1. Mercantile Bar Review Material 1

7/26/2019 1. Mercantile Bar Review Material 1

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A. Letters of Credit

1. Definition/Concept

That issued by one merchant to another for the purpose of attending to a

commercial transaction.

1

An instrument issued by a bank on behalf of one of its customers, authorizing anindividual or a firm to draw drafts on the bank or one of its correspondents for its accountunder certain conditions of the credit.2

An engagement by a bank or other person made at the request of a customer that theissuer will honor drafts or other demands for payment upon compliance with the conditionsspecified in the credit.3 Through it, the bank merely substitutes its own promise to pay forthe promise to pay of one of its customers who in return promises to pay the bank theamount of funds mentioned in the letter of credit plus credit or commitment fees mutuallyagreed upon.

2. Governing laws

a. Code of Commerce

b. Uniform Customs and Practice for Documentary Credits4

3. Nature of letter of credit

The LC is a financial device5 developed as a convenient and relatively safe mode ofdealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who

refuses to part with his goods before he is paid, and a buyer, who wants to have control ofthe goods before paying.

4. Parties to a letter of credit

a. Applicant/buyer/importer one who purchases the goods, procures the LC, andobliges himself to reimburse the issuing bank upon receipt of the documents of title.

b. Issuing/opening bank one which issues the LC, and undertakes to pay the sellerupon receipt of the draft and proper documents of title from the seller and to surrenderthem to the buyer upon reimbursement; and

1Art. 567

2Commercial Law Review, C. Villanueva, 2004 ed.

3Prudential Bank vs. CA, 216 SCRA 257

4The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable to

order.5

mode of payment


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c. Seller/exporter/beneficiary one who sells the goods to the buyer, and whodelivers the draft and documents to the issuing bank to recover payment.6

d. Advising/notifying bank the correspondent bank7 of the opening bank throughwhich it advises the beneficiary of the LC.

e. Confirming bank bank which, upon the request of the beneficiary, confirms theLC issued.

f. Paying bank bank on which the drafts are to be drawn, which may be theopening bank or another bank not in the city of the beneficiary.

g. Negotiating bank bank in the city of the beneficiary which buys or discounts thedrafts contemplated by the LC, if such draft is to be drawn on the opening bank or onanother designated bank not in the city of the beneficiary.

a. Rights and obligations of parties

1. Drawer is liable to person on whom it was issued provided identity proven, forthe amount paid within fixed maximum.

2. Bearer has no right of action if not paid by person who issued it.

3. Drawer may annul the letter of credit, informing the bearer and to whomit is addressed.

4. Bearer shall pay the amount received to drawer, otherwise action for executionmay be filed with interest and current exchange in place where payment made on place

where repaid.

5. If a bearer does not make use of letter of credit within agreed period, or if none,within 6 months from date if in the Philippines, and 12 months if outside the Philippines, itshall be void.8

6The number of parties may be increased. Modern letters of credit are usually not made between natural

persons. They involve bank-to-bank transactions.7

agent8

Arts. 569-572


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5. Basic Principles of letter of credit

a. Doctrine of independence

The three (3) basic contracts are distinct and independent, and the undertakings of

the respective parties in each are neither subject to claims and defenses nor affected by thebreach in the others.

b. Fraud exception principle

When the beneficiary, for the purpose of drawing on the credit, fraudulently presentsto the confirming bank, documents that contain, expressly or by implication, materialrepresentations of fact that to his knowledge are untrue.9

c. Doctrine of strict compliance

It espouses that the documents tendered by the seller/beneficiary must strictly

conform to the terms of the LC.10

9Transfield Phils, Inc. vs. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and

Security Bank Corp., G.R. No. 146717, November 22, 200410

i.e. they must include all the documents required by the LC (Feati Bank vs. CA)


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B. Warehouse Receipts Law

1. Nature and Functions of a Warehouse Receipt11

a. To whom delivered:

1. To the person lawfully entitled to the goods

2. To the person named in a non-negotiable receipt or to his assignee

3. To the lawful holder of a negotiable receipt

b. Kinds:

1. Negotiable warehouse receipts - a warehouse receipt wherein it is expressly statedthat the goods are deliverable to bearer or to the order of a person specified therein.12

2. Non-negotiable warehouse receipts - a warehouse receipt in which it is stated thatthe goods received will be delivered to the depositor or to any specified person. The receiptshould be stamped on its face "non-negotiable."A holder of a non-negotiable receipt notstamped "non-negotiable"believing it to be negotiable may treat the receipt as negotiable. 13

c. Distinction between a Negotiable Instrument and a Negotiable

Warehouse Receipt

Negotiable instrument Warehouse receipt14

Subject is money Subject is merchandise

The instrument itself is the object of value The goods are the objects of value

11A warehouse receipt is a written acknowledgment by the warehouseman that he has received the

goods described therein and holds the same for the person to whom it is issued or as the latter may

order.

It is a contract between the owner of the goods or the person authorized by the owner to transfer

ownership or possession over the goods, on one hand, and the warehouseman, on the other hand, for the

latter to store the goods and the former to pay the compensation for that service.

A warehouseman is a person lawfully engaged in the business of storing goods for profit.12

A warehouse receipt stating that the goods are deliverable to bearer is a negotiable warehouse receipt.

If the words "non-negotiable" are inserted in the receipt, the insertion is void, and the receipt remains

negotiable.13

A non-negotiable warehouse receipt, if not stamped with the words "non-negotiable," may make a

warehouseman liable for damages suffered by a holder of such receipt who purchases it for value

supposing it to be negotiable.

The said holder may treat, as his option, such receipt as imposing upon the warehouseman the same

liabilities he would have incurred had the receipt been negotiable.14

even if negotiable, is not a negotiable instrument within the meaning of the Negotiable Instruments

Law


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Intermediate parties become secondarilyliable

Intermediate parties are not liable for thewarehouseman's failure to deliver the goods.

d. Rights of a holder of a negotiable warehouse receipt as against atransferee of a non-negotiable warehouse receipt

Rights of a holder of a negotiable warehousereceipt

Rights of a transferee of a non-negotiablewarehouse receipt

1. Such title to the goods as the personnegotiating the receipt to him has had abilityto convey to a purchaser in good faith for

value, and also such title to the goods as thedepositor or person to whose order thegoods were to be delivered by the terms ofthe receipt has had ability to convey to apurchaser in good faith for value;

1. Such person acquires thereby as againstthe transferor the title of the goods subjectto the terms of any agreement with thetransferor.

2. The direct obligation of thewarehouseman to hold possession of thegoods for him according to the terms of thereceipt as fully as if the warehouseman hadcontracted directly with him.

2. If the receipt is non-negotiable, suchperson also acquires the right to notify the

warehouseman of the transfer to him of suchreceipt and thereby to acquire the directobligation of the warehouseman to holdpossession of the goods for him according tothe terms of the receipt.

3. Prior to the notification of thewarehouseman by the transfer or transfereeof a non-negotiable receipt, the title of thetransferee to the goods and the right toacquire the obligation of the warehousemanmay be defeated by the levy of an attachmentor execution upon the goods by a creditor ofthe transferor or by a notification to the

warehouseman by the transferor or a

subsequent purchaser from the transferor ofa subsequent sale of the goods by thetransferor.15

15Sec. 42


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2. Duties of a Warehouseman

1. To deliver the goods upon demand made by the holder of the receipt or by thedepositor.

2. To exercise such care in regard to the goods as a reasonably careful owner ofsimilar goods would exercise.

3. To keep the goods separate from the goods of other depositors, except in the caseof fungible goods.

3. Warehousemans Lien

All lawful charges for storage and preservation of the goods, all lawful claims formoney advanced, interest, insurance, transportation, labor, weighing, coopering, and othercharges and expenses in relation to such goods, also all reasonable charges and expenses fornotices and advertisements of sale, and for the sale of the goods where default has been

made in satisfying the warehousemans lien.


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C. Trust Receipts Law

1. Definition/Concept of a Trust Receipt Transaction

A trust receipt transaction is any transaction by and between a person referred to as

the entruster, and another person referred to as entrustee, whereby the entruster, who ownsor holds absolute title or security interests over certain specified goods, documents orinstruments, releases the same to the possession of the entrustee upon the latter's executionand delivery to the entruster of a signed document called a "trust receipt" wherein theentrustee binds himself to hold the designated goods, documents or instruments in trust forthe entruster and to sell or otherwise dispose of the goods, documents or instruments withthe obligation to turn over to the entruster the proceeds thereof to the extent of the amountowing to the entruster or as appears in the trust receipt or the goods, documents orinstruments themselves if they are unsold or not otherwise disposed of, in accordance withthe terms and conditions specified in the trust receipt, or for other purposes substantiallyequivalent to any of the following:

1. In the case of goods or documents

a) to sell the goods or procure their sale; or

b) to manufacture or process the goods with the purpose of ultimate sale. Inthe case of goods delivered under trust receipt for the purpose of manufacturing orprocessing before its ultimate sale, the entruster shall retain its title over the goods

whether in its original or processed form until the entrustee has complied ful ly withhis obligation under the trust receipt; or

c) to load, unload, ship or tranship or otherwise deal with them in a manner

preliminary or necessary to their sale; or

2. In the case of instruments,

a) to sell or procure their sale or exchange; or

b) to deliver them to a principal; or

c) to effect the consummation of some transactions involving delivery to adepository or register; or

d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of sellinggoods, documents or instruments for profit who, at the outset of the transaction, has, asagainst the buyer, general property rights in such goods, documents or instruments, or whosells the same to the buyer on credit, retaining title or other interest as security for the


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payment of the purchase price, does not constitute a trust receipt transaction and is outsidethe purview and coverage of the Decree. 16

a. Loan/security feature

1. This is not a simple loan transaction between a creditor and debtor-importer.2. The law warrants the validity of the entrusters security interest as against thecreditors of the trust receipt agreement.

b. Ownership of the goods, documents and instruments under a

trust receipt

1. Goods are owned by the bank, and are only released to the importer in trust afterthe grant of the loan. The bank acquires a security interest in the goods as holder of asecurity title for the advances it made to the entrustee.

2. Entrustee must deliver money or return unsold goods to entrustor

3. Bank is preferred over other creditors.

4. Bank is also not liable to buyer of goods as vendor

5. Purchaser from entrustee gets good title.

6. No particular form is required for trust receipt

2. Rights of the Entruster17

The entruster shall be entitled to the proceeds from the sale of the goods, documentsor instruments released under a trust receipt to the entrustee to the extent of the amountowing to the entruster or as appears in the trust receipt, or to the return of the goods,documents or instruments in case of non-sale, and to the enforcement of all other rightsconferred on him in the trust receipt provided such are not contrary to the provisions of thisDecree.

The entruster may cancel the trust and take possession of the goods, documents orinstruments subject of the trust or of the proceeds realized therefrom at any time upondefault or failure of the entrustee to comply with any of the terms and conditions of the trustreceipt or any other agreement between the entruster and the entrustee, and the entruster inpossession of the goods, documents or instruments may, on or after default, give notice tothe entrustee of the intention to sell, and may, not less than five days after serving or sending

of such notice, sell the goods, documents or instruments at public or private sale, and theentruster may, at a public sale, become a purchaser.

16Sec. 4

17Entruster" refers to the person holding title over the goods, documents, or instruments subject of a

trust receipt transaction, and any successor in interest of such person.


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The proceeds of any such sale, whether public or private, shall be applied

(a) to the payment of the expenses thereof;

(b) to the payment of the expenses of re-taking, keeping and storing the goods,

documents or instruments;

(c) to the satisfaction of the entrustee's indebtedness to the entruster.

The entrustee shall receive any surplus but shall be liable to the entruster for anydeficiency. Notice of sale shall be deemed sufficiently given if in writing, and eitherpersonally served on the entrustee or sent by post-paid ordinary mail to the entrustee's lastknown business address.18

a. Validity of the security interest as against the creditors of the

entrustee/innocent purchasers for value

The entruster's security interest in goods, documents, or instruments pursuant to thewritten terms of a trust receipt shall be valid as against all creditors of the entrustee for theduration of the trust receipt agreement.19

3. Obligations and Liability of the Entrustee

The entrustee shall

(1) hold the goods, documents or instruments in trust for the entruster and shalldispose of them strictly in accordance with the terms and conditions of the trust receipt;

(2) receive the proceeds in trust for the entruster and turn over the same to theentruster to the extent of the amount owing to the entruster or as appears on the trustreceipt;

(3) insure the goods for their total value against loss from fire, theft, pilferage orother casualties;

(4) keep said goods or proceeds thereof whether in money or whatever form,separate and capable of identification as property of the entruster;

(5) return the goods, documents or instruments in the event of non-sale or upon

demand of the entruster; and

(6) observe all other terms and conditions of the trust receipt not contrary to theprovisions of this Decree.20

18Sec. 7

19Sec. 12

20Sec. 9


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The risk of loss shall be borne by the entrustee. Loss of goods, documents orinstruments which are the subject of a trust receipt, pending their disposition, irrespective of

whether or not it was due to the fault or negligence of the entrustee, shall not extinguish hisobligation to the entruster for the value thereof.21

a. Payment/Delivery of proceeds of sale or disposition of goods,documents or instruments

Keep said goods or proceeds separate and capable of identification.

b. Return of goods, documents or instruments in case of sale

Return the goods, documents or instruments in the event of non-sale or upondemand.

c. Liability for loss of goods, documents or instruments

The risk of loss shall be borne by the entrustee. Loss of goods, documents orinstruments which are the subject of a trust receipt, pending their disposition, irrespective of

whether or not it was due to the fault or negligence of the entrustee, shall not extinguish hisobligation to the entruster for the value thereof.22

d. Penal sanction if offender is a corporation

The penalty provided for in this Decree shall be imposed upon the directors,officers, employees or other officials or persons therein responsible for the offense, withoutprejudice to the civil liabilities arising from the criminal offense. 23

4. Remedies available

The entrustor can:

a. Cancel trust and take possession of the goofs

b. File a 3rd party claim or separate civil action at any time upon default or failure ofentrustee to comply with terms and conditions of the trust agreement.24

21 Sec. 1022

ibid.23

Sec. 13, last sen.24

Prudential Bank vs. NLRC, 251 SCRA 421, 1995

Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be

abated by the imposition of penal sanctions (Tiomico vs. Court of Appeals, 1999)

The offense is malum prohibitum. There is no need to prove damage to the entrustor. (Metropolitan

Bank vs. Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981)

Offense: estafa under Art. 315 of the Revised Penal Code.


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D. Negotiable Instruments Law25

1. Forms and Interpretation

a. Requisites of Negotiability

1. Must be in writing and signed by the maker or drawer;26

2. Must contain an unconditional promise or order to pay a sum certain in money;27

3. Must be payable on demand, or at a fixed or determinable future time;

4. Must be payable to order or to bearer;28 and

25Negotiable instrument (NI)

A written contract for the payment of money which complies with the requirements of Sec. 1 of the

NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand

as money, so as to give the holder in due course (HDC) the right to hold the instrument free from

defenses available to prior parties. (Reviewer on Commercial Law, Professors Sundiang and Aquino)26

Any kind of material that substitutes paper is sufficient.

With respect to the signature, it is enough that what the maker or drawer affixed shows his intent to

authenticate the writing. (Notes and Cases on Banks, Negotiable Instruments and other Commercial

Documents, Timoteo B. Aquino)

Signature, binding so long it is intended or adopted as the signature of the signer or made with his

authority.

No person liable on the instrument whose signature does not appear thereon.

One who signs in a trade or assumed name liable to same extent as if he had signed in his own name.

(Sec. 18, NIL)

Signature of party may be made by duly authorized agent; no particular form of appointment

necessary. (Sec. 19, NIL)

"In writing" - includes print; written or typed27Where the promise or order is made to depend on a contingent event, it is conditional, and the

instrument involved is non-negotiable. The happening of the event does not cure the defect.

The unconditional nature of the promise or order is not affected by:

a) An indication of a particular fund out of which reimbursement is to be made, or a particular account

to be debited with the amount; or

b) A statement of the transaction which gives rise to the instrument

Where the promise or order is subject to the terms and conditions of the transaction stated, the

instrument is rendered non-negotiable. The NI must be burdened with the terms and conditions of that

agreement to destroy its negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.)

But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3)

The dates of each installment must be fixed or at least determinable and the amount to be paid for

each installment.

A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on

the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a

mathematical computation. (Notes and Cases on Banks, Negotiable Instruments and other Commercial

Documents, Timoteo B. Aquino)28

The instrument is payable to order where it is drawn payable to the order of a specified person, or to

him or his order. (Sec. 8)

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

The instrument may be made payable to the order of:

a. A payee who is not the maker, drawer or drawee


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5. When the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.29

b. Kinds of negotiable instrument

Promissory note An unconditional promise in writing by oneperson to another signed by the makerengaging to pay on demand or at a fixed ordeterminable future time, a sum certain inmoney to order or to bearer.30

Bill of exchange An unconditional order in writing addressedby one person to another, signed by theperson giving it, requiring the person to

whom it is addressed to pay on demand or ata fixed or determinable future time a sumcertain in money to order or to bearer.31

b. The drawer or maker

c. The drawee

d. 2 or more payees jointly

e. One or some of several payees

f. The holder of an office for a time being

Payable to Bearer

The instrument is payable to bearer:

a. When it is expressed to be so payable; or

b. When it is payable to a person named therein or to bearer; orc. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the

person making it so payable; or

d. When the name of the payee does not purport to be the name of any person; or

e. When the only or last indorsement is an indorsement in blank. (Sec. 9)

An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed

especially. If it is originally a bearer instrument, it will always be a BEARER instrument.

As opposed to an original order instrument becoming payable to bearer, if the same is indorsed

specially, it can no longer be negotiated further by mere delivery, it has to be indorsed.

A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does

not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383)

Fictitious payee rule:

It is not necessary that the person referred to in the instrument is really non-existent or fictitious to

make the instrument payable to bearer. The person to whose order the instrument is made payable may

in fact be existing but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the person making it

so payable does not intend to pay the specified persons. (Reviewer on Commercial Law, Professors

Sundiang and Aquino)29

Applicable only to a bill of exchange

A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or

more drawees in the alternative or in succession. (Sec. 128)30

Sec. 18431

Sec. 126


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Check A bill of exchange drawn on a bank payableon demand.32 It is the most common form ofbill of exchange.

2. Completion and delivery

a. Insertion of date

Where an instrument expressed to be payable at a fixed period after date is issuedundated, or where the acceptance of an instrument payable at a fixed period after sight isundated, any holder may insert therein the true date of issue or acceptance, and theinstrument shall be payable accordingly. The insertion of a wrong date does not avoid theinstrument in the hands of a subsequent holder in due course; but as to him, the date soinserted is to be regarded as the true date.33

b. Completion of blanks

Where the instrument is wanting in any material particular, the person in possessionthereof has a prima facie authority to complete it by filling up the blanks therein. And asignature on a blank paper delivered by the person making the signature in order that thepaper may be converted into a negotiable instrument operates as a prima facieauthority to fillit up as such for any amount. In order, however, that any such instrument when completedmay be enforced against any person who became a party thereto prior to its completion, itmust be filled up strictly in accordance with the authority given and within a reasonable time.But if any such instrument, after completion, is negotiated to a holder in due course, it is

valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled

up strictly in accordance with the authority given and within a reasonable time.34

c. Incomplete and undelivered instruments

If completed and negotiated without authority, not a valid contract against a personwho has signed before delivery of the contract even in the hands of a holder in due coursebut subsequent indorsers are liable. This is a real defense.35

d. Complete but undelivered instruments

1. Between immediate parties and those who are similarly situated, delivery must be

coupled with the intention of transferring title to the instrument.

2. As to a holder in due course, it is conclusively presumed that there was validdelivery; and

32Sec. 185

33Sec. 13

34Sec. 14

35Sec. 15


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3. As against an immediate party and remote party who is not a holder in duecourse, presumption of a valid and intentional delivery is rebuttable. 36

3. Rules of interpretation

a. Discrepancy between the amount in figures and that in words the words prevail,but if the words are ambiguous, reference will be made to the figures to fix the amount.

b. Payment for interest is provided for interest runs from the date of theinstrument, if undated, from issue thereof.

c. Instrument undated consider date of issue.

d. Conflict between written and printed provisions written provisions prevail.

e. When the instrument is so ambiguous that there is doubt whether it is a bill ornote, the holder may treat it as either at his election;

f. If one signs without indicating in what capacity he has affixed his signature, he isconsidered an indorser.

g. If two or more persons sign We promise to pay,their liability is joint37 but if theysign I promise to pay,the liability is solidary.38

4. Signature

a. Signing in trade name

One who signs in a trade or assumed name will be liable to the same extent as if hehad signed in his own name.39

b. Signature of agent

The signature of any party may be made by a duly authorized agent. No particularform of appointment is necessary for this purpose; and the authority of the agent may beestablished as in other cases of agency.40

Where the instrument contains or a person adds to his signature words indicatingthat he signs for or on behalf of a principal or in a representative capacity, he is not liable onthe instrument if he was duly authorized; but the mere addition of words describing him asan agent, or as filling a representative character, without disclosing his principal, does notexempt him from personal liability.41

36Sec. 16

37each liable for his part

38each can be compelled to comply with the entire obligation (Sec. 17)

39Sec. 18

40Sec. 19

41Sec. 20


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c. Indorsement by minor or corporation

The indorsement or assignment of the instrument by a corporation or by an infantpasses the property therein, notwithstanding that from want of capacity, the corporation orinfant may incur no liability thereon.42

d. Forgery43

Counterfeit making or fraudulent alteration of any writing, which may consist of:

1. Signing of anothers name with intent to defraud; or

2. Alteration of an instrument in the name, amount, name of payee, etc. with intentto defraud.44

General Rule:

When a signature is forged or made without the authority of the person, thesignature45 is wholly inoperative.46

Exception:

Unless the party against whom it is sought to enforce such right is precluded fromsetting up the forgery or want of authority.47

5. Consideration

Every negotiable instrument is deemed prima facie to have been issued for a valuableconsideration. Every person whose signature appears thereon is presumed to have become aparty thereto for value.48

42Sec. 22

43Persons precluded from setting up defense of forgery

1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers,

persons negotiating by delivery and acceptors.

2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.44

1 Agbayani, 1992 ed.45

not instrument itself and the genuine signatures46

Legal Effects:

1. No right to retain the instrument

2.To give a discharge therefore

3. To enforce payment thereof against any party thereto, can be acquired through or under such

signature47

Sec. 2348

Sec. 24

What constitutes value:

a. An antecedent or pre-existing debt

b. Value previously given

c. Lien arising from contract or by operation of law. (Sec. 27)


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6. Accommodation party

One who has signed the instrument as maker, drawer, acceptor, or indorser, withoutreceiving value therefor, and for the purpose of lending his name to some other person.Such a person is liable on the instrument to a holder for value, notwithstanding such holder,

at the time of taking the instrument, knew him to be only an accommodation party.

49

7. Negotiation

a. Distinguished from assignment

Negotiation Assignment

The transfer of the instrument from oneperson to another so as to constitute thetransferee as holder thereof.50

The transferee does not become a holderand he merely steps into the shoes of thetransferor. Any defense available against thetransferor is available against the transferee.51

b. Modes of negotiation

Issuance First delivery of the instrument complete inform to a person who takes it as a holder.52

Subsequent Negotiation 1. If payable to bearer, a negotiableinstrument may be negotiated by mere

delivery.

2. If payable to order, a NI may benegotiated by indorsement completed bydelivery.53

49Sec. 29

50Sec.30

51Timoteo B. Aquino, Notes and Cases on Banks, Negotiable Instruments and other Commercial

Documents

Assignment may be effected whether the instrument is negotiable or non-negotiable. (Sesbreo vs.

CA, 222 SCRA 466)52

Sec. 191

Steps:

1. Mechanical act of writing the instrument completely and in accordance with the requirements of

Section 1; and

2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the

intention of giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de

Leon, 2000 ed.)


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Incomplete negotiation of order instrument Where the holder of an instrument payableto his order transfers it for value withoutindorsing it, the transfer vests in thetransferee such title as the transferor had

therein and he also acquires the right to havethe indorsement of the transferor. But forthe purpose of determining whether thetransferee is a holder in due course, thenegotiation takes effect as of the time whenthe indorsement is made.54

c. Kinds of Indorsement

Special Specifies the person to whom or to whoseorder, the instrument is to be payable.55

Blank Specifies no indorsee.

a. Instrument becomes payable to bearerand may be negotiated by delivery.56

b. May be converted to special indorsementby writing over the signature of indorser in

blank any contract consistent with characterof indorsement.57

Absolute One by which indorser binds himself to pay:a. Upon no other condition than failure ofprior parties to do so;

b. Upon due notice to him of such failure.

53In both cases, delivery must be intended to give effect to the transfer of instrument. ( Development

Bank vs. Sima Wei, 219 SCRA 736)54

Sec. 4955

Sec. 3456

id.57

Sec. 35


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Conditional Right of the indorsee is made to depend onthe happening of a contingent event. Partyrequired to pay may disregard theconditions.58

Restrictive When it either:

a. Prohibits further negotiation of theinstrument; or

b. Constitutes the indorsee the agent of theindorser; or

c. Vests the title in the indorsee in trust foror to the use of some other persons. But

mere absence of words implying power tonegotiate does not make an indorsementrestrictive.

Qualified Constitutes the indorser a mere assignor ofthe title to the instrument.59

Joint Indorsement payable to two (2) or morepersons.

Irregular A person who, not otherwise a party to aninstrument, places thereon his signature inblank before delivery.60

58Sec. 39

59Sec. 38

It is made by adding to the indoser's signature words like "sans recourse, without recourse", "indorser

not holder", "at the indorser's own risk", etc.60

Sec. 64


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8. Rights of the Holder61

a. Holder in Due Course62

1. May sue on the instrument in his own name;

2. May receive payment and if payment is in due course, the instrument isdischarged;

3. Holds the instrument free from any defect of title of prior parties and free fromdefenses available to parties among themselves; and

4. May enforce payment of the instrument for the full amount thereof against allparties liable thereon.63

b. Defenses against the Holder

In the hands of any holder other than a holder in due course, a negotiable instrument

is subject to the same defenses as if it were non-negotiable. But a holder who derives his titlethrough a holder in due course, and who is not himself a party to any fraud or illegalityaffecting the instrument, has all the rights of such former holder in respect of all partiesprior to the latter.64

61Holder - a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191)

62A holder who has taken the instrument under the following conditions:

1 .Instrument is complete and regular upon its face;

2. Became a holder before it was overdue and without notice that it had been previously dishonored;

3 For value and in good faith; and

4. At the time he took it, he had no notice of any infirmity in the instrument or defect in the title of the

person negotiating it. (Sec. 52)

Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this

presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. The

weight of authority sustains the view that a payee may be a holder in due course. Hence, the presumption

that he is a prima facie holder in due course applies in his favor. (Cely Yang vs. Court of Appeals , G.R. No.

138074, August 15, 2003)63

Secs. 51 and 5764

Sec. 58


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9. Liabilities of Parties

a. Maker

The maker of a negotiable instrument, by making it, engages that he will pay it

according to its tenor, and admits the existence of the payee and his then capacity toindorse.65

b. Drawer

The drawer by drawing the instrument admits the existence of the payee and his thencapacity to indorse; and engages that, on due presentment, the instrument will be acceptedor paid, or both, according to its tenor, and that if it be dishonored and the necessaryproceedings on dishonor be duly taken, he will pay the amount thereof to the holder or toany subsequent indorser who may be compelled to pay it. But the drawer may insert in theinstrument an express stipulation negativing or limiting his own liability to the holder.66

c. Acceptor

The acceptor, by accepting the instrument, engages that he will pay it according tothe tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacityand authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

d. Indorser

Where a person, not otherwise a party to an instrument, places thereon his signaturein blank before delivery, he is liable as indorser, in accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payeeand to all subsequent parties.

(b) If the instrument is payable to the order of the maker or drawer, or is payable tobearer, he is liable to all parties subsequent to the maker or drawer.

(c) If he signs for the accommodation of the payee, he is liable to all parties

subsequent to the payee.67

Where a person places his indorsement on an instrument negotiable by delivery, heincurs all the liability of an indorser.68

65Sec. 60

66Sec. 61

67Sec. 64

68ibid.


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e. Warranties

Every person negotiating an instrument by delivery or by a qualified indorsementwarrants:

(a) That the instrument is genuine and in all respects what it purports to be;(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which would impair the validity of theinstrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of noholder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to a person negotiating

public or corporation securities other than bills and notes.69

Every indorser who indorses without qualification, warrants to all subsequentholders in due course:

a) That the instrument is genuine and in all respects what it purports to be;

b) That he has a good title to it;

c) That all prior parties had capacity to contract;

d) That the instrument is, at the time of his indorsement, valid and subsisting; and

e) He engages that, on due presentment, it shall be accepted or paid, or both, as thecase may be, according to its tenor, and that if it be dishonored and the necessaryproceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or toany subsequent indorser who may be compelled to pay. it.70

69Sec. 65

70Sec. 66


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10. Presentment for Payment

The production of a Bill of Exchange to the drawee for his acceptance, or to thedrawee or acceptor for payment or the production of a Promissory Note to the party liablefor the payment of the same.71

a. Necessity of presentment for payment

Presentment for payment is necessary in order to charge the drawer and indorsers. 72

b. Parties to whom presentment for payment should be made

To the person primarily liable or if he is absent or inaccessible, to any person foundat the place where the presentment is made.73

c. Dispensation with presentment for payment

1. In order to charge the drawer where he has no right to expect or require that thedrawee or acceptor will pay the instrument.74

2. In order to charge an indorser when the instrument was made or accepted for hisaccommodation and he has no reason to expect that the instrument will be paid ifpresented.75

d. Dishonor by non-payment76

1. Payment is refused or cannot be obtained after due presentment for payment;

2. Presentment is excused and the instrument is overdue and unpaid.77

71Sec. 70

72Sec. 70, last sen.

73Sec. 72

74Sec. 79

75Sec. 80

76Effect: There is an immediate right of recourse by the holder against persons secondarily liable.

However, notice of dishonor is generally required. (Sec. 84)77

Sec. 83


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11. Notice of Dishonor

Notice given by holder or his agent to party or parties secondarily liable that theinstrument was dishonored by non-acceptance by the drawee of a bill or by non-payment bythe acceptor of a bill or by non-payment by the maker of a note.78

a. Parties to be notified

Given to secondary party or his agent.79

b. Parties who may give notice of dishonor

Given by holder or his agent, or by any party who may be compelled by the holderto pay.80

c. Effect of notice

Immediate right of recourse against the drawer and indorsers accrues to the holderand no presentment for payment is necessary.81

d. Form of notice

1. By bringing verbally or

2. By writing to the knowledge of the person liable the fact that a specifiedinstrument, upon proper proceedings taken, has not been accepted or has not been paid, andthat the party notified is expected to pay it.

e. Waiver

Either before the time of giving notice, or after the omission to give due notice.Waiver may be expressed or implied.82

As to who are affected by an express waiver depends on where the waiver is written:

1. If it appears in the body or on the face of the instrument, it binds all parties; but

2. If it is written above the signature of an indorser, it binds him only.83

78Sec. 89

79Sec. 97

80Sec. 90

81Sec. 151

82Sec. 109

83Sec. 110


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f. Dispensation with notice

1. When party to be notified knows about the dishonor, actually or constructively;84

2. If waived;85 and

3. When after due diligence, it cannot be given.86

g. Effect of failure to give notice

An omission to give notice of dishonor by non-acceptance does not prejudice therights of a holder in due course subsequent to the omission. 87

12. Discharge of Negotiable Instrument

a. Discharge of negotiable instrument

A release of all parties, whether primary or secondary, from the obligations arisingthereunder. It renders the instrument without force and effect and, consequently, it can nolonger be negotiated.88

b. Discharge of parties secondarily liable

1. By any act which discharges the instrument;

2. By the intentional cancellation of his signature by the holder;

3. By the discharge of a prior party;

4. By a valid tender of payment made by a prior party;

5. By the release of the principal debtor, unless the holders right of recourse against

the party secondarily liable is expressly reserved;

6. By any agreement binding upon the holder to extend the time of payment or to

postpone the holders right to enforce the instrument.89

84Secs. 114-117

85Sec. 109

86Sec. 112

87Sec. 117

88The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.

89Sec. 120


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c. Right of party who discharged instrument

Where the instrument is paid by a party secondarily liable thereon, it is notdischarged; but the party so paying it is remitted to his former rights as regard all priorparties, and he may strike out his own and all subsequent indorsements and against negotiate

the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by thedrawer; and

(b) Where it was made or accepted for accommodation and has been paid by theparty accommodated.90

d. Renunciation by holder

The holder may expressly renounce his rights against any party to the instrumentbefore, at, or after its maturity. An absolute and unconditional renunciation of his rights

against the principal debtor made at or after the maturity of the instrument discharges theinstrument. But a renunciation does not affect the rights of a holder in due course withoutnotice. A renunciation must be in writing unless the instrument is delivered up to the personprimarily liable thereon.91

13. Material alteration

a. Concept

Any alteration which changes:

a) The date;

b) The sum payable, either for principal or interest;

c) The time or place of payment:

d) The number or the relations of the parties;

e) The medium or currency in which payment is to be made;

f) Adds a place of payment where no place of payment is specified, or

In the following cases, the agreement to extend the time of payment does not discharge a party

secondarily liable:

a) where the extension of time is consented to by such party;

b) where the holder expressly reserves his right of recourse against such party.

Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only

cancels his own liability and that of the parties subsequent to him. (Sec. 121)90

Sec. 12191

Sec. 122


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g) Any other change or addition which alters the effect of the instrument in anyrespect, is a material alteration.92

b. Effect of material alteration

Where a negotiable instrument is materially altered without the assent of all partiesliable thereon, it is avoided, except as against a party who has himself made, authorized, orassented to the alteration and subsequent indorsers.

When an instrument has been materially altered and is in the hands of a holder indue course not a party to the alteration, he may enforce payment thereof according to itsoriginal tenor.93

14. Acceptance

a. Definition

The signification by the drawee of his assent to the order of the drawer.

It is the act by which the drawee manifests his consent to comply with the requestcontained in the bill of exchange directed to him.

b. Manner

Must be in writing and signed by the drawee and must not express that the draweewill perform his promise by any other means than the payment of money.94

The holder of the bill presenting the same for acceptance may require that the

acceptance be written on the bill, and if such request is refused, may treat the bill asdishonored.95

c. Time for acceptance

The drawee is allowed twenty-four (24) hours after presentment in which to decidewhether or not he will accept the bill; the acceptance, if given, dates as of the day ofpresentation.96

92Sec. 125

93Sec. 124

94Sec. 132

95Sec. 133

96Sec. 136


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d. Rules governing acceptance

The holder of a bill presenting the same for acceptance may require that theacceptance be written on the bill, and, if such request is refused, may treat the bill asdishonored.97

Where an acceptance is written on a paper other than the bill itself, it does not bindthe acceptor except in favor of a person to whom it is shown and who, on the faith thereof,receives the bill for value.98

An unconditional promise in writing to accept a bill before it is drawn is deemed anactual acceptance in favor of every person who, upon the faith thereof, receives the bill for

value.99

Where a drawee to whom a bill is delivered for acceptance destroys the same, orrefuses within twenty-four hours after such delivery or within such other period as theholder may allow, to return the bill accepted or non-accepted to the holder, he will be

deemed to have accepted the same.100

A bill may be accepted before it has been signed by the drawer, or while otherwiseincomplete, or when it is overdue, or after it has been dishonored by a previous refusal toaccept, or by nonpayment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of anydifferent agreement, is entitled to have the bill accepted as of the date of the firstpresentment.101

An acceptance is either general or qualified. A general acceptance assents withoutqualification to the order of the drawer. A qualified acceptance in express terms varies the

effect of the bill as drawn.102

An acceptance to pay at a particular place is a general acceptance unless it expresslystates that the bill is to be paid there only and not elsewhere.103

An acceptance is qualified which is:

(a) Conditional - which makes payment by the acceptor dependent on the fulfillmentof a condition therein stated;

(b) Partial - an acceptance to pay part only of the amount for which the bill is

drawn;

97Sec. 133

98Sec. 134

99Sec. 135

100Sec. 137

101Sec. 138

102Sec. 139

103Sec. 140


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(c) Local - an acceptance to pay only at a particular place;

(d) Qualified - as to time;

(e) The acceptance of some, one or more of the drawees but not of all.

104

The holder may refuse to take a qualified acceptance and if he does not obtain anunqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where aqualified acceptance is taken, the drawer and indorsers are discharged from liability on thebill unless they have expressly or impliedly authorized the holder to take a qualifiedacceptance, or subsequently assent thereto. When the drawer or an indorser receives noticeof a qualified acceptance, he must, within a reasonable time, express his dissent to the holderor he will be deemed to have assented thereto.105

15. Presentment for Acceptance

a. Time/place/manner of presentment

a. Where the bill is payable after sight, or when it is necessary in order to fix thematurity of the instrument;

b. Where the bill expressly stipulates that it shall be presented for acceptance;

c. Where the bill is drawn payable elsewhere than at the residence or place ofbusiness of the drawee.106

d. Where a bill is addressed to 2 or more drawees who are not partners, presentment

must be made to all.

e. Where drawee is dead, presentment may be made to his personal representative.

f. Where the drawee is adjudged a bankrupt, insolvent or made an assignment to hiscreditors, presentment may be made to him or his trustee or assignee.

b. Effect of failure to make presentment

The drawer and all indorsers are discharged.107

104Sec. 141

105Sec. 142

106Sec. 143

107See sec. 144, last sen.


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c. Dishonor by non-acceptance

When duly presented for acceptance acceptance is refused or cannot be obtained;

or

When presentment for acceptance is excused bill is not accepted.

108

16. Promissory Notes109

An unconditional promise in writing made by one person to another, signed by themaker, engaging to pay on demand, or at a fixed or determinable future time, a sum certainin money to order or to bearer.

Where a note is drawn to the maker's own order, it is not complete until indorsed byhim.110

17. Checks

a. Definition

A bill of exchange drawn on a bank payable on demand.111

b. Kinds112

Cashiers Check One drawn by the cashier of a bank, in thename of the bank against the bank itselfpayable to a third person. It is a primaryobligation of the issuing bank and acceptedin advance upon issuance.113

Managers Check A check drawn by the manager of a bank inthe name of the bank itself payable to a thirdperson. It is similar to the cashiers check asto the effect and use.

Memorandum Check A check given by a borrower to a lender forthe amount of a short loan, with the

understanding that it is not to be presented

108Sec. 149

109Apromise to pay money

110Sec. 184

111Sec. 185

112Cesar Villanueva, Commercial Law Review, 2004 ed.

113Tan vs. CA, 239 SCRA 310


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at the bank, but will be redeemed by themaker himself when the loan falls due and

which understanding is evidenced by writingthe word memorandum, memo ormem on the check.

Certified Check An agreement whereby the bank againstwhom a check is drawn undertakes to pay itat any future time when presented forpayment.114

c. Presentment for payment

(1) Time

Within reasonable time after its issue.115

(2) Effect of delay

The drawer will be discharged from liability thereon to the extent of the loss causedby the delay.116

114Sec. 187

115Sec. 186

116Ibid.


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E. Insurance Code

1. Concept of Insurance

An agreement whereby one undertakes for a consideration to indemnify another

against loss, damage or liability arising from an unknown or contingent event.

117

2. Elements of an Insurance Contract

1. The insured possesses an insurable interest susceptible of pecuniary estimation;

2. The insured is subject to a risk of loss through the destruction or impairment ofthat interest by the happening of designated perils;

3. The insurer assumes that risk of loss;

4. Such assumption is part of a general scheme to distribute actual losses among a

large group or substantial number of persons bearing somewhat similar risks; and

5. The insured makes a ratable contribution118 to a general insurance fund. 119

3. Characteristics/Nature of Insurance Contracts

Consensual It is perfected by the meeting of the minds of the parties.

Voluntary The parties may incorporate such terms andconditions as they may deem convenient.

Aleatory It depends upon some contingent event.

UnilateralImposes legal duties only on the insurer whopromises to indemnify in case of loss.

Conditional It is subject to conditions the principal one ofwhich is the happening of the event insuredagainst.

117Sec. 2, par. 2

118premium

119A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements, it is a

risk-distributing device (The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)


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Contract of indemnityExcept life and accident insurance, a contract ofinsurance is a contract of indemnity wherebythe insurer promises to make good only the lossof the insured

PersonalEach party having in view the character, creditand conduct of the other.120

4. Classes

Marine121 Insurance against risks connected withnavigation, to which a ship, cargo, freightage,profits or other insurable interest in movableproperty, may be exposed during a certain

voyage or a fixed period of time.122

Fire123 A contract by which the insurer for aconsideration agrees to indemnify the insuredagainst loss of, or damage to, property byhostile

120ibid.

121Coverage:

A.

1. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry andrespondentia, and interest in respect to all risks or perils of navigation;

2. Persons or property in connection with marine insurance;

3. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or

otherwise; and

4. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99)

Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of

seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or

not. (Roque v. IAC, 139 SCRA 596)

B. Marine Protection and Indemnity Insurance122

Sec. 99123

Prerequisites to recovery:

1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly by the

insurer

2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly or

impliedly by the insurer

It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire

insurance. The determination is important for 2 reasons:

1. Rules on constructive total loss and abandonment applies only to marine insurance;

2. Rule on co-insurance applies primarily to marine insurance;

3. Rule on co-insurance applies to fire insurance only if expressly agreed upon. (Commercial Law

Reviewer, Aguedo Agbayani, 1988 ed.)


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fire, including loss by lightning, windstorm,tornado or earthquake and other allied risks,

when such risks are covered by extension to fireinsurance policies or under separate policies.124

Casualty125 Insurance covering loss or liability arising fromaccident or mishap, excluding those fallingunder other types of insurance such as fire ormarine.126

Suretyship127 An agreement whereby a surety guarantees theperformance by the principal or obligor of anobligation or undertaking in favor of anobligee.128

Life Insurance on human lives and insuranceappertaining thereto or connected therewith

which includes every contract or pledge for thepayment of endowments or annuities.129

124Sec. 167

125Classifications:

1. Insurance against specified perils which may affect the person and/or property of the insured.(accident or health insurance)

Examples: personal accident, robbery/theft insurance

2. Insurance against specified perils which may give rise to liability on the part of the insured for claims

for injuries to or damage to property of others. (third party liability insurance)

Insurable interest is based on the interest of the insured in the safety of persons, and their property,

who may maintain an action against him in case of their injury or destruction, respectively.

Examples: workmens compensation, motor vehicle liability126

Sec. 174127

It is essentially a credit accommodation.

It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally.

(Sec. 20)

When the contract is primarily drawn up by 1 party, the benefit of doubt goes to the other party

(insured/obligee) in case of an ambiguity following the rule in contracts of adhesion. Suretyship, especially

in fidelity bonding, is thus treated like non-life insurance in some respects.

Nature of liability of surety:

1. Solidary;

2. Limited to the amount of the bond;

3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract

between the obligor and the obligee. (Sec. 176)128

Sec. 175129

Sec. 179


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Compulsory Motor Vehicle LiabilityInsurance130

A species of compulsory insurance thatprovides for protection coverage that willanswer for legal liability for losses and damagesfor bodily injuries or property damage that may

be sustained by another arising from the useand operation of motor vehicle by its owner.

5. Insurable Interest

The insured possess an interest of some kind susceptible of pecuniary estimation.

A person has an insurable interest in the subject matter if he is so connected, sosituated, so circumstanced, so related, that by the preservation of the same he shall derivepecuniary benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice.

In Life/Health131 Every person has an insurable interest in thelife and health:

1. of himself, of his spouse and of hischildren;2. of any person on whom he depends

wholly or in part for education or support;

3. of any person under a legal obligation tohim to pay money or respecting property or

services, of which death or illness mightdelay or prevent performance; and

4. of any person upon whose life any estateor interest vested in him depends.132

130Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their

dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or

operators responsible for the accident sustained (Shafer v. Judge, RTC, 167 SCRA 386).

Claimants/victims may be a passenger or a 3rd party

It applies to all vehicles whether public and private vehicles.

It is the only compulsory insurance coverage under the Insurance Code.131

General rule: There is no limit in the amount the insured can insure his life.

Exception: In a creditor-debtor relationship where the creditor insures the life of his debtor, the limit

of insurable interest is equal to the amount of the debt.

If at the time of the death of the debtor the whole debt has already been paid, the creditor can no

longer recover on the policy because the principle of indemnity applies.132

Sec. 10

When it should exist: When the insurance takes effect; not thereafter or when the loss occurs.


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In Property Every interest in property whether real orpersonal, or any relation thereto, or liabilityin respect thereof, of such nature that thecontemplated peril might directly damnify

the insured,

133

which may consist in:

1. an existing interest;

2. any inchoate interest founded on anexisting interest; or

3. an expectancy coupled with an existinginterest in that out of which the expectancyarises.134

133Sec. 13

134Sec. 14

The measure of insurable interest in property is the extent to which the insured might be damnified by

loss or injury thereof (Sec. 17)

When insurable interest should exist:

It must exist at the time the policy is taken and at the time the loss incurred but it need not exist in the

meantime.


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c. Double Insurance135 and Over Insurance136

Double insurance where same person is insured by severalinsurers separately in respect to same subject

and interest.

137

Over-insurance when the insured insures the same propertyfor an amount greater than the value of theproperty with the same insurance company.

135Requisites:

1. Person insured is the same;

2. Two or more insurers insuring separately;

3. Subject matter is the same;

4. Interest insured is also the same;

5. Risk or peril insured against is likewise the same.

Effects: Where double insurance is allowed, but over insurance results: (Sec. 94)

1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such

order as he may select, up to the amount for which the insurers are severally liable under their respective

contracts;

2. Where the policy under which the insured claims is a valued policy, the insured must give credit as

against the valuation for any sum received by him under any other policy without regard to the actual

value of the subject matter insured;

3. Where the policy under which the insured claims is an unvalued policy he must give credit, as againstthe full insurable value, for any sum received by him under any policy;

4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of

the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers,

according to their right of contribution among themselves;

5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in

proportion to the amount for which he is liable under his contract.

Additional or Other Insurance Clause

A condition in the policy requiring the insured to inform the insurer of any other insurance coverage of

the property insured. It is lawful and specifically allowed under Sec. 75 which provides that (a) policy may

declare that a violation of a specified provision thereof shall avoid it, otherwise the breach of an

immaterial provision does not avoid it.

A stipulation against double insurance.

Purposes:

1. To prevent an increase in the moral hazard

2. To prevent over-insurance and fraud.

To constitute a violation of the clause, there should have been double insurance.136

Effect in case of loss:

1. The insurer is bound only to pay to the extent of the real value of the property lost;

2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the

property;137

Sec. 93


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d. Multiple or Several Interests on Same Property

Several persons have insurable interests on same property. Unless each of them isnamed as insured in the property insurance, there would be no coverage for those notnamed. While they did have an insurable interest in the property, their interests were not

identified.

6. Perfection of the Contract of Insurance 138

An insurance contract is a consensual contract and is therefore perfected themoment there is a meeting of minds with respect to the object and the cause orconsideration.

a. Offer and Acceptance/Consensuality

Applicant usually makes the offer to the insurer.

Submission of application, even w/ payment is a mere offer on the part of theapplicant, it does not bind the insurer.

Approval of the application by the insurer is necessary to perfect contract. If made:

- w/ payment of premium policy becomes effective

- w/o payment effective upon payment of premium

(1) Delay in acceptance

Situation where applicant submits application for insurance, but due to negligence ofcompany, w/c takes an unreasonably long time before processing the application, theapplicant dies before the application is processed, thus, the contract is not perfected.139

(2) Delivery of Policy

The act of putting the insurance policy140 into the possession of the insured.141

138Tort Theory

What is being followed in insurance contracts is what is known as the cognition theory. Thus, an

acceptance made by letter shall not bind the person making the offer except from the time it came to his

knowledge. (Enriquez vs. Sun Life Assurance Co. of Canada , 41 Phil. 269)139 Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the policy, w/c is

given to the estate of the deceased applicant. (not to beneficiary because contract not perfected. Also, no

contractual liability also bec. no contact)140

the physical document141

Effects of Delivery:

1) Where delivery is conditional Non-performance of Condition precedent prevents contract from

taking effect

2) Where delivery is unconditional Delivery corresponding terms of application consummates the

contract and policy delivered becomes final contract bet the parties


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Actual delivery of the policy is not essential unless the parties have so agreed in clearlanguage. Constructive delivery may be sufficient.142

b. Premium Payment143

Consideration paid an insurer for undertaking to indemnify the insured against aspecified peril.

c. Non-Default Options in Life Insurance

Cash Surrender Value The amount the insured, in case of default,after the payment of at least three (3) fullannual premiums, is entitled to receive if hesurrenders the policy and releases his claimsupon it. It is the portion of reserve on a lifepolicy

Nature:

Premium is uniform throughout lifetime ofpolicy, so during the earlier years of the

3) Where premium still unpaid after unconditional delivery Policy will lapse if premium unpaid at

time and manner specified in the policy, in the absence of any clear agreement that insurer will

extend credit.

Individual life insurance contracts usually stipulate that:

1) Premium be paid and

2) Policy be delivered to the insured while he is alive and in good health. Concurrence of both is

necessary. (see Perez v CA case)142Vda. De Sindayen case

Whether or not policy was delivered after its issuance depends not upon manual possession by the

insured but rather upon the intention of the parties as manifested in their acts or agreements.

Whether or not delivery to agent is delivery to insured is a question over w/c there has been many

conflicting opinions.143

Basis of the right of the insurer to collect premiums: Assumption of risk.

General rule: No policy issued by an insurance company is valid and binding until actual payment of

premium. Any agreement to the contrary is void. (Sec. 77)

Exceptions:

1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)

2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)

3. Section 77 may not apply if the parties have agreed to the payment of the premium in installments

and partial payment has been made at the time of the loss. (Makati Tuscany Condominium Corp. v. CA,

215 SCRA 462)

4. Where a credit term has been agreed upon. (UCPB vs. Masagana Telemart, 308 SCRA 259)

5. Where the parties are barred by estoppel. (id., 356 SCRA 307)

Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums

are not paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)

Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its payment, so far

as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the

premium is actually paid. (Sec. 78)


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policy, the premium charges will be morethan the actual cost of the protection againstthe risk in order to meet the higher cost ofrisk during the latter years of the policy whenthe insured is older.144

The more premiums he has paid, thegreater will be the CSV but the value isalways a lesser sum than the total amt. ofpremiums paid.

CSV is the amount company holds intrust for insured deliverable upon demand.So long as the policy remains in force, thecompany has practically no beneficial interestin it except as its custodian; this is thepractical, though not the legal, relation of thecompany to this fund.145

Extended Insurance Depends on availability of CSV.146

Either stated or equal to the amount of thecash surrender value, taken as a singlepremium, will purchase; the insured is giventhe right, upon default, after the payment ofat least three full annual premiums to havethe policy continued in force from the date

of default for a time either stated or equal tothe amount as the net value of the policytaken as a single premium, will purchase Alsocalled term insurance, temporaryinsurance or paid-up extended insurance

Paid-up Insurance Amount of Insurance that the CSV, appliedas a single premium, can purchase.147

144Reserve Value - Surrender Charge = Cash Surrender Value

145 Effect: Surrender policy; terminates the contract of insurance146

Effect: Policy continues in force from date of default, for a period

During extended period: If insured dies, beneficiary can recover face amount of policy. Insured can

also reinstate the policy w/in this period.

Beyond extended period: If he survives No benefits. He cannot even reinstate the policy by paying past

premiums; has to purchase new policy

Better option if insured not in good health or geriatric147

Effect: Policy continues in force from date of default for the whole period and under the same

conditions of the original contract w/o further payment of premiums. However, in case of death of


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Better option if insured is still young and ingood health because unlike extendedinsurance, he may later reinstate policy if he

wishes

Automatic Premium Loan Upon default, insurer lends/advances to theinsured without any need of application onhis part, amount necessary to pay overduepremium, but not to exceed the CSV of thepolicy.

Only applies if requested in writing by theinsured either in the application or at anytime before the expiration of the graceperiod.148

If there is still CSV, auto premium loancontinues until it is exhausted.

Advantageous to the insured because it helpsto continue the contract and all its features infull force and effect.

Insured under no legal obligation to repayloan

d. Reinstatement of a Lapsed Policy of Life Insurance149

1) Does not create a new contract, merely revives the old policy.150

2) Required by Insurance Code for every individual and industrial life policy.

3) Not required that three (3) annual premiums have been paid.

insured, he may recover only the paid-up value of the policy w/c is much less than the original amount

agreed upon. (In other words, na-reduce yung original insurance contract to one with a lower value)148

Effect: Insurance continues in force for period covered by the payment. After period, if insured still

does not resume paying his premiums, policy lapses, unless there remains CSV.149 Sec. 227 (j)

Requisites:

a) Exercised w/in 3 years from default

b) Insured must present evidence of insurability satisfactory to the company

c) Pay all back premiums and all his indebtedness to the insurance company

d) CSV has not been duly paid nor the extension period expired

Insurability does not mean that insured is in good health. Other factors affect insurability like nature

of work, age, etc.150

Thus, insurer cannot require higher premium than amount stipulated in the contract.


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4) Application for reinstatement must be filed during the insureds lifetime.

e. Refund of Premiums151

A person insured is entitled to a return of premium:

1) To the whole premium if no part of his interest in the thing insured be exposedto any of the perils insured against;

2) Where the insurance is made for a definite period and the insured surrenders hispolicy, before termination thereof152

151There is no right to recovery of premiums in life insurance because it is not a divisible contract. It is not

an insurance for any single year, w/ a privilege of renewal from year to year by paying the annual

premium. It is an entire contract of insurance for life subject to discontinuance and forfeiture for non-

payment of any of the stipulated premiums.152

such portion as corresponds w/ unexpired time, as a pro rata rate, returned (Sec. 79)

Exceptions:

a) Short period rate agreed upon and appears on face of policy (exception to pro rata rate).

b) Life insurance (exception to applicability of this section).

c) When the contract is voidable because of fraud or misrepresentations of the insurer or his agent

(Sec. 81)

d) When the contract is voidable because of the existence of facts of w/c the insurer was ignorant w/o

his fault (ibid.);

e) When the insurer never incurred any liability under the policy because of default of the insured

other than actual fraud (ibid.);

f) When there is over insurance (Sec. 82);

g) When rescission is granted due to the insurers breach of contract


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7. Rescission of Insurance Contracts

a. Concealment153

A neglect to communicate that which a party knows and ought to communicate.154

There is concealment where the insured has knowledge of facts material to the risk,and good faith and fair dealing requires him to reveal them, and he fails to do so. 155

b. Misrepresentation/Omissions156

153Requisites:

a. A party knows a fact which he neglects to communicate or disclose to the other.

b. Such party concealing is duty bound to disclose such fact to the other.

c. Such party concealing makes no warranty as to the fact concealed.

d. The other party has not the means of ascertaining the fact concealed.

e. Material

Effects: Entitles insurer to rescind, even if the death or loss is due to a cause not related to the

concealed matter (Sec. 27).

Good Faith is not a defense in concealment. Sec. 27 clearly provides that, the concealment whether

intentional or unintentional entitles the injured party to rescind the contract of insurance.

Test of Materiality: Determined not by the event, but solely by the probable and reasonable influence

of the facts upon the party to whom the communication is due, in forming his estimate of the advantages

of the proposed contract, or in making his inquiries (Sec. 31).

Exception to Sec. 31:

a. Incontestability clause

b. Matters under Sec.110 (marine insurance)

The waiver of medical examination in a non-medical insurance contract renders even more material the

information required of the applicant concerning the previous conditions of health and diseases suffered.

(Sunlife v. Sps. Bacani, 246 SCRA 268).The right to information of material facts may be waived, either by the terms of the insurance or by

neglect to make inquiries as to such facts where they are distinctly implied in other facts of which

information is communicated. (Sec.33)

Where matters of opinion or judgment are called for, answers made in good faith and without intent to

deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot rely on those

statements. He must make further inquiry. (Philamcare Health Systems vs. CA, G.R. No. 125678, March 18,

2002).154

Sec. 26155

Villanueva, Phil Commercial Law, 1998 Ed., p. 177156

Requisites of a false representation (misrepresentation):

a. The insured stated a fact which is untrue.

b. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states

positively as true without knowing it to be true and which has a tendency to mislead.

c. Such fact in either case is material to the risk.

Characteristics:

a. It is not a part of the contract but merely a collateral inducement to it.

b. It may be oral or written.

c. It is made at the same time of issuing the policy or before but not after.

d. It may be altered or withdrawn before the insurance is effected but not afterwards.

e. It always refers to the date the contract goes into effect.

Kinds:


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Factual statements made by the insured at the time of, or prior to, the issuance of thepolicy to give information to the insurer and induce him to enter into the insurance contract.

They are considered an active form of concealment.

c. Breach of Warranties

General rule:

Violation of material warranty or of a material provision of a policy will entitle theother party to rescind the contract.157

Exceptions:

a) Loss occurs before the time of performance of the warranty.b) The performance becomes unlawful at the place of the contract.c) Performance becomes impossible.158

Immaterial.159

General rule: It will not avoid the policy.

Exception:When the policy expressly provides or declares that a violation thereofwill avoid it.160

a. Affirmative affirmation of a fact when the contract begins; and

b. Promissory promise to be performed after policy was issued.

Effect of Misrepresentation: the injured party is entitled to rescind from the time when the

representation becomes false.157

Sec. 74158

Sec. 73159

ex. Other insurance clause160

Sec. 75


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8. Claims Settlement and Subrogation

a. Notice and Proof of Loss

Notice of Loss Proof of Loss

The formal notice given the insurer by theinsured or claimant under a policy of theoccurrence of the loss insured against.161

The formal evidence given the insurancecompany by the insured or claimant under apolicy of the occurrence of the loss, theparticulars and the data necessary to enablethe company to determine its liability and theamount. Is not tantamount to proof orevidence under the law on evidence.162

Other provisions:

When a preliminary proof of loss is required by a policy, the insured is not bound togive such proof as would be necessary in a court of justice; but it is sufficient for him to givethe best evidence which he has in his power at the time.163

All defects in a notice of loss, or in preliminary proof thereof, which the insuredmight remedy, and which the insurer omits to specify to him, without unnecessary delay, asgrounds of objection, are waived.164

161The purpose is to apprise the insurance company so that it may make proper investigation and take

such action as maybe necessary to protect its interest.

It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claimUnder Sec. 88, insurer is exonerated if notice of loss is not given to the insurer by the insured or by the

person entitled to the benefit without unnecessary delay.

It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss

already.162

Proof of loss is distinct from notice of loss and intended to:

1. give the insurer information by which he may determine the extent of his liability

2. afford him a means of detecting any fraud that may have been practiced upon him.

The law does not stipulate any requirement as to the form in which notice or proof of loss must be

given. However, according to De Leon, it is advisable to give the notice in writing for the protection of the

insured or his beneficiary. Notice may be an informal or provisional claim containing a minimum of

information as distinguished from a formal claim which contains full details of the loss, computations of

the amounts claimed, and supporting evidence, together with a demand or request for payment

Nature of notice and proof of loss

Although they are in the form of conditions precedent, they are in the nature of conditions subsequent

the breach of which affects a right that has already accrued (before the loss, insurers liability is

contingent but with the happening of the loss, his liability becomes properly fixed).

These conditions are intended merely for evidentiary purposes and do not form any part of the

conditions of liability and are construed with much less strictness than those conditions that operate prior

to loss.163

Sec. 89164

Sec. 90


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Delay in the presentation to an insurer of notice or proof of loss is waived if causedby any act of him, or if he omits to take objection promptly and specifically upon thatground.165

If the policy requires, by way of preliminary proof of loss, the certificate or testimony

of a person other than the insured, it is sufficient for the insured to use reasonable diligenceto procure it, and in case of the refusal of such person to give it, then to furnish reasonableevidence to the insurer that such refusal was not induced by any just grounds of disbelief inthe facts necessary to be certified or testified.166

b. Guidelines on Claims Settlement

(1) Unfair Claims Settlement; Sanctions

Unfair claim settlement practices:

a) knowingly misrepresenting to claimants pertinent facts or policy provisions

relating to coverage at issue;

b) failing to acknowledge with reasonable promptness pertinent communicationswith respect to claims arising under its policies;

c) failing to adopt and implement reasonable standards for the prompt investigationof claims arising under its policies;

d) not attempting in good faith to effectuate prompt, fair and equitable settlement ofclaims submitted in which liability has become reasonably clear; or

e) compelling policyholders to institute suits to recover amounts due under itspolicies by offering without justifiable reason substantially less than the amounts ultimatelyrecovered in suits brought by them.

Sanction:

Considered sufficient cause for the suspension or revocation of the company'scertificate of authority.167

(2) Prescription of Action

All criminal actions for the violation of any of the provisions of this Code shallprescribe afte