notice of abandonment must be explicit and
5. It must be successful, i.e. Resulted in the saving must specify the particular cause of
of the vessel or cargo; and abandonment. (Sec. 146, ibid)
6. It must be necessary. (Sundiang Sr. & Aquino,
2014) Such notice must state only enough to show that
there is probable cause for abandonment, but
Liability of the insurer as to averages need not be accompanied with proof of interest
or of loss.
GR: The marine insurer is liable both for general
average and particular average loss. Person who may make notice of abandonment

The abandonment need not necessarily be made by

the insured but may be made by an authorized

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 MERCANTILE LAW
agent, and an agent having an authority to insure Effect of insured’s failure to make abandonment
has prima facie an authority to abandon. (De Leon,
2010) The insured has an election to abandon or not, and
cannot be compelled to abandon although
Person to whom notice of abandonment may be abandonment is proper. If the insured fails to
made abandon, he may nevertheless recover his actual
loss. (IC, Sec. 157)
To the insurer or his authorized agent or the broker
who is the agent for both parties (ibid). Measure of indemnity

Acceptance of abandonment may either be express 1. Valued policy – the parties are bound by the
or implied from the conduct of the insurer. Mere valuation, if the insured had some interest at
silence of the insurer for unreasonable length of risk and there is no fraud. (Sec. 158, ibid)
time after notice shall be construed as an
acceptance. (IC, Sec. 152) Overvaluation of property by the insured may
take place either at the time of making the
Effects of acceptance of abandonment contract or at the time of submission of the
proof of loss. In either event, such
1. The insurer becomes at once liable for the overvaluation, if fraudulent, entirely avoids the
whole amount of the insurance and also insurance. However, such fraudulent intent
becomes entitled to all rights which insured must be alleged and clearly proven by the
possessed in the thing insured. (Sec. 148, ibid) insurer. (Perez, 2006)

2. GR: It fixes the rights of the parties; whether 2. Open policy – the following rules shall apply in
express or implied, it is conclusive upon them, estimating a loss:
(Sec. 153, ibid.) and irrevocable. (Sec. 154, ibid) a. Value of the ship – value at the beginning of
the risk.
XPN: Where the ground upon which it was b. Value of the cargo – actual cost to the
made proves to be unfounded (Sec. 154, ibid). insured, when laden on board, or where
Under Sec. 147, abandonment can be sustained that cost cannot be ascertained, its market
only upon the ground specified in the notice value at the time and place of lading, adding
thereof. the charges incurred in purchasing and
placing it on board, but without reference
3. It stops the insurer to rely on any insufficiency to any loss incurred in raising money for its
in the form, time, or right, of abandonment (Sec. purchase, or to any drawback on its
145, 143, 141, ibid). Whether the insured has a exportation, or to the fluctuation of the
right to abandon is immaterial where the market at the port of destination, or to
abandonment is accepted and there is no fraud. expenses incurred on the way or on arrival.
(New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US] c. Value of freightage – gross freightage
378) exclusive of primage, which is a small
compensation paid by a shipper to the
4. On accepted abandonment of a ship, freightage master of the vessel for his care and trouble
earned previous to the loss belongs to the bestowed on the shipper’s goods and which
insurer of said freightage; but freightage the master is entitled to retain in the
subsequently earned belongs to the insurer of absence of an agreement to the contrary
the ship. (Sec. 155, ibid) with the owners of the vessels.
d. Cost of insurance – the cost of insurance is
Effect of the insurer’s refusal to accept a valid always added in calculating the value of the
abandonment ship, cargo, or freightage or other subject
matter in an open policy. (De Leon, 2010)
If the insurer refuses to accept a valid abandonment,
he is liable as upon an actual total loss, deducting Co-Insurance
from the amount any proceeds of the thing insured
which may have come to the hands of the insured. Co-insurance is a form of insurance in which the
(Sec. 156, ibid) person who insures his property for less than the
entire value is understood to be his own insurer for
However, if the abandonment was improper, the the difference which exists between the true value
insured may nevertheless recover to the extent of of the property and the amount of insurance.
the damage proved. (De Leon, 2010)

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 INSURANCE CODE
In such a case, a marine insurer is liable upon a The subject of insurance The subject is the
partial loss only for such proportion of the amount is the property original insurer’s risk
insured by him as the loss bears to the value of the An insurance of the Insurance of a different
whole interest of the insured in the property same interest interest
insured. (IC, Sec. 159) The insured party is the The original insured
party in interest in all has no interest in the
Requisites for co-insurance contracts contract of reinsurance
which is independent
There is co-insurance when the following requisites of the original contract
concur: of insrurance
1. The loss is partial; and The insured has to give Consent of the original
2. The amount of insurance is less than the value consent insured (who is hardly
of the property insured. (Sundiang Sr. & Aquino, even aware of the
2014) reinsurance
transaction) is not
Co-insurance in marine insurance vs. Co- necessary. (De Leon,
insurance in fire insurance 2014)

CO-INSURANCE IN CO-INSURANCE IN
MARINE INSURANCE FIRE INSURANCE Formula to determine the amount recoverable
There is co-insurance by There has to be an in co-insurance
virtue of Section 159 of express stipulation to
the Insurance Code, as that effect. Illustration
long as the above-
enumerated requisites (Partial) Loss X Amount of = Amount of recovery
are present. Insurance

Co-insurance vs. Reinsurance (1994 Bar) (Insurer’s Liability)

Value of thing Insured
CO-INSURANCE REINSURANCE
If a vessel valued at P1M is insured for only P800,
A plan of indemnity It is a contract through 000 and is damaged to the extent of P400, 000, the
insurance under which which the insurer insurer will be required to pay only 80% of the loss
the reinsurer assumes procures a third suffered, or P320,000; the other 20% or P80,000
the obligation on the person to insure him being borne by the insured himself.
amount reinsured, in against loss or liability
the same fashion as the by reason of such P400,000 or 2/5 X P800,000 = P320, 000
insurer is obligated to original insurance. In P1M
the insured (excluding every reinsurance, the
policy loans). For this original contract of The insured is considered a co-insurer as to the
risk, the insurer the insurance and the uninsured portion of P200,000. (1M – 800,000).
insurer usually pays to contract of reinsurance
the reinsurer the gross are separate and distict If the loss is total, the insurer is liable for the full
premium (less from each other and amount of P800,000. On the other hand, if the
commissions and covered by separate property is insured to its full value, the insured is
expense, allowances) it policies. (Diaz, et. al. entitled to recover the full amount of the partial loss
has collected from the 2014) of P400,000.
insured on the amount
insured (it should be Amount the insured is entitled to recover in case
noted that the insurer of loss if profits to be realized are separately
has no relationship with insured
the insured or
beneficiary).
Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover,
CO-INSURANCE REINSURANCE in case of loss, a proportion of such profits
The insurer remains as The insurer becomes equivalent to the proportion which the value of the
the insurer of the the insured, insofar as property lost bears to the value of the whole. (IC,
original insured the reinsurer is Sec. 160)
concerned

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 MERCANTILE LAW
Conclusive presumption of loss of profits The following are indirect losses:
1. Physical damage caused to other property.
When profits are valued and insured by a contract 2. Loss of earnings due to the interruption of
of marine insurance, a loss of them is conclusively business by damage to the insured’s property.
presumed from a loss of the property out of which 3. Additional expenses incurred by the insurer
they were expected to arise, and the valuation fixes following the damage to the property or
their amount. (IC, Sec. 162) contents by an insured peril. (De Leon, 2010)

Other Terms Friendly fire vs. Hostile fire

Drawback FRIENDLY FIRE HOSTILE FIRE

Fire that burns in a Fire that escapes and
It is an allowance made by the government upon the place where it is burns in a place where
duties due on imported merchandise when the supposed to burn. it is not supposed to be.
importer, instead of selling there, re-exports it; or E.g. Gas stove, fire It may also refer to fire
the refunding of such duties if already paid. (Perez, place that started out as a
2006) friendly fire but
escapes from its
Primage original place or it
becomes too strong as
It is a small allowance or compensation payable to it becomes out of
the master or owner of the vessel for the use of his control. (Sundiang Sr. &
cables and ropes to discharge the goods, and to the Aquino, 2014)
mariners for lading and unlading in any port. (Perez,
2006) Ocean Marine Insurance vs. Fire Insurance

NOTE: Drawback and primage are not included in OCEAN MARINE FIRE
determining the loss in a marine open policy. A policy of insurance Where the hazard is
on a vessel engaged in fire alone and the
“Port of refuge expenses” navigationis a contract subject is an unfinished
of marine insurance vessel, never afloat for
These are the additional expenses incurred in although it insures a voyage, the contract
repairing the damages suffered by a vessel because against fire risks only. to insure is a fire risk,
of the perils insured against as well as those especially in the
incurred for saving the vessel from such perils, such absence of an express
as the expense of launching or raising the vessel or agreement that it shall
of towing or navigating it into port for her safety. have the incidents of
These are items to be borne by the insurer in marine policy, or
addition to a total loss if that afterwards takes place. where it insures
(IC, Sec. 165) materials in a shipyard
for use in constructing
FIRE INSURANCE vessels.

It is a contract of indemnity by which the insurer, for Also where a policy

a consideration, agrees to indemnify the insured insures against fire, a
against loss of or damage by fire, lightning, vessel while moored
windstorm, tornado or earthquake and other allied and in use as a hospital.
risks, when such risks are covered by extension to (De Leon, 2010)
fire insurance policies or under separate policies.
(IC, Sec. 169)
Marine vs. Fire insurance

NOTE: The liability of an insurer is to pay for direct Marine Insurance Fire Insurance
loss only. The insurer may be liable to pay for Rules on constructive Not in a fire insurance
consequential or indirect losses if covered by total loss (IC, Secs. 133,
extension to such fire policies or insured under 141) and abandonment
separate policy. (De Leon, 2010) (IC, Sec. 140) apply

Indirect losses

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 INSURANCE CODE
In case of partial loss of The insured may only Merchants Corporation v. Country Bankers Insurance
a thing insured for less become a co-insurer if Corporation, G.R. No. 198588, July 11, 2012)
than its actual value, expressly agreed upon
the insured in a marine by the parties (IC, Sec. Q: On May 13, 2014, Freedom Insurance
policy is a co-insurer of 174) (De Leon, 2010). Company (Freedom) issued Fire Insurance
the uninsured portion Policy to BCP Corporation for the latter’s
(IC, Sec. 159) machineries and equipment located at Tower 1
Building located in Concepcion, Tarlac which
Alteration made in the use or condition of the was used as a factory for automotive parts. The
thing insured insurance, which was for 10 million and
effective for a period of one year, was procured
Insurer may rescind a fire insurance policy on the by BCP Corporation for Rizal Commercial
ground of alteration made in the use or condition of Banking Corporation (RCBC), the mortgagee of
the thing insured, following the requisites: the insured machineries and equipment. On
October 12, 2014, the insured machineries were
1. The use or condition of the thing is specially totally lost by fire. BCP Corporation filed a fire
limited or stipulated in the policy; insurance claim with Freedom which denied the
2. Such use or condition is altered; claim upon the ground that at the time of loss,
3. The alteration is made without the consent of the insured machineries and equipment were
the insurer; transferred by BCP Corporation to a location
4. The alteration is made by means within the different from that indicated in the policy. The
control of the insured; and insured machineries were transferred from the
5. The alteration increases the risk. (IC, Sec. 170) Tower 1 Buiding to the Tower 2 Building also
6. There must be a violation of a material policy found in Concepcion, Tarlac which was used as a
provision. (Sundiang Sr. & Aquino, 2014) warehouse for storing old and unused
machineries of the corporation. Was the refusal
NOTE: A contract of fire insurance is not affected by of Freedom justified?
any act of the insured subsequent to the execution
of the policy, which does not violate its provisions A: YES. The policy stipulated that the insured
even though it increases the risk and is the cause of properties were located at the Tower1 Building but
the loss. (IC, Sec. 172) BCP Corporation transferred the machineries
without the consent of Freedom. The alteration of
Q: United Merchants Corporation (UMC)’s the location increased the risk of loss. The transfer
General Manager Alfredo Tan insured UMC’s affected Freedom’s ability to control the risk by
stocks in trade of Christmas lights against fire guarding against the risk brought about by the
with Country Bankers Insurance Corporation change in condition, specifically the change in the
(CBIC). Unfortunately, a fire gutted the location of the risk. Tower 2 Building was not the
warehouse rented by UMC. When UMC location stipulated in the policy. There being an
demanded for payment under the insurance unconsented removal, the transfer was at BCP’s
policy, CBIC rejected its claim due to breach of own risk and it must suffer the consequences of the
Condition No. 15 of the policy which states that fire. (Malayan Insurance Company, Inc. v. PAP Co.,
if the claim be in any respect fraudulent, or if any Ltd. G.R. No. 200784, August 7, 2013)
false declaration be made or used in support
thereof, all the benefits under the policy shall be Effect when the insured has no control or
forfeited.CBIC contends that because arson and knowledge of the alteration
fraud attended the claim, UMC is not entitled to
recover under Condition No. 15 of the insurance GR: The insurer is not relieved from liability if the
policy. Is UMC is entitled to claim from CBIC the acts or circumstances by which the risk is increased
full coverage of its fire insurance policy? are occasioned by accident, or a cause over which
the insured has no control.
A: NO. The Insurance Code provides that a policy
may declare that a violation of specified provisions XPNs:
thereof shall avoid it. Thus, in fire insurance policies, 1. Actually known to the insured; or
which contain provisions such as Condition No. 15 2. Insured is presumed to know of the alteration
of the insurance policy, a fraudulent discrepancy when the acts or circumstances, permanently
between the actual loss and that claimed in the and substantially affects the conditions of the
proof of loss voids the insurance policy. Mere filing property so as to constitute an increase in risk.
of such a claim will exonerate the insurer. (United (De Leon, supra, 2010)

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 MERCANTILE LAW
Measure of indemnity in open and valued undertaking, even though the cost may exceed the
policies in fire insurance original amount of insurance. (De Leon, 2010)

OPEN POLICIES VALUED POLICIES Insured can pledge, hypothecate or transfer a

The expense it would be The parties are bound fire insurance policy or rights thereunder
to the insured at the time by the valuation, in the
of the commencement of absence of fraud. He may do so after a loss has occurred and even
the fire to replace the (Sundiang Sr. & Aquino without the consent of, or notice to, the insurer. In
thing lost or injured in 2014, citing such a case, it is not the personal contract which is
the condition in which it Development Insurance being assigned, but a claim under or a right of action
was at the time of the Corporation v. IAC, G.R. on the policy against the insurer. (De Leon, 2010)
injury. No. 713610, July 19,
1986). Limitation to the right of the insured in pledging,
In an open policy, the hypothecating or transferring his right under a
actual loss, as fire insurance policy
determined, will
represent the total Section 175 of the Insurance Code prohibits the
indemnity due the exercise of this right in the case where the pledging,
insured except only that hypothecating, or transferring is made to any
the total indemnity shall person, firm or company who acts as agent for or
not exceed the total value otherwise represents the insurer.
of the policy
NOTE: Any such pledge, etc. shall be void and of no
Co-insurance clause in fire policies effect insofar as it may affect other creditors of the
insured (ibid).
The co-insurance clause is a clause requiring the
insured to maintain insurance to an amount equal CASUALTY INSURANCE
to the value or specified percentage of the value of
the insured property under penalty of becoming co- It is an insurance covering loss or liability arising
insurer to the extent of such deficiency. This is to from accident or mishap, excluding certain types of
prevent the property owners from taking out such loss which by law or custom are considered as
small amount of insurance, and thereby reducing falling exclusively within the scope of other types of
the premium payments and thereby increasing the insurance such as fire or marine. (IC, Sec. 176)
rates of premium for all. (De Leon, 2010)
Coverage of casualty insurance
NOTE: A co-insurance cannot exist in fire insurance
if there is no stipulation to that effect. 1. Employer's liability and workmen’s insurance –
the risk insured against is the liability of the
Option to rebuild clause assured to make compensation or pay damages
for an accident, injury, or death, occurring to a
It gives the insurer the option to rebuild the servant or other employee, in the course of his
destroyed property instead of paying the amount of employment under statutes imposing such
the loss or damage, notwithstanding a fixed liability on employers.
valuation in the policy (IC, Sec. 174). This clause 2. Public utility insurance – indemnifies against
serves to protect the insurer against unfairness in liability on account of injuries to the person or
the appraisal and award rendered by a packed property of another. It may extend to
board of arbitrators, or in the proof of loss. automobiles, elevators, fly wheels, libel,
theaters, and vessels.
NOTE: The insurer must exercise his option to 3. Motor vehicle liability insurance – is a contract
rebuild within the time stipulated in the policy, or in of insurance against passenger and third-party
the absence of stipulation, within a reasonable time. liability for death or bodily injuries and damage
The choice by the insurer shall produce no effect to property arising from, motor vehicle
except from the time it has been communicated to accidents.
the insured. (Article 1201, NCC) 4. Plate glass insurance – an insurance against loss
from accidental breaking of plate-glass
Unless the policy has limited the cost of rebuilding windows, doors, showcases, etc.
to the amount of the insurance, the insurer, after 5. Burglary and theft insurance – an insurance
electing to rebuild, can be compelled to perform his against loss of property by the depredations of
burglars and thieves.

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 INSURANCE CODE
6. Personal accident insurance – a form of Co. Ltd, G.R. No. L-
insurance which undertakes to indemnify the 25579, March 29,
assured against the expense, loss of time, and 1972)
suffering resulting from accidents causing him
physical injury, usually by payment at a fixed
rate per week while the consequent disability Rules on Third party liability insurance
lasts, and sometimes including the payment of a
fixed sum to his heirs in case of his death by 1. Insurable interest is based on the interest of the
accident within the term of the policy. insured in the safety of the persons, and their
7. Health insurance – an indemnity to persons for property, who may maintain an action against
expense and loss of time occasioned by disease. him in case of their injury or destruction
8. Other substantially similar kinds of insurance. respectively. (De Leon, 2010)
(Perez, 2006) 2. In a TPL insurance contract, the insurer
assumes the obligation by paying the injured
Two divisions of casualty insurance third party to whom the insured is liable. Prior
payment by the insured to the injured third
1. Accident or health insurance – Insurance against person is not necessary in order that the
specified perils which may affect the person obligation of the insurer may arise. The moment
and/or property of the insured. (E.g. personal the insured becomes liable to third persons, the
accident, robbery/theft insurance) insured acquires an interest in the insurance
2. Third party liability insurance (TPL) – Insurance contract which may be garnished like any other
against specified perils which may give rise to credit. (Perla Compania de Seguros, Inc. vs.
liability on the part of the insured of claims for Ramolete, G.R. No. L-60887, November 13, 1991)
injuries or damage to property of others. (De 3. In burglary, robbery and theft insurance, the
Leon, 2010) opportunity to defraud the insurer (moral
hazard) is so great that insurer have found it
“Accidental” vs. “Intentional” as used in necessary to fill up the policies with many
insurance restrictions designed to reduce the hazard. The
purpose of the exception is to guard against
ACCIDENTAL INTENTIONAL liability should theft be committed by one
The terms “accident” Intentional as used in having unrestricted access to the property.
and “accidental” have an accident policy (Fortune Insurance & Surety Co. vs. CA, G.R. No.
been taken to mean excepting intentional 115278, May 23, 1995)
that which happens injuries inflicted by 4. The right of the person injured to sue the
by chance or the insured or any insurer of the party at fault (insured), depends
fortuitously, without other person, implies on whether the contract of insurance is
intention or design, the exercise of the intended to benefit third persons also or only
which is unexpected, reasoning faculties, the insured (Eulogio vs. Del Monte, GR No. L-
unusual or consciousness, and 22042, August 17, 1967). If the contract provides
unforeseen. The term volition. Where a for:
does not, without provision of the policy a. Indemnity against third party liability – The
qualification, exclude excludes intentional third persons to whom the insured is liable,
events resulting in injury, it is the can sue directly the insurer upon the
damage or loss due to intention of the occurrence of the injury or event upon
fault, recklessness or person inflicting the which the liability depends.The purpose is
negligence of third injury that is to protect the injured person against the
parties. (Sundiang Sr. controlling. If the insolvency of the insured who causes such
& Aquino, 2014 citing injuries suffered by injury and to give him a certain beneficial
Pan Malayan the insured clearly interest in the proceeds of the policy. It is as
Insurance Corp. V. CA, resulted from the if the injured person were especially named
G.R. No. 81026, April 3, intentional act of a in the policy. (Shafer vs. RTC Judge, G.R. No.
1990) third person, the 78848, November 14, 1988, 1996 Bar)
insurer is relieved b. Indemnity against actual loss or payment –
from liability as The third persons cannot proceed against
stipulated. (Sundiang the insurer, the contract being solely to
Sr. & Aquino, 2014 reimburse the insured for liability actually
citing Biagtan v. The discharged by him through payment to
Insular Life Assurance third persons, said third person’s recourse
being thus limited to the insured alone.

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 MERCANTILE LAW
(Guingon vs. Del Monte, G.R. No. L-22042, with finality. Is the contention of the insurer
August 17, 1967) Prior payment by the correct? (1996 Bar)
insured is necessary to give rise to the
obligation of the insurer. A: NO, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
Source of liability of third party liability determining Cesar’s liability with finality before the
insurance (1996, 2000 Bar) third party liability insurer could be sued. The
occurrence of the injury to Roberto immediately
The direct liability of the insurer under indemnity gave rise to the liability of the insurer under its
contract against third party liability does not mean policy. Where an insurance policy insures directly
that the insurer can be held solidarily liable with the against liability, the insurer’s liability accrues
insured. The insurer’s liability is based on contract; immediately upon the occurrence of the injury or
that of the insured is based on tort. (Figuracion vda. event upon which the liability depends. (Shafer vs.
De Maglana, et. al. v. Hon. Francisco Consolacion, G.R. RTC Judge, supra)
No. 60506, August 6, 1992)
Liability of insurer if the insured was
--- committing a felony

Q: Lawrence, a boxer, is a holder of an accident Liabilities arising out of acts of negligence, which
insurance policy. In a boxing match, he died after are also criminal, are also insurable on the ground
being knocked out by the opponent. Can his that such acts are accidental. Thus, a motor
father who is a beneficiary under said insurance insurance policy covering the insured’s liability for
policy successfully claim indemnity from the accidental injury caused by his negligence, even
insurance company? (1990 Bar) though gross and attended by criminal
consequences such as homicide through reckless
A: YES. Clearly, the proximate cause of death was imprudence, will not be void as against public
the boxing contest. Death sustained in a boxing policy. But liability consequences of deliberate
contest is an accident. (De la Cruz v. Capital criminal acts are not insurable. (Sundiang Sr. &
Insurance & Surety Co., G.R. No. L-21574, June 30, Aquino, 2014)
1966)
“No action” clause
Liability of the insurer vs. Liability of the insured
It is a requirement in a policy of liability insurance
INSURER INSURED which provides that suit and final judgment be first
The liability is direct but Liability is direct and obtained against the insured, that only thereafter
the insurer cannot be can be held liable with can the person injured recover on the policy. It
held solidarily liable all the parties at fault. expressly disallows suing the insurer as co-
with the insured and defendant. (Guingon v. Del Monte, supra)
other parties at fault.
Liability is based on Liability is based on A “no action” clause must yield to the provisions of
contract. tort. the Rules of Court regarding multiplicity of suits.
The third-party liability The liability extends to (Shafer v. RTC Judge, supra.)
is only up to the extent the amount of actual
of the insurance policy and other damages. Rules in accident insurance
and that required by (Heirs Poe v. Malayan
law. Insurance, G.R. No. 1. For death or injury to be covered by the policy,
156302, April 7, 2009) such should not be the natural or probable
result of the insured’s voluntary act, or if
something unforeseen occurs in the doing of the
act which produces the injury, which may result
Q: While driving his car along EDSA, Cesar to death. (Dela Cruz vs. Capitol Insurance &
sideswiped Roberto, causing injuries to the Surety Co., supra)
latter, Roberto sued Cesar and the third-party 2. Suicide and willful exposure to needless peril
liability insurer for damages and/or insurance are in pari matere because they both signify a
proceeds. The insurance company moved to disregard for one’s life. Voluntary exposure to a
dismiss the complaint, contending that the known danger is generally held to negate the
liability of Cesar has not yet been determined accidental character of whatever followed from
the known danger. (De Leon, 2010)

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 INSURANCE CODE
3. The insured’s beneficiary has the burden of More of a credit Generally a contract of
proof in demonstrating that the cause of death accommodation with indemnity
is due to the covered peril. Once that fact is the surety assuming
established, the burden shifts to the insurer to primary liability
show any excepted peril that may have been Surety is entitled to No right of recovery for
stipulated by the parties. (Vda. De Gabriel vs. CA, reimbursement from the loss the insurer may
G.R. No. 103883, Novembber 14, 1996) the principal and his sustain except when the
guarantors for the loss it insurer is entitled to
SURETYSHIP may suffer under the subrogation.
contract.
Contract of suretyship A bond may be canceled May be canceled
by or with the consent of unilaterally either by the
It is an agreement whereby a party called the the obligee or by the insured or by the insurer
“surety” guarantees the performance by another commissioner or by the on grounds provided by
party called the “principal or obligor” of an court. law.
obligation or undertaking in favor of a third party Requires acceptance of Does not need
called the “obligee”. It includes official the obligee before it acceptance of any third
recognizances, stipulations bonds or undertakings becomes valid and party.
issued by any company by virtue and under the enforceable.
provisions of Act No. 536, as amended by Act No. A risk-shifting device, A risk-distributing
2206. (IC, Sec. 177) the premium paid being device, the premium
in the nature of a service paid being considered a
The extent of surety’s liability is determined by the fee. ratable contribution to a
language of the suretyship contract or bond itself. It common fund. (De Leon,
cannot be extended by implications beyond the 2010)
terms of the contract. Having accepted the bond, the
creditor is bound by the recital in the surety bond Types of surety bonds
that the terms and conditions of distributorship
contract be reduced in writing or at the very least 1. Contract bonds – These are connected with
communicated in writing to the surety. Such non- construction and supply contracts. They are for
compliance by the creditor impacts not on the the protection of the owner against a possible
validity or legality of the surety-contract but on the default by the contractor or his possible failure
creditor’s right to demand performance. (First to pay materials, men, laborers and sub-
Lepanto–Taisho Insurance Corporation vs. Chevron contractors.The position of surety, therefore, is
Philippines, G.R. No. 177839, January 18, 2012) to answer for a failure of the principal to
perform in accordance with the terms and
Nature of liability of surety specifications of the contract. There may be two
bonds:
The liability of the surety or sureties shall be: a. Performance bond – One covering the
faithful performance of the contract; and
1. Solidary – Joint and several with the obligor and b. Payment bond – One covering the payment
2. Limited or fixed – Limited to the amount of the of laborers and material men.
bond (It cannot be extended by implication).
3. Contractual – It is determined strictly by the 2. Fidelity bonds –They pay an employer for loss
terms of the contract of suretyship in relation to growing out of a dishonest act of his employee.
the principal contract between the obligor and For the purposes of underwriting, they are
the obligee. (IC, Sec. 178) classified as:
a. Industrial bond – One required by private
Suretyship vs. Property Insurance employers to cover loss through dishonesty
of employees; and
SURETYSHIP PROPERTY b. Public official bond – One required of public
INSURANCE officers for the faithful performances of
It is an accessory The principal contract their duties and as a condition of entering
contract. itself. upon the duties of their offices.
There are three parties: There are only two
the surety, parties: insurer and 3. Judicial bonds – They are those which are
obligor/debtor, and the insured required in connection with judicial
obligee/creditor. proceedings (ibid).

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 MERCANTILE LAW
Rules of payment of premiums in suretyship such an agreement with Chevron, thus no copy
of such agreement could be submitted. Because
1. The premium becomes a debt as soon as the of this, Chevron Philippines, Inc. sued First
contract of suretyship or bond is perfected and Lepanto-Taisho for the payment of unpaid oil
delivered to the obligor (IC, Sec. 77); and petroleum purchases made by
2. The contract of suretyship or bonding shall not Fumitechniks. Is the surety liable to the creditor
be valid and binding unless and until the in absence of a written contract with the
premium therefor has been paid; principal?
3. Where the obligee has accepted the bond, it
shall be valid and enforceable notwithstanding A: NO. Section 176 of the Insurance Code is clear
that the premium has not been paid (Philippine that a surety contract should be read and
Pryce Assurance Corp. v. CA, G.R.No. 107062, interpreted together with the contract entered into
February 21, 1994); between the creditor and the principal. A surety
4. If the contract of suretyship or bond is not contract is merely a collateral one, its basis is the
accepted by, or filed with the obligee, the surety principal contract or undertaking which it secures.
shall collect only a reasonable amount; Necessarily, the stipulations in such principal
5. If the non-acceptance of the bond be due to the agreement must at least be communicated or made
fault or negligence of the surety, no service fee, known to the surety. Having accepted the bond,
stamps, or taxes imposed shall be collected by Chevron as creditor must be held bound by the
the surety; and recital in the surety bond that the terms and
6. In the case of continuing bond (for a term longer conditions of its distributorship contract be reduced
than one year or with no fixed expiration date), in writing or at the very least communicated in
the obligor shall pay the subsequent annual writing to the surety. Such non-compliance by the
premium as it falls due until the contract is Chevron impacts not on the validity or legality of the
canceled (IC, Sec. 179) (De Leon, 2010). surety contract but on the creditor’s right to
demand performance. (First Lepanto-Taisho
By law and by the specific contract involved in this Insurance v. Chevron Philippines, Inc., G.R. No.
case, the effectivity of the bond required for the 177839, January 18, 2012)
obtention of a license to engage in the business of
receiving rice for storage is determined not alone by LIFE INSURANCE
the payment of premiums but principally by the
Administrator of the NFA. A continuing bond, as in It is insurance on human lives and insurance
this case where, there is no fixed expiration date, appertaining thereto or connected therewith (Sec.
may be cancelled only by the obligee, which is the 181, Insurance Code). It is made payable on the
NFA, by the Insurance Commissioner, and by the death of the person, or on his surviving a specified
court. (Country Bankers Insurance Corporation vs. period, or otherwise contingently on the
Lagman, G.R. No. 165487, July 13, 2011, in Divina, continuance or cessation of life. (IC, Sec. 182)
2014)
NOTE: Every contract or undertaking for the
Q: Fumitechniks Corporation, represented by payment of annuities including contracts for the
Ma. Lourdes Apostol, had applied for and was payment of lump sums under a retirement program
issued a surety bond by First Lepanto-Taisho where a life insurance company manages or acts as
Insurance Corporation (First Lepanto-Taisho) a trustee for such retirement program shall be
for the amount of P15,700,000.00. As stated in considered a life insurance contract for purposes of
the attached rider, the bond was in compliance the Insurance Code. (IC, Sec. 181)
with the requirement for the grant of a credit
line with the Chevron Philippines, Inc. Every contract or pledge for the payment of
(Chevron) to guarantee payment of the cost of endowments or annuities shall also be considered a
fuel products withdrawn within the stipulated life insurance contract under the Insurance Code.
time in accordance with the terms and (IC, Sec. 182)
conditions of agreement between Chevron and
Fumitechniks. When Fumitechniks defaulted on Who may exercise any right under the policy
its obligation, Chevron notified First Lepanto-
Taisho of Fumitechniks’ unpaid purchases. First In the absence of a judicial guardian, the father, or in
Lepanto-Taisho thereafter demanded to the latter’s absence or incapacity, the mother, of any
Fumitechniks the submission of a copy of the minor, who is an insured or a beneficiary under a
agreement secured by the bond, together with contract of life, health, or accident insurance, may
copies of documents such as delivery receipts. exercise, in behalf of said minor, any right under the
Fumitechniks, however, denied that it executed policy, without necessity of court authority or the

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 INSURANCE CODE
giving of a bond, where the interest of the minor in Contract of life annuity
the particular act involved does not exceed Five
hundred thousand pesos (P500,000.00) or in It is a contract to pay the insured, or a named person
such reasonable amount as may be determined or persons, a sum or sums periodically during life or
by the Commissioner. Such right may include, but certain period. (Perez, 2006)
shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of Measure of indemnity under a policy of
the Policy, and giving the minor’s consent to any insurance upon life or health
transaction on the minor’s consent to any
transaction on the policy. GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
In the absence or in case of the incapacity of the policy.
father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of XPN: The interest of a person insured is susceptible
age, or any relative who has actual custody of the of exact pecuniary measurement. (IC, Sec. 186)
minor insured or beneficiary, shall act as a
guardian without need of a court order or Liability of the insurer in case of suicide
judicial appointment as such guardian, as long
as such person is not otherwise disqualified or The insurer shall be liable in case of suicide by the
incapacitated. Payment made by the insurer insured if:
pursuant to this section shall relieve such 1. The suicide is committed after the policy has
insurer of any liability under the contract. (IC, been in force for a period of 2 years from the
Sec. 182) date of its issue or of its last reinstatement.
2. The suicide is committed within a shorter
Reasons why a Life insurance is also a contract period as provided in the policy.
of indemnity 3. The suicide is committed in the state of insanity
regardless of the date of commission. (IC, Sec.
This is because of the following reasons: 183)
1. The liability in life insurance is absolutely
certain Q: Sun Insurance Co. issued to Tan a life policy
2. Amount of life insurance generally is without having this provision: “the company shall not be
limit liable in respect of ‘bodily injury’ consequent
3. The policy is a valued policy upon the insured person who willfully exposes
4. There is no direct pecuniary loss required. (De himself to needless peril except in an attempt to
Leon, 2010) save human life". Tan designated his wife,
Beverly as beneficiary.
Kinds of life insurance policies
One evening, Tan, while playing with his hand
1. Ordinary life, general life or old line policy – gun, suddenly stood in front of his secretary and
Insured pays a premium every year until he pointed the gun at her. Startled, she pushed the
dies. Cash surrender value after 3 years. gun aside and said that it may be loaded. Thus,
2. Limited payment – Insured pays premium for a Tan, to assure her that it was not loaded, pointed
limited period. If he dies within the period, his it at his temple. The next moment, there was an
beneficiary is paid; if he outlives the period, he explosion and Tan slumped to the floor lifeless.
does not get anything.
3. Endowment – insured pays premium for Beverly, then claimed the proceeds from Sun
specified period. If he outlives the period, the Insurance, but the latter rejected her claim on
face value of the policy is paid to him; if not, his the ground that the death of Tan was not
beneficiaries receive the benefit. accidental. Beverly sued the insurer. Will
4. Term insurance – insured pays premium only Beverly’s claim prosper? (1993, 1994 Bar)
once, and he is insured for a specified period. If
he dies within the period, his beneficiaries A: Beverly can recover the proceeds of the policy
benefit. If he outlives the period, no person from the insurer. The death of the insured was not
benefits from the insurance. due to suicide or willful exposure to needless peril
5. Industrial life – entitles the insured to pay which are excepted risks. The insured’s act was
premiums weekly, or where premiums are purely an act of negligence which is covered by the
payable monthly or oftener. (Sundiang Sr. & policy and for which the insured got the insurance
Aquino, 2014) for his protection. In fact, he removed the magazine
from the gun and when he pointed the gun to his

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 MERCANTILE LAW
temple he did so because he thought that it was safe accurately in terms of
for him to do so. He did so to assure his sister that cash value.
the gun was harmless. There is none in the policy
that would relieve the insurer of liability for the The insured is
The beneficiary is under
death of the insured since the death was an accident. required to submit
no obligation to prove
(Sun Insurance v CA, G.R. Nos. 79937-38, February 13, proof of his actual
actual financial loss as a
1989) pecuniary loss as a
result of the death of the
condition precedent to
insured in order to
Life insurance vs. Fire/Marine insurance collecting the
collect the insurance.
insurance.
FIRE/MARINE
LIFE INSURANCE COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
It is a contract of INSURANCE
It is a contract of
investment not contract
indemnity. Motor vehicle liability insurance
of indemnity.
Always regarded as
May be open or valued. It is a protection coverage that will answer for legal
valued policy.
May be transferred or The transferee or liability for losses and damages for bodily injuries or
assigned to any person assignee must have an property damage that may be sustained by another
even if he has no insurable interest in arising from the use and operation of a motor
insurable interest. the thing insured. vehicle by its owner. (Compulsory Motor Vehicle
The consent of the Liability Insurance, prepared and distributed by the
Consent, in the Insurance Commission)
insurer is not essential to
absence of waiver by
the validity of the
the insurer, is essential The Insurance Code makes it unlawful for any land
assignment of a life
in the assignment of transportation operator or owner of a motor vehicle
policy unless expressly
the policy. to operate the same in public highways unless there
required.
Insurable interest in the Insurable interest in is an insurance or guaranty to indemnify the death
life or health of the the property insured or bodily injury of a third party or passenger arising
person insured need not must exist not only from the use thereof (IC, Sec. 387). Registration of
exist after the insurance when the insurance any vehicle will not be made or renewed without
takes effect or when loss takes effect but also complying with the requirement. (IC, Sec. 389)
occurs. when the loss occurs.
Purpose of motor vehicle liability insurance
Insurable interest
Insurable interest need
must have a legal
not have any legal basis. To give immediate financial assistance to victims of
basis.
motor vehicle accidents and/or their dependents,
Contingency that is
especially if they are poor regardless of financial
contemplated is a certain
The contingency capability of motor vehicle owners or operators
event, the only
insured against may or responsible for the accident sustained. (First
uncertainty being the
may not occur. Integrated Bonding Insurance Co., Inc. v. Hernando,
time when it will take
G.R. No. L-51221, July 31, 1991)
place.
The liability of the
NOTE: The insurer’s liability accrues immediately
insurer to make payment Liability is uncertain
upon the occurrence of the injury or event upon
is certain, the only because the happening
which the liability depends, and does not depend on
uncertain element being of the peril insured
the recovery of judgment by the injured party
when such payment against is uncertain.
against the insured. (Shafer v. Judge, RTC, supra)
must be made.
May be terminated by the
May be cancelled by Definitions
insured but cannot be
either party and is
cancelled by the insurer
usually for a term of 1. Motor vehicle
and is usually a long term
one year
contract.
Any vehicle propelled by any power other than
The reverse is muscular power using the public highways, but
The “loss” to the
generally true of the
beneficiary caused by the excepting road rollers, trolleys cars, street
loss of property, i.e., it
death of the insured can sweepers, sprinklers, lawn mowers, bulldozers,
is capable of pecuniary graders, forklifts, amphibian trucks, and cranes if
seldom be measured
estimation.
not used in public highways, vehicles which run

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only on rails or tracks, and tractors, trailers and 2. For LTOs, coverage must be comprehensive
traction engines of all kinds used exclusively for against both passenger and third-party
agricultural purposes. (Sec. 3[a] of RA 4136) liabilities for death or bodily injuries. (Ins.
Memo. Cir. No. 3-81)
NOTE: Trailers having any number of wheels, when
propelled or intended to be propelled by Substitutes for a compulsory motor vehicle
attachment to a motor vehicle shall be classified as liability insurance policy
separate motor vehicle with no power rating (ibid).
Instead of a CMVLI policy, MVOs or LTOs may either:
2. Passenger
1. Post a surety bond with the Insurance
Any fare-paying person being transported and Commissioner who shall be made the obligee or
conveyed in and by a motor vehicle for creditor in the bond in such amount or amounts
transportation of passengers for compensation, required as limits of indemnity to answer for
including persons expressly authorized by law or by the same losses sought to be covered by a
the vehicle’s operator or his agents to ride without CMLVI policy; or
fare. (IC, Sec. 386, [b]) 2. Make a cash deposit with the Insurance
Commission in such amount or amounts
3. Third-party required as limits of indemnity for the same
purpose. (Sec. 390, ibid)
Any person other than a passenger as defined in this
section (ibid.) and shall also exclude a member of After the cash deposit or surety bond has been
the household, or a member of the family within the proceeded against by the Insurance Commissioner,
second degree of consanguinity or affinity, of a such cash deposit shall be replenished or such
motor vehicle owner or land transportation surety bond shall be restored by the MVO or LTO in
operator, as likewise defined herein, or his the right amount/s required as limit of liability
employee in respect of death, bodily injury, or within 60 days after impairment or expiry,
damage to property arising out of and in the course otherwise, he shall secure a CMLVI required (ibid).
of employment. (Sec. 386, [c], ibid)
Duties of motor vehicle owner or land
4. Owner or Motor vehicle owner (MVO) transportation operator in contemplation of the
cancellation of the policy
Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land Contemplating the cancellation of the policy, the
Transportation Office. (Sec. 386, [d], ibid) MVO or LTO shall:
1. Give to the insurance or surety company
5. Land transportation operator (LTO) concerned a written notice of his intention to
cancel;
The owner or owners of motor vehicles for 2. Secure, before the insurance policy or surety
transportation of passengers for compensation, bond ceases to be effective, another similar
including school buses. (Sec. 386, [e], ibid) policy or bond to replace that one canceled;
3. Without making any replacement, make a cash
Persons required to maintain a compulsory deposit in sufficient amount with the Insurance
motor vehicle liability insurance (CMVLI) policy Commissioner and secure a certification from
to operate motor vehicle/s in public highways the Insurance Commissioner regarding the
deposit made for presentation to and filing with
1. Motor vehicle owner (MVO) the Land Transportation Office (CMVLI, supra)
2. Land transportation operator (LTO) (Sec. 387, (IC, Sec. 393-394).
ibid).
Effects of the cancellation of the policy
Scope of coverage required for compulsory
motor vehicle liability insurance GR: Upon receipt of the notice of such cancellation,
the Land Transportation Office shall order the
1. For MVOs, the coverage must be comprehensive immediate confiscation of the plates of the motor
against third party liability for death or bodily vehicle concerned.
injuries. If the private motor vehicle is being
used to transport passengers for compensation, XPNs: No confiscation will be ordered if said Office
the coverage shall include passenger liability. receives any of the following:

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 MERCANTILE LAW
1. An evidence or proof of a new and valid CMVLI The claimant is not free to choose from which
cover which may be either an insurance policy insurer he will claim the "no fault indemnity," as the
or guaranty in cash or surety bond; law, by using the word "shall”, makes it mandatory
2. A signed duplicate of an endorsement or that the claim be made against the insurer of the
addendum issued by the insurance company vehicle in which the occupant is riding, mounting or
concerned showing revival or continuance of dismounting from. That said vehicle might not be
the CMVLI cover; or the one that caused the accident is of no moment
3. A certification issued by the Insurance since the law itself provides that the party paying
Commissioner to the effect that a cash deposit may recover against the owner of the vehicle
in the amount required as limit of indemnity responsible for the accident. (Perla Compania de
has been made with him by the MVO or LTO Seguros, Inc. v. Ancheta, G.R. No. L-49599, August 8,
(CMVLI, supra, IC, Sec. 393). 1988)

“Own damage” coverage This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds P15,
It simply meant that the insurer had assumed to 000 and there is controversy in respect thereto, the
reimburse the costs for repairing the damage to the finding of fault may be availed of by the insurer only
insured vehicle, as opposed to damage to third party as to the excess. The first P15, 000 shall be paid
vehicle/property. The phrase “own damage” does without regard to the fault. (CMVLI, supra)
not mean damage to the insured car caused by the
assured itself, instead, of third parties. (Pan ---
Malayan Insurance Corporation v. Court of Appeals,
supra) Q: X is a passenger of a jeepney for hire being
driven by Y. The jeepney collided with another
No fault indemnity clause (1994 Bar) passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
It is a clause where the insurer is required to pay a suffered injuries. Both passenger jeepneys are
third party injured or killed in an accident without covered by Comprehensive Motor Vehicular
the necessity of proving fault or negligence on the Insurance Coverage. If X wants to claim under
part of the insured. There is a stipulated maximum the "no fault indemnity clause", his claim will lie
amount to be recovered. (2012 Bar)

Rules under the “no fault indemnity clause” A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
1. The total indemnity in respect of any one Insurance Code states that in the case of an occupant
person shall not exceed P15,000 for all motor of a vehicle, the claim shall lie against the insurer of
vehicles. (Ins. Memo. Circ. No. 4-2006) the vehicle in which the occupant is riding,
mounting or dismounting from.
2. Proof of loss:
a. Police report of accident Authorized driver clause
b. Death certificate and evidence sufficient to
establish proper payee It indemnifies the insured owner against loss or
c. Medical report and evidence of medical or damage to the car but limits the use of the insured
hospital disbursement (IC, Sec. 391 [3]). vehicle to:
3. Claim may be made against one motor vehicle
only (Sec. 391 [c], ibid). 1. The insured himself; or
4. In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle The insured need not prove that he has a
in which the occupant is riding, mounting or driver’s license at the time of the accident if he
dismounting from (ibid). was the driver. (Sundiang Sr. & Aquino, 2014)
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending 2. Any person who drives on his order or with his
vehicle (ibid). permission; provided, that the person driving is
6. In all cases, the right of the party paying the permitted to drive the motor vehicle in
claim to recover against the owner of the accordance with the law, and is not disqualified.
vehicle responsible for the accident shall be (Villacorta v. Insurance Commissioner, G.R. No.
maintained (ibid). 54171, October 28, 1980)

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 INSURANCE CODE
The main purpose of this clause is to require a November 28, 2012) (Sundiang Sr. & Aquino,
person other than the insured, who drives the 2014)
car on the insured’s order or with his
permission, to be duly licensed drivers and ---
have no disqualification to drive a motor
vehicle. Q: On May 26, 2014, Jess insured with Jack
Insurance (Jack) his 2014 Toyota Corolla sedan
An Irish citizen whose 90-day tourist visa had under a comprehensive motor vehicle insurance
expired, cannot recover on his car insurance policy, policy for one year. On July 1, 2014, Jess’ car was
not being authorized to drive a motor vehicle unlawfully taken. Hence, he immediately
without a Philippine driver’s license. (Stokes v. reported the theft to the traffic Management
Malayan Insurance Co., Inc. G.R. No. L-34768, Command (TMC) of the Philippine National
February 24, 1984) Police (PNP), which made Jess accomplish a
complaint sheet as part of its procedure. In the
A driver with an expired Traffic Violation Receipt or complaint sheet, Jess alleged that a certain Ric
expired Temporary Operator’s permit is not Silat (Silat) took possession of the subject
considered an authorized driver within the meaning vehicle to add accessories and improvements
of the insurance policy. The Traffic Violation Receipt thereon. However, Silat failed to return the
is coterminous with a confiscated license under the subject vehicle within the agreed three- day
Motor Vehicle Law. (Gutierrez v. Capital Insurance & period. As a result, Jess notified Jack of his claim
Surety Co., Inc., G.R. No. L-26287, June 29, 1984) for reimbursement of the value of the lost
vehicle under the insurance policy. Jack refused
Theft clause to pay claiming that there is no theft as Jess gave
Silat lawful possession of the car. Is Jack
It is that which includes theft as among the risks correct? (2014 Bar)
insured against. Where a car is unlawfully and
wrongfully taken without the knowledge and A: NO, Jack Insurance is not correct. Ric Silat was
consent of the owner, such taking constitutes “theft” merely given physical possession of the car. He did
and it is the theft clause, not the authorized driver not have juridical possession over the same. It is
clause which should apply. (Perla Compania de also apparent that the taking by Silat of the car of
Seguros, Inc. v. CA, supra) Jess is without the consent or authority of the latter.
Thus, the act of Silat in depriving Jess of his car, soon
The “Theft Clause” of a comprehensive motor after the transfer of physical possession of the same
vehicle insurance policy has been interpreted by the to him, constitutes theft under the insurance policy
Court in several cases to cover situations like (1) that is compensable. (Paramount Insurance v.
when one takes the motor vehicle of another Spouses Remonduelaz, G.R. No. 173773, November 8,
without the latter’s consent even if the motor 2012)
vehicle is later returned, there is theft- there being
intent to gain as the use of the thing unlawfully Q: On February 21, 2013, Barrack entered into a
taken constitutes gain or (2) when there is taking of contract of insurance with Matino Insurance
a vehicle by another person without the permission Company (Matino) involving a motor vehicle.
or authority from the owner thereof. (Paramount The policy obligates Matino to pay Barrack the
Insurance vs. Spouses Remondeulaz, G.R. No. 173773, amount of P600,000 in case of loss or damage to
November 28, 2012) said vehicle during the period covered, which is
from February 26,2013 to February 26,2014.
Theft
On April 16,2013, at about 9:00 am, Barrack
There is theft if the vehicle is taken with intent to instructed his driver, JJ, to bring the motor
gain without the consent of the insured-owner. vehicle to a nearby auto shopfor tune-up.
Thus, there is theft even if: However, JJ no longer despite and diligent
efforts to locate the said vehicle, the efforts
1. The vehicle is returned; proved futile. Resultantly, Barrack promptly
2. The vehicle was stolen by the driver of the notified Matino of the said loss and demanded
insured (Alpha Insurance and Surety Company v. payment of the insurance proceeds of P600,000.
Castor, G.R. 198174, September 2, 2013); In a letter dated July 5,2013, Matino denied the
3. The vehicle was taken to the owner of a repair claim, reasoning as stated in the contract that
shop for the purpose of repair and in order to “the company shall not be liable for any
attach accessories. (Paramount Insurance v. malicious damage caused by the insured, any
Spouses Remondeulaz, G.R. No. 173773, member of his family or by a person in the

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 MERCANTILE LAW
insured’s service. Is Matino correct in denying The maximum sum of guaranteed benefits is not
the claim? (2014 Bar) more than one thousand (1000) times of current
daily minimum wage rate for nonagricultural
A: Matino Insurance is not correct in denying the workers in Metro Manila. (IC, Sec. 187)
claim. The loss of the motor vehicle is not excluded
under the insurance policy as the loss was due to NOTE: No insurance company or mutual benefit
theft, not malicious damage. The “malicious association shall engage in the business of
damage” clause under the policy is not applicable microinsurance unless it possesses all the
but rather the “theft” clause. Thus, the provision requirements as may be prescribed by the
under the policy that ”the company shall not be Commissioner. The Commissioner shall issue such
liable for any malicious damage caused by the rules and regulations governing microinsurance.
insured, any member of his family or by a person in (IC, Sec. 188)
the insured’s service” is not applicable. (Alpha
Insurance and Surety Co. v. Castor, G.R. No. 198174, TRANSPORTATION LAW
September 2,2003).
Laws that govern contracts of transportation
Limitations with respect to compulsory motor
vehicle liability insurance over solicitation Contracts of transportation, whether by land, sea, or
air, [i] if within the Philippines; or [ii] if the
1. No government office or agency having the duty transportation of goods be from a foreign country to
of implementing the provisions of the Insurance the Philippines, shall be governed by the following
Code on CMVLI shall act as agent in procuring laws, arranged by order of application:
the insurance policy or surety bond required;
2. No official or employee of such office or agency 1. Provisions of the New Civil Code on Common
shall similarly act as such agent; and Carriers;
3. The commission of an agent procuring the 2. Code of Commerce; and
corresponding insurance policy or surety bond 3. Special laws such as Carriage of Goods by the
shall in no case exceed 10% of the amount of Sea (COGSA); Salvage Law; Public Service Act;
premiums therefore. (IC, Sec. 400) Land Transportation and Traffic Code; Tariff
and Customs Code; and Civil Aeronautics Act
Q: When a passenger jeepney, insured but with (Art. 1735 and 1766, NCC; American President
an authorized driver’s clause and was driven by Lines, Ltd. v. Klepper, G.R. No. L-15671, November
a driver who only holds a Traffic Violation 29, 1960).
Report (TVR) because his license was
confiscated, met an accident, may the owner of NOTE: In case of international carriage in air
the jeepney claim from the insurance company? transportation, (i) the Montreal Convention as
(2003 Bar) ratified by the Philippines in 2015; and (ii) the
Warsaw Convention (R.A. 9497 may be applicable.
A: YES. The fact that the driver was merely holding
a TVR does not violate the condition that the driver If the goods are to be transported from the
should have a valid and existing driver’s license. Philippines to a foreign country, the law of the latter
Besides, such a condition should be disregarded country shall govern the transportation contract
because what is involved is a passenger jeepney, and (Art. 1753, CC; National Development Co. v. CA, G.R.
what is involved here is not own damage insurance No. L-49407, August 19, 1988).
but third party liability where the injured party is a
third party not privy to the contract of insurance. COMMON CARRIER

MICROINSURANCE Requisites for an entity to be classified as a

common carrier (1996, 1997, 2000, 2002 Bar)
It is a financial product or service that meets the risk (PBL-FP)
protection needs of the poor where: 1. Must be a Person, corporation, firm or
association
The amount of contributions, premiums, fees or 2. Engaged in the Business of carrying or
charges, computed on a daily basis, does not exceed transporting passengers or goods or both;
seven and a half percent (7.5%) of the current daily 3. The carriage or transport must either be by
minimum wage rate for nonagricultural workers in Land, water or air;
Metro Manila; and 4. The service is for a Fee;
5. The service is offered to the Public (Art. 1732,
NCC).

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